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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/ X / Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
/ / Transition Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-8881
SBARRO, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 11-2501939
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
763 Larkfield Road, Commack, New York 11725
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (5l6) 864-0200
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on
Title of each class which Registered
Common Stock, par value $.01
per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ X ].
The aggregate market value of Common Stock held by non-
affiliates of the registrant as of March 15, 1996 was
approximately $302,000,000.
The number of shares of Common Stock of the registrant
outstanding as of March 15, 1996 was 20,348,735.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used in
connection with the registrant's 1996 Annual Meeting of
Shareholders are incorporated by reference into Part III of
this report.
SBARRO, INC.
PART I
ITEM 1. BUSINESS
Sbarro, Inc., a New York corporation, was
organized in 1977 and is the successor to a number of family
food and restaurant businesses developed and operated by the
Sbarro family. The Company has established wholly-owned
subsidiaries to operate its restaurants in various
geographic areas and to conduct its franchising business.
As used in this report, the term "Company" refers to Sbarro,
Inc. and its consolidated subsidiaries, unless the context
indicates otherwise.
General
The Company and its subsidiaries develop and
operate or franchise an international chain of family-style
Italian restaurants under the "Sbarro", "Sbarro The Italian
Eatery" and "Cafe Sbarro" names. Sbarro restaurants are
family-oriented cafeteria-style restaurants featuring a menu
of popular Italian food, including pizza with a variety of
toppings, a selection of pasta dishes and other hot and cold
Italian entrees, salads, sandwiches, cheesecake and other
desserts.
As of December 31, 1995, there were 771 Sbarro
restaurants, located in 47 states throughout the United
States, as well as Australia, Belgium, Canada, Chile, the
District of Columbia, France, Israel, Kuwait, Lebanon, the
Philippines, Puerto Rico, Qatar, Saudi Arabia and the United
Kingdom. At that date, the Company owned and operated 571
restaurants and franchised 200 restaurants. Most Sbarro
restaurants are located in shopping malls. In addition, the
Company and its franchisees have opened restaurants at
downtown locations, on toll roads, and in strip shopping
centers, sports arenas, hospitals, convention centers,
universities and airports. In addition, kiosks have been
introduced in certain selected markets. The Company
continues to develop franchise opportunities in domestic and
foreign markets.
Restaurant Expansion
The Company has expanded significantly in recent
years, growing from 457 restaurants at the beginning of 1991
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to 771 at the end of 1995. During 1995, 84 new Sbarro
restaurants were opened, of which 44 were Company-owned and
40 were franchised. In addition, 40 Company-owned units and
two franchised units were closed.
During 1996, the Company plans to open
approximately 80 - 90 restaurants, of which approximately 40
- 45 are expected to be Company-owned and the balance are
expected to be franchised. The actual number of openings
will depend on the Company's ability to locate appropriate
sites, negotiate acceptable lease terms, obtain necessary
local governmental permits, complete construction, and
recruit and train restaurant management and hourly
personnel.
The Company continues to expand the basic Sbarro
concept outside of the shopping mall environment by opening
Company and franchised restaurants on toll roads, in strip
shopping centers, sports arenas, hospitals, convention
centers, universities, airports and in transportation hubs.
The Company and its franchisees also operate restaurants in
downtown areas of major U. S. cities such as New York,
Boston, Chicago and Philadelphia.
The following table indicates the number of
Company-owned and franchised restaurants during each of the
years from 1991 through 1995.
Fiscal Year
1995 1994 1993 1992 1991
Company-owned restaurants:
Opened during period 44 53 59 58 63
Acquired from [sold to]
franchisees during period - net - 2 7 [1] 2
Closed during period (*) [40] [3] [7] [13] [1]
Open at end of period 571 567 515 456 412
Franchised restaurants:
Opened during period (**) 40 38 24 26 19
Purchased from [sold to]
Company during period - net - [2] [7] 1 [2]
Closed or terminated during
period [2] [8] [14] [14] [8]
Open at end of period 200 162 134 131 118
All restaurants:
Opened during period 84 91 83 84 82
Closed or terminated during
period [42] [11] [21] [27] [9]
Open at end of period 771 729 649 587 530
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(*) In 1995, the Company closed 40 Company-owned
restaurants. The costs associated with the closing of these
restaurants was provided for in the 1995 financial
statements. See Note A to "Selected Financial Data" in Item
6 of this Report and ``Management's Discussion and Analysis
of Financial Condition and Results of Operations'' in Item 7
of this report.
(**) In 1995, 1994, 1993 and 1992, Company franchisees
opened one, two, two and five kiosk units, respectively. In
addition, in 1994 the Company's franchisees closed one kiosk
unit and one unit now operates as a food court. These kiosk
units are in addition to the restaurants contained in the
above table.
Concept and Menu
Most Sbarro restaurants are in enclosed shopping
malls and are either "in-line" or "food court" locations.
As of December 31, 1995, there were 241 "in-line"
restaurants, which are self-contained restaurants usually
occupying approximately 1,500-3,000 square feet, containing
the space and furniture to seat approximately 60-120 people
and employing 10-40 persons, including part-time personnel.
At that date, there were also 524 "food court" restaurants,
which are primarily located in areas of shopping malls
designated exclusively for restaurant use and share a common
dining area provided by the mall. These restaurants are
generally smaller in size, occupy approximately 500-1,000
square feet, contain only enough space for kitchen and
service areas, have a more limited menu than an "in-line"
restaurant and employ 6-30 persons, including part-time
personnel. A franchisee operates five free-standing units
in the Middle East, two of which are in Saudi Arabia and two
in Kuwait and one in Qatar. In addition, a franchisee
operates a free-standing unit in Puerto Rico.
The Company's restaurants are generally open seven
days a week serving lunch, dinner and, in limited locations,
breakfasts, with hours conforming to the hours of the major
department stores or other large retailers in the mall or
trade area. Typically, mall restaurants are open to serve
customers 10 to 12 hours a day, except on Sunday, when mall
hours may be more limited. For Company-owned restaurants
open a full year, average sales in 1995 and 1994 were
$702,000 and $682,000, respectively, for "in-line"
restaurants and $487,000 and $507,000, respectively, for
"food court" restaurants.
Sbarro restaurants are family-oriented, featuring
a menu of popular Italian food, including pizza with a
variety of toppings, a selection of pasta dishes and other
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hot and cold Italian entrees, salads, sandwiches, cheesecake
and other desserts. In addition to soft drinks, some of the
larger restaurants serve beer and wine, although alcoholic
beverage sales are not emphasized.
Food is prepared according to special recipes
developed by the Sbarro family. Emphasis is placed on
serving generous portions of quality Italian-style food at
modest prices. Entree selections, excluding pizza,
generally range in price from $2.99 to $5.29. The Company
believes that pizza, which is sold predominantly by the
slice, and other pizza items account for approximately one-
half of restaurant sales.
Sbarro restaurants offer quick, efficient,
friendly cafeteria-style and buffet service designed to
minimize customer waiting time and facilitate table
turnover. The decor of a Sbarro restaurant incorporates a
contemporary motif, with booth and table seating (for "in-
line" restaurants), complemented by the feeling of a
traditional Italian delicatessen, often with hanging
replicas of cheeses, salamis, prosciutto hams and other
Italian specialties.
