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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended DECEMBER 30, 2001
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ________ to ________
Commission file number 333-90817
SBARRO, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 11-2501939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 BROADHOLLOW ROAD, MELVILLE, NEW YORK 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 715-4100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ].
The registrant's common stock is not publicly-held or publicly traded.
The number of shares of Common Stock of the registrant outstanding as of
March 15, 2002 was 7,064,328.
DOCUMENTS INCORPORATED BY REFERENCE
None
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SBARRO, INC.
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO "WE," "US," "OUR,"
"SBARRO" OR THE "COMPANY" INCLUDE SBARRO, INC. AND OUR SUBSIDIARIES.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements about our financial
condition, results of operations, future prospects and business. These
statements appear in a number of places in the report and include statements
regarding our intent, belief, expectation, strategies or projections at that
time. These statements generally contain words such as "may," "should," "seeks,"
"believes," "expects," "intends," "plans," "estimates," "projects," "strategy"
and similar expressions or the negative of those words. Forward-looking
statements are subject to a number of known and unknown risks and uncertainties
that could cause actual results to differ materially from those projected,
expressed or implied in the forward-looking statements. These risks and
uncertainties, many of which are not within our control, include but are not
limited to:
o general economic, weather and business conditions;
o the availability of suitable restaurant sites in appropriate regional
shopping malls and other locations on reasonable rental terms;
o changes in consumer tastes;
o changes in population and traffic patterns, including the effect that
terrorist or other events may have on the willingness of consumers to
frequent malls, airports or downtown areas which are the predominant areas
in which our restaurants are located;
o our ability to continue to attract franchisees;
o the success of our present, and any future, joint ventures and other
expansion opportunities;
o the availability of food (particularly cheese and tomatoes) and paper
products at current prices;
o our ability to pass along cost increases to our customers;
o no material increase occurring in the Federal minimum wage;
o the continuity of services of members of our senior management team;
o our ability to attract and retain competent restaurant and executive
managerial personnel;
o competition;
o the level of, and our ability to comply with, government regulations;
o our ability to generate sufficient cash flow to make interest payments and
principal under our senior notes and credit agreement;
o the effects which restrictions imposed on us under the indenture for the
senior notes and the credit agreement may have on our ability to operate
our business; and
o our ability to repurchase senior notes to the extent required and make
repayments under our credit agreement to the extent required in the event
we make certain asset sales or experience a change of control.
You are cautioned not to place undue reliance on these statements, which
speak only as of the date of the report. We do not undertake any responsibility
to release publicly any revisions to these forward-looking statements to take
into account events or circumstances that occur after the date of this report.
Additionally, we do not undertake any responsibility to update you on the
occurrence of any unanticipated events which may cause actual results to differ
from those expressed or implied by the forward-looking statements contained in
this report.
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PART I
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ITEM 1. BUSINESS
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Sbarro, Inc., a New York corporation, was organized in 1977 and is the
successor to a number of family food and restaurant businesses developed and
operated by the Sbarro family. Today, we are a leading owner, operator and
franchisor of quick-service restaurants, serving a wide variety of Italian
specialty foods with 927 restaurants worldwide at December 30, 2001. In
addition, since 1995, we have created, primarily through joint ventures, other
restaurant concepts for the purpose of developing growth opportunities in
addition to the Sbarro restaurants. We presently operate 35 other concept units
through majority or minority owned joint ventures or wholly owned subsidiaries.
(See "New Concept Development," below.)
GOING PRIVATE TRANSACTION
-------------------------
On September 28, 1999, members of the Sbarro family (who prior thereto
owned approximately 34.4% of our common stock) became the holders of 100% of our
issued and outstanding common stock as a result of a merger in which (i) a
company owned by the members of the Sbarro family merged with and into us, (ii)
our shareholders (other than the members of the Sbarro family and the company
owned by them) received the right to receive $28.85 per share in cash in
exchange for the approximately 13.5 million shares of our common stock not owned
by the members of the Sbarro family, and (iii) all outstanding stock options,
including stock options held by the members of the Sbarro family, were
terminated in exchange for a cash payment equal to the number of shares subject
to the options multiplied by the excess, if any, of $28.85 over the applicable
option exercise price. The cost of the merger, including fees and expenses, was
funded through the use of substantially all of the our cash then on hand and the
placement of $255.0 million of 11.0% senior notes due September 15, 2009 sold at
a price of 98.514% of par to yield 11.25% per annum. In April 2000, we exchanged
these senior notes for Senior Notes having the same terms, except that the new
Senior Notes (the "Senior Notes") were registered under the Securities Act of
1933. The old senior notes and the Senior Notes were issued under an Indenture
dated September 28, 1999 (the "Indenture"). We also entered into a five year,
$30.0 million unsecured senior revolving bank credit facility under a Credit
Agreement dated as of September 23, 1999 (the "Credit Agreement"). The Credit
Agreement provides an unsecured senior revolving credit facility which enables
us to borrow, on a revolving basis from time to time during its five-year term,
up to $30.0 million, including a $10.0 million sublimit for standby letters of
credit. Our payment obligations under the Senior Notes and the Credit Agreement
are jointly, severally, unconditionally and irrevocably guaranteed by all of our
current Restricted Subsidiaries (as defined in the Indenture) and is to be
similarly guaranteed by our future Restricted Subsidiaries. We have received a
waiver of compliance for fiscal 2001 from certain ratios required to be
maintained under the Credit Agreement and an amendment to certain ratios
required to be maintained for fiscal 2002 and fiscal 2003. See "Selected
Financial Data" included in Item 6 of this report, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7 of
this report, "Financial Statements and Supplementary Data" included in Item 8 of
the report and "Certain Relationships and Related Transactions" included in Item
13 of this report.
-3-
GENERAL
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We are a leading owner, operator and franchisor of quick service
restaurants, serving a wide variety of Italian specialty foods. Under the
"Sbarro" and "Sbarro The Italian Eatery" names, we developed one of the first
quick-service concepts that extended beyond offering one primary specialty item,
such as pizza or hamburgers. Our diverse menu offering includes pizza, pasta and
other hot and cold Italian entrees, salads, sandwiches, cheesecake and other
desserts and beverages. All of our entrees are prepared fresh daily in each
restaurant using special recipes developed by us. We focus on serving our
customers generous portions of high quality Italian-style food at attractive
prices. We believe that the Sbarro concept is unlike other quick-service Italian
restaurants due to its diverse menu selection and its fast, cafeteria-style
service.
Since our inception in 1959, we have focused on high customer traffic
venues due to the large number of captive customers who base their eating
decision primarily on impulse and convenience. We therefore do not have to incur
the significant advertising and promotional expenditures that certain of our
competitors incur to attract customers to their destination restaurants. These
factors, combined with adherence to strict cost controls, provide us with high
and stable operating margins. Over the past ten years, we have extended the
Sbarro concept from downtown locations and enclosed shopping malls to other high
customer traffic venues, including toll roads, airports, sports arenas,
hospitals, convention centers, university campuses and casinos. We believe the
opportunity to open additional Sbarro units in these and other new venues should
continue to increase as companies, municipalities and others seek to outsource
their non-core food operations to companies with an established brand name.
As of December 30, 2001, we operated 927 Sbarro quick service restaurants,
consisting of 602 Company-owned and 325 franchised restaurants located in 47
States, the District of Columbia, the Commonwealth of Puerto Rico, certain
United States territories and 25 countries throughout the world.
In addition, since 1995, we have created and operated other casual and fine
dining concepts for the purpose of developing growth opportunities in addition
to our Sbarro restaurants. With our joint venture partners or in wholly owned
subsidiaries, we currently operate 35 casual and fine dining restaurants
featuring varying cuisines under other restaurant concepts.
RESTAURANT EXPANSION
--------------------
We have grown from 103 Sbarro-owned or franchised quick service restaurants
at the time of our initial public offering in 1985 to 927 as of December 30,
2001 excluding 37 new concept units. During 2001, 51 new Sbarro restaurants were
opened, of which 9 were Company-owned and 42 were franchised. However, 43
Company-owned and 20 franchised Sbarro units were closed, resulting in the first
decrease in our history in the number of units operated by us. In addition, we
and the other concepts in which we participate opened four casual and fine
dining units in 2001. (See "Other Concepts" below).
-4-
The following table summarizes the number of Sbarro-owned and franchised
quick service restaurants in operation during each of the years from 1997
through 2001:
Fiscal Year
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Company-owned Sbarro restaurants:
Opened during period (1) 9 13 24 25 28
(Sold to) acquired from franchisees
during period - 1 (1) 1 4
Closed during period (2) (43) (16) (9) (20) (8)
--- --- --- --- ---
Open at end of period (3) 602 636 638 624 618
Franchised Sbarro restaurants:
Opened during period 42 36 49 43 47
Acquired from (sold to) the Company
during period - (1) 1 (1) (4)
Closed or terminated during period (20) (18) (32) (13) (23)
--- --- --- --- ---
Open at end of period 325 303 286 268 239
All Sbarro restaurants:
Opened during period (1) 49 49 73 68 75
Closed or terminated during period (2) (62) (34) (41) (33) (31)
--- --- --- --- ---
Open at end of period (3) 927 939 924 892 857
Kiosks (all franchised) open at end of year 4 5 4 8 7
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(1) Excludes 4, 7, 7, 7 and 5 other concept units opened during the respective
fiscal years.
(2) See Note (3) to "Selected Financial Data" in Item 6 of this Report for
information with respect to charges in 2001, 1998 and 1997 relating to the
closing and planned closing of certain Company-owned units.
(3) Excludes 37, 33, 26, 19 and 14 other concept units at the end of the
respective fiscal years. Two of these units have been closed in fiscal
2002.
TRADITIONAL QUICK SERVICE CONCEPT AND MENU
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Sbarro quick service restaurants are family oriented, offering quick,
efficient, cafeteria and buffet style service designed to minimize customer
waiting time and facilitate table turnover. The decor of a Sbarro restaurant
incorporates a contemporary motif that blends with the characteristics of the
surrounding area.
As of December 30, 2001, there were 247 "in-line" Sbarro restaurants and
673 "food court" Sbarro quick service restaurants. In addition, franchisees
operated seven freestanding Sbarro restaurants. "In-line" restaurants, which are
self-contained restaurants, usually occupy between 1,500 and 3,000 square feet,
contain the space and furniture to seat approximately 60 to 120 people and
employ 10 to 40 persons, including part-time personnel. "Food court" restaurants
are primarily
-5-
located in areas of shopping malls designated exclusively for restaurant use and
share a common dining area provided by the mall. These restaurants generally
occupy between 500 and 1,000 square feet and contain only kitchen and service
areas. They frequently have a more limited menu than an "in-line" restaurant and
employ 6 to 30 persons, including part-time personnel.
Sbarro restaurants are generally open seven days a week serving lunch,
dinner and, in a limited number of locations, breakfast, with hours conforming
to those of the major department stores or other large retailers in the mall or
trade area in which they are located. Typically, mall restaurants are open to
serve customers 10 to 12 hours a day, except on Sunday, when mall hours may be
more limited. For Sbarro-owned restaurants open a full year, average sales in
fiscal 2001 were $0.7 million for "in-line" restaurants and $0.5 million for
"food court" restaurants.
Sbarro restaurants feature a menu of popular Italian food, including pizza
with a variety of toppings, a selection of pasta dishes and other hot and cold
Italian entrees, salads, sandwiches, cheesecake and other desserts. In addition
to soft drinks, a limited number of the larger restaurants serve beer and wine.
All of our entrees are prepared fresh daily in each restaurant according to
special recipes developed by us. We place emphasis on serving generous portions
of quality Italian-style food at attractive prices. Entree selections, excluding
pizza, generally range in price from $2.79 to $7.99. We believe that pizza,
which is sold predominantly by the slice, accounts for approximately 50% of
Sbarro restaurant sales.
Substantially all of the food ingredients and related restaurant supplies
used by the restaurants are purchased from a national independent wholesale food
distributor which is required to adhere to established product specifications
for all food products sold to our restaurants. Breads, pastries, produce, fresh
dairy and certain meat products are purchased locally for each restaurant. Soft
drink mixes are purchased from major beverage producers under national
contracts. We believe that there are other distributors who would be able to
service our needs and that satisfactory alternative sources of supply are
generally available for all items regularly used in our restaurants.
RESTAURANT MANAGEMENT
---------------------
Each Sbarro restaurant is managed by one general manager and one or two
co-managers or assistant managers, depending upon the size of the location.
Managers are required to participate in Sbarro training sessions in restaurant
management and operations prior to the assumption of their duties. In addition,
each restaurant manager is required to comply with an extensive operations
manual containing procedures for assuring uniformity of operations and
consistent high quality of products. We have a restaurant management bonus
program that provides the management teams of Sbarro-owned restaurants with the
opportunity to receive cash bonuses based on certain performance-related
criteria of their location.
We employ area and regional directors, each of whom is typically
responsible for the operations of 6 to 14 Sbarro-owned restaurants in a given
area. Before each new restaurant opening, we assign an area or regional director
to coordinate opening procedures. Area and regional directors recruit and
supervise the managerial staff of all Sbarro-owned restaurants and report to one
of the four regional vice presidents. The regional vice presidents coordinate
the activities of the area and regional directors assigned to their areas of
responsibility and report to the President of our Quick Service Division.
-6-
FRANCHISE DEVELOPMENT
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Growth in franchise operations occurs through the establishment of new
Sbarro restaurants by new franchisees and existing franchisees who have
multi-unit franchise agreements. We rely principally upon our reputation and the
strength of our existing restaurants, as well as to participation in national
franchise conventions, to attract new franchisees.
As of December 30, 2001, we had 325 franchised Sbarro restaurants operated
by 88 franchisees in 33 states of the United States as well as its territories
and in 25 countries throughout the world. We are presently considering
additional franchise opportunities in the United States and other countries. In
certain instances, we have established franchise locations under territorial
agreements in which we have granted, for specified time periods, exclusive
rights to enter into franchise agreements for restaurant units in certain
geographic areas (primarily foreign countries) or venues (primarily specified
non-mall locations such as for certain toll roads or airports).
In order to obtain a franchise, we generally require payment of an initial
fee and continuing royalties at rates of 3.5% to 10.0% of gross revenues.
Franchise agreements entered into prior to 1988 generally have an initial term
of 15 years with the franchisee having a renewal option provided that the
agreement has not been previously terminated by either party for specified
reasons. Since 1988, we have required the franchise agreements to end at the
same time as the underlying lease, but generally in not less than ten nor more
than twenty years. Since 1990, the renewal option has also been subject to
conditions, including a remodel or image enhancement requirement. Franchise
agreements granted under territorial agreements and those for non-traditional
sites are at negotiated fees, royalty rates and terms and conditions other than
those contained in our basic franchise agreement. The franchise and territorial
agreements provide us with the right to terminate a franchisee for a variety of
reasons, including insolvency or bankruptcy, failure to operate its restaurant
according to standards, understatement of gross receipts, failure to pay fees,
or material misrepresentation on an application for a franchise.
We presently employ twelve management level individuals responsible for
overseeing the operations of franchise units and for developing new units. These
employees report to the President of our Franchising and Licensing Division.
OTHER CONCEPTS
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Since 1995, we have developed and established new restaurant concepts to
provide growth opportunities that leverage our restaurant management and
financial expertise. These concepts are operated either by us alone or through
joint ventures with restaurateurs experienced in the particular food area. We
are actively involved in the day-to-day operations of each venture. Our joint
ventures and other wholly-owned concepts presently operate 35 restaurants. We
intend to develop and expand the steakhouse joint venture locations. We are
evaluating the continued development of the "Mama Sbarro" concept. We do not
plan to open any additional restaurants for, and are evaluating the disposition
of, the balance of the existing concepts. During fiscal 2001, we recorded
charges to earnings of $10.6 million related to the impairment of property,
equipment and other assets of certain of these concepts and the closing of two
restaurants and certain conversion costs.
-7-
The following is a summary of our existing internally operated and joint
venture operated concepts:
o We operate twelve moderately priced quick casual dining restaurants
serving Italian food. The restaurants provide both quick-service and
table service, with take-out service available, and generally cater to
families. Prior to March 2001, when we acquired the ownership interest
of our 20% partner in this venture in connection with the settlement
of litigation against this partner, these locations were operated
under either the "Umberto of New Hyde Park" or "Tony and Bruno's"
names. Five of our six table service units currently operate under the
name "Mama Sbarro." Our six quick service units operate in mall
locations under the name "Umberto of New Hyde Park." During fiscal
2001, we determined that two proposed "Mama Sbarro" locations, with
accumulated costs of approximately $1.1 million, would not be opened.
These costs are included in the 2001 provision in our financial
statements for restaurant closing costs. We recorded costs of
approximately $0.2 million for the conversion of the "Umberto of New
Hyde Park" and "Tony and Bruno" locations to "Mama Sbarro" units. In
addition, the provision for asset impairment includes approximately
$1.6 million in fiscal 2001 related to two "Mama Sbarro locations." We
are planning to open additional table service non-mall sites of the
Mama Sbarro concept in fiscal 2003.
o We have a 40% interest in a joint venture that presently operates
eight casual dining restaurants with a Rocky Mountain steakhouse motif
under the name "Boulder Creek Steaks & Saloon." This venture also
operates three fine dining steak restaurants under the names
"Rothmann's Steakhouse" and "Burton & Doyle." We are planning to open
additional sites of this concept.
o We have a 70% interest in a joint venture formed to develop moderately
priced, table service restaurants featuring an Italian Mediterranean
menu. The venture presently operates one unit under the name "Salute"
located in New York City. During 1997, this venture closed two
restaurants, resulting in a $3.3 million before tax, or $2.0 million
after tax, charge to our earnings. An additional $1.0 million charge
to earnings before tax, or $0.6 million after tax, was recorded in
1999 when we subsequently agreed to absorb a portion of our joint
venture partners' losses on these units upon their disposition. In
early 2002, this venture closed another location with a minimal charge
to earnings that was recorded in fiscal 2001.
o We operate two moderately priced, table service restaurants featuring
an Italian Mediterranean menu. One, which opened in the latter part of
2000 in Las Vegas, operates under the name "BICE Ristorante," and the
other, which opened in mid-2001 in New York City, operates under the
name "Medi." A third location, "Salute" (renamed from "The Grill on
the Park") in New York City, which opened in late 2000, was closed in
fiscal 2002. The provision for asset impairment and store closings
includes approximately $7.7 million related to the BICE Las Vegas and
Salute locations.
o We have a 50% interest in a joint venture which, in June 1999,
acquired two quick service Mexican style restaurants operating in
strip centers under the names "Baja Grill" and "Waves."
o We have a 25% interest in a joint venture formed in 1999 that has
operated one seafood restaurant under the name "Vincent's Clam Bar."
-8-
All of the other concept locations, except for four Umberto of New Hyde
Park mall units and the BICE Ristorante restaurant in Las Vegas, are located in
the New York City metropolitan area. We are continually evaluating the operating
performance of these ventures to assess their continued feasibility and future
growth potential. As noted above, we may seek to expand the "Mama Sbarro" and
steakhouse concepts, but do not plan to open any additional restaurants for, and
are evaluating the disposition of, the other existing concepts. There can be no
assurance as to the performance of any of the other concept locations.
All of our other concept locations presently operate through unrestricted
subsidiaries which do not guarantee our Senior Notes and obligations under our
Credit Agreement. As such, we have certain restrictions as to the financing we
can provide to these new concepts and these entities are not subject to the
restrictions contained in the Indenture and our Credit Agreement. Ventures in
which we have a 50% or less interest are accounted for under the equity method
of accounting.
