Filed pursuant to Rule 424(b)(3)
Registration No. 333-90817
Prospectus
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SBARRO, INC.
OFFER TO EXCHANGE
$255,000,000 11% SENIOR NOTES DUE 2009
FOR
REGISTERED 11% SENIOR NOTES DUE 2009
o TERMS OF THE REGISTERED NOTES
The terms of the registered notes are substantially identical to your
original notes, except that the registered notes will have no transfer
restrictions.
o EXPIRATION DATE; WITHDRAWAL RIGHTS The exchange offer will expire at
5:00 p.m. New York city time on Monday, April 24, 2000, unless we
extend the deadline. You may withdraw your tender of original notes at
any time before the exchange offer expires. We will exchange all
original notes that are validly tendered and not withdrawn before the
exchange offer expires and will issue the registered notes promptly
after the exchange offer expires.
o NO PUBLIC MARKET
There is no public market for the original notes or the registered
notes. We do not expect that an active public market in the registered
notes will develop.
o PROSPECTUS DELIVERY REQUIREMENT FOR BROKER-DEALERS
All broker-dealers must comply with the registration and prospectus
delivery requirements of the Securities Act of 1933.
o CONDITIONS TO THE EXCHANGE OFFER
The exchange offer is subject to customary conditions, including the
conditions that the exchange offer not violate applicable law or any
applicable interpretation of the staff of the Securities and Exchange
Commission.
NEITHER THE SEC NOR ANY OTHER FEDERAL OR STATE AGENCY HAS PASSED ON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS OR THE INVESTMENT MERITS OF THE REGISTERED NOTES
BEING OFFERED. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INVESTMENT INVOLVES RISKS. SEE THE RISK FACTORS SECTION BEGINNING ON PAGE
13.
The date of this prospectus is March 24, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SEC IF
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITATING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
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TABLE OF CONTENTS
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Prospectus Summary..................................................... 1
Risk Factors........................................................... 13
Forward Looking Statements............................................. 20
The Going Private Transaction.......................................... 21
Use of Proceeds........................................................ 22
Exchange Offer ........................................................ 22
Capitalization......................................................... 34
Unaudited Consolidated Pro Forma Financial Data........................ 35
Selected Consolidated Historical Financial Data........................ 38
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 42
Business............................................................... 51
Management............................................................. 64
Certain Relationships and Related Transactions......................... 71
Security Ownership of Certain Beneficial Owners and Management......... 74
Description of Credit Facility......................................... 75
Description of Notes................................................... 77
Plan of Distribution................................................... 135
Certain United States Federal Income Tax Considerations................ 136
Legal Matters.......................................................... 141
Independent Public Accountants......................................... 141
Where You Can Find More Information.................................... 141
Index to Consolidated Financial Statements............................. F-1
WE HAVE NOT AUTHORIZED ANY DEALER, SALES PERSON OR OTHER PERSON TO GIVE
ANY INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY UPON ANY UNAUTHORIZED INFORMATION. YOU MAY ONLY USE THIS PROSPECTUS
WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS
MAY ONLY BE ACCURATE ON THE DATE THAT APPEARS ON THE FRONT COVER.
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PROSPECTUS SUMMARY
The following summary contains basic information about the exchange
offer but does not contain all the information that may be important to you. For
a more complete understanding of the exchange offer, we encourage you to read
this entire document and the other documents to which we refer, including the
accompanying letter of transmittal. Unless the context otherwise requires, all
references to "we," "us," "our," "Sbarro" or the "Company" include Sbarro, Inc.
and our subsidiaries, except that in "Description of Notes," such words refer
only to Sbarro, Inc. and not to any of our subsidiaries.
THE COMPANY
We are a leading owner, operator and franchisor of quick-service
restaurants, serving a wide variety of Italian specialty foods. Under the
"Sbarro" and "Sbarro The Italian Eatery" names, we developed one of the first
quick-service concepts that extended beyond offering one primary specialty item,
such as pizza or hamburgers. Our diverse menu offering includes pizza, pasta and
other hot and cold Italian entrees, salads, sandwiches, cheesecake and other
desserts and beverages. We prepare all of our entrees fresh daily in each
restaurant using special recipes developed by us. We believe that the Sbarro
concept is unlike other quick-service Italian restaurants due to its diverse
menu selection and its fast, cafeteria-style service.
Since our inception in 1959, we have focused on high customer traffic
venues due to the large number of captive customers who base their eating
decision primarily on impulse and convenience. We therefore do not have to incur
the significant advertising and promotional expenditures that certain of our
competitors incur to attract customers to their destination restaurants. These
factors, combined with adherence to strict cost controls, provide us with high
and stable operating margins. Over the past ten years, we have extended the
Sbarro concept from downtown locations and enclosed shopping malls to other high
customer traffic venues, including toll roads, airports, sports arenas,
hospitals, convention centers, university campuses and casinos. We believe the
opportunity to open additional Sbarro units in these and other new venues should
continue to increase as companies, municipalities and others seek to outsource
their non-core food operations to companies with an established brand name. As
of January 2, 2000, the Sbarro system included 930 restaurants, consisting of
644 Sbarro-owned and 286 franchised restaurants located in 48 States, the
District of Columbia, the Commonwealth of Puerto Rico, certain United States
territories and 22 countries throughout the world. Of the total 930 Sbarro
units, 794 are located in enclosed shopping malls and the remaining 132 are
generally located in other high customer traffic venues.
THE GOING PRIVATE TRANSACTION
On September 28, 1999, some of the members of the Sbarro family became
the holders of all of our common stock in a going private transaction in which
we incurred significant debt. We refer to those family members as our
"continuing shareholders."
We needed approximately $411.0 million to finance the going private
transaction and pay related fees and expenses. We obtained those funds from:
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o $159.8 million of our cash on hand; and
o the $251.2 million of gross proceeds from the private debt
offering in which we issued the original notes.
