AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999
REGISTRATION NO. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
SBARRO, INC.
AND THE SUBSIDIARY GUARANTORS IDENTIFIED IN FOOTNOTE (A) BELOW
- --------------------------------------------------------------------------------
(Exact name of Co-Registrants as specified in their Charters)
NEW YORK
FOR SUBSIDIARY GUARANTORS, PLEASE SEE FOOTNOTE (A) BELOW
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(State or Other Jurisdiction of Organization)
5812
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(Primary Standard Industrial Classification Code)
11-2501139
FOR SUBSIDIARY GUARANTORS, PLEASE SEE FOOTNOTE (A) BELOW
- --------------------------------------------------------------------------------
(I.R.S. Employer Identification No.)
401 BROADHOLLOW ROAD
MELVILLE, NEW YORK 11747
(516) 715-4100
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(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Co-Registrants' Principal Executive Office)
Mario Sbarro
Chairman of the Board, President and Chief Executive Officer
Sbarro, Inc.
401 Broadhollow Road
Melville, New York 11747
(516) 715-4100
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(Name, Address, Including Zip Code,
and Telephone Number, Including Area Code, of Agent for Service)
<PAGE>
COPY TO:
Robert G. Rooney Richard A. Rubin, Esq.
Vice President Parker Chapin Flattau & Klimpl, LLP
Finance and Chief Financial Officer 1211 Avenue of the Americas
Sbarro, Inc. New York, New York 10036
401 Broadhollow Road (212) 704-6000
Melville, New York 11747
(516) 715-4100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed
Title of Amount Maximum Proposed Amount of
Each Class to be to be Offering Price Maximum Registration Fee
Registered Registered Per Unit (1) Offering Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11% Senior Notes Due 2009.. $255,000,000 100% $255,000,000 $70,890
- --------------------------------------------------------------------------------------------------------------------
Subsidiary Guarantees...... -- -- $0(2) $0(2)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(1) under the Securities Act of 1933.
(2) Pursuant to Rule 457(n) under the Securities Act of 1933 no fee is with
respect to the Subsidiary Guarantees.
THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
CO-REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
(A) The following direct or indirect wholly owned subsidiaries of
Sbarro, Inc. are guarantors of the notes and are co-registrants, with Sbarro,
Inc., each of which is incorporated in the jurisdiction and has the I.R.S.
Employer Identification Number indicated:
<TABLE>
<CAPTION>
I.R.S. Employer
Identification
Name of Corporation Jurisdiction of Organization Number
- ------------------- ---------------------------- ----------------
<S> <C> <C>
Sbarro Properties, Inc. New York 11-3279541
Sbarro America, Inc. New York 11-3189130
Sbarro America Properties, Inc. New York 11-3279540
Sbarro's of Texas, Inc. Texas 76-0435138
Italian Food Franchising, Inc. New York 11-3189139
Corest Management, Inc. New York 11-3189134
Franrest Management, Inc. New York 11-3189135
Larkfield Equipment Corp. New York 11-3117942
Sbarro Foods, Inc. New York 13-3289742
Sbarro of Roosevelt Field, Inc. New York 11-2738512
Sbarro of Virginia, Inc. Virginia 11-3189135
Demefac Leasing Corp. New York 11-3342379
Franchise Contracting and Equipment Corp. New York 11-2531875
Melville Advertising Agency Inc. New York 11-2534834
Sbarro Commack, Inc. New York 11-3046007
Sbarro Dominion Limited New Brunswick, Canada N/A
Sbarro of Las Vegas, Inc. New York 11-3282853
Sbarro of Hawaii, Inc. New York 11-3349165
Sbarro Pennsylvania, Inc. Pennsylvania 11-3153530
Sbarro Franchise Associates, Inc. New York 11-3494009
Sbarro H.D.F., Inc. New York 11-3445227
N.H.D., Inc. New York 11-3453320
Bushranger Holding, Inc. New York N/A
Melville Pizzeria, Inc. New York 11-3496599
Sbarro One World Trade, Inc. New York 11-3298403
401 Broad Hollow Realty Corp. New York 11-3206395
401 Broad Hollow Fitness Center Corp. New York 11-3494009
Sbarro Bistros, Inc. New York 11-3510693
Syosset Bistro, Inc. New York 11-3510383
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</TABLE>
<PAGE>
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVMEBER 12, 1999
PROSPECTUS
OFFER TO EXCHANGE
SBARRO, INC.
11% SENIOR NOTES DUE 2009 THAT HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 FOR ANY AND ALL OF OUR OUTSTANDING
11% SENIOR NOTES DUE 2009 THAT HAVE NOT BEEN SO REGISTERED
We are offering to exchange up to $255,000,000 aggregate principal
amount of our 11% Senior Notes due 2009, which have been registered under the
Securities Act of 1933, for an equal principal amount at maturity of our issued
and outstanding 11% Senior Notes due 2009. We refer to our issued and
outstanding Senior Notes as the "Old Notes" and the Senior Notes that we propose
to issue in exchange for the Old Notes as the "New Notes."
The terms of the New Notes are substantially identical in all material
respects to the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes, which we issued on September 28,
1999 pursuant to exemptions from the registration requirements of the Securities
Act of 1933 and applicable state securities laws. Where the terms of the Old
Notes and the New Notes are the same, we refer to them as the "Notes." For
information on the procedures for exchanging Old Notes for New Notes, see "The
Exchange Offer." Set forth below is a summary of the terms of the Notes offered
by this Prospectus. For more detail concerning the terms of the Notes, see
"Description of Notes."
. INTEREST
The Notes have a fixed annual rate of 11%, which will be paid every six
months on March 15 and September 15, commencing March 15, 2000.
. MATURITY
The Notes will mature on September 15, 2009.
. GUARANTEES
If we cannot make payments on the Notes when they are due, our guarantor
subsidiaries have guaranteed the Notes and must make payments instead. Not
all of our subsidiaries will be guarantors. Certain of our future
subsidiaries may also guarantee the Notes.
. RANKING
The Notes and the subsidiary guarantees are senior unsecured obligations of
us and our guarantor subsidiaries, ranking pari passu in right of payment
to all of our and the guarantor subsidiaries' present and future senior
debt, respectively.
. MANDATORY OFFER TO REPURCHASE
If we sell certain assets and do not use the proceeds as specified in the
indenture or if we experience specific kinds of changes of control, we must
offer to repurchase the Notes.
. OPTIONAL REDEMPTION
We may, at our option, redeem the Notes at the prices set forth in this
Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ________,
1999. YOU MAY WITHDRAW YOUR TENDER OF OLD NOTES AT ANY TIME BEFORE THE EXCHANGE
OFFER'S EXPIRATION DATE.
THE EXCHANGE OF NOTES SHOULD NOT BE TAXABLE FOR U.S. FEDERAL INCOME TAX
PURPOSES.
THIS INVESTMENT INVOLVES RISKS. SEE THE RISK FACTORS SECTION BEGINNING ON PAGE
15.
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER FEDERAL OR
STATE AGENCY HAS PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
INVESTMENT MERITS OF THE NEW NOTES OFFERED HEREBY. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is __________, 1999
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements about our
financial condition, results of operations, future prospects and business. These
statements appear in a number of places in this Prospectus and include
statements regarding our intent, belief, expectation, strategies or projections
at that time. These statements generally contain words such as "may," "should,"
"seeks," "believes," "expects," "intends," "plans," "estimates," "projects,"
"strategy" and similar expressions or the negative of those words.
Forward-looking statements are subject to a number of known and unknown
risks and uncertainties that could cause actual results to differ materially
from those projected, expressed or implied in the forward-looking statements.
These risks and uncertainties, many of which are not within our control,
include, but are not limited to those set forth under "Risk Factors." Such
factors include the following:
. holders of Notes are responsible for compliance with exchange
offer procedures;
. requirements for the transfer of Notes;
. our level of debt;
. our ability to meet our debt service obligations;
. the effective priority that the holders of any secured debt will
have over your claims as a holder of the New Notes;
. the restrictions imposed on us by the indenture and our credit
facility;
. the ability of courts, under specific circumstances, to void the
Notes or the guarantees;
. there is not a public market for New Notes;
. we have concentrated ownership;
. we may not be able to repurchase the Notes following a change in
control;
. we operate in a highly competitive environment;
. our operating expenses are vulnerable to increases in food and
restaurant operating costs;
. we rely on one independent wholesale distributor;
. we depend on our senior management and other key employees;
. our strategy depends on obtaining and retaining attractive high
customer traffic locations;
. our business is subject to governmental regulation;
. our quarterly results of operations fluctuate due to the
seasonality of our business; and
. we may be subject to Year 2000 risks.
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<PAGE>
Because forward-looking statements are subject to risks and
uncertainties, actual results may differ materially from those expressed or
implied by any forward-looking statements. You are cautioned not to place undue
reliance on these statements, which speak only as of the date of this
Prospectus.
We do not undertake any responsibility to release publicly any
revisions to these forward-looking statements to take into account events or
circumstances that occur after the date of this Prospectus. Additionally, we do
not undertake any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this
Prospectus.
WHERE YOU CAN FIND MORE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form
S-4 (Registration No. 333 - ) that we filed with the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, which we refer to as
the "Securities Act." This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits to the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to our company and
the New Notes offered by this Prospectus, please refer to the Registration
Statement. Any statements made in this Prospectus concerning the provisions of
certain documents are not necessarily complete and, in each instance, we urge
you to refer to the copy of such document filed as an exhibit to the
Registration Statement otherwise filed with the SEC. All of our statements
concerning such documents are qualified in their entirety by such reference.
We will file and have in the past filed annual, quarterly and other
reports and other information with the SEC. You may read and copy any document
we file at SEC's public reference facility at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can also be obtained by mail at prescribed
rates from the Public Reference Section of the SEC, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The SEC maintains a web site
(http://www.sec.gov) that contains reports and other information electronically
filed through the SEC's Electronic Data Gathering, Analysis and Retrieval
system, which is called "EDGAR."
We have agreed that, whether or not required by the rules and
regulations of the SEC, so long as any Notes are outstanding, we will furnish to
the holders of the Notes, and file with the SEC (unless the SEC will not accept
such a filing), (1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC under the Securities Exchange
Act of 1934, as amended, on Forms 10-Q and 10-K if we were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations," in each case that describes our financial condition
and results of operations and, with respect to our annual financial statements
and related notes only, a report thereon by our independent public accountants,
and (2) all current reports that would be required to be filed with the SEC on
Form 8-K if we were required to file such reports. We refer to the Securities
Exchange Act of 1934, as amended, as the "Exchange Act." In addition, for so
long as any Notes remain outstanding, we will agree to make available to any
prospective purchaser of the Notes, or any beneficial owner of the Notes in
connection with any sale thereof, the information required by Rule 144A(d)(4)
under the Securities Act.
We have not authorized any dealer, salesperson or other individual to
give any information or to make any representations other than those contained
in this Prospectus. You may not rely on any information or representations other
than those set forth in this Prospectus.
ii
<PAGE>
THIS PROSPECTUS IS NOT AN OFFER TO SELL THE NEW NOTES AND IT IS NOT
SOLICITING AN OFFER TO BUY THE NEW NOTES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS PROHIBITED. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
UNDER THE TERMS DESCRIBED HEREIN SHALL IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY DATE AFTER THE DATE HEREOF.
iii
<PAGE>
PROSPECTUS SUMMARY
Throughout this document, we refer to this Prospectus and the
accompanying Letter of Transmittal as the "Exchange Offer." The following
summary contains basic information about the Exchange Offer but does not contain
all the information that may be important to you. For a more complete
understanding of the Exchange Offer, we encourage you to read this entire
document and the other documents to which we refer, including the Letter of
Transmittal. Unless the context otherwise requires, all references to "we,"
"us," "our," "Sbarro" or the "Company" include Sbarro, Inc. and our
subsidiaries, except that in "Description of Notes," such words refer only to
Sbarro, Inc. and not to any of our subsidiaries.
THE COMPANY
We are a leading owner, operator and franchisor of quick-service
restaurants, serving a wide variety of Italian specialty foods. Under the
"Sbarro" and "Sbarro The Italian Eatery" names, we developed one of the first
quick-service concepts that extended beyond offering one primary specialty item
(i.e., pizza or hamburgers). Our diverse menu offering includes pizza, pasta and
other hot and cold Italian entrees, salads, sandwiches, cheesecake and other
desserts and beverages. All of our entrees are prepared fresh daily in each
restaurant according to special recipes developed by us. We focus on serving our
customers generous portions of high quality Italian-style food at attractive
prices. The Sbarro concept is unlike other quick-service Italian restaurants due
to its diverse menu selection and its fast, cafeteria-style service.
Since our inception in 1959, we have focused on high customer traffic
venues due to the large number of captive customers who base their eating
decision primarily on impulse and convenience. We therefore do not have to incur
the significant advertising and promotional expenditures that certain of our
competitors incur to attract customers to their destination restaurants. These
factors, combined with adherence to strict cost controls, provide us with high
and stable operating margins. We initially located our restaurant sites in New
York and then, with the rapid expansion of enclosed shopping malls in the 1970s,
expanded into these facilities nationwide due to their high customer traffic and
impulse purchase characteristics. Over the past ten years, we have extended the
Sbarro concept to other high customer traffic venues, including toll roads,
airports, sports arenas, hospitals, convention centers, university campuses and
casinos. We believe the opportunity to open additional Sbarro units in these and
other new venues should continue to increase as companies, municipalities and
others seek to outsource their non-core food operations to companies with an
established brand name. As of July 18, 1999, the Sbarro system included 908
restaurants, consisting of 634 Company-owned and 274 franchised restaurants
located in 48 States, the District of Columbia, the Commonwealth of Puerto Rico,
certain United States territories and 21 countries throughout the world. Of the
total 908 Sbarro units, 772 are located in enclosed shopping malls and the
remaining 136 are generally located in other high customer traffic venues,
including those described above.
We have demonstrated our ability to identify, develop and efficiently
operate restaurants and have increased our total restaurant base (including
franchised operations) from 103 restaurants at the time of our initial public
offering in 1985 to 908 at July 18, 1999. During the past decade, our growth in
shopping malls has been primarily derived from opportunities that have arisen
from the major renovation of existing shopping malls or the re-merchandising of
a mall's food operations and, to a lesser extent, the development of new
shopping malls. Historically, our strategy has been to own and operate our
restaurants directly whenever possible in order to closely control all aspects
of restaurant operations and, thus, maximize restaurant profitability. However,
we have granted franchises to accomplish our expansion in international markets
in order to minimize our capital risk and have typically granted franchises
domestically only when necessary to open a unit in a desirable location. For
example, the food
<PAGE>
operations in many of the non-mall locations in which we have units, such as
toll roads and certain airports, are operated by third-party food service
management companies, such as Host Marriott Services Corporation, under separate
franchise agreements with a number of quick-service restaurant companies. We
expect that a higher percentage of our future new unit growth will come from
franchised locations, as we believe opportunities to open Sbarro units in
non-mall venues will continue to increase, both domestically and
internationally. We have developed a qualification and training program that
provides strict operating standards for franchisees and we restrict the size of
territories granted to franchisees. We believe that our franchise units meet the
quality and customer service benchmarks of our Company-owned units. For the
twelve months ended July 18, 1999, restaurant sales at Company-owned restaurants
accounted for approximately 98% of our total operating revenues, with franchise
related income accounting for the balance.
INDUSTRY OVERVIEW
The restaurant industry represents one of the largest sectors of the
economy, with estimated industry sales of approximately $338 billion in 1998,
accounting for approximately 4% of the nation's gross domestic product. Between
1990 and 1998, restaurant industry sales grew an average of approximately 5% per
year.
The quick-service restaurant industry includes hamburgers, pizza,
chicken, various types of sandwiches, and Mexican, Chinese and other ethnic
foods. According to the National Restaurant Association, sales at quick-service
restaurants reached approximately $106 billion in 1998, compared with
approximately $62 billion in 1988. This growth primarily reflects consumers'
increasing desire for a convenient, fast and reasonably priced restaurant
experience. In addition, the National Restaurant Association estimates that the
percentage of the average American family's food budget spent on meals consumed
away from home has increased from approximately 25% in 1955 to approximately 44%
in 1998. We believe this trend will continue as the number of dual income
households increases, consumers' disposable income increases and consumers'
leisure time decreases. Further, pizza, which accounts for approximately 50% of
Sbarro's revenues, continues to be one of the most popular fast food categories.
At the end of 1998, there were over 30,000 pizza restaurants in the United
States, generating nearly $16 billion in annual revenues.
COMPETITIVE STRENGTHS
We believe that our success in the quick-service restaurant industry is
attributable to the following key competitive strengths:
LEADING QUICK-SERVICE OPERATOR IN HIGH CUSTOMER TRAFFIC VENUES. We are
a leading owner, operator and franchisor of quick-service restaurants, having
developed over the course of the past 40 years a business model for high
customer traffic venues including, among others, shopping malls, airports and
toll roads. Over the years, certain national quick-service pizza chains
attempted to replicate their stand-alone concepts in shopping malls but have
since reduced the scope of their operations in these venues. Additionally, we
have long-standing relationships with many of the major shopping mall developers
and real estate management companies, as well as with national food service
management companies that enter into restaurant franchise agreements on behalf
of owners. As a result of these relationships and our significant presence in
major shopping malls throughout the United States, we believe that we have a
competitive advantage in opening new units in high customer traffic venues.
STRONG, NATIONALLY RECOGNIZED BRAND NAME. The breadth of our operations
and the visibility of our units across many high customer traffic venues
throughout the United States and abroad have enabled us to forge strong brand
name recognition with our customers. Our consistent product quality and service,
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diverse menu of attractively priced Italian food served in a cafeteria style
format, distinctive logo and clean and bright locations have become recognized
symbols of Sbarro.
CONSISTENT RECORD OF GROWTH AND PROFITABILITY. We have a track record
of consistent operating performance and a high level of profitability. Our
operating and cost controls have resulted in a consistent revenue base and a
relatively low cost structure. As a result of our focus on high customer traffic
venues, we do not need to offer discounts or promotions to attract customers and
do not incur significant marketing expenditures. See "Selected Financial Data."
PROVEN BUSINESS MODEL. Over the course of the past 40 years, our
management team has developed and refined a business model specifically for high
customer traffic venues. We have extensive experience in identifying and
developing restaurant locations and in operating these sites. We forecast the
initial capital investment and pre-opening costs associated with opening a new
Sbarro restaurant as well as its expected sales and profitability. Since the
cost of food, paper products, payroll and other employee benefits as a
percentage of restaurant sales is generally consistent from location to location
by unit type, our forecasting focuses primarily on projecting restaurant
revenues and semi-variable costs. When forecasting revenues for prospective
locations, we consider such factors as the area's demographics and the retail
environment surrounding the location. We also have developed standard restaurant
operating procedures that specify all aspects of restaurant management,
including recipes, production processes, restaurant design, customer service and
staff training. This ensures system-wide consistency of product and service
quality, while maximizing profitability.
MODERATE CAPITAL EXPENDITURE REQUIREMENTS. Sbarro restaurants typically
have moderate capital expenditure requirements for both their initial
development and ongoing maintenance. Approximately 96% of our 634 Company-owned
restaurants at July 18, 1999 are located in shopping malls. These units are
relatively small (500 to 3,000 square feet) and are less expensive to open than
fast food establishments in free standing locations. Additionally, the majority
of our locations have limited, if any, dedicated seating solely for Sbarro
customers due to their location in common area food courts, which further
minimizes initial and ongoing maintenance costs. A new Sbarro unit typically
requires a $0.3 million to $0.5 million initial capital investment with only
minimal annual maintenance expenditures thereafter. This relatively low initial
capital investment, when combined with our historically high unit operating
margins, generally enables us to recover our initial investment and pre-opening
costs for mall units in approximately 2.5 to 3.5 years, depending upon unit
type. Further, our franchisees typically fund the capital expenditures for their
units.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT OWNERSHIP. Our experienced
management team has extensive experience in the restaurant industry and
represents one of our key competitive advantages. Our senior management team is
led by Mario Sbarro, Chairman and Chief Executive Officer, Anthony Sbarro, Vice
Chairman, and Joseph Sbarro, Senior Executive Vice President, all of whom have
been with us since their father opened the first Sbarro restaurant in 1959. As a
result of the consummation of the "going private" transaction discussed below,
the Sbarro family owns all of our common stock. See "-- The Going Private
Transaction."
BUSINESS STRATEGY
We continuously seek to provide high quality Italian food products to a
broad customer base. We have concentrated our product development on creating a
menu of healthy, attractively priced items that appeal to the tastes of our
customers and produce high margins. We intend to achieve further growth and
strengthen our competitive position through the continued implementation of the
following initiatives:
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EXPAND TRADITIONAL SBARRO STORE BASE. We plan to continue to increase
our network of Company-owned and franchised Sbarro locations. We believe new
Company-owned locations will primarily be driven by opportunities arising from
major renovations of existing shopping malls or the re-merchandising of a mall's
food operations and, to a lesser extent, the development of new shopping malls.
We also plan to increase the level of franchising in both international and
domestic markets.
INCREASE PENETRATION OF NEW HIGH CUSTOMER TRAFFIC VENUES. We began
targeting toll roads and airport locations in the early 1990s and subsequently
expanded our targeted venues to include sports arenas, hospitals, convention
centers, university campuses and casinos due to the similar characteristics
(i.e., high customer traffic, impulse purchase, etc.) between these venues and
our core shopping mall locations. Approximately 15% of our Company-owned and
franchise restaurants are located in these non-mall venues. We believe these
venues offer significant expansion potential as the owners of these facilities
(or, in certain cases, food service management companies with whom the owners
have contracted the operations) increasingly seek to outsource their non-core
food service operations to companies with an established brand, such as Sbarro,
in order to simplify their own operations and potentially increase
profitability. As previously discussed, a significant portion of our units in
these locations are, and are expected to continue to be, operated as franchises.
PURSUE STRATEGIC JOINT VENTURE ARRANGEMENTS. Since 1995, we have
entered into several joint ventures to develop new restaurant concepts in an
effort to leverage our restaurant management expertise into other venues that we
believe have attractive growth opportunities. To date, these joint ventures have
established mid and upper-priced Italian and steakhouse restaurants.
Additionally, we have recently acquired, through a joint venture, a two-unit
Mexican restaurant business and have established a joint venture that intends to
operate seafood restaurants. Our joint ventures presently operate 24
restaurants. We have chosen to develop these ventures with restaurateurs
experienced in the particular food area. Our ownership interest in these
ventures currently ranges from 25% to 80% and we are actively involved in the
operation and administration of all of these ventures. Our joint ventures are in
various stages of development and expansion, and we are also considering
additional concepts for their development potential. Given the early development
stage of these ventures and their ownership structure, our existing joint
ventures are, and our future joint ventures are expected to be, initially
designated as, or held by, Unrestricted Subsidiaries under the indenture
governing the Notes (the "Indenture"). Unrestricted Subsidiaries will not
guarantee our obligations under the Notes and will not be subject to the
restrictive covenants under the Indenture. See "Description of Notes --
Subsidiary Guarantees." There can be no assurance as to the performance of our
existing joint ventures or our ability to identify and successfully develop new
restaurant concepts.
THE GOING PRIVATE TRANSACTION
On September 28, 1999, Mario Sbarro, Joseph Sbarro, Joseph Sbarro
(1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin
Montgomery, not individually but as trustees under that certain Trust Agreement
dated April 28, 1994 for the benefit of Carmela Sbarro and her descendants
became the holders of all of our common stock pursuant to an Amended and
Restated Agreement and Plan of Merger dated as of January 19,1999 among us,
Sbarro Merger LLC and such holders. We refer to the persons who became the
owners of all of our common stock as the "Continuing Shareholders."
Pursuant to the terms of the merger agreement, Sbarro Merger LLC merged
with and into us, and our shareholders, other than the Continuing Shareholders
and Sbarro Merger LLC, received the right to receive $28.85 in cash in exchange
for the approximately 13.5 million shares of our common stock not owned by the
Continuing Shareholders, and all outstanding stock options, including stock
options held by the Continuing Shareholders, were terminated in exchange for a
cash payment equal to the number of
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shares subject to the stock option multiplied by the excess, if any, of $28.85
over the applicable option exercise price. We refer to the merger of Sbarro
Merger LLC into us as the "Merger" and our former shareholders (other than the
Continuing Shareholders), who received $28.85 per share in cash in exchange for
such 13.5 million shares of our common stock as the "Public Shareholders."
We needed approximately $411.0 million to consummate the Merger and pay
related fees and expenses. We obtained such funds from:
. $159.8 million of our cash on hand; and
. the $251.2 million of gross proceeds from the private debt
offering in which we issued the Old Notes.
Contemporaneously with the consummation of the Merger and the private
debt offering, we also entered into $30.0 million revolving credit facility to
help ensure that we will have adequate working capital in the future. We refer
to the Merger, the private debt offering in which we issued the Old Notes and
our credit facility as the "Transaction."
* * * * *
Our principal executive offices are located at 401 Broadhollow Road,
Melville, New York 11747, and our telephone number is (516) 715-4100. Sbarro,
Inc. was incorporated under the laws of the State of New York in 1977.
5
<PAGE>
THE PRIVATE DEBT OFFERING
Pursuant to a Note Purchase Agreement dated as of September 23, 1999,
we completed the sale of the Old Notes in an aggregate principal amount of
$255.0 million to Bear, Stearns, & Co. Inc. on September 28, 1999. Bear Stearns
subsequently resold the Old Notes to qualified institutional buyers pursuant to
Rule 144A under the Securities Act, which is an exemption from the registration
requirements under that Act. The net proceeds from the our sale of the Old Notes
of approximately $242.2 million after deducting discounts to Bear Stearns and
estimated offering expenses, were used, with other sources of funds, to finance
the Merger and pay related fees and expenses. In this document, we sometimes
refer to Bear Stearns as the "Initial Purchaser" and the sale of the Old Notes
to the Initial Purchaser and the subsequent resale to qualified institutional
buyers as the "Private Debt Offering."
As a condition to their purchase of the Old Notes, we agreed to conduct
the Exchange Offer following the Private Debt Offering.
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Notes Offered........................................ We are offering for exchange up to $255,000,000
aggregate principal amount of 11% Senior Notes due 2009,
which we have registered under the Securities Act. The
terms of the New Notes are substantially identical to
the Old Notes in all material respects, except that:
. the New Notes have been registered under the
Securities Act;
. the Old Notes have certain transfer
restrictions and registration rights; and
. the New Notes will not contain certain
provisions relating to liquidated damages
to be paid to the holders of Old Notes under
certain circumstances if we do not timely
conduct the Exchange Offer.
Exchange Offer....................................... We are offering to exchange the New Notes for Old Notes
that are timely and properly tendered and accepted for
exchange. We will issue the New Notes promptly after the
expiration date of the Exchange Offer for Old Notes that
are properly tendered on or before the Expiration Date
and not withdrawn. If you are not an affiliate of the
Company or another person ineligible to participate in
the Exchange Offer and you do not tender your Old Notes,
you will have no further exchange rights under the
Registration Rights Agreement with respect to
non-tendered Old Notes once the Exchange Offer is
consummated. See "The Exchange Offer - Resale of New
Notes." Accordingly, your Old Notes will continue to be
subject to the restrictions on transfer
6
<PAGE>
discussed in "The Exchange Offer - Consequences of Failure to
Exchange."
Tenders, Expiration Date; Withdrawal;
Exchange Date........................................ The Exchange Offer will expire at 5:00 p.m., New York
City time, on __________, 1999, which is 30 days after
the date this Prospectus is first mailed to holders of
Old Notes, unless extended by us in our sole discretion.
You may withdraw any Old Notes tendered pursuant to the
Exchange Offer at any time prior to the expiration date
of the Exchange Offer. If you withdraw any Old Notes
tendered pursuant to the Exchange Offer, you may
retender them at any time prior to the expiration date
of the Exchange Offer. We will return to you any of your
tendered Old Notes not accepted for exchange for any
reason without expense as promptly as practicable after
the expiration or termination of the Exchange Offer. The
date of acceptance for exchange for New Notes of all Old
Notes timely and properly tendered, not withdrawn and
accepted will be the first business day following the
expiration date of the Exchange Offer or as soon as
practicable thereafter.
Shelf Registration Statement......................... If the Exchange Offer is not permitted by applicable law
or Commission policy or you notify us in a timely manner
of the occurrence of certain events set forth in the
Registration Rights Agreement, we have agreed to
register your Old Notes with a shelf registration
statement and to use our best efforts to cause the shelf
registration statement to be declared effective by the
SEC within certain time periods after the consummation
of the Exchange Offer. We have agreed to maintain the
effectiveness of the shelf registration statement for,
under certain circumstances, a maximum of two years
following the date that the SEC declares it effective to
cover resales of the Old Notes held by such holders.
Accrued Interest on the New Notes.................... Each New Note will bear interest from the most recent
date to which interest has been paid on the Old Note for
which it is exchanged or, if no interest payment has
been made on the Old Note, from September 28, 1999.
Interest on the Old Notes accepted for exchange will
cease to accrue upon issuance of the New Notes.
Procedures for Tendering Old Notes................... If you want to accept the Exchange Offer, you must
complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with its instructions,
and mail or otherwise deliver the Letter
7
<PAGE>
of Transmittal, or the facsimile, together with either (1)
certificates for your Old Notes or (2) a book-entry confirmation
of your Old Notes into the book-entry transfer facility, if
that procedure is available, and, in each case, any
other required documentation, to Firstar Bank, N.A., as
Exchange Agent, at the address set forth in The
"Exchange Offer" section of this Prospectus and in the
Letter of Transmittal.
Special Procedures for Beneficial Owners............. Any beneficial owner of Old Notes whose Old Notes are
registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and who wishes to
tender the beneficial owner's Old Notes for exchange
should contact the registered holder and instruct it to
tender its Old Notes on the beneficial owner's behalf.
If the beneficial owner wishes to tender its Old Notes
on its own behalf, the beneficial owner must, prior to
completing and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in
its own name or obtain a properly completed bond power
from the registered holder. The transfer of registered
ownership may take considerable time and may not be able
to be completed prior to the expiration date of the
Exchange Offer.
Guaranteed Delivery Procedures....................... If you want to tender your Old Notes for exchange and
your Old Notes are not immediately available or you
cannot deliver the Old Notes or any other documents
required by the Letter of Transmittal to the Exchange
Agent in a timely manner, you must tender your Old Notes
according to the delivery procedures described in "The
Exchange Offer -- Guaranteed Delivery Procedures"
section of this Prospectus.
Certain Federal Income Tax Considerations............ The exchange pursuant to the Exchange Offer should not
be treated as an event in which gain or loss, if any, is
realized by you or our company for U.S. federal income
tax purposes.
Use of Proceeds...................................... We will not receive any proceeds from the Exchange Offer.
Exchange Agent....................................... Firstar Bank, N.A., the trustee under the Indenture, is
serving as Exchange Agent for the Exchange Offer.
8
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
New Notes............................................ A total of $255.0 million in principal amount at
maturity of 11% Senior Notes due 2009, which we have
registered under the Securities Act.
Maturity............................................. The New Notes will mature on September 15, 2009.
Interest............................................. We will pay interest on the New Notes at a fixed annual
rate of 11%. We will pay the interest due on the New
Notes in cash every six months on March 15 and September
15. We will make the first payment on March 15, 2000.
Each New Note will bear interest from the most recent
date to which interest on the Old Note has been paid or,
if no interest payment has been made, from September 28,
1999. Interest on the Old Notes accepted for exchange
will cease to accrue upon issuance of the New Notes.
Subsidiary Guarantors................................ All of our Restricted Subsidiaries (as defined in the
Indenture) will guarantee the New Notes with
unconditional guarantees of payment. If we cannot make
payments on the New Notes when they are due, the
guarantor subsidiaries must make them instead.
Ranking.............................................. The New Notes will be unsecured senior obligations and
will rank equally with all our other existing and future
senior unsecured debt and will rank senior to all our
existing and future subordinated debt, if any. The New
Notes will be effectively subordinated to all of our
existing and future senior secured debt, if any, to the
extent of such security.
Our subsidiaries' guarantees will be unsecured senior
obligations of the respective guarantor subsidiaries and
will rank equally with all of our guarantor subsidiaries'
existing and future senior unsecured debt and will rank
senior to all of our guarantor subsidiaries' existing
and future subordinated debt, if any. The guarantees will
be effectively subordinated to all of our guarantor subsidiaries'
existing and future senior secured debt, if any, to the extent
of such security.
As of July 18, 1999, on a pro forma basis after giving
effect to the Transaction, the aggregate amount of our
consolidated indebtedness would have been $265.0 million
(all of which would have been senior debt), which does not
include guarantees
9
<PAGE>
of indebtedness and reimbursement obligations in respect of
letters of credit in the aggregate amount of approximately
$8.8 million and guarantees of certain real property lease
obligations of our Unrestricted Subsidiaries (as defined in
the Indenture) and related joint ventures.
Optional Redemption.................................. We may redeem some or all of the New Notes at our option
at any time at the redemption prices described under
"Description of Notes -- Optional Redemption" plus any
interest that is due and unpaid and liquidated damages, if
any, on the date we redeem the New Notes.
Mandatory Repurchase................................. If we experience a change of control or sell assets, in
certain circumstances, we must offer to repurchase the
New Notes at the prices set forth under "Description of
Notes-- Repurchase at Option of Holders."
Certain Covenants.................................... We will issue the New Notes under the Indenture with
Firstar Bank, N.A., as trustee. The Indenture, among
other things, limits our ability and the ability of our
Restricted Subsidiaries to:
. incur additional indebtedness;
. pay dividends or make other distributions on,
redeem or repurchase, our capital stock;
. make investments and other restricted payments;
. use assets as security in other transactions;
. sell certain assets, consolidate or merge with
or into other companies;
. enter into certain transactions with our
affiliates; and
. sell stock in our Restricted Subsidiaries.
These covenants are subject to exceptions, which are
described in "Description of Notes."
</TABLE>
10
<PAGE>
RISK FACTORS
You should carefully consider the matters set forth under "Risk
Factors" beginning on page 15, as well as the other information and financial
statements and data included in this Prospectus, before tendering your Old Notes
in the Exchange Offer and making an investment in the New Notes.
11
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents our summary consolidated historical and
pro forma consolidated financial data for the periods and the dates indicated.
Unless otherwise indicated, all amounts and ratios set forth below reflect our
consolidated financial results, including certain subsidiaries that will
initially be designated as Unrestricted Subsidiaries under the Indenture and
that will not guarantee our obligations under the Notes. Historical operating
results for interim periods are not necessarily indicative of results that may
be expected for the full year, particularly since our earnings, EBITDA (as
defined below) and Adjusted EBITDA (as defined below) have been highest in the
fourth fiscal quarter due primarily to increased volume in shopping malls during
the holiday shopping season. The unaudited consolidated pro forma financial data
and the as adjusted balance sheet data are provided for informational purposes
only and are not necessarily indicative of future results or what our results of
operations or financial position would have been had the Transaction occurred on
the dates indicated. The information presented below should be read in
conjunction with "Unaudited Consolidated Pro Forma Financial Data," "Selected
Consolidated Historical Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our audited Consolidated
Financial Statement and notes thereto for the year ended January 3, 1999 and our
unaudited Consolidated Financial Statements and notes thereto for the
twenty-eight weeks ended July 18, 1999 included elsewhere herein.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------- ---------
HISTORICAL
FISCAL YEAR TWENTY-EIGHTY WEEKS ENDED
-------------------------------------------- ------------------------- PRO FORMA
TWENTY-EIGHT
WEEKS ENDED
JULY 18, JULY 12, JULY 18,
1998(1) 1997 1996 1998(1)(2) 1999 1998 1999 (2)
------- ---- ---- --------- -------- --------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurant sales...............$361,534 $337,723 $319,315 $361,534 $179,051 $174,028 $179,051
Franchise related income........ 8,578 7,360 6,375 8,578 4,332 4,154 4,332
Interest income................. 5,120 4,352 3,798 -- 2,624 2,545 ---
------- -------- -------- -------- -------- -------- --------
Total revenues............375,232 349,435 329,488 370,112 186,007 180,727 183,383
Costs and expenses:
Costs of food and paper
products..................... 76,572 69,469 68,668 76,572 36,981 36,423 36,981
Restaurant operating
expenses:
Payroll and other employee
benefits.................... 93,367 84,910 78,258 93,367 49,575 46,899 49,575
Occupancy and other...........101,013 93,528 85,577 101,013 56,205 52,985 56,205
Depreciation and
amortization.................. 22,429 23,922 22,910 29,924 12,278 11,725 16,314
General and administrative...... 19,708 17,762 14,940 19,708 12,339 10,367 12,339
Interest expense................ -- -- -- 30,519 -- -- 16,433
Provision for unit
closings(3)....................... 2,515 3,300 -- 2,515 -- 1,525 --
Non-recurring charges(4)........ 5,605 -- -- 5,605 -- 986 --
Other income.................... (2,680) (1,653) (1,171) (2,680) (2,574) (1,259) (2,574)
------- -------- -------- -------- -------- -------- ---------
Total costs and
expenses..........................318,529 291,238 269,182 356,543 164,804 159,651 185,273
Income before income taxes and
cumulative effect of change
in method of accounting......... 56,703 58,197 60,306 13,569 21,203 21,076 (1,890)
Income taxes(5)................... 21,547 22,115 22,916 8,426 8,057 8,009 858
------- -------- -------- -------- -------- -------- --------
Income before cumulative
effect of change in method
of accounting................... 35,156 36,082 37,390 5,143 13,146 13,067 (2,748)
Cumulative effect of change
in method of accounting for
start-up costs.................. (822) -- -- (795) -- (822) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................$ 34,334 $ 36,082 $ 37,390 $ 4,348 $ 13,146 $ 12,245 $ (2,748)
======== ======== ======== ======== ======== ======== =========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ---------
HISTORICAL
FISCAL YEAR TWENTY-EIGHT WEEKS ENDED
----------------------------------------- ------------------------
PRO FORMA
TWENTY-EIGHT
JULY 18, JULY 12, WEEKS ENDED
1998(1) 1997 1996 1998(1)(2) 1999 1998 JULY 18,
------ ---- ---- ---------- --------- -------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL AND RESTAURANT
DATA:
EBITDA(6).........................$ 74,012 $ 77,767 $ 79,418 $ 74,012 $ 30,857 $ 30,256 $ 30,857
Adjusted
EBITDA(6)......................... 82,132 81,067 79,418 82,132 30,857 32,767 30,857
EBITDA margin(6).................. 20.0% 22.5% 24.4% 20.0% 16.8% 17.0% 16.8%
Adjusted EBITDA margin(6)......... 22.2% 23.5% 24.4% 22.2% 16.8% 18.4% 16.8%
Capital expenditures(7)...........$ 27,717 $ 28,556 $ 25,928 $ 27,717 $ 12,746 $ 15,760 $ 12,746
Ratio of earnings to fixed
charges(8)...................... 3.9x 4.2x 4.6x 1.3x 2.9x 3.1x 0.9x
Number of restaurants at
end of period;
Company-owned................... 630 623 597 630 634 626 634
Franchised...................... 268 239 219 268 274 247 274
-------- -------- -------- -------- -------- -------- --------
Total number of restaurants... 898 862 816 898 908 873 908
======== ======== ======== ======== ======== ======== ========
PRO FORMA RATIOS:
EBITDA to cash interest expense(9)................................ 2.6x 2.0x
Adjusted EBITDA to cash interest expense(9)....................... 2.9x 2.0x
Total debt to EBITDA.............................................. 3.4x 8.3x
Total debt to Adjusted EBITDA..................................... 3.1x 8.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 18, 1999
----------------------------
ACTUAL AS ADJUSTED(10)
----------------------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA: ----------------------------
<S> <C> <C>
Working capital (deficiency)....................................... $132,072 $(13,928)
Total assets....................................................... 311,744 405,479
Total long-term debt(11)........................................... -- 255,000
Shareholders' equity............................................... 270,489 99,224
</TABLE>
(1) Our fiscal year ends on the Sunday nearest December 31. Our 1998 fiscal
year and the twelve months ended July 18, 1999 each contained 53 weeks.
All other fiscal years presented contained 52 weeks. Accordingly, the
1998 fiscal year and the twelve months ended July 18, 1999 each
benefited from one additional week of operations over the other
reported fiscal years. The additional week contributed revenues, EBITDA
and net income of approximately $8.5 million, $2.7 million and $1.7
million, respectively.
(2) Gives effect to the Transaction as if it had occurred at the beginning
of the respective periods.
(3) Represents provisions of (a) $3.3 million for the closing of two joint
venture units in 1997 and (b) $2.5 million for the closing of 20
restaurant locations in 1998.
(4) Represents (a) a charge of $3.5 million in connection with the
settlement of a lawsuit, (b) a write down of $1.1 million of the
carrying cost on a parcel of Company-owned land and (c) other charges
of approximately $1.0 million for costs associated with the termination
of a prior merger proposal by the Sbarro Family.
(5) We currently intend to elect to be taxed under the provisions of
Subchapter S of the Internal Revenue Code of 1986, as amended (the
"Code"), and, where applicable and permitted, under similar state and
local income tax provisions beginning as early as fiscal 2000. Under
the provisions of Subchapter S, substantially all taxes on our income
would be paid by our shareholders. On a pro forma basis to give effect
to the Transaction, if we were taxed as an S corporation as of the
beginning of fiscal 1998, we and our shareholders would have had an
aggregate tax liability of approximately $13.6 million on our income.
This amount is higher than the amount presented due to differences in
tax rates between individual and corporate taxpayers
13
<PAGE>
and temporary differences currently accounted for as deferred taxes in
our financial statements (such deferred taxes will be eliminated or
reduced upon conversion to an S corporation). The Indenture will permit
us to make distributions to our shareholders in amounts that are
designed to enable them to pay their personal tax obligations arising
from our Subchapter S earnings. See "Description of Notes -- Restricted
Payments."
(6) EBITDA represents earnings before cumulative effect of change in
accounting method, interest income, interest expense, taxes,
depreciation and amortization. Adjusted EBITDA represents EBITDA plus
provision for unit closings and non-recurring charges. EBITDA margin
represents EBITDA divided by the sum of restaurant sales and franchise
related income. Adjusted EBITDA margin represents Adjusted EBITDA
divided by the sum of restaurant sales and franchise related income.
EBITDA and Adjusted EBITDA should not be considered in isolation from,
or as a substitute for, net income, cash flow from operations or other
cash flow statement data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Rather, EBITDA and Adjusted EBITDA are presented because
they are widely accepted supplemental financial measures, and we
believe that they provide relevant and useful information. Our
calculation of EBITDA and Adjusted EBITDA may not be comparable to
similarly titled measures reported by other companies, since all
companies do not calculate these non-GAAP measures in the same manner.
Our EBITDA and Adjusted EBITDA calculations are not intended to
represent cash provided by (used in) operating activities since they do
not include interest and taxes and changes in operating assets and
liabilities, nor are they intended to represent a net increase in cash
since they do not include cash provided by (used in) investing and
financing activities.
(7) Included in fiscal 1996, fiscal 1997, fiscal 1998 (actual and pro
forma), the twenty-eight weeks ended July 12, 1998 and July 18, 1999
(actual and pro forma) and the twelve months ended July 18, 1999 are
$4.2 million, $5.0 million, $4.8 million, $3.5 million, $0.4 million
and $1.7 million, respectively, related to construction of the
Company's headquarters.
(8) The ratio of earnings to fixed charges has been determined by dividing
the total fixed charges into the sum of earnings before taxes on income
and fixed charges. Fixed charges consist of interest expense and
one-third of rental expense (deemed to be a reasonable approximation of
the interest factor).
(9) Cash interest expense represents total interest expense, less (a)
amortization of $1.5 million of deferred financing fees and
amortization of $0.4 million of original issue discount on the Notes
for fiscal 1998 and the twelve months ended July 18, 1999 and (b)
amortization of $0.8 million of deferred financing fees and
amortization of $0.2 million of original issue discount on the Notes.
(10) Gives effect to the Transaction as if it had occurred as of July 18,
1999. See "Capitalization" and "Unaudited Consolidated Pro Forma
Financial Data."
(11) The Notes are recorded at a discount of approximately $3.8 million to
the face amount to reflect the original issue discount on the Notes.
14
<PAGE>
RISK FACTORS
An investment in the Notes involves a high degree of risk. You should
carefully consider the following risk factors in addition to the other
information included in this Prospectus before tendering your Old Notes in the
Exchange Offer and making an investment in the New Notes.
RISKS RELATING TO THE NOTES
HOLDERS RESPONSIBLE FOR COMPLIANCE WITH EXCHANGE OFFER PROCEDURES; CONSEQUENCES
OF FAILURE TO EXCHANGE
We will issue the New Notes in exchange for the Old Notes pursuant to
the Exchange Offer only after we have received such Old Notes, along with a
properly completed and duly executed Letter of Transmittal and all other
required documents, in a timely manner. Therefore, if you want to tender your
Old Notes in exchange for New Notes, you should allow sufficient time to ensure
timely delivery. Neither the Exchange Agent nor the Company is under any duty to
give notification of defects or irregularities with respect to the tender of Old
Notes for exchange. The Exchange Offer will expire at 5:00 p.m. New York City
time on ___________, 1999. Old Notes that are not tendered or are tendered but
not accepted for exchange will, following the Expiration Date and the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act or offered and sold by you
pursuant to an exemption from or in a transaction not subject to, the Securities
Act. Subject to certain exceptions, you will not be entitled to any rights to
have such Old Notes registered under the Securities Act. We do not currently
anticipate that we will register the Old Notes under the Securities Act. See
"The Exchange Offer - Consequences of Failure to Exchange Offer."
The New Notes and any Old Notes which remain outstanding after
consummation of the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage thereof have
taken certain actions or exercised certain rights under the Indenture.
THERE ARE REQUIREMENTS FOR THE TRANSFER OF NEW NOTES
Based on interpretations by the staff of the SEC, as set forth in
no-action letters issued to third parties, we believe that you may offer for
resale, resell and otherwise transfer the New Notes without compliance with the
registration and prospectus delivery provisions of the Securities Act. These
interpretations apply only if
. you are not an "affiliate" of ours within the meaning of Rule
405 under the Securities Act,
. you acquired the New Notes in the ordinary course of your
business
. you are not a broker dealer who purchased the Old Notes from
us for resale pursuant to an exemption from the registration
requirements of the Securities Act and
. you have no arrangement with any person to participate in the
distribution of the New Notes that you acquire in the Exchange
Offer.
We have not submitted a no-action letter to the SEC regarding this
Exchange Offer, and we cannot assure you that the SEC would make a similar
determination with respect to the Exchange Offer. If
16
<PAGE>
you are an affiliate of the Company, or are engaged in or intend to engage in or
have any arrangement or understanding with respect to a distribution of the New
Notes to be acquired in the Exchange Offer, you
. may not rely on the applicable interpretations of the staff of
the SEC and
. must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any
resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge in the Letter of Transmittal that it will
deliver a prospectus meeting the requirements under the Securities Act in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act for the period set forth in the "Plan of Distribution." This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Notes where the Old Notes
exchanged for such New Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. To comply with the
securities laws of certain jurisdictions, if applicable, the New Notes may not
be offered or sold unless they have been registered or qualified for sale in
such jurisdictions or an exemption from registration or qualification is
available.
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT, WHICH COULD HURT OUR ABILITY TO MAKE
PRINCIPAL AND INTEREST PAYMENTS ON THE NOTES.
As a result of the Transaction, we have substantial debt and are highly
leveraged. After giving pro forma effect to the Transaction:
. our total debt outstanding as of July 18, 1999 would have been
approximately $265.0 million, which does not include
guarantees of indebtedness and reimbursement obligations in
respect of letters of credit in the aggregate amount of
approximately $8.8 million and guarantees of certain real
property lease obligations of our Unrestricted Subsidiaries
and related joint ventures;
. our interest expense would have been approximately $30.5
million for the twelve months ended July 18, 1999; and
. our total shareholders' equity as of July 18, 1999 would have
been approximately $99.2 million, with a tangible net worth
deficiency of $140.5 million.
The Transaction actually closed on September 28, 1999. Our cash on hand
increased between July 18, 1999 and September 28, 1999. Therefore, we are able
to use additional cash, rather than borrowings under our credit facility, to
consummate the Transaction. The pro forma numbers discussed in the previous
paragraph give effect to borrowings under our credit facility that we would have
needed to make to consummate the Transaction on July 18, 1999 but that we did
not need to make (and did not make) upon consummation of the Transaction because
of the increase in our cash on hand between July 18, 1999 and September 29,
1999.
As of November 1, 1999, we had undrawn availability under our credit
facility of approximately $28.2 million (net of outstanding letters of credit
and certain guarantees of reimbursement obligations that aggregated
approximately $1.8 million).
16
<PAGE>
We and our subsidiaries also may, subject to certain restrictions in
the Indenture and our credit facility, incur significant additional indebtedness
(including secured indebtedness) from time to time. Our high level of debt could
have important consequences to you, including the following:
. making it difficult for us to satisfy our obligations under
the Notes;
. limiting our ability to obtain financing for working capital,
capital expenditures, acquisitions and general corporate
purposes;
. increasing our vulnerability to downturns in our business or
the economy generally;
. limiting our ability to withstand competitive pressures from
our less leveraged competitors;
. hindering our ability to plan for changes in our business and
the industry in which we operate;
. requiring us to manage a company that will be subject to
financial and other covenants; and
. having a material adverse effect on us if we fail to comply
with the covenants in the Indenture or our credit facility, as
a failure could result in an event of default that, if not
cured or waived, could result in all of our indebtedness
becoming immediately due and payable.
We urge you to consider the information under "Capitalization,"
"Unaudited Consolidated Pro Forma Financial Data" and "Description of Notes --
Incurrence of Indebtedness and Issuance of Preferred Stock" for more information
on these matters.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE
OBLIGATIONS.
Although we currently expect that we will be able to service our debt
with cash flow from operations, we cannot assure you that our future cash flows
will be sufficient to meet our debt service obligations and commitments, and any
insufficiency could have a negative impact on our business. Our ability to
generate cash flows from operations in order to make scheduled payments on our
debt as they become due will depend on our future financial performance, which
will be affected by a range of economic, competitive and business factors. We
cannot control many of these factors, such as general economic and financial
conditions in the restaurant industry or the economy at large. A significant
drop in operating cash flows resulting from changes in economic conditions,
increased competition or other uncertainties beyond our control could increase
the need for alternative sources of liquidity and could have a material adverse
effect on our business, financial condition, results of operations, prospects
and our ability to service our debt obligations. If we are unable to generate
sufficient cash flows to meet our debt service obligations, we will have to
pursue one or more alternatives, such as reducing or delaying capital
expenditures, refinancing debt, selling assets or raising equity capital. We
cannot assure you that any of these alternatives could be accomplished on
satisfactory terms or that they would yield sufficient funds to retire the Notes
and our other senior debt. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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THE CLAIMS OF HOLDERS OF ANY SECURED DEBT WILL HAVE EFFECTIVE PRIORITY OVER YOUR
CLAIMS AS A HOLDER OF THE NEW NOTES.
The New Notes will rank pari passu in right of payment with all of our
present and future senior debt (and senior in right of payment to all of our
present and future debt that is expressly subordinated to the Notes). Neither
the New Notes nor our credit facility is secured by any of our assets or any of
the assets of our subsidiary guarantors. Currently, neither we nor any of our
subsidiary guarantors have any material indebtedness that is secured by any of
our or their respective assets. Certain of our Unrestricted Subsidiaries are
likely to incur indebtedness that may be secured by their assets. Should we or
our subsidiary guarantors incur secured debt and become insolvent or be
liquidated, the secured lenders will have a claim on the assets securing such
indebtedness that will have priority over any claim you may have for payment
under the New Notes or the guarantees. Accordingly, it is possible that there
would be no assets remaining from which claims of the holders of the Notes could
be satisfied or, if any assets remained, they might be insufficient to satisfy
these claims fully. See "Capitalization," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Description of Credit Facility," "Description of Notes" and the
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.
THE INDENTURE AND OUR CREDIT FACILITY IMPOSE RESTRICTIONS ON US THAT MAY
RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS.
The Indenture and our credit facility contain covenants that restrict
our ability to take various actions, such as incurring additional debt, paying
dividends, repurchasing junior debt, making investments, entering into certain
transactions with affiliates, merging or consolidating with other entities and
selling all or substantially all of our assets. Our ability to comply with these
covenants can be affected by events beyond our control and we cannot assure you
that we will satisfy those requirements. A breach of any of these provisions
could result in a default under the Indenture and/or our credit facility, which
would allow all amounts outstanding under both to be declared immediately due
and payable. We cannot assure you that our assets would be sufficient to repay
such amounts (including amounts due under the New Notes) in full. We may also be
prevented from taking advantage of business opportunities that arise if we fail
to meet certain financial ratios or because of the limitations imposed on us by
the restrictive covenants under the Indenture and our credit facility. We urge
you to read the information under "Description of Notes -- Certain Covenants"
and "Description of Credit Facility" for a more detailed discussion of the
substantive requirements of these restrictive covenants.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
THE NEW NOTES OR THE GUARANTEES.
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance laws, a court
of competent jurisdiction could void, in whole or in part, the New Notes or the
guarantees or, alternatively, subordinate the Notes or the guarantees to our or
our subsidiaries' respective existing and future debt. For example, a court
could void or subordinate the Notes or guarantees if it finds that at the time
the Notes or guarantees are issued any of the following occurred:
. we or the guarantors incurred such indebtedness with the
intent to hinder, delay or defraud creditors; or
. we or the guarantors received less than reasonably equivalent
value or fair consideration for incurring such debt, and
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. were insolvent,
. were rendered insolvent by reason of the incurrence of such
debt and the application of the proceeds of that debt,
. were engaged or were about to engage in a business or
transaction for which the assets remaining within the United
States constituted unreasonably small capital to carry on our
business, or
. intended to incur, or believed that we or our guarantors would
incur, debts beyond our or their ability to pay such debts as
they matured.
The measure of insolvency for purposes of determining these fraudulent
conveyance issues will vary depending upon the law applied in each case.
Generally, however, we or our subsidiaries would be considered insolvent if the
sum of our or their respective debts, including contingent liabilities, is
greater than all of our or their respective assets at fair valuation or if the
present fair saleable value of our or their respective assets was less than the
amount that would be required to pay the probable liability on our or their
respective existing debts, including contingent liabilities, as they become
absolute and matured.
We believe that, for purposes of the United States Bankruptcy Code and
state fraudulent transfer or conveyance laws, the Notes and the guarantees are
being issued without the intent to hinder, delay or defraud creditors and for
proper purposes and in good faith. Because the proceeds of the indebtedness,
including the New Notes and guarantees, we are incurring will be paid to
Sbarro's shareholders in the Merger, a court might find that we did not receive
reasonably equivalent value or fair consideration for the issuance of the New
Notes. Also, a court might find that our present or future subsidiary guarantors
did not receive reasonably equivalent value or fair consideration for the
issuance of their guarantees. However, we believe that after the issuance of the
New Notes and the application of proceeds therefrom, we will be solvent, will
have sufficient capital for carrying on our business and will be able to pay our
debts as they mature. We cannot assure you, however, that a court would agree
with our view.
