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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 July 18, 1999
Commission File Number 1-8881
SBARRO, INC.
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 11-2501939
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
Inorporation or organization)
401 Broadhollow 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 August 30, 1999
Common Stock, $.01 par value 20,548,690
- --------------------------------------------------------------------------------
<PAGE>
SBARRO, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGES
Consolidated Financial Statements:
Balance Sheets - July 18, 1999 (unaudited) and January 3, 1999 . . . . . .. 3
Statements of Income (unaudited) - Twenty-Eight Weeks ended July 18,
1999 and July 12, 1998 and Twelve Weeks ended July 18, 1999 and
July 12, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..4-5
Statements of Cash Flows (unaudited) - Twenty-Eight Weeks ended
July 18, 1999 and July 12, 1998. . . . . . . . . . . . . . . . . . . . . .6-7
Notes to Unaudited Consolidated Financial Statements - July 18, 1999 . . ..8-9
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . ..10-18
Qualitative and quantitative disclosures of market risk.....................18
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . 19-21
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<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(In thousands)
July 18, 1999 January 3, 1999
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents......... $152,907 $150,472
Franchisees........................ 1,505 1,342
Other.................................2,037 2,185
----- -----
3,542 3,527
Inventories 2,882 3,122
Prepaid expenses......................... 5,114 1,291
----- -----
Total current assets.............. 164,445 158,412
Property and equipment, net................138,397 138,126
Other assets.............................. 8,902 6,630
----- -----
$311,744 $303,168
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................. $7,512 $7,122
Accrued expenses.......................24,786 25,764
Income taxes............................. 75 4,146
------ ------
Total current liabilities...........32,373 37,032
Deferred income taxes........................8,882 9,219
Shareholders' equity:
Preferred stock, $1 par value; authorized
1,000,000 shares; none issued......... -- --
Common stock, $.01 par value;
authorized 40,000,000 shares; issued
and outstanding 20,548,690 shares at
July 18, 1999 and 20,531,643 shares
atJanuary 3, 1999............. 205 205
Additional paid-in capital.............35,013 34,587
Retained earnings.....................235,271 222,125
------- -------
270,489 256,917
------- -------
$311,744 $303,168
======== ========
See notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the twenty-eight weeks ended:
July 18, 1999 July 12, 1998
------------- -------------
Revenues:
<S> <C> <C>
Restaurant sales.......... $179,051 $174,028
Franchise related income............. 4,332 4,154
Interest income...................... 2,624 2,545
----- -----
Total revenues.............186,007 180,727
------- -------
Costs and expenses:
Cost of food and paper products..... 36,981 36,423
Restaurant operating expenses:
Payroll and other employee benefits. 49,575 46,899
Occupancy and other.. ...............56,205 52,985
Depreciation and amortization........12,278 11,725
General and administrative...........12,339 10,367
Provision for unit closings.......... -- 1,525
Terminated transaction costs......... -- 986
Other income.........................(2,574) (1,259)
------- -------
Total costs and expenses...164,804 159,651
------- -------
Income before income taxes and cumulative
effect of change in method of accounting
for start-up costs..........................21,203 21,076
Income taxes...................................8,057 8,009
----- -----
Income before cumulative effect .. 13,146 13,067
of accounting change ------ ------
Cumulative effect of change in method of accounting
for start-up costs, less income tax benefit
of $504.............................. -- (822)
------ ------
Net income...................................$13,146 $12,245
======= =======
Per share information:
Net income per share:
Basic:
Income before accounting change.....$.64 $.64
Accounting change.................... -- (.04)
----- -----
Net income......................... $.64 $.60
==== ====
Diluted:
Income before accounting change.....$.64 $.63
Accounting change................... -- (.04)
---- ----
Net income..........................$.64 $.59
==== ====
Shares used in computing net income per share:
Basic........................... 20,533,176 20,507,204
========== ==========
Diluted..........................20,640,299 20,606,707
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the twelve weeks ended:
July 18, 1999 July 12, 1998
------------- -------------
Revenues:
<S> <C> <C>
Restaurant sales................ $78,697 $75,897
