10-Q/A 1 d870722-1.txt QUARTER ENDED OCTOBER 6, 2002 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED OCTOBER 6, 2002 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 NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING AS OF NOVEMBER 14, 2002 WAS 7,064,328. -------------------------------------------------------------------------------- EXPLANATORY NOTE This Amendment is being filed solely to correct typographical errors in the "all restaurants" and "open at end of period" numbers in the October 6, 2002 columns in the following table on this page, and to correct a non-numerical spelling error. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS --------------------- The following table provides information concerning the number of Company-owned and franchised restaurants in operation during each indicated period:
40 WEEKS ENDED 12 WEEKS ENDED FISCAL YEAR 10/6/02 10/7/01 10/6/02 10/7/01 2001 2000 ------- ------- ------- ------- ==== ==== Company-owned restaurants: Opened during period 8 4 5 1 9 13 Acquired from (sold to) franchisees during period-net (4) -- (3) -- -- 1 Closed during period (1) (41) (36) (22) (7) (43) (16) ---- ---- ---- ---- ---- ---- Open at end of period (2) 565 604 565 604 602 636 Franchised restaurants: Opened during period 28 22 13 9 42 36 Purchased from (sold to) Company during period-net 4 -- 3 -- -- (1) Closed or terminated during period (18) (12) (5) (7) (20) (18) ---- ---- ---- ---- ---- ---- Open at end of period 339 313 339 313 325 303 All restaurants: Opened during period 36 26 18 10 51 49 Closed or terminated during period (1) (59) (48) (27) (14) (63) (34) ---- ---- ---- ---- ---- ---- Open at end of period (2) 904 917 904 917 927 939 Kiosks (all franchised) open at end of period 4 5 4 5 4 5 (1) In addition, we have closed five and are planning to close approximately an additional five low volume, unprofitable Sbarro locations in the fourth quarter of fiscal 2002. See Note 4 of the "Notes to the Unaudited Consolidated Financial Statements" for information on the effect of the planned closings on our consolidated financial statements. (2) Excludes 35, 36, 37 and 33 other concept units as of October 6, 2002, October 7, 2001, the end of fiscal 2001 and the end of fiscal 2000, respectively (see Note 7 of the "Notes to the Unaudited Consolidated Financial Statements").
Our business is subject to seasonal fluctuations, the effect of weather and economic conditions and consumer confidence in shopping safety. 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 has accounted for approximately 40% of annual operating net income before amortization of intangible assets and any provision for restaurant closings or asset impairment. This percentage fluctuates due to the length of the holiday shopping period between Thanksgiving and New Year's Day, the number of weeks in our fourth quarter, weather and economic conditions and our results of operations in earlier quarters. Our consolidated EBITDA for the forty weeks ended October 6, 2002 was $42.5 million and our EBITDA margin was 15.9%, compared to $37.0 million and 12.9%, respectively, for the forty weeks ended October 7, 2001. Our consolidated EBITDA for the twelve weeks ended October 6, 2002 was $19.6 million and our EBITDA margin was 24.0%, compared to $12.1 million and 13.7%, respectively, for the twelve weeks ended October 7, 2001. EBITDA for the forty and twelve weeks ended October 6, 2002 includes the insurance recovery of $7.2 million, net. Excluding this item, the EBITDA for the forty and twelve weeks ended October 6, 2002 was $35.3 million and $12.5 million, respectively, and the EBITDA margins were 13.2% and 15.2%, respectively. EBITDA represents earnings before 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 ("GAAP") 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 decreased 7.1% to $254.5 million for the forty weeks ended October 6, 2002 from $273.9 million for the forty weeks ended October 7, 2001 and decreased 8.5% to $78.0 million for the twelve weeks ended October 6, 2002 from $85.2 million in the twelve weeks ended October 7, 2001. The decrease in sales for the forty weeks ended October 6, 2002 resulted from $17.0 million lower sales of Sbarro quick service units and $2.4 million lower sales of consolidated other concept units. Of the decline in Sbarro quick service unit restaurant sales for the forty weeks, approximately $11.3 million resulted from a 4.8% decrease in comparable unit sales to $222.4 million. The decrease in sales for the twelve weeks ended October 6, 2002 reflects $6.0 million lower sales of Sbarro quick service units and $1.2 million lower sales of consolidated other concept units. Of the decline in Sbarro quick service unit restaurant sales for the twelve weeks, approximately $4.3 million resulted from a 5.9% decrease in comparable unit sales to $69.0 million. We believe the decline in comparable restaurant sales in both reported fiscal 2002 periods was attributable to a reduction in shopping mall traffic related to the general economic