SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended JANUARY 2, 2005.
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ________ to ________
Commission file number 333-90817
SBARRO, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 11-2501939
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
401 BROADHOLLOW ROAD, MELVILLE, NEW YORK 11747 - 4714
(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
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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 31, 2005 was 7,064,328.
DOCUMENTS INCORPORATED BY REFERENCE
None
- --------------------------------------------------------------------------------
*This Form 10-K is voluntarily submitted pursuant to a requirement contained in
the indenture governing Sbarro, Inc.'s Senior Notes due 2009.
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, national security, 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 increases in the Federal minimum wage;
o the continuity of service 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 line of credit;
o our ability to comply with covenants contained in the indenture under
which the senior notes are issued, 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 our senior notes to the extent required in
the event we make certain asset sales or experience a change of
control.
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You are cautioned not to place undue reliance on forward looking
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.
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 927 company-owned and franchised restaurants worldwide at
January 2, 2005. In addition, since 1995, we have created, through subsidiaries
and joint ventures, other restaurant concepts for the purpose of developing
growth opportunities in addition to the Sbarro restaurants. We presently operate
24 other concept restaurants through owned subsidiaries and joint ventures.
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 a company
owned by the members of the Sbarro family merged with and into us. 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 million of
11% 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 are to be similarly guaranteed by
our future restricted subsidiaries.
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GENERAL
-------
We are a leading owner, operator and franchisor of quick service
restaurants, serving a wide variety of Italian specialty foods. Under the
"Sbarro", "Sbarro The Italian Eatery", "Cafe Sbarro", "Umberto's", "Tony and
Brunos" and "La Cuccina" 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 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
reasonable 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 January 2, 2005, we had 927 Sbarro quick service restaurants,
consisting of 511 company-owned restaurants and 416 franchised restaurants
located in 46 States, the District of Columbia, the Commonwealth of Puerto Rico,
certain United States territories and 29 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 24 casual and fine dining restaurants
featuring varying cuisines under other restaurant concepts, including three
opened and one closed in the first quarter of 2005.
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RESTAURANT EXPANSION
--------------------
The following table summarizes the number of Sbarro owned, franchised and other
concept restaurants in operation during each of the years from 2000 through
2004:
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Company owned Sbarro restaurants (1):
Open at beginning of period 533 563 607 641 643
Opened during the period 2 4 13 9 13
(Sold to) acquired from franchisees
during period (3) (12) (6) - 1
Closed during period (21) (22) (51) (43) (16)
---- ---- ---- ---- ----
Open at end of period 511 533 563 607 641
Franchised Sbarro restaurants:
Open at beginning of period 364 349 322 303 286
Opened during the period 63 41 43 42 36
Acquired from (sold to) Sbarro
during period 3 12 6 - (1)
Closed or terminated during period (14) (38) (22) (23) (18)
---- ---- ---- ---- ----
Open at end of period 416 364 349 322 303
Other concepts (1):
Open at beginning of period 27 27 31 27 25
Opened during period 0 3 2 4 2
Closed during period (5) (3) (6) 0 0
---- ---- ---- ---- ----
Open at end of period 22 27 27 31 27
All restaurants (1):
Open at beginning of period 924 939 960 971 954
Opened during the period 65 48 58 55 51
Closed or terminated during period (40) (63) (79) (66) (34)
---- ---- ---- ---- ----
Open at end of period of 949 924 939 960 971
(1) The table above reflects a reclassification of our Umberto mall
restaurants from, other concepts to Company owned Sbarro restaurants
for each of the years presented.
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QUICK SERVICE RESTAURANTS
-------------------------
Our Quick Service Restaurants ("QSR"), which operate under the names
"Sbarro", "Sbarro The Italian Eatery," "Cafe Sbarro", "Umberto's", "Tony and
Bruno's" and "La Cuccina", are family oriented restaurants offering cafeteria
and buffet style quick service designed to minimize customer waiting time and
facilitate table turnover. The decor of a QSR restaurant incorporates a
contemporary motif that blends with the characteristics of the surrounding area.
As of January 2, 2005, there were 96 company owned "in-line" QSR
restaurants and 415 company owned "food court" QSR restaurants. In addition,
franchisees operated 416 QSR restaurants. "In-line" restaurants, which are
self-contained restaurants, usually occupy between 1,500 and 3,000 square feet,
and 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, contain only kitchen and service areas, have a more
limited menu and employ 6 to 30 persons, including part-time personnel.
QSR 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 company owned QSR restaurants open a full year, average annual
sales in 2004 were approximately $840,000 for an "in-line" restaurant and
$562,000 for a "food court" restaurant. Our business is subject to seasonal
fluctuations, and the effects of weather, economic conditions, inflation,
national security and business conditions. Sales have been highest in our fourth
quarter due primarily to increased volume in shopping malls during the holiday
shopping season but fluctuate due to the length of the holiday shopping period
between Thanksgiving and New Year's Day, the number of weeks in our fourth
quarter and weather conditions.
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. A
limited number of restaurants serve breakfast. In addition to soft drinks, a
limited number of the 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 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 QSR restaurant sales.
Substantially all of the food ingredients, beverages and related
restaurant supplies used by our QSR 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 and distributed by our
national independent distributor. Our current contractual arrangement, which
expires in January 2008, requires us to purchase 95% of all of our food
ingredients that are not purchased locally and related restaurant supplies
through the distributor. The majority of the products used in our restaurants
are proprietary and we are involved in negotiating their cost to the
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wholesaler. 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 QSR restaurants.
RESTAURANT MANAGEMENT
---------------------
Our QSR restaurants are 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 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 Company owned QSR restaurants with the opportunity to
receive cash bonuses based on certain performance-related criteria of their
location.
We employ 31 Directors of Operations, each of whom is typically
responsible for the operations of 13 to 18 company owned QSR restaurants.
Directors of Operations recruit and supervise the managerial staff of all
company owned QSR restaurants and report to one of the five Vice Presidents of
Operations. The Vice Presidents of Operations coordinate the activities of the
Directors of Operations and report to our President and Chief Executive Officer.
FRANCHISE DEVELOPMENT
---------------------
Growth in franchise operations occurs through the opening of new QSR
restaurants by new and existing franchisees. We rely principally upon our
reputation, the strength of our existing restaurants, and participation in
national franchise conventions to attract new franchisees.
As of January 2, 2005, we had 416 franchised Sbarro restaurants
operated by 106 franchisees in 38 states of the United States as well as its
territories and in 29 countries throughout the world. We are presently
considering additional worldwide franchise opportunities. 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).
In order to obtain a franchise, we generally require payment of an
initial fee and continuing royalties at rates of 3.5% to 10% of gross revenues.
We require the franchise agreements to end at the same time as the underlying
lease, generally ten years, including a renewal period of the underlying lease,
if applicable. 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 Sbarro standards, understatement of gross receipts, failure to pay
fees, or material misrepresentation on a franchise application.
We presently employ 12 management level employees who are responsible
for overseeing the operations of franchise units and for developing new units.
-7-
OTHER CONCEPTS
--------------
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 24 restaurants.
As of January 2, 2005, we are including our Umberto mall restaurants that had
previously been included in our "Other concepts" with our Company owned QSR
restaurants.
The following is a summary of our other concepts:
o In early 2005, we opened a casual dining restaurant serving Italian
food under the name "Carmela's of Brooklyn" in Orlando, Florida The
restaurant provides both take out and table service, and generally
caters to families. In connection with this concept we entered into a
Joint Venture Development Agreement for the Orlando market. The joint
venture partner will be required to contribute one half of the
estimated development cost and will share in one half of the profits,
as defined, of each location in which it decides to participate. We
plan to open five additional restaurants in 2005.
o We operate eight casual dining restaurants serving Italian food
principally under the name "Mama Sbarro" in New York. The restaurants
provide both take-out and table service, and generally caters to
families. We did not open any Mama Sbarro locations in 2004 nor do we
plan to open any in 2005.
o We have a 40% interest in a joint venture that presently operates ten
casual dining restaurants, including one opened in January 2005, with
a Rocky Mountain steakhouse motif under the name "Boulder Creek Steaks
& Saloon" in New York. This joint venture also operates three fine
dining steak restaurants, two of which are operated under the name
"Rothmann's Steak House" and one which is operated under the name
"Burton & Doyle." During 2004, a Boulder Creek location was closed and
reopened in January 2005 as a mid-scale steakhouse under the name
"Sagamore." We are planning to open one fine dining restaurant in
2005.
o In January 2005, we sold, to a related party, our 70% interest in a
joint venture that, operated one moderately priced, table service
restaurant featuring an Italian Mediterranean menu under the name
"Salute" in New York City. (See Item 13 "Certain Relationships and
Related Transactions.")
o We have a 50% interest in a joint venture which operates two quick
service Mexican style restaurants in strip centers under the name
"Baja Grill."
All of our other concept locations presently operate through
unrestricted subsidiaries which do not guarantee our senior notes. 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. Ventures which are less than
50% owned and those owned at 50% for which we do not have operating control and
where we are not considered the primary beneficiary are accounted for under the
equity method of accounting.
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As of January 2, 2005, we had an aggregate investment, net of
write-downs, in these ventures of approximately $4.6 million. The amount of our
investment does not include our share of guarantees of indebtedness and
reimbursement obligations with respect to letters of credit in the aggregate
amount of approximately $7.4 million and guarantees of certain real property
lease obligations of these subsidiaries and other concepts in the approximate
amount of $1.8 million.
All concepts which are greater than 50% owned or where we are
considered the primary beneficiary are consolidated in our financial statements.
EMPLOYEES
---------
As of January 2, 2005, we employed approximately 6,500 persons,
excluding employees of our other concepts, of whom approximately 3,970 were
full-time field and restaurant personnel, approximately 2,400 were part-time
restaurant personnel and 130 were corporate administrative personnel. None of
our employees are covered by collective bargaining agreements. We believe our
employee relations are satisfactory. In the first quarter of 2004, we
implemented a reduction in work force that reduced our corporate administrative
head count by approximately 35 persons and recorded severance and other related
costs of approximately $0.7 million.
COMPETITION
-----------
The restaurant business is highly competitive. Many of our direct
competitors operate within the pizza restaurant segment. We compete in each
market in which we operate with locally-owned restaurants, as well as with
national and regional restaurant chains. We believe we compete on the basis of
menu selection, price, service, location and food quality. Factors that affect
our business operations include changes in consumer tastes, inflation, national,
regional and local economic conditions, population, traffic patterns, changes in
discretionary spending priorities, demographic trends, national security,
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. Increased food, beverage, labor, occupancy
and other costs could also adversely affect us.
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, increased
competition from existing or new companies and loss of market share, could have
an adverse effect on our operations.
TRADEMARKS
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Our Sbarro restaurants operate principally under the "Sbarro," "Sbarro
The Italian Eatery", "Cafe Sbarro", "Umberto's", "Tony and Bruno's" and "La
Cuccina" trademarks. Our other concept locations operate under separate
trademarks, including "Mama Sbarro" and "Boulder Creek." In addition, we have
trademarked the font and style of "Carmela's of Brooklyn." 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.
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GOVERNMENTAL REGULATION
-----------------------
We are subject to various federal, state and local laws affecting our
businesses, as are our franchisees. Each of our restaurants and those owned by
our franchisees and joint ventures are subject to a variety of licensing and
governmental regulatory provisions relating to wholesomeness of food,
sanitation, building, 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 ("FTC") regulations and
various state laws regulating the offer and sale of franchises. The FTC and
various state laws require us to furnish to prospective franchisees a franchise
offering circular containing prescribed information. We are currently registered
to offer and sell franchises, or are exempt from registering, in all states in
which we operate franchised restaurants 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 QSR
restaurants, our other 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 QSR restaurants.
We believe that we are in compliance in all material respects with the
laws to which we are subject.
AVAILABLE INFORMATION:
Although we are not required to file reports with the Securities and
Exchange Commission ("SEC") as a result of our going private transaction, we
voluntarily file with the SEC quarterly reports on Form 10-Q, annual reports on
Form 10-K and, if applicable, current reports on Form 8-K, and amendments to
these reports.
The public may read and copy any materials that we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
The public can obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site, with an address of http://www.sec.gov that contains reports, proxy and
information statements and other information regarding our electronic filings
with the SEC.
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The address of our Internet site is http://www.sbarro.com. Our Internet
site does not include reports we file with the SEC because our only traded
security is our senior notes which are not actively traded. However, we will
provide to the public, as soon as reasonably practical after we electronically
file them with the SEC, free of charge, a reasonable number of copies of our
periodic reports filed with the SEC, upon written request to our Chief Financial
Officer at our corporate headquarters, 401 Broadhollow Road, Melville, New York
11747-4714.
ITEM 2. PROPERTIES
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All Sbarro restaurants are typically leased under ten-year leases that
often do not include an option to renew the lease. We have historically
generally been able to renew or extend leases on existing sites. As of January
2, 2005, we leased 532 restaurants, of which 29 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 January 2, 2005 have initial terms expiring
as follows (excludes unconsolidated joint ventures):
YEARS INITIAL LEASE NUMBER OF SBARRO- NUMBER OF FRANCHISED
TERMS EXPIRE OWNED RESTAURANTS RESTAURANTS
- ------------ ----------------- -----------
2005........................................ 34 (1) 4
2006........................................ 41 4
2007 ....................................... 68 6
2008........................................ 63 2
2009........................................ 70 3
Thereafter.................................. 230 10
(1) Includes 13 restaurants under month-to-month arrangements 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 a one year
period.
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. Approximately 73% of the rentable square feet is currently under lease to
unaffiliated third parties. The remaining 27%, consisting primarily of one floor
of the building, is occupied by our Corporate and Principal Executive offices.
We occupied a two-story 20,000 square foot office building for
administrative support functions located in Commack, New York. We had leased the
building since May 1986 until April 2004 from a partnership owned by some of our
shareholders. Our obligation for the remainder of the lease term was terminated
in April 2004 upon the sale of the building.
In addition, our other concepts own one restaurant and lease 23
restaurants.
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ITEM 3. LEGAL PROCEEDINGS
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In December 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. The court issued a ruling in
December 2003 which was unfavorable to us but did not set the amount of damages.
We are appealing the ruling due to errors that we believe were made by the trial
judge.
In September 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 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 immaterial amounts. The remaining parties
to this case have agreed that it will be settled upon the same terms and
conditions that the court orders in connection with its decision in the case
discussed in the preceding paragraph.
In March 2002, four 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 alleged that the plaintiffs were required to
perform labor services without proper premium overtime compensation from at
least May 1999. The plaintiffs sought actual damages, punitive damages and
attorneys' fees and costs, each in unspecified amounts. The case was settled
March 22, 2005 for $48,000, with our insurance company paying $30,000 and us
paying $18,000.
In August 2002, a subcontractor and the general contractor, pursuant to
a construction contract entered into to build the joint venture location that
was closed during 2002 and also the subject of the lawsuit discussed below,
filed a complaint against the limited liability joint venture company alleging
that they were owed for unpaid billings. We were a defendant in the suit by
reason of the fact that we guaranteed the bonds under which mechanics liens
against the plaintiffs were bonded. In late 2004, we settled the lawsuit for
$500,000. The settlement amount had been paid and included in our financial
statements.
In May 2002, the landlord of the joint venture described above filed a
complaint against Sbarro in the Supreme Court of the New York for Westchester
County alleging that we were obligated to it, pursuant to a Guaranty Agreement
we executed, for all rent during the remaining lease based on an alleged breach
of the lease by the tenant, a subsidiary of the Company. We believed that our
guarantee was limited in amount while the landlord alleged that the guarantee
covered all amounts that would become due during the remaining lease term. The
court issued a ruling in November 2003 which limited our liability, which we
estimated at $500,000. The landlord appealed this decision. Given the
uncertainty of the results of an appeal and liability we would have by reason of
a reversal, we agreed to settle the matter for $800,000. Settlement agreements
are currently being drafted.
In November 2004, a contractor, pursuant to a construction contract
entered into to build a QSR location, instituted an action for unpaid amounts
under the construction contract. We have
-12-
disputed certain change orders under the contract and seek to invoke the penalty
clause under the contract. The action is pending in the Broward County Circuit
Court, State of Florida. We believe that our ultimate liability will not exceed
$50,000.
In May 2004, a suit was filed by the landlord of one of our QSR
locations as a result of premature termination of the lease on that location by
one of our subsidiaries. The landlord has obtained a consent judgment against
the subsidiary for approximately $75,000. The landlord now seeks to enforce the
judgment against the subsidiary. While we do not believe the judgment can be
enforced against us, we believe that our ultimate liability will not exceed
$75,000.
In March 2005, we settled a case relating to payments due to a
contractor for construction done on one of our other concept restaurants.
In addition to the above complaints, from time to time, we are a party
to claims and legal proceedings in the ordinary course of business. In our
opinion, the results of such claims and legal proceedings are not expected to
have a material adverse effect on our consolidated 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 six
shareholders of record. (See Item 12 "Security Ownership of Certain Beneficial
Owners and Management.")
No dividends were declared in 2004. During 2003, we declared dividends
of $1,782,283 to our shareholders for tax distributions related to 2002 taxable
earnings of which $1.1 million was paid in 2003 and $0.7 million was paid in
March 2004. Tax distributions are determined under a formula contained in a tax
payment agreement with our shareholders designed 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 Code, on their pro-rata share
of our taxable income (See Item 13, "Certain Relationships and Related
Transactions - Tax Payment Agreement".)
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 January 2, 2005; however, we are not presently
permitted under the indenture to pay dividends (other than distributions
pursuant to the tax payment agreement) make stock repurchases or, with certain
exceptions, incur indebtedness.
-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 2004,
2003 and 2002 consolidated financial statements have been audited and reported
on by BDO Seidman, LLP, an independent registered public accounting firm, and
our consolidated financial statements for years 2001 and 2000 were audited and
reported on by Arthur Andersen LLP, independent public accountants.
FISCAL YEAR (1)
---------------
(DOLLARS IN THOUSANDS)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
SYSTEM-WIDE SALES (UNAUDITED)(2) $584,723 $536,216 $550,279 $570,609 $569,260
======== ======== ======== ======== ========
INCOME STATEMENT DATA:
Revenues:
Restaurant sales (1) $331,313 $314,708 $345,206 $372,673 $382,365
Franchise related income 12,093 10,868 10,070 10,286 11,231
Real estate and other 5,488 6,748 5,104 5,756 5,812
-- -------- -------- -------- -------- --------
Total revenues 348,894 332,324 360,380 388,715 399,408
-- -------- -------- -------- -------- --------
Costs and expenses:
Costs of food and paper products 72,073 67,446 67,593 74,614 74,405
Payroll and other employee benefits.. 90,857 89,614 96,288 103,828 101,553
Other operating costs 114,571 110,453 114,892 116,581 114,122
Depreciation and amortization (3) 16,400 19,712 20,683 30,375 29,039
General and administrative 28,576 25,451 23,960 29,472 30,882
Asset impairment, restaurant
closings and loss on sale of other
concept restaurant (4) 2,202 6,073 9,196 18,224 -
-- -------- -------- -------- -------- --------
Total costs and expenses 324,679 318,749 332,612 373,094 350,001
-- -------- -------- -------- -------- --------
Operating income 24,215 13,575 27,768 15,621 49,407
-- -------- -------- -------- -------- --------
Other (expense) income:
Interest expense (30,694) (31,039) (30,959) (30,950) (30,243)
Interest income 654 694 528 756 949
Equity in net income of
unconsolidated affiliates 855 425 668 310 303
Other income (5) 1,181 - 7,162 - -
-- -------- -------- -------- -------- --------
Net other expense (28,004) (29,920) (22,601) (29,884) (28,991)
-- -------- -------- -------- -------- --------
(Loss) income before minority interest (credit) (3,789) (16,345) 5,167 (14,263) 20,416
Minority interest - (41) (52) (1) (46)
-- -------- -------- -------- -------- --------
(Loss) income before income taxes (credit) (3,789) (16,386) 5,115 (14,264) 20,370
Income taxes (credit) (6) 534 844 334 325 (5,075)
-- -------- -------- -------- -------- --------
Net (loss) income $(4,323) $(17,230) $4,781 $(14,589) $25,445
========= ========= ======== ========= =======
-15-
FISCAL YEAR (1)
---------------
(DOLLARS IN THOUSANDS)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
OTHER FINANCIAL AND RESTAURANT DATA:
Net cash provided by
operating activities (7) $15,816 $11,034 $32,453 $34,812 $48,329
Net cash used in
investing activities (7) $(8,906) $(8,521) $(10,988) $(22,453) $(31,158)
Net cash used in
financing activities (7) $(340) $(1,254) $ (3,267) $(17,726) $ (8,606)
EBITDA (8) $42,651 $33,671 $56,229 $46,305 $78,703
Capital expenditures $8,906 $8,521 $10,988 $22,528 $31,193
Number of restaurants at end of period:
Company-owned 511 533 563 607 641
Franchised 416 364 349 322 303
Other concepts 22 27 27 31 27
--------- --------- -------- --------- ----------
Total number of restaurants 949 924 939 960 971
=== === === === ===
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $384,613 $386,830 $404,291 $404,228 $428,020
Working capital $32,554 $28,352 $27,095 $4,614 $10,293
Total long-term obligations $268,349 $268,152 $267,941 $267,718 $267,478
Shareholders' equity (as restated) (9) $65,334 $69,657 $88,669 $87,013 $113,597
(1) Our fiscal year ends on the Sunday nearest December 31. Our 2004 year,
which ended January 2, 2005, contained 53 weeks. All other years
presented contained 52 weeks. The 53rd week of operations produced
revenues of approximately $9 million and approximate income before
taxes of $2.5 million.
