================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended April 23, 2000 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 (I.R.S. Employer I.D. No.)
incorporation or organization)
401 Broad Hollow Road, Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 715-4100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The Company has been required to file reports since April 24, 2000 but has been
required to or has been voluntarily filing reports for more than the past 12
months.
The number of shares of Common Stock of the registrant outstanding as of June 1,
2000 was 7,064,328.
<PAGE>
--------------------------------------------------------------------------------
SBARRO, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGES
Consolidated Financial Statements:
Balance Sheets - April 23, 2000 (unaudited) and
January 2, 2000. . . . . . . . . . . . . . . . . . . . . . . . 3-4
Statements of Operations (unaudited) - Sixteen Weeks
ended April 23, 2000 and April 25, 1999 . . . . . . . . . . . . 5
Statements of Cash Flows (unaudited) - Sixteen Weeks
ended April 23, 2000 and April 25, 1999 . . . . . . . . . . . 6-7
Notes to Unaudited Consolidated Financial Statements
- April 23, 2000 . . . . . . . . . . . . . . . . . . . . . . 8-20
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . 21-27
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .28
-----------------
Pg. 2
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(In thousands except per share data)
April 23, 2000 January 2, 2000
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $15,569 $33,514
Restricted cash for untendered shares (Note 2) 220 298
Receivables; net of allowance for doubtful
accounts of $292 and $419, respectively
Franchisees 1,245 1,429
Taxes 1,924 -
Other 3,064 2,938
--------------- --------------
6,233 4,367
Inventories 3,079 3,686
Prepaid expenses 3,593 1,905
--------------- -------------
Total current assets 28,694 43,770
Property and equipment, net 137,012 137,232
Other assets:
Excess of purchase price over the cost
of net assets acquired, net of
accumulated amortization of
$4,312 and $2,000, respectively (Note 2) 218,442 220,681
Deferred financing costs, net of
accumulated amortization of $601
and $277, respectively (Note 3) 9,229 9,553
Loan receivable from officer (Note 4) 2,000 -
Other assets 6,647 6,597
----------- -----------
$402,024 $417,833
=========== ===========
</TABLE>
(continued)
Pg. 3
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands except per share data)
April 23, 2000 January 2, 2000
(unaudited)
Current liabilities:
<S> <C> <C>
Amounts due for untendered shares(Note 2) $220 $298
Accounts payable 5,763 9,673
Accrued expenses 28,418 32,409
Accrued interest payable(Note 3) 3,195 7,480
Current portion of mortgage payable 123 -
Income taxes payable(Note 4) - 754
------------ ----------
Total current liabilities 37,719 50,614
Deferred income taxes(Note 5) - 5,629
Long-term debt, net of original issue
discount(Note 3) 251,427 251,310
Mortgage payable, net of current
portion (Note 3) 15,877 -
Shareholders' equity (Note 2):
Preferred stock, $1 par value; authorized
1,000,000 shares; none issued - -
Common stock, $.01 par value; authorized
40,000,000 shares; issued and outstanding
7,064,328 shares at April 23, 2000 and
January 2, 2000 71 71
Additional paid-in capital 10 10
Retained earnings 96,920 110,199
----------- ----------
97,001 110,280
----------- ----------
$402,024 $417,833
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
Pg. 4
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the sixteen weeks ended:
April 23, 2000 April 25, 1999
Revenues:
<S> <C> <C>
Restaurant sales $104,299 $100,354
Franchise related income 2,796 2,506
Interest income 455 1,591
----------- -------------
Total revenues 107,550 104,451
----------- -------------
Costs and expenses:
Cost of food and paper products 20,334 20,964
Restaurant operating expenses:
Payroll and other employee benefits 29,576 28,103
Occupancy and other 33,472 31,868
Depreciation and amortization 9,410 6,950
General and administrative 7,646 6,912
Interest expense (Note 3) 9,330 -
Other operating income (1,853) (1,495)
---------- -------------
Total costs and expenses 107,915 93,302
---------- -------------
Income (loss) before income taxes (365) 11,149
Income taxes (benefit) (Notes 4 and 5) (5,559) 4,237
---------- --------------
Net income $ 5,194 $ 6,912
============= ==============
</TABLE>
Pg. 5
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the sixteen weeks ended:
April 23, 2000 April 25, 1999
Operating activities:
<S> <C> <C>
Net income $ 5,194 $6,912
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,867 6,967
Provision for deferred income taxes (5,629) (176)
Changes in operating assets and liabilities:
Increase in receivables (1,602) (194)
Decrease in inventories 607 237
Increase in prepaid expenses (1,688) (2,577)
Decrease (increase) in other assets 182 (135)
