================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended July 16, 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 August
15, 2000 was 7,064,328.
--------------------------------------------------------------------------------
<PAGE>
SBARRO, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGES
Consolidated Financial Statements:
Balance Sheets - July 16, 2000 (unaudited) and
January 2, 2000. . . . . . . . . . . . . . . . . . . . . 3-4
Statements of Operations (unaudited) - Twenty-eight
Weeks ended July 16, 2000 and July 18, 1999 and
Twelve Weeks ended July 16, 2000 and July 18, 1999 . . . 5-6
Statements of Cash Flows (unaudited) - Twenty-eight
Weeks ended July 16,2000 and July 18, 1999 . . . . . . . 7-8
Notes to Unaudited Consolidated Financial Statements
- July 16, 2000 . . . . . . . . . . . . . . . . . . . .9-21
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . 22-28
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . .29
-----------------
Pg. 2
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(In thousands except share data)
July 16, 2000 January 2, 2000
------------- ---------------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $19,207 $33,514
Restricted cash for untendered shares (Note 2) 195 298
Receivables; net of allowance for doubtful
accounts of $138 and $419, respectively
Franchisees 1,341 1,429
Taxes 1,174 -
Other 4,007 2,938
---------------- --------------
6,522 4,367
Inventories 2,891 3,686
Prepaid expenses 3,450 1,905
---------------- -------------
Total current assets 32,265 43,770
Property and equipment, net 139,323 137,232
Other assets:
Excess of purchase price over the cost
of net assets acquired, net of
accumulated amortization of
$6,047 and $2,000, respectively (Note 2) 216,720 220,681
Deferred financing costs, net of
accumulated amortization of $843
and $277, respectively (Note 2) 8,987 9,553
Loan receivable from officer (Note 4) 2,000 -
Other assets 5,932 6,597
--------------- -------------
$405,227 $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)
July 16, 2000 January 2, 2000
------------- ---------------
(unaudited)
Current liabilities:
<S> <C> <C>
Amounts due for untendered shares (Note 2) $195 $298
Accounts payable 6,464 9,673
Accrued expenses 26,003 32,409
Accrued interest payable (Note 2 and 3) 9,740 7,480
Current portion of mortgage payable 116 -
Income taxes payable (Note 5) - 754
---------------- --------------
Total current liabilities 42,518 50,614
Deferred income taxes (Note 5) - 5,629
Long-term debt, net of original issue
discount (Note 2) 251,515 251,310
Mortgage payable, net of current
portion (Note 3) 15,854 -
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 July 16, 2000 and
January 2, 2000 71 71
Additional paid-in capital 10 10
Retained earnings 95,259 110,199
--------------- ------------
95,340 110,280
--------------- ------------
$405,227 $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 twenty-eight weeks ended:
July 16, 2000July 18, 1999
Revenues:
<S> <C> <C>
Restaurant sales $ 185,664 $179,051
Franchise related income 6,581 4,332
Interest income 635 2,624
---------------- ---------------
Total revenues 192,880 186,007
------------- -------------
Costs and expenses:
Cost of food and paper products 36,290 36,981
Restaurant operating expenses:
Payroll and other employee benefits 52,296 49,575
Occupancy and other 59,032 56,124
Depreciation and amortization 16,516 12,261
General and administrative 13,863 12,442
Interest expense (Note 3) 16,585 -
Other operating income (2,934) (2,579)
-------------- --------------
Total costs and expenses 191,648 164,804
------------- ------------
Income before income taxes 1,232 21,203
(Benefit)/provision for income taxes
(Note 5) (5,409) 8,057
-------------- --------------
Net income $ 6,641 $ 13,146
============= =============
</TABLE>
Pg. 5
