-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N2LgnBOVtbaEBYR4RUDEcydN07FROQsf+vCyQvbWmner4fNyW6gi6MlUFNGWbH9x R6VPLemCJRfQgTfgBtU2eA== 0000910680-04-000571.txt : 20040602 0000910680-04-000571.hdr.sgml : 20040602 20040602104517 ACCESSION NUMBER: 0000910680-04-000571 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040418 FILED AS OF DATE: 20040602 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SBARRO INC CENTRAL INDEX KEY: 0000766004 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 112501939 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-96807 FILM NUMBER: 04843102 BUSINESS ADDRESS: STREET 1: 401 BROADHOLLOW ROAD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5168640200 MAIL ADDRESS: STREET 1: 401 BROADHOLLOW ROAD CITY: MELVILLE STATE: NY ZIP: 11747 10-Q 1 f10q041804.txt QUARTERLY REPORT ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended April 18, 2004 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 11747-4714 (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 No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ----------- ----------- The number of shares of Common Stock of the registrant outstanding as of May 17, 2004 was 7,064,328. ============================================================================== SBARRO, INC. FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGES --------------------- ----- Consolidated Financial Statements: Balance Sheets - April 18, 2004 (unaudited) and December 28, 2003..............................3-4 Statements of Operations (unaudited) - Sixteen Weeks ended April 18, 2004 and April 20, 2003...........................................................................5 Statements of Cash Flows (unaudited) - Sixteen Weeks ended April 18, 2004 and April 20, 2003............................................................................6-7 Notes to Unaudited Consolidated Financial Statements..........................................8-22 Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................................................23-32 Qualitative and Quantitative Disclosures of Market Risk..................................................33 Controls and Procedures..................................................................................33 PART II. OTHER INFORMATION...........................................................................34
Page 2 Part I - Financial Information Item 1. Consolidated Financial Statements SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands) ASSETS April 18, December 28, 2004 2003 -------- -------- (unaudited) Current assets: Cash and cash equivalents $ 40,822 $ 56,409 Restricted cash for untendered shares 21 21 Receivables, net of allowance for doubtful accounts of $461 in 2004 and $488 in 2003: Franchisee 2,036 1,700 Other 806 1,171 -------- -------- 2,842 2,871 Inventories 2,802 2,707 Prepaid expenses 6,547 3,844 Current portion of loans receivable from officers 2,588 2,810 -------- -------- Total current assets 55,622 68,662 Property and equipment, net 93,477 96,604 Intangible assets: Trademarks, net 195,916 195,916 Goodwill, net 9,204 9,204 Deferred financing costs and other, net 5,186 5,482 Loans receivable from officers, less current portion 3,065 3,347 Other assets 7,453 7,614 -------- -------- $369,923 $386,829 ======== ========
See notes to unaudited consolidated financial statements. Page 3 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands except share data) LIABILITIES & SHAREHOLDERS' EQUITY April 18, December 28, 2004 2003 -------- -------- (unaudited) Current liabilities: Amounts due for untendered shares $ 21 $ 21 Accounts payable 11,804 13,734 Accrued expenses 15,214 18,774 Accrued interest payable 2,787 8,181 Current portion of mortgage payable 173 168 -------- -------- Total current liabilities 29,999 40,878 -------- -------- Deferred rent 8,787 8,711 -------- -------- Long-term debt, net of original issue discount 268,210 268,152 -------- -------- Contingencies - - Shareholders' equity: 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 71 71 Additional paid-in capital 10 10 Retained earnings 62,846 69,007 -------- -------- Total shareholders equity 62,927 69,088 -------- -------- $369,923 $386,829 ======== ========
See notes to unaudited consolidated financial statements. Page 4 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands) April 18, 2004 April 20, 2003 -------- -------- Revenues: Restaurant sales $ 90,846 $ 88,509 Franchise related income 3,404 2,939 Real estate and other 1,961 1,667 -------- -------- Total revenues 96,211 93,115 -------- -------- Costs and expenses: Restaurant operating expenses: Cost of food and paper products 20,009 19,304 Payroll and other employee benefits 26,147 26,211 Other operating costs 33,807 33,532 Depreciation and amortization 4,984 5,896 General and administrative costs 8,126 8,719 Provision for restaurant closings 175 529 -------- -------- Total costs and expenses 93,248 94,191 -------- -------- Operating income (loss) 2,963 (1,076) -------- -------- Other (expense) income: Interest expense (9,477) (9,583) Interest income 196 214 Equity in net income of unconsolidated affiliates 398 281 -------- -------- Net other expense (8,883) (9,088) -------- -------- Loss before minority interest (5,920) (10,164) Minority interest - (5) -------- -------- Loss before income taxes (5,920) (10,169) Income taxes 241 321 -------- -------- Net loss $ (6,161) $(10,490) ======== ========
See notes to unaudited consolidated financial statements. Page 5 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) April 18, 2004 April 20, 2003 -------- -------- Operating activities: Net loss $ (6,161) $(10,490) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 5,421 6,365 Increase in deferred rent, net 93 90 Loss on sale of other concept units - 250 Restaurant closing costs 175 529 Minority interest - 5 Equity in net income of unconsolidated affiliates (398) (281) Dividends received from unconsolidated affiliate 305 119 -------- -------- (565) (3,413) Changes in operating assets and liabilities: Receivables 228 (220) Inventories (95) 932 Prepaid expenses (2,703) (4,424) Other assets 48 (195) Accounts payable and accrued expenses (4,549) 571 Accrued interest payable (5,394) (5,394) -------- -------- Net cash used in operating activities (13,030) (12,143) -------- --------
