Attached files

file filename
EX-32.02 - SECTION 906 CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER - SBARRO INCdex3202.htm
EX-32.01 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 - SBARRO INCdex3201.htm
EX-31.01 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - SBARRO INCdex3101.htm
EX-31.02 - SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER - SBARRO INCdex3102.htm
Table of Contents

 

UNITED STATES

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 September 27, 2009

   Commission file number 333-142081

 

 

SBARRO, INC.

(Exact name of registrant as specified in its charter)

 

 

 

NEW YORK   11-2501939
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The number of shares of Common Stock of the registrant outstanding as of November 12, 2009 was 100.

 

 


Table of Contents

SBARRO, INC.

FORM 10-Q INDEX

 

      PAGES

PART I. FINANCIAL INFORMATION

  

Item 1.

   Consolidated Financial Statements (unaudited):   
  

Balance Sheets (unaudited)—September 27, 2009 and December 28, 2008

   3-4
  

Statements of Operations (unaudited)— Nine months ended September 27, 2009 and September 28, 2008 and the quarter ended September 27, 2009 and September 28, 2008

   5-6
  

Statement of Shareholders’ Equity (unaudited)—Nine months ended September 27, 2009

   7
  

Statements of Cash Flows (unaudited)— Nine months ended September 27, 2009 and September 28, 2008

   8
  

Notes to Unaudited Consolidated Financial Statements

   9

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    29

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    38

Item 4T.

   Controls and Procedures    39

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings    40

Item 1A.

   Risk Factors    40

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    40

Item 3.

   Defaults Upon Senior Securities    40

Item 4.

   Submission of Matters to a Vote of Security Holders    40

Item 5.

   Other Information    40

Item 6.

   Exhibits    41

 

2


Table of Contents

Part I – Financial Information

 

Item 1. Consolidated Financial Statements

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

(UNAUDITED)

(In thousands)

 

     September 27, 2009    December 28, 2008

Current assets:

     

Cash and cash equivalents

   $ 13,456    $ 38,286

Receivables, net of allowance for doubtful accounts of $1,145 and $446 at September 27, 2009 and December 28, 2008:

     

Franchise

     3,564      3,845

Other

     2,999      3,948
             
     6,563      7,793

Inventories

     2,588      3,083

Prepaid expenses

     2,216      2,953
             

Total current assets

     24,823      52,115

Property and equipment, net

     59,889      65,640

Intangible assets:

     

Goodwill

     194,786      201,460

Trademarks

     173,100      195,000

Other intangible assets, net

     19,710      23,539

Deferred financing costs, net

     9,334      8,934

Other assets

     1,326      1,080
             

Total assets

   $ 482,968    $ 547,768
             

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES & SHAREHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

(In thousands except share data)

(CONTINUED)

 

     September 27, 2009     December 28, 2008  

Current liabilities:

    

Accounts payable

   $ 6,640      $ 11,621   

Accrued expenses

     22,309        22,972   

Accrued interest payable

     3,340        7,291   

Due to former shareholders

     —          2,993   

Insurance premium financing

     —          1,087   

Current portion of debt

     —          3,958   
                

Total current liabilities

     32,289        49,922   

Deferred rent

     6,047        5,189   

Deferred tax liability

     77,323        87,238   

Due to former shareholders & other

     12,258        11,043   

Accrued interest payable

     2,008        —     

Long-term debt

     336,032        346,297   

Commitments and contingencies

    

Shareholders’ equity:

    

Common stock

    

Authorized 1,000 shares; $.01 par value issued and outstanding 100 shares at September 27, 2009 and December 28, 2008

     —          —     

Additional paid-in capital

     133,000        133,000   

Additional paid-in capital warrants

     6,340        —     

Currency translation adjustments

     172        135   

Advances to MidOcean SBR Holdings

     (305     (305

Accumulated deficit

     (125,339     (88,639
                

Total shareholders’ equity

     13,868        44,191   

Noncontrolling interests

     3,143        3,888   
                

Total shareholders’ equity, including noncontrolling interests

     17,011        48,079   
                

Total liabilities and shareholders’ equity

   $ 482,968      $ 547,768   
                

See notes to unaudited consolidated financial statements.

 

4


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands)

 

     For the nine months
ended
September 27, 2009
    For the nine months
ended
September 28, 2008
 

Revenues:

    

Restaurant sales

   $ 235,083      $ 248,379   

Franchise related income

     10,162        12,108   
                

Total revenues

     245,245        260,487   

Costs and expenses:

    

Cost of food and paper products

     48,117        56,983   

Payroll and other employee benefits

     66,047        70,860   

Other operating costs

     89,915        92,398   

Other income, net

     (2,885     (2,785

Depreciation and amortization

     12,297        12,720   

General and administrative

     22,612        20,975   

Goodwill & other intangible asset impairment

     31,474        —     

Asset impairment, restaurant closings/remodels

     2,305        1,184   
                

Total costs and expenses, net

     269,882        252,335   
                

Operating (loss) income

     (24,637     8,152   
                

Other (expense) income:

    

Interest expense

     (20,747     (21,617

Write-off of deferred financing costs

     (423     —     

Interest income

     33        132   
                

Net other expense

     (21,137     (21,485
                

Loss before income taxes and equity investments

     (45,774     (13,333

Income tax benefit

     (9,480     (4,937
                

Loss before equity investments

     (36,294     (8,396

Loss from equity investments

     (162     (185
                

Net loss

     (36,456     (8,581

Less: Net income attributable to noncontrolling interests

     (244     (325
                

Net loss attributable to Sbarro, Inc.

   $ (36,700   $ (8,906
                

See notes to unaudited consolidated financial statements.

 

5


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands)

 

     For the three months
ended
September 27, 2009
    For the three months
ended
September 28, 2008
 

Revenues:

    

Restaurant sales

   $ 82,141      $ 87,483   

Franchise related income

     3,388        4,384   
                

Total revenues

     85,529        91,867   

Costs and expenses:

    

Cost of food and paper products

     16,988        20,215   

Payroll and other employee benefits

     23,260        24,132   

Other operating costs

     30,341        31,446   

Other income, net

     (865     (884

Depreciation and amortization

     3,830        3,986   

General and administrative

     6,786        6,730   

Goodwill & other intangible asset impairment

     31,474        —     

Asset impairment, restaurant closings/remodels

     309        849   
                

Total costs and expenses, net

     112,123        86,474   
                

Operating (loss) income

     (26,594     5,393   
                

Other (expense) income:

    

Interest expense

     (7,414     (6,572

Interest income

     —          25   
                

Net other expense

     (7,414     (6,547
                

Loss before income taxes and equity investments

     (34,008     (1,154

Income tax benefit

     (9,752     (114
                

Loss before equity investments

     (24,256     (1,040

Loss from equity investments

     (54     (57
                

Net loss

     (24,310     (1,097

Less: Net income attributable to noncontrolling interests

     (211     (77
                

Net loss attributable to Sbarro, Inc.

   $ (24,521   $ (1,174
                

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(In thousands except share data)

 

    Common Stock   Additional
paid-in
capital
  Additional
paid-in
capital -
warrants
  Advances to
MidOcean
SBR
Holdings
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (b)
  Noncontrolling
Interest
    Total  
    Number of
Shares
  Amount              

Balance at December 28, 2008

  100   $ —     $ 133,000   $ —     $ (305   $ (88,639   $ 135   $ 3,888      $ 48,079   

Components of comprehensive income (loss):

                 

Net (loss) income

        —       —       —          (36,700     —       244        (36,456

Currency translation adjustments

        —       —       —          —          37     (21     16   
                       

Comprehensive income (loss) (a)

                    (36,440

Additional paid-in capital warrants

        —       6,340     —          —          —       —          6,340   

Capital contribution from noncontrolling interest

        —       —       —          —          —       394        394   

Distribution of earnings & return of capital

        —       —       —          —          —       (988     (988

Short-term loan payment

        —       —       —          —          —       (374     (374
                                                           

Balance at September 27, 2009

  100   $ —     $ 133,000   $ 6,340   $ (305   $ (125,339   $ 172   $ 3,143      $ 17,011   
                                                           

 

(a)

The components of comprehensive income (loss) are as follows:

 

     Quarter ended
Sept 27, 2009
    Quarter ended
Sept 28, 2008
    Year to date
Sept 28, 2008
 

Net loss (including noncontrolling interests)

   $ (24,310   $ (1,097   $ (8,581

Currency translation adjustments

     (56     40        (4
                        
     (24,366     (1,057     (8,585

Less: comprehensive income attributable to noncontrolling interests

     160        122        352   
                        

Comprehensive income - Sbarro, Inc.

