______________________________________________________________________
______________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/ X / Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended October 5, 1997
Commission File Number 1-8881
SBARRO, INC.
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 11-2501939
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
763 Larkfield Road, Commack, New York 11725
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (516) 864-0200
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, and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class Outstanding at November 14, 1997
Common Stock, $.01 par value 20,443,238
______________________________________________________________________
______________________________________________________________________<PAGE>
SBARRO, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION PAGES
Consolidated Financial Statements:
Balance Sheets - October 5, 1997 (unaudited)
and December 29, 1996 . . . . . . . . . . . . . . . . . . . 3-4
Statements of Income (unaudited) - Forty Weeks
ended October 5, 1997 and October 6, 1996 and Twelve
Weeks ended October 5, 1997 and October 6, 1996. . . . . . .5-6
Statements of Cash Flows (unaudited) - Forty
Weeks ended October 5, 1997 and October 6, 1996 . . . . . . 7-8
Notes to Unaudited Consolidated Financial
Statements - October 5, 1997 . . . . . . . . . . . . . . . . 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . .10-13
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . 13
Pg. 2<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
Oct. 5, 1997 Dec. 29, 1996
(unaudited)
Current assets:
Cash and cash equivalents $94,865 $104,818
Marketable securities 2,500 2,500
Receivables:
Franchisees 745 743
Other 1,582 1,122
2,327 1,865
Inventories 2,665 2,841
Prepaid expenses 5,999 1,409
Total current assets 108,356 113,433
Marketable securities 5,000 7,500
Property and equipment, net 134,505 130,993
Other assets:
Deferred charges, net of
accumulated amortization of
$2,475,000 at October 5, 1997
and $1,436,000 at December
29, 1996 1,642 1,633
Other 5,337 5,100
6,979 6,733
$254,840 $258,659
(continued)
Pg. 3<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands)
Oct. 5, 1997 Dec. 29, 1996
(unaudited)
Current liabilities:
Accounts payable $ 5,476 $ 7,173
Accrued expenses 21,656 22,663
Dividend payable - 4,691
Income taxes 641 5,287
Total current liabilities 27,773 39,814
Deferred income taxes 13,461 13,645
Shareholders' equity:
Preferred stock, $1 par value;
authorized 1,000,000 shares;
none issued Common stock, $.01
par value; authorized 40,000,000
shares; issued and outstanding
20,442,238 shares at October 5,
1997 and 20,392,909 shares at
December 29, 1996 204 204
Additional paid-in capital 32,348 31,219
Retained earnings 181,054 173,777
213,606 205,200
$254,840 $258,659
See notes to unaudited consolidated financial statements
Pg. 4<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
For the forty weeks ended:
Oct. 5, 1997 Oct. 6, 1996
Revenues:
Restaurant sales $244,903 $230,047
Franchise related income 5,152 4,698
Interest income 3,288 2,861
Total revenues 253,343 237,606
Costs and expenses:
Cost of food and paper products 50,289 50,481
Restaurant operating expenses:
Payroll and other employee
benefits 63,045 57,845
Occupancy and other 71,554 64,711
Depreciation and amortization 17,999 17,268
General and administrative 13,354 11,470
Other income (1,324) (950)
Total costs and expenses 214,917 200,825
Income before income taxes 38,426 36,781
Income taxes 14,602 13,976
Net income $23,824 $22,805
Per share data:
Earnings per common and common
equivalent share $1.17 $1.12
Weighted average number of
shares used in the computation 20,421,266 20,362,333
See notes to unaudited consolidated financial statements
Pg. 5<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
For the twelve weeks ended:
Oct. 5, 1997 Oct. 6, 1996
Revenues:
Restaurant sales $79,805 $75,916
Franchise related income 1,856 1,592
Interest income 1,017 913
Total revenues 82,678 78,421
Costs and expenses:
Cost of food and paper products 16,491 16,632
Restaurant operating expenses:
Payroll and other
employee benefits 19,946 18,087
Occupancy and other 22,207 20,547
Depreciation and amortization 5,581 5,353
General and administrative 4,093 3,408
Other income (489) (282)
Total costs and expenses 67,829 63,745
Income before income taxes 14,849 14,676
Income taxes 5,643 5,488
Net income $ 9,206 $ 9,188
Per share data:
Earnings per common and common
equivalent share $0.45 $0.45
Weighted average number of shares
used in the computation 20,440,596 20,379,932
See notes to unaudited consolidated financial statements
Pg. 6<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
For the forty weeks ended:
Oct. 5, 1997 Oct. 6, 1996
Operating activities:
Net income $23,824 $22,805
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 17,999 17,268
Deferred income taxes (184) (992)
Changes in operating assets
and liabilities:
(Increase) decrease in
receivables (463) 722
Decrease in inventories 176 367
Increase in prepaid expenses (4,589) (3,645)
Increase in deferred charges (1,048) (1,021)
Increase in other assets (443) (1,369)
Decrease in accounts payable