See notes to unaudited consolidated financial statements. Page 6 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) April 18, April 20, 2004 2003 -------- -------- Investing activities: Purchases of property and equipment $ (2,324) $ (3,071) -------- -------- Net cash used in investing activities (2,324) (3,071) -------- -------- Financing activities: Mortgage principal repayments (54) (50) Tax distributions (682) (1,101) Repayment of loans receivable from officers 503 - -------- -------- Net cash used in financing activities (233) (1,151) -------- -------- Decrease in cash and cash equivalents (15,587) (16,365) Cash and cash equivalents at beginning of period 56,409 55,150 -------- -------- Cash and cash equivalents at end of period $ 40,822 $ 38,785 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 204 $ 119 ======== ======== Cash paid during the period for interest $ 14,458 $ 14,548 ======== ======== See notes to unaudited consolidated financial statements. Page 7 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) 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 our management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the consolidated financial position of Sbarro and our subsidiaries at April 18, 2004 and our consolidated results of operations and cash flows for the first quarter which includes the sixteen week periods ended April 18, 2004 and April 20, 2003 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 December 28, 2003. 2. Recent accounting pronouncements: Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No 46, "Consolidation of Variable Interest Entities," was effective immediately upon its issuance during fiscal 2003 for all enterprises with variable interests in entities created after January 31, 2003. In December 2003, the FASB staff issued FIN No. 46(R) which changes the effective date for interests in variable interest entities created before February 1, 2003 beginning with the first interim reporting period after March 15, 2004. If an entity is determined to be a variable interest entity, it must be consolidated by the enterprise that absorbs the majority of the entity's expected losses if they occur, receives a majority of the entity's expected residual returns if they occur, or both. Where it is reasonably possible that the enterprise will consolidate or disclose information about a variable interest entity, the enterprise must disclose the nature, purpose, size and activity of the variable interest entity and the enterprise's maximum exposure to loss as a result of its involvement with the variable interest entity in all financial statements issued after January 31, 2003. The FASB has specifically exempted traditional franchise arrangements from the evaluations required under FIN No. 46. We have also reviewed our corporate relationships for possible coverage under FIN No. 46. The application of FIN No. 46 did not have a material effect on our disclosures and our financial position or results of operations. We have several variable interest entities, for which we have provided certain required disclosures in our Form 10-K. However, we are not the primary beneficiary and therefore do not need to consolidate these entities. Page 8 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) 3. Debt: In March 2004, we obtained an uncommitted line of credit to replace our former revolving credit facility. Under the new line, we currently have the ability, subject to bank approval, to borrow up to $3 million, including outstanding letters of credit. The new line of credit contains no financial covenants or unused line fees. Interest applicable to the loans under the new line of credit is at the bank's prime rate at the time of any borrowings. The line expires in May 2005. There currently are $1.7 million of letters of credit outstanding and we have $1.3 million of undrawn availability. Under our senior notes indenture, there are various covenants that limit our ability to borrow funds, in addition to lending arrangements that existed at the date the indenture was entered into 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, 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. As of April 18, 2004, that ratio was 1.36 to 1. As a result, we are not presently able to borrow funds except for the specifically permitted indebtedness, of up to $75.0 million of revolving credit loans. In order to make restricted payments, that ratio must be at least 2.0 to 1, after giving pro forma effect to the restricted payment and, in any event, is limited in dollar amount pursuant to a formula contained in the indenture. We refer to the amount that is available for us to make dividends and other restricted payments as the "restricted payment availability." We cannot make restricted payments (other than distributions pursuant to the tax payment agreement) until we increase the restricted payment availability by approximately $17.8 million, and then only to the extent of any excess over that amount. In March 2000, one of our 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 outstanding principal balance of the loan as of April 18, 2004 was $15.3 million. The mortgage agreement contains various covenants, including a requirement that the subsidiary maintain a minimum ratio of EBITDA to annual debt service of at least 1.2 to 1.0. We were in compliance with all covenants in the indenture for the senior notes and our mortgage as of April 18, 2004. Page 9 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) 4. Income taxes: We made Subchapter S tax distributions in the amount of $1.8 million to our shareholders related to our fiscal 2002 tax basis income. Of such amount, $1.1 million was paid in the first quarter of 2003 and $0.7 million was paid in the first quarter of 2004. 5. Litigation: On December 20, 1999, Antonio Garcia and thirteen current and former general managers of Sbarro restaurants in California amended a complaint filed in the Superior Court of California for Orange County. The complaint alleges that the plaintiffs were improperly classified as exempt employees under the California wage and hour law. The plaintiffs are seeking actual damages, punitive damages and costs of the lawsuit, including reasonable attorney's fees, each in unspecified amounts. Plaintiffs filed a motion to certify the lawsuit as a class action, but the Court denied the motion. The court issued a ruling in December 2003 which was unfavorable to us but did not set the amount of damages. We are appealing the ruling due to errors that we believe were made by the trial judge. On September 6, 2000, Manuel Jimenez and seven other current and former general managers of Sbarro restaurants in California filed a complaint against Sbarro in the Superior Court of California for Orange County alleging that the plaintiffs were improperly classified as exempt employees under California wage and hour law. The plaintiffs are seeking actual damages, punitive damages and costs of the lawsuit, including reasonable attorney's fees, each in unspecified amounts. Plaintiffs are represented by the same counsel who is representing the plaintiffs in the case discussed in the preceding paragraph. We have separately settled with two of the managers for immaterial amounts. The remaining parties to this case have agreed that it will be settled upon the same terms and conditions that the court orders in connection with its decision in the case discussed in the preceding paragraph. On March 22, 2002, five former general managers of Sbarro restaurants in California filed a complaint against Sbarro in the Superior Court of California for Los Angeles County. The complaint alleges that the plaintiffs were required to perform labor services without proper premium overtime compensation from at least May of 1999. The plaintiffs are seeking actual damages, punitive damages and attorney's fees and costs, each in unspecified amounts. In addition, plaintiffs have requested class action status for all managerial employees who worked overtime and/or were not otherwise paid regular wages due and owing from May 1999 to present. The case is currently in the discovery phase. Page 10 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) In August 2002, a subcontractor and the general contractor, pursuant to a construction contract to build a joint venture location that we closed in fiscal 2002 and is also the subject of the lawsuit discussed below, filed a complaint against the limited