Decrease in accounts payable and accrued
expenses (7,524) (6,124)
Decrease in accrued interest payable (4,285) -
Decrease in income taxes payable (754) (4,109)
--------------- -------------
Net cash (used in) provided by operating
activities (5,632) 801
-------------- -------------
Investing activities:
Purchases of property and equipment (7,453) (7,520)
--------------- ------------
Net cash used in investing activities (7,453) (7,520)
---------------- --------------
</TABLE>
(continued)
Pg. 6
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the sixteen weeks ended:
April 23, 2000 April 25, 1999
Financing activities:
<S> <C> <C>
Proceeds from mortgage 16,000 -
Cost of mortgage (387) -
Loan to officer (2,000) -
Proceeds from exercise of stock options - 47
Distributions to shareholders (18,473) -
------------- ------------
Net cash (used in) provided by financing activities (4,860) 47
--------------------- -----------
Decrease in cash and cash equivalents (17,945) (6,672)
Cash and cash equivalents at beginning of period 33,514 154,909
-------------- -------------
Cash and cash equivalents at end of period $15,569 $148,237
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $2,627 $8,432
============ ==============
Cash paid during the period for interest $13,166 $ -
============= ==============
</TABLE>
See notes to unaudited consolidated financial statements
Pg. 7
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. Basis of presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and
Regulation S-X related to interim period financial statements and,
therefore, do not include all information and footnotes required by
generally accepted accounting principles. However, in the opinion of
Sbarro's management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair presentation
of the consolidated financial position of Sbarro and its subsidiaries
at April 23, 2000 and our consolidated results of operations and cash
flows for the sixteen weeks ended April 23, 2000 and April 25, 1999
have been included. The results of operations for interim periods are
not necessarily indicative of the results that may be expected for the
entire year. Reference should be made to the annual financial
statements, including footnotes thereto, included in our Annual Report
on Form 10-K for the fiscal year ended January 2, 2000.
Certain items in the fiscal 1999 financial statements have been
reclassified to conform to the fiscal 2000 presentation.
2. 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 "going private" 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.
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
$255.0 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.
Pg. 8
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
2. Going Private Transaction (continued):
As of April 23, 2000, there was $0.2 million remaining on deposit with
a third party paying agent for untendered shares to be redeemed as part
of the merger consideration. Such amounts are shown as restricted cash
and amounts due for untendered shares in the balance sheet. Should any
shares remain untendered after one year from September 28, 1999, the
related funds are returned to Sbarro to be held until claimed or
escheated to the appropriate juristrictions.
In accordance with Emerging Issues Task Force Issue 88-16, "Basis in
Leveraged Buyout Transactions", the acquisition of all the outstanding
shares of common stock not owned by the Sbarro family and all
outstanding stock options have been accounted for under the purchase
method of accounting. As a result, the remaining shares of common stock
owned by the Sbarro family are presented in shareholders' equity at
their original basis in the accompanying consolidated balance sheet.
The final purchase price allocations have not been completed and are
subject to adjustment based on fair market appraisals and other fair
market value estimates as of the date of the Merger. The excess of
purchase price over the cost of assets acquired is being amortized on a
straight line basis over an estimated useful life of 30 years.
Summarized below are the unaudited pro forma results of our operations
for the sixteen weeks ended April 25, 1999 as if the merger and related
financing had taken place as of the beginning of the 1999 period
presented. Adjustments have been made for the amortization of the
excess of the purchase price over the cost basis of net assets
acquired, interest expense and related changes in income tax expense
arising from our election to be taxed under Subchapter S of the
Internal Revenue Code (See Note 5).
Sixteen weeks ended
April 25, 1999
Pro Forma:
Revenues $102,860
=========
Loss before income taxes $(1,922)
===============
Net loss $(2,077)
================
These pro forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
merger and related financing taken place at the beginning of the 1999
period presented.
3. 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").
