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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED APRIL 20, 2003 COMMISSION FILE NUMBER 333-90817
SBARRO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2501939
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER I.D. NO.)
INCORPORATION OR ORGANIZATION)
401 BROAD HOLLOW ROAD, MELVILLE, NEW YORK 11747
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 715-4100
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES NO
--------------- ------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED TITLE (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES NO X
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THE NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING AS OF MAY 30,
2003 WAS 7,064,328.
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SBARRO, INC.
FORM 10-Q INDEX
---------------
PART I. FINANCIAL INFORMATION PAGES
--------------------- -----
Consolidated Financial Statements:
Balance Sheets - April 20, 2003 (unaudited) and December 29, 2002........3-4
Statements of Operations (unaudited) - Sixteen Weeks ended April 20, 2003
and April 21, 2002.....................................................5
Statements of Cash Flows (unaudited) - Sixteen Weeks ended April 20,
2003 And April 21, 2002..............................................6-7
Notes to Unaudited Consolidated Financial Statements - April 20, 2003...8-22
Management's Discussion and Analysis of Financial Condition and Results
of Operations..........................................................23-30
Qualitative and Quantitative Disclosures of Market Risk.......................31
Controls and Procedures.......................................................31
PART II. OTHER INFORMATION....................................................32
-----------------
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands except share data)
--------------------------------------
April 20, 2003 December 29, 2002
-------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $38,785 $55,150
Restricted cash for untendered shares 21 21
Receivables, net of allowance for doubtful
accounts of $265 in 2003 and $491 in 2002:
Franchisee 1,802 2,059
Other 2,120 1,244
-------- --------
3,922 3,303
Inventories 2,354 3,285
Prepaid expenses 7,064 2,362
Current portion of loans receivable from shareholders - 3,232
-------- --------
Total current assets 52,146 67,353
Property and equipment, net 110,533 115,081
Intangible assets:
Trademarks, net 195,916 195,916
Goodwill, net 9,204 9,204
Deferred financing costs and other, net 6,303 6,632
Loans receivable from shareholders, less current portion 6,032 2,800
Other assets 8,243 7,787
-------- --------
$388,377 $404,773
======== ========
See notes to unaudited consolidated financial statements
Page 3
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands except share data)
--------------------------------------
April 20, 2003 December 29, 2002
-------------- -----------------
(unaudited)
Current liabilities:
Amounts due for untendered shares $21 $21
Accounts payable 14,511 10,279
Accrued expenses 17,597 21,623
Accrued interest payable 2,787 8,181
Current portion of mortgage payable 171 154
Total current liabilities 35,087 40,258
-------- --------
Deferred rent 8,790 8,474
Long-term debt, net of original issue
discount 267,990 267,941
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 April 20, 2003
and December 29, 2002 71 71
Additional paid-in capital 10 10
Retained earnings 76,429 88,019
-------- --------
76,510 88,100
-------- --------
$388,377 $404,773
======== ========
See notes to unaudited consolidated financial statements
Page 4
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except share data)
--------------------------------------
April 20, 2003 April 21, 2002
-------------- ---------------
Revenues:
Restaurant sales $88,509 $100,769
Franchise related income 2,939 2,743
Real estate and other 1,667 1,694
-------- --------
Total revenues 93,115 105,206
-------- --------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 19,304 20,008
Payroll and other employee benefits 26,211 28,489
Other operating costs 33,532 35,717
Depreciation and amortization 5,896 6,824
General and administrative 8,719 7,155
Provision for restaurant closings 529 124
-------- --------
Total costs and expenses 94,191 98,317
-------- --------
Operating (loss) income before minority
interest (1,076) 6,889
Minority interest (5) (19)
-------- --------
Operating (loss) income (1,081) 6,870
-------- --------
Other income (expense):
Interest expense (9,583) (9,574)
Interest income 214 154
Equity in net income of unconsolidated affiliates 281 261
-------- --------
Net other expense (9,088) (9,159)
-------- --------
Loss before income taxes (10,169) (2,289)
Income taxes 321 132
-------- --------
Net loss $(10,490) $(2,421)
======== ========
See notes to unaudited consolidated financial statements
Page 5
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands except share data)
----------------------------------------
April 20, 2003 April 21, 2002
-------------- --------------
Operating activities:
Net loss $(10,490) $(2,421)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 6,365 7,271
Increase in deferred rent, net 90 262
Loss on sale of other concept units included in prior year
asset impairment costs 250 -
Minority interest 5 19
Equity in net income of unconsolidated affiliates (281) (261)
Dividends received from unconsolidated affiliate 119 311
Changes in operating assets and liabilities:
(Increase) decrease in receivables (220) 154
Decrease in inventories 932 490
Increase in prepaid expenses (4,424) (2,147)
Increase in other assets (195) -
Increase (decrease) in accounts payable and accrued
expenses 1,100 (7,786)
Decrease in accrued interest payable (5,394) (5,394)
------ ------
Net cash used in operating activities (12,143) (9,502)
------- ------
See notes to unaudited consolidated financial statements
Page 6
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(In thousands except share data)
----------------------------------------
April 20, 2003 April 21, 2002
-------------- --------------
Investing activities:
Purchases of property and equipment $(3,071) $(1,721)
------- -------
Net cash used in investing activities (3,071) (1,721)
------- -------
Financing activities:
Mortgage principal repayments (50) (46)
Tax distributions related to the prior fiscal year (1,101) (3,125)
------ ------
Net cash used in financing activities (1,151) (3,171)
------ ------
Decrease in cash and cash equivalents (16,365) (14,394)
Cash and cash equivalents at beginning of period 55,150 36,952
------ ------
Cash and cash equivalents at end of period $38,785 $22,558
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $119 $340
==== ====
Cash paid during the period for interest $14,548 $14,497
======= =======
See notes to unaudited consolidated financial statements
Page 7
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and
Regulation S-X related to interim period financial statements and,
therefore, do not include all information and footnotes required by
generally accepted accounting principles. However, in the opinion of
our management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair presentation
of the consolidated financial position of Sbarro and our subsidiaries
at April 20, 2003 and our consolidated results of operations and cash
flows for the sixteen week periods ended April 20, 2003 and April 21,
2002 have been included. The results of operations for interim periods
are not necessarily indicative of the results that may be expected for
the entire year. Reference should be made to the annual financial
statements, including footnotes thereto, included in our Annual Report
on Form 10-K for the fiscal year ended December 29, 2002.
