10-K/A 1 f10ka123001.txt FORM 10-K/A - DATED 12/30/01 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A |X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 30, 2001 |_| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission file number 333-90817 SBARRO, INC. (Exact name of Registrant as specified in its charter) NEW YORK 11-2501939 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 401 BROADHOLLOW ROAD, MELVILLE, NEW YORK 11747 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 715-4100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ]. The registrant's common stock is not publicly-held or publicly traded. The number of shares of Common Stock of the registrant outstanding as of March 15, 2002 was 7,064,328. DOCUMENTS INCORPORATED BY REFERENCE None -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------ OF OPERATIONS ------------- The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements, the notes thereto and other data and information appearing elsewhere in this report. RESULTS OF OPERATIONS Our fiscal year ends on the Sunday nearest to December 31. Each of fiscal 2001, 2000 and 1999 consisted of 52 weeks. The going private transaction, including the purchase price allocation and certain other related transactions described in the notes to the consolidated financial statements, affect the comparability of the interest income, depreciation and amortization, interest expense and income tax line items in our consolidated statements of operations for fiscal 2000 as compared to fiscal 1999 discussed below. Our loss of $14.6 million in fiscal 2001 includes charges of $18.2 million for a provision for asset impairment, restaurant closings and other charges discussed below. One high volume Sbarro-owned quick service unit was destroyed in the September 11, 2001 attack on the World Trade Center in New York City. In addition, a number of airports were closed due to the events of September 11 causing airport Sbarro-owned and franchise units to close and a number of downtown locations experienced reduced sales. We have made claims under our business interruption insurance policies with respect thereto. We are fully insured for the cost of the assets destroyed at the Company location. The estimated amount of the expected recovery is included in accounts receivable as of December 30, 2001. In addition, we expect to recover lost income from our business interruption insurance coverage but, under applicable accounting principles, have not reflected any estimated recoveries in our financial statements. FISCAL 2001 COMPARED TO FISCAL 2000 Our consolidated EBITDA for the fiscal year ended December 30, 2001 (including the charges reflected above) was $46.3 million and our EBITDA margin was 11.9%, compared to $78.7 million and 19.7%, respectively, for the fiscal year ended December 31, 2000. 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 total revenues. 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 quick service units and consolidated other concept units decreased by $9.7 million, or 2.5%, to $372.7 million for fiscal 2001 from $382.4 million in fiscal 2000. Sales increases in consolidated other concept units of $4.0 million were offset by a $13.7 million decline in sales from quick service units. Sales at both Sbarro quick service and some of our consolidated other concept locations for fiscal 2001 have been adversely impacted by the general -2- economic downturn and were further affected by the events of September 11, 2001. During fiscal 2001, we closed 34 more units than we opened which resulted in a net sales reduction of approximately $1.2 million. Revenues from new quick service units did not offset the loss of revenues from quick service units closed since the beginning of fiscal 2000. The units closed since the beginning of fiscal 2000, with the exception of our high volume owned unit destroyed in the collapse of the World Trade Center on September 11, 2001 and the one high volume unit closed in fiscal 2000 and replaced in fiscal 2001, were generally low volume units that did not have a material impact on our results of operations. Following the events of September 11, a number of airport and other, principally downtown, locations were closed for a period of time, and those locations, as well as a number of other downtown locations, experienced a prolonged period of reduced sales. These units had sales of $8.7 million for the period from September 11, 2001 through the end of fiscal 2001 compared to $11.2 million for the similar period in fiscal 2000. Comparable Sbarro quick service unit sales decreased 2.1% to $321.0 million in fiscal 2001. Comparable Sbarro quick service unit sales levels that, as noted above, had already been affected by the decrease in mall traffic related to the general economic downturn in the United States, were negatively affected after the tragedy of September 11. In late March 2001 and mid June 2001, we implemented price increases of 0.7% and 3.3%, respectively. Comparable restaurant sales are made up of sales at locations that were open during the entire current and prior fiscal year. Excluding approximately $0.3 million related to the termination of an area development agreement in Egypt recognized during fiscal 2001 and $1.5 million of termination fees related to our development agreement and the closing of all Sbarro locations in Japan recognized in fiscal 2000, franchise related income increased 2.8% to $10.0 million for the fiscal year