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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended October 10, 1999 Commission File Number 333-90817
SBARRO, INC.
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 11-2501939
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
401 Broad Hollow Road, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 715-4100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class Outstanding at November 22, 1999
Common Stock, $.01 par value 7,064,328
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<PAGE>
SBARRO, INC.
FORM 10-Q INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGES
Item 1. Consolidated Financial Statements:
Balance Sheets - October 10, 1999 (unaudited) and January 3, 1999 . . . . . . . . . .3-4
Statements of Income (unaudited) - Forty Weeks ended October 10, 1999
And October 4, 1998 and Twelve Weeks ended October 10, 1999 and
October 4, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 5-6
Statements of Cash Flows (unaudited) - Forty Weeks ended
October 10, 1999 and October 4, 1998 . . . . . . . . . . . . . . . . . . . . . .7-8
Notes to Unaudited Consolidated Financial Statements - October 10, 1999. . . . . . .9-14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-25
Item 3. Quantitative and Qualitative Disclosure about Market Risk . . . . . . . . . . . . . . .25
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
-----------------
</TABLE>
Pg. 2
<PAGE>
Item 1. Consolidated Financial Statements:
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(In thousands)
October 10, 1999 January 3, 1999
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 8,518 $150,472
Restricted cash for untendered
shares (See Note 2) 4,782 -
Receivables:
Franchisees 1,671 1,342
Other 3,099 2,185
------------- -------------
4,770 3,527
Inventories 2,855 3,122
Prepaid expenses 6,352 1,291
-------------- --------------
Total current assets 27,277 158,412
Property and equipment, net 138,978 138,126
Other assets:
Excess of purchase price over the cost
of net assets acquired, net of
accumulated amortization of
$250 (See Note 2) 224,940 -
Deferred financing costs, net of accumulated
amortization of $32 (See Note 3) 9,190 -
Other assets 6,782 6,630
--------------- ----------------
$407,167 $303,168
============= =============
</TABLE>
(continued)
Pg. 3
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
October 10, 1999 January 3, 1999
(unaudited)
Current liabilities:
<S> <C> <C>
Accounts payable $ 8,948 $ 7,122
Amounts due for untendered shares
(See Note 2) 4,782 -
Accrued expenses 31,801 25,764
Income taxes 267 4,146
-------------- -------------
Total current liabilities 45,798 37,032
Deferred income taxes 8,681 9,219
Long-term debt (See Note 3) 251,223 -
Shareholders' equity (See Note 2):
Preferred stock, $1 par value;
authorized 1,000,000 shares; none issued - -
Common stock, $.01 par value; authorized
40,000,000 shares; issued and outstanding
7,064,328 shares at October 10, 1999 and
20,531,643 shares at January 3, 1999 71 205
Additional paid-in capital 10 34,587
Retained earnings 101,384 222,125
---------------- ---------------
101,465 256,917
---------------- ---------------
$407,167 $303,168
=============== ==============
</TABLE>
See notes to unaudited consolidated financial statements
Pg. 4
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the forty weeks ended:
October 10, 1999 October 4, 1998
---------------- ---------------
Revenues:
<S> <C> <C>
Restaurant sales $265,022 $256,708
Franchise related income 6,750 6,192
Interest income 3,679 3,734
----------------- --------------
Total revenues 275,451 266,634
--------------- --------------
Costs and expenses:
Cost of food and paper products 54,926 54,068
Restaurant operating expenses:
Payroll and other employee benefits 72,405 68,161
Occupancy and other 81,436 76,301
Depreciation and amortization 18,043 16,986
General and administrative 17,720 14,808
Provision for unit closings - 1,525
Terminated transaction costs - 986
Litigation settlement and related costs - 3,544
Interest expense 980 -
Other income (3,614) (2,242)
--------------- --------------
Total costs and expenses 241,896 234,137
-------------- ------------
Income before income taxes and cumulative
effect of change in method of accounting
for start-up costs 33,555 32,497
Income taxes 12,846 12,349
--------------- --------------
Income before cumulative effect
of accounting change 20,709 20,148
Cumulative effect of change in method
of accounting for start-up costs, net of
income taxes of $504 - (822)
------------------- -----------------
Net income $20,709 $19,326
============== ==============
</TABLE>
See notes to unaudited consolidated financial statements
Pg. 5
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the twelve weeks ended:
October 10, 1999 October 4, 1998
---------------- ---------------
Revenues:
<S> <C> <C>
Restaurant sales $85,971 $82,680
Franchise related income 2,418 2,038
Interest income 1,055 1,189
-------------- -------------
Total revenues 89,444 85,907
-------------- ------------
Costs and expenses:
Cost of food and paper products 17,945 17,645
Restaurant operating expenses:
Payroll and other employee benefits 22,830 21,262
Occupancy and other 25,231 23,316
Depreciation and amortization 5,765 5,261
General and administrative 5,381 4,441
Litigation settlement and related costs - 3,544
Interest expense 980 -
Other income (1,040) (983)
---------------- --------------
Total costs and expenses 77,092 74,486
--------------- -------------
Income before income taxes 12,352 11,421
Income taxes 4,789 4,340
---------------- --------------
Net income $ 7,563 $ 7,081
=============== =============
</TABLE>
See notes to unaudited consolidated financial statements
Pg. 6
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the forty weeks ended:
October 10, 1999 October 4, 1998
---------------- ---------------
Operating activities:
<S> <C> <C>
Net income $ 20,709 $ 19,326
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in method
of accounting for start-up costs - 822
Depreciation and amortization 18,087 17,056
Deferred income taxes (538) (616)
Provision for unit closings - 1,525
Changes in operating assets and liabilities:
Increase in receivables (1,243) (1,512)
Decrease in inventories 267 390
Increase in prepaid expenses (5,060) (4,257)
Increase in other assets (930) (253)
Increase (decrease) in accounts payable
and accrued expenses 6,034 (4,704)
Decrease in income taxes payable (3,880) (4,745)
------------- ------------
Net cash provided by operating activities 33,446 23,032
-------------- ------------
Investing activities:
Proceeds from maturity of marketable security - 2,500
Purchases of property and equipment (18,865) (21,089)
-------------- -------------
Net cash used in investing activities (18,865) (18,589)
-------------- ------------
</TABLE>
(continued)
Pg. 7
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the forty weeks ended:
October 10, 1999 October 4, 1998
---------------- ---------------
Financing activities:
<S> <C> <C>
Proceeds from exercise of stock options 426 2,073
Proceeds from long-term debt 251,211 -
Cost of Merger and related financing (411,000) -
Accrued or previously paid Merger costs 2,828 -
Cash dividends paid - (5,521)
------------------ -------------
Net cash used in financing activities (156,535) (3,448)
-------------- -------------
(Decrease) increase in cash and cash equivalents (141,954) 995
Cash and cash equivalents at beginning of period 150,472 119,810
-------------- --------------
Cash and cash equivalents at end of period $ 8,518 $120,805
=============== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $16,743 $20,157
============== ==============
Cash paid during the period for interest - -
=================== ===================
</TABLE>
See notes to unaudited consolidated financial statements
Pg. 8
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. Basis of presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and
Regulation S-X related to interim period financial statements and,
therefore, do not include all information and footnotes required by
generally accepted accounting principles. However, in the opinion of
management, all adjustments (consisting of normal recurring adjustments
and accruals) considered necessary for a fair presentation of the
consolidated financial position of the Company and its subsidiaries at
October 10, 1999 and their consolidated results of operations for the
forty and twelve week periods ended October 10, 1999 and October 4,
1998 have been included. The results of operations for the interim
periods are not necessarily indicative of the results that may be
expected for the entire year. Reference should be made to the annual
financial statements, including footnotes thereto, included in the
Company's Annual Report on Form 10-K for the fiscal year ended January
3, 1999.