2. 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 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 were effective for us at the beginning of 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
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 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 adopted the provisions of SFAS No. 146 for
restructuring activities
Page 8
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
initiated after December 29, 2002. The adoption of SFAS No. 146 has not
had 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, for all
guarantees issued or modified after December 31, 2002, a liability for
the fair value of the obligation undertaken be recorded at the
inception of a guarantee. No revision of or restatement of accounting
for guarantees issued or modified prior to December 31, 2002 is
allowed. The disclosure requirements of Interpretation No. 45 were
effective with our 2002 financial statements. As described in the Notes
to the Consolidated Financial Statements included in our Annual Report
on Form 10-K for the year ended December 29, 2002, we have provided
certain guarantees that would require recognition upon issuance or
modification under the provisions of FIN 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 45 will have a material
impact on our financial position or results of operations.
3. LONG-TERM DEBT:
We have received a waiver of compliance for the first quarter of fiscal
2003 from certain ratios required to be maintained under our bank
credit agreement, as had been amended in March 2003. Our credit
agreement requires that we maintain a minimum ratio of consolidated
EBITDA to consolidated interest expense (in each case with the
guaranteeing subsidiaries, the same entities as our Restricted
Subsidiaries under the indenture) of at least 1.4 to 1.0 beginning
December 30, 2002 and 1.5 to 1.0 beginning December 28, 2003 for the
four quarters ended April 20, 2003, this ratio was 1.36 to 1. 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. For the four quarters ended April 20,
2003, this ratio was 6.67 to 1.
We are subject to various covenants under the indenture under which our
senior notes are issued and under our bank credit agreement. One of the
covenants limits our ability to borrow funds (except under specifically
permitted arrangements, such as up to $75.0 million of revolving credit
loans) unless our consolidated interest ratio coverage (as defined),
after giving pro forma effect to the interest on the new borrowing, for
the four most recently ended fiscal quarters is at least 2.5 to 1.
Another covenant limits our ability to make "restricted payments,"
including, among other things, dividend payments (other than as
distributions pursuant to our tax payment agreement with our
shareholders related to Subchapter S distributions) and investments in,
among other things, unrestricted subsidiaries, to specified amounts
determined under a formula contained in the indenture
Page 9
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
provided that that ratio is at least 2.0 to 1 after giving pro forma
effect to the restricted payment. For the four fiscal quarters ended
April 20, 2003, our consolidated interest coverage ratio was 1.59 to 1.
As a result, we are not presently able to borrow funds (other than the
specifically permitted indebtedness). Additionally, under the formula
contained in the indenture, we may not presently make restricted
payments other than certain permitted investments and tax
distributions. We cannot make restricted payments until we increase the
restricted payment availability by approximately $10.8 million, and
then only to the extent of any excess over that amount.
We were in compliance with the various covenants in the indenture for
our senior notes, and our mortgage as of April 20, 2003.
4. INCOME TAXES:
During the first quarter of fiscal 2003, we made a Subchapter S tax
distribution to our shareholders, based on our tax basis income for
fiscal 2002, that totaled $1.1 million compared to a $3.1 million
Subchapter S tax distribution made, during the first quarter of fiscal
2002 based on our tax basis income for fiscal 2001.
5. RELATED PARTY TRANSACTIONS:
On April 6, 2003, loans of $3.23 million to certain of our shareholders
were extended to April 6, 2005. The notes bear interest at 4.63% per
annum.
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, signed 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 and, as
such, it was subsequently subleased to this franchisee. 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.
6. 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
Page 10
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
as a class action, but the Court denied the motion. The trial was
reasonable attorney's fees, each in unspecified amounts. Plaintiffs
filed a motion to certify the lawsuit concluded in April 2003, and the
parties have submitted post-trial briefs. The Court has not yet issued
a judgment.