and accrued expenses (2,261) (6,225)
Decrease in income taxes
payable (4,646) (1,367)
Net cash provided by operating
activities 28,365 26,543
Investing activities:
Proceeds from maturity of
marketable securities 2,500 -
Purchases of property
and equipment (20,709) (19,033)
Net cash used in
investing activities (18,209) (19,033)
(continued)
Pg. 7
SBARRO, INC. AND SUBSIDIARIES<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(In thousands)
For the forty weeks ended:
Oct. 5, 1997 Oct. 6, 1996
Financing activities:
Proceeds from exercise of
stock options 1,129 815
Cash dividends paid (21,238) (17,921)
Net cash used in financing
activities (20,109) (17,106)
Decrease in cash and cash
equivalents (9,953) (9,596)
Cash and cash equivalents at
beginning of period 104,818 93,501
Cash and cash equivalents at
end of period $94,865 $83,905
Supplemental disclosure of
cash flow information:
Cash paid during the period
for income taxes $19,354 $16,321
See notes to unaudited consolidated financial statements
Pg. 8<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions for
Form 10-Q and Regulation S-X related to interim period
financial statements and, therefore, do not include all
information and footnotes required by generally accepted
accounting principles. However, in the opinion of
management, all adjustments (consisting of normal recurring
adjustments and accruals) considered necessary for a fair
presentation of the consolidated financial position of the
Company and its subsidiaries at October 5, 1997 and their
consolidated results of operations for the forty and twelve
weeks ended October 5, 1997 and October 6, 1996 have been
included. The results of operations for the interim periods
are not necessarily indicative of the results that may be
expected for the entire year. Reference should be made to
the annual financial statements, including footnotes
thereto, included in the Company's Annual Report on Form 10-
K for the fiscal year ended December 29, 1996.
2. In February, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share. SFAS No. 128 simplifies the
standards for computing earnings per share previously found
in APB Opinion No. 15, Earnings Per Share and is effective
for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier
adoption is not permitted. The Company will adopt SFAS No.
128 with respect to its report on results of operations for
the fourth quarter of fiscal 1997 and for the year ended
December 28, 1997. Upon adoption, prior period earnings per
share must be restated. The Company does not expect the
adoption of SFAS No. 128 to have a significant impact to its
reported results.
3. The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants has issued an
Exposure Draft Statement of Position (SOP) which, if adopted
in its current form, would require all companies which
capitalize pre-opening and similar costs to write off all
existing such costs, net of tax benefit, as a ``cumulative
effect of accounting change''and to expense all such costs
as incurred in the future. The exposure draft, if enacted,
would be effective beginning with the Company's 1998 fiscal
year. The Company does not expect the proposal, if adopted,
to materially affect future operating income except that, in
the first quarter in which such proposal is effective, the
Company would be required to write off the accumulated costs
($1,235,000 at October 5, 1997) which would be reflected as
a cumulative effect of accounting change ($766,000 after tax
at October 5, 1997).
Pg. 9<PAGE>
SBARRO, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The Company's business is subject to seasonal fluctuations, the
effects of weather and economic conditions. Earnings have been highest in
its fourth quarter due primarily to increased traffic in shopping malls
during the holiday shopping season. Normally, the fourth fiscal quarter
accounts for approximately 40% of net income for the year. In 1996, the
fourth fiscal quarter accounted for 39% of net income for the year. In
1995, the fourth fiscal quarter accounted for 42% of net income for the
year. The length of the holiday shopping period between Thanksgiving and
Christmas and the number of weeks in the fourth quarter can produce changes
in the fourth quarter earnings relationship from year to year.
The following table provides information concerning the number of
Company-owned and franchised restaurants in operation during each indicated
period:
40 Weeks 40 Weeks 12 Weeks 12 Weeks
Ended Ended Ended Ended Fiscal Year
10/05/97 10/06/96 10/05/9710/06/96 1996 1995
Company-owned restaurants:
Opened during period 19 20 5 10 29 44
Acquired from (sold to)
franchisees during
period-net 2 1 1 1 1 -
Closed during period (5) (3) - - (4) (40)
Open at end of period 613 589 613 589 597 571
Franchised restaurants:
Opened during period 31 25 14 11 36 40
Purchased from (sold to)
Company during period-net(2) (1) (1) (1) (1) -
Closed or terminated
during period (22) (13) (3) (7) (16) (2)
Open at end of period 226 211 226 211 219 200
All restaurants:
Opened during period 50 45 19 21 65 84
Closed or terminated
during period (27) (16) (3) (7) (20) (42)
Open at end of period 839 800 839 800 816 771
In addition, franchisees operated six kiosk/cart units at October 5, 1997.
