- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED OCTOBER 6, 2002 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 I.D. NO.)
INCORPORATION OR ORGANIZATION)
401 BROAD HOLLOW ROAD, MELVILLE, NEW YORK 11747
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 715-4100
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, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---------- -----------
THE NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING AS OF
NOVEMBER 14, 2002 WAS 7,064,328.
- --------------------------------------------------------------------------------
SBARRO, INC.
FORM 10-Q INDEX
PAGES
-----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements:
Balance Sheets - October 6, 2002 (unaudited) and
December 30, 2001. . . . . . . . . . . . . . . . . . . . . . . . . .3-4
Statements of Operations (unaudited) - Forty Weeks and Twelve
Weeks ended October 6, 2002 and October 7, 2001 . . . . . . . . . . 5-6
Statements of Cash Flows (unaudited) - Forty Weeks ended
October 6, 2002 and October 7, 2001 . . . . . . . . . . . . . . . . 7-8
Notes to Unaudited Consolidated Financial Statements -
October 6, 2002. . . . . . . . . . . . . . . . . . . . . . . . . 9-26
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . 27-36
Item 3. Qualitative and Quantitative Disclosures of Market Risk . . . . . . .36
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . .37
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 37
Pg. 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS EXCEPT SHARE DATA)
------------------------------------------
OCTOBER 6, 2002 DECEMBER 30, 2001
--------------- -----------------
(UNAUDITED)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $30,479 $36,952
RESTRICTED CASH FOR UNTENDERED SHARES 21 45
RECEIVABLES, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $175 (NOTE 7):
FRANCHISE 2,495 2,162
OTHER 1,584 2,797
-------- --------
4,079 4,959
INVENTORIES 2,796 3,537
LOANS RECEIVABLE FROM SHAREHOLDERS 3,232 -
PREPAID EXPENSES 8,749 1,242
-------- --------
TOTAL CURRENT ASSETS 49,356 46,735
PROPERTY AND EQUIPMENT, NET 121,080 132,303
INTANGIBLE ASSETS:
TRADEMARKS AND TRADENAMES, NET (NOTE 2) 195,916 195,916
GOODWILL, NET (NOTE 2) 9,204 9,204
DEFERRED FINANCING COSTS, NET 6,881 7,707
LOANS RECEIVABLE FROM SHAREHOLDERS 2,800 6,032
OTHER ASSETS 7,539 6,865
-------- --------
$392,776 $404,762
======== ========
(CONTINUED)
PG. 3
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
-----------------------------------------
OCTOBER 6, 2002 DECEMBER 30, 2001
--------------- -----------------
(UNAUDITED)
CURRENT LIABILITIES:
AMOUNTS DUE FOR UNTENDERED SHARES $21 $45
ACCOUNTS PAYABLE 10,263 9,107
ACCRUED EXPENSES 17,681 24,648
ACCRUED INTEREST PAYABLE 1,708 8,181
CURRENT PORTION OF MORTGAGE PAYABLE 152 140
-------- --------
TOTAL CURRENT LIABILITIES 29,825 42,121
DEFERRED RENT 8,864 8,479
LONG-TERM DEBT, NET OF ORIGINAL ISSUE
DISCOUNT (NOTE 5) 267,880 267,718
CONTINGENCIES (NOTE 8)
SHAREHOLDERS' EQUITY:
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 OCTOBER 6, 2002 AND
DECEMBER 30, 2001 71 71
ADDITIONAL PAID-IN CAPITAL 10 10
RETAINED EARNINGS 86,126 86,363
-------- --------
86,207 86,444
-------- --------
$392,776 $404,762
======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PG. 4
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
-----------------------------------------
FOR THE FORTY WEEKS ENDED:
-----------------------------------------
OCTOBER 6, 2002 OCTOBER 7, 2001
--------------- ---------------
REVENUES:
RESTAURANT SALES $254,454 $273,928
FRANCHISE RELATED INCOME 7,636 7,652
REAL ESTATE AND OTHER 4,334 4,407
-------- --------
TOTAL REVENUES 266,424 285,987
-------- --------
COSTS AND EXPENSES:
RESTAURANT OPERATING EXPENSES:
COST OF FOOD AND PAPER PRODUCTS 49,864 56,155
PAYROLL AND OTHER EMPLOYEE BENEFITS 71,867 75,868
OTHER OPERATING COSTS 89,152 90,306
DEPRECIATION AND AMORTIZATION (NOTE 2) 15,784 24,094
GENERAL AND ADMINISTRATIVE 17,985 24,053
PROVISION FOR RESTAURANT CLOSINGS (NOTE 4) 2,911 2,817
-------- --------
TOTAL COSTS AND EXPENSES 247,563 273,293
-------- --------
OPERATING INCOME BEFORE MINORITY INTEREST 18,861 12,694
MINORITY INTEREST (36) 26
-------- --------
OPERATING INCOME 18,825 12,720
-------- --------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (23,905) (24,123)
INTEREST INCOME 390 640
EQUITY IN NET INCOME OF
UNCONSOLIDATED AFFILIATES 692 185
INSURANCE RECOVERY, NET (NOTE 3) 7,162 -
-------- --------
NET OTHER EXPENSE (15,661) (23,298)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 3,164 (10,578)
INCOME TAXES (NOTE 6) 276 280
-------- --------
NET INCOME (LOSS) $2,888 $(10,858)
======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PG. 5
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
------------------------------------------
FOR THE TWELVE WEEKS ENDED:
------------------------------------------
OCTOBER 6, 2002 OCTOBER 7, 2001
--------------- ---------------
REVENUES:
RESTAURANT SALES $ 78,006 $85,206
FRANCHISE RELATED INCOME 2,561 2,430
REAL ESTATE AND OTHER 1,319 1,138
-------- -------
TOTAL REVENUES 81,886 88,774
-------- -------
COSTS AND EXPENSES:
RESTAURANT OPERATING EXPENSES:
COST OF FOOD AND PAPER PRODUCTS 15,010 17,648
PAYROLL AND OTHER EMPLOYEE BENEFITS 21,811 23,237
OTHER OPERATING COSTS 26,775 26,754
DEPRECIATION AND AMORTIZATION (NOTE 2) 3,872 7,117
GENERAL AND ADMINISTRATIVE 5,286 7,734
PROVISION FOR RESTAURANT CLOSINGS (NOTE 4) 682 1,352
-------- -------
TOTAL COSTS AND EXPENSES 73,436 83,842
-------- -------
OPERATING INCOME BEFORE MINORITY INTEREST 8,450 4,932
MINORITY INTEREST ( 3) 28
-------- -------
OPERATING INCOME 8,447 4,960
-------- -------
OTHER INCOME (EXPENSE):
INTEREST EXPENSE (7,165) (7,238)
INTEREST INCOME 130 147
EQUITY IN NET INCOME OF
UNCONSOLIDATED AFFILIATES 147 60
INSURANCE RECOVERY, NET (NOTE 3) 7,162 -
-------- -------
NET OTHER INCOME (EXPENSE) 274 (7,031)
-------- -------
INCOME (LOSS) BEFORE INCOME TAXES 8,721 (2,071)
INCOME TAXES (NOTE 6) 75 80
-------- -------
NET INCOME (LOSS) $8,646 $(2,151)
======== =======
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PG. 6
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
-----------------------------------------
FOR THE FORTY WEEKS ENDED:
-----------------------------------------
OCTOBER 6, 2002 OCTOBER 7, 2001
--------------- ---------------
OPERATING ACTIVITIES:
NET INCOME (LOSS) $2,888 $(10,858)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 16,939 25,211
PROVISION FOR RESTAURANT CLOSINGS 2,046 2,061
INCREASE IN DEFERRED RENT, NET 403 607
MINORITY INTEREST 36 (26)
EQUITY IN NET INCOME OF
UNCONSOLIDATED AFFILIATES (692) (185)
DIVIDENDS RECEIVED FROM
UNCONSOLIDATED AFFILIATE 311 244
CHANGES IN OPERATING ASSETS AND LIABILITIES:
DECREASE (INCREASE) IN RECEIVABLES 881 (1,657)
DECREASE IN INVENTORIES 741 504
INCREASE IN PREPAID EXPENSES (7,507) (6,313)
INCREASE IN OTHER ASSETS (181) (140)
DECREASE IN ACCOUNTS PAYABLE
AND ACCRUED EXPENSES (6,012) (2,703)
DECREASE IN ACCRUED INTEREST PAYABLE (6,473) (6,223)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,380 522
(CONTINUED)
PG. 7
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
------------------------------------------
FOR THE FORTY WEEKS ENDED:
------------------------------------------
OCTOBER 6, 2002 OCTOBER 7, 2001
--------------- ---------------
INVESTING ACTIVITIES:
PURCHASES OF PROPERTY AND EQUIPMENT $(6,611) $(14,453)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (6,611) (14,453)
------- -------
FINANCING ACTIVITIES:
MORTGAGE PRINCIPAL REPAYMENTS (117) (107)
PURCHASE OF MINORITY INTEREST IN JOINT VENTURE - (1,000)
