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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended April 24, 2005 Commission file number 333-90817
SBARRO, INC.
(Exact name of registrant as specified in its Charter)
NEW YORK 11-2501939
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
401 Broad Hollow Road, Melville, New York 11747-4714
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 715-4100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
*Yes X No
-------------- ---------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
-------------- ---------------
The number of shares of Common Stock of the registrant outstanding as of June 4,
2005 was 7,064,328.
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*This form 10-Q is voluntarily submitted pursuant to a requirement contained in
the indenture governing Sbarro, Inc.'s Senior Notes due 2009.
SBARRO, INC
FORM 10-Q INDEX
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PART I. FINANCIAL INFORMATION PAGES
Consolidated Financial Statements:
Balance Sheets - April 24, 2005 (unaudited) and January 2, 2005...........3-4
Statements of Operations (unaudited) - Sixteen Weeks ended
April 24, 2005 and April 18, 2004.......................................5
Statements of Cash Flows (unaudited) - Sixteen Weeks ended
April 24, 2005 and April 18, 2004.....................................6-7
Notes to Unaudited Consolidated Financial Statements.....................8-22
Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................23-31
Qualitative and Quantitative Disclosures of Market Risk.......................32
Controls and Procedures....................................................32-33
PART II. OTHER INFORMATION................................................34
Page 2
Part I - Financial Information
Item 1. Consolidated Financial Statements
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
April 24, 2005 January 2, 2005
-------------- ---------------
(unaudited)
Current assets:
Cash and cash equivalents $ 51,043 $ 63,000
Receivables, net of allowance for doubtful
accounts of $431 at April 24, 2005 and
January 2, 2005:
Franchise 1,971 1,846
Other 1,606 1,680
-------- --------
3,577 3,526
Inventories 2,368 2,809
Prepaid expenses 4,134 3,877
Current portion of loans receivable from
shareholders and officers -- 46
-------- --------
Total current assets 61,122 73,258
Property and equipment, net 83,962 88,465
Trademarks 195,916 195,916
Goodwill 9,204 9,204
Deferred financing costs, net 4,225 4,521
Loans receivable from shareholders and officers,
less current portion 5,607 5,602
Other assets 8,266 7,647
-------- --------
$368,302 $384,613
======== ========
See notes to unaudited consolidated financial statements.
Page 3
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES & SHAREHOLDERS' EQUITY
(In thousands except share data)
April 24, 2005 January 2, 2005
-------------- ---------------
(unaudited)
Current liabilities:
Accounts payable $ 8,033 $ 11,593
Accrued expenses 19,108 20,748
Accrued interest payable 2,787 8,181
Current portion of mortgage payable 188 182
-------- --------
Total current liabilities 30,116 40,704
Deferred rent 10,192 10,226
Long-term debt, net of original issue
discount 268,401 268,349
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 71 71
Additional paid-in capital 10 10
Retained earnings 59,512 65,253
-------- --------
Total shareholders' equity 59,593 65,334
-------- --------
$368,302 $384,613
======== ========
See notes to unaudited consolidated financial statements.
Page 4
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the sixteen weeks ended
(In thousands)
April 24, 2005 April 18, 2004
-------------- --------------
Revenues:
Restaurant sales $ 91,255 $ 90,846
Franchise related income 3,544 3,404
Real estate and other 1,718 1,961
-------- ---------
Total revenues 96,517 96,211
-------- ---------
Costs and expenses:
Cost of food and paper products 19,030 20,009
Payroll and other employee benefits 25,581 26,147
Other operating costs 35,141 33,807
Depreciation and amortization 4,973 4,984
General and administrative costs 8,066 8,126
Asset impairment and restaurant closings 102 175
-------- ---------
Total costs and expenses 92,893 93,248
-------- ---------
Operating income 3,624 2,963
-------- ---------
Other (expense) income:
Interest expense (9,473) (9,477)
Interest income 365 196
Equity in net income of unconsolidated affiliates 20 398
-------- ---------
Net other expense (9,088) (8,883)
-------- ---------
Loss before income taxes (5,464) (5,920)
Income taxes 277 241
-------- ---------
Net loss $ (5,741) $ (6,161)
======== =========
See notes to unaudited consolidated financial statements.