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the twelve weeks ended:
July 16, 2000 July 18, 1999
Revenues:
<S> <C> <C>
Restaurant sales $ 81,365 $78,697
Franchise related income 3,785 1,826
Interest income 181 1,033
------------ ---------------
Total revenues 85,331 81,556
---------------- --------------
Costs and expenses:
Cost of food and paper products 15,956 16,017
Restaurant operating expenses:
Payroll and other employee benefits 22,720 21,472
Occupancy and other 25,560 24,256
Depreciation and amortization 7,106 5,311
General and administrative 6,218 5,530
Interest expense (Notes 2 and 3) 7,255 -
Other operating income (1,081) (1,084)
------------- ------------
Total costs and expenses 83,734 71,502
------------- -----------
Income before income taxes 1,597 10,054
Provision for income taxes (Note 5) 150 3,820
--------------- -------------
Net income $ 1,447 $ 6,234
============= =============
</TABLE>
Pg. 6
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the twenty-eight weeks ended:
July 16, 2000 July 18, 1999
Operating activities:
<S> <C> <C>
Net income $ 6,641 $13,146
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 17 315 12,278
Provision for deferred income taxes (5,629) (337)
Changes in operating assets and liabilities:
Increase in receivables (2,011) (15)
Decrease in inventories 795 240
Increase in prepaid expenses (1,545) (3,823)
Decrease (increase) in other assets 859 (2,357)
Decrease in accounts payable and accrued
expenses (9,578) (306)
Increase in accrued interest payable 2,260 -
Decrease in income taxes payable (754) (4,071)
-------------- -------------
Net cash provided by operating
activities 8,353 14,755
------------ ------------
Investing activities:
Purchases of property and equipment (14,663) (12,746)
------------- --------------
Net cash used in investing activities (14,663) (12,746)
------------- --------------
</TABLE>
(continued)
Pg. 7
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
For the twenty-eight weeks ended:
July 16, 2000 July 18, 1999
Financing activities:
<S> <C> <C>
Proceeds from mortgage 16,000 -
Mortgage principal repayments (29) -
Cost of mortgage (387) -
Loan to officer (2,000) -
Proceeds from exercise of stock options - 426
Distributions to shareholders (21,581) -
------------- -----------
Net cash (used in) provided by financing activities (7,997) 426
--------------- ------------
(Decrease) increase in cash and cash equivalents (14,307) 2,435
Cash and cash equivalents at beginning of period 33,514 150,472
------------- -------------
Cash and cash equivalents at end of period $19,207 $152,907
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $2,962 $13,861
============= =============
Cash paid during the period for interest $13,559 $ -
============ ==============
</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 July 16, 2000 and our consolidated results of operations for each of
the twenty-eight and twelve weeks ended July 16, 2000 and July 18, 1999
and cash flows for the twenty-eight 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 (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) and is to be
similarly guaranteed by our future Restricted Subsidiaries.
As of July 16, 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 to be 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.
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 twenty-eight and twelve weeks ended July 18, 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).
Twenty-eight weeks ended Twelve weeks ended
July 18, 1999 July 18, 1999
-------------- -------------
Pro Forma:
Revenues $183,383 $80,523
========= ========
Income (loss) before
income taxe $(1,511) $411
=========== ========
Net loss $(2,523) $(446)
=========== =========
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 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) 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.