LOANS TO SHAREHOLDERS - (3,932)
REPAYMENT OF SHAREHOLDER LOANS - 700
TAX DISTRIBUTIONS RELATED TO THE PRIOR FISCAL YEAR (3,125) (7,564)
DIVIDENDS - (5,000)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (3,242) (16,903)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (6,473) (30,834)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 36,952 42,319
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $30,479 $11,485
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR INCOME TAXES $626 $791
======= =======
CASH PAID DURING THE PERIOD FOR INTEREST $29,247 $29,241
======= =======
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PG. 8
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Regulation
S-X related to interim period financial statements and, therefore, do not
include all information and footnotes required by generally accepted
accounting principles. However, in the opinion of our management, all
adjustments (consisting of normal recurring adjustments and accruals)
considered necessary for a fair presentation of our consolidated financial
position at October 6, 2002 and our consolidated results of operations for
each of the forty and twelve week periods ended October 6, 2002 and October
7, 2001 and cash flows for the forty weeks in each of the respective years
have been included. The results of operations for interim periods are not
necessarily indicative of the results that may be expected for the entire
year. Reference should be made to the annual financial statements,
including footnotes thereto, included in our Annual Report on Form 10-K for
the fiscal year ended December 30, 2001.
Certain items in the financial statements presented have been reclassified
to conform to the fiscal 2002 presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board ("FASB") 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 No. 142 became effective
with respect to our Company with the beginning of fiscal 2002. SFAS No. 142
requires that the amortization of goodwill (which was $4.2 million and $1.3
million in the forty and twelve weeks ended October 7, 2001, respectively)
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 continue to be amortized over their useful lives. We have completed
our initial impairment test on goodwill and intangible assets (trademarks
and tradenames) with indefinite lives acquired prior to July 1, 2001
($205.1 million, net of accumulated amortization of $19.3 million, at
October 6, 2002) and concluded that there had been no impairment at January
1, 2002.
Pg. 9
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS:
The effect of the adoption of SFAS No. 142 on the reported net loss for the
fiscal 2001 periods presented in this report is as follows:
Forty Weeks Ended Twelve Weeks Ended
----------------- ------------------
Oct. 6, 2002 Oct. 7, 2001 Oct. 6, 2002 Oct. 7, 2001
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Reported net income (loss) $2,888 $(10,858) $8,646 $(2,151)
Add back: Amortization of
goodwill and intangible assets
with indefinite lives - 4,177 - 1,246
Adjusted net income (loss) $2,888 $ (6,681) $8,646 $(905)
In August 2001, the FASB 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. SFAS No. 143
became effective with respect to us with the beginning of fiscal 2002 and
has not had a material effect on our financial position and operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." This statement supersedes
SFAS No. 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-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 No. 121 for recognition and measurement of
impairment, but amends the accounting and reporting standards for segments
of a business to be disposed of. SFAS No. 144 became effective with respect
to us with the beginning of fiscal 2002. The adoption of SFAS No. 144 has
not had a material impact on our financial position and operating results.
We will continue to assess impairment of the assets of our restaurants on a
restaurant-by-restaurant basis.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement eliminates the prior requirement that gains
and losses on debt extinguishment must be classified as extraordinary items
in the income statement and contains other nonsubstantive corrections to
Pg. 10
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
authoritative accounting literature in SFAS No. 4, 44 and 64. The changes
in SFAS 145 related to debt extinguishment will be effective for us
beginning with our 2003 fiscal year and the other changes were effective
for us beginning with transactions after May 15, 2002. Adoption of this
standard has not had, and we do not expect that it will have, a material
effect on our financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting
for restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force (EITF) Issue
No. 94-3. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized
at the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at
fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs (including our future accounting for restaurant
closing costs) as well as the amount recognized. We will adopt the
provisions of SFAS No. 146 for restructuring activities initiated after
December 29, 2002.
3. 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 substantial sales revenues and operating income, the effect on
the results for the third quarter and year to date of fiscal 2001 was not
material to our 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 those
airport locations and a number of downtown locations have continued to
experience a period of reduced sales through the third quarter of fiscal
2002.
In September 2002, we reached an agreement to settle, for $9.65 million,
our claim with our insurance company for the reimbursement of the
depreciated cost of the assets destroyed at the Sbarro-owned location, as
well as for lost income under our business interruption insurance coverage.
The proceeds of the settlement, less the $1.5 million advance received in
May 2002, was received in September 2002. Approximately $7.2 million, net
of related expenses, of the settlement relates to reimbursement of lost
income under our business interruption insurance coverage and is included
in our statement of operations for the forty and twelve weeks ended October
6, 2002.
Pg. 11
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROVISION FOR RESTAURANT CLOSINGS:
During the forty and twelve weeks ended October 6, 2002, we recorded a
provision for restaurant closings of $2.9 million and $0.7 million,
respectively. Of the provision, approximately $1.6 million and $0.7 million
were recorded in the second and third fiscal quarters of fiscal 2002,
respectively, for the net book value of the property and equipment to be
abandoned and anticipated closing costs of approximately thirty low volume,
unprofitable Sbarro quick service locations that we planned to close in the
third and fourth quarter of fiscal 2002 (twenty-five of those units have
been closed to date). The net book value of approximately one-half of the
units to be closed was included in the provision for asset impairment
recorded in fiscal 2001. The balance of the provision in both periods of
fiscal 2002 relate to costs that either were not included in the provision
for asset impairment recorded in the fourth quarter of fiscal 2001 or which
were not absorbed by amounts received from landlords in connection with
such closings.
5. LONG-TERM DEBT:
We were in compliance with the various covenants in the indenture for our
senior notes, our bank credit agreement and our mortgage as of October 6,
2002.
