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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|_| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended DECEMBER 29, 2002
|_| 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 Identification No.)
incorporation or organization)
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 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 ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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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 17, 2003 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 this
time. These statements generally contain words such as "may," "should," "seeks,"
"believes," "in our opinion," "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, inflation, 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 effects that
military action and terrorism 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), beverage
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 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 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
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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.
PART I
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 911 company-owned and franchised restaurants worldwide at
December 29, 2002. 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 30
other concept units through majority or minority owned joint ventures or wholly
owned subsidiaries. (See "Other Concepts," 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 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 new senior notes having the same terms, except that the
new senior notes were registered under the Securities Act of 1933. Throughout
this report we are referring to the new senior notes as the "senior notes." The
old senior notes and the new senior notes were issued under an indenture dated
September 28, 1999, which, throughout this report, we are referring to as the
"indenture." Our payment obligations under the senior notes 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. 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 this
report and "Security Ownership of Certain Beneficial Owners and Management"
included in Item 12 of this report.
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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 margin percentages. Sbarro restaurants are primarily
located in shopping malls, downtown locations and other high customer traffic
venues, including toll roads, airports, sports arenas, hospitals, convention
centers, university campuses and casinos. We believe that there may be
opportunities to open similar Sbarro units in these and other venues.
As of December 29, 2002, we operated 911 Sbarro quick service restaurants,
consisting of 558 company-owned and 353 franchised restaurants located in 46
States, the District of Columbia, the Commonwealth of Puerto Rico, certain
United States territories and 27 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 30 casual and fine dining restaurants
featuring varying cuisines under other restaurant concepts.
RESTAURANT EXPANSION
--------------------
We grew from 103 Sbarro-owned or franchised quick service restaurants at
the time of our initial public offering in 1985 to 939 at the end of fiscal
2000. However, since the end of fiscal 2000, while we have added 50 more
franchised units than were closed, we have closed or sold to franchisees 78 more
company-owned units than we opened, resulting in a net decrease of 28
Sbarro-owned or franchised quick service restaurants. As a result, the total
number of company-owned and franchised units at December 29, 2002 was 911.
During 2002, 55 new Sbarro restaurants were opened, of which 13 were
company-owned and 42 were franchised. However, 51 company-owned and 20
franchised Sbarro units were closed, resulting in a decrease of 16 company-owned
and franchised units at the end of fiscal 2002 than at the end of fiscal 2001.
Six company-owned units were sold to franchisees. Therefore, at year-end we had
558 company-owned and 353 franchised Sbarro restaurants. In addition, during
fiscal 2002, we and the joint ventures in which we participate opened 2 and
closed 7 casual and fine dining units. As a result, the total number of casual
and fine dining other concept units was 32 at December 29, 2002. (See "Other
Concepts" below).
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The following table summarizes the number of Sbarro-owned and franchised
quick service restaurants in operation during each of the years from 1998
through 2002:
Fiscal Year
------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Company-owned Sbarro restaurants:
Opened during period (1) 13 9 13 24 25
(Sold to) acquired from franchisees
during period (2) (6) - 1 (1) 1
Closed during period (2) (3) (51) (43) (16) (9) (20)
---- ---- ---- --- ----
Open at end of period (2) (4) 558 602 636 638 624
Franchised Sbarro restaurants:
Opened during period 42 42 36 49 43
Acquired from (sold to) Sbarro
during period 6 - (1) 1 (1)
Closed or terminated during period (20) (20) (18) (32) (13)
---- ---- ---- ---- ----
Open at end of period 353 325 303 286 268
All Sbarro restaurants:
Opened during period (1) 55 51 49 73 68
Closed or terminated during period (2) (3) (71) (63) (34) (41) (33)
---- ---- ---- ---- ----
Open at end of period (2) (4) 911 927 939 924 892
Kiosks (all franchised) open at end of year 3 4 5 4 8
(1) Excludes 2, 4, 7, 7 and 7 other concept units opened during fiscal 2002,
2001, 2000, 1999 and 1998, respectively.
(2) To date in fiscal 2003, we have closed 7 company-owned units and sold 2
company-owned Sbarro units to franchisees.
(3) See Notes (3) and (4) to "Selected Financial Data" in Item 6 of this report
for information with respect to charges relating to the closing and planned
closing of Company-owned units.
(4) Excludes 32, 37, 33, 26 and 19 other concept units at the end of fiscal
2002, 2001, 2000, 1999 and 1998, respectively. See Notes (3) and (4) to
"Selected Financial Data" in Item 6 of this report for information with
respect to charges relating to the closing of other concept locations.
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.
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As of December 29, 2002, there were 243 "in-line" Sbarro restaurants and
661 "food court" Sbarro quick service restaurants. In addition, franchisees
operated 7 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 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 2002 were $0.8 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. In early fiscal 2003, we replaced our national independent wholesale
distributor, with which we did not have a contract, by entering into a contract
with another national independent wholesale distributor due to the former
distributor's bankruptcy. Our current contractual arrangement requires us to
purchase 95% of all of our food ingredients that are not purchased locally and
related restaurant supplies through the new distributor at product prices that
are not materially different from those of our prior distributor. As the
majority of the products used in our restaurants are proprietary and we are
involved with negotiating their cost to the wholesaler, we do not believe that
there will be a material impact on our cost of food and paper products from this
new contractual arrangement. Should the need arise, 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.
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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.
FRANCHISE DEVELOPMENT
---------------------
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 on participation in national
franchise conventions, to attract new franchisees.
As of December 29, 2002, we had 353 franchised Sbarro restaurants operated
by 101 franchisees in 37 states of the United States as well as its territories
and in 27 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.
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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 restauranteurs experienced in the particular food area. We
participate with our partners in overseeing the operations of each venture. Our
joint ventures and other wholly-owned concepts presently operate 30 restaurants.
We intend to continue to expand the steakhouse joint venture, but do not intend
to expand our other joint venture operations. During fiscal 2002, we recorded
charges to earnings of $4.7 million related to the closing of 7 other concept
restaurants. Charges for the impairment of property, equipment and other assets
of 5 of the locations closed in fiscal 2002 had been recorded in fiscal 2001.
Additional closing costs of approximately $0.2 million were recorded for these
restaurants in fiscal 2002.
The following is a summary of our existing internally operated and joint
venture operated concepts:
o We presently have a 100% interest in a venture that operates eight
moderately priced quick casual dining restaurants serving Italian food,
under the name "Mama Sbarro." The restaurants provide both quick-service
and table service, with take-out service available, and generally cater to
families. In March 2001, we acquired the 20% ownership interest in this
concept and another concept discussed below from our then partner in
connection with the settlement of litigation against this partner. At that
time, the locations were operated under either the "Umberto of New Hyde
Park" or "Tony and Bruno's" names. During fiscal 2002, we sold two Mama
Sbarro locations to unaffiliated third parties after recording a provision
for impairment of $1.6 million in fiscal 2001 with respect to these units.
In February 2003, we sold two other Mama Sbarro locations to an
unaffiliated third party for an aggregate of $0.8 million in cash and
notes. We recorded a provision for impairment of $0.2 million related to
these two locations in fiscal 2002. This provision approximates the
estimated loss from the sale. There is a proposal for us to sell a 49%
interest in the 8 remaining Mama Sbarro locations to a company owned by
Gennaro J. Sbarro, who is a Corporate Vice President and President of our
Casual and Fine Dining Division. Mr. Sbarro is a stockholder of Sbarro and
the son of Joseph Sbarro, an officer, director and one of our principal
stockholders. Mr. Sbarro will cease to be an officer and employee of
Sbarro, Inc. should the transaction be finalized. The proposed sales price,
which is to be paid in cash, is $1.3 million. We anticipate that the
transaction will result in a loss of approximately $0.4 million that will
be recorded in the first quarter of fiscal 2003. We do not presently plan
to open additional Mama Sbarro restaurants in fiscal 2003.
o We operate five quick service units in mall locations under the name
"Umberto of New Hyde Park" in which we own a 100% interest, having acquired
the ownership interest of our former 20% partner as described above. We
closed one "Umberto of New Hyde Park" location during fiscal 2002,
recording a closing cost of approximately $0.1 million.
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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, two of which are operated under the name
"Rothmann's Steak House" and the other is operated under the name "Burton &
Doyle." The joint venture is planning to open additional sites of each type
of restaurant.
o We have a 70% interest in a joint venture that presently operates one
moderately priced, table service restaurant featuring an Italian
Mediterranean menu under the name "Salute" in New York City. In early 2002,
this joint venture closed one of its two remaining locations with a minimal
charge to earnings that was recorded in fiscal 2001.
o At the beginning of fiscal 2002, we had a 50% interest with the same joint
venture partners in three moderately priced, table service restaurants that
also featured an Italian-Mediterranean menu. All three locations were
closed during fiscal 2002. A provision for asset impairment of $7.7 million
had been recorded during fiscal 2001 for two of the locations. Additional
losses of $0.3 million were recorded related to these locations in fiscal
2002. We recorded a loss on of the closing of the third restaurant in
fiscal 2002 of approximately $4.1 million, for a total restaurant closing
cost in fiscal 2002 of approximately $4.4 million for this venture.
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."
All of the other concept locations, except for three Umberto of New Hyde
Park mall units, are located in the New York City metropolitan area.
All of our other concept locations presently operate through unrestricted
subsidiaries which do not guarantee our senior notes or our 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 under which our senior notes are issued
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 29, 2002, we had an aggregate investment, net of
write-downs, impairment charges and losses on sales, in the form of advances to
and property and equipment costs of these other concepts of approximately $11.7
million. The amount of our investment does not include guarantees of
indebtedness and reimbursement obligations in respect of letters of credit in
the aggregate amount of approximately $8.5 million (in addition to approximately
$0.3 million of remaining letters of credit for locations that have closed, of
which $0.1 million is being used for security under leases that have been sublet
to the new owners and $0.2 million is being held by the landlord until the
finalization of remaining lease issues) and guarantees of certain real property
lease obligations of these subsidiaries and other concepts in the approximate
amount of $4.1 million. In
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addition, our other concepts have potential obligations of $3.3 million for
subleased real property for locations that have been sold to the purchasers of
those locations.
EMPLOYEES
---------
As of December 29, 2002, we employed approximately 5,000 persons, excluding
employees of other concepts, of whom approximately 2,750 were full-time field
and restaurant personnel, approximately 2,040 were part-time restaurant
personnel and 210 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, military action, terrorism, 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.
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,
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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 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, or are exempt from registering, in all states in which we
operate that have registration requirements. 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 have historically
contributed less than 1% of total revenues of Sbarro quick service restaurants.
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.
ITEM 2. PROPERTIES
- -------------------
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 29, 2002, we
leased 585 restaurants, of which 27 were subleased to franchisees under terms
which cover all of our obligations under the leases. 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. Some leases provide either
exclusively, or in combination with base rent, for contingent rents generally
ranging from 8% to 10% of net restaurant sales, usually in excess of stipulated
amounts.
Leases to which we were a party at December 29, 2002 have initial terms expiring
as follows:
-11-
YEARS INITIAL LEASE NUMBER OF SBARRO- NUMBER OF FRANCHISED
TERMS EXPIRE OWNED RESTAURANTS RESTAURANTS
- ------------ ----------------- -----------
2003........................... 71 (1) 3
2004........................... 46 2
2005........................... 54 4
2006 .......................... 51 4
2007........................... 54 3
Thereafter..................... 282 11
(1) Includes 18 restaurants under month-to-month tenancies and 16 restaurants
as to which we pay only contingent rent based on the level of net
restaurant sales, the leases for which are generally for one year periods.
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 29 facilities.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
On December 20, 1999, Antonio Garcia and thirteen 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. The plaintiffs filed a motion to certify the
lawsuit as a class action, but the motion was denied by the court.
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. The plaintiffs are seeking actual damages, punitive damages and
costs of the lawsuit, including reasonable attorney's fees, each in unspecified
amounts. We have separately settled with two of the managers for immaterial
amounts. The plaintiffs are represented by the same counsel who is representing
the plaintiffs in the Garcia case.
-12-
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 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,
will 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.
-13-
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 eight
shareholders of record. (See Item 12 "Security Ownership of Certain Beneficial
Owners and Management.")
During 2002 and 2001, we declared the following dividends to our
shareholders. Tax distributions are 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).
AMOUNT
PER SHARE TOTAL TYPE
--------- ----- ----
FISCAL 2002
-----------
January 15, 2002 $0.44 $3,125,000 Tax Distribution
FISCAL 2001
-----------
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
The tax distribution paid in 2002 related to 2001 taxable earnings. In addition,
on January 21, 2003, we declared dividends to our shareholders of $0.16 per
share (a total of $1,100,061) 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 (other than distributions pursuant to the tax payment
agreement) and other restricted payments will depend upon our future
profitability and certain other factors. At the time of declaration of the
dividend, we must have 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. For the four
fiscal quarters ended December 29, 2002, our consolidated interest coverage
ratio was 1.90 to 1. In any event, restricted payments are limited in dollar
amount pursuant to a formula contained in the indenture and credit agreement. We
refer to the amount that is available for us to make dividends and other
restricted payments as the "restricted payment availability." We cannot make
restricted payments until we increase the restricted payment availability
subsequent to December 29, 2002 by approximately $7.2 million, and then only to
the extent of any excess over that amount.
We do not have any equity compensation plans, contracts or arrangements for
employees or non-employees.
-14-
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. Our fiscal
2002 consolidated financial statements have been audited and reported on by BDO
Seidman, LLP, independent certified public accountants, and our consolidated
statements for years prior to fiscal 2002 were audited and reported on by Arthur
Andersen LLP, independent public accountants. The audit report covering our
financial statements as of and for the fiscal years ended December 30, 2001 and
December 31, 2000 has not been reissued by Arthur Andersen LLP in connection
with this filing.
