<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-2.
</TABLE>
Sbarro, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-12.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
SBARRO, INC.
763 LARKFIELD ROAD
COMMACK, NEW YORK 11725
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 21, 1997
To the Shareholders:
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Shareholders (the
"Meeting") of Sbarro, Inc. (the "Company") will be held at the Salute
restaurant, 270 Madison Avenue, at the corner of 39th Street, New York, New
York, on Wednesday, May 21, 1997, promptly at 9:15 A.M., Eastern Daylight
Savings Time, to consider and act upon the following matters:
1. The election of three Class 2 directors to serve until the Company's
Annual Meeting of Shareholders to be held in the year 2000 and until
their respective successors are elected and qualified;
2. A proposal to approve amendments to the Company's 1991 Stock Incentive
Plan;
3. A proposal to approve an amendment to the Company's 1993 Non-Employee
Director Stock Option Plan;
4. A proposal to approve the Company's Performance Incentive Plan;
5. A proposal to ratify the action of the Board of Directors in appointing
Arthur Andersen LLP as the Company's independent public accountants for
the fiscal year ending December 28, 1997; and
6. The transaction of such other business as may properly come before the
Meeting or any adjournment or postponement thereof.
Information regarding the matters to be acted upon at the Meeting is
contained in the accompanying Proxy Statement.
The close of business on April 11, 1997 has been fixed as the record date
for the determination of shareholders entitled to notice of and to vote at the
Meeting or any adjournment or postponement thereof.
A continental breakfast will be available to all attendees beginning at
8:30 A.M.
By Order of the Board of Directors,
JOSEPH SBARRO,
Secretary
Commack, New York
April 29, 1997
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. EACH SHAREHOLDER
IS URGED TO SIGN, DATE AND RETURN THE ENCLOSED FORM OF PROXY WHICH IS BEING
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. AN ENVELOPE ADDRESSED TO THE
COMPANY'S TRANSFER AGENT IS ENCLOSED FOR THAT PURPOSE AND NEEDS NO POSTAGE IF
MAILED IN THE UNITED STATES.
<PAGE> 3
SBARRO, INC.
763 LARKFIELD ROAD
COMMACK, NEW YORK 11725
---------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
MAY 21, 1997
This Proxy Statement is furnished to the holders of Common Stock, par value
$.01 per share ("Common Stock"), of Sbarro, Inc. (the "Company") in connection
with the solicitation of proxies by the Board of Directors of the Company
("Proxy" or "Proxies") for use at the Annual Meeting of Shareholders (the
"Meeting") to be held on Wednesday, May 21, 1997, promptly at 9:15 A.M., Eastern
Daylight Savings Time, at the Salute restaurant, 270 Madison Avenue, at the
corner of 39th Street, New York, New York, and at any adjournment or
postponement thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting. The cost of preparing, assembling and mailing the Notice of
Annual Meeting, this Proxy Statement and Proxies is to be borne by the Company.
The Company will also reimburse brokers who are holders of record of Common
Stock for their expenses in forwarding Proxies and Proxy soliciting material to
the beneficial owners of such shares. In addition to the use of the mails,
Proxies may be solicited without extra compensation by directors, officers and
employees of the Company by telephone, telecopy, telegraph or personal
interview. The approximate mailing date of this Proxy Statement is April 29,
1997.
Unless otherwise specified, all Proxies received will be voted for the
election of all nominees named herein to serve as directors and in favor of each
of the other proposals set forth in the Notice of Annual Meeting accompanying
this Proxy Statement. A Proxy may be revoked at any time before its exercise by
filing with the Secretary of the Company an instrument of revocation or a duly
executed proxy bearing a later date, or by attendance at the Meeting and
electing to vote in person. Attendance at the Meeting will not in and of itself
constitute revocation of a Proxy.
The close of business on April 11, 1997 has been fixed by the Board of
Directors (the "Board of Directors" or the "Board") as the record date (the
"Record Date") for the determination of shareholders entitled to notice of, and
to vote at, the Meeting and any adjournment and postponement thereof. As of the
Record Date, there were 20,407,825 shares of Common Stock outstanding. Each
share of Common Stock outstanding on the Record Date will be entitled to one
vote on all matters to come before the Meeting. A majority of the shares
entitled to vote, represented in person or by proxy, is required to constitute a
quorum for the transaction of business. Proxies submitted which contain
abstentions or broker nonvotes will be deemed present at the Meeting in
determining the presence of a quorum.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides that the Board 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 eight members with three
members in each of Classes 1 and 2 and two members in Class 3. Any director
elected by the Board to fill the existing vacancy in the Board will hold office
until the next meeting of shareholders at which the election of directors is in
the regular order of business and until his or her successor has been elected
and qualified. Each class is elected for a term of three years. The term of
office of the current Class 1, 2 and 3 directors is scheduled to expire at the
1999, 1997 and 1998 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
<PAGE> 4
elected directors to hold office until the third succeeding annual meeting and
the election and qualification of their respective successors.
At the Meeting, shareholders will elect three Class 2 directors to serve
until the annual meeting of shareholders scheduled to be held in the year 2000
and until their respective successors are elected and qualified. Unless
otherwise directed, the persons named in the Proxy intend to cast all Proxies
received for the election of Messrs. Richard A. Mandell, Joseph Sbarro and Terry
Vince (the "nominees") to serve as Class 2 directors upon their nomination at
the Meeting. Each nominee and each other incumbent director was elected by
shareholders. Each of the nominees has advised the Company of his willingness to
serve as a director of the Company. In case any nominee should become
unavailable for election to the Board of Directors for any reason, the persons
named in the Proxies have discretionary authority to vote the Proxies for one or
more alternative nominees who will be designated by the Board of Directors.
The following is a description of the nominees and of each other member of
the Board of Directors:
INFORMATION ABOUT NOMINEES
Class 2 Directors
RICHARD A. MANDELL, 54, has been Vice President -- Private Investments of
Clariden Asset Management (NY) Inc., a subsidiary of Clariden Bank, a private
Swiss bank, since January 1996. 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 a member
of the Audit and Compensation Committees of the Board. Mr. Mandell is also a
director of Trend-Lines, Inc. and U.S.A. Detergents, Inc.
JOSEPH SBARRO, 56, 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. Mr. Sbarro
is a member of the Executive Committee of the Board.
TERRY VINCE, 68, has been Chairman of the Board and President of Sovereign
Hotels (a company which operates hotels) since October 1991 and Chairman of the
Board of Fame Corp. (a food service management company) since January 1994. Mr.
Vince served as Chairman Emeritus (from November 1990 until October 1991) and
Chairman of the Board of Directors and President (from November 1988 until
November 1990) of daka International, Inc. (a food and restaurant service
company), prior to which Mr. Vince served as Chairman of the Board of Directors
and President of daka, Inc., the predecessor of daka International, Inc., from
1973 until November 1988. He became a director of the Company in December 1988.
Mr. Vince is a member of the Compensation and Stock Option Committees of the
Board.
INFORMATION ABOUT DIRECTORS WHOSE TERMS OF OFFICE CONTINUE AFTER THE MEETING
Class 1 Directors
HAROLD L. KESTENBAUM, 47, has been a practicing attorney in New York since
1976. He became a director of the Company in March 1985. Mr. Kestenbaum is
Chairman of the Stock Option Committee and a member of the Audit Committee of
the Board.
ANTHONY SBARRO, 51, 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. Mr. Sbarro is a member of the Executive Committee of the Board.
PAUL A. VATTER, 72, 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
2
<PAGE> 5
Graduate School of Business Administration, where he served as a Professor since
1958. He became a director of the Company in March 1985. Professor Vatter is a
member of the Stock Option Committee of the Board.
Class 3 Directors
MARIO SBARRO, 55, 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 and 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). Mr. Sbarro
is Chairman of the Executive Committee of the Board.
BERNARD ZIMMERMAN, 64, 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 has 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. Mr.
Zimmerman is Chairman of the Audit and Compensation Committees, and is a member
of the Executive Committee, of the Board.
BOARD MEETINGS AND COMMITTEES
The Board of Directors is responsible for the management of the Company.
During the Company's 1996 fiscal year, ended December 29, 1996, the Board of
Directors held four meetings. Each incumbent director attended at least 75% of
all meetings of the Board and committees on which the person served which were
held during that fiscal year.
The Board of Directors has established Executive, Audit, Compensation and
Stock Option Committees. There is no standing nominating committee.
When the Board is not in session, the Executive Committee has, to the
extent permitted by law, all of the power and authority of the Board. The
Executive Committee held no formal meetings during fiscal 1996, but met
informally from time to time during the year.
The principal functions of the Audit Committee are to nominate independent
auditors for appointment by the Board; meet with independent auditors to review
and approve the scope of their audit engagement and the fees related to such
work; meet with the Company's financial management and independent auditors to
review matters relating to internal accounting controls, the Company's
accounting practices and procedures and other matters relating to the financial
condition of the Company; and report to the Board periodically with respect to
such matters. The Audit Committee held two meetings during fiscal 1996.
The Compensation and Stock Option Committees, described below under
"Executive Compensation -- Report of the Compensation and Stock Option
Committees", each held one formal meeting during fiscal 1996. In addition, the
Committees met informally from time to time during the year.
COMPENSATION OF DIRECTORS
Non-employee directors currently receive a retainer at the rate of $16,000
per annum and $1,000 for each meeting of the Board of Directors attended and
$500 for each meeting of a Committee of the Board attended if such meeting is
not held on the same day as a meeting of the Board of Directors. Directors are
also reimbursed for reasonable travel expenses incurred in attending Board and
Committee meetings.