At the same time as the private debt offering, we entered into a $30.0
million five-year revolving credit facility to help ensure that we will have
adequate working capital in the future. We refer to the notes issued in the
private debt offering as the "original notes" and the registered notes that we
are offering to exchange for the original notes as the "registered notes." Where
we do not intend to make a distinction between the original notes and the
registered notes, we refer to them together as the "notes."
* * * * *
Our principal executive offices are located at 401 Broadhollow Road,
Melville, New York 11747, and our telephone number is (516) 715-4100. Sbarro,
Inc. was incorporated under the laws of the State of New York in 1977.
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THE PRIVATE DEBT OFFERING
Pursuant to a note purchase agreement that we entered into on September
23, 1999, we completed the private placement of the original notes in an
aggregate principal amount of $255.0 million to Bear, Stearns, & Co. Inc. on
September 28, 1999. Bear Stearns subsequently resold the original notes to
qualified institutional buyers pursuant to Rule 144A under the Securities Act,
which is an exemption from the registration requirements under that Act. The net
proceeds from the our sale of the original notes of approximately $242.2
million, after deducting discounts to Bear Stearns and estimated offering
expenses, were used, with our cash on hand, to finance the merger and pay
related fees and expenses. In this document, we sometimes refer to our sale of
the original notes to Bear Stearns and the subsequent resale to qualified
institutional buyers as the "private debt offering."
As a condition to the purchase of the original notes, we agreed to
conduct the exchange offer following the private debt offering.
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THE EXCHANGE OFFER
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Terms of Exchange Offer.............................. We are offering to exchange the registered notes for
original notes that are timely and properly tendered and
accepted for exchange. We will issue the registered
notes promptly after the expiration date of the exchange
offer for original notes that are properly tendered on
or before the expiration date set forth on the cover
page of this prospectus and not withdrawn. If you are
not an affiliate of Sbarro or another person ineligible
to participate in the exchange offer and you do not
tender your original notes, you will have no further
exchange rights under the registration rights agreement
with respect to non-tendered original notes once we
complete the exchange offer. See "The Exchange Offer -
Resale of Registered Notes." In that case, your
original notes will continue to be subject to the
restrictions on transfer discussed in "The Exchange
Offer - Consequences of Failure to Exchange."
Tenders, Expiration Date; Withdrawal;
Exchange Date........................................ The exchange offer will expire at 5:00 p.m., New York
city time, on Monday, April 24, 2000, which is 30 days after
the date this prospectus is first mailed to holders of
original notes, unless extended by us in our sole
discretion. You may withdraw any original notes tendered
pursuant
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to the exchange offer at any time prior to the
expiration date of the exchange offer. If you withdraw
any original notes tendered pursuant to the exchange
offer, you may retender them at any time prior to the
expiration date of the exchange offer. We will return to
you any of your tendered original notes not accepted for
exchange for any reason without expense as promptly as
practicable after the expiration or termination of the
exchange offer. The date of acceptance for exchange for
registered notes of all original notes timely and
properly tendered, not withdrawn and accepted will be
the first business day following the expiration date of
the exchange offer or as soon as practicable thereafter.
Procedures for Tendering Original Notes.............. If you want to accept the exchange offer, you must
complete, sign and date an original or a copy of the
letter of transmittal that accompanies this prospectus
in accordance with its instructions, and mail or
otherwise deliver the letter of transmittal, or a
facsimile of the letter of transmittal, together with
either (1) certificates for your original notes or (2) a
book-entry confirmation of your original notes into The
Depository Trust Company, if that procedure is available
to you, and, in each case, any other required
documentation, to Firstar Bank, N.A., as exchange agent,
at the address set forth in the "exchange offer" section
of this prospectus and in the letter of transmittal.
Special Procedures for Beneficial Owners............. If you are a beneficial owner of original notes whose
original notes were registered in the name of a broker,
dealer, commercial bank, trust company or other nominee
and wish to tender your original notes for exchange, you
should contact the registered holder and instruct it to
tender its original notes on your behalf. If you wish
to tender your original notes on your own behalf, you
must, prior to completing and executing the letter of
transmittal and delivering your original notes, either
make appropriate arrangements to register ownership of
the original notes in your own name or obtain a
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properly completed bond power from the registered
holder. The transfer of registered ownership may take
considerable time and may not be able to be completed
prior to the expiration date of the exchange offer.
Guaranteed Delivery Procedures....................... If you want to tender your original notes for exchange
and your original notes are not immediately available or
you cannot deliver the original notes or any other
documents required by the letter of transmittal to the
exchange agent in a timely manner, you must tender your
original notes according to the delivery procedures
described in "The Exchange Offer-- Guaranteed Delivery
procedures" section of this Prospectus.
Certain Federal Income Tax Considerations............ The exchange pursuant to the exchange offer will not be
treated as an event in which gain or loss, if any, is
realized by you or us for United States federal income
tax purposes.
Use of Proceeds...................................... We will not receive any proceeds from the exchange offer.
Exchange Agent....................................... Firstar Bank, N.A., the trustee under the Indenture, is
serving as exchange agent for the exchange offer.
Its address is:
Firstar Bank, N.A.
Corporate Trust Department
101 East Fifth Street, 12th Floor
St. Paul, Minnesota 55101
Attn: Frank P. Leslie
For information call: (651) 229-2600
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SUMMARY DESCRIPTION OF THE REGISTERED NOTES
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Registered Notes..................................... A total of $255.0 million in principal amount at
maturity of 11% senior notes due 2009, which we have
registered under the Securities Act.
The terms of the registered notes are substantially
identical to the original notes in all material
respects, except that:
o the registered notes have been registered under
the Securities Act;
o the original notes have certain transfer
restrictions and registration rights; and
o the registered notes will not contain
certain provisions relating to liquidated
damages to be paid to the holders of
original notes under certain circumstances
if we do not timely conduct the exchange
offer.
Maturity............................................. The registered notes will mature on September 15, 2009.