   $ (24,526   $ (1,179   $ (8,937
                        

 

(b)

The components of accumulated other comprehensive income are as follows:

 

     Sept 27, 2009    December 28, 2008

Currency translation adjustments

   $ 191    $ 175

Less: noncontrolling interests - currency translation adjustments

     19      40
             

Accumulated other comprehensive income - Sbarro, Inc.

   $ 172    $ 135
             

See notes to unaudited consolidated financial statements.

 

7


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     For the nine months
ended
September 27, 2009
    For the nine months
ended
September 28, 2008
 

Operating Activities:

    

Net loss

   $ (36,456   $ (8,581

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

    

Goodwill & other intangible asset impairment

     31,474        —     

Depreciation and amortization

     12,297        12,720   

Amortization of deferred financing costs

     1,084        841   

Provision for doubtful accounts receivable

     916        —     

Increase in deferred rent, net of tenant allowance

     1,404        1,218   

Asset impairment and restaurant closings/remodels

     1,100        1,184   

Change in deferred income taxes, net

     (9,915     (5,854

Write-off of deferred financing costs

     423        —     

Equity in net loss of unconsolidated affiliates

     162        185   

Changes in operating assets and liabilities:

    

Decrease in receivables

     54        158   

Decrease in inventories

     495        333   

(Increase) decrease in prepaid expenses

     (350     191   

Increase in other assets

     (86     (111

(Decrease) increase in accounts payable, accrued expenses & other liabilities

     (8,278     4,036   

Decrease in accrued interest payable

     (1,941     (4,252
                

Net cash (used in) provided by operating activities

     (7,617     2,068   
                

Investing Activities:

    

Purchases of property and equipment

     (6,277     (13,371

Purchase of franchises and other locations

     —          (1,261

Investment in joint ventures

     (283     (124
                

Net cash used in investing activities

     (6,560     (14,756
                

Financing Activities:

    

Proceeds from second lien

     25,000        —     

Debt issue and credit amendment costs

     (1,834     —     

Repayment of secured term loan and revolver

     (32,958     (1,373

Advances to MidOcean SBR Holdings

     —          (305

Capital contribution from noncontrolling interests

     394        480   

Repayment of short-term loan to noncontrolling interests

     (374     (614

Distribution of earnings to noncontrolling interests

     (881     (922
                

Net cash used in financing activities

     (10,653     (2,734
                

Decrease in cash and cash equivalents

     (24,830     (15,422

Cash and cash equivalents at beginning of period

     38,286        28,867   
                

Cash and cash equivalents at end of period

   $ 13,456      $ 13,445   
                

See notes to unaudited consolidated financial statements.

 

8


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1. Description of business:

Basis of financial statement presentation:

On January 31, 2007, entities controlled by MidOcean Partners III, LP, a private equity firm, and certain of its affiliates (“MidOcean”) acquired the Company, pursuant to an agreement and plan of merger (“Merger Agreement”). MidOcean SBR Acquisition Corp., a wholly-owned subsidiary of Sbarro Holdings, LLC, merged with and into the Company (the “Merger”), with the Company surviving the Merger. Sbarro Holdings, LLC is a wholly-owned subsidiary of MidOcean SBR Holdings, LLC (“Holdings”). Sbarro Holdings, LLC owns 100% of our outstanding common stock and Holdings owns 100% of the limited liability company interests of Sbarro Holdings, LLC.

MidOcean owns approximately 76% of Holdings and acquired control of the Company in the Merger. Certain of our senior managers acquired approximately 5% of the outstanding equity of Holdings in connection with the Merger, with the balance of the equity of Holdings being owned by other investors.

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 September 27, 2009, and our consolidated results of operations for the three months ended September 27, 2009 and September 28, 2008 and our consolidated results of operations and cash flows for the nine months ended September 27, 2009 and September 28, 2008 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 our annual financial statements, including footnotes thereto, included in our Annual Report on Form 10-K for the year ended December 28, 2008.

Subsequent Events

The Company evaluated subsequent events through November 12, 2009, which is the date the financial statements were issued. We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to November 12, 2009 that would have a material impact on our financial statements.

Liquidity

We are highly leveraged and a substantial portion of our liquidity needs arise from debt service on indebtedness incurred in connection with the Merger and from funding our costs of operations, working capital and capital expenditures. Cash flow generated during our fourth quarter is critical to achieving positive annual operating cash flow. Adverse macroeconomic factors, including reduced mall traffic during the holiday shopping season, and a decline in consumer spending, among other factors, may negatively impact achieving our projected operating cash flow.

Our ability to borrow funds under our revolver is subject to our compliance with our debt covenant requirements. Prior to the amendment to our Senior Credit Facilities, such covenants included an interest coverage ratio and a total net leverage ratio. As of year end, we were in violation of our total net leverage ratio covenant under the credit agreement governing our Senior Credit Facilities. On March 26, 2009, we entered into an amendment to the Senior Credit Facilities. The amendment permitted the Company to refinance a portion of our Term Loan by entering into a new Second Lien Facility, permanently waived a breach of our total net leverage ratio covenant for the fiscal quarter ended December 28, 2008, replaced our total net leverage ratio covenant and interest coverage ratio covenant with a minimum EBITDA covenant and a maximum capital expenditure covenant, increased the margin on our Term Loan and Revolving Facility by 200 basis points, required prepayment of $25.0 million of the Term Loan from the proceeds of the Second Lien Facility, required prepayment of $3.5 million of the Revolving Facility from cash on hand and simultaneously reduced the Revolving Facility’s amount outstanding and commitment to $21.5 million, and restricted payment of MidOcean’s annual management fee so that such fee will accrue but not be paid until the Company’s EBITDA is at least $55.0 million and, after such goal is obtained, then a maximum of $2.0 million of such fees may be paid each year. See Note 3—Long-Term Debt for additional information regarding the amendment to the Senior Credit Facilities and the new Second Lien Facility.

In response to the economic downturn in 2008, we began to implement aggressive strategic initiatives to reduce costs and improve our liquidity. These initiatives, which are ongoing, include closing unprofitable stores, renegotiating store lease terms, reducing headcount, revising our recipes without affecting our customers, as well as other expense controls. We believe these actions will enhance our liquidity going forward and will enable us to be in compliance with our debt covenants under the amended credit agreement and that cash generated from operations, together with cash on hand and amounts available under the Senior Credit Facilities, will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs and

 

9


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

capital expenditure requirements for at least the next year. Our future financial and operating performance, ability to service or refinance our debt and ability to comply with covenants and restrictions contained in our debt agreements will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

Certain reclassifications have been made to the prior periods’ financial statements to conform to current classifications as a result of the Company’s adoption of “Non Controlling Interests in Consolidated Financial Statements” as discussed in Note 2 below.

2. Recent Accounting Pronouncements:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued “Fair Value Measurements.” This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The statement applies whenever other statements require or permit assets or liabilities to be measured at fair value. It is effective for fiscal years beginning after November 15, 2007. This statement does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. The FASB issued this statement to exclude a prior FASB statement and its related interpretive accounting pronouncements that address leasing transactions. In October 2008, the FASB issued an additional clarification of the application of “Fair Value Measurements” in an inactive market that illustrates how an entity would determine fair value when the market for a financial asset is not active. We adopted this statement which did not have a material effect on our consolidated financial statements.

In December 2007, the FASB issued “Business Combinations,” which is effective for annual periods beginning on or after December 15, 2008. The FASB retained the fundamental requirements to account for all business combinations using the acquisition method (formerly the purchase method) and for an acquiring entity to be identified in all business combinations. However, the new standard requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed in the transaction; establishes the acquisition date for value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. The Company will apply the provisions of this statement prospectively to business combinations for which the acquisition date is on or after December 29, 2008. We evaluated this statement but we did not have any business combinations; therefore, the adoption had no impact on our consolidated financial statements.

In December 2007, the FASB issued “Noncontrolling Interests in Consolidated Financial Statements,” which is effective for fiscal years beginning on or after December 15, 2008. This requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements, but separate from the equity of the parent company. The statement further requires that consolidated net income be reported at amounts attributable to the parent and the noncontrolling interest rather than expensing the income attributable to the minority interest holder. This statement also requires that companies provide sufficient disclosures to clearly identify and distinguish between the interest of the parent company and the interest of the noncontrolling interest holder. On December 29, 2008, we adopted this statement and presented noncontrolling interests as a component of equity, a separate net income attributable to/from noncontrolling interests and a classification of distributions to/from noncontrolling interests in the consolidated financial statements. Prior period amounts have been reclassified to conform with the current presentation. The adoption of this statement did not have any other material impacts on our consolidated financial statements.