Page 5
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the sixteen weeks ended
(In thousands)
April 24, 2005 April 18, 2004
-------------- --------------
Operating activities:
Net loss $ (5,741) $ (6,161)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,973 5,421
Amortization of senior notes discount 117 117
Amortization of deferred financing costs 296 296
Asset impairment and restaurant closings 102 175
Increase in deferred rent, net 33 93
Equity in net income of unconsolidated affiliates (20) (398)
Dividends received from unconsolidated affiliate -- 305
Changes in operating assets and liabilities:
(Increase) decrease in receivables (51) 228
(Increase) decrease in inventories 441 (95)
Increase in prepaid expenses (257) (2,703)
(Increase) decrease in other assets (67) 48
Decrease in accounts payable and accrued expenses (5,324) (4,962)
Decrease in accrued interest payable (5,394) (5,394)
--------- ---------
Net cash used in operating activities (10,892) (13,030)
--------- ---------
(Continued)
Page 6
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the sixteen weeks ended
(In thousands)
April 24, 2005 April 18, 2004
-------------- --------------
Investing activities:
Purchases of property and equipment $ (1,347) $ (2,324)
Proceeds from sale of joint venture property and equipment 300 --
--------- ---------
Net cash used in investing activities (1,047) (2,324)
--------- ---------
Financing activities:
Mortgage principal repayments (59) (54)
Tax distributions -- (682)
Reduction in loans receivable from officers 41 503
--------- ---------
Net cash used in financing activities (18) (233)
--------- ---------
Decrease in cash and cash equivalents (11,957) (15,587)
Cash and cash equivalents at beginning of period 63,000 56,409
--------- ---------
Cash and cash equivalents at end of period $ 51,043 $ 40,822
========= =========
Supplemental disclosure of cash flow
information:
Cash paid for:
Income taxes $ 90 $ 204
========= =========
Interest $ 14,503 $ 14,458
========= =========
See notes to unaudited consolidated financial statements.
Page 7
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. Basis of presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and
Regulation S-X related to interim period financial statements and,
therefore, do not include all information and footnotes required by
generally accepted accounting principles. However, in the opinion of
our management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair presentation
of the consolidated financial position of Sbarro and our subsidiaries
at April 24, 2005 and our consolidated results of operations and cash
flows for the sixteen weeks ended April 24, 2005 and April 18, 2004
have been included. The results of operations for interim periods are
not necessarily indicative of the results that may be expected for the
entire year. Reference should be made to the annual financial
statements, including footnotes thereto, included in our Annual Report
on Form 10-K for the year ended January 2, 2005.
Certain items in the financial statements presented have been
reclassified to conform to the 2005 presentation.
2. Recent accounting pronouncements:
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 154
"Accounting Changes and Error Corrections" a replacement of APB Opinion
No. 20 and FASB Statement No. 3. This statement changes the
requirements for the accounting and reporting of a change in accounting
principle and applies to all voluntary changes in accounting
principles. It also applies to changes required by an accounting
pronouncement in the usual instance that the pronouncement does not
include specific transition provisions. This statement requires
retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect
of the change. When it is impracticable to determine the
period-specific effects of an accounting change on one or more
individual prior periods presented, this Statement requires that the
new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding
adjustment be made to the opening balance of retained earnings for that
period rather than being reported in an income statement. When it is
impracticable to determine the cumulative effect of applying a change
in accounting principle to all prior periods, this Statement requires
that the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. We do not anticipate
that SFAS No. 154 will have a material impact on our financial position
or results of operations. SFAS No. 154 is effective for fiscal years
beginning after December 15, 2005.
Page 8
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
3. Debt:
Senior Notes:
The $255 million of 11% senior notes issued in 1999 are due September
15, 2009. Interest 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 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 that limit our ability to
borrow funds, other than certain permitted indebtedness, to make
"restricted payments" including, among other things, dividend payments,
and to make investments in, among other things, unrestricted
subsidiaries. The indenture for the senior notes permits us to make
distributions to shareholders pursuant to a tax payment agreement
between us and our shareholders that contains 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.
Among other covenants, the indenture requires that, in order for us to
borrow, our consolidated interest ratio coverage (as defined in the
indenture), after giving pro forma effect to the interest on the new
borrowing, for the four most recently ended fiscal quarters must be at
least 2.5 to 1. As of April 24, 2005, that ratio was 1.4 to 1. As a
result, we are not presently able to borrow funds except for the
specifically permitted indebtedness, including up to $75 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 $33.4 million, and
then only to the extent of any excess over that amount.
Page 9
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Line of Credit:
In March 2004, we obtained an uncommitted line of credit to replace our
former revolving credit facility. Under the line of credit, we
currently have the ability, subject to bank approval, to borrow up to
$3 million, including outstanding letters 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, which was to expire in
May 2005, has been extended to July 15, 2005. There currently are $1.8
million of letters of credit outstanding. The Company is finalizing a
new line of credit to replace the existing credit line. The new line is
expected to be in place during the second quarter of 2005. While we
expect to have this new line in place, there can be no assurances that
we will complete the negotiations to finalize an agreement or further
extend our existing line.