ended December 30, 2001 from $9.7 million for the fiscal year ended December 31, 2000. The increase resulted from greater continuing royalties due to a higher number of franchise units in operation in the current fiscal year offset, in large part, by decreases in royalties from locations in operation during all of fiscal 2001 and 2000. Franchises, both domestically and internationally, were also affected by the general economy and the events of September 11. Real estate and other revenues decreased $56,000 for the fiscal year ended December 30, 2001 from fiscal 2000 primarily due to decreases in certain vendor rebates. Cost of food and paper products as a percentage of restaurant sales increased to 20.0% for fiscal 2001 from 19.5% in the 2000 fiscal year. The increase in fiscal 2001 relates primarily to higher average cheese prices ($2.7 million), increased distribution fees ($0.5 million) and the reduced level of sales. Cheese prices to date in fiscal 2002 are lower than those experienced at the comparable point in time in fiscal 2001 and significantly lower than the average price for all of fiscal 2001. Payroll and other benefits increased to 27.9% of restaurant sales for the year ended December 30, 2001 from 26.6% of restaurant sales for the year ended December 31, 2000. The increase was primarily due to the reduced level of sales and tight labor market that was experienced into the third quarter of fiscal 2001 that had increased wages and salaries and the associated amounts paid for payroll taxes. Since then, we have seen an abatement of these pressures as a result of the continuing economic slowdown. In addition, we took steps to reduce payroll expenses during late fiscal 2001 and have seen a reduction of those costs in the early part of fiscal 2002. Other operating expenses increased to 31.3% of restaurant sales for fiscal 2001 from 29.8% for fiscal 2000 primarily due to increases in rent, utilities and other occupancy related expenses and the reduced level of sales. -3- During fiscal 2001, we recorded a provision for asset impairment, restaurant closings and other charges of $18.2 million. Of that provision, (a) $5.5 million was for property and equipment asset impairment, including $3.6 million related to our other concepts, (b) $11.7 million was for restaurant closings, including $6.7 million for our other concepts and $0.2 million for the cost of the conversion of our Umberto and Tony & Bruno locations to our Mama Sbarro concept and (c) $1.0 million was for other charges. In early 2002, we closed two of other concept locations for which amounts were included in the provision. Depreciation and amortization expense increased by $1.3 million for fiscal 2001 from fiscal 2000. Depreciation and amortization expense included $5.4 million and $5.0 million in fiscal 2001 and 2000, respectively, for the amortization of the excess of the purchase price over the cost of net assets acquired in connection with the completion of the going private transaction on September 28, 1999. The finalization of the purchase price allocation in fiscal 2000 resulted in a reduction of the originally estimated amounts in fiscal 2000 while fiscal 2001 represents a full year of such amortization. Under SFAS No. 142, "Goodwill and Other Intangible Assets," commencing in fiscal 2002 we will no longer amortize goodwill and intangible assets with indefinite lives (for which our earnings were charged $5.4 million and $5.0 million in fiscal 2001 and fiscal 2000, respectively) but instead we will review those assets annually for impairment (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives. With respect to goodwill and intangible assets (trademarks and tradenames) acquired prior to July 1, 2001 ($205.2 million, net of accumulated amortization, at December 30, 2001), we will adopt SFAS 142 effective with fiscal 2002. Our initial evaluations of impairment are expected to be completed by the end of the first quarter of fiscal 2002. We do not believe an impairment, if any, will be material. General and administrative expenses were $29.5 million, or 7.6% of total revenues, for fiscal 2001 compared to $30.9 million, or 7.7% of total revenues, for fiscal 2000. General and administrative costs for fiscal 2001 reflect decreases in field management costs, a reduction in corporate staff costs due to a cost containment program which we implemented beginning in the fourth quarter of fiscal 2001 and lower costs related to litigation contingencies offset, in part, by a decrease in the amount of overhead capitalized in connection with capital projects due to the reduced number of new unit openings. Minority interest represents the share of the minority holders' interests in the combined operations or loss in each period of the fiscal years being reported of the joint ventures in which we have a majority interest. In early fiscal 2002, we closed one of the two locations which are included in the calculation of the minority interest with a minimal charge to earnings that was recorded in fiscal 2001. Interest expense of $31.0 million and $30.2 million for fiscal 2001 and 2000, respectively, relate to the 11%, $255.0 million Senior Notes issued to finance our going private transaction, the 8.4%, $16.0 million mortgage loan on our corporate headquarters and fees for the unused borrowing capacity under our Credit Agreement. Of these amounts, $1.5 million in each of 2001 and 2000 represented non-cash charges for the accretion of the original issue