Interest............................................. We will pay interest on the registered notes at a fixed
annual rate of 11%. We will pay the interest due on the
registered notes in cash every six months on March 15
and September 15. We made the first payment on March 15,
2000. Each registered note will bear interest from the
most recent date to which interest on the original note
has been paid. Interest on the original notes accepted
for exchange will cease to accrue upon issuance of the
registered notes.
Subsidiary Guarantors................................ All of our restricted subsidiaries (as defined in the
indenture governing the notes) will guarantee the
registered notes with unconditional guarantees of
payment. If we cannot make payments on the registered
notes when they are due, the guarantor subsidiaries must
make them instead.
The guarantees are joint and several obligations of our 3
restricted subsidiaries, and the
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obligations of each grantor are limited to the maximum amount
that would not result in the obligations of each guarantor
constituting a fraudulent conveyance under applicable law.
Ranking.............................................. The registered notes and the guarantees will be
unsecured senior obligations of us and our guarantor
subsidiaries, respectively. They will rank equally with
all other existing and future senior unsecured debt, and
will rank senior to all existing and future subordinated
debt of us and our guarantor subsidiaries, if any,
respectively. The registered notes and the guarantees
will be effectively subordinated to all of our existing
and future senior secured debt, if any, to the extent of
such security.
As of January 2, 2000, the aggregate amount of our
consolidated indebtedness was $251.3 million (all of which was
senior debt), which does not include guarantees of
indebtedness and reimbursement obligations in respect of
letters of credit in the aggregate amount of approximately
$17.5 million, guarantees of certain real property lease
obligations of our unrestricted subsidiaries and related joint
ventures and a $16.0 million loan obtained on March 3, 2000,
which is secured by a mortgage on our corporate headquarters
building.
Optional Redemption.................................. We may redeem some or all of the registered notes at our
option at any time at the redemption prices described under
"Description of Notes -- Optional Redemption" plus any
interest that is due and unpaid and liquidated damages, if
any, on the date we redeem the registered notes.
Mandatory Repurchase................................. If we experience a change of control or sell assets, in
certain circumstances, we must offer to repurchase the
registered notes at the prices set forth under
"Description of Notes-- Repurchase at Option of Holders."
Certain Covenants................................... We will issue the registered notes under the indenture
with Firstar Bank, N.A., as trustee. The indenture,
among other things, limits our
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ability and the ability of our restricted subsidiaries to:
o incur additional indebtedness;
o pay dividends or make other distributions on,
redeem or repurchase, our capital stock;
o make investments and other restricted payments;
o use assets as security in other transactions;
o sell certain assets, consolidate or merge with
or into other companies;
o enter into certain transactions with our
affiliates; and
o sell stock in our restricted subsidiaries.
These covenants are subject to exceptions, which are
described in "Description of Notes."
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SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents our summary consolidated historical and
pro forma consolidated financial data for the periods and the dates indicated.
Unless otherwise indicated, all amounts and ratios set forth below reflect our
consolidated financial results, including the subsidiaries that have initially
been designated as unrestricted subsidiaries and that will not guarantee our
obligations under the notes. The unaudited consolidated pro forma financial data
and the balance sheet data are provided for informational purposes only and are
not necessarily indicative of future results or what our results of operations
or financial position would have been had the going private transaction occurred
on the dates indicated. The information presented below should be read in
conjunction with "Unaudited Consolidated Pro Forma Financial Data," "Selected
Consolidated Historical Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our audited consolidated
financial statement and notes thereto for the year ended January 2, 2000
included elsewhere in this prospectus.
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HISTORICAL PRO FORMA
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FISCAL YEAR
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1999 1998(1) 1997 1999(2)
---- ------- ---- -------
(UNAUDITED)
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INCOME STATEMENT DATA:
Revenues:
Restaurant sales................................... $366,630 $361,534 $337,723 $366,630
Franchise related income......................... 9,006 8,578 7,360 9,006
Interest income.................................. 3,828 5,120 4,352 --
----- ----- -----
Total revenues............................. 379,464 375,232 349,435 375,636
Costs and expenses:
Costs of food and paper products................. 73,986 76,572 69,469 73,986
Restaurant operating expenses:
Payroll and other employee benefits............ 97,174 93,367 84,910 97,174
Occupancy and other............................ 106,852 101,013 93,528 106,852
Depreciation and amortization...................... 25,363 22,429 23,922 30,945
General and administrative......................... 23,456 19,708 17,762 23,456
Interest expense................................... 7,948 -- -- 31,226
Provision for unit closings(3)..................... 1,013 2,515 3,300 1,013
Non-recurring charges(4)........................... -- 5,605 -- --
Other income....................................... (5,173) (2,680) (1,653) (5,173)
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Total costs and expenses...................... 330,619 318,529 291,238 359,479
Income before income taxes and cumulative effect of
change in method of accounting................. 48,845 56,703 58,197 16,157
Income taxes(5).................................... 19,322 21,547 22,115 9,495
Income (loss) before cumulative effect of change in ------ -------- -------- -------
method of accounting........................... 29,523 35,156 36,082 6,662
Cumulative effect of change in method of accounting
for start-up costs............................. -- (822) -- --
------- --------- --------- -------
Net income (loss).................................. $29,523 $34,334 $36,082 $6,662
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HISTORICAL PRO FORMA
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FISCAL YEAR
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1999 1998(1) 1997 1999(2)
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(UNAUDITED)
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OTHER FINANCIAL AND RESTAURANT DATA:
Net cash provided by operating activities (6)...... $62,005 $58,641 $ 61,026 $62,005
EBITDA(7).......................................... 78,328 $74,012 $ 77,767 78,328
EBITDA margin(7)................................... 20.9% 20.0% 22.5% 20.9%
Capital expenditures(8)............................ $25,099 $27,717 $ 28,556 25,099
Ratio of earnings to fixed charges(9).............. 2.4x 3.9x 4.2x 1.3
Number of restaurants at end of period:
Company-owned.................................... 644 630 623 644
Franchised....................................... 286 268 239 286
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Total number of restaurants.................... 930 898 862 930
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PRO FORMA RATIOS:
EBITDA to cash interest expense (10) .............. 2.6x
Total debt to EBITDA............................... 3.2x
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AS OF JANUARY 2, 2000
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ACTUAL
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(DOLLARS IN THOUSANDS)
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BALANCE SHEET DATA:
Working capital (deficiency)......................................................... $ (2,544)
Total assets......................................................................... 417,833
Total long-term debt(11)............................................................. 251,310
Shareholders' equity(12)............................................................. 110,280
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(1) Our fiscal year ends on the Sunday nearest December 31. Our
1998 fiscal year contained 53 weeks. All other fiscal years
presented contained 52 weeks. Accordingly, the 1998 fiscal
year benefited from one additional week of operations over the
other reported fiscal years. The additional week contributed
revenues, EBITDA and net income of approximately $8.5 million,
$2.7 million and $1.7 million, respectively.
