================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended October 8, 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
November 15, 2000 was 7,064,328.
--------------------------------------------------------------------------------
<PAGE>
SBARRO, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGES
Consolidated Financial Statements:
Balance Sheets - October 8, 2000 (unaudited)
and January 2, 2000 . . . . . . . . . . . . . . . . . . . . 3-4
Statements of Operations (unaudited) - Forty Weeks
ended October 8, 2000 and October 10, 1999 and
Twelve Weeks ended October 8, 2000
and October 10, 1999 . . . . . . . . . . . . . . . . . 5-6
Statements of Cash Flows (unaudited) - Forty weeks ended
October 8, 2000 and October 10, 1999 . . . . . . . . . . . .7-8
Notes to Unaudited Consolidated Financial Statements -
October 8, 2000 . . . . . . . . . . . . . . . . . . . . . 9-21
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . 22-29
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . .29
-----------------
Pg. 2
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(In thousands except share data)
October 8, 2000 January 2, 2000
--------------- ---------------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $18,068 $33,514
Restricted cash for untendered shares (Note 2) 188 298
Receivables; net of allowance for doubtful
accounts of $138 and $419, respectively
Franchisees 1,436 1,429
Taxes 701 -
Other 3,246 2,938
---------------- --------------
5,383 4,367
Inventories 2,989 3,686
Prepaid expenses 6,489 1,905
--------------- -------------
Total current assets 33,117 43,770
Property and equipment, net 156,896 137,232
Other assets:
Intangible assets, net of accumulated
amortization of $8,058 and $2,000,
respectively 203,729 230,234
Loan receivable from officer (Note 4) 2,000 -
Other assets,net 7,419 6,597
-------------- -------------
$403,161 $417,833
============ ===========
</TABLE>
(continued)
Pg. 3
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands except share data)
October 8, 2000 January 2, 2000
--------------- ---------------
(unaudited)
Current liabilities:
<S> <C> <C>
Amounts due for untendered shares (Note 2) $188 $298
Accounts payable 10,596 9,673
Accrued expenses 24,847 32,409
Accrued interest payable (Notes 2 and 3) 2,259 7,480
Current portion of mortgage payable 129 -
Income taxes payable (Note 5) - 754
---------------- --------------
Total current liabilities 38,019 50,614
Deferred income taxes (Note 5) - 5,629
Long-term debt, net of original issue
discount (Note 2) 251,602 251,310
Mortgage payable, net of current
portion (Note 3) 15,811 -
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 October 8, 2000 and
January 2, 2000 71 71
Additional paid-in capital 10 10
Retained earnings 97,648 110,199
-------------- ------------
97,729 110,280
------------- ------------
$403,161 $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 forty weeks ended:
October 8, 2000 October 10, 1999
Revenues:
<S> <C> <C>
Restaurant sales $270,656 $265,022
Franchise related income 9,103 6,750
-------------- -------------
Total revenues 279,759 271,772
------------- ------------
Costs and expenses:
Cost of food and paper products 53,127 54,926
Restaurant operating expenses:
Payroll and other employee benefits 75,256 72,405
Occupancy and other 84,822 81,355
Depreciation and amortization 24,110 18,026
General and administrative 19,752 17,804
Other operating income (4,023) (3,600)
-------------- --------------
Total costs and expenses 253,044 240,916
------------- ------------
Operating income 26,715 30,856
Interest (expense) income:
Interest expense (Notes 2 and 3) (23,837) (980)
Interest income 967 3,679
------------ ------------
Net interest (expense) income (22,870) 2,699
----------- -----------
Income before income taxes 3,845 33,555
(Benefit) provision for income taxes (Note 5) (5,244) 12,846
------------- --------------
Net income $9,089 $ 20,709
============ =============
</TABLE>
Pg. 5
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the twelve weeks ended:
October 8, 2000 October 10, 1999
Revenues:
<S> <C> <C>
Restaurant sales $84,992 $85,971
Franchise related income 2,522 2,418
-------------- -------------
Total revenues 87,514 88,389
-------------- -------------
Costs and expenses:
Cost of food and paper products 16,837 17,945
Restaurant operating expenses:
Payroll and other employee benefits 22,962 22,830
Occupancy and other 25,790 25,231
Depreciation and amortization 7,594 5,765
General and administrative 5,889 5,362
Other operating income (1,089) (1,021)
----------- -----------
Total costs and expenses 77,983 76,112
------------ ----------
Operating income 9,531 12,277
------------ ----------
Interest (expense) income:
Interest expense (Notes 2 and 3) (7,252) (980)
Interest income 332 1,055
------------- ---------- -
Net interest (expense) income (6,920) 75
------------ ------------
Income before income taxes 2,611 12,352
Provision for income taxes (Note 5) 165 4,789
-------------- ------------
Net income $2,446 $ 7,563
=========== ============
</TABLE>
Pg. 6
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the forty weeks ended:
