- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X|Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended January 2, 2000
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ________ to ________
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 or organization) (I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ X ].
The registrant's common stock is not publicly-held nor publicly traded.
The number of shares of Common Stock of the registrant outstanding as
of February 28, 2000 was 7,064,328.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
SBARRO, INC.
Unless the context otherwise requires, all references to "we", "us",
"our", "Sbarro" or the "Company" include Sbarro, Inc. and our subsidiaries.
PART I
Forward-Looking Statements
This report contains certain forward-looking statements about our
financial condition, results of operations, future prospects and business. These
statements appear in a number of places in the report and include statements
regarding our intent, belief, expectation, strategies or projections at that
time. These statements generally contain words such as "may", "should", "seeks",
"believes", "expects", "intends", "plans", "estimates", "projects", "strategy"
and similar expressions or the negative of those words.
Forward-looking statements are subject to a number of known and unknown
risks and uncertainties that could cause actual results to differ materially
from those projected, expressed or implied in the forward-looking statements.
These risks and uncertainties, many of which are not within our control include
but are not limited to, 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 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; the loss of services of
members of our senior management team, the Company's ability to attract
competent restaurant and executive managerial personnel; competition; government
regulations; our ability to generate sufficient cash flow to make interest
payments and principal under our senior notes and credit agreement; the effects
which restrictions imposed on us under our senior notes indenture and credit
agreement may have on our ability to operate our business; and our ability to
repurchase senior notes to the extent required and make repayments under our
credit agreement to the extent required in the event we make certain asset sales
or experience a change of control.
Because forward-looking statements are subject to risks and
uncertainties, actual results may differ materially from those expressed or
implied by any forward-looking statements. You are cautioned not to place undue
reliance on these statements, which speak only as of the date of the report.
We do not undertake any responsibility to release publicly any revisions to
these forward-looking statements to take into account events or circumstances
that occur after the date of this report, other than as required by law.
Additionally, we do not undertake any responsibility to update you on the
occurrence of any unanticipated events which may cause actual results to differ
from those expressed or implied by the forward-looking statements contained in
this report, other than as required by law.
<PAGE>
ITEM 1. BUSINESS
Sbarro, Inc., a New York corporation, was organized in 1977
and is the successor to a number of family food and restaurant businesses
developed and operated by the Sbarro family. Today, we are a leading owner,
operator and franchisor of quick-service restaurants, serving a wide variety of
Italian specialty foods with 930 restaurants worldwide at January 2, 2000. In
addition since 1995, we have created, primarily through joint ventures, other
concepts for the purpose of developing growth opportunities in addition to the
Sbarro restaurants. (See "New Concept Development", below.)
Going Private Transaction
On September 28, 1999, members of the Sbarro family (who prior
thereto owned approximately 34.4% of the Sbarro's common stock) became the
holders of 100% of our issued and outstanding common stock as a result of a
merger in which (i) a company owned by the members of the Sbarro family merged
with and into the company, (ii) our 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 our 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. See "Certain Relationships and
Related Transactions included in Item 13 of this report for a discussion of
amounts received by the continuing shareholders, other officers and directors of
Sbarro and their respective immediate family members. The cost of the merger,
including fees and expenses, was funded through the use of substantially all of
the our 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"). We 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"). The Credit Agreement
provides an unsecured senior revolving credit facility which enables us 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.
Our payment obligations under the Senior Notes and the Credit Agreement are
jointly, severally, unconditionally and irrevocably guaranteed by all of our
current Restricted Subsidiaries (as defined in the Indenture) and is to be
similarly guaranteed by our future Restricted Subsidiaries. See "Selected
Financial Data" included in Item 6 of this Report, "Management's Discussion and
Analysis of Financial condition and Results of Operations" included in Item 7 of
this Report, "Financial Statements and Supplementary Data" included in Item 8 of
the Report and "Certain Relationships and Related Transactions" included in Item
13 of this Report.
<PAGE>
General
We are a leading owner, operator and franchisor of
quick-service restaurants, serving a wide variety of Italian specialty foods.
Under the "Sbarro" and "Sbarro The Italian Eatery" names, we developed one of
the first quick-service concepts that extended beyond offering one primary
specialty item, such as pizza or hamburgers. Our diverse menu offering includes
pizza, pasta and other hot and cold Italian entrees, salads, sandwiches,
cheesecake and other desserts and beverages. All of our entrees are prepared
fresh daily in each restaurant using special recipes developed by us. We focus
on serving our customers generous portions of high quality Italian-style food at
attractive prices. We believe that the Sbarro concept is unlike other
quick-service Italian restaurants due to its diverse menu selection and its
fast, cafeteria-style service.
Since our inception in 1959, we have focused on high customer
traffic venues due to the large number of captive customers who base their
eating decision primarily on impulse and convenience. We therefore do not have
to incur the significant advertising and promotional expenditures that certain
of our competitors incur to attract customers to their destination restaurants.
These factors, combined with adherence to strict cost controls, provide us with
high and stable operating margins. Over the past ten years, we have extended the
Sbarro concept from downtown locations and enclosed shopping malls to other high
customer traffic venues, including toll roads, airports, sports arenas,
hospitals, convention centers, university campuses and casinos. We believe the
opportunity to open additional Sbarro units in these and other new venues should
continue to increase as companies, municipalities and others seek to outsource
their non-core food operations to companies with an established brand name. As
of January 2, 2000, the Sbarro system included 930 restaurants, consisting of
644 Company-owned and 286 franchised restaurants located in 48 States, the
District of Columbia, the Commonwealth of Puerto Rico, certain United States
territories and 21 countries throughout the world. In addition, since 1995, we
have created and operated, through joint ventures, other concepts for the
purpose of developing growth opportunities in addition to our Sbarro
restaurants.
Restaurant Expansion
We have expanded significantly in recent years, growing from
103 Sbarro-owned or franchised traditional type restaurants at the time of our
initial public offering in 1985 to 930 as of January 2, 2000. During 1999, 73
new Sbarro and mall-based Umberto of New Hyde Park restaurants were opened, of
which 24 were Company-owned and 49 were franchised, while 10 Company-owned and
32 franchised units were closed.
<PAGE>
The following table summarizes the number of Sbarro-owned and
franchised restaurants excluding new concepts in non-mall locations in operation
during each of the years from 1995 through 1999:
<TABLE>
<CAPTION>
Fiscal Year
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Company-owned Sbarro restaurants:
Opened during period (1) 24 26 30 29 44
(Sold to) acquired from franchisees
during period (1) 1 4 1 -
Closed during period (2) (9) (20) (8) (4) (40)
Open at end of period (3) 644 630 623 597 571
Franchised Sbarro restaurants:
Opened during period 49 43 47 36 40
Acquired from (sold to) Company
during period 1 (1) (4) (1) -
Closed or terminated during period (32) (13) (23) (16) (2)
Open at end of period 286 268 239 219 200
All Sbarro restaurants:
Opened during period (1) 73 69 77 65 84
Closed or terminated during period (2) (42) (33) (31) (20) (42)
Open at end of period (3) 930 898 862 816 771
Kiosks (all franchised) open at
end of year 4 8 7 7 8
</TABLE>
(1) Includes, in 1999, 1998, 1997, 1996 and 1995, none, one, two, three and
none mall locations, respectively, of a joint venture which operates as
Umberto of New Hyde Park which, for the purpose of this Report, are
considered Sbarro restaurants.
(2) See Note (2) to "Selected Financial Data" in Item 6 of this Report for
information with respect to charges in 1998 and 1995 relating to the
closing and planned closing of certain Company-owned units.
(3) Includes, in 1999, 1998, 1997, 1996 and 1995, six, six, five, three and
none joint venture mall locations which operate as Umberto of New Hyde Park
<PAGE>
Traditional Concept and Menu
Sbarro restaurants are family oriented, offering quick,
efficient, cafeteria and buffet style service designed to minimize customer
waiting time and facilitate table turnover. The decor of a Sbarro restaurant
incorporates booth and table seating (for "in-line" restaurants), with a
contemporary motif that blends with the characteristics of the surrounding area.
As of January 2, 2000, there were 259 "in-line" Sbarro
restaurants and 664 "food court" Sbarro restaurants. In addition, franchisees
operated seven freestanding Sbarro restaurants, including two in the Middle
East, three in Minnesota and one in each of the Bahamas and Puerto Rico.
"In-line" restaurants, which are self-contained restaurants, usually occupy
approximately 1,500 to 3,000 square feet, contain the space and furniture to
seat approximately 60 to 120 people and employ 10 to 40 persons, including
part-time personnel. "Food court" restaurants are primarily located in areas of
shopping malls designated exclusively for restaurant use and share a common
dining area provided by the mall. These restaurants generally occupy
approximately 500 to 1,000 square feet and contain only kitchen and service
areas. They frequently have a more limited menu than an "in-line" restaurant and
employ 6 to 30 persons, including part-time personnel.
Sbarro restaurants are generally open seven days a week
serving lunch, dinner and, in a limited number of locations, breakfast, with
hours conforming to those of the major department stores or other large
retailers in the mall or trade area in which they are located. Typically, mall
restaurants are open to serve customers 10 to 12 hours a day, except on Sunday,
when mall hours may be more limited. For Sbarro - owned restaurants open a full
year, average sales in fiscal 1999 were $0.7 million for "in-line" restaurants
and $0.5 million for "food court" restaurants.
Sbarro restaurants feature a menu of popular Italian food,
including pizza with a variety of toppings, a selection of pasta dishes and
other hot and cold Italian entrees, salads, sandwiches, cheesecake and other
desserts. In addition to soft drinks, some of the larger restaurants serve beer
and wine.
All of our entrees are prepared fresh daily in each restaurant
according to special recipes developed by us. We place emphasis on serving
generous portions of quality Italian-style food at attractive prices. Entree
selections, excluding pizza, generally range in price from $2.99 to $5.29. We
believe that pizza, which is sold predominantly by the slice, accounts for
approximately 50% of Sbarro restaurant sales.
Substantially all of the food ingredients and related
restaurant supplies used by the restaurants are purchased from a national
independent wholesale food distributor which is required to adhere to
established product specifications for all food products sold to our
restaurants. Breads, pastries, produce, fresh dairy and certain meat products
are purchased locally for each restaurant. Soft drink mixes are purchased from
major beverage producers under national contracts. We believe that there are
other distributors who would be able to service our needs and that satisfactory
alternative sources of supply are generally available for all items regularly
used in the restaurants.
<PAGE>
Restaurant Management
Each Sbarro restaurant is managed by one general manager and
one or two co-managers or assistant managers, depending upon the size of the
location. Managers are required to participate in Sbarro training sessions in
restaurant management and operations prior to the assumption of their duties. In
addition, each restaurant manager is required to comply with an extensive
operations manual containing procedures for assuring uniformity of operations
and consistent high quality of products. We have a restaurant management bonus
program that provides the management teams of Sbarro-owned restaurants
with the opportunity to receive a percentage of restaurant sales in cash bonuses
based on certain performance-related criteria of their location.
We also employ 70 to 75 area directors, each of whom is
typically responsible for the operations of 6 to 14 Sbarro-owned restaurants in
a given area. Before each new restaurant opening, we assign an area director to
coordinate opening procedures. Each area director reports to one of the 12
regional directors. The regional directors recruit and supervise the managerial
staff of all Sbarro-owned restaurants and report to one of the four regional
vice presidents. The regional vice presidents coordinate the activities of the
regional directors assigned to their areas of responsibility and report to the
President of our Quick Service Division.
Franchise Development
Growth in franchise operations occurs through the
establishment of new Sbarro restaurants by new franchisees and existing
franchisees who have multi-unit franchise agreements. We rely principally upon
our reputation and the strength of its existing restaurants to attract new
franchisees as well as to participate in national franchise conventions.
As of January 2, 2000, we had 286 franchised Sbarro
restaurants operated by 79 franchisees in 32 states of the United States as well
as its territories and in 21 countries throughout the world. We are presently
considering additional franchise opportunities in the United States and other
countries. In certain instances, we have established franchise locations under
territorial agreements in which we have granted, for specified time periods,
exclusive rights to enter into franchise agreements for restaurant units in
certain geographic areas, primarily in foreign countries, or for specified
non-mall locations (such as for certain toll roads or airports) in the United
States or foreign countries.
We generally require payment of an initial fee and continuing
royalties at rates of 3.5% to 10.0% of gross revenues. Franchise agreements
entered into prior to 1988 generally have an initial term of 15 years with the
franchisee having a renewal option provided that the agreement has not been
previously terminated by either party for specified reasons. Since 1988, we have
required the franchise agreements to end at the same time as the underlying
lease, but generally not less than ten nor more than twenty years. Since 1990,
the renewal option has also been subject to conditions, including a remodel or
image enhancement requirement. Franchise agreements granted under territorial
agreements and those for non-traditional sites contain negotiated fees, royalty
rates and terms and conditions other than those contained in our basic franchise
agreement. The franchise and territorial agreements provide us with the right to
<PAGE>
terminate a franchisee for a variety of reasons, including insolvency or
bankruptcy, failure to operate its restaurant according to standards,
understatement of gross receipts, failure to pay fees, or material
misrepresentation on an application for a franchise.
We employ ten management level individuals responsible for
overseeing the operations of franchise units and for developing new units. These
employees report to the President of our Franchising and Licensing Division.
New Concept Development
Since 1995, we have entered into several joint ventures to
develop new restaurant concepts and established one concept independently to
provide growth opportunities that leverage our restaurant management expertise.
Our joint ventures and other new concept presently operate 28 restaurants. We
have chosen to develop the joint ventures with restaurateurs experienced in the
particular food area and we are actively involved in the day-to-day operations
of each venture. Since January 2000, the President of our Casual and Fine Dining
Division, a newly formed position, has been overseeing these joint ventures and
other new concepts on our behalf. These concepts are in various stages of
development and expansion and we are considering additional concepts for
potential development.
The following is a summary of our existing joint ventures and
other new concepts:
o We have a 100% interest in a new concept that presently
operates two moderately priced casual dining restaurants
serving Italian food under the name "Tony and Bruno's" in two
strip center locations. The restaurants primarily provide
table service and cater to families. Take-out service is also
available. We are planning to open additional sites of this
concept.
o We have an 80% interest in a joint venture that presently
operates moderately priced casual family restaurants serving
Italian food under the name "Umberto of New Hyde Park" in six
mall and eight strip center locations. The format is both
quick-service and table service. In the non-mall locations,
take-out service is also available. One non-mall location was
closed in 1998. In February 1999, we instituted an action
against the 20% partner in this venture, the resolution of
which is not expected to have a material adverse effect on the
operation of these restaurants. See "Legal Proceedings" for
further discussion of the action. We do not plan to open any
additional restaurants under this brand name at this time.
o We have a 40% interest in a joint venture that presently
operates five casual dining restaurants with a Rocky Mountain
steakhouse motif under the name "Boulder Creek Steaks &
Saloon." This venture also operates two fine dining steak
restaurants under the names "Rothmann's Steakhouse" and
"Burton & Doyle". We are planning to open additional sites of
each type of restaurant.
<PAGE>
o We have a 70% interest in two moderately priced, table service
restaurants featuring an Italian Mediterranean menu that
operate under the names "Salute" and "Cafe Med" which are
located in New York City. During 1997, this venture closed two
other restaurants, resulting in a $3.3 million before tax, or
$2.0 million after tax, charge to our earnings. An additional
$1.0 million charge to earnings before tax, or $0.6 million
after tax, was recorded in 1999 when we subsequently agreed to
absorb a portion of our joint venture partners' losses on
these units upon their disposition. We are planning to open
additional restaurants with this joint venture partner and
expect that our equity interest in these new ventures will be
50% or higher.
o We have a 50% interest in a joint venture which, in June 1999,
acquired two Mexican style restaurants operating in strip
centers under the name "Baja Grill". We are currently
evaluating whether to expand this concept.
o We have a 25% interest in a joint venture that was recently
formed for the purpose of establishing seafood restaurants and
is operating one unit under the name "Vincent's Clam Bar".
