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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 29, 1996
__
/ / 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 of (I.R.S. Employer
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 [ ].
The aggregate market value of Common Stock held by non-affiliates
of the registrant as of March 14, 1997 was approximately $357,000,000.
The number of shares of Common Stock of the registrant outstanding
as of March 14, 1997 was 20,407,825.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used in connection with the
registrant's 1997 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 become a leading operator and franchisor
of family-style Italian restaurants, with 816 Sbarro restaurants
worldwide. In addition, since 1995, the Company has created,
through joint ventures, other concepts for the purpose of
developing growth opportunities in addition to its Sbarro
restaurants. (See ``New Ventures'', below.) As used in this
report, the term "Company" refers to Sbarro, Inc. and its
consolidated subsidiaries, unless the context indicates
otherwise.
General
The Company develops and operates or franchises an
international chain of family-style Italian restaurants under the
"Sbarro" and "Sbarro The Italian Eatery" names (``Sbarro
restaurants''). 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 29, 1996, there were 816 Sbarro
restaurants, located in 48 states throughout the United States,
the District of Columbia and in Aruba, Australia, the Bahamas,
Belgium, Canada, Chile, France, Israel, Japan, Korea, Kuwait,
Lebanon, the Philippines, Puerto Rico, Qatar, Saudi Arabia, and
the United Kingdom. At that date, the Company owned and operated
597 restaurants and franchised 219 Sbarro restaurants. In
addition, since 1995, the Company has created and operated,
through joint ventures, other concepts for the purpose of
developing growth opportunities in addition to its Sbarro
restaurants.
Restaurant Expansion
The Company has expanded significantly in recent years,
growing from 123 restaurants at the time of the Company's initial
public offering of Common Stock in 1985 to 530 restaurants at the
beginning of 1992 to 816 at the end of 1996. During 1996, 65 new
Sbarro restaurants were opened, of which 29 were Company-owned
and 36 were franchised.
-2-
During 1997, the Company plans to open approximately 80
restaurants, of which approximately 40 are expected to be
Company-owned and the balance are expected to be franchised. The
actual number of openings will depend on the availability of
appropriate sites, as well as other factors.
While most Sbarro restaurants are located in shopping
malls, in recent years the Company has been expanding the basic
Sbarro concept outside the shopping mall environment by adding
Company and franchise restaurants in downtown areas in major
United States cities, such as Boston, Chicago, New York and
Philadelphia, as well as on toll roads, in strip shopping
centers, hospitals, convention centers, universities, casinos,
hotels and airports. In addition, kiosks have been introduced in
certain selected markets.
The following table indicates the number of Company-
owned and Sbarro franchised restaurants during each of the years
from 1992 through 1996.
Fiscal Year
1996 1995 1994 1993 1992
Company-owned Sbarro restaurants:
Opened during period (*) 29 44 53 59 58
Acquired from [sold to]
franchisees during period - net 1 - 2 7 [1]
Closed during period (**) [4] [40] [3] [7] [13]
Open at end of period 597 571 567 515 456
Franchised Sbarro restaurants:
Opened during period 36 40 38 24 26
Purchased from [sold to]
Company during period - net [1] - [2] [7] 1
Closed or terminated during
period [16] [2] [8] [14] [14]
Open at end of period 219 200 162 134 131
All Sbarro restaurants:
Opened during period 65 84 91 83 84
Closed or terminated during
period [20] [42] [11] [21] [27]
Open at end of period 816 771 729 649 587
Kiosks (all franchised) 7 8 7 7 5
(*) Includes, in 1996, three mall locations of a joint venture
which operate as Umberto of New Hyde Park units.
(**) In December 1995, the Company announced the planned closing
of 40 Company-owned Sbarro restaurants. The costs associated
with the closing of these restaurants was provided for in the
-3-
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.
Concept and Menu
Sbarro restaurants are family oriented, offering quick,
efficient, friendly cafeteria and buffet style service designed
to minimize customer waiting time and facilitate table turnover.
The decor of a Sbarro restaurant incorporates booth and table
seating (for "in-line" restaurants), with a contemporary motif
that blends with the characteristics of the surrounding area.
As of December 29, 1996, there were 252 ``in-line''
Sbarro restaurants and 556 ``food court'' Sbarro restaurants. In
addition, franchisees operated eight free-standing Sbarro
restaurants, including five in the Middle East and one in each of
the Bahamas, Puerto Rico and Minnesota. "In-line" restaurants,
which are self-contained restaurants, usually occupy
approximately 1,500-3,000 square feet, contain the space and
furniture to seat approximately 60-120 people and employ 10-40
persons, including part-time personnel. "Food court" restaurants
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 generally occupy
approximately 500-1,000 square feet and contain only kitchen and
service areas. They frequently have a more limited menu than an
"in-line" restaurant and employ 6-30 persons, including part-time
personnel.