October 8, 2000 October 10, 1999
Operating activities:
<S> <C> <C>
Net income $9,089 $20,709
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 25,253 18,087
Benefit for deferred income taxes (5,629) (538)
Changes in operating assets and liabilities:
Increase in receivables (873) (1,243)
Decrease in inventories 697 267
Increase in prepaid expenses (4,584) (5,060)
Decrease (increase) in other assets 827 (930)
(Decrease) increase in accounts payable
and accrued expenses (6,800) 2,595
(Decrease) increase in accrued interest
payable (5,221) 935
Decrease in income taxes payable (754) (3,880)
-------------- -------------
Net cash provided by operating
activities 12,005 30,942
--------------- ------------
Investing activities:
Purchases of property and equipment (19,364) (18,865)
------------- --------------
Net cash used in investing activities (19,364) (18,865)
------------- --------------
</TABLE>
(continued)
Pg. 7
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the forty weeks ended:
October 8, 2000 October 10, 1999
Financing activities:
<S> <C> <C>
Proceeds from long-term debt - 251,211
Cost of Merger and related financing - (411,000)
Accrued or previously paid Merger costs - 2,828
Proceeds from mortgage 16,000 -
Mortgage principal repayments (60) -
Cost of mortgage (387) -
Loan to officer (2,000) -
Proceeds from exercise of stock options - 426
Distributions to shareholders (21,640) -
------------- ------------------
Net cash used in financing activities (8,087) (156,535)
-------------- -------------
Decrease in cash and cash equivalents (15,446) (144,458)
Cash and cash equivalents at beginning of period 33,514 154,909
------------- -------------
Cash and cash equivalents at end of period $18,068 $ 10,451
============ ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $3,711 $16,743
============= =============
Cash paid during the period for interest $27,879 $ -
============ ==================
</TABLE>
See notes to unaudited consolidated financial statements
Pg. 8
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. Basis of presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and
Regulation S-X related to interim period financial statements and,
therefore, do not include all information and footnotes required by
generally accepted accounting principles. However, in the opinion of
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 October 8, 2000 and our consolidated results of operations for each
of the forty and twelve week period ended October 8, 2000 and October
10, 1999 and cash flows for the forty weeks in each of the respective
years 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. 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 sold at a price of 98.514% of par to yield 11.25%
per annum. In April 2000, we exchanged these Senior Notes for Senior
Notes having the same terms, except that the new Senior Notes ("Senior
Notes") were registered under the Securities Act of 1933. The old
senior notes and 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) and is to be
similarly guaranteed by our future Restricted Subsidiaries.
As of October 8, 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. Funds for
the untendered shares are being returned to Sbarro to be held until
claimed or escheated to the appropriate juristrictions.
Pg. 9
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
2. Going Private Transaction (continued):
In accordance with Emerging Issues Task Force Issue 88-16, "Basis in
Leveraged Buyout Transactions", the acquisition of all the outstanding
shares of common stock not owned by the Sbarro family and all
outstanding stock options have been accounted for under the purchase
method of accounting. As a result, the remaining shares of common stock
owned by the Sbarro family are presented in shareholders' equity at
their original basis in the accompanying consolidated balance sheet.
Portions of the final purchase price allocations were determined by
professional appraisers utilizing recognized valuation procedures and
techniques. During the third quarter of fiscal 2000, we recorded an
allocation of the purchase price from the going private transaction
based on an appraisal of the Company at September 29, 1999. As a
result, property and equipment and intangible assets were increased by
$18.5 million and $204 million, respectively, and additional
amortization expense for the period from September 29, 1999 through
July 10, 2000 of $0.3 million was recorded in the third quarter of
fiscal 2000. The purchase price allocation is being amortized on a
straight line basis over an average estimated useful life of 30
years.
Summarized below are the unaudited pro forma results of our operations
for the forty and twelve weeks ended October 10, 1999 as if the merger
and related financing had taken place as of the beginning of the 1999
periods presented. Adjustments have been made for the amortization of
the excess of the purchase price over the cost basis of net assets
acquired, interest expense and related changes in income tax expense
arising from our election to be taxed under Subchapter S of the
Internal Revenue Code (see Note 5).