Franchise related income........ 1,826 1,848
Interest Income................. 1,033 1,099
----- -----
Total revenues..............81,556 78,844
------ ------
Costs and expenses:
Cost of food and paper products......16,017 15,755
Restaurant operating expenses:
Payroll and other employee benefits. 21,472 20,348
Occupancy and other................ 24,264 23,093
Depreciation and amortization........ 5,311 5,055
General and administrative........... 5,548 4,403
Provision for unit closings.......... -- 1,525
Terminated transaction costs......... -- 986
Other income.........................(1,110) (559)
------- -----
Total costs and expenses... 71,502 70,606
------- ------
Income before income taxes .................. 10,054 8,238
Income taxes.................................. 3,820 3,131
------ -----
Net income....................................$6,234 $5,107
====== ======
Per share information:
Net income per share:
Basic:
Net income......................... .$.30 $.25
Diluted:
Net income...........................$.30 $.25
==== ====
Shares used in computing net income per share:
Basic............................20,534,480 20,526,633
========== ==========
Diluted..........................20,599,281 20,605,477
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the twenty-eight weeks ended:
July 18, 1999 July 12, 1998
------------- -------------
Operating activities:
<S> <C> <C>
Net income............................... $13,146 $12,245
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect in change in method
of accounting for start-up costs... -- 822
Depreciation and amortization....... 12,278 11,725
Deferred income taxes............... (337) (335)
Provision for unit closings......... -- 1,525
Changes in operating assets and
liabilities:
Increase in receivables........... (15) (810)
Decrease in inventories........... 240 301
Increase in prepaid expenses.......(3,823) (3,040)
Increase in other assets...........(2,357) (70)
Decrease in accounts payable
and accrued expenses... ......... (306) (2,852)
Decrease in income taxes payable...(4,071) (4,586)
------ ------
Net cash provided by operating activities..14,755 14,925
------ ------
Investing activities:
Purchases of property and equipment.......(12,746) (15,760)
-------- --------
Net cash used in investing activities.....(12,746) (15,760)
-------- --------
</TABLE>
(continued)
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the twenty-eight weeks ended:
July 18, 1999 July 12, 1998
------------- -------------
<S> <C> <C>
Financing activities:
Proceeds from exercise of stock options..$ 426 $ 2,073
Cash dividends paid...................... -- (5,521)
------ -------
Net cash provided by (used in)financing
activities...... 426 (3,448)
------- -------
Increase (decrease) in cash and cash
equivalents......... 2,435 (4,283)
Cash and cash equivalents at beginning
of period......... 150,472 119,810
------- -------
Cash and cash equivalents at end
of period............... $152,907 $115,527
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for
income taxes............. $13,861 $13,841
======= =======
</TABLE>
See notes to unaudited consolidated financial statements
<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
July 18, 1999, their consolidated results of operations for the
twenty-eight and twelve week periods ended July 18, 1999 and July 12,
1998 and their consolidated cash flows for the twenty-eight weeks ended
July 18, 1999 and July 12, 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. Proposed merger:
On January 19, 1999, the Company entered into a merger agreement for
the merger of a company formed by members of the Sbarro family, the
Company's principal shareholders, with and into the Company in which
all outstanding common stock of the Company not owned by those
shareholders are to be converted into the right to receive $28.85 in
cash. The shares to be purchased comprise approximately 65.6% of the
Company's outstanding shares of common stock. In addition, all
outstanding stock options, including those held by members of the
Sbarro family, will be terminated. For each such option, the holder
thereof will be paid the difference between $28.85 and the exercise
price per share, multiplied by the total number of shares of common
stock subject to such option.
Following the Company's announcement of the proposal by members of the
Sbarro family for the merger, seven class action lawsuits were
instituted by shareholders against the Company, those members of the
Sbarro family who are directors of the Company and all or some of the
other directors of the Company. In a memorandum of understanding
entered into on January 19, 1999, which was confirmed by a subsequent
formal stipulation of settlement, counsel for the plaintiffs and
counsel for the defendants agreed to settle all of the lawsuits, and
the Sbarro Family agreed to increase the merger consideration from
$27.50 per share to $28.85 per share.