All joint venture restaurants, except four Umberto of New Hyde
Park mall units, are presently located in the New York City metropolitan area.
We are continually evaluating the operating performance of these ventures to
assess their feasibility and future growth potential. We intend to seek to
expand our existing ventures, if appropriate, and to develop new restaurant
concepts either independently or through existing or new joint ventures. There
can be no assurance as to the performance of the existing joint ventures or our
ability to successfully identify and develop new concepts.
All of our new concepts presently operate through unrestricted
subsidiaries as defined in the indenture. As such, we have certain restrictions
as to the financing we can provide to these new concepts and these entities are
not subject to the restrictions contained in the indenture and our revolving
credit facility.
As of January 2, 2000, we had an aggregate investment in our unrestricted
subsidiaries and related joint ventures of approximately $14.7 million, which
does not include guarantees of indebtedness and reimbursement obligations in
respect of letters of credit in the aggregate amount of approximately $17.5
million and guarantees of certain real property lease obligations of these
unrestricted subsidiaries and related joint ventures. In addition, we have also
sublet locations to, guaranteed all or portions of joint venture location leases
and provided other credit enhancements for these joint ventures.
Employees
As of January 2, 2000, we employed approximately 8,800
persons, exclusive of joint ventures, of whom approximately 4,000 were full-time
field and restaurant personnel, 4,600 were part-time restaurant personnel and
200 were corporate administrative personnel. None of our employees are covered
by collective bargaining agreements. We believe our employee relations are
satisfactory.
<PAGE>
Competition
The restaurant business is highly competitive. Many of our
direct competitors operate within the pizza restaurant segment. We believe we
compete on the basis of price, service, location and food quality. Factors that
affect our and our franchisees' business operations include changes in consumer
tastes, national, regional and local economic conditions, population, traffic
patterns, changes in discretionary spending priorities, demographic trends,
consumer confidence in food wholesomeness, handling and safety, weather
conditions, the type, number and location of competing restaurants and other
factors. There is also active competition for management personnel and
attractive commercial shopping mall, center city and other locations suitable
for restaurants. We compete in each market in which we operate with
locally-owned restaurants, as well as with national and regional restaurant
chains. Factors, such as inflation and increased food, beverage, labor,
occupancy and other costs, could also adversely affect us and others in the
restaurant industry.
Although we believe we are well positioned to compete because
of our leading market position, focus and expertise in the quick-service Italian
specialty food business and strong national brand name recognition, we could
experience increased competition from existing or new companies and loss of
market share, which could have an adverse effect on our operations.
Trademarks
Our Sbarro restaurants operate principally under the "Sbarro"
and "Sbarro The Italian Eatery" service marks, which are registered with the
United States Patent and Trademark Office for terms presently expiring in 2004
and 2001, respectively. Registered service marks may continually be renewed for
10 year periods. We have also registered or filed applications to register
"Sbarro" and "Sbarro The Italian Eatery" in several other countries. We believe
that these marks continue to be materially important to our business. The joint
ventures to which the Company is a party have also applied for United States
trademarks covering trade names used by them.
Governmental Regulation
We are subject to various federal, state and local laws
affecting our business, as are our franchisees. Each of our restaurants and
those owned by our franchisees are subject to a variety of licensing and
governmental regulatory provisions relating to wholesomeness of food,
sanitation, health, safety and, in certain cases, licensing of the sale of
alcoholic beverages. Difficulties in obtaining, or the failure to obtain,
required licenses or approvals can delay or prevent the opening of a new
restaurant in any particular area. Our operations and those of our franchisees
are also subject to federal laws, such as minimum wage laws, the Fair Labor
Standards Act and the Immigration Reform and Control Act of 1986. They are also
subject to state laws governing such matters as wages, working conditions,
employment of minors, citizenship requirements and overtime. Some states have
set minimum wage requirements higher than the federal level.
<PAGE>
We are also subject to Federal Trade Commission regulations
and various state laws regulating the offer and sale of franchises. The FTC and
various state laws require us to furnish to prospective franchisees a franchise
offering circular containing prescribed information. We are currently registered
to offer and sell franchises in seven states and are currently exempt from the
franchise registration requirements in five states based upon "large franchisor"
exemptions, which are based upon our experience and meeting certain size tests,
generally requiring a net worth of at least $5 to $15 million (depending on the
state). The states in which we are registered, and a number of states in which
we may franchise, require registration of a franchise offering circular or a
filing with state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states, and bills have been introduced in Congress from time to time which
provide for federal regulation of the franchisor-franchisee relationship in
certain respects. The state laws often limit, among other things, the duration
and scope of non-competition provisions and the ability of a franchisor to
terminate or refuse to renew a franchise.
We believe that we are in compliance in all material respects
with the laws to which we are subject.
Following the availability of our financial statements for the
quarter ended October 10, 1999, we amended our FTC franchise offering circular
and, where required, filed appropriate amendments to state franchise
registrations to reflect the going private transaction. Until the amendments are
approved in those states, we will not be able to sell or renew franchises in
those states. We currently expect, although there can be no assurance, that such
amendments will be approved and that any delay will not have a material adverse
effect on our business. Furthermore, state franchise examiners have discretion
to disapprove franchise registrations based on a franchisor's financial
condition. While we believe that, following completion of the going private
transaction, we continue to meet these financial requirements, there is little
specific guidance under state franchise laws as to acceptable levels of a
franchisor's net worth, and whether "net worth" includes or excludes intangible
assets, and debt, and, depending upon a franchisor's financial condition, state
franchise examiners in many states may require a franchisor to escrow initial
franchise fees for a limited period of time.
Although alcoholic beverage sales are not emphasized in our
restaurants, some of our larger restaurants serve beer and wine. Sales of beer
and wine contributed less than 1% of our total revenues during fiscal 1999. We
have submitted documents to amend our applications with the appropriate alcohol,
beverage and tobacco authorities in 14 of the 16 states in which we sell beer
and wine to reflect the going private transaction and have filed part of an
amendment that is required in California. We expect to be able to continue to
sell beer and wine in most of the locations pending completion of the approval
process, except that we have discontinued selling beer and wine in Colorado.
While we do not anticipate the denial of any of our remaining applications,
there can be no assurance thereof.
<PAGE>
ITEM 2. PROPERTIES
All Sbarro restaurants are typically leased under ten-year
leases that often do not include an option to renew the lease. We have
historically been able to renew or extend leases on existing sites. As of
January 2, 2000, we leased 657 restaurants, of which 24 were subleased to
franchisees under terms which cover all of our obligations under the lease. The
remaining franchisees directly lease their restaurant spaces. Most of our
restaurant leases provide for the payment of base rents plus real estate taxes,
utilities, insurance, common area charges and certain other expenses, as well as
contingent rents generally ranging from 8% to 10% of net restaurant sales in
excess of stipulated amounts.
Leases to which we were a party at January 2, 2000 have initial terms expiring
as follows:
<TABLE>
<CAPTION>
Years Initial Lease Number of Sbarro- Number of Franchised
Terms Expire owned Restaurants Restaurants
- ------------ ----------------- -----------
<S> <C> <C>
2000...................... 28 2
2001...................... 51 4
2002...................... 65 3
2003...................... 75 3
2004...................... 50 1
Thereafter................ 364 11
</TABLE>
We own a four-story office building in Melville, New York with
approximately 100,000 square feet and a cafeteria style restaurant operated by
us. This building was purchased and renovated at a total cost of approximately
$20.8 million. Approximately 73% of the rentable square feet is currently under
lease to unaffiliated third parties. One floor of the building is occupied by us
as our principal executive offices. On March 3, 2000, we obtained a ten year,
8.4%, $16.0 million mortgage loan on this property.
We also occupy a two-story 20,000 square foot office building
for administrative support functions located in Commack, New York. We have
leased the building since May 1986 from a partnership owned by some of our
shareholders at an annual base rental of $0.3 million for the remainder of the
lease term, which expires in 2011. In addition, we pay real estate taxes,
utilities, insurance and certain other expenses for the facility. See "Certain
Relationships and Related Transactions" in Item 13 of this Report for a
description of the lease.
In addition, our new restaurant concepts, including joint
ventures, own one facility and lease 27 facilities.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In February 1999, the Umberto of New Hyde Park joint venture
companies, in which we have an 80% interest, began an action in the U.S.
District Court for the Eastern District of New York against Umberto Corteo, who
owns the remaining 20% interest in the joint venture companies, and against
three other restaurants owned by Mr. Corteo. We alleged, among other things,
that Mr. Corteo engaged in unfair trade practices and in trademark infringement,
thereby breaching the joint venture agreements. We are seeking an accounting,
compensatory and punitive damages and injunctive relief. The answer filed by Mr.
Corteo and his co-defendants denies our claims and further alleges that
non-competition restrictions against Mr. Corteo in the joint venture agreements
are unenforceable. Mr. Corteo and his co-defendants have also counterclaimed
against us alleging misappropriation of trademark rights and failure to perform
administrative duties that amounted to a breach of the agreements. We believe
that our claims against Mr.
Corteo will be proven and that we have substantial defenses to his
counterclaims.
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 our restaurants
in the State of Washington at various times since November 17, 1996 and that, in
connection with their employment, we 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 our
restaurant managers employed for any period of time on or after November 9, 1996
in the State of Washington. We currently own and operate 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. We believe that we have substantial defenses to
the claims and intend to vigorously defend this action.
On December 20, 1999, Antonio Garcia and eleven other current
and former general managers of Sbarro restaurants in California amended a
complaint filed in the Superior Court of California for Orange County. The
complaint alleges that the plaintiffs were improperly classified as exempt
employees under the California wage and hour law. The plaintiffs are seeking
actual damages, punitive damages and costs of the lawsuit, including reasonable
attorney's fees, each in unspecified amounts. Plaintiff's counsel has stated
that he is in contact with the plaintiff's counsel in the Wanli case and that he
may attempt to file a class action based upon alleged violations of the Fair
Labor Standards Act. We believe that we have substantial defenses to the claims
and intend to vigorously defend this action.
From time to time, we are a party to certain claims and legal
proceedings in the ordinary course of business, none of which, in our opinion,
would have a material adverse effect on our financial position or results of
operations.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
As a result of the going private transaction, our Common Stock
is not publicly-held nor publicly traded. (See Item 12 "Security Ownership of
Certain Beneficial Owners and Management").
On March 13, 2000, we declared a dividend of $18.0 million to
our shareholders. In 1997 and 1996, we declared dividends of ($22.1 million and
$18.7 million, respectively. Dividends were thereafter suspended pending our
consideration of the original proposals which resulted in the going private
transaction.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 of this Report and our consolidated financial
statements and the related notes included in Item 8 of this Report, which
consolidated financial statements have been audited and reported on by Arthur
Andersen LLP, independent public accountants.
<TABLE>
<CAPTION>
Fiscal Year
(Dollars in thousands)
1999 1998(1) 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Restaurant sales.................. 366,630 $361,534 $337,723 $319,315 $310,132
Franchise related income.......... 9.006 8,578 7,360 6,375 5,942
Interest income................... 3,828 5,120 4,352 3,798 3,081
--------- -------- -------- -------- --------
379,464 375,232 349,435 329,488 319,155
Costs and expenses:
Costs of food and paper products.. 73,986 76,572 69,469 68,668 67,361
Restaurant operating expenses:
Payroll and other employee
benefits..................... 97,174 93,367 84,910 78,258 78,342
Occupancy and other............. 106,852 101,013 93,528 85,577 84,371
Depreciation and amortization..... 25,363 22,429 23,922 22,910 23,630
General and administrative........ 23,456 19,708 17,762 14,940 16,089
Provision for unit closings(2).... 1,013 2,515 3,300 -- 16,400
Terminated transaction costs(3)... -- 986 -- -- --
Litigation settlement and
related costs(4)................ -- 3,544 -- -- --
Loss on land to be sold(5)........ -- 1,075 -- -- --
Interest expense.................. 7,948 -- --
Other income...................... (5,173) (2,680) (1,653) (1,171) (1,359)
--------- -------- --------- -------- --------
Total costs and expenses... 330,619 318,529 291,238 269,182 284,834
Income before income taxes
and cumulative effect of
change in method of
accounting...................... 48,845 56,703 58,197 60,306 34,321
Income taxes(6)..................... 19,322 21,547 22,115 22,916 13,042
------ -------- -------- -------- --------
Income before cumulative
effect of change in
method of accounting.............. 29,523 35,156 36,082 37,390 21,279
-- (822) -- -- --
------ --------- ------- ------- -------
Net income.......................... $ 29,523 $ 34,334 $ 36,082 $ 37,390 $ 21,279
======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 1998(1) 1997 1996 1995
---- ------- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Other Financial and Restaurant Data:
Net cash provided by
operating activities(7)............. $62,005 $58,641 $61,026 $54,009 $54,580
Net cash provided by (used in)
investing activities(7)............. (25,004) (20,165) (26,022) (25,662) 11,139
Net cash used in
financing activities(7).............. (158,356) (3,377) (20,012) (17,030) (14,580)
EBITDA 78,328 $74,012 $77,767 $79,418 $54,870
EBITDA margin(8)....................... 20.9% 20.0% 22.5% 24.4% 17.4%
Capital expenditures(9)................ 25,099 $27,717 $28,556 $ 25,928 $17,513
Ratio of earnings to fixed
charges(10).......................... 2.4x 3.9x 4.2x 4.6x 3.1x
Number of restaurants at end
of period:
Company-owned........................ 644 630 623 597 571
Franchised........................... 286 268 239 219 200
---------- ------- ------- ------- -------
Total number of restaurants....... 930 898 862 816 771
========== ======= ======= ======= =======
Balance Sheet Data (at end of period):
Total assets........................... $417,833 $303,168 $278,649 $ 258,659 $242,730
Working capital (deficiency)........... (2,544) 121,380 88,006 73,619 57,645
Total debt............................. 251,310 -- -- -- --
Shareholders' equity................... 110,280 256,917 220,439 205,200 185,666
</TABLE>
(1) Our fiscal year ends on the Sunday nearest December 31. Our 1998 fiscal
year ended January 3, 1999 and contained 53 weeks. All other fiscal
years presented contained 52 weeks. As a result, our 1998 fiscal year
benefited from one additional week of operations over the other
reported fiscal years. The additional week contributed revenues, EBITDA
and net income of approximately $8.5 million, $2.7 million and $1.7
million, respectively.
(2) Represents provisions of (a) $16.4 million for the closing of
approximately 40 under-performing restaurants in fiscal 1995, (b) $3.3
million for the closing of two joint venture units in fiscal 1997,
(c) $2.5 million for the closing of 20 restaurants in fiscal 1998 and
(d) a special allocation of losses in fiscal 1999 which arose as a
result of the final disposition of two joint venture unit closings
recorded in 1997.
(3) Represents a charge for costs associated with the termination of a prior
going private proposal by the Sbarro family.
(4) Represents a charge in connection with the settlement of a lawsuit.
<PAGE>
(5) Represents a write down of the carrying cost on a parcel of land
that we own.
(6) We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and, where applicable and permitted, under
similar state and local income tax provisions beginning in fiscal 2000.
For a discussion of the distributions that we are permitted to make to
our shareholders to pay taxes on our income, see "Certain Relationships
and Related Transactions - Tax Agreement" in Item 13 of this report.