Mortgage:
In March 2000, one of our 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 of the loan
as of April 24, 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 debt service of at least 1.2 to
1.0.
We were in compliance with all covenants in the indenture for the
senior notes and our mortgage as of April 24, 2005.
Page 10
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
4. 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 May 2002, the landlord of a joint venture restaurant location closed
during 2002 filed a complaint against us in the Supreme Court of 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 and included 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 settled the matter for $800,000 in the first quarter of
2005.
Page 11
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
5. Guarantor and non-guarantor financial statements:
Certain subsidiaries have guaranteed amounts outstanding under our
senior notes and 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 and the credit
agreement on a joint and several basis.
The following condensed consolidating financial information presents:
(1) Condensed unaudited consolidating balance sheets as of April
24, 2005 and January 2, 2005 and unaudited statements of
operations and cash flows for the quarters ended April 24,
2005 and April 18, 2004 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.
Page 12
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Consolidating Balance Sheet
As of April 24, 2005
(In thousands)
(Unaudited)
ASSETS
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Current assets:
Cash and cash equivalents $ 46,357 $ 3,565 $ 1,121 $ -- $ 51,043
Receivables net of allowance for
doubtful accounts of $431
Franchise 1,971 -- -- -- 1,971
Other 794 161 651 -- 1,606
---------- ---------- ---------- ---------- ----------
2,765 161 651 -- 3,577
Inventories 1,057 1,239 72 -- 2,368
Prepaid expenses 3,389 712 33 -- 4,134
---------- ---------- ---------- ---------- ----------
Total current assets 53,568 5,677 1,877 -- 61,122
Intercompany receivables 2,165 444,115 (3,825) (442,455) --
Investment in subsidiaries 67,570 1,944 -- (69,514) --
Property and equipment, net 32,026 48,837 3,099 -- 83,962
Trademarks 195,916 -- -- -- 195,916
Goodwill 9,204 -- -- -- 9,204
Deferred financing costs, net 4,041 184 -- -- 4,225
Loans receivable from shareholders and 5,607 -- -- -- 5,607
officers
Other assets 6,573 1,671 22 -- 8,266
---------- ---------- ---------- ---------- ----------
$ 376,670 $ 502,428 $ 1,173 $(511,969) $ 368,302
========== ========== ========== ========== ==========
Page 13
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Consolidating Balance Sheet
As of April 24, 2005
(In thousands except share data)
(Unaudited)
LIABILITIES & SHAREHOLDERS EQUITY
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Current liabilities:
Accounts payable $ 7,404 $ 113 $ 516 $ -- $ 8,033
Accrued expenses 15,315 2,606 1,187 -- 19,108
Accrued interest payable 2,787 -- -- -- 2,787
Current portion of mortgage payable -- 188 -- -- 188
---------- ---------- ---------- ---------- ----------
Total current liabilities 25,506 2,907 1,703 -- 30,116
---------- ---------- ---------- ---------- ----------
Intercompany payables 442,372 83 -- (442,455) --
Deferred rent 9,871 -- 321 -- 10,192
---------- ---------- ---------- ---------- ----------
Long-term debt, net of original issue
discount 253,323 15,078 -- -- 268,401
---------- ---------- ---------- ---------- ----------
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) (1) (288,994) 350,689 (3,869) 1,686 59,512
---------- ---------- ---------- ---------- ----------
(354,402) 484,360 (851) (69,514) 59,593
========== ========== ========== ========== ==========
$ 376,670 $ 502,428 $ 1,173 $(511,969) $ 368,302
========== ========== ========== ========== ==========
(1) Retained earnings reflects a reclassification of our Umberto Mall
restaurants from nonguarantor subsidiaries to parent.