Forty weeks ended Twelve weeks ended
October 10, 1999 October 10, 1999
----------------- ----------------
Pro Forma (000's):
Revenues $271,772 $88,389
========= ========
Income before income taxes $2,407 $3,852
======== =========
Net income (loss) $(868) $1,591
========== =========
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. Mortgage payable:
In March 2000, one of our Restricted 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 Restricted
Subsidiary maintain a minimum ratio of EBITDA to annual and quarterly
debt service of at least 1.2 to 1.0.
Pg. 10
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
4. Related party transactions:
(a) In March 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.
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.
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 share of our taxable income,
whether or not it is distributed to them.
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
share 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 for income tax purposes.
For the forty weeks ended October 8, 2000, we made tax distributions of
$3.6 million in accordance with the tax payment distribution agreement.
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 in
the first quarter of fiscal 2000.
Pg. 11
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
6. Comprehensive income:
The Company's operations did not give rise to any items includable in
comprehensive income which were not already included in net income for
either of the forty or twelve week periods ended October 8, 2000 and
October 10, 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. Based upon discussions
held with Mr. Corteo during November 2000, we believe there is a
substantial likelihood that the litigation will be resolved through
settlement. Any settlement agreement would not have a material impact
upon either the financial condition or operations of the Company.
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.
Pg. 12
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
7. Contingencies (continued):
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. 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
Credit Agreement on a joint and several basis.
The following condensed consolidating financial information presents:
(1) Condensed consolidating statements of operations for the forty
and twelve weeks ended October 8, 2000 and October 10, 1999,
statements of cash flows for the forty week periods ended in
each respective year and balance sheets as of October 8, 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,
(2) Elimination entries necessary to consolidate Sbarro, Inc., the parent, with
the guarantor and nonguarantor subsidiaries.
(3) Investments in subsidiaries are accounted for by the parent on the cost
method.
The principal elimination entries eliminate intercompany balances and
transactions.
Pg. 13
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the forty weeks ended October 8, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $119,584 $136,445 $14,627 $ - $270,656
Franchise related income 9,103 - - - 9,103
Intercompany credits - 11,924 - (11,924) -
------------ -------- ----------- --------- -------------
Total revenues 128,687 148,369 14,627 (11,924) 279,759
Costs and expenses:
Cost of food and paper
products 21,388 27,696 4,043 - 53,127
Restaurant operating
expenses:
Payroll and other
employee benefits 30,062 39,697 5,497 - 75,256
Occupancy and other 39,392 41,516 3,914 - 84,822
Depreciation and
amortization 13,841 9,646 623 - 24,110
General and administrative 8,936 10,107 709 - 19,752
Intercompany charges 11,924 - - (11,924) -
Other operating income (2,502) (1,521) - - (4,023)
----------- ----------- ----------- ----------- ------------
Total costs and expenses 123,041 127,141 14,786 (11,924) 253,044
---------- ---------- -------- -------- ---------
Operating income (loss) 5,646 21,228 (159) - 26,715
Interest (expense) income:
Interest expense (22,986) (775) (76) - (23,837)
Interest income 1,970 - (1,003) - 967
---------- -------------- ---------- ------------- -----------
Net interest (expense) income 21,016 (775) (1,079) - (22,870)
--------- ----------- ---------- ------------- -----------
Income (loss) before
income taxes (15,370) 20,453 (1,238) - 3,845
Income taxes (benefit) (5,968) 770 (46) - (5,244)
---------- --------- --------- ---------- --------
Net income (loss) $(9,402) $19,683 $(1,192) $ - $9,089
========== ========= ======== ======== =======
</TABLE>
Pg. 14
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the forty weeks ended October 10, 1999
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $117,190 $137,147 $10,685 $ - $265,022
Franchise related income 6,750 - - - 6,750
Intercompany credits - 13,973 - (13,973) -
------------ -------- ----------- ---------- -------------
Total revenues 123,940 151,120 10,685 (13,973) 271,772
Costs and expenses:
Cost of food and paper
products 22,327 29,814 2,785 - 54,926
Restaurant operating
expenses:
Payroll and other