As of December 30, 2001, we had an aggregate investment in the form of
advances to and property and equipment costs of these other concepts of
approximately $30.0 million. The amount of our investment does not include
guarantees of indebtedness, reimbursement obligations in respect of letters of
credit in the aggregate amount of approximately $8.4 million and guarantees of
certain real property lease obligations of these subsidiaries and other concepts
in the approximate amount of $4.8 million. In addition, we have also sublet
locations to, guaranteed all or portions of other concepts location leases and
provided other credit enhancements for these joint ventures.
EMPLOYEES
---------
As of December 30, 2001, we employed approximately 6,600 persons, excluding
employees of new concepts, of whom approximately 3,000 were full-time field and
restaurant personnel, approximately 3,375 were part-time restaurant personnel
and 225 were corporate administrative personnel. None of our employees are
covered by collective bargaining agreements. We believe our employee relations
are satisfactory.
COMPETITION
-----------
The restaurant business is highly competitive. Many of our direct
competitors operate within the pizza restaurant segment. We believe we compete
on the basis of menu selection, price, service, location and food quality.
Factors that affect our and our franchisees' business operations include changes
in consumer tastes, national, regional and local economic conditions,
population, traffic patterns, changes in discretionary spending priorities,
demographic trends, consumer confidence in food wholesomeness, handling and
safety, weather conditions, the type, number and location of competing
restaurants and other factors. There is also active competition for management
personnel and attractive commercial shopping mall, center city and other
locations suitable for restaurants. We compete in each market in which we
operate with locally-owned restaurants, as well as with national and regional
restaurant chains. Factors such as inflation and increased food, beverage,
labor, occupancy and other costs could also adversely affect us and others in
the restaurant industry.
Although we believe we are well positioned to compete in the quick-service
Italian specialty food business because of our leading market position, focus,
expertise and strong national brand name recognition, we could experience
increased competition from existing or new companies and loss of market share,
which could have an adverse effect on our operations.
-9-
TRADEMARKS
----------
Our Sbarro restaurants operate principally under the "Sbarro" and "Sbarro
The Italian Eatery" trademarks. Our other concept locations operate under
separate trademarks, including "Mama Sbarro" and "Boulder Creek." The trademarks
are registered with the United States Patent and Trademark Office with no
expiration date but must be renewed every ten years. Such registered service
marks may continually be renewed for 10 year periods. We have also registered or
filed applications to register "Sbarro" and "Sbarro The Italian Eatery" in
several other countries. We believe that these marks continue to be materially
important to our business. The joint ventures to which we are a party have also
applied for United States trademarks covering trade names used by them.
GOVERNMENTAL REGULATION
-----------------------
We are subject to various federal, state and local laws affecting our
businesses, as are our franchisees. Each of our restaurants and those owned by
our franchisees and joint ventures are subject to a variety of licensing and
governmental regulatory provisions relating to wholesomeness of food,
sanitation, health, safety and, in certain cases, licensing of the sale of
alcoholic beverages. Difficulties in obtaining, or the failure to obtain,
required licenses or approvals can delay or prevent the opening of a new
restaurant in any particular area. Our operations and those of our franchisees
and joint ventures are also subject to federal laws, such as minimum wage laws,
the Fair Labor Standards Act and the Immigration Reform and Control Act of 1986.
They are also subject to state laws governing such matters as wages, working
conditions, employment of minors, citizenship requirements and overtime. Some
states have set minimum wage requirements higher than the federal level.
We are also subject to Federal Trade Commission (the "FTC") regulations and
various state laws regulating the offer and sale of franchises. The FTC and
various state laws require us to furnish to prospective franchisees a franchise
offering circular containing prescribed information. We are currently registered
to offer and sell franchises in six states and are currently exempt from the
franchise registration requirements in five states based upon "large franchisor"
exemptions, which are based upon our experience and meeting certain size tests,
generally requiring a net worth of at least $5 to $15 million (depending on the
state). The states in which we are registered, and a number of states in which
we may franchise, require registration of a franchise offering circular or a
filing with state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states, and bills have been introduced in Congress from time to time which
provide for federal regulation of the franchisor-franchisee relationship in
certain respects. The state laws often limit, among other things, the duration
and scope of non-competition provisions and the ability of a franchisor to
terminate or refuse to renew a franchise.
Although alcoholic beverage sales are not emphasized in our Sbarro quick
service restaurants, our new concepts serve alcoholic beverages and some of our
larger restaurants serve beer and wine. Sales of beer and wine contributed less
than 1% of our total revenues during fiscal 2001. We submitted timely
applications where appropriate to amend our liquor license applications to
reflect the going private transaction and have received approvals in all
jurisdictions.
We believe that we are in compliance in all material respects with the laws
to which we are subject.
-10-
ITEM 2. PROPERTIES
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All Sbarro restaurants are typically leased under ten-year leases that
often do not include an option to renew the lease. We have historically been
able to renew or extend leases on existing sites. As of December 30, 2001, we
leased 595 restaurants, of which 23 were subleased to franchisees under terms
which cover all of our obligations under the lease. The remaining franchisees
directly lease their restaurant spaces. Most of our restaurant leases provide
for the payment of base rents plus real estate taxes, utilities, insurance,
common area charges and certain other expenses, as well as contingent rents
generally ranging from 8% to 10% of net restaurant sales in excess of stipulated
amounts.
Leases to which we were a party at December 30, 2001 have initial terms
expiring as follows:
YEARS INITIAL LEASE NUMBER OF SBARRO- NUMBER OF FRANCHISED
TERMS EXPIRE OWNED RESTAURANTS RESTAURANTS
- ------------ ----------------- -----------
2002........................................ 42 7
2003........................................ 62 3
2004........................................ 49 2
2005........................................ 62 2
2006 ....................................... 46 3
Thereafter.................................. 311 6
We own a four-story office building in Melville, New York having
approximately 100,000 square feet and a cafeteria style restaurant operated by
us. This building was purchased and renovated at a total cost of approximately
$21.5 million. Approximately 73% of the rentable square feet is currently under
lease to unaffiliated third parties. The remaining 27%, consisting of one floor
of the building, is occupied by us as our principal executive offices. On March
3, 2000, we obtained a ten year, 8.4%, $16.0 million mortgage loan on this
property.
We also occupy a two-story 20,000 square foot office building for
administrative support functions located in Commack, New York. We have leased
the building since May 1986 from a partnership owned by some of our shareholders
at an annual base rental of $0.3 million for the remainder of the lease term,
which expires in 2011. In addition, we pay real estate taxes, utilities,
insurance and certain other expenses for the facility. See "Certain
Relationships and Related Transactions" in Item 13 of this Report for a
description of the lease.
In addition, our other concepts own one facility and lease 35 facilities.
-11-
ITEM 3. LEGAL PROCEEDINGS
-----------------
On December 20, 1999, Antonio Garcia and eleven other current and former
general managers of Sbarro restaurants in California amended a complaint filed
in the Superior Court of California for Orange County. The complaint alleges
that the plaintiffs were improperly classified as exempt employees under the
California wage and hour law. The plaintiffs are seeking actual damages,
punitive damages and costs of the lawsuit, including reasonable attorney's fees,
each in unspecified amounts. Plaintiff's filed a motion to certify the lawsuit
as a class action, but the motion was denied by the court. We believe that we
have substantial defenses to the claims and are vigorously defending this
action.
On September 6, 2000, Manuel Jimenez and seven other current and former
general managers of Sbarro restaurants in California filed a complaint against
Sbarro in the Superior Court of California for Orange County alleging that the
plaintiffs were improperly classified as exempt employees under California wage
and hour law. Plaintiffs are represented by the same counsel who is representing
the plaintiffs in the Garcia case. We believe that we have substantial defenses
to the claims and are vigorously defending this action.
From time to time, we are a party to certain claims and legal proceedings
in the ordinary course of business, none of which, in our opinion, would have a
material adverse effect on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
-12-
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
---------------------------------------------------------------------
As a result of the going private transaction in September 1999 our Common
Stock is not publicly-held nor publicly traded. We currently have six
shareholders of record. (See Item 12 "Security Ownership of Certain Beneficial
Owners and Management.")
During 2001 and 2000, we declared the following dividends to our
shareholders as distributions pursuant to a Tax Payment Agreement with our
shareholders to enable them to pay income taxes imposed upon them as a result of
our election to be taxed under the provisions of Subchapter S of the Internal
Revenue on their pro-rata share of our taxable income (see Item 13, "Certain
Relationships and Related Transactions - Tax Payment Agreement) or as general
dividends:
AMOUNT
FISCAL 2001 PER SHARE TOTAL TYPE
----------- --------- ----- ----
January 15, 2001 $0.50 $3,560,613 Tax Distribution
April 12, 2001 0.71 5,000,000 General Dividend
April 15, 2001 0.57 4,003,154 Tax Distribution
FISCAL 2000
-----------
March 15, 2000 $2.548 $18,000,000 General Dividend
April 17, 2000 0.072 511,156 Tax Distribution
June 13, 2000 0.457 3,229,743 Tax Distribution
September 15, 2000 0.009 59,096 Tax Distribution
December 15, 2000 0.046 327,870 General Dividend
All tax distributions paid in 2001 related to 2000 tax basis earnings. In
addition, on January 15, 2002, we declared dividends to our shareholders of
$0.44 per share (a total of $3,125,000) as a tax distribution.
The Indenture under which our Senior Notes are issued and our Credit
Agreement contain various covenants that may limit our ability to make
"restricted payments" including, among other things, dividend payments (other
than as distributions pursuant to the Tax Payment Agreement). Under the terms of
the Indenture, we currently are not permitted to make "restricted payments"
other than distributions pursuant to the Tax Payment Agreement. Our ability to
make future dividend payments (in addition to distributions pursuant to the Tax
Payment Agreement) and other restricted payments will depend upon our future
profitability and having, at the time of declaration of the dividend, a
consolidated interest ratio coverage (as defined in the Indenture), after giving
pro forma effect to the restricted payments, for the four most recently ended
fiscal quarters of at least 2.0 to 1.
-13-
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following Selected Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 of this report and our consolidated financial
statements and the related notes included in Item 8 of this report, which
consolidated financial statements have been audited and reported on by Arthur
Andersen LLP, independent public accountants.
FISCAL YEAR
(DOLLARS IN THOUSANDS)
2001 2000 1999 1998(1) 1997
---- ---- ---- ------- ----
SYSTEM-WIDE SALES (UNAUDITED) $ 570,609 $ 569,260 $ 543,219 $ 524,572 $ 473,716
========= ========= ========= ========= =========
INCOME STATEMENT DATA:
Revenues:
Restaurant sales $ 372,673 $ 382,365 $ 375,514 $ 370,101 $ 344,190
Franchise related income 10,286 11,231 8,688 8,284 7,175
Real estate and other 5,756 5,812 5,495 3,402 1,764
--------- --------- --------- --------- ---------
Total revenues 388,715 399,408 389,697 381,787 353,129
Costs and expenses:
Restaurant operating expenses:
Costs of food and paper products 74,614 74,405 75,956 78,603 70,994
Payroll and other employee benefits 103,828 101,553 97,336 93,338 85,021
Other operating costs 116,581 114,122 108,599 102,927 94,468
Depreciation and amortization (2) 30,375 29,039 25,712 22,784 24,357
General and administrative costs 29,472 30,882 28,854 23,999 21,241
Provision for asset impairment, restaurant
closings and other charges (3)(4) 18,224 -- 1,013 2,515 3,300
Terminated transaction costs (5) -- -- -- 986 --
Litigation settlement and related costs (6) -- -- -- 3,544 --
Loss on land to be sold (7) -- -- -- 1,075 --
--------- --------- --------- --------- ---------
Total costs and expenses 373,094 350,001 337,470 329,771 299,381
Operating income before minority interest 15,621 49,407 52,227 52,016 53,748
Minority interest (1) (46) 266 (101) 208
--------- --------- --------- --------- ---------
Operating income 15,620 49,361 52,493 51,915 53,956
--------- --------- --------- --------- ---------
Other (expense) income:
Interest expense (30,950) (30,243) (7,899) -- --
Interest income (8) 756 949 3,828 5,120 4,352
Equity in net income (loss) of
unconsolidated affiliates 310 303 423 (296) (111)
--------- --------- --------- --------- ---------
Net other (expense) income (29,884) (28,991) (3,648) 4,824 4,241
--------- --------- --------- --------- ---------
-14-
(Loss) income before income taxes and
cumulative effect of change in method of
accounting for start-up costs (14,264) 20,370 48,845 56,739 58,197
Income taxes (credit) (9) 325 (5,075) 19,322 21,547 22,115
--------- --------- --------- --------- ---------
(Loss) income before cumulative effect of
change in method of accounting for start-up
costs (14,589) 25,445 29,523 35,192 36,082
Cumulative effect of change in method of
accounting for start-up costs, net of income
taxes of $504 -- -- -- (858) --
--------- -------- -------- -------- --------
Net (loss) income $ (14,589) $ 25,445 $ 29,523 $ 34,334 $ 36,082
========= ======== ======== ======== ========
2001 2000 1999 1998(1) 1997
---- ---- ---- ------- ----
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL AND RESTAURANT DATA:
Net cash provided by
operating activities (10) $ 34,812 $ 48,329 $ 62,282 $ 59,199 $ 61,939
Net cash used in
investing activities (10) (22,453) (31,158) (25,227) (20,661) (27,020)
Net cash used in
financing activities (10) (17,726) (8,606) (158,356) (3,377) (20,012)
EBITDA (11) 46,306 78,703 78,628 74,403 78,202
EBITDA margin (11) 11.9% 19.7% 20.2% 19.5% 22.1%
Capital expenditures (12) $ 22,528 $ 31,193 $ 25,282 $ 28,213 $ 29,758
Ratio of earnings to fixed charges (13) 0.7x 1.4x 2.6x 3.8x 4.1x
Number of restaurants at end of period:
Company-owned (14) 602 636 638 624 618
Franchised 325 303 286 268 239
--- --- --- --- ---
Total number of restaurants 927 939 924 892 857
=== === === === ===
2001 2000 1999 1998(1) 1997
---- ---- ---- ------- ----
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 404,762 $ 428,555 $ 417,543 $ 308,251 $ 278,811
Working capital (deficiency) 4,614 10,293 (1,935) 126,619 93,464
Total long-term obligations 276,197 274,269 263,090 14,902 17,270
Shareholders' equity 86,444 113,597 110,280 256,918 220,439
- ----------
(1) Our fiscal year ends on the Sunday nearest December 31. Our 1998 fiscal
year contained 53 weeks. All other fiscal years presented contained 52
weeks. As a result, our 1998 fiscal year benefited from one additional week
of operations over the other reported fiscal years. The additional week
contributed revenues, net income and EBITDA of approximately $8.6 million,
$1.7 million and $2.7 million, respectively.
(2) Includes amortization of the excess purchase price over the book value of
assets acquired as a result of the 1999 going private transaction on
September 28, 2000 of $5.4 million, $5.0
-15-
million and $2.0 million in fiscal 2001, 2000 and 1999, respectively. In
fiscal 2000, we finalized our allocation of the purchase price from the
going private transaction based on an evaluation of our net assets at
September 29, 1999 resulting in lower annual amortization expense than
originally estimated. In July 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. Under SFAS No.
142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually for impairment (or more frequently if
impairment indicators arise). Our goodwill and intangible assets with
indefinite lives aggregated $205.2 million, net of accumulated
amortization, at December 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, we will adopt SFAS No. 142 effective
for fiscal 2002. The Company's earnings were charged with $5.4 million,
$5.0 million and $2.0 million in fiscal 2001, 2000 and 1999, respectively,
for the amortization of goodwill and intangible assets with indefinite
lives. Under SFAS No. 142, we will not incur similar charges commencing in
fiscal 2002. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives. Our
initial evaluations of impairment are expected to be completed by the end
of the first quarter of fiscal 2002.
(3) Fiscal 2001 represents a provision for asset impairment ($5.5 million),
restaurant closings ($11.7 million) and other charges ($1.0 million)
relating to the Sbarro restaurants and other concept locations.
(4) Fiscal 1999, 1998 and 1997 represent provisions of (a) a special allocation
of losses in fiscal 1999 which arose as a result of the final disposition
of two joint venture unit closings recorded in 1997, (b) $2.5 million for
the closing of 20 restaurants in fiscal 1998 and (c) $3.3 million for the
closing of two joint venture units in fiscal 1997.
(5) Represents a charge for costs associated with the termination of a prior
going private proposal by the Sbarro family.
(6) Represents a charge in connection with the settlement of a lawsuit.
(7) Represents a write-down of the carrying cost on a parcel of undeveloped
land that we own.
(8) We used substantially all of our available cash on September 28, 1999 in
order to fund the going private transaction. We will not realize the level
of interest income as we had prior thereto unless and until we rebuild our
cash position.
(9) A credit of $5.6 million was recorded in 2000 to write-off deferred income
taxes as a result of electing to be taxed under the provisions of
Subchapter S of the Internal Revenue Code and, where applicable and
permitted, under similar state and local income tax provisions beginning in
fiscal 2000. For a discussion of the distributions that we are permitted to
make to our shareholders to pay taxes on our income, see "Certain
Relationships and Related Transactions - Tax Payment Agreement" in Item 13
of this report.
-16-
(10) For a more detailed presentation of our cash flow data, see our audited
consolidated financial statements and related notes included in Item 8 of
this Report. In 2000, net cash provided by operating activities before the
change in deferred taxes caused by the conversion to Subchapter S status
and the change in accrued interest payable was $53.3 million. In 1999, net
cash provided by operating activities before the change in accrued interest
payable was $54.8 million.
(11) EBITDA represents earnings before cumulative effect of change in accounting
method, interest income, interest expense, taxes, depreciation and
amortization. EBITDA includes the effect of the unusual charges included in
notes 3, 4, 5 and 6 above. EBITDA margin represents EBITDA divided by total
revenues. EBITDA should not be considered in isolation from, or as a
substitute for, net income, cash flow from operations or other cash flow
statement data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
Rather, EBITDA is presented because it is a widely accepted supplemental
financial measure, and we believe that it provides relevant and useful
information. Our calculation of EBITDA may not be comparable to a similarly
titled measure reported by other companies, since all companies do not
calculate this non-GAAP measure in the same manner. Our EBITDA calculations
are not intended to represent cash provided by (used in) operating
activities since they do not include interest and taxes and changes in
operating assets and liabilities, nor are they intended to represent a net
increase in cash since they do not include cash provided by (used in)
investing and financing activities.
(12) The following amounts related to the construction of the building in which
our headquarters are located, which opened in late 1998, are included as
capital expenditures: $5.0 million in fiscal 1997, $4.8 million in fiscal
1998, $1.6 million in fiscal 1999 and $0.4 million in fiscal 2000.
(13) The ratio of earnings to fixed charges has been determined by dividing the
total fixed charges into the sum of income before income taxes, cumulative
effect of change in method of accounting for start-up costs, minority
interests, equity in net income (loss) of unconsolidated affiliates and
fixed charges. Fixed charges consist of interest expense and one-third of
rental expense, which we deem to be a reasonable approximation of the
interest factor of this expense.
(14) Excludes 37, 33, 26, 19 and 14 for other concept units that were open at
the end of fiscal 2001, 2000, 1999, 1998 and 1997, respectively.
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements, the notes thereto and other data and information appearing
elsewhere in this report.