The Company's 1993 Non-Employee Director Stock Option Plan, 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 the
Company's Common Stock to each non-employee director in office immediately after
each Annual Meeting of Shareholders. The term of each option granted under the
plan is five years
3
<PAGE> 6
although it is proposed to extend the term of each heretofore and hereafter
granted non-employee director options to ten years. See "Proposal 3. Proposal to
Amend the Company's 1993 Non-Employee Stock Option Plan." Each option is
exercisable at an exercise price equal to 100% of the fair market value of the
Company's Common Stock on the date of grant commencing one year following the
date of grant, subject to early termination in certain instances.
Bernard Zimmerman and Company, Inc., of which Mr. Zimmerman is President
and a majority shareholder, renders financial and consulting assistance to the
Company, for which it received fees of $106,100 during the Company's fiscal year
ended December 29, 1996.
EXECUTIVE OFFICERS
The following is information concerning the executive officers of the
Company, other than those who also serve as directors (as to whom information is
provided above):
CARMELA SBARRO, 75, 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. Mrs. Sbarro served as a director of the Company from
March 1985 until December 1988 when she was elected Director Emeritus of the
Company.
GEORGE W. HERZ II, 41, 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, 53, 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
twenty-five years.
CARMELA N. MERENDINO, 32, 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, 38, 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. Mr. Missano served as a consultant to the Company from June 1992 until he
became a full time employee at the end of fiscal 1993. From November 1988 until
he joined the Company as an employee, Mr. Missano served as President of Anaton
Corp., a franchisee of the Company.
JAMES M. O'SHEA, 44, joined the Company in January 1995 and was elected
Vice President -- Human Resources in February 1995. Prior to joining the
Company, Mr. O'Shea served as Director of Human Resources and Administration of
Euro-Disney SCA (a theme park operator) from October 1991 through August 1994
and Staff Vice President -- Personnel of Cunard Line Ltd. (a cruise line and
hotel operator) from September 1986 through May 1991.
GENNARO A. SBARRO, 30, 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 operational positions for the Company.
GENNARO J. SBARRO, 34, was elected Corporate Vice President -- Operations
in August 1996, prior to which he served as Vice President -- Operations (East)
since February 1995. For more than five years prior thereto, Mr. Sbarro served
in various capacities for the Company.
LEONARD G. SKROSKY, 65, 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.
4
<PAGE> 7
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.
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 31, 1997 (except as noted
below), with respect to (a) holders known to the Company to beneficially own
more than five percent of the outstanding Common Stock of the Company, (b) each
director and nominee, (c) each executive officer named in the Summary
Compensation Table under the caption "Executive Compensation" below and (d) 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).............................................. 1,913,240(4) 9.3%
Anthony Sbarro(3)............................................ 1,398,800(5) 6.8%
Joseph Sbarro(3)............................................. 1,957,914(6) 9.5%
Trust of Carmela Sbarro(3)................................... 2,497,884(7) 12.2%
Harold L. Kestenbaum......................................... 21,750(8) *
Richard A. Mandell........................................... 15,000(9) *
Paul A. Vatter............................................... 17,250(9) *
Terry Vince.................................................. 18,300(9) *
Bernard Zimmerman............................................ 52,500(10) *
Robert S. Koebele............................................ 18,666(11) *
Anthony J. Missano........................................... 6,666(12) *
All directors and executive officers as a group (18
persons)................................................... 7,960,757(13) 37.7%
</TABLE>
- ---------------
(1) Shares subject to options are considered beneficially owned to the extent
currently exercisable or exercisable within 60 days after March 31, 1997.
(2) Asterisk indicates less than 1%. Shares subject to such options 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 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 763 Larkfield Road, Commack, New York
11725.
(4) Includes (i) 370 shares owned by Mr. Sbarro's wife and 3,240 shares owned
by a child of Mr. Sbarro who resides in his household (as to all of which
shares Mr. Sbarro disclaims beneficial ownership), and (ii) 270,000 shares
subject to options. Excludes the shares held by the Trust of Carmela
Sbarro, of which trust Mario Sbarro serves as a trustee and as to which
shares Mr. Sbarro may be deemed a beneficial owner with shared voting and
dispositive power.
(5) Includes 165,000 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) 150,000 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
(footnotes continued on the following page)
5
<PAGE> 8
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) 15,000
shares subject to options.
(9) Includes 15,000 shares subject to options.
(10) Represents 15,000 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 6,666 shares subject to options.
(12) Represents shares subject to options.
(13) Includes (i) an aggregate of 16,360 shares owned by spouses and by or as
custodian for children who reside in their households (as to which shares
beneficial ownership is disclaimed) and (ii) 735,581 shares subject to
options.
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 four
most highly compensated persons who were serving as executive officers of the
Company at the end of the Company's 1996 fiscal year for services in all
capacities to the Company and its subsidiaries during the Company's 1996, 1995
and 1994 fiscal years:
<TABLE>
<CAPTION>
LONG TERM
NAME AND ANNUAL COMPENSATION COMPENSATION
PRINCIPAL --------------------- ------------
POSITION(1) YEAR SALARY BONUS OPTIONS(#)
- ------------------------------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Mario Sbarro..................................... 1996 $460,000 $500,000 100,000
Chairman of the Board, President 1995 400,000 112,500 --
and Chief Executive Officer(1) 1994 400,000 225,000 --
Anthony Sbarro................................... 1996 300,000 -- --
Vice Chairman of the Board and Treasurer(1) 1995 300,000 87,500 --
1994 235,000 175,000 --
Joseph Sbarro.................................... 1996 276,000 150,000 50,000
Senior Executive Vice President and Secretary 1995 250,000 75,000 --
1994 235,000 150,000 --
Robert S. Koebele................................ 1996 181,000 50,000 --
Vice President -- Finance and Chief Financial 1995 175,000 30,000 --
Officer
1994 163,000 50,000 5,000
Anthony J. Missano............................... 1996 157,000 65,000 --
Corporate Vice President 1995 144,000 30,000 --
1994 125,000 51,000 5,000
</TABLE>
- ---------------
(1) Prior to May 1996, Mario Sbarro served only as Chairman of the Board of
Directors and Chief Executive Officer of the Company and Anthony Sbarro
served as President, as well as Treasurer, of the Company.
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. The following table contains information concerning options
granted during the Company's 1996 fiscal year to the executive officers named in
the Summary Compensation Table. No stock appreciation rights have been granted
to date.
6
<PAGE> 9
<TABLE>
<CAPTION>
INDIVIDUAL OPTIONS POTENTIAL
-------------------------------------------------- REALIZABLE VALUE
PERCENT AT ASSUMED ANNUAL
NUMBER OF OF TOTAL RATES OF STOCK
SHARES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
- ------------------------------- ---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mario Sbarro................... 100,000 27.8% $ 24.75 8/19/06 $1,556,514 $3,944,513
Joseph Sbarro.................. 50,000 13.9% $ 24.75 8/19/06 $ 778,257 $1,972,256
</TABLE>
- ---------------
(1) These options are exercisable as to one-third of the number of shares
subject to the options annually, commencing on August 20, 1998.
(2) These are hypothetical values using assumed compound growth rates prescribed
by the Securities and Exchange Commission and are not intended to forecast
possible future appreciation, if any, in the market price of the Company's
Common Stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUES
The following table sets forth certain information concerning the number of
shares of Common Stock acquired upon the exercise of stock options during the
Company's fiscal year ended December 29, 1996 by, and the number and value at
December 29, 1996 of shares of Common Stock subject to unexercised options held
by, the executive officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
YEAR-END YEAR-END
SHARES ACQUIRED VALUE (EXERCISABLE/ (EXERCISABLE/
NAME ON EXERCISE REALIZED(1) UNEXERCISABLE) UNEXERCISABLE)(2)
- ----------------------------- --------------- ----------- ---------------- ------------------
<S> <C> <C> <C> <C>
Mario Sbarro................. -- -- 270,000/100,000 $ 631,245/12,500
Anthony Sbarro............... -- -- 165,000/ 0 $ 315,623/ 0
Joseph Sbarro................ -- -- 150,000/ 50,000 $ 315,623/ 6,250
Robert S. Koebele............ 3,000 $25,375 5,470/ 7,030 $ 11,691/15,289
Anthony J. Missano........... -- -- 6,666/ 5,834 $ 5,623/11,252
</TABLE>
- ---------------
(1) Represents the closing price of the Company's Common Stock on the New York
Stock Exchange on the dates of exercise of the options, minus the applicable
option exercise prices.
(2) Represents the closing price of the Company's Common Stock on the New York
Stock Exchange on December 27, 1996, the last trading day of the Company's
1996 fiscal year, minus the respective exercise prices.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEES
This report is presented by the Compensation Committee of the Board of
Directors, except for the portion of the report under the caption "Long-Term
Incentive Compensation", which is presented by the Board's Stock Option
Committee. The Compensation Committee establishes the compensation for the
Company's three principal executive officers (Mario, Anthony and Joseph Sbarro)
and, with the recommendation of the Company's Chief Executive Officer, the
compensation of the other executive officers of the Company. The Stock Option
Committee administers (including making grants under) the Company's 1991 Stock
Incentive Plan. Each Committee consists exclusively of non-employee directors.
This report describes the policies of the Committees as in effect in fiscal
1996. As circumstances arise and the Committees deem it appropriate, policies in
effect from time to time may change.
