SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
Sbarro, Inc.
(Name of Issuer)
Sbarro, Inc.
Sbarro Merger LLC
Mario Sbarro
Joseph Sbarro
Anthony Sbarro
Joseph Sbarro (1994) Family Limited Partnership
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
(Name of Person(s) Filing Statement)
Common Stock, par value $.01 per share
(Title of Class of Securities)
805844-10-7
(Cusip Numbers of Class of Securities)
----------------
Mario Sbarro, Chairman and President
Sbarro, Inc.
401 Broadhollow Road
Melville, New York 11747
Telephone Number: (516) 715-4100
Copies To:
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Richard A. Rubin, Esq. Steven J. Gartner, Esq. Arthur A. Katz, Esq.
Parker Chapin Flattau & Klimpl, LLP Willkie Farr & Gallagher Warshaw Burstein Cohen
1211 Avenue of the Americas 787 Seventh Avenue Schlesinger & Kuh, LLP
New York, New York 10036 New York, New York 10019 555 Fifth Avenue
(212) 704-6000 (212) 728-8000 New York, New York 10017
(212) 984-7700
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<PAGE>
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf Of Person(s) Filing Statement)
This statement is filed in connection with (check the appropriate box):
a. [X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities
Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act
of 1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies. [X]
Calculation of Filing Fee
Transaction Amount of Filing Fee*
Valuation* $79,129.93
$395,649,643
[X] Check Box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously
paid. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
The entire filing fee was paid in connection with the original filing of
the Schedule 13E-3 which was filed on February 26, 1999.
- --------
* Determined by multiplying 13,467,649 (the number of outstanding shares of
Common Stock of Sbarro, Inc. not owned by the persons filing this Schedule
13E-3) by $28.85 per share and adding the aggregate amount anticipated to
be paid to persons holding options to purchase shares of Common Stock
issued by the Company in consideration of cancellation of such options.
** Determined pursuant to Rule 0-11(b)(1) by multiplying $395,649,643 by 1/50
of 1%.
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<PAGE>
INTRODUCTION
This Amendment No. 3 ("Amendment No. 3") to the Rule 13e-3 Transaction
Statement on Schedule 13E-3 (the "Original Schedule 13E-3" and, as amended
through Amendment No. 3, this "Schedule 13E-3") is being filed by Sbarro, Inc.,
a New York corporation (the "Company"), Sbarro Merger LLC, a New York limited
liability company ("Mergeco"), and Mario Sbarro, Joseph Sbarro, Anthony Sbarro,
the Joseph Sbarro (1994) Family Limited Partnership and Mario Sbarro and
Franklin Montgomery, not individually but as trustees under that certain Trust
Agreement dated April 28, 1984 (the "Trust of Carmela Sbarro") for the benefit
of Carmela Sbarro and her descendants (collectively, the "Continuing
Shareholders"), pursuant to Section 13(e) of the Securities Exchange Act of
1934, as amended, and Rule 13e-3 thereunder, in connection with the proposed
merger (the "Merger") of Mergeco with and into the Company, with the Company as
the surviving corporation in the Merger (the "Surviving Corporation"). The
Merger is to be effected pursuant to an Amended and Restated Agreement and Plan
of Merger dated as of January 19, 1999, among the Company, Mergeco and the
Continuing Shareholders (the "Restated Merger Agreement"). Mergeco was formed by
the Continuing Shareholders in connection with the Merger and is owned solely by
the Continuing Shareholders. Pursuant to the terms and conditions set forth in
the Restated Merger Agreement, if the Merger is consummated, each outstanding
share of Common Stock other than (i) shares of Common Stock then owned of record
by the Continuing Shareholders or Mergeco and (ii) shares of Common Stock in the
Company's treasury, if any, will be converted into the right to receive $28.85
per share in cash, without interest. As a result of the Merger, the Continuing
Shareholders will own 100% of the capital stock of the Surviving Corporation.
Concurrently herewith the Company is filing an amended preliminary proxy
statement (the "Proxy Statement") relating to a Special Meeting of Shareholders
of the Company being called to consider adoption of the Restated Merger
Agreement (the "Meeting"). There is attached to this Amendment No. 3 a cross
reference sheet supplied pursuant to Instruction F to Schedule 13E-3 to show the
location in the Proxy Statement of the information required to be included in
response to the items of Schedule 13E-3. The information in the Proxy Statement
is hereby expressly incorporated herein by reference, and capitalized terms used
but not defined herein shall have the meanings ascribed thereto in the Proxy
Statement.
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
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Item 1. Issuer and Class of Security
Subject to the Transaction.
(a) .............................. Front Cover Page;
"SUMMARY - Certain Definitions";
"SUMMARY - The Merger Parties; The Company";
"MANAGEMENT - Directors and Executive Officers
of the Company".
(b) .............................. Front Cover Page;
"SUMMARY - Certain Definitions";
"SUMMARY - Information Concerning the Meeting;
Record Date for the Meeting; Quorum Requirements";
"SUMMARY - Market Prices of and Dividends on the
Common Stock".
(c) .............................. "SUMMARY - Market Prices of and Dividends on the
Common Stock".
(d) .............................. "SUMMARY - Market Prices of and Dividends on the
Common Stock";
"SPECIAL FACTORS - Financing
of the Merger"; "SPECIAL
FACTORS - Plans for the
Company after the Merger".
(e) .............................. Not Applicable.
(f) .............................. "CERTAIN TRANSACTIONS IN THE COMMON
STOCK".
Item 2. Identity and Background.
(a)-(d) .......................... "SUMMARY - Certain Definitions";
"SUMMARY - The Merger Parties";
"BUSINESS OF THE COMPANY";
"MANAGEMENT";
"SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT".
(e) and (f) ...................... Not Applicable.
(g) ..............................
"SUMMARY - The Merger Parties";
"MANAGEMENT".
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<PAGE>
SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
Item 3. Past Contacts, Trans
actions or Negotiations.
(a) (1) .......................... Not Applicable.
(a) (2) and (b) .................. "SPECIAL FACTORS - Background of the
Transaction";
"MANAGEMENT - Directors and Executive Officers
of the Company";
"CERTAIN TRANSACTIONS IN THE COMMON
STOCK".
Item 4. Terms of the Transaction.
(a) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SUMMARY - Information Concerning the Meeting;
Purpose of the Meeting";
"SUMMARY - Special Factors; Certain Effects of the
Merger";
"SUMMARY - Special Factors; Litigation Pertaining to
the Merger";
"SUMMARY - Special Factors;
Financing of the Merger";
"SUMMARY - The Restated
Merger Agreement"; "SPECIAL
FACTORS - Interests of
Certain Persons in the Merger
and the Company"; "SPECIAL
FACTORS - Certain Effects of
the Merger"; "SPECIAL FACTORS
- Financing of the Merger";
"SPECIAL FACTORS - Regulatory
Approvals"; "LITIGATION
PERTAINING TO THE MERGER";
"THE RESTATED MERGER
AGREEMENT".
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
(b) .............................. "SUMMARY - Information Concerning the Meeting;
Purpose of the Meeting";
"SUMMARY - Information Concerning the Meeting;
Voting Requirements";
"SUMMARY - Special Factors; Certain Effects of the
Merger";
"SUMMARY - Special Factors;
Litigation Pertaining to the
Merger"; "SUMMARY - The
Restated Merger Agreement;
The Merger Consideration";
"SPECIAL FACTORS - Interests
of Certain Persons in the
Merger and the Company";
"SPECIAL FACTORS - Certain
Effects of the Merger";
"LITIGATION PERTAINING TO THE
MERGER Current Shareholder
Litigation"; "THE RESTATED
MERGER AGREEMENT - The
Merger; Merger
Consideration"; "THE RESTATED
MERGER AGREEMENT Treatment of
Options".
Item 5. Plans or Proposals of the
Issuer or Affiliate.
(a) and (b) ...................... "SUMMARY - Special Factors; Plans for the Company
after the Merger";
"SPECIAL FACTORS - Plans for the Company after
the Merger".
(c) .............................. "SPECIAL FACTORS - Interests of Certain Persons in
the Merger and the Company; Directors and Officers of
the Surviving Corporation";
"THE RESTATED MERGER AGREEMENT -
Directors and Officers, Certificate of Incorporation and
By-Laws Following the Merger".
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
(d)-(e) .......................... "SUMMARY - Special Factors; Plans for the Company
after the Merger";
"SUMMARY - Special Factors; Financing of the
Merger";
"SUMMARY - Market Prices of
and Dividends on the Common
Stock"; "SPECIAL FACTORS -
Plans for the Company after
the Merger"; "SPECIAL FACTORS
- Financing of the Merger".
(f)-(g) .......................... "SUMMARY - Special Factors; Certain Effects of the
Merger";
"SPECIAL FACTORS - Certain Effects of the Merger".
Item 6. Source and Amount of
Funds or Other
Consideration.
(a) .............................. "SUMMARY - Special Factors; Financing of the
Merger";
"SPECIAL FACTORS - Financing of the Merger".
(b) .............................. "SPECIAL FACTORS - Interests of Certain Persons in
the Merger and the Company; Compensation of Special
Committee Members"; "SPECIAL
FACTORS - Fees and Expenses";
"SPECIAL FACTORS - Financing
of the Merger; Terms of Bear
Stearns' Engagement";
"LITIGATION PERTAINING TO THE
MERGER Current Shareholder
Litigation"; "THE RESTATED
MERGER AGREEMENT - Fees and
Expenses".
(c) .............................. "SUMMARY - Special Factors; Financing of the
Merger";
"SPECIAL FACTORS - Certain Financial Projections";
"SPECIAL FACTORS - Plans for the Company after
the Merger";
"SPECIAL FACTORS - Financing of the Merger".
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<PAGE>
SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
(d) .............................. "SUMMARY - Special Factors; Financing of the
Merger";
"SPECIAL FACTORS - Financing of the Merger".
Item 7. Purpose(s), Alternatives,
Reasons and Effects.
(a) and (c) ...................... "SUMMARY - Special Factors; Continuing Share
holders' Purpose and Reasons for the Merger";
"SPECIAL FACTORS - Background of the
Transaction";
"SPECIAL FACTORS - The Continuing Shareholders'
Purpose and Reasons for the Merger".
(b) .............................. "SPECIAL FACTORS - Background of the
Transaction";
"SPECIAL FACTORS - The Continuing Shareholders
Purpose and Reasons for the Merger".
(d) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SUMMARY - Information Concerning the Meeting;
Purpose of the Meeting";
"SUMMARY - Special Factors; Plans for the Company
after the Merger";
"SUMMARY - Special Factors; Interests of Certain
Persons in the Merger and the Company";
"SUMMARY - Special Factors; Certain Effects of the
Merger";
"SUMMARY - Special Factors; Certain U.S. Federal
Income Tax Consequences";
"SUMMARY - Special Factors; Accounting
Treatment";
"SUMMARY - Special Factors;
Financing of the Merger";
"SUMMARY - The Restated
Merger Agreement; The Merger
Consideration"; "SPECIAL
FACTORS - The Continuing
Shareholders Purpose and
Reasons for the Merger";
"SPECIAL FACTORS - Certain
Financial Projections";
"SPECIAL FACTORS - Plans for
the Company after the
Merger";
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<PAGE>
SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
"SPECIAL FACTORS - Interests of Certain Persons in
the Merger and the Company";
"SPECIAL FACTORS - Certain Effects of the Merger";
"SPECIAL FACTORS - Certain U.S. Federal Income
Tax Consequences";
"SPECIAL FACTORS - Fees and Expenses";
"SPECIAL FACTORS - Accounting Treatment";
"SPECIAL FACTORS - Risk of Insolvency";
"THE RESTATED MERGER AGREEMENT - The
Merger; Merger Consideration";
"THE RESTATED MERGER AGREEMENT - The
Exchange Fund; Payment for Shares of Common
Stock";
"THE RESTATED MERGER AGREEMENT -
Treatment of Options";
"THE RESTATED MERGER AGREEMENT - Tax
Withholding".
Item 8. Fairness of the
Transaction.
(a) ..............................
Front Cover Page; "CERTAIN
QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SUMMARY - Special Factors;
Recommendation of the Special
Committee and the Board of
Directors"; "SUMMARY -
Special Factors; Presentation
and Fairness Opinion of
Prudential Securities";
"SPECIAL FACTORS - Background
of the Transaction"; "SPECIAL
FACTORS - Recommendations of
the Special Committee and the
Board of Directors"; "SPECIAL
FACTORS - The Continuing
Shareholders' Purpose and
Reasons for the Merger";
"SPECIAL FACTORS -
Presentation and Fairness
Opinion of Prudential
Securities".
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
(b) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SUMMARY - Special Factors;
Recommendation of the Special
Committee and the Board of
Directors"; "SUMMARY -
Special Factors; Factors
Considered by the Special
Committee and the Board of
Directors"; "SUMMARY -
Special Factors; Presentation
and Fairness Opinion of
Prudential Securities";
"SPECIAL FACTORS - Background
of the Transaction"; "SPECIAL
FACTORS - Recommendation of
the Special Committee and the
Board of Directors"; "SPECIAL
FACTORS - The Continuing
Shareholders' Purpose and
Reasons for the Merger";
"SPECIAL FACTORS -
Presentation and Fairness
Opinion of Prudential
Securities"; "SPECIAL FACTORS
- Certain Financial
Projections"; "LITIGATION
PERTAINING TO THE MERGER
Current Shareholder
Litigation"; "THE RESTATED
MERGER AGREEMENT - No
Solicitation; Fiduciary
Obligation of Directors";
"THE RESTATED MERGER
AGREEMENT Conditions"; "THE
RESTATED MERGER AGREEMENT
Termination"; "THE RESTATED
MERGER AGREEMENT Amendment
and Waiver".
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<PAGE>
SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
(c) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SUMMARY - Information
Concerning the Meeting;
Voting Requirements";
"SUMMARY - The Restated
Merger Agreement; Conditions
to, and Termination of, the
Merger"; "SPECIAL FACTORS -
Recommendations of the
Special Committee and the
Board of Directors"; "THE
RESTATED MERGER AGREEMENT -
The Merger; Merger
Consideration; "THE RESTATED
MERGER AGREEMENT Covenants";
"THE RESTATED MERGER
AGREEMENT Conditions"; "THE
RESTATED MERGER AGREEMENT
Termination".
(d) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SUMMARY - Special Factors; Fairness Opinion of
Prudential Securities";
"SPECIAL FACTORS - Background of the
Transaction";
"SPECIAL FACTORS - Recommendation of the
Special Committee and the Board of Directors";
"SPECIAL FACTORS - The Continuing Shareholders'
Purpose and Reasons for the Merger";
"SPECIAL FACTORS - Presentation and Fairness
Opinion of Prudential Securities".
(e) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SPECIAL FACTORS - Background of the
Transaction";
"SPECIAL FACTORS - Recommendation of the
Special Committee and the Board of Directors";
"SPECIAL FACTORS - The Continuing Shareholders'
Purpose and Reasons for the Merger".
(f) .............................. "SPECIAL FACTORS - Background of the
Transaction".
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<PAGE>
SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
Item 9. Reports, Opinions,
Appraisals and Certain
Negotiations.
(a) and (b)....................... "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SUMMARY - Special Factors; Factors Considered by
the Special Committee and the Board of Directors";
"SUMMARY - Special Factors; Fairness Opinion of
Prudential Securities";
"SPECIAL FACTORS - Background of the
Transaction";
"SPECIAL FACTORS -
Recommendation of the Special
Committee and the Board of
Directors"; "SPECIAL FACTORS
- The Continuing
Shareholders' Purpose and
Reasons for the Merger";
"SPECIAL FACTORS -
Presentation and Fairness
Opinion of Prudential
Securities".
(c) .............................. "AVAILABLE INFORMATION".
Item 10. Interest in Securities of the
Issuer.
(a) .............................. "SUMMARY - Information Concerning the Meeting;
Voting Requirements";
"SPECIAL FACTORS - Interests
of Certain Persons in the
Merger and the Company";
"SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT"
(b) .............................. "CERTAIN TRANSACTIONS IN THE COMMON
STOCK".
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<PAGE>
SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
Item 11. Contracts, Arrangements
or Understandings With
Respect to the Issuer's
Securities........................ "SUMMARY - Information Concerning the Meeting;
Voting Requirements";
"SUMMARY - The Restated Merger Agreement";
"SPECIAL FACTORS - Interests of Certain Persons in
the Merger and the Company";
"SPECIAL FACTORS - Fees and Expenses";
"SPECIAL FACTORS - Financing of the Merger";
"THE RESTATED MERGER AGREEMENT".
Item 12. Present Intention and
Recommendation of
Certain Persons with
Regard to the Transaction.
(a) .............................. "SUMMARY - Information Concerning the Meeting;
Voting Requirements";
"SPECIAL FACTORS -
Recommendation of the Special
Committee and the Board of
Directors"; "THE RESTATED
MERGER AGREEMENT Covenants";
"CERTAIN TRANSACTIONS IN THE
COMMON STOCK".
(b) .............................. "SUMMARY - Special Factors; Recommendation of
the Special Committee and the Board of Directors";
"SPECIAL FACTORS - Background of the
Transaction";
"SPECIAL FACTORS - Recommendation of the
Special Committee and the Board of Directors".
Item 13. Other Provisions of the
Transaction.
(a) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SUMMARY - No Right of
Appraisal"; "LITIGATION
PERTAINING TO THE MERGER
Current Shareholder
Litigation".
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SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
(b)-(c)........................... Not Applicable.
Item 14. Financial Information.
(a) .............................. "WHERE YOU CAN FIND MORE INFORMATION";
"CONSOLIDATED FINANCIAL STATEMENTS".
(b) .............................. Not Applicable.
Item 15. Persons and Assets
Employed, Retained or
Utilized.
(a) .............................. Front Cover Page;
"SUMMARY - Special Factors; Plans for the Company
after the Merger";
"SUMMARY - Special Factors;
Financing of the Merger";
"SPECIAL FACTORS - Plans for
the Company after the
Merger"; "SPECIAL FACTORS -
Interests of Certain Persons
in the Merger and the
Company"; "SPECIAL FACTORS -
Fees and Expenses"; "SPECIAL
FACTORS - Financing of the
Merger"; "THE RESTATED MERGER
AGREEMENT Indemnification and
Insurance"; "THE RESTATED
MERGER AGREEMENT - Fees and
Expenses".
(b) .............................. Front Cover Page;
"CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER";
"SPECIAL FACTORS - Interests of Certain Persons in
the Merger and the Company; Compensation of the
Special Committee Members".
Item 16. Additional Information. "SUMMARY - Information Concerning the Meeting";
Proxy Statement, together with the proxy card.
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<PAGE>
SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
Item 17. Material to be Filed as
Exhibits.
(a) (1) .......................... Debt Financing Letter, dated as of January 19, 1999.*
(b) (1) ........................ Presentation by Prudential Securities Incorporated to the
Special Committee, dated January 19, 1999.*
(b) (2) ........................ Opinion of Prudential Securities Incorporated, dated
January 19, 1999 (set forth as Annex II to the Proxy
Statement).*
(b) (3) ........................ Presentation by Bear, Stearns & Co. Inc. to certain
Continuing Shareholders, dated October 10, 1996 (in
accordance with Rule 202 of Regulation S-T, Section II
of the enclosed presentation is being filed in paper
pursuant to a continuing hardship exemption).*
(b) (4) ........................ Presentation by Bear, Stearns & Co. Inc. to the
Company's Board of Directors, dated January 15,
1997.*
(b) (5) ........................ Presentation by Bear, Stearns & Co. Inc. to the
Company's Board of Directors, dated January 23, 1997
(in accordance with Rule 202 of Regulation S-T, the
financial models of this presentation are being filed in
paper pursuant to a continuing hardship exemption).*
(b) (6) ........................ Presentation by Bear, Stearns & Co. Inc. to the
Company's Board of Directors, dated July 20, 1998 (in
accordance with Rule 201 of Regulation S-T,
Appendices G, H, I and J of this exhibit is being filed in
paper pursuant to a temporary hardship exemption).*
(b) (7) ........................ List of potential purchasers of the Company prepared in
August 1998.*
(b) (8) ........................ August 1998 confidential information memorandum sent
to potential purchasers of the Company.*
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* Filed herewith.
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<PAGE>
SCHEDULE 13E-3
ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT
- --------------------------------------------- ------------------------------------------------------------------
(b) (9) ........................ Presentation by Prudential Securities Incorporated to the
Special Committee, dated March 3, 1998.*
(c) (1) ........................ Amended and Restated Agreement and Plan of Merger
between Sbarro, Inc., Sbarro Merger LLC, Mario
Sbarro, Joseph Sbarro, Anthony Sbarro, the Joseph
Sbarro (1994) Family Limited Partnership 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, dated as of
January 19, 1999 (as amended June 17, 1999) (set forth
as Annex I to the Proxy Statement).*
(d) (1) ........................ Proxy Statement (including Annexes I and II), together
with the proxy card.*
(e) ............................ Not applicable.
(f) ............................ As of the date of this Schedule 13E-3, no written
instruction, form or other material has been furnished to
any person making the actual oral solicitation or other
recommendation for such person's use, directly or
indirectly, in connection with this Rule 13e-3
transaction.
(g) (1) ........................ Memorandum of Understanding, dated January 19,
1999.*
(g) (2) ........................ Stipulation of Settlement dated April 7, 1999 among
counsel to the plaintiffs and counsel to the defendants in
the Current Shareholder Litigation (as defined in the
Proxy Statement filed as Exhibit (d)(1).*
</TABLE>
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* Filed herewith.
-16-
<PAGE>
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The information set forth on the Front Cover Page and in "SUMMARY -
Certain Definitions"; "SUMMARY - The Merger Parties; 1The Company"; and
"MANAGEMENT Directors and Executive Officers of the Company" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth on the Front Cover Page and in "SUMMARY -
Certain Definitions"; "SUMMARY - Information Concerning the Meeting; Record Date
for the Meeting; Quorum Requirements"; and "SUMMARY - Market Prices of and
Dividends on the Common Stock" of the Proxy Statement is incorporated herein by
reference.
(c) The information set forth in "SUMMARY - Market Prices of and
Dividends on the Common Stock" of the Proxy Statement is incorporated herein by
reference.
(d) The information set forth in "SUMMARY - Market Prices of and
Dividends on the Common Stock"; "SPECIAL FACTORS - Financing of the Merger"; and
"SPECIAL FACTORS Plans for the Company after the Merger" of the Proxy Statement
is incorporated herein by reference.
(e) Not applicable.
(f) The information set forth in "CERTAIN TRANSACTIONS IN THE COMMON
STOCK" of the Proxy Statement is incorporated herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
This Statement is being filed jointly by the Company (which is the
issuer of the class of equity securities that is the subject of the Rule 13e-3
transaction), Mergeco and the Continuing Shareholders.
(a) - (d) The information set forth in "SUMMARY - Certain Definitions";
"SUMMARY The Merger Parties"; "BUSINESS OF THE COMPANY"; "MANAGEMENT"; and
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of the Proxy
Statement is incorporated herein by reference.
(e) During the last five years, neither the Company, nor, to the best
of its knowledge, any of its directors, executive officers or controlling
persons has been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors). During the last five years, neither
Mergeco, nor any of its members has been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors). During the last five
years, none of the individual Continuing Shareholders has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors).
During the last five years, the sole general partner of the Joseph Sbarro (1994)
Family Limited Partnership has not been convicted in a criminal proceeding
(excluding traffic violations or similar
-17-
<PAGE>
misdemeanors). During the last five years, neither of the trustees of the Trust
of Carmela Sbarro has been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors).
(f) During the last five years, neither the Company, nor, to the best
of its knowledge, any of its directors, executive officers or controlling
persons, was a party to a civil proceeding of a judicial or administrative body
of competent jurisdiction and as a result of such proceeding was or is subject
to a judgment, decree or final order enjoining further violations of, or
prohibiting activities, subject to, federal or state securities laws or finding
any violation of such laws. During the last five years, neither Mergeco, nor any
of its members was a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding was or is
subject to a judgment, decree or final order enjoining further violations of, or
prohibiting activities, subject to, federal or state securities laws or finding
any violations of such laws. During the last five years, none of the individual
Continuing Shareholders was a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining further
violations of, or prohibiting activities, subject to, federal or state
securities laws or finding any violations of such laws. During the last five
years, the sole general partner of the Joseph Sbarro (1994) Family Limited
Partnership was not a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining further
violations of, or prohibiting activities, subject to, federal or state
securities laws or finding any violations of such laws. During the last five
years, neither of the trustees of the Trust of Carmela Sbarro was a party to a
civil proceeding of a judicial or administrative body of competent jurisdiction
and as a result of such proceeding was or is subject to a judgment, decree or
final order enjoining further violations of, or prohibiting activities, subject
to, federal or state securities laws or finding any violations of such laws.
(g) The information set forth in "SUMMARY - The Merger Parties"; and
"MANAGEMENT" of the Proxy Statement is incorporated herein by reference.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) (1) Not applicable.
(a) (2) and (b) The information set forth in "SPECIAL FACTORS -
Background of the Transaction"; "MANAGEMENT - Directors and Executive Officers
of the Company"; and "CERTAIN TRANSACTIONS IN THE COMMON STOCK" of the Proxy
Statement is incorporated herein by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER"; "SUMMARY - Information Concerning the Meeting; Purpose
of the Meeting"; "SUMMARY - Special Factors; Certain Effects of the Merger";
"SUMMARY Special Factors; Litigation Pertaining to the Merger"; "SUMMARY -
Special Factors; Financing of
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<PAGE>
the Merger"; "SUMMARY - The Restated Merger Agreement"; "SPECIAL FACTORS -
Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS -
Certain Effects of the Merger"; "SPECIAL FACTORS - Financing of the Merger";
"SPECIAL FACTORS - Regulatory Approvals"; "LITIGATION PERTAINING TO THE MERGER";
and "THE RESTATED MERGER AGREEMENT" of the Proxy Statement is incorporated
herein by reference.
(b) The information set forth in "SUMMARY - Information Concerning the
Meeting; Purpose of the Meeting"; "SUMMARY - Information Concerning the Meeting;
Voting Require ments"; "SUMMARY - Special Factors; Certain Effects of the
Merger"; "SUMMARY - Special Factors; Litigation Pertaining to the Merger";
"SUMMARY - The Restated Merger Agreement; The Merger Consideration"; "SPECIAL
FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL
FACTORS - Certain Effects of the Merger"; "LITIGATION PERTAINING TO THE MERGER -
Current Shareholder Litigation"; "THE RESTATED MERGER AGREEMENT - The Merger;
Merger Consideration"; and "THE RESTATED MERGER AGREEMENT - Treatment of
Options" of the Proxy Statement is incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a) and (b) The information set forth in "SUMMARY - Special Factors;
Plans for the Company after the Merger"; and "SPECIAL FACTORS - Plans for the
Company after the Merger" of the Proxy Statement is incorporated herein by
reference.
(c) The information set forth in "SPECIAL FACTORS - Interests of
Certain Persons in the Merger and the Company; Directors and Officers of the
Surviving Corporation"; and "THE RESTATED MERGER AGREEMENT - Directors and
Officers, Certificate of Incorporation and By-Laws Following the Merger" of the
Proxy Statement is incorporated herein by reference.
(d) - (e) The information set forth in "SUMMARY - Special Factors;
Plans for the Company after the Merger"; "SUMMARY - Special Factors; Financing
of the Merger"; "SUMMARY - Market Prices of and Dividends on the Common Stock";
"SPECIAL FACTORS - Plans for the Company after the Merger"; and "SPECIAL FACTORS
- - Financing of the Merger" of the Proxy Statement is incorporated herein by
reference.
(f) - (g) The information set forth in "SUMMARY - Special Factors;
Certain Effects of the Merger"; and "SPECIAL FACTORS - Certain Effects of the
Merger" of the Proxy Statement is incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in "SUMMARY - Special Factors; Financing
of the Merger"; and "SPECIAL FACTORS - Financing of the Merger" of the Proxy
Statement is incorporated herein by reference.
-19-
<PAGE>
(b) The information set forth in "SPECIAL FACTORS - Interests of
Certain Persons in the Merger and the Company; Compensation of Special Committee
Members"; "SPECIAL FACTORS Fees and Expenses"; "SPECIAL FACTORS - Financing of
the Merger; Terms of Bear Stearns' Engagement"; "LITIGATION PERTAINING TO THE
MERGER - Current Shareholder Litigation"; and "THE RESTATED MERGER AGREEMENT -
Fees and Expenses" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth in "SUMMARY - Special Factors; Financing
of the Merger"; "SPECIAL FACTORS - Certain Financial Projections"; "SPECIAL
FACTORS - Plans for the Company after the Merger"; and "SPECIAL FACTORS -
Financing of the Merger" of the Proxy Statement is incorporated herein by
reference.
(d) The information set forth in "SUMMARY - Special Factors; Financing
of the Merger"; and "SPECIAL FACTORS - Financing of the Merger" of the Proxy
Statement is incorporated herein by reference.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) and (c) The information set forth in "SUMMARY - Special Factors;
Continuing Share holders' Purpose and Reasons for the Merger"; "SPECIAL FACTORS
- - Background of the Transaction"; and "SPECIAL FACTORS - The Continuing
Shareholders' Purpose and Reasons for the Merger" of the Proxy Statement is
incorporated herein by reference.
(b) The information set forth in "SPECIAL FACTORS - Background of the
Transaction" and "SPECIAL FACTORS - The Continuing Shareholders Purpose and
Reasons for the Merger" of the Proxy Statement is incorporated herein by
reference.
(d) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER"; "SUMMARY - Information Concerning the Meeting; Purpose
of the Meeting"; "SUMMARY - Special Factors; Plans for the Company after the
Merger"; "SUMMARY - Special Factors; Interests of Certain Persons in the Merger
and the Company"; "SUMMARY - Special Factors; Certain Effects of the Merger";
"SUMMARY - Special Factors; Certain U.S. Federal Income Tax Consequences";
"SUMMARY - Special Factors; Accounting Treatment"; "SUMMARY - Special Factors;
Financing of the Merger"; "SUMMARY - The Restated Merger Agreement; The Merger
Consideration"; "SPECIAL FACTORS - The Continuing Shareholders Purpose and
Reasons for the Merger"; "SPECIAL FACTORS - Certain Financial Projections";
"SPECIAL FACTORS - Plans for the Company after the Merger"; "SPECIAL FACTORS -
Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS
Certain Effects of the Merger"; "SPECIAL FACTORS - Certain U.S. Federal Income
Tax Consequences"; "SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS -
Accounting Treatment"; "SPECIAL FACTORS - Risk of Insolvency"; "THE RESTATED
MERGER AGREEMENT - The Merger; Merger Consideration"; "THE RESTATED MERGER
AGREEMENT - The Exchange Fund; Payment for Shares of Common Stock"; "THE
RESTATED
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<PAGE>
MERGER AGREEMENT - Treatment of Options"; and "THE RESTATED MERGER
AGREEMENT - Tax Withholding" of the Proxy Statement is incorporated herein by
reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) The information set forth on the Front Cover Page and in "CERTAIN
QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors;
Recom mendation of the Special Committee and the Board of Directors"; "SUMMARY -
Special Factors; Presentation and Fairness Opinion of Prudential Securities";
"SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS -
Recommendations of the Special Committee and the Board of Directors"; "SPECIAL
FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger"; and
"SPECIAL FACTORS - Presentation and Fairness Opinion of Prudential Securities"
of the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER"; "SUMMARY - Special Factors; Recommendation of the
Special Committee and the Board of Directors"; "SUMMARY - Special Factors;
Factors Considered by the Special Committee and the Board of Directors";
"SUMMARY - Special Factors; Presentation and Fairness Opinion of Prudential
Securities"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS
- - Recommendation of the Special Committee and the Board of Directors"; "SPECIAL
FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger";
"SPECIAL FACTORS - Presentation and Fairness Opinion of Prudential Securities";
"SPECIAL FACTORS - Certain Financial Projections"; "LITIGATION PERTAINING TO THE
MERGER Current Shareholder Litigation"; "THE RESTATED MERGER AGREEMENT - No
Solicitation; Fiduciary Obligation of Directors"; "THE RESTATED MERGER AGREEMENT
- - Conditions"; "THE RESTATED MERGER AGREEMENT - Termination" and "THE RESTATED
MERGER AGREEMENT - Amendment and Waiver" of the Proxy Statement is incorporated
herein by reference.
(c) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER"; "SUMMARY - Information Concerning the Meeting; Voting
Requirements"; "SUMMARY - The Restated Merger Agreement; Conditions to, and
Termination of, the Merger"; "SPECIAL FACTORS - Recommendations of the Special
Committee and the Board of Directors"; "THE RESTATED MERGER AGREEMENT - The
Merger; Merger Consideration; "THE RESTATED MERGER AGREEMENT - Covenants"; "THE
RESTATED MERGER AGREEMENT - Conditions"; and "THE RESTATED MERGER AGREEMENT -
Termination" of the Proxy Statement is incorporated herein by reference.
(d) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER"; "SUMMARY - Special Factors; Fairness Opinion of ;
"SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS -
Recommendation of the Special Committee and the Board of Directors"; "SPECIAL
FACTORS - The Continuing
-21-
<PAGE>
Shareholders' Purpose and Reasons for the Merger"; and "SPECIAL FACTORS -
Presentation and Fairness Opinion of of the Proxy Statement is incorporated
herein by reference.
(e) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER"; "SPECIAL FACTORS - Background of the Transaction";
"SPECIAL FACTORS - Recommendation of the Special Committee and the Board of
Directors"; and "SPECIAL FACTORS - The Continuing Shareholders' Purpose and
Reasons for the Merger" of the Proxy Statement is incorporated herein by
reference.
(f) The information set forth in "SPECIAL FACTORS - Background of the
Transaction" of the Proxy Statement is incorporated herein by reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) and (b) The information set forth in "CERTAIN QUESTIONS AND ANSWERS
ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors; Factors Considered by
the Special Committee and the Board of Directors"; "SUMMARY - Special Factors;
Fairness Opinion of ; "SPECIAL FACTORS - Background of the Transaction";
"SPECIAL FACTORS Recommendation of the Special Committee and the Board of
Directors"; "SPECIAL FACTORS The Continuing Shareholders' Purpose and Reasons
for the Merger"; and "SPECIAL FACTORS Presentation and Fairness Opinion of of
the Proxy Statement is incorporated herein by reference.
(c) The information set forth in "AVAILABLE INFORMATION" of the Proxy
Statement is incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information set forth in "SUMMARY - Information Concerning the
Meeting; Voting Requirements"; "SPECIAL FACTORS - Interests of Certain Persons
in the Merger and the Company"; and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" of the Proxy Statement is incorporated herein by
reference.
(b) The information set forth in "CERTAIN TRANSACTIONS IN THE COMMON
STOCK" of the Proxy Statement is incorporated herein by reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The information set forth in "SUMMARY - Information Concerning the
Meeting; Voting Requirements"; "SUMMARY - The Restated Merger Agreement";
"SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company";
"SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS - Financing of the
Merger"; and "THE RESTATED MERGER AGREEMENT" of the Proxy Statement is
incorporated herein by reference.
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<PAGE>
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS
WITH REGARD TO THE TRANSACTION.
(a) The information set forth in "SUMMARY - Information Concerning the
Meeting; Voting Requirements"; "SPECIAL FACTORS - Recommendation of the Special
Committee and the Board of Directors"; "THE RESTATED MERGER AGREEMENT -
Covenants"; and "CERTAIN TRANSACTIONS IN THE COMMON STOCK" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in "SUMMARY - Special Factors;
Recommendation of The Special Committee and the Board of Directors"; "SPECIAL
FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendation of
the Special Committee and the Board of Directors" of the Proxy Statement is
incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT
VOTING AND THE MERGER"; "SUMMARY - No Right of Appraisal"; and "LITIGATION
PERTAINING TO THE MERGER - Current Shareholder Litigation" of the Proxy
Statement is incorporated herein by reference.
(b) - (c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) The information set forth in "WHERE YOU CAN FIND MORE INFORMATION";
and "CONSOLIDATED FINANCIAL STATEMENTS" of the Proxy Statement is incorporated
herein by reference.
(b) Not Applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAIN OR UTILIZED.
(a) The information set forth on the Front Cover Page and in "SUMMARY -
Special Factors; Plans for the Company after the Merger"; "SUMMARY - Special
Factors; Financing of the Merger"; "SPECIAL FACTORS - Plans for the Company
after the Merger; "SPECIAL FACTORS - Interests of Certain Persons in the Merger
and the Company"; "SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS -
Financing of the Merger"; "THE RESTATED MERGER AGREEMENT Indemnification and
Insurance"; and "THE RESTATED MERGER AGREEMENT - Fees and Expenses" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth on the Front Cover Page and in "CERTAIN
QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; and "SPECIAL FACTORS -
Interests of
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<PAGE>
Certain Persons in the Merger and the Company; Compensation of the Special
Committee Members" of the Proxy Statement is incorporated herein by reference.
ITEM 16. ADDITIONAL INFORMATION.
The information set forth in "SUMMARY - Information Concerning the
Meeting" of the Proxy Statement is incorporated herein by reference.
Proxy Statement, together with the proxy card.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Debt Financing Letter, dated as of January 19, 1999.*
(b)(1) Presentation by Prudential Securities Incorporated to the
Special Committee, dated January 19, 1999.*
(b)(2) Opinion of Prudential Securities Incorporated, dated January
19, 1999 (set forth as Annex II to the Proxy Statement).*
(b)(3) Presentation by Bear, Stearns & Co. Inc. to certain Continuing
Shareholders, dated October 10, 1996 (in accordance with Rule
202 of Regulation S-T, Section II of the enclosed presentation
is being filed in paper pursuant to a continuing hardship
exemption).*
(b)(4) Presentation by Bear, Stearns & Co. Inc. to the Company's
Board of Directors, dated January 15, 1997.*
(b)(5) Presentation by Bear, Stearns & Co. Inc. to the Company's
Board of Directors, dated January 23, 1997 (in accordance with
Rule 202 of Regulation S-T, the financial models of this
presentation are being filed in paper pursuant to a continuing
hardship exemption).*
(b)(6) Presentation by Bear, Stearns & Co. Inc. to the Company's
Board of Directors, dated July 20, 1998 (in accordance with
Rule 201 of Regulation S-T, Appendices G, H, I and J of this
exhibit is being filed in paper pursuant to a temporary
hardship exemption).*
(b)(7) List of potential purchasers of the Company prepared in August
1998.*
(b)(8) August 1998 confidential information memorandum sent to
potential purchasers of the Company.*
(b)(9) Presentation by Prudential Securities Incorporated to the
Special Committee, dated March 3, 1998.*
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<PAGE>
(c) (1) Amended and Restated Agreement and Plan of Merger between
Sbarro, Inc., Sbarro Merger LLC, Mario Sbarro, Joseph Sbarro,
Anthony Sbarro, the Joseph Sbarro (1994) Family Limited
Partnership 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, dated as of January 19, 1999 (as amended June 17,
1999) (set forth as Annex I to the Proxy Statement).*
(d) (1) Proxy Statement (including Annexes I and II), together with
the proxy card.*
(e) Not applicable.
(f) As of the date of this Schedule 13E-3, no written instruction,
form or other material has been furnished to any person making
the actual oral solicitation or other recommendation for such
person's use, directly or indirectly, in connection with this
Rule 13e-3 transaction.
(g)(1) Memorandum of Understanding, dated January 19, 1999.*
(g)(2) Stipulation of Settlement dated April 7, 1999 among counsel to
the plaintiffs and counsel to the defendants in the Current
Shareholder Litigation (as defined in the Proxy Statement
filed as Exhibit (d)(1).*
- ---------------------
* Filed herewith.
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<PAGE>
SIGNATURES
After due inquiry and to the best of my knowledge and belief, the
undersigned certify that the information set forth in this statement is true,
complete and correct.
SBARRO, INC.
By: /s/ Mario Sbarro
--------------------------------------------
Name: Mario Sbarro
Title: President and Chief Executive Office
SBARRO MERGER LLC
By: /s/ Mario Sbarro
--------------------------------------------
Name: Mario Sbarro
Title: Member
/s/ Mario Sbarro
--------------------------------------------
Mario Sbarro
/s/ Joseph Sbarro
--------------------------------------------
Joseph Sbarro
/s/ Anthony Sbarro
--------------------------------------------
Anthony Sbarro
JOSEPH SBARRO (1994)
FAMILY LIMITED PARTNERSHIP
/s/ Joseph Sbarro
--------------------------------------------
Name: Joseph Sbarro
Title: General Partner
/s/ Mario Sbarro
--------------------------------------------
Mario Sbarro, as trustee under that certain
Trust Agreement dated April 28, 1984 for the
benefit of Carmela Sbarro
/s/ Franklin Montgomery
--------------------------------------------
Franklin Montgomery, as trustee under that
certain Trust Agreement dated April 28, 1984
for the benefit of Carmela Sbarro
Dated: June 21, 1999
-26-
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION
- ------- -----------
(a)(1) Debt Financing Letter, dated as of January 19, 1999.*
(b)(1) Presentation by Prudential Securities Incorporated to the
Special Committee, dated January 19, 1999.*
(b)(2) Opinion of Prudential Securities Incorporated, dated January
19, 1999 (set forth as Annex II to the Proxy Statement).*
(b)(3) Presentation by Bear, Stearns & Co. Inc. to certain Continuing
Shareholders, dated October 10, 1996 (in accordance with Rule
202 of Regulation S-T, Section II of the enclosed presentation
is being filed in paper pursuant to a continuing hardship
exemption).*
(b)(4) Presentation by Bear, Stearns & Co. Inc. to the Company's
Board of Directors, dated January 15, 1997.*
(b)(5) Presentation by Bear, Stearns & Co. Inc. to the Company's
Board of Directors, dated January 23, 1997 (in accordance with
Rule 202 of Regulation S-T, the financial models of this
presentation are being filed in paper pursuant to a continuing
hardship exemption).*
(b)(6) Presentation by Bear, Stearns & Co. Inc. to the Company's
Board of Directors, dated July 20, 1998 (in accordance with
Rule 201 of Regulation S-T, Appendices G, H, I and J of this
exhibit is being filed in paper pursuant to a temporary
hardship exemption).*
(b)(7) List of potential purchasers of the Company prepared in August
1998.*
(b)(8) August 1998 confidential information memorandum sent to
potential purchasers of the Company.*
(b)(9) Presentation by Prudential Securities Incorporated to the
Special Committee, dated March 3, 1998.*
(c)(1) Amended and Restated Agreement and Plan of Merger between
Sbarro, Inc., Sbarro Merger LLC, Mario Sbarro, Joseph Sbarro,
Anthony Sbarro, the Joseph Sbarro (1994) Family Limited
Partnership 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, dated as of January 19, 1999 (as amended June 17,
1999) (set forth as Annex I to the Proxy Statement).*
(d)(1) Proxy Statement (including Annexes I and II), together with
the proxy card.*
(e) Not applicable.
(f) As of the date of this Schedule 13E-3, no written instruction,
form or other material has been furnished to any person making
the actual oral solicitation or other recommendation for such
person's use, directly or indirectly, in connection with this
Rule 13e-3 transaction.
(g)(1) Memorandum of Understanding, dated January 19, 1999.*
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<PAGE>
(g)(2) Stipulation of Settlement dated April 7, 1999 among counsel to
the plaintiffs and counsel to the defendants in the Current
Shareholder Litigation (as defined in the Proxy Statement
filed as Exhibit (d)(1).*
- ---------------------
* Filed herewith.
-28-
[LETTERHEAD OF BEAR STEARNS]
As of January 19, 1999
Mr. Mario Sbarro
Mr. Joseph Sbarro
Mr. Anthony Sbarro
The Trust of Carmela Sbarro
Sbarro Merger LLC
Gentlemen:
We understand that Sbarro Merger LLC and Sbarro, Inc. (the "Company") have
entered into an Agreement and Plan of Merger dated as of January 19, 1999,
pursuant to which, among other things, all shareholders of the Company, other
than the Continuing Shareholders (as defined in the Agreement and Plan of
Merger), will receive $28.85 per share in cash (the "Transaction").
You have informed us that the aggregate cash purchase price, together with fees
and expenses, will result in a total Transaction cost of approximately $408
million. You have informed us that the Transaction cost will be funded by: (A)
approximately $138 million of cash and marketable securities which is expected
to be available to the Company at the closing of the Transaction, (B)
approximately $300 million of total debt financing, based in all material
respects on the terms and conditions set forth in a term sheet delivered by you
to the Special Committee of the Company's Board of Directors considering the
Transaction (the "Debt Financing"). The Debt Financing shall include either a
bank revolving credit facility, which shall have undrawn availability on the
closing date of the Transaction, or excess cash to fund the Company's ongoing
working capital needs, including capital expenditures.
You have asked Bear, Stearns & Co. Inc. ("Bear Stearns") to act as placement
agent and arranger in connection with the Debt Financing.
This letter will confirm that, based upon and subject to (a) the foregoing, (b)
the information concerning the Company supplied to us by the Continuing
Shareholders and the Company, and (c) current market conditions, Bear Stearns is
highly confident as of the date hereof of its ability to place and arrange the
Debt Financing, subject to each of the following: (I) the negotiation of
definitive language with respect to the terms and conditions of the senior notes
included in the Debt Financing as set forth in the term sheet referred to above
and the negotiation of other acceptable terms and conditions of the Debt
Financing, including, but not limited to, interest rate, price and other
covenants; (II) the negotiation of acceptable terms, and the execution of
acceptable documentation, related to the Transaction and the Debt Financing;
(III) no material adverse change in the business, prospects, condition
(financial or otherwise) or results of operations of the Company; (IV)
satisfactory completion of legal due diligence; (V) nothing coming to our
<PAGE>
Sbarro Merger LLC
As of January 19, 1999
Page 2
attention which shall contradict or call into question (A) the information
previously provided to us by the Continuing Shareholders or the Company or (B)
the results of our financial due diligence investigation; (VI) no material
adverse change in market conditions for new issues of high yield debt or
syndicated bank loan facilities; (VII) no material adverse change in conditions
of the financial and capital markets generally, and (VIII) the Continuing
Shareholders' and the Company's full cooperation with respect to the marketing
of the Debt Financing. The acceptability of each of the foregoing will be
determined in the sole discretion of Bear Stearns' Commitment Committee.
This letter does not constitute a commitment or undertaking on the part of Bear
Stearns to provide any part of the Debt Financing described above and does not
ensure the successful placement, arrangement or completion of the Debt
Financing. Bear Stearns does not and shall not have any liability (whether
direct or indirect, in contract or tort or otherwise) to the Company, the
Continuing Shareholders or any other person or entity in connection with this
letter.
You are hereby authorized to deliver a copy of this letter to the Continuing
Shareholders' and the Company's respective affiliates and representatives;
provided, however, that in connection with the Transaction and the related Debt
Financing, no public reference to Bear Stearns or this letter shall be made by
the Continuing Shareholders or the Company or any of its respective
representatives or affiliates without our express written consent.
Yours sincerely,
BEAR, STEARNS & CO. INC.
By: /s/ John T. Kilgallon
------------------------------
John T. Kilgallon
Senior Managing Director
PROJECT OREGANO
Highly Confidential
------------------------------------------------------
Presentation to the Special Committee of the Board of
Directors
January 19, 1999
------------------------------------------------------
<PAGE>
PROJECT OREGANO
Table of Contents
I. Transaction Overview
II. Company Overview and
Historical Financial Information
III. Valuation Summary
A. Methodology
B. Risk and Growth Rankings - Pizza and Value Priced Italian
Restaurant Companies
C. Risk and Growth Rankings - Fast Food Restaurant Companies
D. Composite Implied Valuation
E. Discounted Cash Flow Analysis
F. Comparable Company Analysis
G. Comparable Transactions Analysis
H. Comparable Companies Valuation Update
Appendix
A. Comparable Companies Analysis
B. Rule 13e-3 Premiums Analysis
C. Weighted Average Cost of Capital
2
<PAGE>
PROJECT OREGANO
-----------------------
I. Transaction Overview
------------------------
<PAGE>
PROJECT OREGANO
TRANSACTION OVERVIEW
Transaction Overview
Synopsis: On January 20, 1998, the Sbarro family made an offer to
take Sbarro, Inc., a New York corporation (the "Company"
or "Sbarro"), private for $28.50 per share (the "Prior
Offer").
In June 1998, negotiations regarding the Prior Offer were
terminated and the Company announced it will explore
various strategic alternatives.
On November 25, 1998, the Company received a new proposal
from members of the Sbarro family to take the Company
private at $27.50 per share.
In January 1999, the Sbarro family increased its offer to
purchase, through a new company ("Mergeco"), each
outstanding share not owned by the Sbarro family to
$28.85. In addition, Mergeco will pay all transaction
related expenses including $2 million in legal fees as
part of an agreement to settle seven class action
lawsuits prior to the closing of the transaction.
Purchase Price: $28.85 per share, or in the aggregate $388.2 million for
the 13.5 million shares (approximately 65.6% of the
outstanding shares) of the Company's Common Stock not
currently owned by the members of the Sbarro family.
Accounting Treatment: Purchase Accounting
Consideration: Cash
4
<PAGE>
PROJECT OREGANO
TRANSACTION OVERVIEW
Transaction Overview
Terms: The offer is subject, among other things, to: (i)
entering into a definitive merger agreement; (ii)
approval of the transaction by the special committee of
the Board, the full Board of Directors, and the
Company's shareholders; (iii) receipt of satisfactory
financing for the transaction; (iv) continued suspension
of dividends by the Company; and (v) receipt of a
fairness opinion from the financial advisor to the
special committee of the Board stating that the proposed
transaction is fair from a financial point of view to
the public shareholders.
Financing: Management believes the transaction will be financed with
approximately $138.4 million in cash on the Company's
balance sheet and a total of $270.0 million in high yield
debt. Concurrent with the execution of the merger
agreement, Bear Stearns & Co. will provide the Company
with a "highly confident" letter.
5
<PAGE>
PROJECT OREGANO
TRANSACTION OVERVIEW
($ in thousands, except offer price and EPS)
Offer Price $28.85
LTM
Operating Implied
Sbarro Parameters (1) Multiple (5)
---------------------------- ------------------- ---------------
LTM Revenues (2) $357,928 1.3x
LTM EBITDA (2) 79,804 5.9x
LTM EBIT (2) 56,825 8.3x
LTM Net Income (3) 38,206 15.7x
1998 EPS (3) (4) 1.86 15.5x
1999 EPS (3) (4) 1.87 15.4x
Tangible Book Value (3) 241,838 2.5x
(1) As of 10/4/98.
(2) Enterprise value multiple; assumes utilization $125.8 million of cash on
balance sheet as of 10/4/98.
(3) Equity value multiple.
(4) Source: Company management.
(5) All multiples assume offer price for 100% of Sbarro's outstanding shares.
6
<PAGE>
PROJECT OREGANO
TRANSACTION OVERVIEW
Transaction Assumptions
($ in millions)
<TABLE>
<CAPTION>
- ------------------------------------------------ --------------------------------------------------------------------
Sources Uses
- ------------------------------------------------ --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of Shares Outstanding (000s) 20,528
Number of Shares to be Repurchased (000s) 13,457 65.6%
Excess Cash on Balance Sheet (1) $ 138.4 Purchase Price of Equity $ 388.2
Purchase Price of Options (2) 7.1
High Yield Debt 270.0 Non-Financing Costs (3) 4.6
------------ ------------
Total Purchase Price $ 400.0
Financing Costs (3) $ 8.4
------------
Total Sources of Funds $ 408.4 Total Uses of Funds $ 408.4
============ ============
- ------------------------------------------------ --------------------------------------------------------------------
(1) Projected as of 12/31/98.
(2) Options outstanding as of 12/2/98. Treasury stock method assumed.
(3) Company estimate. Non-financing costs include $2 million of legal fees as
part of litigation settlement.
</TABLE>
7
<PAGE>
PROJECT OREGANO
TRANSACTION OVERVIEW
Pro Forma Capitalization
($ in millions)
- -------------------------------------------------------------------------------
Pro Forma
Estimated % of Total
Pro Forma Capitalization 12/31/98 Capitalization
- -------------------------------------------------------------------------------
Cash & Cash Equivalents $ 6.6 0.0%
High Yield Debt 270.0 79.4%
---------------- ------------------
Total Long Term Debt $ 270.0 79.4%
Common Equity 70.1 20.6%
---------------- ------------------
Total Shareholders' Equity $ 70.1 20.6%
Total Capitalization $ 340.1 100.0%
================ ==================
- -------------------------------------------------------------------------------
8
<PAGE>
PROJECT OREGANO
------------------------------------------
II. Company Overview and Historical
Financial Information
-------------------------------------------
<PAGE>
PROJECT OREGANO
----------------
A. Description
----------------
<PAGE>
PROJECT OREGANO
COMPANY OVERVIEW
Description
o The Company develops, operates, and franchises an international chain of
family-style, cafeteria-type Italian restaurants under the "Sbarro" and
"Sbarro The Italian Eatery" names.
o Sbarro's menu consists of popular Italian food, including pizza, pasta, hot
and cold Italian entrees, salads, sandwiches, and desserts.
o The restaurants are located primarily in malls, and to a lesser extent,
airports, hospitals, universities, toll roads, and office cafeterias.
o As of October 4, 1998, the Company had 881 units in operation which
consisted of: 625 Company-owned units and 256 franchised units of which 797
were domestic units and 84 were international units.
o Since its initial public offering in 1985, the Company has expanded from
123 restaurants to 881 as of October 4, 1998. Over the past three years,
Sbarro's compound annual growth rate in the number of restaurants added has
slowed to approximately 5%, with franchised restaurants growing faster than
company-owned locations.
11
<PAGE>
PROJECT OREGANO
COMPANY OVERVIEW
Ownership and Management Summary
o Sbarro family members and the Trust of Carmela Sbarro own 34.4% of the
Company's outstanding common stock.
o Certificate of Incorporation requires affirmative vote of holders of at
least 66 2/3% of the total number of common shares outstanding to merge,
consolidate, or sell 25% or more of the Company's assets.
o Senior management includes:
Mario Sbarro - Chairman of the Board, CEO, and President
Anthony Sbarro - Vice Chairman of the Board
Joseph Sbarro - Senior Executive VP and Secretary
Gennaro A. Sbarro - Corporate Vice President Franchise Operations
Gennaro J. Sbarro - Corporate Vice President Operations - East
Anthony J. Missano - Corporate Vice President Operations - West
Robert S. Koebele - Chief Financial Officer
Leonard G. Skrosky - Senior Vice President - Real Estate
George W. Herz - General Counsel
12
<PAGE>
PROJECT OREGANO
----------------------
B. Financial Review
----------------------
<PAGE>
PROJECT OREGANO
FINANCIAL REVIEW
Historical and Projected Balance Sheets
(In 000's)
<TABLE>
<CAPTION>
Historical (1) Projected (1)
---------------------------------- ---------------------------------------------------------------
FY FY FY FY FY FY FY FY
ASSETS 1996 1997 10/4/98 1998 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 114,818 $ 127,310 $ 125,805 $ 144,970 $ 168,923 $ 194,593 $ 222,612 $ 251,356 $ 281,332
Accounts receivables 1,865 2,375 3,887 2,484 2,551 2,653 2,759 2,865 2,973
Inventories 2,841 2,962 2,572 3,173 3,274 3,401 3,532 3,664 3,797
Prepaid expenses 1,409 1,768 6,025 1,888 1,938 2,016 2,096 2,177 2,259
Total current assets 120,933 134,415 138,289 152,515 176,687 202,664 230,999 260,063 290,361
Property and equipment, net 130,993 136,798 138,691 135,622 127,056 117,970 109,117 100,650 92,112
Deferred charges, net 1,633 1,596 NA 1,600 1,600 1,600 1,600 1,600 1,600
Other assets 5,100 5,840 6,129 5,800 5,800 5,800 5,800 5,800 5,800
Total assets $ 258,659 $ 278,649 $ 283,109 $ 295,536 $ 311,143 $ 328,034 $ 347,515 $ 368,112 $ 389,874
LIABILITIES AND EQUITY
Accounts payable $ 7,173 $ 10,086 $ 6,560 $ 10,822 $ 11,166 $ 11,599 $ 12,045 $ 12,496 $ 12,950
Accrued expenses 22,663 26,025 23,998 27,930 28,816 29,935 31,087 32,250 33,422
Dividends payable 4,691 5,521 - 5,521 5,521 5,521 5,521 5,521 5,521
Income taxes 5,287 4,777 32 4,777 4,777 4,777 4,777 4,777 4,777
Total current liabilities 39,814 46,409 30,590 49,050 50,280 51,832 53,431 55,043 56,670
Deferred income taxes 13,645 11,801 10,681 10,301 8,801 7,301 7,301 7,301 7,301
Total liabilities 53,459 58,210 41,271 59,351 59,081 59,133 60,732 62,344 63,971
Common Stock 31,423 32,648 34,721 32,648 32,648 32,648 32,648 32,648 32,648
Retained earnings 173,777 187,791 207,117 203,538 219,414 236,252 254,136 273,120 293,254
Shareholders' equity 205,200 220,439 241,838 236,186 252,062 268,900 286,784 305,768 $ 325,902
Total liabilities and
shareholders' equity $ 258,659 $ 278,649 $ 283,109 $ 295,536 $ 311,143 $ 328,034 $ 347,515 $ 368,112 $ 389,874
</TABLE>
(1) Historical results from Company's 10-K. Projections provided by the
Company.
14
<PAGE>
PROJECT OREGANO
FINANCIAL REVIEW
HISTORICAL AND PROJECTED INCOME STATEMENTS
($ in 000's, except per share data)
<TABLE>
<CAPTION>
Historical (1) Projected (1)
---------------------------------------- ------------------------------------------------------------
FY FY YTD YTD FY FY FY FY FY FY
1996 1997 10/5/97 10/4/98 1998 (2) 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C> <C> <C> C> <C>
Restaurant sales $ 319,315 $ 337,723 $ 244,903 $ 256,708 $ 353,564 $ 364,790 $ 378,954 $393,536 $ 408,250 $ 423,096
Franchise related income 6,375 7,360 5,152 6,192 9,038 7,600 8,396 9,209 10,045 10,890
Total revenues 325,690 345,083 250,055 262,900 362,602 372,391 387,350 402,745 418,295 433,986
Cost of food and paper
products 68,668 69,469 50,289 54,068 74,248 76,606 79,580 82,643 85,733 88,850
Gross profit 257,022 275,614 199,766 208,832 288,354 295,785 307,770 320,103 332,563 345,136
Payroll and other benefits 78,258 84,910 63,045 68,161 91,043 93,933 97,581 101,336 105,124 108,947
Occupancy and other expenses 85,577 93,528 71,554 76,301 99,705 102,871 106,865 110,977 115,127 119,313
General and administrative 14,940 17,762 13,354 14,738 19,399 19,923 20,723 21,547 22,379 23,238
Unit closings and
litigation charges - 3,300 - 6,055 - - - - - -
Other income (3) (1,171) (1,653) (1,324) (2,242) (2,000) (3,500) (3,500) (3,500) (3,500) (3,500)
Total costs
and expenses 177,604 197,847 146,629 163,013 208,147 213,227 221,669 230,360 239,130 247,998
EBITDA 79,418 81,067 53,137 51,874 80,207 82,557 86,101 89,743 93,433 97,138
Depreciation 22,910 23,922 17,999 17,056 23,426 24,016 24,536 24,903 25,117 25,188
EBIT 56,508 57,145 35,138 34,818 56,780 58,542 61,564 64,840 68,316 71,951
Interest income 3,798 4,352 3,288 3,734 4,956 5,775 6,652 7,610 8,592 9,617
Income before taxes 60,306 58,197 38,426 32,497 61,736 64,316 68,216 72,450 76,909 81,568
Income taxes 22,916 22,115 14,602 12,349 23,460 25,727 27,287 28,980 30,764 32,627
NI - before unit closings
provision & accounting
change $ 37,390 $ 38,128 $ 23,824 $ 23,902 $ 38,276 $ 38,590 $ 40,930 $ 43,470 $ 46,145 $ 48,941
EPS, excludes unit closings
provision & accounting
change $ 1.83 $ 1.86 $ 1.16 $ 1.16 $ 1.86 $ 1.87 $ 1.99 $ 2.11 $ 2.24 $ 2.38
</TABLE>
- ---------------------
(1) Historical results from Company's 10-K. Projections provided by the
Company.
(2) Based on 52 week year -1998 will have 53 weeks and have EBIT of
approximately $3 million for the 53rd week.
(3) Includes income from joint ventures, income from two 20% owned stores,
beverage rebates, insurance recoveries, and rental/leasing income before
depreciation on new building.
(4) Projected EPS assumes 20.6 million diluted shares outstanding, the same
number of diluted shares outstanding as of 10/4/98.
15
<PAGE>
PROJECT OREGANO
FINANCIAL REVIEW
HISTORICAL AND PROJECTED INCOME STATEMENT RELATIONSHIPS
<TABLE>
<CAPTION>
Historical (1) Projected (1)
------------------------------------- --------------------------------------------------------
FY FY YTD YTD FY FY FY FY FY FY
1996 1997 10/5/97 10/4/98 1998 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurant sales (2) 98.0% 97.9% 97.9% 97.6% 97.5% 98.0% 97.8% 97.7% 97.6% 97.5%
Franchise related income (2) 2.0% 2.1% 2.1% 2.4% 2.5% 2.0% 2.2% 2.3% 2.4% 2.5%
------------------------------------- --------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of food and paper products (3) 21.5% 20.6% 20.5% 21.1% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0%
Gross Margin (3) 80.5% 81.6% 81.6% 81.4% 81.6% 81.1% 81.2% 81.3% 81.5% 81.6%
Payroll and other benefits (3) 24.5% 25.1% 25.7% 26.6% 25.8% 25.8% 25.8% 25.8% 25.8% 25.8%
Occupancy and other expenses (3) 26.8% 27.7% 29.2% 29.7% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2%
General and administrative (2) 4.6% 5.1% 5.3% 5.6% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4%
EBITDA (2) 24.4% 23.5% 21.3% 19.7% 22.1% 22.2% 22.2% 22.3% 22.3% 22.4%
EBIT (2) 17.4% 16.6% 14.1% 13.2% 15.7% 15.7% 15.9% 16.1% 16.3% 16.6%
Net income (2) 11.5% 11.0% 9.5% 9.1% 10.6% 10.4% 10.6% 10.8% 11.0% 11.3%
</TABLE>
(1) Historical results from Company's 10-K. Projections provided by the
Company.
(2) As a percentage of total revenues.
(3) As a percentage of restaurant sales.
16
<PAGE>
PROJECT OREGANO
FINANCIAL REVIEW
Operating Performance (1)
<TABLE>
<CAPTION>
FY FY YTD YTD FY FY FY FY FY FY
Company-Owned Restaurants 1996 1997 10/5/97 10/4/98 1998 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning number 571 597 597 623 623 633 655 677 699 721
Additions 29 30 19 19 25 25 25 25 25 25
Acquired from (sold to)
franchisees 1 4 2 1 1 - - - -
Divestitures (4) (8) (5) (18) (16) (3) (3) (3) (3) (3)
Ending number 597 623 613 625 633 655 677 699 721 743
Percent of total 73.2% 72.3% 73.1% 70.9% 70.4% 68.5% 66.8% 65.3% 64.0% 62.8%
Franchised Restaurants
Beginning number 200 219 219 239 239 266 301 336 371 406
Additions 36 47 31 26 40 40 40 40 40 40
Purchases from (sold to)
franchisees (1) (4) (2) (1) (1) - - - - -
Divestitures (16) (23) (22) (8) (12) (5) (5) (5) (5) (5)
Ending number 219 239 226 256 266 301 336 371 406 441
Percent of total 26.8% 27.7% 26.9% 29.1% 29.6% 31.5% 33.2% 34.7% 36.0% 37.2%
All Restaurants
Beginning number 771 816 816 862 862 899 956 1,013 1,070 1,127
Additions 65 77 50 45 65 65 65 65 65 65
Closed during period (20) (31) (27) (26) (28) (8) (8) (8) (8) (8)
Ending number 816 862 839 881 899 956 1,013 1,070 1,127 1,184
Comparative Store Sales Growth -0.18% -0.36% -0.20% 0.90% 1.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Average Sales per Restaurant
($ in millions) $0.547 $0.554 NA NA $0.563$ 0.566 $ 0.569 $0.572$ 0.575 $ 0.578
</TABLE>
(1) Information provided by the Company.
17
<PAGE>
PROJECT OREGANO
FINANCIAL REVIEW
Operating Performance (1)
<TABLE>
<CAPTION>
FY FY YTD YTD FY FY FY FY FY FY
Total Systemwide Sales 1996 1997 10/5/97 10/4/98 1998 1999 2000 2001 2002 2003
($ in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company-Owned $ 319.3 $ 337.7 $ 244.9 $ 256.7 $ 353.6 $ 364.8 $ 379.0 $ 393.5 $ 408.3 $ 423.1
Franchised $ 118.3 $ 132.8 NA NA $ 142.2 $ 160.6 $ 181.2 $ 202.2 $ 223.4 $ 244.8
Total Systemwide Sales $ 437.6 $ 470.5 NA NA $ 495.7 $ 525.4 $ 560.2 $ 595.7 $ 631.6 $ 667.9
Franchise Royalty Fee (new) NA NA NA NA 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Franchise Royalty Fee (old) NA NA NA NA 7.5% 4.8% 4.8% 4.8% 4.8% 4.8%
Avg. Franchise Fee per Store(2) $ 0.019 $ 0.026 NA NA $ 0.020 $ 0.020 $ 0.020 $ 0.020 $ 0.020 $ 0.020
Total Initial Franchise Fees $ 0.7 $ 1.2 NA NA $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8
Total Franchise Royalty Fee $ 5.7 $ 6.2 NA NA $ 8.2 $ 6.8 $ 7.6 $ 8.4 $ 9.2 $ 10.1
Total Revenue from Franchisees $ 6.4 $ 7.4 $ 5.2 $ 6.2 $ 9.0 $ 7.6 $ 8.4 $ 9.2 $ 10.0 $ 10.9
Total Revenue ($ in millions)
Company-Owned $ 319.3 $ 337.7 $ 244.9 $256.7 $ 353.6 $ 364.8 $ 379.0 $ 393.5 $ 408.3 $ 423.1
Franchise Related Income $ 6.4 $ 7.4 $ 5.2 $ 6.2 $ 9.0 $ 7.6 $ 8.4 $ 9.2 $ 10.0 $ 10.9
Total Revenue $ 325.7 $ 345.1 $ 250.1 $262.9 $ 362.6 $ 372.4 $ 387.3 $ 402.7 $ 418.3 $ 434.0
Total Capital Expenditures ($ in millions)
CapEx per New Restaurant NA NA NA NA $ 0.41 $ 0.41 $ 0.41 $ 0.41 $ 0.41 $ 0.41
New Restaurant CapEx $ 14.1 $ 15.9 NA NA $ 10.3 $ 10.3 $ 10.3 $ 10.3 $ 10.3 $ 10.3
Capital Expenditures
(New Headquarters) $ 4.3 $ 5.0 NA NA $ 7.0 $ - $ - $ - $ - $ -
Maintenance Capital
Expenditures $ 7.5 $ 7.6 NA NA $ 5.0 $ 5.2 $ 5.2 $ 5.8 $ 6.4 $ 6.4
</TABLE>
(1) Information provided by the Company.
(2) FY'96 and FY'97 average franchise/development fee per store was calcuated
based on total initial franchise fees and development fees divided by new
franchise stores. Projected fees are provided by the Company.
18
<PAGE>
PROJECT OREGANO
FINANCIAL REVIEW
WORKING CAPITAL RELATIONSHIPS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Historical Projected
-----------------------------------------------------------------------------------------------
FY FY FY FY FY FY FY FY
1996 1997 1998 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Inventory as days of COGS 15.1 15.6 15.6 15.6 15.6 15.6 15.6 15.6
Accounts receivable as days of sales 2.3 2.5 2.5 2.5 2.5 2.5 2.5 2.5
Prepaid expenses as days of sales 1.6 1.9 1.9 1.9 1.9 1.9 1.9 1.9
Accounts payable as days of COGS 38.1 53.0 53.2 53.2 53.2 53.2 53.2 53.2
Accrued expenses as days of COGS 120.5 136.7 137.3 137.3 137.3 137.3 137.3 137.3
Other assets $5,100 $5,840 $5,800 $5,800 $5,800 $5,800 $5,800 $5,800
Deferred charges, net (in 000s) $1,633 $1,596 $1,600 $1,600 $1,600 $1,600 $1,600 $1,600
Dividends payable (in 000's) $4,691 $5,521 $5,521 $5,521 $5,521 $5,521 $5,521 $5,521
Income taxes payable (in 000's) $5,287 $4,777 $4,777 $4,777 $4,777 $4,777 $4,777 $4,777
Deferred income taxes (in 000s) $13,645 $11,801 $10,301 $8,801 $7,301 $7,301 $7,301 $7,301
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
PROJECT OREGANO
FINANCIAL REVIEW
(Graphic omitted)
Graph depicting the daily prices of shares of Sbarro Inc. from January
12, 1998 to January 11, 1999.
(Graphic omitted)
Graph depicting the trading volume of shares of Sbarro Inc. from
January 12, 1998 to January 11, 1999.
Source: IDD Information Services/Tradeline
20
<PAGE>
PROJECT OREGANO
FINANCIAL REVIEW
(Graphic omitted)
Graph depicting the closing prices from January 13, 1998 to January
11, 1999 of the S&P 500, Sbarro Inc., Pizza & Italian, and Fast Food as a
percentage of what their respective closing prices were on January 13, 1998.
Pizza & Italian is a composite of CEC, DRI, NPCI, PZZI, and UNO.
Fast Food is a composite of FM, YUM, SONC, and WEN.
Source: IDD Information Services/Tradeline
21
<PAGE>
PROJECT OREGANO
FINANCIAL REVIEW
(Graphic omitted)
Graph depicting what percent of the total volume of shares, traded
from January 12, 1998 to January 11, 1999, traded at specified prices.
Graph shows 16,784,400 cumulative shares, 82% of the 20,528,000 shares
outstanding as reported on 1/11/99.
Source: IDD Information Services/ Tradeline
22
<PAGE>
PROJECT OREGANO
-----------------------
III. Valuation Summary
-----------------------
<PAGE>
PROJECT OREGANO
------------------------
A. Methodology
------------------------
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
Methodology
o Reviewed historical and projected operational information provided by
Sbarro's management. Discussed the Company's historical results, future
growth opportunities, and other matters which we considered relevant to our
analysis with management.
o Reviewed the Company's historical and projected financial information, as
provided by the Company and its financial advisors.
o Analyzed qualitative factors associated with the transaction, including
existing management profile and stock ownership.
o Reviewed the Company's Confidential Memorandum dated August 1998 and the
written indications of interest received from prospective buyers. Discussed
this information with the Company's financial advisers.
o Valued the Company based on a discounted cash flow analysis.
o Compared and analyzed the Company's financial and operational performance
with certain publicly traded pizza and value priced Italian and fast food
restaurants. Valued Sbarro based on comparable publicly traded pizza and
value priced Italian and fast food restaurant companies.
o Analyzed recent mergers and acquisitions involving restaurant companies and
valued the Company based on implied multiples from these transactions.
o Analyzed the premiums paid in selected Rule 13e-3 transactions.
o Analyzed the stock trading history of Sbarro.
25
<PAGE>
PROJECT OREGANO
-----------------------------------
B. Risk and Growth Rankings - Pizza
and Value Priced Italian
Restaurant Companies
-----------------------------------
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
(Graphic omitted)
Graph comparing the sales growth of Sbarro to the range and mean of sales
growth for CEC, DRI, NPCI, PZZI, and UNO over a period of eight quarters ending
11/29/98.
27
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
Comparable Pizza and Value Priced Italian Restaurant Companies
--------------------------------------------------
Growth Factors
--------------------------------------------------
===============================================
Projected Consensus EPS Growth Rate
(Five (5) Year Growth)
===============================================
CEC Entertainment, Inc. 22.0%
NPC International, Inc. 21.0%
Uno Restaurant Corporation 15.0%
Darden Restaurants, Inc. 13.0%
Pizza Inn, Inc. 11.0%
Sbarro, Inc. 5.0%
===============================================
Mean 16.4%
Mean does not include Sbarro.
For further information and detailed analysis, see pages 61-65.
28
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
<TABLE>
<CAPTION>
Comparable Pizza and Value Priced Italian Restaurant Companies
------------------------------------------------------------------------------------------------------
Growth Factors
------------------------------------------------------------------------------------------------------
================================================ ================================================
Historical Sales Growth Historical EBITDA Growth
(Two (2) Year CAGR ) (Two (2) Year CAGR )
================================================ ================================================
<S> <C> <C> <C> <C> <C>
NPC International, Inc. 18.4% CEC Entertainment, Inc. 64.2%
CEC Entertainment, Inc. 15.2% NPC International, Inc. 18.8%
Uno Restaurant Corporation 5.4% Pizza Inn, Inc. 8.2%
Sbarro, Inc. 4.5% Sbarro, Inc. 6.7%
Darden Restaurants, Inc. 1.5% Uno Restaurant Corporation 6.4%
Pizza Inn, Inc. -0.6% Darden Restaurants, Inc. -6.2%
================================================ ================================================
Mean 8.0% Mean 18.3%
================================================ ================================================
Historical EBIT Growth Historical Net Income Growth
(Two (2) Year CAGR ) (Two (2) Year CAGR )
================================================ ================================================
CEC Entertainment, Inc. 301.2% Uno Restaurant Corporation 17.0%
Uno Restaurant Corporation 18.9% Pizza Inn, Inc. 13.6%
NPC International, Inc. 17.0% Sbarro, Inc. 10.1%
Sbarro, Inc. 9.5% NPC International, Inc. 9.2%
Pizza Inn, Inc. 6.8% Darden Restaurants, Inc. -9.2%
Darden Restaurants, Inc. -9.1% CEC Entertainment, Inc. NA
================================================ ================================================
Mean 67.0% Mean 7.6%
</TABLE>
Mean does not include Sbarro.
For further information and detailed analysis, see pages 61-65.
29
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
<TABLE>
<CAPTION>
Comparable Pizza and Value Priced Italian Restaurant Companies
------------------------------------------------------------------------------------------------------
Risk Factors ($ in millions)
------------------------------------------------------------------------------------------------------
================================================ ================================================
Total LTM Sales (1) Number of Restaurants (1)
================================================ ================================================
<S> <C> <C> <C> <C>
Darden Restaurants, Inc. $3,409.6 Darden Restaurants, Inc. 1,143
NPC International, Inc. $443.4 Sbarro, Inc. 881
CEC Entertainment, Inc. $380.3 NPC International, Inc. 649
Sbarro, Inc. $357.9 Pizza Inn, Inc. 505
Uno Restaurant Corporation $191.3 CEC Entertainment, Inc. 320
Pizza Inn, Inc. $68.2 Uno Restaurant Corporation 163
================================================ ================================================
Mean $898.6 Mean 556
================================================ ================================================
Equity Market Capitalization (2) Enterprise Value (2)
(Equity Market Capitalization plus Net Debt)
================================================ ================================================
Darden Restaurants, Inc. $2,532.8 Darden Restaurants, Inc. $2,840.6
Sbarro, Inc. $521.2 CEC Entertainment, Inc. $480.4
CEC Entertainment, Inc. $463.7 Sbarro, Inc. $395.4
NPC International, Inc. $305.0 NPC International, Inc. $391.3
Uno Restaurant Corporation $73.0 Uno Restaurant Corporation $114.4
Pizza Inn, Inc. $48.0 Pizza Inn, Inc. $54.8
================================================ ================================================
Mean $657.3 Mean $776.3
</TABLE>
Mean does not include Sbarro.
For further information and detailed analysis, see pages 61-65.
(1) As of latest reported quarter.
(2) As of 1/12/99.
30
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
<TABLE>
<CAPTION>
Comparable Pizza and Value Priced Italian Restaurant Companies
------------------------------------------------------------------------------------------------------
Risk Factors
------------------------------------------------------------------------------------------------------
================================================ ================================================
LTM EBITDA Margins (1) LTM EBIT Margins (1)
(EBITDA to Sales) (EBIT to Sales)
================================================ ================================================
<S> <C> <C> <C> <C> <C>
Sbarro, Inc. 22.3% Sbarro, Inc. 15.9%
CEC Entertainment, Inc. 21.9% CEC Entertainment, Inc. 14.8%
NPC International, Inc. 16.4% NPC International, Inc. 10.2%
Uno Restaurant Corporation 13.0% Pizza Inn, Inc. 9.9%
Pizza Inn, Inc. 11.3% Uno Restaurant Corporation 6.5%
Darden Restaurants, Inc. 9.8% Darden Restaurants, Inc. 6.0%
================================================ ================================================
Mean 14.5% Mean 9.5%
================================================ ================================================
Leverage (1) LTM Net Income Margins (1)
(Total Debt to Total Cap.(book)) (Net Income to Sales)
================================================ ================================================
Sbarro, Inc. 0.0x Sbarro, Inc. 10.7%
CEC Entertainment, Inc. 0.1x CEC Entertainment, Inc. 8.6%
Darden Restaurants, Inc. 0.2x Pizza Inn, Inc. 6.5%
Uno Restaurant Corporation 0.4x NPC International, Inc. 4.6%
NPC International, Inc. 0.4x Darden Restaurants, Inc. 3.5%
Pizza Inn, Inc. 0.5x Uno Restaurant Corporation 3.1%
================================================ ================================================
Mean 0.3x Mean 5.3%
</TABLE>
Mean does not include Sbarro.
For further information and detailed analysis, see pages 61-65.
(1) As of latest reported quarter.
31
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
------------------------------------------
C. Risk and Growth Rankings - Fast
Food Restaurant Companies
------------------------------------------
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
(Graphic omitted)
Graph comparing the sales growth of Sbarro to the range and mean of
sales growth of FM, SONC, YUM, and WEN over a period of eight quarters ending
10/4/98.
33
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
Comparable Fast Food Restaurant Companies
--------------------------------------------------------------------------
Growth Factors
--------------------------------------------------------------------------
===============================================
Projected Consensus EPS Growth Rate
(Five (5) Year Growth)
===============================================
Foodmaker, Inc. 20.0%
Sonic Corp. 17.0%
Tricon Global Restaurants, Inc. 15.0%
Wendy's International, Inc. 14.0%
Sbarro, Inc. 5.0%
===============================================
Mean 16.5%
Mean does not include Sbarro.
For further information and detailed analysis, see pages 72-76.
34
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
Comparable Fast Food Restaurant Companies
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Growth Factors
------------------------------------------------------------------------------------------------------
================================================ ================================================
Historical Sales Growth Historical EBITDA Growth
(Two (2) Year CAGR ) (Two (2) Year CAGR )
================================================ ================================================
<S> <C> <C> <C> <C> <C>
Sonic Corp. 20.4% Sonic Corp. 20.9%
Wendy's International, Inc. 8.1% Wendy's International, Inc. 15.1%
Foodmaker, Inc. 5.3% Foodmaker, Inc. 10.1%
Sbarro, Inc. 4.5% Sbarro, Inc. 6.7%
Tricon Global Restaurants, Inc. -2.8% Tricon Global Restaurants, Inc. -4.9%
================================================ ================================================
Mean 7.8% Mean 10.3%
================================================ ================================================
Historical EBIT Growth Historical Net Income Growth
(Two (2) Year CAGR ) (Two (2) Year CAGR )
================================================ ================================================
Sonic Corp. 18.8% Foodmaker, Inc. 41.1%
Wendy's International, Inc. 15.5% Sonic Corp. 16.0%
Foodmaker, Inc. 13.3% Tricon Global Restaurants, Inc. 13.9%
Sbarro, Inc. 9.5% Wendy's International, Inc. 11.1%
Tricon Global Restaurants, Inc. 0.6% Sbarro, Inc. 10.1%
================================================ ================================================
Mean 12.1% Mean 20.5%
</TABLE>
Mean does not include Sbarro.
For further information and detailed analysis, see pages 72-76.
35
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
Comparable Fast Food Restaurant Companies
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Risk Factors ($ in millions)
------------------------------------------------------------------------------------------------------
================================================ ================================================
Total LTM Sales (1) Number of Restaurants (1)
================================================ ================================================
<S> <C> <C> <C> <C> <C>
Tricon Global Restaurants, Inc. $8,732.0 Tricon Global Restaurants, Inc. 29,600
Wendy's International, Inc. $1,970.5 Wendy's International, Inc. 6,785
Foodmaker, Inc. $1,174.3 Sonic Corp. 1,847
Sbarro, Inc. $357.9 Foodmaker, Inc. 1,414
Sonic Corp. $219.1 Sbarro, Inc. 881
================================================ ================================================
Mean $3,024.0 Mean 9,912
================================================ ================================================
Equity Market Capitalization (2) Enterprise Value (2)
(Equity Market Capitalization plus Net Debt)
================================================ ================================================
Tricon Global Restaurants, Inc. $7,656.0 Tricon Global Restaurants, Inc. $11,251.0
Wendy's International, Inc. $2,769.1 Wendy's International, Inc. $3,118.4
Foodmaker, Inc. $866.1 Foodmaker, Inc. $1,177.9
Sbarro, Inc. $521.2 Sonic Corp. $510.8
Sonic Corp. $443.5 Sbarro, Inc. $395.4
================================================ ================================================
Mean $2,933.7 Mean $4,014.5
</TABLE>
Mean does not include Sbarro.
For further information and detailed analysis, see pages 72-76.
(1) As of latest reported quarter.
(2) As of 1/12/99.
36
<PAGE>
PROJECT OREGANO
RISK AND GROWTH RANKINGS
<TABLE>
<CAPTION>
Comparable Fast Food Restaurant Companies
------------------------------------------------------------------------------------------------------
Risk Factors
------------------------------------------------------------------------------------------------------
================================================ ================================================
LTM EBITDA Margins (1) LTM EBIT Margins (1)
(EBITDA to Sales) (EBIT to Sales)
================================================ ================================================
<S> <C> <C> <C> <C> <C>
Sonic Corp. 23.1% Sonic Corp. 17.5%
Sbarro, Inc. 22.3% Sbarro, Inc. 15.9%
Wendy's International, Inc. 17.9% Wendy's International, Inc. 12.5%
Tricon Global Restaurants, Inc. 13.3% Tricon Global Restaurants, Inc. 8.1%
Foodmaker, Inc. 11.4% Foodmaker, Inc. 7.8%
================================================ ================================================
Mean 16.4% Mean 11.5%
================================================ ================================================
Leverage (1) LTM Net Income Margins (1)
(Total Debt to Total Cap.(book)) (Net Income to Sales)
================================================ ================================================
Sbarro, Inc. 0.0x Sbarro, Inc. 10.7%
Sonic Corp. 0.3x Sonic Corp. 10.2%
Wendy's International, Inc. 0.3x Wendy's International, Inc. 7.3%
Foodmaker, Inc. 0.7x Foodmaker, Inc. 3.4%
Tricon Global Restaurants, Inc. 1.6x Tricon Global Restaurants, Inc. 1.6%
================================================ ================================================
Mean 0.7x Mean 5.6%
</TABLE>
Mean does not include Sbarro.
For further information and detailed analysis, see pages 72-76.
(1) As of latest reported quarter.
37
<PAGE>
PROJECT OREGANO
------------------------------
D. COMPOSITE IMPLIED VALUATION
------------------------------
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
COMPOSITE IMPLIED SHARE PRICE
[GRAPHIC OMITTED]
Graph comparing the offer price to the implied share price for Pizza &
Value Priced Italian restaurants and Fast Food restaurants. The graph also
compares the offer price to the implied share price based on discounted cash
flows and comparable transactions.
(1) The range of the above graph represents the mean values of the high, low,
mean, and median indication of each valuation methodology. Implied values
for each valuation approach are detailed on the following page.
39
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
<TABLE>
<CAPTION>
SUMMARY OF IMPLIED PRICES OF ALL VALUATION METHODOLOGIES
- ---------------------------------
Offer Price $ 28.85
- ---------------------------------
High Low Mean Median
-----------------------------------------------
<S> <C> <C> <C> <C>
Discounted Cash Flows $ 31.92 $ 25.99 $ 28.80 $ 28.73
Comparable Companies
Pizza and Value Priced Italian Restaurants
LTM Revenue $ 27.81 $ 16.36 $ 21.15 $ 20.41
LTM EBITDA 38.56 23.77 30.11 28.18
LTM EBIT 43.95 28.22 32.45 29.70
LTM Net Income 38.53 19.97 26.85 25.96
1998 EPS 40.79 22.87 29.19 26.55
1999 EPS 35.13 21.65 26.50 22.72
Tangible Book Value 30.20 11.54 23.97 27.07
Mean $ 36.42 $ 20.63 $ 27.17 $ 25.80
Fast Food Restaurants
LTM Revenue $ 46.22 $ 23.34 $ 32.78 $ 30.79
LTM EBITDA 44.84 39.86 42.04 41.72
LTM EBIT 49.83 40.59 43.52 41.83
LTM Net Income 39.92 35.47 37.30 36.50
1998 EPS 36.49 33.69 35.59 36.10
1999 EPS 35.13 28.94 31.98 31.93
Tangible Book Value 73.60 29.98 47.56 39.10
Mean $ 46.57 $ 33.13 $ 38.68 $ 36.85
Comparable Transactions
LTM Revenue $ 30.25 $ 15.61 $ 21.22 $ 18.54
LTM EBITDA 38.41 31.99 34.73 34.23
LTM EBIT 50.98 30.63 39.26 40.30
LTM Net Income 51.49 22.93 35.54 33.48
Tangible Book Value 71.48 11.01 38.33 31.61
Mean $ 48.52 $ 22.43 $ 33.82 $ 31.63
</TABLE>
40
<PAGE>
PROJECT OREGANO
------------------------------------
E. DISCOUNTED CASH FLOW ANALYSIS
------------------------------------
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
<TABLE>
<CAPTION>
PROJECTED UNLEVERED FREE CASH FLOWS
(In 000's) Fiscal Years Ended December 31,
--------------------------------------------------------------------
Free Cash Flow: 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
Operating Income (EBIT) $ 58,542 $ 61,564 $ 64,840 $ 68,316 $ 71,951
Less: Income Taxes @ 40.0% (23,417) (24,626) (25,936) (27,327) (28,780)
Tax-Adjusted Operating Income $ 35,125 $ 36,939 $ 38,904 $ 40,990 $ 43,170
Plus: Depreciation 24,016 24,536 24,903 25,117 25,188
Less: Capital Expenditures (15,450) (15,450) (16,050) (16,650) (16,650)
Plus: Changes in Non-Cash
Working Capital and Long-
Term Assets and Liabilities
Deferred Taxes (1,500) (1,500) - - -
Receivables (67) (102) (105) (107) (107)
Inventories (101) (127) (131) (132) (133)
Prepaid Expenses (51) (78) (80) (81) (82)
Deferred Charges - - - - -
Other Assets - - - - -
Accounts Payable and Accruals 1,230 1,552 1,598 1,613 1,627
- - - - -
-------------------------------------------------------------------
Free Cash Flow: $ 43,202 $ 45,770 $ 49,039 $ 50,750 $ 53,013
-------------------------------------------------------------------
</TABLE>
42
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
<TABLE>
<CAPTION>
IMPLIED VALUATION
Present Value of Projected Cash Flows and Terminal Values
(In 000's, except per share data)
----------------------------------------------------------------------------------------------------------------------------
Terminal PV of PV of
Value Free PV of Aggregate Less: PV of Equity
Multiple of Discount Cash Flow Terminal Present Total Plus: Equity per
2003 EBITDA Rate (1) 1999-2003 (2) Value Value Debt (3) Cash (3) Value Share (4)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.50% $183,674 $294,814 $478,488 $ - $ 125,805 $604,293 $ 29.09
11.50% 179,350 281,829 461,178 - 125,805 586,983 28.25
- ------------- ---------------------------------------------------------------------------------------------------------------
5.0x 12.50% 175,192 269,524 444,716 - 125,805 570,521 27.46
- ------------- ---------------------------------------------------------------------------------------------------------------
13.50% 171,193 257,858 429,051 - 125,805 554,856 26.71
14.50% 167,345 246,793 414,137 - 125,805 539,942 25.99
------------- -----------
------------- -----------
10.50% $183,674 $353,777 $537,451 $ - $ 125,805 $663,256 $ 31.92
11.50% 179,350 338,195 517,544 - 125,805 643,349 30.97
- -----------------------------------------------------------------------------------------------------------------------------
6.0x 12.50% 175,192 323,428 498,621 - 125,805 624,426 30.06
- -----------------------------------------------------------------------------------------------------------------------------
13.50% 171,193 309,429 480,622 - 125,805 606,427 29.19
14.50% 167,345 296,151 463,496 - 125,805 589,301 28.36
------------- ------------
(1) As of 1/12/99, weight average cost of capital was 2.16% based on Company's
industry peer group. See calculation in appendix.
(2) Assumes three-quarter year discounting.
(3) As of 10/4/98 balance sheet.
(4) Assumes fully diluted shares outstanding as of 12/2/98 of 20.776 million. mean $ 28.80
</TABLE>
43
<PAGE>
PROJECT OREGANO
-------------------------------
F. COMPARABLE COMPANY ANALYSIS
-------------------------------
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
IMPLIED VALUATION - PIZZA AND VALUE PRICED ITALIAN
COMPARABLE COMPANIES
{GRAPHIC OMITTED]
Graph comparing the offer price to the implied share price of Pizza
and Value Priced Italian restaurants based on LTM revenue, LTM EBITDA, LTM
EBIT, LTM new income, 1998 EPS, 1999 EPS and book value.
45
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
COMPARABLE COMPANY SUMMARY VALUATION MATRIX - PIZZA AND VALUE PRICED ITALIAN
RESTAURANTS
(In thousands except per share)
Offer Price $28.85
<TABLE>
<CAPTION>
Enterprise Value/ Equity Value/
LTM(1) LTM(1) LTM(1) LTM(1)
Revenue EBITDA EBIT Net Income 1998 EPS 1999 EPS
<S> <C> <C> <C> <C> <C> <C>
Sbarro Operating Parameters (2) $357,928 $ 79,804 $ 56,825 $ 38,206 $ 1.86 $ 1.87
Comparable Company Valuation Multiples(3)
Pizza and Value High 1.3x 8.5x 13.9x 21.0x 22.0x 18.8x
Priced Italian Low 0.6 4.6 8.1 10.9 12.3 11.6
Comparables (4)Mean 0.9 6.3 9.7 14.6 15.7 14.1
Median 0.8 5.8 8.6 14.1 14.3 12.1
------------------------------------------
Plus: Cash (5) $ 125,805 $ 125,805 $ 125,805
------------------------------------------
Diluted Shares Outstanding (6) 20,776 20,776 20,776 20,776 -
Implied Equity Value Per Share
Pizza and Value High $ 27.81 $ 38.56 $ 43.95 $ 38.53 $ 40.79 $ 35.13
Priced Italian Low 16.36 23.77 28.22 19.97 22.87 21.65
Comparables Mean 21.15 30.11 32.45 26.85 29.19 26.50
Median 20.41 28.18 29.70 25.96 26.55 22.72
10/4/98
Book Value
<C> <C>
Sbarro Operating Parameters (2) $ 241,838
Comparable Company Valuation Multiples(3)
Pizza and Value High 2.6x
Priced Italian Low 1.0
Comparables (4)Mean 2.1
Median 2.3
Plus: Cash (5)
Diluted Shares Outstanding (6) 20,776
Implied Equity Value Per Share Mean
Pizza and Value High $ 30.20 $36.42
Priced Italian Low 11.54 20.63
Comparables Mean 23.97 27.17
Median 27.07 25.80
(1) Financial information for the latest twelve months ended 10/4/98.
(2) Parameters exclude one-time charges.
(3) Revenue, EBITDA, and EBIT are multiples of Enterprise Value. Net Income
and Book Value are multiples of Equity Value.
(4) Includes CEC Entertainment, Darden Restaurants, NPC International,
Pizza Inn, and Uno Restaurant Corp. See Appendix for more detail.
(5) As of 10/4/98 Form 10-Q.
(6) Calculated using the treasury stock method.
</TABLE>
46
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES
<TABLE>
<CAPTION>
(In millions, except per LTM FYE Shares
share data) Ticker Date Date Out.
------ ---- ---- ------
<S> <C> <C> <C> <C> <C>
CEC Entertainment, Inc. (b) CEC 10/04/98 01/02/98 18.0
Darden Restaurants, Inc. (c)(d) DRI 11/29/98 05/31/98 137.8
NPC International, Inc. (e)(f) NPCI 09/29/98 03/31/98 24.4
Pizza Inn, Inc. (g)(h)* PZZI 09/27/98 06/28/98 11.7
Uno Restaurant Corporation (i) UNO 09/27/98 09/27/98 10.3
Sbarro, Inc. (Trading (j)(k) SBA 10/4/98 12/28/97 20.5
Multiples)
Summary Statistics Exclude
Sbarro, Inc.
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
Based on Latest Twelve Months Results
-------------------------------------
Enterprise Value
Market Values Multiples Equity Value Multiples
------------- ---------------- ----------------------
(In millions, except per 1/12/99 Book Net LTM
share data) Per Share Equity Unlevered Sales EBITDA EBIT Value Income E.P.S.
--------- ------ --------- ----- ------ ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CEC Entertainment, Inc. (b) $25.19 $463.7 $480.4 1.3x 5.8x 8.5x 2.6x 14.1x 14.3x
Darden Restaurants, Inc. (c)(d) $18.00 $2,532.8 $2,840.6 0.8x 8.5x 13.9x 2.5x 21.0x 22.1x
NPC International, Inc. (e)(f) $12.25 $305.0 $391.3 0.9x 5.4x 8.6x 2.1x 14.9x 15.1x
Pizza Inn, Inc. (g)(h)* $3.94 $48.0 $54.8 0.8x 7.1x 8.1x 7.4x 10.9x 12.0x
Uno Restaurant Corporation (i) $7.06 $73.0 $114.4 0.6x 4.6x 9.1x 1.0x 12.1x 12.8x
Sbarro, Inc. (Trading (j)(k) $25.38 $521.2 $395.4 1.1x 5.0x 7.0x 2.2x 13.6x 13.6x
Multiples)
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
Based on Forward Results
------------------------
Equity Value Multiples
----------------------
1999 P/E/
(In millions, except per 1998 1999 5yr
share data) E.P.S. E.P.S. Growth
----- ------ --------
<S> <C> <C> <C>
CEC Entertainment, Inc. (b) 14.0x 11.6x 0.5x
Darden Restaurants, Inc. (c)(d) 22.0x 18.8x 1.4x
NPC International, Inc. (e)(f) 14.6x 12.1x 0.6x
Pizza Inn, Inc. (g)(h)* 12.3x NA NA
Uno Restaurant Corporation (i) NA NA NA
Sbarro, Inc. (Trading (j)(k) 13.7x 13.5x 2.7x
Multiples)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summary Statistics Exclude High 1.3x 8.5x 13.9x 2.6x 21.0x 22.1x 22.0x 18.8x 1.4x
Sbarro, Inc. Low 0.6x 4.6x 8.1x 1.0x 10.9x 12.0x 12.3x 11.6x 0.5x
Mean 0.9x 6.3x 9.7x 2.1x 14.6x 15.2x 15.7x 14.1x 0.8x
Median 0.8x 5.8x 8.6x 2.3x 14.1x 14.3x 14.3x 12.1x 0.6x
Sbarro, Inc. (Implied 1.3x 5.9x 8.3x 2.5x 15.7x 15.5x 15.5x 15.4x NM
Multiple at Offer Price)
</TABLE>
See footnote descriptions on page 65.
47
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
IMPLIED VALUATION - FAST FOOD RESTAURANT
COMPARABLE COMPANIES
[GRAPHIC OMITTED]
Graph comparing the offer price to the implied share price of Fast Food
restaurants based on LTM revenue, LTM EBITDA, LTM EBIT, LTM new income, 1998
EPS, 1999 EPS and book value.
48
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
<TABLE>
<CAPTION>
Comparable Company Summary Valuation Matrix - Fast Food Restaurants
(In thousands, except per share)
Offer Price $28.85
Enterprise Value / Equity Value /
--------------------------------------- --------------------------------------------
LTM (1) LTM (1) LTM (1) LTM (1) 10/4/98
Revenue EBITDA EBIT Net Income 1998 EPS 1999 EPS Book Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sbarro Operating Parameters (2) $357,928 $ 79,804 $ 56,825 $ 38,206 $ 1.86 $ 1.87 $ 241,838
Comparable Company Valuation
Multiples (3)
Fast Food Restaurant High 2.3x 10.1x 16.0x 21.7x 19.6x 18.8x 6.3x
Comparables (4)Low 1.0 8.8 12.6 19.3 18.1 15.4 2.6
Mean 1.6 9.4 13.7 20.3 19.2 17.1 4.1
Median 1.4 9.3 13.1 19.8 19.4 17.0 3.4
-----------------------------------
Plus: Cash (5) $ 125,805 $125,805 $ 125,805
-----------------------------------
Diluted Shares Outstanding (6) 20,776 20,776 20,776 20,776 - - 20,776
Implied Equity Value Per Share Mean
Fast Food Restaurant High $ 46.22 $ 44.84 $ 49.83 $ 39.92 $ 36.49 $ 35.13 $ 73.60 $46.57
Comparables Low 23.34 39.86 40.59 35.47 33.69 28.94 29.98 33.13
Mean 32.78 42.04 43.52 37.30 35.59 31.98 47.56 38.68
Median 30.79 41.72 41.83 36.50 36.10 31.93 39.10 36.85
(1) Financial information for the latest twelve months ended 10/4/98.
(2) Parameters exclude one-time charges.
(3) Revenue, EBITDA, and EBIT are multiples of Enterprise Value. Net
Income and Book Value are multiples of Equity Value.
(4) Includes Foodmaker, Tricon Global Restaurants, Sonic Corp., and Wendy's.
See Appendix for more detail.
(5) As of 10/4/98 Form 10-Q.
(6) Calculated using the treasury stock method.
</TABLE>
49
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE FAST FOOD COMPANIES
<TABLE>
<CAPTION>
(In millions, except per LTM FYE Shares
share data) Ticker Date Date Out.
------ ---- ---- ----
<S> <C> <C> <C> <C>
Foodmaker, Inc. (b) FM 09/27/98 09/27/98 38.0
Tricon Global Restaurants, (c)(d)* YUM 09/05/98 12/27/97 152.9
Inc.
Sonic Corp. (e) SONC 08/31/98 08/31/98 18.9
Wendy's International, Inc. (f)(g) WEN 10/04/98 12/28/97 124.4
Sbarro, Inc. (Trading (h)(i) SBA 10/4/98 12/28/97 20.5
Multiples)
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
Based on Latest Twelve Months Results
(In millions, except per 1/12/99 Book Net LTM
share data) Per Share Equity Unlevered Sales EBITDA EBIT Value Income E.P.S.
--------- ------ --------- ----- ------ ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foodmaker, Inc. $21.94 $866.1 $1,177.9 1.0x 8.8x 12.8x 6.3x 21.7x 22.1x
Tricon Global Restaurants, $49.88 $7,656.0 $11,251.0 1.3x 9.7x 16.0x NA 56.2x 57.1x
Inc.
Sonic Corp. $22.88 $443.5 $510.8 2.3x 10.1x 13.3x 3.4x 19.8x 20.2x
Wendy's International, Inc. $22.00 $2,769.1 $3,118.4 1.6x 8.9x 12.6x 2.6x 19.3x 20.2x
Sbarro, Inc. (Trading $25.38 $521.2 $395.4 1.1x 5.0x 7.0x 2.2x 13.6x 13.6x
Multiples)
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
Based on Forward Results
------------------------
Equity Value Multiples
----------------------
1999 P/E/
(In millions, except per 1998 1999 5yr
share data) E.P.S. E.P.S. Growth
<S> <C> <C> <C>
Foodmaker, Inc. 18.1x 15.4x 0.8x
Tricon Global Restaurants, 19.6x 18.8x 1.3x
Inc.
Sonic Corp. 19.4x 16.3x NA
Wendy's International, Inc. 19.5x 17.7x 1.3x
Sbarro, Inc. (Trading 13.7x 13.5x 3.7x
Multiples)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
High 2.3x 10.1x 16.0x 6.3x 21.7x 22.1x 19.6x 18.8x 1.3x
Low 1.0x 8.8x 12.6x 2.6x 19.3x 20.2x 18.1x 15.4x 0.8x
Mean 1.6x 9.4x 13.7x 4.1x 20.3x 20.8x 19.2x 17.1x 1.1x
Median 1.4x 9.3x 13.1x 3.4x 19.8x 20.2x 19.4x 17.0x 1.3x
1.3x 5.9x 8.3x 2.5x 15.7x 15.5x 15.5x 15.4x NM
See footnote descriptions on page 76.
</TABLE>
50
<PAGE>
PROJECT OREGANO
-----------------------------------
G. COMPARABLE TRANSACTIONS ANALYSIS
------------------------------------
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
IMPLIED VALUATION- COMPARABLE TRANSACTIONS
(Graphic omitted)
Graph comparing the offer price to the implied share price of
comparable transactions based on LTM revenue, LTM EBITDA, LTM EBIT, LTM new
income, 1998 EPS, 1999 EPS and book value.
52
<PAGE>
<TABLE>
<CAPTION>
PROJECT OREGANO
VALUATION SUMMARY
Comparable Transaction Summary Valuation Matrix
(In thousands, except per share)
Offer Price $28.85
Enterprise Value / Equity Value /
--------------------------------------------- ---------------------------
LTM (1) LTM (1) LTM (1) LTM (1) 10/4/98
Revenue EBITDA EBIT Net Income Book Value
<S> <C> <C> <C> <C> <C> <C>
Sbarro Operating Parameters (2) $ 357,928 $ 79,804 $ 56,825 $ 38,206 $ 241,838
Comparable Transaction Valuation
Multiples (3)
High 1.4x 8.4x 16.4x 28.0x 6.1x
Low 0.6 6.8 9.0 12.5 0.9
Mean 0.9 7.5 12.1 19.3 3.3
Median 0.7 7.3 12.5 18.2 2.7
Plus: Cash (4) $ 125,805 $ 125,805 $ 125,805
Diluted Shares Outstanding (5) 20,776 20,776 20,776 20,776 20,776
Implied Equity Value Per Share Mean
High $ 30.25 $ 38.41 $ 50.98 $ 51.49 $ 71.48 $ 48.52
Low 15.61 31.99 30.63 22.93 11.01 22.43
Mean 21.22 34.73 39.26 35.54 38.33 33.82
Median 18.54 34.23 40.30 33.48 31.61 31.63
(1) Financial information for the latest twelve months ended 10/4/98.
(2) Parameters exclude one-time charges.
(3) Revenue, EBITDA, and EBIT are multiples of Enterprise Value. Net Income
and Book Value are multiples of Equity Value. Includes Spaghetti
Warehouse, Au Bon Pain, Pollo Tropical, Bertucci's, DavCo Restaurants,
International Dairy Queen, Perkins Family Restaurants, Krystal Company,
and Family Restaurants. See Appendix for more detail.
(4) As of 10/4/98 Form 10-Q.
(5) Calculated using the treasury stock method.
</TABLE>
53
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
<TABLE>
<CAPTION>
Comparable Transactions Valuation Summary
($ in millions)
<S> <C> <C> <C> <C>
Target Target Anounced Offer Terms EV
Acquiror Business Description Effective Attitude EPP
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Spaghetti Warehouse Operates 40 full service restaurants 9/18/98 Cash $ 50.7
casual-dining which compete in Pending Friendly $ 46.2
Consolidated Restaurant Cos the Italian segment.
- --------------------------------------------------------------------------------------------------------------------
Au Bon Pain Co Inc. (2) Own 152 stores and franchises 111 8/13/98 Cash $ 73.0
quick-service restaurants worldwide Pending Friendly $ 73.0
Bruckmann Rosser Sherrill & Co.
- --------------------------------------------------------------------------------------------------------------------
Pollo Tropical Inc Owns and operates 36, and franchise 6/4/98 Cash $ 95.1
19, quick-service restaurants. 7/20/98 Friendly $ 94.9
Carrols Corp
- --------------------------------------------------------------------------------------------------------------------
Bertucci's (3) (4) Operates 84, full-service Italian 4/3/98 Cash $101.7 $ 140.3
restaurants in 11 states. 7/21/98 Friendly $ 93.5 0.7x
NE Restaurant Co.
- --------------------------------------------------------------------------------------------------------------------
DavCo Restaurants (5) (6) Operates 229 Wendy's International 9/5/97 Cash $202.2 $ 299.1
Restaurants and 34 Friendly's 3/24/98 Friendly $151.1 0.7x
DavCo Acquisition Holding Inc. Restaurants.
- --------------------------------------------------------------------------------------------------------------------
International Dairy Queen (7) Develops, licenses and services a 10/21/97 Stock $536.6 $ 421.1
chain of over 6,000 quick-service 1/8/98 Friendly $582.2 1.3x
Berkshire Hathaway, Inc. restaurants
- --------------------------------------------------------------------------------------------------------------------
Perkins Family Restaurants, L.P. Owns and)operates 135 restaurants 8/4/97 Cash $240.8 $ 262.8
(8)(9)(10) and 333 franchised restaurants 12/23/97 Friendly $186.4 0.9x
The Restaurant Company in 32 states.
- --------------------------------------------------------------------------------------------------------------------
Krystal Company (11) Owns and operates over 250 9/2/97 Cash $137.6 $ 248.2
franchised quick-service restaurants 9/29/97 Friendly $108.4 0.6x
Port Royal Holdings, Inc. in 8 states
- --------------------------------------------------------------------------------------------------------------------
Family Restaurants, Inc. (12)(13) Coco's operates 170 bakery 3/4/96 Cash $306.5 $ 501.2
(Coco's and Carrows) restaurants and Carrows 5/23/96 Friendly $135.0 0.6x
Flagstar Companies, Inc. operates 157 family restaurants
primarily in California.
- --------------------------------------------------------------------------------------------------------------------
Table continued
<S> <C> <C> <C> <C> <C>
Target Revenue EBIT EBITDA Net Income TBV
Acquiror EV/REV. EV/EBIT EV/EBITDA EPP/Net Inc. EPP/TBV
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Spaghetti Warehouse $ 66.0 $ 2.3 $ 6.1 $ 1.2 $129.6
0.8x 22.5x 8.3x 38.7x 0.4x
Consolidated Restaurant Cos
- ----------------------------------------------------------------------------------------------
Au Bon Pain Co Inc. (2) $ 190.7 NA NA NA NA
0.4x NA NA NA NA
Bruckmann Rosser Sherrill & Co.
- ------------------------------------------------------------------------------------------------
Pollo Tropical Inc $ 67.7 $ 9.8 $12.2 $ 5.9 $ 31.1
1.4x 9.7x 7.8x 16.0x 3.1x
Carrols Corp
- ------------------------------------------------------------------------------------------------
Bertucci's (3) (4) $ 140.3 $ 6.2 $14.9 $ 3.3 $ 72.3
0.7X 16.4x 6.8x 28.0x 1.3x
NE Restaurant Co.
- ------------------------------------------------------------------------------------------------
DavCo Restaurants (5) (6) $ 299.1 $15.1 $24.0 $ 6.3 $ 24.6
0.7x 13.4x 8.4x 23.8x 6.1x
DavCo Acquisition Holding Inc.
- ------------------------------------------------------------------------------------------------
International Dairy Queen (7) $ 421.1 $59.7 $66.2 $38.1 $ 97.9
1.3x 9.0x 8.1x 15.3x 5.9x
Berkshire Hathaway, Inc.
- ------------------------------------------------------------------------------------------------
Perkins Family Restaurants, L.P. $ 262.8 $19.2 $35.1 $ 9.1 NM
(8)(9)(10) 0.9x 12.5x 6.9x 20.5x NM
The Restaurant Company
- ------------------------------------------------------------------------------------------------
Krystal Company (11) $ 248.2 9.3 $20.4 $ 3.4 $ 45.6
0.6x 14.8x 6.8x NM 2.4x
Port Royal Holdings, Inc.
- ------------------------------------------------------------------------------------------------
Family Restaurants, Inc. (12)(13) $501.2 $33.2 NA $ 10.0 $132.2
(Coco's and Carrows) 0.6x 9.2x NA 12.5x 0.9x
Flagstar Companies, Inc.
- ------------------------------------------------------------------------------------------------
Summary Statistics (excludes pending transactions)
Legend High 1.4x 16.4x 8.4x 28.0x 6.1x
EV = Enterprise Value Low 0.6x 9.0x 6.8x 12.5x 0.9x
EPP = Equity Purchase Price Mean 0.9x 12.1x 7.5x 19.3x 3.3x
LTM = Latest Twelve Months Median 0.7x 12.5x 7.3x 18.2x 2.7x
TBV = Tangible Book Value
Sbarro's Implied Multiple at Offer Price
1.3x 8.3x 5.9x 15.7x 2.5x
54
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
Footnotes:
- ------------------------------------
(1) Financial data excludes the results of discontinued operations,
extraordinary gains, one-time charges and pending transactions. Unless
otherwise noted, options are assumed to be cashed out based on the
treasury stock method.
(2) The management discussions in the relevant 10-K and 10-Qs were the
source of the revenue for the Au Bon Pain business unit.
(3) Outstanding shares as of the Form S-4 dated 11/5/98.
(4) Financial data as of LTM ended 4/18/98.
(5) Rule 13e-3 transaction. Buying group owned 48% of outstanding common stock.
(6) Financial data as of fiscal year ended 9/27/97.
(7) Depreciation and amortization not disclosed in Form 10-Q. Depreciation and
amortization is from latest Form 10-K.
(8) Company is a "pass through" entity. Tangible book value (TBV) has been
excluded from summary statistics.
(9) Net income is calculated based on an assumed 40% tax rate.
(10) Rule 13e-3 transaction.
(11) Company filed for bankruptcy in 1995, filed a plan of reorganization in
Feb. 1997, and was acquired in September. Therefore, the net income
multiple has been excluded from the summary statistics.
(12) Family Restaurants was a private company at the time of the transaction.
(13) Assumption of debt includes issuance of $150MM of senior notes to
refinance target's outstanding balance on revolver and the assumption of
capital lease obligations.
</TABLE>
55
<PAGE>
PROJECT OREGANO
----------------------------
H. COMPARABLE COMPANIES
VALUATION UPDATE
---------------------------
<PAGE>
PROJECT OREGANO
VALUATION SUMMARY
<TABLE>
<CAPTION>
Comparable Companies - Valuation Update
At 4/15/98
------------------------------------------------------------------------
Company Name Symbol Stock Price LTM EPS/ PE FTM EPS/PE (1) 1998 EPS/PE 1999 EPS/PE
- -------------------------------- ---------- ----------- -------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sbarro, Inc. SBA $29.50 $1.86 $2.08 $1.86 $1.87
15.9x 14.2x 15.9x 15.7x
Comparable Pizza and Value
Priced Italian Food
Companies
CEC Entertainment, Inc. CEC $33.56 $1.34 $1.66 $1.66 $1.98
25.0x 20.2x 20.2x 17.0x
Carden Restaurants, Inc. DRI $17.69 $0.53 $0.78 $0.74 $0.94
33.4x 22.7x 23.9x 18.8x
NPC International, Inc. NPCI $13.00 $0.72 $0.94 $0.95 $1.18
18.1x 13.8x 13.7x 11.0x
Pizza Inn, Inc. PZZI $5.50 $0.34 $0.42 $0.42 NA
16.2x 13.1x 13.1x NA
Uno Restaurant Corporation UNO $7.50 $0.42 NA NA NA
17.9x NA NA NA
------------------------------------------------------------------------ -
Excludes Mean 22.1x 17.5x 17.7x 15.6x
Sbarro Median 18.1x 17.0x 17.0x 17.0x
------------------------------------------------------------------------ -
Comparable Fast Food Companies
Foodmaker, Inc. FM $20.25 $0.95 $1.16 $1.17 $1.40
21.3x 17.5x 17.3x 14.5x
Tricon Global Restaurants, Inc. YUM $31.69 ($0.04) $1.86 $1.88 $2.12
NM 17.0x 16.9x 14.9x
Sonic Corp. SONC $22.50 $0.99 $1.19 $1.15 NA
22.8x 18.9x 19.6x NA
Wendy's International, Inc. WEN $22.00 $1.24 $1.14 $1.17 $1.34
17.7x 19.3x 18.8x 16.4x
------------------------------------------------------------------------ -
Excludes Mean 20.6x 18.2x 18.1x 15.3x
Sbarro Median 21.3x 18.2x 18.1x 14.9x
------------------------------------------------------------------------ -
Table continued At 01/12/99
----------------------------------------------------------- -------------
Company Name Stock Price LTM EPS/PE FTM EPS/PE (1) 1998 EPS/PE 1999 EPS/PE
- -------------------------------- ------------ ------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sbarro, Inc. . $25.38 $1.86 NA $1.86 $ 1.87
-14.0% 13.6x NA 13.7x 13.5x
Comparable Pizza and Value Price
Italian Food Companies
CEC Entertainment, Inc. $25.19 $1.77 $2.08 $1.80 $ 2.18
-25.0% 14.3x 12.1x 14.0x 11.6x
Carden Restaurants, Inc. $18.00 $0.82 $0.90 $0.82 $ 0.96
1.8% 22.1x 20.0x 22.0x 18.8x
NPC International, Inc. $12.25 $0.81 $0.87 $0.84 $ 1.01
-5.8% 15.1x 14.1x 14.6x 12.1x
Pizza Inn, Inc. $3.94 $0.33 NA $0.32 NA
-28.4% 12.0x NA 12.3x NA
Uno Restaurant Corporation $7.06 $0.55 NA NA NA
-5.8% 12.8x NA NA NA
-------------------------------------------------------------------
-12.6% 15.2x 15.4x 15.7x 14.1x
-5.8% 14.3x 14.1x 14.3x 12.1x
-------------------------------------------------------------------
Comparable Fast Food Companies
Foodmaker, Inc. $21.94 $0.99 $1.33 $1.21 $1.42
8.3% 22.1x 16.5x 18.1x 15.4x
Tricon Global Restaurants, Inc. $49.88 $0.87 $2.58 $2.54 $2.66
57.4% 57.1x 19.3x 19.6x 18.8x
Sonic Corp. $22.88 $1.13 $1.32 $1.18 $1.40
1.7% 20.2x 17.3x 19.4x 16.3x
Wendy's International, Inc. $22.00 $1.09 $1.22 $1.13 $1.24
0.0% 20.2x 18.0x 19.5x 17.7x
------------------------------------------------------------------------
16.8% 20.8x (2) 17.8x 19.2x 17.1x
5.0% 20.2x (2) 17.7x 19.4x 17.0x
------------------------------------------------------------------------
- ------------------------------------------
Note: Earnings estimates from First Call except Sbarro estimates which are from Company provided projections.