Sbarro restaurants are generally open seven days a week
serving lunch, dinner and, in a limited number of locations,
breakfast, with hours conforming to those 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 1996 and 1995 were $698,000 and $702,000, respectively,
for "in-line" restaurants and $486,000 and $487,000,
respectively, for "food court" restaurants.
Sbarro restaurants feature 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. In addition to soft
drinks, some of the larger restaurants serve beer and wine,
although alcoholic beverage sales are not emphasized.
All food products are prepared fresh daily in each
restaurant according to special recipes developed by the Sbarro
family. Emphasis is placed on serving generous portions of
quality Italian-style food at value prices. Entree selections,
-4-
excluding pizza, generally range in price from $2.99 to $5.29.
The Company believes that pizza, which is sold predominantly by
the slice, accounts for approximately one-half of Sbarro
restaurant sales.
The Company's ``signature'' 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, pastries,
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.
The Company has a Restaurant Management Bonus Program
which provides the management teams of Company-owned Sbarro
restaurants with the opportunity to receive a percentage of
restaurant sales in cash bonuses based on certain performance -
related criteria.
The Company also employs 70 - 75 Area Directors, each
of whom is typically responsible for the operations of 7 - 15
Company-owned Sbarro 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 the ten Regional Directors. The Regional Directors recruit
and supervise the managerial staff of all Company-owned Sbarro
restaurants and report to one of the five Regional Vice
Presidents. The Regional Vice Presidents coordinate the
activities of the Regional Directors assigned to their areas of
responsibility and report to one of two Corporate Vice
Presidents. The Corporate Vice Presidents have total
responsibility for their geographic areas.
Franchise Development
While the Company continues to emphasize expansion
through Company-owned units, growth in franchise operations is
-5-
also anticipated through the establishment of new Sbarro
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 29, 1996, the Company had 219 franchised
Sbarro restaurants operated by 73 franchisees in 30 states as
well as Aruba, Australia, the Bahamas, Belgium, Canada, Chile,
France, Israel, Japan, Korea, Kuwait, Lebanon, the Philippines,
Puerto Rico, Qatar, Saudi Arabia and the United Kingdom. The
Company is presently considering additional franchise
opportunities in the United States and other countries.
In certain instances, franchise locations have been
established through territorial agreements under which the
Company granted, for specified time periods, exclusive rights to
enter into franchise agreements for restaurant units in certain
geographic areas, primarily in foreign countries, or for
specified non-mall locations (such as for certain toll roads or
airports) in the United States or foreign 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. Franchise agreements entered into prior to 1988
generally have an initial term of 15 years with the franchisee
having a 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 its 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 new restaurant
concepts. The first venture is a casual dining chain in a Rocky
Mountain steakhouse motif. This venture, in which the Company
has a 40% interest, presently operates two restaurants
-6-
under the name Boulder Creek Steaks & Saloon, with two additional
restaurants under construction. The second venture, in which the
Company has a 70% interest, is a moderately priced, table service
restaurant chain featuring an Italian Mediterranean menu under
the names Bice Med Grille, Salute and Cafe Med. Two restaurants
in New York City and one on Long Island, New York are currently
operating. The third venture is a family restaurant concept
under the name Umberto of New Hyde Park featuring pizza and other
Italian-style foods, in which the Company has an 80% interest.
This venture currently operates one restaurant in a strip
shopping center on Long Island, New York and three food court
units in regional shopping malls in Chicago, Las Vegas and White
Plains, New York. The Company intends to monitor the results of
these three concepts for the purpose of evaluating their
potential future growth.
Employees
As of December 29, 1996, the Company (exclusive of
joint ventures to which the Company is a party) employed
approximately 7,770 persons, of whom approximately 2,700 were
full-time field and restaurant personnel, 4,900 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 in which it
operates with locally-owned restaurants as well as with national
and regional restaurant chains.
Trademarks
The Sbarro restaurants operate under the "Sbarro" and
"Sbarro The Italian Eatery" service marks which are registered
with the United States Patent and Trademark Office for terms
presently expiring in 2004 and 2001, respectively. Registered
service marks may continually be renewed for 10 year periods.
The Company has also registered or filed applications to register
"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. The joint
ventures, to which the Company is a party, have also applied for
United States trademarks covering trade names used by them.
-7-
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 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. In addition,
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. The Company
believes it is in compliance with such laws in all material
aspects.
ITEM 2. PROPERTIES
All Sbarro restaurants are operated in leased premises.
