================================================================================
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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
Fiscal Year
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
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-
<PAGE>
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
=== === === === ===
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Long Term
Name and Annual Compensation Compensation
Principal Position Year Salary Bonus Options (#)
- ------------------ ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
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 ---
- ----------
</TABLE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Class (2)
- ---------------- ------------------------ -----------
<S> <C> <C>
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%
</TABLE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/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-
<PAGE>
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
</TABLE>
-38-
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
--------------------------------------------------------------
January 3, 1999 December 28, 1997
----------------------- --------------------------
<S> <C> <C>
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
======== ========
</TABLE>
(continued)
F-2
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands)
----------------------------------------------------------
January 3, 1999 December 28, 1997
---------------------- --------------------------
<S> <C> <C>
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
======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
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
--------- ------------ -----------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
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
--------- ----------- ------------
<S> <C> <C> <C>
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
================= =============== ================
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
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
--------- ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
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
========== ==== ======= ======== ========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
-----------------------------------------------------
For the Years Ended
-----------------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
--------- ----------- ------------
<S> <C> <C> <C>
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
-------- -------- -------
</TABLE>
(continued)
F-7
<PAGE>
<TABLE>
<CAPTION>
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
---- ---- ----
<S> <C> <C>
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
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------------------------------------
For The Years Ended
------------------------------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Quarterly financial information (unaudited):
<TABLE>
<CAPTION>
(In thousands, except share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter (b)
------- ------- ------- ----------
Fiscal year 1998
----------------
<S> <C> <C> <C> <C>
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
---------- ---------- ---------- ----------
</TABLE>
(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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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
- ----------- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
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
====== ====== ======== ======
</TABLE>
(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
<PAGE>
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
<PAGE>
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.
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.
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
<TABLE> <S> <C>
<ARTICLE> 5
<S>
<C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-END> JAN-03-1999
<CASH> 150,472
<SECURITIES> 0
<RECEIVABLES> 3,527
<ALLOWANCES> 0
<INVENTORY> 3,122
<CURRENT-ASSETS> 158,412
<PP&E> 301,745
<DEPRECIATION> 163,619
<TOTAL-ASSETS> 303,168
<CURRENT-LIABILITIES> 37,032
<BONDS> 0
0
0
<COMMON> 205
<OTHER-SE> 256,712
<TOTAL-LIABILITY-AND-EQUITY> 303,168
<SALES> 361,534
<TOTAL-REVENUES> 375,232
<CGS> 76,572
<TOTAL-COSTS> 169,939
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 56,703
<INCOME-TAX> 21,547
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 822
<CHANGES> 0
<NET-INCOME> 34,334
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.67
</TABLE>