downturn in the United States and the further impact of the events of September 11, 2001 offset, in part, by price increases of 0.7% and 3.3% implemented in late March 2001 and mid-June 2001, -2- respectively. Comparable restaurant sales are made up of sales at locations that were open during the entire current and prior fiscal years. Since the end of the first quarter of fiscal 2001, we closed 55 more units than we opened, causing the remaining $5.7 million and $1.7 million net reduction in Sbarro quick service unit sales for the forty weeks and twelve weeks, respectively, ended October 6, 2002. The units closed since the beginning of fiscal 2001, with the exception of our high volume owned unit destroyed in the collapse of the World Trade Center on September 11, 2001, were generally low volume, unprofitable, units that did not have a material impact on our results of operations. In addition, during fiscal 2002, we have closed four consolidated other concept units, which resulted in a reduction of $2.9 million and $1.1 million in net sales at those locations for the forty and twelve weeks, respectively, of fiscal 2002. Excluding approximately $0.3 million related to the termination of an area development agreement for Egypt during the first quarter of fiscal 2001, franchise related income increased 4.1% to $7.6 million for the forty weeks ended October 6, 2002 from $7.3 million in the comparable fiscal 2001 period and 5.4% to $2.6 million for the twelve weeks ended October 7, 2002 from $2.4 million in the twelve week period ended October 7, 2001. The increases for both the forty and twelve week periods ended October 6, 2002 were due to increases in both royalty and non-royalty revenues. The increase in non-royalty revenues was due to an increase in the number of unit openings in fiscal 2002 and an increase in the average initial franchising fee per unit opened, resulting in an increase in total initial franchise fees, and franchise transfer fees in the second fiscal quarter of 2002, partially offset by a reduction in income recognized from existing area development agreements in both the forty and twelve week periods of fiscal 2002 than in both of the same periods of fiscal 2001. Continuing royalty revenues from new locations opened in fiscal 2002 and fiscal 2001 offset a reduction in royalty revenues from pre-existing units caused by a reduction in comparable unit sales at both domestic and international locations. Real estate and other revenues decreased 1.6% and increased 15.9% in the forty and twelve weeks of 2002, respectively, from the same periods in fiscal 2001 due to changes in certain vendor rebates. Cost of food and paper products as a percentage of restaurant sales improved to 19.6% for the forty weeks ended October 6, 2002 from 20.5% for the comparable 2001 period and improved to 19.2% for the twelve weeks ended October 6, 2002 from 20.7% for the comparable 2001 fiscal period. The improvements were primarily due to the benefit derived from closing locations in fiscal 2002 and 2001 that were not able to function as efficiently as our other quick service locations due to their low sales volume and to the effect of lower average cheese prices in fiscal 2002. Cheese prices, which were, on average, slightly higher in first quarter of 2002, were significantly lower in the second and third quarters of 2002, than in the comparable periods in 2001. The benefit from the decrease in cheese prices was $1.5 million and $0.9 million for the forty and twelve weeks of fiscal 2002 from the same periods in fiscal 2001. Cheese prices to date in the fourth quarter of fiscal 2002 continue to be significantly lower than in the comparable period in fiscal 2001. Payroll and other employee benefits decreased by $4.0 million but increased to 28.2% from 27.7% as a percentage of restaurant sales for the forty weeks ended October 6, 2002 compared to the same period in fiscal 2001. For the twelve week period ended October 6, 2002, these costs -3- decreased by $1.4 million but increased to 28.0% from 27.3% as a percentage of restaurant sales compared to the comparable twelve week period in fiscal 2001. The dollar decreases were primarily due to the effect of steps taken to reduce payroll costs beginning in late fiscal 2001 and the closing the locations in fiscal 2002 and 2001. The percentage increases were due to the reduced level of sales in each of the 2002 periods reported. Other operating expenses decreased by $1.1 million, but increased to 35.0% of restaurant sales, in the forty weeks ended October 6, 2002 from 33.0% in the forty weeks ended October 7, 2001. These expenses, as a dollar amount, were flat, but increased to 34.3% of restaurant sales, in the twelve weeks ended October 6, 2002 from 31.4% in the twelve weeks ended October 7, 2001. The dollar decline the forty week period was due to the fewer Sbarro-owned units operating in our system. The percentage increases in both periods of fiscal 2002 compared to the fiscal 2001 periods were due to lower sales volume and the effects of higher