FISCAL YEAR
-----------
(DOLLARS IN THOUSANDS)
2002 2001 2000 1999 1998(1)
---- ---- ---- ---- -------
SYSTEM-WIDE SALES (UNAUDITED) $550,279 $570,609 $569,260 $543,219 $524,572
======== ======== ======== ======== ========
INCOME STATEMENT DATA:
Revenues:
Restaurant sales $345,206 $372,673 $382,365 $375,514 $370,101
Franchise related income 10,070 10,286 11,231 8,688 8,284
Real estate and other 5,104 5,756 5,812 5,495 3,402
-------- --------- --------- -------- --------
Total revenues 360,380 388,715 399,408 389,697 381,787
Costs and expenses:
Restaurant operating expenses:
Costs of food and paper products 67,593 74,614 74,405 75,956 78,603
Payroll and other employee benefits 96,288 103,828 101,553 97,336 93,338
Other operating costs 114,892 116,581 114,122 108,599 102,927
Depreciation and amortization (2) 20,683 30,375 29,039 25,712 22,784
General and administrative costs 23,960 29,472 30,882 28,854 23,999
Asset impairment, restaurant
closings and other charges (3)(4) 9,196 18,224 -- 1,013 2,515
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 332,612 373,094 350,001 337,470 329,771
Operating income before minority interest 27,768 15,621 49,407 52,227 52,016
Minority interest (52) (1) (46) 266 (101)
----------- ----------- ---- ---------- -----
Operating income 27,716 15,620 49,361 52,493 51,915
------ ------ ---------- --------- --------
Other (expense) income:
Interest expense (30,959) (30,950) (30,243) (7,899) --
Interest income (8) 528 756 949 3,828 5,120
Equity in net income (loss) of
unconsolidated affiliates 668 310 303 423 (296)
Insurance recovery, net (9) 7,162 -- -- -- --
-------- ------- ------- ------- -------
Net other (expense) income (22,601) (29,884) (28,991) (3,648) 4,824
-------- -------- -------- ------- -----
-15-
FISCAL YEAR
-----------
(DOLLARS IN THOUSANDS)
2002 2001 2000 1999 1998(1)
---- ---- ---- ---- -------
Income (loss) before income taxes (credit ) and
cumulative effect of change in method of
accounting for start-up costs 5,115 (14,264) 20,370 48,845 56,739
Income taxes (credit) (10) 334 325 (5,075) 19,322 21,547
-------- ------ ------- ------ --------
Income (loss) before cumulative effect of
change in method of accounting for start-up
costs 4,781 (14,589) 25,445 29,523 35,192
Cumulative effect of change in method of accounting
for start-up costs, net of income taxes of $504 -- -- -- -- (858)
------ ------ ------ ------ ---------
Net income (loss) $4,781 $(14,589) $25,445 $ 29,523 $ 34,334
====== ========= ======= ======== ========
OTHER FINANCIAL AND RESTAURANT DATA:
Net cash provided by
operating activities (11) $32,453 $34,812 $48,329 $62,282 $59,199
Net cash used in
investing activities (11) (10,988) (22,453) (31,158) (25,227) (20,661)
Net cash used in
financing activities (11) (3,267) (17,726) (8,606) (158,356) (3,377)
EBITDA (12) $56,229 $46,305 $78,703 $78,628 $74,403
Capital expenditures (13) $10,988 $22,528 $31,193 $25,282 $28,213
Number of restaurants at end of period:
Company-owned (14) 558 602 636 638 624
Franchised 353 325 303 286 268
--- --- --- ---------- -------
Total number of restaurants 911 927 939 924 892
=== === === ========== =======
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $404,773 $404,762 $428,555 $417,543 $308,251
Working capital (deficiency) 27,095 4,614 10,293 (1,935) 126,619
Total long-term obligations 276,415 276,197 274,269 263,090 14,902
Shareholders' equity 88,100 86,444 113,597 110,280 256,918
- ----------------
(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 our going private transaction on September
28, 1999 of $5.4 million, $5.0 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
-16-
our net assets at September 28, 1999, resulting in lower annual
amortization expense than originally estimated. In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which
became effective as to us with the beginning of fiscal 2002. 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). Accordingly, we incurred no amortization of
goodwill or of intangible assets with indefinite lives in fiscal 2002.
Separable intangible assets that are not deemed to have indefinite lives
will continue to be amortized over their useful lives. Our goodwill and
intangible assets with indefinite lives, which aggregated $205.1 million,
net of accumulated amortization, at December 29, 2002, is tested annually
for impairment. Our testing for impairment concluded that there is no
impairment at the end of fiscal 2002.
(3) Fiscal 2002 represents a provision for the impairment of assets of $0.4
million and restaurant closings of $8.8 million relating to Sbarro
restaurant and other concept locations. Fiscal 2001 represents provisions
for asset impairment of $5.5 million, restaurant closings of $11.7 million
and other charges of $1.0 million relating to Sbarro restaurants and other
concept locations.
(4) Fiscal 1999 and 1998 represent provisions of a special allocation of losses
of $1.0 million in fiscal 1999 which arose as a result of the final
disposition of two other concept unit closings recorded in 1997 and $2.5
million for the closing of 20 restaurants in fiscal 1998, respectively.
(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) Represents the portion, net of related expenses, of the settlement of our
insurance claim for reimbursement of lost income under our business
interruption insurance arising out of the events of September 11, 2001.
(10) 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 laws 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.
(11) 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 a
change in deferred taxes caused by the conversion to Subchapter S status
and a change in accrued interest payable was $53.3 million. In 1999, net
cash
-17-
provided by operating activities before the change in accrued interest
payable was $54.8 million.
(12) 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 and the insurance recovery described in note 9
above. 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, we believe that EBITDA provides relevant and useful information for
analysts and investors in our senior notes in that EBITDA is one of the
factors in the calculation of our compliance with the ratios in the
indenture under which our senior notes are issued and bank credit agreement
and to determine the commitment fee we pay on the unused portion of our
credit facility. We also internally use EBITDA to determine whether to
continue or close restaurant units since it provides us with a measurement
of whether we our receiving an adequate cash return on our cash investment.
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. The following table reconciles EBITDA to our net
income which we believe is the most direct comparable financial measure to
EBITDA, for each of the periods presented (in thousands):
FISCAL YEAR
-----------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
EBITDA $56,229 $46,305 $78,703 $78,628 $74,403
Interest expense (30,959) (30,950) (30,243) (7,899) --
Interest income 528 756 949 3,828 5,120
Income (taxes) credit (334) (325) 5,075 (19,322) (21,547)
Depreciation and amortization (20,683) (30,375) (29,039) (25,712) (22,784)
Cumulative effect of change in accounting -- -- -- -- (858)
------ --------- ------- ------- -------
Net income (loss) $4,781 ($14,589) $25,445 $29,523 $34,334
====== ========= ======= ======= =======
(13) 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: $0.4 million in fiscal 2000, $1.6 million in fiscal
1999 and $4.8 million in fiscal 1998.
(14) Excludes 32, 37, 33, 26 and 19 for other concept units that were open at
the end of fiscal 2002, 2001, 2000, 1999 and 1998, respectively.
-18-
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
2002, 2001 and 2000 consisted of 52 weeks. Our net income of $4.8 million in
fiscal 2002 is after charges of $9.2 million for a provision for asset
impairment and restaurant closings. Net income included income of approximately
$7.2 million, net of expenses, from the settlement of our insurance claim for
the reimbursement of lost income under our business interruption insurance
arising out of the events of September 11, 2001. 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.
FISCAL 2002 COMPARED TO FISCAL 2001:
- ------------------------------------
Restaurant sales from Sbarro-owned quick service units and consolidated
other concept units decreased by $27.5 million, or 7.4%, to $345.2 million for
fiscal 2002 from $372.7 million in fiscal 2001. This was comprised of sales
decreases of $22.9 million in our quick service units and $4.6 million in
consolidated other concept units. Sales at both Sbarro quick service and our
consolidated other concept locations for fiscal 2002 have continued to be
adversely impacted by the reduction in shopping mall traffic related to the
general economic downturn in the United States and the continuing impact of the
events of September 11, 2001. During fiscal 2002, we closed or sold to
franchisees 44 more company-owned quick service units than we opened which
resulted in a net sales reduction of approximately $5.6 million. In addition,
quick service sales in fiscal 2002 compared to fiscal 2001 decreased by
approximately $3.2 million from the 34 locations that were closed during 2001
(including our high volume owned unit destroyed in the collapse of the World
Trade Center on September 11, 2001), net of locations opened. The units closed
since the beginning of fiscal 2001, with the exception of the World Trade Center
unit, were generally low volume units that did not have a material impact on our
profitability. Comparable Sbarro quick service unit sales decreased by $15.1
million, or 4.8%, to $299.5 million in fiscal 2002. The remainder of the sales
difference to 2001 is comprised of sales differences between 2002 and 2001 at
locations that were not open for a full year in either 2002 or 2001 due to their
being remodeled or relocated. In late March 2001 and mid June 2001, we
implemented price increases of 0.7% and 3.3%, respectively. Comparable
consolidated other concept sales decreased $1.2 million, or 8%, to $14.1 million
in fiscal 2002. Comparable restaurant sales are comprised of sales at locations
that were open during the entire current and prior fiscal year. In addition,
during fiscal 2002, we closed 7 consolidated other concept units that resulted
in a reduction in sales of approximately $3.4 million from fiscal 2001.
Franchise related income was relatively unchanged for the fiscal year ended
December 29, 2002, excluding approximately $0.3 million related to the
termination of an area development agreement in Egypt recognized during fiscal
2001. Continuing royalty revenues from new locations opened in fiscal 2002 and
fiscal 2001 partially offset a reduction in royalty revenues from pre-existing
units caused by a reduction in comparable unit sales at both domestic and
international locations. This
-19-
increase was offset, however, by a reduction in income recognized from existing
area development agreements in fiscal 2002 compared to fiscal 2001.
Real estate and other revenues decreased $0.6 million for the fiscal year
ended December 29, 2002 from fiscal 2001 primarily due to decreases in certain
vendor rebates resulting principally from decreases in the purchasing volumes
caused by decreased sales.
Cost of food and paper products as a percentage of restaurant sales
decreased to 19.6% for fiscal 2002 from 20.0% in the 2001 fiscal year. The
improvement was primarily due to both 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 a $1.7 million
benefit in fiscal 2002 from lower average cheese prices that prevailed in fiscal
2001. Cheese prices to date in fiscal 2003 are lower than those experienced
during the same period in fiscal 2002 and lower than the average cost per pound
during the 2002 fiscal year. In early fiscal 2003, we replaced our national
independent wholesale distributor with another national independent wholesale
distributor due to the bankruptcy of our then national wholesale food
distributor. As the majority of the products used in our restaurants are
proprietary and we are involved in negotiating their cost to the wholesaler, we
do not believe there will be a material impact on the cost of food and paper
products from this new arrangement.
Payroll and other benefits decreased approximately $7.5 million in fiscal
2002 but remained at 27.9% of restaurant sales in both fiscal 2002 and fiscal
2001. The dollar decrease was primarily due to the effect of steps taken to
reduce payroll costs beginning in late fiscal 2001 and the closing of locations
in fiscal 2002 and 2001. The decrease in the dollar amount of expenditures for
payroll and other benefits did not produce a change in these costs as a
percentage of sales due to the reduced level of sales in fiscal 2002.
Other operating expenses decreased by approximately $1.7 million but
increased to 33.3% of restaurant sales for fiscal 2002 from 31.3% for fiscal
2001. The dollar decline was due to fewer Sbarro and consolidated other concept
locations in operation during fiscal 2002. The percentage increase in fiscal
2002 was 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 are 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, which, as
discussed below in " -- Liquidity and Capital Resources," has been a factor in
reducing the amount of our capital expenditures. In addition, as the average age
of our locations increase, overall repair and maintenance costs have been
increasing. These aspects were offsetting factors against dollar savings
effected from the closing of low volume units.
Depreciation and amortization expense decreased by $9.7 million for fiscal
2002 from fiscal 2001. As a result of the adoption of SFAS No. 142, "Goodwill
and Other Intangible Assets," in fiscal 2002, we no longer amortized goodwill
and intangible assets with indefinite lives. In fiscal 2001, our earnings were
charged $5.4 million for amortization of goodwill and intangible assets with
indefinite lives. In addition, there was a reduction of $2.3 million in
depreciation and amortization related to locations that closed in fiscal 2001
and fiscal 2002. The balance of the change in depreciation and amortization
expense in fiscal 2002 relates to locations that had been included in the
provision for
-20-
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 or 2001.
General and administrative expenses were $24.0 million, or 6.6% of total
revenues, for fiscal 2002 compared to $29.5 million, or 7.6% of total revenues,
for fiscal 2001. General and administrative costs for 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 fiscal 2002, we recorded a provision for asset impairment,
restaurant closings and other charges of $9.2 million. Of the provision, $8.7
million was for restaurant closings, including $4.7 million for the closing or
sale of 7 of our other concept restaurants, and $0.5 million was for the
impairment of property and equipment.
Under SFAS No. 142, commencing in fiscal 2002, we 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 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. The testing, as of the end of fiscal 2002, of goodwill and
intangible assets with indefinite lives (trademarks) acquired prior to July 1,
2001 ($205.1 million, net of accumulated amortization, at December 29, 2002) for
impairment by an independent valuation firm engaged to assist us in the
determination of impairment resulted in no reduction to our carrying value of
intangible assets with indefinite lives at December 29, 2002. The valuation firm
used the capitalization of earnings and the guideline company valuation methods
in determining the fair value of these assets.
Minority interest represents the share of the minority holders' interests
in the earnings or loss of a joint venture in which we have a majority interest.
In early fiscal 2002, we closed one of the two locations operated by this joint
venture with an insignificant charge to earnings that was recorded in fiscal
2001.