Pg. 10<PAGE>
Restaurant sales from Company-owned units increased 6.5% to
$244,903,000 for the forty weeks ended October 5, 1997 from
$230,047,000 for the comparable period in 1996 and 5.1% to
$79,805,000 for the twelve weeks ended October 5, 1997 from
$75,916,000 for the comparable period in 1996. These increases
resulted primarily from a higher number of units in operation
during both periods of the current fiscal year and selective menu
price increases of approximately .5% and 1% which became
effective in mid April 1996 and mid July 1996. These were
offset, in part, by a decrease in comparable unit sales of .2%
for the forty weeks ended October 5, 1997 and .8% for the twelve
weeks ended October 5, 1997. Comparable unit sales for the
current forty week period were $223,111,000 and for the twelve
week period were $72,018,000. Comparable unit sales are made up
of sales at locations that were open during the entire current
and prior fiscal year.
Franchise related income increased 9.7% to $5,152,000 for the
forty weeks ended October 5, 1997 from $4,698,000 for the
comparable period in 1996. Franchise related income increased
16.6% to $1,856,000 for the twelve weeks ended October 5, 1997
from $1,592,000 for the comparable period in 1996. These
increases resulted from higher continuing royalties due to a
larger number of franchise units in operation in 1997 and an
increase in initial franchise and development fees due to opening
more franchise units in 1997 than in the comparable periods in
1996. During the forty weeks ended October 5, 1997, 22 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, two
franchise units were purchased by the Company.
Interest income increased to $3,288,000 for the forty weeks ended
October 5, 1997 from $2,861,000 for the comparable period in 1996
and to $1,017,000 for the twelve weeks ended October 5, 1997 from
$913,000 for the comparable period in 1996. These increases were
due to higher amounts of cash invested at comparable interest
rates in the current periods over the comparable periods in 1996.
Cost of food and paper products as a percentage of restaurant
sales improved to 20.5% for the forty weeks ended October 5, 1997
from 21.9% for the comparable period in 1996 and to 20.7% for the
twelve weeks ended October 5, 1997 from 21.9% for the comparable
period in 1996. These improvements resulted from lower food
prices, primarily of cheese, lower prices of various paper
products and the effect of the selective menu price increases
implemented in mid 1996.
Restaurant operating expenses - payroll and other employee
benefits increased to 25.7% of restaurant sales for the forty
weeks ended October 5, 1997 from 25.1% for the comparable period
in 1996 and to 25.0% for the twelve weeks ended October 5, 1997
from 23.8% for the comparable period in 1996. These percentage
increases were attributable to the higher costs of providing
benefits to employees and a decrease in comparable unit sales for
Pg. 11<PAGE>
the comparable periods of each year. Restaurant operating
expenses - occupancy and other expenses increased to 29.2% for
the forty weeks ended October 5, 1997 from 28.1% for the
comparable period in 1996 and to 27.8% for the twelve weeks ended
October 5, 1997 from 27.1% for the comparable period in 1996.
These percentage increases were primarily attributable to rent
and rent related charges which increased at a faster rate than
sales.
Depreciation and amortization expenses increased to $17,999,000
for the forty weeks ended October 5, 1997 from $17,268,000 for
the forty weeks ended October 6, 1996 and to $5,581,000 for the
twelve weeks ended October 5, 1997 from $5,353,000 for the twelve
weeks ended October 6, 1996. These increases were primarily the
result of the number of additional Company-owned units in
operation during the forty and twelve weeks ended October 5, 1997
over the comparable periods in 1996.
General and administrative expenses were $13,354,000 or 5.3% of
total revenues for the forty weeks ended October 5, 1997 compared
to $11,470,000 or 4.8% of total revenues for the forty weeks
ended October 6, 1996. General and administrative expenses were
$4,093,000 or 5.0% for the twelve weeks ended October 5, 1997
compared to $3,408,000 or 4.4% for the comparable period in 1996.
These increases were due to the hiring of additional personnel in
anticipation of the Company's development plans and increases in
executive compensation and legal fees.
The effective income tax rate for both the forty weeks ended
October 5, 1997 and October 6, 1996 was 38.0%.