rent and other occupancy related expenses resulting from the renewal of existing leases at the end of their terms at higher rental rates compounded by the reduced level of sales. In addition, we have been experiencing increases in repair and maintenance costs compared to fiscal 2001, a portion of which relates to the cost of a number of nationwide maintenance contracts entered into in late fiscal 2001 or early fiscal 2002 for the repair of our property and equipment. Also, as the average age of our locations increase, overall repair and maintenance costs have been increasing. These factors were offsetting factors against dollar savings effected from the closing of low volume units. Depreciation and amortization expense decreased by $8.3 million and $3.2 million for the forty and twelve weeks, respectively, of fiscal 2002 from the same periods in fiscal 2001. For the forty weeks of this fiscal year, the reduction was due primarily to a $4.2 million reduction in amortization expense resulting from SFAS No. 142, "Goodwill and Other Intangible Assets" becoming applicable to us as of the beginning of fiscal 2002, as well as a $1.6 million reduction in depreciation and amortization related to locations that closed since the end of the first quarter of fiscal 2001. For the twelve week period ended October 6, 2002, the reduction of amortization due to the applicability to the use of SFAS 142 was $1.2 million and the reduction in depreciation and amortization related to closed locations was $0.2 million. The balance of the change in depreciation and amortization expense in each of the fiscal 2002 reported periods relates to locations that had been included in the provision for asset impairment in fiscal 2001 for which no depreciation was taken in fiscal 2002 and to decreases in depreciation and amortization for locations that became fully depreciated during either fiscal 2002 and 2001. Under SFAS No. 142, we no longer amortize goodwill and intangible assets with indefinite lives, but rather review those assets annually for impairment (or more frequently if impairment indicators arise). Separate intangible assets that are not deemed to have indefinite lives continue to be amortized over their useful lives. We have completed our evaluation of goodwill and intangible assets (trademarks and tradenames) with indefinite lives acquired prior to July 1, 2001 ($205.1 million, net of accumulated amortization of $19.3 million at October 6, 2002). The evaluation did not have an impact on our financial position and results of operations. Due to the seasonal nature of the Sbarro quick service locations, we generally measure asset impairment of our restaurant locations after our full fiscal year results, unless impairment indications arise earlier. -4- General and administrative expenses were $18.0 million, or 6.8% of total revenues, for the forty weeks ended October 6, 2002, compared to $24.1 million, or 8.4% of total revenues, for the forty weeks ended October 7, 2001. Those costs were $5.3 million, or 6.5% of total revenues, for the twelve weeks ended October 6, 2002, compared to $7.7 million, or 8.7% of total revenues, for the twelve weeks ended October 7, 2001. The reductions in general and administrative costs for both periods of fiscal 2002 reflect decreases in field management costs and a reduction in corporate staff costs due to a cost containment program which we implemented beginning in the fourth quarter of fiscal 2001. During the forty weeks ended October 6, 2002, we recorded a provision for restaurant closings of $2.9 million. For the same forty weeks that ended on October 7 in fiscal 2001, we recorded a provision of $2.8 million. The provisions for the twelve weeks ended October 6, 2002 and October 7, 2001 were $0.7 million and $1.4 million, respectively. Of the provisions recorded in fiscal 2002, approximately $0.7 million was recorded in the third quarter (in addition to the $1.6 million recorded in the second quarter of fiscal 2002) for the net book value of the property and equipment to be abandoned at, and record the anticipated closing costs of, approximately thirty low volume, unprofitable Sbarro quick service locations that we have planned to close by the end of fiscal 2002 (twenty-five of those units have been closed to date). The net book value of approximately one-half of the units closed was included in the provision for asset impairment recorded in fiscal 2001. The balance of the provisions recorded in fiscal 2001 relate to costs that either were not included in the provision for asset impairment recorded in the fourth quarter of fiscal 2001 or which were not absorbed by amounts received from landlords in connection with such closings. The $1.4 million provision recorded in the third quarter of fiscal 2001 relates to the write off of the remaining book value of quick service store closings. Minority interest represents the share of the minority holders' interests in the combined profit or loss reported for the applicable period of the joint venture in which we have a