-----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, NtbrvyLXZyGs1N412Gg2Y+eUP7xIl0xjpgTdRKy1B3Icwz5UgLLP6YlKrs4jRJj/ MhNHthGr+E5yveL6d0aaTw== 0000910680-99-000140.txt : 19990406 0000910680-99-000140.hdr.sgml : 19990406 ACCESSION NUMBER: 0000910680-99-000140 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990405 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: 1229 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08881 FILM NUMBER: 99587677 BUSINESS ADDRESS: STREET 1: 401 BROADHOLLOW ROAD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5168640200 10-K 1 SBARRO FORM 10-K ================================================================================ 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 January 3, 1999 |_| 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 incorporation or organization) (I.R.S. Employer Identification No.) 401 Broad Hollow Road, Melville, New York 11747 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 715-4100 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 February 26, 1999 was approximately $339,908,000. The number of shares of Common Stock of the registrant outstanding as of February 26, 1999 was 20,531,977. DOCUMENTS INCORPORATED BY REFERENCE None 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 898 restaurants worldwide at January 3, 1999. 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 On January 19, 1999, the Company, Sbarro Merger LLC, a New York limited liability company ("Mergeco"), and Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants (collectively the "Sbarro Family") entered into an Agreement and Plan of Merger (the "Merger Agreement"). The Merger Agreement followed an initial proposal for a similar transaction made in January 1998 and terminated in June 1998, and a revised proposal made on November 25, 1998 that became the subject of the Merger Agreement (the "Revised Proposal"). The Merger Agreement provides for the merger of Mergeco with and into the Company (the "Merger"), with each outstanding share of the Company's Common Stock, other than shares held of record by Mergeco or the Sbarro Family or in the Company's treasury, to be converted into the right to receive $28.85 in cash (the "Merger Consideration"). The shares to be purchased comprise approximately 65.6% of the Company's presently outstanding shares of Common Stock. In addition, all outstanding stock options, including those held by the Sbarro Family, will be terminated. For each such option, the holder thereof will be paid the difference between the Merger Consideration and the exercise price per share, multiplied by the total number of shares of Common Stock subject to such option. The Merger Agreement contains certain conditions to closing, including, among other things, (i) adoption of the Merger Agreement by a majority of the votes cast (excluding votes cast by the Sbarro Family, abstentions and broker non-votes) at a meeting of the Company's shareholders to be called to consider adoption of the Merger Agreement, (ii) receipt of financing for the transactions contemplated by the Merger Agreement, (iii) the continued suspension of dividends by the Company and (iv) the settlement of shareholder class action lawsuits that have been filed relating to the Merger. A Memorandum of Understanding to settle those lawsuits was entered into on January 19, 1999. See "Legal Proceedings" in Item 3 of this Report. This Report does not give effect to changes in the Company that will occur if the Merger is consummated. -2- 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 January 3, 1999, there were 898 Sbarro and mall-based Umberto of New Hyde Park restaurants (630 of which were Company owned and operated and 268 were franchised) located in 48 states throughout the United States, its territories and 21 countries throughout the world. 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 649 restaurants at the beginning of 1994 and 898 at the end of 1998. During 1998, 69 new Sbarro and mall-based Umberto of New Hyde Park restaurants were opened, of which 26 were Company-owned and 43 were franchised, while 20 Company-owned and 13 franchised units were closed. At the end of 1999, the Company expects that there will be an additional 57 units in operation, of which approximately 22 (net of estimated unit closings) are expected to be Company- owned and the balance are expected to be franchised. The actual number of additional units 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-owned and franchised 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. -3- The following table indicates the number of Company-owned and franchised restaurants (excluding non-mall joint venture restaurants) during each of the years from 1994 through 1998.
Fiscal Year 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Company-owned Sbarro restaurants: Opened during period (1) 26 30 29 44 53 Acquired from franchisees during period 1 4 1 - 2 Closed during period (2) [20] [8] [4] [40] [3] Open at end of period (3) 630 623 597 571 567 Franchised Sbarro restaurants: Opened during period 43 47 36 40 38 Sold to Company during period [1] [4] [1] - [2] Closed or terminated during period [13] [23] [16] [2] [8] Open at end of period 268 239 219 200 162 All Sbarro restaurants: Opened during period (1) 69 77 65 84 91 Closed or terminated during period (2) [33] [31] [20] [42] [11] Open at end of period (3) 898 862 816 771 729 Kiosks (all franchised) open at end of year 8 7 7 8 7
(1) Includes, in 1998, 1997 and 1996, one, two and three mall locations, respectively, of a joint venture which operates as Umberto of New Hyde Park which, for the purpose of this Report, are considered Sbarro restaurants. (2) See Note B to "Selected Financial Data" in Item 6 of this Report for information with respect to charges in 1998 and 1995 relating to the closing and planned closing of certain Company- owned units. (3) Includes, in 1998, 1997 and 1996, six, five and three joint venture mall locations which operate as Umberto of New Hyde Park Concept and Menu Sbarro restaurants are family oriented, offering quick, efficient, 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 January 3, 1999, there were 258 "in-line" Sbarro restaurants and 633 "food court" Sbarro restaurants. In addition, franchisees operated seven freestanding Sbarro restaurants, including two in the Middle East, three in Minnesota and one in each of the Bahamas and Puerto Rico. "In-line" restaurants, which are self-contained restaurants, usually occupy 4 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 1998 (first 52 weeks) and 1997 were $705,000 and $693,000, respectively, for "in-line" restaurants and $506,000 and $493,000, respectively, for "food court" restaurants. A principal factor in the increase in average sales per restaurant was the 1.4% and .7% selective menu price increases in September 1998 and February 1998, respectively. 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 Company. 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. Substantially all of the food ingredients and related restaurant supplies used by the restaurants are purchased from a national independent wholesale food distributor which is required to adhere to established product specifications for all food products sold to the Company's restaurants. Breads, pastries, produce, fresh dairy and certain meat products are purchased locally for each restaurant. Soft drink mixes are purchased from major beverage producers under national contracts. 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 6 - 14 Company-owned Sbarro restaurants in a given area. Before each new restaurant opening, the Company assigns an Area Director to coordinate opening -5- procedures. Each Area Director reports to one of the 13 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 Growth in franchise operations occurs 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 January 3, 1999, the Company had 268 franchised Sbarro restaurants operated by 73 franchisees in 30 states of the United States as well as its territories and in 21 countries throughout the world. 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 has 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 fee and continuing royalties at rates 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 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 renewal option has also been subject to certain conditions, including a remodel or image enhancement requirement. Franchise agreements granted under territorial agreements and those for non-traditional sites contain negotiated fees, royalty rates and terms and conditions other than those contained in the Company's basic franchise agreement. The franchise and territorial agreements 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. The Company employs ten management level individuals responsible for overseeing the operations of franchise units and for developing new units. These employees report to a Corporate Vice President. New Ventures Since 1995, the Company has entered into joint venture arrangements for the purpose of developing new restaurant concepts. The first venture, in which the Company has a 40% interest, presently operates five casual dining restaurants, with a Rocky Mountain steakhouse motif, under the name Boulder Creek Steaks & Saloon. In addition, it operates one Rothmann's Steakhouse, a fine dining restaurant. A second fine dining steakhouse is under construction. Another venture, in which the Company has a 70% interest, is a moderately priced, table service restaurant chain featuring an Italian Mediterranean menu, currently operating two restaurants under the names Salute and Cafe Med. During 1997, the joint venture determined to close two other restaurants resulting in a $3,300,000 before tax ($2,046,000 or $.10 basic and diluted earnings per share after tax) charge to -6- the Company's earnings. A third venture in which the Company has an 80% interest is a family restaurant concept in mall and non-mall locations under the name Umberto of New Hyde Park. In non-mall locations, this concept features table service and take-out pizza and other Italian-style foods. This venture currently operates six restaurants in strip shopping centers and six in shopping malls. One non-mall restaurant was closed in 1998. In February 1999, the Company instituted an action against its partner in this joint venture alleging, among other things, breach of contract and unfair competition, seeking damages and injunctive relief. The matter is in its initial stages and no answer has been submitted to this complaint. To date, all joint-venture restaurants, except four Umberto of New Hyde Park mall units, are located in the New York City metropolitan area. The Company continues to monitor the results of these three concepts for the purpose of evaluating their potential future growth. In March 1999, another joint venture, in which the Company has a 50% interest entered into an agreement to acquire a business which currently operates two Mexican-style restaurants. The Company is also currently considering entering into a joint venture for the purpose of establishing a seafood restaurant. Employees As of January 3, 1999, the Company (exclusive of joint ventures to which the Company is a party) employed approximately 7,500 persons, of whom approximately 3,300 were full-time field and restaurant personnel, 4,000 were part-time restaurant personnel and 200 were corporate administrative 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 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 -7- 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 January 3, 1999, the Company leased 655 restaurants, of which 25 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 January 3, 1999 have initial terms expiring as follows: Years Initial Lease Number of Company- Number of Franchised Terms Expire owned Restaurants Restaurants ------------------- ------------------ -------------------- 1999 35 4 2000 - 2004 319 17 2005 - 2009 266 4 2010 - 2013 10 0 In March 1994, the Company purchased a 100,000 square foot, four-story office building in Melville, New York, for $5,350,000. The Company has renovated the building at an additional cost of approximately $15 million and, since November 1998, has occupied 25% of the building as its principal executive offices. The balance of the facility, other than one half of one story and common areas and a cafeteria style restaurant operated by the Company, are currently under lease to unaffiliated third parties. The Company also occupies a two-story 20,000 square foot office building for administrative support functions located in Commack, New York. The building has been subleased for a period of fifteen years since May 1986 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. ITEM 3. LEGAL PROCEEDINGS Following the Company's announcement of the Revised Proposal, (see "Business Recent Developments" in Item 1 of this Report), seven class action lawsuits were instituted by shareholders against the Company, those members of the Sbarro Family who are directors of the Company and all or some of the other directors of the Company. The lawsuits were instituted in the Supreme Court of the State of New