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 twenty-eight weeks ended July 16, 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 includible in
comprehensive income which were not already included in net income for
either of the twenty-eight or twelve week periods ended July 16, 2000
and July 18, 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 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
Pg. 12
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (continued)
7. Contingencies (continued):
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. As described in Note 2,
we have not completed final purchase price allocations. Accordingly,
the condensed summary financial information 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 for the
twenty-eight and twelve weeks ended July 16, 2000 and July 18,
1999 and cash flows for the twenty-eight week periods ended in
each respective year and balance sheets as of July 16, 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 Twenty-Eight Weeks Ended July 16, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $ 81,997 $93,953 $9,714 $ - $185,664
Franchise related income 6,58 - - - 6,581
Intercompany credits - 8,043 - (8,043) -
Interest income 1,334 - (699) - 635
-------- ------------- ------------ ------------- --------
Total revenues 89,912 101,996 9,015 (8,043) 192,880
-------- --------- ------------ --------- ---------
Costs and expenses:
Cost of food and paper
products 14,670 18,965 2,655 - 36,290
Restaurant operating
expenses:
Payroll and other
employee benefits 22,835 25,805 3,656 - 52,296
Occupancy and other 26,105 30,420 2,507 - 59,032
Depreciation and
amortization 9,589 6,529 398 - 16,516
General and administrative 5,919 7,436 508 - 13,863
Intercompany charges 8,043 - - (8,043) -
Interest expense 16,090 440 55 - 16,585
Other operating income (1,825) (1,109) - - (2,934)
---------- ----------- -------- ------- -------
Total costs and expenses 101,426 88,486 9,779 (8,043) 191,648
---------- ----------- -------- ------- -------
Income (loss) before
income taxes (11,514) 13,510 (764) - 1,232
Income taxes (benefit) (5,918) 537 (28) - (5,409)
----------- ---------- ------ -------- --------
Net income (loss) $(5,596) $12,973 $(736) $ - $6,641
========== ======== ====== ======== ========
</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 Twenty-Eight Weeks Ended July 18, 1999
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $79,349 $92,819 $6,883 $ - $179,051
Franchise related inc 4,332 - - - 4,332
Intercompany credits - 9,715 - (9,715) -
Interest income 2,624 - - - 2,624
---------- ---------- --------- ---------- -------------
Total revenues 86,305 102,534 6,883 (9,715) 186,007
Costs and expenses:
Cost of food and paper
products 15,148 20,064 1,769 - 36,981
Restaurant operating
expenses:
Payroll and other
employee benefits 20,374 26,788 2,413 - 49,575
Occupancy and other 27,822 26,513 1,789 - 56,124
Depreciation and
amortization 5,332 6,613 316 - 12,261
General and administrative 4,438 8,081 277 (354) 12,442
Intercompany charges 9,715 - - (9,715) -
Other operating income (1,989) (1,088) 144 354 (2,579)
-------- --------- ---------- ---------- -----------
Total costs and expenses 80,840 86,971 6,708 (9,715) 164,804
--------- ---------- -------- -------- ------------
Income before
income taxes 5,465 15,563 175 - 21,203
Income taxes 2,076 5,914 67 - 8,057
------- -------- ------- -------- ----------
Net income $3,389 $9,649 $108 $ - $ 13,146
======== ======== ====== ======== ===========
</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 July 16, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $35,801 $41,129 $4,435 $ - $81,365
Franchise related
income 3,785 - - - 3,785
Intercompany credits - 3,361 - (3,361) -
Interest income 363 - (182) - 181
---------- ---------- --------- ---------- ----------
Total revenues 39,949 44,490 4,253 (3,361) 85,331
Costs and expenses:
Cost of food and paper
products 6,434 8,304 1,218 - 15,956
Restaurant operating
expenses:
Payroll and other
employee benefits 10,646 10,409 1,665 - 22,720
Occupancy and other 9,471 14,992 1,097 - 25,560
Depreciation and
amortization 4,128 2,801 177 - 7,106
General and administrative 3,216 2,826 176 - 6,218
Intercompany charges 3,361 - - (3,361) -
Interest expense 6,896 336 23 - 7,255
Other operating inco (648) (433) - - (1,081)
----------- ----------- ----------- ----------- ---------
Total costs and expenses 43,504 39,235 4,356 (3,361) 83,734
---------- ---------- -------- ------- ---------