THERE IS NO PUBLIC MARKET FOR THE NOTES.
Prior to the Exchange Offer there has been no public trading market for
the New Notes. We have been advised by the Initial Purchaser that it currently
makes, and intends to continue to make, a market in the Notes; however, the
Initial Purchaser is not obligated to do so. Any market-making may be
discontinued at any time, and we cannot assure you that an active trading market
for the New Notes will develop or, if a trading market develops, that it will
continue. Further, the liquidity of, and trading market for, the New Notes may
be adversely affected by declines and volatility in the market for high yield
securities generally. The liquidity of, and trading market for, the New Notes
also may be adversely affected by any changes in our financial performance or
prospects or in the prospects for the other companies in our industry. We do not
intend to list the New Notes on any national securities exchange or to seek the
admission of the New Notes to trading in the National Association of Securities
Dealers Automated Quotation System.
RISKS RELATING TO US
THE SBARRO FAMILY CONTROLS US.
The Continuing Shareholders own 100% of our stock and have the power to
designate all of our directors and exercise control over our business, policies
and affairs. The interests of the Continuing Shareholders may differ from the
interests of the holders of the Notes.
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WE MAY NOT BE ABLE TO REPURCHASE THE NEW NOTES UPON A CHANGE OF CONTROL.
If a change of control occurs, we must offer to repurchase all
outstanding Notes at a purchase price equal to 101% of their principal amount,
plus accrued and unpaid interest and liquidated damages, if any, to the purchase
date. It is possible that we will not have sufficient funds at the time of such
change of control to make any required repurchase of the Notes. If we were
required to repurchase the New Notes, we would probably require third party
financing; however, we cannot be sure that we would be able to obtain such
financing on acceptable terms, if at all. In addition, under certain
circumstances our credit facility restricts our ability to repurchase Notes and
prohibits repurchases pursuant to a change of control offer. A change of control
will result in an event of default under our credit facility and may cause the
acceleration of that debt, in which case we would have to repurchase the New
Notes as well as repay our credit facility in full. We urge you to read
"Description of Notes -- Repurchase at the Option of Holders -- Change of
Control" and "Description of Credit Facility."
Certain transfers of more than 35% of our common stock by the
Continuing Shareholders, including transfers to third parties to pay estate
taxes upon the death of those family members or their permitted transferees,
could also trigger the change of control provisions under the Indenture. In
order to pay estate taxes, the estate of a family member could seek to sell the
estate's stock to us or to a third party. However, the repurchase of those
shares by us would be subject to certain limitations under the Indenture and our
credit facility, and the sale of those shares to a third party could trigger the
change of control provisions under the Indenture. See "Description of Notes --
Repurchase at the Option of Holders -- Change of Control."
WE OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT.
The restaurant business is highly competitive. We believe that we
compete on the basis of price, service, location and food quality. Factors that
affect our and our franchisees' business operations include changes in consumer
tastes, national, regional and local economic conditions, population, traffic
patterns, discretionary spending priorities, demographic trends and consumer
confidence in food wholesomeness, handling and safety, weather conditions, the
type, number and location of competing restaurants and other factors. There is
also active competition for management personnel and attractive commercial
shopping mall, center city and other locations suitable for restaurants. We
compete in each market in which we operate with locally-owned restaurants as
well as with national and regional restaurant chains. Factors such as inflation
and increased food, beverage, labor, occupancy and other costs could adversely
affect us and others in the restaurant industry.
Although we believe we are well positioned to compete because of our
leading market position, focus and expertise in the quick-service Italian
specialty food business and strong national brand name recognition, we could
experience increased competition from existing or new companies and loss of
market share that, in turn, could have a material adverse effect on our
business, financial condition, results of operations, prospects and ability to
service our debt obligations.
WE ARE VULNERABLE TO INCREASES IN FOOD AND RESTAURANT OPERATING COSTS.
Our profitability is affected by significant fluctuations in food and
paper product prices, labor and employee benefit costs and occupancy costs.
Significant increases in food and paper product costs, payroll and employee
benefit costs or occupancy costs, which we may not be able to pass on to our
customers, could have a material adverse effect on our business, financial
condition, results of operations, prospects and ability to service our debt
obligations. Many of the factors in determining those expenses, such as
inflation and shortages of supply, are beyond our control.
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The need to provide fresh products to customers subjects us to the risk
that shortages and interruptions in supply, which could be caused by adverse
weather and other conditions, could adversely affect the availability, quality
and cost of ingredients. We have in the past experienced significant and rapid
variations in the cost of food products, particularly cheese. For fiscal 1996,
1997 and 1998, the cost of cheese represented approximately 25.3%, 22.5% and
24.5%, respectively, of our overall cost of food and paper products. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Results of Operations."
We have a substantial number of hourly employees who are paid wages at
or based on the federal or state minimum wage. Increases in the minimum wage
could increase our labor costs. Furthermore, strong labor markets, like the one
we are currently experiencing, can result in upward pressures on wages and
salaries. As a result, we have recently been experiencing higher personnel and
benefits costs. In addition, we have also recently experienced higher occupancy
related costs with respect to leases for new restaurants and renewal leases for
existing restaurant space. See "-- Locations -- Our strategy depends on
obtaining and retaining attractive high customer traffic locations."
WE RELY ON ONE NATIONAL INDEPENDENT WHOLESALE DISTRIBUTOR.
We use a national independent wholesale food distributor to purchase
most of the food ingredients (other than breads, pastries, produce, fresh dairy
and certain meat products, which we purchase locally) and related restaurant
supplies that we use, and to distribute these items for us on a national basis
on attractive terms. While we are dependent upon this one national independent
distributor, we believe that there are other distributors who would be able to
service our needs. However, there can be no assurance that we will be able to
replace our distributor with others on comparable terms or without disruptions
to the flow of our food products and other supplies to our systems, any of which
could have a material adverse effect on our business, financial condition,
results of operations, prospects and ability to service our debt obligations.
WE DEPEND ON OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES.
Our success is dependent upon our senior management team, consisting
primarily of members of the Sbarro Family, as well as our ability to attract and
retain other key employees. As a privately-held company with restrictions and
limitations on stock repurchases contained in the Indenture, we may be unable to
offer key executives stock-based compensation of the type that our publicly-held
competitors can offer. We do not have employment agreements with any member of
senior management or any key employee. There is no assurance that we will be
able to retain our existing senior management or to attract other key employees.
The loss of any of our key employees could have a material adverse effect on our
business, financial condition, results of operations, prospects and ability to
service our debt obligations. See "Business -- Restaurant Management" and
"Management."
OUR STRATEGY DEPENDS ON OBTAINING AND RETAINING ATTRACTIVE HIGH CUSTOMER TRAFFIC
LOCATIONS.
Our strategy to improve overall profitability by targeting high
customer traffic venues with higher profit potential, coupled with a continued
slowing in the development of new shopping malls, has resulted in a gradual
decline in the number of Company-owned restaurants we opened per year over the
past five years. From 1989 to 1994, we opened, on average, approximately 58
Company-owned locations per year. We opened 44 in 1995, 29 in 1996, 30 in 1997
and 26 in 1998 (before closings and units acquired from franchisees). We opened
9 units through July 18, 1999 and plan to open approximately 20 Company - owned
restaurants from that time through the end of the year. However, the number of
restaurants that we actually open will depend on the availability of appropriate
sites, as well as the timing of construction and
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other factors. There can be no assurance that we will be able to continue to
obtain appropriate locations or renew existing locations on favorable terms, if
at all.
We are also dependent on our ability to enter into new leases and renew
existing leases on favorable terms and may find it more expensive to enter into
such leases during periods when market rents are increasing. If a significant
portion of our existing leases were to expire during such a period, we may find
it more expensive to continue to operate our then existing number of stores.
See "Business -- Properties."
OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION.
We are subject to various federal, state and local laws affecting our
business, as are our franchisees. Each of our restaurants and those owned by our
franchisees are subject to a variety of licensing and governmental regulatory
provisions relating to wholesomeness of food, sanitation, health, safety and, in
certain cases, licensing of the sale of alcoholic beverages. Difficulties in
obtaining, or the failure to obtain, required licenses or approvals can delay or
prevent the opening of a new restaurant in any particular area, which could have
a material adverse effect on our business, financial condition, results of
operations, prospects and ability to service our debt obligations.
Regulations of the Federal Trade Commission (the "FTC") and various
state laws regulating the offer and sale of franchises require us to furnish to
prospective franchisees a franchise offering circular containing prescribed
information. We are currently registered to offer and sell franchises in seven
states and are currently exempt from the franchise registration requirements in
five states based upon "large franchisor" exemptions, which are based upon our
experience and meeting certain size tests, generally requiring a net worth of at
least $5 to $15 million (depending on the state). The states in which we are
registered, and a number of states in which we may franchise, require
registration of a franchise offering circular or a filing with state
authorities. Following the availability of our financial statements for the
quarter ended October 10, 1999, we intend to amend our FTC franchise offering
circular and, where required, filed appropriate amendments to state franchise
registrations to reflect the Transaction. Until such amendments are filed and,
where required, approved, we will not be able to sell or renew franchises in
those states. We currently expect, although there can be no assurance, that such
amendments will be approved and that any delay will not have a material adverse
effect on our business. Furthermore, state franchise examiners have discretion
to disapprove franchise registrations based on a franchisor's financial
condition. While we believe that, following completion of the Transaction, we
continue to meet these financial requirements, there is little specific guidance
under state franchise laws as to acceptable levels of a franchisor's net worth
(and whether "net worth" includes or excludes intangible assets) and debt, and,
depending upon a franchisor's financial condition, state franchise examiners in
many states may require a franchisor to escrow initial franchise fees for a
limited period of time. See "Business -- Government Regulation."
Although alcoholic beverage sales are not emphasized in our
restaurants, some of our larger restaurants serve beer and wine. Sales of beer
and wine contributed less than 1% of our total revenues during fiscal 1998. We
have submitted documents to amend our applications with the appropriate alcohol,
beverage and tobacco authorities in 14 of the 16 states in which we sell beer
and wine to reflect the Transaction and have filed part of an amendment that is
required in California. We do not intend to continue selling beer and wine in
Colorado. We expect to be able to continue to sell beer and wine in most of the
locations pending completion of the approval process.
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OUR QUARTERLY RESULTS OF OPERATIONS FLUCTUATE DUE TO THE SEASONALITY OF OUR
BUSINESS.
Our business is subject to seasonal fluctuations. The fourth fiscal
quarter normally accounts for approximately 40% of net income for the year due
primarily to increased volume in shopping malls during the holiday shopping
season. The length of the holiday shopping period between Thanksgiving and
Christmas and the number of weeks in the fourth quarter result in fluctuations
in fourth quarter earnings from year to year. See "Management's Discussion and
Analysis of Financial of Condition and Results of Operations -- Seasonality."
OUR FAILURE, OR THE FAILURE OF OUR KEY SUPPLIERS OR LANDLORDS, TO ADDRESS
INFORMATION TECHNOLOGY ISSUES RELATED TO THE YEAR 2000 COULD ADVERSELY AFFECT
OUR OPERATIONS.
Our failure, or the failure of one or more of our key suppliers or
landlords to, implement changes to our or their respective information
technology ("IT") systems, so that they will recognize a year that begins with
the digits "20" ("Year 2000") in a timely manner could have a material adverse
effect on our business, financial condition, results of operations, prospects
and ability to service our debt obligations. Although we believe our systems
will be timely compliant, we believe that the most likely worst case scenarios
we face in the event that our or our suppliers' existing computers will not be
Year 2000 compliant involve (1) the timeliness of our internal reporting and
analysis of corporate information and the potential of temporarily supplementing
our staff if we are required to rely, for a period of time, on manual
information reporting and processing while remediation to one or more of our
internal IT systems is effectuated, (2) the processing of our payroll and (3)
our ability to maintain our traditional levels of revenues should we experience
temporary supply shortages of food, soft drink mixes and paper products if we or
our distributors experience IT or non-IT Year 2000 problems or should the
landlords of our restaurants experience non-IT issues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000."
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THE GOING PRIVATE TRANSACTION
On September 28, 1999, Mario Sbarro, Joseph Sbarro, Joseph Sbarro
(1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin
Montgomery, not individually but as trustees under that certain Trust Agreement
dated April 28, 1994 for the benefit of Carmela Sbarro and her descendants,
became the holders of all of our common stock pursuant to an Amended and
Restated Agreement and Plan of Merger dated as of January 19,1999 among us,
Sbarro Merger LLC and such holders. We refer to the persons who became the
owners of all of our common stock as the "Continuing Shareholders."
Pursuant to the terms of the merger agreement, Sbarro Merger LLC merged
with and into us, and our shareholders, other than the Continuing Shareholders
and Sbarro Merger LLC received the right to receive $28.85 in cash in exchange
for the approximately 13.5 million shares of our common stock not owned by the
Continuing Shareholders, and all outstanding stock options, including stock
options held by Continuing Shareholders, were terminated in exchange for a cash
payment equal to the number of shares subject to the stock option multiplied by
the excess, if any, of $28.85 over the applicable option exercise price.
We needed approximately $411.0 million to consummate the Merger and pay
related fees and expenses. We obtained such funds from:
. $159.8 million our cash on hand; and
. the $251.2 million in gross proceeds from the Private Debt
Offering.
Contemporaneously with the consummation of the Merger and the Private
Debt Offering, we also entered into our new $30.0 million credit facility to
help ensure that we will have adequate working capital in the future. We refer
to the Merger, the Private Debt Offering and our credit facility as the
"Transaction."
USE OF PROCEEDS
We received net proceeds from the sale of the Old Notes of
approximately $242.2 million. We will not receive any proceeds from the Exchange
Offer. The net proceeds from the sale of the Old Notes in the Private Debt
Offering were used to finance the Merger and pay related fees and expenses. See
"The Going Private Transaction."
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THE EXCHANGE OFFER
THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), we are offering to exchange the New Notes for
Old Notes that are properly tendered on or before the Expiration Date and not
withdrawn as permitted below. As used herein, the term "Expiration Date" means
5:00 p.m., New York City time, on ________, 1999; provided, however, that if we,
in our sole discretion, have extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $255.0 million aggregate principal
amount at maturity of the Old Notes is outstanding. This Prospectus, together
with the Letter of Transmittal, is first being sent on or about ____________,
1999, to all holders of Old Notes known to us. Our obligation to accept Old
Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions set forth under "-- Conditions of the Exchange Offer" below.
We expressly reserve the right, at any time or from time to time, to
extend the period of time during which the Exchange Offer is open, and thereby
delay acceptance for exchange of any Old Notes, by giving oral or written notice
of such extension to the Holders thereof as described below. During any such
extension, all Old Notes previously tendered will remain subject to the Exchange
Offer and may be accepted for exchange by the Company. Any Old Notes not
accepted for exchange for any reason will be returned without expense to the
tendering holder as promptly as practicable after the expiration or termination
of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount at maturity of $1,000 and any integral multiple thereof.
We expressly reserve the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "-- Conditions of the Exchange Offer." We will give prompt
written or oral notice of any extension, amendment, non-acceptance or
termination to the holders of the Old Notes. In the case of any extension, we
will give notice by means of a press release or other public announcement no
later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
RESALE OF NEW NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, including "Shearman & Sterling"
(available July 2, 1993), "K-III Communications Corporation" (available May 14,
1993), "Warnaco, Inc." (available October 11, 1991), "Morgan Stanley & Co.
Incorporated" (available June 5, 1991), "Mary Kay Cosmetics, Inc." (available
June 5, 1991) and "Exxon Capital Holdings Corporation" (available May 13, 1988),
we believe that you (unless you are a broker-dealer or an "affiliate" of the
Company or the Guarantors within the meaning of Rule 405 under the Securities
Act) may offer for resale, resell and otherwise transfer the New Notes that we
issue pursuant to the Exchange Offer in exchange for Old Notes without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that
. you acquire the New Notes in the ordinary course of your business,
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. you have no arrangement or understanding with any person to
participate in the distribution of the New Notes, and
. you are not engaged in, and do not intend to engage in, a
distribution of such New Notes.
Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge in the Letter of Transmittal that it will deliver a prospectus in
connection with any resale of such New Notes. We have agreed that for the period
of time set forth in "Plan of Distribution," we will make this Prospectus
available to any broker-dealer in connection with any such resale. See "Plan of
Distribution." The Letter of Transmittal states that by so acknowledging and
delivering such a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
We do not intend to request the SEC to consider, and the SEC has not
considered, the Exchange Offer in the context of a no-action letter, and there
can be no assurance that the staff of the SEC would make a similar determination
with respect to the Exchange Offer as it has in such other circumstances. By
properly completing a Letter of Transmittal when you tender Old Notes for New
Notes, you will represent to us, that
. you are not an affiliate (as defined in Rule 405 under the
Securities Act) of ours.
. you are not engaged in, and do not intend to engage in, and
have no arrangement or understanding with any person to
participate in, a distribution of the New Notes and if you are
not a broker-dealer, neither you nor any such other person has
an arrangement or understanding with any person to participate
in the distribution of such New Notes within the meaning of
the Securities Act and
. you are acquiring the New Notes in the ordinary course of your
business, whether or not you are the beneficial owner,
In the event that you cannot make the requisite representations to us,
you cannot rely on the interpretations by the staff of the SEC and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a resale transaction. Unless an exemption from registration
is otherwise available, any such resale transaction must be covered by an
effective registration statement containing the selling security holders
information required by Item 507 of Regulation S-K under the Securities Act.
This Prospectus may be used for an offer to resell, resale or other transfer of
New Notes only as specifically set forth under "Plan of Distribution."
INTEREST ON THE NEW NOTES
The New Notes will bear interest at 11% per annum. Interest on the New
Notes will be payable semi-annually, in arrears, on September 15 and March 15 of
each year, commencing on March 15, 2000. Holders of New Notes will receive
interest on March 15, 2000 from the date of initial issuance of the New Notes,
plus an amount equal to the accrued interest on the Old Notes from the most
recent date to which interest has been paid to the date of exchange thereof for
New Notes or, if no interest payment has been made on the Old Notes, From
September 28, 1999. Interest on the Old Notes accepted for exchange will cease
to accrue upon issuance of the New Notes.
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PROCEDURES FOR TENDERING OLD NOTES
The tender of Old Notes by a holder thereof as set forth below and the
acceptance thereof by us will constitute a binding agreement between the
tendering holder and us upon the terms and subject to the conditions set forth
in this Prospectus and in the accompanying Letter of Transmittal. Except as set
forth below, a holder who wishes to tender Old Notes for exchange pursuant to
the Exchange Offer must transmit a properly completed and duly executed Letter
of Transmittal, including all other documents required by the Letter of
Transmittal or (in the case of a book-entry transfer) an Agent's Message (as
defined below) in lieu of the Letter of Transmittal, to Firstar Bank, N.A., as
the "Exchange Agent," at the address set forth below under "Exchange Agent" on
or prior to the Expiration Date. In addition, either
. certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal, or
. a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at the Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to
the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date
with the Letter of Transmittal or an Agent's Message in lieu
of such Letter of Transmittal, or
. the holder must comply with the guaranteed delivery procedures
described below.
"Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility and received by the Exchange Agent and forming a part of a
Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has
received an express acknowledgment from the tendering participant that the
tendering participant has received and agrees to be bound by the Letter of
Transmittal and that we may enforce the Letter of Transmittal against the
participant. THE METHOD OF DELIVERY OF OLD NOTES, LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO US.
Signatures on a Letter of Transmittal or a notice of withdrawal must be
guaranteed unless the Old Notes surrendered for exchange pursuant to a Letter of
Transmittal are tendered (1) by a registered holder of the Old Notes who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (2) for the account of an Eligible
Institution (as defined below). In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, are required to be guaranteed, the
guarantee must be by (collectively, "Eligible Institutions") a
. firm that is a member of the National Association of
Securities Dealers, Inc.,
. a commercial bank or trust company having an office or
correspondent in the United States or
. an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act.
If Old Notes are registered in the name of a person other than a signer
of the Letter of Transmittal, the Old Notes surrendered for exchange must be
endorsed by, or accompanied by a duly
27
<PAGE>
executed written instrument or instruments of transfer, in satisfactory form as
determined by us in our sole discretion, duly executed by the registered holder,
in each case, with the signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Letters of Transmittal and Old Notes tendered for
exchange will be determined by us in our sole discretion, which determination
shall be final and binding. We reserve the absolute right to reject any and all
tenders of any particular Old Note not properly tendered or not accept any
particular Old Note which acceptance might, in our judgment or the judgment of
our counsel, be unlawful. We also reserve the absolute right to waive any
defects or irregularities or conditions of the Exchange Offer as to any
particular tender either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular either before or after the Expiration Date
(including the Letter of Transmittal and the instructions to the Letter of
Transmittal) by us shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with the tenders of Old Notes for
exchange must be cured within a reasonable period of time that we shall
determine. Neither we nor the Exchange Agent nor any other person shall be under
any duty to give notification of any defect or irregularity with respect to any
tender of Old Notes for exchange, nor shall any of them incur any liability for
failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other
than the registered holders or holders of Old Notes, the Old Notes must be
endorsed or accompanied by powers of attorney, in either case signed by the
registered holder or holders exactly as the name or names of the registered
holder or holders appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, the signer should so indicate when signing, and, unless waived by us,
proper evidence satisfactory to us of the signer's authority to act must be
submitted with the Letter of Transmittal.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of the unsatisfied conditions to the
Exchange Offer, we will accept, promptly after the Expiration Date, Old Notes
properly tendered and will issue the New Notes that you exchange for the
accepted Old Notes promptly after acceptance of the Old Notes. See "--
Conditions of the Exchange Offer" below. For purposes of the Exchange Offer, we
shall be deemed to have accepted properly tendered Old Notes for exchange when,
as and if we have given oral or written notice of acceptance to the Exchange
Agent, with written confirmation of any oral notice to be given promptly.
For each Old Note accepted for exchange, the holder of such Old Note
will receive a New Note having a principal amount at maturity equal to that of
the surrendered Old Note.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of
. certificates for those Old Notes or a timely Book-Entry
Confirmation of those Old Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility,
. a properly completed and duly executed Letter of Transmittal
or, instead, an Agent's Message and
28
<PAGE>
. all other required documents.
If any tendered Old Notes are not accepted for any reason or if Old
Notes are submitted for a greater principal amount than the holder wishes to
exchange, the unaccepted or non-exchange Old Notes will be returned without
expense to the tendering Holder thereof (or, in the case of Old Notes tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry procedures described below, the
unaccepted or non-exchanged Old Notes will be credited to an account maintained
with the Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer promptly after the date of this Prospectus. Any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing the Book-Entry Transfer
Facility to transfer Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility in accordance with the Book-Entry Transfer
Facility's procedures for transfer. The participant using the Book-Entry
Transfer Facility's procedures for transfer should transmit its acceptance to
the Book-Entry Transfer Facility on or prior to the Expiration Date or comply
with the guaranteed delivery procedures described below. The Book-Entry Transfer
Facility will verify the participant's acceptance, execute a book-entry transfer
of the tendered Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility and then send to the Exchange Agent confirmation of such
book-entry transfer, including the Agent's Message confirming that the
Book-Entry Transfer Facility has received an express acknowledgment from the
participant that such participant has received and agrees to be bound by the
Letter of Transmittal and that the Company may enforce the Letter of Transmittal
against the participant. However, although delivery of Old Notes may be effected
through book-entry transfer at the Book-Entry Transfer Facility, an Agent's
Message and any other required documents, must, in any case, be transmitted to
and received by the Exchange Agent at the address set forth below under "--
Exchange Agent" on or prior to the Expiration Date or there must be compliance
with the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a holder of Old Notes desires to tender Old Notes and the Old Notes
being tendered are not immediately available, or time will not permit the
holder's Old Notes, the Letter of Transmittal or any other required documents to
reach the Exchange Agent before the Expiration Date, or the procedure for
delivery by book-entry transfer cannot be completed on a timely basis, a tender
may be effected if
. the tender is made through an Eligible Institution,
. prior to the Expiration Date, the Exchange Agent received from
the Eligible Institution a Notice of Guaranteed Delivery,
substantially in the form provided by the Company (by hand,
overnight courier, mail or facsimile transmission to the
Exchange Agent), setting forth the name and address of the
holder of the Old Notes and the amount of Old Notes tendered,
stating that the tender is being made by sending the Notice of
Guaranteed Delivery and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of
the execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, in proper
form for transfer, or a Book-Entry Confirmation, together with
a properly completed and duly executed appropriate Letter of
Transmittal (or facsimile of the Letter of Transmittal or,
instead, Agent's Message) with any required signature
guarantees
29
<PAGE>
and any other required documents, will be deposited by the
Eligible Institution with the Exchange Agent, and
. the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the
case may be, together with a properly completed and duly
executed Letter of Transmittal (or facsimile thereof or,
instead, Agent's Message) with any required signature
guarantees and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within three
NYSE trading days after the date of execution of the Notice of
Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must
be received by the Exchange Agent at the address set forth below under "--
Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration Date.
Any such notice of withdrawal must
. specify the name of the person having tendered the Old Notes
to be withdrawn (the "Depositor"),
. identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount at maturity
of such Old Notes),
. contain a statement that the holder is withdrawing its
election to have the Old Notes exchanged,
. be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which the Old Notes
were tendered (including any required signature guarantees) or
be accompanied by documents of transfer to have the trustee
with respect to the Old Notes register the transfer of such
Old Notes in the name of the person withdrawing the tender and
. specify the name in which such Old Notes are registered, if
different from that of the depositor.
If Old Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawn Old Notes and otherwise comply with the procedures
of the Book Entry Transfer Facility. All questions as to the validity, form and
eligibility (including time of receipt) of notices of withdrawal will be
determined by the Company, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer and no New Notes will
be issued with respect to the withdrawn Old Notes unless the Old Notes so
withdrawn are, as described below, timely and validly retendered. Any Old Notes
that have been tendered for exchange but that are not exchanged for any reason
will be returned to the holder without cost to the holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, the Old Notes will be credited to an account maintained with
the Book-Entry Transfer Facility for the Old Notes) as soon as practicable after
31
<PAGE>
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may retendered by following the procedures described under
"-- Procedures for Tendering Old Notes" above at any time on or prior to 5:00
p.m., New York City time, on the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount
at maturity of the Old Notes being tendered for exchange. However,
notwithstanding any other provisions of the Exchange Offer, we will not be
required to accept for exchange, or exchange any New Notes for, any Old Notes,
and may terminate the Exchange Offer as provided herein before the acceptance of
any Old Notes for exchange, if:
. any action or proceeding is instituted or threatened in any
court or by or before any governmental agency with respect to
the Exchange Offer which, in our sole judgment, might
materially impair our ability to proceed with the Exchange
Offer;
. any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is
interpreted by the staff of the SEC, which, in our sole
judgment, might materially impair our ability to proceed with
the Exchange Offer; or
. any governmental approval has not been obtained, if, in our
sole discretion, we deem that approval necessary for the
consummation of the Exchange Offer as contemplated hereby.
If we determine, in our sole discretion, that any of these conditions
are not satisfied, we may
. refuse to accept any Old Notes and return all tendered Old
Notes to the tendering holders,
. extend the Exchange Offer and retain all Old Notes tendered
prior to the expiration of the Exchange Offer, subject,
however, to the rights of holders who tendered Old Notes to
withdraw their tendered Old Notes, or
. waive unsatisfied conditions with respect to the Exchange
Offer and accept all properly tendered Old Notes that have not
been withdrawn.
The foregoing conditions are for our sole benefit and may be asserted
by us regardless of the circumstances giving rise to any condition or may be
waived by us in whole or in part at any time and from time to time in our sole
discretion. The failure by us at any time to exercise any of the foregoing
rights shall not be deemed a waiver or that right, and each right shall be
deemed an ongoing right which may be asserted by us at any time and from time to
time.
In addition, we will not accept for exchange any Old Notes tendered,
and no New Notes will be issued in exchange for those Old Notes, if at such time
any stop order shall be threatened or in effect with respect to the Registration
Statement of which this Prospectus constitutes a part or the qualification of
the Indenture under the Trust Indenture Act of 1939, as amended.
EXCHANGE AGENT
Firstar Bank, N.A. has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the applicable address set forth below. Questions and requests
for assistance, requests for additional copies of this Prospectus or of
31
<PAGE>
the Letter of Transmittal and requests for Notices of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:
By Hand, Overnight Courier or Facsimile Transmission
Registered or Certified Mail: (Eligible Institutions Only):
Firstar Bank, N.A. (651) 229-6415
Corporate Trust Department
101 East Fifth Street, 12th Floor To Confirm by Telephone
St. Paul, Minnesota 55101 or for Information Call:
Attn: Frank P. Leslie (651) 229-2600
--------------------------------------------
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS BY FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
We will not make any payment to brokers, dealers or others soliciting
acceptances of the Exchange Offer. However, we will pay the Exchange Agent's
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection its services.
We will pay the cash expenses incurred by us in connection with our
performance and completion of the Exchange Offer. These expenses include fees
and expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs and related fees and expenses.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated
to pay any transfer taxes. If, however,
. certificates representing New Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be
delivered to, or are to be registered or issued in the name
of, any person other than the registered holder of the Old
Notes tendered hereby, or
. if tendered Old Notes are registered in the name of any person
other than the person signing this Letter of Transmittal, or
. if a transfer tax is imposed for any reason other than the
exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any transfer taxes (whether imposed on the registered holder
or on any other persons) will be payable by the tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer of the Old Notes and the restrictions on
transfer of the Old Notes arising as a consequence of the issuance of the Old
32
<PAGE>
Notes pursuant to exemptions from the registration requirements of the
Securities Act and applicable state securities laws. Accordingly, such Old Notes
may be resold only
. to the Company (upon redemption thereof or otherwise),
. pursuant to an effective registration statement under the
Securities Act,
. so long as the old Notes are eligible for resale pursuant to
Rule 144A, to a qualified institutional buyer within the
meaning of Rule 144A under the Securities Act in a transaction
meeting the requirements of Rule 144A, or
. pursuant to another available exemption from the registration
requirements of the Securities Act,
. in each case in accordance with any applicable securities laws
of any state of the United States.
Upon consummation of the Exchange Offer, holders of Old Notes will not
be entitled to any further registration rights under the Registration Rights
Agreement, except under limited circumstances. See " Description of Notes
- --Exchange Offer; Registration Rights." We do not currently anticipate that we
will register under the Securities Act the resale of any Old Notes that remain
outstanding after consummation of the Exchange Offer (subject to the limited
circumstances in the Registration Right Agreement, if applicable).
Holders of the Old and New Notes which remain outstanding after
consummation of the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage thereof have
taken certain actions or exercised certain rights under the Indenture.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old
Notes as reflected in our accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by us.
33
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at July 18, 1999 on
an actual and as adjusted basis to give effect to the Transaction. This table
should be read in conjunction with "Selected Consolidated Historical Financial
Data," "Unaudited Consolidated Pro Forma Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
audited Consolidated Financial Statements and notes thereto for the year ended
January 3, 1999 and our unaudited Consolidated Financial Statements and notes
thereto for the twenty-eight weeks ended July 18, 1999, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF JULY 18, 1999
-------------------------
ACTUAL AS ADJUSTED
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................. $ 152,907 $ 6,907
========== ============
Long-term debt (including current portion):
Existing total debt................................................. $ -- $ --
Credit Facility(1).................................................. -- 13,789
11% Senior Notes due 2009, net(2)................................... -- 251,211
---------- ------------
Total long-term debt........................................... -- 265,000
Shareholders' equity.................................................. 270,489 99,224
---------- ------------
Total capitalization........................................ $ 270,489 $ 364,224
</TABLE>
- ---------------
(1) We have entered into a credit agreement with European American Bank
with respect to our $30.0 million credit facility. As of November 1,
1999, we had undrawn availability under our credit facility of
approximately $28.2 million (net of outstanding letters of credit and
certain guarantees of reimbursement obligations that currently
aggregate approximately $1.8 million), subject to our satisfaction of
certain conditions. See "Description of Credit Facility." The
Transaction actually closed on September 28, 1999. Our cash on hand
increased between July 18, 1999 and September 28, 1999. Therefore, we
were able to use additional cash, rather than borrowings under our
credit facility, to consummate the Transaction. The "As Adjusted"
presentation set forth above gives effect to borrowings under our
credit facility that we would have needed to consummate the Transaction
on July 18, 1999 but that we did not need to make (and did not make)
upon actual consummation of the Transaction because of the increase in
our cash on hand between July 18, 1999 and September 28, 1999. See "The
Going Private Transaction."
(2) The New Notes are recorded at a discount of approximately $3.8 million
to the face amount to reflect the original issue discount on the Old
Notes.
34
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following unaudited consolidated pro forma financial data have been
derived from our historical financial statements. The unaudited consolidated pro
forma balance sheet gives effect to the Transaction as if it had occurred on
July 18, 1999. The unaudited consolidated pro forma income statements for the
year ended January 3, 1999, twenty-eight weeks ended July 18, 1999 and the
twelve months ended July 18, 1999 give effect to the Transaction as if it had
occurred at the beginning of each period presented. The Transaction actually
closed on September 28, 1999. Our cash on hand increased between July 18, 1999
and September 28, 1999. Therefore, we were able to use additional cash, rather
than borrowings under our credit facility, to consummate the Transaction. The
unaudited consolidated pro forma financial data give effect to borrowings under
our credit facility that we would have needed to consummate the Transaction on
July 18, 1999 but that we did not need to make (and did not make) upon actual
consummation of the Transaction because of the increase in our cash on hand
between July 18, 1999 and September 28, 1999. See "The Going Private
Transaction."
The unaudited consolidated pro forma financial data should be read in
conjunction with "Selected Consolidated Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our audited Consolidated Financial Statements and notes thereto for
the year ended January 3, 1999 and our unaudited Consolidated Financial
Statements and notes thereto for the twenty-eight weeks ended July 18, 1999,
included elsewhere in this Prospectus.
The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable and are described in
the notes accompanying the unaudited consolidated pro forma financial
statements. The unaudited consolidated pro forma financial data do not purport
to represent what our results of operations or financial position would have
been had the Transaction occurred on the dates indicated, or to project our
results of operations or financial position for any future period or date, nor
does it give effect to any matters other than those described in the notes
thereto. The Merger was accounted for as a purchase for financial accounting
purposes.
The unaudited consolidated pro forma financial data presented herein do
not reflect our current intention to elect to be taxed under the provisions of
Subchapter S of the Code and, where applicable and permitted, under similar
state and local income tax provisions, beginning as early as fiscal 2000. At the
time of our S corporation election, our deferred income taxes will be eliminated
or reduced. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- After the
Transaction" and "Certain Relationships and Related Transactions."
All amounts set forth below reflect the unaudited consolidated
financial data of the Company, including certain subsidiaries that will
initially be designated as Unrestricted Subsidiaries under the Indenture and
that will not guarantee our obligations under the New Notes.
35
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
JULY 18, 1999
TRANSACTION
HISTORICAL ADJUSTMENTS PRO FORMA
--------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 152,907 $ (146,000)(a) $ 6,907
Receivables............................................. 3,542 -- 3,542
Inventories............................................. 2,882 -- 2,882
Prepaid expenses........................................ 5,114 -- 5,114
---------------- ---------------- ------------
Total current assets............................ 164,445 (146,000) 18,445
Property and equipment, net............................... 138,397 -- 138,397
Excess purchase price over cost basis..................... -- 224,835(b) 224,835
Deferred financing fees and transaction costs............. -- 14,900(c) 14,900
Other assets, net......................................... 8,902 -- 8,902
---------------- ---------------- ------------
$ 311,744 $ 93,735 $ 405,479
================ ================ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 7,512 $ -- $ 7,512
Accrued expenses........................................ 24,786 -- 24,786
Income taxes............................................ 75 -- 75
---------------- ---------------- ------------
Total current liabilities....................... 32,373 -- 32,373
Long-term debt............................................ -- 265,000(d) 265,000
Deferred income taxes..................................... 8,882 -- 8,882
Commitments and contingencies
Shareholders' equity...................................... 270,489 (171,265)(e) 99,224
---------------- ---------------- ------------
$ 311,744 $ 93,735 $ 405,479
================ ================ ============
See notes to unaudited consolidated pro forma financial data
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 3, 1999
TRANSACTION
HISTORICAL ADJUSTMENTS PRO FORMA
--------- ---------------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Restaurant sales........................................ $ 361,534 $ -- $ 361,534
Franchise related income................................ 8,578 -- 8,578
Interest income......................................... 5,120 (5,120)(a) --
--------------- ----------------- -------------
Total revenues.................................. 375,232 (5,120) 370,112
--------------- ----------------- -------------
Costs and expenses:
Cost of food and paper products......................... 76,572 -- 76,572
Restaurant operating expenses:
Payroll and other employee benefits.................. 93,367 -- 93,367
Occupancy and other.................................. 101,013 -- 101,013
Depreciation and amortization............................. 22,429 7,495(b) 29,924
General and administrative................................ 19,708 -- 19,708
Interest expense.......................................... -- 28,650(c) 30,519
1,490(d)
379(e)
Provision for unit closings............................... 2,515 -- 2,515
Non-recurring charges..................................... 5,605 -- 5,605
Other income.............................................. (2,680) -- (2,680)
--------------- -------------
Total costs and expenses........................ 318,529 38,014 356,543
--------------- ----------------- -------------
Income before income taxes and cumulative effect of
change in method of accounting.......................... 56,703 (43,134) 13,569
Income taxes.............................................. 21,547 (13,121)(f) 8,426
--------------- ----------------- -------------
Income before cumulative change in method of
accounting.............................................. 35,156 (30,013) 5,143
Cumulative effect of change in method of accounting for
start-up costs.......................................... (822) 27(f) (795)
--------------- ----------------- ------------
Net income................................................ $ 34,334 $ (29,986) $ 4,348
=============== ================= =============
See notes to unaudited consolidated pro forma financial data
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
TWENTY-EIGHT WEEKS ENDED JULY 18, 1999
TRANSACTION
HISTORICAL ADJUSTMENTS PRO FORMA
--------- ---------------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Restaurant sales........................................ $ 179,051 $ -- $ 179,051
Franchise related income................................ 4,332 -- 4,332
Interest income......................................... 2,624 (2,624)(a) --
-------------- ------------ -----------
Total revenues.................................. 186,007 (2,624) 183,383
-------------- ------------- -----------
Costs and expenses:
Cost of food and paper products......................... 36,981 -- 36,981
Restaurant operating expenses:
Payroll and other employee benefits.................. 49,575 -- 49,575
Occupancy and other.................................. 56,205 -- 56,205
Depreciation and amortization............................. 12,278 4,036(b) 16,314
General and administrative................................ 12,339 -- 12,339
Interest expense.......................................... -- 15,427(c) 16,433
802(d)
204(e)
Other income.............................................. (2,574) -- (2,574)
-------------- ------------- -----------
Total costs and expenses........................ 164,804 20,469 185,273
-------------- ------------- -----------
Income (loss) before income taxes......................... 21,203 (23,093) (1,890)
Income taxes.............................................. 8,057 (7,199)(f) 858
-------------- ------------- -----------
Net income (loss)......................................... $ 13,146 $ (15,894) $ (2,748)
============== ============= ===========
See notes to unaudited consolidated pro forma financial data
</TABLE>
38
<PAGE>
SBARRO, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA
1. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS:
We have made the following pro forma adjustments to arrive at our pro
forma consolidated balance sheet as of July 18, 1999:
(a) Represents cash on hand used as consideration in the Merger.
(b) Represents the excess of the purchase price over the fair
value of net assets acquired arising as a result of the
Merger. The adjustments are based on presently available
information and on certain assumptions that we believe are
reasonable; however, actual recording of the Merger will be
based upon appraisals, evaluations and estimates of fair
values.
(c) Represents deferred financing and other costs associated with
the Merger.
(d) Represents initial borrowings under our credit facility had
the Transaction been consummated at July 18, 1999 and issuance
of the Notes. The Notes are recorded at a discount of
approximately $3.8 million to the face amount to reflect the
original issue discount on the Notes.
(e) Represents the elimination of the Public Shareholders'
proportionate share of shareholders' equity.
2. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
We have made the following pro forma adjustments to arrive at our pro
forma consolidated statements of operations:
(a) Represents elimination of interest income due to $146.0
million of cash on hand used as consideration in the Merger.
(b) Represents amortization of the excess of the purchase price
over the fair value of net assets acquired arising as a result
of the Merger. The adjustments are based on presently
available information and on certain assumptions that we
believe are reasonable; however, actual recording of the
Merger will be based upon appraisals, evaluations and
estimates of fair values.
(c) Represents cash interest expense as a result of the issuance
of the Notes and borrowings of $13.8 million under our credit
facility had the Transaction been consummated at July 18,
1999.
(d) Represents amortization of deferred financing and transaction
costs over the life of the Notes.
(e) Represents amortization of original issue discount over the
life of the Notes.
(f) Reflects adjustments to our income tax provision and effective
tax rate as a result of the Transaction. Our effective tax
rate after the Merger will be higher than our historical
effective tax rate primarily due to the non-deductible
amortization of the excess of the purchase price over the fair
value of net assets acquired arising as a result of the
Merger. The adjustments are based on presently available
information and on certain assumptions that we believe are
reasonable; however, actual recording of the Merger will be
based upon appraisals, evaluations and estimates of fair
values.
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<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table presents our selected consolidated historical
income statement data, other financial data and balance sheet data for the
periods and the dates indicated. Unless otherwise indicated, all amounts and
ratios set forth below reflect our consolidated financial results, including
certain subsidiaries that will initially be designated as Unrestricted
Subsidiaries under the Indenture and that will not guarantee our obligations
under the Notes. The selected consolidated historical financial data presented
below for fiscal years 1996 through 1998 were derived from, and are qualified by
reference to, our audited consolidated financial statements and notes thereto,
which are included elsewhere in this Prospectus. The selected consolidated
historical financial data presented below for fiscal years 1994 and 1995 were
derived from, and are qualified by reference to, our audited consolidated
financial statements and notes thereto, which are not included elsewhere herein.
The selected consolidated historical financial data for the periods ended July
12, 1998 and July 18, 1999 were derived from, and are qualified by reference to,
our unaudited consolidated financial statements and notes thereto, which are
included elsewhere in this Prospectus. The unaudited consolidated historical
financial statements include all adjustments (consisting only of normal
recurring adjustments) that in the opinion of our management are necessary for a
fair presentation of our financial position and results of operations for these
interim periods. Historical operating results of such interim periods are not
necessarily indicative of results that may be expected for the full year,
particularly since our earnings and EBITDA have been highest in the fourth
fiscal quarter due primarily to increased volume in shopping malls during the
holiday shopping season. The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our audited Consolidated Financial Statements and
notes thereto for the year ended January 3, 1999 and our unaudited Consolidated
Financial Statements and notes thereto for the twenty-eight weeks ended July 18,
1999, included elsewhere herein.
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS
FISCAL YEAR ENDED
---------- ------------------
JULY 18, JULY 12,
1998(1) 1997 1996 1995 1994 1999 1998
------- ---- ---- ---- ---- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurant sales...................... $ 361,534 $ 337,723 $ 319,315 $ 310,132 $ 288,808 $ 179,051 $ 174,028
Franchise related income.............. 8,578 7,360 6,375 5,942 5,234 4,332 4,154
Interest income....................... 5,120 4,352 3,798 3,081 1,949 2,624 2,545
--------- --------- --------- --------- --------- --------- ---------
375,232 349,435 329,488 319,155 295,991 186,007 180,727
Costs and expenses:
Costs of food and paper products...... 76,572 69,469 68,668 67,361 61,877 36,981 36,423
Restaurant operating expenses:
Payroll and other employee benefits. 93,367 84,910 78,258 78,342 70,849 49,575 46,899
Occupancy and other................. 101,013 93,528 85,577 84,371 76,353 56,205 52,985
Depreciation and amortization......... 22,429 23,922 22,910 23,630 21,674 12,278 11,725
General and administrative............ 19,708 17,762 14,940 16,089 13,319 12,339 10,367
Provision for unit closings(2)........ 2,515 3,300 -- 16,400 -- -- 1,525
Terminated transaction costs(3)....... 986 -- -- -- -- -- 986
Litigation settlement and related
costs(4)............................ 3,544 -- -- -- -- -- --
Loss on sale of land to be sold(5).... 1,075 -- -- -- -- -- --
Other income.......................... (2,680) (1,653) (1,171) (1,359) (1,351) (2,574) (1,259)
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses....... 318,529 291,238 269,182 284,834 242,721 164,804 159,651
Income before income taxes and cumulative
effect of change in method of accounting 56,703 58,197 60,306 34,321 53,270 21,203 21,076
Income taxes(6)......................... 21,547 22,115 22,916 13,042 20,244 8,057 8,009
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of change
in method of accounting.................. 35,156 36,082 37,390 21,279 33,026 13,146 13,067
Cumulative effect of change in method of
accounting for start-up costs......... (822) -- -- -- -- -- (822)
--------- -------- ------- --------- --------- --------- ---------
Net income.............................. $ 34,334 $ 36,082 $37,390 $ 21,279 $33,026 $ 13,146 $ 12,245
========= ========= ========= ========= ========= ========= =========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS
FISCAL YEAR ENDED
JULY 18, JULY 12,
1998(1) 1997 1996 1995 1994 1999 1998
------- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL AND RESTAURANT DATA:
EBITDA(7)............................... $ 74,012 $ 77,767 $ 79,418 $ 54,870 $ 72,995 $ 30,859 $ 30,256
Adjusted EBITDA(7)...................... 82,132 81,067 79,418 71,270 72,995 30,857 32,767
EBITDA margin(7)........................ 20.0% 22.5% 24.4% 17.4% 24.8% 16.8% 17.0%
Adjusted EBITDA margin(7)............... 22.2% 23.5% 24.4% 22.5% 24.8% 16.8% 18.4%
Capital expenditures(8)................. $ 27,717 $ 28,556 $ 25,928 $ 17,513 $ 32,058 12,746 $ 15,760
Ratio of earnings to fixed charges(9)... 3.9x 4.2x 4.6x 3.1x 4.7x 2.9x 3.1x
Net cash provided by operating
activities............................ $ 54,204 $ 61,026 $ 54,009 $ 54,580 $ 54,401 $1 14,755 $ 14,925
Net cash provided by (used in) investing
activities............................ (20,165) (26,022) (25,662) 11,139 (33,407) (12,746) (15,760)
Net cash provided by (used in) financing
activities............................ (3,377) (20,012) (17,030) (14,580) (11,937) 426 (3,448)
Number of restaurants at end of period:
Company-owned......................... 630 623 597 571 567 634 626
Franchised............................ 268 239 219 200 162 274 247
---------- --------- --------- --------- --------- --------- ---------
Total number of restaurants.... 898 862 816 771 729 908 873
========== ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................ $ 303,168 $ 278,649 $ 258,659 $ 242,730 $ 232,051 $ 311,744 $ 278,255
Working capital......................... 121,380 88,006 73,619 57,645 43,271 132,072 101,145
Total debt.............................. -- -- -- -- -- -- --
Shareholders' equity.................... 256,917 220,439 205,200 185,666 179,580 270,489 234,757
</TABLE>
- -----------------
(1) Our fiscal year ends on the Sunday nearest December 31. Our 1998 fiscal
year ended January 3, 1999 and contained 53 weeks. All other fiscal
years presented contained 52 weeks. Accordingly, the 1998 fiscal year
benefited from one additional week of operations over the prior
reported fiscal years. The additional week contributed revenues, EBITDA
and net income of approximately $8.5 million, $2.7 million and $1.7
million, respectively.
(2) Represents provisions of (a) $16.4 million for the closing of
approximately 40 under-performing restaurants in 1995, (b) $3.3 million
for the closing of two joint venture units in 1997 and (c) $2.5 million
for the closing of 20 restaurants in 1998.
(3) Represents a charge for costs associated with the termination of a
prior merger proposal by the Sbarro Family.
(4) Represents a charge in connection with the settlement of a lawsuit.
(5) Represents a write down of the carrying cost on a parcel of
Company-owned land.
(6) We currently intend to elect to be taxed under the provisions of
Subchapter S of the Code and, where applicable and permitted, under
similar state and local income tax provisions beginning as early as
fiscal 2000. See "Unaudited Consolidated Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- After the
Transaction" and "Certain Relationships and Related Transactions."
(7) EBITDA represents earnings before cumulative effect of change in
accounting method, interest income, interest expense, taxes,
depreciation and amortization. Adjusted EBITDA represents EBITDA plus
provisions for unit closings and non-recurring charges. EBITDA margin
represents EBITDA divided by the sum of restaurant sales and franchise
related income. Adjusted EBITDA margin represents Adjusted EBITDA
divided by the sum of restaurant sales and franchise related income.
EBITDA and Adjusted EBITDA should not be considered in isolation from,
or as a substitute for, net income, cash flow from operations or other
cash flow statement data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Rather, EBITDA and Adjusted EBITDA are presented because
they are widely accepted supplemental financial measures, and we
believe that they provide relevant and useful information. Our
calculation of EBITDA and Adjusted EBITDA may not be comparable to
similarly titled measures reported by other companies, since all
companies do not calculate these
41
<PAGE>
non-GAAP measures in the same manner. Our EBITDA and Adjusted EBITDA
calculations are not intended to represent cash provided by (used in)
operating activities since they do not include interest and taxes and
changes in operating assets and liabilities, nor are they intended to
represent a net increase in cash since they do not include cash
provided by (used in) investing and financing activities.
(8) Included in fiscal 1994, fiscal 1995, fiscal 1996, fiscal 1997, fiscal
1998 and the twenty-eight weeks ended July 12, 1998 and July 18, 1999
are $6.0 million, $0.4 million, $4.2 million, $5.0 million, $4.8
million, $3.5 million and $0.4 million, respectively, related to
construction of the Company's headquarters.
(9) The ratio of earnings to fixed charges has been determined by dividing
the total fixed charges into the sum of earnings before taxes on income
and fixed charges. Fixed charges consist of interest expense and
one-third of rental expense (deemed to be a reasonable approximation of
the interest factor).
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements, the notes thereto and other data and information appearing
elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The Company's fiscal year ends on the Sunday nearest to December 31.
The fiscal year which ended on January 3, 1999 contained 53 weeks, while all
other reported fiscal years contained 52 weeks. As a result, the 1998 fiscal
year benefitted from one additional week of operations over the prior reported
fiscal years, with its year ending on January 3, 1999 as opposed to December 28,
1998. The additional week in fiscal 1998 produced revenues of $8.5 million, net
income of $1.7 million and basic and diluted earnings per share of $0.08.
TWENTY-EIGHT WEEKS ENDED JULY 18, 1999
Restaurant sales from Company-owned and consolidated joint venture
units increased 2.9% to $179.1 million for the twenty-eight weeks ended July 18,
1999 from $174.0 million for the twenty-eight weeks ended July 12, 1998. The
increase resulted from a higher number of units in operation in the current
fiscal period than the comparable period in 1998 and selective menu price
increases of approximately 1.4% and 0.7% at Company-owned units which became
effective in September 1998 and February 1998, respectively. During the period,
comparable unit sales increased 0.9% to $167.8 million, primarily as a result of
the menu price increases. Comparable restaurant sales are made up of sales at
locations that were open during the entire current period and entire prior
fiscal year.
Franchise related income increased 4.3% to $4.3 million for the
twenty-eight weeks ended July 18, 1999 from $4.2 million for the twenty-eight
weeks ended July 12, 1998. This increase resulted primarily from greater
continuing royalties due to a higher number of franchise units in operation in
the current year period than in the comparable period in 1998.
Interest income increased to $2.6 million for the twenty-eight weeks
ended July 18, 1999 from $2.5 million for the twenty-eight weeks ended July 12,
1998. This increase was due to higher cash balances being invested in the
current year period than in the prior year period, partially offset by lower
interest rates in the first part of the year and shorter investment maturities
in the 1999 period as compared to the 1998 period.
Cost of food and paper products as a percentage of restaurant sales was
20.7% for the twenty-eight weeks ended July 18, 1999 as compared to 20.9% for
the twenty-eight weeks ended July 12, 1998. Cheese prices, which fluctuate
throughout the year, were slightly lower during the first 28 weeks of 1999 as
compared to the related 1998 period. After the end of the second quarter, cheese
prices increased to levels that are higher than cheese prices for the comparable
period in fiscal 1998.
Restaurant operating expenses -- payroll and other benefits increased
to 27.7% of restaurant sales for the twenty-eight weeks of fiscal 1999 from
26.9% for the twenty-eight weeks ended July 18, 1998. The increase was primarily
due to the tight labor market, resulting in pressures on wages and salaries and
associated increases in amounts paid for payroll taxes.
Restaurant operating expenses -- occupancy and other expenses increased
to 31.4% of restaurant sales for the twenty-eight weeks ended July 18, 1999 from
30.5% of restaurant sales for the twenty-eight
43
<PAGE>
weeks ended July 12, 1998. This increase is attributable principally to rent and
other occupancy related costs increasing at a higher rate than restaurant sales.
Depreciation and amortization expense increased by $0.6 million for the
twenty-eight weeks ended July 18, 1999 over the same period in 1998 primarily as
a result of the Company's new headquarters building being completed in the
fourth quarter of fiscal 1998.
General and administrative expenses were $12.3 million, or 6.6% of
total revenues, for the first twenty-eight weeks of fiscal 1999, compared to
$10.4 million, or 5.7% of total revenues, for the comparable period in fiscal
1998. The increase was primarily due to higher payroll costs and costs
associated with the administration of additional Company-owned restaurants and
joint venture start-up operations, increases in various field training and human
resources functions and increased costs associated with expansion into our
recently completed corporate headquarters.
The provision for unit closings of $1.5 million ($0.9 million after tax
or $0.05 after tax basic and diluted earnings per share) in the twelve weeks
ended July 12, 1998 related to a reserve established for the closing of certain
Company-owned units.
Terminated transaction costs of $1.0 million ($0.6 million after tax or
$0.03 after tax basic and diluted earnings per share) in the twelve weeks ended
July 12, 1998 related to costs associated with the termination of the original
proposal by the Sbarro Family to acquire all shares of the Company not owned by
them.
Other income increased by $1.3 million to $2.6 million in the
twenty-eight weeks ended July 18, 1999, compared to the twenty-eight weeks ended
July 12, 1998, primarily as a result of increased incentives from suppliers and
income, net of expenses, generated from the leasing of a significant portion of
our corporate headquarters building to third parties.
The effective income tax rate was 38.0% for both the twenty-eight weeks
ended July 18, 1999 and July 12, 1998.