employee benefits 30,111 39,118 3,176 - 72,405
Occupancy and other 37,584 40,714 3,057 - 81,355
Depreciation and
amortization 7,956 9,605 465 - 18,043
General and administrative 8,761 9,072 555 (554) 17,804
Intercompany charges 13,973 - - (13,973) -
Other operating income (2,329) (1,815) (10) 554 (3,600)
-------- ----------- -------- ---------- -----------
Total costs and expenses 118,353 126,508 10,028 (13,973) 240,916
---------- ---------- -------- --------- ---------
Operating income (loss) 5,587 24,612 657 - 30,856
Interest (expense) income:
Interest expense (980) - - - (980)
Interest income 3,679 - - - 3,679
-------- ------------ ----------- -------------- ---------
Net interest (expense) income 2,699 - - - 2,699
-------- ------------ ----------- -------------- ---------
Income before
income taxes 8,286 24,612 657 - 33,555
Income taxes 3,167 9,426 253 - 12,846
-------- --------- ------- -------- ----------
Net income $5,119 $15,186 $404 $ - $20,709
======== ========= ====== ======== ======== ======
</TABLE>
Pg. 15
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the twelve weeks ended October 8, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $37,586 $42,493 $4,913 $ - $84,992
Franchise related income 2,522 - - - 2,522
Intercompany credits - 3,881 - (3,881) -
----------- -------- ---------- ------- -----------
Total revenues 40,108 46,374 4,913 (3,881) 87,514
-
Costs and expenses:
Cost of food and paper
products 6,717 8,732 1,388 - 16,837
Restaurant operating
expenses:
Payroll and other
employee benefits 7,228 13,892 1,842 - 22,962
Occupancy and other 13,287 11,096 1,407 - 25,790
Depreciation and
amortization 4,252 3,117 225 - 7,594
General and administrative 3,017 2,671 201 - 5,889
Intercompany charges 3,881 - - (3,881) -
Other operating income (678) (411) - - (1,089)
---------- ---------- ----------- ----------- ---------
Total costs and expenses 37,704 39,097 5,063 (3,881) 77,983
---------- --------- -------- ------- ----------
Operating income (loss) 2,404 7,277 (150) - 9,531
Interest (expense) income:
Interest expense (6,896) (335) (21) - (7,252)
Interest income 636 - (304) - 332 Net
-------- ---------- ------- ----------- --------
interest (expense) income (6,260) (335) (325) - (6,920)
--------- ---------- --------- ----------- ---------
Income (loss) before
income taxes (3,856) 6,942 (475) - 2,611
Income taxes (benefit) (50) 233 (18) - 165
----------- ------- --------- -------- -------
Net income (loss) $(3,806) $6,709 $(457) $ - $2,446
========== ======== ======= ======== ======= =
</TABLE>
Pg. 16
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Operations
For the twelve weeks ended October 10, 1999
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $37,841 $44,328 $3,802 $ - $85,971
Franchise related income 2,418 - - - 2,418
Intercompany credits - 4,258 - (4,258) -
----------- ------- --------- -------- -----------
Total revenues 40,259 48,586 3,802 (4,258) 88,389
-
Costs and expenses:
Cost of food and paper
products 7,179 9,750 1,016 - 17,945
Restaurant operating
expenses:
Payroll and other
employee benefits 9,738 12,330 762 - 22,830
Occupancy and other 9,762 14,202 1,267 - 25,231
Depreciation and
amortization 2,624 2,992 149 - 5,765
General and administrative 4,312 991 278 (200) 5,381
Intercompany charges 4,258 - - (4,258) -
Other operating income (358) (728) (154) 200 (1,040)
---------- --------- -------- -------- ---------
Total costs and expenses 37,515 39,537 3,318 (4,258) 76,112
---------- --------- -------- ------- --------
Operating income (loss) 2,744 9,049 3,318 - 12,277
Interest (expense) income:
Interest expense (980) - - - (980)
Interest income 1,055 - - - 1,055
--------- ----------- ---------- ---------- ---------
Net interest (expense) income 75 - - - 75
----------- ----------- ---------- ---------- -----------
Income before
income taxes 2,819 9,049 484 - 12,352
Income taxes 1,091 3,511 187 - 4,789
--------- ------- ------- -------- ----------
Net income $1,728 $5,358 $297 - $7,563
======== ======== ====== ======== ========
</TABLE>
Pg. 17
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
As of October 8, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $14,066 $3,480 $522 $ - $18,068
Restricted cash for untendered
shares 188 - - - 188
Receivables 4,060 1,241 82 - 5,383
Inventories 1,263 1,509 217 - 2,989
Prepaid expenses and other 4,085 2,217 187 - 6,489
--------- -------- ------- ------ --------------
Total current assets 23,662 8,447 1,008 - 33,117
Intercompany receivables - 177,031 - (177,031) -
Investment in subsidiaries 65,469 - - (65,469) -
Net property, plant and
equipment 51,197 91,075 14,624 - 156,896
Intercompany receivables
- long term 3,579 - - (3,579) -
Intangibles and other assets, net 231,120 1,008 (1,617) (17,363) 213,148
----------- ---------- ----------- ----------- --------------
Total assets $375,027 $277,561 $14,015 $(263,442) $403,161
========== ========== ========== ========== ===============
Amounts due for untendered
shares $188 $ - $ - $ - $188
Accounts payable and accrued
expenses 31,782 433 3,228 - 35,443