As of December 29, 1996, the Company leased 628 restaurants, of
which 34 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 8% to 10% of net restaurant sales in excess of
stipulated amounts. Leases to which the Company were a party at
December 29, 1996 have initial terms expiring as follows:
Years Initial Lease Number of Company- Number of Franchised
Terms Expire owned Restaurants Restaurants
1997 38 1
1998 - 2001 213 19
2002 - 2006 318 13
2007 - 2013 25 1
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 a current annual base rental of $337,000. In
addition, the Company pays real estate taxes, utilities,
insurance and certain other expenses for the facility.
-8-
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 additional cost of approximately $7 million and intends
to occupy a portion of the building in 1997 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
The Company's Common Stock is listed on the New York
Stock Exchange under the symbol ``SBA''. The range of high and
low sales prices of the Company's Common Stock on the New York
Stock Exchange for the last two fiscal years is as follows:
1996 1995
Quarter Ended High Low Quarter Ended High Low
April 21 $27.00 $21.38 April 23 $27.88 $22.75
July 14 $28.13 $24.13 July 16 $26.00 $19.88
October 6 $26.00 $22.88 October 8 $25.00 $21.50
December 29 $27.50 $24.25 December 31 $23.25 $20.88
-9-
As of March 1, 1997, there were approximately 570
holders of record of the Company's Common Stock, exclusive of
shareholders whose shares were held by brokerage firms,
depositories and other institutional firms in "street name" for
their customers.
In 1996 and 1995, the Company declared quarterly
dividends of $.23 per share and $.19 per share, respectively,
aggregating $.92 per share and $.76 per share for the respective
years. On February 20, 1997, the Company's Board of Directors
declared an increase in the quarterly dividend to $.27 per share,
beginning with the quarterly cash dividend to be paid on April 2,
1997 to shareholders of record on March 18, 1997.
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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
Dec. 29, Dec. 31, Jan. 1, Jan. 2, Jan. 3,
Income Statement Data: 1996 1995 1995 1994 1993
(In thousands, except share and per share data)
Revenues:
Restaurant sales $319,315 $310,132 $288,808 $259,213 $231,796
Franchise related income 6,375 5,942 5,234 4,758 4,433
Interest income 3,798 3,081 1,949 1,579 1,319
329,488 319,155 295,991 265,550 237,548
Costs and expenses:
Cost of food and
paper products 68,668 67,361 61,877 55,428 51,078
Restaurant operating expenses:
Payroll & other
employee benefits 78,258 78,342 70,849 64,653 57,555
Occupancy & other expenses 85,577 84,371 76,353 68,241 62,819
Depreciation and
amortization 22,910 23,630 21,674 18,599 16,174
General and administrative 14,940 16,089 13,319 12,913 12,388
Provision for unit
closings (Note A) - 16,400 - - -
Other income (1,171) (1,359) (1,351) (1,244) (1,287)
269,182 284,834 242,721 218,590 198,727
Income before income taxes and cumulative
effect of change in method of accounting for
income taxes 60,306 34,321 53,270 46,960 38,821
Income taxes 22,916 13,042 20,244 18,612 14,752
Income before cumulative effect
of accounting change 37,390 21,279 33,026 28,348 24,069
Cumulative effect of change
in method of accounting
for income taxes - - - 1,010 -
Net income (Note A) $37,390 $21,279 $33,026 $29,358 $24,069
Per share data:
Earnings per common and common
equivalent share before
cumulative effect of change
in method of accounting
for income taxes $1.84 $1.05 $1.63 $1.40 $1.18
Cumulative effect of
change in method of
accounting for income taxes - - - .05 -
Earnings per common and
common equivalent share
(Notes A and B) $1.84 $1.05 $1.63 $1.45 $1.18
Dividends declared $0.92 $0.76 $0.64 $0.52 -
Weighted average number
of shares used in the
computation
(Note B) 20,369,128 20,336,809 20,310,283 20,280,816 20,322,863
Dec. 29, Dec. 31, Jan. 1, Jan. 2, Jan. 3,
Balance Sheet Data: 1996 1995 1995 1994 1993
(In thousands)
Total assets $258,659 $242,730 $232,051 $207,733 $183,045
Working capital 73,619 57,645 43,271 45,218 41,456
Shareholders' equity 205,200 185,666 179,580 159,037 139,974
Number of Restaurants at End of Period:
Company-owned and
operated (Note A) 597 571 567 515 456
Franchised 219 200 162 134 131
Total (Note C) 816 771 729 649 587
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.
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.
Note C: Excludes kiosks operated by franchisees and restaurants owned and
operated by joint ventures to which the Company is a party (other than
three mall locations of a joint ventrue which are included in the table as
Company-owned and operated units).