We are subject to various covenants under the Indenture under which our
senior notes are issued and under our bank credit agreement. One of the
covenants limits our ability to borrow funds (except under specifically
permitted arrangements, such as up to $75.0 million of revolving credit
loans) unless our consolidated interest ratio coverage (as defined), after
giving pro forma effect to the interest on the new borrowing, for the four
most recently ended fiscal quarters is at least 2.5 to 1. Another covenant
limits our ability to make "restricted payments," including, among other
things, dividend payments (other than as distributions pursuant to the Tax
Payment Agreement) and investments in, among other things, unrestricted
subsidiaries, to specified amounts determined under a formula contained in
the Indenture provided that that ratio is at least 2.0 to 1 after giving
pro forma effect to the restricted payment. As of October 6, 2002, that
ratio was 2.23 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). Additionally, under the formula
contained in the Indenture, we may not presently make restricted payments
other than certain permitted investments.
6. INCOME TAXES:
During the first quarter of fiscal 2002, we made tax distributions, based
on our tax basis income for fiscal 2001, of $3.1 million compared to $7.6
million of tax distributions, based on our tax basis income for fiscal
2000, during the first quarter of fiscal 2001. There were no tax
distributions during the second or third quarters of either fiscal 2002 or
fiscal 2001.
Pg. 12
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY AND OTHER TRANSACTIONS:
As of July 14, 2002, we sold the assets of a Sbarro-owned location that we
intended to close to a corporation whose shareholder is the brother-in-law
of our Chairman of the Board and President for fair value of $88,900. The
sales price resulted in a loss of approximately $64,000 that is included in
the provision for restaurant closings in the statement of operations. At
the same time, that corporation entered into a franchise agreement with us
with an initial franchise fee, a continuing royalty percentage and other
terms and conditions that are similar to those in effect for most of our
other new franchisees. We received promissory notes for each of the
purchase price and initial franchise fee that are payable over seven years
and bear interest on the unpaid principal balances at 7% interest per
annum.
As of March 28, 2002, we sold, for nominal consideration, the assets of a
Mama Sbarro location to an unrelated third party. The purchaser also
entered into a joint venture agreement with Sbarro that provides for the
quarterly distribution to us of a 50% profit participation, as defined, if
any. Losses incurred in any year only offset income of the year of the
loss. The location was closed for renovation for the majority of the second
quarter and, to date, has not generated distributable income. A second unit
was sold to the same unrelated third party under similar terms and
conditions, including the profit participation agreement, as of July 31,
2002. In addition, we are to lend up to $50,000 to the purchaser for the
remodeling of the second location sold which is anticipated to re-open by
the end of the 2002 fiscal year. Any loan is to be repaid monthly from the
cash flow of the restaurant, together with interest at the Citibank prime
rate (4.75% at October 6, 2002) plus 2% with a maturity date of August
2007. Approximately $19,000 has been advanced to date. The net book value
of both of these locations had been included in the provision for
restaurant impairment recorded in fiscal 2001.
8. CONTINGENCIES:
On December 20, 1999, fourteen 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 court denied the motion. We
have separately settled with two of the managers for immaterial amounts.
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. Plaintiffs are
Pg. 13
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONTINGENCIES (CONTINUED):
represented by the same counsel who is representing the plaintiffs in the
case discussed in the preceding paragraph.
On March 22, 2002, five former general managers of Sbarro restaurants in
California filed a complaint against us in the Superior Court of California
for Los Angeles County. The complaint alleges that the plaintiffs were
required to perform labor services without proper premium overtime
compensation from at least May of 1999. The plaintiffs are seeking actual
damages, punitive damages and attorney's fees and costs, each in
unspecified amounts. In addition, plaintiffs have requested class action
status for all managerial employees who worked overtime and/or were not
otherwise paid regular wages due and owing from May 1999 to present.
We believe that we have substantial defenses to the claims in each of the
actions and are vigorously defending these actions.
In addition, 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.
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS:
Certain subsidiaries have guaranteed amounts outstanding under our senior
notes and bank 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 October 6, 2002
(unaudited) and December 30, 2001 and condensed consolidating
statements of income for the forty and twelve weeks ended October 6,
2002 (unaudited) and October 7, 2001 (unaudited) and cash flows for
the forty weeks ended October 6, 2002 (unaudited) and October 7, 2001
(unaudited) 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, and
(2) Elimination entries necessary to consolidate Sbarro, Inc., the parent,
with the guarantor and nonguarantor subsidiaries.
The principal elimination entries eliminate intercompany balances and
transactions. Investments in subsidiaries are accounted for by the parent
on the cost method.
Pg. 14
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 6, 2002
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current assets:
Cash and cash equivalents $24,839 $4,823 $817 $30,479
Restricted cash for untendered 21 - - 21
shares
Receivables less allowance for
doubtful accounts of $175:
Franchise 2,495 - - 2,495
Other 382 1,038 164 1,584
-------- -------- ------- --------
2,877 1,038 164 4,079
Inventories 1,085 1,388 323 2,796
Loans receivable from shareholders 3,232 - - 3,232
Prepaid expenses 6,623 1,868 258 8,749
-------- -------- ------- --------
Total current assets 38,677 9,117 1,562 49,356
Intercompany receivables 13,168 300,874 - $(314,042) -
Investment in subsidiaries 65,469 - - (65,469) -
Property and equipment, net 44,253 65,609 11,218 - 121,080
Intercompany receivables - long term 3,608 - - (3,608) -
Intangible assets:
Trademarks and tradenames, net 195,916 - - - 195,916
Goodwill, net 9,324 - - (120) 9,204
Deferred financing costs, net 6,601 280 - - 6,881
Loans receivable from shareholders 2,800 - - - 2,800
Other assets 8,844 1,710 (658) (2,357) 7,539
-------- -------- ------- --------- --------
$388,660 $377,590 $12,122 $(385,596) $392,776
======== ======== ======= ========= ========
Pg. 15
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING BALANCE SHEET
AS OF OCTOBER 6, 2002
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current liabilities:
Amounts due for untendered shares $21 $21
Accounts payable 9,691 $230 $342 10,263
Accrued expenses 16,095 (784) 2,370 17,681
Accrued interest payable 1,708 - - 1,708
Current portion of mortgage payable - 152 - 152
-------- -------- ------- --------
Total current liabilities 27,515 (402) 2,712 29,825
Intercompany payables 300,874 - 13,168 $(314,042) -
Deferred rent 8,209 - 655 - 8,864
Long-term debt, net of
original issue discount 252,361 15,519 - - 267,880
Intercompany payables - long term - 3,608 - (3,608) -
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) (200,380) 293,396 (6,890) - 86,126