Pg. 9
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
3. Long-term debt (continued):
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 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 for us and our 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 offered 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 were to be
registered under the Securities Act of 1933, as amended. The exchange
was completed in April 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) We entered into a five year, $30 million unsecured senior revolving
bank credit facility under a Bank Credit Agreement dated as of
September 23, 1999 (the "Credit Agreement") in connection with the
going private transaction. The 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
April 23, 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.
Pg. 10
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
3. Long-term debt (continued):
At our option, the interest rates applicable to loans under the bank
credit agreement are at either (a) the bank's prime rate (9.50% at June
1, 2000) plus a margin ranging from zero to 0.75% (the margin at May
31, 2000 was .25%) or (b) reserve adjusted LIBOR (6.61% at June 1,
2000) plus a margin ranging from 1.5% to 2.5% (the margin at May 31,
2000 was 2.00%). In each case, the margin depends upon the ratio of our
senior debt (as defined) to our 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 varies 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 as of May 31, 2000 was .35% per year.
The bank credit agreement contains various covenants for us and our
guaranteeing subsidiaries, including, but not limited to, restrictions
on the payment of dividends, 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 April 23, 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. The accretion and
amortization will result in an increase in reported interest expense
above amounts payable in cash.
(d) In March 2000, one of our guarantor subsidiaries obtained a $16.0
million 8.4% loan due in 2010 secured by a mortgage on our corporate
headquarters building. The loan is payable in monthly installments of
principal and interest of $0.1 million. The mortgage agreement contains
various covenants including a requirement that the guarantor subsidiary
maintain a minimum ratio of EBITDA to annual debt service of at least
1.2 to 1.0.
Pg. 11
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
4. Related party transactions:
(a) On March 13, 2000, our board of directors authorized us to lend our
Chairman, President and Chief Executive Officer $2.0 million under a
note that is payable on April 4, 2002. The note bears interest at the
rate of 6.46% payable annually.
(b) In April 2000, we renewed the lease for an administrative office
building in which we are the sole tenant on the same terms and
conditions as our present lease. The annual rent payable under the
lease is $0.3 million per 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. The building is leased from Sbarro Enterprises, L.P. whose
limited partners are Mario, Joseph, Anthony and Carmela Sbarro.
(c) In connection with the going private transaction and the related
financing, 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.
5. Income taxes:
In March 2000 we 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 January 3, 2000. With certain limited exceptions, we will not
pay federal, state and local income taxes for periods for which we are
treated as an S corporation.
Pg. 12
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
5. Income taxes (continued):
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 on their respective shares of our taxable income,
whether or not it is distributed to them. For the sixteen weeks ended
April 23, 2000, we made tax distributions of $0.5 million in accordance
with the tax payment distribution agreement. (See Note 4).
In accordance with SFAS No. 109 "Accounting for Income Taxes", we
reversed our deferred tax accruals upon our conversion to S corporation
status. This resulted in a credit to income taxes of $5.6 million.
6. Comprehensive income:
The Company's operations did not give rise to any items includible in
comprehensive income which were not already included in net income for
either of the sixteen week periods ended April 23, 2000 and April 25,
1999.
7. 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, 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
Pg. 13
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
7. Contingencies (continued):
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.
Plaintiffs' counsel has stated that he is in contact with the
plaintiffs' 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.
8. Guarantor and non-guarantor financial statements:
Certain subsidiaries have guaranteed amounts outstanding under the
Senior Notes and Credit Agreement such debt arrangements. 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. As
described in Note 2, we have not completed final purchase price
allocations. Accordingly, the condensed summary financial statements
presented below does not give effect to any final purchase price
allocations.
The following condensed consolidating financial information presents:
(1) Condensed consolidating statements of operations and cash
flows for the fiscal quarters ended April 23, 2000 and April
25, 1999 and balance sheets as of April 23, 2000 and January
2, 2000 of (a) Sbarro, Inc., the parent, (b) the guarantor
subsidiaries as a group, (c) the nonguarantor subsidiaries as
a group and (d) the Company on a consolidated basis, and
Pg. 14
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
(2) Elimination entries necessary to consolidate Sbarro, Inc., the parent, with
the guarantor and nonguarantor subsidiaries.
The principal elimination entries eliminate intercompany balances and
transactions.