On September 6, 2000, eight other current and former general managers
of Sbarro restaurants in California filed a complaint against us in the
Superior Court of California for Orange County alleging that the
plaintiffs were improperly classified as exempt employees under
California wage and hour law. The plaintiffs are seeking actual
damages, punitive damages and costs of the lawsuit, including
reasonable attorney's fees, each in unspecified amounts. Plaintiffs are
represented by the same counsel who is representing the plaintiffs in
the case discussed in the preceding paragraph. We have separately
settled with four of the plaintiffs in this action for immaterial
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 illegally required to perform labor services without
proper premium overtime compensation from at least May of 1999. The
plaintiffs are seeking actual damages, punitive damages and attorney's
fees and costs, each in unspecified amounts. In addition, plaintiffs
have requested class action status for all managerial employees who
worked overtime and/or were not otherwise paid regular wages due and
owing from May 1999 to present.
We believe that we have substantial defenses 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.
7. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS:
Certain subsidiaries have guaranteed amounts outstanding under our
senior notes and bank credit agreement. Each of the guaranteeing
subsidiaries is our direct or indirect wholly owned subsidiary and each
has fully and unconditionally guaranteed the senior notes and the
credit agreement on a joint and several basis.
The following condensed consolidating financial information presents:
(1) Condensed consolidating balance sheets as of April 20, 2003
(unaudited) and December 29, 2002 and statements of operations
and cash flows for the fiscal quarters ended April 20, 2003
(unaudited) and April 21, 2002 (unaudited) of (a)
Page 11
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The principal elimination entries eliminate intercompany balances and
transactions. Investments in subsidiaries are accounted for by the
parent on the cost method.
Page 12
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF APRIL 20, 2003
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current assets:
Cash and cash equivalents $33,863 $3,907 $1,015 $38,785
Restricted cash for untendered shares 21 - - 21
Receivables less allowance for
Doubtful accounts of $265:
Franchise 1,802 - - 1,802
Other 926 709 485 2,120
-------- -------- ------ --------
2,728 709 485 3,922
Inventories 998 1,220 136 2,354
Prepaid expenses 6,220 623 221 7,064
-------- -------- ------ --------
Total current assets 43,830 6,459 1,857 52,146
Intercompany receivables 4,323 319,850 - $(324,173) -
Investment in subsidiaries 65,469 - - (65,469) -
Property and equipment, net 41,508 63,447 5,578 - 110,533
Intercompany receivables - long term 3,158 - - (3,158) -
Intangible assets, net:
Trademarks, net 195,916 - - - 195,916
Goodwill, net 9,204 - - - 9,204
Deferred financing costs and others,
net 6,043 260 - - 6,303
Loans receivable from shareholders 6,032 - - - 6,032
Other assets 9,319 2,155 (754) (2,477) 8,243
-------- -------- ------ --------- --------
$384,802 $392,171 $6,681 $(395,277) $388,377
======== ======== ====== ========= ========
Page 13
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF APRIL 20, 2003
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current liabilities:
Amounts due for untendered shares $21 $21
Accounts payable 13,351 $224 $936 14,511
Accrued expenses 14,398 1,293 1,906 17,597
Accrued interest payable 2,787 - - 2,787
Current portion of mortgage payable - 171 - 171
-------- -------- ------ --------
Total current liabilities 30,557 1,688 2,842 35,087
Intercompany payables 319,850 - 4,323 $(324,173) -
Deferred rent 8,110 - 680 - 8,790
Long-term debt, net of
original issue discount 252,565 15,425 - - 267,990
Intercompany payables - long term - 3,158 - (3,158) -
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)
(226,361) 306,431 (3,641) - 76,429
-------- -------- ------ --------- --------
(226,280) 371,900 (1,164) (67,946) 76,510
-------- -------- ------ --------- --------
$384,802 $392,171 $6,681 $(395,277) $388,377
======== ======== ====== ========= ========
Page 14
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 2002
(IN THOUSANDS EXCEPT SHARE DATA)
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 shareholders 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 shareholders,
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
======== ======== ====== ========== ========
Page 15
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 2002
(IN THOUSANDS EXCEPT SHARE DATA)
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 - 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
======== ======== ====== ========== ========
Page 16
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIXTEEN WEEKS ENDED APRIL 20, 2003
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
REVENUES:
- ---------
Restaurant sales $37,415 $46,595 $4,499 $88,509
Franchise related income 2,939 - - 2,939
Real estate and other 780 887 - - 1,667
Intercompany charges - 3,160 - $(3,160) -
-------- -------- ------- --------- --------
Total revenues 41,134 50,642 4,499 (3,160) 93,115
-------- -------- ------- --------- --------
Cost and expenses:
Restaurant operating expenses:
Cost of food and paper products 7,798 10,324 1,182 - 19,304
Payroll and other employee
benefits 10,831 13,794 1,586 - 26,211
Other operating costs 14,938 17,337 1,257 - 33,532
Depreciation and amortization 2,645 2,940 311 - 5,896