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1996 Compared to 1995
Restaurant sales from Company-owned units increased
3.0% to $319,315,000 in 1996 from $310,132,000 in 1995. The
increase resulted from the higher contribution to sales in 1996
than in 1995 from units opened during 1995 together with the
contribution to sales from units opened during 1996 offset, in
part, by the loss of sales from underperforming units closed at
the end of 1995. Another factor affecting sales was the
selective menu price increases of approximately .5% and 1% in mid
April 1996 and mid July 1996. Comparable unit sales remained
relatively unchanged at $292,088,000 in 1996 and $292,622,000 in
1995. Comparable restaurant sales are made up of sales at
locations that were open during the entire current year and
entire prior fiscal year.
Franchise related income increased 7.3% to $6,375,000
in 1996 from $5,942,000 in 1995. This increase resulted from
higher royalties due principally to a larger number of franchise
units in operation in the current year than in 1995, offset
somewhat by lower initial franchise licensing fees due to less
unit openings. Comparable sales at franchise locations did not
change significantly.
Interest income increased to $3,798,000 in 1996 from
$3,081,000 in 1995. This increase was primarily due to larger
amounts of cash invested, offset somewhat by slightly lower
yields on cash equivalents and marketable securities for the
fiscal year.
Cost of food and paper products decreased as a
percentage of restaurant sales to 21.5% in 1996 from 21.7% in
1995. This improvement resulted principally from the effects of
the closing of underperforming units in late 1995, which had
higher food cost relationships than more typical Company
locations, lower prices of various paper products and food items
and, to a limited extent, the selective menu price increases,
offset by higher cheese prices during the second and third
quarters of 1996, which increased food costs by approximately
$1,800,000. Current cheese prices are slightly below cheese
prices that were in effect at this time in 1996.
Restaurant operating expenses - payroll and other
employee benefits decreased to 24.5% of restaurant sales in 1996
from 25.3% of restaurant sales in 1995. Restaurant operating
expenses - occupancy and other expenses decreased to 26.8% of
restaurant sales in 1996 from 27.2% of restaurant sales in 1995.
These improvements were principally due to the Company's program
-12-
of closing underperforming units which had higher payroll and
other restaurant cost relationships, improved supervision and
controls over costs and, to a limited extent, the impact of menu
price increases.
Depreciation and amortization expenses decreased to
$22,910,000 in 1996 from $23,630,000 in 1995. This decrease was
principally due to the closing of underperforming units in late
1995, offset somewhat from new unit openings in 1996.
General and administrative expenses were $14,940,000 in
1996 or 4.5% of revenues and $16,089,000 in 1995 or 5.0% of
revenues. The decrease in dollars was principally due to
improved controls in supervising and administering restaurants.
The decrease in this category of expenses as a percentage of
revenues was, in addition to the dollar decrease, favorably
impacted by the spreading of non-variable costs over a larger
revenue base.
The effective income tax rate was 38.0% for 1996 and
1995.
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.
-13-
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
was attributable to the higher costs 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 operation 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.
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. In addition, food and paper product costs may be
temporarily or permanently affected by weather, economic and
other factors beyond the Company's control that may reduce
available supply and, accordingly, increase the price of food
stuff and paper products. The increase in the Federal minimum
wage, the first phase of which went into effect in October 1996,
did not materially affect the Company's fiscal 1996 results of
operations. The second phase, which is scheduled to go into
effect in September 1997, is not expected to materially affect
the Company's results of operations in fiscal 1997 or in later
years.
-14-
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. The fourth fiscal quarter normally
accounts for approximately 40% of net income for the year. In
1996, the fourth fiscal quarter accounted for 39% of net income
for the year. 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 1996, operating activities contributed $54.0
million to cash flow resulting primarily from net income of $37.4
million and a non-cash expense of $22.9 million for depreciation
and amortization, which were somewhat offset by increases in
deferred charges ($1.3 million) and other assets ($1.8 million)
and a decrease in accounts payable and accrued expenses ($4.3
million). During the year, the Company expended approximately
$25.9 million for the acquisition of property and equipment
related, primarily, to the opening of 29 Company-owned
restaurants, construction costs related to the joint venture
operations and the renovation of the Company's new headquarters
building. In addition, $17.9 million was used to pay four
quarterly cash dividends to the Company's shareholders.
At December 29, 1996, the Company had cash, cash
equivalents and marketable securities of approximately $114.8
million and its working capital was approximately $73.6 million.
