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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 28, 1997
__
/ / 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 [X].
The aggregate market value of Common Stock held by non-affiliates
of the registrant as of March 20, 1998 was approximately $390,832,000.
The number of shares of Common Stock of the registrant outstanding
as of March 20, 1998 was 20,517,311.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be used in connection with the
registrant's 1998 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 862 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 terms "Company" and ``Sbarro'' refers to Sbarro, Inc.
and its consolidated subsidiaries, unless the context indicates
otherwise.
___________________ Recent Developments
The Company has received a proposal from Mario Sbarro,
Joseph Sbarro, Anthony Sbarro and the Trust of Carmela Sbarro
(the ``Sbarro Family'') for the merger of the Company with a
company to be owned by the Sbarro Family pursuant to which
shareholders of the Company, other than the Sbarro Family, would
receive $28.50 per share in cash, or an aggregate of
approximately $380 million for the approximately 13.4 million
shares (approximately 65% of the outstanding shares) of the
Company's Common Stock not owned by the Sbarro Family. The
proposal is subject, among other things, to (i) entering into a
definitive merger agreement, (ii) approval of the transaction by
the special committee of the Board, the full Board of Directors
and the Company's shareholders, (iii) receipt of satisfactory
financing for the transaction, (iv) the immediate suspension of
dividends by the Company and (v) receipt of a fairness opinion
from the financial advisor to the special committee of the Board
stating that the proposed transaction is fair, from a financial
point of view, to the public shareholders. The Sbarro Family has
advised the Company that they have received a letter from an
investment banking firm which indicates that, subject to certain
conditions, the firm was highly confident that financing for the
transaction could be obtained. The Sbarro Family also advised
the Company that they are not interested in selling their
interests in the Company. The Board of Directors has appointed a
special committee to evaluate and consider the proposal.
Seven lawsuits have been instituted by purported
shareholders of the Company alleging, with respect to the
proposed transaction, in general, a breach of fiduciary duties by
the directors of the Company and members of the Sbarro Family,
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that the proposed price per share to be paid to public
shareholders is inadequate and that the proposal serves no
legitimate business purpose of the Company. (See ``Legal
Proceedings''in Item 3 of this Report.)
On February 11, 1998, the Company's Board of Directors
deferred consideration of the Company's quarterly cash dividend
pending consideration of the proposed transaction. (See ``Market
for Registrant's Common Equity and Related Shareholder Matters''
in Item 5 of this Report.)
General
The Company develops and operates or franchises an
international chain of family-style Italian restaurants
principally 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 28, 1997, there were 862 Sbarro
restaurants, located in 48 states throughout the United States,
the District of Columbia and in Aruba, Australia, the Bahamas,
Belgium, Canada, Chile, Cyprus, France, Israel, Japan, Korea,
Kuwait, Lebanon, New Zealand, the Philippines, Puerto Rico,
Russia, Saudi Arabia, and the United Kingdom. At that date, the
Company owned and operated 623 restaurants and franchised 239
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 587 restaurants at the
beginning of 1993 to 862 at the end of 1997. During 1997, 77 new
Sbarro restaurants were opened, of which 30 were Company-owned
and 47 were franchised.
During 1998, the Company plans to open approximately 80
restaurants, of which approximately 35 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
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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 franchised restaurants (excluding non-mall new venture
restaurants) during each of the years from 1993 through 1997.
Fiscal Year
1997 1996 1995 1994 1993
Company-owned Sbarro restaurants:
Opened during period (*) 30 29 44 53 59
Acquired from franchisees
during period 4 1 - 2 7
Closed during period (**) [8] [4] [40] [3] [7]
Open at end of period 623 597 571 567 515
Franchised Sbarro restaurants:
Opened during period 47 36 40 38 24
Sold to Company during period [4] [1] - [2] [7]
Closed or terminated during
period [23] [16] [2] [8] [14]
Open at end of period 239 219 200 162 134
All Sbarro restaurants:
Opened during period 77 65 84 91 83
Closed or terminated during
period [31] [20] [42] [11] [21]
Open at end of period 862 816 771 729 649
Kiosks (all franchised) 7 7 8 7 7
(*) Includes, in 1997 and 1996, two and three mall locations,
respectively, of a joint venture which operates as Umberto of New
Hyde Park.
(**) 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
1995 financial statements. See Note A to "Selected Financial
Data" in Item 6 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.
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As of December 28, 1997, there were 260 ``in-line''
Sbarro restaurants and 597 ``food court'' Sbarro restaurants. In
addition, franchisees operated five free-standing Sbarro
restaurants, including two 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 1997 and 1996 were $693,000 and $698,000, respectively,
for "in-line" restaurants and $493,000 and $486,000,
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,
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
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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 nine 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
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 28, 1997, the Company had 239 franchised
Sbarro restaurants operated by 73 franchisees in 30 states as
well as Aruba, Australia, the Bahamas, Belgium, Canada, Chile,
Cyprus, France, Israel, Japan, Korea, Kuwait, Lebanon, New
Zealand, the Philippines, Puerto Rico, Russia, Saudi Arabia and
the United Kingdom. The Company is presently considering
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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 royalty 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 in the Franchise Agreement 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
agreements also provide the Company with 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 four restaurants under the
name Boulder Creek Steaks & Saloon, with one additional
restaurant 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. During 1997, the joint venture determined to closed
two other restaurants, located on Long Island, resulting in a
$3,300,000 before tax ($2,046,000 or $.10 basic and diluted
earnings per share after tax) charge to the Company's earnings.
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 three restaurants in strip shopping centers on
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Long Island and Brooklyn, New York, with two additional
restaurants under construction, and five food court units in
regional shopping malls in Chicago, Las Vegas, White Plains and
Long Island, New York. The Company continues to monitor the
results of these three concepts for the purpose of evaluating
their potential future growth.