(7) For a more detailed presentation of our cash flow data, see our audited
consolidated financial statements and their related notes for the year
ended January 2, 2000 included elsewhere in Item 8 of this report.
(8) EBITDA represents earnings before cumulative effect of change in
accounting method, interest income, interest expense, taxes,
depreciation and amortization. EBITDA includes the effect of the
unusual charges included in notes 2, 3, 4 and 5. EBITDA margin
represents EBITDA divided by the sum of restaurant sales and franchise
related income. EBITDA should not be considered in isolation from, or
as a substitute for, net income, cash flow from operations or other
cash flow statement data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Rather, EBITDA is presented because it is a widely accepted
supplemental financial measure, and we believe that it provides
relevant and useful information. Our calculation of EBITDA may not be
comparable to a similarly titled measure reported by other companies,
since all companies do not calculate this non-GAAP measure in the same
manner. Our EBITDA calculations are not intended to represent cash
provided by (used in) operating activities since they do not include
interest and taxes and changes in operating assets and liabilities, nor
are they intended to represent a net increase in cash since they do not
include cash provided by (used in) investing and financing activities.
(9) The following amounts related to the construction of our headquarters are
included as capital expenditures: $0.4 million in fiscal 1995, $4.2 million
in fiscal 1996, $5.0 million in fiscal 1997, $4.8 million in fiscal 1998,
and $1.6 million in fiscal 1999.
(10) The ratio of earnings to fixed charges has been determined by dividing
the total fixed charges into the sum of earnings before taxes on income
and fixed charges. Fixed charges consist of interest expense and
one-third of rental expense, which we deem to be a reasonable
approximation of the interest factor of this expense.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements, the notes thereto and other data and information appearing
elsewhere in this report.
Results of Operations
Our fiscal year ends on the Sunday nearest to December 31. The fiscal
year which ended on January 3, 1999 contained 53 weeks, while all other reported
fiscal years contained 52 weeks. As a result, our 1998 fiscal year benefited
from one additional week of operations over the other reported fiscal years,
with its year ending on January 3, 1999 as opposed to December 28, 1997. The
additional week in fiscal 1998 produced revenues of $8.5 million, and net income
of $1.7 million.
Fiscal 1999 Compared to Fiscal 1998
Restaurant sales from Sbarro-owned units and consolidated joint venture
units increased 1.4% to $366.6 million from $361.5 million in the 1998 fiscal
year. The increase resulted primarily from a higher number of units in operation
in the current fiscal year than the comparable period in 1998 and selective menu
price increases of approximately 2.8%, 1.4% and .7% at Sbarro-owned units which
became effective in September 1999, September 1998 and February 1998,
respectively. Sales for 1998 included $8.5 million generated in the 53rd week of
the 1998 fiscal year. Comparable unit sales increased 0.8% in the fiscal 1999
year from the first 52 weeks of the 1998 fiscal year 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 and prior fiscal year.
Franchise related income increased 4.7% to $9.0 million in fiscal 1999
from $8.6 million in fiscal 1998. The increases resulted primarily from greater
continuing royalties due to a higher number of franchise units in operation in
the current year than in the 1998 fiscal year partially offset by lower area
development and initial franchise fees in fiscal 1999.
Interest income was approximately $3.8 million for fiscal 1999 compared
to $5.1 million in fiscal 1998. As discussed elsewhere in this report, we used
substantially all of our available cash in order to fund the going private
transaction. Therefore, we generated a minimal amount of interest income for the
period from September 28, 1999, the date of the going private transaction, to
the end of the fiscal year. We will not realize the level of interest income as
it had 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 20.2% for fiscal 1999 compared to 21.2% for the 1998 fiscal year.
Cost of food and paper products as a percentage of restaurant sales declined
from the prior year primarily due to lower average cheese prices during fiscal
1999 and the impact of the menu price increases described above.
<PAGE>
Restaurant operating expenses - payroll and other benefits increased to
26.5% of restaurant sales in fiscal 1999 from 25.8% of restaurant sales in
fiscal 1998. This 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. Congress has recently been considering increasing the
minimum wage by $1.00 per hour over a two to three year period beginning as
early as April 2000. Any such increases would increase our labor costs.
Restaurant operating expenses - occupancy and other expenses increased
to 29.1% of restaurant sales in fiscal 1999 from 27.9% in fiscal 1998. The
increase was attributable principally to increases in rent and other occupancy
related costs.
Depreciation and amortization expense increased by $2.9 million in
fiscal 1999 over fiscal 1998 primarily as a result of an increase in
depreciation and amortization of our new headquarters building that 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
going private transaction.
General and administrative expenses were $23.5 million, or 6.2% of
total revenues, for the 1999 fiscal year, compared to $19.7 million, or 5.3% of
total revenues, for the 1998 fiscal year. The increase was primarily due to
higher payroll costs and costs associated with the administration of additional
Sbarro-owned restaurants, expanding joint venture operations, higher litigation
costs, increases in various field training and human resource functions and
costs associated with our headquarters building, which was completed during the
fourth quarter of fiscal 1998.
Interest expense of $7.9 million in fiscal 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 in financing the going
private transaction and the cost of the unused line of credit and the
amortization of deferred financing charges with respect to the bank credit
agreement entered into at that time. These charges and costs will continue while
the notes are outstanding.
The provision for unit closings is the result of a special allocation
of losses in fiscal 1999 of $1.0 million in connection with the final
disposition of two joint venture unit closings recorded in 1997 and $2.5 million
for the closing of 20 Sbarro restaurants in 1998.
Other income increased by $2.5 million to $5.2 million for the 1999
fiscal year compared to the 1998 fiscal year primarily as a result of increased
incentives from suppliers, income, net of expenses, generated from the leasing
of substantially all of our corporate headquarters building not occupied by
Sbarro to third parties and an increase in equity earnings of joint ventures
accounted for under the equity method of accounting.
<PAGE>
The effective income tax rate was 39.6% and 38.0% for fiscal 1999 and
fiscal 1998, respectively. The increase in the effective income tax rate is
primarily as a result of the non-deductible amortization expenses in connection
with the going private transaction.
The cumulative effect of the change in method of accounting in fiscal
1998 resulted from Sbarro's implementation of Statement of Position 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 those existing costs as a "cumulative effect of
accounting change" and to expense all those costs as incurred in the future. In
accordance with the early application provisions, we 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.
Fiscal 1998 Compared to Fiscal 1997
Our 1998 fiscal year benefited from one additional week of operations
over the prior fiscal year. The additional week in fiscal 1998 produced revenues
of $8.5 million, and net income of $1.7 million.
Restaurant sales from Sbarro-owned units and consolidated joint venture
units increased 7.1% to $361.5 million from $337.7 million in 1997. The
increases resulted primarily from a higher number of units in operation during
the 1998 fiscal year, selective menu price increases of approximately 1.4% and
0.7% which became effective in September 1998 and February 1998, respectively,
and sales generated in week 53 of the 1998 fiscal year. Comparable unit sales
increased 1.6% to $322.4 million for the first 52 weeks of the 1998 fiscal year
from $317.2 million in our 1997 fiscal year. Comparable restaurant sales are
made up of sales at locations that were open during the entire current and prior
fiscal years.
Franchise related income increased 16.5% to $8.6 million in 1998 from
$7.4 million in 1997. The increases resulted from greater continuing royalties
due to a larger number of franchise units in operation in 1998, an increase in
initial franchise and development fees due to opening more international
franchise units in 1998 than in 1997 and royalties generated in week 53 of the
1998 fiscal year. During the year ended January 3, 1999, 13 units were closed by
franchisees. These units did not produce material levels of sales and,
consequently, did not generate material amounts of royalty income to us. In
addition, we purchased one franchise unit.
Interest income increased to $5.1 million in 1998 from $4.4 million in
1997. This increase was due to larger amounts of cash being invested in 1998
than in 1997 and the length of the 1998 fiscal year. Interest rates were
comparable in both years.
Cost of food and paper products, as a percentage of restaurant sales,
increased to 21.2% in 1998 from 20.6% in 1997. Higher cheese prices during 1998
increased food costs by approximately $2.6 million or 0.7% of sales and was the
primary cause of the increase. The increase occurred during the last three
quarters of the fiscal year.
<PAGE>
Restaurant operating expenses -- payroll and other employee benefits
increased to 25.8% of restaurant sales in 1998 from 25.1% of restaurant sales in
1997. This increase was attributable to the $1.2 million (or 0.3% of restaurant
sales) payroll and other employee benefit component of start-up costs expensed
as incurred during 1998 under SOP 98-5 implemented by us in the first quarter of
fiscal 1998, which expenses in prior years were capitalized and charged to
amortization expense over a two year period. In addition, the effects of the
federal minimum wage, which became effective in September 1997, a strong labor
market and an increase in unemployment and other payroll taxes contributed to
the increase.
Restaurant operating expenses -- occupancy and other expenses increased
to 27.9% in 1998 from 27.7% in 1997. The increase is attributable principally to
such costs increasing at a rate faster than the increase in restaurant sales in
1998 from 1997.
Depreciation and amortization expenses decreased to $22.4 million from
$23.9 million principally as a result of the absence of amortization of
previously capitalized start-up costs which, as discussed below, were fully
written off as of the beginning of the year with the implementation of SOP 98-5.
Had we not implemented SOP 98-5, we would have incurred amortization expenses of
$1.2 million in 1998 for prior and current years' costs previously capitalized.
The balance of the decrease relates to the absence of depreciation and
amortization in 1998 on certain older units and also to the closing of certain
Sbarro-owned units, as discussed below.
General and administrative expenses increased to $19.7 million or 5.3%
of total revenues in 1998 from $17.8 million or 5.1% of revenues in 1997. The
increases were due to higher costs associated with the administration of
Sbarro-owned restaurants and additional supervisory, administrative and travel
expenses related to increased international franchising activities. In addition,
$0.8 million, or 0.2% of revenues, of the increase was attributable to the
general and administrative expense component of start-up costs incurred and
expensed during 1998 under SOP 98-5. These start-up expenses in prior years
would have been capitalized and charged to amortization expense over a two year
period.
Results for fiscal 1998 include one-time charges to operating income of
$2.5 million before tax, or $1.6 million after tax, for the closing of 20
Sbarro-owned restaurants and $1.0 million before tax, or $0.6 million after tax,
for costs associated with the terminated negotiations of the initial going
private proposal by the Sbarro family. The fiscal year results also include a
provision of $3.5 million before tax, or $2.2 million after tax, for costs
associated with the settlement approved and finalized in December 1998 of a
lawsuit under the Fair Labor Standards Act and a charge of $1.1 million before
tax, or $0.7 million after tax, for the difference between the carrying cost and
proposed selling price of a parcel of land sold by us.
Other income increased to $2.7 million in 1998 from $1.7 million in
1997 primarily as a result of increased incentives from suppliers.
<PAGE>
The effective income tax rate was 38.0% for fiscal 1998 and 1997.
The cumulative effect of the change in method of accounting resulted
from our implementation of SOP 98-5 which requires companies that have
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. As permitted by its early application
provisions, we implemented SOP 98-5 as of the beginning of our 1998 fiscal year.
In addition to on-going start up costs incurred and expensed during 1998 with
respect to restaurant operating expenses -- payroll and other employee benefits
and general and administrative expenses as discussed above, we incurred a
one-time charge during 1998 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
the year.
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 our control that may reduce the availability and increase the cost of
these items. Historically, the price of cheese has fluctuated more than our
other food ingredients and related restaurant supplies.
Seasonality
Our business is subject to seasonal fluctuations, and the effects of
weather and economic conditions. Earnings have been highest in our fourth fiscal
quarter due primarily to increased volume in shopping malls during the holiday
shopping season. While the fourth fiscal quarter normally accounts for
approximately 40% of net income for the year, the length of the holiday shopping
period between Thanksgiving and New Year's Day and the number of weeks in our
fourth quarter result in fluctuations in fourth quarter financial results from
year to year. In addition, the effects of the going private transaction reduced
the net income for the fourth quarter of 1999 as a percentage of total 1999 net
income. The fourth quarter of 1999 accounted for 31% of net income for the 1999
fiscal year. Excluding the impact of the going private transaction, net income
for the fourth quarter of 1999 would have been approximately 39% of net income
for the 1999 fiscal year. The 1998 fiscal year, which contained 53 weeks, had a
13 week fourth quarter. Excluding the impact of the thirteenth week, the fourth
quarter of fiscal 1998 would have accounted for 38% of our net income, which is
consistent with the comparable prior year period.
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
We have historically not required significant working capital to fund
our existing operations and have financed its capital expenditures and
investments in its joint ventures through cash generated from operations.
Substantially all of our cash was used to complete the going private
transaction. As a result, at January 2, 2000 we had unrestricted cash and cash
equivalents of $33.5 million and a working capital deficit of $2.5 million.
As part of the going private transaction, we issued the original notes
and entered into a $30.0 million bank credit facility. We have $27.5 million of
undrawn availability under the bank credit facility, net of outstanding letters
of credit and guarantees of reimbursement obligations currently aggregating
approximately $2.5 million. In March 2000 we obtained a $16.0 million 8.4%
mortgage loan on our corporate headquarters building and distributed an $18.0
million dividend to our shareholders, as discussed below.
Net cash provided by operating activities was $62.0 million and $58.6
million for the fiscal years ended January 2, 2000 and January 3, 1999,
respectively. Although net income decreased by $4.8 million, cash flow from
operations increased by $3.4 million as a result of increased depreciation and
amortization of $3.3 million and a $5.0 million net change in operating assets
and liabilities principally resulting from accrued interest of $7.5 million.
Net cash used in investing activities primarily relates to capital
expenditures, including investments made by our joint ventures. Net cash used in
investing activities was $25.0 million and $20.2 million for the years ended
January 2, 2000 and January 3, 1999, respectively. The increase in net cash used
in investing activities for the year ended January 2, 2000 from the year ended
January 3, 1999 was due mainly to a decrease in proceeds from the maturities of
marketable securities of $7.5 million, offset by a modest decrease in capital
expenditures from $27.7 million in fiscal 1998 to $25.1 million in fiscal 1999
principally related to the completion of our corporate headquarters in late
1998.
Net cash used in financing activities was $158.4 million for the fiscal
year ended January 2, 2000 compared to $3.4 million for the fiscal year ended
January 3, 1999. This increase primarily resulted from $410.0 million of cash
used, net of accrued or previously paid costs of the going private transaction,
to pay the public shareholders in the going private transaction and related
transaction costs, including 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 fiscal 1998 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.
As a result of the going private transaction, we used substantially all
of our cash on hand and incurred approximately $255.0 million of debt. We expect
<PAGE>
our other liquidity needs will relate to capital expenditures, working capital,
investments in joint ventures, distributions to shareholders as permitted under
the Indenture and general corporate purposes. We expect our primary sources of
liquidity to meet these needs will be cash flow from operations and availability
under our credit facility.
Since we used substantially all of our cash on hand to consummate the
going private transaction, we will not realize the level of interest income as
in the past unless and until we rebuild our cash position. Further, we will
incur annual cash interest expense of approximately $29.7 million under the
senior notes and mortgage loan and may incur additional interest expense for
borrowings under our credit facility.
We believe that aggregate restaurant capital expenditures and our
investments in joint ventures during the next twelve months will be moderately
higher than levels in recent fiscal years. Unpaid capital expenditure
commitments aggregated approximately $3.5 million at January 2, 2000.