It is the philosophy of the Committees to utilize a combination of salary
as a base for compensation, annual bonuses as a means of short-term incentive
and stock options to provide long-term incentive.
7
<PAGE> 10
Consequently, the Compensation and Stock Option Committees coordinate their
efforts to determine overall compensation of executive officers, using, among
other information, information contained in surveys of compensation levels at
other restaurant companies to supplement objective and subjective factors.
In establishing compensation levels for the Company's executive officers
for fiscal 1996, the Compensation Committee reviewed, among other things,
information contained in proxy statements of other restaurant companies, the
results and performance of which the Company regularly reviews and monitors,
proxy statements of various retailers and compensation surveys published by
consulting firms, major public accounting firms and others. The Compensation
Committee, in part, uses the information as a guideline in considering how the
Company's compensation compares to the compensation being paid by the Company's
competitors, as well as by others with whom the Company may be competing for
talent.
Base Salary. The Compensation Committee reviews the base salary of each
executive officer of the Company annually. In determining the base salaries to
be paid to executive officers, the Committee considers, among other factors, the
executive's level of responsibility, experience and expertise, the compensation
of executives occupying comparative positions in other restaurant and retail
organizations derived from its informal studies, and general economic factors.
The Committee, in consultation with the Company's Chief Executive Officer, also
reviews the performance of each of the Company's executive officers. The
Committee's reviews have been qualitative in nature, without specific weights
being assigned to the various factors employed by it. In light of the fact that
the Company's performance in fiscal 1995 did not meet management's expectations,
the Compensation Committee deferred consideration of increases for all executive
officers until mid year 1996 after it had reviewed the Company's and its
executive officers' performance as the year progressed. After reviewing
significantly improved results during the first half of the year and each
executive's contribution in enabling the Company to achieve such results, the
Compensation Committee increased the base salaries of most executive officers
effective July 1996.
Annual Incentive Compensation. The Company continues to place emphasis on
incentive compensation. Through 1996, the Chief Executive Officer of the Company
had set individual performance objectives and goals for each executive officer
other than himself. These goals have been based on specific performance related
targets (including the accomplishment of certain specific programs) established
for the particular executive, for his or her area of responsibility or on a
corporate basis, or determined on a subjective basis. Goals, at times, were
adjusted periodically throughout the year. The Chairman of the Compensation
Committee met periodically with the Chief Executive Officer to review the
performance of executive officers. In determining the amount of annual bonuses,
at the end of the year, the Compensation Committee examined, without assigning
specific weight to any factor, such factors as the Company's revenues and
profitability for the year, the degree to which the Company had fulfilled
objectives developed at the beginning of the year, the executive's contribution
toward the Company's profitability and meeting corporate goals, the degree to
which the executive achieved his or her personal performance goals for the year
and information concerning bonuses paid by competitors as indicated in the
informal Committee surveys. Bonuses, which had been significantly reduced in
fiscal 1995 in light of results being below management's expectations, were
increased in fiscal 1996 to reflect the Company's record results of operations,
with individual bonuses being determined through the use of the factors
described above. In order to address the future tax deductibility for the
Company of all compensation payable to those executive officers listed from time
to time in the Cash Compensation Table, the Board has adopted, subject to
shareholder approval at the Meeting, the Company's Performance Incentive Plan
(see "-- Certain Tax Legislation", below, and "Proposal 4. Proposal to Approve
the Company's Performance Incentive Plan").
Long-Term Incentive Compensation. The Company has utilized stock options
as the primary method of providing long-term incentive compensation. The Company
believes stock options foster the interest of key employees in seeking long-term
growth for the Company, as well as linking the interests of its executives with
the overall interests of stockholders. The Company's Chief Executive Officer
makes recommendations to the Stock Option Committee from time to time with
respect to the grant of stock options to employees in light of the level of
their responsibility, compensation level and prior contribution to the Company's
performance, as well as the future goals and the performance expected of them.
However, the determination of the grant of options rests with the Stock Option
Committee. Although the Stock Option Committee does review the value
8
<PAGE> 11
of options granted by other restaurant companies obtained from the informal
surveys it reviews, it does not target its grants of options to those granted by
others. Like the Compensation Committee, the Stock Option Committee reviews the
Company's and its executive officers' performance, as well as the other factors
it utilizes in determining option grants. Reference is made to " -- Option/SAR
Grants in Last Fiscal Year", above, and "Proposal 2. Proposal to Approve
Amendments to the Company's 1991 Stock Incentive Plan -- Options Received and to
be Received" for information concerning options granted during 1996 and thus far
during 1997.
Chief Executive Officer Compensation. The compensation of Mario Sbarro,
the Company's Chief Executive Officer, is comprised of the same three components
as that of the Company's other executive officers. While it has remained the
belief of the Compensation Committee that Mr. Sbarro's compensation should be in
the top quartile of the compensation levels of chief executive officers in the
Company's peer group, with the concurrence of Mr. Sbarro, the Compensation
Committee had not increased his base salary since early 1992. Based upon the
foregoing and its review of Mr. Sbarro's performance, his re-assuming the duties
as President in addition to his existing duties as Chairman of the Board and
Chief Executive Officer, and his leadership in enabling the Company to reach
record results, the Committee increased Mr. Sbarro's annual base salary to
$500,000 effective July 1, 1996, after year-end awarded Mr. Sbarro a bonus of
$500,000 with respect to 1996 and, since August 1996, has granted Mr. Sbarro
options under the Company's 1991 Stock Incentive Plan to purchase an aggregate
of 200,000 shares of the Company's Common Stock. If the proposed amendments to
the 1991 Stock Incentive Plan are approved by shareholders at the Meeting, the
Stock Option Committee intends to grant Mr. Sbarro an option to purchase an
additional 150,000 shares under that plan.
Certain Tax Legislation. Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), precludes a public company from taking a federal
income tax deduction for annual compensation in excess of $1,000,000 paid to its
chief executive officer or any of its four other most highly compensated
executive officers. Certain "qualified performance-based compensation" is
excluded from the deduction limitation. The Board of Directors, with the
concurrence of both the Compensation and Stock Option Committees, has adopted
(subject to shareholder approval at the Meeting) the Company's Performance
Incentive Plan which is designed to enable compensation paid thereunder to be
considered "qualified performance-based compensation" and fully tax deductible
for Federal income tax purposes.
In addition, the Board has proposed amendments (subject to shareholder
approval at the Meeting) to the Company's 1991 Incentive Stock Plan to increase
the number of shares which can be subject to options (as only a few shares
presently are available for grant thereunder) and to increase the limit on the
number of shares that may be granted to any optionee in any fiscal year of the
Company (which limit is required to assure the deductibility of all compensation
that may arise under that plan).
The Compensation and Stock Option Committees believe both plans align the
interests of executive officers with those of shareholders and recommends that
shareholders approve the Performance Incentive Plan and the proposed amendments
to the Company's 1991 Incentive Stock Plan.
Respectfully submitted,
<TABLE>
<S> <C>
Compensation Committee Stock Option Committee
Bernard Zimmerman, Chairman Harold L. Kestenbaum, Chairman
Richard A. Mandell Paul A. Vatter
Terry Vince Terry Vince
</TABLE>
9
<PAGE> 12
PERFORMANCE GRAPH
The following graph compares the cumulative return on investment to holders
of the Company's Common Stock for the five years ended December 31, 1996 with
the Standard & Poor's ("S&P") Restaurant Index and S&P 500 Index for the same
period. The comparison assumes $100 was invested on December 31, 1991 in the
Company's Common Stock and in each of the comparison groups, and assumes
reinvestment of dividends. In February 1993, the Company initiated a policy of
paying quarterly dividends. Dividends of $.13, $.16, $.19 and $.23 per share
were declared in each of the four quarters of fiscal 1993, 1994, 1995 and 1996,
respectively. In February 1997, the Company further increased its quarterly
dividend to $.27 per share.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG SBARRO, INC., THE S&P 500 INDEX
AND THE S&P RESTAURANTS INDEX
12/91 12/92 12/93 12/94 12/95 12/96
Sbarro, Inc. $100 $88 $113 $102 $87 $108
S&P 500 Index $100 $108 $118 $120 $165 $203
S&P Restaurant Index $100 $128 $150 $149 $224 $221
10
<PAGE> 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is the sublessee of its headquarters office building (the
"Headquarters"), 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 was $298,000 from April 1992 until April 1996 when it
increased in accordance with the terms of the lease to $337,000 for the
remaining five years of the lease term. In addition, the Company is obligated to
pay real estate taxes, utilities, insurance and certain other expenses for the
facility. Management believes that such rents are comparable to the rents that
would be charged by an unaffiliated third party. Payment of principal and
interest and any premium on the bonds issued by the Agency to fund construction
of the headquarters is 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 Mario, Anthony and Joseph Sbarro and Anthony Missano,
son-in-law of Joseph Sbarro, the mother of Mario, Anthony and Joseph Sbarro, who
was a co-founder of the Company and serves as Vice President and Director
Emeritus of the Company; a son of Mario Sbarro; a daughter of Mario Sbarro; and
a son of Joseph Sbarro are employed by the Company in various capacities, for
which they received $100,000, $174,000, $95,000 and $219,000, respectively, for
services rendered during fiscal 1996. In addition, ten other members of the
immediate family of Mario, Anthony and Joseph Sbarro received an aggregate of
$466,000 for services rendered as employees during fiscal 1996.