Employees
As of December 28, 1997, the Company (exclusive of
joint ventures to which the Company is a party) employed
approximately 7,500 persons, of whom approximately 2,700 were
full-time field and restaurant personnel, 4,600 were part-time
restaurant personnel and 200 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 operations.
Trademarks
The Sbarro restaurants operate principally 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.
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
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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. (See ``Legal Proceedings'' in Item 3 of this Report.)
ITEM 2. PROPERTIES
All Sbarro restaurants are operated in leased premises.
As of December 28, 1997, the Company leased 641 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 28, 1997 have initial terms expiring as follows:
Years Initial Lease Number of Company- Number of Franchised
Terms Expire owned Restaurants Restaurants
1998 26 4
1999 - 2003 336 25
2004 - 2008 239 5
2009 - 2012 6 0
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.
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 renovating the building at an
estimated additional cost of approximately $15 million (of which
approximately $10 million has been expended through fiscal 1997)
and intends to occupy approximately 25% of the building in 1998
as its corporate headquarters and lease the remainder of the
building. Leases with unaffiliated third parties to occupy, upon
completion of construction, approximately 40% of the total space
in the facility have been entered into.
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ITEM 3. LEGAL PROCEEDINGS
Following the Company's announcement of a proposal for
the merger of the Company with a company to be owned by the
Sbarro Family (see ``Business - Recent Developments'' in Item 1
of this Report), seven lawsuits were instituted against the
Company, certain directors and/or members of the Sbarro Family.
While each of the complaints varies, in general, they allege a
breach of fiduciary duties by the directors and members of the
Sbarro Family, that the proposed price per share to be paid to
Public Shareholders is inadequate and that the proposal serves no
legitimate business purpose of the Company. Although varying,
the complaints seek, generally, a declaration of class action
status, damages in unspecified amounts alleged to be caused to
the plaintiffs, and other relief (including injunctive relief,
rescission if the transaction is consummated, including
rescissory damages), costs and disbursements, including a
reasonable allowance for counsel fees and expenses. The actions,
which are presently pending in the Supreme Court in New York and
Suffolk County, New York, are in the process of being
consolidated into one action. The defendants intend to
vigorously defend these actions.
On June 18, 1997, an action entitled Kenneth Hoffman
and Gloria Curtis, on behalf of themselves and all others
similarly situated v. Sbarro, Inc., was filed in the United
States District Court for the Southern District of New York. The
plaintiffs, former restaurant level management employees, allege
that the company required general managers and co-managers to
reimburse the Company for cash and certain other shortages
sustained by the Company and thereby lost their status as
managerial employees exempt from the overtime compensation
provisions of the Fair Labor Standards Act (the ``FLSA''). The
plaintiffs seek unpaid overtime compensation, as well as
liquidated damages in an amount equal to any overtime
compensation awarded, reasonable attorney's fees, costs and
expenses. The plaintiffs seek such further and general legal
and/or suitable relief to which they may be entitled. The action
also seeks to join similarly situated past and present employees
in the lawsuit. The Company believes that it has substantial
defenses to the claims, including that it has availed itself of a
``window of correction'' which, the Company believes, under
applicable regulations of the FLSA and court decisions, preserves
employees' exempt status and, thus, precludes any overtime
liability. On October 22, 1997, the Court granted plaintiffs'
request to send notices to determine whether similarly situated
past and present employees of the Company wished to join the
lawsuit. The Company intends to continue vigorously definding
this action.
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From time to time the Company is also a party to
certain claims and legal proceedings in the ordinary course of
business, none of 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 which for the last two fiscal years is as
follows:
1997 1996
Quarter Ended High Low Quarter Ended High Low
April 20 $28.63 $25.13 April 21 $27.00 $21.38
July 13 $29.75 $26.25 July 14 $28.13 $24.13
October 5 $29.44 $26.06 October 6 $26.00 $22.88
December 28 $29.75 $26.00 December 29 $27.50 $24.25
As of March 16, 1998, there were approximately 529
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 1997 and 1996, the Company declared quarterly
dividends of $.27 per share and $.23 per share, respectively,
aggregating $1.08 per share and $.92 per share for the respective
years. On February 11, 1998, the Company announced that its
Board of Directors had deferred consideration of the Company's
quarterly cash dividend pending consideration of a proposed
merger of the Company with a Company to be owned by the Sbaro
Family (see ``Business - Recent Developments'' in Item 1 of this
Report). The proposal was conditioned upon, among other things,
the immediate suspension of dividends by the Company and
obtaining financing therefor.