The cumulative effect of the change in method of accounting in fiscal
1998 resulted from our implementation of the Statement of Position ("SOP") 98-5
of the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants which required companies that had capitalized
pre-opening and similar costs to write off all such existing costs, net of tax
benefit, as a "cumulative effect of accounting change" and to expense all such
costs as incurred in the future. In accordance with its early application
provisions, we implemented SOP 98-5 as of the beginning of our 1998 fiscal year
and incurred a one-time charge of $0.8 million ($0.04 basic and diluted earnings
per share), net of an income tax benefit of $0.5 million, to write off all
start-up costs existing as of the beginning of that year. The Company had no
such charges in the twenty-eight weeks ended July 18, 1999.
FISCAL 1998 COMPARED TO FISCAL 1997
Our 1998 fiscal year benefitted from one additional week of operations
over the prior fiscal year. The additional week in fiscal 1998 produced revenues
of $8.5 million, net income of $1.7 million and basic and diluted earnings per
share of $0.08.
Restaurant sales from Company-owned units and consolidated joint
venture units increased 7.1% to $361.5 million from $337.7 million in 1997. The
increases resulted primarily from a higher number of units in operation during
the 1998 fiscal year, selective menu price increases of approximately 1.4% and
0.7% which became effective in September 1998 and February 1998, respectively,
and sales generated in
44
<PAGE>
week 53 of the 1998 fiscal year. Comparable unit sales increased 1.6% to $322.4
million for the first 52 weeks of the 1998 fiscal year from $317.2 million in
our 1997 fiscal year. Comparable restaurant sales are made up of sales at
locations that were open during the entire current and prior fiscal years.
Franchise related income increased 16.5% to $8.6 million in 1998 from
$7.4 million in 1997. The increases resulted from greater continuing royalties
due to a larger number of franchise units in operation in 1998, an increase in
initial franchise and development fees due to opening more international
franchise units in 1998 than in 1997 and royalties generated in week 53 of the
1998 fiscal year. During the year ended January 3, 1999, 13 units were closed by
franchisees. These units did not produce material levels of sales and,
consequently, did not generate material amounts of royalty income to us. In
addition, we purchased one franchise unit.
Interest income increased to $5.1 million in 1998 from $4.4 million in
1997. This increase was due to larger amounts of cash being invested in 1998
than in 1997 and the length of the 1998 fiscal year. Interest rates were
comparable in both years.
Cost of food and paper products, as a percentage of restaurant sales,
increased to 21.2% in 1998 from 20.6% in 1997. Higher cheese prices during 1998
increased food costs by approximately $2.6 million or 0.7% of sales and was the
primary cause of the increase. The increase occurred during the last three
quarters of the fiscal year.
Restaurant operating expenses -- payroll and other employee benefits
increased to 25.8% of restaurant sales in 1998 from 25.1% of restaurant sales in
1997. This increase was attributable to the $1.2 million (or 0.3% of restaurant
sales) payroll and other employee benefit component of start-up costs expensed
as incurred during 1998 under SOP 98-5 implemented by us in the first quarter of
fiscal 1998 (which expenses in prior years were capitalized and charged to
amortization expense over a two year period). In addition, the effects of the
federal minimum wage, which became effective in September 1997, a strong labor
market and an increase in unemployment and other payroll taxes contributed to
the increase.
Restaurant operating expenses -- occupancy and other expenses increased
to 27.9% in 1998 from 27.7% in 1997. The increase is attributable principally to
such costs increasing at a rate faster than the increase in restaurant sales in
1998 from 1997.
Depreciation and amortization expenses decreased to $22.4 million from
$23.9 million principally as a result of the absence of amortization of
previously capitalized start-up costs which, as discussed below, were fully
written off as of the beginning of the year with the implementation of SOP 98-5.
Had we not implemented SOP 98-5, we would have incurred amortization expenses of
$1.2 million in 1998 for prior and current years' costs previously capitalized.
The balance of the decrease relates to the absence of depreciation and
amortization in 1998 on certain older units and also to the closing of certain
Company-owned units, as discussed below.
General and administrative expenses increased to $19.7 million or 5.3%
of total revenues in 1998 from $17.8 million or 5.1% of revenues in 1997. The
increases were due to higher costs associated with the administration of
Company-owned restaurants and additional supervisory, administrative and travel
expenses related to increased international franchising activities. In addition,
$0.8 million (or 0.2% of revenues) of the increase was attributable to the
general and administrative expense component of start-up costs incurred and
expensed during 1998 under SOP 98-5 (which expenses in prior years would have
been capitalized and charged to amortization expense over a two year period).
45
<PAGE>
Results for fiscal 1998 include one-time charges to operating income of
$2.5 million before tax ($1.6 million or $0.08 basic and diluted earnings per
share after tax) for the closing of 20 Company-owned restaurants and $1.0
million before tax ($0.6 million or $0.03 basic and diluted earnings per share
after tax) for costs associated with the terminated negotiations of the initial
proposal for our acquisition of all shares of our Common Stock not owned by the
Sbarro Family. The fiscal year results also include a provision of $3.5 million
before tax ($2.2 million or $0.11 basic and diluted earnings per share after
tax) for costs associated with the settlement approved and finalized in December
1998 of a lawsuit under the Fair Labor Standards Act and a charge of $1.1
million before tax ($0.7 million or $0.03 basic and diluted earnings per share
after tax) for the difference between the carrying cost and proposed selling
price of a parcel of land being sold by us.
Other income increased to $2.7 million in 1998 from $1.7 million in
1997 primarily as a result of increased incentives from suppliers.
The effective income tax rate was 38.0% for fiscal 1998 and 1997.
The cumulative effect of the change in method of accounting resulted
from our implementation of SOP 98-5 which requires companies that have
capitalized pre-opening and similar costs to write off all such existing costs,
net of tax benefit, as a "cumulative effect of accounting change" and to expense
all such costs as incurred in the future. In accordance with its early
application provisions, we implemented SOP 98-5 as of the beginning of our 1998
fiscal year. In addition to on-going start up costs incurred and expensed during
1998 with respect to restaurant operating expenses -- payroll and other employee
benefits and general and administrative expenses as discussed above, we incurred
a one-time charge during 1998 of $0.8 million ($.04 basic and diluted earnings
per share), net of an income tax benefit of $0.5 million, to write off all
start-up costs existing as of the beginning of the year.
FISCAL 1997 COMPARED TO FISCAL 1996
Restaurant sales from Company-owned units and consolidated joint
venture units increased 5.8% to $337.7 million in 1997 from $319.3 million in
1996. The increase resulted from a higher number of units in operation in fiscal
1997 and the effect of a full year of selective menu price increases of
approximately 0.5% and 1%, which became effective in mid April 1996 and mid July
1996 offset, in part, by a decrease in comparable unit sales of 0.4%. Comparable
unit sales decreased to $305.2 million in 1997 from $306.3 million in 1996.
Comparable restaurant sales are made up of sales at locations that were open
during the entire current and prior fiscal years.
Franchise related income increased 15.5% to $7.4 million in 1997 from
$6.4 million in 1996. This increase resulted from a higher number of units in
operation in 1997 than in 1996 and an increase in initial franchise and
development fees due to the opening of more franchise units in 1997 than in
1996. During the year ended December 28, 1997, 23 units were closed by
franchisees. These units did not produce material levels of sales and,
consequently, did not generate material amounts of royalty income to us. In
addition, four franchise units were purchased by us. Comparable sales at
franchise locations did not change significantly in fiscal 1997 from fiscal
1996.
Interest income increased to $4.4 million in 1997 from $3.8 million in
1996. This increase was due to higher amounts of cash available for investment
in 1997 than in 1996 at comparable interest rates.
Cost of food and paper products decreased as a percentage of restaurant
sales to 20.6% in 1997 from 21.5% in 1996. This improvement resulted from lower
food prices, primarily of cheese from the fourth quarter of fiscal 1996 into the
fourth quarter of fiscal 1997, lower prices of various paper products and the
effect of a full year of the selective menu price increases implemented in mid
1996. Cheese prices
47
<PAGE>
rose in the middle of the fourth quarter of fiscal 1997 and remained at prices
higher than those in the comparable prior year period.
Restaurant operating expenses -- payroll and other employee benefits
increased to 25.1% of restaurant sales in 1997 from 24.5% of restaurant sales in
1996. This percentage increase was attributable to the higher costs of providing
benefits to employees and, to a lesser extent, the effects of the two increases
in the Federal minimum wage which became effective in September 1997 and 1996,
as well as the decrease in comparable unit sales in fiscal 1997.
Restaurant operating expenses -- occupancy and other expenses increased
to 27.7% of restaurant sales in 1997 from 26.8% of restaurant sales in 1996.
This percentage increase was primarily attributable to rent and rent related
charges increasing at a faster rate than restaurant sales.
Depreciation and amortization expenses increased to $23.9 million in
1997 from $22.9 million in 1996. This increase was primarily the result of
additional Company-owned units in operation during 1997 over the number of units
in operation during 1996.
General and administrative expenses were $17.8 million in 1997 or 5.1%
of total revenues and $14.9 million in 1996 or 4.5% of revenues. This increase
was due to hiring additional personnel in anticipation of our development plans
and increases in executive compensation and legal fees.
In 1997, a provision of $3.3 million before tax ($2.0 million or $0.10
per share after tax) relating to its investment in one of our joint ventures was
established for the closing of two joint venture units.
The effective income tax rate was 38.0% for 1997 and 1996.
IMPACT OF INFLATION AND OTHER FACTORS
Food, labor, rent, construction and equipment costs are the items most
affected by inflation in the restaurant business. Although for the past several
years inflation has not been a significant factor, there can be no assurance
that this trend will continue. In addition, food and paper product costs may be
temporarily or permanently affected by weather, economic and other factors
beyond our control that may reduce the availability and increase the cost of
such items. Historically, the price of cheese has fluctuated more than our other
food ingredients and related restaurant supplies.
SEASONALITY
Our business is subject to seasonal fluctuations, the effects of
weather and economic conditions. Earnings have been highest in our fourth fiscal
quarter due primarily to increased volume in shopping malls during the holiday
shopping season. The length of the holiday shopping period between Thanksgiving
and Christmas and the number of weeks in the fourth quarter result in
fluctuations in fourth quarter financial results from year to year. See also "--
Accounting Period." The fourth fiscal quarter normally accounts for
approximately 40% of net income for the year. The 1998 fiscal year, which
contained 53 weeks, had a 13 week fourth quarter. The fourth quarter of 1998
(excluding non recurring items) accounted for 41% of net income for the year.
Excluding the impact of the thirteenth week, the fourth quarter would have
accounted for 38% of such net income, which is consistent with the comparable
prior year period.
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<PAGE>
ACCOUNTING PERIOD
Our fiscal year ends on the Sunday nearest to December 31. The fiscal
year which ended on January 3, 1999 contained 53 weeks. All other reported
fiscal years contained 52 weeks.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically not required significant working capital
to fund its existing operations and has financed its capital expenditures and
investments in its joint ventures through cash generated from operations. At
July 18, 1999, the Company had cash and cash equivalents of $152.9 million and
working capital of $132.1 million, substantially all of which was used to
consummate the Transaction.
HISTORICAL
Net cash provided by operating activities was $14.8 million and $14.9
million for the twenty-eight week periods ended July 18, 1999 and July 12, 1998,
respectively. Net cash provided by operating activities was $54.2 million and
$61.0 million for the years ended January 3, 1999 and December 28, 1997,
respectively. The decrease in cash flows from operations for the year ended
January 3, 1999 from the year ended December 28, 1997 was primarily attributable
to a $4.9 million net change in operating assets and liabilities primarily as a
result of a significant decrease in accounts payable and accrued expenses
arising from timing differences, combined with decreases in net income and
depreciation expense.
Net cash used in investing activities includes capital expenditures
(including investments made in joint ventures) and investments in marketable
securities. Net cash used in investing activities was $12.7 million and $15.8
million for the twenty-eight week periods ended July 18, 1999 and July 12, 1998,
respectively. The decrease in net cash used in investing activities for the
twenty-eight week period ended July 18, 1999 from the twenty-eight week period
ended July 12, 1998 was due to lower capital expenditures during the current
period. Net cash used in investing activities was $20.2 million and $26.0
million for the years ended January 3, 1999 and December 28, 1997, respectively.
The decrease in net cash used in investing activities for the year ended January
3, 1999 from the year ended December 28, 1997 was due mainly to an increase in
proceeds from the maturities of marketable securities of $5.0 million, combined
with a modest decrease in capital expenditures.
Capital expenditures were $12.7 million and $15.8 million for the
twenty-eight week periods ended July 18, 1999 and July 12, 1998, respectively,
and $27.7 million and $28.6 million for the years ended January 3, 1999 and
December 28, 1997, respectively, including $0.4 million, $3.5 million, $4.8
million and $5.0 million, respectively, in each period related to the
construction of our recently completed corporate headquarters.
Net cash provided by financing activities was $0.4 million for the
twenty-eight week period ended July 18, 1999 and consisted entirely of cash
proceeds from the exercise of stock options. Net cash used in financing
activities was $3.4 million for fiscal 1998 and the twenty-eight week period
ended July 12, 1998 and in each case included $5.5 million of cash dividends
paid in fiscal 1998 that were declared in fiscal 1997, partially offset by $2.1
million of proceeds from the exercise of stock options.
AFTER THE TRANSACTION
As a result of the Transaction, we used substantially all of our cash
on hand and incurred approximately $255.0 million of debt, including of original
issue discount, requiring interest payments.
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Our other liquidity needs will relate to capital expenditures, working capital,
investments in joint ventures, distributions to shareholders as permitted under
the Indenture and general corporate purposes. Our primary sources of liquidity
to meet these needs will be cash flow from operations and availability under our
credit facility. In addition, we may, at some point in the future, mortgage our
recently completed headquarters building.
Since we used substantially all of our cash on hand to consummate the
Transaction, we will not realize the level of interest income as in the past
until we rebuild our cash position. Further, we will incur annual cash interest
expense of approximately $28.1 million under the Notes and may incur additional
interest expense for borrowings under our credit facility.
As part of the Transaction, we issued the Old Notes and entered into
our credit facility. We have $28.2 million of undrawn availability under our
credit facility (net of outstanding letters of credit and certain guarantees of
reimbursement obligations that currently aggregate approximately $1.8 million),
subject to our satisfaction of certain conditions. We expect to generate cash
flow from operations from the closing of the Transaction through the end of our
current fiscal year, and expect to make minimal borrowings under our credit
facility during that time.
We believe that aggregate restaurant capital expenditures and our
investments in joint ventures during the next twelve months will be moderately
higher than levels in recent fiscal years.
Our effective tax rate after the Merger will be higher than our
historical effective tax rate primarily due to the non-deductible amortization
of the excess of the purchase price over the fair value of net assets acquired
arising as a result of the Merger. We currently intend to elect to be taxed
under the provisions of Subchapter S of the Code and, where applicable and
permitted, under similar state and local income tax provisions beginning as
early as fiscal 2000. Under the provisions of Subchapter S, substantially all
taxes on our income will be paid by our shareholders. On a pro forma basis to
give effect to the Transaction, if we were taxed as an S corporation as of the
beginning of fiscal 1998, we and our shareholders would have had a tax liability
on our income of approximately $13.6 million. This amount is higher than the
amount that is reflected in "Unaudited Consolidated Pro Forma Financial Data"
for the comparable period due to differences in tax rates between individual and
corporate taxpayers and the timing differences currently accounted for as
deferred taxes in our financial statements (which deferred taxes will be
eliminated or reduced upon conversion to an S corporation).
Historically we have paid dividends on our common stock to our
shareholders. Most recently, we paid quarterly dividends of $0.27 per share (or
$1.08 per share per annum) which aggregated $22.1 million for fiscal 1997 (the
last full fiscal year in which we paid a dividend). Our Board of Directors
suspended the payment of dividends commencing in the first quarter of 1998 in
connection with a prior proposal by the Sbarro Family to take the Company
private and the consideration of other strategic alternatives. We expect that
our Board of Directors will from time to time elect to pay dividends to our
shareholders in amounts that will be based upon a number of factors, including
our working capital needs, operating performance, debt service obligations and
capital expenditure requirements. Such amounts will be subject to the provisions
of the Indenture. See "Description of Notes -- Certain Covenants -- Restricted
Payments."
We believe that, subsequent to the Transaction, cash flow from
operations and funds available under our credit facility will be sufficient to
meet our liquidity needs.
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MARKET RISKS
We have historically invested our cash on hand in short term, fixed
rate, highly rated and highly liquid instruments which mature and are reinvested
throughout the year. Although our existing investments are not considered at
risk with respect to changes in interest rates or markets for these instruments,
our rate of return on short-term investments could be affected at the time of
reinvestment as a result of intervening events.
Our borrowings under our credit facility will be subject to
fluctuations in interest rates. However, we do not expect to enter into any
interest rate swaps or other instruments to hedge our borrowings under our
credit facility. See "Description of Credit Facility -- Interest."
We have not purchased future, forward, option or other instruments to
hedge against fluctuations in the prices of the commodities we purchase. As a
result, our future commodities purchases are subject to changes in the prices of
such commodities.
All of our transactions with foreign franchisees have been denominated
in, and all payments have been made in, United States dollars, reducing the
risks attendant in changes in the values of foreign currencies. Accordingly, we
have not purchased future contracts, options or other instruments to hedge
against changes in values of foreign currencies.
RECENT ACCOUNTING PRONOUNCEMENTS
Pursuant to Statement of Financial Accounting Standards ("SFAS") No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB
Statement No. 133," issued in June 1999, SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. Presently, we do not use derivative
instruments and therefore SFAS No. 133 is not currently applicable.
YEAR 2000
"Year 2000" issues could arise in situations where computer software or
databases recognize the two digit year "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations that could
cause disruptions in business operations and increased costs in processing and
analyzing data. Since our IT systems (used primarily for financial, accounting,
human resources, payroll, operations support and point-of-sales processing and
reporting) and non-information technology ("non-IT") systems (used principally
in communications systems) use computer hardware, software and related
technology, we have conducted a comprehensive review of our computer systems.
STATE OF READINESS. We have determined that, while certain computer
programs require change to assure that they are Year 2000 compliant, all of our
databases are Year 2000 compliant in that they contain four digit year fields,
thereby allowing positive identification of the century and year.
Our internal IT systems use a combination of in-house software
developed by our IT department and packaged software purchased from third
parties. During the past five years, as part of our ongoing IT enhancements, we
have either significantly updated software or designed new software for our
point-of-sales system (which performs cash register and restaurant management
functions) and for our restaurant accounting system (which handles centralized
bookkeeping, sales analysis and cash control functions relating to our
Company-owned restaurants). Our point-of-sales system is currently installed in
approximately 325 restaurant units. The balance of our existing restaurants use
electronic cash registers. We have been orally advised by the manufacturers of
our electronic cash registers that they expect no
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Year 2000 issues with respect to these registers. We have completed the process
of replacing and/or upgrading personal computers that were part of approximately
115 point-of-sales systems installed in fiscal 1995 and early fiscal 1996. These
personal computers are now certified Year 2000 compliant. We have completed
modifying and testing of our point-of-sales software programs for all 325
restaurants and, as of August 3, 1999, all of these locations are operating
under Year 2000 compliant software versions. We are continuing to install a
point-of-sale system in each new unit and in each existing restaurant as
remodeled and to replace existing registers as needed.
We use software developed by a recognized third party software provider
for various corporate office functions, including financial and accounting
reporting and analysis, human resource and payroll processing, inventory
purchasing and accounts payable functions. We have reviewed and determined the
remediation needed to the third party software, have made the changes needed and
recompiled all programs within the packaged software. We have been testing the
remediated system. All internal testing of these systems has been completed by
our IT department and substantially completed by the various users' departments.
Thereafter, any corrections or changes (which are currently not
anticipated to be significant) to programs or systems that are required as a
result of the testing of our internal software and third party software will be
addressed. Final testing is currently anticipated to be completed, and the
updated software installed, by the end of November 1999.
Non-IT systems are used by us primarily for voice communications. We
have received written assurances from our communications systems provider that
our communications systems and equipment are Year 2000 compliant. We have not as
yet received confirmation that our voice messaging system, which utilizes a
recognized provider, is Year 2000 compliant. We do not believe that interruption
of this service would have a material adverse affect on our operations.
We have received written confirmation from our principal food
distributor that, while such distributor could operate under its former manual
systems, it expects that its computer systems will be Year 2000 compliant on a
timely basis. Our principal soft drink mix supplier has publicly reported that
remediation and testing of its key IT systems has been completed for over 99% of
such systems and that completion for substantially all of the remaining systems
is scheduled for the third quarter of 1999.
COSTS. To date, all software modification and testing has been
performed by our internal IT department without the need to employ additional
staff and without significant interruption of the other functions performed by
the department. We believe we will complete this project without additional
staff and without adversely affecting day-to-day operations and support,
although some overtime for personnel outside the IT department staff may be
required during the testing phase of the remediated systems.
At July 18, 1999, we had expended less than $50,000 (in addition to
hardware purchased in the ordinary course, which purchases were not accelerated
as a result of the Year 2000 issue) and anticipate that spending after that date
will be less than $150,000 for testing, purchasing hardware and for other
modification costs to finish the project. We do not separately track internal
costs (which are principally payroll and related costs of our IT systems
department) incurred as part of our Year 2000 project.
RISKS. Although we believe our systems will be timely compliant with
Year 2000 issues, the most reasonably likely worst case scenarios facing us in
the event Year 2000 problems arise involve: (1) the timeliness of internal
reporting and analyzing corporate information and the potential of temporarily
supplementing our staff if we are required to rely, for a period of time, on
manual information reporting and processing while remediation to one or more of
our internal IT systems is effectuated; (2) the processing of our payroll; and
(3) our ability to maintain our traditional levels of revenues should we
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experience temporary supply shortages of food, soft drink mixes and paper
products if our distributors experience IT or non-IT Year 2000 problems or
should the landlords of our restaurants experience non-IT issues (such as with
microprocessors that control door operators, elevator service and heating and
cooling equipment that the landlords are required to maintain under their leases
with us). Like most other companies, we are also subject to certain risks that
are not within our control, such as a failure of IT systems of banks, financial
institutions, telephone companies and public utilities.
CONTINGENCY PLANS. In the event our IT systems should malfunction, we
believe we will nevertheless be able to generate revenues at our existing
restaurants and process data, although delays may result in reporting and
processing information. Our electronic cash registers operate manually and our
point-of-sales cash registers can also operate independent of our IT system. We
still use manual systems both for reporting to our corporate office by
restaurants that are not yet on our point-of-sales system and as a backup for
units that are on our point-of-sales system. Depending upon the results of
testing of our efforts to remediate our software, we intend to develop
contingency plans with respect to the internal reporting of corporate
information in the event of a failure of our IT systems.
With respect to our payroll functions, we have recently comprehensively
analyzed and worked with an outside payroll processing service before
determining to continue to perform all payroll functions through our internal
systems. Therefore, we believe that we could either outsource this function or
have an outsourcer of payroll services install its system at our offices with us
operating the system internally without material delay.
We intend to maintain a higher inventory level of food products and
soft drink mixes and paper products toward the end of 1999 as a contingency
against shortages in the event our suppliers experience unanticipated Year 2000
problems. The levels to be maintained will be based upon future consultation
with our suppliers to obtain updates on the status of their Year 2000 compliance
programs. We believe that there are other distributors of food products,
beverages and paper products that would be able to service our needs in the
event our primary suppliers experience Year 2000 problems that adversely affect
their ability to provide us with the quantity of supplies needed.
We intend to develop additional contingency plans if and to the extent
additional significant risks become evident based on the testing of our internal
systems and future discussions with our suppliers, landlords and other third
party providers of goods and services.
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BUSINESS
THE COMPANY
We are a leading owner, operator and franchisor of quick-service
restaurants, serving a wide variety of Italian specialty foods. Under the
"Sbarro" and "Sbarro The Italian Eatery" names, we developed one of the first
quick-service concepts that extended beyond offering one primary specialty item
(i.e., pizza or hamburgers). Our diverse menu offering includes pizza, pasta and
other hot and cold Italian entrees, salads, sandwiches, cheesecake and other
desserts and beverages. All of our entrees are prepared fresh daily in each
restaurant according to special recipes developed by us. We focus on serving our
customers generous portions of high quality Italian-style food at attractive
prices. The Sbarro concept is unlike other quick-service Italian restaurants due
to its diverse menu selection and its fast, cafeteria-style service.
Since our inception in 1959, we have focused on high customer traffic
venues due to the large number of captive customers who base their eating
decision primarily on impulse and convenience. We therefore do not have to incur
the significant advertising and promotional expenditures that certain of our
competitors incur to attract customers to their destination restaurants. These
factors, combined with adherence to strict cost controls, provide us with high
and stable operating margins. We initially located our restaurant sites in New
York and then, with the rapid expansion of enclosed shopping malls in the 1970s,
expanded into these facilities nationwide due to their high customer traffic and
impulse purchase characteristics. Over the past ten years, we have extended the
Sbarro concept to other high customer traffic venues, including toll roads,
airports, sports arenas, hospitals, convention centers, university campuses and
casinos. We believe the opportunity to open additional Sbarro units in these and
other new venues should continue to increase as companies, municipalities and
others seek to outsource their non-core food operations to companies with an
established brand name. As of July 18, 1999, the Sbarro system included 908
restaurants, consisting of 634 Company-owned and 274 franchised restaurants
located in 48 States, the District of Columbia, the Commonwealth of Puerto Rico,
certain United States territories and 21 countries throughout the world. Of the
total 908 Sbarro units, 772 are located in enclosed shopping malls and the
remaining 136 are generally located in other high customer traffic venues,
including those described above.
We have demonstrated our ability to identify, develop and efficiently
operate restaurants and have increased our total restaurant base (including
franchised operations) from 103 restaurants at the time of our initial public
offering in 1985 to 908 at July 18, 1999. During the past decade, our growth in
shopping malls has been primarily derived from opportunities that have arisen
from the major renovation of existing shopping malls or the re-merchandising of
a mall's food operations and, to a lesser extent, the development of new
shopping malls. Historically, our strategy has been to own and operate our
restaurants directly whenever possible in order to closely control all aspects
of restaurant operations and, thus, maximize restaurant profitability. However,
we have granted franchises to accomplish our expansion in international markets
in order to minimize our capital risk and have typically granted franchises
domestically only when necessary to open a unit in a desirable location. For
example, the food operations in many of the non-mall locations in which we have
units, such as toll roads and certain airports, are operated by third-party food
service management companies, such as Host Marriott Services Corporation, under
separate franchise agreements with a number of quick-service restaurant
companies. We expect that a higher percentage of our future new unit growth will
come from franchised locations, as we believe opportunities to open Sbarro units
in non-mall venues will continue to increase, both domestically and
internationally. We have developed a qualification and training program that
provides strict operating standards for franchisees and we restrict the size of
territories granted to franchisees. We believe that our franchise units meet the
quality and customer service benchmarks of our Company-
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owned units. For the twelve months ended July 18, 1999, restaurant sales at
Company-owned restaurants accounted for approximately 98% of our total operating
revenues, with franchise related income accounting for the balance.
INDUSTRY OVERVIEW
The restaurant industry represents one of the largest sectors of the
economy, with estimated industry sales of approximately $338 billion in 1998,
accounting for approximately 4% of the nation's gross domestic product. Between
1990 and 1998, restaurant industry sales grew an average of approximately 5% per
year.
The quick-service restaurant industry includes hamburgers, pizza,
chicken, various types of sandwiches, and Mexican, Chinese and other ethnic
foods. According to the National Restaurant Association, sales at quick-service
restaurants reached approximately $106 billion in 1998, compared with
approximately $62 billion in 1988. This growth primarily reflects consumers'
increasing desire for a convenient, fast and reasonably priced restaurant
experience. In addition, the National Restaurant Association estimates that the
percentage of the average American family's food budget spent on meals consumed
away from home has increased from approximately 25% in 1955 to approximately 44%
in 1998. We believe this trend will continue as the number of dual income
households increases, consumers' disposable income increases and consumers'
leisure time decreases. Further, pizza, which accounts for approximately 50% of
Sbarro's revenues, continues to be one of the most popular fast food categories.
At the end of 1998, there were over 30,000 pizza restaurants in the United
States, generating nearly $16 billion in annual revenues.
COMPETITIVE STRENGTHS
We believe that our success in the quick-service restaurant industry is
attributable to the following key competitive strengths:
LEADING QUICK-SERVICE OPERATOR IN HIGH CUSTOMER TRAFFIC VENUES. We are
a leading owner, operator and franchisor of quick-service restaurants, having
developed over the course of the past 40 years a business model for high
customer traffic venues including, among others, shopping malls, airports and
toll roads. Over the years, certain national quick-service pizza chains
attempted to replicate their stand-alone concepts in shopping malls but have
since reduced the scope of their operations in these venues. Additionally, we
have long-standing relationships with many of the major shopping mall developers
and real estate management companies, as well as with national food service
management companies that enter into restaurant franchise agreements on behalf
of owners. As a result of these relationships and our significant presence in
major shopping malls throughout the United States, we believe that we have a
competitive advantage in opening new units in high customer traffic venues.
STRONG, NATIONALLY RECOGNIZED BRAND NAME. The breadth of our operations
and the visibility of our units across many high customer traffic venues
throughout the United States and abroad have enabled us to forge strong brand
name recognition with our customers. Our consistent product quality and service,
diverse menu of attractively priced Italian food served in a cafeteria style
format, distinctive logo and clean and bright locations have become recognized
symbols of Sbarro
CONSISTENT RECORD OF GROWTH AND PROFITABILITY. We have a track record
of consistent operating performance and a high level of profitability. Our
operating and cost controls have resulted in a consistent revenue base and a
relatively low cost structure. As a result of our focus on high customer traffic
venues, we do not need to offer discounts or promotions to attract customers and
do not incur significant marketing expenditures. See "Selected Financial Data."
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PROVEN BUSINESS MODEL. Over the course of the past 40 years, our
management team has developed and refined a business model specifically for high
customer traffic venues. We have extensive experience in identifying and
developing restaurant locations and in operating these sites. We forecast the
initial capital investment and pre-opening costs associated with opening a new
Sbarro restaurant as well as its expected sales and profitability. Since the
cost of food, paper products, payroll and other employee benefits as a
percentage of restaurant sales is generally consistent from location to location
by unit type, our forecasting focuses primarily on projecting restaurant
revenues and semi-variable costs. When forecasting revenues for prospective
locations, we consider such factors as the area's demographics and the retail
environment surrounding the location. We also have developed standard restaurant
operating procedures that specify all aspects of restaurant management,
including recipes, production processes, restaurant design, customer service and
staff training. This ensures system-wide consistency of product and service
quality, while maximizing profitability.
MODERATE CAPITAL EXPENDITURE REQUIREMENTS. Sbarro restaurants typically
have moderate capital expenditure requirements for both their initial
development and ongoing maintenance. Approximately 96% of our 634 owned
restaurants at July 18, 1999 are located in shopping malls. These units are
relatively small (500 to 3,000 square feet) and are less expensive to open than
fast food establishments in free standing locations. Additionally, the majority
of our locations have limited, if any, dedicated seating solely for Sbarro
customers due to their location in common area food courts, which further
minimizes initial and ongoing maintenance costs. A new Sbarro unit typically
requires a $0.3 million to $0.5 million initial capital investment with only
minimal annual maintenance expenditures thereafter. This relatively low initial
capital investment, when combined with our historically high unit operating
margins, generally enables us to recover our initial investment and pre-opening
costs for mall units in approximately 2.5 to 3.5 years, depending upon unit
type. Further, our franchisees typically fund the capital expenditures for their
units. As a result of these factors, we generate significant free cash flow.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT OWNERSHIP. Our experienced
management team has extensive experience in the restaurant industry and
represents one of our key competitive advantages. Our senior management team is
led by Mario Sbarro, Chairman and Chief Executive Officer, Anthony Sbarro, Vice
Chairman, and Joseph Sbarro, Senior Executive Vice President, all of whom have
been with us since their father opened the first Sbarro restaurant in 1959. As a
result of the consummation of the "going private" transaction discussed under
"The Going Private Transaction," the Sbarro family owns all of our common stock.
BUSINESS STRATEGY
We continuously seek to provide high quality Italian food products to a
broad customer base. We have concentrated our product development on creating a
menu of healthy, attractively priced items that appeal to the tastes of our
customers and produce high margins. We intend to achieve further growth and
strengthen our competitive position through the continued implementation of the
following initiatives:
EXPAND TRADITIONAL SBARRO STORE BASE. We plan to continue to increase
our network of Company-owned and franchised Sbarro locations. We believe new
Company-owned locations will primarily be driven by opportunities arising from
major renovations of existing shopping malls or the re-merchandising of a mall's
food operations and, to a lesser extent, the development of new shopping malls.
We also plan to increase the level of franchising in both international and
domestic markets.
INCREASE PENETRATION OF NEW HIGH CUSTOMER TRAFFIC VENUES. We began
targeting toll roads and airport locations in the early 1990s and subsequently
expanded our targeted venues to include sports arenas, hospitals, convention
centers, university campuses and casinos due to the similar characteristics
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(i.e., high customer traffic, impulse purchase, etc.) between these venues and
our core shopping mall locations. Approximately 15% of our Company-owned and
franchise restaurants are located in these non-mall venues. We believe these
venues offer significant expansion potential as the owners of these facilities
(or, in certain cases, food service management companies with whom the owners
have contracted the operations) increasingly seek to outsource their non-core
food service operations to companies with an established brand, such as Sbarro,
in order to simplify their own operations and potentially increase
profitability. As previously discussed, a significant portion of our units in
these locations are, and are expected to continue to be, operated as franchises.
PURSUE STRATEGIC JOINT VENTURE ARRANGEMENTS. Since 1995, we have
entered into several joint ventures to develop new restaurant concepts in an
effort to leverage our restaurant management expertise into other venues that we
believe have attractive growth opportunities. To date, these joint ventures have
established mid- and upper-priced Italian and steakhouse restaurants.
Additionally, we have recently acquired, through a joint venture, a two-unit
Mexican restaurant business and have established a joint venture that intends to
operate seafood restaurants. Our joint ventures presently operate 24
restaurants. We have chosen to develop these ventures with restaurateurs
experienced in the particular food area. Our ownership interest in these
ventures currently ranges from 25% to 80% and we are actively involved in the
operation and administration of all of these ventures. Our joint ventures are in
various stages of development and expansion, and we are also considering
additional concepts for their development potential. Given the early development
stage of these ventures and their ownership structure, our existing joint
ventures are, and our future joint ventures are expected to be, initially
designated as, or held by, Unrestricted Subsidiaries under the Indenture.
Unrestricted Subsidiaries will not guarantee our obligations under the Notes and
will not be subject to the restrictive covenants under the Indenture. See
"Description of Notes -- Subsidiary Guarantees." There can be no assurance as to
the performance of our existing joint ventures or our ability to identify and
successfully develop new restaurant concepts.
RESTAURANT EXPANSION
We have expanded significantly in recent years, growing from 103
restaurants at the time of our initial public offering in 1985 to 908 as of July
18, 1999. From July 18, 1999 through the remainder of 1999, we expect that there
will be an additional 19 units (net of estimated unit closings) in operation, of
which we expect approximately nine (net of estimated unit closings) to be
Company-owned and the balance to be franchised. The actual number and type of
additional units will depend on the availability of appropriate sites, as well
as other factors.
The following table indicates the number of Company-owned and
franchised restaurants (excluding non-mall joint venture restaurants) in
operation during each period indicated.
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<TABLE>
<CAPTION>
FISCAL YEAR TWENTY-EIGHT
----------- WEEKS ENDED
1994 1995 1996 1997 1998 JULY 18, 1999
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
COMPANY-OWNED SBARRO RESTAURANTS:
Opened during period(1).................... 53 44 29 30 26 9
Acquired from franchisees
during period......................... 2 -- 1 4 1 --
Closed during period....................... (3) (40) (4) (8) (20) (5)
Open at end of period(2)................... 567 571 597 623 630 634
FRANCHISED SBARRO RESTAURANTS:
Opened during period....................... 38 40 36 47 43 19
Sold to us during period................... (2) -- (1) (4) (1) --
Closed or terminated during period......... (8) (2) (16) (23) (13) (13)
Open at end of period...................... 162 200 219 239 268 274
ALL SBARRO RESTAURANTS:
Opened during period(1).................... 91 84 65 77 69 28
Closed or terminated during period......... (11) (42) (20) (31) (33) (18)
Open at end of period(2)................... 729 771 816 862 898 908
Kiosks (all franchised) open at end of
period................................... 7 8 7 7 8 7
</TABLE>
- ---------------
(1) Includes, in fiscal 1996, fiscal 1997 and fiscal 1998, three, two and
one mall locations, respectively, of a joint venture which operates as
Umberto of New Hyde Park. For the purpose of this Prospectus, we have
included those restaurants with Sbarro restaurants.
(2) Includes, at the end of fiscal 1996, fiscal 1997, fiscal 1998, and as
of July 18, 1999, three, five, six and six joint venture mall
locations, respectively, which operate as Umberto of New Hyde Park.
CONCEPT AND MENU
Sbarro restaurants are family oriented, offering quick, efficient,
cafeteria and buffet style service designed to minimize customer waiting time
and facilitate table turnover. The decor of a Sbarro restaurant incorporates
booth and table seating (for "in-line" restaurants), with a contemporary motif
that blends with the characteristics of the surrounding area.
As of July 18, 1999, there were 254 "in-line" Sbarro restaurants and
647 "food court" Sbarro restaurants. In addition, franchisees operated seven
freestanding Sbarro restaurants, including two in the Middle East, three in
Minnesota and one in each of the Bahamas and Puerto Rico. "In-line" restaurants,
which are self-contained restaurants, usually occupy approximately 1,500 to
3,000 square feet, contain the space and furniture to seat approximately 60 to
120 people and employ 10 to 40 persons, including part-time personnel. "Food
court" restaurants are primarily located in areas of shopping malls designated
exclusively for restaurant use and share a common dining area provided by the
mall. These restaurants generally occupy approximately 500 to 1,000 square feet
and contain only kitchen and service areas. They frequently have a more limited
menu than an "in-line" restaurant and employ 6-30 persons, including part-time
personnel.
Sbarro restaurants are generally open seven days a week serving lunch,
dinner and, in a limited number of locations, breakfast, with hours conforming
to those of the major department stores or other large retailers in the mall or
trade area in which they are located. Typically, mall restaurants are open to
serve customers 10 to 12 hours a day, except on Sunday, when mall hours may be
more limited. For Company-owned restaurants open a full year, average sales in
the first 52 weeks of 1998 were $0.7 million for "in-line" restaurants and $0.5
million for "food court" restaurants.
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Sbarro restaurants feature a menu of popular Italian food, including
pizza with a variety of toppings, a selection of pasta dishes and other hot and
cold Italian entrees, salads, sandwiches, cheesecake and other desserts. In
addition to soft drinks, some of the larger restaurants serve beer and wine.
All of our entrees are prepared fresh daily in each restaurant
according to special recipes developed by us. We place emphasis on serving
generous portions of quality Italian-style food at attractive prices. Entree
selections, excluding pizza, generally range in price from $2.99 to $5.29. We
believe that pizza, which is sold predominantly by the slice, accounts for
approximately 50% of Sbarro restaurant sales.
Substantially all of the food ingredients and related restaurant
supplies used by the restaurants are purchased from a national independent
wholesale food distributor which is required to adhere to established product
specifications for all food products sold to our restaurants. Breads, pastries,
produce, fresh dairy and certain meat products are purchased locally for each
restaurant. Soft drink mixes are purchased from major beverage producers under
national contracts. We believe that there are other distributors who would be
able to service our needs and that satisfactory alternative sources of supply
are generally available for all items regularly used in our restaurants.
RESTAURANT MANAGEMENT
Each Sbarro restaurant is managed by one General Manager and one or two
Co-Managers or Assistant Managers, depending upon the size of the location.
Managers are required to participate in Sbarro training sessions in restaurant
management and operations prior to the assumption of their duties. In addition,
each restaurant Manager is required to comply with an extensive operations
manual containing procedures for assuring uniformity of operations and
consistent high quality of products. We have a Restaurant Management Bonus
Program that provides the management teams of Company-owned Sbarro restaurants
with the opportunity to receive a percentage of restaurant sales in cash bonuses
based on certain performance-related criteria of their location.
We also employ 70 to 75 Area Directors, each of whom is typically
responsible for the operations of 6 to 14 Company-owned Sbarro restaurants in a
given area. Before each new restaurant opening, we assign an Area Director to
coordinate opening procedures. Each Area Director reports to one of 12 Regional
Directors. The Regional Directors recruit and supervise the managerial staff of
all Company-owned restaurants and report to one of four Regional Vice
Presidents. The Regional Vice Presidents coordinate the activities of the
Regional Directors assigned to their areas of responsibility and report to one
of two Corporate Vice Presidents. The Corporate Vice Presidents have total
responsibility for their geographic areas.
FRANCHISE DEVELOPMENT
Growth in franchise operations occurs through the establishment of new
Sbarro restaurants by new franchisees and existing franchisees who have
multi-unit franchise agreements. We rely principally upon our reputation and the
strength of our existing restaurants to attract new franchisees as well as to
participate in national franchise conventions.
As of July 18, 1999, we had 274 franchised Sbarro restaurants operated
by 78 franchisees in 31 states of the United States as well as its territories
and in 21 countries throughout the world. We are presently considering
additional franchise opportunities in the United States and other countries. In
certain instances, franchise locations have been established through territorial
agreements under which we have granted, for specified time periods, exclusive
rights to enter into franchise agreements for restaurant
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<PAGE>
units in certain geographic areas, primarily in foreign countries, or for
specified non-mall locations (such as for certain toll roads or airports) in the
United States or foreign countries.
Our basic franchise agreement generally requires payment of an initial
fee and continuing royalties at rates of 3.5% to 10.0% of gross revenues.
Franchise agreements entered into prior to 1988 generally have an initial term
of 15 years with the franchisee having a renewal option provided that the
agreement has not been previously terminated by either party for specified
reasons. Since 1988, we have required the franchise agreements to be coterminous
with the underlying lease, but generally not less than ten nor more than twenty
years. Since 1990, the renewal option has also been subject to certain
conditions, including a remodel or image enhancement requirement. Franchise
agreements granted under territorial agreements and those for non-traditional
sites contain negotiated fees, royalty rates and terms and conditions other than
those contained in our basic franchise agreement. The franchise and territorial
agreements provide us with the right to terminate a franchisee for a variety of
reasons, including insolvency or bankruptcy, failure to operate its restaurant
according to standards, understatement of gross receipts, failure to pay fees,
or material misrepresentation on an application for a franchise.
We employ ten management level individuals responsible for overseeing
the operations of franchise units and for developing new units. These employees
report to our Corporate Vice President -- Franchising.
JOINT VENTURES
Since 1995, we have entered into several joint ventures to develop new
restaurant concepts to provide growth opportunities that leverage our restaurant
management expertise. Our joint ventures presently operate 24 restaurants. We
have chosen to develop these ventures with restauranteurs experienced in the
particular food area and we are actively involved in the day-to-day operations
of each venture. These ventures are in various stages of development and
expansion and we are considering additional concepts for potential development.
Given the early development stage of these ventures and their ownership
structure, our existing joint ventures are initially, and our future joint
ventures are expected to be, designated as, or held by, Unrestricted
Subsidiaries under the Indenture. Unrestricted Subsidiaries will not guarantee
our obligations under the Notes and will not be subject to the restrictive
covenants under the Indenture. Our ability to invest in current and future joint
ventures will be subject to the limitations contained in the Indenture regarding
our ability to make investments in, advances to, or provide guarantees or other
credit enhancements to support obligations of, our Unrestricted Subsidiaries.
The following is a summary of our existing joint ventures:
. We have an 80% interest in a joint venture that presently
operates moderately priced casual family restaurants serving
Italian food under the name "Umberto of New Hyde Park" in six
mall and seven strip center locations. In addition to table
service, the non-mall locations also feature take-out pizza
and other Italian-style foods. One non-mall location was
closed in 1998. We are planning to open additional non-mall
based locations. In February 1999, we instituted an action
against our partner in this venture, the resolution of which
is not expected to have a material adverse effect on the
operation of these restaurants. See "Legal Proceedings."
. We have a 40% interest in a joint venture that presently
operates five casual dining restaurants with a Rocky Mountain
steakhouse motif under the name "Boulder Creek Steaks &
Saloon." This venture also operates two fine dining steak
restaurants under the
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<PAGE>
names "Rothmann's Steakhouse" and "Burton & Doyle." We are
planning to open additional sites of each type of restaurant.
. We have a 70% interest in two moderately priced, table service
restaurants featuring an Italian Mediterranean menu that
operate under the names "Salute" and "Cafe Med," which are
located in New York City. During 1997, this venture closed two
other restaurants, resulting in a $3.3 million before tax
($2.0 million after tax) charge to our earnings. We are
planning to open additional restaurants with this joint
venture partner and expect that our equity interest in these
new ventures will be 50% or higher.
. We have a 50% interest in a joint venture which, in June 1999,
acquired two Mexican style restaurants operating in strip
centers under the name "Baja Grill." We are currently
evaluating whether to expand this concept.
. We have a 25% interest in a joint venture that was recently
formed for the purpose of establishing seafood restaurants.
All joint venture restaurants, except four Umberto of New Hyde Park
mall units, are presently located in the New York City metropolitan area. We are
continually evaluating the operating performance of these ventures to assess
their feasibility and future growth potential. We intend to seek to expand our
existing ventures, if appropriate, and to develop new restaurant concepts
through existing or new joint ventures. There can be no assurance as to the
performance of the existing joint ventures or our ability to successfully
identify and develop new concepts.
As of July 18, 1999, we had an aggregate investment in our Unrestricted
Subsidiaries and related joint ventures of approximately $9.0 million, which
does not include guarantees of indebtedness and reimbursement obligations in
respect of letters of credit in the aggregate amount of approximately $8.8
million and guarantees of certain real property lease obligations of such
Unrestricted Subsidiaries and related joint ventures. In addition, we have also
sublet locations to, guaranteed all or portions of joint venture location leases
and provided other credit enhancements for these joint ventures. Our joint
ventures have current plans to invest approximately $20.0 million, a portion of
which is expected to be financed and/or guaranteed by us, subject to the
Indenture.
EMPLOYEES
As of July 18, 1999, we employed approximately 7,000 persons (exclusive
of joint ventures), of whom approximately 3,100 were full-time field and
restaurant personnel, 3,700 were part-time restaurant personnel and 200 were
corporate administrative personnel. None of our employees are covered by
collective bargaining agreements. We believe our employee relations are
satisfactory.
COMPETITION
The restaurant business is highly competitive. Many of our direct
competitors operate within the pizza restaurant segment. We believe we compete
on the basis of price, service, location and food quality. Factors that affect
our and our franchisees' business operations include changes in consumer tastes,
national regional and local economic conditions, population, traffic patterns,
changes in discretionary spending priorities, demographic trends, consumer
confidence in food wholesomeness, handling and safety, weather conditions, the
type, number and location of competing restaurants and other factors. There is
also active competition for management personnel and attractive commercial
shopping mall, center city and other locations suitable for restaurants. We
compete in each market in which we operate with locally-owned restaurants, as
well as with national and regional restaurant chains. Factors, such as
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inflation and increased food, beverage, labor, occupancy and other costs, could
also adversely affect us and others in the restaurant industry.
Although we believe we are well positioned to compete because of our
leading market position, focus and expertise in the quick-service Italian
specialty food business and strong national brand name recognition, we could
experience increased competition from existing or new companies and loss of
market share, which could have an adverse effect on our operations.
TRADEMARKS
The Sbarro restaurants operate principally under the "Sbarro" and
"Sbarro The Italian Eatery" service marks, which are registered with the United
States Patent and Trademark Office for terms presently expiring in 2004 and
2001, respectively. Registered service marks may continually be renewed for 10
year periods. We have also registered or filed applications to register "Sbarro"
and "Sbarro The Italian Eatery" in several other countries. We believe that
these marks continue to be materially important to our business. The joint
ventures to which we are a party have also applied for United States trademarks
covering trade names used by them or, in the case of Umberto of New Hyde Park,
license that name from our joint venture partner.
GOVERNMENTAL REGULATION
We are subject to various federal, state and local laws affecting our
business, as are our franchisees. Each of our restaurants and those owned by our
franchisees are subject to a variety of licensing and governmental regulatory
provisions relating to wholesomeness of food, sanitation, health, safety and, in
certain cases, licensing of the sale of alcoholic beverages. Difficulties in
obtaining, or the failure to obtain, required licenses or approvals can delay or
prevent the opening of a new restaurant in any particular area. Our operations
and those of our franchisees are also subject to federal laws (such as minimum
wage laws, the Fair Labor Standards Act and the Immigration Reform and Control
Act of 1986) and state laws governing such matters as wages, working conditions,
employment of minors, citizenship requirements and overtime. Some states have
set minimum wage requirements higher than the federal level.
We are also subject to FTC regulations and various state laws
regulating the offer and sale of franchises. The FTC and various state laws
require us to furnish to prospective franchisees a franchise offering circular
containing prescribed information. We are currently registered to offer and sell
franchises in seven states and are currently exempt from the franchise
registration requirements in five states based upon "large franchisor"
exemptions, which are based upon our experience and meeting certain size tests,
generally requiring a net worth of at least $5 to $15 million (depending on the
state). The states in which we are registered, and a number of states in which
we may franchise, require registration of a franchise offering circular or a
filing with state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states, and bills have been introduced in Congress from time to time which
provide for federal regulation of the franchisor-franchisee relationship in
certain respects. The state laws often limit, among other things, the duration
and scope of non-competition provisions and the ability of a franchisor to
terminate or refuse to renew a franchise.
We believe that we are in compliance in all material respects with the
laws to which we are subject.
Following the availability of our financial statements for the quarter
ended October 10, 1999, we intend to amended our FTC franchise offering circular
and, where required, file appropriate amendments
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to state franchise registrations to reflect the Transaction. Until such
amendments are filed and, where required, approved, we will not be able to sell
or renew franchises in those states. We currently expect, although there can be
no assurance, that such amendments will be approved and that any delay will not
have a material adverse effect on our business. Furthermore, state franchise
examiners have discretion to disapprove franchise registrations based on a
franchisor's financial condition. While we believe that, following completion of
the Transaction, we continue to meet these financial requirements, there is
little specific guidance under state franchise laws as to acceptable levels of a
franchisor's net worth (and whether "net worth" includes or excludes intangible
assets) and debt, and, depending upon a franchisor's financial condition, state
franchise examiners in many states may require a franchisor to escrow initial
franchise fees for a limited period of time.
Although alcoholic beverage sales are not emphasized in our
restaurants, some of our larger restaurants serve beer and wine. Sales of beer
and wine contributed less than 1% of our total revenues during fiscal 1998. We
have submitted documents to amend our applications with the appropriate alcohol,
beverage and tobacco authorities in 14 of the 16 states in which we sell beer
and wine to reflect the Transaction and have filed part of an amendment that is
required in California. We do not intend to continue selling beer and wine in
Colorado. We expect to be able to continue to sell beer and wine in most of the
locations pending completion of the approval process. While we do not anticipate
the denial of any of our remaining applications, there can be no assurance
thereof.
PROPERTIES
All Sbarro restaurants are typically leased under ten-year leases that
often do not include an option to renew the lease. The Company has historically
been able to renew or extend leases on existing sites. As of July 18, 1999, we
leased 659 restaurants, of which 25 were subleased to franchisees under terms
which cover all of our obligations under the lease. The remaining franchisees
directly lease their restaurant spaces. Most of our restaurant leases provide
for the payment of base rents plus real estate taxes, utilities, insurance,
common area charges and certain other expenses, as well as contingent rents
generally ranging from 8% to 10% of net restaurant sales in excess of stipulated
amounts. Leases to which the Company were a party at July 18, 1999 have initial
terms expiring as follows:
<TABLE>
<CAPTION>
YEARS INITIAL LEASE NUMBER OF COMPANY- NUMBER OF FRANCHISED
TERMS EXPIRE OWNED RESTAURANTS RESTAURANTS
- ------------ ----------------- --------------------
<S> <C> <C>
1999 (remainder of year).................... 21 4
2000........................................ 33 5
2001........................................ 60 4
2002........................................ 75 4
2003........................................ 76 3
2004........................................ 51 1
Thereafter.................................. 318 4
</TABLE>
We own a four-story office building in Melville, New York with
approximately 100,000 square feet and a cafeteria style restaurant operated by
us. This building was purchased and renovated at a total cost of approximately
$20.8 million. Approximately 75% of the rentable square feet are currently under
lease to unaffiliated third parties. One floor of the building is occupied by us
as our principal executive offices.
We also occupy a two-story 20,000 square foot office building for
administrative support functions located in Commack, New York. The building has
been subleased for a period of fifteen years since May 1986 from a partnership
owned by certain of our shareholders at a current annual base rental of
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$0.3 million. In addition, we pay real estate taxes, utilities, insurance and
certain other expenses for the facility. See "Certain Relationships and Related
Transactions."
We have obtained consents to the Transaction for substantially all of
the leased premises for which we are required to obtain such consents.
LEGAL PROCEEDINGS
In February 1999, we instituted an action against our partner in our
joint venture that operates under the name "Umberto of New Hyde Park" alleging,
among other things, breach of contract and unfair competition, seeking damages
and injunctive relief. The matter is in its initial stages and no answer has
been submitted to this complaint. We do not expect that the resolution of this
matter will have a material adverse effect on the operation of these
restaurants.
From time to time, the Company is a party to certain claims and legal
proceedings in the ordinary course of business, none of which, in the opinion of
the Company, would have a material adverse effect on the Company's financial
position or results of operations.
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<TABLE>
<CAPTION>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION
---- --- --------
<S> <C> <C> <C>
Mario Sbarro 57 Chairman of the Board, President, Chief
Executive Officer and Director
Anthony Sbarro 53 Vice Chairman of the Board, Treasurer and
Director
Joseph Sbarro 59 Senior Executive Vice President, Secretary
and Director
Carmela Sbarro 77 Vice President and Director
John Bernabeo 43 Vice President-- Architecture and
Engineering
Joseph A. Fallarino 47 Vice President-- Human Resources
Carmela N. Merendino 34 Vice President-- Administration
Anthony J. Missano 40 Corporate Vice President-- Operations
Robert G. Rooney 42 Vice President-- Finance and Chief
Financial Officer
Gennaro A. Sbarro 33 Corporate Vice President-- Franchising
Gennaro J. Sbarro 37 Corporate Vice President-- Operations
Leonard G. Skrosky 67 Senior Vice President-- Real Estate and
Lease Administration
Harold L. Kestenbaum 50 Director
Richard A. Mandell 57 Director
Paul A. Vatter 75 Director
Terry Vince 70 Director
Bernard Zimmerman 66 Director
</TABLE>
EXECUTIVE AND CORPORATE OFFICERS
MARIO SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Chairman of the
Board of Directors and Chief Executive Officer for more than the past five
years. Mr. Sbarro re-assumed the position as our President in May 1996 (a
position he held for more than five years prior to December 1993).