General and administrative 4,999 3,626 94 - 8,719
Provision for restaurant closings 399 - 130 - 529
Intercompany charges
3,160 - - (3,160) -
-------- -------- ------- --------- --------
Total costs and expenses 44,770 48,021 4,560 (3,160) 94,191
-------- -------- ------- --------- --------
Operating income (loss) before
minority interest (3,636) 2,621 (61) - (1,076)
Minority interest - - (5) - (5)
-------- -------- ------- --------- --------
Operating (loss) income (3,636) 2,621 (66) - (1,081)
-------- -------- ------- --------- --------
Other (expense) income:
Interest expense (9,131) (452) - - (9,583)
Interest income 214 - - - 214
Equity in net income of
Unconsolidated affiliates
281 - - - 281
-------- -------- ------- --------- --------
Net other expense (8,636) (452) - - (9,088)
-------- -------- ------- --------- --------
(Loss) income before income taxes (12,272) 2,169 (66) - (10,169)
Income taxes 188 131 2 - 321
-------- -------- ------- --------- --------
Net (loss) income $(12,460) $2,038 $(68) $ - $(10,490)
========= ====== ==== ========== =========
Page 17
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIXTEEN WEEKS ENDED APRIL 21, 2002
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
REVENUES:
- ---------
Restaurant sales $41,413 $52,203 $7,153 $100,769
Franchise related income 2,743 - - 2,743
Real estate and other 809 1,161 - $(276) 1,694
Intercompany charges - 4,050 - (4,050) -
------- ------ -------- ---------- -------
Total revenues 44,965 57,414 7,153 (4,326) 105,206
------- ------ -------- ---------- -------
Cost and expenses:
Restaurant operating expenses:
Cost of food and paper products 7,378 10,754 1,876 - 20,008
Payroll and other employee
benefits 10,722 15,170 2,597 - 28,489
Other operating costs 14,781 18,417 2,519 - 35,717
Depreciation and amortization 2,927 3,532 365 - 6,824
General and administrative 3,600 3,728 103 (276) 7,155
Provision for restaurant closings 100 - 24 - 124
Intercompany charges
4,050 - - (4,050) -
------- ------ -------- ---------- -------
Total costs and expenses 43,558 51,601 7,484 (4,326) 98,317
------- ------ -------- ---------- -------
Operating income (loss) before
minority interest 1,407 5,813 (331) - 6,889
Minority interest - - (19) - (19)
------- ------ -------- ---------- -------
Operating income (loss) 1,407 5,813 (350) - 6,870
------- ------ -------- ---------- -------
Other (expense) income:
Interest expense (9,121) (453) - - (9,574)
Interest income 154 - - - 154
Equity in net income of
unconsolidated affiliates
261 - - - 261
------- ------ -------- ---------- -------
Net other expense (8,706) (453) - - (9,159)
------- ------ -------- ---------- -------
Income (loss) before income taxes (7,299) 5,360 (350) - (2,289)
Income taxes (benefit) (158) 309 (19) - 132
------- ------ -------- ---------- -------
Net income (loss) $(7,141) $5,051 $(331) $ - $(2,421)
======== ====== ===== ========== ========
Page 18
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIXTEEN WEEKS ENDED APRIL 20, 2003
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
OPERATING ACTIVITIES:
- ---------------------
Net (loss) income $(12,460) $2,038 $(68) $(10,490)
Adjustments to reconcile net (loss)
income to net cash used in operating
activities:
Depreciation and amortization 3,499 2,557 309 6,365
Loss on sale of other concept units
included in prior year asset
impairment costs - - 250 250
Increase in deferred rent, net 109 (19) - 90
Minority interest - - 5 5
Equity in net income of
unconsolidated affiliates (281) - - (281)
Dividends received from
unconsolidated affiliates 119 - - 119
Changes in operating assets and
liabilities:
(Increase) decrease in receivables (600) 379 1 (220)
Decrease in inventories 419 506 7 932
Increase in prepaid expenses (3,334) (896) (194) (4,424)
(Increase) decrease in other assets (286) (360) 451 (195)
Increase in accounts payable and
accrued expenses 776 231 93 1,100
Decrease in accrued interest
payable (5,394) - - (5,394)
------- -------- -------- ---------
Net cash (used in) provided by
operating activities (17,433) 4,436 854 (12,143)
------- -------- -------- ---------
Investing activities:
Purchase of property and equipment (2,233) (755) (83) (3,071)
------- -------- -------- ---------
Net cash used in investing activities (2,233) (755) (83) (3,071)
------- -------- -------- ---------
Page 19
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIXTEEN WEEKS ENDED APRIL 20, 2003
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
FINANCING ACTIVITIES:
- ---------------------
Mortgage principal repayments $(50) $(50)
Tax distribution $(1,101) - (1,101)
Intercompany balances 6,994 (6,263) $(731) -
------- ------- ------- -------
Net cash provided by
(used in) financing activities 5,893 (6,313) (731) (1,151)
------- ------- ------- -------
(Decrease) increase in cash and
cash equivalents (13,773) (2,632) 40 (16,365)
Cash and cash equivalents at
Beginning of period 47,636 6,539 975 55,150
------- ------- ------- -------
Cash and cash equivalents at
end of period $33,863 $3,907 $1,015 $38,785
======= ======= ====== =======
Supplemental disclosure of cash flow
Information:
Cash paid during the period for
income taxes $91 $15 $13 $119
=== === === ====
Cash paid during the period for
Interest $14,110 $438 $ - $14,548
======= ==== ====== =======
Page 20
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIXTEEN WEEKS ENDED APRIL 21, 2002
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
OPERATING ACTIVITIES:
- ---------------------
Net (loss) income $(7,141) $5,051 $(331) $(2,421)
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 3,362 3,544 365 7,271
Increase in deferred rent, net 272 (54) 44 262
Minority interest - - 19 19