RESULTS OF OPERATIONS
Our fiscal year ends on the Sunday nearest to December 31. Each of fiscal
2001, 2000 and 1999 consisted of 52 weeks. The going private transaction,
including the purchase price allocation and certain other related transactions
described in the notes to the consolidated financial statements, affect the
comparability of the interest income, depreciation and amortization, interest
expense and income tax line items in our consolidated statements of operations
for fiscal 2000 as compared to fiscal 1999 discussed below. Our loss of $14.6
million in fiscal 2001 includes charges of $18.2 million for a provision for
asset impairment, restaurant closings and other charges discussed below.
One high volume Sbarro-owned quick service unit was destroyed in the
September 11, 2001 attack on the World Trade Center in New York City. In
addition, a number of airports were closed due to the events of September 11
causing airport Sbarro-owned and franchise units to close and a number of
downtown locations experienced reduced sales. We have made claims under our
business interruption insurance policies with respect thereto. We are fully
insured for the cost of the assets destroyed at the Company location. The
estimated amount of the expected recovery is included in accounts receivable as
of December 30, 2001. In addition, we expect to recover lost income from our
business interruption insurance coverage but, under applicable accounting
principles, have not reflected any estimated recoveries in our financial
statements.
FISCAL 2001 COMPARED TO FISCAL 2000
Our consolidated EBITDA for the fiscal year ended December 30, 2001
(including the charges reflected above) was $46.3 million and our EBITDA margin
was 11.9%, compared to $78.7 million and 19.7%, respectively, for the fiscal
year ended December 31, 2000. EBITDA represents earnings before cumulative
effect of change in accounting method, interest income, interest expense, taxes,
depreciation and amortization. EBITDA margin represents EBITDA divided by total
revenues. EBITDA should not be considered in isolation from, or as a substitute
for, net income, cash flow from operations or other cash flow statement data
prepared in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity. Rather, EBITDA is presented
because it is a widely accepted supplemental financial measure, and we believe
that it provides relevant and useful information. Our calculation of EBITDA may
not be comparable to a similarly titled measure reported by other companies
since all companies do not calculate this non-GAAP measure in the same manner.
Our EBITDA calculations are not intended to represent cash provided by (used in)
operating activities since they do not include interest and taxes and changes in
operating assets and liabilities, nor are they intended to represent a net
increase in cash since they do not include cash provided by (used in) investing
and financing activities.
Restaurant sales from Sbarro-owned quick service units and consolidated
other concept units decreased by $9.7 million, or 2.5%, to $372.7 million for
fiscal 2001 from $382.4 million in fiscal 2000. Sales increases in consolidated
other concept units of $4.0 million were offset by a $13.7 million decline in
sales from quick service units. Sales at both Sbarro quick service and some of
our consolidated other concept locations for fiscal 2001 have been adversely
impacted by the general
-18-
economic downturn and were further affected by the events of September 11, 2001.
During fiscal 2001, we closed 34 more units than we opened which resulted in a
net sales reduction of approximately $1.2 million. Revenues from new quick
service units did not offset the loss of revenues from quick service units
closed since the beginning of fiscal 2000. The units closed since the beginning
of fiscal 2000, with the exception of our high volume owned unit destroyed in
the collapse of the World Trade Center on September 11, 2001 and the one high
volume unit closed in fiscal 2000 and replaced in fiscal 2001, were generally
low volume units that did not have a material impact on our results of
operations. Following the events of September 11, a number of airport and other,
principally downtown, locations were closed for a period of time, and those
locations, as well as a number of other downtown locations, experienced a
prolonged period of reduced sales. These units had sales of $8.7 million for the
period from September 11, 2001 through the end of fiscal 2001 compared to $11.2
million for the similar period in fiscal 2000.
Comparable Sbarro quick service unit sales decreased 2.1% to $321.0 million
in fiscal 2001. Comparable Sbarro quick service unit sales levels that, as noted
above, had already been affected by the decrease in mall traffic related to the
general economic downturn in the United States, were negatively affected after
the tragedy of September 11. In late March 2001 and mid June 2001, we
implemented price increases of 0.7% and 3.3%, respectively. Comparable
restaurant sales are made up of sales at locations that were open during the
entire current and prior fiscal year.
Excluding approximately $0.3 million related to the termination of an area
development agreement in Egypt recognized during fiscal 2001 and $1.5 million of
termination fees related to our development agreement and the closing of all
Sbarro locations in Japan recognized in fiscal 2000, franchise related income
increased 2.8% to $10.0 million for the fiscal year ended December 30, 2001 from
$9.7 million for the fiscal year ended December 31, 2000. The increase resulted
from greater continuing royalties due to a higher number of franchise units in
operation in the current fiscal year offset, in large part, by decreases in
royalties from locations in operation during all of fiscal 2001 and 2000.
Franchises, both domestically and internationally, were also affected by the
general economy and the events of September 11.
Real estate and other revenues decreased $56,000 for the fiscal year ended
December 30, 2001 from fiscal 2000 primarily due to decreases in certain vendor
rebates.
Cost of food and paper products as a percentage of restaurant sales
increased to 20.0% for fiscal 2001 from 19.5% in the 2000 fiscal year. The
increase in fiscal 2001 relates primarily to higher average cheese prices ($2.7
million), increased distribution fees ($0.5 million) and the reduced level of
sales. Cheese prices to date in fiscal 2002 are lower than those experienced at
the comparable point in time in fiscal 2001 and significantly lower than the
average price for all of fiscal 2001.
Payroll and other benefits increased to 27.9% of restaurant sales for the
year ended December 30, 2001 from 26.6% of restaurant sales for the year ended
December 31, 2000. The increase was primarily due to the reduced level of sales
and tight labor market that was experienced into the third quarter of fiscal
2001 that had increased wages and salaries and the associated amounts paid for
payroll taxes. Since then, we have seen an abatement of these pressures as a
result of the continuing economic slowdown. In addition, we took steps to reduce
payroll expenses during late fiscal 2001 and have seen a reduction of those
costs in the early part of fiscal 2002.
Other operating expenses increased to 31.3% of restaurant sales for fiscal
2001 from 29.8% for fiscal 2000 primarily due to increases in rent, utilities
and other occupancy related expenses and the reduced level of sales.
-19-
During fiscal 2001, we recorded a provision for asset impairment,
restaurant closings and other charges of $18.2 million. Of that provision, (a)
$5.5 million was for property and equipment asset impairment, including $3.6
million related to our other concepts, (b) $11.7 million was for restaurant
closings, including $6.7 million for our other concepts and $0.2 million for the
cost of the conversion of our Umberto and Tony & Bruno locations to our Mama
Sbarro concept and (c) $1.0 million was for other charges. In early 2002, we
closed two of other concept locations for which amounts were included in the
provision.
Depreciation and amortization expense increased by $1.3 million for fiscal
2001 from fiscal 2000. Depreciation and amortization expense included $5.4
million and $5.0 million in fiscal 2001 and 2000, respectively, for the
amortization of the excess of the purchase price over the cost of net assets
acquired in connection with the completion of the going private transaction on
September 28, 1999. The finalization of the purchase price allocation in fiscal
2000 resulted in a reduction of the originally estimated amounts in fiscal 2000
while fiscal 2001 represents a full year of such amortization. Under SFAS No.
142, "Goodwill and Other Intangible Assets," commencing in fiscal 2002 we will
no longer amortize goodwill and intangible assets with indefinite lives (for
which our earnings were charged $5.4 million and $5.0 million in fiscal 2001 and
fiscal 2000, respectively) but instead we will review those assets annually for
impairment (or more frequently if impairment indicators arise). Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives. With respect to goodwill and intangible
assets (trademarks and tradenames) acquired prior to July 1, 2001 ($205.2
million, net of accumulated amortization, at December 30, 2001), we will adopt
SFAS 142 effective with fiscal 2002. Our initial evaluations of impairment are
expected to be completed by the end of the first quarter of fiscal 2002. We do
not believe an impairment, if any, will be material.
General and administrative expenses were $29.5 million, or 7.6% of total
revenues, for fiscal 2001 compared to $30.9 million, or 7.7% of total revenues,
for fiscal 2000. General and administrative costs for fiscal 2001 reflect
decreases in field management costs, a reduction in corporate staff costs due to
a cost containment program which we implemented beginning in the fourth quarter
of fiscal 2001 and lower costs related to litigation contingencies offset, in
part, by a decrease in the amount of overhead capitalized in connection with
capital projects due to the reduced number of new unit openings.
Minority interest represents the share of the minority holders' interests
in the combined operations or loss in each period of the fiscal years being
reported of the joint ventures in which we have a majority interest. In early
fiscal 2002, we closed one of the two locations which are included in the
calculation of the minority interest with a minimal charge to earnings that was
recorded in fiscal 2001.
Interest expense of $31.0 million and $30.2 million for fiscal 2001 and
2000, respectively, relate to the 11%, $255.0 million Senior Notes issued to
finance our going private transaction, the 8.4%, $16.0 million mortgage loan on
our corporate headquarters and fees for the unused borrowing capacity under our
Credit Agreement. Of these amounts, $1.5 million in each of 2001 and 2000
represented non-cash charges for the accretion of the original issue discount on
our Senior Notes and the amortization of deferred financing costs on the Senior
Notes, Credit Agreement and the mortgage loan. The increase in interest expense
was due to the full period impact in fiscal 2001 of the mortgage loan, which was
entered into in March 2000.
-20-
Interest income was approximately $0.8 million for fiscal 2001 and $0.9
million for fiscal 2000. Interest income in fiscal 2001 was affected by reduced
availability of cash for investment and lower interest rates.
Equity in the net income of unconsolidated affiliates represents our share
of earnings and losses in those new concepts in which the company has a 50% or
less ownership interest. We have determined that we will continue to develop and
expand the steakhouse joint venture locations but are evaluating the disposition
of the other concepts in which we have a 50% or less ownership interest.
We elected to be taxed under the provisions of Subchapter S of the Internal
Revenue Code and, where applicable and permitted, under similar state and local
income tax provisions beginning January 3, 2000. Under the provisions of
Subchapter S, substantially all taxes on our income are paid by our shareholders
rather than us. Our tax expense of $0.3 million and $0.5 million for fiscal 2001
and 2000, respectively, represents taxes owed to jurisdictions that do not
recognize S corporation status or that tax entities based on factors other than
income. As required by Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," we recognized a $5.6 million credit
associated with the reversal of our deferred tax liabilities upon our conversion
to S corporation status in the first quarter of fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999
Our consolidated EBITDA for the fiscal year ended December 31, 2000 was
$78.7 million and our EBITDA margin was 19.7%, compared to $78.6 million and
20.2%, respectively, for the fiscal year ended January 2, 2000.
Restaurant sales from Sbarro-owned quick service units and consolidated new
concept units increased by $6.9 million, or 1.8%, to $382.4 million for fiscal
2000 from $375.5 million in fiscal 1999. Sales from new concept units
contributed $5.1 million of the increase in restaurant sales. However, the
revenues from new quick service units did not offset the loss of revenues from
closed quick service units as we closed two more units than we opened in 2000,
including two high volume units (one of which is being replaced in fiscal 2001).
No material price increases were implemented in fiscal 2000. Comparable Sbarro
quick service unit sales increased 0.2% during fiscal 2000. Comparable
restaurant sales are made up of sales at locations that were open during the
entire current and prior fiscal year.
Franchise related income increased 29.3% to $11.2 million for the fiscal
year ended December 31, 2000 from $8.7 million for the fiscal year ended January
2, 2000. The increase resulted from greater continuing royalties due to a higher
number of franchise units in operation, higher area development and higher
initial franchise fees in fiscal 2000 than in fiscal 1999, particularly from
international markets, and approximately $1.5 million recognized in fiscal 2000
related to the termination of our development agreement and the closing of all
Sbarro locations in Japan. In fiscal 2000, we entered into area development
agreements in specific domestic and international venues and markets with two
major food service operators. To date, these arrangements have not produced
expected revenues.
Real estate and other revenues increased by $0.3 million to $5.8 million
for the fiscal year ended December 31, 2000 from fiscal 1999 due to the full
year impact from leasing a majority of our corporate headquarters building not
occupied by Sbarro to third parties in 1999.
-21-
Cost of food and paper products as a percentage of restaurant sales
improved to 19.5% for fiscal 2000 from 20.2% in the 1999 fiscal year. This
improvement was primarily due to lower average cheese prices during fiscal 2000.
Payroll and other employee benefits increased to 26.6% of restaurant sales
for the year ended December 31 2000 from 25.9% of restaurant sales in the year
ended January 2, 2000. This increase was primarily due to a tight labor market,
resulting in pressures on wages and salaries and associated increases in amounts
paid for payroll taxes.
Other operating expenses increased to 29.8% for fiscal 2000 from 28.9% of
restaurant sales for fiscal 1999 primarily due to increases in rent, utility and
other occupancy related expenses.
Depreciation and amortization expense increased by $3.3 million for fiscal
2000 over fiscal 1999. Depreciation and amortization expense included $4.8 and
$2.0 million in fiscal 2000 and 1999, respectively, for amortization of the
excess of the purchase price over the cost of net assets acquired in connection
with the completion of the going private transaction on September 28, 1999
representing a full year in 2000 compared to three months in 1999. In fiscal
2000, we finalized our allocation of the purchase price from the going private
transaction based on an evaluation of our net assets at September 29, 1999
resulting in lower annual amortization expense than originally estimated.
General and administrative costs were $30.9 million, or 7.7% of total
revenues, for fiscal 2000, compared to $28.9 million, or 7.4% of total revenues,
for fiscal 1999. These increases were primarily due to higher payroll costs,
costs incurred in expanding franchise and new concept operations and increases
in various professional fees, including litigation expenses. These expenses
include the cost of operating our corporate headquarters building.
The provision for unit closings is the result of a special allocation of
losses in fiscal 1999 of $1.0 million in connection with the final disposition
of two joint venture unit closings recorded in 1997.
Minority interest represents the share of the minority holders' interests
in the combined income in fiscal 2000 and combined loss in fiscal 1999 of the
joint ventures in which we have a majority interest.
Interest expense of $30.2 million for fiscal 2000 relates to the 11%,
$255.0 million Senior Notes issued to finance our going private transaction on
September 28, 1999, the 8.4%, $16.0 million mortgage loan on our corporate
headquarters in 2000 and line fees for unused borrowing capacity under our
Credit Agreement. Results for fiscal 1999 included interest only from the date
of the going private transaction through the end of the 1999 fiscal year of $7.9
million for the Senior Notes and Credit Agreement line fees. Of these amounts,
$1.5 and $0.4 million for fiscal 2000 and 1999, respectively, represented
non-cash charges for the accretion of the original issue discount on our Senior
Notes and the amortization of deferred financing costs on the Senior Notes,
Credit Agreement and, in 2000, the mortgage loan.
Interest income was approximately $0.9 million and $3.8 million for the
fiscal years 2000 and 1999, respectively. We used substantially all of our
available cash on September 28, 1999 in order to fund the going private
transaction. Therefore, we had a substantial reduction in our interest income
for fiscal 2000.
-22-
Equity in the net income (loss) of unconsolidated affiliates represents our
share of earnings and losses in those new concepts in which the Company has a
50% or less ownership interest.
We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and, where applicable and permitted, under similar state
and local income tax provisions beginning January 3, 2000. As required by
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," we recognized a $5.6 million credit associated with the reversal
of our deferred tax liabilities upon conversion to S corporation status in the
first quarter of fiscal 2000. Under the provisions of Subchapter S,
substantially all taxes on our income is now paid by our shareholders rather
than us. Our tax expense for the fiscal 2000 included $0.5 million for taxes
owed to jurisdictions that do not recognize S corporation status or that tax
entities based on factors other than income.
IMPACT OF INFLATION AND OTHER FACTORS
Food, labor, rent, construction and equipment costs are the items most
affected by inflation in the restaurant business. Although for the past several
years inflation has not been a significant factor, there can be no assurance
that this trend will continue. In addition, food and paper product costs may be
temporarily or permanently affected by weather, economic and other factors
beyond our control that may reduce the availability and increase the cost of
these items. Historically, the price of cheese has fluctuated more than our
other food ingredients and related restaurant supplies.
SEASONALITY
Our business is subject to seasonal fluctuations, and the effects of
weather and economic conditions. Earnings have been highest in our fourth fiscal
quarter due primarily to increased volume in shopping malls during the holiday
shopping season. Historically, the fourth fiscal quarter had accounted for
approximately 40% of annual operating net income before the effect of additional
amortization associated with the going private transaction ("adjusted operating
income") and fluctuates due to the length of the holiday shopping period between
Thanksgiving and New Year's Day and the number of weeks in our fourth quarter.
Adjusted operating income for the fourth quarter of 2001 and 2000 were
approximately 24% and 40%, respectively, of adjusted operating income for the
respective fiscal year. The lower percentage of adjusted operating income for
the fourth quarter of fiscal 2001 reflect the adverse impact of the general
economic downturn and the effect of the events of September 11, 2001
ACCOUNTING PERIOD
Our fiscal year ends on the Sunday nearest to December 31. All reported
fiscal years contained 52 weeks. Fiscal 2002 will also contain 52 weeks.
-23-
LIQUIDITY AND CAPITAL RESOURCES
We have historically not required significant working capital to fund our
existing operations and have financed our capital expenditures and investments
in our joint ventures through cash generated from operations. At December 30,
2001, we had unrestricted cash and cash equivalents of $37.0 million and working
capital of $4.6 million compared to unrestricted cash and cash equivalents of
$42.3 million and working capital of $10.3 million as of December 31, 2000.
As part of the going private transaction, we sold $255.0 million of 11%
Senior Notes (at a price of 98.514% of par to yield 11.25% per annum), the net
proceeds of which, together with substantially all of our then existing cash,
was used to finance the transaction, and entered into a $30.0 million Credit
Agreement. At December 30, 2001 and March 15, 2002, we had $27.0 million and
$27.3 million of undrawn availability under our Credit Agreement, net of
outstanding letters of credit and guarantees of reimbursement obligations
aggregating approximately $3.0 and $2.7 million, respectively. We were in
compliance with the various covenants in the Indenture for the Senior Notes and
the Mortgage as of December 30, 2001. We have received a waiver of compliance
for fiscal 2001 from certain ratios required to be maintained under our credit
agreement at year end and an amendment to certain annual ratios required for
fiscal 2002 and fiscal 2003. As amended, the Credit Agreement requires that we
maintain a minimum ratio of consolidated EBITDA to consolidated interest expense
(in each case with the guaranteeing subsidiaries) of at least 1.25 to 1.0
through December 28, 2002, 1.90 to 1.0 beginning December 29, 2002 and 2.0 to
1.0 beginning December 28, 2003. We are also required to maintain a ratio of
consolidated senior debt to consolidated EBITDA (in each case with the
guaranteeing subsidiaries) of 7.25 to 1 through December 28, 2002, 4.7 to 1.0
beginning December 29, 2002 and 4.5 to 1.0 beginning December 28, 2003. We
anticipate being in compliance with the revised ratios.
Net cash provided by operating activities was $34.8 million and $48.3
million for the fiscal years ended December 30, 2001 and December 31, 2000,
respectively. The $13.5 million reduction was primarily due to a reduction in
operating income, before the provision for asset impairment, restaurant closings
and other charges, of $15.5 million. Net cash provided by operating activities
before the change in accrued interest payable and the reversal of deferred tax
liabilities in 2000 upon conversion to Subchapter S status was $53.5 million for
fiscal 2000.
Net cash used in investing activities primarily relates to capital
expenditures, including investments made by our consolidated other concepts. Net
cash used in investing activities was $22.5 million for 2001 compared to $31.2
million for 2000.