The Company and its subsidiaries have purchased printing services from a
corporation owned by a son-in-law of Mario Sbarro in the amount of approximately
$160,000 during fiscal 1996. The Company believes that these services were
provided on terms comparable to those that would have been available from
unrelated third parties.
During fiscal 1996, companies owned by a son of Anthony Sbarro and a
company owned by the daughter of Joseph Sbarro paid royalties to the Company
aggregating approximately $94,000 and $30,000, respectively, under franchise
agreements containing terms similar to those in agreements entered into by the
Company with unrelated franchisees.
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 ownership, and reports
of changes of 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 December 29, 1996 were timely filed, except that
Gennaro A. Sbarro did not timely file one report concerning two transactions.
PROPOSAL 2
PROPOSAL TO APPROVE AMENDMENTS
TO THE COMPANY'S 1991 STOCK INCENTIVE PLAN
At the Company's 1991 annual meeting, shareholders approved the Company's
1991 Stock Incentive Plan (the "1991 Plan") to promote the interests of the
Company in attracting and retaining employees, consultants and advisors by
enabling them to acquire or increase a proprietary interest in the Company, to
benefit from appreciation in the value of the Company's Common Stock and, thus,
participate in the long-term growth of the Company. The 1991 Plan authorizes the
Stock Option Committee of the Board of Directors to grant options and stock
appreciation rights ("SARs"), within the limits and subject to the terms and
conditions of the 1991 Plan to employees of, and consultants to, the Company and
its subsidiaries.
11
<PAGE> 14
The Board of Directors has unanimously adopted, subject to shareholder
approval which will be requested at the Meeting, and recommended for submission
to shareholders, amendments to the 1991 Plan (the "Amendments") to:
(i) Increase the number of shares reserved for issuance under the 1991 Plan
by an aggregate of 2,000,000 shares, subject to the 1991 Plan's antidilution
provisions. Through March 31, 1997, options to purchase 61,886 shares of Common
Stock had been exercised under the 1991 Plan and options to purchase 1,432,669
shares were subject to outstanding options held by 75 employees and consultants,
leaving 5,445 shares (together with shares subject to any such outstanding
options which may expire, terminate or be canceled unexercised) available for
future grant under the 1991 Plan. The Board of Directors believes that the 1991
Plan has been instrumental in attracting and retaining employees, officers and
consultants of outstanding ability and that this objective will be furthered by
providing additional shares for future grants. The Board of Directors has also
noted a trend toward the granting of options to key employees to serve as a
significant component of their compensation package and wishes to afford the
Stock Option Committee of the Board with increased flexibility in using options
and/or SARs as part of compensation arrangements.
(ii) Change the limit on the number of shares that may be subject to
options or SARs granted to any one optionee in any fiscal year from 100,000 to
250,000 shares, subject to the 1991 Plan's antidilution provisions. The existing
limit was established by the Board of Directors, and approved by shareholders,
in 1994 in order to enable options granted under the 1991 Plan to be considered
"qualified performance-based compensation" under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), ensuring the deductibility of any
compensation expense that may arise from their exercise (see "Executive
Compensation -- Report of the Compensation and Stock Option Committees", above,
and "-- Federal Income Tax Treatment", below). The proposed increase is designed
to enable the Board and the Stock Option Committee to utilize a higher number of
options annually in creating compensation arrangements.
The following is a discussion of the 1991 Plan:
TYPES OF GRANTS AND AWARDS
The 1991 Plan permits the grant of options and SARs. Options may either be
"incentive stock options" ("ISOs"), within the meaning of Section 422 of the
Code, or "non-qualified stock options" ("NQSOs"), which do not meet the
requirements of Section 422 of the Code. SARs may be granted either on a free-
standing basis or in tandem with ISOs or NQSOs, and may be granted before,
simultaneously with or subsequent to the grant of an option. Any option granted
in tandem with an SAR would no longer be exercisable to the extent the SAR is
exercised and the exercise of the related option would cancel the SAR to the
extent of such exercise.
ELIGIBILITY
All employees of, and consultants and advisors to, the Company and its
subsidiaries, including officers and directors who are also serving in such
capacities, are eligible to be granted options and awarded SARs under the 1991
Plan. ISOs may only be granted to employees (including officers and directors
who are also employees).
ADMINISTRATION
On August 20, 1996, the Board of Directors amended the 1991 Plan in order
to comply with newly-revised Rule 16b-3 adopted by the Securities and Exchange
Commission under Section 16(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") to provide that the 1991 Plan is to be administered by the Board
of Directors or a committee of directors to be composed of not less than two
members, all of whom must be "non-employee directors" within the meaning of
regulations promulgated by the Securities and Exchange Commission. In addition,
in order to comply with Section 162(m) of the Code, the Plan must be
administered by a committee consisting solely of two or more "outside directors"
(within the meaning of such section). The 1991 Plan is currently administered by
the Stock Option Committee of the Board which consists exclusively of
"non-employee directors" under Rule 16b-3 under the Exchange Act and "outside
directors"
12
<PAGE> 15
under Section 162(m) of the Code. The Company intends to continue to comply with
this requirement. Those administering the 1991 Plan are herein collectively
referred to as the "Committee".
Within the limits of the 1991 Plan, the Committee is authorized to
determine, among other things, to whom and the time or times at which options
and SARs are to be granted, the types of options and SARs to be granted, the
number of shares which will be subject to any option or SAR, the term of each
option and SAR, the exercise price of each option and base price of each SAR,
and the time or times and conditions under which options and SARs may be
exercised (including whether all or a portion of an option or SAR exercisable in
installments which are not exercised in any one period may be exercised in a
subsequent period during the term of the option or SAR) and such other terms not
inconsistent with the 1991 Plan as the Committee may deem appropriate. The
Committee may (with the consent of the holder of the option or SAR) cancel or
modify an option or SAR, or grant an option and/or SAR in substitution for any
canceled option or SAR, provided that any substituted option or SAR and any
option or SAR modified would be permitted to be granted on such date under the
terms of the 1991 Plan and the Code, except that the Committee may give credit
toward any required vesting period for the period during which the employee held
the canceled option or SAR.
EXERCISE PRICE
The exercise price of an option or base price of an SAR granted under the
1991 Plan is determined by the Committee, but may not be less than 100% of the
fair market value of the Common Stock on the date of grant (110% of such fair
market value in the case of an ISO granted to an optionee who owns or is deemed
to own stock possessing more than 10% of the combined voting power of all
classes of stock of the Company). The exercise price is payable at the time of
exercise of the option in cash, previously acquired shares of Common Stock
(valued at their fair market value on the date of exercise of the option) or a
combination thereof, in the discretion of the Committee. The Committee may, in
its discretion, permit payment of the exercise price of options by delivery of a
properly executed exercise notice, together with a copy of irrevocable
instructions to a broker to deliver promptly to the Company the amount of sale
or loan proceeds to pay such exercise. To facilitate the foregoing, the Company
may enter into agreements for coordinated procedures with one or more brokerage
firms.
Upon exercise of an SAR, the holder is entitled to receive an amount, in
cash, Common Stock or a combination of the two, as determined by the Committee,
equal to the excess of the fair market value of the shares with respect to which
the SAR is exercised (calculated as of the exercise date) over the base price.
TERMS AND CONDITIONS
The term of each option and SAR is for such period as the Committee may
determine. However, the term of an ISO may not exceed ten years (five years with
respect to ISOs granted to optionees who own or are deemed to own stock
possessing more than 10% of the combined voting power of all classes of stock of
the Company). The aggregate fair market value (determined as of the date of
grant) of Common Stock in respect of which ISOs granted to any employee may be
first exercisable in any calendar year under all incentive stock option plans of
the Company may not exceed $100,000. To the extent such limit is exceeded, the
excess will be treated as a separate NQSO. In addition, under the proposed
Amendments, the maximum number of options or SARs which could be granted to any
employee in any fiscal year would be limited to 250,000 shares (increased from
the present limit of 100,000 shares).
Options and SARs are not transferable or assignable other than by will or
the laws of descent and distribution and may be exercised during the holder's
lifetime only by the holder.
If the holder of an option or SAR ceases to be an employee of, or
consultant or advisor to, the Company for any reason other than disability or
death, the option or SAR shall terminate immediately. If such relationship is
terminated by reason of disability, the remaining portion of the option or SAR
(to the extent exercisable on the date of termination) may be exercised at any
time within one year after such termination (but not after the date the option
or SAR would otherwise expire). In the event such relationship is
13
<PAGE> 16
terminated by reason of the holder's death or if the holder dies within one year
after such relationship is terminated by reason of disability, the remaining
portion of the option or SAR (to the extent exercisable on the date of
termination) may be exercised by the holder's legal representatives or
beneficiaries at any time within one year after the earlier of the date of the
holder's death or the date of termination by reason of disability (but not after
the date the option or SAR would otherwise expire).
ADJUSTMENT IN THE EVENT OF CAPITAL CHANGES
The Board of Directors shall make appropriate adjustments in the number of
shares of Common Stock available under the 1991 Plan, in the number of shares
subject to, and the exercise price or base price of, outstanding options or SARs
and in the maximum number of shares of Common Stock which may be subject to
options or SARs granted to any one person in any fiscal year in the event of any
change in the Common Stock by reason of any stock dividend, stock split, stock
combination, recapitalization, merger, consolidation, reorganization or the
like.