2. Going private transaction:
On September 28, 1999, members of the Sbarro family (who prior thereto
owned approximately 34.4% of the Company's common stock) became the
holders of 100% of the issued and outstanding common stock of the
Company pursuant to an Amended and Restated Agreement and Plan of
Merger dated as of January 19, 1999 (the "Merger Agreement"). Pursuant
to the terms of the Merger Agreement (i) a company owned by the members
of the Sbarro family merged with and into the Company (the "Merger"),
(ii) the Company's shareholders (other than the members of the Sbarro
family and the company owned by them) received the right to receive
$28.85 per share in cash in exchange for the approximately 13.5 million
shares of the Company's common stock not owned by the members of the
Sbarro family, and (iii) all outstanding stock options, including stock
options held by the members of the Sbarro family, were terminated in
exchange for a cash payment equal to the number of shares subject
thereto multiplied by the excess, if any, of $28.85 over the applicable
option exercise price. The cost of the Merger, including amounts to pay
related fees and expenses of the transactions, is estimated at
approximately $411.0 million and was funded using substantially all of
the Company's cash on hand and the sale of $255 million of 11% Senior
Notes (See Note 3).
As of October 10, 1999, there was $4.8 million ($0.5 million as of
November 17, 1999) remaining on deposit with a third party paying agent
for untendered shares to be redeemed as part of the Merger
consideration. Such amounts are shown as restricted cash and amounts
due for untendered shares in the balance sheet. Should any shares
remain untendered after one year from September 28, 1999, the related
funds are returned to the Company to be held until claimed or escheated
to the appropriate juristrictions.
Pg. 9
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
In accordance with Emerging Issues Task Force Issue 88-16, "Basis in
Leveraged Buyout Transactions", the acquisition of all the outstanding
shares of common stock not owned by the Sbarro family and all
outstanding stock options have been accounted for under the purchase
method of accounting. As a result, the remaining shares of common stock
owned by the Sbarro family are presented in shareholders' equity at
their original basis in the accompanying consolidated balance sheet.
The final purchase price allocations have not been completed and are
subject to adjustment based on fair market appraisals and other fair
market value estimates as of the date of the Merger. The excess of
purchase price over the cost of assets acquired is being amortized on a
straight line basis over an estimated useful life of 30 years.
Summarized below are the unaudited pro forma results of operations for
the forty weeks ended October 10, 1999 and October 4, 1998 of the
Company as if the Merger had taken place as of the beginning of the
periods presented. Adjustments have been made for the amortization of
the excess of the purchase price over the cost basis of net assets
acquired, interest expense and related changes in income tax expense.
Forty weeks ended
October 10, 1999 October 4, 1998
Pro Forma:
Revenues $275,451 $266,634
========= ==========
Income before cumulative effect
of accounting change $ 1,551 $ 132
============ ============
Net income (loss) $ 1,551 $ (690)
============ =============
These pro forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
Merger taken place at the beginning of the periods presented or of
results which may occur in the future.
3. Long-term debt:
The cost of the Merger including fees and expenses was funded through
the use of substantially all of the Company's cash on hand and the
placement of $255.0 million of 11.0% Senior Notes due September 15,
2009 (the "Senior Notes") sold at a price of 98.514% of par to yield
11.25% per annum. The Senior Notes were issued under an Indenture dated
September 28, 1999 (the "Indenture"). The Company also entered into a
five year, $30 million unsecured senior revolving bank credit facility
under a Credit Agreement dated as of September 23, 1999 (the "Credit
Agreement").
Pg. 10
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Interest on the Senior Notes is payable semi-annually on March 15 and
September 15 of each year commencing on March 15, 2000. The Company's
payment obligations under the Senior Notes are jointly, severally,
unconditionally and irrevocably guaranteed by all of the Company's
current Restricted Subsidiaries (as defined in the Indenture) and is to
be similarly guaranteed by the Company's future Restricted Subsidiaries
(the "Guarantor Subsidiaries"). The Senior Notes and the subsidiary
guarantees are senior unsecured obligations of the Company and the
Guarantor Subsidiaries, respectively, ranking pari passu in right of
payment to all of the Company's and the Guarantor Subsidiaries'
respective present and future senior debt, including amounts
outstanding under the Credit Agreement. The Indenture permits
redemption of the Senior Notes at the Company's option at varying
redemption prices and requires the Company to offer to purchase Senior
Notes in the event of a Change of Control and in connection with
certain Asset Sales (each as defined). The Indenture contains various
convenants on the part of the Company and the Guarantor Subsidiaries,
including, but not limited to, restrictions on the payment of
dividends, stock repurchases, certain investments and other restricted
payments, the incurrence of indebtedness and liens on its assets,
affiliate transactions, asset sales and mergers.