(2) System-wide sales are the total of sales at QSR Company-owned and
consolidated other concept restaurants and the sales of our franchisees
as reported to us. We believe system-wide sales information is an
industry-wide statistic used by analysts and investors to compare
restaurant companies that operate franchise units and/or operate
multiple concept restaurants, as well as company-owned restaurant
units. We use this statistic to assist in our analysis of per location
sales and per location sales information by type of location and to
compare sales at franchise restaurants to sales at Company-owned
restaurants to judge, among other things, the relative operating
success of the franchisee. The following table reconciles our
system-wide sales to our restaurant sales which we believe is the most
direct comparable United States generally accepted accounting
principles ("GAAP") financial measure to system-wide sales for each of
the years presented (in thousands):
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Restaurant sales $331,313 $314,708 $345,206 $372,673 $382,365
Franchise unit sales 253,410 221,508 205,073 197,936 186,895
------- ------- ------- ------- -------
System-wide sales $584,723 $536,216 $550,279 $570,609 $569,260
-16-
(3) 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 and $5.0 million in 2001 and 2000,
respectively. In 2000, we finalized our allocation of the purchase
price from the going private transaction based on an evaluation of 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 for us with the beginning of 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 for years after 2001. Separable intangible assets that
are not deemed to have indefinite lives 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 January 2, 2005, are tested annually for impairment.
Our testing for impairment concluded that there was no impairment of
our goodwill or intangible assets for any periods presented.
(4) Asset impairment, restaurant closings and loss on sale of other concept
restaurant consists of the following (in millions):
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Impairment of assets $1.1 $4.1 $0.4 $5.5 -
Restaurant
closings/remodels 0.8 2.0 8.8 12.7 -
Loss on sale of other
concept restaurant 0.3 - - - -
---- ---- ---- ----- ----
Total $2.2 $6.1 $9.2 $18.2 -
==== ==== ==== ===== ====
(5) Other income in 2004 represents the difference between the amounts
allegedly owed to a former distributor and the negotiated settlement
with the Bankruptcy Trustee. Other income in 2002 represents the
portion of the settlement of our insurance claim, net of related
expenses attributable to the reimbursement of lost income under our
business interruption insurance arising out of the events of September
11, 2001.
(6) 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
2000.
(7) 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
-17-
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.
(8) EBITDA represents earnings (losses) before interest income, interest
expense, taxes, depreciation and amortization and includes the effect
of the insurance recovery described in note 4 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 "GAAP" 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. We
also internally use EBITDA to determine whether or not to continue
operating restaurant units since it provides us with a measurement of
whether we are receiving an adequate cash return on our 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 (loss) for each of the
periods which we believe is the most direct comparable GAAP financial
measure to EBITDA, presented (in thousands):
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
EBITDA $42,651 $33,671 $56,229 $46,305 $78,703
Interest expense (30,694) (31,039) (30,959) (30,950) (30,243)
Interest income 654 694 528 756 949
Income (taxes) credit (534) (844) (334) (325) 5,075
Depreciation and
amortization (16,400) (19,712) (20,683) (30,375) (29,039)
-------- -------- -------- -------- --------
Net (loss) income $(4,323) $(17,230) $ 4,781 ($14,589) $25,445
========== =========== ======= ========= =======
(9) In 2004, the Company noted an error in the minority interest account
and accrued expenses and recorded $569,000 to correct this error, which
related to the recording of income and minority interest of a
consolidated subsidiary in years prior to December 31, 2000. The
correction was adjusted to opening retained earnings. The error
resulted from the misinterpretation of certain Partnership Agreements
concerning the sharing of the losses of two of the locations within
this consolidated subsidiary.
-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
EXECUTIVE OVERVIEW
We are a leading owner, operator and franchisor of Quick Service
Restaurants ("QSR") restaurants, serving a wide variety of Italian specialty
foods with 927 locations as of January 2, 2005. We also operate, in certain
cases with joint venture partners, a number of other restaurant concepts with 22
locations as of January 2, 2005. In 2005, we sold one other concept restaurant
and we opened three in early 2005.
While we have been faced with numerous pressures that have affected our
business, including the events of September 11, 2001, the general economic
downturn in recent years in the United States, and the March 2003 military
action in Iraq, we saw increased sales in all areas of our business as we moved
through 2004 and into 2005. Mall traffic has increased as retailers,
particularly high end mall based retailers, are serving more customers. In
addition, during 2004, we re-energized our quick-service restaurant operations
while continuing to provide a quality product coupled with quality service. We
believe our strategy resulted in the significant improvement of our operating
results, including higher sales and earnings. The increase in mall traffic,
combined with selective price increases, improvements in operational controls
and upgraded store management at all levels produced increased sales in 2004.
While we have closed approximately 130 company owned QSR locations since 2001,
net of those opened, substantially all those QSR restaurants which remain are
generating increased levels of sales. As a result, earnings which had been
declining in prior years, improved significantly in 2004 over those reported in
2003. Our Franchise Group has also seen improvements in revenues as economic
conditions have improved world wide. Approximately 113 new franchised locations,
net of those closed, have opened since 2001.
We developed a new concept, Carmela's of Brooklyn, which opened its
first restaurant in early 2005. Carmela's of Brooklyn is expected to operate
outside of our traditional mall, hospitality and airport venues. We believe that
the continuing development of this and other concepts, along with a combination
of our re-energized QSR restaurants and continued growth in our franchise based
business, should lead to continued improvements in both revenue and profit.
Since September 2003, we have restructured our corporate staff. In
September 2003, Michael O'Donnell was hired as our President and Chief Executive
Officer, while Mario Sbarro remained as Chairman of the Board of Directors. In
January 2004, Peter Beaudrault joined us as our Corporate Vice President and
President of our Quick Service Division, and Anthony J. Missano, formerly
President of our Quick Service Division, became our President of Business
Development, with responsibilities for real estate, construction, purchasing and
other business development matters. In February 2004, Anthony J. Puglisi was
hired as our Chief Financial Officer, a position that had remained vacant since
June 2002. In March 2005, Michael O'Donnell resigned his position as
-19-
President and Chief Executive Officer and Peter Beaudrault was appointed
President and Chief Executive Officer. Mr. O'Donnell remains a member of our
Board of Directors.
SEASONALITY
Our business is subject to seasonal fluctuations, and the effects of
weather, national security, economic and business conditions. Earnings have been
highest in our fourth quarter due primarily to increased volume in shopping
malls during the holiday shopping season. Our annual earnings can fluctuate 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.
GOODWILL AND OTHER INTANGIBLE ASSETS
Due to the seasonality of our business, until we determine the results
of operations for our fourth quarter, 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 as required by SFAS No. 142, "Goodwill and Other
Intangible Assets," 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. Our annual test for impairment charges
of our goodwill and intangible assets with indefinite lives at the end of 2004
and 2003 concluded that there were no impairment changes related to these
assets. However, during 2004 and 2003, we recorded impairment of our long-lived
assets of $1.1 million and $4.1 million, respectively, as a result of our
periodic evaluation of impairment indicators of the property and equipment that
is part of our long lived assets.
ACCOUNTING PERIOD
Our fiscal year ends on the Sunday nearest to December 31. Our 2004
year contained 53 weeks. All other reported years contain 52 weeks. As a result,
our 2004 year benefited from one additional week of operations over the other
years which generated approximate revenues of $9 million and approximate income
before taxes of $2.5 million.
PRIMARY FACTORS CONSIDERED BY MANAGEMENT IN EVALUATING OPERATING PERFORMANCE
Our evaluation of operating performance of Sbarro focuses on a number
of factors, all of which play a material role:
o comparable Sbarro owned QSR location sales;
o franchise location sales and their relationship to our
franchise revenues;
o decisions to continue to operate or close Sbarro owned QSR
locations;
o percentage relationship of the cost of food and paper products
and payroll and other benefit costs to our restaurant sales;
o level of other operating expenses and their relationship to
restaurant sales;
o relationship of general and administrative costs to revenues;
o provision for asset impairment and restaurant closings; and
o EBITDA.
The following statistical information highlights the primary factors
covered by our management in evaluating our operating performance:
-20-
RELEVANT FINANCIAL INFORMATION
Fiscal Year
-----------
2004 2003 2002
---- ---- ----
(in millions)
Comparable QSR owned sales (1) $309 $288 $298
Comparable QSR owned sales
- percentage change vs. prior year (1) 8.2% -3.4% -1.3%
Franchise location sales $253 $222 $205
Franchise revenues $ 12 $11 $10
Cost of food and paper products as a
percentage of restaurant sales 21.8% 21.4% 19.6%
Payroll and other benefits as a percentage
of restaurant sales 27.4% 28.5% 27.9%
Other operating expenses as a percentage
of restaurant sales 34.6% 35.1% 33.3%
General and administrative costs as a
percentage of revenues 8.2% 7.7% 6.6%
Provision for asset impairment and
restaurant closings, loss on sale of other
concept restaurants $2.2 $6.1 $9.2
EBITDA (2) $43 $34 $56
(1) Comparable QSR owned sales dollars and annual percentage changes are
based on locations that were in operation on a continuing basis within
each year presented. Comparable QSR sales in 2004 include the 53rd week
of approximately $8.5 million in sales. The 53rd week in 2004 accounts
for approximately 3% of the 8.2% comparable increase.
(2) See "Selected Financial Data" for information concerning this
"Non-GAAP" financial measure and a reconciliation of EBITDA to our net
income (loss), which we believe is the most direct comparable financial
measure to EBITDA.
IMPACT OF INFLATION AND OTHER FACTORS
Food, labor, rent, construction and equipment costs are the items most
affected by inflation in the restaurant business. Although for the past several
years, inflation has not been a significant factor, there can be no assurance
that this trend will continue. In addition, food and paper product costs may be
temporarily or permanently affected by weather, economic and other factors
beyond our control that may reduce the availability and increase the cost of
these items. Historically, the price of cheese has fluctuated more than any of
our other food ingredients and related restaurant supplies.
-21-
FISCAL 2004 COMPARED TO FISCAL 2003
Sales by QSR restaurants and consolidated other concept restaurants
increased 5.3% to $331.3 million for 2004 from $314.7 million for 2003. The
increase in sales for 2004 reflects $16.6 million (5.5%) of higher sales of QSR
restaurants. The sales of consolidated other concept units were essentially flat
in 2004 as compared to 2003. Increases in comparable location sales of $24
million (8.2%) (includes approximately $8.5 million of QSR revenue, or a 3.0%
increase relating to the 53rd week) in 2004 from 2003 was the primary reason for
the improvement in QSR restaurant sales. Comparable restaurant sales represent
sales at locations that were open during the entire current and prior years. We
believe that improved economic conditions in the United States, increased mall
traffic, improvement in operational controls and upgraded field and store
management combined with selective price increases accounted for the
improvements.
Franchise related income increased 11.3% to $12.1 million in 2004 from
$10.9 million in 2003. The increase was attributed to additional locations
opened during the year (net of closed locations) and an increase in comparable
sales of 6% for foreign locations and 2% for domestic locations.
Real estate and other decreased to $5.5 million in 2004 as compared to
$6.8 million in 2003. The decrease was primarily due to $.7 million of rebates
recorded in 2003 resulting from a change in estimate.
Cost of food and paper products as a percentage of restaurant sales
increased by .4% to 21.8% for 2004 from 21.4% for 2003. The cost of sales
percentage in 2004 was negatively impacted by the increase in cheese prices
throughout most of the year. Cheese prices in 2004 increased substantially over
cheese prices in 2003 and were approximately $0.34 per pound higher for a total
increase of approximately $2.9 million or 0.9% of restaurant sales. Improved
operational controls combined with selective price increases of our products
offset the effect of the increased cheese prices on our cost of sales as a
percentage of restaurant sales.
Payroll and other employee benefits increased $1.2 million but, as a
percentage of restaurant sales, decreased to 27.4% in 2004 from 28.5% of
restaurant sales in 2003. The dollar increase was primarily due to payroll and
other employee benefits relating to the 53rd week in 2004 of approximately $2.0
million offset by better management of staff levels and less restaurants in
operation than in 2003. The decrease as a percentage of restaurant sales was
primarily a result of improved sales resulting from increased mall traffic and
selective price increases.
Other operating costs increased by $4.1 million but decreased to 34.6%
of restaurant sales in 2004 from 35.1% in 2003. The increase was primarily
related to an increase in restaurant management bonuses of $2.2 million
resulting from improved profits and an increase in occupancy and other costs due
to the 53rd week in 2004 of approximately $1.6 million.
Depreciation and amortization expense decreased by $3.3 million to
$16.4 million for 2004 from $19.7 million for 2003. The reduction was due to
fewer restaurants in operation in 2004, as well as the reduction in depreciation
resulting from the asset impairment charges taken in 2003 and disposal of assets
in 2004.
General and administrative expenses were $28.6 million for 2004,
compared to $25.5 million for 2003. The principal factors contributing to the
increase were increased bonuses of $1.5 million, additional litigation reserves
of $1.2 million and costs associated with additions and changes to
-22-
senior management of $1.2 million. These increases were offset by a reduction in
work force that reduced our 2004 costs by approximately $2.5 million. In
connection with this reduction in work force in early 2004, we recorded
severance and other related costs of approximately $1.2 million in 2004.
During 2004 and 2003, we recorded a provision for asset impairment,
restaurant closing and remodel charges and loss on sale of other concept
restaurant of $2.2 million and $6.1 million, respectively. In 2004, $1.1 million
related to the impairment of assets as compared to $4.1 million in 2003.
Restaurant closings and remodels accounted for $0.8 million and $2.0 million in
2004 and 2003, respectively. In 2004, there was a charge of $0.3 million to
record the loss on sale of another concept restaurant. The charge for asset
impairment resulted from our evaluation of impairment indicators which
determined that the carrying amount of certain store assets may not be
recoverable from the estimated undiscounted future cash flows resulting from the
use of those assets.
Interest expense of approximately $31 million for both 2004 and 2003
relates to the 11%, $255 million senior notes we issued to finance our going
private transaction ($28.1 million in both 2004 and 2003), the 8.4%, $16 million
mortgage loan on our corporate headquarters ($1.3 million in both periods). In
addition, $1.5 million in both 2004 and 2003 represents non-cash charges
primarily for the accretion of the original issue discount on our senior notes
and the amortization of deferred financing costs on the senior notes, and the
mortgage loan.
Interest income was approximately $0.7 million in both 2004 and 2003.
Equity in the net income of unconsolidated affiliates represents our
proportionate share of earnings and losses in those other concept restaurants in
which we have a 50% or less ownership interest. Our equity in the overall
profits of those concepts increased by $0.4 million in 2004 from 2003 as a
result of improvements in our steakhouse joint venture.
In 2003, we replaced our then national independent wholesale
distributor which had declared bankruptcy. In December 2004, we entered into a
settlement agreement with the bankruptcy trustee to settle $2.1 million
allegedly due from us for $0.9 million. The difference between the alleged
amount due (which we had fully reserved for) and the settlement agreement of
approximately $1.2 million is reported in other income.
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 was $0.5 million and $0.8 million
for 2004 and 2003, respectively. The expense was for taxes owed by us to
jurisdictions that do not recognize S corporation status or that tax entities
based on factors other than income and for taxes withheld at the source of
payment on foreign franchise income related payments.
-23-
FISCAL 2003 COMPARED TO FISCAL 2002
Sales by QSR restaurants and consolidated other concept restaurants
decreased 8.8% to $314.7 million for 2003 from $345.2 million in 2002. The
decrease in sales for 2003 reflected $22.3 million (6.9%) of lower sales of
Sbarro QSR restaurants and $8.2 million (35.6%) of lower sales of consolidated
other concept units. Declines in comparable location sales of $10.1 million
(3.4% to $287.3 million) in 2003 from 2002 was the primary reason for the
decline in QSR restaurant sales. We believe that these declines were
attributable to a reduction in shopping mall traffic related to the general
economic downturn in the United States and, additionally with respect to the
first quarter of 2003, the effects of the threatened and then actual military
action in Iraq. Comparable restaurant sales are made up of sales at locations
that were open during the entire current and prior years.
During 2003, we closed 30 more units than we opened, causing the
remaining $12.3 million net reduction in QSR restaurant sales. The units closed
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 4.7% decrease in comparable unit sales to $14.7
million. We believe that the decline was attributable to the same factors that
affected QSR restaurant sales. In addition, during 2003 two consolidated other
concept units were closed, resulting in a net sales reduction of $7.5 million
for 2003. These units were either unprofitable or marginally profitable and were
part of ventures that we determined to discontinue.
Franchise related revenues rose by $0.8 million, or 7.9%, in 2003 over
2002. Excluding approximately $0.6 million of revenues in 2003 related to area
development agreements for the United Arab Emirates and Korea that expired,
franchise related income increased 2.0% to $10.3 million in 2003 from $10.1
million in 2002. Initial royalties from locations opened during 2003 and ongoing
royalties earned from locations opened in 2003 and during 2002 were offset, in
part, by a 2.7% reduction in comparable unit sales in 2003 from 2002 levels.
Approximately $0.7 million of the increase in real estate and other
revenues to $6.8 million in 2003 from $5.1 million in 2002 was for rebates
recorded in 2003 resulting from a change in estimate. Increased usage of certain
other products that were subject to rebates accounted for the remainder of the
2003 increase from 2002 levels.
Cost of food and paper products as a percentage of restaurant sales
increased to 21.4% for 2003 from 19.6% in 2002. The cost of sales percentage in
2003 was negatively impacted by the decrease in comparable unit 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 to facilitate the consistency in product in
each restaurant unit and reduce labor needed to prepare our products. We
estimate that this added approximately 3/4 of 1 percentage point to our cost of
food. The increase in cheese prices that began at the end of the second quarter
resulted in significantly higher cheese costs in the third and fourth quarters
of 2003 compared to the similar periods in 2002 causing a 7/10 of 1% increase in
cost of sales for 2003. In early 2003, we replaced our then national independent
wholesale distributor, which had declared bankruptcy, with another national
independent wholesale distributor.
-24-
Payroll and other employee benefits decreased by $6.7 million but, as a
percentage of restaurant sales, increased to 28.5% in 2003 from 27.9% of
restaurant sales in 2002. The dollar decrease was primarily due to fewer units
in operation while the percentage of sales increase was due to the reduction in
comparable unit sales and resulting operating inefficiencies.