(1) Forward twelve months.
(2) Excludes Tricon Global Restaurants.
</TABLE>
57
<PAGE>
PROJECT OREGANO
--------------------
APPENDIX
--------------------
<PAGE>
PROJECT OREGANO
---------------------------------
A. COMPARABLE COMPANIES ANALYSIS
---------------------------------
<PAGE>
PROJECT OREGANO
--------------------------------------------------
1. PIZZA AND VALUE PRICED ITALIAN RESTAURANTS
---------------------------------------------------
<PAGE>
PROJECT OREGANO
APPENDIX
Company Descriptions
CEC Entertainment Inc.
The company is engaged in the family restaurant/entertainment center business
through its Chuck E. Cheese's Pizza restaurants which offer a variety of pizza,
salad bar, sandwiches and desserts and feature musical and comic entertainment
by life-size, computer-controlled robotic characters, family oriented games,
rides and arcade-style activities. As of October 19, 1998, the company operated
259 restaurants and franchisees operated 61 restaurants located in 44 states.
Darden Restaurants, Inc.
The company is the world's largest full-service restaurant organization. As of
August 30, 1998, the company operated 1,143 restaurants, including 642 domestic
Red Lobster restaurants, 459 domestic The Olive Garden restaurants and 3
domestic Bahama Breeze restaurants. The company also operated 39 restaurants in
Canada, including 34 Red Lobster and 5 The Olive Garden restaurants. All of its
restaurants are company owned and operated.
NPC International, Inc.
The company is the largest Pizza Hut franchisee in the world. As of September
29, 1998, the company owned and operated 524 Pizza Hut restaurants and 125
Pizza Hut delivery units.
Pizza Inn, Inc.
The company is the franchisor and food/supplies distributor to a system of
restaurants operating under the Pizza Inn name. As of September 9, 1998, the
Pizza Inn system consisted of 505 units, including 3 company operated units and
502 franchised units. Pizza Inn units are located in 22 states and 19 foreign
countries. Domestic units, which are comprised of 294 full-service units, 40
delivery/carry-out units and 98 express units, are located predominantly in the
southern half of the United States, with Texas, North Carolina and Arkansas
accounting for approximately 29%, 16% and 11%, respectively, of the total.
Uno Restaurant Corporation
As of October 12, 1998, the company owned and operated or franchised a total of
163 restaurants in 19 states, the District of Columbia and 3 foreign countries.
These restaurants include 97 owned and 66 franchised casual dining,
full-service restaurants under the Pizzeria Uno Chicago Bar & Grill name. The
company also operates a consumer foods division, which supplies American
Airlines, movie theaters, hotel restaurants and supermarkets in the Northeast
with both frozen and refrigerated Pizzeria Uno brand products, as well as
certain private label products.
61
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES
<TABLE>
<CAPTION>
Latest Twelve Month Results
---------------------------
(In millions, except
per share data)
Rest. Net Book
Sales Pft. EBITDA EBIT Inc. Assets Value Debt ROE
-------- ------ ------ ------ ------ -------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CEC Entertainment, Inc. $380.3 $139.6 $83.4 $56.5 $32.9 $244.4 $178.7 $27.0 19.2%
Darden Restaurants, Inc. $3,409.6 $686.6 $335.7 $205.1 $120.9 $1,879.4 $1,000.4 $320.9 11.7%
NPC International, Inc. $443.4 $78.8 $72.6 $45.3 $20.4 $314.4 $143.9 $90.2 16.3%
Pizza Inn, Inc. $68.2 $11.5 $7.7 $6.8 $4.4 $20.5 $6.5 $7.8 50.7%
Uno Restaurant $191.3 $38.5 $24.8 $12.5 $6.0 $143.2 $73.7 $43.4 8.3%
Corporation
Sbarro, Inc. (Trading $357.9 $96.4 $79.8 $56.8 $38.2 $283.1 $241.8 $0.0 16.8%
Multiples)
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
Latest Fiscal Year
Results
------------------
(In millions, except
per share data)
Sales EBIT Net
<S> <C> <C> <C>
CEC Entertainment, Inc. $349.2 $44.4 $25.1
Darden Restaurants, Inc. $3,287.0 $173.8 $101.7
NPC International, Inc. $455.3 $45.6 $19.5
Pizza Inn, Inc. $68.6 $7.8 $5.0
Uno Restaurant $191.3 $12.5 $6.0
Corporation
Sbarro, Inc. (Trading $345.1 $57.1 $38.1
Multiples)
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
(In millions, except Per Share Results (a) EPS Growth
per share data) --------------------- ----------
LTM 1998 1999 98-99 5-Yrs.
<S> <C> <C> <C> <C> <C>
CEC Entertainment, Inc. $1.77 $1.80 $2.18 21.1% 22.00%
Darden Restaurants, Inc. $0.82 $0.82 $0.96 17.1% 13.00%
NPC International, Inc. $0.81 $0.84 $1.01 20.2% 21.00%
Pizza Inn, Inc. $0.33 $0.32 NA NA 11.00%
Uno Restaurant $0.55 NA NA NA 15.00%
Corporation
Sbarro, Inc. (Trading $1.86 $1.86 $1.87 0.8% 5.04%
Multiples)
<C> <C>
High 21.1% 22.0%
Low 17.1% 11.0%
Mean 19.5% 16.4%
Median 20.2% 15.0%
Summary Statistics Exclude Sbarro, Inc.
</TABLE>
62
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES
<TABLE>
<CAPTION>
Latest Twelve Months
--------------------
(In millions, except per Margins Credit
share data) ------- ------
Rest. Crnt. Debt/ EBITDA/
Pft. S,G&A EBITDA EBIT Net Debt/Cap. Ratio EBITDA Int.
----- ----- ------ ---- ----- --------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CEC Entertainment, Inc. 36.7% 21.9% 21.9% 14.8% 8.6% 0.1x 0.7x 0.3x 42.2x
Darden Restaurants, Inc. 20.1% 14.1% 9.8% 6.0% 3.5% 0.2x 0.6x 1.0x 16.1x
NPC International, Inc. 17.8% 7.8% 16.4% 10.2% 4.6% 0.4x 0.3x 1.2x 5.0x
Pizza Inc, Inc. 16.9% 7.0% 11.3% 9.9% 6.5% 0.5x 1.8x 1.0x 16.3x
Uno Restaurant Corporation 20.1% 13.5% 13.0% 6.5% 3.1% 0.4x 0.3x 1.8x 7.0x
Sbarro, Inc. (Trading 26.9% 11.8% 22.3% 15.9% 10.7% 0.0x 4.5x NA NA
Multiples)
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
(In millions, except per Two Year Growth
share data)
Sales EBIT EBITDA Net Income
----- ----- ------ ----------
<S> <C> <C> <C> <C>
CEC Entertainment, Inc. 15.2% 301.2% 64.2% NA
Darden Restaurants, Inc. 1.5% -9.1% -6.2% -9.2%
NPC International, Inc. 18.4% 17.0% 18.8% 9.2%
Pizza Inc, Inc. -0.6% 6.8% 8.2% 13.6%
Uno Restaurant Corporation 5.4% 18.9% 6.4% 17.0%
Sbarro, Inc. (Trading 4.5% 9.5% 6.7% 10.1%
Multiples)
Summary Statistics Exclude Sbarro, Inc.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High 36.7% 21.9% 21.9% 14.8% 8.6% 0.5x 1.8x 1.8x 42.2x
Low 16.9% 7.0% 9.8% 6.0% 3.1% 0.1x 0.3x 0.3x 5.0x
Mean 22.3% 12.8% 14.5% 9.5% 5.3% 0.3x 0.7x 1.1x 17.3x
Median 20.1% 13.5% 13.0% 9.9% 4.6% 0.4x 0.6x 1.0x 16.1x
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
High 18.4% 301.2% 64.2% 17.0%
Low -0.6% -9.1% -6.2% -9.2%
Mean 8.0% 67.0% 18.3% 7.6%
Median 5.4% 17.0% 8.2% 11.4%
</TABLE>
63
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES
Latest Twelve Months
--------------------
<TABLE>
<CAPTION>
(Dollars in millions except per
unit date) Restaurants
-----------
Owned Franchised Total
----- ---------- -----
<S> <C> <C> <C>
CEC Entertainment, Inc. 259 61 320
Darden Restaurants, Inc. 1,143 - 1,143
NPC International, Inc. 649 - 649
Pizza Inn, Inc. 3 502 505
Uno Restaurant Corporation 97 66 163
Sbarro, Inc. (Trading Multiples) 625 256 881
Summary Statistics Exclude
Sbarro, Inc.
High 1,143 502 1,143
Low 3 61 163
Mean 430 210 556
Median 259 66 505
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
(Dollars in millions except per
unit date) Per Unit Data (1)
-------------------------------------------------------------------------
Revenue EBIT EBITDA EBITDA+Rent ROI
------- ---- ------ ----------- ---
<S> <C> <C> <C> <C> <C>
CEC Entertainment, Inc. $1,437,000 NA NA NA NA
Darden Restaurants, Inc. $2,883,000 $548,000 $657,000 $704,000 28.2%
NPC International, Inc. $630,000 NA NA NA NA
Pizza Inn, Inc. NA NA NA NA NA
Uno Restaurant Corporation $1,856,000 $229,000 $348,000 NA NA
Sbarro, Inc. (Trading Multiples) $548,922 $104,131 $138,328 $261,891 30.5%
Summary Statistics Exclude
Sbarro, Inc.
High $2,883,000 $548,000 $657,000 NA NA
Low $630,000 $229,000 $348,000 NA NA
Mean $1,701,500 $388,500 $502,500 NA NA
Median $1,646,500 $388,500 $502,500 NA NA
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
(Dollars in millions except per
unit date) New Store (1)
-----------------------------
Growth Tot.Cost/Unit
------ --------------
<S> <C> <C>
CEC Entertainment, Inc. 2.2% $1,500,000
Darden Restaurants, Inc. -0.7% $2,500,000
NPC International, Inc. -5.7% $725,000
Pizza Inn, Inc. 2.2% NA
Uno Restaurant Corporation -1.8% $2,350,000
Sbarro, Inc. (Trading Multiples) 4.3% $859,036
Summary Statistics Exclude
Sbarro, Inc.
High 2.2% $2,500,000
Low -5.7% $725,000
Mean -0.7% $1,768,750
Median -0.7% $1,925,000
</TABLE>
(1) Unit level data from company financials and Credit Suisse First Boston
industry research report dated 2/11/98.
64
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES
Footnotes
* Indicates one or more parameters have been excluded from the summary
statistics.
(a) Earnings estimates from First Call except Sbarro estimates which are from
company projections.
(b) Gains and losses on property transactions in fiscal 1997, fiscal 1996 and
fiscal 1995 were added back net of taxes based on the effective tax rate of the
company.
(c) Charges for restructuring and asset impairment in fiscal 1996 and 1997 were
added back net of taxes based on the effective tax rate of the company.
(d) Per unit data and comparative store sales data is for Olive Garden
restaurants only.
(e) Charges for restructuring and asset impairment in fiscal 1998 and 1996 were
added back net of taxes based on the effective tax rate of the company.
(f) Excludes gain on recapitalization of Romacorp which was incurred during
second quarter of fiscal 1999. Romacorp restaurants excluded from unit data.
(g) Provision for bad debt in fiscal 1998 and fiscal 1997 was added back net of
taxes based on the effective tax rate of the company.
(h) Restaurant count as of the latest fiscal year ended 6/28/98.
(i) Special charges in fiscal 1997 and fiscal 1996 were added back net of taxes
based on the effective tax rate of the company.
(j) Provisions for unit closings in fiscal 1997 and fiscal 1996 were added back
net of taxes based on the effective tax rate of the company.
(k) Terminated transaction and litigation settlement charges incurred during the
forty-weeks ended 10/4/98 were added back net of taxes based on the effective
tax rate of the company.
65
<PAGE>
PROJECT OREGANO
APPENDIX
CEC ENTERTAINMENT INC. (1)
Daily Prices: July 13, 1998 to January 11, 1999
[GRAPHIC OMITTED]
Graph depicting the daily prices of shares of CEC Entertainment Inc. from
July 13, 1998 to January 11, 1999.
[GRAPHIC OMITTED]
Graph depicting the trading volume of shares of CEC Entertainment Inc.
from July 13, 1998 to January 11, 1999.
(1) Data prior to 7/9/98 is unavailable fromIDD Information Services/Tradeline
as a result of the company's name change to CEC Entertainment Inc.
Source: IDD Information Services/Tradeline
66
<PAGE>
PROJECT OREGANO
APPENDIX
DARDEN RESTAURANTS INC
Daily Prices: January 12, 1998 to January 11, 1999
[GRAPHIC OMITTED]
Graph depicting the daily prices of shares of Darden Restaurants, Inc.
from January 12, 1998 to January 11, 1999.
[GRAPHIC OMITTED]
Graph depicting trading volume of shares of Darden Restaurants, Inc.
from January 12, 1998 to January 11, 1999.
Source: IDD Information Services/Tradeline
67
<PAGE>
PROJECT OREGANO
APPENDIX
NPC INTERNATIONAL INC
Daily Prices: January 12, 1998 to January 11, 1999
[GRAPHIC OMITTED]
Graph depicting the daily prices of shares of NPC International, Inc.
from January 12, 1998 to January 11, 1999.
[GRAPHIC OMITTED]
Graph depicting trading volume of shares of NPC International, Inc.
from January 12, 1998 to January 11, 1999.
Source: IDD Information Services/Tradeline
68
<PAGE>
PROJECT OREGANO
APPENDIX
PIZZA INN INC
Daily Prices: January 12, 1998 to January 11, 1999
[GRAPHIC OMITTED]
Graph depicting the daily prices of shares of Pizza Inn Inc. from
January 12, 1998 to January 11, 1999.
[GRAPHIC OMITTED]
Graph depicting trading volume of shares of Pizza Inn Inc. from
January 12, 1998 to January 11, 1999.
Source: IDD Information Services/Tradeline
69
<PAGE>
PROJECT OREGANO
APPENDIX
UNO RESTAURANT CORP
Daily Prices: January 12, 1998 to January 11, 1999
[GRAPHIC OMITTED]
Graph depicting the daily prices of shares of UNO Restaurant Corp. from
January 12, 1998 to January 11, 1999.
[GRAPHIC OMITTED]
Graph depicting trading volume of shares of UNO Restaurant Corp. from
January 12, 1998 to January 11, 1999.
Source: IDD Information Services/Tradeline
70
<PAGE>
PROJECT OREGANO
--------------------------
2. FAST FOOD RESTAURANTS
--------------------------
<PAGE>
PROJECT OREGANO
APPENDIX
Company Descriptions
Foodmaker, Inc.
The company owns, operates and franchises Jack in the Box restaurants, a
fast-food chain located principally in the Western and Southwestern United
States. Jack in the Box is a leading regional competitor in the fast-food
segment of the restaurant industry. At September 28, 1997, there were 1,414
Jack in the Box restaurants, of which 1069 were operated by the company and 345
were franchised.
TRICON Global Restaurants, Inc.
The company is the world's largest quick service restaurant company based on
number of units, with 29,600 units in 95 countries and territories. The
company, owns, operates and franchises three of the most recognized restaurant
concepts, Pizza Hut, Taco Bell and KFC. As of September 5, 1998, the company's
system included 10,049 company operated/joint venture restaurants and 19,551
franchised/licensed restaurants.
Sonic Corp.
The company operates and franchises the largest chain of drive-in restaurants
in the United States. As of August 31, 1998, the company had 1,847 restaurants
in operation, consisting of 292 company-owned restaurants and 1,555 franchised
restaurants, principally in the south central and southeastern United States.
At a typical Sonic restaurant, a customer drives into one of 24 to 36 covered
drive-in spaces, orders through an intercom, and has the food delivered by a
carhop within an average of four minutes.
Wendy's International, Inc.
The company is primarily engaged in the business of operating, developing, and
franchising a system of distinctive quick-service restaurants. At December 28,
1997, there were 5,207 Wendy's restaurants in operation in the United States
and in 34 other countries and territories. Of these restaurants, 1,202 were
operated by the company and 4,005 were franchised. During the same period, the
company operated 124 Tim Hortons restaurants and its franchisees operated 1,454
in Canada and the United States.
72
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE FAST FOOD COMPANIES
<TABLE>
<CAPTION>
Latest Twelve Month Results
-------------------------------------------------------------------------------------------
(in millions, except Results
per share data)
-------------------------------------------------------------------------------------------
Sales Rest. EBITDA EBIT Net Assets Book Debt ROE
Pft. Inc. Value
----- ---- ------ ---- --- ----- ------ ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foodmaker, Inc. $1,174.3 $179.4 $133.8 $91.7 $39.9 $743.6 $137.0 $321.7 35.5%
Tricon Global $8,732.0 $1,612.0 $1,158.0 $703.0 $136.2 $4,616.0 ($1,375.0) $3,834.01 12.4%
Restaurants, Inc.
Sonic Corp. $219.1 $83.3 $50.6 $38.4 $22.3 $233.2 $132.0 $69.9 17.9%
Wendy's International, $1,970.5 $523.7 $352.2 $246.9 $143.5 $1,794.7 $1,075.3 $451.7 12.6%
Inc.
Sbarro, Inc. (Trading $357.9 $96.4 $79.8 $56.8 $38.2 $283.1 $241.8 $0.0 16.8%
Multiples)
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
Latest Fiscal Year
Results
-----------------------
(in millions, except Results Per Share Results EPS Growth
per share data) (a)
------------------------- --------------------- ---------------
Sales EBIT Net LTM 1998 1999 98-99 5-Yrs.
----- ---- --- --- ---- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Foodmaker, Inc. $1,174.3 $91.7 $39.9 $0.99 $1.21 $1.42 17.4% 20.00%
Tricon Global $9,681.0 $662.0 $141.6 $0.87 $2.54 $2.66 4.7% 15.00%
Restaurants, Inc.
Sonic Corp. $219.1 $38.4 $22.3 $1.13 $1.18 $1.40 18.6% 17.00%
Wendy's International, $2,036.9 $295.3 $173.4 $1.09 $1.13 $1.24 9.7% 14.00%
Inc.
Sbarro, Inc. (Trading $345.1 $57.1 $38.1 $1.86 $1.86 $1.87 0.8% 3.66%
Multiples)
Summary Statistics Exclude Sbarro, Inc.
High 18.6% 20.0%
Low 4.7% 14.0%
Mean 12.6% 16.5%
Median 13.5% 16.0%
</TABLE>
73
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE FAST FOOD COMPANIES
<TABLE>
<CAPTION>
Latest Twelve Months
---------------------------------------------------------------------------------------------------
(in millions, except per Margins Credit
share data)
--------------------------------------------- --------------------------------------------------
Rest. S,G&A EBITDA EBIT Net Debt/Cap. Crnt. Debt/EBITDA EBITDA/Int
Pft. Ratio
----- ----- ------ ---- --- -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foodmaker, Inc. 15.3% 7.8% 11.4% 7.8% 3.4% 0.7x 0.4x 2.4x 4.0x
Tricon Global Restaurants, 18.5% 10.4% 13.3% 8.1% 1.6% 1.6x 0.4x 3.3x 4.0x
Inc.
Sonic Corp. 38.0% 20.5% 23.1% 17.5% 10.2% 0.3x 0.7x 1.4x 18.4x
Wendy's International, Inc. 26.6% 14.0% 17.9% 12.5% 7.3% 0.3x 1.4x 1.3x 228.9x
Sbarro, Inc. (Trading 26.9% 11.8% 22.3% 15.9% 10.7% 0.0x 4.5x NA NA
Multiples)
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
(in millions, except per Two Year Growth
share data)
----------------------------------------------
Sales EBIT EBITDA Net Income
<S> <C> <C> <C> <C>
Foodmaker, Inc. 5.3% 13.3% 10.1% 41.1%
Tricon Global Restaurants, -2.8% 0.6% -4.9% 13.9%
Inc.
Sonic Corp. 20.4% 18.8% 20.9% 16.0%
Wendy's International, Inc. 8.1% 15.5% 15.1% 11.1%
Sbarro, Inc. (Trading 4.5% 9.5% 6.7% 10.1%
Multiples)
</TABLE>
Summary Statistics Exclude Sbarro, Inc.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High 38.0% 20.5% 23.1% 17.5% 10.2% 1.6x 1.4x 3.3x 228.9x
Low 15.3% 7.8% 11.4% 7.8% 1.6% 0.3x 0.4x 1.3x 4.0x
Mean 24.6 13.2% 16.4% 11.5% 5.6% 0.7x 0.7x 2.1x 63.9x
Median 22.5% 12.2% 15.6% 10.3% 5.3% 0.5x 0.5x 1.9x 11.2x
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
High 20.4% 18.8% 20.9% 16.0%
Low -2.8% 0.6% -4.9% 11.1%
Mean 7.8% 12.1% 10.3% 13.6%
Median 6.7% 14.4% 12.6% 13.9%
</TABLE>
74
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE FAST FOOD COMPANIES
<TABLE>
<CAPTION>
Latest Twelve Months
---------------------------------------------------------------------------------------------------
(Dollars in millions except per Restaurants Per Unit Data (1)
unit data)
---------------------------------- ---------------------------------------------------------------
Owned Franchised Total Revenue EBIT EBITDA EBITDA+Rent ROI
----- ---------- ----- ------- ---- ------ ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Foodmaker, Inc. 1,069 345 1,414 $1,114.228 NA NA NA NA
Tricon Global Restaurants, Inc. 10,049 19,551 29,600 $630,000 NA NA NA NA
Sonic Corp. 292 1,555 1,847 $707,000 NA NA NA NA
Wendy's International, Inc. 1,326 5,459 6,785 $1,132,000 $107,000 $172,000 $201,000 20.6%
Sbarro, Inc. (Trading Multiples) 625 256 881 $548,922 $104,131 $138,328 $261,891 30.5%
</TABLE>
Summary Statistics Exclude Sbarro, Inc.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 10,049 19,551 29,600 $1,132,000) NA NA NA NA
Low 292 345 1,414 $630,000 NA NA NA NA
Mean 3,184 6,728 9,912 $895,807 NA NA NA NA
Median 1,198 3,507 4,316 $910,614 NA NA NA NA
</TABLE>
TABLE CONTINUED
<TABLE>
<CAPTION>
Latest Twelve Months
--------------------------
(Dollars in millions except per New Store (1)
unit data)
-------------------------
Growth Tot.Cost/Unit
------ -------------
<S> <C> <C>
Foodmaker, Inc. 6.9% $1,300,000
Tricon Global Restaurants, Inc. -0.4% $725,000
Sonic Corp. 9.9% NA
Wendy's International, Inc. 7.4% $975,000
Sbarro, Inc. (Trading Multiples) 4.3% $859,036
</TABLE>
Summary Statistics Exclude Sbarro, Inc.
<TABLE>
<CAPTION>
<S> <C> <C>
High 9.9% $1,300,000
Low -0.4% $0
Mean 6.0% $750,000
Median 7.1% $850,000
</TABLE>
(1) Unit level data from company financials and Credit Suisse First Boston
industry research report dated 2/11/98.
75
<PAGE>
PROJECT OREGANO
SELECTED COMPARABLE FAST FOOD COMPANIES
Footnotes
* Indicates one or more parameters have been excluded from the summary
statistics.
(a) Earnings estimates from First Call except Sbarro estimates which are from
company projections.
(b) Litigation settlement of $45.8 million in fiscal 1998 was removed net
of taxes.
(c) Unusual charges and gains/losses related to facility actions in fiscal 1997,
fiscal 1996, fiscal 1995 and the interim periods ended 9/5/98 and 9/6/97 were
added back net of taxes based on a 40% tax rate.
(d) Joint venture restaurants are classified as company owned restaurants.
Restaurant unit growth between 12/21/97-9/5/98. Per unit data is for Pizza Hut
Restaurants only.
(e) Provision for Impairment of long-lived assets and provision for litigation
settlement in fiscal 1998, fiscal 1997 and fiscal 1996 were added back net of
taxes based on the effective tax rate of the company.
(f) Non-recurring charges in fiscal 1997 and special charges related to Hortons
in fiscal 1995 were added back net of taxes based on the effective tax rate of
the company.
(g) Non recurring gains from sale of properties to franchisees in all periods
was removed net of taxes. Restaurant count as of fiscal 1997. Comparable store
growth is for domestic Wendy's restaurants only.
(h) Provisions for unit closings in fiscal 1997 and fiscal 1995 were added back
net of taxes based on the effective tax rate of the company.
(i) Terminated transaction and litigation settlement charges incurred during the
forty-weeks ended 10/4/98 were added back net of taxes based on the effective
tax rate of the company.
76
<PAGE>
PROJECT OREGANO
APPENDIX
FOODMAKER INC
Daily Prices: January 12, 1998 to January 11, 1999
[GRAPHIC OMITTED]
Graph depicting the daily prices of shares of Foodmaker Inc. from
January 12, 1998 to January 11, 1999.
[GRAPHIC OMITTED]
Graph depicting trading volume of shares of Foodmaker Inc. from January
12, 1998 to January 11, 1999.
Source: IDD Information Services/Tradeline
77
<PAGE>
PROJECT OREGANO
APPENDIX
TRICON GLOBAL RESTAURANTS
Daily Prices: January 12, 1998 to January 11, 1999
[GRAPHIC OMITTED]
Graph depicting the daily prices of shares of Tricon Global
Restaurants from January 12, 1998 to January 11, 1999.
[GRAPHIC OMITTED]
Graph depicting trading volume of shares of Tricon Global Restaurants
from January 12, 1998 to January 11, 1999.
Source: IDD Information Services/Tradeline
78
<PAGE>
PROJECT OREGANO
APPENDIX
SONIC CORP
Daily Prices: January 12, 1998 to January 11, 1999
[GRAPHIC OMITTED]
Graph depicting the daily prices of shares of Sonic Corp. from January
12, 1998 to January 11, 1999.
[GRAPHIC OMITTED]
Graph depicting trading volume of shares of Sonic Corp. from January
12, 1998 to January 11, 1999.
Source: IDD Information Services/Tradeline
79
<PAGE>
PROJECT OREGANO
APPENDIX
WENDY'S INTERNATIONAL
Daily Prices: January 12, 1998 to January 11, 1999
[GRAPHIC OMITTED]
Graph depicting the daily prices of shares of Wendy's International
Inc. from January 12, 1998 to January 11, 1999.
[GRAPHIC OMITTED]
Graph depicting trading volume of shares of Wendy's International Inc.
from January 12, 1998 to January 11, 1999.
Source: IDD Information Services/Tradeline
80
<PAGE>
PROJECT OREGANO
-----------------------------------
B. 13E-3 PREMIUMS ANALYSIS
-----------------------------------
<PAGE>
PROJECT OREGANO
APPENDIX
Selected Closed Rule 13e-3 Transactions
- Transaction Size: $100 - $500 Million
- Date Range: 1/1/92 - 12/2/98
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Transaction Stock Premiums
Value Offer Prior to Announcement
Date ($ in Share --------------------------
Announced Target Name Acquiror Name Millions) Price 1 Day 1 Week 4 Weeks
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
02/11/98 MTL Inc. Sombrero Acquisition Corp. $250.4 $40.00 37.9% 38.5% 56.1%
(1) 08/04/97 Perkins Family Restaurant LP Restaurant Co 76.3 14.00 28.7 26.5 31.8
08/29/97 Rexel Inc Rexel SA(Pinault-Printemps) 302.0 22.50 19.2 30.0 21.6
08/29/96 Amtrol Inc Cypress Group LLC 227.2 28.25 71.2 56.9 56.9
08/14/97 Tuesday Morning Corp Madison Dearborn Partners 298.6 25.00 22.7 25.8 11.1
06/02/97 Acordia Inc(Anthem Inc) Anthem Inc 193.2 40.00 12.7 11.5 26.0
01/28/97 Calgene Inc(Monsanto Co) Monsanto Co 242.6 8.00 62.0 60.0 60.0
(2) 01/21/97 Mafco Consolidated Grp(Mafco) Mafco Holdings Inc 116.8 33.50 23.5 23.5 27.6
01/13/97 Zurich Reinsurance Centre Zurich Versicherungs GmbH 319.0 39.50 17.1 18.5 11.6
07/22/96 Telebit Corp Cisco Systems Inc 196.3 13.35 21.4 22.8 6.0
06/03/96 Univar Corp Pakhoed Holding NV 331.8 19.45 57.2 54.1 58.8
05/24/97 SyStemix Inc(Novartis AG) Novartis AG 107.6 19.50 4.7 69.6 59.2
10/26/95 Maxtor Corp Hyundai Electronics Industries 228.2 6.70 42.9 64.9 44.9
07/14/95 REN Corp-USA(COBE Labs Inc) COBE Laboratories(Gambro AB) 182.1 20.00 27.0 20.3 26.0
04/05/95 Club Med Inc Club Mediterranee SA 153.4 32.00 41.4 39.9 44.6
02/27/95 CCP Insurance Inc Conseco Inc 273.7 23.25 20.0 30.1 23.2
12/28/94 Fleet Mortgage Group Inc Fleet Financial Group Inc,MA 188.1 20.00 19.4 18.5 18.5
11/01/94 Pacific Telecom(PacifiCorp) PacifiCorp 159.0 30.00 23.7 23.7 23.7
09/14/94 Petrolane Inc(QFB Partners) AmeriGas Inc(UGI Corp) 109.6 16.00 48.8 50.6 45.5
09/08/94 Contel Cellular Inc(Contel) GTE Corp 254.3 25.50 43.7 37.8 36.0
09/21/92 MidSouth Corp Kansas City Southern Inds Inc 197.3 20.50 86.4 88.5 86.4
- ------------------------------------------------------------------------------------------------------------------------------------
Summary Statistics
High $331.8 86.4% 88.5% 86.4%
Low 76.3 4.7% 11.5% 6.0%
Mean 207.9 34.8% 38.7% 36.9%
Median 196.8 27.0% 30.1% 31.8%
Source: Securities Data Corporation
All companies are incorporated in states that have supermajority shareholder
provisions, unless noted.
(1) Transaction is below the range, but shares
similar characteristics with the proposed transaction.
(2) Acquiror purchased remaining 15% interest for $33.50 per share and paid a
cash dividend of $10.00 per share.
</TABLE>
82
<PAGE>
PROJECT OREGANO
------------------------------------
C. WEIGHTED AVERAGE COST OF CAPITAL
-------------------------------------
<PAGE>
PROJECT OREGANO
APPENDIX - WEIGHTED AVERAGE COST OF CAPITAL
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Market Value Market Value Market Value Debt/ Equity/ Debt/ Historic Unlevered
of Total Debt of Equity (1) of Total Capital Total Capital Total Capital Equity Beta (3) Beta (4)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CEC Entertainment $ 27.0 $ 463.7 $ 490.6 5.5% 94.5% 5.8% 1.07 1.05
Darden Restuarants, Inc. 320.9 2,532.8 2,853.7 11.2% 88.8% 12.7% 0.77 0.74
NPC International, Inc. 90.2 305.0 395.2 22.8% 77.2% 29.6% 0.82 0.75
Pizza Inn, Inc. 7.8 48.0 55.8 14.0% 86.0% 16.3% 0.45 0.43
Uno Restaurant Corporation 43.4 73.0 116.5 37.3% 62.7% 59.5% 0.61 0.53
Foodmaker, Inc. 321.7 866.1 1,187.8 27.1% 72.9% 37.1% 1.06 0.96
Tricon Global Restaurants, Inc. 3,834.0 7,656.0 11,490.0 33.4% 66.6% 50.1% 0.56 0.49
Sonic Corp. 69.9 443.5 513.4 13.6% 86.4% 15.8% 1.21 1.15
Wendy's International, Inc. 451.7 2,769.1 3,220.9 14.0% 86.0% 16.3% 0.71 0.67
- ---------------------------------------------------------------------------------------------------------------------------------
Mean $ 574.1 $ 1,684.1 $ 2,258.2 19.9% 80.1% 27.0% 0.81 0.75
Median $ 90.2 $ 463.7 $ 513.4 14.0% 86.0% 16.3% 0.77 0.74
- ---------------------------------------------------------------------------------------------------------------------------------
WACC Calculation Inputs:
% Equity (%E) 80.0% Selected Unlevered Beta (Mean Value) 0.75
% Debt (%D) 20.0% Risk-Free Rate (Rf) (5) 5.55%
Debt/Equity 25.0% Risk Premium (Rm-Rf) (6) 7.80%
Tax Rate 40.00%
Small Stock Risk Premium (SSR) (7) 1.70%
Beta (Levered)
-------------
BL=Bu*[1+((1-t)*D/E)] 0.86
-------------
Cost of Equity Cost of Debt
-------------
Ke=Rf+BL*(Rm-Rf)+SSR 13.99% Pre-Tax Cost of Debt (Kd) (8) 8.06%
-------------
- -------------------------------------------------------
WACC=[((Kd)*(%D))*(1-t)]+(Ke*(%E)) 12.16%
- ------------------------------------------------------
</TABLE>
(1) Market value of equity as of 1/12/99.
(2) Market value of equity plus market value of total debt.
(3) Source: Bloomberg adjusted beta calculation from five years of historical
(monthly) price information compared to the S&P 500, excluding Tricon which
is monthly since 9/30/97,
Darden which is monthly since 5/31/95, and Pizza Inn which is monthly since
8/31/93.
(4) Unlevered Beta=Beta/[1+((total debt)*(1-tax rate))/total equity value)]
(5) 20-year Treasury as of 1/12/99 as reported on Bloomberg.
(6) Source: Ibbotson Associates. Stock Bonds and Inflation, 1998 Yearbook.
Large company common stocks total returns minus long term (20 year)
government bond total returns.
(7) Source: Ibbotson Associates. Stock Bonds and Inflation, 1998 Yearbook.
Expected low capitalization equity size premium (capitalization between
$261 million and $945 million).
(8) Based on 300 basis points over the 6-month Libor Rate as of 1/12/99.
84
PROJECT PIZZA
PROJECT PIZZA:
POSSIBLE ALTERNATIVE TRANSACTION STRUCTURE
October 10, 1996
- --------------------------------------------------------------------------------
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
I Transaction Overview
A. Sources and Uses of Funds
B. Pro Forma Capitalization
C. Projected Financial Results
D. Summary Selected Balance Sheet Items
E. Pro Forma Financial Statements
F. Pro Forma Equity Ownership
II Financial Models
A. $32 Price / 1,500,000 public shares left outstanding
B. $32 Price / no public shares left outstanding
C. $29 Price / 1,500,000 public shares left outstanding
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION I
TRANSACTION OVERVIEW
<PAGE>
TRANSACTION OVERVIEW
- --------------------------------------------------------------------------------
o If the self tender price is required to be above $29 per share, the
Transaction outlined in our presentation becomes increasingly difficult to
finance.
o Under such circumstances, we would suggest considering a recapitalization
structure whereby instead of offering cash for all of the publicly held
shares, approximately 1.5 million shares are left outstanding. This can
still be done through the same self tender mechanism, but with a ceiling on
the number of shares the Company would accept.
o We have modeled such a transaction at $32 per share and found it to be
financeable at that level.
o Under this structure, the Control Group would still achieve its objectives
to: (i) cash out Anthony's shares and his interest in Carmela's Trust; (ii)
$40 million in upfront distributions to the Control Group; (iii) $5 million
in ongoing annual dividends to the Control Group; (iv) shifting of
substantial equity interest to the descendants of the Control Group; and (v)
significantly increasing the overall percentage ownership interest of the
Control Group and its descendants.
o The disadvantage of this alternative is that public shareholders maintain
approximately a 30% ongoing interest. We would propose terminating dividends
on the common stock.
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION I-A
SOURCES AND USES OF FUNDS
<PAGE>
SOURCES AND USES OF FUNDS
- --------------------------------------------------------------------------------
($ IN MILLIONS)
- ----------------------------------------- --------------------------------------
SOURCES OF FUNDS USES OF FUNDS
- ----------------------------------------- --------------------------------------
Excess Cash on Balance Sheet(1) $108.0 Total Purchase Price
Long Term Marketable Securities 7.5 (@$32 per share) $439.5(3)
Distributions to Control Group
Senior Debt: Shares Exchanged for Cash 40.0
Revolving Credit Facility 0.0(2) Stock Options Cashed out 1.3(4)
Term Loan A 100.0
Term Loan B 52.0 Financing Costs 11.9
Senior Subordinated Notes 230.0 Non-Financing Costs 4.8
--------- ----------
Total New Long Term Debt 382.0
---------
TOTAL SOURCES OF FUNDS $497.5 TOTAL USES OF FUNDS $497.5
========== ===========
- ----
(1) Estimated at December 31, 1996. Includes $2.5 million of short-term
marketable securities.
(2) Assumes $40 to $50 million Revolving Credit Facility
is undrawn at closing.
(3) The purchase price of $32.00 per share represents a premium of 24.9% over
the closing stock price of $25.625 per share as of October 9, 1996.
Excludes shares tendered by Control Group.
(4) Represents cash out of stock options owned by Anthony.
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION I-B
PRO FORMA CAPITALIZATION
<PAGE>
PRO FORMA CAPITALIZATION
- --------------------------------------------------------------------------------
($ IN MILLIONS)
% OF TOTAL
PRO FORMA 12/31/96 CAPITALIZATION INTEREST RATE
Senior Debt:
Revolving Credit Facility $0.0 0% 8.25%(1)
Term Loan A 100.0 99% 8.25%(1)
Term Loan B 52.0 50% 8.75%(1)
Senior Subordinated Notes 230.0 227% 11.50%
----------- ----------- ----------
TOTAL LONG TERM DEBT 382.0 377%
Convertible Preferred Stock 60.6 60%
Common Equity (341.3) (337%)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY (280.7) (277%)
----------- -----------
TOTAL CAPITALIZATION $101.3 100%
=========== ===========
- ---------------------------------------
(1) Assumes six month LIBOR rate of 5.75%.
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION I-C
PROJECTED FINANCIAL RESULTS
<PAGE>
PROJECTED FINANCIAL RESULTS(1)
- --------------------------------------------------------------------------------
($ IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
LTM 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
--- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $321.4 $329.7 $359.4 $380.0 $401.4 $423.3 $445.6 $468.5 $491.8 $515.7 $540.1
EBITDA(2) 75.9 80.6 91.4 96.3 101.7 107.2 112.8 118.5 124.4 130.4 136.5
Income tax expense
(current) 4.9 6.9 12.0 14.8 17.5 21.0 25.1 28.8 33.4 36.6 40.8
Net income 7.4 10.4 18.0 21.6 25.4 30.7 37.3 43.2 50.4 54.9 61.1
Additional dividends 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
</TABLE>
- ----
(1) Assumes Subchapter C corporation status.
(2) $562,500 in incremental annual rent expense assumed to result from sale
of New Facility in mid 1997.
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION I-D
SUMMARY SELECTED BALANCE SHEET ITEMS
<PAGE>
SUMMARY SELECTED BALANCE SHEET ITEMS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ IN MILLIONS)
PRO
FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31,
------- ----------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash & Cash Equivalents $2.5 $2.5 $2.5 $2.5 $2.5 $29.3 $75.7 $126.0 $180.1 $239.0
======= ====== ======= ====== ====== ====== ====== ====== ====== ======
Senior Debt
Revolving Credit Facility - - - - - - - - - -
Term Loan A $100.0 $58.1 $31.1 - - - - - - -
Term Loan B 52.0 52.0 52.0 51.7 14.8 - - - - -
Senior Subordinated Notes 230.0 230.0 230.0 230.0 230.0 230.0 230.0 230.0 230.0 230.0
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Debt $382.0 $340.1 $313.0 $281.7 $244.8 $230.0 $230.0 $230.0 $230.0 $230.0
======= ====== ======= ====== ====== ====== ====== ====== ====== ======
Net Debt $379.5 $337.6 $310.5 $279.2 $242.3 $200.7 $154.3 $104.0 $49.9 $(9.0)
======= ====== ======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION I-E
PRO FORMA FINANCIAL STATEMENTS
<PAGE>
PRO FORMA FINANCIAL STATISTICS
- --------------------------------------------------------------------------------
LTM ENDED
COVERAGE AND LEVERAGE RATIOS JULY 14, 1996(2) 1996E(2) 1997E
- ---------------------------- ---------------- -------- -----
EBITDA / Interest 1.93x 2.05x 2.44x
EBITDA - CapEx / Interest 1.48 1.68 2.04
EBITDAR / Interest + Rents 1.41 1.46 1.58
Total Debt + Capitalized Leases (1)/EBITDAR 5.8x 5.6x 5.0x
Total Debt + Preferred Stock/EBITDA 5.8x 5.5x 4.4x
Total Debt / EBITDA 5.0 4.7 3.7
Net Debt / EBITDA 5.0 4.7 3.7
- --------------------------------------------
(1) Leases capitalized at 7.0x Rents for the relevant period.
(2) Excludes planned capital expenditures attributable to the Company's
corporate facilities.
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION I-F
PRO FORMA EQUITY OWNERSHIP
<PAGE>
POTENTIAL CORPORATE STRUCTURES
- --------------------------------------------------------------------------------
EQUITY OWNERSHIP - C-CORP. STRUCTURE
<TABLE>
<CAPTION>
PURCHASE
(REPURCHASE) AFTER PURCHASE OF
PRE-TRANSACTION OF COMMON SHARES COMMON EQUITY AFTER ESTATE PLANNING
----------------- ---------------- ----------------- -------------------------------
VOTING
SHARES % SHARES % SHARES % SHARES % INTEREST
------ --- ------- ---- ------ --- ------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INSIDERS
Control Group (Mario and Joseph) 3,474,834 17.1% (1,250,000) -6.1% 2,224,834 41.3% 856,933(2) 17.1% 36.8%
Anthony 1,223,300 6.0% (1,223,300) -6.0% - 0.0% - 0.0% 0.0%
Trust of Carmela 2,497,884 12.3% (832,628) -4.1% 1,665,256 30.9% 1,665,256 33.2% 33.2%
Descendants of Control Group - 0.0% - 0.0% - 0.0% 989,113 19.7% 0.0%
PUBLIC SHAREHOLDERS(1) 13,177,724 64.7% (11,677,724) -57.3% 1,500,000 27.8% 1,500,000 29.9% 29.9%
Shares Outstanding 20,373,742 100.0% (14,983,652) -73.5% 5,390,090 100.0% 5,011,302 100.0% 100.0%
</TABLE>
|X| Assumes issuance of $60.6 million of 8.25% Convertible Preferred Stock to
the Control Group in exchange for 1,893,939 shares of common stock. The
Preferred Stock would be convertible into common stock at a price of $40 per
share. Approximately $40 million of the Convertible Preferred Stock is
placed in an Income Tax Defective Trust for the benefit of descendants.
- ----
(1) Includes other officers and directors.
(2) Excludes stock options. After exercise of outstanding stock options, share
ownership increases to 1,556,434 or 27.3%, and total insider ownership is
4,210,803 or 73.7%.
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION II
FINANCIAL MODELS
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION I-A
$32 PRICE / 1,500,000 PUBLIC SHARES LEFT OUTSTANDING
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION II-B
$32 PRICE / NO PUBLIC SHARES LEFT OUTSTANDING
<PAGE>
PROJECT PIZZA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTION II-C
$29 PRICE / 1,500,000 PUBLIC SHARES LEFT OUTSTANDING
PROJECT WONTON
Presentation to The Board of Directors
Alternatives to Enhance Shareholder Value
Highly Confidential
Not To Be Reproduced or Discussed With Outsiders
January 15, 1997
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
I Situation Assessment
II Summary of Alternatives to Increase Shareholder Value
III Recommendation
Appendices
----------
A Summary Transaction Timetable
B Ownership Summary
C Traded Volume Analysis
D Discounted Cash Flow Analysis
E Description of Comparable Companies
F Comparable M&A Transactions
G Summary Term Sheets
H Comparable Recapitalization Transactions
- --------------------------------------------------------------------------------
<PAGE>
PROJECT WONTON
SECTION I
SITUATION ASSESSMENT
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
SITUATION ASSESSMENT
- --------------------------------------------------------------------------------
BEAR STEARNS IS PLEASED TO HAVE THIS OPPORTUNITY TO PRESENT OUR RECOMMENDATIONS
TO WONTON'S BOARD OF DIRECTORS REGARDING ENHANCING SHAREHOLDER VALUE.
AMONG THE FACTORS WE CONSIDERED IN OUR ANALYSIS ARE THE FOLLOWING ASPECTS OF THE
COMPANY'S CURRENT SITUATION.
o MARKET LEADER: Leading provider of quick service specialty foods in the
U.S. and abroad
o STABLE CASH FLOW: Proven format provides strong and stable cash flow
o INTERNAL GROWTH CONSTRAINTS: Lack of availability of desirable
locations may constrain new stores to 35-45 per year
o NO BORROWINGS: Cash flow generation in excess of capital expenditures
results in unlevered balance sheet
o LIMITED ACQUISITION OPPORTUNITIES: Preference for internal development;
few similar good concepts
o SIGNIFICANT EXCESS CASH: Currently in excess of $100 million in cash
- --------------------------------------------------------------------------------
Page 1
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
SITUATION ASSESSMENT
- --------------------------------------------------------------------------------
AS A RESULT OF CERTAIN OF THESE FACTORS, THE COMPANY'S COMMON STOCK HAS
UNDERPERFORMED IN RECENT PERIODS. IN THE CURRENT MARKET ENVIRONMENT, EQUITY
INVESTORS FAVOR:
o GROWTH EMPHASIS: The equity market has a bias toward strong growth
stories
o DEPLOYING CASH: Excess cash is not highly valued by investors COMP
STORE INCREASES: As organic growth has slowed, the Company's P/E Ratio
has declined
o SELECTIVE INDUSTRIES: Restaurants are an out of favor sector in the
equity markets
A CONTINUATION OF CURRENT INVESTOR SENTIMENT, COMBINED WITH POTENTIALLY
AGGRESSIVE 1997 WALL STREET ESTIMATES, MAY LEAD TO CONTINUED UNDERPERFORMANCE.
- --------------------------------------------------------------------------------
Page 2
<PAGE>
PROJECT WONTON
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HISTORICAL FINANCIAL REVIEW
- --------------------------------------------------------------------------------
($ IN MILLIONS) ANALYSTS
ACTUAL PROJECTED (1)(2)
----------------------------------------------------- ----------------
1991 1992 1993 1994 1995 CAGR 1996E 1997E
---- ---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $208.0 $236.2 $264.0 $294.0 $316.1 11.0% $328.9 $356.7
% Growth 9.4% 13.6% 11.7% 11.4% 11.3% 4.0% 8.5%
EBITDA $51.4 $53.7 $64.0 $73.0 $71.3 8.5% $79.3 $89.2
% Of Revenues 24.7% 22.7% 23.8% 24.4% 22.6% 24.1% 25.0%
NET INCOME $21.8 $24.1 $28.3 $33.0 $31.4(3) 9.6% $37.4 $43.1
EARNINGS PER SHARE $1.07 $1.18 $1.45 $1.63 $1.55(3) 9.7% $1.84 $2.10
DIVIDENDS PER SHARE -- -- $0.52 $0.64 $0.76 $0.92 --
FORWARD P/E MULTIPLE 20.5x 17.3x 19.5x 14.0x 14.2x 14.0x 12.3x
CAPITAL EXPENDITURES $23.9 $28.8 $31.9 $32.1 $17.5 -- --
STORES ANALYSIS
---------------
OWNED STORE OPENINGS 63 58 59 53 44 29 45
OWNED STORES (EOP) 412 456 515 567 571 600 645
FRANCHISED STORES (EOP) 118 131 134 162 200 225 270
</TABLE>
- -----------------------
(1) Source: Merrill Lynch research report dated November 12, 1996, except with
respect to store information.
(2) Source: Owned and franchised store information from Montgomery Securities
research report dated August 19, 1996.
(3) Excludes pre-tax provision of $16.4MM ($10.2MM after-tax) for closing of
approximately 40 stores.
- --------------------------------------------------------------------------------
Page 3
<PAGE>
PROJECT WONTON
<TABLE>
<CAPTION>
PROJECTED FINANCIAL PERFORMANCE
($ IN MILLIONS)
Projected Fiscal Year Ended December 31,
Actual -------------------------------------------------------------------------------
LTM(1) 1996 1997 1998 1999 2000 2001 2005 CAGR
------ ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $323.9 $326.3 $354.0 $379.2 $405.1 $431.4 $458.2 $570.4 6.1%
% Growth 3.2% 8.5% 7.1% 6.8% 6.5% 6.2% 5.3%
EBITDA $77.4 $79.7 $87.0 $95.3 $101.8 $108.5 $115.3 $143.8 6.5%
% Revenue 23.9% 24.4% 24.6% 25.1% 25.1% 25.2% 25.2% 25.2%
NET INCOME $36.0 $37.5 $41.8 $45.0 $48.0 $52.4 $57.8 $79.7 8.4%
EARNINGS PER SHARE $1.77 $1.84 $2.05 $2.17 $2.31 $2.51 $2.76 $3.76 7.9%
DIVIDENDS PER SHARE(4) $0.88 $0.92 $1.06 $1.22 $1.40 $1.61 $1.85 $3.24
CAPITAL EXPENDITURES $25.4 $25.4 $25.4 $20.4 $22.9 $20.6 $21.9 $22.0
POSSIBLE FUTURE STOCK PRICE $39.00(2) $53.00(2)
PRESENT VALUE OF FUTURE STOCK PRICE
$28.00(3) $31.00(3)
STORE ASSUMPTIONS
-----------------
OWNED STORE OPENINGS (NET)(5) 18 27 37 37 37 37 37 37
OWNED STORES (EOP) 589 598 635 672 709 746 783 931
FRANCHISED STORES (EOP) 211 218 254 290 326 362 398 542
</TABLE>
- -----------------------
Source: Company projections.
(1) LTM = Latest twelve months ended October 6, 1996.
(2) Assumes P/E multiple of 14.0x (same as current 1996 estimated multiple).
(3) Present value of dividends and future stock price discounted at Wonton's
weighted average cost of capital of 10.7%.
(4) Assumes $0.92 annual dividend in 1996, increasing by 15% thereafter.
(5) Assumes 40 new stores opened and 3 existing stores closed annually after
1996.
- --------------------------------------------------------------------------------
Page 4
<PAGE>
PROJECT WONTON
<TABLE>
<CAPTION>
COMPARABLE PUBLIC COMPANIES - CURRENT MARKET VALUATION
($ IN MILLIONS, EXCEPT PER SHARE)
LATEST FIVE YEAR
TWELVE MONTHS PROJECTED % CHANGE
---------------------------------- EARNINGS IN STOCK
PRICE ON VALUE OF 1996E 1997E GROWTH PRICE FROM
1/10/97 EQUITY REVENUES EBIT NET INCOME P/E(2) P/E(2) RATE(2) 1/1/96
-------- -------- -------- ---- ---------- ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wonton $25.75 $525.1 $323.9 $54.3(1) $36.0(1) 14.0x 12.3x 14.3% 19.1%
S&P 500 759.50 - - - - 18.7x 16.5x 12.4% 23.3%
LIMITED SERVICE RESTAURANTS
- ---------------------------
CKE Restaurant $32.25 $780.6 $550.0 $41.3 $19.3 32.6x 25.9x 28.0% 123.8%
Papa John's $31.38 $900.9 $338.7 $23.0 $16.4 31.4x 24.1x 37.7% 73.8%
Wendy's $21.38 $2,764.7 $1,867.7 $251.9 $135.8 17.8x 15.2x 16.8% -0.6%
Sonic $22.50 $305.3 $151.1 $32.0 $16.6 17.2x 15.0x 19.5% 23.3%
Foodmaker $9.25 $359.3 $1,058.5 $67.2 $20.1 17.1x 14.2x 25.0% 1.4%
Luby's Cafeterias $20.25 $471.2 $450.1 $64.7 $39.2 12.6x 11.4x 10.8% -9.5%
Ryan's Family Steakhouse $7.50 $382.0 $558.8 $60.8 $36.4 10.7x 9.5x 13.4% 7.1%
Buffets(3) $8.00 $360.7 $745.0 $51.2 $31.7 10.8x 8.6x 17.7% -43.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Harmonic Mean 16.0x 13.5x 18.3%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------
(1) Excludes pre-tax provision of $16.4MM ($10.2 million after-tax) related to
the closing of approximately 40 stores.
(2) Source: First Call estimates.
(3) Pro Forma for merger with Hometown Buffets completed September 20, 1996.
- --------------------------------------------------------------------------------
Page 5
<PAGE>
PROJECT WONTON
<TABLE>
<CAPTION>
COMPARABLE PUBLIC COMPANIES - FINANCIAL RATIOS
(LATEST TWELVE MONTHS)
Valuation Multiples(1) Credit Statistics
---------------------------------------------------------- ---------------------------------
Enterprise Value
--------------------- Price to Price to Price to EBITDA/ Debt/ Total Debt/
LTM EBITDA LTM EBIT LTM EPS 1996 EPS 1997 EPS Interest Mkt. Cap. EBITDA
---------- -------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Wonton 5.6x 7.9x 14.5x 14.0x 12.3x NM 0% 0x
LIMITED SERVICE RESTAURANTS:
CKE Restaurant 12.8x 20.3x 35.4x 32.6x 25.9x 6.6x 9.2% 1.1x
Papa John's 24.7x 38.5x 52.6x 31.4x 24.1x NM 0.2% 0.1x
Wendy's 8.5x 11.6x 20.0x 17.8x 15.2x NM 8.9% 0.7x
Sonic 7.7x 9.8x 18.2x 17.2x 15.0x NM 5.4% 0.4x
Foodmaker 6.9x 10.7x 18.1x 17.1x 14.2x 2.1x 110.8% 3.9x
Luby's Cafeterias 6.1x 7.8x 12.2x 12.6x 11.4x NM 8.5% 0.5x
Ryan's Family Steakhouse 5.8x 8.1x 10.8x 10.7x 9.5x NM 29.0% 1.3x
Buffets(2) 4.1x 7.5x 11.5x 10.8x 8.6x NM 13.6% 0.5x
- ----------------------------------------------------------------------------------------------
Harmonic Mean 7.3x 10.8x 17.1x 16.0x 13.5x
- ----------------------------------------------------------------------------------------------
</TABLE>
- -----------------------
(1) Based on 1/10/97 stock price.
(2) Pro Forma for merger with Hometown Buffets completed September 20, 1996.
- --------------------------------------------------------------------------------
Page 6
<PAGE>
PROJECT WONTON
HISTORICAL 5 YEAR STOCK PRICE PERFORMANCE
WONTON VS. S&P 500 VS. RESTAURANT COMPOSITE INDEX
JANUARY 10, 1992 THROUGH JANUARY 10, 1997
[GRAPHIC OMITTED]
- -----------------
*Restaurant Composite Index includes: CKE Restaurant, Papa John's, Wendy's,
Sonic, Luby's, Ryan's and Buffets.
- --------------------------------------------------------------------------------
Page 7
<PAGE>
HISTORICAL 12 MONTH STOCK PRICE PERFORMANCE
WONTON VS. S&P 500 VS. RESTAURANT COMPOSITE INDEX
JANUARY 10, 1996 THROUGH JANUARY 10, 1997
[GRAPHIC OMITTED]
- -----------------------
* Restaurant Composite Index includes: CKE Restaurant, Papa John's, Wendy's,
Sonic, Foodmaker, Luby's, Ryan's and Buffets.
- --------------------------------------------------------------------------------
Page 8
<PAGE>
PROJECT WONTON
SECTION II
SUMMARY OF ALTERNATIVES TO INCREASE
SHAREHOLDER VALUE
<PAGE>
PROJECT WONTON
ALTERNATIVES TO INCREASE SHAREHOLDER VALUE
BEAR STEARNS HAS REVIEWED THE FOLLOWING ALTERNATIVES WITH CERTAIN COMPANY
PRINCIPALS
- --------------------------------------------------------------------------------
ALTERNATIVES Considerations
- --------------------------------------------------------------------------------
Status Quo >> Cash continues to build without attractive use
Earnings growth continues to slow
Likely continued public valuation issue
- --------------------------------------------------------------------------------
Sell >> Management believes Company is undervalued
Certain insiders are not interested in selling
- --------------------------------------------------------------------------------
Acquisition >> Strong strategic preference for developing new
concepts and JV's internally Company has not
historically made acquisitions Few concepts with
strong business fit
- --------------------------------------------------------------------------------
Management Buyout >> Highly leveraged capital structure
Operating flexibility constrained
- --------------------------------------------------------------------------------
Open Market Purchase >> Moderate repurchase would not have significant
EPS impact Not generally effective for
purchasing large percentages of public float
- --------------------------------------------------------------------------------
Special Dividend >> Not tax efficient from individual shareholder
standpoint
- --------------------------------------------------------------------------------
Recapitalization >> Use of excess cash combined with modest
borrowing Potential capital gains treatment for
shareholders Use of leverage provides for
accelerated earnings growth
- --------------------------------------------------------------------------------
Page 9
<PAGE>
PROJECT WONTON
SECTION III
RECOMMENDATION
<PAGE>
PROJECT WONTON
RECOMMENDATION
GIVEN THESE CONSIDERATIONS, BEAR STEARNS BELIEVES A LEVERAGED RECAPITALIZATION
IS THE MOST ATTRACTIVE ALTERNATIVE TO INCREASE SHAREHOLDER VALUE.
o ENHANCES SHAREHOLDER VALUE:
o Shareholders can monetize holdings at a premium price
o Potential capital gains treatment
o Efficient use of cash on hand
o Reduces cost of capital
o New debt "supercharges" remaining equity going forward
o TAKES ADVANTAGE OF CURRENT ROBUST DEBT MARKETS:
o Attractive bank market
o Strong public debt market
-Treasury rates at relative historical lows
-Tight corporate credit borrowing spreads
o MODEST LEVERAGE MAINTAINS OPERATING FLEXIBILITY:
o Downturn in operations
o Unexpected opportunities
- --------------------------------------------------------------------------------
Page 10
<PAGE>
PROJECT WONTON
RECOMMENDATION
BASED ON THE COMPANY'S PROJECTIONS, A $250 - $300 MILLION LEVERAGED
RECAPITALIZATION PROVIDES A HIGHER RETURN TO SHAREHOLDERS WHILE PROVIDING THE
NECESSARY OPERATING FLEXIBILITY FOR MANAGEMENT.
A $250 - $300 MILLION LEVERAGED RECAPITALIZATION WOULD CONSIST OF THE FOLLOWING:
The Company would tender for $250 to $300 million of common shares
MS and JS would sell 333,333 shares ($10 million), or slightly more, to the
Company
Tender price of approximately $29.00 - $30.00 per share (premium of 12.6% -
16.5% based on 1/10/97 closing price of $25.75)
The tender would also be subject to certain conditions including financing and
possibly a minimum number of shares being tendered
Tender funded with:
Cash and marketable securities on hand (approximately $110 million)
New debt raised (between $150-$200 million) from banks and/or public debt
market
This structure has the flexibility to provide for a significant sale by other
large shareholders
- --------------------------------------------------------------------------------
Page 11
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
LEVERAGED RECAPITALIZATION ALTERNATIVES
- --------------------------------------------------------------------------------
BEAR STEARNS HAS DISCUSSED THE FOLLOWING LEVERAGED RECAPITALIZATION SCENARIOS
WITH MANAGEMENT:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
($ IN MILLIONS) SCENARIO A SCENARIO B SCENARIO C
$250 RECAP $275 RECAP $300 RECAP
---------------------------------------------------------------------------------
PRO FORMA CAPITAL STRUCTURE: $ Rate $ Rate $ Rate
-- ---- -- ---- -- ----
<S> <C> <C> <C> <C>
Senior Bank Credit Facility:
Revolver(1) - 8.00% - 8.00% - 8.00%
Term Loan A $100.0 8.00% $75.0 8.00% $50.0 8.00%
Term Loan B 50.0 8.25% - -
Total Bank Debt 150.0 75.0 50.0
Senior Sub Notes - 100.0 9.75% 150.0 9.75%
TOTAL DEBT $150.0 $175.0 $200.0
SOURCES OF FUNDS:
Cash on Balance Sheet(2) $100.0 $100.0 $100.0
Senior Bank Credit Facility 150.0 75.0 50.0
Senior Subordinated Notes - 100.0 150.0
TOTAL SOURCES $250.0 $275.0 $300.0
----------------------------------------------------------------------------------
</TABLE>
- -----------------------
(1) $50.0 million undrawn revolving credit facility.
(2) Does not include funds for estimated fees and expenses of $8 - $11 million.
- --------------------------------------------------------------------------------
Page 12
<PAGE>
PROJECT WONTON
<TABLE>
<CAPTION>
PRO FORMA INCOME STATEMENT - $250 MILLION RECAPITALIZATION
($ IN MILLIONS)
PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31,
--------- ------------------------------------------------------
LTM(1) 1996 1997 1998 1999 2000 2001 2005 CAGR
------ ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $323.9 $326.3 $354.0 $379.2 $405.1 $431.4 $458.2 $570.4 6.1%
EBITDA 77.4 79.7 87.0 95.3 101.8 108.5 115.3 143.8 6.5%
EBIT 54.3 57.0 63.4 69.6 73.6 79.7 87.7 120.6 8.4%
NET INCOME $24.9 $26.5 $31.0 $36.3 $40.7 $46.5 $52.8 $76.3 11.9%
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $2.00 $2.13 $2.47 $2.88 $3.20 $3.63 $4.11 $5.84 11.4%
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE(4) $0.30 $0.30 $0.30 $0.44 $0.53 $0.71 $1.85 $3.24
POSSIBLE FUTURE STOCK PRICE $58.00(2) $82.00(2)
PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE $40.00(3) $46.00(3)
</TABLE>
- -------------
(1) LTM = Latest twelve months ended October 6, 1996.
(2) Assumes P/E multiple of 14.0x (same as current 1996 estimated multiple).
(3) Present value of stock price discounted at Wonton's weighted average cost of
capital of 9.1%.
(4) Annual dividend is based on the amount that could be paid under bank
agreements. As dividend availability increases, we assume dividend returns
to the 15% annual increase on 1996's $0.92 per share.
- --------------------------------------------------------------------------------
Page 13
<PAGE>
PROJECT WONTON
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRO FORMA INCOME STATEMENT - $275 MILLION RECAPITALIZATION
- --------------------------------------------------------------------------------
($ IN MILLIONS)
PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31,
LTM(1) 1996 1997 1998 1999 2000 2001 2005 CAGR
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $323.9 $326.3 $354.0 $379.2 $405.1 $431.4 $458.2 $570.4 6.1%
EBITDA 77.4 79.7 87.0 95.3 101.8 108.5 115.3 143.8 6.5%
EBIT 54.3 57.0 63.4 69.6 73.6 79.7 87.7 120.6 8.4%
NET INCOME $22.8 $24.4 $28.8 $33.9 $37.8 $42.6 $48.2 $74.8 12.8%
- --------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $1.97 $2.11 $2.46 $2.88 $3.19 $3.57 $4.01 $6.13 12.1%
- --------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE(4) $0.49 $0.49 $0.49 $0.64 $0.61 $1.61 $1.85 $3.24
POSSIBLE FUTURE STOCK PRICE $56.00(2) $86.00(2)
========= =========
PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE $40.00(3) $48.00(3)
========= =========
</TABLE>
- -----------------------
(1) LTM = Latest twelve months ended October 6, 1996.
(2) Assumes P/E multiple of 14.0x (same as current 1996 estimated multiple).
(3) Present value of stock price and dividends discounted at Wonton's weighted
average cost of capital of 9.1%.
(4) Annual dividend is based on the amount that could be paid under bank
agreements. As dividend availability increases, we assume dividend returns
to the 15% annual increase on 1996's $0.92 per share.
- --------------------------------------------------------------------------------
Page 14
<PAGE>
PROJECT WONTON
<TABLE>
<CAPTION>
PRO FORMA INCOME STATEMENT - $300 MILLION RECAPITALIZATION
($ IN MILLIONS)
PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31,
---------------- -----------------------------------------------------------
LTM(1) 1996 1997 1998 1999 2000 2001 2005 CAGR
------ ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $323.9 $326.3 $354.0 $379.2 $405.1 $431.4 $458.2 $570.4 6.1%
EBITDA 77.4 79.7 87.0 95.3 101.8 108.5 115.3 143.8 6.5%
EBIT 54.3 57.0 63.4 69.6 73.6 79.7 87.7 120.6 8.4%
NET INCOME $21.1 $22.7 $26.9 $31.7 $35.1 $39.6 $45.2 $73.5 13.4%
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $1.96 $2.11 $2.48 $2.89 $3.18 $3.57 $4.04 $6.45 12.5%
- ----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE(4) $0.97 $0.97 $0.97 $1.22 $1.40 $1.61 $1.85 $3.24
POSSIBLE FUTURE STOCK PRICE $57.00(2) $90.00(2)
========= =========
PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE $42.00(3) $52.00(3)
========= =========
</TABLE>
- -----------------------
(1) LTM = Latest twelve months ended October 6, 1996.
(2) Assumes P/E multiple of 14.0x (same as current 1996 estimated multiple).
(3) Present value of stock price and dividends discounted at Wonton's weighted
average cost of capital of 9.1%.
(4) Annual dividend is based on the amount that could be paid under bank
agreements. As dividend availability increases, we assume dividend returns
to the 15% annual increase on 1996's $0.92 per share. (Assumes current bank
debt level is such that 25% of Excess Cash Flow test could be expanded to
50% of Excess Cash Flow)
- --------------------------------------------------------------------------------
Page 15
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
SUMMARY FINANCIAL DATA - $250 MILLION RECAP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ IN MILLIONS)
PRO
FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2005
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES $25.4 $25.4 $20.4 $22.9 $20.6 $21.9 $22.0
CASH FLOW AVAILABLE FOR DEBT
AMORTIZATION(1)
$23.1 $28.0 $38.0 $41.3 $47.8 $37.8 $40.0
DEBT AMORTIZATION:
Term Loan Required Amort. - $15.0 $20.0 $20.0 $20.0 $25.0 -
Additional Cash Sweep - 13.0 18.0 21.3 22.8 - -
Senior Sub Notes - - - - - - -
Total Debt Outstanding $150.0 $122.0 $84.0 $42.8 - - -
====== ====== ===== ===== ===== ===== =====
Cash & Cash Equivalents $2.8 $2.8 $2.8 $2.8 $7.8 $45.6 $202.9
====== ====== ===== ===== ===== ===== =====
Shareholders' Equity ($45.1) ($17.7) $13.3 $47.5 $85.4 $115.6 $255.5
====== ====== ===== ===== ===== ===== =====
CREDIT STATISTICS / LEVERAGE: LTM
EBITDA / Interest 6.4x 6.6x 7.9x 11.4x 19.6x 61.5x NA NA
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed Charge Coverage (EBITDA)(2) 2.0x 2.2x 2.6x 2.6x 3.1x 4.0x 3.7x NA
Fixed Charge Coverage (EBITDAR)(3) 1.4x 1.4x 1.5x 1.5x 1.6x 1.8x 1.7x 2.4x
- ----------------------------------------------------------------------------------------------------------------------------------
Total Debt/EBITDA 1.9x 1.9x 1.4x 0.9x 0.4x NA NA NA
Total Debt + Leases(4) / EBITDAR 3.9x 3.8x 3.5x 3.2x 2.9x 2.6x 2.6x 2.6x
</TABLE>
- -----------------------
(1) Defined as Cash Flow from operating activities less capital expenditures.
(2) Defined as EBITDA - CapEx divided by Interest + Required Principal
Amortization.
(3) Defined as EBITDAR - CapEx divided by Interest + Rents + Required Principal
Amortization.
(4) Capitalized rents at 7.0x.
- --------------------------------------------------------------------------------
Page 16
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
SUMMARY FINANCIAL DATA - $275 MILLION RECAP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ IN MILLIONS)
PRO
FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31,
------ -------------------------------------------------------
1996 1997 1998 1999 2000 2001 2005
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES $25.4 $25.4 $20.4 $22.9 $20.6 $21.5 $22.0
CASH FLOW AVAILABLE FOR DEBT AMORTIZATION(1)
$18.8 $23.8 $33.6 $37.8 $34.2 $34.6 $41.3
DEBT AMORTIZATION:
Term Loan Required Amort. - $5.0 $10.0 $15.0 $20.0 $25.0 -
Additional Cash Sweep - 18.8 23.6 2.6 - - -
Senior Sub Notes - - - - - - -
Total Debt Outstanding $175.0 $151.2 $117.6 $100.0 $100.0 $100.0 -
====== ====== ===== ===== ===== ===== =====
Cash & Cash Equivalents $2.8 $2.8 $2.8 $23.0 $57.1 $91.7 $140.8
====== ====== ===== ===== ===== ===== =====
Shareholders' Equity ($70.8) ($47.6) ($20.9) $9.9 $34.2 $61.4 $193.3
====== ====== ===== ===== ===== ===== =====
CREDIT STATISTICS / LEVERAGE: LTM
EBITDA / Interest 4.9x 5.1x 5.9x 7.6x 9.7x 11.1x 11.8x NA
- -------------------------------------------------------------------------------------------------------------------------------
Fixed Charge Coverage (EBITDA)(2) 2.6x 2.9x 3.4x 3.3x 3.1x 3.0x 2.7x NA
Fixed Charge Coverage (EBITDAR)(3) 1.5x 1.6x 1.6x 1.7x 1.6x 1.6x 1.6x 2.4x
- ------------------------------------------------------------------------------------------------------------------------------
Total Debt/EBITDA 2.3x 2.2x 1.7x 1.2x 1.0x 0.9x 0.9x NA
Total Debt + Leases(4) / EBITDAR 4.1x 4.0x 3.7x 3.4x 3.3x 3.2x 3.2x 2.6x
</TABLE>
- -----------------------
(1) Defined as Cash Flow from operating activities less capital expenditures.
(2) Defined as EBITDA - CapEx divided by Interest + Required Principal
Amortization.
(3) Defined as EBITDAR - CapEx divided by Interest + Rents + Required Principal
Amortization.
(4) Capitalized rents at 7.0x.
- --------------------------------------------------------------------------------
Page 17
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
SUMMARY FINANCIAL DATA - $300 MILLION RECAP
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ IN MILLIONS)
PRO
FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31,
---- --------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2005
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES $25.4 $25.4 $20.4 $22.9 $20.6 $21.5 $22.0
CASH FLOW AVAILABLE FOR DEBT AMORTIZATION(1)
$12.3 $17.3 $25.8 $27.4 $32.6 $33.2 $42.6
DEBT AMORTIZATION:
Term Loan Required Amort. - $5.0 $10.0 $10.0 $12.5 $12.5 -
Additional Cash Sweep - 12.3 15.8 - - - -
Senior Sub Notes - - - - - - -
Total Debt Outstanding $200.0 $182.2 $156.9 $150.0 $150.0 $150.0 -
====== ====== ===== ===== ===== ===== =====
Cash & Cash Equivalents $2.8 $2.8 $2.8 $23.3 $55.9 $89.1 $85.9
====== ====== ===== ===== ===== ===== =====
Shareholders' Equity ($95.5) ($78.9) ($60.0) ($39.6) ($16.9) $8.8 $138.4
====== ====== ===== ===== ===== ===== =====
CREDIT STATISTICS / LEVERAGE: LTM
EBITDA / Interest 4.2x 4.3x 4.9x 5.9x 6.9x 7.4x 7.9x NA
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed Charge Coverage (EBITDA)(2) 2.3x 2.5x 2.9x 2.9x 3.2x 3.2x 3.4x NA
Fixed Charge Coverage (EBITDAR)(3) 1.4x 1.5x 1.6x 1.6x 1.6x 1.7x 1.7x 2.4x
- ------------------------------------------------------------------------------------------------------------------------------------
Total Debt/EBITDA 2.6x 2.5x 2.1x 1.6x 1.5x 1.4x 1.3x NA
Total Debt + Leases(4) / EBITDAR 4.3x 4.2x 4.0x 3.7x 3.6x 3.5x 3.4x 2.6x
</TABLE>
- -----------------------
(1) Defined as Cash Flow from operating activities less capital expenditures.
(2) Defined as EBITDA - CapEx divided by Interest + Required Principal
Amortization.
(3) Defined as EBITDAR - CapEx divided by Interest + Rents + Required Principal
Amortization.
(4) Capitalized rents at 7.0x.
- --------------------------------------------------------------------------------
Page 18
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
SUMMARY OF ALTERNATIVES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ IN MILLIONS, EXCEPT PER SHARE DATA)
SCENARIO A SCENARIO B SCENARIO C
STATUS QUO $250 RECAP $275 RECAP $300 RECAP
INCOME STATEMENT DATA: YEAR 2001 ---------- ---------- ---------- -----------
- ---------------------------------
<S> <C> <C> <C> <C>
Earnings Per Share $2.79 $4.11 $4.01 $4.04
GROWTH RATE(1) 9.1% 14.8% 14.6% 14.8%
Dividends Per Share(2) $1.85 $1.85 $1.85 $1.85
Possible Future Stock Price(3) $39.00 $58.00 $56.00 $57.00
BALANCE SHEET DATA: YEAR 2001
Cash & Cash Equivalents $229.6 $45.6 $91.7 $89.1
Total Debt - - $100.0 $150.0
Shareholders' Equity $303.4 $115.6 $61.4 $8.8
CREDIT STATISTICS: YEAR 1997
EBITDA / Interest NA 7.9x 5.9x 4.9x
- ---------------------------------------------------------------------------------------------------
Fixed Charge Ratio (EBITDA)(4) NA 2.6x 3.4x 2.9x
Fixed Charge Ratio (EBITDAR)(5) 2.1x 1.5x 1.6x 1.6x
- ---------------------------------------------------------------------------------------------------
Total Debt / EBITDA NA 1.4x 1.7x 2.1x
Total Debt + Leases / EBITDA 2.7x 3.5x 3.7x 4.0x
</TABLE>
- -----------------------
(1) Cumulative average growth rate between 1997 and 2001.
(2) Assumes dividends grow at 15% per year beginning in 1998.
(3) Assumes existing P/E multiple of 14.0x. (Same as current 1996 multiple).
(4) Defined as EBITDA - CapEx divided by Interest + Required Principal
Amortization.
(5) Defined as EBITDA - CapEx divided by Interest + Rents + Required Principal
Amortization.
- --------------------------------------------------------------------------------
Page 19
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
SUMMARY OF ALTERNATIVES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ IN MILLIONS, EXCEPT PER SHARE DATA)
SCENARIO A SCENARIO B SCENARIO C
STATUS QUO $250 RECAP $275 RECAP $300 RECAP
---------- ----------- ---------- ----------
INCOME STATEMENT DATA: YEAR 2005
<S> <C> <C> <C> <C>
Earnings Per Share $3.76 $5.84 $6.13 $6.45
GROWTH RATE(1) 8.9% 12.5% 13.3% 14.0%
Dividends Per Share(2) $3.24 $3.24 $3.24 $3.24
Possible Future Stock Price(3) $53.00 $82.00 $86.00 $90.00
BALANCE SHEET DATA: YEAR 2005
Cash & Cash Equivalents $313.1 $202.9 $140.8 $85.9
Total Debt - - - -
Shareholders' Equity $372.4 $255.5 $193.3 $138.4
</TABLE>
- -----------------------
(1) Cumulative average growth rate between 1997 and 2005.
(2) Assumes dividends grow at 15% per year beginning in 1998.
(3) Assumes existing P/E multiple of 14.0x. (Same as current 1996 estimated
multiple).
(4) Defined as EBITDA - CapEx divided by Interest + Required Principal
Amortization.
(5) Defined as EBITDA - CapEx divided by Interest + Rents + Required
Principal Amortization.
- --------------------------------------------------------------------------------
Page 20
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
COMPARISON OF FINANCING OPTIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BANK FINANCING (SCENARIO A) PUBLIC DEBT FINANCING (SCENARIO B & C)
--------------------------- ---------------------------------------
<S> <C> <C>
INTEREST RATE: 8.00% - 8.25% (Libor + 250 - 275 bps) 9.75% - 10.00% (UST + 337.5 - 362.5 bps)
AMORTIZATION: 5 - 7 year contractual amortization None (8 year bullet)
PREPAYMENT: Prepayment at anytime Non-callable until end of year 4
COVENANTS: Maintenance based (quarterly compliance): Incurrence based (at time of elected
Minimum interest coverage transaction):
Minimum fixed charge coverage Debt incurrence
Maximum leverage Limitation on :
Limitation on: Restricted payments (e.g. - dividend
Capital expenditures limitations)
Restricted payments (e.g. - dividend Asset sales
limitations) Affiliate transactions
Asset sales
Affiliate transactions
Acquisitions
TIMING: Additional 3-4 weeks for bank syndication Banks more likely to close before syndication
likely
</TABLE>
- --------------------------------------------------------------------------------
Page 21
<PAGE>
PROJECT WONTON
APPENDIX A
SUMMARY TRANSACTION TIMETABLE
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
ILLUSTRATIVE TIMETABLE - RECAPITALIZATION (TENDER OFFER)
- --------------------------------------------------------------------------------
- -------------------------- ------------------------ -------------------------
JANUARY 1997 February 1997 March 1997
- -------------------------- ------------------------ -------------------------
S M T W T F S S M T W T F S S M T W T F S
- -------------------------- ------------------------ -------------------------
1 2 3 4 1 1
5 6 7 8 9 10 11 2 3 4 5 6 7 8 2 3 4 5 6 7 8
12 13 14 15 16 17 18 9 10 11 12 13 14 15 9 10 11 12 13 14 15
19 20 21 22 23 24 25 16 17 18 19 20 21 22 16 17 18 19 20 21 22
26 27 28 29 30 31 23 24 25 26 27 28 23 24 25 26 27 28 29
30 31
- -------------------------- ------------------------ -------------------------
WEEK OF JANUARY 13: Present proposal to Board of Directors
Board considers Recapitalization
WEEK OF JANUARY 20: Board authorizes Recapitalization Begin confidential
discussions with possible bank lenders Draft of internal
financial statements available
WEEK OF JANUARY 27: Legal counsel drafts tender offer documentation Legal
counsel begins drafting debt Offering Circular and
description of Notes Public information package sent to
debt Rating Agencies Begin preparation of Rating Agency
presentation
WEEK OF FEBRUARY 3: Continue preparation of Rating Agency presentation
Continue discussions with bank lenders Accountants
sign-off on financial results
WEEK FEBRUARY 10: Company issues press release announcing self tender
Company commences tender offer Drafting of debt offering
circular and description of notes continues Continue
discussions with bank lenders Presentations to rating
agencies Draft of GAAP financial statements available
(excluding footnotes) Regularly scheduled dividend
announcement
- --------------------------------------------------------------------------------
Page 22
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
ILLUSTRATIVE TIMETABLE - RECAPITALIZATION (TENDER OFFER)
- --------------------------------------------------------------------------------
- -------------------------- ------------------------ -------------------------
JANUARY 1997 February 1997 March 1997
- -------------------------- ------------------------ -------------------------
S M T W T F S S M T W T F S S M T W T F S
- -------------------------- ------------------------ -------------------------
1 2 3 4 1 1
5 6 7 8 9 10 11 2 3 4 5 6 7 8 2 3 4 5 6 7 8
12 13 14 15 16 17 18 9 10 11 12 13 14 15 9 10 11 12 13 14 15
19 20 21 22 23 24 25 16 17 18 19 20 21 22 16 17 18 19 20 21 22
26 27 28 29 30 31 23 24 25 26 27 28 23 24 25 26 27 28 29
30 31
- -------------------------- ------------------------ -------------------------
WEEK OF FEBRUARY 17: Receive bank financing commitment and begin negotiating
bank loan agreements
Audited financial statements with footnotes available
Finalize debt Offering Circular and description of Notes
Debt offering circular printed and distributed to
investors
WEEK OF FEBRUARY 24: Presentation to debt salesforce
Receive credit ratings from Rating Agencies
Begin roadshow for debt offering
WEEK OF MARCH 3: Complete roadshow for debt offering
Finalize bank loan agreements(1)
WEEK OF MARCH 10: Price debt offering
Close debt offering
Close bank financing
Consummate tender offer
- -----------------------
(1) Assumes bank lenders do not require syndication prior to closing. If
syndication is required, additional time needed to syndicate is 3 to 4
weeks.
- --------------------------------------------------------------------------------
Page 23
<PAGE>
PROJECT WONTON
APPENDIX B
OWNERSHIP SUMMARY
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
PRO FORMA OWNERSHIP SUMMARY
- --------------------------------------------------------------------------------
$250 MILLION RECAPITALIZATION
- --------------------------------------------------------------------------------
PRE-TRANSACTION Post-Recapitalization
SHARES % Shares %
Insiders:
Joseph and Mario S. 3,454,294 15.9% 3,120,961 23.1%
Trust of Carmela S. 2,497,884 11.5% 2,497,884 18.5%
Options (J. and M.) 570,000 2.6% 570,000 4.2%
Other option holders 768,702 3.5% 768,702 5.7%
Public Shareholders 14,440,065 66.4% 6,570,000 48.6%
Total Shares Outstanding 21,730,945 100.0% 13,527,547 100.0%
- --------------------------------------------------------------------------------
$275 MILLION RECAPITALIZATION
- --------------------------------------------------------------------------------
PRE-TRANSACTION Post-Recapitalization
SHARES % Shares %
Insiders:
Joseph and Mario S. 3,454,294 15.9% 3,120,961 24.6%
Trust of Carmela S. 2,497,884 11.5% 2,497,884 19.7%
Options (J. and M.) 570,000 2.6% 570,000 4.5%
Other option holders 768,702 3.5% 768,702 6.1%
Public Shareholders 14,440,065 66.4% 5,711,500 45.1%
Total Shares Outstanding 21,730,945 100.0% 12,669,047 100.0%
- --------------------------------------------------------------------------------
$300 MILLION RECAPITALIZATION
- --------------------------------------------------------------------------------
PRE-TRANSACTION Post-Recapitalization
SHARES % Shares %
Insiders:
Joseph and Mario S. 3,454,294 15.9% 3,120,961 26.3%
Trust of Carmela S. 2,497,884 11.5% 2,497,884 21.1%
Options (J. and M.) 570,000 2.6% 570,000 4.8%
Other option holders 768,702 3.5% 768,702 6.5%
Public Shareholders 14,440,065 66.4% 4,887,550 41.3%
Total Shares Outstanding 21,730,945 100.0% 11,845,047 100.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 24
<PAGE>
PROJECT WONTON
OWNERSHIP SUMMARY
TOP FIFTEEN INSTITUTIONAL OWNERS BY HOLDINGS(1)
Shares %
Dalton Greiner Hartman 762,700 3.7%
Strong Capital Management 699,700 3.4%
Lazard Freres 649,990 3.2%
First Chicago NBD Corp. 462,460 2.3%
Barclays Bank 423,929 2.1%
Moody Aldrich & Sullivan 403,820 2.0%
Wedge Capital Management LLP 372,900 1.8%
Pacific Income Advisors 364,581 1.8%
Chase Manhattan 334,365 1.6%
Putnam Investment Management 325,800 1.6%
Equitable Companies 312,550 1.5%
Fidelity Management & Research 310,600 1.5%
Hughes Investment Management 267,000 1.3%
Travelers Inc. 265,465 1.3%
Florida St. Board / Administration 225,000 1.1%
TOP FIFTEEN INSTITUTIONS 6,180,860 30.3%
Total Shares Outstanding 20,392,243 100.0%
- -----------------------
Source: CDA / Spectrum.
- --------------------------------------------------------------------------------
Page 25
<PAGE>
PROJECT WONTON
APPENDIX C
TRADED VOLUME ANALYSIS
<PAGE>
PROJECT WONTON
TRADED VOLUME ANALYSIS
PROJECT WONTON
JANUARY 10, 1996 TO JANUARY 10, 1997
[GRAPHIC OMITTED]
- -----------------------
Source: Factset.
- --------------------------------------------------------------------------------
Page 26
<PAGE>
PROJECT WONTON
APPENDIX D
DISCOUNTED CASH FLOW ANALYSIS
<PAGE>
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Project Wonton - DCF Analysis ("Status Quo" Case)
<TABLE>
<CAPTION>
DCF Valuation - Terminal Value as a Multiple of EBITDA
1997 1998 1999 2000 2001 Term. Value
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
4.0%
Sales $354.0 $379.2 $405.1 $431.4 $458.2
EBITDA 87.0 95.3 101.8 108.5 115.3
EBIT 63.4 69.6 73.6 79.7 87.7
Taxes 40% (25.3) (27.8) (29.4) (31.9) (35.1)
------ ------ ------ ------ ------
Net Income 38.0 41.7 44.2 47.8 52.6 52.6
Depreciation & Amort. 23.6 25.7 28.2 28.7 27.6 27.6
Capital Expenditures (24.4) (19.4) (21.9) (19.6) (20.9) 20.9
Capitalized Store Opening Costs (1.0) (1.0) (1.0) (1.0) (1.0) (1.0
Change in Work Cap. 2.0 1.9 1.9 2.0 2.0 1.3
--- --- --- --- --- ---
Free Cash Flow 38.3 48.9 51.4 58.0 60.3 59.6
==== ==== ==== ==== ---- ====
NPV of Cash Flows @ 10.7% $187.3 Terminal Value Calculation
--------------------------
PV of Terminal Value 6.5x 450.8
@ EBITDA Multiple of: ----- Year 2001 EBITDA $ 115.3
Total Enterprise Value $638.1 EBITDA Terminal Multiple 6.5x
-------
Less: Debt Assumed - Terminal Value in 2000 $ 749.4
Plus: Cash (110.3)
Plus: Equity Offsets 32.6
Value To Equity 560.4 Multiple of 2001 EBITDA 6.5x
Fully Diluted Shares Outstanding 21.7 Multiple of 2001 EBIT 8.5x
Value Per Share $25.79 Multiple of 2001 Net Inc. 14.2x
Multiple of 2001 PCF 12.4x
Sensitivity Table - DCF Value Per Share
EBITDA Exit Multiple Implied Perp. Growth Rate
5.5x 6.0x 6.5x 7.0x 7.5x of Free Cash Flow (1)(2) 2.7x
---- ---- ---- ---- ----
9.5% $ 23.87 $ 25.55 $ 27.24 $ 28.92 $ 30.61 ---------------------------------
Discount 10.0% $ 23.33 $ 24.98 $ 26.62 $ 28.27 $ 29.92 (1) Normalizes cash flow for perpetuity.
Rate 10.5% $ 22.80 $ 24.41 $ 26.02 $ 27.63 $ 29.24
11.0% $ 22.29 $ 23.86 $ 25.44 $ 27.01 $ 28.59 (2) Using Gordon Growth Model
11.5% $ 21.79 $ 23.33 $ 24.87 $ 26.41 $ 27.95
- ----------------- -------------- -------------- -------------- -------------
</TABLE>
<PAGE>
PROJECT WONTON
APPENDIX E
DESCRIPTION OF COMPARABLE COMPANIES
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
COMPARABLE PUBLIC COMPANIES - OPERATING DATA
<TABLE>
<CAPTION>
($ IN MILLIONS)
Number of % EBITDA Comp Store Unit Growth Revenue Growth Net Income Growth
Locations Franchise Margin Sales Growth 1994-95 1995-96 1994-95 1995-96 1994-95 1995-96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wonton 816 27% 23.9% 0.6% 7% 6% 8% 3% (5%) 19%
LIMITED SERVICE RESTAURANTS
CKE Restaurants 657 38% 11.9% 8.4% 1% 4% 5% 26% 742% 95%
Papa John's 1,156 75% 10.6% 6.4% 39% 32% 57% 32% 56% 66%
Wendy's Int'l 5,829 70% 18.4% 5.0% 7% 8% 10% 10% 16% 20%
Sonic Corp. 1,567 85% 27.0% 5.0% 2% 3% 21% 22% 32% 25%
Foodmaker 1,270 31% 9.8% 4.0% 2% 1% 4% NA NM 6%
Luby's Cafeterias 204 - 18.3% (0.3%) 10% 15% 7% 27% 6% 9%
Ryan's Family Steakhouse 257 10% 15.3% (0.1%) 6% NA 15% 11% 9% 10%
Buffets 338 7% 12.5% (3.5%) 23% NA 37% NA 28% -
</TABLE>
- -----------------------
Source: Wall Street Research, Company 10-Qs and 10Ks.
- --------------------------------------------------------------------------------
Page 27
<PAGE>
PROJECT WONTON
DESCRIPTION OF COMPARABLE COMPANIES
BUFFETS, INC.
The Company and its subsidiaries owns and operates a chain of buffet
restaurants under the name of Old Country Buffet and Country Buffet. On
September 20, 1996, the Company merged with Hometown Buffet which also owns and
operates a chain of buffet restaurants. The combined Company owns approximately
350 restaurants in 32 different states. The Company also franchises a number of
restaurants.
CKE RESTAURANTS
The Company operates and franchises the Carl's Jr. restaurant chain
primarily in the southwestern United States. The Company owns over 390 units and
franchises over 240. The Company also operates Boston Chicken stores in CKE's
California territory.
FOODMAKER, INC.
The Company operates and franchises Jack In The Box, a leading fast-food
chain in western and the southwestern United States. The Company owns
approximately 860 unit and franchises approximately 400 units. The Jack In The
Box concept is also in five international locations: Mexico, Hong Kong,
Indonesia, Egypt and the Philippines.
LUBY'S CAFETERIAS, INC.
The Company owns and operates over 200 cafeterias under the name "Luby's"
located in suburban shopping areas in approximately 11 states located primarily
in southern and the southwestern United States.
- --------------------------------------------------------------------------------
Page 28
<PAGE>
PROJECT WONTON
DESCRIPTION OF COMPARABLE COMPANIES
PAPA JOHN'S INTERNATIONAL
The Company is a rapidly growing operator and franchiser of pizza delivery
and carryout restaurants that operate under the trademark Papa John's. The
Company owns approximately 220 restaurants and franchises approximately 660.
RYAN'S FAMILY STEAK HOUSES, INC.
The Company owns and franchises more than 260 restaurants largely in the
southeastern United States. The Company's restaurants feature "Steaks, Buffet &
Bakery." The Company also operates under three casual dining concepts on a test
basis, consisting of Cliente Grille or Chilace Grille, Laredo Grill and
Bellissimo's Italian Eatery.
SONIC CORP.
The Company operates and franchises more than 1,500 drive-in restaurants
located principally in the south central and southeastern United States that
feature fast service and a limited menu of moderately priced, cooked-to-order
items.
WENDY'S INTERNATIONAL
The Company operates or franchises more than 4,400 Wendy's restaurants in
the United States and 33 other countries. The Company also operates
approximately 1,200 Tim Hortons restaurants, which offers coffee and a full line
of fresh baked goods, as well as soups and sandwiches, primarily in Canada.
- --------------------------------------------------------------------------------
Page 29
<PAGE>
APPENDIX F
COMPARABLE M&A TRANSACTIONS
<PAGE>
PROJECT WONTON
<TABLE>
<CAPTION>
SELECTED COMPARABLE M&A TRANSACTIONS
($ IN MILLIONS)
Date Annonced/
Status
Enterprise Equity Premium Enterprise Value/ Equity Value/
(date completed) Target Acquiror Value Value Paid Revenue EBITDA EBIT Net Income Book Value
- --------------- ------ -------- ---------- ------ ------- ------- ------ ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8/23/94 / Ground Round 399 Ventures $161.5 $104.2 41.2% 0.66x 6.0x 12.2x 16.7x 1.6x
terminated Restaurants
8/15/95 / TPI Enterprises, Shoney's Inc. 158.8 54.5 -17.8% 0.57x 7.8x NM NM 0.8x
11/17/95 Inc.
11/6/95 / NPC International Management 301.5 221.5 44.0% 0.96 6.6x 11.7x 19.1x 2.7x
withdrawn
3/4/96 / Cococ Restaurants, Flagstar Cos Inc. 306.5 275.0 NA 0.61x 5.0x 9.1x NM NM
5/23/96 Jojos Restau-
rants, Carrows
Restaurants, Inc.
(Family Restau-
rants)
5/2/96 / Houlihan's Restau- Zapata Corp. 157.0 85.2 33.3% 0.58x 5.0x 9.8x 20.5x 1.2x
terminated rants Group
6/4/96 / Hometown Buffet Inc. Buffets Inc. 209.8 178.3 3.5% 1.09x 7.8x 14.6x 24.0x 2.3x
9/20/96
Harmonic Mean of 0.70x 6.2x 11.2x 19.7x 1.4x
Transaction Multiples
-----------------------------------------------------------------------------------------------------------------------
Wonton Management $509.0 $619.3 16.5% 1.57x 6.6x 9.4x 17.2x 3.2x
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Page 30
<PAGE>
APPENDIX G
SUMMARY TERM SHEETS
<PAGE>
<TABLE>
<CAPTION>
PROJECT WONTON
SUMMARY OF INDICATIVE TERMS FOR BANK FACILITY
($ IN MILLIONS)
Scenario A Scenario B Scenario C
$250 Million Recap $275 Million Recap $300 Million Recap
<S> <C> <C> <C>
Capitalization:
Revolver $40 - 50 (Undrawn) $40 - 50 (Undrawn) $40 - 50 (Undrawn)
Term Loan A $100 $75 $50
Term Loan B $50 -- --
EXPECTED PRICING:
Revolver LIBOR + 250 LIBOR + 250 LIBOR + 250
Term Loan A LIBOR + 250 LIBOR + 250 LIBOR + 250
Term Loan B LIBOR + 275 -- --
MATURITY / AMORTIZATION:
Revolver 5 year "evergreen" SAME SAME
Term Loan A 5 year maturity; staggered SAME SAME
principal amortization in years 1-5
Term Loan B 7 year maturity; equal principal -- --
amortization in years 6-7
OTHER:
CASH SWEEP: 75% of Excess Cash Flow(3) 75% of Excess Cash Flow(3) 50% of Excess Cash Flow(2)(3)
FEES: 1% commitment fee SAME SAME
1% closing fee
RESTRICTED PAYMENTS / DIVIDENDS: Up to 25% of Excess Cash Flow Up to 25% of Excess Cash Flow Up to 50% of Excess Cash Flow
may be paid in dividends may be paid in dividends may be paid in dividends(2)
</TABLE>
- ---------------------
(1) Negotiated terms may allow for a portion of the Bank facilities to be
extended under the revolving credit line.
(2) For Scenario C, the bank facilities should permit less than 75% cash flow
sweep, thereby allowing greater than 25% excess cash flow for dividends.
(3) Applied to repay Term Loans in inverse order of maturities ("cash flow
sweep").
- --------------------------------------------------------------------------------
Page 31
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
SUMMARY OF INDICATIVE TERMS FOR SENIOR SUB NOTES
- --------------------------------------------------------------------------------
ISSUE: Senior Subordinated Notes (the "Notes")
PRINCIPAL AMOUNT: $100 - 150 million
MATURITY: 2005 (8 years)
ASSUMED RATINGS: Strong to mid single B
INDICATIVE COUPON: 9 3/4% - 10% (T + 337.5 - 362.5 bps), payable in cash
semi-annually in arreaRS
SECURITY: None
RANKING: The Notes will be unsecured senior subordinated
indebtedness of the Company and will rank subordinated in
right of payment to all existing and future senior
indebtedness of the Company and PARI PASSU with or senior
to all existing and future subordinated indebtedness of
the Company
MANDATORY REDEMPTION None
OPTIONAL REDEMPTION: Non-callable for four years. Until the end of year four,
redeemable at the Company's option at any time, in whole
or in part, at a premium equal to 50% of the coupon,
declining ratably to par by the end of year seven. Also,
35% of the Principal Amount of the Notes may be redeemed
by the Company within the first three years at a premium
with the proceeds of an equity offering
- --------------------------------------------------------------------------------
Page 32
<PAGE>
APPENDIX H
COMPARABLE RECAPITALIZATION TRANSACTIONS
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
UNITED STATIONERS MERGER WITH ASSOCIATED STATIONERS
- --------------------------------------------------------------------------------
ASSOCIATED HOLDINGS ACQUIRED ON MARCH 30, 1995 A MAJORITY INTEREST IN UNITED
STATIONERS WHICH MERGED WITH ASSOCIATED STATIONERS, A WHOLLY-OWNED SUBSIDIARY OF
ASSOCIATED HOLDINGS
o Associated Holdings offered to purchase up to 17.2 million shares
(approximately 92.5% of the common shares outstanding) of United
Stationers
o Post-transaction, the shares not purchased by Associated Holdings
comprised approximately 19% of the new common stock on a fully-diluted
basis
o The new Company expected to generate approximately $26.0 million in
annual cost savings
o Cash offer price of $15.50 per share, totaling $267 million offered in
the purchase of United Stationer's shares. This price represented a 12.7%
premium over the closing price of the Company's common stock ($13.75), on
the day prior to the transaction's announcement
o The Company's current stock price as of January 10, 1997 was $21.25
(37.1% appreciation over the purchase price)
-------------------------------------------------------------------------
Page 33
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
UNITED STATIONERS
- --------------------------------------------------------------------------------
TRADING HISTORY POST-TRANSACTION
MARCH 30, 1995 TO JANUARY 10, 1997
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
Page 34
<PAGE>
PROJECT WONTON
- --------------------------------------------------------------------------------
HAYES WHEEL CORP. INTERNATIONAL MERGER WITH MOTOR WHEEL CORP.
- --------------------------------------------------------------------------------
MWC HOLDING MERGER WITH HAYES WHEEL CORP. INTERNATIONAL ON AUGUST 2, 1996
MWC Holdings offered in consideration for each Hayes Wheel common share $28.80
in cash and .1 shares of the Company's new common stock. The total consideration
per share of approximately $32.00 represented a 29.3% premium over the closing
price of the Company's stock on the day prior to the announcement of the
transaction ($24.75)
Post-transaction, the original shareholders of Hayes Wheel Corp. stock owned
approximately 15.8% of the Company's new common stock
Cash consideration of $28.80 per share, totaling $506 million offered in the
purchase of Hayes Wheel shares
The Company's current stock price as of January 10, 1997 was $43.50(1) (35.9%
appreciation over the purchase price)
- --------------------
(1) Current price adjusted for 2:1 split on 1/7/97 (actual price was $21.75 on
1/10/97).
- --------------------------------------------------------------------------------
Page 35
<PAGE>
PROJECT WONTON
HAYES WHEEL CORP. INTERNATIONAL
TRADING HISTORY POST-TRANSACTION(1)
AUGUST 2, 1996 TO JANUARY 10, 1997
[GRAPHIC OMITTED]
- --------------------
(1) Historical prices adjusted for 2:1 split on January 7, 1997.
- --------------------------------------------------------------------------------
Page 36
PROJECT WONTON
- --------------------------------------------------------------------------------
SUMMARY OF ALTERNATIVES
<TABLE>
<CAPTION>
($ in millions, except per shate data)
SCENARIO A SCENARIO B SCENARIO C NEW SCENARIO C SCENARIO D
STATUS QUO 250 MM RECAP $275 MM RECAP $300 MM RECAP $300 MM RECAP $200 MM
---------- ------------ ------------- ------------- -------------- -----------
RECAP
-----
INCOME STATEMENT DATA: YEAR 2001
- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings Per Share $2.79 $4.11 $4.01 $4.04 $3.87 $3.45
CAGR(1) 7.7% 13.6% 13.0% 13.0% 12.6% 10.8%
Dividends Per Share(2) $1.85 $1.85 $1.85 $1.85 $1.85 $1.85
Possible Future Stock $39.00 $58.00 $56.00 $57.00 $54.00 $48.00
Price(3)
BALANCE SHEET DATA: YEAR 2001
- -----------------------------
Cash & Cash $229.6 $45.6 $91.7 $89.1 $131.0 $138.6
Equivalents
Total Debt - - $100.0 $150.0 $200.0 $100.0
Shareholders' Equity $303.4 $115.6 $61.4 $8.8 $1.3 $107.4
CREDIT STATISTICS: YEAR 1997
- ----------------------------
EBITDA/Interest NA 7.9x 5.9x 4.9x 4.5x 9.2x
Fixed Charge Ratio NA 2.6x 3.4x 2.9x 2.7x 7.0x
(EBITDA)(4)
Fixed Charge Ratio 2.1x 1.5x 1.6x 1.6x 1.5x 1.9x
(EBITDAR)(5)
- ---------------------------- ------------ ----------- --------------- ----------- ------------ -------------
Total Debt/EBITDA NA 1.4x 1.7x 2.1x 2.3x 1.1x
Total Debt + 2.7x 3.5x 3.7x 4.0x 4.1x 3.4x
Leases/EBITDA
</TABLE>
- --------
(1) CAGR = Compounded Annual Growth Rate.
(2) Assumes dividents grow at 15% per year beginning in 1997.
(3) Assumes existing P/E multiple of 14.0x (Same as current 1996 multiple).
(4) Defined as EBITDA - Caplix divided by Interest + Required Principal
Amortization.
(5) Defined as EBITDAR - Caplix divided by Interest + Rents +
Required Principal Amortization.
<PAGE>
<TABLE>
<CAPTION>
PROJECT WONTON
- --------------------------------------------------------------------------------
SUMMARY OF ALTERNATIVES
SCENARIO A SCENARIO B SCENARIO C NEW SCENARIO C SCENARIO D
STATUS QUO 250 MM RECAP $275 MM RECAP $300 MM RECAP $300 MM RECAP $200 MM RECAP
---------- ------------ ------------- ------------- -------------- -------------
INCOME STATEMENT DATA: YEAR 2005
- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings Per Share $3.76 $5.84 $6.13 $6.45 $6.43 $5.20
CAGR(1) 7.9% 11.4% 12.1% 12.7% 13.1% 10.8%
Dividends Per Share(2) $3.24 $3.24 $3.24 $3.24 $3.24 $3.24
Possible Future Stock $53.00 $82.00 $86.00 $90.00 $90.00 $73.00
Price(3)
BALANCE SHEET DATE: YEAR 2005
- -----------------------------
Cash & Cash $313.1 $202.9 $140.8 $85.9 $72.1 $177.3
Equivalents
Total Debt - - - - - -
Shareholders' Equity $372.4 $255.5 $193.3 $138.4 $124.7 $229.6
</TABLE>
- --------
(1) CAGR = Compounded Annual Growth Rate.
(2) Assumes dividends grow at 15% per year beginning in 1997.
(3) Assumes existing P/E multiple of 14.0x. (Same as current 1996 multiple).
-2-
PROJECT WONTON
PRESENTATION TO THE BOARD OF DIRECTORS
STRATEGIC ALTERNATIVES
HIGHLY CONFIDENTIAL
NOT TO BE REPRODUCED OR DISCUSSED WITH OUTSIDERS
July 20, 1998
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
I Situation Assessment
II Summary of Alternatives to Increase Shareholder Value
III Leveraged Recapitalization
A Company Sponsored Recapitalization
B Financial Investor Sponsored Recapitalization
IV Sale of the Company
V Conclusion
Appendices
A Summary Transaction Timetables
B Ownership Summary and Traded Volume Analysis
C Discounted Cash Flow Analysis
D Comparable Public Companies
E Comparable Mergers and Acquisitions Transactions
F Precedent Leveraged Recapitalization Transactions
G Illustrative Company Sponsored Leveraged Recapitalization Model
H Illustrative Financial Investor Sponsored Leveraged Recapitalization
Model
I Illustrative Leveraged Buyout Model
J Illustrative Merger Model
<PAGE>
SECTION I
SITUATION ASSESSMENT
<PAGE>
SITUATION ASSESSMENT
- --------------------------------------------------------------------------------
BEAR STEARNS IS PLEASED TO HAVE THIS OPPORTUNITY TO AGAIN DISCUSS WITH WONTON'S
BOARD OF DIRECTORS OUR EVALUATION OF ALTERNATIVES TO ENHANCE SHAREHOLDER VALUE
FOR THE BENEFIT OF ALL SHAREHOLDERS.
OUR EVALUATION OF ALTERNATIVES IS IMPACTED BY THE FOLLOWING KEY CONSIDERATIONS:
o HIGH QUALITY RESTAURANT COMPANY: Proven concept with high operating
margins and consistent financial performance are very unusual within
restaurant sector.
o ROBUST CAPITAL MARKETS: Ready liquidity and financing available at rates
near to historic lows.
o VERY SIGNIFICANT ACQUISITION ACTIVITY: Record levels of acquisition
activity driven by desire for core earnings growth for corporate
acquirers and the significant capital available for financial buyers.
o COMPANY SHAREHOLDER BASE FOCUSED ON VALUE CREATION: The attempted
going-private transaction has focused shareholders' attention on the
Company's effort to enhance shareholder value.
THE FOLLOWING INFORMATION PROVIDES AN ASSESSMENT OF THE CURRENT SITUATION AS IT
RELATES TO THE COMPANY FOLLOWED BY A DISCUSSION OF THE COMPANY'S STRATEGIC
ALTERNATIVES.
Page 1
<PAGE>
SITUATION ASSESSMENT - PUBLIC EQUITY MARKETS
- --------------------------------------------------------------------------------
THE PUBLIC EQUITY MARKETS HAVE ENJOYED RECORD RETURNS OVER THE LAST SEVERAL
YEARS AND ARE AT RECORD HIGHS IN TERMS OF VALUATION:
o SHARE PRICE GAINS: S&P 500 has gained 108% over the last 3 years.
o HIGH VALUATION MULTIPLES: Current P/E multiples for expected 1998
earnings of the S&P 500 are 27.8x.
o LOW DIVIDEND YIELDS: Current dividend yield for S&P 500 companies is
1.35%.
AS THE MARKETS HAVE MOVED TO THESE RECORD LEVELS, HOWEVER, INVESTORS HAVE
FOCUSED ON SEVERAL KEY THEMES:
o GROWTH EMPHASIS: The equity market has a bias toward strong growth
stories.
o DEPLOYING CASH: Excess cash is not highly valued by investors.
o SELECTIVE INDUSTRIES: Restaurants are a relatively out-of-favor sector
in the equity markets.
o LEVERAGABLE BRAND: Investors value the ability to apply an existing
brand and business model into new markets.
Page 2
<PAGE>
SITUATION ASSESSMENT - DEBT CAPITAL MARKETS
- --------------------------------------------------------------------------------
THE DEBT CAPITAL MARKETS ARE CURRENTLY VERY ATTRACTIVE FOR ISSUERS DUE TO RECORD
LIQUIDITY AT RATES NEAR HISTORIC LOWS:
o LOW TREASURY YIELDS: The 10-year Treasury bond yield has decreased from
a yield of 6.49% in January 1997 to 5.49% today.
o TIGHTENING SPREADS: The average spread to worst for corporate high yield
issues decreased from 9.8% to 9.2%.
o RECORD HIGH YIELD ISSUANCE: YTD issuance of high yield bonds totals
$101.2 billion, 80% greater than the 1997 period.
BEAR STEARNS HIGH YIELD INDEX - YIELD TO WORST
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Page 3
<PAGE>
SITUATION ASSESSMENT - RESTAURANT INDUSTRY
- --------------------------------------------------------------------------------
OVERALL, THE RESTAURANT INDUSTRY HAS BEEN AN OUT-OF-FAVOR SECTOR IN RECENT YEARS
WITH PUBLIC EQUITY INVESTORS DUE TO:
o SLOWING GROWTH: Industry growth has slowed to 4.5% from 8.0% in the
1980s.
o COMPETITION: Increased competition from new entrants.
o HIGHER COSTS: Increasing labor costs.
o EXCESS CAPACITY: General overcapacity after over-expansion in the early
1990s.
THOSE RESTAURANT CONCEPTS THAT HAVE ACHIEVED AND SUSTAINED HIGH MARKET
VALUATIONS POSSESS:
o CONSISTENT EARNINGS GROWTH
o HIGH VISIBILITY OF EARNINGS
o SAME STORE SALES GROWTH
o STRONG ROI PERFORMANCE
RECENTLY, FINANCIAL INVESTORS HAVE BEGUN INVESTING AGGRESSIVELY IN THIS SECTOR
AS IT PRESENTS ATTRACTIVE RELATIVE VALUATIONS TO OTHER INDUSTRY SECTORS.
Page 4
<PAGE>
SITUATION ASSESSMENT - THE COMPANY
- --------------------------------------------------------------------------------
WONTON IS A UNIQUE AND VERY ATTRACTIVE RESTAURANT COMPANY WITH A WIDE RANGE OF
STRATEGIC ALTERNATIVES.
THE FOLLOWING FACTORS ARE THE KEY CONSIDERATIONS IN EVALUATING THE COMPANY'S
STRATEGIC ALTERNATIVES:
o MARKET LEADER: Leading provider of quick service specialty foods in the
U.S. and abroad. Unique franchise in serving the "captive" customer.
o STABLE CASH FLOW: Proven format provides strong and stable cash flow.
o INTERNAL GROWTH CONSTRAINTS: Lack of availability of desirable locations
for Wonton core business may constrain new stores to 25-35 per year.
o NO BORROWINGS: Cash flow generation in excess of capital expenditures
results in over "equitized" balance sheet.
o LIMITED ACQUISITION OPPORTUNITIES: Preference for internal development;
few similar good concepts.
o SIGNIFICANT EXCESS CASH: Currently approximately $120 million in excess
cash.
o ABILITY TO EXTEND CONCEPT: Limited track record of extending concept to
"non-captive" customer base.
Page 5
<PAGE>
SITUATION ASSESSMENT - GROWTH INITIATIVES
- --------------------------------------------------------------------------------
WONTON MANAGEMENT HAS DEVELOPED SEVERAL RESTAURANT CONCEPTS TO PROVIDE FUTURE
GROWTH OUTSIDE OF ITS WONTON CORE BUSINESS:
o UMBERTO'S (80% OWNED): Upscale pizzeria and family-style Italian
restaurant.
o 3,500 - 4,000 square foot typical size in higher quality strip malls in
suburban locations.
o 70% take-out / self-service; 30% dine-in.
o 5 existing locations.
o Competes with neighborhood Italian restaurants and upscale family
pizzerias.
o BOULDER CREEK STEAKS & SALOON (40% OWNED): Family-style steakhouse.
o 7,000 square foot typical size in standalone suburban locations.
o 100% dine-in.
o 4 existing locations.
o Competes with family-style steak house restaurants (Outback, Lone Star)
Page 6
<PAGE>
SITUATION ASSESSMENT - GROWTH INITIATIVES
- --------------------------------------------------------------------------------
o BICE (70% OWNED): Upscale Italian restaurant.
o Typically urban locations.
o 100% dine-in.
o 3 existing locations.
o Competes with wide variety of upscale Italian restaurants.
o BAJA GRILL (PENDING ACQUISITION - WOULD BE 50% OWNED): South of the
border cuisine.
o 1,500 - 2,000 square foot typical size in strip malls in suburban
locations.
o In process of acquiring 2-store established business.
o Competes with upscale, health conscience Mexican restaurants.
Page 7
<PAGE>
<TABLE>
<CAPTION>
SITUATION ASSESSMENT - HISTORICAL FINANCIAL REVIEW
- --------------------------------------------------------------------------------
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ACTUAL 6 YEAR 3 YEAR
1991 1992 1993 1994 1995 1996 1997 CAGR CAGR
---- ---- ---- ---- ---- ---- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $208.0 $236.2 $264.0 $294.0 $316.1 $325.7 $345.1 8.8% 5.5%
% GROWTH 9.4% 13.6% 11.8% 11.4% 11.3% 3.0% 6.0%
% COMP GROWTH (0.5%) (0.3%) 2.5% 3.1% 0.5% (0.2%) (0.4%)
EBITDA $51.4 $53.7 $64.0 $73.0 $71.3(1) $79.5 $81.1(4) 7.9% 3.6%
% OF REVENUES 24.7% 22.7% 24.8% 24.4% 22.6% 24.4% 23.5%
NET INCOME $21.8 $24.1 $28.3 $33.0 $31.4(1) $37.4 $38.1(4) 9.8% 4.9%
DILUTED EARNINGS PER SHARE $1.07 $1.18 $1.45 $1.63 $1.55(1) $1.84 $1.87(4) 9.8% 4.7%
DIVIDENDS PER SHARE -- -- $0.52 $0.64 $0.76 $0.92 $1.08
FORWARD P/E MULTIPLE(2) 20.5x 17.3x 19.5x 14.0x 14.2x 14.8x 15.6x
CAPITAL EXPENDITURES $23.9 $28.8 $31.9 $32.1 $17.5 $25.9 $28.6
STORES ANALYSIS
OWNED STORE OPENINGS 63 58 59 53 44 29 30
NET OWNED STORE OPENINGS(3) 64 44 59 52 4 26 26
OWNED STORES (EOP) 412 456 515 567 571 597 623 7.1% 3.2%
FRANCHISED STORES (EOP) 118 131 134 162 200 219 239 12.5% 13.8%
</TABLE>
- --------------------
(1) Excludes pre-tax provision of $16.4MM ($10.2MM after-tax) for closing of
approximately 40 stores.
(2) Calculated using closing stock price and estimated EPS at respective year
end.
(3) Owned store openings, plus stores acquired from franchisees, less owned
store closings.
(4) Excludes pre-tax provision of $3.3 million ($2.0 million after-tax) for
closing of several joint venture units.
