SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended April 25, 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.)
incorporation or organization)
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 June 4, 1999
Common Stock, $.01 par value 20,534,313
- --------------------------------------------------------------------------------
<PAGE>
SBARRO, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGES
Consolidated Financial Statements:
Balance Sheets - April 25, 1999 (unaudited) and January 3, 1999. . . . . 3-4
Statements of Income (unaudited) - Sixteen Weeks ended April 25, 1999
and April 19, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6
Statements of Cash Flows (unaudited) - Sixteen Weeks ended April 25, 1999
and April 19, 1998 . . . . . . . . . . . . . . .. . . . . . . . . . . .7-8
Notes to Unaudited Consolidated Financial Statements - April 25, 1999 . . 9-11
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . 11-19
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .20-21
-----------------
Pg. 2
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
April 25, 1999 January 3, 1999
(unaudited)
Current assets:
Cash and cash equivalents $146,072 $150,472
Receivables:
Franchisees 1,396 1,342
Other 2,325 2,185
---------------- ----------------
3,721 3,527
Inventories 2,885 3,122
Prepaid expenses 3,868 1,291
Total current assets 156,546 158,412
Property and equipment, net 138,732 138,126
Other assets 6,712 6,630
------------------ -----------------
$301,990 $303,168
=============== ==============
(continued)
Pg. 3
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
April 25, 1999 January 3, 1999
<S> (unaudited)
<C> <C>
Accounts payable $5,272 $ 7,122
Accrued expenses 23,762 25,764
Income taxes 37 4,146
---------------- ---------------
Total current liabilities 29,071 37,032
Deferred income taxes 9,043 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
20,533,645 shares at April 25, 1999 and
20,531,643 shares at January 3, 1999 205 205
Additional paid-in capital 34,634 34,587
Retained earnings 229,037 222,125
--------------- -------------
263,876 256,917
--------------- -------------
$301,990 $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, except per share data)
For the sixteen weeks ended:
April 25, 1999 April 19, 1998
Revenues:
<S> <C> <C>
Restaurant sales $100,354 $98,131
Franchise related income 2,506 2,306
Interest income 1,591 1,446
-------------- --------------
Total revenues 104,451 101,883
-------------- --------------
Costs and expenses:
Cost of food and paper products 20,964 20,668
Restaurant operating expenses:
Payroll and other employee benefits 28,103 26,551
Occupancy and other 31,941 29,892
Depreciation and amortization 6,700 6,670
General and administrative 6,791 5,964
Other income (1,197) (700)
--------------- ---------------
Total costs and expenses 93,302 89,045
--------------- -------------
Income before income taxes and cumulative
effect of change in method of accounting
for start-up costs 11,149 12,838
Income taxes 4,237 4,878
--------------- -------------
Income before cumulative effect
of accounting change 6,912 7,960
Cumulative effect of change in method
of accounting for start-up costs, less
income tax benefit of $504 - (822)
---------------- ---------------
Net income $ 6,912 $ 7,138
=============== ==============
</TABLE>
(continued)
Pg. 5
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
For the sixteen weeks ended:
April 25, 1999 April 19, 1998
Per share information:
Net income per share:
Basic:
Income before accounting change $.34 $.39
Accounting change - (.04)
------ ------
Net income $.34 $.35
==== ====
Diluted:
Income before accounting change $.34 $.39
Accounting change - (.04)
------ ------
Net income $.34 $.35
==== ====
Shares used in computing net income
per share:
Basic 20,532,200 20,491,939
---------- ----------
Diluted 20,574,522 20,665,846
---------- ----------
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 sixteen weeks ended:
April 25, 1999 April 19, 1998
Operating activities:
<S> <C> <C>
Net income $6,912 $7,138
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 6,967 6,670
Provision for deferred income taxes (176) (205)
Changes in operating assets and liabilities:
(Increase) decrease in receivables (194) 66
Decrease in inventories 237 243
Increase in prepaid expenses (2,577) (1,783)
Increase in other assets (135) (523)
Decrease in accounts payable and accrued
expenses (3,852) (5,853)
Decrease in income taxes payable (4,109) (4,345)
--------- -------------
Net cash provided by operating
activities 3,073 2,230
----------- -- -----------
Investing activities:
Purchases of property and equipment (7,520) (9,360)
-------------- --------------
Net cash used in investing activities (7,520) (9,360)
-------------- --------------
</TABLE>
(continued)
Pg. 7
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the sixteen weeks ended:
April 25, 1999 April 19, 1998
Financing activities:
<S> <C> <C>
Proceeds from exercise of stock options 47 1,991
Cash dividends paid - (5,521)
----------------- ----------------
Net cash provided by (used in) financing activities 47 (3,530)