(2) Gives effect to the going private transaction as if it had
occurred at the beginning of the respective periods.
(3) Represents provisions of (a) $3.3 million for the closing of
two joint venture units in fiscal 1997, (b) $2.5 million for
the closing of 20 restaurant locations in fiscal 1998 and (c)
a special allocation of losses in fiscal 1999 which were the
result of the final disposition of two joint venture unit
closings recorded in 1997.
(4) Represents (a) a charge of $3.5 million in connection with the
settlement of a lawsuit, (b) a write down of $1.1 million of
the carrying cost on a parcel of Sbarro-owned land and (c)
other charges of approximately $1.0 million for costs
associated with the termination of a prior merger proposal by
the Sbarro family.
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(5) We have elected to be taxed under the provisions of Subchapter
S of the Internal Revenue Code and, where applicable and
permitted, under similar state and local income tax provisions
beginning in fiscal 2000. Under the provisions of Subchapter
S, substantially all taxes on our income will be paid by our
shareholders. On a pro forma basis to give effect to the going
private transaction and the $16.0 million mortgage on our
corporate headquarters building issued in March 2000, if we
were taxed as an S corporation as of the beginning of fiscal
1999, we and our shareholders would have had an aggregate tax
liability of approximately 50% of our income before taxes or
approximately $25.4 million. This amount is higher than the
amount presented due to differences in tax rates between
individual and corporate taxpayers and temporary differences
currently accounted for as deferred taxes in our financial
statements and the effect of double taxation in those states
that do not recognize S corporation status. These deferred
taxes may be eliminated or reduced as a result of our
conversion to an S corporation. The indenture permits us to
make distributions to our shareholders in amounts that are
designed to enable them to pay their personal tax obligations
arising from our Subchapter S earnings. For a discussion of
the distributions that we are permitted to make for our
shareholders to pay taxes on our income, see "Certain
Relationships and Related Transactions" and "Description of
Notes -- Certain Covenants -- Restricted Payments" and "--
Covenants Relating to Tax Payment Agreement."
(6) For more detailed presentation of our cash flows from
operating activities, see our audited consolidated statements
of cash flows and notes thereto for the year ended January 2,
2000 included elsewhere in this prospectus.
(7) EBITDA represents earnings before cumulative effect of change
in accounting method, interest income, interest expense,
taxes, depreciation and amortization. EBITDA includes the
effect of the unusual charges discussed in notes 3 and 4.
EBITDA margin represents EBITDA divided by the sum of
restaurant sales and franchise related income. EBITDA should
not be considered in isolation from, or as a substitute for,
net income, cash flow from operations or other cash flow
statement data prepared in accordance with generally accepted
accounting principles or as a measure of a company's
profitability or liquidity. Rather, EBITDA is presented
because it is a widely accepted supplemental financial
measure, and we believe that it provides relevant and useful
information. Our calculation of EBITDA may not be comparable
to a similarly titled measure reported by other companies,
since all companies do not calculate this non-GAAP measure in
the same manner. Our EBITDA calculations are not intended to
represent cash provided by (used in) operating activities
since they do not include interest and taxes and changes in
operating assets and liabilities, nor are they intended to
represent a net increase in cash since they do not include
cash provided by (used in) investing and financing activities.
(8) The following amounts related to the construction of our
headquarters are included as capital expenditures: $5.0
million in fiscal 1997, $4.8 million in fiscal 1998, and $1.6
million in fiscal 1999.
(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
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charges consist of interest expense and one-third of rental
expense (deemed to be a reasonable approximation of the
interest factor).
(10) Cash interest expense represents total interest expense, less
amortization of $1.1 million of deferred financing fees and
amortization of $0.4 million of original issue discount on the
notes for the year ended January 2, 2000.
(11) The notes are recorded at a discount of approximately $3.7
million to the face amount, net of accumulated accretion, to
reflect the original issue discount on the notes.
(12) Does not give effect to an $18.0 million dividend declared on
March 13, 2000.
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RISK FACTORS
An investment in the notes involves a high degree of risk. You should
carefully consider the following risk factors in addition to the other
information included in this prospectus before tendering your original notes in
the exchange offer and making an investment in the registered notes.
RISKS RELATING TO THE NOTES
WE HAVE A SUBSTANTIAL AMOUNT OF DEBT, WHICH COULD HURT OUR ABILITY TO MAKE
PRINCIPAL AND INTEREST PAYMENTS ON THE NOTES.
As a result of the going private transaction, we have substantial debt
and are highly leveraged. Our total debt outstanding as of January 2, 2000 was
approximately $251.3 million, net of original issue discount and accumulated
accretion. This does not include guarantees of indebtedness and reimbursement
obligations in respect of letters of credit in the aggregate amount of
approximately $17.5 million, guarantees of certain real property lease
obligations of our unrestricted subsidiaries and related joint ventures and a
$16.0 million loan obtained on March 3, 2000, which is secured by a mortgage on
our corporate headquarters building. After giving effect to the going private
transaction and the mortgage:
o our ratio of indebtedness to total capital was 0.7 to 1 at
January 2, 2000 and our pro forma ratio of earnings to fixed
charges was 1.3 to 1 for the year ended January 2, 2000
assuming the going private transaction had occurred before the
start of that fiscal year;
o our interest expense would have been approximately $31.2
million for the year ended January 2, 2000 if the going
private transaction had occurred before the start of that
fiscal year; and
o our total shareholders' equity as of January 2, 2000 was
$110.3 million, with a tangible net worth deficiency of $120.0
million.