All food products are prepared fresh daily in each
restaurant. Pastries are purchased locally, and the
Company's cheesecakes are prepared in its original kitchen
located in Brooklyn, New York. Substantially all of the
food ingredients and related restaurant supplies used by the
restaurants are purchased from a national independent
wholesale food distributor, while breads, produce, fresh
dairy and certain meat products are purchased locally for
each restaurant. The Company requires that the distributor
adhere to established product specifications for all food
products sold to its restaurants. The Company believes that
there are other distributors who would be able to service
the Company's needs and that satisfactory alternative
sources of supply are generally available for all items
regularly used in the restaurants.
Restaurant Management
Each Sbarro restaurant is managed by one General
Manager and one or two Co-managers or Assistant Managers.
Managers are required to participate in Company training
sessions in restaurant management and operations prior to
the assumption of their duties. In addition, each
restaurant manager is required to comply with an extensive
operations manual containing procedures for assuring
uniformity of operations and consistent high quality of
products.
-5-
The Company has a Restaurant Management Bonus
Program which provides the management teams of Company-owned
restaurants with the opportunity to receive cash bonuses
based on a percentage of the operating profits of the
restaurants and other performance related criteria.
The Company also employs 65 - 70 Area Directors,
each of whom is typically responsible for the operations of
7 - 15 Company-owned restaurants in a given area. Before
each new restaurant opening, the Company assigns an Area
Director to coordinate opening procedures. Each Area
Director reports to one of seven Regional Vice-Presidents.
The Regional Vice-Presidents recruit, train and supervise
the managerial and staff employees of all Company-owned
restaurants. The Regional Vice-Presidents report to one of
two Vice-Presidents of Operations. The Vice-Presidents of
Operations coordinate the activities of the Regional Vice-
Presidents assigned to their areas of responsibility and act
as liaisons with the corporate office.
Franchise Development
The Company continues to emphasize expansion
through Company-owned units. In addition, increased growth
in franchise operations is anticipated through the
establishment of new restaurants by new franchisees and by
existing franchisees capable of multi-unit operations. The
Company relies principally upon its reputation and the
strength of its existing restaurants to attract new
franchisees.
As of December 31, 1995, the Company had 200
franchised restaurants operated by 65 franchisees in 28
states, Australia, Belgium, Canada, Chile, France, Israel,
Kuwait, Lebanon, the Philippines, Puerto Rico, Qatar, Saudi
Arabia and the United Kingdom.
Prior to 1995, territorial agreements, which grant
exclusive geographic development rights for a specified time
period to franchisees, were entered into for Puerto Rico
(including portions of the Caribbean Basin), the
Netherlands, Luxembourg, Belgium, Northern France, Chile and
Israel. In 1995, an additional Territorial Agreement was
entered into for Korea and in early 1996 for Japan. The
Company is in discussion regarding territorial agreements
for Russia, the Bahamas, China, Hong Kong and South Africa.
In addition, the Company has agreements with
Marriott Corporation and Concession Air Corporation covering
the franchising in the United States of Sbarro units on
certain toll roads and at certain airports and universities.
-6-
It also has a relationship with Forte PLC (formerly
Trusthouse Forte) for the franchising of Sbarro units on
motorways and at airports in the United Kingdom.
The Company is presently considering additional
franchise opportunities in the United States and other
countries.
The Company's basic franchise agreement generally
requires payment of an initial license fee of $35,000 and
requires continuing payments of fees of 5% - 7% of gross
revenues (which includes total receipts from all sales less
applicable sales taxes). Franchise agreements entered into
prior to 1988 generally have an initial term of 15 years
with the franchisee having a 5-year renewal option, provided
that the agreement has not been previously terminated by
either party for specified reasons. Since 1988, the Company
has required the franchise agreements to be coterminous with
the underlying lease, but generally not less than ten nor
more than twenty years. Since 1990, the Company has granted
a renewal option subject to certain conditions, including a
remodel or image enhancement requirement. Franchise
agreements granted under Territorial Agreements contain
negotiated terms and conditions other than those contained
in the Company's basic franchise agreement. The Company
retains the right to terminate a franchisee for a variety of
reasons, including insolvency or bankruptcy, failure to
operate the restaurant according to standards,
understatement of gross receipts, failure to pay fees, or
material misrepresentation on an application for a
franchise.
New Ventures
During 1995, the Company entered into joint venture
arrangements for the purpose of developing three potential
new restaurant concepts. The first venture is developing a
casual dining chain in a Rocky Mountain steakhouse motif.
This venture, in which the Company has a 40% interest,
presently operates two restaurants under the name Boulder
Creek Steaks and Saloon, with a third restaurant under
development. The second venture, in which the Company has a
70% interest, is developing a moderately priced, table
service restaurant chain featuring an Italian Mediterranean
menu under the name Bice Mediterranean Grille. Three
restaurants in New York City and Long Island, New York are
currently under development by this venture. The third
venture is a family restaurant concept under the name
Umberto's of New Hyde Park featuring pizza and other
Italian-style foods with table and take-out service. The
Company has an 80% interest in this venture, whose first
unit is currently under development. The Company intends to
-7-
use 1996 to study the initial results of these three
concepts for the purpose of evaluating their potential for
future growth.
Employees
As of December 31, 1995, the Company employed
approximately 7,700 persons, of whom approximately 2,600
were full-time field and restaurant personnel, 4,930 were
part-time restaurant personnel and 170 were Headquarters
Office personnel. None of the Company's employees are
covered by collective bargaining agreements. The Company
believes its employee relations are satisfactory.
Competition
The restaurant business is highly competitive with
respect to price, service, location and food quality, and is
often affected by changes in consumer tastes, economic
conditions, population and traffic patterns. There is
active competition for management personnel and attractive
commercial shopping mall, center city and other locations
suitable for restaurants. The Company competes in each
market with locally-owned restaurants as well as with
national and regional restaurant chains.
Trademarks
The "Sbarro", "Cafe Sbarro", and "Sbarro The
Italian Eatery" service marks are registered with the United
States Patent and Trademark Office for terms presently
expiring in 2004, 2001 and 2006, respectively. Registered
service marks may continually be renewed for 10 year
periods. The Company has also filed applications to
register or has registered "Sbarro", "Cafe Sbarro" and
"Sbarro The Italian Eatery" in several other countries. The
Company believes that these marks continue to be materially
important to the Company's business.
Governmental Regulation
The Company is subject to various Federal, state
and local laws affecting its business. The restaurants of
the Company and its franchisees are subject to a variety of
regulatory provisions relating to wholesomeness of food,
sanitation, health, safety and, in certain cases, licensing
of the sale of alcoholic beverages.
The Company is also subject to a substantial
number of state laws and regulations governing the offer and
sale of franchises. Such laws impose registration and
disclosure requirements on franchisors in the offer and sale
-8-
of franchises and may also apply substantive standards to
the relationship between franchisor and franchisee. The
Company is also subject to Federal Trade Commission
regulations governing disclosure requirements in the sale of
franchises.
The Fair Labor Standards Act, governing such
matters as minimum wage requirements, overtime, employment
of minors and other working conditions, is applicable to the
Company.