liability joint venture company alleging that they are owed approximately $800,000, plus interest. We are a defendant in the suit by reason of the fact that we guaranteed the bonds under which mechanics liens for the plaintiffs were bonded. The parties to the lawsuit have orally agreed to enter into settlement discussions. Should those discussions not result in an agreed upon settlement, the parties have agreed to binding arbitration. We believe that our maximum liability that would result from the settlement discussions or binding arbitration would be approximately $400,000. In May 2002, the landlord of the joint venture described above filed a complaint against Sbarro in the Supreme Court of the New York for Westchester County alleging that we were obligated to it, pursuant to a Guaranty Agreement we executed for all rent during the remaining lease, based on an alleged breach of the lease by the tenant, a subsidiary of the joint venture. We believed that our guarantee was limited in amount while the landlord alleged that the guarantee covered all amounts that would become due during the remaining lease term. The court issued a ruling in November 2003 which established our liability at $500,000 and we have accrued for this amount. The landlord has appealed this decision. We believe that we have substantial defenses in each of these actions and we are vigorously defending these actions. In addition to the above complaints, from time to time, we are a party to certain claims and legal proceedings in the ordinary course of business. In our opinion, the results of the complaints and other claims and legal proceedings are not expected to have a material adverse effect on our consolidated financial position or results of operations. 6. Guarantor and non-guarantor financial statements: Certain subsidiaries have guaranteed amounts outstanding under our senior notes and new line of credit. 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. Page 11 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) The following condensed consolidating financial information presents: (1) Condensed consolidating balance sheets as of April 18, 2004 (unaudited) and December 28, 2003 and statements of operations and cash flows for the fiscal quarters ended April 18, 2004 (unaudited) and April 20, 2003 (unaudited) of (a) Sbarro, Inc., the parent, (b) the guarantor subsidiaries as a group, (c) the nonguarantor subsidiaries as a group and (d) Sbarro on a consolidated basis. (2) Elimination entries necessary to consolidate Sbarro, Inc., the parent, with the guarantor and nonguarantor subsidiaries. The principal elimination entries eliminate intercompany balances and transactions. Investments in subsidiaries are accounted for by the parent on the cost method. Page 12 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Balance Sheet As of April 18, 2004 (In thousands except share data) (Unaudited)
Unrestricted Guarantor Subsidiaries Consolidated ASSETS Parent Subsidiaries (as a group) Eliminations Total ---------- ---------- -------- ------------ ---------- Current assets: Cash and cash equivalents $ 35,638 $ 3,694 $ 1,490 $ 40,822 Restricted cash for untendered shares 21 - - 21 Receivables less allowance for doubtful accounts of $461 Franchisee 2,036 - - 2,036 Other (558) 1,070 294 806 ---------- ---------- -------- ------------ ---------- 1,478 1,070 294 2,842 Inventories 1,193 1,471 138 2,802 Prepaid expenses 5,542 951 54 6,547 Current portion of loans receivable from officers 2,588 - - 2,588 ---------- ---------- -------- ------------ ---------- Total current assets 46,460 7,186 1,976 55,622 Intercompany receivables 2,546 315,807 $ (318,353) - Investment in subsidiaries 65,469 - (65,469) Property and equipment, net 35,171 53,833 4,473 93,477 Intangible assets: Trademarks, net 195,916 - - - 195,916 Goodwill, net 9,101 - - 103 9,204 Deferred financing costs and other, 4,965 221 - - 5,186 net Loans receivable from officers, less current portion 3,065 - - - 3,065 Other assets 8,078 1,802 (426) (2,001) 7,453 ---------- ---------- -------- ------------ ---------- $ 370,771 $ 378,849 $ 6,023 $ (385,720) $ 369,923 ========== ========== ======== ============ ==========
Page 13 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Balance Sheet As of April 18, 2004 (In thousands except share data) (Unaudited)
Guarantor Unrestricted Consolidated LIABILITIES & SHAREHOLDERS' EQUITY Parent Subsidiaries Subsidiaries Eliminations Total ---------- ---------- -------- ----------- ---------- Current liabilities: Amounts due for untendered shares $ 21 $21 Accounts payable 10,665 $172 $388 $579 11,804 Accrued expenses 12,209 1,322 1,683 - 15,214 Accrued interest payable 2,787 - - - 2,787 Current portion of mortgage payable - 173 - - 173 ---------- ---------- -------- ----------- ---------- Total current liabilities 25,682 1,667 2,071 579 29,999 ---------- ---------- -------- ----------- ---------- Intercompany payables 312,725 2,208 3,420 (318,353) - ---------- ---------- -------- ----------- ---------- Deferred rent 8,096 - 691 - 8,787 ---------- ---------- -------- ----------- ---------- Long-term debt, net of original issue discount 252,945 15,265 - - 268,210 ---------- ---------- -------- ----------- ---------- Shareholders' equity (deficit): Preferred stock, $1 par value; authorized 1,000,000 shares; none issued - - - - - Common stock, $.01 per value: authorized 40,000,000 shares; issued and outstanding 7,064,328 shares 71 - - - 71 Additional paid-in capital 10 65,469 2,477 (67,946) 10 Retained earnings (deficit) (228,758) 294,240 (2,636) - 62,846 ---------- ---------- -------- ----------- ---------- Total shareholders' equity (deficit) (228,677) 359,709 (159) (67,946) 62,927 ---------- ---------- -------- ----------- ---------- $ 370,771 $ 378,849 $ 6,023 $ (385,720) $ 369,923 ========== ========== ======== =========== ==========
Page 14 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Balance Sheet As of December 28, 2003 (In thousands except share data)
Guarantor Nonguarantor Consolidated ASSETS Parent Subsidiaries Subsidiaries Eliminations Total -------- -------- ------- ---------- -------- Current assets: Cash and cash equivalents $49,515 $5,595 $1,299 $56,409 Restricted cash for untendered 21 - - 21 shares Receivables less allowance for doubtful accounts of $488 Franchisee 1,700 - - 1,700 Other (191) 966 396 1,171 -------- -------- ------- ---------- -------- 1,509 966 396 2,871 Inventories 1,177 1,387 143 2,707 Prepaid expenses 4,018 (227) 53 3,844 Current portion of loans receivable from officers 2,810 - - 2,810 -------- -------- ------- ---------- -------- Total current assets 59,050 7,721 1,891 68,662 Intercompany receivables 6,697 317,237 - $(323,934) - Investment in subsidiaries 65,469 - - (65,469) - Property and equipment, net 36,189 55,706 4,709 96,604 Intangible assets: Trademarks, net 195,916 - - - 195,916 Goodwill, net 9,204 - - - 9,204 Deferred financing costs and 5,369 233 - (120) 5,482 other, net Loans receivable from officers, less current portion 3,347 - - - 3,347 Other assets 7,034 1,822 (212) (1,030) 7,614 -------- -------- ------- ---------- -------- $388,275 $382,719 $6,388 $(390,553) $386,829 ======== ======== ====== ========== ========
Page 15 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Balance Sheet As of December 28, 2003 (In thousands except share data)