Page 8
<PAGE>
<TABLE>
<CAPTION>
SITUATION ASSESSMENT - PROJECTED FINANCIAL PERFORMANCE
- --------------------------------------------------------------------------------
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PROJECTED FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1999 2000 2001 2002 CAGR
---- ---- ---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C> <C> <C>
Core Business $360.4 $386.0 $417.5 $451.2 $485.9 7.8%
Umberto's $4.3 $15.7 $34.4 $59.4 $91.3
Other Concepts(1) $12.6 $31.1 $55.1 $90.1 $135.8
------ ------ ------ ------ ------- -----
Total $377.2 $432.8 $507.0 $600.8 $713.0 17.2%
% GROWTH 9.5% 14.7% 17.1% 18.5% 18.7%
% COMP GROWTH CORE BUSINESS 0.5% 1.5% 1.5% 1.5% 1.5%
EBITDA
Core Business $84.8 $91.1 $98.9 $107.2 $115.6 8.1%
Umberto's $0.3 $2.6 $6.4 $11.6 $18.4
Other Concepts(1) $1.5 $4.2 $8.0 $14.0 $22.0
------ ------ ------ ------ ------- -----
Total $86.7 $98.0 $113.3 $132.8 $156.1 15.8%
% OF REVENUES CORE BUSINESS 23.5% 23.6% 23.7% 23.7% 23.8%
% OF REVENUES UMBERTO'S 7.5% 16.7% 18.7% 19.6% 20.1%
NET INCOME $41.1 $48.6 $59.3 $73.2 $90.6 21.9%
DILUTED EARNINGS PER SHARE $1.97 $2.33 $2.85 $3.51 $4.35 21.9%
CAPITAL EXPENDITURES
Core Business $23.4 $21.7 $23.7 $24.3 $24.9
Umberto's $2.2 $5.4 $7.2 $9.0 $10.8
Other Concepts $4.1 $5.7 $9.5 $12.1 $15.3
------ ------ ------ ------ ------
Total $29.6 $32.7 $40.4 $45.4 $51.0
</TABLE>
- -------------------
Source: Company projections.
(1) Consists of BICE, Boulder Creek and Baja Grill concepts.
Page 9
<PAGE>
<TABLE>
<CAPTION>
SITUATION ASSESSMENT - PROJECTED FINANCIAL PERFORMANCE
- --------------------------------------------------------------------------------
ACTUAL PROJECTED FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999 2000 2001 2002 CAGR
-------- -------- -------- ------ ------ ------ -----
CORE BUSINESS STORE ASSUMPTIONS
<S> <C> <C> <C> <C> <C> <C> <C>
OWNED STORE OPENINGS (NET) 26 28 40 45 45 45
OWNED STORES (EOP) 623 651 691 736 781 826 5.8%
FRANCHISED STORE OPENINGS (NET) 20 35 50 60 60 60
FRANCHISED STORES (EOP) 239 274 324 384 444 504 16.1%
NEW CONCEPTS STORE ASSUMPTIONS
UMBERTO'S OWNED STORES (EOP) 3 9 24 44 69 99
BOULDER CREEK OWNED STORES (EOP) 3 8 14 24 36 51
BICE OWNED STORES (EOP) 2 4 7 11 16 22
BAJA GRILL OWNED STORES (EOP) 0 2 7 17 32 52
</TABLE>
- ----
Source: Company projections.
Page 10
<PAGE>
HISTORICAL 5 YEAR STOCK PRICE PERFORMANCE
- --------------------------------------------------------------------------------
WONTON VS. S&P 500 AND RESTAURANT COMPOSITE INDEX (1)
JULY 16, 1993 THROUGH JULY 17, 1998
[GRAPHIC OMITTED]
- ----
(1) Restaurant Composite Index includes: Buffet's, Consolidated Products,
Foodmaker, Lonestar, Luby's, Piccadilly, Ryan's and Ruby's.
Page 11
<PAGE>
HISTORICAL 12 MONTH STOCK PRICE PERFORMANCE
- --------------------------------------------------------------------------------
WONTON VS. S&P 500 AND RESTAURANT COMPOSITE INDEX (1)
JULY 16, 1997 THROUGH JULY 17, 1998
[GRAPHIC OMITTED]
- ----
(1) Restaurant Composite Index includes: Buffet's, Consolidated Products,
Foodmaker, Lonestar, Luby's, Piccadilly, Ryan's and Ruby's.
Page 12
<PAGE>
<TABLE>
<CAPTION>
SITUATION ASSESSMENT - COMPARABLE PUBLIC COMPANIES
- --------------------------------------------------------------------------------
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FIVE YEAR
LATEST TWELVE MONTHS PROJECTED % CHANGE IN
------------------------------ EARNINGS STOCK PRICE
PRICE ON VALUE OF 1998 1999 GROWTH FROM
17-JUL-98 EQUITY EPS(1) EPS(1) RATE(2) 1/1/98
--------- ------- ------ ------ --------- ------------
REVENUES EBIT NET INCOME
-------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Project Wonton $26.31 $540.08 $351.47 $57.13 $38.20 $1.97 $2.05 13.50% 0.005
LIMITED SERVICE & CASUAL DINING
- -------------------------------
RESTAURANTS
- -----------
Buffets Inc. $15.06 $685.70 $824.62 $43.05 $32.25 $0.82 $0.95 16.50% 60.7%
Consolidated Products $20.69 $432.34 $290.37 $31.29 $18.05 $0.96 $1.19 19.83% 26.3%
Foodmaker, Inc. $16.38 $641.88 $1,154.95 $84.35 $37.21 $1.20 $1.41 19.57% 8.7%
Lone Star Steakhouse $12.88 $530.42 $608.62 $99.24 $65.32 $1.01 $1.21 19.00% (26.4%)
Luby's Cafeterias, Inc. $17.56 $408.69 $502.21 $54.93 $32.73 $1.32 - 9.00% 0.0%
Piccadilly Cafeterias Inc. $13.06 $137.53 $312.49 $18.19 $10.07 $1.01 - - (0.5%)
Ruby Tuesday $17.06 $281.23 $695.19 $72.37 $43.68 $0.90 $1.06 16.22% 32.5%
Ryan's Family Steakhouse $10.94 $486.86 $605.95 $65.35 $38.31 $0.87 $0.96 12.33% 27.7%
</TABLE>
- ----
(1) Source: First Call Calendar EPS Estimates.
(2) Source: Bloomberg.
Page 13
<PAGE>
SITUATION ASSESSMENT - COMPARABLE PUBLIC COMPANIES' FINANCIAL RATIOS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(ALL ESTIMATES ARE LATEST TWELVE MONTHS UNLESS NOTED)
VALUATION MULTIPLES CREDIT STATISTICS
-------------------------------------------------------- -----------------------------------------
ENTERPRISE VALUE
-----------------
LTM LTM PRICE TO PRICE TO PRICE TO EBITDA/ TOTAL DEBT/ DEBT/
EBITDA EBIT LTM EPS 1998 EPS(1) 1999 EPS(1) INTEREST EBITDA MKT. CAP
Project Wonton 5.2x 7.4x 14.1x 13.4x 12.8x NM 0.0 x 0.0%
LIMITED SERVICE & CASUAL DINING
- --------------------------------
RESTAURANTS
- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Buffets Inc. 8.0x 15.6x 21.2x 18.4x 15.9x 23.7x 0.5 x 6.8%
Consolidated Products 10.1x 15.0x 25.5x 21.5x 17.4x 15.2 x 0.8 x 8.4%
Foodmaker, Inc. 7.3x 10.8x 17.6x 13.6x 11.6x 3.3 x 2.8 x 38.3%
Lone Star Steakhouse 3.0x 4.0x 8.3x 12.7x 10.6x NM 0.0 x 0.0%
Luby's Cafeterias, Inc. 6.5 x 8.9 x 12.5 x 13.3 x - 15.3 x 1.1 x 17.5%
Piccadilly Cafeterias Inc. 5.4x 9.0x 13.6x 12.9x - 14.2 x 0.9 x 16.0%
Ruby Tuesday 3.2 x 5.0 x 13.7x 19.0x 16.1x 30.6 x 0.8 x 25.1%
Ryan's Family Steakhouse 6.7x 9.4x 13.3x 12.6x 11.4x 16.0 x 1.4 x 21.2%
Harmonic Mean 5.3x 8.0x 14.1x 14.9x 13.3x
</TABLE>
- ----
(1) Source: First Call Calendar EPS Estimates.
Page 14
<PAGE>
SITUATION ASSESSMENT - OTHER RESTAURANT COMPANIES
- --------------------------------------------------------------------------------
($ IN MILLIONS)
<TABLE>
<CAPTION>
THE MARKET HAS REWARDED CERTAIN RESTAURANT COMPANIES BASED ON A VARIETY OF
FACTORS:
P/E MULTIPLES
------------------------------------------------------------
EQUITY MARKET PRICE TO LTM PRICE TO 1998 PRICE TO 1999
RESTAURANT COMPANY CAPITALIZATION EPS EPS(1) EPS(1) COMMENTS
------------------ -------------- ------------- ------------- ------------- ------------------------------------------------
<S> <C> <C> <C> <C>
CKE $2,051 34.4x 25.8x 20.5x o Turning around operating and financial
performance of once troubled concepts
o Growth through acquisition
McDonald's $50,354 31.4x 29.2x 25.7x o Strength of brand franchise
o Global presence
Papa John's $1,170 39.3x 32.4x 25.4x o High historical and projected growth
in sales and earnings
</TABLE>
- ----
(1) Source: First Call Calendar EPS Estimates.
Page 15
<PAGE>
SITUATION ASSESSMENT - M&A ACTIVITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IN THE LAST TWELVE MONTHS THERE HAS BEEN A SIGNIFICANT INCREASE IN ACQUISITION
ACTIVITY IN THE RESTAURANT SECTOR.
($ IN MILLIONS)
ENTERPRISE VALUE EQUITY VALUE
DATE ------------------------- ---------------------
ANNOUNCED / EQUITY ENTERPRISE REMIUM LTM LTM LTM NET BOOK
COMPLETED Target/Acquiror VALUE VALUE PAID(1) REVENUE EBITDA EBIT INCOME VALUE
----------- --------------- ------ ---------- ------ ------- -------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4/3/98 / Bertucci's Inc./ $96.5 $104.3 35.5% 0.76x 6.7x 16.0x 27.5x 1.4x
Pending Investor Group
4/2/98 / Spaghetti Warehouse/ $51.2 $56.4 26.1% 0.87x 7.8x 16.3x 25.3x 1.1x
Pending Conquest partners
3/13/98 / Pollo Tropical, Inc./ $94.0 $97.2 38.6% 1.50x 9.6x 12.4x 21.4x 3.3x
Pending Management
1/15/98 / Hardee's (Advantica Restaurant Group)/ $381.0 $427.0 NA 0.78x 6.6x 14.5x NA NA
4/1/98 CKE Restaurants, Inc.
10/21/97 / International Dairy Queen Inc./ $596.3 $548.8 10.1% 1.30x 8.3x 9.2x 15.6x 3.1x
1/7/98 Berkshire Hathaway Inc.
9/23/97 / El Chico Restaurants, Inc./ $49.3 $59.4 21.4% 0.58x 5.8x 12.9x 17.1x 1.8x
1/22/98 Cracken, Harkey, Street & Co., L.L.C.
9/5/97 / DavCo Restaurants Inc./ $137.6 $186.5 49.5% 0.81x 7.5x 11.7x 21.7x 2.7x
4/3/98 Citicorp Venture Capital Ltd.
8/4/97 / Perkins Family Restaurant, L.P./ $146.7 $206.6 28.7% 0.80x 5.8x 10.5x 10.0x 2.4x
12/23/97 The Restaurant Company
HARMONIC MEAN OF TRANSACTION MULTIPLES 0.85X 7.1X 12.5X 17.9X 1.9X
</TABLE>
- ----
(1) Over stock price on day prior to announcement.
Page 16
<PAGE>
SECTION II
SUMMARY OF ALTERNATIVES TO INCREASE
SHAREHOLDER VALUE
<PAGE>
ALTERNATIVES TO INCREASE SHAREHOLDER VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WONTON HAS THE ABILITY TO PURSUE A WIDE VARIETY OF POSSIBLE STRATEGIC
ALTERNATIVES.
<S> <C>
ALTERNATIVES CONSIDERATIONS
Status Quo o Cash continues to build without attractive use
o Earnings growth continues to slow
o Likely continued public valuation issue
o Significant pressure from shareholders
Acquisition o Strong strategic preference for developing new concepts and JVs internally
o Company has not historically made acquisitions
o Few concepts with strong business fit
Management Buyout o Family pursued previously but could not reach agreement
Open Market Purchase o Moderate repurchase would not have significant EPS impact
o Not generally effective for purchasing large percentages of public float
Special Dividend o Not tax efficient from individual shareholder standpoint
Leveraged Recapitalization o Use of excess cash combined with borrowing
o Potential to provide significant liquidity to all shareholders while retaining equity
ownership upside
o Potential capital gains treatment for shareholders
o Use of leverage provides for accelerated earnings growth
Sale of Company o Opportunity for very attractive valuation given strength of the company and acquisition
market
o Only practical if Wonton family interested in selling
o Presents significant issues including ongoing management
</TABLE>
Page 17
<PAGE>
ALTERNATIVES TO INCREASE SHAREHOLDER VALUE
- --------------------------------------------------------------------------------
BEAR STEARNS BELIEVES THE TWO ALTERNATIVES THAT WOULD CREATE THE MOST
SHAREHOLDER VALUE FOR ALL WONTON SHAREHOLDERS ARE:
o SIGNIFICANT LEVERAGED RECAPITALIZATION
o Can deliver significantly greater value than status quo scenario to all
shareholders based on earnings projections
- Shareholders can monetize a portion of their holdings at a premium price
- Efficient use of cash on hand and reduces Company's cost of capital
- New debt "supercharges" remaining equity going forward
o Takes advantage of current robust debt markets
o Can be done in conjunction with new equity investor
o Consistent operating performance and modest levels of capital spending
mitigate risk of significant debt
o SALE OF COMPANY
o Delivers immediate value to all shareholders
o Likelihood of significant premium to current valuation
o Significant interest on the part of strategic and financial buyers
THE FOLLOWING INFORMATION SUMMARIZES OUR EVALUATION OF THESE TWO ALTERNATIVES.
Page 18
<PAGE>
Section III
LEVERAGED RECAPITALIZATION
<PAGE>
OVERVIEW OF LEVERAGED RECAPITALIZATION
- --------------------------------------------------------------------------------
A LEVERAGED RECAPITALIZATION COULD BE CONDUCTED BY THE COMPANY EXCLUSIVELY OR IN
CONJUNCTION WITH A FINANCIAL INVESTOR.
o Bear Stearns believes if a leveraged recapitalization is pursued, it should
be significant thus maximizing the immediate value delivered to
shareholders. The size of a recapitalization is also dependent on the
family's desire for liquidity.
o A leveraged recapitalization allows existing investors to receive
substantial cash and retain ownership in ongoing entity.
o A new Financial Investor should be considered if existing Family management
wishes to exit and/or a very significant recapitalization is contemplated.
o A new Financial Investor structure is typically used when a company seeks to
execute a recapitalization that is very close to a sale in terms of shares
repurchased and repurchase price, but allows existing owners to retain a
small percentage of the still public company.
o Financial Investors prefer this structure over a 100% sale because:
o By qualifying for recapitalization accounting (typically requires
existing owners to retain 7-10% of pro forma ownership), goodwill is
avoided
o Potential for liquidity increased due to company remaining public
THE FOLLOWING PAGES PROVIDE AN ILLUSTRATIVE EXAMPLES OF EACH TYPE OF LEVERAGED
RECAPITALIZATION.
Page 19
<PAGE>
Section III-A
COMPANY SPONSORED RECAPITALIZATION
<PAGE>
OVERVIEW OF COMPANY SPONSORED RECAPITALIZATION
- --------------------------------------------------------------------------------
THE FOLLOWING EXAMPLE ILLUSTRATES THE VALUE A COMPANY SPONSORED RECAPITALIZATION
COULD DELIVER TO SHAREHOLDERS (EXAMPLE ASSUMES THE FAMILY WOULD PARTICIPATE):
o The Company would tender for 14 million common shares at a price of
approximately $32.00 per share (premium of 19% to current price).
o Tender funded with:
o Excess cash and marketable securities on hand (approximately $125 million)
o New debt raised of approximately $340 million from banks and/or bond market
o The tender would also be subject to certain conditions including financing
and possibly a minimum number of shares being tendered.
Page 20
<PAGE>
COMPANY SPONSORED RECAPITALIZATION: $450 MILLION
- --------------------------------------------------------------------------------
($ IN MILLIONS)
Sources of Funds Uses of Funds
- ---------------- -------------
Excess Cash on Balance Sheet(1) $125.0 Purchase Price of Equity $450.0
Bank Debt / Senior Notes 340.0 Transaction Fees and Expenses 15.0
Total Sources $465.0 Total Uses $465.0
- ----------------------------------------- -------------------------------------
========================================= =====================================
Pro Forma Capitalization (1)
----------------------------------------
Cash and Equivalents $6.0
Bank Debt / Senior Notes $340.0
Shareholders Equity ($228.1)
========================================
- ----
(1) Estimated as of 10/4/98.
Page 21
<PAGE>
COMPANY SPONSORED RECAPITALIZATION: $450 MILLION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA INCOME STATEMENT: ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA PROJECTED FYE DECEMBER 31,
--------- ------------------------------------------
MANAGEMENT PROJECTIONS(1) 1998 1999 2000 2001 2002 CAGR
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
REVENUES $365.7 $405.7 $460.4 $525.5 $600.0 13.2%
EBITDA 85.2 94.4 106.9 121.7 138.6 12.9%
EBIT 58.5 66.4 76.9 89.6 105.2 15.8%
NET INCOME $15.0 $20.1 $27.1 $35.6 $46.1 32.3%
DILUTED EARNINGS PER SHARE $2.22 $2.96 $4.00 $5.25 $6.80 32.3%
POSSIBLE FUTURE STOCK PRICE(2) $30.36 $40.57 $54.76 $72.01 $93.17
PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE(3) $28.25 $32.27 $37.22 $41.84 $46.27
PROJECTED FYE DECEMBER 31,
-------------------------------------------
SUMMARY CREDIT STATISTICS @ CLOSE 1999 2000 2001 2002
-------- ---- ---- ---- ----
TOTAL DEBT $340.0 $340.0 $340.0 $340.0 $340.0
NET DEBT $334.0 $308.1 $274.9 $232.0 $178.0
NET DEBT / EBITDA 3.92x 3.26x 2.57x 1.91x 1.28x
EBITDA / INTEREST EXPENSE(4) 2.49x 2.76x 3.13x 3.56x 4.06x
</TABLE>
- ----
(1) Includes projected results of Umberto, but excludes projected results of
Boulder Creek, BICE and Baja Grill.
(2) Assumes P/E multiple of 13.7x (same as current 1998 estimated multiple).
(3) Present value of future stock price discounted at Wonton's assumed pro forma
cost of equity of 17%.
(4) Assumes all bond financing structure and interest rate of 9.75%.
Page 22
<PAGE>
COMPANY SPONSORED RECAPITALIZATION: SUMMARY
- --------------------------------------------------------------------------------
BENEFITS
- --------
o A large recapitalization can monetize a significant portion of investors'
holdings at a premium to the market price. Based on $450 million
recapitalization:
o Approximately 68% of shares would receive $32 per share $22 weighted value
o Approximately 32% of shares would have possible value of $30 (based on
current multiple) $10 weighted value
o Allows existing investors to participate in the equity upside on a
"supercharged" basis due to leverage
o Combined value of immediate cash and remaining ownership may exceed value
obtained in a sale over a medium term time horizon
ISSUES
- ------
o Company must operate under significant debt load (4.1x trailing EBITDA based
on $450 million recapitalization)
o Trading characteristics of stock
negatively impacted May lead to trading at a decreased multiple of earnings:
o Significant decrease in liquidity
o Likely reduction in research coverage
o Negative net worth will preclude certain Institutions from ownership
o Composition of institutional shareholder base will change income oriented
funds will sell
Page 23
<PAGE>
Section III-B
FINANCIAL INVESTOR SPONSORED RECAPITALIZATION
<PAGE>
OVERVIEW OF FINANCIAL INVESTOR SPONSORED RECAPITALIZATION
- --------------------------------------------------------------------------------
TO MAXIMIZE THE UPFRONT CASH PROCEED AVAILABLE TO CURRENT INVESTORS IN A
RECAPITALIZATION, THE COMPANY COULD SELL A CONTROLLING OWNERSHIP TO A NEW
FINANCIAL INVESTOR.
THE FOLLOWING IS AN EXAMPLE OF A STRUCTURE BEAR STEARNS BELIEVES COULD BE
EXECUTED AND WOULD PROVIDE SHAREHOLDERS WITH SIGNIFICANT VALUE:
o Wonton tenders for 18.9 million shares (90% of diluted shares) for $35.00
per share ($661 million recapitalization). Assumes the Wonton Family tenders
90% of their aggregate shares (tender amounts among different family
constituencies may differ).
o Tender is funded by:
o $123 million excess cash
o $430 new bank/bond debt
o $125 million of new common equity from a Financial Investor
(3.6 million new shares at $35.00 per share)
o Pro forma ownership is as follows
o Wonton Family 0.7 million shares (12.3%)
o Existing Investors 1.4 million shares (24.6%)
o Financial Investor 3.6 million shares (63.2%)
---
5.7
Page 24
<PAGE>
FINANCIAL INVESTOR SPONSORED RECAPITALIZATION: $661 MILLION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA INCOME STATEMENT: ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA PROJECTED FYE DECEMBER 31,
-----------------------------------------------------
MANAGEMENT PROJECTIONS(1) 1998 1999 2000 2001 2002 CAGR
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
REVENUES $365.7 $405.7 $460.4 $525.5 $600.0 13.2%
EBITDA 85.2 94.4 106.9 121.7 138.6 12.9%
EBIT 58.5 66.4 76.9 89.6 105.2 15.8%
NET INCOME $8.1 $13.3 $20.5 $29.3 $39.8 49.0%
DILUTED EARNINGS PER SHARE $1.42 $2.34 $3.61 $5.17 $7.02 49.0%
PROJECTED FYE DECEMBER 31,
SUMMARY CREDIT STATISTICS @ CLOSE 1999 2000 2001 2002
TOTAL DEBT $430.0 $408.6 $380.9 $350.0 $350.0
NET DEBT $421.6 $401.6 $373.9 $335.9 $286.3
NET DEBT / EBITDA 4.95x 4.25x 3.50x 2.76x 2.07x
EBITDA / INTEREST EXPENSE 1.88x 2.12x 2.52x 3.03x 3.57x
</TABLE>
- -----------------
(1) Includes projected results of Umberto, but excludes projected results of
Boulder Creek, BICE and Baja Grill.
Page 25
<PAGE>
FINANCIAL INVESTOR SPONSORED RECAPITALIZATION ISSUES
THE FOLLOWING ADDITIONAL ISSUES ARE PRESENT IN A FINANCIAL INVESTOR SPONSORED
RECAPITALIZATION:
o CONTROL: The Financial Investor will likely require control of the board and
final authority on business strategy and operating issues.
o ONGOING EQUITY OWNERSHIP OF MANAGEMENT: If the Wonton Family desires to
continue to manage Company, Financial Investor will want a "significant"
continuing equity investment in Company.
o RISK ASSOCIATED WITH REMAINING EQUITY "STUB": The more significant level of
leverage magnifies the positive and negative issues associated with a
leveraged recapitalization as discussed in the introduction.
Page 26
<PAGE>
Section IV
SALE OF THE COMPANY
<PAGE>
SALE OF THE COMPANY
BEAR STEARNS BELIEVES A SALE OF THE COMPANY COULD PROVIDE SHAREHOLDERS WITH A
MONETIZATION OF ALL SHARES AT A SIGNIFICANT PREMIUM TO THE CURRENT MARKET PRICE
IF THE WONTON FAMILY IS INTERESTED IN SELLING THEIR OWNERSHIP.
BASED ON OUR REVIEW OF THE LIKELY INTERESTED BUYERS AND CURRENT MARKET
CONDITIONS, BEAR STEARNS BELIEVES A SALE COULD PROVIDE SHAREHOLDERS WITH VALUES
BETWEEN $34 AND $37 PER SHARE. THIS VALUATION ASSUMES THE FOLLOWING:
o GROWTH POTENTIAL: Buyers are confident regarding the Company's growth
prospects beyond its existing "captive customer" venues
o MANAGEMENT: Buyers either have management or can retain new management to
run the Company if Wonton Family management wants to leave Company
o EXISTING LOCATIONS: Buyers are comfortable that existing leases will
generally continue to be available on comparable terms
o MARKET CONDITIONS: Assumes a continuation of the currently robust capital
markets, especially for debt financings
FOLLOWING IS A DISCUSSION OF SALE CONSIDERATIONS AND PROCESS.
Page 27
<PAGE>
POSITIONING OF COMPANY
BEAR STEARNS BELIEVES THE MOST EFFECTIVE WAY TO MAXIMIZE SHAREHOLDER VALUE IN A
SALE IS TO POSITION THE COMPANY IN THE FOLLOWING MANNER:
o DOMINANT IN ATTRACTIVE CORE BUSINESS: Dominant position in quick service
to the "captive customer" with a business model that is unusually stable
and possesses high margins
o SIGNIFICANT GROWTH POTENTIAL BEYOND CORE BUSINESS: Due to the strength
of the Wonton brand and related new concepts (e.g. Umberto's), there are
significant additional growth opportunities away from existing venues
TO ACHIEVE A VALUATION AT THE HIGH END OF THE ESTIMATED PRICE RANGE, BEAR
STEARNS BELIEVES A BUYER MUST BE CONFIDENT REGARDING THE COMPANY'S GROWTH
POTENTIAL BEYOND ITS EXISTING "CAPTIVE" CUSTOMER BASE.
o Primary growth vehicles to be emphasized:
o Expansion to nontraditional venues without a "captive" customer base
o "CoBranding" with other QSRs
o Franchising
o Expansion of Umberto's upscale concept under Umberto's or Wonton name
o Increased international franchising
Page 28
<PAGE>
MARKETING PROCESS
DUE TO THE QUALITY AND STRENGTH OF WONTON'S BUSINESS, BEAR STEARNS ANTICIPATES
SIGNIFICANT INTEREST ON THE PART OF STRATEGIC AND FINANCIAL INVESTORS.
IF THE WONTON BOARD OF DIRECTORS AUTHORIZES A SALE PROCESS, BEAR STEARNS
RECOMMENDS A LIMITED AUCTION WITH THE FOLLOWING CHARACTERISTICS:
o ONLY QUALIFIED BUYERS: All potential strategic and financial buyers
would be qualified as to financial capability and demonstrated interest
o TWO STAGE PROCESS: Initial bids based on Offering Memorandum would be
used to further qualify buyers. Only buyers with significant and
credible interest would be allowed to meet with management and have
access to additional confidential information
o TIMING: Bear Stearns believes a definitive agreement could be signed
within 10 weeks of the Board's authorization of a sale process
FOLLOWING IS A LIST OF THE TIER 1 FINANCIAL AND STRATEGIC BUYERS ALONG WITH
ILLUSTRATIVE ACQUISITION MODELS (ADDITIONAL INTERESTED BUYERS LOCATED IN
APPENDIX).
Page 29
<PAGE>
<TABLE>
<CAPTION>
OVERVIEW OF FINANCIAL BUYERS: TIER 1
NAME RESTAURANT INVESTMENTS SIZE OF FUND(1)
<S> <C> <C>
APOLLO o Family Restaurants, Inc. (80%)
o Koo Koo Roo (pending) $3.6 billion
CVC o Davco Restaurants, Inc. Internal(2)
MCCOWN DE LEEUW o Papa Ginos
o D'Angelos $750 million
BRUCKMAN, ROSSER, SHERRILL o California Pizza Kitchen
o Acapulco Restaurants
o (formerly owned Restaurant Associates) $400 million
CASTLE HARLAN o Charlie Brown's Steakhouse
o (currently seeking restaurant investment) $610 million
SAUNDERS KARP o California Cafe Corporation
o Marie Callender Pie Shops
o Souper Salad $600 million
BOSTON VENTURES o Motown Cafe
o Ground Round $800 million
</TABLE>
- -------------
(1) Reflects recent fund raisings which are generally uninvested.
(2) Funds for investment sourced from internal allocations within Citicorp.
Current funds available unknown.
Page 30
<PAGE>
OVERVIEW OF STRATEGIC BUYERS: TIER 1
<TABLE>
<CAPTION>
Company Existing Brands Financial Flexibility Comments
- ------- --------------- --------------------- --------
<S> <C> <C> <C> <C>
CKE RESTAURANTS Carl's Jr. Equity Market Cap: $1.9 billion o Most acquisitive company in
Hardee's Debt / EBITDA: 2.4x(1) restaurant sector
Taco Bueno o Large percentage of
companyowned locations
o CEO plays active role in
acquisition process
Church's Chicken Restaurants
Popeye's Chicken & Biscuits Equity Market Cap: NM o Recent restaurant acquisitions
AFC ENTERPRISES Seattle's Best Coffee Debt / EBITDA: 4.2x o Demonstrated interest in
franchise concepts
o Freeman Spogli (LBO firm)
Arby's Inc. major shareholder
Mistic Brands
Cable Car Beverage Corp.
Royal Crown Co.
Snapple Beverage Corp. Equity Market Cap: $676 million o Currently evaluating several
TRIARC COMPANIES National Propane Corp. Debt / EBITDA: 6.6x(2) potential restaurant acquisitions
o Sold all companyowned Arby's
locations in 1997
o Prior interest in Wonton
o Significant leverage reduces
ability to consummate acquisition
</TABLE>
- -----------------------
(1) Based on 1Q98 annualized EBITDA.
(2) Pro forma for acquisitions and divestitures of assets which took place in
1997.
Page 31
<PAGE>
ILLUSTRATIVE LBO ANALYSIS: $36.00 PRICE PER SHARE(1)
ASSUMING A $36 PURCHASE PRICE (7.7X TRAILING EBITDA), BEAR STEARNS HAS
SUMMARIZED AN AGGRESSIVE TRANSACTION STRUCTURE THAT COULD BE EXECUTED BY A
FINANCIAL BUYER IN TODAY'S MARKET.
<TABLE>
<CAPTION>
Uses of Funds Credit Statistics
- ------------- -----------------
<S> <C> <C> <C>
Purchase Price of Equity (at $36)(2) $756.3 AT CLOSE
Transaction Fees and Expenses 20.0 Total Debt / EBITDA 6.0x
Total Uses ------ EBITDA / Cash Interest Expense 1.9x
$776.3 EBITDA / Total Interest Expense(4) 1.5x
====== Total Debt / Total Capitalization 78.5%
</TABLE>
<TABLE>
<CAPTION>
Sources of Funds Shareholder Returns: 4-Year IRR
- ---------------- -------------------------------
<S> <C> <C> <C>
Excess Cash on Balance Sheet (3) $126.3 IRR
Bank Credit Facility 75.0 6.0x Exit EBITDA Multiple 29.5%
Senior Notes 350.0 6.5x Exit EBITDA Multiple 34.6%
Senior Discount Notes 85.0 7.0x Exit EBITDA Multiple 39.1%
Common Equity 140.0
-----
Total Sources $776.3
=====
</TABLE>
- ----------------
(1) Uses management projections which include results of Umberto but exclude
results of Boulder Creek, BICE and Baja Grill.
(2) Includes dilutive impact of 1.8 million options.
(3) Estimated as of 10/4/98(including marketable securities).
(4) Assumes interest rate on financing is 8.19% for bank loans, 10.75% for
Senior Notes and 13.00% for Sr. Disc. Notes with 5% equity.
Page 32
<PAGE>
ILLUSTRATIVE ACQUISITION ANALYSIS: CKE'S PURCHASE AT $36.00 PER SHARE
ASSUMING A $36 PURCHASE PRICE (7.7X TRAILING EBITDA), BEAR STEARNS HAS
SUMMARIZED THE PRO FORMA IMPACT TO CKE FOR FISCAL YEAR 1999.
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CKE(1) Wonton Adjust- Combined
FYE 1/00 FYE 12/99 ments(3)
Revenue $2,170.9 $405.7 $2,576.6
Cost Synergies(4) $5.0 $5.0
EBITDA $294.5 $94.4 $5.0 $393.9
MARGIN 13.6% 23.2% 15.3%
EBIT $213.7 $66.4 ($8.4) $271.7
MARGIN 9.8% 16.3% 10.6%
Goodwill Amortization $13.4 $13.4
Net Interest Expense $39.1 ($7.2) $59.9(5) $91.8
Net Income $106.9 $44.6 ($46.9) $104.6
- --------------------------------------------------------------------------------
Diluted EPS $2.16 $2.12 $2.11
- --------------------------------------------------------------------------------
% ACCRETION (2.1%)
Total Debt $628.4(6) $0.0 $642.9 $1,271.3
Debt / EBITDA 2.1x NM 3.2x
EBITDA / Interest Expense 7.5x NM 4.2x
- ------------------
(1) Source: Merrill Lynch research report dated 3/19/98. EPS estimates from
First Call.
(2) Management projections including results of Umberto but excluding results of
Boulder Creek, BICE and Baja Grill
(3) Assumes purchase accounting treatment for 100% debtfinanced acquisition.
(4) Preliminary estimate of possible cost synergies related to a strategic
buyer.
(5) Assumes 8.00% interest expense.
(6) Actual as of 5/18/98.
Page 33
<PAGE>
ILLUSTRATIVE POOLING ANALYSIS: CKE'S PURCHASE AT $36.00 PER SHARE
ASSUMING A $36 PURCHASE PRICE (7.7X TRAILING EBITDA), BEAR STEARNS HAS
SUMMARIZED THE PRO FORMA IMPACT TO CKE FOR FISCAL YEAR 1999.
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CKE(1) Wonton Adjust- Combined
FYE 1/00 FYE 12/99 ments(3)
Revenue $2,170.9 405.7 $2,576.6
Cost Synergies(4) $5.0 $5.0
EBITDA $294.5 $94.4 $5.0 $393.9
MARGIN 13.6% 23.2% 15.3%
EBIT $213.7 $66.4 $5.0 $285.1
MARGIN 9.8% 16.3% 11.1%
Goodwill Amortization $0.0 $0.0
Net Interest Expense $39.1 ($7.2) $0.3(5) $32.2
Net Income $106.9 $44.6 $2.9 $154.4
- --------------------------------------------------------------------------------
EPS $2.16 $2.12 $2.31
- --------------------------------------------------------------------------------
% ACCRETION 6.8%
Total Debt $628.4(6) $0.0 $0.0 $628.4
Debt / EBITDA 2.1x NM 1.6x
EBITDA / Interest Expense 7.5x NM 12.3x
- ---------------
(1) Source: Merrill Lynch research report dated 3/19/98. EPS estimates from
First Call.
(2) Management projections including results of Umberto but excluding results of
Boulder Creek, BICE and Baja Grill.
(3) Assumes pooling accounting treatment for 100% equityfinanced acquisition.
(4) Preliminary estimate of possible cost synergies related to a strategic
buyer.
(5) Assumes 8.00% interest expense.
(6) Actual as of 5/18/98.
Page 34
<PAGE>
ILLUSTRATIVE ACQUISITION ANALYSIS: CKE'S PURCHASE AT $36.00 PER SHARE
THE FOLLOWING MATRICES REFLECT THE ACCRETION / DILUTION TO CKE BASED ON THE
FOLLOWING SHARE PURCHASE PRICE AND COST SYNERGIES:
Purchase Accounting Pooling Accounting
Cost Synergies Cost Synergies
$0MM $5MM $10MM $15MM $0MM $5MM $10MM $15MM
-------------------------------- ----------------------------
$34 |(1.8%) | 1.1% | 3.9% | 6.8% $34 |6.4%| 8.5%|10.7% | 12.8%
-------------------------------- -----------------------------
Share $36 |(5.0%) |(2.1%)| 0.7% | 3.6% $36 |4.7%| 6.8%| 9.0% | 11.1%
Purchase -------------------------------- -----------------------------
Price $38 |(8.1%) |(5.3%)|(2.4%)| 0.4% $38 |3.2%| 5.2%| 7.3% | 9.4%
-------------------------------- -----------------------------
$40 |(11.3%)|(8.5%)|(5.6%)|(2.8%) $40 |1.6%| 3.7%| 5.7% | 7.8%
Page 35
<PAGE>
KEY ISSUES RELATED TO A POSSIBLE SALE
o DESIRE OF FAMILY RELATED TO SALE OF SHARES
o MANAGEMENT ISSUES
o Potential departure of key Family executives after transaction (issue is
mitigated if it is a strategic buyer)
o Depth of second tier management team
o Buyer's need for key Family executives during transition period
o UMBERTO'S OWNERSHIP STRUCTURE
o Primary growth vehicle not whollyowned
o NONCOMPETE AGREEMENT
o Buyer's need for some form of noncompete agreement from Family
o LISANTI (SUPPLIER) ISSUES
o Absence of formal contract
o Nature of relationship after departure of key senior managers
Page 36
<PAGE>
OTHER CONSIDERATIONS
FOLLOWING ARE OTHER KEY CONSIDERATIONS RELEVANT TO THE BOARD'S EVALUATION OF A
POSSIBLE SALE:
o TYPE OF CONSIDERATION: Do shareholders receive cash, stock or a combination
of both
o TRANSACTION STRUCTURE: Is transaction structured as a taxfree
reorganization or a taxable transaction (form of consideration is an
integral part of this)
o DISRUPTIVE PROCESS: While every effort will be made to limit dissemination
of information and control process, a sale process will impact management,
employees and suppliers. In addition, trading activity in the stock may
necessitate Company comment / announcement
Page 37
<PAGE>
Section V
CONCLUSION
<PAGE>
CONCLUSION
IF THE WONTON FAMILY IS INTERESTED IN SELLING ITS ENTIRE OWNERSHIP, BEAR STEARNS
BELIEVES THE MOST ATTRACTIVE ALTERNATIVE FOR ALL SHAREHOLDERS CAN BE OBTAINED
THROUGH A SALE OF THE COMPANY.
o IMMEDIATE MONETIZATION: All shareholders receive cash (or possibly liquid
securities) for their ownership interest.
o ATTRACTIVE VALUATION: Value estimates of $34 $37 per share represent
significant premium to current valuation
o HIGH LIKELIHOOD OF SUCCESS: Attractiveness of Company and strength of
current market makes quick and successful sale highly likely
IF THE WONTON FAMILY WISHES TO RETAIN ALL OR A PORTION OF ITS OWNERSHIP, BEAR
STEARNS RECOMMENDS THE COMPANY PURSUE A LEVERAGED RECAPITALIZATION.
Page 38
<PAGE>
Appendix A
SUMMARY TRANSACTION TIMETABLES
<PAGE>
PROCESS & TIMETABLE FOR SALE OF WONTON
STEPS
KEY
SUCCESS
FACTORS
STEPS [GRAPHIC OMITTED][GRAPHIC OMITTED]
Page 39
<PAGE>
ILLUSTRATIVE TIMETABLE -- LEVERAGED RECAPITALIZATION (TENDER OFFER)
- --------------------------------------------------------------------------------
JULY 1998 AUGUST 1998 SEPTEMBER 1998
- --------------------------------------------------------------------------------
S M T W T F S S M T W T F S S M T W T F S
- --------------------------------------------------------------------------------
1 2 3 4 1 1 2 3 4 5
5 6 7 8 9 10 11 2 3 4 5 6 7 8 6 7 8 9 10 11 12
12 13 14 15 16 17 18 9 10 11 12 13 14 15 13 14 15 16 17 18 19
19 20 21 22 23 24 25 16 17 18 19 20 21 22 20 21 22 23 24 25 26
26 27 28 29 30 31 23 24 25 26 27 28 29 27 28 29 30
30 31
- --------------------------------------------------------------------------------
-Begin confidential discussions with possible bank lenders
WEEK 1: -Draft of internal financial statements available
WEEK 2: -Legal counsel drafts tender offer documentation
-Legal counsel begins drafting debt Offering Circular and
description of Notes
-Public information package sent to debt Rating Agencies
-Begin preparation of Rating Agency presentation
WEEK 3: -Continue preparation of Rating Agency presentation
-Continue discussions with bank lenders
-Accountants sign-off on financial results
WEEK 4: -Company issues press release announcing self tender
-Company commences tender offer
-Drafting of debt offering circular and description of notes
continues
-Continue discussions with bank lenders
-Presentations to rating agencies
-Draft of GAAP financial statements available (excluding
footnotes)
-Regularly scheduled dividend announcement
Page 40
<PAGE>
ILLUSTRATIVE TIMETABLE LEVERAGED RECAPITALIZATION (TENDER OFFER)
- --------------------------------------------------------------------------------
JULY 1998 AUGUST 1998 SEPTEMBER 1998
- --------------------------------------------------------------------------------
S M T W T F S S M T W T F S S M T W T F S
- --------------------------------------------------------------------------------
1 2 3 4 1 1 2 3 4 5
5 6 7 8 9 10 11 2 3 4 5 6 7 8 6 7 8 9 10 11 12
12 13 14 15 16 17 18 9 10 11 12 13 14 15 13 14 15 16 17 18 19
19 20 21 22 23 24 25 16 17 18 19 20 21 22 20 21 22 23 24 25 26
26 27 28 29 30 31 23 24 25 26 27 28 29 27 28 29 30
30 31
- --------------------------------------------------------------------------------
WEEK 5: -Receive bank financing commitment and begin negotiating bank
loan agreements(1)
-Audited financial statements with footnotes available
-Finalize debt Offering Circular and description of Notes
-Debt offering circular printed and distributed to investors
WEEK 6: -Presentation to debt sales force
-Receive credit ratings from Rating Agencies
-Begin roadshow for debt offering
WEEK 7: -Complete roadshow for debt offering
-Finalize bank loan agreements(1)
WEEK 8: -Price debt offering
-Close debt offering
-Close bank financing
-Consummate tender offer
- -------------------
(1) Assumes bank lenders do not require syndication prior to closing. If
syndication is required, additional time needed to syndicate is 3 to 4
weeks.
Page 41
<PAGE>
Appendix B
OWNERSHIP SUMMARY AND TRADED VOLUME ANALYSIS
<PAGE>
OWNERSHIP SUMMARY
TOP FIFTEEN INSTITUTIONAL OWNERS BY HOLDINGS(1)
Shares %
------ ---
First Chicago NBD Corp. 1,096,500 5.4%
Furman Selz LLC 961,700 4.7%
Moody Aldrich & Sullivan 808,700 4.0%
Wedge Capital Management LLP 602,400 3.0%
Perry Corp. 546,400 2.7%
Dalton Greiner Hartman 468,100 2.3%
Travelers Inc. 424,800 2.1%
Hughes Investment Management 389,600 1.9%
Barclays Bank 378,600 1.9%
Equitable Companies 370,400 1.8%
Chase Manhattan Corp. 308,400 1.5%
MH Davidson & Co. Inc. 251,400 1.2%
College Retire Equities 250,600 1.2%
Dimensional Fund Advs. 232,800 1.1%
Florida St. Board/Administration 225,000 1.1%
----------- -----
TOP FIFTEEN INSTITUTIONS 7,315,400 35.8%
Total Shares Outstanding 20,525,477 100.0%
- --------------------------
(1) Source: CDA / Spectrum: as of March 31, 1998.
Page 42
<PAGE>
TRADED VOLUME ANALYSIS
PROJECT WONTON
JULY 10, 1997 TO JULY 10, 1998
[GRAPHIC OMITTED]
- ------------------------
Source: FactSet.
Page 43
<PAGE>
Appendix C
DISCOUNTED CASH FLOW ANALYSIS
<PAGE>
DISCOUNTED CASH FLOW ANALYSIS CORE BUSINESS(1)
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Present Vvalue of Equity
- --------------------------------------------------------------------------------
PROJECTED
------------------------------------------------------------
Fiscal years ended December 31, 1999 2000 2001 2002
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $386.0 $417.5 $451.2 $485.9
EBITDA 91.1 98.9 107.2 115.6
EBIT 63.7 70.2 77.3 85.6
Taxes @ 40% (25.5) (28.1) (30.9) (34.2)
Unlevered Net Income 38.2 42.1 46.4 51.3
Plus: Depreciation & Amortization 27.4 28.8 29.9 30.1
Less: Capital Expenditures (21.7) (23.7) (24.3) (24.9)
Less: Working Capital (Increase) Decrease 2.4 2.9 3.2 3.3
Unlevered Free Cash Flow 46.4 50.1 55.1 59.7
======== ======== ======== =========
</TABLE>
Present Value of Equity @ 12/31/98
- -----------------------------------
Present Value of 1999 2002 Free Cash Flows $158.6
Present Value of Terminal Value 440.9
Present Value of Total Enterprise $599.5
Plus: Cash and Cash Equivalents 131.0
Plus: Option Exercise Proceeds 46.2
Less: Total Debt --
Present Value of Gross Equity Value 776.7
-----
Present Value of Equity Per Share @ 12/31/98 $34.84
=====
DCF Assumptions
- -----------------
Weighted Average Cost of Capital 12.0%
Terminal EBITDA exit multiple 6.0x
Fully Diluted shares outstanding 22.3
- -----------------
(1) Based on Wonton management projections.
Page 44
<PAGE>
DISCOUNTED CASH FLOW ANALYSIS UMBERTO(1)
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Present Value of Equity
- --------------------------------------------------------------------------------
PROJECTED
-------------------------------
Fiscal years ended December 31, 1999 2000 2001 2002
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues $15.7 $34.4 $59.4 $91.3
EBITDA 2.6 6.4 11.6 18.4
EBIT 2.2 5.4 9.9 15.7
Taxes @ 40% (0.9) (2.2) (3.9) (6.3)
Unlevered Net Income 1.3 3.2 5.9 9.4
Plus: Depreciation & Amortization 0.5 1.0 1.8 2.7
Less: Capital Expenditures (5.4) (7.2) (9.1) (10.8)
Less: Working Capital (Increase) Decrease 0.0 0.0 0.0 0.0
Unlevered Free Cash Flow (3.6) (2.9) (1.3) 1.3
====== ===== ===== ======
</TABLE>
Present Value of Equity @ 12/31/98
- -------------------------------------
Present Value of 1999 2002 Free Cash Flows $(5.3)
Present Value of Terminal Value 66.4
-----
Present Value of Total Enterprise 61.0
Plus: Cash and Cash Equivalents --
Plus: Option Exercise Proceeds --
Less: Total Debt --
Present Value of Gross Equity Value 61.0
-----
Present Value of Equity Per Share @ 12/31/98 $2.74
-----
DCF Assumptions
- --------------------
Weighted Average Cost of Capital 18.0%
Terminal EBITDA exit multiple 7.0x
Fully Diluted shares outstanding 22.3
- -------------------
(1) Based on Wonton management projections.
<PAGE>
Appendix D
COMPARABLE PUBLIC COMPANIES
<PAGE>
DESCRIPTION OF COMPARABLE COMPANIES
o BUFFETS, INC.
The Company operates 364 restaurants under the names Old Country Buffet,
Hometown Buffet, and Roadhouse Grill in 34 states. In addition, the Company
has 24 franchised restaurants in operation in ten states. The Company also
has a number of restaurants under franchise.
o CONSOLIDATED PRODUCTS, INC.
The Company is engaged primarily in the ownership, operation and franchising
of Steak n Shake restaurants through its whollyowned subsidiary, Steak n
Shake, Inc. Steak n Shake has 194 Companyoperated restaurants and 55
franchised restaurants, located in 14 midwestern and southeastern states.
o FOODMAKER INC.
The Company owns, operates and franchises 76 restaurants under the Jack In
The Box restaurant concept. The company has restaurants located principally
in the Western and Southwestern United States. In addition, the Company owns
approximately 40% of Family Restaurants, Inc., the operator of full service
family restaurants located primarily in California and parts of the
Southwest under the Carrow's and Coco's formats and full service Mexican
restaurants nationwide operated under the ChiChi's, El Torito and Casa
Gallardo names.
o LONE STAR STEAKHOUSE & SALOON, INC
The company owns and operates a chain of 267 midpriced, full service,
casual dining restaurants located in the United States which operate under
the trade name Lone Star Steakhouse and Saloon. In addition, the Company
owns and operates eight upscale steakhouse restaurants, three operating as
Del Frisco's Double Eagle Steak House restaurants and five operating as
Sullivan's Steakhouse restaurants. Internationally, the Company owns a 65%
interest in a joint venture which operates 34 restaurants in Australia (the
"Australian Joint Venture"), thirteen of which were opened in 1997.
Page 46
<PAGE>
DESCRIPTION OF COMPARABLE COMPANIES
o LUBY'S CAFETERIAS, INC.
The Company operates 232 cafeterias under the name "Luby's" located in
suburban shopping areas in Arizona, Arkansas, Florida, Kansas, Louisiana,
Mississippi, Missouri, New Mexico, Oklahoma, Tennessee, and Texas. Of the
232 cafeterias operated by the Company, 135 are at locations owned by the
Company and 97 are on leased premises
o PICCADILLY CAFETERIAS INC.
The Company operates 129 cafeterias in 15 states. Of these, 56 are in
suburban malls, 22 are in suburban strip centers, and 51 are freestanding
suburban locations. Up to six new cafeterias are expected to be opened
before the fiscal year end.
o RUBY TUESDAY INC.
The Company operates three separate and distinct casual dining concepts
comprised of Ruby Tuesday, Mozzarella's and Tia's. As of May 31, 1997, the
Company operated 393 casual dining restaurants in 33 states.
o RYAN'S FAMILY STEAK HOUSES, INC.
The Company is a South Carolina corporation that operates a chain of 272
Companyowned and 25 franchised Ryan's Family Steakhouse restaurants located
principally in the southern and midwestern United States.
Page 47
<PAGE>
Appendix E
COMPARABLE MERGERS AND ACQUISITIONS TRANSACTIONS
<PAGE>
COMPARABLE MERGERS AND ACQUISITIONS TRANSACTIONS
($ IN MILLIONS)
<TABLE>
<CAPTION>
ENTERPRISE VALUE EQUITY VALUE
DATE ------------------------- -------------
ANNOUNCED / EQUITY ENTERPRISE PREMIUM LTM LTM TM NET BOOK
EFFECTIVE TARGET/ACQUIROR VALUE VALUE PAID(1) REVENUE EBITDA EBIT INCOME VALUE
- ------------- --------------- ------- -------- --------- ------- -------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4/3/98 / Bertucci's Inc./ $96.5 $104.3 35.5% 0.76x 6.7x 16.0x 27.5x 1.4x
Pending Investor Group
4/2/98 / Spaghetti Warehouse/ $51.2 $56.4 26.1% 0.87x 7.8x 16.3x 25.3x 1.1x
Pending Conquest partners
3/13/98 / Pollo Tropical, Inc./ $94.0 $97.2 38.6% 1.50x 9.6x 12.4x 21.4x 3.3x
Pending Management
1/15/98 / Hardee's (Advantica Restaurant Group)/ $381.0 $427.0 NA 0.78x 6.6x 14.5x NA NA
4/1/98 CKE Restaurants, Inc.
10/21/97 / International Dairy Queen Inc./ $596.3 $548.8 10.1% 1.30x 8.3x 9.2x 15.6x 3.1x
1/7/98 Berkshire Hathaway Inc.
9/23/97 / El Chico Restaurants, Inc./ $49.3 $59.4 21.4% 0.58x 5.8x 12.9x 17.1x 1.8x
1/22/98 Cracken, Harkey, Street & Co.,L.L.C.
9/5/97 / DavCo Restaurants Inc./ $137.6 $186.5 49.5% 0.81x 7.5x 11.7x 21.7x 2.7x
Pending Citicorp Venture Capital Ltd.
8/4/97 / Perkins Family Restaurant, L.P./ $146.7 $206.6 28.7% 0.80x 5.8x 10.5x 10.0x 2.4x
12/23/97 The Restaurant Company
6/4/96 / HomeTown Buffet Inc./ $175.5 $214.5 3.3% 1.22x 8.9x 16.8x 25.4x 2.4x
9/20/96 Buffets Inc.
5/2/96 / Houlihan's Restaurant Group, Inc./ $85.2 $158.6 33.3% 0.59x 5.2x 10.1x 20.7x 1.2x
Terminated Zapata Corporation
3/4/96 / Cocos Restaurants, Jojos Restaurants,
Carrow Restaurants, Inc./ $275.0 $306.5 NA 0.61x 5.0x 9.1x NM NA
5/23/96 Flagstar Companies, Inc.
- ------------------------------------
(1) Over stock price on day prior to announcement.
Page 48
<PAGE>
COMPARABLE MERGERS AND ACQUISITIONS TRANSACTIONS (CONT.)
($ IN MILLIONS)
ENTERPRISE VALUE EQUITY VALUE
DATE -------------------- -------------
ANNOUNCED / EQUITY ENTERPRISE PREMIUM LTM LTM LTM NET BOOK
EFFECTIVE TARGET/ACQUIROR VALUE VALUE PAID(1) REVENUE EBITDA EBIT INCOME VALUE
- -------------- --------------- ------ ---------- -------- ------- ------ ---- ------ -------
11/6/95 / NPC International Inc./ $228.4 $306.1 44.0% 0.97x 6.7x 11.9x 32.0x 2.8x
Withdrawn Management
9/5/95 / TPI Enterprises/ $73.4 $170.6 25.0% 0.60x 8.1x NM NM 1.1x
9/9/96 Shoney's
8/23/94 / Ground Round Restaurants, Inc./ $101.7 $156.6 41.2% 0.65x 6.0x 12.2x 17.0x 1.6x
Terminated 399 Ventures Inc.
HIGH 1.50X 9.55X 16.84X 32.00X 3.35X
LOW 0.58X 4.99X 9.13X 9.96X 1.10X
HARMONIC MEAN OF TRANSACTION MULTIPLES 0.79X 6.7X 12.1X 19.3X 1.8X
</TABLE>
- ---------------------
(1) Over stock price on day prior to announcement.
Page 49
<PAGE>
OVERVIEW OF STRATEGIC BUYERS: TIER 2
<TABLE>
<CAPTION>
Company Existing Brands Financial Flexibility Comments
- ----------------- ----------------- ----------------------- ------------------
<S> <C> <C> <C>
INTERNATIONAL INC. Wendy's Equity Mkt Cap: $2.9 billion o Not historically acquisitive
Tim Horton's Debt / EBITDA: 0.8x o Wall St. pressure for new growth initiatives
o Family ownership of Wonton is a positive
MCDONALD'S McDonald's Equity Mkt Cap: $50.2 billion o Wonton is relatively small
Debt / EBITDA: 1.8x o No demonstrated interest outside core concept
TRICON GLOBAL Pizza Hut Equity Mkt Cap: $5.0 billion o Currently focusing on existing businesses
Taco Bell Debt / EBITDA: 5.7x o Looking to reduce company-owned restaurant
Kentucky Fried Chicken count
GRAND METROPOLITAN Burger King Equity Mkt Cap: NA o Adding restaurants unlikely a priority
Pillsbury Debt / EBITDA: NA o Future ownership of Burger King unclear
Haagen Dazs
Green Giant
J&B Rare Scotch
Smirnoff Vodka
Equity Mkt Cap: $670 million o High company-owned restaurant percentage
FOODMAKER INC. Jack In The Box Debt / EBITDA: 2.0x o Limited financial flexibility
Equity Mkt Cap: $1.0 billion o Highest growth in pizza sector
PAPA JOHN'S Papa John's Debt / EBITDA: NA o Focusing on franchise expansion
</TABLE>
Page 50
<PAGE>
OVERVIEW OF FINANCIAL BUYERS: TIER 2
NAME RESTAURANT INVESTMENTS SIZE OF FUND(1)
- ---- ---------------------- ---------------
T.H. LEE o Cinnabon International, Inc. $3.0 billion
o NY Restaurant Group (Smith & Wollensky)
FREEMAN SPOGLI o AFC Enterprises 55% ownership $900 million
Popeye's, Church's)
J.H. WHITNEY o Briazz, Inc. $425 million
J.W. CHILDS o Chevy's Restaurants $500 million
CENTRE PARTNERS o Johnny Rockets Group $450 million
SEAVER KENT o Bojangles Restaurants $110 million
o Cafe Valley
MADISON DEARBORN o Peter Piper, Inc.
o Carrols (Burger King) $925 million
LEONARD GREEN o Family Restaurants, Inc. (20%) $750 million
BLACKSTONE o Expressed Interest in Wonton $3.8 billion
HAMPSTEAD GROUP o Houlihan's Not specified
QUAD C o Huddle House $300 million
Page 51
<PAGE>
OVERVIEW OF FINANCIAL BUYERS: TIER 2
OTHERS WITH EXPRESSED INTEREST IN RESTAURANT INVESTMENTS:
- ----------------------------------------------------------
EVERCORE $195 million
FENWAY $527 million
STONINGTON $1.0 billion
AMERICAN SECURITIES PARTNERS $100 million
ODYSSEY PARTNERS $700 million
- -------------------------------
(1) Reflects recent fund raisings which are generally uninvested.
Page 52
<PAGE>
Appendix F
PRECEDENT LEVERAGED RECAPITALIZATION TRANSACTIONS
<PAGE>
UNITED STATIONERS MERGER WITH ASSOCIATED STATIONERS
ASSOCIATED HOLDINGS ACQUIRED ON MARCH 30, 1995 A MAJORITY INTEREST IN UNITED
STATIONERS WHICH MERGED WITH ASSOCIATED STATIONERS, A WHOLLYOWNED SUBSIDIARY OF
ASSOCIATED HOLDINGS
o Associated Holdings offered to purchase up to 17.2 million shares
(approximately 92.5% of the common shares outstanding) of United
Stationers
o Posttransaction, the shares not purchased by Associated Holdings
comprised approximately 23% of the new common stock
o The new Company expected to generate approximately $26.0 million in
annual cost savings
o Cash offer price of $15.50 per share, totaling $267 million offered in
the purchase of United Stationer's shares. This price represented a
12.7% premium over the closing price of the Company's common stock
($13.75), on the day prior to the transaction's announcement
o The Company's current stock price as of July 17, 1998 was $71.63 (362%
appreciation over the purchase price)
Page 53
<PAGE>
UNITED STATIONERS TENDER OFFER SUMMARY
($ IN MILLIONS)
Sources of Funds Uses of Funds
- ---------------------------------- -----------------------------------
Senior Credit Facilities $426.7 Purchase of Shares $266.6
Subordinated Bridge Facility 130.0 Debt Refinancing 268.6
Equity Investment 12.0 Fees, Expenses and Other(1) 33.5
------- ------
Total Sources $568.7 Total Uses $568.7
======= ======
Pro Forma Capitalization
-----------------------------
Cash and Equivalents $ 6.7
Bank Debt $550.2 90.6%
Shareholder's Equity $ 57.2 9.4%
------ ------
Total Capitalization $607.4 100.0%
====== ======
- ------------------------
(1) Includes $1,469 of other liabilities paid at offer closing.
(2) Pro forma for the tender offer and subsequent merger of Associated Holdings
and United Stationers.
Page 54
<PAGE>
UNITED STATIONERS OWNERSHIP SUMMARY
(SHARES IN MILLIONS)
Pre-Transaction Ownership Post-Transaction Ownership
- ------------------------------------- ----------------------------------
|
SHARES % | SHARES %
------ ---- | ------ ----
|
Management and Directors 0.4 2.3% |Buying Group(2) 4.6 76.8%
|
HW Associates(1) 4.7 25.3% |HW Associates(1) 0.4 6.0%
|
Other Public Shareholders 13.5 72.4% |Management, Directors
----- ----- | and Other Public
| Shareholders of
| United(3) 1.0 17.2%
| ---- ------
Total 18.6 100.0% | Total 6.0 100.0%
===== ====== | ==== ======
|
- -----------------
(1) General partnership consisting of members of the Hecktman and Wolf families.
(2) Includes Wingate Partners, ASI Partners, Cumberland Capital, Good Capital
and former management of Associated Stationers.
(3) Pro forma for tender offering.
Page 55
<PAGE>
UNITED STATIONERS SUMMARY FINANCIAL PERFORMANCE
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996 1997 LTM 1998(1)
------- -------- -------- ------- -----------
REVENUE $470.19 $1,751.46 $2,298.17 $2,558.14 $2,635.63
EBITDA(2) $23.51 $91.00 $139.05 $160.97 $167.86
EBIT(2) $18.12 $67.32 $113.00 $134.93 $140.92
NET INCOME(2) $4.21 $10.08 $30.25 $45.36 $50.90
DILUTED EPS(2) $0.51 $0.79 $2.03 $2.95 $3.18
Y/E SHARE PRICE $6.63 $27.75 $19.50 $48.13 $62.25
- -------------
(1) Period ended March 31, 1998.
(2) Excludes the following pretax non recurring charges and extraordinary
items: (i) a $9.7 million restructuring charge in 1995 related to the
merger, (ii) a $59.4 million noncash charge in 1997 as a result of the
vesting of certain incentive options, (iii) a $5.3 million charge in 1997
associated with the termination of certain management agreements, and (iv) a
$5.9 million extraordinary loss in 1997 from the early extinguishment of
debt.
Page 56
<PAGE>
UNITED STATIONERS
TRADING HISTORY POSTTRANSACTION
MARCH 30, 1995 TO JULY 17, 1998
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
Page 57
<PAGE>
HAYES WHEELS INTERNATIONAL MERGER WITH MOTOR WHEEL CORP.
MWC HOLDINGS MERGER WITH HAYES WHEELS INTERNATIONAL ON AUGUST 2, 1996
o MWC Holdings, a public company engaged in the business of manufacturing
brakes and steel wheels for the automotive industry, and controlled by
Joseph Littlejohn & Levy, offered in consideration for each Hayes Wheels
International common share $28.80 in cash and .1 shares of the Company's new
common stock. The total consideration per share of approximately $32.00
represented a 29.3% premium over the closing price of the Company's stock on
the day prior to the announcement of the transaction ($24.75)
o Posttransaction, the original shareholders of Hayes Wheels International
stock owned approximately 15.8% of the Company's new common stock
o Cash consideration of $28.80 per share, totaling $506 million offered in the
purchase of Hayes Wheels International shares
o The Company's current stock price as of July 17, 1998 was $76.63(1) (139%
appreciation over the purchase price)
- -----------------------
(1) Current price adjusted for 2:1 split on 1/7/97 (actual price was $38.31
on 7/17/98).
Page 58
<PAGE>
HAYES WHEELS INTERNATIONAL
($ IN MILLIONS)
Sources of Funds Uses of Funds
- -------------------------------- -----------------------------------------
Revolving Credit Facility $26.4 Purchase of Shares $506.1
Senior Term Debt 425.0 Debt Refinancing 274.1
Senior Subordinated Notes 250.0 Retirement of Mgt. Options 5.2
New Investors' Equity 200.0 Working Capital 75.0
Fees and Expenses 41.0
------ ------
Total Sources $901.4 Total Uses $901.4
====== ======
Pro-Forma Capitalization(1)
------------------------------------
Cash $78.2
Bank Debt 451.5 62.8%
Senior Subordinated Notes 250.0 34.8%
Shareholder's Equity 17.7 2.4%
------- ------
Total Capitalization $719.2 100.0%
======= ======
- ----------------------
(1) Pro forma for the merger of Hayes Wheels and MWC Holding.
Page 59
<PAGE>
HAYES WHEELS INTERNATIONAL OWNERSHIP SUMMARY
(SHARES IN MILLIONS)
Pre-Transaction Ownership Post-Transaction Ownership
- --------------------------------------- --------------------------------------
SHARES % SHARES %
------ --- ------ ---
Management, Directors
and Other Public Shares 9.4 53.7% New Equity Investors(1) 8.1 2.7%
Varity Corporation 8.1 46.3% Former Public Share-
holders of MWC 1.3 11.5%
Management, Directors and
Other Public Shareholders
of Hayes 0.9 8.5%
Varity Corporation 0.8 7.3%
----- ------ ----- ------
Total 17.6 100.0% Total 11.1 100.0%
===== ====== ===== ======
- ----------------
(1) Includes Joseph Littlejohn & Levy, TSG Capital, CIBC WG Argosy and Chase
Equity Partners.
Page 60
<PAGE>
HAYES WHEELS INTERNATIONAL - SUMMARY FINANCIAL PERFORMANCE
- --------------------------------------------------------------------------------
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JANUARY 31,
-------------------------------------
PRO FORMA (1)
1996 1997 1998 LTM 1998(2)
----------- -------- ---------- -----------
REVENUE $968.30 $778.20 $1,262.80 $1,426.50
EBITDA(3) $133.20 $109.50 $216.70 $222.20
EBIT(3) $84.30 $61.90 $145.50 $170.20
NET INCOME(3) $5.60 $8.58 $31.40 $42.30
DILUTED EPS(3) $0.50 $0.31 $1.12 $1.40
Y/E STOCK PRICE $24.25 $20.25 $23.88 $38.44
- ---------------
(1) Pro forma for the merger of Hayes Wheels and MWC Holdings as if it occurred
on January 31, 1995.
(2) Period ended April 30, 1998.
(3) Excludes pre-tax non recurring charges in fiscal 1996 of $36.6 million in
connection with a plant restructuring at
MWC Holdings and the following non recurring charges in fiscal 1997: (i) a
$109 million charge in connection with the closing of a fabricated wheel
facility, and (ii) a $6.4 million charge in connection with the merger with
MWC Holdings.
Page 61
<PAGE>
HAYES WHEELS INTERNATIONAL
- --------------------------------------------------------------------------------
TRADING HISTORY POST-TRANSACTION(1)
AUGUST 2, 1996 TO JULY 17, 1998
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
- --------------
(1) Historical prices adjusted for 2:1 split on January 7, 1997.
Page 62
<PAGE>
SWING-N-SLIDE CORP. LEVERAGED RECAPITALIZATION
- --------------------------------------------------------------------------------
SWING-N-SLIDE COMMENCED A TENDER OFFER FOR APPROXIMATELY 37.5% OF ITS COMMON
SHARES OUTSTANDING ON NOVEMBER 14, 1994.
o Cash offer price of $11.00 per share represented a 22% premium over the
closing price of the Company's common stock ($9.00), on the day prior to the
tender announcement.
o On January 6, 1995, the Company announced that it had accepted 3.6 million
shares for purchase at $11.00. On the same day, the closing price of the
Company's stock was $7.50. An investor lawsuit was filed alleging management
fraud and a scheme to enrich certain shareholders.
o On January 5, 1996, GreenGrass Holdings, a partnership organized by
institutional investors and senior management of the Company announced a
tender offer to purchase 3.51 million shares (approximately 58.5% of total
common shares outstanding) at a price of $6.50, a 44% premium to the closing
price of the common stock ($4.50) on the previous day.
o The tender was successfully completed on February 15, 1996. The closing
price of the Company's common stock on this date was $5.44.
o On April 29, 1998, the Company's name was changed to Playcore Inc. The
Company's current stock price as of July 17, 1998 was $3.75 (a 66% decrease
from the original recap tender price).
Page 63
<PAGE>
SWING-N-SLIDE - 1995 TENDER OFFER SUMMARY
- --------------------------------------------------------------------------------
($ IN MILLIONS)
Sources of Funds Uses of Funds
- --------------------------------- -----------------------------
Bank Debt $48.5 Purchase of Shares $42.0
-----
Dept Repayment 4.0
Total Sources $48.5 Fees and Expenses 2.5
===== =====
Total Uses $48.5
Pro Forma Capitalization
--------------------------------
Cash and Equivalents $0.0
Bank Debt $37.0
Shareholders' Equity ($1.3)
-------
$35.7
=======
Page 64
<PAGE>
SWING-N-SLIDE CORP.
- --------------------------------------------------------------------------------
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997 LTM 1998(1)
------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE $51.07 $51.82 $45.08 $41.87 $89.49 $103.90
EBITDA(2) $16.94 $14.68 $13.47 $12.06 $15.14 $15.60
EBIT(2) $13.79 $7.91 $11.13 $9.62 $11.57 $12.95
NET INCOME(2) $7.96 $4.59 $4.13 $1.57 $1.18 $2.43
DILUTED EPS(2) $0.83 $0.48 $0.67 $0.26 $0.29 $0.48
Y/E STOCK PRICE $13.00 $8.50 $4.00 $3.25 $4.00 $3.88
</TABLE>
- ----------------------------
(1) Period Ended March 31,1998.
(2) Excludes nonrecurring charges and extraordinary items.
Page 65
<PAGE>
SWING-N-SLIDE CORP.
- --------------------------------------------------------------------------------
TRADING HISTORY POST-TRANSACTION
NOVEMBER 15, 1994 TO JULY 17, 1998
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
Page 66
<PAGE>
Appendix G
ILLUSTRATIVE COMPANY SPONSORED LEVERAGED RECAPITALIZATION MODEL
<PAGE>
Appendix H
ILLUSTRATIVE FINANCIAL INVESTOR SPONSORED LEVERAGED RECAPITALIZATION MODEL
<PAGE>
Appendix I
ILLUSTRATIVE LEVERAGED BUYOUT MODEL
<PAGE>
Appendix J
ILLUSTRATIVE MERGER MODEL
TARGET LIST OF POTENTIAL BUYERS
AFC ENTERPRISES
CKE RESTAURANTS, INC.
TRIARC COMPANIES
ALLIED DOMECQ
BRINKER
DARDEN
FOODMAKER
MCDONALDS'S
PAPA JOHN'S
TRICON GLOBAL RESTAURANTS INC.
WENDY'S INTERNATIONAL INC.
APOLLO MANAGEMENT, L.P.
BOSTON VENTURES MANAGEMENT, INC.
BRUCKMANN, ROSSER, SHERRILL & CO., INC.
CASTLE HARLAN, INC.
CITICORP VENTURE CAPITAL, LTD.
MCCOWN DE LEEUW & CO.
SAUNDERS KARP & MEGRUE, L.P.
AMERICAN SECURITIES CAPITAL PARTNERS
THE BLACKSTONE GROUP L.P.
BAIN CAPITAL
CENTRE PARTNERS
EVERCORE PARTNERS INC.
FREEMAN, SPOGLI AND CO.
HARVEST PARTNERS
THE HAMPSTEAD GROUP, INC.
J.H. WHITNEY & CO.
J.W. CHILDS ASSOCIATES, L.P.
JACOBSON PARTNERS
KELSO & COMPANY, L.P.
KKR
LEONARD GREEN
MADISON DEARBORN
ODYSSEY PARTNERS
QUAD C
STONINGTON PARTNERS, INC.
THOMAS H. LEE COMPANY
HOST MARRIOTT SERVICES
Book # ...........
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
CONFIDENTIAL MEMORANDUM
- --------------------------------------------------------------------------------
AUGUST 1998
<PAGE>
[GRAPHIC OMITTED]
CONFIDENTIAL EVALUATION MATERIAL
Sbarro, Inc. ("Sbarro" or the "Company") is considering the sale of all or
substantially all of the Company (the "Proposed Transaction"). This Confidential
Memorandum (the "Memorandum") is being furnished, on a confidential basis, to a
limited number of parties for the purpose of evaluating the Proposed
Transaction. This Memorandum is based on information supplied by Sbarro and is
being furnished through Bear, Stearns & Co. Inc. ("Bear Stearns"), as Sbarro's
exclusive financial advisor, in connection with the Proposed Transaction. This
Memorandum is being provided solely for use by prospective parties in connection
with their consideration of the Proposed Transaction.
Use of this Memorandum (and of all related and ancillary information
subsequently provided) is governed by the terms of the Confidentiality Agreement
which each recipient has previously executed and which strictly limits the use,
circulation and copying of the information embodied herein. This Memorandum
constitutes "Evaluation Material," as defined in such Confidentiality Agreement.
Persons in possession of the Memorandum should familiarize themselves with such
Confidentiality Agreement before reading, circulating or using any information
contained in this Memorandum. This Memorandum may not be distributed, reproduced
or used without the prior written consent of Sbarro for any purpose other than
the evaluation of the Company and the Proposed Transaction by the person to whom
this Memorandum has been delivered.
This Memorandum has been prepared to assist interested parties in making their
own evaluations of the Company and does not purport to be all-inclusive or to
contain all of the information that a prospective investor may desire.
Prospective investors are urged to conduct their own independent investigation
and evaluation of the Company and the Proposed Transaction. Bear Stearns has not
independently verified any of the information, including the projections,
contained herein. Bear Stearns, Sbarro or any of their respective employees,
affiliates or representatives do not make any representation or warranty,
express or implied, as to the accuracy or completeness of any of the information
contained herein or any other written or oral communications transmitted or made
available to a prospective purchaser or for any omissions from this Memorandum
or any other supplemental information, and Bear Stearns, Sbarro and their
respective affiliates, employees and representatives expressly disclaim any and
all liability based on or relating to the use of such information and
communications by the prospective purchaser or any of its affiliates or
representatives. Only those particular representations and warranties, if any,
which may be made to the purchaser in one or more definitive written agreements,
when and if executed, and subject to such limitations and restrictions as may be
specified in such definitive written agreements, shall have any legal effect.
This Memorandum presents information with respect to the Company as of the date
hereof. Delivery of this Memorandum at any later time shall not, under any
circumstances, create any implication that there has been no change in the
information set forth herein or in the affairs of the Company since the date
hereof. The information contained herein is subject to change, completion or
amendment without notice. Neither Bear Stearns or Sbarro intends to update or
otherwise revise this Memorandum following its distribution.
The financial estimates and projections presented in this Memorandum represent
the subjective views of the management of Sbarro and are current estimates of
future performance based on assumptions which management believes are
reasonable, but which may not prove to be correct. There can be no assurance
that management's estimates and projections will be realized.
ii
<PAGE>
Neither this Memorandum nor its delivery to any prospective purchaser shall
constitute an offer to sell any asset or security or to enter into any other
transaction or commercial agreement.
Sbarro reserves the right to: (i) negotiate with one or more prospective
purchasers at any time and to enter into a definitive agreement regarding the
Proposed Transaction without prior notice to any recipient or to any other
prospective purchaser; (ii) terminate, at any time, the process or terminate the
further participation in such process by any party; (iii) modify, at any time,
or for any reason, any procedure relating to such process; and (iv) amend or
replace the Memorandum and reserve the right to take any action, whether or not
in the ordinary course of business, which they deem necessary or prudent.
Under no circumstances should the management or employees of Sbarro be contacted
directly. All communications, inquiries and requests for information should be
directed to one of the Bear Stearns representatives listed below.
Certain statements contained in this Memorandum are forward-looking statements
which are subject to a number of known and unknown risks and uncertainties that
could cause the Company's actual results and performance to differ materially
from those described or implied in the forward-looking statements. These risks
and uncertainties, many of which are not within the Company's control, include,
but are not limited to, general economic, weather and business conditions; the
availability of suitable restaurant sites in appropriate regional shopping malls
and other locations on reasonable rental terms; changes in consumer tastes;
changes in population and traffic patterns; ability to continue to attract
franchisees; the success of its present, and any future, joint ventures and
other expansion opportunities; the availability of food (particularly cheese and
tomatoes) and paper products at reasonable prices; no material increase
occurring in the Federal minimum wage; and the Company's ability to attract
competent restaurant and executive managerial personnel.
BEAR, STEARNS & CO. INC.
245 Park Avenue
New York, New York 10167
Telephone: (212) 272-2000
Facsimile: (212) 272-3092
- --------------------------------------------------------------------------------
RANDALL PAULSON JOHN KIMM
Senior Managing Director Vice President
(212) 272-6778 (212) 272-6813
iii
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SECTION PAGE
- ------- ----
I. EXECUTIVE SUMMARY
Company Description.............................................1
Strategy........................................................2
Restaurant Industry.............................................4
Summary Financial Results.......................................4
II. INVESTMENT CONSIDERATIONS...........................................5
III. COMPANY OVERVIEW
Company Description and History.................................7
Operations......................................................7
New Restaurant Concepts........................................12
Properties.....................................................12
Employees......................................................13
Ownership......................................................15
IV. BUSINESS STRATEGY
Operational Strategy...........................................16
Growth Strategy - Core Business................................17
Growth Strategy - New Restaurant Concepts......................19
V. INDUSTRY AND COMPETITIVE OVERVIEW
Restaurant Industry............................................21
Quick Service Restaurant Industry..............................21
Pizza Restaurant Segment.......................................22
VI. FINANCIAL OVERVIEW
Historical Financial Performance...............................24
Projected Financial Performance................................29
VII. APPENDIX
Form 10-K Dated December 28, 1997
Form 10-Q Dated April 19, 1998
Proxy Statement Dated July 17, 1998
iv
<PAGE>
SBARRO, INC.
- --------------------------------------------------------------------------------
I. EXECUTIVE SUMMARY
- --------------------------------------------------------------------------------
COMPANY DESCRIPTION
Sbarro, Inc. ("Sbarro" or the "Company") was founded by the Sbarro family in
1959 and today is the leading operator and franchiser of quick service
restaurants serving a wide variety of Italian specialties. Under the "Sbarro"
and "Sbarro The Italian Eatery" names, the Company developed one of the first
quick service concepts that extended beyond offering one primary specialty item
(e.g., pizza or hamburgers) and also developed an exhibition kitchen where
customers could watch the preparation of many of the Company's fresh food
products. The Company's menu includes pizza, pasta and other hot and cold
Italian entrees, salads, sandwiches, cheesecake and other desserts and
beverages. As of July 12, 1998, the Sbarro system included 873 Company-operated
and franchised restaurants with operations in 21 countries. For the last twelve
months ended April 19, 1998, the Company generated systemwide sales of $476.6
million. Revenues and EBITDA for the same period were $351.5 million and $80.7
million, respectively. As of April 19, 1998, the Company's balance sheet
contained no debt and cash and marketable securities of approximately $116.7
million.
Since its inception, the Company has focused almost exclusively on high customer
traffic venues to take advantage of the customer density and impulse nature of
the customer purchase that such locations offer. The Company initially located
its restaurant sites in Manhattan and then, with the rapid expansion of enclosed
shopping malls in the 1970's, extended its concept into these facilities due to
their similar high traffic characteristics. Over the past several years, the
Company has expanded the Sbarro concept to new high traffic venues including
toll roads and airports and has recently begun targeting sports arenas,
hospitals, convention centers, university campuses and casinos. As of July 12,
1998, the Company owned and operated 626 restaurants and franchised 247
restaurants located in 48 states throughout the United States and 20 countries
worldwide.
The Company has demonstrated its ability to identify, develop and operate
profitable restaurants and has increased its total restaurant base (including
franchised operations) from 587 locations at the end of 1992 to 873 at July 12,
1998, representing a compounded annual growth rate of approximately 7.5%. Over
the past decade, the Company's growth in shopping malls has been primarily
derived from opportunities that have arisen from the major renovation of an
existing shopping mall or the re-merchandising of the mall's food operations
and, to a lesser extent, the development of new shopping malls. Historically,
the Company's strategy has been to own and operate its restaurants whenever
possible in order to closely control all aspects of restaurant operations and
maximize profitability. To expand its growth opportunities through franchising
while mitigating the associated risks, the Company has developed a rigorous
qualification and training program that defines strict operating standards for
franchisees and also severely restricts the size of territories granted to
franchisees. The Company believes that franchised units meet the quality and
customer service benchmarks of Company-owned units, and expects a more
significant portion of future new unit growth will come from franchised
locations as the Company continues to expand the Sbarro concept into new venues,
both domestically and internationally.
The Company's Common Stock is listed on the New York Stock Exchange under the
symbol "SBA." As of July 17, 1998, the closing stock price was $26.31 and
20,528,309 shares of its
1
<PAGE>
common stock and 1,584,184 options (at a weighted average exercise price of
$25.88) were outstanding.
STRATEGY
BUSINESS STRATEGY
Since its founding, the Company has sought to deliver high quality, affordably
priced Italian food products to a broad customer base. Sbarro has concentrated
its product development on creating a menu of healthy, popularly priced items
which appeal to the tastes of its customers and also afford the Company high
gross margins. It has continued to emphasize the freshness of its food through
its exhibition kitchens and has also developed a restaurant operations model
which specifies all aspects of restaurant management, including recipes,
production processes, restaurant design, customer service and staff training.
This model ensures consistency of product and service and provides the Company
with consistent operating performance. The Sbarro concept is unlike typical
quick service restaurants because of its diverse menu of Italian foods, nor does
it compare to other Italian / pizza restaurants because of its fast, cafeteria
style service.
The Company has historically focused on high customer traffic venues such as
shopping malls due to the dense base of captive customers who base their eating
decision primarily on impulse and convenience and who are thus relatively less
price sensitive than normal quick service restaurant customers. This provides
the Company more flexibility in pricing and allows the Company to avoid the
advertising and promotional spending that would be required to attract customers
to standalone units. These factors, combined with tight cost controls, provide
Sbarro with very high and stable operating margins relative to other restaurant
companies. The Company has become the dominant Italian quick service restaurant
concept in high customer traffic venues and its strong relationships with
shopping center developers and operators give it preferential access to
attractive locations. The Company has thus developed a strong, nationally
recognized brand name.
GROWTH STRATEGY
The Company expects future growth to be driven by (i) further penetrating high
customer traffic venues, (ii) increased franchising, (iii) expansion into
traditional quick service restaurant venues and (iv) expansion of a recently
developed Italian casual dining concept that is similar to the Sbarro business
model.
New High Customer Traffic Venues
The Company began targeting toll roads and airport locations in the early 1990's
due to the similar characteristics (e.g., customer density, impulse purchase)
between these venues and the Company's significant base of shopping mall
locations. Approximately 7% of the Company's existing restaurants are located in
these venues and recently the Company has targeted other high customer traffic
venues including sports arenas, hospitals, convention centers, universities and
casinos. The Company believes these venues offer significant expansion potential
as the operators of these facilities increasingly look to outsource their food
service operations to companies with an established brand in order to simplify
their own operations and maximize profitability.
2
<PAGE>
Franchising
The Company plans to increase the level of franchising with selected franchisees
in both international and domestic markets. The Company has developed a
comprehensive qualification and training process for franchisees which
prescribes strict operating standards that it believes will provide Sbarro with
the level of control necessary to meet the Company's customer service and
quality requirements. The Company's large base of foreign business partners
which currently numbers 21 will facilitate accelerated international expansion.
Traditional Quick Service Restaurant Venues
The Company believes there is significant opportunity to expand the Sbarro
concept into traditional quick service restaurant markets. The SBARRO name is
well recognized with consumers and its strong brand identity is able to attract
significant customer traffic. The likely method of penetrating this market in
the near term is through co-branding with other restaurant concepts in
standalone locations. By combining two concepts, lease and overhead expenses are
shared while customer traffic is enhanced, significantly improving the overall
economics of the particular unit. The Company has commenced this co-branding
strategy in 12 Minnesota locations, working with a franchisee to combine Sbarro
and Arby's restaurants. Based on the successful results to date, the Company
plans to expand the program to other locations.
New Concepts
The Company has also sought to develop new restaurant concepts that possess
similarities to the successful Sbarro business model. One such concept is
UMBERTO'S OF NEW HYDE PARK, a casual dining Italian concept that is an extension
of the Sbarro model and is being successfully applied to upscale strip
locations. Umberto's has been developed with a 20% joint venture partner and
offers a more diverse menu of Italian specialties at a moderate price point and
high quality level with both dine-in and counter/takeout service. The Company
currently operates five Umberto's units in Long Island, New York that have
generated attractive economics that are comparable to its core Sbarro units.
RESTAURANT INDUSTRY(1)
The restaurant industry is one of the largest sectors of the economy, with
estimated industry sales of approximately $336 billion in 1998, accounting for
more than 4% of the nation's gross domestic product. Between 1990 and 1997,
restaurant industry sales grew an average of 4.5% annually. The National
Restaurant Association projects continued industry growth, as the increasing
percentage of dual-earner households and higher disposable incomes combined with
decreasing leisure time, continue to increase the percentage of meals eaten away
from the home.
- -------------
(1) Source: National Restaurant Association, unless otherwise noted.
3
<PAGE>
QUICK SERVICE RESTAURANT INDUSTRY
The quick service sector of the restaurant industry accounts for over 31% of
total restaurant revenues. Between 1993 and 1997, the number of quick service
units grew at a 5.3% annual rate, while revenues grew at 5.4%. The National
Restaurant Association predicts that sales at quick service restaurants will
reach approximately $106 billion in 1998.
PIZZA RESTAURANT SEGMENT(2)
Approximately 50% of Sbarro's revenues are derived from pizza, and thus many of
the Company's most direct competitors operate within the pizza restaurant
segment. At the end of 1997, there were over 30,000 pizza restaurants in
operation, generating nearly $16 billion in revenues. Pizza restaurant segment
revenues have recently declined, with revenue growth among smaller pizza chains
being more than offset by revenue declines among the largest pizza chains.
According to Euromonitor Market Direction, a market research firm, this has been
partially driven by changing consumer preferences toward better quality pizza
and a wider variety of product offerings.
SUMMARY FINANCIAL RESULTS
The following charts present a summary of the historical revenues and EBITDA of
the Company from 1994 to the latest quarter ended April 19, 1998:
REVENUE EBITDA
($ IN MILLIONS) ($ IN MILLIONS)
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
- ------------------
(1) Source: Euromonitor Market Direction.
(2) Excludes a $16.4 million pre-tax provision for the closing of certain
underperforming units.
(3) Excludes a $3.3 million pre-tax provision for the closing of certain joint
venture units.
4
<PAGE>
SBARRO, INC.
- --------------------------------------------------------------------------------
II. INVESTMENT CONSIDERATIONS
- --------------------------------------------------------------------------------
LEADING QUICK SERVICE OPERATOR IN HIGH CUSTOMER TRAFFIC VENUES
The Company, through its "Sbarro" and "Sbarro The Italian Eatery" brands, is the
dominant brand of Italian quick service restaurant operating in shopping malls,
airports, toll roads and other high customer traffic locations. The Company has
developed a proven and unique business model for operating in these high
customer traffic locations and faces limited competition from other quick
service Italian restaurants in these venues. The Company has developed close
relationships with major mall developers and operators, as well as national food
service companies that franchise restaurants in other high traffic locations,
which gives it preferential access to attractive locations.
STRONG, NATIONALLY RECOGNIZED BRAND NAME
The breadth of Sbarro's operations and the visibility of its units across many
high customer traffic locations have enabled the Company to forge strong brand
name recognition with consumers. The Sbarro concept is unusual among quick
service restaurants, with its varied menu of quality, popularly priced Italian
food served in a cafeteria style format. Its exhibition kitchens, distinctive
logo and clean and bright locations have become recognized symbols of the
Company.
CONSISTENT RECORD OF GROWTH AND PROFITABILITY
Sbarro has a track record of consistent operating performance and a high level
of profitability that is unusual in the restaurant industry. Its strict
operating and cost controls and proven business model have resulted in a
consistent revenue base and a low cost structure. Revenues and EBITDA have
increased from $236.2 million and $53.7 million, respectively, in fiscal 1992 to
$351.5 million and $80.7 million, respectively, for the last twelve months ended
April 19, 1998. This increase represents compound annual growth rates of 7.9%
and 8.1% for revenue and EBITDA, respectively. Its EBITDA margins of 23.0% are
among the highest and most consistent in the restaurant industry.
PROVEN BUSINESS MODEL
In its almost 40 years of operations, Sbarro management has developed and
refined a business model that is unique for high traffic customer venues. The
Company has extensive experience in identifying attractive restaurant locations
and developing these sites. The Company has developed a forecasting approach
that enables it to project, with relative precision, the capital and pre-opening
costs associated with opening new Sbarro restaurants, as well as to determine
whether a prospective location has a high likelihood of success. Since the cost
of food, paper products, payroll and other employee benefits is generally within
a small range as a percentage of restaurant sales from location to location, the
Company's model focuses on projected restaurant revenues and the fixed and
semi-variable costs expected to be incurred. The Company's
5
<PAGE>
forecasting approach also projects a prospective restaurant's revenues based on
such factors as the area's demographics and the retail environment surrounding
the location.
Based on an initial investment of approximately $350,000 for a typical food
court unit and an annual store level contribution of approximately $100,000 per
year, the Company typically realizes a first year cash on cash return of
approximately 29% and a ten year IRR of approximately 26% after periodic capital
improvement expenditures. For a typical in-line/downtown restaurant with an
average investment of approximately $450,000 and an annual store level
contribution of approximately $112,000, the Company realizes a first year cash
on cash return of approximately 25% and a ten year IRR of 21% after periodic
capital improvement expenditures.
SIGNIFICANT GROWTH OPPORTUNITIES
The Company plans to pursue a growth strategy that combines a full schedule of
new unit openings in its traditional high customer traffic venues with selected
openings in traditional quick service restaurant locations (some of which will
be through co-branding), and development of a new casual Italian restaurant
concept under the name Umberto's. The Company expects to increase the number of
Company-owned and franchised units by 63 in 1998 and 90 in 1999. In addition to
continued expansion in shopping malls, the Company plans to focus on other dense
customer venues such as toll roads, airports, sports arenas, hospitals,
convention centers, universities and casinos. With the strength of the Sbarro
brand name, the Company believes that it can also expand into traditional quick
service restaurant venues. Co-branding with other restaurant concepts will be
pursued and the Company's franchising activity will be expanded.
Internationally, the Company will continue to work with major foreign
franchisees to expand into new markets as well as increase penetration in
existing markets.
The Company has recently developed a new casual Italian restaurant concept
called Umberto's of New Hyde Park that offers a broader menu than the core
Sbarro restaurants at a slightly higher quality level and price point. The
Umberto's restaurants are designed for a mixture of sit-down dining, self
service and take-out service. The Company believes a moderately priced,
comfortable Italian restaurant is very appealing to its suburban, middle-class
target customer base. Early results for existing units have generated attractive
economics, and the Company believes that Umberto's has significant growth
potential.
LIMITED COMPETITION FROM OTHER NATIONAL ITALIAN CHAINS
Sbarro is the only national Italian chain focused on high customer traffic
locations. The other national chains, including Pizza Hut and Little Caesars,
have attempted to replicate their stand-alone concept in malls and other
locations but have experienced relatively poor performance and, as a result,
have reduced the scope of their operations in these venues. As a result, the
Company has a significant competitive advantage in opening new units in malls
and other dense customer traffic locations.
6
<PAGE>
SBARRO, INC.
- --------------------------------------------------------------------------------
III. COMPANY OVERVIEW
- --------------------------------------------------------------------------------
COMPANY DESCRIPTION AND HISTORY
The Company was founded by the Sbarro family in 1959 at which time the family
owned and operated several gourmet Italian delicatessens and provided catering
for family and business events. Under the "Sbarro" and "Sbarro The Italian
Eatery" names, the Company developed one of the first quick service concepts
that extended beyond offering one primary specialty item (e.g., pizza or
hamburgers) and also developed an exhibition kitchen where customers could watch
the preparation of many of the Company's fresh food products. The Company's menu
includes pizza, pasta and other hot and cold Italian entrees, salads,
sandwiches, beverages and desserts, including the Company's "signature"
cheesecake prepared in its original kitchen in Brooklyn, New York. With the
development of enclosed shopping centers in the 1970s, the Company opened its
first mall restaurant. Today, Sbarro is the leading brand of Italian quick
service restaurants operating in high customer traffic venues.
As of July 12, 1998, there were a total of 873 Sbarro restaurants in operation,
626 Company-owned and 247 franchised. These restaurants are located in 48 states
throughout the United States and the District of Columbia, as well as Aruba,
Australia, the Bahamas, Belgium, Canada, Chile, Cyprus, France, Guam, Israel,
Japan, Korea, Kuwait, Lebanon, New Zealand, the Philippines, Puerto Rico,
Russia, Saudi Arabia and the United Kingdom. In addition, since 1995, the
Company has created and operated other restaurant concepts for the purpose of
developing growth opportunities in addition to its core Sbarro format.
The Company was incorporated in New York in 1977. Its Common Stock is listed on
the New York Stock Exchange under the symbol "SBA." As of July 17, 1998, the
closing stock price was $26.31 and 20,528,309 shares of its common stock and
1,584,184 options (at a weighted average exercise price of $25.88) were
outstanding.
OPERATIONS
RESTAURANT EXPANSION AND FINANCIAL REVIEW
As illustrated below, the Company has posted a consistent record of growth, as
evidenced by both unit count and systemwide sales. Since its inception, Sbarro
management has focused on profitable growth. The number of Sbarro units has
grown at a compounded annual rate of 7.5% since 1992. Systemwide sales (which
includes sales from franchised units) have grown at a compounded annual rate of
approximately 8.6% during this same period, driven by the increase in new units
and the consistent performance of existing units. Sbarro's revenues and EBITDA
have increased at a compound annual rate of 7.9% and 8.1%, respectively, over
this same period. For the last twelve months ended April 19, 1998, the Company's
EBITDA margin was 23.0%.
7
<PAGE>
UNIT COUNT AND SYSTEMWIDE SALES
REVENUE EBITDA
($ IN MILLIONS) ($ IN MILLIONS)
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
- ------------------------
(1) Excludes a $16.4 million provision for the closing of certain
underperforming units.
(2) Excludes a $3.3 million provision for the closing of certain joint venture
units.
8
<PAGE>
Company-owned units comprised approximately 72% of total systemwide sales for
the last twelve months ended April 19, 1998 with the remaining 28% of systemwide
sales related to franchised units. Revenues from Company-owned units comprised
97.8% of total operating revenues for the last twelve months ended April 19,
1998. The remaining 2.2% of Sbarro's operating revenues were derived from fees
and royalties from franchisees. The standard franchise agreement includes an
initial franchise fee of $35,000 and ongoing royalty fees which are typically 5%
- - 7% of gross revenues.
The following charts represent systemwide sales and total revenues for the last
twelve months ended April 19, 1998:
SYSTEMWIDE SALES COMPOSITION COMPANY REVENUE COMPOSITION(1)
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
[GRAPHIC OMITTED]
CONCEPT AND MENU
Sbarro restaurants offer 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 design using consistent signage and color
schemes shared across virtually all units.
As of July 12, 1998, there were 258 "in-line" Sbarro restaurants and 608 "food
court" Sbarro restaurants. In addition, franchisees operated seven freestanding
Sbarro restaurants. "In-line" restaurants, which are self-contained, usually
occupy approximately 1,500-3,000 square feet, contain the space and furniture to
seat approximately 60-120 people and employ 10-40 persons, including part-time
personnel. "Food court" restaurants are primarily located in areas of shopping
malls and airports designated exclusively for restaurant use and share a common
dining area provided by the facility. These restaurants generally occupy
approximately 500-1,000 square feet and contain only kitchen and service areas.
They frequently have a more limited menu than an "in-line" restaurant and employ
6-30 persons, including part-time personnel.
Sbarro restaurants are generally open seven days a week serving lunch, dinner
and, in a limited number of locations, breakfast, with hours conforming to those
of the major department stores or
- ------------------
(1) Revenues exclude interest income.
9
<PAGE>
other large retailers in the mall or trade area. Typically, mall restaurants are
open to serve customers 10 to 12 hours a day, except on Sunday, when mall hours
may be more limited. For Company-owned restaurants open a full year, average
sales in 1997 were $693,000 for "in-line" restaurants and $493,000 for "food
court" restaurants.
Sbarro restaurants feature a menu of popular Italian food, including pizza with
a variety of toppings, a selection of pasta dishes and other hot and cold
Italian entrees, salads, sandwiches, cheesecake and other desserts. In addition
to soft drinks, some of the larger restaurants serve beer and wine, although
alcoholic beverage sales are not emphasized.
All food products are prepared fresh daily in each restaurant according to
special recipes developed by the Sbarro family. Emphasis is placed on serving
generous portions of quality Italian-style food at value prices. Entree
selections, excluding pizza, generally range in price from $2.99 to $5.29. The
Company believes that pizza, which is sold predominately by the slice, accounts
for approximately one-half of Sbarro restaurant sales.
The Company's "signature" cheesecakes are prepared in its original kitchen
located in Brooklyn, New York. Substantially all of the food ingredients and
related restaurant supplies used by the restaurants are purchased from major
manufacturers and suppliers, who ship these items to a national independent food
distributor who warehouses and ships to the Sbarro restaurants as needed.
Breads, pastries, produce, fresh dairy and certain meat products are purchased
locally for each restaurant. The Company requires that the manufacturers and
suppliers adhere to established product specifications for all food products
sold to its restaurants. The Company believes that there are other companies who
would be able to service the Company's distribution needs and that satisfactory
alternative sources of supply are generally available for all items regularly
used in Sbarro restaurants.
RESTAURANT MANAGEMENT
Each Sbarro restaurant is managed by one General Manager and one or more
Co-Managers or Assistant Managers. Managers are required to participate in
Company training sessions in restaurant management and operations prior to the
assumption of their duties. In addition, each restaurant Manager is required to
comply with an extensive operations manual containing procedures for assuring
uniformity of operations and consistent product quality. The Company has a
Restaurant Management Bonus Program that provides the management teams of
Company-owned restaurants with the opportunity to receive a percentage of
restaurant sales as a bonus based on certain performance-related criteria.
The Company also employs approximately 75 Area Directors, each of whom is
typically responsible for the operations of 7 - 15 Company-owned restaurants in
a given area. Before each new restaurant opening, the Company assigns an Area
Director to coordinate opening procedures. Each Area Director reports to one of
the nine Regional Directors who recruit and supervise the managerial staff of
all Company-owned restaurants and report to one of the five Regional Vice
Presidents. The Regional Vice Presidents coordinate the activities of the
Regional Directors assigned to their areas of responsibility and report to one
of two Corporate Vice Presidents. The Corporate Vice Presidents have total
operating and financial responsibility for their geographic areas.
10
<PAGE>
REAL ESTATE
Sbarro restaurants are very attractive mall tenants due to the Company's leading
position within high customer traffic venues and the favorable economics that
real estate owners realize as a result of the Company's high sales per square
foot. Sbarro has developed and maintains very strong relationships with the
leading real estate developers and operators. Members of the Company's executive
management maintain these relationships and are responsible for the key aspects
of Sbarro's real estate activity including the identification of sites for new
units and the negotiation of lease terms.
FRANCHISE DEVELOPMENT
While the Company continues to emphasize expansion through Company-owned units,
it plans to grow franchise operations through the development of new franchisees
and by existing franchisees capable of multi-unit operations. The Company relies
principally upon its reputation and the strength of its existing restaurants to
attract new franchisees.
As of July 12, 1998, the Company had 247 franchised Sbarro restaurants operated
by 79 franchisees in 31 states as well as franchisees operating international
locations in the following countries: Aruba, Australia, the Bahamas, Belgium,
Canada, Chile, Cyprus, France, Guam, Israel, Japan, Korea, Kuwait, Lebanon, New
Zealand, the Philippines, Puerto Rico, Russia, Saudi Arabia and the United
Kingdom. The Company is presently considering additional franchise opportunities
in other countries.
In certain instances, franchise locations have been established through
territorial agreements under which the Company granted, for specified time
periods, exclusive rights to enter into franchise agreements for restaurant
units in certain geographic areas, primarily in foreign countries, or for
specified non-mall locations (such as for certain toll roads or airports) in the
United States or foreign countries.
The Company's basic franchise agreement generally requires payment of an initial
license fee of $35,000 and requires continuing payments of royalty fees of 5% -
7% of gross revenues. Franchise agreements entered into prior to 1988 generally
have an initial term of 15 years with the franchisee having a renewal option,
provided that the agreement has not been previously terminated by either party
for specified reasons. Since 1988, the Company has required the franchise
agreements to be coterminous with the underlying lease, but generally not less
than ten or more than twenty years. Since 1990, the Company has granted a
renewal option in the Franchise Agreement subject to certain conditions,
including a remodel or image enhancement requirement. Franchise agreements
granted under territorial agreements contain negotiated terms and conditions
other than those contained in the Company's basic franchise agreement. The
agreements also provide the Company with the right to terminate a franchisee for
a variety of reasons, including insolvency or bankruptcy, failure to operate its
restaurant according to standards, understatement of gross receipts, failure to
pay fees, or material misrepresentation on an application for a franchise.
SEASONALITY
The Company's business is subject to seasonal fluctuations, the effects of
weather and economic conditions. Earnings have been highest in its fourth fiscal
quarter due primarily to increased
11
<PAGE>
customer traffic during the holiday shopping season. The fourth fiscal quarter
typically accounts for approximately 40% of annual net income. The length of the
holiday shopping period between Thanksgiving and Christmas and the number of
weeks in the fourth quarter also impacts the fourth quarter earnings
relationship from year to year.
NEW RESTAURANT CONCEPTS
During 1995, the Company began developing three new restaurant concepts. The
first is a casual dining concept under the name Umberto's of New Hyde Park,
featuring pizza and other Italian-style foods. The Company has an 80% interest
in this restaurant business. Umberto's currently operates five restaurants on
Long Island, New York, with three additional units planned for 1998 openings and
five food court units in regional shopping malls in Chicago, Las Vegas, White
Plains and Long Island, New York. The Company is also developing with joint
venture partners a family-style steakhouse concept and an upscale, table-service
Italian restaurant, and is analyzing the market potential of a new concept that
would offer healthy, South-of-the-Border cuisine.
PROPERTIES
All Sbarro restaurants are operated in leased premises. As of December 28, 1997,
the Company leased 641 restaurants, of which 34 were subleased to franchisees
under terms which cover all obligations of the Company under the lease. The
remaining franchisees directly lease their restaurant space. Most of the
Company's restaurant leases provide for the payment of base rents plus real
estate taxes, utilities, insurance, common area charges and certain other
expenses, as well as contingent rents generally ranging from 8% to 10% of net
restaurant sales in excess of stipulated amounts. Leases to which the Company
was a party at December 28, 1997 have initial terms expiring as follows:
Years Initial Lease Number of Company- Number of Franchised
Terms Expire Owned Restaurants Restaurants
------------ ----------------- -----------
1998 26 4
1999 - 2003 336 25
2004 - 2008 239 5
2009 - 2012 6 0
Since May 1986, the Company's headquarters have been located in a two-story
20,000 square foot office building located in Commack, New York, which is leased
for a period of fifteen years at a current annual base rent of $337,000. The
Company pays real estate taxes, utilities, insurance and certain other expenses
for the facility.
In March 1994, the Company purchased a 100,000 square foot office building in
Melville, New York, for $5,350,000 and recently completed the renovation of the
building at an estimated additional cost of approximately $15 million. The
Company intends to occupy approximately 25% of the building in late-1998 as its
corporate headquarters and lease the remainder of the building. The Company has
entered into leases with unaffiliated third parties to occupy approximately 50%
of the total space in the facility.
12
<PAGE>
EMPLOYEES
WORKFORCE DESCRIPTION
As of December 28, 1997, the Company (exclusive of joint ventures to which the
Company is a party) employed approximately 7,500 persons, of whom approximately
2,700 were full-time field and restaurant personnel, 4,600 were part-time
restaurant personnel and 200 were headquarters office personnel. None of the
Company's employees are covered by collective bargaining agreements. The Company
believes its employee relations are satisfactory.
MANAGEMENT BIOGRAPHIES
MARIO SBARRO, 56, has been an officer, a director and a principal shareholder of
the Company since its organization in 1977, serving as Chairman of the Board of
Directors and Chief Executive Officer for more than the past five years. Mr.
Sbarro re-assumed the position of President of the Company in May 1996 (a
position he held for more than five years prior to December 1993). Mr. Sbarro is
Chairman of the Executive Committee of the Board.
ANTHONY SBARRO, 52, has been an officer, a director and a principal shareholder
of the Company since its organization in 1977, serving as Vice Chairman of the
Board of Directors since May 1996 and as President and Chief Operating Officer
from December 1993 through May 1996. For more than five years prior to December
1993, Mr. Sbarro was an Executive Vice President of the Company. He has also
served as Treasurer of the Company for more than the past five years. Mr. Sbarro
is a member of the Executive Committee of the Board.
JOSEPH SBARRO, 58, has been an officer, a director and a principal shareholder
of the Company since its organization in 1977, serving as Senior Executive Vice
President since December 1993. For more than five years prior thereto, Mr.
Sbarro was an Executive Vice President of the Company. He has also served as
Secretary of the Company for more than the past five years. Mr. Sbarro is a
member of the Executive Committee of the Board.
13
<PAGE>
CARMELA SBARRO, 76, has been Vice President of the Company since March 1985.
Mrs. Sbarro devotes a substantial portion of her time to recipe and product
development. Mrs. Sbarro was a founder of the Company, together with her late
husband, Gennaro Sbarro. The Board of Directors elected Mrs. Sbarro as a
director of the Company in January 1998. Mrs. Sbarro previously served as a
director of the Company from March 1985 until December 1988, when she was
elected Director Emeritus of the Company.
ANTHONY J. MISSANO, 39, was elected Corporate Vice President - Operations in
August 1996, prior to which he served as Vice President - Operations (West) from
February 1995, and as a Zone Vice President from June 1992 until February 1995.
Mr. Missano served as a consultant to the Company from June 1992 until he became
a full time employee at the end of fiscal 1993. From November 1988 until he
joined the Company, Mr. Missano served as President of Anaton Corp., a
franchisee of the Company.
GENARRO A. SBARRO, 31, was elected Corporate Vice President - Franchising in
August 1996, prior to which he served as Vice President - Franchising since
February 1995. For more than five years prior thereto, Mr. Sbarro served in
various operational positions for the Company.
GENARRO J. SBARRO, 36, was elected Corporate Vice President - Operations in
August 1996, prior to which he served as Vice President - Operations (East)
since February 1995. For more than five years prior thereto, Mr. Sbarro served
in various capacities for the Company.
JOHN BERNABEO, 41, joined the Company in August 1992 and served in various
capacities prior to his election as Vice President - Architecture and
Engineering in May 1997.
GEORGE W. HERZ II, 43, joined the Company in November 1995 and was elected Vice
President and General Counsel in February 1996. Prior to joining the Company,
Mr. Herz served as General Counsel (from 1993) and Corporate Counsel (from 1982
until 1992) of Minuteman Press International, Inc. (a franchiser of printing
centers).
ROBERT S. KOEBELE, 54, has served as Vice President - Finance and Chief
Financial Officer of the Company for more than the past five years. Mr. Koebele
has been a certified public accountant in New York for more than the past
twenty-five years.
CARMELA N. MERENDINO, 33, was elected Vice President - Administration in October
1988. Ms. Merendino joined the Company in March 1985 and performed a variety of
corporate administrative functions for the Company prior to her election as Vice
President - Administration.
14
<PAGE>
OWNERSHIP
The following table presents the ownership of the Company as of July 17, 1998:
-----------------------------------------------------------------------
EXISTING FULLY DILUTED SHARE OWNERSHIP
(AMOUNTS IN MILLIONS) SHARES % TOTAL
------------ --------
Sbarro Family 7.08 32.0%
Public Shareholders 13.45 60.8
Mgmt./Director Options 1.58 7.2
Total 22.11 100.0%
------------------------------- ========== ========
15
<PAGE>
SBARRO, INC.
- --------------------------------------------------------------------------------
IV. BUSINESS STRATEGY
- --------------------------------------------------------------------------------
OPERATIONAL STRATEGY
RESTAURANT OPERATIONS
The Company's product development efforts have concentrated on creating food
products which satisfy the demands of consumers in terms of flavor, price and
nutrition, while at the same time establishing price points and a restaurant
operations model which afford the Company high gross margins. The Company's
operations model provides detailed specifications for the creation of all of its
menu items, thereby ensuring that consistent ingredients and production
processes are utilized across its restaurant system. The Company believes that
the consistent design and layout of its restaurants, including similar design,
signage and color schemes for virtually all restaurants, has helped it to
establish a strong brand identity for customers.
Operational processes, including food preparation, customer service and other
major functions, are designed to optimize productivity and are implemented and
updated across all restaurants. Training of restaurant managers and other staff
is emphasized, ensuring that all units consistently operate using the "Sbarro
formula." The Company has long-standing relationships with many food
manufacturers and suppliers who provide the Company with food ingredients, paper
products and other restaurant supplies to all Sbarro units. One national food
distributor warehouses and delivers nearly all key raw ingredients to Sbarro
units, minimizing the Company's distribution costs and also helping to ensure a
high level of service and product consistency. Sbarro's business model is
adaptable to a wide range of restaurant sizes (i.e., from 600 to 5000 square
feet), while still maintaining high operating margins.
HIGH CUSTOMER TRAFFIC VENUES
A key success factor for Sbarro has been its traditional focus on high customer
traffic venues such as shopping malls, which offer several advantages. The high
customer density and the impulse nature of the customer purchase allow the
Company to minimize advertising and promotional expenses that would otherwise be
required to attract customers to its restaurants. These factors also result in
customers being less price sensitive than customers that frequent "destination"
restaurants. Sbarro is the dominant quick service Italian restaurant within high
traffic customer venues, and has a long track record of satisfying demand in
terms of quality and value. As food becomes an increasingly important part of
the merchandising of high customer traffic venues, especially malls, Sbarro's
reputation and track record make it a very desirable component to a venue's food
offering. This, combined with the strong relationships the Company has with mall
developers and operators, gives the Company preferential access to most new mall
sites that become available either through new construction or refurbishment of
existing shopping centers.
OPERATING COSTS
The Company has always maintained a strong focus on its cost structure and
believes that this is a primary reason for the relatively high operating margins
it generates. The Company believes it purchases its food ingredients and other
restaurant supplies at very attractive prices due to its
16
<PAGE>
large and consistent volumes. By using a single distributor for maintaining and
shipping restaurant supplies for all its restaurants, the Company maintains
close control over the distribution function and also obtains very favorable
pricing for these distribution services. Sbarro also enters into joint marketing
arrangements in certain situations, most notably with soft drink manufacturers,
aimed at increasing sales and decreasing expenses. The Company has also tightly
controlled its general and administrative expenses, which should continue to
provide operating leverage as the Company expands its business.
GROWTH STRATEGY - CORE BUSINESS
HIGH CUSTOMER TRAFFIC VENUES
Over the past decade, the Company's growth in new shopping mall locations has
been primarily derived from opportunities that have arisen as a result of either
the complete renovation of a shopping mall or the re-merchandising of its food
operations, and to a lesser extent the development of new shopping malls.
Because of the large number of existing malls and their normal cycle of
refurbishment, there will continue to be opportunities for the Company to expand
into new sites or relocate within existing units. As the food service operations
of malls have become increasingly important drivers of customer traffic, mall
developers and operators have increased their efforts to attract proven
restaurant concepts. In the early 1990's, the Company began to focus on other
high customer traffic venues outside of its traditional mall base. These
locations, such as airport and toll roads, have similar characteristics to
shopping malls and thus are very well suited to the Company's business model.
More recently, the Company has pursued new high customer traffic venues
including sports arenas, hospitals, convention centers, universities and
casinos. Operators of these facilities are increasingly seeking to outsource
their food service operations to recognized branded concepts in an effort to
simplify their own operations and improve profitability. The Company believes
there is substantial opportunity to expand in these types of locations.
FRANCHISING
The Company has traditionally sought to operate its own restaurants whenever
possible, franchising its brand only in situations where it is either required
or is a practical necessity, such as international locations and concessions
(airports and toll roads). The Company operated in this manner because it
believed it could best control product quality and customer experience by
operating its own units, and it further avoided the problems associated with
granting exclusive territories as the Company expanded its business. To mitigate
the issues associated with franchising, the Company has designed a thorough
qualification and training process for franchisees and has developed a franchise
agreement that prescribes strict operating standards and limits exclusive
territories. With these changes, the Company believes it can significantly
increase its franchising activity while maintaining the high quality and service
standards that its customers expect.
The Company works with major franchisees worldwide to promote the Sbarro concept
and to date, has franchised restaurants in Aruba, Australia, the Bahamas,
Belgium, Canada, Chile, Cyprus, France, Guam, Israel, Japan, Korea, Kuwait,
Lebanon, New Zealand, the Philippines, Puerto Rico, Russia, Saudi Arabia and the
United Kingdom. The Company continues to expand
17
<PAGE>
existing franchise relationships and forge new relationships with attractive
foreign business partners.
TRADITIONAL QUICK SERVICE RESTAURANT VENUES
The Company believes there is significant opportunity to expand the Sbarro
concept into traditional quick service restaurant markets. The SBARRO name is
well recognized with consumers and its strong brand identity is able to attract
significant customer traffic. The likely method of penetrating this market in
the near term is through co-branding with other restaurant concepts in
standalone locations. By combining two concepts, lease and overhead expenses are
shared while customer traffic is enhanced, significantly improving the overall
economics of the particular unit. The Company has commenced this co-branding
strategy in 12 Minnesota locations, working with a franchisee to combine Sbarro
and Arby's restaurants. Based on the successful results to date, the Company
plans to expand the program to other locations.
PROJECTED UNIT EXPANSION
The following table shows the projected unit openings of both Company-owned and
franchised Sbarro restaurants through 2002:
-------------------------------------------------------------------------------
PROJECTED SBARRO RESTAURANT OPENINGS
FISCAL YEAR
-----------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
COMPANY-OWNED
Beginning Units 623 651 691 736 781
Openings (net) 28 40 45 45 45
---- ---- ---- ---- ----
Ending Units 651 691 736 781 826
==== ==== ==== ==== ====
FRANCHISED
Beginning Units 239 274 324 384 444
Openings (net) 35 50 60 60 60
---- ---- ---- ---- ----
Ending Units 274 324 384 444 504
==== ==== ==== ==== ====
TOTAL
Beginning Units 862 925 1,015 1,120 1,225
Openings (net) 63 90 105 105 105
---- ---- ---- ---- ----
Ending Units 925 1,015 1,120 1,225 1,330
==== ==== ==== ==== ====
18
<PAGE>
GROWTH STRATEGY - NEW RESTAURANT CONCEPTS
UMBERTO'S OF NEW HYDE PARK
The Company has also sought to develop new restaurant concepts that possess
similarities to the successful Sbarro business model. One such concept is
UMBERTO'S OF NEW HYDE PARK, a casual dining Italian concept that is an extension
of the Sbarro model and is being successfully applied to upscale strip
locations. Umberto's has been developed with a 20% joint venture partner and
offers a more diverse menu of Italian specialties at a moderate price point and
high quality level with both dine-in and counter/takeout service.
Currently, there are five Umberto's units in operation in Long Island, New York.