majority interest. In early fiscal 2002, we closed one of the two locations owned by this joint venture. The closed unit had a nominal operating loss in the first quarter of fiscal 2002. The provision for the closing of this unit, which was not material, was made in the fourth quarter of fiscal 2001. Interest expense of $23.9 million and $24.1 million for the forty weeks ended October 6, 2002 and October 7, 2001, respectively, and of $7.2 million for each of the third fiscal quarters of 2002 and 2001, relate to the 11%, $255.0 million senior notes issued to finance our going private transaction in September 1999, the 8.4%, $16.0 million mortgage loan on our corporate headquarters entered into in the first quarter of 2001 (the principal of which is being repaid at the rate of $0.1 million per quarter), and fees for unused borrowing capacity under our credit agreement. Of these amounts, $1.1 million and $0.4 million in each of the forty weeks and twelve weeks ended October 6, 2002 and October 7, 2001, 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, bank credit agreement and the mortgage loan. Interest income for the forty week period ended October 6, 2002 and October 7, 2001 was approximately $0.4 million and $0.6 million, respectively. -5- Interest income was approximately $0.1 million for the third quarter of both the 2002 and 2001 fiscal years. Higher cash available for investment in each of the forty and twelve weeks in fiscal 2002 as compared to fiscal 2001 was offset by the lower interest rates in effect. The Indenture under which our senior notes are issued and our bank credit agreement limit the type of investments we may make. Equity in the net income of unconsolidated affiliates represents our share of earnings and losses in those new concepts in which we have a 50% or less ownership interest. The increase of $0.5 million and $0.1 million during the forty and twelve weeks ended October 6, 2002 as compared to the same periods in fiscal 2001, was primarily a result of improved performance of our steakhouse joint venture. 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. In September 2002, we reached an agreement to settle, for $9.65 million, our claim with our insurance company for the reimbursement of the depreciated cost of the assets destroyed at the Sbarro-owned World Trade Center location, as well as for lost income under our business interruption insurance coverage. We received the remaining amount of such settlement, less the $1.5 million advance received in May 2002, in September 2002. Approximately $7.2 million, net of related expenses, of the settlement relates to reimbursement of lost income under our business interruption insurance coverage and is included in our statement of operations for the forty and twelve weeks ended October 6, 2002. 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. Under the provisions of Subchapter S, substantially all taxes on our income is paid by our shareholders rather than us. Our tax expense of $0.3 million for both the forty week periods ended October 6, 2002 and October 7, 2001 and $0.1 million for both twelve week periods then ended was 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. At October 6, 2002, we had unrestricted cash and cash equivalents of $30.5 million and working capital of $19.5 million compared to unrestricted cash and cash equivalents of $11.5 and a working capital deficit of $2.4 million at October 7, 2001. Net cash provided by operating activities was $3.4 million for the forty weeks ended October 6, 2002 and $0.5 million for the forty weeks ended October 7, 2001. The $5.5 million increase in EBITDA and $2.5 million difference in the change in accounts receivable (primarily due to the receipt during the second quarter of fiscal 2002 of the $1.5 million advance for our insurance claim related to the World Trade Center, that had been recognized as a receivable, and an increase in amounts owed by franchisees due to the higher number of locations open in fiscal 2002) was offset by an increase in prepaid expenses of $1.2 million and $3.3 million lower amount of -6- accounts payable and accrued expenses in fiscal 2002 than at fiscal 2001 year-end. Accounts payable and accrued expenses at October 6, 2002 approximated those balances at October 7, 2001. Year-end accounts payable and accrued expenses are traditionally highest at the end of each of the Company's fiscal years which occurs at the end of the peak holiday season. Net cash used in investing activities has historically been primarily for capital expenditures, including those made by our consolidated other concepts. Net cash used in investing activities declined from $14.5 million for the forty weeks ended October 7, 2001 to $6.6 million for the forty weeks ended October 6, 2002 primarily due to a decline in quick service new unit openings and renovation activity, a reduction in expenditures for consolidated other concept locations as the development of these concepts has slowed, and the impact of nationwide maintenance contracts we