Interest expense of $31.0 million in both fiscal 2002 and 2001 relate to
the 11%, $255.0 million senior notes issued to finance our going private
transaction ($28.1 million), the 8.4%, $16.0 million mortgage loan on our
corporate headquarters ($1.3 million) and fees for the unused borrowing capacity
under our credit agreement ($0.1 million). In addition, interest expense
includes $1.5 million in each of 2002 and 2001, which represents 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.
Interest income was approximately $0.5 million in fiscal 2002 and $0.8
million in fiscal 2001. Higher cash available for investment in fiscal 2002 than
in fiscal 2001 was offset by the lower prevailing interest rates in effect. The
indenture under which our senior notes are issued and our credit agreement limit
the types of investments which we may make.
Equity in the net income of unconsolidated affiliates represents our
proportionate share of earnings and losses in those other concepts in which we
have a 50% or less ownership interest. The increase in our share of the equity
in the net income of unconsolidated affiliates of $0.4 million in
-21-
fiscal 2002 over fiscal 2001 was primarily as a result of the improved
performance of our steakhouse joint venture. We have determined that we will
continue to develop and expand the steakhouse joint venture, but do not intend
to expand our other joint venture operations.
In September 2002, we reached an agreement to settle, for $9.65 million,
our claim against our insurance company for the reimbursement of the depreciated
cost of the assets destroyed at the Sbarro-owned World Trade Center location, as
well as for lost income under our business interruption insurance coverage,
resulting from the events of September 11, 2001. In September 2002, we received
the amount of the settlement, less an advance of $1.5 million that was received
in May 2002 against our claim for property damage at our World Trade Center
location. Approximately $7.2 million, net of related expenses, from the
settlement relates to reimbursement of lost income under our business
interruption insurance coverage and is included in our results of operations
fiscal 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 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 for both fiscal 2002 and
2001 represents taxes owed to jurisdictions that do not recognize S corporation
status or that tax entities based on factors other than income.
FISCAL 2001 COMPARED TO FISCAL 2000
- -----------------------------------
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 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.
-22-
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 fiscal 2001 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, 2001.
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.
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. For the balance of the year there was 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.
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.
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 $3.0
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 the 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.
-23-
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 earnings 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 ($28.1 and $27.6 million, respectively,
inclusive in fiscal 2000 of a correction of the prior year expense of $0.5
million), the 8.4%, $16.0 million mortgage loan on our corporate headquarters
($1.3 and $1.0 million, respectively) and fees for the unused borrowing capacity
under our credit agreement ($0.1 million). In addition, interest expense
includes $1.5 million in each of 2001 and 2000, which represents 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.
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 prevailing 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 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 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.
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
-24-
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 but 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. In recent years, our fourth quarter income has fluctuated significantly
due to a number of other factors, including the adverse effect of the general
economic downturn, the continuing effect of the events of September 11, 2001 and
significant year end adjustments relating to asset impairment and store closing
costs. Due to the seasonality of our business, until after our fourth quarter is
completed, we are not able to perform the annual test for impairment on our
goodwill and intangible assets with indefinite lives acquired prior to July 1,
2001 required by SFAS No. 142 and fully evaluate the impairment of long-lived
assets as required by SFAS No. 144, "Accounting for the Impairment and Disposal
of Long-Lived Assets." Any required adjustments are recorded at that time unless
impairment factors are present earlier. See Note 14 of the notes to consolidated
financial statements in Item 8 of this report for further information regarding
our quarterly financial information.
ACCOUNTING PERIOD
- -----------------
Our fiscal year ends on the Sunday nearest to December 31. All reported
fiscal years contained 52 weeks. Fiscal 2003 will also contain 52 weeks.
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 29,
2002, we had unrestricted cash and cash equivalents of $55.2 million and working
capital of $27.1 million compared to unrestricted cash and cash equivalents of
$37.0 million and working capital of $4.6 million as of December 30, 2001.
Net cash provided by operating activities was $32.5 million and $34.8
million for the fiscal years ended December 29, 2002 and December 30, 2001,
respectively. The $2.3 million reduction was primarily due to a $2.2 million
reduction in accounts receivable resulting principally from the payment of our
claim for property damage at the World Trade Center offset by a $4.1 million
decrease in accounts payable and accrued expenses that reflect the reduction in
our number of stores and employees.
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 to $11.0 million in 2002 from
$22.5 million in 2001 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 slowed, and the
impact of the nationwide maintenance contracts we entered into in late fiscal
2001 and early fiscal 2002. Investing activities for fiscal 2002 include $1.9
million of the approximately $2.4 million committed relating to an upgrade of
our computer systems.
-25-
Net cash used in financing activities was $3.3 million for the fiscal year
ended December 29, 2002 compared to $17.7 million for the fiscal year ended
December 30, 2001. Cash used in financing activities for fiscal 2002 resulted
primarily from $3.1 million of tax distributions to shareholders (see below).
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), and $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.
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. 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 under a formula contained in a tax
payment agreement between us and our shareholders. The tax payment agreement
permits us to make periodic 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
shares of our taxable income and such income were taxed at the highest
applicable federal and New York State marginal income tax rates. We and our
shareholders had a tax liability of approximately 46% of our taxable income in
both 2002 and 2001. There are differences in the book and tax treatments of the
provision for asset impairment and the non-deductibility of goodwill
(amortization of goodwill is not deductible for tax purposes but was an expense
for financial reporting purposes in fiscal 2001), and there are significant
differences in book and tax depreciation. The 46% tax rate is higher than our
historical effective tax rate prior to 2000 due to (a) differences in tax rates
between individual and corporate taxpayers, (b) 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
(c) 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. We made tax
distributions of $3.1 million in fiscal 2002 related to 2001 taxable earnings,
$7.6 million in fiscal 2001 related to fiscal 2000 taxable earnings and $1.1
million in January 2003 related to 2002 taxable earnings. We do not expect to
make additional tax distributions in 2003 related to 2002 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.
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 March 15, 2003 and December 29, 2002 and December 30, 2001, we had $28.1
million, $28.1 million and $27.0 million of undrawn availability under our
credit agreement, net of outstanding letters of credit and guarantees of
reimbursement obligations aggregating approximately $1.9 million, $1.9 million
and $3.0 million, respectively. We have received a waiver of compliance for
fiscal 2002 from certain ratios required to be maintained under our credit
agreement at year end and an
-26-
amendment to certain annual ratios for 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 1.4 to 1.0 beginning December 30, 2002 and 1.5 to 1.0 beginning
December 28, 2003. We are also required to maintain a maximum ratio of
consolidated senior debt to consolidated EBITDA (in each case with the
guaranteeing subsidiaries) of 6.5 to 1.0 beginning December 30, 2002 and 6.0 to
1.0 beginning December 28, 2003. We were in compliance with all covenants in the
indenture for the senior notes and the mortgage as of December 29, 2002.
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. As of December 29, 2002, that ratio
was 1.90 to 1. As a result, we are not presently able to borrow funds except for
the specifically permitted indebtedness, such as up to $75.0 million of
revolving credit loans. In order to make restricted payments, that ratio must be
at least 2.0 to 1, after giving pro forma effect to the restricted payment and,
in any event, is limited in dollar amount pursuant to a formula contained in the
indenture and credit agreement. We refer to the amount that is available for us
to make dividends and other restricted payments as the "restricted payment
availability." We cannot make restricted payments until we increase the
restricted payment availability by approximately $7.2 million, and then only to
the extent of any excess over that amount.
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 approximate the fiscal 2002 level of $11.0
million. Unpaid capital expenditure commitments aggregated approximately $0.9
million at December 29, 2002. In addition, we have committed additional
expenditures of $0.5 million for the upgrade of our computer system.
We expect our primary sources of liquidity to meet these needs will be cash
flow from operations. We do not presently expect to borrow under our credit
agreement in fiscal 2003.
-27-
OFF-BALANCE SHEET ARRANGEMENTS
We and our unconsolidated subsidiaries (those that are included in our
income statement caption "Equity in net income (loss) of unconsolidated
affiliates)" have contractual obligations that contingently require payments
under a line of credit, standby letters of credit and a mortgage loan of our
steakhouse joint venture and a bank loan of our quick service Mexican-style
restaurant concept. In addition, Sbarro has a contractual obligation under the
operating lease for the Vincent's Clam Bar location.
Our obligations under the guarantees for the line of credit, standby letter
and a mortgage loan of our steakhouse joint venture (our 40% interest in the
joint venture's results of operations are included in our equity in the net
income of unconsolidated affiliates in our income statement) are several and, as
a result, cover only our share of that debt. Our guarantees are used to
facilitate the continuing borrowing by the steakhouse joint venture and are in
place should the venture be unable to repay the amounts owed under the line of
credit and mortgage loan and should the standby letter of credit be drawn upon
and the venture not have funds available for such drawing. For fiscal 2002, we
included $0.7 million of our share of this venture's net income in our income
statement and received $0.3 million of distributions during the year. As of
December 29, 2002, the amount of the guarantees for this joint venture was
approximately $6.2 million. Our guarantees, should the line of credit be fully
utilized, would increase to $7.8 million.
Our obligation under the bank loan to our quick service Mexican-style
restaurant, (our 50% interest in the joint venture's results of operations are
included in our equity in the net income of unconsolidated affiliates in our
income statement), is up to the outstanding amount of the loan. Our guarantee
was established at the inception of the borrowing by the venture to facilitate
its borrowing and is required to be in place until the loan is repaid. For
fiscal 2002, this venture had a minimal loss that was included in our income
statement. There were no distributions from this joint venture during fiscal
2002. As of December 29, 2002, the amount of our guarantee for this joint
venture was $1.9 million.
Sbarro's contractual obligation under the operating lease for the Vincent's
Clam Bar location (our 25% interest in the joint venture's results of operations
are included in our equity in the net income of unconsolidated affiliates in our
income statement) includes base rent plus real estate taxes, utilities,
insurance, common area charges and certain other expenses, as well as contingent
rentals based on sales amounts in excess of stipulated amounts. As of December
29, 2002, our obligation for base rent under this operating lease through the
expiration of the lease term in 2011 was approximately $1.4 million.
-28-
CONTRACTUAL OBLIGATIONS
- -----------------------
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:
PAYMENTS DUE BY PERIOD
----------------------
MORE THAN 5
LESS THAN -----------
TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS YEARS
----- ------ ----------- ----------- -----
(IN MILLIONS)
Long-Term Debt Obligations
Senior notes (1) $ 255.0 $- 0 - $ - 0 - $ - 0 - $ 255.0
Mortgage Loan (2) $ 15.7 $ 0.1 $ 0.3 $ 0.3 $ 15.0
Credit agreement (3) $ - 0 - $- 0 - $ - 0 - $ - 0 - $ - 0 -
Standby Letters of Credit (4) $ 2.7 $- 0 - $ 0.1 $ 0.1 $ 2.5
Capitalized Lease Obligations $ - 0 - $- 0 - $ - 0 - $ - 0 - $ - 0 -
Operating Leases (5) $ 508.5 $ 73.9 $ 140.7 $ 125.1 $ 168.8
Purchase obligations (6) $ 1.4 $ 1.4 $ - 0 - $ - 0 - $ - 0 -
Other Long-Term Liabilities
Reflected on Balance Sheet $ - 0 - $- 0 - $ - 0 - $ - 0 - $ - 0 -
Total $ 783.3 $ 75.4 $ 141.1 $ 125.5 $ 441.3
(1) There are no principal repayment obligations under the senior notes until
September 2009, when the entire principal balance becomes payable.
(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, less outstanding letters of credit issued pursuant to a $10.0
million subfacility. No repayments are required under the credit agreement
until September 2004, when the entire principal balance becomes payable.
There are currently no amounts outstanding under the credit agreement.
However, of the $2.7 million of letters of credit reflected below, $1.9
million reduces our availability under the 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 operating leases or to guarantee construction costs for Sbarro or
other concept locations. Of the outstanding standby letters of credit,
approximately $0.1 million are for locations that have been subleased to
the buyers of two of our other concept locations (one of which was sold in
2003 and, upon replacement of the security, we expect to be relieved of our
security obligation under the related lease and this letter of credit) and
approximately $0.2 million is for another concept location that was closed
in 2002 that, upon finalization of remaining lease issues, is expected to
be cancelled. All the standby letters of credit are annually renewable
through the expiration of the related lease terms. If not renewed, the
beneficiary may draw upon the letter of credit as long as the underlying
obligation remains outstanding.
(5) Represents base rent under operating leases which we either sublease to, or
guarantee the obligations of, franchisees or certain of our other concepts.
Excludes real estate taxes, utilities, insurance, common area charges and
other expenses that are not fixed and contingent rent obligations which
vary with the level of net restaurant sales. Also excludes leases that are
under month-to-month tenancies.
-29-
(6) Represents commitments for capital expenditures, including for the
construction of restaurants and upgrading of our computer system, for which
we are contractually committed. Excludes potential purchases under our
contractual arrangement with our national independent wholesale distributor
that commenced in February 2003 that requires us, for the next five years,
subject to various causes for termination, to purchase 95% of most all our
food ingredients and related restaurant supplies from them. The agreement
does not, however, require us to purchase any specific fixed or minimum
quantities. Among the factors that will effect the dollar amount of
purchases we make under the contract are:
o Number of Sbarro locations open during the term of the contract
o Level of sales made at Sbarro locations
o Market price of mozzarella cheese and other commodity items
o Price of diesel fuel
o Mix of products sold by Sbarro locations
Historically, we have not purchased or entered into interest rate swaps of
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.
RELATED PARTY TRANSACTIONS
- --------------------------
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 have been
advised by a real estate broker that the 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 our other concepts, 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, $422,057 during fiscal 2002.
Based on our experience with non-affiliated printers that provide similar
services to us, we believe the services have been provided on terms comparable
to those available from unrelated third parties.
During fiscal 2002, we paid cash dividends to our shareholders totaling
$3.1 million in the form of distributions made pursuant to the tax payment
agreement described above. On January 21, 2003, we paid a cash dividend to our
shareholders of $1.1 million as a distribution made pursuant to the tax payment
agreement.