Guarantor Nonguarantor Consolidated LIABILITIES & SHAREHOLDERS' EQUITY Parent Subsidiaries Subsidiaries Eliminations Total --------- --------- --------- --------- --------- Current liabilities: Amounts due for untendered shares $ 21 $ 21 Accounts payable 11,859 $ 129 $ 419 $ 1,327 13,734 Accrued expenses 15,521 1,447 1,806 - 18,774 Accrued interest payable 8,181 - - - 8,181 Current portion of mortgage payable - 168 - - 168 --------- --------- --------- --------- --------- Total current liabilities 35,582 1,744 2,225 1,327 40,878 --------- --------- --------- --------- --------- Intercompany payables 317,236 2,958 3,740 (323,934) - --------- --------- --------- --------- --------- Deferred rent 8,009 - 702 - 8,711 --------- --------- --------- --------- --------- Long-term debt, net of original issue discount 252,827 15,325 - - 268,152 --------- --------- --------- --------- --------- Shareholders' equity (deficit): 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 71 - - - 71 Additional paid-in capital 10 65,469 2,477 (67,946) 10 Retained earnings (deficit) (225,460) 297,223 (2,756) - 69,007 --------- --------- --------- --------- --------- Total shareholders' equity (deficit) (225,379) 362,692 (279) (67,946) 69,088 --------- --------- --------- --------- --------- $ 388,275 $ 382,719 $ 6,388 $(390,553) $ 386,829 ========= ========= ========= ========= =========
Page 16 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Statement of Operations For the sixteen weeks ended April 18, 2004 (In thousands) (Unaudited)
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total -------- -------- -------- -------- -------- Revenues: Restaurant sales $ 38,982 $ 47,512 $ 4,352 $ 90,846 Franchise related income 3,404 - - 3,404 Real estate and other 1,010 951 - 1,961 Intercompany charges 2,524 - - $ (2,524) - -------- -------- -------- -------- -------- Total revenues 45,920 48,463 4,352 (2,524) 96,211 -------- -------- -------- -------- -------- Cost and expenses: Restaurant operating expenses Cost of food and paper products 8,037 10,790 1,182 - 20,009 Payroll and other employee benefits 10,447 14,203 1,497 - 26,147 Other operating costs 15,545 17,034 1,228 - 33,807 Depreciation and amortization 2,144 2,562 278 - 4,984 General and administrative 4,298 3,776 52 - 8,126 Provision for restaurant closings 175 - - - 175 Intercompany charges - 2,524 - (2,524) - -------- -------- -------- -------- -------- Total costs and expenses 40,646 50,889 4,237 (2,524) 93,248 -------- -------- -------- -------- -------- Operating income (loss) 5,274 (2,426) 115 - 2,963 Other (expense) income Interest expense (9,032) (445) - - (9,477) Interest income 196 - - - 196 Equity in net income of unconsolidated affiliates 398 - - - 398 -------- -------- -------- -------- -------- Net other expense (8,438) (445) - - (8,883) -------- -------- -------- -------- -------- (Loss) income before minority interest (3,164) (2,871) 115 - (5,920) Minority interest - - - - - -------- -------- -------- -------- -------- Income (loss) before income taxes (3,164) (2,871) 115 - (5,920) Income taxes (benefit) 134 112 (5) - 241 -------- -------- -------- -------- -------- Net income (loss) $ (3,298) (2,983) $ 120 $ - $ (6,161) ======== ======== ======== ======== ========
Page 17 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Statement of Operations For the sixteen weeks ended April 20, 2003 (In thousands) (Unaudited)
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total -------- -------- -------- -------- -------- Revenues: Restaurant sales $ 37,415 $ 46,595 $ 4,499 $ 88,509 Franchise related income 2,939 - - 2,939 Real estate and other 780 887 - 1,667 Intercompany charges - 3,160 - $ (3,160) - -------- -------- -------- -------- -------- Total revenues 41,134 50,642 4,499 (3,160) 93,115 -------- -------- -------- -------- -------- Cost and expenses: Restaurant operating expenses: Cost of food and paper products 7,798 10,324 1,182 - 19,304 Payroll and other employee benefits 10,831 13,794 1,586 - 26,211 Other operating costs 14,938 17,337 1,257 - 33,532 Depreciation and amortization 2,645 2,940 311 - 5,896 General and administrative 4,999 3,626 94 - 8,719 Provision for restaurant closings 399 - 130 - 529 Intercompany charges 3,160 - - (3,160) - -------- -------- -------- -------- -------- Total costs and expenses 44,770 48,021 4,560 (3,160) 94,191 -------- -------- -------- -------- -------- Operating (loss) income (3,636) 2,621 (61) - (1,076) -------- -------- -------- -------- -------- Other (expense) income: Interest expense (9,131) (452) - - (9,583) Interest income 214 - - - 214 Equity in net income of unconsolidated affiliates 281 - - - 281 -------- -------- -------- -------- -------- Net other expense (8,636) (452) - - (9,088) -------- -------- -------- -------- -------- (Loss) income before minority interest (12,272) 2,169 (61) - (10,164) Minority interest - - (5) - (5) -------- -------- -------- -------- -------- (Loss) income before income taxes (12,272) 2,169 (66) - (10,169) Income taxes 188 131 2 - 321 -------- -------- -------- -------- -------- Net (loss) income $(12,460) $ 2,038 $ (68) $ - $(10,490) ======== ======== ======== ======== ========
Page 18 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Statement of Cash Flows For the sixteen weeks ended April 18, 2004 (In thousands) (Unaudited)
Guarantor Unrestricted Consolidated Parent Subsidiaries Subsidiaries Eliminations Total -------- -------- -------- -------- -------- Operating Activities: Net (loss) income $ (3,298) $ (2,983) $ 120 $ (6,161) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 2,244 2,900 277 5,421 Increase in deferred rent, net 89 3 1 93 Loss on sale of other concept units Restaurant closing costs 175 - - 175 Minority interest - - - - Equity in income of unconsolidated affiliates (398) - - (398) Dividends received from unconsolidated affiliates 305 - - 305 -------- -------- -------- -------- (883) (80) 398 (565) Changes in operating assets and liabilities: Receivables 229 (104) 103 228 Inventories (16) (84) 5 (95) Prepaid expenses (1,524) (1,178) (1) (2,703) Other assets (919) 17 202 $ 748 48 Accounts payable and accrued expenses (3,564) (82) (155) (748) (4,549) Accrued interest payable (5,394) - - - (5,394) -------- -------- -------- -------- -------- Net cash (used in) provided by operating activities (12,071) (1,511) 552 - (13,030) -------- -------- -------- -------- --------
Page 19 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Statement of Cash Flows For the sixteen weeks ended April 18, 2004 (In thousands) (Unaudited)
Guarantor Unrestricted Elimin Consolidated Parent Subsidiaries Subsidiaries ations Total -------- -------- -------- -- -------- Investing activities: Purchases of property and equipment $ (1,031) $ (1,252) $ (41) $ (2,324) -------- -------- -------- -------- Net cash (used in) provided by investing activities (1,031) (1,252) (41) (2,324) -------- -------- -------- -------- Financing activities: Mortgage principal repayments - (54) - (54) Tax distribution (682) - - (682) Repayment of loans receivable from officers 503 - - 503 Intercompany balances (596) 916 (320) - -------- -------- -------- -------- Net cash provided by (used in) financing activities (775) 862 (320) (233) -------- -------- -------- -------- (Decrease) increase in cash and cash equivalents (13,877) (1,901) 191 (15,587) Cash and cash equivalents at beginning of Period 49,515 5,595 1,299 56,409 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 35,638 $ 3,694 $ 1,490 $ 40,822 ======== ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 106 $ 95 $ 3 $- $ 204 ======== ======== ======== == ======== Cash paid during the period for interest $ 14,025 $ 433 $ - $- $ 14,458 ======== ======== ======== == ========