As of January 2, 2000, we had undrawn availability under our credit
facility of approximately $27.5 million, net of outstanding letters of credit
and certain guarantees of reimbursement obligations that aggregated
approximately $2.5 million.
We and our subsidiaries also may, subject to certain restrictions in
the Indenture and our credit facility, incur significant additional debt from
time to time. This could include secured debt. Our high level of debt could have
important consequences to you, including the following:
o making it difficult for us to satisfy our obligations under
the notes;
o limiting our ability to obtain financing for working capital,
capital expenditures, acquisitions and general corporate
purposes;
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o increasing our vulnerability to downturns in our business or
the economy generally;
o limiting our ability to withstand competitive pressures from
our less leveraged competitors;
o hindering our ability to plan for changes in our business and
the industry in which we operate;
o requiring us to manage a company that will be subject to
financial and other covenants; and
o having a material adverse effect on us if we fail to comply
with the covenants in the indenture or our credit facility,
because a failure could result in an event of default that, if
not cured or waived, could result in all of our indebtedness
becoming immediately due and payable.
We urge you to consider the information under "Capitalization,"
"Unaudited Consolidated Pro Forma Financial Data" and "Description of Notes --
Incurrence of Indebtedness and Issuance of Preferred Stock" for more information
on these matters.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MAKE INTEREST PAYMENTS
UNDER THE NOTES AND THE CREDIT AGREEMENT DUE TO EVENTS THAT ARE BEYOND OUR
CONTROL.
A range of economic, competitive and business factors affects our
ability to generate cash flow from operations to make scheduled payments on our
debt, including the registered notes, as they become due depends on our future
financial performance. We cannot control many of these factors, such as general
economic and financial conditions in the restaurant industry or the economy at
large. A significant drop in operating cash flow resulting from changes in
economic conditions, increased competition or other uncertainties beyond our
control could increase the need for alternative sources of liquidity. If we are
unable to generate sufficient cash flows to make interest payments, we will have
to pursue one or more alternatives, such as reducing or delaying capital
expenditures, refinancing debt, selling assets or raising equity capital. We
cannot assure you that any of these alternatives could be accomplished on
satisfactory terms or that they would yield sufficient funds to retire the notes
and our other senior debt. For a discussion of our liquidity, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Although we currently expect that we will be able to service our debt
with cash flow from operations, we cannot assure you that our future cash flows
will be sufficient to meet our debt service obligations and commitments,
including our obligations under the registered notes. On a pro forma basis, we
used 24.6% of our cash flow from operations before interest expense, net of the
related tax benefit, to meet our debt service obligations, net of related tax
benefits, for the year ended January 2, 2000.
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THE CLAIMS OF HOLDERS OF ANY SECURED DEBT WILL HAVE EFFECTIVE PRIORITY OVER YOUR
CLAIMS AS A HOLDER OF THE REGISTERED NOTES, WHICH COULD IMPAIR YOUR CLAIM TO OUR
ASSETS IF WE WERE TO BECOME INSOLVENT OR ARE LIQUIDATED.
The registered notes will rank pari passu in right of payment with all
of our present and future senior debt and senior in right of payment to all of
our present and future debt that is expressly subordinated to the notes. Neither
the registered notes nor our credit facility is secured by any of our assets or
any of the assets of our subsidiary guarantors. Currently, neither we nor any of
our subsidiary guarantors have any material indebtedness that is secured by any
of our or their respective assets, except that on March 3, 2000, a restricted
subsidiary mortgaged our recently completed headquarters building, which this
subsidiary owns, for a $16.0 million loan. Certain of our unrestricted
subsidiaries are likely to incur indebtedness that may be secured by their
assets. If we or our subsidiary guarantors incur secured debt and become
insolvent or be liquidated, the secured lenders will have a claim on the assets
securing that indebtedness that will have priority over any claim you may have
for payment under the registered notes or the guarantees. Accordingly, it is
possible that there would be no assets remaining from which claims of the
holders of the notes could be satisfied or, if any assets remained, they might
be insufficient to satisfy these claims fully.
THE INDENTURE AND OUR CREDIT FACILITY IMPOSE RESTRICTIONS ON US THAT MAY
RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS THAT, IN TURN, COULD IMPAIR OUR
ABILITY TO REPAY OUR OBLIGATIONS UNDER THE REGISTERED NOTES.
The indenture and our credit facility contain covenants that restrict
our ability to take various actions, such as incurring additional debt, paying
dividends, repurchasing junior debt, making investments, entering into certain
transactions with affiliates, merging or consolidating with other entities and
selling all or substantially all of our assets. Our ability to comply with these
covenants can be affected by events beyond our control and we cannot assure you
that we will satisfy those requirements. A breach of any of these provisions
could result in a default under the indenture and/or our credit facility, which
would allow all amounts outstanding under both to be declared immediately due
and payable. We cannot assure you that our assets will be sufficient to repay
such amounts, including amounts due under the registered notes, in full. We may
also be prevented from taking advantage of business opportunities that arise if
we fail to meet certain financial ratios or because of the limitations imposed
on us by the restrictive covenants under the indenture and our credit facility.
We urge you to read the information under "Description of Notes -- Certain
Covenants" and "Description of Credit Facility" for a more detailed discussion
of the substantive requirements of these restrictive covenants.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
THE REGISTERED NOTES OR THE GUARANTEES.