In April 2009, the FASB issued “Recognition and Presentation of Other-Than-Temporary Impairments.” This provides new guidance on the recognition and presentation of an other-than-temporary impairment for debt securities classified as available-for-sale and held-to-maturity and provides some new disclosure requirements for both debt and equity securities. It is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this statement which did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions that are Not Orderly.” This provides additional guidance for estimating the fair value of assets and liabilities within the scope of “Fair Value Measurements” in markets that have experienced a significant reduction in volume and activity in relation to normal activity. It is effective for interim and annual periods ending after June 15, 2009. We adopted this statement which did not have a material effect on our consolidated financial statements.

 

10


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

In April 2009, the FASB issued “Interim Disclosures About Fair Value of Financial Instruments.” This amends, “Disclosures about Fair Values of Financial Instruments,” and “Interim Financial Reporting,” and requires disclosures about fair value of financial instruments in interim financial statements. It is effective for interim periods ending after June 15, 2009. We adopted the disclosure requirements of this statement.

In May 2009, the FASB issued, “Subsequent Events.” This standard provides guidance on management’s assessment of subsequent events, which are defined as events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This standard also requires disclosure of the date through which subsequent events have been evaluated and whether that is the date that the financial statements were issued or available to be issued. This standard is effective for interim or annual fiscal periods ending after June 15, 2009. We adopted this statement which did not have an impact on our consolidated financial statements.

In June 2009, the FASB issued “Amendments to FASB Interpretation No. 46(R).” This statement amends the consolidation guidance applicable to variable interest entities and is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2009. We are evaluating the impact that this statement will have on our consolidated financial results.

In June 2009, FASB issued “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” This standard replaces “The Hierarchy of Generally Accepted Accounting Principles,” and establishes only two levels of U.S. generally accepted accounting principles (“GAAP”): authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We began to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on our consolidated financial statements.

3. Long Term Debt:

Indenture:

In connection with the Merger, we issued $150.0 million of senior notes at 10.375% due 2015 (“Senior Notes”). The interest is payable on February 1 and August 1 of each year.

The Senior Notes are senior unsecured obligations of ours and are guaranteed by all of our current and future domestic subsidiaries and rank equally in right of payment with all existing and future senior indebtedness of ours. The Senior Notes are effectively subordinated to all secured indebtedness of ours to the extent of the collateral securing such indebtedness, including the Senior Credit Facilities and Second Lien Facility (both defined below). In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders of secured indebtedness will have prior claim to those of our assets that constitute their collateral. The Senior Notes are structurally subordinated to all existing and future indebtedness, claims of holders of preferred stock and other liabilities of our subsidiaries that do not guarantee the Senior Notes. In the event of a bankruptcy, liquidation or reorganization of any of our non-guarantor subsidiaries, holders of their indebtedness and their trade creditors will generally be entitled to payment of their claims in full from the assets of those subsidiaries before any assets are made available for distribution to us. The Senior Notes are senior in right of payment to any future subordinated obligations of ours.

The indenture governing the notes contains certain events of default and restrictive covenants which are customary with respect to non-investment grade debt securities, including limitations on the incurrence of additional indebtedness, dividends, repurchases of capital stock, sales of assets, liens, mergers and transactions with affiliates.

 

11


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Senior Credit Facilities:

In connection with the Merger, we entered into senior secured credit facilities. The senior secured credit facilities originally provided for loans of $208.0 million under a $183.0 million senior secured term loan facility (the “Term Loan”) and a $25.0 million senior secured revolving facility (the “Revolving Facility,” and collectively with the Term Loan, the “Senior Credit Facilities”). The Revolving Facility also provides for the issuance of letters of credit not to exceed $10.0 million at any one time outstanding and swing-line loans not to exceed $5.0 million at any one time outstanding. In connection with the Merger, we borrowed the entire $183.0 million available under the Term Loan. On October 17, 2008 and November 18, 2008, we borrowed $8.0 million and $12.0 million, respectively, and we repaid $3.5 million and $4.0 million on March 26, 2009 and June 1, 2009, respectively, under the Revolving Facility. The Term Loan matures in 2014 and the Revolving Facility is scheduled to terminate and come due in 2013.

On March 26, 2009, we entered into an amendment to the Senior Credit Facilities. The amendment permitted the Company to refinance a portion of the Term Loan by entering into a new Second Lien Facility (defined and discussed below), permanently waived a breach of our total net leverage ratio covenant for the fiscal quarter ended December 28, 2008, permanently replaced our total net leverage ratio covenant and interest coverage ratio covenant with a minimum EBITDA covenant and a maximum capital expenditure covenant, increased the margin on our Term Loan and Revolving Facility by 200 basis points, required prepayment of $25.0 million of the Term Loan from the proceeds of the Second Lien Facility, required prepayment of $3.5 million of the Revolving Facility from cash on hand and simultaneously reduced the Revolving Facility’s amount outstanding and commitment to $21.5 million, and restricted payment of MidOcean’s annual management fee so that such fee will accrue but not be paid until the Company’s EBITDA is at least $55.0 million and, after such goal is obtained, then a maximum of $2.0 million of such fees may be paid each year. In the first quarter of 2009, we wrote off $.4 million of deferred financing costs related to the prepayment of the Term Loan. On June 1, 2009, we repaid $4.0 million of the Revolving Facility. There were $3.6 million of letters of credit outstanding as of September 27, 2009. The letters of credit were issued instead of cash security deposits under our operating leases or to guarantee construction costs of our locations, and for run-out claims under our medical plan. As a result, as of September 27, 2009, our remaining borrowing availability under the Senior Credit Facilities was $5.4 million.

In general, borrowings under the Senior Credit Facilities bear interest based, at our option, at either the LIBOR rate or an alternate base rate (“ABR”), in each case plus a margin. Our rate of interest for borrowings under the Senior Credit Facilities, as amended, is LIBOR plus 4.50% or ABR plus 3.50%. In addition to paying interest on outstanding principal under the Senior Credit Facilities, we are required to pay an unused line fee to the lenders with respect to the unutilized revolving commitments at a rate that shall not exceed 50 basis points per annum.

Our obligations under the Senior Credit Facilities are unconditionally and irrevocably guaranteed by our domestic subsidiaries. In addition, the Senior Credit Facilities are secured by first priority perfected security interests in substantially all of our and our domestic subsidiaries’ capital stock, and up to 65% of the outstanding capital stock of our foreign subsidiaries.

The credit agreement governing the Senior Credit Facilities contains certain events of default and restrictive covenants which are customary with respect to facilities of this type, including limitations on the incurrence of additional indebtedness, dividends, investments, repayment of certain indebtedness, sales of assets, liens, mergers and transactions with affiliates. In addition, the credit agreement, as amended, requires compliance with certain financial and operating covenants, including a minimum EBITDA covenant and a maximum capital expenditure covenant.

Second Lien Facility

On March 26, 2009, we entered into a new Second Lien Facility. The Second Lien Facility provides for a $25.5 million secured term loan facility which matures in 2014. The loan under the Second Lien Facility was made by Column Investments S.a.r.l., an affiliate of MidOcean. In connection with closing the Second Lien Facility, we borrowed the entire $25.5 million available under the facility which provided for cash proceeds of $25.0 million (representing a discount).

Borrowings under the Second Lien Facility bear interest at 15% per annum payable quarterly in arrears. The Second Lien Facility requires no principal payments until maturity. Interest is payable quarterly as follows: (i) prior to the third anniversary, interest is only payable in kind; and (ii) after the third anniversary, interest is payable in cash so long as the Senior Credit Facilities leverage ratio is less than or equal to 2.75:1.00. Interest accrued on the Second Lien Facility as of September 27, 2009 was approximately $2.0 million.

 

12


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

Our obligations under the Second Lien Facility are unconditionally and irrevocably guaranteed by our domestic subsidiaries. In addition, the Second Lien Facility is secured by a second priority perfected security interest in substantially all of our and our domestic subsidiaries’ capital stock, and up to 65% of the outstanding capital stock of our foreign subsidiaries.

The credit agreement governing the Second Lien Facility contains certain events of default and restrictive covenants which are customary with respect to facilities of this type, including limitations on the incurrence of indebtedness, dividends, investments, prepayment of certain indebtedness, sales of assets, liens, mergers and transactions with affiliates. In addition, the credit agreement contains (i) cross-acceleration provisions tied to the Senior Credit Facilities and cross-default provisions tied to the Senior Notes and (ii) compliance with certain financial and operating covenants, including a minimum EBITDA covenant and a maximum capital expenditure covenant, which are based on the covenants contained in the Senior Credit Facilities with less restrictive thresholds by approximately 15%. The credit agreement also contains a make-whole provision for any prepayment prior to the scheduled maturity date.