The four existing Umberto's restaurants with at least several months of
operational history are expected to achieve average 1998 revenues and EBITDA of
$1.3 million and $288,000, respectively, which the Company believes it can
improve as it continues to refine its business model. Based on its current
business model, the Company projects that a typical Umberto's unit would
generate $1.2 million in annual revenues and $308,000 in annual EBITDA before
the allocation of corporate overhead expenses (resulting in an EBITDA margin of
25.7%). The Company believes that the main competitors to Umberto's are small,
individually owned Italian restaurants, and that its target suburban, middle
class customer base does not have a wide selection of restaurants to choose from
that offer a similar menu of high quality, reasonably priced Italian dishes in
comfortable surroundings. The Company believes the high percentage of counter
service is also an indication of the potential for a quality, ready-to-eat,
at-home Italian meal for consumers.
The following table shows the projected revenues and profitability of the
Company's business model for new Umberto's units as well as for the existing
units with several months of operational history:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PROJECTED 1998 PROFIT AND LOSS STATEMENTS(1)
UMBERTO'S UNITS
(DOLLARS IN THOUSANDS)
BUSINESS
MODEL UNIT 1 UNIT 2 UNIT 3 UNIT 4
-------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Opening Date NA 4/96 12/97 3/98 4/98
Revenues $1,200 $1,222 $1,274 $1,764 $936
EBITDA (before Startup Costs) $308 $311 $273 $384 $185
Operating Profit (before Startup
Costs) $268 $270 $252 $355 $162
Startup Costs $50 $0 $80 $138 $105
---- ---- ---- ---- ----
Operating Profit (after Startup Costs) $218 $270 $172 $217 $57
==== ==== ==== ==== ====
Margins (before Startup Costs)
EBITDA 25.7% 25.5% 21.4% 21.8% 19.8%
Operating 22.3% 22.1% 19.8% 20.1% 17.3%
</TABLE>
- -----------------
(1) Excludes allocation of general and administrative expenses.
19
<PAGE>
OTHER RESTAURANT CONCEPTS
The Company is also developing other restaurant concepts that are in the initial
stages of development. It has entered into two joint venture agreements to
create a family style steakhouse concept and an upscale Italian restaurant
concept. It is also analyzing the market opportunity for a concept that would
offer healthy, South-of-the-Border cuisine. These additional restaurant concepts
share the Sbarro strategy of offering high value, high quality food in clean and
comfortable surroundings.
20
<PAGE>
SBARRO, INC.
- --------------------------------------------------------------------------------
V. INDUSTRY AND COMPETITIVE OVERVIEW
- --------------------------------------------------------------------------------
RESTAURANT INDUSTRY(6)
The restaurant industry is one of the largest sectors of the economy, accounting
for more than 4% of the nation's gross domestic product. Because of consumers'
increasing propensity to eat away from home, restaurant industry sales growth in
the 1980s was rapid, approximating 8% on a nominal basis and 3% on a real basis.
Factors contributing to the growth included a proliferation of two-wage earner
families, more households which sought increasing convenience as lifestyles
became more active, and attitudinal changes toward eating away from home. These
trends have continued into the 1990's, although the industry's average annual
rate of growth has slowed to a 4.5% nominal and 2.1% real rate during this
decade. The National Restaurant Association forecasts that total industry sales
will reach approximately $336 billion in 1998, constituting a 4.7% nominal and
1.8% real growth rate over 1997 figures. There are approximately 799,000
restaurant outlets nationwide (up from 155,000 in 1972) and the industry employs
approximately 9.5 million people.
The entire restaurant industry is expected to continue to benefit from growth in
disposable incomes and the attractive value proposition that restaurants offer
to consumers. Households with incomes above $40,000, although they only make up
1/3 of all households, account for 58% of total spending on food away from home.
As the number of higher-income households increases, restaurant demand is
expected to continue to expand. In addition, according to a 1997 consumer survey
conducted by the National Restaurant Association, 65% of fast-food customers and
86% of sit-down restaurant customers were positively surprised by the price they
paid. This has provided restaurant operators with additional pricing flexibility
without significantly affecting volume. At the same time, wholesale food prices
have largely remained stable, allowing operators to realize higher gross
margins.
QUICK SERVICE RESTAURANT INDUSTRY(7)
Since quick service restaurants were introduced in the mid-1950's, they have
grown to account for over 31% of total restaurant industry revenues. Although
the traditional hamburger concepts still account for 63% of the quick service
restaurant sector, it has expanded to include pizza, chicken, Chinese food,
Mexican food, ice cream/yogurt, donuts and various types of sandwiches. During
the period 1993 - 1997, annual unit and revenue growth in the quick service
restaurant industry totaled 5.3% and 5.4%, respectively. The National Restaurant
Association predicts that sales at quick service restaurants will reach
approximately $106 billion in 1998, a 5.1% increase relative to 1997.
- -------------------
(1) Source: National Restaurant Association.
(2) Source: Euromonitor Market Direction, unless otherwise noted.
21
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The following charts show the expansion in units and revenues of the quick
service restaurant sector from 1993-1997:
UNITS(1) REVENUES(1)
(IN THOUSANDS) (IN $ BILLIONS)
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Growth in the quick service sector is expected to continue, although at a slower
rate than historical levels. The National Restaurant Association projects growth
rates averaging approximately 4% over the 1998-2002 period. Customers have
developed more sophisticated tastes and are increasingly demanding higher
quality food and better value. Restaurant chains that are positioned to deliver
variety and value should benefit from these trends.
PIZZA RESTAURANT SEGMENT (1)
In 1997, the pizza segment of the quick service restaurant sector experienced a
decline in the number of units as well as overall revenues for the first time in
decades. Pizza outlets constituted 21.5% of quick service outlets in 1993 but
fell in share to 19.3% in 1997. Much of the decline was driven by the largest
chains reorganizing their operations and closing underperforming units. For
example, Pizza Hut (a subsidiary of Tricon Global Restaurants), the largest
pizza restaurant company in the U.S. in terms of sales and number of units,
closed 212 restaurants (approximately 2.4% of its outstanding units) in 1997.
Domino's, the number two pizza chain, halted its unit growth.
In contrast, pizza restaurants other than the largest quick service chains
mentioned above have continued to grow their businesses. Part of the reason for
the success of these concepts is their ability to meet changing consumer
preferences toward better quality pizza and a wider variety of product
offerings. Sbarro, largely because of its diverse menu and also its focus on
high customer traffic venues, has also continued its expansion and increased its
market share during the past several years. Evolving customer demand is also a
key reason for the Company's development of the Umberto's concept.
- ----------------------------
(1) Source: Euromonitor Market Direction.
22
<PAGE>
The following charts show the number of units and revenues of the pizza segment
from 1993-1997:
UNITS(1) REVENUES(1)
(IN THOUSANDS) (IN $ BILLIONS)
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
The following tables show the market shares of the top pizza chains between
1993-1997, both in terms of units and revenues:
<TABLE>
<CAPTION>
SHARE OF UNITS(1)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pizza Hut 30.3% 29.7% 29.1% 29.0% 28.7%
Domino's Pizza 15.6 14.6 13.9 14.0 14.6
Little Caesar's Pizza 16.2 15.9 15.5 13.0 13.2
Papa John's Pizza 1.4 2.2 2.9 3.8 4.7
Sbarro 2.4 2.5 2.4 2.5 2.7
Others 34.1 35.2 36.3 37.8 36.1
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
SHARE OF REVENUE(1)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pizza Hut 33.7% 34.4% 33.4% 30.6% 29.0%
Domino's Pizza 12.8 12.8 13.2 14.3 14.2
Little Caesar's Pizza 14.7 11.1 9.8 8.8 9.2
Papa John's Pizza 1.1 2.0 2.9 3.8 5.5
Sbarro 2.4 2.5 2.5 2.5 2.7
Others 35.3 37.2 38.2 39.9 39.6
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
- ----------------------
(1) Source: Euromonitor Market Direction.
23
<PAGE>
SBARRO, INC.
- --------------------------------------------------------------------------------
VI. FINANCIAL OVERVIEW
- --------------------------------------------------------------------------------
HISTORICAL FINANCIAL PERFORMANCE
The following tables show summary financial statements for the Company for the
fiscal years 1994-1997, as well as the last twelve months ending April 19, 1998:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) FISCAL YEAR LTM
------------------------------------------ ---------
1994 1995(2) 1996 1997(3) 4/19/98(4)
---- ------- ---- ------- ----------
<S> <C> <C> <C> <C> <C>
Total Systemwide Sales (1) $384.0 $416.3 $437.6 $463.1 $476.6
====== ====== ====== ====== ======
Revenues $294.0 $316.1 $325.7 $345.1 $351.5
Cost of Food and Paper $61.9 $67.4 $68.7 $69.5 $71.2
------ ------- ------ ------- ------
Gross Profit $232.1 $248.7 $257.0 $275.6 $280.3
GROSS MARGIN % 79.0% 78.7% 78.9% 79.9% 79.7%
Other Cash Operating Expenses $159.1 $177.4 $177.6 $194.6 $199.6
------ ------- ------ ------- ------
EBITDA $73.0 $71.3 $79.4 $81.0 $80.7
EBITDA MARGIN % 24.8% 22.6% 24.4% 23.5% 23.0%
Depreciation & Amortization $21.7 $23.6 $22.9 $23.9 $23.6
------ ------- ------ ------- ------
Operating Profit $51.3 $47.6 $56.5 $57.1 $57.1
OPERATING MARGIN % 17.5% 15.1% 17.4% 16.6% 16.2%
Interest Income $1.9 $3.1 $3.8 $4.4 $4.5
------ ------- ------ ------- ------
Income Before Taxes $53.3 $50.8 $60.3 $61.5 $61.6
Taxes $20.2 $19.4 $22.9 $23.4 $23.4
------ ------- ------ ------- ------
Net Income $33.0 $31.4 $37.4 $38.1 $38.2
====== ====== ====== ====== ======
Cash Dividends Paid $12.5 $14.8 $17.9 $21.2 $16.6(5)
OTHER DATA:
Capital Expenditures $32.1 $17.5 $25.9 $28.6 $28.0
Comparable Store Sales Growth 3.1% 0.5% 0.0% (0.4%) 0.1%
BALANCE SHEET DATA (END OF PERIOD):
Cash & Marketable Securities $49.9 $101.0 $112.3 $127.3 $116.7
Gross Property & Equipment $235.1 $235.3 $260.3 $286.4 $295.8
Total Assets $232.1 $242.7 $258.7 $278.6 $271.4
Total Debt $0.0 $0.0 $0.0 $0.0 $0.0
Shareholders' Equity $179.6 $185.7 $205.2 $220.4 $229.6
</TABLE>
--------------------
(1) Represents combined sales of Company-owned and franchised locations.
(2) Excludes a $16.4 million provision ($10.2 million after tax) for the
closing of certain under-performing restaurants that did not meet the
performance criteria set by the Company. Including such charge, net income
was $21.3 million.
(3) Excludes a $3.3 million provision ($2.0 million after tax) for the closing
of certain joint venture units. Including such charge, net income was
$36.1 million.
(4) Net income excludes effect of change in accounting treatment for
pre-opening costs.
(5) The Company discontinued its quarterly dividend in January 1998.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS(1)
1997 Compared to 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 during 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 year and entire prior fiscal year.
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 the
Company. In addition, four franchise units were purchased by the Company.
Comparable sales at franchise locations did not change significantly in fiscal
1997 from fiscal 1996.
Interest income increased to $4.4 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 have risen since the middle of the fourth quarter of fiscal
1997 and currently remain 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 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
revenues and $14.9 million in 1996 or 4.5% of revenues. This increase was due to
hiring additional personnel in anticipation of the Company's development plans
and increases in executive compensation and legal fees.
- ---------------------------------------
(1) Source: Company SEC Filings.
25
<PAGE>
In 1997, a provision of $3.3 million before tax ($2.0 million or $.10 after tax)
relating to the Company's investment in one of its joint ventures was
established for the closing of certain joint venture units.
The effective income tax rate was 38.0% for 1997 and 1996.
1996 Compared to 1995
Restaurant sales from Company-owned units increased 3.0% to $319.3 million in
1996 from $310.1 million in 1995. The increase resulted from the higher
contribution to sales in 1996 than in 1995 from units opened during 1995
together with the contribution to sales from units opened during 1996, offset,
in part, by the loss of sales from underperforming units closed at the end of
1995. Another factor affecting sales was the selective menu price increases of
approximately 0.5% and 1% in mid April 1996 and mid July 1996. Comparable unit
sales remained relatively unchanged at $292.1 million in 1996 and $292.6 million
in 1995. Comparable restaurant sales are made up of sales at locations that were
open during the entire current year and entire prior fiscal year.
Franchise related income increased 7.3% to $6.4 million in 1996 from $5.9
million in 1995. This increase resulted from higher royalties due principally to
a larger number of franchise units in operation in the current year than in
1995, offset somewhat by lower initial franchise licensing fees due to less unit
openings. Comparable sales at franchise locations did not change significantly.
Interest income increased to $3.8 million in 1996 from $3.1 million in 1995.
This increase was primarily due to larger amounts of cash invested, offset
somewhat by slightly lower yields on cash equivalents and marketable securities
for the fiscal year.
Cost of food and paper products decreased as a percentage of restaurant sales to
21.5% in 1996 from 21.7% in 1995. This improvement resulted principally from the
effects of the closing of underperforming units in late 1995, which had higher
food cost relationships than more typical Company locations, lower prices of
various paper products and food items and, to a limited extent, the selective
menu price increases, offset by higher cheese prices during the second and third
quarters of 1996, which increased food costs by approximately $1.8 million.
Restaurant operating expenses - payroll and other employee benefits decreased to
24.5% of restaurant sales in 1996 from 25.3% of restaurant sales in 1995.
Restaurant operating expenses - occupancy and other expenses decreased to 26.8%
of restaurant sales in 1996 from 27.2% of restaurant sales in 1995. These
improvements were principally due to the Company's program of closing
underperforming units which had higher payroll and other restaurant cost
relationships, improved supervision and controls over costs and, to a limited
extent, the impact of menu price increases.
Depreciation and amortization expenses decreased to $22.9 million in 1996 from
$23.6 million in 1995. This decrease was principally due to the closing of
underperforming units in late 1995, offset somewhat from new unit openings in
1996.
General and administrative expenses were $14.9 million in 1996 or 4.5% of
revenues and $16.1 million in 1995 or 5.0% of revenues. The decrease in dollars
was principally due to improved controls in supervising and administering
restaurants. The decrease in this category of expenses as a percentage of
revenues was, in addition to the dollar decrease, favorably impacted by the
spreading of non-variable costs over a larger revenue base.
26
<PAGE>
The effective income tax rate was 38.0% for 1996 and 1995.
1995 Compared to 1994
Restaurant sales from Company-own units increased by $21.3 million of 7.4% to
$310.1 million in 1995 from $288.8 million in 1994. The increase resulted
primarily from the higher number of units in operation during 1995, in addition
to a 0.5% increase in comparable restaurant sales to $273.9 million from $272.5
million in 1994. In March 1995, the Company selectively increased menu prices
which did not materially affect 1995 sales. Comparable unit sales are made up of
sales at locations that were open during the entire current and prior fiscal
year.
Franchise related income increased 13.5% to $5.9 million in 1995 from $5.2
million in 1994. This increase resulted from higher royalties due to a larger
number of franchise units in operation in the current year than in 1994 on
relatively stable comparable unit sales, as well as an increase in the number of
new franchise units resulting in higher initial franchise fees.
Interest income increased to $3.1 million in 1995 from $1.9 million in 1994.
This increase was primarily due to larger amounts of cash invested and higher
investment yields on invested cash and marketable securities for the fiscal
year.
Cost of food and paper products increased as a percentage of restaurant sales to
21.7% in 1995 from 21.4% in 1994. This increase was primarily due to higher
prices of cheese and paper products in 1995.
Restaurant operating expenses - payroll and other employee benefits increased to
25.3% of restaurant sales in 1995 from 24.5% of restaurant sales in 1994. This
percentage increase was attributable to the higher costs of providing benefits
to employees and a slower growth in comparable unit sales in 1995. Restaurant
operating expenses - occupancy and other expenses increased to 27.2% of
restaurant sales in 1995 from 26.4% of restaurant sales in 1994. This percentage
increase was attributable to higher occupancy related charges and a slower
growth in comparable unit sales in 1995.
Depreciation and amortization increased to $23.6 million in 1995 from $21.7
million in 1994. The increase was the result of the number of additional
Company-owned units in operation during 1995 over the number of units in
operation during 1994.
General and administrative expenses were $16.1 million in 1995 or 5.0% of
revenues and $13.3 million in 1994 or 4.5% of revenues. This increase was
primarily due to increased costs associated with supervising and administering
the additional restaurants in operation and adding management level personnel.
27
<PAGE>
In 1995, a provision of $16.4 million before tax ($10.2 million or $0.50 per
share after tax) was established for the closing of approximately 40
underperforming restaurants. These units produced sales of approximately $8.0
million in 1995 and pretax losses of approximately $3.2 million ($2.0 million or
$0.10 per share after tax).
The effective income tax rate was 38.0% for 1995 and 1994.
28
<PAGE>
PROJECTED FINANCIAL PERFORMANCE
The following tables show summary projected financial performance for Sbarro on
a consolidated basis as well as separate projections for the Umberto's and
Sbarro core business operations. Note that the other restaurant concepts
currently under development are not included in this analysis.
<TABLE>
<CAPTION>
SBARRO, INC.
CONSOLIDATED FINANCIAL PROJECTIONS(1)
-------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FISCAL YEAR
---------------------------------------------------------
1998E 1999E 2000E 2001E 2002E
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total Systemwide Sales (2) $501.0 $568.7 $668.5 $795.6 $947.3
====== ====== ======= ====== ======
Revenues $365.8 $405.7 $460.4 $525.5 $600.0
EBITDA $85.2 $94.4 $106.9 $121.7 $138.6
EBITDA MARGIN % 23.3% 23.3% 23.2% 23.2% 23.1%
Depreciation & Amortization $27.1 $28.3 $30.4 $32.4 $33.7
------ ------ ------ ------ ------
Operating Profit $58.2 $66.1 $76.6 $89.3 $104.9
------ ------ ------ ------ ------
OPERATING MARGIN % 15.9% 16.3% 16.6% 17.0% 17.5%
Capital Expenditures $29.1 $28.4 $32.7 $35.6 $38.4
STORE DATA:
Company-Owned
Beginning Units 625 659 714 779 849
Openings (net) 34 55 65 70 75
----- ----- ----- ----- -----
Ending Units 659 714 779 849 924
===== ===== ===== ===== =====
Franchised
Beginning Units 239 274 329 404 489
Openings (net) 35 55 75 85 95
----- ----- ----- ----- -----
Ending Units 274 329 404 489 584
===== ===== ===== ===== =====
Total
Beginning Units 864 933 1,043 1,183 1,338
Openings (net) 69 110 140 155 170
----- ----- ----- ----- -----
Ending Units 933 1,043 1,183 1,338 1,508
===== ===== ===== ===== =====
</TABLE>
- --------------------------
(1) Includes 100% of the financial results of Umberto's (the Company's 80%
owned restaurant venture).
(2) Represents combined sales of Company-owned and franchised locations.
29
<PAGE>
<TABLE>
<CAPTION>
UMBERTO'S OF NEW HYDE PARK
DIVISIONAL FINANCIAL PROJECTIONS(1)
(DOLLARS IN MILLIONS) FISCAL YEAR
----------------------------------------------------------
1998E 1999E 2000E 2001E 2002E
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total Systemwide Sales (2) $5.5 $22.7 $58.5 $115.7 $195.3
====== ======= ======= ======= ======
Revenues $5.5 $19.7 $42.9 $74.3 $114.1
EBITDA $0.4 $3.3 $8.0 $14.5 $23.0
EBITDA MARGIN % 7.8% 16.7% 18.7% 19.6% 20.1%
Depreciation & Amortization $0.1 $0.6 $1.3 $2.2 $3.3
------ ------- ------- ------- -------
Operating Profit $0.3 $2.7 $6.7 $12.3 $19.7
------ ------- ------- ------- -------
OPERATING MARGIN % 5.1% 13.8% 15.7% 16.6% 17.2%
OTHER DATA:
Capital Expenditures $2.7 $6.8 $9.0 $11.3 $13.5
Comparable Store Sales Growth 2.0% 2.0% 2.0% 2.0% 2.0%
STORE DATA:
Company-Owned
Beginning Units 2 8 23 43 68
Openings (net) 6 15 20 25 30
------ ------- ------- ------- ------
Ending Units 8 23 43 68 98
====== ====== ====== ====== ======
Franchised
Beginning Units 0 0 5 20 45
Openings (net) 0 5 15 25 35
------ ------- ------- ------- ------
Ending Units 0 5 20 45 80
====== ====== ====== ====== ======
Total
Beginning Units 2 8 28 63 113
Openings (net) 6 20 35 50 65
------ ------- ------- ------- ------
Ending Units 8 28 63 113 178
====== ====== ====== ====== ======
</TABLE>
--------------------
(1) Represents 100% of the financial results of Umberto's (the Company's 80%
owned restaurant venture).
(2) Represents combined sales of Company-owned and franchised locations.
30
<PAGE>
<TABLE>
<CAPTION>
SBARRO CORE BUSINESS
DIVISIONAL FINANCIAL PROJECTIONS
-----------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) FISCAL YEAR
-----------------------------------------------------------
1998E 1999E 2000E 2001E 2002E
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total Systemwide Sales (1) $495.5 $546.0 $609.9 $680.0 $752.0
====== ====== ====== ====== ======
Revenues $360.4 $386.0 $417.5 $451.2 $485.9
Cost of Food and Paper $71.6 $76.6 $82.7 $89.2 $95.9
------ ------ ------ ------ ------
Gross Profit $288.7 $309.4 $334.8 $362.0 $390.0
GROSS MARGIN % 80.1% 80.2% 80.2% 80.2% 80.3%
Other Cash Operating Expenses $203.9 $218.3 $235.9 $254.8 $274.4
------ ----- ------ ------ ------
EBITDA $84.8 $91.1 $98.9 $107.2 $115.6
EBITDA MARGIN % 23.5% 23.6% 23.7% 23.7% 23.8%
Depreciation & Amortization $26.6 $27.4 $28.8 $29.9 $30.1
------ ----- ----- ------ -----
Operating Profit $58.2 $63.7 $70.2 $77.3 $85.6
------ ----- ----- ------ -----
OPERATING MARGIN % 16.2% 16.5% 16.8% 17.1% 17.6%
OTHER DATA:
Capital Expenditures $26.4 $21.7 $23.7 $24.3 $24.9
Comparable Store Sales Growth 0.5% 1.5% 1.5% 1.5% 1.5%
STORE DATA:
Company-Owned
Beginning Units 623 651 691 736 781
Openings (net) 28 40 45 45 45
------ ----- ----- ------ -----
Ending Units 651 691 736 781 826
====== ===== ====== ====== =====
Franchised
Beginning Units 239 274 324 384 444
Openings (net) 35 50 60 60 60
------ ----- ----- ------ -----
Ending Units 274 324 384 444 504
====== ===== ====== ====== =====
Total
Beginning Units 862 925 1,015 1,120 1,225
Openings (net) 63 90 105 105 105
------ ----- ------ ------ -----
Ending Units 925 1,015 1,120 1,225 1,330
====== ====== ====== ====== =====
</TABLE>
- ----------------
(1) Represents combined sales of Company-owned and franchised locations.
31
<PAGE>
DISCUSSION OF KEY PROJECTION ASSUMPTIONS - CORE BUSINESS
Store Openings
The Company expects to accelerate the new store openings to approximately 50
owned and 60 franchised units annually versus its current 1998 plan of 35 owned
and 45 franchised units. This growth in unit openings is going to be
accomplished by (i) focusing on high customer traffic venues where the Company
currently has little presence (e.g., college campuses), (ii) expanding into
traditional standalone quick service restaurant venues, in particular through
co-branding arrangements, and (iii) increasing the pace of its international
expansion.
Store Revenues
The Company believes it can increase the comparable store revenues for both
Company-owned and franchised units by approximately 1.5% annually. This will be
accomplished through selective price increases and assumes modest increases in
store traffic. For new franchised units opened, the Company has assumed $20,000
in initial franchise fees per restaurant and royalties of 4% of revenues which
are significantly lower than most of the current franchise arrangements which
call for $35,000 in initial fees and royalties of 5%-7% of sales. Overall,
revenues from core business units (including franchise revenues) are projected
to grow to approximately $485.9 million by 2002, implying a compounded annual
growth rate of 7.1% over 1997 revenues of $344.4 million.
Operating Costs
The Company has used existing costs as a percentage of revenue as the basis for
projecting its future operating costs. These cost assumptions are generally
conservative due to the high cheese prices in 1998, which accounts for 30% of
total food and paper products costs. These prices have averaged 25% higher than
during the comparable period in 1997, which generally represented a normalized
price level for cheese. Secondly, a substantial portion of the Company's
overhead is fixed, and therefore the Company should realize a degree of
operating leverage as revenues increase. This is particularly true of general &
administrative expenses, which should decrease as a percentage of sales over the
projection period. Other income of $3.5 million annually is assumed, primarily
as a result of joint marketing programs and rent to be received from subleasing
space in the new headquarters building.
Overall, EBITDA margins for the Sbarro core business are expected to increase
from 23.5% in 1998 to 23.8% in 2002. Although operating costs are expected to
remain constant as a percent of sales for Company operated restaurants, the
growth in higher margin franchising operations will increase overall margins
slightly. Depreciation & amortization expense, which is based on the current
depreciable asset base and the future projected capital expenditures required,
are projected to increase at a slower rate than revenues. Consolidated operating
margins are forecast to increase from 16.2% in 1998 to 17.6% in 2002.
Capital expenditures for new restaurants are assumed to total approximately
$450,000 per unit. In addition, capital expenditures of $5.0 million, $5.2
million, $5.2 million, $5.8 million and $6.4 million for 1998-2002,
respectively, are assumed for the maintenance of existing units. The $7
32
<PAGE>
million of 1998 capital expenditures required to complete the construction of
the new headquarters building has already been incurred.
Umberto's
The projected financial performance of Umberto's is based on its unit expansion
plan and the pro forma financial model the Company has developed for individual
stores. The Company plans to rapidly expand the Umberto's concept resulting in a
unit base of 98 Company-operated and 80 franchised restaurants by 2002. Based on
its analysis of the market environment and the fact that few companies currently
serve this niche, the Company believes its unit growth projections are
reasonable.
New units opened in 1998 are projected to generate $1.2 million in annualized
revenues, with an assumed increase of 2% per year through 2002. The Company
bases this comparable store sales increase on the more upscale nature of the
product offering and the assumption that the increasing strength of the
Umberto's brand will also allow for modest price increases. For franchised
restaurants, a $30,000 initial franchise fee and a 6% royalty are assumed. Based
on this projected unit growth, total revenues for Umberto's are expected to
reach approximately $114.1 million by 2002.
In developing the Umberto's financial plan, the Company has categorized all
expenses as either variable or fixed. Variable costs include food and paper
products, payroll and benefits, repairs and maintenance, restaurant supplies,
linen and uniforms, office supplies and credit card discounts. Fixed costs
include rent and rent-related costs, utilities, telephone, insurance, carting
and armored car/bank charges. The Company's pro forma financial model assumes
that all variable costs grow at the same rate as revenues while fixed costs
remain constant. Pre-opening costs are estimated to total $50,000 per store, and
are expensed as incurred. Depreciation is based on an assumed capital investment
of $450,000 per new restaurant. A restaurant management bonus is also assumed at
20% of restaurant pre-tax earnings.
33
________________________________________________________________________________
___________________________________________________
Project Oregano
Presentation to the Special Committee
of the Board of Direetors
March 1998
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
TABLE OF CONTENTS
I. Financial Data
II. Valuation Summary
A. Composite Implied Valuation
B. Discounted Cash Flow Analysis
C. Comparable Transactions Analysis
D. Comparable Companies Analysis
E. Leveraged Buy-Out Analysis
Appendix A. Comparable Companies Analysis
1. Comparable Companies (Pizza and Value
Priced Italian Restaurants)
2. Comparable Companies (Fast Food
Restaurants)
B. Leveraged Buy-Out Analysis
[LOGO] Prudential
Securities
<PAGE>
Section I
<PAGE>
________________________________________________________________________________
___________________________________________________
I. Financial Data
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
FINANCIAL DATA
HISTORICAL AND PROJECTED BALANCE SHEETS
<TABLE>
<CAPTION>
HISTORICAL (1) PROJECTED (1)
---------------------- ---------------------------------------------------------
(In 000's) FY FY FY FY FY FY FY
ASSETS 1996 1997 1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 114,818 $127,310 $134,350 $159,352 $186,766 $217,539 $250,312
Accounts receivables 1,865 2,375 2,242 2,364 2,492 2,621 2,751
Inventories 2,841 2,962 2,929 3,086 3,251 3,416 3,584
Prepaid expenses 1,409 1,768 1,560 1,645 1,734 1,823 1,914
--------- -------- -------- -------- -------- -------- --------
Total current assets 120,933 134,415 141,081 166,447 194,242 225,400 258,561
Property and equipment, net 130,993 136,798 139,254 132,015 123,805 115,175 106,003
Deferred charges, net 1,633 1,596 1,600 1,600 1,600 1,600 1,600
Other assets 5,100 5,840 6,500 6,500 6,500 6,500 6,500
--------- -------- -------- -------- -------- -------- --------
Total assets $ 258,659 $278,649 $288,435 $306,562 $326,147 $348,675 $372,664
========= ======== ======== ======== ======== ======== ========
LIABILITIES AND EQUITY
Accounts payable $ 7,173 $ 10,086 $ 7,391 $ 7,788 $ 8,202 $ 8,620 $ 9,042
Accrued expenses 22,663 26,025 23,376 24,630 25,940 27,262 28,597
Dividend payable (2) 4,691 5,521 5,521 5,521 5,521 5,521 5,521
Income taxes (2) 5,287 4,777 4,777 4,777 4,777 4,777 4,777
--------- -------- -------- -------- -------- -------- --------
Total current liabilities 39,814 46,409 41,065 42,715 44,439 46,180 47,937
Deferred income taxes 13,645 11,801 10,301 8,801 7,301 7,301 7,301
--------- -------- -------- -------- -------- -------- --------
Total liabilities 53,459 58,210 51,366 51,516 51,740 53,481 55,238
Retained earnings 173,777 220,439 237,069 255,045 274,407 295,194 317,425
--------- -------- -------- -------- -------- -------- --------
Shareholders' equity 205,200 220,439 237,069 255,045 274,407 295,194 317,425
Total liabilities and shareholders'
equity $ 258,659 $278,649 $288,435 $306,562 $326,147 $348,675 $372,664
========= ======== ======== ======== ======== ======== ========
(1) Historical results from Comnpany's 1O-K. Projections provided by the Company.
(2) Assumes that projected dividends payable and income taxes accounts will stay at 12/28/97 level through 2002.
</TABLE>
3 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
FINANCIAL DATA
HISTORICAL AND PROJECTED INCOME STATEMENTS
<TABLE>
<CAPTION>
Historical (1) Projected (1)
---------------------- ---------------------------------------------------------
FY FY FY FY FY FY FY
(in 000's except per share data) 1996 1997 1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C> <C> <C>
Existing restaurant sales $ 319,315 $ 337,723 $ 349,149 $ 367,875 $ 387,436 $ 407,189 $ 427,134
Existing franchise related income 6,375 7,360 6,664 7,345 8,043 8,749 9,462
--------- --------- --------- --------- --------- --------- ---------
Total revenues 325,690 345,083 355,813 375,220 395,479 415,938 436,596
Cost of food and paper products 68,668 69,469 70,807 74,605 78,572 82,578 86,623
--------- --------- --------- --------- --------- --------- ---------
Gross profit 257,022 275,614 285,006 300,615 316,907 333,360 349,973
Gross margin as % of sales 80.5% 81.6% 81.6% 81.7% 81.8% 81.9% 81.9%
Payroll and other benefits 78,258 84,910 86,589 91.233 96,084 100,983 105,929
Occupancy and other expenses 85,577 93,528 40,187 42,342 44,594 46,867 49,163
Rent expense -- -- 56,911 59,964 63,152 66,372 69,623
General and administrative 14,940 17,762 18,303 19,301 20,343 21,396 22,459
Provision for unit closings -- 3,300 -- -- -- -- --
Other income (2) (1,171) (1,653) (1,466) (1,800) (1,800) (1,800) (1,800)
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses 177,604 197,847 200,524 211,040 222,374 233,818 245,374
EBITDA 79,418 81,067 84,482 89,574 94,534 99,542 104,600
EBITDA margin 24.4% 23.5% 23.7% 23.9% 23.9% 23.9% 24.0%
Depreciation 22,910 23,922 26,094 26,790 27,759 28,781 29,922
EBIT 56,508 57,145 58,388 62,785 66,774 70,762 74,678
Interest income 3,798 4,352 6,811 7,692 9,133 10,733 12,481
--------- --------- --------- --------- --------- --------- ---------
Income before taxes 60,306 58,197 65,199 70,476 75,908 81,495 87,159
Income taxes 22,916 22,115 24,776 26,781 28,845 30,968 33,120
--------- --------- --------- --------- --------- --------- ---------
Net income $ 37,390 $ 38,128 $ 40,423 $ 43,695 $ 47,063 $ 50,527 $ 54,038
========= ========= ========= ========= ========= ========= =========
Net income margin 11.5% 11.0% 11.4% 11.6% 11.9% 12.1% 12.4%
(1) Historical results from Company's 10-K. Projections provided by the Company.
(2) Includes income from joint ventures, income from two 20% owned stores, beverage rebates, and insurance recoveries.
</TABLE>
4 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
RESTAURANT OPENING ASSUMPTIONS/(1)/
<TABLE>
<CAPTION>
FY FY FY FY FY
COMPANY OWNED RESTAURANTS 1998 1999 2000 2001 2002
- ------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Beginning number 627 659 691 723 755
Additions 35 35 35 35 35
Acquired from (sold to) franchisees -- -- -- -- --
Divestitures (3) (3) (3) (3) (3)
------ ------ ------ ------ ------
Ending number 659 691 723 755 787
Percent of total 71.6% 70.2% 69.1% 68.0% 67.l%
FRANCHISED RESTAURANTS
- ----------------------
Beginning number 231 262 293 324 355
Additions 35 35 35 35 35
Purchases from (sold to) franchisees -- -- -- -- --
Divestitures (4) (4) (4) (4) (4)
------ ------ ------ ------ ------
Ending number 262 293 324 355 386
Percent of total 28.4% 29.8% 30.9% 32.0% 32.9%
ALL RESTAURANTS
- ---------------
Beginning number 858 921 984 1,047 1,110
Additions 70 70 70 70 70
Closed during period (7) (7) (7) (7) (7)
------ ------ ------ ------ ------
Ending number 921 984 1,047 1,110 1,173
SAME STORE SALES GROWTH 0.50% 0.50% 0.50% 0.50% 0.50%
AVERAGE SALES PER RESTAURANT ($ IN MILLIONS) $ 0.543 $ 0.545 $ 0.548 $ 0.551 $ 0.554
(table continued)
FY FY FY FY FY
TOTAL SYSTEMWIDE SALES ($ IN MILLIONS) 1998 1999 2000 2001 2002
- -------------------------------------- ---- ---- ---- ---- ----
Company-Owned $ 349.1 $ 367.9 $ 387.4 $ 407.2 $ 427.1
Franchises-existing (old) 76.3 74.4 72.6 70.8 69.0
Franchises-existing (new) 38.6 57.8 77.3 97.0 116.9
Franchises-new stores 19.0 19.1 19.2 19.3 19.4
------ ------- ------- ------- -------
Total Systemwide Sales 483.0 519.1 556.5 594.3 632.4
TOTAL REVENUE FROM FRANCHISEES ($ IN MILLIONS)
- --------------------------------------------
FRANCHISE ROYALTY FEE (NEW) 4.0% 4.0% 4.0% 4.0% 4.0%
FRANCHISE ROYALTY FEE (OLD) 4.8% 4.8% 4.8% 4.8% 4.8%
INITIAL FRANCHISE FEE PER STORE/(2)/ $ 0.020 $ 0.020 $ 0.020 $ 0.020 $ 0.020
Total Initial Franchise Fee $ 0.7 $ 0.7 $ 0.7 $ 0.7 $ 0.7
Franchise Royalty Fee-existing $ 5.2 $ 5.9 $ 6.6 $ 7.3 $ 8.0
Franchise Royalty Fee-new stores $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8
------ ------- ------- ------- -------
Total Revenue from Franchisees $ 6.66 $ 7.34 $ 8.04 $ 8.75 $ 9.46
TOTAL REVENUE ($ IN MILLIONS)
- -----------------------------
Company-Owned $ 349.1 $ 367.9 $ 387.4 $ 407.2 $ 427.1
Franchises $ 6.7 $ 7.3 $ 8.0 $ 8.7 $ 9.5
------ ------- ------- ------- -------
Total Revenue $ 355.8 $ 375.2 $ 395.5 $ 415.9 $ 436.6
TOTAL CAPITAL EXPENDITURES ($ IN MILLIONS)
- ------------------------------------------
CapEx per New Restaurant $ 0.41 $ 0.41 $ 0.41 $ 0.41 $ 0.41
Restaurant CapEx $ 14.4 $ 14.4 $ 14.4 $ 14.4 $ 14.4
Capital Expenditures (New Headquarters) $ 9.0 $ - $ - $ - $ -
Maintenance Capital Expenditures $ 5.2 $ 5.2 $ 5.2 $ 5.8 $ 6.4
Investments in Joint Ventures $ - $ - $ - $ - $ -
</TABLE>
Notes:
(1) Information provided by the Company.
(2) Represents weighted average fee which takes into account all franchise
types.
5 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
FINANCIAL DATA
Working Capital Assumptions
<TABLE>
<CAPTION>
HISTORICAL PROJECTED
------------------- ----------------------------------------------------
FY FY FY FY FY FY FY
1996 1997 1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C> <C> <C>
Inventory as days of COGS 15.1 15.6 15.1 15.1 15.1 15.1 15.1
Accounts receivable as days of sales 2.3 2.5 2.3 2.3 2.3 2.3 2.3
Prepaid expenses as days of sales 1.6 1.9 1.6 1.6 1.6 1.6 1.6
Accounts payable as days of COGS 38.1 53.0 38.1 38.1 38.1 38.1 38.1
Accrued expenses as days of COGS 120.5 136.7 120.5 120.5 120.5 120.5 120.5
Other assets as days of sales (1) 5.7 6.2 6,500 6,500 6,500 6,500 6,500
Deferred charges, net (in 000s) 1,633 1,596 1,600 1,600 1,600 1,600 1,600
Dividends payable 4,691 5,521 5,521 5,521 5,521 5,521 5,521
Income taxes payable 5,287 4,777 4,777 4,777 4,777 4,777 4,777
Deferred income taxes (in 000s) 13,645 11,801 10,301 8,801 7,301 7,301 7,301
</TABLE>
(1) Historical numbers are days of sales. Projected assumptions were provided
by the Company.
6 [LOGO] Prudential
- --- Securities
<PAGE>
Section II
<PAGE>
________________________________________________________________________________
___________________________________________________
II. Valuation Summary
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
________________________________________________________________________________
___________________________________________________
A. Composite Implied Valuation
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
COMPOSITE IMPLIED VALUATION SHARE PRICE
[Graphic]
9 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
SUMMARY OF IMPLIED PRICES OF ALL VALUATION METHODOLOGIES
OFFER PRICE $ 28.50
------------------------
HIGH LOW MEAN MEDIAN
-----------------------------------
DISCOUNTED CASH FLOWS $ 36.68 $ 30.00 $ 33.18 $ 33.11
COMPARABLE TRANSACTIONS
LTM Revenue $ 28.85 $ 16.36 $ 22.22 $ 21.45
LTM EBITDA 41.31 33.03 37.17 37.17
LTM EBIT 40.76 31.66 35.40 33.76
LTM Net Income 37.72 22.99 30.37 30.39
Tangible Book Value 37.01 10.08 23.54 23.54
------- ------- ------- -------
Mean $ 37.13 $ 22.82 $ 29.74 $ 29.27
COMPARABLE COMPANIES
Pizza and Value Priced Italian Restaurants
LTM Revenue $ 34.95 $ 17.05 $ 24.50 $ 25.42
LTM EBITDA 42.30 26.01 37.01 40.19
LTM ESIT 56.44 34.70 42.69 39.33
LTM Net Income 56.12 26.40 37.53 29.33
Tangible Book Value 69.94 10.51 33.12 28.00
------- ------- ------- -------
Mean $ 51.95 $ 22.93 $ 34.97 $ 32.46
Fast Food Restaurants
LTM Revenue $ 42.79 $ 13.86 $ 25.97 $ 22.95
LTM EBITDA 42.84 19.92 34.88 37.35
LTM EBIT 74.03 23.91 43.10 40.94
LTM Net Income 119.01 30.93 52.27 37.44
Tangible Book Value 92.09 11.65 35.06 25.82
------- ------- ------- -------
Mean $ 74.15 $ 20.05 $ 38.26 $ 32.90
LBO ANALYSIS $ 33.00 $ 29.00 $ 31.00 $ 31.00
10 [LOGO] Prudential
- --- Securities
<PAGE>
________________________________________________________________________________
___________________________________________________
B. Discounted Cash Flow Analysis
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
DISCOUNTED CASH FLOW ANALYSIS
IMPLIED VALUATION
<TABLE>
PRESENT VALUE OF PROJECTED CASH FLOWS AND TERMINAL VALUES
(IN 000'S, EXCEPT PER SHARE DATA)
---------------------------------------------------------
<CAPTION>
TERMINAL PV OF PV OF
VALUE FREE PV OF AGGREGATE LESS: PV OF EQUITY
MULTIPLE OF DISCOUNT CASH FLOW TERMINAL PRESENT TOTAL PLUS: EQUITY PER
2002 EBITDA RATE (1) 1998-2002 VALUE VALUE DEBT(2) CASH(2) VALUE SHARE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
11.00% $175,566 $392,399 $567,965 $ - $ 127,310 $ 695,275 $ 33.52
12.00% $171,522 $376,877 548,400 - 127,310 675,710 $ 32.58
-------------- -----------------------------------------------------------------------------------------------------
6.0x 13.00% $167,630 $362,100 529,730 - 127,310 657,040 $ 31.68
-------------- -----------------------------------------------------------------------------------------------------
14.00% $163,883 $348,024 511,907 - 127,310 639,217 $ 30.82
15.00% $160,274 $334,612 494,885 - 127,310 622,195 $ 30.00
---------- -------
11.00% $175,566 $457,799 $633,365 $ - $ 127,310 $ 760,675 $ 36.68
12.00% $171,522 $439,690 611,212 - 127,310 738,522 $ 35.61
-------------- -----------------------------------------------------------------------------------------------------
7.0x 13.00% $167,630 $422,450 590,080 - 127,310 717,390 $ 34.59
-------------- -----------------------------------------------------------------------------------------------------
14.00% $163,883 $406,028 569,911 - 127,310 697,221 $ 33.62
15.00% $160,274 $390,380 550,654 - 127,310 677,964 $ 32.69
---------- -------
</TABLE>
(1) As of 2/24/98, Company's weighted average cost of capital was 12.73%.
(2) As of 12/28/97 balance sheet.
(3) Assumes fully diluted shares outstanding as of 12/28/97 of 20,739,373.
12 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
DISCOUNTED CASH FLOW ANALYSIS
PROJECTED UNLEVERED FREE CASH FLOWS
<TABLE>
<CAPTION>
(in 000's) FISCAL YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
FREE CASH FLOW: 1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
Operating Income (EBITA) $ 58,388 $ 62,785 $ 66,774 $ 70,762 $ 74,678
Less: Income Taxes @ 38.0% (22,188) (23,858) (25,374) (26,889) (28,378)
---------- ---------- ---------- ---------- ---------
Tax-Adjusted Operating Income $ 36,201 $ 38,926 $ 41,400 $ 43,872 $ 46,300
plus: Depreciation 26,094 26,790 27,759 28,781 29,922
less: Capital Expenditures (28,550) (19,550) (19,550) (20,150) (20,750)
plus: (Increases)/Decreases in Non-
Cash Working Capital
Deferred Taxes (1,500) (1,500) (1,500) - -
Receivables 133 (122) (128) (129) (130)
Inventories 33 (157) (164) (166) (167)
Prepaid Expenses 208 (85) (89) (90) (91)
Deferred Charges (4) -- -- -- --
Other Assets (660) -- -- -- --
Accounts Payable and Accruals (5,344) 1,650 1,724 1,741 1,758
Free Cash Flow: $ 26,611 $ 45,952 $ 49,453 $ 53,859 $ 56,842
---------- ---------- ---------- ---------- ---------
</TABLE>
13 [LOGO] Prudential
- --- Securities
<PAGE>
________________________________________________________________________________
___________________________________________________
C. Comparable Transactions Analysis
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
COMPARABLE TRANSACTIONS SUMMARY VALUATION MATRIX
($ in thousands, except per share)
Offer Price $ 28.50
----------------------------------
<TABLE>
<CAPTION>
Enterprise Value/ Equity Value/
--------------------------------------- ------------------------
REVENUE EBITDA EBIT NET INCOME BOOK VALUE
------- ------ ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SBARRO 1997 OPERATING PARAMETERS(1) $345,083.0 $ 81,067.0 $ 57,145.0 $ 38,128.0 $ 220,439.0
------------------------------------------------------------------
COMPARABLE TRANSACTION VALUATION MULTIPLES(2)
HIGH 1.4x 9.0x 12.5x 20.5x 3.5x
LOW 0.6 6.9 9.2 12.5 0.9
MEAN 1.0 7.9 10.6 16.5 2.2
MEDIAN 0.9 7.9 10.0 16.5 2.2
------------------------------------------------------------------
PLUS: CASH (3) $ 127,310 $ 127,310 $ 127,310
---------------------------------------
FULLY DILUTED SHARES OUTSTANDING(4) 20,679.0 20,679.0 20,679.0 20,679.0 20,679.0
------------------------------------------------------------------
IMPLIED EQUITY VALUE PER SHARE MEAN
HIGH $ 28.85 $ 41.31 $ 40.76 $ 37.72 $ 37.01 $ 37.13
LOW 16.36 33.03 31.66 22.99 10.08 22.82
MEAN 22.22 37.17 35.40 30.37 23.54 29.74
MEDIAN 21.45 37.17 33.78 30.39 23.54 29.27
------------------------------------------------------------------ --------
SBARRO'S IMPLIED MULTIPLE AT OFFER PRICE 1.7x 7.3x 10.3x 15.5x 2.7x
------------------------------------------------------------------
</TABLE>
(1) Financial information for the fiscal year ended 12/28/97. Source:
Company submitted information.
(2) Revenue, EBITDA, and EBIT are multiples of Enterprise Value. Net Income
and Book Value are multiples of Equity Value. Includes Perkins Family
Restaurants, International Dairy Queen, Family Restaurants.
(3) As of 12/28/97.
(4) Calculated using the Treasury Method
15 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
COMPARABLE TRANSACTIONS VALUATION SUMMARY
<TABLE>
<CAPTION>
($ in millions)
Target Target Announced Offer Terms EV Revenue EBIT EBITDA Net Income TBV
Acquiror Business Description Effective Status EPP EV/Rev. EV/EBIT EV/EBITDA EPP/Net Inc. EPP/TBV
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International Dairy Queen (2) Develops, licenses and 10/21/97 Stock $559.1 $411.2 $55.9 $62.3 $35.4 $168.1
services a chain of 1/8/98 Friendly $583.6 1.4x 10.0x 9.0x 16.5x 3.5x
restaurants.
Berkshire Hathaway, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Perkins Family Restaurants, Owns and operates 8/4/97 Cash $240.8 $262.8 $19.2 $35.1 $ 9.1 $ 37.7
L.P.(3)(4) franchised restaurants. 12/23/97 Completed $186.4 0.9x 12.5x 6.9x 20.5x 4.9x
The Restaurant Company
- ------------------------------------------------------------------------------------------------------------------------------------
Family Restaurants, Inc.(5)(6) Coco's operates 170 3/4/96 Cash $306.5 $501.2 $33.2 NA $10.0 $132.2
(Coco's and Carrows) bakery restaurants and 5/23/98 Completed $125.0 0.6x 9.2x NA 12.5x 0.9x
Flagstar Companies, Inc. operates 157 family
restaurants primarily
in California.
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY STATISTICS
LEGEND HIGH 1.4x 12.5x 9.0x 20.5x 3.5x
EV = ENTERPRISE VALUE LOW 0.6x 9.2x 6.9x 12.5x 0.9x
EPP = EQUITY PURCHASE PRICE MEAN 1.0x 10.6x 7.9x 16.5x 2.2x
LTM = LATEST TWELVE MONTHS MEDIAN 0.9x l0.0x 7.9x 16.5x 2.2x
TBV = TANGIBLE BOOK VALUE
</TABLE>
Footnotes:
- -----------------------------------------------------------------------
(1) Financial data excludes the results of discontinued operations,
extraordinary gains and one-time charges. Unless otherwise noted, options
are assumed to be cashed out based on the treasury stock method.
(2) Depreciation and amortization not disclosed in 10-Q. Depreciation and
amortization is from latest 10-K.
(3) Company is a "pass through" entity, i.e, S-Corp or Partnership. Tangible
book value (TBV) has been excluded from summary statistics.
(4) Net income is calculated based on an assumed 40% tax rate.
(5) Denotes a private company.
(6) Assumption of debt includes issuance of $150MM of senior notes to refinance
target's outstanding balance on revolver and the assumption of capital
lease obligations.
16 [LOGO] Prudential
- --- Securities
<PAGE>
________________________________________________________________________________
___________________________________________________
D. Comparable Companies Analysis
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
COMPARABLE COMPANIES SUMMARY VALUATION MATRIX - PIZZA AND VALUE PRICED ITALIAN
RESTAURANTS
($ in thousands, except per share)
Offer Price $ 28.50
----------------------------------
<TABLE>
<CAPTION>
Enterprise Value/ Equity Value/
--------------------------------------- ------------------------
REVENUE EBITDA EBIT NET INCOME BOOK VALUE
------- ------ ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SBARRO 1997 OPERATING PARAMETERS(1) $345,083 $ 81,067 $ 57,145 $ 38,128 $ 220,439
------------------------------------------------------------------
COMPARABLE COMPANY VALUATION MULTIPLES(2)
PIZZA AND VALUE HIGH 1.7x 9.2x 18.2x 30.4x 6.6x
PRICED ITALIAN LOW 0.7 5.1 10.3 14.3 1.0
COMPARABLES(3) MEAN 1.1 7.9 13.2 20.4 3.1
MEDIAN 1.2 8.7 12.0 15.9 2.6
------------------------------------------------------------------
PLUS: CASH (4) $ 127,310 $ 127,310 $ 127,310
---------------------------------------
FULLY DILUTED SHARES OUTSTANDING(1) 20,679.0 20,679.0 20,679.0 20,679.0 20,679.0
------------------------------------------------------------------
IMPLIED EQUITY VALUE PER SHARE MEAN
PIZZA AND VALUE HIGH $ 34.95 $ 42.30 $ 56.44 $ 56.12 $ 69.94 $ 51.95
PRICED ITALIAN LOW 17.05 26.01 34.70 26.40 10.51 22.93
COMPARABLES MEAN 24.50 37.01 42.69 37.53 33.12 34.97
MEDIAN 25.42 40.19 39.33 29.33 28.00 32.46
------------------------------------------------------------------ --------
SBARRO IMPLIED MULTIPLE AT OFFER PRICE 1.7x 7.3x 10.3x 15.5x 2.7x
------------------------------------------------------------------
</TABLE>
(1) Financial information for the fiscal year ended 12/28/97. Source:
Company submitted information.
(2) Revenue, EBITDA, and EBIT are multiples of Enterprise Value and Net
Income is a multiple of Equity Value. Per l0/5/97 10-Q, includes held
to maturity marketable maturities, which mature in 1998.
(3) Includes Darden Restaurants, NPC International, Pizza Inn, Showbiz
Pizza, and Uno Restaurant Corp.
(4) As of 12/28/97.
18 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
COMPARABLE COMPANIES SUMMARY VALUATION MATRIX - FAST FOOD RESTAURANTS
($ in thousands, except per share)
Offer Price $ 28.50
----------------------------------
<TABLE>
<CAPTION>
Enterprise Value/ Equity Value/
--------------------------------------- ------------------------
REVENUE EBITDA EBIT NET INCOME BOOK VALUE
------- ------ ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SBARRO 1997 OPERATING PARAMETERS(1) $345,083 $ 81,067 $ 57,145 $ 38,128 $ 220,439
------------------------------------------------------------------
COMPARABLE COMPANY VALUATION MULTIPLES(2)
FAST FOOD RESTAURANT HIGH 2.2x 9.4x 24.6x 64.5x 8.6x
COMPARABLES(3) LOW 0.5 3.5 6.4 16.8 1.1
MEAN 1.2 7.3 13.4 28.3 3.3
MEDIAN 1.0 8.0 12.6 20.3 2.4
------------------------------------------------------------------
PLUS: CASH (4) $ 127,310 $ 127,310 $ 127,310
---------------------------------------
FULLY DILUTED SHARES OUTSTANDING(1) 20,679.0 20,679.0 20,679.0 20,679.0 20,679.0
------------------------------------------------------------------
IMPLIED EQUITY VALUE PER SHARE MEAN
FAST FOOD RESTAURANT HIGH $ 42.79 $ 42.84 $ 74.03 $ 119.01 $ 92.09 $ 74.15
COMPARABLES LOW 13.86 19.92 23.91 30.93 11.65 20.05
MEAN 25.97 34.88 43.10 52.27 35.06 38.26
MEDIAN 22.95 37.35 40.94 37.44 25.82 32.90
------------------------------------------------------------------ --------
SBARRO IMPLIED MULTIPLE AT OFFER PRICE 1.7x 7.3x 10.3x 15.5x 2.7x
------------------------------------------------------------------
</TABLE>
(1) Financial information for the fiscal year ended 12/28/97. Source:
Company submitted information.
(2) Revenue, EBITDA, and EBIT are multiples of Enterprise Value and Net
Income is a multiple of Equity Value. Per l0/5/97 10-Q, includes held
to maturity marketable securities, which mature in 1998.
(3) Includes Au Bon Pain, Foodmaker, Tricon Global Restaurants, Sonic
Corp., and Wendy's.
(4) As of 12/28/97.
19 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS
<TABLE>
<CAPTION>
(Dollars in millions, except per share data) LTM FYE Shares
Ticker Date Date Out.
------ -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Darden Restaurants, Inc. (b)(c)(d) DRI 11/23/97 5/25/97 148.6
NPC International, Inc. (e)(f)(g) NPCI 12/23/97 3/25/97 24.7
Pizza Inn, Inc. (h)(i)(j) PZZI l2/28/97 6/29/97 12.7
Showbiz Pizza Time, Inc. (e)(k) SHBZ 9/26/97 12/27/96 18.7
Uno Restaurant Corporation (e)(l)(m) UNO 12/28/97 9/28/97 10.9
Sbarro, Inc. (n) SBA 12/28/97 12/28/97 20.4
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
(table continued)
Based on Latest Twelve Months Results
-----------------------------------------------------------------------------------------
Market Values Enterprise Value Multiples Equity Value Multiples
----------------------------- --------------------------- ---------------------------
(Dollars in millions, except per share data)
2/27/98 Book Net LTM
Per Share Equity Unlevered Sales EBITDA EBIT Value Income E.P.S.
--------- -------- --------- ------- ------ -------- --------- ------- ------
Darden Restaurants, Inc. $13.50 $2,041.4 $2,393.1 0.8x 9.0x 18.2x 1.9x 30.4x 30.9x
NPC International, Inc. $11.50 $289.4 $495.3 1.2x 7.4x 12.0x 2.6x 15.9x l5.9x
Pizza Inn, Inc. $5.31 $72.6 $78.4 1.2x 9.2x 10.3x 6.6x 15.6x 15.6x
Showbiz Pizza Time, Inc. $29.00 $562.2 $571.3 1.7x 8.7x 14.3x 3.4x 25.5x 25.0x
Uno Restaurant Corporation $6.50 $71.1 $118.0 0.7x 5.1x 11.3x l.0x 14.3x 15.3x
Sbarro, Inc. $29.50 $611.8 $484.5 1.4x 6.0x 8.5x 2.8x l6.0x 15.9x
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 1.7x 9.2x 18.2x 6.6x 30.4x 30.9x
LOW 0.7x 5.lx 10.3x 1.0x 14.3x 15.3x
MEAN 1.lx 7.9x 13.2x 3.lx 20.4x 20.5x
MEDIAN 1.2x 8.7x 12.0x 2.6x 15.9x l5.9x
ADJ. MEAN 1.0x 8.4x 12.5x 2.7x l9.0x 18.9x
COUNT 5 5 5 5 5 5
(table continued)
Based on Forward Results
-------------------------------
Equity Value Multiples
-------------------------------
(Dollars in millions, except per sharem data)
1997 1998 1998P/E/
E.P.S. E.P.S. 5yr Growth
--------- ------ ----------
Darden Restaurants, Inc. 27.0x 19.6x l.6x
NPC International, Inc. 15.9x 12.lx 0.6x
Pizza Inn, Inc. 15.6x 12.6x 0.8x
Showbiz Pizza Time, Inc. 21.8x 17.7x 1.0x
Uno Restaurant Corporation 15.3x NA NA
Sbarro, Inc. 15.9x 15.0x 1.2x
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 27.0x 19.6x 1.6x
LOW 15.6x 12.lx 0.6x
MEAN 20.1x 15.5x 1.0x
MEDIAN 18.9x 15.2x 0.9x
ADJ. MEAN 18.9x 15.2x 0.9x
COUNT 4 4 4
</TABLE>
20 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
SELECTED COMPARABLE FAST FOOD COMPANIES
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
LTM FYE Shares
Ticker Date Date Out.
------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Au Bon Pain Co., Inc. (b)(c)(d) ABPCA 10/4/97 12/28/96 11.8
Foodmaker, Inc. (c)(e) FM 9/28/97 9/28/97 39.1
Tricon Global Restaurants, Inc. (c)(f)(g) YUM 9/6/97 12/30/96 151.8
Sonic Corp. (h) SONC 10/30/97 8/31/97 12.8
Wendy's International, Inc. (i)(j) WEN 9/28/97 12/29/96 132.2
Sbarro, Inc. (k) SBA 12/28/97 12/28/97 20.4
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
(table continued)
BASED ON LATEST TWELVE MONTHS RESULTS
-------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Market Values Enterprise Value Multiples Equity Value Multiples
------------------------------ -------------------------- -------------------------
2/27/98 Book Net LTM
Per Share Equity Unlevered Sales EBITDA EBIT Value Income E.P.S.
--------- ------ --------- ----- ------ ---- ----- ------ ------
Au Bon Pain Co., Inc. $8.38 $100.0 $177.2 0.7x 7.2x 24.6x 1.1x 64.5x 63.7x
Foodmaker, Inc. $18.81 $759.2 $1,078.3 1.0x 8.6x 12.6x 8.6x 21.5x 21.2x
Tricon Global Restaurants, Inc. $28.50 $4,325.6 $4,444.6 0.5x 3.5x 6.4x 1.2x 19.9x 20.3x
Sonic Corp. $29.25 $381.2 $423.5 2.2x 9.4x 12.6x 3.1x 19.2x 19.7x
Wendy's International, Inc. $21.69 $2,916.5 $3,140.4 1.6x 8.0x 10.7x 2.4x 16.4x 16.8x
Sbarro, Inc. $29.50 $611.8 $484.5 1.4x 6.0x 8.5x 2.8x 16.0x 15.9x
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 2.2x 9.4x 24.6x 8.6x 64.5x 63.7x
LOW 0.5x 3.5x 6.4x 1.1x 16.4x 16.8x
MEAN 1.2x 7.3x 13.4x 3.3x 28.3x 28.3x
MEDIAN 1.0x 8.0x 12.6x 2.4x 19.9x 20.3x
ADJ. MEAN 1.1x 7.9x 12.0x 2.2x 20.2x 20.4x
COUNT 5 5 5 5 5 5
(table continued)
BASED ON FORWARD RESULTS
---------------------------------
(Dollars in millions, except per share data)
Equity Value Multiples
---------------------------------
1997 1998 1998P/E/
E.P.S. E.P.S. 5yr Growth
----- ----- ----------
Au Bon Pain Co., Inc. 44.1x 26.2x 1.5x
Foodmaker, Inc. 19.8x 16.8x 0.8x
Tricon Global Restaurants, Inc. NA 14.9x 1.1x
Sonic Corp. 19.6x 17.1x 1.1x
Wendy's International, Inc. 16.3x 18.1x 1.2x
Sbarro, Inc. 15.9x 15.0x 1.2x
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 44.1x 26.2x 1.5x
LOW 16.3x 14.9x 0.8x
MEAN 25.0x 18.6x 1.2x
MEDIAN 19.7x 17.1x 1.1x
ADJ. MEAN 19.7x 17.3x 1.1x
COUNT 4 5 5
</TABLE>
21 [LOGO] Prudential
- --- Securities
<PAGE>
________________________________________________________________________________
___________________________________________________
E. Leveraged Buy-Out Analysis
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
LEVERAGED BUY-OUT ANALYSIS
BASE CASE SCENARIO - ANALYSIS ASSUMES 0.5% COMPARATIVE STORE SALES GROWTH AND 70
NEW STORES, PER ANNUM.
<TABLE>
<CAPTION>
SENSITIVITY ANALYSIS - YEAR 2002 CASH OUT
------------------------------------------------
OFFER PRICE
$29.00 $30.00 $31.00 $32.00 $33.00
<S> <C> <C> <C> <C> <C> <C>
CASH OUT MULTIPLE -EBITDA 6.0x 110% 51% 34% 25% 18%
7.0x 126% 63% 44% 34% 27%
8.0x 139% 72% 52% 42% 34%
</TABLE>
23 [LOGO] Prudential
- --- Securities
<PAGE>
Section III
<PAGE>
________________________________________________________________________________
___________________________________________________
III. Appendix
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
________________________________________________________________________________
___________________________________________________
A. Comparable Companies Analysis
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
COMPARABLE RESTAURANT COMPANIES
ANALYSIS(1)(2)
SIZE FACTORS ($ IN MILLIONS)
LTM SALES
- ----------------------------------------
Tricon Global Restaurants, Inc. $9,625.0
Darden Restaurants, Inc. $3,172.1
Wendy's International, Inc. $2,013.4
Foodmaker, Inc. $1,071.7
NPC International, Inc. $409.8
SBARRO, INC. $345.1
Showbiz Pizza Time, Inc. $331.1
Au Bon Pain Co., Inc. $248.6
Sonic Corp. $192.9
Uno Restaurant Corporation $180.8
Pizza Inn, Inc. $68.0
- ----------------------------------------
MEAN $1,731.3
EQUITY VALUE AS OF 2/27/98
(EQUITY MARKET CAPITALIZATION)
- ----------------------------------------
Tricon Global Restaurants, Inc. $4,325.6
Wendy's International, Inc. $2,916.5
Darden Restaurants, Inc. $2,041.4
Foodmaker, Inc. $759.2
SBARRO, INC. $611.8
Showbiz Pizza Time, Inc. $562.2
Sonic Corp. $381.2
NPC International, Inc. $289.4
Au Bon Pain Co., Inc. $100.0
Pizza Inn, Inc. $72.6
Uno Restaurant Corporation $71.1
- ----------------------------------------
MEAN $1,151.9
NUMBER OF RESTAURANTS
- ----------------------------------------
Tricon Global Restaurants, Inc. 29,096
Wendy's International, Inc. 6,626
Sonic Corp. 1,717
Foodmaker, Inc. 1,323
Darden Restaurants, Inc. 1,151
NPC International, Inc. 876
SBARRO, INC. 858
Pizza Inn, Inc. 494
Showbiz Pizza Time, Inc. 314
Au Bon Pain Co., Inc. 289
Uno Restaurant Corporation 161
- ----------------------------------------
MEAN 4,205
ENTERPRISE VALUE AS OF 2/27/98
(EQUITY MARKET CAPITALIZATION
PLUS NET DEBT)
- ----------------------------------------
Tricon Global Restaurants, Inc. $4,444.6
Wendy's International, Inc. $3,140.4
Darden Restaurants, Inc. $2,393.1
Foodmaker, Inc. $1,078.3
Showbiz Pizza Time, Inc. $571.3
NPC International, Inc. $495.3
SBARRO, INC. $484.5
Sonic Corp. $423.5
Au Bon Pain Co., Inc. $177.2
Uno Restaurant Corporation $118.0
Pizza Inn, Inc. $78.4
- ----------------------------------------
MEAN $1,292.0
26 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
COMPARABLE RESTAURANT COMPANIES ANALYSIS(1)(2)
GROWTH FACTORS AS OF FISCAL YEAR END
SALES GROWTH
(Two (2) Year CAGR)
- ----------------------------------------
Sonic Corp. 21.9%
Au Bon Pain Co., Inc. 13.8%
Wendy's International, Inc. 9.2%
Uno Restaurant Corporation 5.9%
Pizza Inn, Inc. 5.6%
Showbiz Pizza Time, Inc. 4.6%
SBARRO, INC. 4.5%
Foodmaker, Inc. 2.6%
Tricon Global Restaurants, Inc. 1.4%
Darden Restaurants, Inc. 0.1%
NPC International, Inc. -3.6%
- ----------------------------------------
MEAN 6.2%
EBIT GROWTH
(Two (2) Year CAGR)
- ----------------------------------------
Showbiz Pizza Time, Inc. 127.3%
Foodmaker, Inc. 51.7%
Sonic Corp. 21.9%
NPC International, Inc. 20.1%
Wendy's International, Inc. 16.6%
Pizza Inn, Inc. 15.8%
SBARRO, INC. 9.5%
Tricon Global Restaurants, Inc. 3.9%
Uno Restaurant Corporation -13.3%
Darden Restaurants, Inc. -27.6%
Au Bon Pain Co., Inc. -61.2%
- ----------------------------------------
MEAN 15.5%
EBITDA GROWTH
(Two (2) Year CAGR)
- ----------------------------------------
Foodmaker, Inc. 28.9%
Showbiz Pizza Time, Inc. 27.9%
Sonic Corp. 27.9%
Pizza Inn, Inc. 16.1%
Wendy's International, Inc. 14.4%
NPC International, Inc. 8.1%
SBARRO, INC. 6.7%
Tricon Global Restaurants, Inc. 1.9%
Uno Restaurant Corporation -3.5%
Darden Restaurants, Inc. -13.9%
Au Bon Pain Co., Inc. -16.8%
- ----------------------------------------
MEAN 9.1%
NET INCOME GROWTH
(Two (2) Year CAGR)
- ----------------------------------------
Au Bon Pain Co., Inc. NM
Foodmaker, Inc. NM
Showbiz Pizza Time, Inc. 341.1%
NPC International, Inc. 81.8%
Pizza Inn, Inc. 26.1%
Sonic Corp. 24.0%
Wendy's International, Inc. 16.6%
SBARRO, INC. 10.1%
Tricon Global Restaurants, Inc. 4.9%
Uno Restaurant Corporation -17.9%
Darden Restaurants, Inc. -42.0%
- ----------------------------------------
MEAN 54.3%
27 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
COMPARABLE RESTAURANT COMPANIES ANALYSIS(1)(2)
GROWTH FACTORS (CONT'D)
COMPARATIVE STORE SALES GROWTH
(Trailing One (1) Year Growth)
- ----------------------------------------
Showbiz Pizza, Inc. 9.6%
Foodmaker, Inc. 6.5%
Sonic Corp. 6.3%
Wendy's International, Inc. 5.3%
Darden Restaurants, Inc. 1.2%
SBARRO, INC. -0.4%
Au Bon Pain Co., Inc. -1.3%
Uno Restaurant Corporation -1.7%
Pizza Inn, Inc. -2.0%
Tricon Global Restaurants, Inc. -4.0%
NPC International, Inc. -7.5%
- ----------------------------------------
MEAN 1.2%
CONSENSUS FORWARD GROWTH RATE
(Five (5) Year Growth)
- ----------------------------------------
NPC International, Inc. 22.0%
Foodmaker, Inc. 20.0%
Au Bon Pain Co., Inc. 17.0%
Showbiz Pizza Time, Inc. 17.0%
Sonic Corp. 16.0%
Wendy's International, Inc. 15.0%
Pizza Inn, Inc. 15.0%
Uno Restaurant Corporation 15.0%
Tricon Global Restaurants, Inc. 13.0%
Darden Restaurants, Inc. 12.0%
SBARRO, INC. 12.0%
- ----------------------------------------
MEAN 16.2%
28 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
VALUATION SUMMARY
COMPARABLE RESTAURANT COMPANIES ANALYSIS(1)(2)
RISK FACTORS
EBITDA MARGINS
(EBITDA to Sales)
- ----------------------------------------
SBARRO, INC. 23.5%
Sonic Corp. 23.5%
Showbiz Pizza Time, Inc. 19.9%
Wendy's International, Inc. 19.6%
NPC International, Inc. 16.4%
Tricon Global Restaurants, Inc. 13.2%
Uno Restaurant Corporation 12.9%
Pizza Inn, Inc. 12.5%
Foodmaker, Inc. 11.7%
Au Bon Pain Co., Inc. 9.9%
Darden Restaurants, Inc. 8.4%
- ----------------------------------------
MEAN 14.8%
LEVERAGE
(Total Debt to Total Cap. (book))
- ----------------------------------------
SBARRO, INC. 0.0X
Tricon Global Restaurants, Inc. 0.1x
Showbiz Pizza Time, Inc. 0.2x
Darden Restaurants, Inc. 0.3x
Sonic Corp. 0.3x
Wendy's International, Inc. 0.3x
Pizza Inn, Inc. 0.4x
Uno Restaurant Corporation 0.4x
Au Bon Pain Co., Inc. 0.5x
NPC International, Inc. 0.7x
Foodmaker, Inc. 0.8x
- ----------------------------------------
MEAN 0.4X
EBIT MARGINS
(EBIT to Sales)
- ----------------------------------------
Sonic Corp. 17.4%
SBARRO, INC. 16.6%
Wendy's International, Inc. 14.6%
Showbiz Pizza Time, Inc. 12.1%
Pizza Inn, Inc. 11.2%
NPC International, Inc. 10.1%
Foodmaker, Inc. 8.0%
Tricon Global Restaurants, Inc. 7.2%
Uno Restaurant Corporation 5.8%
Darden Restaurants, Inc. 4.1%
Au Bon Pain Co., Inc. 2.9%
- ----------------------------------------
MEAN 9.3%
NET INCOME MARGINS
(Net Income to Sales)
- ----------------------------------------
SBARRO, INC. 11.0%
Sonic Corp. 10.3%
Wendy's International, Inc. 8.9%
Pizza Inn, Inc. 6.8%
Showbiz Pizza Time, Inc. 6.7%
NPC International, Inc. 4.4%
Foodmaker, Inc. 3.3%
Uno Restaurant Corporation 2.7%
Tricon Global Restaurants, Inc. 2.3%
Darden Restaurants, Inc. 2.1%
Au Bon Pain Co., Inc. 0.6%
- ----------------------------------------
MEAN 4.8%
29 [LOGO] Prudential
- --- Securities
<PAGE>
Section I
<PAGE>
________________________________________________________________________________
___________________________________________________
1. Comparable Companies (Pizza and
Value Priced Italian Restaurants)
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS
<TABLE>
<CAPTION>
LATEST TWELVE MONTH RESULTS
--------------------------------------------------------------------------------------------------
Results
--------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Sales Rest. Pat. EBITDA EBIT Net Inc. Assets Book Value Debt ROE
----- ---------- ------ ---- -------- ------ ---------- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Darden Restaurants, Inc. $3,172.1 $603.9 $265.1 $131.5 $67.1 $1,981.6 $1,065.1 $373.7 5.9%
NPC International, Inc. $409.8 $72.4 $67.3 $41.3 $18.2 $391.8 $110.2 $210.2 18.1%
Pizza Inn, Inc. $68.0 $12.4 $8.5 $7.6 $4.6 $22.9 $11.1 $6.5 44.3%
Showbiz Pizza Time, Inc. $331.1 $128.2 $65.8 $40.0 $22.1 $231.0 $163.2 $30.2 14.6%
Uno Restaurant Corporation $180.8 $53.7 $23.3 $10.5 $5.0 $145.3 $72.1 $48.9 6.6%
Sbarro, Inc. $345.1 $97.2 $81.1 $57.1 $38.1 $278.6 $220.4 $0.0 17.9%
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
(table continued)
LATEST FISCAL YEAR RESULTS
Results Per Share Results (a) EPS Growth
(Dollars in millions, except per share data)
Sales EBIT Net LTM EPS 1997 EPS 1998 EPS 97-98 5-Yrs.
----- ---- --- ------- -------- -------- ----- ------
Darden Restaurants, Inc. $3,171.8 $97.7 $44.4 $0.44 $0.50 $0.69 38.0% 12.00%
NPC International, Inc. $295.3 $34.5 $17.8 $0.72 $0.72 $0.95 31.6% 22.00%
Pizza Inn, Inc. $69.1 $7.5 $4.5 $0.34 $0.34 $0.42 23.5% 15.00%
Showbiz Pizza Time, Inc. $292.9 $25.7 $13.2 $1.16 $1.33 $1.64 23.3% 17.00%
Uno Restaurant Corporation $178.0 $10.0 $4.9 $0.42 $0.42 NA NA 15.00%
Sbarro, Inc. $345.1 $57.1 $38.1 $1.86 $1.86 $1.97 5.9% 12.00%
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 38.0% 22.0%
LOW 23.3% 12.0%
MEAN 29.1% 16.2%
MEDIAN 27.6% 15.0%
ADJ. MEAN 27.6% 15.7%
COUNT 4 5
</TABLE>
31 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
- ---------------------------------------------------------------------------
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS
<TABLE>
<CAPTION>
LATEST TWELVE MONTHS
-------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Margins Credit
------------------------------------------- --------------------------------------------------
Rest.
Pat. S, G &A EBITDA EBIT Net Debt/Cap. Crnt. Ratio Debt/EBITDA EBITDA/Int
---- ------- ------ ---- --- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Darden Restaurants, Inc. 19.0% 14.9% 8.4% 4.1% 2.1% 0.3x 0.7x 1.4x 12.5x
NPC International, Inc. 17.7% 7.8% 16.4% 10.1% 4.4% 0.7x 0.4x 3.1x 5.2x
Pizza Inn, Inc. 18.2% 7.0% 12.5% 11.2% 6.8% 0.4x 2.3x 0.8x 15.2x
Showbiz Pizza Time, Inc. 38.7% 41.0% 19.9% 12.1% 6.7% 0.2x 1.4x 0.5x 22.0x
Uno Restaurant Corporation 29.7% 23.4% 12.9% 5.8% 2.7% 0.4x 0.4x 2.1x 7.9x
Sbarro, Inc. 28.2% 12.1% 23.5% 16.6% 11.0% 0.0x 2.9x 0.0x NM
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 38.7% 41.0% 19.9% 12.1% 6.8% 0.7x 2.3x 3.1x 22.0x
LOW 17.7% 7.0% 8.4% 4.1% 2.1% 0.2x 0.4x 0.5x 5.2x
MEAN 24.7% 18.8% 14.0% 8.7% 4.6% 0.4x 1.0x 1.6x 12.6x
MEDIAN 19.0% 14.9% 12.9% 10.1% 4.4% 0.4x 0.7x 1.4x 12.5x
ADJ. MEAN 22.3% 15.4% 13.9% 9.0% 4.6% 0.3x 0.8x 1.4x 11.9x
COUNT 5 5 5 5 5 5 5 5 5
(table continued)
(Dollars in millions, except per share data)
Two Year Growth
-------------------------------------
Net
Sales EBIT EBITDA Income
----- ------- ------- --------
Darden Restaurants, Inc. 0.1% -27.6% -13.9% -42.0%
NPC International, Inc. -3.6% 20.1% 8.1% 81.8%
Pizza Inn, Inc. 5.6% 15.8% 16.1% 26.1%
Showbiz Pizza Time, Inc. 4.6% 127.3% 27.9% 341.1%
Uno Restaurant Corporation 5.9% 13.3% -3.5% -17.9%
Sbarro, Inc. 4.5% 9.5% 6.7% 10.1%
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 5.9% 127.3% 27.9% 341.1%
LOW -3.6% -27.6% -13.9% -42.0%
MEAN 2.5% 24.5% 6.9% 77.8%
MEDIAN 4.6% 15.8% 8.1% 26.1%
ADJ. MEAN 3.4% 7.5% 6.9% 30.0%
COUNT 5 5 5 5
</TABLE>
32 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
- ---------------------------------------------------------------------------
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS
<TABLE>
<CAPTION>
LATEST TWELVE MONTHS
------------------------------------------------------------------------------------
Restaurants Per Unit Data
------------------------ -------------------------------------------------------
(Dollars in millions except per unit data)
Owned Franchised Total Revenue EBIT EBITDA EBITDA+Rent ROI
----- ---------- ------ ---------- -------- -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Darden Restaurants, Inc. 1,151 - 1,151 $2,675,000 $361,000 $468,000 $522,000 20.9%
NPC International, Inc. 732 144 876 $665,000 $116,375 NA $206,510 31.0%
Pizza Inn, Inc. 5 489 494 NA NA NA NA NA
Showbiz Pizza Time, Inc. 245 69 314 $1,400,000 $117,600 $238,000 NA NA
Uno Restaurant Corporation 95 66 161 $1,920,000 NA $407,250 NA 18.10%
Sbarro, Inc. 627 231 858 $548,922 $104,131 $138,328 $261,891 30.5%
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 1,151.0 489.0 1,151.0 $2,675,000 $361,000 $468,000 $522,000 31.0%
LOW 5.0 66.0 161.0 $665,000 $116,375 $238,000 $206,150 18.1%
MEAN 445.6 192.0 599.2 $1,665,000 $198,325 $371,083 $364,075 23.3%
MEDIAN 245.0 106.5 494.0 $1,660,000 $117,600 $407,250 $364,075 20.9%
ADJ. MEAN 357.3 106.5 561.3 $1,660,000 $117,600 $407,250 NA 20.9%
COUNT 5 4 5 4 3 3 2 3
(table continued)
LATEST TWELVE MONTHS
--------------------
New Store
--------------------
(Dollars in millions except per unit data)
Tot.
Growth Cost/Unit
------- ----------
Darden Restaurants, Inc. -6.0% $2,500,000
NPC International, Inc. 60.7% $665,000
Pizza Inn, Inc. 5.1% NA
Showbiz Pizza Time, Inc. -1.6% $1,300,000
Uno Restaurant Corporation 7.3% $2,250,000
Sbarro, Inc. 5.1% $859,036
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 60.7% $2,500,000
LOW -6.0% $665,000
MEAN 13.1% $1,678,750
MEDIAN 5.1% $1,775,000
ADJ. MEAN 3.6% $1,775,000
COUNT 5 4
</TABLE>
(1) Unit level data from Salomon Industry research report except for NPC
International unit data which comes from A.G. Edwards & Sons company
research report, Showbiz Pizza Time unit data which comes from Credit
Suisse First Boston company research report and Uno Restaurant Corporation
unit data which comes from NationsBanc Montgomery Securities Industry
research report.
33 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS
Footnotes
- ---------
(a) Earnings estimates from First Call except Sbarro estimates which are from
company projections.
(b) Charges for restructuring and asset impairment in fiscal 1995, 1996 and
1997 were added back after tax effecting at the average tax rate of the
company.
(c) Exercise price of options assumed to be the average price of exercisable
options.
(d) Per unit data and comparative store sales data is for Olive Garden
restaurants only.
(e) Exercise price of outstanding options used as average exercise of
exercisable options.
(f) Impairment and loss provision for underperforming assets in fiscal 1996
and fiscal 1995 were added back after tax effecting at a 40% tax rate.
(g) Per unit restaurant data and comparative store sales data is for Pizza Hut
restaurants only. Comparative store sales are for the nine months ended
12/97.
(h) Non-recurring gain in fiscal 1995 was added back after tax effecting at the
average tax rate of the company. Dividend payout ratio is based on declared
dividend rate at 12/97.
(i) Restaurant count as of fiscal 1996. Comparative store sales information
from Van Kasper & Company research report.
(j) All outstanding options were assumed to be exercisable.
(k) Restaurant count as of fiscal 1996. Comparative store growth for the nine
months ended 9/97.
(1) Asset impairment charges in fiscal 1996 and 1997 were added back after tax
effecting at the average tax rate of the company.
(m) Comparative store sales data information is for the year ended 9/97.
(n) Provision for unit closings in fiscal 1995 and 1997 was added back after
tax effecting at a 40% tax rate.
34 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
COMPARABLE COMPANIES
COMPANY DARDEN RESTAURANTS, INC.
DESCRIPTIONS ------------------------
The company is the world's largest full-service
restaurant organization. In the United States, as
of November 23, 1997, the company operated 1,111
restaurants in 49 states, including 649 Red
Lobster restaurants, 460 The Olive Garden
restaurants, and two Bahama Breeze restaurants. In
addition, the company operated 40 restaurants in
Canada, including 35 Red Lobster and 5 The Olive
Garden restaurants. All of its restaurants in
North America are company-operated.
NPC INTERNATIONAL, INC.
------------------------
The company is the largest Pizza Hut franchisee in
the world. The company, through its wholly owned
subsidiary, Romacorp, Inc., is also the
owner/franchisor of Tony Roma's, a casual theme
restaurant. As of December 23, 1997, the company
owned and operated 684 Pizza Hut restaurants and
45 Tony Roma's restaurants. Additionally, 145 Tony
Roma's restaurants were franchised.
PIZZA INN, INC.
---------------
The company is the franchisor and food and supply
distributor to a system of restaurants operating
under the Pizza Inn name. At September 8, 1997,
the Pizza Inn system consisted of 494 units,
including five company operated units and 489
franchised units. Pizza Inn units are currently
located in 18 states and 19 foreign countries.
Domestic units are located predominantly in the
southern half of the United States, with Texas,
North Carolina and Arkansas accounting for
approximately 30%, 15% and 11%, respectively, of
the total.
35 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
COMPARABLE COMPANIES
COMPANY SHOWBIZ PIZZA, INC.
DESCRIPTIONS -------------------
The company is engaged in the family restaurant/
entertainment center business through its Chuck E.
Cheese's restaurants which offer a variety of
pizza, salad bar, sandwiches and desserts and
feature musical and comic entertainment by
life-size, computer-controlled robotic characters,
family oriented games, rides and arcade-style
activities. As of March 14, 1997, the company
operated 245 restaurants and franchisees operated
69 restaurants located in 44 states.
UNO RESTAURANT CORPORATION
--------------------------
The Company owns and operates or franchises a
total of 161 restaurants, including 95 owned and
66 franchised casual dining, full-servlce
restaurants under the Pizzeria Uno ... Chicago Bar
& Grill name. Company-owned restaurants are
located primarily in major markets from New
England to Virginia, Florida, Chicago and Denver
and franchised restaurants are located throughout
the United States as well as one restaurant in
Seoul, Korea.
36 [LOGO] Prudential
- --- Securities
<PAGE>
Section II
<PAGE>
________________________________________________________________________________
___________________________________________________
2. Comparable Companies (Fast Food
Restaurants)
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
SELECTED COMPARABLE FAST FOOD COMPANIES
<TABLE>
<CAPTION>
LATEST TWELVE MONTH RESULTS
-------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Results
-------------------------------------------------------------------------------------------
Rest. Book
Sales Pft. EBITDA EBIT Net Inc. Assets Value Debt ROE
-------- -------- -------- ------ -------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Au Bon Pain Co., Inc. $248.6 $129.5 $24.5 $7.2 $1.5 $196.3 $91.6 $80.9 1.7%
Foodmaker, Inc. $1,017.7 $166.0 $125.5 $85.6 $35.3 $681.8 $87.9 $347.7 50.7%
Tricon Global Restaurants, Inc. $9,625.0 $1,568.0 $1,266.0 $692.0 $217.0 $5,865.0 $3,564.0 $299.0 NA
Sonic Corp. $192.9 $75.2 $45.3 $33.6 $19.9 $188.8 $123.8 $46.5 16.7%
Wendy's International, Inc. $2,013.4 $603.6 $394.7 $294.2 $178.3 $1,914.0 $1,204.2 $454.8 16.0%
Sbarro, Inc. $345.1 $97.2 $81.1 $57.1 $38.1 $278.6 $220.4 $0.0 17.9%
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
(table continued)
LATEST FISCAL YEAR RESULTS
-------------------------
(Dollars in millions, except per share data)
Results Per Share Results (a) EPS Growth
------------------------- ---------------------------- -----------------
Sales EBIT Net LTM EPS 1997 EPS 1998 EPS 97-98 5-Yrs.
----- ---- --- ------- -------- -------- ----- ------
Au Bon Pain Co., Inc. $236.9 $2.3 ($1.7) $0.13 $0.19 $0.32 68.4% 17.00%
Foodmaker, Inc. $1,071.7 $85.6 $35.3 $0.89 $0.95 $1.12 17.9% 20.00%
Tricon Global Restaurants, Inc. $9,838.0 $628.0 $131.0 $1.40 ($0.56) $1.91 NA 13.00%
Sonic Corp. $184.0 $32.2 $19.2 $1.48 $1.49 $1.71 14.8% 16.00%
Wendy's International, Inc. $1,897.1 $261.6 $155.9 $1.29 $1.33 $1.20 -9.8% 15.00%
Sbarro, Inc. $345.1 $57.1 $38.1 $1.86 $1.86 $1.97 5.9% 12.00%
SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 68.4% 20.0%
LOW -9.8% 13.0%
MEAN 22.8% 16.2%
MEDIAN 16.3% 16.0%
ADJ. MEAN 16.3% 16.0%
COUNT 4 5
</TABLE>
38 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
SELECTED COMPARABLE FAST FOOD COMPANIES
<TABLE>
<CAPTION>
LATEST TWELVE MONTHS
----------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
Margins Credit
------------------------------------------- -----------------------------------------------
Rest. Crnt.
Pft. S, G & A EBITDA EBIT Net Debt/Cap. Ratio Debt/EBITDA EBITDA/Int
----- -------- ------ ---- ----- --------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Au Bon Pain Co., Inc. 52.1% 13.3% 9.9% 2.9% 0.6% 0.5x 1.3x 3.3x 3.5x
Foodmaker, Inc. 15.5% 7.5% 11.7% 8.0% 3.3% 0.8x 0.5x 2.8x 3.1x
Tricon Global Restaurants, Inc. 16.3% 10.0% 13.2% 7.2% 2.3% 0.1x 0.6x 0.2x 4.3x
Sonic Corp. 39.0% 21.5% 23.5% 17.4% 10.3% 0.3x 0.9x 1.0x 22.8x
Wendy's International, Inc. 30.0% 15.4% 19.6% 14.6% 8.9% 0.3x 2.0x 1.2x 76.7x
Sbarro, Inc. 28.2% 12.1% 23.5% 16.6% 11.0% 0.0x 2.9x 0.0x NM
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 52.1% 21.5% 23.5% 17.4% 10.3% 0.8x 2.0x 3.3x 76.7x
LOW 15.5% 7.5% 9.9% 2.9% 0.6% 0.1x 0.5x 0.2x 3.1x
MEAN 30.6% 13.5% 15.6% 10.0% 5.1% 0.4x 1.1x 1.7x 22.1x
MEDIAN 30.0% 13.3% 13.2% 8.0% 3.3% 0.3x 0.9x 1.2x 4.3x
ADJ. MEAN 28.4% 12.9% 14.8% 9.9% 4.8% 0.3x 0.9x 1.7x 10.2x
COUNT 5 5 5 5 5 5 5 5 5
(table continued)
(Dollars in millions, except per share data)
Two Year Growth
------------------------------------
Net
Sales EBIT EBITDA Income
----- ----- ------ ------
Au Bon Pain Co., Inc. 13.8 -61.2 -16.8 NA
Foodmaker, Inc. 2.6 51.7 28.9 NA
Tricon Global Restaurants, Inc. 1.4 3.9 1.9 4.9
Sonic Corp. 21.9 21.9 27.9 24.0
Wendy's International, Inc. 9.2 16.6 14.4 16.6
Sbarro, Inc. 4.5% 9.5% 6.7% 10.1%
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 21.9% 51.7% 28.9% 24.0%
LOW 1.4% -61.2% -16.8% 4.9%
MEAN 9.8% 6.6% 11.2% 15.1%
MEDIAN 9.2% 16.6% 14.4% 16.6%
ADJ. MEAN 8.5% 14.1% 14.7% 16.6%
COUNT 5 5 5 3
</TABLE>
39 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
SELECTED COMPARABLE FAST FOOD COMPANIES
<TABLE>
<CAPTION>
LATEST TWELVE MONTHS
----------------------------------------------------------------------------------------
Restaurants Per Unit Data(1)(2)
----------------------------- --------------------------------------------------------
(Dollars in millions, except per unit data)
Owned Franchised Total Revenue EBIT EBITDA EBITDA+Rent ROI
------ ---------- ----- ------- ---- ------ ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Au Bon Pain Co., Inc. 231 58 289 $950,000 $74,000 $139,000 $237,000 13.5%
Foodmaker, Inc. 963 360 1,323 $1,071,00 $108,171 $145,656 $224,900 17.3%
Tricon Global Restaurants, Inc. 12,883 16,213 29,096 $665,000 $116,375 NA $206,150 31.0%
Sonic Corp. 267 1,450 1,717 $600,000 $93,000 $128,000 $140,000 25.5%
Wendy's International, Inc. 2,725 3,901 6,626 $975,000 $133,000 $176,000 $211,000 22.2%
Sbarro, Inc. 627 231 858 $548,922 $104,131 $138,328 $261,891 30.5%
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 12,883.0 16,213.0 29,096.0 $1,071,000 $133,000 $176,000 $237,000 31.0%
LOW 231.0 58.0 289.0 $600,000 $74,000 $128,000 $140,000 13.5%
MEAN 3,413.8 4,396.4 7,810.2 $852,200 $104,909 $147,164 $203,810 21.9%
MEDIAN 963.0 1,450.0 1,717.0 $950,000 $108,171 $142,328 $211,000 22.2%
ADJ. MEAN 1,318.3 1,903.7 3,222.0 $863,333 $105,849 $142,328 $214,017 21.7%
COUNT 5 5 5 5 5 4 5 5
(table continued)
LATEST TWELVE MONTHS
--------------------
New Store
--------------------
(Dollars in millions, except per unit data)
Tot.
Growth Cost/Unit
------ ----------
Au Bon Pain Co., Inc. 13.3% $1,750,000
Foodmaker, Inc. 4.2% $1,300,000
Tricon Global Restaurants, Inc. NA $665,000
Sonic Corp. 8.2% $550,000
Wendy's International, Inc. 7.5% $950,000
Sbarro, Inc. 5.1% $859,036
SUMMARY STATISTICS EXCLUDE SBARRO, INC.
HIGH 13.3% $1,750,000
LOW 4.2% $550,000
MEAN 8.3% $1,043,000
MEDIAN 7.8% $950,000
ADJ. MEAN 7.8% $971,667
COUNT 4 5
</TABLE>
(1) Unit level data from Salomon Industry research report except for Foodmaker
unit data which comes from Salomon Smith Barney company research report.
40 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
SELECTED COMPARABLE FAST FOOD COMPANIES
FOOTNOTES
- ---------
(a) Earnings estimates from First Call except Sbarro estimates which are from
company projections.
(b) Reduction in carrying value of long-lived assets in fiscal 1995 and 1996
and facilities relocation charges in fiscal 1994, 1995 and 1996 were added
back after tax effecting at a 40% tax rate.
(c) Restaurant count as of fiscal 1996.
(d) Per unit data is for Au Bon Pain restaurants only.
(e) Equity in loss of FRI was added back in fiscal 1995 after tax effecting at
a 40% tax rate.
(f) Income statement results are pro forma for the spin off from PepsiCo. Gains
from restaurant sales are not included in SG&A. Per unit restaurant data is
for Pizza Hut restaurants only.
(g) Unusual disposal charges in fiscal 1996 were added back after tax effecting
at a 40% tax rate. Outstanding option information was not available.
(h) Provision for impairment of long-lived assets in fiscal years 1995-1997
and the 3-months ended 11/97 were added back after tax effecting at a 40%
tax rate.
(i) Special charges in fiscal 1994 and 1995 and restructuring charges during
the nine months ended 9/97 were added back after tax effecting at a 40% tax
rate.
(j) Comparable store sale information is from Legg Mason research report.
(k) Provision for unit closings in fiscal 1995 and 1997 was added back after
tax effecting at a 38% tax rate.
41 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
COMPARABLE COMPANIES
COMPANY AU BON PAIN CO., INC.
DESCRIPTIONS ---------------------
The company owns, operates and franchises Au Bon
Pain and Saint Louis Bread Company bakery cafes.
Both concepts specialize in high quality food for
breakfast and lunch. The company's bakery cafes
are principally located in the northeastern and
mid-Atlantic United States. As of December 28,
1996, there were 289 bakery cafes of which 231
were operated by the company (177 Au Bon Pain
restaurants and 54 Saint Louis Bread Company
restaurants) and 58 were franchised (48 Au Bon
Pain restaurants and 10 Saint Louis Bread Company
restaurants).
FOODMAKER, INC.
----------------
The company owns, operates and franchises Jack in
the Box restaurants, a fast-food chain located
principally in the western and southwestern United
States. Jack in the Box is a leading regional
competitor in the fast-food segment of the
restaurant industry. At September 28, 1997, there
were 1,323 Jack in the Box restaurants, of which
963 were operated by the company and 360 were
franchised.
TRICON Global Restaurants, Inc.
--------------------------------
The company is the world's largest quick service
restaurant company based on number of units, with
more than 29,000 units in 95 countries and
territories. The company, owns, operates and
franchises three of the most recognized
restaurants concepts, Pizza Hut, Taco Bell and
KFC. As of December 30, 1996, the company's system
included 12,883 company operated/joint venture
restaurants and 16,213 franchised restaurants. Of
the total restaurants, 9,863 were KFC restaurants,
12,388 were Pizza Hut restaurants, and 6,845 were
Taco Bell restaurants.
42 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
COMPARABLE COMPANIES
COMPANY SONIC CORP.
DESCRIPTIONS -----------
The company operates and franchises the largest
chain of drive-in restaurants in the United
States. As of November 30, 1997, the company had
1,717 restaurants in operation, consisting of 267
company-owned restaurants and 1,450 franchised
restaurants, principally in the south central and
southeastern United States. At a typical Sonic
restaurant, a customer drives into one of 24 to 36
covered drive-in spaces, orders through an
intercom, and has the food delivered by a carhop
within an average of four minutes.
WENDY'S INTERNATIONAL, INC.
---------------------------
The company is primarily engaged in the business
of operating, developing, and franchising a system
of distinctive quick-service restaurants. At
September 28, 1997, there were 5,133 Wendy's
restaurants in operation in the United States and
in 33 other countries and territories. Of these
restaurants, 1,232 were operated by the company
and 3,901 were franchised. During the same period,
the company and its franchisees also operated
1,493 Tim Hortons restaurants in Canada and the
United States.
43 [LOGO] Prudential
- --- Securities
<PAGE>
________________________________________________________________________________
___________________________________________________
B. Leveraged Buy-Out Analysis
___________________________________________________
[LOGO] Prudential
Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
LEVERAGED BUY-OUT ANALYSIS
TRANSACTION ASSUMPTIONS
(In millions, except offer price)
OFFER PRICE $ 33.00
COMPARATIVE STORE SALES GROWTH 0.5%
SOURCES AND USES OF FUNDS
- -------------------------
SOURCES OF FUNDS
- ----------------
Excess Cash on Balance Sheet $ 117.1
Bank Credit Facility 200.0
Senior Unsecured Notes 300.0
Equity Investment 103.1
------------------
TOTAL SOURCES OF FUNDS $ 720.2
==================
USES OF FUNDS
- -------------
Number of Fully Diluted Shares Outstanding 20,914
Number of Shares to be Repurchased 20,914 100.0%
Purchase Price of Equity $ 690.2
Purchase Price of Options 15.4
Repayment of Existing Debt -
------------------
TOTAL PURCHASE PRICE $ 705.6
Financing Costs 9.8
Non-Financing Costs 4.8
------------------
TOTAL USES OF FUNDS $ 720.2
==================
PRO FORMA % OF
ESTIMATED TOTAL INTEREST
PRO FORMA CAPITALIZATION 12/28/97 CAPITALIZATION RATE
- ------------------------
Cash & Cash Equivalents $ 10.2 5.50%
Bank Credit Facility 200.0 33.2% 8.00%
Senior Unsecured Notes 300.0 49.7% 10.50%
------------
TOTAL LONG TERM DEBT $ 500.0
Common Equity $ 103.1 17.1%
------------
Total Shareholders' Equity 103.1 17.1%
TOTAL CAPITALIZATION $ 603.1 100.0%
============ ================
Implied Equity Value $ 690.2
Implied Enterprise Value $ 572.2
Goodwill $ 484.4
Period (Years) 30
45 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
LEVERAGED BUY-OUT ANALYSIS
INCOME STATEMENTS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
PROJECTED FISCAL YEARS ENDING DECEMBER 31,
--------------------------------------------------------------------------------------
(In 000's except per share data) 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Existing restaurant sales $ 349,149 $ 368,358 $ 387,750 $ 407,326 $ 427,089
Existing franchise related income 6.664 7,353 8,049 8,752 9,461
---------- ----------- ---------- ---------- -----------
Total revenues 355,813 375,711 395,799 416,078 436,550
Cost of food and paper products 70,807 74,703 78,636 82,606 86,614
---------- ----------- ---------- ---------- -----------
Gross profit 285,006 301,008 317,163 333,472 349,937
Gross margin 81.6% 81.7% 81.8% 81.9% 81.9%
Payroll and other benefits 86,589 91,353 96,162 101,017 105,918
Occupancy and other expenses 40,187 42,398 44,630 46,883 49,158
Rent expense 56,911 60,042 63,203 66,394 69,616
General and administrative 17,960 18,948 19,946 20,953 21,969
Provision for unit closings - - - - -
Other income (1,466) (2,173) (2,171) (2,159) (2,135)
---------- ----------- ---------- ---------- -----------
Total costs and expenses 200,181 210,568 221,770 233,088 244,526
EBITDA 84,825 90,440 95,394 100,384 105,411
EBITDA margin 23.8% 24.1% 24.1% 24.1% 24.1%
Depreciation 26,094 26,790 27,759 28,781 29,922
Amortization (1) 16,147 16,147 16,147 16,147 16,147
---------- ----------- ---------- ---------- -----------
EBIT 42,584 47,503 51,487 55,456 59,342
Interest expense 48,320 47,560 45,960 43,960 41,760
Interest income 12 184 58 175 266
---------- ----------- ---------- ---------- -----------
Income before taxes (5.,724) 127 5,585 11,671 17,848
Income taxes @ 40% 3,961 6,184 8,258 10,571 12,918
---------- ----------- ---------- ---------- -----------
Net income $ (9,685) $ (6,057) $ (2,673) $ 1,100 $ 4,930
========== =========== ========== ========== ===========
Net income margin -2.8% -1.6% -0.7% 0.3% 1.2%
</TABLE>
(1) Goodwill is not tax-deductible.
46 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
LEVERAGED BUY-OUT ANALYSIS
BALANCE SHEETS
<TABLE>
<CAPTION>
------------- ---------------------------------------------------------------------
PRO FORMA PROJECTED FISCAL YEARS ENDING DECEMBER 31,
------------- ---------------------------------------------------------------------
(In 000's) 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 10,214 $ 219 $ 3,343 $ 1,059 $ 3,174 $ 4,836
Accounts receivables 2,375 2,242 2,367 2,494 2,622 2,751
Inventories 2,962 2,929 3,090 3,253 3,417 3,583
Prepaid expenses 1,768 1,560 1,647 1,735 1,824 1,914
------------ ------------ ------------ ----------- ------------- ------------
Total current assets 17,319 6,950 10,448 8,541 11,037 13,083
Property and equipment, net 136,798 139,254 132,015 123,805 115,175 106,003
Goodwill 484,418 468,271 452,124 435,976 419,829 403,682
Deferred financing fees 9,800 8,820 7,840 6,860 5,880 4,900
Deferred charges, net 1,596 1,600 1,600 1,600 1,600 1,600
Other assets 5,840 6,500 6,500 6,500 6,500 6,500
------------ ------------ ------------ ----------- ------------- ------------
Total assets $ 655,771 $ 631,395 $ 610,526 $ 583,283 $ 560,021 $ 535,768
============ ============ ============ =========== ============= ============
LIABILITIES AND EQUITY
Accounts payable $ 10,086 $ 7,391 $ 7,798 $ 8,208 $ 8,623 $ 9,041
Accrued expenses 26,025 23,376 24,662 25,961 27,271 28,594
Dividend payable - - - - - -
Income taxes 4,777 1,200 1,200 1,200 1,200 1,200
------------ ------------ ------------ ----------- ------------- ------------
Total current liabilities 40,888 31,967 33,660 35,369 37,094 38,835
Deferred income taxes 11,801 10,031 8,526 7,247 6,160 5,236
Bank credit facility 200,000 196,000 181,000 156,000 131,000 101,000
Senior unsecured notes 300,000 300,000 300,000 300,000 300,000 300,000
------------ ------------ ------------ ----------- ------------- ------------
Total liabilities 552,689 537,998 523,186 498,616 474,254 445,072
Retained earnings 103,082 93,397 87,340 84,667 85,767 90,696
------------ ------------ ------------ ----------- ------------- ------------
Shareholders' equity 103,082 95,397 87,340 84,667 85,767 90,696
------------ ------------ ------------ ----------- ------------- ------------
Total liabilities and shareholders' equity $ 655,771 $ 631,395 $ 610,526 $ 583,283 $ 560,021 $ 535,768
============ ============ ============ =========== ============= ============
</TABLE>
47 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
LEVERAGED BUY-OUT ANALYSIS
CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
---------------------------------------------------------------
PROJECTED FISCAL YEARS ENDING DECEMBER 31,
---------------------------------------------------------------
(In 000's) 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income $ (9,685) $ (6,057) $ (2,673) $ 1,100 $ 4,930
Depreciation and Amortization 43,221 43,917 44,887 45,908 47,049
Deferred taxes (1,770) (1,505) (1,279) (1,087) (924)
Decrease (increase) in receivables 133 (125) (127) (128) (129)
Decrease (increase) in inventories 33 (161) (163) (164) (166)
Decrease (increase) in prepaid expenses 208 (87) (88) (89) (90)
Decrease (increase) in deferred charges (4) - - - -
Increase in other assets (660) - - - -
(Decrease) increase in accounts payable and accruals (5,344) 1,693 1,709 1,725 1,742
(Decrease) increase in income taxes and dividends payable (3,577) - - - -
---------- ---------- ---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 22,555 $ 37,674 $ 42,266 $ 47,265 $ 52,412
Capital expenditures (new stores) (14,350) (14,350) (14,350) (14,350) (14,350)
Capital expenditures (maintenance) (14,200) (5,200) (5,200) (5,800) (6,400)
Proceeds from sale of mark. sec - - - - -
Proceeds from disposition of property & equip - - - - -
---------- ---------- ---------- ---------- ----------
NET CASH PROVIDED (USED IN) INVESTING ACTIVITIES (28,550) (19,550) (19,550) (20,150) (20,750)
Proceeds (repayment) of bank credit facility (4,000) (15,000) (25,000) (25,000) (30,000)
Proceeds (repayment) of unsecured debt - - - - -
Payment of annual dividends - - - - -
Transaction adjustments-assets -
Transaction adjustments-equity
Proceeds from exercise of stock options - - - - -
Cash dividends paid - - - - -
---------- ---------- ---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (4,000) (15,000) (25,000) (25,000) (25,000)
Increase in cash (9,995) 3,124 (2,284) 2,115 1,662
Cash at beginning of year 10,214 219 3,343 1,059 3,174
---------- ---------- ---------- ---------- ----------
Cash at end of year $ 219 $ 3,343 $ 1,059 $ 3,174 $ 4,836
==============================================================
</TABLE>
48 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
LEVERAGED BUY-OUT ANALYSIS
LEVERAGED BUY-OUT CASH FLOWS
<TABLE>
<CAPTION>
(In 000's except offer price) PROJECTED FISCAL YEARS ENDING DECEMBER 31,
-------------------------------------------------------------------------------
Income Statement: 1998 1999 2000 2001 2002
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EBITDA $84,825 $90,440 $95,394 $100,384 $105,411
Depreciation 26,094 26,790 27,759 28,781 29,922
Amortization 16,147 16,147 16,147 16,147 16,147
OPERATING PROFIT (EBIT) 42,584 47,503 51,487 55,456 59,342
------------------------------------------------------------------------------------------------------------------------
Interest Expense (Net)/(1)/ 48,308 47,376 45,902 43,785 41,494
-------- ------- ------- -------- --------
Pretax Income (5,724) 127 5,585 11,671 17,848
Taxes @40.00%/(2)/ 4,169 6,510 8,693 11,127 13,598
-------- ------- ------- -------- --------
Net Income $ (9,893) $(6,383) $(3,108) $ 543 $ 4,250
======== ======= ======= ======== ========
Cash Flow:
- ---------
EBITA $58,731 $63,650 $67,634 $71,603 $75,489
Add: Depreciation 26,094 26,790 27,759 28,781 29,922
Less: Taxes (4,169) (6,510) (8,693) (11,127) (13,598)
Capital Expenditures (28,550) (19,550) (19,550) (20,150) (20,750)
Change in WC source/(use) (5,634) 1,319 1,332 1,344 1,357
-------- ------- ------- -------- --------
Cash Flow Available for Debt Service 46,472 65,699 68,482 70,451 72,420
Less: Net Interest Expense (48,308) (47,376) (45,902) (43,785) (41,494)
-------- ------- ------- -------- --------
Cash Flow Available for Distribution $ (1,836) $18,323 $22,580 $26,665 $30,926
======== ======= ======= ======== ========
Capital Structure: Rates
- ----------------- -----
Cash $219 $3,343 $1,059 $3,174 $4,836
Bank Credit Facility 8.00% 196,000 181,000 156,000 131,000 101,000
Senior Unsecured Notes 10.50% 300,000 300,000 300,000 300,000 300,000
-------- ------- ------- -------- --------
Net Debt Outstanding $495,781 $477,657 $454,941 $427,826 $396,164
======== ======= ======= ======== ========
Interest Expense:
- ----------------
Bank Credit facility 8.00% $15,840 $15,080 $13,480 $11,480 $9,280
Senior Unsecured Notes 10.50% 31,500 31,500 31,500 31,500 31,500
-------- ------- ------- -------- --------
Total Interest Expense 47,340 46,580 44,980 42,980 40,780
Interest Income @ 5.50% 12 184 58 175 266
-------- ------- ------- -------- --------
Net Interest Expense 47,328 46,396 44,922 42,805 40,514
Deferred Financing Charges 980 980 980 980 980
</TABLE>
Notes:
- -----
(1) Includes amortization of deferred financing charges
(2) Goodwill is not tax-deductible
49 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
LEVERAGED BUY-OUT ANALYSIS
CREDIT STATISTICS
<TABLE>
<CAPTION>
PRO FORMA PROJECTED FISCAL YEARS ENDING DECEMBER 31,
--------- -----------------------------------------------------------
(In 000's, except offer price) 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATIONAL PARAMETERS
EBIT $57,145 $42,584 $47,503 $51,487 $55,456 $59,342
EBITDA 81,067 84,825 90,440 95,394 100,384 105,411
Total Debt 500,000 496,000 481,000 456,000 431,000 401,000
Net Cash Interest Expense 47,328 47,328 46,396 44,922 42,805 40,514
Cash 10,214 219 3,343 1,059 3,174 4,836
COVERAGE STATISTICS:
EBIT/Net Cash Interest Expense 1.21x 0.90x 1.02x 1.15x 1.30x 1.46x
EBITDA/Total Cash Interest Expense 1.71x 1.79x 1.94x 2.12x 2.34x 2.58x
EBITDA/Net Cash Interest Expense 1.71x 1.79x 1.95x 2.12x 2.35x 2.60x
(EBITDA-CapEx)/Total Cash Interest Expense 1.11x 1.19x 1.52x 1.69x 1.87x 2.08x
LEVERAGE STATISTICS:
Total Net Debt/EBIT 8.57x 11.64x 10.06x 8.84x 7.71x 6.68x
Total Net Debt/EBITDA 6.04x 5.84x 5.28x 4.77x 4.26x 3.76x
Total Debt/EBITDA 6.17x 5.85x 5.32x 4.78x 4.29x 3.80x
OFFER PRICE $33.00
COMPARATIVE STORE SALES GROWTH 0.5%
</TABLE>
NOTES:
- -----
Total Cash Interest Expense excludes deferred financing charges.
Net Cash Interest Expense includes interest income, but excludes deferred
financing charges.
50 [LOGO] Prudential
- --- Securities
<PAGE>
PROJECT OREGANO
________________________________________________________________________________
LEVERAGED BUY-OUT ANALYSIS
RETURNS ANALYSIS
<TABLE>
<CAPTION>
PROJECTED FISCAL YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------
(In 000's, except offer price) 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EBITDA $84,825 $90,440 $95,394 $100,384 $105,411
ENTERPRISE VALUE
Multiples of EBITDA
6.0 x $508,949 $542,641 $572,362 $602,303 $632,466
7.0 593,774 633,081 667,755 702,687 737,877
8.0 678,598 723,521 763,149 803,071 843,288
Net Debt Outstanding $495,781 $477,657 $454,941 $427,826 $396,164
EQUITY VALUE
Multiples of EBITDA
6.0 x $13,168 $64,984 $117,421 $174,477 $236,301
7.0 97,993 155,424 212,815 274,861 341,712
8.0 182,818 245,864 308,208 375,245 447,123
OFFER PRICE $33.00
COMPARATIVE STORE SALES GROWTH 0.5%
</TABLE>
51 [LOGO] Prudential
- --- Securities
PRELIMINARY COPY SUBJECT TO COMPLETION, DATED JUNE 21, 1999
[SBARRO, INC. LOGO]
SBARRO, INC.
401 BROADHOLLOW ROAD
MELVILLE, NEW YORK 11747
_________ __, 1999
Dear Fellow Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders
of Sbarro, Inc. (the "COMPANY") to be held at ___________________, _______, New
York on ______ __, 1999, at 10:00 a.m., local time.
At the meeting, you will be asked to consider and vote upon a proposal
to adopt an Amended and Restated Agreement and Plan of Merger (the "RESTATED
MERGER AGREEMENT"), dated as of January 19, 1999, among the Company, Sbarro
Merger LLC ("MERGECO"), and three members of the Sbarro family who are executive
officers and directors of the Company and two of their affiliated entities (the
"CONTINUING SHAREHOLDERS"). You can find the full text of the Restated Merger
Agreement as Annex I at the back of the accompanying Proxy Statement, and we
urge you to read it in its entirety. Your Board of Directors is seeking your
vote on this important transaction.
If the Restated Merger Agreement is adopted, upon completion of the
transactions contemplated in the attached Proxy Statement, Mergeco, an entity
owned by the Continuing Shareholders, will be merged with and into the Company
(the "MERGER"). As a result, the entire equity interest in the Company will be
owned by the Continuing Shareholders and you will be entitled to receive $28.85
in cash for each share of Common Stock of the Company that you then own. The
Company will continue its operations following completion of the Merger.
However, shareholders of the Company, other than the Continuing Shareholders,
will no longer have an equity interest in the Company and, therefore, will not
participate in any potential future earnings and growth of the Company.
On November 25, 1998, to avoid any conflict of interest, your Board of
Directors formed a Special Committee of its independent directors to consider
and evaluate the fairness of the merger proposal. The Special Committee consists
of Richard A. Mandell, Harold L. Kestenbaum, Paul A. Vatter and Terry Vince,
none of whom is an employee of, or consultant to, the Company, Mergeco or the
Continuing Shareholders and none of whom has any interest in the proposed
Merger, other than as a holder of non-employee director stock options and, in
some cases, as a public shareholder.
EACH OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS BELIEVES THAT
THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS PUBLIC
SHAREHOLDERS. THE BOARD OF DIRECTORS HAS ADOPTED THE RESTATED MERGER AGREEMENT
AND RECOMMENDS THAT YOU VOTE "FOR" ADOPTION OF THE RESTATED MERGER AGREEMENT.
In arriving at its recommendation to the Board of Directors, the
Special Committee gave careful consideration to a number of factors described in
the accompanying Proxy Statement. One factor was the written opinion of
Prudential Securities Incorporated, the financial advisor to the Special
Committee, dated January 19, 1999, that as of that date and subject to the
considerations, assumptions and limitations discussed in the opinion, the $28.85
per share cash merger price was fair to the Company's shareholders, other than
the Continuing Shareholders, from a financial point of view. You can find the
full text of this opinion as Annex II at the back of the accompanying Proxy
Statement, and we urge you to read it in its entirety.
<PAGE>
Under the New York Business Corporation Law, the affirmative vote of at
least two-thirds of the votes of all of the outstanding shares of Common Stock
of the Company is required to adopt the Restated Merger Agreement. The
Continuing Shareholders, who own approximately 34.4% of the Company's
outstanding Common Stock, have agreed in the Restated Merger Agreement to vote
their shares of Common Stock in favor of adoption of the Restated Merger
Agreement. The Restated Merger Agreement further provides that it also must be
adopted by the affirmative vote of a majority of the votes cast at the meeting,
excluding votes cast by the Continuing Shareholders, abstentions and broker
non-votes.
The accompanying Proxy Statement explains the proposed Merger and
provides specific information concerning the meeting. Please read it carefully.
