-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Di78qfxIKyxZPcno/nbxicUt2LaqPtYtOqMf8IOsAfmyogvHCVChuss6NP3iR8P/ icuD+JYGx4va7rLMAz+PLQ== 0000766004-97-000001.txt : 19970401 0000766004-97-000001.hdr.sgml : 19970401 ACCESSION NUMBER: 0000766004-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SBARRO INC CENTRAL INDEX KEY: 0000766004 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 112501939 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08881 FILM NUMBER: 97569680 BUSINESS ADDRESS: STREET 1: 763 LARKFIELD RD CITY: COMMACK STATE: NY ZIP: 11725 BUSINESS PHONE: 5168640200 10-K 1 ________________________________________________________________________ _______________________________________________________ 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. -10- 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). -11- 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. EX-23 2 EXHIBIT No. 23.01 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 7, 1997, included in this Form 10-K, into Sbarro, Inc.'s previously filed Registration Statements on Form S-3 (File No. 33-39637) and Form S-8 (File Nos. 33-4380, 33-39636 and 33-68486). It should be noted that we have performed no audit procedures subsequent to February 7, 1997, the date of our report. Furthermore, we have not audited any financial statements of Sbarro, Inc. as of any date or for any period subsequent to December 29, 1996. /s/ Arthur Andersen LLP New York, New York March 26, 1997 EX-27 3
5 1,000 YEAR DEC-28-1997 DEC-29-1996 104,818 2,500 1,865 0 2,841 113,433 260,290 129,297 258,659 39,814 0 0 0 204 204,996 258,659 319,315 329,488 68,668 163,835 0 0 0 60,306 22,916 37,390 0 0 0 37,390 $1.84 $1.84
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