Accrued interest 2,259 - - - 2,259
Current portion of mortgage
payable - 129 - - 129
---------- --------- --------- -------- ----------------
Total current liabilities 34,229 562 3,228 - 38,019
Intercompany payables 177,031 - 15,593 (192,624) -
Long-term debt, net of
current portion 251,602 15,811 - - 267,413
Intercompany payables -
long term - 3,579 - (3,579) -
Common stock 71 - - - 71
Additional paid-in capital 10 65,469 1,770 (67,239) 10
Retained earnings (deficit) (87,916) 192,140 (6,576) - 97,648
-------- ---------- ------- ----------- ---------
Total stockholders' equity
(deficiency) (87,835) 257,609 (4,806) (67,239) 97,729
--------- ----------- ------- -------- ---------------
Total liabilities and
stockholders' equity $375,027 $277,561 $14,015 $(263,442) $403,161
========== ========== ========= ========== ==============
</TABLE>
Pg. 18
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheet
As of January 2, 2000
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) -
Intangibles and other assets, net 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. 19
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
8. Guarantor and non-guarantor financial statements (continued):
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
For the forty weeks ended October 8, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Operating activities:
<S> <C> <C> <C> <C> <C>
Net income (loss) $(9,402) $19,683 $(1,192) $ - $9,089
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 15,028 9,601 624 - 25,253
Deferred taxes (5,629) - - - (5,629)
Changes in operating assets
and liabilities:
Increase in receivables (432) (412) (29) - (873)
Decrease (increase) in inventories 330 455 (88) - 697
Increase in prepaid
expenses (1,852) (2,594) (138) - (4,584)
(Decrease) increase in
other assets (6,175) 84 2,043 4,875 827
(Decrease) increase in accounts
payable and accrued expenses(6,706) (586) 492 - (6,800)
Decrease in accrued
interest payable (5,221) - - - (5,221)
(Decrease) increase in
income taxes payable (986) 180 52 - (754)
--------- ----------- ---------- ----------- -------
Net cash (used in) provided by
operating activities (21,045) 26,411 1,764 4 875 12,005
-------- ---------- --------- --------- ---------
Investing activities:
Purchases of property and
equipment (4,708) (7,269) (7,387) - (19,364)
------- ------- ------- ---------- --------
Net cash used in investing activities(4,708) (7,269) (7,387) - (19,364)
------- ------- ------- ---------- --------
Financing activities:
Proceeds from mortgage - 16,000 - - 16,000
Mortgage principal repayments - (60) - - (60)
Cost of mortgage - (387) - - (387)
Loan to officer (2,000) - - - (2,000)
Distributions to shareholders (21,640) - - - (21,640)
Intercompany balances 35,606 (35,606) 4,875 (4,875) -
----------- -------- --------- -------- ------------
Net cash (used in) provided
by financing activities 11,966 (20,053) 4,875 (4,875) (8,087)
------------- --------- --------- ------- -------
Decrease in cash and cash
equivalents (13,787) (911) (748) - (15,446)
Cash and cash equivalents
at beginning of period 27,853 4,391 1,270 - 33,514
----------- --------- -------- ------- ---------
Cash and cash equivalents
at end of period $14,066 $3,480 $522 $ - $18,068
========= ======== ======= ======== =============
Supplemental disclosure of cash flow information:
Cash paid during the period
for income taxes $3,110 $557 $44 $ - $3,711
========= ====== ===== ========== ==============
Cash paid during the period
for interest $27,022 $775 $82 $ - $27,879
========= ====== ====== ========== ============
</TABLE>
Pg. 20
<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 forty weeks ended October 10, 1999
<TABLE>
<CAPTION>
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Operating activities:
<S> <C> <C> <C> <C> <C>
Net income $5,119 $15,186 $404 $ - $20,709
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 8,017 9,605 465 - 18,087
Deferred taxes (538) - - - (538)
Changes in operating assets
and liabilities:
(Increase) in receivables (1,173) (41) (29) - (1,243)
Decrease in inventories 105 162 - - 267
Increase in prepaid expenses (2,702) (2,248) (110) - (5,060)
Increase (decrease) in other assets1,691 (1,974) 34 (681) (930)
Increase (decrease) in accounts
payable and accrued expenses 1,551 (268) 1,312 - 2,595
Increase in accrued interest payable935 - - - 935
Decrease in income taxes payable (3,784) (96) - - (3,880)
--------- ------------ ----------- -------- ---------
Net cash provided by
operating activities 9,221 20,326 2,076 (681) 30,942
--------- ----------- ----------- ---------- ----------
Investing activities:
Purchases of property and
equipment (11,850) (5,794) (1,221) - (18,865)
-------- ------- ------- ---------- --------
Net cash used in investing
activities (11,850) (5,794) (1,221) - (18,865)
-------- ------- ------- ---------- --------
Financing activities:
Proceeds from exercise of
stock options 426 - - - 426
Proceeds from long-term debt 251,211 - - - 251,211
Cost of merger and related financing(411,000) - - - (411,000)