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
On July 16, 1999, following a hearing held on June 29, 1999, an order and
final judgment was entered which, among other things, approved a
stipulation of settlement and related settlement of the class actions and
awarded plaintiffs' counsel attorneys' fees and disbursements of
approximately $1.6 million in connection with the settlement, subject to,
and payable upon, completion of the merger. Those fees and disbursements
will be capitalized, and not expensed for financial reporting purposes. On
August 16, 1999, the appeal period related to the order and final judgment
expired. No appeals were filed. The settlement remains subject to
consummation of the merger. Reference is made to Item 1 of Part II of this
Report for additional information.
The merger was approved at a Special Meeting of Shareholders held on August
13, 1999. The merger agreement remains subject to, among other things,
receipt of financing for the transactions contemplated by the merger
agreement and the continued suspension of dividends by the Company.
3. 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 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.
4. Earnings per share:
The number of shares of common stock subject to stock options included in
diluted earnings per share were 107,123 and 99,503 for the twenty-eight
weeks ended July 18, 1999 and July 12, 1998, respectively, and 64,801 and
78,844 for the twelve weeks ended July 18, 1999 and July 12, 1998,
respectively.
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 twenty-eight week periods ended July 18, 1999 and July 12,
1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements, the Notes thereto and other data and information appearing
elsewhere in this Report.
General
On January 19, 1999, the Company entered into a merger agreement for
the merger of a company owned by members of the Sbarro family, the Company's
principal shareholders, with and into the Company in which all the outstanding
Common Stock of the Company not owned by those shareholders are to be converted
into the right to receive $28.85 in cash. The shares to be purchased comprise
approximately 65.6% of the Company's outstanding shares of Common Stock. In
addition, all outstanding stock options, including those held by those members
of the Sbarro family, will be terminated. For each such option, the holder
thereof will be paid the difference between $28.85 and the exercise price per
share, multiplied by the total number of shares of Common Stock subject to such
option. The merger agreement was adopted at a Special Meeting of Shareholders
held on August 13, 1999.
The merger agreement remains subject to certain conditions to closing,
including, among other things, receipt of financing for the transactions
contemplated by the merger agreement and the continued suspension of dividends
by the Company.
This Report does not give effect to changes in the Company that may
occur if the merger is consummated.
Results of Operations
The Company's fiscal year ends on the Sunday nearest to December 31.
The fiscal year which ended on January 3, 1999 contained 53 weeks. All other
reported fiscal years contained 52 weeks. 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.
<PAGE>
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>
28 Weeks 28 Weeks
Ended Ended Fiscal Year Fiscal Year
07/18/99 07/12/98 1998 1997
<S> <C> <C> <C> <C>
Company-owned Sbarro restaurants:
Opened during period (1) 9 15 26 30
Acquired from franchisees
during period-net -- 1 1 4
Closed during period (5) (13) (20) (8)
--- ---- ---- ---
Open at end of period (2) 634 626 630 623
Franchised Sbarro restaurants:
Opened during period 19 15 43 47
Sold to Company during
period-net -- (1) (1) (4)
Closed or terminated during period (13) (6) (13) (23)
---- --- ---- ----
Open at end of period 274 247 268 239
All Sbarro restaurants:
Opened during period (1) 28 30 69 77
Closed or terminated during period (18) (19) (33) (31)
---- ---- ---- ----
Open at end of period (2) 908 873 898 862
Kiosks (all franchised) open at
end of period 7 9 8 7
</TABLE>
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(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. No mall locations were opened by
this joint venture in either of the twenty-eight weeks ended July 18,
1999 or July 12, 1998.
(2) Includes, as of July 18, 1999 and July 12, 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.
Restaurant sales from Company-owned and consolidated joint venture units
increased 2.9% to $179.1 million for the twenty-eight weeks ended July 18, 1999
from $174.0 million for the twenty-eight weeks ended July 12, 1998 and increased
3.7% to $78.7 million for the twelve weeks ended July 18, 1999 from $75.9
million for the twelve weeks ended July 12, 1998. The increase resulted from a
higher number of units in operation in the current fiscal period than the
comparable period in 1998 and selective menu price increases of approximately
1.4% and 0.7% at Company-owned units which became effective in September 1998
and February 1998, respectively. Comparable unit sales increased 0.9% and 1.8%
for the twenty-eight and twelve weeks ended July 18, 1999 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.