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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. 28, Dec. 29,Dec. 31, Jan. 1, Jan. 2,
Income Statement Data: 1997 1996 1995 1995 1994
(In thousands, except share and per share data)
Revenues:
Restaurant sales $337,723 $319,315 $310,132 $288,808 $259,213
Franchise related income 7,360 6,375 5,942 5,234 4,758
Interest income 4,352 3,798 3,081 1,949 1,579
349,435 329,488 319,155 295,991 265,550
Costs and expenses:
Cost of food and paper
products 69,469 68,668 67,361 61,877 55,428
Restaurant operating expenses:
Payroll & other
employee benefits 84,910 78,258 78,342 70,849 64,653
Occupancy & other expenses 93,528 85,577 84,371 76,353 68,241
Depreciation and amortization23,922 22,910 23,630 21,674 18,599
General and administrative 17,762 14,940 16,089 13,319 12,913
Provision for unit
closings (Note A) 3,300 - 16,400 - -
Other income (1,653) (1,171) (1,359) (1,351) (1,244)
291,238 269,182 284,834 242,721 218,590
Income before income taxes and cumulative
effect of change in method of accounting
for income taxes 58,197 60,306 34,321 53,270 46,960
Income taxes 22,115 22,916 13,042 20,244 18,612
Income before cumulative effect
of accounting change 36,082 37,390 21,279 33,026 28,348
Cumulative effect of change
in method of accounting
for income taxes - - - - 1,010
Net income (Note A) $36,082 $37,390 $21,279 $33,026 $29,358
Per share data:
Basic earnings per share before
cumulative effect of change
in method of accounting
for income taxes $1.77 $1.84 $1.05 $1.63 $1.40
Cumulative effect of change
in method of accounting
for income taxes - - - - .05
Basic earnings per share
(Notes A and B) $1.77 $1.84 $1.05 $1.63 $1.45
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Income Statement Data: (continued)
Basic number of shares
used in the computation
(Note B) 20,426,678 20,369,128 20,336,809 20,310,283 20,280,816
Diluted earnings per share before
cumulative effect of change
in method of accounting
for income taxes $1.76 $1.83 $1.04 $1.62 $1.39
Cumulative effect of change
in method of accounting
for income taxes - - - - .05
Diluted earnings per share $1.76 $1.83 $1.04 $1.62 $1.44
Diluted number of shares used
in the
computation 20,504,303 20,404,620 20,396,704 20,355,275 20,339,945
Dividends declared $1.08 $0.92 $0.76 $0.64 $0.52
Dec. 28, Dec. 29,Dec. 31, Jan. 1, Jan. 2,
Balance Sheet Data: 1997 1996 1995 1995 1994
(In thousands)
Total assets $278,649 $258,659 $242,730 $232,051 $207,733
Working capital 88,006 73,619 57,645 43,271 45,218
Shareholders' equity 220,439 205,200 185,666 179,580 159,037
Number of Restaurants at End of Period:
Company-owned and
operated (Note A) 623 597 571 567 515
Franchised 239 219 200 162 134
Total (Note C) 862 816 771 729 649
Note A: In 1997, a provision of $3,300,000 before tax
($2,046,000 or $.10 basic and diluted earnings per share after
tax) relating to the Company's investment in one of its joint
ventures was established for the closing of certain joint venture
units. Had the provision not been made, 1997 net income would
have been $38,128,000 or $1.87 basic earnings per share and $1.86
diluted earnings per share. In 1995, a provision of $16,400,000
before tax ($10,168,000 or $0.50 basic and diluted 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 basic
earnings per share and $1.54 diluted earnings per share.
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Note B: All share and per share data have been restated to give
effect to Statement of Financial Accounting Standards (``SFAS'')
No. 128 which became effective for the Company at the end of 1997
and 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 five mall locations of a joint venture which
are included in the table as Company-owned and operated units).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1997 Compared to 1996
Restaurant sales from Company-owned units and
consolidated joint venture units increased 5.8% to $337,723,000
in 1997 from $319,315,000 in 1996. The increase resulted from a
higher number of units in operation in the current fiscal year
and the effect of a full year of selective menu price increases
of approximately .5% and 1%, which became effective in mid April
1996 and mid July 1996 offset, in part, by a decrease in
comparable unit sales of .4%. Comparable unit sales decreased to
$305,195,000 in 1997 from $306,313,000 in 1996. 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 15.5% to $7,360,000
in 1997 from $6,375,000 in 1996. This increase resulted from a
higher number of units in operation in the current year than in
1996 and an increase in initial franchise and development fees
due to the opening of more franchise units in 1997 than in 1996.
During the year ended December 28, 1997, 23 units were closed by
franchisees. These units did not produce material levels of
sales and, consequently, did not generate material amounts of
royalty income to the Company. In addition, four franchise units
were purchased by the Company. Comparable sales at franchise
locations did not change significantly in fiscal 1997 from fiscal
1996.
Interest income increased to $4,352,000 in 1997 from
$3,798,000 in 1996. This increase was due to higher amounts of
cash available for investment in 1997 than in 1996 at comparable
interest rates.
Cost of food and paper products decreased as a
percentage of restaurant sales to 20.6% in 1997 from 21.5% in
1996. This improvement resulted from lower food prices,
primarily of cheese from the fourth quarter of fiscal 1996 into
-14-
1997 Compared to 1996 (Continued)
the fourth quarter of fiscal 1997, lower prices of various paper
products and the effect of a full year of the selective menu
price increases implemented in mid 1996. Cheese prices have
risen since the middle of the fourth quarter of fiscal 1997 and
currently remain at prices higher than those in the comparable
prior year period.
Restaurant operating expenses - payroll and other
employee benefits increased to 25.1% of restaurant sales in 1997
from 24.5% of restaurant sales in 1996. This percentage increase
was attributable to the higher costs of providing benefits to
employees and, to a lesser extent, the effects of the two
increases in the Federal minimum wage which became effective in
September 1997 and 1996, as well as the decrease in comparable
unit sales in fiscal 1997. Restaurant operating expenses -
occupancy and other expenses increased to 27.7% of restaurant
sales in 1997 from 26.8% of restaurant sales in 1996. This
percentage increase was primarily attributable to rent and rent
related charges increasing at a faster rate than sales.
Depreciation and amortization expenses increased to
$23,922,000 in 1997 from $22,910,000 in 1996. This increase was
primarily the result of additional Company owned units in
operation during 1997 over the number of units in operation
during 1996.
General and administrative expenses were $17,762,000 in
1997 or 5.1% of revenues and $14,940,000 in 1996 or 4.5% of
revenues. This increase was due to hiring additional personnel
in anticipation of the Company's development plans, and increases
in executive compensation and legal fees. General and
administrative expenses in 1998 may be affected by costs
associated with the proposal made by certain members of the
Sbarro Family for the merger of the Company with a company to be
owned by them, which would be expensed if the merger does not
take place and by potential additional costs associated with
pending litigation against the Company. (See Note 6 of Notes to
Consolidated Financial Statements.)