ITEM 2. PROPERTIES
All Sbarro restaurants are operated in leased
premises. As of December 31, 1995, the Company leased 601
restaurants, of which 30 were subleased to franchisees under
terms which cover all obligations of the Company under the
lease. The remaining franchisees directly lease their
restaurant spaces. Most of the Company's restaurant leases
provide for the payment of base rents plus real estate
taxes, utilities, insurance, common area charges and certain
other expenses, as well as contingent rents generally
ranging from 6% to 10% of net restaurant sales in excess of
stipulated amounts. Leases to which the Company was a party
at December 31, 1995 have initial terms expiring as follows:
Years Initial Lease Number of Company- Number of Franchised
Terms Expire owned Restaurants Restaurants
1996 16 4
1997 - 1999 134 10
2000 - 2004 321 16
2005 - 2013 100 -
Since May 1986, the Company's Headquarters have
been located in a two-story 20,000 square foot office
building located in Commack, New York, which is subleased
for a period of fifteen years from a partnership owned by
certain shareholders of the Company at an annual base rental
of $298,000 until April 1996, and $337,000 thereafter. In
addition, the Company pays real estate taxes, utilities,
insurance and certain other expenses for the facility.
In March 1994, the Company purchased a 100,000
square foot office building in Melville, New York, for
$5,350,000. The Company is in the process of refurbishing
the building at an estimated cost of approximately $7
million and intends to occupy a portion of the building in
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late 1996 as its Corporate Headquarters and lease the
remainder of the building.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to
certain claims and legal proceedings in the ordinary course
of business. There are no pending claims or proceedings
which, in the opinion of the Company, would have a material
adverse effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Effective September 23, 1994, the Company's Common
Stock was listed on the New York Stock Exchange (under the
symbol ``SBA'') and its listing was withdrawn from the
American Stock Exchange. The range of high and low sales
prices on the New York Stock Exchange and the American Stock
Exchange for the last two fiscal years is as follows:
1995 1994
Quarter High Low Quarter High Low
Ended Ended
April 23 $27.88 $22.75 April 24 $29.50 $21.92
July 16 $26.00 $19.88 July 17 $25.83 $21.33
October 8 $25.00 $21.50 October 9 $25.63 $22.58
December 31 $23.25 $20.88 January 1 $26.00 $21.25
As of March 1, 1996 there were approximately 630
holders of record of the Company's Common Stock, exclusive
of shareholders whose shares were held by brokerages,
depositories and other institutional firms in "street name"
for their customers.
-10-
In 1995 and 1994, the Company declared quarterly
dividends of $.19 per share and $.16 per share,
respectively, aggregating $.76 per share and $.64 per share
for the respective years. On February 22, 1996, the
Company's Board of Directors declared an increase in the
quarterly dividend to $.23 per share, beginning with the
quarterly cash dividend to be paid on April 3, 1996 to
shareholders of record on March 19, 1996.
All share and per share data have been adjusted to
give effect to a 3-for-2 stock split in the form of a 50%
stock dividend distributed on September 22, 1994 to
shareholders of record on September 9, 1994.
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data should be read in
conjunction with Management's Discussion and Analysis
included in Item 7 of this Report and the consolidated
financial statements of the Company and the related notes
included in Item 8 of this Report, which consolidated
financial statements have been audited and reported on by
Arthur Andersen LLP, independent public accountants.
Years Ended
Income Statement Data: Dec. 31,Jan. 1, Jan. 2,Jan.3, Dec. 29,
1995 1995 1994 1993 1991
(In thousands, except share and per share data)
Revenues:
Restaurant sales $310,132 $288,808 $259,213$231,796 $203,959
Franchise related income 5,942 5,234 4,758 4,433 4,066
Interest income 3,081 1,949 1,579 1,319 1,796
319,155 295,991 265,550 237,548 209,821
Costs and expenses:
Cost of food and paper products 67,361 61,877 55,428 51,078 44,346
Restaurant operating expenses:
Payroll & other employee benefits78,342 70,849 64,653 57,555 49,819
Occupancy & other expenses 84,371 76,353 68,241 62,819 53,042
Depreciation and amortization 23,630 21,674 18,599 16,174 15,138
General and administrative 16,089 13,319 12,913 12,388 10,593
Provision for unit closings
(Note A) 16,400 0 0 0 2,050
Other income (1,359) (1,351) (1,244) (1,287) (1,214)
284,834 242,721 218,590 198,727 173,774
Income before income taxes and
cumulative effect of change in
method of accounting for
income taxes 34,321 53,270 46,960 38,821 36,047
Income taxes 13,042 20,244 18,612 14,752 14,217
Income before cumulative
effect of accounting change 21,279 33,026 28,348 24,069 21,830
Cumulative effect of change
in method of accounting for
income taxes - - 1,010 -
Net income (Note A) $21,279 $33,026 $29,358 $24,069 $21,830
Per share data:
Earnings per common and
common equivalent share
before cumulative effect of
change in method of accounting
for income taxes $1.05 $1.63 $1.40 $1.18 $1.07
Cumulative effect of change
in method of accounting for
income taxes - - 0.05 - -
Earnings per common and common
equivalent share (Notes A & B) $1.05 $1.63 $1.45 $1.18 $1.07
Dividends declared $0.76 $0.64 $0.52 - -
Weighted average number of shares
used in the computation
(Note B) 20,336,809 20,310,283 20,280,816 20,322,863 20,372,776
Dec. 31,Jan. 1, Jan. 2,Jan., Dec. 29,
Balance Sheet Data: 1995 1995 1994 1993 1991
(In thousands)
Total assets $242,730 $232,051 $207,733 $183,045$158,806
Working capital 57,645 43,271 45,218 41,456 29,378
Shareholders' equity 185,666 179,580 159,037 139,974 115,742
Number of Restaurants at End of Period:
Company-owned and operated (Note A) 571 567 515 456 412
Franchised 200 162 134 131 118
Total 771 729 649 587 530
Note A: In 1995, a provision of $16,400,000 before tax
($10,168,000 or $0.50 per share after tax) was established
for the closing of approximately 40 under-performing
restaurants. Had the provision not been made, 1995 net
income would have been $31,447,000 or $1.55 per share. In
1991, a provision of $2,050,000 before tax ($1,240,000 or
-11-
$0.06 per share after tax) for the closing of certain
restaurants that did not meet the performance criteria set
by the Company. Had the provision not been made, 1991 net
income would have been $23,070,000 or $1.13 per share.
Note B: All share and per share data have been adjusted to
give effect to a 3-for-2 stock split in the form of a 50%
stock dividend distributed on September 22, 1994 to
shareholders of record on September 9, 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1995 Compared to 1994
Restaurant sales from Company-owned units
increased 7.4% to $310,132,000 in 1995 from $288,808,000 in
1994. The increase resulted primarily from the higher
number of units in operation during 1995, in addition to a
.5% increase in comparable restaurant sales to $273,927,000
from $272,460,000 in 1994. In March 1995, the Company
selectively increased menu prices which did not materially
affect 1995 sales. Comparable unit sales are made up of
sales at locations that were open during the entire current
and prior fiscal year.
Franchise related income increased 13.5% to
$5,942,000 in 1995 from $5,234,000 in 1994. This increase
resulted from higher royalties due to a larger number of
franchise units in operation in the current year than in
1994 on relatively stable comparable unit sales, as well as
an increase in the number of new franchise units resulting
in higher initial franchise fees.
Interest income increased to $3,081,000 in 1995 from
$1,949,000 in 1994. This increase was primarily due to
larger amounts of cash invested and higher investment yields
on invested cash and marketable securities for the fiscal
year.
Cost of food and paper products increased as a
percentage of restaurant sales to 21.7% in 1995 from 21.4%
in 1994. This increase was primarily due to higher prices
of cheese and paper products in 1995.