In connection with the issuance of the Senior Notes, the Company and
its Guarantor Subsidiaries have agreed to offer the holders of the
Senior Notes the right to exchange those Senior Notes for 11% Senior
Notes due 2009 with the same terms as the existing Senior Notes but
which are to be registered under the Securities Act of 1933, as
amended. If the Company does not timely comply with its obligations to
effectuate such registration, the Company will be required to pay
liquidated damages to each holder of the Senior Notes.
The Credit Agreement provides an unsecured senior revolving credit
facility to the Company enabling the Company to borrow, on a revolving
basis from time to time during its five-year term, up to $30.0 million,
including a $10.0 million sublimit for standby letters of credit. Each
of the Company's current Guarantor Subsidiaries (the same entities as
the Restricted Subsidiaries under the Indenture) have agreed to, and
the future Guarantor Subsidiaries are to, unconditionally and
irrevocably guarantee the Company's obligations under the Credit
Agreement on a joint and several basis. The Company's borrowings under
the Credit Agreement are repayable on September 28, 2004. In addition,
the Company will be required to repay the Company's loans and reduce
the lenders' commitments under the Credit Agreement using the proceeds
of certain asset sales and issuances of certain equity interests of,
and sales of equity interests in, Guarantor Subsidiaries. At the
Company's option, the interest rates applicable to loans under the
Credit Agreement will be at either (a) the bank's prime rate (8.5% at
November 22, 1999)
Pg. 11
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
plus a margin ranging from zero to 0.75% (the initial margin is 0.50%)
or (b) reserve adjusted LIBOR (5.59% at November 22, 1999) plus a
margin ranging from 1.5% to 2.5% (the initial margin is 2.25%). In each
case, the margin depends upon the ratio of the Company's senior debt
(as defined) to its earnings before interest, taxes and depreciation
and amortization ("EBITDA"). The Company has agreed to pay certain fees
in connection with the Credit Agreement, including an unused commitment
fee at a rate per year that will vary from 0.25% of the undrawn amount
of the facility to 0.45% of the undrawn amount of the facility per
year, depending upon the ratio of the Company's senior debt to EBITDA.
Initially, the unused commitment fee was 0.40% per year. No amounts
were outstanding under the credit facility as of October 10, 1999.
The Credit Agreement contains various covenants on the part of the
Company and the Guarantor Subsidiaries, including, but not limited to,
restrictions on the payment of dividends and making stock repurchases,
certain investments and other restricted payments, the incurrence of
indebtedness, guarantees, other contingent obligations, and liens on
assets, affiliate transactions, asset sales and mergers, consolidations
and acquisitions of stock or assets by the Company and the Guarantor
Subsidiaries. The Credit Agreement also contains provisions which,
under certain circumstances, prohibit redemptions or repurchases of the
Senior Notes, including repurchases that might otherwise be required
pursuant to the terms of the Indenture, and imposes certain conditions
on the Company's amending or supplementing the Indenture. In addition,
the Company is required to maintain a minimum ratio of consolidated
EBITDA to consolidated interest expense (in each case with the
Guarantor Subsidiaries) of at least 2.0 to 1.0 and a ratio of
consolidated senior debt to consolidated EBITDA (in each case with the
Guarantor Subsidiaries) ranging from 4.5 to 1.0 in 1999 to 3.9 to 1.0
beginning December 29, 2002.
The discount at which the Senior Notes were issued, an aggregate of
$3.8 million, is being accreted to the Senior Notes over the original
ten year life of the Senior Notes. The costs of issuing the Senior
Notes and establishing the Credit Agreement, an aggregate of $8.7
million and $0.5 million, respectively, were capitalized as deferred
financing costs and are being amortized over the ten and five year
lives, respectively, of the Senior Notes and the Credit Agreement,
respectively. The accretion and amortization will result in an increase
in reported interest expense.
4. Cumulative effect of accounting change:
In accordance with its early application provisions, the Company
implemented Statement of Position ("SOP") 98-5 of the Accounting
Standards Executive Committee of the
Pg. 12
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
American Institute of Certified Public Accountants as of the beginning
of its 1998 fiscal year. This SOP required companies that capitalize
pre-opening and similar costs to write off all existing such costs, net
of tax benefit, as a "cumulative effect of accounting change" and to
expense all such costs as incurred in the future.
5. Comprehensive income:
The Company's operations did not give rise to any items includible in
comprehensive income which were not already included in net income for
either of the twelve or forty week periods ended October 10, 1999 and
October 4, 1998.
6. Summarized condensed financial information:
The following present condensed summary financial information for the
subsidiaries of the Company guaranteeing the Company's obligations
under the Senior Notes and Credit Agreement. The non-guaranteeing
subsidiaries are immaterial on an individual and combined basis. Each
of the Guarantor Subsidiaries is a direct or indirect wholly owned
subsidiary of the Company and each has fully and unconditionally
guaranteed the Senior Notes and the Credit Agreement on a joint and
several basis. The Company has determined that presenting separate
financial statements and other disclosures concerning each Guarantor
Subsidiary is not material to investors. As described in Note 2, the
Company has not completed the final purchase price allocations.
Accordingly, the guarantor financial information presented below does
not give effect to any final purchase price allocations.
Condensed Summary Guarantor Subsidiaries Financial Information
Balance Sheet Data
October 10, 1999 October 4, 1998
---------------- ---------------
(In thousands)
Current assets $ 7,526 $ 6,448
Intercompany receivables 163,550 140,071
------------ ------------
Total current assets 171,076 146,519
Property and equipment, net 78,708 80,150
Other assets, net 600 51
--------------- ------------------
$ 250,384 $ 226,720
============= ===============
Current liabilities $83 $651
Intercompany payables-long-term 18,800 20,210
Shareholders' equity 231,501 205,859
------------- ---------------
$ 250,384 $ 226,720
=========== ===============
Pg. 13
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Condensed Summary Guarantor Subsidiaries Financial Information
Income Statement Data
Forty Weeks Ended
October 10, 1999 October 4, 1998
(In thousands)
Revenues $ 137,147 $ 133,640
============ ============
Gross profit (a) $ 107,333 $ 104,434
============ ============
Income before cumulative effect of change
in accounting principle (b) $ 15,186 $ 17,053
========== ============
Net income (b) $ 15,186 $ 17,053
========== ============
- ----------------
(a) Gross profit represents the difference between restaurant sales and the
cost of food and paper products.