Accrued or previously paid merger costs2,828 - - - 2,828
Intercompany balances 16,756 (16,756) (681) 681 -
------------ -------- ---------- ------ ---------
Net cash (used in) provided
by financing activities (139,779) (16,756) (681) 681 (156,535)
------------- ---------- ------- ------ -----------
(Decrease) increase in cash and
cash equivalents (142,408) (2,224) 174 - (144,458)
Cash and cash equivalents
at beginning of period 148,134 6,268 507 - 154,909
----------- -------- ---- -------- --------------
Cash and cash equivalents
at end of period $5,726 $4,044 $681 $ - $10,451
======== ======== ===== ======== =============
Supplemental disclosure of cash flow information:
Cash paid during the period
for income taxes $15,164 $1,569 $10 $ - $16,743
========== ======== ==== ========= =========
Cash paid during the period
for interest $ - $ - $ - $ - $ -
============== ============ ======== ========= ============
</TABLE>
Pg. 21
<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>
40 Weeks 40 Weeks 12 Weeks 12 Weeks
Ended Ended Ended Ended Fiscal Year
10/08/00 10/10/99 10/08/00 10/10/99 1999 1998
-------- -------- -------- -------- ---- ----
Company-owned restaurants:
<S> <C> <C> <C> <C> <C> <C>
Opened during period 7 18 2 9 24 25
Acquired from (sold to)
franchisees during period-net - - - - (1) 1
Closed during period (11) (9) (3) (4) (9) (20)
------- ----- ------ ------- ------ ------
Open at end of period (1) 634 633 634 633 638 624
Franchised restaurants:
Opened during period 28 34 11 15 49 43
Purchased from (sold to)
Company during period-net - - - - 1 (1)
Closed or terminated during period (15) (24) (2) (11) (32) (13)
----- ----- ---- ------- ---- -----
Open at end of period 299 278 299 278 286 268
All restaurants:
Opened during period 35 52 13 24 73 68
Closed or terminated during period (26) (33) (5) (15) (41) (33)
----- ----- --- ---- ----- -----
Open at end of period (1) 933 911 933 911 924 892
Kiosks (all franchised) open at
end of period 5 6 5 6 4 8
</TABLE>
(1) Excludes 31, 24, 26 and 19 new concept units as of October 8, 2000, October
10, 1999, fiscal 1999 and fiscal 1998, respectively.
Pg. 22
<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 forty and twelve weeks ended October 8, 2000 as
compared to the comparable period in fiscal 1999 (see below).
Our consolidated EBITDA for the forty weeks ended October 8, 2000 was $50.8
million and our EBITDA margin was 18.2%, compared to $48.9 million and 18.0%,
respectively, for the forty weeks ended October 10, 1999. Our consolidated
EBITDA for the twelve weeks ended October 8, 2000 was $17.1 million and our
EBITDA margin was 19.6% compared to $18.0 million and 20.4%, respectively, for
the twelve weeks ended October 10, 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 by $5.6 million or 2.1% to $270.7 million for the forty
weeks ended October 8, 2000 from $265.0 million in the forty weeks ended October
10, 1999. Restaurant sales from those same units decreased by $1.0 million or
1.1% to $85.0 million for the twelve weeks ended October 8, 2000 from $86.0
million in the twelve weeks ended October 10, 1999. Sales from new concept units
contributed $14.6 million and $4.9 million for the forty and twelve weeks ended
October 8, 2000, respectively, compared to $10.7 million and $3.8 million for
the forty and twelve weeks ended October 10, 1999. The increase in overall
restaurant sales in the comparable forty week period of fiscal 2000 resulted
primarily from a higher number of new concept units being 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. The decrease in sales at Sbarro-owned units in the third quarter
of 2000 from the same quarter in 1999 resulted from a greater reduction in
revenues from closed units than the increase in revenue from new units due to
lower net new unit openings in fiscal 2000 than in
Pg. 23
<PAGE>
fiscal 1999. Comparable Sbarro unit sales decreased 0.5% for the twelve weeks
ended October 8, 2000 as compared to the same period in fiscal 1999 and
increased 0.4% for the first forty weeks of fiscal 2000 over the same forty week
period of the 1999 fiscal year. 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 34.9% to $9.1 million for the forty
weeks ended October 8, 2000 from $6.8 million in the forty week period ended
October 10, 1999. The increase for the third quarter of fiscal 2000 was 4.3% to
$2.5 million from $2.4 million for the same quarter of fiscal 1999. The
increases resulted from greater continuing royalties due to a higher number of
franchise units in operation in the fiscal 2000 periods than in the comparable
1999 period, higher area development and initial franchise fees in each of the
first three quarters of fiscal 2000 than the comparable periods of fiscal 1999
and, approximately $1.5 million recognized in the second quarter of fiscal 2000
related to the termination of our development agreement and the closing of all
Sbarro locations in Japan. During the first quarter of 2000, 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.