ANTHONY SBARRO has been an officer, a director and a principal
shareholder of Sbarro 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. He has also served as
our Treasurer for more than the past five years.
JOSEPH SBARRO has been an officer, a director and a principal
shareholder of Sbarro 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. He has also served as our
Secretary for more than the past five years.
CARMELA SBARRO has been one of our Vice Presidents since March 1985.
Mrs. Sbarro was a founder of Sbarro, together with her late husband, Gennaro
Sbarro. Mrs. Sbarro devotes a substantial portion of her time to recipe and
product development. The Board elected Mrs. Sbarro as a director in
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January 1998. Mrs. Sbarro previously served as a director from March 1985 until
December 1988, when she was elected Director Emeritus.
JOHN BERNABEO joined Sbarro in August 1992 and served in various
capacities prior to his election as Vice President -- Architecture and
Engineering in May 1997.
JOSEPH A. FALLARINO joined Sbarro in September 1998 and was elected
Vice President -- Human Resources in November 1998. Prior to joining us, Mr.
Fallarino served as Senior Vice President -- Human Resources of Arbor Management
LLC, a provider of financial services and healthcare services, from March 1996
until March 1998. Mr. Fallarino also served as Vice President -- Human Resources
of AMS Corporation, a national outsourcing company, from January 1994 until
February 1996 and Director of Human Resources of Ogden Corporation, an
international diversified service corporation, from April 1998 until September
1998.
CARMELA N. MERENDINO was elected Vice President -- Administration in
October 1988. Ms. Merendino joined Sbarro in March 1985 and performed a variety
of corporate administrative functions for us prior to her election as Vice
President -- Administration.
ANTHONY J. MISSANO was elected Corporate Vice President -- Operations
in August 1996, prior to which he served as Vice President -- Operations (West)
from February 1995, and as a Zone Vice President from June 1992 until February
1995.
ROBERT G. ROONEY joined Sbarro in June 1999 and serves as Vice
President -- Finance and Chief Financial Officer. From December 1996 until he
joined us, Mr. Rooney was employed by Discovery Zone, Inc. (a national family
entertainment center chain), serving as Senior Vice President, Chief Financial
and Administrative Officer since February 1997. From March 1994 until September
1996, Mr. Rooney served as Senior Vice President and Chief Financial Officer of
Victory Capital LLC (formerly Forschner Enterprises, Inc.), a venture capital
firm, and, from September 1992 to February 1994, served as a director and
consultant on behalf of various investors and investment funds affiliated with
Forschner Enterprises, Inc. Discovery Zone, Inc., which had filed under Chapter
11 of the United States Bankruptcy Code prior to Mr. Rooney's joining that
company, again filed under that law on April 20, 1999. Mr.
Rooney has been a certified public accountant in New York for over 15 years.
GENNARO A. SBARRO was elected Corporate Vice President -- Franchising
in August 1996, prior to which he served as Vice President -- Franchising since
February 1995. For more than five years prior thereto, Mr. Sbarro served in
various capacities for us.
GENNARO J. SBARRO was elected Corporate Vice President -- Operations in
August 1996, prior to which he served as Vice President -- Operations (East)
since February 1995, and as a Zone Vice President from June 1992 until February
1995.
LEONARD G. SKROSKY served 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 Sbarro in June 1996 and was elected Senior Vice
President -- Real Estate in November 1996.
HAROLD L. KESTENBAUM has been a practicing attorney in New York since
1976. He became a director of Sbarro in March 1985.
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RICHARD A. MANDELL, a private investor, was a Managing Director of
BlueStone Capital Partners, L.P., an investment banking firm, from February
until April 1998 and Vice President -- Private Investments of Clariden Asset
Management (NY) Inc., a subsidiary of Clariden Bank, a private Swiss bank, from
January 1996 until February 1998. From 1982 until June 1995, Mr. Mandell served
as a Managing Director of Prudential Securities Incorporated, an investment
banking firm. He became a director of Sbarro in March 1986. Mr. Mandell is also
a director of Trend-Lines, Inc., U.S.A. Detergents, Inc. and Shells Seafood
Restaurants, Inc.
PAUL A. VATTER has been, since his retirement in 1995, Professor
Emeritus, and from 1970 until his retirement was Lawrence E. Fouraker Professor
of Business Administration, at Harvard University's Graduate School of Business
Administration, where he served as a Professor since 1958. He became a director
of Sbarro in March 1985. Mr. Vatter has advised us of his intention to retire
upon consummation of the Merger or, if the Merger is not consummated, upon the
expiration of his current term at the 1999 Annual Meeting of Shareholders.
TERRY VINCE has been Chairman of the Board and President of Sovereign
Hotels (a company that operates hotels) since October 1991 and Chairman of the
Board of Fame Corp. (a food service management company) since January 1994. Mr.
Vince became a director of Sbarro in December 1988.
BERNARD ZIMMERMAN has been President of Bernard Zimmerman and Co., Inc.
since October 1972 and was Senior Vice President of The Zimmerman Group, Inc.
from January 1991 to November 1996, financial and management consulting firms.
Mr. Zimmerman also served as President and a director of Beacon Hill Mutual
Fund, Inc. from December 1994 until October 1996. From September 1986 until
September 1993, Mr. Zimmerman also served as Chairman and President of St.
Lawrence Seaway Corp., an owner and manager of agricultural properties. Mr.
Zimmerman has been a certified public accountant in New York for more than the
past thirty-five years. He became a director of Sbarro in March 1985.
Under our Certificate of Incorporation, the Board of Directors is
divided into three classes as nearly equal in number as the then total number of
directors constituting the entire Board permits. Our Board of Directors
presently consists of nine members, with each class being elected for a term of
three years. Anthony Sbarro, Harold L. Kestenbaum and Paul A. Vatter serve as
Class 1 directors, Joseph Sbarro, Richard A. Mandell and Terry Vince serve as
Class 2 directors and Mario Sbarro, Carmela Sbarro and Bernard Zimmerman serve
as Class 3 directors, with terms of office scheduled to expire at our 1999, 2000
and 2001 Annual Meetings of Shareholders, respectively. At each annual meeting,
directors are elected to succeed those in the class whose term expires at that
annual meeting, such newly-elected directors to hold office until the third
succeeding annual meeting and the election and qualification of their respective
successors.
We can give no assurance that, following the Transaction, the Board of
Directors will continue to be classified or that the size or composition of the
Board of Directors will remain the same.
Our officers are elected annually by the Board of Directors at its
meeting held immediately after the annual meeting of our shareholders, and hold
their respective offices until their successors are duly elected and qualified.
Officers may be removed at any time by the Board.
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.
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation of our chief executive officer and other five most highly
compensated persons who were serving as executive officers at the end of our
1998 fiscal year for services in all capacities to us and our subsidiaries
during our 1998, 1997 and 1996 fiscal years. Pursuant to the terms of the Merger
Agreement, all of the options set forth on the table (under the caption "Long
Term Compensation") were terminated in exchange for a cash payment equal to the
number of shares to the options thereto multiplied by the excess, if any, of
$28.85 over the applicable option exercise price. See "Certain Relationships and
Related Transactions."
<TABLE>
<CAPTION>
LONG TERM
NAME AND ANNUAL COMPENSATION COMPENSATION
-------------------
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)
- ------------------ ---- ------ ----- ----------
<S> <C> <C> <C> <C>
Mario Sbarro.......................................... 1998 $ 713,462 $ 300,000 --
Chairman of the Board, President and 1997 700,000 160,000 250,000
Chief Executive Officer(1) 1996 460,000 500,000 100,000
Anthony Sbarro........................................ 1998 305,769 200,000 --
Vice Chairman of the Board and 1997 300,000 150,000 100,000
Treasurer(1) 1996 300,000 -- --
Joseph Sbarro......................................... 1998 305,769 200,000 --
Senior Executive Vice President 1997 300,000 150,000 100,000
and Secretary 1996 276,000 150,000 50,000
Anthony J. Missano.................................... 1998 203,846 100,000 --
Corporate Vice 1997 200,000 75,000 80,000
President-- Operations 1996 157,000 65,000 --
Gennaro A. Sbarro..................................... 1998 203,846 100,000 --
Corporate Vice 1997 200,000 75,000 80,000
President-- Franchising 1996 129,000 45,000 --
Gennaro J. Sbarro..................................... 1998 203,846 100,000 --
Corporate Vice 1997 200,000 75,000 80,000
President-- Operations 1996 155,000 65,000 --
</TABLE>
- ---------
(1) Prior to May 1996, Mario Sbarro served as Chairman of the Board of
Directors and Chief Executive Officer and Anthony Sbarro served as
President and Treasurer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUES
No options to purchase shares of our common stock were exercised during
our fiscal year ended January 3, 1999 by the executive officers named in the
Summary Compensation Table. The following table sets forth certain information
concerning the number and value, at January 3, 1999, of shares of common stock
subject to unexercised options held by the executive officers named in the
Summary Compensation Table. Pursuant to the terms of the Merger Agreement, all
of the options set forth on the table were terminated in exchange for a cash
payment equal to the number of shares subject to the options multiplied by the
excess, if any, of $28.85 over the applicable option exercise price. See
"Certain Relationships and Related Transactions."
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ---- --------------------------- ---------------------------
<S> <C> <C>
Mario Sbarro........... 303,333/316,667 $876,037/202,083
Anthony Sbarro......... 165,000/100,000 $414,060/106,250
Joseph Sbarro.......... 166,667/133,333 $438,018/154,167
Anthony J. Missano..... 12,500/80,000 $ 23,438/85,000
Gennaro A. Sbarro. 18,251/80,000 $ 49,312/85,000
Gennaro J. Sbarro. 12,500/80,000 $ 23,438/85,000
</TABLE>
- ------------
(1) Represents the number of shares subject to the option multiplied by the
difference between the closing price of $26.19 per share of our common
stock on the New York Stock Exchange on December 31, 1998, the last
trading day of the Company's 1998 fiscal year, and the respective
exercise prices. For information regarding amounts that these persons
received in connection with the termination of such options, see
"Certain Relationships and Related Transactions."
COMPENSATION OF DIRECTORS
Our non-employee directors currently receive a retainer at the rate of
$16,000 per annum, $1,000 for each meeting of the Board attended and $500 for
each meeting attended of a Committee of the Board on which they serve, if the
meeting is not held on the same day as a meeting of the Board, except that
members of the Special Committee that considered the Merger and a prior proposal
for a similar transaction (the "Special Committee") received additional
compensation as described below. Members of the Board also are reimbursed for
reasonable travel expenses incurred in attending Board and Committee meetings.
The regular compensation of employee directors of the Company covers
compensation for services as a director. Our non-employee directors earned the
following cash compensation (exclusive of travel reimbursements) from us for
services as members of the Board (other than for service on the Special
Committee) during fiscal 1998:
Harold L. Kestenbaum....... $22,000
Richard A. Mandell......... 22,000
Paul A. Vatter............. 22,000
Terry Vince................ 21,000
Bernard Zimmerman.......... 22,000
Each non-employee director held stock options under our 1993
Non-Employee Director Stock Option Plan, as amended, to purchase an aggregate of
22,500 shares of common stock at exercise prices ranging from $21.50 to $28.875
per share. The options and this plan were terminated upon consummation of the
Transaction and our non-employee directors received cash in an amount equal to
the excess of $28.85 over the applicable exercise price per share of the options
held by them under this plan. For information regarding amounts that our
non-employee directors received in connection with the termination of options
granted under this plan, see "Certain Relationships and Related Transactions."
As compensation for serving on the Special Committee, we agreed to pay
to each member of the Special Committee a fee equal to (1) $2,500 for services
rendered in any day on which the member expended four hours or more in
performing services as a member of the Special Committee and (2) $1,250 for each
day in which the member expended a reasonable amount of time, but less than four
hours, in performing services as a member of the Special Committee. In addition
to the foregoing fees, Richard A. Mandell, as Chairman of the Special Committee,
$10,000 with respect to the Special Committee's
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consideration of the prior proposal and $10,000 with respect to the Special
Committee's consideration of the Merger. Each member of the Special Committee
was reimbursed for all out-of-pocket expenses incurred in performing his
services. The members of the Special Committee earned the following cash
compensation (exclusive of travel reimbursements) from the Company in connection
with the Merger and the prior proposal:
Harold L. Kestenbaum....... $14,750
Richard A. Mandell......... 48,500
Paul A. Vatter............. 9,750
Terry Vince................ 9,750
Bernard Zimmerman and Company, Inc., of which Bernard Zimmerman is
President and a majority shareholder, renders financial and consulting
assistance to the Company, for which it received fees of $140,400 during the
Company's fiscal year ended January 3, 1999.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are the sole tenant of our administrative office building, which is
leased from the Suffolk County Industrial Development Agency (the "Agency") by
Sbarro Enterprises, L.P., a Delaware limited partnership, and, in turn,
subleased to us. The annual rent payable pursuant to the sublease is $0.3
million for the last five years of the sublease term, which expires in 2001. In
addition, we are obligated to pay real estate taxes, utilities, insurance and
certain other expenses for the facility. We believe that our rent is comparable
to the rent that would be charged by an unaffiliated third party. Principal and
interest and any premium on the bonds issued by the Agency to fund the original
construction of the facility are the responsibility of Sbarro Enterprises, L.P.
and are severally guaranteed by Mario, Joseph and Anthony Sbarro. The bonds
mature on January 1, 2000. The limited partners of Sbarro Enterprises, L.P. are
Mario, Joseph, Anthony and Carmela Sbarro.
In addition to the compensation of Mario, Anthony, Joseph, Gennaro A.
and Gennaro J. Sbarro and Anthony J. Missano, (1) Carmela Sbarro, the mother of
Mario, Anthony and Joseph Sbarro, who was a co-founder of Sbarro and serves as
Vice President and a director, and (2) Carmela N. Merendino, a daughter of Mario
Sbarro, who serves as Vice President -- Administration, received $101,923 and
$126,442, respectively, from us for services rendered during fiscal 1998. In
addition, other members of the immediate families of Mario, Anthony, Joseph and
Carmela Sbarro, who are our employees, earned an aggregate of $523,423 during
fiscal 1998.
We, our subsidiaries and the joint ventures in which we have an
interest have purchased printing services from a corporation owned by a
son-in-law of Mario Sbarro for which they paid, in the aggregate, $322,768
during fiscal 1998. We believe that these services were provided on terms
comparable to those that would have been available from unrelated third parties.
Companies owned by a son of Anthony Sbarro and a company owned by the
daughter of Joseph Sbarro paid royalties to us under franchise agreements
containing terms similar to those in agreements entered into by us with
unrelated franchisees. Such royalties paid to us aggregated $95,151 and $10,406,
respectively, during fiscal 1998.
We intend to elect to be taxed under the provisions of Subchapter S of
the Code, and, where applicable and permitted, under similar state and local
income tax provisions, beginning as early as fiscal 2000. We will not pay
federal and state and local income taxes (with certain limited exceptions) for
periods for which we are treated as an S corporation. Rather, our shareholders
will include their pro-rata share of our taxable income on their individual
income tax returns and thus will be required to pay taxes with respect to their
respective shares of our taxable income, whether or not it is distributed to
them.
We have entered into a tax payment agreement with our shareholders. The
tax payment agreement will permit us to make periodic distributions ("Tax
Distributions") to our shareholders in amounts that are intended to approximate
the income taxes, including estimated taxes, that would be payable by our
shareholders if their only income were their pro-rata shares of our taxable
income and such income were taxed at the highest applicable federal and New York
State marginal income tax rates. Tax Distributions may be made only with respect
to periods in which we are treated as an S corporation.
The tax payment agreement provides for adjustments of the amount of Tax
Distributions previously paid in respect of a year upon the filing of our
federal income tax return for that year, upon the filing of an amended federal
income tax return or as a result of an audit. In these circumstances, if it is
determined that the amount of Tax Distributions previously made for the year was
less than the amount computed based upon our federal income tax return, our
amended federal return or as adjusted based on
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the results of the audit, as the case may be, we may make additional Tax
Distributions which might include amounts to cover any interest or penalties.
Conversely, if it is determined in these circumstances that the amount of Tax
Distributions previously made for a year exceeded the amount computed based on
our federal income tax return, our amended federal return or the results of an
audit, as the case may be, our shareholders will be required to repay the
excess, with, in certain circumstances, interest. In addition, our shareholders
will be required to return, with interest, any Tax Distributions previously
distributed with respect to any taxable year for which it is subsequently
determined that we were not an S corporation.
Other than the Continuing Shareholders, our directors, executive
officers, owners of more than 5% of our common stock and members of the
immediate families of the foregoing persons, upon consummation of the Merger,
received the same $28.85 merger consideration for each share of our common stock
owned by them as the other Public Shareholders receive.
In accordance with the merger agreement, upon consummation of the
Merger, we paid the Public Shareholders merger consideration of $28.85 per share
in cash. Other than the Continuing Shareholders, our directors, executive
officers, owners of more than 5% of our common stock and members of the
immediate families of the foregoing persons received the same $28.85 merger
consideration for each share of our common stock owned by them as the other
Public Shareholders received. We also terminated all outstanding stock options
and paid in cash to each stock option holder, whether or not the option holder's
stock options were then vested or exercisable, an amount in cash equal to the
excess of $28.85 over the applicable exercise price per share subject to the
stock option. The following table sets forth the amount received by our
directors, our executive officers and owners of more than 5% of our common stock
(including entities controlled by them) upon termination of their stock options:
<TABLE>
<CAPTION>
NAME RELATIONSHIP TO COMPANY AMOUNT
---- ----------------------- ------
<S> <C> <C>
Mario Sbarro Chairman of the Board, President, Chief Executive $2,221,987
Officer and Director
Anthony Sbarro Vice Chairman of the Board, Treasurer and Director 1,145,242
Joseph Sbarro Senior Executive Vice President, Secretary and Director 1,323,743
John Bernabeo Vice President-- Architecture and Engineering 9,312
Joseph A. Fallarino Vice President-- Human Resources 20,188
Carmela N. Merendino Vice President-- Administration 54,212
Anthony J. Missano Corporate Vice President-- Operations 348,000
Gennaro A. Sbarro Corporate Vice President-- Franchising 389,168
Gennaro J. Sbarro Corporate Vice President-- Operations 348,000
Leonard G. Skrosky Senior Vice President-- Real Estate and Lease 197,500
Administration
Harold L.Kestenbaum Director 93,965
Richard A. Mandell Director 93,965
Paul A. Vatter Director 93,965
Terry Vince Director 93,965
Bernard Zimmerman Director 160,213
</TABLE>
Other members of the immediate family of Mario Sbarro, Anthony Sbarro
and Joseph Sbarro received $495,162, $7,350 and $696,000, respectively, in
connection with the termination of their stock options.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of shares of our common stock as of the date of this Prospectus
(except as noted below) with respect to (1) holders known to us to beneficially
own more than five percent of our outstanding common stock, (2) each of our
directors, (3) our Chief Executive Officer and our five next most highly
compensated executive officers and (4) all of our directors and executive
officers as a group. We understand 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>
SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER NUMBER PERCENT
---------------- ------ -------
<S> <C> <C>
Mario Sbarro(1)................................ 1,524,730(2) 21.6%
Anthony Sbarro(1).............................. 1,233,800 17.5%
Joseph Sbarro(1)............................... 1,807,914(3) 25.6%
Trust of Carmela Sbarro(1)..................... 2,497,884(4) 35.3%
Harold L. Kestenbaum........................... -- --
Richard A. Mandell............................. -- --
Paul A. Vatter................................. -- --
Terry Vince.................................... -- --
Bernard Zimmerman.............................. -- --
Anthony J. Missano............................. -- --
Gennaro A. Sbarro.............................. -- --
Gennaro J. Sbarro.............................. -- --
All directors and executive officers as a
group (19 persons)........................... 7,064,328 100.0%
</TABLE>
- ---------
(1) The business address of each of Mario Sbarro, Joseph Sbarro, Anthony
Sbarro and the Trust of Carmela Sbarro is 401 Broadhollow Road,
Melville, New York 11747.
(2) Excludes the 2,497,884 shares held by the Trust of Carmela Sbarro, of
which trust Mario Sbarro serves as a trustee (as to which shares Mr.
Sbarro may be deemed a beneficial owner with shared voting and
dispositive power).
(3) Includes 609,000 shares owned by a partnership of which Mr. Sbarro is
the sole general partner.
(4) The trust was created by Carmela Sbarro for her benefit and for the
benefit of her descendants, including Mario, Joseph and Anthony Sbarro.
The trustees of the trust are Franklin Montgomery, whose business
address is 488 Madison Avenue, New York, New York 10022, and Mario
Sbarro. As trustees, Franklin Montgomery and Mario Sbarro may be deemed
to be the beneficial owners of these shares with shared voting and
dispositive power.
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DESCRIPTION OF CREDIT FACILITY
On September 23, 1999, we entered into a credit agreement with European
American Bank providing an unsecured revolving credit facility to us that
enables us to borrow, on a revolving basis from time to time during its
five-year term, up to $30.0 million, including a $10.0 million sublimit for
standby letters of credit. The following brief description of our credit
agreement does not purport to be complete and is qualified in its entirety to
the credit agreement filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
SECURITY, GUARANTEES
None of our assets secure our credit facility. Each of our current and
future Restricted Subsidiaries under the Indenture has also guaranteed our
obligations under our credit facility, as well as guarantee our obligations
under the Notes.
INTEREST
At our option, the interest rates applicable to loans under our credit
facility will be either:
. the bank's prime rate plus a margin ranging from zero to 0.75%
(the initial margin will be 0.50%) or
. reserve adjusted LIBOR plus a margin ranging from 1.5% to 2.5%
(the initial margin will be 2.25%).
In each case, the margin depends upon the ratio of our senior debt to
EBITDA.
FEES
We have agreed to pay certain fees in connection with our credit
facility, including an unused commitment fee at a rate per year that will vary
from 0.25% of the undrawn amount of the facility to 0.45% of the undrawn amount
of the facility per year, depending upon the ratio of our senior debt to EBITDA.
Initially, the unused commitment fee will be 0.40% per year.
REPAYMENT
Our borrowings under our credit facility are repayable on September 28,
2004. In addition, we will be required to repay our loans and reduce commitments
under our credit facility using the proceeds of certain asset sales and the
future issuance of certain debt or equity securities by us or our Restricted
Subsidiaries.
COVENANTS
Our credit facility has certain affirmative and negative covenants,
including, but not limited to, limitations on liens, indebtedness, guarantees
and other contingent obligations, restricted payments, mergers, consolidations
and acquisitions of stock or assets, asset sales, investments and transactions
with affiliates. In addition, our credit facility contains provisions that under
certain circumstances prohibit redemptions or repurchases of the Notes,
including repurchases that might otherwise be required pursuant to the terms of
the Indenture, and imposes certain conditions on our amending or supplementing
the
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Indenture. Additionally, we will have to maintain a minimum ratio of our
consolidated EBITDA (with our Restricted Subsidiaries) to our consolidated
interest expense (with our Restricted Subsidiaries) of at least 2.0 to 1.0 and a
ratio of our consolidated senior debt (with our Restricted Subsidiaries) to our
consolidated EBITDA (with our Restricted Subsidiaries) ranging from 4.5 to 1.0
in 1999 to 3.9 to 1.0 beginning December 29, 2002.
EVENTS OF DEFAULT
Our credit facility contains various events of default, including,
without limitation, defaults for non-payment of principal, interest, fees or
reimbursement obligations with respect to letters of credit, breaches of
representations, warranties or covenants, certain events of bankruptcy and
insolvency, changes of control, certain ERISA violations and cross-defaults to
certain other indebtedness.
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Company" refers only to Sbarro, Inc. and not to any of its subsidiaries.
GENERAL
The Company will issue the New Notes pursuant to the same Indenture
(the "Indenture"), dated as of September 28, 1999, among the Company, as Issuer,
each of the Guarantors, as guarantors, and Firstar Bank, as trustee (the
"Trustee"), under which the Company issued the Old Notes. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The
Notes are subject to all such terms, and Holders of Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof.
The following description is a summary of the material provisions of
the Indenture. It does not restate that agreement in its entirety. We urge you
to read the Indenture because it, and not this description, define your rights
as holders of the New Notes.
Copies of the Indenture, Tax Payment Agreement referred to under "--
Certain Covenants -- Covenant relating to Tax Payment Agreement" and "Certain
Relationships and Related Transactions" and the Registration Rights Agreement
referred to under "--Registration Rights; Liquidated Damages" were filed as
exhibits to the Registration Statement of which this Prospectus is a part, which
you may receive as set forth under "-- Additional Information." For purposes of
this "Description of Notes," the term "Company" refers only to Sbarro, Inc. and
not to any of its Subsidiaries.
THE OLD NOTES AND THE NEW NOTES WILL REPRESENT THE SAME DEBT
The New Notes will be issued solely in exchange for an equal principal
amount of Old Notes pursuant to the Exchange Offer. The New Notes will evidence
the same debt as the Old Notes and both series of Notes will be entitled to the
benefits of the Indenture and treated as a single class of debt securities. The
terms of the New Notes will be the same in all material respects as the Old
Notes except that (1) the New Notes will be registered under the Securities Act,
and therefore, will not bear legends restricting the transfer thereof and (2)
certain of the registration rights, under the Registration Rights Agreement,
relating to the New Notes are different than those relating to the Old Notes
and, therefore, the defaults under the Registration Rights Agreement that may
require the Company to pay additional interest will be different for the New
Notes and the Old Notes. See "Registration Rights Agreement; Liquidated
Damages." If the Exchange Offer is consummated, holders of Old Notes who do not
exchange their Old Notes for New Notes will vote together with holders of the
New Notes for all relevant purposes under the Indenture. Accordingly, all
references herein to specified percentages in aggregate principal amount of the
outstanding Notes shall be deemed to mean, at any time after the Exchange Offer
is consummated, such percentages in aggregate principal amount of the Old Notes
and the New Notes then outstanding.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
The Notes:
. are senior, unsecured obligations of the Company;
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. rank pari passu in right of payment with all present and
future senior indebtedness of the Company;
. are senior in right of payment to all present and future
indebtedness of the Company that by its terms is expressly
subordinated to the Notes;
. are effectively subordinated to all present and future secured
indebtedness of the Company to the extent of the assets
securing such indebtedness; and
. are effectively subordinated to claims of creditors of the
Company's subsidiaries, except to the extent that holders of
the Notes may be creditors of such subsidiaries pursuant to a
Subsidiary Guarantee.
On a pro forma basis, after giving effect to the Transaction, if it had
occurred as of July 18, 1999, the Company's aggregate consolidated indebtedness
would have been approximately $265.0 million (none of which would have been
expressly subordinated by its terms in right and priority of payment to the
Notes), which does not include guarantees of indebtedness and reimbursement
obligations in respect of letters of credit in the aggregate amount of
approximately $8.8 million and guarantees of certain real property lease
obligations of our Unrestricted Subsidiaries and related joint ventures. In
addition, the Company would have had $16.2 million of additional borrowings
available under the Credit Facility (net of outstanding letters of credit and
certain guarantees of reimbursement obligations that currently aggregate
approximately $1.8 million), subject to the Company's satisfaction of certain
conditions. The Indenture permits the Company to incur additional Indebtedness
in the future, subject to certain restrictions. See "-- Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock."
As of September 28, 1999, certain of the Company's Subsidiaries,
including Sbarro Venture, Inc. (which has a 70% interest in the joint venture
that owns and operates the "Salute" and "Cafe Med" restaurants), Sbarro City
Venture, Inc. (which has a 50% interest in the joint venture that is planning to
open additional Italian Mediterranean restaurants), Sbarro New Hyde Park Inc.
(which has an 80% interest in the joint venture that owns and operates "Umberto
of New Hyde Park" restaurants ), Sbarro Boulder Inc.(which has a 40% interest in
the joint venture that owns and operates "Boulder Creek Steaks & Saloon,"
"Rothmann's Steakhouse" and the "Burton & Doyle" steakhouse), Mex-SS, Inc.
(which has a 50% interest in the joint venture that owns and operates "Baja
Grill" restaurants) and Sbarro Seafood Inc. (which has a 25% interest in the
recently formed joint venture to establish an Italian seafood restaurant), and
their respective Subsidiaries, will be Unrestricted Subsidiaries. Under certain
circumstances, the Company is to designate additional current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to many of the restrictive covenants set forth in the Indenture. The
Company's payment obligations under the Notes will be guaranteed, jointly and
severally, by all of the Company's present and future Restricted Subsidiaries.
See "-- Subsidiary Guarantees." Unrestricted Subsidiaries will not be required
to guarantee the Company's payment obligations under the Notes. In the event of
a bankruptcy, liquidation or reorganization of any Unrestricted Subsidiary, such
Unrestricted Subsidiary will pay the holders of its debt and its trade creditors
before it will be able to distribute any of its assets to us.
For the twelve months ended July 18, 1999, the Subsidiaries that will
be Unrestricted Subsidiaries as of the Closing Date had Adjusted EBITDA (as
defined in Note (6) under "Prospectus Summary -- Summary Consolidated Historical
and Pro Forma Financial Data") of $1.2 million and EBITDA margin of 9.1%. As of
July 18, 1999, we had an aggregate investment in our Unrestricted Subsidiaries
and related joint ventures of approximately $9.0 million, which does not include
guarantees of indebtedness and reimbursement obligations in respect of letters
of credit in the aggregate amount of approximately $8.8
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million and guarantees of certain real property lease obligations of such
Unrestricted Subsidiaries and related joint ventures.
The Company's payment obligations under the Notes are jointly and
severally guaranteed (the "Subsidiary Guarantees") by all of the Company's
Restricted Subsidiaries existing on the Closing Date. The Indenture provides
that if the Company or any of its Subsidiaries shall acquire or create another
Restricted Subsidiary after the Closing Date, or any Unrestricted Subsidiary
shall cease to be an Unrestricted Subsidiary and shall become a Restricted
Subsidiary, then such Subsidiary shall become a Guarantor of the Notes and
deliver an opinion of counsel, in accordance with the terms of the Indenture.
The obligations of each Guarantor under its Subsidiary Guarantee are limited to
the maximum amount that would not result in the obligations of such Guarantor
under its Subsidiary Guarantee constituting a fraudulent conveyance under
applicable law.
The Indenture provides that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person) another
Person, whether or not affiliated with such Guarantor, or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to another Person,
unless:
(1) the Person formed by or surviving such consolidation or
merger (if other than such Guarantor) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall
have been made is a Person organized and existing under the laws of
the United States of America, any state thereof, or the District of
Columbia and expressly assumes, pursuant to a supplemental indenture
in form and substance reasonably satisfactory to the Trustee, all the
obligations of such Guarantor under the Notes and the Indenture; and
(2) immediately after giving effect to such transaction, no
Default or Event of Default exists.
The provisions of clause (1) of the preceding sentence shall not apply if the
Person formed by or surviving the relevant consolidation or merger or to which
the relevant sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is the Company, a Guarantor or a Person that is not, after
giving effect to such transaction, a Restricted Subsidiary of the Company.
The Indenture provides that in the event:
(1) of a merger or consolidation to which a Guarantor is a
party, then the Person formed by or surviving such merger or
consolidation (if, after giving effect to such transaction, such Person
is neither the Company nor a Restricted Subsidiary of the Company)
shall be released and discharged from the obligations of such Guarantor
under its Subsidiary Guarantee or
(2) of a sale or other disposition (whether by merger,
consolidation or otherwise) of all of the Equity Interests of a
Guarantor at the time owned by the Company and its Restricted
Subsidiaries to any Person that, after giving effect to such
transaction, is neither the Company nor a Restricted Subsidiary of the
Company, then such Guarantor shall be released and discharged from its
obligations under its Subsidiary Guarantee or
(3) that a Guarantor shall have been effectively designated by
the Board of Directors of the Company as an Unrestricted Subsidiary in
accordance with the terms of the Indenture, then such Guarantor shall
be released and discharged from its obligations under its Subsidiary
Guarantee,
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provided that, in the case of each of clauses (1), (2) and (3), (A) the relevant
transaction or designation, as the case may be, is in compliance with the
Indenture, (B) immediately after giving effect to such transaction or
designation, no Default or Event of Default shall exist and (C) the Person being
released and discharged shall have been released and discharged from all
obligations it might otherwise have under guarantees of Indebtedness of the
Company or any of its Restricted Subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
The Notes are general, unsecured obligations of the Company. The
Company issued $255.0 million aggregate principal amount of Old Notes upon
consummation of the Transaction. The Notes may be issued in denominations and
integral multiples of $1,000. The Notes will mature on September 15, 2009.
Subject to the covenants described below under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company may issue additional Notes (the "Additional Notes") under the Indenture.
The Old Notes, the New Notes and any Additional Notes that the Company
subsequently issues under the Indenture would be treated as a single class for
all purposes under the Indenture.
Interest on the Notes accrues at the rate of 11% per annum and is
payable semi-annually in arrears on March 15 and September 15 of each year,
commencing on March 15, 2000, to Holders of record on the immediately preceding
March 1 and September 1, respectively. Interest on the Notes accrues from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of original issuance. Interest is computed on the basis of a
360-day year comprised of twelve 30-day months.
Principal of and premium, interest and Liquidated Damages, if any, on
the Notes is payable at the office or agency of the Company maintained for such
purpose or, at the option of the Company, payment of interest and Liquidated
Damages may be made by check mailed to the Holders of the Notes at their
respective addresses set forth in the register of Holders of Notes; provided
that all payments on the Global Notes and all payments of principal, premium,
interest and Liquidated Damages, if any, with respect to Notes, the Holders of
which have given wire transfer instructions to the Company at least five
business days prior to the applicable payment date, will be required to be made
by wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's office
or agency will be the office of the Trustee maintained for such purpose. The
Notes will be issued in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
Prior to September 15, 2004, the Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the Make-Whole Price, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the applicable
redemption date.
On or after September 15, 2004, the Company may redeem the Notes, in
whole or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest and Liquidated Damages, if any, thereon
to the applicable redemption date, if redeemed during the twelve-month period
beginning on September 15 of the years indicated below:
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YEAR PERCENTAGE
---- ----------
2004................................ 105.500%
2005................................ 103.667
2006................................ 101.833
2007 and thereafter................. 100.000%
Notwithstanding the foregoing, at any time on or prior to September 15,
2002, the Company may on any one or more occasions redeem up to 35% of the
aggregate principal amount of Notes originally issued, including any Additional
Notes issued under the Indenture, at a redemption price equal to 111% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date, with the net cash proceeds of
one or more Public Equity Offerings; provided that (i) at least 65% of the
aggregate principal amount of Notes originally issued, including any Additional
Notes issued under the Indenture, remain outstanding immediately following each
such redemption and (ii) such redemption shall occur within 60 days of the
closing of each such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection
of Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of
Holders," the Company is not required to make mandatory redemption or sinking
fund payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, unless notice of redemption
of the Notes in whole has been given pursuant to the provisions of the Indenture
described above under "Optional Redemption," the Company will be obligated to
make an offer (a "Change of Control Offer") to each Holder of Notes to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such Holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase (the "Change of Control
Payment"). Within 30 days following a Change of Control, the Company will mail a
notice to each Holder with a copy to the Trustee describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no later than
the third business day following the expiration date of the Change of Control
Offer (the "Change of Control Payment Date"), pursuant to the procedures
required by the Indenture and described in such notice. A Change of Control
Offer must remain open for at least 30 and not more than 40 days (unless
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otherwise required by applicable law). In addition, the Company must comply with
the requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful,
(1) accept for payment all Notes or portions thereof properly
tendered pursuant to the Change of Control Offer,
(2) deposit with the Paying Agent an amount equal to the
Change of Control Payment in respect of all Notes or portions thereof
so tendered and
(3) deliver or cause to be delivered to the Trustee for
cancellation the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions
thereof being purchased by the Company.
The Paying Agent will promptly mail or deliver to each Holder of Notes
so tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction. However, restrictions in the Indenture
described herein on the ability of the Company and its Restricted Subsidiaries
to incur additional Indebtedness, to grant Liens on their respective properties,
to make Restricted Payments and to make Asset Sales may also make more difficult
or discourage a takeover of the Company, whether favored or opposed by the
management of the Company. Consummation of any such transaction in certain
circumstances may require repurchase of the Notes, and there can be no assurance
that the Company or the acquiring party will have sufficient financial resources
to effect such repurchase. Such restrictions and the restrictions on
transactions with Affiliates may, in certain circumstances, make more difficult
or discourage any leveraged buyout of the Company or any of its Subsidiaries by
the management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Notes protection in
all circumstances from the adverse aspects of a future highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
The Credit Facility provides that a Change of Control without the prior
written consent of the Required Lenders will constitute an event of default
thereunder and contains a covenant that would be breached by a repurchase of
Notes pursuant to a Change of Control Offer. Any other credit agreements or
other agreements governing indebtedness to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from repurchasing Notes pursuant
to a Change of Control Offer, the Company could seek the consent of its lenders
to the repurchase of Notes or could attempt to refinance or repay the borrowings
that contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from repurchasing
Notes. In such case, the Company's failure to repurchase tendered Notes would
constitute an Event of Default under the Indenture which would, in turn,
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constitute a default under the Credit Facility. Such a default would permit the
lenders under the Credit Facility to declare the Indebtedness thereunder to be
due and payable.
The Company will not be required to make a Change of Control Offer
following a Change of Control if a third party makes the Change of Control Offer
in the manner, at the times and otherwise in compliance with the requirements
set forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Company and its Restricted Subsidiaries taken as a
whole. Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
The Indenture provides that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, consummate an
Asset Sale unless
(i) the Company (or such Restricted Subsidiary, as the case
may be) receives consideration at the time of such Asset Sale at least
equal to the fair market value (evidenced by a resolution of the Board
of Directors of the Company set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or
sold or otherwise disposed of and
(ii) at least 75% of the consideration therefor received by
the Company or such Restricted Subsidiary is in the form of cash or
Cash Equivalents; provided that the amount of
(a) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the
Company or such Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms
subordinated to the Notes or any Guarantee thereof) that are
assumed by the transferee of any such assets or Equity
Interests pursuant to a customary novation agreement that
expressly releases the Company or such Restricted Subsidiary
from further liability and
(b) any securities, notes or other obligations
received by the Company or such Restricted Subsidiary from
such transferee that are converted by the Company or such
Restricted Subsidiary into cash within 30 days after such
Asset Sale (to the extent of the cash received) shall be
deemed to be cash for purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset
Sale, the Company, at its option, may apply such Net Proceeds
(1) to permanently reduce any Senior Debt of the Company
and/or its Wholly-Owned Restricted Subsidiaries (and to correspondingly
reduce commitments with respect thereto in the case of revolving
borrowings) or
(2) to the acquisition of a controlling interest in another
business, the making of a capital expenditure or the acquisition of
other assets (other than assets that would be classified as
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current assets in accordance with GAAP), in each case, in the same or a
reasonably similar line of business as the Company and its Restricted
Subsidiaries were engaged in on the date of the Indenture or in any
business reasonably complementary, related or incidental thereto as
determined in good faith by the Board of Directors of the Company.
Pending the final application of any such Net Proceeds, the Company may
apply such Net Proceeds to temporarily reduce borrowings under the Credit
Facility or invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the
Company will be required to make an offer to all Holders of Notes (an "Asset
Sale Offer") to purchase the maximum principal amount of Notes that does not
exceed the Excess Proceeds at an offer price in cash in an amount equal to 100%
of the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture.
To the extent that the aggregate principal amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Notes tendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on
a pro rata basis (with such adjustments as may be deemed appropriate by the
Trustee so that only Notes in denominations of $1,000, or integral multiples
thereof, shall be purchased). Upon completion of an Asset Sale Offer, the amount
of Excess Proceeds shall be reset at zero. The Asset Sale Offer must be
commenced within 30 days following the date on which the aggregate amount of
Excess Proceeds exceeds $5.0 million and remain open for at least 30 and not
more than 40 days (unless otherwise required by applicable law).
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to an Asset Sale Offer. The Credit Facility will
limit the Company's ability to conduct an Asset Sale Offer.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that neither the Company nor any of its
Restricted Subsidiaries will, directly or indirectly,
(1) declare or pay any dividend or make any other payment or
distribution on account of the Company's Equity Interests (including,
without limitation, any payment in connection with any merger (other
than the Merger) or consolidation involving the Company) or to any
direct or indirect holders of the Company's Equity Interests in their
capacity as such (other than dividends or distributions (a) payable in
Equity Interests (other than Disqualified Stock) of the Company or (b)
payable to the Company or any Guarantor that is a Wholly-Owned
Restricted Subsidiary of the Company);
(2) except for Permitted Investments in Persons that are, or
after giving effect to such Investments become, Subsidiaries of the
Company, purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger (other
than the Merger) or consolidation involving the Company) any Equity
Interests of the Company or any
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Affiliate of the Company (other than any such Equity Interests owned by
the Company or any Wholly Owned Restricted Subsidiary of the Company,
any Equity Interests then being issued by the Company or a Wholly Owned
Restricted Subsidiary of the Company or any Investment in a Person
that, after giving effect to such Investment, is a Wholly Owned
Restricted Subsidiary of the Company);
(3) make any payment on or with respect to, or purchase,
redeem, repay, defease or otherwise acquire or retire for value, any
Indebtedness of the Company or any Guarantor that is subordinated in
right of payment to the Notes or any Guarantee thereof, except a
regularly scheduled payment of interest or principal; or
(4) make any Restricted Investment
(all such payments and other actions set forth in clauses (1) through (4) above
being collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Consolidated Interest Coverage Ratio test set forth in
the first paragraph of the covenant described below under the caption "
-- Incurrence of Indebtedness and Issuance of Preferred Stock" if the
number 2.5 in such paragraph were 2.0; and
(c) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments declared or made by the Company
and its Restricted Subsidiaries after the Closing Date (excluding
Restricted Payments permitted by clauses (ii), (iii), (v) and (vi) and
clause (viii) (if and to the extent that the reimbursement obligations
paid pursuant to clause (viii) are direct obligations of the Company or
any of its Restricted Subsidiaries and are in respect of letters of
credit issued prior to the Closing Date) of the next succeeding
paragraph), is less than the sum, without duplication, of
(1) 50% of the Adjusted Consolidated Net Income of
the Company for the period (taken as one accounting period)
from the Closing Date to the end of the Company's most
recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted
Payment (or, if such Adjusted Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus
(2) 100% of the aggregate net cash proceeds received
by the Company from the issue or sale since the Closing Date
of Equity Interests of the Company (other than Disqualified
Stock), or of Disqualified Stock or debt securities of the
Company that have been converted into such Equity Interests
(other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the
Company and other than Disqualified Stock or convertible debt
securities that have been converted into Disqualified Stock),
plus
(3) to the extent that any Restricted Investment
(other than any Committed Restricted Investment) that was made
after the Closing Date is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to
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such Restricted Investment (less the cost of disposition, if
any) (but only to the extent not included in subclause (1) of
this clause (c) or applied to reduce Unrestricted Investments
Outstanding) and (B) the initial amount of such Restricted
Investment, plus
(4) to the extent that any Restricted Investment
(other than any Committed Restricted Investment) that was made
after the Closing Date in the form of a guarantee of
Indebtedness is reduced as a result of a reduction in the
maximum principal amount of Indebtedness that may be
guaranteed under such guarantee, the amount of such reduction,
plus
(5) to the extent that any Restricted Investment
(other than any Committed Restricted Investment) that was made
after the Closing Date in the form of the furnishing of a
letter of credit as security for Indebtedness or other
obligations is reduced as a result of a reduction in the
maximum reimbursement obligations in respect of such letter or
credit, the amount of such reduction, plus
(6) to the extent that any Restricted Investment
(other than any Committed Restricted Investment) that was made
after the Closing Date in the form of the guarantee of a lease
has been amortized (as provided in the definition of
"Investments"), the amount of such amortization, plus
(7) to the extent that any Restricted Investment
(other than any Committed Restricted Investment) that was made
after the Closing Date in the form of a guarantee of
obligations other than Indebtedness or a lease is reduced as a
result of a reduction in the maximum liability under such
guarantee, the amount of such reduction, plus
(8) in the event that (A) any Unrestricted Subsidiary
shall have been effectively designated by the Board of
Directors of the Company as a Restricted Subsidiary in
accordance with the terms of the Indenture and (B) immediately
after giving effect to such designation no Default or Event of
Default shall have existed and such Subsidiary shall have
become a Wholly-Owned Restricted Subsidiary of the Company,
the lowest of (x) an amount equal to the fair market value (as
determined in good faith by the Board of Directors of the
Company) at the time of such designation of the outstanding
Investments of the Company and its Restricted Subsidiaries in
the Subsidiary so designated, (y) an amount equal to the net
book value of such outstanding Investments at the time of such
designation and (z) an amount equal to the amount of
Restricted Investments (other than Committed Restricted
Investments) made by the Company and its Restricted
Subsidiaries in such Subsidiary after the Closing Date less
the amount, if any, of any amounts included in subclause (3),
(4), (5), (6) or (7) of this clause (c) in respect of such
Subsidiary, plus
(9) $20.0 million.
The foregoing provisions will not prohibit
(i) the payment of any dividend within 60 days after the date
of declaration thereof, if at said date of declaration such payment
would have complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement, defeasance or
other acquisition of any subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net
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cash proceeds of the substantially concurrent sale (other than to a
Subsidiary of the Company) of, other Equity Interests of the Company
(other than any Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (c) (2) of the preceding paragraph;
(iii) the redemption, repurchase, retirement, defeasance or
other acquisition of subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(iv) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any
Restricted Subsidiary of the Company held by any member of the
Company's (or any of its Restricted Subsidiaries') management or board
of directors or any employee stock ownership plan; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $1.0 million in any
twelve-month period;
(v) Tax Distributions in respect of periods when the Company
is an S Corporation;
(vi) Committed Restricted Investments;
(vii) Restricted Investments consisting of payments pursuant
to guaranties (not prohibited by the provisions of the Indenture) of
Indebtedness;
(viii) Restricted Investments consisting of payments pursuant
to reimbursement obligations in respect of letters of credit (not
prohibited by the provisions of the Indenture) securing Indebtedness or
other obligations; and
(ix) Restricted Investments consisting of payments pursuant to
guaranties (not prohibited by the provisions of the Indenture) of
obligations (other than Indebtedness),
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (i) through (iv) no Default or Event
of Default shall have occurred and be continuing.
The amount of all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined in
good faith by the Board of Directors whose resolution with respect thereto shall
be delivered to the Trustee. Notwithstanding the two preceding sentences, the
amount of any Restricted Investment that is a guarantee of (or the furnishing of
a letter or credit as security for) Indebtedness or other obligations shall be
as determined under the definition of "Investments." Not later than the date of
making any Restricted Payment, the Company shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payments were permitted and
setting forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this
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covenant. All such outstanding Investments in the Subsidiary so designated will
be deemed to constitute Investments in an amount equal to the sum of (a) the
greater of (i) the net book value of such Investments at the time of such
designation and (ii) the fair market value of such Investments at the time of
such designation and (b) the amount of such Investments constituting a guarantee
of (or the furnishing of a letter of credit as security for) Indebtedness or
other obligations. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
Any such designation by the Board of Directors shall be evidenced to
the Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions. If, at any time, any
Unrestricted Subsidiary would fail to meet the definition of an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock," the Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period,
and (ii) no Default or Event of Default would be in existence following such
designation.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that neither the Company nor any of its
Restricted Subsidiaries will, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company's Restricted
Subsidiaries will not issue any shares of Preferred Stock (other than to the
Company or a Wholly Owned Restricted Subsidiary of the Company); provided,
however, that the Company and the Guarantors may incur Indebtedness (including
Acquired Debt) if the Consolidated Interest Coverage Ratio of the Company for
the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred would have been at least 2.5 to 1,
determined on a pro forma basis, as if the additional Indebtedness had been
incurred at the beginning of such four-quarter period and no Default or Event of
Default shall have occurred and be continuing at the time of, or would occur
after giving effect on a pro forma basis to, such incurrence.
The provisions of the first paragraph of this covenant will not apply
to the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and the Guarantors of
Indebtedness under (A) the Credit Facility, (B) Capital Lease
Obligations or (C) purchase money or mortgage financings; provided that
the aggregate amount of all Indebtedness (with letters of credit being
deemed for all purposes of the Indenture to have a principal amount
equal to the maximum potential liability of the Company and its
Restricted Subsidiaries in respect thereof) outstanding under this
clause (i) after giving effect to such incurrence, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or
replace any Indebtedness incurred pursuant to this clause (i), does not
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exceed a principal amount equal to $75.0 million less the aggregate
principal amount of all Indebtedness permanently repaid with the Net
Proceeds of any Asset Sale;
(ii) the incurrence by the Company and the Guarantors of
Indebtedness represented by the Notes, the Guarantees thereof and the
Indenture in the principal amount of Notes originally issued on the
Closing Date;
(iii) the incurrence by the Company and its Restricted
Subsidiaries of the Existing Indebtedness;
(iv) the incurrence by the Company and the Guarantors of
additional Indebtedness (other than Hedging Obligations) in an
aggregate principal amount not to exceed $10.0 million at any time
outstanding;
(v) the incurrence by the Company and the Guarantors of
Indebtedness in connection with the acquisition of assets or a new
Wholly-Owned Restricted Subsidiary; provided that such Indebtedness was
incurred by the prior owner of such assets or such Restricted
Subsidiary prior to such acquisition by the Company and the Guarantors
and was not incurred in connection with, or in contemplation of, such
acquisition by the Company and the Guarantors and provided further that
the aggregate principal amount of Indebtedness incurred pursuant to
this clause (v) does not exceed $5.0 million at any time outstanding;
(vi) the incurrence by the Company and its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace Indebtedness
(other than Hedging Obligations and other than Indebtedness permitted
to be incurred pursuant to clause (iv), clause (vii) or clause (ix) of
this paragraph) that was permitted by the Indenture to be incurred;
(vii) the incurrence by the Company or any of its Wholly Owned
Restricted Subsidiaries of intercompany Indebtedness between or among
the Company and its Wholly Owned Restricted Subsidiaries; provided,
however, that any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
the Company or a Wholly Owned Restricted Subsidiary of the Company, and
any sale or other transfer of any such Indebtedness to a Person that is
not either the Company or a Wholly Owned Restricted Subsidiary of the
Company, shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Restricted Subsidiary, as the
case may be;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose
of hedging against fluctuations in currency values or for the purpose
of fixing or hedging interest rate risk with respect to any floating
rate Indebtedness of the Company or any of its Restricted Subsidiaries
that is permitted by the terms of the Indenture to be outstanding,
provided that the notional principal amount of any Hedging Obligations
does not exceed the principal amount of Indebtedness to which such
agreement relates; and
(ix) the Guarantee by the Company or any of its Restricted
Subsidiaries of Indebtedness of the Company or a Wholly Owned
Restricted Subsidiary of the Company that was permitted to be incurred
by another provision of this covenant.
For purposes of determining the amount of any Indebtedness of any
Person under this covenant, (a) the principal amount of any Indebtedness of such
Person arising by reason of such Person having
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granted or assumed a Lien on its property to secure Indebtedness of another
Person shall be the lower of the fair market value of such property and the
principal amount of such Indebtedness outstanding (or committed to be advanced)
at the time of determination; (b) the amount of any Indebtedness of such Person
arising by reason of such Person having Guaranteed Indebtedness of another
Person where the amount of such Guarantee is limited to an amount less than the
principal amount of the Indebtedness so Guaranteed shall be such amount as so
limited; and (c) Indebtedness shall not include a non-recourse pledge by the
Company or any of its Restricted Subsidiaries of Investments in any Person that
is not a Restricted Subsidiary of the Company to secure the Indebtedness of such
Person.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (ix) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof.
LIENS
The Indenture provides that neither the Company nor any of its
Restricted Subsidiaries will, directly or indirectly, create, incur, assume or
suffer to exist any Lien securing Indebtedness or trade payables on any asset
now owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, unless the Notes are equally and
ratably secured with such Indebtedness or trade payables for so long as such
Indebtedness or trade payables are so secured; provided, however, that the
provisions of this sentence shall not prohibit Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that neither the Company nor any of its
Restricted Subsidiaries will, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any consensual encumbrance or restriction
on the ability of any Restricted Subsidiary to
(i) (a) pay dividends or make any other distributions to the
Company or any of its Restricted Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness or other
Obligations owed to the Company or any of its Restricted Subsidiaries,
(ii) make loans or advances to the Company or any of its
Restricted Subsidiaries,
(iii) transfer any of its properties or assets to the Company
or any of its Restricted Subsidiaries,
(iv) grant Liens on its assets as security for the Notes or
any Guarantee thereof or
(v) Guarantee the Notes or any renewals or refinancings
thereof,
except for such encumbrances or restrictions (other than encumbrances and
restrictions in respect of clause (v) of this sentence) existing under or by
reason of
(a) Existing Indebtedness as in effect on the Closing Date,
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(b) the Credit Facility as in effect as of the Closing Date, and
any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more
restrictive with respect to such dividend and other payment
restrictions than those contained in the Credit Facility as in effect
on the Closing Date,
(c) the Notes, any Guarantee thereof and the Indenture,
(d) applicable law,
(e) any instrument governing Indebtedness or Equity Interests of a
Person acquired by the Company or any of its Restricted Subsidiaries as
in effect at the time of such acquisition (except to the extent such
Indebtedness or Equity Interests were incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is
not applicable to any Person, or the Equity Interests, properties or
assets of any Person, other than the Person, or the Equity Interests,
property or assets of the Person, so acquired, provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of
the Indenture to be incurred,
(f) by reason of customary nonassignment provisions (or provisions
prohibiting sublease) in leases entered into in the ordinary course of
business and consistent with past practices,
(g) purchase money or mortgage obligations permitted by the
Indenture for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) or (iv)
above on the property so acquired,
(h) customary restrictions in asset or stock sale agreements
limiting transfer of such assets or stock pending the closing of such
sale,
(i) customary non-assignment provisions in contracts entered into
in the ordinary course of business, or
(j) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained
in the agreements governing the Indebtedness being refinanced.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving Person), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions to, another
Person unless
(1) the Company is the surviving Person or the Person formed
by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made is a Person organized or
existing under the laws of the United States, any state thereof or the
District of Columbia;
(2) the Person formed by or surviving any such consolidation
or merger (if other than the Company) or the Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all the obligations of the Company under the Notes
and
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the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee;
(3) immediately after giving effect to such transaction no
Default or Event of Default exists; and
(4) except in the case of a merger of the Company with or into
a Wholly Owned Restricted Subsidiary of the Company, the Company or the
Person formed by or surviving any such consolidation or merger (if
other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will
have Consolidated Net Worth immediately after the transaction equal to
or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction
and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Consolidated Interest Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "Incurrence
of Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that neither the Company nor any of its
Subsidiaries will make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate of the Company (each of the foregoing, an "Affiliate
Transaction"), unless
(1) such Affiliate Transaction is on terms that are no less
favorable to the Company or the relevant Subsidiary than those that
would have been obtained in a comparable transaction by the Company or
such Subsidiary with an unrelated Person and
(2) the Company delivers to the Trustee
(a) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate
payments or consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction
complies with clause (1) above and that such Affiliate
Transaction has been approved by a majority of the independent
members of the Board of Directors and
(b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate
payments or consideration in excess of $5.0 million, an
opinion as to the fairness to the Company or such Subsidiary
of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm
of national standing.