Equity in income of
Unconsolidated affiliates (261) - - (261)
Dividends received from
Unconsolidated affiliates 311 - - 311
Changes in operating assets
and liabilities:
Decrease (increase) in receivables 187 (13) (20) 154
Decrease in inventories 246 186 58 490
Increase in prepaid assets (755) (1,153) (239) (2,147)
(Increase) decrease in other assets (183) 264 39 $(120) -
(Decrease) increase in accounts
Payable and accrued expenses (5,854) (1,162) (890) 120 (7,786)
Decrease in accrued interest
Payable (5,394) - - - (5,394)
-------- -------- ------ ------ --------
Net cash (used in) provided by
operating activities (15,210) 6,663 (955) - (9,502)
-------- -------- ------ ------ --------
Investing activities:
- ---------------------
Purchases of property and equipment (1,347) (416) 42 - (1,721)
-------- -------- ------ ------ --------
Net cash (used in) provided by
investing activities (1,347) (416) 42 - (1,721)
-------- -------- ------ ------ --------
Page 21
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIXTEEN WEEKS ENDED APRIL 21, 2002
(IN THOUSANDS)
(UNAUDITED)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
FINANCING ACTIVITIES:
- ---------------------
Mortgage principal repayments - (46) - - (46)
Tax distribution (3,125) - - - (3,125)
Intercompany balances 6,939 (7,574) 635 - -
------- ------ -------- ------- -------
Net cash (used in) provided
by financing activities 3,814 (7,620) 635 - (3,171)
------- ------ -------- ------- -------
Decrease in cash and
cash equivalents (12,743) (1,373) (278) - (14,394)
Cash and cash equivalents at
beginning of period 29,673 5,437 1,842 - 36,952
------- ------ -------- ------- -------
Cash and cash equivalents at
end of period $16,930 $4,064 $1,564 $ - $22,558
======= ====== ======== ======= =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for
income taxes $233 $107 $ - $ - $340
======= ==== ======== ======= =======
Cash paid during the period for
interest $14,055 $442 $ - $ - $14,497
======= ==== ======== ======= =======
Page 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
The following table provides information concerning the number of Company-owned
and franchised restaurants in operation during each indicated period:
16 WEEKS 16 WEEKS FISCAL YEAR
ENDED ENDED ----------------------
04/20/03 04/21/02 2002 2001
-------- -------- ---- ----
Company-owned restaurants:
Opened during period - 2 13 9
Acquired from (sold to)
franchisees during period-net (4) - (6) -
Closed during period (9) (11) (51) (43)
--- --- --- ---
Open at end of period (1) 545 593 558 602
Franchised restaurants:
Opened during period 10 7 42 42
Purchased from (sold to)
Company during period-net 4 - 6 -
Closed or terminated during period (8) (8) (20) (20)
--- --- --- ---
Open at end of period 359 324 353 325
All restaurants:
Opened during period 10 9 55 51
Closed or terminated during period (17) (19) (71) (63)
--- --- --- ---
Open at end of period (1) 904 917 911 927
Kiosks (all franchised) open at
end of period 3 4 3 4
- --------------------
(1) Excludes 30, 34, 32 and 37 other concept units as of April 20, 2003 and
April 21, 2002, the end of fiscal 2002 and the end of fiscal 2001,
respectively.
Page 23
Our business is subject to seasonal fluctuations, the effect 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 also fluctuated significantly due
to a number of additional 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, we perform the annual testing for
impairment on our trademarks and goodwill as required by SFAS 142 after our
fourth quarter is completed and more information is available to us. The
evaluation of impairment of long-lived assets as required by SFAS 144 is made
when events or circumstances indicate that the carrying amount of the assets may
not be recoverable and considers many factors, in addition to seasonality. If
impairment factors are present earlier than year-end, we record any adjustments
as determined necessary through interim testing at that time.
Our consolidated EBITDA for the sixteen weeks ended April 20, 2003 was $5.0
million compared to $14.0 million for the sixteen weeks ended April 21, 2002.
EBITDA represents earnings before interest income, interest expense, taxes,
depreciation and amortization. EBITDA should not be considered in isolation
from, or as a substitute for, net income, cash flow from operations or other
cash flow statement data prepared in accordance with generally accepted
accounting principles ("GAAP") of the United States 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 as one of the measures to determine
whether to continue or close restaurant units since it provides us with a
measurement of whether we are 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 loss which we
believe is the most direct comparable financial measure to EBITDA, for each of
the sixteen week periods presented (in thousands):
2003 2002
---- ----
EBITDA $5,096 $13,955
Interest expense (9,583) (9,574)
Interest income 214 154
Income taxes (321) (132)
Depreciation and amortization (5,896) (6,824)
-------- -------
Net loss $(10,490) $(2,421)
======== =======
Page 24
Restaurant sales from Sbarro-owned quick service units and consolidated other
concept units decreased 12.2% to $88.5 million for the sixteen weeks ended April
20, 2003 from $100.8 million in the sixteen weeks ended April 21, 2002. The
decrease in sales reflects $9.6 million of lower sales of Sbarro quick service
units and $2.6 million of lower sales of consolidated other concept units. Of
the decline in Sbarro quick service unit restaurant sales, approximately $6.3
million resulted from a 7.1% decrease in comparable unit sales to $84.6 million.