Our effective tax rate after the going private transaction was higher
than our historical effective tax rate 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 going private transaction. In March
2000, we elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and, where applicable and permitted, under similar state
and local income tax provisions beginning January 3, 2000. Under the provisions
of Subchapter S, substantially all taxes on our income will be paid by our
shareholders. On a pro forma basis to give effect to the going private
transaction, if we were taxed as an S corporation as of the beginning of fiscal
1999, we and our shareholders would have had a tax liability on our income of
approximately $25.4 million or 50% of our income before taxes. This amount is
higher than our historical effective tax rate due to (i) differences in tax
rates between individual and corporate taxpayers, (ii) the timing differences
currently accounted for as deferred taxes in our financial statements (which
deferred taxes may be eliminated or reduced upon conversion to an S corporation,
in fiscal 2000) and (iii) the effect of double taxation in those state and local
jurisdictions that do not recognize S corporation status. The indenture and
credit facility permit distributions to shareholders for taxes on our earnings,
as discussed under " Certain Relationships and Related Transactions - Tax
Agreement" in Item 13 of this report.
Historically we have paid dividends on our common stock to our
shareholders. Quarterly dividends aggregated $22.1 million for fiscal 1997, the
last full fiscal year in which we paid a dividend. Our Board of Directors
suspended the payment of dividends commencing in the first quarter of 1998 in
connection with a prior going private proposal by the Sbarro family and the
consideration of other strategic alternatives. On March 13, 2000 our Board of
Directors declared a dividend of $18 million. We expect that our Board of
Directors will from time to time elect to pay dividends to our shareholders in
amounts that will be based upon a number of factors, including our working
capital needs, operating performance, debt service obligations and capital
expenditure requirements. Distributions are subject to the provisions of the
Indenture.
We do not have any principal repayment obligations under the notes or
our credit agreement for ten and five years, respectively. We believe that cash
flow from operations and funds available under our credit facility will be
sufficient to meet our liquidity needs.
<PAGE>
Market Risks
We have historically invested our cash on hand in short term, fixed
rate, highly rated and highly liquid instruments which mature and are reinvested
throughout the year. Although our existing investments are not considered at
risk with respect to changes in interest rates or markets for these instruments,
our rate of return on short-term investments could be affected at the time of
reinvestment as a result of intervening events.
Our borrowings under our credit facility will be subject to
fluctuations in interest rates. However, we do not expect to enter into any
interest rate swaps or other instruments to hedge our borrowings under our
credit facility.
We have not purchased future, forward, option or other instruments to
hedge against fluctuations in the prices of the commodities we purchase. As a
result, our future commodities purchases are subject to changes in the prices of
such commodities.
All of our transactions with foreign franchisees have been denominated
in, and all payments have been made in, United States dollars, reducing the
risks attendant in changes in the values of foreign currencies. As a result, we
have not purchased future contracts, options or other instruments to hedge
against changes in values of foreign currencies.
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, we do not use derivative instruments and
therefore SFAS No. 133 is not currently applicable.
<PAGE>
Year 2000
In 1999, we implemented a program with the objective of avoiding "year
2000" issues, which could arise in situations where computer software or
databases recognize the two digit year "00" as the year 1900 rather than the
year 2000. Our IT systems, which we use primarily for financial, accounting,
human resources, payroll, operations support and point-of-sales processing and
reporting, and our non-information technology systems, which we use principally
in communications systems, both use computer hardware, software and related
technology that could have been affected by year 2000 issues. This could have
resulted in system failures or miscalculations that could have caused
disruptions in business operations and increased costs in processing and
analyzing data. As part of program to avoid year 2000 issues, we reviewed our
in-house software developed by our IT department and packaged software purchased
from third parties, and remediated these where needed.
All software modification and testing was 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 spent less
than $150,000 for testing, purchasing hardware and for other modification costs
to finish the project. We did not separately track internal costs which were
principally payroll and related costs of our IT systems department incurred as
part of our year 2000 project. We do not anticipate additional expenditures as
part of our year 2000 program.
To date, we have experienced no significant year 2000 problems with
either the hardware or software used in our IT or non-IT systems, in interfacing
with our food and beverage suppliers or with the systems employed by the
landlords of the facilities in which we conduct business. We do not anticipate
any year 2000 problems in the future. Should any occur, we believe we could
quickly implement the contingency plans we developed in preparing for year 2000.
ITEM 7-A. QUALITATIVE AND QUANTITATIVE DISCLOSURES OF MARKET RISK
We have historically invested our cash on hand in short term, fixed
rate, highly rated and highly liquid instruments which are reinvested when they
mature throughout the year. Although our existing investments are not considered
at risk with respect to changes in interest rates or markets for these
instruments, our rate of return on short-term investments could be affected at
the time of reinvestment as a result of intervening events.
Our borrowings under our credit facility will be subject to
fluctuations in interest rates. However, we do not expect to enter into any
interest rate swaps or other instruments to hedge our borrowings under our
credit facility.
We have not purchased future, forward, option or other instruments to
hedge against fluctuations in the prices of the commodities we purchase. As a
result, our future commodities purchases are subject to changes in the prices of
such commodities.
<PAGE>
All of our 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. As a result, we
have not purchased future contracts, options or other instruments to hedge
against changes in values of foreign currencies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Annexed hereto starting
on Page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company and their ages at
February 29, 2000 are:
Name Age Position
Mario Sbarro 58 Chairman of the Board, President, Chief
Executive Officer and Director
Anthony Sbarro 53 Vice Chairman of the Board, Treasurer and
Director
Joseph Sbarro 59 Senior Executive Vice President, Secretary
and Director
Carmela Sbarro 78 Vice President and Director
Anthony J. Missano 41 President--Quick Service Division and Corporate
Vice President
Gennaro A. Sbarro 33 President -- Franchising and Licensing
Division and Corporate Vice President
Gennaro J. Sbarro 37 President -- Casual and Fine Dining
Division and Corporate Vice President
Robert G. Rooney 42 Senior Vice President and Chief Financial
Officer
Carmela N. Merendino 35 Vice President-- Administration
Joseph A. Fallarino 47 Vice President-- Human Resources
Henry G. Ciocca 53 Vice President and General Counsel
John Bernabeo 43 Vice President-- Architecture and
Engineering
Donald A. Dziomba 51 Vice President-- Management Information Services
Steven B. Graham 46 Vice President and Controller
Harold L. Kestenbaum 50 Director
Richard A. Mandell 57 Director
Terry Vince 71 Director
Bernard Zimmerman 67 Director
MARIO SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Chairman of our
board of directors and Chief Executive Officer for more than the past five
years. Mr. Sbarro re-assumed the position as our President in May 1996 (a
position he held for more than five years prior to December 1993).
<PAGE>
ANTHONY SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Vice Chairman
of our board of directors since May 1996 and as President and Chief Operating
Officer from December 1993 through May 1996. For more than five years prior to
December 1993, Mr. Sbarro was an Executive Vice President. He has also served as
our Treasurer for more than the past five years.
JOSEPH SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Senior
Executive Vice President since December 1993. For more than five years prior
thereto, Mr. Sbarro was an Executive Vice President. He has also served as our
Secretary for more than the past five years.
CARMELA SBARRO has been one of our Vice Presidents since March 1985. Mrs.
Sbarro was a founder of Sbarro, together with her late husband, Gennaro Sbarro.
Mrs. Sbarro devotes a substantial portion of her time to recipe and product
development. Our board of directors elected Mrs. Sbarro as a director in January
1998. Mrs. Sbarro previously served as a director from March 1985 until December
1988, when she was elected director emeritus.
ANTHONY J. MISSANO has been a Corporate Vice President since August
1996 and was elected President of our Quick Service Division in January 2000.
From February 1995 until August 1996, he served as Vice President -- Operations
(West), and from June 1992 until February 1995 he served as a Zone Vice
President.
GENNARO A. SBARRO has been a Corporate Vice President since August 1996
and was elected President of our Franchising and Licensing Division in January
2000. From February 1995 until August 1996 he served as Vice President --
Franchising, and for more than five years prior thereto Mr. Sbarro served in
various capacities for us.
GENNARO J. SBARRO has been a Corporate Vice President since August 1996
and was elected President of our Casual and Fine Dining Division in January
2000. From February 1995 until August 1996, he served as Vice President --
Operations (East), and from June 1992 until February 1995 he served as a Zone
Vice President.
ROBERT G. ROONEY was elected Senior Vice President and Chief Financial
Officer in January 2000. From June 1999, when he joined us, until January 2000,
Mr. Rooney served as Vice President -- Finance and Chief Financial Officer. From
December 1996 until he joined us, Mr. Rooney was employed by Discovery Zone,
Inc. (a national family entertainment center chain), serving as Senior Vice
President, Chief Financial and Administrative Officer since February 1997. From
March 1994 until September 1996, Mr. Rooney served as Senior Vice President and
Chief Financial Officer of Victory Capital LLC (formerly Forschner Enterprises,
Inc.), a venture capital firm, and, from September 1992 to February 1994, served
as a director and consultant on behalf of various investors and investment funds
affiliated with Forschner Enterprises, Inc. Discovery Zone, Inc., which had
<PAGE>
filed under Chapter 11 of the United States Bankruptcy Code prior to Mr.
Rooney's joining that company, again filed under that law on April 20, 1999. Mr.
Rooney has been a certified public accountant in New York for over 20 years.
CARMELA N. MERENDINO was elected Vice President -- Administration in
October 1988. Ms. Merendino joined us in March 1985 and performed a variety of
corporate administrative functions for us prior to her election as Vice
President -- Administration.
JOSEPH A. FALLARINO joined Sbarro in September 1998 and was elected
Vice President -- Human Resources in November 1998. Prior to joining us, from
April 1998 until September 1998, Mr. Fallarino served as Director of Human
Resources of Ogden Corporation, an international diversified service
corporation; from March 1996 until March 1998, he served as Senior Vice
President -- Human Resources of Arbor Management LLC, a provider of financial
services and healthcare services; and from January 1994 until February 1996, he
served as Vice President -- Human Resources of AMS Corporation, a national
outsourcing company.
HENRY G. CIOCCA joined Sbarro in January 2000 and serves as Vice
President and General Counsel. From August 1997 to April 1999, Mr. Ciocca was an
advisor to the President of The Thomson Corporation, a worldwide information and
publishing company. From September 1995 to June 1997, Mr. Ciocca was President,
Chief Executive Officer and a Director of Markborough Properties, Inc., a
publicly-traded commercial real estate company headquartered in Toronto; from
June 1993 to August 1995, Mr. Ciocca was President and Chief Executive Officer
of Markborough Development, a division of The Thomson Corporation that developed
master planned communities in the United States; and from June 1987 to June
1993, Mr. Ciocca held various positions with The Thomson Corporation, including
Executive Vice President and General Counsel. Mr. Ciocca is admitted to practice
law in Connecticut, Florida and New York.
JOHN BERNABEO joined Sbarro in August 1992 and served in various
capacities prior to his election as Vice President -- Architecture and
Engineering in May 1997.
DONALD A. DZIOMBA was elected Vice President - Management Information
Services in January 2000. Mr. Dziomba had served as our Director of Management
Information Systems since joining Sbarro in November 1993.
STEVEN B. GRAHAM was elected Vice President and Controller in January 2000.
Mr. Graham has served as our Controller since joining Sbarro in April 1994. Mr.
Graham has been a certified public accountant in New York for over 20 years.
HAROLD L. KESTENBAUM has been a practicing attorney in New York since 1976.
He became a director of Sbarro in March 1985.
<PAGE>
RICHARD A. MANDELL, a private investor, was a Managing Director of
BlueStone Capital Partners, L.P., an investment banking firm, from February
until April 1998 and Vice President -- Private Investments of Clariden Asset
Management (NY) Inc., a subsidiary of Clariden Bank, a private Swiss bank, from
January 1996 until February 1998. From 1982 until June 1995, Mr. Mandell served
as a Managing Director of Prudential Securities Incorporated, an investment
banking firm. He became a director of Sbarro in March 1986. Mr. Mandell is also
a director of Trend-Lines, Inc., U.S.A. Detergents, Inc. and Shells Seafood
Restaurants, Inc.
TERRY VINCE has been Chairman of the Board and President of Sovereign
Hotels, a company that operates hotels, since October 1991 and Chairman of the
Board of Fame Corp., a food service management company, since January 1994. Mr.
Vince became a director of Sbarro in December 1988.
BERNARD ZIMMERMAN has been President of Bernard Zimmerman and Co., Inc.
since October 1972 and was Senior Vice President of The Zimmerman Group, Inc.
from January 1991 to November 1996, financial and management consulting firms.
Mr. Zimmerman also served as President and a director of Beacon Hill Mutual
Fund, Inc. from December 1994 until October 1996. From September 1986 until
September 1993, Mr. Zimmerman also served as Chairman and President of St.
Lawrence Seaway Corp., an owner and manager of agricultural properties. Mr.
Zimmerman has been a certified public accountant in New York for more than the
past thirty-five years. He became a director of Sbarro in March 1985.
Under our certificate of incorporation, our board of directors is
divided into three classes as nearly equal in number as the then total number of
directors constituting the entire board permits. Our board of directors
presently consists of eight members, with each class being elected for a term of
three years. Anthony Sbarro and Harold L. Kestenbaum serve as Class 1 directors,
Joseph Sbarro, Richard A. Mandell and Terry Vince serve as Class 2 directors and
Mario Sbarro, Carmela Sbarro and Bernard Zimmerman serve as Class 3 directors.
The terms of our Class 1 and our Class 2 directors will expire at our next
annual meeting of shareholders and the term of our Class 3 directors will expire
at our annual meeting of shareholders in 2001. At each annual meeting, directors
are elected to succeed those in the class whose term expires at that annual
meeting, such newly-elected directors to hold office until the third succeeding
annual meeting and the election and qualification of their respective
successors.
Paul Vatter, who had, prior to the going private transaction, indicated
an intention to retire, resigned from the board effective on December 31, 1999.
As a result, our board of directors consists of eight members. To permit this,
our shareholders amended our by-laws so that the minimum number of directors
that can constitute our board is now six. The maximum number of directors that
could constitute our board remains twelve. There is no present intention to
replace Mr. Vatter as a director.
Our officers are elected annually by the board of directors at its
meeting held immediately after the annual meeting of our shareholders, and hold
their respective offices until their successors are duly elected and qualified.
Officers may be removed at any time by the board.
<PAGE>
Mario, Anthony and Joseph Sbarro are the sons of Carmela Sbarro. Carmela N.
Merendino is the daughter, and Gennaro A. Sbarro is the son, of Mario Sbarro.
Gennaro J. Sbarro is the son, and Anthony J. Missano is the son-in-law, of
Joseph Sbarro.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and
long-term compensation of our chief executive officer and other five most highly
compensated persons who were serving as executive officers at the end of our
1999 fiscal year for services in all capacities to us and our subsidiaries
during our 1999, 1998 and 1997 fiscal years. All of the options set forth on the
table under the caption "Long Term Compensation" were terminated in the going
private transaction in exchange for a cash payment equal to the number of shares
to the options thereto multiplied by the excess, if any, of $28.85 over the
applicable option exercise price. See "--Aggregated Option Exercises is Last
Fiscal Year" for information on amounts executive officers named in the Summary
Compensation Table received in connection with the termination of options that
they held.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Annual Long Term
Name and Compensation Compensation
Principal Position Year Salary Bonus Options(#)
Mario Sbarro................................. 1999 $ 700,000 $ 300,000 --
Chairman of the Board, President and 1998 713,462 300,000 --
Chief Executive Officer 1997 700,000 160,000 250,000
Anthony Sbarro............................... 1999 300,000 200,000 --
Vice Chairman of the Board and Treasurer 1998 305,769 200,000 --
1997 300,000 150,000 100,000
Joseph Sbarro................................ 1999 300,000 200,000 --
Senior Executive Vice President and 1998 305,769 200,000 --
Secretary 1997 300,000 150,000 100,000
Anthony J. Missano........................... 1999 200,000 150,000 --
President-- Quick Service Division 1998 203,846 100,000 --
1997 200,000 75,000 80,000
Gennaro A. Sbarro............................ 1999 200,000 150,000 --
President-- and Licensing Division 1998 203,846 100,000 --
1997 200,000 75,000 80,000
Gennaro J. Sbarro............................ 1999 200,000 150,000 --
President-- Casual and Fine Dining Division 1998 203,846 100,000 --
1997 200,000 75,000 80,000
</TABLE>
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Year End Values
All of the options held by each executive officer named in the Summary
Compensation Table were terminated in the going private transaction in exchange
for a cash payment equal to the number of shares subject to the options
multiplied by the excess of $28.85 over the applicable option exercise price.