entered into during late fiscal 2001 and early fiscal 2002. Investing activities in the forty weeks ended October 6, 2002 include $1.3 million, paid as part of previously committed costs of $2.3 million relating to an upgrade of our computer systems. Net cash used in financing activities was $3.2 million for the forty weeks ended October 6, 2002 compared to net cash used of $16.9 million in the comparable 2001 period. The reduction in amount of cash used was due to a $4.4 million reduction in tax distributions made under a tax payment agreement, the absence in fiscal 2002 of $3.2 million of loans (net of $0.7 million of loan repayments) and the absence of $5.0 million of dividends (outside of the Tax Payment Agreement) made to our shareholders in the fiscal 2001 period and the absence of the $1.0 million purchase price paid by us as part of the settlement of litigation in the fiscal 2001 period for the 20% interest in the Umberto of New Hyde Park concept that we did not own. We incur annual cash interest expense of approximately $29.7 million under our senior notes and mortgage loan and may incur additional interest expense for borrowings under our bank 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 to the extent permitted under the Indenture for the senior notes and the bank credit agreement and general corporate purposes. We believe that aggregate restaurant capital expenditures and our investments in joint ventures during fiscal 2002 will be significantly lower than levels in fiscal 2001 due to fewer scheduled store openings, lower renovation activity, lower expenditures for other concept locations and the maintenance contract referred to earlier. We expect our primary sources of liquidity to meet our needs will be cash flow from operations. The closing of the Sbarro quick service locations through the end of fiscal 2002 is expected, after termination payments to landlords, to increase liquidity as these units were low volume, under performing units that had negative EBITDA. Also, at October 15, 2002, we had $28.1 million of undrawn availability under our bank credit agreement, net of outstanding letters of credit and guarantees of reimbursement obligations aggregating approximately $1.9 million. We are subject to various covenants under the Indenture under which our senior notes are issued and under our bank credit agreement. One of the covenants limits our ability to borrow funds (except under specifically permitted arrangements, such as up to $75.0 million of revolving credit loans) unless our consolidated interest ratio coverage (as defined), after giving pro forma effect to the interest on the new borrowing, for the four most recently ended fiscal quarters is at least 2.5 -7- to 1. Another covenant limits our ability to make "restricted payments," including, among other things, dividend payments (other than as distributions pursuant to the Tax Payment Agreement) and investments in, among other things, unrestricted subsidiaries, to specified amounts determined under a formula contained in the Indenture provided that that ratio is at least 2.0 to 1 after giving pro forma effect to the restricted payment. As of October 6, 2002, that ratio was 2.23 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). Additionally, under the formula contained in the Indenture, we may not presently make restricted payments other than certain permitted investments. The Tax Payment Agreement was entered into as part of our election that our shareholders, rather than us, be taxed on our taxable income pursuant to Subchapter S of the Internal Revenue Code and, where applicable and permitted, under similar state and local tax provisions. The Tax Payment Agreement permits us, regardless of whether we can make restricted payments, to make periodic tax distributions to our shareholders in amounts intended to approximate the income taxes, including estimated taxes, that would be payable by them 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. Our contractual obligations and other commercial commitments with respect to both our Sbarro quick service and the other concepts (both those in which we have a majority or minority interest) do not differ materially from the information disclosed in the Form 10-K for the 2001 fiscal year. Our bank credit agreement was amended in March 2002 to (a) increase the required maximum ratio of Consolidated Senior Debt (as defined) at the end of a fiscal quarter to Consolidated EBITDA (as defined) for the four fiscal quarters then ended that we may have to ratios ranging from 7.25 to 1 through the third quarter of fiscal 2002 to 4.50 to 1 after the third quarter of fiscal 2003, and (b) to decrease the required minimum ratio of Consolidated EBITDA (as defined) for the four quarters ended on the measurement date to Consolidated Interest Expense (as defined) for the four quarters ended on the measurement date that we may have, to ratios ranging from 1.25 to 1 through the third quarter of fiscal 2002 to 2.00 to 1 after the third quarter of fiscal 2003. CRITICAL