PLAN TERM AND AMENDMENTS
No options or SARs may be granted under the 1991 Plan after February 12,
2001. The Board or Committee may terminate the 1991 Plan at any time with
respect to any shares of Common Stock not at the time subject to options or SARs
and may alter or amend the 1991 Plan, provided that, without the approval of
shareholders, no amendment may be made which would (i) change the class of those
eligible to receive options or SARs, (ii) increase the total number of shares
available for option or SARs (except for anti-dilution adjustments described
above) or (iii) materially increase the benefits accruing to participants under
the 1991 Plan.
FEDERAL INCOME TAX TREATMENT
The following is a general summary of the Federal income tax consequences
under current tax law of ISOs, NQSOs and SARs. It does not purport to cover
special rules relating to, among other things, the exercise of an option with
previously acquired shares nor state or local income or other tax consequences
inherent in the ownership and exercise of stock options and the ownership and
disposition of the underlying shares.
A holder will not recognize taxable income for Federal income tax purposes
upon the grant of an ISO, NQSO or SAR.
In the case of an ISO, no taxable income is recognized upon exercise of the
option. If the optionee disposes of the shares acquired pursuant to the exercise
of an ISO more than two years after the date of grant and more than one year
after the transfer of the shares to him or her, the optionee will recognize
long-term capital gain or loss and the Company will not be entitled to a
deduction. However, if the optionee disposes of such shares within the required
holding period (a "disqualifying disposition"), a portion of his or her gain
equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price (but not more than the gain realized on the
disposition) will be treated as ordinary income and the Company will generally
be entitled to a deduction for such amount. Any additional gain or loss will be
treated as a long-term or short-term capital gain or loss. Long-term capital
gain is generally taxed at a more favorable rate than ordinary income or
short-term capital gain.
Upon the exercise of a NQSO or SAR, the holder recognizes ordinary income
in an amount equal to the excess, if any, of the fair market value of the shares
subject thereto on the date of exercise over the exercise price or base price of
the NQSO or SAR; the holder's basis in the shares acquired is equal to the
amount, if any, paid upon exercise, increased by the amount of ordinary income
required to be recognized; and the Company is generally entitled to a deduction
for the amount of ordinary income recognized by the holder. If the optionee
later sells the shares acquired pursuant to the NQSO or SAR, he or she will
recognize long-term or short-term capital gain or loss.
14
<PAGE> 17
In addition to the Federal income tax consequences described above, an
optionee who exercises an ISO may be subject to the alternative minimum tax,
which is payable to the extent it exceeds the optionee's regular tax. For this
purpose, upon the exercise of an ISO, the excess of the fair market value of the
shares on the date of exercise over the exercise price therefor is an increase
to his or her alternative minimum taxable income. In addition, the optionee's
basis in such shares is increased by such amount for purposes of computing the
gain or loss on the disposition of the shares for alternative minimum tax
purposes. If an optionee is required to pay an alternative minimum tax, the
amount of such tax which is attributable to deferral preferences (including the
ISO adjustment) is allowed as a credit against the optionee's regular tax
liability in subsequent years. To the extent the credit is not used, it is
carried forward.
OPTIONS RECEIVED AND TO BE RECEIVED
Set forth under the caption "Executive Compensation -- Option/SAR Grants in
Last Fiscal Year" is information concerning options granted during fiscal 1996
to the persons named in the Summary Compensation Table. The following table sets
forth the number of shares underlying options that were granted under the 1991
Plan during the Company's fiscal year ended December 29, 1996 to (i) all current
executive officers as a group, and (ii) all other employees, including current
officers who are not executive officers:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERLYING
OPTIONS
CATEGORY OF OPTIONEE GRANTED
---------------------------------------------------------------- ----------
<S> <C>
Executive officers as a group
(three persons, including the persons named in the Summary
Compensation Table)........................................ 250,000
Other employees as a group (three persons)...................... 110,000
</TABLE>
All options were granted at 100% of the fair market value of the underlying
shares on the date of grant. Accordingly, the foregoing table does not include
any value that may arise from a future increase in the market value of the
Company's Common Stock. The closing price of the Company's Common Stock on the
New York Stock Exchange on April 22, 1997 was $27.50 per share.
Subsequent to year end, the Stock Option Committee of the Board of
Directors granted options under the 1991 Plan to purchase 100,000 shares of the
Company's Common Stock to each of Mario Sbarro, Anthony Sbarro and Joseph Sbarro
and 303,000 shares to other executive officers and employees. See "Executive
Compensation."
The grant of options is within the discretion of the Committee. If
Amendments are approved, the Company's Stock Option Committee intends to grant
an option to Mario Sbarro to purchase an additional 150,000 shares of the
Company's Common Stock. Except therefor, the Company is unable to determine
future options, if any, that may be granted to the named persons or groups in
the following table.
The Company's Board of Directors unanimously recommends a vote FOR adoption
of the Amendments.
15
<PAGE> 18
PROPOSAL 3
PROPOSAL TO AMEND THE COMPANY'S
1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
At the Company's 1993 annual meeting, shareholders approved the Company's
1993 Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan")
to foster the Company's ability to attract and retain the services of
experienced and knowledgeable directors who are not employees of the Company
("Outside Directors") and to provide additional incentive for Outside Directors
to continue to work for the best interests of the Company and its shareholders
through the continuing ownership of Common Stock.
The Board of Directors has unanimously adopted, subject to shareholder
approval which will be requested at the Meeting, an amendment to the
Non-Employee Director Plan to provide that the term of all previously granted
options and all options to be granted in the future under the Non-Employee
Director Plan be for a term of ten years in lieu of five years.
DESCRIPTION OF THE NON-EMPLOYEE DIRECTOR PLAN
The Non-Employee Director Plan authorizes the grant of options to purchase
up to 300,000 shares of the Company's Common Stock, subject to potential
adjustment in the event of a stock dividend, stock split, stock combination,
recapitalization, merger in which the Company is the surviving corporation,
reorganization or the like. Upon the expiration, cancellation or termination of
unexercised options, the shares subject thereto will again be available for
grant under the Non-Employee Director Plan. The Non-Employee Director Plan is
administered by the Board of Directors subject to the provisions of the
Non-Employee Director Plan. Participation in the Non-Employee Director Plan is
limited to Outside Directors.
The Non-Employee Director Plan provides for the granting of an option to
purchase 3,750 shares of Common Stock of the Company to each Outside Directors
on the date such person becomes a director and an option to purchase an
additional 3,750 shares to each director then in office immediately following
each annual meeting of shareholders at which directors are elected. To the date
hereof, options to purchase 11,250 shares granted under the Non-Employee
Director Plan have been exercised and options to purchase 75,000 shares are
outstanding.
The option exercise price of each share granted under the Non-Employee
Director Plan is 100% of the fair market value of the Company's Common Stock on
the date of grant. The closing price of the Company's Common Stock on the New
York Stock Exchange on April 22, 1997 was $27.50 per share. Upon exercise of the
option, the exercise price is to be paid in full in cash.
At present, each option has a term of five years. If the proposed amendment
to the Non-Employee Director Plan is approved by shareholders, all currently
outstanding and future options will have a term of ten years. An option becomes
exercisable as to the full number of shares subject to the option for the
remaining term of the option commencing one year after grant.
In the event that an optionee ceases to serve on the Board of Directors for
any reason (including as a result of not being re-elected to the Board) other
than by reason of disability or death, options held by the optionee may be
exercised, to the extent that the optionee was entitled to do so at the time of
cessation of service, at any time within three months after such cessation of
service but in no event after the date on which the option would otherwise
expire. However, if the Outside Director's service on the Board is terminated
for cause, the Outside Director's options shall terminate immediately. If an
optionee ceases to serve on the Board by reason of disability, options held by
such optionee may be exercised in whole or in part as to the remaining
unexercised portion of the options (notwithstanding that the option had not
become exercisable at the date of cessation of service on the Board) at any time
within nine months after cessation of service on the Board but in no event after
the date on which the option would otherwise expire. If an optionee dies (a)
while serving on the Board, (b) within three months after cessation of service
on the Board (other than for cause) or (c) within nine months after cessation of
service on the Board by reason of disability, options held by such
16
<PAGE> 19
optionee may be exercised in whole or in part by the legal representatives or
beneficiaries of the optionee within one year after the date of such optionee's
death as to the remaining unexercised portion of the options (notwithstanding
that the option had not yet become exercisable at the date of death), but in no
event after the date on which the option would otherwise expire.
An option may not be transferred by an Outside Director other than by will
or by the laws of descent and distribution, and an option may be exercised
during the optionee's lifetime only by the optionee.
No options may be granted under the Non-Employee Director Plan after
February 15, 2003. Options outstanding on that date, however, shall in all
respects continue subject to the Non-Employee Director Plan. The Board may
terminate the Non-Employee Director Plan at any time with respect to any shares
not at the time subject to option and may alter or amend the Non-Employee
Director Plan; provided, however, that, if required by applicable law, without
the approval of shareholders, no alteration or amendment may be made which would
(1) change the class of eligible participants who may receive options, (2)
increase the total number of shares available for option (except for
anti-dilution adjustments described above), (3) decrease the option price at
which options may be granted (except for anti-dilution adjustments), or (4)
materially increase the benefits accruing to participants under the Non-Employee
Director Plan.
FEDERAL INCOME TAX CONSEQUENCES
The optionee will not recognize any income for Federal income tax purposes,
and the Company will not be entitled to any deduction, upon the grant of an
option. Generally, an option holder recognizes ordinary taxable income at the
time an option is exercised in an amount equal to the excess of the fair market
value of the shares of Common Stock on the date of exercise over the exercise
price. The Company generally will be entitled to a compensation deduction for
Federal income tax purposes at the same time as, and in the same amount that,
the option holder recognizes such income.