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
-30-
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.
Companies owned by a son of Anthony Sbarro paid royalties to us under
franchise agreements containing terms similar to those in agreements entered
into by us with unrelated franchisees. Royalties paid under these agreements in
fiscal 2002 were $91,551. A company owned by the daughter of Joseph Sbarro is
indebted to us for royalties for 2001 and 2000 in the approximate amount of
$90,000. No royalties were recorded relating to this franchisee in fiscal 2002.
The related franchise agreement contains terms similar to those in agreements
entered into by us with unrelated franchisees.
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 $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 containing terms similar to those in
agreements entered into by us with unrelated 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. In addition, we subleased this location to that franchisee.
Payments under the sublease are being made directly to the landlord by the
franchisee. Interest income received relating to the promissory notes was $2,850
in fiscal 2002. Royalties paid under this arrangement in fiscal 2002 were
$6,723. Future minimum rental payments under the lease for this location over
the term of the lease, which expires in 2010, are approximately $0.6 million.
On March 3, 2003, a company in which Gennaro J. Sbarro, who is a Corporate
Vice President and President of our Casual and Fine Dining Division, has a 50%
interest, entered into a franchise agreement with us for a new location. The
terms of the franchise agreement are similar to those in agreements entered into
by us with unrelated franchisees. The lease for the location was entered into in
September 2002 by one of our subsidiaries. Subsequent to that date, we
determined that the economics of the location would be better suited for a
franchise operator. Payments under the sublease will be made directly to the
landlord by the franchisee. Future minimum rental payments under the lease for
this location over the term of the lease, which expires in 2018, are
approximately $2.6 million. The location is expected to open in the second
quarter of fiscal 2003.
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 2002 fiscal year.
Mr. Zimmerman is a member of Board of Directors. We have been advised by Mr.
Zimmerman that these fees were charged on a basis similar to those that Bernard
Zimmerman & Company, Inc. charges to unrelated clients.
Harold Kestenbaum, P.C., of which Harold Kestenbaum is the shareholder, has
been assisting one of our other concepts in the preparation of its initial
Uniform Franchise Offering Circular, for which the fee was $20,000. Mr.
Kestenbaum is a member of our Board of Directors. We have been advised by Mr.
Kestenbaum that these fees were charged on a basis similar to those that Harold
Kestenbaum, P.C. charges to unrelated clients.
In addition to the compensation of Mario, Anthony, Joseph, Gennaro A. and
Gennaro J. Sbarro and Anthony J. Missano:
-31-
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 2002; and
o Carmela N. Merendino, a daughter of Mario Sbarro, who serves as Vice
President - Administration, received $131,288 from us for services
rendered during fiscal 2002.
o Other members of the immediate families of Mario, Anthony, Joseph and
Carmela Sbarro who are our employees, earned an aggregate of $538,856
during fiscal 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
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 authoritative
accounting literature in SFAS No. 4, 44 and 64. The changes in SFAS No. 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
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including certain Costs Incurred in a Restructuring)." 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 and do not anticipate that it will
have a material effect of our financial position or results of operations.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" which addresses the accounting
for and disclosure by guarantors regarding obligations relating to the issuance
of certain guarantees. FIN No. 45 requires that, at the inception of a
guarantee, for all guarantees issued or modified after December 31, 2002, a
liability for the fair value of the obligation undertaken be recorded. No
revision of or restatement of accounting for guarantees issued or modified prior
to December 31, 2002 is allowed. The disclosure requirements of FIN No. 45 are
effective with our 2002 financial statements. As described in Note 10 to the
consolidated financial statements in Item 8 of this report, we have provided
certain guarantees that would require recognition upon issuance or modification
under the provisions of FIN No. 45. While the nature of our business will likely
result in the issuance of certain guarantees in the future, we do not anticipate
that FIN No. 45 will have a material impact on our financial position or results
of operations.
-32-
In November 2002, the EITF reached a consensus on Issue 02-16 "Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor," addressing the accounting of cash consideration received by a customer
from a vendor, including vendor rebates and refunds. The consensus reached
states that consideration received should be presumed to be a reduction of the
price of the vendor's products or services and should therefore be shown as a
reduction of cost of sales in the income statement of the customer. The
presumption could be overcome if the vendor receives an identifiable benefit in
exchange for the consideration or the consideration represents a reimbursement
of a specific incremental identifiable cost incurred by the customer in selling
the vendor's product or service. If one of these conditions is met, the cash
consideration should be characterized as revenues or a reduction of the related
costs, as applicable, in the income statement of the customer. The consensus
reached also concludes that rebates or refunds based on the customer achieving a
specified level of purchases should be recognized as a reduction of cost of
sales based on a systematic and rational allocation of the consideration to be
received relative to the transactions that mark the progress of the customer
toward earning the rebate or refund provided the amounts are probable and
reasonably estimatable. This standard is effective for arrangements entered into
after December 31, 2002. Our current accounting policy for the accounting for
vendor rebates complies with the consensus reached in the EITF.
CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
- ------------------------------------------
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. 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:
o SFAS No. 5, "Accounting for Contingencies." Pursuant to SFAS No. 5, in
the past we have made, and we intend in the future to make, decisions regarding
the accounting for legal matters based on the status of the matter and our best
estimate of the outcome (we expense defense costs as incurred). This requires
management judgments regarding the probability and estimated amount of possible
future contingent liabilities, especially, in our case, legal matters. However,
especially if a matter goes to a jury trial, our estimate could be off since our
estimates are based, in large part, on our experience in settling matters.
o SFAS No. 142, "Goodwill and Other Intangible Assets," requires us to
periodically assess the impairment of goodwill and intangible asset acquired
prior to July 1, 2001 ($205.1 million, net of accumulated amortization, at
December 29, 2002). As discussed under " -- Results of Operations" above, the
annual test for impairment on our goodwill and intangible assets with indefinite
lives acquired prior to July 1, 2001 required by SFAS No. 142 concluded that
there was no impairment in the carrying value of such assets as of December 29,
2002. The independent firm we engaged to assist us in the determination of
impairment, used the capitalization of earnings and the guideline company
valuation methods in determining the fair value of our goodwill and intangible
assets with indefinite lives.
-33-
o SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 144 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. We evaluate our long-lived
assets for impairment at the individual restaurant level on an annual basis, or
whenever events and circumstances indicate that the carrying amount of a
restaurant may not be recoverable, including our business judgment of when to
close underperforming units. These impairment evaluations require an estimation
of cash flows over the remaining life of the related restaurant lease, which is
generally up to 10 years. Our estimates are based on average cash flows from
recent operations of the restaurants and, unless specific circumstances about
the location warrant, do not include unsupportable sales growth and margin
improvement assumptions. Should the carrying amount not be deemed to be
recoverable, we write the assets down to their fair value.
o SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses accounting for restructuring and similar costs,
supersedes previous accounting guidance, principally EITF 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.
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%. 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 in
the changes of 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.
-34-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors
Sbarro, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheet of Sbarro, Inc.
(a New York corporation) and subsidiaries as of December 29, 2002, and the
related consolidated statements of income, shareholders' equity and cash
flows for the year then ended. 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 audit. The
Company's consolidated financial statements as of December 30, 2001, and
for each of the two years in the period ended December 30, 2001, prior to
the adjustments discussed in Note 1, were audited by auditors who have
ceased operations. Those auditors expressed an unqualified opinion of those
financial statements in their report dated March 21, 2002.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sbarro,
Inc. and subsidiaries as of December 29, 2002 and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and intangible assets
upon the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" in
2002.
As discussed above, the consolidated financial statements of Sbarro, Inc.
and subsidiaries as of December 30, 2001, and for the two years in the
period ended December 30, 2001, were audited by other auditors who have
ceased operations. As described in Note 1, these financial statements have
been revised to include the transitional disclosures required by SFAS No.
142. We performed the following audit procedures with respect to the
disclosures in Note 1 with respect to 2001 and 2000. We agreed the net
income (loss) as previously reported and the adjustments to reported net
income (loss) representing amortization expense recognized in those periods
-35-
related to goodwill and intangible assets that are no longer being
amortized, as a result of initially applying SFAS No. 142, to the Company's
underlying records obtained from management, and (ii) tested the
mathematical accuracy of the reconciliation of adjusted net income (loss)
to reported net income (loss). In our opinion, the disclosures for 2001 and
2000 in Note 1 are appropriate. However, we were not engaged to audit,
review, or apply any procedures to the 2001 and 2000 financial statements
of the Company other than with respect to such disclosures and,
accordingly, we do not express an opinion or any other form of assurance on
the 2001 and 2000 consolidated financial statements taken as a whole.
/s/ BDO Seidman, LLP
New York, New York
March 14, 2003,
except for Note 9, as to
which the date is March 28, 2003
-36-
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 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 audit 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 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
This is a copy of the audit report previously issued by Arthur Andersen LLP
in connection with our filing on Form 10-K for the fiscal year ended
December 30, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K.
-37-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 29, 2002 DECEMBER 30, 2001
----------------- -----------------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents $55,150 $36,952
Restricted cash for untendered shares 21 45
Receivables, net of allowance for doubtful accounts of $491
in 2002 and $175 in 2001
Franchise 2,059 2,162
Other 1,244 2,797
----------- ------------
3,303 4,959
Inventories 3,285 3,537
Prepaid expenses 2,362 1,242
Current portion of loans receivable from officers 3,232 -
----------- ------------
Total current assets 67,353 46,735
Property and equipment, net 115,081 132,303
Intangible assets:
Trademarks, net 195,916 195,916
Goodwill, net 9,204 9,204
Deferred financing costs and other, net 6,632 7,707
Loans receivable from officers, less current portion 2,800 6,032
Other assets 7,787 6,865
----------- ------------
$404,773 $404,762
=========== ============
See notes to consolidated financial statements.
-38-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 29, 2002 DECEMBER 30, 2001
(IN THOUSANDS EXCEPT SHARE DATA)
Current liabilities:
Amounts due for untendered shares $ 21 $ 45
Accounts payable 10,279 9,107
Accrued expenses 21,623 24,648
Accrued interest payable 8,181 8,181
Current portion of mortgage payable 154 140
--------- ---------
Total current liabilities 40,258 42,121
--------- ---------
Deferred rent 8,474 8,479
--------- ---------
Long-term debt, net of original issue discount 267,941 267,718
--------- ---------
Commitments and contingencies
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 December 29,
2002 and December 30, 2001 71 71
Additional paid-in capital 10 10
Retained earnings 88,019 86,363
--------- ---------
88,100 86,444
--------- ---------
$404,773 $404,762
========= =========
See notes to consolidated financial statements.
-39-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
--------------------------------------------------------
DEC. 29, 2002 DEC. 30, 2001 DEC. 31, 2000
------------- ------------- -------------
(IN THOUSANDS)
Revenues:
Restaurant sales $345,206 $372,673 $382,365
Franchise related income 10,070 10,286 11,231
Real estate and other 5,104 5,756 5,812
---------- --------- --------
Total revenues 360,380 388,715 399,408
---------- --------- --------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 67,593 74,614 74,405
Payroll and other employee benefits 96,288 103,828 101,553
Other operating costs 114,892 116,581 114,122
Depreciation and amortization 20,683 30,375 29,039
General and administrative 23,960 29,472 30,882
Asset impairment, restaurant closings and other charges 9,196 18,224 -
---------- --------- --------
Total costs and expenses 332,612 373,094 350,001
---------- --------- --------
Operating income before minority interest 27,768 15,621 49,407
Minority interest (52) (1) (46)
---------- --------- --------
Operating income 27,716 15,620 49,361
---------- --------- --------
Other (expense) income:
Interest expense (30,959) (30,950) (30,243)
Interest income 528 756 949
Equity in net income of
unconsolidated affiliates 668 310 303
Insurance recovery, net 7,162 - -
---------- --------- --------
Net other expense (22,601) (29,884) (28,991)
---------- --------- --------
Income (loss) before income taxes (credit) 5,115 (14,264) 20,370
Income taxes (credit) 334 325 (5,075)
---------- --------- --------
Net income (loss) $4,781 $(14,589) $25,445
========== ========= ========
See notes to consolidated financial statements
-40-
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 3, 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
Net income - - - 4,781 4,781
- - -
Distribution to
shareholders - - - (3,125) (3,125)
--------- -------- -------- -------- --------
Balance at
December 29, 2002 7,064,328 $71 $10 $88,019 $88,100
========= === === ======= =======
See notes to consolidated financial statements.
-41-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
----------------------------------------------------------
DECEMBER 29, DECEMBER 30, DECEMBER 31,
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss) $4,781 $(14,589) $25,445
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 22,137 31,830 30,489
Increase in deferred rent, net 212 969 180
Asset impairment, restaurant closing and
other charges 7,922 17,352 -
Minority interest 52 1 46
Equity in net income of unconsolidated
affiliates (668) (310) (303)
Dividends received from unconsolidated
affiliates 311 244 156
Changes in operating assets and liabilities:
Decrease (increase) in receivables 1,658 (553) (132)
Decrease (increase) in inventories 252 (36) 186
(Increase) decrease in prepaid expenses (1,121) (424) 698
(Increase) decrease in other assets (429) (1,135) 304
(Increase) decrease in accounts payable
and accrued expenses (2,654) 1,463 (3,080)
Decrease in income taxes payable - - (732)
------ ------ -------
Net cash provided by operating activities
before change in deferred taxes due to
conversion to Subchapter S status and
increase in accrued interest payable 32,453 34,812 53,257
Change in deferred taxes due to conversion to
Subchapter S status - - (5,629)
Increase in accrued interest payable - - 701
------ ------ ------
Net cash provided by operating activities 32,453 34,812 48,329
====== ------ ------
(continued)
-42-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE FISCAL YEARS ENDED
DECEMBER 29, DECEMBER 30, DECEMBER 31,
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
INVESTING ACTIVITIES:
Purchases of property and equipment (10,988) (22,528) (31,193)
Proceeds from disposition of property and equipment - 75 35
-------- ------- ------
Net cash used in investing activities (10,988) (22,453) (31,158)
-------- ------- ------
FINANCING ACTIVITIES:
Mortgage principal repayments (142) (130) (81)
Proceeds from mortgage - - 16,000
Cost of mortgage - - (397)
Purchase of minority interest - (1,000)
Loans to shareholders - (6,732) (2,000)
Repayment of shareholder loans - 2,700 -
Tax distributions (3,125) (7,564) (3,800)
Dividends - (5,000) (18,328)
-------- ------- ------
Net cash used in financing activities (3,267) (17,726) (8,606)
-------- ------- ------
Increase (decrease) in cash and cash equivalents 18,198 (5,367) 8,565
Cash and cash equivalents at
beginning of year 36,952 42,319 33,754
-------- ------- ------
Cash and cash equivalents at end of year $55,150 $36,952 $42,319
======= ======= =======
See notes to consolidated financial statements.