---------------- ----------------
Decrease in cash and cash equivalents (4,400) (10,660)
Cash and cash equivalents at beginning of period 150,472 119,810
-------------- --------------
Cash and cash equivalents at end of period $146,072 $109,150
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $8,432 $9,353
=============== ===============
</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
April 25, 1999 and their consolidated results of operations and cash
flows for the sixteen weeks ended April 25, 1999 and April 19, 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 owned 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 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 contains certain conditions to closing, including,
among other things, (i) approval by a majority of the votes cast
(excluding votes cast by those members of the Sbarro family,
abstentions and broker non-votes) in addition to two-thirds of all
outstanding Common Stock at a meeting of the Company's shareholders to
be called to consider adoption of the merger agreement, (ii) receipt of
financing for the transactions contemplated by the merger agreement,
(iii) the continued suspension of dividends by the Company and (iv) the
settlement of shareholder class action lawsuits that have been filed
relating to the merger.
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. The proposed class consists of all
record and beneficial owners of the Company's Common Stock during the
period beginning with the close of business on November 25, 1998 and
ending on the effective date of the merger. While the complaints in
each of the law-
Pg. 9
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
suits vary, in general, they allege that the directors breached
fiduciary duties, that the then proposed price of $27.50 to be paid to
shareholders other than those members of the Sbarro family was
inadequate and that there were inadequate procedural protections for
public shareholders. Although varying, the complaints seek, generally,
a declaration of a breach of, or an order requiring the defendants to
carry out, their fiduciary duties to the plaintiffs, damages in
unspecified amounts alleged to be caused to the plaintiffs, other
relief (including injunctive relief or rescission or rescissory damages
if the transaction is consummated), and costs and disbursements,
including a reasonable allowance for counsel fees and expenses.
On January 19, 1999, counsel for all of the plaintiffs and counsel for
all of the defendants entered into a Memorandum of Understanding
pursuant to which an agreement in principle to settle all of the
lawsuits was reached and the Sbarro family agreed to an increase in the
merger consideration to $28.85 per share. The Memorandum of
Understanding states that plaintiffs' counsel intend to apply to the
Court for an award of attorneys' fees and disbursements in an amount of
no more than $2.1 million to be paid by the Company, which the
defendants have agreed not to oppose. The defendants are also
responsible for providing notice of the settlement to all class
members. The settlement would result in the complete discharge and bar
of all claims against, past, present and future officers and directors
of the Company and others associated with the merger with respect to
matters and issues of any kind that have been or could have been
asserted in these lawsuits. On April 7, 1999, a Stipulation of
Settlement was entered into embodying the terms of the Memorandum of
Understanding. The settlement is subject to, among other things, court
approval of the settlement and consummation of the merger. It is a
condition to the Sbarro family's obligations under the merger agreement
that holders of no more than 1,000,000 shares of Common Stock request
exclusion from the settlement. The Court has scheduled a hearing for
June 29, 1999 to consider the settlement.
3. Cumulative effect of accounting change:
In accordance with its early application provisions, the Company
implemented Statement of Position 98-5 (SOP) 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 42,322 and 173,907 in the sixteen
week periods ended April 25, 1999 and April 19, 1998, respectively.
Pg. 10
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
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 sixteen week periods ended April 25, 1999 and April 19,
1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 contains certain conditions to closing, including,
among other things, (i) adoption of the merger agreement by a majority of the
votes cast (excluding votes cast by the Sbarro family, abstentions and broker
non-votes), in addition to two-thirds of all outstanding Common Stock, at a
meeting of the Company's shareholders to be called to consider adoption of the
merger agreement, (ii) receipt of financing for the transactions contemplated by
the merger agreement, (iii) the continued suspension of dividends by the Company
and (iv) the settlement of shareholder class action lawsuits that have been
filed relating to the merger.
This Report does not give effect to changes in the Company that may
occur if the merger is consummated.