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance laws, a court
of competent jurisdiction could void, in whole or in part, the registered notes
or the guarantees or, alternatively, subordinate the registered notes or the
guarantees to our or our subsidiaries' respective existing
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and future debt. For example, a court could void or subordinate the registered
notes or guarantees if it finds that at the time the notes or guarantees are
issued any of the following occurred:
o we or the guarantors incurred such indebtedness with the
intent to hinder, delay or defraud creditors; or
o we or the guarantors received less than reasonably equivalent
value or fair consideration for incurring such debt, and
o were insolvent,
o were rendered insolvent by reason of the incurrence of such
debt and the application of the proceeds of that debt,
o were engaged or were about to engage in a business or
transaction for which the assets remaining within the United
States constituted unreasonably small capital to carry on our
business, or
o intended to incur, or believed that we or our guarantors would
incur, debts beyond our or their ability to pay such debts as
they matured.
The measure of insolvency for purposes of determining these fraudulent
conveyance issues will vary depending upon the law applied in each case.
Generally, however, we or our subsidiaries would be considered insolvent if the
sum of our or their respective debts, including contingent liabilities, is
greater than all of our or their respective assets at fair valuation or if the
present fair saleable value of our or their respective assets was less than the
amount that would be required to pay the probable liability on our or their
respective existing debts, including contingent liabilities, as they become
absolute and matured.
Our legal counsel did not provide an opinion that we issued the notes
or the guarantees without violating fraudulent conveyance laws. As discussed
above, determining if the issuance of notes or guarantees would have resulted in
a fraudulent conveyance would have been fact intensive and require the following
factual determinations, which are subjective and not within the expertise of
counsel, regarding us and each of our restricted subsidiaries individually:
o the fair value or present fair salable value of assets and
o quantification of liabilities and contingent liabilities.
However, we believe that we issued the registered notes and the
guarantees without the intent to hinder, delay or defraud creditors and for
proper purposes and in good faith. Because we paid the proceeds of the
indebtedness, including the registered notes and guarantees, to Sbarro's
shareholders in the merger, a court might find that we did not receive
reasonably equivalent value or fair consideration for the issuance of the
registered notes. Also, a court might find that our present or future subsidiary
guarantors did not receive reasonably equivalent value or fair consideration for
the issuance of their guarantees. However, we believe that we were solvent
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after issuing the original notes, that we have sufficient capital for carrying
on our business and that we will be able to pay our debts as they mature.
IF YOU DO NOT COMPLY WITH THE EXCHANGE OFFER'S PROCEDURES, YOU MAY HAVE TO KEEP
YOUR ORIGINAL NOTES, WHICH ARE SUBJECT TO RESTRICTIONS ON TRANSFER.
We will issue the registered notes in exchange for the original notes
pursuant to the exchange offer only after we have received original notes, along
with a properly completed and duly executed letter of transmittal and all other
required documents, in a timely manner. Therefore, if you want to tender your
original notes in exchange for registered notes, you should allow sufficient
time to ensure timely delivery. Neither us nor the exchange agent is under any
duty to give notification of defects or irregularities with respect to the
tender of original notes for exchange. The exchange offer will expire at 5:00
p.m. New York City time on the expiration date set forth on the cover of this
prospectus.
Original notes that are not tendered or are tendered but not accepted
for exchange will, following the expiration date and the consummation of the
exchange offer, continue to be subject to the existing restrictions on transfer.
In general, the original notes may not be offered or sold unless registered
under the Securities Act or offered and sold by you pursuant to an exemption
from, or in a transaction not subject to, the Securities Act. Subject to certain
exceptions, you will not be entitled to any rights to have your original notes
registered under the Securities Act. We do not currently anticipate that we will
register the original notes under the Securities Act. See "The Exchange Offer -
Consequences of Failure to Exchange Offer" for a discussion of possible
consequences to you if you do not participate in the exchange offer.
WE MAY NOT BE ABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL, EVEN THOUGH
WE ARE REQUIRED TO DO SO.
If a change of control occurs, we must offer to repurchase all
outstanding notes at a purchase price equal to 101% of their principal amount,
plus accrued and unpaid interest and liquidated damages, if any, to the purchase
date. It is possible that we will not have sufficient funds at the time of a
change of control to make any required repurchase of the notes. If we are
required to repurchase the notes, we would probably require third party
financing, but we cannot be sure that we would be able to obtain third party
financing on acceptable terms, if at all. In addition, our credit facility
restricts our ability to repurchase notes and prohibits repurchases pursuant to
a change of control offer. A change of control will result in an event of
default under our credit facility and may cause the acceleration of that debt,
in which case we would have to repurchase the notes as well as repay our credit
facility in full.
Certain transfers of more than 35% of our common stock by the
continuing shareholders, including transfers to third parties to provide cash
needed to pay estate taxes upon the death of those family members or their
permitted transferees could also trigger the change of control provisions under
the indenture. In order to pay estate taxes, the estate of a family member could
seek to sell the estate's stock to us or to a third party. However, the
repurchase of those shares by us would be subject to limitations under the
indenture and our credit facility, and the sale of those shares to a third party
could trigger the change of control provisions under the indenture.
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We urge you to read "Description of Notes -- Repurchase at the Option of Holders
- -- Change of Control" and "Description of Credit Facility" for a discussion of
our obligations under the indenture and the restrictions under our credit
agreement as to a repurchase of notes in the event of a change of control.
RISKS RELATING TO US
THE SBARRO FAMILY CONTROLS US AND THEIR INTERESTS MAY BE DIFFERENT FROM THE
INTERESTS OF THE HOLDERS OF THE NOTES.
The continuing shareholders own 100% of our stock and have the power to
designate all of our directors and exercise control over our business, policies
and affairs. The interests of the continuing shareholders may differ from the
interests of the holders of the notes.
WE ARE VULNERABLE TO INCREASES IN FOOD AND PAPER PRODUCT PRICES.
Significant increases in food and paper product costs, which we may not
be able to pass on to our customers, could affect our financial results and
decrease our cash available to pay interest on the notes. Many of the factors in
determining food and paper product prices, such as inflation and shortages of
supply, are beyond our control.