York, New York County and Suffolk County. The lawsuits in Suffolk County were discontinued and subsequently refilled as one lawsuit in New York County (with one additional plaintiff) in anticipation of consolidating all lawsuits into one lawsuit. While the -8- complaints in each of the lawsuits vary, in general, they allege that the directors breached fiduciary duties, that the then proposed price of $27.50 to be paid to shareholders other than the Sbarro Family was inadequate and that there were inadequate procedural protections for those shareholders. Although varying, the complaints seek, generally, a declaration of a breach of, or an order requiring the defendants to carry out, their fiduciary duties to the plaintiffs, damages in unspecified amounts alleged to be caused to the plaintiffs, other relief (including injunctive relief or rescission or rescissory damages if the transaction is consummated), and costs and disbursements, including a reasonable allowance for counsel fees and expenses. On January 19, 1999, counsel for all of the plaintiffs and counsel for all of the defendants entered into a Memorandum of Understanding pursuant to which an agreement in principle to settle all of the lawsuits was reached and the Sbarro Family agreed to an increase in the merger consideration to $28.85 per share. The Memorandum of Understanding states that plaintiffs' counsel intend to apply to the Court for an award of attorneys' fees and disbursements in an amount of no more than $2.1 million to be paid by the Company, which the defendants have agreed not to oppose. The defendants are also responsible for providing notice of the settlement to all class members. The settlement would result in the complete discharge and bar of all claims against, past, present and future officers and directors of the Company, and others associated with the Merger with respect to matters and issues of any kind that have been or could have been asserted in these lawsuits. The settlement is subject to, among other things, (i) completion of a formal stipulation of settlement, (ii) certification of the lawsuits as a class action covering all record and beneficial owners of the Common Stock during the period beginning on November 25, 1998 through the effective date of the Merger, (iii) court approval of the settlement and (iv) consummation of the Merger. It is a condition to Mergeco's obligations under the Merger Agreement that holders of no more than 1,000,000 shares of Common Stock request exclusion from the settlement. In December 1998, the Court approved, and the Company completed, the settlement of an action entitled Kenneth Hoffman and Gloria Curtis, on behalf of themselves and all others similarly situated v. Sbarro, Inc. that was pending in the United States District Court for the Southern District of New York. The plaintiffs, former restaurant level management employees, alleged 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 settlement resulted in a one-time charge of $3,544,000 before tax or $2,197,000 after tax ($.11 basic and diluted earnings per share) in fiscal 1998. From time to time the Company is 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. -9- 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: 1998 1997 - -------------------------------------- ------------------------------------ Quarter Ended High Low Quarter Ended High Low April 19 $30.13 $25.44 April 20 $28.63 $25.13 July 12 $29.69 $25.56 July 13 $29.75 $26.25 October 4 $27.25 $18.31 October 5 $29.44 $26.06 January 3 $26.69 $19.38 December 28 $29.75 $26.00 As of February 26, 1999, there were approximately 425 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. Dividends were thereafter suspended pending consideration by the Company of proposals by certain members of the Sbarro family for the Company's acquisition of all Common Stock not owned by them (see "Business - Recent Developments" in Item 1 of this Report) and consideration of other strategic alternatives. -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 Jan. 3, Dec. 28, Dec. 29, Dec. 31, Jan. 1, Income Statement Data: 1999 (A) 1997 1996 1995 1995 -------- ---- ---- ---- ---- (In thousands, except share and per share data) Revenues: Restaurant sales $361,354 $337,723 $319,315 $310,132 $288,808 Franchise related income 8,578 7,360 6,375 5,942 5,234 Interest income 5,120 4,352 3,798 3,08 1,949 ----------- ----------- ----------- ---------- ----------- 375,232 349,435 329,488 319,155 295,991 --------- --------- --------- --------- --------- Costs and expenses: Cost of food and paper products 76,572 69,469 68,668 67,361 61,877 Restaurant operating expenses: Payroll and other employee benefits 93,367 84,910 78,258 78,342 70,849 Occupancy and other expenses 101,013 93,528 85,577 84,371 76,353 Depreciation and amortization 22,429 23,922 22,910 23,630 21,674 General and administrative 19,708 17,762 14,940 16,089 13,319 Provision for unit closings (B) 2,515 3,300 - 16,400 - Terminated transaction costs (C) 986 - - - - Litigation settlement and related costs (D) 3,544 - - - - Loss on sale of land to be sold (E) 1,075 - - - - Other income (2,680) (1,653) (1,171) (1,359) (1,351) ------------ ------------ ------------ ------------ ------------ 318,529 291,238 269,182 284,834 242,721 --------- --------- --------- --------- --------- Income before income taxes and cumulative effect of change in method of accounting for start-up costs 56,703 58,197 60,306 34,321 53,270 Income taxes 21,547 22,115 22,916 13,042 20,244 --------- --------- --------- --------- --------- Income before cumulative effect of accounting changes 35,156 36,082 37,390 21,279 33,026 Cumulative effect of change in method of accounting for start-up costs (822) - - - - ---------------------------- ----------------------------- --------------- Net income $ 34,334 $ 36,082 $ 37,390 $ 21,279 $ 33,026 ========= ========== ========= ========== ========== Per share data ( F): Basic earnings per share before cumulative effect of change in method of accounting for start-up costs $1.71 $1.77 $1.84 $1.05 $1.63 Cumulative effect of change in method of accounting for start-up costs .04 - - - - --------------- --------------- ----------------------------- --------------- Basic earnings per share $1.67 $1.77 $1.84 $1.05 $1.63 ============= ============ =========== ============ ============ Number of basic shares used in the computation 20,516,890 20,426,678 20,369,128 20,336,809 20,310,283 ========== ========== ========== ========== ========== -11- Years Ended Jan. 3, Dec. 28, Dec. 29, Dec. 31, Jan. 1, 1999 1997 1996 1995 1995 ------ -------- ------- ------- Income Statement Data: (continued) Diluted earnings per share before cumulative effect of change in method of accounting for start-up costs $1.71 $1.76 $1.83 $1.04 $1.62 Cumulative effect of change in method of accounting for start-up costs ( .04) - - - - ---------- ------------- ------------- -------------- ------------ Diluted earnings per share $1.67 $1.76 $1.83 $1.04 $1.62 ========== ========== ========== ========= ========= Number of diluted shares used in the computation 20,583,367 20,504,303 20,404,620 20,396,704 20,355,275 ========== ========== ========== ========== ========== Dividends declared - $1.08 $0.92 $0.76 $0.64 ============== ========== ========== ========== ========== Balance Sheet Data: Jan. 3, Dec. 28, Dec. 29, Dec. 31, Jan. 1, 1999 1997 1996 1995 1995 ------ ------- ------- ------- ------ (In thousands) Total assets $303,168 $278,649 $258,659 $242,730 $232,051 Working capital 121,380 88,006 73,619 57,645 43,271 Shareholders' equity 256,917 220,439 205,200 185,666 179,580 Number of Restaurants at End of Period: Company-owned and operated 630 623 597 571 567 Franchised 268 239 219 200 162 --- --- --- --- --- Total (G) 898 862 816 771 729 === === === === ===
A: The Company's fiscal year ends on the Sunday nearest December 31. The Company's 1998 fiscal year ended January 3, 1999 and contained 53 weeks. All other reported fiscal years contained 52 weeks. Accordingly, the 1998 fiscal year benefitted from one additional week of operations over the prior reported fiscal years. The additional week in fiscal 1998 produced revenues of $8,534,000, net income of $1,666,000 and basic and diluted earnings per share of $.08. B: In 1998, a provision of $2,515,000 before tax ($1,559,000 or $.08 basic and diluted earnings per share after tax) was established for the closing of 20 restaurant locations. 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. 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. C: The 1998 financial statements reflect a charge of $986,000 before tax ($611,000 or $.03 basic and diluted earnings per share after tax) for costs associated with the termination of negotiations of the initial proposal for the Company's acquisition of all shares of its Common Stock not owned by certain members of the Sbarro family. -12- D: The 1998 financial statements reflect a charge of $3,544,000 before tax ($2,197,000 or $.11 basic and diluted earnings per share after tax) in connection with the settlement of a lawsuit under the Fair Labor Standards Act. E: During 1998, the Company received an offer to sell a parcel of Company-owned land included in construction-in-progress for an amount less than its carrying cost and, accordingly, the 1998 financial statements reflect a reduction of such carrying cost of $1,075,000 ($667,000 or $.03 basic and diluted earnings per share). F: All share and per share data have been restated to give effect to Statement of Financial Accounting Standard 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. G: Excludes (i) kiosks operated by franchisees and (ii) restaurants operated by joint ventures to which the Company is a party other than six mall locations of one joint venture which are included in the table as "Company-owned and operated units". -13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General On January 19, 1999, the Company entered into a merger agreement for the merger of a company owned by members of the Sbarro family, the Company's principal shareholders, with and into the Company in which all outstanding Common Stock of the Company not owned by those shareholders are to be converted into the right to receive $28.85 in cash. The shares to be purchased comprise approximately 65.6% of the Company's outstanding shares of Common Stock. In addition, all outstanding stock options, including those held by those members of the Sbarro family, will be terminated. For each such option, the holder thereof will be paid the difference between $28.85 and the exercise price per share, multiplied by the total number of shares of Common Stock subject to such option. The merger agreement contains certain conditions to closing, including, among other things, (i) adoption of the Merger Agreement by a majority of the votes cast (excluding votes cast by the Sbarro Family, abstentions and broker non-votes) at a meeting of the Company's shareholders to be called to consider adoption of the merger agreement, (ii) receipt of financing for the transactions contemplated by the merger agreement, (iii) the continued suspension of dividends by the Company and (iv) the settlement of shareholder class action lawsuits that have been filed relating to the merger. This following discussion does not give effect to changes in the Company that will occur if the merger is consummated. Results of Operations 1998 Compared to 1997 The 1998 fiscal year benefitted from one additional week of operations over the prior reported fiscal years. The additional week in fiscal 1998 produced revenues of $8,534,000, net income of $1,666,000 and basic and diluted earnings per share of $.08. Restaurant sales from Company-owned units and consolidated joint venture units increased 7.1% to $361,534,000 from $337,723,000 in 1997. The increases resulted primarily from a higher number of units in operation during the current fiscal year, selective menu price increases of approximately 1.4% and .7% which became effective in September 1998 and February 1998, respectively, and sales generated in week 53 of the 1998 fiscal year. Comparable unit sales increased 1.6% to $322,379,000 for the first 52 weeks of the 1998 fiscal year from $317,209,000 in the 1997 fiscal year. Comparable restaurant sales are made up of sales at locations that were open during the entire current and prior fiscal years. Franchise related income increased 16.5% to $8,578,000 in 1998 from $7,360,000 in 1997. The increases resulted from greater continuing royalties due to a larger number of franchise units in operation in 1998, an increase in initial franchise and development fees due to opening more international franchise units in 1998 than in 1997 and royalties generated in week 53 of the 1998 fiscal year. During the year ended January 3, 1999, 13 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, one franchise unit was purchased by the Company. -14- Interest income increased to $5,120,000 in 1998 from $4,352,000 in 1997. This increase was due to larger amounts of cash being invested in 1998 than in 1997 and the length of the 1998 fiscal year. Interest rates were comparable in both years. Cost of food and paper products, as a percentage of restaurant sales, increased to 