discount on our Senior Notes and the amortization of deferred financing costs on the Senior Notes, Credit Agreement and the mortgage loan. The increase in interest expense was due to the full period impact in fiscal 2001 of the mortgage loan, which was entered into in March 2000. -4- Interest income was approximately $0.8 million for fiscal 2001 and $0.9 million for fiscal 2000. Interest income in fiscal 2001 was affected by reduced availability of cash for investment and lower interest rates. Equity in the net income of unconsolidated affiliates represents our share of earnings and losses in those new concepts in which the company has a 50% or less ownership interest. We have determined that we will continue to develop and expand the steakhouse joint venture locations but are evaluating the disposition of the other concepts in which we have a 50% or less ownership interest. 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 rather than us. Our tax expense of $0.3 million and $0.5 million for fiscal 2001 and 2000, respectively, represents taxes owed to jurisdictions that do not recognize S corporation status or that tax entities based on factors other than income. 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 our conversion to S corporation status in the first quarter of fiscal 2000. FISCAL 2000 COMPARED TO FISCAL 1999 Our consolidated EBITDA for the fiscal year ended December 31, 2000 was $78.7 million and our EBITDA margin was 19.7%, compared to $78.6 million and 20.2%, respectively, for the fiscal year ended January 2, 2000. Restaurant sales from Sbarro-owned quick service units and consolidated new concept units increased by $6.9 million, or 1.8%, to $382.4 million for fiscal 2000 from $375.5 million in fiscal 1999. Sales from new concept units contributed $5.1 million of the increase in restaurant sales. However, the revenues from new quick service units did not offset the loss of revenues from closed quick service units as we closed two more units than we opened in 2000, including two high volume units (one of which is being replaced in fiscal 2001). No material price increases were implemented in fiscal 2000. Comparable Sbarro quick service unit sales increased 0.2% during fiscal 2000. 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 29.3% to $11.2 million for the fiscal year ended December 31, 2000 from $8.7 million for the fiscal year ended January 2, 2000. The increase resulted from greater continuing royalties due to a higher number of franchise units in operation, higher area development and higher initial franchise fees in fiscal 2000 than in fiscal 1999, particularly from international markets, and approximately $1.5 million recognized in fiscal 2000 related to the termination of our development agreement and the closing of all Sbarro locations in Japan. In fiscal 2000, we entered into area development agreements in specific domestic and international venues and markets with two major food service operators. To date, these arrangements have not produced expected revenues. Real estate and other revenues increased by $0.3 million to $5.8 million for the fiscal year ended December 31, 2000 from fiscal 1999 due to the full year impact from leasing a majority of our corporate headquarters building not occupied by Sbarro to third parties in 1999. -5- Cost of food and paper products as a percentage of restaurant sales improved to 19.5% for fiscal 2000 from 20.2% in the 1999 fiscal year. This improvement was primarily due to lower average cheese prices during fiscal 2000. Payroll and other employee benefits increased to 26.6% of restaurant sales for the year ended December 31 2000 from 25.9% of restaurant sales in the year ended January 2, 2000. This increase was primarily due to a tight labor market, resulting in pressures on wages and salaries and associated increases in amounts paid for payroll taxes. Other operating expenses increased to 29.8% for fiscal 2000 from 28.9% of restaurant sales for fiscal 1999 primarily due to increases in rent, utility and other occupancy related expenses. Depreciation and amortization expense increased by $3.3 million for fiscal 2000 over fiscal 1999. Depreciation and amortization expense included $4.8 and $2.0 million in fiscal 2000 and 1999, respectively, for amortization of the excess of the purchase price over the cost of net assets acquired in connection with the completion of the going private transaction on September 28, 1999 representing a full year in 2000 compared to three months in 1999. In fiscal 2000, we finalized our allocation of the purchase price from the going private transaction based on an evaluation of our net assets at September 29, 1999 resulting in lower annual amortization expense than originally estimated. General and administrative costs were $30.9 million, or 7.7% of total revenues, for fiscal 2000, compared to $28.9 million, or 7.4% of total revenues, for fiscal 1999. These increases were primarily due to higher payroll costs, costs incurred in expanding franchise and new concept operations and increases in various professional fees, including litigation expenses. These expenses include the cost of operating our corporate headquarters building. The provision for unit closings is the result of a special allocation of losses in fiscal 1999 of $1.0 million in connection with the final disposition of two joint venture unit closings recorded in 1997. Minority interest represents the share of the minority holders' interests