Page 14
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
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
Receivables, net of 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 shareholders and 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
Trademarks, net 195,916 -- -- -- 195,916
Goodwill, net 9,204 -- -- -- 9,204
Deferred financing costs, net 4,326 195 -- -- 4,521
Loans receivable from officers, less
current portion 5,602 -- -- -- 5,602
Other assets 5,906 1,720 21 -- 7,647
---------- ---------- ---------- ---------- ----------
$ 386,556 $ 501,021 $ 4,445 $(507,409) $ 384,613
========== ========== ========== ========== ==========
Page 15
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Consolidating Balance Sheet
As of January 2, 2005
(In thousands except share data)
LIABILITIES & 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
========== ========== ========== ========== ==========
Page 16
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Consolidating Statement of Operations
For the sixteen weeks ended April 24, 2005
(In thousands)
(Unaudited)
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $ 39,695 $ 48,362 $ 3,198 $ -- $ 91,255
Franchise related income 3,544 -- -- -- 3,544
Real estate and other 514 1,188 16 -- 1,718
Intercompany charges 20 -- -- (20) --
--------- --------- --------- --------- ---------
Total revenues 43,773 49,550 3,214 (20) 96,517
--------- --------- --------- --------- ---------
Cost and expenses:
Cost of food and paper products 7,448 10,643 939 -- 19,030
Payroll and other employee 10,929 13,424 1,228 -- 25,581
Other operating costs 16,082 18,083 976 -- 35,141
Depreciation and amortization 2,302 2,472 199 -- 4,973
General and administrative 4,800 3,056 210 -- 8,066
Asset impairment and restaurant
closings 102 -- -- -- 102
Intercompany charges -- 20 -- (20) --
--------- --------- --------- --------- ---------
Total costs and expenses 41,663 47,698 3,552 (20) 92,893
--------- --------- --------- --------- ---------
Operating income (loss) 2,110 1,852 (338) -- 3,624
Other (expense) income:
Interest expense (9,032) (441) -- -- (9,473)
Interest income 365 -- -- -- 365
Equity in net income of
unconsolidated affiliates 20 -- -- -- 20
--------- --------- --------- --------- ---------
Net other expense (8,647) (441) -- -- (9,088)
Income (loss) before income taxes (6,537) 1,411 (338) -- (5,464)
Income taxes 193 84 -- -- 277
--------- --------- --------- --------- ---------
Net income (loss) $ (6,730) $ 1,327 $ (338) $ -- $ (5,741)
========= ========= ========= ========= =========
Page 17
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Consolidating Statement of Operations
For the sixteen weeks ended April 18, 2004
(In thousands)
(Unaudited)
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Revenues:
Restaurant sales $ 38,982 $ 47,512 $ 4,352 -- $ 90,846
Franchise related income 3,404 -- -- -- 3,404
Real estate and other 1,010 951 -- -- 1,961
Intercompany charges 2,524 -- -- $ (2,524) --
--------- --------- --------- --------- ---------
Total revenues 45,920 48,463 4,352 (2,524) 96,211
--------- --------- --------- --------- ---------
Cost and expenses:
Cost of food and paper products 8,037 10,790 1,182 -- 20,009
Payroll and other employee benefits 10,447 14,203 1,497 -- 26,147
Other operating costs 15,545 17,034 1,228 -- 33,807
Depreciation and amortization 2,144 2,562 278 -- 4,984
General and administrative 4,298 3,776 52 -- 8,126
Asset impairment and restaurant
closings 175 -- -- -- 175
Intercompany charges -- 2,524 -- (2,524) --
--------- --------- --------- --------- ---------
Total costs and expenses 40,646 50,889 4,237 (2,524) 93,248
--------- --------- --------- --------- ---------
Operating (loss) income 5,274 (2,426) 115 -- 2,963
Other (expense) income:
Interest expense (9,032) (445) -- -- (9,477)
Interest income 196 -- -- -- 196
Equity in net income of
unconsolidated affiliates 398 -- -- -- 398
--------- --------- --------- --------- ---------
Net other expense (8,438) (445) -- -- (8,883)
--------- --------- --------- --------- ---------
Income (Loss) before income taxes
(credit) (3,164) (2,871) 115 -- (5,920)
Income taxes (credit) 134 112 (5) -- 241
--------- --------- --------- --------- ---------
Net income (loss) $ (3,298) (2,983) $ 120 -- $ (6,161)
========= ========= ========= ========= =========
Page 18
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Consolidating Statement of Cash Flows
For the sixteen weeks ended April 24, 2005
(In thousands)
(Unaudited)
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Operating Activities:
Net (loss) income $ (6,730) $ 1,327 $ (338) $ -- $ (5,741)
Adjustments to reconcile net income (loss)
to net cash, provided by (used in)
operating activities:
Depreciation and amortization 2,301 2,472 200 -- 4,973
Amortization of deferred financing 296 -- -- -- 296
Amortization of senior notes discount 117 -- -- -- 117
Asset impairment and restaurant closings 102 -- -- -- 102
Increase (decrease) in deferred rent, net 60 (27) -- -- 33
Equity in income of unconsolidated
affiliates (20) -- -- -- (20)
Changes in operating assets and liabilities:
Decrease (increase) in receivables (866) 950 (78) (57) (51)
Decrease in inventories 147 226 68 -- 441
Decrease (increase) in prepaid expenses 631 (911) 23 -- (257)
Decrease (increase) in other assets (103) 49 (1) (12) (67)
(Decrease) increase in accounts payable
and accrued expenses (5,084) (2) (295) 57 (5,324)
Decrease in accrued interest
payable (5,394) -- -- -- (5,394)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities (14,543) 4,084 (421) (12) (10,892)
--------- --------- --------- --------- ---------
Page 19
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Consolidating Statement of Cash Flows
For the sixteen weeks ended April 24, 2005
(In thousands)
(Unaudited)
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Investing activities:
- ---------------------
Purchases of property and equipment (619) (635) (93) -- (1,347)
Proceeds from sale of joint venture
property and equipment 300 -- -- -- 300
--------- --------- --------- --------- ---------
Net cash used in investing activities (319) (635) (93) -- (1,047)
--------- --------- --------- --------- ---------
Financing activities:
- ---------------------
Mortgage principal repayments -- (59) -- -- (59)
Reduction in loans receivable from
officers 41 -- -- -- 41
Intercompany balances 4,028 (4,505) 465 12 --
--------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities 4,069 (4,564) 465 12 (18)
--------- --------- --------- --------- ---------
Decrease in cash and cash equivalents (10,793) (1,115) (49) -- (11,957)
Cash and cash equivalents at beginning
of period 57,150 4,680 1,170 -- 63,000
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period $ 46,357 $ 3,565 $ 1,121 $ -- $ 51,043
========= ========= ========= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for:
Income taxes $ 8 $ 82 $ -- $ -- $ 90
--------- --------- --------- --------- ---------
Interest 14,063 $ 440 $ -- $ -- $ 14,503
========= ========= ========= ========= =========
Page 20
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Consolidating Statement of Cash Flows
For the sixteen weeks ended April 18, 2004
(In thousands)
(Unaudited)
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Operating Activities:
Net (loss) income $ (3,298) $ (2,983) $ 120 $ -- $ (6,161)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Depreciation and amortization 2,244 2,900 277 -- 5,421
Amortization of senior notes discount 117 -- -- -- 117
Amortization of deferred financing 296 -- -- -- 296
Asset impairment and restaurant
closings 175 -- -- -- 175
Increase in deferred rent, net 89 3 1 -- 93
Equity in net income of unconsolidated
affiliates (398) -- -- -- (398)
Dividends received from unconsolidated
affiliates 305 -- -- -- 305
Changes in operating assets and liabilities:
Decrease (increase) in receivables 229 (104) 103 -- 228
Decrease (increase) in inventories (16) (84) 5 -- (95)
Increase in prepaid expenses (1,524) (1,178) (1) -- (2,703)
Decrease (increase) in other assets (919) 17 202 748 48
Decrease in accounts payable and accrued
expenses (3,977) (82) (155) (748) (4,962)
Decrease in accrued interest payable (5,394) -- -- -- (5,394)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities (12,071) (1,511) 552 -- (13,030)
--------- --------- --------- --------- ---------
Page 21
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Consolidating Statement of Cash Flows
For the sixteen weeks ended April 18, 2004
(In thousands)
(Unaudited)
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Investing activities:
- ---------------------
Purchase of property and equipment $ (1,031) $ (1,252) $ (41) $ -- $ (2,324)
--------- --------- --------- ------------ ---------
Net cash used in investing activities (1,031) (1,252) (41) -- (2,324)
--------- --------- --------- ------------ ---------
Financing activities:
- ---------------------
Mortgage principal repayments -- (54) -- -- (54)
Tax distribution (682) -- -- -- (682)
Reduction in loans receivable from
officers 503 -- -- -- 503
Intercompany balances (596) 916 (320) -- --
--------- --------- --------- ------------ ---------
Net cash (used in) provided by
financing activities (775) 862 (320) -- (233)
--------- --------- --------- ------------ ---------
Increase (decrease) in cash and
cash equivalents (13,877) (1,901) 191 -- (15,587)
--------- --------- --------- ------------ ---------
Cash and cash equivalents at
beginning of period 49,515 5,595 1,299 -- 56,409
--------- --------- --------- ------------ ---------
Cash and cash equivalents at
end of period $ 35,638 $ 3,694 $ 1,490 -- $ 40,822
========= ========= ========= ============ =========
Supplemental disclosure of cash flow
information:
Cash paid for:
Income taxes $ 106 $ 95 $ 3 $ -- $ 204
========= ========= ========= ============ =========
Interest $ 14,025 433 $ -- -- $ 14,458
========= ========= ========= ============ =========
Page 22
Item 2. 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
- ---------------------
We are a leading owner, operator and franchisor of Quick Service Restaurants
("QSR"), serving a wide variety of Italian specialty foods. We also operate, in
certain cases with joint venture partners, a number of other restaurant
concepts.