Cost of food and paper products as a percentage of restaurant sales improved to
19.6% and 19.8% for the forty and twelve weeks ended October 8, 2000,
respectively, from 20.7% and 20.9%, respectively, for the comparable 1999 fiscal
periods. These improvements were primarily due to lower average cheese prices
during fiscal 2000 and the impact of the menu price increases described above.
Restaurant operating expenses - payroll and other employee benefits increased to
27.8% of restaurant sales in the forty weeks ended October 8, 2000 from 27.3% of
restaurant sales in the forty weeks ended October 10, 1999. For the third
quarter of fiscal 2000 and 1999, these expenses represented 27.0% and 26.6%,
respectively, of restaurant sales. These increases were primarily due to the
tight labor market, resulting in pressures on wages and salaries and associated
increases in amounts paid for payroll taxes. Congress has passed bills which, if
signed and implemented, would increase the minimum wage by $1.00 per hour over a
two to three year period and increase the Company's labor costs for certain of
its hourly employees. This is also expected to result in wage increases for
hourly employees that are paid in excess of the proposed minimum wage level.
Restaurant operating expenses - occupancy and other expenses increased to 31.3%
of restaurant sales in the forty weeks ended October 8, 2000 from 30.7% in the
forty weeks ended October 10, 1999. These expenses represented 30.3% and 29.3%
of restaurant sales for the twelve weeks ended October 8, 2000 and October 10,
1999, respectively. These increases were attributable principally to increases
in rent and utility costs.
Depreciation and amortization expense increased by $6.1 and $1.8 million in the
forty and twelve weeks ended October 8, 2000, respectively, over the forty and
twelve week period ended October 10, 1999, respectively, primarily as a result
of the amortization of the excess of the purchase
Pg. 24
<PAGE>
price over the cost of net assets acquired in connection with the completion of
the going private transaction on September 28, 1999. In the third
quarter of fiscal 2000, we recorded additional amortization of $0.3 million for
the period from September 29, 1999 to July 10, 2000 in connection with
recording of the purchase price allocation for the going private transaction.
General and administrative expenses were $19.8 million, or 7.0% of total
revenues, for the forty weeks ended October 8, 2000, compared to $17.8 million,
or 6.6% of total revenues, for the forty weeks ended October 10, 1999. For the
twelve weeks ended October 8, 2000 and October 10, 1999, general and
administrative expenses were $5.9 million, or 6.7% of total revenues, compared
to $5.4 million, or 6.1% of total revenues, respectively. These increases were
primarily due to higher payroll costs due to the tight labor market, expanding
franchise and new concept operations and increases in various field human
resource functions.
Other operating income increased by $0.4 million to $4.0 million for the forty
weeks ended October 8, 2000 from the comparable fiscal 1999 period 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. Other operating income for
the twelve weeks ended October 8, 2000 increased nominally over the comparable
period in fiscal 1999.
Interest expense of $23.8 million for the first three quarters and $7.3 million
for the third quarter of 2000 relate to the Senior Notes and mortgage discussed
in Notes 2 and 3 and line fees for unused borrowing capacity under the Credit
Agreement. Results for the third quarter of 1999 included interest only from the
September 28, 1999 date of the Merger to the end of the quarter of $1.0 million.
Of these amounts, $1.1 and $0.4 million for the forty and twelve weeks ended
October 8, 2000 and $50,000 for each of the forty and twelve weeks ended October
10, 1999, represented non-cash charges for the accretion of the original issue
discount on our Senior Notes and the amortization of deferred financing costs on
both the Senior Notes and the Credit Agreement.