We believe this decline was attributable to a reduction in shopping mall traffic
related to the general economic downturn in the United States, the continuing
impact of the events of September 11, 2001 and the effects of the threatened and
then actual military action in Iraq during the first quarter of fiscal 2003.
Comparable restaurant sales are made up of sales at locations that were open
during the entire current and prior fiscal years. Since the end of fiscal 2001,
we closed 47 more units than we opened (including nine units closed during the
first quarter of fiscal 2003), causing the remaining $3.3 million net reduction
in Sbarro quick service unit sales. The units closed since the end of fiscal
2001, were generally low volume units that did not have a material impact on our
results of operations. Of the decline in consolidated other concept unit sales,
approximately $0.7 million resulted from a 14.4% decrease in comparable unit
sales to $4.2 million. We believe that this decline was attributable to the same
factors that affected Sbarro quick service locations. In addition, since the end
of fiscal 2001, eight consolidated other concept units have been closed, which
resulted in a net sales reduction of $1.9 million from sales at those locations
in the first quarter of fiscal 2003.
Franchise related income increased 7.1% to $2.9 million for the sixteen weeks
ended April 20, 2003 from $2.7 million in the sixteen-week period ended April
21, 2002. This increase was from royalties earned from locations opened during
fiscal 2003 and 2002 offset, in part, by a 4.7% reduction in comparable unit
sales at both domestic and international locations in the first quarter of
fiscal 2003.
Real estate and other revenues decreased 1.6% in the first fiscal quarter of
2003 from the same period in fiscal 2002 primarily due to changes in certain
vendor rebates.
Cost of food and paper products as a percentage of restaurant sales increased to
21.8% for the sixteen weeks ended April 20, 2003 from 19.9% for the comparable
2002 fiscal period. 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. We do not
believe there will be a material impact on the cost of food and paper products
from this new distribution arrangement as the majority of the products used in
our restaurants are proprietary and we are involved in negotiating their cost to
the wholesaler. However, the cost of sales percentage in the first quarter of
2003 was impacted by the cost of purchases of product from third parties until
the new distribution contract was effective as well as by the decrease in
comparable sales. In addition, without changing the effect on the final product,
we modified our pizza and pasta sauce recipes to utilize ready made sauce
instead of crushed tomatoes as the base raw material. We estimate that this has
added approximately .75% to our cost of food. The use of this product allows for
more effective use of our restaurant staff in enhancing the overall guest
experience at our quick-service locations. Changes in cheese prices did not have
a significant effect on the change in cost of sales in the first quarter of
fiscal 2003.
Page 25
Cheese prices to date in the second quarter to date of fiscal 2003 have been
slightly lower than in the comparable period in fiscal 2002.
Payroll and other employee benefits decreased by $2.3 million, as a percentage
of restaurant sales, increased to 29.6% in the sixteen weeks ended April 20,
2003 from 28.3% of restaurant sales in the sixteen weeks ended April 21, 2002.
Both effects were primarily due to the reduced level of sales.
Other operating expenses decreased by $2.2 million but increased to 37.9% of
restaurant sales in the sixteen weeks ended April 20, 2003 from 35.4% in the
sixteen weeks ended April 21, 2002 primarily due to increases in rent and other
occupancy related expenses resulting from the renewal of existing leases at the
end of their terms at higher rental rates, compounded, in the case of the
percentage of restaurant sales, by the reduced level of sales. In addition, we
are continuing to experience increases in our repair and maintenance costs due
to the number of years that the majority of our locations have been operating
and the results of the long-term utilization of their equipment.
Depreciation and amortization expense decreased by $0.9 million for the first
quarter of fiscal 2003 from the same period in fiscal 2002. The reduction was
due to fewer numbers of units in operation in fiscal 2003 ($0.6 million) and for
locations that had been included in the provision for asset impairment in fiscal
2002 for which no depreciation was taken in fiscal 2003 and decreases in
depreciation and amortization for locations that became fully depreciated during
fiscal 2002.
General and administrative expenses were $8.7 million, or 9.4% of total
revenues, for the sixteen weeks ended April 20, 2003, compared to $7.2 million,
or 6.8% of total revenues, for the sixteen weeks ended April 21, 2002. Factors
contributing to the increases were $0.2 million of legal fees incurred in
connection with a lawsuit tried in fiscal 2003, a $0.2 million allowance for
doubtful accounts receivable recorded with respect to our franchisee in Spain
that declared bankruptcy during the first quarter of fiscal 2003, bonuses of
$0.7 million that were granted to certain executive officers and higher
quick-service field management travel and related costs relating to a number of
regional field management meetings that were held in the beginning of fiscal
2003.
During the first sixteen weeks of fiscal 2003 and 2002, we recorded provisions
for restaurant closings of $0.5 million and $0.1 million, respectively.
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 owned by this joint
venture. The closed unit had a nominal operating loss in the first quarter of
fiscal 2002.