The following table summarizes the number of Sbarro owned, franchised and other
concept restaurants in operation during each indicated period:
16 Weeks 16 Weeks
Ended Ended
04/24/05 04/18/04 (1)
-------- ------------
Company-owned Sbarro
restaurants:
Open at beginning of period 511 533
Opened during period 1 2
Sold to franchisees
during period -- (2)
Closed during period (15) (22)
----- -----
Open at end of period 497 511
----- -----
Franchised Sbarro restaurants:
Open at beginning of period 416 364
Opened during period 16 32
Acquired from Sbarro during
period -- 2
Closed or terminated during period -- (5)
----- -----
Open at end of period 432 393
----- -----
Other concepts:
Open at beginning of period 22 27
Opened during period 3 --
Closed during period -- (3)
----- -----
Open at end of period 25 24
----- -----
All restaurants:
Open at beginning of period 949 924
Opened during period 20 34
Closed or terminated during period (15) (30)
----- -----
Open at end of period 954 928
--------------------- ===== =====
(1) The table above reflects a reclassification of our Umberto mall restaurants
from other concepts to company-owned Sbarro restaurants for the sixteen weeks
ended April 18, 2004.
Page 23
Executive Overview
Sales increased in the first quarter of 2005 compared to the first quarter of
2004. Mall traffic has increased as retailers, particularly high end mall based
retailers, are serving more customers. In addition, since 2004, we re-energized
our QSR 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. Selective price
increases, improvements in operational controls and upgraded store management at
all levels produced increased sales and improved earnings in the first quarter
of 2005.
We have developed a new concept, Carmela's of Brooklyn, which opened its first
restaurant in February 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 revenues and profits.
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. In recent years, our fourth quarter
income has fluctuated significantly due to a number of other factors, including
the adverse effect of the general economic downturn and significant year end
adjustments relating to asset impairment and store closing costs.
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 our annual test
for impairment on our goodwill and intangible assets with indefinite lives 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 become evident.
Page 24
Relevant Financial Information
Sixteen weeks ended
-------------------------------------------------
April 25, 2005 April 18, 2004
-------------------------------------------------
(dollars in millions)
Comparable Sbarro-owned QSR sales (1) $ 86.3 $ 85.8
Sbarro-owned QSR sales percentage change vs. prior
comparable period (1) 2.2% 6.6%
Franchise location sales $ 78.8 $ 71.9
Franchise revenues $ 3.5 $ 3.4
Cost of food and paper products as a percentage 20.9% 22.0%
of restaurant sales
Payroll and other benefits as a percentage of 28.0% 28.8%
restaurant sales
Other operating expenses as a percentage of 38.5% 37.2%
restaurant sales
General and administrative costs as a percentage 8.4% 8.4%
of revenues
Asset impairment, and restaurant closings $ 0.1 $ 0.2
EBITDA (2) $ 8.6 $ 8.3
- ----------
(1) Comparable Sbarro-owned QSR sales dollar and annual percentage changes
are based on locations that were in operation on a continuing basis for all
of each period presented. Comparable Sbarro-owned QSR sales for the 16
weeks of 2004 included the week between Christmas and New Year's, a
traditionally high traffic week, while the 16 weeks of 2005 did not include
that high traffic week (negatively impacting sales by $1.9 million). The
percentage change vs. prior comparable period adjusted for this unusual
week would have been 4.5% for the first quarter of 2005.
(2) Our consolidated EBITDA for the sixteen weeks ended April 24, 2005 was
$8.6 million compared to $8.3 million for the sixteen weeks ended April 18,
2004. EBITDA represents earnings before interest income, interest expense,
taxes, depreciation and amortization. EBITDA should not be considered in
isolation from, or as a substitute for, net income, cash flow from
operations or other cash flow statement data prepared in accordance with
generally accepted accounting principles ("GAAP") 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 calculations used
to determine our compliance with the ratios in the indenture under which
our senior notes are issued. We also internally use EBITDA to determine
whether to
Page 25
continue operating restaurant units since it provides us with a measurement
of whether we are receiving an adequate cash return on our cash investment.