(b) No portion of the cumulative effect of change in accounting
principles pertained to the Guarantor Subsidiaries (see Note 4).
7. Contingencies:
On November 17, 1999, certain former managers of restaurant units in
the State of Washington instituted a lawsuit against the Company
alleging that they served as store managers, general managers,
assistant managers or co-managers in Company restaurants in the State
of Washington at various times since November 17, 1996 and that, in
connection therewith, the Company violated the overtime pay provisions
of the State of Washington's Minimum Wage Act by treating them as
overtime exempt employees, breached alleged employment agreements and
statutory provisions by failing to record and pay for hours worked at
the contract rates and/or statutory minimum wage rates and failed to
provide statutorily required meal breaks and rest periods. The
plaintiffs also seek to represent all of the Company's restaurant
managers employed for any period of time on or after November 9, 1996
in the State of Washington. The Company currently owns and operates
approximately 18 restaurants in the State of Washington. The plaintiffs
seek actual damages, exemplary damages and costs of the lawsuit,
including reasonable attorney's fees, each in unspecified amounts, and
injunctive relief. The Company believes it has substantial defenses to
the claims and intends to vigorously defend this action.
From time to time the Company is also a party to certain claims and
legal proceedings in the ordinary course of business, none of which, in
the opinion of the Company, would have a material adverse effect on the
Company's financial position or results of operations.
Pg. 14
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's
financial condition and results of operations should be read in conjunction with
the consolidated financial statements, the notes thereto and other data and
information appearing elsewhere in this Report.
Going Private Transaction
On September 28, 1999, members of the Sbarro family (who prior
thereto owned approximately 34.4% of the Company's common stock) became the
holders of 100% of the issued and outstanding common stock of the Company
pursuant to an Amended and Restated Agreement and Plan of Merger dated as of
January 19, 1999 (the "Merger Agreement"). Pursuant to the terms of the Merger
Agreement (i) a company owned by the members of the Sbarro family merged with
and into the Company (the "Merger"), (ii) the Company's shareholders (other than
the members of the Sbarro family and the company owned by them) received the
right to receive $28.85 per share in cash in exchange for the approximately 13.5
million shares of the Company's common stock not owned by the members of the
Sbarro family, and (iii) all outstanding stock options, including stock options
held by the members of the Sbarro family, were terminated in exchange for a cash
payment equal to the number of shares subject thereto multiplied by the excess,
if any, of $28.85 over the applicable option exercise price. The cost of the
Merger, including amounts to pay related fees and expenses of the transactions,
is estimated at approximately $411.0 million.
The cost of the Merger including fees and expenses was funded
through the use of substantially all of the Company's cash on hand and the
placement of $255.0 million of 11.0% Senior Notes due 2009 (the "Senior Notes"),
sold at a price of 98.514% of par to yield 11.25% per annum. The Senior Notes
were issued under an Indenture dated September 28, 1999 (the "Indenture"). The
Company also entered into a five year, $30 million unsecured senior revolving
bank credit facility under a Credit Agreement dated as of September 23, 1999
(the "Credit Agreement") to provide working capital.
Pg. 15
<PAGE>
Results of Operations
The Company's fiscal year ends on the Sunday nearest to
December 31. The fourth fiscal quarter normally accounts for approximately 40%
of net income for the year. Fiscal 1999 has 52 weeks with a twelve week fourth
quarter. The 1998 fiscal year, which contained 53 weeks, had a thirteen week
fourth quarter. The Company's 1999 fiscal year began on January 4, 1999, six
days later than its 1998 fiscal year which began on December 29, 1997.
The following table indicates the number of Company-owned and
franchised restaurants (excluding non-mall joint venture restaurants) in
operation during each indicated period:
<TABLE>
<CAPTION>
40 Weeks 40 Weeks 12 Weeks 12 Weeks
Ended Ended Ended Ended Fiscal Year
10/10/99 10/04/98 10/10/99 10/04/98 1998 1997
Company-owned restaurants:
<S> <C> <C> <C> <C> <C> <C>
Opened during period (1) 18 19 9 4 26 30
Acquired from (sold to)
franchisees during period-net - 1 - - 1 4
Closed during period (9) (18) (4) (5) (20) (8)
----- ---- ----- ----- ----- -----
Open at end of period (2) 639 625 639 625 630 623
==== ==== ==== ==== ==== ====
Franchised restaurants:
Opened during period 34 26 15 11 43 47
Purchased from (sold to)
Company during period-net - (1) - - (1) (4)
Closed or terminated during period (24) (8) (11) (2) (13) (23)
---- ----- ---- ----- ----- -----
Open at end of period 278 256 278 256 268 239
==== ==== ==== ==== ==== ====
All restaurants:
Opened during period (1) 52 45 24 15 69 77
Closed or terminated during period (33) (26) (15) (7) (33) (31)
---- ---- ---- ----- ---- ----
Open at end of period (2) 917 881 917 881 898 862
==== ==== ==== ==== ==== ====
Kiosks (all franchised) open at
end of period 6 9 6 9 8 7
</TABLE>
- ------------------------
(1) Includes, in fiscal 1998 and 1997, one and two mall locations,
respectively, of a joint venture which operates as Umberto of New Hyde
Park. For purposes of this Report, the Company has included those
restaurants with Sbarro restaurants. One mall location was opened by this
joint venture in the forty weeks ended October 4, 1998. No mall locations
of this joint venture were opened in the forty weeks ended October 10,
1999.