Page 20 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Statement of Cash Flows For the sixteen weeks ended April 20, 2003 (In thousands) (Unaudited)
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total -------- -------- -------- -------- -------- Operating Activities: Net (loss) income $(12,460) $ 2,038 $ (68) $(10,490) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities Depreciation and amortization 3,499 2,557 309 6,365 Increase in deferred rent, net 109 (19) - 90 Loss on sale of other concept units - - 250 250 Restaurant closing costs 529 - - 529 Minority interest - - 5 5 Equity in net income of unconsolidated affiliates (281) - - (281) Dividends received from unconsolidated affiliates 119 - - 119 -------- -------- -------- -------- (8,485) 4,576 496 (3,413) Changes in operating assets and liabilities: Receivables (600) 379 1 (220) Inventories 419 506 7 932 Prepaid expenses (3,334) (896) (194) (4,424) Other assets (286) (360) 451 (195) Accounts payable and accrued expenses 247 231 93 571 Accrued interest payable (5,394) - - (5,394) -------- -------- -------- -------- Net cash (used in) provided by operating activities (17,433) 4,436 854 (12,143) -------- -------- -------- --------
Page 21 SBARRO, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (Continued) Consolidating Statement of Cash Flows For the sixteen weeks ended April 20, 2003 (In thousands) (Unaudited)
Guarantor Nonguarantor Consolidated Parent Subsidiaries Subsidiaries Eliminations Total -------- ------- ----- ------ -------- Investing activities: Purchase of property and $ (2,233) $ (755) $ (83) $ (3,071) equipment -------- ------- ----- -------- Net cash used in investing activities (2,233) (755) (83) (3,071) -------- -------- -------- -------- Financing activities: Mortgage principal repayments - (50) - (50) Tax distribution (1,101) - - (1,101) Intercompany balances 6,994 (6,263) (731) - -------- -------- -------- -------- Net cash provided by (used in) financing activities 5,893 (6,313) (731) (1,151) -------- -------- -------- -------- (Decrease) increase in cash and cash equivalents (13,773) (2,632) 40 (16,365) Cash and cash equivalents at beginning of period 47,636 6,539 975 55,150 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 33,863 $ 3,907 $ 1,015 $ 38,785 ======== ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 91 $ 15 $ 13 $ 119 ======== ======== ======== ======== Cash paid during the period for interest $ 14,110 $ 438 $ - $ - $ 14,548 ======== ======== ======== ====== ========
Page 22 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:
16 Weeks 16 Weeks Ended Ended Fiscal Year 04/18/04 04/20/03 2003 2002 -------- -------- ---- ---- Company-owned restaurants: Opened during period 2 - 4 13 Sold to franchisees during period-net (2) (4) (12) (6) Closed during period (12) (9) (22) (51) Open at end of period (1) 516 545 528 558 Franchised restaurants: Opened during period 9 10 39 42 Purchased from Company during period-net 2 4 12 6 Closed or terminated during period (5) (8) (17) (20) Open at end of period 393 359 387 353 All restaurants: Opened during period 11 10 43 55 Closed or terminated during period (17) (17) (39) (71) Open at end of period (1) 909 904 915 911 Kiosks (all franchised) open at end of period 3 3 3 3
- ---------- (1) Excludes 29, 30, 29 and 32 other concept units as of April 18, 2004 and April 20, 2003, the end of fiscal 2003 and the end of fiscal 2002, respectively. Page 23 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. As a result, our annual earnings can fluctuate 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. In recent years, our fourth quarter income has fluctuated significantly due to a number of other factors, including the adverse effect of the general economic downturn and significant year end adjustments relating to asset impairment and store closing costs. Due to the seasonality of our business, until after our fourth quarter is completed, we are not able to perform the testing for impairment on our goodwill and intangible assets with indefinite lives acquired prior to July 1, 2001 as required by SFAS No. 142, "Goodwill and Other Intangible Assets." Any required adjustments are recorded at that time unless impairment factors are present earlier. Relevant Financial Information
Sixteen weeks ended ---------------------------------------- April 18, 2004 April 21, 2004 ---------------------------------------- (in millions except number of locations) ---------------------------------------- Comparable Sbarro - owned quick service sales (1) $ 85.8 $ 80.5 Comparable Sbarro - owned quick service sales - change for period (1) 6.6% (5.9)% Number of Sbarro - owned quick service locations closed and locations sold to franchisees during the period 14 13 Franchise location sales $ 71.9 $ 61.5 Franchise revenues $ 3.4 $ 3.0 Cost of food and paper products as a percentage of restaurant sales 22.0% 21.8% Payroll and other benefits as a percentage of restaurant sales 28.8% 29.6% Other operating expenses as a percentage of restaurant sales 37.2% 37.9% General and administrative costs as a percentage of revenues 8.4% 9.4% Provision for restaurant closings $ 0.2 $ 0.5 EBITDA $ 8.3 $ 5.1
(1) Comparable Sbarro-owned quick service sales dollar and annual percentage changes are based on locations that were comparable as of April 18, 2004 in each of the periods presented based on locations opened prior to December 29, 2002. Page 24 Our consolidated EBITDA for the sixteen weeks ended April 18, 2004 was $8.3 million compared to $5.1 million for the sixteen weeks ended April 20, 2003. EBITDA represents earnings (losses) before interest income, interest expense, taxes, depreciation and amortization. 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") of the United States measure of a company's profitability or liquidity. Rather, we believe that EBITDA provides relevant and useful information for analysts and investors in our senior notes in that EBITDA is one of the factors in the calculation of our compliance with the ratios in the indenture under which our senior notes are issued. We also internally use EBITDA as one of the measures to determine whether to continue operating or close restaurant units since it provides us with a measurement of whether we are receiving an adequate cash return on our cash investment. 