The following table sets forth the number and value of shares of common stock
subject to those options and the amount received by the named executive officers
in exchange for the termination of their options. The executives did not have
any unexercised options at the end of our 1999 fiscal year. See "Certain
Relationships and Related Transactions" included in Item 13 of this Report, for
more information about amounts received in exchange for termination of options.
Shares
Acquired on Value
Name Exercise Realized(1)
- ---- -------- --------
Mario Sbarro..................... 620,000(2) $2,221,987
Anthony Sbarro................... 265,000 1,145,242
Joseph Sbarro.................... 300,000 1,323,743
Anthony J. Missano............... 93,500 348,000
Gennaro A. Sbarro................ 98,251 389,168
Gennaro J. Sbarro................ 93,500 348,000
(1) Represents the number of shares subject to the options multiplied by the
excess of $28.85 over the applicable option exercise price.
(2) No value was realized upon the termination of options covering 100,000
shares whose exercise price was in excess of $28.85 per share.
Compensation of Directors
Our non-employee directors currently receive a retainer at the rate of
$16,000 per annum, $1,000 for each meeting of the Board attended and $500 for
each meeting attended of a committee of the board on which they serve if the
meeting is not held on the same day as a meeting of the board, except that
members of the special committee that considered the merger and a prior proposal
for a similar transaction received additional compensation as described below.
Members of the board also are reimbursed for reasonable travel expenses incurred
in attending board and committee meetings. The regular compensation of our
employee directors covers compensation for services as a director. Our
non-employee directors earned the following cash compensation, exclusive of
travel reimbursements, from us during fiscal 1999
<PAGE>
for services as members of the board, other than for service on the special
committee:
---------------------------------------------- ------------------
Harold L. Kestenbaum....................... $20,000
---------------------------------------------- ------------------
---------------------------------------------- ------------------
Richard A. Mandell......................... $20,000
---------------------------------------------- ------------------
---------------------------------------------- ------------------
Paul A. Vatter............................. $20,000
---------------------------------------------- ------------------
---------------------------------------------- ------------------
Terry Vince................................ $20,000
---------------------------------------------- ------------------
---------------------------------------------- ------------------
Bernard Zimmerman.......................... $20,000
---------------------------------------------- ------------------
Each non-employee director held stock options under our 1993
non-employee director stock option plan to purchase an aggregate of 22,500
shares of common stock at exercise prices ranging from $21.50 to $28.875 per
share. The options and this plan were terminated upon consummation of the going
private transaction and our non-employee directors received cash in an amount
equal to the excess of $28.85 over the applicable exercise price per share of
the options held by them under this plan. For information regarding amounts that
our non-employee directors received in connection with the termination of
options granted under this plan, see "Certain Relationships and Related
Transactions."
As compensation for serving on the special committee, we agreed to pay
to each member of the special committee a fee equal to (1) $2,500 for services
rendered in any day on which the member expended four hours or more in
performing services as a member of the special committee and (2) $1,250 for each
day in which the member expended a reasonable amount of time, but less than four
hours, in performing services as a member of the special committee. In addition
to the foregoing fees, Richard A. Mandell, as chairman of the special committee,
$10,000 with respect to the special committee's consideration of the prior
proposal and $10,000 with respect to the special committee's consideration of
the merger. Each member of the special committee was reimbursed for all
out-of-pocket expenses incurred in performing his services. The members of the
special committee earned the following cash compensation, exclusive of travel
reimbursements, from us in connection with the merger and the prior proposal:
Harold L. Kestenbaum........................ $14,750
--------------------------------------------- ---------------------
--------------------------------------------- ---------------------
Richard A. Mandell.......................... 48,500
--------------------------------------------- ---------------------
--------------------------------------------- ---------------------
Paul A. Vatter.............................. 9,750
--------------------------------------------- ---------------------
--------------------------------------------- ---------------------
Terry Vince................................. 9,750
--------------------------------------------- ---------------------
Bernard Zimmerman and Company, Inc., of which Bernard Zimmerman is
President and a majority shareholder, renders financial and consulting
assistance to us, for which it received fees of $474,000 during our 1999 fiscal
year. Harold L. Kestenbaum, P.C., of which Harold Kestenbaum is a principal,
received fees of $2,767 for legal services during our 1999 fiscal year.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
ownership of shares of our common stock as of February 28, 2000 with respect to
(1) holders known to us to beneficially own more than five percent of our
outstanding common stock, (2) each of our directors, (3) our Chief Executive
Officer and our five next most highly compensated executive officers and (4) all
of our directors and executive officers as a group. We understand that, except
as noted below, each beneficial owner has sole voting and investment power with
respect to all shares attributable to such owner.
Shares Beneficially Owned
Beneficial Owner Number Percent
- ---------------- ------ -------
Mario Sbarro(1)..................... 1,524,730(2) 21.6%
Anthony Sbarro(1)................... 1,233,800 17.5%
Joseph Sbarro(1).................... 1,756,022(3) 25.6%
Trust of Carmela Sbarro(1).......... 2,497,884(4) 35.3%
Harold L. Kestenbaum................ -- --
Richard A. Mandell.................. -- --
Terry Vince......................... -- --
Bernard Zimmerman................... -- --
Anthony J. Missano.................. 25,946(5) 0.4%
Gennaro A. Sbarro................... -- --
Gennaro J. Sbarro................... 25,946 0.4%
All directors and executive
officers as a group
(18 persons).................... 7,064,328 100.0%
(1) The business address of each of Mario Sbarro, Joseph Sbarro, Anthony Sbarro
and the Trust of Carmela Sbarro is 401 Broadhollow Road, Melville, New York
11747.
(2) Excludes the 2,497,884 shares held by the Trust of Carmela Sbarro, of
which trust Mario Sbarro serves as a co-trustee and as to which shares
Mr. Sbarro may be deemed a beneficial owner with shared voting and
dispositive power.
(3) Excludes 25,946 shares beneficially owned by each of Mr. Sbarro's son,
Gennaro J. Sbarro, reflected below, and daughter. Mr. Sbarro's daughter
is the wife of Anthony J. Missano.
(4) The trust was created by Carmela Sbarro for her benefit and for the
benefit of her descendants, including Mario, Joseph and Anthony Sbarro.
The trustees of the trust are Franklin Montgomery, whose business
address is 488 Madison Avenue, New York, New York 10022, and Mario
<PAGE>
Sbarro. As trustees, Franklin Montgomery and Mario Sbarro may be deemed
to be the beneficial owners of these shares with shared voting and
dispositive power.
(5) Represents shares owned by Mr. Missano's wife. Mr. Missano disclaims
beneficial ownership of these shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are the sole tenant of an administrative office building, which is
leased from Sbarro Enterprises, L.P. The annual rent payable pursuant to the
sublease is $0.3 million each year for the remainder of the lease term, which
expires in 2011. In addition, we are obligated to pay real estate taxes,
utilities, insurance and certain other expenses for the facility. We believe
that our rent is comparable to the rent that would be charged by an unaffiliated
third party. The limited partners of Sbarro Enterprises, L.P. are Mario, Joseph,
Anthony and Carmela Sbarro.
In addition to the compensation of Mario, Anthony, Joseph, Gennaro A. and
Gennaro J. Sbarro and Anthony J. Missano:
o Carmela Sbarro, the mother of Mario, Anthony and Joseph
Sbarro, who was a co-founder of Sbarro and serves as Vice
President and a director, received $100,000 from us for
services rendered during fiscal 1999; and
o Carmela N. Merendino, a daughter of Mario Sbarro, who serves
as Vice President -- Administration, received $155,000 from us
for services rendered during fiscal 1999.
In addition, other members of the immediate families of Mario, Anthony,
Joseph and Carmela Sbarro, who are our employees, earned an aggregate of
$729,534 during fiscal 1999.
We, our subsidiaries and the joint ventures in which we have an
interest have purchased printing services from a corporation owned by a
son-in-law of Mario Sbarro for which they paid, in the aggregate, $396,947
during fiscal 1999. We believe that these services were provided on terms
comparable to those that would have been available from unrelated third parties.
On March 13, 2000, our board of directors authorized us to lend Mario
Sbarro, our Chairman, President and Chief Executive Officer, $2.0 million under
a note that will be payable two years after we make the loan. The note will bear
interest at the rate of 6.45%, which will be payable annually. We believe that
the loan is on terms that are no less favorable to us than would have been
obtained in a comparable transaction by us with an unrelated person.
<PAGE>
Companies owned by a son of Anthony Sbarro and a company owned by the
daughter of Joseph Sbarro paid royalties to us under franchise agreements
containing terms similar to those in agreements entered into by us with
unrelated franchisees. Royalties paid to us aggregated $111,166 and $38,860,
respectively, during fiscal 1999.
Tax Agreement
We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code of 1986, and, where applicable and permitted, under
similar state and local income tax provisions, beginning in fiscal 2000. With
certain limited exceptions, we will not pay federal and state and local income
taxes for periods for which we are treated as an S corporation. Rather, our
shareholders will include their pro-rata share of our taxable income on their
individual income tax returns and thus will be required to pay taxes with
respect to their respective shares of our taxable income, whether or not it is
distributed to them.
We have entered into a tax payment agreement with our shareholders. The
tax payment agreement permits us to make periodic tax distributions to our
shareholders in amounts that are intended to approximate the income taxes,
including estimated taxes, that would be payable by our shareholders if their
only income were their pro-rata shares of our taxable income and that income was
taxed at the highest applicable federal and New York State marginal income tax
rates. We may only make the tax distributions with respect to periods in which
we are treated as an S corporation.
The tax payment agreement provides for adjustments of the amount of tax
distributions previously paid in respect of a year upon the filing of our
federal income tax return for that year, upon the filing of an amended federal
income tax return or as a result of an audit. In these circumstances, if it is
determined that the amount of tax distributions previously made for the year was
less than the amount computed based upon our federal income tax return, our
amended federal return or as adjusted based on the results of the audit, we may
make additional tax distributions which might include amounts to cover any
interest or penalties. Conversely, if it is determined in these circumstances
that the amount of tax distributions previously made for a year exceeded the
amount computed based on our federal income tax return, our amended federal
return or the results of an audit, as the case may be, our shareholders will be
required to repay the excess, with, in certain circumstances, interest. In
addition, our shareholders will be required to return, with interest, any tax
distributions previously distributed with respect to any taxable year for which
it is subsequently determined that we were not an S corporation.
Going Private Transaction
When we completed the going private transaction, we paid our public
shareholders merger consideration of $28.85 per share in cash. Other than the
members of the Sbarro family who are our continuing shareholders (who received
<PAGE>
no merger consideration), our directors, executive officers, owners of more than
5% of our common stock and members of the immediate families of the foregoing
persons received the same $28.85 merger consideration for each share of our
common stock owned by them as the other public shareholders received. We also
terminated all outstanding stock options and paid in cash to each stock option
holder (including the members of the Sbarro family who are our continuing
shareholders), whether or not the option holder's stock options were then vested
or exercisable, an amount in cash equal to the excess of $28.85 over the
applicable exercise price per share subject to the stock option. The following
table sets forth the amount received by our directors, our executive officers
and owners of more than 5% of our common stock, including entities controlled by
them, upon termination of their stock options:
<TABLE>
<CAPTION>
<S> <C> <C>
Name Relationship to Company Amount
Mario Sbarro Chairman of the Board, President, $ 2,221,987
Chief Executive Officer and Director
Anthony Sbarro Vice Chairman of the Board, 1,145,242
Treasurer and Director
Joseph Sbarro Senior Executive Vice President, 1,323,743
Secretary and Director
John Bernabeo Vice President -- 9,312
Architecture and Engineering
Joseph A. Fallarino Vice President-- Human Resources 20,188
Carmela N. Merendino Vice President-- Administration 54,212
Anthony J. Missano President-- Quick Service Division 348,000
Gennaro A. Sbarro President-- Franchising and Licensing Division 389,168
Gennaro J. Sbarro President-- Casual and Fine Dining Division 348,000
Steven B. Graham Vice President and Controller 13,567
Donald A. Dziomba Vice President - Management Information Systems 11,917
Harold L. Kestenbaum Director 93,965
Richard A. Mandell Director 93,965
Paul A. Vatter Director 93,965
Terry Vince Director 93,965
Bernard Zimmerman Director 160,213
</TABLE>
Other members of the immediate family of Mario Sbarro, Anthony Sbarro and
Joseph Sbarro received $495,162, $7,350 and $696,000, respectively, in
connection with the termination of their stock options.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1) and (a)(2) and (d) Financial Statements and Financial Statement Schedule
Financial Statements Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets at January 2, 2000 and
January 3, 1999 F-2
Consolidated Statements of Income for each of the
fiscal years in the three-year period ended January 2, 2000 F-4
Consolidated Statements of Shareholders' Equity for each of
the fiscal years in the three-year period ended January 2, 2000 F-5
Consolidated Statements of Cash Flows for each of the
fiscal years in the three-year period ended January 2, 2000 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule
Report of Independent Public Accountants on Schedule S-1
II - Valuation and Qualifying Accounts S-2
Information required by other schedules called for under Regulation S-X
is either not applicable or is included in the consolidated financial
statements or notes thereto.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by us during the fourth quarter of
our fiscal year ended January 2, 2000.
<PAGE>
(c) Exhibits:
*2.01 Agreement and Plan of Merger dated as of January 19,
1999 among the Company, Sbarro Merger LLC, a New York
limited liability company, 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. (Exhibit 2 to the Company Current Report
on Form 8-K dated (date of earliest event reported)
January 19, 1999, File No. 1-8881)
*3.01(a) Restated Certificate of Incorporation of the
Company as filed with the Department of State of the
State of New York on March 29, 1985. (Exhibit 3.01 to
the Company's Registration Statement on Form S-1,
File No.
2-96807)
*3.01(b) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as filed with
the Department of State of the State of New York on
April 3, 1989. (Exhibit 3.01(b) to the Company's
Annual Report on Form 10-K for the year ended January
1, 1989, File No. 1-8881)
*3.01(c) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as filed with
the Department of State of the State of New York on
May 31, 1989. (Exhibit 4.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
April 23, 1989, File No. 1-8881)
*3.01(d) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as filed with
the Department of State of the State of New York on
June 1, 1990. (Exhibit 4.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
April 22, 1990, File No. 1-8881)
* 3.02 By-Laws of the Company, as amended. (Exhibit 3.1
to the Company's Registration Statement on Form S-4,
File No. 333-90817)
*4.01 Indenture dated as of September, 28, 1999 among the
Company, the Restricted Subsidiaries of the Company
named therein, as guarantors, and Firstar Bank, N.A.,
including the form of 11% Senior Notes of the Company
to be issued upon consummation of the Exchange Offer
and the form of Senior Guarantees of the Guarantors.