<PAGE>
Franchise related income increased 4.3% to $4.3 million for the twenty-eight
weeks ended July 18, 1999 from $4.2 million for the twenty-eight weeks ended
July 12, 1998. This increase 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. Franchise related income
remained relatively unchanged for the twelve weeks ended July 18, 1999 as
compared to the twelve week period ended July 12, 1998 primarily due to timing
differences in opening new units and recognizing related development fee income.
Interest income increased to $2.6 million for the twenty-eight weeks ended July
18, 1999 from $2.5 million for the twenty-eight weeks ended July 12, 1998 and
decreased to $1.0 million from $1.1 million for the twelve weeks ended July 18,
1999 as compared to the twelve weeks ended July 12, 1998. These changes were due
to higher cash balances being invested in the current year period than in the
prior year period, offset by lower interest rates in the first part of the year
and shorter investment maturities in the 1999 periods as compared to the 1998
periods.
Cost of food and paper products as a percentage of restaurant sales declined to
20.7% for the twenty-eight weeks ended July 18, 1999 as compared to 20.9% for
the twenty-eight weeks ended July 12, 1998 and to 20.4% from 20.8% for the
twelve week periods then ended. Cheese prices, which fluctuate throughout the
year, were slightly lower during the first 28 weeks of 1999 as compared to the
related 1998 period. After the end of the second quarter, cheese prices
increased to levels that are higher than cheese prices for the comparable period
in fiscal 1998.
Restaurant operating expenses -- payroll and other benefits increased to 27.7%
of restaurant sales for the twenty-eight weeks of fiscal 1999 from 26.9% for the
first twenty-eight weeks of fiscal 1998 and to 27.3% from 26.8% for the twelve
week periods ended July 18, 1999 and July 12, 1998, respectively. The increase
was primarily due to the tight labor market, resulting in pressures on wages and
salaries and associated increases in amounts paid for payroll taxes.
Restaurant operating expenses -- occupancy and other expenses increased to 31.4%
of restaurant sales for the twenty-eight weeks ended July 18, 1999 from 30.5% of
restaurant sales for the twenty-eight weeks ended July 12, 1998 and to 30.8%
from 30.5% for the twelve week periods then ended. This increase is attributable
principally to rent and other occupancy related costs increasing at a higher
rate than restaurant sales.
Depreciation and amortization expense increased by $0.6 million and $0.3 million
for the twenty-eight and twelve weeks ended July 18, 1999, respectively, over
the corresponding periods in 1998 primarily as a result of the Company's new
headquarters building being completed in the fourth quarter of fiscal 1998.
General and administrative expenses were $12.3 million, or 6.6% of total
revenues, for the first twenty-eight weeks of fiscal 1999, compared to $10.4
million, or 5.7% of total revenues, for the comparable period in fiscal 1998 and
$5.5 million, or 6.8% of total revenues, for the twelve weeks ended July 18,
1999, compared to $4.4 million, or 5.6% or total revenues, for the comparable
period in fiscal 1998. These increases were primarily due to higher payroll
costs and costs associated with the administration of additional Company-owned
restaurants and joint venture start-up operations, increases in various field
training and human resources functions and increased costs associated with
expansion into the Company's recently completed corporate headquarters.
The provision for unit closings of $1.5 million before tax ($0.9 million after
tax or $.05 after tax basic and diluted earnings per share) in the twelve weeks
ended July 12, 1998 related to a reserve established for the closing of certain
Company-owned units.
Terminated transaction costs of $1.0 million before tax ($0.6 million after tax
or $.03 after tax basic and diluted earnings per share) in the twelve weeks
ended July 12, 1998 related to costs associated with the termination of the
original proposal by members of the Sbarro Family to acquire all shares of the
Company not owned by them.
Other income increased by $1.3 million to $2.6 million in the twenty-eight weeks
ended July 18, 1999, compared to the twenty-eight weeks ended July 12, 1998 and
by $0.6 million to $1.1 million for the twelve weeks ended July 18,1999 as
compared to the twelve weeks ended July 12, 1998, primarily as a result of
increased incentives from suppliers and income, net of expenses, generated from
the leasing of a significant portion of the Company's corporate headquarters
building to third parties.
The effective income tax rate was 38.0% for both the twenty-eight and twelve
weeks ended July 18, 1999 and July 12, 1998.