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the Sixteen Weeks Ended April 23, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $46,196 $52,823 $5,280 $ - $104,299
Franchise related income 2,796 - - - 2,796
Intercompany charges - 4,682 - (4,682) -
Interest income 972 - - (517) 455
------- ----------- ----------- --------- --------------
Total revenues 49,964 57,505 5,280 (5,199) 107,550
------ ------ ------- --------- --------
Costs and expenses:
Cost of food and paper
products 8,237 10,660 1,437 - 20,334
Restaurant operating
expenses:
Payroll and other
employee benefits 12,190 15,396 1,990 - 29,576
Occupancy and other 16,634 15,429 1,409 - 33,472
Depreciation and
amortization 5,461 3,728 221 - 9,410
General and administrative 2,702 4,611 333 - 7,646
Intercompany charges 4,682 - - (4,682) -
Interest expense 9,194 105 517 (517) 9,330
Other operating income (1,176) (677) - - 1,853
-------- --------- --------- --------- ---------
Total costs and expenses 57,924 49,252 5,938 (5,199) 107,915
------- ------- ----- ----- -------
Income (loss) before
income taxes (7,960) 8,253 (658) - (365)
Income taxes (benefit) (5,815) 278 (22) - (5,559)
----------- ------- ------ -------- ---------
Net income (loss) $(2,145) $7,975 $(636) $ - $5,194
======== ====== ====== ======== ========
</TABLE>
Pg. 15
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
Condensed Consolidating Statement of Operations
For the Sixteen Weeks Ended April 25, 1999
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $44,432 $52,158 $3,764 $ - $100,354
Franchise related income 2,506 - - - 2,506
Intercompany charges - 5,495 - (5,495) -
Interest income 1,591 - - - 1,591
------- ---------- --------- ---------- ---------
Total revenues 48,529 57,653 3,764 (5,495) 104,451
Costs and expenses:
Cost of food and paper
products 8,564 11,432 968 - 20,964
Restaurant operating
expenses:
Payroll and other
employee benefits 11,496 15,313 1,294 - 28,103
Occupancy and other 15,075 15,779 1,014 - 31,868
Depreciation and
amortization 3,287 3,485 178 - 6,950
General and administrative 3,132 3,802 155 (177) 6,912
Intercompany charges 5,495 - - (5,495) -
Other operating income (1,397) (359) 84 177 (1,495)
-------- ------- ------- -------- -------
Total costs and expenses 45,652 49,452 3,693 (5,495) 93,302
------- ------- ------ ------- -------
Income before
income taxes 2,877 8,201 71 - 11,149
Income taxes 1,093 3,116 28 - 4,237
----- ----- ----- -------- -------
Net income $1,784 $5,085 $43 $ - $6,912
====== ====== === ======== ======
</TABLE>
Pg. 16
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
Condensed Consolidating Balance Sheet
As of April 23, 2000
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $11,384 $3,669 $516 $ - $15,569
Restricted cash for untendered
shares 220 - - - 220
Receivables 5,041 1,043 149 - 6,233
Inventories 1,350 1,568 161 - 3,079
Prepaid expenses and other 2,674 733 186 - 3,593
------- ------ ------ ------ ------
Total current assets 20,669 7,013 1,012 - 28,694
Intercompany receivables - 179,133 - (179,133) -
Investment in subsidiaries 66,237 - - (66,237) -
Net property, plant and
equipment 46,537 81,793 8,682 - 137,012
Intercompany receivables
- long term 3,389 - - (3,389) -
Goodwill and other assets 248,099 1,048 915 (13,744) 236,318
-------- ---------- --------- ----------- --------
Total assets $384,931 $268,987 $10,609 $(262,503) $402,024
======== ======== ======= ========== ========
Amounts due for untendered
shares $220 $ - $ - $ - $220
Accounts payable and accrued
expenses 30,779 566 2,836 - 34,181
Accrued interest 3,195 - - - 3,195
Current portion of mortgage
payable - 123 - - 123
---------- --- --------- -------- --------
Total current liabilities 34,194 689 2,836 - 37,719
Intercompany payables 179,133 - 11,974 (191,107) -
Long-term debt, net of
current portion 251,427 15,877 - - 267,304
Intercompany payables -
long term - 3,389 - (3,389) -
Common stock 71 - - - 71
Additional paid-in capital 10 66,237 1,770 (68,007) 10
Retained earnings (deficit) (79,904) 182,795 (5,971) - 96,920
-------- ------- ------- ------------- ------