Interest expense of $9.6 million for the first quarter of both fiscal 2003 and
2002 relates to the 11%, $255.0 million senior notes issued to finance our going
private transaction ($8.6 million), the 8.4%, $16.0 million mortgage loan on our
corporate headquarters in 2001 ($0.5 million) and fees for unused borrowing
capacity under our credit agreement ($0.1 million). In addition, $0.4 million in
each of the first quarter of fiscal 2003 and 2002 represents non-cash charges
for the
Page 26
total of 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 $0.2 million for each of the first quarters of
fiscal 2003 and 2002. Higher cash available for investment in fiscal 2003 than
in fiscal 2002 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 was primarily as a result of
improved performance of our steakhouse joint venture. We have determined that we
will continue, to the extent agreed with our joint venture partners, to develop
and expand the steakhouse joint venture locations but do not intend to expand
our other joint venture operations.
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 for both the first quarter of fiscal 2003 and
fiscal 2002 of approximately $0.3 million and $0.1 million, respectively, was
for taxes owed to jurisdictions that do not recognize S corporation status or
that tax entities based on factors other than income.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
We have historically not required significant working capital to fund our
existing operations and have financed our capital expenditures and investments
in our joint ventures through cash generated from operations. At April 20, 2003,
we had unrestricted cash and cash equivalents of $38.8 million and working
capital of $17.1 million compared to unrestricted cash and cash equivalents of
$22.5 million and working capital of $8.5 million at April 21, 2002.
Net cash used in operating activities was $12.1 million for the sixteen weeks
ended April 20, 2003 compared to $9.5 million used during the sixteen weeks
ended April 21, 2002. The $2.6 million increase in cash used resulted primarily
from an $8.9 million reduction in EBITDA, an increase in prepaid expenses of
approximately $2.3 million, primarily due to an increase in prepaid insurance in
fiscal 2003 as compared to fiscal 2002, offset, in large part, by an $8.9
million increase in accounts payable and accrued expenses. Of the increase in
accounts payable, approximately $2.6 million relates to the amount accrued for
our bankrupt former national independent wholesale distributor. We are in
negotiations with its creditors' committee with regard to the amount, if any,
owed as we believe that significant additional costs were incurred after the
bankruptcy filing date due to the bankruptcy. Accrued expenses for the first
quarter of fiscal 2003 include the accrued bonuses of $0.7 million for certain
executive officers discussed above. The increase also reflects approximately
$2.1 million related to the financing of our insurance policies in fiscal 2003.
Although our policies were also financed in fiscal 2002, no amounts were accrued
as the financing terms had yet been finalized.
Page 27
Net cash used in investing activities has historically been primarily for
capital expenditures, including investments made by our consolidated other
concepts. Net cash used in investing activities increased from $1.7 million for
the sixteen weeks ended April 21, 2002 to $3.1 million for the sixteen weeks
ended April 20, 2003 primarily due to an increase in quick service and
renovation activity.
Net cash used in financing activities was $1.2 million for the sixteen weeks
ended April 20, 2003 compared to $3.2 million in the comparable 2002 period,
caused by a $2.0 million reduction in tax distributions to shareholders.
We incur annual cash interest expense of approximately $29.7 million under our
senior notes and mortgage loan and may incur additional interest expense for
borrowings under our credit agreement. In addition to debt service, we expect
that our other liquidity needs will relate to capital expenditures, working
capital, investments in other ventures, distributions to shareholders 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 levels.
We expect our primary sources of liquidity to meet these needs will be cash flow
from operations. Also at May 30, 2003, we had $28.1 million of undrawn
availability under our bank credit agreement, net of outstanding letters of
credit and guarantees of reimbursement obligations aggregating approximately
$1.9 million.
We are subject to various covenants under the indenture under which our senior
notes are issued and under our bank credit agreement. One of the covenants
limits our ability to borrow funds (except under specifically permitted
arrangements, such as up to $75.0 million of revolving credit loans) unless our
consolidated interest ratio coverage (as defined), after giving pro forma effect
to the interest on the new borrowing, for the four most recently ended fiscal
quarters is at least 2.5 to 1. Another covenant limits our ability to make
"restricted payments," including, among other things, dividend payments (other
than as distributions pursuant to our tax payment agreement with our
shareholders related to Subchapter S distributions) and investments in, among
other things, unrestricted subsidiaries, to specified amounts determined under a
formula contained in the indenture provided that that ratio is at least 2.0 to 1
after giving pro forma effect to the restricted payment. For the four fiscal
quarters ended April 20, 2003, our consolidated interest coverage ratio was 1.59
to 1. As a result, we are not presently able to borrow funds (other than the
specifically permitted indebtedness). Additionally, under the formula contained
in the indenture, we may not presently make restricted payments other than
certain permitted investments and tax distributions. We cannot make restricted
payments until we increase the restricted payment availability by approximately
$10.8 million, and then only to the extent of any excess over that amount.
The tax payment agreement was entered into as part of our election that our
shareholders, rather than us, be taxed on our taxable income pursuant to
Subchapter S of the Internal Revenue Code and, where applicable and permitted,
under similar state and local tax provisions. The Tax Payment Agreement permits
us, regardless of whether we can make restricted payments, to make
Page 28
periodic tax distributions to our shareholders in amounts intended to
approximate the income taxes, including estimated taxes, that would be payable
by them if their only income were their pro rata share of our taxable income and
that income was taxed at the highest applicable Federal and New York state
marginal income tax rates.