-------- ------- ------ ------- ------
(200,299) 358,865 (4,413) (67,946) 86,207
-------- ------- ------ ------- ------
$388,660 $377,590 $12,122 $(385,596) $392,776
======== ======== ======= ========= ========
Pg. 16
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 30, 2001
(IN THOUSANDS EXCEPT SHARE DATA)
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 45 - - 45
shares
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
Goodwill, net 9,204 - - - 9,204
Deferred financing costs, net 7,398 309 - - 7,707
Loans receivable from shareholders 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
======== ======== ======= ========= ========
Pg. 17
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 30, 2001
(IN THOUSANDS EXCEPT SHARE DATA)
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
======== ======== ======= ========= ========
Pg. 18
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FORTY WEEKS ENDED OCTOBER 6, 2002
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $106,043 $130,493 $17,918 $254,454
Franchise related income 7,636 - - 7,636
Real estate and other 2,115 2,910 - $(691) 4,334
Intercompany charges - 11,091 - (11,091) -
--------- ------- ----- ---------- ------
Total revenues 115,794 144,494 17,918 (11,782) 266,424
--------- ------- ----- ---------- ------
Cost and expenses:
Restaurant operating expenses:
Cost of food and paper products 19,614 25,419 4,831 - 49,864
Payroll and other employee
benefits 28,110 37,233 6,524 - 71,867
Other operating costs 37,388 45,970 5,794 - 89,152
Depreciation and amortization 6,823 8,032 929 - 15,784
General and administrative 9,301 9,028 347 (691) 17,985
Provision for restaurant closings 2,770 - 141 - 2,911
Intercompany charges 11,091 - - (11,091) -
--------- ------- ----- ---------- ------
Total costs and expenses 115,097 125,682 18,566 (11,782) 247,563
--------- ------- ----- ---------- ------
Operating income (loss) before minority
interest 697 18,812 (648) - 18,861
--------- ------- ----- ---------- ------
Minority interest - - (36) - (36)
--------- ------- ----- ---------- ------
Operating income (loss) 697 18,812 (684) - 18,825
Other (expense) income:
Interest expense (22,774) (1,131) - - (23,905)
Interest income 390 - - - 390
Equity in net income of
unconsolidated affiliates
692 - - - 692
Insurance recovery, net 7,162 - - 7,162
--------- ------- ----- ---------- ------
Net other expense (14,530) (1,131) - - (15,661)
--------- ------- ----- ---------- ------
(Loss) income before income taxes (13,833) 17,681 (684) - 3,164
Income taxes (benefit) (1,352) 1,690 (62) - 276
--------- ------- ----- ---------- ------
Net (loss) income $(12,481) $15,991 $(622) $ - $2,888
========= ======= ===== ========== =======
Pg. 19
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FORTY WEEKS ENDED OCTOBER 7, 2001
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $114,395 $139,009 $20,524 $273,928
Franchise related income 7,652 - - 7,652
Real estate and other 2,070 2,337 - 4,407
Intercompany charges - 8,538 - $(8,538) -
-------- ------- ------- ----------- --------
Total revenues 124,117 149,884 20,524 (8,538) 285,987
-------- ------- ------- ----------- --------
Cost and expenses:
Restaurant operating expenses:
Cost of food and paper products 21,233 29,263 5,659 - 56,155
Payroll and other employee
benefits 29,151 39,778 6,939 - 75,868
Other operating costs 37,482 45,634 7,190 - 90,306
Depreciation and amortization 12,447 10,509 1,138 - 24,094
General and administrative 11,582 11,670 801 - 24,053
Provision for restaurant closings 2,423 - 394 - 2,817
Intercompany charges
8,538 - - (8,538) -
-------- ------- ------- ----------- --------
Total costs and expenses 122,856 136,854 22,121 (8,538) 273,293
-------- ------- ------- ----------- --------
Operating income (loss) before minority
interest 1,261 13,030 (1,597) - 12,694
Minority interest - - 26 - 26
-------- ------- ------- ----------- --------
Operating income (loss) 1,261 13,030 (1,571) - 12,720
-------- ------- ------- ----------- --------
Other (expense) income:
Interest expense (23,012) (1,111) (1,437) 1,437 (24,123)
Interest income 2,077 - - (1,437) 640
Equity in net income of
unconsolidated affiliates 185 - - - 185
-------- ------- ------- ----------- --------
Net other expense (20,750) (1,111) (1,437) - (23,298)
-------- ------- ------- ----------- --------
(Loss) income before income taxes (19,489) 11,919 (3,008) - (10,578)
Income taxes (benefit) 67 315 (102) - 280
-------- ------- ------- ----------- --------
Net (loss) income $(19,556) $11,604 $(2,906) $ - $(10,858)
======== ======= ======= =========== ========
Pg. 20
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE WEEKS ENDED OCTOBER 6, 2002
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $33,246 $39,588 $5,172 $78,006
Franchise related income 2,561 - - 2,561
Real estate and other 651 875 - $(207) 1,319
Intercompany charges - 3,651 - (3,651) -
------ ------ ----- ---------- ------
Total revenues 36,458 44,114 5,172 (3,858) 81,886
------ ------ ----- ---------- ------
Cost and expenses:
Restaurant operating expenses:
Cost of food and paper products 6,786 6,733 1,491 - 15,010
Payroll and other employee
benefits 8,018 11,919 1,874 - 21,811
Other operating costs 12,392 12,738 1,645 - 26,775
Depreciation and amortization 1,706 1,875 291 - 3,872
General and administrative 2,604 2,742 147 (207) 5,286
Provision for restaurant closings 700 - (18) - 682
Intercompany charges 3,651 - - (3,651) -
------ ------ ----- ---------- ------
Total costs and expenses 35,857 36,007 5,430 (3,858) 73,436
------ ------ ----- ---------- ------
Operating income (loss) before minority
interest 601 8,107 (258) - 8,450
Minority interest - - (3) - (3)
------ ------ ----- ---------- ------
Operating income (loss) 601 8,107 (261) - 8,447
------ ------ ----- ---------- ------
Other (expense) income:
Interest expense (6,827) (338) - - (7,165)
Interest income 130 - - - 130
Equity in net income of
unconsolidated affiliates
147 - - - 147
Insurance recovery, net 7,162 - - - 7,162
------ ------ ----- ---------- ------
Net other income (expense) 612 (338) - - 274
------ ------ ----- ---------- ------
Income before income taxes 1,213 7,769 (261) - 8,721
Income taxes (benefit) (1,209) 1,331 (47) - 75
------ ------ ----- ---------- ------
Net income (loss) $2,422 $6,438 $(214) $ - $8,646
====== ====== ===== ========== ======
Pg. 21
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE WEEKS ENDED OCTOBER 7, 2001
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $35,145 $43,600 $6,461 $85,206
Franchise related income 2,430 - - 2,430
Real estate and other 479 659 - 1,138
Intercompany charges - 2,193 - $(2,193) -
------- ------- ------ -------- -------
Total revenues 38,054 46,452 6,461 (2,193) 88,774
------- ------- ------ -------- -------
Cost and expenses:
Restaurant operating expenses:
Cost of food and paper products 6,621 9,209 1,818 - 17,648
Payroll and other employee
benefits 8,659 12,351 2,227 - 23,237
Other operating costs 10,514 14,173 2,067 - 26,754
Depreciation and amortization 3,566 3,172 379 - 7,117
General and administrative 4,911 2,456 367 - 7,734
Provision for restaurant closings 1,208 - 144 - 1,352
Intercompany charges 2,193 - - (2,193) -
------- ------- ------ -------- -------
Total costs and expenses 37,672 41,361 7,002 (2,193) 83,842
------- ------- ------ -------- -------
Operating income (loss) before minority
Interest 382 5,091 (541) - 4,932
Minority interest - - 28 - 28
------- ------- ------ -------- -------
Operating income (loss) 382 5,091 (513) - 4,960
------- ------- ------ -------- -------
Other (expense) income:
Interest expense (6,927) (311) (572) 572 (7,238)
Interest income 719 - - (572) 147
Equity in net income of
unconsolidated affiliates
60 - - - 60
------- ------- ------ -------- -------