<PAGE>
The cumulative effect of the change in method of accounting in fiscal 1998
resulted from the Company's implementation of the 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, net of tax
benefit, 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 the
Company's 1998 fiscal year and incurred a one-time charge of $0.8 million ($0.04
basic and diluted earnings per share), 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 charges in the 1999 periods.
Impact of Inflation and Other Factors
Food, labor, rent, construction and equipment costs are the items most affected
by inflation in the restaurant business. Although for the past several years
inflation has not been a significant factor, there can be no assurance that this
trend will continue. In addition, food and paper product costs may be
temporarily or permanently affected by weather, economic and other factors
beyond 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
our 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. See also
"--Accounting Period." The fourth fiscal quarter normally accounts for
approximately 40% of net income for the year.
Accounting Period
Our fiscal year ends on the Sunday nearest to December 31. The fiscal year
which ended on January 3, 1999 contained 53 weeks. All other reported
fiscal years contained 52 weeks.
<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. At
July 18, 1999, the Company had cash and cash equivalents of $152.9 million and
working capital of $132.1 million.
Net cash provided by operating activities was $14.8 million and $14.9 million
for the twenty-eight week periods ended July 18, 1999 and July 12, 1998,
respectively. Net cash used in investing activities consists primarily of
capital expenditures (including investments made by joint ventures). Capital
expenditures were $12.7 million and $15.8 million for the twenty-eight week
periods ended July 18, 1999 and July 12, 1998, respectively. The $3.1 million
decrease in the current twenty eight week period was primarily due to lower
spending for the Company's recently completed corporate headquarters. Net cash
provided by financing activities was $0.4 million for the twenty-eight week
period ended July 18, 1999 and consisted entirely of cash proceeds from the
exercise of stock options. Net cash used in financing activities was $3.4
million for the twenty-eight week period ended July 12, 1998 and included $5.5
million of cash dividends paid in fiscal 1998 that were declared in fiscal 1997
offset by $2.1 million of proceeds from the exercise of stock options.
Dividends
The Company's Board of Directors has suspended quarterly cash dividends since
the last quarter of 1997 pending consideration of proposals made by certain
members of the Sbarro Family to merge the Company with a company owned by them
in which all of the shares of the Company not owned by them would be exchanged
for cash and the consideration of other strategic alternatives. The proposals
were, and the merger agreement entered into with respect to the proposed merger
agreement is, conditioned upon, among other things, the continued suspension of
dividends by the Company.
<PAGE>
Recent Accounting Pronouncements
Pursuant to 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 our 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, we have conducted a comprehensive review of our computer systems.
State of Readiness. We have determined that, while certain computer programs
require change to assure that they are Year 2000 compliant, all of our databases
are Year 2000 compliant in that they contain four digit year fields, thereby
allowing positive identification of the century and year.
Our internal IT systems use a combination of in-house software developed by our
IT department and packaged software purchased from third parties. During the
past five years, as part of our ongoing IT enhancements, we have either
significantly updated software or designed new software for our point-of-sales
system (which performs cash register and restaurant management functions) and
for our restaurant accounting system (which handles centralized bookkeeping,
sales analysis and cash control functions relating to our Company-owned
restaurants). Our point-of-sales system is currently installed in approximately
325 restaurant units. The balance of our existing restaurants use electronic
cash registers. We have been orally advised by the manufacturers of our
electronic cash registers that they expect no Year 2000 issues with respect to
these registers. We have 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. We have completed modifying and testing of our
point-of-sales software programs for all 325 restaurants and, as of August 3,
1999, all of these locations are operating under Year 2000 compliant software
versions. We are continuing to install a point-of-sale system in each new unit
and in each existing restaurant as remodeled and to replace existing registers
as needed.
We use software developed by a recognized third party software provider for
various corporate office functions, including financial and accounting reporting
and analysis, human resource and payroll processing, inventory purchasing and
accounts payable functions. We have reviewed and determined the remediation
needed to the third party software, have made the changes needed and recompiled
all programs within the packaged software. We have recently commenced testing
the remediated system. All internal testing of these systems has been completed
by IT. The remainder of the testing by the various user departments is expected
to be completed by October 31, 1999.
<PAGE>
Thereafter, any corrections or changes (which are currently not anticipated to
be significant) to programs or systems that are required as a result of the
testing of our internal software and third party software will be addressed.
Final testing is currently anticipated to be completed, and the updated software
installed, by the end of November 1999.