Our contractual obligations and off balance sheet arrangements with respect to
both our Sbarro quick service and our other concepts (both those in which we
have a majority or minority interest) do not differ materially from the
information disclosed in Item 7, Part 2 of our Annual Report on Form 10-K for
the 2002 fiscal year.
We have received a waiver of compliance for the first quarter of fiscal 2003
from certain ratios required to be maintained under our bank credit agreement,
as amended in March 2003. Our credit agreement requires that we maintain a
minimum ratio of consolidated EBITDA to consolidated interest expense (in each
case with the guaranteeing subsidiaries, the same entities as our Restricted
Subsidiaries under the indenture) of at least 1.4 to 1.0 beginning December 30,
2002 and 1.5 to 1.0 beginning December 28, 2003 on the four quarters ended April
20, 2003, this ratio was 1.36 to 1. 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. For the four quarters ended April 20, 2003,
this ratio was 6.67 to 1.
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. During the sixteen weeks ending
April 20, 2003, there have been no material changes in the 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 from the matters discussed under the heading
"Critical Accounting Policies and Judgments" in Part II, Item 7 of our Annual
Report on Form 10-K for the fiscal year ended December 29, 2002.
FORWARD LOOKING STATEMENTS
- --------------------------
This report contains certain forward-looking statements about our financial
condition, results of operations, future prospects and business. These
statements appear in a number of places in the report and include statements
regarding our intent, belief, expectation, strategies or projections at that
time. These statements generally contain words such as "may," "should," "seeks,"
"believes," "in our opinion," "expects," "intends," "plans," "estimates,"
"projects," "strategy" and similar expressions or the negative of those words.
Page 29
Forward-looking statements are subject to a number of known and unknown risks
and uncertainties that could cause actual results to differ materially from
those projected, expressed or implied in the forward-looking statements. These
risks and uncertainties, many of which are not within our control, include but
are not limited to:
o general economic, weather and business conditions;
o the availability of suitable restaurant sites in appropriate regional
shopping malls and other locations on reasonable rental terms;
o changes in consumer tastes;
o changes in population and traffic patterns, including the effect that
military action and terrorism or other events may have on the willingness
of consumers to frequent shopping malls, airports or downtown areas which
are the predominant areas in which our restaurants are located;
o our ability to continue to attract franchisees;
o the success of the our present, and any future, joint ventures and other
expansion opportunities;
o the availability of food (particularly cheese and tomatoes) and paper
products at current prices;
o our ability to pass along cost increases to our customers;
o no material increase occurring in the Federal minimum wage;
o the continuity of services of members of our senior management team;
o our ability to attract and retain competent restaurant and executive
managerial personnel;
o competition;
o the level of, and our ability to comply with, government regulations;
o our ability to generate sufficient cash flow to make interest payments and
principal under our senior notes and 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 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.
Page 30
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES OF MARKET RISK
We have historically invested our cash on hand in short term, fixed rate, highly
rated and highly liquid instruments which are reinvested when they mature
throughout the year. The indenture under which our senior notes are issued
limits the investments we may make. 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 million 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
attendant in changes in the values of foreign currencies. As a result, we have
not purchased future contracts, options or other instruments to hedge against
changes in values of foreign currencies.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report, an evaluation
was carried out of the effectiveness of the design and operation of our
"disclosure controls and procedures," as defined in, and pursuant to
Rule 13a-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.
Page 31
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal proceedings
On December 20, 1999, fourteen current and former general managers of
Sbarro restaurants in California amended a complaint against us filed
in the Superior Court of California for Orange County. The complaint
alleges that the plaintiffs were improperly classified as exempt
employees under the California wage and hour law. The plaintiffs are
seeking actual damages, punitive damages and costs of the lawsuit,
including reasonable attorney's fees, each in unspecified amounts.
Plaintiffs filed a motion to certify the lawsuit as a class action, but
the Court denied the motion. The trial was concluded in April 2003, and
the parties have submitted post-trial briefs. The Court has not yet
issued a judgment.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
4.02(d) Letter agreement dated May 30, 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.
99.01 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.02 Certification of Vice President, Controller and Principal Accounting
Officer, the person performing the function of our principal financial
officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None
Page 32
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SBARRO, INC.
-------------------------------------
Registrant
Date: June 3, 2003 By: /s/ MARIO SBARRO
--------------------- -------------------------------------
Mario Sbarro
Chairman of the Board and President
(Principal Executive Officer)
Date: June 3, 2003 By: /s/ STEVEN B. GRAHAM
--------------------- -------------------------------------
Steven B. Graham
Vice President and Controller
(Principal Accounting Officer)
Page 33
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mario Sbarro, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sbarro, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
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
Page 34
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 3, 2003 /s/ MARIO SBARRO
----------------------------------------
Mario Sbarro,
Chairman of the Board and President
(Principal Executive Officer)
Page 35
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven B. Graham, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sbarro, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
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
Page 36
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 3, 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)
Page 37
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
4.02(d) Letter agreement dated May 30, 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.
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.