Our calculation of EBITDA may not be comparable to a similarly titled
measure reported by other companies, since all companies do not calculate
this non-GAAP measure in the same manner. Our EBITDA calculations are not
intended to represent cash provided by (used in) operating activities since
they do not include interest and taxes and changes in operating assets and
liabilities, nor are they intended to represent a net increase in cash
since they do not include cash provided by (used in) investing and
financing activities. The following table reconciles EBITDA to our net loss
for the sixteen week periods presented, which we believe is the most direct
comparable GAAP financial measure to EBITDA (in thousands):
Sixteen Weeks Ended
April 24, 2005 April 18, 2004
-------------- --------------
EBITDA $ 8,617 $ 8,345
Interest expense (9,473) (9,477)
Interest income 365 196
Income taxes (277) (241)
Depreciation and amortization (4,973) (4,984)
--------- ---------
Net loss $ (5,741) $(6,161)
========= =========
Sales by QSR and consolidated other concept restaurants increased 0.5% to $91.3
million for the sixteen weeks ended April 24, 2005 from $90.8 million for the
sixteen weeks ended April 18, 2004. The increase in sales for the first quarter
of 2005 includes $1.0 million (1%) of higher restaurant sales in our QSR
restaurants. The 16 weeks of 2004 included a week between Christmas and New
Year's, a traditionally high traffic week, while the 16 weeks of 2005 did not
include that high traffic week (negatively impacting sales by $1.9 million).
Sales increased 1% after absorbing this unusual start. Restaurant sales of our
consolidated other concepts were slightly down for the quarter. We believe that
improved economic conditions in the United States, improvement in our
operational controls and upgraded field and store management, combined with
selective price increases, accounted for the improvements.
Franchise related income increased slightly to $3.5 million for the first
quarter of 2005 from $3.4 million in the first quarter of 2004. The increase was
attributed to additional locations opened during the last year (net of closed
locations) and a slight increase in comparable sales.
Cost of food and paper products as a percentage of restaurant sales improved by
1.1% to 20.9% for the sixteen weeks ended April 24, 2005 from 22.0% for the
sixteen weeks ended April 18, 2004. The cost of cheese in the first quarter of
2005 averaged approximately $1.75 per pound compared to an average of
approximately $1.82 per pound for the first quarter of 2004. This $.07 per pound
improvement in cheese cost
Page 26
accounted for $0.2 million or 0.2 of the percentage point improvement. Improved
operational controls, combined with selective price increases implemented in
2004 contributed to the improvement in our cost of sales as a percentage of
restaurant sales.
Payroll and other employee benefits as a percentage of restaurant sales,
improved to 28.0% in the first quarter of 2005 from 28.8% in the first quarter
of 2004. The improvement was primarily a result of the improved sales resulting
from increased mall traffic and selective price increases taken in 2004.
Other operating costs increased by $1.3 million in the first quarter of 2005 and
as a percentage of restaurant sales increased to 38.5% from 37.2% in the first
quarter of 2004. The increase was primarily related to an increase in restaurant
management bonuses of approximately $0.9 million resulting from improved
profits, and an increase in occupancy and other costs.
Interest expense of $9.5 million for both the first quarter of 2005 and 2004
relates primarily to the 11%, $255 million senior notes we issued to finance our
going private transaction and the 8.4%, $16 million mortgage loan on our
corporate headquarters.
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 decreased by $0.4 million in the first quarter of 2005
from the first quarter of 2004 as a result of a decline in traffic in our
steakhouse joint venture. There is currently one steakhouse under construction
which is expected to be completed during the second quarter of 2005. We do not
have any further expansion plans for this venture.
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 $0.3 million and $0.2 million for the first
quarter of 2005 and 2004, respectively. The expense in each period 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.
Page 27
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 agreement and general corporate purposes.
We incur annual cash interest expense of approximately $29 million under the
senior notes and 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 2005 will approximate
$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 was to expire
in May 2005 and has been extended to July 15, 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 giving effect to
outstanding letters of credit, was $1.2 million at April 24, 2005. The Company
is finalizing a new line of credit to replace the existing credit line. The new
line should be in place in the second quarter of 2005. While we expect to have
this new line in place, there can be no assurances that we will complete the
negotiations to finalize an agreement or further extend our existing line.
Contractual Obligations and Off-Balance Sheet Arrangements
Our contractual obligations and off-balance sheet arrangements with respect to
both our and other concepts (both those in which we have a majority or minority
interest) do not materially differ from the information disclosed in Part II,
Item 7 of our Annual Report on Form 10-K for the year ended January 2, 2005.