You may obtain additional information about the Company from documents that the
Company has filed with the Securities and Exchange Commission.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED OR DISAPPROVED THE RESTATED MERGER AGREEMENT OR THE
PROPOSED MERGER NOR HAVE THEY DETERMINED IF THE PROXY STATEMENT IS ADEQUATE OR
ACCURATE. FURTHERMORE, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED
THE FAIRNESS OR MERITS OF THE PROPOSED MERGER. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the meeting,
we urge you to please complete, sign and date the enclosed proxy card and return
it in the enclosed envelope as soon as possible. The envelope requires no
postage if mailed in the United States. If you attend the meeting, you may vote
your shares in person, even if you have previously submitted a proxy card. Your
proxy may be revoked at any time before it is voted by submitting a written
revocation or a proxy bearing a later date to the Secretary of the Company, or
by attending and voting in person at the meeting. For shares held in "street
name," you may revoke or change your vote by submitting instructions to your
broker or nominee.
Your prompt submission of a proxy card will be greatly appreciated.
Sincerely,
Mario Sbarro
Chairman of the Board
and Chief Executive Officer
<PAGE>
PRELIMINARY COPY SUBJECT TO COMPLETION, DATED JUNE 21, 1999
SBARRO, INC.
401 Broadhollow Road
Melville, New York 11747
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _______, 1999
To the Shareholders of Sbarro, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"MEETING") of Sbarro, Inc. (the "COMPANY") will be held at ____________ , ______
, New York, on _________ , ________ __, 1999, at 10:00 a.m. local time to:
1. Consider and vote upon a proposal to adopt an Amended and
Restated Agreement and Plan of Merger (the "RESTATED MERGER
AGREEMENT"), dated as of January 19, 1999, among the Company,
Sbarro Merger LLC ("MERGECO"), Mario Sbarro, Joseph Sbarro,
Joseph Sbarro (1994) Family Limited Partnership, Anthony
Sbarro, and Mario Sbarro and Franklin Montgomery, not
individually but as trustees under that certain Trust
Agreement dated April 28, 1984 for the benefit of Carmela
Sbarro and her descendants (collectively, the "CONTINUING
SHAREHOLDERS"), pursuant to which, among other things, Mergeco
will merge with and into the Company (the "MERGER") and each
outstanding share of the Company's Common Stock held by
shareholders other than the Continuing Shareholders will be
converted into the right to receive $28.85 in cash, without
interest. The Restated Merger Agreement is more fully
described in the accompanying Proxy Statement and the full
text can be found as Annex I at the back of the accompanying
Proxy Statement.
2. Consider such other matters as may properly come before the
Meeting or any adjournments or postponements thereof.
Information regarding the proposal to be acted upon at the Meeting is
contained in the accompanying Proxy Statement.
The close of business on ___________, 1999 (the "RECORD DATE") has been
fixed as the record date for the determination of shareholders entitled to
notice of, and to vote at, the Meeting or any adjournments or postponements
thereof. Only holders of record at the close of business on the Record Date are
entitled to notice of, and to vote at, the Meeting or any adjournments or
postponements thereof.
ADOPTION OF THE RESTATED MERGER AGREEMENT WILL REQUIRE THE AFFIRMATIVE
VOTE OF AT LEAST TWO- THIRDS OF THE VOTES OF ALL OUTSTANDING SHARES OF THE
COMPANY'S COMMON STOCK. WHILE NOT REQUIRED BY THE NEW YORK BUSINESS CORPORATION
LAW OR THE COMPANY'S CERTIFICATE OF INCORPORATION OR BY-LAWS, THE RESTATED
MERGER AGREEMENT PROVIDES THAT IT ALSO MUST BE ADOPTED BY AT LEAST A MAJORITY OF
THE VOTES CAST AT THE MEETING, EXCLUDING VOTES CAST BY THE CONTINUING
SHAREHOLDERS, ABSTENTIONS AND BROKER NON-VOTES.
PLEASE DO NOT SEND ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
INSTRUCTIONS FOR THE PURPOSE OF EXCHANGING YOUR SHARES FOR THE
CONSIDERATION TO BE RECEIVED UPON CONSUMMATION OF THE MERGER WILL BE SENT
TO YOU FOLLOWING THE EFFECTIVE TIME OF THE MERGER.
<PAGE>
YOUR BOARD OF DIRECTORS, BASED IN PART UPON THE UNANIMOUS
RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS, RECOMMENDS THAT
YOU VOTE "FOR" ADOPTION OF THE RESTATED MERGER AGREEMENT.
By Order of the Board of Directors,
JOSEPH SBARRO,
Secretary
Melville, New York
____________, 1999
IT IS ESPECIALLY IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. EACH
SHAREHOLDER IS URGED TO, AS PROMPTLY AS PRACTICABLE, SIGN, DATE AND RETURN THE
ENCLOSED FORM OF PROXY, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU HOLD SHARES DIRECTLY IN YOUR NAME AND ATTEND THE MEETING, YOU MAY
VOTE YOUR SHARES IN PERSON, EVEN IF YOU HAVE PREVIOUSLY SUBMITTED A PROXY CARD.
YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED BY SUBMITTING A WRITTEN
REVOCATION OR A PROXY BEARING A LATER DATE TO THE SECRETARY OF THE COMPANY, OR
BY ATTENDING AND VOTING IN PERSON AT THE MEETING. FOR SHARES HELD IN "STREET
NAME," YOU MAY REVOKE OR CHANGE YOUR VOTE BY SUBMITTING NEW VOTING INSTRUCTIONS
TO YOUR BROKER OR NOMINEE.
<PAGE>
PRELIMINARY COPY SUBJECT TO COMPLETION, DATED JUNE 21, 1999
SBARRO, INC.
401 BROADHOLLOW ROAD
MELVILLE, NEW YORK 11747
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
__________, 1999
This Proxy Statement is furnished to the holders of Common Stock of
Sbarro, Inc. (the "COMPANY") in connection with the solicitation of proxies
("PROXIES") by the Board of Directors of the Company (the "BOARD") for use at
the Special Meeting of Shareholders (the "MEETING") to be held on
_______________, 1999, at 10:00 a.m., local time, at ___________, ________, New
York, and at any adjournments or postponements thereof, for the purpose set
forth in the accompanying Notice of Meeting.
The cost of preparing, assembling, printing, mailing and distributing
the Notice of Meeting, this Proxy Statement and Proxies is to be borne by the
Company. The Company also will reimburse brokers, banks and other custodians,
nominees and fiduciaries, who are holders of record of the Company's Common
Stock, for their reasonable out-of-pocket expenses in forwarding proxy
soliciting materials to the beneficial owners of shares of Common Stock. The
Company has engaged Kissel-Blake, Wall Street Plaza, 88 Pine Street, New York,
New York 10005 to assist in the distribution of proxy materials and the
solicitation of votes. For its services, Kissel-Blake will receive a fee of
$7,000, plus reimbursement of certain out-of-pocket expenses. In addition to the
use of the mail, Proxies may be solicited without extra compensation by
directors, officers and employees of the Company by personal interview,
telephone, telegram, cablegram or other means of electronic communication. The
approximate mailing date of this Proxy Statement is __________, 1999.
Unless otherwise specified, all Proxies received will be voted in favor
of the proposal to adopt the Restated Merger Agreement described in this Proxy
Statement. A shareholder may revoke a Proxy at any time before its exercise by
filing with the Secretary of the Company an instrument of revocation or a duly
executed proxy bearing a later date, or by attendance at the Meeting and voting
in person. Attendance at the Meeting, without voting in person, will not
constitute revocation of a Proxy.
The close of business on ________ , 1999 has been fixed by the Board as
the record date (the "RECORD DATE") for the determination of shareholders
entitled to notice of, and to vote at, the Meeting and any adjournments or
postponements thereof. As of the Record Date, there were 20,534,313 shares of
Common Stock of the Company outstanding. Each share of Common Stock outstanding
on the Record Date will be entitled to one vote on the matters to come before
the Meeting. The presence, in person or by proxy, of the holders of a majority
of the outstanding shares of the Company's Common Stock is required to
constitute a quorum for the transaction of business at the Meeting. Proxies
submitted which contain abstentions or broker non-votes will be deemed present
at the Meeting for the purpose of determining the presence of a quorum.
YOUR BOARD OF DIRECTORS HAS RECOMMENDED A VOTE "FOR" ADOPTION OF THE
RESTATED MERGER AGREEMENT.
<PAGE>
<TABLE>
<CAPTION>
CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER
<S> <C>
Q: WHY AM I RECEIVING THESE MATERIALS? A: If your broker holds your shares in
its name (or in what is commonly
A: The Board of Directors of Sbarro, called "street name"), then you
Inc. is providing these proxy should give your broker instructions
materials to give you information to on how to vote. Otherwise your
determine how to vote in connection shares will not be voted.
with a special meeting of
shareholders which will take place Q: CAN I CHANGE MY VOTE?
on ____________, 1999 at __________.
A: You may change your proxy
Q: WHAT WILL BE VOTED ON AT THE MEETING? instructions at any time prior to
the vote at the Meeting. For shares
A: Whether to adopt the Restated Merger held directly in your name, you may
Agreement pursuant to which Mergeco accomplish this by completing a new
will merge with and into the proxy or by attending the Meeting
Company, with the Company as the and voting in person. Attendance at
surviving corporation. Following the the Meeting alone will not cause
Merger, the Continuing Shareholders your previously granted proxy to be
will own all of the Company's revoked unless you vote in person.
capital stock. For shares held in "street name,"
you may accomplish this by
Q: WILL ANY OTHER MATTERS BE VOTED ON submitting new voting instructions
AT THE MEETING? to your broker or nominee.
A: No. Q: WHAT VOTE IS REQUIRED TO ADOPT THE
RESTATED MERGER AGREEMENT?
Q: WHO CAN VOTE?
A: For the Merger to occur, two
A: All shareholders of record as of the approvals are required. First,
close of business on ______________, two-thirds of all outstanding shares
1999. of Common Stock of the Company must
adopt the Restated Merger Agreement.
Q: WHAT SHOULD I DO NOW? Second, a majority of the votes
cast, other than votes of the
A: PLEASE VOTE. You are invited to Continuing Shareholders, abstentions
attend the Meeting. However, you and broker non-votes, must be for
should mail your signed and dated adoption of the Restated Merger
proxy card in the enclosed envelope Agreement.
as soon as possible, so that your
shares will be represented at the Q: HOW ARE VOTES COUNTED?
Meeting in case you are unable to
attend. No postage is required if A: You may vote "FOR", "AGAINST" or
the proxy card is returned in the "ABSTAIN." If you "ABSTAIN" or do
enclosed postage prepaid envelope not vote, it has the same effect as
and mailed in the United States. a vote "AGAINST" with respect to the
vote that requires the Restated
Q: WHAT DOES IT MEAN IF I RECEIVE MORE Merger Agreement to be adopted by
THAN ONE PROXY OR VOTING INSTRUCTION two-thirds of all outstanding Common
CARD? Stock of the Company. An abstention
or non-vote will have no effect with
A: It means your shares are registered respect to the vote that requires
differently or are held in more than adoption of the Restated Merger
one account. Please provide voting Agreement by a majority of Public
instructions for each proxy card Shareholders. If you provide
that you receive. specific voting instructions, your
shares will be voted as you
Q: HOW CAN I VOTE SHARES HELD IN MY instruct. If you sign your proxy
BROKER'S NAME? card or broker voting instruction
card with no further instructions,
your shares will be voted in
-i-
<PAGE>
accordance with the recommendation Q: SHOULD I SEND IN MY STOCK
of the Board. CERTIFICATES NOW?
Q: WHAT WILL I RECEIVE IN THE MERGER? A: No. After the Merger is consummated,
we will send you written
A: You will be entitled to receive instructions that will tell you how
$28.85 per share in cash in exchange to exchange your certificates for
for each share of the Company's $28.85 per share in cash. PLEASE DO
Common Stock owned by you. NOT SEND IN YOUR CERTIFICATES NOW OR
WITH YOUR PROXIES. Hold your
Q: WHAT IS THE BOARD'S RECOMMENDATION? certificates until you receive our
instructions.
A: The Board recommends that you vote
your shares "FOR" adoption of the Q: WHAT ARE THE U.S. FEDERAL INCOME TAX
Restated Merger Agreement. CONSEQUENCES OF THE MERGER TO ME?
Q: WHY IS THE BOARD OF DIRECTORS A: Your receipt of cash in exchange for
RECOMMENDING THAT I VOTE TO ADOPT your shares in the Merger generally
THE RESTATED MERGER AGREEMENT? will be taxable for U.S. federal
income tax purposes in the same
A: A Special Committee of the Board, manner as if you sold your shares
consisting of four independent for $28.85 per share in cash. To
directors, negotiated the terms of review the federal income tax
the Restated Merger Agreement with consequences to shareholders in
the Continuing Shareholders and, greater detail, see pages ___ to ___
based on a number of factors, and consult with your tax advisor.
including a fairness opinion
received from Prudential Securities Q: WILL I HAVE APPRAISAL RIGHTS?
Incorporated, unanimously concluded
that the Merger is fair to, and in A: No. You will not have any appraisal
the best interests of, the Company rights as a result of the Merger.
and the Public Shareholders and
recommended its adoption by the full Q: WHO CAN ANSWER MY QUESTIONS?
Board. In the opinion of your Board,
based in part upon the A: If you have more questions about the
recommendation of the Special Merger or would like additional
Committee, the Merger is fair to, copies of this Proxy Statement, you
and in the best interests of, the should contact Kissel-Blake at
Company and the Public Shareholders. 1-800-554-7733 (toll free in the
To review the background and reasons United States) or 1-212-344-6733
for the Merger in greater detail, (call collect).
see pages ___ to ___.
Q: WHEN WILL THE MERGER TAKE PLACE?
A: If the Restated Merger Agreement is
adopted, we expect that it will take
approximately two weeks to complete
the necessary financing
arrangements. However, the closing
may take longer if the financing or
other closing conditions have not
been then satisfied.
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY.......................................................................1
Certain Definitions..................................................1
Information Concerning the Meeting...................................3
The Merger Parties...................................................4
Special Factors......................................................4
The Restated Merger Agreement........................................7
No Right of Appraisal................................................9
Selected Consolidated Financial Data of the Company..................9
Market Prices of and Dividends on the Common Stock..................13
Forward-Looking Information.........................................14
SPECIAL FACTORS..............................................................15
Background of the Transaction.......................................15
Recommendations of the Special Committee and the Board of Directors.28
The Continuing Shareholders' Purpose and Reasons for the Merger.....33
Presentation and Fairness Opinion of Prudential Securities..........36
Certain Financial Projections.......................................42
Plans for the Company after the Merger..............................47
Conduct of the Business of the Company if the Merger is not
Consummated.....................................................48
Interests of Certain Persons in the Merger and the Company..........48
Certain Effects of the Merger.......................................51
Certain U.S. Federal Income Tax Consequences........................52
Fees and Expenses...................................................53
Accounting Treatment................................................54
Financing of the Merger.............................................54
Regulatory Approvals................................................56
Risk of Insolvency..................................................57
Risk that the Merger will not be Consummated........................57
LITIGATION PERTAINING TO THE MERGER..........................................57
Initial Proposal Litigation.........................................57
Current Shareholder Litigation......................................58
THE RESTATED MERGER AGREEMENT................................................60
The Merger; Merger Consideration....................................60
The Exchange Fund; Payment for Shares of Common Stock...............60
Transfers of Common Stock...........................................61
Treatment of Stock Options..........................................61
Tax Withholding.....................................................61
Directors and Officers, Certificate of Incorporation and By-Laws
Following the Merger............................................62
Representations and Warranties......................................62
Covenants...........................................................62
Indemnification and Insurance.......................................63
No Solicitation; Fiduciary Obligations of Directors.................65
Conditions..........................................................66
Termination.........................................................67
Fees and Expenses...................................................68
Amendment and Waiver................................................68
BUSINESS OF THE COMPANY......................................................69
Overview............................................................69
Industry Overview .................................................70
-iii-
<PAGE>
TABLE OF CONTENTS (CONT'D)
PAGE
----
Competitive Strengths..............................................70
Business Strategy..................................................71
MANAGEMENT..................................................................72
Directors and Executive Officers of the Company....................72
Family Relationships...............................................76
Background of the Continuing Shareholders..........................76
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT............................................77
CERTAIN TRANSACTIONS IN THE COMMON STOCK....................................79
INDEPENDENT PUBLIC ACCOUNTANTS..............................................80
SHAREHOLDER PROPOSALS.......................................................80
WHERE YOU CAN FIND MORE INFORMATION.........................................81
AVAILABLE INFORMATION.......................................................81
OTHER MATTERS...............................................................82
Annex I -- Amended and Restated Agreement and Plan of Merger
Annex II -- Opinion of Prudential Securities Incorporated
-iv-
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT.
IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO
UNDERSTAND THE PROPOSED MERGER FULLY, AND FOR A MORE COMPLETE DESCRIPTION OF THE
TERMS OF THE PROPOSED MERGER, YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY,
INCLUDING THE ANNEXES, AND THE OTHER DOCUMENTS TO WHICH WE REFER YOU. THOSE
OTHER DOCUMENTS ARE LISTED IN THE SECTION HEADING "WHERE YOU CAN FIND MORE
INFORMATION" ON PAGE __. FOR FURTHER INFORMATION, ALSO SEE THE SECTION HEADING
"AVAILABLE INFORMATION" ON PAGE __.
CERTAIN DEFINITIONS
Instead of repeating certain full descriptions of certain terms
throughout this Proxy Statement, we have used the following shortened terms.
Certain other terms which are not used as frequently are defined within the
document at their first use, with the defined term being italicized.
COMPANY means Sbarro, Inc., a New York
corporation of which you are
presently a shareholder, as well
as the Surviving Corporation
after the Merger.
CONTINUING SHAREHOLDERS means 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.
MERGECO means Sbarro Merger LLC, a limited
liability company formed in New
York by the Continuing
Shareholders solely for
implementing the Merger. The
Continuing Shareholders own all
of the equity interests of
Mergeco.
MERGER AGREEMENT means the Agreement and Plan of Merger
entered into on January 19, 1999
among the Company, Mergeco and
the Continuing Shareholders.
MERGER means the merger of Mergeco with and
into the Company pursuant to the
Restated Merger Agreement, with
the Company as the Surviving
Corporation.
RESTATED MERGER AGREEMENT means the Amended and Restated
Agreement and Plan of Merger,
dated as of January 19, 1999,
among the Company, Mergeco and
the Continuing Shareholders. The
Restated Merger Agreement made
certain non-economic and, except
to extend the date after which
either the Company or the
Continuing Shareholders could
terminate the transaction solely
by reason of the Merger not
having been consummated from
June 30, 1999 to August 31,
1999, non-substantive changes to
the Merger Agreement, and
restated the Merger Agreement as
so amended.
SURVIVING CORPORATION means the Company following the
Merger, as the surviving
corporation of the Merger.
COMMON STOCK means the Company's common stock, par
value $.01 per share.
<PAGE>
PUBLIC SHAREHOLDERS means all of the shareholders of the
Company other than the
Continuing Shareholders.
PUBLIC SHARES means the outstanding shares of Common
Stock held by the Public
Shareholders.
MERGER CONSIDERATION means the $28.85 per share in cash
without interest, to be received
by the Public Shareholders
following consummation of the
Merger.
STOCK OPTIONS means all outstanding options to
purchase Common Stock granted by
the Company.
BOARD means the full Board of Directors of
the Company consisting of Mario
Sbarro, Joseph Sbarro, Anthony
Sbarro, Carmela Sbarro, Harold
J. Kestenbaum, Richard A.
Mandell, Paul A. Vatter, Terry
Vince and Bernard Zimmerman.
SPECIAL COMMITTEE means the committee of the Board
formed to consider and evaluate
the proposal made by the
Continuing Shareholders. The
members of the Special Committee
are Richard A. Mandell
(Chairman), Harold L.
Kestenbaum, Paul A. Vatter and
Terry Vince, the four directors
of the Company who are neither
employees of, nor consultants
to, the Company, Mergeco or the
Continuing Shareholders, and
have no interest in the proposed
Merger, other than as holders of
non-employee director Stock
Options and, in some cases, as
Public Shareholders.
References in this Proxy Statement to "we," "our" or "us" refers to the
Company, not to Mergeco or the Continuing Shareholders. When we refer to the
Company's management, we mean one or more of the Company's principal executive
officers, Mario Sbarro (Chairman of the Board and President), Anthony Sbarro
(Vice Chairman of the Board and Treasurer), Joseph Sbarro (Senior Vice President
and Secretary) and Robert S. Koebele (Vice President-Finance and Chief Financial
Officer).
All information contained in this Proxy Statement relating to Mergeco
and the Continuing Shareholders has been supplied by them for inclusion and has
not been independently verified by the Company. No persons have been authorized
to give any information or to make any representations other than those
contained in this Proxy Statement.
Certain statements contained in this Proxy Statement are
forward-looking and 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. You should refer to "--Forward-Looking
Information" on pages ___ and ___.
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INFORMATION CONCERNING THE MEETING
TIME, DATE AND PLACE. The Meeting will be held on _________, __, 1999
at 10:00 a.m., local time, at__________ , ___________ , New York.
PURPOSE OF THE MEETING. At the Meeting, holders of Common Stock at the
close of business on the Record Date will consider and vote upon a proposal to
adopt the Restated Merger Agreement. If the Restated Merger Agreement is adopted
at the Meeting and the Merger is consummated, Mergeco will be merged with and
into the Company. The Company will be the surviving corporation of the Merger
and the entire equity interest in the Company will be owned by the Continuing
Shareholders. All shares of Common Stock outstanding immediately prior to the
time when the Merger is consummated (the "EFFECTIVE TIME"), other than shares of
Common Stock then (i) owned of record by the Continuing Shareholders or Mergeco
and (ii) held in the Company's treasury, will be converted into the right to
receive $28.85 in cash per share, payable to the holder thereof, without
interest. Under the New York Business Corporation Law (the "NYBCL") and the
Company's By-Laws, no other business may be transacted at the Meeting.
RECORD DATE FOR THE MEETING; QUORUM REQUIREMENTS. The close of business
on _________ __, 1999 has been fixed as the Record Date for determining
shareholders entitled to notice of, and to vote at, the Meeting. Each share of
Common Stock outstanding on the Record Date is entitled to one vote at the
Meeting. As of the Record Date, 20,534,313 shares of Common Stock were
outstanding. The presence, in person or by proxy, of a majority of all
outstanding Common Stock is required to constitute a quorum for the transaction
of business at the Meeting.
VOTING REQUIREMENTS. Under the NYBCL, the affirmative vote of at least
two-thirds of all of the outstanding shares of Common Stock is required to adopt
the Restated Merger Agreement. The Continuing Shareholders, who own
approximately 34.4% of the Common Stock, have agreed in the Restated Merger
Agreement to vote their Common Stock in favor of adoption of the Restated Merger
Agreement. In addition, the Restated Merger Agreement provides that it is a
condition to the consummation of the Merger that the Restated Merger Agreement
also must be adopted by at least a majority of the votes cast at the Meeting,
excluding votes cast by the Continuing Shareholders, abstentions and broker
non-votes.
PROXIES. A proxy card is enclosed for your use in voting by mail. A
proxy may be revoked at any time prior to its exercise at the Meeting. Common
Stock represented by properly executed Proxies received at or prior to the
Meeting, and which have not been revoked, will be voted in accordance with the
instructions indicated on the Proxy.
YOU SHOULD NOT SEND ANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK WITH
YOUR PROXY CARD. IF THE MERGER IS CONSUMMATED, INFORMATION AS TO THE PROCEDURE
FOR THE EXCHANGE OF YOUR CERTIFICATES WILL BE SENT TO YOU. SEE "THE RESTATED
MERGER AGREEMENT -- THE EXCHANGE FUND; PAYMENT FOR SHARES OF COMMON STOCK" AND
"THE RESTATED MERGER AGREEMENT -- TRANSFERS OF COMMON STOCK."
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<PAGE>
THE MERGER PARTIES
THE COMPANY. The Company was organized in New York in 1977 and is the
successor to a number of family food and restaurant businesses developed and
operated by the Sbarro family. The Company develops and operates or franchises
an international chain of family-style Italian restaurants principally under the
"Sbarro" and "Sbarro The Italian Eatery" names. Sbarro restaurants are
family-oriented cafeteria-style restaurants featuring a menu of popular Italian
food, including pizza with a variety of toppings, a selection of pasta dishes
and other hot and cold Italian entrees, salads, sandwiches, cheesecake and other
desserts. As of April 25, 1999, there were 910 Sbarro restaurants of which 635
were Company-owned and 275 were franchise units. In addition, since 1995, the
Company has created and operated, through joint ventures, other restaurant
concepts for the purpose of developing growth opportunities. Its principal
executive offices are currently located at 401 Broadhollow Road, Melville, New
York 11747, and its telephone number is (516) 715-4100.
MERGECO. Mergeco is a New York limited liability company organized on
December 15, 1998 by the Continuing Shareholders for the purpose of effecting
the Merger. The Continuing Shareholders are the only members of Mergeco. If the
Merger is consummated, at the Effective Time, Mergeco will be merged with and
into the Company, with the Company as the surviving corporation following the
Merger. Mergeco has no material assets and has not engaged in any activities
except in connection with entering into the Restated Merger Agreement and
carrying out the transactions contemplated by the Restated Merger Agreement. The
address of Mergeco is c/o Mario Sbarro, 401 Broadhollow Road, Melville, New York
11747, and its telephone number is (516) 715-4100.
SPECIAL FACTORS
FOR A COMPLETE DESCRIPTION OF THE SPECIAL FACTORS TO BE CONSIDERED IN
THE MERGER, WE URGE YOU TO READ THE SECTION ENTITLED "SPECIAL FACTORS" BEGINNING
ON PAGE __.
CONTINUING SHAREHOLDERS' PURPOSE AND REASONS FOR THE MERGER. The
Continuing Shareholders desire to become the owners of all of the capital stock
in the Company that they do not already own for the reasons described under the
section entitled "SPECIAL FACTORS -- The Continuing Shareholders' Purpose and
Reasons for the Merger" beginning on page __. The Continuing Shareholders
structured the transaction as a merger because it would enable the transaction
to be completed in one step, which would minimize the risk that the contemplated
transactions will not be finalized and reduce transaction costs. If the Merger
is consummated, the Common Stock will cease to be publicly traded, the Public
Shares will cease to be outstanding and the Public Shareholders will be entitled
to receive the Merger Consideration of $28.85 per share in cash, without
interest. Following the Merger, all of the outstanding capital stock of the
Company, as the surviving corporation in the Merger, will be owned by the
Continuing Shareholders.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS. On
January 19, 1999, the Merger Agreement was presented for consideration to a
meeting of the Special Committee, consisting of four directors of the Company
who are not employees of, or consultants to, the Company, Mergeco or the
Continuing Shareholders and have no interest in the proposed Merger, other than
as holders of non-employee director Stock Options and, in some cases, as Public
Shareholders. The Special Committee unanimously concluded that the proposed
Merger, as reflected in the Merger Agreement, and the terms and provisions of
the Merger Agreement, including the Merger Consideration of $28.85 in cash per
share, were fair to, and in the best interests of, the Company and the Public
Shareholders, and unanimously resolved to recommend to the Board that it adopt
the Merger Agreement. Thereafter, the Board, based in part upon the
recommendation of the Special Committee, concluded that the Merger, as reflected
in the Merger Agreement, and the terms and provisions of the Merger Agreement,
including the Merger Consideration of $28.85 in cash per share, were fair to,
and in the best interests of, the Company and the Public Shareholders, adopted
the Merger Agreement, authorized the Company to enter into the Merger Agreement
and resolved to recommend to the Public Shareholders that they vote to adopt the
Merger Agreement. On June 17, 1999, the Company, Mergeco and the Continuing
Shareholders made certain non-economic and, except to extend the date after
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<PAGE>
which either the Company or the Continuing Shareholders could terminate the
transaction solely by reason of the Merger not having been consummated from June
30, 1999 to August 31, 1999, non-substantive changes to the Merger Agreement,
and restated the Merger Agreement as so amended. The Special Committee and the
Board each concluded that none of the changes made affected their prior actions
and recommendations. The Special Committee addressed its recommendation to the
Board and the Board specifically addressed its recommendation to the Public
Shareholders as a separate individual class. Neither the Special Committee nor
the Board addressed its recommendation to the Continuing Shareholders. See
"SPECIAL FACTORS -- Recommendation of the Special Committee and the Board of
Directors" beginning on page __.
FACTORS CONSIDERED BY THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS.
The Special Committee, in reaching its decision to recommend adoption of the
Merger Agreement to the Board, and the Board, in adopting the Merger Agreement
and recommending adoption of the Merger Agreement by the Public Shareholders,
each considered a number of factors. In considering the Restated Merger
Agreement, the Special Committee and the Board each concluded that none of the
changes made in the Restated Merger Agreement to the Merger Agreement affected
their prior actions and recommendations. For a discussion of factors considered
by the Special Committee and the Board of Directors in making their respective
recommendations, see "SPECIAL FACTORS -- Recommendations of the Special
Committee and the Board of Directors" beginning on page __.
PRESENTATION AND FAIRNESS OPINION OF PRUDENTIAL SECURITIES. Prudential
Securities Incorporated ("PRUDENTIAL SECURITIES") delivered its written opinion,
dated January 19, 1999, and addressed to the Special Committee, to the effect
that, as of that date, based upon and subject to the various considerations,
assumptions and limitations stated therein, the Merger Consideration of $28.85
per share in cash to be received by the Public Shareholders in the Merger was
fair, from a financial point of view, to the Public Shareholders. Prudential
Securities also has concluded that had the changes in the Restated Merger
Agreement been in the Merger Agreement on January 19, 1999, they would not have
caused Prudential Securities to alter its conclusion. The full text of the
written opinion of Prudential Securities is set forth as Annex II at the back of
this Proxy Statement. You should read this opinion carefully. See "SPECIAL
FACTORS -- Presentation and Fairness Opinion of Prudential Securities,"
beginning on page ___.
PLANS FOR THE COMPANY AFTER THE MERGER. None of the Continuing
Shareholders, Mergeco or the Company currently have any plans or proposals that
relate to or would result in an extraordinary corporate transaction, such as a
merger, reorganization or liquidation involving the Company or any of its
subsidiaries, a sale or transfer of a material amount of assets of the Company
or any of its subsidiaries or, except as indicated elsewhere in this Proxy
Statement, any material change in the Company's capitalization, corporate
structure or business or the composition of the Board or executive officers
following consummation of the Merger. However, the Continuing Shareholders
intend, from time to time, to evaluate and review the Company's businesses,
operations, properties, composition of the Board, management and other
personnel, corporate structure, dividend policy and capitalization, and to make
such changes as are deemed appropriate. The Continuing Shareholders also intend
to continue to explore joint ventures and other opportunities to expand the
Company's business. See "SPECIAL FACTORS -- Plans for the Company after the
Merger," beginning on page __.
CONDUCT OF THE BUSINESS OF THE COMPANY IF THE MERGER IS NOT
CONSUMMATED. The Board has made no determination as to the direction of the
Company should the Merger not be consummated. The Board currently expects that
the Company's present management will continue to operate the Company's business
substantially as presently operated. However, if the Merger is not consummated,
management and the Board intend, from time to time, to evaluate and review the
Company's businesses, operations, properties, management and other personnel,
corporate structure, dividend policy and capitalization, and to make such
changes as are deemed appropriate and to continue to explore joint ventures and
other opportunities to expand the Company's business. See "SPECIAL FACTORS --
Conduct of the Business of the Company if the Merger is not Consummated"
beginning on page ___.
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<PAGE>
INTEREST OF CERTAIN PERSONS IN THE MERGER AND THE COMPANY. In
considering the recommendations of the Special Committee and of the Board, you
should be aware that the Continuing Shareholders and certain executive officers
and directors of the Company have certain relationships or interests in the
Merger and the Company that are different from your interests as a shareholder
and that may present actual or potential conflicts of interest. The Special
Committee and the Board were aware of these potential or actual conflicts of
interest and considered them in evaluating the proposed Merger. For a
description of these and other interests, see "SPECIAL FACTORS -- Interests of
Certain Persons in the Merger and the Company" beginning on page ___.
For a discussion of certain agreements by the Company with respect to
indemnification of, and insurance for, directors and officers of the Company,
see "THE RESTATED MERGER AGREEMENT -- Indemnification and Insurance" beginning
on page ___.
CERTAIN EFFECTS OF THE MERGER. Upon consummation of the Merger, each
Public Share will be converted into the right to receive $28.85 in cash, without
interest. The Public Shareholders will no longer have any ownership interest in,
and will not be shareholders of, the Company. As a result, they will no longer
benefit from any increases in the value of the Company. Conversely, the Public
Shareholders will no longer bear the risk of any decreases in value of the
Company.
As a result of the Merger, the Company will be privately held and there
will be no public market for the Common Stock. Upon consummation of the Merger,
the Common Stock will cease to be listed or quoted on the New York Stock
Exchange ("NYSE") or otherwise, the registration of the Common Stock under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), will be
terminated and the Common Stock will no longer constitute "margin securities"
under the rules of the Board of Governors of the Federal Reserve System. See
"SPECIAL FACTORS -- Certain Effects of the Merger" beginning on page __.
LITIGATION PERTAINING TO THE MERGER. Commencing on November 27, 1998,
following the Company's announcement of the proposed Merger, seven class action
lawsuits were instituted by shareholders against the Company, those Continuing
Shareholders serving on the Board and, except in certain lawsuits, some or all
of the other directors of the Company. The purported class consists of all
record and beneficial owners of the Company's Common Stock during the period
beginning with the close of business on November 25, 1998 and ending on the
effective date of the Merger (the "CLASS"). While the complaints in each of the
actions vary, in general, they allege that the Continuing Shareholders and the
other directors breached fiduciary duties, that the then proposed consideration
of $27.50 to be paid to Public Shareholders was inadequate and that there were
inadequate procedural protections for the Public Shareholders.
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 Continuing Shareholders agreed to increase their offer of the Merger
Consideration to $28.85 per share. On April 7, 1999, a Stipulation of Settlement
was entered into embodying (and superseding) the Memorandum of Understanding
(the "STIPULATION OF SETTLEMENT"). Following the consolidation of each of the
pending lawsuits into one proceeding (the "CURRENT SHAREHOLDER LITIGATION")
before the Supreme Court of the State of New York (the "COURT"), on May 11,
1999, the Court issued a Scheduling Order pursuant to which a hearing was
scheduled to be held on June 29, 1999 to determine, among other things, whether
the Court should approve the settlement. The settlement is subject to certain
conditions. The obligations of Mergeco to consummate the Merger is subject to,
among other things, the settlement of these lawsuits and that holders of no more
than an aggregate of 1,000,000 shares of Common Stock (approximately 4.9% of the
Company's presently outstanding shares) request exclusion from the Class on
behalf of whom the actions were instituted. Notice of, among other things, the
scheduled hearing before the Court and the requirements for appearing at the
hearing and requesting exclusion from the Class on behalf of whom the actions
were instituted was distributed beginning May 17, 1999. No requests for
exclusion from the Class had been received through the close of business on June
17, 1999. See "-- No Right of Appraisal" and "THE RESTATED MERGER AGREEMENT --
Conditions" beginning on page __.
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<PAGE>
See "SPECIAL FACTORS -- Background of the Transaction," beginning on
page __ and "LITIGATION PERTAINING TO THE MERGER" beginning on page _ for
further information concerning these lawsuits and similar lawsuits instituted
with respect to a prior proposal made by the Continuing Shareholders in January
1998 and the terms and conditions of the Stipulation of Settlement.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES. You will generally be
taxed on your receipt of the $28.85 per share cash Merger Consideration in the
same manner as if you sold your shares for such amount. BECAUSE DETERMINING THE
TAX CONSEQUENCES OF THE MERGER MAY DEPEND UPON YOUR PERSONAL CIRCUMSTANCES, YOU
SHOULD CONSULT YOUR TAX ADVISOR IN ORDER TO UNDERSTAND FULLY HOW THE MERGER WILL
AFFECT YOU. For a more detailed discussion of potential United States federal
income tax consequences to you as a result of the Merger, see "SPECIAL FACTORS
- -- Certain U.S. Federal Income Tax Consequences" beginning on page ___.
ACCOUNTING TREATMENT. For accounting and financial reporting purposes,
the Merger will be accounted for in accordance with the "purchase method" of
accounting.
FINANCING OF THE MERGER. Approximately $408 million will be required to
pay the aggregate Merger Consideration to the Public Shareholders and to pay
holders of Stock Options, and to pay the estimated fees and expenses associated
with the Merger, as well as to provide sufficient liquidity to fund the
Company's ongoing working capital needs, including capital expenditures. It is
anticipated that the sources of the required funds will be approximately $138
million of the Company's cash and marketable securities and up to $300 million
to be obtained through debt financing (the "DEBT FINANCING"). Although different
sources and types of financing may be obtained, the Debt Financing presently
contemplates the placement of senior notes and may include either a bank
revolving credit facility, which will have undrawn availability on the closing
date of the Merger of up to $30 million, or excess cash from the senior note
placement, to provide sufficient liquidity to fund the Company's ongoing working
capital needs, including capital expenditures. Among the conditions to the
obligation of the Continuing Shareholders to consummate the Merger is that the
Company has obtained the Debt Financing on material terms and conditions no less
favorable than those described in the Restated Merger Agreement and a term sheet
delivered by Mergeco and the Continuing Shareholders to the Special Committee.
Mergeco and the Continuing Shareholders have received, and delivered to the
Special Committee, a letter dated as of January 19, 1999 (the "DEBT FINANCING
LETTER") from Bear, Stearns & Co. Inc. ("BEAR STEARNS") that, as of that date,
subject to certain conditions, including market conditions, Bear Stearns was
"highly confident" of its ability to place or arrange the Debt Financing. See
"SPECIAL FACTORS -- Financing of the Merger." Bear Stearns has advised Mergeco
and the Continuing Shareholders that, if the changes in the Restated Merger
Agreement had been included in the Merger Agreement on January 19, 1999, it
would not have caused Bear Stearns to alter the statements made in the Debt
Financing Letter.
THE RESTATED MERGER AGREEMENT
THE MERGER CONSIDERATION. If the Merger is consummated, each Public
Share will be converted into the right to receive the Merger Consideration of
$28.85 per share in cash, without interest.
CONDITIONS TO, AND TERMINATION OF, THE MERGER. The conditions referred
to below are only brief summaries of certain conditions and termination rights
specified in the Restated Merger Agreement, and are qualified in their entirety
by reference to the Restated Merger Agreement. See Annex I at the back of this
Proxy Statement for the complete text of the Restated Merger Agreement.
The Restated Merger Agreement will terminate:
o automatically if the required shareholder votes are not
obtained at the Meeting; or
o if the Board (with the approval of the Special Committee) and
Mergeco mutually agree to terminate the Restated Merger
Agreement.
Either the Board (with the approval of the Special Committee), on
behalf of the Company, or the members of Mergeco, on behalf of Mergeco, may
terminate the Restated Merger Agreement if:
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<PAGE>
o the Special Committee withdraws or modifies, in a manner
adverse to Mergeco, its approval or recommendation of the
Merger, the Restated Merger Agreement or the transactions
contemplated by the Restated Merger Agreement;
o there occur certain adverse political or financial events
affecting the United States which, in the terminating party's
sole judgment, make it inadvisable or impractical to proceed
with the Merger;
o any third party consents or government approvals which are
material have not been obtained;
o with certain exceptions, the representations and warranties of
the other are not true and correct in all material respects at
the closing date of the Merger or the covenants and agreements
to be performed and complied with by the other prior to the
closing of the Merger have not been complied with or
performed;
o any law, regulation, court order or injunction prohibits the
Merger or the transactions contemplated by the Restated Merger
Agreement; or
o the Merger is not consummated by August 31, 1999 without fault
of the terminating party.
Mergeco independently may terminate the Restated Merger Agreement if:
o the Company does not obtain the Debt Financing in an amount of
at least $300 million, on the material terms and conditions no
less favorable than those set forth in the term sheet
delivered by the Continuing Shareholders to the Special
Committee and having a yield to maturity not in excess of
11.25% per annum (see "SPECIAL FACTORS -- Financing of the
Merger");
o there is any material adverse change in the business,
condition, properties, assets or prospects of the Company and
its subsidiaries taken as a whole;
o there occurs a material adverse change (or event reasonably
likely to result in an adverse change) in the securities,
financial or borrowing markets, or applicable tax or other
laws or regulations, so as to (i) decrease in any material
respect the benefits of the Merger to the Continuing
Shareholders or (ii) make it impractical to proceed with the
Merger or the transactions contemplated by the Restated Merger
Agreement or by the Debt Financing;
o any of Mario Sbarro, Anthony Sbarro, Joseph Sbarro or Carmela
Sbarro or members of their families who are executive officers
of the Company die or become disabled (see "MANAGEMENT");
o the seven class action lawsuits instituted with respect to the
transactions contemplated by the Restated Merger Agreement
have not been consolidated into one lawsuit in the Supreme
Court of New York, the settlement of the consolidated lawsuit
(in accordance with the Stipulation of Settlement) has not
been approved by that Court, final judgment has not been
entered in accordance with the Stipulation of Settlement or
has not become final, or holders of 1,000,000 or more shares
of Common Stock have requested exclusion from the settlement
(see "LITIGATION PERTAINING TO THE MERGER");
o there is any other pending lawsuit or other action or
proceeding or decision which could prevent or substantially
delay the completion of the Merger or is reasonably likely to
materially increase the Merger Consideration, result in
material damages or cause rescission of the Merger; or
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o any law or regulation or court order imposes material
limitations on the ability of the Continuing Shareholders to
effectively exercise full rights to ownership of the new
Common Stock to be issued to them in the Merger.
NO SOLICITATION. The Company has agreed in the Restated Merger
Agreement not to take any action to solicit, initiate or encourage any proposal
for (i) a merger or other business combination involving the Company or any of
its subsidiaries, (ii) the acquisition of an equity interest in the Company or
any of its subsidiaries, or (iii) the sale of a substantial portion of the
assets of the Company or any of its subsidiaries, or enter into negotiations
with, or furnish information to, any other party with respect to those types of
transactions. The Company may, however, enter into negotiations with, or furnish
information to, any other party with respect to any such proposal but only to
the extent that such action is taken by, or upon the authority of, the Board if,
in the Board's good faith judgment:
o the proposed transaction is more favorable to the Company's
shareholders than the Merger, is achievable and is supported
by creditable financing; and
o failure to take such action would breach the Board's fiduciary
duties to the Company's shareholders under applicable law.
See "THE RESTATED MERGER AGREEMENT -- No Solicitation; Fiduciary
Obligations of Directors."
FEES AND EXPENSES. For a discussion of the obligations for the payment
of fees and expenses in connection with the Merger, see "THE RESTATED MERGER
AGREEMENT -- Fees and Expenses."
NO RIGHT OF APPRAISAL
The Common Stock is listed on the NYSE. As a consequence of such
listing, under Section 910 of the NYBCL, appraisal rights will not be available
to dissenting Public Shareholders. Accordingly, a Public Shareholder who objects
to the Merger will not have the right to have a court determine and fix the fair
value of the shareholder's Public Shares. A hearing is scheduled to be held
before the Court on June 29, 1999 to determine, among other things, whether the
Court should approve the settlement of the Current Shareholder Litigation as
fair, reasonable, adequate and in the best interests of the Class. Notice of,
among other things, the scheduled hearing before the Court and the requirements
for appearing at the hearing and requesting exclusion from the Class on behalf
of whom the actions were instituted was distributed beginning May 17, 1999. The
election to be excluded as a Class member is required to be postmarked no later
than June 18, 1999. Absent making such an election, a Class member will be bound
by all determinations, orders and judgments of the Court in the actions. Any
excluded Class member will have no rights with respect to the settlement, will
not be bound by the Stipulation of Settlement and may then pursue any legal and
equitable remedies that the shareholder may have. However, equitable remedies
may not be available as a practical matter where transactions have already been
consummated. Any Class member who chooses to be excluded from the settlement
must request exclusion with respect to all Common Stock owned by the Class
member. No requests for exclusion from the Class had been received through the
close of business on June 17, 1999.
See "LITIGATION PERTAINING TO THE MERGER."
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following table sets forth selected financial information for the
Company and its subsidiaries as of and for the sixteen week first quarters ended
April 25, 1999 and April 19, 1998, and as of and for each of the prior five
fiscal years. The following financial information should be read in conjunction
with the Company's Consolidated Financial Statements and related Notes included
elsewhere in this Proxy Statement. The interim unaudited information for the
Company and its subsidiaries for the sixteen weeks ended April 25, 1999 and
April 19, 1998 reflect, in the opinion of management of the Company, all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the information provided for such interim periods. The results
of operations of such interim periods are not necessarily indicative of results
which may be expected for any other interim period or for the year as a whole.
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<TABLE>
<CAPTION>
SIXTEEN WEEKS ENDED FISCAL YEARS ENDED
------------------------- ------------------------------------------------------------------
APRIL 25, APRIL 19, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1,
1999 1998 1999(1) 1997 1996 1995 1995
----- ---- ------- ---- ---- ---- ----
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurant sales......... $ 100,354 $ 98,131 $ 361,534 $ 337,723 $ 319,315 $ 310,132 $ 288,808
Franchise related income. 2,506 2,306 8,578 7,360 6,375 5,942 5,234
Interest income.......... 1,591 1,446 5,120 4,352 3,798 3,081 1,949
----------- --------- ----------- ------------ ------------ ------------ ----------
Total revenues......... 104,451 101,883 375,232 349,435 329,488 319,155 295,991
Cost and expenses:
Cost of food and paper products 20,964 20,668 76,572 69,469 68,668 67,361 61,877
Restaurant operating expenses:
Payroll and other
employee benefits... 28,103 26,551 93,367 84,910 78,258 78,342 70,849
Occupancy and other
expenses............... 31,941 29,892 101,013 93,528 85,577 84,371 76,353
Depreciation and amortization 6,700 6,670 22,429 23,922 22,910 23,630 21,674
General and administrative
expenses.................... 6,791 5,964 19,708 17,762 14,940 16,089 13,319
Provision for unit closings (2) -- -- 2,515 3,300 -- 16,400 --
Terminated transaction costs (3) -- -- 986 -- -- -- --
Litigation settlement and related
costs (4)................ -- -- 3,544 -- -- -- --
Loss on sale of land to be sold (5) -- -- 1,075 -- -- -- --
Other income................ (1,197) (700) (2,680) (1,653) (1,171) (1,359) (1,351)
----------- --------- ----------- ------------ ------------ ------------ ----------
Total costs and expenses.... 93,302 89,045 318,529 291,238 269,182 284,834 242,721
----------- --------- ----------- ------------ ------------ ------------ ----------
Income before income taxes and
cumulative effect of accounting
changes.................. 11,149 12,838 56,703 58,197 60,306 34,321 53,270
Income taxes................ 4,237 4,878 21,547 22,115 22,916 13,042 20,244
----------- --------- ----------- ------------ ------------ ------------ ----------
Income before cumulative effect of
accounting changes....... 6,912 7,960 35,156 36,082 37,390 21,279 33,026
Cumulative effect of accounting
changes (6).............. -- (822) (822) -- -- -- --
----------- --------- ----------- ------------ ------------ ------------ ----------
Net income.................. $6,912 $7,138 $34,334 $36,082 $37,390 $21,279 $33,026
=========== ========= =========== ============ ============ ============ ==========
PER SHARE DATA (7):
Basic earnings per share before
cumulative effect of accounting
changes.................. 0.34 0.39 $1.71 $1.77 $1.84 $1.05 $1.63
Cumulative effect of accounting
changes (6).............. -- (.04) (.04) -- -- -- --
----------- --------- ----------- ------------ ------------ ------------ ----------
Basic earnings per share.... $ 0.34 0.35 1.67 $1.77 $1.84 $1.05 $1.63
=========== ========= =========== ============ ============ ============ ==========
Basic number of shares used in
the computation.......... 20,532,200 20,491,939 20,516,890 20,426,678 20,369,128 20,336,809 20,310,283
Diluted earnings per share before
cumulative effect of accounting
changes.................. 0.34 0.39 $1.71 $1.76 $1.83 $1.04 $1.62
Cumulative effect of accounting
changes (6).............. -- (.04) (.04) -- -- -- --
----------- --------- ---------- ------------ ------------ ------------ ----------
Diluted earnings per share.. $ 0.34 0.35 $1.67 $1.76 $1.83 $1.04 $1.62
=========== ========== ========== ============ ============ ============ ==========
Diluted number of shares used
in the computation.......... 20,574,522 20,665,846 20,583,367 20,504,303 20,404,620 20,396,704 20,355,275
=========== ========== ========== ============ ============ ============ ==========
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
SIXTEEN WEEKS ENDED FISCAL YEARS ENDED
------------------------- ------------------------------------------------------------------
APRIL 25, APRIL 19, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1,
1999 1998 1999(1) 1997 1996 1995 1995
----- ---- ------- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities.... $ 146,072 $ 116,650 $150,472 $ 127,310 $114,818 $ 103,501 $ 80,980
Total assets................ 301,990 271,350 303,168 278,649 258,659 242,730 232,051
Working capital............. 127,475 94,539 121,380 88,006 73,619 57,645 43,271
Shareholders' equity........ 263,876 229,568 256,917 220,439 205,200 185,666 179,580
Book value per share
outstanding (8).......... 12.85 11.18 12.51 10.78 10.06 9.13 8.83
Ratio of earnings to fixed 3.44x 4.09x 5.03x 5.44x 5.99x 3.93x 6.13x
charges (9)..............
- -----------------------------
</TABLE>
(1) The Company's fiscal year ends on the Sunday nearest December 31. The
Company's 1998 fiscal year ended January 3, 1999 and contained 53
weeks. All other reported fiscal years contained 52 weeks. Accordingly,
the 1998 fiscal year benefitted from one additional week of operations
over the prior reported fiscal years. The additional week in fiscal
1998 produced revenues of $8,534, net income of $1,666 and basic and
diluted earnings per share of $.08. The Company's 1999 fiscal year
began on January 4, 1999, six days later than its 1998 fiscal year,
which began on December 29, 1997. Therefore, the first quarter of the
1999 fiscal year did not benefit from seasonally strong
"post-Christmas" revenues and profit margins. The Company estimates
that this resulted in decreases in first quarter fiscal 1999 revenues
of approximately $1,300,000, net income of approximately $450,000 and
basic and diluted earnings per share of approximately $.02.
(2) In 1998, a provision of $2,515 before tax ($1,559 or $.08 basic and
diluted earnings per share after tax) was established for the closing
of 20 restaurants locations.
In 1997, a provision of $3,300 before tax ($2,046 or $.10 basic and
diluted earnings per share after tax) relating to the Company's
investment in one of its joint ventures was established for the closing
of certain joint venture units.
In 1995, a provision of $16,400 before tax ($10,168 or $.50 basic and
diluted earnings per share after tax) was established for the closing
of approximately 40 under-performing restaurants.
(3) The 1998 financial statements reflect a charge of $986 before tax ($611
or $.03 basic and diluted earnings per share after tax) for costs
associated with the termination of negotiations of the Initial
Proposal.
(4) The 1998 financial statements reflect a charge of $3,544 before tax
($2,197 or $.11 basic and diluted earnings per share after tax) in
connection with the settlement of a lawsuit under the Fair Labor
Standards Act.
(5) During 1998, the Company received an offer to sell a parcel of
Company-owned land included in construction-in-progress for an amount
less than the carrying cost and, accordingly, the 1998 financial
statements reflect a reduction of such carrying cost of $1,075 ($667 or
$.03 basic and diluted earnings per share after tax).
(6) The cumulative effect of the change in method of accounting resulted
from the Company's implementation of the Statement of Position 98-5
(SOP) 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, the
Company implemented the SOP as of the beginning of its 1998 fiscal year
and incurred a one-time charge of $822,000 ($.04 basic and diluted
earnings per share), net of an income tax benefit of $504,000, to write
off all start-up costs existing as of the beginning of the year.
(7) All share and per share data have been restated to give effect to
Statement of Financial Accounting Standard No. 128, which became
effective for the Company at the end of 1997, and have been adjusted to
give effect to a 3-for-2 stock split in the form of a 50% stock
dividend distributed on September 22, 1994.
-11-
<PAGE>
(8) Book value per share outstanding was computed by dividing shareholders'
equity at the end of the reported period by the actual number of shares
outstanding at the end of the reported period, and does not include the
dilutive effect of Stock Options.
(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).
-12-
<PAGE>
MARKET PRICES OF AND DIVIDENDS ON THE COMMON STOCK
The Common Stock is listed on the NYSE under the symbol "SBA." The
following table shows the range of high and low sales prices (rounded to the
nearest cent) of the Common Stock for the periods indicated as reported on the
NYSE Composite Tape:
Fiscal Year 1997: High Low
- ---------------- ---- ---
First Quarter (ended April 20, 1997)............ $28.63 $25.13
Second Quarter (ended July 13, 1997)............ 29.75 26.25
Third Quarter (ended October 5, 1997)........... 29.44 26.06
Fourth Quarter (ended December 28, 1997)........ 29.75 26.00
Fiscal Year 1998:
- ----------------
First Quarter (ended April 19, 1998)............ $30.13 $25.44
Second Quarter (ended July 12, 1998)............ 29.69 25.56
Third Quarter (ended October 4, 1998)........... 27.25 18.31
Fourth Quarter (ended January 3, 1999).......... 26.69 19.38
Fiscal Year 1999:
- ----------------
First Quarter (ended April 25, 1999)............ 27.06 23.50
Second Quarter (through June 17, 1999).......... 27.31 26.00
The Revised Proposal was announced after the close of trading on the
NYSE on November 25, 1998. The closing price of the Common Stock on the NYSE on
November 25, 1998 was $24-13/16 per share. On January 19, 1999, the day before
public announcement that the Merger Agreement had been entered into, the closing
price of the Common Stock on the NYSE was $25-5/16. On June 18, 1999, the
closing price of the Common Stock on the NYSE was $26 - 3/4 per share. YOU ARE
URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR YOUR SHARES OF COMMON STOCK.
During 1997, the Company declared four quarterly dividends of $.27 per
share. The Board has deferred the declaration of dividends for all quarterly
periods subsequent to the fourth quarter of fiscal 1997 in response to the
requirements of proposals made by the Continuing Shareholders regarding a "going
private" transaction (both of which were conditioned upon, among other things,
the suspension of dividends by the Company) and, during the interval between
termination of the first proposal while it was considering strategic
alternatives to enhance shareholder value. Under the terms of the Restated
Merger Agreement, the Company has agreed, among other things, not to declare,
set aside or pay any dividends prior to the Effective Time.
As of the Record Date, there were approximately 425 holders of record
of Common Stock, exclusive of shareholders whose shares were held by brokerage
firms, banks, depositories and other institutional firms in "street name" for
their customers.
-13-
<PAGE>
FORWARD-LOOKING INFORMATION
This Proxy Statement contains forward-looking statements, which are
generally identified by words such as "may," "should," "seeks," "believes,"
"expects," "intends," "estimates," "projects," "strategy" and similar
expressions or the negative of those words. Those statements appear in a number
of places in this Proxy Statement and include statements regarding the intent,
belief, expectation, strategies or projections of the Company, its management,
Mergeco and the Continuing Shareholders at that time. 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 the Company's control, include, but are not limited to,
general economic, weather and business conditions; the availability of suitable
restaurant sites in appropriate regional shopping malls and other locations on
reasonable rental terms; changes in consumer tastes; changes in population and
traffic patterns; the ability to continue to attract franchisees; the success of
the Company's present, and any future, joint ventures and other expansion
opportunities; the availability of food (particularly cheese and tomatoes) and
paper products at reasonable prices; no material increase occurring in the
Federal minimum wage; the Company's ability to attract competent restaurant and
executive managerial personnel; competition; government regulation; the
Company's ability to successfully and timely complete compliance of its
information systems for the Year 2000 and the ability of certain of its
suppliers and landlords to be timely Year 2000 compliant; the Company's ability
to generate adequate profits and cash flow to service its projected debt; and
the availability of financing, if and when required, on favorable terms. The
accompanying information contained in this Proxy Statement and in documents
incorporated by reference identifies important factors that could cause
expectations not to be met. Forward-looking statements speak only as of the date
made, and none of the Company, Mergeco or the Continuing Shareholders undertake
any obligation to update or revise any forward-looking statements. It is likely
that if one or more of the risks and uncertainties materializes, the current
expectations of the Company, its management, Mergeco and the Continuing
Shareholders will not be recognized.
-14-
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE TRANSACTION
Beginning in late 1995, informal discussions were held among members of
the Executive Committee of the Board, consisting of Mario Sbarro, Chairman of
the Board, Joseph Sbarro, Anthony Sbarro and Bernard Zimmerman, a director of
the Company and president and a majority shareholder of a company which serves
as a consultant to the Company, in light of the fact that, at that time, Anthony
Sbarro was assessing his role with the Company. The Continuing Shareholders
considered the feasibility of a transaction in which the Company would acquire
all of the Common Stock owned by the Public Shareholders and Anthony Sbarro,
one-third of the shares owned by The Trust of Carmela Sbarro and a portion of
the shares owned by Mario and Joseph Sbarro. As a result of these discussions,
it was determined to commence an overall assessment of the future direction of
the Company. As part of this process, from time to time, Mario and Joseph Sbarro
and Mr. Zimmerman met with the investment banking firms of Bear Stearns and
Prudential Securities. In September 1996, they met with the investment banking
firm of Montgomery Securities, as well as with Bear Stearns and Prudential
Securities, concerning their potential retention by the Company or the
Continuing Shareholders.
On October 10, 1996, Mario Sbarro, Joseph Sbarro and Bernard Zimmerman
met with Bear Stearns, which presented possible alternatives for accomplishing
the transaction which the Continuing Shareholders were contemplating. Bear
Stearns noted that, if the Company were to conduct a tender offer for all
outstanding shares of Common Stock, other than those beneficially owned by Mario
Sbarro and Joseph Sbarro, at a price above $29.00 per share, the transaction
would become increasingly difficult to finance given the level of debt that
would be required to consummate the transaction. Bear Stearns, therefore,
suggested consideration of a leveraged recapitalization through a tender offer
in which, among other things, the Company would acquire an aggregate of
approximately 1.25 million of the shares owned by Mario and Joseph Sbarro, all
1.2 million shares owned by Anthony Sbarro, 0.8 million of the shares owned by
The Trust of Carmela Sbarro and 11.7 million of the 13.2 million of the shares
held by the Public Shareholders. In order to consider certain financial effects
of the recapitalizations being contemplated, for illustrative and discussion
purposes, Bear Stearns presented information assuming purchase prices of $29.00
per share (to be financed with $115.5 million of the Company's cash and
approximately $339 million of debt financing) and $32.00 per share (to be
financed with $115.5 million of the Company's cash and approximately $382
million of debt financing). Bear Stearns concluded that such a transaction could
be financed based on then current market conditions. Also for illustrative and
discussion purposes, Bear Stearns presented information assuming a tender offer
for all Public Shares at $32.00 per share (to be financed with $115.5 million of
the Company's cash and approximately $436 million of debt financing). The
summary contained herein of the October 10, 1996 presentation by Bear Stearns to
Mario Sbarro, Joseph Sbarro and Bernard Zimmerman is qualified in its entirety
by reference to the full text of the presentation filed as an exhibit to the
Schedule 13E-3 transaction statement related to the Merger filed with the SEC
(the "Schedule 13E-3"). See "AVAILABLE INFORMATION."
On October 26, 1996, Mario and Joseph Sbarro, in their individual
capacities, retained Bear Stearns to assist in exploring the advisability of
proposing a transaction, as a result of which they or their affiliates would own
at least a majority of the voting securities of the Company, with the
understanding that, in the event a transaction was structured in a manner in
which some or all of the purchase price was to be paid by the Company, they
would use their best efforts to have the Company retain Bear Stearns, and the
Continuing Shareholders would be released from their obligations under their
engagement letter. It was also understood that, in the event the Continuing
Shareholders were to propose a transaction between the Continuing Shareholders
and the Company, the Company would retain another investment banking firm to act
as the financial advisor to a special committee of the Board of Directors
(consisting of the directors who were neither employees of, nor consultants to,
the Company) and that the special committee would rely on the advice of such
firm and not Bear Stearns with respect to such transaction.
-15-
<PAGE>
Bear Stearns thereupon commenced an analysis of the Company's business,
results of operations, financial position, structure and prospects, and
discussed with the Continuing Shareholders various structural alternatives and
analyses for consideration. Over the next two months, the Continuing
Shareholders met with their advisors to consider legal, accounting, financing,
tax and estate planning aspects of the alternatives presented by Bear Stearns.
On November 19, 1996, Mario Sbarro informed the entire Board that the
Continuing Shareholders were exploring a potential transaction which
contemplated a program under which they would purchase or the Company would
repurchase some or all of the then outstanding Common Stock. Subsequently, based
upon their then concerns about long-term operating flexibility limitations under
covenants likely to be contained in the agreements governing the high level of
debt required, and tax and estate planning considerations, the Continuing
Shareholders decided not to pursue a management buyout (going private)
transaction, and asked Bear Stearns to conduct an analysis of strategic
alternatives to increase shareholder value.
On January 15, 1997, at a special meeting of the Board, Bear Stearns
reviewed with the Board various strategic alternatives potentially available to
the Company to increase shareholder value. The alternatives discussed by Bear
Stearns were (i) maintaining the status quo, (ii) declaring a special cash
dividend, (iii) repurchasing Common Stock in the open market, (iv) acquiring
other businesses, (v) selling the Company, (vi) going private through a
management buy out, and (vii) a leveraged recapitalization of the Company
through a tender offer for a significant portion of outstanding Common Stock to
be financed with the Company's cash position and the use of debt financing.
Based in part upon operating and financial information provided to it
and discussions with the Company's management, Bear Stearns cited the following
considerations in its evaluation of the alternatives:
o Maintenance of the status quo by the Company would likely
result in a continued buildup of cash, which would not be
highly valued by investors;
o A special one-time cash dividend would not be tax efficient
from an individual shareholder's standpoint, since it would be
taxed at ordinary income, rather than capital gains, tax
rates;
o An open market stock repurchase program would not be an
efficient mechanism for repurchasing a large number of shares
of Common Stock and a moderate repurchase program would not
have a significant impact on the Company's earnings per share;
o As to acquisitions, management had expressed a strong
strategic preference for developing new concepts and joint
ventures internally, the Company had not historically made
acquisitions and there appeared to be few concepts available
that would provide a strong business fit with the Company;
o Since the Continuing Shareholders had indicated that they were
not interested in a sale of the Company, a sale of control of
the Company without their participation was unlikely; and
o A going private transaction would involve the incurrence of a
significant level of debt resulting in a highly leveraged
capital structure and constraints on operating flexibility as
a result of requirements to comply with loan covenants
governing the debt that would be incurred.
In view of these considerations, Bear Stearns recommended consideration
of a leveraged recapitalization of the Company in which the Company would
purchase between $250-300 million of its outstanding Common Stock through a
tender offer utilizing a substantial portion of its cash, together with $150-200
million of debt financing. Bear Stearns reviewed with the Board three leveraged
recapitalization scenarios for consideration. The presentation contemplated
$250, $275 and $300 million leveraged recapitalizations to be effectuated by a
Company tender offer at a price of between $29.00 and $30.00 per
-16-
<PAGE>
share (at a time when the market price of the Common Stock was approximately
$25.75 per share) utilizing approximately $100 million of the Company's cash and
between $150 and $200 million of debt financing. Under the three scenarios
presented, the Company would have repurchased between 8.3 million and 10.0
million shares of Common Stock, with certain of the Continuing Shareholders
tendering an aggregate of approximately 333,333 shares. Assuming, among other
things, that (a) the Company achieved certain levels of financial performance,
(b) the debt financing was effected at the assumed interest rates, (c) the
Company's price/earnings multiple remained constant at 14.0 x (which was the
then current multiple based on analysts' consensus estimates of the Company's
1996 earnings), and (d) the Company increased its dividend by 15% annually, it
was estimated that the remaining outstanding Common Stock could have a possible
future stock price at the end of 2001 and 2005 of $58 and $82 per share,
respectively, under the $250 million recapitalization scenario; $56 and $86 per
share, respectively, under the $275 million recapitalization scenario; and $57
and $90 per share, respectively, under the $300 million recapitalization
scenario. Assuming a discount rate equal to the Company's estimated pro forma
weighted average cost of capital for the scenarios, such possible future stock
prices at the end of 2001 and 2005 would have an estimated present value of $40
and $46 per share, respectively, under the $250 million recapitalization
scenario; $40 and $48 per share, respectively, under the $275 million
recapitalization scenario; and $42 and $52 per share, respectively, under the
$300 million recapitalization scenario. The presentation also included a status
quo scenario based upon the foregoing assumptions (except that the Company would
not engage in a leveraged recapitalization or borrow funds) which indicated
possible stock prices of $39 and $53 per share at the end of 2001 and 2005,
respectively, with an estimated present value (assuming the same discount rate
as employed with the other scenarios) of $28 and $31 per share at the end of
2001 and 2005, respectively. The possible future stock prices were based on a
number of assumptions and were for illustrative and discussion purposes only.
Bear Stearns also discussed the possible disadvantages of a leveraged
recapitalization, including reduced liquidity in the market for the Common
Stock, reduced research coverage by analysts, the impact on the Company's
shareholder base due to the elimination of, or reduction in, dividends and
reduction in the Company's equity market capitalization, and the operating and
financial constraints associated with leverage. The Board then requested Bear
Stearns to provide it with (i) additional information in order to consider the
Company's ability to service debt in the event of an economic or business
downturn and (ii) customary financial covenants that could be expected in
financing arrangements and that could impact the Company's operating
flexibility.
The summary contained herein of the January 15, 1997 presentation by
Bear Stearns to the Board is qualified in its entirety by reference to the full
text of the presentation filed as an exhibit to the Schedule 13E-3. See
"AVAILABLE INFORMATION."
At a special meeting of the Board held on January 23, 1997, Bear
Stearns reviewed with the Board the Company's ability to service the various
levels of debt contemplated under the leveraged recapitalization scenarios being
considered based on several assumed levels of operating performance, including
no growth in operating income and annual reductions in operating income. Bear
Stearns presented, based on information provided by the Company, detailed
analyses for $250, $275 and $300 million recapitalization scenarios containing
projected balance sheets, income statements and cash flows for the ten years
ending December 31, 2005, including various debt service ratios derived from the
projected financial statements, to aid the Board in its analysis of the
Company's ability to service the levels of debt being considered. The Board also
received a summary of such alternatives, as well as a status quo scenario (no
recapitalization or borrowing) and new $200 and $300 million recapitalization
scenarios (based upon different financing structures). Bear Stearns also
presented a comparative analysis of various terms and financial and operational
covenants customary for both bank debt and high-yield debt. Following a
discussion of the information presented and the potential effects that
recapitalizations at various amounts could have on the Common Stock that would
remain outstanding, the Board requested management to consider a
recapitalization size that it might be willing to recommend to the Board. The
summary contained herein of the July 23, 1997 presentation by Bear Stearns to
the Board is qualified in its entirety by reference to the full text of the
presentation filed as an exhibit to the Schedule 13E-3. See "AVAILABLE
INFORMATION."
-17-
<PAGE>
At a regularly scheduled meeting of the Board held on February 12,
1997, the Board continued to consider alternate recapitalization scenarios. The
Board authorized management to proceed with an examination of the feasibility of
a $250-$300 million leveraged recapitalization, which would utilize
approximately $100 million of the Company's existing cash with the balance to be
borrowed from banks and/or obtained in the bond market, with a revolving credit
facility for working capital purposes. The Board then authorized the Company to
formally retain Bear Stearns as the Company's financial advisor to consider a
variety of strategic alternatives, including a recapitalization and a going
private transaction. Bear Stearns was not engaged to render, and has not
rendered, any opinion as to the fairness of any transaction presented to the
Board, including the proposed Merger. See "-- Financing of the Merger" for
information regarding the Company's engagement agreement with Bear Stearns.
However, as a result of an increase in interest rates in late March
1997, along with other considerations, the Board at its regularly scheduled
meeting on May 21, 1997 determined not to pursue a recapitalization transaction
at that time.
During the summer of 1997, as the interest rate environment became more
settled, following informal discussions with other members of the Board,
management, along with Mr. Zimmerman, asked Bear Stearns to present additional
information concerning a recapitalization transaction.
At the Board's regularly scheduled meeting held on August 19, 1997,
management presented information to the Board concerning a possible repurchase
of approximately $230 million of Common Stock to be financed, together with
estimated expenses, with approximately $90 million of the Company's cash and
$150 million in borrowings. On August 27, 1997, an informal meeting was held
with Bear Stearns, at which certain members of the Board participated in person
and others by telephone conference, to discuss the likely effects that the
elimination of or a substantial reduction in dividends as part of the
recapitalization transaction, would have on the Common Stock that would remain
outstanding following a recapitalization.
At the Board's regularly scheduled meeting held on November 18, 1997,
the Board was apprised of the Company's negotiations for bank financing to fund
a leveraged recapitalization. The Board was also advised that the Continuing
Shareholders had requested Bear Stearns to provide information concerning a
going private transaction. Mario Sbarro further informed the Board that the
Continuing Shareholders had recently received an inquiry from a nationally
recognized investment banking firm as to whether the Continuing Shareholders
would be interested in selling their Common Stock to Triarc Companies, Inc., an
unaffiliated food and beverage company, at a significant premium to the then
market price of the Common Stock. The potential purchaser proposed a transaction
in which a restaurant franchising business it owned would be merged into the
Company in exchange for shares of Common Stock, and the Company would repurchase
all of the Common Stock owned by the Continuing Shareholders at $44.50 per share
using the Company's available cash and the combined companies' financing
sources. The proposed transaction did not contemplate the acquisition of Common
Stock held by the Public Shareholders. The proposed transaction would have
resulted in the potential purchaser acquiring majority ownership of the Company.
All discussions were preliminary, based only on publicly available information
and did not result in any formal offer being made. Mr. Sbarro advised the Board
that the Continuing Shareholders had not previously received any other proposals
for the sale of their interests in the Company, had not had time to consider the
inquiry and were not sure that they would entertain any such proposal. Because
of the preliminary nature of discussions related to this inquiry, no transaction
was presented for consideration by the Board. Both prior and subsequent to the
Board's November 18, 1997 meeting, meetings and telephone discussions to explore
a potential transaction were held among representatives and principals of the
potential purchaser, Mario Sbarro and Mr. Zimmerman, and, in one instance, with
Bear Stearns and Parker Chapin Flattau & Klimpl, LLP, counsel to the Company
("PARKER CHAPIN"), present.
In late November 1997, the Continuing Shareholders determined that they
were not interested in selling their Common Stock and determined to accelerate
their consideration of a going private transaction. On December 1, 1997, the
potential purchaser was advised of the Continuing Shareholders' decision not to
proceed with a sale of their interest in the Company.
-18-
<PAGE>
The Continuing Shareholders thereupon recommenced consideration of the
legal, accounting, tax, estate planning and family continuity and succession
aspects of a going private transaction with their advisors and Mr. Zimmerman.
The Continuing Shareholders also discussed with Bear Stearns the feasibility,
method and potential effects of various financing alternatives.
At a special meeting of the Board held on January 12, 1998, the
Continuing Shareholders submitted a proposal to the Board to acquire all of the
outstanding Common Stock not owned by them for $28.50 in cash through a merger
with a company to be owned by them. Completion of the transaction was
conditioned on, among other things:
o entering into a definitive agreement with the Company;
o approval of the transaction by the Special Committee, the full
Board and the Company's shareholders;
o receipt of satisfactory financing for the transaction; and
o receipt of a fairness opinion from a financial advisor to the
Special Committee that the proposed transaction is fair from a
financial point of view to the holders of Public Shares.
The Continuing Shareholders also advised the Board that they had
received a letter from Bear Stearns that stated that, subject to certain
conditions, Bear Stearns was "highly confident" of its ability to place or
arrange financing for the transaction. In addition, the Continuing Shareholders
advised the Board that they were not interested in selling their Common Stock.
They further advised the Board that their proposal contemplated an immediate
suspension of the payment of cash dividends and, on January 20, 1998, the
Continuing Shareholders amended their proposal to formally condition their offer
on the immediate suspension of dividends by the Company. As amended, the
proposal is referred to in this Proxy Statement as the "INITIAL PROPOSAL."
At the January 12, 1998 meeting, the Board established the Special
Committee consisting of Richard A. Mandell, Harold L. Kestenbaum, Paul A. Vatter
and Terry Vince, the four directors who are neither employees of, nor
consultants to, the Company, Mergeco or the Continuing Shareholders and had no
interest in the proposed transaction other than as holders of non-employee
director Stock Options and, in some cases, as Public Shareholders. The Special
Committee was authorized to consider and evaluate the Initial Proposal, assess
whether it would be in the best interests of the Company and the Public
Shareholders to pursue a transaction with the Continuing Shareholders, make a
recommendation to the Board with respect to acting on the Initial Proposal, and,
if appropriate, enter into and conduct discussions concerning the Initial
Proposal and negotiate a definitive agreement with respect to the Initial
Proposal on behalf of the Company. The Board also authorized the Special
Committee to retain, at the expense of the Company, legal counsel and an
independent investment banking firm to assist and advise it in its work
concerning the Initial Proposal. Immediately following the meeting, members of
the Special Committee met with Parker Chapin, which reviewed with the members
the Special Committee's duties and responsibilities.
The Special Committee thereupon held its first meeting and appointed
Mr. Mandell to serve as its Chairman and identified a number of investment
banking and law firms to interview to act as financial advisor and legal counsel
to the Special Committee.
On January 14, 1998, Messrs. Mandell and Kestenbaum met to interview
law firms to serve as the legal advisors to the Special Committee. After
discussing the results of these interviews with the other members of the Special
Committee, the Special Committee agreed to retain Willkie Farr & Gallagher
("WILLKIE FARR") as its legal counsel. The Special Committee made its
determination based on Willkie Farr's experience and expertise in matters such
as those contemplated in the Initial Proposal and its experience in advising
other special committees of boards of directors in similar transactions.
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On January 16, 1998, Messrs. Mandell and Kestenbaum, with the
assistance of Willkie Farr, interviewed investment banking firms to act as the
financial advisor to the Special Committee. On January 18, 1998, the Special
Committee met by telephone conference to discuss the retention of a financial
advisor and determined to retain Prudential Securities based on Prudential
Securities' experience and expertise in matters such as those contemplated in
the Initial Proposal, its experience in advising other special committees of
boards of directors in similar transactions, its experience in the industry and
the proposed terms of its engagement. Prudential Securities had served as the
managing underwriter of the Company's initial public offering in 1985 and
co-managing underwriter of a public offering of Common Stock by, among others,
certain of the Continuing Shareholders in 1989. Prudential Securities had not
been engaged by the Company in any capacity since 1989. Mr. Mandell, who had
served as a Managing Director of Prudential Securities from 1982 until June
1995, informed the other members of the Special Committee of his prior
affiliation with Prudential Securities and confirmed that he had no existing
employment, consulting or other relationship with Prudential Securities.
During the week of January 18, 1998, the Special Committee reviewed and
negotiated the terms of engagement letters with Willkie Farr and Prudential
Securities, and Prudential Securities held various discussions with
representatives of the Company concerning the due diligence to be performed by
the advisors to the Special Committee.
On January 20, 1998, the Special Committee and the Company entered into
an engagement letter with Prudential Securities, under which Prudential
Securities was retained by the Special Committee to provide financial advice and
assistance in connection with the Initial Proposal and, if requested by the
Special Committee, to render an opinion as to the fairness, from a financial
point of view, to the Public Shareholders of the consideration to be received by
the Public Shareholders. See "-- Presentation and Fairness Opinion of Prudential
Securities."
On January 20, 1998, the Company issued a press release announcing the
Initial Proposal and the conditions to completion of the then proposed merger,
including the condition that dividends be suspended. In its press release, the
Company also announced preliminary results of operations for its fourth quarter
and year ended December 28, 1997, which were lower than earnings for the
comparable periods in the prior year and stated that earnings would further be
affected by a charge to earnings as a result of an evaluation of its investment
in certain units of one of its joint ventures, but that it was premature to
quantify the amount of the charge.
Beginning on January 21, 1998, seven lawsuits were instituted against
the Company, those Continuing Shareholders who are directors of the Company and,
except in certain lawsuits, all or some of the other directors. In general, the
complaints alleged that the defendants breached fiduciary duties, that the
proposed price per share to be paid to Public Shareholders was inadequate and
that the Initial Proposal served no legitimate business purpose of the Company.
In September 1998, following termination of negotiations regarding the Initial
Proposal, these lawsuits were discontinued, without prejudice and without costs.
See "LITIGATION PERTAINING TO THE MERGER -- Initial Proposal Litigation."
On February 12, 1998, the Special Committee met with its financial and
legal advisors. Prudential Securities discussed the progress of its due
diligence activities. Willkie Farr reviewed with the Special Committee members
their fiduciary duties and the rights and powers of the Special Committee and
its members under applicable law and under the Company's Certificate of
Incorporation and By-Laws. The Special Committee was advised that its purpose
was to negotiate at arms' length with the Continuing Shareholders in order to
protect the interests of the Public Shareholders. The Special Committee was
further advised that it was under no obligation to reach any agreement with the
Continuing Shareholders, unless the Special Committee determined that such
agreement was in the best interests of the Public Shareholders. At this meeting,
the Special Committee reviewed the first draft of the then proposed Merger
Agreement between the Company and the Continuing Shareholders that had been
submitted to Willkie Farr by Warshaw Burstein Cohen Schlesinger & Kuh, LLP
("WARSHAW BURSTEIN"), counsel to the Continuing Shareholders, and Parker Chapin.
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On February 19, 1998, the Special Committee held a telephonic meeting
with Willkie Farr and Prudential Securities, in which Willkie Farr reviewed and
discussed the significant terms of the draft Merger Agreement with the Special
Committee. The Special Committee also discussed proposed changes to the draft
Merger Agreement for submission to the Continuing Shareholders' advisors.
During the week of February 23, 1998, upon the authorization of the
Special Committee, Willkie Farr began negotiations on open issues with respect
to the non-financial terms of the proposed Merger Agreement with Parker Chapin
and Warshaw Burstein.
On February 25, 1998, Prudential Securities met with management of the
Company to discuss due diligence matters, including the financial status and the
management of the Company and the operational aspects of the Company and the
restaurant industry generally.
On March 3, 1998, Prudential Securities and Willkie Farr again met with
the Special Committee. Prudential Securities made a preliminary presentation to
the Special Committee summarizing its work to date. The presentation discussed
various approaches to valuation and included, among other things, a discounted
cash flow analysis of the Company, analyses of comparable transactions and
comparable companies and a leveraged buy-out (going private) analysis.
Prudential Securities applied discount rates ranging from 11.0% to 15.0% and
terminal value multiples of 6.0x and 7.0x in its discounted cash flow analysis,
which resulted in an implied range of equity values per share of $30.00 to
$36.68 with a median of $33.11 and a mean of $33.18. The comparable transactions
analysis of the consideration paid in three then recent merger and acquisition
transactions which Prudential Securities deemed to be reasonably similar to the
Initial Proposal indicated an implied range of equity values per share of $22.82
to $37.13 with a median of $29.27 and a mean of $29.74. Prudential Securities'
analysis of five selected pizza and Italian food comparable companies indicated
an implied range of equity values per share of $22.93 to $51.95 with a median of
$32.46 and a mean of $34.97. Prudential Securities' analyses of five selected
fast food comparable companies indicated an implied range of equity values per
share of $20.05 to $74.15 with a median of $32.90 and a mean of $38.26.
Prudential Securities' leveraged buy-out analysis indicated an implied range of
equity values per share of $29.00 to $33.00 with a median and mean of $31.00.
The summary contained herein of the March 3, 1998 presentation by Prudential
Securities to the Special Committee is qualified in its entirety by reference to
the full text of the presentation filed as an exhibit to the Schedule 13E-3. See
"AVAILABLE INFORMATION."
Willkie Farr then discussed with the Special Committee a number of open
issues relating to the proposed Merger Agreement.
On March 24, 1998, Prudential Securities and Mr. Mandell met with Bear
Stearns, Mario and Joseph Sbarro and Mr. Zimmerman to discuss various issues
relating to the Initial Proposal, and, on March 28, 1998, Mr. Mandell had a
telephone conference with Mario Sbarro and Mr. Zimmerman to discuss Merger
Agreement issues.
Thereafter, Prudential Securities continued to gather information and
conducted diligence concerning the Company and its results of operations,
financial condition and prospects. Prudential Securities and Bear Stearns held
discussions concerning the valuation methodologies employed by Prudential
Securities in its analysis of the Company, and Willkie Farr, Parker Chapin and
Warshaw Burstein continued to negotiate the non-financial terms of a proposed
Merger Agreement. In addition, the Continuing Shareholders and the Special
Committee negotiated various aspects of the Merger Consideration. During this
period, at times with Bear Stearns, the Continuing Shareholders met with
prospective financing sources.
During the period from January 12, 1998 through June 16, 1998, the
Special Committee held seven formal meetings, including four in which some or
all Special Committee members participated by means of telephone conference. In
addition, the members of the Special Committee held numerous informal
discussions regarding price and terms among themselves and with Willkie Farr and
Prudential Securities.
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On June 16, 1998, Mario Sbarro met with Messrs. Mandell and Zimmerman.
Mr. Sbarro advised Mr. Mandell that, while the matter would be further discussed
at the meeting of the Board scheduled for the next day, it was apparent from
ongoing discussions regarding the Initial Proposal that the Continuing
Shareholders and the Special Committee were not going to reach an agreement on
the terms and conditions of a merger. In addition to being unable to reach an
agreement as to the Merger Consideration to be paid to Public Shareholders, the
Continuing Shareholders and the Special Committee had been unable to agree upon,
among other things, the method of handling unvested stock options, the
circumstances under which each party would be entitled to reimbursement for its
expenses in the event of termination of the then proposed Merger Agreement, the
establishment of basic financing terms that the Continuing Shareholders would
deem acceptable, indemnification and indemnification insurance provisions, and
circumstances under which a party could terminate the proposed Merger Agreement.
At a special meeting of the Board held on June 17, 1998, Mario Sbarro,
on behalf of the Continuing Shareholders, advised the Board that, because the
Continuing Shareholders and the Special Committee could not agree on mutually
acceptable terms of a transaction, negotiations for a going private transaction
would be terminated. Mr. Sbarro also expressed his belief that it would be in
the best interests of all shareholders for the Company to review various other
strategic alternatives available to the Company. The Board concurred and the
Special Committee was then disbanded.
A press release was then issued by the Company reporting that an
agreement with the Continuing Shareholders concerning the terms of the proposed
transaction could not be reached, that the suspension of dividends would
continue and that the Company and its investment banker would explore various
strategic alternatives for the benefit of all shareholders. The Board determined
to continue the suspension of dividends while it considered other strategic
alternatives to enhance shareholder value.
On July 20, 1998, the Board held a special meeting at which Bear
Stearns made a presentation to the Board regarding the strategic alternatives
previously discussed at the Board's January 15, 1997 meeting. Bear Stearns noted
that, since negotiations for the proposed going private transaction had not been
successful, based on information provided by the Company and discussions with
management, the two alternatives to consider for the creation of shareholder
value for all shareholders of the Company were a significant leveraged
recapitalization or a sale of the Company. Bear Stearns thereupon reviewed with
the members of the Board the positive and negative effects of both types of
transactions as they would pertain to shareholders. Bear Stearns concluded that,
if the Continuing Shareholders would be interested in selling their entire
interests in the Company, it believed the most attractive alternative for
increasing shareholder value for all shareholders would be through a sale of the
Company. Bear Stearns advised that a sale of the Company was only practical if
the Continuing Shareholders were interested in selling their interests in the
Company. Bear Stearns stated its belief that, if a leveraged recapitalization
were pursued, it should be significant, thus maximizing the immediate value to
shareholders. Bear Stearns also noted that a recapitalization which included a
financial investor should be considered if the Continuing Shareholders
determined to retain a small portion of their Common Stock or a very significant
recapitalization was contemplated. For illustrative and discussion purposes,
there were presented to the Board examples of a $450 million Company-sponsored
recapitalization, a $661 million investor-sponsored recapitalization and the
sale of the entire equity interest of the Company to a financial purchaser.
In the example of the Company-sponsored $450 million recapitalization,
the Company would tender for 14 million shares of Common Stock at a price of
$32.00 per share (a 19% premium to the then current market price). This
recapitalization would be financed with $125 million of the Company's cash and
$340 million of debt. Assuming, among other things, that (a) the Company
achieved certain levels of financial performance, (b) debt financing was
effected at assumed interest rates, (c) the Company's price/earnings multiple
remained constant at 13.7x (which was the then current multiple based on
analysts' consensus estimates of the Company's 1998 earnings) and (d) no future
dividends, it was estimated that the remaining outstanding Common Stock could
have possible future stock prices at the end of 1998 and 2002 of $30.36 and
$93.17, respectively, with estimated present values (assuming a discount rate
equal to the Company's
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estimated pro forma weighted average cost of capital for this scenario) at the
end of 1998 and 2002, of $28.25 and $46.27, respectively.
The illustrative $661 million investor-sponsored recapitalization
assumed a tender offer for 18.9 million shares (90% of the Company's outstanding
shares on a diluted basis) at $35.00 per share to be financed with $123 million
of the Company's cash, $430 million of debt financing and $125 million of new
common equity from a financial investor. This recapitalization would have
resulted in the Continuing Shareholders, Public Shareholders and the financial
investor owning 12.3%, 24.6% and 63.2%, respectively, of the Common Stock to be
outstanding after the transaction. No possible future market price information
was presented under the illustrative investor-sponsored transaction.
The illustrative analysis of a sale of the Company to a financial
purchaser assumed a price of $36.00 per share which would have required
financing of approximately $775 million.
Also presented to the Board were detailed financial models, including
projected Company balance sheets, income statements and cash flows for the five
years ending December 31, 2002, and calculations of various debt service ratios
and other credit analysis statistics, for each of the three presented scenarios,
as well as "exit case" information for the investor-sponsored leveraged
recapitalization and financial purchaser business sale scenarios. Bear Stearns
indicated that, based on its review of likely interested purchasers and current
market conditions, it believed that if potential purchasers (a) were confident
regarding the Company's growth prospects, (b) had either sufficient existing
management or could retain new management if the Sbarro family wished to leave,
and (c) were able to finance in excess of $500 million of the acquisition price
in the debt capital markets, a sales process could provide shareholder value in
the mid-$30s per share. Bear Stearns also noted that potential financial
purchasers may look for continued participation in a transaction by principal
shareholders in order to structure a transaction that would be entitled to
recapitalization accounting treatment. The representatives of Bear Stearns were
then excused from the meeting, at which time the directors who were Continuing
Shareholders indicated to the Board that at price levels in the range of the
mid-$30s per share, the Continuing Shareholders were willing to consider selling
their interests in the Company. The Continuing Shareholders also advised the
Board that, if a potential purchaser desired the Continuing Shareholders to
participate in a transaction, they would consider doing so under mutually
acceptable terms. The Board thereupon authorized Bear Stearns to determine the
interests of potential strategic and financial purchasers in acquiring the
Company, including the price that they would be willing to pay. The summary
contained herein of the July 20, 1998 presentation by Bear Stearns to the Board
is qualified in its entirety by reference to the full text of the presentation
filed as an exhibit to the Schedule. See "AVAILABLE INFORMATION."
Bear Stearns then prepared a list of potential strategic and financial
purchasers, which it reviewed with the Board and management. A confidential
information memorandum was then prepared which was designed to solicit interest
from potential purchasers of the Company by providing general information about
the Company and ideas for the future growth of the Company. The information
memorandum described many of the Company's strengths and strategies, noting that
the Company's growth initiatives could be driven by (a) further penetrating high
customer traffic venues, (b) increased franchising (particularly in
international markets), (c) expansion into traditional quick service restaurant
venues (including through co-branding with other restaurant concepts in
stand-alone locations) and (d) significant expansion of the Company's recently
developed Umberto of New Hyde Park joint venture concept (see "Business of the
Company"). The memorandum also summarized information about the Company's
business and management contained in the Company's public filings with the SEC
and contained a detailed business description, strategy and growth initiatives
and historical and projected financial information. The financial projections
were considerably more optimistic than the Company's Operating Projections, as
they anticipated a more aggressive expansion of the Company's business into new
venues and increases in comparable store sales and operating margins. See "--
Certain Financial Projections." The summary contained herein of the Confidential
Information Memorandum is qualified in its entirety by reference to the full
text of the presentation filed as an exhibit to the Schedule 13E-3. See
"AVAILABLE INFORMATION." On August 6, 1998, Bear Stearns began to
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contact potential purchasers. Confidentiality agreements were then prepared and
distributed to potential purchasers who orally had indicated having an interest
in obtaining further information.
On August 17, 1998, the Continuing Shareholders met with Messrs.
Mandell and Zimmerman, and with Parker Chapin and Bear Stearns to review the
status of the business sale process.
At a meeting of the Board held on August 19, 1998, at which
representatives of Bear Stearns participated by telephone conference, Bear
Stearns updated the Board on the status of its contacts with potential
purchasers. Bear Stearns also advised that it would provide the confidential
information memorandum to potential purchasers who executed confidentiality
agreements.
Bear Stearns contacted 38 potential purchasers (12 potential strategic
purchasers and 26 financial purchasers) during August 1998, including the third
party that had expressed an interest in purchasing the Continuing Shareholders'
Common Stock in 1997. A total of 17 potential purchasers signed confidentiality
agreements and each received the confidential information memorandum. Potential
purchasers were instructed to base their initial indications of interest on
information contained in the confidential information memorandum and that, if
their initial indications of interest were sufficient, they would be provided
the opportunity to meet with management and perform detailed due diligence in
preparation for a final bid. In early September 1998, Bear Stearns received four
written preliminary indications of interest. The remaining potential purchasers
indicated they were not interested in pursuing a transaction.
Each of the four written preliminary indications of interest were from
potential financial purchasers and reflected an interest in further exploring a
proposed transaction. Each was subject to, among other things, conducting due
diligence, obtaining financing and negotiating acceptable agreements. One
indication of interest contemplated the forming of a new corporation with the
Company's management and other investors to purchase the Company for a cash
price of approximately $30.00-$32.50 per share. During subsequent discussions
with Bear Stearns related to the contemplated amounts and type of debt and
equity financing for the contemplated transaction, the potential purchaser
reduced its indication of interest to approximately $28-$30 per share. A second
indication of interest contemplated the merger of the Company with a financially
troubled restaurant company controlled by a potential financial purchaser. This
proposal contemplated consideration with a face value of $29.00-$31.00 per
share, of which approximately $6.00 was to be in preferred and common stock of a
newly-formed company, with the balance to be paid through the Company's existing
cash and other financing to be sought. The potential financial purchaser would
not commit new equity to the proposed transaction. The remaining two indications
of interest contemplated cash prices of approximately $25.00 per share in one
case and, in the other case, approximately $25.00-$29.00, with a requirement in
the latter case that the Continuing Shareholders participate with the potential
purchaser through the ownership of common stock in the acquiring entity. As part
of the business sale process, Bear Stearns approached each party that had
submitted a preliminary indication of interest to seek an increase in the
contemplated price. None of the parties were willing to increase their original
proposal from the prices indicated above.
On October 7, 1998, in a telephone conference, Bear Stearns informed
participating Board members as to the status of the sale process and the results
of its discussions with the potential purchasers. The Continuing Shareholders
noted that all the bids contemplated a price below the minimum price at which
the Continuing Shareholders had previously indicated their willingness to
consider selling their interests in the Company and indicated that they would
not consider selling their Common Stock at the prices proposed in the
preliminary indications of interest. Based on this information, the Board
advised Bear Stearns to terminate the business sale process.
On October 15, 1998, Mario Sbarro, Joseph Sbarro, Bernard Zimmerman,
Robert S. Koebele (the Company's Chief Financial Officer), Parker Chapin, Bear
Stearns, Richard A. Mandell, as Chairman of the former Special Committee of the
Board, and Willkie Farr and Prudential Securities, which had served as legal and
financial advisors, respectively, to the former Special Committee in connection
with the Initial Proposal, met to determine whether Prudential Securities would
give consideration to another offer from the Continuing
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Shareholders. Prudential Securities indicated that it would need to obtain
updated information concerning the Company, review the results of the business
sales process which the Company had conducted through Bear Stearns and review
the other factors it previously had considered before it could determine whether
any offer that might be made would be fair to Public Shareholders from a
financial point of view.
At the Board's regularly scheduled quarterly meeting held on November
17, 1998, Mario Sbarro advised the Board that the Continuing Shareholders were,
again, considering a going private transaction to acquire all of the Common
Stock not owned by them. Mr. Sbarro also advised the Board that management had
met with a major bank on behalf of the Continuing Shareholders to determine
whether bank financing was available on acceptable terms and that the Continuing
Shareholders also were considering high-yield debt financing.
On November 18, 1998, a telephone conference was held among Mario
Sbarro, Messrs. Zimmerman and Mandell, Willkie Farr, Parker Chapin and Bear
Stearns to review then unresolved matters, other than the amount of the Merger
Consideration, at the time the Initial Proposal had been terminated. The
unresolved matters included the method of handling unvested options, the
circumstances under which each party would be entitled to reimbursement for its
expenses in the event of termination of the then proposed Merger Agreement, the
establishment of basic financing terms that the Continuing Shareholders would
deem acceptable, indemnification and indemnification insurance provisions, and
the circumstances under which a party could terminate the previously proposed
Merger Agreement.
Between November 18, 1998 and November 25, 1998, the Continuing
Shareholders consulted with Bear Stearns concerning potential financing for a
going private transaction, and Parker Chapin reviewed with Willkie Farr matters
that had not been resolved in the negotiation of the Merger Agreement at the
time the Initial Proposal was withdrawn. On November 24, 1998, Mario Sbarro, on
behalf of the Continuing Shareholders, met with Mr. Mandell and Parker Chapin to
review open issues. At that meeting, Mr. Sbarro was advised that, before
specific issues could be resolved, the Continuing Shareholders should make a
formal proposal to the Board.
After the close of business on November 25, 1998, a telephonic meeting
of the Board (at which only Mario Sbarro, and Messrs. Kestenbaum, Mandell,
Vatter and Zimmerman were able to participate due to the short notice given) was
held, at which the Continuing Shareholders submitted a proposal for the Merger
of a company to be formed by them with and into the Company, pursuant to which
each Public Shareholder of the Company would receive $27.50 in cash in exchange
for their shares of Common Stock. This proposal is referred to in this Proxy
Statement as the "REVISED PROPOSAL." The Revised Proposal was, except for the
proposed Merger Consideration, under terms similar to those contained in the
Initial Proposal, including the same conditions. The Continuing Shareholders
advised the Board that they had been informed that Bear Stearns was "highly
confident" in its ability to place or arrange the financing for the Merger.
At the November 25 meeting, the Board reappointed the Special Committee
and, as it had with the Initial Proposal, authorized the Special Committee to
consider and evaluate the Revised Proposal, assess whether it would be in the
best interests of the Company and the Public Shareholders to pursue a
transaction with the Continuing Shareholders, make a recommendation to the Board
with respect to acting on the Revised Proposal and, if appropriate, enter into
and conduct discussions concerning the Revised Proposal and negotiate a
definitive agreement with respect to the Revised Proposal on behalf of the
Company. In addition, the Special Committee was again authorized to retain, at
the expense of the Company, legal counsel and an independent investment banking
firm to assist and advise it in its work concerning the Revised Proposal.
Following this meeting, the Company issued a press release announcing the
Revised Proposal.
Beginning on November 27, 1998, seven lawsuits were commenced against
the Company, those Continuing Shareholders who are directors of the Company and,
except in certain lawsuits, all or some of the other directors. Like the Initial
Proposal Litigation, the lawsuits were purportedly brought by certain Public
Shareholders as class actions on behalf of all Public Shareholders. In general,
the new lawsuits allege that the defendants breached their fiduciary duties,
that the proposed price to be paid Public Shareholders was
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inadequate and that there were inadequate procedural protections for the Public
Shareholders. These new actions are referred to in this Proxy Statement as the
"CURRENT SHAREHOLDER LITIGATION." See "LITIGATION PERTAINING TO THE MERGER --
Current Shareholder Litigation."
During the next several days, informal conversations were held among
members of the Special Committee, in which the Special Committee determined to
again retain Willkie Farr as its legal advisor and Prudential Securities as its
financial advisor based, in large part, upon their respective experience,
expertise and familiarity with the Company gained from participation in the
Initial Proposal, and experience in advising special committees of boards of
directors in similar transactions. Both firms were formally retained at a
meeting of the Special Committee held on Tuesday, December 1, 1998. New
engagement letters with Prudential Securities and Willkie Farr were approved. At
the December 1 meeting, the Special Committee also discussed with its advisors
the status of several outstanding issues.
During the period from December 1, 1998 through January 18, 1999,
representatives of Prudential Securities recommenced their due diligence review,
including holding additional discussions with management of the Company
concerning the Company's business, financial condition and prospects. In
connection with this review, the Company provided to Prudential Securities
copies of information relating to the business sale process, including the
confidential information memorandum, which contained long-term projections
prepared by the Company's management in August 1998 and contained in the
confidential information memorandum utilized in the business sale process (the
"BUSINESS SALE PROJECTIONS"), Bear Stearns' potential purchasers' log, and
updated operating projections prepared by the Company's management in October
1998 to reflect then present and expected future business trends and conditions
(the "OPERATING PROJECTIONS"). The Business Sale Projections and the Operating
Projections are referred to collectively as the "PROJECTIONS." See " -- Certain
Financial Projections." Telephone conference calls also took place in which Bear
Stearns provided Prudential Securities with additional information concerning
the business sale process. During this period, Company management held meetings
with potential bank lenders and Bear Stearns regarding possible financing for
the Merger.
On December 3, 1998, Parker Chapin delivered to Willkie Farr a proposed
Merger Agreement reflecting changes requested by the Continuing Shareholders and
certain of the changes that had been requested by the Special Committee at the
time negotiations of the Initial Proposal had terminated and that were
acceptable to the Continuing Shareholders.
On December 15, 1998, representatives of the Continuing Shareholders,
Bear Stearns and the Special Committee met, and the Continuing Shareholders and
the Special Committee negotiated various provisions in the proposed Merger
Agreement. Since Prudential Securities had not completed its diligence
concerning the Company, the Merger Consideration was not discussed.
During the period from December 16, 1998 through January 18, 1999,
various meetings and telephone conferences were held among representatives of
the Continuing Shareholders and representatives of the Special Committee to
negotiate various provisions in the proposed Merger Agreement, including the
Merger Consideration. During this period, the Continuing Shareholders and
members of the Special Committee received various drafts of the proposed Merger
Agreement that were revised to reflect negotiated changes.
In addition, meetings and telephone conferences also were held among
the Continuing Shareholders, Parker Chapin and counsel to certain of the
plaintiffs in the Current Shareholder Litigation. Separate discussions also were
held between the Continuing Shareholders and Richard A. Mandell, Chairman of the
Special Committee, as well as between the representatives of the Special
Committee and counsel to those plaintiffs.
During the week of January 8, 1999, Parker Chapin and counsel for the
plaintiffs in the Current Shareholder Litigation discussed a possible basis for
the settlement of the Current Shareholder Litigation. On January 11, 1999, the
Continuing Shareholders and counsel for the plaintiffs reached a tentative
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understanding under which the Continuing Shareholders would increase the price
to be paid for the Public Shares to $28.85 per share. This understanding was
then communicated to Mr. Mandell.
During the next few days, further negotiations were held which resolved
the remaining open issues in the proposed Merger Agreement. A revised draft of
the proposed Merger Agreement and the presentation prepared by Prudential
Securities analyzing the Merger and the Merger Consideration was distributed to
all directors on January 15, 1999.
Meanwhile, during the period from January 12, 1999 through January 19,
1999, representatives of the Continuing Shareholders and counsel for the
plaintiffs in the Current Shareholder Litigation negotiated the remaining terms
of a Memorandum of Understanding to set forth the proposed terms and conditions
for the settlement of the Current Shareholder Litigation.
On January 19, 1999, the Special Committee held a meeting to consider
the Merger Agreement and determine whether to recommend its adoption to the full
Board. The meeting was attended by all members of the Special Committee, with
Paul A. Vatter attending by telephone conference. Representatives of Prudential
Securities and Willkie Farr also attended the meeting. Willkie Farr advised the
members of the Special Committee as to their fiduciary duties in considering
this matter, reviewed the principal terms and conditions of the Merger Agreement
and summarized the terms of the proposed settlement of the Current Shareholder
Litigation. Prudential Securities made a presentation to the Special Committee,
in which it discussed the information described under "-- Presentation and
Fairness Opinion of Prudential Securities." Prudential Securities then rendered
its oral opinion (confirmed in writing later that day) to the Special Committee
that, as of such date, the Merger Consideration of $28.85 per share to be
received by the Public Shareholders in the Merger was fair, from a financial
point of view, to the Public Shareholders. At the conclusion of these
presentations and after full discussion, including a discussion of the items
discussed under "--Recommendations of the Special Committee and the Board of
Directors," the Special Committee unanimously concluded that the Merger, as
reflected in the Merger Agreement, and the terms and provisions of the Merger
Agreement, including the Merger Consideration of $28.85 in cash per share, were
fair to, and in the best interests of, the Company and the Public Shareholders
and unanimously resolved to recommend to the Board that it adopt the Merger
Agreement.
Later in the day of January 19, 1999, a meeting of the Board was held
to consider adopting the Merger Agreement. The meeting was attended by all
members of the Board except Carmela Sbarro, with Paul A. Vatter attending by
telephone conference. Representatives of Parker Chapin, Willkie Farr, Warshaw
Burstein and Bear Stearns also attended the meeting. Parker Chapin advised the
members of the Board as to their fiduciary duties and the provisions of the
NYBCL pertaining to the approval of transactions with interested directors. Mr.
Mandell presented a report from the Special Committee which described the
process employed by the Special Committee and its advisors, as well as the
Special Committee's reasons for recommending adoption of the Merger Agreement.
Willkie Farr described for the Board the structure of the Merger and the
principal terms of the Merger Agreement, including the more significant
covenants and closing conditions, and provisions for termination,
indemnification and expense reimbursement. The Board also was advised of the
opinion of Prudential Securities. The Board further was advised by Parker Chapin
that the Memorandum of Understanding to settle the Current Shareholder
Litigation had been executed by counsel to the plaintiffs and contemplated a
$28.85 in cash per share Merger Consideration. After discussion, based in part
on the recommendation of the Special Committee and the fairness opinion received
from Prudential Securities, the members of the Board present at the meeting,
including all members of the Special Committee, unanimously concluded that the
Merger, as reflected in the Merger Agreement, and the terms and provisions of
the Merger Agreement, including the Merger Consideration of $28.85 in cash per
share, were fair to, and in the best interests of, the Company and the Public
Shareholders, unanimously adopted the Merger Agreement, authorized the Company
to enter into the Merger Agreement and resolved to recommend to the Public
Shareholders that they vote to adopt the Merger Agreement. See "--
Recommendation of the Special Committee and the Board of Directors."
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Certain directors may have actual or potential conflicts of interest in
connection with this action and recommendation that are discussed below under
"-- Interests of Certain Persons in the Merger and the Company."
Following completion of the meeting of the Board, the Merger Agreement
was executed. Prior to the commencement of trading in the Common Stock on
January 20, 1999, the Company issued a press release announcing that the Merger
Agreement and the Memorandum of Understanding to settle the Current Shareholder
Litigation had been entered into.
On April 7, 1999, a Stipulation of Settlement was entered into
embodying (and superceding) the Memorandum of Understanding (the "Stipulation of
Settlement"). On May 11, 1999, the Court issued a Scheduling Order, pursuant to
which a hearing was scheduled to be held on June 29, 1999, to determine, among
other things, whether the Court should approve the settlement of the Current
Shareholder Litigation. Notice of, among other things, the scheduled hearing
before the Court and as to requirements for appearing at the hearing and
requesting exclusion from the Class on behalf of whom the actions were
instituted was distributed beginning May 17, 1999. See "LITIGATION PERTAINING TO
THE MERGER -- Current Shareholder Litigation."
In mid-June 1999, it was proposed to extend the date after which either
the Company or the Continuing Shareholders could terminate the transaction
solely by reason of the Merger not having been consummated from June 30, 1999 to
August 31, 1999 and to make certain other non-economic and non- substantive
changes to the Merger Agreement.
On June 17, 1999, the Special Committee held a telephonic meeting to
consider the Restated Merger Agreement and determine whether to recommend its
adoption to the full Board. Willkie Farr reviewed the amendments proposed to the
Merger Agreement with the members of the Special Committee, following which the
Special Committee unanimously approved the changes to the Merger Agreement and
concluded that none of the changes made to the Merger Agreement affected its
prior actions and recommendations. A telephonic meeting of the Board was then
held to consider adopting the Restated Merger Agreement which was attended by
all members of the Board except Carmela Sbarro. Parker Chapin reviewed the
amendments proposed to the Merger Agreement with the Board. After discussion,
the members of the Board present at the meeting, including all members of the
Special Committee, unanimously approved the changes to the Merger Agreement and
concluded that none of the changes made to the Merger Agreement affected its
prior actions and recommendations, adopted the Restated Merger Agreement,
authorized the Company to enter into the Restated Merger Agreement and resolved
to recommend to the Public Shareholders that they vote to adopt the Restated
Merger Agreement.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
At a meeting of the Special Committee held on January 19, 1999, at
which all members of the Special Committee were present, with Paul A. Vatter
attending by telephone conference, the Special Committee met with its legal and
financial advisors to review the proposed terms of the Merger. The Special
Committee unanimously concluded that the Merger, as reflected in the Merger
Agreement, and the terms and provisions of the Merger Agreement, including the
Merger Consideration of $28.85 in cash per share, were fair to, and in the best
interests of, the Company and the Public Shareholders, and unanimously resolved
to recommend to the Board that it adopt the Merger Agreement.
At a special meeting of the Board held immediately following the
Special Committee's determination, at which all directors of the Company were
present, except for Carmela Sbarro, the Board considered the recommendation of
the Special Committee. The Board members who were present unanimously concluded,
based in part on the recommendation of the Special Committee, that the Merger,
as reflected in the Merger Agreement, and the terms and provisions of the Merger
Agreement, including the Merger Consideration of $28.85 in cash per share, were
fair to, and in the best interests of the Company and the Public Shareholders,
unanimously adopted the Merger Agreement, authorized the Company to enter into
the Merger Agreement
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and unanimously resolved to recommend to the Public Shareholders that they vote
to adopt the Merger Agreement.
At a meeting of the Special Committee held by telephone conference on
June 17, 1999, the Restated Merger Agreement was presented for consideration to
the Special Committee, which unanimously approved the changes to the Merger
Agreement and concluded that none of the changes made to the Merger Agreement
affected the Special Committee's prior actions and recommendations. Thereafter,
at a special meeting of the Board held by telephone conference at which all
members of the Board were present, except Carmela Sbarro, the Board members who
were present unanimously approved the changes to the Merger Agreement and
concluded that none of the changes made to the Merger Agreement affected the
Board's prior actions and recommendations, adopted the Restated Merger
Agreement, authorized the Company to enter into the Restated Merger Agreement
and resolved to recommend to the Public Shareholders that they vote to adopt the
Restated Merger Agreement.
The Special Committee addressed its recommendation to the Board and the
Board specifically addressed its recommendation to the Public Shareholders as a
separate individual class. Neither the Special Committee nor the Board addressed
its recommendation to the Continuing Shareholders.
SPECIAL COMMITTEE. In determining to recommend that the Board adopt the
Merger Agreement, the Special Committee considered a number of factors. The
material factors considered by the Special Committee were:
(1) Prudential Securities' opinion that, as of January 19, 1999,
the date of the Special Committee's meeting to consider the
Merger, the Merger Consideration was fair, from a financial
point of view, to the Public Shareholders. The full text of
Prudential Securities' opinion, describing various
considerations, assumptions and limitations stated therein, is
set forth in Annex II to this Proxy Statement. The Special
Committee also considered the presentations by Prudential
Securities to the Special Committee regarding:
o the Company's current financial condition, results of
operations and future prospects (both as a public and
a private company);
o the industry in which the Company operates and the
financial, operating and stock price history of the
Company in comparison to certain pizza and value
priced Italian restaurant companies and fast food
restaurant companies, including considerations of
current market prices, historical market prices,
sales growth, discounted cash flow, enterprise value
and equity value, as well as an analysis of the
valuation of comparable transactions, all of which
are reflected in the report presented by Prudential
Securities to the Board on January 19, 1999, and in
the opinion of Prudential Securities; and
o Bear Stearns' "highly confident" letter and the term
sheet delivered by the Continuing Shareholders to the
Special Committee.
See "-- Presentation and Fairness Opinion of Prudential
Securities."
(2) The fact that the Merger Agreement and the Merger
Consideration are the product of arms' length negotiations
between the Continuing Shareholders and the Special Committee,
as well as between the Continuing Shareholders and counsel to
the plaintiffs in the Current Shareholder Litigation. These
extensive negotiations led to an increase in the proposed
Merger Consideration from $27.50 to $28.85 per share, which
the Continuing Shareholders agreed to on the condition that
this price was final and there would be no further
negotiations. The Continuing Shareholders made it clear in
these discussions that $28.85 per share was the highest price
that they would be willing to pay.
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<PAGE>
(3) The solicitation of interest with respect to the possible sale
of the Company in August and September 1998. Despite a
solicitation conducted for the Company by Bear Stearns to 38
potential purchasers, the process yielded only four written
preliminary indications of interest, none of which were
acceptable to the Continuing Shareholders. The Special
Committee recognized that, while the Merger Consideration was
within the range of prices in certain of the preliminary
indications of interest, other preliminary indications of
interest were below the Merger Consideration. Further, it
recognized that the prospective acquirors provided their
indications based on the Business Sale Projections and without
having conducted diligence and, therefore, there was a risk
that they would lower their contemplated prices. The Special
Committee also noted that, while certain of the preliminary
indications included higher potential prices, that did not
alter the fact that the Merger Consideration itself was fair.
In addition, the Special Committee noted that any indications
of interest were subject to obtaining financing and that any
unaffiliated purchaser would need to purchase the shares held
by the Public Shareholders as well as the Continuing
Shareholders. Therefore, a purchase transaction would be more
expensive for an unaffiliated party than for the Continuing
Shareholders even at the same or somewhat lower per share
merger consideration. The additional financing that would be
required for such a purchase made the consummation of such a
transaction with those submitting higher preliminary
indications of interest even less likely. While the Special
Committee recognized that, although bank financing was
generally available, market conditions for obtaining certain
financing structures that certain potential acquirors may have
required to consummate an acquisition were less favorable
during late August through November 1998 than earlier in the
year, it did not believe that these conditions materially
affected the number and nature of the indications of interest
received. The Special Committee also was advised that none of
Bear Stearns, the Company or the Continuing Shareholders had
received any proposals for the purchase of the business or the
Common Stock owned by the Continuing Shareholders since the
termination of the business sale process on October 7, 1998.
See "-- Background of the Transaction."
(4) The terms and conditions of the Merger Agreement, including:
o the ability of the Board to furnish information to,
and enter into negotiations with, third parties with
respect to unsolicited alternative offers or
proposals if, in its good faith judgment, the
proposal is more favorable to the Company's
shareholders than the Merger, is achievable and
supported by creditable financing, and the Board's
failure to take these actions would otherwise breach
its fiduciary duties to the Company's shareholders
under applicable law (see "THE RESTATED MERGER
AGREEMENT -- No Solicitation; Fiduciary Obligations
of Directors");
o the requirement that the Merger Agreement be adopted
by the affirmative vote of a majority of the votes
cast at the Meeting, excluding votes cast by the
Continuing Shareholders, abstentions and broker
non-votes, as well as by two-thirds of the votes of
all outstanding shares of Common Stock;
o the requirement that the approval of the Special
Committee is required for any action that may be
taken by the Board pursuant to the Merger Agreement
(including any amendment or termination of the Merger
Agreement or waiver of any of the Company's rights
thereunder); and
o the absence of any termination or "break up" fees
payable by the Company and the fact that (i) the
Company's only financial obligation to the Continuing
Shareholders in the event of termination of the
Merger Agreement would be the payment of the
Continuing Shareholders' fees and expenses, up to
$500,000, and that such payment would not be made if
the Merger Agreement is terminated because of (a)
failure of
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the Continuing Shareholders to obtain financing
(unless resulting from a material adverse change in
the securities, financial or borrowing markets) or
(b) a breach by Mergeco or the Continuing
Shareholders of their representations, warranties or
covenants, and (ii) if the Merger Agreement is
terminated due to failure of the Continuing
Shareholders to obtain financing (unless resulting
from a material adverse change in the securities,
financial or borrowing markets), then Mergeco and the
Continuing Shareholders would, jointly and severally,
be obligated to pay the Company for 50% of the fees
and expenses incurred by the Company, up to $500,000.
(5) The receipt by the Continuing Shareholders and Mergeco of a
"highly confident" letter from Bear Stearns with respect to
the arrangement of the necessary financing for the Merger and
the term sheet delivered by the Continuing Shareholders to the
Special Committee. This procedure enabled the Special
Committee to be assured that the "highly confident" letter
would pertain to the same basic financing terms that the
Continuing Shareholders agreed would limit their ability to
terminate the Merger Agreement for a failure to obtain
satisfactory financing.
(6) The Merger Consideration of $28.85 per share, which represents
a premium of 16.3% over $24-13/16, the closing price per share
of the Common Stock on the NYSE on November 25, 1998, the day
on which, following the close of trading, the Company
announced the Revised Proposal. The Special Committee also
considered that between January 1, 1994 and January 20, 1998,
the date the Company announced the Initial Proposal, the
Common Stock had traded in a relatively narrow price range
between a low of $19.875 per share (on May 1, 1995) and a high
of $29.9375 per share (on October 14, 1997), closing at
$26.3125 per share on December 31, 1997 and $26.375 on January
16, 1998, the last trading day prior to January 20, 1998. The
Special Committee also noted that, while following the
announcement of the Initial Proposal, the market price of the
Common Stock reached $30.125 per share on March 13, 1998, it
believed this resulted from speculation that a higher merger
consideration might be negotiated. The Special Committee also
noted that the Common Stock traded as low as $18.3125 per
share on September 21, 1998, approximately three months after
the announcement of termination of the Initial Proposal.