Total stockholders' equity
(deficiency) (79,823) 249,032 (4,201) (68,007) 97,001
-------- ------- ----- -------- ------
Total liabilities and
stockholders equity $384,931 $268,987 $10,609 $(262,503) $402,024
======== ======== ======= ========== ========
</TABLE>
Pg. 17
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
Condensed Consolidating Balance Sheet
As of January 2, 2000
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $27,853 $4,391 $1,270 $ - $33,514
Restricted cash for untendered
shares 298 - - - 298
Receivables 3,485 829 53 - 4,367
Inventories 1,594 1,963 129 - 3,686
Prepaid expenses and other 2,234 (378) 49 - 1,905
------- ----- ------- ----- -------
Total current assets 35,464 6,805 1,501 - 43,770
Intercompany receivables - 172,769 - (172,769) -
Investment in subsidiaries 66,237 - - (66,237) -
Net property, plant and
equipment 47,568 82,215 7,449 - 137,232
Intercompany receivables
- long term 19,897 - - (19,897) -
Goodwill and other assets 247,180 706 1,433 (12,488) 236,831
--------- ----------- ------- ----------- ---------
Total assets $416,346 $262,495 $10,383 $(271,391) $417,833
======== ======== ======= ========== ========
Amounts due for untendered
shares $298 $ - $ - $ - $298
Accounts payable and accrued
expenses 38,587 759 2,736 - 42,082
Accrued interest 7,480 - - - 7,480
Income taxes 986 (180) (52) - 754
------- ----- ---- ------- -------
Total current liabilities 47,351 579 2,684 - 50,614
Intercompany payables 172,769 - 10,718 (183,487) -
Long-term debt, net of
current portion 251,310 - - - 251,310
Deferred income taxes 5,629 - - - 5,629
Intercompany payables
- long term - 19,897 - (19,897) -
Common stock 71 - - - 71
Additional paid-in capital 10 66,237 1,770 (68,007) 10
Retained earnings (deficit) (60,794) 175,782 (4,789) - 110,199
-------- ------- ------- ------------- -------
Total stockholders' equity
(deficiency) (60,713) 242,019 (3,019) (68,007) 110,280
-------- ------- ------- -------- -------
Total liabilities and
stockholders equity $416,346 $262,495 $10,383 $(271,391) $417,833
======== ======== ======= ========== ========
</TABLE>
Pg. 18
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
Condensed Consolidating Statement of Cash Flows
For the Sixteen Weeks ended April 23, 2000
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Operating activities:
<S> <C> <C> <C> <C> <C>
Net income (loss) $(2,145) $7,975 $(636) $ - $5,194
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 5,913 3,716 238 - 9,867
Deferred taxes (5,629) - - - (5,629)
Changes in operating assets
and liabilities:
Increase in receivables (1,293) (213) (96) - (1,602)
Decrease (increase) in inventories244 396 (33) - 607
Increase in prepaid expenses (441) (1,110) (137) - (1,688)
Increase (decrease) in
other assets (967) (64) (43) 1,256 182
(Decrease) increase in accounts
payable and accrued expenses(7,704) 78 102 - (7,524)
Decrease in accrued
interest payable (4,285) - - - (4,285)
(Decrease) increase in
income taxes payable (986) 180 52 - (754)
------- ------- ------ -------- -------
Net cash (used in) provided by
operating activities (17,293) 10,958 (553) 1,256 (5,632)
-------- ------ ------- ----- -------
Investing activities:
Purchases of property and
equipment (2,462) (3,534) (1,457) - (7,453)
------- ------- ------- ---------- -------
Net cash used in investing
activities (2,462) (3,534) (1,457) - (7,453)
------- ------- ------- ---------- -------
Financing activities:
Proceeds from mortgage - 16,000 - - 16,000
Cost of mortgage - (387) - - (387)
Loan to executive officer (2,000) - - - (2,000)
Cash dividends paid (18,473) - - - (18,473)
Intercompany balances 23,759 (23,759) 1,256 (1,256) -
-------- -------- ----- ------- ------------
Net cash (used in) provided
by financing activities 3,286 (8,146) 1,256 (1,256) (4,860)
------- --------- ----- ------- -------
Decrease in cash and cash
equivalents (16,469) (722) (754) - (17,945)
Cash and cash equivalents
at beginning of period 27,853 4,391 1,270 - 33,514
------- ------ ----- -------- -------
Cash and cash equivalents
at end of period $11,384 $3,669 $516 $ - $15,569