Page 28
Sources and Uses of Cash
The following table summarizes our cash and cash equivalents and working capital
as at the end of the first quarters of 2005 and 2004, respectively and the
sources and uses of our cash flows during the first quarters of each of the
respective years:
Sixteen Weeks Ended
-------------------
April 24, 2005 April 18, 2004
-------------- --------------
(in millions)
Liquidity at the end of period
------------------------------
Cash and cash equivalents $ 51.0 $ 40.8
Working capital 31.0 25.6
Net cash flows for the period
-----------------------------
Used in operating activities (10.9) (13.1)
Used in investing activities (1.1) (2.3)
Used in financing activities -- (0.2)
------- --------
Net decrease in cash $(12.0) $(15.6)
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 used in operating activities was $10.9 million for the sixteen weeks
ended April 24, 2005 compared to $13.1 million used during the sixteen weeks
ended April 18, 2004. The decrease in net cash used in operating activities is
primarily related to the change in prepaid expenses resulting from the timing of
our insurance payments.
Net cash used in investing activities has historically been primarily for
capital expenditures. Net cash used in investing activities decreased by $1.2
million to $1.1 million for the sixteen weeks ended April 24, 2005 from $2.3
million for the sixteen weeks ended April 18, 2004 primarily due to the sale of
joint venture property and equipment.
Page 29
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 the financial statements. Due to their nature, estimates involve judgments
based upon available information. Therefore, actual results or amounts could
differ from estimates and the difference could have a material impact on our
consolidated financial statements. During the sixteen weeks ended April 24,
2005, there were no material changes in our accounting policies discussed under
the heading "Critical Accounting Policies and Judgments" in Part II, Item 7 of
our Annual Report on Form 10-K for the fiscal year ended January 2, 2005 whose
application may have the most significant effect on our reported results of
operations or financial position and that require judgments estimates and
assumptions by management that can affect their application from the matters.
Certain Relationships and Transactions
During the first quarter of 2005, there were no changes in related party
transactions discussed under the heading "Certain Relationships and Related
Transactions" in Part II, Item 13 of our Annual Report on Form 10-K for the year
ended January 2, 2005.
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;
Page 30
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 services of members of our senior management team;
o our ability to attract and retain competent restaurant and executive
managerial personnel;
o competition;
o the level of, and our ability to comply with, government regulations;
o our ability to generate sufficient cash flow to make interest payments
and principal under our senior notes and 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.
You are cautioned not to place undue reliance on these statements, which speak
only as of the date of the report. We do not undertake any responsibility to
release publicly any revisions to these forward-looking statements to take into
account events or circumstances that occur after the date of this report.
Additionally, we do not undertake any responsibility to update you on the
occurrence of any unanticipated events which may cause actual results to differ
from those expressed or implied by the forward-looking statements contained in
this report.
Page 31
Item 3. Qualitative and Quantitative Disclosures of Market Risk
We have historically invested our cash on hand in short term, fixed rate, highly
rated and highly liquid instruments which are reinvested when they mature
throughout the year. The indenture under which our senior notes are issued
limits us to similar investments. Although our existing investments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, our rate of return on short-term investments could be
affected at the time of reinvestment as a result of intervening events.
Future borrowings under our 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 in the values of foreign currencies. As a result, we have not purchased
future contracts, options or other instruments to hedge against changes in
values of foreign currencies.
Item 4. Controls and Procedures
Disclosure Controls and Procedures:
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our 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, our 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 our 2004 year ended closing process and the delay in the
filing of our Form 10-K for that year, we identified two issues which we are in
the process of (but have not as yet completed) rectifying:
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 of our fiscal 2004
financial statements 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
Page 32
will expand the numbers of members of our staff with knowledge
of technical accounting literature. As reported in our Report
on Form 10-K for the year ended January 2, 2005, we had
changed certain senior accounting personnel and added a
director of compliance. In addition, just prior to the filing
of our Report on Form 10-K, we hired a senior accountant.
Since the filing of our Report on Form 10-K, we have hired two
additional senior accountants (one of whom is replacing a
senior accountant who recently resigned), and are seeking an
additional senior accountant. 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. We are in the process of
evaluating computer software programs that can provide the
requisite lease analysis in the future and are also in the
process of 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 fourth quarter of 2004
that have materially affected, or are reasonable likely to materially affect,
the Company's internal control over financial reporting.
Page 33
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal proceedings
In May 2002, the landlord of a joint venture restaurant location closed
during 2002 filed a complaint against us in the Supreme Court of 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 and included 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 settled the matter for $800,000 in the first quarter of
2005.
Item 6. Exhibits
Exhibit
Number Description
------ -----------
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.
Page 34
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.
SBARRO, INC.
------------------------------
Registrant
Date: June 8, 2005 By: /s/ Peter Beaudrault
------------ --------------------
Peter Beaudrault
President and
Chief Executive Officer
(Principal Executive Officer)
Date: June 8, 2005 By: /s/ Anthony J. Puglisi
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Anthony J. Puglisi
Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Page 35
EXHIBIT INDEX
Exhibit
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Number Description
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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.