(Exhibit 4.1 to the Company's Current Report on Form
8-K dated (date of earliest event reported) September
23, 1999, File No. 1-8881)
<PAGE>
4.02 Credit Agreement dated as of September 23, 1999 among
the Company, European American Bank, as agent, and the
Lenders party thereto (Exhibit 4.2 to the
Company's Current Report on Form 8-K dated (date
of earliest event reported) September 23, 1999, File
No. 1-8881)
*10.01 Commack, New York Corporate Headquarters Sublease.
(Exhibit 10.04 to the Company's Registration Statement
on Form S-1, File No. 2-96807)
+ *10.02 The Company's Performance Incentive Plan. (Exhibit
A to the Company's Proxy Statement dated April 29,
1997, File No. 1-8881)
+ *10.03 Consulting Agreement (including option) dated
June 3, 1985 between the Company and Bernard
Zimmerman & Company, Inc. (Exhibit 10.04 to the
Company's Annual Report on Form 10-K for the year
ended January 1, 1989, File No. 1-8881)
+ *10.04 Form of Indemnification Agreement between the Company
and each of its directors and officers. (Exhibit
10.04 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1989, File No. 1-8881)
*10.05 Registration Rights Agreement dated as of September
28, 1999 among the Company, the Guarantors named
therein and Bear, Stearns & Co. Inc. (Exhibit 10.1
to the Company's Current Report on Form 8-K dated
(date of earliest event reported) September 23, 1999,
File No. 1-8881)
<PAGE>
*10.06 Tax Payment Agreement dated as of September 28, 1999
among the Company, 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
(Exhibit 10.6 to the Company's Registration Statement
on Form S-4, File No. 333-90817
*12.01 Statement of computation of earnings to fixed charges
(Exhibit 12.1 to amendment No. 2 to the Company's
Registration Statement on Form S-4, File No. 333-90817)
21.01 List of subsidiaries.
27.01 Financial Data Schedule
- -----------------------------
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.
<PAGE>
UNDERTAKING
We hereby undertake to furnish to the Securities and Exchange
Commission, upon request, all constituent instruments defining the rights of
holders of long-term debt of our us and our consolidated subsidiaries not filed
with this Report. Those instruments have not been filed since none are, nor are
being, registered under Section 12 of the Securities Exchange Act of 1934 and
the total amount of securities authorized under any of those instruments does
not exceed 10% of the total assets of us and our subsidiaries on a consolidated
basis.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on March
30, 2000.
SBARRO, INC.
By: /s/ MARIO SBARRO
Mario Sbarro, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ MARIO SBARRO Chairman of the Board March 30, 2000
Mario Sbarro (Principal Executive Officer)
and Director
/s/ ROBERT G. ROONEY Senior Vice President and March 30, 2000
Robert G. Rooney Chief Financial Officer
(Principal Financial Officer)
/s/ JOSEPH SBARRO Director March 30, 2000
Joseph Sbarro
/s/ ANTHONY SBARRO Director March 30, 2000
Anthony Sbarro
<PAGE>
Signature Title Date
/s/ STEVEN B. GRAHAM Vice President and March 30, 2000
Steven B. Graham Controller (Principal
Accounting Officer)
/s/ HAROLD KESTENBAUM Director March 30, 2000
Harold Kestenbaum
/s/ RICHARD A. MANDELL Director March 30, 2000
Richard A. Mandell
/s/ CARMELA SBARRO Director March 30, 2000
Carmela Sbarro
/s/ TERRY VINCE Director
Terry Vince
/s/ BERNARD ZIMMERMAN Director March 30, 2000
Bernard Zimmerman
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sbarro, Inc.:
We have audited the accompanying consolidated balance sheets of Sbarro,
Inc. (a New York corporation) and subsidiaries as of January 2, 2000 and
January 3, 1999, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in
the period ended January 2, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sbarro, Inc. and
subsidiaries as of January 2, 2000 and January 3, 1999, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended January 2, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
New York, New York
March 13, 2000
F-1
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
(In thousands except share date)
Current assets:
<S> <C> <C>
Cash and cash equivalents $33,514 $154,909
Restricted cash for untendered
shares (Note 2) 298 -
Receivables, net of allowance for
doubtful accounts of $419 in 1999
Franchise 1,429 1,342
Other 2,938 2,185
--------------- ------------
4,367 3,527
Inventories 3,686 3,122
Prepaid expenses 1,905 1,291
--------------- ------------
Total current assets 43,770 162,849
Property and equipment, net (Note 4) 137,232 138,126
Other assets:
Excess of purchase price over the cost
of net assets acquired, net of
accumulated amortization of
$2,000 (Note 2) 220,681 -
Deferred financing costs, net of accumulated
amortization of $277 (Note 7) 9,553 -
Other assets, net 6,597 6,630
------------- -------------
$417,833 $307,605
=========== ===========
</TABLE>
F-2
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 2, 2000 January 3, 1999
--------------- ---------------
(In thousands except share data)
Current liabilities:
<S> <C> <C>
Accounts payable $ 9,673 $ 11,559
Amounts due for untendered shares
(Note 2) 298 -
Accrued expenses (Note 5) 35,589 25,764
Income taxes payable (Note 6) 754 4,146
---------- -----------
Total current liabilities 46,314 41,469
Deferred income taxes (Note 6) 9,929 9,219
Long-term debt, net of original
issue discount (Note 7) 251,310 -
Commitments and contingencies (Note 8)
Shareholders' equity (Notes 2 and 10):
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 January 2, 2000 and
20,531,643 shares at January 3, 1999 71 205
Additional paid-in capital 10 34,587
Retained earnings 110,199 222,125
---------- -------------
110,280 256,917
----------- -------------
$417,833 $307,605
============ ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the Fiscal Years Ended
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
(52 weeks) (53 weeks) (52 weeks)
(In thousands)
Revenues:
Restaurant sales $366,630 $361,534 $337,723
Franchise related income 9,006 8,578 7,360
Interest income 3,828 5,120 4,352
----------- ---------- ----------
Total revenues 379,464 375,232 349,435
--------- -------- --------
Costs and expenses:
Cost of food and paper products 73,986 76,572 69,469
Restaurant operating expenses:
Payroll and other employee benefits 97,174 93,367 84,910
Occupancy and other expenses 106,852 101,013 93,528
Depreciation and amortization 25,363 22,429 23,922
General and administrative 23,456 19,708 17,762
Provision for unit closings (Note 11) 1,013 2,515 3,300
Terminated transaction costs (Note 2) - 986 -
Litigation settlement and related
costs (Note 8) - 3,544 -
Loss on land to be sold (Note 4) - 1,075 -
Interest expense (Note 7) 7,948 - -
Other income (5,173) (2,680) (1,653)
--------- --------- ---------
Total costs and expenses 330,619 318,529 291,238
-------- -------- --------
Income before income taxes and
cumulative effect of change in method
of accounting for start-up costs 48,845 56,703 58,197
Income taxes (Note 6) 19,322 21,547 22,115
-------- ------ ------
Income before cumulative effect
of accounting change 29,523 35,156 36,082
Cumulative effect of change in method
of accounting for start-up costs, net of
income taxes of $504 (Note 1) - (822) -
---------- ---------------- ------------
Net income $29,523 $34,334 $36,082
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Additional
shares of paid-in Retained
common stock Amount capital earnings Total
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance at
December 29, 1996 20,392,909 $204 $31,219 $173,777 $205,200
Exercise of stock options 53,745 0 1,225 0 1,225
Net income 36,082 36,082
Dividends declared (22,068) (22,068)
--------------- -------- ----------- --------- ---------
Balance at
December 28, 1997 20,446,654 204 32,444 187,791 220,439
Exercise of stock options 84,989 1 2,143 2,144
Net income 34,334 34,334
----------- --------- ------- ---------- -------
Balance at
January 3, 1999 20,531,643 205 34,587 222,125 256,917
Exercise of stock options 17,337 426 426
Net income 29,523 29,523
Shares repurchased and
retired in going private
transaction (Note 2) (13,484,652) (134) (35,003) (35,137)
Adjustment to original
cost basis of continuing
shareholders (Note 2) (141,449) (141,449)
--------------- -------- --------- ----------- -----------
Balance at
January 2, 2000 7,064,328 $71 $10 $110,199 $110,280
========= ==== === ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Fiscal Years Ended
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
(52 weeks) (53 weeks) (52 weeks)
(In thousands)
Operating activities:
<S> <C> <C> <C>
Net income $29,523 $34,334 $36,082
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 25,740 22,429 23,922
Increase (decrease) in deferred
income taxes 710 (2,078) (1,844)
Provision for unit closings 1,013 2,515 3,300
Loss on land to be sold - 1,075 -
Changes in operating assets and liabilities:
Increase in receivables (839) (1,152) (510)
Increase in inventories (564) (160) (121)
(Increase) decrease in prepaid
expenses (615) 477 (359)
Increase in other assets (1,814) (817) (2,468)
Increase in accounts payable
and accrued expenses 10,243 1,827 3,534
Decrease in income taxes
payable (1,392) (631) (510)
----------- -------- ----------
Net cash provided by
operating activities 62,005 58,641 61,026
-------- -------- ----------
</TABLE>
(continued)
F-6
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
<S> <C> <C> <C>
(52 weeks) (53 weeks) (52 weeks)
(In thousands)
Investing activities:
Proceeds from maturities of marketable
securities - 7,500 2,500
Purchases of property and equipment (25,099) (27,717) (28,556)
Proceeds from disposition of property
and equipment 55 52 34
---------- ---------- --------
Net cash used in investing activities (25,044) (20,165) (26,022)
- ------- ------ ------
Financing activities:
Proceeds from exercise of stock
options 426 2,144 1,225
Proceeds from long-term debt 251,211 - -
Cost of merger and related financing (411,000) - -
Accrued and previously paid merger costs 1,007 - -
Cash dividends paid - (5,521) (21,237)
-------------- ------ ---------
Net cash used in
financing activities (158,356) (3,377) (20,012)
------------- -------- --------
(Decrease) increase in cash and cash
equivalents (121,395) 35,099 14,992
Cash and cash equivalents at
beginning of year 154,909 119,810 104,818
---------- --------- ----------
Cash and cash equivalents at end
of year $33,514 $154,909 $119,810
======= ======== ========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
Basis of financial statement presentation:
The consolidated financial statements include the accounts of Sbarro,
Inc., its wholly-owned subsidiaries and the accounts of its joint
ventures (together, "we", "our", "us", or "Sbarro"). All intercompany
accounts and transactions have been eliminated.
The preparation of our financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that may affect the amounts reported in the financial statements and
accompanying notes. Our actual results could differ from those estimates.
Cash equivalents:
All highly liquid debt instruments with a maturity of three months or
less at the time of purchase are considered to be cash equivalents.
Marketable securities:
We classified our investments in marketable securities as "held to
maturity". These investments were stated at amortized cost, which
approximated market, and were comprised primarily of direct obligations
of the U.S. Government and its agencies. All previous investments in
marketable securities matured during fiscal 1998.
Inventories:
Inventories, consisting primarily of food, beverages and paper
supplies, are stated at cost, which is determined by the first-in,
first-out method.
Property and equipment and depreciation:
Property and equipment are stated at cost. Depreciation is provided for
by the straight-line method over the estimated useful lives of the
assets. Amortization of leasehold improvements is provided for by the
straight-line method over the estimated useful lives of the assets or
the lease term, whichever is shorter. One-half year of depreciation and
amortization is recorded in the year in which the restaurant commences
operations.
F-8
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Deferred charges:
We account for pre-opening and similar costs in accordance with
Statement of Position ("SOP") 98-5 of the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants, which required companies to write off all such costs, net
of tax benefit, as a "cumulative effect of accounting change" upon
adoption and to expense all of those costs as incurred in the future.
In accordance with its early application provisions, we implemented the
SOP as of the beginning of our 1998 fiscal year which resulted in a
charge of $1.2 million before tax, or $0.8 million after tax.
Comprehensive income:
In the first quarter of 1998, we adopted Statement of Financial
Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income",
which establishes new rules for the reporting of comprehensive income
and its components. The adoption of this statement had no impact on our
net income or shareholders' equity. For the 1999, 1998 and 1997 fiscal
years, our operations did not give rise to items includible in
comprehensive income which were not already included in net income.
Therefore, our comprehensive income is the same as our net income for
all periods presented.
Franchise related income:
Initial franchise fees are recorded as income as restaurants are opened
by the franchisee and we have performed substantially all services.
Development fees are recognized over the number of restaurant openings
covered under each development agreement. Royalty and other fees from
franchisees are accrued as earned. Revenues and expenses related to
construction of franchised restaurants are recognized when contractual
obligations are completed and the restaurants are opened.
Stock based compensation plans:
In accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations, compensation cost for stock options were measured as
the excess, if any, of the quoted market price of the Company's stock
at the date of grant over the amount an employee paid to acquire the
stock (Note 10). All option plans were terminated upon the completion
of the going private transaction (Note 2).
F-9
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Income taxes:
We file a consolidated federal income tax return. Deferred income taxes
result primarily from differences between financial and tax reporting
of depreciation and amortization.
Accounting period:
Our fiscal year ends on the Sunday nearest to December 31. Our 1998
fiscal year ended January 3, 1999 and contained 53 weeks. All other
reported fiscal years contained 52 weeks.
Per share data:
The provisions of SFAS No. 128, "Earnings Per Share" became effective for
Sbarro's quarter and year ended December 28, 1997. SFAS No. 128 requires the
presentation of both basic and diluted earnings per share on the face of the
income statement. After the going private transaction (Note 2), we are not
subject to the provisions of SFAS No. 128.
Long-lived Assets:
Impairment losses are recorded on long-lived assets on a restaurant by
restaurant basis whenever impairment factors are determined to be
present, the undiscounted cash flows estimated to be generated by those
assets are less than the carrying value of such assets and events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
Derivative instruments and hedging activities:
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of SFAS Statement No. 133 - an Amendment of
SFAS Statement No. 133," issued in June 1999, SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000. Presently, we do not use derivative
instruments and therefore we do not expect SFAS No. 133 to be applicable when it
is adopted in fiscal 2000.
Reclassifications:
Certain items in the fiscal 1998 and 1997 financial statements have
been reclassified to conform to the fiscal 1999 presentation.
F-10
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Supplemental disclosures of cash flow information:
For The Fiscal Years Ended
January 2, January 3, December 28,
2000 1999 1997
(In thousands)
Cash paid for:
Income taxes $20,054 $24,235 $24,297
======== ======= =======
Interest $30 $ - $ -
=== ========== =======
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 our issued and outstanding common stock under an
Amended and Restated Agreement and Plan of Merger dated as of January
19, 1999. Under the terms of the merger agreement (i) a company owned
by the members of the Sbarro family merged with and into Sbarro, (ii)
our 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 our
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 to the options 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 transaction, was approximately $411.0 million and
was funded using substantially all of our cash on hand and the sale of
$255 million of 11% Senior Notes (Note 7).
As of January 2, 2000, there was $0.3 million remaining on deposit with
a third party paying agent for untendered shares to be redeemed as part
of the merger consideration. That amount is shown as restricted cash
and amounts due for untendered shares in the consolidated balance
sheet. Should any shares remain untendered after one year from
September 28, 1999, the related funds will be returned to us to be held
until claimed or escheated to the appropriate jurisdictions.
F-11
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Going private transaction (continued):
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 shareholder's 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 weighted average useful life of 30 years.
Summarized below are our unaudited pro forma results of operations for
the year ended January 2, 2000 and January 3, 1999 as if the merger had
taken place as of the beginning of each year. Adjustments have been
made for the amortization of the excess of the purchase price over the
cost basis of net assets acquired, interest expense, including interest
on the $16 million mortgage issued subsequent to year end to one of the
guaranteeing subsidiaries (Note 15) and related changes in income tax
expense.