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Restaurant operating expenses - payroll and other
employee benefits increased to 25.3% of restaurant sales in
1995 from 24.5% of restaurant sales in 1994. This
percentage increase is attributable to the higher cost of
providing benefits to employees and a slower growth in
comparable unit sales in 1995. Restaurant operating
expenses - occupancy and other expenses increased to 27.2%
of restaurant sales in 1995 from 26.4% of restaurant sales
in 1994. This percentage increase was attributable to
higher occupancy related charges and a slower growth in
comparable unit sales in 1995.
Depreciation and amortization increased to $23,630,000
in 1995 from $21,674,000 in 1994. The increase was the
result of the number of additional Company-owned units in
operation during 1995 over the number of units in operation
during 1994.
General and administrative expenses were $16,089,000 in
1995 or 5.0% of revenues and $13,319,000 in 1994 or 4.5% of
revenues. This increase was primarily due to increased
costs associated with supervising and administering the
additional restaurants in operations and adding management
level personnel.
In 1995, a provision of $16,400,000 before tax
($10,168,000 or $0.50 per share after tax) was established
for the closing of approximately 40 under-performing
restaurants. These units produced sales of approximately $8
million in 1995 and pretax losses of approximately $3.2
million ($2 million or $0.10 per share after tax).
The effective income tax rate was 38.0% for 1995 and
1994.
1994 Compared to 1993
Restaurant sales from Company-owned units
increased 11.4% to $288,808,000 in 1994 from $259,213,000 in
1993. The increase resulted primarily from sales at
restaurants opened or acquired subsequent to January 3, 1993
in addition to a 3.1% increase in comparable restaurant
sales to $250,280,000 in 1994 from $242,755,000 in 1993.
There were no significant adjustments in menu prices that
affected the comparison of the periods. Comparable
restaurant sales are made up of sales at locations that were
open during the entire 1994 and 1993 fiscal years.
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Franchise related income increased 10.0% to
$5,234,000 in 1994 from $4,758,000 in 1993. This increase
resulted primarily from an increase in royalties due to the
larger number of franchise units in operation for the fiscal
year. Comparable sales at franchise locations did not
change significantly.
Interest income increased to $1,949,000 in 1994
from $1,579,000 for 1993. This increase was primarily due
to higher prevailing interest rates and an increase in
invested cash and marketable securities for the fiscal year.
Cost of food and paper products, as a percentage
of restaurant sales, were comparable for the reported fiscal
years (21.4% for 1994 and 1993) reflecting similar raw
ingredient prices in each year.
Restaurant operating expenses - payroll and other
employee benefits decreased to 24.5% of restaurant sales in
1994 from 24.9% of restaurant sales in 1993. This
percentage decrease is primarily attributable to higher
comparable unit sales in 1994, resulting in spreading the
fixed portion of restaurant payroll over this larger sales
base. Restaurant operating expenses - occupancy and other
expenses remained relatively consistent in each year at
26.4% in 1994 and 26.3% in 1993.
Depreciation and amortization increased to
$21,674,000 in 1994 from $18,599,000 in 1993. The increase
was the result of the number of additional Company-owned
units in operation in 1994 and property and equipment
expenditures, primarily in late 1993 and early 1994, related
to the conversion of certain restaurants to the buffet
concept.
General and administrative expenses were
$13,319,000 in 1994 or 4.5% of revenues and $12,913,000 in
1993 or 4.9% of revenues. The dollar increase reflects the
Company's addition of management (principally, field
support) personnel during 1993 which permitted further
expansion in 1994 of operating units and sales without
further substantial addition to its administrative costs in
1994. The percentage decrease reflects the spreading of
non-variable costs over a larger revenue base.
The effective income tax rate was 38.0% for 1994
and 39.6% for 1993. The 1994 percentage reflects lower
state and local income taxes. Included in the 1993 rate is
a non-recurring increase in the provision of $377,000 due to
the increase in the Federal corporate income tax rate
applied to the Company's deferred tax liabilities at year-
end 1992.
-14-
Impact of Inflation
Food, labor, construction and equipment costs are
the items most affected by inflation in the restaurant
business. Although for the past several years inflation has
not been a significant factor, there can be no assurance
that this trend will continue.
Seasonality
The Company's business is subject to seasonal
fluctuations, the effects of weather and economic
conditions. Earnings have been highest in its fourth fiscal
quarter due primarily to increased volume in shopping malls
during the holiday shopping season. Normally the fourth
fiscal quarter accounts for approximately 40% of net income
for the year. In 1995, the fourth fiscal quarter accounted
for 42% of net income for the year (prior to the provision
in 1995 for unit closings). The length of the holiday
shopping period between Thanksgiving and Christmas and the
number of weeks in the fourth quarter produce changes in the
fourth quarter earnings relationship from year to year.
(See also, ``Accounting Period''.)
Liquidity and Capital Resources
During 1995, operating activities contributed
$54.6 million to cash flow resulting primarily from net
income of $21.3 million, a non-cash expense of $23.6 million
for depreciation and amortization and a $16.4 million
provision for store closings, which were somewhat offset by
a reduction in deferred income taxes of $5.2 million.
During the year, the Company expended approximately $17.5
million for the acquisition of property and equipment
related, primarily, to the opening of 44 Company-owned
restaurants.
The Company anticipates that approximately 40 - 45
Company-owned and operated units will be opened during 1996
and that its capital expenditures (including approximately
$7 million to renovate and equip the Company's new
headquarters building) will approximate $25 million in 1996.
The Company does not anticipate making material expenditures
for remodeling of Company-owned restaurants during 1996.
From time to time, the Company has the opportunity to
contract for and secure price protection for certain of its
raw ingredients. Such situations may require the advance
outlay of funds for inventories of these items.
-15-
At December 31, 1995, the Company had cash, cash
equivalents and marketable securities of approximately
$103.5 million and its working capital was approximately
$57.6 million.
In 1995, the Company declared quarterly dividends
of $0.19 per share aggregating $0.76 per share (or $15.5
million) for the year. In February 1996, the Company's
Board of Directors declared an increase in its quarterly
dividend to $0.23 per share. The first such quarterly cash
dividend will be paid on April 3, 1996 to shareholders of
record on March 19, 1996.
The Company believes, based on current
projections, that its liquid assets presently on hand,
together with funds expected to be generated from
operations, should be sufficient for its presently
contemplated operations, dividends and the purchase of
property and equipment for the opening of additional
restaurant locations, as well as to renovate and equip the
Company's new headquarters building.
Accounting Period
The Company's fiscal year ends on the Sunday
nearest to December 31, with fiscal quarters of sixteen
weeks in the first quarter and twelve weeks in each
succeeding quarter (except in a 53 week year, which has a
thirteen week fourth quarter, the next of which will be
fiscal 1998). The Company's 1995, 1994 and 1993 fiscal
years each contained 52 weeks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annexed hereto starting on Page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
PART III
The information called for by Part III (Items 10,
11, 12 and 13) of Form 10-K is incorporated herein by
reference to such information which will be contained in the
Company's definitive Proxy Statement to be used in
connection with the Company's 1996 Annual Meeting.
-16-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) (1) and (a) (2) and (d) Financial Statements and
Financial Statement Schedule
Financial Statements Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1995
and January 1, 1995 F-2
Consolidated Statements of Income for each of
the years in the three-year period ended
December 31, 1995 F-4
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended December 31, 1995 F-5
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
December 31, 1995 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules
Report of Independent Public Accountants on
Schedule S-1
II - Valuation and Qualifying Accounts S-2
(b) Reports on Form 8-K
The only Reports on Form 8-K filed during the fourth
quarter of the Company's fiscal year ended December 31,
1995 were reports dated December 13, 1995 and December
27, 1995 (dates of earliest events reported), each
reporting under Item 5. Other events.