21.2% in 1998 from 20.6% in 1997. Higher cheese prices during 1998 increased food costs by approximately $2,635,000 or .7% of sales and was the primary cause of the increase. The increase occurred during the last three quarters of the fiscal year. Cheese prices have decreased significantly since the end of the fiscal year to levels that are comparable to prices in the first quarter of fiscal 1998. Restaurant operating expenses - payroll and other employee benefits increased to 25.8% of restaurant sales in 1998 from 25.1% of restaurant sales in 1997. This increase was attributable to the $1,150,000 (or .3% of restaurant sales) payroll and other employee benefit component of start-up costs expensed as incurred during 1998 under Statement of Position 98-5 of the American Institute of Certified Public Accountants (the "SOP") implemented by the Company in the first quarter of fiscal 1998 (which expenses in prior years were capitalized and charged to amortization expense over a two year period). In addition, the effects of the Federal minimum wage, which became effective in September 1997, a strong labor market and an increase in unemployment and other payroll taxes contributed to the increase. Restaurant operating expenses - occupancy and other expenses increased to 27.9% in 1998 from 27.7% in 1997. The increase is attributable principally to such costs increasing at a rate faster than the increase in sales in 1998 from 1997. Depreciation and amortization expenses decreased to $22,429,000 from $23,922,000 principally as a result of the absence of amortization of previously capitalized start-up costs which, as discussed below, were fully written off as of the beginning of the year with the implementation of the SOP. Had the Company not implemented the SOP, it would have incurred amortization expenses of $1,189,000 in 1998 for prior and current years' costs previously capitalized. The balance of the decrease relates to the absence of depreciation and amortization in 1998 on certain older units and also to the closing of certain Company-owned units, as discussed below. General and administrative expenses increased to $19,708,000 or 5.3% of revenues in 1998 from $17,762,000 or 5.1% of revenues in 1997. The increases were due to higher costs associated with the administration of Company-owned restaurants and additional supervisory, administrative and travel expenses related to increased international franchising activities. In addition, $829,000 (or .2% of revenues) of the increase was attributable to the general and administrative expense component of start-up costs incurred and expensed during 1998 under the SOP (which expenses in prior years would have been capitalized and charged to amortization expense over a two year period). Results for fiscal 1998 include one-time charges to operating income of $2,515,000 before tax ($1,560,000 or $.08 basic and diluted earnings per share after tax) for the closing of 20 Company-owned restaurants and $986,000 before tax ($611,000 or $.03 basic and diluted earnings per share after tax) for costs associated with the terminated negotiations of the initial proposal for the acquisition by the Company of all shares of the Company's Common Stock not owned by certain members of the Sbarro family. The fiscal year results also include a provision of $3,544,000 before tax ($2,197,000 or $.11 basic and diluted earnings per share after tax) for costs associated with the settlement approved and finalized in December 1998 of a lawsuit under the Fair Labor Standards Act and a charge of $1,075,000 before tax ($667,000 or $.03 basic and diluted earnings per share after tax) for the difference between the carrying cost and proposed selling price of a parcel of land being sold by the Company. -15- Other income increased to $2,680,000 in 1998 from $1,653,000 from 1997 primarily as a result of increased incentives from suppliers. The effective income tax rate was 38.0% for fiscal 1998 and 1997. The cumulative effect of the change in method of accounting resulted from the Company's implementation of the SOP which requires companies that have capitalized pre-opening and similar costs to write off all such existing costs, net of tax benefit, as a "cumulative effect of accounting change" and to expense all such costs as incurred in the future. In accordance with its early application provisions, the Company implemented the SOP as of the beginning of its 1998 fiscal year. In addition to on-going start up costs incurred and expensed during 1998 with respect to restaurant operating expenses - - payroll and other employee benefits and general and administrative expenses as discussed above, the Company incurred a one-time charge during 1998 of $822,000, net of an income tax benefit of $504,000 ($.04 basic and diluted earnings per share), to write off all start-up costs existing as of the beginning of the year. 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 fiscal 1997 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 and prior fiscal years. 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 1997 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 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 rose in the middle of the fourth quarter of fiscal 1997 and remained 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 -16- 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. 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. 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 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".) The fourth fiscal quarter normally accounts for approximately 40% of net income for the year. The 1998 year, which contained 53 weeks, had a 13 week fourth quarter. The fourth quarter of 1998 (excluding non recurring items) accounted for 41% of net income for the year. Excluding week 53, the fourth quarter would have accounted for 38% of such net income. In 1997, the fourth fiscal quarter (prior to the provision for the closing of certain joint venture units) accounted for 38% of net income for the year. Accounting Period The Company's fiscal year ends on the Sunday nearest to December 31. The fiscal year which ended on January 3, 1999 contained 53 weeks. All other reported fiscal years contained 52 weeks. -17- Liquidity and Capital Resources During 1998, operating activities contributed $54,204,000 to cash flow. This consisted primarily of net income of $34,334,000, non-cash depreciation and amortization of $22,429,000 and one time charges totaling $4,412,000 which were partially offset by decreases in accounts payable and accrued expenses of $2,610,000 and deferred taxes of $2,078,000. During 1998, investing activities used $20,165,000, with the Company expending approximately $27,717,000 for the acquisition of property and equipment related primarily to the opening of 26 Company-owned restaurants, the Company's share of construction costs related to consolidated joint venture operations and the renovation and equipping of the Company's new headquarters building partially offset by the receipt of $7,500,000 from the maturity of its remaining marketable securities. Financing activities in 1998 used $3,377,000, with $5,521,000 used to pay, in early 1998, the quarterly cash dividend declared in late 1997 to the Company's shareholders partially offset by $2,144,000 received from the exercise of stock options. At January 3, 1999, the Company had cash and cash equivalents of $150,472,000, an increase of $30,662,000 from the amount at the end of the 1997 fiscal year, and its working capital was $121,380,000. The Company anticipates that in 1999, approximately 25 new Company-owned and operated units will be opened and that its capital expenditures, including new units and remodeling of existing units, will approximate $13 million. 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. No such contracts were entered into during, or outstanding at the end of, fiscal 1998. 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 and for the investment in property and equipment for the opening of additional restaurant locations and remodeling of existing restaurants. Year 2000 "Year 2000" issues could arise in situations where computer software or databases recognize the two digit year "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations that could cause disruptions in business operations and increased costs in processing and analyzing data. Since the Company's information technology ("IT") systems (used primarily for financial, accounting, human resources, payroll, operations support and point-of- sales processing and reporting) and non-information technology ("non-IT") systems (used principally in communications systems) use computer hardware, software and related technology, the Company has conducted a comprehensive review of its computer systems. State of Readiness. The Company has determined that, while certain computer programs require change to assure that they are Year 2000 compliant, all of their databases are Year 2000 compliant in that they contain four digit year fields, thereby allowing positive identification of the century and year. The Company's internal IT systems utilize a combination of in-house software developed by the Company's IT department and packaged software purchased from third parties. During the past five years, as part of its ongoing IT enhancements, the Company has either significantly updated software or designed new software for its point-of-sales system (which -18- performs cash register and restaurant management functions) and for its restaurant accounting system (which handles centralized bookkeeping, sales analysis and cash control functions relating to its Company-owned restaurants). The Company's point-of-sales system is currently installed in approximately 300 restaurant units. The balance of the Company's existing restaurants use electronic cash registers. The Company has been orally advised by the manufacturers of its electronic cash registers that they expect no Year 2000 issues with respect to these registers. The Company is in the process of replacing the personal computers that were part of the approximately 115 point-of-sales systems installed in 1995 and early 1996. The Company is also in the process of updating and modifying its software programs for all 300 restaurants in order to handle Year 2000 issues. Neither of these processes is believed to be complex and both are expected to be completed, tested and implemented during the summer of 1999. The Company is continuing to install its point-of-sales system in each new unit, in each existing restaurant as remodeled and to replace existing registers as needed. The Company uses software developed by a recognized third party software provider for various corporate office functions, including financial and accounting reporting and analysis, human resource and payroll processing, inventory purchasing and accounts payable functions. The Company has reviewed and determined the remediation needed to the third party software, has made the changes needed and recompiled all programs within the packaged software. The Company has recently commenced testing the remediated system. The remediation process with respect to its third party software is also expected to be completed during the summer of 1999. Thereafter, any corrections or changes (which are currently not anticipated to be significant) to programs or systems that are required as a result of the testing of its internal software and third party software will be addressed. Final testing is currently anticipated to be completed, and the updated software installed, by the end of November 1999. Non-IT systems are used by the Company primarily for voice communications. The Company has received written assurances from its communications systems provider that the Company's communications systems and equipment are Year 2000 compliant. The Company has not as yet received confirmation that its voice messaging system, which utilizes a recognized provider, is Year 2000 compliant. The Company does not believe that interruption of this service would have a material adverse affect on its operations. The Company has been orally advised by its principal food distributor that, while it could operate under its former manual systems, it expects that its computer systems will be Year 2000 compliant on a timely basis. The Company's principal soft drink mix supplier has publicly reported that it expects remediation and testing of its key IT systems to be 98% completed by the end of the second quarter of 1999 and compliant by the fourth quarter of 1999. Costs. To date, all software modification and testing has been performed by the Company's internal IT department without the need to employ additional staff and without significant interruption of the other functions performed by the department. The Company believes it will complete this project without additional staff and without adversely affecting day-to-day operations and support, although some overtime for personnel outside the IT department staff may be required during the testing phase of the remediated systems. To date, the Company has expended less than $30,000 (in addition to hardware purchased in the ordinary course, which purchases were