When an optionee subsequently disposes of the shares of Common Stock
received upon exercise of an option, he or she will recognize long-term or
short-term capital gain or loss (depending upon the holding period) in an amount
equal to the difference between the sale price and the fair market value of the
shares on the date of exercise of the option.
The Company's Board of Directors unanimously recommends a vote FOR adoption
of the proposed amendment.
PROPOSAL 4
PROPOSAL TO APPROVE THE COMPANY'S
PERFORMANCE INCENTIVE PLAN
GENERAL
The Board of Directors has adopted the Sbarro, Inc. Performance Incentive
Plan (the "Performance Plan"), subject to approval by the shareholders at the
Meeting. The Performance Plan is designed to secure and retain key employees of
outstanding ability for the Company and its subsidiaries, motivate such
employees to exert their best efforts on behalf of the Company and permit the
Company to continue to obtain the full tax deductibility of any incentive
compensation that may be paid under the Performance Plan to the Company's Chief
Executive Officer and its four other most highly compensated officers ("Covered
Employees") as "qualified performance-based compensation" under Section 162(m)
of the Code and the regulations thereunder (collectively, "Section 162(m)"). If
the Performance Plan is not approved by shareholders, no payments will be made
by the Company under the Performance Plan. The following summary of the
Performance Plan is qualified in its entirety by reference to the text of the
full Performance Plan, which is attached to this Proxy Statement as Exhibit A.
17
<PAGE> 20
PURPOSE OF THE PERFORMANCE PLAN
The Performance Plan is designed to provide incentives for performance to
key employees of the Company and its subsidiaries who meet pre-established
goals, while permitting the Company to obtain tax deductions for payments made
thereunder. By making a specified portion of key employees' annual cash
compensation dependent upon certain pre-established performance targets, the
Performance Plan is intended to motivate participants to exert their best
efforts on behalf of the Company and its subsidiaries while aligning their
interests with those of the Company's shareholders. Through 1996, annual
incentive compensation had been based on either objective or subjective
criteria, which criteria were adjusted periodically throughout the year. Based
on those criteria, employee performance was then reviewed by the Compensation
Committee following the end of the year to determine the amount of annual
incentive compensation to be paid (see "Executive Compensation -- Report of the
Compensation and Stock Option Committees").
ADMINISTRATION
The Performance Plan is to be administered by a committee of the Board
which is to consist of at least two members of the Board, each of whom is to be
an "outside director" within the meaning of Section 162(m) (the "Committee").
Within the limits of the Performance Plan, the Committee has authority to
determine, from time to time, the eligible individuals to participate in the
Plan (the "Participants"), the objectives and criteria ("Targets") for
determining the amounts which a Participant may earn under the Performance Plan
("Bonus Awards"), the period or periods during which Targets are measured
("Measurement Periods"), whether and the extent to which such Targets have been
met and such other terms, provisions and conditions as are not inconsistent with
the Performance Plan. The Committee is also authorized, among other things, to
interpret the Performance Plan, correct any defects and reconcile
inconsistencies in the Performance Plan and make all other determinations
necessary or advisable for the administration of the Performance Plan. The
Company may fix compensation and award bonuses outside the Performance Plan even
though such compensation and bonuses would not be deemed to be "qualified
performance-based compensation" under Section 162(m).
TARGETS
The Committee is to establish the Targets and Bonus Awards payable upon a
Participant's attaining the applicable Targets within 90 days after the
beginning of the applicable Measurement Period (but in no event after 25% of the
Measurement Period has elapsed). While the Committee generally has authority to
reduce any amount payable to a Participant (except as to any Participant whose
employment is terminated as a result of disability or death and, in most
instances, in the event of a Change in Control of the Company), such payments
may not be increased, except as to any Participant who the Committee determines
not to be a Covered Employee. However, the Committee may set a Target which is
based in whole or in part on the level of a Participant's salary or base pay at
any time during the Measurement Period which may cause a Bonus Award to increase
if the Participant's salary or base pay increases. Targets are to be based on
one or more of the following (which are to be specified by the Committee at the
time of its determination of Targets): (i) a specified level of, or growth in,
pre- or post-tax income, earnings per share, operating income, operational cash
flow, return on equity, return on assets, market price for the Company's Common
Stock and/or total return to shareholders, (ii) a specified growth in revenues
and/or number of Company-owned and/or franchised locations, and (iii) a
specified reduction in one or more costs. Targets may be on a corporate-wide
basis and/or with respect to (or excluding) one or more operating units,
divisions, acquired businesses, minority investments, partnerships or joint
ventures. Targets may be based upon the amount of the growth of the criteria
item, maintaining the status quo thereof or limiting economic loss, except that,
with respect to revenues and number of locations, such criteria must be based on
the growth thereof. At the time of grant, the Committee is to also define the
criteria and the method of calculation thereof, which may be based on generally
accepted accounting principles with or without specified adjustments. Specified
adjustments may (but need not) include adjustments for (i) corporate
transactions, such as acquisitions, divestitures and reorganizations, and (ii)
the effects of changes in accounting principles, extraordinary accounting
charges or items, restructuring charges, charges for restaurant closings and
nonrecurring or unusual events, and changes
18
<PAGE> 21
in commodity prices (such as for cheese, tomatoes, other food stuffs and paper
products), Federal, state or local minimum wages, Federal, state or local tax
rates, and other items which may be outside the control of the Participant but
which may affect results that otherwise would have been attained under the
applicable Targets.
CERTIFICATION AND PAYMENT OF BONUS AWARDS
As soon as practicable following receipt of final financial and such other
data as may be needed, the Committee generally is to determine and certify to
the Company, with respect to each Participant, whether, and the extent to which,
the Company has achieved the Targets for the applicable Measurement Period. No
Participant shall be entitled to receive a Bonus Award in excess of $3 million
for any taxable year of the Company. All Bonus Awards are to be paid in cash,
subject to applicable withholding. The Company is not required to establish any
separate fund or otherwise segregate assets to fund the payment of Bonus Awards.
TERMINATION OF EMPLOYMENT AND CHANGES IN CONTROL
If a Participant ceases to be an employee of the Company for any reason,
other than disability, death or a "Change in Control" of the Company (as defined
in the Performance Plan), prior to the end of the applicable Measurement Period,
the Participant shall be entitled to a pro rata (based on the portion of the
Measurement Period during which such Participant was an employee) payment of the
amount of the Bonus Award such Participant would have earned had such
Participant remained an employee of the Company for the entire Measurement
Period (subject to the Committee's right to reduce such Bonus Award). No Bonus
Award shall be paid to any Participant whose employment is terminated for cause.
If a Participant's employment with the Company is terminated by reason of
disability or death, the Participant or the Participant's estate or legal
representatives shall be entitled to receive such pro rata payment of the amount
of the Bonus Award such Participant would have earned had such Participant
remained an employee of the Company for the entire Measurement Period. Upon the
occurrence of a "Change in Control" of the Company during a Measurement Period,
the Participant is to be paid, within 30 days after such "Change in Control" and
regardless of whether his or her employment is terminated, one of the following:
(1) the full Bonus Award the Participant would have earned for the Measurement
Period had all applicable Targets been satisfied and the Participant remained an
employee of the Company throughout the entire Measurement Period, (2) the Bonus
Award to which the Participant would be entitled had the Company's results been
equal to the amount obtained by annualizing the Company's actual results through
the date of such Change in Control and the Participant remained as employee of
the Company throughout the entire Measurement Period, or (3) a pro rata Bonus
Award based on the full Bonus Award the Participant would have earned for the
entire Measurement Period had all applicable Targets been satisfied and the
Participant remained an employee of the Company throughout the entire
Measurement Period.
ASSIGNABILITY
No Participant has the right to assign or transfer a right to receive any
Bonus Award, except by will or the laws of descent or distribution, and any such
Bonus Award is to be payable during a Participant's life only to the
Participant.
AMENDMENTS AND TERMINATION
Subject to the rights of disabled or deceased Participants and in the event
of a "Change in Control" during a Measurement Period, the Committee may amend or
terminate the Performance Plan at any time, to be effective at such date as the
Committee designates, subject to obtaining shareholder approval with respect to
any modification of the Performance Plan to the extent required under Section
162(m).
19
<PAGE> 22
FEDERAL INCOME TAX TREATMENT
Based on the Company's interpretation of Section 162(m), the Company
believes all payments made pursuant to the Performance Plan will be deductible
by the Company. Bonus Awards will be taxable as ordinary income to the
Participant in the year received.
BENEFITS TO NAMED EXECUTIVE OFFICER AND OTHERS
Bonus Awards in 1997 and future years (including to the persons named in
the Summary Compensation Table, all other current executive officers and all
other Performance Plan Participants) will be determined based upon the Company's
achievement of one or more of the Targets. Because the Performance Plan, in
accordance with Section 162(m), prohibits Targets from being established more
than 25% into a Measurement Period, the Committee intends to establish most
Targets for 1997 based upon results of operations for the Company's last three
fiscal quarters of 1997. Since such Targets have not as yet been established and
performance has not yet occurred, it is not presently possible to determine the
amounts, if any, that will be received by such persons or groups pursuant to the
Performance Plan. See "Executive Compensation -- Summary Compensation Table" for
information concerning bonuses awarded in 1996 to the persons named in that
table and "Executive Compensation -- Report of the Compensation and Stock Option
Committees" for information concerning the manner in which bonuses have
heretofore been determined.