Net other expense (6,148) (311) (572) - (7,031)
------- ------- ------ -------- -------
(Loss) income before income taxes (5,766) 4,780 (1,085) - (2,071)
Income taxes (benefit) 29 109 (58) - 80
------- ------- ------ -------- -------
Net (loss) income $(5,795) $4,671 $(1,027) $ - $(2,151)
======= ====== ======== =========== =======
Pg. 22
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FORTY WEEKS ENDED OCTOBER 6, 2002
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
OPERATING ACTIVITIES: PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- --------------------- ------ ------------ ------------ ------------ -----
Net (loss) income $(12,481) $15,991 $(622) $2,888
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 7,816 8,194 929 16,939
Provision for restaurant closings 2,046 - - 2,046
Increase in deferred rent, net 495 (120) 28 403
Minority interest - - 36 36
Equity in income of
unconsolidated affiliates (692) - - (692)
Dividends received from
unconcolidated affiliates 311 - - 311
Changes in operating assets
and liabilities:
Decrease (increase) in receivables 1,355 (425) (49) 881
Decrease (increase) in inventories 328 383 30 741
Increase in prepaid assets (4,707) (2,398) (402) (7,507)
(Increase) decrease in other assets (406) 262 83 $(120) (181)
(Decrease) increase in accounts
payable and accrued expenses (3,149) (1,027) (1,956) 120 (6,012)
Decrease in accrued interest
payable (6,473) - - - (6,473)
-------- ------- ------- -------- --------
Net cash (used in) provided by
operating activities (15,557) 20,860 (1,923) - 3,380
-------- ------- ------- -------- --------
Investing activities:
- ---------------------
Purchases of property and equipment (4,795) (1,629) (187) - (6,611)
-------- ------- ------- -------- --------
Net cash used in investing activities (4,795) (1,629) (187) - (6,611)
-------- ------- ------- -------- --------
Pg. 23
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FORTY ENDED OCTOBER 6, 2002
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Financing activities:
- ---------------------
Mortgage principal repayments - (117) - - (117)
Distributions to shareholders (3,125) - - - (3,125)
Intercompany balances 18,643 (19,728) 1,085 - -
------- ------ ------- -------- -------
Net cash provided by
(used in) financing activities 15,518 (19,845) 1,085 - (3,242)
------- ------ ------- -------- -------
Decrease in cash and
cash equivalents (4,834) (614) (1,025) - (6,473)
Cash and cash equivalents at
beginning of period 29,673 5,437 1,842 - 36,952
------- ------ ------- -------- -------
Cash and cash equivalents at
end of period $24,839 $4,823 $817 $ - $30,479
======= ====== ======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for
income taxes $375 $250 $ 1 $ - $626
======= ====== ======= ======== =======
Cash paid during the period for $28,145 $1,108 $29,247 $ - $29,247
interest ======= ====== ======= ======== =======
Pg. 24
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FORTY WEEKS ENDED OCTOBER 7, 2001
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
OPERATING ACTIVITIES: PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- --------------------- ------ ------------ ------------ ------------ -----
Net (loss) income $(19,556) $11,604 $(2,906) $(10,858)
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 13,533 10,540 1,138 25,211
Provision for restaurant closing 2,061 - - 2,061
Increase in deferred rent, net 833 (226) - 607
Minority interest - - (26) (26)
Equity in income of unconsolidated
affiliates (185) - - (185)
Dividends received from
unconsolidated affiliates 244 - - 244
Changes in operating assets and
liabilities:
(Increase) decrease in receivables (1,495) (176) 14 (1,657)
Decrease (increase) in inventories 266 309 (71) 504
Increase in prepaid expenses (4,160) (2,073) (80) (6,313)
Decrease (increase) in other assets 3,830 (4,156) 186 (140)
(Decrease) increase in accounts
payable and accrued expenses (5,966) 3,263 - (2,703)
Decrease in accrued interest payable (6,223) - - (6,223)
-------- ------- ------- --------
Net cash (used in) provided by
operating activities (16,818) 19,085 (1,745) 522
-------- ------- ------- --------
Investing activities:
- ---------------------
Purchase of property and equipment (2,099) (9,036) (3,318) (14,453)
-------- ------- ------- --------
Net cash used in investing activities (2,099) (9,036) (3,318) (14,453)
-------- ------- ------- --------
Pg. 25
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FORTY WEEKS ENDED OCTOBER 7, 2001
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Financing activities:
- ---------------------
Mortgage principal repayments (107) (107)
Purchase of minority interest in
joint venture $(1,000) - (1,000)
Loans to shareholders, net (3,232) - (3,232)
Distributions to shareholders (12,564) - (12,564)
Intercompany balances 4,128 (9,550) 5,422 -
------- ------ ----- -------
Net cash (used in) provided
by financing activities (12,668) (9,657) 5,422 (16,903)
------- ------ ----- -------
(Decrease) increase in cash and
cash equivalents (31,585) 392 359 (30,834)
Cash and cash equivalents at
Beginning of period 36,963 4,232 1,124 42,319
------- ------ ----- -------
Cash and cash equivalents at
end of period $5,378 $4,624 $1,483 $11,485
======= ====== ===== =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for
income taxes $321 $463 $ 7 $791
======= ====== ===== =======
Cash paid during the period for
Interest $28,111 $1,130 $ - $29,241
======= ====== ===== =======
Pg. 26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
The following table provides information concerning the number of Company-owned
and franchised restaurants in operation during each indicated period:
40 WEEKS ENDED 12 WEEKS ENDED FISCAL YEAR
10/6/02 10/7/01 10/6/02 10/7/01 2001 2000
------- ------- ------- ------- ---- ----
Company-owned restaurants:
Opened during period 8 4 5 1 9 13
Acquired from (sold to) franchisees during
period-net (4) - (3) - - 1
Closed during period (1) (41) (36) (22) (7) (43) (16)
---- ---- ---- ---- ---- ----
Open at end of period (2) 585 604 585 604 602 636
Franchised restaurants:
Opened during period 28 22 13 9 42 36
Purchased from (sold to) Company during
period-net 4 - 3 - - (1)
Closed or terminated during period (18) (12) (5) (7) (20) (18)
---- ---- ---- ---- ---- ----
Open at end of period 328 313 328 313 325 303
All restaurants:
Opened during period 36 26 18 10 51 49
Closed or terminated during period (1) (31) (48) (13) (14) (63) (34)
---- ---- ---- ---- ---- ----
Open at end of period (2) 913 917 913 917 927 939
Kiosks (all franchised) open at end of
period 4 5 4 5 4 5
- --------------------------------
(1) In addition, we have closed five and are planning to close approximately an
additional five low volume, unprofitable Sbarro locations in the fourth
quarter of fiscal 2002. See Note 4 of the "Notes to the Unaudited
Consolidated Financial Statements" for information on the effect of the
planned closings on our consolidated financial statements.
(2) Excludes 35, 36, 37 and 33 other concept units as of October 6, 2002,
October 7, 2001, the end of fiscal 2001 and the end of fiscal 2000,
respectively (see Note 7 of the "Notes to the Unaudited Consolidated
Financial Statements").
Pg. 27
Our business is subject to seasonal fluctuations, the effect of weather and
economic conditions and consumer confidence in shopping safety. 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 has accounted for approximately 40% of annual operating net
income before amortization of intangible assets and any provision for restaurant
closings or asset impairment. This percentage fluctuates due to the length of
the holiday shopping period between Thanksgiving and New Year's Day, the number
of weeks in our fourth quarter, weather and economic conditions and our results
of operations in earlier quarters.