(2) Includes, as of October 10, 1999 and October 4, 1998 and the end of
fiscal 1998 and fiscal 1997, six, five, six and five joint venture mall
locations, respectively, which operate as Umberto of New Hyde Park.
Pg. 16
<PAGE>
Restaurant sales from Company-owned and consolidated joint
venture units increased 3.2% to $265.0 million for the forty weeks ended October
10, 1999 from $256.7 million for the forty weeks ended October 4, 1998 and
increased 4.0% to $86.0 million for the twelve weeks ended October 10, 1999 from
$82.7 million for the twelve week period ended October 4, 1998. The increases
resulted from a higher number of units in operation in the current fiscal
periods than the comparable periods in 1998 and selective menu price increases
of approximately 2.8%, 1.4% and 0.7% at Company-owned units which became
effective in September 1999, September 1998 and February 1998, respectively.
Comparable unit sales increased 0.8% for the forty weeks ended October 10, 1999
and 0.6% for the twelve weeks ended October 10, 1999, from the comparable forty
and twelve week periods ended October 11, 1998, primarily as a result of the
menu price increases. Comparable restaurant sales are made up of sales at
locations that were open during the entire current period and entire prior
fiscal year.
Franchise related revenue increased 9.0% to $6.8 million and 18.6% to $2.4
million for the forty and twelve weeks ended October 10, 1999, respectively.
These increases resulted primarily from greater continuing royalties due to a
higher number of franchise units in operation in the current year period than in
the comparable period in 1998, offset in the forty week period, by a decrease in
initial franchise fees due to the timing of unit openings in 1999. The increase
in franchise fees in the third quarter reflected the opening of more units
during the 1999 period as compared to the corresponding prior year period.
Interest income was approximately $3.7 million for both the
forty weeks ended October 10, 1999 and forty weeks ended October 4, 1998.
Interest income decreased $0.1 million to $1.1 million for the twelve weeks
ended October 10, 1999 as compared to $1.2 million for the twelve week period
ended October 4, 1998. As discussed elsewhere in this Report, the Company
utilized substantially all of its available cash in order to fund the Merger.
Therefore, the Company generated minimal amounts of interest income for the
period from September 28, 1999 (the date of the Merger) to October 10, 1999. The
Company will not realize the level of interest income as it has in the past
unless and until it rebuilds its cash position.
Cost of food and paper products as a percentage of restaurant
sales improved to 20.7% for the forty weeks ended October 10, 1999 compared to
21.1% for the forty weeks ended October 4, 1998 and improved to 20.9% from 21.3%
for the twelve week periods then ended. Cost of food and paper products as a
percentage of restaurant sales were positively affected by the menu price
increases described above. Cheese prices, which fluctuate throughout the year,
were slightly lower during the first 28 weeks of fiscal 1999 and significantly
higher during the twelve weeks ended October 10, 1999 than they were in the
comparable periods of fiscal 1998. After the end of the third quarter, cheese
prices decreased to levels that are lower than cheese prices for the comparable
period in fiscal 1998.
Restaurant operating expenses - payroll and other benefits
increased to 27.3% of restaurant sales for the forty weeks ended October 10,
1999 from 26.6% for the forty weeks ended October 4, 1998 and to 26.6% for the
twelve weeks ended October 10, 1999 from 25.7% for the twelve weeks ended
October 4, 1998. The increases were primarily due to the tight labor market,
resulting in pressures on wages and salaries and associated increases in amounts
paid for payroll taxes.
Pg. 17
<PAGE>
Restaurant operating expenses - occupancy and other expenses
increased to 30.7% of restaurant sales for the forty weeks ended October 10,
1999 from 29.7% of restaurant sales for the forty weeks ended October 4, 1998
and to 29.3% for the twelve weeks ended October 10, 1999 from 28.2% for the
twelve week period ended October 4, 1998. These increases are attributable
principally to increases in rent and other occupancy related costs.
Depreciation and amortization expense increased by $1.1
million and $0.5 million for the forty and twelve week periods ended October 10,
1999, respectively, over the corresponding periods in 1998 primarily as a result
of an increase in depreciation and amortization of the Company's new
headquarters building (which was completed in the fourth quarter of fiscal 1998)
and amortization of the excess of the purchase price over the cost of net assets
acquired in connection with the Merger.
General and administrative expenses were $17.7 million, or
6.4% of total revenues, for the first forty weeks of fiscal 1999, compared to
$14.8 million, or 5.6% of total revenues, for the comparable period in fiscal
1998 and $5.4 million, or 6.0% of total revenues, for the twelve weeks ended
October 10, 1999, compared to $4.4 million, or 5.2% of total revenues, for the
comparable period in fiscal 1998. The increases were primarily due to higher
payroll costs and costs associated with the administration of additional
Company-owned restaurants, expanding joint venture operations, higher litigation
costs, increases in various field training and human resource functions and
costs associated with the Company's recently completed corporate headquarters.
Interest expense of $1.0 million in the twelve weeks ended
October 10, 1999 relates to the accrual of interest, accretion of original issue
discount and the amortization of deferred financing charges with respect to the
Senior Notes for the period subsequent to their issuance on September 28, 1999.
A provision of $3.5 million ($2.2 million after tax) in the
forty and twelve weeks ended October 4, 1998 was recorded for costs associated
with the settlement in November 1998 of a lawsuit under the Fair Labor Standards
Act.
The provision for unit closings of $1.5 million ($0.9 million
after tax) in the forty weeks ended October 4, 1998 related to a reserve
established for the closing of certain Company-owned units.
Terminated transaction costs of $1.0 million ($0.6 million
after tax) in the forty weeks ended October 4, 1998 related to costs associated
with the termination of a prior proposal by the Sbarro family for the Company's
acquisition of all shares of the Company not owned by them.
Other income increased by $1.4 million to $3.7 million in the
forty weeks ended October 10, 1999 compared to the forty weeks ended October 4,
1998 and by $0.1 million to $1.1 million for the twelve weeks ended October 10,
1999 from the twelve weeks ended October 4, 1998, primarily as a result of
increased incentives from suppliers and income, net of expenses,
Pg. 18
<PAGE>
generated from the leasing of substantially all of the Company's corporate
headquarters building not occupied by the Company to third parties.