(c) Exhibits:
* 3.01(a) Restated Certificate of Incorporation of the
Company as filed with the Department of State
of the State of New York on March 29, 1985.
(Exhibit 3.01 to the Company's Registration
Statement on Form S-1, File No. 2-96807)
-17-
(c) Exhibits (continued):
* 3.01(b) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as
filed with the Department of State of the
State of New York on April 3, 1989. (Exhibit
3.01(b) to the Company's Annual Report on
Form 10-K for the year ended January 1, 1989,
File No. 1-8881)
* 3.01(c) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as
filed with the Department of State of the
State of New York on May 31, 1989. (Exhibit
4.01 to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 23,
1989, File No. 1-8881)
* 3.01(d) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as
filed with the Department of State of the
State of New York on June 1, 1990. (Exhibit
4.01 to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 22,
1990, File No. 1-8881)
* 3.02 By-Laws of the Company, as amended. (Exhibit
4.02 to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 23,
1989, File No. 1-8881)
*10.01 Commack, New York Corporate Headquarters
Sublease. (Exhibit 10.04 to the Company's
Registration Statement on Form S-1, File No.
2-96807)
+ *10.02(a) 1985 Incentive Stock Option Plan, as amended.
(Exhibit 4.01 to Post-Effective Amendment No.
1 to the Company's Registration Statement on
Form S-8 File No. 33-4380)
+ *10.02(b) 1991 Stock Incentive Plan, as amended.
(Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
April 24, 1994, File No. 1-8881)
+ *10.02(c) Form of Stock Option Agreement dated May 30,
1990 between the Company and each of Anthony
Sbarro, Joseph Sbarro and Mario Sbarro,
together with a schedule, pursuant to
Instruction 2 to Item 601 of Regulation S-K,
-18-
(c) Exhibits (continued):
identifying the details in which the actual
agreements differ from the exhibit filed
herewith. (Exhibit 10.02(c) to the Company's
Annual Report on Form 10-K for the year ended
December 30, 1990, File No. 1-8881)
+ *10.02(d) 1993 Non-Employee Director Stock Option Plan.
(Exhibit 10.02 (d) to the Company's Annual
Report on Form 10-K for the year ended
January 3, 1993, File No. 1-8881)
+ *10.03 Consulting Agreement (including option) dated
June 3, 1985 between the Company and Bernard
Zimmerman & Company, Inc. (Exhibit 10.04 to
the Company's Annual Report on Form 10-K for
the year ended January 1, 1989, File No.
1-8881)
+ *10.04 Form of Indemnification Agreement between the
Company and each of its directors and
officers. (Exhibit 10.04 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 1-8881)
*22.01 List of subsidiaries. (Exhibit 22.01 to the
Company's Annual Report on Form 10-K for the
year ended January 2, 1994, File No. 1-8881)
23.01 Consent of Arthur Andersen LLP.
27.01 Financial Data Schedule.
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.
-19-
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 27,
1996.
SBARRO, INC.
By: /s/ Mario Sbarro
Mario Sbarro, Chairman of the Board
-20-
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Mario Sbarro Chairman of the Board, March 27, 1996
Mario Sbarro (Principal Executive
Officer) and Director
/s/Robert S. Koebele Vice President-Finance March 27, 1996
Robert S. Koebele (Chief Financial and
Accounting Officer)
/s/Joseph Sbarro Director March 27, 1996
Joseph Sbarro
/s/Anthony Sbarro Director March 27, 1996
Anthony Sbarro
/s/Harold Kestenbaum Director March 27, 1996
Harold Kestenbaum
/s/Richard A. Mandell Director March 27, 1996
Richard A. Mandell
-21-
Signature Title Date
/s/Paul A. Vatter Director March 27, 1996
Paul A. Vatter
/s/Terry Vince Director March 27, 1996
Terry Vince
/s/Bernard Zimmerman Director March 27, 1996
Bernard Zimmerman
-22-
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Sbarro, Inc.:
We have audited the accompanying consolidated balance sheets
of Sbarro, Inc. (a New York corporation) and subsidiaries as
of December 31, 1995 and January 1, 1995, and the related
consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Sbarro, Inc. and subsidiaries as of December 31,
1995 and January 1, 1995, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
February 9, 1996
F-1
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
December 31, January 1,
1995 1995
Current assets:
Cash and cash equivalents $93,501 $42,362
Marketable securities 27,033
Receivables:
Franchisees 741 445
Other 1,863 2,270
2,604 2,715
Inventories 2,763 2,792
Prepaid expenses 1,754 1,570
Total current assets 100,622 76,472
Marketable securities 10,000 11,585
Property and equipment, net
(Note 3,9) 126,757 140,709
Other assets:
Deferred charges, net of
accumulated amortization
of $1,573,000 at December
31, 1995 and $1,548,000
at January 1, 1995 1,767 1,874
Other 3,584 1,411
5,351 3,285
$242,730 $232,051
(continued)
F-2
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands)
December 31, January 1,
1995 1995
Current liabilities:
Accounts payable $7,399 $6,375
Accrued expenses (Note 4) 27,005 18,711
Dividend payable 3,865 3,253
Income taxes (Note 5) 4,708 4,862
Total current liabilities 42,977 33,201
Deferred income taxes (Note 5) 14,087 19,270
Commitments (Note 6)
Shareholders' equity (Note 8):
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
20,345,483 shares at December 31,
1995 and 20,328,981 shares at
January 1, 1995 203 203
Additional paid-in capital 30,330 30,066
Retained earnings 155,133 149,311
185,666 179,580
$242,730 $232,051
See notes to consolidated financial statements
F-3
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Years Ended
December 31, January 1, January 2,
1995 1995 1994
Revenues:
Restaurant sales $310,132 $288,808 $259,213
Franchise related income 5,942 5,234 4,758
Interest income 3,081 1,949 1,579
Total revenues 319,155 295,991 265,550
Costs and expenses:
Cost of food and paper
products 67,361 61,877 55,428
Restaurant operating
expenses:
Payroll and other
employee benefits 78,342 70,849 64,653
Occupancy and other
expenses 84,371 76,353 68,241
Depreciation and
amortization 23,630 21,674 18,599
General and administrative 16,089 13,319 12,913
Provision for unit
closings (Note 9) 16,400
Other income (1,359) (1,351) (1,244)
Total costs and expenses 284,834 242,721 218,590
Income before income taxes
and cumulative effect of
change in method of
accounting for income taxes 34,321 53,270 46,960
Income taxes (Note 5) 13,042 20,244 18,612
Income before cumulative
effect of accounting change 21,279 33,026 28,348
Cumulative effect of change
in method of accounting
for income taxes (Note 5) 1,010
Net income $21,279 $33,026 $29,358
(continued)
F-4
(Consolidated Statements of Income - Continued)
Per share data:
Earnings per common and
common equivalent share
before cumulative effect
of change in method of
accounting for income taxes $1.05 $1.63 $1.40
Cumulative effect of change
in method of accounting
for income taxes (Note 5) 0.05
Earnings per common and
common equivalent share $1.05 $1.63 $1.45
Dividends declared $0.76 $0.64 $0.52
Weighted average number
of shares used in the
computation 20,336,809 20,310,283 20,280,816
See notes to consolidated financial statements
F-4
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
Common stock
Additional
Number of paid-in Retained
shares Amount capital earnings Total
Balance at
January 3,
1993 13,513,499 $135 $29,092 $110,747 $139,974
Exercise of
stock options 17,662 523 523
Net income 29,358 29,358
Dividends declared (10,818) (10,818)
Balance at
January 2,
1994 13,531,161 135 29,615 129,287 159,037
Exercise of