Non-IT systems are used by us primarily for voice communications. We have
received written assurances from our communications systems provider that our
communications systems and equipment are Year 2000 compliant. We have not as yet
received confirmation that our voice messaging system, which utilizes a
recognized provider, is Year 2000 compliant. We do not believe that interruption
of this service would have a material adverse affect on our operations.
We have received written confirmation from our principal food distributor that,
while such distributor could operate under its former manual systems, it expects
that its computer systems will be Year 2000 compliant on a timely basis. Our
principal soft drink mix supplier has publicly reported that remediation and
testing of its key IT systems has been completed for 98% of such systems and
that completion for substantially all of the remaining systems is scheduled for
the third quarter of 1999.
Costs. To date, all software modification and testing has been performed by our
internal IT department without the need to employ additional staff and without
significant interruption of the other functions performed by the department. We
believe we will complete this project without additional staff and without
adversely affecting day-to-day operations and support, although some overtime
for personnel outside the IT department staff may be required during the testing
phase of the remediated systems.
To date, we have expended 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) and anticipate spending less than $150,000 for testing,
purchasing hardware and for other modification costs to finish the project. We
do not separately track internal costs (which are principally payroll and
related costs of our IT systems department) incurred as part of our Year 2000
project.
Risks. Although we believe our systems will be timely compliant with Year 2000
issues, the most reasonably likely worst case scenarios facing us in the event
Year 2000 problems arise involve: (1) the timeliness of internal reporting and
analyzing corporate information and the potential of temporarily supplementing
our staff if we are required to rely, for a period of time, on manual
information reporting and processing while remediation to one or more of our
internal IT systems is effectuated; (2) the processing of our payroll; and (3)
our ability to maintain our traditional levels of revenues should we experience
temporary supply shortages of food, soft drink mixes and paper products if our
distributors experience IT or non-IT Year 2000 problems or should the landlords
of our restaurants 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 us). Like most
other companies, we are also subject to certain risks that are not within our
control, such as a failure of IT systems of banks, financial institutions,
telephone companies and public utilities.
<PAGE>
Contingency Plans. In the event our IT systems should malfunction, we believe we
will nevertheless be able to generate revenues at our existing restaurants and
process data, although delays may result in reporting and processing
information. Our electronic cash registers operate manually and our
point-of-sales cash registers can also operate independent of our IT system. We
still use manual systems both for reporting to our corporate office by
restaurants that are not yet on our point-of-sales system and as a backup for
units that are on our point-of-sales system. Depending upon the results of
testing of our efforts to remediate our software, we intend to develop
contingency plans with respect to the internal reporting of corporate
information in the event of a failure of our IT systems.
With respect to our payroll functions, we have recently comprehensively analyzed
and worked with an outside payroll processing service before determining to
continue to perform all payroll functions through our internal systems.
Therefore, we believe that we could either outsource this function or have an
outsourcer of payroll services install its system at our offices with us
operating the system internally without material delay.
We intend to 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 our suppliers experience unanticipated Year 2000
problems. The levels to be maintained will be based upon future consultation
with our suppliers to obtain updates on the status of their Year 2000 compliance
programs. We believe that there are other distributors of food products,
beverages and paper products that would be able to service our needs in the
event our primary suppliers experience Year 2000 problems that adversely affect
their ability to provide us with the quantity of supplies needed. We intend to
develop additional contingency plans if and to the extent additional significant
risks become evident based on the testing of our internal systems and future
discussions with our suppliers, landlords and other third party providers of
goods and services.
<PAGE>
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, general economic, weather and business conditions; 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; the Company's ability to continue to
attract franchisees; the success of the Company's present, and any future, joint
ventures and other expansion opportunities; the availability of food
(particularly cheese and tomatoes) and paper products at reasonable prices; no
material increase occurring in the Federal minimum wage; and the Company's
ability to attract competent restaurant and executive managerial personnel;
government regulations; and the Company's ability to successfully and timely
complete compliance of its information systems for the Year 2000 and the ability
of certain of its suppliers and landlords to be timely Year 2000 compliant.