The effective income tax rate was 38.3% and 38.8% for the
forty and twelve week periods ended October 10, 1999, respectively, and 38% for
both the forty and twelve weeks ended October 4, 1998. The increase in the
effective income tax rate is as a result of the non-deductible amortization
expenses in connection with the Merger.
The cumulative effect of the change in method of accounting in
fiscal 1998 resulted from the Company's implementation of Statement of Position
("SOP") 98-5 of the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants which required companies that had
capitalized pre-opening and similar costs to write off all such existing costs
as a "cumulative effect of accounting change" and to expense all such costs as
incurred in the future. In accordance with its early application provisions, the
Company implemented SOP 98-5 as of the beginning of our 1998 fiscal year and
incurred a one-time charge of $0.8 million, net of an income tax benefit of $0.5
million, to write off all start-up costs existing as of the beginning of that
year. The Company had no such one-time charge in the forty weeks ended October
10, 1999.
Impact of Inflation and Other Factors
Food, labor, rent, construction and equipment costs are the
items most affected by inflation in the restaurant business. Although for the
past several years inflation has not been a significant factor in the Company's
results of operations, there can be no assurance that this trend will continue.
In addition, food and paper product costs may be temporarily or permanently
affected by weather, economic and other factors beyond the Company's control
that may reduce the availability and increase the cost of such items.
Historically, the price of cheese has fluctuated more than the Company's other
food ingredients and related restaurant supplies.
Seasonality
The Company's business is subject to seasonal fluctuations,
the effects of weather and economic conditions. Earnings have been highest in
the Company's fourth fiscal quarter due primarily to increased volume in
shopping malls during the holiday shopping season. The length of the holiday
shopping period between Thanksgiving and Christmas and the number of weeks in
the fourth quarter result in fluctuations in fourth quarter financial results
from year to year. The fourth fiscal quarter normally accounts for approximately
40% of net income for the year. Fiscal 1999 has 52 weeks with a twelve week
fourth quarter. The 1998 fiscal year, which contained 53 weeks, had a thirteen
week fourth quarter. The fourth quarter of 1998 (excluding non recurring items)
accounted for 41% of net income for the year. Excluding the impact of the
thirteenth week, the fourth quarter of 1998 would have accounted for 38% of such
net income, which is consistent with the comparable prior year period.
Pg. 19
<PAGE>
Liquidity and Capital Resources
The Company has historically not required significant working
capital to fund its existing operations and has financed its capital
expenditures and investments in its joint ventures through cash generated from
operations. Substantially all of the Company's cash was used to complete the
Going Private Transaction described above. Accordingly, at October 10, 1999, the
Company had unrestricted cash of $8.5 million and a working capital deficit of
$18.5 million.
Net cash provided by operating activities was $33.4 million
and $23.0 million for the forty week periods ended October 10, 1999 and October
4, 1998, respectively. The increase in cash flow from operations for the forty
weeks ended October 10, 1999 from the forty weeks ended October 4, 1998 was
principally attributable to a $10.3 million net change in operating assets and
liabilities primarily as a result of an increase in accounts payable and accrued
expenses arising from timing differences combined with increases in net income
and depreciation and amortization expense.
Net cash used in investing activities primarily relates to
capital expenditures (including investments made by joint ventures). Purchases
of property and equipment were $18.9 million and $21.1 million for the forty
week periods ended October 10, 1999 and October 4, 1998, respectively, excluding
$2.5 million of proceeds from the maturity of a marketable security during the
1998 period. Capital expenditures include $0.4 million and $4.4 million for the
forty week periods ended October 10, 1999 and October 4, 1998, respectively, for
the construction of the Company's corporate headquarters completed in late 1998.
Net cash used in financing activities was $156.5 million for
the forty week period ended October 10, 1999 compared to $3.4 million in the
comparable fiscal 1998 period. This increase primarily resulted from $408.1
million of cash used (net of accrued or previously paid Merger costs) to pay the
Merger consideration and related Merger and financing costs offset by
approximately $251.2 million of net proceeds raised through the private
placement of the Senior Notes. Net cash used in financing activities for the
forty week period ended October 4, 1998 of $3.4 million was comprised of $5.5
million of cash dividends paid in fiscal 1998 that were declared in fiscal 1997
partially offset by $2.1 million of proceeds from the exercise of stock options.
Since the Company used substantially all of its cash on hand
to consummate the Merger, it will not realize the level of interest income it
has in the past unless and until it rebuilds its cash position. Further, the
Company will incur annual cash interest expense of approximately $28.1 million
in connection with the Senior Notes and may incur additional interest expense
for borrowings under its new Credit Agreement.
The Company's effective tax rate after the Merger is higher
than its historical effective tax rate of 38% primarily due to the
non-deductible amortization of the excess of the purchase price over the fair
value of net assets acquired arising as a result of the Merger. The Company
intends to elect to be taxed under the provisions of Subchapter S of the
Internal Revenue Code of 1986, as amended, and, where applicable and permitted,
under similar state and
Pg. 20
<PAGE>
local income tax provisions beginning as early as fiscal 2000. Under the
provisions of Subchapter S, substantially all taxes on the Company's income will
be paid by its shareholders. As contemplated in the Indenture, the Company has
entered into a tax payment agreement with its shareholders which permits the
Company to make periodic distributions to its shareholders in amounts that are
intended to approximate the income taxes, including estimated taxes, that would
be payable by its shareholders if their only income were their pro rata shares
of the Company's taxable income and such income was taxed at the highest
applicable federal and New York State marginal income tax rates. Tax payment
distributions may be made only with respect to periods in which the Company is
treated as an S corporation.
During the forty weeks ended October 4, 1998, the Company used
$5.5 million to pay, in early 1998, the quarterly cash dividend declared in late
1997 to the Company's then shareholders. The Board of Directors suspended the
payment of dividends commencing in the first quarter of 1998 in connection with
a prior merger proposal by the Sbarro family and the consideration of other
strategic alternatives. The Company expects that its Board of Directors will
from time to time elect to pay dividends to the current shareholders in amounts
that will be based upon a number of factors, including the Company's working
capital needs, operating performance, debt service obligations and capital
expenditure requirements. Such amounts will be subject to the provisions of the
Indenture and its Credit Agreement.