stock options 24,124 519 519
3-for-2 stock
split 6,773,696 68 (68)
Net income 33,026 33,026
Dividends declared (13,002) (13,002)
Balance at
January 1,
1995 20,328,981 203 30,066 149,311 179,580
Exercise of
stock options 16,502 264 264
Net income 21,279 21,279
Dividends declared (15,457) (15,457)
Balance at
December 31,
1995 20,345,483 $203 $30,330 $155,133 $185,666
See notes to consolidated financial statements
F-5
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended
December 31, January 1, January 2,
1995 1995 1994
Operating activities:
Net income $21,279 $33,026 $29,358
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Cumulative effect of
change in method of
accounting for income taxes (1,010)
Depreciation and
amortization 23,630 21,674 18,599
Provision for deferred
income taxes (5,183) 1,192 555
Provision for unit
closings 16,400
Changes in operating assets
and liabilities:
Decrease (increase) in
receivables 58 (1,441) (290)
Decrease (increase) in
inventories 29 (257) (364)
(Increase) decrease in
prepaid expenses (292) (103) 66
Increase in deferred charges(1,400) (1,605) (1,551)
Increase in other assets (2,425) (122) (254)
Increase in accounts payable
and accrued expenses 2,638 1,736 2,810
(Decrease) increase in income
taxes payable (154) 301 173
Net cash provided by
operating activities 54,580 54,401 48,092
(continued)
F-6
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
For the Years Ended
December 31, January 1, January 2,
1995 1995 1994
Investing activities:
Proceeds from maturities of
marketable securities 28,618
Proceeds from sales of
marketable securities 526,192 23,298
Purchases of marketable
securities (527,555) (60,553)
Purchases of property
and equipment (17,513) (32,058) (31,898)
Proceeds from disposition of
property and equipment 34 14 15
Net cash provided by (used in)
investing activities 11,139 (33,407) (69,138)
Financing activities:
Proceeds from exercise of
stock options 264 519 523
Cash dividends paid (14,844) (12,456) (8,111)
Net cash used in
financing activities (14,580) (11,937) (7,588)
Increase (decrease) in cash
and cash equivalents 51,139 9,057 (28,634)
Cash and cash equivalents at
beginning of year 42,362 33,305 61,939
Cash and cash equivalents
at end of year $93,501 $42,362 $33,305
See notes to consolidated financial statements
F-7
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies:
Basis of financial statement presentation:
The consolidated financial statements include the
accounts of Sbarro, Inc. and its wholly-owned
subsidiaries (the "Company"). All material
intercompany accounts and transactions have been
eliminated.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that may
affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ
from those estimates.
Cash equivalents:
All highly liquid debt instruments with a maturity of
three months or less at the time of purchase are
considered to be cash equivalents.
Marketable securities:
The Company classifies its investments in marketable
securities as ``held to maturity''. These investments
are stated at amortized cost, which approximates
market, and are comprised primarily of direct
obligations of the U.S. Government and its agencies.
Securities classified as long term mature in 1997 and
1998.
Inventories:
Inventories, consisting primarily of food, beverages
and paper supplies, are stated at cost which is
determined by the first-in, first-out method.
Property and equipment and depreciation:
Property and equipment are stated at cost.
Depreciation is provided for principally by the
straight-line method over the estimated useful lives of
the assets. Amortization of leasehold improvements is
provided for by the straight-line method over the
estimated useful lives of the assets or the lease term,
whichever is shorter. One-half year of depreciation
F-8
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Property and equipment and depreciation (continued)
and amortization is recorded in the year in which the
restaurant commences operations.
Deferred charges:
Certain costs and expenses incurred which are directly
related to new restaurant openings (primarily crew
payroll costs and travel expenses incurred prior to
opening) are deferred and amortized on a straight-line
basis over a twenty-four month period. One-half year
of amortization is recorded in the year in which the
restaurant commences operations.
Deferred income:
Deferred income relates to vendor cash advances for
allowances to be based on product usage.
Franchise related income:
Initial franchise fees are recorded as income as
restaurants are opened by the franchisee and all
services have been substantially performed by the
Company. Development fees are amortized over the
number of restaurant openings covered under each
development agreement. Royalty and other fees from
franchisees are accrued as earned. Revenues and
expenses related to construction of franchised
restaurants are recognized when contractual obligations
are completed and the restaurants are opened.
Income taxes:
The Company files a consolidated federal income tax
return. Deferred income taxes result primarily from
differences between financial and tax reporting of
depreciation and amortization.
Accounting period:
The Company's fiscal year ends on the Sunday nearest to
December 31, with fiscal quarters of sixteen weeks in
the first quarter and twelve weeks in each succeeding
quarter (except in a 53 week year, which has a thirteen
week fourth quarter).
F-9
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Per share data:
Earnings per share is computed using the weighted
average number of common shares outstanding and, where
applicable, common equivalent shares issuable upon
exercise of stock options calculated under the treasury
stock method.
All share and per share data have been adjusted to give
effect to a 3-for-2 stock split in the form of a 50%
stock dividend distributed on September 22, 1994.
Impact of recently issued accounting standards:
In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
(``SFAS'') No. 121, ``Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be
Disposed of''. The Company anticipates that SFAS 121,
which is effective for the Company's 1996 fiscal year,
will not have a material impact on the Company's
results of operations and financial condition.
Supplemental disclosures of cash flow information:
(In thousands)
For the Years Ended
December 31, January 1, January 2,
1995 1995 1994
Cash paid for:
Income taxes $18,880 $18,992 $17,386
2. Description of business:
The Company, its subsidiaries and franchisees develop
and operate family oriented cafeteria style Italian
restaurants under the ``Sbarro'', ``Sbarro the Italian
Eatery'' and ``Cafe Sbarro'' names. The restaurants
are located throughout the United States and overseas,
principally, in shopping malls and other high traffic
locations.
F-10
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Description of business (continued):
The following tabulates the number of units in
operation as of the end of the indicated fiscal years:
December 31, January 1, January 2,
1995 1995 1994
Company-owned 571 567 515
Franchised 200 162 134
771 729 649
3. Property and equipment:
(In thousands)
December 31, January 1,
1995 1995
Leasehold improvements $142,341 $142,264
Furniture, fixtures and
equipment 83,679 83,773
Construction-in-progress (*) 9,278 9,102
235,298 235,139
Less accumulated depreciation
and amortization 108,541 94,430
$126,757 $140,709
(*) Includes $6,351 in 1995 and $5,350 in 1994 related
to the improvement and acquisition of the new corporate
headquarters.