-43-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 2002 and 2001 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 with depreciation provided
using the straight-line method over the following estimated useful
lives: leasehold improvements - the lesser of the useful lives of the
assets or lease terms, including option periods, and furniture,
fixtures and equipment - three to ten years.
INTANGIBLE ASSETS:
Intangible assets consist of our trademarks, goodwill and deferred
financing costs. Trademarks and tradenames 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).
-44-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 8) and are being amortized as additional interest
expense over the respective remaining lives of the related debt
instruments which range from 1 1/2 years to 7 years.
TRADEMARKS AND GOODWILL:
Effective July 1, 2001, we adopted certain provisions of Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," and effective
January 1, 2002, we adopted the full provisions of SFAS No. 141 and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting and broadens the
criteria for recording intangible assets apart from goodwill. SFAS No
142 requires that purchased goodwill and certain indefinite-lived
intangibles no longer be amortized, but instead be tested for
impairment at least annually. As a result of adopting SFAS No. 142 we
ceased the amortization of trademarks and goodwill beginning January 1,
2002. Prior to the adoption of SFAS No. 142 we amortized our trademarks
and goodwill on a straight-line basis over 40 years.
SFAS No. 142 prescribes a two-step process for impairment testing of
goodwill. The first step of this test, used to identify impairment,
compares the fair value of a reporting unit with its carrying amount
including goodwill. The second step (if necessary) measures the amount
of the impairment. Using the guidance in SFAS No. 142, we have
determined that Sbarro as a whole is the reporting unit for purposes of
evaluating goodwill for impairment. Our annual impairment test
indicated that the fair value of the reporting unit exceeded the
reporting unit's carrying amount. Accordingly, the second step of the
goodwill impairment test was not necessary. We performed a separate
impairment test on the trademarks based on the discounted cash flows
method. The fair value of the trademarks exceeded the carrying value.
We have noted no subsequent indicators that would require testing
trademarks and goodwill for impairment.
There were no changes in the carrying amount of the trademarks or
goodwill for the years ended December 29, 2002 and December 30, 2001.
Supplemental comparative disclosure as if the change had been
retroactively applied, is as follows (in thousands).
-45-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dec. 29, 2002 Dec. 30. 2001 Dec. 31, 2000
------------- ------------- -------------
(in thousands)
Reported net income (loss) $4,781 $(14,589) $25,445
Add back: Amortization of
goodwill and intangible assets
with indefinite lives - 5,433 4,988
------ --------- -------
Adjusted net income (loss) $4,781 $(9,156) $30,433
====== ======== =======
ASSET RETIREMENT OBLIGATIONS:
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 or operating results.
LONG-LIVED ASSETS:
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 and has not had a material impact on our financial position
or operating results. Long-lived assets are evaluated for impairment
when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated
undiscounted future cash flows resulting from the use of these assets.
When any such impairment exists, the related assets will be written
down to their fair value.
ACCOUNTING FOR VENDOR REBATES:
In November 2002 the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 02-16 "Accounting by a Customer (Including a
Reseller) for Certain Consideration
-46-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Received from a Vendor", addressing the accounting of cash
consideration received by a customer from a vendor including vendor
rebates and refunds. The consensus reached states that consideration
received should be presumed to be a reduction of the prices of the
vendor's products or services and should therefore be shown as a
reduction of cost of sales in the income statement of the customer. The
presumption could be overcome if the vendor receives an identifiable
benefit in exchange for the consideration or the consideration
represents a reimbursement of a specific incremental identifiable cost
incurred by the customer in selling the vendor's product or service. If
one of those conditions is met, the cash consideration should be
characterized as revenues or a reduction of such costs as applicable in
the income statement of the customer. The consensus reached also
concludes that rebates or refunds based on the customer achieving a
specified level of purchases should be recognized as a reduction of
cost of sales based on a systematic and rational allocation of the
consideration to be received relative to the transactions that mark the
progress of the customer toward earning the rebate or refund provided
from amounts are probable and reasonably estimable. This standard is
effective for arrangements entered into after December 31, 2002.
Our current accounting policy, which conforms to the provisions of EITF
No. 02-16, is to account for vendor rebates related to the usage of the
products for which rebates are received in Company-owned Sbarro
locations as a reduction of the cost of food and paper products as
shown in our income statements. The rebates are recognized as earned
based on our usage of the related products. We also receive
consideration from manufacturers for the usage of the same raw
materials by our franchisees. Such rebate amounts are included in the
caption "Real estate and other" in our statements of income.
EQUITY INVESTMENTS:
We account for our 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
income.
COMPREHENSIVE INCOME:
We observe the provisions of SFAS No. 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. Comprehensive income
includes charges and credits to equity that are not the result of
transactions with the shareholders. 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.
-47-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FRANCHISE RELATED INCOME:
Initial franchise fees are recorded as income as restaurants are opened
by the franchisee and we have performed substantially all required
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.
We monitor the financial condition of our franchisees and record
provisions for estimated losses on receivables when we believe that our
franchisees are unable to make their required payments. While we use
the best information available in making our determination, the
ultimate recovery of recorded receivables is also dependent upon future
economic events and other conditions that may be beyond our control.
Included in general and administrative expenses are provisions for
uncollectible franchise receivables of $0.3 million, $.006 million and
a net recovery of $.006 million in 2002, 2001 and 2000, respectively.
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 or, 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.
-48-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 29, 2002 was approximately $235.9 million. The carrying amount
of the mortgage loan approximates fair value because the interest rate
this instrument bears is reasonably equivalent to the current rates
offered for debt of similar nature and maturity.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
The FASB 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, which became 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:
We have a 401(k) Plan ("Plan") for all qualified employees. The Plan
provides for a 25% matching employer contribution of up to 4% of the
employees' deferred savings (maximum contribution of 1% of an
employee's deferred savings). The employer contributions vest over five
years. The employee's deferred savings cannot exceed 15% of an
individual participant's compensation in any calendar year. Our
contribution to the Plan was $36,000, $137,000 and $163,000 in fiscal
2002, 2001 and 2000, respectively. The contribution was lower in fiscal
2002 as our matching contribution was suspended for the first half of
the year.
NEW ACCOUNTING PRONOUNCEMENTS:
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
-49-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
must be classified as extraordinary items in the income statement and
contains other nonsubstantive corrections to authoritative accounting
literature in SFAS No. 4, 44 and 64. The changes in SFAS No. 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 it to 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 EITF Issue No. 94-3 "Liability for
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". 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 for 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 have adopted the provisions of SFAS No. 146 for
restructuring activities initiated after December 29, 2002. We do not
anticipate that the adoption of SFAS No. 146 will have a material
effect on our financial position or results of operations.
In November 2002, the FASB issued FIN No. 45 Guarantor's Accounting and
Disclosure Requirements for Guarantees including Indirect Guarantees of
Indebtedness of Others which addresses the accounting for and
disclosure by guarantors regarding obligations relating to the issuance
of certain guarantees. FIN No. 45 requires that at the inception of a
guarantee for all guarantees issued or modified after December 31,
1992, a liability for the fair value of the obligation undertaken be
recorded. No revision of or restatement of accounting for guarantees
issued or modified prior to December 31, 2002 is allowed. The
disclosure requirements of FIN No. 45 are effective with our 2002
financial statements. As described in Note 10 we have provided certain
guarantees that would require recognition upon issuance or modification
under the provisions of FIN No. 45. While the nature of our business
will likely result in the issuance of certain guarantees in the future,
we do not anticipate that FIN No. 45 will have a material impact on our
financial position or results of operations.
-50-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
FOR THE FISCAL YEARS ENDED
-----------------------------------------------
DECEMBER 29, DECEMBER 30, DECEMBER 31,
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Cash paid for:
Income taxes $ 796 $ 1,107 $ 3,949
======= ======= =======
Interest $29,498 $29,491 $28,104
======= ======= =======
RECLASSIFICATIONS:
Certain items in the financial statements presented have been
reclassified to conform to the fiscal 2002 presentation.
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. (Note 9)
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 29,
2002, there was $21,000 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 EITF Issue No. 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 Sbarro 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 reduction in depreciation
and amortization in the fourth quarter of fiscal 2000 (see Notes 4 and
13). In accordance with SFAS No. 142, we have not amortized any of the
intangible assets with indefinite lives after fiscal 2001.
-51-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
in seeking to provide growth opportunities that leverage our restaurant
management and financial expertise.
The following sets forth the number of Sbarro restaurants in operation
as of:
DECEMBER 29, DECEMBER 30, DECEMBER 31,
2002 2001 2000
---- ---- ----
Sbarro-owned (a) 558 602 636
Franchised 353 325 303
--- --- ---
911 927 939
=== === ===
(a) Excludes 32, 37 and 33 other concept units as of the end of the
respective fiscal years.
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 substantial sales revenues and
operating income, the effect on our consolidated results for 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 temporarily closed due to the
events of September 11 causing airport Sbarro-owned and franchise units
to close for periods of time. Due to the continuing effect of the
events of September 11th, compounded by the effect of the economic
slowdown in the United States, those airport locations and a number of
downtown locations continued to experience a period of reduced sales
throughout 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 results
of operations for fiscal 2002.
-52-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT, NET:
DECEMBER 29, DECEMBER 30,
2002 (A) 2001 (B)
(IN THOUSANDS)
Land and improvements $ 3,781 $ 3,781
Leasehold improvements 155,359 158,934
Furniture, fixtures and equipment 71,757 72,186
Construction-in-progress - 684
------- -------
230,897 235,585
Less accumulated depreciation and 115,816 103,282
------- -------
amortization (c)
$115,081 $132,303
======== ========
(a) During 2002, we recorded a charge of $0.5 million reing to
impairment losses on property and equipment, of which $0.2
million was for other concept locations. In addition, we recorded
a provision for restaurant closings of approximately $8.7 million
in connection with the closing of 57 Sbarro locations ($4.0
million) and 7 other concept locations ($4.7 million) during
fiscal 2002.
(b) 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 3 other concept locations ($6.5 million) during fiscal 2001.
(c) Depreciation and amortization of property and equipment was $20.7
million, $24.9 million and $24.0 million in fiscal 2002, 2001 and
2000, respectively.
6. ACQUIRED INTANGIBLE ASSETS:
DECEMBER 29, DECEMBER 30,
2002 2001
---- ----
(IN THOUSANDS)
Trademarks $207,590 $207,590
Goodwill 9,712 9,712
Deferred financing costs 10,129 10,129
------ ------
227,431 227,431
Less accumulated amortization 15,679 14,604
-------- --------
$211,752 $212,827
======== ========
-53-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization expense of the acquired intangible assets for each of the
2002, 2001 and 2000 fiscal years was as follows:
FOR THE FISCAL YEARS ENDED
--------------------------
DECEMBER 29, DECEMBER 30, DECEMBER 31,
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Trademarks (a) $ - $5,189 $4,723
Goodwill (a) - 244 265
Deferred financing costs (b) 1,074 1,074 1,071
------ ------ ------
$1,074 $6,507 $6,059
====== ====== ======
(a) Under SFAS No. 142, as of December 31, 2001, trademarks and goodwill are no
longer amortized.
(b) Amortization of deferred financing costs for the next five years will be as
follows:
FISCAL YEARS ENDING:
--------------------
December 28, 2003 $1,074
January 2, 2005 1,038
January 1, 2006 962
December 31, 2006 962
December 30, 2007 962
Later years 1,634
------
$6,632
7. ACCRUED EXPENSES:
DECEMBER 29, DECEMBER 30,
2002 2001
---- ----
(IN THOUSANDS)
Compensation $5,502 $6,068
Payroll and sales taxes 3,047 3,968
Rent and related cost 1,896 1,834
Provision for restaurant closings 1,452 1,467
(Notes 5 and 12)
Other 9,726 11,311
------- -------
$21,623 $24,648
======= =======
-54-
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 or, 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 $3.1 million in fiscal 2002 related to our fiscal 2001
earnings, $7.6 million in fiscal 2001 related to our fiscal 2000
earnings, and $1.1 million in January 2003 related to our fiscal 2002
earnings. Our shareholders are expected to have taxable income that is
significantly higher than our book income in fiscal 2002 and despite
our book loss in fiscal 2001 resulting from differences in the book and
tax treatments of the provision for asset impairment, the
non-deductability of goodwill in 2001 for tax purposes and significant
differences in book and tax depreciation. However, we estimate that no
additional distributions will be made in 2003 related to 2002 earnings.