Pg. 11
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
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. Therefore, the first quarter of the 1999 fiscal year did not
benefit from seasonally strong "post-Christmas" revenues and profit margins. The
Company estimates that this resulted in decreases in first quarter fiscal 1999
revenues of approximately $1,300,000, net income of approximately $450,000 and
basic and diluted earnings per share of approximately $.02.
The Company's business is subject to seasonal fluctuations, the effects
of weather and economic conditions. Earnings have been highest in its fourth
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 can produce changes
in the fourth quarter earnings relationship from year to year. The fourth fiscal
quarter normally accounts for approximately 40% of net income for the year. The
1998 year, which contained 53 weeks, had a 13 week fourth quarter. The fourth
quarter of 1998 (excluding non-recurring items) accounted for approximately 41%
of net income for the year. Excluding the 53rd week, the fourth quarter would
have accounted for 38% of such net income for the year.
Pg. 12
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
The following table provides information concerning the number of
Company-owned and franchised restaurants in operation during each indicated
period:
<TABLE>
<CAPTION>
16 Weeks 16 Weeks
Ended Ended Fiscal Year
-------------------------
04/25/99 04/19/98 1998 1997
-------- -------- ---- ----
Company-owned restaurants:
<S> <C> <C> <C> <C> <C>
Opened during period (1) 7 10 26 30
Acquired from (sold to)
franchisees during period-net 1 1 4
Closed during period (2) (6) (20) (8)
Open at end of period (2) 635 628 630 623
Franchised restaurants:
Opened during period 13 9 43 47
Purchased from (sold to)
Company during period-net (1) (1) (4)
Closed or terminated during period (6) (4) (13) (23)
Open at end of period 275 243 268 239
All restaurants:
Opened during period (1) 20 19 69 77
Closed or terminated during period (8) (10) (33) (31)
Open at end of period (2) 910 871 898 862
Kiosks (all franchised) open at
end of period 8 9 8 7
(1) Includes, in the fiscal year 1998, one joint venture mall location which
operates as Umberto of Hyde Park.
(2) As of April 25, 1999 and the end of the 1998 fiscal year there were
six, and as of April 19, 1998 and the end of 1997 fiscal year there were
five, joint venture mall locations which operate as Umberto of New Hyde
Park.
</TABLE>
Pg. 13
<PAGE>
Restaurant sales from Company-owned and consolidated joint venture units
increased 2.3% to $100,354,000 for the sixteen weeks ended April 25, 1999 from
$98,131,000 for the sixteen weeks ended April 19, 1998. The increase resulted
from a higher number of units in operation in the current fiscal year than in
the comparable period in 1998 and selective menu price increases of
approximately 1.4% and .7% at Company-owned units which became effective in
September 1998 and February 1998, respectively. The selective menu price
increases were the primary factor in a .2% increase in comparable unit sales to
$93,837,000 in the sixteen weeks ended April 25, 1999. These increases were
partially offset by the effects of the timing of the beginning of the fiscal
year in 1999 compared to 1998 as discussed above. 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 income increased 8.7 % to $2,506,000 for the sixteen weeks
ended April 25, 1999 from $2,306,000 for the sixteen weeks ended April 19, 1998.
This increase resulted primarily from greater continuing royalties due to a
higher number of franchise units in operation in the current year than in the
comparable period in 1998. The six units that were closed by franchisees during
the quarter ended April 25, 1999 did not produce material levels of sales and,
consequently, did not generate material amounts of royalty income to the
Company. Comparable sales at franchise locations decreased approximately 1.5%
for the sixteen weeks ended April 25, 1999 from the comparable sixteen week
period in 1998 primarily due to lower unit sales at Russian, Israeli and
Japanese franchise locations.
Interest income increased to $1,591,000 for the sixteen weeks ended April 25,
1999 from $1,446,000 for the sixteen weeks ended April 19, 1998. This increase
was due to higher amounts of cash available for investment in the current year
period than in the prior year period, partially offset by lower interest rates
in the first fiscal quarter of 1999 than in the similar period in 1998.
Cost of food and paper products as a percentage of restaurant sales improved to
20.9% for the sixteen weeks ended April 25, 1999 from 21.1% for the sixteen
weeks ended April 19, 1998. Cheese prices, which were the primary cause of the
increase in food costs in fiscal 1998, have decreased significantly since the
beginning of fiscal 1999 to levels that are comparable to prices in the first
quarter of fiscal 1998 and have remained at such levels.