Accordingly, the Special Committee gave greater weight to the
narrow price range at which the Common Stock traded between
1994 and 1997 and concluded that those prices were indicative
of investors' view of the value of the Common Stock.
(7) The Company's current financial condition, results of
operations and future prospects (both as a public company and
as a private company), as well as the strategic direction of
its business and the trends in the restaurant industry, based
upon the knowledge of the members of the Special Committee,
each of whom has been a director of the Company for more than
the past ten years. Specifically, the Special Committee
concluded that, while the Company's results of operations and
financial condition were strong, the fact that there has been
a decline in the Company's rate of growth in both operating
revenues (from 11.4% in 1994 to 6.0% in 1997, in each case
over the preceding year) and operating income (from 13.1% in
1994 to 1.1% in 1997, in each case over the preceding year) in
recent years and the fact that comparable unit sales and
operating margins had remained relatively flat may limit the
potential for an increase in the market price of the Common
Stock. The Special Committee also considered (i) the maturity
of the Company's existing core business, (ii) the limited
prospects of significant growth in the Company's core business
and (iii) uncertain growth prospects of the Company's existing
joint ventures and any future concepts the Company might
develop. In reviewing the Company's future business prospects,
the Special Committee reviewed both the Business Sale
Projections contained in the confidential memorandum utilized
in the business sale process in August 1998 and the Operating
Projections discussed under "-- Certain Financial
Projections". The Special Committee
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considered the fact that the Operating Projections constituted
the material assumptions that underlay Prudential Securities'
opinion (see "-- Presentation and Fairness Opinion of
Prudential Securities") and recognized that the Business Sale
Projections assumed an aggressive expansion strategy to
solicit interest from potential purchasers by presenting the
possibility for significant growth in both revenue and
earnings before interest income, interest expense, taxes,
depreciation and amortization, and non-recurring and
extraordinary charges and credits ("EBITDA"). In particular,
the Business Sale Projections assumed that the Company's
future growth would be derived primarily from a significant
increase in the opening of core Sbarro restaurant units and
Umberto of New Hyde Park joint venture restaurants. The
Special Committee believed these assumptions were not
realistic. In addition, the Special Committee considered that
the Business Sale Projections represented the opportunities a
potential buyer of the Company might have with a different
approach to operating the Company and a different management
team. Therefore, the Special Committee concluded that the
Business Sale Projections were not relevant to a going concern
analysis and gave no weight to the Business Sale Projections
in making its determination. The Special Committee viewed the
Operating Projections as a more realistic view of the
Company's future prospects in that the Operating Projections
were more in line with the Company's historical financial
trends.
(8) The fact that no regulatory approvals are required in order
for Mergeco and the Continuing Shareholders to consummate the
Merger other than, in certain cases, obtaining approvals under
alcohol and beverage licenses of the Company resulting from a
technical "change of control" of the Company, which approvals
are likely to be obtained since "control" would be passing to
the Continuing Shareholders who were approved with respect to
the Company. On the other hand, it is likely that, in addition
to obtaining alcohol and beverage license approvals or
transfers, other regulatory approvals (including under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended), not required with respect to the Merger, would be
required if the Company were to be sold to others. See "--
Regulatory Approvals."
The Special Committee did not attempt to determine the liquidation
value of the Company and did not give significant weight to the per share book
value of the Company (which was $11.78 at October 4, 1998, the end of the
Company's last fiscal quarter for which such information was calculated prior to
the Special Committee's determination), because there was no intention to
liquidate the Company and because both book value was, and liquidation value was
believed to be, well below the Merger Consideration. The Special Committee
considered the preliminary indications of interest received as part of the
business sale process and the Merger Consideration negotiated with the
Continuing Shareholders to be indicative of the Company's going concern value.
In recommending that the Board adopt the Merger Agreement, the Special
Committee was aware, and considered as a negative factor, that if the Merger is
consummated, the Public Shareholders would no longer have an equity interest in
the Company and, therefore, would not participate in any potential future
earnings and growth of the Company. In this regard, the Special Committee also
considered that if the Business Sale Projections contained in the confidential
information memorandum utilized in the business sale process in August 1998
discussed under "-- Certain Financial Projections" are realized, the Common
Stock could significantly increase in value. The Special Committee also noted
that Prudential Securities, in rendering its opinion as to the fairness of the
Merger Consideration to the Public Shareholders, relied on the Company's updated
Operating Projections and not the Business Sale Projections. The Special
Committee concluded that, in light of its analysis of the Company, its business
and its growth prospects, receiving a premium above the market price of the
Common Stock by Public Shareholders is preferable to an uncertain future return.
THE BOARD OF DIRECTORS. In reaching its determination that the Merger
and Merger Consideration are fair to, and in the best interests of, the Company
and the Public Shareholders, adopting the Merger Agreement and recommending that
the Public Shareholders adopt the Merger Agreement, the Board
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<PAGE>
considered and specifically adopted the conclusions and recommendation of the
Special Committee and the factors described above which the Special Committee
took into account in making its recommendation to the Board. The Company will
continue its operations following completion of the Merger. However,
shareholders of the Company, other than the Continuing Shareholders, will no
longer have an equity interest in the Company and, therefore, will not
participate in any potential future earnings and growth of the Company.
In light of the number and variety of factors that the Special
Committee and Board considered in their respective evaluations of the Merger,
neither the Special Committee nor the Board found it practicable to assign
relative weights to the foregoing factors and, accordingly, neither did so.
Each of the Special Committee and the Board believes that the Merger is
procedurally fair because, among other things, (i) the Special Committee
consisted of independent directors appointed by the Board to represent solely
the interests of, and to negotiate on behalf of, the Public Shareholders, (ii)
the Special Committee retained and was advised by Willkie Farr as its own legal
counsel, which assisted the Special Committee in its negotiations, (iii) the
Special Committee retained Prudential Securities to assist it in evaluating the
Merger Consideration and received an opinion from Prudential Securities as to
the fairness of the Merger Consideration to the Public Shareholders from a
financial point of view, (iv) the terms and conditions of the Merger Agreement,
including the Merger Consideration, resulted from arms' length negotiations
between the Special Committee and the Continuing Shareholders and their
respective advisors, (v) the Merger Consideration was also negotiated between
counsel to the plaintiffs in the Current Shareholder Litigation and the
Continuing Shareholders and their respective advisors, and (vi) the Merger
Agreement must be adopted by the affirmative vote of a majority of the votes
cast at the Meeting excluding votes cast by Continuing Shareholders, abstentions
and broker non-votes, in addition to the statutory requirement that the Merger
Agreement be adopted by two-thirds of the votes of all outstanding shares of
Common Stock.
EACH OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS BELIEVES THAT
THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND THE PUBLIC
SHAREHOLDERS. THE BOARD OF DIRECTORS HAS ADOPTED THE RESTATED MERGER AGREEMENT
AND RECOMMENDS THAT YOU VOTE "FOR" ADOPTION OF THE RESTATED MERGER AGREEMENT.
Except to the extent a recommendation is made in a person's capacity as
a director, no executive officer of the Company, nor any of the Continuing
Shareholders or Mergeco has made any recommendation with respect to adoption of
the Restated Merger Agreement or any other transaction contemplated by the
Restated Merger Agreement. The Continuing Shareholders and Mergeco have agreed
to vote their Common Stock in favor of adoption of the Restated Merger
Agreement.
The Continuing Shareholders, Mergeco and the Company have been informed
by the other directors and executive officers of the Company, who owned an
aggregate of 31,568 shares of Common Stock on the Record Date, that they plan to
vote their Common Stock in favor of adoption of the Merger.
THE CONTINUING SHAREHOLDERS' PURPOSE AND REASONS FOR THE MERGER
The Continuing Shareholders entered into the Restated Merger Agreement
in order to become the sole owners of the Company. The transaction is structured
as a merger, in which the equity interest in the Company of all the Public
Shareholders would be extinguished in exchange for $28.85 in cash per share of
Common Stock. A merger enables the transaction to be completed in one step,
which would minimize the risk that the contemplated transactions will not be
finalized and reduce transaction costs.
The Continuing Shareholders believe that causing the Company to be
closely held will:
o Enable the Company's management to focus on long-term growth
without having to meet the expectations of many Public
Shareholders for short-term results. While the Company's
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management has been taking steps to address some of the
Company's long-term issues by closing under-performing units,
focusing on operating units more likely to succeed with less
emphasis on revenue growth and seeking to expand through joint
ventures to develop new restaurant concepts, this process had
not resulted in an improvement in the market price of the
Common Stock.
o Provide the Continuing Shareholders with increased flexibility
in dealing with matters of succession and estate planning.
o Enable the Company to elect to be taxed under the provisions
of Subchapter S under the Internal Revenue Code of 1986, as
amended (the "CODE"), enabling equity owners the ability to
avoid the double tax on distributions that presently exists on
dividends paid by the Company (although each shareholder is
taxed on his share of the Company's income whether or not it
is distributed).
o Afford the Continuing Shareholders the possible advantages of
owning a "highly leveraged" entity, where any improvement in
earnings, after interest expense (which would be tax
deductible), inures to the benefit of shareholders and not
lenders. The Continuing Shareholders recognize, however, that
the transactions contemplated by the Restated Merger Agreement
will involve a substantial risk to them because of the large
amount of indebtedness to be incurred by the Surviving
Corporation in connection with the consummation of the Merger.
See "-- Financing of the Merger."
o Reduce costs associated with publishing and distributing to
its shareholders annual and quarterly reports and proxy
statements, which the Continuing Shareholders estimate will
result in annual savings to the Company of approximately
$200,000, since the Company will no longer be subject to the
proxy solicitation rules under the Exchange Act, although as a
result of the proposed Debt Financing, the Company will be
required to continue to file quarterly and annual reports with
the SEC or deliver similar documents to investors in the Debt
Financing.
The Continuing Shareholders and Mergeco have concluded that the Merger,
including the Merger Consideration of $28.85 per share in cash and the terms and
conditions of the Restated Merger Agreement, are fair to the Company and the
Public Shareholders based upon the following factors:
(1) Prudential Securities rendered an opinion to the Special
Committee to the effect that, as of January 19, 1999, based
upon and subject to various considerations, assumptions and
limitations stated therein, the Merger Consideration was fair,
from a financial point of view, to the Public Shareholders.
(2) The analysis and conclusions as to the fairness of the Merger
Consideration of the Special Committee and the Board, which
the Continuing Shareholders specifically adopted.
(3) The Special Committee, consisting solely of independent
directors, unanimously recommended that the Board adopt the
Restated Merger Agreement.
(4) The Merger Consideration and the other terms and conditions of
the Merger Agreement were the result of arms' length, good
faith negotiations between the Special Committee and the
Continuing Shareholders and their respective advisors, as well
as, in the case of the Merger Consideration, between counsel
to the plaintiffs in the Current Shareholder Litigation and
the Continuing Shareholders and their respective advisors that
resulted in an increase in the Merger Consideration from
$27.50 per share to $28.85 per share.
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(5) During the substantial period of time which would elapse
between the announcement of entering into the Merger Agreement
and the Effective Time, there would be ample time and
opportunity for other persons to propose alternative
transactions to the Merger, and that the Restated Merger
Agreement permits the Board to furnish information to, and
enter into negotiations with, third parties with respect to
unsolicited alternative offers or proposals if, in the Board's
good faith judgment, the proposal is more favorable to the
Company's shareholders than the Merger, is achievable, is
supported by creditable financing and the Board's failure to
take these actions would otherwise breach its fiduciary duties
to the Company's shareholders under applicable law.
(6) The Merger Consideration represents a premium of 16.3% over
the closing per share market price of the Common Stock on the
NYSE on the date the Continuing Shareholders made the Revised
Proposal.
(7) The Continuing Shareholders reviewed the historical price
range of the Common Stock and concluded that the price range
of $20.375 to $29.9375, at which the Common Stock traded from
January 1, 1994 until the Initial Proposal on January 20, 1998
(see "-- Recommenda tions of the Special Committee and the
Board of Directors"), was indicative of investors' view of the
value of the Common Stock.
The Continuing Shareholders did not attempt to determine the
liquidation value of the Company and did not give significant weight to the per
share book value of the Company (which was $11.78 at October 4, 1998, the end of
the Company's last fiscal quarter for which such information was calculated
prior to the Special Committee's determination), because there is no intention
to liquidate the Company and because both book value was, and liquidation value
was believed to be, well below the Merger Consideration. The Merger
Consideration was within the range of the high and low prices expressed in two
of the four indications of interest received and was above the price expressed
in a third indication of interest. The fourth indication of interest
contemplated the merger of the Company with a financially troubled restaurant
company controlled by a potential financial purchaser and, while it had
contemplated consideration with a face value of $29.00- $31.00 per share, such
consideration included $6.00 of preferred and common stock of a newly-formed
company. See " -- Background of the Transaction." The Continuing Shareholders
believe that the Merger Consideration of $28.85 in cash does not represent less
than the Company's going concern value because it is within the range of the
final preliminary indications of interest received as part of the business sale
process and is the product of arms' length, good faith negotiations with the
Special Committee and counsel to the plaintiffs in the Current Shareholder
Litigation.
The only alternative transactions considered by the Continuing
Shareholders were a sale of the Company and a leveraged recapitalization. The
Continuing Shareholders were willing to consider selling their interests in the
Company at a price in the range of the mid-$30s per share. However, after the
sale process failed to produce a potential purchaser in that price range, the
Board abandoned this alternative. The Continuing Shareholders determined to
pursue a going private transaction in which they would become owners of 100% of
the equity interests in the Company through the Merger so that they could have
greater control over the future direction of the Company, including with regard
to ownership and estate planning, than they would if the Company pursued a
leveraged recapitalization.
The Continuing Shareholders recognize that the Merger Consideration of
$28.85 per share in cash is less than the price at which they were willing to
consider selling their interests in the Company and below the per share price at
which certain (and above the price at which other) third parties expressed a
preliminary interest in acquiring the Company. The Continuing Shareholders were
willing to consider a sale of their interests in the Company, which was founded
by their family and bears their family name, only at a price which included a
significant premium to the market price of the Common Stock. The Continuing
Shareholders believe that the fact that the Merger Consideration is less than
the premium price they were willing to consider does not render the Merger
Consideration unfair.
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<PAGE>
The Continuing Shareholders believe that the Merger will afford Public
Shareholders the benefit of being able to determine, by a majority of the votes
cast, other than votes of the Continuing Shareholders, abstentions and broker
non-votes, whether to dispose of their Common Stock at a 16.3% premium over the
market price of the Common Stock on the NYSE on November 25, 1998, the date the
Continuing Shareholders made the Revised Proposal. The Continuing Shareholders
noted that, over the five years ended December 31, 1997 (the end of the year
preceding their Initial Proposal), the market price of the Company's Common
Stock increased only 19%, while the Standard & Poor's Restaurant Index increased
80% and the Standard & Poor's 500 Index increased 123%. The Continuing
Shareholders also recognized that the Operating Projections for the five years
ending at the end of fiscal 2002 did not indicate a dramatic increase in the
percentage of revenue growth, while the Company's EBITDA margin percentage was
projected to remain steady and its operating margin percentage was projected to
increase slightly (see "Certain Financial Projections"). The Continuing
Shareholders concluded that, absent significant growth in these areas, it was
unlikely that there would be significant increase in the market price of its
Common Stock.
The Continuing Shareholders recognize that, following the Merger, the
Public Shareholders will no longer have an equity interest in the Company and,
therefore, will not participate in any potential future earnings and growth of
the Company. While this could be detrimental to the Public Shareholders if the
Company successfully grows, the Continuing Shareholders noted that the market
price of the Common Stock has been trading within a relatively narrow range with
the reduction in the Company's rate of growth and believe that any significant
business growth that would affect the market price of the Common Stock is
uncertain and long-term. Accordingly, the Continuing Shareholders believe that
offering Public Shareholders the opportunity to select, by majority action of
the Public Shareholders (other than abstensions and broker non-votes), the
present receipt of the Merger Consideration instead of a speculative future
return is appropriate.
PRESENTATION AND FAIRNESS OPINION OF PRUDENTIAL SECURITIES
On January 19, 1999, the date the Merger Agreement was entered into,
Prudential Securities delivered its opinion to the Special Committee to the
effect that, as of such date, the Merger Consideration was fair, from a
financial point of view, to the Public Shareholders. Prudential Securities
presented the financial analysis underlying its opinion at a meeting of the
Special Committee on January 19, 1999.
The full text of the Prudential Securities opinion, which sets forth
the assumptions made, matters considered and limits on the review undertaken, is
attached to this Proxy Statement as Annex II and is incorporated herein by
reference. The summary of the Prudential Securities opinion set forth below is
qualified in its entirety by reference to the full text of the Prudential
Securities opinion. You are urged to read the Prudential Securities opinion in
its entirety.
THE PRUDENTIAL SECURITIES OPINION IS DIRECTED ONLY TO THE FAIRNESS OF
THE MERGER CONSIDERATION TO THE PUBLIC SHAREHOLDERS FROM A FINANCIAL POINT OF
VIEW. IT DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW THAT
SHAREHOLDER SHOULD VOTE AT THE MEETING OR AS TO ANY OTHER ACTION THAT
SHAREHOLDER SHOULD TAKE REGARDING THE PROPOSED MERGER.
The full text of the presentation by Prudential Securities relating to
its opinion is attached as an exhibit to the Schedule 13E-3. See "AVAILABLE
INFORMATION."
In conducting its analysis and arriving at its opinion, Prudential
Securities reviewed such information and considered such financial data and
other factors as Prudential Securities deemed relevant under the circumstances,
including the following:
o a draft, dated January 19, 1999, of the Merger Agreement,
including the exhibits thereto;
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o a draft, dated January 19, 1999, of the "highly confident"
letter from Bear Stearns to certain of the Continuing
Shareholders and Mergeco;
o certain publicly available historical, financial and operating
data for the Company including, but not limited to, (i) the
Annual Report to shareholders and Annual Report on Form 10-K
for the fiscal year ended December 28, 1997, (ii) the
Quarterly Report on Form 10-Q for the fiscal quarter ended
October 4, 1998, (iii) Current Reports on Forms 8-K, filed
with the SEC on June 18, 1998, September 22, 1998 and December
2, 1998, and (iv) the Proxy Statement relating to the Annual
Meeting of Shareholders held on August 19, 1998;
o historical stock market prices and trading volumes for the
Common Stock;
o certain information relating to the Company, including
projected balance sheets, income statements and cash flow data
for the 1998 through 2003 fiscal years, prepared by the
management of the Company;
o the Company's confidential information memorandum dated August
1998, and the preliminary written indications of interest
received from prospective purchasers;
o publicly available financial, operating and stock market data
concerning certain companies engaged in businesses that
Prudential Securities deemed comparable to the Company or
otherwise relevant to its inquiry;
o the financial terms of certain recent transactions, including
"going private" transactions, that Prudential Securities
deemed relevant to its inquiry; and
o such other financial studies, analyses and investigations that
Prudential Securities deemed relevant to its inquiry.
Prudential Securities assumed, with the Company's consent, that the
draft of the Merger Agreement that they reviewed would conform in all material
respects to the definitive Merger Agreement.
Prudential Securities discussed with management of the Company (i) the
past and current operating results and financial condition of the Company, (ii)
the prospects for the Company, (iii) management's estimates of the Company's
future financial performance, and (iv) such other matters as Prudential
Securities deemed relevant. Prudential Securities also considered qualitative
factors associated with the proposed Merger, including the existing management
profile and stock ownership.
In connection with its review and analysis and in the preparation of
its opinion, Prudential Securities relied upon the accuracy and completeness of
the financial and other information publicly available or provided to it by the
Company and has not undertaken any independent verification of such information
or any independent valuation or appraisal of any of the assets or liabilities of
the Company. With respect to certain financial forecasts of the Company that the
Company's management provided to Prudential Securities, Prudential Securities
assumed that such information, and the assumptions and bases therefor,
represented the Company's management's best then available estimate as to the
future financial performance of the Company. Further, the Prudential Securities
opinion was based on economic, financial and market conditions as they existed
on the date the opinion was rendered and can only be evaluated as of such date,
and Prudential Securities assumes no responsibility to update or revise the
Prudential Securities opinion based upon events or circumstances occurring after
that date.
For purposes of its analysis and preparation of its opinion, Prudential
Securities used the Operating Projections, rather than the Business Sale
Projections, because the Business Sale Projections assumed an aggressive
expansion strategy and were designed to solicit interest from potential
purchasers by presenting the possibility for significant growth in both revenues
and EBITDA. The Operating Projections represented
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<PAGE>
management's then current view of the Company's future prospects in light of
present and expected future business trends. The Operating Projections
constitute the material assumptions that underlie the Prudential Securities
opinion. See "-- Certain Financial Projections."
The Prudential Securities opinion, including Prudential Securities'
presentation of such opinion to the Special Committee, was one of the many
factors that the Special Committee took into consideration in making its
determination to recommend to the Board adoption of the Merger Agreement. See
"-- Recommendations of the Special Committee and the Board of Directors."
Consequently, Prudential Securities' analyses described below should not be
viewed as solely determinative of the opinion of the Special Committee with
respect to the Merger Consideration.
In arriving at its opinion, Prudential Securities performed a variety
of financial analyses, including those summarized in this Proxy Statement. The
summary set forth below of the analyses presented to the Special Committee at
the January 19, 1999 meeting does not purport to be a complete description of
the analyses performed. The preparation of a fairness opinion is a complex
process that involves various determinations as to the most appropriate and
relevant methods of financial analyses and the application of these methods to
the particular circumstance. Therefore, such an opinion is not necessarily
susceptible to partial analysis or summary description. Prudential Securities
believes that its analyses must be considered as a whole and selecting portions
thereof or portions of the factors considered by it, without considering all
analyses and factors, could create an incomplete view of the evaluation process
underlying its opinion. Prudential Securities made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the Company. Any estimates contained in Prudential Securities' analyses are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the values of businesses and securities do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Subject to the foregoing, the
following is a summary of all the material financial analyses presented by
Prudential Securities to the Special Committee on January 19, 1999.
RISK AND GROWTH ANALYSIS. Prudential Securities reviewed and compared
certain financial and operating information relating to the Company to
corresponding financial and operating information for selected groups of certain
companies that were considered by Prudential Securities to be reasonably similar
to the Company. The first group of companies consisted of pizza and value priced
Italian food companies, including CEC Entertainment, Inc. (which operates Chuck
E. Cheese's pizza restaurants), Darden Restaurants, Inc. (which operates The
Olive Garden restaurants), NPC International, Inc. (a franchisee of Pizza Hut
restaurants and delivery units), Pizza Inn, Inc. (a franchisor of Pizza Inn
restaurants), and Uno Restaurant Corporation (an owner/operator and franchisor
of Pizzeria Uno Chicago Bar & Grill restaurants), referred to here as the "PIZZA
AND ITALIAN FOOD COMPARABLE COMPANIES." While none of the restaurants owned,
operated or franchised by the Pizza and Italian Food Comparable Companies
operate cafeteria-style restaurants as does the Company, those restaurants offer
menu options similar to those offered by the Company. The second group of
companies consisted of fast food companies, including Foodmaker, Inc., Tricon
Global Restaurants, Inc., Sonic Corp. and Wendy's International, Inc., referred
to here as the "FAST FOOD COMPARABLE COMPANIES." The Pizza and Italian Food
Comparable Companies and the Fast Food Comparable Companies are referred to
collectively as the "COMPARABLE COMPANIES."
When compared to the Pizza and Italian Food Comparable Companies,
Prudential Securities' analysis showed, among other things, that:
o comparable restaurant sales growth over the trailing eight
quarters ended between September 27, 1998 and November 29,
1998 ranged from - 9.7% to 14.2% compared to - 0.9% to 1.6%
for the Company;
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<PAGE>
o projected consensus earnings per share growth rate for five
years ranged from 11% to 22% compared to 5.0% for the Company;
o historical sales growth over two years ranged from - 0.6% to
18.4% compared to 4.5% for the Company;
o historical EBITDA growth over two years ranged from - 6.2% to
64.2% compared to 6.7% for the Company;
o historical earnings before interest and taxes ("EBIT") growth
over two years ranged from - 9.1% to 301.2% compared to 9.5%
for the Company;
o historical net income growth over two years ranged from - 9.2%
to 17% compared to 10.1% for the Company;
o total latest twelve months ("LTM") sales as of the latest
reported quarter prior to January 19, 1999 ranged from $68.2
million to $3,409.6 million compared to $357.9 million for the
Company;
o number of restaurants as of the latest reported quarter prior
to January 19, 1999 ranged from 163 to 1,143 compared to 881
for the Company;
o equity market capitalization as of January 12, 1999 ranged
from $48.0 million to $2,532.8 million compared to $521.2
million for the Company;
o enterprise value as of January 12, 1999 ranged from $54.8
million to $2,840.6 million compared to $395.4 million for the
Company;
o LTM EBITDA margins as of the latest reported quarter prior to
January 19, 1999 ranged from 9.8% to 21.9% compared to 22.3%
for the Company;
o LTM EBIT margins as of the latest reported quarter prior to
January 19, 1999 ranged from 6.0% to 14.8% compared to 15.9%
for the Company;
o total debt to total book capitalization as of the latest
reported quarter prior to January 19, 1999 ranged from 0.5x to
0.1x compared to 0.0x for the Company; and
o LTM net income margins as of the latest reported quarter prior
to January 19, 1999 ranged from 3.1% to 8.6% compared to 10.7%
for the Company.
When compared to the Fast Food Comparable Companies, Prudential
Securities' analysis showed, among other things, that:
o comparable restaurant sales growth over trailing eight
quarters ending between August 31, 1998 and October 4, 1998
ranged from 2.0% to 10.3% compared to - 0.9% to 1.6% for the
Company;
o projected consensus earnings per share growth rate for five
years ranged from 14.0% to 20.0% compared to 5.0% for the
Company;
o historical sales growth over two years ranged from - 2.8% to
20.4% compared to 4.5% for the Company;
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<PAGE>
o historical EBITDA growth over two years ranged from - 4.9% to
20.9% compared to 6.7% for the Company;
o historical EBIT growth over two years ranged from 0.6% to
18.8% compared to 9.5% for the Company;
o historical net income growth over two years ranged from 11.1%
to 41.1% compared to 10.1% for the Company;
o total LTM sales as of the latest reported quarter prior to
January 19, 1999 ranged from $219.1 million to $8,732.0
million compared to $357.9 million for the Company;
o number of restaurants as of the latest reported quarter prior
to January 19, 1999 ranged from 1,414 to 29,600 compared to
881 for the Company;
o equity market capitalization as of January 12, 1999 ranged
from $443.5 million to $7,656.0 million compared to $521.2
million for the Company;
o enterprise value as of January 12, 1999 ranged from $510.8
million to $11,251.0 million compared to $395.4 million for
the Company;
o LTM EBITDA margins as of the latest reported quarter prior to
January 19, 1999 ranged from 11.4% to 23.1% compared to 22.3%
for the Company;
o LTM EBIT margins as of the latest reported quarter prior to
January 19, 1999 ranged from 7.8% to 17.5% compared to 15.9%
for the Company;
o total debt to total book capitalization as of the latest
reported quarter prior to January 19, 1999 ranged from 1.6x to
0.3x compared to 0.0x for the Company; and
o LTM net income margins as of the latest reported quarter prior
to January 19, 1999 ranged from 1.6% to 10.2% compared to
10.7% for the Company.
Discounted Cash Flow Analysis. Prudential Securities also considered
the results of a discounted cash flow analysis of the Company. Prudential
Securities calculated the net present value of the Company's projected five-year
stream of unlevered free cash flows and projected terminal value multiple of
2003 EBITDA, based on the financial projections provided to Prudential
Securities by the Company. Prudential Securities applied discount rates ranging
from 10.50% to 14.50% and terminal value multiples of 5.0x and 6.0x. This
analysis resulted in an implied range of per share value of $25.99 to $31.92.
Comparable Companies Analysis. A comparable companies analysis was
employed by Prudential Securities to establish a range of implied equity values
per share of common stock. Prudential Securities analyzed publicly available
historical and projected financial results, including:
o current enterprise value as a multiple of: LTM revenues, LTM
EBITDA and LTM EBIT.
o current equity value as a multiple of: LTM net income,
projected 1998 earnings per share ("1998 EPS"), projected 1999
earnings per share ("1999 EPS") and book value (at October 4,
1998); and
The Pizza and Italian Food Comparable Companies were found to have a
range of enterprise value as a multiple of LTM Revenues of 0.6x to 1.3x; a range
of enterprise value as a multiple of LTM EBITDA of 4.6x to 8.5x; a range of
enterprise value as a multiple of LTM EBIT of 8.1x to 13.9x; a range of equity
value as a multiple of LTM net income of 10.9x to 21.0x; a range of equity value
as a multiple of 1998 EPS of
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12.3x to 22.0x; a range of equity value as a multiple of 1999 EPS of 11.6x to
18.8x; and a range of equity value as a multiple of book value of 1.0x to 2.6x.
Applying such multiples to the Company's LTM revenues, LTM EBITDA, LTM EBIT, LTM
net income, 1998 EPS, 1999 EPS and book value resulted in an implied range of
equity value per share of $11.54 to $43.95 with a mean of $27.17 and a median of
$25.80. The Merger Consideration of $28.50 per share falls within the range of
implied equity value per share which Prudential Securities believes supports the
Prudential Securities opinion. If such multiples are applied to the Company's
LTM Revenues, LTM EBITDA, LTM EBIT, LTM net income, 1998 EPS and 1999 EPS, but
not book value, the result is an implied range of equity values per share of
$16.36 to $43.95 with a median of $25.69 and a mean of $27.71. Prudential
Securities does not believe that book value is an appropriate measure of the
value of a going concern and believes that applying such multiples to the
Company's book value would not result in a meaningful analysis.
The Fast Food Comparable Companies were found to have a range of
enterprise value as a multiple of LTM Revenues of 1.0x to 2.3x; a range of
enterprise value as a multiple of LTM EBITDA of 8.8x to 10.1x; a range of
enterprise value as a multiple of LTM EBIT of 12.6x to 16.0x; a range of equity
value as a multiple of LTM net income of 19.3x to 21.7x; a range of equity value
as a multiple of 1998 EPS of 18.1x to 19.6x; a range of equity value as a
multiple of 1999 EPS of 15.4x to 18.8x; and a range of equity value as a
multiple of book value of 2.6x to 6.3x. Applying such multiples to the Company's
LTM revenues, LTM EBITDA, LTM EBIT, LTM net income, 1998 EPS, 1999 EPS and book
value resulted in an implied range of equity value per share of $23.34 to $73.60
with a mean of $38.68 and a median of $36.85. The Merger Consideration of $28.50
per share falls within the range of implied equity value per share which
Prudential Securities believes supports the Prudential Securities opinion. If
such multiples are applied to the Company's LTM Revenues, LTM EBITDA, LTM EBIT,
LTM net income, 1998 EPS and 1999 EPS, but not book value, the result is an
implied range of equity values per share of $23.34 to $49.83 with a median of
$36.98 and a mean of $37.20. Prudential Securities does not believe that book
value is an appropriate measure of the value of a going concern and believes
that applying such multiples to the Company's book value would not result in a
meaningful analysis.
Comparable Transactions Analysis. Prudential Securities also analyzed
the consideration paid in several recent merger and acquisition transactions
which Prudential Securities deemed to be reasonably similar to the Merger, and
considered the multiple of the acquired entity's enterprise value to its LTM
revenues, LTM EBITDA and LTM EBIT, and the multiple of the acquired entity's
equity value to its LTM net income and book value at October 4, 1998 based upon
publicly available information for such transactions. The transactions
considered were the combinations of: (i) Spaghetti Warehouse and Consolidated
Restaurant Cos, (ii) Au Bon Pain Co Inc. and Bruckman Rossner Sherrill & Co.,
(iii) Pollo Tropical and Carrols Corp., (iv) Bertucci's and NE Restaurant Co.,
(v) DavCo Restaurants and DavCo Acquisition Holding Inc., (vi) International
Dairy Queen and Berkshire Hathaway, (vii) Perkins Family Restaurants, L.P. and
The Restaurant Company, (viii) Krystal Company and Port Royal Holdings, Inc.,
and (ix) Family Restaurants and Flagstar Companies, Inc. (collectively, the
"Comparable Transactions"). The Comparable Transactions were found to imply for
each acquired entity a range of enterprise value as a multiple of LTM revenues
of 0.6x to 1.4x; a range of enterprise values as a multiple of LTM EBITDA of
6.8x to 8.4x; a range of enterprise value as a multiple of LTM EBIT of 9.0x to
16.4x; a range of equity value as a multiple of LTM net income of 0.5x to 28.0x;
and a range of equity value as a multiple of book value of 0.9x to 6.1x.
Applying such multiples to the Company's LTM revenues, LTM EBITDA, LTM EBIT, LTM
net income and book value resulted in an implied range for the equity value per
share of $11.01 to $71.48 with a mean of $33.82 and a median of $31.63. The
Merger Consideration of $28.50 per share falls within the range of implied
equity value per share which Prudential Securities believes supports the
Prudential Securities opinion. If such multiples are applied to the Company's
LTM Revenues, LTM EBITDA, LTM EBIT, LTM net income, but not book value, the
result is an implied range of equity values per share of $15.61 to $51.49 with a
median of $31.64 and a mean of $32.69. Prudential Securities does not believe
that book value is an appropriate measure of the value of a going concern and
believes that applying such multiples to the Company's book value would not
result in a meaningful analysis.
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None of the Comparable Companies or acquired entities used in the above
analyses for comparative purposes is, of course, identical to the Company.
Accordingly, a complete analysis of the results of the foregoing calculations
cannot be limited to a quantitative review of such results and involves complex
considerations and judgments concerning differences in financial and operating
characteristics of each of the Comparable Companies or the acquired entities and
other factors that could affect the public trading value of the Comparable
Companies or the consideration paid for each of the acquired entities as well as
the proposed Merger Consideration for the Company.
The Special Committee engaged Prudential Securities to be its exclusive
financial advisor in connection with the Revised Proposal and to provide a
fairness opinion because Prudential Securities is a nationally recognized
investment banking firm engaged in the valuation of businesses and their
securities in connection with merger and acquisition transactions, because of
its familiarity with the Company, because it has substantial experience in
transactions similar to the proposed Merger. Pursuant to an engagement letter
dated November 30, 1998 among the Company, the Special Committee and Prudential
Securities, the Company paid Prudential Securities a retainer of $500,000 on
November 30, 1998 and an additional $250,000 upon the delivery of the fairness
opinion of Prudential Securities. An additional fee of $225,000 will be payable
upon the consummation of the Merger. Pursuant to an engagement letter dated
January 20, 1998, in connection with the Initial Proposal, the Company paid
Prudential Securities a retainer of $250,000 upon such initial retention. In
addition, the November 30, 1998 engagement letter with Prudential Securities
provides that the Company will reimburse Prudential Securities for its
out-of-pocket expenses and will indemnify Prudential Securities and certain
related persons against certain liabilities, including liabilities under
securities laws, arising out of the Merger or its engagement. In the ordinary
course of business, Prudential Securities may actively trade shares of the
Common Stock for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Certain Financial Projections
The Company does not as a matter of course make public forecasts or
projections as to future performance (including as to revenues, earnings, other
income statement items and cash flows) or financial position. However, in August
1998, the Company's management prepared the long-term Business Sale Projections
in connection with the engagement of Bear Stearns to solicit interest in the
acquisition of the Company by third parties. See "-- Background of the
Transaction." In October 1998, the Company's management prepared the Updated
Operating Plan to reflect then present and expected future business trends and
conditions. The Business Sale Projections set forth below are the same as
included in a confidential information memorandum provided to potential
purchasers of the Company who indicated an interest in acquiring the Company and
entered into confidentiality agreements (see "--Background of the Transaction").
The Operating Projections, which appear following the Business Sale Projections,
are based on more detailed financial information. The Projections are included
in this Proxy Statement solely because they were provided to Prudential
Securities.
There are significant differences between the Business Sale Projections
and the Operating Projections. The primary differences in the assumptions
between the Business Sale Projections and the Operating Projections are that the
Business Sale Projections reflected (i) higher comparable restaurant unit annual
sales increases, (ii) increased openings of Sbarro restaurant units, (iii)
higher operating margins, and (iv) a more rapid expansion of the Company's
Umberto of New Hyde Park joint venture. The Business Sale Projections assumed an
aggressive expansion strategy and were designed to solicit interest from
potential purchasers by presenting the possibility for significant growth in
both revenues and EBITDA that might be available to a potential buyer of the
Company with a different approach to operating the Company and a different
management team. The Operating Projections reflect management's then current
view of the Company's future prospects in light of present and expected future
business trends.
The Projections were based upon numerous estimates and assumptions that
are inherently subject to significant uncertainties, are difficult to predict
and, in many cases, are influenced by factors beyond the Company's control. The
material assumptions used in preparing the Projections are described in the
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respective Projections and footnotes to the Projections. Certain assumptions on
which both the Business Sale Projections and the Operating Projections were
based related to the achievement of strategic goals, objectives and targets over
the applicable periods that were more favorable than recent historical results.
Accordingly, there can be no assurance that the projected results will be
realized or that actual results will not be significantly higher or lower than
those predicted. See "SUMMARY--Forward-Looking Information."
The Company's 1998 fiscal year consisted of 53 weeks. All projected
years consist of 52 weeks. The projected financial results for the 1998 fiscal
year in the Projections were based on the first 52-weeks of that fiscal year in
order to provide comparability to the historical and projected periods. At the
time the Projections were prepared, the Company's management estimated that
approximately $8.0 million of revenue and $3.0 million of EBITDA would be
generated during the 53rd week of fiscal 1998. Actual 1998 revenues and EBITDA
for the 53rd week totaled $8.5 million and $1.7 million, respectively.
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<TABLE>
<CAPTION>
Business Sale Projections (1)
(dollars in millions) Fiscal Year
--------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Systemwide Sales (2) $947.3 $795.6 $668.5 $568.7 $501.0
====== ====== ====== ====== ======
Revenues (3) $600.0 $525.5 $460.4 $405.7 $365.8
Revenue Growth % 14.2% 14.1% 13.5% 10.9% 6.0%
EBITDA $138.6 $121.7 $106.9 $94.4 $85.2
EBITDA Margin % 23.1% 23.2% 23.2% 23.3% 23.3%
Depreciation and Amortization (4) $33.7 $32.4 $30.4 $28.3 $27.1
------- ----- ----- ----- -----
Operating Profit $104.9 $89.3 $76.6 $66.1 $58.2
======= ===== ===== ===== =====
Operating Margin % 17.5% 17.0% 16.6% 16.3% 15.9%
Capital Expenditures $38.4 $35.6 $32.7 $28.4 $29.1
Assumed Store Data (5):
Company-Owned
Beginning Units 849 779 714 659 625
Unit Openings (net) 75 70 65 55 34
------- ------- ------- ------- -------
Ending Units 924 849 779 714 659
======= ======= ======= ======= =======
Franchised
Beginning Units 489 404 329 274 239
Unit Openings (net) 95 85 75 55 35
------- ------- ------- ------- -------
Ending Units 584 489 404 329 274
======= ======= ======= ======= =======
Total
Beginning Units 1,338 1,183 1,043 933 864
Unit Openings (net) 170 155 140 110 69
------- ------ ------ ------ -------
Ending Units 1,508 1,338 1,183 1,043 933
======= ====== ====== ====== =======
Assumed Comparable Unit
Revenues Increases
Company core units 1.5% 1.5% 1.5% 1.5% .5%
Umberto of New Hyde Park 2.0% 2.0% 2.0% 2.0% 2.0%
Units
</TABLE>
- --------------------
(1) Includes 100% of the projected financial results of Umberto of New Hyde
Park (an 80% owned restaurant joint venture).
(2) Represents combined projected sales of Company-owned and franchised
locations.
-44-
<PAGE>
(3) Revenues are based on the assumed unit data and assumed comparable unit
revenues increases set forth in the table.
(4) Based upon the Company's then depreciable asset base and future projected
capital expenditure requirements.
(5) Includes both Umberto of New Hyde Park shopping mall and strip center
units, in addition to the Company's core operation units. Actual unit
openings for 1998 were 26 Company-owned and 43 franchised units, with net
openings, after giving effect to unit closings during the year, of 7
Company-owned and 29 franchised units.
-45-
<PAGE>
<TABLE>
<CAPTION>
Operating Projections (1)
(dollars in millions) Fiscal Year
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Systemwide Sales (2) $631.4 $595.7 $560.3 $525.2 $496.1
====== ====== ====== ====== ======
Revenues (3) $418.3 $402.9 $387.6 $372.4 $362.9
Revenue Growth % 3.8% 3.9% 4.1% 2.6% 5.3%
EBITDA $93.6 $89.9 $86.3 $82.7 $80.3
EBITDA Margin % 22.4% 22.3% 22.3% 22.2% 22.1%
Depreciation and Amortization (4) $25.1 $24.9 $24.5 $24.0 $23.5
----- ----- ----- ----- -----
Operating Profit $68.4 $65.0 $61.7 $58.7 $56.8
===== ===== ===== ===== =====
Operating Margin % 16.4% 16.1% 15.9% 15.8% 15.7%
Capital Expenditures $13.4 $13.4 $13.4 $13.4 $10.7
Assumed Store Data (5):
Company-Owned
Beginning Units 699 677 655 633 623
Unit Openings (net) 22 22 22 22 10
------ ------- ------- ------- -------
Ending Units 721 699 677 655 633
====== ====== ====== ====== ======
Franchised
Beginning Units 371 336 301 266 239
Unit Openings (net) 35 35 35 35 27
------ ------- ------- ------- ----
Ending Units 406 371 336 301 266
====== ====== ====== ====== ======
Total
Beginning Units 1,070 1,013 956 899 862
Unit Openings (net) 57 57 57 57 37
----- ------- ------- ------- -------
Ending Units 1,127 1,070 1,013 956 899
===== ===== ===== ====== ======
Assumed Comparable Unit
Revenues Increases
Company core units .5% .5% .5% .5% .5%
Umberto of New Hyde Park Units 0% 0% 0% 0% 0%
</TABLE>
- --------------------
(1) Included 100% of the financial results of Umberto of New Hyde Park (an 80%
owned restaurant joint venture).
(2) Represents combined projected sales of Company-owned and franchised
locations.
(3) Revenues are based on the assumed unit data and assumed comparable unit
revenues increases set forth in the table.
-46-
<PAGE>
(4) Based upon the Company's then depreciable asset base and future projected
capital expenditure requirements.
(5) Includes both Umberto of New Hyde Park shopping mall and strip center
units, in addition to the Company's core operation units. Actual unit
openings for 1998 were 26 Company-owned and 43 franchised units, with net
openings, after giving effect to unit closings during the year, of 7
Company-owned and 29 franchised units;
While the Projections were prepared in good faith by the Company's
management, no assurance can be made regarding future events. Therefore, neither
the Business Sale Projections nor the Operating Projections can be considered a
reliable prediction of future operating results and should not be relied on as
such. Additionally, the Projections were prepared at the times indicated above
and do not reflect any subsequent results or any changes that have occurred or
may occur in the future regarding the business, assets, operations, properties,
management, capitalization, corporate structure or policies of the Company,
general economic or business conditions, or any other transaction or event that
has occurred since the respective dates of preparation, or that may occur, and
were not anticipated at the time such information was prepared. The Projections
were not prepared to comply with the published guidelines of either the SEC
regarding projections or forecasts or the American Institute of Certified Public
Accountants' Guide for Prospective Financial Statements, nor in accordance with
generally accepted accounting principles. The Company's independent auditors
have not examined, compiled or performed any procedures regarding the
Projections, nor have they expressed any opinion or given any assurance on such
information or its achievability and, accordingly, they assume no responsibility
for the Projections. None of the Company, Mergeco nor the Continuing
Shareholders intends to update or supplement the Projections prior to the
Meeting. Shareholders are cautioned not to place undue reliance on the
Projections.
Plans for the Company after the Merger
None of the Continuing Shareholders, Mergeco or the Company currently
have any plans or proposals that relate to or would result in an extraordinary
corporate transaction, such as a merger, reorganization or liquidation involving
the Company or any of its subsidiaries, a sale or transfer of a material amount
of assets of the Company or any of its subsidiaries or, except as indicated
elsewhere in this Proxy Statement, any material change in the Company's
capitalization, corporate structure or business or the composition of the Board
or executive officers following the consummation of the Merger. However, the
Continuing Shareholders intend, from time to time, to evaluate and review the
Company's businesses, operations, properties, management and other personnel,
corporate structure and capitalization, and to make such changes as are deemed
appropriate. The Continuing Shareholders also intend to continue to explore
joint ventures and other opportunities to expand the Company's business. In that
regard, the Continuing Shareholders, after the Merger, may review proposals or
may propose the acquisition or disposition of assets or other changes in the
Company's business, corporate structure, capitalization, management or dividend
policy which they consider to be in the best interests of the Company and its
then shareholders. The Company and the Continuing Shareholders anticipate that
the indebtedness to be incurred in connection with the Merger will be repaid
primarily with cash generated from the operations of the business of the Company
or a subsequent refinancing. However, subject to the terms of the Debt Financing
and market and other conditions, the Company may, in the future, consider such
other means of repaying such indebtedness as the Company and the Continuing
Shareholders may determine in their sole and absolute discretion.
If the Merger is consummated, the Continuing Shareholders currently
intend to cause the Company to elect to be taxed under the provisions of
Subchapter S of the Code commencing with the fiscal year 2000 and to have the
Company make distributions to them in order to enable them to pay income taxes
to be borne by them as a result of that election. See "-- Financing of the
Merger" and "SUMMARY -- Market Prices of and Dividends on the Common Stock."
-47-
<PAGE>
Conduct of the Business of the Company if the Merger is not Consummated
The Board has made no determination as to the direction of the Company
should the Merger not be consummated. The Board currently expects that the
Company's present management will continue to operate the Company's business
substantially as presently operated. However, even if the Merger is not
consummated, management and the Board intend, from time to time, to evaluate and
review the Company's businesses, operations, properties, management and other
personnel, corporate structure, dividend policy and capitalization, and make
such changes as are deemed appropriate and to continue to explore joint ventures
and other opportunities to expand the Company's business.
Interests of Certain Persons in the Merger and the Company
In considering the recommendation of the Special Committee and of the
Board, you should be aware that the Continuing Shareholders and certain
executive officers and directors of the Company have certain relationships or
interests in the Merger and the Company, including those referred to below, that
are different from the interests of Public Shareholders and that may present
actual or potential conflicts of interest. The Special Committee and the Board
were aware of these potential and actual conflicts of interest and considered
them in evaluating the proposed Merger.
Merger Consideration and Stock Options. As of the Record Date, the
Continuing Shareholders owned an aggregate of 7,064,328 shares of Common Stock,
representing approximately 34.4% of the total outstanding shares of Common Stock
on that date. The Continuing Shareholders currently contemplate that,
immediately prior to the Merger, each of them will purchase membership interests
in Mergeco in proportion to their share ownership in the Company. In the Merger,
those membership interests would be converted into new shares of the Company's
Common Stock and the old shares of Common Stock then owned of record by the
Continuing Shareholders will be canceled for no consideration. Following the
Merger, the Continuing Shareholders will own all of the outstanding Common Stock
of the Surviving Corporation.
As of the Record Date, directors and executive officers of the Company
and members of their immediate families, other than the Continuing Shareholders,
owned an aggregate of 31,568 shares of Common Stock for each of which shares,
they, as Public Shareholders, will be entitled to receive the Merger
Consideration of $28.85 per share in cash. See "CERTAIN TRANSACTIONS IN THE
COMMON STOCK" for information regarding the intention of certain executive
officers to sell their Common Stock prior to the consummation of the Merger.
In the Merger, all outstanding Stock Options, including those held by
the Continuing Shareholders and the other directors and executive officers of
the Company are to be terminated and the Company will pay to each Stock Option
holder, whether or not such Stock Options are then vested or exercisable, an
amount in cash equal to the excess, if any, of the Merger Consideration over the
applicable exercise price per share of the Common Stock subject to the Stock
Option, multiplied by the number of shares of Common Stock subject to such Stock
Option. See "THE RESTATED MERGER AGREEMENT -- Treatment of Options" and
"SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
-48-
<PAGE>
The following table sets forth the Merger Consideration and
consideration to be received for the termination of Stock Options held by the
following groups, in addition to the percentage of Stock Options held by each
group.
<TABLE>
<CAPTION>
Merger Cash to be Cash to be Percentage of
Consideration (to received for received for total Common
be received for currently Stock Options Stock subject
outstanding exercisable not yet to Stock
Common Stock) Stock Options exercisable Options (1)
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Continuing Shareholders $ 0 $3,535,969 $1,155,002 5.29%
Other directors, including members of
the Special Committee and
members of their immediate
families 259,650 446,308 89,766 .67%
Members of the immediate families
of the Continuing Shareholders,
including certain executive officers
of the Company 593,445 570,229 628,283 1.39%
Other executive officers of the 425,768 222,308 130,555 .61%
Company
</TABLE>
- ------------------
(1) Based on the total number of shares of Common Stock subject to all
outstanding Stock Options as of the date of this Proxy Statement.
Directors and Officers of the Surviving Corporation. Under the terms of
the Restated Merger Agreement, upon consummation of the Merger, the current
executive officers and directors of the Company will remain as the initial
executive officers and directors of the Surviving Corporation, except that
Robert S. Koebele, Vice President - Finance and Chief Financial Officer of the
Company, has advised the Company that he intends to retire in the early part of
the summer of 1999 whether or not the Merger is consummated, and Paul A. Vatter,
a director, has advised the Company of his intention to retire upon consummation
of the Merger or, if the Restated Merger Agreement is not adopted at the
Meeting, upon the expiration of his current term at the next annual meeting of
shareholders. The Continuing Shareholders, as owners of 100% of the capital
stock of the Surviving Corporation, will have the ability to take action to
terminate any officers and directors of the Surviving Corporation whom they
choose.
Compensation of Directors. Non-employee directors currently receive a
retainer at the rate of $16,000 per annum, $1,000 for each meeting of the Board
attended and $500 for each meeting attended of a Committee of the Board on which
they serve, if such meeting is not held on the same day as a meeting of the
Board, except that members of the Special Committee received additional
compensation for service on that committee 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.
-49-
<PAGE>
The non-employee directors earned the following cash compensation
(exclusive of travel reimbursements) from the Company 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
The Company's 1993 Non-Employee Director Stock Option Plan, as amended,
which was approved by shareholders at the Company's 1993 Annual Meeting of
Shareholders, provides for the automatic grant of an option to purchase 3,750
shares of Common Stock to each non-employee director in office immediately after
each annual meeting of shareholders. Each option has a ten year term, is subject
to early termination in certain instances, and is exercisable commencing one
year following the date of grant at an exercise price equal to 100% of the fair
market value of the Common Stock on the date of grant. As of the date of this
Proxy Statement, each non-employee director of the Company, including each
member of the Special Committee, holds Stock Options under this plan to purchase
an aggregate of 22,500 shares of Common Stock at exercise prices ranging from
$21.50 to $28.875 per share. This plan will be terminated upon consummation of
the Merger. In consideration of such termination, the Company will pay each
non-employee director, in cash and as full settlement for his Stock Options,
whether or not then exercisable, an amount determined by multiplying (i) the
excess, if any, of the Merger Consideration over the applicable exercise price
per share of Common Stock subject to such Stock Options by (ii) the total number
of shares of Common Stock subject to such Stock Options.
Compensation of Special Committee Members. As compensation for serving
on the Special Committee (and on the special committee which considered the
Initial Proposal), the Company agreed to pay to each member of the Special
Committee a fee equal to (i) $2,500 for services rendered in any day on which
the member expended four hours or more in performing services as a member of the
Special Committee and (ii) $1,250 for each day in which such member expended a
reasonable amount of time, but less than four hours, in performing services as a
member of the Special Committee. In addition to the foregoing fees, Mr. Mandell,
as Chairman of the Special Committee, received $10,000 with respect to the
Special Committee's consideration of the Initial Proposal and is entitled to
receive $10,000 with respect to the Special Committee's consideration of the
Revised Proposal. Each member of the Special Committee is being reimbursed for
all out-of-pocket expenses incurred in performing his services.
Through June 15, 1999, the members of the Special Committee have earned
the following cash compensation (exclusive of travel reimbursements) from the
Company in connection with the Initial Proposal and the Revised Proposal:
Richard A. Mandell.................................... $48,500
Harold L. Kestenbaum.................................. 14,750
Paul A. Vatter........................................ 9,750
Terry Vince........................................... 9,750
Indemnification Arrangements. For a discussion of certain requirements
in the Restated Merger Agreement for the indemnification of directors and
officers of the Company and the maintenance of directors' and officers'
insurance, see "THE RESTATED MERGER AGREEMENT -- Indemnification and Insurance."
-50-
<PAGE>
Consulting Arrangement. Since 1986, a company of which Bernard
Zimmerman, a director of the Company, is President and a majority shareholder,
has rendered financial and consulting services to the Company. This company
earned fees of $116,400 and $140,400 during fiscal 1997 and 1998, respectively.
Certain Other Transactions. The Company is the sole tenant of its
administrative office building, which is leased from the Suffolk County
Industrial Development Agency (the "Agency") by Sbarro Enterprises, L.P., a
Delaware limited partnership, and, in turn, subleased to the Company. The annual
rent payable pursuant to the sublease is $337,000 for the last five years of the
sublease term, which expires in 2001. In addition, the Company is obligated to
pay real estate taxes, utilities, insurance and certain other expenses for the
facility. The Company believes that such rents are comparable to the rents that
would be charged by an unaffiliated third party. Principal and interest (the
last of which payments is due in December 1999) and any premium on the bonds
issued by the Agency to fund construction of the facility are the responsibility
of Sbarro Enterprises, L.P. and are severally guaranteed by Mario, Joseph and
Anthony Sbarro. The limited partners of Sbarro Enterprises, L.P. are Mario,
Joseph, Anthony and Carmela Sbarro.
In addition to the compensation of Mario, Anthony, Joseph, Gennaro A.
and Gennaro J. Sbarro and Anthony J. Missano, as reflected in the Company's
Annual Report on Form 10-K for the year ended January 3, 1999 (see "WHERE YOU
CAN FIND MORE INFORMATION"), (i) Carmela Sbarro, the mother of Mario, Anthony
and Joseph Sbarro, who was a co-founder of the Company and serves as Vice
President and a director of the Company, and (ii) Carmela N. Merendino, a
daughter of Mario Sbarro, who serves as Vice President - Administration of the
Company, each received $100,000 from the Company for services rendered during
fiscal 1997 and received $101,923 and $126,442, respectively, for services
rendered during fiscal 1998. In addition, other members of the immediate
families of Mario, Anthony, Joseph and Carmela Sbarro earned an aggregate of
$467,823 (nine persons) and $523,423 (eleven persons) for services rendered as
employees of the Company during fiscal 1997 and 1998, respectively.
The Company, its subsidiaries and the joint ventures in which the
Company has an interest have purchased printing services from a corporation
owned by a son-in-law of Mario Sbarro for which they paid, in the aggregate,
approximately $220,000 and $322,768 during fiscal 1997 and 1998, respectively.
The Company believes that these services were provided on terms comparable to
those that would have been available from unrelated third parties.
Companies owned by a son of Anthony Sbarro and a company owned by the
daughter of Joseph Sbarro paid royalties to the Company under franchise
agreements containing terms similar to those in agreements entered into by the
Company with unrelated franchisees. Such royalties paid to the Company
aggregated approximately $71,660 and $33,053, respectively, during fiscal 1997
and approximately $95,151 and $10,406, respectively, during fiscal 1998.
Certain Effects of the Merger
If the Merger is consummated, the entire equity in the Company will be
owned by the Continuing Shareholders. The Public Shareholders will no longer
have any ownership interest in, and will not be shareholders of, the Company. As
a result, the Public Shareholders will no longer benefit from any increases in
the value of the Company, nor will they bear the risk of any decreases in the
value of the Company. Instead, upon consummation of the Merger, each Public
Shareholder will have the right to receive $28.85 in cash for each share of
Common Stock held. Following the Merger, the Continuing Shareholders will
benefit from any increases in the value of the Company and also bear the risk of
any decreases in the value of the Company. As the sole equity owners of the
Company after the Merger, the investment in the Company of the Continuing
Shareholders also will bear the risks associated with the significant amount of
debt to be incurred by the Company in connection with the Merger. See " --
Financing of the Merger."
Because the Common Stock will be closely held and cease to be publicly
traded, the Continuing Shareholders believe that they will be able to focus on
increasing the long-term value of the Company to a greater degree by reducing
management's commitment of resources with respect to procedural and compliance
-51-
<PAGE>
requirements of a company with publicly owned common stock. However, the
Continuing Shareholders will bear the risks associated with the lack of
liquidity of their continuing investment in the Company.
Following the Merger, the Public Shareholders will have no continuing
interest in the Company. As a result, the Common Shares will no longer meet the
requirements of the NYSE for continued listing and will be delisted from the
NYSE. The Common Stock currently constitutes "margin securities" under the
regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), which has the effect, among other things, of allowing
brokers to extend credit on the collateral of the Common Stock. As a result of
the Merger, the Common Stock will no longer constitute "margin securities" for
purposes of the margin regulations of the Federal Reserve Board and, therefore,
will no longer constitute eligible collateral for credit extended by brokers.
The Common Stock is currently registered as a class of securities under
the Exchange Act. Registration of the Common Stock under the Exchange Act may be
terminated upon application of the Company to the SEC if the Common Stock is not
listed on a national securities exchange or quoted on NASDAQ and there are fewer
than 300 record holders of the outstanding shares. Termination of registration
of the Common Stock under the Exchange Act would substantially reduce the
information required to be furnished by the Company to its shareholders and to
the SEC and would make certain provisions of the Exchange Act, such as the
short-swing trading provisions of Section 16(b), the requirement of furnishing a
proxy statement in connection with shareholders' meetings pursuant to Section
14(a) and the requirements of Rule 13e-3 under the Exchange Act with respect to
"going private" transactions no longer applicable to the Company. In addition,
"affiliates" of the Company and persons holding "restricted securities" of the
Company may be deprived of the ability to dispose of those securities pursuant
to Rule 144 promulgated under the Securities Act of 1933, as amended. It is the
present intention of the Company to make an application for the termination of
the registration of the Common Stock under the Exchange Act as soon as
practicable after the Effective Time.
Certain U.S. Federal Income Tax Consequences
The following is a general summary of the material United States
federal income tax consequences of the Merger to the Public Shareholders under
provisions of the Code, and existing regulations and administrative and judicial
interpretations thereunder in effect as of the date hereof, all of which are
subject to change, possibly with retroactive effect. The discussion applies only
to shareholders who hold shares of Common Stock as capital assets within the
meaning of Section 1221 of the Code. In addition, the discussion does not apply
to any shareholder who is attributed any shares of a Continuing Shareholder
under Section 318 of the Code (to whom the entire Merger Consideration may be
treated as a dividend taxable at ordinary income tax rates), any shareholder who
is not a U.S. person within the meaning of Section 7701(a)(30) of the Code, any
shareholder who acquired shares in a compensatory transaction, including upon
the exercise of an option, any shareholder who holds shares as part of a hedging
or conversion transaction, straddle or other risk reduction transaction, and any
other category of shareholder who is subject to special tax rules, such as
financial institutions, insurance companies, broker-dealers and tax-exempt
entities. In addition, the following discussion does not consider the effect of
any state, local, foreign or other tax laws.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, YOU ARE ADVISED TO CONSULT
WITH YOUR OWN TAX ADVISOR AS TO THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX CONSEQUENCES OF THE MERGER TO YOU.
If the Merger is consummated, each Public Shareholder will be treated
as having sold shares for the Merger Consideration. As a result, a Public
Shareholder will recognize capital gain or loss in an amount equal to the
difference between the Merger Consideration and the Public Shareholder's
adjusted tax basis in such Public Shares. Such capital gain or loss will be a
long-term capital gain or loss if the Public Shareholder has held the Public
Shares for more than one year on the Effective Date of the Merger even though
the Merger Consideration is not paid to the Public Shareholder on the Effective
Date. There are certain
-52-
<PAGE>
limitations on the deductibility of capital losses. Gain or loss must be
determined separately for each block of Common Stock (i.e., shares acquired at
the same cost in a single transaction).
To prevent backup withholding equal to 31% of the Merger Consideration
payable to a Public Shareholder, the Public Shareholder must either (i)
establish an exemption from backup withholding (e.g. because it is a
corporation) or (ii) provide its taxpayer identification number to the Paying
Agent, certify that the Public Shareholder is not subject to backup withholding
and otherwise comply with the backup withholding rules under the Code. Backup
withholding is not an additional tax; rather, any amount so withheld is
creditable against the shareholder's federal income tax liability. See "THE
RESTATED MERGER AGREEMENT -- Tax Withholding."
Certain penalties may apply to a failure to furnish correct
information. Public Shareholders should consult with their own tax advisors as
to the qualifications for an exemption from withholding and the procedures for
obtaining an exemption.
Neither the Company, Mergeco nor any of the Continuing Shareholders
will recognize gain or loss as a result of the Merger.
Fees and Expenses
Estimated fees and expenses (rounded to the nearest thousand dollars)
incurred or to be incurred by the Company, Mergeco and the Continuing
Shareholders in connection with the Merger (including the Initial Proposal and
the Revised Proposal) are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
Investment banking fees and expenses - Prudential Securities................ $1,280,000
Investment banking fees and expenses - Bear Stearns......................... 1,700,000
Debt financing discounts and commissions.................................... 9,000,000(1)
Legal fees and expenses.....................................................
Accounting fees.............................................................
SEC filing fee.............................................................. 79,000
Printing and mailing expenses...............................................
Proxy solicitation agent fees and expenses.................................. 7,000
Paying Agent fees...........................................................
Special Committee fees and expenses......................................... 75,000
Litigation settlement fees and expenses..................................... 2,125,000
Miscellaneous............................................................... _________
Total.............................................................. $
</TABLE>
--------------------
(1) Assumes that the entire contemplated $300 million of Debt
Financing will be through the placement of senior notes. See
"-- Financing of the Merger."
The above fees and expenses include approximately $___________, which
represent fees and expenses incurred or to be incurred by or on behalf of
Mergeco and/or the Continuing Shareholders in connection with the Merger that
will, in effect, be borne by the Company if the Merger is consummated since, by
operation of law, in a merger, the Surviving Corporation assumes and becomes
liable for the obligations of the entity merging into it.
The Restated Merger Agreement provides that, except in certain
circumstances, in the event of termination of the Restated Merger Agreement
without consummation of the Merger, the Company, on the one hand, and Mergeco
and the Continuing Shareholders, on the other hand, will pay their own expenses.
The fees and expenses to be borne by the Company will include those of financial
advisors (including Bear
-53-
<PAGE>
Stearns and Prudential Securities), accountants and counsel for the Company and
the Special Committee, and fees and expenses for the preparation, printing,
mailing and filing of documents used in connection with the Merger and the Debt
Financing. The fees and expenses of Mergeco will include any commitment and
other fees or expenses of any person providing or proposing to provide the Debt
Financing and fees and expenses of counsel for Mergeco.
If termination of the Restated Merger Agreement is not due to the
failure to obtain the Debt Financing (or is due to a failure to obtain the Debt
Financing as a result of a material adverse change in the securities, financial
or borrowing markets) or a breach by Mergeco or the Continuing Shareholders of
their representations, warranties or covenants in the Restated Merger Agreement,
then the Company is to reimburse Mergeco and the Continuing Shareholders for the
fees and expenses incurred by them in connection with the Merger, with the
maximum reimbursement by the Company being $500,000. If, however, termination of
the Restated Merger Agreement is due to failure to obtain the Debt Financing
(unless resulting from a material adverse change in the securities, financial or
borrowing markets), then Mergeco and the Continuing Shareholders will, jointly
and severally, be obligated to reimburse the Company for 50% of the fees and
expenses incurred by the Company in connection with the Merger, with the maximum
reimbursement by Mergeco and the Continuing Shareholders being $500,000 in the
aggregate. See "THE RESTATED MERGER AGREEMENT -- Fees and Expenses."
For information regarding payment of fees and expenses to the Special
Committee, see "-- Interests of Certain Persons in the Merger and the Company."
For information regarding Prudential Securities' engagement by the Special
Committee and the payment of fees and expense in connection with that
engagement, see "-- Presentation and Fairness Opinion of Prudential Securities."
For information regarding Bear Stearns' engagement by the Company and the
payment of fees and expenses in connection with that engagement, see "--
Financing of the Merger."
Neither Mergeco nor the Company will pay any fees or commissions to any
broker or dealer or any other person (other than the Proxy Solicitation Agent)
for soliciting Proxies pursuant to the Merger. Brokers, banks, and other
custodians, nominees and fiduciaries will, upon request, be reimbursed by the
Company for reasonable out-of-pocket expenses incurred by them in forwarding
proxy soliciting materials to the beneficial owners of shares.
Accounting Treatment
For accounting and financial reporting purposes, the Merger will be
accounted for in accordance with the "purchase method" of accounting.
Financing of the Merger
Approximately $408 million will be required to pay the aggregate Merger
Consideration to the Public Shareholders and to pay holders of Stock Options
following consummation of the Merger, as well as estimated fees and expenses of
the contemplated transactions and to provide sufficient liquidity to fund the
Company's ongoing working capital needs, including capital expenditures. It is
anticipated that the sources of the required funds will be $138 million of the
Company's cash and marketable securities and up to $300 million to be obtained
by the Company through the Debt Financing. Although different sources and types
of financing may be obtained, the Debt Financing presently contemplates the
placement of Senior Notes (the "Senior Notes") and will include either a bank
revolving credit facility, which will have undrawn availability on the closing
date of the Merger of up to $30 million, or excess cash from the Senior Note
placement, to provide sufficient liquidity to fund the Company's ongoing working
capital needs, including capital expenditures. To date, no commitment has been
obtained for a revolving credit facility.
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It is a condition to the obligation of Mergeco to consummate the Merger
that the Company has obtained the Debt Financing (i) in the amount of at least
$300 million, (ii) on material terms and conditions no less favorable to the
Company than those set forth in a term sheet that has been delivered to the
Special Committee, and (iii) having a yield to maturity not to exceed 11.25% per
annum.
Mergeco and the Continuing Shareholders have received the Debt
Financing Letter, dated as of January 19, 1999, from Bear Stearns which states
that, as of the date of the Debt Financing Letter, based upon and subject to (i)
the first paragraph under this heading, (ii) the information supplied to Bear
Stearns by the Continuing Shareholders and the Company and (iii) current market
conditions, Bear Stearns was "highly confident" of its ability to place or
arrange the Debt Financing, subject to the negotiation of definitive language
with respect to the terms and conditions set forth in a term sheet delivered to
the Special Committee. The Debt Financing Letter does not discuss or specify
interest rates. The summary contained herein of the Debt Financing Letter is
qualified in its entirety by reference to the full text of the Debt Financing
Letter filed as an exhibit to the Schedule 13E-3.
The Debt Financing Letter is subject to, among other things (i)
negotiation of definitive language with respect to the terms and conditions of
the Senior Notes and the negotiation of other acceptable terms and conditions of
the Debt Financing, including, but not limited to, interest rate, price and
other covenants, (ii) negotiation of acceptable terms, and the execution of
acceptable documentation, related to the Merger and the Debt Financing, (iii)
there having occurred no material adverse change in the business, prospects,
condition (financial or otherwise) or results of operations of the Company, (iv)
satisfactory completion of legal due diligence, (v) nothing coming to Bear
Stearns' attention that contradicts or calls into question (a) the information
previously provided to Bear Stearns by the Company or the Continuing
Shareholders or (b) the results of Bear Stearns' financial due diligence
investigation, (vi) no material adverse change in market conditions for new
issues of high-yield debt or syndicated bank loan facilities, (vii) there having
occurred no material adverse change in conditions of the financial and capital
markets generally, and (viii) the Continuing Shareholders' and the Company's
full cooperation with respect to the marketing of the Debt Financing. The
satisfaction of the foregoing conditions is to be determined in the sole
discretion of Bear Stearns' Commitment Committee. The Debt Financing Letter does
not constitute a commitment on the part of Bear Stearns to provide the Debt
Financing and does not ensure the successful completion of the Debt Financing.
If the Debt Financing is not consummated, the Merger will not be consummated,
even if the Public Shareholders adopt the Restated Merger Agreement at the
Meeting. See "THE RESTATED MERGER AGREEMENT -- Conditions."
It is presently contemplated (although no negotiations with respect to
the Debt Financing has been had with any potential purchaser of Senior Notes)
that the Senior Notes will be unsecured senior obligations of the Company; rank
pari passu with all existing and future senior indebtedness of the Company; be
jointly and severally guaranteed on a senior unsecured basis by all present and
future "restricted" subsidiaries of the Company, have a maturity of 10 years
from the date of issuance, subject to the Company's right to call, and the
holders' rights to require the Company to repurchase, the Senior Notes at an
earlier date under certain circumstances; and bear interest at a rate to be
determined at the time of pricing of the Senior Notes.
The actual terms and conditions of the Senior Notes will depend upon
market conditions at the time the Senior Notes are placed and upon negotiations
with prospective purchasers of the Senior Notes. The Senior Notes will be
governed by an indenture containing, among other things, covenants customary for
this type of financing, including restrictions on dividends, stock repurchases,
liens, indebtedness, affiliate transactions, asset sales and mergers.
The indenture for the Senior Notes has not been finalized and,
accordingly, the provisions described herein may change materially as a result
of the negotiation of definitive agreements.
Terms of Bear Stearns' Engagement. On February 12, 1997, the Company
engaged Bear Stearns as its exclusive financial advisor and agent in connection
with exploring various alternatives to enhance shareholder value, including
recapitalization and going private transactions. Bear Stearns' engagement by the
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Company superseded an arrangement which it had entered into with certain of the
Continuing Shareholders in October 1996. As a result, those Continuing
Shareholders were released from their obligations under their engagement letter.
The February 12, 1997 engagement letter provides that Bear Stearns is
to receive a cash fee of $1.6 million from the Company in the event the Merger
is consummated. Either the Company or Bear Stearns may terminate the Bear
Stearns engagement letter at any time. If, however, either an agreement for
specified transactions described in the engagement letter (including
recapitalization and going private transactions) is entered into, or the Company
consummates such a transaction, within six months following termination of the
engagement letter, Bear Stearns remains entitled to its fee. If, with certain
exceptions, certain other transactions not specified in the engagement letter
that were proposed by Bear Stearns to the Company or its management as an option
are authorized by the Board and either an agreement for such a transaction is
entered into, or such a transaction is consummated, within six months after the
termination of the engagement letter, Bear Stearns' fee arrangement is to be
determined in good faith through negotiations with the Company. Bear Stearns was
not engaged to render, and has not rendered, any opinion as to the fairness of
any transaction presented to the Board, including the proposed Merger.
In addition, in the engagement letter, the Company granted Bear Stearns
the right to act as sole managing underwriter or exclusive agent in connection
with the raising of financing for specified transactions. If Bear Stearns
arranges, or itself provides, financing to consummate such a transaction on
terms approved by the Company, Bear Stearns is to receive a fee equal to 3% of
the gross proceeds raised through the issuance of any fixed rate debt financing
in a registered offering or private placement under the Securities Act, and 1%
of the amount of any bank or similar credit facility arranged (including any
committed facility which is arranged but partially or wholly undrawn). If Bear
Stearns elects not to act as sole managing underwriter or exclusive agent for
the financing and the Company completes one of the transactions specified in the
engagement letter with financing provided or arranged by a third party, Bear
Stearns will be entitled to 50% of the fee it would otherwise be entitled to
under the preceding paragraph if the specified transaction is completed on terms
substantially similar to the specified transaction as proposed by Bear Stearns
or, with certain exceptions, another transaction previously proposed by Bear
Stearns. Bear Stearns is also to be reimbursed for its out-of-pocket expenses
incurred up to $100,000 in the aggregate, but not for expenses related to its
acting as underwriter or placement agent for any financing for the Company. The
engagement letter provides that the Company will indemnify Bear Stearns and
certain related parties against certain liabilities which may arise out of its
engagement.
Regulatory Approvals
The Company does not believe that any material federal or state
regulatory approvals, filings or notices are required by the Company in
connection with the Merger other than (i) filings required under the Exchange
Act, (ii) filings of certificates of merger with the New York Department of
State, (iii) filings to fulfill the delisting requirements of the NYSE, (iv)
filings under applicable alcohol and beverage laws and regulations, and (v)
filings in connection with any applicable transfer or other taxes in any
applicable jurisdiction. The Company believes that none of such filings would
present an obstacle to prompt completion of the Merger. The Company, the
Continuing Shareholders and Mergeco do not believe that they are required to
make a filing with the Department of Justice or the Federal Trade Commission
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, although each agency has the authority to challenge the Merger on
antitrust grounds before or after the Merger is consummated.
The Company is in the process of obtaining consents or acknowledgments,
where required, under certain leases to which it is a party. The Company does
not believe there are any other material third party consents required by the
Company under the Restated Merger Agreement.
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Risk of Insolvency
On a pro forma basis, assuming that the Merger and the Debt Financing
had been completed on April 25, 1999, the close of the Company's first fiscal
quarter of 1999, the Company would have had net worth of $83 million and a
negative tangible net worth (net worth exclusive of the excess of cost over book
value of assets acquired) of $139 million. If, as a result of the Merger, the
fair value of the Company's assets is less than its actual and contingent
liabilities, the Company has inadequate capital or the Company is unable to pay
its debts as they become due, the transfer of funds representing the Merger
Consideration payable to Public Shareholders upon consummation of the Merger may
be deemed to be a "fraudulent conveyance" under applicable law and, therefore,
may be subject to claims of creditors of the Company. If such a claim is
asserted by the creditors of the Company after the Merger, there is a risk that
Public Shareholders may be ordered by a court to turn over to the Company's
trustee in bankruptcy all or a portion of the Merger Consideration they
received.
Based upon the projected capitalization of the Company at the Effective
Time and projected results of operations and cash flow after the Merger,
management of the Company has no reason to believe at this time that the Company
will be insolvent immediately after giving effect to the Merger.
Risk that the Merger will not be Consummated
Consummation of the Merger is subject to certain conditions, including
(i) shareholder adoption of the Restated Merger Agreement, (ii) receipt by the
Company of financing for the transactions contemplated by the Restated Merger
Agreement, and (iii) final settlement of the Current Shareholder Litigation. See
"THE RESTATED MERGER AGREEMENT -- Conditions." Although Bear Stearns has
provided a letter to the Continuing Shareholders and Mergeco to the effect that,
based upon and subject to the conditions set forth therein, including current
market conditions, it is "highly confident" in its ability to place or arrange
the Debt Financing on terms at least as favorable to the Company as those set
forth on the term sheet delivered by the Continuing Shareholders to the Special
Committee, the Restated Merger Agreement provides that Mergeco is not obligated
to consummate the Merger if, among other things, the Debt Financing would have a
yield to maturity in excess of 11.25% per annum or if a material adverse change
(or event or occurrence that is reasonably likely to result in an adverse
change) in securities, financial or borrowing markets occurs. Bear Stearns'
"highly confident" letter does not pertain to interest rates. Therefore, even if
the requisite approval by shareholders is obtained, there can be no assurance
that the Merger will be consummated. See " --Conduct of the Business of the
Company if the Merger is not Consummated."
See " -- Conduct of the Business of the Company if the Merger is not
Consummated," and "THE RESTATED MERGER AGREEMENT -- Fees and Expenses" with
respect to obligations of the Company, on the one hand, and Mergeco and the
Continuing Shareholders, on the other hand, to reimburse each other for fees and
expenses in certain instances if the Restated Merger Agreement is terminated.
LITIGATION PERTAINING TO THE MERGER
Initial Proposal Litigation
Following the Company's announcement of the Initial Proposal in January
1998, seven lawsuits were instituted by shareholders against the Company, those
Continuing Shareholders who are directors of the Company and, except in certain
of the lawsuits, all or some of the other directors of the Company. While the
complaints varied, in general, they alleged that such directors breached
fiduciary duties, that the proposed price per share to be paid to Public
Shareholders was inadequate and that the proposal served no legitimate business
purpose of the Company. Although varying, the complaints generally sought a
declaration of class action status, damages in unspecified amounts alleged to be
caused to the plaintiffs, and other relief (including injunctive relief,
rescission or rescissory damages if the transaction was consummated), and costs
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and disbursements, including a reasonable allowance for counsel fees and
expenses. In June 1998, the Continuing Shareholders withdrew the Initial
Proposal and, in September 1998, all seven lawsuits, which were pending in the
Supreme Court in New York County and Suffolk County, New York, were voluntarily
discontinued, without prejudice, and without interest and costs.
Current Shareholder Litigation
Following the Company's announcement of the Revised Proposal, seven
class action lawsuits were instituted by shareholders against the Company, those
Continuing Shareholders who are directors of the Company, and, except in certain
of the lawsuits, all or some of the other directors of the Company. The lawsuits
were instituted in the Supreme Court of the State of New York, New York County
and Suffolk County. The lawsuits in Suffolk County were discontinued and
subsequently refiled as one lawsuit in New York County (with one additional
plaintiff) in anticipation of consolidating all lawsuits into one lawsuit. The
purported Class consists of all record and beneficial owners of the Company's
Common Stock during the period beginning with the close of business on November
25, 1998 and ending on the effective date of the Merger. 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 Public
Shareholders was inadequate and that there were inadequate procedural
protections for the Public 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 Continuing Shareholders agreed to increase the Merger Consideration to
$28.85 per share. The Memorandum of Understanding states the 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 Time, (iii) court approval of the settlement, and (iv) consummation of
the Merger. It is a condition to Mergeco's obligation under the Restated Merger
Agreement that holders of no more than an aggregate of 1,000,000 shares of
Common Stock (approximately 4.9% of the Company's presently outstanding shares)
request exclusion from the settlement. On April 7, 1999, the Stipulation of
Settlement was entered into, embodying (and superseding) the terms of the
Memorandum of Understanding. The foregoing is a summary of the Memorandum of
Understanding and the Stipulation of Settlement and is qualified in its entirety
by reference to the full text of the Memorandum of Understanding and the
Stipulation of Settlement, respectively, which have been filed as exhibits to
the Schedule 13E-3.
On May 11, 1999, following the consolidation of the pending lawsuits
into one action, the Court issued a Scheduling Order, pursuant to which a
hearing was scheduled to be held on June 29, 1999, to determine (a) whether the
Court should approve the settlement as fair, reasonable, adequate and in the
best interest of the Class; (b) determine whether the Stipulation of Settlement
and the terms and conditions of the settlement should be finally approved by the
Court; (c) determine whether an Order and Final Judgment should be entered by
the Court dismissing the actions as to all defendants with prejudice and on the
merits as against the plaintiffs and all members of the Class except those
persons who submit a valid and timely request for exclusion from the Class, and
extinguish, release and enjoin prosecution of any and all settled claims; (d)
hear and determine such other matters as the Court may deem necessary; and (e)
in the event the Court approves the settlement and enters the Order and Final
Judgment, to consider an application by counsel
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to the Class for an award of attorneys' fees and expenses. The Court has
reserved the right to adjourn the settlement hearing, including consideration of
the application for attorneys' fees and expenses, without further notice other
than by oral announcement at the settlement hearing or any adjournment thereof.
The Court also has reserved the right to approve the settlement at or after the
settlement hearing with such modifications as may be consented to by the parties
to the Stipulation of Settlement and without notice to the Class. The Scheduling
Order also fixed June 18, 1999 as the last day for shareholders to elect to be
excluded from the Class and June 19, 1999 as the last day for shareholders to
file notice of their intention to appear at the settlement hearing. Notices as
to the procedures to be followed in making such elections were sent to
shareholders commencing on May 17, 1999 and a Summary Notice was published in
The Wall Street Journal on May 20, 1999. No requests for exclusion from the
Class, or notices of proposed appearances at the scheduled hearing, had been
received through the close of business on June 17, 1999.
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THE RESTATED MERGER AGREEMENT
The following is a summary of the material provisions of the Restated
Merger Agreement. This summary is qualified in its entirety by reference to the
full text of the Restated Merger Agreement, a copy of which is attached as Annex
I to this Proxy Statement and incorporated herein by reference. Any capitalized
terms used and not defined below have the meanings given to them in the Restated
Merger Agreement.
The Merger; Merger Consideration
The Restated Merger Agreement provides that the Merger will become
effective at such time as Certificates of Merger are duly filed with the New
York Department of State by both the Company and Mergeco or at such later time
as is specified in the Certificates of Merger. If the Restated Merger Agreement
is adopted at the Meeting by the affirmative vote of at least two-thirds of the
votes of all outstanding shares of Common Stock and a majority of the votes cast
at the Meeting, excluding votes cast by the Continuing Shareholders, abstentions
and broker non-votes, and the other conditions to consummation of the Merger are
satisfied, it is currently anticipated that the Merger will become effective as
soon thereafter as practicable. See "-- Conditions." However, there can be no
assurance as to the timing of the consummation of the Merger or that the Merger
will be consummated.
At the Effective Time, Mergeco will be merged with and into the
Company, the separate corporate existence of Mergeco will cease, and the Company
will continue as the Surviving Corporation. In the Merger, each share of Common
Stock issued and outstanding immediately prior to the Effective Time (other than
Common Stock then (i) held in the treasury of the Company or (ii) owned of
record by Mergeco or the Continuing Shareholders) will, by virtue of the Merger
and without any action on the part of the holder of the shares, be converted
into the right to receive the Merger Consideration in cash, without interest,
upon surrender of the stock certificate representing such Common Stock. At the
Effective Time, the Public Shareholders will cease to have any rights as
shareholders of the Company, except the right to receive the Merger
Consideration. Each certificate representing a Public Share will, after the
Effective Time, evidence only the right to receive, upon the surrender of such
certificate, an amount of cash per share equal to the Merger Consideration
multiplied by the number of Public Shares evidenced by such certificate.
Each share of Common Stock issued and outstanding immediately prior to
the Effective Time which is then (i) held in the treasury of the Company or (ii)
owned of record by Mergeco or the Continuing Shareholders will automatically be
canceled, retired and cease to exist and no payment will be made with respect to
those shares.
Each membership unit of Mergeco issued and outstanding immediately
prior to the Effective Time will be converted into and become one share of
Common Stock of the Surviving Corporation and will constitute the only issued or
outstanding shares of capital stock of the Surviving Corporation immediately
after the Effective Time. Accordingly, after the Merger, the Continuing
Shareholders will be the only shareholders of the Surviving Corporation.
The Exchange Fund; Payment for Shares of Common Stock
As of or as soon as reasonably practicable following the Effective
Time, the Surviving Corporation will deposit in trust with a bank or trust
company with offices in New York City (the "Paying Agent"), for the benefit of
the Public Shareholders, cash in an aggregate amount equal to the product of (i)
the number of Public Shares issued and outstanding immediately prior to the
Effective Time and (ii) the Merger Consideration (the "Exchange Fund"). See "--
Tax Withholding." The Paying Agent will, pursuant to irrevocable instructions,
make the payments provided for under the Restated Merger Agreement out of the
Exchange Fund.
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Promptly after the Effective Time, the Surviving Corporation will cause
the Paying Agent to mail to each holder of record of Public Shares as of the
Effective Time a form letter of transmittal containing instructions for use in
surrendering certificates for payment in accordance with the Restated Merger
Agreement in exchange for the Merger Consideration. No shareholder should
surrender any certificates until the shareholder receives the letter of
transmittal and other materials for such surrender. Upon surrender of a
certificate for cancellation, together with a properly completed and executed
letter of transmittal, to the Paying Agent after the Effective Time, the holder
of such certificate will be entitled to receive the Merger Consideration in
exchange for each Public Share formerly represented by such certificate, without
any interest, less any required withholding of taxes. See "-- Tax Withholding."
The certificate so surrendered will be canceled.
Until surrendered pursuant to the procedures described above, after the
Effective Time each certificate will represent, for all purposes, the right to
receive the Merger Consideration in cash multiplied by the number of Public
Shares evidenced by such certificate, without any interest.
Any portion of the Exchange Fund that remains unclaimed by the Public
Shareholders one year after the Effective Time (including any interest,
dividends, earnings or distributions received on the unclaimed funds) will be
repaid to the Surviving Corporation, upon demand. Any Public Shareholders who
have not complied with the procedures set forth above may look only to the
Surviving Corporation for payment of their claim for the Merger Consideration,
without any interest, but will have no greater rights against the Surviving
Corporation than may be accorded to general creditors of the Surviving
Corporation under New York law. Notwithstanding the foregoing, neither the
Paying Agent nor any party to the Restated Merger Agreement will be liable to
any holder of certificates formerly representing Public Shares for any amount
paid to a public official pursuant to any applicable abandoned property, escheat
or similar law.
Transfers of Common Stock
After the Effective Time, there will be no transfers of Public Shares
on the stock transfer books of the Company. If, after the Effective Time,
certificates are presented to the Paying Agent or the Surviving Corporation,
they will be canceled and exchanged for the Merger Consideration multiplied by
the number of Public Shares evidenced by such certificates, without any
interest.
Treatment of Stock Options
At the Effective Time, all outstanding Stock Options, including Stock
Options held by the Continuing Shareholders, are to be terminated. In
consideration of such termination, the Surviving Corporation will pay to the
holder of each such Stock Option, in cash and as full settlement for such Stock
Option, whether or not then exercisable, an amount determined by multiplying (i)
the excess, if any, of the Merger Consideration over the applicable exercise
price per share of Common Stock subject to such Stock Option by (ii) the total
number of shares of Common Stock subject to such Stock Option. See " -- Tax
Withholding."
Tax Withholding
The Surviving Corporation and the Paying Agent will be entitled to
deduct and withhold from the amounts payable to any Public Shareholder or holder
of Stock Options such amounts as Mergeco, the Surviving Corporation or the
Paying Agent is required to deduct and withhold with respect to the making of
such payment under applicable tax law. To the extent that amounts are so
deducted and withheld by the Surviving Corporation or the Paying Agent, such
amounts will be treated for all purposes of the Restated Merger Agreement as
having been paid to the relevant Public Shareholder or holder of Stock Options.
See "SPECIAL FACTORS -- Certain U.S. Federal Income Tax Consequences."
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Directors and Officers, Certificate of Incorporation and By-Laws Following the
Merger
The Restated Merger Agreement provides that the current directors and
officers of the Company will be the initial directors and officers of the
Surviving Corporation. However, Paul A. Vatter, a director of the Company, has
advised the Company of his intention to retire upon consummation of the Merger
or, if the Restated Merger Agreement is not adopted at the Meeting, upon
expiration of his current term at the next annual meeting of shareholders. In
addition, Robert S. Koebele, Vice President - Finance and Chief Financial
Officer, has advised the Company that he intends to retire in the early part of
the summer of 1999 whether or not the Merger is consummated.
The Certificate of Incorporation of the Company in effect immediately
prior to the Effective Time will be the Certificate of Incorporation of the
Surviving Corporation until it is subsequently amended, and the By-Laws of the
Company immediately prior to the Effective Time will be the By-Laws of the
Surviving Corporation until it is subsequently amended.
Representations and Warranties
The Restated Merger Agreement contains certain representations and
warranties of the Company, Mergeco and the Continuing Shareholders. The
representations of the Company relate to, among other things, its organization,
capitalization, power and authority to enter into the Restated Merger Agreement
and the transactions contemplated thereby, the binding effect of the Restated
Merger Agreement, the fairness opinion of Prudential Securities, the
recommendations by the Special Committee and by the Board, compliance with
required filings and consents under applicable law, and the absence of conflicts
with corporate documents and agreements. The representations of Mergeco and the
Continuing Shareholders (which are joint and several) relate to, among other
things, the organization of Mergeco, the ownership of Mergeco, the absence of
obligations, liabilities or activities of Mergeco except in furtherance of the
transactions contemplated by the Restated Merger Agreement, the power and
authority of Mergeco and the Continuing Shareholders to enter into the Restated
Merger Agreement and the transactions contemplated by the Restated Merger
Agreement, the binding effect of the Restated Merger Agreement, required filings
and consents and the Debt Financing Letter and sufficiency of the Debt Financing
contemplated thereby.
Covenants
The Company has agreed that, prior to the Effective Time, neither the
Company nor its subsidiaries will: (i) carry on their respective businesses
other than in the usual, regular and ordinary course of business consistent with
past practice, (ii) issue shares of Common Stock (other than pursuant to the
exercise of Stock Options outstanding on January 19, 1999) or capital stock or
options to purchase Common Stock or capital stock, (iii) declare, set aside or
pay any dividend or other distribution in respect of its capital stock or other
equity interest (with certain exceptions in the case of subsidiaries), or (iv)
repurchase its capital stock, or agree to do any of the foregoing. The Company
has agreed to use its best efforts to obtain the necessary adoption of the
Restated Merger Agreement by the Public Shareholders. The Restated Merger
Agreement provides that this Proxy Statement will include the recommendation of
the Board to the Public Shareholders in favor of the adoption of the Restated
Merger Agreement (and reflect that the Special Committee has made a similar
recommendation to the Board), subject to the fiduciary duties under applicable
law of such directors (including the directors constituting the Special
Committee). Notwithstanding any other provision of the Restated Merger Agreement
to the contrary, if the Board or the Special Committee determines, in good faith
in the exercise of its fiduciary duties under applicable law, that it is
required to withdraw, modify or amend its recommendation in favor of the Merger,
such withdrawal, modification or amendment will not constitute a breach of the
Restated Merger Agreement.
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The Continuing Shareholders have agreed (i) to vote at the Meeting all
7,064,328 shares of outstanding Common Stock owned of record by them for
adoption of the Restated Merger Agreement (but only if at least a majority of
the votes cast at the Meeting excluding votes cast by the Continuing
Shareholders, abstentions and broker non-votes, are cast in favor of adoption of
the Restated Merger Agreement), (ii) not to grant a proxy to vote any shares
other than to another Continuing Shareholder or to persons identified in a proxy
card distributed on behalf of the Board, to vote such Continuing Shareholder's
shares at the Meeting in the manner provided in clause (i), and (iii) not to
sell, transfer or otherwise dispose of any of their shares (other than transfers
of shares to Mergeco or any family members of Mario Sbarro, Anthony Sbarro or
Joseph Sbarro or trusts for the benefit of such Continuing Shareholders or such
family members, which shares may be so transferred only if the transferee agrees
in writing to be bound by the terms of the agreements described in this
paragraph). In the event of any transfer of such shares, such shares will be
deemed owned of record by the Continuing Shareholders.
Mergeco has agreed not to conduct any business or enter into any
activities of any nature prior to the Effective Time, other than activities in
connection with the Restated Merger Agreement and the transactions contemplated
by the Restated Merger Agreement. Mergeco and the Continuing Shareholders have
also agreed to use their best efforts to assist the Company in obtaining the
Debt Financing on terms and conditions no less favorable to the Company than
those described under the caption "SPECIAL FACTORS -- Financing of the Merger",
and the Company has agreed to cooperate with, and use its best efforts to
assist, Mergeco in obtaining the financing.
In addition, Mergeco, the Company and the Continuing Shareholders have
made further agreements regarding access to the Company's records, the calling
of the Meeting, the preparation, filing and mailing of this Proxy Statement and
the Schedule 13E-3, the obtaining of consents of third parties and governmental
authorities and making public announcements.
Subject to the terms and conditions provided in the Restated Merger
Agreement and the fiduciary duties under applicable law of the directors of the
Company, including directors constituting the Special Committee, as determined
by such directors in good faith, each of the parties has agreed to use its best
efforts consistent with applicable legal requirements to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary or
proper and advisable under applicable laws and regulations to ensure that the
conditions to consummation of the Merger are satisfied and to consummate and
make effective, in a commercially reasonable manner, the transactions
contemplated by the Restated Merger Agreement. Mergeco and the Company also have
agreed to use their best efforts to obtain all material consents of third
parties and governmental authorities, and to make all governmental filings,
necessary for the consummation of the transactions contemplated by the Restated
Merger Agreement. The Continuing Shareholders have agreed to use their best
efforts to cause Mergeco to perform all of its obligations under the Restated
Merger Agreement.
Indemnification and Insurance
The NYBCL permits, in general, a New York corporation, such as the
Company, 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 in any capacity at the request of the
corporation, against any judgment, fines, amounts paid in settlement and
reasonable expenses, including attorney's fees actually and necessarily incurred
as a result of such action or proceeding, or any appeal therein, if such
director or officer acted in good faith, for a purpose he or she reasonably
believe 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. The NYBCL also 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 such
person to repay
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such amount as, and to the extent, required by law. The NYBCL provides that
indemnification and advancement of expense provisions contained in the NYBCL are
not exclusive of any rights to which a person seeking indemnification or
advancement of expenses may be entitled, whether contained in the certificate of
incorporation or the By-Laws of the corporation or, when authorized by such
certificate of incorporation or By-Laws, (i) a resolution of shareholders, (ii)
a resolution of directors or (iii) an agreement providing for indemnification.
However, the NYBCL also provides that no indemnification may be made on behalf
of any such person if a judgment or other final adjudication adverse to the
person 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.
The Company's Certificate of Incorporation provides, in accordance with
the NYBCL, that a director will not be personally liable to the Company or its
shareholders for damages for any breach of duty as a director unless a judgment
or other final adjudication adverse to the director establishes that (i) the
director's acts or omissions were in bad faith or involved intentional
misconduct or knowing violation of law, (ii) the director personally gained, in
fact, a financial profit or other advantage to which the director was not
legally entitled, or (iii) the director's acts violated provisions of the NYBCL
that impose liability upon directors in certain instances for declarations of
dividends, stock repurchases or redemptions, distributions of assets following a
dissolution, or loans to directors, when made contrary to NYBCL provisions.
The Company's By-Laws, adopted by shareholders at the Company's 1989
Annual Meeting of Shareholders, provide, among other things, that the Company
will indemnify any officer or director (including officers and directors serving
another entity in any capacity at the Company's request) to the fullest extent
permitted by law.
The Company is a party to indemnification agreements with each of its
directors and certain of its officers confirming the indemnification granted
under the Company's By-Laws.
The Restated Merger Agreement provides that, until and for a period of
six years after the Effective Time, the provisions of the Company's Certificate
of Incorporation limiting the personal liability of directors for damages and
the indemnification provisions of the Company's Certificate of Incorporation and
By-Laws as they relate to those who have served as directors or officers of the
Company at any time through the Effective Time will not be amended, repealed or
otherwise modified in any manner that would make any of such provisions less
favorable to the directors or officers of the Company or the Surviving
Corporation than those that pertain to directors and officers on the date of the
Restated Merger Agreement. Until and for a period of six years after the
Effective Time (subject to extension until the final disposition of any claim
asserted or made during such period), the Surviving Corporation will (i)
indemnify, defend and hold harmless the present and former officers and
directors of the Company and its subsidiaries, Mergeco and the members of
Mergeco (collectively, the "Indemnified Parties"), from and against, and pay or
reimburse the Indemnified Parties for, all losses, obligations, expenses,
claims, damages or liabilities resulting from or arising out of actions or
omissions of such Indemnified Parties occurring on or prior to the Effective
Time (including, without limitation, the transactions contemplated by the
Restated Merger Agreement) to the fullest extent permitted or required, as the
case may be, under (a) applicable law, (b) the Company's Certificate of
Incorporation or By-laws or the articles of organization or operating agreement
of Mergeco in effect on the date of the Restated Merger Agreement, including,
without limitation, provisions relating to advances of expenses incurred in the
defense of any action or suit, (c) any indemnification agreement between the
Indemnified Party and the Company, or (d) resolutions adopted by the
shareholders or directors of the Company or the members of Mergeco and (ii)
advance to any Indemnified Parties expenses incurred in defending any action or
suit with respect to such matters upon receipt of an undertaking (which need not
be secured) by or on behalf of such Indemnified Party to repay such amount as,
and to the extent, it is not entitled to be indemnified, in each case to the
fullest extent such Indemnified Party is entitled to
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indemnification or advancement of expenses under the Company's Certificate of
Incorporation, By-Laws or indemnification agreements with its officers and
directors or Mergeco's operating agreement in effect on the date hereof and
subject to the terms of such Certificate of Incorporation, By-Laws,
indemnification agreements or operating agreement. However, (i) no
indemnification will be made to or on behalf of Mergeco or a member of Mergeco
in his or its individual capacity or in his or its capacity as a member of
Mergeco which arises as a result of the transactions contemplated in the
Restated Merger Agreement if a judgment or other final adjudication adverse to
Mergeco or such member of Mergeco, as the case may be, establishes that its or
his acts constituted a breach of (a) its or his fiduciary duties to the Company
or the shareholders of the Company or (b) any of Mergeco's or such member's
representations, warranties or obligations under the Restated Merger Agreement
which caused the Company to terminate the Restated Merger Agreement and (ii)
nothing in the Restated Merger Agreement may be construed as adversely affecting
any such member's entitlement to indemnification from the Company as an officer
or director of the Company.
To support its indemnification obligation, the Surviving Corporation
has agreed to use its best efforts to obtain, and maintain effective for a
period of at least one year after the Effective Time, of at least $5.0 million
directors' and officers' liability insurance (i) covering reimbursement of the
Surviving Corporation for any obligation it may incur as a result of
indemnification of directors and officers and (ii) providing insurance for
directors and officers in cases where such reimbursement is not applicable,
including in the event of insolvency of the Company. However, the Surviving
Corporation is not required to pay a premium in excess of $100,000 for such
insurance, but, if such premium would exceed such amount, the Surviving
Corporation is to purchase as much coverage as possible for such amount. It is
the Company's understanding that such insurance will not cover actions taken by
directors and officers with respect to the transactions contemplated by the
Restated Merger Agreement.
No Solicitation; Fiduciary Obligations of Directors
The Company has agreed that it will not, and will not authorize or
permit any of their representatives to, (i) take any action to solicit, initiate
or encourage any offer or proposal for, or any indication of interest in, a
merger or other business combination involving the Company or any subsidiary of
the Company or the acquisition of any equity interest in, or the sale of a
substantial portion of the assets of, the Company or any such subsidiary (a
"Transaction Proposal"), except for the transactions contemplated under the
Restated Merger Agreement or (ii) enter into negotiations with, or furnish
information to, any other party with respect to any Transaction Proposal.
However, the Company and their representatives will not be prohibited from
taking any action described in clause (ii) above to the extent such action is
taken by, or upon the authority of, the Board if, in the good faith judgment of
the Board, (i) such Transaction Proposal is (after consultation with a financial
advisor of a nationally recognized reputation) (a) more favorable to the
Company's shareholders than the Merger, (b) achievable, and (c) supported by
creditable financing, which may include a "highly confident" letter from a
nationally recognized investment banking firm or nationally recognized lending
institution and (ii) after consultation with counsel, failure to take such
action would breach the Board's fiduciary duties to the Company's shareholders
under applicable law. In addition, the Company is required to promptly provide
Mergeco with a summary of the material terms of any Transaction Proposal and of
any negotiations or communications between the Company or its subsidiaries or
any of their respective representatives concerning any Transaction Proposal. The
Company also is required to give Mergeco not less than three business days'
written notice before providing any confidential information to any person
(other than Mergeco, and prospective sources of the Debt Financing, and their
respective representatives) concerning the business, properties or prospects of
the Company and/or its subsidiaries. The Restated Merger Agreement does not
prohibit the Company from making a statement to its shareholders that is
required by Rule 14e-2(a) promulgated under the Exchange Act or from making any
other disclosure to its shareholders if, in the good faith judgment of the
Board, after consultation with counsel, failure to make such a disclosure would
breach its fiduciary duties to the Company's shareholders under applicable law
or would otherwise violate the Exchange Act, other applicable law or stock
exchange regulations.
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Conditions
The respective obligations of each party to the Restated Merger
Agreement to effect the Merger are subject to the following conditions: (i) the
adoption of the Restated Merger Agreement at the Meeting by the affirmative vote
of at least two-thirds of the votes of all outstanding shares of Common Stock
and a majority of the votes cast at the Meeting, excluding votes cast by the
Continuing Shareholders, abstentions and broker non-votes, (ii) there will not
have occurred (a) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or (b) commencement of a war,
armed hostilities or other international or national calamity, directly
involving the United States, that has a material adverse effect on the general
economic conditions in the United States such as to make it, in the judgment of
a party to the Restated Merger Agreement, inadvisable or impracticable to
proceed with the Merger or the transactions contemplated by the Restated Merger
Agreement or by the Debt Financing, or (iii) other than the filing of
Certificates of Merger, each of the Company and Mergeco will have obtained such
consents from third parties and approvals from governmental instrumentalities as
will be required for the consummation of the transactions contemplated by the
Restated Merger Agreement, except for such consents the failure to obtain which
would not have a "Material Adverse Effect."
A "Material Adverse Effect" is defined in the Restated Merger Agreement
as something that has a material adverse effect on the business, condition
(financial or otherwise), properties, assets or prospects of the Company and its
subsidiaries, taken as a whole.
The obligations of Mergeco to effect the Merger are also subject to the
additional conditions that: (i) with certain exceptions, the representations and
warranties of the Company contained in the Restated Merger Agreement will be
true and correct as of the date of the Restated Merger Agreement and as of the
closing date of the Merger, (ii) each and all of the covenants and agreements of
the Company contained in the Restated Merger Agreement will have been duly
performed and complied with, except where the failure to comply (a) would not
have a Material Adverse Effect or a material adverse effect on the ability of
the Company to consummate the transactions contemplated by the Restated Merger
Agreement, or (b) was the direct result of an act or omission of any of the
Continuing Shareholders, (iii) there has been no (a) material adverse change in
the business, condition (financial or otherwise), properties, assets or
prospects of the Company and its subsidiaries taken as a whole, (b) death or
disability of any of Mario Sbarro, Anthony Sbarro, Joseph Sbarro or Carmela
Sbarro or any executive officer of the Company having a family relationship (as
defined in Item 401 of Regulation S-K promulgated by the SEC) with a Continuing
Shareholder, or (c) material adverse change, or event or occurrence that is
reasonably likely to result in an adverse change, in securities, financial or
borrowing markets, or applicable tax or other laws or regulations, such as to
decrease in any material respect the benefits of the Merger to the Continuing
Shareholders or make it impractical to proceed with the Merger or the
transactions contemplated by the Restated Merger Agreement or by the Debt
Financing, (iv) no statute, rule, regulation, or temporary, preliminary or
permanent order or injunction will have been proposed, promulgated, enacted,
entered, enforced or deemed applicable by any state, federal or foreign
government or governmental authority or court or governmental agency of
competent jurisdiction that (a) prohibits consummation of the Merger or the
transactions contemplated by the Restated Merger Agreement or the Merger, or (b)
imposes material limitations on the ability of the Continuing Shareholders
effectively to exercise full rights of ownership with respect to the shares of
Common Stock to be issued to them pursuant to the Restated Merger Agreement, (v)
the settlement of the consolidated lawsuit, as reflected in the Stipulation of
Settlement, will have been approved by the Court, final judgment will have been
entered in accordance with the Stipulation of Settlement and will have become
final and the consolidated lawsuit will have been dismissed with prejudice and
without costs to any party (except as provided in the Stipulation of Settlement)
and no holders, or holders of no more than an aggregate of 1,000,000 shares of
Common Stock (approximately 4.9% of the Company's presently outstanding shares),
will have requested exclusion from the settlement (see "LITIGATION PERTAINING TO
THE MERGER"), (vi) neither (a) any action, suit or proceeding before any court
or governmental body relating to the Merger or the transactions contemplated by
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the Restated Merger Agreement will be pending in which an unfavorable judgment
or decree could prevent or substantially delay the consummation of the Merger,
or is reasonably likely to (1) result in a material increase in the aggregate
Merger Consideration, (2) result in an award of material damages, (3) cause the
Merger to be rescinded, or (4) result in a material amount of rescissory
damages, nor (b) any decision in any action, suit or proceeding relating to the
Merger or the transactions contemplated by the Restated Merger Agreement will
have been rendered by any court or governmental body which has any such effect,
and (vii) the Company has obtained the Debt Financing (a) of at least $300
million, (b) on the material terms and conditions no less favorable to the
Company than those set forth in the term sheet delivered by the Continuing
Shareholders to the Special Committee, and (c) having a yield to maturity not to
exceed 11.25% per annum.
The obligations of the Company to effect the Merger are also subject to
the additional conditions that: (i) with certain exceptions, the representations
and warranties of Mergeco contained in the Restated Merger Agreement will be
true and correct as of the date of the Restated Merger Agreement and the closing
date of the Merger, (ii) each and all of the covenants and agreements of Mergeco
contained in the Restated Merger Agreement will have been duly performed and
complied with in all material respects prior to the consummation of the Merger,
except where the failure to comply would not have a material adverse effect on
the ability of Mergeco to consummate the transactions contemplated by the
Restated Merger Agreement, and (iii) no statute, rule, regulation, or temporary,
preliminary or permanent order or injunction will have been proposed,
promulgated, enacted, entered, enforced or deemed applicable by any state,
federal or foreign government or governmental authority or court or governmental
agency of competent jurisdiction that prohibits consummation of the Merger or
the transactions contemplated by the Restated Merger Agreement or the Merger.
Termination
The Restated Merger Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the shareholders of the
Company: (i) by mutual consent of the Board and the members of Mergeco, (ii)
automatically, if, at the Meeting, the Company's shareholders have not voted to
adopt the Restated Merger Agreement by the requisite shareholder votes, (iii) by
action of the Board or the members of Mergeco if, without the fault of the
terminating party, the Merger has not been consummated on or prior to August 31,
1999, (iv) by action of the Board or the members of Mergeco, if the Special
Committee has withdrawn or modified in a manner adverse to Mergeco its approval
or recommendation of the Merger, the Restated Merger Agreement or the
transactions contemplated by the Restated Merger Agreement, (v) by action of the
members of Mergeco if the conditions to the obligations of Mergeco contained in
the Restated Merger Agreement have not been satisfied prior to the consummation
of the Merger or have become incapable of being satisfied or if the events the
non-occurrence of which are a condition to obligations of Mergeco contained in
the Restated Merger Agreement have occurred prior to the consummation of the
Merger, and (vi) by action of the Board if the conditions to the obligations of
the Company contained in the Restated Merger Agreement have not been satisfied
prior to the consummation of the Merger or have become incapable of being
satisfied or if the events, whose non-occurrence are a condition to the
Company's obligations contained in the Restated Merger Agreement, have occurred
prior to the consummation of the Merger. See "-- Conditions."
The Restated Merger Agreement provides that, in the event of its
termination, no party to the Restated Merger Agreement will have any liability
or further obligation to any other party to the Restated Merger Agreement and
the Merger will be abandoned. However (i) any termination by the Company arising
out of a breach by Mergeco or the Continuing Shareholders of any representation,
warranty, covenant or agreement contained in the Restated Merger Agreement will
be without prejudice to the rights of the Company to seek damages with respect
such breach, and (ii) any termination by Mergeco arising out of a breach by the
Company of any representation, warranty, covenant or agreement contained in the
Restated Merger Agreement, other than a breach by the Company that is the direct
result of an act or omission of the Continuing Shareholders, will be without
prejudice to the rights of Mergeco to seek damages with respect to
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such breach. The obligations described in this paragraph and the obligations of
the parties with respect to the payment of fees and expenses described below
survive any termination of the Restated Merger Agreement.
Fees and Expenses
If the Restated Merger Agreement is terminated for any reason, except
as discussed below, the Company, on the one hand, and Mergeco and the Continuing
Shareholders, on the other hand, are each to pay their own fees and expenses.
The fees and expenses of the Company will include fees and expenses of financial
advisors (including Bear Stearns and Prudential Securities), accountants and
counsel for the Company and the Special Committee, and fees and expenses for the
preparation, printing, mailing and filing of documents used in connection with
the Merger and the Debt Financing. The fees and expenses of Mergeco will include
any commitment and other fees or expenses of any person providing or proposing
to provide the Debt Financing and fees and expenses of counsel for Mergeco.
Except with respect to any stock transfer taxes payable by Public Shareholders,
the Surviving Corporation will pay any transfer taxes (including any interest
and penalties thereon and additions on any transfer taxes) payable in connection
with the Merger and will be responsible for the preparation and filing of any
required tax returns, declarations, reports, schedules, terms and information
returns with respect to such transfer taxes.
If termination of the Restated Merger Agreement is not due to the
failure to obtain the Debt Financing (or is due to a failure to obtain the Debt
Financing as a result of a material adverse change in the securities, financial
or borrowing markets, or applicable tax or other laws or regulations) or a
breach by Mergeco or the Continuing Shareholders of their representations,
warranties or covenants, then the Company will reimburse Mergeco and the
Continuing Shareholders for the fees and expenses incurred by them in connection
with the Merger, with the maximum reimbursement by the Company being $500,000 in
the aggregate.
If termination of the Restated Merger Agreement is due to failure to
obtain the Debt Financing (unless resulting from a material adverse change in
the securities, financial or borrowing markets, or applicable tax or other laws
or regulations), then Mergeco and the Continuing Shareholders will, jointly and
severally, be obligated to reimburse the Company for 50% of the fees and
expenses incurred by the Company in connection with the Merger, with the maximum
reimbursement by Mergeco and the Continuing Shareholders being $500,000 in the
aggregate.
Amendment and Waiver
Subject to applicable law, the Restated Merger Agreement may be
amended, modified or supplemented by the written agreement of the parties at any
time prior to the Effective Time except that, in the case of the Company, such
action must be approved by the Special Committee. In addition, after shareholder
adoption of the Restated Merger Agreement has been obtained, no amendment may be
made that reduces the amount or changes the form of the Merger Consideration or
otherwise materially and adversely affects the rights of the Public Shareholders
without further approval by the holders of such number of votes of Common Stock
that are required to adopt the Restated Merger Agreement in accordance with the
Restated Merger Agreement.
The Company and Mergeco, respectively, may waive the satisfaction of
any obligation, covenant, agreement or condition of the other under the Restated
Merger Agreement. However, the waiver of any of the Company's rights under the
Restated Merger Agreement requires the approval of the Special Committee. The
Company has made no determination as to whether it would waive any condition and
any such determination would be made on behalf of the Company by the Board based
on the facts and circumstances existing at the time such waiver is requested.
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BUSINESS OF THE COMPANY
Overview
The Company is a leading owner, operator and franchiser of
quick-service restaurants, serving a wide variety of Italian specialty foods.
Under the "Sbarro" and "Sbarro The Italian Eatery" names, the Company developed
one of the first quick-service concepts that extended beyond offering one
primary specialty item (i.e., pizza or hamburgers). The Company's menu includes
pizza, pasta and other hot and cold Italian entrees, salads, sandwiches,
cheesecake and other desserts and beverages. The Sbarro concept is unlike
typical quick-service restaurants because of its diverse menu of Italian foods,
nor does it compare to other Italian/pizza restaurants because of its quick,
cafeteria style service.
As of April 25, 1999, the Sbarro system included 910 Sbarro
restaurants, consisting of 635 Company-operated and mall-based Umberto of New
Hyde Park restaurants and 275 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. For the year ended January 3,
1999, systemwide sales (including franchised locations, but excluding joint
venture locations other than mall-based Umberto of New Hyde Park restaurants),
Company operating revenues and Company EBITDA were $511.0 million, $370.1
million and $82.7 million, respectively. EBITDA margin for this period was
approximately 22.2%, which is among the highest in the quick-service restaurant
industry.
Since its inception, the Company has focused on high customer traffic
venues due to the density of captive customers who base their eating decision
primarily on impulse and convenience. This provides the Company more flexibility
in pricing and allows the Company to avoid the significant advertising and
promotional spending that is often employed to attract customers to destination
restaurants. These factors, combined with adherence to strict cost controls,
provide Sbarro with high and stable operating margins. The Company initially
located its restaurant sites in New York and then, with the rapid expansion of
enclosed shopping malls in the 1970s, expanded into these facilities due to
their high traffic, impulse purchase characteristics. Over the past ten years,
the Company has extended the Sbarro concept to other high traffic venues,
including toll roads and airports, sports arenas, hospitals, convention centers,
university campuses and casinos. The Company believes the opportunity to open
Sbarro units in new venues should continue to expand in the future as companies,
municipalities and others seek to outsource their non-core food operations.
The Company has demonstrated its ability to identify, develop and
efficiently operate restaurants and has increased its total restaurant base
(including franchised operations) from 123 restaurants at the time of the
Company's initial public offering of Common Stock in 1985 to 910 at April 25,
1999. Over the past decade, the Company's 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,
the Company's strategy has been to operate its restaurants directly whenever
possible in order to closely control all aspects of restaurant operations and,
thus, maximize restaurant profitability. The Company has, however, granted
franchises to expand in international markets and to minimize its capital risk
and has granted franchises domestically generally when necessary to open a unit
in a desirable attractive location. The Company has developed a qualification
and training program that provides strict operating standards for franchisees
and also restricts the size of territories granted to franchisees. The Company
believes that franchised units meet the quality and customer service benchmarks
of Company-owned units, and expects that a higher percentage of future new unit
growth will come from franchised locations, as the Company seeks to expand the
Sbarro concept into new venues, both domestically and internationally. For the
year ended January 3, 1999, Company-operated restaurant revenues accounted for
approximately 97.7% of total operating revenues, with franchise related income
accounting for the balance.
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Industry Overview
The restaurant industry is one of the largest sectors of the economy,
with estimated industry sales of approximately $336 billion in 1998, accounting
for more than 4% of the nation's gross domestic product. Between 1990 and 1997
(the latest available information), restaurant industry sales grew an average of
4.5% annually.
The quick-service restaurant industry includes hamburgers, pizza,
chicken, various types of sandwiches, and Mexican, Chinese and other ethnic
foods. The National Restaurant Association estimates that 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, reasonably priced restaurant experience.