In 1997, a provision of $3,300,000 before tax
($2,046,000 or $.10 after tax) relating to the Company's
investment in one of its joint ventures was established for the
closing of certain joint venture units.
The effective income tax rate was 38.0% for 1997 and
1996.
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
-15-
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.
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
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.
-16-
1996 Compared to 1995 (Continued)
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.
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 increase the price of food stuff and paper
products.
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
1997, the fourth fiscal quarter accounted for 38% of net income
for the year (prior to the provision in 1997 for the closing of
certain joint venture units). 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'' .)
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 1997, 1996 and 1995 fiscal years each contained 52
weeks. Fiscal 1998 will contain 53 weeks.
-17-
Potential Effect of AICPA Exposure Draft Statement of Position
The Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants has issued an
Exposure Draft Statement of Position (SOP) which, if adopted in
its current form, would require all companies which capitalize
pre-opening and similar costs to write off all existing such
costs, net of tax benefit, as a ``cumulative effect of accounting
change'' and to expense all such costs as incurred in the future.
The exposure draft, if enacted, would be effective beginning with
the Company's 1999 fiscal year. The Company does not expect this
proposal to materially affect future operating income except that
the Company would be required to write off the accumulated costs
($1,219,000 at December 28, 1997) which would be reflected as a
cumulative effect of accounting change ($756,000 after tax at
December 28, 1997).
Liquidity and Capital Resources
During 1997, operating activities contributed $61.0
million to cash flow resulting primarily from net income of $36.1
million, non-cash expenses of $23.9 million for depreciation and
amortization, a $3.3 million provision for unit closings and an
increase in accounts payable and accrued expenses ($3.5 million),
which were somewhat offset by increases in deferred charges ($1.6
million) and other assets ($.8 million). During the year, the
Company expended approximately $28.6 million for the acquisition
of property and equipment related primarily, to opening 30
Company-owned restaurants, construction costs related to joint
venture operations and the renovation of the Company's new
headquarters building. In addition, $21.2 million was used to
pay four quarterly cash dividends to the Company's shareholders.
At December 28, 1997, the Company had cash, cash
equivalents and marketable securities of approximately $127.3
million (compared to $114.8 million at the end of fiscal 1996)
and its working capital was approximately $88.0 million.
The Company anticipates that approximately 35 Company-
owned and operated units will be opened during 1998 and that its
capital expenditures (including approximately $5.0 million to
complete the renovation and equipping of the Company's new
headquarters building) will approximate $28.0 million in 1998.
The Company does not anticipate making material expenditures for
remodeling of Company-owned restaurants during 1998. 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 1997, the Company declared quarterly dividends of
$0.27 per share aggregating $1.08 per share (or $22,068,000) for
the year. On February 11, 1998, the Company announced that its
-18-
Liquidity and Capital Resources (Continued)
Board of Directors had deferred consideration of the Company's
quarterly cash dividend pending consideration of a transaction
that has been proposed by members of the Sbarro Family to merge
the Company with a Company owned by them in which all of the
shares of the Company not owned by such members of the Sbarro
Family would be exchanged for cash. The proposal was conditioned
upon, among other things, the immediate suspension of dividends
by the Company and obtaining financing therefor (such financing
could adversely affect the Company's liquidity after becoming
privately owned).
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, 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.
Year 2000
In July, 1996, the Emerging Issues Task Force of the
FASB reached a consensus on Issue 96-14, ``Accounting for the
Costs Associated with Modifying Computer Software for the Year
2000,''which requires that costs associated with modifying
computer software for the Year 2000 be expensed as incurred. The
Company does not believe, based upon its internal reviews and
other factors, that future external and internal costs to be
incurred relating to the modification of internal-use software
for the Year 2000 will have a material effect on the Company's
results of operations or financial position. In addition, the
Company has addressed the Year 2000 issue with its principal
suppliers and has been assured that they will be timely Year 2000
compliant.
Forward Looking Statement
Certain statements contained in this Report are
forward-looking statements which are subject to a number of known
and unknown risks and uncertainties that could cause the
Company's actual results and performance to differ materially
from those described or implied in the forward-looking
statements. These risks and uncertainties, many of which are not
within the Company's control, include, but are not limited to,
general economic weather and business conditions; the
availability of suitable restaurant sites in appropriate regional
shopping malls and other locations on reasonable rental terms;
changes in consumer tastes; changes in population and traffic
patterns; ability to continue to attract franchisees; the success
of its present, and any future, joint ventures and other
expansion opportunities; the availability of food (particularly
-19-
cheese and tomatoes) and paper products at reasonable prices; no
material increase occurring in the Federal minimum wage; and the
Company's ability to attract competent restaurant and executive
managerial personnel.
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 1998 Annual Meeting.
-20-
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 28, 1997 and
December 29, 1996 F-2
Consolidated Statements of Income for each of the
years in the three-year period ended December 28, 1997 F-4
Consolidated Statements of Shareholders' Equity for
each of the years in the three-year period ended
December 28, 1997 F-5
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 28, 1997 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule
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 by the Company during the
fourth quarter of the Company's fiscal year ended December 28,
1997.
(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)
-21-
(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 4.3
to the Company's Quarterly Report on Form 10-Q for
the quarter ended April 21, 1996, 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 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
10.1 to the Company's Quarterly Report on Form 10-
Q for the quarter ended April 20, 1997, 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)
-22-
+ *10.02(d) 1993 Non-Employee Director Stock Option Plan, as
amended. (Exhibit 10.2 (d) to the Company's
Quarterly Report on Form 10-Q for the quarter
ended April 20, 1997, File No. 1-8881)
+ *10.02(e) The Company's Performance Incentive Plan.
(Exhibit A to the Company's Proxy Statement dated
April 29, 1997, 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.
23.01 Consent of Arthur Andersen LLP.
27.01 Financial Data Schedule.
_____________________________
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.