Net cash used in financing activities was $17.7 million for the fiscal year
ended December 30, 2001 compared to $8.6 million for the fiscal year ended
December 31, 2000. Cash used in financing activities for fiscal 2001 resulted
primarily from $12.6 million of distributions to shareholders, including tax
distributions of $7.6 million (see below), $4.0 million of loans to our
shareholders, net of $2.7 of repayments of certain loans, and the purchase of
the 20% interest in the Umberto of New Hyde Park concept in settlement of
litigation for $1.0 million. Cash used in financing activities for fiscal 2000
resulted primarily from $22.1 million of distributions to shareholders,
including tax distributions of $3.8 million (see below), and a $2.0 million loan
to our Chairman, President and CEO offset, in part, by $15.6 million of net
proceeds from a $16.0 million 8.4% ten year loan secured by a mortgage on our
corporate headquarters.
-24-
In March 2000, we elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code and, where applicable and permitted, under similar
state and local income tax provisions beginning January 3, 2000. Under the
provisions of Subchapter S, substantially all taxes on our income are paid by
our shareholders. We and our shareholders had a tax liability of approximately
46% of our taxable income in both 2001 and 2000. Despite our book loss, our
shareholders are expected to have taxable income in fiscal 2001 resulting from
differences in the book and tax treatments of the provision for asset
impairment, the non-deductability of goodwill for tax purposes and significant
differences in book and tax depreciation. The 46% tax rate is higher than our
historical effective tax rate prior to 2000 due to (i) differences in tax rates
between individual and corporate taxpayers, (ii) the timing differences
previously accounted for as deferred taxes in our financial statements (which
deferred taxes were eliminated upon our conversion to S corporation status) and
(iii) the effect of double taxation (once on us for our taxable income and once
on our shareholders for dividends received from us) in those state and local
jurisdictions that do not recognize S corporation status. The Indenture for the
Senior Notes and the Credit Agreement permit us to make distributions to
shareholders to provide funds to them for their payments of taxes on our
earnings. We made tax distributions of $3.8 million in fiscal 2000, $7.6 million
in fiscal 2001 (all for fiscal 2000) and $3.1 million in January 2002 related to
2001 tax basis earnings. We do not expect to make additional tax distributions
in 2002 related to 2001 earnings.
We incur annual cash interest expense of approximately $29.7 million under
the Senior Notes and mortgage loan and may incur additional interest expense for
borrowings under our Credit Agreement. In addition to debt service, we expect
that our other liquidity needs will relate to capital expenditures, working
capital, investments in other ventures, distributions to shareholders as
permitted under the Indenture for the Senior Notes and the Credit Agreement and
general corporate purposes. We believe that aggregate restaurant capital
expenditures and our investments in joint ventures during the next twelve months
will be significantly lower than levels in fiscal 2001 ($22.5 million) due to
reduced levels of capital expenditures proposed for our consolidated other
concepts. Unpaid capital expenditure commitments aggregated approximately $1.4
million at December 30, 2001.
We expect our primary sources of liquidity to meet these needs will be cash
flow from operations and availability under our Credit Agreement.
Under the Indenture under which our Senior Notes are issued, there are
various covenants that limit our ability to borrow funds in addition to lending
arrangements that existed at the date of the going private transactions and
replacements of those arrangements, to make "restricted payments" including,
among other things, dividend payments (other than as distributions pursuant to
the Tax Payment Agreement), and to make investments in, among other things,
unrestricted subsidiaries. Among other covenants, the Indenture requires that,
in order for us to borrow (except under specifically permitted arrangements,
such as up to $75.0 million of revolving credit loans), our consolidated
interest ratio coverage (as defined in the Indenture), after giving pro forma
effect to the interest on the new borrowing, for the four most recently ended
fiscal quarters must be at least 2.5 to 1. In order to make restricted payments,
our ratio must be at least 2.0 to 1, after giving pro forma effect to the
restricted payment. As of December 30, 2001, that ratio was 2.03 to 1. As a
result, we are not presently able to borrow funds other than specifically
permitted indebtedness, including up to $75.0 million of revolving credit loans.
-25-
Our contractual obligations with respect to both our and the other concepts
(both those in which we have a majority or minority interest) are as follows:
DUE BY PERIOD
----------------------------------------------------------
AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS YEARS
- ----------------------- ----- ------ ----------- ----------- -----
(IN MILLIONS)
Senior Notes (1) $ 255.0 $ -0- $ -0- $ -0- $ 255.0
Mortgage Loan (2) $ 15.8 $ 0.1 $ 0.3 $ 0.3 $ 15.2
Credit Agreement (3) $ -0- $ -0- $ -0- $ -0- $ -0-
Standby Letters of Credit (4) $ 3.0 $ -0- $ -0- $ 0.1 $ 2.9
Guarantees (5) $ 7.0 $ 2.0 $ 0.1 $ -0- $ 4.9
Operating Leases (6) $ 590.9 $ 7.8 $ 147.4 $ 134.1 $ 231.6
(1) There are no principal repayment obligations under the Senior Note until
September 2009.
(2) Payable in monthly installments of principal and interest of $0.1 million.
Table includes only principal portion of the installment payments.
(3) The Credit Agreement enables us to borrow, from time to time, up to $30.0
million, net of outstanding letters of credit issued pursuant to a $10.0
million subfacility therefor under the Credit Agreement. No repayments are
required under the Credit Agreement until September 2004. There are
currently no amounts outstanding under the Credit Agreement. However, of
the $3.0 million of letters of credit reflected below, $2.7 million reduces
our availability under such Credit Agreement.
(4) Represents our maximum reimbursement obligations to the issuer of the
letter of credit in the event the letter of credit is drawn upon. The
letters of credit generally are issued instead of cash security deposits
under leases or to guarantee construction costs for Sbarro or other concept
locations. With the exception of one standby letter of credit for one of
our other concept locations that guarantees the payment of construction
costs, all the standby letters of credit are annually renewable through the
expiration of the related lease terms.
(5) Represents our portion of the borrowings of our steakhouse joint venture,
in which we have a minority interest. Our obligation under the guaranty is
several so that we are potentially responsible only for our share of the
debt. Our potential share is shown in the above table.
(6) Includes operating leases subleased by us to franchisees and operating
leases for which we guarantee the obligations for certain of our other
concept locations.
Except for the foregoing, we have no off-balance sheet contractual
arrangements. We have no unconditional purchase obligations except that, at
December 30, 2001, we were a party to contracts aggregating $7.0 million with
respect to the construction of restaurants (of which approximately $1.4 million
remained to be paid thereunder). Historically, we have not purchased or entered
into interest rate swaps or future, forward, option or other instruments
designed to hedge against changes in interest rates, the price of commodities we
purchase or the value of foreign currencies.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS No. 142, goodwill and intangible
-26-
assets with indefinite lives are no longer amortized but are reviewed annually
for impairment (or more frequently if impairment indicators arise). Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives. The amortization provisions of SFAS No.
142 have, since July 1, 2001, applied to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, we will adopt SFAS No. 142 effective December 31, 2001.
The provisions of SFAS No. 142 that we will adopt effective December 31, 2001
will result in a reduction of approximately $5.4 million in annual amortization
of intangible assets. Our initial evaluations of impairment are expected to be
completed by the end of the first quarter of fiscal 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This statement addresses
financial and reporting obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of
long-lived assets, except for certain obligations of lessees. We have adopted
SFAS No. 143 in fiscal 2002. SFAS No. 143 is not expected to have a material
effect on our operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-lived Assets." This
statement supersedes SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" and Accounting Principles
Board Opinion No. 30, "Reporting Results of Operations-Infrequently Occurring
Events and Transactions." This Statement retains the fundamental provisions of
SFAS 121 for recognition and measurement of impairment, but amends the
accounting and reporting standards for segments of a business to be disposed of.
The adoption of SFAS 144 is not expected to have a material impact as we will
continue to assess impairment of the assets of our restaurants as we have in the
past.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
- ------------------------------------------
Accounting policies whose application may have a significant effect on our
reported results of operations and financial position and that can require
judgments by management that can affect their application, include SFAS No. 5,
"Accounting for Contingencies," and SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 5
requires management judgments regarding the probability and estimated amount of
possible future contingent liabilities, especially, in our case, legal matters.
SFAS No. 121 requires judgments regarding future operating or disposition plans
for marginally performing assets. The application of both of these policies has
affected the amount and timing of charges to operating results that have been
significant in recent years. In the past we have made, and we intend in the
future to make, decisions regarding legal matters based on the status of the
matter and our best estimate of the outcome (we expense defense costs as
incurred) and regarding our long-lived assets based on our business judgment of
when to close underperforming units. We will be required to periodically assess,
under SFAS 142, "Goodwill and Other Intangible Assets," the impairment of
goodwill and intangible asset acquired prior to July 1, 2001 ($205.2 million,
net of accumulated amortization, at December 30, 2001). Our initial evaluations
of impairment are expected to be completed by the end of the first quarter of
fiscal 2002. Any such impairment would affect our earnings but, since any charge
to earnings would be a non-cash charge, would not affect our cash flow. We do
not believe an impairment, if any, will be material.
-27-
ITEM 7-A. QUALITATIVE AND QUANTITATIVE DISCLOSURES
----------------------------------------
OF MARKET RISK
--------------
We have historically invested our cash on hand in short term, fixed rate,
highly rated and highly liquid instruments which are reinvested when they mature
throughout the year. The Indenture under which our Senior Notes are issued
limits us to similar investments. Although our existing investments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on short-term investments could be
affected at the time of reinvestment as a result of intervening events.
Future borrowings under our credit facility (none are currently
outstanding) will be at rates that float with the market and, therefore, will be
subject to fluctuations in interest rates. Our $255.0 Senior Notes bear a fixed
interest rate of 11.0%. However, we do not expect to enter into any interest
rate swaps or other instruments to hedge interest rates on borrowings under our
credit facility for Senior Notes.
We have not purchased future, forward, option or other instruments to hedge
against fluctuations in the prices of the commodities we purchase. As a result,
our future commodities purchases are subject to changes in the prices of such
commodities.
All of our transactions with foreign franchisees have been denominated in,
and all payments have been made in, United States dollars, reducing the risks
attendant in changes in the values of foreign currencies. As a result, we have
not purchased future contracts, options or other instruments to hedge against
changes in values of foreign currencies.
-28-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Sbarro, Inc.:
We have audited the accompanying consolidated balance sheets of Sbarro,
Inc. (a New York corporation) and subsidiaries as of December 30, 2001 and
December 31, 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three fiscal years in
the period ended December 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sbarro, Inc. and
subsidiaries as of December 30, 2001 and December 31, 2000, and the results
of their operations and their cash flows for each of the three fiscal years
in the period ended December 30, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
New York, New York
March 21, 2002
-29-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
(IN THOUSANDS EXCEPT SHARE DATA)
Current assets:
Cash and cash equivalents $ 36,952 $ 42,319
Restricted cash for untendered shares (Note 2) 45 153
Receivables, net of allowance for doubtful accounts of $ 175
in 2001 and $211 in 2000
Franchise 2,162 1,350
Other 2,797 1,554
-------- --------
4,959 2,904
Inventories 3,537 3,531
Prepaid expenses 1,242 999
-------- --------
Total current assets 46,735 49,906
Property and equipment, net (Note 5) 132,303 152,468
Intangible assets:
Trademarks and tradenames, net
(Notes 2 and 6) 195,916 201,044
Deferred financing costs and other,
net (Notes 2 and 6) 16,911 17,008
Loans receivable from officers (Note 11) 6,032 2,000
Other assets 6,865 6,129
-------- --------
$404,762 $428,555
======== ========
-30-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
(IN THOUSANDS EXCEPT SHARE DATA)
Current liabilities:
Amounts due for untendered shares (Note 2) $ 45 $ 153
Accounts payable 9,107 10,284
Accrued expenses (Note 7) 24,648 20,865
Accrued interest payable (Note 9) 8,181 8,181
Current portion of mortgage payable (Note 9) 140 130
-------- --------
Total current liabilities 42,121 39,613
Deferred rent 8,479 7,867
Long-term debt, net of original issue
discount (Note 9) 267,718 267,478
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 2 and 13):
Preferred stock, $1 par value; authorized 1,000,000 shares;
none issued -- --
Common stock, $.01 par value; authorized 40,000,000 shares;
issued and outstanding 7,064,328 shares at December 30,
2001 and December 31, 2000 71 71
Additional paid-in capital 10 10
Retained earnings 86,363 113,516
-------- --------
86,444 113,597
-------- --------
$404,762 $428,555
======== ========
See notes to consolidated financial statements
-31-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
--------------------------------------------------------
DEC. 30, 2001 DEC. 31, 2000 JAN. 2, 2000
------------- ------------- ------------
(IN THOUSANDS)
Revenues:
Restaurant sales $372,673 $382,365 $375,514
Franchise related income 10,286 11,231 8,688
Real estate and other 5,756 5,812 5,495
-------- -------- --------
Total revenues 388,715 399,408 389,697
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 74,614 74,405 75,956
Payroll and other employee benefits 103,828 101,553 97,336
Other operating costs 116,581 114,122 108,599
Depreciation and amortization 30,375 29,039 25,712
General and administrative 29,472 30,882 28,854
Provision for asset impairment, restaurant
closings and other charges (Note 12) 18,224 - 1,013
-------- -------- --------
Total costs and expenses 373,094 350,001 337,470
-------- -------- --------
Operating income before minority interest 15,621 49,407 52,227
Minority interest (1) (46) 266
-------- -------- --------
Operating income 15,620 49,361 52,493
-------- -------- --------
Other (expense) income:
Interest expense (Note 9) (30,950) (30,243) (7,899)
Interest income 756 949 3,828
Equity in net income of
unconsolidated affiliates 310 303 423
-------- -------- --------
Net other expense (29,884) (28,991) (3,648)
-------- -------- --------
(Loss) income before income taxes (credit) (14,264) 20,370 48,845
Income taxes (credit) (Note 8) 325 (5,075) 19,322
-------- -------- --------
Net (loss) income $(14,589) $25,445 $29,523
======== ======= =======
See notes to consolidated financial statements
-32-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NUMBER OF ADDITIONAL
SHARES OF PAID-IN RETAINED
COMMON STOCK AMOUNT CAPITAL EARNINGS TOTAL
------------ ------ ------- -------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at
January 4, 1999 20,531,643 $ 205 $ 34,587 $ 222,125 $ 256,917
Exercise of stock options 17,337 - 426 - 426
Net income 29,523 29,523
Shares repurchased and
retired in going private
transaction (Note 2) (13,484,652) (134) (35,003) - (35,137)
Adjustment to original cost
basis of continuing
shareholders (Note 2) - - - (141,449) (141,449)
---------- ----------- ----------- ----------- -----------
Balance at
January 2, 2000 7,064,328 71 10 110,199 110,280
Net income 25,445 25,445
Distributions to
shareholders - - - (22,128) (22,128)
---------- ----------- ----------- ----------- -----------
Balance at
December 31, 2000 7,064,328 7l 10 113,516 113,597
Net loss (14,589) (14,589)
Distributions to
shareholders - - - (12,564) (12,564)
---------- ----------- ----------- ----------- -----------
Balance at
December 30, 2001 7,064,328 $ 71 $ 10 $ 86,363 $ 86,444
========== =========== =========== =========== ===========
See notes to consolidated financial statements
-33-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
----------------------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net (loss) income $(14,589) $ 25,445 $ 29,523
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 31,830 30,489 26,088
Increase in deferred income taxes - - 710
Increase (decrease) in deferred rent, net 969 180 (107)
Non-cash provision for asset impairment, restaurant
closing and other charges 17,352 - 1,013
Minority interest 1 46 (266)
Equity in net income of unconsolidated affiliates (310) (303) (423)
Dividends received from unconsolidated affiliates 244 156 -
Changes in operating assets and liabilities:
(Increase) decrease in receivables (553) (132) 770
(Increase) decrease in inventories (36) 186 (554)
(Increase) decrease in prepaid expenses (424) 698 (408)
(Increase) decrease in other assets (1,135) 304 (2,898)
Decrease (increase) in accounts payable and
accrued expenses 1,463 (3,080) 2,762
Decrease in income taxes payable - (732) (1,408)
-------- -------- --------
Net cash provided by operating activities
before change in deferred taxes due to
conversion to Subchapter S status and
increase in accrued interest payable 34,812 53,257 54,802
Change in deferred taxes due to conversion to
Subchapter S status - (5,629) -
Increase in accrued interest payable - 701 7,480
-------- -------- --------
Net cash provided by operating activities 34,812 48,329 62,282
======== ======== ========
(continued)
-34-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE FISCAL YEARS ENDED
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
---- ---- ----
(IN THOUSANDS)
INVESTING ACTIVITIES:
Purchases of property and equipment (22,528) (31,193) (25,282)
Proceeds from disposition of property and
equipment 75 35 55
------- ------- -------
Net cash used in investing activities (22,453) (31,158) (25,227)
------- ------- -------
FINANCING ACTIVITIES:
Proceeds from mortgage - 16,000 -
Mortgage principal repayments (130) (81) -
Cost of mortgage - (397) -
Purchase of minority interest (1,000)
Loans to shareholders (6,732) (2,000) -
Repayment of shareholder loans 2,700 - -
Proceeds from long-term debt - - 251,211
Cost of merger and related financing - - (411,000)
Accrued and previously paid merger costs - - 1,007
Proceeds from exercise of stock options - - 426
Tax distributions (7,564) (3,800) -
Dividends (5,000) (18,328) -
------- ------- -------
Net cash used in financing activities (17,726) (8,606) (158,356)
------- ------- -------
(Decrease) increase in cash and cash
equivalents (5,367) 8,565 (121,301)
Cash and cash equivalents at 42,319 33,754 155,055
beginning of year ------- ------- -------
Cash and cash equivalents at end of year $36,952 $42,319 $33,754
======= ======= =======
See notes to consolidated financial statements
-35-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The consolidated financial statements include the accounts of Sbarro,
Inc., its wholly owned subsidiaries and the accounts of its
majority-owned joint ventures (together, "we," "our," "us," or
"Sbarro"). All significant intercompany accounts and transactions have
been eliminated. Minority interest includes the interests held by our
partners in certain of our majority-owned joint ventures. The minority
interests at the end of fiscal 2001 and 2000 were not material.
The preparation of our financial statements in conformity with
generally accepted accounting principles requires us to make estimates
and assumptions that may affect the amounts reported in the financial
statements and accompanying notes. Our actual results could differ
from those estimates.
CASH EQUIVALENTS:
All highly liquid debt instruments with a maturity of three months or
less at the time of purchase are considered to be cash equivalents.
INVENTORIES:
Inventories, consisting primarily of food, beverages and paper
supplies, are stated at cost, which is determined by the first-in,
first-out method.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, less accumulated
amortization and depreciation. Depreciation of equipment and
amortization of leasehold improvements is provided for by the
straight-line method over the estimated useful lives of the assets or
the lease term, whichever is shorter. One-half year of depreciation
and amortization is recorded in the year in which the restaurant
commences operations.
INTANGIBLE ASSETS:
Intangible assets consist of our trademarks and tradenames, goodwill
and deferred financing costs. Trademark and tradename values as well
as goodwill were determined based on a fair value allocation of the
purchase price from the going private transaction (see Note 2) and are
being amortized on a straight line basis over 40 years. There is
additional goodwill relating to the purchase of the 20% minority
interest in one of our other concepts in March 2001 in connection with
the settlement of an action against such minority owner.
-36-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INTANGIBLE ASSETS (CONTINUED):
In July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method.