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):
-55-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE FISCAL YEARS ENDED
DECEMBER 29, DECEMBER 30, DECEMBER 31,
2002 2001 2000
---- ---- ----
(IN THOUSANDS)
Federal:
Current $ - $ - $ -
Deferred - - (4,589)
---- ---- -------
- - (4,589)
---- ---- -------
State and local:
Current 334 325 554
Deferred - - (1,040)
---- ---- -------
334 325 (486)
---- ---- -------
$334 $325 $(5,075)
==== ==== ========
9. LONG-TERM DEBT:
INDENTURE:
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, including, but not
limited to, restrictions on the 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 by us and the guaranteeing
subsidiaries. We were in compliance with the various covenants
contained in the indenture as of December 29, 2002.
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
2002, 2001 and 2000.
-56-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CREDIT AGREEMENT:
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 29,
2002.
At our option, the interest rates applicable to loans under the credit
agreement will be at either (i) the bank's prime rate (4.25% at March
14, 2003) plus a margin ranging from zero to 0.75% (the margin at
February 21, 2003 was 0.75%) or (ii) reserve adjusted LIBOR (3.59% at
February 21, 2003) plus a margin ranging from 1.5% to 2.5% (the margin
at March 17, 2003 was 2.25%). 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 our senior debt to
EBITDA. The unused commitment fee at March 14, 2003 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. We have received a
waiver of compliance for fiscal 2002 for certain ratios required to be
maintained under our credit agreement at year end and an amendment to
certain annual ratios for 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 1.4 to 1.0 beginning December 30, 2002 and
1.5 to 1.0 beginning December 28, 2003. We are also required to
maintain a maximum ratio of consolidated senior debt to consolidated
EBITDA (in each case with the
-57-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
guaranteeing subsidiaries) of 6.5 to 1.0 beginning December 30, 2002
and 6.0 to 1.0 beginning December 28, 2003.
MORTGAGE:
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 29, 2002 was $15.7 million. The mortgage
agreement contains various covenants, including a requirement that the
subsidiary maintain a minimum ratio of EBITDA to annual and quarterly
debt service of at least 1.2 to 1.0. The subsidiary was in compliance
with the various covenants contained in the mortgage agreement as of
December 29, 2002.
MATURITIES OF LONG-TERM DEBT:
Scheduled maturities of long-term debt are as follows (in thousands):
FISCAL YEARS ENDING:
December 28, 2003 $ 154
January 2, 2005 168
January 1, 2006 182
December 31, 2006 197
December 30, 2007 215
Later years 269,731
-------
270,647
Less:
Current maturities (154)
Unaccreted original issue discount (2,552)
--------
$267,941
========
10. COMMITMENTS AND CONTINGENCIES:
LEASES:
All of our restaurants are 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.
-58-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 29, DECEMBER 30, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
(IN THOUSANDS)
Minimum rentals $51,975 $52,856 $50,070
Common area charges 15,246 15,827 14,819
Contingent rentals 3,760 4,511 4,827
----- ----- -----
$70,981 $73,194 $69,716
======= ======= =======
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 29, 2002 and the existing leased
administrative and support function office (Note 11) are as follows (in
thousands):
FISCAL YEARS ENDING:
--------------------
December 28, 2003 $ 71,243
January 2, 2005 69,229
January 1, 2006 66,532
December 31, 2006 62,576
December 30, 2007 58,264
Later years 160,303
-------
$488,147
========
We are the principal lessee under certain operating leases for four
other concept locations that have been sold and sublet to unaffiliated
third parties. Future minimum rental payments required under these non
- cancelable operating leases as of December 29, 2002 are as follows
(in thousands):
FISCAL YEARS ENDING:
--------------------
December 28, 2003 $ 292
January 2, 2005 221
January 1, 2006 233
December 31, 2006 238
December 30, 2007 238
Later years 2,036
------
$3,258
======
-59-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We are the principal lessee under operating leases for certain
franchised restaurants which are subleased to franchisees. 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 29, 2002 are
as follows (in thousands):
FISCAL YEARS ENDING:
--------------------
December 28, 2003 $1,871
January 2, 2005 1,699
January 1, 2006 1,415
December 31, 2006 1,350
December 30, 2007 1,038
Later years 1,912
------
$9,285
======
We are the principal lessee under an operating lease for a franchised
restaurant that was sold and franchised to a related party (see note
11) that is subleased to the franchisee. The franchisee pays rent and
related expenses directly to the landlord. Future minimum rental
payments required under this non-cancelable operating lease are as
follows (in thousands):
FISCAL YEARS ENDING:
--------------------
December 28, 2003 $ 80
January 2, 2005 84
January 1, 2006 85
December 31, 2006 85
December 30, 2007 85
Later years 191
---
$610
====
As of March 14, 2003, future minimum rental payments required under a
non-cancelable operating lease for restaurants that had not as yet
opened as of December 29, 2002 are as follows (in thousands):
FISCAL YEARS ENDING:
--------------------
December 28, 2003 $ 397
January 2, 2005 450
January 1, 2006 450
December 31, 2006 458
December 30, 2007 460
Later years 2,357
-----
$4,572
======
-60-
As of March 14, 2003, future minimum rental payments required under a
non-cancelable operating lease for a restaurant that has been
franchised to a related party (see note 11) and which had not as yet
opened as of December 29, 2002 in which we are the principal lessee are
as follows (in thousands):
FISCAL YEARS ENDING:
--------------------
December 28, 2003 $ 53
January 2, 2005 159
January 1, 2006 159
December 31, 2006 160
December 30, 2007 160
Later years 1,951
------
$2,642
======
CONSTRUCTION AND COMPUTER SYSTEM:
We are a party to contracts aggregating $1.4 million with respect to
the construction of restaurants. Payments of approximately $0.5 million
have been made on those contracts as of December 29, 2002. In addition,
we have committed to spend an additional $0.5 million relating to an
upgrade of our computer systems for a total project cost of $2.4
million.
PURCHASE COMMITMENT:
We have a contractual arrangement with a national independent wholesale
distributor that commenced in February 2003 and that requires us, for
the next five years, subject to early termination for certain specified
causes to purchase 95% of most all our food ingredients and related
restaurant supplies from them. The agreement does not, however, require
us to purchase any specific fixed quantities. Among the factors that
will effect the dollar amount of purchases we make under the contract
are:
o Number of Sbarro locations open during the term of the contract
o Level of sales made at Sbarro locations
o Market price of mozzarella cheese and other commodity items
o Price of diesel fuel o Mix of products sold by Sbarro locations
LETTERS OF CREDIT:
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,
that have been issued instead of cash security deposits under operating
leases. Of the outstanding standby letters of credit, approximately
$0.1 million are for locations that have been subleased to the buyers
of two of our other concept
-61-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
locations (one of which was sold in 2003) and approximately $0.2
million is for an other concept location that was closed in 2002 that,
upon finalization of remaining lease issues, will be cancelled.
GUARANTEE ARRANGEMENTS PERTAINING TO THE OTHER CONCEPTS:
We are a party to various financial guarantees to a bank for two of our
other concepts. We are jointly liable, along with our partner, for a
loan owed by one of our other concepts. Our liabilities under the line
of credit, mortgage loans and $0.1 million of letters of credit is
limited to our minority ownership percentage. The balance of the
letters of credit of $0.6 million is jointly and severally guaranteed
by each of the partners in the other concept. To varying degrees, these
guarantees involve elements of performance and credit risk. The
possibility of our having to honor our contingencies is largely
dependent upon future operations of the other concepts. We would record
a liability if events occurred that make payment under the guarantees
probable.
The details of our guarantees as of December 29, 2002 and their terms
are as follows:
TYPE OF GUARANTEE AMOUNT (1) TERM
----------------- ---------- ----
Loan $1.9 million November 1, 2007
Mortgage loan 0.3 million June 30, 2008
Letters of credit 1.0 million Varying through May 2021
Line of credit 5.2 million December 31, 2008
(1) Amount represents our current maximum exposure under existing
borrowings and letters of credit. Our exposure under the line of credit
could increase to $7.7 million if the full amount of the line of credit
was utilized.
LITIGATION:
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 attorneys' 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.
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
-62-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
California wage and hour law. The plaintiffs are seeking actual
damages, punitive damages and costs of the lawsuit, including
reasonable attorneys' fees, each in unspecified amounts. Plaintiffs are
represented by the same counsel who is representing the plaintiffs in
the case discussed in the preceding paragraph. We have separately
settled with two of the managers for unmaterial amounts.
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 attorneys' 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 in each of the actions and
are vigorously defending these actions.
In addition to the above complaints, from time to time, we are a party
to certain claims and legal proceedings in the ordinary course of
business. In our opinion, the results of the complaints and other
claims and legal proceedings are not expected to have a material
adverse effect on our consolidated 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 2002, 2001 and 2000 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 have been advised by a real estate
broker that our rent is comparable to the rent that would be charged by
an unaffiliated third party.
In April 2000, we loaned our 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. The loan was
prepaid, with interest to the date of repayment, in 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. The loans were repaid
-63-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 in each of the 2002, 2001, and 2000 fiscal
years, respectively.
A member of our Board of Directors assisted one of our other concepts
in the preparation of its initial Uniform Franchise Offering Circular
in fiscal 2002 for which the fee was $20,000.
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, $422,000, $487,000 and $547,000
in fiscal 2002, 2001 and 2000, respectively.
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 franchises. Royalties under these
agreements in fiscal 2002 were $91,551. A company owned by the daughter
of Joseph Sbarro are indebted to us for royalties for 2001 and 200 in
the approximate amount of $90,000. No royalties were recorded relating
to this franchise in fiscal 2002.
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 $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 containing terms similar to those in agreements entered into
by us with unrelated 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. In addition, we subleased the lease for this
location to that franchisee. Payments under the sublease are being made
directly to the landlord by the franchisee. Interest income received
relating to the promissory notes was $2,850 in fiscal 2002. Royalties
paid under this arrangement in fiscal 2002 were
-64-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$6,723. Future minimum rental payments under the lease for this
location over the term of the lease, which expires in 2010, are
approximately $0.6 million.
On March 3, 2003, a company in which Gennaro J. Sbarro, who is a
Corporate Vice President and President of our Casual and Fine Dining
Division, has a 50% interest, entered into a franchise agreement with
us for a new location. The terms of the franchise agreement are similar
to those in agreements entered into by us with unrelated franchisees.
The lease for the location was entered into in September 2002 by one of
our subsidiaries. Subsequent to that date, we determined that the
economics of the location would be better suited for a franchise
operator. Payments under the sublease will be made directly to the
landlord by the franchisee. Future minimum rental payments under the
lease for this location over the term of the lease, which expires in
2018, are approximately $2.6 million. The location is expected to open
in the second quarter of fiscal 2003.
12. PROVISION FOR ASSET IMPAIRMENT, RESTAURANT CLOSINGS AND OTHER CHARGES:
During 2002, we recorded an $9.2 million provision for impairment of
property and equipment (based on the remaining net book value of
property and equipment) and for lease termination costs associated with
restaurant closings (see Note 5).
During 2001, we recorded a provision for impairment of property and
equipment (based on the remaining net book value of property and
equipment) and for lease termination costs associated with restaurant
closings and for other charges of $18.2 million (see Note 5).
13. DIVIDENDS:
During 2002, we made a distribution to our shareholders for taxes
totaling $3.1 million.
During 2001, we made distributions to our shareholders totaling $12.6
million, including $7.6 million for taxes.
In January, 2003, we made a tax distribution of $1.1 million.
Distributions for taxes were made pursuant to the tax payment agreement
described in Note 8.
-65-
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(IN THOUSANDS)
FISCAL YEAR 2002
----------------
Revenues $105,206 $79,332 $81,886 $93,956
Gross profit (a) 80,761 60,833 62,996 73,023
Net income (loss)(b) (2,421) (3,337) 8,646 1,893
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEAR 2001
----------------
Revenues $112,746 $84,467 $88,774 $102,728
Gross profit (a) 85,778 64,437 67,558 80,286
Net loss (b) (4,109) (4,598) (2,151) (3,731)
(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 of property and equipment, restaurant closings and
other charges in 2002 and 2001. See Note 4 for information
regarding an insurance recovery in the third quarter of fiscal
2002.
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 29, 2002
and December 30, 2001 and related statements of income and cash
flows for the fiscal years ended December 29, 2002, December 30,
2001 and December 31, 2000 of (a) Sbarro, Inc., the parent, (b)
the guarantor subsidiaries as a group, (c) the nonguarantor
subsidiaries as a group and (d) Sbarro on a consolidated basis.
(2) Elimination entries necessary to consolidate Sbarro, Inc., the
parent, with the guarantor and nonguarantor subsidiaries.
-66-
The principal elimination entries eliminate intercompany balances and
transactions. Investments in subsidiaries are accounted for by the
parent on the cost method.