not accelerated as a result of the Year 2000 issue) and anticipates spending less than $150,000 for testing, purchasing hardware and for other -19- modification costs to finish the project. The Company does not separately track internal costs (which are principally payroll and related costs of its IT systems department) incurred as part of its Year 2000 project. Risks. Although the Company believes its systems will be timely compliant with Year 2000 issues, the most reasonably likely worst case scenarios facing the Company in the event Year 2000 problems arise involve: (i) the timeliness of internal reporting and analyzing corporate information and the potential of temporarily supplementing its staff if the Company is required to rely, for a period of time, on manual information reporting and processing while remediation to one or more of its internal IT systems is effectuated; (ii) the processing of payroll; and (iii) its ability to maintain its traditional levels of revenues should it experience temporary supply shortages of food, soft drink mixes and paper products if its distributors experience IT or non-IT Year 2000 problems or should the landlords of the Company's restaurants experience non-IT issues (such as with microprocessors that control door operators, elevator service and heating and cooling equipment that the landlords are required to maintain under their leases with the Company). The Company, like most other companies, is also subject to certain risks that are not within its control, such as a failure of IT systems of banks, financial institutions, telephone companies and public utilities. Contingency Plans. In the event the Company's IT systems should malfunction, the Company believes it will nevertheless be able to generate revenues at its existing restaurants and process data, although delays may result in reporting and processing information. The Company's electronic cash registers operate manually and its point-of-sales cash registers can also operate independent of the IT system. The Company still utilizes manual systems both for reporting to its corporate office by restaurants that are not yet on its point-of-sales system and as a backup for units that are on the point-of-sales system. Depending upon the results of testing of its efforts to remediate its software during the summer of 1999, the Company intends to develop contingency plans with respect to the internal reporting of corporate information in the event of a failure of its IT systems. With respect to its payroll functions, the Company has recently comprehensively analyzed and worked with an outside payroll processing service before determining to continue to perform all payroll functions through its internal systems. Therefore, the Company believes that it could either outsource this function or have an outsourcer of payroll services install its system at the Company with the Company operating the system internally without material delay. The Company intends to maintain a higher inventory level of food products and soft drink mixes and paper products toward the end of 1999 as a contingency against shortages in the event its suppliers experience unanticipated Year 2000 problems. The levels to be maintained will be based upon future consultation with its suppliers to obtain updates on the status of their Year 2000 compliance programs. The Company believes that there are other distributors of food products, beverages and paper products that would be able to service the Company's needs in the event its primary suppliers experience Year 2000 problems that adversely affect their ability to provide the Company with the quantity of supplies needed. The Company intends to develop additional contingency plans if and to the extent additional significant risks become evident based on the testing of its internal systems and future discussions with its suppliers, landlords and other third party providers of goods and services. 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 -20- 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; the ability to continue to attract franchisees; the success of the Company's present, and any future, joint ventures and other expansion opportunities; the availability of food (particularly cheese and tomatoes) and paper products at reasonable prices; no material increase occurring in the Federal minimum wage; the Company's ability to attract competent restaurant and executive managerial personnel; competition; government regulations; and the Company's ability to successfully and timely complete compliance of its information systems for the Year 2000 and the ability of certain of its suppliers and landlords to be timely Year 2000 compliant. ITEM 7-A. QUALITATIVE AND QUANTITATIVE DISCLOSURES OF MARKET RISK The Company's cash equivalents are invested in short term, fixed interest, highly rated and highly liquid instruments which mature and are reinvested throughout the year. Therefore, although the Company's existing investments are not considered at risk with respect to changes in interest rates or markets for these instruments, the Company's yield return on future short-term investments could be affected at the time of reinvestment as a result of intervening events. The Company presently has no borrowings, and does not purchase interest rate swap or other instruments to hedge against interest rate fluctuations. The Company does not purchase future, forward, option or other instruments to hedge against fluctuations in the prices of the commodities it purchases. All transactions with foreign franchisees are denominated in, and all payments are made in, United States dollars, reducing the risks attendant in changes in the values of foreign currencies. Accordingly, the Company does not purchase future contracts, options or other instruments to hedge against changes in values of foreign currencies. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Annexed hereto starting on Page F-1. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None -21- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company and their ages at March 31, 1999 are: Name Age Position - ---- --- -------- Mario Sbarro 57 Chairman of the Board, President, Chief Executive Officer and Director Anthony Sbarro 52 Vice Chairman of the Board, Treasurer and Director Joseph Sbarro 58 Senior Executive Vice President, Secretary and Director Carmela Sbarro 77 Vice President and Director John Bernabeo 42 Vice President - Architecture and Engineering Joseph A. Fallarino 47 Vice President - Human Resources George W. Herz II 43 Vice President and General Counsel Robert S. Koebele 55 Vice President - Finance and Chief Financial Officer Carmela N. Merendino 34 Vice President - Administration Anthony J. Missano 40 Corporate Vice President - Operations Genarro A. Sbarro 32 Corporate Vice President - Franchising Genarro J. Sbarro 36 Corporate Vice President - Operations Leonard G. Skrosky 67 Senior Vice President - Real Estate and Lease Administration Harold L. Kestenbaum 49 Director Richard A. Mandell 56 Director Paul A. Vatter 74 Director Terry Vince 70 Director Bernard Zimmerman 66 Director MARIO SBARRO has been an officer, a director and a principal shareholder of the Company since its organization in 1977, serving as Chairman of the Board of Directors and Chief Executive Officer for more than the past five years. Mr. Sbarro re-assumed the position of President of the Company in May 1996 (a position he held for more than five years prior to December 1993). ANTHONY SBARRO has been an officer, a director and a principal shareholder of the Company since its organization in 1977, serving as Vice Chairman of the Board of Directors since May 1996 and as President and Chief Operating Officer from December 1993 through May 1996. For more than five years prior to December 1993, Mr. Sbarro was an Executive Vice President of the Company. He has also served as Treasurer of the Company for more than the past five years. JOSEPH SBARRO has been an officer, a director and a principal shareholder of the Company since its organization in 1977, serving as Senior Executive Vice President since December 1993. For more than five years prior thereto, Mr. Sbarro was an Executive Vice President of the Company. He has also served as Secretary of the Company for more than the past five years. -22- CARMELA SBARRO has been Vice President of the Company since March 1985. Mrs. Sbarro was a founder of the Company, together with her late husband, Gennaro Sbarro. Mrs. Sbarro devotes a substantial portion of her time to recipe and product development. The Board elected Mrs. Sbarro as a director of the Company in January 1998. Mrs. Sbarro previously served as a director of the Company from March 1985 until December 1988, when she was elected Director Emeritus of the Company. JOHN BERNABEO joined the Company in August 1992 and served in various capacities prior to his election as Vice President - Architecture and Engineering in May 1997. JOSEPH A. FALLARINO joined the Company in September 1998 and was elected Vice President - Human Resources in November 1998. Prior to joining the Company, Mr. Fallarino served as Senior Vice President - Human Resources of Arbor Management LLC, a provider of financial services and healthcare services, from March 1996 until March 1998. Mr. Fallarino also served as Vice President - Human Resources of AMS Corporation, a national outsourcing company, from January 1994 until February 1996 and Director of Human Resources of Ogden Corporation, an international diversified service corporation, from April 1998 until September 1998. GEORGE W. HERZ II joined the Company in November 1995 and was elected Vice President and General Counsel in February 1996. Prior to joining the Company, Mr. Herz served as General Counsel (from 1993) and Corporate Counsel (from 1982 until 1992) of Minuteman Press International, Inc. (a franchisor of printing centers). ROBERT S. KOEBELE has served as Vice President - Finance and Chief Financial Officer of the Company for more than the past five years. Mr. Koebele has been a certified public accountant in New York for more than the past thirty years. Mr. Koebele has advised the Company that he intends to retire in the early part of the summer of 1999. CARMELA N. MERENDINO was elected Vice President - Administration in October 1988. Ms. Merendino joined the Company in March 1985 and performed a variety of corporate administrative functions for the Company prior to her election as Vice President - Administration. ANTHONY J. MISSANO was elected Corporate Vice President - Operations in August 1996, prior to which he served as Vice President - Operations (West) from February 1995, and as a Zone Vice President from June 1992 until February 1995. GENNARO A. SBARRO was elected Corporate Vice President-Franchising in August 1996, prior to which he served as Vice President - Franchising since February 1995. For more than five years prior thereto, Mr. Sbarro served in various capacities for the Company. GENNARO J. SBARRO was elected Corporate Vice President - Operations in August 1996, prior to which he served as Vice President - Operations (East) since February 1995, and as a Zone Vice President from June 1992 until February 1995. LEONARD G. SKROSKY served the Company as Senior Vice President - Real Estate and Lease Administration from February 1987 until December 1993. From January 1994 until June 1996, Mr. Skrosky was President of The Skrosky Company, a real estate firm dealing with site selection and lease negotiations for several restaurant and other companies. He rejoined the Company in June 1996 and was elected Senior Vice President - Real Estate in November 1996. -23- HAROLD L. KESTENBAUM has been a practicing attorney in New York since 1976. He became a director of the Company in March 1985. RICHARD A. MANDELL, a private investor, was a Managing Director of BlueStone Capital Partners, L.P., an investment banking firm, from February until April 1998 and Vice President - Private Investments of Clariden Asset Management (NY) Inc., a subsidiary of Clariden Bank, a private Swiss bank, from January 1996 until February 1998. From 1982 until June 1995, Mr. Mandell served as a Managing Director of Prudential Securities Incorporated, an investment banking firm. He became a director of the Company in March 1986. Mr. Mandell is also a director of Trend-Lines, Inc., U.S.A. Detergents, Inc. and Shells Seafood Restaurants, Inc. PAUL A. VATTER has been, since his retirement in 1995, Professor Emeritus, and from 1970 until his retirement was Lawrence E. Fouraker Professor of Business Administration, at Harvard University's Graduate School of Business Administration, where he served as a Professor since 1958. He became a director of the Company in March 1985. Mr. Vatter has advised the Company of his intention to retire upon consummation of the Merger or, if the Merger is not consummated, upon the expiration of his current term at the 1999 Annual Meeting of Shareholders. TERRY VINCE has been Chairman of the Board and President of Sovereign Hotels (a company that operates hotels) since October 1991 and Chairman of the Board of Fame Corp. (a food service management company) since January 1994. Mr. Vince became a director