Income (loss) before
income taxes (3,555) 5,255 (103) - 1,597
Income taxes (benefit) (103) 259 (6) - 150
----------- --------- -------- -------- --------
Net income (loss) $(3,452) $4,996 $(97) $ - $1,447
========== ======== ====== ======== =======
</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 July 18, 1999
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Revenues:
<S> <C> <C> <C> <C> <C>
Restaurant sales $34,917 $40,661 $3,119 $ - $78,697
Franchise related income 1,826 - - - 1,826
Intercompany credits - 4,220 - (4,220) -
Interest income 1,033 - - - 1,033
----------- ---------- --------- ---------- ------------
Total revenues 37,776 44,881 3,119 (4,220) 81,556
Costs and expenses:
Cost of food and paper
products 6,585 8,632 800 - 16,017
Restaurant operating
expenses:
Payroll and other
employee benefits 8,878 11,475 1,119 - 21,472
Occupancy and other 12,747 10,734 775 - 24,256
Depreciation and
amortization 2,045 3,128 138 - 5,311
General and administrative 1,306 4,279 122 (177) 5,530
Intercompany charges 4,220 - - (4,220) -
Other operating income (593) (729) 61 177 (1,084)
----------- ---------- --------- -------- ---------
Total costs and expenses 35,188 37,519 3,015 (4,220) 71,502
---------- ---------- -------- ------- ---------
Income before
income taxes 2,588 7,362 104 - 10,054
Income taxes 983 2,798 39 - 3,820
-------- ------- ------- -------- ----------
Net income $1,605 $4,564 $65 $ - $6,234
======== ======== ===== ======== ========
</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 July l6, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $15,814 $3,275 $118 $ - $19,207
Restricted cash for untendered
shares 195 - - - 195
Receivables 5,411 962 149 - 6,522
Inventories 1,245 1,487 159 - 2,891
Prepaid expenses and other 1,702 1,594 154 - 3,450
---------- ------- -------- ------ -----------
Total current assets 24,367 7,318 580 - 32,265
Intercompany receivables - 184,513 - (184,513) -
Investment in subsidiaries 66,237 - - (66,237) -
Net property, plant and
equipment 45,126 81,592 12,605 - 139,323
Intercompany receivables
- long term 3,579 - - (3,579) -
Goodwill and other assets 249,014 1,041 (1,239) (15,177) 233,639
----------- -------------- ---------- ----------- ------------
Total assets $388,323 $274,464 $11,946 $(269,506) $405,227
========== =========== ========== ========== ============
Amounts due for untendered
shares $195 $ - $ - $ - $195
Accounts payable and accrued
expenses 28,738 854 2,875 - 32,467
Accrued interest 9,740 - - - 9,740
Current portion of mortgage
payable - 116 - - 116
---------- -------- --------- -------- -----------------
Total current liabilities 38,673 970 2,875 - 42,518
Intercompany payables 184,513 - 13,407 (197,920) -
Long-term debt, net of
current portion 251,515 15,854 - - 267,369
Intercompany payables -
long term - 3,579 - (3,579) -
Common stock 71 - - - 71
Additional paid-in capital 10 66,237 1,770 (68,007) 10
Retained earnings (deficit) (86,459) 187,824 (6,106) - 95,259
-------- ------------ ------- ------------- ----------
Total stockholders' equity
(deficiency) (86,378) 254,061 (4,336) (68,007) 95,340
---------- ----------- ------- -------- -----------
Total liabilities and
stockholders' equity $388,323 $274,464 $11,946 $(269,506) $405,227
========== =========== ========== ========== ===========
</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) -
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. 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 Twenty-Eight Weeks ended July 16, 2000
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Operating activities:
<S> <C> <C> <C> <C> <C>
Net income (loss) $(5,596) $12,973 $(736) $ - $6,641
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 10,365 6,524 426 - 17,315
Deferred taxes (5,629) - - - (5,629)
Changes in operating assets
and liabilities:
Increase in receivables (1,782) (133) (96) - (2,011)
Decrease (increase) in
inventories 348 477 (30) - 795
Decrease (increase) in
prepaid expenses 531 (1,971) (105) - (1,545)
Increase (decrease) in
other assets (3,998) 102 2,066 2,689 859
(Decrease) increase in accounts
payable and accrued expenses (9,737) 20 139 - (9,578)
Increase in accrued
interest payable 2,260 - - - 2,260
(Decrease) increase in
income taxes payable (986) 180 52 - (754)
--------- --------- ---------- --------- -------
Net cash (used in) provided by
operating activities (14,224) 18,172 1,716 2,689 8,353
-------- -------- -------- ------- -------
Investing activities:
Purchases of property and
equipment (3,296) (5,810) (5,557) - (14,663)
------- ------- ------- ---------- --------
Net cash used in investing
activities (3,296) (5,810) (5,557) - (14,663)
------- ------- ------- ---------- --------
Financing activities:
Proceeds from mortgage - 16,000 - - 16,000
Mortgage principal repayments - (29) - - (29)
Cost of mortgage - (387) - - (387)
Loan to officer (2,000) - - - (2,000)
Distributions to shareholders (21,581) - - - (21,581)
Intercompany balances 29,062 (29,062) 2,689 (2,689) -
----------- -------- -------- -------- ------------
Net cash (used in) provided
by financing activities 5,481 (13,478) 2,689 (2,689) (7,997)
----------- --------- -------- ------- -------
Decrease in cash and cash
equivalents (12,039) (1,116) (1,152) - (14,307)
Cash and cash equivalents
at beginning of period 27,853 4,391 1,270 - 33,514
---------- --------- ----- ------- -------
Cash and cash equivalents
at end of period $15,814 $3,275 $118 $ - $19,207
========= ======== ====== ======== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period
for income taxes $2,515 $409 $38 $ - $2,962
========= ===== ==== =========== ==========
Cash paid during the period
for interest $13,060 $440 $59 $ - $13,559
========= ===== ===== ========== =========
</TABLE>
Pg. 20
<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 Twenty-Eight Weeks ended July 18, 1999
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
Operating activities:
<S> <C> <C> <C> <C> <C>
Net income $3,389 $9,649 $108 $ - $13,146
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 5,960 5,984 334 - 12,278
Deferred taxes (337) - - - (337)
Changes in operating assets
and liabilities:
Decrease (increase)in receivables 6 1 (22) - (15)
Decrease (increase)in inventories 93 159 (12) - 240
Increase in prepaid expenses (2,060) (1,643) (120) - (3,823)
Decrease in other assets (2,039) (10) (308) - (2,357)
(Decrease) increase in accounts
payable and accrued expenses (955) (461) 1,110 - (306)
Decrease in income
taxes payable (4,030) (41) - - (4,071)
--------- ------------ --------- -------- ---------
Net cash provided by
operating activities 27 13,638 1,090 - 14,755
----------- ---------- -------- -------- --------
Investing activities:
Purchases of property and
equipment (8,180) (3,745) (821) - (12,746)
------- ------- ----- ---------- --------
Net cash used in investing
activities (8,180) (3,745) (821) - (12,746)
------- ------- ----- ---------- --------
Financing activities:
Proceeds from exercise of
stock options 426 - - - 426
Intercompany balances 12,832 (12,832) - - -
--------- -------- ------ ------ ---------
Net cash (used in) provided
by financing activities 13,258 (12,832) - - 426
----------- ---------- ------ ------ -----
Increase (decrease) in cash and
cash equivalents 5,105 (2,939) 269 - 2,435
Cash and cash equivalents
at beginning of period 143,697 6,268 507 - 150,472
----------- --------- ----- -------- -----------
Cash and cash equivalents
at end of period $148,802 $3,329 $776 $ - $152,907
========== ======== ====== ======== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period
for income taxes $12,848 $1,003 $10 $ - $13,861
========== ======== ===== ========= ==========
</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>
28 Weeks 28 Weeks 12 Weeks 12 Weeks
Ended Ended Ended Ended Fiscal Year
07/16/00 07/18/99 07/16/00 7/18/99 1999 1998
-------- -------- -------- ------- ---- ----
Company-owned restaurants (1):
<S> <C> <C> <C> <C> <C> <C>
Opened during period 5 9 - 2 24 25
Acquired from (sold to)
franchisees during period-net - - - - (1) 1
Closed during period (8) (5) (4) (3) (9) (20)
------ ----- ------ ------- ------ ------
Open at end of period 635 628 641 625 638 624
Franchised restaurants:
Opened during period 17 19 11 6 49 43
Purchased from (sold to)
Company during period-net - - - - 1 (1)
Closed or terminated during period (13) (13) (6) (7) (32) (13)
----- ----- ---- ------ ---- -----
Open at end of period 290 274 290 274 286 268
All restaurants:
Opened during period 22 28 11 8 73 68
Closed or terminated during period (18) (18) (10) (10) (41) (33)
----- ----- ---- ---- ----- -----
Open at end of period 925 902 925 899 924 892
Kiosks (all franchised) open at
end of period 5 8 5 8 4 8
</TABLE>
(1) Excludes 28, 23, 26 and 19 new concept units as of July 16, 2000,
July 18, 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 twenty-eight and twelve weeks ended July 16,
2000 as compared to the comparable period in fiscal 1999 (see below).