The Company's Board of Directors unanimously recommends a vote FOR this
proposal.
PROPOSAL 5
PROPOSAL TO RATIFY THE
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Arthur Andersen LLP has audited the financial statements of the
Company for the past seven years and the Board of Directors has, subject to
ratification by shareholders, appointed that firm to act as its independent
public accountants for the Company's fiscal year ending December 28, 1997.
Accordingly, management will present to the Meeting a resolution proposing the
ratification of the appointment of Arthur Andersen LLP as the Company's
independent public accountants for the fiscal year ending December 28, 1997.
A representative of Arthur Andersen LLP is expected to be present at the
Meeting with the opportunity to make a statement if the representative desires
to do so and is expected to be available to respond to appropriate questions
addressed by shareholders.
The Company's Board of Directors unanimously recommends a vote FOR this
proposal.
VOTING REQUIREMENTS
Directors are elected by a plurality of the votes cast at the Meeting
(Proposal 1). The affirmative vote of a majority of the votes cast at the
Meeting will be required to approve the amendments to the 1991 Plan (Proposal 2)
and Non-Employee Director Stock Option Plan (Proposal 3), approve the Company's
Performance Incentive Plan (Proposal 4) and ratify the appointment of Arthur
Andersen LLP as the Company's independent public accountants for the Company's
fiscal year ending December 28, 1997 (Proposal 5). Abstentions and broker
nonvotes with respect to any matter are not considered as votes cast with
respect to that matter. The Board of Directors has unanimously recommended a
vote in favor of each nominee named in the Proxy and FOR Proposals 2, 3, 4 and
5.
20
<PAGE> 23
MISCELLANEOUS
SHAREHOLDER PROPOSALS
Any shareholder proposal intended to be presented at the 1998 Annual
Meeting of Shareholders must be received by the Company not later than December
31, 1997 for inclusion in the Company's proxy statement and form of proxy for
that meeting.
OTHER MATTERS
Management does not intend to bring before the Meeting for action any
matters other than those specifically referred to above and is not aware of any
other matters which are proposed to be presented by others. If any other matters
or motions should properly come before the Meeting, the persons named in the
Proxy intend to vote thereon in accordance with their judgment on such matters
or motions, including any matters or motions dealing with the conduct of the
Meeting.
PROXIES
All shareholders are urged to fill in their choices with respect to the
matters to be voted upon, sign and promptly return the enclosed form of Proxy.
By Order of the Board of Directors,
JOSEPH SBARRO,
Secretary
April 29, 1997
21
<PAGE> 24
EXHIBIT A
SBARRO, INC.
PERFORMANCE INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the Sbarro, Inc. (the "Company") Performance Incentive Plan
(the "Plan") is to secure and retain key employees of outstanding ability for
the Company and its Subsidiaries (as defined in Section 3), to motivate such
employees to exert their best efforts on behalf of the Company and its
Subsidiaries by providing incentives for performance upon meeting
pre-established goals and to permit the Company to continue to obtain tax
deductions for "qualified performance-based compensation" paid to such
employees.
2. ADMINISTRATION
The Plan shall be administered by such committee (the "Committee") of
directors as the Board of Directors (the "Board") may establish or designate
from time to time, consisting of at least two members of the Board (or such
greater number as may from time to time be required under the laws of the
jurisdiction in which the Company is incorporated), each of whom shall be an
"outside director" within the meaning of Section 162(m) of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder (collectively, the
"Code"). The Committee shall have the authority, consistent with the Plan, to
determine, from time to time, the individuals eligible to participate in the
Plan ("Participants"); the time periods of participation; the objectives and
criteria ("Targets") for determining the amounts which a Participant may earn
under the Plan ("Bonus Awards"); the period or periods during which such Targets
are measured (the "Measurement Period"); whether and the extent to which such
Targets have been met; and such other terms, provisions and conditions as are
not inconsistent with the Plan as the Committee may deem appropriate. In
selecting Participants and setting Targets, the Committee may take into account
the nature of the services rendered by the Participant, the Participant's
present and potential contributions to the Company's success, and such other
factors as the Committee in its discretion may deem relevant. Subject to the
express provisions of the Plan, the Committee may interpret the Plan; correct
any defect, supply any omission or reconcile any inconsistency in the Plan;
prescribe, amend and rescind rules and regulations relating to the Plan; and
make all other determinations necessary or advisable for the administration of
the Plan. All determinations of the Committee shall be made in a manner
consistent with Section 162(m) of the Code.
Notwithstanding anything to the contrary, the Committee shall have the
authority to reduce the amount payable to a Participant pursuant to a Bonus
Award even if applicable Targets have been met; provided, however, that (i) no
Bonus Award payable under Section 5(b) to a Participant whose employment is
terminated by reason of disability or death shall be reduced and (ii) no Bonus
Award payable under Section 5(c) shall be reduced following a "Change in
Control" of the Company, as defined in Section 5(c), except where the Committee
consists solely of "Incumbent Directors", as defined in Section 5(c). The
Committee shall not have any authority to increase any Bonus Award for any
"Covered Employee", as defined in the Code; provided, however, that nothing
herein shall be construed as preventing the Committee from setting a Target
which is based in whole or in part on the level of such Participant's salary or
base pay at any time during the Measurement Period which may cause a Bonus Award
to increase if the Participant's salary or base pay increases. In addition,
nothing herein shall be construed to limit the Committee's ability to increase a
Bonus Award under the Plan as to any Participant who it determines not to be a
Covered Employee nor to prevent the Company from fixing compensation or awarding
bonuses outside the Plan even though such compensation and bonuses would not be
deemed to be "qualified performance-based compensation" under Section 162(m) of
the Code. All determinations by the Committee shall be conclusive and binding on
the Company and all Participants.
A-1
<PAGE> 25
3. ELIGIBILITY
Key employees of the Company and its Subsidiaries are eligible to
participate under the Plan. Participation under the Plan shall not confer on any
individual any right to continue as an employee of the Company or any Subsidiary
nor limit or restrict in any way any right of the Company or any Subsidiary to
terminate the employment of a Participant, including during a Measurement
Period. For purposes of the Plan, a "Subsidiary" of the Company means a
"subsidiary corporation" of the Company within the meaning of Section 424(f) of
the Code.
4. BONUS AWARDS
(a) Each Participant shall be granted the right to receive a Bonus Award in
accordance with and subject to the terms of the Plan and the terms of the
particular grant. To determine a Participant's Bonus Award for any Measurement
Period, the Committee shall establish (i) a single objective Target or series of
objective Targets for the Measurement Period in accordance with Section 4(b) for
such Participant, and (ii) the amount that will be payable to a Participant upon
the achievement of the applicable Target(s) for the Measurement Period. The
various Targets and the Bonus Award payable upon attaining the applicable
Targets must be established in writing within 90 days after the beginning of the
applicable Measurement Period (but, in no event, after 25% of the Measurement
Period has elapsed), and such terms shall not thereafter be changed, except as
to those Participants who the Committee determines will not be Covered Employees
during the Company's taxable year in which the Bonus Award would otherwise be
deductible by the Company for Federal income tax purposes. As soon as
practicable following receipt of final financial and such other data as may be
needed, the Committee shall determine, with respect to each Participant, whether
and the extent to which the Company has achieved the Targets for the applicable
Measurement Period and shall certify such determinations in writing to the
Company.
(b) The Committee shall select Targets for each Participant for each
Measurement Period. The formula or standard and method for computing the amount
of Bonus Award to be payable to the Participant if the Target is attained shall
be set forth in writing at the time of the grant of the right to receive a Bonus
Award. The Targets for each Participant shall be based upon one or more of the
following criteria (which are to be specified by the Committee at the time of
its determination of the Targets): (i) a specified level of, or growth in, pre-
or post-tax income, earnings per share, operating income, operational cash flow
(including, earnings before one or more of interest, taxes, rents, depreciation
and amortization), return on equity, return on assets, market price for the
Company's Common Stock and/or total return to shareholders (the sum of the
market price for the Company's Common Stock plus dividends paid), (ii) a
specified growth in revenues and/or number of Company-owned and/or franchised
locations, and (iii) a specified reduction in one or more costs. Targets may be
on a corporate-wide basis and/or with respect to (or excluding) one or more
operating units, divisions, acquired businesses, minority investments,
partnerships or joint ventures. Targets may be based upon the amount of the
growth of the criteria item, maintaining the status quo thereof or limiting
economic loss, except that, with respect to revenues and number of locations,
such criteria must be based on the growth thereof. At the time of grant, the
Committee shall also define the criteria and the method of calculation thereof,
which may be based on generally accepted accounting principles with or without
specified adjustments. Specified adjustments may (but need not) include
adjustments for (x) corporate transactions, such as acquisitions, divestitures
and reorganizations, and (y) the effects of changes in accounting principles,
extraordinary accounting charges or items, restructuring charges, charges for
restaurant closings and nonrecurring or unusual events, and changes in commodity
prices (such as for cheese, tomatoes, other food stuffs and paper products),
Federal, state or local minimum wages, Federal, state or local tax rates, and
other items which may be outside the control of the Participant but which may
affect results that otherwise would have been attained under the applicable
Targets. In selecting Target criteria, including any definition of such criteria
and adjustments for calculating whether the Targets have been met, the Committee
shall use its best efforts to cause the Bonus Awards to constitute "qualified
performance-based compensation" within the meaning of Section 162(m) of the
Code.