In connection with the closing of the Second Lien Facility, Holdings issued immediately exercisable warrants to certain MidOcean entities to acquire 5% of Holdings units issued and outstanding on the dates of exercise. The fair value of the warrants issued in connection with the credit agreement governing the Second Lien Facility was $6.3 million and was recorded as paid-in capital with the offset recorded as a discount on the Second Lien Facility which is amortized over the life of the Second Lien Facility.

In connection with the amendment to the Senior Credit Facilities and entry into the new Second Lien Facility, we recorded deferred financing costs of $1.9 million.

Long-term debt of $12.5 million is scheduled to mature in 2013 and $330.3 million is scheduled to mature in 2014 and thereafter.

4. Intangibles (in thousands):

Goodwill

We have two reporting units (Company-owned and Franchise) for the purposes of evaluating goodwill for impairment. The carrying value of goodwill was allocated to each of our reporting units based upon the fair value of the reporting units at the date of the Merger.

Testing for impairment must be performed annually, or on an interim basis upon the occurrence of a triggering event or circumstances that would more likely than not reduce the carrying amount of a reporting unit below its fair value. The Company last performed its annual test for impairment as of December 27, 2008 and was scheduled to do so again in the fourth quarter of 2009. However, with the continuing economic downturn affecting our five year financial forecasts, management believed that there were circumstances evident to warrant impairment testing as of September 27, 2009.

Goodwill impairment testing is a two-step process. Step 1 involves comparing the fair value of the Company’s reporting units to their carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, Step 2 must be completed to measure the amount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.

Consistent with previous tests, we considered the results of both an income approach and a market approach in determining the fair value of the reporting units.

For the income approach we assumed that the current economic downturn would continue domestically in 2010 with slight improvements in the second half of the year, followed by growth in future years consistent with our growth prior to the recent downturn in the economy. Internationally, we assumed the continued downturn in the economy in 2010 followed by growth in future years consistent with our growth prior to the recent downturn in the economy.

 

13


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

We applied gross margin assumptions consistent with the Company’s current trends and used a 5.3% growth factor. Discounting the projected cash flows at 15.0% we determined a fair value for the reporting units.

We calculated the fair value of the reporting units’ equity using a market approach based on option pricing principles. This method estimates the fair value of the reporting unit’s equity using inputs such as current debt, future expected interest payments over the term, expected volatility and risk-free rate. For purposes of our analysis, we used a three year term with an expected volatility of 40.0% and risk-free rate of 1.5%. Volatility assumptions were based on published estimates of the Company’s industry peer group.

The Company considered each alternative in determining fair value of the reporting units, and in doing so concluded that given the current environment, the market-based equity pricing model (market approach) was most appropriate. This resulted in full impairment of goodwill in the amount of $6.7 million for the franchise reporting segment. No goodwill impairment was recorded for the Company-owned reporting segment as its fair value exceeded its carrying value by 38%.

Had the volatility assumption in the market approach been at a point below 35%, Step 2 testing would have been performed on the Company-owned reporting segment and it is likely that an impairment of goodwill would have been necessary.

The following table presents goodwill balances of the two reporting units and the activity for the periods shown:

 

     Company-owned     Franchise  

December 30, 2007

   $ 196,087      $ 15,149   

Adjustments, net of store acquisitions

     (1,301     —     

Impairment

     —          (8,475
                

December 28, 2008

     194,786        6,674   

Impairment

     —          (6,674
                

September 27, 2009

   $ 194,786      $ —     
                

Other Intangibles

In connection with the impairment testing of the Company’s goodwill, impairment testing was also performed on our trademarks and other indefinite lived intangible assets. We completed this test to determine any impairment value on trademarks, franchise relationships and franchise rights acquired by using the income approach which projects the present value of future cash flows attributable to these assets using the Relief from Royalty method.

The following table presents trademark, franchise rights acquired, franchise relationships and franchise agreements, net and the activity for the periods shown:

 

     Trademark     Franchise
Relationships
    Franchise
Rights Acquired
   Franchise
Agreements, net
 

December 30, 2007

   $ 248,000      $ 24,300      $ 1,351    $ 6,345   

Amortization

     —          —          —        (1,457

Impairment

     (53,000     (7,000     —        —     
                               

December 28, 2008

   $ 195,000      $ 17,300      $ 1,351    $ 4,888   

Amortization

     —          —          —        (929

Impairment

     (21,900     (2,900     —        —     
                               

September 27, 2009

   $ 173,100      $ 14,400      $ 1,351    $ 3,959   
                               

 

14


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

For purposes of establishing inputs for the fair value calculations described above related to indefinite lived intangible assets, we assumed that the current economic downturn would continue domestically through 2010 with slight improvements in the second half of 2010, followed by growth in future years consistent with our growth prior to the recent downturn in the economy. Internationally, we assumed the continued downturn in the economy in 2010 followed by growth in future years consistent with our growth prior to the recent downturn in the economy.

We applied gross margin assumptions consistent with the Company’s current trends and used a 4.4% growth factor. Discounting the projected cash flows of these indefinite lived intangible assets at 14.5%, a rate similar to that used in the Company’s goodwill impairment tests, we determined a value of $173.1 million for our trademarks and $14.4 million for our franchise relationships at September 27, 2009. Accordingly, we impaired $21.9 million of trademark and $2.9 million for franchise relationships intangibles at September 27, 2009. The fair value of the franchise rights acquired exceeded their carrying value. If the terminal growth rate used in the fair value calculation for trademarks and franchise relationships intangibles was decreased by 1%, the impairment charge would have increased by $10.3 million and $1.0 million, respectively. If the discount rate used in the fair value calculation for trademarks and franchise relationships was increased by 1%, the impairment charges would have increased by $16.0 million and $1.5 million, respectively.

Franchise agreements are definite lived assets and amortized over the life of the agreements. Amortization expense of $.9 and $1.1 million was recorded in the nine months ended September 27, 2009 and September 28, 2008, respectively. At September 27, 2009 and September 28, 2008 accumulated amortization was $4.0 million and $2.7 million, respectively.

Franchise Rights Acquired

During 2007, we purchased 9 stores in Utah and Hawaii owned by two franchisees. The total purchase price was $4.0 million of which $2.6 million was allocated to fixed assets and $1.4 million was allocated to franchise rights.

Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the indefinite lived asset impairment testing during the nine months ended September 27, 2009 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue, margin growth rates, or net cash flows are not achieved, we may be required to record additional impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

5. Income Taxes:

We provide for income taxes using the liability method. Deferred taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and income tax purposes as determined under enacted tax laws and rates. The effect of changes in tax laws or rates is accounted for in the period of enactment.

We adopted the provisions of FASB Interpretation “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB 109.” This interpretation prescribes a recognition threshold and a related measurement model. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The adoption of the provisions of this did not have a material impact on our consolidated financial statements and we do not expect the change to have a significant impact on our results of operations or financial position during the next twelve months.

In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will be realized. Ultimately, the realization of the deferred tax asset is dependent upon the generation of sufficient future taxable income during those periods in which temporary differences become deductible and/or net operating loss and tax credit carryforwards can be utilized. Management considers the level of historical taxable income, scheduled reversal of taxable temporary differences, projected future taxable income and impairment of other assets.

Based on these considerations and the uncertainty surrounding the future economic climate, management believes that it is more likely than not that our net operating loss carryforward, foreign tax credit carryforward, and other deferred tax assets will not be realized. In the first nine months of 2009, we recorded an addition to our valuation allowance against these deferred tax assets of $5.6 million. The balance of the valuation allowance as of September 27, 2009 was $40.6 million.

 

15


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

6. Fair Value Measurement

Current accounting guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:

 

   

Level 1 – Quoted prices for identical instruments in active markets.

 

   

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets.

 

   

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

In addition, the guidance requires disclosures about the use of fair value to measure assets and liabilities to enable the assessment of inputs used to develop fair value measures, and for unobservable inputs to determine the effects of the measurements on earnings.

The fair values of cash and cash equivalents, accounts receivables-net, and accounts payable approximate carrying amounts because of the short maturities of these instruments. Based on the quoted market price and trades, the estimated fair value of our Senior Notes as of September 27, 2009 approximated $119 million. Fair value of the Senior Credit Facility was obtained from an independent source of composite bid prices from multiple dealers (level 2 input) and approximated $141 million as of September 27, 2009.