of the Company in December 1988. BERNARD ZIMMERMAN has been President of Bernard Zimmerman and Co., Inc. since October 1972 and was Senior Vice President of The Zimmerman Group, Inc. from January 1991 to November 1996, financial and management consulting firms. Mr. Zimmerman also served as President and a director of Beacon Hill Mutual Fund, Inc. from December 1994 until October 1996. From September 1986 until September 1993, Mr. Zimmerman also served as Chairman and President of St. Lawrence Seaway Corp., an owner and manager of agricultural properties. Mr. Zimmerman has been a certified public accountant in New York for more than the past thirty-five years. He became a director of the Company in March 1985. The Company's Certificate of Incorporation provides that the Board of Directors shall be divided into three classes, with such classes to be as nearly equal in number as the then total number of directors constituting the entire Board permits. The Company's Board of Directors presently consists of nine members, with each class being elected for a term of three years. Anthony Sbarro, Harold L. Kestenbaum and Paul A. Vatter serve as Class 1 directors, Joseph Sbarro, Richard A. Mandell and Terry Vince serve as Class 2 directors and Mario Sbarro, Carmela Sbarro and Bernard Zimmerman serve as Class 3 directors, with terms of office scheduled to expire at the Company's 1999, 2000 and 2001 Annual Meetings of Shareholders, respectively. At each annual meeting, directors are elected to succeed those in the class whose term expires at that annual meeting, such newly-elected directors to hold office until the third succeeding annual meeting and the election and qualification of their respective successors. The officers of the Company are elected annually by the Board of Directors at its meeting held immediately after the annual meeting of the shareholders, and hold their respective offices until their successors are duly elected and qualified. Officers may be removed at any time by the Board. -24- Family Relationships Mario, Anthony and Joseph Sbarro are the sons of Carmela Sbarro. Carmela N. Merendino is the daughter, and Gennaro A. Sbarro is the son, of Mario Sbarro. Gennaro J. Sbarro is the son, and Anthony J. Missano is the son-in-law, of Joseph Sbarro. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act requires the Company's executive officers and directors, and persons who beneficially own more than 10% of the Company's Common Stock, to file initial reports of beneficial ownership, and reports of changes of beneficial ownership, of the Company's equity securities with the Securities and Exchange Commission and furnish copies of those reports to the Company. Based solely on a review of the copies of the reports furnished to the Company to date and written representations that no reports were required, the Company believes that all reports required to be filed by such persons with respect to the Company's fiscal year ended January 3, 1999 were timely filed. -25- ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth information concerning the annual and long-term compensation of the Company's chief executive officer and other five most highly compensated persons who were serving as executive officers of the Company at the end of the Company's 1998 fiscal year for services in all capacities to the Company and its subsidiaries during the Company's 1998, 1997 and 1996 fiscal years:
Long Term Name and Annual Compensation Compensation Principal Position Year Salary Bonus Options (#) - ------------------ ---- ------ ----- --------------- Mario Sbarro 1998 $713,462 $300,000 --- Chairman of 1997 700,000 160,000 250,000 the Board, President 1996 460,000 500,000 100,000 and Chief Executive Officer (1) Anthony Sbarro 1998 305,769 200,000 --- Vice Chairman of 1997 300,000 150,000 100,000 the Board 1996 300,000 --- --- and Treasurer (1) Joseph Sbarro 1998 305,769 200,000 --- Senior 1997 300,000 150,000 100,000 Executive Vice 1996 276,000 150,000 50,000 President and Secretary Anthony J. Missano 1998 203,846 100,000 --- Corporate Vice 1997 200,000 75,000 80,000 President-Operations 1996 157,000 65,000 --- Gennaro A. Sbarro 1998 203,846 100,000 --- Corporate Vice 1997 200,000 75,000 80,000 President-Franchising 1996 129,000 45,000 --- Gennaro J. Sbarro 1998 203,846 100,000 --- Corporate Vice 1997 200,000 75,000 80,000 President-Operations 1996 155,000 65,000 --- - ----------
(1) Prior to May 1996, Mario Sbarro served as Chairman of the Board of Directors and Chief Executive Officer of the Company and Anthony Sbarro served as President and Treasurer of the Company. -26- Option/SAR Grants in Last Fiscal Year The Company's 1991 Stock Incentive Plan permits the grant of options and stock appreciation rights to employees of, and consultants and advisors to, the Company and its subsidiaries, including officers and directors who are serving in such capacities. During fiscal 1998, the Company did not grant any options to the executive officers named in the Summary Compensation Table. No stock appreciation rights have been granted to date. Aggregated Option Exercises in Last Fiscal Year and Year-End Values No options to purchase shares of the Company's Common Stock were exercised during the Company's fiscal year ended January 3, 1999 by the executive officers named in the Summary Compensation Table. The following table sets forth certain information concerning the number and value at January 3, 1999 of shares of Common Stock subject to unexercised options held by the executive officers named in the Summary Compensation Table. Number of Shares Value of Unexercised Underlying Unexercised In-the-Money Options Options at Fiscal Year-End at Fiscal Year-End (1) Name (Exercisable/Unexercisable) (Exercisable/Unexercisable) ------ ----------------------------- --------------------------- Mario Sbarro 303,333/316,667 $876,037/202,083 Anthony Sbarro 165,000/100,000 $414,060/106,250 Joseph Sbarro 166,667/133,333 $438,018/154,167 Anthony J. Missano 12,500/ 80,000 $23,438/85,000 Gennaro A. Sbarro 18,251/ 80,000 $49,312/85,000 Gennaro J. Sbarro 12,500/ 80,000 $23,438/85,000 - ----------------- (1) Represents the number of shares subject to the option multiplied by the difference between the closing price of the Company's Common Stock on the New York Stock Exchange on December 31, 1998, the last trading day of the Company's 1998 fiscal year, and the respective exercise prices. -27- Compensation of Directors Non-employee directors currently receive a retainer at the rate of $16,000 per annum, $1,000 for each meeting of the Board of Directors attended and $500 for each meeting attended of a Committee of the Board of Directors on which they serve, if such meeting is not held on the same day as a meeting of the Board of Directors. Members of the Special Committee (as defined below) received additional compensation for service on that committee, as described below. Members of the Board of Directors also are reimbursed for reasonable travel expenses incurred in attending Board of Directors and Committee meetings. The regular compensation of employee directors of the Company covers compensation for services as a director. The Company's 1993 Non-Employee Director Stock Option Plan, as amended, which was approved by shareholders at the Company's 1993 Annual Meeting of Shareholders, provides for the automatic grant of an option to purchase 3,750 shares of Common Stock to each non-employee director in office immediately after each annual meeting of shareholders. Each option has a ten year term, is subject to early termination in certain instances, and is exercisable commencing one year following the date of grant at an exercise price equal to 100% of the fair market value of the Common Stock on the date of grant. Compensation of Special Committee Members In January 1998, the Board of Directors formed a special committee (the "Special Committee"), consisting of Harold L. Kestenbaum, Richard A. Mandell, Paul A. Vatter and Terry Vince, to evaluate the Initial Proposal. The Special Committee was disbanded in June 1998 when the Initial Proposal was terminated and was reappointed in November 1998 to evaluate the Revised Proposal. As compensation for serving on the Special Committee (including consideration of both the Initial Proposal and the Revised Proposal), the Company agreed to pay to each member of the Special Committee a fee equal to (i) $2,500 for services rendered in any day on which the member expended four hours or more in performing services as a member of the Special Committee and (ii) $1,250 for each day in which such member expended a reasonable amount of time, but less than four hours, in performing services as a member of the Special Committee. In addition to the foregoing fees, Mr. Mandell, as Chairman of the Special Committee, received $10,000 with respect to the Special Committee's consideration of the Initial Proposal and is entitled to receive $10,000 with respect to the Special Committee's consideration of the Revised Proposal. Each member of the Special Committee is being reimbursed for all out-of-pocket expenses incurred in performing his services. Through March 15, 1999, the members of the Special Committee have earned the following cash compensation (exclusive of travel reimbursements) from the Company in connection with the Initial Proposal and the Revised Proposal: Richard A. Mandell $32,500 Harold L. Kestenbaum 10,000 Paul A. Vatter 5,000 Terry Vince 5,000 -28- Compensation Committee Interlocks and Insider Participation Bernard Zimmerman and Company, Inc., of which Bernard Zimmerman is President and a majority shareholder, renders financial and consulting assistance to the Company, for which it received fees of $140,400 during the Company's fiscal year ended January 3, 1999. Mr. Zimmerman is Chairman of the Compensation Committee of the Board of Directors, but does not serve on the Stock Option Committee of the Board. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of shares of the Company's Common Stock as of March 1, 1999 (except as noted below) with respect to (i) holders known to the Company to beneficially own more than five percent of the outstanding Common Stock of the Company, (ii) each director of the Company, (iii) each executive officer named in the Summary Compensation Table under the caption "Executive Compensation" in Item 11 of this Report and (iv) all directors and executive officers of the Company as a group. The Company understands that, except as noted below, each beneficial owner has sole voting and investment power with respect to all shares attributable to such owner.
Amount and Nature of Percent of Beneficial Owner Beneficial Ownership (1) Class (2) - ---------------- ------------------------ ----------- Mario Sbarro (3)................................ 1,867,586 (4) 8.9% Anthony Sbarro (3).............................. 1,432,133 (5) 6.9% Joseph Sbarro (3)............................... 2,007,913 (6) 9.7% Trust of Carmela Sbarro (3)..................... 2,497,884 (7) 12.2% Carmela Sbarro.................................. 400 * Harold L. Kestenbaum............................ 25,500 (8) * Richard A. Mandell.............................. 18,750 (9) * Paul A. Vatter.................................. 21,000 (9) * Terry Vince..................................... 22,050 (9) * Bernard Zimmerman............................... 61,700 (10) * Robert S. Koebele............................... 25,666 (11) * Anthony J. Missano.............................. 39,166 (12) * Gennaro A. Sbarro............................... 54,187 (13) * Gennaro J. Sbarro............................... 39,166 (12) * Joel M. Greenblatt (14)......................... 1,917,329 (14) 9.3% Bank One Corporation (15). . . . . . . . . . 1,213,600 (15) 5.9% All directors and executive officers as a group (18 persons).................................. 8,171,207 (16) 37.9%