(c) No Participant shall be entitled to a Bonus Award in excess of $3.0
million for any taxable year of the Company.
A-2
<PAGE> 26
(d) All Bonus Awards will be paid in cash as soon as practicable following
the Committee's determination and written certification of the Bonus Awards
(which written certification shall not be required for a Bonus Award
attributable solely to an increase in the market price of the Company's Common
Stock). The Company shall not be required to establish any separate fund or
otherwise segregate assets to fund the payment of Bonus Awards. The Company
shall withhold any amounts the Company may determine to be necessary to satisfy
the Company's obligation to withhold Federal, state and local income taxes or
other taxes or amounts owed by reason of the Bonus Award.
5. TERMINATION OF EMPLOYMENT
(a) If a Participant's employment with the Company and its subsidiaries
terminates for any reason, other than disability (as defined in Section 23(e)(3)
of the Code), death or a "Change in Control" of the Company (as defined below),
prior to the end of the applicable Measurement Period, the Company shall,
following the Committee's making of all applicable determinations following the
end of the Measurement Period, make a pro rata payment of the amount of the
Bonus Award such Participant would have earned had such Participant remained an
employee of the Company or a Subsidiary for the entire Measurement Period;
provided, however, that no Bonus Award shall be deemed earned by (and no Bonus
Award earned but not yet paid for a completed Measurement Period shall be paid
to) a Participant whose employment is terminated for cause. For purposes of the
Plan: (a) a transfer of an employee from the Company to a Subsidiary or vice
versa, or from a Subsidiary to another Subsidiary, (b) a leave of absence, duly
authorized in writing by the Company, for military service or sickness or for
any other purpose approved by the Company if the period of such leave does not
exceed 90 days, and (c) a leave of absence in excess of 90 days, duly authorized
in writing by the Company (provided the employee's right to re-employment is
guaranteed either by statute or by contract) shall not be deemed a termination
of employment.
(b) If a Participant's employment with the Company is terminated during a
Measurement Period by reason of such Participant's disability or death, the
Participant or the Participant's estate or legal representatives shall,
following the Committee's making of all applicable determinations following the
end of the Measurement Period, receive a pro rata payment of the Bonus Award the
Participant would have earned had such Participant remained an employee of the
Company or a Subsidiary for the entire Measurement Period.
(c) Following the occurrence of a "Change in Control" of the Company during
a Measurement Period, each Participant shall be paid, as soon as practicable,
but in no event later than 30 days after such Change in Control and regardless
of whether the Participant's employment is terminated, one of the following at
the discretion of a Committee selected solely by the Incumbent Directors (either
on a Participant-by-Participant basis or on an overall basis): (1) the full
Bonus Award the Participant could have earned for the Measurement Period had all
applicable Targets been satisfied and the Participant remained an employee of
the Company or a Subsidiary throughout the entire Measurement Period, (2) the
Bonus Award to which the Participant would be entitled had the Company's results
been equal to the amount obtained by annualizing the Company's actual results
through the date such Change in Control and the Participant remained an employee
of the Company or a Subsidiary throughout the entire Measurement Period, or (3)
a pro rata Bonus Award based on the full Bonus Award the Participant would have
earned for the entire Measurement Period had all applicable Targets been
satisfied and the Participant remained an employee of the Company or a
Subsidiary throughout the entire Measurement Period. In the event the Committee
fails or is unable to determine which of the foregoing methods shall apply, the
method specified in clause (3) shall be used. Except as specifically permitted
in Section 2, following the occurrence of a Change in Control, no action,
including, without limitation, any amendment, suspension or termination of the
Plan, shall be taken which would adversely affect the rights of any Participant
or the operation of the Plan with respect to any Bonus Award to which the
Participant may have become entitled hereunder on or prior to the date of such
action or as a result of such Change in Control. For all purposes of this Plan,
"Change in Control" means when (i) any "person" or "group," each as such term is
used in Section 13(d) of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (collectively, the "Exchange Act") (other
than (w) the Company, (x) any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, (y) any corporation immediately
following which transaction is owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportion as their
ownership of stock of the Company or (z) any lineal
A-3
<PAGE> 27
descendant or spouses or former spouses of, or trusts for the benefit of or
entity controlled by, lineal descendants (including a group formed or majority
owned by the foregoing) of Gennaro and Carmela Sbarro), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding securities ordinarily
having the right to vote at the election of directors; (ii) during any period of
two consecutive years, individuals who at the beginning of such two year period
constitute the Board, together with any new director (other than a director
designated by a person (except one in clauses (w) -- (z) above) who has entered
into an agreement with the Company to effect a transaction described in clause
(i), (iii) or (iv)) whose election by the Board or nomination for election by
the Company's shareholders was approved by a vote of at least three-quarters of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved (collectively, "Incumbent Directors"), cease for any reason to
constitute at least a majority of the Board; (iii) the shareholders of the
Company approve a merger or consolidation of the Company with any other company
other than (A) a merger or consolidation whereby the voting securities of the
Company outstanding immediately prior thereto continue to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 50% of the combined voting
power of the Company's then outstanding securities or (C) a merger or
consolidation with an entity at least 35% owned by any lineal descendant or
spouses or former spouses of, or trusts for the benefit of or entity controlled
by, lineal descendants (including a group formed or majority owned by the
foregoing) of Gennaro and Carmela Sbarro; or (iv) the shareholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets.
(d) Except where another method is expressly provided for in this
Agreement, any pro ration of Bonus Awards shall be based upon the number of
completed calendar days in the Measurement Period during which the Participant
was an employee of the Company or a Subsidiary (or, in the case of a Change in
Control, prior to the date such event occurs) relative to the total number of
calendar days in the full Measurement Period.
6. NON-ASSIGNABILITY
No right to receive any Bonus Award shall be assignable or transferable by
any Participant except by will or the laws of descent and distribution and any
attempt to assign or transfer same shall be null and void and result in the
forfeiture of such Bonus Award otherwise payable. Each Bonus Award shall be
payable during a Participant's lifetime only to the Participant.
7. GOVERNING LAW
The validity, interpretation, construction and performance of the Plan
shall be governed under the laws of the State of New York.
8. AMENDMENTS AND TERMINATION
Except to the extent it would adversely affect the rights of Participants
under Sections 5(b) or 5(c), the Committee may amend or terminate the Plan at
any time, to be effective at such date as the Committee designates, subject to
obtaining shareholder approval with respect to any modification to the extent
required under Section 162(m) of the Code.
9. SHAREHOLDER APPROVAL
Adoption of the Plan shall be subject to approval by the Company's
shareholders at the Company's 1997 Annual Meeting of Shareholders. If the Plan
is not so approved by the Company's Shareholders, no Bonus Awards shall be paid
by the Company under the Plan.
A-4
<PAGE> 28
PROXY
SBARRO, INC.
(Solicited on behalf of the Board of Directors)
The undersigned holder of Common Stock of SBARRO, INC., revoking all
proxies heretofore given, hereby constitutes and appoints Mario Sbarro and
Anthony Sbarro, and each of them, Proxies, with full power of substitution, for
the undersigned and in the name, place and stead of the undersigned, to vote
all of the undersigned's shares of said stock, according to the number of votes
and with all the powers the undersigned would posses if personally present, at
the Annual Meeting of Shareholders of SBARRO, INC. to be held at the Salute
Restaurant, 270 Madison Avenue, at the corner of 39th Street, New York, New
York on Wednesday, May 21, 1997 at 9:15 A.M., Eastern Daylight Savings time,
and at any adjournments or postponements thereof.
The undersigned hereby acknowledges receipt of the Notice of Meeting
and Proxy Statement relating to the meeting and hereby revokes any proxy or
proxies heretofore given.
Each properly executed Proxy will be voted in accordance with the
specifications made on the reverse side of this Proxy and in the discretion of
the Proxies on any other matter that may properly come before the meeting.
Where no choice is specified, this Proxy will be voted FOR all listed nominees
to serve as directors and FOR each of Proposals 2, 3, 4 and 5.
PLEASE MARK, DATE AND SIGN THIS PROXY ON REVERSE SIDE
<PAGE> 29
The Board of Directors recommends a vote FOR all listed PLEASE MARK
nominees and FOR Proposals 2, 3, 4 and 5. YOUR CHOICE
LIKE THIS [X]
IN BLACK OR
BLUE INK
FOR WITHHOLD
all nominees listed AUTHORITY
(except as marked to vote all
to the contrary) listed
nominees
below
(1) Election of three Class I Directors
Nominees: Richard A. Mandell, Joseph Sbarro [ ] [ ]
and Terry Vince
(Instruction: To withhold authority to vote for any
individual nominee, circle that nominee's name in
the list provided above.)
FOR AGAINST ABSTAIN
(2) Approve amendments to the Company's 1991 [ ] [ ] [ ]
Stock Incentive Plan.
(3) Approve an amendment to the Company's 1993 FOR AGAINST ABSTAIN
Non-Employee Director Stock Option Plan. [ ] [ ] [ ]
(4) Approve the Company's Performance Incentive FOR AGAINST ABSTAIN
Plan. [ ] [ ] [ ]
(5) Ratify the appointment of Arthur Andersen FOR AGAINST ABSTAIN
LLP as the Company's independent public [ ] [ ] [ ]
accountants.
Signature(s) ______________________________________ Dated _______________, 1997
(Signatures should conform to names as
registered. For jointly owned shares,
each owner should sign. When signing
as attorney, executor, administrator,
trustee, guardian or officer of a
corporation, please give full title.)