Fair value of the Second Lien was obtained from an independent source based on broker quotes, as well as consideration of peer group credit spread analysis and was determined to be $23.2 million at September 27, 2009.

The fair values of goodwill and intangible assets were determined using level 3 inputs. The level 3 fair values were determined using both the market approach and the income approach (discounted cash flow). The market approach determined the fair value using an options valuation model. This model estimated the fair value of the Company’s equity using inputs such as current debt, future expected interest payments over the term, expected volatility and risk-free rate. The fair value of certain intangibles was determined under the discounted cash flow approach. In doing so, the Company determined fair value based on estimated future cash flows discounted at a rate commensurate with the Company’s risk characteristics. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. We assumed that the current economic downturn would continue domestically in 2010 with slight improvements in the second half of the year, followed by growth in future years consistent with our growth prior to the recent downturn in the economy. Internationally, we assumed the continued downturn in the economy through 2010 followed by growth in future years consistent with our growth prior to the recent downturn in the economy. This is discussed further in Note 4—Intangibles to our Consolidated Financial Statements.

 

16


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

7. Business Segment Information:

We operate our business through two segments. Our company-owned restaurant segment is comprised of the operating activities of our company-owned quick service restaurants (“QSR”) and other concept restaurants. Our franchise restaurant segment is comprised of our franchised restaurants which offer opportunities worldwide for qualified operators to conduct business under the Sbarro name and other trade names owned by Sbarro. Revenue from our franchised restaurant segment is generated from initial franchise fees, ongoing royalties and other franchising revenue. We do not allocate indirect corporate charges to our operating segments. Such costs are managed on an entity-wide basis, and the information to reasonably allocate such costs is not readily available. We do not allocate assets by segment because our chief operating decision makers do not review the assets by segment to assess performance, as the assets are managed on an entity-wide basis. Our operating segments are discussed in Note 1—Summary of Significant Accounting Policies and Note 13—Business Segment Information to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 28, 2008.

The following table sets forth the information concerning the revenue and operating income before unallocated costs of each of our company-owned and franchised restaurant segments:

 

     Company-
Owned
Restaurants
    Franchised
Restaurants
   Totals  
     (In thousands)  

3rd Quarter 2009

       

Total revenue

   $ 82,141      $ 3,388    $ 85,529   
                       

Operating (loss) income before unallocated costs

     (23,195     2,150      (21,045
                 

Unallocated costs and expenses (1)

          5,549   
             

Operating loss

        $ (26,594
             

3rd Quarter 2008

       

Total revenue

   $ 87,483      $ 4,384    $ 91,867   
                       

Operating income before unallocated costs

     7,741        3,389      11,130   
                 

Unallocated costs and expenses (1)

          5,737   
             

Operating income

        $ 5,393   
             

YTD 3rd Quarter 2009

       

Total revenue

   $ 235,083      $ 10,162    $ 245,245   
                       

Operating (loss) income before unallocated costs

     (11,936     6,277      (5,659
                 

Unallocated costs and expenses (1)

          18,978   
             

Operating loss

        $ (24,637
             

YTD 3rd Quarter 2008

       

Total revenue

   $ 248,379      $ 12,108    $ 260,487   
                       

Operating income before unallocated costs

     17,024        8,729      25,753   
                 

Unallocated costs and expenses (1)

          17,601   
             

Operating income

        $ 8,152   
             

 

(1)

Represents certain general and administrative expenses that are not allocated by segment.

Geographic Information

The Company recorded revenues of $239 million and $6 million and $253 million and $7 million in the United States and all other foreign countries in the first nine months of 2009 and 2008, respectively, and $83 million and $2 million and $89 million and $3 million in the United States and all other foreign countries in the third quarter of 2009 and 2008, respectively.

 

17


Table of Contents

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

 

8. Guarantor and non-guarantor financial statements:

Certain subsidiaries have guaranteed amounts outstanding under our credit facilities. Each of the guaranteeing subsidiaries is a direct or indirect wholly-owned subsidiary of the Company and each has fully and unconditionally guaranteed the Senior Notes, the Senior Credit Facilities, and the Second Lien Facility on a joint and several basis.

The following condensed consolidating financial information presents:

 

  (1)

Condensed unaudited consolidating balance sheets as of September 27, 2009 and December 28, 2008 and unaudited statements of operations for the three months ended September 27, 2009 and September 28, 2008 and our unaudited statement of operations and cash flows for the nine months ended September 27, 2009 and September 28, 2008 for: (a) Sbarro, (“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 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 equity method.

 

18


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Balance Sheet

As of September 27, 2009

ASSETS

(In thousands)

(Continued)

 

     Parent     Guarantor
Subsidiaries
   Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total

Current assets:

           

Cash and cash equivalents

   $ 11,806      $ 1,446    $ 204      $ —        $ 13,456

Receivables

           

Franchise

     3,564        —        —          —          3,564

Other

     2,668        252      79        —          2,999
                                     
     6,232        252      79        —          6,563

Inventories

     1,030        1,449      109        —          2,588

Prepaid expenses

     1,689        461      66        —          2,216
                                     

Total current assets

     20,757        3,608      458        —          24,823

Intercompany receivables

     (33,808     35,805      (1,848     (149     —  

Investment in subsidiaries

     66,854        —        1,240        (68,094     —  

Property and equipment, net

     20,316        38,393      1,410        (230     59,889

Goodwill

     194,786        —        —          —          194,786

Trademarks

     173,100        —        —          —          173,100

Other intangible assets, net

     19,710        —        —          —          19,710

Deferred financing costs, net

     9,334        —        —          —          9,334

Other assets

     1,514        186      523        (897     1,326
                                     

Total assets

   $ 472,563      $ 77,992    $ 1,783      $ (69,370   $ 482,968
                                     

 

19


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Balance Sheet

As of September 27, 2009

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

(In thousands)

(Continued)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Current liabilities:

          

Accounts payable

   $ 6,345      $ 153      $ 142      $ —        $ 6,640   

Accrued expenses

     20,046        2,255        731        (723     22,309   

Accrued interest payable

     3,340        —          —          —          3,340   
                                        

Total current liabilities

     29,731        2,408        873        (723     32,289   

Deferred rent

     256        5,791        —          —          6,047   

Deferred tax liability

     77,323        —          —          —          77,323   

Due to former shareholders & other

     12,636        (378     —          —          12,258   

Accrued interest payable

     2,008        —          —          —          2,008   

Long-term debt

     336,032        —          —          —          336,032   

Shareholders’ equity:

          

Common stock, $.01 par value, 1000 shares authorized, 100 issued & outstanding

     —          —          372        (372     —     

Additional paid-in capital

     133,000        68,302        1,902        (70,204     133,000   

Additional paid-in capital warrants

     6,340        —          —          —          6,340   

Currency translation adjustments

     172        —          252        (252     172   

Advances to MidOcean SBR Holdings

     (305     —          —          —          (305

(Accumulated deficit) retained earnings

     (125,339     77        (1,616     1,539        (125,339
                                        

Total shareholders’ equity

     13,868        68,379        910        (69,289     13,868   

Noncontrolling interest

     709        1,792        —          642        3,143   
                                        

Total shareholders’ equity, including noncontrolling interests

     14,577        70,171        910        (68,647     17,011   
                                        

Total liabilities and shareholders’ equity

   $ 472,563      $ 77,992      $ 1,783      $ (69,370   $ 482,968   
                                        

 

20


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Balance Sheet

As of December 28, 2008

ASSETS

(In thousands)

(Continued)

 

     Parent     Guarantor
Subsidiaries
   Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total

Current assets:

           

Cash and cash equivalents

   $ 34,249      $ 3,468    $ 569      $ —        $ 38,286

Receivables

           

Franchise

     3,845        —        —          —          3,845

Other

     3,346        531      442        (371     3,948
                                     
     7,191        531      442        (371     7,793

Inventories

     1,243        1,720      120        —          3,083

Prepaid expenses

     2,050        590      313        —          2,953

Deferred tax asset

     —          —        —          —          —  
                                     

Total current assets

     44,733        6,309      1,444        (371     52,115

Intercompany receivables

     (27,269     28,887      (2,038     420        —  

Investment in subsidiaries

     66,447        —        —          (66,447     —  

Property and equipment, net

     24,199        40,685      986        (230     65,640

Goodwill

     201,460        —        —          —          201,460

Trademarks

     195,000        —        —          —          195,000

Other intangible assets, net

     23,539        —        —          —          23,539

Deferred financing costs, net

     8,934        —        —          —          8,934

Other assets

     1,080        183      1,479        (1,662     1,080
                                     

Total assets

   $ 538,123      $ 76,064    $ 1,871      $ (68,290   $ 547,768
                                     

 