The Company's liquidity needs prior to the maturity of its
debt are expected to include interest payments on the new debt (approximately
$28.1 million annually), capital expenditures, working capital, investments in
joint ventures, distributions to shareholders as permitted under the Indenture
and Credit Agreement and general corporate purposes. The Company's primary
sources of liquidity to meet these needs are cash flow from operations and
availability under the Company's $30.0 million Credit Agreement.
In addition, the Company may mortgage its recently completed headquarters
building.
The Company believes that aggregate restaurant capital
expenditures and its investments in joint ventures during the next twelve months
will be moderately higher than levels in recent fiscal years.
The Company presently has $28.2 million of undrawn
availability under its Credit Agreement (net of outstanding letters of credit
and certain guarantees of reimbursement obligations that currently aggregate
approximately $1.8 million). The Company expects to generate cash flow from
operations through the end of its current fiscal year and to make minimal
borrowings under its Credit Agreement during that time.
The Company believes that cash flow from operations and funds
available under its Credit Agreement will be sufficient to meet its liquidity
needs.
Pg. 21
<PAGE>
Recent Accounting Pronouncements
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No.
133," issued in June 1999, SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000. Presently, the Company does not use derivative instruments
and therefore SFAS No. 133 is not currently applicable.
Year 2000
"Year 2000" issues could arise in situations where computer software or
databases recognize the two digit year "00" as the year 1900 rather than the
Year 2000. This could result in system failures or miscalculations that could
cause disruptions in business operations and increased costs in processing and
analyzing data. Since the Company's Information Technology ("IT") systems (used
primarily for financial, accounting, human resources, payroll, operations
support and point-of-sales processing and reporting) and non-information
technology ("non-IT") systems (used principally in communications systems) use
computer hardware, software and related technology, the Company has conducted a
comprehensive review of its computer systems.
State of Readiness. The Company has determined that, while certain computer
programs required changes to assure that they were Year 2000 compliant, all of
its databases are Year 2000 compliant in that they contain four digit year
fields, thereby allowing positive identification of the century and year.
The Company's internal IT systems use a combination of in-house software
developed by the Company's IT department and packaged software purchased from
third parties. During the past five years, as part of its ongoing IT
enhancements, the Company has either significantly updated software or designed
new software for its point-of-sales system (which performs cash register and
restaurant management functions) and for its restaurant accounting system (which
handles centralized bookkeeping, sales analysis and cash control functions
relating to its Company-owned restaurants). The point-of-sales system is
currently installed in approximately 325 restaurants units. The balance of the
Company's existing restaurants use electronic cash registers. The Company has
been orally advised by the manufacturers of its electronic cash registers that
they expect no Year 2000 issues with respect to these registers. The Company has
completed the process of replacing and/or upgrading personal computers that were
part of approximately 115 point-of-sales systems installed in fiscal 1995 and
early fiscal 1996. These personal computers are now certified Year 2000
compliant. The modification and testing of the point-of-sales software programs
for all 325 restaurants has been completed and all of these locations are
operating under Year 2000 compliant software versions. The Company is continuing
to install a point-of-sales system in each new unit and in each existing
restaurant as remodeled and to replace existing registers as needed.
The Company uses software developed by a recognized third party software
provider for various corporate office functions, including financial and
accounting reporting and analysis, human
Pg. 22
<PAGE>
resource and payroll processing, inventory purchasing and accounts payable
functions. Those systems have been reviewed and the Company has determined the
remediation needed to the third party software, made the changes needed and
recompiled all programs within the packaged software. All internal testing of
these systems has been substantially completed by IT personnel and the various
user departments. Any additional corrections or changes that may be required are
not anticipated to be significant.
Non-IT systems are used by the Company primarily for voice communications. The
Company has received written assurances from its communications systems provider
that its communications systems and equipment are Year 2000 compliant. The
Company has also received written confirmation that its voice messaging system,
which utilizes a recognized provider, is Year 2000 compliant. The Company does
not believe that interruption of these services would have a material adverse
affect on its operations.
The Company has received written confirmation from its principal food
distributor that, while the distributor could operate under its former manual
systems, it expects that its computer systems will be Year 2000 compliant on a
timely basis. The Company's principal soft drink mix supplier has publicly
reported that remediation and testing of its key IT systems has been completed
for 99% of such systems and that completion for substantially all of the
remaining systems were expected by the end of October 1999.
Costs. To date, all software modification and testing has been performed by the
Company's internal IT department without the need to employ additional staff and
without significant interruption of the other functions performed by the
department. Total expenditures for testing, purchasing hardware and for other
modification costs for the entire Year 2000 project will be less than $50,000
(in addition to hardware purchased in the ordinary course, which purchases were
not accelerated as a result of the Year 2000 issue). Internal costs incurred as
part of the Year 2000 project (which are principally payroll and related costs
of its IT systems department) are not tracked separately.
Risks. Although the Company believes that its systems will be timely compliant
with Year 2000 issues, the most reasonably likely worst case scenarios facing
the Company in the event Year 2000 problems arise involve: (1) the timeliness of
internal reporting and analyzing corporate information and the potential of
temporarily supplementing Company staff if it is required to rely, for a period
of time, on manual information reporting and processing while remediation to one
or more of internal IT systems is effectuated; (2) the processing of Company
payroll; and (3) ability to maintain its traditional levels of revenues should
the Company experience temporary supply shortages of food, soft drink mixes and
paper products if its distributors experience IT or non-IT Year 2000 problems or
should its restaurant's landlords experience non-IT issues (such as with
microprocessors that control door operators, elevator service and heating and
cooling equipment that the landlords are required to maintain under their leases
with the Company). Like most other companies, the Company is also subject to
certain risks that are not within its control, such as a failure of IT systems
of banks, financial institutions, telephone companies and public utilities.
Pg. 23
<PAGE>
Contingency Plans. In the event its IT systems should malfunction, the Company
believes that it will nevertheless be able to generate revenues at existing
restaurants and process data, although delays may result in reporting and
processing information. The electronic cash registers operate manually and the
point-of-sales cash registers can also operate independent of the IT system.