THE AVAILABILITY, QUALITY AND COST OF OUR INGREDIENTS FLUCTUATES, WHICH AFFECTS
OUR FINANCIAL RESULTS.
Adverse weather and other conditions could cause shortages and
interruptions in, and also could adversely effect the availability, quality and
cost of, the ingredients we use to prepare our foods. These events could
adversely affect our operations because we need to provide our customers with
fresh products. We have in the past experienced significant and rapid variations
in the cost of food products, particularly cheese. For fiscal 1997, 1998 and
1999, the cost of cheese represented approximately 22.5%, 24.5% and 21.8%,
respectively, of our overall cost of food and paper products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Results of Operations" for more information about the effect of cheese prices on
our financial results.
HIGH LABOR AND OCCUPANCY COSTS PUT PRESSURE ON OUR CONTINUED PROFITABILITY.
We have a substantial number of hourly employees whose wages are based
on the federal or state minimum wage. Congress has recently been considering
increasing the minimum wage by $1.00 per hour over a two to three year period
beginning as early as April 2000. Any such increases would increase our labor
costs. Furthermore, strong labor markets, like the one we are currently
experiencing, can result in upward pressures on wages and salaries. As a result,
we have recently been experiencing higher personnel and benefits costs. In
addition, we have also recently experienced higher occupancy related costs with
respect to leases for new restaurants and renewal leases for existing restaurant
space. Further increases in our labor and occupancy costs would decrease our
profitability and cash available to service our debt obligations if we are
unable to recover these increases by increasing the prices we charge our
customers.
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WE RELY ON ONE NATIONAL INDEPENDENT WHOLESALE DISTRIBUTOR AND REPLACING IT COULD
DISRUPT THE FLOW OF OUR FOOD PRODUCTS AND SUPPLIES.
We use one national independent wholesale food distributor, Lisanti
Foods, Inc., to deliver most of the food ingredients, other than breads,
pastries, produce, fresh dairy and certain meat products, which we purchase
locally, and related restaurant supplies that we use, and, for certain items, to
purchase these items for us on a national basis. Our arrangement with this
distributor is on competitive terms but terminable at-will by either of us.
While we are dependent upon this one national independent distributor, we
believe that there are other distributors who would be able to service our
needs. However, there can be no assurance that we will be able to replace our
distributor with others on comparable terms or without disruptions to the flow
of our food products and other supplies to our systems.
WE DEPEND ON OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES.
Our success is dependent upon our senior management team, consisting
primarily of members of the Sbarro family, who have been personally in charge of
most aspects of our business since our inception. Although no member of the
Sbarro family has indicated an intent to retire, the loss of their services
through retirement, death or disability or otherwise, without obtaining
comparable replacements, could adversely affect our operations. Our continued
success is also dependent upon our ability to attract and retain other key
employees. As a privately-held company with restrictions and limitations on
stock repurchases contained in the indenture, we may be unable to offer key
executives stock-based compensation of the type that our publicly-held
competitors can offer. We do not have employment agreements with any member of
the Sbarro family or any key employee. There is no assurance that we will be
able to retain our existing senior management or to attract other key employees.
For a discussion of how our senior management team operates us, see "Business --
Restaurant Management," and for a description of the backgrounds of our senior
management team, see "Management."
WE ARE DEPENDENT ON OBTAINING AND RETAINING ATTRACTIVE HIGH CUSTOMER TRAFFIC
LOCATIONS.
We are dependent on our ability to enter into new leases and renew
existing leases on favorable terms and may find it more expensive to enter into
such leases during periods when market rents are increasing. There is also
active competition for attractive commercial shopping mall, center city and
other locations suitable for restaurants. If a significant portion of our
existing leases were to expire during such a period, we may find it more
expensive to continue to operate our then existing stores. See "Business --
Restaurant Expansion" for a discussion of the number of Sbarro-owned locations
that we have opened in the past and "Business -- Properties" for a discussion of
when our leases expire.
OUR QUARTERLY RESULTS OF OPERATIONS FLUCTUATE DUE TO THE SEASONALITY OF OUR
BUSINESS.
A weak holiday shopping season would adversely affect our
profitability. Our annual revenues and earnings are substantially dependent upon
the amount of traffic in shopping malls during the holiday shopping period
between Thanksgiving and New Year's Day. As a result,
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changes in the level of traffic in shopping malls during this period have a
disproportionate effect on our annual results of operations. The fourth fiscal
quarter normally accounts for approximately 40% of our net income for the year
due primarily to increased volume in shopping malls during the holiday shopping
season. The length of the holiday shopping period between Thanksgiving and New
Year's Day and the number of weeks in the fourth quarter also cause fluctuations
in fourth quarter earnings from year to year. See "Management's Discussion and
Analysis of Financial of Condition and Results of Operations -- Seasonality" for
further discussion about our seasonal fluctuations in revenues and earnings.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements about our
financial condition, results of operations, future prospects and business. These
statements appear in a number of places in this prospectus and include
statements regarding our intent, belief, expectation, strategies or projections
at that time. These statements generally contain words such as "may," "should,"
"seeks," "believes," "expects," "intends," "plans," "estimates," "projects,"
"strategy" and similar expressions or the negative of those words.
Forward-looking statements are subject to a number of known and unknown
risks and uncertainties that could cause actual results to differ materially
from those projected, expressed or implied in the forward-looking statements.
These risks and uncertainties, many of which are not within our control include
but are not limited to those set forth under "Risk Factors.
Because forward-looking statements are subject to risks and
uncertainties, actual results may differ materially from those expressed or
implied by any forward-looking statements. You are cautioned not to place undue
reliance on these statements, which speak only as of the date of this
prospectus.
We do not undertake any responsibility to release publicly any
revisions to these forward-looking statements to take into account events or
circumstances that occur after the date of this prospectus, other than as
required by law. Additionally, we do not undertake any responsibility to update
you on the occurrence of any unanticipated events which may cause actual results
to differ from those expressed or implied by the forward-looking statements
contained in this prospectus, other than as required by law.