The foregoing provisions do not prohibit
(1) any reasonable employment agreement or other compensation
plan or arrangement paid or made available to officers or employees of
the Company or its Subsidiaries for services actually rendered or to be
rendered and entered into by the Company or any Subsidiary in the
ordinary course of business and consistent with past practice;
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(2) transactions between or among the Company and/or its
Wholly Owned Restricted Subsidiaries;
(3) any Remote Guarantee or Permitted Investment or any
Restricted Payment that is permitted by the provisions of the Indenture
described above under the caption "Restricted Payments";
(4) transactions between or among Unrestricted Subsidiaries of
the Company;
(5) the provision, in the ordinary course of business
consistent with past practice and for cash consideration not less than
the cost thereof, of support services (such as accounting,
architectural, legal and administrative services) by the Company and
its Restricted Subsidiaries to Unrestricted Subsidiaries of the Company
and entities in which the Company has, directly or indirectly, an
equity interest of 20% or more;
(6) the Tax Payment Agreement;
(7) leases or subleases by the Company and its Restricted
Subsidiaries of real property to Unrestricted Subsidiaries or Persons
in which Unrestricted Subsidiaries have an equity interest to the
extent that such leases or subleases are in effect on the Closing Date;
(8) guarantees of Indebtedness or real property lease
obligations of Unrestricted Subsidiaries or entities in which
Unrestricted Subsidiaries have an equity interest to the extent that
such guarantees are in effect on the Closing Date; or
(9) payments by the Company to Sbarro Enterprises, L.P. under
the sublease for the Company's administrative office building as in
effect on the Closing Date.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED
SUBSIDIARIES
The Indenture provides that the Company
(1) will not, and will not permit any Wholly Owned Restricted
Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Equity Interests or other ownership interests
(including convertible debt securities) of any Wholly Owned Restricted
Subsidiary of the Company to any Person (other than the Company or a
Wholly Owned Restricted Subsidiary of the Company), unless (a) such
transfer, conveyance, sale, lease or other disposition is of all the
Equity Interests and other ownership interests of such Wholly Owned
Restricted Subsidiary and (b) the Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance
with the covenant described above under the caption "-- Asset Sales,"
and
(2) will not permit any Wholly Owned Restricted Subsidiary of
the Company to issue any of its Equity Interests or other ownership
interests (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to
the Company or a Wholly Owned Restricted Subsidiary of the Company.
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ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that if the Company or any of its Subsidiaries
shall acquire or create another Subsidiary after the date of the Indenture, then
such newly acquired or created Subsidiary shall become a Guarantor and deliver
an opinion of counsel, in accordance with the terms of the Indenture; provided,
however, that all Subsidiaries that have been properly designated as
Unrestricted Subsidiaries in accordance with the Indenture shall not be subject
to the preceding clause for so long as they continue to constitute Unrestricted
Subsidiaries.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid and is paid to all Holders of the Notes that consent,
waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
COVENANTS RELATING TO TAX PAYMENT AGREEMENT
The Indenture includes a number of covenants relating to the Tax
Payment Agreement, including agreements by the Company
(a) if it elects to be treated as an S corporation for federal
income tax purposes, to elect (to the extent permitted by applicable
law) to be treated as an S corporation or its equivalent for state and
local income tax purposes,
(b) to give notice to the Trustee if it learns of any
termination of its status as an S corporation,
(c) to provide the Trustee with certificates as to
computations under the Tax Payment Agreement, including an annual
certificate from the Company's independent accountants confirming
computations based on the Company's federal income tax return, and
(d) to cause its shareholders to make any repayments of Tax
Distributions required by the Tax Payment Agreement.
In addition, the Indenture provides that any such repayments must be
treated as capital contributions which shall not increase the amount available
for Restricted Payments, except for any such increase resulting from such
repayments causing an increase in Adjusted Consolidated Net Income.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the SEC, so long as any Notes are outstanding, the Company will
furnish to the Holders of Notes
(1) all quarterly and annual financial information that would
be required to be contained in a filing with the SEC on Forms 10-Q and
10-K if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" that describes the financial condition and
results of operations of the Company and its consolidated Subsidiaries
(showing in reasonable detail, either on the face of the financial
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statements or in the footnotes thereto, the financial condition and
results of operations of the Company and its Restricted Subsidiaries
separate from the financial information and results of operations of
the Unrestricted Subsidiaries of the Company) and, with respect to the
annual information only, a report on said financial statements
(including the footnotes thereto) by the Company's then certified
independent accountants and
(2) all current reports that would be required to be filed
with the SEC on Form 8-K if the Company were required to file such
reports. In addition, whether or not required by the rules and
regulations of the SEC, the Company will (without being required to
register the Notes under Section 12 of the Exchange Act) file a copy of
all such information and reports with the SEC for public availability
(unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors
upon request. In addition, the Company and its Restricted Subsidiaries
will agree that, for so long as any Notes remain outstanding, they will
furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event
of Default:
(1) default for 30 days in the payment when due of interest
on, or Liquidated Damages, if any, with respect to, the Notes;
(2) default in payment when due (whether payable at maturity,
upon redemption or otherwise) of the principal of or premium, if any,
on the Notes;
(3) failure by the Company or any of its Restricted
Subsidiaries to comply with the provisions described under the caption
"Change of Control," "Asset Sales," or "Merger, Consolidation or Sale
of Assets;"
(4) failure by the Company or any of its Restricted
Subsidiaries for 30 days after written notice by the Trustee or the
Holders of at least 25% in principal amount of the then outstanding
Notes to comply with any of its other agreements in the Indenture or
the Notes other than those referred to in clauses (1), (2) or (3)
above;
(5) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the
Company or any of its Restricted Subsidiaries), whether such
Indebtedness or guarantee now exists, or is created after the Closing
Date, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period, if any, provided in such Indebtedness
on the date of such default (a "Payment Default") or (b) results in the
acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more;
(6) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0
million and either (a) any creditor commences enforcement proceedings
upon any such judgment or (b) such judgments are not paid, discharged
or stayed for a period of 60 days;
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(7) except as permitted by the Indenture, any Guarantee of the
Notes shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect,
or any Guarantor, or any Person acting on behalf of any Guarantor,
shall deny or disaffirm its obligations under its Guarantee of the
Notes; and
(8) certain events of bankruptcy or insolvency with respect to
the Company, any of its Significant Subsidiaries that is a Restricted
Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes and all other Obligations thereunder to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, with respect to the
Company, any Significant Subsidiary that is a Restricted Subsidiary or any group
of Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal, premium, if any, interest or Liquidated Damages, if any,) if it
determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company or any
Guarantor with the intention of avoiding payment of the premium that the Company
would have had to pay if the Company then had elected to redeem the Notes
pursuant to the optional redemption provisions of the Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of principal, premium, if any, interest or Liquidated Damages, if any,
on the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company or any Guarantor, as such, shall have any liability for any obligations
of the Company or such Guarantor under the Notes, the Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the Notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the SEC that such a waiver is against
public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for
(1) the rights of Holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on the Notes when such payments are due
from the trust referred to below,
(2) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or
agency for payment and money for security payments held in trust,
(3) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to
have the obligations of the Company released with respect to certain covenants
that are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or Event
of Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance
(1) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders of the Notes, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal
of, premium, if any, and interest and Liquidated Damages, if any, on
the outstanding Notes on the Stated Maturity or on the applicable
redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (a) the Company
has received from, or there has been published by, the Internal Revenue
Service a ruling or (b) since the Closing Date, there has been a change
in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes, as a result of such Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on
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the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event
of Default resulting from the borrowing of funds to be applied to such
deposit) or, insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
(6) the Company shall have delivered to the Trustee an opinion
of counsel to the effect that after the 91st day following the deposit,
the trust fund will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
(7) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Notes over the
other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others;
and
(8) the Company shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
as to all Notes issued thereunder when:
(1) either:
(a) all Notes that have been authenticated (except lost, stolen or
destroyed Notes that have been replaced or paid and Notes for whose
payment money has theretofore been deposited in trust and thereafter
repaid to the Company) have been delivered to the Trustee for
cancellation; or
(b) all Notes that have not been delivered to the Trustee for
cancellation have become due and payable by reason of the giving of a
notice of redemption or otherwise or will become due and payable within
one year or are to be called for redemption within one year under
irrevocable arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name of and at the expense
of the Company and the Company has irrevocably deposited or caused to
be deposited with the Trustee, in trust, for the benefit of the Holders
of Notes, cash in U.S. dollars, non-callable Government Securities, or
a combination thereof, in such amounts as will be sufficient, without
consideration of any reinvestment of interest, to pay and discharge the
entire indebtedness on the Notes not theretofore delivered to the
Trustee for cancellation for principal, premium and Liquidated Damages,
if any, and accrued interest to the date of maturity or redemption;
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(2) such deposit, if made pursuant to the preceding clause (1)(b), will
not result in a breach or violation of, or constitute a default under, any
material agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound;
(3) the Company has paid or caused to be paid all sums payable by it
under the Indenture;
(4) the Company has delivered irrevocable instructions to the Trustee
to apply all money and Government Securities deposited pursuant to the preceding
clause (1)(b) toward the payment of the Notes at maturity or the redemption
date, as the case may be;
(5) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit, if made pursuant to the preceding clause
1(b), was not made by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others;
(6) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the satisfaction and discharge of the
Indenture have been complied with; and
(7) the Trustee shall have received such other documents and assurances
as the Trustee shall reasonably require.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Note for a period of 15 days before a selection of Notes to be
redeemed or between a record date and the next succeeding Interest Payment Date.
The registered Holder of a Note will be treated as the owner of it for
all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture
or the Notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the Notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder):
(1) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
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(2) reduce the principal of or change the fixed maturity of
any Note or alter the provisions with respect to the redemption of the
Notes or, if the Company has become obligated to make a Change of
Control Offer or an Asset Sale Offer, amend, change or modify the
obligation of the Company to make or consummate such Change of Control
Offer or Asset Sale Offer;
(3) reduce the rate of or change the time for payment of
interest or Liquidated Damages, if any, on any Note;
(4) waive a Default or Event of Default in the payment of
principal of or premium, interest or Liquidated Damages, if any, on the
Notes (except a rescission of acceleration of the Notes by the Holders
of at least a majority in aggregate principal amount of the Notes and a
waiver of the payment default that resulted from such acceleration);
(5) make any Note payable in money other than that stated in
the Notes;
(6) make any change in certain provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal of or premium, interest or Liquidated
Damages, if any, on the Notes;
(7) waive a redemption payment with respect to any Note;
(8) except as described in the third paragraph under "--
Subsidiary Guarantees," release any Guarantor from its Guarantee of the
Notes; or
(9) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any Holder of
Notes, the Company, the Guarantors and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's or any Guarantor's
obligations to Holders of Notes in the case of a merger, consolidation or sale
of assets, to provide security for the Notes, to add a Guarantor, to make any
change that would provide any additional rights or benefits to the Holders of
Notes or that does not adversely affect the legal rights under the Indenture of
any such Holder, or to comply with requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Trustee has been appointed by the Company as Registrar and Paying
Agent with respect to the Notes.
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that, in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any
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Holder of Notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to the Trustee against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this may obtain a copy of the Indenture, the Tax
Payment Agreement and the Registration Rights Agreement, as set forth under
"Where You Can Find More Information."
BOOK-ENTRY, DELIVERY AND FORM
BOOK-ENTRY
Except as set forth in the next paragraph, the Notes will be issued in
the form of one or more fully registered Notes in global form (the "Global
Notes"). Following the Closing Date, Notes resold to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2) (3) or (7) under the Securities
Act) will be represented by a separate note in registered global form or by
Certificated Securities as described below and Notes resold to persons who
acquire such securities in reliance on Regulation S under the Securities Act
("non-U.S. Persons") will be represented by a separate global note or by
Certificated Securities as described below.
Notes that are issued as described below under "Certificated
Securities" will be issued in the form of registered definitive Certificates
(the "Certificated Securities"), such Certificated Securities may, unless the
Global Notes have previously been exchanged for Certificated Securities, be
exchanged for an interest in a Global Note representing the principal amount of
Notes being transferred.
The Global Notes will be deposited upon issuance with the Trustee as
custodian for The Depository Trust Company, New York, New York (the
"Depositary"), and registered in the name of Cede & Co. ("Cede"), as the
Depositary's nominee, in each case for credit to an account of a direct or
indirect participant in the Depositary as described below. The Depositary is a
limited-purpose trust company organized under the New York Banking Law that was
created to hold securities for its participating organizations (collectively,
the "Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of its Participants. The
Depositary's Participants include securities brokers and dealers (including the
Initial Purchaser), banks and trust companies, clearing corporations and certain
other organizations. Access to the Depositary's system is also available to
other entities such as brokers, dealers, banks and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
So long as the Depositary or its nominee (the "Global Note Holder") is
the registered owner of any Notes, the Global Note Holder will be considered the
sole Holder under the Indenture of any Notes evidenced by a Global Note.
Beneficial owners of Notes evidenced by a Global Note will not be considered the
owners or Holders thereof under the Indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. Accordingly, beneficial owners of an interest in a Global
Note must rely on the procedures of the Depositary, and if such person is not a
Participant, on the procedures of the Participant or Indirect Participant
through which such person owns its interest, to exercise any rights and fulfill
any obligations of a Holder under the Indenture. None of the Company, the
Trustee, the Registrar or any Paying Agent will have any responsibility or
liability for any aspect of the records of the Depositary, any Participant or
any Indirect Participant or for maintaining, supervising or reviewing any
records of any of them relating to the Notes, and each of the
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Company, the Trustee, the Registrar or any Paying Agent may conclusively rely
on, and will be protected in relying on, instructions from the Global Note
Holder or the Depositary for all purposes.
Upon issuance of the Global Notes, the Global Note Holder will credit,
on its book-entry registration and transfer system, the number of Notes
represented by such Global Notes to the accounts of the Participants. The
accounts to be credited upon issuance shall be designated by the Initial
Purchaser. Ownership of beneficial interests in the Global Notes will be limited
to Participants or Indirect Participants in the Depositary. Ownership of
beneficial interest in such Global Notes will be shown on, and the transfer of
that ownership will be effected only through, records maintained by the
Depositary or its nominee (with respect to Participants' interests) for such
Global Notes, or by Participants or Indirect Participants (with respect to
beneficial interests of persons other than Participants).
The laws of some states require that certain persons take physical
delivery in certificated form of securities that they own. Consequently, the
ability to transfer beneficial interests in a Global Note to such persons will
be limited to that extent. Because the Depositary can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having beneficial interest in a Global Note to
pledge such interests to persons or entities that do not participate in the
Depositary system, or otherwise take actions in respect of such interests, may
be affected by the lack of a physical certificate evidencing such interests.
Payments in respect of the principal of, premium, if any, and interest
on any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, none of the
Company, the Trustee, the Registrar or the Paying Agent has or will have any
responsibility or liability for the payment of such amounts (or the timing of
such payments) to beneficial owners of Notes. The Company believes, however,
that it is currently the policy of the Depositary to immediately credit the
accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
The Global Notes (and any Notes issued in exchange therefor) will be
subject to certain restrictions on transfer set forth therein and in the
Indenture and will bear the legend regarding such restrictions set forth in the
Indenture. Except as set forth below, record ownership of the Global Notes may
be transferred, in whole or in part, only to another nominee of the Depositary
or to a successor of the Depositary or its nominee. Transfers between
Participants in the Depositary's system will be effected in accordance with the
Depositary's procedures, and will be settled in same-day funds.
The Depositary has advised the Company that it will take any action
permitted to be taken by a Holder of the Notes only at the direction of one or
more Participants to whose account with the Depositary interests in the Global
Notes are credited.
The information in this section concerning the Depositary and its
book-entry system has been obtained from sources that the Company believes to be
reliable, but the Company takes no responsibility for the accuracy thereof.
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CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest
in a Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). All such certificated Notes would be subject to the
legend requirements described under "Notice to Investors" below. In addition, if
(1) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a Depositary and the Company is unable to
locate a qualified successor within 90 days,
(2) the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of Notes in the form of Certificated Securities
under the Indenture, or
(3) if a Default or Event of Default occurs and any owner of a
beneficial interest in a Global Note so requests,
then, upon surrender by the Global Note Holder of a Global Note, Notes in the
form of Certificated Securities will be issued to each person that the Global
Note Holder and the Depositary identify as being the beneficial owner of the
related Notes.
Upon the transfer of Certificated Securities to a person entitled to
hold an interest in a Global Note under the Indenture, such Certificated
Securities may, unless a Global Note has previously been exchanged for
Certificated Securities, be exchanged for an interest in a Global Note
representing the principal amount of Notes being transferred.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, and
interest and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Note Holder. With
respect to Certificated Securities, the Company will make all payments of
principal, premium, if any, and interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof or, if no such account is specified, by mailing a check to each such
Holder's registered address.
The Notes represented by the Global Notes are eligible to trade in the
PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System,
and any permitted secondary market trading activity in such Notes will,
therefore, be required by the Depositary to be settled in immediately available
funds. The Company expects that secondary trading in the Certificated Securities
will also be settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchaser have entered into
the Registration Rights Agreement. Pursuant to the Registration Rights
Agreement, the Company and the Guarantors have agreed to file with the SEC the
Exchange Offer Registration Statement of which this Prospectus is a part the
appropriate form under the Securities Act with respect to the Exchange Notes.
Upon the effectiveness of the Exchange Offer Registration Statement, the Company
will offer to the Holders of Transfer Restricted
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Securities (pursuant to the Exchange Offer) who are able to make certain
representations the opportunity to exchange their Transfer Restricted Securities
for Exchange Notes. If
(1) the Company is not required to file the Exchange Offer
Registration Statement or is not permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
SEC policy or is not otherwise permitted by the SEC,
(2) for any reason the Exchange Offer is not consummated
within 210 days after the Closing Date or
(3) the Initial Purchaser that is a Holder of Transfer
Restricted Securities notifies the Company prior to the 20th day
following consummation of the Exchange Offer that (a) it is prohibited
by law or SEC policy from participating in the Exchange Offer, (b) it
may not resell the Exchange Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (c) it is a broker-dealer
and owns Notes acquired directly from the Company or an affiliate of
the Company,
then the Company and the Guarantors will file with the SEC a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement.
The Company and the Guarantors must use their best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the SEC. For purposes of the foregoing, "Transfer Restricted
Securities" means each Note until the earliest to occur of
(1) the date on which such Note has been exchanged by a person
other than a broker-dealer for an Exchange Note in the Exchange Offer,
(2) following the exchange by a broker-dealer in the Exchange
Offer of a Note for an Exchange Note, the date on which such Exchange
Note is sold to a purchaser who receives from such broker-dealer on or
prior to the date of such sale a copy of the prospectus contained in
the Exchange Offer Registration Statement,
(3) the date on which such Note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or
(4) the date on which such Note may be freely transferred without
restriction under the Securities Act or is distributed to the public
pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that
(1) the Company and the Guarantors will file an Exchange Offer
Registration Statement with the SEC on or prior to 60 days after the
Closing Date,
(2) the Company and the Guarantors will use their best efforts
to have the Exchange Offer Registration Statement declared effective by
the SEC on or prior to 180 days after the Closing Date,
(3) unless the Exchange Offer would not be permitted by
applicable law or SEC policy, the Company and the Guarantors will
commence the Exchange Offer and use their best efforts to
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issue, on or prior to 30 days after the date on which the Exchange
Offer Registration Statement was declared effective by the SEC,
Exchange Notes in exchange for all Notes tendered prior thereto in the
Exchange Offer and
(4) if obligated to file the Shelf Registration Statement, the
Company and the Guarantors will use their best efforts to file the
Shelf Registration Statement with the SEC on or prior to 60 days after
such filing obligation arises and to cause the Shelf Registration to be
declared effective by the SEC on or prior to 180 days after such
obligation arises.
If (a) the Company and the Guarantors fail to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the SEC on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), (c) the
Company and the Guarantors fail to consummate the Exchange Offer within 30 days
of the Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above, a "Registration Default"),
then the Company will pay an amount ("Liquidated Damages") to each Holder of
Notes, with respect to the first 90-day period immediately following the
occurrence of the first Registration Default, in an amount equal to $.05 per
week per $1,000 principal amount of Notes held by such Holder. The amount of the
Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages of $.50 per week per $1,000 principal amount of Notes. All accrued
Liquidated Damages will be paid by the Company on each Interest Payment Date to
the Global Note Holder by wire transfer of immediately available funds or by
federal funds check and to Holders of Certificated Securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness or Preferred Stock of any other Person existing at the time such
other Person is merged with or into or became a Subsidiary of such specified
Person, including, without limitation, Indebtedness or Preferred Stock incurred
by such other Person in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person,
and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
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"Adjusted Consolidated Net Income" means, with respect to any Person
for any period, the sum of (i) the Consolidated Net Income of such Person for
such period plus (ii) the aggregate amount of intangible amortization charges
resulting from the Merger to the extent that such intangible amortization
charges were deducted in computing such Consolidated Net Income.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means
(1) the sale, lease, conveyance or other disposition
(collectively, "dispositions") of any assets or rights (including,
without limitation, by way of a sale and leaseback), other than
dispositions of inventory in the ordinary course of business consistent
with past practices (provided that the disposition of all or
substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "Change of Control" and/or
the provisions described above under the caption "Merger, Consolidation
or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and
(2) the issuance of Equity Interests by any Restricted
Subsidiary or the disposition by the Company or a Restricted Subsidiary
of Equity Interests in any of the Company's Restricted Subsidiaries
(other than directors' qualifying shares or shares required by
applicable law to be held by a Person other than the Company or a
Restricted Subsidiary of the Company);
provided, however, that the term Asset Sale shall not include any disposition of
any assets or rights or any issuance or disposition of Equity Interests if such
transaction would have been an Asset Sale in the absence of this proviso to the
extent that the gross proceeds thereof do not exceed, in aggregate amount
together with all other such dispositions or issuances, $3.0 million in any
fiscal year of the Company (such proceeds, to the extent non-cash, to be
determined in good faith by the Board of Directors of the Company).
Notwithstanding the foregoing, the following will be deemed not to be
Asset Sales:
(1) a transfer of assets or rights or Equity Interests by the
Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned
Restricted Subsidiary;
(2) an issuance of Equity Interests by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned
Restricted Subsidiary;
(3) a Permitted Investment or Restricted Payment that is
permitted by the covenant described above under the caption "Restricted
Payments";
(4) a disposition of Cash Equivalents solely for cash or other
Cash Equivalents; and
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(5) a disposition of assets in a single transaction or group
of related transactions, the gross proceeds of which do not exceed
$10,000 (such proceeds, to the extent non-cash, to be determined in
good faith by the Board of Directors of the Company).
"Capital Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means
(1) in the case of a corporation, corporate stock,
(2) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents
(however designated) of corporate stock,
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited) and
(4) any other interest or participation that confers on a
Person the right to receive a share of the profits (other than
incentive compensation arrangements based upon profits) and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means
(1) United States dollars,
(2) securities issued or directly and fully guaranteed or
insured by the United States government or any agency or
instrumentality thereof having maturities of not more than six months
from the date of acquisition,
(3) certificates of deposit and Eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital
and surplus in excess of $500 million and a Keefe Bank Watch Rating of
AB or better,
(4) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (2)
and (3) above entered into with any financial institution meeting the
qualifications specified in clause (3) above,
(5) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's, a division of The
McGraw Hill Companies, and in each case maturing within six months
after the date of acquisition and
(6) Investments in money market funds substantially all the
assets of which are comprised of securities and other obligations of
the types described in clauses (1) through (5) above.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other
disposition, in one or a series of related transactions, directly or
indirectly, of all or substantially all of the assets of the Company
and its
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Restricted Subsidiaries taken as a whole to any Person or "group" (as
such term is used in Section 13(d)(3) of the Exchange Act), other than
to one or more Permitted Holders,
(2) the adoption of a plan relating to the liquidation or
dissolution of the Company,
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that
any Person or group, other than one or more Permitted Holders, becomes
the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act, except that a Person shall be deemed to
have "beneficial ownership" of all securities that such Person has the
right to acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition),
directly or indirectly, of more than 35% of the Voting Stock of the
Company (measured by voting power rather than number of shares) or
(4) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors.
"Closing Date" means the date of the closing of the sale of the Notes
initially issued pursuant to the Indenture.
"Committed Restricted Investments" means up to $13.9 million of
Investments that were, as of August 30, 1999, committed to be made by the
Company and its Restricted Subsidiaries and are set forth in a Schedule to the
Indenture.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus, to the
extent deducted in computing such Consolidated Net Income,
(1) an amount equal to any net loss realized in connection
with an Asset Sale,
(2) provision for taxes based on income or profits of such
Person and its Restricted Subsidiaries for such period and Tax
Distributions, if any,
(3) Consolidated Interest Expense, and
(4) depreciation and amortization (including amortization of
goodwill and other intangibles but excluding amortization of prepaid
cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it
represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a
prior period) of such Person and its Restricted Subsidiaries for such
period to the extent that such depreciation, amortization and other
non-cash expenses were deducted in computing such Consolidated Net
Income, minus
(5) non-cash items increasing such Consolidated Net Income for
such period, in each case, for such period without duplication on a
consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, (1) the provision for taxes based on the
income or profits of, and the depreciation and amortization and other non-cash
charges of, a Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Person was included in calculating Consolidated Net Income
and (2) the Net Income
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of any Unrestricted Subsidiary shall be excluded, whether or not such
Unrestricted Subsidiary has paid any dividends or distributions to the Company
or any of its Restricted Subsidiaries.
"Consolidated Interest Coverage Ratio" means, with respect to any
Person for any period, the ratio of the Consolidated Cash Flow of such Person
for such period to the Consolidated Interest Expense of such Person for such
period. In the event that the Company or any of its Restricted Subsidiaries
incurs, assumes, Guarantees, redeems or repays any Indebtedness (other than
revolving credit borrowings) subsequent to the commencement of the period for
which the Consolidated Interest Coverage Ratio is being calculated but prior to
the date on which the event for which the calculation of the Consolidated
Interest Coverage Ratio is made (the "Calculation Date"), then the Consolidated
Interest Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, Guarantee, redemption or repayment of Indebtedness as if
the same had occurred at the beginning of the applicable four-quarter reference
period.
In addition, for purposes of making the computation referred to above,
(1) acquisitions that have been made by the Company or any of
its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, and
other transactions consummated by the Company or any of its Restricted
Subsidiaries with respect to which pro forma effect may be given
pursuant to Article 11 of Regulation S-X under the Securities Act, in
each case during the four-quarter reference period or subsequent to
such reference period and on or prior to the Calculation Date shall be
deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (3) of the proviso set forth
in the definition of Consolidated Net Income,
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded
and
(3) the Consolidated Interest Expense attributable to
discontinued operations, as determined in accordance with GAAP, and
operations or businesses disposed of prior to the Calculation Date,
shall be excluded, but only to the extent that the obligations giving
rise to such Consolidated Interest Expense will not be obligations of
the referent Person or any of its Restricted Subsidiaries following the
Calculation Date.
"Consolidated Interest Expense" means, with respect to any Person for
any period, the sum, without duplication, of
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations),
(2) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period,
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(3) any interest expense for such period on Indebtedness of
another Person that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person
or one of its Restricted Subsidiaries (whether or not such Guarantee or
Lien is called upon), in each case, on a consolidated basis and in
accordance with GAAP, and
(4) the product of (x) any Preferred Stock dividends declared
or paid or payable in cash, and (y) a fraction, the numerator of which
is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person,
expressed as a decimal, determined, in each case, on a consolidated
basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP, less the amount of all Tax Distributions, if any, made by such Person
from the beginning of such period through the date that is 30 days after the end
of such period; provided that
(1) the Net Income of any Person that is not a Restricted
Subsidiary of such Person or that is accounted for by the equity method
of accounting shall be excluded, except that the Net Income of such
Person shall be included to the extent of the amount of dividends or
distributions paid in cash by such Person during such period to the
referent Person or a Wholly Owned Restricted Subsidiary thereof (other
than any such dividends or distributions (x) which the Company elects
not to include in the computation of Consolidated Net Income at the
time of the computation thereof or (y) which consist of payments to the
Company referred to in subclause (3) of clause (c) of the first
paragraph under "Certain Covenants -- Restricted Payments"),
(2) the net income (but not loss) of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of
that net income is not at the date of determination permitted without
any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders,
(3) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such
acquisition shall be excluded,
(4) the cumulative effect of a change in accounting principles
shall be excluded and
(5) any non-cash write-off or charge (excluding any such
non-cash write-off or charge to the extent it represents an accrual of
or reserve of cash expenses in any future period) in respect of the
disposition or write-down of fixed assets other than in the ordinary
course of business shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date, the
sum of
(a) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date,
plus
(b) the respective amounts reported on such Person's balance
sheet as of such date with respect to any series of Preferred Stock
(other than Disqualified Stock) that by its terms is not entitled to
the payment of dividends unless such dividends may be declared and paid
only out of
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net earnings in respect of the year of such declaration and payment,
but only to the extent of any cash received by such Person upon
issuance of such Preferred Stock, less
(i) all write-ups (other than write-ups resulting
from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after
the acquisition of such business) subsequent to the Closing
Date in the book value of any asset owned by such Person or a
consolidated Restricted Subsidiary of such Person,
(ii) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not
Restricted Subsidiaries and
(iii) all unamortized debt discount and expense and
unamortized deferred charges as of such date, in each case
determined in accordance with GAAP.
"Continuing Director" means, as of any date of determination, any
member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the Closing Date or (ii) was nominated for election or
elected to the Board of Directors of the Company with the approval of a majority
of the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facility" means that certain Credit Agreement, dated as of
September 23, 1999, by and among the Company, certain lenders and other
financial institutions, and European American Bank, as administrative agent for
such lenders and other financial institutions, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, in each case as any of the same may be amended, extended,
refinanced, renewed, increased, restated, replaced or refunded from time to
time.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means up to $8.8 million in aggregate principal
amount of Indebtedness of the Company and its Restricted Subsidiaries (other
than Indebtedness under the Credit Facility) in existence on the Closing Date
and set forth in a Schedule to the Indenture, until such Indebtedness is repaid.
Existing Indebtedness includes
(a) certain Guarantees of obligations for borrowed money (the
"Borrowed Money Obligations"), including the Company's Guarantee of 40%
of up to $11.0 million of Indebtedness from time to time outstanding of
Boulder Creek Holding LLC and Boulder Creek Venture LLC under loan
agreements with HSBC Bank U.S.A., as they may be amended and in effect
from time to time,
(b) certain Guarantees of reimbursement obligations in respect
of letters of credit,
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(c) any Guarantee by the Company or any of its Restricted
Subsidiaries of Indebtedness issued in exchange for, or the net
proceeds of which are used to refund, refinance or replace, Borrowed
Money Obligations at the time guaranteed pursuant to a Guarantee
referred to in clause (a) above ("Guaranteed Refinancing
Indebtedness"), to the extent that (x) the principal amount of such
Guaranteed Refinancing Indebtedness does not exceed the principal
amount of the guaranteed Borrowed Money Obligations so refunded,
refinanced or replaced and (y) the obligor(s) of such Guaranteed
Refinancing Indebtedness are the same as the obligors on the guaranteed
Borrowed Money Obligations being refunded, refinanced or replaced, and
(d) any Guarantee of reimbursement obligations in respect of a
letter of credit issued in replacement for a letter of credit in
respect of which the reimbursement obligations are guaranteed pursuant
to a Guarantee referred to in clause (b) above (a "Replacement Letter
of Credit") to the extent that (x) the amount of Indebtedness
represented by the Guarantee of reimbursement obligations in respect of
the Replacement Letter of Credit does not exceed the amount of
Indebtedness represented by the Guarantee of reimbursement obligations
in respect of the letter of credit so replaced and (y) the obligor(s)
of the reimbursement obligations in respect of the Replacement Letter
of Credit are the same as the obligor(s) of the reimbursement
obligations in respect of the letter of credit so replaced.
For purposes of the Indenture,
(a) any Guarantee by the Company or any of its Restricted
Subsidiaries of Guaranteed Refinancing Indebtedness shall not be deemed
to be an additional Investment to the extent that (x) the provisions of
subclauses (x) and (y) of clause (c) of the preceding sentence are
satisfied in respect of such Guaranteed Refinancing Indebtedness and
(y) the Guarantee of the Borrowed Money Obligations refunded,
refinanced or replaced by such Guaranteed Refinancing Indebtedness was
entered into prior to August 30, 1999 or constitutes a Committed
Restricted Investment and
(b) any Guarantee by the Company or any of its Restricted
Subsidiaries of reimbursement obligations in respect of a Replacement
Letter of Credit shall not be deemed to be an additional Investment to
the extent that (x) the provisions of subclauses (x) and (y) of clause
(d) of the preceding sentence are satisfied in respect of such
Guarantee and such Replacement Letter of Credit and (y) the Guarantee
of the reimbursement obligations in respect of the letter of credit
replaced by such Replacement Letter of Credit was entered into prior to
August 30, 1999 or constitutes a Committed Restricted Investment.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect in the United States from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means
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(1) each of the Company's Restricted Subsidiaries that is a
party to the Indenture on the date of execution and delivery of the
Indenture and
(2) each other Person that becomes a guarantor of the
obligations of the Company under the Notes and the Indenture from time
to time in accordance with the provisions of the "Additional Subsidiary
Guarantees" covenant, and their respective successors and assigns;
provided, however, that "Guarantor" shall not include any Person that is
released from its Guarantee of the obligations of the Company under the Notes
and the Indenture as described under "Subsidiary Guarantees."
Each of the Company's Restricted Subsidiaries existing on the date of
the Indenture will be a Guarantor, In addition, the Indenture will require that
each future Restricted Subsidiary of the Company become a Guarantor. See
"Certain Covenants -- Additional Subsidiary Guarantees."
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under
(1) currency exchange or interest rate swap, cap or collar
agreements and
(2) other agreements or arrangements designed to protect such
Person against fluctuations in currency exchange or interest rates.
"Indebtedness" means with respect to any Person, without duplication,
(1) any indebtedness of such Person, whether or not
contingent, in respect of borrowed money or evidenced by bonds, notes,
debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers acceptances or
representing Capital Lease Obligations or the balance deferred and
unpaid of the purchase price of any property or services or
representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent
any of the foregoing indebtedness (other than letters of credit (or
reimbursement agreements in respect thereof) and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP,
(2) all indebtedness of others secured by a Lien on any asset
of such Person (whether or not such indebtedness is assumed by such
Person) and
(3) to the extent not otherwise included, the Guarantee by
such Person of any Indebtedness of any other Person.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of
(a) direct or indirect loans (including guarantees of (or the
furnishing of letters of credit as security for) Indebtedness or other
obligations but excluding Remote Guarantees),
(b) advances or capital contributions (excluding (i) salary
and bonus advances, and commission, travel and similar advances, to
officers and employees made in the ordinary course of business
consistent with past practice and (ii) amounts payable by shareholders
of the Company pursuant to the provisions of the Tax Payment
Agreement),
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(c) purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, and
(d) payments pursuant to guarantees of Indebtedness or other
obligations (including payments pursuant to Remote Guarantees),
together with all items that are or would be classified as investments
on a balance sheet prepared in accordance with GAAP, excluding,
however, trade accounts receivable and bank deposits made in the
ordinary course of business consistent with past practice.
The amount of any Investment by any Person that constitutes a guarantee
of (or the furnishing of a letter of credit as security for) Indebtedness or
other obligations shall be deemed to be
(a) if such Investment is a guarantee of Indebtedness, the
maximum principal amount of Indebtedness that may be guaranteed under
such guarantee,
(b) if such Investment is the furnishing of a letter of
credit, the maximum reimbursement obligation in respect of such letter
of credit,
(c) if such Investment is a guarantee of a lease, the lesser
of (A) the sum of (i) the total amount of fixed rent (excluding
escalations resulting from a rise in the consumer price index or
similar index and excluding amounts required to be paid for insurance,
taxes, gas, electricity, common area charges and other similar charges)
provided for in such lease during the term thereof, and (ii) the
product of (x) the Company's estimate (as determined in good faith by
the Board of Directors whose resolution with respect thereto shall be
delivered to the Trustee) of the amounts (exclusive of fixed rent) that
will be payable under such lease in respect of the first year of the
term thereof and (y) the number of years of the term of such lease and
(B) the maximum liability of such Person under such guarantee (as
determined in good faith by the Board of Directors of the Company whose
resolution with respect thereto shall be delivered to the Trustee) and
(d) if such Investment is a guarantee of obligations other
than Indebtedness or a lease, the maximum liability of such Person
under such guarantee.
If an Investment by a Person consists of the guarantee of a lease and
the amount of such Investment is determined under subclause (A) of clause (c) of
the preceding sentence, such Investment shall be deemed to be amortized on a
straight line basis over the term of the lease (or the remaining term of the
lease if the Investment is made or deemed to have been made after the
commencement of the term of the lease). If an Investment by a Person consists of
the guarantee of a lease and the amount of such Investment is determined under
subclause (B) of clause (c) of the second preceding sentence, such Investment
shall be deemed to be amortized as and to the extent that the maximum liability
of such Person under such guarantee (as determined in good faith by the Board of
Directors of the Company, whose resolution with respect thereto shall be
delivered to the Trustee) is reduced.
Any unamortized portion of an Investment by a Person that consists of a
guarantee of a lease shall be deemed to be amortized on such date, if any, as
such Person has no further liability under such guarantee. If an Investment by a
Person consists of the guarantee of a lease and the fixed rent under such lease
is increased or the term of such lease is extended, (a) such Person shall be
deemed to have made a new Investment on the date (and computed as if the term of
the lease commenced as of the date) on which the action which increased the
fixed rent or extended the term occurred and (b) the unamortized portion
immediately prior to such date of such Person's original Investment by reason of
such guarantee shall be deemed to be amortized on such date. If the Company or
any Restricted Subsidiary of the Company sells
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or otherwise disposes of any Equity Interests of any direct or indirect Wholly
Owned Restricted Subsidiary of the Company such that, after giving effect to any
such sale or disposition, such Person is no longer a Wholly Owned Restricted
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to sum of (a) the
fair market value of the Equity Interests of such Restricted Subsidiary not sold
or disposed of in an amount determined as provided in the penultimate paragraph
of the covenant described above under the caption "Restricted Payments" and (b)
the amount of the Investments by the Company and its Restricted Subsidiaries
constituting a guarantee of (or the furnishing of a letter of credit as security
for) Indebtedness or other obligations of such Restricted Subsidiary.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional, sale or other title retention agreement, any lease
in the nature thereof, and any option or other agreement to sell or give a
Lien).
"Make-Whole Amount" means, with respect to any Note, an amount equal to
the excess, if any, of
(a) the present value of the remaining principal, premium and
interest payments that would be payable with respect to such Note if
such Note were redeemed on September 15, 2004, computed using a
discount rate equal to the Treasury Rate plus 50 basis points, over
(b) the outstanding principal amount of such Note.
"Make-Whole Average Life" means, with respect to any date of redemption
of Notes, the number of years (calculated to the nearest one-twelfth) from such
redemption date to September 15, 2004.
"Make-Whole Price" means, with respect to any Note, the greater of (a)
the sum of the principal amount of and Make-Whole Amount with respect to such
Note, and (b) the redemption price of such Note on September 15, 2004.
"Merger" means the merger of Sbarro Merger LLC with and into the
Company pursuant to that certain Amended and Restated Agreement and Plan of
Merger, dated as of January 19, 1999, among the Company, Sbarro Merger LLC and
Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership,
Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not individually but
as trustees under that certain Trust Agreement dated April 28, 1984 for the
benefit of Carmela Sbarro and her descendants.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however,
(i) any gain (but not loss), together with any related
provision for taxes on such gain (but not loss), realized in connection
with (a) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions) or (b) the disposition of
any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its
Subsidiaries,
(ii) any extraordinary gain or loss and any nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary gain or loss or nonrecurring gain (but not loss).
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"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale, but only
as and when received), net of
(1) the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and
sales commissions) and any relocation expenses incurred as a result
thereof,
(2) taxes paid or payable as a result thereof (after taking
into account any available tax credits or deductions and any tax
sharing arrangements),
(3) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the
subject of such Asset Sale and
(4) any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Obligations" means any principal, interest (including post-petition
interest), penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Permitted Holder" means Mario Sbarro, Anthony Sbarro, Joseph Sbarro,
their respective spouses and lineal descendants, any spouse of any such lineal
descendant who is a full time employee of the Company or any of its
Subsidiaries, any trust for the benefit of one or more of the foregoing, any
Person in which one or more of the foregoing holds 80% or more of the Voting
Stock (measured by voting power rather than number of shares) and the trust
created under that certain Trust Agreement dated April 28, 1984 for the benefit
of Carmela Sbarro and her descendants.
"Permitted Investments" means
(1) any Investment in the Company or in a Wholly Owned
Restricted Subsidiary of the Company;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary
of the Company in a Person, if as a result of such Investment (a) such
Person becomes a Wholly Owned Restricted Subsidiary of the Company and
a Guarantor or (b) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets
to, or is liquidated into, the Company or a Wholly Owned Restricted
Subsidiary of the Company;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"Repurchase at the Option of Holders -- Asset Sales";
(5) any acquisition of assets received solely in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of the
Company;
(6) Investments received in connection with the settlement of
any ordinary course obligations owed to the Company or any of its
Restricted Subsidiaries; and
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(7) other Investments (including Investments in the form of
guarantees of (or providing letters of credit as security for)
Indebtedness or other obligations) but excluding Committed Restricted
Investments) in businesses reasonably similar to the business engaged
in by the Company and its Restricted Subsidiaries on the date of the
Indenture or in businesses reasonably complementary, related or
incidental thereto (as determined in good faith by the Board of
Directors of the Company) if, after giving effect to such Investment,
the aggregate amount of Unrestricted Investments Outstanding does not
exceed $20.0 million.
"Permitted Liens" means
(1) Liens in favor of the Company or any of its Restricted
Subsidiaries;
(2) Liens securing Obligations incurred pursuant to clause (i)
of the second paragraph of the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock"; provided, that the
outstanding principal amount of Indebtedness secured by Liens (other
than Liens on the real property and related personal property owned by
the Company and/or its Restricted Subsidiaries located at 401
Broadhollow Road, Melville, New York) permitted by this clause (ii)
shall not at any time exceed $50.0 million;
(3) Liens on property or Equity Interests of a Person existing
at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary of the Company; provided that such Liens
were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets or Equity Interests other
than those of the Person merged into or consolidated with the Company;
(4) Liens on property existing at the time of acquisition
thereof by the Company or any Restricted Subsidiary of the Company;
provided that such Liens were in existence prior to the contemplation
of such acquisition;
(5) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a
like nature incurred in the ordinary course of business;
(6) Liens existing on the Closing Date;
(7) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good
faith by appropriate proceedings promptly instituted and diligently
concluded; provided that any reserve or other appropriate provision as
shall be required in conformity with GAAP shall have been made
therefore;
(8) Liens securing the Notes or any Guarantee thereof;
(9) Liens securing Permitted Refinancing Indebtedness to the
extent that the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded was permitted to be secured by a Lien
provided that such Liens do not extend to any assets other than those
that secured the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded;
(10) Liens securing Indebtedness (including Capital Lease
Obligations) incurred pursuant to clause (iv) of the second paragraph
of the covenant entitled "Incurrence of Indebtedness and
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Issuance of Preferred Stock"; provided that such Liens cover only
assets acquired with the proceeds of such Indebtedness; and
(11) Liens incurred in the ordinary course of business of the
Company or any Restricted Subsidiary of the Company with respect to
obligations that do not exceed $2.0 million at any one time outstanding
and that (a) are not incurred in connection with the borrowing of money
or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially
detract from the value of the property or materially impair the use
thereof in the operation of business by the Company or such Restricted
Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the
Company or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness (other than Hedging Obligations and other than
Indebtedness permitted to be incurred pursuant to clause (iv) , clause (vii) or
clause (ix) of the second paragraph under "Incurrence of Indebtedness and
Issuance of Preferred Stock") of the Company or any of its Restricted
Subsidiaries; provided that:
(1) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal
amount of (or accreted value, if applicable), plus premium and accrued
interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith);
(2) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to
the Notes or any Guarantee thereof, such Permitted Refinancing
Indebtedness is subordinated in right of payment to the Notes or such
Guarantee on terms at least as favorable to the Holders of Notes as
those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Company or by
the Restricted Subsidiary that is an obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means an individual, limited or general partnership,
corporation, limited liability company, association, unincorporated
organization, trust, joint stock company, joint venture or other entity, or a
government or any agency or political subdivision thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of
any class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Public Equity Offering" means a bona fide underwritten sale to the
public of common stock of the Company pursuant to a registration statement
(other than on Form S-8 or any other form relating to securities issuable under
any benefit plan of the Company) that is declared effective by the SEC.
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"Remote Guarantee" means a guarantee of a tenant's obligations under a
lease of real property which does not apply to obligations accruing in respect
of periods subsequent to the date on which the tenant surrenders possession of
the leased premises to the landlord (whether or not such surrender is authorized
by the terms of the lease), does not apply to any breach arising from any such
surrender and does not apply to any obligations that may have been accelerated
under the provisions of the lease.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"S Corporation" means a corporation that is treated as an "S
corporation" for federal income tax purposes.
"Senior Debt" means Indebtedness of the Company or any of its
Restricted Subsidiaries that is not subordinated in right of payment to any
other Indebtedness of the Company or such Restricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person,
(1) any corporation, association or other business entity of
which more than 50% of the total voting power of shares of Capital
Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of at least a majority of the directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of
that Person (or a combination thereof) and
(2) any partnership (a) the sole general partner or the
managing general partner of which is such Person or a Subsidiary of
such Person or (b) the only general partners of which are such Person
or one or more Subsidiaries of such Person (or any combination
thereof).
"Tax Distributions" means amounts paid or distributed to or for the
benefit of shareholders of the Company (net of amounts repaid by such
shareholders) pursuant to and in accordance with the Tax Payment Agreement as in
effect on the Closing Date.
"Tax Payment Agreement" means the Tax Payment Agreement, dated as of
the Closing Date, among the Company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro
(1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin
Montgomery, not individually but as trustees under that certain Trust Agreement
dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants, and
any future shareholders of the Company that may become parties thereto. See
"Certain Relationships and Related Transactions" for a brief description of the
Tax Payment Agreement.
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"Treasury Rate" means, at any time of computation, the yield to
maturity at such time (as compiled by and published in the most recent Federal
Reserve Statistical Release H.15(519), which has become publicly available at
least two business days prior to the date of the redemption notice or, if such
Statistical Release is no longer published, any publicly available source of
similar market data) of United States Treasury securities with a constant
maturity most nearly equal to the Make-Whole Average Life; provided, however,
that if the Make-Whole Average Life is not equal to the constant maturity of the
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the
Make-Whole Average Life is less than one year, the weekly average yield on
actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.
"Unrestricted Investments Outstanding" means, at any time of
determination, in respect of any Permitted Investments made in any Person
pursuant to clause (7) of the definition of the term Permitted Investments (and
any Investments (other than Committed Restricted Investments) made in such
Person by the Company or any of its Restricted Subsidiaries during the period
from August 30, 1999 to the Closing Date), the difference between
(1) the sum of all Permitted Investments theretofore made by
the Company or any Restricted Subsidiary in such Person on or after the
date of the Indenture pursuant to clause (7) of the definition of
Permitted Investments plus the sum of all Investments (other than
Committed Restricted Investments) made by the Company or any Restricted
Subsidiary in such Person during the period from August 30, 1999 to the
Closing Date minus
(2) the sum of, without duplication,
(a) the amount of all dividends and distributions
paid in cash by such Person after August 30, 1999 to the
Company or a Restricted Subsidiary of the Company (to the
extent that the Company does not elect to include the amount
of such dividends and distributions in the computation of
Consolidated Net Income pursuant to the parenthetical of
clause (1) of the definition thereof at the time of
determination),
(b) all repayments after August 30, 1999 by such
Person of the principal amount of loans or advances that
constitute Permitted Investments theretofore made by the
Company or any of its Restricted Subsidiaries in such Person
pursuant to clause (7) of the definition of Permitted
Investments or that constitute loans or advances (other than
Committed Restricted Investments) made by the Company or any
of its Restricted Subsidiaries in such Person during the
period from August 30, 1999 to the Closing Date,
(c) any other reduction made in cash of such
Investments by the Company or any of its Restricted
Subsidiaries in such Person,
(d) if any Permitted Investment made in such Person
by the Company or any of its Restricted Subsidiaries pursuant
to clause (7) of the definition of the term Permitted
Investments (or if any Investment (other than Committed
Restricted Investments) made in such Person by the Company or
any of its Restricted Subsidiaries during the period from
August 30, 1999 to the Closing Date) was in the form of a
guarantee of Indebtedness, the amount of any reduction in the
maximum principal amount of Indebtedness that may be
guaranteed under such guarantee,
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(e) if any Permitted Investment made in such Person
by the Company or any of its Restricted Subsidiaries pursuant
to clause (7) of the definition of the term Permitted
Investments (or if any Investment (other than Committed
Restricted Investments) made in such Person by the Company or
any of its Restricted Subsidiaries during the period from
August 30, 1999 to the Closing Date) was in the form of the
furnishing of a letter of credit as security for Indebtedness
or other obligations, the amount of any reduction in the
maximum reimbursement obligations in respect of such letter or
credit,
(f) if any Permitted Investment made in such Person
by the Company or any of its Restricted Subsidiaries pursuant
to clause (7) of the definition of the term Permitted
Investments (or if any Investment (other than Committed
Restricted Investments) made in such Person by the Company or
any of its Restricted Subsidiaries during the period from
August 30, 1999 to the Closing Date) was in the form of the
guarantee of a lease, the amount of amortization (as provided
in the definition of "Investments") of such Investment and
(g) if any Permitted Investment made in such Person
by the Company or any of its Restricted Subsidiaries pursuant
to clause (7) of the definition of the term Permitted
Investments (or if any Investment (other than Committed
Restricted Investments) made in such Person by the Company or
any of its Restricted Subsidiaries during the period from
August 30, 1999 to the Closing Date) was in the form of a
guarantee of obligations other than Indebtedness or a lease,
the amount of any reduction in the maximum liability under
such guarantee;
provided that (x) the amount of Unrestricted Investments Outstanding in respect
of any Person in respect of such Investments shall at no time be a negative
amount and (y) the amount of Unrestricted Investments Outstanding in respect of
any Permitted Investments theretofore made in any Person pursuant to clause (7)
of the definition of the term Permitted Investments (and any Investments (other
than Committed Restricted Investments) made in such Person by the Company or any
of its Restricted Subsidiaries during the period from August 30, 1999 to the
Closing Date) shall be zero if, at the time of determination, such Person is a
Wholly-Owned Restricted Subsidiary of the Company.
"Unrestricted Subsidiary" means each of the Subsidiaries of the Company
listed on a Schedule to the Indenture and any other Subsidiary that, subject to
the provisions described in the penultimate paragraph under "-- Restricted
Payments," is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a Board Resolution, but only to the extent that such Subsidiary
(a) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the
Company unless the terms of any such agreement, contract, arrangement
or understanding comply with the covenant set forth under "Affiliate
Transactions,"
(b) is a Person with respect to which neither the Company nor
any of its Restricted Subsidiaries has any direct or indirect
obligation (i) to subscribe for additional Equity Interests or (ii) to
maintain or preserve such Person's financial condition or to cause such
Person to achieve any specified levels of operating results and
(c) is not a guarantor of, and is not otherwise directly or
indirectly providing credit support for, any Indebtedness of the
Company or any of its Restricted Subsidiaries.
119
<PAGE>
Any such designation by the Board of Directors shall be evidenced to
the Trustee by filing with the Trustee a certified copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "-- Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if
(1) such Indebtedness is permitted under the covenant
described under the caption "-- Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period, and
(2) no Default or Event of Default would be in existence
following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of at least a
majority of the directors, managers, trustees or other governing body of such
Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing
(1) the sum of the products obtained by multiplying (a) the
amount of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by
(2) the then outstanding principal amount of such
Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock and other Equity
Interests or other ownership interests (including convertible debt securities)
of which (other than directors' qualifying shares) shall at the time be owned by
such Person and/or by one or more Wholly Owned Restricted Subsidiaries of such
Person.
120
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes acquired
as a result of market-making activities or other trading activities. Any such
broker-dealer who intends to use this Prospectus in connection with the resale
of New Notes received in exchange for Old Notes pursuant to the Exchange Offer
must notify, or cause us to be notified, on or prior to the Expiration Date,
that it is such a broker-dealer. We have agreed that, for a period ending on the
earlier of 30 days from the date of the Prospectus and the date on which a
broker-dealer is no longer required to deliver a Prospectus in connection with
market making or other trading activities, we will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any resale by applicable broker dealers.
We will not receive any proceeds from the issuance of the New Notes
offered hereby or from any sale of New Notes by broker-dealers. New Notes
received by broker-dealers for their own account pursuant to the Exchange Offer
may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any New Notes. Any broker-dealer that resells New Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker-dealer that participates in a distribution of New Notes may be deemed to
be an "underwriter" within the meaning of the Securities Act, and any profit on
any resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
We have agreed that we will promptly furnish a reasonable number of
additional copies of this Prospectus, and any amendment or supplement to this
Prospectus, to any broker-dealer that requests this document in the Letter of
Transmittal for a period ending on the earlier of 30 days from the date of the
Prospectus and the date on which a broker-dealer is no longer required to
deliver a Prospectus in connection with market making or other trading
activities. We have agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the New Notes, including any broker-dealers, against
certain liabilities, including liabilities under the Securities Act. We note,
however, that in the opinion of the SEC, indemnification against liabilities
arising under federal securities laws is against public policy and may be
unenforceable.