Interest income was approximately $1.0 million and $0.3 million for the forty
and twelve week periods ended October 8, 2000, respectively, compared to $3.7
million and $1.1 million in the forty and twelve week periods ended October 10,
1999. As discussed elsewhere in this report, we used substantially all of our
available cash on September 28, 1999 in order to fund the going private
transaction. Therefore, we have a substantial reduction in our interest income
for 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.
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 Statement of
Financial Accounting Standards (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 in the first quarter of
fiscal 2000. Under the provisions of Subchapter S, substantially all taxes on
our income is now paid by our shareholders rather than us. Our tax expense for
the first three
Pg. 25
<PAGE>
quarters of fiscal 2000 included $0.4 million (of which $0.2 million was
recorded in the third quarter) 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 at September 28, 1999 was used to complete the going private
transaction. As a result, at October 8, 2000, we had unrestricted cash and cash
equivalents of $18.1 million and a working capital deficit of $4.9 million
compared to unrestricted cash, cash equivalents and marketable securities of
$10.5 million and a working capital deficit of $18.5 million at October 10,
1999.
As part of the going private transaction, we issued $255.0 million of Senior
Notes and entered into a $30.0 million bank Credit Agreement. At October 8, 2000
we have $26.9 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 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 and, in April 2000, we
loaned $2 million to our Chairman and CEO. In addition, we have made $3.6
million of tax distributions (which are treated as dividends) to our
shareholders in fiscal 2000 as discussed below.
Net cash generated in operating activities was $12.0 million for the forty weeks
ended October 8, 2000 compared to $30.9 million generated during the forty weeks
ended October 10, 1999. The $18.9 million reduction was primarily due to a $25.6
million increase in net interest expense related to the going private
transaction partially offset by an improvement in operating income before
depreciation and amortization.
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 $19.4 million for the forty weeks ended October 8, 2000 and $18.9
million for the forty weeks ended October 10, 1999.
Net cash used in financing activities was $8.1 million for the forty weeks ended
October 8, 2000 compared to $156.5 million of cash used by financing activities
for the comparable period in 1999. Financing activities through the third
quarter of fiscal 2000, resulted primarily from cash dividends of $18.0 million
and tax distributions of $3.6 million (see below) to our shareholders and a $2.0
million loan to our Chairman, President and CEO offset by $15.6 million of net
proceeds from a loan secured by a mortgage on our corporate headquarters.
Financing activities for the comparable period of 1999 resulted primarily from
$408.2 million of cash used (net of accrued or previously paid Merger costs) to
pay the Merger consideration and related Merger and financing costs offset by
approximately $251.2 million of net proceeds raised through the private
placement of the Senior Notes.
Pg. 26
<PAGE>
As a result of the going private transaction, we used substantially all of our
cash on hand at September 28, 1999 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 that our other liquidity needs will relate to capital expenditures,
working capital, investments in joint ventures, distributions to shareholders as
permitted under the Indenture for the Senior Notes and the 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.
We do not have any principal repayment obligations under the Senior Notes or our
Credit Agreement until September 2009 and September 2004, respectively. We were
in compliance with the various covenants in the Indenture for the Senior Notes,
the Credit Agreement and the Mortgage as of October 8, 2000.
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 are paid by
our shareholders. We and our shareholders will have a tax liability of
approximately 46% of our taxable income. This tax rate is higher than our
historical effective tax rate prior to 2000 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 for the Senior Notes and
the Credit Agreement permit us to make distributions to shareholders for taxes
on our earnings and we made tax distributions of $3.6 million during the forty
weeks ended October 8, 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 limitations contained in the Indenture for the Senior Notes and the Credit
Agreement. We believe that cash flow from operations will be sufficient to fund
future growth and meet planned capital expenditure needs through fiscal 2001.
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<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 include
statements regarding our intent, belief, expectations, 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; our 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; increases 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
the Indenture for the Senior Notes and the 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 the 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 this 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.
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.
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<PAGE>
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.
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.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SBARRO, INC.
Registrant
Date: November 21, 2000 By: /s/MARIO SBARRO
----------------- ----------------------------------
Mario Sbarro
Chairman of the Board and President
(Principal Executive Officer)
Date: November 21, 2000 By: /s/ROBERT G. ROONEY
----------------- -----------------------------------
Robert G. Rooney
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
Date: November 21, 2000 By: /s/STEVEN B. GRAHAM
----------------- ----------------------------------
Steven B. Graham
Vice President and Controller
(Principal Accounting Officer)
Pg. 30
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