F-11
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Accrued expenses:
(In thousands)
December 31, 1995 January 1, 1995
Compensation $4,905 $ 4,770
Payroll and
sales taxes 4,196 3,545
Rent 6,330 5,938
Provision for
store closings (Note 9) 6,767 -
Other 4,807 4,458
$27,005 $18,711
5. Income taxes:
(In thousands)
For the Years Ended
December 31, January 1, January 2,
1995 1995 1994
Federal:
Current $14,897 $15,606 $12,906
Deferred (4,158) 948 1,507
10,739 16,554 14,413
State and local:
Current 3,328 3,446 3,799
Deferred (1,025) 244 400
2,303 3,690 4,199
$13,042 $20,244 $18,612
Deferred tax liabilities are comprised of the
following:
December 31, January 1,
1995 1995
Depreciation and
amortization $16,360 $19,293
Deferred charges 554 599
Other 102 106
Gross deferred tax
liabilities 17,016 19,998
Accrued liabilities (2,527) (504)
Deferred income (336) (159)
Other (66) (65)
Gross deferred tax assets (2,929) (728)
$14,087 $19,270
F-12
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Income taxes (continued):
Actual tax expense differs from ``expected'' tax
expense (computed by applying the Federal corporate
rate of 35% for the years ended December 31, 1995,
January 1, 1995 and January 2, 1994) as follows:
(In thousands)
For the Years Ended
December 31, January 1, January 2,
1995 1995 1994
Computed "expected"
tax expense $12,012 $18,645 $16,436
Increase (reduction) in
income taxes resulting
from:
State and local income
taxes, net of Federal
income tax benefit 1,497 2,399 2,715
Tax exempt interest
income (311) (337) (296)
Other, net (156) (463) (243)
$13,042 $20,244 $18,612
Deferred income taxes are provided for temporary
differences between financial and tax reporting. These
differences and the amount of the related deferred tax
provision are as follows:
(In thousands)
For the Years Ended
December 31, January 1, January 2,
1995 1995 1994
Depreciation and
amortization $(2,781) $1,210 $1,653
Accrued expenses (2,482) 104 309
Other 80 (122) 55
$(5,183) $1,192 $1,907
F-13
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Income taxes (continued):
In the first quarter of 1993, the Company adopted
Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes", the effects of
which have been reflected in the financial statements
as a cumulative effect of a change in the method of
accounting. SFAS 109 requires the Company to compute
deferred income taxes based on the difference between
the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse.
The adoption of this method of accounting, as required
by SFAS 109, resulted in a $1,010,000 cumulative
increase in earnings ($0.05 per share) and decrease in
net deferred tax liabilities in 1993.
In accordance with SFAS 109, the retroactive increase
in the Federal corporate income tax rate, enacted in
the third quarter of 1993, has been reflected in the
results for 1993. The effective rate for earnings
subsequent to the rate increase was 38.9%. The new
income tax rate resulted in an increase in the tax
provision of approximately $500,000 (or $0.02 per
share) and the new income tax rate applied to the
Company's deferred tax liabilities at January 3, 1993
(which had previously been calculated using the old
rate) resulted in a non-recurring increase in the tax
provision of $377,000 (or $0.02 per share).
6. Commitments:
The Company conducts all of its operations in leased
facilities. Most of the Company's restaurant leases
provide for the payment of base rents plus real estate
taxes, utilities, insurance, common area charges and
certain other expenses, as well as contingent rents
generally ranging from 6% to 10% of net restaurant
sales in excess of stipulated amounts.
F-14
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Commitments (continued):
Rental expense under operating leases, including common
area charges, other expenses and additional amounts
based on sales, are as follows:
(In thousands)
For the Years Ended
December 31, January 1, January 2,
1995 1995 1994
Minimum rentals $35,142 $31,146 $28,135
Contingent rentals 3,082 3,269 2,504
Common area charges 10,846 9,586 8,437
$49,070 $44,001 $39,076
Future minimum rental and other payments required under
non-cancelable operating leases for Company-operated
restaurants that were open on December 31, 1995 and the
existing corporate office are as follows (in
thousands):
Years ending:
December 29, 1996 $49,603
December 28, 1997 48,560
January 3, 1999 46,250
January 2, 2000 43,464
January 1, 2001 40,842
Later years 143,385
$372,104
The Company is the principal lessee under operating
leases for certain franchised restaurants which are
subleased to the individual franchisees. Franchisees
pay rent and related expenses directly to the landlord.
Future minimum rental payments required under these
non-cancelable operating leases for franchised
F-15
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Commitments (continued):
restaurants as of December 31, 1995 are as follows (in
thousands):
Years ending:
December 29, 1996 $1,492
December 28, 1997 1,303
January 3, 1999 1,177
January 2, 2000 1,006
January 1, 2001 788
Later years 1,280
$7,046
As of February 9, 1996, future minimum rental payments
required under non-cancelable operating leases for
restaurants which had not opened as of December 31,
1995 are as follows (in thousands):
Years ending:
December 29, 1996 $640
December 28, 1997 1,051
January 3, 1999 1,086
January 2, 2000 1,111
January 1, 2001 1,055
Later years 6,215
$11,158
The Company has entered into contracts aggregating
$2,200,000 with respect to the construction of
restaurants to be opened or renovated in 1996. Of such
amount, $818,000 is included in construction-in-
progress as of December 31, 1995.
In March 1994, the Company purchased a 100,000 square
foot office building in Melville, New York, for
$5,350,000. The Company is in the process of
refurbishing the building at an estimated cost of
approximately $7 million and intends to occupy a
portion of the building as its Corporate Headquarters
and lease the remainder of the building. (See Note 3).
F-16
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Transactions with related parties:
In May 1986, the Company entered into a fifteen year
sublease with a partnership owned by certain
shareholders of the Company for its Corporate
Headquarters office building. In each of the years
1995, 1994 and 1993 the Company incurred rent expense
for such building of $298,000. Pursuant to the
sublease, the annual base rent increases to $337,000
beginning April 1996. Management believes that such
rents are comparable to the rents that would be charged
by an unaffiliated third party.
A member of the Board of Directors acts as a consultant
to the Company for which he received $96,000 in each of
the years ended December 31, 1995 and January 1, 1995
and $65,400 in the year ended January 2, 1994.
8. Stock options:
In 1991, the Company adopted its 1991 Stock Incentive
Plan (the "1991 Plan") which replaced the Company's
1985 Incentive Stock Option Plan. No further options
may be granted under the 1985 Plan. Under the 1991
Plan, the Company may grant, until February 2001,
incentive stock options and non-qualified stock options
alone or in tandem with stock appreciation rights
("SARs") to employees and consultants of the Company
and its subsidiaries. An aggregate of 750,000 shares
of common stock was originally subject to the 1991
Plan. In 1994, the Company's Board of Directors
authorized and its shareholders approved an increase in
the number of shares available under the 1991 Plan to
1,500,000 shares. Options and SARs may not be granted
at exercise prices less than 100% of the fair market
value of the Company's common stock on the date of
grant. The Board of Directors' Committee administering
the Plan is empowered to determine, within the limits
of the 1991 Plan, the number of shares subject to each
option and SAR, the exercise price, and the time period
(which may not exceed ten years) and terms under which
each may be exercised.
F-17
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Stock options (continued):
Changes in options under these plans, expressed in
number of shares, are as follows:
For the Years Ended
December 31,January 1,January 2,
1995 1995 1994
Options outstanding,
beginning of period 720,958 681,266 173,261
Granted 15,000 128,500 569,250
Exercised (16,502) (32,306) (26,493)
Canceled (69,244) (56,502) (34,752)
Options outstanding,
end of period 650,212 720,958 681,266
Options exercisable,
end of period 418,962 257,457 135,753
Exercise price per share
for options outstanding,
end of period $14.75-$28.75 $14.75-$28.75 $1.78-$28.75
Exercise price per share
for options exercised
during the period $14.75-$21.17 $1.78-$21.17 $16.25-$21.17
At December 31, 1995, there were 850,750 shares
available for grant under the 1991 Plan.