Manual systems both for reporting to the Company's corporate office by
restaurants that are not yet on the Company's point-of-sales system are still
being used and are available as a backup for units that use the point-of-sales
system. Depending upon the results of testing of the efforts to remediate its
software, the Company intends to develop contingency plans with respect to the
internal reporting of corporate information in the event of a failure of IT
systems.
With respect to payroll functions, the Company has comprehensively analyzed and
worked with an outside payroll processing service before determining to continue
to perform all payroll functions through its internal systems. Therefore, the
Company believes that it could either outsource this function or have an
outsourcer of payroll services install its system at the Company's offices with
the Company operating the system internally without material delay.
The Company may maintain a higher inventory level of food products and soft
drink mixes and paper products toward the end of 1999 as a contingency against
shortages in the event that its suppliers experience unanticipated Year 2000
problems. The levels to be maintained will be based upon consultations with the
suppliers to obtain updates on the status of their Year 2000 compliance
programs. The Company believes that there are other distributors of food
products, beverages and paper products that would be able to service its needs
in the event that its primary suppliers experience Year 2000 problems that
adversely affect their ability to provide the Company with the quality of
supplies needed.
The Company intends to develop additional contingency plans if and to the extent
additional significant risks become evident.
Forward-Looking Statements
Certain statements contained in this Report are forward-looking statements which
are subject to a number of known and unknown risks and uncertainties that could
cause the Company's actual results and performance to differ materially from
those described or implied in the forward-looking statements. These risks and
uncertainties, many of which are not within the Company's control, include, but
are not limited to, the level of the Company's debt and its ability to meet its
debt service obligations; the restrictions imposed on the Company by the
indenture and the Credit Agreement; the Company's ability to repurchase Senior
Notes following a "change in control" of the Company (as defined in the
Indenture); that the Company operates in a highly competitive environment;
changes in consumer tastes; national and local economic conditions; changes in
population, traffic patterns, discretionary spending priorities and demographic
trends; weather conditions; the Company's reliance on one independent
distributor; the Company's vulnerability to increases in food and restaurant
operating costs which could be caused by inflation and shortages of supply,
including food, labor and restaurant locations; rapid variations in the cost of
food products (particularly tomatoes and cheese); increases in the federal or
state minimum wage;
Pg. 24
<PAGE>
the ability to obtain and retain attractive high customer traffic locations on
favorable terms; the Company's ability to continue to attract franchisees; the
success of its present, and any future, joint ventures and other expansion
opportunities; and the failure of its systems (or those of a current or future
key supplier or landlord) to be Year 2000 compliant in a timely manner.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company has historically invested its cash on hand in
short term, fixed rate, highly rated and highly liquid instruments which matured
and were reinvested throughout the year. In connection with the Merger, the
Company used substantially all of its available funds. In addition, there are
restrictions as to the types of investments the Company may make under both the
Indenture and Credit Agreement. As of October 10, 1999, the Company did not have
any investments. Subsequent to that date, the Company has invested its excess
funds in permitted investments. Although its existing investments are not
considered at risk with respect to changes in interest rates or markets for
these instruments, the rate of return on short-term investments could be
affected at the time of reinvestment as a result of intervening events.
Borrowings under the Company's Credit Agreement will be
subject to fluctuations in interest rates. The Company does not expect to enter
into any interest rate swaps or other instruments to hedge interest rates under
its borrowings under its Credit Agreement. Currently there are no amounts
outstanding under the Credit Agreement.
The Company has not purchased future, forward, option or other
instruments to hedge against fluctuations in the prices of the commodities it
purchases. As a result, its future commodities purchases are subject to changes
in the prices of such commodities.
All of the Company's transactions with foreign franchisees
have been denominated in, and all payments have been made in, United States
dollars, reducing the risks attendant in changes in the values of foreign
currencies. Accordingly, the Company has not purchased future contracts, options
or other instruments to hedge against changes in values of foreign currencies.
Pg. 25
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 17, 1999, an action entitled Shan Wanli, Basem
Tawill, Abdul Hamid v. Sbarro, Inc. was filed in the Superior Court of the State
of Washington for King County. The plaintiffs allege that they served as store
managers, general managers, assistant managers or co-managers in Company
restaurants in the State of Washington at various times since November 17, 1996
and that, in connection therewith, the Company violated the overtime pay
provisions of the State of Washington's Minimum Wage Act by treating them as
overtime exempt employees, breached alleged employment agreements and statutory
provisions by failing to record and pay for hours worked at the contract rates
and/or statutory minimum wage rates and failed to provide statutorily required
meal breaks and rest periods. The plaintiffs also seek to represent all of the
Company's restaurant managers employed for any period of time on or after
November 9, 1996 in the State of Washington. The Company currently owns and
operates 18 restaurants in the State of Washington. Plaintiffs seek actual
damages, exemplary damages and costs of the lawsuit, including reasonable
attorney's fees, each in unspecified amounts, and injunctive relief. The Company
believes it has substantial defenses to the claims and intends to vigorously
defend this action.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K.
The only Report on Form 8-K filed by the Company during the quarter for
which this Report is filed was dated September 23, 1999 reporting under Item 1,
Changes in Control of Registrant; Item 2, Acquisition or Disposition of Assets;
and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits.
The only financial statements filed with that Report were the following pro
forma financial statements:
(a) Unaudited consolidated pro forma balance sheet at July 18, 1999.
(b) Unaudited consolidated pro forma income statements for the
year ended January 3, 1999, twenty-eight weeks ended July 18,
1999 and twelve months ended July 18, 1999.
(c) Notes to unaudited consolidated pro forma financial data.
Pg. 26
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SBARRO, INC.
Registrant
Date: November 24, 1999 By: /s/ MARIO SBARRO
-------------------- --------------------------
Mario Sbarro
Chairman of the Board and President
Date: November 24, 1999 By: /s/ ROBERT G. ROONEY
-------------------- --------------------------
Robert G. Rooney
Chief Financial Officer
Pg. 27
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
<PAGE>
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