-67-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 2002
ASSETS
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current assets:
Cash and cash equivalents $47,636 $6,539 $975 $55,150
Restricted cash for untendered
shares 21 - - 21
Receivables less allowance for
doubtful accounts of $491:
Franchise 2,059 - 2,059
Other 69 1,088 87 1,244
-------- -------- ------- --------
2,128 1,088 87 3,303
Inventories 1,417 1,725 143 3,285
Prepaid expenses 2,677 (342) 27 2,362
Current portion of loans receivable
from officers 3,232 - - 3,232
-------- -------- ------- --------
Total current assets 57,111 9,010 1,232 67,353
Intercompany receivables 5,197 313,877 - $(319,074) -
Investment in subsidiaries 65,469 - - (65,469) -
Property and equipment, net 42,762 65,726 6,593 - 115,081
Intercompany receivables - long term 3,308 - - (3,308) -
Intangible assets:
Trademarks, net 195,916 - - - 195,916
Goodwill, net 9,324 - - (120) 9,204
Deferred financing costs, net 6,361 271 - - 6,632
Loans receivable from officers,
less current portion 2,800 - - - 2,800
Other assets 8,742 1,705 (303) (2,357) 7,787
-------- -------- ------- ------- --------
$396,990 $390,589 $7,522 $(390,328) $404,773
======== ======== ====== ========== ========
-68-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 2002
LIABILITIES AND SHAREHOLDERS EQUITY
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current liabilities:
Amounts due for untendered shares $21 $21
Accounts payable 9,503 $212 $564 10,279
Accrued expenses 17,887 1,560 2,176 21,623
Accrued interest payable 8,181 - - 8,181
Current portion of
mortgage payable - 154 - 154
--------- --------- ------- -------
Total current liabilities 35,592 1,926 2,740 40,258
--------- --------- ------- -------
Intercompany payables 313,877 293 5,197 $(319,074) -
--------- --------- ------- -------- -------
Deferred rent
7,793 - 681 - 8,474
--------- --------- ------- -------- -------
Long-term debt, net of original issue
discount 252,449 15,492 - - 267,941
--------- --------- ------- -------- -------
Intercompany payables - long term - 3,308 - (3,308) -
--------- --------- ------- -------- -------
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) (212,802) 304,394 (3,573) - 88,019
--------- --------- ------- -------- -------
(212,721) 369,863 (1,096) (67,946) 88,100
-------- --------- -------- -------- -------
$396,990 $390,589 $7,522 $(390,328) $404,773
======== ======== ====== ========== ========
-69-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 12,078 281,438 - $(293,516) -
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, net 195,916 - - - 195,916
Goodwill, net 9,204 - - - 9,204
Deferred financing costs, net 7,398 309 - - 7,707
Loans receivable from officers 6,032 - - - 6,032
Other assets 8,066 1,852 (576) (2,477) 6,865
---------- ------ ------- --------- ----------
$391,895 $364,549 $13,680 $(365,362) $404,762
======== ======== ======= ========== ========
-70-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
========= ========= ======== ========== ========
-71-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $144,394 $177,728 $23,084 $345,206
Franchise related income 10,070 - - 10,070
Real estate and other 1,605 3,499 - 5,104
Intercompany charges - 15,275 - $(15,275) -
--------- -------- ------ ------------- ------
Total revenues 156,069 196,502 23,084 (15,275) 360,380
--------- -------- ------ ------------- ------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 26,596 34,592 6,405 - 67,593
Payroll and other employee
benefits 37,996 50,005 8,287 - 96,288
Other operating costs 48,242 59,207 7,443 - 114,892
Depreciation and amortization 9,133 10,290 1,260 - 20,683
General and administrative 11,203 12,286 471 - 23,960
Provision for asset impairment,
restaurant closings and other
charges (1) 12,850 - (3,654) - 9,196
Intercompany charges 15,275 - - (15,275) -
--------- -------- ------ ------------- ------
Total costs and expenses 161,295 166,380 20,212 (15,275) 332,612
--------- -------- ------ ------------- ------
Operating (loss) income before
minority interest (5,226) 30,122 2,872 - 27,768
Minority interest - - (52) - (52)
--------- -------- ------ ------------- ------
Operating income (loss) (5,226) 30,122 2,820 - 27,716
--------- -------- ------ ------------- ------
Other (expense) income:
Interest expense (29,600) (1,359) - - (30,959)
Interest income 528 - - - 528
Equity in net income of
unconsolidated affiliates 668 - - - 668
Insurance recovery, net 7,162 - - - 7,162
--------- -------- ------ ------------- ------
Net other expense (21,242) (1,359) - - (22,601)
--------- -------- ------ ------------- ------
(Loss) income before income taxes
(credit) (26,468) 28,763 2,820 - 5,115
Income taxes (credit) (1,629) 1,773 190 - 334
--------- -------- ------ ------------- ------
Net (loss) income $(24,839) $26,990 $2,630 $ - $4,781
========= ======= ====== ============= ======
(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 $8.2 million, which is eliminated in consolidation.
-72-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF LOSS
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) 388,710
---------- ------- ------- ---------- --------
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 (loss) income before
minority interest (11,648) 25,282 1,987 - 15,621
Minority interest - - (1) - (1)
---------- ------- ------- ---------- --------
Operating (loss) 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 (26,612) (1,369) (1,903) - (29,884)
---------- ------- ------- ---------- --------
(Loss) income before income taxes
(credit) (38,260) 23,913 83 - (14,264)
Income taxes (credit) (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.
-73-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF INCOME
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 (26,380) (999) (1,612) - (28,991)
---------- ------- --------- ---------- --------
Income (loss) before income taxes
(credit) (13,403) 35,146 (1,373) - 20,370
Income taxes (credit) (5,790) 743 (28) - (5,075)
---------- ------- --------- ---------- --------
Net income (loss) $(7,613) $34,403 $(1,345) $ - $25,445
========== ======== ======== ========== =======
-74-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002
GUARANTOR NONGUARANTOR CONSOLIDATED
Operating activities: PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- --------------------- ------ ------------ ------------ ------------ -----
Net (loss) income $(24,839) $26,990 $2,630 $4,781
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 12,551 8,325 1,261 22,137
Increase in deferred income taxes
Decrease in deferred rent, net 421 (135) (74) 212
Provision for asset impairment,
restaurant closings and other
charges 3,453 - 4,469 7,922
Minority interest - - 52 52
Equity in income of
unconsolidated affiliates (668) - - (668)
Dividends received from
unconsolidated affiliates 311 - - 311
Changes in operating assets and
liabilities:
Decrease (increase) in receivables 2,105 (475) 28 1,658
(Increase) decrease in
inventories (4) 46 210 252
(Increase) decrease in prepaid
expenses (763) (187) (171) (1,121)
(Increase) decrease in other
assets (438) 282 (273) (429)
(Decrease) increase in accounts
payable and accrued expenses (2,475) 1,827 (1,886) $(120) (2,654)
-------- ------- --------- -------- ---------
Net cash (used in) provided by
operating activities (10,346) 36,673 6,246 (120) 32,453
-------- ------- --------- -------- ---------
Investing activities:
- ---------------------
Purchases of property and equipment (8,357) (2,398) (233) (10,988)
-------- ------- --------- -------- ---------
Net cash used in investing activities (8,357) (2,398) (233) - (10,988)
-------- ------- --------- -------- ---------
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SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Financing activities:
- ---------------------
Mortgage principal repayments - (142) - - (142)
Tax distribution (3,125) - - - (3,125)
Intercompany balances 39,791 (33,031) (6,880) 120 -
-------- --------- --------- -------- ----------
Net cash provided by (used in)
financing activities 36,666 (33,173) (6,880) 120 (3,267)
-------- --------- --------- -------- -------
(Decrease) increase in cash and cash
equivalents 17,963 1,102 (867) - 18,198
Cash and cash equivalents at beginning
of year 29,673 5,437 1,842 - 36,952
-------- ------- ------- ---------- -------
Cash and cash equivalents at end of
period $47,636 $6,539 $975 $ - $55,150
======= ======= ==== ========= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for income
taxes $533 $262 $1 $ - $796
==== ==== == === ====
Cash paid during the period for
interest $28,171 $1,327 $ - $ - $29,498
======= ====== === === =======
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SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Operating activities:
- ---------------------
Net (loss) income $ (37,972) $23,327 $ 56 $ - $ (14,589)
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities
Depreciation and amortization 12,491 17,827 1,511 - 31,830
Increase in deferred rent, net 720 (258) 507 - 969
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 (1,200) 666 112 - (424)
(Increase) decrease in
other assets 339 (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)
------- ------- ------- -------- --------
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SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 provided by (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
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
GUARANTOR NONGUARANTOR CONSOLIDATED
Operating activities: PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- --------------------- ------ ------------ ------------ ------------ -----
Net (loss) income ($7,613) $34,403 $(1,345) $ - $25,445
Adjustments to reconcile net (loss)
income to net cash (used in)
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
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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ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------- -------------------------------------------------------------------
On May 22, 2002, our board of directors, upon recommendation of the
audit committee, decided to end the engagement of Arthur Andersen LLP
as our independent public accountants, and authorized the engagement of
BDO Seidman, LLP to serve as our independent certified public
accountants for the fiscal year ending December 29, 2002. None of
Arthur Andersen's reports on our consolidated financial statements for
the fiscal years ended December 30, 2001 and December 31, 2000
contained an adverse opinion or disclaimer of opinion, nor was any such
report qualified or modified as to uncertainty, audit scope or
accounting principles.
During our fiscal years ended December 30, 2001 and December 31, 2000,
there were no disagreements between us and Arthur Andersen on any
matter of accounting principle or practice, financial statement
disclosure, or auditing scope or procedure which, if not resolved to
Arthur Andersen's satisfaction, would have caused them to make
reference to the subject matter in connection with their report on our
consolidated financial statements for such years; and there were no
reportable events as defined in Item 304 (a) (1) (v) of Securities and
Exchange Commission Regulation S-K.
During the fiscal years ended December 30, 2001 and December 31, 2000,
and prior to its appointment as our independent certified public
accountants, we did not consult with BDO Seidman, LLP with respect to
the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might
be rendered on our consolidated financial statements, or any other
matters or reportable events as set forth in Items 304 (a) (2) (i) and
(ii) of Regulation S-K.
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PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Our directors and executive officers and their ages at March 15, 2003 are:
NAME AGE POSITION
---- --- --------
Mario Sbarro 61 Chairman of the Board, President, Chief
Executive Officer and Director
Anthony Sbarro 56 Vice Chairman of the Board, Treasurer and
Director
Joseph Sbarro 62 Senior Executive Vice President, Secretary
and Director
Carmela Sbarro 81 Vice President and Director
Anthony J. Missano 44 President - Quick Service Division and Corporate Vice
President
Gennaro A. Sbarro 36 President - Franchising and Licensing
Division and Corporate Vice President
Gennaro J. Sbarro 40 President - Casual and Fine Dining Division and Corporate
Vice President
Carmela N. Merendino 38 Vice President - Administration
John Bernabeo 46 Vice President - Architecture and Engineering
Steven B. Graham 49 Vice President and Controller
Ashraf Kilada 39 Vice President - Risk Management and Benefits
Harold L. Kestenbaum 53 Director
Richard A. Mandell 60 Director
Terry Vince 74 Director
Bernard Zimmerman 70 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.
CARMELA SBARRO has been a Vice President for more than the past five years.
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
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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 has been Vice President - Architecture and Engineering for
more than the past five years.
ASHRAF KILADA was elected Vice President - Risk Management and Benefits in
January 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 for more
than the past five years. He became a director of Sbarro in March 1985. Mr.
Kestenbaum is also a director of Rezconnect Technologies, Inc. and UFSI, 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 Encore Capital Group, 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, and Chairman of the Board
of Fame Corp., a food service management company, for more than the past five
years. Mr. Vince became a director of Sbarro in December 1988.
BERNARD ZIMMERMAN has been President of Bernard Zimmerman & Co., Inc. a
financial and management consulting firm, for more than the past five years. Mr.
Zimmerman has
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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 2002, our 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 2002 fiscal year for
services in all capacities to us and our subsidiaries during our 2002, 2001 and
2000 fiscal years:
ANNUAL
COMPENSATION
NAME AND ------------
PRINCIPAL POSITION YEAR SALARY BONUS
- ------------------ ---- ------ -----
Mario Sbarro................................... 2002 $700,000 --
Chairman of the Board, President and 2001 700,000 --
Chief Executive Officer 2000 700,000 $300,000
Anthony Sbarro................................. 2002 325,000 --
Vice Chairman of the Board and Treasurer 2001 300,000 --
2000 300,000 200,000
Joseph Sbarro.................................. 2002 325,000 --
Senior Executive Vice President and 2001 300,000 --
Secretary 2000 300,000 200,000
Anthony J. Missano............................. 2002 220,000 --
Corporate Vice President and President - Quick 2001 220,000 --
Service Division 2000 200,000 150,000
Gennaro A. Sbarro.............................. 2002 220,000 --
Corporate Vice President and President - 2001 220,000 --
Franchise and Licensing Division 2000 200,000 150,000
Gennaro J. Sbarro.............................. 2002 220,000 --
Corporate Vice President and President - 2001 220,000 --
Casual and Fine Dining Division 2000 200,000 150,000
There was no other annual compensation, long-term compensation or other
compensation awarded to, earned by or paid to any of the foregoing persons
during any of the reported periods.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR.
We did not grant any options to purchase our securities or any stock
appreciation rights during fiscal 2002.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END VALUES
No options were exercised during fiscal 2002 and no options were
outstanding at the end of fiscal 2002.
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.
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, directors and employees,
may participate in deliberations of our board concerning executive officer
compensation.
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 2002
fiscal year.
See Item 13, "Certain Relationships and Related Transactions" in this
report, for information concerning related party transactions.
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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 15, 2003 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)................................... 1,075,230 (2) 15.2%
Anthony Sbarro (1)................................. 1,233,800 17.5%
Joseph Sbarro (1).................................. 1,306,522 (3) 18.5%
Trust of Carmela Sbarro (1)........................ 2,497,884 (4) 35.4%
Harold L. Kestenbaum............................... -- --
Richard A. Mandell................................. -- --
Terry Vince........................................ -- --
Bernard Zimmerman.................................. -- --
Anthony J. Missano................................. 475,446(5) 6.7%
Gennaro A. Sbarro.................................. 449,500 6.3%
Gennaro J. Sbarro.................................. 25,946 0.4%
All directors and executive officers as a group
(16 persons)................................... 7,064,328 100.0%
- ----------------------
(1) The business address of each beneficial owner of more than five percent of
our common stock 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, Anthony
and Joseph Sbarro. Each trustee may be deemed to be the beneficial owner of
all these shares with shared voting and dispositive power.
(5) Includes 25,946 shares owned by Mr. Missano's wife. Mr. Missano disclaims
beneficial ownership of these shares.
We do not have any equity compensation plans, contracts or arrangements
for employees or non-employees.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
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 other concents 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, $422,057 during fiscal 2002.
We believe that these services were provided on terms comparable to those that
would have been available from unrelated third parties.
During fiscal 2002, we paid cash dividends to our shareholders totaling
$3.1 million in the form of distributions made pursuant to the tax payment
agreement described below. On January 21, 2003, we paid a cash dividend to our
shareholders of $1.1 million as a distribution made pursuant to the tax payment
agreement.