In 1993, options were granted under the 1991 Plan to
the Company's Chairman of the Board, President, Senior
Executive Vice President and one non-employee director
to purchase 120,000, 90,000, 75,000 and 37,500 shares,
respectively, at $27.09 per share, the fair market
value of the Company's common stock on the date of
grant, for a period of 10 years from the date of grant.
Such options remain unexercised.
In 1990, shareholder approved options were granted to
the Company's Chairman of the Board, President and
Senior Executive Vice President to purchase 150,000,
75,000 and 75,000 shares, respectively, at
F-18
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Stock options (continued):
$20.67 per share, the fair market value of the
Company's common stock on the date of grant, for a
period of 10 years from the date of grant. Such
options remain unexercised.
On February 16, 1993, the Company adopted the 1993 Non-
Employee Director Stock Option Plan ("1993 Plan")
covering an aggregate of 300,000 shares of common
stock. Each non-employee director is to be granted an
option to purchase 3,750 shares of common stock
following each annual shareholders' meeting. Each
option has a five year term and is exercisable in full
commencing one year after grant at 100% of the fair
market value of the Company's common stock on the date
of grant. In 1995, 1994 and 1993, each of the six non-
employee directors were granted options to purchase
3,750 shares at $21.50, $23.71 and $23.05 per share,
respectively. No options granted under this plan have
been exercised.
9. Provision for unit closings:
A provision for restaurant closings in the amount of
$16,400,000 ($10,168,000 or $0.50 per share after tax)
was established in 1995 for the closing of
approximately 40 under-performing restaurants.
10. Dividends:
In 1995 and 1994, the Company declared quarterly
dividends of $0.19 per share and $0.16 per share,
respectively, aggregating $0.76 per share and $0.64 per
share for the respective years. In February 1996, the
Company's Board of Directors declared an increase in
the quarterly dividend to $0.23 per share, beginning
with the quarterly cash dividend to be paid on April 3,
1996 to shareholders of record on March 19, 1996.
F-19
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Quarterly financial information (unaudited):
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal year 1995
Revenues $84,607 $68,764 $75,789 $89,995
Gross profit (a) 64,252 52,171 57,536 68,812
Net income 4,610 5,485 8,125 3,059 (b)
Earnings per share $0.23 $0.27 $0.40 $0.15 (b)
Fiscal year 1994
Revenues $77,411 $63,010 $69,776 $85,794
Gross profit (a) 59,071 48,208 53,365 66,287
Net income 6,169 5,838 8,061 12,958
Earnings per share $0.30 $0.29 $0.40 $0.64
(a) Gross profit represents the difference between
restaurant sales and the cost of food and paper
products.
(b) See Note 9.
F-20
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE
To the Board of Directors and Shareholders
of Sbarro, Inc.:
We have audited, in accordance with generally accepted
auditing standards, the consolidated financial statements of
Sbarro, Inc. and subsidiaries, included in this filing and
have issued our report thereon dated February 9, 1996. Our
audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The
accompanying schedule is the responsibility of the Company's
management and is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has
been subjecctted to the auditing procedures applied in the
audit of the bbaassic financial statements and, in our opinion,
fairly states in all material respects the financial data
required to be set forth therein in relations to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
New York, New York
February 9, 1996
S-1
SCHEDULE II
SBARRO, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
FOR THE THREE YEARS ENDED
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
Balance Charged Charged to
at to Other Deductions Balance
Beginning Costs and Accounts Describe End of
Description of Period Expenses Describe (1) Period
December 31, 1995:
Accumulated amortization
of deferred charges $1,548 $1,507 ($1,482) $1,573
Accumulated amortization
of Canadian development
rights (2) 311 57 368
Accumulated amortization
of Purchased Leasehold
rights (2) 586 178 764
$2,445 $1,742 ($1,482) $2,705
January 1, 1995:
Accumulated amortization
of deferred charges $1,360 $1,460 ($1,272) $1,548
Accumulated amortization
of Canadian development
rights (2) 264 47 311
Accumulated amortization
of Purchased Leasehold
rights (2) 410 176 586
$2,034 $1,683 ($1,272) $2,445
January 2, 1994:
Accumulated amortization
of deferred charges $1,167 $1,289 ($1,096) $1,360
Accumulated amortization
of Canadian development
rights (2) 237 27 264
Accumulated amortization
of Purchased Leasehold
rights (2) 246 164 410
$1,650 $1,480 ($1,096) $2,034
(1) Write-off of fully amortized deferred charges
(2) Included in other assets S-2
EXHIBIT INDEX
Exhibit Number Description
*3.01(a) Restated Certificate of Incorporation of the
Company as file with the Department of State
of the State of New York on March 29, 1985.
(Exhibit 3.01 to the Company's Registration
Statement on Form S-1, File No. 2-96807)
*3.01(b) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as filed
with the Department of State of the State of
New York on April 3, 1989. (Exhibit 3.01(b)
to the Company's Annual Report on Form 10-K
for the year ended January 1, 1989, File No.
1-8881)
*3.01(c) Certificate of Amendment to the Company's
Restated Certificate of Incorporation as filed
with the Department of State of the State of
New York on May 31, 1989. (Exhibit 4.01 to
the Company's Quarterly Report on Form 10-Q
for the quarter ended April 23, 1989, File No.
1-8881)
*3.01(d) Certificate of Amendment to the Company's
Restate Certificate of Incorporation as filed
with the Department of State of the State of
New York on June 1, 1990. (Exhibit 4.01 to
the Company's Quarterly Report on Form 10-Q
for the quarter ended April 22, 1990, File No.
1-8881)
*3.02 By-Laws of the Company, as amended. (Exhibit
4.02 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 23, 1989,
File No. 1-8881)
*10.01 Commack, New York Corporate Headquarters
Sublease. (Exhibit 10.04 to the Company's
Registration Statement on Form S-1, File No.
2-96807)
+ *10.02(a) 1985 Incentive Stock Option Plan, as amended.
(Exhibit 4.01 to Post-Effective Amendment No.
1 to the Company's Registration Statement on
Form S-8 File No. 33-4380)
Exhibit Index (continued):
Exhibit Number
+ *10.02(b) 1991 Stock Incentive Plan, as amended.
(Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
April 24, 1994, File No. 1-8881)
+ *10.02(c) Form of Stock Option Agreement dated May 30,
1990 between the Company and each of Anthony
Sbarro, Joseph Sbarro and Mario Sbarro,
together with a schedule, pursuant to
Instruction 2 to Item 601 of Regulation S-K,
identifying the details in which the actual
agreements differ from the exhibit filed
herewith. (Exhibit 10.02(c) to the Company's
Annual Report on Form 10-K for the year ended
December 30, 1990, File No. 1-8881)
+ *10.02(d) 1993 Non-Employee Director Stock Option Plan.
(Exhibit 10.02(d) to the Company's Annual
Report on Form 10-K for the year ended January
3, 1993, File No. 1-8881)
+ *10.03 Consulting Agreement (including option) dated
June 3, 1985 between the Company and Bernard
Zimmerman & Company, Inc. (Exhibit 10.04 to
the Company's Annual Report on Form 10-K for
the year ended January 1, 1989, File No. 1-
8881)
+ *10.04 Form of Indemnification Agreement between the
Company and each of its directors and
officers. (Exhibit 10.04 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989, File No. 1-8881)
*22.01 List of subsidiaries. (Exhibit 22.01 to the
Company's Annual Report on Form 10-K for the
year ended January 2, 1994, File No. 1-8881)
23.01 Consent of Arthur Andersen LLP.
27.01 Financial Data Schedule.
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.