This trend is expected to continue as the increasing percentage of dual-earner
households and higher disposable incomes, combined with decreasing leisure time,
continue to increase the percentage of meals eaten away from the home. According
to the National Restaurant Association, the percentage of the average family's
food budget spent on meals consumed "away from home" increased from
approximately 25% of the food budget in 1955 to approximately 39% in 1995 (the
latest available information). Approximately 50% of Sbarro's revenues are
derived from pizza. Many of the Company's most direct competitors operate within
the pizza restaurant segment. At the end of 1997, there were over 30,000 pizza
restaurants in operation, generating nearly $16 billion in annual revenues.
Competitive Strengths
The Company believes its success in the quick-service restaurant
industry is attributed to the following competitive strengths:
Leading Quick Service Operator in High Customer Traffic Venues. The
Company, through its "Sbarro" and "Sbarro The Italian Eatery" brands, is the
leading Italian quick-service restaurant operator and franchisor, having
developed a proven business model for operating in shopping malls, airports,
toll roads and other high customer traffic locations. Several national
quick-service chains have attempted to replicate their stand-alone concept in
malls and other locations but have reduced the scope of their operations in
these venues. Additionally, the Company has developed close relationships with
many of the major shopping mall developers and operators, as well as national
food service companies that franchise restaurants in other high traffic
locations. As a result of these longstanding relationships, the Company believes
it has a competitive advantage in opening new units in shopping malls and other
dense customer traffic locations.
Strong, Nationally Recognized Brand Name. The breadth of Sbarro's
operations and the visibility of its units across many high customer traffic
locations have enabled the Company to forge strong brand name recognition with
consumers. The Company's consistent product quality and service, its varied menu
of moderately priced Italian food served in a cafeteria style format, its
distinctive logo and its clean and bright locations have become recognized
symbols of the Company.
Consistent Record of Growth and Profitability. Sbarro has a track
record of consistent operating performance and a high level of profitability.
Its operating and cost controls and business model have resulted in a consistent
revenue base and a relatively low cost structure. Company operating revenues and
EBITDA have increased from $294.0 million and $73.0 million, respectively, in
fiscal 1994 to $370.1 million and $82.1 million, respectively, for the fiscal
year ended January 3, 1999 (which consisted of 53 weeks). The Company's EBITDA
margin of approximately 22.2% for the year ended January 3, 1999 is among the
highest in the restaurant industry.
Proven Business Model. In the 40 years of operations of the Company and
its Sbarro family owned predecessors, Sbarro management has developed and
refined a business model for high traffic customer venues. The Company has
extensive experience in identifying and developing restaurant locations and in
operating these sites. The Company forecasts the initial capital investment and
pre-opening costs associated
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with opening new Sbarro restaurants, as well as estimated profitability. Since
the cost of food, paper products, payroll and other employee benefits is
generally within a small range as a percentage of restaurant sales from location
to location, the Company's forecasting focuses on projected restaurant revenues
and the fixed and semi-variable costs expected to be incurred. The Company's
forecasting approach also projects a prospective restaurant's revenues based on
such factors as the area's demographics and the retail environment surrounding
the location. Additionally, the Company has developed a restaurant operations
model which specifies all aspects of restaurant management, including recipes,
production processes, restaurant design, customer service and staff training.
This model ensures consistency of product and service and efficient ingredients
usage, maximizing profitability.
Moderate Capital Expenditure Requirements. Most Sbarro restaurant units
have limited capital expenditure requirements for both their initial development
and ongoing maintenance. Approximately 93% of the 635 Company-owned locations
(including Umberto of New Hyde Park mall locations) are located in shopping
malls and, as a result, the units are relatively small (500-3,000 square feet)
and are inexpensive to establish, as compared to other fast food establishments
which primarily have larger, free standing locations. Additionally, the majority
of the Company's locations have limited, if any, dedicated seating solely for
Sbarro customers as a result of their location in common area food courts, thus
further minimizing the initial and ongoing maintenance costs. A new Sbarro unit
typically requires a $300,000-$400,000 initial capital investment with minimal
annual maintenance expenditures thereafter. Further, the Company's franchisees
fund capital expenditures for their units. As a result of the limited capital
expenditure requirements, along with immediate payment for all Company
restaurant sales, the Company generates significant free cash flow.
Business Strategy
The Company continuously seeks to provide high quality, affordably
priced Italian food products to a broad customer base. Sbarro has concentrated
its product development on creating a menu of healthy, moderately priced items
that appeal to the tastes of its customers and produce high gross margins. The
Company intends to achieve further growth and strengthen its competitive
position through the continued implementation of the following initiatives:
Expand Traditional Sbarro Store Base. The Company plans to continue to
increase its network of Company-operated and franchised Sbarro locations. New
Company-operated 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. The Company also plans to increase the level of franchising with selected
franchisees in both international and domestic markets.
Increase Penetration of New High Customer Traffic Venues. The Company
began targeting toll roads and airport locations in the early 1990s and,
subsequently, sports arenas, hospitals, convention centers, university campuses
and casinos due to the similar characteristics (i.e., customer density, impulse
purchase, etc.) between these venues and the Company's significant base of
shopping mall locations. Approximately 13% of the Company's existing restaurants
are located in these non-mall venues. The Company believes these venues offer
significant expansion potential as the operators of these facilities
increasingly seek to outsource their non-core food service operations to
companies with an established brand in order to simplify their own operations
and maximize profitability.
Pursue Strategic Joint Venture Arrangements. Since 1995, the Company
has entered into several joint ventures to develop new restaurant concepts to
provide potential future growth opportunities. To date, these joint ventures
have established new popular, mid- and high-priced Italian and steakhouse
restaurants. The Company is also in the process of establishing joint ventures
for Mexican and seafood restaurants. The Company has chosen to develop these
ventures with restaurateurs experienced in the particular food area. The Company
continually evaluates its existing joint ventures, and will evaluate new joint
ventures, to determine where it is most advantageous to deploy its resources.
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<PAGE>
A description of the Company's business, and other information about
the Company, is contained in the Company's Annual Repot on Form 10-K for the
year ended January 3, 1999, which is incorporated into this Proxy Statement by
reference. See "Where You Can Find More Information."
MANAGEMENT
Directors and Executive Officers of the Company
The following table contains the name and business address of each
director and executive officer of the Company, the present principal occupation
or employment of each of those persons and the name, principal business and
address of the corporation or other organization in which the occupation or
employment of each of those persons is conducted. Also set forth below are the
material occupations, positions, offices and employment of each of those persons
and the name, principal business and address of any corporation or other
organization in which any material occupation, position, office or employment of
each such person was held during the last five years. Mario Sbarro, Anthony
Sbarro, Joseph Sbarro, Carmela Sbarro, Harold L. Kestenbaum, Richard A. Mandell,
Paul A. Vatter, Terry Vince and Bernard Zimmerman are directors of the Company.
Each person listed below is a citizen of the United States. Unless otherwise
indicated below, the business address of each director and executive officer,
for the past five years, has been at the principal executive office of the
Company. Beginning five years prior to the date of this Proxy Statement and
continuing until November 1998, the principal executive office of the Company
was located at 763 Larkfield Road, Commack, New York 11725. Since November 1998,
the Company's principal executive office has been 401 Broadhollow Road,
Melville, New York 11747.
Business Address and
Name Principal Occupations
---- ---------------------
MARIO SBARRO Mr. Sbarro has been an officer, a
director and a principal shareholder of the
Company since its organization in 1977,
serving as Chairman of the Board and Chief
Executive Officer for more than the past
five years and President since May 1996.
ANTHONY SBARRO Mr. Sbarro has been an officer, a director
and a principal shareholder of the Company
since its organization in 1977, serving as
Vice Chairman of the Board since May 1996
and as President and Chief Operating
Officer from December 1993 through May
1996. For more than five years prior to
December 1993, Mr. Sbarro was an Executive
Vice President of the Company. He also has
served as Treasurer of the Company for more
than the past five years.
JOSEPH SBARRO Mr. Sbarro has been an officer, a director
and a principal shareholder of the Company
since its organization in 1977, serving as
Senior Executive Vice President since
December 1993. For more than five years
prior thereto, Mr. Sbarro was an Executive
Vice President of the Company. He also has
served as Secretary of the Company for more
than the past five years.
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<PAGE>
Business Address and
Name Principal Locations
CARMELA SBARRO Mrs. Sbarro has been a Vice President of
the Company since March 1985. Mrs. Sbarro
was a founder of the Company, together with
her late husband, Gennaro Sbarro. Mrs.
Sbarro devotes a substantial portion of her
time to recipe and product development.
Mrs. Sbarro has served as a director of the
Company since January 1998.
HAROLD L. KESTENBAUM Mr. Kestenbaum has been a practicing
attorney in New York since 1976. From
October 1997 to the present, the business
address of Mr. Kestenbaum has been 585
Stewart Avenue, Garden City, New York
11530. From five years prior to the date of
this Proxy Statement through September
1997, the business address of Mr.
Kestenbaum was 170 Old Country Road,
Mineola, New York 11501. He became a
director of the Company in March 1985.
RICHARD A. MANDELL Mr. Mandell is a private investor. His
residence address is 666 Greenwich Street,
New York, New York 10014. Mr. Mandell was a
Managing Director of the investment firm of
BlueStone Capital Partners, L.P., 575 Fifth
Avenue, New York, New York 10017, from
February until April 1998 and Vice
President - Private Investments of Clariden
Asset Management (NY) Inc., 12 East 49th
Street, New York, New York 10022, 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, One New York
Plaza, New York, New York 10292. He became
a director of the Company in March 1986.
Mr. Mandell is also a director of
Trend-Lines, Inc., USA Detergents, Inc. and
Shells Seafood Restaurants, Inc.
PAUL A. VATTER Mr. Vatter has been Professor Emeritus
since his retirement in 1995, and from 1970
until his retirement was Lawrence E.
Fouraker Professor of Business
Administration, at Harvard University's
Graduate School of Business Administration,
Cumnock Hall, Boston, Massachusetts 02163,
where he served as a Professor since 1958.
His residence address is 244 Clifton
Street, Belmont, Massachusetts 02178. He
became a director of the Company in March
1985. Mr. Vatter has advised the Company of
his intention to retire upon consummation
of the Merger or, if the Restated Merger
Agreement is not adopted at the Meeting,
upon the expiration of his current term at
the next annual meeting of shareholders.
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Business Address and
Name Principal Locations
---- ---------------------
TERRY VINCE Mr. Vince has been Chairman of the Board
and President of Sovereign Hotels, 591
North Avenue, Wakefield, Massachusetts
01880, a company that operates hotels,
since October 1991 and Chairman of the
Board of Fame Corp., 1400 State Street,
Springfield, Massachusetts 01109, a food
service management company, since January
1994. He became a director of the Company
in December 1988.
BERNARD ZIMMERMAN Mr. 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. The address of Bernard
Zimmerman and Co., Inc. and The Zimmerman
Group, Inc. is 18 High Meadow Road, Weston,
Connecticut 06883. Mr. Zimmerman also
served as President and a director of
Beacon Hill Mutual Fund, Inc., 75 Federal
Street, Boston, Massachusetts 02110, from
December 1994 until October 1996. From 1986
until September 1993, Mr. Zimmerman was
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 35 years. He
became a director of the Company in March
1985.
JOHN BERNABEO Mr. Bernabeo joined the Company in August
1992 and served in various capacities prior
to his election as Vice President -
Architecture and Engineering in May 1997.
JOSEPH A. FALLARINO Mr. Fallarino joined the Company in
September 1998 and was elected Vice
President - Human Resources in November
1998. Prior to joining the Company, Mr.
Fallarino served as Senior Vice President -
Human Resources of Arbor Management LLC,
333 Omni Building, Earl Ovington Boulevard,
Uniondale, New York 11553 , a provider of
financial services and healthcare services,
from March 1996 until March 1998, and Vice
President Human - Resources of AMS
Corporation, 855 Avenue of the Americas,
New York, New York 10001, a national
outsourcing company, from January 1994
until February 1996, and Director of Human
Resources of Ogden Corporation, 2 Penn
Plaza, New York, New York, an international
diversified services corporation, from
April 1988 until September 1993.
GEORGE W. HERZ II Mr. Herz joined the Company in November
1995 and was elected Vice President and
General Counsel in February 1996. Prior to
joining the Company, Mr. Herz served as
General Counsel from 1993 and Corporate
Counsel from 1982 until 1992 of Minuteman
Press International, Inc., 1640 New
Highway, Farmingdale, New York 11735, a
franchisor of printing centers.
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Business Address and
Name Principal Locations
---- ---------------------
ROBERT S. KOEBELE Mr. Koebele has been Vice President -
Finance and Chief Financial Officer of the
Company for more than the past five years.
Mr. Koebele has been a certified public
accountant in New York for more than the
past 30 years. Mr. Koebele has advised the
Company that he intends to retire in the
early part of the summer of 1999, whether
or not the Merger is consummated.
CARMELA N. MERENDINO Ms. Merendino has been Vice President -
Administration of the Company for more than
the past five years. Ms. Merendino joined
the Company in March 1985 and performed a
variety of corporate administrative
functions for the Company prior to her
election as Vice President -
Administration.
ANTHONY J. MISSANO Mr. Missano has been Corporate Vice
President - Operations since August 1996,
prior to which he served the Company as
Vice President - Operations (West) since
February 1995, and as a Zone Vice President
from June 1992 until February 1995.
ROBERT G. ROONEY Mr. Rooney joined the Company in June 1999
as Co-Vice President- Finance and Co-Chief
Financial Officer and will become the
Company's sole Vice President-Finance and
Chief Financial Officer upon the retirement
of Mr. Koebele. From December 1996 until he
joined the Company, 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 Mr. Sbarro has been Corporate Vice
President-Franchising of the Company since
August 1996, prior to which he served the
Company as Vice President - Franchising
since February 1995. For more than five
years prior thereto, Mr. Sbarro served the
Company in various capacities with the
Company.
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<PAGE>
Business Address and
Name Principal Locations
---- ---------------------
GENNARO J. SBARRO Mr. Sbarro has been Corporate Vice
President - Operations of the Company since
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 Mr. Skrosky, who rejoined the Company in
June 1996, has been Senior Vice President -
Real Estate since November 1996. Mr.
Skrosky was 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, 510
Hallet Road, East Stroudsburg, Pennsylvania
18301, a real estate firm dealing with site
selection and lease negotiations for
several restaurant and other companies.
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.
Background of the Continuing Shareholders
The only members of Mergeco are Mario Sbarro, Joseph Sbarro and Anthony
Sbarro, Joseph Sbarro (1994) Family Limited Partnership 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 (the "Trust of Carmela Sbarro"). Information concerning Mario,
Joseph and Anthony Sbarro is contained in "-- Directors and Executive Officers
of the Company." Joseph Sbarro (1994) Family Limited Partnership is a New York
partnership formed in June 1994, whose business address is c/o Joseph Sbarro,
Sbarro, Inc., 401 Broadhollow Road, Melville, New York 11747. It holds
investments of the family of Joseph Sbarro. The business address of the Trust of
Carmela Sbarro is c/o Mario Sbarro, Sbarro, Inc., 401 Broadhollow Road,
Melville, New York 11747. It was formed in April 1984 and is a trust for the
benefit of Carmela Sbarro and her descendants. The trustees of the Trust of
Carmela Sbarro are Mario Sbarro and Franklin Montgomery. Franklin Montgomery, a
citizen of the United States, has been an attorney in sole practice for more
than the past five years. His business address is 488 Madison Avenue, New York,
New York 10022.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of Common Stock as of June 15, 1999 (except as noted below) with
respect to (i) holders known to the Company to beneficially own more than five
percent of the outstanding Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company, (iv) all directors and executive
officers of the Company as a group and (v) each Continuing Shareholder. The
Company understands that, except as noted below, each beneficial owner has sole
voting and investment power with respect to all shares attributable to such
owner. As of June 15, 1999, Mergeco did not beneficially own any shares of
Common Stock.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Class (2)
---------------- -----------------------
<S> <C> <C>
Mario Sbarro (3)............................................. 1,916,586 (4) 9.2%
Anthony Sbarro (3)........................................... 1,432,133 (5) 6.9%
Joseph Sbarro (3)............................................ 2,007,913 (6) 9.7%
Trust of Carmela Sbarro (3)(7)............................... 2,497,884 12.2%
Carmela Sbarro (3)........................................... 400 *
Harold L. Kestenbaum......................................... 25,500 (8) *
Richard A. Mandell........................................... 18,750 (9) *
Paul A. Vatter............................................... 21,000 (9) *
Terry Vince.................................................. 22,050 (9) *
Bernard Zimmerman............................................ 60,700(10) *
John Bernabeo................................................ 833(11) *
Joseph A. Fallarino.......................................... 0 --
George W. Herz II............................................ 4,666(11) *
Robert S. Koebele............................................ 25,666(12) *
Carmela N. Merendino......................................... 20,966(13) *
Anthony J. Missano........................................... 39,166(11) *
Gennaro A. Sbarro............................................ 54,187(14) *
Gennaro J. Sbarro............................................ 39,166(11) *
Leonard G. Skrosky........................................... 70,649(15) *
Joel M. Greenblatt........................................... 1,879,647(16) 9.2%
Bank One Corporation......................................... 1,213,600(17) 5.9%
All directors and executive officers as a 8,253,765(18) 38.1%
group (18) persons.........................................
</TABLE>
- ---------------
(1) Shares subject to Stock Options, for purposes of the table, are considered
beneficially owned only to the extent currently exercisable or exercisable
within 60 days after June 15, 1999. See "THE RESTATED MERGER AGREEMENT --
Treatment of Stock Options."
(2) Asterisk indicates less than 1%. As of June 15, 1999, 20,534,313 shares of
Common Stock were outstanding. Shares subject to Stock Options are
considered outstanding only for the purpose of computing the percentage of
outstanding Common Stock which would be owned by the optionee if such Stock
Options were exercised, but (except for the calculation of beneficial
ownership by all
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<PAGE>
executive officers and directors as a group) are not considered
outstanding for the purpose of computing the percentage of outstanding
Common Stock owned by any other person.
(3) The business address of each of Mario Sbarro, Joseph Sbarro, Anthony
Sbarro, the Trust of Carmela Sbarro and Carmela Sbarro is 401 Broadhollow
Road, Melville, New York 11747.
(4) Includes (i) 740 shares owned by Mr. Sbarro's wife and 4,450 shares owned
by a charitable foundation supported by Mr. Sbarro and his wife, of which
Mr. Sbarro, his wife and another director of the Company are the directors
(as to which shares, in each case, Mr. Sbarro disclaims beneficial
ownership), and (ii) 386,666 shares subject to Stock Options. Excludes the
2,497,884 shares held by the Trust of Carmela Sbarro, of which trust Mr.
Sbarro serves as a trustee (as to which shares Mr. Sbarro may be deemed a
beneficial owner with shared voting and dispositive power). See footnote
(7) below.
(5) Includes 198,333 shares subject to Stock Options.
(6) Includes (i) 609,000 shares owned by Joseph Sbarro (1994) Family Limited
Partnership, of which Mr. Sbarro is the sole general partner, and (ii)
199,999 shares subject to Stock Options.
(7) The Trust of Carmela Sbarro was created by Carmela Sbarro for her benefit
and for the benefit of her descendants, including Mario, Joseph, and
Anthony Sbarro. The trustees of the trust are Franklin Montgomery, whose
business address is 488 Madison Avenue, New York, New York 10022, and Mario
Sbarro. As trustees, Franklin Montgomery and Mario Sbarro may be deemed to
be the beneficial owners of these shares with shared voting and dispositive
power.
(8) Represents (i) 6,750 shares owned by Mr. Kestenbaum's wife, as to which
shares Mr. Kestenbaum disclaims beneficial ownership, and (ii) 18,750
shares subject to Stock Options.
(9) Includes 18,750 shares subject to Stock Options.
(10) Includes (i) 4,450 shares owned by a family foundation supported by Mario
Sbarro and his wife, of which Mr. Zimmerman is a director (as to which
shares Mr. Zimmerman disclaims beneficial ownership), and (ii) 18,750 and
37,500 shares subject to Stock Options held, respectively, by Mr. Zimmerman
individually and Bernard Zimmerman and Company, Inc., a company of which
Mr. Zimmerman is President and a majority shareholder.
(11) Represents shares subject to Stock Options.
(12) Includes 14,666 shares subject to Stock Options.
(13) Includes (i) 4,730 shares owned by Ms. Meredino's husband and 1,840 shares
owned by Ms. Merendino as custodian for her minor children (as to which
shares, in each case, Ms. Merendino disclaims beneficial ownership), and
(ii) 9,666 shares subject to Stock Options.
(14) Includes (i) 3,140 shares owned by Mr. Sbarro's wife, as to which shares
Mr. Sbarro disclaims beneficial ownership, and (ii) 44,917 shares subject
to Stock Options.
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<PAGE>
(15) Includes 66,666 shares subject to Stock Options.
(16) Based solely upon information as of April 6, 1999 contained in a Schedule
13D dated April 19, 1999 filed with the SEC and the Company by Mr.
Greenblatt, Gotham Capital V, LLC, Gotham Capital VI, LLC and Gotham
Capital VII, LLC, each of whose address is 100 Jericho Quadrangle, Suite
212, Jericho, New York 11753. The Schedule 13G indicates that Mr.
Greenblatt has sole voting and dispositive power with respect to 122,083
shares and that he shares voting and dispositive power with respect to
4,567 shares with Gotham Capital V, LLC, 315,495 shares with Gotham Capital
VI, LLC and 412,502 shares with Gotham Capital VII, LLC. Includes 875,000
and 150,000 shares which have been transferred by Gotham V and Gotham VI,
respectively, in connection with equity swaps on such number of shares.
Gotham V, Gotham VI and Mr. Greenblatt include the shares subject to such
swaps in their Schedule 13D but disclaim beneficial ownership of those
shares.
(17) Based solely upon information as of December 31, 1998 contained in a
Schedule 13G dated February 1, 1999 filed with the SEC and the Company by
Bank One Corporation, One First National Plaza, Chicago, Illinois 60670 as
parent holding company of NBD Bank (Indiana), NBD Bank (Michigan) and
Pegasus Funds. The Schedule 13G indicates that Bank One Corporation has
sole voting and dispositive power with respect to 1,209,900 shares and sole
voting power with respect to another 3,700 shares. The Company believes
Bank One Corporation may have sold some or all of the shares beneficially
owned by it.
(18) Includes (i) 4,450 owned by a charitable foundation, of which a director
and executive officer of the Company, his wife and another director of the
Company are directors, as to which shares each disclaims beneficial
ownership, (ii) an aggregate of 17,200 shares owned by spouses, and as
custodian for minor children, of directors and executive officers, as to
which shares beneficial ownership is disclaimed and (iii) 1,135,994 shares
subject to Stock Options.
CERTAIN TRANSACTIONS IN THE COMMON STOCK
There have been no transactions in the Common Stock effected since
December 15, 1998 by (i) the Company or any majority-owned subsidiary of the
Company, (ii) any director or executive officer of the Company, (iii) any
persons controlling the Company, (iv) Mergeco, (v) any Continuing Shareholder,
including the general partner of the Joseph Sbarro (1994) Family Limited
Partnership or either trustee of the Trust of Carmela Sbarro, or (vi) any
associate of any of the foregoing, except that the Company has issued an
aggregate of 334 shares to employees (none of whom is within the foregoing
categories of persons) upon the exercise of Stock Options under stock option
plans of the Company.
It is the present intention of the following persons (as well as other
children of Mario Sbarro who own an aggregate of 7,170 shares of Common Stock)
to sell the shares indicated opposite their names prior to the Effective Time in
order to recognize capital gain tax treatment with respect to the disposition of
their presently owned Common Stock rather than ordinary income tax treatment
that would otherwise apply to them as a result of their family relationship to
Mario Sbarro if they exchanged their shares in the Merger (see "SPECIAL FACTORS
- -- Certain U.S. Federal Income Tax Consequences"):
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<TABLE>
<CAPTION>
Relationship to the Company and Number
Name Continuing Shareholders of Shares
- ---- ----------------------- ---------
<S> <C> <C>
Annunziatina Sbarro Wife of Mario Sbarro 740
Carmela Sbarro Vice President, director and mother of Mario, Joseph and 400
Anthony Sbarro
Carmela N. Merendino Vice President-Administration and daughter of Mario Sbarro 4,730
Gennaro A. Sbarro Vice President-Franchising and son of Mario Sbarro 6,130
</TABLE>
Neither the Company nor any of the Continuing Shareholders (who are
considered to be the only affiliates of the Company) have made any purchases of
Common Stock since December 29, 1996.
On February 19, 1997, the Company granted Stock Options, exercisable at
$25.125 per share, to the following current executive officers: Mario Sbarro (to
purchase 100,000 shares); Anthony Sbarro (to purchase 100,000 shares); Joseph
Sbarro (to purchase 100,000 shares); Gennaro A. Sbarro (to purchase 80,000
shares); Gennaro J. Sbarro (to purchase 80,000 shares); Anthony J. Missano (to
purchase 80,000 shares); Carmela Merendino (to purchase 6,500 shares); Robert
Koebele (to purchase 6,500 shares); George W. Herz II (to purchase 4,000 shares)
and John Bernabeo (to purchase 2,500 shares). On May 21, 1997, Mario Sbarro was
granted an additional Stock Option to purchase 150,000 shares of Common Stock at
an exercise price of $28.875 per share. Following the Company's 1997 annual
meeting of shareholders, held on May 21, 1997, Harold L. Kestenbaum, Richard A.
Mandell, Paul A. Vatter, Terry Vince and Bernard Zimmerman, the Company's
non-employee directors, were each granted Stock Options to purchase 3,750 shares
of Common Stock at an exercise price of $28.875 per share and, following the
1998 annual meeting of shareholders, held on August 19, 1998, those non-employee
directors were each granted options to purchase 3,750 shares of Common Stock at
$24.0625 per share. On November 17, 1998, Joseph Fallarino was granted a Stock
Option to purchase 5,000 shares of Common Stock at an exercise price of $24.8125
per share.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company's consolidated financial statements as at January 3, 1999
and December 28, 1997 and for the three fiscal years ended December 29, 1996,
December 28, 1997 and January 3, 1999 included in this Proxy Statement have been
audited by Arthur Andersen LLP, independent public accountants, as stated in
their report with respect thereto. It is expected that representatives of Arthur
Andersen LLP will be present at the Meeting, both to respond to appropriate
questions of shareholders of the Company and to make a statement if they desire.
SHAREHOLDER PROPOSALS
If the Merger is consummated, there no longer will be public
shareholders of the Company and no public participation in any future meetings
of shareholders of the Company. However, if the Merger is not consummated, the
Company intends to hold its 1999 Annual Meeting of Shareholders on or about
________, 1999. If a shareholder intends to present a proposal at the Company's
1999 Annual Meeting of Shareholders and wants that proposal to be included in
the Company's Proxy Statement and proxy card for that meeting, the proposal must
be received at the Company's principal executive offices not later than
__________, 1999.
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<PAGE>
As to any proposal that a shareholder intends to present to shareholders without
including it in the Company's Proxy Statement for the Company's 1999 Annual
Meeting of Shareholders, the proxies named in management's proxy for that
meeting will be entitled to exercise their discretionary authority on that
proposal unless the Company receives notice of the matter to be proposed not
later than _________, 1999. Even if proper notice is received on or prior to
__________, 1999, the proxies named in management's proxy for that meeting may
nevertheless exercise their discretionary authority with respect to such matter
by advising shareholders of such proposal and how they intend to exercise their
discretion to vote on such matter, unless the shareholder making the proposal
solicits proxies with respect to such proposal as required by Rule 14a- 4(c)(2)
under the Exchange Act.
WHERE YOU CAN FIND MORE INFORMATION
The SEC allows the Company to "incorporate by reference" information
into its Proxy Statement, which means that the Company can disclose important
information by referring you to another document filed separately with the SEC.
The following documents are incorporated by reference in this Proxy Statement
and are deemed to be a part hereof:
(1) The Company's Annual Report on Form 10-K for the fiscal year
ended January 3, 1999;
(2) The Company's Quarterly Report on Form 10-Q for the sixteen weeks
ended April 25, 1999; and
(3) The Company's Current Report on Form 8-K dated (date of earliest
event reported): January 19, 1999.
Any statement contained in a document incorporated by reference is
deemed to be modified or superseded for all purposes to the extent that a
statement contained in this Proxy Statement modifies or replaces such statement.
The Company also incorporates by reference the information contained in
all other documents the Company files with the SEC pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy Statement
and before the Meeting. The information contained in any such document will be
considered part of this Proxy Statement from the date the document is filed and
will supplement or amend the information contained in this Proxy Statement.
The Company undertakes to provide by first class mail, without charge
and within one business day of receipt of any request, to any person to whom a
copy of this Proxy Statement has been delivered, a copy of any or all of the
documents referred to above which have been incorporated by reference in this
Proxy Statement, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference therein).
AVAILABLE INFORMATION
The Company, Mergeco and the Continuing Shareholders have filed with
the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3 under the Exchange
Act with respect to the Merger. This Proxy Statement does not contain all of the
information set forth in the Schedule 13E-3 and the exhibits to the Schedule
13E-3, certain parts of which are omitted, as permitted in accordance with the
rules and regulations of the SEC. The Company is subject to the informational
requirements of the Exchange Act and, in
-81-
<PAGE>
accordance therewith, files reports, proxy statements and other information with
the SEC. A copy of the written report presented by Prudential Securities to the
Special Committee, including the opinion of Prudential Securities as to the
fairness of the consideration to be received in the Merger, was filed as an
exhibit to the Schedule 13E-3. Descriptions contained herein concerning any
documents are not necessarily complete and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Schedule 13E-3. Each
such statement is qualified in its entirety. Copies of the Schedule 13E-3 and
all exhibits to the Schedule 13E-3. are available for inspection and copying at
the principal executive offices of the Company during regular business hours by
any interested shareholder of the Company, or a representative who has been so
designated in writing, and may be inspected and copied, or obtained by mail,
without charge, by written request directed to us at the following address:
Robert S. Koebele, Vice President - Finance
Sbarro, Inc.
401 Broadhollow Road
Melville, New York 11747
The Company is currently subject to the information requirements of the
Exchange Act and in accordance therewith files periodic reports, proxy
statements and other information with the SEC relating to its business,
financial and other matters. Copies of such reports, proxy statements and other
information, as well as the Schedule 13E-3, may be copied (at prescribed rates)
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the following
Regional Offices of the SEC: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and Seven World Trade Center, Suite 1300, New York, New York
10048. For further information concerning the SEC's public reference rooms, you
may call the SEC at 1-800-SEC-0330. Some of this information may also be
accessed on the World Wide Web through the SEC's Internet address at
"http://www.sec. gov." The Company's Common Stock is listed on the NYSE, and
materials also may be inspected at the NYSE's offices at 20 Broad Street, New
York, New York 10005.
OTHER MATTERS
At a special meeting, under the NYBCL and the Company's By-Laws, no
matter may be considered which is not set forth in the notice for such meeting.
As a result, no matter other than consideration of adoption of the Restated
Merger Agreement may be brought before the Meeting. If any other matters or
motions should properly come before the Meeting, the persons named in the Proxy
intend to vote thereon in accordance with their discretion on such matters or
motions, including any matters or motions dealing with the conduct of the
Meeting.
By Order of the Board of Directors,
JOSEPH SBARRO,
Secretary
________, 1999
-82-
<PAGE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Annual Financial Statements F-2
---------------------------
Report of Independent Public Accountants F-3
Consolidated Balance Sheets at January 3, 1999 and
December 28, 1997 F-4
Consolidated Statements of Income for each of the
years in the three-year period ended January 3, 1999 F-6
Consolidated Statements of Shareholders' Equity for each of
the years in the three-year period ended January 3, 1999 F-8
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended January 3, 1999 F-9
Notes to Consolidated Financial Statements F-11
Interim Financial Statements (unaudited) F-24
----------------------------------------
Balance Sheets - April 25, 1999 (unaudited) and January 3, 1999 F-25
Statements of Income (unaudited) - Sixteen Weeks ended April 25, 1999
and April 19, 1998 F-27
Statements of Cash Flows (unaudited) - Sixteen Weeks ended April 25, 1999
and April 19, 1998 F-29
Notes to Unaudited Consolidated Financial Statements - April 25, 1999 F-31
F-1
<PAGE>
ANNUAL FINANCIAL STATEMENTS
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Shareholders
of Sbarro, Inc.:
We have audited the accompanying consolidated balance sheets of Sbarro, Inc. (a
New York corporation) and subsidiaries as of January 3, 1999 and December 28,
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended January 3, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sbarro, Inc. and subsidiaries
as of January 3, 1999 and December 28, 1997, and the results of their operations
and their cash flows for each of the three years in the period ended January 3,
1999, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
February 10, 1999
F-3
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------
January 3, 1999 December 28, 1997
----------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $150,472 $119,810
Marketable securities - 7,500
Receivables:
Franchisees 1,342 810
Other 2,185 1,565
------------ ------------
3,527 2,375
------------ ------------
Inventories 3,122 2,962
Prepaid expenses 1,291 1,768
------------ -----------
Total current assets 158,412 134,415
Property and equipment, net (Notes 3 and 10) 138,126 136,798
Other assets, net 6,630 7,436
----------- -----------
$303,168 $278,649
=========== ===========
</TABLE>
(continued)
F-4
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
------------------------------------------
January 3, 1999 December 28, 1997
--------------- -------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 7,122 $10,086
Accrued expenses (Note 4) 25,764 26,025
Dividend payable - 5,521
Income taxes (Note 5) 4,146 4,777
---------- --------
Total current liabilities 37,032 46,409
Deferred income taxes (Note 5) 9,219 11,801
Commitments and contingencies (Notes 6 and 7) - -
Shareholder's equity (Note 9):
Preferred stock, $1 par value: authorized
1,000,000 shares; none issued - -
Common stock, $.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-5
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands, except share data)
------------------------------------------------
For the Years Ended
------------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Restaurant sales $361,534 $337,723 $319,315
Franchise related income 8,578 7,360 6,375
Interest income 5,120 4,352 3,798
---------- ---------- ----------
Total revenues 375,232 349,435 329,488
---------- ---------- ----------
Costs and expenses:
Cost of food and paper products 76,572 69,469 68,668
Restaurant operating expenses:
Payroll and other employee benefits 93,367 84,910 78,258
Occupancy and other expenses 101,013 93,528 85,577
Depreciation and amortization 22,429 23,922 22,910
General and administrative 19,708 17,762 14,940
Provision for unit closings (Note 10) 2,515 3,300 -
Terminated transaction costs (Note 6) 986 - -
Litigation settlement and related
costs (Note 7) 3,544 - -
Loss on sale of land to be sold (Note 3) 1,075 - -
Other income (2,680) (1,653) (1,171)
--------- --------- ---------
Total costs and expenses 318,529 291,238 269,182
--------- --------- ---------
Income before income taxes and
cumulative effect of change in method
of accounting for start-up costs 56,703 58,197 60,306
Income taxes (Note 5) 21,547 22,115 22,916
------ ------ ------
Income before cumulative effect
of accounting change 35,156 36,082 37,390
Cumulative effect of change in method
of accounting for start-up costs, net of
income taxes of $504 (822) - -
--------- --------- ---------
Net income $34,334 $36,082 $37,390
========= ========= =========
</TABLE>
F-6
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands, except share data)
For the Years Ended
January 3, December 28, December 29,
1999 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
Per share information:
Net income per share:
Basic:
Income before accounting change $1.71 $1.77 $1.84
Accounting change (.04) - -
----- ----- -----
Net income $1.67 $1.77 $1.84
===== ===== =====
Diluted:
Income before accounting change $1.71 $1.76 $1.83
Accounting change (.04) - -
------ ------- -------
Net 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-7
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except share data)
---------------------------------------------------------------------
Common stock
---------------------------------------------------------------------
Additional
Number of paid-in Retained
shares Amount capital earnings Total
--------- ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 20,345,483 $203 $30,330 $155,133 $185,666
Exercise of stock options 47,426 1 889 890
Net income 37,390 37,390
Dividends declared (18,746) (18,746)
--------------- -------- ---------- -------- --------
Balance at
December 29, 1996 20,392,909 204 31,219 173,777 205,200
Exercise of stock options 53,745 1,225 1,225
Net income 36,082 36,082
Dividends declared (22,068) (22,068)
--------------- -------- ------------ -------- --------
Balance at
December 28, 1997 20,446,654 204 32,444 187,791 220,439
Exercise of stock options 84,989 1 2,143 2,144
Net income 34,334 34,334
--------------- -------- ------------ ---------- --------
Balance at
January 3, 1999 20,531,643 $205 $34,587 $222,125 $256,917
=============== ======== ============ ========== ========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------
For the Years Ended
---------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---------- ------------ ------------
<S>
Operating activities:
<C> <C> <C>
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
--------- -------- ---------
</TABLE>
(continued)
F-9
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(In thousands)
--------------------------------------------------
For the Years Ended
--------------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
--------- ------------ ------------
<S> <C> <C>
Investing activities:
Proceeds from maturities of marketable
securities 7,500 2,500
Purchases of property and equipment (27,717) (28,556) (25,928)
Proceeds from disposition of property
and equipment 52 34 266
--------- ---------- ---------
Net cash used in investing activities (20,165) (26,022) (25,662)
---------- ---------- ---------
Financing activities:
Proceeds from exercise of stock
options 2,144 1,225 890
Cash dividends paid (5,521) (21,237) (17,920)
-------- --------- ----------
Net cash used in
financing activities (3,377) (20,012) (17,030)
-------- ---------- ----------
Increase in cash and cash
equivalents 30,662 14,992 11,317
Cash and cash equivalents at
beginning of year 119,810 104,818 93,501
--------- --------- ---------
Cash and cash equivalents at end
of year $150,472 $119,810 $104,818
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-10
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The consolidated financial statements include the accounts of
Sbarro, Inc. and its wholly-owned subsidiaries (together, the
"Company") and the accounts of its joint ventures. All intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that may affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
CASH EQUIVALENTS:
All highly liquid debt instruments with a maturity of three months
or less at the time of purchase are considered to be cash
equivalents.
MARKETABLE SECURITIES:
The Company had classified its investments in marketable securities
as "held to maturity". These investments were stated at amortized
cost, which approximated market, and were comprised primarily of
direct obligations of the U.S. Government and its agencies. All
previous investments in marketable securities matured during fiscal
1998.
INVENTORIES:
Inventories, consisting primarily of food, beverages and paper
supplies, are stated at cost which is determined by the first-in,
first-out method.
PROPERTY AND EQUIPMENT AND DEPRECIATION:
Property and equipment are stated at cost. Depreciation is provided
for by the straight-line method over the estimated useful lives of
the assets. Amortization of leasehold improvements is provided for
by the straight-line method over the estimated useful lives of the
assets or the lease term, whichever is shorter. One-half year of
depreciation and amortization is recorded in the year in which the
restaurant commences operations.
F-11
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
DEFERRED CHARGES:
The Company accounts for pre-opening and similar costs in accordance
with Statement of Position (SOP) 98-5 of the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants which requires companies to write off all such costs,
net of tax benefit, as a "cumulative effect of accounting change"
and to expense all such costs as incurred in the future. In
accordance with its early application provisions, the Company
implemented the SOP as of the beginning of its 1998 fiscal year.
Application of the SOP resulted in a charge of $1,226,000 ($822,000
or $.04 basic and diluted earnings per share after tax).
COMPREHENSIVE INCOME:
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income", which establishes new rules for the reporting
of comprehensive income and its components. The adoption of this
statement had no impact on the Company's net income or shareholders'
equity. For the 1998, 1997 and 1996 fiscal years, the Company's
operations did not give rise to items includible in comprehensive
income which were not already included in net income. Therefore, the
Company's comprehensive income is the same as its net income for all
periods presented.
FRANCHISE RELATED INCOME:
Initial franchise fees are recorded as income as restaurants are
opened by the franchisee and all services have been substantially
performed by the Company. Development fees are amortized over the
number of restaurant openings covered under each development
agreement. Royalty and other fees from franchisees are accrued as
earned. Revenues and expenses related to construction of franchised
restaurants are recognized when contractual obligations are
completed and the restaurants are opened.
STOCK BASED COMPENSATION PLANS:
In accordance with Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," and related
interpretations, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to
acquire the stock. (See Note 9).
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.
F-12
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PER SHARE DATA:
The provisions of SFAS No. 128, "Earnings Per Share" became
effective for the Company's quarter and year ended December 28,
1997. SFAS No. 128 requires the presentation of both basic and
diluted earnings per share on the face of the income statement. SFAS
No. 128 replaced primary and fully diluted earnings per share with
basic and diluted earnings per share, respectively. Earnings per
share is calculated using the weighted average number of shares of
common stock outstanding for the period, with basic earnings per
share excluding, and diluted earnings per share including,
potentially dilutive securities, such as stock options that could
result in the issuance of common stock. The number of shares of
common stock subject to stock options included in diluted earnings
per share were 66,477 in 1998, 77,625 in 1997 and 35,492 in 1996.
LONG-LIVED ASSETS:
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" requires that long-lived
assets, certain identifiable intangibles and goodwill be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of those assets may not be recoverable.
SFAS No. 121 did not have a material effect on the Company's results
of operations or financial position in 1998, 1997 or 1996.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
(In Thousands)
------------------------------------------------
For The Years Ended
------------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---- ---- ----
Cash paid for:
Income taxes $24,235 $24,297 $23,143
======= ======= =======
F-13
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. DESCRIPTION OF BUSINESS:
The Company and its franchisees develop and operate family oriented
cafeteria style Italian restaurants principally under the "Sbarro"
and "Sbarro The Italian Eatery" names. The restaurants are located
throughout the United States and overseas, principally in shopping
malls and other high traffic locations.
The following sets forth the number of units in operation as of:
January 3, December 28, December 29,
1999 1997 1996
---- ---- ----
Company-owned 630 623 597
Franchised 268 239 219
--- --- ---
898 862 816
=== === ===
3. PROPERTY AND EQUIPMENT:
(In thousands)
-----------------------------------------
January 3, December 28,
1999 1997
---- ----
Leasehold improvements $191,192 $168,581
Furniture, fixtures and equipment 107,891 97,688
Construction-in-progress (A) 2,662 20,096
--------- ---------
301,745 286,365
Less accumulated depreciation and
amortization 163,619 149,567
--------- ---------
$138,126 $136,798
========= =========
(A) During 1998 the Company recorded a charge of $1,075 before tax
($667 or $.03 basic and diluted earnings per share after tax) for
the difference between the carrying cost and proposed selling price
of a parcel of land being sold by the Company. As of December 28,
1997, construction in progress includes $15,651 related to the
acquisition and improvement of the Company's new corporate
headquarters.
4. ACCRUED EXPENSES:
(In thousands)
---------------------------------
January 3, December 28,
1999 1997
---- ----
Compensation $4,109 $5,051
Payroll and sales taxes 3,193 3,494
Rent 6,786 6,699
Provision for unit closings (Note 10) 2,867 4,351
Other 8,809 6,430
--------- ---------
$25,764 $26,025
========= =========
F-14
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES:
(In Thousands)
------------------------------------------------------
For The Years Ended
------------------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---- ---- ----
Federal:
Current $19,421 $19,868 $19,216
Deferred (2,209) (1,557) (322)
--------- --------- ---------
17,212 18,311 18,894
--------- --------- ---------
State and local:
Current 4,708 4,091 4,142
Deferred (373) (287) (120)
--------- --------- ---------
4,335 3,804 4,022
--------- --------- ---------
$21,547 $22,115 $22,916
========= ========= =========
Deferred income taxes are comprised of the following:
(In thousands)
-----------------------------------------
January 3, December 28,
1999 1997
---- ----
Depreciation and amortization $15,805 $15,782
Deferred charges - 475
Other 101 60
-------- ---------
Gross deferred tax liabilities 15,906 16,317
-------- ---------
Accrued expenses (4,776) (2,431)
Deferred income (1,483) (1,949)
Other (428) (136)
-------- ---------
Gross deferred tax assets (6,687) (4,516)
-------- ---------
$9,219 $11,801
======== =========
F-15
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED):
Actual tax expense differs from "expected" tax expense (computed by
applying the Federal corporate rate of 35% for the years ended
January 3, 1999, December 28, 1997, and December 29, 1996) as
follows:
(In Thousands)
----------------------------------------
For The Years Ended
----------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---- ---- ----
Computed "expected" tax expense $19,382 $20,369 $21,108
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of
Federal income tax benefit 2,725 2,429 2,614
Tax exempt interest income (43) (59) (63)
Other, net (517) (624) (743)
--------- --------- ---------
$21,547 $22,115 $22,916
========= ========= =========
Deferred income taxes are provided for temporary differences between
financial and tax reporting. These differences and the amount of the
related deferred tax benefit are as follows:
(In Thousands)
----------------------------------------------
For The Years Ended
----------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---- ---- ----
Depreciation and amortization $(1,891) $(1,824) $(1,397)
Accrued expenses (261) (624) 1,791
Other (430) 604 (836)
-------- --------- ---------
$(2,582) $(1,844) $ (442)
======== ========= ========
F-16
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPOSED MERGER:
On January 19, 1999, the Company entered into a merger agreement for
the merger of a company owned by members of the Sbarro family, the
Company's principal shareholders, with and into the Company in which
all outstanding Common Stock of the Company not owned by those
shareholders are to be converted into the right to receive $28.85 in
cash. The shares to be purchased comprise approximately 65.6% of the
Company's outstanding shares of Common Stock. In addition, all
outstanding stock options, including those held by those members of
the Sbarro family, will be terminated (see Note 9). For each such
option, the holder thereof will be paid the difference between
$28.85 and the exercise price per share, multiplied by the total
number of shares of Common Stock subject to such option.
The merger agreement contains certain conditions to closing,
including, among other things, (i) approval by a majority of the
votes cast (excluding votes cast by the Sbarro Family, abstentions
and broker non-votes) at a meeting of the Company's shareholders to
be called to consider adoption of the merger agreement, (ii) receipt
of financing for the transactions contemplated by the merger
agreement, (iii) the continued suspension of dividends by the
Company and (iv) the settlement of shareholder class action lawsuits
that have been filed relating to the merger.
Following the Company's announcement of the proposal by members of
the Sbarro family for the merger, seven class action lawsuits were
instituted by shareholders against the Company, those members of the
Sbarro family who are directors of the Company and all or some of
the other directors of the Company. While the complaints in each of
the lawsuits vary, in general, they allege that the directors
breached fiduciary duties, that the then proposed price of $27.50 to
be paid to shareholders other than the Sbarro family was inadequate
and that there were inadequate procedural protections for those
shareholders. Although varying, the complaints seek, generally, a
declaration of a breach of, or an order requiring the defendants to
carry out, their fiduciary duties to the plaintiffs, damages in
unspecified amounts alleged to be caused to the plaintiffs, other
relief (including injunctive relief or rescission or rescissory
damages if the transaction is consummated), and costs and
disbursements, including a reasonable allowance for counsel fees and
expenses.
On January 19, 1999, counsel for all of the plaintiffs and counsel
for all of the defendants entered into a Memorandum of Understanding
pursuant to which an agreement in principle to settle all of the
lawsuits was reached and the Sbarro Family agreed to an increase in
the merger consideration to $28.85 per share. The Memorandum of
Understanding states that plaintiffs' counsel intend to apply to the
Court for an award of attorneys' fees and disbursements in an amount
of no more than $2.1 million to be paid by the Company, which the
defendants have agreed not to oppose. The defendants are also
responsible for providing notice of the settlement to all Class
members. The settlement would result in the complete discharge and
bar of all claims against, past, present and future officers and
directors of the Company and others associated with the merger with
respect to matters and issues of any kind that have been or could
have been asserted in these lawsuits. The settlement is subject to,
among other things, (i) completion of a formal stipulation of
settlement, (ii) certification of the lawsuits as a class action
covering all record and beneficial owners of the Common Stock during
the period beginning on November 25, 1998 through the effective date
of the merger, (iii) court approval of the settlement and (iv)
consummation of the merger. It is a condition to the Sbarro family's
obligations under the merger agreement that holders of no more than
1,000,000 shares of Common Stock request exclusion from the
settlement.
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).
F-17
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS:
The Company conducts all of its operations in leased facilities.
Most of the Company's restaurant leases provide for the payment of
base rents plus real estate taxes, utilities, insurance, common area
charges and certain other expenses, as well as contingent rents
generally ranging from 8% to 10% of net restaurant sales in excess
of stipulated amounts.
Rental expense under operating leases, including common area
charges, other expenses and additional amounts based on sales, are
as follows:
(In thousands)
------------------------------------------
For the Years Ended
------------------------------------------
January 3, December 28, December 29,
1999 1997 1996
---- ---- ----
Minimum rentals $43,387 $40,365 $36,383
Common area charges 13,314 12,541 11,303
Contingent rentals 3,011 2,910 2,819
--------- --------- -------
$59,712 $55,816 $50,505
========= ========= =======
Future minimum rental and other payments required under
non-cancelable operating leases for Company-operated restaurants
that were open on January 3, 1999 and the existing leased
administrative and support function office (Note 8) are as follows
(in thousands):
Years ending:
------------
January 2, 2000 $65,075
December 31, 2000 63,472
December 30, 2001 60,409
December 29, 2002 56,000
December 28, 2003 51,180
Later years 134,673
-------
$430,809
========
F-18
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
The Company is the principal lessee under operating leases for
certain franchised restaurants which are subleased to the
franchisee. Franchisees pay rent and related expenses directly to
the landlord. Future minimum rental payments required under these
non-cancelable operating leases for franchised restaurants that were
open as of January 3, 1999 are as follows (in thousands):
Years ending:
------------
January 2, 2000 $1,352
December 31, 2000 1,088
December 30, 2001 954
December 29, 2002 626
December 28, 2003 475
Later years 727
--------
$5,222
========
As of February 10, 1999, future minimum rental payments required
under non-cancelable operating leases for restaurants which had not
as yet opened as of January 3, 1999 are as follows (in thousands):
Years ending:
------------
January 2, 2000 $1,537
December 31, 2000 2,023
December 30, 2001 2,026
December 29, 2002 1,931
December 28, 2003 2,053
Later years 10,923
--------
$20,493
========
The Company is a party to contracts aggregating $3,159,000 with
respect to the construction of restaurants. Payments of
approximately $385,000 have been made on those contracts as of
January 3, 1999.
One of the joint ventures in which the Company is a partner has
entered into a contract to purchase the land on which a restaurant
is located, at the end of its five year lease on such property in
2002, for $950,000.
The Company is a guarantor of its pro rata interest (up to
$4,400,000) of a line of credit granted to one of the joint ventures
in which the Company is a partner.
F-19
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONTINUED):
CONTINGENCIES:
In December 1998, the Court approved, and Company completed, the
settlement of an action entitled Kenneth Hoffman and Gloria Curtis,
on behalf of themselves and all others similarly situated v. Sbarro,
Inc. that was pending in the United States District Court for the
Southern District of New York. The plaintiffs, former restaurant
level management employees, alleged that the Company required
general managers and co-managers to reimburse the Company for cash
and certain other shortages sustained by the Company and thereby
lost their status as managerial employees exempt from the overtime
compensation provisions of the Fair Labor Standards Act. The
settlement resulted in a one-time charge of $3,544,000 before tax or
$2,197,000 ($.11 basic and diluted earnings per share after tax) in
fiscal 1998.
8. TRANSACTIONS WITH RELATED PARTIES:
In May 1986, the Company entered into a fifteen year sublease with a
partnership owned by certain shareholders of the Company in Commack
for its present administrative and support function offices. For
1998 and 1997 and for each of the remaining years of the lease, the
rent expense is $337,000 per year. In 1996, the Company incurred
rent expense for such building of $298,000. Management believes that
such rents are comparable to the rents that would be charged by an
unaffiliated third party.
A member of the Board of Directors acts as a consultant to the
Company for which he received $140,400 in 1998, $116,400 in 1997 and
$106,100 in 1996.
9. STOCK OPTIONS:
The Company's Board of Directors has adopted, and its shareholders
have approved, a 1991 Stock Incentive Plan (the "1991 Plan"), which
replaced the Company's 1985 Incentive Stock Option Plan, and a 1993
Non-Employee Director Stock Option Plan (the "1993 Plan").
Under the 1991 Plan, the Company may grant, until February 2001,
incentive stock options and non-qualified stock options, alone or in
tandem with stock appreciation rights ("SARS"), to employees and
consultants of the Company and its subsidiaries. Options and SARS
may not be granted at exercise prices of less than 100% of the fair
market value of the Company's common stock on the date of grant. The
Board of Directors and the Board's Committee administering the 1991
Plan are empowered to determine, within the limits of the 1991 Plan,
the number of shares subject to each option and SAR, the exercise
price, and the time period (which may not exceed ten years) and
terms under which each may be exercised.
The 1993 Plan provides for the automatic grant to each non-employee
director of an option to purchase 3,750 shares of common stock
following each annual shareholders' meeting. Each option has a ten
year term and is exercisable in full commencing one year after grant
at 100% of the fair market value of the Company's common stock on
the date of grant. In 1998, 1997 and 1996, each of the five
non-employee directors were granted options to purchase 3,750 shares
at $ 24.06, $28.88 and $26.88 per share, respectively. In 1997,
options to purchase an aggregate of 11,250 shares granted to a
deceased director were exercised at prices ranging from $21.50 to
$23.71.
F-20
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED):
A summary of the status of the Company's option plans is presented
in the table below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- --------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period 1,638,339 $25.85 934,836 $25.57 717,712 $24.97
Granted 23,750 $24.22 777,750 $25.96 378,750 $25.55
Exercised (84,989) $25.23 (53,745) $22.78 (47,426) $18.24
Canceled or expired (16,668) $25.15 (20,502) $24.66 (114,200) $24.84
-------------------------- -------------------------- -----------------------
Options outstanding,
end of period 1,560,432 $25.87 1,638,339 $25.85 934,836 $25.57
Options exercisable,
end of period 617,515 $25.99 573,880 $26.05 534,214 $25.89
</TABLE>
Of the options outstanding at January 3, 1999, options to purchase
78,182 shares had exercise prices ranging from $15.17 to $21.83 per
share, with a weighted average exercise price of $21.36 per share
and a weighted average remaining contractual life of 5.53 years, of
which options to purchase 76,515 shares were exercisable, with a
weighted average exercise price of $21.36 per share. The remaining
options to purchase 1,482,250 shares had exercise prices ranging
from $23.05 to $28.88 per share, with a weighted average exercise
price of $26.11 per share and a weighted average remaining
contractual life of 6.8 years, of which options to purchase 541,000
shares are exercisable, with a weighted average exercise price of
$26.65 per share. At January 3, 1999, there were an aggregate of
2,054,730 shares available for option grants under the 1991 and 1993
Plans.
The foregoing table includes options granted in 1997 under the 1991
Plan to the Company's Chairman of the Board and President to
purchase 100,000 and 150,000 shares at $25.13 and $28.88 per share,
respectively, and to the Company's Vice Chairman of the Board and
Senior Executive Vice President to purchase 100,000 and 100,000
shares, respectively, at $25.13 per share; options granted in 1996
to the Company's Chairman of the Board and President and Senior
Executive Vice President to purchase 100,000 and 50,000 shares,
respectively, at $24.75 per share; and options granted in 1993 under
the 1991 Plan to the Company's Chairman of the Board and President,
Vice Chairman of the Board and Senior Executive Vice President and
one non-employee director to purchase 120,000, 90,000, 75,000 and
37,500 shares, respectively, at $27.09 per share. Each such option
was granted at an exercise price equal to the fair market value of
the Company's common stock on the date of grant and is exercisable
for 10 years from the date of grant. Such options remain
unexercised.
In addition to the foregoing, in 1990, shareholder approved options
were granted to the Company's Chairman of the Board and President,
Vice Chairman of the Board and Senior Executive Vice President to
purchase 150,000, 75,000 and 75,000 shares, respectively, at $20.67
per share, the fair market value of the Company's common stock on
the date of grant, for a period of 10 years from the date of grant.
Such options remain unexercised.
See Note 6 for the effect of the proposed acquisition of all shares
not owned by the Sbarro family on the options outstanding as of
January 3, 1999.
F-21
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED):
The Company has adopted the pro forma disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". Accordingly, no
compensation cost has been recognized for the stock option plans.
Had compensation cost for the Company's stock option plans been
determined under SFAS No. 123, the Company's net income and earnings
per share would have approximated the pro forma amounts below:
(In thousands, except per share data)
Net income: 1998 1997 1996
---- ---- ----
As Reported 34,334 36,082 37,390
====== ====== ======
Pro Forma 33,770 35,089 37,160
====== ====== ======
Per share information:
Net income per share (as reported):
Basic $1.67 $1.77 $1.84
===== ===== =====
Diluted $1.67 $1.76 $1.83
===== ===== =====
Net income per share (pro forma):
Basic $1.65 $1.72 $1.82
===== ===== =====
Diluted $1.64 $1.71 $1.82
===== ===== =====
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions:
1998 1997 1996
---- ---- ----
Expected life (years) .5 1.5 4
Interest rate 5.15% 5.82% 6.53%
Volatility 31% 21% 28%
Dividend yield 0.00% 4.00% 3.50%
Weighted average fair value
of options granted $2.38 $2.79 $5.75
===== ===== =====
10. PROVISION FOR UNIT CLOSINGS:
A provision for restaurant closings of $2,515,000 ($1,559,000 or
$.08 basic and diluted earnings per share after tax) was established
in fiscal 1998 relating to the closing of 20 restaurant locations.
A provision for restaurant closings in the amount of $3,300,000
($2,046,000 or $.10 basic and diluted earnings per share after tax)
relating to the Company's investment in one of its joint ventures
was established in 1997 for the closing of certain of the joint
venture's units.
11. DIVIDENDS:
In 1997 and 1996, the Company declared quarterly dividends of $.27
per share and $.23 per share, respectively, aggregating $1.08 per
share and $.92 per share for the respective years. Dividends were
thereafter suspended pending consideration by the Company of
proposals by certain members of the Sbarro family for the Company's
acquisition of all Common Stock not owned by them and consideration
of other strategic alternatives.
F-22
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
(In thousands, except share data)
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter (b)
-------- ------- ------- ----------
<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.
(b) See Notes 1, 3, 6, 7 and 10 for information regarding unusual
charges.
(c) See Note 10.
(d) The sum of the quarters does not equal the full year per
share amounts included in the accompanying statement of
income due to the effect of the weighted average number
of shares outstanding during the fiscal year as compared
to the quarters.
F-23
<PAGE>
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
F-24
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------
April 25, 1999 January 3, 1999
-------------- ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $146,072 $150,472
Receivables:
Franchisees 1,396 1,342
Other 2,325 2,185
---------------- ----------------
3,721 3,527
Inventories 2,885 3,122
Prepaid expenses 3,868 1,291
---------------- ----------------
Total current assets 156,546 158,412
Property and equipment, net 138,732 138,126
Other assets 6,712 6,630
----------------- ----------------
$301,990 $303,168
================= ================
</TABLE>
(continued)
F-25
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
------------------------------------
April 25, 1999 January 3, 1999
-------------- ---------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $5,272 $ 7,122
Accrued expenses 23,762 25,764
Income taxes 37 4,146
-------------- ---------------
Total current liabilities 29,071 37,032
Deferred income taxes 9,043 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
20,533,645 shares at April 25, 1999 and
20,531,643 shares at January 3, 1999 205 205
Additional paid-in capital 34,634 34,587
Retained earnings 229,037 222,125
------------- ---------------
263,876 256,917
------------- ---------------
$301,990 $303,168
============= ===============
</TABLE>
See notes to unaudited consolidated financial statements
F-26
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data)
-----------------------------------------
For the sixteen weeks ended:
-----------------------------------------
April 25, 1999 April 19, 1998
-------------- --------------
<S> <C> <C>
Revenues:
Restaurant sales $100,354 $98,131
Franchise related income 2,506 2,306
Interest income 1,591 1,446
------------ -------------
Total revenues 104,451 101,883
------------ -------------
Costs and expenses:
Cost of food and paper products 20,964 20,668
Restaurant operating expenses:
Payroll and other employee benefits 28,103 26,551
Occupancy and other 31,941 29,892
Depreciation and amortization 6,700 6,670
General and administrative 6,791 5,964
Other income (1,197) (700)
------------ -------------
Total costs and expenses 93,302 89,045
------------ -------------
Income before income taxes and cumulative
effect of change in method of accounting
for start-up costs 11,149 12,838
Income taxes 4,237 4,878
------------ -------------
Income before cumulative effect
of accounting change 6,912 7,960
Cumulative effect of change in method
of accounting for start-up costs, less
income tax benefit of $504 - (822)
------------- -------------
Net income $ 6,912 $ 7,138
============= =============
</TABLE>
(continued)
F-27
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data)
----------------------------------------
For the sixteen weeks ended:
----------------------------------------
April 25, 1999 April 19, 1998
-------------- --------------
<S> <C> <C>
Per share information:
Net income per share:
Basic:
Income before accounting change $.34 $.39
Accounting change - (.04)
------ ------
Net income $.34 $.35
====== ======
Diluted:
Income before accounting change $.34 $.39
Accounting change - (.04)
------ ------
Net income $.34 $.35
====== ======
Shares used in computing net income per share:
Basic 20,532,200 20,491,939
---------- ----------
Diluted 20,574,522 20,665,846
---------- ----------
</TABLE>
See notes to unaudited consolidated financial statements
F-28
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
------------------------------------
For the sixteen weeks ended:
------------------------------------
April 25, 1999 April 19, 1998
-------------- --------------
<S> <C> <C>
Operating activities:
Net income $6,912 $7,138
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 6,967 6,670
Provision for deferred income taxes (176) (205)
Changes in operating assets and liabilities:
(Increase) decrease in receivables (194) 66
Decrease in inventories 237 243
Increase in prepaid expenses (2,577) (1,783)
Increase in other assets (135) (523)
Decrease in accounts payable and
accrued expenses (3,852) (5,853)
Decrease in income taxes payable (4,109) (4,345)
---------- -----------
Net cash provided by operating
activities 3,073 2,230
---------- -----------
Investing activities:
Purchases of property and equipment (7,520) (9,360)
---------- ------------
Net cash used in investing activities (7,520) (9,360)
---------- ------------
</TABLE>
(continued)
F-29
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------
For the sixteen weeks ended:
----------------------------------------
April 25, 1999 April 19, 1998
-------------- --------------
<S> <C> <C>
Financing activities:
Proceeds from exercise of stock options 47 1,991
Cash dividends paid - (5,521)
--------------- --------------
Net cash provided by (used in)
financing activities 47 (3,530)
--------------- --------------
Decrease in cash and cash equivalents (4,400) (10,660)
Cash and cash equivalents at beginning
of period 150,472 119,810
--------------- --------------
Cash and cash equivalents at end of period $146,072 $109,150
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for
income taxes $8,432 $9,353
================ =============
</TABLE>
See notes to unaudited consolidated financial statements
F-30
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 April 25, 1999 and their consolidated
results of operations and cash flows for the sixteen weeks ended
April 25, 1999 and April 19, 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, included in the Company's Annual Report on Form
10-K for the fiscal year ended January 3, 1999.
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.
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 those members of the Sbarro
family, abstentions and broker non-votes) in addition to two-thirds
of all outstanding Common Stock 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. The proposed Class consists of
all record and beneficial owners of the Company's Common Stock
during the period beginning with the close of business on November
25, 1998 and ending on the effective date of the merger. While the
complaints in each of the law-suits 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 those members
of the Sbarro family was inadequate and that there were inadequate
F-31
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
procedural protections for public 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. On April 7, 1999, a
Stipulation of Settlement was entered into embodying the terms of
the Memorandum of Understanding. The settlement is subject to, among
other things, court approval of the settlement and 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. The
Court has scheduled a hearing for June 29, 1999 to consider the
settlement.
3. Cumulative effect of accounting change:
In accordance with its early application provisions, the Company
implemented Statement of Position 98-5 (SOP) the Accounting
Standards Executive Committee of the American Institute of Certified
Public Accountants as of the beginning of its 1998 fiscal year. This
SOP required 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 42,322 and 173,907 in
the sixteen week periods ended April 25, 1999 and April 19, 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 sixteen week periods ended April 25, 1999
and April 19, 1998.
F-32
<PAGE>
ANNEX I
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
SBARRO MERGER LLC,
SBARRO, INC.,
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
Dated as of January 19, 1999
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
SECTION Page
PARTIES................................................................1
PREAMBLE...............................................................1
ARTICLE I
THE MERGER
1.1 The Merger....................................................2
1.2 Certificate of Incorporation..................................2
1.3 By-Laws.......................................................2
1.4 Directors and Officers........................................2
1.5 Effective Time................................................2
ARTICLE II
CONVERSION OF SHARES
2.1 Company Common Stock..........................................3
2.2 Mergeco Membership Interests..................................3
2.3 Exchange of Shares............................................3
2.4 Stock Option Plans............................................5
2.5 Withholding Rights............................................5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 Organization..................................................5
3.2 Capitalization................................................6
3.3 Authorization of this Agreement; Recommendation of Merger.....6
3.4 Governmental Filings; No Conflicts............................7
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERGECO
AND THE CONTINUING SHAREHOLDERS
4.1 Organization..................................................8
4.2 Membership Interests..........................................8
4.3 Authorization of this Agreement...............................8
4.4 Governmental Filings; No Violations...........................8
4.5 Financing Arrangements........................................9
ARTICLE V
COVENANTS
5.1 Conduct of the Business of the Company........................9
5.2 Activities of Mergeco........................................10
5.3 Access to Information........................................10
5.4 Financing....................................................10
5.5 Shareholders' Meeting........................................10
5.6 Proxy Statement and Schedule 13E-3...........................11
5.7 Best Efforts.................................................12
5.8 Consents.....................................................12
5.9 Public Announcements.........................................12
5.10 Indemnification..............................................13
5.11 No Solicitation..............................................15
5.12 Transfer Taxes...............................................16
ARTICLE VI
CLOSING CONDITIONS
6.1 Conditions to the Obligations of Each Party..................16
6.2 Conditions to the Obligations of Mergeco.....................17
6.3 Conditions to the Obligations of the Company.................18
ARTICLE VII
CLOSING
7.1 Time and Place...............................................19
7.2 Filings at the Closing.......................................19
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ARTICLE VIII
TERMINATION AND ABANDONMENT
8.1 Termination..................................................20
8.2 Procedure and Effect of Termination..........................21
ARTICLE IX
MISCELLANEOUS
9.1 Amendment; Modification and Approval of Special Committee....21
9.2 Waiver of Compliance; Consents...............................21
9.3 Non-Survival of Representations and Warranties...............22
9.4 Notices......................................................22
9.5 Assignment; Parties in Interest..............................23
9.6 Costs and Expenses...........................................23
9.7 Specific Performance.........................................24
9.8 Governing Law................................................24
9.9 Counterparts.................................................24
9.10 Interpretation...............................................25
9.11 Entire Agreement.............................................25
9.12 Severability.................................................25
9.13 Headings.....................................................25
SIGNATURES............................................................26
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AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this
"Agreement"), dated as of January 19, 1999 , among Sbarro Merger LLC, a New York
limited liability company ("Mergeco"), Sbarro, Inc., a New York corporation (the
"Company"), and Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited
Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not
individually but as trustees under that certain Trust Agreement dated April 28,
1984 for the benefit of Carmela Sbarro and her descendants (collectively the
"Continuing Shareholders").
WHEREAS, the Continuing Shareholders have proposed to the
Board of Directors of the Company that Mergeco merge with and into the Company
(the "Merger"), with the holders of all of the outstanding shares of Common
Stock, par value $.01 per share, of the Company (the "Common Stock") not
currently owned by the Continuing Shareholders receiving a cash payment in
exchange for their shares of Common Stock;
WHEREAS, a Special Committee of the Board of Directors of the
Company (the "Special Committee") has determined that the Merger is fair to, and
in the best interests of, the Public Shareholders (as defined in Section
2.1(a)), and has recommended the approval and adoption of this Agreement to the
Board of Directors of the Company;
WHEREAS, the Board of Directors of the Company and the members
of Mergeco have approved and adopted this Agreement and approved the Merger upon
the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of the Company believes it is
in the best interests of the Company and its shareholders to consummate the
Merger upon the terms and subject to the conditions set forth in this Agreement;
and
WHEREAS, Mergeco, the Company and the Continuing Shareholders
entered into an Agreement and Plan of Merger, dated as of January 19, 1999, and
now desire to amend such agreement in certain respects, and, as so amended,
restate such agreement with the same effect as if executed on January 19, 1999;
NOW, THEREFORE, in consideration of the representations,
warranties and agreements herein contained, the parties hereto agree as follows:
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. (a) As promptly as practicable following the
satisfaction or waiver of the conditions set forth in Article VI hereof, and in
accordance with the provisions of this Agreement and the provisions of the New
York Business Corporation Law (the "NYBCL") and the New York Limited Liability
Company Law (the "NYLLCL"), the parties hereto shall cause Mergeco to be merged
with and into the Company. The Company shall be the surviving corporation
(hereinafter sometimes called the "Surviving Corporation") and shall continue
its corporate existence under the laws of the State of New York. At the
Effective Time (as hereinafter defined), the separate existence of Mergeco shall
cease.
(b) The Merger shall have the effects specified in Section 906 of the
NYBCL and Section 1004 of the NYLLCL. From and after the Effective Time, the
Surviving Corporation shall possess all the rights, privileges, immunities,
powers and purposes of Mergeco and the Company and shall assume and become
liable for all the liabilities, obligations and penalties of the Company and
Mergeco.
1.2 Certificate of Incorporation. The Certificate of Incorporation of
the Company, as amended and in effect immediately prior to the Effective Time,
shall be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended in accordance with the provisions thereof and the NYBCL.
1.3 By-Laws. The By-Laws of the Company in effect immediately prior to
the Effective Time shall be the By-Laws of the Surviving Corporation until
thereafter amended, altered or repealed as provided therein and in the NYBCL.
1.4 Directors and Officers. The directors and officers of the Company
immediately prior to the Effective Time shall be the directors and officers,
respectively, of the Surviving Corporation, each to hold office in accordance
with the Certificate of Incorporation and the By-Laws of the Surviving
Corporation.
1.5 Effective Time. As soon as practicable following the Closing (as
defined in Section 7.1 of this Agreement), and provided that this Agreement
shall not have been terminated pursuant to Article VIII hereof, the Company and
Mergeco will cause certificates of merger (the "Certificates of Merger"),
together with any other documents required by law to effectuate the Merger, to
be executed, verified and delivered for filing by the New York Department of
State as provided in Section 904-a of the NYBCL and Section 1003 of the NYLLCL,
to the extent required. The Merger shall become effective on the date on which
the second of the two Certificates of Merger is filed by the New York Department
of State or such other date as shall be specified in the Certificates of Merger.
The date and time when the Merger shall become effective is herein referred to
as the "Effective Time."
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ARTICLE II
CONVERSION OF SHARES
2.1 Company Common Stock. (a) Each share of Common Stock issued and
outstanding immediately prior to the Effective Time, except for (i) shares of
Common Stock then owned of record by Mergeco or the Continuing Shareholders and
(ii) shares of Common Stock held in the Company's treasury, if any, shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into the right to receive $28.85 in cash, payable to the holder
thereof, without interest thereon, upon surrender of the certificate
representing such share of Common Stock (such cash amount is referred to herein
as the "Merger Consideration"; the shares of Common Stock for which the Merger
Consideration is to be paid are referred to herein as the "Public Shares"; and
the holders thereof are referred to herein as the "Public Shareholders").
(b) Each share of Common Stock issued and outstanding immediately prior
to the Effective Time that is then owned of record by Mergeco or the Continuing
Shareholders shall, by virtue of the Merger and without any action on the part
of the holder thereof, be canceled and retired and cease to exist, and no
payment shall be made with respect thereto.
(c) Each share of Common Stock issued and held in the Company's
treasury immediately prior to the Effective Time, if any, shall, by virtue of
the Merger, be canceled and retired and cease to exist, and no payment shall be
made with respect thereto.
(d) At the Effective Time, the Public Shareholders shall cease to have
any rights as shareholders of the Company except the right to receive the Merger
Consideration.
2.2 Mergeco Membership Interests. Each membership unit of Mergeco (the
"Mergeco Membership Interests") issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into one share of Common Stock of the
Surviving Corporation. The Common Stock issued pursuant to this Section 2.2
shall, immediately after the Effective Time, constitute the only issued or
outstanding shares of capital stock of the Surviving Corporation.
2.3 Exchange of Shares. (a) As of or as soon as reasonably practicable
following the Effective Time, the Surviving Corporation shall deposit in trust
with a bank or trust company that has offices in New York City and is designated
by the Surviving Corporation (the "Paying Agent"), cash in an aggregate amount
equal to the product of (x) the number of Public Shares issued and outstanding
immediately prior to the Effective Time and (y) the Merger Consideration (such
amount being hereinafter referred to as the "Exchange Fund"). The Paying Agent
shall, pursuant to irrevocable instructions, make the payments provided for in
Section 2.1(a) of this Agreement out of the Exchange Fund. The Paying Agent
shall invest the Exchange Fund, as the Surviving Corporation directs, in direct
obligations of the United States of America, obligations for which the full
faith and
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credit of the United States of America is pledged to provide for the payment of
all principal and interest or commercial paper obligations receiving the highest
rating from either Moody's Investors Service, Inc. or Standard & Poor's, a
division of The McGraw Hill Companies, or a combination thereof, provided that,
in any such case, no such instrument shall have a maturity exceeding three
months. Any net profit resulting from, or interest or income produced by, such
investments shall be payable to the Surviving Corporation. The Surviving
Corporation shall replace any monies lost through any investment made pursuant
to this Section 2.3(a). The Exchange Fund shall not be used for any other
purpose except as provided in this Agreement.
(b) Promptly after the Effective Time, the Surviving Corporation shall
cause the Paying Agent to mail to each record holder (as of the Effective Time)
of an outstanding certificate or certificates that immediately prior to the
Effective Time represented Public Shares (the "Certificates") a form letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Paying Agent) and instructions for use in effecting the
surrender of the Certificates for payment therefor. Upon surrender to the Paying
Agent of a Certificate, together with a properly completed and executed letter
of transmittal, the holder of such Certificate shall be entitled to receive in
exchange therefor cash in an amount equal to the product of the number of Public
Shares represented by such Certificate and the Merger Consideration, less any
applicable withholding tax, and such Certificate shall forthwith be canceled. In
the event any Certificate shall have been lost or destroyed, the Paying Agent,
subject to such other reasonable conditions as the Surviving Corporation may
impose (including the posting of an indemnity bond or other surety in favor of
the Surviving Corporation with respect to the Certificates alleged to be lost or
destroyed), shall be authorized to accept an affidavit from the record holder of
such Certificate in a form reasonably satisfactory to the Surviving Corporation.
No interest shall be paid or accrued on the cash payable upon the surrender of
the Certificates. If payment is to be made to a person other than the person in
whose name the Certificate surrendered is registered, it shall be a condition of
payment that the Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
payment shall pay any transfer or other tax required by reason of the payment to
a person other than the registered holder of the Certificate surrendered or
establish to the satisfaction of the Paying Agent and the Surviving Corporation
that such tax has been paid or is not applicable. Until surrendered in
accordance with the provisions of this Section 2.3, each Certificate shall
represent for all purposes only the right to receive the Merger Consideration in
cash multiplied by the number of Public Shares evidenced by such Certificate,
without any interest thereon.
(c) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of Public Shares that were
outstanding immediately prior to the Effective Time.
(d) Any portion of the Exchange Fund that remains unclaimed by the
Public Shareholders of the Company for one year after the Effective Time
(including any interest, dividends, earnings or distributions received with
respect thereto) shall be repaid to the Surviving Corporation, upon demand. Any
Public Shareholders who have not theretofore satisfied the provisions of Section
2.3(b)
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<PAGE>
shall thereafter look only to the Surviving Corporation for payment of their
claim for the Merger Consideration, without any interest thereon, but shall have
no greater rights against the Surviving Corporation than may be accorded to
general creditors of the Surviving Corporation under New York law.
Notwithstanding the foregoing, neither the Paying Agent nor any party hereto
shall be liable to any holder of Certificates formerly representing shares of
Common Stock for any amount paid with respect thereof to a public official
pursuant to any applicable abandoned property, escheat or similar law.
2.4 Stock Option Plans. At the Effective Time, all outstanding Stock
Options (as defined herein), including Stock Options held by the Continuing
Shareholders, shall be terminated and, promptly following the Effective Time,
the Surviving Corporation shall, to the extent permitted by the applicable Stock
Option Plan (as defined herein) or agreement between the Company and the
optionee related to the applicable Stock Option, subject to Section 2.5, pay to
the holder of each such Stock Option, in cash and as full settlement for such
Stock Option, whether or not then exercisable, the Stock Option Buyout Amount
(as defined herein) for the shares of Common Stock subject to such Stock Option.
As used herein: (i) with respect to any Stock Option, the "Stock Option Buyout
Amount" shall mean (A) the excess, if any, of the Merger Consideration over the
exercise price per share of such Stock Option, (B) multiplied by the total
number of shares of Common Stock subject to such Stock Option; (ii) the "1991
Plan" shall mean the Company's 1991 Stock Incentive Plan, as amended to date;
(iii) the "1993 Plan" shall mean the Company's 1993 Non-Employee Director Stock
Option Plan, as amended to date (the 1991 Plan and the 1993 Plan being
collectively referred to herein as the "Stock Option Plans"); and (iv) "Stock
Options" shall mean all options to purchase shares of Common Stock under the
Company's 1985 Incentive Stock Option Plan, the 1991 Plan and the 1993 Plan and
options held by any of the Continuing Shareholders that were not granted under
the Stock Option Plans.
2.5 Withholding Rights. The Surviving Corporation and the Paying Agent
shall be entitled to deduct and withhold from the amounts payable (including the
Merger Consideration) pursuant to this Agreement to any Public Shareholder or
holder of Stock Options such amounts as Mergeco, the Surviving Corporation or
the Paying Agent is required to deduct and withhold with respect to the making
of such payment under applicable tax law. To the extent that amounts are so
deducted and withheld by Mergeco, the Surviving Corporation or the Paying Agent,
such amounts shall be treated for all purposes of this Agreement as having been
paid to the relevant Public Shareholder or holder of Stock Options.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Mergeco as follows:
3.1 Organization. The Company is a corporation validly existing and in
good standing under the laws of the State of New York and has all requisite
power (corporate or otherwise) and
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<PAGE>
authority to own, lease and operate its properties and to conduct its business
as now being conducted, except where the failure to be so organized, existing
and in good standing or to have such power and authority would not, individually
or in the aggregate, have a material adverse effect on the business, condition
(financial or otherwise), properties, assets or prospects of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect"). The Company was
formed under the name Sbarro Licensing Inc.
3.2 Capitalization. The authorized capital stock of the Company
consists of (i) 40,000,000 shares of Common Stock, of which, on January 15,
1999, there were 20,531,977 shares issued and outstanding, which number of
outstanding shares may change by virtue of the exercise of outstanding Stock
Options, and (ii) 1,000,000 shares of preferred stock, par value $1.00 per
share, of which there are no shares issued and outstanding. Except for the Stock
Option Plans, there are not now any existing stock option or similar plans and,
except for currently outstanding Stock Options, there are not now any
outstanding options, warrants, calls, subscriptions, preemptive rights or other
rights or other agreements or commitments whatsoever obligating the Company to
issue, transfer, deliver or sell, or cause to be issued, transferred, delivered
or sold, any shares of capital stock or equity interests, as the case may be, of
the Company or obligating the Company to grant, extend or enter into any such
agreement or commitment.
3.3 Authorization of this Agreement; Recommendation of Merger. (a) The
Company has all requisite corporate power and authority to execute and deliver
this Agreement and, subject to approval by the shareholders of the Company, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized and approved by the Company's Board of
Directors and, except for the adoption of this Agreement by the shareholders of
the Company, no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by the Company and, subject only to adoption hereof by its
shareholders (and assuming the due authorization, execution and delivery hereof
by Mergeco and the Continuing Shareholders), this Agreement constitutes a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms.
(b) The Special Committee has received the opinion of Prudential
Securities Incorporated ("Prudential Securities") dated January 19, 1999 that,
as of the date of such opinion, the Merger Consideration to be received by the
Public Shareholders pursuant to this Agreement is fair, from a financial point
of view, to the Public Shareholders.
(c) The Special Committee (at a meeting duly called and held at which a
quorum was present) has determined that the Merger is fair to, and in the best
interests of, the Public Shareholders, and has recommended the adoption of this
Agreement to the Board of Directors of the Company, subject to the right of the
Special Committee to withdraw, modify or amend such recommendation if the
Special Committee determines, in good faith after consultation with legal
counsel, that failure
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<PAGE>
to take such action would be reasonably likely to result in a breach of its
fiduciary duties to the Company's shareholders under applicable law.
(d) The Board of Directors of the Company (at a meeting duly called and
held at which a quorum was present) has determined that the Merger is fair to,
and in the best interests of, the shareholders of the Company, has adopted this
Agreement and has recommended the adoption of this Agreement by the shareholders
of the Company, subject to the right of the Board of Directors of the Company to
withdraw, modify or amend such recommendation to the extent that the Board of
Directors of the Company determines, in good faith after consultation with legal
counsel, that failure to take such action would be reasonably likely to result
in a breach of its fiduciary duties to the Company's shareholders under
applicable law.
3.4 Governmental Filings; No Conflicts. Except for (i) filings required
under the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "Exchange Act"), (ii) the filing and
recordation of appropriate merger documents as required by the NYBCL and, if
applicable, the laws of other states in which the Company is qualified to do
business, (iii) filings, if any, under securities or blue sky laws or takeover
statutes, (iv) filings to fulfill the delisting requirements of the New York
Stock Exchange, (v) regulatory filings relating to the operation of the
Company's business, (vi) filings in connection with any applicable transfer or
other taxes in any applicable jurisdiction and (vii) filings under applicable
alcohol and beverage laws and regulations, no filing with, and no permit,
authorization, consent or approval of, any public body or authority is necessary
for the consummation by the Company of the transactions contemplated by this
Agreement, the failure to make or obtain which would have, individually or in
the aggregate, a Material Adverse Effect or a material adverse effect on the
ability of the Company to consummate the transactions contemplated hereby.
Neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby nor compliance by the Company with any of the
provisions hereof will (x) conflict with or result in any violation of any
provision of the Certificate of Incorporation of the Company or By-Laws of the
Company, as in effect on the date hereof, or (y) assuming the truth of the
representations and warranties of Mergeco contained herein and its compliance
with all agreements contained herein and assuming the due making of all filings
and obtaining all permits, authorizations, consents and approvals referred to in
the preceding sentence, violate any statute, rule, regulation, order,
injunction, writ or decree of any public body or authority by which the Company
or any of its assets or properties is bound, excluding from the foregoing clause
(y) conflicts, violations, breaches or defaults which, either individually or in
the aggregate, would not have a Material Adverse Effect or a material adverse
effect on the Company's ability to consummate the transactions contemplated
hereby.
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<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERGECO
AND THE CONTINUING SHAREHOLDERS
Mergeco and the Continuing Shareholders, jointly and severally,
represent and warrant to the Company as follows:
4.1 Organization. Mergeco is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
New York and has all requisite power and authority to consummate the
transactions contemplated hereby. Mergeco was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement. As of the date
hereof and the Effective Time, except for obligations or liabilities incurred in
connection with its organization and the transactions contemplated by this
Agreement and, except for this Agreement, its Operating Agreement and any other
agreements or arrangements contemplated by this Agreement or in furtherance of
the transactions contemplated hereby, Mergeco has not and will not have
incurred, directly or indirectly, any obligations or liabilities or engaged in
any business activities of any type or kind whatsoever or entered into any
agreements or arrangements with any person whatsoever.
4.2 Membership Interests. All of the outstanding Mergeco Membership
Interests are owned by the Continuing Shareholders. There are not now, and, at
the Effective Time there will not be, any other outstanding membership interests
or rights or other agreements or commitments whatsoever obligating Mergeco or
any of its subsidiaries, if any, to issue, transfer, deliver or sell, or cause
to be issued, transferred, delivered or sold, to any other person any additional
membership interests of Mergeco, or obligating Mergeco to grant, extend or enter
into any such agreement or commitment.
4.3 Authorization of this Agreement. Mergeco and the Continuing
Shareholders have all requisite power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized and approved by the
holders of all the membership interests of Mergeco, and no other proceedings on
the part of Mergeco are necessary to authorize this Agreement or consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Mergeco and the Continuing Shareholders and adopted by
the members of Mergeco, and (assuming the due authorization, execution and
delivery hereof by the Company) constitutes a valid and binding agreement of
Mergeco and the Continuing Shareholders.
4.4 Governmental Filings; No Violations. Except for (i) filings
required by the applicable requirements of the Exchange Act, (ii) the filing and
recordation of appropriate merger documents as required by the NYLLCL, (iii)
filings, if any, under the securities or blue sky laws or takeover statutes,
(iv) filings in connection with any applicable transfer or other taxes in any
applicable jurisdiction and (v) filings under applicable alcohol and beverage
laws and regulations, no filing with, and no permit, authorization, consent or
approval of, any public body or authority is necessary for
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<PAGE>
the consummation by Mergeco of the transactions contemplated by this Agreement,
the failure to make or obtain which is reasonably likely to impair the ability
of Mergeco to perform its obligations hereunder or to consummate the
transactions contemplated hereby. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby nor
compliance by Mergeco with any of the provisions hereof will (x) conflict with
or result in any violation of any provision of the articles of organization or
operating agreement of Mergeco, (y) result in a violation or breach of, or
constitute a default (or give rise to any right of termination, cancellation or
acceleration) under, any note, bond, mortgage, indenture, license, agreement or
other instrument or obligation to which Mergeco is a party, or by which it or
any of its properties or assets is bound or (z) assuming the truth of the
representations and warranties of the Company hereunder and its compliance with
all agreements contained herein and assuming the due making of all filings or
obtaining of all permits, authorizations, consents and approvals referred to in
the preceding sentence, violate any statute, rule, regulation, order,
injunction, writ or decree of any public body or authority by which Mergeco or
any of its properties or assets is bound, excluding from the foregoing clauses
(y) and (z) conflicts, violations, breaches or defaults which, either
individually or in the aggregate, are not reasonably likely to impair materially
the ability of Mergeco to perform its obligations hereunder or to consummate the
transactions contemplated hereby.
4.5 Financing Arrangements. Mergeco and the Continuing Shareholders
have received a "highly confident" letter (the "Debt Financing Letter") dated as
of January 19, 1999 from Bear, Stearns & Co. Inc. ("Bear Stearns"), a copy of
which has heretofore been delivered to the Special Committee, relating to
approximately $300 million of debt financing (the "Debt Financing"), which Debt
Financing Letter is currently in effect. It is contemplated that the Debt
Financing, together with the Company's cash and marketable securities
immediately prior to the Effective Time (collectively with the Debt Financing,
the "Financing"), will be sufficient to enable the Surviving Corporation to pay
the Merger Consideration to all Public Shareholders, make any payments
contemplated by Section 2.4 and otherwise to consummate the transactions
contemplated hereby and to fund all costs and expenses of the Company and
Mergeco incurred in connection with the Merger and the transactions contemplated
hereby. The revolving credit facility, or the excess cash, referred to in the
Debt Financing Letter is designed to fund the Surviving Corporation's ongoing
working capital needs.
ARTICLE V
COVENANTS
5.1 Conduct of the Business of the Company. During the period from the
date of this Agreement to the Effective Time, neither the Company nor any of its
subsidiaries will (i) carry on their respective businesses other than in the
usual, regular and ordinary course of business, consistent with past practice;
(ii) issue any options to purchase shares of Common Stock or other capital stock
or issue any shares of Common Stock (other than pursuant to the exercise of
currently outstanding Stock Options) or other capital stock; or (iii) declare,
set aside or pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of its capital stock, or equity
interest, as the case may be, or repurchase or agree to repurchase any shares of
its
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capital stock, or agree to do any of the foregoing; provided, however, that (x)
any of the Company's wholly-owned direct or indirect subsidiaries may declare,
set aside or pay any dividend or other distribution with respect to their
capital stock, and (y) any other subsidiary of the Company may make a
distribution to the Company or other owners of such subsidiary if and to the
extent such subsidiary is required to do so by contract as in effect on the date
hereof.
5.2 Activities of Mergeco. From the date of this Agreement to the
Effective Time, Mergeco will not conduct any business or engage in any
activities of any nature other than activities in connection with this Agreement
or the transactions contemplated hereby.
5.3 Access to Information. During the period from the date of this
Agreement to the Effective Time, during normal business hours, upon reasonable
notice and in such a manner as will not unreasonably interfere with the conduct
of the business of the Company, the Company will (i) give Mergeco and its
authorized representatives, including representatives and advisors of persons
proposing to provide the Debt Financing, reasonable access to all stores,
offices and other facilities, and to all books and records, of the Company and
its subsidiaries, (ii) permit Mergeco and its authorized representatives to make
such inspections as it may reasonably require and (iii) cause its officers and
those of its subsidiaries to furnish Mergeco with a copy of each report,
schedule and other document filed or received by it during such period pursuant
to the requirements of federal and state securities laws and such financial and
operating data and other information with respect to the business and properties
of the Company and its subsidiaries as Mergeco may from time to time reasonably
request. Mergeco shall take reasonable steps to insure that any confidential
information provided to it or its representatives and advisors remains
confidential and is used for no purpose other than the transactions contemplated
hereby.
5.4 Financing. Mergeco and the Continuing Shareholders shall use their
best efforts to obtain the Debt Financing on terms and conditions no less
favorable to the Company than those described in Section 6.2(g). The Company
shall cooperate with, and use its best efforts to assist, Mergeco in obtaining
the Financing.
5.5 Shareholders' Meeting. (a) As soon as practicable, the Company,
acting through its Board of Directors, shall, in accordance with applicable law,
take all steps necessary to duly call, give notice of, convene and hold a
special or annual meeting of its shareholders (as same may be adjourned or
postponed from time to time, the "Shareholders' Meeting") for the purpose of
adopting this Agreement. The notice of such meeting shall contain the
information required to be included therein pursuant to the NYBCL.
(b) The Continuing Shareholders agree (i) to vote at the Shareholders'
Meeting all 7,064,328 shares of outstanding Common Stock owned of record by them
as of the date of this Agreement (the "Continuing Shareholder Shares") for
adoption of this Agreement but only if at least a majority of the votes cast at
the Shareholders' Meeting (excluding votes cast by the holders of the Continuing
Shareholder Shares, abstentions and broker non-votes) are cast in favor of
adoption of this Agreement, (ii) not to grant a proxy to vote any Continuing
Shareholder Shares other than to
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another Continuing Shareholder or to persons identified in a proxy card
distributed on behalf of the Company's Board of Directors to vote such
Continuing Shareholder Shares at the Shareholders' Meeting in the manner
provided in clause (i), and (iii) not to sell, transfer or otherwise dispose of
any Continuing Shareholder Shares (other than transfers of Continuing
Shareholder Shares to Mergeco or any family members of Mario Sbarro, Anthony
Sbarro or Joseph Sbarro or trusts for the benefit of such Continuing
Shareholders or such family members), which shares may be so transferred only if
the transferee agrees in writing to be bound by the terms of the agreements
contained in this Section 5.5(b). In the event of any transfer of Continuing
Shareholder Shares after the date hereof, such shares shall remain Continuing
Shareholder Shares and be deemed to be owned of record by the Continuing
Shareholders for purposes of Article II of this Agreement and this Section
5.5(b).
5.6 Proxy Statement and Schedule 13E-3. (a) The Company will, as soon
as practicable, prepare and file with the Securities and Exchange Commission
(the "Commission") a proxy statement and a form of proxy, in connection with the
vote of the Company's shareholders with respect to the Merger (such proxy
statement, together with any amendments thereof or supplements thereto, in each
case in the form or forms mailed to the Company's shareholders, being the "Proxy
Statement"). The Company, Mergeco and the Continuing Shareholders shall together
prepare and file a Transaction Statement on Schedule 13E-3 (the "Schedule
13E-3") under the Exchange Act. Each of Mergeco, the Company and the Continuing
Shareholders shall furnish all information required to be included about such
person (as defined in Section 9.10) in the Proxy Statement and the Schedule
13E-3 and, after consultation with each other, shall respond promptly to any
comments made by the Commission with respect to the Proxy Statement and any
preliminary version thereof and the Schedule 13E-3. The Company shall cause the
Proxy Statement to be mailed to its shareholders at the earliest practicable
time. The Proxy Statement shall include the recommendation of the Company's
Board of Directors to the shareholders of the Company (and reflect that the
Special Committee has made a similar recommendation to the Company's Board of
Directors), subject to the fiduciary duties under applicable law of such
directors (including the directors constituting the Special Committee), as
determined by such directors in good faith after consultation with counsel, in
favor of the adoption of this Agreement. The Company shall use its best efforts
to obtain the necessary adoption of this Agreement by its shareholders.
Notwithstanding anything to the contrary in this Agreement, if the Board of
Directors of the Company or the Special Committee determines, in good faith
after consultation with counsel that, in the exercise of its respective
fiduciary duties, under applicable law it is required to withdraw, modify or
amend its recommendation in favor of the Merger, such withdrawal, modification
or amendment shall not constitute a breach of this Agreement.
(b) The information supplied by the Company for inclusion in the Proxy
Statement or the Schedule 13E-3 shall not, at the time the Proxy Statement is
mailed, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading or, at the time of the Shareholders' Meeting, as then amended or
supplemented, omit to state any material fact necessary to correct any statement
originally supplied by the Company for inclusion in the Proxy Statement or the
Schedule 13E-3 which has become false or misleading. If, at any time prior to
the Effective Time, any event relating to the Company or any of its affiliates,
or
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relating to their respective officers, directors or shareholders, should be
discovered which should be set forth in an amendment of, or a supplement to,
such Proxy Statement or Schedule 13E-3, the Company shall promptly so inform
Mergeco and will furnish all necessary information to Mergeco relating to such
event. All documents that the Company is responsible for filing with the
Commission in connection with the transactions contemplated by this Agreement
shall comply in all material respects, both as to form and otherwise, with the
Exchange Act.
(c) The information supplied or to be supplied by Mergeco and the
Continuing Shareholders for inclusion in the Proxy Statement or the Schedule
13E-3 shall not, at the time the Proxy Statement is mailed, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading or, at the time of
the Shareholders' Meeting, as then amended or supplemented, omit to state any
material fact necessary to correct any statement originally supplied by Mergeco
and the Continuing Shareholders for inclusion in the Proxy Statement or the
Schedule 13E-3 which has become false or misleading. If, at any time prior to
the Effective Time, any event relating to Mergeco or any of its affiliates, or
relating to the respective officers, directors or shareholders of Mergeco or its
affiliates, as the case may be, should be discovered which should be set forth
in an amendment of, or a supplement to, such Proxy Statement or Schedule 13E-3,
Mergeco shall promptly so inform the Company and will furnish all necessary
information to the Company relating to such event. All documents that Mergeco is
responsible for filing with the Commission in connection with the transactions
contemplated by this Agreement shall comply in all material respects, both as to
form and otherwise, with the Exchange Act.
5.7 Best Efforts. Subject to the terms and conditions herein provided
and the fiduciary duties under applicable law of the directors of the Company,
including directors constituting the Special Committee, as determined by such
directors in good faith after consultation with counsel, each of the parties
hereto agrees to use its best efforts consistent with applicable legal
requirements to take, or cause to be taken, all action, and to do, or cause to
be done, all things necessary or proper and advisable (including, but not
limited to, executing any and all additional documents) under applicable laws
and regulations to ensure that the conditions set forth in Article VI hereof are
satisfied and to consummate and make effective, in a commercially reasonable
manner, the transactions contemplated by this Agreement. Without limiting the
generality of the foregoing, the Continuing Shareholders shall use their best
efforts to cause Mergeco to perform all of its obligations under this Agreement.
5.8 Consents. Mergeco and the Company each shall use their best efforts
to obtain all material consents of third parties and governmental authorities,
and to make all governmental filings, necessary for the consummation of the
transactions contemplated by this Agreement.
5.9 Public Announcements. Mergeco and the Company will consult with
each other before issuing any press release or otherwise making any public
statements with respect to the Merger, this Agreement and the transactions
contemplated hereby, and shall not issue any such press
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release or make any such public statement prior to such consultation, except as
may be required by law or in accordance with the Company's obligations incurred
pursuant to its listing agreement with the New York Stock Exchange.
5.10 Indemnification. (a) Until and for a period of six years after the
Effective Time, the provisions of the Certificate of Incorporation of the
Company limiting the personal liability of directors for damages and the
indemnification provisions of the Certificate of Incorporation and Bylaws of the
Company as they relate to those who have served as directors or officers of the
Company at any time through the Effective Time shall not be amended, repealed or
otherwise modified in any manner that would make any of such provisions less
favorable to the directors or officers of the Company or the Surviving
Corporation than those that pertain to directors and officers on the date
hereof. Until and for a period of six years after the Effective Time (provided
that if any claim or claims are asserted or made under this Section 5.10 within
such six-year period, all rights to indemnification in respect of each such
claim shall continue until final disposition of such claim), the Surviving
Corporation shall, (i) indemnify, defend and hold harmless the present and
former officers and directors of the Company and its subsidiaries, Mergeco and
the members of Mergeco (collectively, the "Indemnified Parties"), from and
against, and pay or reimburse the Indemnified Parties for, all losses,
obligations, expenses, claims, damages or liabilities (whether or not resulting
from third-party claims and including interest, penalties, out-of-pocket
expenses and attorneys' fees incurred in the investigation or defense of any of
the same or in asserting any of their rights hereunder) resulting from or
arising out of actions or omissions of such Indemnified Parties occurring on or
prior to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement) to the fullest extent permitted or required, as
the case may be, under (A) applicable law, (B) the Certificate of Incorporation
or By-laws of the Company or the articles of organization or operating agreement
of Mergeco in effect on the date of this Agreement, including, without
limitation, provisions relating to advances of expenses incurred in the defense
of any action or suit, (C) any indemnification agreement between the Indemnified
Party and the Company, or (D) resolutions adopted by the shareholders or
directors of the Company or the members of Mergeco; and (ii) advance to any
Indemnified Parties expenses incurred in defending any action or suit with
respect to such matters upon receipt of an undertaking (which need not be
secured) by or on behalf of such Indemnified Party to repay such amount as, and
to the extent, it is not entitled to be indemnified, in each case to the fullest
extent such Indemnified Party is entitled to indemnification or advancement of
expenses under the Company's Certificate of Incorporation, By-laws or
indemnification agreements with its officers and directors or Mergeco's
operating agreement in effect on the date hereof and subject to the terms of
such Certificate of Incorporation, By-laws, indemnification agreements or
operating agreement; provided, however, that (i) no indemnification shall be
made to or on behalf of Mergeco or a member of Mergeco in his or its individual
capacity or in his or its capacity as a member of Mergeco which arises as a
result of the transactions contemplated herein if a judgment or other final
adjudication adverse to Mergeco or such member of Mergeco, as the case may be,
establishes that its or his acts constituted a breach of (x) its or his
fiduciary duties to the Company or the shareholders of the Company, or (y) any
of Mergeco's or such member's representations, warranties or obligations
hereunder which caused the Company to
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terminate this Agreement; and (ii) nothing herein shall be construed as
adversely affecting any such member's entitlement to indemnification from the
Company as an officer or director of the Company.
(b) The Surviving Corporation shall use its best efforts to maintain in
effect for one year after the Effective Time one or more policies of directors'
and officers' liability insurance covering (i) reimbursement of the Company for
any obligation it incurs as a result of indemnification of directors and
officers (the "Corporate Reimbursement Feature") and (ii) also providing
insurance for directors and officers individually in cases where the Corporate
Reimbursement Feature is not applicable, including in the event of the
insolvency of the Company (the "Individual Feature"), with an aggregate limit of
liability of not less than $5.0 million for the policy period for all such
policies; provided, however, that the Surviving Corporation shall not be
required to pay a premium therefor in excess of $100,000, but, if such premium
would exceed such amount, the Surviving Corporation shall purchase as much
coverage as possible for such amount. Such policy shall be on a "claims made"
basis and shall have a retention amount of not more than $250,000 and no
co-insurance with respect to the Corporate Reimbursement Feature, and retention
and co-insurance amounts not greater than the minimum amounts required by New
York state law with respect to the Individual Feature. The policies will cover
and relate to any individual who is, becomes or was a director or officer of the
Company. Such policies may be subject to additional customary conditions and
exclusions, including an exclusion for any lawsuits pending at the time such
policy is written or relating to the Merger.
(c) Any Indemnified Party wishing to claim indemnification under
Section 5.10(a) shall provide notice to the Surviving Corporation promptly after
such Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and the Indemnified Party shall permit the Surviving Corporation
(at its expense) to assume the defense of any claim or any litigation resulting
therefrom; provided, however, that (i) counsel for the Surviving Corporation,
who shall conduct the defense of such claim or litigation, shall be reasonably
satisfactory to the Indemnified Party and the Indemnified Party may participate
in such defense at such Indemnified Party's expense, and (ii) the omission by or
delay of any Indemnified Party to give notice as provided herein shall not
relieve the Surviving Corporation of its indemnification obligation under this
Agreement, except to the extent that such omission or delay results in a failure
of actual notice to the Surviving Corporation or the Surviving Corporation is
materially prejudiced as a result thereof. In the event that the Surviving
Corporation does not accept the defense of any matter as above provided, or
counsel for such Indemnified Party advises that there are issues that raise
conflicts of interest between the Surviving Corporation and the Indemnified
Party, the Indemnified Party may retain counsel satisfactory to it, and the
Surviving Corporation shall pay all reasonable fees and expenses of such counsel
for the Indemnified Party promptly as statements therefor are received;
provided, however, that the Surviving Corporation shall not be liable for any
settlement effected without its prior written consent (which consent shall not
be unreasonably withheld); and provided, further, that the Surviving Corporation
shall not be responsible for the fees and expenses of more than one counsel for
all of the Indemnified Parties, unless such Indemnified Party concludes (based
upon the written advice of counsel to such Indemnified Party) that there may be
legal defenses available to such Indemnified Party that are different from or
additional to those available to any other Indemnified Party, in which event the
Indemnified Party making such conclusion shall be entitled to select separate
counsel to
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assert such legal defenses and to otherwise participate in the defense of the
matter, and the Surviving Corporation shall be liable to the Indemnified Party
under this Section 5.10 for any such legal or other expenses incurred by the
Indemnified Party in connection with such defense. In any event, the Surviving
Corporation and the Indemnified Parties shall cooperate in the defense of any
action or claim. The Surviving Corporation shall not, in the defense of any such
claim or litigation, except with the consent of the Indemnified Party, consent
to entry of any judgment or enter into any settlement that provides for
injunctive or other nonmonetary relief affecting the Indemnified Party or that
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability with respect
to such claim or litigation.
(d) This Section 5.10 is intended for the benefit of, and to grant
third party rights to, persons entitled to indemnification under this Section
5.10 and/or the benefits of Article Seventh of the Certificate of Incorporation
of the Company as in effect on the date hereof, whether or not parties to this
Agreement, and each of such persons shall be entitled to enforce the covenants
contained in this Section 5.10.
(e) If the Surviving Corporation or any of its respective successors or
assigns (i) reorganizes or consolidates with or merges into any other person and
is not the resulting, continuing or surviving corporation or entity of such
reorganization, consolidation or merger, or (ii) liquidates, dissolves or
transfers all or substantially all of its properties and assets to any person or
persons, then, and in such case, proper provision will be made so that the
respective successors and assigns of the Surviving Corporation assume all of the
obligations of the Surviving Corporation referred to in this Section 5.10.
5.11 No Solicitation. (a) The Company and its subsidiaries shall not,
and shall not authorize or permit any of their officers, directors (including
but not limited to directors who are members of the Special Committee), agents,
representatives, advisors or affiliates (collectively, for the purposes of this
Section 5.11, "Representatives") to, in each case whether or not in writing and
whether or not communicated to the shareholders of the Company generally, (i)
take any action to solicit, initiate or encourage any Transaction Proposal (as
defined herein), or (ii) enter into negotiations with, or furnish information
to, any other party with respect to any Transaction Proposal; provided, however,
that the Company and the Representatives shall not be prohibited from taking any
action described in clause (ii) above to the extent such action is taken by, or
upon the authority of, the Board of Directors of the Company if, in the good
faith judgment of the Board of Directors, (x) such Transaction Proposal is
(after consultation with a financial advisor of a nationally recognized
reputation) (A) more favorable to the Company's shareholders than the Merger,
(B) achievable, and (C) supported by creditable financing, which may include a
"highly confident" letter from a nationally recognized investment banking firm
or nationally recognized lending institution, and (y) after consultation with
counsel, failure to take such action would breach its fiduciary duties to the
Company's shareholders under applicable law. For the purposes of this Agreement,
"Transaction Proposal" means any offer or proposal for, or any indication of
interest in, a merger or other business combination involving the Company or any
subsidiary of the Company or the acquisition of any equity
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interest in, or the sale of a substantial portion of the assets of, the Company
or any such subsidiary, except for the transactions contemplated hereby.
(b) The Company shall promptly provide Mergeco with a summary of the
material terms of any Transaction Proposal and of any negotiations or
communications between the Company or its subsidiaries or any of their
respective Representatives concerning any Transaction Proposal.
(c) The Company shall give Mergeco not less than three business days'
written notice before providing any confidential information to any person
(other than Mergeco, the prospective sources of the Debt Financing and their
respective representatives) concerning the business, properties or prospects of
the Company and/or its subsidiaries.
(d) Nothing contained in this Agreement shall prohibit the Company from
making a statement to its shareholders that is required by Rule 14e-2(a)
promulgated under the Exchange Act or from making any other disclosure to its
shareholders if, in the good faith judgment of the Board of Directors, after
consultation with counsel, failure to make such a statement would breach its
fiduciary duties to the Company's shareholders under applicable law or would
otherwise violate the Exchange Act, other applicable law or stock exchange
regulation.
5.12 Transfer Taxes. Except to the extent otherwise contemplated in
Section 2.3, the Surviving Corporation shall pay any transfer taxes (including
any interest and penalties thereon and additions thereto) payable in connection
with the Merger and shall be responsible for the preparation and filing of any
required tax returns, declarations, reports, schedules, terms and information
returns with respect to such transfer taxes.
ARTICLE VI
CLOSING CONDITIONS
6.1 Conditions to the Obligations of Each Party. The respective
obligations of each party hereto to effect the Merger shall be subject to the
satisfaction or waiver, at or prior to the Effective Time, of the following
conditions:
(a) the proposal to adopt this Agreement at the Shareholders' Meeting
shall have been approved and adopted by the affirmative vote of at least
two-thirds of the votes of all outstanding shares of Common Stock entitled to
vote thereon in accordance with the NYBCL;
(b) the proposal to adopt this Agreement shall have been approved and
adopted by the affirmative vote of at least a majority of the votes cast at the
Shareholders' Meeting excluding (i) votes cast by the holders of the Continuing
Shareholder Shares, (ii) abstentions and (iii) broker non- votes;
(c) there shall not have occurred (i) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States or (ii) a commencement of a war, armed hostilities or other international
or national calamity, directly involving the United States, that
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has a material adverse effect on the general economic conditions in the United
States such as to make it, in the judgment of a party hereto, inadvisable or
impractical to proceed with the Merger or the transactions contemplated hereby
or by the Debt Financing; and
(d) other than the filing of the Certificates of Merger as contemplated
in Section 1.5, each of the Company and Mergeco shall have obtained such
consents from third parties and approvals from government instrumentalities as
shall be required for the consummation of the transactions contemplated hereby,
except for such consents the failure to obtain which would not have a Material
Adverse Effect.
6.2 Conditions to the Obligations of Mergeco. The obligation of Mergeco
pursuant to this Agreement to consummate the Merger is also subject to the
satisfaction or waiver, at the Closing, of the following additional conditions:
(a) the representations and warranties of the Company contained herein
shall be true and correct in all respects (in the case of any representation or
warranty containing any materiality qualification) or in all material respects
(in the case of any representation or warranty without any materiality
qualification) as of the date of this Agreement and as of the Closing with the
same effect as though all such representations and warranties had been made as
of the Closing, except (i) for any such representations and warranties made as
of a specified date, which shall be true and correct as of such date, (ii) as
expressly contemplated by this Agreement, and (iii) for breaches of
representations or warranties that (x) would not have a Material Adverse Effect
or a material adverse effect on the ability of the Company to consummate the
transactions contemplated hereby, or (y) are known on the date hereof by any of
the Continuing Shareholders; and Mergeco shall have received from the Company an
officer's certificate to this effect at the Closing;
(b) each and all of the covenants and agreements of the Company to be
performed and complied with pursuant to this Agreement prior to the Closing
shall have been duly performed and complied with, except where the failure to
comply with such covenant or agreement (i) would not have a Material Adverse
Effect or a material adverse effect on the ability of the Company to consummate
the transactions contemplated hereby, or (ii) was the direct result of an act or
omission of any of the Continuing Shareholders; and Mergeco shall have received
from the Company an officer's certificate to this effect at the Closing;
(c) there shall have been no (i) material adverse change in the
business, condition (financial or otherwise), properties, assets or prospects of
the Company and its subsidiaries taken as a whole; (ii) death or disability of
any of Mario Sbarro, Anthony Sbarro, Joseph Sbarro or Carmela Sbarro or any
executive officer of the Company named in the Company's Annual Report on Form
10- K/A for the year ended December 28, 1997 as stated therein to have a family
relationship (as such term is defined in Item 401 of Regulation S-K promulgated
by the Commission) with a Continuing Shareholder; or (iii) material adverse
change, or event or occurrence that is reasonably likely to result in an adverse
change, in securities, financial or borrowing markets, or applicable tax or
other laws or regulations, such as to decrease in any material respect the
benefits of the Merger to the Continuing
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Shareholders or make it impractical to proceed with the Merger or the
transactions contemplated hereby or by the Debt Financing;
(d) no statute, rule, regulation, or temporary, preliminary or
permanent order or injunction shall have been proposed, promulgated, enacted,
entered, enforced or deemed applicable by any state, federal or foreign
government or governmental authority or court or governmental agency of
competent jurisdiction that (i) prohibits consummation of the Merger or the
transactions contemplated hereby or thereby, or (ii) imposes material
limitations on the ability of the Continuing Shareholders effectively to
exercise full rights of ownership with respect to the shares of Common Stock to
be issued to them pursuant to Section 2.2 of this Agreement;
(e) the seven class action lawsuits which have heretofore been
instituted with respect to the transactions contemplated hereby shall have been
consolidated into one action in the Supreme Court of the State of New York and
the settlement of such actions, as reflected in that certain Memorandum of
Understanding dated January 19, 1999 (the "Memorandum of Understanding") among
the parties to such actions, shall have been approved by the Supreme Court of
New York County, final judgment shall have been entered in accordance with the
Settlement Agreement contemplated in the Memorandum of Understanding and shall
have become final, such actions shall have been dismissed with prejudice and
without costs to any party (except as provided in the Memorandum of
Understanding) and no holders, or holders of no more than an aggregate of
1,000,000 shares of Common Stock, shall have requested exclusion from the
"Class", as such term is defined in the Memorandum of Understanding.
(f) neither (i) any action, suit or proceeding before any court or
governmental body relating to the Merger or the transactions contemplated hereby
shall be pending in which an unfavorable judgment or decree could prevent or
substantially delay the consummation of the Merger, or is reasonably likely to
(w) result in a material increase in the aggregate Merger Consideration, (x)
result in an award of material damages, (y) cause the Merger to be rescinded or
(z) result in a material amount of rescissory damages, nor (ii) any decision in
any action, suit or proceeding relating to the Merger or the transactions
contemplated hereby shall have been rendered by any court or governmental body
which has any such effect; and
(g) the Company shall have obtained the Debt Financing referred to in
Section 4.5: (i) in at least the amount set forth in the Financing Letter, (ii)
on the material terms and conditions no less favorable to the Surviving
Corporation than those set forth in the term sheet heretofore delivered to the
Special Committee, and (iii) having a yield to maturity not to exceed 11.25% per
annum.
6.3 Conditions to the Obligations of the Company. The obligation of the
Company pursuant to this Agreement to consummate the Merger is also subject to
the satisfaction or waiver, at the Closing, of the following additional
conditions:
(a) the representations and warranties of Mergeco contained herein
shall be true and correct in all respects (in the case of any representation or
warranty containing any materiality
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qualification) or in all material respects (in the case of any representation or
warranty without any materiality qualification) as of the date of this Agreement
and as of the Closing with the same effect as though all such representations
and warranties had been made as of the Closing, except (i) for any such
representations and warranties made as of a specified date, which shall be true
and correct as of such date, (ii) as expressly contemplated by this Agreement,
and (iii) for breaches of representations or warranties that would not have a
material adverse effect on the ability of Mergeco to consummate the transactions
contemplated hereby; and the Company shall have received from Mergeco a member's
certificate to this effect at the Closing; and
(b) each and all of the covenants and agreements of Mergeco to be
performed and complied with pursuant to this Agreement prior to the Closing
shall have been duly performed and complied with in all material respects except
where the failure to comply with such covenant or agreement would not have a
material adverse effect on the ability of Mergeco to consummate the transactions
contemplated hereby; and the Company shall have received from Mergeco a member's
certificate to this effect at the Closing; and
(c) no statute, rule, regulation, or temporary, preliminary or
permanent order or injunction shall have been proposed, promulgated, enacted,
entered, enforced or deemed applicable by any state, federal or foreign
government or governmental authority or court or governmental agency of
competent jurisdiction that prohibits consummation of the Merger or the
transactions contemplated hereby or thereby.
ARTICLE VII
CLOSING
7.1 Time and Place. The closing of the Merger (the "Closing") shall
take place at the offices of Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of
the Americas, New York, New York, as soon as practicable following satisfaction
or waiver of the conditions set forth in Article VI. The date on which the
Closing actually occurs is herein referred to as the "Closing Date."