The Company anticipates that approximately 40 Company-
owned and operated units will be opened during 1997 and that its
capital expenditures (including approximately $7 million to
complete the renovation and equipping of the Company's new
headquarters building) will approximate $25 million in 1997. The
Company does not anticipate making material expenditures for
remodeling of Company-owned restaurants during 1997. 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.
In 1996, the Company declared quarterly dividends of
$0.23 per share aggregating $0.92 per share (or $18.7 million)
for the year. In February 1997, the Company's Board of Directors
declared an increase in its quarterly dividend to $0.27 per
-15-
share. The first such quarterly cash dividend will be paid on
April 2, 1997 to shareholders of record on March 18, 1997.
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
investment in property and equipment for the opening of
additional restaurant locations, as well as the completion of the
renovation and equipping of 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 1996, 1995 and 1994
fiscal years each contained, and its 1997 fiscal year will
contain, 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
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 1997 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 29, 1996
and December 31, 1995 F-2
Consolidated Statements of Income for each of the
years in the three-year period ended December 29,
1996 F-4
Consolidated Statements of Shareholders' Equity
for each of the years in the three-year period
ended December 29, 1996 F-5
Consolidated Statements of Cash Flows for each
of the years in the three-year period ended
December 29, 1996 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
Information required by other schedules called for under
Regulation S-X is either not applicable or is included in the
consolidated financial statements or notes thereto.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the fourth quarter
of the Company's fiscal year ended December 29, 1996.
(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 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 6, 1996
File No. 33-4380)
+ *10.02(b) 1991 Stock Incentive Plan, as amended. (Exhibit
10.2 to the Company's Quarterly Report on Form 10-
Q for the quarter ended October 6, 1996, 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)
-18-
(c) Exhibits (continued):
+ *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)
*21.01 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 26, 1997.
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 26, 1997
Mario Sbarro (Principal Executive
Officer) and Director
/s/ ROBERT S. KOEBELE Vice President-Finance March 26, 1997
Robert S. Koebele (Chief Financial and
Accounting Officer)
/s/ JOSEPH SBARRO Director March 26, 1997
Joseph Sbarro
/s/ ANTHONY SBARRO Director March 26, 1997
Anthony Sbarro
/s/ HAROLD KESTENBAUM Director March 26, 1997
Harold Kestenbaum
/s/ RICHARD A. MANDELL Director March 26, 1997
Richard A. Mandell
-21-
Signature Title Date
/s/ PAUL A. VATTER Director March 26, 1997
Paul A. Vatter
/s/ TERRY VINCE Director March 26, 1997
Terry Vince
/s/ BERNARD ZIMMERMAN Director March 26, 1997
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 29, 1996 and December 31, 1995, and the related
consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December
29, 1996. 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 29, 1996 and
December 31, 1995, and the results of their operations and their
cash flows for each of the three years in the period ended
December 29, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
New York, New York
February 7, 1997
F-1
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
December 29, December 31,
1996 1995
Current assets:
Cash and cash equivalents $104,818 $93,501
Marketable securities 2,500
Receivables:
Franchisees 743 741
Other 1,122 1,863
1,865 2,604
Inventories 2,841 2,763
Prepaid expenses 1,409 1,754
Total current assets 113,433 100,622
Marketable securities 7,500 10,000
Property and equipment, net
(Notes 3 and 9) 130,993 126,757
Other assets:
Deferred charges, net of
accumulated amortization
of $1,436,000 at December
29, 1996 and $1,573,000
at December 31, 1995 1,633 1,767
Other 5,100 3,584
6,733 5,351
$258,659 $242,730
(continued)
F-2
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands)
December 29, December 31,
1996 1995
Current liabilities:
Accounts payable $7,173 $7,399
Accrued expenses (Note 4) 22,663 27,005
Dividend payable 4,691 3,865
Income taxes (Note 5) 5,287 4,708
Total current liabilities 39,814 42,977
Deferred income taxes (Note 5) 13,645 14,087
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
20,392,909 shares at
December 29, 1996 and
20,345,483 shares at
December 31, 1995 204 203
Additional paid-in capital 31,219 30,330
Retained earnings 173,777 155,133
205,200 185,666
$258,659 $242,730
See notes to consolidated financial statements
F-3
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
For the Years Ended
December 29, December 31, January 1,
1996 1995 1995
Revenues:
Restaurant sales $319,315 $310,132 $288,808
Franchise related income 6,375 5,942 5,234
Interest income 3,798 3,081 1,949
Total revenues 329,488 319,155 295,991
Costs and expenses:
Cost of food and paper
products 68,668 67,361 61,877
Restaurant operating
expenses:
Payroll and other
employee benefits 78,258 78,342 70,849
Occupancy and other
expenses 85,577 84,371 76,353
Depreciation and
amortization 22,910 23,630 21,674
General and administrative 14,940 16,089 13,319
Provision for unit
closings (Note 9) 16,400
Other income (1,171) (1,359) (1,351)
Total costs and expenses 269,182 284,834 242,721
Income before income taxes 60,306 34,321 53,270
Income taxes (Note 5) 22,916 13,042 20,244
Net income $37,390 $21,279 $33,026
Earnings per common and
common equivalent share $1.84 $1.05 $1.63
Dividends declared $0.92 $0.76 $0.64
Weighted average number
of shares used in the
computation 20,369,128 20,336,809 20,310,283
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 2, 13,531,161 $135 $29,615 $129,287 $159,037
1994
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
Exercise of
stock options 47,426 1 889 890
Net income 37,390 37,390
Dividends declared (18,746) (18,746)
Balance at
December 29,
1996 20,392,909 $204 $31,219 $173,777 $205,200
See notes to consolidated financial statements
F-5
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended
December 29,December 31, January 1,
1996 1995 1995
Operating activities:
Net income $37,390 $21,279 $33,026
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 22,910 23,630 21,674
(Decrease) increase
in deferred income taxes (442) (5,183) 1,192
Provision for unit closings 16,400
Changes in operating assets
and liabilities:
Decrease (increase)
in receivables 739 58 (1,441)
(Increase) decrease
in inventories (78) 29 (257)
Decrease (increase)
in prepaid expenses 268 (292) (103)
Increase in deferred charges (1,298) (1,400) (1,605)
Increase in other assets (1,750) (2,425) (122)
(Decrease) increase in
accounts payable
and accrued expenses (4,309) 2,638 1,736
Increase (decrease)
in income taxes payable 579 (154) 301
Net cash provided by
operating activities 54,009 54,580 54,401
(continued)
F-6
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
For the Years Ended
December 29, December 31, January 1,
1996 1995 1995
Investing activities:
Proceeds from maturities of
marketable securities 28,618
Proceeds from sales of
marketable securities 526,192
Purchases of marketable
securities (527,555)
Purchases of property
and equipment (25,928) (17,513) (32,058)
Proceeds from disposition of
property and equipment 266 34 14
Net cash provided by (used in)
investing activities (25,662) 11,139 (33,407)
Financing activities:
Proceeds from exercise of
stock options 890 264 519
Cash dividends paid (17,920) (14,844) (12,456)
Net cash used in
financing activities (17,030) (14,580) (11,937)
Increase in cash and cash
equivalents 11,317 51,139 9,057
Cash and cash equivalents at
beginning of year 93,501 42,362 33,305
Cash and cash equivalents
at end of year $104,818 $93,501 $42,362
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., its wholly-owned subsidiaries (together,
the "Company") and the accounts of its joint ventures. 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 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 and amortization is recorded in the year in
which the restaurant commences operations.
F-8
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
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.
Stock based compensation plan:
In accordance with Accounting Principles Board Opinion
(``APB'') No. 25, ``Accounting for Stock Issued to
Employees,''and related Interpretations, compensation cost
for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the
stock. (See Note 8).
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.
F-9
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
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 Company's 1996, 1995 and 1994 fiscal years
each contained 52 weeks.
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.
Supplemental disclosures of cash flow information:
(In thousands)
For the Years Ended
December 29, December 31,January 1,
1996 1995 1995
Cash paid for:
Income taxes $23,143 $18,880 $18,992
2. Description of business:
The Company, its subsidiaries and franchisees develop and
operate family oriented cafeteria style Italian restaurants
under the ``Sbarro'' and ``Sbarro The Italian Eatery'' 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:
The following tabulates the number of units in operation as
of:
December 29, December 31, January 1,
1996 1995 1995
Company-owned 597 571 567
Franchised 219 200 162
816 771 729
3. Property and equipment:
(In thousands)
December 29, December 31,
1996 1995
Leasehold improvements $154,507 $142,341
Furniture, fixtures and
equipment 91,644 83,679
Construction-in-progress * 14,139 9,278
260,290 235,298
Less accumulated depreciation
and amortization 129,297 108,541
$130,993 $126,757
(*) Includes $10,609 in 1996 and $6,351 in 1995 related to
the acquisition and improvement of the Company's new
corporate headquarters.