in the combined income in fiscal 2000 and combined loss in fiscal 1999 of the joint ventures in which we have a majority interest. Interest expense of $30.2 million for fiscal 2000 relates to the 11%, $255.0 million Senior Notes issued to finance our going private transaction on September 28, 1999, the 8.4%, $16.0 million mortgage loan on our corporate headquarters in 2000 and line fees for unused borrowing capacity under our Credit Agreement. Results for fiscal 1999 included interest only from the date of the going private transaction through the end of the 1999 fiscal year of $7.9 million for the Senior Notes and Credit Agreement line fees. Of these amounts, $1.5 and $0.4 million for fiscal 2000 and 1999, respectively, represented non-cash charges for the accretion of the original issue discount on our Senior Notes and the amortization of deferred financing costs on the Senior Notes, Credit Agreement and, in 2000, the mortgage loan. Interest income was approximately $0.9 million and $3.8 million for the fiscal years 2000 and 1999, respectively. We used substantially all of our available cash on September 28, 1999 in order to fund the going private transaction. Therefore, we had a substantial reduction in our interest income for fiscal 2000. -6- Equity in the net income (loss) of unconsolidated affiliates represents our share of earnings and losses in those new concepts in which the Company has a 50% or less ownership interest. 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 fiscal 2000 included $0.5 million for taxes owed to jurisdictions that do not recognize S corporation status or that tax entities based on factors other than income. IMPACT OF INFLATION AND OTHER FACTORS Food, labor, rent, construction and equipment costs are the items most affected by inflation in the restaurant business. Although for the past several years inflation has not been a significant factor, there can be no assurance that this trend will continue. In addition, food and paper product costs may be temporarily or permanently affected by weather, economic and other factors beyond our control that may reduce the availability and increase the cost of these items. Historically, the price of cheese has fluctuated more than our other food ingredients and related restaurant supplies. SEASONALITY Our business is subject to seasonal fluctuations, and the effects of weather and economic conditions. Earnings have been highest in our fourth fiscal quarter due primarily to increased volume in shopping malls during the holiday shopping season. Historically, the fourth fiscal quarter had accounted for approximately 40% of annual operating net income before the effect of additional amortization associated with the going private transaction ("adjusted operating income") and fluctuates due to the length of the holiday shopping period between Thanksgiving and New Year's Day and the number of weeks in our fourth quarter. Adjusted operating income for the fourth quarter of 2001 and 2000 were approximately 24% and 40%, respectively, of adjusted operating income for the respective fiscal year. The lower percentage of adjusted operating income for the fourth quarter of fiscal 2001 reflect the adverse impact of the general economic downturn and the effect of the events of September 11, 2001 ACCOUNTING PERIOD Our fiscal year ends on the Sunday nearest to December 31. All reported fiscal years contained 52 weeks. Fiscal 2002 will also contain 52 weeks. -7- 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. At December 30, 2001, we had unrestricted cash and cash equivalents of $37.0 million and working capital of $4.6 million compared to unrestricted cash and cash equivalents of $42.3 million and working capital of $10.3 million as of December 31, 2000. As part of the going private transaction, we sold $255.0 million of 11% Senior Notes (at a price of 98.514% of par to yield 11.25% per annum), the net proceeds of which, together with substantially all of our then existing cash, was used to finance the transaction, and entered into a $30.0 million Credit Agreement. At December 30, 2001 and March 15, 2002, we had $27.0 million and $27.3 million of undrawn availability under our Credit Agreement, net of outstanding letters of credit and guarantees of reimbursement obligations aggregating approximately $3.0 and $2.7 million, respectively. We were in compliance with the various covenants in the Indenture for the Senior Notes and the Mortgage as of December 30, 2001. We have received a waiver of compliance for fiscal 2001 from certain ratios required to be maintained under our credit agreement at year end and an amendment to certain annual ratios required for fiscal 2002 and fiscal 2003. As amended, the Credit Agreement requires that we maintain a minimum ratio of consolidated EBITDA to consolidated interest expense (in each case with the guaranteeing subsidiaries) of at least 1.25 to 1.0 through December 28, 2002, 1.90 to 1.0 beginning December 29, 2002 and 2.0 to 1.0 beginning December 28, 2003. We are also required to maintain a ratio of consolidated senior debt to consolidated EBITDA (in each case with the guaranteeing subsidiaries) of 7.25 to 1 through December 28, 2002, 4.7 to 1.0 beginning December 29, 2002 and 4.5 to 1.0 beginning December 28, 2003. We anticipate being in compliance with the revised ratios. Net cash provided by operating activities was $34.8 million and $48.3 million for the fiscal years ended December 30, 2001 and December 