Our consolidated EBITDA for the forty weeks ended October 6, 2002 was $42.5
million and our EBITDA margin was 15.9%, compared to $37.0 million and 12.9%,
respectively, for the forty weeks ended October 7, 2001. Our consolidated EBITDA
for the twelve weeks ended October 6, 2002 was $19.6 million and our EBITDA
margin was 24.0%, compared to $12.1 million and 13.7%, respectively, for the
twelve weeks ended October 7, 2001. EBITDA for the forty and twelve weeks ended
October 6, 2002 includes the insurance recovery of $7.2 million, net. Excluding
this item, the EBIDTA for the forty and twelve weeks ended October 6, 2002 was
$35.3 million and $12.5 million, respectively, and the EBITDA margins were 13.2%
and 15.2%, respectively. EBITDA represents earnings before 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 ("GAAP") 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 decreased 7.1% to $254.5 million for the forty weeks ended
October 6, 2002 from $273.9 million for the forty weeks ended October 7, 2001
and decreased 8.5% to $78.0 million for the twelve weeks ended October 6, 2002
from $85.2 million in the twelve weeks ended October 7, 2001. The decrease in
sales for the forty weeks ended October 6, 2002 resulted from $17.0 million
lower sales of Sbarro quick service units and $2.4 million lower sales of
consolidated other concept units. Of the decline in Sbarro quick service unit
restaurant sales for the forty weeks, approximately $11.3 million resulted from
a 4.8% decrease in comparable unit sales to $222.4 million. The decrease in
sales for the twelve weeks ended October 6, 2002 reflects $6.0 million lower
sales of Sbarro quick service units and $1.2 million lower sales of consolidated
other concept units. Of the decline in Sbarro quick service unit restaurant
sales for the twelve weeks, approximately $4.3 million resulted from a 5.9%
decrease in comparable unit sales to $69.0 million. We believe the decline in
comparable restaurant sales in both reported fiscal 2002 periods was
attributable to a reduction in shopping mall traffic related to the general
economic downturn in the United States and the further impact of the events of
September 11, 2001 offset, in part, by price increases of 0.7% and 3.3%
implemented in late March 2001 and
Pg. 28
mid-June 2001, respectively. Comparable restaurant sales are made up of sales at
locations that were open during the entire current and prior fiscal years. Since
the end of the first quarter of fiscal 2001, we closed 55 more units than we
opened, causing the remaining $5.7 million and $1.7 million net reduction in
Sbarro quick service unit sales for the forty weeks and twelve weeks,
respectively, ended October 6, 2002. The units closed since the beginning of
fiscal 2001, with the exception of our high volume owned unit destroyed in the
collapse of the World Trade Center on September 11, 2001, were generally low
volume, unprofitable, units that did not have a material impact on our results
of operations. In addition, during fiscal 2002, we have closed four consolidated
other concept units, which resulted in a reduction of $2.9 million and $1.1
million in net sales at those locations for the forty and twelve weeks,
respectively, of fiscal 2002.
Excluding approximately $0.3 million related to the termination of an area
development agreement for Egypt during the first quarter of fiscal 2001,
franchise related income increased 4.1% to $7.6 million for the forty weeks
ended October 6, 2002 from $7.3 million in the comparable fiscal 2001 period and
5.4% to $2.6 million for the twelve weeks ended October 7, 2002 from $2.4
million in the twelve week period ended October 7, 2001. The increases for both
the forty and twelve week periods ended October 6, 2002 were due to increases in
both royalty and non-royalty revenues. The increase in non-royalty revenues was
due to an increase in the number of unit openings in fiscal 2002 and an increase
in the average initial franchising fee per unit opened, resulting in an increase
in total initial franchise fees, and franchise transfer fees in the second
fiscal quarter of 2002, partially offset by a reduction in income recognized
from existing area development agreements in both the forty and twelve week
periods of fiscal 2002 than in both of the same periods of fiscal 2001.
Continuing royalty revenues from new locations opened in fiscal 2002 and fiscal
2001 offset a reduction in royalty revenues from pre-existing units caused by a
reduction in comparable unit sales at both domestic and international locations.
Real estate and other revenues decreased 1.6% and increased 15.9% in the forty
and twelve weeks of 2002, respectively, from the same periods in fiscal 2001 due
to changes in certain vendor rebates.
Cost of food and paper products as a percentage of restaurant sales improved to
19.6% for the forty weeks ended October 6, 2002 from 20.5% for the comparable
2001 period and improved to 19.2% for the twelve weeks ended October 6, 2002
from 20.7% for the comparable 2001 fiscal period. The improvements were
primarily due to the benefit derived from closing locations in fiscal 2002 and
2001 that were not able to function as efficiently as our other quick service
locations due to their low sales volume and to the effect of lower average
cheese prices in fiscal 2002. Cheese prices, which were, on average, slightly
higher in first quarter of 2002, were significantly lower in the second and
third quarters of 2002, than in the comparable periods in 2001. The benefit from
the decrease in cheese prices was $1.5 million and $0.9 million for the forty
and twelve weeks of fiscal 2002 from the same periods in fiscal 2001. Cheese
prices to date in the fourth quarter of fiscal 2002 continue to be significantly
lower than in the comparable period in fiscal 2001.
Payroll and other employee benefits decreased by $4.0 million but increased to
28.2% from
Pg. 29
27.7% as a percentage of restaurant sales for the forty weeks ended October 6,
2002 compared to the same period in fiscal 2001. For the twelve week period
ended October 6, 2002, these costs decreased by $1.4 million but increased to
28.0% from 27.3% as a percentage of restaurant sales compared to the comparable
twelve week period in fiscal 2001. The dollar decreases were primarily due to
the effect of steps taken to reduce payroll costs beginning in late fiscal 2001
and the closing the locations in fiscal 2002 and 2001. The percentage increases
were due to the reduced level of sales in each of the 2002 periods reported.
Other operating expenses decreased by $1.1 million, but increased to 35.0% of
restaurant sales, in the forty weeks ended October 6, 2002 from 33.0% in the
forty weeks ended October 7, 2001. These expenses, as a dollar amount, were
flat, but increased to 34.3% of restaurant sales, in the twelve weeks ended
October 6, 2002 from 31.4% in the twelve weeks ended October 7, 2001. The dollar
decline the forty week period was due to the fewer Sbarro-owned units operating
in our system. The percentage increases in both periods of fiscal 2002 compared
to the fiscal 2001 periods were due to lower sales volume and the effects of
higher rent and other occupancy related expenses resulting from the renewal of
existing leases at the end of their terms at higher rental rates compounded by
the reduced level of sales. In addition, we have been experiencing increases in
repair and maintenance costs compared to fiscal 2001, a portion of which relates
to the cost of a number of nationwide maintenance contracts entered into in late
fiscal 2001 or early fiscal 2002 for the repair of our property and equipment.
Also, as the average age of our locations increase, overall repair and
maintenance costs have been increasing. These factors were offsetting factors
against dollar savings effected from the closing of low volume units.
Depreciation and amortization expense decreased by $8.3 million and $3.2 million
for the forty and twelve weeks, respectively, of fiscal 2002 from the same
periods in fiscal 2001. For the forty weeks of this fiscal year, the reduction
was due primarily to a $4.2 million reduction in amortization expense resulting
from SFAS No. 142, "Goodwill and Other Intangible Assets" becoming applicable to
us as of the beginning of fiscal 2002, as well as a $1.6 million reduction in
depreciation and amortization related to locations that closed since the end of
the first quarter of fiscal 2001. For the twelve week period ended October 6,
2002, the reduction of amortization due to the applicability to the use of SFAS
142 was $1.2 million and the reduction in depreciation and amortization related
to closed locations was $0.2 million. The balance of the change in depreciation
and amortization expense in each of the fiscal 2002 reported periods relates to
locations that had been included in the provision for asset impairment in fiscal
2001 for which no depreciation was taken in fiscal 2002 and to decreases in
depreciation and amortization for locations that became fully depreciated during
either fiscal 2002 and 2001. Under SFAS No. 142, we no longer amortize goodwill
and intangible assets with indefinite lives, but rather review those assets
annually for impairment (or more frequently if impairment indicators arise).