21


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Balance Sheet

As of December 28, 2008

LIABILITIES AND SHAREHOLDER’S EQUITY (DEFICIT)

(In thousands)

(Continued)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Current liabilities:

          

Accounts payable

   $ 11,255      $ 219      $ 147      $ —        $ 11,621   

Accrued expenses

     21,358        1,647        504        (537     22,972   

Accrued interest payable

     7,291        —          —          —          7,291   

Due to former shareholders

     2,993        —          —          —          2,993   

Insurance premium financing

     1,087        —          —          —          1,087   

Current portion of debt

     3,958        —          —          —          3,958   
                                        

Total current liabilities

     47,942        1,866        651        (537     49,922   

Deferred rent

     500        4,689        —          —          5,189   

Deferred tax liability

     87,238        —          —          —          87,238   

Due to former shareholders

     11,043        —          —          —          11,043   

Long-term debt

     346,297        —          —          —          346,297   

Shareholders’ equity:

          

Common stock, $.01 par value, 1000 shares authorized, 100 issued & outstanding

     —          —          148        (148     —     

Additional paid-in capital

     133,000        68,301        699        (69,000     133,000   

Currency translation adjustments

     135        —          169        (169     135   

Advances to MidOcean SBR Holding

     (305     —          —          —          (305

(Accumulated deficit) retained earnings

     (88,639     (856     (708     1,564        (88,639
                                        

Total shareholders’ equity

     44,191        67,445        308        (67,753     44,191   

Noncontrolling interest

     912        2,064        912        —          3,888   
                                        

Total shareholders’ equity, including noncontrolling interests

     45,103        69,509        1,220        (67,753     48,079   
                                        

Total liabilities and shareholders’ equity

   $ 538,123      $ 76,064      $ 1,871      $ (68,290   $ 547,768   
                                        

 

22


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Operations

For the nine months ended September 27, 2009

(In thousands)

(Continued)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

          

Restaurant sales

   $ 99,855      $ 133,785      $ 1,443      $ —        $ 235,083   

Franchise related income

     10,162        —          —          —          10,162   
                                        

Total revenues

     110,017        133,785        1,443        —          245,245   
                                        

Costs and expenses:

          

Cost of food and paper products

     23,887        23,773        457        —          48,117   

Payroll and other employee benefits

     26,705        38,770        572        —          66,047   

Other operating costs

     38,166        50,748        1,001        —          89,915   

Other income, net

     (270     (2,510     (105     —          (2,885

Depreciation and amortization

     5,723        6,516        58        —          12,297   

General and administrative

     22,588        5        19        —          22,612   

Asset impairment, restaurant closings

     1,232        1,073        —          —          2,305   

Goodwill & other intangible asset impairment

     31,474        —          —          —          31,474   

Intercompany charges

     (13,979     13,893        86        —          —     
                                        

Total costs and expenses, net

     135,526        132,268        2,088        —          269,882   
                                        

Operating (loss) income

     (25,509     1,517        (645     —          (24,637

Other (expense) income:

          

Interest expense

     (20,747     —          —          —          (20,747

Write-off of deferred financing costs

     (423     —          —          —          (423

Interest income

     33        —          —          —          33   
                                        

Net other (expense) income

     (21,137     —          —          —          (21,137
                                        

Equity in loss of subsidiaries

     396        —          —          (396     —     
                                        

(Loss) income before income taxes and equity investments

     (46,250     1,517        (645     (396     (45,774

Income tax benefit

     (9,480     —          —          —          (9,480
                                        

(Loss) income before equity investments

     (36,770     1,517        (645     (396     (36,294

Loss from equity investments

     —          —          (162     —          (162
                                        

Net (loss) income

     (36,770     1,517        (807     (396     (36,456

Net loss (income) attributable to noncontrolling interests

     70        (583     269        —          (244
                                        

Net (loss) income attributable to Sbarro, Inc.

   $ (36,700   $ 934      $ (538   $ (396   $ (36,700
                                        

 

23


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Operations

For the nine months ended September 28, 2008

(In thousands)

(Continued)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations    Consolidated
Total
 

Revenues:

           

Restaurant sales

   $ 107,306      $ 139,456      $ 1,617      $ —      $ 248,379   

Franchise related income

     12,108        —          —          —        12,108   
                                       

Total revenues

     119,414        139,456        1,617        —        260,487   
                                       

Costs and expenses:

           

Cost of food and paper products

     26,708        29,732        543        —        56,983   

Payroll and other employee benefits

     29,012        41,302        546        —        70,860   

Other operating costs

     39,407        51,954        1,037        —        92,398   

Other income, net

     (620     (2,119     (46     —        (2,785

Depreciation and amortization

     6,339        6,311        70        —        12,720   

General and administrative

     20,975        —          —          —        20,975   

Asset impairment, restaurant closings

     —          1,184        —          —        1,184   

Intercompany charges

     (15,495     15,376        119        —        —     
                                       

Total costs and expenses, net

     106,326        143,740        2,269        —        252,335   
                                       

Operating income (loss)

     13,088        (4,284     (652     —        8,152   

Other (expense) income:

           

Interest expense

     (21,581     (1     (35     —        (21,617

Interest income

     130        2        —          —        132   
                                       

Net other (expense) income

     (21,451     1        (35     —        (21,485
                                       

Equity in loss of subsidiaries

     (5,288     —          —          5,288      —     
                                       

Loss before income taxes and equity investments

     (13,651     (4,283     (687     5,288      (13,333

Income tax benefit

     (4,815     —          (122     —        (4,937
                                       

Loss before equity investments

     (8,836     (4,283     (565     5,288      (8,396

Loss from equity investments

     —          —          (185     —        (185
                                       

Net loss

     (8,836     (4,283     (750     5,288      (8,581

Net (income) loss attributable to noncontrolling interests

     (70     (514     259        —        (325
                                       

Net loss attributable to Sbarro, Inc.

   $ (8,906   $ (4,797   $ (491   $ 5,288    $ (8,906
                                       

 

24


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Operations

For the three months ended September 27, 2009

(In thousands)

(Continued)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

          

Restaurant sales

   $ 35,431      $ 46,084      $ 626      $ —        $ 82,141   

Franchise related income

     3,388        —          —          —          3,388   
                                        

Total revenues

     38,819        46,084        626        —          85,529   
                                        

Costs and expenses:

          

Cost of food and paper products

     8,556        8,256        176        —          16,988   

Payroll and other employee benefits

     9,485        13,560        215        —          23,260   

Other operating costs

     12,975        17,000        366        —          30,341   

Other income, net

     (48     (806     (11     —          (865

Depreciation and amortization

     1,945        1,860        25        —          3,830   

General and administrative

     6,763        4        19        —          6,786   

Asset impairment, restaurant closings

     (1,766     1,753        13        —          —     

Goodwill & other intangible asset impairment

     31,474        —          —          —          31,474   

Intercompany charges

     199        110        —          —          309   
                                        

Total costs and expenses, net

     69,583        41,737        803        —          112,123   
                                        

Operating (loss) income

     (30,764     4,347        (177     —          (26,594

Other (expense) income:

          

Interest expense

     (7,414     —          —          —          (7,414

Interest income

     —          —          —          —          —     
                                        

Net other (expense) income

     (7,414     —          —          —          (7,414
                                        

Equity in loss of subsidiaries

     3,802        —          —          (3,802     —     
                                        

(Loss) income before income taxes and equity investments

     (34,376     4,347        (177     (3,802     (34,008

Income tax benefit

     (9,752     —          —          —          (9,752
                                        

(Loss) income before equity investments

     (24,624     4,347        (177     (3,802     (24,256

Loss from equity investments

     —          —          (54     —          (54
                                        

Net (loss) income

     (24,624     4,347        (231     (3,802     (24,310

Net loss (income) attributable to noncontrolling interests

     103        (393     79        —          (211
                                        

Net (loss) income attributable to Sbarro, Inc.