SFAS 142 also requires that the amortization of goodwill (which
resulted in a charge to earnings of $5.4 million in 2001) cease on
December 31, 2001. Under SFAS No. 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed
annually for impairment (or more frequently if impairment indicators
arise). Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful
lives. The amortization provisions of SFAS No. 142 apply immediately
to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1,
2001 ($205.2 million, net of accumulated amortization, at December 30,
2001), we will adopt SFAS No. 142 effective with fiscal 2002. Our
initial evaluations of impairment are expected to be completed by the
end of the first quarter of fiscal 2002.
Deferred financing costs were incurred as a result of the going
private transaction (see Note 2) and the mortgage on the corporate
headquarters building (see Note 9) and are being amortized as
additional interest expense over the respective lives of the related
debt instrument.
ASSET RETIREMENT OBLIGATION:
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement
addresses financial and reporting obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from acquisition,
construction, development and/or the normal operation of long-lived
assets, except for certain obligations of lessees. We will adopt SFAS
No. 143 in fiscal 2002. SFAS No. 143 is not expected to have a
material effect on our operations.
LONG-LIVED ASSETS:
In connection with SFAS 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of,"
impairment losses are recorded on long-lived assets on a restaurant by
restaurant basis whenever impairment factors are determined to be
present, the undiscounted cash flows estimated to be generated by
those assets are less than the carrying value of such assets and
events or changes in circumstances indicate that the carrying amount
may not be recoverable. Additionally, the Company periodically reviews
-37-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
LONG-LIVED ASSETS (CONTINUED):
the values assigned to goodwill and other acquired intangibles which
resulted from the going private and other transactions to determine if
they have been permanently impaired by adverse conditions. In August
2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." This statement
supersedes SFAS 121 and Accounting Principles Board Opinion No. 30,
"Reporting Results of Operations-Reporting the Effects of Disposal of
a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." This Statement retains the
fundamental provisions of SFAS 121 for recognition and measurement of
impairment, but amends the accounting and reporting standards for
segments of a business to be disposed of. The adoption of SFAS 144 is
not expected to have a material impact as we will continue to assess
impairment of the assets of our restaurants as we have in the past.
EQUITY INVESTMENTS:
The Company accounts for its investments in 50% or less owned joint
ventures under the equity method of accounting. The equity in the net
income (loss) of these unconsolidated affiliates and the related
assets are included in other assets in the accompanying consolidated
statements of operations.
COMPREHENSIVE INCOME:
We observe the provisions of Statement of Financial Accounting
Standards ("SFAS") 130, "Reporting Comprehensive Income," which
establishes rules for the reporting of comprehensive income and its
components. The adoption of this statement had no impact on our net
income or shareholders' equity. For all years presented, our
operations did not give rise to items includible in comprehensive
income which were not already included in net income. Therefore, our
comprehensive income is the same as our net income for all periods
presented.
FRANCHISE RELATED INCOME:
Initial franchise fees are recorded as income as restaurants are
opened by the franchisee and we have performed substantially all
services. Development fees are recognized over the number of
restaurant openings covered under each development agreement, with any
remaining balance recognized at the end of the term of the agreement.
Royalty and other fees from franchisees are accrued as earned.
-38-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
DEFERRED RENT:
The majority of our lease agreements provide for scheduled rent
increases during the lease term. Provision has been made for the
excess of operating lease rental expense over cash rentals paid,
computed on a straight-line basis over the lease terms.
INCOME TAXES:
In March 2000, we elected to be taxed, beginning January 3, 2000,
under the provisions of Subchapter S of the Internal Revenue Code of
1986, and, where applicable and permitted, under similar state and
local income tax provisions. We no longer pay federal, and, with
certain limited exceptions, state and local income taxes for periods
for which we are treated as an S corporation. Rather, our shareholders
include their pro-rata share of our taxable income on their individual
income tax returns and thus are required to pay taxes on their
respective share of our taxable income, whether or not it is
distributed to them. We file a consolidated federal income tax return
for informational purposes.
Minority interest includes no provision or liability for income taxes
as any tax liability related to their interest is the responsibility
of the minority partners.
In accordance with SFAS No. 109, "Accounting for Income Taxes," we
reversed our net deferred taxes upon our conversion to S corporation
status. This resulted in a credit to income taxes of $5.6 million in
the first quarter of fiscal 2000.
ACCOUNTING PERIOD:
Our fiscal year ends on the Sunday nearest to December 31. All
reported fiscal years contained 52 weeks.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash, receivables, accounts payable, and
accrued liabilities approximate fair value because of the short-term
nature of these items. The estimated fair value of the Senior Notes at
December 30, 2001 was approximately $244,800. The carrying amount of
the mortgage loan approximates fair value because the interest rate
this instrument bears is equivalent to the current rates offered for
debt of similar nature and maturity.
-39-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and SFAS No. 138, which is effective for
fiscal years beginning after June 15, 2000. Presently, we do not use
derivative instruments and therefore SFAS No. 133, while effective in
fiscal 2001, is not currently applicable.
SEGMENT REPORTING:
We have no material reportable segments under SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information,"
other than our primary quick service restaurant business.
DEFINED CONTRIBUTION PLAN:
The Company maintains a 401(k) Plan ("Plan") for all qualified
employees. The Plan provides for a 25% matching employer contribution
of up to four percent of the employees' deferred savings (maximum
contribution of 1% of an employee's deferred savings). The employer
contributions vest over five years. The deferred amount cannot exceed
fifteen percent of an individual participant's compensation in any
calendar year. The Company's contribution to the Plan was $137,000,
$163,000 and $147,000 in fiscal 2001, 2000 and 1999, respectively.
RECLASSIFICATIONS:
Certain items in the financial statements presented have been
reclassified to conform to the fiscal 2001 presentation.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
FOR THE FISCAL YEARS ENDED
------------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
---- ---- ----
(IN THOUSANDS)
Cash paid for:
Income taxes $ 1,107 $ 3,949 $20,129
======== ======== =======
Interest $ 29,491 $ 28,104 $ 30
======== ======== ========
-40-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. GOING PRIVATE TRANSACTION:
On September 28, 1999, members of the Sbarro family (who prior thereto
owned approximately 34.4% of the Sbarro's common stock) became the
holders of 100% of our issued and outstanding common stock as a result
of a "going private" merger. The cost of the merger, including fees
and expenses, was funded through the use of substantially all of our
then cash on hand and the placement of $255.0 million of 11.0% Senior
Notes due September 15, 2009 sold at a price of 98.514% of par to
yield 11.25% per annum. We also entered into an unsecured senior
revolving bank credit facility under a Credit Agreement dated as of
September 23, 1999 (the "Credit Agreement"). The Credit Agreement
provides an unsecured senior revolving credit facility which enables
us to borrow, on a revolving basis from time to time during its
five-year term, up to $30.0 million, including a $10.0 million
sublimit for standby letters of credit.
During the second quarter of fiscal 2001, the funds remaining for
untendered shares that had been held by a third party paying agent
were returned to us. We will hold such funds until the related shares
are tendered or escheated to the appropriate jurisdiction. At December
30, 2001, there was $45,000 being held by us for such untendered
shares that is shown as restricted cash and amounts due for untendered
shares in the consolidated balance sheet.
In accordance with Emerging Issues Task Force Issue 88-16, "Basis in
Leveraged Buyout Transactions," the acquisition of all the outstanding
shares of common stock not owned by the Sbarro family and all
outstanding stock options was accounted for under the purchase method
of accounting. As a result, the remaining shares of common stock owned
by the Sbarro family are presented in shareholders' equity at their
original basis in the accompanying consolidated balance sheet. During
fiscal 2000, we finalized an allocation of the purchase price from the
going private transaction based on an evaluation of the Company at
September 29, 1999. As a result, property and equipment and intangible
assets were increased by $7.0 million and $216.0 million,
respectively, and annual depreciation and amortization expense was
lower than originally estimated due to the allocation to assets with
different remaining useful lives. This resulted in a $2.4 million
education of depreciation and amortization in the fourth quarter of
fiscal 2000 (see Notes 5 and 14).
All stock option plans that were in effect as of the date of the going
private transaction were terminated on September 29, 1999.
Summarized below are our unaudited pro forma results of operations for
our 1999 fiscal year ended January 2, 2000, as if the merger had taken
place as of the beginning of that year.
-41-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. GOING PRIVATE TRANSACTION (CONTINUED):
Adjustments have been made for the amortization of the excess of the
purchase price over the cost basis of net assets acquired, interest
expense, including interest on a $16.0 million bank mortgage loan
issued subsequent to fiscal 1999 to one of our subsidiaries (Note 14)
and related changes in income tax expense.
FOR THE FISCAL YEAR ENDED
-------------------------
JANUARY 2, 2000
---------------
(IN THOUSANDS)
Pro Forma:
Revenues $389,697
========
Net income $ 6,662
===========
These pro forma results of operations are not necessarily indicative
of the actual results of operations that would have occurred had the
merger taken place at the beginning of the period presented or of
results which may occur in the future.
3. DESCRIPTION OF BUSINESS:
We and our franchisees develop and operate family oriented cafeteria
style Italian restaurants principally under the "Sbarro" and "Sbarro
The Italian Eatery" names. The restaurants are located throughout the
world, principally in shopping malls and other high traffic locations.
Since 1995, we have developed and established other restaurant
concepts to provide growth opportunities that leverage our restaurant
management and financial expertise.
The following sets forth the number of restaurants in operation as of:
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
---- ---- ----
Sbarro-owned (a) 602 636 638
Franchised 325 303 286
--- --- ---
927 939 924
=== === ===
(a) Excludes 37, 33 and 26 other concept units as of the end of the
respective fiscal years.
-42-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EFFECT OF EVENTS OF SEPTEMBER 11, 2001:
As a result of the events of September 11, 2001, a Sbarro-owned
location, as well as a franchise location, that had operated in the
World Trade Center in New York City were destroyed. Although the
Sbarro-owned location generated high sales revenues and operating
income, the effect on fiscal 2001 was not material to consolidated
results as a whole. The franchise location did not generate
significant royalty revenues. In addition, a number of airports were
closed due to the events of September 11 causing airport Sbarro-owned
and franchise units to close for periods of time and a number of
downtown locations have experienced a prolonged period of reduced
sales.
We are fully insured for the cost of the assets destroyed at the
Company location. The estimated amount of the expected recovery is
included in accounts receivable as of December 30, 2001. In addition,
we expect to recover lost income from our business interruption
insurance coverage but, under applicable accounting principles, have
not reflected any estimated recoveries in our financial statements.
5. PROPERTY AND EQUIPMENT, NET:
DECEMBER 30, DECEMBER 31,
2001 (A) 2000
---- ----
(IN THOUSANDS)
Land and improvements $ 3,781 $ 3,781
Leasehold improvements 158,934 165,627
Furniture, fixtures and equipment 72,186 78,237
Construction-in-progress 684 717
-------- --------
235,585 248,362
Less accumulated depreciation and 103,282 95,894
amortization (b) -------- --------
$132,303 $152,468
======== ========
(a) During 2001, we recorded a charge of $5.1 million, of which $3.3
million was for our other concepts, relating to impairment losses
on property and equipment. In addition, we recorded a provision
for restaurant closings of approximately $10.8 million in
connection with the closing of 43 Sbarro locations ($4.3 million)
and three other concept locations ($6.5 million).
(b) Depreciation and amortization of property and equipment was
$24.9, $24.0 and $23.9 million in fiscal 2001, 2000 and 1999,
respectively.
-43-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACQUIRED INTANGIBLE ASSETS:
DECEMBER 30, DECEMBER 31,
2001 2000
---- ----
(IN THOUSANDS)
Trademarks and tradenames $207,590 $207,529
Goodwill 9,712 8,519
Deferred financing costs 10,129 10,101
-------- --------
227,431 226,149
Less accumulated amortization 14,604 8,097
-------- --------
$212,827 $218,052
======== ========
Amortization of the acquired intangible assets:
FISCAL YEARS ENDED
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
---- ---- ----
(IN THOUSANDS)
Trademarks and tradenames $5,189 $4,723 $2,000
Goodwill 244 265 -
Deferred financing costs and other 1,074 1,071 391
------ ------- ----
$6,507 $6,059 $2,391
====== ====== ======
7. ACCRUED EXPENSES:
DECEMBER 30, DECEMBER 31,
2001 2000
---- ----
(IN THOUSANDS)
Compensation $ 6,068 $ 5,265
Payroll and sales taxes 3,968 3,413
Rent and related cost 1,834 2,549
Provision for restaurant closings 1,467 50
(Notes 5 and 12)
Other 11,311 9,588
------- -------
$24,648 $20,865
======= =======
-44-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
In March 2000, we elected to be taxed, beginning January 3, 2000,
under the provisions of Subchapter S of the Internal Revenue Code of
1986, and, where applicable and permitted, under similar state and
local income tax provisions. We no longer pay federal, and with
certain limited exceptions, state and local income taxes for periods
for which we are treated as an S corporation.
Rather, our shareholders include their pro-rata share of our taxable
income on their individual income tax returns and thus are required to
pay taxes on their respective share of our taxable income, whether or
not it is distributed to them.
In connection with the going private transaction and the related
financing, we have entered into a tax payment agreement with our
shareholders. The tax payment agreement permits us to make periodic
tax distributions to our shareholders in amounts that are intended to
approximate the income taxes, including estimated taxes, that would be
payable by our shareholders if their only income were their pro-rata
share of our taxable income and that income was taxed at the highest
applicable federal and New York State marginal income tax rates. We
may only make the tax distributions with respect to periods in which
we are treated as an S corporation for income tax purposes. We made
distributions to our shareholders in accordance with the tax payment
agreement of $7.6 million in fiscal 2001 (all of which related to our
fiscal 2000 earnings), $3.8 million in fiscal 2000 and $3.1 million in
January 2002 related to our fiscal 2001 earnings. We estimate that no
additional distributions will be made in 2002 related to 2001
earnings. Despite our book loss, our shareholders are expected to have
taxable income in fiscal 2001 resulting from differences in the book
and tax treatments of the provision for asset impairment, the
non-deductability of goodwill for tax purposes and significant
differences in book and tax depreciation.
In accordance with SFAS No. 109, "Accounting for Income Taxes," we
reversed our net deferred income taxes upon our conversion to S
corporation status. This resulted in a credit to income taxes of $5.6
million in the first quarter of fiscal 2000.
The provision for income taxes is composed of the following (payable
by us to jurisdictions that do not recognize S corporation status or
that tax entities based on factors other than income):
-45-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED):
FOR THE FISCAL YEARS ENDED
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
---- ---- ----
(IN THOUSANDS)
Federal:
Current $ - $ - $14,758
Deferred - (4,589) 557
------ ------- ------
- (4,589) 15,315
------ ------- ------
State and local:
Current 325 554 3,854
Deferred - (1,040) 153
------ ------- ------
325 (486) 4,007
------ ------- ------
$325 $(5,075) $19,322
==== ======== =======
Our tax expense for fiscal 1999 (prior to our S corporation election)
differed from "expected" tax expense (computed by applying the Federal
corporate rate of 35% for the fiscal year ended January 2, 2000) as
follows:
FOR THE FISCAL YEAR ENDED
-------------------------
JANUARY 2,
2000
----
(IN THOUSANDS)
Computed "expected" tax expense $17,096
Increase (reduction) in income
taxes resulting from:
State and local income taxes, net of federal income tax benefit 2,605
Tax exempt interest income and dividends received deduction (1,002)
Amortization of excess purchase price over the cost
of net assets acquired 700
Other, net (77)
-------
$19,322
=======
Deferred income taxes are provided for temporary differences between
financial and tax reporting. These differences and the amount of the
related deferred tax benefit are as follows (in thousands):
FOR THE FISCAL YEAR ENDED
JANUARY 2,
2000
Depreciation and amortization $(408)
Accrued expenses 2,706
Other (1,588)
------
$ 710
=====
-46-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT:
(a) The merger (Note 2) was partially funded by the placement of
$255.0 million of 11.0% Senior Notes due September 15, 2009.
Interest on the Senior Notes is payable semi-annually on March 15 and
September 15 of each year and commenced on March 15, 2000. Our payment
obligations under the Senior Notes are jointly, severally,
unconditionally and irrevocably guaranteed by all of Sbarro's current
Restricted Subsidiaries (as defined in the Indenture) and is to be
similarly guaranteed by our future Restricted Subsidiaries. The Senior
Notes and the subsidiary guarantees are senior unsecured obligations
of Sbarro and the guaranteeing subsidiaries, respectively, ranking
pari passu in right of payment to all of our and their respective
present and future senior debt, including amounts outstanding under
the bank credit agreement discussed below. The Indenture permits
redemption of the Senior Notes at our option at varying redemption
prices and requires us to offer to purchase Senior Notes in the event
of a Change of Control and in connection with certain Asset Sales
(each as defined). The Indenture contains various covenants on our
part and on the part of the guaranteeing subsidiaries, including, but
not limited to, restrictions on our payment of dividends, stock
repurchases, certain investments and other restricted payments, the
incurrence of indebtedness and liens on our assets, affiliate
transactions, asset sales and mergers. We were in compliance with the
various covenants contained in the Indenture as of December 30, 2001.
The discount at which the Senior Notes were issued, an aggregate of
approximately $3.8 million, is being accreted to the Senior Notes on a
straight-line basis over the original ten year life of the Senior
Notes. Accretion of the discount was $0.3 million in each of fiscal
2001 and 2000 and $0.1 million in fiscal 1999.
(b) On September 23, 1999, we entered into a Bank Credit Agreement
(the "Credit Agreement") which provides us with an unsecured senior
revolving credit facility that enables us to borrow, on a revolving
basis from time to time during its five-year term, up to $30.0
million, including a $10.0 million sublimit for standby letters of
credit. No amounts were outstanding under the credit facility as of
December 30, 2001.
At our option, the interest rates applicable to loans under the Credit
Agreement will be at either (i) the bank's prime rate (4.75% at March
15, 2002) plus a margin ranging from zero to 0.75% (the margin at
March 15, 2002 was 0.75%) or (ii) reserve adjusted LIBOR (1.90% at
March 15, 2002) plus a margin ranging from 1.5% to 2.5% (the margin at
March 15, 2002 was 2.5%). In each case, the margin depends upon the
ratio of our senior debt (as defined) to our earnings before interest,
taxes and depreciation and amortization ("EBITDA"). We have agreed to
pay certain fees in connection with the Credit Agreement, including an
unused commitment fee at a rate per year that will vary from 0.25% of
the undrawn amount of the facility to 0.45% of the undrawn amount of
the facility per year, depending upon the ratio of
-47-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED):
our senior debt to EBITDA. The unused commitment fee at March 15, 2002
was 0.45% per year.
Each of our current guaranteeing subsidiaries (the same entities as
the Restricted Subsidiaries under the Indenture) have agreed to, and
the future guaranteeing subsidiaries are to, unconditionally and
irrevocably guarantee our obligations under the Credit Agreement on a
joint and several basis. All borrowings under the Credit Agreement are
repayable on September 28, 2004. In addition, we will be required to
repay our loans and reduce the lenders' commitments under the Credit
Agreement using the proceeds of certain asset sales and issuances of
certain equity interests of, and sales of equity interests in, the
guaranteeing subsidiaries.