-23-
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, 1998.
SBARRO, INC.
By: /s/MARIO SBARRO
Mario Sbarro, Chairman of the Board
-24-
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, 1998
Mario Sbarro (Principal Executive Officer)
and Director
/s/ROBERT S. KOEBELE Vice President-Finance March 27, 1998
Robert S. Koebele (Chief Financial and
Accounting Officer)
/s/JOSEPH SBARRO Director March 27, 1998
Joseph Sbarro
/s/ANTHONY SBARRO Director March 27, 1998
Anthony Sbarro
/s/HAROLD KESTENBAUM Director March 27, 1998
Harold Kestenbaum
/s/RICHARD A. MANDELL Director March 27, 1998
Richard A. Mandell
/s/CARMELA SBARRO Director March 27, 1998
Carmela Sbarro
-25-
Signature Title Date
/s/PAUL A. VATTER Director March 27, 1998
Paul A. Vatter
/s/TERRY VINCE Director March 27, 1998
Terry Vince
/s/BERNARD ZIMMERMAN Director March 27, 1998
Bernard Zimmerman
-26-
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 28, 1997 and December 29, 1996, and the related
consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December
28, 1997. 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 28, 1997 and
December 29, 1996, and the results of their operations and their
cash flows for each of the three years in the period ended
December 28, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
New York, New York
February 11, 1998
F-1
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
December 28, December 29,
1997 1996
Current assets:
Cash and cash equivalents $119,810 $104,818
Marketable securities 7,500 2,500
Receivables:
Franchisees 810 743
Other 1,565 1,122
2,375 1,865
Inventories 2,962 2,841
Prepaid expenses 1,768 1,409
Total current assets 134,415 113,433
Marketable securities - 7,500
Property and equipment, net
(Notes 3 and 9) 136,798 130,993
Other assets:
Deferred charges, net of
accumulated amortization
of $1,269,000 at December 28,
1997 and $1,436,000 at
December 29, 1996 1,596 1,633
Other, net 5,840 5,100
7,436 6,733
$278,649 $258,659
(continued)
F-2
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands)
December 28, December 29,
1997 1996
Current liabilities:
Accounts payable $10,086 $7,173
Accrued expenses (Note 4) 26,025 22,663
Dividend payable 5,521 4,691
Income taxes (Note 5) 4,777 5,287
Total current liabilities 46,409 39,814
Deferred income taxes (Note 5) 11,801 13,645
Commitments and contingencies (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
20,446,654 shares at
December 28, 1997 and
20,392,909 shares at
December 29, 1996 204 204
Additional paid-in capital 32,444 31,219
Retained earnings 187,791 173,777
220,439 205,200
$278,649 $258,659
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 28, December 29, December 31,
1997 1996 1995
Revenues:
Restaurant sales $337,723 $319,315 $310,132
Franchise related income 7,360 6,375 5,942
Interest income 4,352 3,798 3,081
Total revenues 349,435 329,488 319,155
Costs and expenses:
Cost of food and paper
products 69,469 68,668 67,361
Restaurant operating expenses:
Payroll and other employee
benefits 84,910 78,258 78,342
Occupancy and other
expenses 93,528 85,577 84,371
Depreciation and
amortization 23,922 22,910 23,630
General and administrative 17,762 14,940 16,089
Provision for unit
closings (Note 9) 3,300 16,400
Other income (1,653) (1,171) (1,359)
Total costs and expenses 291,238 269,182 284,834
Income before income taxes 58,197 60,306 34,321
Income taxes (Note 5) 22,115 22,916 13,042
Net income $36,082 $37,390 $21,279
Per share information:
Net income per share:
Basic $1.77 $1.84 $1.05
Diluted $1.76 $1.83 $1.04
Shares used in computing
net income per share:
Basic 20,426,678 20,369,128 20,336,809
Diluted 20,504,303 20,404,620 20,396,704
Dividends declared (Note 10) $1.08 $0.92 $0.76
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 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
Exercise of
stock options 53,745 1,225 1,225
Net income 36,082 36,082
Dividends declared (22,068) (22,068)
Balance at
December 28,
1997 20,446,654 $204 $32,444 $187,791 $220,439
See notes to consolidated financial statements
F-5
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended
December 28, December 29,December 31,
1997 1996 1995
Operating activities:
Net income $36,082 $37,390 $21,279
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 23,922 22,910 23,630
Decrease in deferred
income taxes (1,844) (442) (5,183)
Provision for unit closings 3,300 16,400
Changes in operating assets
and liabilities:
(Increase) decrease in
receivables (510) 739 58
(Increase) decrease in
inventories (121) (78) 29
(Increase) decrease in
prepaid expenses (359) 268 (292)
Increase in deferred charges (1,624) (1,298) (1,400)
Increase in other assets (844) (1,750) (2,425)
Increase (decrease) in
accounts payable and
accrued expenses 3,534 (4,309) 2,638
Increase (decrease) in
income taxes payable (510) 579 (154)
Net cash provided by
operating activities 61,026 54,009 54,580
(continued)
F-6
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
For the Years Ended
December 28, December 29,December 31,
1997 1996 1995
Investing activities:
Proceeds from maturities
of marketable securities 2,500 28,618
Purchases of property
and equipment (28,556) (25,928) (17,513)
Proceeds from disposition
of property and equipment 34 266 34
Net cash (used in) provided
by investing activities (26,022) (25,662) 11,139
Financing activities:
Proceeds from exercise of
stock options 1,225 890 264
Cash dividends paid (21,237) (17,920) (14,844)
Net cash used in
financing activities (20,012) (17,030) (14,580)
Increase in cash and cash
equivalents 14,992 11,317 51,139
Cash and cash equivalents at
beginning of year 104,818 93,501 42,362
Cash and cash equivalents at
end of year $119,810 $104,818 $93,501
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 (together,
the "Company") and the accounts of its joint ventures. All
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.