(1) Shares subject to options are considered beneficially owned to the extent currently exercisable or exercisable within 60 days after March 1, 1999. (2) Asterisk indicates less than 1%. Shares subject to such options that are considered to be beneficially owned are considered outstanding only for the purpose of computing the percentage of outstanding Common Stock which would be owned by the optionee if such options were exercised, but (except for the calculation of beneficial ownership by all executive -29- officers and directors as a group) are not considered outstanding for the purpose of computing the percentage of outstanding Common Stock owned by any other person. (3) The business address of each of Mario Sbarro, Joseph Sbarro, Anthony Sbarro and the Trust of Carmela Sbarro is 401 Broadhollow Road, Melville, New York 11747. (4) Includes (i) 5,450 and 740 shares owned by a charitable foundation supported by Mario Sbarro and his wife, of which Mr. Sbarro, his wife and Bernard Zimmerman, a director of the Company, are the directors, and by Mr. Sbarro's wife, respectively (as to all of which shares Mr. Sbarro disclaims beneficial ownership), and (ii) 336,666 shares subject to options. Excludes (i) the shares held by the Trust of Carmela Sbarro, of which trust Mario Sbarro serves as a trustee (as to which shares Mr. Sbarro may be deemed a beneficial owner with shared voting and dispositive power). (5) Includes 198,333 shares subject to options. (6) Includes (i) 609,000 shares owned by a partnership of which Mr. Sbarro is the sole general partner and (ii) 199,999 shares subject to options. (7) The trust was created by Carmela Sbarro for her benefit and for the benefit of her descendants, including Mario, Joseph and Anthony Sbarro. The trustees of the trust are Franklin Montgomery, whose business address is 488 Madison Avenue, New York, New York 10022, and Mario Sbarro. As trustees, Franklin Montgomery and Mario Sbarro may be deemed to be the beneficial owners of these shares with shared voting and dispositive power. (8) Represents (i) 6,750 shares owned by Mr. Kestenbaum's wife, as to which shares Mr. Kestenbaum disclaims beneficial ownership, and (ii) 18,750 shares subject to options. (9) Includes 18,750 shares subject to options. (10) Includes (i) 5,450 shares owned by a family foundation supported by Mario Sbarro and Mario Sbarro's wife, of which Mr. Zimmerman is a director (as to which shares Mr. Zimmerman disclaims beneficial ownership), and (ii) 18,750 and 37,500 shares subject to options held, respectively, by Mr. Zimmerman individually and Bernard Zimmerman and Company, Inc., a company of which Mr. Zimmerman is President and a majority shareholder. (11) Includes 14,666 shares subject to options. (12) Represents shares subject to options. (13) Includes (i) 2,400 shares owned by Mr. Sbarro's wife, as to which shares Mr. Sbarro disclaims beneficial ownership, and (ii) 16,584 shares subject to options. (14) Based solely upon information as of March 3, 1999 contained in a Schedule 13G dated March 5, 1999 filed with the Securities and Exchange Commission and the Company by Mr. Greenblatt, Gotham Capital V, LLC, Gotham Capital VI, LLC, and Gotham Capital VII, LLC, each of whose address is 100 Jericho Quadrangle, Suite 212, Jericho, New York 11753. The Schedule 13G indicates that Mr. Greenblatt has sole voting and dispositive power with respect to 41,500 shares and that he shares voting and dispositive power with respect to -30- 974,327 shares with Gotham Capital V, LLC, 489,000 shares with Gotham Capital VI, LLC and 412,502 shares with Gotham Capital VII, LLC. (15) Based solely upon information as of December 31, 1998 contained in a Schedule 13G dated February 1, 1999 filed with the Securities and Exchange Commission and the Company by Bank One Corporation, One First National Plaza, Chicago, Illinois 60670 as parent holding company of NBD Bank (Indiana), NBD Bank (Michigan) and Pegasus Funds. The Schedule 13G indicates that Bank One Corporation has sole voting and dispositive power with respect to 1,209,900 shares and that it has sole voting power with respect to another 3,700 shares. The Company believes Bank One Corporation may have sold some or all of the shares beneficially owned by it. (16) Includes (i) 5,450 owned by a charitable foundation, of which a director and executive officer of the Company, his wife and another director of the Company are directors, as to which shares each disclaims beneficial ownership, (ii) an aggregate of 17,200 shares owned by spouses, and as custodian for minor children, of directors and executive officers, as to which shares beneficial ownership is disclaimed and (iii) 1,052,661 shares subject to options. -31- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company is the sole tenant of its administrative office building, which is leased from the Suffolk County Industrial Development Agency (the "Agency") by Sbarro Enterprises, L.P., a Delaware limited partnership, and, in turn, subleased to the Company. The annual rent payable pursuant to the sublease is $337,000 for the last five years of the sublease term, which expires in 2001. In addition, the Company is obligated to pay real estate taxes, utilities, insurance and certain other expenses for the facility. The Company believes that such rents are comparable to the rents that would be charged by an unaffiliated third party. Principal and interest and any premium on the bonds issued by the Agency to fund construction of the facility are the responsibility of Sbarro Enterprises, L.P. and are severally guaranteed by Mario, Joseph and Anthony Sbarro. The limited partners of Sbarro Enterprises, L.P. are Mario, Joseph, Anthony and Carmela Sbarro. In addition to the compensation of Mario, Anthony, Joseph, Gennaro A. and Gennaro J. Sbarro and Anthony J. Missano, (i) Carmela Sbarro, the mother of Mario, Anthony and Joseph Sbarro, who was a co-founder of the Company and serves as Vice President and a director of the Company, and (ii) Carmela N. Merendino, a daughter of Mario Sbarro, who serves as Vice President - Administration of the Company, received $101,923 and $126,442, respectively, from the Company for services rendered during fiscal 1998. In addition, other members of the immediate families of Mario, Anthony, Joseph and Carmela Sbarro earned an aggregate of $523,423 (eleven persons) for services rendered as employees of the Company during fiscal 1998. The Company, its subsidiaries and the joint ventures in which the Company has an interest have purchased printing services from a corporation owned by a son-in-law of Mario Sbarro for which they paid, in the aggregate, $322,768 during fiscal 1998. The Company believes that these services were provided on terms comparable to those that would have been available from unrelated third parties. Companies owned by a son of Anthony Sbarro and a company owned by the daughter of Joseph Sbarro paid royalties to the Company under franchise agreements containing terms similar to those in agreements entered into by the Company with unrelated franchisees. Such royalties paid to the Company aggregated $95,151 and $10,406, respectively, during fiscal 1998. -32- 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 January 3, 1999 and December 28, 1997 F-2 Consolidated Statements of Income for each of the years in the three-year period ended January 3, 1999 F-4 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended January 3, 1999 F-6 Consolidated Statements of Cash Flows for each of the years in the three-year period ended January 3, 1999 F-7 Notes to Consolidated Financial Statements F-9 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 The only Report on Form 8-K filed by the Company during the fourth quarter of the Company's fiscal year ended January 3, 1999 was dated (date of earliest event reported) November 25, 1998 reporting under Item 5, Other Events, and Item 7, Financial Statements, Proforma Financial Information and Exhibits. Subsequent to year-end, the Company filed a Report on Form 8-K dated (date of earliest event reported) January 19, 1999 reporting under Item 5, Other Events, and Item 7, Financial Statements, Proforma Financial Information and Exhibits. No financial statements were filed with either report. -33- (c) Exhibits: *2.01 Agreement and Plan of Merger dated as of January 19, 1999 among the Company, Sbarro Merger LLC, a New York limited liability company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants. (Exhibit 2 to the Company Current Report on Form 8-K dated (date of earliest event reported) January 19, 1999, File No. 1-8881) * 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) + *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, -34- 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-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) * 10.05 Memorandum of Understanding dated January 19, 1999 among counsel to the plaintiffs and counsel to the defendants in the various class action lawsuits instituted by certain shareholders of the Company. (Exhibit 99.01 to the Company Current Report on Form 8-K dated (date of earliest event reported) January 19, 1999, 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. -35- 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 April 2, 1999. SBARRO, INC. By: /s/ MARIO SBARRO ------------------------------------- Mario Sbarro, Chairman of the Board -36- 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 April 2, 1999 - -------------------------------------------- (Principal Executive Officer) Mario Sbarro and Director /s/ ROBERT S. KOEBELE Vice President-Finance April 2, 1999 - --------------------------------------------- (Chief Financial and Robert S. Koebele Accounting Officer) /s/ JOSEPH SBARRO Director April 2, 1999 - --------------------------------------------- Joseph Sbarro /s/ ANTHONY SBARRO Director April 2, 1999 - --------------------------------------------- Anthony Sbarro /s/ HAROLD KESTENBAUM Director April 2, 1999 - --------------------------------------------- Harold Kestenbaum /s/ RICHARD A. MANDELL Director April 2, 1999 - --------------------------------------------- Richard A. Mandell /s/ CARMELA SBARRO Director April 2, 1999 - --------------------------------------------- Carmela Sbarro -37- Signature Title Date --------- ------ ---- /s/ PAUL A. VATTER Director April 2, 1999 --------------------------------------------- Paul A. Vatter /s/ TERRY VINCE Director April 2, 1999 --------------------------------------------- Terry Vince /s/ BERNARD ZIMMERMAN Director April 2, 1999 --------------------------------------------- Bernard Zimmerman
-38- 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 January 3, 1999 and December 28, 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended January 3, 1999. 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 January 3, 1999 and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1999, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP New York, New York February 10, 1999 F-1
SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (In thousands) -------------------------------------------------------------- January 3, 1999 December 28, 1997 ----------------------- -------------------------- Current assets: Cash and cash equivalents $150,472 $119,810 Marketable securities - 7,500 Receivables: Franchisees 1,342 810 Other 2,185 1,565 ------------ ------------ 3,527 2,375 ------------ ------------ Inventories 3,122 2,962 Prepaid expenses 1,291 1,768 ------------ ----------- Total current assets 158,412 134,415 Property and equipment, net (Note 3 and 10) 138,126 136,798 Other assets, net 6,630 7,436 ----------- ----------- $303,168 $278,649 ======== ========
(continued) F-2
SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands) ---------------------------------------------------------- January 3, 1999 December 28, 1997 ---------------------- -------------------------- Current liabilities: Accounts payable $ 7,122 $10,086 Accrued expenses (Note 4) 25,764 26,025 Dividend payable - 5,521 Income taxes (Note 5) 4,146 4,777 ---------- -------- Total current liabilities 37,032 46,409 Defered income taxes (Note 5) 9,219 11,801 Commitments and contingencies (Notes 6 and 7) Shareholder's equity (Note 9): Preferred stock, $1 par value: authorized 1,000,000 shares; none issued Common stock, $1.01 par value; authorized 40,000,000 shares at January 3, 1999 and 20,446,654 shares at December 28, 1997 205 204 Additional paid-in capital 34,587 32,444 Retained earnings 222,125 187,791 --------- --------- 256,917 220,439 --------- --------- $303,168 $278,649 ======== ========
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 ------------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 --------- ------------ ----------- Revenues: Restaurant sales $361,534 $337,723 $319,315 Franchise related income 8 578 7,360 6,375 Interest income 5,120 4,352 3,798 ---------- ---------- ---------- Total revenues 375,232 349,435 329,488 -------- -------- -------- Costs and expenses: Cost of food and paper products 76,572 69,469 68,668 Restaurant operating expenses: Payroll and other employee benefits 93,367 84,910 78,258 Occupancy and other expenses 101,013 93,528 85,577 Depreciation and amortization 22,429 23,922 22,910 General and administrative 19,708 17,762 14,940 Provision for unit closings (Note 10) 2,515 3,300 - Terminated transaction costs (Note 6) 986 - - Litigation settlement and related costs (Note 7) 3,544 - - Loss on sale of land to be sold (Note 3) 1,075 - - Other income (2,680) (1,653) (1,171) --------- --------- --------- Total costs and expenses 318,529 291,238 269,182 -------- -------- -------- Income before income taxes and cumulative effect of change in method of accounting for start-up costs 56,703 58,197 60,306 Income taxes (Note 5) 21,547 22,115 22,916 ------ ------ ------ Income before cumulative effect of accounting change 35,156 36,082 37,390 Cumulative effect of change in method of accounting for start-up costs, net of income taxes of $504 (822) - - --------- ------------ ------------ Net income $34,334 $36,082 $37,390 ======= ======= =======
F-4
SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data) -------------------------------------------------------- For the Years Ended -------------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 --------- ----------- ------------ Per share information: Net income per share: Basic: Income before accounting change $1.71 $1.77 $1.84 Accounting change (.04) - - ------- -------- -------- Net income $1.67 $1.77 $1.84 ===== ===== ===== Diluted: Income before accounting change $1.71 $1.76 $1.83 Accounting change (.04) - - ------ ------- ------- Net Injcome $1.67 $1.76 $1.83 ===== ===== ===== Shares used in computing net income per share: Basic 20,516,890 20,426,678 20,369,128 ========== ========== ========== Diluted 20,583,367 20,504,303 20,404,620 ========== ========== ========== Dividends declared (Note 11) - $1.08 $0.92 ================= =============== ================