The Credit Agreement contains various covenants on our part and on the
part of the guaranteeing subsidiaries, including, but not limited to,
restrictions on the payment of dividends and making stock repurchases,
certain investments and other restricted payments, the incurrence of
indebtedness, guarantees, other contingent obligations, liens on
assets, affiliate transactions, asset sales and mergers,
consolidations and acquisitions of stock or assets by us and our
guaranteeing subsidiaries. The Credit Agreement also contains
provisions which, under certain circumstances, prohibit redemptions or
repurchases of the Senior Notes, including repurchases that might
otherwise be required pursuant to the terms of the Indenture, and
imposes certain conditions on our amending or supplementing the
Indenture. In addition, we are required to maintain a minimum ratio of
consolidated EBITDA to consolidated interest expense (in each case
with the guaranteeing subsidiaries) of at least 1.25 to 1.0 through
December 28, 2002, 1.90 to 1.0 beginning December 29, 2002 and 2.0 to
1.0 beginning December 28, 2003. We are also required to maintain a
ratio of consolidated senior debt to consolidated EBITDA (in each case
with the guaranteeing subsidiaries) of 7.25 to 1 through December 28,
2002, 4.7 to 1.0 beginning December 29, 2002 and 4.5 to 1.0 beginning
December 28, 2003. We obtained a waiver of compliance for fiscal 2001
from the required ratios of consolidated senior debt to consolidated
EBITDA and of consolidated EBITDA to consolidated interest as defined
in the Credit Agreement.
(c) In March 2000, one of our Restricted Subsidiaries obtained a $16.0
million, 8.4% loan due in 2010, secured by a mortgage on our corporate
headquarters building. The loan is payable in monthly installments of
principal and interest of $0.1 million. The outstanding principal
balance as of December 30, 2001 was $15.8 million. The mortgage
agreement contains various covenants, including a requirement that the
Restricted Subsidiary maintain a minimum ratio of EBITDA to annual and
quarterly debt service of at least 1.2 to 1.0. The Restricted
Subsidiary was in compliance with the various covenants contained in
the mortgage agreement as of December 30, 2001.
-48-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED):
Scheduled maturities of long-term debt are as follows (in thousands):
Fiscal years ending:
December 29, 2002 $ 140
December 28, 2003 155
January 2, 2005 168
January 1, 2006 182
December 31, 2006 197
Later years 269,947
--------
270,789
Less:
Current maturities (140)
Unaccreted original issue discount (2,931)
--------
$267,718
========
10. COMMITMENTS AND CONTINGENCIES:
Commitments:
We conduct all of our operations in leased facilities. Most of our
restaurant leases provide for the payment of base rents plus real
estate taxes, utilities, insurance, common area charges and certain
other expenses, as well as contingent rents generally ranging from 8%
to 10% of net restaurant sales in excess of stipulated amounts.
Rental expense under operating leases, including common area charges,
other expenses and additional amounts based on sales, were as follows:
FOR THE FISCAL YEARS ENDED
----------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 2,
2001 2000 2000
---- ---- ----
(IN THOUSANDS)
Minimum rentals $52,856 $50,070 $47,627
Common area charges 15,827 14,819 14,002
Contingent rentals 4,511 4,827 4,567
------- ------- -------
$73,194 $69,716 $66,196
======= ======= =======
-49-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
COMMITMENTS (CONTINUED):
Future minimum rental and other payments required under non-cancelable
operating leases for our Sbarro restaurants and our other concept
locations that were open on December 30, 2001 and the existing leased
administrative and support function office (Note 11) are as follows
(in thousands):
FISCAL YEARS ENDING:
--------------------
December 29, 2002 $76,195
December 28, 2003 73,117
January 2, 2005 70,658
January 1, 2006 67,311
December 31, 2006 63,769
Later years 226,762
We are the principal lessee under operating leases for certain
franchised restaurants which are subleased to the franchisee.
Franchisees pay rent and related expenses directly to the landlord.
Future minimum rental payments required under these non-cancelable
operating leases for franchised restaurants that were open as of
December 30, 2001 are as follows (in thousands):
FISCAL YEARS ENDING:
--------------------
December 29, 2002 $1,383
December 28, 2003 1,259
January 2, 2005 1,114
January 1, 2006 889
December 31, 2006 855
Later years 1,273
As of March 1, 2002, future minimum rental payments required under
non-cancelable operating leases for restaurants which had not as yet
opened as of December 30, 2001 are as follows (in thousands):
FISCAL YEARS ENDING:
--------------------
December 29, 2002 $248
December 28, 2003 603
January 2, 2005 615
January 1, 2006 638
December 31, 2006 639
Later years $3,620
-50-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
COMMITMENTS (CONTINUED):
We are a party to contracts aggregating $7.0 million with respect to
the construction of restaurants. Payments of approximately $5.6
million have been made on those contracts as of December 30, 2001.
As of March 15, 2002, there are $2.7 million of letters of credit
outstanding for our benefit as well as for the benefit of our 100%
owned other concepts. We have guaranteed up to $2.1 million of loans,
$0.3 million of a mortgage, $0.3 million of letters of credit and a
$4.6 million line of credit for certain of our minority owned
ventures.
CONTINGENCIES:
On November 17, 1999, an action was instituted against us in which the
plaintiffs allege that they served as store managers, general
managers, assistant managers or co-managers in our restaurants in the
State of Washington at various times since November 17, 1996 and that,
in connection with their employment, we violated the overtime pay
provisions of the State of Washington's Minimum Wage Act by treating
them as overtime exempt employees, breached alleged employment
agreements and statutory provisions by failing to record and pay for
hours worked at the contract rates and/or statutory minimum wage rates
and failed to provide statutorily required meal breaks and rest
periods. The plaintiffs represented substantially all of our
restaurant managers employed for any period of time on or after
November 9, 1996 in the State of Washington. The settlement agreement
approved by the court in February 2001 did not have a material impact
upon either our financial condition or results of operations.
On December 20, 1999, twelve current and former general managers of
Sbarro restaurants in California amended a complaint against us filed
in the Superior Court of California for Orange County. The complaint
alleges that the plaintiffs were improperly classified as exempt
employees under the California wage and hour law. The plaintiffs are
seeking actual damages, punitive damages and costs of the lawsuit,
including reasonable attorney's fees, each in unspecified amounts.
Plaintiffs filed a motion to certify the lawsuit as a class action,
but the motion was denied by the court. We believe that we have
substantial defenses to the claims and are vigorously defending this
action.
On September 6, 2000, eight other current and former general managers
of Sbarro restaurants in California filed a complaint against us in
the Superior Court of California for Orange County alleging that the
plaintiffs were improperly classified as exempt employees under
California wage and hour law. The plaintiffs are seeking actual
damages, punitive damages and costs of the lawsuit, including
reasonable attorney's fees, each in unspecified amounts.
-51-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
CONTINGENCIES (CONTINUED):
Plaintiffs are represented by the same counsel who is representing the
plaintiffs in the case discussed in the preceding paragraph. We
believe that we have substantial defenses to the claims and are
vigorously defending this action.
From time to time, we are a party to certain claims and legal
proceedings in the ordinary course of business, none of which, in our
opinion, would have a material adverse effect on our financial
position or results of operations.
11. TRANSACTIONS WITH RELATED PARTIES:
We are the sole tenant of an administrative office building in
Commack, New York which is leased from a partnership owned by certain
of our shareholders.
For each of the 2001, 2000 and 1999 fiscal years, the annual rent paid
pursuant to the sublease was $0.3 million. The annual rent payable
pursuant to the sublease is $0.3 million each year for the remainder
of the lease term which expires in 2011. In addition, we are obligated
to pay real estate taxes, utilities, insurance and certain other
expenses for the facility. We believe that our rent is comparable to
the rent that would be charged by an unaffiliated third party.
In April 2000, we loaned Mario Sbarro, our Chairman, President and
Chief Executive Officer, $2.0 million, pursuant to a note due on April
4, 2002 bearing interest at 6.46%, payable annually. Such loan was
prepaid November 19, 2001.
On January 2 and 3, 2001, we loaned three executive officers and
directors, Mario, Anthony and Joseph Sbarro, $200,000, $300,000 and
$200,000, respectively, which loans were repaid on January 15, 2001
with interest at our bank's prime rate in effect during the time that
the loans were outstanding.
On April 5, 2001, we loaned $3.23 million to certain of our
shareholders, including: Mario Sbarro, $1.08 million, Joseph Sbarro,
$1.24 million and Anthony Sbarro, $0.87 million. The related notes are
payable on April 5, 2003, and bear interest at the rate of 4.63%,
payable annually.
-52-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. TRANSACTIONS WITH RELATED PARTIES (CONTINUED):
On December 28, 2001, we loaned $2.8 million to our shareholders,
including: Mario Sbarro, $0.60 million, Joseph Sbarro, $0.70 million
and Anthony Sbarro, $0.49 million and the Trust of Carmela Sbarro,
$0.99 million The related notes are payable on December 28, 2004, and
bear interest at the rate of 2.48%, payable annually.
A member of our Board of Directors acts as a consultant to us for
which he received $0.3 million, $0.3 million, and $0.5 million in the
2001, 2000, and 1999 fiscal years, respectively.
We and our other concepts have purchased printing services from a
corporation owned by a son-in-law of Mario Sbarro for which we and our
other concepts paid, in the aggregate, $487,000, $547,000 and $397,000
in fiscal 2001, 2000 and 1999, respectively.
12. PROVISION FOR ASSET IMPAIRMENT, RESTAURANT CLOSINGS AND OTHER CHARGES:
During 2001, we recorded a provision for asset impairment, restaurant
closings and other charges of $18.2 million. (See Note 5.)
In connection with the final disposition of two joint venture unit
closings recorded in fiscal 1997, we agreed to a special allocation of
losses which resulted in an additional $1.0 million charge before tax,
or $0.6 million after tax, to earnings in fiscal 1999.
13. DIVIDENDS:
During 2001, we made distributions to our shareholders totaling $12.6
million including $7.6 million for taxes. Distributions for taxes were
made pursuant to the tax payment agreement described in Note 8. During
2000, we made distributions to our shareholders totaling $22.1
million, including $3.8 million for taxes. In January, 2002, we made a
tax distribution of $3.1 million.
-53-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS)
FISCAL YEAR 2001
----------------
Revenues $112,746 $84,467 $88,774 $102,728
Gross profit (a) 85,778 64,443 67,558 80,280
Net loss (b) (4,109) (4,598) (2,151) (2,731)
======== ======= ======= ========
FISCAL YEAR 2000
----------------
Revenues $111,369 $88,308 $91,560 $108,171
Gross profit (a) 86,029 67,038 70,324 84,569
Net income (b) 5,194 1,447 2,448 16,356
======== ======= ======= ========
(a) Gross profit represents the difference between restaurant sales
and the cost of food and paper products.
(b) See Note 12 for information regarding the provision for asset
impairment, restaurant closings and other charges in 2001. See
Note 8 regarding a $5.6 million credit to income tax expense upon
conversion to an S Corporation in the first quarter of 2000. See
Note 2 regarding a reduction of $2.4 million of depreciation and
amortization recorded in the fourth quarter of 2000 upon
finalization of the purchase price allocation from the going
private transaction.
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS:
Certain subsidiaries have guaranteed amounts outstanding under the
Senior Notes and Credit Agreement. Each of the guaranteeing
subsidiaries is our direct or indirect wholly owned subsidiary and
each has fully and unconditionally guaranteed the Senior Notes and the
Credit Agreement on a joint and several basis.
The following condensed consolidating financial information presents:
(1) Condensed consolidating balance sheets as of December 30, 2001
and December 31, 2000 and related statements of operations and
cash flows for the fiscal years ended December 30, 2001, December
31, 2000 and January 2, 2000 of (a) Sbarro, Inc., the parent, (b)
the guarantor subsidiaries as a group, (c) the nonguarantor
subsidiaries as a group and (d) the Company on a consolidated
basis.
-54-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
(2) Elimination entries necessary to consolidate Sbarro, Inc., the
parent, with the guarantor and nonguarantor subsidiaries.
(3) Investments in subsidiaries are accounted for by the parent on
the cost method.
The principal elimination entries eliminate intercompany balances and
transactions.
-55-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 30, 2001
ASSETS
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current assets:
Cash and cash equivalents $29,673 $5,437 $1,842 $36,952
Restricted cash for untendered Shares 45 - - 45
Receivables less allowance for
Doubtful accounts of $175:
Franchise 2,162 - - 2,162
Other 2,069 613 115 $ - 2,797
-------- -------- -------- ---------- --------
4,231 613 115 - 4,959
Inventories 1,413 1,771 353 - 3,537
Prepaid expenses 1,916 (530) (144) - 1,242
-------- -------- -------- ---------- --------
Total current assets 37,278 7,291 2,166 - 46,735
Intercompany receivables 12,079 281,438 - (293,517) -
Investment in subsidiaries 65,469 - - (65,469) -
Property and equipment, net 46,554 73,659 12,090 - 132,303
Intercompany receivables - long term 3,900 - - (3,900) -
Intangible assets:
Trademarks and tradenames, net 195,916 - - - 195,916
Deferred financing costs and 16,602 309 - - 16,911
other, net
Loan receivable from officer 6,032 - - - 6,032
Other assets 8,065 1,852 (576) (2,476) 6,865
-------- -------- -------- ---------- --------
$391,895 $364,549 $13,680 $(365,362) $404,762
======== ======== ======== ========== ========
-56-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 30, 2001
LIABILITIES AND SHAREHOLDERS' EQUITY
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current liabilities:
Amounts due for untendered shares $ 45 $ 45
Accounts payable 8,014 $ 164 $ 929 9,107
Accrued expenses 19,392 1,824 3,432 24,648
Accrued interest payable 8,181 - - 8,181
Current portion of mortgage payable - 140 - - 140
----------- ------ --------- --------- ---------
Total current liabilities 35,632 2,128 4,361 - 42,121
Intercompany payables 281,438 - 12,078 ($293,516) -
Deferred rent 7,512 - 967 - 8,479
Long-term debt, net of
Original issue discount 252,070 15,648 - - 267,718
Intercompany payables - long term - 3,900 - (3,900) -
Shareholders' equity (deficit):
Preferred stock, $1 par value;
authorized 1,000,000 shares; none
issued - - - - -
Common stock, $.01 par value:
authorized 40,000,000 shares;
issued and outstanding 7,064,328
shares 71 - - - 71
Additional paid-in capital 10 65,469 2,477 (67,946) 10
Retained earnings (deficit) (184,838) 277,404 (6,203) - 86,363
---------- --------- ---------- ----------- ----------
(184,757) 342,873 (3,726) (67,946) 86,444
---------- --------- ---------- ----------- ----------
$391,895 $364,549 $13,680 ($365,362) $404,762
========= ========= ======== ========== ========
-57-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2000
ASSETS
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current assets:
Cash and cash equivalents $36,963 $4,232 $1,124 $42,319
Restricted cash for untendered
shares 153 - - 153
Receivables less allowance for
doubtful accounts of $211:
Franchise 1,350 - - 1,350
Other 1,111 370 103 ($30) 1,554
-------- -------- -------- --------- --------
2,461 370 103 (30) 2,904
Inventories 1,459 1,763 309 - 3,531
Prepaid expenses 836 136 27 - 999
-------- -------- -------- --------- --------
Total current assets 41,872 6,501 1,563 (30) 49,906
Intercompany receivables 20,318 195,470 - (215,788) -
Investment in subsidiaries 65,469 - - (65,469)
Property and equipment, net 45,486 88,026 18,956 - 152,468
Intercompany receivables - long term 3,558 - - (3,558)
Intangible assets:
Trademarks and tradenames, net 201,044 - - - 201,044
Deferred financing costs and other,
net 16,262 373 - - 16,635
Loan receivable from officer 2,000 - - - 2,000
Other assets 10,788 52 (534) (3,804) 6,502
-------- -------- -------- --------- --------
$406,797 $290,422 $ 19,985 ($288,649) $428,555
======== ======== ======== ========== ========
-58-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current liabilities:
Amounts due for untendered shares $153 $153
Accounts payable 9,593 $135 $556 10,284
Accrued expenses 20,025 (1,094) 1,934 20,865
Accrued interest payable 8,181 - - 8,181
Current portion of
Mortgage payable - 130 - - 130
--------- --------- --------- --------- --------
Total current liabilities 37,952 (829) 2,490 - 39,613
Intercompany payables 195,470 - 20,318 ($215,788) -
Deferred rent 6,791 - 1,076 7,867
Long-term debt, net of original issue
discount 251,689 15,789 - - 267,478
Intercompany payables - long term - 3,558 - (3,558) -
Shareholders' equity (deficit):
Preferred stock, $1 par value;
authorized 1,000,000 shares; None
issued - - - - -
Common stock, $.01 par value:
authorized 40,000,000 shares;
issued and outstanding 7,064,328
shares 71 - - - 71
Additional paid-in capital 10 65,469 2,507 (67,976) 10
Retained earnings (deficit) (85,186) 206,435 (6,406) (1,327) 113,516
--------- --------- --------- --------- --------
(85,105) 271,904 (3,899) (69,303) 113,597
-------- -------- ------- --------- --------
$406,797 $290,422 $19,985 ($288,649) $428,555
======== ======== ======= ========== ========
-59-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $155,310 $189,731 $27,632 $372,673
Franchise related income 10,286 - - 10,286
Real estate and other 3,078 3,548 - $ (870) 5,756
Intercompany charges - 13,020 - (13,020) -
-------- ------- -------- --------- ----------
Total revenues 168,674 206,299 27,632 (13,890) 388,715
-------- ------- -------- --------- ----------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper Products 27,900 39,173 7,541 - 74,614
Payroll and other Employee
benefits 41,287 53,185 9,356 - 103,828
Other operating costs 46,619 60,197 9,765 - 116,581
Depreciation and Amortization 16,025 12,844 1,506 - 30,375
General and administrative 14,161 15,618 563 (870) 29,472
Provision for asset impairment,
restaurant closings and other
charges (1) 21,310 (3,086) - 18,224
Intercompany charges 13,020 - - (13,020) -
-------- ------- -------- --------- ----------
Total costs and expenses 180,322 181,017 25,645 (13,890) 373,094
-------- ------- -------- --------- ----------
Operating income before minority
interest (11,648) 25,282 1,987 - 15,621
Minority interest - - (1) - (1)
-------- ------- -------- --------- ----------
Operating income (11,648) 25,282 1,986 - 15,620
Other (expense) income:
Interest expense (29,581) (1,369) (1,903) 1,903 (30,950)
Interest income 2,659 - - (1,903) 756
Equity in net income of
unconsolidated affiliates 310 - - - 310
-------- ------- -------- --------- ----------
Net other (expense) income (26,612) (1,369) (1,903) - (29,884)
(Loss) income before income taxes (38,260) 23,913 83 - (14,264)
Income taxes (benefit) (288) 586 27 - 325
-------- ------- ------- ---------- -------
Net (loss) income $(37,972) $23,327 $ 56 $ - $ (14,589)
========= ======= ======== ========== ===========
(1) Income included in Nonguarantor Subsidiaries for the provision for asset
impairment, restaurant closings and other charges represents uncollectibility of
amounts due to the Parent of $13.7 million, which is eliminated in
consolidation.