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. The following table reconciles EBITDA to our net loss for the sixteen week periods presented which we believe is the most direct comparable GAAP financial measure to EBITDA (in thousands): 2004 2003 ---- ---- EBITDA $ 8,345 $ 5,096 Interest expense (9,477) (9,583) Interest income 196 214 Income taxes (241) (321) Depreciation and amortization (4,984) (5,896) ------- ---------- Net loss $(6,161) $(10,490) ======== ========= Page 25 Restaurant sales from the Sbarro-owned quick service business and consolidated other concepts increased 2.6% to $90.8 million for the sixteen weeks ended April 18, 2004 from $88.5 million in the sixteen weeks ended April 20, 2003. The increase in sales reflects $2.5 million of higher sales of the Sbarro quick service business partially offset by $0.2 million of lower sales of consolidated other concepts. The increase in Sbarro quick service business resulted from an approximate $5.3 million (6.6%) increase in comparable sales to $85.8 million. We believe that the increase in comparable sales is primarily due to the improvement in the economy partially offset by the loss of $2.8 million of sales, from the closure, since the end of the first quarter of 2003, of generally low volume locations that did not have a material impact on our operations (including 12 unites closed in the first quarter of fiscal 2004). The 6.6% increase in comparable sales includes approximately 1.5% attributable to price increases in the fourth quarter of 2003. In addition, there were selective price increases that became effective during the last half of the first fiscal quarter of 2004 which did not have a material impact on the first quarter of 2004. The decline in consolidated other concept unit sales was primarily a result of the closing of two unprofitable or marginally profitable locations in early 2003. Franchise related income increased 15.8 % to $3.4 million for the first quarter of 2004 from $2.9 million in the first quarter of 2003. Increases in royalties from comparable locations that were a result of sales increases of 19.9% for international locations and 2.6% for domestic locations and from royalties from locations opened during the first quarter of 2004 and 2003 contributed to the increase in the franchise related income during the first quarter of fiscal 2004. Real estate and other revenues increased 17.6% in the first quarter of fiscal 2004 from the same period in fiscal 2003 primarily due to variations in certain vendor rebates. Cost of food and paper products as a percentage of restaurant sales increased to 22.0% for the sixteen weeks ended April 18, 2004 from 21.8% for the comparable 2003 fiscal period. The cost of food and paper products percentage for the first fiscal quarter of 2004 was positively impacted by the increase in comparable unit sales and the price increase implemented late in the first quarter of 2004. Cheese prices, which increased beginning at the end of the second quarter of fiscal 2003 and declined at the end of the fourth quarter of fiscal 2003 through early 2004, continued to increase to record high levels at the first quarter of fiscal 2004. These increases in cheese prices resulted in a 1.0% increase in the cost of food and paper products when compared to the first quarter of fiscal 2003. Cheese prices in the second quarter have moderated from the historically high first quarter amounts. In the first quarter of fiscal 2003, we purchased product from third parties, increasing our cost of food and paper products during that quarter, until our current distribution contract became effective after the bankruptcy of our former distributor. Payroll and other employee benefits decreased to 28.8% in the first quarter of 2004 from 29.6% of restaurant sales in the first quarter of 2003. The dollar decrease was primarily due to increased restaurant sales as a result of both unit sales and price increases as well as the elimination of locations with higher payroll costs. Page 26 Other operating expenses increased by $0.3 million but decreased to 37.2% of restaurant sales in the first quarter of 2004 from 37.9% in the first quarter of 2003. The dollar increase was primarily due to increases in rent and other occupancy related expenses resulting from the renewal of existing leases at higher rental rates. As a percentage of restaurant sales, these costs improved primarily as a result of the higher level of sales. Depreciation and amortization expense decreased by $0.9 million for the first quarter of fiscal year 2004 from the same period in fiscal year 2003. Of the reduction, $0.3 million was due to fewer numbers of units in operation in fiscal 2004, $0.3 million was for locations that had been included in the provision for asset impairment in fiscal 2003 for which no depreciation was taken in fiscal 2004, $0.2 million related to locations that became fully depreciated during fiscal 2003 and of $0.1 million related to our administrative office building that was closed in May 2004. General and administrative expenses were $8.1 million, or 8.4% of total revenues, for the first quarter of 2004, compared to $8.7 million, or 9.4% of total revenues, for the first quarter of 2003. Factors contributing to the decrease in the general and administrative costs included lower costs of approximately $0.7 million due to the reduction in work force, $0.2 million due to a reduction in legal fees and a $0.2 million decrease in the bad debt expense, bonuses of $0.7 million granted to certain executive officers in the first quarter of 2003 which were not granted in the first quarter of 2004 offset, in part, by $0.7 million of severance and other costs related to the reduction in work force, and $0.2 million of costs related to new executives. The annual effect of our reduction in work force on our administrative and general costs is estimated at $3.1 million. Interest expense of $9.5 million and $9.6 million for the first quarter of 2004 and 2003, respectively, relates to the 11%, $255.0 million senior notes issued to finance our going private transaction ($8.6 million) and the 8.4%, $16.0 million mortgage loan on our corporate headquarters in 2001 ($0.5 million). In addition, $0.4 million and $0.5 million in the first quarter of fiscal 2004 and 2003, respectively, represents non-cash charges for the total of the accretion of the original issue discount on our senior notes and the amortization of deferred financing costs on the senior notes, credit agreement (for the line of credit that was terminated in the fourth quarter of fiscal 2003) and the mortgage loan. Interest income was approximately $0.2 million for each of the first quarters of fiscal 2004 and 2003. The indenture under which our senior notes are issued and our credit agreement limit the types of investments which we may make. Equity in the net income of unconsolidated affiliates represents our proportionate share of earnings and losses in those other concepts in which we have a 50% or less ownership interest. The $0.1 million increase in our share of the equity in the net income of unconsolidated affiliates was primarily as a result of an improvement in the performance of our steakhouse joint venture. There currently are two steakhouses under construction, both of which are expected to be completed during the fourth quarter of fiscal 2004. We do not have any further expansion plans for this venture. Page 27 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. Under the provisions of Subchapter S, substantially all taxes on our income are paid by our shareholders rather than us. Our tax expense was approximately $0.2 million and $0.3 million for the first fiscal quarter of fiscal 2004 and 2003, respectively. The expense was for taxes owed by us (rather than our shareholders) to jurisdictions that do not recognize S corporation status or that tax entities based on factors other than income and for taxes withheld at the source of payment on foreign franchise income related payments. Liquidity and Capital Resources Cash Requirements Our liquidity requirements relate to debt service, capital expenditures, working capital, investments in other