ACCOUNTING POLICIES AND CONTRACTUAL OBLIGATIONS -------------------------------------------------------- Accounting policies are an integral part of the preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America. Understanding these policies, therefore, is a key factor in understanding our reported results of operations and financial position. Certain critical accounting policies require us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. Due to their nature, estimates involve judgments based upon available information. Therefore, actual results or amounts could differ from estimates and the difference could have a material impact on our consolidated financial statements. During the forty weeks ended October 6, 2002, there were no material changes to the matters discussed under the headings "Critical Accounting Policies" and "Contractual Obligations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 30, 2001. -8- FORWARD LOOKING STATEMENTS -------------------------- This report contains certain forward-looking statements about our financial condition, results of operations, future prospects and business. These statements appear in a number of places in the report and include statements regarding our intent, belief, expectation, strategies or projections at that time. These statements generally contain words such as "may," "should," "seeks," "believes," "expects," "intends," "plans," "estimates," "projects," "strategy" and similar expressions or the negative of those words. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those projected, expressed or implied in the forward-looking statements. These risks and uncertainties, many of which are not within our control, include but are not limited to: o general economic, weather and business conditions; o the availability of suitable restaurant sites in appropriate regional shopping malls and other locations on reasonable rental terms; o changes in consumer tastes; o changes in population and traffic patterns, including the effect that terrorist or other events may have on the willingness of consumers to frequent malls, airports or downtown areas which are the predominant areas in which our restaurants are located; o our ability to continue to attract franchisees; o the success of the our present, and any future, joint ventures and other expansion opportunities; o the availability of food (particularly cheese and tomatoes) and paper products at current prices; o our ability to pass along cost increases to our customers; o no material increase occurring in the Federal minimum wage; o the continuity of services of members of our senior management team; o our ability to attract and retain competent restaurant and executive managerial personnel; o competition; o the level of, and our ability to comply with, government regulations; o our ability to generate sufficient cash flow to make interest payments and principal under our senior notes and bank credit agreement; o our ability to comply with covenants contained in the Indenture under which the senior notes are issued and in our bank credit agreement, and the effects which the restrictions imposed by those covenants may have on our ability to operate our business; and o our ability to repurchase senior notes to the extent required and make repayments under our bank credit agreement to the extent required in the event we make certain asset sales or experience a change of control. -9- 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. 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. -10- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to the Report to be signed on its behalf by the undersigned thereunto duly authorized. SBARRO, INC. --------------------------- Registrant Date: November 20, 2002 By: /s/ Steven B. Graham ------------------ -------------------------- Steven B. Graham Vice President and Controller (Principal Accounting Officer) -11- CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Mario Sbarro, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Sbarro, Inc.; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and -12- b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 20, 2002 /s/ Mario Sbarro ------------------------------------ Mario Sbarro, Chairman of the Board and President (Principal Executive Officer) -13- CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven B. Graham, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Sbarro, Inc.; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and -14- b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 20, 2002 /s/ Steven B. Graham ------------------------------------- Steven B. Graham, Vice President and Controller (Principal Accounting Officer and person performing the function of our principal financial officer) -15- EXHIBIT INDEX 99.01 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.02 Certification of Vice President, Controller, Principal Accounting Officer, the person performing the function of our principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -16-