Our consolidated EBITDA for the twenty-eight weeks ended July 16, 2000 was $33.7
million and our EBITDA margin was 17.5%, compared to $30.8 million and 16.8%,
respectively, for the twenty-eight weeks ended July 18, 1999. Our consolidated
EBITDA for the twelve weeks ended July 16, 2000 was $15.8 million and our EBITDA
margin was 18.6% compared to $14.3 million and 17.8%, respectively. 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 $6.6 million or 3.7% to $185.7 million for the
twenty-eight weeks ended July 16, 2000 from $179.1 million in the twenty-eight
weeks ended July 18, 1999. Restaurant sales from those same units increased by
$2.7 million or 3.4% to $81.4 million for the twelve weeks ended July 16, 2000
from $78.7 million in the twelve weeks ended July 18, 1999. Sales from new
concept units contributed $9.7 million and $4.4 million for the twenty-eight and
twelve weeks ended July 16, 2000, respectively, compared to $6.9 million and
$3.1 million for the twenty-eight and twelve weeks ended July 18, 1999. The
increase in overall restaurant sales resulted primarily from a higher number of
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. Comparable Sbarro unit sales increased
0.8% for the first twenty-eight weeks of fiscal 2000 over the same twenty-eight
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.
Pg. 23
<PAGE>
Franchise related income increased 51.9% to $6.6 million for the first
twenty-eight weeks ended July 16, 2000 from $4.3 million in the twenty-eight
week period ended July 18, 1999. The increase for the second quarter of fiscal
2000 was 107.3% to $3.8 million from $1.8 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 current twelve week period than in
the comparable 1999 period, higher area development and initial franchise fees
in each of the first two quarters of fiscal 2000 than the comparable periods of
fiscal 1999 and, for the second quarter of 2000, approximately $1.5 million
recognized in 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.
Interest income was approximately $0.6 million for the twenty-eight weeks ended
July 16, 2000 compared to $2.6 million in the twenty-eight week period ended
July 18, 1999. Interest income for the respective twelve week periods then ended
were $0.2 million and $1.0 million. 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.
Cost of food and paper products as a percentage of restaurant sales improved to
19.5% and 19.6% for the twenty-eight and twelve weeks ended July 16, 2000,
respectively, from 20.7% and 20.4%, 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
28.2% of restaurant sales in the twenty-eight weeks ended July 16, 2000 from
27.7% of restaurant sales in the twenty-eight weeks ended July 18, 1999. For the
second quarter of fiscal 2000 and 1999, these expenses represented 27.9% and
27.3%, 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 recently
been considering increasing the minimum wage by $1.00 per hour over a two to
three year period, which if implemented, would increase our labor costs for
certain of our hourly employees. This is also expected to result in wage
increases for our hourly employees that are paid in excess of the proposed
minimum wage level.
Restaurant operating expenses - occupancy and other expenses increased to 31.8%
of restaurant sales in the twenty-eight weeks ended July 16, 2000 from 31.3% in
the twenty-eight weeks ended July 18, 1999. These expenses represented 31.3% and
30.8% of restaurant sales for the twelve weeks ended July 16, 2000 and July 18,
1999, respectively. These increases were attributable principally to increases
in rent and other occupancy related costs.