See notes to consolidated financial statements F-5
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 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 Exercise of stock options 84,989 1 2,143 2,144 Net income 34,334 34,334 ----------------- -------- ----------- ---------- -------- Balance at January 3, 1999 20,531,643 $205 $34,587 $222,125 $256,917 ========== ==== ======= ======== ========
See notes to consolidated financial statements F-6
SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) ----------------------------------------------------- For the Years Ended ----------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 --------- ----------- ------------ Operating activities: Net income $34,334 $36,082 $37,390 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in method of accounting for start-up costs 822 Depreciation and amortization 22,429 23,922 22,910 Decrease in deferred income taxes (2,078) (1,844) (442) Provision for unit closings 2,515 3,300 Loss on sale of land to be sold 1,075 Changes in operating assets and liabilities: (Increase) decrease in receivables (1,152) (510) 739 Increase in inventories (160) (121) (78) Decrease (increase) in prepaid expenses 477 (359) 268 Increase in other assets (817) (2,468) (3,048) (Decrease) increase in accounts payable and accrued expenses (2,610) 3,534 (4,309) Increase (decrease) in income taxes payable (631) (510) 579 ---------- --------- --------- Net cash provided by operating activities 54,204 61,026 54,009 -------- -------- -------
(continued) F-7
SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands) ----------------------------------------------------- For the Years Ended ----------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 ---- ---- ---- Investing activities: Proceeds from maturities of marketable securities 7,500 2,500 Purchases of property and equipment (27,717) (28,556) (25,928) Proceeds from disposition of property and equipment 52 34 266 ---------- ---------- --------- Net cash used in investing activities (20,165) (26,022) (25,662) ------- ------ -------- Financing activities: Proceeds from exercise of stock options 2,144 1,225 890 Cash dividends paid (5,521) (21,237) (17,920) -------- ------ -------- Net cash used in financing activities (3,377) (20,012) (17,030) --------- -- ------ -------- Increase in cash and cash equivalents 30,662 14,992 11,317 Cash and cash equivalents at beginning of year 119,810 104,818 93,501 --------- --------- --------- Cash and cash equivalents at end of year $150,472 $119,810 $104,818 ======== ======== ========
See notes to consolidated financial statements F-8 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 had classified its investments in marketable securities as "held to maturity". These investments were stated at amortized cost, which approximated market, and were comprised primarily of direct obligations of the U.S. Government and its agencies. All previous investments in marketable securities matured during fiscal 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 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-9 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of significant accounting policies (continued): Deferred charges: The Company accounts for pre-opening and similar costs in accordance with Statement of Position (SOP) 98-5 of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants which requires companies to write off all such costs, net of tax benefit, as a "cumulative effect of accounting change" and to expense all such costs as incurred in the future. In accordance with its early application provisions, the Company implemented the SOP as of the beginning of its 1998 fiscal year. Application of the SOP resulted in a charge of $1,226,000 ($822,000 or $.04 basic and diluted earnings per share after tax). Comprehensive income: In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income", which establishes new rules for the reporting of comprehensive income and its components. The adoption of this statement had no impact on the Company's net income or shareholders' equity. For the 1998, 1997 and 1996 fiscal years, the Company's operations did not give rise to items includible in comprehensive income which were not already included in net income. Therefore, the Company's comprehensive income is the same as its net income for all periods presented. 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 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 9). Accounting period: The Company's fiscal year ends on the Sunday nearest to December 31. The Company's 1998 fiscal year ended January 3, 1999 and contained 53 weeks. All other reported fiscal years contained 52 weeks. F-10 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of significant accounting policies (continued): Per share data: The provisions of SFAS No. 128, "Earnings Per Share" became effective for the Company's 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 No. 128 replaced 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 66,477 in 1998, 77,625 in 1997 and 35,492 in 1996. 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 be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. SFAS No. 121 did not have a material effect on the Company's results of operations or financial position in 1998, 1997 or 1996. Supplemental disclosures of cash flow information: (In Thousands) ------------------------------------------------- For The Years Ended ------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 --------- ----------- ----------- Cash paid for: Income taxes $24,235 $24,297 $23,143 ======= ======= ======= F-11 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. Description of business: The Company and its 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: January 3, December 28, December 29, 1999 1997 1996 --------- ----------- ----------- Company-owned 630 623 597 Franchised 268 239 219 --- --- --- 898 862 816 === === === 3. Property and equipment: (In thousands) --------------------------------------------- January 3, December 28, 1999 1997 Leasehold improvements $191,192 $168,581 Furniture, fixtures and equipment 107,891 97,688 Construction-in-progress (A) 2,662 20,096 ----- ------ 301,745 286,365 Less accumulated depreciation and amortization 163,619 149,567 ------- ------- $138,126 $136,798 ======== ======== (A) During 1998 the Company recorded a charge of $1,075 before tax ($667 or $.03 basic and diluted earnings per share after tax) for the difference between the carrying cost and proposed selling price of a parcel of land being sold by the Company. As of December 28, 1997, construction in progress includes $15,651 related to the acquisition and improvement of the Company's new corporate headquarters. 4. Accrued expenses: (In thousands) ---------------------------------------- January 3, December 28, 1999 1997 Compensation $4,109 $5,051 Payroll and sales taxes 3,193 3,494 Rent 6,786 6,699 Provision for unit closings (Note 10) 2,867 4,351 Other 8,809 6,430 ----- ----- $25,764 $26,025 ======= ======= F-12 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Income taxes: (In Thousands) --------------------------------------------------- For The Years Ended --------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 --------- ----------- ----------- Federal: Current $19,421 $19,868 $19,216 Deferred (2,209) (1,557) (322) ------ ------ ---- 17,212 18,311 18,894 ------ ------ ------ State and local: Current 4,708 4,091 4,142 Deferred (373) (287) (120) ---- ---- ---- 4,335 3,804 4,022 ----- ----- ----- $21,547 $22,115 $22,916 ======= ======= ======= Deferred income taxes are comprised of the following: (In thousands) ------------------------------------------ January 3, December 28, 1999 1997 --------- ----------- Depreciation and amortization $15,805 $15,782 Deferred charges - 475 Other 101 60 --- -- Gross deferred tax liabilities 15,906 16,317 ------ ------ Accrued expenses (4,776) (2,431) Deferred income (1,483) (1,949) Other (428) (136) ---- ---- Gross deferred tax assets (6,687) (4,516) ------ ------ $9,219 $11,801 ====== ======= F-13 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 January 3, 1999, December 28, 1997, and December 29, 1996) as follows:
(In Thousands) ------------------------------------------------------------------ For The Years Ended ------------------------------------------------------------------ January 3, December 28, December 29, 1999 1997 1996 --------- ----------- ----------- Computed "expected" tax expense $19,382 $20,369 $21,108 Increase (reduction in income taxes resulting from: State and local income taxes, net of Federal income tax benefit 2,725 2,429 2,614 Tax exempt interest income (43) (59) (63) Other, net (517) (624) (743) ---- ---- ---- $21,547 $22,115 $22,916 ======= ======= =======
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 ----------------------------------------- January 3, December 28, December 29, 1999 1997 1996 --------- ----------- ----------- Depreciation and amortization $(1,891) $(1,824) $(1,397) Accrued expenses (261) (624) 1,791 Other (430) 604 (836) ---- --- ---- $(2,582) $(1,844) $ (442) ======= ======= ======= F-14 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Proposed merger: On January 19, 1999, the Company entered into a merger agreement for the merger of a company owned by members of the Sbarro family, the Company's principal shareholders, with and into the Company in which all outstanding Common Stock of the Company not owned by those shareholders are to be converted into the right to receive $28.85 in cash. The shares to be purchased comprise approximately 65.6% of the Company's outstanding shares of Common Stock. In addition, all outstanding stock options, including those held by those members of the Sbarro family, will be terminated (see Note 9). For each such option, the holder thereof will be paid the difference between $28.85 and the exercise price per share, multiplied by the total number of shares of Common Stock subject to such option. The merger agreement contains certain conditions to closing, including, among other things, (i) approval by a majority of the votes cast (excluding votes cast by the Sbarro Family, abstentions and broker non- votes) at a meeting of the Company's shareholders to be called to consider adoption of the merger agreement, (ii) receipt of financing for the transactions contemplated by the merger agreement, (iii) the continued suspension of dividends by the Company and (iv) the settlement of shareholder class action lawsuits that have been filed relating to the merger. Following the Company's announcement of the proposal by members of the Sbarro family for the merger, seven class action lawsuits were instituted by shareholders against the Company, those members of the Sbarro Family who are directors of the Company and all or some of the other directors of the Company. While the complaints in each of the lawsuits vary, in general, they allege that the directors breached fiduciary duties, that the then proposed price of $27.50 to be paid to shareholders other than the Sbarro Family was inadequate and that there were inadequate procedural protections for those shareholders. Although varying, the complaints seek, generally, a declaration of a breach of, or an order requiring the defendants to carry out, their fiduciary duties to the plaintiffs, damages in unspecified amounts alleged to be caused to the plaintiffs, other relief (including injunctive relief or rescission or rescissory damages if the transaction is consummated), and costs and disbursements, including a reasonable allowance for counsel fees and expenses. On January 19, 1999, counsel for all of the plaintiffs and counsel for all of the defendants entered into a Memorandum of Understanding pursuant to which an agreement in principle to settle all of the lawsuits was reached and the Sbarro Family agreed to an increase in the merger consideration to $28.85 per share. The Memorandum of Understanding states that plaintiffs' counsel intend to apply to the Court for an award of attorneys' fees and disbursements in an amount of no more than $2.1 million to be paid by the Company, which the defendants have agreed not to oppose. The defendants are also responsible for providing notice of the settlement to all class members. The settlement would result in the complete discharge and bar of all claims against, past, present and future officers and directors of the Company and others associated with the merger with respect to matters and issues of any kind that have been or could have been asserted in these lawsuits. The settlement is subject to, among other things, (i) completion of a formal stipulation of settlement, (ii) certification of the lawsuits as a class action covering all record and beneficial owners of the Common Stock during the period beginning on November 25, 1998 through the effective date of the merger, (iii) court approval of the settlement and (iv) consummation of the merger. It is a condition to the Sbarro family's obligations under the merger agreement that holders of no more than 1,000,000 shares of Common Stock request exclusion from the settlement. F-15 In connection with the termination of negotiations for the initial proposal of the Company's acquisition of all shares of common stock not owned by such members of the Sbarro family, in fiscal 1998, the Company recorded a charge of $986,000 ($611,000 or $.03 basic and diluted earnings per share after tax). 