   $ (24,521   $ 3,954      $ (152   $ (3,802   $ (24,521
                                        

 

25


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Operations

For the three months ended September 28, 2008

(In thousands)

(Continued)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Revenues:

          

Restaurant sales

   $ 38,413      $ 48,537      $ 533      $ —        $ 87,483   

Franchise related income

     4,384        —          —          —          4,384   
                                        

Total revenues

     42,797        48,537        533        —          91,867   
                                        

Costs and expenses:

          

Cost of food and paper products

     9,433        10,614        168        —          20,215   

Payroll and other employee benefits

     9,905        14,066        161        —          24,132   

Other operating costs

     13,476        18,087        (117     —          31,446   

Other income, net

     (57     (825     (2     —          (884

Depreciation and amortization

     2,044        1,962        (20     —          3,986   

General and administrative

     6,730        —          —          —          6,730   

Asset impairment, restaurant closings

     —          849        —          —          849   

Intercompany charges

     (3,778     3,747        31        —          —     
                                        

Total costs and expenses, net

     37,753        48,500        221        —          86,474   
                                        

Operating income

     5,044        37        312        —          5,393   

Other (expense) income:

          

Interest expense

     (6,563     —          (9     —          (6,572

Interest income

     25        —          —          —          25   
                                        

Net other (expense) income

     (6,538     —          (9     —          (6,547
                                        

Equity in loss of subsidiaries

     251        —          —          (251     —     
                                        

(Loss) income before income taxes and equity investments

     (1,243     37        303        (251     (1,154

Income tax benefit

     8        —          (122     —          (114
                                        

(Loss) income before equity investments

     (1,251     37        425        (251     (1,040

Loss from equity investments

     —          —          (57     —          (57
                                        

Net (loss) income

     (1,251     37        368        (251     (1,097

Net loss (income) attributable to noncontrolling interests

     77        259        (413     —          (77
                                        

Net (loss) income attributable to Sbarro, Inc.

   $ (1,174   $ 296      $ (45   $ (251   $ (1,174
                                        

 

26


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Cash Flows

For the nine months ended September 27, 2009

(In thousands)

(Continued)

 

    Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Operating Activities:

         

Net (loss) income

  $ (36,770   $ 1,517      $ (807   $ (396   $ (36,456

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

         

Goodwill & other intangible asset impairment

    31,474        —          —          —          31,474   

Depreciation and amortization

    5,723        6,516        58        —          12,297   

Amortization of deferred financing costs

    1,084        —          —          —          1,084   

Provision for doubtful accounts receivable

    916        —          —          —          916   

Increase in deferred rent, net of tenant allowance

    510        883        11        —          1,404   

Asset impairment, restaurant closings/remodels

    817        283        —          —          1,100   

Change in deferred income taxes, net

    (9,915     —          —          —          (9,915

Equity in net loss of unconsolidated affiliates

    —          —          162        —          162   

Write-off of deferred financing costs

    423        —          —          —          423   

Changes in operating assets and liabilities:

         

(Increase) decrease in receivables

    (189     251        363        (371     54   

Decrease in inventories

    213        271        11        —          495   

(Increase) decrease in prepaid expenses

    (726     129        247        —          (350

Increase in other assets

    (86     —          —          —          (86

(Decrease) increase in accounts payable and accrued expenses

    (7,747     (580     698        (649     (8,278

Decrease in accrued interest payable

    (1,941     —          —          —          (1,941
                                       

Net cash (used in) provided by operating activities

    (16,214     9,270        743        (1,416     (7,617
                                       

Investing Activities:

         

Purchases of property and equipment

    (1,378     (4,424     (475     —          (6,277

Investment in joint ventures

    (283     —          —          —          (283
                                       

Net cash used in investing activities

    (1,661     (4,424     (475     —          (6,560
                                       

Financing Activities:

         

Proceeds from second lien

    25,000        —          —          —          25,000   

Repayment of secured term loan and revolver

    (32,958     —          —          —          (32,958

Debt issue and credit amendment costs

    (1,834     —          —          —          (1,834

Capital contribution from noncontrolling interests

    —          —          394        —          394   

Repayment of short-term loan to noncontrolling interests

    —          —          (374     —          (374

Distribution of earnings to noncontrolling interests

    (881     —          —          —          (881

Intercompany balances

    6,105        (6,868     (653     1,416        —     
                                       

Net cash used in financing activities

    (4,568     (6,868     (633     1,416        (10,653
                                       

Decrease in cash and cash equivalents

    (22,443     (2,022     (365     —          (24,830

Cash and cash equivalents at beginning of period

    34,249        3,468        569        —          38,286   
                                       

Cash and cash equivalents at end of period

  $ 11,806      $ 1,446      $ 204      $ —        $ 13,456   
                                       

 

27


Table of Contents

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Cash Flows

For the nine months ended September 28, 2008

(In thousands)

(Continued)

 

     Parent     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Eliminations     Consolidated
Total
 

Operating Activities:

          

Net (loss) income

   $ (8,836   $ (4,283   $ (750   $ 5,288      $ (8,581

Adjustments to reconcile net (loss) income to net cash used in operating activities:

          

Depreciation and amortization

     6,339        6,311        70        —          12,720   

Amortization of deferred financing costs

     841        —          —          —          841   

Increase in deferred rent, net of tenant allowance

     1,112        106        —          —          1,218   

Asset impairment, restaurant closings/remodels

     —          1,184        —          —          1,184   

Change in deferred income tax, net

     (5,854     —          —          —          (5,854

Equity in net loss of unconsolidated affiliates

     —          —          185        —          185   

Equity in loss of subsidiaries

     5,288        —          —          (5,288     —     

Changes in operating assets and liabilities:

          

Decrease (increase) in receivables

     588        27        (457     —          158   

Decrease in inventories

     164        152        17        —          333   

Decrease in prepaid expenses

     168        16        7        —          191   

Increase in other assets

     (25     (86     —          —          (111

Increase (decrease) in accounts payable and accrued expenses

     4,370        (1,135     1,475        (674     4,036   

Decrease in accrued interest payable

     (4,252     —          —          —          (4,252
                                        

Net cash (used in) provided by operating activities

     (97     2,292        547        (674     2,068   
                                        

Investing Activities:

          

Purchases of property and equipment

     (3,694     (9,677     —          —          (13,371

Purchases of other locations

     —          (1,261     —          —          (1,261

Investment in joint ventures

     (124     —          —          —          (124
                                        

Net cash used in investing activities

     (3,818     (10,938     —          —          (14,756
                                        

Financing Activities:

          

Repayment of secured term loan

     (1,373     —          —          —          (1,373

Advances to MidOcean SBR Holding

     (305     —          —          —          (305

Capital contribution from noncontrolling interests

     —          —          480        —          480   

Repayment of short-term loan to noncontrolling interests

     —          —          (614     —          (614

Distribution of earnings to noncontrolling interests

     (922     —          —          —          (922

Intercompany balances

     (7,959     7,412        (127     674        —     
                                        

Net cash (used in) provided by financing activities

     (10,559     7,412        (261     674        (2,734
                                        

(Decrease) increase in cash and cash equivalents

     (14,474     (1,234     286        —          (15,422

Cash and cash equivalents at beginning of period

     25,693        2,893        281        —          28,867   
                                        

Cash and cash equivalents at end of period

   $ 11,219      $ 1,659      $ 567      $ —        $ 13,445   
                                        

 

28


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

We make statements in this Quarterly Report that are considered forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. The words “anticipate,” “believe,” “estimate,” “intend,” “may,” “will,” “expect” and similar words often indicate that a statement is a “forward-looking statement.” Statements about non-historic results also are considered to be forward-looking statements. None of these forward-looking statements are guarantees of future performance or events, and they are subject to numerous risks, uncertainties and other factors. These risks, uncertainties and other factors include, but are not limited to:

 

   

general economic, inflation, national security, weather and business conditions;

 

   

decrease in mall traffic, and other events arising from the downturn in the economy;

 

   

the availability of suitable restaurant sites in appropriate regional shopping malls and other locations on reasonable rental terms;

 

   

changes in consumer tastes;

 

   

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;

 

   

our ability to continue to attract franchisees;

 

   

the success of our present, and any future, joint ventures and other expansion opportunities;

 

   

changes in commodity and commodity related prices (particularly cheese and flour), beverage and paper products;

 

   

our ability to pass along cost increases to our customers;

 

   

increases in the Federal minimum wage;

 

   

the continuity of services of members of our senior management team;

 

   

our ability to attract and retain competent restaurant and executive managerial personnel;

 

   

competition;

 

   

the level of, and our ability to comply with, government regulations;

 

   

our ability to generate sufficient cash flow to make interest payments under our borrowing agreements;

 

   

our ability to comply with financial covenants and ratios and the effects the restrictions imposed by those financial covenants and ratios may have on our ability to operate our business; and

 

   

our ability to repurchase and/or repay amounts under our borrowing agreements to the extent required in the event of certain circumstances as defined in our borrowing agreements.

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements, the notes thereto and other data and information appearing elsewhere in this report.

Executive Overview

For the purposes of management’s discussion and analysis, the year to date third quarter of 2009 is the thirty nine weeks ended September 27, 2009 and the year to date third quarter of 2008 is the thirty nine weeks ended September 28, 2008 and the third quarter of 2009 is the thirteen weeks ended September 27, 2009 and the third quarter of 2008 is the thirteen weeks ended September 28, 2008.