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 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.
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants has issued an
Exposure Draft Statement of Position (SOP) which, if adopted
in its current form, would require all companies which
capitalize pre-opening and similar costs to write off all
existing such costs, net of tax benefit, as a ``cumulative
effect of accounting change'' and to expense all such costs
as incurred in the future. The exposure draft, if enacted,
would be effective beginning with the Company's 1999 fiscal
year. The Company does not expect this proposal to
materially affect future operating income except that the
Company would be required to write off the accumulated costs
($1,219,000 at December 28, 1997) which would be reflected
as a cumulative effect of accounting change ($756,000 after
tax at December 28, 1997).
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.
F-9
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Stock based compensation plans:
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.
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 1997, 1996 and 1995 fiscal years
each contained 52 weeks. The Company's 1998 fiscal year
will contain 53 weeks, with 13 weeks in the fourth quarter.
Per share data:
The provisions of Statement of Financial Accounting
Standards (`` SFAS'') No. 128, ``Earnings Per Share'' became
effective as to the Company for the quarter and year ended
December 28, 1997. SFAS No. 128 requires the presentation
of both basic and diluted earnings per share on the face of
the income statement. SFAS 128 replaces primary and fully
diluted earnings per share with basic and diluted earnings
per share, respectively. Earnings per share is calculated
using the weighted average number of shares of common stock
outstanding for the period, with basic earnings per share
excluding, and diluted earnings per share including,
potentially dilutive securities, such as stock options that
could result in the issuance of common stock. The number of
shares of common stock subject to stock options included in
diluted earnings per share were 77,625 in 1997, 35,492 in
1996 and 59,895 in 1995. As required by SFAS 128, all prior
period amounts have been restated to conform to the new
presentation.
F-10
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of significant accounting policies (continued):
Long-Lived Assets:
SFAS No. 121, `` Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of,''
requires that long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held
and used be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount
of those assets may not be recoverable. The adoption of
SFAS No. 121 in fiscal 1997 did not have a material effect
on the Company's results of operations or financial
position.
Supplemental disclosures of cash flow information:
(In thousands)
For the Years Ended
December 28, December 29,December 31,
1997 1996 1995
Cash paid for:
Income taxes $24,297 $23,143 $18,880
2. Description of business:
The Company and franchisees develop and operate family
oriented cafeteria style Italian restaurants principally
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.
The following sets forth the number of units in operation as
of:
December 28, December 29,December 31,
1997 1996 1995
Company-owned 623 597 571
Franchised 239 219 200
862 816 771
F-11
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Property and equipment:
(In thousands)
December 28, December 29,
1997 1996
Leasehold improvements $168,581 $154,507
Furniture, fixtures and
equipment 97,688 91,644
Construction-in-progress * 20,096 14,139
286,365 260,290
Less accumulated
depreciation and
amortization 149,567 129,297
$136,798 $130,993
(*) Includes $15,651 in 1997 and $10,609 in 1996 related to
the acquisition and improvement of the Company's new
corporate headquarters.
4. Accrued expenses:
(In thousands)
December 28, December 29,
1997 1996
Compensation $5,051 $4,392
Payroll and sales taxes 3,494 3,672
Rent 6,699 6,427
Provision for unit
closings (Note 9) 4,351 1,922
Other 6,430 6,250
$26,025 $22,663
5. Income taxes:
(In thousands)
For the Years Ended
December 28, December 29,December 31,
1997 1996 1995
Federal:
Current $19,868 $19,216 $14,897
Deferred (1,557) (322) (4,158)
18,311 18,894 10,739
State and local:
Current 4,091 4,142 3,328
Deferred (287) (120) (1,025)
3,804 4,022 2,303
$22,115 $22,916 $13,042
F-12
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Income taxes: (Continued)
Deferred income taxes are comprised of the following:
(In thousands)
December 28, December 29,
1997 1996
Depreciation and
amortization $15,782 $16,427
Deferred charges 475 448
Other 60 55
Gross deferred
tax liabilities 16,317 16,930
Accrued expenses (2,431) (1,620)
Deferred income (1,949) (1,580)
Other (136) (85)
Gross deferred tax assets (4,516) (3,285)
$11,801 $13,645
Actual tax expense differs from `` expected'' tax expense
(computed by applying the Federal corporate rate of 35% for
the years ended December 28, 1997, December 29, 1996 and
December 31, 1995) as follows:
(In thousands)
For the Years Ended
December 28, December 29, December 31,
1997 1996 1995
Computed "expected"
tax expense $ 20,369 $21,108 $12,012
Increase (reduction)
in income taxes
resulting from:
State and local
income taxes, net
of Federal income
tax benefit 2,429 2,614 1,497
Tax exempt interest
income (59) (63) (311)
Other, net (624) (743) (156)
$22,115 $22,916 $13,042
F-13
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Income taxes: (Continued)
Deferred income taxes are provided for temporary differences
between financial and tax reporting. These differences and
the amount of the related deferred tax benefit are as
follows:
(In thousands)
For the Years Ended
December 28,December 29,December 31,
1997 1996 1995
Depreciation and
amortization $(1,824) $(1,397) $(2,781)
Accrued expenses (624) 1,791 (2,482)
Other 604 (836) 80
$(1,844) $(442) $(5,183)
6. Commitments and contingencies:
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 28, December 29, December 31,
1997 1996 1995
Minimum rentals $40,365 $36,383 $35,142
Common area charges 12,541 11,303 10,846
Contingent rentals 2,910 2,819 3,082
$55,816 $50,505 $49,070
F-14
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Commitments and contingencies (continued):
Commitments (continued):
Future minimum rental and other payments required under non-
cancelable operating leases for Company-operated restaurants
that were open on December 28, 1997 and the existing
corporate office are as follows (in thousands):
Years ending:
January 3, 1999 $57,982
January 2, 2000 55,970
January 1, 2001 53,678
December 31, 2001 50,101
December 30, 2002 45,032
Later years 106,000
$368,763
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 28, 1997 are as follows (in thousands):
Years ending:
January 3, 1999 $1,884
January 2, 2000 1,717
January 1, 2001 1,382
December 31, 2001 1,123
December 30, 2002 779
Later years 1,167
$8,052
As of February 11, 1998, future minimum rental payments
required under non-cancelable operating leases for
restaurants which had not as yet opened as of December 28,
1997 are as follows (in thousands):
Years ending:
January 3, 1999 $857
January 2, 2000 1,091
January 1, 2001 1,098
December 31, 2001 1,137
December 30, 2002 1,158
Later years 6,195
$11,536
F-15
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Commitments and contingencies (continued):
Commitments (continued):
The Company is a party to contracts aggregating $1,734,000
with respect to the construction of restaurants and
approximately $1 million with respect to the Company's new
corporate headquarters building to be opened in 1998.