======= ====== ==== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period
for income taxes $2,388 $239 $ - $ - $2,627
======= ==== ======== ========= ================
Cash paid during the period
for interest $13,033 $105 $28 $ - $13,166
======= ==== ===== ========== =======
</TABLE>
Pg. 19
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
Condensed Consolidating Statement of Cash Flows
For the Sixteen Weeks ended April 25, 1999
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Operating activities:
<S> <C> <C> <C> <C> <C>
Net income $1,784 $5,085 $43 $ - $6,912
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 3,037 3,735 195 - 6,967
Provision for deferred income
taxes (176) - - - (176)
Changes in operating assets
and liabilities:
(Increase) decrease in
receivables (147) (49) 2 - (194)
Decrease in inventories 58 154 25 - 237
Increase in prepaid expenses (1,439) (1,107) (31) - (2,577)
(Increase) decrease in
other assets (69) 41 (3) (104) (135)
Decrease in accounts payable
and accrued expenses (5,564) (540) (20) - (6,124)
Decrease in income taxes
payable (4,099) (11) 1 - (4,109)
------- ------- ----- ------- -------
Net cash (used in) provided by
operating activities (6,615) 7,308 212 (104) 801
------- ----- --- ----- -------
Investing activities:
Purchases of property and
equipment (5,365) (1,965) (190) - (7,520)
------- ------- ----- ------- -------
Net cash used in investing
activities (5,365) (1,965) (190) - (7,520)
------- ------- ----- ------- -------
Financing activities:
Proceeds from exercise of
stock options 47 - - - 47
Intercompany balances 8,448 (8,448) (104) 104 -
----- ------- ----- --- -------
Net cash (used in) provided
by financing activities 8,495 (8,448) (104) 104 47
----- ------- ----- --- --
Decrease in cash and cash
equivalents (3,485) (3,105) (82) - (6,672)
Cash and cash equivalents
at beginning of period 148,134 6,268 507 - 154,909
------- ----- --- ------- -------
Cash and cash equivalents
at end of period $144,649 $3,163 $425 $ - $148,237
======== ====== ==== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period
for income taxes $7,911 $521 $ - $ - $8,432
====== ==== ====== ====== ======
</TABLE>
Pg. 20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Our fiscal year ends on the Sunday nearest to December 31. Fiscal 2000 and
fiscal 1999 each contain 52 weeks.
The following table provides information concerning the number of Company-owned
and franchised restaurants in operation during each indicated period:
<TABLE>
<CAPTION>
16 Weeks 16 Weeks
Ended Ended Fiscal Year
04/23/00 04/25/99 1999 1998
-------- -------- ---- ----
Company-owned restaurants (1):
<S> <C> <C> <C> <C>
Opened during period 5 7 24 25
Acquired from (sold to)
franchisees during period-net - - (1) 1
Closed during period (4) (2) (9) (20)
------ ------ ------ ------
Open at end of period 639 635 638 624
Franchised restaurants:
Opened during period 6 13 49 43
Purchased from (sold to)
Company during period-net - - 1 (1)
Closed or terminated during period (7) (6) (32) (13)
------ ------ ----- -----
Open at end of period 285 275 286 268
All restaurants:
Opened during period 11 20 73 68
Closed or terminated during period (11) (8) (41) (33)
----- ------ ----- -----
Open at end of period 924 904 924 892
Kiosks (all franchised) open at
end of period 4 8 4 8
</TABLE>
(1) Excludes 28, 20, 26 and 19 new concept units as of April 23, 2000, April 16,
1999, fiscal 1999 and fiscal 1998, respectively.
Pg. 21
<PAGE>
Our business is subject to seasonal fluctuations, and the effect 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 operating 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.
The going private transaction and certain other transactions described in Notes
2, 3, 4 and 5 of the Notes to the Consolidated Financial Statements have
affected the comparability of the interest income, depreciation and
amortization, interest expense and income tax line items in our consolidated
statements of operations for the sixteen weeks ended April 23, 2000 as compared
to the comparable period in fiscal 1999 (see below).