4. Accrued expenses:
(In thousands)
December 29, December 31,
1996 1995
Compensation $4,392 $4,905
Payroll and sales taxes 3,672 4,196
Rent 6,427 6,330
Provision for store
closings (Note 9) 1,922 6,767
Other 6,250 4,807
$22,663 $27,005
F-11
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Income taxes:
(In thousands)
For the Years Ended
December 29, December 31, January 1,
1996 1995 1995
Federal:
Current $19,216 $14,897 $15,606
Deferred (322) (4,158) 948
18,894 10,739 16,554
State and local:
Current 4,142 3,328 3,446
Deferred (120) (1,025) 244
4,022 2,303 3,690
$22,916 $13,042 $20,244
Deferred tax liabilities are comprised of the following:
(In thousands)
December 29, December 31,
1996 1995
Depreciation and
amortization $16,427 $16,360
Deferred charges 448 554
Other 55 102
Gross deferred tax
liabilities 16,930 17,016
Accrued expenses (1,620) (2,527)
Deferred income (1,580) (336)
Other (85) (66)
Gross deferred tax assets (3,285) (2,929)
$13,645 $14,087
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 29, 1996, December 31, 1995 and
January 1, 1995) as follows:
(In thousands)
For the Years Ended
December 29, December 31, January 1,
1996 1995 1995
Computed "expected"
tax expense $21,108 $12,012 $18,645
Increase (reduction)
in income taxes
resulting from:
State and local income
taxes, net of Federal
income tax benefit 2,614 1,497 2,399
Tax exempt interest
income (63) (311) (337)
Other, net (743) (156) (463)
$22,916 $13,042 $20,244
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 29, December 31, January 1,
1996 1995 1995
Depreciation and
amortization $(1,397) $(2,781) $1,210
Accrued expenses 1,791 (2,482) 104
Other (836) 80 (122)
$ (442) $(5,183) $1,192
F-13
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
8% to 10% of net restaurant sales in excess of stipulated
amounts.
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 29, December 31, January 1,
1996 1995 1995
Minimum rentals $36,383 $35,142 $31,146
Contingent rentals 2,819 3,082 3,269
Common area charges 11,303 10,846 9,586
$50,505 $49,070 $44,001
Future minimum rental and other payments required under non-
cancelable operating leases for Company-operated restaurants
that were open on December 29, 1996 and the existing
corporate office are as follows (in thousands):
Years ending:
December 28, 1997 $55,372
January 3, 1999 53,078
January 2, 2000 50,109
January 1, 2001 47,713
December 31, 2001 43,342
Later years 97,483
$347,097
F-14
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Commitments (continued):
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 restaurants that were open
as of December 29, 1996 are as follows (in thousands):
Years ending:
December 28, 1997 $1,751
January 3, 1999 1,754
January 2, 2000 1,608
January 1, 2001 1,277
December 31, 2001 990
Later years 2,005
$9,385
As of February 7, 1997, future minimum rental payments
required under non-cancelable operating leases for
restaurants which had not as yet opened as of December 29,
1996 are as follows (in thousands):
Years ending:
December 28, 1997 $386
January 3, 1999 638
January 2, 2000 637
January 1, 2001 665
December 31, 2001 671
Later years 3,455
$6,452
The Company has entered into contracts aggregating
$1,343,000 with respect to the construction of restaurants
and $7 million with respect to the Company's new corporate
headquarters building to be opened in 1997. No payments
have been made on those contracts as of December 29, 1996.
One of the joint ventures in which the Company is a partner
has entered into a contract to purchase the land, on which a
restaurant is being constructed at the end of a five year
lease on such property in 2002 for $1,000,000. The Company
and one of its co-venturers have jointly and severally
guaranteed the underlying lease and the purchase price until
F-15
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Commitments (continued):
the restaurant is substantially completed. In connection
with the construction of the restaurant which will open in
1997, the joint venture has entered into contracts
aggregating approximately $1,820,000.
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 present corporate headquarters office
building. In each of the years 1996, 1995 and 1994 the
Company incurred rent expense for such building of $298,000.
Rent for the remainder of the lease is $337,000. 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 $106,100 in the year ended
December 29, 1996 and $96,000 in each of the years ended
December 31, 1995 and January 1, 1995.
8. Stock options:
The Company's Board of Directors has adopted and
shareholders have approved a 1991 Stock Incentive Plan (the
``1991 Plan''), which replaced the Company's 1985 Incentive
Stock Option Plan, and a 1993 Non-Employee Director Stock
Option Plan (the ``1993 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. Options and SARs may not be granted at
exercise prices less 100% of the fair market value of common
stock on the date of grant. The Board of Directors'
Committee administering the 1991 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-16
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Stock options (continued):
The 1993 Plan provides for the automatic grant to each non-
employee director of 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 1996, 1995 and 1994 each of the six (five in 1996) non-
employee directors were granted options to purchase 3,750
shares at $28.50, $21.50 and $23.71 per share, respectively.
No options granted under this plan have been exercised.