31, 2000, respectively. The $13.5 million reduction was primarily due to a reduction in operating income, before the provision for asset impairment, restaurant closings and other charges, of $15.5 million. Net cash provided by operating activities before the change in accrued interest payable and the reversal of deferred tax liabilities in 2000 upon conversion to Subchapter S status was $53.5 million for fiscal 2000. Net cash used in investing activities primarily relates to capital expenditures, including investments made by our consolidated other concepts. Net cash used in investing activities was $22.5 million for 2001 compared to $31.2 million for 2000. Net cash used in financing activities was $17.7 million for the fiscal year ended December 30, 2001 compared to $8.6 million for the fiscal year ended December 31, 2000. Cash used in financing activities for fiscal 2001 resulted primarily from $12.6 million of distributions to shareholders, including tax distributions of $7.6 million (see below), $4.0 million of loans to our shareholders, net of $2.7 of repayments of certain loans, and the purchase of the 20% interest in the Umberto of New Hyde Park concept in settlement of litigation for $1.0 million. Cash used in financing activities for fiscal 2000 resulted primarily from $22.1 million of distributions to shareholders, including tax distributions of $3.8 million (see below), and a $2.0 million loan to our Chairman, President and CEO offset, in part, by $15.6 million of net proceeds from a $16.0 million 8.4% ten year loan secured by a mortgage on our corporate headquarters. -8- 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 had a tax liability of approximately 46% of our taxable income in both 2001 and 2000. Despite our book loss, our shareholders are expected to have taxable income in fiscal 2001 resulting from differences in the book and tax treatments of the provision for asset impairment, the non-deductability of goodwill for tax purposes and significant differences in book and tax depreciation. The 46% 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 (once on us for our taxable income and once on our shareholders for dividends received from us) 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 to provide funds to them for their payments of taxes on our earnings. We made tax distributions of $3.8 million in fiscal 2000, $7.6 million in fiscal 2001 (all for fiscal 2000) and $3.1 million in January 2002 related to 2001 tax basis earnings. We do not expect to make additional tax distributions in 2002 related to 2001 earnings. We 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 other ventures, distributions to shareholders as permitted under the Indenture for the Senior Notes and the Credit Agreement and general corporate purposes. We believe that aggregate restaurant capital expenditures and our investments in joint ventures during the next twelve months will be significantly lower than levels in fiscal 2001 ($22.5 million) due to reduced levels of capital expenditures proposed for our consolidated other concepts. Unpaid capital expenditure commitments aggregated approximately $1.4 million at December 30, 2001. We expect our primary sources of liquidity to meet these needs will be cash flow from operations and availability under our Credit Agreement. Under the Indenture under which our Senior Notes are issued, there are various covenants that limit our ability to borrow funds in addition to lending arrangements that existed at the date of the going private transactions and replacements of those arrangements, to make "restricted payments" including, among other things, dividend payments (other than as distributions pursuant to the Tax Payment Agreement), and to make investments in, among other things, unrestricted subsidiaries. Among other covenants, the Indenture requires that, in order for us to borrow (except under specifically permitted arrangements, such as up to $75.0 million of revolving credit loans), our consolidated interest ratio coverage (as defined in the Indenture), after giving pro forma effect to the interest on the new borrowing, for the four most recently ended fiscal quarters must be at least 2.5 to 1. In order to make restricted payments, our ratio must be at least 2.0 to 1, after giving pro forma effect to the restricted payment. As of December 30, 2001, that ratio was 2.03 to 1. As a result, we are not presently able to borrow funds other than specifically permitted indebtedness, including up to $75.0 million of revolving credit loans. -9- Our contractual obligations with respect to both our and the other concepts (both those in which we have a majority or minority interest), as of March 1, 2002, are as follows:
DUE BY PERIOD ---------------------------------------------------------- LESS THAN AFTER CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS ----------------------- ----- ------ ----------- ----------- ------- (IN MILLIONS) Senior Notes (1) $ 255.0 $ -0- $ -0- $ -0- $ 255.0 Mortgage Loan (2) $ 15.8 $ 0.1 $ 0.3 $ 0.3 $ 15.2 Credit Agreement (3) $ -0- $ -0- $ -0- $ -0- $ -0- Standby Letters of Credit (4) $ 3.0 $ -0- $ -0- $ 0.1 $ 2.9 Guarantees (5) $ 7.0 $ 2.0 $ 0.1 $ -0- $ 4.9 Operating Leases (6) $ 590.9 $ 77.8 $ 147.4 $ 134.1 $ 231.6