Liquidity and Capital Resources
At October 5, 1997, the Company had cash and cash equivalents and
marketable securities of approximately $97,365,000 and its
working capital was approximately $80,583,000. Cash provided by
operations for the forty weeks ended October 5, 1997 of
$28,365,000 and a portion ($20,709,000) of the available working
capital was used to purchase restaurant property and equipment
and to renovate the Company's new headquarters building and
$21,238,000 to pay four quarterly dividends. The Company
believes, based on current projections, that its liquid assets
presently on hand, together with cash generated from operations,
should be sufficient for its presently contemplated operations,
dividends and the purchase of property and equipment relating to
its development of restaurants, as well as renovating and
equipping the Company's new headquarters building.
Forward-Looking Statements
Information contained in this document concerning future results,
performance or expectations are forward-looking statements that
involve risks and uncertainties. Actual results, performance or
Pg. 12<PAGE>
developments could differ materially from those expressed or
implied by those forward-looking statements as a result of known
or unknown risks, uncertainties and other factors as described
from time to time in the Company's filings with the Securities
and Exchange Commission, press releases and other communications.
Dividends
On February 20, 1997, the Company increased its quarterly cash
dividend to $.27 per share, or an aggregate annual rate of $1.08
per share. This dividend was paid on April 2, 1997 to
shareholders of record on March 18, 1997, and amounted to
$5,510,113.
On May 22, 1997, the Company declared a quarterly cash dividend
of $.27 per share. The cash dividend was paid on July 8, 1997 to
shareholders of record on June 18, 1997, and amounted to
$5,518,774.
On August 20, 1997, the Company declared a quarterly cash
dividend of $.27 per share. The cash dividend was paid on
October 3, 1997 to shareholders of record on September 18, 1997,
and amounted to $5,518,909.
On November 18, 1997, the Company declared a quarterly cash
dividend of $.27 per share. The cash dividend will be paid on
January 2, 1998 to shareholders of record on December 18, 1997.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 13, 1997 in which the
Company reported upon an action entitled Kenneth Hoffman and
Gloria Curtis, on behalf of themselves and all others similarly
situated v. Sbarro, Inc. (commenced on July 18, 1997 in the
United States District Court for the Southern District of New
York). The plaintiffs, former restaurant level management
employees, allege that the Company required general managers and
co-managers to reimburse the Company for cash and certain other
shortages sustained by the Company and thereby lost their status
as managerial employees exempt from the overtime compensation
provisions of the Fair Labor Standards Act (the ``FLSA''). The
plaintiffs seek unpaid overtime compensation, as well as
liquidated damages in an amount equal to any overtime
compensation awarded, reasonable attorney's fees, costs and
expenses. The plaintiffs further seek such further and general
legal and/or equitable relief to which they may be entitled.
Pg. 13<PAGE>
On October 22, 1997, the Court granted plaintiffs'
request to send notices to determine whether similarly situated
past and present employees of the Company wished to join the
lawsuit. The Company had opposed the plaintiffs' request based
upon its belief that it had availed itself of a ``window of
correction''which, under applicable regulations of the FLSA and
court decisions, preserves employees exempt status and thus
precludes any overtime liability. The Company continues to
believe that it has substantial defenses to the claims, including
that it has availed itself of a ``window of correction''. It
intends to appeal this decision at the appropriate time and to
continue vigorously defending this action.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K.
The only Report on Form 8-K was filed by the Company during
the quarter for which this Report is filed was dated (date of
earliest event reported) July 21, 1997 reporting under Item 5,
Other Events, and Item 7, Financial Statements, Pro Forma
Financial Information and Exhibits. No financial statements were
filed with that Report.
Pg. 14<PAGE>
SIGNATURE
Pursuant to the requirements 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.
SBARRO, INC.
Registrant
Date: November 19, 1997 By: /s/ MARIO SBARRO
Mario Sbarro
Chairman of the Board and President
Date: November 19, 1997 By: /s/ ROBERT S. KOEBELE
Robert S. Koebele
Vice President-Finance
Pg. 15<PAGE>
EXHIBIT 27
EXHIBIT INDEX<PAGE>
Exhibit Number Description
27 Financial Data Schedule<PAGE>
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<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> OCT-5-1997
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<PP&E> 279,665
<DEPRECIATION> 145,160
<TOTAL-ASSETS> 254,840
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0
0
<COMMON> 204
<OTHER-SE> 213,402
<TOTAL-LIABILITY-AND-EQUITY> 254,840
<SALES> 244,903
<TOTAL-REVENUES> 253,343
<CGS> 50,289
<TOTAL-COSTS> 134,599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 38,426
<INCOME-TAX> 14,602
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<NET-INCOME> 23,824
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