Item 3. Qualitative and quantitative disclosures of market risk
The Company has historically invested its cash on hand in short term, fixed
rate, highly rated and highly liquid instruments which mature and are reinvested
throughout the year. Therefore, although the Company's existing investments are
not considered at risk with respect to changes in interest rates or markets for
these instruments, the Company's rate of return on short-term investments could
be affected at the time of reinvestment as a result of intervening events. The
Company presently has no borrowings, and does not purchase interest rate swap or
other instruments to hedge against interest rate fluctuations.
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, the Company's future commodities purchases are subject to changes in the
price of such commodities.
All 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On January 19, 1999, the Company entered into a merger agreement for the merger
of a company formed by members of the Sbarro family, the Company's principal
shareholders, with and into the Company in which all outstanding common stock of
the Company not owned by those shareholders are to be converted into the right
to receive $28.85 in cash.
Following the Company's announcement of the proposal by members of the Sbarro
family for the merger, seven class action lawsuits were instituted by
shareholders against the Company, those members of the Sbarro family who are
directors of the Company and all or some of the other directors of the Company.
In a memorandum of understanding entered into on January 19, 1999, which was
confirmed by a subsequent formal stipulation of settlement, counsel for the
plaintiffs and counsel for the defendants agreed to settle all of the lawsuits,
and the Sbarro Family agreed to increase the merger consideration from $27.50
per share to $28.85 per share.
On June 29, 1999, a hearing was held before the Court. No opposition to the
settlement was presented at the hearing and no shareholder requested exclusion
from the class on behalf of whom the actions were brought. The Court entered an
order and final judgment on July 16, 1999, among other things, approving the
stipulation of settlement and the settlement, adjudging the terms thereof to be
fair, reasonable, adequate and in the best interests of the Class, certifying
the class action and class and awarded plaintiffs' counsel attorneys' fees and
disbursements of approximately $1.6 million in connection with the settlement,
subject to, and payable upon, completion of the merger. Those fees and
disbursements will be capitalized, and not expensed for financial reporting
purposes.
On August 16, 1999, the appeal period related to the Order and Final Judgment
expired. No appeals were filed. The settlement is subject to consummation of the
merger. The closing of the merger is subject to, among other things, the receipt
of financing for the transaction and the continued suspension of dividends by
the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
On August 13, 1999, the Company held a Special Meeting of Shareholders to
consider a proposal to adopt the Amended and Restated Agreement and Plan of
Merger (the "Restated Merger Agreement") by and among the Company, Sbarro Merger
LLC ("Mergeco"), Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family
Limited Partnership, Anthony Sbarro and Mario Sbarro and Franklin Montgomery,
not individually but as trustees under that certain Trust Agreement dated April
28, 1984 for the benefit of Carmela Sbarro and her descendants (the "Continuing
Shareholders").
<PAGE>
Under the New York Business Corporation Law (the "BCL"), the affirmative vote of
at least two-thirds of all outstanding shares of the Company's common stock was
required to adopt the Restated Merger Agreement (the "BCL Voting Requirement").
In addition, the Restated Merger Agreement provides that it was a condition to
the consummation of the Merger that the Restated Merger Agreement be adopted by
at least a majority of the votes cast at the Special Meeting, excluding votes
cast by the Continuing Shareholders, abstentions and broker non-votes (the
"Merger Agreement Requirement"). At the Special Meeting, the Company's
shareholders approved the Restated Merger Agreement.
A motion made by a shareholder at the Special Meeting to table the vote
concerning the merger was rejected by the following vote:
For Against
1,100 7,064,028
In meeting the BCL Voting Requirement, the Company's shareholders adopted the
Restated Merger Agreement by the following vote:
For Against Abstain
15,278,273 727,372 6,802
In meeting the Merger Agreement Requirement, the Company's shareholders adopted
the Restated Merger Agreement by the following vote:
For Against
8,213,945 727,372
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 Current Report on Form 8-K filed by the Company during the period
covered by this report was a report dated (date of earliest event reported) June
17, 1999 reporting under Item 5, Other Events, and Item 7, Financial Statements,
Pro Forma Financial Information and Exhibits. No financial statements were filed
with that report.
<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: August 31, 1999 By: MARIO SBARRO
Mario Sbarro
Chairman of the Board and
President and Chief
Executive Officer
Date: August 31, 1999 By: ROBERT G. ROONEY
Robert G. Rooney
Vice President-Finance
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
<PAGE>
EXHIBIT 27
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