Restaurant operating expenses - payroll and other benefits increased to 28.0% of
restaurant sales for the first sixteen weeks of fiscal 1999 from 27.1% for the
first sixteen weeks of fiscal 1998. The increase was due to the strong labor
market and resulting pressures on wages and salaries. The additional wage costs
also resulted in increases in amounts paid for payroll taxes. The Company's
health insurance costs rose due to increased premiums, as well as higher
employee participation in the Company's health insurance plan. Restaurant
operating expenses - occupancy and other expenses increased to 31.8% of
restaurant sales for the sixteen weeks ended April 25, 1999 from 30.5% of
restaurant sales for the sixteen weeks ended April 19, 1998. This increase is
attributable principally to rent and other occupancy related costs increasing at
a higher rate than sales.
Depreciation and amortization expense remained approximately the same in the
first sixteen weeks of 1999 as in the comparable period in 1998.
Pg. 14
<PAGE>
General and administrative expenses were $6,791,000, or 6.5% of total revenues,
for the first sixteen weeks of fiscal 1999, compared to $5,964,000, or 5.9% of
total revenues, for the comparable period in fiscal 1998. The increase was
primarily due to higher payroll costs and costs associated with the
administration of additional Company-owned restaurants. General and
administrative expenses for the balance of 1999 may be affected by costs
associated with the proposed merger of the Company with a company to be owned by
certain members of the Sbarro family, which costs would be expensed if the
merger is not consummated. (See Note 2 of Notes to Unaudited Consolidated
Financial Statements included elsewhere herein).
Other income increased by $497,000 to $1,197,000 in the sixteen weeks ended
April 25, 1999 as compared to the sixteen weeks ended April 19, 1998, primarily
as a result of increased incentives from suppliers.
The effective income tax rate was 38.0% for both the sixteen weeks ended April
25, 1999 and April 19, 1998.
The cumulative effect of the change in method of accounting resulted from the
Company's implementation of the Statement of Position 98-5 (SOP) 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 the SOP as of the beginning of its 1998 fiscal year and
incurred a one-time charge of $822,000, ($.04 basic and diluted earnings per
share), net of an income tax benefit of $504,000, to write off all start-up
costs existing as of the beginning of that year.
Liquidity and Capital Resources
During the first sixteen weeks of 1999, operating activities contributed
$3,073,000 to cash flows. This consisted primarily of net income of $6,912,000
and non-cash depreciation and amortization of $6,967,000 partially offset
principally by increases in prepaid expenses of $2,577,000, a decrease of
$3,852,000 in accounts payable and accrued expenses from their peak year end
balances and a decrease in income taxes payable of $4,109,000. During the
sixteen weeks ended April 25, 1999, the Company expended approximately
$7,520,000 in investing activities for the acquisition of property and equipment
related primarily to the opening of seven Company-owned restaurants and the
Company's share of construction costs related to consolidated joint venture
operations. Financing activities generated $47,000 from the receipt of proceeds
from the exercise of stock options. At April 25, 1999, the Company had cash and
cash equivalents of approximately $146,072,000 and its working capital was
approximately $127,475,000. The Company believes, based on current projections,
that its liquid assets presently on hand, together with funds expected to be
generated from operations, should be sufficient for its presently contemplated
operations and the investment in property and equipment for the opening of
additional restaurant locations and remodeling of existing restaurants.
Pg. 15
<PAGE>
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 suspension of dividends
by the Company.
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 require change to assure that they are Year 2000 compliant, all of
their 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 utilize 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 Company's point-of-sales system is currently
installed in approximately 300 restaurant 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 is in the
process of replacing the personal computers that were part of the approximately
115 point-of-sales systems installed in 1995 and early 1996. The Company is also
in the process of updating and modifying its software programs for all 300
restaurants in order to handle Year 2000 issues. Neither of these processes is
believed to be complex and both are expected to be completed, tested and
implemented during the summer of 1999. The Company is continuing to install its
point-of-sales system in each new unit, 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. 16
<PAGE>
resource and payroll processing, inventory purchasing and accounts payable
functions. The Company has reviewed and determined the remediation needed to the
third party software, has made the changes needed and recompiled all programs
within the packaged software. The Company has recently commenced testing the
remediated system. The remediation process with respect to its third party
software is also expected to be completed during the summer of 1999.