Other operating expenses decreased by $4.4 million but increased to
35.1% of restaurant sales in 2003 from 33.3% in 2002. The lower dollar level of
other operating expenses resulted primarily from the fewer number of units in
operation. The increase as a percentage of restaurant sales was 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 by the reduction in comparable unit sales and increases in our repair
and maintenance costs due to the number of years that the majority of our
locations have been operating and the effects of the long-term utilization on
their equipment.
Depreciation and amortization expense decreased by $1.0 million to
$19.7 million for 2003 from $20.7 million in 2002. The reduction was primarily
due to fewer restaurants in operation in 2003.
General and administrative expenses were $25.5 million for 2003,
compared to $24.0 million in 2002. The principal factors contributing to the
increase in 2003 were $0.2 million of legal fees incurred in connection with a
lawsuit, a $0.2 million allowance for doubtful accounts receivable recorded with
respect to our franchisee in Spain that declared bankruptcy, a $0.2 million
allowance against the collectibility of amounts owed by our Israeli franchisee,
bonuses of $0.7 million that were granted to certain executive officers, $0.5
million of costs and expenses related to the hiring and employment of our then
President and Chief Executive Officer and higher QSR field management travel and
related costs, offset by a reversal of approximately $0.3 million of excess
estimates for the ultimate cost of two lawsuits related to one of our former
joint venture locations.
During 2003, we recorded a provision for asset impairment, restaurant
closing and loss on sale of other concept restaurant of $6.1 million. Of the
provision, $2.0 million was for costs relating to restaurant closings and $4.1
million was for the impairment of property and equipment. The charge for asset
impairment resulted from our evaluation of impairment indicators which
determined that the carrying amount of certain store assets may not be
recoverable from the estimated undiscounted future cash flows resulting from the
use of those assets.
Interest expense of $31 million for both 2003 and 2002 related
primarily to the 11%, $255 million senior notes we issued to finance our going
private transaction ($28.1 million in both 2003 and 2002), the 8.4%, $16 million
mortgage loan on our corporate headquarters in 2001 ($1.3 million in both
periods). In addition, $1.5 million in both 2003 and 2002 represented non-cash
charges for the accretion of the original issue discount on our senior notes and
the amortization of deferred financing costs on the senior notes and the
mortgage loan.
Interest income was approximately $0.7 million in 2003 and $0.5 million
in 2002. Higher average cash available for investment in 2003 compared to 2002
was partially offset by lower prevailing interest rates in effect.
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. Our equity in the overall profits of
those concepts declined by $0.2 million in 2003 from 2002 resulting from our
proportionate share ($0.5 million) of the losses from the sale of a clam bar
joint venture
-25-
location and one of the locations of our steakhouse joint venture. These losses
offset our equity in the operating net income of unconsolidated affiliates of
approximately $0.9 million in 2003 compared to $0.7 million in 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 was $0.8 million and $0.3 million
for 2003 and 2002, respectively. The expense was for taxes owed by us to
jurisdictions that do not recognize S corporation status or that tax entities
based on factors other than income and for taxes withheld at the source of
payment on foreign franchise income related payments.
LIQUIDITY AND CAPITAL RESOURCES
CASH REQUIREMENTS
Our liquidity requirements relate to debt service, capital
expenditures, working capital, investments in other ventures, distributions to
shareholders when permitted under the indenture for the senior notes and to
repay any borrowings we may make under our line of credit and general corporate
purposes. We incur annual cash interest expense of approximately $29 million
under the senior notes and our mortgage loan and may incur additional interest
expense for borrowings under our line of credit. We are not required to make
principal payments, absent the occurrence of certain events, on our senior notes
until they mature in September 2009. We believe that aggregate restaurant
capital expenditures and our investments in joint ventures during the next
twelve months will be approximately $14 million.
We expect our primary sources of liquidity to meet current requirements
will be cash flow from operations. Our $3.0 million line of credit which expires
in May 2005 is uncommitted. Therefore, our lender could refuse to lend to us at
any time. We do not presently expect to borrow under our line of credit except
for required letters of credit. The maximum amount available of our line of
credit, after given effect to outstanding letters of credit, was $1.2 million at
January 2, 2005. The Company is in discussions with several banks to extend or
replace the credit line.
-26-
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) were as
follows as of January 2, 2005:
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN MORE THAN 5
--------- -----------
TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS YEARS
----- ------ ----------- ----------- -----
(IN MILLIONS)
Long-Term Debt Obligations:
Senior notes (1) $255.0 $ - $ - $255.0 $ -
Mortgage loan (2) 15.3 0.2 0.4 0.5 14.2
Credit line (3) - - - - -
Estimated interest expense 162.0 29.3 87.9 30.5 14.3
on long-term debt
Letters of credit (4) 1.8 1.8 - - -
Guaranteed indebtedness (5) 7.4 1.6 3.0 1.7 1.1
Capital lease obligations - - - - -
Operating leases (6) 290.6 51.4 93.8 69.8 75.6
Purchase obligations (7) 0.4 0.4 - - -
------- ------ ------ ------- -------
Total $732.5 $84.7 $185.1 $357.5 $105.2
====== ====== ====== ======= =======
(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 the principal portion of the installment
payments.
(3) Our line of credit enables us to borrow, subject to bank approval, up
to $3.0 million, less outstanding letters of credit through May 2005.
There are currently no amounts outstanding under the new line of
credit. The $1.8 million of letters of credit reflected in the table
above reduces our availability under the line of credit to $1.2
million.
(4) Represents our maximum reimbursement obligations to the issuer of the
letters of credit in the event the letters 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. All the
standby letters of credit supporting leases are annually renewable
through the expiration of the related lease terms. If not renewed, the
beneficiary may draw upon the letters of credit as long as the
underlying obligation remains outstanding.
(5) Represents our maximum reimbursement obligations relating to guarantees
of our nonconsolidated subsidiaries' debt and letter of credit
obligations. Although we do not expect to have to pay these
obligations, the amount disclosed represents the full exposure.
(6) Represents base rent under operating leases including those 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.
-27-
(7) Represents commitments for capital expenditures, including for the
construction of restaurants for which we are contractually committed.
Excludes potential purchases under our contractual arrangement with our
national independent wholesale distributor that commenced in February
2003 and that requires us, for the next four 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 affect the dollar amount of
purchases we make under the agreement 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; and
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.
SOURCES AND USES OF CASH
The following table summarizes our cash and cash equivalents and
working capital as at the end of our two latest years and the sources and uses
of our cash flows during those two years:
Year Ended
2004 2003
---- ----
(in millions)
Liquidity at year end
- ---------------------
Cash and cash equivalents $63.0 $56.4
Working capital $32.6 $28.4
Net cash flows for each year
- ----------------------------
Provided by operating activities $15.8 $11.0
Used in investing activities $(8.9) $(8.5)
Used in financing activities $(0.3) $(1.2)
------ ------
Net increase in cash $6.6 $1.3
==== ====
We have not historically required significant working capital to fund
our existing operations and have financed our capital expenditures and
investments in joint ventures through cash generated from operations.
Net cash provided by operating activities was $15.8 million in 2004
compared to $11.0 million in 2003 year. This $4.8 million increase was primarily
due to the improvements in operating income of $10.6 million offset by a non
cash decrease as compared to 2003 primarily of depreciation and amortization of
$3.3 million and asset impairment, restaurant closings and loss on sale of other
concept restaurants of $3.9 million.
Net cash used in investing activities has historically been primarily
for capital expenditures. Net cash used in investing activities increased to
$8.9 million in 2004 from $8.5 million in 2003.
-28-
Capital expenditures were utilized for QSR restaurant openings and renovation
activity and for expenditures for consolidated other concept locations.
Net cash used in financing activities was $0.3 million in 2004 compared
to $1.2 million in 2003. Cash used in financing activities in 2004 resulted
primarily from a tax distribution to shareholders offset by a reduction in loans
receivable from officers. 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
permits us to make distributions to shareholders under a formula that is
designed 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 such income were taxed at the highest applicable federal
and New York State marginal income tax rates.
FINANCING
In March 2004, we obtained a line of credit under which we currently
have the ability, subject to bank approval, to borrow up to $3 million, less
outstanding letters of credit. At January 2, 2005, there were $1.8 million of
letters of credit outstanding and, we had $1.2 million of undrawn availability,
subject to bank approval, under the line of credit. The line of credit contains
no financial covenants or unused line fees. Interest applicable to the loans
under the line of credit is at the bank's prime rate at the time of any
borrowings. The line expires in May 2005. The Company is in discussions with
several banks to extend or replace the line of credit.
As part of the going private transaction, we sold $255 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. The indenture under which our senior notes
are issued does not require us to make, except under certain circumstances,
principal payments until September 2009, when the outstanding principal balance
is due. The indenture contains various covenants that limit our ability to
borrow funds in addition to lending arrangements that existed at the date of the
going private transaction 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) our consolidated interest ratio coverage
(as defined in the Indenture), after giving pro forma effect to the interest on
the new borrowings, for the four most recently ended quarters must be at least
2.5 to 1. As of January 2, 2005, that ratio was 1.36 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. 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 (other
than distributions pursuant to the tax payment agreement) until we increase the
restricted payment availability by approximately $18 million, and then only to
the extent of any excess over that amount.
In March 2000, one of our restricted subsidiaries obtained a $16
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
-29-
January 2, 2005 was $15.3 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.
As of January 2, 2005, we were in compliance with all covenants in the
indenture for the senior notes and our mortgage. Our subsidiary is in compliance
with the covenants for its mortgage.
OFF-BALANCE SHEET ARRANGEMENTS
We and our unconsolidated subsidiaries 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 joint venture. In addition, we have a
contractual obligation for the remainder of the original term of the operating
lease for the clam bar location which was sold by the joint venture to which we
are a party.
We are a party to various financial guarantees to a bank for two of our
other concepts. We are jointly liable, along with our joint venture partner, for
a loan owed by one of the other concepts. Our liabilities under the line of
credit, mortgage loan and $0.1 million of letters of credit to the second
concept are limited to our minority ownership percentage. The remaining letter
of credit for the second concept of $0.6 million is jointly and severally
guaranteed by each of the partners in the joint venture. 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 record a liability if events occur
that make payment under the guarantees probable. Under FIN No. 45, we are
required to record a liability for the fair value of any obligation undertaken
or modified after December 31, 2002. No such obligation was undertaken or
modified in 2004 or 2003.
The details of our guarantees as of January 2, 2005 and their terms are
as follows:
TYPE OF GUARANTEED OBLIGATION AMOUNT (1) TERM
----------------------------- ---------- ----
Line of credit $5.0 million December 2010
Loan 1.4 million November 2007
Letters of credit 0.7 million December 2010
Mortgage loan 0.3 million August 2019
- ---------
(1) Represents our current maximum exposure under existing borrowings
and letters of credit. Our exposure under the line of credit could increase to
$6.3 million if the full amount of the line of credit is utilized. In 2003, the
loan expiration date for all new term loans was extended from December 31, 2008
to December 31, 2010.
Our steakhouse joint venture entered into construction contracts
aggregating approximately $4.3 million for three restaurants, of which two
opened in early 2005. Through March 1, 2005, payments of approximately $2.8
million have been made against these contracts. The construction of the
restaurants is guaranteed by us under the terms of the leases for the locations.
In addition, we also guarantee the rent through the first year of operations of
one restaurant location and the rent until another restaurant opens.
-30-
Our obligation under the bank loan to our quick service Mexican-style
restaurant joint venture is joint and several with our partner's guarantee and
is therefore up to 100% of the outstanding amount of the loan. Our guarantee was
established at the inception of the borrowing by the venture to facilitate its
borrowings and is required to be in place until the loan is repaid. As of
January 2, 2005, the amount subject to our loan guarantee for this joint venture
was $1.4 million.
In August 2003, we closed, sold the assets and transferred the lease,
subject to our remaining $0.15 million guarantee for the remainder of the
original lease term, of the clam bar location. Our guarantee of the lease became
operable upon the buyer's default and will continue until the premises are
released.
In certain instances, we guarantee the leases for franchisees. We
currently guarantee 29 leases for franchisees. Ten of these leases were
guaranteed after the adoption of FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The Company has recorded a liability of $0.1 million
which represents the fair value of these guarantees as of January 2, 2005.
RELATED PARTY TRANSACTIONS
We were the sole tenant of an administrative office building which we
leased from a partnership owned by Sbarro Enterprises, L.P., the limited
partners of which are Mario Sbarro, our Chairman and a director, Joseph Sbarro,
our Senior Vice President, Secretary and a director, Anthony Sbarro, our Vice
Chairman, Treasurer and a director, and Carmela Sbarro, Vice President and a
director. The annual rent paid was $100,000, $300,000 and $300,000 for 2004,
2003 and 2002, respectively. We were advised by a real estate broker that the
rent to be paid by us was comparable to the rent that would have been charged by
an unaffiliated third party. The lease was terminated upon the sale of the
building by the partnership in April 2004.
On April 5, 2001, we loaned $3.2 million to certain of our
shareholders, including: Mario Sbarro, $1.1 million, Joseph Sbarro, $1.2 million
and Anthony Sbarro, $0.9 million. The due dates of the related notes have been
extended to April 6, 2007. The notes bear interest at the rate of 4.63% per
annum, payable annually. As of January 2, 2005, the balance of these loans was
$2.9 million.
On December 28, 2001, we loaned $2.8 million to our shareholders,
including: Mario Sbarro, $0.6 million, Joseph Sbarro, $0.7 million, Anthony
Sbarro, $0.5 million, and the Trust of Carmela Sbarro, $1.0 million. The due
dates of the related notes have been extended to December 28, 2007. The notes
bear interest at the rate of 2.48% per annum, payable annually. As of January 2,
2005, the balance of these loans was $2.6 million.
In March 2004, we loaned $40,000 to Gennaro A. Sbarro, then our
Corporate Vice President and President of our Franchising and Licensing
Division. The note was repaid in February 2005 including interest at 2.69% per
annum. In connection with his resignation in 2004, we entered into a severance
agreement providing for a lump sum payment of approximately $453,000.
In June 2003, Anna Missano, the daughter of Joseph Sbarro, issued to us
a note for approximately $90,000 for royalties due us for 2001 and 2000. The
note is repayable at approximately $10,000 per year, including interest at 2.96%
per annum, with a balloon payment due on June 30, 2010. The principal balance of
the notes at January 2, 2005 was approximately $79,000.
-31-
The interest rates charged on the foregoing related party loans
included above approximate the Applicable Federal Rate (AFR) published by the
Internal Revenue Service at the time of the loan. We recorded interest income
from related parties was approximately $211,000, $223,000 and $221,000 in 2004,
2003 and 2002, respectively.
Bernard Zimmerman & Company, Inc., of which Bernard Zimmerman, a
director of Sbarro, is President and a majority shareholder, renders financial
and consulting assistance to us, for which it received fees of approximately
$26,000 for services rendered during 2004 and $0.3 million in both 2003 and
2002.
Harold Kestenbaum, a member of our Board of Directors, assisted one of
our other concepts in the preparation of its initial Uniform Franchise Offering
Circular in 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, $480,000, $340,000 and $422,000 in 2004, 2003
and 2002, 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 2004, 2003
and 2002 were approximately $89,000, $90,000 and $92,000, respectively.
As of July 2002, we sold the assets of a restaurant to a corporation
owned by the brother-in-law of our Chairman of the Board for $88,900. The sales
price resulted in a loss of approximately $64,000 that was included in the
provision for restaurant closings. That corporation also entered into a
franchise agreement with us. We received promissory notes for each of the
purchase price and initial franchise fee that were payable over seven years and
bore interest on the unpaid principal balances at 7% per annum. In addition in
2002, we subleased this location to that franchisee. Payments under the sublease
were being made directly to the landlord by the franchisee. Interest payments
received relating to the promissory notes was approximately $4,000 in 2003. No
interest payments were received in 2004. Royalties paid under this arrangement
were approximately $1,800 in 2004, $3,300 in 2003 and $6,800 in 2002.
In March 2005, we re-purchased the assets of the restaurant from the
corporation for $88,900. The remaining unpaid principal balance of the
promissory notes were offset against the purchase price of the assets. The
remaining balance under the promissory notes of approximately $22,000, and
accrued but unpaid royalties of approximately $31,000 had been fully reserved in
2004.
In 2002, a company in which Gennaro J. Sbarro, then our Corporate Vice
President and President of our Casual and Fine Dining Division and the son of
Joseph Sbarro has a 50% interest (the other 50% is owned by an unaffiliated
third party) entered into a sublease for $50,000 greater than rent or other
charges due under the lease. Rent and other charges due under the lease are paid
directly to the landlord. Payment under the sublease are due to us. Rent of
approximately $23,000 was included in the 2004 results of operations. To
reimburse Sbarro for equipment costs, the Company owned by Mr. Sbarro, issued a
non-interest bearing note in our favor for approximately $55,000, that is
repayable in eighteen equal monthly installments of approximately $3,000 which
commenced in November 2002. The principal balance on the note as of January 2,
2005 was approximately $16,000. As of October 31, 2003, Mr. Sbarro resigned from
his positions with us and a corporation owned by Mr. Sbarro entered into an
eighteen month agreement with us to provide
-32-
consulting services to our quick service and casual dining division for
approximately $23,000 per month and the reimbursement for customary and usual
expenses that may be incurred by that corporation in the performance of its
services.
In October 2003, we sold the assets of three underperforming
Sbarro-owned restaurants that we proposed to close to entities owned separately
by each of three other of Anthony Sbarro's sons, each of which entered into a
franchise agreement with us. Two of the locations, which had no remaining book
value, were transferred for no consideration while the third was sold for $0.3
million that was paid in full, and resulted in a gain to Sbarro of approximately
$0.1 million. In connection with the sale of the locations, the employment of
these individuals with Sbarro was terminated and we included a charge for their
total severance pay of approximately $60,000 in our results of operations for
2003. The franchise agreements provide for the payment of 5% of the location's
sales as a continuing franchise fee but did not provide for any initial
franchise fee. We have waived continuing franchise fees through 2006. In
addition, we subleased two of the locations to two of the franchisees. Payments
under the subleases are being made directly to the landlord by the franchisees
and they are not in default.
In January 2004, one of Mario Sbarro's daughters, resigned from her
position as Manager of Administration - Construction. A corporation owned by her
entered into a one year agreement to provide consulting services related to
construction matters to us for a series of monthly payments totaling $100,000.
In addition, that corporation provided consulting services related to
construction matters for our steakhouse joint venture of $18,900 in 2004.
In February 2005, a joint venture in which we have a 70% interest, sold
the assets of one of our other joint venture restaurants to a company owned by
Gennaro A. Sbarro our then Corporate Vice President and President of our
Franchising and Licensing Division and the son of Mario Sbarro, for
approximately $900,000 (which approximated fair value) resulting in a loss of
approximately $284,000. The Company received $300,000 in cash and promissory
notes of $600,000. The promissory notes are payable monthly in 72 equal monthly
installments in the amount of $8,333 including interest at 5% per annum with a
balloon payment of $111,375 at maturity. The joint venture also sold the
inventory of the restaurant for approximately $67,000, with $50,000 paid at
closing and the remainder of $17,000 payable in four equal monthly installments
from March 2005 to June 2005. The company owned by Mr. Sbarro entered into a
sublease, which we guarantee and a Security Agreement to secure the obligations
under the promissory notes. The sublease and Security Agreement are intended to
enable Sbarro to recapture the business in the event of an uncured default.
Compensation of related parties includes salary, taxable benefits and
accrued bonus. Salaries for 2004 include one additional week of salary due to
our 53 week year in 2004. Compensation is as follows:
o Mario Sbarro was our Chairman of the Board in 2004 and Chairman
of the Board, President and Chief Executive Officer in 2003 and
2002. His compensation was approximately $884,000 in 2004,
$700,000 in 2003 and $920,000 in 2002.
o Anthony Sbarro was our Vice Chairman of the Board and Treasurer
in 2004, 2003 and 2002. His compensation was approximately
$582,000 in 2004, $400,000 in 2003 and $545,000 in 2002.
-33-
o Joseph Sbarro was our Senior Executive Vice President and
Secretary in 2004, 2003 and 2002. His compensation was
approximately $585,000 in 2004, $400,000 in 2003 and $575,000 in
2002.