For the Fiscal Years Ended
January 2, 2000 January 3, 1999
--------------- ---------------
(In thousands)
Pro Forma:
Revenues $375,636 $370,112
========= ==========
Income before cumulative
effect of accounting
change $ 6,662 $ 5,143
=========== ============
Net income $ 6,662 $ 4,348
=========== =============
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.
In connection with the termination of negotiations for the initial
proposal of our acquisition of all shares of common stock not owned by
such members of the Sbarro family we recorded a charge of $1.0 million
before tax, or $0.6 million after tax, in our 1998 financial
statements.
F-12
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Description of business:
We and our franchisees develop and operate family oriented cafeteria
style Italian restaurants principally under the "Sbarro" and "Sbarro
The Italian Eatery" names. The restaurants are located throughout the
world, principally in shopping malls and other high traffic locations.
The following sets forth the number of units in operation as of:
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
Sbarro-owned 644 630 623
Franchised 286 268 239
--- --- ---
930 898 862
=== === ===
4. Property and equipment, net:
January 2, January 3,
2000 1999
---- ----
(In thousands)
Land and improvements (a) $ 3,364 $ 3,364
Leasehold improvements 203,296 187,828
Furniture, fixtures and equipment 111,235 107,891
Construction-in-progress 3,031 2,662
---- -----
320,926 301,745
Less accumulated depreciation 183,694 163,619
and amortization
$137,232 $138,126
========== ========
(a) During 1998, we recorded a charge of $1.1 million before tax,
$0.7 million after tax, for the difference between the
carrying cost and proposed selling price of a parcel of land
which is being offered for sale.
F-13
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Accrued expenses:
January 2, January 3,
2000 1999
---- ----
(In thousands)
Interest $7,487 $ -
Compensation 6,169 4,109
Payroll and sales taxes 5,219 3,193
Rent 7,514 6,786
Provision for unit closings
(Note 11) 863 2,867
Other 8,337 8,809
----- -----
$35,589 $25,764
======= =======
6. Income taxes:
For the Fiscal Years Ended
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
(In thousands)
Federal:
Current $14,758 $19,421 $19,868
Deferred 557 (2,209) (1,557)
--- ------ ------
15,315 17,212 18,311
------ ------ ------
State and local:
Current 3,854 4,708 4,091
Deferred 153 (373) (287)
------ ---- ----
4,007 4,335 3,804
----- ----- -----
$19,322 $21,547 $22,115
========= ======= =======
F-14
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Income taxes (continued):
Deferred income taxes are comprised of the following:
January 2, January 3,
2000 1999
---- ----
(In thousands)
Depreciation and amortization $15,397 $15,805
Deferred charges 11 -
Other 495 101
--- ------
Gross deferred tax liabilities 15,903 15,906
------ ------
Accrued expenses (2,070) (4,776)
Deferred income (3,496) (1,483)
Other (408) (428)
---- ----
Gross deferred tax assets (5,974) (6,687)
------- ------
$9,929 $9,219
======= ======
Actual tax expense differs from "expected" tax expense (computed by
applying the Federal corporate rate of 35% for the fiscal years ended
January 2, 2000, January 3, 1999, and December 28, 1997) as follows:
For the Fiscal Years Ended
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
(In thousands)
Computed "expected" tax
expense $17,096 $19,382 $20,369
Increase (reduction) in income
taxes resulting from:
State and local income taxes,
net of Federal income tax
benefit 2,605 2,725 2,429
Tax exempt interest income
and dividends received
deduction (1,002) (1,198) (978)
Amortization of excess
purchase price over the cost
of net assets acquired 700 - -
Other, net (77) 638 295
---- --- ---
$19,322 $21,547 $22,115
======== ======= =======
F-15
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Income taxes (continued):
Deferred income taxes are provided for temporary differences between
financial and tax reporting. These differences and the amount of the
related deferred tax benefit are as follows:
For the Fiscal Years Ended
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
(In thousands)
Depreciation and
amortization $ (408) $(1,891) $(1,824)
Accrued expenses 2,706 (261) (624)
Other (1,588) (430) 604
---- ----- ----
$710 $(2,582) $(1,844)
==== ======= =======
In March, 2000, we filed elections to change our tax status from a C
Corporation to Subchapter "S" corporation effective fiscal 2000. As a
result, in lieu of federal and certain state corporate income taxes,
the shareholders will be taxed on their proportionate shares of income,
or receive the benefit of any losses individually. In the future, our
income tax provision will be significantly reduced and substantially
all taxes on our income will be paid by shareholders. We will make
distributions to shareholders for taxes owed by them on our earnings
pursuant to a tax agreement with shareholders. During fiscal 2000, we
may reduce or eliminate a portion of our deferred tax liability as a
consequence of this change in status.
7. Long-term debt:
(a) The cost of the merger, including fees and expenses, was funded
through the use of substantially all of our cash on hand and the
placement of $255 million of 11.0% Senior Notes due September 15, 2009
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"). We also entered into a five year, $30 million unsecured
senior revolving bank credit facility under a bank credit agreement
dated as of September 23, 1999.
Interest on the Senior Notes is payable semi-annually on March 15 and
September 15 of each year commencing on March 15, 2000. Our payment
obligations under the Senior Notes are jointly, severally,
unconditionally and irrevocably guaranteed by all of Sbarro's current
Restricted Subsidiaries (as defined in the Indenture) and is to be
similarly guaranteed by our future Restricted Subsidiaries. The Senior
Notes and the subsidiary guarantees are senior unsecured obligations of
Sbarro and the guaranteeing
F-16
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Long-term debt (continued):
subsidiaries, respectively, ranking pari passu in right of payment to
all of our and their respective present and future senior debt,
including amounts outstanding under the bank credit agreement. The
Indenture permits redemption of the Senior Notes at our option at
varying redemption prices and requires us to offer to purchase Senior
Notes in the event of a Change of Control and in connection with
certain Asset Sales (each as defined). The Indenture contains various
convenants on our part and the guarantor subsidiaries, including, but
not limited to, restrictions on our payment of dividends, stock
repurchases, certain investments and other restricted payments, the
incurrence of indebtedness and liens on our assets, affiliate
transactions, asset sales and mergers.
In connection with the issuance of the Senior Notes, Sbarro and the
guaranteeing 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 we do not timely comply with our obligations to effectuate
such registration, we will be required to pay liquidated damages until
cured to each holder of the Senior Notes beginning at $.05 per $1,000
of notes per week for the first 90 days increasing every ninety days up
to a maximum of $.50 per $1,000 of notes per week. The initial deadline
under the registration rights agreement is March 27, 2000.
The discount at which the Senior Notes were issued, an aggregate of
approximately $3.8 million, is being accreted to the Senior Notes over
the original ten year life of the Senior Notes.
(b) The bank credit agreement provides us with an unsecured senior
revolving credit facility that enables us to borrow, on a revolving
basis from time to time during its five-year term, up to $30 million,
including a $10 million sublimit for standby letters of credit. No
amounts were outstanding under the credit facility as of January 2,
2000.
Each of our current guaranteeing subsidiaries (the same entities as the
Restricted Subsidiaries under the Indenture) have agreed to, and the
future guaranteeing subsidiaries are to, unconditionally and
irrevocably guarantee our obligations under the bank credit agreement
on a joint and several basis. All borrowings under the bank credit
agreement are repayable on September 28, 2004. In addition, we will be
required to repay our loans and reduce the lenders' commitments under
the bank credit agreement using the proceeds of certain asset sales and
issuances of certain equity interests of, and sales of equity interests
in, the guaranteeing subsidiaries.
At our option, the interest rates applicable to loans under the bank
credit agreement will be at either (a) the bank's prime rate (8.75% at
February 28, 2000) plus a margin ranging from zero to 0.75% (there is
no margin at February 28, 2000) or (b) reserve adjusted LIBOR (5.88% at
February 28, 2000) plus a margin ranging from 1.5% to 2.5% (the margin
at February 28, 2000 is 1.75%). In each case, the
F-17
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Long-term debt (continued):
margin depends upon the ratio of our senior debt (as defined) to its
earnings before interest, taxes and depreciation and amortization
("EBITDA"). We have agreed to pay certain fees in connection with the
bank 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 our senior debt to EBITDA. The unused commitment fee is
0.30% per year.
The bank credit agreement contains various covenants on our part and
on the part of the guaranteeing
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 us and our guaranteeing
subsidiaries. The bank 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 our amending or supplementing the Indenture. In addition, we are
required to maintain a minimum ratio of consolidated EBITDA to
consolidated interest expense (in each case with the guaranteeing
subsidiaries) of at least 2.0 to 1.0 and a ratio of consolidated senior
debt to consolidated EBITDA (in each case with the guaranteeing
subsidiaries) ranging from 4.5 to 1.0 in 1999 to 3.9 to 1.0 beginning
December 29, 2002. We are in compliance with the various covenants
contained in the agreement as of January 2, 2000.
(c) The costs of issuing the Senior Notes and establishing the bank
credit agreement, an aggregate of approximately $9.3 million and $0.6
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 above amounts payable in cash.
8. Commitments and contingencies:
Commitments:
We conduct all of our operations in leased facilities. Most of our
restaurant leases provide for the payment of base rents plus real
estate taxes, utilities, insurance, common area charges and certain
other expenses, as well as contingent rents generally ranging from 8%
to 10% of net restaurant sales in excess of stipulated amounts.
F-18
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Commitments and contingencies:
Commitments (continued):
Rental expense under operating leases, including common area charges,
other expenses and additional amounts based on sales, are as follows:
For the Fiscal Years Ended
January 2, January 3, December 28,
2000 1999 1997
---- ---- ----
(In thousands)
Minimum rentals $46,682 $43,387 $40,365
Common area charges 13,763 13,314 12,541
Contingent rentals 3,134 3,011 2,910
----------- --------- ---------
$63,579 $59,712 $55,816
======== ======= =======
Future minimum rental and other payments required under non-cancelable
operating leases for Sbarro-operated restaurants that were open on
January 2, 2000 and the existing leased administrative and support
function office (Note 9) are as follows (in thousands):
Fiscal Years Ending:
December 31, 2000 $68,989
December 30, 2001 67,505
December 29, 2002 64,222
December 28, 2003 60,316
January 2, 2005 56,392
Later years 155,858
We are the principal lessee under operating leases for certain
franchised restaurants which are subleased to the franchisee.
Franchisees pay rent and related expenses directly to the landlord.
Future minimum rental payments required under these non-cancelable
operating leases for franchised restaurants that were open as of
January 2, 2000 are as follows (in thousands):
Fiscal Years Ending:
December 31, 2000 $1,631
December 30, 2001 1,567
December 29, 2002 1,291
December 28, 2003 1,165
January 3, 2005 1,067
Later years 3,250
F-19
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Commitments and contingencies:
Commitments (continued):
As of February 28, 2000, future minimum rental payments required under
non-cancelable operating leases for restaurants which had not as yet
opened as of January 2, 2000 are as follows (in thousands):
Fiscal Years Ending:
December 31, 2000 $1,522
December 30, 2001 2,180
December 29, 2002 2,516
December 28, 2003 2,656
January 3, 2005 2,737
Later years 25,825
We are a party to contracts aggregating $3.9 million with respect to
the construction of restaurants. Payments of approximately $0.4 million
have been made on those contracts as of January 2, 2000.
We are the guarantor of $2.3 million of letters of credit and for our
pro rata interests of up to $8.9 million for loans, a mortgage and a
line of credit for certain of our joint ventures.
Contingencies:
In February 1999, the Umberto of New Hyde Park joint venture companies,
in which we have an 80% interest, began an action in the U.S. district
Court for the Eastern District of New York against Umberto Corteo, who
owns the remaining 20% interest in the joint venture companies, and
against three other restaurants owned by Mr. Corteo. We alleged, among
other things, that Mr. Corteo engaged in unfair trade practices and in
trademark infringement, thereby breaching the joint venture agreements.
We are seeking an accounting, compensatory and punitive damages and
injunctive relief. The answer filed by Mr. Corteo and his co-defendants
denies our claims and further alleges that non-competition restrictions
against Mr. Corteo in the joint venture agreements are unenforceable.
Mr. Corteo and his co-defendants have also counterclaimed against us
alleging misappropriation of trademark rights and failure to perform
administrative duties that amounted to a breach of the agreements. We
believe that our claims against Mr. Corteo will be proven and that we
have substantial defenses to his counterclaims.
On November 17, 1999, certain former managers of restaurant units in
the State of Washington instituted a lawsuit against Sbarro alleging
that they served as store managers, general managers, assistant
managers or co-managers in our restaurants in the State of Washington
at various times since November 17, 1996 and that, in connection with
their employment, we 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
F-20
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Commitments and contingencies:
Contingencies (continued):
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 our
restaurant managers employed for any period of time on or after
November 9, 1996 in the State of Washington. We currently own and
operate 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. We believe that we have substantial defenses to the claims and
intend to vigorously defend this action.
On December 20, 1999, twelve current and former general managers of
Sbarro restaurants in California amended a complaint filed in the
Superior Court of California for Orange County. The amended complaint
alleges that the plaintiffs were improperly classified as exempt
employees under the California wage and hour law. The plaintiffs are
seeking actual damages, punitive damages and costs of the lawsuit,
including reasonable attorney fees, each in unspecified amounts.
Plaintiffs' counsel has stated that they are in contact with the
plaintiffs' counsel in the case discussed above and that he may attempt
to file a class action based upon alleged violations of the Fair Labor
Standards Act. We believe that we have substantial defenses to the
claims and intend to vigorously defend this action.
In December 1998, the Court approved, and we completed, the settlement
of an action that was pending in the United States District Court for
the Southern District of New York whereby the plaintiffs, former
restaurant level management employees, alleged that we required general
managers and co-managers to reimburse us for cash and certain other
shortages sustained by us and thereby lost their status as managerial
employees exempt from the overtime compensation provisions of the Fair
Labor Standards Act. The settlement resulted in a one-time charge of
$3.5 million before tax, or $2.2 million after tax, in fiscal 1998.
From time to time we are also a party to certain claims and legal
proceedings in the ordinary course of business, none of which, in our
opinion, would have a material adverse effect on our financial position
or results of operations.
F-21
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Transactions with related parties:
We are the sole tenant of an administrative office building which is
leased from a partnership owned by certain of Sbarro's shareholders.
For each of the 1999, 1998 and 1997 fiscal years, the annual rent paid
pursuant to the sublease was $0.3 million. The annual rent payable
pursuant to the sublease is $0.3 million each year for the remainder of
the lease term which expires in 2011. In addition, we are obligated to
pay real estate taxes, utilities, insurance and certain other expenses
for the facility. We believe that our rent is comparable to the rent
that would be charged by an unaffiliated third party.
A member of our Board of Directors acts as a consultant to us for
which he received $0.5 million, $0.1 million and $0.1
million in the 1999, 1998 and 1997 fiscal years, respectively.
10. Stock options:
Our Board of Directors adopted, and our shareholders had approved, a
1991 Stock Incentive Plan (the "1991 Plan"), which replaced the
Company's 1985 Incentive Stock Option Plan, and a 1993 Non-Employee
Director Stock Option Plan (the "1993 Plan"). As part of the going
private transaction, all outstanding options and option plans were
terminated in exchange for a cash payment equal to the number of shares
subject to the stock option multiplied by the excess, if any, of $28.85
over the option's exercise price (Note 2).
Under the 1991 Plan, we were able to grant, until February 2001,
incentive stock options and non-qualified stock options, alone or in
tandem with stock appreciation rights ("SARS"), to our employees and
consultants. Options and SARs were not able to be granted at exercise
prices of less than 100% of the fair market value of our common stock
on the date of grant. The Board of Directors and the Board's Committee
were empowered to determine, within the limits of the 1991 Plan, the
number of shares subject to each option and SAR, the exercise price,
and the time period (which may not exceed ten years) and terms under
which each may be exercised.