A summary of the status of the Company's option plans are
presented in the table below:
1996 1995 1994
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding,
beginning of
period 717,712 $24.97 765,964 $24.75 703,757 $25.01
Granted 378,750 $25.55 37,500 $22.53 151,000 $21.99
Exercised (47,426) $18.24 (16,502)$15.97 (32,306) $16.11
Canceled
or expired (114,200) $24.84 (69,244)$21.44 (56,502) $25.02
Options
outstanding,
end of
period 934,836 $25.57 717,712 $24.97 765,964 $24.75
Options
exercisable,
end of period534,214 $25.89 463,962 $25.89 279,957 $25.60
Weighted average
fair value of
options granted $5.75 $5.30
Of the options outstanding at December 29, 1996, options to
purchase 144,086 shares with exercise prices between $14.75
F-17
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Stock options (continued):
and $22.13, with a weighted average exercise price of $21.16
and a weighted average remaining contractual life of 6.7
years, of which 74,714 were exercisable, with a weighted
average exercise price of $20.82. The remaining options to
purchase 790,750 shares had exercise prices between $22.14
and $28.75, with a weighted average exercise price of $26.41
and a weighted average remaining contractual life of 7.1
years, of which 459,500 are exercisable, with a weighted
average exercise price of $26.72. At December 29, 1996,
there were 818,700 shares available for option grants under
the 1991 and 1993 Plans.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with
the following assumptions:
1996 1995
Expected life (years) 4 4
Interest rate 6.53% 6.51%
Volatility 28% 28%
Dividend yield 3.50% 3.50%
The Company has adopted the pro forma disclosure provisions
of Statement of Financial Accounting Standards (SFAS) No.
123, ``Accounting for Stock-Based Compensation''.
Accordingly, no compensation cost has been recognized for
the stock option plans. Had compensation cost for the
Company's stock option plans been determined under SFAS No.
123, the Company's net income and earnings per share would
approximate the pro forma amounts below:
(In thousands, except per share data)
1996 1995
Net Income: As Reported 37,390 21,279
Pro Forma 37,160 21,258
Earnings Per Share: As Reported $1.84 $1.05
Pro Forma $1.82 $1.05
Because the SFAS No. 123 method of accounting is not applied
to options granted prior to January 1, 1995, the resulting
pro forma compensation cost may not be representative of
that to be expected in future years.
F-18
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Stock options (continued):
The foregoing tables includes options granted in 1996 under
the 1991 Plan to the Company's Chairman of the Board and
President and Senior Executive Vice President to purchase
100,000 and 50,000 shares, respectively, at $24.75 per share
and options granted in 1993 to the Company's Chairman of the
Board and President, Vice Chairman of the Board and 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. Each such option was
granted at the fair market value of the Company's common
stock on the date of grant and is exercisable for 10 years
from the date of grant. Such options remain unexercised.
In addition to the foregoing, in 1990, shareholder approved
options were granted to the Company's Chairman of the Board
and President, Vice Chairman of the Board and Senior
Executive Vice President to purchase 150,000, 75,000 and
75,000 shares, respectively, at $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.
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 1996 and 1995, the Company declared quarterly dividends
of $0.23 per share and $0.19 per share, respectively,
aggregating $0.92 per share and $0.76 per share for the
respective years. In February 1997, the Company's Board of
Directors declared an increase in the quarterly dividend to
$0.27 per share, beginning with the quarterly cash dividend
to be paid on April 2, 1997 to shareholders of record on
March 18, 1997.
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 1996
Revenues $88,057 $71,128 $78,421 $91,882
Gross profit (a) 66,722 53,560 59,284 71,081
Net income 6,975 6,642 9,188 14,585
Earnings per share $0.34 $0.33 $0.45 $0.72
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)
(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 7, 1997. 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 subjected to the auditing
procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
New York, New York
February 7, 1997
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
at to to Other Deductions Balance
Beginning Costs and Accounts Describe End of
Description of Period Expenses Describe (1) Period
December 29, 1996:
Accumulated
amortization of
deferred charges $1,573 $1,432 $(1,569) $1,436
Accumulated
amortization of
Canadian develop-
ment rights (2) 368 56 424
Accumulated
amortization of
Purchased Leasehold
rights (2) 764 178 942
$2,705 $1,666 $(1,569) $2,802
December 31, 1995:
Accumulated
amortization of
deferred charges $1,548 $1,507 $(1,482) $1,573
Accumulated
amortization of
Canadian develop-
ment 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 develop-
ment rights (2) 264 47 311
Accumulated
amortization of
Purchased Leasehold
rights (2) 410 176 586
$2,034 $1,683 $(1,272) $2,445
(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)
*21.01 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.