7.2 Filings at the Closing. Promptly following the Closing, the Company
and Mergeco shall cause Certificates of Merger, together with any other
documents required by law to effectuate the Merger, to be executed, verified and
delivered for filing by the New York Department of State as provided by Section
904-a of the NYBCL and Section 1003 of the NYLLCL, respectively, to the extent
required, and shall take any and all other lawful actions and do any and all
other lawful things necessary to cause the Merger to become effective.
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ARTICLE VIII
TERMINATION AND ABANDONMENT
8.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the shareholders of the
Company:
(a) by mutual consent of the Board of Directors of the Company (by
action taken by the Company's Board of Directors) and the members of Mergeco;
(b) automatically, without action by any party hereto, if, at the
Shareholders' Meeting, the Company's shareholders shall have not voted to adopt
this Agreement in accordance with the requirements set forth in Sections 6.1(a)
and (b);
(c) by action of the Board of Directors of the Company or the members
of Mergeco if, without the fault of the terminating party, the Merger has not
been consummated on or prior to August 31, 1999;
(d) by action of the Board of Directors of the Company or the members
of Mergeco if the Special Committee shall have withdrawn or modified in a manner
adverse to Mergeco its approval or recommendation of the Merger, this Agreement
or the transactions contemplated hereby;
(e) by action of the Board of Directors of the Company or the members
of Mergeco if (i) any of the events set forth in Section 6.1(c) shall have
occurred or (ii) consents or approvals described in Section 6.1(d) shall not
have been obtained prior to the Closing or shall have become incapable of being
obtained, and, in the case of (i) or (ii), shall not have been, on or before the
date of such termination, permanently waived by the Board of Directors of the
Company or the members of Mergeco, as the case may be;
(f) by action of the members of Mergeco if (i) any of the conditions
set forth in Sections 6.2(a), (b), (e), or (g) that are required to be satisfied
at or prior to the Closing shall not have been satisfied prior to the Closing or
shall have become incapable of being satisfied or (ii) if any of the events set
forth in Sections 6.2(c), (d) or (f) shall have occurred prior to the Closing
and, in the case of (i) or (ii), shall not have been, on or before the date of
such termination, permanently waived by Mergeco; provided, however, that, in the
case of Sections 6.2(a) or (b), the Company shall not have cured such breach, in
all material respects, within ten (10) business days following the receipt of
written notice from Mergeco of such breach; and
(g) by action of the Board of Directors of the Company if (i) any of
the conditions set forth in Sections 6.3(a) or (b) that are required to be
satisfied at or prior to the Closing shall not have been satisfied prior to the
Closing or shall have become incapable of being satisfied or (ii) if any of the
events set forth in Section 6.3(c) shall have occurred prior to the Closing and,
in the case of (i)
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or (ii), shall not have been, on or before the date of such termination,
permanently waived by the Board of Directors of the Company; provided, however,
that, in the case of Sections 6.3(a) and (b), Mergeco and the Continuing
Shareholders shall not have cured such breach, in all material respects, within
ten (10) business days following the receipt of written notice from the Company
of such breach.
8.2 Procedure and Effect of Termination. In the event of termination
and abandonment of the Merger by either Mergeco or the Company pursuant to
Section 8.1, written notice thereof shall forthwith be given to the other, and
this Agreement shall terminate and the Merger shall be abandoned, without
further action by any of the parties hereto. If this Agreement is terminated as
provided herein, no party hereto shall have any liability or further obligation
to any other party to this Agreement; provided, however, that (i) any
termination by the Company arising out of a breach by Mergeco or the Continuing
Shareholders of any representation, warranty, covenant or agreement contained in
this Agreement shall be without prejudice to the rights of the Company to seek
damages with respect thereto, and (ii) any termination by Mergeco arising out of
a breach by the Company of any representation, warranty, covenant or agreement
contained in this Agreement, other than a breach by the Company that is the
direct result of an act or omission of the Continuing Shareholders, shall be
without prejudice to the rights of Mergeco to seek damages with respect thereto;
and provided, further, however, that the obligations set forth in this Section
8.2 and Section 9.6 shall in any event survive any termination.
ARTICLE IX
MISCELLANEOUS
9.1 Amendment; Modification and Approval of Special Committee. Subject
to applicable law, this Agreement may be amended, modified or supplemented only
by written agreement of Mergeco and the Continuing Shareholders, on the one
hand, and the Company, on the other hand, at any time prior to the Effective
Time with respect to any of the terms contained herein; provided, however, that
(i) after this Agreement is adopted by the Company's shareholders pursuant to
Section 5.5, no such amendment or modification shall be made that reduces the
amount or changes the form of the Merger Consideration or otherwise materially
and adversely affects the rights of the Public Shareholders hereunder without
further approval by the holders of such number of votes of shares of Common
Stock that are required to approve this Agreement pursuant to Sections 6.1(a)
and (b), and (ii) the approval of the Special Committee shall be required for
any action that may be taken by the Board of Directors pursuant to this
Agreement, including without limitation, any determination to terminate this
Agreement, any amendment or modification of this Agreement, any extension by the
Company of the time for the performance of any obligations or other acts of
Mergeco and any waiver of any of the Company's rights under this Agreement.
9.2 Waiver of Compliance; Consents. Any failure of Mergeco or the
Company to comply with any obligation, covenant, agreement or condition herein
may be waived by the other party, only by a written instrument signed by the
party granting such waiver (and if required pursuant to Section 9.1(ii), by an
authorized member of the Special Committee), but such waiver or failure to
insist upon
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<PAGE>
strict compliance with such obligation, covenant, agreement or condition shall
not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this Section
9.2.
9.3 Non-Survival of Representations and Warranties. Each and every
representation and warranty made in this Agreement shall expire with, and be
terminated and extinguished by, the Merger. This Section 9.3 shall have no
effect upon any other obligation of the parties hereto, whether to be performed
before or after the Closing.
9.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if (i) delivered personally or by
nationally-recognized overnight courier, (ii) mailed by registered or certified
mail, return receipt requested, postage prepaid or (iii) transmitted by
facsimile, and in each case, addressed to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice:
(a) if to Mergeco or the Continuing Shareholders, to:
Sbarro Merger LLC
401 Broadhollow Road
Melville, New York 11747
Facsimile: (516) 715-4190
Attention: Mario Sbarro
with copies to
Warshaw Burstein Cohen Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, New York 10017
Facsimile: (212) 972-9150
Attention: Arthur A. Katz, Esq.
(b) if to the Company, to
Sbarro, Inc.
401 Broadhollow Road
Melville, New York 11747
Facsimile: (516) 715-4185
Attention: Robert S. Koebele, Vice President-Finance
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<PAGE>
with copies to
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Facsimile: (212) 704-6288
Attention: Richard A. Rubin, Esq.
and to
Special Committee of the Board of Directors of Sbarro, Inc.
c/o Steven J. Gartner, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Facsimile: (212) 728-8111
with copies to
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Facsimile: (212) 728-8111
Attention: Steven J. Gartner, Esq.
Any notice so addressed shall be deemed to be given (x) three business days
after being mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid and (y) upon delivery, if transmitted by personal
delivery, nationally-recognized overnight courier or facsimile; provided,
however, that notices of a change of address shall be effective only upon
receipt thereof.
9.5 Assignment; Parties in Interest. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns; but neither this
Agreement nor any of the rights, interests or obligations hereunder may be
assigned by any party without the prior written consent of the other parties.
Except for Section 5.10, which is intended for the benefit of the Indemnified
Parties, this Agreement is not intended to confer upon any person, except the
parties, any rights or remedies under or by reason of this Agreement.
9.6 Costs and Expenses. Each party represents and warrants that it has
not obligated either itself or any other party to incur any broker, finder or
investment banking fees or related expenses, except for fees and expenses
payable by the Company to Bear, Stearns and to Prudential Securities. In the
event that this Agreement is terminated for any reason, the Company, on the one
hand, and Mergeco and the Continuing Shareholders, on the other hand, shall each
pay their own fees
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<PAGE>
and expenses, it being understood that (a) the fees and expenses of the Company
shall include (i) the fees and expenses of financial advisors (including Bear
Stearns and Prudential Securities), (ii) any fees and expenses involved in the
preparation, printing, mailing and filing of documents used in connection with
the Merger or the Debt Financing, and (iii) the fees and expenses of accountants
and counsel for the Company and the Special Committee, and (b) the fees and
expenses of Mergeco shall include (i) any commitment and other fees or expenses
payable to any person providing or proposing to provide the Debt Financing for
the Merger, and (ii) the fees and expenses of counsel for Mergeco; provided,
however, that in the event this Agreement is terminated for any reason other
than pursuant to (A) Section 8.1(g) due to a breach of this Agreement under
Sections 6.3(a) or (b), or (B) Section 8.1(f) by reason of the failure to obtain
the Debt Financing on the terms contemplated in Section 6.2(g) other than by
reason of circumstances described in Section 6.2(c)(iii), the Company shall pay
and reimburse Mergeco and the Continuing Shareholders for the fees and expenses
incurred by them in connection with the transactions contemplated hereby up to
$500,000 in the aggregate; and provided, further, however, that if this
Agreement is terminated pursuant to Section 8.1(f) by reason of the failure to
obtain the Debt Financing on the terms contemplated in Section 6.2(g) other than
by reason of circumstances described in Section 6.2(c)(iii), Mergeco and the
Continuing Shareholders shall, jointly and severally, be obligated to pay and
reimburse the Company for 50% of the fees and expenses incurred by the Company,
provided that Mergeco and the Continuing Shareholders, together, shall not be
obligated to so pay or reimburse the Company in excess of $500,000 in the
aggregate.
9.7 Specific Performance. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity. Notwithstanding the foregoing, and without
limiting the Company's obligations under Section 9.6, in the event of a breach
of this Agreement by the Company, the sole and exclusive remedy of Mergeco or
the Continuing Shareholders shall be to either (i) terminate this Agreement
pursuant to Section 8.1 (and seek any remedy provided them under Section 8.2),
or (ii) pursue specific performance pursuant to this Section 9.7.
9.8 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.
9.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
9.10 Interpretation. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement. As used in this Agreement, (i) the term "person" shall mean and
include an individual, a partnership, a joint venture, a corporation, a limited
liability company, a trust, an unincorporated organization and a government or
any department or agency thereof; (ii) the terms "affiliate" and "associate"
shall have the meanings set forth in Rule 12b- 2 of the General Rules and
Regulations promulgated under the Exchange Act; (iii) the term "subsidiary" of
any specified corporation shall mean any corporation, limited liability company
or other entity that is controlled, directly or indirectly, by the Company; (iv)
"best efforts" shall mean the commercially reasonable efforts that a prudent
person desirous of achieving a result would use in similar circumstances to
ensure that such result is timely achieved; provided, however, that a person
required to use his best efforts under this Agreement will not be required to
take actions that would result in a materially adverse change in the benefits to
such person of this Agreement and the transactions contemplated hereby; and (v)
the words "hereunder," "herein," "hereof" and words or phrases of similar import
shall refer to each and every term and provision of this Agreement.
9.11 Entire Agreement. This Agreement, including the schedules hereto,
embodies the entire agreement and understanding of the parties in respect of the
subject matter contained herein and supersedes all prior agreements and the
understandings between the parties with respect to such subject matter.
9.12 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void, unenforceable or against its regulatory policy, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in effect and shall in no way be affected, impaired or invalidated.
9.13 Headings. The Article and Section 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.
[THE NEXT PAGE IS THE SIGNATURE PAGE]
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<PAGE>
IN WITNESS WHEREOF, Mergeco, the Company and the Continuing
Shareholders have caused this Agreement to be signed, by their respective duly
authorized officers or directly, as of the date first above written.
SBARRO MERGER LLC
By: /s/ Mario Sbarro
-----------------------------------
Name: Mario Sbarro
Title: Member
SBARRO, INC.
By: /s/ Robert S. Koebele
----------------------------------
Name: Robert S. Koebele
Title: Vice President-Finance
The Continuing Shareholders:
/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
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
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
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<PAGE>
ANNEX II
[LOGO] Prudential
Prudential Securities Incorporated
One New York Plaza, New York, NY 10292
(212) 778-1000
January 19, 1999
The Special Committee of the Board of Directors
Sbarro, Inc.
401 Broadhollow Road
Melville, NY 11747
Members of the Special Committee of the Board of Directors:
We understand that Sbarro, Inc., a New York corporation ("Sbarro" or the
"Company"), Sbarro Merger LLC, a New York limited liability company ("Mergeco"),
and Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited
Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not
individually but as trustees under that certain Trust Agreement dated April 28,
1984 for the benefit of Carmela Sbarro and her descendants (collectively the
"Continuing Stockholders") propose to enter into an Agreement and Plan of Merger
(the "Agreement"), pursuant to which Mergeco will merge with and into the
Company (the "Merger"). In the Merger, each outstanding share of Sbarro common
stock, par value $.01 per share (the "Company Common Stock"), other than shares
held by Mergeco or the Continuing Stockholders or in the Company's treasury,
will be converted into the right to receive $28.85 in cash (the "Merger
Consideration").
You have requested our opinion as to the fairness from a financial point of view
of the Merger Consideration to be received by the Public Stockholders (defined
as all holders of Company Common Stock other than the Continuing Stockholders).
In conducting our analysis and arriving at the opinion expressed herein, we have
reviewed such materials and considered such financial and other factors as we
deemed relevant under the circumstances, including:
(i) a draft, dated January 19, 1999, of the Agreement, including the
exhibits thereto;
(ii) a draft, dated January 19, 1999, of the Bear, Stearns & Co. Inc.
"highly confident" letter (the "Highly Confident Letter");
<PAGE>
[LOGO] Prudential Prudential Securities Incorporated
(iii) certain publicly available historical, financial and operating
data for the Company including, but not limited to, (a) the Annual
Report to shareholders and Annual Report on Form 10-K for the fiscal
year ended December 28, 1997, (b) the Quarterly Report on Form 10-Q for
the fiscal quarter ended October 4, 1998, (c) Reports on Forms 8-K,
dated June 18, 1998, September 22, 1998 and December 2, 1998, and (d)
the Proxy Statement relating to the Annual Meeting of Shareholders held
on August 19, 1998;
(iv) historical stock market prices and trading volumes for the Company
Common Stock;
(v) certain information relating to the Company, including projected
balance sheet, income statement and cash flow data for the 1998 through
2003 fiscal years, prepared by the management of the Company;
(vi) the Company's Confidential Memorandum dated August 1998 and the
preliminary written indications of interest received from prospective
buyers;
(vii) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses that we deemed
comparable to Sbarro or otherwise relevant to our inquiry;
(viii) the financial terms of certain recent transactions, including
"going private" transactions, that we deemed relevant to our inquiry;
and
(ix) such other financial studies, analyses and investigations that we
deemed relevant to our inquiry.
We have assumed, with your consent, that the draft of the Agreement we reviewed
will conform in all material respects to the Agreement when in final form.
We have met with the senior management of the Company to discuss (i) the past
and current operating and financial condition of the Company, (ii) the prospects
for the Company, (iii) their estimates of the Company's future financial
performance and (iv) such other matters we deemed relevant.
In connection with our review and analysis and in arriving at our opinion, we
have relied upon the accuracy and completeness of the financial and other
information provided to us by the Company and have not undertaken any
independent verification of such information or any independent valuation or
appraisal of any of the assets or liabilities of the Company.
With respect to certain financial forecasts provided to us by the Company, we
have assumed that such information (and the assumptions and bases therefor)
represents the Company's best currently available estimate as to the future
financial performance of the Company. Further, our
2
<PAGE>
[LOGO] Prudential Prudential Securities Incorporated
opinion is necessarily based on economic, financial and market conditions as
they exist and can only be evaluated as of the date hereof.
Our opinion does not address nor should it be construed to address the relative
merits of the Merger or alternative business strategies that may be available to
the Company.
As you know, we have been retained by the Company to render this opinion and
will receive a fee for such service, a portion of which fee is contingent upon
the consummation of the Merger. In the ordinary course of business we may
actively trade the shares of Company Common Stock for our own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
This letter and the opinion expressed herein are for the use of the Special
Committee of the Board of Directors of the Company. This opinion does not
constitute a recommendation to the stockholders of the Company as to how such
stockholders should vote in connection with the Merger or as to any other action
such stockholders should take regarding the Merger. This opinion may not be
reproduced, summarized, excerpted from or otherwise publicly referred to or
disclosed in any manner without our prior written consent; except that the
Company may include this opinion in its entirety in any proxy statement relating
to the Merger sent to the Company's stockholders and filed with the Securities
and Exchange Commission.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Merger Consideration to be received by the Public Stockholders
in the Merger is fair from a financial point of view.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
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<PAGE>
PRELIMINARY COPY SUBJECT TO COMPLETION, DATED JUNE 18, 1999
PROXY
SBARRO, INC.
(Solicited on behalf of the Board of Directors)
The undersigned holder of Common Stock of SBARRO, INC., revoking all
proxies heretofore given, hereby constitutes and appoints Mario Sbarro and
Anthony Sbarro, and each of them, proxies, with full power of substitution, for
the undersigned and in the name, place and stead of the undersigned, to vote all
of the undersigned's shares of said stock, according to the number of votes and
with all the powers the undersigned would possess if personally present, at the
Special Meeting of Shareholders of SBARRO, INC., to be held at
_________________________, _______________, New York on _________, ______ __,
1999 at 10:00 a.m., local time, and at any adjournments or postponements
thereof.
The undersigned hereby acknowledges receipt of the Notice of Meeting
and Proxy Statement relating to the meeting and hereby revokes any proxy or
proxies heretofore given.
Each properly executed Proxy will be voted in accordance with the
specifications made on the reverse side of this Proxy and in the discretion of
the proxies on such other matters that may properly come before the meeting or
any adjournments or postponements thereof. Where no choice is specified, this
Proxy will be voted FOR adoption of the Amended and Restated Agreement and Plan
of Merger.
PLEASE MARK, DATE AND SIGN THIS PROXY ON REVERSE SIDE
<PAGE>
PLEASE MARK |X|
The Board of Directors recommends a vote FOR adoption of the YOUR CHOICE
Amended and Restated Agreement and Plan of Merger. LIKE THIS
IN BLACK OR
BLUE INK
Adoption of the Amended and Restated |_| FOR |_| AGAINST |_| ABSTAIN
Agreement and Plan of Merger, dated as
of January 19, 1999, among the
Company, Sbarro Merger LLC, 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.
Signatures(s)_________________________________________ Dated____________, 1999
(Signatures should conform to names as registered. For jointly owned shares,
each owner should sign. When signing as attorney, executor, administrator,
trustee, guardian or officer of a corporation, please give full title.)
MEMORANDUM OF UNDERSTANDING
WHEREAS, on or about November 25, 1998, Sbarro, Inc.
("Sbarro") announced that it had received a proposal from the Sbarro family (the
"Acquisition Group") to acquire for $27.50 cash per share the Sbarro shares that
they collectively did not already own in a transaction to be structured as a
cash merger (the "Merger") with a company to be owned by the Acquisition Group
(the "Merger Proposal"); and
WHEREAS, five putative class action lawsuits challenging the
Merger Proposal were filed by Sbarro shareholders and are pending in the Supreme
Court of the State of New York, County of New York (the "Actions"); and
WHEREAS, as a result of the pendency of the Actions, counsel
for plaintiffs in the Actions and representatives of the Acquisition Group and
Sbarro conducted negotiations in an effort to reach a settlement of the Actions
in conjunction with the consideration of the Merger Proposal by the Special
Committee of the Board of Directors of Sbarro appointed to consider the Merger
Proposal (the "Special Committee"); and
WHEREAS, as a result of discussions and negotiations that the
Acquisition Group had with plaintiffs' counsel and with the Special Committee,
the Acquisition Group has agreed to the terms of the revised Merger Proposal
discussed below;
NOW THEREFORE, as a result of the foregoing, the parties to
the Actions, by their respective attorneys, have reached an
agreement-in-principle providing for the settlement of the Actions (the
"Settlement") on the terms and subject to the conditions set forth below in this
memorandum of understanding (the "Memorandum"):
1. The purpose of this Memorandum is to set forth the
agreement-in-principle of the parties to the Actions with respect to the matters
addressed below.
2. In full settlement of any and all claims whatsoever which
have been or could have been made in the Actions, all of which shall be released
and discharged:
a. Subject to the approval of a merger agreement (the
"Merger Agreement") by the Special Committee, the board of directors of Sbarro,
the Acquisition Group and the Sbarro stockholders, and the satisfaction or
waiver of all conditions to closing thereunder, the Acquisition Group may
proceed with the Merger in which the holders of Sbarro stock, other than the
Acquisition Group, will receive $28.85 cash per share (the "Merger
Consideration").
<PAGE>
b. The parties to the Actions agree that the cash
consideration of $28.85 per Sbarro share, representing a $1.35 per share
increase over the initial Merger Proposal constitutes fair, adequate and
reasonable consideration to be paid to the holders of Sbarro stock other than
the Acquisition Group and for the settlement of all claims which were raised or
could have been raised by plaintiffs or any members of the Class (as defined
below) in the Actions.
3. The parties to the Actions will use their best efforts to
complete the discovery contemplated by this Memorandum and to agree upon,
execute and present to the Supreme Court, New York County, as soon as
practicable, a formal Stipulation of Settlement and such other documents as may
be necessary and appropriate in order to obtain the prompt approval by the Court
of the Settlement and the dismissal with prejudice of the Actions and any other
related actions in the manner contemplated herein and by the Stipulation of
Settlement. Pending the negotiation and execution of the Stipulation of
Settlement, all proceedings in the Actions, except for Settlement-related
proceedings pursuant to this Memorandum of Understanding, shall be suspended.
4. The Stipulation of Settlement expressly will provide as
follows:
a. for the conditional certification of the Actions,
for settlement purposes only, as a class action pursuant to Article 9 of the New
York Civil Practice Law and Rules on behalf of a class consisting of all record
and beneficial owners of Sbarro stock during the period beginning on and
including the close of business on November 25, 1998 through and including the
date of the consummation of the Merger, including any and all of their
respective successors in interest, predecessors, representatives, trustees,
executors, administrators, heirs, assigns or transferees, immediate and remote,
and any person or entity acting for or on behalf of, or claiming under any of
them, and each of them, and excluding the defendants in the Actions and any
person, firm, trust, corporation or other entity related to or affiliated with
any of the defendants (the "Class")
b. for the complete discharge, dismissal with
prejudice, settlement and release of, and an injunction barring, all claims,
demands, rights, actions or causes of actions, rights, liabilities, damages,
losses, obligations, judgments, suits, matters and issues of any kind or nature,
that have been or could have been asserted in the Actions or in any court,
tribunal or proceeding by or on behalf of any member of the Class, whether
individual, class, representative, legal, equitable or any other type or in any
capacity against defendants in the Actions or any of their families, parent
entities, associates, affiliates or subsidiaries and each and all of their
respective past, present or future officers, directors, stockholders, members,
representatives,
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<PAGE>
employees, attorneys, financial or investment advisors, consultants,
accountants, investment bankers, commercial bankers, engineers, advisors or
agents, heirs, executors, trustees, general or limited partners or partnerships,
personal representatives, estates, administrators, predecessors, successors and
assigns (collectively, the "Released Persons").
c. that defendants in the Actions have denied, and
continue to deny, that any of them have committed or have threatened to commit
any violations of law or breaches of duty to the plaintiffs, the Class or
anyone;
d. that defendants in the Actions are entering into
the Stipulation of Settlement in part because the Settlement would eliminate the
distraction, burden and expense of further litigation;
e. subject to the Order of the Court, pending final
determination of whether the Settlement provided for in the Stipulation of
Settlement should be approved, that plaintiffs and all members of the Class, and
each of them, are barred and enjoined from commencing, prosecuting, instigating
or in any way participating in the commencement or prosecution of any action
asserting any released claim, either directly, representatively, derivatively or
in any other capacity, against any defendant in the Actions which have been or
could have been asserted, or which arise out of or relate in any way to any of
the transactions or events described in any complaint or amended complaint in
the Actions.
f. defendants may withdraw from the settlement if the
holders of more than 1,000,000 shares of common stock of Sbarro shall have
requested exclusion from the Class.
5. The Settlement contemplated by this Memorandum of
Understanding will not be binding upon any party until, and is otherwise subject
to:
a. the completion by plaintiffs in the Actions of such
documentary discovery and/or oral depositions or interviews as reasonably are
requested by them and agreed to by the respective party from whom discovery is
requested;
b. a formal Stipulation of Settlement (and such other
documentation as may be required to obtain final approval by the Court of the
Settlement) has been executed by counsel for the parties to the Actions, which
Stipulation of Settlement shall include a provision permitting defendants to
terminate the Settlement if, prior to the effective time of the Merger, any
action is pending in any state or federal court which raises any settled claims
against any of the Released Persons;
c. the consummation of the Merger;
3
<PAGE>
d. final approval by the Court of the Settlement (and
the exhaustion of possible appeals, if any) and the dismissal of the Actions by
the Court with prejudice and without awarding costs to any party (except as
provided herein) have been obtained, and entry by the Court of a final order and
judgment containing such release language as is negotiated by the parties and
contained in the Stipulation of Settlement; and
e. the determination by defendants in the Actions that
the dismissal of the Actions in accordance with the Stipulation of Settlement
will result in the release with prejudice of the settled claims.
6. This Memorandum of Understanding shall be null and void and
of no force and effect should any of the conditions herein not be met or should
plaintiffs' counsel determine in good faith, based upon the discovery
contemplated by this Memorandum, that the proposed Settlement is not fair,
reasonable and adequate; in such event, this Memorandum of Understanding shall
not be deemed to prejudice in any way the positions of the parties with respect
to the Actions nor to entitle any party to the recovery of costs and expenses
incurred to implement this Memorandum of Understanding (except as provided in
paragraph 7 hereof for the costs of notice of the Settlement).
7. Plaintiffs' counsel intend to apply to the Court for an
award of attorneys' fees (inclusive of disbursements and fees), in an amount of
no more than $2.1 million, to be paid by Sbarro pursuant to the terms of the
Stipulation of Settlement following final Court approval of the Settlement and
the entry of an order awarding fees and expenses by the Court. Defendants agree
that they will not oppose such an application. Defendants shall be responsible
for providing notice of the Settlement to the members of the Class and shall pay
the costs and expenses relating to providing notice of the Settlement to the
Class.
8. Neither this Memorandum of Understanding nor any provision
hereof shall be deemed a presumption, concession or an admission by any
defendant in the Actions of any fault, liability or wrongdoing as to any facts
or claims alleged or asserted in the Actions, or any other actions or
proceedings, and shall not be interpreted, construed, deemed, invoked, offered,
or received in evidence or otherwise used by any person in the Actions, or in
any other action or proceeding, whether civil, criminal or administrative.
9. This Memorandum of Understanding constitutes the entire
agreement among the parties with respect to the subject matter hereof, and may
not be amended nor any of its provisions waived except by a writing signed by
all of the signatories hereto.
4
<PAGE>
10. This Memorandum of Understanding and the Settlement
contemplated by it shall be governed by, and construed in accordance with, the
laws of the State of New York, regardless of laws that might otherwise govern
under applicable conflict of laws principles.
11. This Memorandum will be executed by counsel for the
parties to the Actions. This Memorandum may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. By signing this
Memorandum, counsel for plaintiffs in the Actions represent that they have
authority to act on behalf of all plaintiffs and their counsel in all of the
actions constituting the Actions.
12. This Memorandum of Understanding shall be binding upon and
shall inure to the benefit of the parties and their respective agents,
successors, executors, heirs and assigns.
IN WITNESS WHEREOF, the parties have executed this Memorandum
effective as of the date set forth below.
ABBEY GARDY & SQUITIERI, LLP PARKER CHAPIN FLATTAU
& KLIMPL, LLP
By: /s/ Arthur N. Abbey By: /s/ Richard Rubin
--------------------------- ----------------------------
Arthur N. Abbey Richard Rubin
212 East 39th Street 1211 Avenue of the Americas
New York, New York 10016 New York, New York 10036
(212) 889-3700 (212) 704-6000
BERNSTEIN LITOWITZ BERGER WILLKIE FARR & GALLAGHER
& GROSSMANN LLP
By: /s/ Jeffrey A. Klafter By: /s/ Stephen W. Greiner
----------------------------- ---------------------------
Jeffrey A. Klafter Stephen W. Greiner
1285 Avenue of the Americas 787 Seventh Avenue
New York, New York 19919 New York, New York 10019
(212) 554-1400 (212) 728-8000
5
<PAGE>
GOODKIND LABATON RUDOFF WARSHAW BURSTEIN COHEN
& SUCHAROW LLP SCHLESINGER & KUH, LLP
By: /s/ Jonathan M. Plasse By: /s/ Arthur A. Katz
----------------------------- -----------------------------
Jonathan M. Plasse Arthur A. Katz
100 Park Avenue 555 Fifth Avenue
New York, New York 10017 New York, New York 10017
(212) 907-0700 (212) 984-7700
On behalf of:
ENTWISTLE & CAPPUCCI LLP 400 Park Avenue, 16th Floor New York, New York 10022
(212) 894-7200
WECHSLER HARWOOD HALEBIAN & FEFFER, LLP
488 Madison Avenue, 8th Floor
New York, New York 10022
(212) 935-7400
WOLF POPPER, LLP
845 Third Avenue
New York, New York 10022
(212) 759-4600
BERNSTEIN LIEBHARD & LIFSHITZ, LLP 10 East 40th Street New York, New York 10016
(212) 779-1414
LOWEY DANNENBERG BEMPORAD & SELINGER, P.C.
The Gateway Building
1 North Lexington Avenue
White Plains, New York 10601
(914) 997-0500
FINKELSTEIN THOMPSON & LOUGHRAN
Suite 601
1055 Thomas Jefferson Street, N.W.
Washington, D.C. 20007
(202) 337-8000
Dated: January 19, 1999
6
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
- --------------------------------------------------)
LEE BRENIN, On Behalf of Himself ) Index No. 98-605796
and All Others Similarly Situated, )
)
Plaintiff, )
) STIPULATION OF SETTLEMENT
v. ) -------------------------
)
MARIO SBARRO, ANTHONY SBARRO, )
CARMELA SBARRO, JOSEPH SBARRO, )
and SBARRO, INC. )
)
Defendants. )
- --------------------------------------------------)
PETER SALIT, On Behalf of Himself ) Index No. 98-605801
and All Others Similarly Situated, )
)
Plaintiff, )
)
v. )
)
SBARRO, INC., JOSEPH SBARRO, ANTHONY )
SBARRO, MARIO SBARRO, CARMELLA )
SBARRO, TERRY VINCE, HAROLD )
KESTENBAUM, RICHARD A. MANDELL, )
PAUL A. VATTER AND BERNARD )
ZIMMERMAN, )
)
Defendants. )
- --------------------------------------------------)
<PAGE>
- ------------------------------------------------------)
DAVID FINKELSTEIN, On Behalf of Himself ) Index No. 98-605827
and All Others Similarly Situated, )
)
Plaintiff, )
)
v. )
)
SBARRO, INC., JOSEPH SBARRO, ANTHONY )
SBARRO, MARIO SBARRO, CARMELLA )
SBARRO, TERRY VINCE, HAROLD )
KESTENBAUM, RICHARD A. MANDELL, )
PAUL A. VATTER AND BERNARD )
ZIMMERMAN, )
)
Defendants. )
- ------------------------------------------------------)
BARRY ADELMAN, On Behalf of Himself ) Index No. 98-605847
and All Others Similarly Situated, )
)
Plaintiff, )
)
v. )
)
MARIO SBARRO, ANTHONY SBARRO, )
CARMELA SBARRO, JOSEPH SBARRO, )
and SBARRO, INC. )
)
Defendants. )
- ------------------------------------------------------)
<PAGE>
- ---------------------------------------------------------)
CHARTER CAPITAL CORP., GRUNTAL )
FINANCIAL LLC SAVINGS PLAN A/C )
NORMAN EPSTEIN, HARBOR FINANCE )
PARTNERS, LIST, INC. and WAYNE CRIMI, )
On Behalf of Themselves and All Others Similarly )
Situated, )
)
Plaintiffs, ) Index No. 99-100884
)
- against - )
)
JOSEPH SBARRO, ANTHONY SBARRO, )
MARIO SBARRO, BERNARD ZIMMERMAN, )
PAUL VATTER, HAROLD KESTENBAUM, )
JERRY VINCE, RICHARD A. MANDELL and )
SBARRO, INC. )
)
Defendants. )
- ---------------------------------------------------------)
The parties to the above-captioned actions (the "Actions"), by and
through their respective attorneys, have entered into this Stipulation of
Settlement (the "Stipulation") subject to the approval of the Supreme Court of
the State of New York, County of New York (the "Court").
WHEREAS,
A. Defendant Sbarro, Inc. ("Sbarro" or the "Company") is a New York
corporation with its principal executive offices located at 401 Broadhollow
Road, Melville, New York 11747. Sbarro operates a chain of family-style,
cafeteria-type Italian restaurants under the "Sbarro" and "Sbarro The Italian
Eatery" names. As of January 3, 1999, Sbarro had 630 Company-owned and 268
franchised restaurants in the United States and abroad.
<PAGE>
B. Defendants Mario Sbarro, Joseph Sbarro, Anthony Sbarro, Carmela
Sbarro, Terry Vince, Harold L. Kestenbaum, Richard A. Mandell, Paul A. Vatter
and Bernard Zimmerman (collectively, the "Individual Defendants" and together
with Sbarro, the other defendant in the Actions, the "Defendants") are, and were
at all times relevant to this litigation, officers and/or directors of Sbarro.
C. On January 20, 1998, Sbarro announced that it had received a
proposal from Defendants Mario Sbarro, Joseph Sbarro and Anthony Sbarro
(including Joseph Sbarro (1994) Family Limited Partnership and The Trust of
Carmela Sbarro (collectively, the "Sbarro Family") pursuant to which all other
holders of Sbarro common stock (the "Public Shareholders") would receive $28.50
cash per share for their Sbarro shares in a transaction structured as a cash
merger with a company to be owned by the Sbarro Family (the "Initial Merger
Proposal"). The Sbarro Family are the owners of approximately 34.4% of Sbarro's
presently outstanding common stock (Sbarro's only outstanding class of capital
stock) and the Public Shareholders own the remaining 65.6%. The Initial Merger
Proposal was terminated in June 1998.
D. Following the close of business on November 25, 1998, Sbarro
announced that it had received a proposal from the Sbarro Family pursuant to
which the Public Shareholders would receive $27.50 cash per share for their
Sbarro shares in a transaction to be structured as a cash merger of an entity to
be owned by the Sbarro Family with and into the Company (the "Revised Merger
Proposal"). Sbarro named a Special Committee of its Board of Directors,
consisting of Defendants Richard A. Mandell, Harold L. Kestenbaum, Paul A.
Vatter and Terry Vince, to consider the Revised Merger Proposal.
-2-
<PAGE>
E. Following the announcement of the Revised Merger Proposal, the
following putative class actions challenging the Revised Merger Proposal were
filed by Sbarro shareholders in the Supreme Court of the State of New York,
County of New York: Lee Brenin v. Mario Sbarro, et al., Index No. 98-605796;
Peter Salit v. Sbarro, Inc. et al., Index No. 98-605801; David Finkelstein v.
Sbarro, Inc. et al., Index No. 98-605827; Barry Adelman v. Mario Sbarro, et al.,
Index No. 98-605847; Charter Capital et al. v. Joseph Sbarro et al., Index No.
99-100884. In addition, the following putative class actions challenging the
Revised Merger Proposal were filed by Sbarro shareholders in the Supreme Court
of the State of New York, County of Suffolk: Charter Capital Corp. v. Joseph
Sbarro et al., Index No. 98-27736; Harbor Finance Partners and List, Inc. v.
Mario Sbarro et al., Index No. 98-27723; and Gruntal Financial LLC Savings Plan
A/C Norman Epstein v. Richard A. Mandell et al., Index No. 98-27200. The actions
filed in the County of Suffolk were voluntarily discontinued in order to pursue
the litigation in the County of New York. The Actions challenged the Revised
Merger Proposal alleging, among other things, that the $27.50 per share merger
consideration to be paid to the Public Shareholders was inadequate. The Actions
sought, among other things, to enjoin the consummation of the proposed
transaction or, in the alternative, to rescind the transaction if it takes
place, unspecified money damages and attorney's fees and expenses.
F. Following the filing of the Actions, counsel for plaintiffs in the
Actions ("plaintiffs' counsel") and their financial expert met with the Special
Committee's Chairman, counsel and financial advisor, and conducted negotiations
with the Sbarro Family, in an effort to reach a settlement of the Actions.
-3-
<PAGE>
G. As a result of the discussions and negotiations that the Sbarro
Family had with plaintiffs' counsel and with the Special Committee, the Sbarro
Family agreed to raise the price to be paid to the Public Shareholders in the
proposed Merger to $28.85 per share (the "Increased Merger Consideration"), or
to an aggregate of approximately $388.6 million, representing an increase per
share of $1.35, or an aggregate increase of approximately $18.2 million, from
the Revised Merger Proposal announced on November 25, 1998 (the "Final Merger
Proposal"). The Final Merger Proposal was made expressly contingent upon the
adoption of the Agreement and Plan of Merger dated January 19, 1999 among the
Company, Sbarro Mergeco LLC ("Mergeco") and the Sbarro Family (the "Merger" or
"Merger Agreement") by the holders of a majority of the shares of Sbarro common
stock owned by the Public Shareholders (the "Public Shareholders Voting
Requirement"), as well as by two-thirds of all outstanding shares of Sbarro
common stock (the "Statutory Voting Requirement").
H. On January 19, 1999, the following events occurred:
1. After receiving a written opinion from its financial
advisor, Prudential Securities Incorporated ("Prudential"), that, as of the date
of the Merger Agreement, the Increased Merger Consideration was fair, from a
financial point of view, to the Public Shareholders, the Special Committee
concluded that the Merger, as reflected in a proposed Merger Agreement, was fair
to, and in the best interests of, the Company and the Public Shareholders, and
unanimously resolved to recommend that Sbarro's Board of Directors adopt the
Merger Agreement;
2. After a presentation by the Special Committee and based, in
part, on the recommendation of the Special Committee and the fairness opinion
received from Prudential,
-4-
<PAGE>
Sbarro's Board of Directors also determined that the Merger was fair to, and in
the best interests of, the Company and the Public Shareholders and adopted the
Merger Agreement. Consummation of the Merger Agreement is conditioned upon,
among other things: (i) fulfillment of the Public Shareholder Voting
Requirement, as well as of the Statutory Voting Requirement; (ii) receipt of
financing for the transactions contemplated by the Merger Agreement; (iii) the
continued suspension of dividends by the Company; and (iv) settlement of the
Actions; and
3. The parties to the Actions executed a Memorandum of
Understanding (the "MOU"), which contemplates the settlement and dismissal of
the Actions pursuant to this Stipulation.
I. The Sbarro Family agreed to the Final Merger Proposal after
considering the existence of the Actions and the desirability of satisfactorily
addressing the claims set forth in the Actions.
J. Pursuant to the Merger Agreement and subject to the terms and
conditions thereof, Mergeco, a New York limited liability company formed by the
Sbarro Family for the purpose of the Merger, will be merged with and into Sbarro
with each then outstanding share of the Company's common stock, other than
shares held of record by Mergeco or the Continuing Shareholders or in the
Company's treasury, to be converted into the right to receive the Increased
Merger Consideration in cash, without interest. In addition, all outstanding
stock options, including those held by the Sbarro Family, will be terminated,
with the holders thereof to be paid the difference between the Increased Merger
Consideration and the applicable exercise price per share multiplied by the
total number of shares of Sbarro common stock subject to such option.
-5-
<PAGE>
K. Following execution of, and pursuant to, the MOU, plaintiffs'
counsel: (i) continued their investigation and legal analysis of the matters
alleged in the Actions and consulted with their financial advisor; (ii) engaged
in additional discovery, including documentary discovery and the depositions of
Defendant Mario Sbarro, Defendant Richard A. Mandell (Chairman of the Special
Committee), and Dennis Kelly (a Managing Director of Prudential); and (iii)
reviewed and commented upon a draft of the proxy statement which will be
provided to Sbarro shareholders in connection with the Merger (the "Proxy
Statement").
L. In light of the aforementioned investigation, the additional facts
developed in discovery, the events, negotiations and agreements described above,
and an analysis of applicable law, counsel for plaintiffs in the Actions have
concluded that the terms and conditions of the settlement provided for in this
Stipulation (the "Settlement") are fair, reasonable, adequate and in the best
interests of the plaintiffs and the Class (as defined in paragraph 5(c) below).
M. Plaintiffs are entering into this Stipulation after taking into
account: (i) the substantial benefits to the members of the Class from the
Merger Agreement, including the Increased Merger Consideration and the Public
Shareholder Voting Requirement; (ii) the risks of continued litigation; and
(iii) the conclusion of plaintiffs' counsel that the terms and conditions of the
Settlement are fair, reasonable, adequate and in the best interests of the
Public Shareholders. Plaintiffs and plaintiffs' counsel have agreed to the terms
of the Settlement because, in their view, the Settlement achieves plaintiffs'
principal objectives in the litigation, which are to maximize shareholder value
for the Company's shareholders and to provide additional representation for the
Public Shareholders.
-6-
<PAGE>
N. All the defendants in the Actions have denied and continue to deny
vigorously any liability with respect to any and all claims alleged in the
Actions, expressly deny having engaged in any wrongful or illegal activity, or
having violated any law or regulation or duty, and expressly deny that any
person or entity has suffered any harm or damages as a result of the Settled
Claims (as defined in paragraph 4 below). While denying any fault or wrongdoing,
and relying on the provision of this Stipulation that it shall in no event be
construed as or deemed to be evidence of an admission or concession on the part
of Defendants or any Released Person (as defined in paragraph 4 below) of any
fault or liability whatsoever, and without conceding any infirmity in their
defenses against the claims alleged in the Actions, Defendants consider it
desirable that the Actions be settled and dismissed, subject to the terms and
conditions of this Stipulation, because the Settlement will (i) halt the
substantial expense, inconvenience and distraction of continued litigation of
plaintiffs' claims; (ii) finally put to rest those claims; and (iii) dispel any
uncertainty that may exist as a result of this litigation.
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED, subject to the
approval of the Court pursuant to Article 9 of the New York Civil Practice Law
and Rules ("CPLR"), as follows:
SETTLEMENT
1. In consideration for the full settlement, satisfaction, compromise
and release of the Settled Claims, and in furtherance of the Final Merger
Proposal and the Merger Agreement, the parties to the Actions have agreed to
settle the Actions upon the terms described below.
2. The Sbarro Family has agreed to the payment of the Increased Merger
Consideration upon consummation of the Merger as a result of the discussions and
negotiations
-7-
<PAGE>
described above, and after also considering the desirability of obtaining the
dismissal, release and discharge of the Released Persons of and from all Settled
Claims.
3. Plaintiffs' counsel have agreed to the Settlement after having
reviewed a draft of the Proxy Statement to satisfy themselves that the Proxy
Statement would fully and fairly disclose all material information. The
Increased Merger Consideration in the Final Merger Proposal, as reflected in the
terms of the Merger Agreement, together with the opportunity of plaintiffs'
counsel to review and comment on the Proxy Statement, furnishes consideration
for plaintiffs' agreement to release and discharge each of the defendants from
the Settled Claims. Plaintiffs and their counsel shall take all reasonable steps
necessary to support consummation of the Merger.
SETTLED CLAIMS
4. Subject to the Settlement becoming final as contemplated in
paragraph 8 below, any and all claims, demands, rights, actions or causes of
action, rights, liabilities, damages, losses, obligations, judgments, suits,
matters and issues of any kind or nature, known or unknown, that have been or
could have been asserted in the Actions or in any court, tribunal or proceeding
by or on behalf of any member of the Class (who has not elected to be excluded
from the Class), whether individual, class, representative, derivative, legal,
equitable or any other type or in any other capacity relating to the claims
asserted in the Actions (collectively, the "Settled Claims") against Defendants
in the Actions, Mergeco, the Sbarro Family or any of their families, parent
entities, associates, affiliates or subsidiaries, and each and all of the
foregoing's past, present or future officers, directors, shareholders, members,
employees, attorneys, financial or investment advisors, consultants,
accountants, investment bankers, commercial bankers, engineers, advisors or
agents, general or limited partners or partnerships, and the personal
representatives, heirs,
-8-
<PAGE>
estates, administrators, executors, trustees, predecessors in interest,
successors and assigns of each of the foregoing (collectively, the "Released
Persons") shall be fully, finally and forever compromised, settled, discharged
and dismissed with prejudice and on the merits and released pursuant to the
terms and conditions set forth herein, provided however, that the parties hereto
expressly reserve all rights and claims to enforce compliance with the terms of
this Stipulation. With respect to any and all claims being settled and released,
it is the intention of the parties hereto that, upon the Settlement becoming
final, plaintiffs and each member of the Class who has not elected to be
excluded from the Class, hereby expressly waive and relinquish, to the fullest
extent permitted by law, the provisions, rights, and benefits of Section 1542 of
the California Civil Code, which statute provides that:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
SUBMISSION AND APPLICATION TO COURT
5. As soon as practicable after the execution of this Stipulation, the
parties hereto shall jointly apply to the Court for an order substantially in
the form attached hereto as Exhibit A (the "Scheduling Order"), which shall
include, among other things, provisions that:
a. consolidate the Actions and appoint the signatories to this
Stipulation on behalf of plaintiffs as Co-Lead Counsel for plaintiffs.
b. preliminarily find the Settlement to be fair, reasonable,
adequate and in the best interests of the Class, subject to a final
determination based upon the record before the Court at the Settlement Hearing
(as defined below);
-9-
<PAGE>
c. provide for the certification of the Actions, for
settlement purposes only, as a class action pursuant to CPLR Article 9 on behalf
of a class consisting of all record and beneficial owners of Sbarro common stock
during the period beginning on and including the close of business on November
25, 1998 through and including the date the Merger is consummated (the "Merger
Date"), including any and all of their personal representatives, heirs, estates,
administrators, executors, trustees, predecessors in interest, transferees,
successors and assigns, immediate and remote, and any person or entity acting
for or on behalf of, or claiming under, any of them, and each of them, but
excluding the Defendants in the Actions, Mergeco, the Sbarro Family and their
respective personal representatives, heirs, estates, administrators, executors,
trustees, predecessors in interest, successors and assigns (the "Class");
d. certify the named plaintiffs in the Actions, on whose
behalf the Stipulation has been executed, as representative parties for the
Class;
e. direct that a settlement hearing (the "Settlement Hearing")
be held to determine whether the Court should (i) approve the Settlement
pursuant to CPLR 908 as fair, reasonable, adequate and in the best interests of
the Class, (ii) enter an Order and Final Judgment substantially in the form
attached hereto as Exhibit B, dismissing the Actions with prejudice and on the
merits, and with each party to bear its own costs (except as provided herein),
and extinguish, release and enjoin prosecution of any and all Settled Claims,
(iii) approve an application of counsel for plaintiffs for an award of fees and
reimbursement of expenses, and (iv) hear such other matters as the Court may
deem necessary and appropriate; and
f. provide that (i) a copy of the Notice of Pendency of Class
Action, Proposed Settlement of Class Action and Settlement Hearing (the
"Notice"), substantially in the
-10-
<PAGE>
form attached hereto as Exhibit A-1, is approved, (ii) a copy of the Summary
Notice (the "Summary Notice"), substantially in the form attached hereto as
Exhibit A-2, is approved, and (iii) the distribution of the Notice and Summary
Notice, substantially in the manner set forth in the Scheduling Order,
constitutes the best notice practicable under the circumstances, is due and
sufficient notice of the Settlement Hearing and of all matters relating to the
Settlement, and fully satisfies the requirements of due process, CPLR Article 9
and all other applicable law.
COSTS OF NOTICE
6. All costs incurred in identifying on the stock records maintained by
or on behalf of Sbarro and notifying the members of the Class of the Settlement,
including the printing and copying of the Notice and publication of the Summary
Notice as set forth in the Scheduling Order, will be paid by Sbarro.
ORDER AND FINAL JUDGMENT
7. If the Settlement (including any modification thereto made with the
consent of the parties as provided for herein) is approved by the Court, the
parties shall promptly request the Court to enter an Order and Final Judgment
substantially in the form attached hereto as Exhibit B, which will, among other
things:
a. determine that the Class has been adequately represented in
the Actions and the Settlement;
b. approve the Stipulation and the Settlement and adjudge the
terms thereof to be fair, reasonable, adequate and in the best interests of the
Class;
c. determine that the requirements of CPLR Article 9 and due
process have been satisfied in connection with notice to the Class;
-11-
<PAGE>
d. dismiss, as to all Released Persons, the Actions with
prejudice and without costs, except as herein provided, and extinguish,
discharge and release any and all Settled Claims of each plaintiff and each
other Class member, except those persons who submit a valid and timely request
for exclusion from the Class in the manner described in the Notice ("Request for
Exclusion"), said dismissal to be subject only to the Settlement becoming final
as contemplated in paragraph 8 and compliance by the parties with the terms of
this Stipulation and any Order of the Court concerning this Stipulation, and
permanently enjoin plaintiffs and all other members of the Class, except those
persons who submit a valid and timely Request for Exclusion, from asserting,
commencing, prosecuting or continuing, either directly, individually,
representatively, derivatively or in any other capacity, any of the Settled
Claims against Mergeco, the Sbarro Family or any Released Person; and
e. without affecting the finality of the Order and Final
Judgment, reserve the Court's jurisdiction over all of the parties and the Class
members, except those persons who submit a valid and timely Request for
Exclusion, for the administration and consummation of the Settlement and this
Stipulation and the application of plaintiffs' counsel for an award of
attorneys' fees and expenses.
FINALITY OF SETTLEMENT
8. The approval of the Settlement shall be considered final when the
following three events have occurred: (i) entry of the Order and Final Judgment
approving the Settlement; (ii) expiration of any applicable period for the
appeal of the Order and Final Judgment without an appeal having been filed or,
if an appeal is filed, entry of an order affirming the Order and Final Judgment
appealed from and the expiration of any applicable period for the
reconsideration,
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<PAGE>
rehearing or appeal of such affirmance without any motion for reconsideration or
rehearing or further appeal having been filed; and (iii) consummation of the
Merger.
RIGHTS TO WITHDRAW FROM THE SETTLEMENT
9. Defendants, by action taken by a majority of Defendants Mario
Sbarro, Joseph Sbarro and Anthony Sbarro, or plaintiffs, by action taken by
plaintiffs' Co-Lead Counsel (as identified below), shall have the option to
withdraw from and terminate the Settlement in the event that: (i) either the
Scheduling Order or the Order and Final Judgment referred to above are not
entered substantially in the forms specified in Exhibits A and B hereto,
respectively, including such modifications thereto as may be ordered by the
Court with the consent of the parties; (ii) the Settlement is not approved by
the Court or is disapproved, or the Court or appellate court requests the
parties to make a material modification to the Settlement to which the parties
do not consent; (iii) the condition to finality of the Settlement set forth in
clause (ii) of paragraph 8 above shall not have been satisfied; or (iv) the
Merger Agreement is terminated. In order to exercise this option to withdraw
from and terminate this Settlement, a party shall provide, by hand or facsimile,
written notice of such withdrawal and the grounds therefor to all signatories to
this Stipulation as soon as is practicable.
10. In the event the Settlement is not approved by the Court, or the
Court approves the Settlement but such approval is reversed or vacated on
appeal, reconsideration or otherwise and such order reversing or vacating the
Settlement becomes final by lapse of time or otherwise, or in the event the
Merger is not consummated on or before September 30, 1999, or if any of the
conditions to such Settlement are not fulfilled, then the Settlement shall be of
no further force and effect, and this Stipulation and any amendment thereof, and
all negotiations, proceedings and
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<PAGE>
statements relating thereto, except for paragraph O, this paragraph and
paragraphs 6 and 14, shall be null and void and without prejudice to any party,
and each party shall be restored to his, her or its respective position as it
existed prior to the execution of the MOU.
ATTORNEYS' FEES
11. At or before the Settlement Hearing, plaintiffs' counsel will apply
for an award of attorneys' fees (inclusive of expenses), not to exceed
$2,100,000, subject to the Settlement becoming final, as contemplated in
paragraph 8. Defendants agree they will not object to such an application by
plaintiffs' counsel, but Defendants retain the right to oppose any other
application for fees or disbursements by plaintiffs, plaintiffs' counsel or any
other person. Any fee and expense award to plaintiffs' counsel shall be paid
exclusively by Sbarro on behalf of and for the benefit of all Defendants. The
fairness, reasonableness and adequacy of the Settlement, and whether the
Settlement is in the best interests of the Public Shareholders, may be
considered and ruled upon by the Court independently of its consideration of any
award of attorneys' fees and expenses. No counsel for plaintiffs shall apply to
any court for any fees and expenses except as provided for in this paragraph.
12. Subject to the terms and conditions of this Stipulation, such fees
and expenses shall be paid within five (5) business days of the later of (i) the
date on which the Settlement becomes final as provided in paragraph 8 above, or
(ii) the date when the Order granting the application of plaintiffs' counsel for
an award of fees and expenses ("Fee and Expense Order") has become final and, in
either case, upon expiration of any period to file an appeal of the Fee and
Expense Order without an appeal having been filed or, if an appeal is filed,
entry of an order affirming the Fee and Expense Order and the expiration of any
applicable period for the reconsideration, rehearing or
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<PAGE>
appeal of such affirmance without any motion for reconsideration or hearing or
further appeal having been filed. Except as expressly provided herein,
Defendants shall bear no other expenses, costs, damages or fees alleged or
incurred by the named plaintiffs, or any member of the Class, or by any of their
attorneys, experts, advisors, agents or representatives.
AUTHORITY
13. Each of the attorneys executing this Stipulation on behalf of any
party hereto warrants and represents that such attorney has been duly authorized
and empowered to execute this Stipulation on behalf of such party.
STIPULATION NOT AN ADMISSION
14. The provisions contained in this Stipulation and all negotiations,
statements and proceedings in connection therewith shall not be deemed a
presumption, a concession or an admission by any Defendant of any fault,
liability or wrongdoing as to any facts or claims alleged or asserted in the
Actions or any other action or proceeding, and shall not be interpreted,
construed, deemed, invoked, or offered in evidence or otherwise used by any
person in the Actions or in any other action or proceeding, whether civil,
criminal or administrative, except in a proceeding to enforce the terms or
conditions of this Stipulation.
COUNTERPARTS
15. This Stipulation may be executed in any number of actual or
telecopied counterparts and by each of the different parties thereto on several
counterparts, each of which when so executed and delivered shall be an original.
The executed signature page(s) from each actual or telecopied counterpart may be
joined together and attached to one such original and shall constitute one and
the same page and part of the same instrument.
-15-
<PAGE>
WAIVER
16. The waiver by any party of any breach of any provision of this
Stipulation shall not be deemed or construed as a waiver of any other breach,
whether prior, subsequent or contemporaneous, or of any other provision of this
Stipulation.
ENTIRE AGREEMENT: AMENDMENTS
17. This Stipulation constitutes the entire agreement among the parties
with respect to the subject matter hereof, and may not be amended, except by a
writing executed by all of the parties hereto and no provision may be waived
except by a writing executed by the party to be charged.
18. This Stipulation, upon becoming operative, shall be binding upon
and inure to the benefit of the Released Persons, as well as the parties hereto
and their respective heirs, estates, administrators, executors, trustees,
successors and assigns and upon any corporation, partnership or entity into or
with which any party may merge or consolidate or which may otherwise assume its
obligations.
19. All of the exhibits hereto are incorporated herein by reference as
if set forth herein verbatim, and the terms of all exhibits are expressly made
part of this Stipulation.
GOVERNING LAW
20. This Stipulation shall be construed and enforced in accordance with
the laws of the State of New York, without regard to its principles of conflicts
of laws other than Section 5-1401 of New York's General Obligation Law.
-16-
<PAGE>
BEST EFFORTS
21. The parties hereto and their attorneys agree to cooperate fully
with one another in seeking the Court's approval of this Stipulation and the
Settlement and to use their best efforts to effect the confirmation of this
Stipulation and the Settlement.
Dated: April 7, 1999
ABBEY GARDY & SQUITIERI, LLP PARKER CHAPIN FLATTAU
& KLIMPL, LLP
By: /s/ Arthur N. Abbey By: /s/ Joel M. Wolosky
-------------------------- ------------------------------
Arthur N. Abbey Joel M. Wolosky
212 East 39th Street 1211 Avenue of the Americas
New York, NY 10016 New York, NY 10036
(212) 889-3700 (212) 704-6000
BERNSTEIN LITOWITZ BERGER ATTORNEYS FOR DEFENDANTS
& GROSSMANN LLP SBARRO, INC. AND BERNARD
ZIMMERMAN
By: /s/ Jeffrey A. Klafter
---------------------------
Jeffrey A. Klafter WILLKIE FARR & GALLAGHER
1285 Avenue of the Americas
New York, NY 10019
(212) 554-1400
By: /s/ Stephen W. Greiner
--------------------------
Stephen W. Greiner
GOODKIND LABATON RUDOFF 787 Seventh Avenue
& SUCHAROW LLP New York, NY 10019
(212) 728-8000
By: /s/ Jonathan M. Plasse
----------------------------
Jonathan M. Plasse ATTORNEYS FOR DEFENDANTS
100 Park Avenue RICHARD A. MANDELL, HAROLD L.
New York, NY 10017 KESTENBAUM, PAUL A. VATTER AND
(212) 907-0700 TERRY VINCE
CO-LEAD COUNSEL FOR PLAINTIFFS
AND THE CLASS
-17-
<PAGE>
ENTWHISTLE & CAPPUCCI LLP WARSHAW BURSTEIN COHEN
400 Park Avenue, 16th Floor SCHLESINGER & KUH, LLP
New York, NY 10022
(212) 894-7200
By: /s/ Arthur A. Katz
--------------------------
WECHSLER HANWOOD HALEBIAN Arthur A. Katz
& FEFFER, LLP 555 Fifth Avenue
488 Madison Avenue, 8th Floor New York, NY 10017
New York, NY 10022 (212) 984-7700
(212) 935-7400
ATTORNEYS FOR DEFENDANTS
WOLF POPPER LLP JOSEPH SBARRO, ANTHONY
845 Third Avenue SBARRO, MARIO SBARRO AND
New York, NY 10022 CARMELA SBARRO
(212) 759-4600
BERNSTEIN LIEBHARD & LIFSHITZ, LLP
10 East 40th Street
New York, NY 10016
(212) 779-1414
ATTORNEYS FOR PLAINTIFFS
-18-
<PAGE>
PRESENT: HON. BEATRICE SHAINSWIT, JUSTICE At a ____ Term, Part _____,
Supreme Court of the State
of New York, County of New
York, at the Courthouse, 60
Centre Street, New York, NY
on the ___ day of May, 1999
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
- -----------------------------------------------------)
LEE BRENIN, On Behalf of Himself ) Index No. 98-605796
and All Others Similarly Situated, )
)
Plaintiff, )
) SCHEDULING ORDER
v. ) ----------------
)
MARIO SBARRO, ANTHONY SBARRO, )
CARMELA SBARRO, JOSEPH SBARRO, )
and SBARRO, INC. )
)
Defendants. )
- -----------------------------------------------------)
PETER SALIT, On Behalf of Himself ) Index No. 98-605801
and All Others Similarly Situated, )
)
Plaintiff, )
)
v. )
)
SBARRO, INC., JOSEPH SBARRO, ANTHONY )
SBARRO, MARIO SBARRO, CARMELLA )
SBARRO, TERRY VINCE, HAROLD )
KESTENBAUM, RICHARD A. MANDELL, )
PAUL A. VATTER AND BERNARD )
ZIMMERMAN, )
)
Defendants. )
- -----------------------------------------------------)
EXHIBIT A
<PAGE>
- ------------------------------------------------------)
DAVID FINKELSTEIN, On Behalf of Himself ) Index No. 98-605827
and All Others Similarly Situated, )
)
Plaintiff, )
)
v. )
)
SBARRO, INC., JOSEPH SBARRO, ANTHONY )
SBARRO, MARIO SBARRO, CARMELLA )
SBARRO, TERRY VINCE, HAROLD )
KESTENBAUM, RICHARD A. MANDELL, )
PAUL A. VATTER AND BERNARD )
ZIMMERMAN, )
)
Defendants. )
- ------------------------------------------------------)
BARRY ADELMAN, On Behalf of Himself ) Index No. 98-605847
and All Others Similarly Situated, )
)
Plaintiff, )
)
v. )
)
MARIO SBARRO, ANTHONY SBARRO, )
CARMELA SBARRO, JOSEPH SBARRO, )
and SBARRO, INC. )
)
Defendants. )
- -------------------------------------------------------)
EXHIBIT A
<PAGE>
- ---------------------------------------------------------)
CHARTER CAPITAL CORP., GRUNTAL )
FINANCIAL LLC SAVINGS PLAN A/C )
NORMAN EPSTEIN, HARBOR FINANCE )
PARTNERS, LIST, INC. and WAYNE CRIMI, )
On Behalf of Themselves and All Others Similarly )
Situated, )
)
Plaintiffs, ) Index No. 99-100884
)
- against - )
)
JOSEPH SBARRO, ANTHONY SBARRO, )
MARIO SBARRO, BERNARD ZIMMERMAN, )
PAUL VATTER, HAROLD KESTENBAUM, )
JERRY VINCE, RICHARD A. MANDELL and )
SBARRO, INC. )
)
Defendants. )
- ---------------------------------------------------------)
The parties to the above-captioned actions (the "Actions") having
applied pursuant to Article 9 of the New York Civil Practice Law and Rules
("CPLR") for an Order, among other things, (1) consolidating the Actions for all
purposes and establishing an organizational structure for plaintiffs' counsel;
(2) preliminarily finding the proposed settlement of the Actions described in
the Stipulation of Settlement entered into by the parties, dated April 7, 1999
(the "Stipulation") to be fair, reasonable, adequate and in the best interests
of the Class defined below; (3) determining solely for purposes of the
Settlement that the Actions may be maintained as a class action; (4) certifying
the plaintiffs in the Actions, on whose behalf the Stipulation has been
executed, as representative parties for the Class; (5) scheduling a hearing to
consider, among other things, final approval of the Settlement (the "Settlement
Hearing"); and (6) directing notice of the Settlement
EXHIBIT A
<PAGE>
to the Class; and the Court having read and considered the Stipulation and
accompanying documents, the complaints filed, and the summons' served, in each
of the Actions and all parties having consented to the entry of this Order,
NOW, this day of May, 1999, upon application of all parties to the
Actions, IT IS HEREBY ORDERED as follows:
1. Each of the Actions shall be consolidated pursuant to Rule 602 of
the New York Civil Practice Law and Rules for all purposes.
2. Hereafter, the Actions shall bear Index No. 98-605796 and their
caption shall be as set forth as:
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
- ---------------------------------------------------------)
PETER SALIT, BARRY ADELMAN, )
DAVID FINKELSTEIN, LEE BRENIN, CHARTER )
CAPITAL CORP., GRUNTAL FINANCIAL LLC )
SAVINGS PLAN A/C/ NORMAN EPSTEIN, HARBOR )
FINANCE PARTNERS, LIST, INC. and WAYNE )
CRIMI, On Behalf of Themselves and All Others )
Similarly Situated, )
) Consolidated
Plaintiffs, ) Index No. 98-605796
)
- against - )
)
SBARRO, INC., JOSEPH SBARRO, ANTHONY )
SBARRO, MARIO SBARRO, CARMELA SBARRO, )
TERRY VINCE, HAROLD KESTENBAUM, )
RICHARD A. MANDELL, PAUL A. VATTER )
and BERNARD ZIMMERMAN, )
)
Defendants. )
- ---------------------------------------------------------)
EXHIBIT A
-2-
<PAGE>
3. All papers previously filed and served to date in any of the actions
consolidated herein are hereby deemed as part of the record in the Actions
unless and to the extent otherwise provided for herein. Co-lead Counsel for
plaintiffs (identified below) shall serve a copy of this Order with notice of
entry upon the Clerk of the Court (Room 141B) and the Clerk of the Trial Support
Office (Room 158), who are directed to mark their records to reflect the
consolidation.
4. The organizational structure of plaintiffs' counsel established in
paragraph 5 hereof shall apply to all plaintiffs' counsel in the Actions and any
other related action filed subsequent to or transferred to this Court following
the date of this Order.
5. The law firms of Abbey, Gardy & Squitieri, LLP, Bernstein Litowitz
Berger & Grossmann LLP and Goodkind Labaton Rudoff & Sucharow LLP shall
constitute plaintiffs' Co- Lead Counsel and serve as Co-Lead Counsel for the
Class ("Class Counsel").
6. All motions and applications shall be made on behalf of all
plaintiffs jointly. Plaintiffs shall serve only joint and consolidated sets of
papers. Service on counsel for defendants shall be good and sufficient if made
by hand delivery, facsimile transmission, or overnight delivery.
7. All notices, proposed orders, pleadings, motions, and memoranda
shall be served upon Class Counsel.
8. Class Counsel are authorized to receive orders, notices,
correspondence and telephone calls from the Court and the Clerk of the Court on
behalf of all the plaintiffs.
9. The initial complaint filed in Lee Brenin v. Mario Sbarro, et al.,
Index No. 98- 605796, shall be the operative complaint of the Actions (the
"Consolidated Complaint") bearing the caption and index number as provided
above.
EXHIBIT A
-3-
<PAGE>
10. Service of the Consolidated Complaint on defendants who have been
served in any of the individual Actions shall be sufficient if served upon their
attorneys of record in such Actions.
11. The Court adopts and incorporates the definitions in the
Stipulation for purposes of this Order.
12. Solely for purposes of the Settlement, the Actions shall be
maintained as a class action pursuant to CPLR Article 9 on behalf of a class
consisting of all record and beneficial owners of Sbarro, Inc. ("Sbarro") common
stock during the period beginning on and including the close of business on
November 25, 1998 through and including the date the proposed merger of Sbarro
Merger LLC ("Mergeco") with and into Sbarro is consummated (the "Merger Date"),
including any and all of their personal representatives, heirs, estates,
administrators, executors, trustees, predecessors in interest, transferees,
successors and assigns, immediate and remote, and any person or entity acting
for or on behalf of, or claiming under, any of them, and each of them, but
excluding the Defendants in the Actions, Mergeco, the Sbarro Family and their
respective personal representatives, heirs, estates, administrators, executors,
trustees, predecessors in interest, successors and assigns (the "Class");
13. The Court finds that (a) the Class is so numerous that joinder of
all members is impracticable, (b) there are questions of law or fact common to
the Class, (c) the claims of the named plaintiffs are typical of the claims of
the Class, (d) the named plaintiffs and Class Counsel will fairly and adequately
protect the interests of the Class and the named plaintiffs are certified as
-4-
<PAGE>
representative parties for the Class, and (e) the Class meets the further
requirements of CPLR Article 9.
14. The Court preliminarily finds the Settlement to be fair,
reasonable, adequate and in the best interests of the Class, subject to a final
determination based upon the record before the Court at the Settlement Hearing.
15. The Settlement Hearing shall be held on , 1999, at a.m./p.m. in the
Supreme Court of the State of New York, County of New York, in Courtroom ___, 60
Centre Street, New York, New York 10007 to determine whether the Court should
approve the Settlement pursuant to CPLR 908 as fair, reasonable, adequate and in
the best interests of the Class, whether the Stipulation and the terms and
conditions of the Settlement should be finally approved by the Court, and
whether to enter an Order and Final Judgment dismissing the Actions as to all
defendants with prejudice and on the merits and with each party to bear its own
expenses (except as provided in the Stipulation) as against the plaintiffs and
all members of the Class except those who submit a valid and timely request for
exclusion from the Class and extinguish, release and enjoin prosecution of any
and all Settled Claims, and to hear and determine such other matters as the
Court may deem necessary. At the Settlement Hearing, Class Counsel may apply for
an award of attorneys' fees and expenses as set forth in the Stipulation,
subject to the Settlement becoming final, as contemplated in paragraph 8 of the
Stipulation, which application shall be heard by the Court at the Settlement
Hearing or at such time thereafter as the Court in its discretion deems
appropriate.
EXHIBIT A
-5-
<PAGE>
16. The Court reserves the right to adjourn the Settlement Hearing,
including consideration of the application for attorneys' fees and expenses,
without further notice other than by oral announcement at the Settlement Hearing
or any adjournment thereof.
17. The Court reserves the right to approve the Settlement at or after
the Settlement Hearing with such modification as may be consented to by the
parties to the Stipulation and without further notice to the Class.
18. The Notice of Pendency of Class Action, Proposed Settlement of
Class Action and Settlement Hearing (the "Notice"), substantially in the form
attached as Exhibit A-1 to the Stipulation, and the Summary Notice (the "Summary
Notice"), substantially in the form attached as Exhibit A-2 to the Stipulation,
are approved.
19. a. Within five (5) business days of the date of this Order,
defendant Sbarro shall cause to be mailed, by first-class mail, postage prepaid,
the Notice, in substantially the form attached hereto as Exhibit A-1, to all
members of the Class who can be identified with reasonable effort on the stock
records maintained by or on behalf of Sbarro as of the fifth from last business
day before the Notice is mailed.
b. Within seven (7) business days of the date of this Order,
Sbarro shall cause the Summary Notice, in substantially the form attached hereto
as Exhibit A-2, to be published in the national edition of THE WALL STREET
JOURNAL.
c. Sbarro shall be solely responsible for the cost of printing
and mailing the Notice to the Class and of publishing the Summary Notice as set
forth herein.
EXHIBIT A
-6-
<PAGE>
20. The form and method of distribution of the Notice and Summary
Notice specified herein constitutes the best notice practicable under the
circumstances and shall constitute due and sufficient notice of the Settlement
Hearing and of all matters relating to Settlement to all persons entitled to
receive such notice, and fully satisfies the requirements of due process, CPLR
Article 9 and all other applicable law. Sbarro shall, on or before the date of
the Settlement Hearing, file proof of mailing of the Notice and publication of
the Summary Notice.
21. Requests for Exclusion from the Class must be postmarked on or
before _________, 1999 and comply with the procedures set forth in the Notice.
22. Any member of the Class who does not request exclusion from the
Class and who objects to the Stipulation, the Settlement, the Order and Final
Judgment, and/or the application for attorneys' fees and expenses, or who
otherwise wishes to be heard, may appear in person or by their attorney at the
Settlement Hearing and present any evidence or argument that may be proper and
relevant; provided however, that no person other than plaintiffs, Class Counsel,
Defendants and counsel for Defendants in the Actions shall be heard, and no
papers, briefs, pleadings or other documents submitted by any such person shall
be received and considered by the Court (unless the Court in its discretion
shall thereafter otherwise direct, upon application of such person and for good
cause shown) unless no later than ten (10) days prior to the Settlement Hearing
directed herein, such person files with the Court (a) written notice of their
intention to appear; (b) a detailed statement of their objections to any matter
before the Court; (c) the grounds therefor or the reasons why they desire to
appear and to be heard; (d) a statement of the number of shares of Sbarro common
stock owned by such persons as of the close of business on
EXHIBIT A
-7-
<PAGE>
November 25, 1998 and any transactions on Sbarro common stock from that date
until the submission of their objection; and (e) documents and writings which
such person desires the Court to consider, and, on or before or such filing,
serves a copy of their filing by hand or overnight mail on the following counsel
of record:
Arthur N. Abbey
Abbey Gardy & Squitieri LLP
212 East 39th Street
New York, NY 10016
Jeffrey A. Klafter
Bernstein Litowitz Berger & Grossmann LLP
1285 Avenue of the Americas
New York, NY 10019
Jonathan M. Plasse
Goodkind Labaton Rudoff & Sucharow LLP
100 Park Avenue
New York, NY 10017
Class Counsel
Joel M. Wolosky
Parker Chapin Flatteau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attorneys for Defendants Sbarro, Inc. and
Bernard Zimmerman
EXHIBIT A
-8-
<PAGE>
Stephen W. Greiner
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019
Attorneys for Defendants Richard A. Mandell,
Harold L. Kestenbaum, Paul Vatter and
Terry Vince
Arthur A. Katz
Warshaw Burstein Cohen Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, NY 10017
Attorneys for Defendants Joseph Sbarro,
Anthony Sbarro, Mario Sbarro and
Carmela Sbarro
23. Any person who fails to object in the manner prescribed above shall
be deemed to have waived such objection and shall be forever barred from raising
such objection in the Actions or any other action or proceedings.
24. Pending final determination of whether the Settlement should be
approved, plaintiffs and all members of the Class are barred and enjoined from
commencing, continuing, asserting or prosecuting any action or claim, either
directly, individually, representatively, derivatively or in any other capacity,
against Mergeco, the Sbarro Family or any Defendant which are Settled Claims.
25. In the event the Settlement is not approved by the Court, or the
Court approves the Settlement but such approval is reversed or vacated on
appeal, reconsideration or otherwise and such order reversing or vacating the
Settlement becomes final by lapse of time or otherwise, or if any of the
conditions to such Settlement are not fulfilled, then the Settlement shall be of
no
EXHIBIT A
-9-
<PAGE>
further force and effect, and the Stipulation and any amendment thereof, and all
negotiations, proceedings and statements relating thereto, except for paragraphs
O, 6, 10 and 14 of the Stipulation, shall be null and void and without prejudice
to any party hereto, and each party shall be restored to his, her or its
respective position as it existed prior to January 19, 1999, the date of the
execution of the Memorandum of Understanding among counsel to the plaintiffs and
counsel to the Defendants related to the Stipulation and the Settlement.
SO ORDERED:
-----------------------------
J.S.C.
-10-
<PAGE>
PRESENT: HON. BEATRICE SHAINSWIT, JUSTICE At a ____ Term, Part _____,
Supreme Court of the State
of New York, County of New
York, at the Courthouse, 60
Centre Street, New York, NY
on the ___ day of ____, 1999
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
- ----------------------------------------------------------)
PETER SALIT, BARRY ADELMAN, )
DAVID FINKELSTEIN, LEE BRENIN, CHARTER )
CAPITAL CORP., GRUNTAL FINANCIAL LLC )
SAVINGS PLAN A/C/ NORMAN EPSTEIN, HARBOR )
FINANCE PARTNERS, LIST, INC. and WAYNE )
CRIMI, On Behalf of Themselves and All Others )
Similarly Situated, ) Consolidated
)
Plaintiffs, ) Index No. 98-605796
)
- against - )
)
SBARRO, INC., JOSEPH SBARRO, ANTHONY )
SBARRO, MARIO SBARRO, CARMELA SBARRO, )
TERRY VINCE, HAROLD L. KESTENBAUM, )
RICHARD A. MANDELL, PAUL A. VATTER )
and BERNARD ZIMMERMAN, )
)
Defendants. )
- ----------------------------------------------------------)
ORDER AND FINAL JUDGMENT
------------------------
A hearing (the "Settlement Hearing") having been held before this Court
(the "Court") on ________________, 1999, pursuant to the Court's order of April
__, 1999 (the "Scheduling Order"), upon a Stipulation of Settlement dated April
__, 1999 (the "Stipulation"), with respect to the above-captioned consolidated
action (the "Actions"), it appearing that due notice of said
EXHIBIT B
<PAGE>
hearing has been given in accordance with the aforesaid Scheduling Order; the
respective parties having appeared by their attorneys of record; the Court
having heard and considered evidence and memoranda in support of the proposed
Settlement; the attorneys for the respective parties having been heard; an
opportunity to be heard having been given to all other persons requesting to be
heard in accordance with the Scheduling Order; the Court having determined that
notice to the certified Class (as defined below), pursuant to the Scheduling
Order, was adequate and sufficient; and the entire matter of the proposed
Settlement having been heard and considered by the Court;
IT IS HEREBY ORDERED, ADJUDGED AND DECREED this day of
, 1999, that:
1. Unless otherwise defined herein, all defined terms shall be defined
as set forth in the Stipulation.
2. The form of, and manner of giving, notice to the members of the
Class is hereby determined to have been the best notice practicable under the
circumstances, was due and sufficient notice of the Settlement Hearing and of
all matters relating to the Settlement, and fully satisfied the requirements of
due process, Article 9 of the New York Civil Practice Law and Rules ("CPLR") and
all other applicable law.
3. The Stipulation and the Settlement are approved and the terms
thereof are adjudged to be fair, reasonable, adequate and in the best interests
of the Class.
4. The Class has been adequately represented in the Actions and the
Settlement.
5. Subject to the Settlement becoming final as contemplated in
paragraph 8 of the Stipulation, and compliance by the parties with the terms of
the Stipulation and this Order, any
2
<PAGE>
and all claims, demands, rights, actions or causes of action, rights,
liabilities, damages, losses, obligations, judgments, suits, matters and issues
of any kind or nature, known or unknown, that have been or could have been
asserted in the Actions or in any court, tribunal or proceeding by or on behalf
of any member of the Class, whether individual, class, representative,
derivative, legal, equitable or any other type or in any other capacity relating
to the claims asserted in the Actions (collectively, the "Settled Claims")
against Defendants in the Actions, Mergeco, the Sbarro Family or any of their
families, parent entities, associates, affiliates or subsidiaries, and each and
all of the foregoing's past, present or future officers, directors,
shareholders, members, employees, attorneys, financial or investment advisors,
consultants, accountants, investment bankers, commercial bankers, engineers,
advisors or agents, general or limited partners or partnerships, and the
personal representatives, heirs, estates, administrators, executors, trustees,
predecessors in interest, successors and assigns of each of the foregoing
(collectively, the "Released Persons") are except as to those persons who are
excluded from the Class, fully, finally and forever compromised, settled,
discharged and dismissed with prejudice and on the merits and released pursuant
to the terms and conditions set forth herein; provided, however, that the
parties to the Stipulation expressly reserve all rights and claims to enforce
compliance with the terms of the Stipulation and this Order and Final Judgment.
With respect to any and all claims being settled and released, it is the
intention of the parties hereto that, upon the Settlement becoming final,
plaintiffs and each member of the Class (who has not elected to be excluded from
the Class) hereby expressly waive and relinquish, to the fullest extent
permitted by law, the provisions, rights, and benefits of Section 1542 of the
California Civil Code, which statute provides that:
3
<PAGE>
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor. 6. Only the persons identified in Exhibit 1
hereto are deemed to have validly and timely requested exclusion
exclusion from the Class and are excluded from the Class
7. Subject to the Settlement becoming final pursuant to paragraph 8 of
the Stipulation and compliance by the parties with the terms of the Stipulation
and this Order, the Actions are dismissed as to all Released Persons with
prejudice and on the merits and without costs except as provided in the
Stipulation.
8. Subject to the Settlement becoming final, pursuant to paragraph 8 of
the Stipulation and compliance by the parties with the terms of the Stipulation
and this Order, the plaintiffs and all members of the Class, except those
identified on Exhibit 1 hereto, are permanently barred and enjoined from
commencing, continuing, asserting or prosecuting, either directly, individually,
representatively, derivatively or in any other capacity, any of the Settled
Claims against Mergeco, the Sbarro Family or any Released Person.
9. In the event the Merger is not consummated on or before September
30, 1999, unless otherwise agreed by the parties, this Order and Final Judgment
shall be of no force and effect, and the Stipulation and any amendment thereof,
and all negotiations, proceedings and statements relating thereto, except for
paragraphs O, 6, 10 and 14 of the Stipulation, shall be null and void and
without prejudice to any party, and each party shall be restored to his, her or
its respective portion as it existed prior to January 19, 1999, the date of the
execution of the
EXHIBIT B
4
<PAGE>
Memorandum of Understanding among counsel to the plaintiffs and counsel to the
Defendants related to the Stipulation and the Settlement.
10. Without affecting the finality of this Order and Final Judgment in
any way, this Court reserves jurisdiction over all of the parties and the Class
members of all matters relating to the administration and consummation of the
Settlement and the Stipulation and the application of plaintiffs' counsel for an
award of attorneys' fees and expenses.
Dated: _______________ , 1999
-------------------------------
J.S.C.
EXHIBIT B
5
<PAGE>
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
- -----------------------------------------------------------)
PETER SALIT, BARRY ADELMAN, )
DAVID FINKELSTEIN, LEE BRENIN, CHARTER )
CAPITAL CORP., GRUNTAL FINANCIAL LLC )
SAVINGS PLAN A/C/ NORMAN EPSTEIN, HARBOR )
FINANCE PARTNERS, LIST, INC. and WAYNE )
CRIMI, On Behalf of Themselves and All Others )
Similarly Situated, ) Consolidated
)
Plaintiffs, )Index No. 98-605796
)
- against - )
)
SBARRO, INC., JOSEPH SBARRO, ANTHONY )
SBARRO, MARIO SBARRO, CARMELA SBARRO, )
TERRY VINCE, HAROLD L. KESTENBAUM, )
RICHARD A. MANDELL, PAUL A. VATTER )
and BERNARD ZIMMERMAN, )
)
Defendants. )
- -----------------------------------------------------------)
NOTICE OF PENDENCY OF CLASS ACTION,
PROPOSED SETTLEMENT OF CLASS ACTION
AND SETTLEMENT HEARING
----------------------
TO: ALL RECORD AND BENEFICIAL OWNERS OF THE COMMON STOCK OF
SBARRO, INC. DURING THE PERIOD BEGINNING ON AND INCLUDING THE
CLOSE OF BUSINESS ON NOVEMBER 25, 1998 THROUGH AND INCLUDING
THE DATE THE PROPOSED MERGER BETWEEN SBARRO AND AN ENTITY
FORMED BY THE SBARRO FAMILY (AS DEFINED BELOW) IS CONSUMMATED
(THE "MERGER DATE"), INCLUDING ANY AND ALL OF THEIR PERSONAL
REPRESENTATIVES, HEIRS, ESTATES, ADMINISTRATORS, EXECUTORS,
TRUSTEES, PREDECESSORS IN INTEREST, TRANSFEREES, SUCCESSORS AND
ASSIGNS, IMMEDIATE AND REMOTE, AND ANY PERSON OR ENTITY ACTING
FOR OR ON BEHALF OF, OR CLAIMING UNDER, ANY OF THEM, AND EACH
OF THEM, BUT EXCLUDING THE DEFENDANTS IN THE ACTIONS, SBARRO
MERGER LLC, THE SBARRO FAMILY AND THEIR RESPECTIVE PERSONAL
EXHIBIT A-1
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REPRESENTATIVES, HEIRS, ESTATES, ADMINISTRATORS, EXECUTORS,
TRUSTEES, PREDECESSORS IN INTEREST, SUCCESSORS AND ASSIGNS.
PLEASE READ THIS NOTICE CAREFULLY AND IN ITS ENTIRETY. YOUR RIGHTS WILL
BE AFFECTED BY THE LEGAL PROCEEDINGS IN THIS LITIGATION. IF YOU WERE
NOT THE BENEFICIAL HOLDER OF SBARRO STOCK BUT HELD SBARRO STOCK FOR A
BENEFICIAL HOLDER, PLEASE TRANSMIT THIS DOCUMENT TO SUCH BENEFICIAL
HOLDER.
1. This notice is given pursuant to Article 9 of the New York Civil
Practice Law and Rules ("CPLR") and pursuant to an Order of this Court entered
in the above-captioned consolidated actions (the "Actions") to all record and
beneficial owners of Sbarro, Inc. ("Sbarro" or the "Company") common stock
during the period beginning on and including the close of business on November
25, 1998 through and including the Merger Date, including any and all of their
personal representatives, heirs, estates, administrators, executors, trustees,
predecessors in interest, transferees, successors and assigns, immediate and
remote, and any person or entity acting for or on behalf of, or claiming under,
any of them, and each of them, but excluding the Defendants in the Actions,
Mergeco, the Sbarro Family and their respective personal representatives, heirs,
estates, administrators, executors, trustees, predecessors in interest,
successors and assigns (the "Class").
2. On May 11, 1999, the Court entered an order (the "Scheduling Order")
which, among other things, (a) consolidated the Actions for all purposes; (b)
preliminarily found the Settlement described herein (the "Settlement") to be
fair, reasonable, adequate and in the best interests of the Class, subject to a
final determination based upon the record before the Court at the Settlement
Hearing described below; and (c) determined, solely for purposes of the
Settlement, that the Actions may be maintained as a class action by the named
plaintiffs as
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representatives of the Class, and naming the law firms of Abbey, Gardy &
Squitieri, LLP, Bernstein Litowitz Berger & Grossmann LLP, and Goodkind Labaton
Rudoff & Sucharow LLP as Co-Lead Counsel for the Class ("Class Counsel").
SETTLEMENT HEARING
------------------
3. Members of the Class have an interest in these proceedings and are
hereby notified that a hearing (the "Settlement Hearing") shall be held on June
29, 1999, at 10:30 a.m. in the Supreme Court of the State of New York, County of
New York, Part 10, Room 222, 60 Centre Street, New York, New York 10007 to
determine the following issues:
a. whether the Court should approve the Settlement pursuant to
CPLR 908 as fair, reasonable, adequate and in the best interest of the Class;
b. whether the Stipulation of Settlement dated April 7, 1999
(the "Stipulation") and the terms and conditions of the Settlement should be
finally approved by the Court;
c. whether an Order and Final Judgment should be entered by
the Court dismissing the Actions as to all defendants with prejudice and on the
merits and with each party to bear its own expenses (except as provided in the
Stipulation) as against the plaintiffs and all members of the Class except those
persons who submit a valid and timely request for exclusion from the Class in
the manner described below, and extinguish, release and enjoin prosecution of
any and all Settled Claims (the "Order and Final Judgment");
d. to hear and determine such other matters as the Court may
deem necessary; and
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e. in the event the Court approves the Settlement and enters
the Order and Final Judgment, to consider an application by Class Counsel for an
award of attorneys' fees and expenses, as described below.
4. The Court has reserved the right to adjourn the Settlement Hearing,
including consideration of the application for attorneys' fees and expenses,
without further notice other than by oral announcement at the Settlement Hearing
or any adjournment thereof. The Court also has reserved the right to approve the
Settlement at or after the Settlement Hearing with such modifications as may be
consented to by the parties to the Stipulation and without further notice to the
Class.
SUMMARY OF SETTLEMENT
---------------------
The Actions and the Settlement address claims arising out of a
proposed merger of an entity formed by Defendants Mario Sbarro, Joseph Sbarro
and Anthony Sbarro (including Joseph Sbarro (1994) Family Limited Partnership
and The Trust of Carmela Sbarro, entities participating with such Defendants
(collectively, the "Sbarro Family"), under which all outstanding common stock of
Sbarro not owned by the Sbarro Family (the "Public Shares") would be exchanged
for cash (the "Merger"). Pursuant to the Settlement described herein, the price
to be paid for the Public Shares in the Merger has been increased to $28.85 per
share, a $1.35 per share increase from the $27.50 per share previously proposed
by the Sbarro Family. This per share increase represents an aggregate increase
of approximately $18.2 million. In consideration of this increase to be paid for
the Public Shares, among other things, plaintiffs in the Actions have agreed,
subject to consummation of the Merger and the approval of the Settlement
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by the Court, to the dismissal of their claims relating to the Merger. A more
complete description of the Settlement is set forth below.
FACTUAL BACKGROUND
------------------
The following description of the Actions and the Settlement
have been prepared by counsel for the parties. The Court has made no findings
with respect to such matters, and this Notice is not an expression by the Court
of any findings of fact or of law.
A. Defendant Sbarro is a New York corporation with its principal
executive offices located at 401 Broadhollow Road, Melville, New York 11747.
Sbarro operates a chain of family-style, cafeteria-type Italian restaurants
under the "Sbarro" and "Sbarro The Italian Eatery" names. As of January 3, 1999,
Sbarro had 630 Company-owned and 268 franchised restaurants in the United States
and abroad.
B. Defendants Mario Sbarro, Joseph Sbarro, Anthony Sbarro, Carmela
Sbarro, Terry Vince, Harold L. Kestenbaum, Richard A. Mandell, Paul A. Vatter
and Bernard Zimmerman (collectively, the "Individual Defendants" and together
with Sbarro, the other defendant in the Actions, the "Defendants") are, and were
at all times relevant to this litigation, officers and/or directors of Sbarro.
C. On January 20, 1998, Sbarro announced that it had received a
proposal from the Sbarro Family, owners of approximately 34.4% of Sbarro's
presently outstanding common stock (Sbarro's only outstanding class of capital
stock), pursuant to which all other holders of Sbarro common stock (the "Public
Shareholders") would receive $28.50 cash per share for their Sbarro
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shares in a transaction structured as a cash merger with a company to be owned
by the Sbarro Family (the "Initial Merger Proposal"). The Initial Merger
Proposal was terminated in June 1998.
D. Following the close of business on November 25, 1998, Sbarro
announced that it had received a proposal from the Sbarro Family pursuant to
which the Public Shareholders would receive $27.50 cash per share for their
Sbarro shares in a transaction to be structured as a cash merger of an entity to
be owned by the Sbarro Family with and into the Company (the "Revised Merger
Proposal"). Sbarro named a Special Committee of its Board of Directors,
consisting of Defendants Richard A. Mandell, Harold L. Kestenbaum, Paul A.
Vatter and Terry Vince, to consider the Revised Merger Proposal.
E. Following the announcement of the Revised Merger Proposal, the
following putative class actions challenging the Revised Merger Proposal were
filed by Sbarro shareholders in the Supreme Court of the State of New York,
County of New York: Lee Brenin v. Mario Sbarro, et al., Index No. 98-605796;
Peter Salit v. Sbarro, Inc. et al., Index No. 98-605801; David Finkelstein v.
Sbarro, Inc. et al., Index No. 98-605827; Barry Adelman v. Mario Sbarro, et al.,
Index No. 98-605847; Charter Capital et al. v. Joseph Sbarro et al., Index No.
99-100884. In addition, the following putative class actions challenging the
Revised Merger Proposal were filed by Sbarro shareholders in the Supreme Court
of the State of New York, County of Suffolk: Charter Capital Corp. v. Joseph
Sbarro et al., Index No. 98-27736; Harbor Finance Partners and List, Inc. v.
Mario Sbarro et al., Index No. 98-27723; and Gruntal Financial LLC Savings Plan
A/C Norman Epstein v. Richard A. Mandell et al., Index No. 98-27200. The actions
filed in the County of Suffolk were voluntarily discontinued in order to pursue
the litigation in the County of
EXHIBIT A-1
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New York. The Actions challenged the Revised Merger Proposal alleging, among
other things, that the $27.50 per share merger consideration to be paid to the
Public Shareholders was inadequate. The Actions sought, among other things, to
enjoin the consummation of the proposed transaction or, in the alternative, to
rescind the transaction if it takes place, unspecified money damages and
attorney's fees and expenses.
F. Following the filing of the Actions, counsel for plaintiffs in the
Actions ("plaintiffs' counsel") and their financial expert met with the Special
Committee's Chairman, counsel and financial advisor, and conducted negotiations
with the Sbarro Family, in an effort to reach a settlement of the Actions.
G. As a result of the discussions and negotiations that the Sbarro
Family had with plaintiffs' counsel and with the Special Committee, the Sbarro
Family agreed to raise the price to be paid to the Public Shareholders in the
proposed Merger to $28.85 per share (the "Increased Merger Consideration"), or
to an aggregate of approximately $388.6 million, representing an increase per
share of $1.35, or an aggregate increase of approximately $18.2 million, from
the Revised Merger Proposal announced on November 25, 1998 (the "Final Merger
Proposal"). The Final Merger Proposal was made expressly contingent upon the
adoption of the Agreement and Plan of Merger dated January 19, 1999 among the
Company, Sbarro Mergeco LLC ("Mergeco") and the Sbarro Family (the "Merger
Agreement") by the holders of a majority of the shares of Sbarro common stock
owned by the Public Shareholders (the "Public Shareholders Voting Requirement"),
as well as by two-thirds of all outstanding shares of Sbarro common stock (the
"Statutory Voting Requirement").
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H. On January 19, 1999, the following events occurred:
1. After receiving a written opinion from its financial
advisor, Prudential Securities Incorporated ("Prudential"), that, as of the date
of the Merger Agreement, the Increased Merger Consideration was fair, from a
financial point of view, to the Public Shareholders, the Special Committee
concluded that the Merger, as reflected in a proposed Merger Agreement, was fair
to, and in the best interests of, the Company and the Public Shareholders, and
unanimously resolved to recommend that Sbarro's Board of Directors adopt the
Merger Agreement;
2. After a presentation by the Special Committee and based, in
part, on the recommendation of the Special Committee and the fairness opinion
received from Prudential, Sbarro's Board of Directors also determined that the
Merger was fair to, and in the best interests of, the Company and the Public
Shareholders and adopted the Merger Agreement. Consummation of the Merger
Agreement is conditioned upon, among other things: (i) fulfillment of the Public
Shareholder Voting Requirement, as well as of the Statutory Voting Requirement;
(ii) receipt of financing for the transactions contemplated by the Merger
Agreement; (iii) the continued suspension of dividends by the Company; and (iv)
settlement of the Actions; and
3. The parties to the Actions executed a memorandum of
understanding (the "MOU"), which contemplates the settlement and dismissal of
the Actions pursuant to the Stipulation.
EXHIBIT A-1
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<PAGE>
I. The Sbarro Family agreed to the Final Merger Proposal after
considering the existence of the Actions and the desirability of satisfactorily
addressing the claims set forth in the Actions.
J. Pursuant to the Merger Agreement and subject to the terms and
conditions thereof, Mergeco, a New York limited liability company formed by the
Sbarro Family for the purpose of the Merger, will be merged with and into Sbarro
with each then outstanding share of the Company's common stock, other than
shares held of record by Mergeco or the Continuing Shareholders or in the
Company's treasury, to be converted into the right to receive the Increased
Merger Consideration in cash, without interest. In addition, all outstanding
stock options, including those held by the Sbarro Family, will be terminated,
with the holders thereof to be paid the difference between the Increased Merger
Consideration and the applicable exercise price per share multiplied by the
total number of shares of Sbarro common stock subject to such option.
K. Following execution of, and pursuant to, the MOU, plaintiffs'
counsel: (i) continued their investigation and legal analysis of the matters
alleged in the Actions and consulted with their financial advisor; (ii) engaged
in additional discovery, including documentary discovery and the depositions of
the Chairman and Chief Executive Officer of Sbarro, the Chairman of the Special
Committee, and a Managing Director of Prudential; and (iii) reviewed and
commented upon a draft of the proxy statement which will be provided to Sbarro
shareholders in connection with the Merger (the "Proxy Statement").
L. In light of the aforementioned investigation, the additional facts
developed in discovery, the events, negotiations and agreements described above,
and analysis of applicable
EXHIBIT A-1
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law, counsel for plaintiffs in the Actions have concluded that the terms and
conditions of the Settlement provided for in the Stipulation are fair,
reasonable, adequate and in the best interests of the plaintiffs and the Class.
M. Plaintiffs entered into the Stipulation after taking into account:
(i) the substantial benefits to the members of the Class from the Merger
Agreement, including the Increased Merger Consideration and the Public
Shareholder Voting Requirement; (ii) the risks of continued litigation; and
(iii) the conclusion of plaintiffs' counsel that the terms and conditions of the
Settlement are fair, reasonable, adequate and in the best interests of the
Public Shareholders. Plaintiffs and plaintiffs' counsel have agreed to the terms
of the Settlement because, in their view, the Settlement achieves plaintiffs'
principal objectives in the litigation, which are to maximize shareholder value
for the Company's shareholders and to provide additional representation for the
Public Shareholders.
N. All the defendants in the Actions have denied and continue to deny
vigorously any liability with respect to any and all claims alleged in the
Actions, expressly deny having engaged in any wrongful or illegal activity, or
having violated any law or regulation or duty, and expressly deny that any
person or entity has suffered any harm or damages as a result of the Settled
Claims (as defined in paragraph 5 below). While denying any fault or wrongdoing,
and relying on the provision of the Stipulation that it shall, in no event, be
construed as or deemed to be evidence of an admission or concession on the part
of Defendants or any Released Person (as defined in paragraph 5 below) of any
fault or liability whatsoever, and without conceding any infirmity in their
defenses against the claims alleged in the Actions, Defendants consider it
desirable that the
EXHIBIT A-1
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Actions be settled and dismissed, subject to the terms and conditions of the
Stipulation, because the Settlement will (i) halt the substantial expense,
inconvenience and distraction of continued litigation of plaintiffs' claims;
(ii) finally put to rest those claims; and (iii) dispel any uncertainty that may
exist as a result of this litigation. The Court has made no finding that
Defendants engaged in any wrongdoing or wrongful conduct or otherwise
acted improperly or in violation of any law or regulation or duty in any
respect.
THE SETTLEMENT TERMS
--------------------
The following are the principal provisions set forth in the
Stipulation:
THE SETTLEMENT
1. In consideration for the full settlement, satisfaction, compromise
and release of the Settled Claims (as defined below), and in furtherance of the
Final Merger Proposal and the Merger Agreement, the parties to the Actions have
agreed to settle the Actions upon the terms and conditions described below.
2. The Sbarro Family has agreed to the payment of the Increased Merger
Consideration upon consummation of the Merger as a result of the discussions and
negotiations described above, and after also considering the desirability of
obtaining the dismissal, release and discharge of the Released Persons (as
defined below) of and from all Settled Claims.
3. As further consideration for the Settlement, Sbarro has agreed to
pay all costs incurred in identifying members of the Class and notifying by mail
the members of the Class of the Settlement, including the printing and copying
of this Notice and publication of the Summary Notice.
EXHIBIT A-1
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4. Class Counsel have agreed to the Settlement described herein after
having reviewed a draft of the Proxy Statement to satisfy themselves that the
Proxy Statement would fully and fairly disclose all material information. The
Increased Merger Consideration in the Final Merger Proposal, as reflected in the
terms of the Merger Agreement, together with the opportunity of plaintiff's
counsel to review and comment on the Proxy Statement, furnishes consideration
for plaintiffs' agreement to release and forever discharge each of the
Defendants from the Settled Claims.
SETTLED CLAIMS
5. Subject to the Settlement becoming final as contemplated in
paragraph 8 below, any and all claims, demands, rights, actions or causes of
action, rights, liabilities, damages, losses, obligations, judgments, suits,
matters and issues of any kind or nature, known or unknown, that have been or
could have been asserted in the Actions or in any court, tribunal or proceeding
by or on behalf of any member of the Class (who has not elected to be excluded
from the Class in the manner described below), whether individual, class,
representative, derivative, legal, equitable or any other type or in any other
capacity relating to the claims asserted in the Actions (collectively, the
"Settled Claims") against Defendants in the Actions, Mergeco, the Sbarro Family
or any of their families, parent entities, associates, affiliates or
subsidiaries, and each and all of the foregoing's past, present or future
officers, directors, shareholders, members, employees, attorneys, financial or
investment advisors, consultants, accountants, investment bankers, commercial
bankers, engineers, advisors or agents, general or limited partners or
partnerships, and the personal representatives, heirs, estates, administrators,
executors, trustees, predecessors in
EXHIBIT A-1
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interest, successors and assigns of each of the foregoing (collectively, the
"Released Persons") shall be fully, finally and forever compromised, settled,
discharged and dismissed with prejudice and on the merits and released pursuant
to the terms and conditions set forth herein, provided however, that the parties
hereto expressly reserve all rights and claims to enforce compliance with
the terms of the Stipulation. With respect to any and all claims being
settled and released, it is the intention of the parties hereto that, upon
the Settlement becoming final, plaintiffs and each member of the Class who has
not elected to be excluded from the Class, hereby expressly waive and
relinquish, to the fullest extent permitted by law, the provisions, rights,
and benefits of Section 1542 of the California Civil Code, which statute
provides that:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
RIGHTS TO WITHDRAW FROM THE SETTLEMENT
6. Defendants, by action taken by a majority of Defendants Mario
Sbarro, Joseph Sbarro and Anthony Sbarro, or plaintiffs, by action taken by
plaintiffs' Co-Lead Counsel, shall have the option to withdraw from and
terminate the Settlement in the event that: (i) the Order and Final Judgment
referred to below is not entered substantially in the form agreed, including
such modifications thereto as may be ordered by the Court with the consent of
the parties; (ii) the Settlement is not approved by the Court or is disapproved,
or the Court or appellate court requests the parties to make a material
modification to the Settlement to which the parties do not
EXHIBIT A-1
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consent; (iii) the condition to finality of the Settlement set forth in clause
(ii) of paragraph 8 below shall not have been satisfied; or (iv) the Merger
Agreement is terminated.
ORDER AND FINAL JUDGMENT
7. If the Settlement (including any modification thereto made with the
consent of the parties) is approved by the Court, the parties shall promptly
request the Court to enter an Order and Final Judgment, which will, among other
things:
a. determine that the Class has been adequately represented in
the Actions and the Settlement;
b. approve the Stipulation and the Settlement and adjudge the
terms thereof to be fair, reasonable, adequate and in the best interests of the
Class;
c. determine that the requirements of CPLR Article 9 and due
process have been satisfied in connection with notice to the Class;
d. dismiss, as to all Released Persons, the Actions with
prejudice and without costs except as herein provided, and extinguish, discharge
and release any and all Settled Claims of each plaintiff and each other Class
member, except those persons who submit a valid and timely Request for
Exclusion, said dismissal to be subject only to the Settlement becoming final as
contemplated in paragraph 8 below and compliance by the parties with the terms
of the Stipulation and any Order of the Court concerning the Stipulation, and
permanently enjoin plaintiffs and all other members of the Class, except those
persons who submit a valid and timely Request for Exclusion, from asserting,
commencing, prosecuting or continuing, either directly,
EXHIBIT A-1
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individually, representatively, derivatively or in any other capacity, any of
the Settled Claims against Mergeco, the Sbarro Family or any Released Person;
and
e. without affecting the finality of the Order and Final
Judgment, reserve the Court's jurisdiction over all of the parties and the Class
members, except those who submit a valid and timely Request for Exclusion, for
the administration of the terms of the Settlement and the Stipulation and the
application of plaintiffs' counsel for an award of attorneys' fees and expenses.
FINALITY OF SETTLEMENT
8. The approval of the Settlement shall be considered final when the
following three events have occurred: (i) entry of the Order and Final Judgment
approving the Settlement; (ii) expiration of any applicable appeal period for
the appeal of the Order and Final Judgment without an appeal having been filed
or, if an appeal is filed, entry of an order affirming the Order and Final
Judgment appealed from and the expiration of any applicable period for the
reconsideration, rehearing or appeal of such affirmance without any motion for
reconsideration or rehearing or further appeal having been filed; and (iii)
consummation of the Merger.
9. In the event the Settlement is not approved by the Court, or the
Court approves the Settlement but such approval is reversed or vacated on
appeal, reconsideration or otherwise and such order reversing or vacating the
Settlement becomes final by lapse of time or otherwise, or if any of the
conditions to such Settlement are not fulfilled, then the Settlement shall be of
no further force and effect, and the Stipulation and any amendment thereof (with
certain exceptions provided therein), and all negotiations, proceedings and
statements relating thereto, shall be null
EXHIBIT A-1
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and void and without prejudice to any party, and each party shall be restored to
his, her or its respective position as it existed prior to the execution of the
MOU.
ATTORNEYS' FEES
10. At or before the Settlement Hearing, plaintiffs' counsel will apply
for an award of attorneys' fees (inclusive of expenses), not to exceed
$2,100,000, subject to the Settlement becoming final, as contemplated in
paragraph 8 above. Defendants have agreed that they will not object to such an
application by plaintiffs' counsel, but Defendants retain the right to oppose
any other application for fees or disbursements by plaintiffs, plaintiffs'
counsel or any other person. Any fee and expense award to plaintiffs' counsel
shall be paid exclusively by Sbarro on behalf of and for the benefit of all
Defendants. The fairness, reasonableness and adequacy of the Settlement, and
whether the Settlement is in the best interests of the Public Shareholders, may
be considered and ruled upon by the Court independently of its consideration of
any award of attorneys' fees and expenses. No counsel for plaintiffs shall apply
to any court for any fees and expenses except as provided for in this paragraph.
The award of attorneys' fees and expenses will not in any way reduce the amounts
payable to Sbarro shareholders pursuant to the Merger.
YOUR RIGHT TO APPEAR AT THE SETTLEMENT HEARING
----------------------------------------------
11. Any member of the Class who does not request exclusion from the
Class and who objects to the Stipulation, the Settlement, the Order and Final
Judgment, and/or the application for attorneys' fees and expenses, or who
otherwise wishes to be heard, may appear in person or by their attorney at the
Settlement Hearing and present any evidence or argument that may be proper and
relevant; provided however, that no person other than plaintiffs, Class Counsel,
EXHIBIT A-1
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<PAGE>
Defendants and counsel for Defendants in the Actions shall be heard, and no
papers, briefs, pleadings or other documents submitted by any such person shall
be received and considered by the Court (unless the Court in its discretion
shall thereafter otherwise direct, upon application of such person and for good
cause shown) unless no later than ten (10) days prior to the Settlement Hearing,
such person files with the Court (i) written notice of their intention to
appear; (ii) a detailed statement of their objections to any matter before the
Court; (iii) the grounds therefor or the reasons why they desire to appear and
to be heard; (iv) a statement of the number of shares of Sbarro common stock
owned by such person as of the close of business on November 25, 1998 and any
transactions in Sbarro common stock from that date until the submission of their
objection; and (v) documents and writings which such person desires the Court to
consider, and, on or before or such filing, serves a copy of their filing by
hand or overnight mail on the following counsel of record:
Arthur N. Abbey
Abbey Gardy & Squitieri LLP
212 East 39th Street
New York, NY 10016
Jeffrey A. Klafter
Bernstein Litowitz Berger & Grossmann LLP
1285 Avenue of the Americas
New York, NY 10019
Jonathan M. Plasse
Goodkind Labaton Rudoff & Sucharow LLP
100 Park Avenue
New York, NY 10017
EXHIBIT A-1
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<PAGE>
Class Counsel
Joel M. Wolosky
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attorneys for Defendants Sbarro, Inc. and
Bernard Zimmerman
Stephen W. Greiner
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019
Attorneys for Defendants Richard A. Mandell,
Harold L. Kestenbaum, Paul Vatter and
Terry Vince
Arthur A. Katz
Warshaw Burstein Cohen Schlesinger & Kuh, LLP
555 Fifth Avenue
New York, NY 10017
Attorneys for Defendants Joseph Sbarro,
Anthony Sbarro, Mario Sbarro and
Carmela Sbarro
12. Any person who fails to object in the manner prescribed above shall
be deemed to have waived such objection and shall be forever barred from raising
such objection in the Actions or any other action or proceedings.
YOUR RIGHT TO EXCLUDE YOURSELF FROM THE SETTLEMENT
--------------------------------------------------
13. If you are a Class member, you will be bound by all determinations,
orders and judgments of the Court in the Actions, whether favorable or
unfavorable, unless you mail, by first class mail, a written request for
exclusion from the Class, postmarked no later than June 18, 1999,
EXHIBIT A-1
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addressed to counsel for all parties at the addresses listed in paragraph
11 above. You may not exclude yourself from the Class after that date. In order
to be valid, your request must legibly set forth your name and address and a
statement that you wish to be excluded from the Class. You must also provide the
names in which your Sbarro shares were registered, your Social Security or
Taxpayer Identification Number and the number of shares of Sbarro common stock
you owned as of the close of business on November 25, 1998 and any transactions
in Sbarro common stock from that date until the submission of your Request for
Exclusion. Any member of the Class who requests exclusion from the Class must
request exclusion with respect to all shares of which he, she or it is the
beneficial owner, and any Class member who requests exclusion from the Class
with respect to shares whose beneficial ownership is shared in any way must
request exclusion together with all other persons with whom such ownership is
shared. If signing a Request for Exclusion on behalf of any entity (such as a
trust corporation, partnership, limited liability company or estate), you must
enclose evidence of your authority to act for such entity and provide the
foregoing information with respect to that entity.
INTERIM INJUNCTION
------------------
14. Pending final determination of whether the Settlement should be
approved, plaintiffs and all members of the Class, are barred and enjoined from
commencing, continuing, asserting or prosecuting any action or claims, either
directly, individually, representatively, derivatively or in any other capacity,
against Mergeco, the Sbarro Family or any Defendant which are Settled Claims.
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<PAGE>
SCOPE OF THIS NOTICE AND FURTHER INFORMATION
--------------------------------------------
15. This Notice does not purport to be a comprehensive description of
the Actions, the allegations or transactions related thereto, the terms of the
Stipulation, the Settlement or the Settlement Hearing. For a more detailed
statement of the matters involved in this litigation, you may inspect the
pleadings, the Stipulation, the Orders entered by the Court and other papers
filed in the litigation, at the Office of the Clerk of the Supreme Court of the
State of New York, County of New York, 60 Centre Street, New York, New York
10007 during regular business hours of each business day.
DO NOT WRITE OR TELEPHONE THE COURT.
NOTICE TO PERSON OR ENTITIES HOLDING
RECORD OWNERSHIP ON BEHALF OF OTHERS
------------------------------------
16. Brokerage firms, banks and other persons or entities who are
members of the Class in their capacities as record owners, but not as beneficial
owners, are requested to send this notice promptly to beneficial owners.
Additional copies of this notice, for transmittal to beneficial owners, are
available on request directed to: Sbarro, Inc. 401 Broadhollow Road, Melville,
New York 11747, Attention: Vice President-Finance. Reasonable expenses of
EXHIBIT A-1
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forwarding this notice to beneficial will be reimbursed by Sbarro and should be
addressed to: Sbarro, Inc. 401 Broadhollow Road, Melville, New York 11747,
Attention: Vice President- Finance.
BY ORDER OF THE COURT:
_______________________________
J.S.C.
Dated: _________________ , 1999
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<PAGE>
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
- ---------------------------------------------------------)
PETER SALIT, BARRY ADELMAN, )
DAVID FINKELSTEIN, LEE BRENIN, CHARTER )
CAPITAL CORP., GRUNTAL FINANCIAL LLC )
SAVINGS PLAN A/C/ NORMAN EPSTEIN, HARBOR )
FINANCE PARTNERS, LIST, INC. and WAYNE )
CRIMI, On Behalf of Themselves and All Others )
Similarly Situated, ) Consolidated
)
Plaintiffs, ) Index No. 98-605796
)
- against - )
)
SBARRO, INC., JOSEPH SBARRO, ANTHONY )
SBARRO, MARIO SBARRO, CARMELA SBARRO, )
TERRY VINCE, HAROLD L. KESTENBAUM, )
RICHARD A. MANDELL, PAUL A. VATTER )
and BERNARD ZIMMERMAN, )
)
Defendants. )
- ---------------------------------------------------------)
SUMMARY NOTICE OF PENDENCY OF CLASS ACTION,
PROPOSED SETTLEMENT OF CLASS ACTION
AND SETTLEMENT HEARING
----------------------
TO: ALL RECORD AND BENEFICIAL OWNERS OF THE COMMON STOCK OF
SBARRO, INC. ("SBARRO") DURING THE PERIOD BEGINNING ON AND
INCLUDING THE CLOSE OF BUSINESS ON NOVEMBER 25, 1998 THROUGH
AND INCLUDING THE DATE THE PROPOSED MERGER BETWEEN SBARRO
AND AN ENTITY FORMED BY THE SBARRO FAMILY (AS DEFINED BELOW) IS
CONSUMMATED, INCLUDING ANY AND ALL OF THEIR PERSONAL
REPRESENTATIVES, HEIRS, ESTATES, ADMINISTRATORS, EXECUTORS,
TRUSTEES, PREDECESSORS IN INTEREST, TRANSFEREES, SUCCESSORS AND
ASSIGNS, IMMEDIATE AND REMOTE, AND ANY PERSON OR ENTITY ACTING
FOR OR ON BEHALF OF, OR CLAIMING UNDER, ANY OF THEM, AND EACH
OF THEM, BUT EXCLUDING THE DEFENDANTS IN THE ACTIONS, SBARRO
MERGER LLC, THE SBARRO FAMILY AND THEIR RESPECTIVE PERSONAL
REPRESENTATIVES, HEIRS, ESTATES, ADMINISTRATORS, EXECUTORS,
TRUSTEES, PREDECESSORS IN INTEREST, SUCCESSORS AND ASSIGNS (THE
"CLASS").
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YOU ARE HEREBY NOTIFIED that the above-captioned consolidated actions
(the "Actions") have been certified as a class action for settlement purposes
only and that a settlement of the Actions has been proposed whereby the
consideration per share to be paid to shareholders of Sbarro, other than Mario
Sbarro, Joseph Sbarro, Anthony Sbarro, Joseph Sbarro (1994) Family Limited
Partnership and The Trust of Carmela Sbarro (the "Sbarro Family"), in connection
with a proposed merger of an entity formed by the Sbarro Family with and into
Sbarro has been increased from $27.50 per share to $28.85 per share,
representing an aggregate increase of approximately $18.2 million.
A hearing will be held before the Honorable Beatrice Shainswit in the
Supreme Court of the State of New York, County of New York, in Courtroom ____,
60 Centre Street, New York, New York 10007, on , 1999 at a.m./p.m., to
determine, among other things, whether the proposed settlement should be
approved by the Court as fair, reasonable, adequate and in the best interests of
the Class, and to consider the application of plaintiffs' counsel for an award
of attorneys' fees and expenses.
IF YOU ARE A MEMBER OF THE CLASS DESCRIBED ABOVE, YOUR RIGHTS WILL BE
AFFECTED BY THE HEARING. If you have not received the full printed Notice of
Pendency of Class Action, Proposed Settlement of Class Action and Settlement
Hearing (the "Notice"), you may obtain copies of these documents by writing to:
Sbarro, Inc.
401 Broadhollow Road
Melville, New York 11747
Attention: Vice President-Finance
To exclude yourself from the Class you must do so in accordance with
the instructions contained in the Notice no later than
____________________________________, 1999. If you
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are a Class member and do not validly and timely exclude yourself, you will be
bound by the Order and Final Judgment of the Court and will be deemed to have
released all Settled Claims as described in the Notice.
You may obtain further information by writing to the address shown
above.
DO NOT CONTACT THE COURT OR THE CLERK'S OFFICE FOR INFORMATION.
Dated: __________________________, 1999
BY ORDER OF THE COURT
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