(1) There are no principal repayment obligations under the Senior Note until September 2009. (2) Payable in monthly installments of principal and interest of $0.1 million. Table includes only principal portion of the installment payments. (3) The Credit Agreement enables us to borrow, from time to time, up to $30.0 million, net of outstanding letters of credit issued pursuant to a $10.0 million subfacility therefor under the Credit Agreement. No repayments are required under the Credit Agreement until September 2004. There are currently no amounts outstanding under the Credit Agreement. However, of the $3.0 million of letters of credit reflected below, $2.7 million reduces our availability under such Credit Agreement. (4) Represents our maximum reimbursement obligations to the issuer of the letter of credit in the event the letter of credit is drawn upon. The letters of credit generally are issued instead of cash security deposits under leases or to guarantee construction costs for Sbarro or other concept locations. With the exception of one standby letter of credit for one of our other concept locations that guarantees the payment of construction costs, all the standby letters of credit are annually renewable through the expiration of the related lease terms. (5) Represents our portion of the borrowings of our steakhouse joint venture, in which we have a minority interest. Our obligation under the guaranty is several so that we are potentially responsible only for our share of the debt. Our potential share is shown in the above table. (6) Includes operating leases subleased by us to franchisees and operating leases for which we guarantee the obligations for certain of our other concept locations. Except for the foregoing, we have no off-balance sheet contractual arrangements. We have no unconditional purchase obligations except that, at December 30, 2001, we were a party to contracts aggregating $7.0 million with respect to the construction of restaurants (of which approximately $1.4 million remained to be paid thereunder). Historically, we have not purchased or entered into interest rate swaps or future, forward, option or other instruments designed to hedge against changes in interest rates, the price of commodities we purchase or the value of foreign currencies. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible -10- assets with indefinite lives are no longer amortized but are reviewed annually for impairment (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 have, since July 1, 2001, applied to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we will adopt SFAS No. 142 effective December 31, 2001. The provisions of SFAS No. 142 that we will adopt effective December 31, 2001 will result in a reduction of approximately $5.4 million in annual amortization of intangible assets. Our initial evaluations of impairment are expected to be completed by the end of the first quarter of fiscal 2002. In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of long-lived assets, except for certain obligations of lessees. We have adopted SFAS No. 143 in fiscal 2002. SFAS No. 143 is not expected to have a material effect on our operations. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." This statement supersedes SFAS 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting Results of Operations-Infrequently Occurring Events and Transactions." This Statement retains the fundamental provisions of SFAS 121 for recognition and measurement of impairment, but amends the accounting and reporting standards for segments of a business to be disposed of. The adoption of SFAS 144 is not expected to have a material impact as we will continue to assess impairment of the assets of our restaurants as we have in the past. CRITICAL ACCOUNTING POLICIES AND JUDGMENTS ------------------------------------------ Accounting policies whose application may have a significant effect on our reported results of operations and financial position and that can require judgments by management that can affect their application, include SFAS No. 5, "Accounting for Contingencies," and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 5 requires management judgments regarding the probability and estimated amount of possible future contingent liabilities, especially, in our case, legal matters. SFAS No. 121 requires judgments regarding future operating or disposition plans for marginally performing assets. The application of both of these policies has affected the amount and timing of charges to operating results that have been significant in recent years. In the past we have made, and we intend in the future to make, decisions regarding legal matters based on the status of the matter and our best estimate of the outcome (we expense defense costs as incurred) and regarding our long-lived assets based on our business judgment of when to close underperforming units. We will be required to periodically assess, under SFAS 142, "Goodwill and Other Intangible Assets," the impairment of goodwill and intangible asset acquired prior to July 1, 2001 ($205.2 million, net of accumulated amortization, at December 30, 2001). Our initial evaluations of impairment are expected to be completed by the end of the first quarter of fiscal 2002. Any such impairment would affect our earnings but, since any charge to earnings would be a non-cash charge, would not affect our cash flow. We do not believe an impairment, if any, will be material. -11- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 25, 2002. SBARRO, INC. By: /s/ STEVEN B. GRAHAM ----------------------------------------- Steven B. Graham, Vice President and Controller (Principal Accounting Officer)