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 its 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 the Company primarily for voice communications. The
Company has received written assurances from its communications systems provider
that the Company's communications systems and equipment are Year 2000 compliant.
The Company has not as yet received confirmation that its voice messaging
system, which utilizes a recognized provider, is Year 2000 compliant. The
Company does not believe that interruption of this service would have a material
adverse affect on its operations.
The Company has been orally advised by its principal food distributor that,
while it 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 it expects
remediation and testing of its key IT systems to be 98% completed by the end of
the second quarter of 1999 and compliant by the fourth quarter of 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. The Company believes it 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, the Company has expended less than $30,000 (in addition to hardware
purchased in the ordinary course, which purchases were not accelerated as a
result of the Year 2000 issue) and anticipates spending less than $150,000 for
testing, purchasing hardware and for other modification costs to finish the
project. The Company does not separately track internal costs (which are
principally payroll and related costs of its IT systems department) incurred as
part of its Year 2000 project.
Risks. Although the Company believes 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: (i) the timeliness of
internal reporting and analyzing corporate information and the potential of
temporarily supplementing its staff if the Company is required to rely, for a
period of time, on manual information reporting and processing while remediation
to one or more of its internal IT systems is effectuated; (ii) the processing of
payroll; and (iii) its ability to maintain its traditional levels of revenues
should it experience temporary supply
Pg. 17
<PAGE>
shortages of food, soft drink mixes and paper products if its distributors
experience IT or non-IT Year 2000 problems or should the landlords of the
Company's restaurants experience non-IT issues (such as with microprocessors
that control door operators, elevator and escalator service and heating and
cooling equipment that the landlords are required to maintain under their leases
with the Company). The Company, like most other companies, 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.
Contingency Plans. In the event the Company's IT systems should malfunction, the
Company believes it will nevertheless be able to generate revenues at its
existing restaurants and process data, although delays may result in reporting
and processing information. The Company's electronic cash registers operate
manually and its point-of-sales cash registers can also operate independent of
the IT system. The Company still utilizes manual systems both for reporting to
its corporate office by restaurants that are not yet on its point-of-sales
system and as a backup for units that are on the point-of-sales system.
Depending upon the results of testing of its efforts to remediate its software
during the summer of 1999, the Company intends to develop contingency plans with
respect to the internal reporting of corporate information in the event of a
failure of its IT systems.
With respect to its payroll functions, the Company has recently 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 with the Company operating the system internally, without material
delay.
The Company intends 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 its suppliers experience unanticipated Year 2000
problems. The levels to be maintained will be based upon future consultation
with its 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 the
Company's needs in the event its primary suppliers experience Year 2000 problems
that adversely affect their ability to provide the Company with the quantity of
supplies needed.
The Company intends to develop additional contingency plans if and to the extent
additional significant risks become evident based on the testing of its internal
systems and future discussions with its suppliers, landlords and other third
party providers of goods and services.
Forward Looking Statement
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
Pg. 18
<PAGE>
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's cash equivalents are invested in short term, fixed
interest, 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 yield return on future
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 does not purchase future, forward, option or other
instruments to hedge against fluctuations in the prices of the commodities it
purchases.
All transactions with foreign franchisees are denominated in, and all
payments are made in, United States dollars, reducing the risks attendant in
changes in the values of foreign currencies. Accordingly, the Company does not
purchase future contracts, options or other instruments to hedge against changes
in values of foreign currencies.
Pg. 19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, following the Company's announcement on November 25,
1998 of a proposed merger of a company owned 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 cash, 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. The proposed class consists of all record and beneficial owners
of the Company's Common Stock during the period beginning with the close of
business on November 25, 1998 and ending on the effective date of the merger
(the "Class"). The lawsuits were instituted in the Supreme Court of the State of
New York, New York County and Suffolk County. The lawsuits in Suffolk County
were discontinued and subsequently refilled as one lawsuit in New York County
(with one additional plaintiff) in anticipation of consolidating all lawsuits
into one lawsuit. While the complaints in each of the lawsuits vary, in general,
they allege that the directors breached fiduciary duties, that the then proposed
price of $27.50 to be paid to shareholders other than those members of the
Sbarro family was inadequate and that there were inadequate procedural
protections for public shareholders. Although varying, the complaints seek,
generally, a declaration of a breach of, or an order requiring the defendants to
carry out, their fiduciary duties to the plaintiffs, damages in unspecified
amounts alleged to be caused to the plaintiffs, other relief (including
injunctive relief or rescission or rescissory damages if the transaction is
consummated), and costs and disbursements, including a reasonable allowance for
counsel fees and expenses.