Payments of approximately $246,000 have been made on those
contracts as of December 28, 1997.
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 located, at the end of its five year lease on
such property in 2002, for $950,000.
Contingencies:
The Company has received a proposal from Mario Sbarro,
Joseph Sbarro, Anthony Sbarro and the Trust of Carmela
Sbarro (the ``Sbarro Family'') for the merger of the Company
with a company to be owned by the Sbarro Family pursuant to
which shareholders of the Company, other than the Sbarro
Family, would receive $28.50 per share in cash, or an
aggregate of approximately $380 million for the
approximately 13.4 million shares (approximately 65% of the
outstanding shares) of the Company's Common Stock not owned
by the Sbarro Family. The proposal is subject, among other
things, to (i) entering into a definitive merger agreement,
(ii) approval of the transaction by the special committee of
the Board, the full Board of Directors and the Company's
shareholders, (iii) receipt of satisfactory financing for
the transaction, (iv) the immediate suspension of dividends
by the Company and (v) receipt of a fairness opinion from
the financial advisor to the special committee of the Board
stating that the proposed transaction is fair, from a
financial point of view, to the public shareholders.
Following the Company's announcement of a proposal for the
merger of the Company with a company to be owned by the
Sbarro Family, seven lawsuits were instituted against the
Company, certain directors and/or members of the
F-16
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Commitments and contingencies (continued):
Contingencies (continued):
Sbarro Family. While each of the complaints varies, in
general, they allege a breach of fiduciary duties by the
directors and members of the Sbarro Family, that the
proposed price per share to be paid is inadequate and that
the proposal serves no legitimate business purpose of the
Company. Although varying, the complaints seek, generally,
a declaration of class action status, damages in unspecified
amounts alleged to be caused to the plaintiffs, and other
relief (including injunctive relief, rescission if the
transaction is consummated, including rescissory damages),
costs and disbursements, including a reasonable allowance
for counsel fees and expenses. The actions, which are
presently pending in the Supreme Court in New York and
Suffolk County, New York, are in the process of being
consolidated into one action. The defendants intend to
vigorously defend these actions.
On June 18, 1997, an action entitled Kenneth Hoffman and
Gloria Curtis, on behalf of themselves and all others
similarly situated v. Sbarro, Inc., was filed in the United
States District Court for the Southern District of New York.
The plaintiffs, former restaurant level management
employees, allege that the Company required general managers
and co-managers to reimburse the Company for cash and
certain other shortages sustained by the Company and thereby
lost their status as managerial employees exempt from the
overtime compensation provisions of the Fair Labor Standards
Act (the ``FLSA''). The plaintiffs seek unpaid overtime
compensation, as well as liquidated damages in an amount
equal to any overtime compensation awarded, reasonable
attorney's fees, costs and expenses. The plaintiffs seek
such further and general legal and/or suitable relief to
which they may be entitled. The action also seeks to join
similarly situated past and present employees in the
lawsuit. The Company believes that it has substantial
defenses to the claims, including that it has availed itself
of a `` window of correction'' which, the Company believes,
under applicable regulations of the FLSA and court
decisions, preserves employees' exempt status and, thus,
precludes any overtime liability. On October 22, 1997, the
Court granted plaintiffs' request to send notices to
determine whether similarly situated past and present
employees of the Company wished to join the lawsuit. The
Company intends to continue vigorously definding this
action.
F-17
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 present corporate headquarters office
building. In each of 1996 and 1995, the Company incurred
rent expense for such building of $298,000. For 1997 and
for each of the remaining years of the lease the rent
expense is $337,000 per year. 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 $116,400 in 1997, $106,100
in 1996 and $96,000 in 1995.
8. Stock options:
The Company's Board of Directors has adopted and
shareholders have approved the 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 of less than 100% of the fair market value
of the Company's common stock on the date of grant. The
Board of Directors and the Board's Committee administering
the 1991 Plan are 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.
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 ten 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 1997, 1996 and 1995, each of the five (six in 1995) non-
employee directors were granted options to purchase 3,750
shares at $28.88, $26.88, and $21.50 per share,
respectively. In 1997, 11,250 options of one former
director were exercised at $23.05, $23.71 and $21.50,
respectively.