-60-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $163,903 $194,797 $23,665 $382,365
Franchise related income 11,231 - - 11,231
Real estate and other 3,161 3,490 - ($839) 5,812
Intercompany charges - 16,991 - (16,991) -
------- ------- ------- ---------- --------
Total revenues 178,295 215,278 23,665 (17,830) 399,408
------- ------- ------- ---------- --------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 28,760 39,186 6,459 - 74,405
Payroll and other employee
benefits 39,571 53,671 8,311 - 101,553
Other operating costs 46,929 60,667 6,526 - 114,122
Depreciation and amortization 14,894 13,112 1,033 - 29,039
General and administrative 18,173 12,497 1,051 (839) 30,882
Intercompany charges
16,991 - - (16,991) -
------- ------- ------- ---------- --------
Total costs and expenses 165,318 179,133 23,380 (17,830) 350,001
------- ------- ------- ---------- --------
Operating income before minority
interest 12,977 36,145 285 - 49,407
Minority interest - - (46) - (46)
------- ------- ------- ---------- --------
Operating income 12,977 36,145 239 - 49,361
Other (expense) income:
Interest expense (29,244) (999) (1,612) 1,612 (30,243)
Interest income 2,561 - - (1,612) 949
Equity in net income of
unconsolidated affiliates 303 - - - 303
------- ------- ------- ---------- --------
Net other (expense) income (26,380) (999) (1,612) - (28,991)
Income (loss) before income taxes (13,403) 35,146 (1,373) - 20,370
Income taxes (benefit) (5,790) 743 (28) - (5,075)
------- ------- ------- ---------- --------
Net income (loss) $(7,613) $34,403 $(1,345) $ - $25,445
======== ======= ======== ========== =======
-61-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 2, 2000
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $162,770 $194,105 $18,639 $375,514
Franchise related income 8,688 - - 8,688
Real estate and other 2,659 2,913 (77) 5,495
Intercompany charges - 19,864 - $(19,864) -
------- ------- ------ ------- -------
Total revenues 174,117 216,882 18,562 (19,864) 389,697
------- ------- ------ ------- -------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 30,297 40,871 4,788 - 75,956
Restaurant operating
Payroll and other employee
benefits 42,844 48,509 5,983 - 97,336
Other operating costs 43,198 60,325 5,076 - 108,599
Depreciation and amortization 12,210 12,703 799 - 25,712
General and administrative 14,548 12,393 1,913 - 28,854
Provision for asset impairment,
restaurant closings and other
charges - - 1,013 - 1,013
Intercompany charges
19,864 - - (19,864) -
------- ------- ------ ------- -------
Total costs and expenses 162,961 174,801 19,572 (19,864) 337,470
------- ------- ------ ------- -------
Operating income (loss) before
minority interest 11,156 42,081 (1,010) - 52,227
Minority interest - - 266 - 266
------- ------- ------ ------- -------
Operating income (loss) 11,156 42,081 (744) - 52,493
Other (expense) income:
Interest expense (7,899) - (997) 997 (7,899)
Interest income 4,825 - - (997) 3,828
Equity in net income of
unconsolidated affiliates 423 - - - 423
------- ------- ------ ------- -------
Net other (expense) income ( 2,651) - (997) - (3,648)
------- ------- ------ ------- -------
Income (loss) before income taxes 8,505 42,081 (1,741) - 48,845
Income taxes 3,365 16,646 (689) - 19,322
------- ------- ------ ------- -------
Net income (loss) $5,140 $25,435 $(1,052) $ - $29,523
====== ======= ======= ======= =======
-62-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Operating activities:
- ---------------------
Net income (loss) $ (37,972) $23,327 $ 56 $ - $ (14,589)
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation and amortization 12,492 17,827 1,511 - 31,830
Increase in deferred rent, net 720 (258) 507 - 969
Non-cash provision for asset
impairment, restaurant closings
and other charges 20,914 - (3,562) - 17,352
Minority interest - - 1 - 1
Equity in income of
unconsolidated affiliates (310) - - - (310)
Dividends received from
unconsolidated affiliates 244 - - - 244
Changes in operating assets and
liabilities:
Increase in receivables (298) (243) (12) - (553)
Decrease (increase) in
inventories 16 (7) (45) - (36)
(Increase) decrease in
prepaid expenses (1,202) 666 112 - (424)
(Increase) decrease in
other assets 340 (1,518) 43 - (1,135)
(Decrease) increase in accounts
Payable and accrued expenses (2,438) 3,438 463 - 1,463
------- ------- ------- ---------- --------
Net cash (used in) provided by
operating activities (7,494) 43,232 (926) - 34,812
Investing activities:
- ---------------------
Purchases of property and equipment (9,651) (7,947) (4,930) - (22,528)
Proceeds from disposition of
Property and equipment 75 - - - 75
------- ------- ------- ---------- --------
Net cash used in investing activities (9,576) (7,947) (4,930) - (22,453)
------- ------- ------- ---------- --------
-63-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Financing activities:
- ---------------------
Mortgage principal repayments - (130) - - (130)
Purchase of minority interest (1,000) - - - (1,000)
Loans to shareholders (6,732) - - - (6,732)
Repayment of shareholder loans 2,700 - - - 2,700
Tax distributions (7,564) - - - (7,564)
Dividends (5,000) - - - (5,000)
Intercompany balances 27,377 (33,951) 6,574 - -
-------- -------- ------ -------- --------
Net cash used in financing activities 9,781 (34,081) 6,574 - (17,726)
-------- -------- ------ -------- --------
(Decrease) increase in cash and cash
equivalents (7,289) 1,204 718 - (5,367)
Cash and cash equivalents at beginning
of period 36,963 4,232 1,124 - 42,319
-------- ------- ------ -------- --------
Cash and cash equivalents at end of
period $29,674 $5,436 $1,842 $ - $36,952
======= ======== ====== ======== =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes $ 562 $628 $ 7 $ - $1,107
====== ==== ======== ======== ======
Cash paid during the period for
interest $28,159 $1,332 $ - $ - $29,491
======= ====== ========= ========= =======
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SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Net income (loss) ($7,613) $34,403 $(1,345) $ - $25,445
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 17,324 12,131 1,034 - 30,489
Increase in deferred rent, net 180 - - - 180
Minority interest - - 46 - 46
Equity in income of
unconsolidated affiliates (303) - - - (303)
Dividends received from
unconsolidated affiliates 156 - - - 156
Changes in operating assets and
liabilities:
Decrease (increase) in receivables 248 (354) (26) - (132)
Decrease (increase) in inventories 134 201 (149) - 186
Decrease (increase)in prepaid
expenses 1,177 (513) 34 - 698
(Increase) decrease in other
assets (9,441) 242 2,443 7,060 304
(Decrease) increase in accounts
payable and accrued expenses (3,912) (438) 1,270 - (3,080)
(Decrease) increase in income
taxes payable (985) 180 73 - (732)
------- -------- -------- -------- --------
Net cash (used in) provided by
operating activities before change
in accrued interest payable and
effect of conversion to Subchapter
S status (3,035) 45,852 3,380 7,060 53,257
Change in deferred taxes due to
Subchapter S conversion (5,629) - - - (5,629)
Increase in accrued interest payable 701 - - - 701
------- -------- -------- -------- --------
Net cash (used in) provided by
operating activities (7,963) 45,852 3,380 7,060 48,329
Investing activities:
Purchases of property and equipment (7,628) (12,740) (10,825) - (31,193)
Proceeds from disposition of property
and equipment 35 - - - 35
------- -------- -------- -------- --------
Net cash used in investing activities (7,593) (12,740) (10,825) - (31,158)
------- -------- -------- -------- --------
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SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Financing activities:
- ---------------------
Proceeds from mortgage - 16,000 - - 16,000
Mortgage principal repayments - (81) - - (81)
Cost of mortgage - (397) - - (397)
Loan to officer (2,000) - - - (2,000)
Tax distributions (3,800) - - - (3,800)
Dividends (18,328) - - - (18,328)
Intercompany balances 48,793 (48,793) 7,060 (7,060) -
-------- -------- -------- ------- --------
Net cash (used in) provided by
financing activities 24,665 (33,271) 7,060 (7,060) (8,606)
-------- -------- -------- ------- --------
Increase (decrease) in cash and cash
equivalents 9,109 (159) (385) - 8,565
Cash and cash equivalents at beginning
of year 27,853 4,391 1,510 - 33,754
-------- -------- -------- ------- --------
Cash and cash equivalents at end of
year $36,962 $4,232 $1,125 $ - $42,319
======= ====== ======= ======= =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes $3,240 $676 $33 $ - $3,949
======= ====== ======= ======= =======
Cash paid during the period for
interest $27,152 $999 $ - $ - $28,151
======= ====== ======= ======= =======
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SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED JANUARY 2, 2000
GUARANTOR NONGUARANTOR CONSOLIDATED
Operating activities: PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- --------------------- ------ ------------ ------------ ------------ -----
Net income (loss) $5,140 $25,435 $(1,052) $29,523
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 13,017 12,269 802 26,088
Increase in deferred income taxes 710 - - 710
Decrease in deferred rent, net (107) - - (107)
Provision for asset impairment,
restaurant closings and other
charges 1,013 - - 1,013
Minority interest - - (266) (266)
Equity in income of
unconsolidated affiliates (423) - - (423)
Changes in operating assets and
liabilities:
Decrease (increase) in receivables 772 (11) 9 770
(Increase) decrease in
inventories (247) (309) 2 (554)
(Increase) decrease in prepaid
expenses (413) 73 (68) (408)
(Increase) decrease in other
assets (6,629) (17) 333 $3,415 (2,898)
Increase (decrease) in accounts
payable and accrued expenses 2,967 (594) 389 - 2,762
(Decrease) increase in income
taxes payable (1,264) (92) (52) - (1,408)
--------- ---------- ---------- -------- ---------
Net cash provided by operating
activities before change in accrued
interest payable 14,536 36,754 97 3,415 54,802
Increase in accrued interest payable 7,480 - - - 7,480
--------- -------- ------- -------- --------
Net cash provided by operating
activities 22,016 36,754 97 3,415 62,282
--------- -------- ------- -------- --------
Investing activities:
Purchases of property and equipment (8,877) (13,750) (2,655) - (25,282)
Proceeds from disposition of property
and equipment 55 - - - 55
--------- -------- ------- -------- --------
Net cash used in investing activities (8,822) (13,750) (2,655) - (25,227)
--------- -------- ------- -------- --------
-67-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED JANUARY 2, 2000
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Financing activities:
- ---------------------
Proceeds from long-term debt 251,211 - - - 251,211
Cost of merger and related financing (411,000) - - - (411,000)
Accrued and previously paid merger
costs 1,007 - - - 1,007
Proceeds from exercise of stock options 426 - - - 426
Intercompany balances 24,880 (24,880) 3,415 (3,415) -
------- ------ ----- ------ -------
Net cash used in financing activities (133,476) (24,880) 3,415 (3,415) (158,356)
------- ------ ----- ------ -------
(Decrease) increase in cash and cash
equivalents (120,282) (1,876) 857 - (121,301)
Cash and cash equivalents at beginning
of year 148,134 6,268 653 - 155,055
------- ------ ----- ------ -------
Cash and cash equivalents at end of
period $27,852 $4,392 $1,510 $ - $33,754
======= ====== ===== ====== =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes $17,540 $2,544 $ 45 $ - $20,129
======= ====== ===== ====== =======
Cash paid during the period for
interest $ 30 $ - $ - $ - $ 30
======= ====== ===== ====== =======
68
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company and their ages at March
1, 2002 are:
NAME AGE POSITION
---- --- --------
Mario Sbarro 60 Chairman of the Board, President, Chief
Executive Officer and Director
Anthony Sbarro 55 Vice Chairman of the Board, Treasurer and
Director
Joseph Sbarro 61 Senior Executive Vice President, Secretary
and Director
Carmela Sbarro 80 Vice President and Director
Anthony J. Missano 43 President - Quick Service Division and
Corporate Vice President
Gennaro A. Sbarro 35 President - Franchising and Licensing
Division and Corporate Vice President
Gennaro J. Sbarro 39 President - Casual and Fine Dining
Division and Corporate Vice President
Carmela N. Merendino 37 Vice President - Administration
John Bernabeo 45 Vice President - Architecture and Engineering
Steven B. Graham 48 Vice President and Controller
Ashraf Kilada 38 Vice President - Risk Management and Benefits
Harold L. Kestenbaum 52 Director
Richard A. Mandell 59 Director
Terry Vince 73 Director
Bernard Zimmerman 69 Director
MARIO SBARRO has been an officer, a director and a principal shareholder of
Sbarro since its organization in 1977, serving as Chairman of our board of
directors, President and Chief Executive Officer for more than the past five
years.
ANTHONY SBARRO has been an officer, a director and a principal shareholder
of Sbarro since its organization in 1977, serving as Vice Chairman of our board
of directors and Treasurer for more than the past five years.
JOSEPH SBARRO has been an officer, a director and a principal shareholder
of Sbarro since its organization in 1977, serving as Senior Executive Vice
President and Secretary for more than the past five years.
-69-
CARMELA SBARRO has been one of our Vice Presidents since March 1985. Mrs.
Sbarro was a founder of Sbarro, together with her late husband, Gennaro Sbarro.
Mrs. Sbarro devotes a substantial portion of her time to recipe and product
development. Our board of directors elected Mrs. Sbarro as a director in January
1998. Mrs. Sbarro previously served as a director from March 1985 until December
1988, following which she was elected director emeritus until her reelection to
our board of directors.
ANTHONY J. MISSANO has been a Corporate Vice President for more than the
past five years and was elected President of our Quick Service Division in
January 2000.
GENNARO A. SBARRO has been a Corporate Vice President for more than the
past five years and was elected President of our Franchising and Licensing
Division in January 2000.
GENNARO J. SBARRO has been a Corporate Vice President for more than the
past five years and was elected President of our Casual and Fine Dining Division
in January 2000.
CARMELA N. MERENDINO has been Vice President - Administration for more than
the past five years.
JOHN BERNABEO joined Sbarro in August 1992 and served in various capacities
prior to his election as Vice President - Architecture and Engineering in May
1997.
ASHRAF KILADA was elected Vice President - Risk Management and Benefits in
March 2002. Mr. Kilada served as our director of Risk Management and Benefits
for more than the past five years.
STEVEN B. GRAHAM was elected Vice President in January 2000. Mr. Graham has
served as our Controller for more than the past five years. Mr. Graham has been
a certified public accountant in New York for over 20 years.
HAROLD L. KESTENBAUM has been a practicing attorney in New York since 1976.
He became a director of Sbarro in March 1985. Mr. Kestenbaum is also a director
of RezConnect Technologies, Inc. and Uptown Restaurant Group, Inc.
RICHARD A. MANDELL, a private investor and financial consultant, was a
Managing Director of BlueStone Capital Partners, L.P., an investment banking
firm, from February until April 1998 and Vice President - Private Investments of
Clariden Asset Management (NY) Inc., a subsidiary of Clariden Bank, a private
Swiss bank, from January 1996 until February 1998. From 1982 until June 1995,
Mr. Mandell served as a Managing Director of Prudential Securities Incorporated,
an investment banking firm. He became a director of Sbarro in March 1986. Mr.
Mandell is also a director of MCM, Inc. and Woodworkers Warehouse, Inc.
TERRY VINCE has been Chairman of the Board and President of Sovereign
Hotels, Inc. a company that owns and manages hotels, since October 1990 and
Chairman of the Board of Fame
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Corp., a food service management company, since January 1994. Mr. Vince became a
director of Sbarro in December 1988.
BERNARD ZIMMERMAN has been President of Bernard Zimmerman & Co., Inc. since
October 1972 and was Senior Vice President of The Zimmerman Group, Inc. from
January 1991 to November 1996, two financial and management consulting firms.
Mr. Zimmerman also served as President and a director of Beacon Hill Management,
Inc., an advisor to Beacon Hill Mutual Fund, Inc., from December 1994 until
October 1997. From September 1986 until September 1993, Mr. Zimmerman also
served as Chairman and President of St. Lawrence Seaway Corp., an owner and
manager of agricultural properties. Mr. Zimmerman has been a certified public
accountant in New York for more than the past thirty-five years. He became a
director of Sbarro in March 1985.
Our by-laws provide that the minimum number of directors that can
constitute our board is six and the maximum number of directors that can
constitute our board is twelve.
Our officers are elected annually by the board of directors at its meeting
held immediately after the annual meeting of our shareholders, and hold their
respective offices until their successors are duly elected and qualified.
Officers may be removed at any time by the board.
Mario, Anthony and Joseph Sbarro are the sons of Carmela Sbarro. Carmela N.
Merendino is the daughter, and Gennaro A. Sbarro is the son, of Mario Sbarro.
Gennaro J. Sbarro is the son, and Anthony J. Missano is the son-in-law, of
Joseph Sbarro.
During fiscal 2001, the Company's officers, directors and shareholders were
not required to file reports under Section 16(a) of the Securities Exchange Act
of 1934.
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation of
our chief executive officer and other five most highly compensated persons who
were serving as executive officers at the end of our 2001 fiscal year for
services in all capacities to us and our subsidiaries during our 2001, 2000 and
1999 fiscal years:
ANNUAL
NAME AND COMPENSATION OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------ ---- ------ ----- ------------
Mario Sbarro.......................................... 2001 $700,000 -- --
Chairman of the Board, President and 2000 700,000 $ 300,000 --
Chief Executive Officer 1999 700,000 300,000 $2,221,987 (1)
Anthony Sbarro........................................ 2001 300,000 -- --
Vice Chairman of the Board and Treasurer 2000 300,000 200,000 --
1999 300,000 200,000 $1,145,242 (1)
Joseph Sbarro......................................... 2001 300,000 -- --
Senior Executive Vice President and 2000 300,000 200,000 --
Secretary 1999 300,000 200,000 $1,323,743 (1)
Anthony J. Missano.................................... 2001 220,000 -- --
Corporate Vice President and President - Quick 2000 200,000 150,000 --
Service Division 1999 200,000 150,000 $348,000 (1)
Gennaro A. Sbarro..................................... 2001 220,000 -- --
Corporate Vice President and President - 2000 200,000 150,000 --
Franchise and Licensing Division 1999 200,000 150,000 $389,168 (1)
Gennaro J. Sbarro..................................... 2001 220,000 -- --
Corporate Vice President and President - 2000 200,000 150,000 --
Casual and Fine Dining Division 1999 200,000 150,000 $348,000 (1)
- --------------------
(1) All option plans were terminated upon the completion of the going private
transaction. All of the options held by each executive officer named in the
Summary Compensation Table were terminated in the going private transaction
in exchange for a cash payment equal to the number of shares subject to the
options multiplied by the excess of $28.85 over the applicable option
exercise price.
-72-
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR.
We did not grant any options to purchase our securities or any stock
appreciation rights during fiscal 2001.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END VALUES
No options were exercised during fiscal 2001 and no options were
outstanding at the end of fiscal 2001.
COMPENSATION OF DIRECTORS
Our non-employee directors currently receive a retainer at the rate of
$16,000 per annum, $1,000 for each meeting of the Board attended and $500 for
each meeting attended of a committee of the board on which they serve if the
meeting is not held on the same day as a meeting of the board. Members of the
board also are reimbursed for reasonable travel expenses incurred in attending
board and committee meetings.
Bernard Zimmerman & Company, Inc., of which Bernard Zimmerman is President
and a majority shareholder, renders financial and consulting assistance to us,
for which it received fees of $315,200 for services rendered during our 2001
fiscal year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Our board of directors does not presently have a Compensation Committee.
Decisions regarding the compensation of executive officers are being made by the
Executive Committee of the Board of Directors. Accordingly, Mario Sbarro,
Anthony Sbarro and Joseph Sbarro, executive officers and directors, as well as
Bernard Zimmerman, a director and a consultant to us, may participate in
deliberations of our board concerning executive officer compensation.
See Item 13, "Certain Relationships and Related Transactions" in this
report, for information concerning related party transactions.