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.
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
2002 were $91,551. A company owned by the daughter of Joseph Sbarro are indebted
to us for royalties for 2001 and 2000 in the approximate amount of $90,000. No
royalties were recorded relating to this franchisee in fiscal 2002.
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 $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 containing terms similar to those in
agreements entered into by us with unrelated 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. In addition, we subleased this location to that franchisee.
Payments under the sublease are being made directly to the landlord by the
franchisee. Interest income received relating to the promissory notes was $2,850
in fiscal 2002. Royalties paid under this arrangement in fiscal 2002 were
$6,723. Future minimum rental payments under the lease for this location over
the term of the lease, which expires in 2010, are approximately $0.6 million.
-88-
On March 3, 2003, a company in which Gennaro J. Sbarro, who is a Corporate
Vice President and President of our Casual and Fine Dining Division, has a 50%
interest, entered into a franchise agreement with us for a new location. The
terms of the franchise agreement are similar to those in agreements entered into
by us with unrelated franchisees. The lease for the location was entered into in
September 2002 by one of our subsidiaries. Subsequent to that date, we
determined that the economics of the location would be better suited for a
franchise operator. Payments under the sublease will be made directly to the
landlord by the franchisee. Future minimum rental payments under the lease for
this location over the term of the lease, which expires in 2018, are
approximately $2.6 million. The location is expected to open in the second
quarter of fiscal 2003.
There is a proposal for us to sell a 49% interest in the 8 remaining Mama
Sbarro locations to a company owned by Gennaro J. Sbarro, who is a Corporate
Vice President and President of our Casual and Fine Dining Division. Mr. Sbarro
is a stockholder of Sbarro and the son of Joseph Sbarro, an officer, director
and one of our principal stockholders. Mr. Sbarro will cease to be an officer
and employee of Sbarro, Inc. should the transaction be finalized. The proposed
sales price, which is to be paid in cash, is $1.3 million. We anticipate that
the transaction will result in a loss of approximately $0.4 million that will be
recorded in the first quarter of fiscal 2003.
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 2002 fiscal year.
During fiscal 2002 and 2003, Harold Kestenbaum, P.C., of which Harold
Kestenbaum is the shareholder, has been assisting one of our other concepts in
the preparation of its initial Uniform Franchise Offering Circular, for which
the fee was $20,000.
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 2002; and
o Carmela N. Merendino, a daughter of Mario Sbarro, who serves as Vice
President - Administration, received $131,288 from us for services
rendered during fiscal 2002.
o Other members of the immediate families of Mario, Anthony, Joseph and
Carmela Sbarro who are our employees, earned an aggregate of $538,856
during fiscal 2002.
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
-89-
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 $3.1 million in
fiscal 2002 for fiscal 2001 earnings and $7.6 million in fiscal 2001, and $1.1
million in January 2003 (with respect to fiscal 2002 taxes).
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 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.
ITEM 14. 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 -14c 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.
-90-
PART IV
ITEM 15. 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 Certified Public Accountants 35-36
Copy of Report of Independent Public Accountants (Arthur
Andersen LLP) 37
Consolidated Balance Sheets at December 29, 2002 and
December 30, 2001 38-39
Consolidated Statements of Operations for each of the fiscal
years in the three-year period ended December 29, 2002 40
Consolidated Statements of Shareholders' Equity for each of the
fiscal years in the three-year period ended December 29, 2002 41
Consolidated Statements of Cash Flows for each of the fiscal
years in the three-year period ended December 29, 2002 42-43
Notes to Consolidated Financial Statements 44-80
(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 29, 2002. 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.
(a) (3) Exhibits
Exhibits:
--------
*2.01 Agreement and Plan of Merger dated as of January 19, 1999
among Sbarro, Inc., 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 our
-91-
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 Sbarro, Inc. as filed
with the Department of State of the State of New York on March
29, 1985. (Exhibit 3.01 to our Registration Statement on Form
S-1, File No. 2-96807)
* 3.01(b) Certificate of Amendment to our 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 our
Annual Report on Form 10-K for the year ended January 1, 1989,
File No. 1-8881)
* 3.01(c) Certificate of Amendment to our 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 our
Quarterly Report on Form 10-Q for the quarter ended April 23,
1989, File No. 1-8881)
* 3.01(d) Certificate of Amendment to our 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 our
Quarterly Report on Form 10-Q for the quarter ended April 22,
1990, File No. 1-8881)
*3.02 By-Laws of Sbarro, Inc., as amended. (Exhibit 3.1 to our
Registration Statement on Form S-4, File No. 333-90817)
*4.01 Indenture dated as of September, 28, 1999 among Sbarro, Inc.,
our Restricted Subsidiaries named therein, as guarantors, and
Firstar Bank, N.A., including the form of 11% Senior Notes of
Sbarro, Inc. to be issued upon consummation of the Exchange
Offer and the form of Senior Guarantees of the Guarantors.
(Exhibit 4.1 to our Current Report on Form 8-K dated (date of
earliest event reported) September 23, 1999, File No. 1-8881)
*4.02(a) Credit Agreement dated as of September 23, 1999 among Sbarro,
Inc., European American Bank, as agent, and the Lenders party
thereto (Exhibit 4.2 to our Current Report on Form 8-K dated
(date of earliest event reported) September 23, 1999, File No.
1-8881)
*4.02(b) Letter agreement dated March 18, 2002 with respect to the
Credit Agreement dated as of September 23, 1999 between
Sbarro, Inc. and Citibank, N.A. as successor to European
American Bank, as agent. (Exhibit 4.02(a) to our Quarterly
Report on Form 10-Q for the quarter ended April 21, 2002, File
No. 333-90817)
4.02(c) Letter agreement dated March 26, 2003 with respect to the
Credit Agreement dated as of September 23, 1999 between
Sbarro, Inc. and Citibank, N.A. as successor to European
American Bank, as agent.
-92-
*10.01(a) Building Lease between Sbarro Enterprises, L.P. and Sbarro,
Inc. (Exhibit 10.04 to our 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 Sbarro, Inc., (Exhibit 10.01(b) to our
Annual Report on Form 10-K for the year ended December 30,
2001, File No. 333-90817)
+*10.02 Form of Indemnification Agreement between Sbarro, Inc. and
each of its directors and officers. (Exhibit 10.04 to our
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
Sbarro, Inc., 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 our Registration Statement on Form S-4, File
No. 333-90817)
10.05 Distribution Agreement dated January 1, 2003 between Sbarro,
Inc. and Vistar Corporation (confidential treatment has been
requested with respect to certain portions of this agreement).
12.01 Statement of computation of earnings to fixed charges
*16.01 Letter of Arthur Andersen LLP regarding change in certifying
accountant. (Exhibit 16 to our Current Report on Form 8-K
(date of earliest event reported) May 22, 2002, File No.
333-90817)
*21.01 List of subsidiaries. (Exhibit 21.01 to our Annual Report on
Form 10-K for the year ended January 2, 2000, File No.
333-90817)
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.
- ---------------------------
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.
(b) Reports on Form 8-K
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No Reports on form 8-K were filed by us during the fourth quarter of our
fiscal year ended December 29, 2002.
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.
-94-
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 31, 2003.
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 31, 2003
- --------------------------- (Principal Executive
Mario Sbarro Officer) and Director
/s/ STEVEN B. GRAHAM Vice President and March 31, 2003
- --------------------------- Controller (Principal
Steven B. Graham Accounting Officer)
/s/ JOSEPH SBARRO Director March 31, 2003
- ---------------------------
Joseph Sbarro
/s/ ANTHONY SBARRO Director March 31, 2003
- ---------------------------
Anthony Sbarro
/s/ HAROLD L. KESTENBAUM Director March 31, 2003
- ---------------------------
Harold L. Kestenbaum
-95-
SIGNATURE TITLE DATE
- ---------------------------- --------------------- --------------
/s/ RICHARD A. MANDELL Director March 31, 2003
- ---------------------------
Richard A. Mandell
/s/ CARMELA SBARRO Director March 31, 2003
- ---------------------------
Carmela Sbarro
/s/ TERRY VINCE Director March 31, 2003
- ---------------------------
Terry Vince
/s/ BERNARD ZIMMERMAN Director March 31, 2003
- ---------------------------
Bernard Zimmerman
-96-
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 Annual Report on Form 10-K of Sbarro, Inc.;
2. Based on my knowledge, this Annual 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 Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual 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 Annual 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 Annual 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 Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
-97-
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 Annual
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: March 31, 2003 /s/ MARIO SBARRO
-----------------------------
Mario Sbarro,
Chairman of the Board and President
(Principal Executive Officer)
-98-
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 Annual Report on Form 10-K of Sbarro, Inc.;
2. Based on my knowledge, this Annual 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 Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual 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 Annual 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 Annual 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 Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
-99-
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 Annual
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: March 31, 2003 /s/ STEVEN B. GRAHAM
-----------------------------------
Steven B. Graham,
Vice President and Controller
(Principal Accounting Officer and
person performing the function of our
principal financial officer)
-100-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors
Sbarro, Inc.
Melville, New York
The audit referred to in our report dated March 14, 2003, except for Note 9, as
to which the date is March 28, 2003, relating to the consolidated financial
statements of Sbarro, Inc. and subsidiaries, which is contained in Item 8 of
this Form 10-K included the audit of the accompanying financial statement
schedule. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audit.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
New York, New York
March 14, 2003
S-1
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, 2003. 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
This is a copy of the report on the accompanying schedule previously issued by
Arthur Andersen LLP in connection with the schedule included in our filing on
Form 10-K for the fiscal year ended December 30, 2001. This audit report has not
been reissued by Arthur Andersen LLP in connection with this filing on Form
10-K.
S-2
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
at to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- ----------- --------- -------- --------- ---------- ------
December 29, 2002
- -----------------
Allowance for doubtful
accounts receivable $175 $350 $34(2) $ 491
==== ==== === =====
Provision for store closings $1,467 $8,689 $1,333(3) $1,452
====== ====== ====== ======
$7,413(4)
$(42)(5)
December 30, 2001
- -----------------
Allowance for doubtful
accounts receivable $211 $ 61 $97(2) $175
==== ======= === ====
Provision for store closings $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 closings $863 $ 94 $907(3) $ 50
==== ====== ==== =====
(1) Collection of previously reserved receivables.
(2) Write off of uncollectible accounts.
(3) Payments to landlords and others for closed locations.
(4) Write off of property and equipment.
(5) Transfer of miscellaneous balances.
S-3
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
*2.01 Agreement and Plan of Merger dated as of January 19, 1999 among
Sbarro, Inc., 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 our 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 Sbarro, Inc. as filed
with the Department of State of the State of New York on March
29, 1985. (Exhibit 3.01 to our Registration Statement on Form
S-1, File No. 2-96807)
* 3.01(b) Certificate of Amendment to our 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 our Annual
Report on Form 10-K for the year ended January 1, 1989, File No.
1-8881)
* 3.01(c) Certificate of Amendment to our 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 our Quarterly
Report on Form 10-Q for the quarter ended April 23, 1989, File
No. 1-8881)
* 3.01(d) Certificate of Amendment to our 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 our Quarterly
Report on Form 10-Q for the quarter ended April 22, 1990, File
No. 1-8881)
*3.02 By-Laws of Sbarro, Inc., as amended. (Exhibit 3.1 to our
Registration Statement on Form S-4, File No. 333-90817)
*4.01 Indenture dated as of September, 28, 1999 among Sbarro, Inc., our
Restricted Subsidiaries named therein, as guarantors, and Firstar
Bank, N.A., including the form of 11% Senior Notes of Sbarro,
Inc. to be issued upon consummation of the Exchange Offer and the
form of Senior Guarantees of the Guarantors. (Exhibit 4.1 to our
Current Report on Form 8-K dated (date of earliest event
reported) September 23, 1999, File No. 1-8881)
*4.02(a) Credit Agreement dated as of September 23, 1999 among Sbarro,
Inc., European American Bank, as agent, and the Lenders party
thereto (Exhibit 4.2 to our Current Report on Form 8-K dated
(date of earliest event reported) September 23, 1999, File No.
1-8881)
*4.02(b) Letter agreement dated March 18, 2002 with respect to the Credit
Agreement dated as of September 23, 1999 between Sbarro, Inc. and
Citibank, N.A. as successor to European American Bank, as agent.
(Exhibit 4.02(a) to our Quarterly Report on Form 10-Q for the
quarter ended April 21, 2002, File No. 333-90817)
4.02(c) Letter agreement dated March 26, 2003 with respect to the Credit
Agreement dated as of September 23, 1999 between Sbarro, Inc. and
Citibank, N.A. as successor to European American Bank, as agent.
*10.01(a) Building Lease between Sbarro Enterprises, L.P. and Sbarro, Inc.
(Exhibit 10.04 to our 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 Sbarro, Inc., (Exhibit 10.01(b) to our
Annual Report on Form 10-K for the year ended December 30, 2001,
File No. 333-90817)
+*10.02 Form of Indemnification Agreement between Sbarro, Inc. and each
of its directors and officers. (Exhibit 10.04 to our 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
Sbarro, Inc., 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 our
Registration Statement on Form S-4, File No. 333-90817)
10.05 Distribution Agreement dated January 1, 2003 between Sbarro, Inc.
and Vistar Corporation (confidential treatment has been requested
with respect to certain portions of this agreement).
12.01 Statement of computation of earnings to fixed charges
*16.01 Letter of Arthur Andersen LLP regarding change in certifying
accountant. (Exhibit 16 to our Current Report on Form 8-K (date
of earliest event reported) May 22, 2002), File No. 333-90817
*21.01 List of subsidiaries. (Exhibit 21.01 to our Annual Report on Form
10-K for the year ended January 2, 2000, File No. 333-90817)
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.
- --------------------------
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.