In addition to the compensation of Mario, Anthony, and Joseph Sbarro:
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 in
2004, 2003 and 2002.
o Other members of the immediate families of Mario, Anthony, Joseph
and Carmela Sbarro who are our employees were paid an aggregate
of approximately $860,000, $1,344,000 and $1,565,000 during 2004,
2003 and 2002, respectively.
The company has a 40% equity interest in Boulder Creek Steakhouse and
provided administrative services for $165,000, $172,000 and $148,000 in 2004,
2003 and 2002, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 153:
In December 2004, the Financial Accounting Standards Board ("FASB"),
issued Statement of Financial Accounting Standards ("SFAS") SFAS No. 153,
"Exchanges of Non Monetary Assets", which addresses the measurement of exchanges
of nonmonetary assets and eliminates the exception from fair value measurement
for nonmonetary exchanges of similar productive assets and replaces it with an
exception for exchanges that do not have commercial substance. SFAS No. 153 is
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005, with earlier application permitted. We do not anticipate
that SFAS No. 153 will have a material impact on our financial position or
results of operations.
SFAS 123R:
In December 2004, the FASB issued a revision of SFAS No. 123,
"Statement of Financial Accounting Standards No. 123 (revised 2004)", which
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements. This Statement establishes fair value as
the measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees except for equity
instruments held by employee share ownership plans. This Statement is effective
as of the beginning of the first annual reporting period that begins after June
15, 2005. We do not anticipate SFAS No. 123R will have a material impact on our
financial position or results of operations.
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. Accounting policies often require us to make estimates and assumptions
that affect the amounts of assets, liabilities, revenues and expenses reported
in our 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
-34-
application may have the most significant effect on our reported results of
operations and financial position and that require judgments, estimates and
assumptions by management that can affect their application and our results of
operations and financial position, are:
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 to make 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. In our judgment, we believe that the estimate of approximately
$3.2 million for outstanding legal actions.
o SFAS No. 142, "Goodwill and Other Intangible Assets," requires us to
test annually and periodically assess whether there has been an impairment of
goodwill and indefinite lived intangible assets acquired prior to July 1, 2001
($205.1 million, net of accumulated amortization, at December 28, 2003 and
January 2, 2005). As discussed under "Results of Operations" above, the
independent firm we engaged to assist us in the determination of impairment,
used the discounted cash flow method and the guideline company valuation methods
in determining the fair value of our goodwill and the discounted cash flow and
market approach methods in determining the fair value of our trademark and
concluded that there was no impairment in the carrying value of these assets as
of January 2, 2005. However, future estimates could change and cause us to take
an impairment charge with respect to those assets. Further, after taking such a
charge, should future estimates determine that the fair value has risen, SFAS
No. 142 does not allow us to increase the then current value.
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 this
policy has affected the amount and timing of charges to operating results that
have been significant in recent years ($1.1 million, $4.1 million and $0.4
million in 2004, 2003 and 2002, respectively). 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 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. After the impairment
has been identified and the related asset written down, in accordance with SFAS
No. 144, the effect cannot be reversed. As a result, the result of evaluation is
not subject to future review and change.
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. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 changes the expense recognition for certain
costs we incur while closing restaurants or undertaking other exit or disposal
activities. However, the timing difference is not typically of significant
length.
-35-
o FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," elaborates
on the disclosures to be made by a guarantor in its financial statements
concerning its obligations under certain guarantees that it has issued. It also
clarifies (for guarantees issued or modified after January 1, 2003), that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligations undertaken in issuing the guarantee. We
have guarantees that would require recognition upon issuance or modification
under the provisions of FIN No. 45. The nature of our business will likely
result in the issuance of certain guarantees in the future and, as such, we will
be required to evaluate the fair value of the obligation at the inception of
such guarantee. We recognized a liability under FIN No. 45 of approximately
$120,000 in 2004 and $38,000 in 2003. The amount we may be required to recognize
in future years may be higher than this amount depending on the number and
magnitude of guarantees we issue.
o FIN No. 46,"Consolidation of Variable Interest Entities," was
effective immediately upon its issuance during fiscal 2003 for all enterprises
with interests in variable interest entities created after January 31, 2003. In
December 2003, FASB issued FIN No. 46 (R) which changed the effective dates for
the recording of interests in variable interest entities created before February
1, 2003 beginning with the first interim reporting period ending after March 15,
2004. If an entity is determined to be a variable interest entity, it must be
consolidated by the enterprise that absorbs the majority of the entity's
expected losses if they occur, or receives a majority of the entity's expected
residual returns if they occur, or both. Where it is reasonably possible that
the enterprise will consolidate or disclose information about a variable
interest entity, the enterprise must disclose the nature, purpose, size and
activity of the variable interest entity and the enterprise's maximum exposure
to loss as a result of its involvement with the variable interest entity in all
financial statements issued after January 31, 2003. The FASB has specifically
exempted traditional franchise arrangements from the evaluations required under
FIN No. 46. We have also reviewed our joint ventures, equity investments and
corporate relationships for possible coverage under FIN No. 46. The application
of FIN No. 46 did not have a material effect on our disclosures and our
financial position or operating results. We have several variable interest
entities, for which we provide disclosures. However, we are not the primary
beneficiary and therefore do not need to consolidate these entities.
o SFAS 13, "Accounting for Leases" establishes standards of financial
accounting for leases. Certain of the Company's operating leases contain
predetermined fixed escalations of the minimum rentals during the original term
of the lease. For these leases, the Company recognizes the related rental
expense on a straight-line basis over the life of the lease and records the
difference between the amounts charged to operations and amounts paid as
deferred rent. Any lease incentives received by the Company are deferred over
the same period as the lease and amortized over a straight-line basis over the
life of the lease as a reduction of rent expense. We calculate deferred rent
based on the lease term from when we obtain access or control over the leased
property. Rent expense accrued during the construction period is capitalized as
part of the cost of leasehold improvements. The length of time from when we take
possession of property for our QSR restaurants and when our restaurant opens is
normally minimal (1-2 months) as compared to our normal lease terms of ten
years.
-36-
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 million senior notes bear a
fixed interest rate of 11%. 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 purchased, 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.
-37-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
Report of Independent Registered Public Accounting Firm 39
Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003 40
Consolidated Statements of Operations for the years 42
ended January 2, 2005, December 28, 2003 and December 29, 2002
Consolidated Statements of Shareholders' Equity (as restated) for the 43
years ended January 2, 2005, December 28, 2003 and December 29, 2002
Consolidated Statements of Cash Flows for the years 44
ended January 2, 2005, December 28, 2003 and December 29, 2002
Notes to Consolidated Financial Statements 46
-38-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Shareholders
Sbarro, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheets of Sbarro, Inc. and
subsidiaries as of January 2, 2005 and December 28, 2003, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended January 2, 2005, December 28, 2003 and December 29, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sbarro, Inc. and
subsidiaries at January 2, 2005 and December 28, 2003 and the results of their
operations and their cash flows for the years ended January 2, 2005, December
28, 2003 and December 29, 2002 in conformity with accounting principles
generally accepted in the United States.
As explained in Note 1 to the consolidated financial statements, the Company has
restated its financial statements to reflect a correction of an error related to
the calculation of minority interest in prior years. The impact of this
adjustment is to minority interest, accrued expenses and retained earnings as of
the beginning of the year ended December 29, 2002.
/s/ BDO Seidman, LLP
Melville, New York
March 7, 2005
-39-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JANUARY 2, 2005 DECEMBER 28, 2003
--------------- -----------------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents $63,000 $56,430
Receivables, net of allowance for doubtful accounts of $431
in 2004 and $488 in 2003:
Franchise 1,846 1,700
Other 1,680 1,171
-------- --------
3,526 2,871
Inventories 2,809 2,707
Prepaid expenses 3,877 3,844
Current portion of loans receivable from officers 46 2,810
----------- --------
Total current assets 73,258 68,662
Property and equipment, net 88,465 96,604
Trademarks 195,916 195,916
Goodwill 9,204 9,204
Deferred financing costs, net 4,521 5,482
Loans receivable from officers, less current portion 5,602 3,347
Other assets 7,647 7,615
---------- -----------
$384,613 $386,830
======== ========
See notes to consolidated financial statements.
-40-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
JANUARY 2, 2005 DECEMBER 28, 2003
--------------- -----------------
(IN THOUSANDS EXCEPT SHARE DATA)
Current liabilities:
Accounts payable $11,593 $13,734
Accrued expenses 20,748 18,227
Accrued interest payable 8,181 8,181
Current portion of mortgage payable 182 168
----------- ----------
Total current liabilities 40,704 40,310
--------- --------
Deferred rent 10,226 8,711
----------- ---------
Long-term debt, net of original issue discount 268,349 268,152
---------- -------
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 January 2, 2005
and December 28, 2003 71 71
Additional paid-in capital 10 10
Retained earnings 65,253 69,576
--------- --------
65,334 69,657
--------- --------
$384,613 $386,830
======== --------
See notes to consolidated financial statements.
-41-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
--------------------------------------------------------
JAN. 2, 2005 DEC. 28, 2003 DEC. 29, 2002
------------ ------------- -------------
(IN THOUSANDS)
Revenues:
Restaurant sales $331,313 $314,708 $345,206
Franchise related income 12,093 10,868 10,070
Real estate and other 5,488 6,748 5,104
-------- -------- --------
Total revenues 348,894 332,324 360,380
-------- -------- --------
Costs and expenses:
Cost of food and paper products 72,073 67,446 67,593
Payroll and other employee benefits 90,857 89,614 96,288
Other operating costs 114,571 110,453 114,892
Depreciation and amortization 16,400 19,712 20,683
General and administrative 28,576 25,451 23,960
Asset impairment, restaurant closings and
loss on sale of other concept restaurant 2,202 6,073 9,196
-------- -------- --------
Total cost and expenses 324,679 318,749 332,612
-------- -------- --------
Operating income 24,215 13,575 27,768
-------- -------- --------
Other (expense) income:
Interest expense (30,694) (31,039) (30,959)
Interest income 654 694 528
Equity in net income of
unconsolidated affiliates 855 425 668
Other income 1,181 - 7,162
-------- -------- --------
Net other expense (28,004) (29,920) (22,601)
-------- -------- --------
(Loss) income before minority interest (3,789) (16,345) 5,167
-------- -------- --------
Minority Interest - (41) (52)
-------- -------- --------
(Loss) income before income taxes (credit) (3,789) (16,386) 5,115
Income taxes 534 844 334
-------- -------- --------
Net (loss) income $(4,323) $(17,230) $4,781
======== ========= ======
See notes to consolidated financial statements.
-42-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AS RESTATED)
COMMON STOCK
------------
NUMBER OF ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
------- ------ --------------- -------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at
December 30, 2001, 7,064,328 $71 $10 $86,363 $86,444
as previously reported
Correction of error in
recording prior years
income of a
consolidated subsidiary 569 569
--------- --- --- ------- -------
Balance at
December 30, 2001,
as restated 7,064,328 71 10 86,932 87,013
Net income 4,781 4,781
Distributions to
shareholders (3,125) (3,125)
--------- --- --- ------- -------
Balance at
December 29, 2002 7,064,328 71 10 88,588 88,669
Net loss (17,230) (17,230)
Distributions to shareholders (1,782) (1,782)
--------- --- --- ------- -------
Balance at
December 28, 2003 7,064,328 71 10 69,576 69,657
Net loss (4,323) (4,323)
--------- --- --- ------- -------
Balance at
January 2, 2005 7,064,328 $71 $10 $65,253 $65,334
========= === === ======= =======
See notes to consolidated financial statements.
-43-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
----------------------------------------------------------
JANUARY 2, DECEMBER 28, DECEMBER 29,
2005 2003 2002
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net (loss) income $(4,323) $(17,230) $4,781
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 16,400 19,712 20,683
Amortization of deferred financing cost 962 1,148 1,074
Amortization of bond discount 379 379 379
Allowance for doubtful accounts
receivable 222 435 350
Increase in deferred rent, net 273 242 212
Asset impairment, restaurant closings and
loss on sale of other concept restaurant 2,202 6,073 9,196
Minority interest - 41 52
Equity in net income of unconsolidated
affiliates (855) (425) (668)
Other 155 44 (76)
Changes in operating assets and liabilities:
Decrease (increase) in receivables (877) 191 1,308
Decrease (increase) in inventories (102) 578 252
Increase in prepaid expenses (33) (253) (1,121)
Decrease (increase) in other assets 458 (366) (429)
Increase (decrease) in accounts payable
and accrued expenses 955 465 (3,540)
------ ------- ---------
Net cash provided by operating activities 15,816 11,034 32,453
------ ------- ---------
(continued)
-44-
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE FISCAL YEARS ENDED
JANUARY 2, DECEMBER 28, DECEMBER 29,
---------- ------------ ------------
2005 2003 2002
---- ---- ----
(IN THOUSANDS)
INVESTING ACTIVITIES:
Purchases of property and equipment (8,906) (8,521) (10,988)
------- ------- --------
Net cash used in investing activities (8,906) (8,521) (10,988)
------- ------- --------
FINANCING ACTIVITIES:
Mortgage principal repayments (167) (154) (142)
Tax distributions (682) (1,100) (3,125)
Reduction in loans receivable from officers 509 - -
------- ------- --------
Net cash used in financing activities (340) (1,254) (3,267)
------- ------- --------
Increase in cash and cash equivalents 6,570 1,259 18,198
Cash and cash equivalents at
beginning of year 56,430 55,171 36,973
------- ------- --------
Cash and cash equivalents at end of year $63,000 $56,430 $55,171
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $417 $388 $796
==== ==== ====
Interest $29,352 $29,400 $29,498
======= ======= =======
See notes to consolidated financial statements.
-45-
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.
ESTIMATES:
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:
Cash equivalents represent funds invested overnight and highly liquid
money market accounts with a maturity of three months or less at the
time of purchase. Cash equivalents at the end of 2004 and 2003 were $51
million and $34 million, respectively. The Company has restricted cash
of $21,000 which is included in cash in 2004 and 2003.
INVENTORIES:
Inventories, consisting primarily of food, beverages and paper
supplies, are stated at lower of cost or market, which is determined by
the first-in, first-out method.
PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives for
furniture, fixtures and equipment - three to ten years and leasehold
improvements - the lesser of the useful lives of the assets or lease
terms. Rent incurred during the construction period is capitalized.
INTANGIBLE ASSETS:
Intangible assets consist of our trademarks, goodwill and deferred
financing costs. Trademark values, as well as goodwill, were determined
based on a fair value allocation of the purchase price from our going
private transaction (see Note 2).
-46-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred financing costs were incurred as a result of the going private
transaction (see Notes 2 and 6) and the mortgage on the corporate
headquarters building (see Note 9.) The costs 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 6 years.
TRADEMARKS AND GOODWILL:
There were no changes in the carrying amount of the trademarks or
goodwill for the years ended January 2, 2005 and December 28, 2003. We
test for impairment annually or earlier if impairment indicators exist.
We follow 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, including goodwill, with its carrying
amount. The second step (if necessary) measures the amount of the
impairment. 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 our trademarks based on the discounted cash
flows method and market approach method. The fair value of the
trademarks exceeded the carrying value.
LONG-LIVED ASSETS:
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.
EXIT OR DISPOSAL ACTIVITIES:
The liability for costs associated with an exit or disposal activity is
recognized when a liability is incurred in accordance with FAS 146
"Accounting for Costs Associated with Exit or Disposal Activities" and
is measured at fair value.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES:
At the inception of a guarantee for the indebtedness of others, a
liability for the fair value of the obligation undertaken is recorded
for all these guarantees entered into or modified after January 1,
2003. As described in Note 10, there are certain arrangements that were
entered into during 2003 and 2004 with respect to guarantees for
franchised locations and restaurants sold to related parties. The fair
value of these guarantees of $120,000 has been recorded. While the
nature of our business will likely result in the issuance of certain
guarantees in the future, we do not anticipate that they will have a
material impact on our financial position or operating results.
-47-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VARIABLE INTEREST ENTITIES:
Financial Accounting Standards Board ("FASB") Interpretation ("FIN")
No. 46, "Consolidation of Variable Interest Entities," was effective
immediately upon its issuance during fiscal 2003 for all enterprises
with interests in variable interest entities created after January 31,
2003. In December 2003, FASB issued FIN No. 46 (R) which changed the
effective dates for the recording of interests in variable interest
entities created before February 1, 2003 beginning with the first
interim reporting period ending after March 15, 2004. If an entity is
determined to be a variable interest entity, it must be consolidated by
the enterprise that absorbs the majority of the entity's expected
losses if they occur, or receives a majority of the entity's expected
residual returns if they occur, or both. Where it is reasonably
possible that the enterprise will consolidate or disclose information
about a variable interest entity, the enterprise must disclose the
nature, purpose, size and activity of the variable interest entity and
the enterprise's maximum exposure to loss as a result of its
involvement with the variable interest entity in all financial
statements issued after January 31, 2003. The FASB has specifically
exempted traditional franchise arrangements from the evaluations
required under FIN No. 46. We have reviewed our joint ventures, equity
investments and corporate relationships for possible coverage under FIN
No. 46. The application of FIN No. 46 did not have a material effect on
our disclosures and our financial position or operating results. We
have several variable interest entities, for which we provide
disclosures. However, we are not the primary beneficiary and therefore
do not need to consolidate these entities.
ACCOUNTING FOR VENDOR REBATES:
We 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. The rebates are
recognized as earned based on our usage, which approximates purchases,
of the related products. We also receive consideration from
manufacturers for the usage, which approximates purchases, of the same
raw materials by our franchisees. Those rebate amounts are included in
"real estate and other" in our statements of operations.
EQUITY INVESTMENTS:
We account for our investments in 50% or less owned joint ventures and
for 50% owned joint ventures for which we do not have operating control
and are not the primary beneficiary, under the equity method of
accounting. The equity in the net income (loss) of these unconsolidated
affiliates are included in "equity in net income of unconsolidated
affiliates" in our statements of operations and the related assets are
included in "other assets" in the accompanying balance sheets.
-48-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable.
The Company maintains its cash in commercial banks insured by the FDIC.
At times, such cash in banks exceeds the FDIC insurance limit.
Concentration of credit risk with respect to accounts receivable is
generally limited to franchise fees and royalties. Prior to the Company
entering into an agreement with a new franchise, an evaluation of the
financial position and credit worthiness is completed. The Company has
established an allowance for doubtful accounts based upon factors
surrounding the credit risk of certain franchises and other
information.
FRANCHISE RELATED INCOME AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
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 $0.2 million, $0.4 million, and
$0.3 million in 2004, 2003 and 2002, respectively.
LEASES:
Certain of the Company's operating leases contain predetermined fixed
escalations of the minimum rentals during the original term of the
lease. For these leases, the Company recognizes the related rental
expense on a straight-line basis over the life of the lease and records
the difference between the amounts charged to operations and amounts
paid as deferred rent. Any lease incentives received by the Company are
deferred over the same period as the lease and amortized over a
straight-line basis over the life of the lease as a reduction of rent
expense. We calculate deferred rent based on the lease term from when
we obtain access or control over the leased property. Rent expense
accrued during the construction period is capitalized as part of the
cost of leasehold improvements. Due to recent interpretive guidance
related to lease accounting, the Company reviewed their accounting
policies for leases. As of January 2, 2005, we classified $1.3 million
in net leasehold improvements to account for the capitalized rent
during the build-out period which had been previously classified as
deferred rent.
-49-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES:
We are 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. Therefore, we do not 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. Deferred taxes are not material.
ACCOUNTING PERIOD:
Our fiscal year ends on the Sunday nearest to December 31. Our 2004
fiscal year ended January 2, 2005 and contained 53 weeks. All other
reported fiscal years contained 52 weeks.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash, receivables and accounts payable
approximate fair value because of the short-term nature of these items.
Based on the current quoted market price, the estimated fair value of
our senior notes at January 2, 2005 approximated the face value of $255
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 a similar nature
and maturity.