ventures, distributions to shareholders when permitted under the indenture for the senior notes and to repay any borrowings we may make under our line of credit agreement and general corporate purposes. We incur annual cash interest expense of approximately $29.5 million under the senior notes and mortgage loan and may incur additional interest expense for borrowings under our line of credit. We are not required to make principal payments, absent the occurrence of certain events, on our senior notes until they mature in September 2009. We believe that aggregate restaurant capital expenditures and our investments in joint ventures during fiscal 2004 will approximate the fiscal 2003 level of $8.5 million. Our $3.0 million line of credit which expires in May 2005 is uncommitted. Therefore, our lender could refuse to lend to us at any time. Unpaid capital expenditure commitments aggregated approximately $0.8 million at April 18, 2004. We expect our primary source of liquidity to meet these needs will be cash flow from operations. We do not presently expect to borrow under our line of credit in fiscal 2004. Contractual Obligations and Off-Balance Sheet Arrangements Our contractual obligations and off balance sheets arrangements with respect to Sbarro owned and franchised restaurants as well as those for our other concept arrangements (both those in which we have a majority or minority interest) do not materially differ from the information disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the 2003 fiscal year. Page 28 Sources and Uses of Cash The following table summarizes our cash and cash equivalents and working capital as at the end of the first fiscal quarters of 2004 and 2003 and the uses of our cash flows during those two fiscal quarters:
Fiscal Quarter Ended -------------------- April 18, 2004 April 20, 2003 -------------- -------------- (in millions) Liquidity at the end of period ------------------------------ Cash and cash equivalents $ 40.8 $38.8 Working capital 25.6 17.1 Net cash flows for the period ----------------------------- Used in operating activities (13.1) (12.1) Used in investing activities (2.3) (3.1) Used in financing activities (0.2) (1.2) Net decrease in cash (15.6) (16.4)
We have historically not required significant working capital to fund our existing operations and have financed our capital expenditures and investments in joint ventures through cash generated from operations. Net cash used in operating activities was $13.1 million for the sixteen weeks ended April 18, 2004 compared to $12.1 million used during the sixteen weeks ended April 20, 2003. The $1.0 million increase was primarily due to the effect of the decrease in the loss from operations, as adjusted for non-cash items, in the first quarter of 2004 compared to the same calculation for the first quarter of 2003 of approximately $2.8 million, income tax refunds received of approximately $0.3 million, contractual payments of $0.2 million related to prior year sales of other concept locations, a $1.7 million increase in cash as a result of the timing of payments in fiscal 2004 for our insurance policy renewal as the 2003 policy renewals were financed, offset by an increase of approximately $0.8 million in the inventory value due to increases in product costs, primarily cheese, and by a decrease of approximately $5.1 million in accounts payable and accrued expense between the comparable 2004 and 2003 periods due to the change in the level of sales just prior to the beginning of each of those fiscal periods. Net cash used in investing activities has historically been primarily for capital expenditures, including investments made by our consolidated other concepts. Net cash used in investing activities decreased from $3.1 million for the sixteen weeks ended April 20, 2003 to $2.3 million for the sixteen weeks ended April 18, 2004 primarily due to an decrease in quick service renovation activity and $0.6 million that was expended in the first quarter of fiscal 2003 relating to an upgrade of our computer system. Page 29 Net cash used in financing activities was $0.2 million in the first quarter of fiscal 2004 compared to $1.2 million for the first quarter of fiscal 2003. Cash used in financing activities in both years resulted primarily from tax distributions to our shareholders. 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. The indenture for the senior notes permits us to make distributions to shareholders under a formula that is designed 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 such income were taxed at the highest applicable federal and New York State marginal income tax rates. There are differences in the book and tax treatments of the provision for asset impairment, tax credits and in book and tax depreciation. The tax distributions in the first quarter of both fiscal years were made with respect to our taxable income for fiscal 2002. The $0.7 million distribution made in the first quarter of 2004 was declared in November 2003. We do not expect to make tax distributions in 2004 related to the 2003 results of operations. In addition, there were payments of $0.5 million that reduced the loan receivable from officers during the first quarter of 2004. Financing As part of the transaction in which we became a privately-held company, 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. We also entered into a $30.0 million credit agreement that we terminated in the fourth quarter of 2003, except for the temporary continuation of outstanding standby letters of credit. In March 2004, we obtained an uncommitted line of credit, which expires in May 2005, to replace our former revolving credit facility. We currently have the ability, subject to bank approval, to borrow up to $3 million, including outstanding letters of credit. We have $1.7 million of outstanding letters of credit and $1.3 million of undrawn availability. The new line of credit contains no financial covenants or unused line fees. Interest applicable to the loans under the new line of credit is at the bank's prime rate at the time of any borrowings. Under our senior notes indenture, there are various covenants that limit our ability to borrow funds, in addition to lending arrangements that existed at the date that the indenture was entered into 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, 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. As of April 18, 2004, that ratio was 1.36 to 1. As a result, we are not presently able to borrow funds except for the specifically permitted indebtedness of up to $75.0 million of revolving credit Page 30 loans. In order to make restricted payments, that ratio must be at least 2.0 to 1, after giving pro forma effect to the restricted payment and, in any event, is limited in dollar amount pursuant to a formula contained in the indenture. We refer to the amount that is available for us to make dividends and other restricted payments as the "restricted payment availability." We cannot make restricted payments (other than distributions pursuant to the tax payment agreement) until we increase the restricted payment availability by approximately $17.8 million, and then only to the extent of any excess over that amount. In March 2000, one of our 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 outstanding principal balance of the loan as of April 18, 2004 was $15.4 million. The mortgage agreement contains various covenants, including a requirement that the subsidiary maintain a minimum ratio of EBITDA to annual debt service of at least 1.2 to 1.0. We were in compliance with all covenants in the indenture for the senior notes and our mortgage as of April 18, 2004. Critical Accounting Policies and Judgments 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. Accounting policies often 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 sixteen weeks ended April 18, 2004, there were no material changes in the accounting policies whose application may have the most significant effect on our reported results of operations and financial position and that require judgments estimates and assumptions by management that can affect their application from the matters discussed under the heading "Critical Accounting Policies and Judgments" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 28, 2003. 