7. 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 ------------------------------------------ January 3, December 28, December 29, 1999 1997 1996 ---- ---- ---- Minimum rentals $43,387 $40,365 $36,383 Common area charges 13,314 12,541 11,303 Contingent rentals 3,011 2,910 2,819 --------- --------- --------- $59,712 $55,816 $50,505 ======= ======= ======= Future minimum rental and other payments required under non-cancelable operating leases for Company- operated restaurants that were open on January 3, 1999 and the existing leased administrative and support function office (Note 8) are as follows (in thousands): Years ending: ------------ January 2, 2000 $65,075 December 31, 2000 63,472 December 30, 2001 60,409 December 29, 2002 56,000 December 28, 2003 51,180 Later years 134,673 ------- $430,809 ======== F-16 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. Commitments and contingencies (continued): The Company is the principal lessee under operating leases for certain franchised restaurants which are subleased to the franchisee. 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 January 3, 1999 are as follows (in thousands): Years ending: ------------ January 2, 2000 $1,352 December 31, 2000 1,088 December 30, 2001 954 December 29, 2002 626 December 28, 2003 475 Later years 727 --------- $5,222 ========== As of February 10, 1999, future minimum rental payments required under non-cancelable operating leases for restaurants which had not as yet opened as of January 3, 1999 are as follows (in thousands): Years ending: ------------ January 2, 2000 $1,537 December 31, 2000 2,023 December 30, 2001 2,026 December 29, 2002 1,931 December 28, 2003 2,053 Later years 10,923 -------- $20.493 ======== The Company is a party to contracts aggregating $3,159,000 with respect to the construction of restaurants. Payments of approximately $385,000 have been made on those contracts as of January 3, 1999. 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. The Company is a guarantor of its pro rata interest (up to $4,400,000) of a line of credit granted to one of the joint ventures in which the Company is a partner. F-17 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Contingencies: In December 1998, the Court approved, and Company completed, the settlement of an action entitled Kenneth Hoffman and Gloria Curtis, on behalf of themselves and all others similarly situated v. Sbarro, Inc. that was pending in the United States District Court for the Southern District of New York. The plaintiffs, former restaurant level management employees, alleged 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 settlement resulted in a one-time charge of $3,544,000 before tax or $2,197,000 ($.11 basic and diluted earnings per share after tax) in fiscal 1998. 8. 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 in Commack for its present administrative and support function offices. For 1998 and 1997 and for each of the remaining years of the lease, the rent expense is $337,000 per year. In 1996, the Company incurred rent expense for such building of $298,000. 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 $140,400 in 1998, $116,400 in 1997 and $106,100 in 1996. 9. Stock options: The Company's Board of Directors has adopted, and its 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 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 1998, 1997 and 1996, each of the five non-employee directors were granted options to purchase 3,750 shares at $ 24.06, $28.88 and $26.88 per share, respectively. In 1997, options to purchase an aggregate of 11,250 shares granted to a deceased director were exercised at prices ranging from $21.50 to $23.71. F-18 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. Stock options (continued): A summary of the status of the Company's option plans is presented in the table below:
1998 1997 1996 ---- ---- ---- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Options outstanding, beginning of period 1,638,339 $25.85 934,836 $25.57 717,712 $24.97 Granted 23,750 $24.22 777,750 $25.96 378,750 $25.55 Exercised (84,989) $25.23 (53,745) $22.78 (47,426) $18.24 Canceled or expired (16,668) $25.15 (20,502) $24.66 (114,200) $24.84 ---------------------- --------------------- --------------------- Options outstanding, end of period 1,560,432 $25.87 1,638,339 $25.85 934,836 $25.57 Options exercisable, end of period 617,515 $25.99 573,880 $26.05 534,214 $25.89
Of the options outstanding at January 3, 1999, options to purchase 78,182 shares had exercise prices ranging from $15.17 to $21.83 per share, with a weighted average exercise price of $21.36 per share and a weighted average remaining contractual life of 5.53 years, of which options to purchase 76,515 shares were exercisable, with a weighted average exercise price of $21.36 per share. The remaining options to purchase 1,482,250 shares had exercise prices ranging from $23.05 to $28.88 per share, with a weighted average exercise price of $26.11 per share and a weighted average remaining contractual life of 6.8 years, of which options to purchase 541,000 shares are exercisable, with a weighted average exercise price of $26.65 per share. At January 3, 1999, there were an aggregate of 2,054,730 shares available for option grants under the 1991 and 1993 Plans. 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 50,000 shares, respectively, at $24.75 per share; and 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. See Note 6 for the effect of the proposed acquisition of all shares not owned by the Sbarro family on the options outstanding as of January 3, 1999. F-19 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has adopted the pro forma disclosure provisions of 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 have approximated the pro forma amounts below: (In thousands, except per share data) Net income: 1998 1997 1996 ---- ---- ---- As Reported 34,334 36,082 37,390 ====== ====== ====== Pro Forma 33.770 35,089 37,160 ====== ====== ====== Per share information: Net income per share (as reported): Basic $1.67 $1.77 $1.84 ===== ===== ===== Diluted $1.67 $1.76 $1.83 ===== ===== ===== Net income per share (pro forma): Basic $1.65 $1.72 $1.82 ===== ===== ===== Diluted $1.64 $1.71 $1.82 ===== ===== ===== 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: 1998 1997 1996 ---- ---- ---- Expected life (years) .5 1.5 4 Interest rate 5.15% 5.82% 6.53% Volatility 31% 21% 28% Dividend yield 0.00% 4.00% 3.50% Weighted average fair value of options granted $2.38 $2.79 $5.75 ===== ===== ===== 10. Provision for unit closings: A provision for restaurant closings of $2,515,000 ($1,559,000 or $.08 basic and diluted earnings per share after tax) was established in fiscal 1998 relating to the closing of 20 restaurant locations. 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. 11. Dividends: 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. Dividends were thereafter suspended pending consideration by the Company of proposals by certain members of the Sbarro family for the Company's acquisition of all Common Stock not owned by them and consideration of other strategic alternatives. F-20 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. Quarterly financial information (unaudited):
(In thousands, except share data) First Second Third Fourth Quarter Quarter Quarter Quarter (b) ------- ------- ------- ---------- Fiscal year 1998 ---------------- Revenues $101,883 $78,844 $85,907 $108,598 Gross profit (a) 77,463 60,142 65,035 82,322 Net income (b) 7,138 5,107 7,081 15,008 ========== ======== ======== ====== Per share information: Net income per share: Basic $.35 $.25 $.34 $.73 ==== ==== ==== ==== Diluted $.35 $.25 $.34 $.73 ==== ==== ==== ==== Shares used in computation of net income per share: Basic 20,491,939 20,526,633 20,528,309 20,529,006 ----------- ---------- ---------- ---------- Diluted 20,665,846 20,605,477 20,530,983 20,539,488 ----------- ---------- ----------- ----------- 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 (c) 7,885 6,733 9,206 12,258 ======== ======== ======== ======= Per share information: Net income per share: Basic $.39 $.33 $.45 $.60 ==== ==== ==== ==== Diluted (d) $.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 ---------- ---------- ---------- ----------
(a) Gross profit represents the difference between restaurant sales and the cost of food and paper products. (b) See Notes 1, 3, 6, 7 and 10 for information regarding unusual charges. (c) See Note 10. (d) The sum of the quarters does not equal the full year per share amounts included in the accompanying statement of income due to the effect of the weighted average number of shares outstanding during the fiscal year as compared to the quarters. F-21 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 10, 1999. 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 10, 1999 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 Balance at Beginning Costs and Accounts Deductions End of Description of Period Expenses Describe Describe Period - ----------- --------- ---------- ---------- ---------- ----------- January 3, 1999: Accumulated amortization of deferred charges (2) $1,269 $(1,269) (1) Accumulated amortization of Canadian development rights (3) 481 $12 493 Accumulated amortization of purchased leasehold rights (3) 96 85 181 ------ ----- -------- ------ $1,846 $97 $(1,269) $674 ====== ==== ======== ===== December 28, 1997 Accumulated amortization of deferred charges $1,436 $1,495 $(1,662) (2) $1,269 Accumulated amortization of Canadian development rights (3) 424 57 481 Accumulated amortization of purchased leasehold rights (3) 943 213 (1,060) (2) 96 ------ ------- --------- -------- $2,803 $1,765 $(2,722) $1,846 ====== ====== ======== ====== December 29, 1996: Accumulated amortization of deferred charges $1,573 $1,432 $(1,569) (2) $1,436 Accumulated amortization of Canadian development rights (3) 368 56 424 Accumulated amortization of purchased leasehold rights (3) 764 179 943 ------- ------- --------- ------- $2,705 $1,667 $(1,569) $2,803 ====== ====== ======== ======
(1) Amount included in cumulative effect of accounting change for start-up costs (2) Write-off of fully amortized deferred charges (3) Included in other assets S-2 EXHIBIT INDEX ------------- Exhibit Number Description - -------------- ------------ *2.01 Agreement and Plan of Merger dated as of January 19, 1999 among the Company, Sbarro Merger LLC, a New York limited liability company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants. (Exhibit 2 to the Company Current Report on Form 8-K dated (date of earliest event reported) January 19, 1999, File No. 1-8881) *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) + *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-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) *10.05 Memorandum of Understanding dated January 19, 1999 among counsel to the plaintiffs and counsel to the defendants in the various class action lawsuits instituted by certain shareholders of the Company. (Exhibit 99.01 to the Company Current Report on Form 8-K dated (date of earliest event reported) January 19, 1999, 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. EX-21.01 2 LIST OF SUBSIDIARIES. EXHIBIT 21.01 NAME OF SUBSIDIARY STATE OF PERCENTAGE (1)(2) INCORPORATION OWNERSHIP - ------------------- ------------- ----------- Sbarro of Virginia, Inc. Virginia 100 Sbarro America, Inc. New York 100 Sbarro's of Texas, Inc. Texas 49(3) Italian Food Franchising, Inc. New York 100 Corest Management, Inc. New York 100 Franrest Management, Inc. New York 100 Larkfield Equipment Corp. New York 100 Sbarro of Roosevelt Field Inc. New York 100 Melville Advertising Agency, Inc. New York 100 401 Broadhollow Realty Corp. New York 100 (1) Excludes subsidiaries which, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary (within the meaning of Rule 1-02(v) of Regulation S-X) as of the end of the fiscal year covered by this report. (2) Indentation indicates the direct parent of an indirect subsidiary. (3) Sbarro America, Inc. beneficially owns 100% of the outstanding shares of the indicated subsidiary. EX-23.01 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 10, 1999, 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 10, 1999, 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 January 3, 1999. New York, New York April 2, 1999 EX-27 4
5 12-MOS JAN-03-1999 JAN-03-1999 150,472 0 3,527 0 3,122 158,412 301,745 163,619 303,168 37,032 0 0 0 205 256,712 303,168 361,534 375,232 76,572 169,939 0 0 0 56,703 21,547 0 0 822 0 34,334 1.67 1.67
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