121
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a discussion of certain U.S. federal income tax
consequences of the acquisition, ownership and disposition of the Notes. We are
not receiving a legal opinion in respect to the U.S. federal income tax
consequences of the acquisition, ownership and disposition of the Notes. This
summary applies only to Notes held as capital assets within the meaning of
Section 1221 of the Code. It does not discuss all of the tax consequences that
may be relevant to a holder of Notes in light of its particular circumstances or
to holders of Notes subject to special rules (such as holders of Notes that are
tax-exempt organizations, dealers in securities or foreign currencies, financial
institutions, life insurance companies, or regulated investment companies,
holders of Notes whose functional currency is not the U.S. dollar, persons that
hold the Notes as part of a synthetic security, conversion transaction, or
certain "straddle," hedging transactions or other risk reduction or constructive
sale transactions, Non-U.S. Holders (as defined below) that are subject to
net-basis U.S. federal income tax on income or gain derived from the Notes
because such income or gain is effectively connected with the conduct of a U.S.
trade or business, or expatriates of the United States (including former
citizens and residents of the United States)). In addition, it does not consider
state, local or foreign taxes, the effect of tax treaties or other U.S. federal
taxes (including the alternative minimum tax).
The U.S. federal income tax considerations set forth below are based
upon the Code and regulations, rulings and judicial decisions thereunder as of
the date hereof. Such authorities may be repealed, revoked, modified or subject
to different interpretation, possibly with retroactive effect, so as to result
in U.S. federal income tax consequences different from those presented below. No
ruling has been requested from the Internal Revenue Service (the "IRS"). The IRS
or a court may disagree with this discussion.
For purposes of this discussion, a "U.S. Holder" is a holder of Notes
that is an individual who is a citizen or resident of the United States, a
corporation or a partnership that is organized in or under the laws of the
United States or any state thereof, an estate the income of which is includible
in gross income for U.S. tax purposes regardless of its source, or a trust, the
administration of which is subject to the primary supervision of a court within
the United States and as to which one or more United States persons have the
authority to control all substantial decisions of the trust. A "Non-U.S. Holder"
is a holder of Notes that is not a U.S. Holder.
U.S. HOLDERS
INTEREST. Interest on a Note will be taxable to a U.S. Holder as
ordinary interest income in accordance with the U.S. Holder's method of
accounting for U.S. federal income tax purposes. Although the Notes will be
issued at a discount, the Notes will not be treated as issued with original
issue discount for federal income tax purposes since the discount from the
principal amount of the Notes is de minimis for such purposes.
ADDITIONAL AMOUNTS. As more fully described in the Registration Rights
Agreement, in the event of a Registration Default with respect to the Notes, we
will be required to pay additional amounts to the holders of the Notes as
liquidated damages. Since we believe that the likelihood of the imposition of
liquidated damages is remote, any liquidated damages should be included as
ordinary income to a U.S. Holder in accordance with its regular method of
accounting. Similarly, we intend to take the position that the likelihood of a
redemption or a repurchase upon a "Change of Control" is remote. We believe that
the lieklihood of optional redemption giving rise to original issue discount is
remote. Accordingly, any premium with respect thereto should be included in the
U.S. Holder's income as part of the redemption or
112
<PAGE>
repurchase in accordance with its regular method of accounting. In this regard,
our determination is binding on a U.S. Holder unless the U.S. Holder explicitly
discloses on its timely filed U.S. federal income tax return for the year in
which the Note was acquired that it is taking a position contrary to us.
MARKET DISCOUNT. If a U.S. Holder purchases a Note for an amount that
is less than its principal amount, the amount of the difference will be treated
as "market discount" for U.S. federal income tax purposes, unless such
difference is less than a specified de minimus amount. Under the market discount
rules, a U.S. Holder will be required to treat any full or partial principal
payment on, or any gain on the sale, exchange, retirement or other disposition
of, a Note as ordinary income to the extent of the market discount that has not
previously been included in income and is treated as having accrued on such Note
at the time of such payment or disposition. In addition, the U.S. Holder may be
required to defer, until the maturity of the Note or its earlier disposition in
a taxable transaction, the deduction of all or a portion of the interest expense
on any indebtedness incurred or continued to purchase or carry such Note. Any
market discount will be considered to accrue ratably during the period from the
date of acquisition to the maturity date of the Note, unless the U.S. Holder
elects to accrue on a constant interest method. A U.S. Holder may elect to
include market discount in income currently as it accrues (on either a ratable
or constant interest method), in which case the rule described above regarding
deferral of interest deductions will not apply. This election to include market
discount in income currently, once made, applies to all market discount
obligations acquired on or after the first taxable year to which the election
applies and may not be revoked without the consent of the IRS.
AMORTIZABLE BOND PREMIUM. A U.S. Holder that purchases a Note for an
amount in excess of the principal amount will be considered to have purchased
the Note at a "premium." A U.S. Holder generally may elect to amortize the
premium over the remaining term of the Note on a constant yield method. However,
if the Note is purchased at a time when the Note may be optionally redeemed for
an amount that is in excess of its principal amount, special rules would apply
that could result in a deferral of the amortization of bond premium until later
in the term of the Note. The amount amortized in any year will be treated as a
reduction of the U.S. Holder's interest income from the Note. Bond premium on a
Note held by a U.S. Holder that does not make such an election will decrease the
gain or increase the loss otherwise recognized on disposition of the Note. The
election to amortize premium on a constant yield method, once made, applies to
all debt obligations held or subsequently acquired by the electing U.S. Holder
on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the IRS.
SALE, EXCHANGE OR REDEMPTION OF NOTES. A U.S. Holder will recognize
gain or loss on the sale, exchange, redemption, retirement or other taxable
disposition of a Note in an amount equal to the difference, if any, between the
U.S. Holder's adjusted tax basis in the Note and the amount received therefor
(other than amounts attributable to accrued and unpaid interest on the Notes,
which will be treated as interest for U.S. federal income tax purposes). Such
gain or loss should be capital gain or loss, which will be long-term if the Note
was held for more than one year as of the date of disposition. A U.S. Holder's
basis in a Note generally will be the amount paid therefor, increased by any
market discount previously included in income by the U.S. Holder and decreased
by any principal payments received by the U.S. Holder and by any amortizable
bond premium.
Prospective investors should be aware that the resale of a Note may be
affected by the "market discount" rules of the Code, which may recharacterize a
portion of the subsequent holder's gain upon his sale or other taxable
disposition of the Note as ordinary income.
EXCHANGE OF OLD NOTES FOR NEW NOTES. An exchange of an Old Note for a
New Note should not be treated as an event in which gain or loss, if any, is
realized for U.S. federal income tax purposes because the terms of the New Notes
do not differ materially in kind or extent from the terms of the Old
123
<PAGE>
Notes. As a result, a U.S. Holder should not recognize any gain or loss for U.S.
federal income tax purposes if he or she participates in an exchange offer, and
the New Note received in an exchange offer should be treated as a continuation
of the Old Note surrendered in the exchange offer. The U.S. Holder should have
the same basis and holding period in its New Note as it had in the Old Note.
BACKUP WITHHOLDING AND INFORMATION REPORTING. A U.S. Holder of a Note
may be subject to information reporting and possible backup withholding. If
applicable, backup withholding would apply at a rate of 31% with respect to
interest on, or the proceeds of a sale, exchange, redemption, retirement or
other disposition of, such Note, unless such U.S. Holder (1) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (2) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable backup withholding rules. Backup withholding is not an additional
tax. Any amount so withheld may be allowed as a refund or credited against the
U.S. Holder's U.S. federal income tax liability provided the required
information is furnished to the IRS. A U.S. Holder who fails to furnish its
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. We will report annually to the IRS and the U.S. Holder the amount of
any "reportable payment" under the Note and any tax withheld therefrom.
NON-U.S. HOLDERS
PORTFOLIO INTEREST EXCEPTION. The payment of interest on a Note to a
Non-U.S. Holder generally will not be subject to U.S. federal income tax (or to
withholding of such tax), if either (i) the beneficial owner of the Note
certifies to us or our agent, under penalties of perjury, that it is not a U.S.
Holder and provides its name and address on U.S. Treasury Form W-8 or Form
W-8BEN (or on a suitable substitute form) or (ii) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") and holds the Note certifies under penalties of perjury that such
a Form W-8 or Form W-8BEN (or suitable substitute form) has been received from
the beneficial owner by it or by a financial institution between it and the
beneficial owner and furnishes the payer with a copy thereof.
Recently adopted Treasury Regulations (the "Final Withholding
Regulations") will change the methods for satisfying the certification
requirement. The Final Withholding Regulations also will require, in the case of
Notes held by a foreign partnership, that (1) this certification generally be
provided by the partners rather than by the foreign partnership and (2) the
partnership provide certain information, including a United States employer
identification number. A look through rule would apply in the case of tiered
partnerships. The Final Withholding Regulations will become effective for
payments made after December 31, 2000, subject to certain transition rules.
SALE, EXCHANGE OR REDEMPTION OF NOTES. A Non-U.S. Holder generally will
not be subject to U.S. federal income tax on any gain realized in connection
with the sale, exchange redemption, retirement or other disposition of a Note,
unless the Non-U.S. Holder is an individual who is present in the United States
for 183 or more days in the taxable year of the disposition and certain other
requirements are met. Prospective investors should be aware that the resale of a
Note to a U.S. Holder could be affected by the "market discount" provisions
under the Code.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Interest payments on the
Notes made by us or our paying agent to certain Non-U.S. Holders generally will
not be subject to information reporting or "backup withholding" if the
certification described under "-- Non-U.S. Holders -- Portfolio Interest
Exception" above is received.
124
<PAGE>
Payment of proceeds from a sale of a Note to or through the U.S. office
of a broker is subject to information reporting and backup withholding unless
the Non-U.S. Holder certifies as to its non-U.S. status or otherwise establishes
an exemption from information reporting and backup withholding. Payment outside
the United States of the proceeds of the sale of a Note to or through a foreign
office of a "broker" (as defined in applicable U.S. Treasury Regulations) should
not be subject to information reporting or backup withholding, except that if
the broker is a U.S. person, a controlled foreign corporation for U.S. federal
income tax purposes or a foreign person 50% or more of whose gross income is
from a U.S. trade or business, information reporting should apply to such
payment unless the broker has documentary evidence in its records that the
beneficial owner is not a U.S. Holder and certain other conditions are met or
the beneficial owner otherwise establishes an exemption. Any amount so withheld
may be allowed as a refund or credited against the Non-U.S. Holder's U.S.
federal income tax provided the required information is furnished to the IRS.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INTENDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR HOLDER'S
SITUATION. PERSONS CONSIDERING A PURCHASE OF THE NOTES SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, OWNING AND
DISPOSING OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER U.S., STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
(POSSIBLY INCLUDING RETROACTIVE CHANGES) IN U.S. FEDERAL AND OTHER TAX LAWS.
LEGAL MATTERS
Parker Chapin Flattau & Klimpl, LLP, New York, New York will pass upon
the validity of the New Notes offered by us in connection with the Exchange
Offer.
INDEPENDENT PUBLIC ACCOUNTANTS
The historical consolidated financial statements of Sbarro, Inc. and
its subsidiaries as of January 3, 1999 and December 28, 1997 and for each of the
three years in the period ended January 3, 1999 included in this Prospectus have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
125
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
YEAR-END FINANCIAL STATEMENTS (AUDITED) -----
<S> <C>
Report of Independent Public Accountants............................................................. F-2
Consolidated Balance Sheets at January 3, 1999 and December 28, 1997................................. F-3
Consolidated Statements of Income for each of the years in the three-year
period ended January 3, 1999.................................................................... F-4
Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended
January 3, 1999................................................................................. F-5
Consolidated Statements of Cash Flows for each of the years in the three-year period ended January 3,
1999............................................................................................ F-6
Notes to Consolidated Financial Statements........................................................... F-7
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets at July 18, 1999 (unaudited) and January 3, 1999......................... F-17
Consolidated Statements of Income (unaudited) for the twenty-eight weeks ended July 18, 1999 and July
12, 1998........................................................................................ F-18
Consolidated Statements of Cash Flows (unaudited) for the twenty-eight weeks ended July 18, 1999 and
July 12, 1998................................................................................... F-19
Notes to Unaudited Consolidated Financial Statements................................................. F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Sbarro, Inc.:
We have audited the accompanying consolidated balance sheets of Sbarro,
Inc. (a New York corporation) and subsidiaries as of January 3, 1999 and
December 28, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended January 3, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Sbarro, Inc. and
subsidiaries as of January 3, 1999 and December 28, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended January 3, 1999, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, New York
February 10, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1999 DECEMBER 28, 1997
----------------------------------
(IN THOUSANDS)
ASSETS
<S> <C> <C>>
Current assets:
Cash and cash equivalents....................................... $ 150,472 $ 119,810
Marketable securities........................................... -- 7,500
Receivables:
Franchisees.................................................. 1,342 810
Other........................................................ 2,185 1,565
------------- ---------------
3,527 2,375
------------- ---------------
Inventories........................................................ 3,122 2,962
Prepaid expenses................................................... 1,291 1,768
------------- ---------------
Total current assets............................................ 158,412 134,415
Property and equipment, net (Notes 3 and 10)....................... 138,126 136,798
Other assets, net.................................................. 6,630 7,436
------------- ---------------
$ 303,168 $ 278,649
============= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 7,122 $ 10,086
Accrued expenses (Note 4)....................................... 25,764 26,025
Dividend payable................................................ -- 5,521
Income taxes (Note 5)........................................... 4,146 4,777
------------- ---------------
Total current liabilities.................................... 37,032 46,409
Deferred income taxes (Note 5)..................................... 9,219 11,801
Commitments and contingencies (Notes 6 and 7) Shareholders' equity (Note 9):
Preferred stock, $1 par value; authorized 1,000,000
shares; none issued.......................................... -- --
Common stock, $.01 par value; authorized
40,000,000 shares; issued and outstanding 20,531,643 shares at January
3, 1999 and 20,446,654
shares at December 28, 1997.................................. 205 204
Additional paid-in capital....................................... 34,587 32,444
Retained earnings................................................ 222,125 187,791
------------- ---------------
256,917 220,439
------------- ---------------
$ 303,168 $ 278,649
============= ===============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
-------------------
JANUARY 3, 1999 DECEMBER 28, 1997 DECEMBER 29, 1996
--------------- ----------------- ------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Revenues:
Restaurant sales...................................... $ 361,534 $ 337,723 $ 319,315
Franchise related income.............................. 8,578 7,360 6,375
Interest income....................................... 5,120 4,352 3,798
------------- ---------------- ---------------
Total revenues..................................... 375,232 349,435 329,488
------------- ---------------- ---------------
Costs and expenses:
Costs of food and paper products...................... 76,572 69,469 68,668
Restaurant operating expenses:
Payroll and other employee benefits................ 93,367 84,910 78,258
Occupancy and other expenses....................... 101,013 93,528 85,577
Depreciation and amortization......................... 22,429 23,922 22,910
General and administrative............................ 19,708 17,762 14,940
Provision for unit closings (Note 10)................. 2,515 3,300 --
Terminated transaction costs (Note 6)................. 986 -- --
Litigation settlement and related costs (Note 7)...... 3,544 -- --
Loss on sale of land to be sold (Note 3).............. 1,075 -- --
Other income.......................................... (2,680) (1,653) (1,171)
-------------- ---------------- ---------------
Total costs and expenses........................... 318,529 291,238 269,182
------------- ---------------- ---------------
Income before income taxes and cumulative effect of
change in method of accounting for start-up costs..... 56,703 58,197 60,306
Income taxes (Note 5)..................................... 21,547 22,115 22,916
------------- ---------------- ---------------
Income before cumulative effect of accounting change...... 35,156 36,082 37,390
Cumulative effect of change in method of accounting for
start-up costs, net of income taxes of $504........... (822) -- --
------------- ---------------- ---------------
Net income................................................ $ 34,334 $36,082 $ 37,390
============= ================ ===============
Per share information:
Net income per share:
Basic:
Income before accounting change.................... $ 1.71 $ 1.77 $ 1.84
Accounting change.................................. (.04) -- --
-------------- ---------------- ---------------
Net income......................................... $ 1.67 $ 1.77 $ 1.84
============== ================= ================
Diluted:
Income before accounting change.................... $ 1.71 $ 1.76 $ 1.83
Accounting change.................................. (.04) -- --
-------------- ---------------- ---------------
Net Income......................................... $ 1.67 $ 1.76 $ 1.83
============== ================= ================
Shares used in computing net income per share:
Basic................................................. 20,516,890 20,426,678 20,369,128
============= ================ ===============
Diluted............................................... 20,583,367 20,504,303 20,404,620
============= ================ ===============
Dividends declared (Note 11).............................. $ -- $ 1.08 $ 0.92
============= ================= ================
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
ADDITIONAL
NUMBER OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----- ----- ------ -------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995.................. 20,345,483 $ 203 $ 30,330 $ 155,133 $ 185,666
Exercise of stock options..................... 47,426 1 889 890
Net income.................................... -- -- -- 37,390 37,390
Dividends declared............................ -- -- -- (18,746) (18,746)
------------- --------- -------------- ----------- ----------
Balance at December 29, 1996.................. 20,392,909 204 31,219 173,777 205,200
Exercise of stock options..................... 53,745 -- 1,225 -- 1,225
Net income.................................... -- -- 36,082 36,082
Dividends declared............................ -- -- -- (22,068) (22,068)
------------- --------- -------------- ----------- ----------
Balance at December 28, 1997.................. 20,446,654 204 32,444 187,791 220,439
Exercise of stock options 84,989 1 2,143 2,144
Net income.................................... -- -- -- 34,334 34,334
------------- --------- -------------- ----------- ----------
Balance at January 3, 1999.................... 20,531,643 $ 205 $ 34,587 $ 222,125 $ 256,917
============= ========= ============== =========== ==========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
-------------------
JANUARY 3, 1999 DECEMBER 28, 1997 DECEMBER 29, 1996
-------------- ---------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating activities:
Net income.................................................. $ 34,334 $ 36,082 $ 37,390
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in method of accounting for
start-up costs...................................... 822 -- --
Depreciation and amortization....................... 22,429 23,922 22,910
Decrease in deferred income taxes....................... (2,078) (1,844) (442)
Provision for unit closings............................. 2,515 3,300 --
Loss on sale of land to be sold......................... 1,075 -- --
Changes in operating assets and liabilities:
(Increase) decrease in receivables...................... (1,152) (510) 739
Increase in inventories................................. (160) (121) (78)
Decrease (increase) in prepaid expenses................. 477 (359) 268
Increase in other assets................................ (817) (2,468) (3,048)
(Decrease) increase in accounts payable and accrued
expenses................................................ (2,610) 3,534 (4,309)
(Decrease) increase in income taxes payable............. (631) (510) 579
----------------- ----------------- -----------------
Net cash provided by operating activities................... 54,204 61,026 54,009
----------------- ----------------- -----------------
Investing activities:
Proceeds from maturities of marketable securities........... 7,500 2,500 --
Purchases of property and equipment......................... (27,717) (28,556) (25,928)
Proceeds from disposition of property and equipment......... 52 34 266
----------------- ----------------- -----------------
Net cash used in investing activities....................... (20,165) (26,022) (25,662)
----------------- ----------------- -----------------
Financing activities:
Proceeds from exercise of stock options..................... 2,144 1,225 890
Cash dividends paid......................................... (5,521) (21,237) (17,920)
----------------- ----------------- -----------------
Net cash used in financing activities....................... (3,377) (20,012) (17,030)
----------------- ----------------- -----------------
Increase in cash and cash equivalents....................... 30,662 14,992 11,317
Cash and cash equivalents at beginning of year.............. 119,810 104,818 93,501
----------------- ----------------- -----------------
Cash and cash equivalents at end of year.................... $150,472 $119,810 $ 104,818
================= ================= =================
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The consolidated financial statements include the accounts of Sbarro,
Inc. and its wholly-owned subsidiaries (together, the "Company") and the
accounts of its joint ventures. All intercompany accounts and transactions have
been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS:
All highly liquid debt instruments with a maturity of three months or
less at the time of purchase are considered to be cash equivalents.
MARKETABLE SECURITIES:
The Company had classified its investments in marketable securities as
"held to maturity." These investments were stated at amortized cost, which
approximated market, and were comprised primarily of direct obligations of the
U.S. Government and its agencies. All previous investments in marketable
securities matured during fiscal 1998.
INVENTORIES:
Inventories, consisting primarily of food, beverages and paper
supplies, are stated at cost which is determined by the first-in, first-out
method.
PROPERTY AND EQUIPMENT AND DEPRECIATION:
Property and equipment are stated at cost. Depreciation is provided for
by the straight-line method over the estimated useful lives of the assets.
Amortization of leasehold improvements is provided for by the straight-line
method over the estimated useful lives of the assets or the lease term,
whichever is shorter. One-half year of depreciation and amortization is recorded
in the year in which the restaurant commences operations.
DEFERRED CHARGES:
The Company accounts for pre-opening and similar costs in accordance
with Statement of Position (SOP) 98-5 of the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants which
requires companies to write off all such costs, net of tax benefit, as a
"cumulative effect of accounting change" and to expense all such costs as
incurred in the future. In accordance with its early application provisions, the
Company implemented the SOP as of the beginning of its 1998 fiscal year.
Application of the SOP resulted in a charge of $1,226,000 ($822,000 or $.04
basic and diluted earnings per share after tax).
F-7
<PAGE>
COMPREHENSIVE INCOME:
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income",
which establishes new rules for the reporting of comprehensive income and its
components. The adoption of this statement had no impact on the Company's net
income or shareholders' equity. For the 1998, 1997 and 1996 fiscal years, the
Company's operations did not give rise to items includible in comprehensive
income which were not already included in net income. Therefore, the Company's
comprehensive income is the same as its net income for all periods presented.
FRANCHISE RELATED INCOME:
Initial franchise fees are recorded as income as restaurants are opened
by the franchisee and all services have been substantially performed by the
Company. Development fees are amortized over the number of restaurant openings
covered under each development agreement. Royalty and other fees from
franchisees are accrued as earned. Revenues and expenses related to construction
of franchised restaurants are recognized when contractual obligations are
completed and the restaurants are opened.
STOCK BASED COMPENSATION PLANS:
In accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. (See Note 9).
INCOME TAXES:
The Company files a consolidated Federal income tax return. Deferred
income taxes result primarily from differences between financial and tax
reporting of depreciation and amortization.
ACCOUNTING PERIOD:
The Company's fiscal year ends on the Sunday nearest to December 31.
The Company's 1998 fiscal year ended January 3, 1999 and contained 53 weeks. All
other reported fiscal years contained 52 weeks.
PER SHARE DATA:
The provisions of SFAS No. 128, "Earnings Per Share" became effective
for the Company's quarter and year ended December 28, 1997. SFAS No. 128
requires the presentation of both basic and diluted earnings per share on the
face of the income statement. SFAS No. 128 replaced primary and fully diluted
earnings per share with basic and diluted earnings per share, respectively.
Earnings per share is calculated using the weighted average number of shares of
common stock outstanding for the period, with basic earnings per share
excluding, and diluted earnings per share including, potentially dilutive
securities, such as stock options that could result in the issuance of common
stock. The number of shares of common stock subject to stock options included in
diluted earnings per share were 66,477 in 1998, 77,625 in 1997 and 35,492 in
1996.
F-8
<PAGE>
LONG-LIVED ASSETS:
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" requires that long-lived assets,
certain identifiable intangibles and goodwill be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
those assets may not be recoverable. SFAS No. 121 did not have a material effect
on the Company's results of operations or financial position in 1998, 1997 or
1996.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 3, 1999 DECEMBER 28, 1997 DECEMBER 29, 1996
--------------- ----------------- -----------------
(IN THOUSANDS)
--------------
<S> <C> <C> <C>
Cash paid for:
Income taxes.................... $ 24,235 $ 24,297 $ 23,143
================= ================= ====================
</TABLE>
2. DESCRIPTION OF BUSINESS:
The Company and its franchisees develop and operate family oriented
cafeteria style Italian restaurants principally under the "Sbarro" and "Sbarro
The Italian Eatery" names. The restaurants are located throughout the United
States and overseas, principally in shopping malls and other high traffic
locations.
The following sets forth the number of units in operation as of:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997 DECEMBER 29, 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Company-owned.................... 630 623 597
Franchised....................... 268 239 219
--- --- ---
898 862 816
=== === ===
</TABLE>
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements............................... $ 191,192 $ 168,581
Furniture, fixtures and equipment.................... 107,891 97,688
Construction-in-progress (a)......................... 2,662 20,096
----------------- -------------------
301,745 286,365
Less accumulated depreciation and amortization....... 163,619 149,567
----------------- -------------------
$ 138,126 $ 136,798
================= ===================
</TABLE>
- --------------------
(a) During 1998 the Company recorded a charge of $1,075 before tax ($667 or
$.03 basic and diluted earnings per share after tax) for the difference
between the carrying cost and proposed selling price of a parcel of
land being sold by the Company. As of December 28, 1997, construction
in progress includes $15,651 related to the acquisition and improvement
of the Company's new corporate headquarters.
4. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
(IN THOUSANDS)
<S> <C> <C>
Compensation........................................ $ 4,109 $ 5,051
Payroll and sales taxes............................. 3,193 3,494
Rent ............................................... 6,786 6,699
Provision for unit closings (Note 10)............... 2,867 4,351
Other............................................... 8,809 6,430
------------------ ------------------
$ 25,764 $ 26,025
================== ==================
</TABLE>
F-9
<PAGE>
5. INCOME TAXES:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 3, 1999 DECEMBER 28, 1997 DECEMBER 29, 1996
--------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current....................... $ 19,421 $ 19,868 $ 19,216
Deferred...................... (2,209) (1,557) (322)
--------------- ---------------- ----------------
17,212 18,311 18,894
--------------- ---------------- ----------------
State and local:
Current....................... 4,708 4,091 4,142
Deferred...................... (373) (287) (120)
--------------- ---------------- ----------------
4,335 3,804 4,022
--------------- ---------------- ----------------
$ 21,547 $ 22,115 $ 22,916
=============== ================ ================
</TABLE>
Deferred income taxes are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 3, 1999 DECEMBER 28, 1997
-------------- -----------------
(IN THOUSANDS)
-------------
<S> <C> <C>
Depreciation and amortization........................ $ 15,805 $ 15,782
Deferred charges..................................... 475
--
Other................................................ 101 60
----------------- ----------------
Gross deferred tax liabilities....................... 15,906 16,317
----------------- ----------------
Accrued expenses..................................... (4,776) (2,431)
Deferred income...................................... (1,483) (1,949)
Other................................................ (428) (136)
----------------- ----------------
Gross deferred tax assets............................ (6,687) (4,516)
----------------- ----------------
$ 9,219 $ 11,801
================= ================
</TABLE>
Actual tax expense differs from "expected" tax expense (computed by
applying the Federal corporate rate of 35% for the years ended January 3, 1999,
December 28, 1997, and December 29, 1996) as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 3, 1999 DECEMBER 28, 1997 DECEMBER 29, 1996
--------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense......... $ 19,382 $ 20,369 $ 21,108
Increase (reduction) in income taxes
resulting ..............................
State and local income taxes, net of
Federal income tax benefit.............. 2,725 2,429 2,614
Tax exempt interest income.............. (43) (59) (63)
Other, net.............................. (517) (624) (743)
-------------- -------------- ---------------
$ 21,547 $ 22,115 $ 22,916
============== ============== ===============
</TABLE>
Deferred income taxes are provided for temporary differences between financial
and tax reporting. These differences and the amount of the related deferred tax
benefit are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 3, 1999 DECEMBER 28, 1997 DECEMBER 29, 1996
--------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization........... $ (1,891) $ (1,824) $ (1,397)
Accrued expenses........................ (261) (624) 1,791
Other................................... (430) 604 (836)
-------------- ---------------- ---------------
$ (2,582) $ (1,844) $ (442)
============== ================ ===============
</TABLE>
6. PROPOSED MERGER:
On January 19, 1999, the Company entered into a Merger Agreement for
the merger of a company owned by members of the Sbarro family, the Company's
principal shareholders, with and into the Company in which all outstanding
Common Stock of the Company not owned by those shareholders are to be converted
into the right to receive $28.85 in cash. The shares to be purchased comprise
F-10
<PAGE>
approximately 65.6% of the Company's outstanding shares of Common Stock. In
addition, all outstanding stock options, including those held by those members
of the Sbarro family, will be terminated (see Note 9). For each such option, the
holder thereof will be paid the difference between $28.85 and the exercise price
per share, multiplied by the total number of shares of Common Stock subject to
such option.
The Merger Agreement contains certain conditions to closing, including,
among other things, (i) approval by a majority of the votes cast (excluding
votes cast by the Sbarro Family, abstentions and broker non-votes) at a meeting
of the Company's shareholders to be called to consider adoption of the Merger
Agreement, (ii) receipt of financing for the transactions contemplated by the
Merger Agreement, (iii) the continued suspension of dividends by the Company and
(iv) the settlement of shareholder class action lawsuits that have been filed
relating to the merger.
Following the Company's announcement of the proposal by members of the
Sbarro family for the merger, seven class action lawsuits were instituted by
shareholders against the Company, those members of the Sbarro family who are
directors of the Company and all or some of the other directors of the Company.
While the complaints in each of the lawsuits vary, in general, they allege that
the directors breached fiduciary duties, that the then proposed price of $27.50
to be paid to shareholders other than the Sbarro family was inadequate and that
there were inadequate procedural protections for those shareholders. Although
varying, the complaints seek, generally, a declaration of a breach of, or an
order requiring the defendants to carry out, their fiduciary duties to the
plaintiffs, damages in unspecified amounts alleged to be caused to the
plaintiffs, other relief (including injunctive relief or rescission or
rescissory damages if the transaction is consummated), and costs and
disbursements, including a reasonable allowance for counsel fees and expenses.
On January 19, 1999, counsel for all of the plaintiffs and counsel for
all of the defendants entered into a Memorandum of Understanding pursuant to
which an agreement in principle to settle all of the lawsuits was reached and
the Sbarro Family agreed to an increase in the merger consideration to $28.85
per share. The Memorandum of Understanding states that plaintiffs' counsel
intend to apply to the Court for an award of attorneys' fees and disbursements
in an amount of no more than $2.1 million to be paid by the Company, which the
defendants have agreed not to oppose. The defendants are also responsible for
providing notice of the settlement to all Class members. The settlement would
result in the complete discharge and bar of all claims against, past, present
and future officers and directors of the Company and others associated with the
merger with respect to matters and issues of any kind that have been or could
have been asserted in these lawsuits. The settlement is subject to, among other
things, (i) completion of a formal stipulation of settlement, (ii) certification
of the lawsuits as a class action covering all record and beneficial owners of
the Common Stock during the period beginning on November 25, 1998 through the
effective date of the merger, (iii) court approval of the settlement and (iv)
consummation of the merger. It is a condition to the Sbarro family's obligations
under the Merger Agreement that holders of no more than 1,000,000 shares of
Common Stock request exclusion from the settlement.
In connection with the termination of negotiations for the initial
proposal of the Company's acquisition of all shares of common stock not owned by
such members of the Sbarro family, in fiscal 1998, the Company recorded a charge
of $986,000 ($611,000 or $.03 basic and diluted earnings per share after tax).
7. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS:
The Company conducts all of its operations in leased facilities. Most
of the Company's restaurant leases provide for the payment of base rents plus
real estate taxes, utilities, insurance, common area
F-11
<PAGE>
charges and certain other expenses, as well as contingent rents generally
ranging from 8% to 10% of net restaurant sales in excess of stipulated amounts.
Rental expense under operating leases, including common area charges,
other expenses and additional amounts based on sales, are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 3, 1999 DECEMBER 28, 1997 DECEMBER 29, 1996
--------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals.......................... $ 43,387 $ 40,365 $ 36,383
Common area charges...................... 13,314 12,541 11,303
Contingent rentals....................... 3,011 2,910 2,819
--------------- ------------------ -------------------
$ 59,712 $ 55,816 $ 50,505
=============== ================== ===================
</TABLE>
Future minimum rental and other payments required under non-cancelable
operating leases for Company-operated restaurants that were open on January 3,
1999 and the existing leased administrative and support function office (Note 8)
are as follows (in thousands):
Years ending:
January 2, 2000................... $ 65,075
December 31, 2000................. 63,472
December 30, 2001................. 60,409
December 29, 2002................. 56,000
December 28, 2003................. 51,180
Later years....................... 134,673
-------------------
$ 430,809
===================
The Company is the principal lessee under operating leases for certain
franchised restaurants which are subleased to the franchisee. Franchisees pay
rent and related expenses directly to the landlord. Future minimum rental
payments required under these non-cancelable operating leases for franchised
restaurants that were open as of January 3, 1999 are as follows (in thousands):
Years ending:
January 2, 2000.................. $ 1,352
December 31, 2000................ 1,088
December 30, 2001................ 954
December 29, 2002................ 626
December 28, 2003................ 475
Later years...................... 727
--------------------
$ 5,222
====================
As of February 10, 1999, future minimum rental payments required under
non-cancelable operating leases for restaurants which had not as yet opened as
of January 3, 1999 are as follows (in thousands):
Years ending:
January 2, 2000................... $ 1,537
December 31, 2000................. 2,023
December 30, 2001................. 2,026
December 29, 2002................. 1,931
December 28, 2003................. 2,053
Later years....................... 10,923
--------------------
$ 20,493
====================
The Company is a party to contracts aggregating $3,159,000 with respect
to the construction of restaurants. Payments of approximately $385,000 have been
made on those contracts as of January 3, 1999.
One of the joint ventures in which the Company is a partner has entered
into a contract to purchase the land on which a restaurant is located, at the
end of its five year lease on such property in 2002, for $950,000.
F-12
<PAGE>
The Company is a guarantor of its pro rata interest (up to $4,400,000)
of a line of credit granted to one of the joint ventures in which the Company is
a partner.
CONTINGENCIES:
In December 1998, the Court approved, and Company completed, the
settlement of an action entitled Kenneth Hoffman and Gloria Curtis, on behalf of
themselves and all others similarly situated v. Sbarro, Inc. that was pending in
the United States District Court for the Southern District of New York. The
plaintiffs, former restaurant level management employees, alleged that the
Company required general managers and co-managers to reimburse the Company for
cash and certain other shortages sustained by the Company and thereby lost their
status as managerial employees exempt from the overtime compensation provisions
of the Fair Labor Standards Act. The settlement resulted in a one-time charge of
$3,544,000 before tax or $2,197,000 ($.11 basic and diluted earnings per share
after tax) in fiscal 1998.
8. TRANSACTIONS WITH RELATED PARTIES:
In May 1986, the Company entered into a fifteen year sublease with a
partnership owned by certain shareholders of the Company in Commack for its
present administrative and support function offices. For 1998 and 1997 and for
each of the remaining years of the lease, the rent expense is $337,000 per year.
In 1996, the Company incurred rent expense for such building of $298,000.
Management believes that such rents are comparable to the rents that would be
charged by an unaffiliated third party.
A member of the Board of Directors acts as a consultant to the Company
for which he received $140,400 in 1998, $116,400 in 1997 and $106,100 in 1996.
9. STOCK OPTIONS:
The Company's Board of Directors has adopted, and its shareholders have
approved, a 1991 Stock Incentive Plan (the "1991 Plan"), which replaced the
Company's 1985 Incentive Stock Option Plan, and a 1993 Non-Employee Director
Stock Option Plan (the "1993 Plan").
Under the 1991 Plan, the Company may grant, until February 2001,
incentive stock options and non-qualified stock options, alone or in tandem with
stock appreciation rights ("SARs"), to employees and consultants of the Company
and its subsidiaries. Options and SARs may not be granted at exercise prices of
less than 100% of the fair market value of the Company's common stock on the
date of grant. The Board of Directors and the Board's Committee administering
the 1991 Plan are empowered to determine, within the limits of the 1991 Plan,
the number of shares subject to each option and SAR, the exercise price, and the
time period (which may not exceed ten years) and terms under which each may be
exercised.
The 1993 Plan provides for the automatic grant to each non-employee
director of an option to purchase 3,750 shares of common stock following each
annual shareholders' meeting. Each option has a ten year term and is exercisable
in full commencing one year after grant at 100% of the fair market value of the
Company's common stock on the date of grant. In 1998, 1997 and 1996, each of the
five non-employee directors were granted options to purchase 3,750 shares at $
24.06, $28.88 and $26.88 per share, respectively. In 1997, options to purchase
an aggregate of 11,250 shares granted to a deceased director were exercised at
prices ranging from $21.50 to $23.71.
A summary of the status of the Company's option plans is presented in
the table below:
F-13
<PAGE>
<TABLE>
<CAPTION>
1998 WEIGHTED- 1997 WEIGHTED- 1996 WEIGHTED-
AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE
---------------- ---------------- -----------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of 1,638,339 $25.85 934,836 $25.57 717,712 $24.97
period
Granted 23,750 $24.22 777,750 $25.96 378,750 $25.55
Exercised (84,989) $25.23 (53,745) $22.78 (47,426) $18.24
Canceled or expired (16,668) $25.15 (20,502) $24.66 (114,200) $24.84
-------- ------ ------- ------ -------- ------
Options outstanding, end of period 1,560,432 $25.87 1,638,339 $25.85 934,836 $25.57
Options exercisable, end of period 617,515 $25.99 573,880 $26.05 534,214 $25.89
</TABLE>
Of the options outstanding at January 3, 1999, options to purchase
78,182 shares had exercise prices ranging from $15.17 to $21.83 per share, with
a weighted average exercise price of $21.36 per share and a weighted average
remaining contractual life of 5.53 years, of which options to purchase 76,515
shares were exercisable, with a weighted average exercise price of $21.36 per
share. The remaining options to purchase 1,482,250 shares had exercise prices
ranging from $23.05 to $28.88 per share, with a weighted average exercise price
of $26.11 per share and a weighted average remaining contractual life of 6.8
years, of which options to purchase 541,000 shares are exercisable, with a
weighted average exercise price of $26.65 per share. At January 3, 1999, there
were an aggregate of 2,054,730 shares available for option grants under the 1991
and 1993 Plans.
The foregoing table includes options granted in 1997 under the 1991
Plan to the Company's Chairman of the Board and President to purchase 100,000
and 150,000 shares at $25.13 and $28.88 per share, respectively, and to the
Company's Vice Chairman of the Board and Senior Executive Vice President to
purchase 100,000 and 100,000 shares, respectively, at $25.13 per share; options
granted in 1996 to the Company's Chairman of the Board and President and Senior
Executive Vice President to purchase 100,000 and 50,000 shares, respectively, at
$24.75 per share; and options granted in 1993 under the 1991 Plan to the
Company's Chairman of the Board and President, Vice Chairman of the Board and
Senior Executive Vice President and one non-employee director to purchase
120,000, 90,000, 75,000 and 37,500 shares, respectively, at $27.09 per share.
Each such option was granted at an exercise price equal to the fair market value
of the Company's common stock on the date of grant and is exercisable for 10
years from the date of grant.
Such options remain unexercised.
In addition to the foregoing, in 1990, shareholder approved options
were granted to the Company's Chairman of the Board and President, Vice Chairman
of the Board and Senior Executive Vice President to purchase 150,000, 75,000 and
75,000 shares, respectively, at $20.67 per share, the fair market value of the
Company's common stock on the date of grant, for a period of 10 years from the
date of grant. Such options remain unexercised.
See Note 6 for the effect of the proposed acquisition of all shares not
owned by the Sbarro family on the options outstanding as of January 3, 1999.
The Company has adopted the pro forma disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock option plans. Had compensation cost for
the Company's stock option plans been determined under SFAS No. 123, the
Company's net income and earnings per share would have approximated the pro
forma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income:
<S> <C> <C> <C>
As Reported................................................... 34,334 36,082 37,390
=========== ========== =============
Pro Forma..................................................... 33,770 35,089 37,160
=========== ========== =============
Per share information:
Net income per share (as reported):
Basic......................................................... $ 1.67 $ 1.77 $ 1.84
============ ============ ==============
Diluted....................................................... $ 1.67 $ 1.76 1.83
============ ============= =============
Net income per share (pro forma):
Basic......................................................... $ 1.65 $ 1.72 1.82
F-14
<PAGE>
============ ============ ==============
Diluted....................................................... $ 1.64 $ 1.71 1.82
============ ============= =============
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected life (years)............................................. .50% 1.50% 4.00%
Interest rate..................................................... 5.15% 5.82% 6.53%
Volatility........................................................ 31.00% 21.00% 28.00%
Dividend yield.................................................... 0.00% 4.00% 3.50%
Weighted average fair value of options granted.................... $ 2.38 $ 2.79 $ 5.75
======== ======= =======
</TABLE>
10. PROVISION FOR UNIT CLOSINGS:
A provision for restaurant closings of $2,515,000 ($1,559,000 or $.08
basic and diluted earnings per share after tax) was established in fiscal 1998
relating to the closing of 20 restaurant locations.
A provision for restaurant closings in the amount of $3,300,000
($2,046,000 or $.10 basic and diluted earnings per share after tax) relating to
the Company's investment in one of its joint ventures was established in 1997
for the closing of certain of the joint venture's units.
11. DIVIDENDS:
In 1997 and 1996, the Company declared quarterly dividends of $.27 per
share and $.23 per share, respectively, aggregating $1.08 per share and $.92 per
share for the respective years. Dividends were thereafter suspended pending
consideration by the Company of proposals by certain members of the Sbarro
family for the Company's acquisition of all Common Stock not owned by them and
consideration of other strategic alternatives.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(B)
------- ------- ------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal year 1998
Revenues....................................... $ 101,883 $ 78,844 $ 85,907 $ 108,598
Gross profit(a)................................ 77,463 60,142 65,035 82,322
Net income(b).................................. 7,138 5,107 7,081 15,008
============ ========== ========= ========
Per share information:
Net income per share:
Basic...................................... $ .35 $ .25 $ .34 $ .73
============ ========== ========= ==========
Diluted.................................... $ .35 $ .25 $ .34 $ .73
============ ========== ========= ==========
Shares used in computation of net income per share:
Basic...................................... 20,491,939 20,526,633 20,528,309 20,529,006
----------- ---------- ----------
Diluted.................................... 20,665,846 20,605,477 20,530,983 20,539,488
----------- ---------- ---------- ----------
Fiscal year 1997
Revenues....................................... $ 95,364 $ 75,301 $ 82,678 $ 96,092
Gross profit(a)................................ 73,324 57,976 63,314 73,640
Net income(c).................................. 7,885 6,733 9,206 12,258
=========== ========== ========= ==========
Per share information:
Net income per share:
Basic...................................... $ .39$ .33 .45$ .60
------------ ---------- ---------- -----------
Diluted(d)................................. $ .39$ .33 .45$ .60
------------ ---------- ---------- ----------
Shares used in computation of net income per share:
Basic...................................... 20,401,538 20,428,711 20,440.596 20,444,678
----------- ---------- ----------
Diluted.................................... 20,454,534 20,599,676 20,526,757 20,529,233
----------- ---------- ---------- ----------
</TABLE>
- ------------
(a) Gross profit represents the difference between restaurant sales and the cost
of food and paper products.
F-15
<PAGE>
(b) See Notes 1, 3, 6, 7 and 10 for information regarding unusual charges.
(c) See Note 10.
(d) The sum of the quarters does not equal the full year per share amounts
included in the accompanying statement of income due to the effect of
the weighted average number of shares outstanding during the fiscal
year as compared to the quarters.
13. SUMMARY CONDENSED FINANCIAL INFORMATION:
The following tables present condensed summary financial information
for the Guarantor Subsidiaries (the Non-Guarantor Subsidiaries are immaterial on
an individual and combined basis). Each of the Guarantor Subsidiaries is a
direct or indirect wholly-owned subsidiary of the Company. The Guarantors will
jointly and severally and fully and unconditionally guarantee the Senior Notes
of the Company to be issued in connection with the transactions contemplated by
the Merger Agreement. The Company has determined that separate financial
statements and other disclosures concerning the Guarantors are not material to
investors.
<TABLE>
<CAPTION>
SUMMARY GUARANTOR SUBSIDIARY FINANCIAL INFORMATION
BALANCE SHEET DATA
JANUARY 3, 1999 DECEMBER 28, 1997
--------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Current assets....................................... $ 7,623 $ 5,727
Intercompany receivables............................. 147,903 117,835
--------------------- -------------------
Total current assets............................. 155,526 123,562
Property and equipment, net.......................... 80,787 81,717
Other assets, net.................................... 573 93
--------------------- -------------------
$ 236,886 $ 205,372
===================== ===================
Current liabilities.................................. $ 453 $ 855
Intercompany payables-- long term.................... 19,909 15,711
Shareholders' equity................................. 216,524 188,806
--------------------- -------------------
$ 236,886 $ 205,372
===================== ===================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY GUARANTOR SUBSIDIARY FINANCIAL INFORMATION
INCOME STATEMENT DATA
FOR THE YEARS ENDED
JANUARY 3, DECEMBER 28, 1997 DECEMBER 29, 1996
----------- ----------------- -----------------
1999
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues...................................... $ 187,690 $ 178,758 $ 172,336
============= ================ =================
Gross profit(a)............................... $ 146,376 $ 140,554 $ 133,886
============= ================ =================
Income before cumulative effect of change in
method of accounting(b).................. $ 26,935 $ 25,663 $ 25,442
============= ================ =================
Net income(b)................................. $ 26,935 $ 25,663 $ 25,442
============= ================ =================
</TABLE>
- ------------
(a) Gross profit represents the difference between restaurant sales and the cost
of food and paper products.
(b) See Notes to Consolidated Financial Statements for information regarding
non-recurring charges in the years presented.
F-16
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 18, 1999 JANUARY 3, 1999
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents..................................... $ 152,907 $ 150,472
Receivables:
Franchisees................................................. 1,505 1,342
Other....................................................... 2,037 2,185
-------------------- ----------------
3,542 3,527
Inventories................................................... 2,882 3,122
Prepaid expenses.............................................. 5,114 1,291
-------------------- ----------------
Total current assets........................................ 164,445 158,412
Property and equipment, net...................................... 138,397 138,126
Other assets..................................................... 8,902 6,630
-------------------- ----------------
$311,744 $303,168
==================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $7,512 $ 7,122
Accrued expenses.............................................. 24,786 25,764
Income taxes.................................................. 75 4,146
-------------------- ----------------
Total current liabilities................................... 32,373 37,032
Deferred income taxes............................................ 8,882 9,219
Shareholders' equity:
Preferred stock, $1 par value; authorized 1,000,000
shares; none issued -- --
Common stock, $.01 par value; authorized 40,000,000
shares; issued and outstanding 20,548,690 shares at July 18,
1999 and 205 205
20,531,643 shares at January 3, 1999........................
Additional paid-in capital.................................... 35,013 34,587
Retained earnings............................................. 235,271 222,125
-------------------- ----------------
270,489 256,917
-------------------- ----------------
$ 311,744 $ 303,168
==================== ================
</TABLE>
See notes to unaudited consolidated financial statements
F-17
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE TWENTY-EIGHT WEEKS ENDED:
---------------------------------
JULY 18, 1999 JULY 12, 1998
------------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues:
<S> <C> <C>
Restaurant sales............................................. $ 179,051 $ 174,028
Franchise related income..................................... 4,332 4,154
Interest Income.............................................. 2,624 2,545
---------- ----------
Total revenues............................................. 186,007 180,727
---------- ----------
Costs and expenses:
Cost of food and paper products.............................. 36,981 36,423
Restaurant operating expenses:...............................
Payroll and other employee benefits........................ 49,575 46,899
Occupancy and other........................................ 56,205 52,985
Depreciation and amortization................................ 12,278 11,725
General and administrative................................... 12,339 10,367
Provision for unit closings.................................. -- 1,525
Terminated transaction costs................................. -- 986
Other income................................................. (2,574) (1,259)
---------- ----------
Total costs and expenses................................... 164,804 159,651
---------- ----------
Income before income taxes and cumulative effect of change
in method of accounting for start-up costs................... 21,203 21,076
Income taxes..................................................... 8,057 8,009
---------- ----------
Income before cumulative effect of accounting change............. 13,146 13,067
---------- ----------
Cumulative effect of change in method of accounting for
start-up costs, less income tax benefit of $504.............. -- (822)
---------- ----------
Net income....................................................... $ 13,146 $ 12,245
========== ==========
Per share information:
Net income per share:
Basic:
Income before accounting change............................ $ .64 $ .64
Accounting change.......................................... -- (.04)
---------- -----------
Net income................................................. $ .64 $ .60
Diluted:.....................................................
Income before accounting change............................ $ .64 $ .63
Accounting change.......................................... -- (.04)
---------- -----------
Net income................................................. $ .64 $ .59
=========== ===========
Shares used in computing net income per share:
Basic........................................................ 20,533,176 20,507,204
Diluted...................................................... 20,640,299 20,606,707
</TABLE>
See notes to unaudited consolidated financial statements
F-18
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE
TWENTY-EIGHT WEEKS ENDED:
-------------------------
JULY 18, 1999 JULY 12, 1998
------------- --------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income....................................................... $ 13,146 $ 12,245
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect in change in method of accounting for
start-up costs.............................................. -- 822
Depreciation and amortization................................. 12,278 11,725
Deferred income taxes......................................... (337) (335)
Provision for unit closings................................... -- 1,525
Changes in operating assets and liabilities:
Increase in receivables..................................... (15) (810)
Decrease in inventories..................................... 240 301
Increase in prepaid expenses................................ (3,823) (3,040)
Increase in other assets.................................... (2,357) (70)
Decrease in accounts payable and accrued expenses........... (306) (2,852)
Decrease in income taxes payable............................ (4,071) (4,586)
----------------- ----------------
Net cash provided by operating activities........................ 14,755 14,925
----------------- ----------------
INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (12,746) (15,760)
----------------- ----------------
Net cash used in investing activities............................ (12,746) (15,760)
----------------- ----------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options.......................... 426 2,073
Cash dividends paid.............................................. -- (5,521)
----------------- ----------------
Net cash provided by (used in) financing activities.............. 426 (3,448)
----------------- ----------------
Increase (decrease) in cash and cash equivalents................. 2,435 (4,283)
Cash and cash equivalents at beginning of period................. 150,472 119,810
----------------- ----------------
Cash and cash equivalents at end of period....................... $ 152,907 $ 115,527
================= ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes..................... $ 13,861 $ 13,841
================= ================
</TABLE>
See notes to unaudited consolidated financial statements
F-19
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Regulation S-X
related to interim period financial statements and, therefore, do not include
all information and footnotes required by generally accepted accounting
principles. However, in the opinion of management, all adjustments (consisting
of normal recurring adjustments and accruals) considered necessary for a fair
presentation of the consolidated financial position of the Company and its
subsidiaries at July 18, 1999 and their consolidated results of operations and
cash flows for the twenty-eight weeks ended July 18, 1999 and July 12, 1998 have
been included. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the entire year.
Reference should be made to the annual financial statements, including footnotes
thereto, for the fiscal year ended January 3, 1999 included elsewhere in this
Prospectus.
2. PROPOSED MERGER:
On January 19, 1999, the Company entered into a merger agreement for
the merger of a company owned by members of the Sbarro family, the Company's
principal shareholders, with and into the Company in which all outstanding
common stock of the Company not owned by those shareholders are to be converted
into the right to receive $28.85 in cash. The shares to be purchased comprise
approximately 65.6% of the Company's outstanding shares of common stock. In
addition, all outstanding stock options, including those held by those members
of the Sbarro family, will be terminated. For each such option, the holder
thereof will be paid the difference between $28.85 and the exercise price per
share, multiplied by the total number of shares of common stock subject to such
option.
Following the Company's announcement of the proposal by members of the
Sbarro family for the merger, seven class action lawsuits were instituted by
shareholders against the Company, those members of the Sbarro family who are
directors of the Company and all or some of the other directors of the Company.
In a memorandum of understanding entered into on January 19, 1999, which was
confirmed by the subsequent formal stipulation of settlement, counsel for the
plaintiffs and counsel for the defendants agreed to settle all of the lawsuits,
and the Sbarro family agreed to increase the merger consideration from $27.50
per share to $28.85 per share.
On July 16, 1999, following a hearing held on June 29, 1999, the court
before whom the lawsuit was brought entered an order and final judgment that,
among other things, approved the stipulation of settlement and related
settlement of the class actions. The Court awarded plaintiffs' counsel
attorneys' fees and disbursements of approximately $1.6 million in connection
with the settlement, subject to, and payable upon, completion of the merger.
Those fees and disbursements will be capitalized, and not expensed for financial
reporting purposes. On August 16, 1999, the appeal period related to the order
and final judgment expired. No appeals were filed. The settlement remains
subject to consummation of the merger.
The merger was approved at a special meeting of shareholders held on
August 13, 1999. The merger agreement remains subject to, among other things,
receipt of financing for the transactions contemplated thereby and the continued
suspension of dividends by the Company.
F-20
<PAGE>
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE:
In accordance with its early application provisions, the Company
implemented Statement of Position ("SOP") 98-5 of the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants as
of the beginning of its 1998 fiscal year. This SOP requires companies that
capitalize pre-opening and similar costs to write off all existing such costs,
net of tax benefit, as a "cumulative effect of accounting change" and to expense
all such costs as incurred in the future.
4. EARNINGS PER SHARE:
The number of shares of common stock subject to stock options included
in diluted earnings per share were 107,123 and 99,503 for the twenty-eight weeks
ended July 18, 1999 and July 12, 1998, respectively.
5. COMPREHENSIVE INCOME:
The Company's operations did not give rise to any items includible in
comprehensive income which were not already included in net income for either of
the twenty-eight week periods ended July 18, 1999 and July 12, 1998.
6. SUMMARIZED CONDENSED FINANCIAL INFORMATION:
The following tables present condensed summary financial information
for the guarantor subsidiaries (Non-Guarantor subsidiaries are immaterial on an
individual and combined basis). Each of the Guarantor Subsidiaries is a direct
or indirect wholly owned subsidiary of the Company. The Guarantors will jointly
and severally and fully and unconditionally guarantee the Senior Notes of the
Company to be issued in connection with the transactions contemplated by the
merger agreement. The Company has determined that separate financial statements
and other disclosures concerning the Guarantors are not material to investors.
<TABLE>
<CAPTION>
SUMMARY GUARANTOR SUBSIDIARY FINANCIAL INFORMATION
BALANCE SHEET DATA
JULY 18, 1999 JULY 12, 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Current assets........................................................ $ 6,400 $ 5,769
Intercompany receivables.............................................. 160,453 133,983
----------------- ---------------
Total current assets........................................... 166,853 139,752
Property and equipment, net........................................... 78,547 80,124
Other assets, net..................................................... 585 52
----------------- ---------------
$ 245,985 $ 219,928
================= ===============
Current liabilities................................................... $ 217 $ 902
Intercompany payables-- long term..................................... 19,625 19,150
Shareholders' equity.................................................. 226,143 199,876
----------------- ---------------
$ 245,985 $ 219,928
================= ===============
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
SUMMARY GUARANTOR SUBSIDIARY FINANCIAL INFORMATION
INCOME STATEMENT DATA
TWENTY-EIGHT WEEKS ENDED
------------------------
JULY 18, 1999 JULY 12, 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Revenues.......................................................... $ 92,819 $ 91,190
================== ==============
Gross profit(a)................................................... $ 72,755 $ 71,376
================== ==============
Income before cumulative effect of change in accounting
principle(b).................................................. $ 9,649 $ 11,089
================== ==============
Net income(b)..................................................... $ 9,649 $ 11,089
================== ==============
</TABLE>
- ----------
(a) Gross profit represents the difference between restaurant sales and the
cost of food and paper products.