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 salary). 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 $90,000, $105,000, and $36,000 in 2004, 2003 and 2002,
respectively. The contribution was lower in 2002 as our matching
contribution was suspended for the first half of the year.
NEW ACCOUNTING PRONOUNCEMENTS:
SFAS 153:
In December 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 153, "Exchanges of Non Monetary Assets", which
addresses the measurement of exchanges of nonmonetary assets and
eliminates the exception from fair value measurement for nonmonetary
-50-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchanges of similar productive assets and replaces it with an
exception for exchanges that do not have commercial substance. SFAS No.
153 is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005, with earlier application
permitted. We do not anticipate that SFAS No. 153 will have a material
impact on our financial position or results of operations.
SFAS 123R:
In December 2004, the FASB issued a revision of SFAS No. 123, SFAS No.
123R "Statement of Financial Accounting Standards No. 123 (revised
2004)", which requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements. This
Statement establishes fair value as the measurement objective in
accounting for share-based payment arrangements and requires all
entities to apply a fair-value-based measurement method in accounting
for share-based payment transactions with employees except for equity
instruments held by employee share ownership plans. This Statement is
effective as of the beginning of the first annual reporting period that
begins after June 15, 2005. We do not anticipate that SFAS No. 123R
will have a material impact on our financial position or results of
operations.
RECLASSIFICATIONS:
Certain items in the financial statements presented have been
reclassified to conform to the 2004 presentation.
RESTATEMENT:
In 2004, the Company noted an error in the minority interest account
and accrued expenses and recorded $569,000 to correct this error, which
related to the recording of income and minority interest of a
consolidated subsidiary in years prior to December 31, 2001. The
correction was adjusted to opening retained earnings. The error
resulted from the misinterpretation of certain partnership agreements
concerning the sharing of the losses of two of the locations within
this consolidated subsidiary.
2. 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 "going
private" merger. (Note 9)
During the second quarter of 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 January 2, 2005, there
was $21,000 being held by us for such untendered shares included in
cash and cash equivalents.
-51-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2000, we finalized an allocation of the purchase price from the
going private transaction based on an evaluation of Sbarro at September
29, 1999 which increased property and equipment and intangible assets
by $7 million and $216 million, respectively. In accordance with SFAS
No. 142, we have not, since 2001, amortized any of the intangible
assets with indefinite lives.
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.
We operate all of these restaurants as one segment.
The following sets forth the number of Sbarro restaurants in operation
as of:
JANUARY 2, DECEMBER 28, DECEMBER 29,
2005 2003 2002
---- ---- ----
Sbarro owned 511 533 563
Franchised 416 364 349
Other concepts 22 27 27
--- --- ---
All restaurants 949 924 939
=== === ===
4. OTHER INCOME:
BANKRUPTCY SETTLEMENT:
In 2003 we replaced our then national independent wholesale distributor
which had declared bankruptcy. The trustee in bankruptcy alleged that
we were indebted to that distributor in the amount of approximately
$2.1 million which had been fully reserved. In December 2004, we
entered into a settlement agreement with the bankruptcy trustee to
settle the alleged amount due for $0.9 million. The difference between
the alleged amount due and the settlement agreement of approximately
$1.2 million has been reported in other income.
-52-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Due to the
continuing effect of the events of September 11 compounded by the
effect of the economic slowdown in the United States, airport locations
and a number of downtown locations continued to experience a period of
reduced sales through 2003.
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 were 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 2002.
5. PROPERTY AND EQUIPMENT, NET:
JANUARY 2, DECEMBER 28,
2005 (A) 2003 (B)
---- ----
(IN THOUSANDS)
Land $3,781 $3,781
Leasehold improvements 146,362 141,538
Furniture, fixtures and equipment 64,096 65,594
------ ------
214,239 210,913
Less accumulated depreciation and
amortization (c) 125,774 114,309
------- -------
$88,465 $96,604
======= =======
(a) During 2004, we recorded a charge of $1.1 million, relating to
impairment losses on property and equipment. In addition, we
recorded a provision for restaurant closings and remodels of
approximately $0.8 million.
(b) During 2003, we recorded a charge of $4.1 million, of which
$0.4 million was for our other concepts, relating to
impairment losses on property and equipment. In addition, we
recorded a provision for restaurant closings and remodels of
approximately $2.0 million.
(c) Depreciation and amortization of property and equipment was
$16.4 million, $19.7 million and $20.7 million in 2004, 2003
and 2002, respectively.
-53-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEFERRED FINANCING COSTS (IN THOUSANDS):
JANUARY 2, DECEMBER 28,
2005 2003
---- ----
Deferred financing costs $ 9,573 $ 9,573
Less accumulated amortization (5,052) (4,091)
-------- -------
$ 4,521 $ 5,482
======== =======
Amortization expense of the deferred financing costs was (included in
interest expense) $962, $1,148, and $1,074 for 2004, 2003 and 2002
respectively.
Amortization of deferred financing costs for the next five years will
be as follows:
2005 $ 962
2006 962
2007 962
2008 962
2009 673
--------
$ 4,521
7. ACCRUED EXPENSES (IN THOUSANDS):
JANUARY 2, DECEMBER 28,
2005 2003
---- ----
Compensation $4,886 $5,112
Payroll, sales and other taxes 3,730 4,176
Rent and related cost 2,971 1,725
Litigation and legal costs 2,552 1,806
Rebates and other advances 2,270 2,731
Other 4,339 2,677
------- -------
$20,748 $18,227
======= =======
-54-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES:
In connection with the going private transaction and the related
financing, we 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 determined under a formula
designed 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 no distribution to our shareholders in accordance with the tax
payment agreement with respect to our 2004 and 2003 results of
operations. However, we made distributions to our shareholders, in
accordance with the tax payment agreement, of $1.8 million with respect
to our 2002 results of operations and $3.1 million with respect to 2001
results of operations.
The provision for income taxes is comprised of taxes payable directly
by us to jurisdictions that do not recognize S corporation status or
that tax entities based on factors other than income and for taxes
withheld at the source of payment on foreign franchise income related
payments is as follows:
JANUARY 2, DECEMBER 28, DECEMBER 29,
2005 2003 2002
---- ---- ----
(IN THOUSANDS)
Current state and local: $(133) $500 $17
Foreign: 667 344 317
---- ---- ----
$534 $844 $334
==== ==== ====
9. LONG-TERM DEBT:
INDENTURE:
The going private transaction (Note 2) was partially funded by the
placement of $255 million of 11% senior notes due September 15, 2009.
Interest on the senior notes is payable semi-annually on March 15 and
September 15 of each year. 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 equally in right of
payment to all of our and their respective present and future senior
debt, including amounts outstanding under the bank line of credit
agreement discussed below. The indenture permits redemption of the
senior notes at our
-55-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 January 2, 2005; however, we
are not presently permitted under the indenture to pay dividends, make
stock repurchases or, with certain exceptions, incur indebtedness.
We are in compliance with all covenants in the indenture for the senior
notes and our mortgage as of January 2, 2005.
The senior notes were issued, at an aggregate discount of approximately
$3.8 million, which 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 $0.4 million in each of 2004,
2003, and 2002.
LINE OF CREDIT:
In March 2004, we entered into a line of credit arrangement that
enables us to borrow, subject to bank approval, $3 million through May
2005, subject to reduction for standby letters of credit issued by the
bank ($1.8 million at January 2, 2005). Interest applicable to loans
under the line of credit is to be at the bank's prime rate at the time
of any borrowings. There are no unused line fees to be paid or
covenants to be met under the line of credit. Each of our current
guaranteeing subsidiaries (the same entities as the Restricted
Subsidiaries under the Indenture) have agreed to unconditionally and
irrevocably guarantee our obligations under the new line of credit on a
joint and several basis. No amounts have been borrowed under this
agreement. The Company is in discussion with several banks to extend or
replace the credit line.
During 2003, we terminated a previous bank credit agreement which
provided us with an unsecured senior revolving credit facility that
enabled us to borrow, on a revolving basis until September 2004, up to
$30 million, including a $10 million sub limit for standby letters of
credit. No amounts had been borrowed under the credit agreement. The
outstanding letters of credit under this facility were transferred to
our new line of credit facility.
MORTGAGE:
In March 2000, one of our Restricted Subsidiaries obtained a $16
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 January 2, 2005 was $15.3 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 January 2,
2005.
-56-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MATURITIES OF LONG-TERM DEBT:
Scheduled maturities of long-term debt are as follows (in thousands):
2005 $182
2006 197
2007 215
2008 235
2009 255,255
Thereafter 14,240
------
270,324
-------
Current maturities (182)
Unaccreted original issue discount (1,793)
--------
$268,349
========
10. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENT:
On September 8, 2003, we entered into an employment agreement with
Michael O'Donnell, our then President and Chief Executive Officer, for
a term ending on December 31, 2006, subject to earlier termination by
us or Mr. O'Donnell following specified notice. Mr. O'Donnell resigned
his employment effective March 2005. The agreement provided, among
other things, for an annual salary of $450,000 and an annual
performance bonus beginning in 2004 to be based upon the achievement of
increases in EBITDA, as defined, and other objectives to be set forth
in business plans and budgets approved from time to time by our Board
of Directors. The Company paid Mr. O'Donnell a bonus for the year ended
January 2, 2005 of approximately $142,000. No further payments are due
under this agreement as a result of Mr. O'Donnell's resignation.
SPECIAL EVENT BONUS:
We entered into special event bonus agreements on December 10, 2004
with Carmela Merendino, our Vice President-Administration, and Anthony
Missano, President of our Business Development Division, which provide
for them to receive a bonus in the event of a public offering of our
common stock, a change in control of Sbarro, including by merger, sale
of stock or sale of assets, or a liquidation or dissolution of Sbarro.
The special event bonus will be based on the per share proceeds (as
defined in the agreements) received by our shareholders if a special
event occurs in excess of a certain threshold amount. A similar
agreement was entered into with a member of the law firm we retain as
general counsel. This agreement is in addition to the payment of
services at fair value.
-57-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As part of their "at will" employment letter agreements entered into by
us with Peter Beaudrault, our new President and Chief Executive
Officer, and Anthony J. Puglisi, our Vice President and Chief Financial
Officer they received similar special bonus arrangements.
When the special events referenced in the agreements become probable a
fair value model will be used to determine the value of such award.
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.
Rental expense under operating leases was as follows:
2004 2003 2002
---- ---- ----
(IN THOUSANDS)
Minimum rentals $52,100 $51,089 $51,975
Common area charges 14,748 14,702 15,246
Contingent rentals 4,321 4,112 3,760
------- ------- -------
$71,169 $69,903 $70,981
======= ======= =======
Future minimum rental and other payments required under non-cancelable
operating leases for our Sbarro restaurants and our other concept
locations are as follows (in thousands):
FISCAL YEARS ENDING:
--------------------
2005 $71,557
2006 69,021
2007 65,234
2008 59,474
2009 52,014
Thereafter 137,267
-------
$454,567
========
We are the principal lessee under certain operating leases for four
other concept locations that have been sold and sublet to unaffiliated
third parties for which we are contingently responsible. Future minimum
rental payments required under these non-cancelable operating leases as
of January 2, 2005 are as follows (in thousands):
-58-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDING:
--------------------
2005 $321
2006 329
2007 330
2008 277
2009 279
Thereafter 2,796
-----
$4,332
======
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 January 2, 2005 are as
follows (in thousands):
FISCAL YEARS ENDING:
--------------------
2005 $1,785
2006 1,730
2007 1,300
2008 805
2009
661
Thereafter 1,128
-----
$7,409
======
We are the principal lessee under operating leases for three franchised
restaurants that were sold and franchised to related parties (see Note
11) and are subleased by us to the franchisees. The franchisees pay
rent and related expenses directly to the landlord. In 2005, we
repurchased one restaurant. Future minimum rental payments required
under these non-cancelable operating leases are as follows (in
thousands):
FISCAL YEARS ENDING:
--------------------
2005 $288
2006 181
2007 156
2008 157
2009 158
Thereafter 486
---
$1,426
======
Future minimum rental payments required under non-cancelable operating
leases for restaurants that had not as yet opened as of January 2, 2005
are as follows (in thousands):
-59-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDING:
--------------------
2005 $17
2006 97
2007 248
2008 280
2009 310
Thereafter 2,613
-----
$3,565
======
In accordance with FIN No. 45, we have recorded a liability of
approximately $120,000 in 2004 and $38,000 in 2003 which represents the
fair value of the guarantees related to our guarantee of certain
leases.
CONSTRUCTION CONTRACTS AND OTHER:
As of January 2, 2005, we are a party to a contract of approximately
$390,000 with respect to the new construction of a restaurant. Payments
of approximately $215,000 were made on that contract in 2004.
Our joint venture entered into construction contracts aggregating
approximately $4,326,000 for three restaurants of which two opened in
early 2005. Through March 1, 2005, payments of approximately $2,816,000
have been made against these contracts. The construction of the
restaurants is guaranteed by the Company under the terms of the leases
for the locations. In addition, we also guarantee the rent through the
first year of operations of one restaurant location and the rent until
another restaurant opens.
PRODUCT PURCHASE DISTRIBUTION ARRANGEMENT:
We have a contractual arrangement with a national independent wholesale
distributor that commenced in February 2003 and that requires us, until
January 2008, subject to early termination for certain specified causes
to purchase 95% of most of our food ingredients and related restaurant
supplies from it. The agreement does not, however, require us to
purchase any specific fixed quantities. Among the factors that will
affect 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; and
o Mix of products sold by Sbarro locations.
-60-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LETTERS OF CREDIT:
As of January 2, 2005, there are $1.8 million of bank letters of credit
issued under our line of credit to support potential obligations. The
letters of credit 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 locations.
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 joint venture
partner, for a loan owed by one of the other concepts. Our liabilities
under the line of credit, mortgage loan and $0.1 million of letters of
credit to the second concept are limited to our minority ownership
percentage. The remaining letter of credit for the second concept of
$0.6 million is jointly and severally guaranteed by each of the
partners in the 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 record a liability if events occurred that
make payment under the guarantees probable. Under FIN No. 45, we are
required to record a liability for the fair value of any obligation
undertaken or modified after December 31, 2002. No such obligation was
undertaken or modified in 2004 or 2003.
The details of our guarantees as of January 2, 2005 and their terms are
as follows:
TYPE OF GUARANTEED OBLIGATION AMOUNT (1) TERM
----------------------------- ---------- ----
Line of Credit $5.0 million December 2010
Loan 1.4 million November 2007
Letters of credit 0.7 million December 2010
Mortgage Loan 0.3 million August 2019
(1) Represents our current maximum exposure under existing borrowings and
letters of credit. Our exposure under the line of credit could increase
to $6.3 million if the full amount of the line of credit is utilized.
In 2003, the loan expiration date for all new term loans was extended
from December 31, 2008 to December 31, 2010.
-61-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LITIGATION:
There is approximately $3.2 million included in the Company's financial
statements as a reserve for contingent liabilities related to
litigation.
In December 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. The court issued a ruling in
December 2003 which was unfavorable to us but did not set the amount of
damages. We are appealing the ruling due to errors that we believe were
made by the trial judge.
In September 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 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 immaterial amounts. The remaining
parties to this case have agreed that it will be settled upon the same
terms and conditions that the court orders in connection with its
decision in the case discussed in the preceding paragraph.
In March 2002, four 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 alleged that the
plaintiffs were required to perform labor services without proper
premium overtime compensation from at least May 1999. The plaintiffs
sought actual damages, punitive damages and attorneys' fees and costs,
each in unspecified amounts. The case was settled March 22, 2005 for
$48,000, with our insurance company paying $30,000 and us paying
$18,000.
In August 2002, a subcontractor and the general contractor, pursuant to
a construction contract entered into to build the joint venture
location that was closed during 2002 and also the subject of the
lawsuit discussed below, filed a complaint against the limited
liability joint venture company alleging that they were owed for unpaid
billings. We were a defendant in the suit by reason of the fact that we
guaranteed the bonds under which mechanics liens against the plaintiffs
were bonded. In late 2004, we settled the lawsuit for $500,000. The
settlement amount had been paid and included in our financial
statements.
In May 2002, the landlord of the joint venture described above filed a
complaint against Sbarro in the Supreme Court of the New York for
Westchester County alleging that we were obligated to it,
-62-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pursuant to a Guaranty Agreement we executed, for all rent during the
remaining lease based on an alleged breach of the lease by the tenant,
a subsidiary of the Company. We believed that our guarantee was limited
in amount while the landlord alleged that the guarantee covered all
amounts that would become due during the remaining lease term. The
court issued a ruling in November 2003 which limited our liability,
which we estimated at $500,000 and we have included this amount in our
financial statements in 2003. The landlord appealed this decision.
Given the uncertainty of the results of an appeal and liability we
would have by reason of a reversal, we agreed to settle the matter for
$800,000 and have increased the estimated reserve in 2004. Settlement
agreements are currently being drafted.
In November 2004, a contractor, pursuant to a construction contract
entered into to build a QSR location, instituted an action for unpaid
amounts under the construction contract. We have disputed certain
change orders under the contract and seek to invoke the penalty clause
under the contract. The action is pending in the Broward County Circuit
Court, State of Florida. We believe that our ultimate liability will
not exceed $50,000. Provisions have been made in the 2004 financial
statements for this amount.
In May 2004, a suit was filed by the landlord of one of our QSR
locations as a result of our premature termination of the lease on that
location by one of our subsidiaries The landlord has obtained a consent
judgment against the subsidiary for approximately $75,000. The landlord
now seeks to enforce the judgment against the subsidiary. While we do
not believe the judgment can be enforced against us, we believe that
its ultimate liability will not exceed $75,000. Provisions have been
made in the 2004 financial statements for this amount.
In March 2005, we settled a case relating to payments due to a
contractor for construction done on one of our other concept
restaurants. The matter was settled for $90,000 and has been recorded
in the 2004 financial statements.
In addition to the above complaints, from time to time, we are a party
to claims and legal proceedings in the ordinary course of business. In
our opinion, the results of such 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 were the sole tenant of an administrative office building which we
leased from a partnership owned by Sbarro Enterprises, L.P., the
limited partners of which are Mario Sbarro, our Chairman and a
director, Joseph Sbarro, our Senior Vice President, Secretary and a
director, Anthony Sbarro, our Vice Chairman, Treasurer and a director,
and Carmela Sbarro, Vice President and a director. The annual rent paid
was $100,000, $300,000 and $300,000 for 2004, 2003 and 2002,
respectively. We were advised by a real estate broker that the rent to
be paid by us was comparable to the rent that would have been charged
by an unaffiliated third party. The lease was terminated upon the sale
of the building by the partnership in April 2004.
-63-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On April 5, 2001, we loaned $3.2 million to certain of our
shareholders, including: Mario Sbarro, $1.1 million, Joseph Sbarro,
$1.2 million and Anthony Sbarro, $0.9 million. The due dates of the
related notes have been extended to April 6, 2007. The notes bear
interest at the rate of 4.63% per annum, payable annually. As of
January 2, 2005, the balance of these loans was $2.9 million.
On December 28, 2001, we loaned $2.8 million to our shareholders,
including: Mario Sbarro, $0.6 million, Joseph Sbarro, $0.7 million,
Anthony Sbarro, $0.5 million, and the Trust of Carmela Sbarro, $1.0
million. The due dates of the related notes have been extended to
December 28, 2007. The notes bear interest at the rate of 2.48% per
annum payable annually. As of January 2, 2005, the balance of these
loans was $2.6 million.
In March 2004, we loaned $40,000 to Gennaro A. Sbarro, then our
Corporate Vice President and President of our Franchising and Licensing
Division. The note was repaid in February 2005 including interest at
2.69% per annum. In connection with his resignation in 2004 we entered
into a severance agreement providing for a lump sum payment of
approximately $453,000.
In June 2003, Anna Missano, the daughter of Joseph Sbarro, issued to us
a note for approximately $90,000 for royalties due us for 2001 and
2000. The note is repayable at approximately $10,000 per year,
including interest at 2.96% per annum, with a balloon payment due on
June 30, 2010. The principal balance of the notes at January 2, 2005
was approximately $79,000.