Separate intangible assets that are not deemed to have indefinite lives continue
to be amortized over their useful lives. We have completed our evaluation of
goodwill and intangible assets (trademarks and tradenames) with indefinite lives
acquired prior to July 1, 2001 ($205.1 million, net of accumulated amortization
of $19.3 million at October 6, 2002). The evaluation did not have an impact on
our financial position and results of operations. Due to the seasonal nature of
the Sbarro quick service locations, we generally measure asset impairment of our
restaurant locations after our full fiscal year results, unless impairment
indications arise earlier.
Pg. 30
General and administrative expenses were $18.0 million, or 6.8% of total
revenues, for the forty weeks ended October 6, 2002, compared to $24.1 million,
or 8.4% of total revenues, for the forty weeks ended October 7, 2001. Those
costs were $5.3 million, or 6.5% of total revenues, for the twelve weeks ended
October 6, 2002, compared to $7.7 million, or 8.7% of total revenues, for the
twelve weeks ended October 7, 2001. The reductions in general and administrative
costs for both periods of fiscal 2002 reflect decreases in field management
costs and a reduction in corporate staff costs due to a cost containment program
which we implemented beginning in the fourth quarter of fiscal 2001.
During the forty weeks ended October 6, 2002, we recorded a provision for
restaurant closings of $2.9 million. For the same forty weeks that ended on
October 7 in fiscal 2001, we recorded a provision of $2.8 million. The
provisions for the twelve weeks ended October 6, 2002 and October 7, 2001 were
$0.7 million and $1.4 million, respectively. Of the provisions recorded in
fiscal 2002, approximately $0.7 million was recorded in the third quarter (in
addition to the $1.6 million recorded in the second quarter of fiscal 2002) for
the net book value of the property and equipment to be abandoned at, and record
the anticipated closing costs of, approximately thirty low volume, unprofitable
Sbarro quick service locations that we have planned to close by the end of
fiscal 2002 (twenty-five of those units have been closed to date). The net book
value of approximately one-half of the units closed was included in the
provision for asset impairment recorded in fiscal 2001. The balance of the
provisions recorded in fiscal 2001 relate to costs that either were not included
in the provision for asset impairment recorded in the fourth quarter of fiscal
2001 or which were not absorbed by amounts received from landlords in connection
with such closings. The $1.4 million provision recorded in the third quarter of
fiscal 2001 relates to the write off of the remaining book value of quick
service store closings.
Minority interest represents the share of the minority holders' interests in the
combined profit or loss reported for the applicable period of the joint venture
in which we have a majority interest. In early fiscal 2002, we closed one of the
two locations owned by this joint venture. The closed unit had a nominal
operating loss in the first quarter of fiscal 2002. The provision for the
closing of this unit, which was not material, was made in the fourth quarter of
fiscal 2001.
Interest expense of $23.9 million and $24.1 million for the forty weeks ended
October 6, 2002 and October 7, 2001, respectively, and of $7.2 million for each
of the third fiscal quarters of 2002 and 2001, relate to the 11%, $255.0 million
senior notes issued to finance our going private transaction in September 1999,
the 8.4%, $16.0 million mortgage loan on our corporate headquarters entered into
in the first quarter of 2001 (the principal of which is being repaid at the rate
of $0.1 million per quarter), and fees for unused borrowing capacity under our
credit agreement. Of these amounts, $1.1 million and $0.4 million in each of the
forty weeks and twelve weeks ended October 6, 2002 and October 7, 2001,
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, bank credit agreement and the mortgage loan.
Interest income for the forty week period ended October 6, 2002 and October 7,
2001 was approximately $0.4 million and $0.6 million, respectively.
Pg. 31
Interest income was approximately $0.1 million for the third quarter of both the
2002 and 2001 fiscal years. Higher cash available for investment in each of the
forty and twelve weeks in fiscal 2002 as compared to fiscal 2001 was offset by
the lower interest rates in effect. The Indenture under which our senior notes
are issued and our bank credit agreement limit the type of investments we may
make.
Equity in the net income of unconsolidated affiliates represents our share of
earnings and losses in those new concepts in which we have a 50% or less
ownership interest. The increase of $0.5 million and $0.1 million during the
forty and twelve weeks ended October 6, 2002 as compared to the same periods in
fiscal 2001, was primarily a result of improved performance of our steakhouse
joint venture. 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.
In September 2002, we reached an agreement to settle, for $9.65 million, our
claim with our insurance company for the reimbursement of the expected cost of
the assets destroyed at the Sbarro-owned World Trade Center location,
depreciated for lost income under our business interruption insurance coverage.
We received the remaining amount of such settlement, less the $1.5 million
advance received in May 2002, in September 2002. Approximately $7.2 million, net
of related expenses, of the settlement relates to reimbursement of lost income
under our business interruption insurance coverage and is included in our
statement of operations for the forty and twelve weeks ended October 6, 2002.
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. Under the provisions of Subchapter S, substantially all
taxes on our income is paid by our shareholders rather than us. Our tax expense
of $0.3 million for both the forty week periods ended October 6, 2002 and
October 7, 2001 and $0.1 million for both twelve week periods then ended was for
taxes owed to jurisdictions that do not recognize S corporation status or that
tax entities based on factors other than income.
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 October 6,
2002, we had unrestricted cash and cash equivalents of $30.5 million and working
capital of $19.5 million compared to unrestricted cash and cash equivalents of
$11.5 and a working capital deficit of $2.4 million at October 7, 2001.
Net cash provided by operating activities was $3.4 million for the forty weeks
ended October 6, 2002 and $0.5 million for the forty weeks ended October 7,
2001. The $5.5 million increase in EBITDA and $2.5 million difference in the
change in accounts receivable (primarily due to the receipt during the second
quarter of fiscal 2002 of the $1.5 million advance for our insurance claim
related to the World Trade Center, that had been recognized as a receivable, and
an increase in amounts owed by franchisees due to the higher number of locations
open in fiscal
Pg. 32
2002) was offset by an increase in prepaid expenses of $1.2 million and $3.3
million lower amount of accounts payable and accrued expenses in fiscal 2002
than at fiscal 2001 year-end. Accounts payable and accrued expenses at October
6, 2002 approximated those balances at October 7, 2001. Year-end accounts
payable and accrued expenses are traditionally highest at the end of each of the
Company's fiscal years which occurs at the end of the peak holiday season.
Net cash used in investing activities has historically been primarily for
capital expenditures, including those made by our consolidated other concepts.
Net cash used in investing activities declined from $14.5 million for the forty
weeks ended October 7, 2001 to $6.6 million for the forty weeks ended October 6,
2002 primarily due to a decline in quick service new unit openings and
renovation activity, a reduction in expenditures for consolidated other concept
locations as the development of these concepts has slowed, and the impact of
nationwide maintenance contracts we entered into during late fiscal 2001 and
early fiscal 2002. Investing activities in the forty weeks ended October 6, 2002
include $1.3 million, paid as part of previously committed costs of $2.3 million
relating to an upgrade of our computer systems.