Our consolidated EBITDA for the sixteen weeks ended April 23, 2000 was $17.9
million and our EBITDA margin was 16.7%, compared to $16.5 million and 16.0%,
respectively, for the sixteen weeks ended April 25, 1999. EBITDA represents
earnings before cumulative effect of change in accounting method, interest
income, interest expense, taxes, depreciation and amortization. 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.
Restaurant sales from Sbarro-owned units and consolidated new concept joint
venture units increased 3.9% to $104.3 million for the sixteen weeks ended April
23, 2000 from $100.4 million in the sixteen weeks ended April 25, 1999. Sales
from new concept units contributed $1.5 million of the total increase. The
increase resulted primarily from a higher number of units in operation in the
current fiscal year than the comparable period in 1999 and selective menu price
increases of approximately 2.8% at Sbarro units which became effective in
September 1999. Comparable Sbarro unit sales increased .5% in the first sixteen
weeks of fiscal 2000 compared to the sixteen week period of the 1999 fiscal
year. Comparable Sbarro unit sales were negatively affected by the timing of the
Easter week holiday which occurred in the second fiscal quarter of 2000 and the
first fiscal quarter of 1999. Comparable restaurant sales are made up of sales
at locations that were open during the entire current and prior fiscal period.
Franchise related income increased 11.6% to $2.8 million for the sixteen weeks
ended April 23, 2000 from $2.5 million in the sixteen week period ended April
25, 1999. The increases resulted primarily from greater continuing royalties due
to a higher number of franchise units in operation in the current sixteen week
period than in the comparable 1999 period and higher area develop-
Pg. 22
<PAGE>
ment and initial franchise fees in first quarter of fiscal 2000 than the first
quarter of fiscal 1999. During the quarter, we entered into area development
agreements in specific domestic and international venues and markets with two
major food service operators. We believe these agreements will increase the rate
of growth in our franchise operations.
Interest income was approximately $0.5 million for the sixteen weeks ended April
23, 2000 compared to $1.6 million in the sixteen week period ended April 25,
1999. As discussed elsewhere in this report, we used substantially all of our
available cash in order to fund the going private transaction. Therefore, we had
a substantial reduction in our interest income for the first quarter of fiscal
2000. We will not realize the level of interest income as we have in the past
unless and until we rebuild our cash position.
Cost of food and paper products as a percentage of restaurant sales improved to
19.5% for the sixteen weeks ended April 23, 2000 compared to 20.9% for the
comparable 1999 fiscal period. This improvement was primarily due to lower
average cheese prices during the first quarter of fiscal 2000 and the impact of
the menu price increases described above.
Restaurant operating expenses - payroll and other employee benefits increased to
28.4% of restaurant sales in the sixteen weeks ended April 23, 2000 from 28.0%
of restaurant sales in the sixteen weeks ended April 25, 1999. 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.
Restaurant operating expenses - occupancy and other expenses increased to 32.1%
of restaurant sales in the sixteen weeks ended April 23, 2000 from 31.8% in the
sixteen weeks ended April 25, 1999. The increase was attributable principally to
increases in rent and other occupancy related costs.
Depreciation and amortization expense increased by $2.5 million in the sixteen
weeks ended April 23, 2000 over the sixteen week period ended April 25, 1999
primarily as a result of the amortization of the excess of the purchase price
over the cost of net assets acquired in connection with the completion of the
going private transaction on September 28, 1999.
General and administrative expenses were $7.6 million, or 7.1% of total
revenues, for the sixteen weeks ended April 23, 2000, compared to $6.9 million,
or 6.6% of total revenues, for the sixteen weeks ended April 25, 1999. The
increase was primarily due to higher payroll costs due to the tight labor
market, expanding joint venture operations, higher litigation costs and
increases in various field training and human resource functions.
Interest expense of $9.3 million in the first fiscal quarter of 2000 was
recorded for the Senior Notes, mortgage and unused credit line fees. Of this
amount, $0.4 million represented non-cash charges for the accretion of original
issue discounts and the amortization of deferred financing costs.
Other income increased by $0.4 million to $1.9 million for the first fiscal
quarter of 2000
Pg. 23
<PAGE>
primarily as a result of 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 new concept joint
ventures accounted for under the equity method of accounting.