F-18
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Stock options: (Continued)
A summary of the status of the Company's option plans is
presented in the table below:
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options
outstanding,
beginning of
period 934,836 $25.57 717,712 $24.97 765,958 $24.75
Granted 777,750 $25.96 378,750 $25.55 37,500 $22.53
Exercised (53,745)$22.78 (47,426)$18.24 (16,502)$15.97
Canceled
or expired (20,502)$24.66(114,200)$24.84 (69,244)$21.44
Options
outstanding,
end of
period 1,638,339 $25.85 934,836 $25.57 717,712 $24.97
Options
exercisable,
end of
period 573,880 $26.05 534,214 $25.89 463,962 $25.89
Of the options outstanding at December 28, 1997, options to
purchase 106,839 shares had exercise prices ranging between
$15.17 and $22.75, with a weighted average exercise price of
$21.34 and a weighted average remaining contractual life of
6.23 years, of which 77,463 were exercisable, with a
weighted average exercise price of $21.28. The remaining
options to purchase 1,531,500 shares had exercise prices
between $23.05 and $28.88, with a weighted average exercise
price of $26.17 and a weighted average remaining contractual
life of 7.21 years, of which 496,417 are exercisable, with a
weighted average exercise price of $26.79. At December 28,
1997, there were an aggregate of 2,061,452 shares available
for option grants under the 1991 and 1993 Plans.
F-19
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Stock options: (Continued)
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:
1997 1996 1995
Expected life (years) 1.5 4 4
Interest rate 5.82% 6.53% 6.51%
Volatility 21% 28% 28%
Dividend yield 4.00% 3.50% 3.50%
Weighted average
fair value
of options granted $2.79 $5.75 $5.30
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)
Net Income: 1997 1996 1995
As Reported 36,082 37,390 21,279
Pro Forma 35,089 37,160 21,258
Per share information:
Net income per share
(as reported):
Basic $1.77 $1.84 $1.05
Diluted $1.76 $1.83 $1.04
Net income per share (pro forma):
Basic $1.72 $1.82 $1.05
Diluted $1.71 $1.82 $1.04
The foregoing table includes options granted in 1997 under
the 1991 Plan to the Company's Chairman of the Board and
President to purchase 100,000 and 150,000 shares at $25.13
and $28.88 per share, respectively, and to the Company's
Vice Chairman of the Board and Senior Executive Vice
President to purchase 100,000 and 100,000 shares,
respectively, at $25.13 per share; options granted in 1996
to the Company's Chairman of the Board and President and
Senior Executive Vice President to purchase 100,000 and
F-20
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Stock options: (Continued)
50,000 shares, respectively, at $24.75 per share; options
granted in 1993 under the 1991 Plan 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 an exercise price equal to 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
$3,300,000 ($2,046,000 or $.10 basic and diluted earnings
per share after tax) relating to the Company's investment in
one of its joint ventures was established in 1997 for the
closing of certain of the joint venture's units.
A provision for restaurant closings in the amount of
$16,400,000 ($10,168,000 or $0.50 basic and diluted earnings
per share after tax) was established in 1995 for the closing
of approximately 40 under-performing restaurants.
10. Dividends:
In 1997 and 1996, the Company declared quarterly dividends
of $0.27 per share and $0.23 per share, respectively,
aggregating $1.08 per share and $0.92 per share for the
respective years. On February 11, 1998, the Company
announced that its Board of Directors had deferred
consideration of the Company's quarterly cash dividend
pending consideration of a transaction that has been
proposed by the Sbarro Family which would result in the
acquisition at $28.50 per share in cash of all of the shares
of the Company not owned by the Sbarro Family. The proposal
is conditioned upon, among other things, the immediate
suspension of dividends by the Company. (See Note 6)
F-21
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Quarterly financial information (unaudited):
(In thousands, except share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal year 1997
Revenues $95,364 $75,301 $82,678 $96,092
Gross profit (a) 73,324 57,976 63,314 73,640
Net income (b) 7,885 6,733 9,206 12,258
Per share information:
Net income per share:
Basic $.39 $.33 $.45 $.60
Diluted $.39 $.33 $.45 $.60
Shares used in computation
of net income per share:
Basic 20,401,538 20,428,711 20,440,596 20,444,678
Diluted 20,454,534 20,599,676 20,526,757 20,529,233
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
Per share information:
Net income per share:
Basic $.34 $.33 $.45 $.72
Diluted $.34 $.33 $.45 $.71
Shares used in computation
of net income per share:
Basic 20,348,179 20,363,607 20,379,932 20,391,774
Diluted 20,383,628 20,406,051 20,404,755 20,431,626
(a) Gross profit represents the difference between restaurant
sales and the cost of food and paper products.
(b) See Note 9.
F-22
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 11, 1998. 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 11, 1998
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 at
Beginning Costs and Accounts Describe End of
Description of Period Expenses Describe (1) Period
December 28, 1997
Accumulated
amortization of
of deferred
charges $1,436 $1,495 $(1,662) $1,269
Accumulated
amortization
of Canadian
development
rights (2) 424 57 481
Accumulated
amortization
of purchased
leasehold
rights (2) 943 213 (1,060) 96
$2,803 $1,765 $(2,722) $1,846
December 29, 1996:
Accumulated
amortization
of deferred
charges $1,573 $1,432 $(1,569) $1,436
Accumulated
amortization
of Canadian
development
rights (2) 368 56 424
Accumulated
amortization
of purchased
leasehold
rights (2) 764 179 943
$2,705 $1,667 $(1,569) $2,803
S-2
SBARRO, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
FOR THE THREE YEARS ENDED (Continued)
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
(1) Write-off of fully amortized deferred charges
(2) Included in other assets
S-3
EXHIBIT INDEX
Exhibit Number Description
* 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)
* 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 4.3 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended April 21, 1996, 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 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
10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 20, 1997, File No. 1-
8881)
__________________________ Exhibit Index (continued):
Exhibit Number Description
+ *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, as
amended. (Exhibit 10.2 (d) to the Company's
Quarterly Report on Form 10-K for the year ended
April 20, 1997, File No. 1-8881)
+ *10.02(e) The Company's Performance Incentive Plan. (Exhibit
A to the Company's Proxy Statement dated April 29,
1997, 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.
23.01 Consent of Arthur Andersen LLP.
27.01 Financial Data Schedule.
_____________________________
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.