Net cash used in financing activities was $3.2 million for the forty weeks ended
October 6, 2002 compared to net cash used of $16.9 million in the comparable
2001 period. The reduction in amount of cash used was due to a $4.4 million
reduction in tax distributions made under a tax payment agreement, the absence
in fiscal 2002 of $3.2 million of loans (net of $0.7 million of loan repayments)
and the absence of $5.0 million of dividends (outside of the Tax Payment
Agreement) made to our shareholders in the fiscal 2001 period and the absence of
the $1.0 million purchase price paid by us as part of the settlement of
litigation in the fiscal 2001 period for the 20% interest in the Umberto of New
Hyde Park concept that we did not own.
We incur annual cash interest expense of approximately $29.7 million under our
senior notes and mortgage loan and may incur additional interest expense for
borrowings under our bank credit agreement. In addition to debt service, we
expect that our other liquidity needs will relate to capital expenditures,
working capital, investments in joint ventures, distributions to shareholders to
the extent permitted under the Indenture for the senior notes and the bank
credit agreement and general corporate purposes. We believe that aggregate
restaurant capital expenditures and our investments in joint ventures during
fiscal 2002 will be significantly lower than levels in fiscal 2001 due to fewer
scheduled store openings, lower renovation activity, lower expenditures for
other concept locations and the maintenance contract referred to earlier.
We expect our primary sources of liquidity to meet our needs will be cash flow
from operations. The closing of the Sbarro quick service locations through the
end of fiscal 2002 is expected, after termination payments to landlords, to
increase liquidity as these units were low volume, under performing units that
had negative EBITDA. Also, at October 15, 2002, we had $28.1 million of undrawn
availability under our bank credit agreement, net of outstanding letters of
credit and guarantees of reimbursement obligations aggregating approximately
$1.9 million.
We are subject to various covenants under the Indenture under which our senior
notes are issued and under our bank credit agreement. One of the covenants
limits our ability to borrow funds (except under specifically permitted
Pg. 33
arrangements, such as up to $75.0 million of revolving credit loans) unless our
consolidated interest ratio coverage (as defined), after giving pro forma effect
to the interest on the new borrowing, for the four most recently ended fiscal
quarters is at least 2.5 to 1. Another covenant limits our ability to make
"restricted payments," including, among other things, dividend payments (other
than as distributions pursuant to the Tax Payment Agreement) and investments in,
among other things, unrestricted subsidiaries, to specified amounts determined
under a formula contained in the Indenture provided that that ratio is at least
2.0 to 1 after giving pro forma effect to the restricted payment. As of October
6, 2002, that ratio was 2.23 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). Additionally, under the formula
contained in the Indenture, we may not presently make restricted payments other
than certain permitted investments.
The Tax Payment Agreement was entered into as part of our election that our
shareholders, rather than us, be taxed on our taxable income pursuant to
Subchapter S of the Internal Revenue Code and, where applicable and permitted,
under similar state and local tax provisions. The Tax Payment Agreement permits
us, regardless of whether we can make restricted payments, to make periodic tax
distributions to our shareholders in amounts intended to approximate the income
taxes, including estimated taxes, that would be payable by them 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.
Our contractual obligations and other commercial commitments with respect to
both our Sbarro quick service and the other concepts (both those in which we
have a majority or minority interest) do not differ materially from the
information disclosed in the Form 10-K for the 2001 fiscal year. Our bank credit
agreement was amended in March 2002 to (a) increase the required maximum ratio
of Consolidated Senior Debt (as defined) at the end of a fiscal quarter to
Consolidated EBITDA (as defined) for the four fiscal quarters then ended that we
may have to ratios ranging from 7.25 to 1 through the third quarter of fiscal
2002 to 4.50 to 1 after the third quarter of fiscal 2003, and (b) to decrease
the required minimum ratio of Consolidated EBITDA (as defined) for the four
quarters ended on the measurement date to Consolidated Interest Expense (as
defined) for the four quarters ended on the measurement date that we may have,
to ratios ranging from 1.25 to 1 through the third quarter of fiscal 2002 to
2.00 to 1 after the third quarter of fiscal 2003.
CRITICAL ACCOUNTING POLICIES AND CONTRACTUAL OBLIGATIONS
- ---------------------------------------------------------
Accounting policies are an integral part of the preparation of our financial
statements in accordance with accounting principles generally accepted in the
United States of America. Understanding these policies, therefore, is a key
factor in understanding our reported results of operations and financial
position. Certain critical accounting policies require us to make estimates and
assumptions that affect the amounts of assets, liabilities, revenues and
expenses reported in the financial statements. Due to their nature, estimates
involve judgments based upon available information. Therefore, actual results or
amounts could differ from estimates and the difference could have a material
impact on our consolidated financial statements. During the
Pg. 34
forty weeks ended October 6, 2002, there were no material changes to the matters
discussed under the headings "Critical Accounting Policies" and "Contractual
Obligations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal
year ended December 30, 2001.
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 the 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 bank credit agreement;
o our ability to comply with covenants contained in the Indenture under which
the senior notes are issued and in our bank credit agreement, and the
effects which the restrictions imposed by those covenants 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 bank credit agreement to the extent required in the
event we make certain asset sales or experience a change of control.
Pg. 35
You are cautioned not to place undue reliance on these statements, which speak
only as of the date of this 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.
ITEM 3. 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 bank credit agreement (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% per annum. We are not a party to, and do not expect to
enter into, any interest rate swaps or other instruments to hedge interest
rates.
We have not, and do not expect to, purchase 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, and do not expect to, purchase future contracts, options or other
instruments to hedge against changes in values of foreign currencies.
Pg. 36
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report, an evaluation was carried out
of the effectiveness of the design and operation of our "disclosure controls and
procedures," as defined in, and pursuant to, Rule 13a-14 of the Securities
Exchange Act of 1934 by our Chairman of the Board, President and principal
executive officer and Vice President, Controller and principal accounting
officer (the person performing the function of our principal financial officer).
Based on that evaluation these officers concluded that, as of the date of their
evaluation, our disclosure controls and procedures were effective to ensure that
material information relating to us and our subsidiaries is made known to them.
(b) Changes in internal controls
There were no significant changes in our internal controls or in other factors
that could significantly affect these internal controls subsequent to the
evaluation discussed above.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.01 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.02 Certification of Vice President, Controller and Principal Accounting
Officer, the person performing the function of our principal financial
officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
The only Report on Form 8-K filed by the Company during the quarter
covered by this report was dated August 23, 2002 reporting under Item
7, Financial State-ments, Pro Forma Financial Information and
Exhibits. No financial statements were filed with that report.
Pg. 37
SIGNATURE
---------
Pursuant to the requirements 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.
SBARRO, INC.
Registrant
Date: November 18, 2002 By: /s/ MARIO SBARRO
----------------------------------------------
Mario Sbarro
Chairman of the Board and President (Principal
Executive Officer)
Date: November 18, 2002 By: /s/ STEVEN B. GRAHAM
----------------------------------------------
Steven B. Graham
Vice President and Controller (Principal
Accounting Officer)
Pg. 38
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mario Sbarro, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sbarro, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
Pg. 39
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 18, 2002 /s/ MARIO SBARRO
----------------------------------------------
Mario Sbarro,
Chairman of the Board and President
(Principal Executive Officer)
Pg. 40
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven B. Graham, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sbarro, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
Pg. 41
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ STEVEN B. GRAHAM__
----------------------------------------------
Steven B. Graham,
Vice President and Controller
(Principal Accounting Officer and person
performing the function of our
principal financial officer)
Pg. 42
EXHIBIT INDEX
99.01 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.02 Certification of Vice President, Controller, Principal Accounting
Officer, the person performing the function of our principal financial
officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Pg. 43