The interest rates charged on the foregoing related party loans
included above approximate the Applicable Federal Rate (AFR) published
by the Internal Revenue Service at the time of the loan. We recorded
interest income from related parties was approximately $211,000,
$223,000 and $221,000 in 2004, 2003 and 2002, respectively.
Bernard Zimmerman & Company, Inc., of which Bernard Zimmerman, a
director of Sbarro, is President and a majority shareholder, renders
financial and consulting assistance to us, for which it received fees
of approximately $26,000 for services rendered during 2004 and $0.3
million in both 2003 and 2002.
Harold Kestenbaum, a member of our Board of Directors, assisted one of
our other concepts in the preparation of its initial Uniform Franchise
Offering Circular in 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, $480,000, $340,000 and $422,000
in 2004, 2003 and 2002, 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 2004, 2003 and 2002 were approximately $89,000, $90,000
and $92,000, respectively.
-64-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of July 2002, we sold the assets of a restaurant to a corporation
owned by the brother-in-law of our Chairman of the Board for $88,900.
The sales price resulted in a loss of approximately $64,000 that was
included in the provision for restaurant closings. That corporation
also entered into a franchise agreement with us. We received promissory
notes for each of the purchase price and initial franchise fee that
were payable over seven years and bore interest on the unpaid principal
balances at 7% per annum. In addition in 2002, we subleased this
location to that franchisee. Payments under the sublease were being
made directly to the landlord by the franchisee. Interest payments
received relating to the promissory notes was approximately $4,000 in
2003. No interest payments were received in 2004. Royalties paid under
this arrangement were approximately $1,800 in 2004, $3,300 in 2003 and
$6,800 in 2002.
In March 2005, we re-purchased the assets of the restaurant from the
corporation for $88,900. The remaining unpaid principal balance of the
promissory notes were offset against the purchase price of the assets.
The remaining balance under the promissory notes of approximately
$22,000, and accrued but unpaid royalties of approximately $31,000 had
been fully reserved in 2004.
In 2002, a company in which Gennaro J. Sbarro, then our Corporate Vice
President and President of our Casual and Fine Dining Division and the
son of Joseph Sbarro, has a 50% interest (the other 50% is owned by an
unaffiliated third party) entered into a sublease for $50,000 greater
than rent or other charges due under the lease. Rent and other charges
due under the lease are paid directly to the landlord. Payment under
the sublease are due to us. Rent of approximately $23,000 was included
in the 2004 results of operations. To reimburse Sbarro for equipment
costs, the Company owned by Mr. Sbarro, issued a non-interest bearing
note in our favor for approximately $55,000, that is repayable in
eighteen equal monthly installments of approximately $3,000 which
commenced in November 2002. The principal balance on the note as of
January 2, 2005 was approximately $16,000. As of October 31, 2003, Mr.
Sbarro resigned from his positions with us and a corporation owned by
Mr. Sbarro entered into an eighteen month agreement with us to provide
consulting services to our quick service and casual dining division for
approximately $23,000 per month and the reimbursement for customary and
usual expenses that may be incurred by that corporation in the
performance of its services.
In October 2003, we sold the assets of three underperforming
Sbarro-owned restaurants that we proposed to close to entities owned
separately by each of three other of Anthony Sbarro's sons, each of
which entered into a franchise agreement with us. Two of the locations,
which had no remaining book value, were transferred for no
consideration while the third was sold for $0.3 million that was paid
in full, and resulted in a gain to Sbarro of approximately $0.1
million. In connection with the sale of the locations, the employment
of these individuals with Sbarro was terminated and we included a
charge for their total severance pay of approximately $60,000 in our
results of operations for 2003. The franchise agreements provide for
the payment of 5% of the location's sales as a continuing franchise fee
but did not provide for any initial franchise fee. We have waived
continuing franchise fees through 2006. In addition, we subleased two
of the
-65-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
locations to two of the franchisees. Payments under the subleases are
being made directly to the landlord by the franchisees and they are not
in default.
In January 2004, one of Mario Sbarro's daughters, resigned from her
position as Manager of Administration - Construction. A corporation
owned by her entered into a one year agreement to provide consulting
services related to construction matters to us for a series of monthly
payments totaling $100,000. In addition, that corporation provided
consulting services related to construction matters for our steakhouse
joint venture of $18,900 in 2004.
In February 2005, a joint venture in which we have a 70% interest, sold
the assets of one of our other joint venture restaurants, to a company
owned by Gennaro A. Sbarro our then Corporate Vice President and
President of our Franchising and Licensing Division and the son of
Mario Sbarro for approximately $900,000 (which approximated fair value)
resulting in a loss of approximately $284,000. The Company received
$300,000 in cash and promissory notes of $600,000. The promissory notes
are payable monthly in 72 equal monthly installments in the amount of
$8,333 including interest at 5% per annum with a balloon payment of
$111,375 at maturity. The joint venture also sold the inventory of the
restaurant for approximately $67,000 with $50,000 paid at closing and
the remainder of $17,000 payable in four equal monthly installments
from March 2005 to June 2005. The company owned by Mr. Sbarro entered
into a sublease, which we guarantee and a Security Agreement to secure
the obligations under the promissory notes. The sublease and Security
Agreement are intended to enable Sbarro to recapture the business in
the event of an uncured default.
Compensation of related parties includes salary, taxable benefits and
accrued bonus. Salaries for 2004 include one additional week of salary
due to our 53 week year in 2004. Compensation is as follows:
o Mario Sbarro was our Chairman of the Board in 2004 and Chairman
of the Board, President and Chief Executive Officer in 2003 and
2002. His compensation was approximately $884,000 in 2004,
$700,000 in 2003 and $920,000 in 2002.
o Anthony Sbarro was our Vice Chairman of the Board and Treasurer
in 2004, 2003 and 2002. His compensation was approximately
$582,000 in 2004, $400,000 in 2003 and $545,000 in 2002.
o Joseph Sbarro was our Senior Executive Vice President and
Secretary in 2004, 2003 and 2002. His compensation was
approximately $585,000 in 2004, $400,000 in 2003 and $575,000 in
2002.
-66-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition to the compensation of Mario, Anthony, and Joseph Sbarro:
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 in
2004, 2003 and 2002.
o Other members of the immediate families of Mario, Anthony, Joseph
and Carmela Sbarro who are our employees were paid an aggregate
of approximately $860,000, $1,344,000 and $1,565,000 during 2004,
2003 and 2002, respectively.
The company has a 40% equity interest in Boulder Creek Steakhouse and
provided administrative services for $165,000, $172,000 and $148,000 in
2004, 2003 and 2002, respectively.
12. PROVISION FOR ASSET IMPAIRMENT, RESTAURANT CLOSINGS, AND LOSS ON SALE
OF OTHER CONCEPT RESTAURANT (IN THOUSANDS):
The provision for asset impairment, restaurant closings/remodels, and
loss on sale of other concept restaurant consists of the following:
2004 2003 2002
---- ---- ----
Impairment of assets $1,103 $4,100 $400
Restaurant closings/remodels 815 2,000 8,800
Loss on sale of other
concept restaurant 284 - -
------ ------ ------
$2,202 $6,100 $9,200
====== ====== ======
13. DIVIDENDS:
We declared distributions to our shareholders pursuant to the tax
payment agreement described in Note 8 as follows:
o $1.8 million with respect to our taxable income for 2002, of
which $1.1 million was paid in 2003 and $0.7 million was paid
in March 2004;
o $3.1 million with respect to our taxable income for 2001 was
paid in 2002.
-67-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS)
2004
Revenues $96,211 $72,717 $78,306 $101,660
Gross profit (a) 70,837 52,747 57,988 77,668
Net (loss) income (d) (6,161) (4,556) (1,029) 7,423
2003
Revenues (b) $93,115 $72,043 $75,778 $91,388
Gross profit (a) (b) 69,205 54,002 56,408 67,647
Net (loss) income (b) (c) (10,490) (5,212) (7,954) 6,426
(a) Gross profit represents the difference between restaurant
sales and the cost of food and paper products.
(b) Revenues and net income for the fourth quarter of 2003 include
approximately $0.7 million and $0.4 million of vendor rebates
that should have been recorded during 2002 and in the first
two quarters of 2003, respectively. During 2003, we received
new information regarding those rebates and, as a result, were
able to apply better judgment in their recording.
(c) We recorded a provision for asset impairment of $3.0 million
and $1.1 million in the third and fourth quarters of 2003,
respectively.
(d) In the fourth quarter of 2004, we recorded a provision for
asset impairment of $1.1 million, litigation expense of $1.2
million and reversed an accrual for a rebate receivable of
$0.3 million. In addition, we reduced our tax liability
reserve by approximately $0.4 million to reflect our current
estimated tax exposure and reported income of approximately
$1.2 million for a settlement agreement with the bankruptcy
trustee of our former distributor.
-68-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. EQUITY INVESTMENT IN BOULDER CREEK STEAKHOUSE:
The company has a 40% equity interest in Boulder Creek Steakhouse. The
combined condensed financial statements below include the accounts of
Boulder Creek Holding LLC ("Holding"), Boulder Creek Venture LLC
("Venture") and Boulder Creek Properties LLC ("Properties") and their
wholly owned subsidiaries (collectively "Boulder Creek"). Properties
holds the trademark used by Holding and Venture. All material
intercompany accounts and transactions have been eliminated in
combination.
The members of Holding, Venture and Properties are Scotto LLC
("Scotto") (40%), Sbarro Boulder LLC ("Sbarro Boulder") (40%) and Fee
Fee LLC ("Fee Fee") (20%) (the "member LLCs"). Sbarro Boulder is 100%
owned by Sbarro, Inc.
INCOME STATEMENT DATA (IN THOUSANDS):
2004 2003 2002
---- ---- ----
Net sales $49,697 $50,141 $39,889
Costs and expenses 47,149 46,960 37,344
Interest expense, net 477 531 611
Loss from discontinued
operations 47 901 157
------ ------ ------
Net income $2,024 $1,749 $1,777
====== ====== ======
BALANCE SHEET DATA (IN THOUSANDS):
2004 2003
---- ----
Total assets $30,031 $27,290
Total liabilities $21,628 $20,147
Members' equity $ 8,403 $7,143
-69-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS:
Certain subsidiaries have guaranteed amounts outstanding under our
senior notes and new line of credit. Each of the guaranteeing
subsidiaries is our direct or indirect wholly owned subsidiary and each
has fully and unconditionally guaranteed the senior notes on a joint
and several basis.
The following condensed consolidating financial information presents:
(1) Condensed consolidating balance sheets as of January 2, 2005
and December 28, 2003 and related statements of operations and
cash flows for the fiscal years ended January 2, 2005,
December 28, 2003 and December 29, 2002 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.
The principal elimination entries eliminate intercompany balances and
transactions. Investments in subsidiaries are accounted for by the
parent on the cost method.
-70-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
AS OF JANUARY 2, 2005
(IN THOUSANDS)
ASSETS
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current assets:
Cash and cash equivalents $57,150 $4,680 $1,170 $ - $63,000
Restricted cash for untendered shares
Receivables less allowance for
doubtful accounts of $431:
Franchise 1,846 - - - 1,846
Other 53 1,053 574 - 1,680
-------- -------- ------ --------- --------
1,899 1,053 574 - 3,526
Inventories 1,204 1,465 140 - 2,809
Prepaid expenses 4,020 (199) 56 - 3,877
Current portion of loans receivable
from officers 46 - - - 46
-------- -------- ------ --------- --------
Total current assets 64,319 6,999 1,940 - 73,258
Intercompany receivables 406 439,364 (1,875) (437,895) -
Investment in subsidiaries 67,570 1,944 - (69,514) -
Property and equipment, net 33,307 50,799 4,359 - 88,465
Intangible assets:
Trademarks, net 195,916 - - - 195,916
Goodwill 9,204 - - - 9,204
Deferred financing costs, net 4,326 195 - - 4,521
Loans receivable from officers less 5,602 - - - 5,602
current portion
Other assets 5,906 1,720 21 - 7,647
-------- -------- ------ --------- --------
$386,556 $501,021 $4,445 $(507,409) $384,613
======== ======== ====== ========== ========
-71-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
AS OF JANUARY 2, 2005
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current liabilities:
Accounts payable $10,877 $190 $526 $ - $11,593
Accrued expenses 16,802 2,474 1,472 - 20,748
Accrued interest payable 8,181 - - - 8,181
Current portion of mortgage payable - 182 - - 182
-------- -------- ------ --------- --------
Total current liabilities 35,860 2,846 1,998 - 40,704
-------- -------- ------ --------- --------
Intercompany payables 437,895 - - (437,895) -
-------- -------- ------ --------- --------
Deferred rent 9,811 - 415 - 10,226
-------- -------- ------ --------- --------
Long-term debt, net of
original issue discount 253,207 15,142 - - 268,349
-------- -------- ------ --------- --------
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 (65,479) 133,671 3,018 (71,200) 10
Retained earnings (deficit) (284,809) 349,362 (986) 1,686 65,253
-------- -------- ------ --------- --------
(350,217) 483,033 2,032 (69,514) 65,334
-------- -------- ------ --------- --------
$386,556 $501,021 $4,445 $(507,409) $384,613
======== ======== ====== ========== ========
-72-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 28, 2003
(IN THOUSANDS)
ASSETS
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current assets:
Cash and cash equivalents $49,536 $5,595 $1,299 $ - $56,430
Receivables net of allowance for
doubtful accounts of $488:
Franchise 1,700 - - - 1,700
Other (191) 966 396 - 1,171
-------- -------- ------ --------- --------
1,509 966 396 - 2,871
Inventories 1,177 1,387 143 - 2,707
Prepaid expenses 4,018 (227) 53 - 3,844
Current portion of loans receivable
from officers 2,810 - - - 2,810
-------- -------- ------ --------- --------
Total current assets 59,050 7,721 1,891 - 68,662
Intercompany receivables 6,697 317,237 - (323,934) -
Investment in subsidiaries 65,469 - - (65,469) -
Property and equipment, net 36,189 55,706 4,709 - 96,604
Intangible assets:
Trademarks, net 195,916 - - - 195,916
Goodwill 9,204 - - - 9,204
Deferred financing costs net 5,369 233 - (120) 5,482
Loans receivable from officers, less
current portion 3,347 - - - 3,347
Other assets 7,476 1,822 (653) (1,030) 7,615
-------- -------- ------ --------- --------
$388,717 $382,719 $5,947 $(390,553) $386,830
======== ======== ====== ========== ========
-73-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 28, 2003
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Current liabilities:
Accounts payable $11,859 $129 $419 $1,327 $13,734
Accrued expenses 14,974 1,447 1,806 - 18,227
Accrued interest payable 8,181 - - - 8,181
Current portion of mortgage payable - 168 - - 168
-------- -------- ------ --------- --------
Total current liabilities 35,014 1,744 2,225 1,327 40,310
-------- -------- ------ --------- --------
Intercompany payables 317,236 2,958 3,740 (323,934) -
-------- -------- ------ --------- --------
Deferred rent 8,009 - 702 - 8,711
-------- -------- ------ --------- --------
Long-term debt, net of
original issue discount 252,827 15,325 - - 268,152
-------- -------- ------ --------- --------
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) (224,450) 297,223 (3,197) - 69,576
-------- -------- ------ --------- --------
(224,369) 362,692 (720) (67,946) 69,657
-------- -------- ------ --------- --------
$388,717 $382,719 $5,947 $(390,553) $386,830
======== ======== ====== =========== ========
-74-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 2, 2005
(IN THOUSANDS)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $143,649 $172,361 $15,303 $ - $ 331,313
Franchise related income 12,093 - - - 12,093
Real estate and other 1,838 3,547 103 - 5,488
Intercompany charges 11,747 - - (11,747) -
------- ------- ------ --------- ----------
Total revenues 169,327 175,908 15,406 (11,747) 348,894
------- ------- ------ --------- ----------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 28,948 39,001 4,124 - 72,073
Payroll and other employee
benefits 38,641 47,212 5,004 - 90,857
Other operating costs 51,444 58,925 4,202 - 114,571
Depreciation and amortization 7,145 8,347 908 - 16,400
General and administrative 17,143 11,254 179 - 28,576
Asset impairment, restaurant
closings & loss on sale of 2,202 - - - 2,202
other concept restaurant
Intercompany charges - 11,747 - (11,747) -
------- ------- ------ --------- ----------
Total costs and expenses 145,523 176,486 14,417 (11,747) 324,679
======== ======== ====== ========== ==========
Operating income (loss) 23,804 (578) 989 - 24,215
------- ------- ------ --------- ----------
Other (expense) income:
Interest expense (29,361) (1,333) - - (30,694)
Interest income 654 - - - 654
Equity in net income of
unconsolidated affiliates 855 - - - 855
Other income 1,181 - - - 1,181
------- ------- ------ --------- ----------
Net other expense (26,671) (1,333) - - (28,004)
------- ------- ------ --------- ----------
(Loss) income before taxes (2,867) (1,911) 989 - (3,789)
Income taxes 500 - 34 - 534
------- ------- ------ --------- ----------
Net (loss) income $(3,367) $(1,911) $955 $ - $(4,323)
======== ======== ====== ========== ===========
-75-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003
(IN THOUSANDS)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $135,295 $164,535 $14,878 $ - $314,708
Franchise related income 10,868 - - - 10,868
Real estate and other 4,077 2,586 85 - 6,748
Intercompany charges 10,728 - - (10,728) -
--------- -------- ------- ---------- ---------
Total revenues 160,968 167,121 14,963 (10,728) 332,324
--------- -------- ------- ---------- ---------
Costs and expenses:
Restaurant operating expenses:
Cost of food and paper products 27,402 36,116 3,928 - 67,446
Payroll and other employee
benefits 36,474 48,155 4,985 - 89,614
Other operating costs 49,196 57,282 3,975 - 110,453
Depreciation and amortization 8,801 9,899 1,012 - 19,712
General and administrative 15,212 10,418 (179) - 25,451
Asset impairment, restaurant
closings and loss on sale
of other concept restaurant 5,647 - 426 - 6,073
Intercompany charges - 10,728 - (10,728) -
--------- -------- ------- ---------- ---------
Total costs and expenses 142,732 172,598 14,147 (10,728) 318,749
--------- -------- ------- ---------- ---------
Operating income (loss) 18,236 (5,477) 816 - 13,575
--------- -------- ------- ---------- ---------
Other (expense) income:
Interest expense (29,693) (1,346) - - (31,039)
Interest income 694 - - - 694
Equity in net income of
unconsolidated affiliates 425 - - - 425
--------- -------- ------- ---------- ---------
Net other (expense) (28,574) (1,346) - - (29,920)
--------- -------- ------- ---------- ---------
(Loss) income before minority interest
(credit) (10,338) (6,823) 816 - (16,345)
Minority interest - - (41) - (41)
--------- -------- ------- ---------- ---------
Loss before income taxes (credit) (10,338) (6,823) 775 - (16,386)
Income taxes (credit) 536 348 (40) - 844
--------- -------- ------- ---------- ---------
Net (loss) income $(10,874) $(7,171) $815 $ - $(17,230)
========= ======== ======= ========== =========
-76-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002
(IN THOUSANDS)
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 loss on
sale of other concept restaurant 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 (5,226) 30,122 2,872 - 27,768
--------- --------- --------- ------------ --------
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 minority interest
(credit) (26,468) 28,763 2,872 - 5,167
Minority interest - - (52) - (52)
--------- --------- --------- ------------ --------
(Loss) income before income tax
(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
========= ========= ========= ============= ========
-77-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED JANUARY 2, 2005
(IN THOUSANDS)
GUARANTOR NONGUARANTOR CONSOLIDATED
Operating activities: PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- --------------------- ------ ------------ ------------ ------------ -----
Net (loss) income $(3,367) $(1,911) $955 $ - $(4,323)
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 7,145 8,347 908 - 16,400
Amortization of deferred
financing costs 962 - - - 962
Amortization of bond discount 379 - - - 379
Allowance for doubtful accounts
receivable 222 - - - 222
Asset impairment, restaurant
closings and loss on sale of
other concept restaurant 2,202 - - - 2,202
Increase (decrease) in deferred
rent, net 502 - (229) - 273
Equity in net income of
unconsolidated affiliates (855) - - - (855)
Other 155 - - - 155
Changes in operating assets and
liabilities:
Increase in receivables (612) (87) (178) - (877)
Decrease (increase) in inventories (27) (78) 3 - (102)
Increase in prepaid expenses (2) (28) (3) - (33)
Decrease (increase) in other
assets 2,117 103 (732) (1,030) 458
Increase (decrease) in accounts
payable and accrued expenses (936) 1,088 (227) 1,030 955
------- ------- ----- ------- -------
Net cash provided by operating
activities 7,885 7,434 497 - 15,816
------- ------- ----- ------- -------
Investing activities:
Purchases of property and equipment (6,103) (2,144) (659) - (8,906)
------- ------- ----- ------- -------
Net cash used in investing activities (6,103) (2,144) (659) - (8,906)
------- ------- ----- ------- -------
-78-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE FISCAL YEAR ENDED JANUARY 2, 2005
(IN THOUSANDS)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Financing activities:
Mortgage principal repayments - (167) - - (167)
Tax distributions (682) - - - (682)
Reduction in loans receivable from
officers 509 - - - 509
- -
Intercompany balances 6,005 (6,039) 34 - -
------ ------ ---------- ---------- --------
Net cash (used in) provided by
financing activities 5,832 (6,206) 34 - (340)
------ ------ ---------- ---------- --------
Increase (decrease) in cash and cash
equivalents 7,614 (916) (128) - 6,570
Cash and cash equivalents at beginning
of year 49,536 5,596 1,298 - 56,430
------ ------ ---------- ---------- --------
Cash and cash equivalents at end of
year $57,150 $4,680 $1,170 - $63,000
======= ====== ====== ========= =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes $417 $ - $ - $ - $417
------ ------ ---------- ---------- --------
Cash paid during the period for
interest 28,058 $1,294 $ - $ - $29,352
====== ====== ========== ========== =======
-79-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003
(IN THOUSANDS)
GUARANTOR NONGUARANTOR CONSOLIDATED
Operating activities: PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
- --------------------- ------ ------------ ------------ ------------ -----
Net (loss) income $(10,874) $(7,171) $815 $ - $(17,230)
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 8,674 10,029 1,009 - 19,712
Amortization of deferred
financing 1,148 - - - 1,148
Amortization of bond discount 379 - - - 379
Allowance for doubtful accounts
receivable 435 - - - 435
Asset impairment, restaurant
closings and loss on sale of
other concept restaurant 4,199 1,452 422 - 6,073
Minority interest 41 - 41
Increase in deferred rent, net 200 - 42 - 242
Equity in net income of
unconsolidated affiliates (425) - - - (425)
Other 44 - - - 44
Changes in operating assets and
liabilities:
Decrease in receivables 15 121 55 - 191
Decrease in inventories 239 339 - - 578
Increase in prepaid expenses (185) (41) (27) - (253)
Decrease (increase) in other
assets 816 (49) 194 $(1,327) (366)
Increase (decrease) in accounts
payable and accrued expenses 849 (1,108) (603) 1,327 465
----- ----- ----- ---------- ------
Net cash provided by operating
activities 5,514 3,572 1,948 - 11,034
----- ----- ----- ---------- ------
Investing activities:
Purchases of property and equipment (5,849) (2,485) (187) - (8,521)
------- ------- ----- ---------- -------
Net cash used in investing activities (5,849) (2,485) (187) - (8,521)
------- ------- ----- ---------- -------
-80-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003
(IN THOUSANDS)
GUARANTOR NONGUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
Financing activities:
- ---------------------
Mortgage principal repayments - (154) - - (154)
Tax distributions (1,100) - - - (1,100)
Intercompany balances 3,314 (1,876) (1,438) - -
------ ------- ------- ----------- ------
Net cash (used in) provided by
financing activities 2,214 (2,030) (1,438) - (1,254)
------ ------- ------- ----------- ------
Increase (decrease) in cash and cash
equivalents 1,879 (943) 323 - 1,259
Cash and cash equivalents at beginning
of year 47,657 6,539 975 - 55,171
------ ------- ------- ----------- ------
Cash and cash equivalents at end of
year $49,536 $5,596 $1,298 - $56,430
======= ====== ====== =========== =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes $290 $85 $13 $ - $388
======= ====== ====== =========== =======
Cash paid during the period for
interest $28,192 $1,208 $ - $ - $29,400
======= ====== ====== =========== =======
-81-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002
(IN THOUSANDS)
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 11,097 8,325 1,261 - 20,683
Allowance for doubtful accounts
receivable 350 - - - 350
Amortization of deferred financing 1,074 - - - 1,074
Amortization of bond discount 379 - - - 379
Increase (decrease) in deferred
rent, net 421 (135) (74) - 212
Asset impairment, restaurant
closings and loss on sale of
other concept restaurant 4,727 - 4,469 - 9,196
Equity in net income of
unconsolidated affiliates (668) - - - (668)
Minority interest 52 - 52
Other (76) - - - (76)
Changes in operating assets and
liabilities:
Decrease (increase) in receivables 1,755 (475) 28 - 1,308
(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 (3,361) 1,827 (1,886) (120) (3,540)
---------- --------- ----------- ----------- ----------
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)
---------- --------- ----------- ----------- ----------
-82-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002
(IN THOUSANDS)
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 29,694 5,437 1,842 - 36,973
-------- ------- -------- --------- -------
Cash and cash equivalents at end of
period $47,657 $6,539 $975 $ - $55,171
======== ======= ======== ========= =======
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
======== ======= ======== ========= =======
-83-
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------- -------------------------------------------------------------------
NONE
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of l934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer, have concluded that the disclosure controls and
procedures are not effective for the reasons specified below.