-73-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
AND MANAGEMENT
--------------
The following table sets forth certain information regarding the ownership
of shares of our common stock as of March 1, 2001 with respect to (1) holders
known to us to beneficially own more than five percent of our outstanding common
stock, (2) each of our directors, (3) our Chief Executive Officer and our five
next most highly compensated executive officers and (4) all of our directors and
executive officers as a group. We understand that, except as noted below, each
beneficial owner has sole voting and investment power with respect to all shares
attributable to such owner.
SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER NUMBER PERCENT
- ---------------- ------ -------
Mario Sbarro (1)........................................ 1,524,730 (2) 21.6%
Anthony Sbarro (1)...................................... 1,233,800 17.5%
Joseph Sbarro (1)....................................... 1,756,022 (3) 24.9%
Trust of Carmela Sbarro (1)............................. 2,497,884 (4) 35.4%
Harold L. Kestenbaum.................................... -- --
Richard A. Mandell...................................... -- --
Terry Vince............................................. -- --
Bernard Zimmerman....................................... -- --
Anthony J. Missano...................................... 25,946 (5) 0.4%
Gennaro A. Sbarro....................................... -- --
Gennaro J. Sbarro....................................... 25,946 0.4%
All directors and executive officers as a group
(15 persons)........................................ 7,064,328 100.0%
(1) The business address of each of Mario Sbarro, Joseph Sbarro, Anthony Sbarro
and the Trust of Carmela Sbarro is 401 Broadhollow Road, Melville, New York
11747.
(2) Excludes the 2,497,884 shares held by the Trust of Carmela Sbarro, of which
trust Mario Sbarro serves as a co-trustee and as to which shares Mr. Sbarro
may be deemed a beneficial owner with shared voting and dispositive power.
(3) Excludes 25,946 shares beneficially owned by each of Mr. Sbarro's son,
Gennaro J. Sbarro, reflected below, and daughter. Mr. Sbarro's daughter is
the wife of Anthony J. Missano.
(4) The trust was created by Carmela Sbarro for her benefit and for the benefit
of her descendants, including Mario, Joseph and Anthony Sbarro. The
trustees of the trust are Franklin Montgomery, whose business address is
1270 Avenue of the Americas, New York, New York 10020, and Mario Sbarro. As
trustees, Franklin Montgomery and Mario Sbarro may be deemed to be the
beneficial owners of these shares with shared voting and dispositive power.
(5) Represents shares owned by Mr. Missano's wife. Mr. Missano disclaims
beneficial ownership of these shares.
-74-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the caption "Compensation Committee Interlocks and
Insider Participation in Compensation Decisions" in Item 11, "Executive
Compensation," in this report for information concerning the participation of
Messrs. Mario Sbarro, Anthony Sbarro and Joseph Sbarro in executive compensation
determinations.
We are the sole tenant of an administrative office building, which is
leased from Sbarro Enterprises, L.P. The annual rent payable pursuant to the
sublease is $0.3 million each year for the remainder of the lease term, which
expires in 2011. In addition, we are obligated to pay real estate taxes,
utilities, insurance and certain other expenses for the facility. We believe
that our rent is comparable to the rent that would be charged by an unaffiliated
third party. The limited partners of Sbarro Enterprises, L.P. are Mario, Joseph,
Anthony and Carmela Sbarro.
We, our subsidiaries and the joint ventures in which we have an interest
have purchased printing services from a corporation owned by a son-in-law of
Mario Sbarro for which they paid, in the aggregate, $487,825 during fiscal 2001.
We believe that these services were provided on terms comparable to those that
would have been available from unrelated third parties.
During fiscal 2001, we paid cash dividends to our shareholders totaling
$12.6 million including $7.6 million of distributions made pursuant to the tax
payment agreement described below.
On January 2 and 3, 2001, we loaned $200,000 to Mario Sbarro, $300,000 to
Joseph Sbarro and $200,000 to Anthony Sbarro which loans were repaid on January
15, 2001 with interest at the prime rate at European American Bank (which has
since been acquired by Citicorp) during the time that the loans were
outstanding.
On April 5, 2001, we loaned $3.23 million to certain of our shareholders,
including: Mario Sbarro, $1.08 million, Joseph Sbarro, $1.24 million and Anthony
Sbarro, $0.87 million. The related notes are payable on April 5, 2003, and bear
interest at the rate of 4.63%, payable annually.
On December 28, 2001, we loaned $2.8 million to our shareholders,
including: Mario Sbarro, $0.60 million, Joseph Sbarro, $0.70 million and Anthony
Sbarro, $0.49 million and the Trust of Carmela Sbarro, $0.99 million. The
related notes are payable on December 28, 2004, and bear interest at the rate of
2.48%, payable annually.
On January 15, 2002, we paid a cash dividend to our shareholders of $3.1
million as a distribution made pursuant to the tax payment agreement.
A company owned by the daughter of Joseph Sbarro and companies owned by a
son of Anthony Sbarro are parties to franchise agreements with us containing
terms similar to those in agreements entered into by us with unrelated
franchisees. Royalties under these agreements in fiscal 2001 were $44,000
(which, together with $40,000 of fiscal 2000 royalties, have not as yet been
paid) and $88,008, respectively.
-75-
Bernard Zimmerman & Company, Inc., of which Bernard Zimmerman is President
and a majority shareholder, renders financial and consulting assistance to us,
for which it received fees of $315,200 for services during our 2001 fiscal year.
In addition to the compensation of Mario, Anthony, Joseph, Gennaro A. and
Gennaro J. Sbarro and Anthony J. Missano:
o Carmela Sbarro, the mother of Mario, Anthony and Joseph Sbarro, who
was a co-founder of Sbarro and serves as Vice President and a
director, received $100,000 from us for services rendered during
fiscal 2001; and
o Carmela N. Merendino, a daughter of Mario Sbarro, who serves as Vice
President - Administration, received $211,684 from us for services
rendered during fiscal 2001.
o Other members of the immediate families of Mario, Anthony, Joseph and
Carmela Sbarro who are our employees, earned an aggregate of $577,169
during fiscal 2001.
Tax Payment Agreement
We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code of 1986, and, where applicable and permitted, under
similar state and local income tax provisions, beginning in fiscal 2000. With
certain limited exceptions, we do not pay federal and state and local income
taxes for periods for which we are treated as an S corporation. Rather, our
shareholders include their pro-rata share of our taxable income on their
individual income tax returns and thus are required to pay taxes with respect to
their respective shares of our taxable income, whether or not it is distributed
to them.
We have entered into a tax payment agreement with our shareholders. The tax
payment agreement permits us to make periodic tax distributions to our
shareholders in amounts that are intended to approximate the income taxes,
including estimated taxes, that would be payable by our shareholders if their
only income was their pro-rata share of our taxable income and that income was
taxed at the highest applicable federal and New York State marginal income tax
rates. We may only make the tax distributions with respect to periods in which
we are treated as an S corporation. We made distributions of $7.6 million in
fiscal 2001, $3.8 million in fiscal 2000 and $3.1 million in January 2002 (with
respect to fiscal 2001 taxes). We do not expect to make additional distributions
in fiscal 2002 for fiscal 2001 earnings. Despite our book loss, our shareholders
are expected to have taxable income in fiscal 2001 resulting from differences in
the book and tax treatments of the provision for asset impairment, the
non-deductability of goodwill for tax purposes and significant differences in
book and tax depreciation.
The tax payment agreement provides for adjustments of the amount of tax
distributions previously paid in respect of a year upon the filing of our
federal income tax return for that year, upon the filing of an amended federal
income tax return or as a result of an audit. In these circumstances, if it is
determined that the amount of tax distributions previously made for the year was
less than the amount computed based upon our federal income tax return, our
amended federal
-76-
return or as adjusted based on the results of the audit, we may make additional
tax distributions which might include amounts to cover any interest or
penalties. Conversely, if it is determined in these circumstances that the
amount of tax distributions previously made for a year exceeded the amount
computed based on our federal income tax return, our amended federal return or
the results of an audit, as the case may be, our shareholders will be required
to repay the excess, with, in certain circumstances, interest. In addition, our
shareholders will be required to return, with interest, any tax distributions
previously distributed with respect to any taxable year for which it is
subsequently determined that we were not an S corporation.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
----------------------------------------------------
ON FORM 8-K
-----------
(a)(1) Consolidated Financial Statements
The following consolidated financial statements of Sbarro, Inc. and the
Report of Independent Auditors thereon are included in Item 8 above:
Page
----
Report of Independent Public Accountants 29
Consolidated Balance Sheets at December 30, 2001 and
December 31, 2000 30 - 31
Consolidated Statements of Operations for each of the fiscal years
in the three-year period ended December 30, 2001 32
Consolidated Statements of Shareholders' Equity for each of the fiscal
years in the three-year period ended December 30, 2001 33
Consolidated Statements of Cash Flows for each of the fiscal years in the
three-year period ended December 30, 2001 34 - 35
Notes to Consolidated Financial Statements 36 - 68
(a)(2) Financial Statement Schedules
The following financial statement schedule is filed as a part of this
Report on Page S-2: Schedule II - Valuation and Qualifying Accounts for the
three fiscal years ended December 30, 2001. All other schedules called for by
Form 10-K are omitted because they are inapplicable or the required information
is shown in the financial statements, or notes thereto, included herein.
-77-
(a)(3) Exhibits
Exhibits:
--------
*2.01 Agreement and Plan of Merger dated as of January 19, 1999
among the Company, Sbarro Merger LLC, a New York limited
liability company, Mario Sbarro, Joseph Sbarro, Joseph
Sbarro (1994) Family Limited Partnership, Anthony Sbarro,
and Mario Sbarro and Franklin Montgomery, not individually
but as trustees under that certain Trust Agreement dated
April 28, 1984 for the benefit of Carmela Sbarro and her
descendants. (Exhibit 2 to the Company Current Report on
Form 8-K dated (date of earliest event reported) January 19,
1999, File No. 1-8881)
*3.01(a) Restated Certificate of Incorporation of the Company as
filed with the Department of State of the State of New York
on March 29, 1985. (Exhibit 3.01 to the Company's
Registration Statement on Form S-1, File No. 2-96807)
*3.01(b) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on April 3, 1989. (Exhibit
3.01(b) to the Company's Annual Report on Form 10-K for the
year ended January 1, 1989, File No. 1-8881)
*3.01(c) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on May 31, 1989. (Exhibit
4.01 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 23, 1989, File No. 1-8881)
*3.01(d) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on June 1, 1990. (Exhibit
4.01 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 22, 1990, File No. 1-8881)
*3.02 By-Laws of the Company, as amended. (Exhibit 3.1 to the
Company's Registration Statement on Form S-4, File No.
333-90817)
*4.01 Indenture dated as of September, 28, 1999 among the Company,
the Restricted Subsidiaries of the Company named therein, as
guarantors, and Firstar Bank, N.A., including the form of
11% Senior Notes of the Company to be issued upon
consummation of the Exchange Offer and the form of Senior
Guarantees of the Guarantors. (Exhibit 4.1 to the Company's
Current Report on Form 8-K dated (date of earliest event
reported) September 23, 1999, File No. 1-8881)
-78-
*4.02 Credit Agreement dated as of September 23, 1999 among the
Company, European American Bank, as agent, and the Lenders
party thereto (Exhibit 4.2 to the Company's Current Report
on Form 8-K dated (date of earliest event reported)
September 23, 1999, File No. 1-8881)
*10.01(a) Building Lease between Sbarro Enterprises, L.P. and the
Company (Exhibit 10.04 to the Company's Registration
Statement on Form S-1, File No. 2-96807)
*10.01(b) Amendment dated May 4, 2000 to Building Lease between Sbarro
Enterprises, L.P. and the Company, (Exhibit 10.01(b) to the
Company's Annual Report on Form 10-K for the year ended
December 30, 2001, File No. 333-90817)
+*10.02 Form of Indemnification Agreement between the Company and
each of its directors and officers. (Exhibit 10.04 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 1-8881)
*10.04 Tax Payment Agreement dated as of September 28, 1999 among
the Company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro
(1994) Family Limited Partnership, Anthony Sbarro, and Mario
Sbarro and Franklin Montgomery, not individually but as
Trustees under that certain Trust Agreement dated April 28,
1984 for the benefit of Carmela Sbarro and her descendants
(Exhibit 10.6 to the Company's Registration Statement on
Form S-4, File No. 333-90817)
12.01 Statement of computation of earnings to fixed charges
*21.01 List of subsidiaries. (Exhibit 21.01 to the Company's Annual
Report on Form 10-K for the year ended January 2, 2000, File
No. 333-90817)
99.01 Letter dated March 25, 2002 from the Company to the
Securities and Exchange Commission pursuant to Temporary
Note 3T of Article 3 of Regulation S-X regarding the audit
of the Company's financial statements as at and for the year
ended December 30, 2001 by Arthur Andersen LLP.
- ---------------------------
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.
(b) Reports on Form 8-K
No Reports on form 8-K were filed by us during the fourth quarter of our
fiscal year ended December 30, 2001.
-79-
UNDERTAKING
We hereby undertake to furnish to the Securities and Exchange Commission,
upon request, all constituent instruments defining the rights of holders of
long-term debt of our us and our consolidated subsidiaries not filed with this
Report. Those instruments have not been filed since none are, nor are being,
registered under Section 12 of the Securities Exchange Act of 1934 and the total
amount of securities authorized under any of those instruments does not exceed
10% of the total assets of us and our subsidiaries on a consolidated basis.
-80-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 25, 2002.
SBARRO, INC.
By: /s/ MARIO SBARRO
-----------------------------------
Mario Sbarro, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------ --------------------------- --------------
/s/ MARIO SBARRO Chairman of the Board March 25, 2002
- ------------------------ (Principal Executive Officer)
Mario Sbarro and Director
/s/ STEVEN B. GRAHAM Vice President and March 25, 2002
- ------------------------
Steven B. Graham Controller (Principal
Accounting Officer)
/s/ JOSEPH SBARRO Director March 25, 2002
- ------------------
Joseph Sbarro
/s/ ANTHONY SBARRO Director March 25, 2002
- ------------------------
Anthony Sbarro
/s/ HAROLD L. KESTENBAUM Director March 25, 2002
- ------------------------
Harold L. Kestenbaum
-81-
SIGNATURE TITLE DATE
- ------------------------ --------------------------- --------------
/s/ RICHARD A. MANDELL Director March 25, 2002
- ------------------------
Richard A. Mandell
/s/ CARMELA SBARRO Director March 25, 2002
- ------------------------
Carmela Sbarro
/s/ TERRY VINCE Director March 25, 2002
- ------------------------
Terry Vince
/s/ BERNARD ZIMMERMAN Director March 25, 2002
- ------------------------
Bernard Zimmerman
-82-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Sbarro, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Sbarro, Inc. and
subsidiaries included in this filing and have issued our report thereon dated
March 21, 2002. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The accompanying schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
New York, New York
March 21, 2002
S-1
SCHEDULE II
SBARRO, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
FOR THE THREE YEARS ENDED
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- --------- -------- --------
ADDITIONS
---------
Balance Charged Charged to
at to Other Balance at
Beginning Costs and Accounts Deductions End of
Description of Period Expenses Describe Describe Period
- ----------- --------- -------- --------- --------------- ------
December 30, 2001
- -----------------
Allowance for doubtful
accounts receivable $211 $ 61 ($97) (2) $175
==== ====== ===== ====
Provision for store closing $50 $1,881 ($464) (3) $1,467
=== ====== ====== ======
December 31, 2000
- -----------------
Allowance for doubtful ($120) (1)
accounts receivable $419 $ 60 ($148) (2) $211
==== ====== ====== ====
Provision for store closing $863 $ 94 ($907) (3) $ 50
==== ====== ===== =====
January 2, 2000:
- ----------------
Allowance for doubtful
accounts receivable $38 $381 $419
=== ==== ====
Provision for store closing $105 $1,121 ($363) (3) $863
==== ====== ====== ====
(1) Collection of previously reserved receivables.
(2) Write off of uncollectible accounts.
(3) Payments to landlords and others for closed locations.
S-2
EXHIBIT INDEX
-------------
EXHIBIT NUMBER: DESCRIPTION
- -------------- -----------
*2.01 Agreement and Plan of Merger dated as of January 19, 1999
among the Company, Sbarro Merger LLC, a New York limited
liability company, Mario Sbarro, Joseph Sbarro, Joseph
Sbarro (1994) Family Limited Partnership, Anthony Sbarro,
and Mario Sbarro and Franklin Montgomery, not individually
but as trustees under that certain Trust Agreement dated
April 28, 1984 for the benefit of Carmela Sbarro and her
descendants. (Exhibit 2 to the Company Current Report on
Form 8-K dated (date of earliest event reported) January 19,
1999, File No. 1-8881)
*3.01(a) Restated Certificate of Incorporation of the Company as
filed with the Department of State of the State of New York
on March 29, 1985. (Exhibit 3.01 to the Company's
Registration Statement on Form S-1, File No. 2-96807)
*3.01(b) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on April 3, 1989. (Exhibit
3.01(b) to the Company's Annual Report on Form 10-K for the
year ended January 1, 1989, File No. 1-8881)
*3.01(c) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on May 31, 1989. (Exhibit
4.01 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 23, 1989, File No. 1-8881)
*3.01(d) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on June 1, 1990. (Exhibit
4.01 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 22, 1990, File No. 1-8881)
*3.02 By-Laws of the Company, as amended. (Exhibit 3.1 to the
Company's Registration Statement on Form S-4, File No.
333-90817)
*4.01 Indenture dated as of September, 28, 1999 among the Company,
the Restricted Subsidiaries of the Company named therein, as
guarantors, and Firstar Bank, N.A., including the form of
11% Senior Notes of the Company to be issued upon
consummation of the Exchange Offer and the form of Senior
Guarantees of the Guarantors. (Exhibit 4.1 to the Company's
Current Report on Form 8-K dated (date of earliest event
reported) September 23, 1999, File No. 1-8881)
*4.02 Credit Agreement dated as of September 23, 1999 among the
Company, European American Bank, as agent, and the Lenders
party thereto (Exhibit 4.2 to the Company's Current Report
on Form 8-K dated (date of earliest event reported)
September 23, 1999, File No. 1-8881)
*10.01(a) Building Lease between Sbarro Enterprises, L.P. and the
Company (Exhibit 10.04 to the Company's Registration
Statement on Form S-1, File No. 2-96807)
*10.01(b) Amendment dated May 4, 2000 to Building Lease between Sbarro
Enterprises, L.P. and the Company, (Exhibit 10.01(b) to the
Company's Annual Report on Form 10-K for the year ended
December 30, 2001, File No. 333-90817)
+*10.02 Form of Indemnification Agreement between the Company and
each of its directors and officers. (Exhibit 10.04 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 1-8881)
*10.04 Tax Payment Agreement dated as of September 28, 1999 among
the Company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro
(1994) Family Limited Partnership, Anthony Sbarro, and Mario
Sbarro and Franklin Montgomery, not individually but as
Trustees under that certain Trust Agreement dated April 28,
1984 for the benefit of Carmela Sbarro and her descendants
(Exhibit 10.6 to the Company's Registration Statement on
Form S-4, File No. 333-90817)
12.01 Statement of computation of earnings to fixed charges
*21.01 List of subsidiaries. (Exhibit 21.01 to the Company's Annual
Report on Form 10-K for the year ended January 2, 2000, File
No. 333-90817)
99.01 Letter dated March 25, 2002 from the Company to the
Securities and Exchange Commission pursuant to Temporary
Note 3T of Article 3 of Regulation S-X regarding the audit
of the Company's financial statements as at and for the year
ended December 30, 2001 by Arthur Andersen LLP.
- ---------------------------
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.