(b) See Notes to Unaudited Consolidated Financial Statements for
information regarding non-recurring charges in the periods presented.
F-22
<PAGE>
<TABLE>
<S> <C>
======================================================= ====================================================
WE HAVE NOT AUTHORIZED ANY DEALER, SALES
PERSON OR OTHER PERSON TO GIVE ANY INFORMATION OR
REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS.
YOU MUST NOT RELY UPON ANY UNAUTHORIZED INFORMATION.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR BUY ANY NOTES IN ANY JURISDICTION WHERE IT IS SBARRO, INC.
UNLAWFUL. THE INFORMATION IN THIS PROSPECTUS IS
CURRENT AS OF , 1999, EXCEPT AS OTHERWISE NOTED.
---------------------
TABLE OF CONTENTS
--------------------
PAGE OFFER TO EXCHANGE
11% SENIOR NOTES DUE 2009
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933
FOR ANY AND ALL OUTSTANDING
11% SENIOR NOTES DUE 2009
Prospectus Summary....................... 1
Risk Factors............................. 15
The Going Private Transaction............ 24
Use of Proceeds.......................... 24
Exchange Offer .......................... 25
Capitalization........................... 34
Unaudited Consolidated Pro Forma
Financial Data......................... 35
Selected Consolidated Historical
Financial Data......................... 40
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.............. 43
Business................................. 53
Management............................... 64
Certain Relationships and Related
Transactions........................... 70
Security Ownership of Certain
Beneficial Owners and
Management............................. 72
Description of Credit Facility........... 73
Description of Notes..................... 75
Plan of Distribution..................... 121
Notice to Investors...................... 123
Certain U.S. Federal Income Tax Considerations 125
Legal Matters............................ 125
Independent Public Accountants...........
Index to Consolidated Financial PROSPECTUS
Statements............................. F-1
======================================================= ====================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) Section 722 of the New York Business Corporation Law (the "NYBCL")
permits, in general, a New York corporation to indemnify any person made, or
threatened to be made, a party to an action or proceeding by reason of the fact
that he or she was a director or officer of the corporation, or served another
entity in any capacity at the request of the corporation, against any judgments,
fines, amounts paid in settlement and reasonable expenses, including attorneys'
fees actually and necessarily incurred as a result of such action or proceeding,
or any appeal therein, if such person acted in good faith, for a purpose he or
she reasonably believed to be in, or, in the case of service for another entity,
not opposed to, the best interests of the corporation and, in criminal actions
or proceedings, in addition had no reasonable cause to believe that his or her
conduct was unlawful. Section 723 of the NYBCL permits the corporation to pay in
advance of a final disposition of such action or proceeding the expenses
incurred in defending such action or proceeding upon receipt of an undertaking
by or on behalf of the director or officer to repay such amount as, and to the
extent, required by statute. Section 721 of the NYBCL provides that
indemnification and advancement of expense provisions contained in the NYBCL
shall not be deemed exclusive of any rights to which a director or officer
seeking indemnification or advancement of expenses may be entitled, provided no
indemnification may be made on behalf of any director or officer if a judgment
or other final adjudication adverse to the director or officer establishes that
his or her acts were committed in bad faith or were the result of active or
deliberate dishonesty and were material to the cause of action so adjudicated,
or that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled.
(b) The Company's Certificate of Incorporation contains no provision
regarding indemnification of officers or directors.
(c) Article VII of the Company's By-laws, as presently in effect,
provides, in general, that the Company may indemnify any officer or director
(including officers and directors serving another corporation, partnership,
joint venture, trust employee benefit plan or other enterprise at the Company's
request) made, or threatened to be made, a party to an action or proceeding
(whether civil, criminal, administrative or investigative and including an
action by or in the right of the Company) by reason of the fact that he or she
was serving in any of those capacities against judgments, fines, amounts paid in
settlement and reasonable expenses (including attorney's fees) actually incurred
as a result of such action or proceeding, provided that no indemnification shall
be made if a judgment or other final adjudication adverse to such director or
officer establishes that (1) his or her acts were committed in bad faith or were
the result of active and deliberate dishonesty and, in either case, were
material to the cause of action so adjudicated, or (2) he or she personally
gained in fact a financial profit or other advantage to which he or she was not
legally entitled.
(d) The Company has entered into indemnification agreements with each
of its officers and directors confirming the indemnification, granted under
Article VII of the Company's By-Laws.
(e) The Company maintains a directors and officers liability insurance
policy that insures the directors and officers of the Company and its
subsidiaries against losses arising from certain claims made against such
directors or officers by reason of certain wrongful acts (as defined). The
policy also provides for the reimbursement to the Company for any obligation it
incurs as a result of indemnification of officers and directors. The policy
provides combined limit liability of $5,000,000 per policy year for both
directors' and officers' liability coverage at an annual premium of $80,000.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Number Description
- ------ -----------
*2.1 Agreement and Plan of Merger dated as of January 19, 1999 among
the Company, Sbarro Merger LLC, a New York limited liability
company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994)
Family Limited Partnership, Anthony Sbarro, and Mario Sbarro
and Franklin Montgomery, not individually but as trustees under
that certain Trust Agreement dated April 28, 1984 for the
benefit of Carmela Sbarro and her descendants. (Exhibit 2 to
the Company Current Report on Form 8-K dated (date of earliest
event reported) January 19, 1999, File No. 1-8881)
*3.1(a) Restated Certificate of Incorporation of the Company as filed
with the Department of State of the State of New York on March
29, 1985. (Exhibit 3.01 to the Company's Registration Statement
on Form S-1, File No. 2- 96807)
*3.1(b) Certificate of Amendment to the Company's Restated Certificate
of Incorporation as filed with the Department of State of the
State of New York on April 3, 1989. (Exhibit 3.01(b) to the
Company's Annual Report on Form 10-K for the year ended January
1, 1989, File No. 1-8881)
*3.1(c) Certificate of Amendment to the Company's Restated Certificate
of Incorporation as filed with the Department of State of the
State of New York on May 31, 1989. (Exhibit 4.01 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 23, 1989, File No. 1-8881)
*3.1(d) Certificate of Amendment to the Company's Restated Certificate
of Incorporation as filed with the Department of State of the
State of New York on June 1, 1990. (Exhibit 4.01 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 22, 1990, File No. 1-8881)
*3.2 By-Laws of the Company, as amended. (Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 21, 1996, File No. 1-8881)
*4.1 Indenture dated as of September, 28, 1999 among the Company,
the Restricted Subsidiaries of the Company named therein, as
guarantors, and Firstar Bank, N.A., including the form of 11%
Senior Notes of the Company to be issued upon consummation of
the Exchange Offer and the form of Senior Guarantees of the
Guarantors. (Exhibit 4.1 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) September 23,
1999, File No. 1-8881)
*4.2 Credit Agreement dated as of September 23, 1999 among the
Company, European American Bank, as agent, and the Lenders
party thereto (Exhibit 4.2 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) September 23,
1999, File No. 1-8881)
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP
*10.1 Commack, New York Corporate Headquarters Sublease. (Exhibit
10.04 to the Company's Registration Statement on Form S-1, File
No. 2-96807)
+*10.2 The Company's Performance Incentive Plan. (Exhibit A to the
Company's Proxy Statement dated April 29, 1997, File No.
1-8881)
+*10.3 Consulting Agreement (including option) dated June 3, 1985
between the Company and Bernard Zimmerman & Company, Inc.
(Exhibit 10.04 to the Company's Annual Report on Form 10-K for
the year ended January 1, 1989, File No. 1-8881)
+*10.4 Form of Indemnification Agreement between the Company and each
of its directors and officers. (Exhibit 10.04 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1989, File No. 1-8881)
*10.5 Registration Rights Agreement dated as of September 28, 1999
among the Company, the Guarantors named therein and Bear,
Stearns & Co. Inc. (Exhibit 10.1 to the Company's Current
Report on Form 8-K dated (date of earliest event reported)
September 23, 1999, File No. 1-8881)
II-2
<PAGE>
Number Description
- ------ -----------
10.6 Tax Payment Agreement dated as of September 28, 1999 among the
Company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994)
Family Limited Partnership, Anthony Sbarro, and Mario Sbarro
and Franklin Montgomery, not individually but as Trustees under
that certain Trust Agreement dated April 28, 1984 for the
benefit of Carmela Sbarro and her descendants
12.1 Statement of computation of earnings to fixed charges
*21.1 List of subsidiaries (Exhibit 21.01 to the Company's Annual
Report on Form 10-K for the year ended January 3, 1999, File
No. 1-8881)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in
Exhibit 5.1 above)
24.1 Powers of Attorney (included as part of the signature pages
hereto)
25.1 Form T-1 Statement of Eligibility of Trustee
99.1 Form of Letter of Transmittal relating to the Exchange Offer
99.2 Form of Notice of Guaranteed Delivery relating to the Exchange
Offer
99.3 Form of Letter to Registered Holders and DTC Participants
relating to the Exchange Offer
99.4 Form of Letter to Clients relating to the Exchange Offer
99.5 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Participant from beneficial owner relating to the
Exchange Offer
- ---------------
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
II-3
<PAGE>
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 3059(b)(2) of
that Act.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Melville, State of New
York on this 10th day of November, 1999.
SBARRO, INC.
By: /s/ Mario Sbarro
-----------------------
Mario Sbarro
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
POWER OF ATTORNEY
The undersigned directors and officers of Sbarro, Inc. hereby
constitute and appoint Mario Sbarro and Robert G. Rooney and each of them, with
full power to act without the other and with full power of substitution and
resubstitution, our true and lawful attorneys-in-fact with full power to execute
in our name and behalf in the capacities indicated below any and all amendments
(including post-effective amendments and amendments thereto) to this
registration statement and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission
and hereby ratify and confirm each and every act and thing that such
attorneys-in-fact, or any of them, or their substitutes, shall lawfully do or
cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Mario Sbarro Chairman of the Board, President November 10, 1999
- ----------------------------------- and Chief Executive Officer
Mario Sbarro (principal executive officer)
/s/ Robert G. Rooney Vice President - Finance and Chief November 10, 1999
- ----------------------------------- Financial Officer (principal
Robert G. Rooney financial officer)
/s/ Anthony Sbarro Director November 10, 1999
- ----------------------------------
Anthony Sbarro
/s/ Joseph Sbarro Director November 10, 1999
- ----------------------------------
Joseph Sbarro
II-5
<PAGE>
/s/ Carmela Sbarro Director November 10, 1999
- -------------------------------
Carmela Sbarro
/s/ Harold L. Kestenbaum Director November 10, 1999
- -----------------------------------
Harold L. Kestenbaum
/s/ Richard A. Mandell Director November 10, 1999
- -----------------------------------
Richard A. Mandell
Director
- -----------------------------------
Paul A. Vatter
Director
- -----------------------------------
Terry Vince
/s/ Bernard Zimmerman Director November 10, 1999
- -----------------------------------
Bernard Zimmerman
</TABLE>
II-6
<PAGE>
CO-REGISTRANT
SIGNATURES
Pursuant to the requirements of the Securities Act, each of the
co-registrants listed on Footnote A hereto certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form S-4
and it has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Melville, State of New
York, on this 9th day of November, 1999.
On behalf of each of the co-registrants
listed on Footnote A hereto
By: /s/ Mario Sbarro
-------------------------
Mario Sbarro
President
POWER OF ATTORNEY
The undersigned directors and officers of each of the co-registrants
listed on Footnote A hereto hereby constitute and appoint Mario Sbarro and
Robert G. Rooney and each of them, with full power to act without the other and
with full power of substitution and resubstitution, our true and lawful
attorneys-in-fact with full power to execute in our name and behalf in the
capacities indicated below any and all amendments (including post-effective
amendments and amendments thereto) to this registration statement and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission and hereby ratify and confirm each
and every act and thing that such attorneys-in-fact, or any of them, or their
substitutes, shall lawfully do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Mario Sbarro President (principal executive November 9, 1999
- -----------------------------------
Mario Sbarro officer) and Director
/s/ Robert G. Rooney Vice President - Finance and Chief November 9, 1999
- -----------------------------------
Robert G. Rooney Financial Officer (principal
financial officer)
/s/ Anthony Sbarro Director November 9, 1999
- -----------------------------------
Anthony Sbarro
/s/ Joseph Sbarro Director November 9, 1999
- -----------------------------------
Joseph Sbarro
</TABLE>
II-7
<PAGE>
CO-REGISTRANT
SIGNATURES
Pursuant to the requirements of the Securities Act, Sbarro Dominion
Limited hereto certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and it has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Melville, State of New York, on this 9th day of
November, 1999.
SBARRO DOMINION LIMITED
By: /s/ Mario Sbarro
-------------------
Mario Sbarro
President
By: /s/ Joseph Sbarro
-------------------
Joseph Sbarro
Secretary
POWER OF ATTORNEY
The undersigned directors and officers of Sbarro Dominion Limited
hereby constitute and appoint Mario Sbarro and Robert G. Rooney and each of
them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below any
and all amendments (including post-effective amendments and amendments thereto)
to this registration statement and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission and hereby ratify and confirm each and every act and thing that such
attorneys-in-fact, or any of them, or their substitutes, shall lawfully do or
cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Name Title Date
- ---- ---- ----
<S> <C> <C>
/s/ Mario Sbarro President (principal executive November 9, 1999
- -----------------------------------
Mario Sbarro officer) and Director
/s/ Robert G. Rooney Vice President - Finance and Chief November 9, 1999
- -----------------------------------
Robert G. Rooney Financial Officer (principal
financial officer)
/s/ Anthony Sbarro Director November 9, 1999
- -----------------------------------
Anthony Sbarro
/s/ Joseph Sbarro Director November 9, 1999
- -----------------------------------
Joseph Sbarro
</TABLE>
II-8
<PAGE>
(A) The following direct or indirect wholly owned subsidiaries of
Sbarro, Inc. are guarantors of the notes and are co-registrants, each of which
is incorporated in the jurisdiction indicated:
Jurisdiction of
Name of Corporation Organization
- ------------------- ------------
Sbarro Properties, Inc.................................. New York
Sbarro America, Inc..................................... New York
Sbarro America Properties, Inc. ........................ New York
Sbarro's of Texas, Inc. ................................ Texas
Italian Food Franchising, Inc. ......................... New York
Corest Management, Inc. ................................ New York
Franrest Management, Inc. .............................. New York
Larkfield Equipment Corp. .............................. New York
Sbarro Foods, Inc. ..................................... New York
Sbarro of Roosevelt Field, Inc. ........................ New York
Sbarro of Virginia, Inc. ............................... Virginia
Demefac Leasing Corp. .................................. New York
Franchise Contracting and Equipment Corp. .............. New York
Melville Advertising Agency Inc. ....................... New York
Sbarro Commack, Inc. ................................... New York
Sbarro of Las Vegas, Inc. .............................. New York
Sbarro of Hawaii, Inc. ................................. New York
Sbarro Pennsylvania, Inc. .............................. Pennsylvania
Sbarro Franchise Associates, Inc. ...................... New York
Sbarro H.D.F., Inc. .................................... New York
N.H.D., Inc. ........................................... New York
Bushranger Holding, Inc. ............................... New York
Melville Pizzeria, Inc. ................................ New York
Sbarro One World Trade, Inc. ........................... New York
401 Broad Hollow Realty Corp. .......................... New York
401 Broad Hollow Fitness Center Corp. .................. New York
Sbarro Bistros, Inc. ................................... New York
Syosset Bistro, Inc. ................................... New York
II-9
<PAGE>
EXHIBIT INDEX
Number Description
- ------ -----------
*2.1 Agreement and Plan of Merger dated as of January 19, 1999 among
the Company, Sbarro Merger LLC, a New York limited liability
company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994)
Family Limited Partnership, Anthony Sbarro, and Mario Sbarro
and Franklin Montgomery, not individually but as trustees under
that certain Trust Agreement dated April 28, 1984 for the
benefit of Carmela Sbarro and her descendants. (Exhibit 2 to
the Company Current Report on Form 8-K dated (date of earliest
event reported) January 19, 1999, File No. 1-8881)
*3.1(a) Restated Certificate of Incorporation of the Company as filed
with the Department of State of the State of New York on March
29, 1985. (Exhibit 3.01 to the Company's Registration Statement
on Form S-1, File No. 2- 96807)
*3.1(b) Certificate of Amendment to the Company's Restated Certificate
of Incorporation as filed with the Department of State of the
State of New York on April 3, 1989. (Exhibit 3.01(b) to the
Company's Annual Report on Form 10-K for the year ended January
1, 1989, File No. 1-8881)
*3.1(c) Certificate of Amendment to the Company's Restated Certificate
of Incorporation as filed with the Department of State of the
State of New York on May 31, 1989. (Exhibit 4.01 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 23, 1989, File No. 1-8881)
*3.1(d) Certificate of Amendment to the Company's Restated Certificate
of Incorporation as filed with the Department of State of the
State of New York on June 1, 1990. (Exhibit 4.01 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 22, 1990, File No. 1-8881)
*3.2 By-Laws of the Company, as amended. (Exhibit 4.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 21, 1996, File No. 1-8881)
*4.1 Indenture dated as of September, 28, 1999 among the Company,
the Restricted Subsidiaries of the Company named therein, as
guarantors, and Firstar Bank, N.A., including the form of 11%
Senior Notes of the Company to be issued upon consummation of
the Exchange Offer and the form of Senior Guarantees of the
Guarantors. (Exhibit 4.1 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) September 23,
1999, File No. 1-8881)
*4.2 Credit Agreement dated as of September 23, 1999 among the
Company, European American Bank, as agent, and the Lenders
party thereto (Exhibit 4.2 to the Company's Current Report on
Form 8-K dated (date of earliest event reported) September 23,
1999, File No. 1-8881)
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP
*10.1 Commack, New York Corporate Headquarters Sublease. (Exhibit
10.04 to the Company's Registration Statement on Form S-1, File
No. 2-96807)
+*10.2 The Company's Performance Incentive Plan. (Exhibit A to the
Company's Proxy Statement dated April 29, 1997, File No.
1-8881)
+*10.3 Consulting Agreement (including option) dated June 3, 1985
between the Company and Bernard Zimmerman & Company, Inc.
(Exhibit 10.04 to the Company's Annual Report on Form 10-K for
the year ended January 1, 1989, File No. 1-8881)
+*10.4 Form of Indemnification Agreement between the Company and each
of its directors and officers. (Exhibit 10.04 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1989, File No. 1-8881)
*10.5 Registration Rights Agreement dated as of September 28, 1999
among the Company, the Guarantors named therein and Bear,
Stearns & Co. Inc. (Exhibit 10.1 to the Company's Current
Report on Form 8-K dated (date of earliest event reported)
September 23, 1999, File No. 1-8881)
<PAGE>
Number Description
- ------ -----------
10.6 Tax Payment Agreement dated as of September 28, 1999 among the
Company, Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994)
Family Limited Partnership, Anthony Sbarro, and Mario Sbarro
and Franklin Montgomery, not individually but as Trustees under
that certain Trust Agreement dated April 28, 1984 for the
benefit of Carmela Sbarro and her descendants
12.1 Statement of computation of earnings to fixed charges
*21.1 List of subsidiaries (Exhibit 21.01 to the Company's Annual
Report on Form 10-K for the year ended January 3, 1999, File
No. 1-8881)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in
Exhibit 5.1 above) 24.1 Powers of Attorney (included as part of
the signature pages hereto)
25.1 Form T-1 Statement of Eligibility of Trustee
99.1 Form of Letter of Transmittal relating to the Exchange Offer
99.2 Form of Notice of Guaranteed Delivery relating to the Exchange
Offer
99.3 Form of Letter to Registered Holders and DTC Participants
relating to the Exchange Offer
99.4 Form of Letter to Clients relating to the Exchange Offer
99.5 Form of Instructions to Registered Holder and/or Book-Entry
Transfer Participant from beneficial owner relating to the
Exchange Offer
---------------
* Incorporated by reference to the document indicated.
+ Management contract or compensatory plan.
Exhibit 5.1
-----------
November 8, 1999
Sbarro, Inc.
Subsidiary Guarantors Listed on Schedule A hereto
401 Broadhollow Road
Melville, New York 11747
Ladies and Gentlemen:
We are acting as special counsel to Sbarro, Inc., a New York
corporation (the "Company"), and each of the subsidiaries of the Company listed
on Schedule A hereto (the "Subsidiary Guarantors") in connection with a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
proposed exchange of up to $255,000,000 in principal amount of 11% Senior Notes
due 2009 being registered under the Registration Statement (the "New Notes") for
the same principal amount of the Company's issued and outstanding Senior Notes
due 2009 (the "Old Notes"). The Old Notes were issued, and New Notes are to be
issued, pursuant to the Indenture, dated September 28, 1999 (the "Indenture"),
between the Company and Firstar Bank, N.A. (the "Trustee"). The Company's
payment obligations under the New Notes will be jointly and severally guaranteed
by the Subsidiary Guarantors (the "Guarantees").
In connection with the foregoing, we have examined, among other things,
the Registration Statement, the Indenture being filed as Exhibit 4.1 to the
Registration Statement, the form of the New Notes and original or copies of all
such corporate records and of all such agreements, certificates and other
documents as we have deemed relevant and necessary as a basis for the opinions
hereinafter expressed.
In addition, we have made such other investigations of applicable law
as we deemed necessary to enable us to provide you with the opinions hereafter
expressed. In conducting our examination, we have assumed the genuineness of all
signatures, the legal capacity of all individual signatories, the accuracy of
all documents submitted to us as originals and the conformity to originals of
all documents submitted to us as copies. In addition, we have assumed and
without independent investigation have relied upon the factual accuracy of the
representations, warranties and other information contained in the items we
examined and upon the assumptions we have made in this opinion. As to any facts
material to the opinions hereafter expressed that were not independently
established or verified, we have relied upon the statements or certificates of
officers of the Company, the Guarantors, public officials and others.
<PAGE>
Sbarro Inc.
Subsidiary Guarantors Listed on Schedule A hereto
We have assumed that the Trustee has the requisite power and authority
to enter into and perform its obligations under the Indenture, that the
Indenture has been duly authorized, executed and delivered by the Trustee, and
that the Indenture constitutes a legal, valid and binding obligation of the
Trustee enforceable against the Trustee in accordance with its terms.
Based upon the foregoing, and subject to the limitations,
qualifications and assumptions set forth herein, we are of the opinion that:
(1) When the Registration Statement has become effective under the
Securities Act of 1933, as amended (the "Securities Act"), the New Notes have
been duly executed by the Company and duly authenticated by the Trustee and the
New Notes have been issued in exchange for the Old Notes in accordance with the
terms of the Indenture, then the New Notes will constitute valid and binding
obligations of the Company; and
(2) When the Registration Statement has become effective under the
Securities Act, the New Notes have been duly executed by the Company and duly
authenticated by the Trustee and the New Notes have been issued in exchange for
the Old Notes in accordance with the terms of the Indenture, then the Guarantees
will constitute valid and binding obligations of the Subsidiary Guarantors as to
the New Notes in accordance with the terms of the Guarantees.
Our opinions above are subject to the following:
A. (i) Applicable bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to creditors' rights generally, (2) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in equity) and
(3) the exercise of the discretionary power of any court or other authority
before which may be brought any proceeding seeking equitable or other remedies.
B. We express no opinion as to the enforceability of the waiver
provisions contained in Section 4.06 of the Indenture.
C. We have assumed that neither the Company nor any Subsidiary
Guarantor will take any action that would result in any violation of, or
conflict with, or otherwise abrogate their respective obligations to consummate
the transactions relating to or contemplated by the Registration Statement or
the Indenture.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the caption
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
In giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act.
We are counsel admitted to practice only in the State of New York and
we express no opinion as to the applicable laws of any jurisdiction other than
those of the State of New York
-2-
<PAGE>
Sbarro Inc.
Subsidiary Guarantors Listed on Schedule A hereto
and the federal laws of the United States of America. We note that certain of
the Guarantors were incorporated in jurisdictions other than the State of New
York. For the purposes of this opinion, we have assumed that the applicable laws
of such jurisdictions are the same as the applicable laws of the State of New
York. The opinions expressed herein are given as of the date hereof and we
undertake no obligations to supplement this letter if any applicable law changes
after the date hereof or if we become aware of any facts that might change the
opinions expressed herein after the date hereof or for any other reason.
Very truly yours,
/s/ PARKER CHAPIN FLATTAU & KLIMPL, LLP
PARKER CHAPIN FLATTAU & KLIMPL, LLP
-3-
<PAGE>
Sbarro Inc.
Subsidiary Guarantors Listed on Schedule A hereto
SCHEDULE A
----------
Jurisdiction of
Name of Corporation Organization
- ------------------- ---------------
Sbarro Properties, Inc. New York
Sbarro America, Inc. New York
Sbarro America Properties, Inc. New York
Sbarro's of Texas, Inc. Texas
Italian Food Franchising, Inc. New York
Corest Management, Inc. New York
Franrest Management, Inc. New York
Larkfield Equipment Corp. New York
Sbarro Foods, Inc. New York
Sbarro of Roosevelt Field, Inc. New York
Sbarro of Virginia, Inc. Virginia
Demefac Leasing Corp. New York
Franchise Contracting and Equipment Corp. New York
Melville Advertising Agency Inc. New York
Sbarro Commack, Inc. New York
Sbarro Dominion Limited New Brunswick, Canada
Sbarro of Las Vegas, Inc. New York
Sbarro of Hawaii, Inc. New York
Sbarro of Pennsylvania, Inc. Pennsylvania
Sbarro Franchise Associates, Inc. New York
Sbarro H.D.F., Inc. New York
N.H.D., Inc. New York
Bushranger Holding, Inc. New York
Melville Pizzeria, Inc. New York
Sbarro One World Trade, Inc. New York
401 Broad Hollow Realty Corp. New York
401 Broad Hollow Fitness Center Corp. New York
Sbarro Bistros, Inc. New York
Syosset Bistro, Inc. New York
-4-
EXHIBIT 10.6
TAX PAYMENT AGREEMENT (as same may be amended, modified, supplemented
or restated from time to time, this "Agreement"), dated as of September 28,
1999, among Sbarro, Inc., a New York corporation (the "Company"), and Mario
Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership (the
"Partnership"), Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not
individually but as trustees under that certain Trust Agreement dated April 28,
1984 for the benefit of Carmela Sbarro and her descendants.
WHEREAS, the Company may elect to be taxed under the provisions of
Subchapter S of the Code (as hereinafter defined) and comparable provisions of
applicable state and local law, commencing as early as the Company's fiscal year
2000, and may make distributions to the Shareholders (as hereinafter defined) in
order to facilitate their payment of income taxes that will be borne by them as
a result of that election; and
WHEREAS, the Indenture (as hereinafter defined) contains a limitation
on the amount of "Restricted Payments" that may be made by the Company, but
contemplates that, notwithstanding such limitation, the Company may make "Tax
Distributions" (as defined in the Indenture), in respect of periods for which
the Company is an S Corporation (as hereinafter defined); and
WHEREAS, the parties hereto desire to set forth such terms and
conditions;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Agreement
hereby agree as follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following meanings:
(a) "Annual Tax Payment Date" with respect to a taxable year of
an Individual means the due date for an Individual's federal income tax return
for such taxable year (without regard to any extension of time).
(b) "Applicable Percentage" with respect to an Estimated Tax
Payment Date is determined as follows:
Number of the Estimated Tax Payment Date Applicable
with respect to an Individual's taxable year Percentage
-------------------------------------------- ----------
1st 25%
2nd 50%
3rd 75%
4th 100%
<PAGE>
(c) "Applicable Period" with respect to an Estimated Tax Payment
Date is determined as follows:
Number of the Estimated Tax Payment Date Applicable
with respect to an Individual's taxable year Period
- -------------------------------------------- ------
1st 1st two 4-week periods of
the Company ending in
such taxable year
2nd 1st five 4-week periods of
the Company ending in
such taxable year
3rd 1st eight 4-week
periods of the
Company ending in
such taxable year
4th 1st twelve 4-week
periods of the
Company ending in
such taxable year
(d) "Capital Gain Rate" with respect to a particular class of Net
Capital Gains means the aggregate of the maximum marginal federal and New York
State income tax rates (including any surcharge thereon) imposed on such class
of Net Capital Gains of an Individual for the period to which the computation
relates (which period in the case of the computation with respect to an
Estimated Tax Payment Date shall be the Applicable Period), which shall be
reduced to take into account the deductibility of New York State income taxes
against ordinary income for federal income tax purposes (computed by assuming
that such deduction, if any, will be subject to any phase-out therefor under the
Code (i) based solely on (A) the taxable income of the Company for federal
income tax purposes, including amounts required to be separately stated, reduced
by the amount, if any, of Company-level tax imposed under Sections 1374 and/or
1375 of the Code (to the extent not otherwise taken into account in determining
taxable income), for the period to which the computation relates (as annualized
in accordance with paragraph 2 of this Agreement), and (B) the New York State
income tax thereon at the maximum marginal rates for an Individual and (ii)
assuming the Individual is in the maximum marginal federal ordinary income tax
bracket).
(e) "Carryforward Capital Loss" or Carryforward Ordinary Loss"
means, with respect to a taxable period, the aggregate Net Capital Losses or
Ordinary Losses, as the case may be, for all prior taxable years in which the
Company was an S Corporation, to the extent such Net Capital Losses or Ordinary
Losses, as the case may be, were not previously taken into account by reducing
the aggregate amount of payments or distributions (net of required repayments)
in respect of a prior taxable year under this Agreement.
-2-
<PAGE>
(f) "Code" means the U.S. Internal Revenue Code of 1986, as
amended and as the same may be amended from time to time and any successor
thereto. Any reference to a Code section, Chapter or Subchapter shall mean such
section, Chapter or Subchapter of the Code as the same may be amended and any
successor provision thereto.
(g) "Estimated Tax Payment Date" means each date by which an
Individual is required to pay estimated federal income tax with respect to a
taxable year of the Individual (determined without regard to whether estimated
tax payments are required to be made by any particular Shareholder and assuming
estimated tax payments are required to be paid by the Individual).
(h) "Indenture" means that certain Indenture of even date
herewith among the Company, various subsidiaries of the Company who are
guarantors thereunder and FIRSTAR Bank, as trustee, pursuant to which the
Company is initially issuing Notes.
(i) "Individual" means a hypothetical natural person who is a
shareholder of the Company, who is a resident of New York State (but not New
York City or Yonkers) and who uses the calendar year as his taxable year. This
definition is solely for purposes of making the calculations of payments or
distributions (or repayments) under this Agreement and shall not be deemed to
imply that any particular Shareholder is a natural person or resident of New
York State.
(j) "Net Capital Gain" (if positive) and "Net Capital Loss" (if
negative) for a taxable period means (i) the "net capital gain" or "net capital
loss", respectively, of the Company within the meaning of Section 1222 of the
Code, including amounts required to be separately stated, computed without
regard to any carryforward of any net operating loss or capital loss from a
prior taxable year, minus (ii) the amount, if any, of Company-level tax imposed
under Sections 1374 and/or 1375 of the Code with respect to such Net Capital
Gain (to the extent not otherwise taken into account in computing "net capital
gain" or "net capital loss"). Net Capital Gain for a taxable period shall not
exceed the taxable income of the Company for such period. A class of Net Capital
Gain shall refer to items of "net capital gain" under Section 1222 of the Code
that are subject to a particular federal income tax rate.
(k) "Notes" has the meaning ascribed to such term in the
Indenture.
(l) "Ordinary Income" (if positive) and "Ordinary Loss" (if
negative) for a taxable period means (i) the taxable income or taxable loss of
the Company for federal income tax purposes for such taxable period, including
amounts required to be separately stated, computed without regard to any item
included in determining Net Capital Gain or Net Capital Loss and without regard
to any carryforward of any net operating loss or capital loss from a prior
taxable year, (ii) minus the amount, if any, of Company-level tax imposed under
Sections 1374 and/or 1375 of the Code with respect to such taxable income (to
the extent not otherwise taken into account under clause (i)). The amount of
Ordinary Loss for a taxable period shall be reduced
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by the amount, if any, by which Net Capital Gain for such period is reduced as a
result of the penultimate sentence of the definition of Net Capital Gain.
(m) "Ordinary Rate" means the aggregate of the maximum marginal
federal and New York State income tax rates (including any surcharge thereon)
imposed on the ordinary taxable income of an Individual for the period to which
the computation relates (which period in the case of the computation with
respect to an Estimated Tax Payment Date shall be the Applicable Period), which
shall be reduced to take into account the deductibility of New York State income
taxes for federal income tax purposes (computed by assuming that such deduction,
if any, will be subject to any phase-out therefor under the Code (i) based
solely on (A) the taxable income of the Company for federal income tax purposes,
including amounts required to be separately stated, reduced by the amount, if
any, of Company-level tax imposed under Section 1374 and/or 1375 of the Code (to
the extent not otherwise taken into account in determining taxable income), for
the period to which the computation relates (as annualized in accordance with
paragraph 2 of this Agreement and (B) the New York State income tax thereon at
the maximum marginal rates for an Individual and (ii) assuming the Individual is
in the maximum marginal federal ordinary income tax bracket).
(n) "Person" means an individual, a partnership, a joint venture,
a corporation, a limited liability company, a trust, an estate, an
unincorporated organization or a government or any department or agency thereof.
(o) "S Corporation" means a corporation that is treated as an "S
corporation" for federal income tax purposes.
(p) "Shareholders" means the holders of record of shares of
capital stock of the Company, as set forth on the stock records of the Company
on the applicable date as of which Shareholders are determined.
(q) "Tax Return Date" with respect to a taxable year of the
Company means the date on which the federal income tax return of the Company for
such taxable year is filed.
(r) "Trustee" means the trustee under the Indenture.
2. Estimated Tax Payment Distributions. Within 30 days before each
Estimated Tax Payment Date, the Chief Financial Officer of the Company shall:
(a) determine the Ordinary Income or Ordinary Loss and Net
Capital Gain or Net Capital Loss and, in the event of Net Capital Gain, the
amount of each class of Net Capital Gain, for the Applicable Period to which the
Estimated Tax Payment Date relates, which (i) in the case of Ordinary Income or
Net Capital Gain shall be reduced (but not below zero) by the Carryforward
Ordinary Loss or Carryforward Net Capital Loss, respectively, if any and (ii) in
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the case of Net Capital Gain, shall be further reduced (but not below zero) by
any remaining Carryforward Ordinary Loss (after application under clause (i));
(b) annualize each of the amounts determined under clause (a) by
dividing each such amount by the number of weeks in the Applicable Period and
multiplying the result by the number of weeks in the taxable year of the Company
that ends (or is deemed to end) with or within the Individual's taxable year to
which the Estimated Tax Payment Date relates;
(c) multiply the annualized amount of Ordinary Income determined
under clause (b) by the Ordinary Rate and by the Applicable Percentage with
respect to the Estimated Tax Payment Date, and for each class of Net Capital
Gain multiply the portion of the annualized amount of Net Capital Gain with
respect to such class by the applicable Capital Gain Rate with respect to such
class and by the Applicable Percentage with respect to the Estimated Tax Payment
Date;
(d) add the products determined under clause (c) and reduce such
amount (but not below zero) by the aggregate amount of any prior distributions
made pursuant to this Agreement with respect to the taxable year of an
Individual to which the Estimated Tax Payment Date relates.
Not earlier than 10 days before, and not later than 10 days after, each
Estimated Tax Payment Date, the Company may pay or distribute to or for the
benefit of the Shareholders in cash an aggregate amount up to the amount
determined under clause (d) with respect to such Estimated Tax Payment Date.
3. Annual Tax Payment Distribution. Within 30 days before each Annual
Tax Payment Date, the Chief Financial Officer of the Company shall determine the
Ordinary Income or Ordinary Loss and Net Capital Gain or Net Capital Loss and,
in the event there is Net Capital Gain, the amount of each class of Net Capital
Gain, for the taxable year of the Company that ends (or is deemed to end) with
or within the Individual's taxable year to which the Annual Tax Payment Date
relates. Not earlier than 10 days before, and not later than 10 days after, an
Annual Tax Payment Date, the Company may pay or distribute to or for the benefit
of the Shareholders in cash an aggregate amount up to the excess, if any, of (a)
the sum of (i) the product of such Ordinary Income for such taxable year,
reduced (but not below zero) by the Carryforward Ordinary Loss, if any, and
multiplied by the Ordinary Rate, and (ii) the product of each class of Net
Capital Gain for such taxable year, reduced (but not below zero) by the
applicable Carryforward Net Capital Loss, if any, and by any Carryforward
Ordinary Loss (to the extent not taken into account in clause (i) above) and
multiplied by the applicable Capital Gain Rate with respect to such class, over
(b) the aggregate amount of any prior payments or distributions made to or for
the benefit of the Shareholders pursuant to this Agreement with respect to such
taxable year.
4. Adjustment for Under and Excess Distributions. Not earlier than the
date on which the certificate of the Company's certified independent accountants
required pursuant to
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Section 4.14(d)(iv) of the Indenture is given to the Trustee, and not later than
10 days thereafter, the Company may pay or distribute to or for the benefit of
the Shareholders in cash an aggregate amount up to the excess, if any, of the
amount that would be determined under clause (a) of paragraph 3 of this
Agreement over the amount that would be determined under clause (b) of paragraph
3 of this Agreement, in each case utilizing the Ordinary Income and Net Capital
Gains reflected on the Company's federal income tax return filed with respect to
the taxable year of the Company to which such Tax Return Date relates and taking
into account any additional payments or distributions that were made pursuant to
this Agreement with respect to such taxable year. If the amount so determined
under clause (b) of paragraph 3 of this Agreement exceeds the amount so
determined under clause (a) of paragraph 3 of this Agreement, the Company shall
promptly notify each Shareholder of such excess payment or distribution,
including a calculation of such excess and the portion thereof related to the
shares owned by such Shareholder (as determined by the Company through the Board
of Directors whose determination shall be conclusive and binding on the
parties), and each Shareholder shall repay to the Company such portion of the
excess as is related to the shares owned by such Shareholder in cash within 75
days from the date of such notice, plus an amount equal to interest thereon at
the overpayment rate under Section 6621 of the Code from the due date of such
repayment to the date of repayment. Subsequent payments or distributions to or
for the benefit of the Shareholders pursuant to this Agreement shall be reduced
by the aggregate amount, if any, required to be repaid to the Company pursuant
to the preceding sentence that has not been repaid. The Company may offset any
payment or distribution hereunder to or for the benefit of a Shareholder against
the amount such Shareholder is required to repay to the Company that has not
been repaid by such Shareholder. If (a) payments or distributions to or for the
benefit of Shareholders pursuant to this Agreement have been reduced pursuant to
the third sentence of paragraph 4 or the third sentence of paragraph 5 by an
amount required to be repaid by a Shareholder that has not been repaid and (b)
(i) subsequent to such reduction such Shareholder repays such amount to the
Company or (ii) subsequent to or after giving effect to such reduction such
amount is offset against any payment or distribution pursuant to this Agreement
to or for the benefit of such Shareholder, the Company may make additional
distributions pursuant to this Agreement to or for the benefit of the
Shareholders in an amount equal to the amount so repaid or offset (in each case,
exclusive of amounts measured by interest), provided that at no time shall the
aggregate payments or distributions to or for the benefit of Shareholders
pursuant to this Agreement (net of repayments and amounts required to be repaid
(in each case, exclusive of amounts measured by interest)) exceed the aggregate
amount (net or repayments and amounts required to be repaid (in each case,
exclusive of amounts measured by interest)) that would have been paid or
distributed to or for the benefit of Shareholders pursuant to this Agreement if
such Shareholder had not defaulted in such Shareholder's obligations to repay
any amount to the Company pursuant to this Agreement.
5. Effects of Tax Calculation Changes. If the Company's Ordinary Income
or any Net Capital Gain as reflected on its tax return for any taxable year in
which the Company is an S Corporation (or any portion of such year) is changed
for any reason, including as a result of an amended tax return or audit, the
Company may pay or distribute to or for the benefit of the Shareholders in cash
not later than 30 days after such change is determined an aggregate amount
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up to the sum of (a) the excess, if any, of the amount that would be determined
under clause (a) of paragraph 3 of this Agreement over the amount that would be
determined under clause (b) of paragraph 3 of this Agreement, in each case
utilizing such adjusted Ordinary Income or Net Capital Gain and taking into
account any additional payments or distributions that were made pursuant to this
Agreement with respect to such taxable year and any repayments of distributions
pursuant to this Agreement with respect to such taxable year, plus (b) interest
thereon at the underpayment rate under Section 6621 of the Code from the Annual
Tax Payment Date for such taxable year to the date of payment and any penalty
imposed to the extent the penalty relates to any item from the Company. If the
amount so determined under clause (b) of paragraph 3 of this Agreement exceeds
the amount so determined under clause (a) of paragraph 3 of this Agreement, the
Company shall promptly notify each Shareholder of such excess payment or
distribution, including a calculation of such excess and the portion thereof
related to the shares owned by such Shareholder (as determined by the Company
through the Board of Directors, whose determination shall be conclusive and
binding on the parties) and each Shareholder shall repay to the Company such
portion of the excess payment or distribution as is related to the shares owned
by such Shareholder in cash within 75 days from the date of notice thereof from
the Company, plus an amount equal to interest thereon at the overpayment rate
under Section 6621 of the Code from the later of (i) April 15 of the year
following the calendar year to which the repayment relates or (ii) the date on
which the payment or distribution causing the overpayment was made, to the date
of repayment. Subsequent payments or distributions to or for the benefit of the
Shareholders pursuant to this Agreement shall be reduced by the aggregate
amount, if any, required to be repaid to the Company pursuant to the preceding
sentence that has not been repaid. The Company may offset any payment or
distribution hereunder to or for the benefit of a Shareholder against the amount
such Shareholder is required to repay to the Company that has not been repaid by
such Shareholder.
6. Effects of S Corporation Cessation. The provisions of this Agreement
providing for payments or distributions by the Company to or for the benefit of
Shareholders shall apply only in respect of periods for which the Company is an
S Corporation. If the Company ceases to be an S Corporation, the Company shall
promptly notify each Shareholder of any payments or distributions to or for the
benefit of the Shareholders that were made hereunder with respect to periods
following the date the Company ceased to be an S Corporation, including a
calculation of such amount and the portion thereof related to the shares owned
by such Shareholder (as determined by the Company through the Board of
Directors, whose determination shall be conclusive and binding on the parties)
and each Shareholder shall repay to the Company such portion of such amount as
is related to the shares owned by such Shareholder in cash within 75 days from
the date of notice thereof from the Company, plus an amount equal to interest
thereon at the overpayment rate under Section 6621 of the Code from April 15 of
the years following the year to which such repayments relate to the date of
repayment. All repayments by Shareholders pursuant to paragraphs 4, 5 or 6 of
this Agreement (including any amounts measured by interest thereon as set forth
in such paragraphs) shall be deemed to be contributions to the capital of the
Company.
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7. Company Covenants with Respect to S Corporation Election. The
Company has covenanted in the Indenture that: (a) if it elects to be treated as
an S Corporation, (i) it will elect to be treated as an "S corporation" or its
equivalent for state and local income tax purposes and (ii) with respect to each
of the Company's subsidiaries as to which the Company makes a valid "qualified
subchapter S subsidiary" election under Section 1361(b)(3) of the Code, the
Company will make an equivalent election for state and local income tax
purposes, in each case in each state and locality in which the Company does
business that permits such an election, for the earliest possible tax year, and
(b) except in connection with the termination of the Company's status as an S
Corporation, the Company shall not take any action which it knows would
terminate any election made to be treated as an "S corporation" or its
equivalent for state or local income tax purposes, or for one or more of its
subsidiaries to be treated as a "qualified subchapter S subsidiary" or its
equivalent for state or local income tax purposes. If the Company fails to
qualify as an "S corporation" or its equivalent, or if a subsidiary of the
Company fails to be treated as a "qualified subchapter S subsidiary" or its
equivalent, for state or local income tax purposes for any reason (including
failing to elect to be treated as an "S corporation" or its equivalent or as a
"qualified subchapter S subsidiary" or its equivalent) in any jurisdiction that
permits such characterization for any taxable year in which the Company is an S
Corporation, subsequent payments or distributions to or for the benefit of the
Shareholders pursuant to this Agreement shall be reduced (but not below zero) by
an aggregate amount equal to the amount of the increase, if any, in the
Company-level income taxes (including state and local taxes) for such taxable
year as a result of the failure to so qualify.
8. Tax Withholding. The Company shall withhold and timely pay over to
the appropriate taxing authority any income taxes required to be withheld from
payments or distributions made to or for the benefit of Shareholders pursuant to
this Agreement. The Company may elect to file one or more composite income tax
returns where permitted under applicable state or local law, in lieu of the
Shareholders filing individual income tax returns and may pay the tax shown to
be due on such returns. The Company may pay to the appropriate taxing authority
any income tax required to be paid by the Company on behalf of such Shareholders
to such taxing authorities. Payments pursuant to either of the two immediately
preceding sentences shall be treated as payments or distributions to or for the
benefit of such Shareholders pursuant to this Agreement. Subsequent payments or
distributions to or for the benefit of the Shareholders pursuant to this
Agreement shall be reduced by the aggregate amount by which the payments taken
into account pursuant to the immediately preceding sentence exceed the amounts
that would otherwise be paid or distributed pursuant to this Agreement. The
Company may offset any payment or distribution hereunder to or for the benefit
of a Shareholder against the benefit received by such Shareholder pursuant to
this paragraph 8 (to the extent not previously offset).
9. Change in Estimated Tax Laws or the Company's Fiscal Year. In the
event there is a change in the manner, timing or amount of an Individual's
required payments of estimated tax under the Code or applicable New York State
law, or a change in the Company's taxable year to the calendar year, the
payments and distributions permitted under this Agreement shall be adjusted to
take into account such changes in such fashion as may reasonably be
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determined in good faith by the Board of Directors of the Company to permit the
Company to make payments and distributions to or for the benefit of the
Shareholders that would enable an Individual to pay his estimated tax amounts
with respect to items of or relating to the Company without incurring any
interest, addition to tax or penalty (to the same extent contemplated by this
Agreement with respect to current law). All such reasonable determinations made
in good faith by the Board of Directors shall be binding upon all parties to
this Agreement.
10. Change to Partnership Status. The Company may convert from an S
Corporation to an entity taxable as a partnership for federal income tax
purposes, provided such conversion is not otherwise prohibited by the Indenture
(without regard to this Agreement). The Company shall pay any Company-level tax
imposed with respect to such conversion. Subsequent payments or distributions to
or for the benefit of the Shareholders pursuant to this Agreement shall be
reduced by an aggregate amount equal to the amount of the Company-level income
tax payable with respect to such conversion. References in this Agreement to S
Corporation shall include the Company following such conversion, so long as it
is classified as a partnership for federal income tax purposes.
11. Term.
This Agreement shall commence on the date hereof and terminate when
agreed to in a writing signed by or on behalf of (under proper authorization)
Shareholders owning shares of capital stock of the Company possessing at least
80% of the voting power in the election of directors of all capital stock of the
Company, except that the obligations of Shareholders to make any repayments
pursuant to paragraphs 4, 5 and 6 of this Agreement (including any amounts
measured by interest thereon as set forth in such paragraphs) shall survive such
termination.
12. Future Transferees.
(a) To enable the Company to elect to be taxed as an S Corporation, the
Partnership agrees that, on or before December 31, 1999 (or such later date as
the Company, acting through its Board of Directors, may establish), the
Partnership shall transfer all of the shares of the Company's capital stock
owned by it to one or more (but no more than four in addition to Joseph Sbarro)
Persons, each of whom is, and will continue to be, eligible to be a shareholder
of an S Corporation.
(b) The Shareholders agree not to, from the date hereof through March
15, 2002 (or such earlier date as the Company through its Board of Directors
affirmatively determines that it will not make an election before March 15, 2002
to be treated as an S Corporation), and during any period during which the
Company is an S Corporation, transfer (whether by sale, gift, inheritance,
bequest or otherwise), nor agree to transfer nor grant to any Person a right to
receive any capital stock of the Company, nor take any other action, if such
transfer, grant or other action would cause the Company to be ineligible to be,
or to cease being, an S Corporation, and any such transfer or grant shall be
null and void ab initio and shall not be recognized by the Company.
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(c) Any Person purchasing or otherwise acquiring (by gift, inheritance,
bequest, purchase or otherwise) any capital stock of the Company from any
Shareholder, by accepting it, shall be deemed to be a party to this Agreement
and subject to all of the covenants, terms and conditions of this Agreement as
if such Person signed this Agreement. Promptly (but in any case within 10
business days) after such acquisition, such Person shall execute and deliver to
the Company an agreement in substantially the form annexed to this Agreement as
Exhibit "A" in which such new Shareholder agrees, among other things, to be
fully bound by, and subject to, all of the covenants, terms and conditions of
this Agreement and to be deemed a Shareholder hereunder for all purposes hereof
(the "Joinder Agreement"), but the failure of such Person to so execute and
deliver a Joinder Agreement shall not affect such Person's agreement under the
immediately preceding sentence or otherwise under this Agreement.
(d) Following receipt of notice from the Company that the Company will
elect to be treated as an "S corporation" for federal income tax purposes, each
Shareholder shall timely consent to such election and to timely elect or consent
to any other election as contemplated by Section 4.14 of the Indenture.
(e) Any Person who acquires shares of the Company's capital stock from
a transferor-Shareholder shall be obligated to make any repayments that would be
required to be made under this Agreement with respect to payments or
distributions made with respect to the shares so acquired.
(f) Each Shareholder acknowledges and agrees that, with respect to
periods for which the Company is an S Corporation, such Shareholder may be
liable for taxes with respect to items from the Company in excess of the
payments or distributions made to or for the benefit of such Shareholder
pursuant to this Agreement.
(g) The Shareholders acknowledge and agree that, if any Shareholder (a
"Defaulting Shareholder") fails to timely make any repayments pursuant to
paragraphs 4, 5 and 6 of this Agreement (including any amounts measured by
interest thereon as set forth in such paragraphs), such failure could result in
a Default and Event of Default under (i) the Indenture and/or (ii) other loan
arrangements to which the Company or its subsidiaries may from to time be a
party. Accordingly, in the event of such failure, the Defaulting Shareholder
authorizes each other Shareholder (none of whom shall be obligated to) to pay to
the Company, on behalf of the Defaulting Shareholder, any or all of the amount
owed by the Defaulting Shareholder to the Company pursuant to this Agreement.
The amount so paid to the Company on behalf of a Defaulting Shareholder shall be
a loan to the Defaulting Shareholder from the Shareholder(s) making such advance
and a capital contribution by the Defaulting Shareholder to the Company. Each
such loan shall be payable upon demand and shall bear interest at the prime rate
in effect from time to time as announced by European American Bank, plus 5%. All
costs of collection of such loans, including without limitation reasonable
attorneys' fees, shall be borne by the Defaulting Shareholder.
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(h) Nothing herein shall be construed as limiting the ability of any
Shareholders (including a transferor and transferee of shares of capital stock
of the Company) from entering into agreements among themselves relating to their
shares of capital stock in the Company. The Company shall not be bound by any
such agreement, but shall be a third party beneficiary thereof.
13. Legends. Each certificate representing shares of capital stock of
the Company held by any Shareholder shall be imprinted with a legend in
substantially the following form:
"THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO A TAX PAYMENT
AGREEMENT (A COPY OF WHICH IS ON FILE WITH
THE SECRETARY OF THE COMPANY). THE
HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE
OF THIS CERTIFICATE, AGREES TO BE BOUND BY
ALL OF THE PROVISIONS OF SUCH TAX PAYMENT
AGREEMENT."
14. Amendments and Waivers.
(a) The provisions of this Agreement may only be amended in a
writing signed (i) by or on behalf of (under proper authorization) Shareholders
owning shares of capital stock of the Company possessing at least 80% of the
voting power in the election of directors of all capital stock of the Company
and (ii) by an officer of the Company authorized to do so by its Board of
Directors; provided, however, that no amendment may reduce the obligations of
the Shareholders to make any repayments pursuant to paragraphs 4, 5 and 6 of
this Agreement (including any amounts measured by interest thereon as set forth
in such paragraphs), other than in connection with an public offering of common
stock of the Company to provide that the Shareholders who immediately prior to
the consummation of such public offering are (or if the liability were
determined at such time, would be) liable to make such repayments shall continue
to be the sole Shareholders obligated to make repayments after the public
offering.
(b) A waiver of any provision of this Agreement shall be
effective (i) if against the Shareholders generally, only if authorized by
action taken in writing by or on behalf of (under proper authorization)
Shareholders then owning of record shares of capital stock of the Company
possessing at least 80% of the voting power in the election of directors of all
capital stock of the Company or (ii) if against the Company, only if in writing
executed by an officer authorized to do so by the Company's Board of Directors;
provided, however, that so long as any Notes remain outstanding, no waiver shall
reduce the obligations of the Shareholders to make any repayments pursuant to
paragraphs 4, 5 and 6 of this Agreement (including any amounts measured by
interest thereon as set forth in such paragraphs), other than in connection with
an public offering of common stock of the Company to provide that the
Shareholders who immediately prior to the consummation of such public offering
are (or if the liability were
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determined at such time, would be) liable to make such repayments shall continue
to be the sole Shareholders obligated to make repayments after the public
offering. Any waiver granted shall not operate as a waiver of or with respect to
any subsequent or other failure. The failure of any party to enforce any
provision of this Agreement shall in no way be construed as a waiver of such
provision and shall not affect the right of such party to thereafter enforce
each and every provision of this Agreement in accordance with its terms.
15. Successors and Assigns. This Agreement shall be binding upon, and
shall inure to the benefit of and be enforceable by, the parties hereto and
their respective heirs, beneficiaries, distributees, executors, administrators,
successors and assigns. This Agreement covers all shares of the capital stock of
the Company, whether owned at the time a Shareholder becomes a party to this
Agreement or thereafter acquired in any manner.
16. Severability. Whenever possible, each provision of this Agreement
will be interpreted in such a manner as to be effective and valid under
applicable law. The parties agree that (a) the provisions of this Agreement
shall be severable in the event that any of the provisions hereof are held by a
court of competent jurisdiction to be invalid, void or otherwise unenforceable,
(b) such invalid, void or otherwise unenforceable provisions shall be
automatically replaced by other provisions which are as similar as possible in
terms to such invalid, void or otherwise unenforceable provisions but are valid
and enforceable and (c) the remaining provisions shall remain enforceable to the
extent permitted by law.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all such
counterparts taken together shall constitute one and the same agreement. It
shall not be necessary, in making proof of this Agreement, to produce or account
for more than one such counterpart.