In connection with the year ended 2004 closing process and the delay in
the filing of our Form 10-K, the following issues were identified:
o We had insufficient staffing in the accounting and reporting
function and certain changes in management and accounting
personnel during the course of the audit which strained our
existing resources. We have been addressing the issue of
upgrading our finance, accounting and internal control
functions since prior to the commencement of the audit to add
personnel of skills and training that will not only enable us
to accelerate the audit closing function but also will expand
the number of members of our staff with knowledge of technical
accounting literature. In this regard, we have changed certain
senior accounting personnel and added a director of
compliance. We are continuing to expand our personnel in these
areas by adding three additional senior accountants in our
corporate accounting department, one of whom just recently
joined us. We will continue to review whether we need
additional accounting personnel.
o Our existing accounting resources were further strained by our
need to analyze the impact of the views of the Staff of the
Securities and Exchange Commission set forth in a letter dated
February 7, 2005 from the Chief Accountant of the Securities
and Exchange Commission to the Chairman of the Center for
Public Company Audit Firms of the American Institute of Public
Accountants concerning the accounting for operating leases,
which has effected many companies, especially restaurant
companies, with significant leases. As we have just completed
this analysis, we are in the process of examining the steps to
be taken to strengthen our procedures in this area, including
providing training to all present and future staff accountants
to ensure, on a prospective basis, the proper accounting,
reporting, documentation and application of SFAS No. 13,
"Accounting for Leases" and FASB Technical Bulletin No. 85-3,
"Accounting for Operating Leases with Scheduled Rent
Increases."
Internal Control Over Financial Reporting.
Except as described above, there have not been any changes in the
Company's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) since the beginning of the
fourth quarter of 2004 that have materially affected, or are reasonable likely
to materially affect, the Company's internal control over financial reporting.
-84-
ITEM 9B. OTHER INFORMATION
- -------- -----------------
On February 17, 2005 our Board of Directors authorized our payment of bonuses to
all of our salaried employees and certain hourly employees relating to our 2004
results of operations. The bonuses approximate $1.3 million and, with the
exception of the bonuses to Messrs. Mario Sbarro, Joseph Sbarro and Anthony
Sbarro (see "Executive Compensation" in Item 11 of this report), were based on
percentages of the employee's compensation, which percentages varied depending
upon their category of employment. The bonuses to the executive officers named
in the summary compensation table under the caption "Executive Compensation" in
Item 11 of this report were as follows:
Michael O'Donnell $141,750
Mario Sbarro $157,500
Anthony Sbarro $157,500
Joseph Sbarro $157,500
Peter Beaudrault $ 94,500
As part of their at will employment agreements we entered into letter agreements
on December 10, 2004 with, among others, Carmela Merendino, our Vice
President-Administration, and Anthony Missano, President of our Business
Development Division, which provide for them to receive a special bonus in the
event of a public offering of our common stock, a change in control of Sbarro,
including by merger, sale of stock or sale of assets, or a liquidation or
dissolution of Sbarro. The special bonus will be based on the per share proceeds
(as defined in the letter agreements) received by our shareholders in excess of
a threshold amount.
Similar agreements were previously entered into by us with Peter Beaudrault, our
new President and Chief Executive Officer, and Anthony J. Puglisi, our Vice
President and Chief Financial Officer, as part of their at will employment
arrangements entered into at the time they joined us. (See "Executive
Compensation" in Item 11 of this report.)
-85-
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Our directors and executive officers and their ages at March 31, 2005
are:
NAME AGE POSITION
---- --- --------
Mario Sbarro 63 Chairman of the Board and Director
Anthony Sbarro 58 Vice Chairman of the Board, Treasurer
and Director
Joseph Sbarro 64 Senior Executive Vice President,
Secretary and Director
Carmela Sbarro 83 Vice President and Director
Peter Beaudrault 50 President - Chief Executive Officer
Anthony J. Missano 46 President, Business Development and
Corporate Vice President
Carmela N. Merendino 40 Vice President - Administration
Anthony J. Puglisi 55 Vice President and Chief Financial
Officer
Harold L. Kestenbaum 55 Director
Richard A. Mandell 62 Director
Michael O'Donnell 49 Director
Terry Vince 76 Director
Bernard Zimmerman 72 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, and until September 2003, as our President and Chief
Executive Officer.
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. Mrs. Sbarro has been a director since January 1998.
Mrs. Sbarro also served as a director from March 1985 until December 1988,
following which she was elected director emeritus until her re-election to our
board of directors.
-86-
PETER BEAUDRAULT was elected President and Chief Executive Officer in
March 2005 to succeed Mr. O'Donnell. Prior there to, Mr. Beaudrault served as
Corporate Vice President and President of our Quick Service Division since
joining us in March 2004. Prior to joining Sbarro, Mr. Beaudrault was an
industry consultant from January 2003 and for more than five years prior to that
was the President and Chief Executive Officer of the Hard Rock Cafe
International, a restaurant chain.
ANTHONY J. MISSANO was elected President of Business Development in
March 2004. He has been a Corporate Vice President for more than the past five
years and served as President of our Quick Service Division from January 2000
until March 2004.
CARMELA N. MERENDINO has been Vice President - Administration for more
than the past five years.
ANTHONY J. PUGLISI joined us as Vice President-Chief Financial Officer
in February 2004. Prior to joining Sbarro, Mr. Puglisi was the Vice President
and Chief Financial Officer of Langer, Inc., a provider of products used to
treat muscle - skeletal disorders, from April 2002 to February 2004. Mr. Puglisi
was Senior Vice President and Chief Financial Officer of Netrex Corporation,
from September 2000 to October 2001 and Executive Vice President and Chief
Financial Officer of Olsten Corporation, a provider of staffing and home health
care services, from 1993 to March 2000. Mr. Puglisi has been a certified public
accountant in New York for over twenty-five years and is a director of Hi Tech
Pharmacal Company, Inc.
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 has been a private investor and financial consultant
since April 1998. Prior to that date, he was 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 Smith & Wollensky Restaurant Group, Inc. Mr. Mandell has been a
certified public accountant in New York for more than the past thirty years.
MICHAEL O'DONNELL has been Chairman of the Board of Directors, Chief
Executive Officer and President of Champps Entertainment, Inc., a restaurant
chain operator and franchisor, since March 2, 2005, when he resigned as our
President and Chief Executive Officer, a position he held since September 2003.
Mr. O'Donnell remains a director of the Company, a position in which he has
served since September 2003. He joined us as President, Chief Executive Officer
and was elected to our Board of Directors in September, 2003. Prior to his
joining Sbarro, Mr. O'Donnell was an industry consultant from January 2003 and
for more than five years prior to that was the President and Chief Executive
Officer of New Concepts at Outback Steakhouse Inc., a restaurant chain. Mr.
O'Donnell is a director of Champps Entertainment and Boston Inner City Schools.
-87-
TERRY VINCE has been Chairman of the Board and President of Sovereign
Hotels, Inc., a company that owns and manages hotels. 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 over 30 years. In addition, Mr.
Zimmerman is the President and Chief Executive Officer and a director of FCCC,
Inc., and GVC Venture Corporation, both companies are engaged in seeking
business combinations, mergers and/or acquisitions. Mr. Zimmerman has been a
certified public accountant in New York for more than the past thirty-five
years. He became a director of Sbarro in March 1985.
Our by-laws provide that the minimum number of directors that can
constitute our board is six and the maximum number of directors that can
constitute our board is twelve.
Our officers are elected annually by the board of directors 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, of Mario Sbarro. Anthony J. Missano is the
son-in-law of Joseph Sbarro.
Our board of directors has determined that Richard A. Mandell, Chairman
of our Audit Committee, is the audit committee financial expert and is
independent.
During 2004, our officers, directors and shareholders were not required
to file reports under Section 16(a) of the Securities Exchange Act of 1934.
We have adopted a Code of Ethics that applies to, among others, our
principal executive officer, principal financial officer, principal accounting
officer, controller and other persons performing similar functions.
We undertake to provide to any person, without charge, upon request, a
copy of our Code of Ethics. If you wish a copy of our Code of Ethics, please
write to our Chief Financial Officer, Sbarro, Inc., 401 Broadhollow Road,
Melville, New York 11747-4714.
-88-
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
of Michael O'Donnell who served as our chief executive officer during 2004 and
other five most highly compensated persons who were serving as executive
officers at the end of our 2004 year (including Peter Beaudrault, who replaced
Mr. O'Donnell as our Chief Executive Officer in March 2005) for services in all
capacities to us and our subsidiaries during our 2004, 2003 and 2002 years:
ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND ------------ ------------
PRINCIPAL POSITION YEAR SALARY BONUS (1)
- ------------------ ---- ------ ---------
Michael O'Donnell (2)................................. 2004 $465,418 $141,750 $1,080(3)
President and Chief Executive Officer 2003 133,816 -- 360
Mario Sbarro.......................................... 2004 $726,321 $157,500 --
Chairman of the Board, President and 2003 700,000 -- --
Chief Executive Officer 2002 700,000 220,000 --
Anthony Sbarro........................................ 2004 $424,631 $157,500 --
Vice Chairman of the Board and Treasurer 2003 400,000 -- --
2002 325,000 220,000 --
Joseph Sbarro......................................... 2004 $427,792 $157,500 --
Senior Executive Vice President and 2003 400,000 -- --
Secretary 2002 325,000 250,000 --
Peter Beaudrault (4).................................. 2004 $303,808 $94,500 --
Corporate Vice President and President - Quick
Service Division
(1) Annual compensation includes bonuses in the year they are
earned. Bonuses are paid the year following the year earned.
(2) Mr. O'Donnell joined us on September 8, 2003 and resigned as
an officer effective in March 2005.
(3) Represents premium on a $1,000,000 life, accidental death and
dismemberment insurance policy on Mr. O'Donnell.
(4) Mr. Beaudrault was elected our President and Chief Executive
Officer on March 4, 2005 to replace Mr. O'Donnell.
-89-
COMPENSATION OF DIRECTORS
The compensation of non-employee directors previously in effect was
increased effective March 29, 2004. Non-employee directors will now receive a
retainer at the rate of $20,000 (formerly $16,000) per annum, a fee of $1,500
(formerly $1,000) for each meeting of the Board attended and a fee of $1,000
(formerly $500) for each meeting of a committee of the Board attended on which
the director serves if the meeting is not held on the same day as a meeting of
the Board. The Chairman of the Audit Committee will continue to receive a $2,500
per annum retainer in addition to regular committee compensation and
non-employee directors will continue to be reimbursed for their reasonable
travel and other expenses incurred in attending Board and committee meetings.
EMPLOYMENT AGREEMENTS
On March 2, 2005, Michael O'Donnell, who at the time was our President
and Chief Executive Officer, resigned to take a similar position with a
publicly-held non-competitive restaurant chain. In connection with his joining
us on September 8, 2003, we entered into an employment agreement with him which
was in effect until his resignation. That agreement provided for a term ending
on December 31, 2006, subject to earlier termination by us or Mr. O'Donnell
following specified notice. The agreement provided, among other things, for an
annual salary of $450,000, subject to increase at the discretion of our board of
directors, an annual performance bonus beginning in 2004 to be based upon the
achievement of increases in EBITDA, as defined, and other objectives to be set
forth in business plans and budgets approved from time to time by our board,
which bonus, for the year ending December 31, 2004, would not be less than
$112,500 (the bonus paid for 2004 was $141,750); $1,000,000 of life insurance;
the reimbursement of Mr. O'Donnell for certain relocation, travel and housing
expenses incurred; and a special incentive award. The special incentive award
was designed to have rewarded Mr. O'Donnell for improvements in our adjusted
EBITDA, cash position and long term debt position over the term of the
agreement. Mr. O'Donnell forfeited his special incentive award and right to
severance pay by virtue of his voluntary termination of employment.
We are also a party to a letter agreement of employment dated December
29, 2003 with Peter J. Beaudrault providing for him to serve as Corporate Vice
President and President - Quick Service Division. On March 4, 2005, Mr.
Beaudrault was elected by our Board of Directors as our new President and Chief
Executive Officer to replace Mr. O'Donnell. Mr. Beaudrault's letter agreement of
employment is on an "at will" basis, provides for a salary of $300,000 per annum
(which has been increased to $450,000 per annum with his election as our
President and Chief Executive Officer) and a bonus under our corporate office
employee bonus plan. In addition, in the event of a public offering of our
common stock, a change in control of Sbarro, including by merger, sale of stock
or sale of assets, or a liquidation or dissolution of Sbarro, he will be
entitled to a special event bonus based on the per share proceeds (as defined in
the letter agreement) received by our shareholders in excess of a threshold
amount as if he held 160,000 shares of our common stock. We are in the process
of negotiating a revised employment agreement with Mr. Beaudrault.
-90-
SPECIAL EVENT BONUS ARRANGEMENTS
In addition to the special event bonus arrangement with Mr. Beaudrault
described above, we have entered into a similar arrangement with three other
executive officers.
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 our Board of Directors. Accordingly, Mario Sbarro, Anthony Sbarro and
Joseph Sbarro, executive officers and employees, as well as directors,
participated in deliberations of our board concerning executive officer
compensation.
Bernard Zimmerman & Company, Inc., of which Bernard Zimmerman, a
director of Sbarro, is President and a majority shareholder, renders financial
and consulting assistance to us, for which it received fees of approximately
$26,000 for services rendered during our 2004 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 31, 2005 by (1) holders
known to us to beneficially own more than five percent of our outstanding common
stock, (2) each of our directors, (3) the persons named in the summary
compensation table in Item 11 of the report and (4) all of our directors and
executive officers as a group. We understand that, except as noted below, each
beneficial owner has sole voting and investment power with respect to all shares
attributable to such owner.
SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER NUMBER PERCENT
- ---------------- ------ -------
Mario Sbarro (1)....................................................... 1,524,730 (2) 21.5%
Anthony Sbarro (1)..................................................... 1,233,800 17.5%
Joseph Sbarro (1)...................................................... 1,756,022 (3) 24.8%
Trust of Carmela Sbarro (1)............................................ 2,497,884 (4) 35.4%
All directors and executive officers as a group
(13 persons) ..................................................... 7,038,382 (5) 99.6%
- ------------------
(1) The business address of these stockholders 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
and daughter.
(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 the wife of an executive officer. The
executive officer disclaims beneficial ownership of these shares.
No other executive officer included in the Summary Compensation Table in Item 11
or director beneficially owned any shares of our common stock as of March 31,
2005.