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 January 3, 2000. As required by SFAS No. 109,
"Accounting for Income Taxes", we recognized a $5.6 million credit associated
with the reversal of our deferred tax liabilities upon conversion to S
corporation status. Under the provisions of Subchapter S, substantially all
taxes on our income are now paid by our shareholders rather than us. Our tax
expense for the first quarter of fiscal 2000 included $.07 million for taxes
owed to jurisdictions that do not recognize S corporation status or that tax
entities based on factors other than income.
Liquidity and Capital Resources
We have historically not required significant working capital to fund our
existing operations and have financed our capital expenditures and investments
in our joint ventures through cash generated from operations. Substantially all
of our cash was used to complete the going private transaction. As a result, at
April 23, 2000 we had unrestricted cash and cash equivalents of $15.6 million
and a working capital deficit of $9.0 million.
As part of the going private transaction, we issued the senior notes and entered
into a $30.0 million bank Credit Agreement. We have $27.5 million of undrawn
availability under the Credit Agreement, net of outstanding letters of credit
and guarantees of reimbursement obligations currently aggregating approximately
$2.5 million. In March and April 2000 we obtained a $16.0 million 8.4% mortgage
loan on our corporate headquarters building, distributed an $18.0 million
dividend to our shareholders, loaned $2 million to our Chairman and CEO and made
$0.5 million of tax distributions as discussed below.
Net cash used in operating activities was $5.6 million for the sixteen weeks
ended April 23, 2000 compared to $0.8 million generated during the sixteen weeks
ended April 25, 1999. Cash flow from operations decreased by $6.4 million
primarily due to the decrease in net income of $1.7 million and a decrease in
deferred taxes of $5.5 million offset by increased depreciation and amortization
of $2.9 million and a $2.2 million net decrease in operating assets and
liabilities. The net decrease in operating assets and liabilities in the
comparable sixteen week periods of 2000 and 1999 resulted principally from a
decrease in accrued interest payable of $4.3 million, a $1.4 million reduction
in accounts payable and accrued expenses as compared to the respective prior
year end balances and a $2.7 million increase in taxes receivable and decrease
in income taxes payable from the prior year period as a result of our election
of Subchapter S status in March 2000 (see below).
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 $7.5 million for the sixteen weeks ended April 23, 2000 and April
25, 1999.
Pg. 24
<PAGE>
Net cash used in financing activities was $4.9 million for the sixteen weeks
ended April 23, 2000. This primarily resulted from cash dividends of $18.0
million and tax distributions of $0.5 million (see below) to our shareholders
and a $2.0 million loan to our Chairman and CEO offset by $15.6 million of net
proceeds from a loan secured by a mortgage on our corporate headquarters.
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 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 Agreement. In addition to debt service, we expect our other
liquidity needs will relate to capital expenditures, working capital,
investments in joint ventures, distributions to shareholders as permitted under
the Indenture and Credit Agreement 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 Agreement.
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.
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. We and our shareholders will have a tax liability of
approximately 50% of our taxable income. This tax rate is higher than our
historical effective tax rate due to (i) differences in tax rates between
individual and corporate taxpayers, (ii) the timing differences previously
accounted for as deferred taxes in our financial statements (which deferred
taxes were eliminated upon our conversion to S corporation status) 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 and we made tax
distributions of $0.5 million in the sixteen weeks ended April 23, 2000.
Historically we have paid dividends on our common stock to our shareholders. On
March 13, 2000 our Board of Directors declared a dividend of $18.0 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 and Credit Agreement.
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.
Pg. 25
<PAGE>
Forward Looking Statements
This report (and other reports and statements issued by us and our officers from
time to time) 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 our 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; our 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, 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.
Pg. 26
<PAGE>
Item 3. 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.
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.
Pg. 27
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Company during the period
covered by this report.
Pg. 28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SBARRO, INC.
Registrant
Date: June 6, 2000 By: /s/MARIO SBARRO
---------------- --------------------------------------------
Mario Sbarro
Chairman of the Board and President (Principal
Executive Officer)
Date: June 6, 2000 By: /s/ROBERT G. ROONEY
---------------- --------------------------------------------
Robert G. Rooney
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: June 6, 2000 By: /s/STEVEN B. GRAHAM
---------------- -------------------------------------------
Steven B. Graham
Vice President and Controller (Principal
Accounting Officer)
Pg. 29
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