Depreciation and amortization expense increased by $4.3 and $1.8 million in the
twenty-eight and twelve weeks ended July 16, 2000, respectively, over the
twenty-eight and twelve week period ended July 18, 1999, respectively, primarily
as a result of the amortization of the excess of the purchase price over the
cost of net assets deemed in connection with the completion of the going private
transaction on September 28, 1999.
Pg. 24
<PAGE>
General and administrative expenses were $13.9 million, or 7.2% of total
revenues, for the twenty-eight weeks ended July 16, 2000, compared to $12.4
million, or 6.7% of total revenues, for the twenty-eight weeks ended July 18,
1999. For the twelve weeks ended July 16, 2000 and July 18, 1999, general and
administrative expenses were $6.2 million, or 7.3% of total revenues, compared
to $5.5 million, or 6.8% of total revenues, respectively. These increases were
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 $16.6 million for the first half and $7.3 million for the
second quarter of 2000 relate to the Senior Notes, mortgage and unused Credit
Agreement line fees. Of this amount, $0.8 and $0.4 million represented non-cash
charges for the twenty-eight and twelve weeks ended July 16, 2000, respectively,
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.
Other operating income increased by $0.4 million to $2.9 million for the
twenty-eight weeks ended July 16, 2000 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 July 16,
2000 was unchanged from the comparable period in fiscal 1999.
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. 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 two quarters of
fiscal 2000 included $0.3 million (of which $0.2 million was recorded in the
second 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 July 16, 2000, we had unrestricted cash and cash
equivalents of $19.2 million and a working capital deficit of $10.3 million
compared to unrestricted cash, cash equivalents and marketable securities of
$127.3 million and working capital of $232.4 million at July 18, 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. We have $27.5
million of undrawn availability
Pg. 25
<PAGE>
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, and 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 through the second quarter as
discussed below.
Net cash generated in operating activities was $8.4 million for the twenty-eight
weeks ended July 16, 2000 compared to $14.8 million generated during the
twenty-eight weeks ended July 18, 1999. The $6.4 million reduction was primarily
due to the decrease in net income of $6.5 million and a decrease in deferred
taxes of $5.3 million offset by increased depreciation and amortization of $5.0
million and a $0.4 million net increase in operating assets and liabilities. The
net increase in operating assets and liabilities in the comparable twenty-eight
week periods of 2000 from the changes during the comparable period in 1999
resulted principally from an increase in accrued interest payable of $2.3
million, and a $9.3 million reduction in accounts payable and accrued expenses
(other than accrued interest expense) and a $5.3 million increase in taxes
receivable and decrease in income taxes payable 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 $14.7 million for the twenty-eight weeks ended July 16, 2000 and
$12.7 million for the twenty-eight weeks ended July 18, 1999.
Net cash used in financing activities was $8.0 million for the twenty-eight
weeks ended July 16, 2000 compared to $0.4 million of cash provided by financing
activities for the comparable period in 1999. This increase primarily resulted
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 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 at September 29. 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 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
Pg. 26
<PAGE>
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 for ten and five years, respectively. We were in compliance
with the various covenants in the Indenture, Credit Agreement and Mortgage as of
July 16, 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 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 $3.6 million in the twenty-eight weeks ended July 16, 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.
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; 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; no material increase
occurring in
Pg. 27
<PAGE>
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 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 contained in
this report, other than as required by law.
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.
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<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. 29
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SBARRO, INC.
Registrant
Date: August 29, 2000 By: /s/ MARIO SBARRO
--------------- ------------------------------------
Mario Sbarro
Chairman of the Board and
President (Principal
Executive Officer)
Date: August 29, 2000 By: /s/ ROBERT G. ROONEY
--------------- ------------------------------------
Robert G. Rooney
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
Date: August 29, 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