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 were the sole tenant of an administrative office building which we
leased from a partnership owned by Sbarro Enterprises, L.P., the limited
partners of which are Mario Sbarro, our Chairman and a director, Joseph Sbarro,
our Senior Vice President, Secretary and a director, Anthony Sbarro, our Vice
Chairman, Treasurer and a director, and Carmela Sbarro, Vice President and a
director. The annual rent paid was $100,000, $300,000 and $300,000 for 2004,
2003 and 2002, respectively. We were advised by a real estate broker that the
rent to be paid by us was comparable to the rent that would have been charged by
an unaffiliated third party. The lease was terminated upon the sale of the
building by the partnership in April 2004.
On April 5, 2001, we loaned $3.2 million to certain of our
shareholders, including: Mario Sbarro, $1.1 million, Joseph Sbarro, $1.2 million
and Anthony Sbarro, $0.9 million. The due dates of the related notes have been
extended to April 6, 2007. The notes bear interest at the rate of 4.63% per
annum, payable annually. As of January 2, 2005, the balance of these loans was
$2.9 million.
On December 28, 2001, we loaned $2.8 million to our shareholders,
including: Mario Sbarro, $0.6 million, Joseph Sbarro, $0.7 million, Anthony
Sbarro, $0.5 million, and the Trust of Carmela Sbarro, $1.0 million. The due
dates of the related notes have been extended to December 28, 2007. The notes
bear interest at the rate of 2.48% per annum payable annually. As of January 2,
2005, the balance of these loans was $2.6 million.
In March 2004, we loaned $40,000 to Gennaro A. Sbarro, then our
Corporate Vice President and President of our Franchising and Licensing
Division. The note was repaid in February 2005 including interest at 2.69% per
annum. In connection with his resignation in 2004 we entered into a severance
agreement providing for a lump sum payment of approximately $453,000.
In June 2003, Anna Missano, the daughter of Joseph Sbarro, issued to us
a note for approximately $90,000 for royalties due us for 2001 and 2000. The
note is repayable at approximately $10,000 per year, including interest at 2.96%
per annum, with a balloon payment due on June 30, 2010. The principal balance of
the notes at January 2, 2005 was approximately $79,000.
The interest rates charged on the foregoing related party loans
included above approximate the Applicable Federal Rate (AFR) published by the
Internal Revenue Service at the time of the loan. We recorded interest income
from related parties was approximately $211,000, $223,000 and $221,000 in 2004,
2003 and 2002, respectively.
Bernard Zimmerman & Company, Inc., of which Bernard Zimmerman, a
director of Sbarro, is President and a majority shareholder, renders financial
and consulting assistance to us, for which it received fees of approximately
$26,000 for services rendered during 2004 and $0.3 million in both 2003 and
2002.
Harold Kestenbaum, a member of our Board of Directors, assisted one of
our other concepts in the preparation of its initial Uniform Franchise Offering
Circular in 2002 for which the fee was $20,000.
-93-
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, $480,000, $340,000 and $422,000 in 2004, 2003
and 2002, 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 2004, 2003
and 2002 were approximately $89,000, $90,000 and $92,000, respectively.
As of July 2002, we sold the assets of a restaurant to a corporation
owned by the brother-in-law of our Chairman of the Board for $88,900. The sales
price resulted in a loss of approximately $64,000 that was included in the
provision for restaurant closings. That corporation also entered into a
franchise agreement with us. We received promissory notes for each of the
purchase price and initial franchise fee that were payable over seven years and
bore interest on the unpaid principal balances at 7% per annum. In addition in
2002, we subleased this location to that franchisee. Payments under the sublease
were being made directly to the landlord by the franchisee. Interest payments
received relating to the promissory notes was approximately $4,000 in 2003. No
interest payments were received in 2004. Royalties paid under this arrangement
were approximately $1,800 in 2004, $3,300 in 2003 and $6,800 in 2002.
In March 2005, we re-purchased the assets of the restaurant from the
corporation for $88,900. The remaining unpaid principal balance of the
promissory notes were offset against the purchase price of the assets. The
remaining balance under the promissory notes of approximately $22,000, and
accrued but unpaid royalties of approximately $31,000 had been fully reserved in
2004.
In 2002, a company in which Gennaro J. Sbarro, then our Corporate Vice
President and President of our Casual and Fine Dining Division and the son of
Joseph Sbarro, has a 50% interest (the other 50% is owned by an unaffiliated
third party) entered into a sublease for $50,000 greater than rent or other
charges due under the lease. Rent and other charges due under the lease are paid
directly to the landlord. Payment under the sublease are due to us. Rent of
approximately $23,000 was included in the 2004 results of operations. To
reimburse Sbarro for equipment costs, the Company owned by Mr. Sbarro, issued a
non-interest bearing note in our favor for approximately $55,000, that is
repayable in eighteen equal monthly installments of approximately $3,000 which
commenced in November 2002. The principal balance on the note as of January 2,
2005 was approximately $16,000. As of October 31, 2003, Mr. Sbarro resigned from
his positions with us and a corporation owned by Mr. Sbarro entered into an
eighteen month agreement with us to provide consulting services to our quick
service and casual dining division for approximately $23,000 per month and the
reimbursement for customary and usual expenses that may be incurred by that
corporation in the performance of its services.
In October 2003, we sold the assets of three underperforming
Sbarro-owned restaurants that we proposed to close to entities owned separately
by each of three other of Anthony Sbarro's sons, each of which entered into a
franchise agreement with us. Two of the locations, which had no remaining book
value, were transferred for no consideration while the third was sold for $0.3
million that was paid in full, and resulted in a gain to Sbarro of approximately
$0.1 million. In connection with the sale of the locations, the employment of
these individuals with Sbarro was terminated and we included a charge for their
total severance pay of approximately $60,000 in our results of operations for
2003. The franchise agreements provide for the payment of 5% of the location's
sales
-94-
as a continuing franchise fee but did not provide for any initial franchise fee.
We have waived continuing franchise fees through 2006. In addition, we subleased
two of the locations to two of the franchisees. Payments under the subleases are
being made directly to the landlord by the franchisees and they are not in
default.
In January 2004, one of Mario Sbarro's daughters, resigned from her
position as Manager of Administration - Construction. A corporation owned by her
entered into a one year agreement to provide consulting services related to
construction matters to us for a series of monthly payments totaling $100,000.
In addition, that corporation provided consulting services related to
construction matters for our steakhouse joint venture of $18,900 in 2004.
In February 2005, a joint venture in which we have a 70% interest sold
the assets of one of our other joint venture restaurants to a company owned by
Gennaro A. Sbarro our then Corporate Vice President and President of our
Franchising and Licensing Division and the son of Mario Sbarro, for
approximately $900,000 (which approximated fair value) resulting in a loss of
approximately $284,000. The Company received $300,000 in cash and promissory
notes of $600,000. The promissory notes are payable monthly in 72 equal monthly
installments in the amount of $8,333 including interest at 5% per annum with a
balloon payment of $111,375 at maturity. The joint venture also sold the
inventory of the restaurant for approximately $67,000 with $50,000 paid at
closing and the remainder of $17,000 payable in four equal monthly installments
from March 2005 to June 2005. The company owned by Mr. Sbarro entered into a
sublease, which we guarantee and a Security Agreement to secure the obligations
under the promissory notes. The sublease and Security Agreement are intended to
enable Sbarro to recapture the business in the event of an uncured default.
Compensation of related parties includes salary, taxable benefits and
accrued bonus. Salaries for 2004 include one additional week of salary due to
our 53 week year in 2004. Compensation is as follows:
o Mario Sbarro was our Chairman of the Board in 2004 and Chairman
of the Board, President and Chief Executive Officer in 2003 and
2002. His compensation was approximately $884,000 in 2004,
$700,000 in 2003 and $920,000 in 2002.
o Anthony Sbarro was our Vice Chairman of the Board and Treasurer
in 2004, 2003 and 2002. His compensation was approximately
$582,000 in 2004, $400,000 in 2003 and $545,000 in 2002.
o Joseph Sbarro was our Senior Executive Vice President and
Secretary in 2004, 2003 and 2002. His compensation was
approximately $585,000 in 2004, $400,000 in 2003 and $575,000 in
2002.
-95-
In addition to the compensation of Mario, Anthony, and Joseph Sbarro:
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 in
2004, 2003 and 2002.
o Other members of the immediate families of Mario, Anthony, Joseph
and Carmela Sbarro who are our employees were paid an aggregate
of approximately $860,000, $1,344,000 and $1,565,000 during 2004,
2003 and 2002, respectively.
The company has a 40% equity interest in Boulder Creek Steakhouse and
provided administrative services for $165,000, $172,000 and $148,000 in 2004,
2003 and 2002, respectively.
TAX PAYMENT AGREEMENT
We are 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. Therefore, we do not pay federal or, with certain limited
exceptions, state and local income taxes for periods for which we are treated as
a Subchapter S corporation ("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 our going private transaction in 1999 and the
related financing, we 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 determined under a formula designed
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 no distribution to our shareholders
in accordance with the tax payment agreement with respect to 2004. However, in
March 2004 we made distributions to our shareholders, in accordance with the tax
payment agreement, of $0.7 million with respect to 2002 taxable income. Our
shareholders taxable income is significantly higher and their taxable loss is
significantly lower than the related book income or loss resulting from
differences in the book and tax treatments of the provision for asset impairment
and significant differences in book and tax depreciation.
The tax payment agreement provides for adjustments of the amount of tax
distributions previously paid in respect of a year upon the filing of our
federal income tax return for that year, upon the filing of an amended federal
income tax return or as a result of an audit. In these circumstances, if it is
determined that the amount of tax distributions previously made for the year was
less than the amount computed based upon our federal income tax return, our
amended federal 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.
-96-
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- -------- --------------------------------------
Our principal accountants for each of the past two years has been BDO Seidman,
LLP.
AUDIT FEES:
The aggregate audit fees billed for each of the last two years for professional
services rendered by our principal accountants for the audit of our annual
financial statements included in our report on Form 10-K and review of our
quarterly financial statements included in our Reports on Form 10-Q were
$150,000 and $116,000 in 2004 and 2003, respectively.
AUDIT-RELATED FEES:
The aggregate fees billed in each of our last two years for assurance and
related services by our principal accountants that are reasonably related to the
performance of the audit or review of our financial statements not included in
Audit Fees were $12,500 in 2004 and $19,400 in 2003. The services included the
audit of our 401K savings plan in 2004, an individual store location audit in
2004 and 2003 and consultation on various new accounting pronouncements and
their impact on us in 2003 and 2004.
TAX FEES:
The aggregate fees billed in each of the last two years for professional
services rendered by our principal accountants for tax compliance, tax advice
and tax planning were $59,000 and $64,550 in 2004 and 2003, respectively. These
services included, in each year reported, a review of our corporate income and
franchise tax returns, tax planning advice related to our tax returns and those
of our shareholders and tax advice relating to contemplated corporate
transactions.
ALL OTHER FEES:
Other than the fees described above, we have not incurred any fees for any
services rendered by our principal accounting firm.
PRE-APPROVAL POLICIES AND PROCEDURES:
It is our policy that, before we engage our principal accountants for any audit
or non - audit services, the engagement is approved by our audit committee. Our
audit committee has delegated to Richard A. Mandell, its Chairman and an
independent director, the authority to grant such pre-approvals during periods
when the audit committee is not in session and a meeting cannot be readily
convened. A decision by Mr. Mandell to pre-approve an audit or non-audit service
must be presented to the full audit committee at its next scheduled meeting. All
fees paid to and or billed by our principal accountants were approved in
accordance with the policy described above beginning May 6, 2003.
-97-
PART IV
-------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- -------- ------------------------------------------
(a) Consolidated Financial Statements
The following consolidated financial statements of Sbarro, Inc. and the
Report of Independent Auditors thereon are included in Item 8 above:
Report of Independent Registered Public Accounting Firm 39
Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003 40
Consolidated Statements of Operations for the years 42
ended January 2, 2005, December 28, 2003 and December 29, 2002
Consolidated Statements of Shareholders' Equity (as restated) for the 43
years ended January 2, 2005, December 28, 2003 and December 29, 2002
Consolidated Statements of Cash Flows for the years 44
ended January 2, 2005, December 28, 2003 and December 29, 2002
Notes to Consolidated Financial Statements 46
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(b) 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
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)
*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)
-99-
*+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(a) Distribution Agreement dated January 1, 2003 between
Sbarro, Inc. and Vistar Corporation (confidential
treatment has been granted with respect to certain
portions of this agreement).(Exhibit 10.05 of our Annual
Report on Form 10-K for the year ended December 29,
2002, File No. 333-90817).
*10.05(b) Letter Agreement dated January 1, 2003 between Sbarro,
Inc. and Vistar Corporation (confidential treatment has
been granted with respect to certain portions of this
letter agreement). (Exhibit 10.05 (b) of our Annual
Report on Form 10-K for the year ended December 28,
2004, File No. 333-908177.
*+10.06 Employment agreement dated as of September 8, 2003
between Sbarro, Inc. and Michael O'Donnell. (Exhibit
99.01 to our Current Report on Form 8-K dated (date of
earliest event reported) September 8, 2003, File No.
333-90817)
+10.07 Letter agreement dated December 29, 2003 between Sbarro,
Inc. and Peter J. Beaudrault regarding Mr. Beaudrault's
employment with Sbarro.
+10.08 Letter agreement dated December 23, 2003 between Sbarro,
Inc. and Anthony J. Puglisi regarding Mr. Puglisi's
employment with Sbarro.
+10.09 Letter dated December 10, 2004 from Sbarro, Inc. to
Anthony Missano regarding potential "Special Event
Bonus."
+10.10 Letter dated December 10, 2004 from Sbarro, Inc. to
Carmela Merendino regarding potential "Special Event
Bonus."
*+10.11 Corporate Office Employee Bonus Plan (Exhibit 99.1 to
our Current Report on Form 8-K dated (date of earliest
event reported) April 7, 2005, File No. 333-90817)
*+10.12 Resolution regarding non-employee director compensation
(Exhibit 99.2 to our Current Report on Form 8-K dated
(date of earliest event reported) April 7, 2005, File
No. 333-90817)
12.01 Computation of ratio of earnings to fixed charges
-100-
*14.01 Code of Ethics - For Executive Officers and Directors of
Sbarro, Inc. (Exhibit 14.01 of our Annual Report on Form
10-K for the year ended December 28, 2004, 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)
31.01 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.02 Certification of Vice President, Chief Financial Officer
and Principal Accounting Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.01 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Vice President, Chief Financial Officer
and Principal Accounting Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- ---------------------------
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.
The following financial statement schedule is filed as a part of this
Report:
Report of Independent Registered Public Accounting Firm S-1
Valuation and Qualifying Accounts for 2004, 2003 and 2002 S-2
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.
-101-
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 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.
-102-
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 April
22, 2005.
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/ Peter Beaudrault President and Chief April 22, 2005
- -------------------------- Executive Officer
Peter Beaudrault Principal Executive Officer
/s/ Anthony Puglisi Vice President, April 22, 2005
- -------------------------- Chief Financial Officer
Anthony Puglisi And Principal Accounting
Officer
/s/ Mario Sbarro Director April 22, 2005
- --------------------------
Mario Sbarro
/s/ Joseph Sbarro Director April 22, 2005
- --------------------------
Joseph Sbarro
/s/ Anthony Sbarro Director April 22, 2005
- --------------------------
Anthony Sbarro
/s/ Harold Kestenbaum Director April 22, 2005
- --------------------------
Harold L. Kestenbaum
/s/ Richard A. Mandell Director April 22, 2005
- --------------------------
Richard A. Mandell
/s/ Michael O'Donnell Director April 22, 2005
- --------------------------
Michael O'Donnell
/s/ Carmela Sbarro Director April 22, 2005
- --------------------------
Carmela Sbarro
/s/ Terry Vince Director April 22, 2005
- --------------------------
Terry Vince
/s/ Bernard Zimmerman Director April 22, 2005
- --------------------------
Bernard Zimmerman
S-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Shareholders
Sbarro, Inc.
Melville, New York
The audits referred to in our report dated March 7, 2005 relating to the
consolidated financial statements of Sbarro, Inc. and subsidiaries, which is
contained in Item 8 of this Form 10-K included the audits of the accompanying
financial statement schedule for the years ended January 2, 2005, December 28,
2003 and December 29, 2002. 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 audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Melville, New York
March 7, 2005
S-2
SBARRO, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
FOR THE THREE YEARS ENDED
Balance Charged
at to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts(5) Deductions Period
- ----------- --------- -------- ----------- ---------- ------
January 2, 2005
- ---------------
Allowance for doubtful
accounts receivable $488 $222 $279(1) $431
====== ====== === ====== ======
Provision for store closings $987 $815 $(889) $851(2) $62
====== ====== === ====== ======
December 28, 2003
- -----------------
Allowance for doubtful
accounts receivable $491 $435 438(1) $488
====== ====== ====== ======
Provision for store closings $1,452 $2,030 $(111) $2,384(3) $987
====== ====== === ====== ======
December 29, 2002
- -----------------
Allowance for doubtful
accounts receivable $175 $350 $34(1) $ 491
====== ====== === ====== ======
Provision for store closings $1,467 $8,689 $42 $8,746(4) $1,452
====== ====== === ====== ======
(1) Includes write off of uncollected accounts.
(2) Includes write off of property and equipment of $1,089, payments to
landlords and others for closed locations of $181 offset by proceeds received
upon sale of equipment $419.
(3) Includes write off of property and equipment of $2,474, payments to
landlords and others for closed locations of $787 offset by proceeds received
upon sale of equipment of $877.
(4) Includes write off of property and equipment of $7,413 and payments to
landlord and others for closed locations of $1,333.
(5) Represents reclassifications to other accounts.
EXHIBIT INDEX
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EXHIBIT NUMBER DESCRIPTION
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*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)
*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(a) Distribution Agreement dated January 1, 2003 between
Sbarro, Inc. and Vistar Corporation (confidential
treatment has been granted with respect to certain
portions of this agreement).(Exhibit 10.05 of our Annual
Report on Form 10-K for the year ended December 29,
2002, File No. 333-90817).
*10.05(b) Letter Agreement dated January 1, 2003 between Sbarro,
Inc. and Vistar Corporation (confidential treatment has
been granted with respect to certain portions of this
letter agreement). (Exhibit 10.05 (b) of our Annual
Report on Form 10-K for the year ended December 28,
2004, File No. 333-908177.
*+10.06 Employment agreement dated as of September 8, 2003
between Sbarro, Inc. and Michael O'Donnell. (Exhibit
99.01 to our Current Report on Form 8-K dated (date of
earliest event reported) September 8, 2003, File No.
333-90817)
+10.07 Letter agreement dated December 29, 2003 between Sbarro,
Inc. and Peter J. Beaudrault regarding Mr. Beaudrault's
employment with Sbarro.
+10.08 Letter agreement dated December 23, 2003 between Sbarro,
Inc. and Anthony J. Puglisi regarding Mr. Puglisi's
employment with Sbarro.
+10.09 Letter dated December 10, 2004 from Sbarro, Inc. to
Anthony Missano regarding potential "Special Event
Bonus."
+10.10 Letter dated December 10, 2004 from Sbarro, Inc. to
Carmela Merendino regarding potential "Special Event
Bonus."
*+10.11 Corporate Office Employee Bonus Plan (Exhibit 99.1 to
our Current Report on Form 8-K dated (date of earliest
event reported) April 7, 2005, File No. 333-90817)
*+10.12 Resolution regarding non-employee director compensation
(Exhibit 99.2 to our Current Report on Form 8-K dated
(date of earliest event reported) April 7, 2005, File
No. 333-90817)
12.01 Computation of ratio of earnings to fixed charges
*14.01 Code of Ethics - For Executive Officers and Directors of
Sbarro, Inc. (Exhibit 14.01 of our Annual Report on Form
10-K for the year ended December 28, 2004, 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)
31.01 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.02 Certification of Vice President, Chief Financial Officer
and Principal Accounting Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.01 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Vice President, Chief Financial Officer
and Principal Accounting Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.