18. Notices. All notices, demands and other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given to the intended recipient (a)
when personally delivered, (b) upon delivery by overnight courier (receipt
confirmation requested) or (c) five business days after being mailed by
certified or registered mail (return receipt requested), in each case with
delivery charges and postage prepaid and addressed as follows (or to such other
address or to the attention of such other person as the recipient party has
specified by prior written notice to the Company):
If to the Company:
Sbarro, Inc.
401 Broadhollow Road
Melville, New York 11747
Attention: President
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If to a Shareholder:
To such Shareholder at such Shareholder's
address of record in the stock transfer
records of the Company.
Any notice, demand or other communication that may be given by a Shareholder to
one or more other Shareholders shall be deemed given if and when given to the
Company on behalf of such Shareholder(s) in the manner herein provided for
notices to be given to the Company. The Company agrees to forward copies of any
such notices, demands or communications promptly to the applicable
Shareholder(s) in a manner prescribed above and such notice, demand or other
communication shall be deemed given to the Shareholder recipient when same is
given (as provided above) by the Company.
19. Governing Law. This Agreement shall be governed by the laws of the
State of New York (regardless of the laws that might otherwise govern under
applicable principles of conflicts of law) as to all matters, including but not
limited to matters of validity, construction, effect, performance and remedies.
This Agreement shall not be construed against any party by reason of its having
caused this Agreement to be drafted.
20. Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto, and supersedes all prior agreements and
understandings, oral and written, among the parties hereto, with respect to the
subject matter hereof.
21. Further Assurances. Each party hereto shall do and perform or cause
to be done and performed all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments, and documents, as
any other party hereto reasonably may request in order to carry out the
provisions of this Agreement and the consummation of the transactions
contemplated hereby.
22. Submission to Jurisdiction. Each of the parties hereto irrevocably
consents to the jurisdiction of, and venue in, the federal and state courts
located in the Borough of Manhattan, City of New York and State of New York,
over any suit, action, or proceeding with respect to this Agreement, and hereby
waives, and agrees not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof, that such party is not subject
thereto or that such action, suit or proceeding may not be brought or is not
maintainable in said courts or that the venue thereof may not be appropriate or
that this Agreement may not be enforced in or by said courts, and each party
hereto irrevocably agrees that all claims with respect to such action or
proceeding shall be heard and determined in such a federal or New York state
court.
23. Remedies.
(a) Any Person having any rights under any provision of this
Agreement will be entitled to enforce such rights specifically, to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law or equity.
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(b) It is acknowledged that it will be impossible to measure in
money the damages that would be suffered if a party hereto fails to comply with
any of the obligations herein imposed on such party (including, without
limitation, in the event of a failure by a Defaulting Shareholder to timely
comply with such Shareholder's obligations under paragraph 4 or elsewhere in
this Agreement which could cause a Default or Event of Default under the
Indenture and/or other loan arrangements to which the Company or its
subsidiaries may from time to time be a party) and that, in the event of any
such failure, an aggrieved party will be irreparably damaged and will not have
an adequate remedy at law. Any such aggrieved party shall, therefore, be
entitled to injunctive relief, including specific performance, to enforce such
obligations, and if any action should be brought in equity to enforce any of the
provisions of this Agreement, none of the parties hereto shall raise the defense
that there is an adequate remedy at law.
(c) The parties hereto agree that, if any party seeks to resolve
any dispute arising under this Agreement pursuant to a legal proceeding, the
prevailing party or parties to such proceeding shall be entitled to receive
reasonable fees and expenses (including reasonable attorneys' fees and expenses)
incurred in connection with such proceedings.
24. MUTUAL WAIVER OF JURY TRIAL. THE PARTIES HERETO WAIVE ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR
DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT OR ANY DOCUMENTS RELATED
HERETO.
25. Headings. The paragraph headings contained in this Agreement
are for reference purposes only and will not affect in any way the meaning or
interpretation of any provision of this Agreement.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
SBARRO, INC.
By: /s/ Robert G. Rooney
-----------------------------------
Name: Robert G. Rooney
Title: Vice President-Finance
/s/ Mario Sbarro
----------------------------------------
Mario Sbarro
/s/ Joseph Sbarro
----------------------------------------
Joseph Sbarro
JOSEPH SBARRO (1994) FAMILY
LIMITED PARTNERSHIP
By: /s/ Joseph Sbarro
----------------------------------------
Joseph Sbarro, General Partner
/s/ Anthony Sbarro
----------------------------------------
Anthony Sbarro
/s/ Franklin Montgomery
----------------------------------------
Franklin Montgomery, not individually
but as trustee under that certain Trust
Agreement dated April 28, 1984 for the
benefit of Carmela Sbarro and her
descendants
/s/ Mario Sbarro
----------------------------------------
Mario Sbarro, not individually but
as trustee under that certain Trust
Agreement dated April 28, 1984 for
the benefit of Carmela Sbarro and
her descendants
-15-
<PAGE>
EXHIBIT "A"
JOINDER TO
TAX PAYMENT AGREEMENT
THIS JOINDER to the Tax Payment Agreement, dated as of _____________,
1999, by and among Sbarro, Inc., a New York corporation (the "Company"), and the
Shareholders of the Company (the "Agreement"), is made and entered into by the
undersigned new Shareholder of the Company (the "New Shareholder"). Capitalized
terms used herein but not otherwise defined herein shall have the meanings set
forth in the Agreement.
WHEREAS, the New Shareholder is acquiring certain shares of capital
stock of the Company, and the Agreement and the Company require the New
Shareholder, as a condition to acquiring such stock and being recognized as a
Shareholder of the Company, to become a party to the Agreement;
NOW, THEREFORE, in consideration of becoming a Shareholder and being
entitled to the benefits of the Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
New Shareholder hereby agrees as follows:
1. Agreement to be Bound. The New Shareholder agrees that the New
Shareholder is a party to the Agreement and shall be fully bound by, and subject
to, all of the covenants, terms and conditions of the Agreement, shall be
entitled to all of the benefits thereof and shall be deemed a "Shareholder" for
all purposes thereof. Without limiting the foregoing, the New Shareholder
acknowledges that the New Shareholder may be obligated to repay certain excess
payments or distributions made to or for the benefit of Shareholders pursuant to
the Agreement to the extent such payments or distributions relate to the shares
owned by the New Shareholder and that the New Shareholder may be responsible to
pay taxes on amounts in excess of amounts actually distributed to the New
Shareholder.
2. Successors and Assigns. This Joinder shall be binding upon, and
shall inure to the benefit of and be enforceable by, the New Shareholder and the
New Shareholder's respective heirs, beneficiaries, distributees, executors,
administrators, successors and assigns.
3. Governing Law. This Joinder shall be governed by the laws of the
State of New York (regardless of the laws that might otherwise govern under
applicable principles of conflicts of law) as to all matters, including but not
limited to matters of validity, construction, effect, performance and remedies.
4. Headings. The paragraph headings contained in this Joinder are for
reference purposes only and will not affect in any way the meaning or
interpretation of any provision of this Joinder.
IN WITNESS WHEREOF, the undersigned New Shareholder has executed this
Joinder as of the date written below; however, this Joinder shall be effective
as of the time the undersigned New Shareholder first became a Shareholder of the
Company.
Dated: ___________________________ _____________________________________
<TABLE>
<CAPTION>
Sbarro, Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
FISCAL YEAR TWENTY-EIGHT WEEKS ENDED
-------------------------------------------------------- ----------------------------
PRO FORMA JULY 18, JULY 12, JULY 12,
1998 1997 1996 1995 1994 1998 1999 1998 1998
------ ------- ------ ------ ------ --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense....................... $0 $0 $0 $0 $0 $30,519 $0 $0 $16,433
Rental expense......................... 19,705 18,419 16,667 16,193 14,520 19,705 11,097 10,281 11,097
------ ------ ------ ------ ------ ------ ------ ------ ------
Total fixed charges.................... $19,705 $18,419 $16,667 $16,193 $14,520 $50,224 $11,097 $10,281 $27,530
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings available for fixed charges:
Earnings (1) .......................... 56,703 58,197 60,306 34,321 53,270 13,569 21,203 21,076 (1,890)
Add fixed charges...................... 19,705 18,419 16,667 16,193 14,520 50,224 11,097 10,281 27,530
------ ------ ------ ------ ------ ------ ------ ------ ------
Total earnings available for
fixed charges.......................... $76,408 $76,616 $76,973 $50,514 $67,790 $63,793 $32,300 $31,357 $25,640
====== ====== ====== ====== ======= ======= ======= ======= =======
Ratio of earnings to fixed charges..... 3.9 4.2 4.6 3.1 4.7 1.3 2.9 3.1 0.9
- -------------------
(1) Earnings represents "Income (loss) before income taxes and cumulative
effect of change in method of accounting."
(2) The ratio of earnings to fixed charges has been computed based on diving
Total earnings available for fixed charges by Total fixed charges. Total
fixed charges consist of interest and one-third of rent expense (deemed to
be a reasonable approximation of the interest factor).
</TABLE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation in this Form S-4 registration statement of our report dated
February 10, 1999 included in the Sbarro, Inc. Form 10-K for each of the three
years in the period ended January 3, 1999 and to all references to our Firm
included in this Form S-4 registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New York, New York
November 9, 1999
<PAGE>
Exhibit 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
---------------------------------------
FIRSTAR BANK, N.A.
---------------------------------------
(Exact Name of Trustee as specified in its charter)
A National Banking Association 41-0122055
------------------------------ ----------
(State of incorporation or organization (I.R.S. Employer Identification No.)
if not a U.S. national bank)
Corporate Trust Department
101 East Fifth Street
St. Paul, Minnesota 55101
(Address of principal executive offices) (Zip Code)
FIRSTAR BANK, N.A.
101 East Fifth Street
St. Paul, Minnesota 55101
(651) 229-2600
--------------------------------------
(Name, address and telephone number of agent for service)
Sbarro, Inc.
and each of the subsidiary guarantors identified in footnote (A) below
----------------------------------------------------------------------
(Exact name of obligors as specified in their charters)
New York 11-2501139
For subsidiary guarantors see For subsidiary guarantors
footnote (A) below see footnote (A) below
----------------------------- -------------------------
(State or other jurisdiction (I.R.S. Employer
of organization) Identification No.)
401 Broadhollow Road
Melville, New York 11747
-------------------- -----
(Address of obligors' principal executive offices) (Zip Code)
--------------------------------------
11% Senior Notes due 2009
-------------------------
(Title of Indenture Securities)
<PAGE>
(A) The following direct or indirect wholly owned subsidiaries of
Sbarro, Inc. are guarantors of the notes and are co-obligors, with Sbarro, Inc.,
each of which is incorporated in the jurisdiction and has the I.R.S. Employer
Identification Number indicated:
<TABLE>
<CAPTION>
I.R.S. Employer
Identification
Name of Corporation Jurisdiction of Organization Number
- ------------------- ---------------------------- ---------------
<S> <C> <C>
Sbarro Properties, Inc. New York 11-3279541
Sbarro America, Inc. New York 11-3189130
Sbarro America Properties, Inc. New York 11-3279540
Sbarro's of Texas, Inc. Texas 76-0435138
Italian Food Franchising, Inc. New York 11-3189139
Corest Management, Inc. New York 11-3189134
Franrest Management, Inc. New York 11-3189135
Larkfield Equipment Corp. New York 11-3117942
Sbarro Foods, Inc. New York 13-3289742
Sbarro of Roosevelt Field, Inc. New York 11-2738512
Sbarro of Virginia, Inc. Virginia 11-3189135
Demefac Leasing Corp. New York 11-3342379
Franchise Contracting and Equipment Corp. New York 11-2531875
Melville Advertising Agency Inc. New York 11-2534834
Sbarro Commack, Inc. New York 11-3046007
Sbarro Dominion Limited New Brunswick, Canada N/A
Sbarro of Las Vegas, Inc. New York 11-3282853
Sbarro of Hawaii, Inc. New York 11-3349165
Sbarro of Pennsylvania, Inc. Pennsylvania 11-3153530
Sbarro Franchise Associates, Inc. New York 11-3494009
Sbarro H.D.F., Inc. New York 11-3445227
N.H.D., Inc. New York 11-3453320
Bushranger Holding, Inc. New York N/A
Melville Pizzeria, Inc. New York 11-3496599
Sbarro One World Trade, Inc. New York 11-3298403
401 Broad Hollow Realty Corp. New York 11-3206395
401 Broad Hollow Fitness Center Corp. New York 11-3494009
Sbarro Bistros, Inc. New York 11-3510693
Syosset Bistro, Inc. New York 11-3510383
</TABLE>
-2-
<PAGE>
ITEM 1. GENERAL INFORMATION. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency
Treasury Department
Washington, D.C.
Federal Deposit Insurance Corporation
Washington, D.C.
The Board of Governors of the Federal Reserve System
Washington, D.C.
(b) The Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS. If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe
each such affiliation.
None.
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's knowledge the
obligor is not in default under any Indenture for which the Trustee acts as
Trustee.
Item 16. List of Exhibits. Listed below are all exhibits filed as a part of
this statement of eligibility and qualification. Exhibits 1-4 are
incorporated by reference from filing 333-48849. Exhibit 6 is
incorporated by reference from filing 333-79659.
Exhibit 1. A copy of the Articles of Association of the trustee now in
effect.
Exhibit 2. a. A copy of the certificate of the Comptroller of Currency
dated June 1, 1965, authorizing Firstar Bank of
Minnesota, N.A. to act as fiduciary.
b. A copy of the certificate of authority of the trustee
to commence business issued June 9, 1903, by the
Comptroller of the Currency to Firstar Bank of
Minnesota, N.A.
Exhibit 3. A copy of the authorization of the trustee to exercise
corporate trust powers issued by the Federal Reserve Board.
Exhibit 4. A copy of the By-Laws of the trustee as now in effect.
Exhibit 5. N/A.
Exhibit 6. The consent of the trustee required by Section 321(b) of
the Act.
-3-
<PAGE>
Exhibit 7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligor within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligor, or affiliates, are based
upon information furnished to the Trustee by the obligor. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939,
Firstar Bank, N.A., a national banking association organized and existing under
the laws of the United States, has duly caused this statement of eligibility and
qualification to be signed on its behalf by the undersigned, thereunto duly
authorized, and its seal to be hereunto affixed and attested, all in the City of
Saint Paul and State of Minnesota on the 9th day of November, 1999.
FIRSTAR BANK, N.A.,
f/k/a FIRSTAR BANK OF MINNESOTA, N.A.
(seal)
/s/ Frank P. Leslie
---------------------------------------
Frank P. Leslie III, Vice President
-4-
<PAGE>
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned, Firstar Bank of Minnesota, N.A., hereby consents that reports
of examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: November 9, 1999
FIRSTAR BANK, N.A.,
f/k/a FIRSTAR BANK OF MINNESOTA, N.A.
(seal)
/s/ Frank P. Leslie
---------------------------------------
Frank P. Leslie III, Vice President
-5-
<PAGE>
Exhibit 99.1
------------
LETTER OF TRANSMITTAL
Offer to Exchange
11% Senior Notes due 2009
that have been registered under the Securities Act of 1933
for any and all outstanding
11% Senior Notes due 2009
of
SBARRO, INC.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON ________, 1999, UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FIRSTAR BANK, N.A.
BY HAND, OVERNIGHT DELIVERY OR FACSIMILE TRANSMISSIONS
REGISTERED OR CERTIFIED MAIL: (ELIGIBLE INSTITUTIONS ONLY):
Firstar Bank, N.A. (651) 229-6415
Corporate Trust Department
101 East Fifth Street, 12th Floor TO CONFIRM BY TELEPHONE
St. Paul, Minnesota 55101 OR FOR INFORMATION CALL:
Attn: Frank P. Leslie (651) 229-2600
_________________________
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated _________,
1999, of Sbarro, Inc., a New York corporation (the "Company"), and this Letter
of Transmittal, which together constitute the Company's offer to exchange (the
"Exchange Offer") an aggregate principal amount of up to $255,000,000 of the
Company's 11% Senior Notes due 2009, (the "Old Notes") for the same aggregate
principal amount of the Company's issued and outstanding 11% Senior Notes due
2009 (the "New Notes") that have been registered under the Securities Act of
1933 (the "Securities Act"). As used in this Letter of Transmittal, the
Prospectus, as the same may be amended or supplemented from time to time, is
referred to as the "Prospectus."
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same
meanings given them in the Prospectus.
This Letter of Transmittal is to be completed by holders of Old Notes
either if (a) Old Notes are to be forwarded herewith or (b) tenders of Old Notes
are to be made by book-entry transfer to an account maintained by Firstar Bank,
N.A. (the "Exchange Agent") at The Depository Trust Company (the "Book-
<PAGE>
Entry Transfer Facility" or "DTC") pursuant to the procedures set forth in "The
Exchange Offer -- Procedures for Tendering Old Notes" in the Prospectus.
Holders of Old Notes whose certificates (the "Certificates") for such
Old Notes are not immediately available or who cannot deliver their Certificates
and all other required documents to the Exchange Agent on or prior to the
Expiration Date (as defined in the Prospectus) or who cannot complete the
procedures for book-entry transfer on a timely basis, must tender their Old
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
The undersigned has completed the appropriate boxes below and signed
this Letter of Transmittal to indicate the action the undersigned desires to
take with respect to the Exchange Offer.
<TABLE>
<CAPTION>
DESCRIPTION OF OLD NOTES 1 2 3
- ------------------------------------------------------- --------------------- --------------------- ---------------------
Name(s) and Address(es) Principal Amount of
of Registered Holder(s) Certificate Aggregate Principal Old Notes
(Please fill in, if blank)* Number(s)** Amount Old Notes Tendered***
------------------------------------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
--------------------- --------------------- ---------------------
TOTAL
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The name(s) and address(es) of the registered holder(s) of the Old Notes
tendered hereby should be printed above, if they are not already set forth
above, as they appear on the Certificates representing such Old Notes. The
Certificate number(s) and the Old Notes that the undersigned wishes to
tender should be indicated in the appropriate boxes above.
* Need not be completed if Old Notes are being tendered by book-entry
transfer.
** Old Notes may be tendered in whole or in part in denominations of $1,000
and integral multiples thereof. Unless otherwise indicated in this column,
a holder will be deemed to have tendered all Old Notes represented by the
Old Notes indicated in Column 2. See Instruction 4.
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
-2-
<PAGE>
|_| CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution _____________________________________________
Account Number ____________________________________________________________
Transaction Code Number ___________________________________________________
|_| CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s) ______________________________________________
Window Ticket Number (if any) _____________________________________________
Date of Execution of Notice of Guaranteed Delivery ________________________
Name of Institution which Guaranteed Delivery _____________________________
IF GUARANTEED DELIVERY IS TO BE MADE BY BOOK-ENTRY TRANSFER:
Name of Tendering Institution _____________________________________________
Account Number ____________________________________________________________
Transaction Code Number ___________________________________________________
|_| CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES
ARE TO BE RETURNED BY CREDITING THE BOOK-ENTRY TRANSFER FACILITY ACCOUNT
NUMBER SET FORTH ABOVE.
|_| CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR YOUR
OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: __________________________________________________________________________
Address: _______________________________________________________________________
Ladies and Gentlemen: __________________________________________________________
The undersigned hereby tenders to the Company, the above described
aggregate principal amount of the Company's 11% Senior Notes due 2009 (the "Old
Notes") in exchange for a like aggregate principal amount of the Company's 11%
Senior Notes due 2009 that have been registered under the Securities Act (the
"New Notes") upon the terms and subject to the conditions set forth in the
Prospectus and in this Letter of Transmittal (which, together with the
Prospectus, constitute the "Exchange Offer").
Subject to and effective upon the acceptance for exchange of all or any
portion of the Old Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby exchanges, assigns and transfers to or upon the order of the
Company all right, title and interest in and to the Old Notes that are being
tendered herewith.
The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent as its agent and attorney-in-fact (with full knowledge that the
Exchange Agent is also acting as agent of the Company in connection with the
Exchange Offer) with respect to the tendered Old Notes, with full power of
substitution
-3-
<PAGE>
(such power of attorney being deemed to be an irrevocable power coupled with an
interest), subject only to the right of withdrawal described in the Prospectus,
to (1) deliver Certificates for Old Notes to the Company together with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Company, upon receipt by the Exchange Agent, as the undersigned's agent, of
the New Notes to be issued in exchange for such Old Notes, (2) present
Certificates for such Old Notes for transfer, and to transfer the Old Notes, on
the books of the Company, and (3) receive for the account of the Company all
benefits and otherwise exercise all rights of beneficial ownership of such Old
Notes, all in accordance with the terms and conditions of the Exchange Offer.
The undersigned is the registered owner of all the tendered Old Notes
and the undersigned represents that it has received from each beneficial owner
of the tendered Old Notes for which it holds Old Notes (collectively, the
"Beneficial Owners") a duly completed and executed from of "Instruction to
Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" accompanying this Letter of Transmittal, instructing the
undersigned to take the action described in this Letter of Transmittal.
For each Old Note accepted for exchange, the holder of such Old Note
will receive a New Note having a principal amount equal to that of the
surrendered Old Note. The New Notes will bear interest at a rate of 11% per
annum. Accordingly, registered holders of New Notes on the relevant record date
for the first interest payment date following the consummation of the Exchange
Offer will receive interest accruing from the last interest payment date on
which interest was paid on the Old Notes surrendered in exchange therefor or, if
no interest has been paid, from September 28, 1999. Interest on the Exchange
Notes will be payable semi-annually on March 15 and September 15 of each year.
The undersigned, hereby represents and warrants that the undersigned
has full power and authority to tender, exchange, assign and transfer the Old
Notes tendered hereby and that, when the same are accepted for exchange, the
Company will acquire good, marketable and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances, and that the Old
Notes tendered hereby are not subject to any adverse claims or proxies. The
undersigned and each Beneficial Owner will, upon request, execute and deliver
any additional documents deemed by the Company or the Exchange Agent to be
necessary or desirable to complete the tender, exchange, assignment and transfer
of the Old Notes tendered hereby, and the undersigned will comply with its
obligations under the Registration Rights Agreement. The undersigned has read
and agrees to all of the terms of the Exchange Offer.
If any tendered Old Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Old Notes than
are tendered or accepted for exchange, Certificates for such nonexchanged or
nontendered Old Notes will be returned (or, in the case of Old Notes tendered by
book-entry transfer, such Old Notes will be credited to an account maintained at
DTC), without expense to the tendering holder, promptly following the expiration
or termination of the Exchange Offer.
The undersigned understands that tenders of Old Notes pursuant to any
one of the procedures described in "The Exchange Offer -- Procedures for
Tendering Old Notes" in the Prospectus and in the instructions attached hereto
will, upon the Company's acceptance for exchange of such tendered Old Notes,
constitute a binding agreement between the undersigned and the Company upon the
terms and subject to the conditions of the Exchange Offer. The undersigned
recognizes that, under certain circumstances set forth in the Prospectus, the
Company may not be required to accept for exchange any of the Old Notes tendered
hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the New Notes be issued
in the name(s) of the undersigned or, in the case of a book-entry transfer of
Old Notes, that such New Notes be credited to the account indicated above
-4-
<PAGE>
maintained at DTC. If applicable, substitute Certificates representing Old Notes
not exchanged or not accepted for exchange will be issued to the undersigned or,
in the case of a book-entry transfer of Old Notes, will be credited to the
account indicated above maintained at DTC. Similarly, unless otherwise indicated
under "Special Delivery Instructions," please deliver New Notes to the
undersigned at the address shown below the undersigned's signature.
By tendering Old Notes and executing this Letter of Transmittal or
effecting an Agent's Message in lieu thereof, the undersigned hereby represents
and agrees that (1) neither the undersigned nor any Beneficial Owner of Old
Notes participating in the Exchange Offer is an affiliate (within the meaning of
Rule 405 under the Securities Act) of the Company, (2) neither the undersigned
nor any Beneficial Owner of Old Notes participating in the Exchange Offer is
engaged in, nor intends to engage in, and has no arrangement or understanding
with any person to participate in, a distribution of the New Notes and (3) the
undersigned and each Beneficial Owner of Old Notes participating in the Exchange
Offer is acquiring the New Notes in its ordinary course of their respective
businesses.
By tendering Old Notes and executing this Letter of Transmittal or
effecting delivery of an Agent's Message in lieu thereof, the undersigned hereby
represents and agrees that if it or any Beneficial Owner of Old Notes
participating is the Exchange Offer is a broker-dealer or if the undersigned or
any Beneficial Owner of Old Notes is using the Exchange Offer to participate in
a distribution of the New Notes, such person (1) could not under SEC policy as
in effect on the date hereof rely on the position of the SEC enunciated in
Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital
Holdings Corporation (available May 13, 1988), as interpreted in the SEC's
letter to Shearman & Sterling (available July 2, 1993), and similar no-action
letters and (2) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a resale transaction and
that such a resale transaction must be covered by an effective registration
statement containing the selling security holder information required by Item
507 or 508, as applicable, of Regulation S-K if the resales are of New Notes
obtained by the undersigned or such Beneficial Owner in exchange for Old Notes
acquired by the undersigned or such Beneficial Owner directly from the Company.
The Company has agreed that the Prospectus may be used by a
Participating Broker-Dealer (as defined below) in connection with resales of New
Notes received in exchange for Old Notes, where such Old Notes were acquired by
such Participating Broker-Dealer for its own account as a result of
market-making activities or other trading activities, for a period ending the
earlier of 30 days after the date on which the registration statement containing
the Prospectus was first declared effective by the SEC and the date on which
such broker-dealer is no longer required to deliver a Prospectus in connection
with market making or other trading activities, subject to extension under
certain limited circumstances described in the Prospectus (the "Delivery
Period"), or, if earlier, when all such New Notes have been disposed of by such
Participating Broker-Dealer. In that regard, each broker-dealer who acquired Old
Notes for its own account as a result of market-making or other trading
activities (a "Participating Broker-Dealer"), by tendering such Old Notes and
executing this Letter of Transmittal, agrees that, upon receipt of any notice
from the Company of the existence of any fact or the happening of any event that
makes any statement of a material fact made in the registration statement of
which the Prospectus is a part (the "Registration Statement"), the Prospectus,
any amendment or supplement thereto, or any document incorporated by reference
therein untrue in any material respect, or that requires the making of any
additions to or changes in the Registration Statement or the Prospectus in order
to make the statements therein not misleading in any material respect, such
Participating Broker-Dealer will forthwith discontinue disposition of New Notes
until such Participating Broker-Dealer's receipt of the copies of an
supplemented or amended Prospectus that does not contain any untrue statement of
a material fact or omit to state any material fact that is necessary to make the
statements therein not misleading or until it is advised in writing by the
Company that the use of the
-5-
<PAGE>
Prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated by reference in the Prospectus. If so
directed by the Company, each Participating Broker-Dealer will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in such Participating Broker-Dealer's possession, of the Prospectus that
was being used at the time of receipt of such notice. In the event the Company
shall give any such notice, the Delivery Period shall be extended by the number
of days during the period from and including the date of the giving of such
notice of the existence of any fact or the happening of any event that makes any
statement of a material fact made in the Registration Statement, the Prospectus,
any amendment or supplement thereto, or any document incorporated by reference
therein untrue in any material respect, or that requires the making of any
additions to or changes in the registration statement of which the Prospectus is
a part or the Prospectus in order to make the statements therein not misleading
in any material respect to and including the date when each Participating
Broker-Dealer shall have received the copies of such supplemented or amended
Prospectus or shall have received advice from the Company that the use of the
Prospectus may be resumed.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby.
All authority herein conferred or agreed to be conferred in this Letter
of Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except as
stated in the Prospectus, this tender is irrevocable.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD
NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD
NOTES AS SET FORTH IN SUCH BOX.
-6-
<PAGE>
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2,5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE )
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Old Notes hereby tendered or by any person(s) authorized
to become the registered holder(s) by endorsements and documents transmitted
herewith (including such opinions of counsel, certifications and other
information as may be required by the Company for the Old Notes to comply with
the restrictions on transfer applicable to the Old Notes). If signature is by an
attorney-in-fact, executor, administrator, trustee, guardian, officer of a
corporation or another acting in a fiduciary capacity or representative
capacity, please set forth the signer's full title. See Instruction 5.
________________________________________________________________________________
________________________________________________________________________________
(Signature(s) Of Holder(s))
Date ___________________________________________________________________________
Name(s) ________________________________________________________________________
(Please Print)
Capacity (full title) __________________________________________________________
Address: _______________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
________________________________________________________________________________
Area Code and Telephone Number
________________________________________________________________________________
(Tax Identification Or Social Security Number(s
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 2 AND 5)
________________________________________________________________________________
(Authorized Signature)
Date: __________________________________________________________________________
Name of Firm ___________________________________________________________________
Capacity (full title) __________________________________________________________
Address ________________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
________________________________________________________________________________
Area Code and Telephone Number
________________________________________________________________________________
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 1, 2, 5 and 6)
To be completed ONLY if the New Notes or Old Notes not tendered are to be issued
in the name of someone other than the registered holder of the Old Notes whose
name(s) appear(s) above.
Issue
|_| Old Notes not tendered to:
|_| New Notes, to:
Name(s) ________________________________________________________________________
Address ________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
________________________________________________________________________________
Area Code and Telephone Number
________________________________________________________________________________
(Tax Identification or Social Security Number(s))
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 2, 5 AND 6)
To be completed ONLY if New Notes or Old Notes not tendered are to be sent to
someone other than the registered holder of the Old Notes whose name(s)
appear(s) above, or such registered holder(s) at an address other than that
shown above.
Mail
|_| Old Notes not tendered to:
|_| New Notes, to:
Name(s) ________________________________________________________________________
Address ________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
________________________________________________________________________________
(Area Code and Telephone Number)
________________________________________________________________________________
(Tax Identification Or Social Security Number(s))
-7-
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED
DELIVERY PROCEDURES. This Letter of Transmittal is to be completed either if (a)
Certificates are to be forwarded herewith or (b) tenders are to be made pursuant
to the procedures for tender by book-entry transfer set forth in "The Exchange
Offer -- Procedures for Tendering Old Notes" in the Prospectus. Certificates, or
timely confirmation of a book-entry transfer of such Old Notes into the Exchange
Agent's account at DTC, as well as this Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, and any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent at its address set forth herein on or prior to
the Expiration Date.
ANY BENEFICIAL OWNER OF TENDERED OLD NOTES WHO IS NOT THE REGISTERED
HOLDER MUST ARRANGE PROMPTLY WITH THE REGISTERED HOLDER TO EXECUTE AND DELIVER
THIS LETTER OF TRANSMITTAL ON ITS BEHALF THROUGH THE EXECUTION AND DELIVERY TO
THE REGISTERED HOLDER OF THE INSTRUCTIONS OF REGISTERED HOLDER AND/OR BOOK-ENTRY
TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER FORM ACCOMPANYING THIS
LETTER OF TRANSMITTAL.
Holders who wish to tender their Old Notes and (1) whose Old Notes are
not immediately available or (2) who cannot deliver their Old Notes, this Letter
of Transmittal and all other required documents to the Exchange Agent on or
prior to the Expiration Date or (3) who cannot complete the procedures for
delivery by book-entry transfer on a timely basis, may tender their Old Notes by
properly completing and duly executing a Notice of Guaranteed Delivery pursuant
to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus. Pursuant to those
procedures: (1) a tender must be made by or through an Eligible Institution (as
defined below); (2) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form made available by the Company, must be
received by the Exchange Agent on or prior to the Expiration Date; and (3) the
Certificates (or a book-entry confirmation (as defined in the Prospectus))
representing all tendered Old Notes, in proper form for transfer, together with
a Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, with any required signature guarantees and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
within three New York Stock Exchange, Inc. trading days after the date of
execution of such Notice of Guaranteed Delivery, all as provided in "The
Exchange Offer--Procedures for Tendering Old Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or
transmitted by facsimile or mail to the Exchange Agent, and must include a
guarantee by an Eligible Institution in the form set forth in such Notice. For
Old Notes to be properly tendered pursuant to the guaranteed delivery procedure,
the Exchange Agent must receive a Notice of Guaranteed Delivery on or prior to
the Expiration Date. As used herein and in the Prospectus, "Eligible
Institution" means a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as "an eligible guarantor institution," including (as such terms
are defined therein) (1) a bank; (2) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer; (3) a credit union;
(4) a national securities exchange, registered securities association or
clearing agency; or (5) a savings association that is a participant in a
Securities Transfer Association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR
-8-
<PAGE>
OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ENSURE TIMELY DELIVERY.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(1) this Letter of Transmittal is signed by the registered holder
of Old Notes tendered herewith, unless such holder(s) has completed
either the box entitled "Special Issuance Instructions" or the box
entitled "Special Delivery Instructions" above, or
(2) such Old Notes are tendered for the account of a firm that is
an Eligible Institution.
In all other cases, an Eligible Institution must guarantee the
signature(s) on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned
"Description of Old Notes" is inadequate, the Certificate number(s) and/or the
principal amount of Old Notes and any other required information should be
listed on a separate signed schedule which is attached to this Letter of
Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Old Notes will be
accepted only in the principal amount of $1,000 and integral multiples thereof.
If less than all the Old Notes evidenced by any Certificate submitted are to be
tendered, fill in the principal amount of Old Notes which are to be tendered in
the box entitled "Principal Amount of Old Notes Tendered." In such case, new
Certificate(s) for the remainder of the Old Notes that were evidenced by your
old Certificate(s) will be sent to the registered holder of the Old Notes
promptly after the Expiration Date unless special issuance or special delivery
instructions are given. See Instruction 6. All Old Notes represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth above or in the Prospectus on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if Certificates for Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the Certificate for the Old Notes, if different from that of the
person who tendered such Old Notes. If Certificates for the Old Notes have been
delivered or otherwise identified to the Exchange Agent, then prior to the
physical release of such Certificates for the Old Notes, the tendering holder
must submit the serial numbers shown on the particular Certificates for the Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in the Prospectus
under "The Exchange Offer -- Procedures for Tendering Old Notes," the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of Old Notes, in which case a notice of withdrawal will be
effective if delivered to the Exchange Agent by written, telegraphic or
facsimile transmission. Withdrawals of tenders of Old Notes may not be
rescinded. Old Notes properly withdrawn will not be deemed validly tendered for
purposes of the Exchange Offer, but may be retendered at any subsequent time on
or prior to the Expiration Date by following any of the procedures described in
the Prospectus under "The Exchange Offer -- Procedures for Tendering Old Notes."
-9-
<PAGE>
All questions as to the validity, form and eligibility (including time
of receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
None of the Company or any affiliates or assigns of the Company or the Exchange
Agent or any other person shall be under any duty to give any notification of
any irregularities or incur any liability for failure to give any such
notification. Any Old Notes which have been tendered but which are withdrawn
will be returned to the holder thereof without cost to such holder promptly
after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder(s) of the Old
Notes tendered hereby, the signature(s) must correspond exactly with the name(s)
as written on the face of the Certificate(s) without alteration, enlargement or
any change whatsoever.
If any tendered Old Notes are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If any of the Old Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If this Letter of Transmittal or any Certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and must submit proper
evidence satisfactory to the Company, in its sole discretion, of each such
person's authority so to act.
When this Letter of Transmittal is signed by the registered owner(s) of
the Old Notes listed and transmitted hereby, no endorsement(s) of Certificate(s)
or separate bond power(s) are required unless New Notes are to be issued in the
name of a person other than the registered holder(s).
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Old Notes listed, the Certificates must be endorsed
or accompanied by appropriate bond powers, signed exactly as the name or names
of the registered owner(s) appear(s) on the Certificates, and also must be
accompanied by such opinions of counsel, certifications and other information as
the Company may require in accordance with the restrictions on transfer
applicable to the Old Notes. Signatures on the Letter of Transmittal and such
Certificates or bond powers must be guaranteed by an Eligible Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If New Notes are to be
issued in the name of a person other than the signer of this Letter of
Transmittal, or if New Notes are to be sent to someone other than the signer of
this Letter of Transmittal or to an address other than that shown above, the
appropriate boxes on this Letter of Transmittal should be completed.
Certificates for Old Notes not exchanged will be returned by mail or, if
tendered by book-entry transfer, by crediting the account indicated above
maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion,
all questions as to the form of documents, validity, eligibility (including time
of receipt) and acceptance for exchange of any tender of Old Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right to reject any and all tenders determined by it not to be in
proper form or the acceptance of which, or exchange for which, may, in the view
of counsel to the Company, be unlawful. The Company also reserves the absolute
right, subject to applicable law, to waive any of the conditions of the Exchange
Offer set forth in the Prospectus under "The Exchange Offer -- Conditions of the
Exchange Offer" or any conditions or irregularity in any tender of Old Notes of
any particular holder whether or not similar conditions or irregularities are
waived in the case of other holders. The Company's interpretation of the
-10-
<PAGE>
terms and conditions of the Exchange Offer (including this Letter of Transmittal
and the instructions hereto) will be final and binding. No tender of Old Notes
will be deemed to have been validly made until all irregularities with respect
to such tender have been cured or waived. The Company or any affiliates or
assigns of the Company, the Exchange Agent, or any other person shall not be
under any duty to give notification of any irregularities in tenders or incur
any liability for failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions
and requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal
income tax law, a holder whose tendered Old Notes are accepted for exchange is
required to provide the Exchange Agent with such holder's correct taxpayer
identification number ("TIN") on Substitute Form W-9 below. If the Exchange
Agent is not provided with the correct TIN, the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to such holders or other payees with respect to Old Notes exchanged
pursuant to the Exchange Offer may be subject to 31 % backup withholding.
The box "Awaiting TIN" in Part 1 of the Substitute Form W-9 may be
checked if the tendering holder has not been issued a TIN and has applied for a
TIN or intends to apply for a TIN in the near future. If that box is checked,
the holder or other payee must also complete the Certificate of Awaiting
Taxpayer Identification Number below in order to avoid back-up withholding.
Notwithstanding that the box "Awaiting TIN" in Part 1 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the
Exchange Agent will withhold 31% of all payments made prior to the time a
properly certified TIN is provided to the Exchange Agent. The Exchange Agent
will retain such amounts withheld during the 60 day period following the date of
the Substitute Form W-9. If the holder furnishes the Exchange Agent with its TIN
within 60 days after the date of the Substitute Form W-9, the amounts retained
during the 60 day period will be remitted to the holder and no further amounts
shall be retained or withheld from payments made to the holder thereafter. If,
however, the holder has not provided the Exchange Agent with its TIN within such
60 day period, amounts withheld will be remitted to the IRS as backup
withholding. In addition, 31% of all payments made thereafter will be withheld
and remitted to the IRS until a correct TIN is provided.
The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Old Notes or of the last transferee appearing on the transfers attached to,
or endorsed on, the Old Notes. If the Old Notes are registered in more than one
name or are not in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" in Part 2 to
avoid possible erroneous backup withholding. A foreign person may qualify as an
exempt recipient by submitting a properly completed IRS Form W-8, signed under
penalties of perjury, attesting to that holder's exempt status. Please consult
the enclosed "Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9" for additional guidance on which holders are exempt from
backup withholding.
Backup withholding is not an additional U.S. Federal income tax.
Rather, the U.S. Federal income tax liability of a person subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained from the IRS.
-11-
<PAGE>
10. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or
contingent tenders will be accepted. All tendering holders of Old Notes, by
execution of this Letter of Transmittal, shall waive any right to receive notice
of the acceptance of their Old Notes for exchanges.
11. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Old Notes have been lost, destroyed or stolen, the holder should
promptly notify the Exchange Agent. The holder will then be instructed as to the
steps that must be taken in order to replace the Certificate(s). This Letter of
Transmittal and related documents cannot be processed until the procedures for
replacing lost, destroyed or stolen Certificate(s) have been completed.
12. SECURITY TRANSFER TAXES. Holders who tender their Old Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith. If, however, New Notes are to be delivered to, or are to be issued in
the name of, any person other than the registered holder of the Old Notes
tendered, or if a transfer tax is imposed for any reason other than the exchange
of Old Notes in connection with the Exchange Offer, then the amount of any such
transfer tax (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL
OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO
THE EXPIRATION DATE.
-12-
<PAGE>
TO BE COMPLETED BY ALL TENDERING SECURITY HOLDERS
(See Instruction 9)
PAYOR'S NAME: FIRSTAR BANK, N.A.
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------- --------------------------------------- -------------------------------------
TIN:_____________________________
PART 1 - PLEASE PROVIDE YOUR TIN Social Security Number
ON THE LINE AT RIGHT AND CERTIFY OR
SUBSTITUTE BY SIGNING AND DATING BELOW Employer Identification
FORM W-9
DEPARTMENT OF THE TREASURY INTERNAL Awaiting TIN |_|
REVENUE SERVICE --------------------------------------- -------------------------------------
PART 2 -- For Payees exempt from
PAYOR'S REQUEST FOR TAXPAYER backup withholding, see the enclosed
Identification Number Guidelines and complete as instructed
("TIN") AND CERTIFICATION therein.
- ----------------------------------------- --------------------------------------- ---------------------------------------
CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) The number shown on this form is my correct taxpayer
identification number (or I am waiting for a number to be
issued to me),
(2) I am not subject to backup withholding either because (a) I
am exempt from backup withholding, (b) I have not been
notified by the Internal Revenue Service ("IRS") that I am
subject to backup withholding as a result of a failure to report
all interest or dividends, or (c) the IRS has notified me that
I am no longer subject to backup withholding, and
(3) All other information provided on this form is true and correct
SIGNATURE___________________________________ DATE______________________
- ----------------------------------------- -------------------------------------------------------------------------------
</TABLE>
You must cross out item (2) in the Certification if you have been
notified by the IRS that you are subject to backup withholding because of under
reporting interest or dividends on your tax return and you have not been
notified by the IRS that you are no longer subject to backup withholding.
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN
CIRCUMSTANCES RESULT IN BACKUP WITHHOLDING OF 31% OF ANY AMOUNTS
PAID TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
MARKED "AWAITING TIN" IN PART 1 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable payments made to me on account of the Exchange Offer will be retained
until I provide a taxpayer identification number to the Exchange Agent and that,
if I do not provide my taxpayer identification number within 60 days, such
retained amounts shall be remitted to the IRS as backup withholding, and 31% of
all reportable payments made to me thereafter will be withheld and remitted to
the Internal Revenue Service until I provide a taxpayer identification number.
____________________________________ ___________________________________
Signature Date
- --------------------------------------------------------------------------------
-13-
<PAGE>
Exhibit 99.2
------------
NOTICE OF GUARANTEED DELIVERY
Offer to Exchange
11% Senior Notes due 2009
that have been registered under the Securities Act of 1933
for any and all outstanding
11% Senior Notes due 2009
of
SBARRO, INC.
This Notice of Guaranteed Delivery, or one substantially equivalent to
this form, must be used to accept the Exchange Offer (as defined below) if (1)
Certificates for the 11% Senior Notes due 2009 (the "Old Notes") of Sbarro,
Inc., a New York corporation (the "Company"), being tendered are not immediately
available, or (2) time will not permit the Old Notes, the Letter of Transmittal
or any other required documents to be delivered to Firstar Bank, N.A. (the
"Exchange Agent") on or prior to 5:00 p.m., New York City time, on the
Expiration Date (as defined in the Prospectus referred to below) or (3) the
procedures for delivery by book-entry transfer cannot be completed on a timely
basis. This Notice of Guaranteed Delivery may be delivered by hand, overnight
courier or mail, or by facsimile transmission, to the Exchange Agent at the
address set forth below. See "The Exchange Offer -- Procedures for Tendering the
Old Notes" in the Prospectus. Capitalized terms not defined herein have the
meanings given them in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FIRSTAR BANK, N.A.
BY HAND, OVERNIGHT COURIER OR FACSIMILE TRANSMISSION
REGISTERED OR CERTIFIED MAIL: (ELIGIBLE INSTITUTIONS ONLY):
Firstar Bank, N.A. (651) 229-6415
Corporate Trust Department
101 East Fifth Street, 12th Floor TO CONFIRM BY TELEPHONE
St. Paul, Minnesota 55101 OR FOR INFORMATION CALL:
Attn: Frank P. Leslie (651) 229-2600
------------------------------
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN
AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Sbarro, Inc. (the "Company"), upon
the terms and subject to the conditions set forth in the Prospectus dated
_________, 1999 (as the same may be amended or supplemented from time to time,
the "Prospectus"), and the related Letter of Transmittal (which together
constitute the "Exchange Offer"), receipt of which is hereby acknowledged, the
aggregate principal amount of the Old Notes set forth below pursuant to the
guaranteed delivery procedures set forth in the Prospectus under the caption
"The Exchange Offer -- Procedures for Tendering Old Notes."
<TABLE>
<CAPTION>
<S> <C>
Aggregate principal Please print the following information:
amount tendered*: $_____________________
_____________________________________
Certificate No(s).
of Old Notes _____________________________________
(if available): __________________________ (Name(s) of Registered Holder(s))
_____________________________________
Aggregate principal
amount represented by the _____________________________________
Old Notes Certificate(s): $________________ (Address)
_____________________________________
- --------------- (City, State and Zip)
* Must be in integral multiples of $1,000.
_____________________________________
(Area Code and Telephone Number)
IF THE OLD NOTES WILL BE TENDERED BY BOOK-
ENTRY TRANSFER, PLEASE PROVIDE THE _____________________________________
FOLLOWING INFORMATION:
DTC Account Number: __________________
</TABLE>
All authority herein conferred or agreed to be conferred shall survive the death
or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
PLEASE SIGN HERE
x_____________________________________ ___________________________________
x_____________________________________ ___________________________________
(Signature(s) of Owner(s) or (Date)
Authorized Signatory)
THE GUARANTEE ON THE NEXT PAGE MUST BE COMPLETED
-2-
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein): (1) a bank; (2) a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (3) a credit union; (4) a national securities exchange,
registered securities association or clearing agency; or (5) a savings
association that is a participant in a Securities Transfer Association (each of
the foregoing being referred to as an "Eligible Institution"), hereby guarantees
to deliver to the Exchange Agent, at its address set forth above, either the Old
Notes tendered hereby in proper form for transfer, or confirmation of the
book-entry transfer of such Old Notes to the Exchange Agent's account at The
Depositary Trust Company ("DTC") pursuant to the procedures for book-entry
transfer set forth in the Prospectus, in either case together with one or more
properly completed and duly executed Letter(s) of Transmittal (or facsimile
thereof or, instead, Agent's Message) and any other required documents within
three New York Stock Exchange trading days after the date of the execution of
this Notice of Guaranteed Delivery.
- --------------------------------------- ---------------------------------
Name of Firm Authorized Signature
- --------------------------------------- ---------------------------------
Address Title
- --------------------------------------- ---------------------------------
Zip Code Type or Print Name
- --------------------------------------- ---------------------------------
Area Code and Telephone Number Date
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR
OLD NOTES SHOULD ONLY BE SENT WITH THE LETTER OF TRANSMITTAL.
<PAGE>
Exhibit 99.3
------------
LETTER TO REGISTERED HOLDERS AND DTC PARTICIPANTS
Offer to Exchange
11% Senior Notes due 2009
that have been registered under the Securities Act of 1933
for any and all outstanding
11% Senior Notes due 2009
of
SBARRO, INC.
To Registered Holders and Depository
Trust Company Participants:
We are enclosing herewith the material listed below relating to the
offer by Sbarro, Inc. (the "Company") to exchange its 11% Senior Notes due 2009
(the "New Notes") that have been registered under the Securities Act of 1933
(the "Securities Act") for the same principal amount of its issued and
outstanding 11% Senior Notes due 2009 (the "Old Notes") upon the terms and
subject to the conditions set forth in the Company's Prospectus, dated
__________, 1999, and the related Letter of Transmittal (which together
constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated __________, 1999;
2. Letter of Transmittal (together with accompanying Substitute Form
W-9 Guidelines);
3. Notice of Guaranteed Delivery;
4. Letter, to accompany the instruction form referred to in item 5
below, which may be sent to your clients for whose account you hold Old Notes in
your name or in the name of your nominee; and
5. Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Beneficial Owner (which may be sent from your clients to you
with such clients' instructions with regard to the Exchange Offer).
We urge you to contact your clients promptly. Please note that the
Exchange Offer will expire at 5:00 p.m., New York City time, on ____________,
1999, unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
<PAGE>
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (1) neither the person who signs the Letter of
Transmittal nor any beneficial owner of Old Notes participating in the Exchange
Offer is an affiliate (within the meaning of Rule 405 under the Securities Act)
of the Company, (2) neither the person who signs the Letter of Transmittal nor
any beneficial owner of Old Notes participating in the Exchange Offer is engaged
in, nor intends to engage in, and has no arrangement or understanding with any
person to participate in, a distribution of the New Notes and (3) the person who
signs the Letter of Transmittal and each beneficial owner of Old Notes
participating in the Exchange Ofer is acquiring the New Notes in the ordinary
course of their respective businesses.
By tendering Old Notes and executing the Letter of Transmittal, each
holder of Old Notes will also represent and agree that if it or a beneficial
owner of Old Notes is a broker-dealer or if it or a beneficial owner of Old
Notes is using the Exchange Offer to participate in a distribution of the New
Notes, such persons (1) could not under SEC policy as in effect on the date
hereof rely on the position of the SEC enunciated in Morgan Stanley & Co.
Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation
(available May 13, 1988), as interpreted in the SEC's letter to Shearman &
Sterling (available July 2, 1993), and similar no-action letters and (2) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a resale transaction and that such a resale
transaction must be covered by an effective registration statement containing
the selling security holder information required by Item 507 or 508, as
applicable, of Regulation S-K if the resales are of New Notes obtained by the
holder of Old Notes in exchange for Old Notes acquired by the person executing
the Letter of Transmittal or a beneficial owner of Old Notes directly from the
Company.
The enclosed Instruction to Registered Holder and/or Book-Entry
Transfer Participant from Beneficial Owner contains an authorization by the
beneficial owners of the Old Notes for you to make the foregoing and certain
other representations.
The Company will not pay any fee or commission to any broker or dealer
or to any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Old Notes pursuant to the Exchange Offer. The Company
will pay or cause to be paid any transfer taxes payable on the transfer of Old
Notes to it, except as otherwise provided in Instruction 12 of the enclosed
Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
Exchange Agent at the address set forth in the Letter of Transmittal and the
Prospectus.
Very truly yours,
SBARRO, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU THE
AGENT OF SBARRO, INC. OR FIRSTAR BANK, N.A. OR AUTHORIZE YOU TO USE ANY DOCUMENT
OR MAKE ANY STATEMENT ON THEIR BEHALF IN CONNECTION WITH THE EXCHANGE OFFER
OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
-2-
<PAGE>
Exhibit 99.4
------------
FORM OF LETTER TO CLIENTS
Offer to Exchange
11% Senior Notes due 2009 that have
been registered under the Securities Act of 1933
for any and all outstanding
11% Senior Notes due 2009
of
SBARRO, INC.
To Our Clients:
We are enclosing herewith a Prospectus, dated ________, 1999, of
Sbarro, Inc. (the "Company") and a related Letter of Transmittal (which together
constitute the "Exchange Offer") relating to the offer by the Company to
exchange its 11% Senior Notes due 2009 (the "New Notes") that have been
registered under the Securities Act of 1933 (the "Securities Act") for the same
principal amount of its issued and outstanding 11% Senior Notes due 2009 (the
"Old Notes") upon the terms and subject to the conditions set forth in the
Exchange Offer.
Please note that the Exchange Offer will expire at 5:00 p.m., New York
City time, on _________, 1999, unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old
Notes being tendered.
We are the holder of record and/or participant in the book-entry
transfer facility of Old Notes held by us for your account. A tender of such Old
Notes can be made only by us as the record holder and/or participant in the
book-entry transfer facility and pursuant to your instructions. The Letter of
Transmittal is furnished to you for your information only and cannot be used by
you to tender Old Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of
the Old Notes held by us for your account pursuant to the terms and conditions
of the Exchange Offer and that you confirm that we may on your behalf make the
representations contained in the Letter of Transmittal. Please complete and sign
the enclosed "Instructions to Registered Holder and/or Book-Entry Transfer
Participant from Beneficial Owner," which will provide us with such instructions
and confirmation.
Very truly yours,
<PAGE>
Exhibit 99.5
------------
INSTRUCTIONS TO REGISTERED HOLDER AND/OR BOOK-ENTRY
TRANSFER PARTICIPANT FROM BENEFICIAL OWNER
OF
SBARRO, INC.
11% Senior Notes due 2009
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
__________, 1999 (the "Prospectus") of Sbarro, Inc. (the "Company") and the
accompanying Letter of Transmittal (the "Letter of Transmittal") that together
constitute the Company's offer (the "Exchange Offer"). Capitalized terms used
but not defined herein have the meanings given them in the Prospectus.
This will instruct you, the registered holder and/or book-entry
transfer facility participant, as to the action to be taken by you relating to
the Exchange Offer with respect to the Old Notes held by you for the account of
the undersigned.
The aggregate face amount of the Old Notes held by you for the account
of the undersigned is (fill in amount):
$ ______________ of the 11% Senior Notes due 2009.
With respect to the Exchange Offer, the undersigned hereby instructs
you (check appropriate box):
|_| To TENDER the following Old Notes held by you for the account
of the undersigned (insert principal amount of Old Notes to be
tendered, (if any):
$ ______________ of the 12% Senior Notes due 2009.
|_| NOT to TENDER any Old Notes held by you for the account of
the undersigned.
If the undersigned instructs you to tender the Old Notes held by you
for the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representation and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations, that (1) the
undersigned is not an affiliate (within the meaning of Rule 405 under the
Securities Act) of the Company, (2) the undersigned is not engaged in, and does
not intend to engage in, and has no arrangement or understanding with any person
to participate in, a distribution of the New Notes and (3) the undersigned is
acquiring the New Notes in the ordinary course of its business.
By tendering Old Notes and executing this Letter of Transmittal, the
undersigned will also be deemed to represent and agree that if it is a
broker-dealer or if it is using the Exchange Offer to participate in a
distribution of the New Notes, it (1) could not under SEC policy as in effect on
the date hereof rely on the position of the SEC enunciated in Morgan Stanley &
Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation
(available May 13, 1988), as interpreted in the SEC's letter to Shearman &
Sterling (available July 2, 1993), and similar no-action letters and (2) must
comply with the
<PAGE>
registration and prospectus delivery requirements of the Securities Act in
connection with a resale transaction and that such a resale transaction must be
covered by an effective registration statement containing the selling security
holder information required by Item 507 or 508, as applicable, of Regulation S-K
if the resales are of New Notes obtained by the undersigned in exchange for Old
Notes acquired by it directly from the Company.
SIGN HERE
Name of beneficial owner(s): __________________________________________________
Signature(s): __________________________________________________________________
Name(s) (please print): ________________________________________________________
Address: ______________________________________________________________________
Telephone Number: _____________________________________________________________
Taxpayer identification or Social Security Number: ____________________________
Date: _________________________________________________________________________