We are the world’s leading Italian QSR concept and the largest shopping mall-focused restaurant concept in the world. We have a global base of 1,056 units in 42 countries, with 485 company-owned units, 554 franchised units and 17 joint venture units. Sbarro restaurants feature a menu of popular Italian food, including pizza, a selection of pasta dishes and other hot and cold Italian entrees, salads, sandwiches, drinks and desserts.

 

29


Table of Contents

We operate our business through two segments. Our company-owned restaurant segment is comprised of the operating activities of our company-owned QSR’s and other concept restaurants. Our franchised restaurant segment is comprised of our franchised restaurants which offer opportunities worldwide for qualified operators to conduct business under the Sbarro name and other trade names owned by Sbarro. Revenue from our franchised restaurant segment is generated from initial franchise fees, ongoing royalties and other franchising revenue. We do not allocate indirect corporate charges to our operating segments. Such costs are managed on an entity-wide basis, and the information to reasonably allocate such costs is not readily available. We do not allocate assets by segment because our chief operating decision makers do not review the assets by segment to assess performance, as the assets are managed on an entity-wide basis. Our operating segments are discussed in Note 1—Summary of Significant Accounting Policies and Note 13—Business Segment Information to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 28, 2008.

Our Restaurant Expansion

The following table summarizes the number of company-owned, franchised, and joint venture restaurants in operation during each indicated period:

 

     Three months ended     Nine months ended  
     September 27,
2009
    September 28,
2008
    September 27,
2009
    September 28,
2008
 

Company-owned Sbarro restaurants:

        

Open at beginning of period

   485      509      509      506   

Opened during period

   2      3      7      11   

Acquired from franchisees during period

   —        1      —        2   

Closed during period

   (2   (3   (31   (9
                        

Open at end of period

   485      510      485      510   
                        

Franchised Sbarro restaurants:

        

Open at beginning of period

   560      546      566      524   

Opened during period

   13      22      49      70   

Transferred to Sbarro during period

   —        (1   —        (2

Closed during period

   (19   (16   (61   (41
                        

Open at end of period

   554      551      554      551   
                        

Joint venture Sbarro restaurants:

        

Open at beginning of period

   17      9      16      7   

Opened during period

   —        5      1      7   
                        

Open at end of period

   17      14      17      14   
                        

All restaurants:

        

Open at beginning of period

   1,062      1,064      1,091      1,037   

Opened during period

   15      30      57      88   

Closed during period

   (21   (19   (92   (50
                        

Open at end of period

   1,056      1,075      1,056      1,075   
                        

Seasonality

Revenues are highest in our fourth quarter due primarily to increased traffic in shopping malls during the holiday shopping season. Our annual revenues and earnings can fluctuate due to the length of the holiday shopping period between Thanksgiving and New Year’s Day.

Goodwill and Other Intangible Assets

Management typically performs its required annual test for impairment on goodwill and evaluates the impairment of long-lived assets in the fourth quarter. However, the Company performed its impairment test for goodwill and other intangible assets in the third quarter 2009 as circumstances existed that served as a triggering event outside of the quarter that the annual goodwill impairment assessment is traditionally performed. This resulted in impairment charges to goodwill of $6.7 and intangible assets of $24.8 million. Given the uncertainty as to the length of the current economic condition and the timing and degree of recovery, it is reasonably possible that impairment charges may occur in future periods.

 

30


Table of Contents

Noncontrolling Interests

We present noncontrolling interests in the equity section of our consolidated balance sheets, as a separate net income attributable to noncontrolling interests in our consolidated statement of operations, and as a distribution to/from noncontrolling interests in the consolidated statements of cash flows.

Summary Financial Information (dollars in millions)

     Three months
ended
September 27,
2009
    Three months
ended
September 28,
2008
    Nine months
ended
September 27,
2009
    Nine months
ended
September 28,
2008
 

Comparable sales percentage change vs. prior comparable period (1):

        

QSR-owned locations

     -5.2     -1.0     -5.0     -0.4

Franchise locations:

        

Domestic Franchise

     -7.1     -2.0     -5.4     -1.2

International Franchise (2)

     -27.3     15.5     -25.9     20.1

Cost of food and paper products as a percentage of restaurant sales

     20.7     23.1     20.5     22.9

Payroll and other benefits as a percentage of restaurant sales

     28.3     27.6     28.1     28.5

Other operating expense as a percentage of restaurant sales

     36.9     35.9     38.2     37.2

General and administrative costs as a percentage of revenues

     7.9     7.3     9.2     8.1

EBITDA (3) (4)

   $ (23.0   $ 9.2      $ (13.2   $ 20.4   

 

(1)

Comparable and annual percentage changes are based on locations that were open during the entire period within the periods presented.

(2)

The majority of the decline in the 2009 International comparable Franchise sales related to the increase in the value of the U.S. dollar. Without consideration for foreign currency fluctuations, the international comparable franchise sales would have been -13% for the third quarter 2009 and -9% for the year-to-date ended September 27, 2009.

(3)

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 GAAP or as a measure of a company’s profitability or liquidity. Rather, we believe that EBITDA provides relevant and useful information for analysts of, and investors in, our Senior Notes in that the Senior Credit Facilities and the Second Lien Facility each contain a minimum EBITDA covenant. EBITDA, as calculated under our bank credit agreement, includes certain additional adjustments which are included in our Senior Credit Facility amendment. We also use EBITDA internally to determine whether 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.

(4)

Included in the calculation of EBITDA in the third quarter 2009 is goodwill and intangible asset impairment charges of $31.5 million. This is discussed in further detail under Note 4 – Intangible Assets to our Consolidated Financial Statements included in this report. Included in the calculation of EBITDA for the first nine months of 2009 is $.4 million related to the write-off of deferred financing costs, $.4 million of professional fees related to the prepayment and amendment to the Senior Credit Facilities and the goodwill and intangible asset impairment charges booked in the third quarter.

For each of the periods, the following table reconciles EBITDA to our net loss for each of the periods presented, which we believe is the most direct comparable GAAP financial measure to EBITDA (dollars in thousands):

 

     Three months
ended
September 27,
2009
    Three months
ended
September 28,
2008
    Nine months
ended
September 27,
2009
    Nine months
ended
September 28,
2008
 

EBITDA

   $ (23,029   $ 9,245      $ (13,169   $ 20,362   

Interest Expense

     (7,414     (6,572     (20,747     (21,617

Interest Income

     —          25        33        132   

Income Tax Benefit

     9,752        114        9,480        4,937   

Depreciation and Amortization

     (3,830     (3,986     (12,297     (12,720
                                

Net Loss Attributable to Sbarro, Inc.

   $ (24,521   $ (1,174   $ (36,700   $ (8,906
                                

 

31


Table of Contents

The following table sets forth the information concerning the revenue and operating income before unallocated costs of each of our company-owned and franchised restaurant segments:

 

     Company-
Owned
Restaurants
    Franchised
Restaurants
   Totals  
     (In thousands)  

3rd Quarter 2009

       

Total revenue

   $ 82,141      $ 3,388    $ 85,529   
                       

Operating (loss) income before unallocated costs

     (23,195     2,150      (21,045
                 

Unallocated costs and expenses (1)

          5,549   
             

Operating loss

        $ (26,594
             

3rd Quarter 2008

       

Total revenue

   $ 87,483      $ 4,384    $ 91,867   
                       

Operating income before unallocated costs

     7,741        3,389      11,130   
                 

Unallocated costs and expenses (1)

          5,737   
             

Operating income

        $ 5,393   
             

YTD 3rd Quarter 2009

       

Total revenue

   $ 235,083      $ 10,162    $ 245,245   
                       

Operating (loss) income before unallocated costs

     (11,936     6,277      (5,659
                 

Unallocated costs and expenses (1)

          18,978   
             

Operating loss

        $ (24,637
             

YTD 3rd Quarter 2008

       

Total revenue

   $ 248,379      $ 12,108    $ 260,487   
                       

Operating income before unallocated costs

     17,024        8,729      25,753   
                 

Unallocated costs and expenses (1)

          17,601   
             

Operating income

        $ 8,152   
             

 

(1)

Represents certain general and administrative expenses that are not allocated by segment.

Third Quarter 2009 versus Third Quarter 2008

Sales by QSR and consolidated other concept restaurants were $82.1 million for the third quarter of 2009 compared to $87.5 million for the third quarter of 2008. The decrease in sales is due to a decrease in comparable unit sales of 5.2% in our QS