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 this time. These statements generally contain words such as "may," "should," "seeks," "believes," "in our opinion," "expects," "intends," "plans," "estimates," "projects," "strategy" and similar expressions or the negative of those words. Page 31 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 military action and terrorism or other events may have on the willingness of consumers to frequent shopping 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 our present, and any future, joint ventures and other expansion opportunities; o the availability of food (particularly cheese and tomatoes), beverage 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 mortgage loan; o our ability to comply with covenants contained in the indenture under which the senior notes are issued, 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 in the event we make certain asset sales or experience a change of control. You are cautioned not to place undue reliance on these statements, which speak only as of the date of the report. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. 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. Page 32 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. The indenture under which our senior notes are issued limits us to similar investments. 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. Future borrowings under our uncommitted line of credit (none are currently outstanding) will be at rates that float with the market and, therefore, will be subject to fluctuations in interest rates. We are not a party to, and do not expect to enter into any interest rate swaps or other instruments to hedge interest rates. We have not, and do not expect to, purchase 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 to 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. Item 4. Controls and Procedures Disclosure Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such terms is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of l934, as amended (the "Exchange Act") as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period, our disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within Sbarro to disclose material information otherwise required to be set forth in our periodic reports. Internal Control Over Financial Reporting: There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of 2004 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting. Page 33 PART II. OTHER INFORMATION Item 1. Legal proceedings None of the proceedings discussed in Item 3 of our Annual Report on Form 10-K for our 2003 fiscal year have been terminated and there have not been any material developments in those proceedings during the first fiscal quarter of fiscal 2004 except that the parties to the legal proceeding related to a construction contract entered into to build a joint venture location that we closed in fiscal 2002 have orally agreed to settlement discussions and, should those fail to result in a settlement, binding arbitration of the matter. See Note 5 of the Notes to Consolidated Financial Statement contained elsewhere in this report for additional information concerning this legal proceeding. Item 6. Exhibits and Reports on Form 8-K. a) Exhibits: 31.01 Certification of Principal Executive pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.02 Certification of Vice President, Chief Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.01 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.02 Certification of Vice President, Chief Financial Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: We filed no reports on Form 8-K during the quarter covered by this report. Page 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. SBARRO, INC. -------------------------------------------- Registrant Date: June 2, 2004 By: /s/ MICHAEL O'DONNELL --------------------------- --------------------- Michael O'Donnell President and Chief Executive Officer Date: June 2, 2004 By: /s/ ANTHONY J. PUGLISI --------------------------- ------------------------------------------- Anthony J. Puglisi Vice President; Chief Financial Officer and Principal Accounting Officer
Page 35 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 31.01 Certification of Principal Executive pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.02 Certification of Vice President, Chief Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.01 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.02 Certification of Vice President, Chief Financial Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-31 2 ex31_1-f10q041804.txt EX-31.1; CERTIFICATION OF PRINCIPAL EXECUTIVE EXHIBIT 31.01 CERTIFICATION I, Michael O'Donnell, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Sbarro, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 2, 2004 /s/ Michael O'Donnell - --------------------- Michael O'Donnell, President and Chief Executive Officer Principal Executive Officer EX-31 3 ex31_2-f10q041804.txt EX-31.2; CERTIFICATION OF VICE PRESIDENT EXHIBIT 31.02 CERTIFICATION I, Anthony J. Puglisi, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Sbarro, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 2, 2004 /s/ Anthony J. Puglisi - ---------------------- Anthony J. Puglisi Vice President and Chief Financial Officer EX-32 4 ex32_1-f10q041804.txt EX-32.1; CERTIFICATION OF PEO Exhibit 32.01 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Sbarro, Inc. (the "Company") on Form 10-Q for the period ended April 18, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael O'Donnell, Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: (1) The Report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 2, 2004 /s/ Michael O'Donnell - --------------------- Michael O'Donnell President and Chief Executive Officer (Principal Executive Officer) NOTE: A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 5 ex32_2-f10q041804.txt EX-32.2; CERTIFICATION OF VICE PRESIDENT Exhibit 32.02 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Sbarro, Inc. (the "Company") on Form 10-Q for the period ended April 18, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Anthony J. Puglisi, Vice President-Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: (1) The Report fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 2, 2004 /s/ Anthony J. Puglisi - ---------------------- Anthony J. Puglisi, Vice President and Chief Financial Officer NOTE: A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----