On January 19, 1999, counsel for all of the plaintiffs and counsel for all of
the defendants entered into a Memorandum of Understanding pursuant to which an
agreement in principle to settle all of the lawsuits was reached and the Sbarro
family agreed to an increase in the merger consideration to $28.85 per share.
The Memorandum of Understanding states that plaintiffs' counsel intend to apply
to the Court for an award of attorneys' fees and disbursements in an amount of
no more than $2.1 million to be paid by the Company, which the defendants have
agreed not to oppose. The defendants are also responsible for providing notice
of the settlement to all class members. The settlement would result in the
complete discharge and bar of all claims against, past, present and future
officers and directors of the Company, and others associated with the Merger
with respect to matters and issues of any kind that have been or could have been
asserted in these lawsuits. The settlement is subject to, among other things,
court approval of the settlement and consummation of the Merger. It is a
condition to Mergeco's obligations under the Merger Agreement that holders of no
more than 1,000,000 shares of Common Stock request exclusion from the
settlement. On April 7, 1999, a Stipulation of Settlement was entered into
embodying the terms of the Memorandum of Understanding (the "Stipulation").
On May 11, 1999, the Court issued a Scheduling Order, pursuant to which a
hearing has been scheduled to be held on June 29, 1999, to determine (a) whether
the Court should approve the
Pg. 20
<PAGE>
settlement as fair, reasonable, adequate and in the best interest of the Class;
(b) determine whether the Stipulation and the terms and conditions of the
settlement should be finally approved by the Court; (c) determine whether an
Order and Final Judgment should be entered by the Court dismissing the actions
as to all defendants with prejudice and on the merits as against the plaintiffs
and all members of the Class except those persons who submit a valid and timely
request for exclusion from the Class, and extinguish, release and enjoin
prosecution of any and all settled claims; (d) hear and determine such other
matters as the Court may deem necessary; and (e) in the event the Court approves
the settlement and enters the Order and Final Judgment, to consider an
application by counsel to the Class for an award of attorneys' fees and
expenses. The Court has reserved the right to adjourn the settlement hearing,
including consideration of the application for attorneys' fees and expenses,
without further notice other than by oral announcement at the settlement hearing
or any adjournment thereof. The Court also has reserved the right to approve the
settlement at or after the settlement hearing with such modifications as may be
consented to by the parties to the Stipulation and without further notice to the
Class.
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)
January 19, 1999 reporting under Item 5, Other Events, and Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits. No financial
statements were filed with this report.
Pg. 21
<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: June 8, 1999 By: /s/ MARIO SBARRO
--------------------------- ---------------------------
Mario Sbarro
Chairman of the Board and
President
Date: June 8, 1999 By: /s/ ROBERT S. KOEBELE
--------------------------- ---------------------------
Robert S. Koebele
Vice President-Finance
Pg. 22
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
<PAGE>
EXHIBIT 27
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000766004
<NAME> Sbarro, Inc.
<MULTIPLIER> 1000
<CURRENCY> usd
<S> <C>
<PERIOD-TYPE> 4-mos
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> APR-25-1999
<EXCHANGE-RATE> 1
<CASH> 146072
<SECURITIES> 0
<RECEIVABLES> 3271
<ALLOWANCES> 0
<INVENTORY> 2885
<CURRENT-ASSETS> 156546
<PP&E> 309279
<DEPRECIATION> 170547
<TOTAL-ASSETS> 301990
<CURRENT-LIABILITIES> 29071
<BONDS> 0
0
0
<COMMON> 205
<OTHER-SE> 263671
<TOTAL-LIABILITY-AND-EQUITY> 301990
<SALES> 100354
<TOTAL-REVENUES> 104451
<CGS> 20964
<TOTAL-COSTS> 49067
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11149
<INCOME-TAX> 4237
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6912
<EPS-BASIC> .34
<EPS-DILUTED> .34
</TABLE>