The 1993 Plan provided for the automatic grant to each non-employee
director of an option to purchase 3,750 shares of common stock
following each annual shareholders' meeting. Each option had a ten year
term and was exercisable in full commencing one year after grant at
100% of the fair market value of our common stock on the date of grant.
In each of fiscal 1998, 1997 and 1996, each of the five non-employee
directors were granted options to purchase 3,750 shares at $ 24.06,
$28.88 and $26.88 per share, respectively. In fiscal 1997, options to
purchase an aggregate of 11,250 shares granted to a deceased director
were exercised at prices ranging from $21.50 to $23.71.
F-22
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Stock options (continued):
A summary of the status of our option plans is presented in the table
below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
<S> <C> <C> <C> <C> <C> <C>
Shares Price Shares Price Shares Price
Options outstanding,
beginning of period 1,560,432 $25.87 1,638,339 $25.85 934,836 $25.57
Granted -0- N/A 23,750 $24.22 777,750 $25.96
Exercised (17,337) $24.58 (84,989) $25.23 (53,745) $22.78
Terminated for cash
(Note 2) (1,391,095) N/A - -
Canceled or expired (152,000) $28.83 (16,668) $25.15 (20,502) $24.66
---------------------------------------- ----------------------------------
Options outstanding,
end of period -0- N/A 1,560,432 $25.87 1,638,339 $25.85
Options exercisable,
end of period N/A N/A 617,515 $25.99 573,880 $26.05
</TABLE>
The foregoing table includes options granted in fiscal 1997 under the
1991 Plan to our Chairman of the Board and President to purchase
100,000 and 150,000 shares at $25.13 and $28.88 per share,
respectively, and to our Vice Chairman of the Board and Senior
Executive Vice President to purchase 100,000 and 100,000 shares,
respectively, at $25.13 per share; options granted in fiscal 1996 to
our Chairman of the Board and President and Senior Executive Vice
President to purchase 100,000 and 50,000 shares, respectively, at
$24.75 per share; and options granted in fiscal 1993 under the 1991
Plan to our Chairman of the Board and President, Vice Chairman of the
Board and Senior Executive Vice President and one non-employee director
to purchase 120,000, 90,000, 75,000 and 37,500 shares, respectively, at
$27.09 per share. Each such option was granted at an exercise price
equal to the fair market value of our common stock on the date of grant
and was exercisable for 10 years from the date of grant. As part of the
going private transaction, those options were terminated in exchange
for a cash payment equal to the number of shares subject to the stock
option multiplied by the excess, if any, of $28.85 over the option's
exercise price (Note 2).
In addition to the foregoing, in fiscal 1990, shareholders approved
options were granted to our Chairman of the Board and President, Vice
Chairman of the Board and Senior Executive Vice President to purchase
150,000, 75,000 and 75,000 shares, respectively, at $20.67 per share,
the fair market value of our common stock on the date of grant, for a
period of 10 years from the date of grant. As part of
F-23
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Stock options (continued):
the going private transaction, these options were also terminated in
exchange for a cash payment equal to the number of shares subject to
the stock option multiplied by the excess, if any, of $28.85 over the
option's exercise price (Note 2).
Sbarro adopted the pro forma disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation
cost has been recognized in the accompanying financial statements for
the stock option plans. No calculation is presented for fiscal 1999 as
a result of the termination of all outstanding options in connection
with the going private transaction (Note 2). Had compensation cost for
our stock option plans been determined under SFAS No. 123 for the years
ended January 3, 1999 and December 28, 1997, our net income would have
approximated the pro forma amounts below:
For the Fiscal Years Ended
January 3, December 28,
1999 1997
---- ----
(In thousands)
Net income:
As Reported 34,334 36,082
====== ======
Pro Forma 33,770 35,089
====== ======
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
1998 1997
---- ----
Expected life (years) .5 1.5
Interest rate 5.15% 5.82%
Volatility 31% 21%
Dividend yield 0.00% 4.00%
Weighted average fair value
of options granted $2.38 $2.79
===== =====
11. Provision for unit closings:
In connection with the final disposition of two joint venture units
closings recorded in fiscal 1997, we agreed to a special allocation of
losses which resulted in an additional $1.0 million charge before tax,
or $0.6 million after tax, to earnings in fiscal 1999.
F-24
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Provision for unit closings (continued):
A provision for restaurant closings of $2.5 million before tax, or
$1.6 million after tax, was established in fiscal 1998
relating to the closing of 20 restaurant locations.
A provision for restaurant closings in the amount of $3.3 million
before tax, or $2.0 million after tax, relating to our investment in
one of our joint ventures was established in fiscal 1997 for the
closing of certain of the joint venture's units.
12. Dividends:
In fiscal 1997, we declared quarterly dividends of $.27 per share
aggregating $22.1 million or $1.08 per share. Dividends were thereafter
suspended pending consideration by the Company of various proposals by
certain members of the Sbarro family for the going private transaction
(Note 2).
On March 13, 2000, the Board of Directors declared an $18 million
dividend to shareholders (Note 15).
13. Quarterly financial information (unaudited):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands)
Fiscal year 1999
Revenues $104,451 $81,556 $89,444 $104,013
Gross profit (a) 79,390 62,680 68,026 82,548
Net income (b) 6,912 6,234 7,563 8,814
========== ========== ========= ==========
Fiscal year 1998
Revenues $101,883 $78,844 $85,907 $108,598
Gross profit (a) 77,463 60,142 65,035 82,322
Net income (b) 7,138 5,107 7,081 15,008
===== ===== ===== ======
</TABLE>
(a) Gross profit represents the difference between restaurant sales and
the cost of food and paper products.
(b) See Notes 8 and 11 for information regarding unusual charges.
F-25
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Summarized condensed financial information:
The following tables present condensed summary financial information
for Sbarro's subsidiaries that guarantee the parent company's
obligations under the Senior Notes and bank credit agreement and
exclude the parent company and non-guarantor subsidiaries. The
non-guaranteeing subsidiaries represent less than 3% of consolidated
pre-tax income and assets on an individual and combined basis. Each of
the guaranteeing subsidiaries is our direct or indirect wholly owned
subsidiary and each has fully and unconditionally guaranteed the Senior
Notes and the bank credit agreement on a joint and several basis. We
have determined that presenting separate financial statements and other
disclosures concerning each guaranteeing subsidiary is not material to
investors. As described in Note 2, we have not completed final purchase
price allocations. Accordingly, the condensed summary guarantor
subsidiary financial information presented below does not give effect
to any final purchase price allocations.
Condensed Summary Guarantor Subsidiaries Financial Information
Balance Sheet Data
January 2, 2000 January 3, 1999
--------------- ---------------
(In thousands)
Current assets............... $ 6,805 $ 7,623
Intercompany receivables..... 172,744 147,903
---------------- ---------------------
Total current assets..... 179,549 155,526
Property and equipment, net.. 82,214 80,787
Other assets, net............ 707 573
--------------------- ---------------------
$ 262,470 $ 236,886
================ =============
Current liabilities.......... $ 579 $ 453
Intercompany payables-
- long term............... 19,897 19,909
Shareholders' equity......... 241,994 216,524
--------------------- ---------------------
$ 262,470 $ 236,886
============= =============
F-26
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Summarized condensed financial information (continued):
Income Statement Data
For the Fiscal Years Ended
January 2, 2000 January 3, 1999 December 28, 1997
------------- ------------- -----------------
(In thousands)
Revenues.................... $ 189,321 $ 187,690 $ 178,758
============= ============= ================
Gross profit(a)............. $ 149,428 $ 146,376 $ 140,554
============= ============= ================
Income before cumulative
effect of change in
method of accounting(b)... $ 25,470 $ 26,935 $ 25,663
============= ============= ================
Net income(b)............... $ 25,470 $ 26,935 $ 25,663
============= ============= ================
(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 the
change in accounting principles pertained to the guaranteeing subsidiaries (Note
1).
15. Subsequent events:
On March 3, 2000, a 100% wholly owned subsidiary of Sbarro obtained a
8.4%, ten year, $16,000,000 mortgage loan that is collateralized by a
building which is owned by one of the guaranteeing subsidiaries of our
Senior Notes issued in connection with the going private transaction.
The loan is being paid based on a thirty year amortization schedule.
On March 13, 2000, the Board of Directors declared an $18 million
dividend to shareholders and granted our Chairman of the Board and
President a $2.0 million, 6.45%, two year loan.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Sbarro, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Sbarro, Inc. and
subsidiaries, included in this filing and have issued our report thereon dated
March 13, 2000. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The accompanying schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
New York, New York
March 13, 2000
S-1
<PAGE>
SCHEDULE II
SBARRO, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(In thousands)
FOR THE THREE YEARS ENDED
<S> <C> <C> <C> <C> <C>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------ - -------- -------------- -------- --------
ADDITIONS
Balance Charged Charged to
at to Other Balance at
Beginning Costs and Accounts Deductions End of
Description of Period Expenses Describe Describe Period
January 2, 2000:
Allowance for doubtful
accounts receivable (1) $38 $381 $419
Accumulated amortization of
Canadian development rights (5) 493 13 506
Accumulated amortization of
purchased leasehold rights (5) 181 86 267
---- ---- -----
$712 $ 480 $1,192
===== ======= =======
January 3, 1999:
Allowance for doubtful
accounts receivable (1) $38 $38
Accumulated amortization
of deferred charges (3) 1,269 (1,269) (3)
Accumulated amortization of
Canadian development rights (5) 481 12 493
Accumulated amortization of
purchased leasehold rights (5) 96 85 181
--- ----- ----------- ------
$1,884 $97 $ (1,269) $712
====== ==== ========== ====
December 28, 1997
Allowance for doubtful
accounts receivable (1) $43 ($5) (2) $38
Accumulated amortization
of deferred charges (3) 1,436 $1,495 (1,662) (4) 1,269
Accumulated amortization of
Canadian development rights (5) 424 57 481
Accumulated amortization of
purchased leasehold rights (5) 943 213 (1,060) (4) 96
--- ------- --------- --------
$2,846 $1,765 $(2,727) $1,884
====== ====== ======== ======
</TABLE>
(1) Included in accounts receivable
(2) Write off of uncollectible accounts
(3) Amount included in cumulative effect of accounting change for start-up costs
(4) Write-off of fully amortized deferred charges (5) Included in other assets
S-2
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
*2.01 Agreement and Plan of Merger dated as of January 19, 1999
among the Company, Sbarro Merger LLC, a New York limited
liability company, 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.
(Exhibit 2 to the Company Current Report on Form 8-K dated
(date of earliest event reported) January 19, 1999, File No.
1-8881)
*3.01(a) Restated Certificate of Incorporation of the Company as
filed with the Department of State of the State of New
York on March 29, 1985. (Exhibit 3.01 to the Company's
Registration Statement on Form S-1, File No. 2-96807)
* 3.01(b) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on April 3, 1989. (Exhibit
3.01(b) to the Company's Annual Report on Form 10-K for the
year ended January 1, 1989, File No. 1-8881)
* 3.01(c) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on May 31, 1989. (Exhibit 4.01
to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 23, 1989, File No. 1-8881)
* 3.01(d) Certificate of Amendment to the Company's Restated
Certificate of Incorporation as filed with the Department of
State of the State of New York on June 1, 1990. (Exhibit 4.01
to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 22, 1990, File No. 1-8881)
* 3.02 By-Laws of the Company, as amended. (Exhibit 3.1 to the
Company's Registration Statement on Form S-4, File No.
333-90817)
*4.01 Indenture dated as of September, 28, 1999 among the Company,
the Restricted Subsidiaries of the Company named therein, as
guarantors, and Firstar Bank, N.A., including the form of 11%
Senior Notes of the Company to be issued upon consummation of
the Exchange Offer and the form of Senior Guarantees of the
Guarantors. (Exhibit 4.1 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) September 23,
1999, File No. 1-8881)
*4.02 Credit Agreement dated as of September 23, 1999 among
the Company, European American Bank, as agent, and
the Lenders party thereto (Exhibit 4.2 to the
Company's Current Report on Form 8-K dated (date of
earliest event reported) September 23, 1999, File No.
1-8881)
*10.01 Commack, New York Corporate Headquarters Sublease.
(Exhibit 10.04 to the Company's Registration
Statement on Form S-1, File No. 2-9680
+ *10.02 The Company's Performance Incentive Plan. (Exhibit A to
the Company's Proxy Statement dated April 29, 1997,
1997, File No. 1-8881)
+ *10.03 Consulting Agreement (including option) dated
June 3, 1985 between the Company and Bernard
Zimmerman & Company, Inc. (Exhibit 10.04 to the
Company's Annual Report on Form 10-K for the year
ended January 1, 1989, File No. 1-8881)
+ *10.04 Form of Indemnification Agreement between the Company and
each of its directors and officers. (Exhibit
10.04 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1989, File No. 1-8881)
*10.05 Registration Rights Agreement dated as of September 28,
1999 among the Company, the Guarantors named
therein and Bear, Stearns & Co. Inc. (Exhibit 10.1 to the
Company's Current Report on Form 8-K dated (date of
earliest event reported) September 23, 1999, File No. 1-8881)
*10.06 Tax Payment Agreement dated as of September 28, 1999
among the Company, 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
(Exhibit 10.6 to t he Company's Registration
Statement on Form S-4, File No. 333-90817.
*12.01 Statement of computation of earnings to fixed charges
(Exhibit 12.1 to Amendment No. 2 to the Company's
Registration Statement on Form S-4, file No. 333-90817).
21.01 List of subsidiaries.
27.01 Financial Data Schedule.
- -----------------------------
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.
<PAGE>
EXHIBIT 21.01
NAME OF SUBSIDIARY STATE OF PERCENTAGE
(1)(2) INCORPORATION OWNERSHIP
Sbarro of Virginia, Inc. Virginia 100
Sbarro America, Inc. New York 100
Sbarro's of Texas, Inc. Texas 49 (3)
Italian Food Franchising,
Inc. New York 100
Corest Management, Inc. New York 100
Franrest Management, Inc. New York 100
Larkfield Equipment Corp. New York 100
Sbarro of Roosevelt Field
Inc. New York 100
Melville Advertising
Agency, Inc. New York 100
401 Broadhollow Realty Corp. New York 100
(1) Excludes subsidiaries which, if considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary (within the
meaning of Rule 1-02(v) of Regulation S-X) as of the end of the fiscal
year covered by this report.
(2) Indentation indicates the direct parent of an indirect subsidiary.
(3) Sbarro America, Inc. beneficially owns 100% of the outstanding shares of the
indicated subsidiary.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000766004
<NAME> Sbarro, Inc.
<MULTIPLIER> 1000
<CURRENCY> usd
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Jan-02-2000
<PERIOD-START> Jan-04-1999
<PERIOD-END> Jan-02-2000
<EXCHANGE-RATE> 1
<CASH> 33812
<SECURITIES> 0
<RECEIVABLES> 4786
<ALLOWANCES> 419
<INVENTORY> 3686
<CURRENT-ASSETS> 43770
<PP&E> 320926
<DEPRECIATION> 183694
<TOTAL-ASSETS> 417833
<CURRENT-LIABILITIES> 46314
<BONDS> 251310
0
0
<COMMON> 71
<OTHER-SE> 110209
<TOTAL-LIABILITY-AND-EQUITY> 417833
<SALES> 366630
<TOTAL-REVENUES> 379464
<CGS> 73986
<TOTAL-COSTS> 171160
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7948
<INCOME-PRETAX> 48845
<INCOME-TAX> 19322
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29523
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