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THE GOING PRIVATE TRANSACTION
On September 28, 1999, the continuing shareholders became the holders
of all of our common stock pursuant to an amended and restated agreement and
plan of merger dated as of January 19,1999 among us, Sbarro Merger LLC and the
continuing shareholders.
Our shareholders, other than the continuing shareholders and Sbarro
Merger LLC, received the right to receive $28.85 per share in the going private
transaction in cash in exchange for the approximately 13.5 million shares of our
common stock not owned by the continuing shareholders. We also terminated all
outstanding stock options in the going private transaction in exchange for a
cash payment equal to the number of shares subject to the stock option
multiplied by the excess, if any, of $28.85 over the option's exercise price.
See "Certain Relationships and Related Transactions" for a discussion of amounts
received by the continuing shareholders, other officers and directors of Sbarro
and their respective immediate family members. We refer to our former
shareholders, other than the continuing shareholders, as the "public
shareholders."
We needed approximately $411.0 million to consummate the merger and pay
related fees and expenses. We obtained such funds from:
o $159.8 million our cash on hand; and
o the $251.2 million in gross proceeds from our private debt
offering.
Contemporaneously with the consummation of the merger and our private
debt offering, we also entered into our new $30.0 million five-year revolving
credit facility to help ensure that we will have adequate working capital in the
future.
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USE OF PROCEEDS
We received net proceeds from the sale of the original notes of
approximately $242.2 million. We will not receive any proceeds from the exchange
offer. The net proceeds from the sale of the original notes in the private debt
offering were used to finance the going private transaction and pay related fees
and expenses.
THE EXCHANGE OFFER
THE EXCHANGE OFFER; PERIOD FOR TENDERING ORIGINAL NOTES
Upon the terms and subject to the conditions set forth in this
prospectus and in the accompanying letter of transmittal, we are offering to
exchange the registered notes for original notes that are properly tendered on
or before the expiration date and not withdrawn as permitted below. As used in
this prospectus, the "expiration date" will be 5:00 p.m., New York city time, on
the date on the cover page of this prospectus; or, if we, in our sole
discretion, have extended the period of time for which the exchange offer is
open, the "expiration date" will be the latest time and date to which the
exchange offer is extended.
As of the date of this prospectus, $255.0 million aggregate principal
amount at maturity of the original notes is outstanding. This prospectus,
together with the letter of transmittal, is first being sent on or about the
date on the cover page of this prospectus, to all holders of original notes
known to us. Our obligation to accept original notes for exchange pursuant to
the exchange offer is subject to certain conditions set forth under "--
Conditions of the Exchange Offer" below.
We expressly reserve the right, at any time or from time to time, to
extend the period of time during which the exchange offer is open, and thereby
delay acceptance for exchange of any original notes, by giving oral or written
notice of the extension to the note holders as described below. During any such
extension, all original notes previously tendered will remain subject to the
exchange offer and may be accepted for exchange by us. Any original notes not
accepted for exchange for any reason will be returned without expense to the
tendering holder as promptly as practicable after the expiration or termination
of the exchange offer.
Original notes tendered in the exchange offer must be in denominations
of principal amount at maturity of $1,000 and any integral multiple thereof.
We expressly reserve the right to amend or terminate the exchange
offer, and not to accept for exchange any original notes not previously accepted
for exchange, upon the occurrence of any of the conditions of the exchange offer
specified below under "-- Conditions of the Exchange Offer." We will give prompt
written or oral notice of any extension, amendment, non-acceptance or
termination to the holders of the original notes. In the case of any extension,
we will give notice by means of a press release or other public announcement no
later
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than 9:00 a.m., New York city time, on the next business day after the
previously scheduled expiration date.
RESALE OF REGISTERED NOTES
Based on interpretations by the staff of the SEC set forth in no-action
letters issued to third parties, including "Shearman & Sterling" (available July
2, 1993), "K-III Communications Corporation" (available May 14, 1993), "Warnaco,
Inc." (available October 11, 1991), "Morgan Stanley & Co. Incorporated"
(available June 5, 1991), "Mary Kay Cosmetics, Inc." (available June 5, 1991)
and "Exxon Capital Holdings Corporation" (available May 13, 1988), we believe
that you (unless you are a broker-dealer or an "affiliate" of us or our
guarantors within the meaning of Rule 405 under the Securities Act) may offer
for resale, resell and otherwise transfer the registered notes that we issue
pursuant to the exchange offer in exchange for original notes without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that:
o you acquire the registered notes in the ordinary course of
your business,
o you have no arrangement or understanding with any person to
participate in the distribution of the registered notes, and
o you are not engaged in, and do not intend to engage in, a
distribution of your registered notes.
Each broker-dealer that receives registered notes for its own account
in exchange for original notes, where its original notes were acquired by the
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge in the letter of transmittal that it will deliver a
prospectus in connection with any resale of its registered notes. We have agreed
that for the period of time set forth in "Plan of Distribution," we will make
this prospectus available to any broker-dealer in connection with any resale of
its registered notes. For more information regarding the prospectus delivery
obligation of broker-dealers, see "Plan of Distribution." The letter of
transmittal states that a broker-dealer who acknowledges its prospectus delivery
requirement in the letter of transmittal and delivers a prospectus in connection
with any resales of its registered notes will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
We do not intend to request the SEC to consider, and the SEC has not
considered, the exchange offer in the context of a no-action letter, and there
can be no assurance that the staff of the SEC would make a similar determination
with respect to the exchange offer as it has in other circumstances. By properly
completing a letter of transmittal when you tender original notes for registered
notes, you will represent to us, that:
o you are not an affiliate (as defined in Rule 405 under the
Securities Act) of ours,
o you are not engaged in, and do not intend to engage in, and
have no arrangement or understanding with any person to
participate in, a distribution of the registered
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notes and if you are not a broker-dealer, neither you nor any
other person has an arrangement or understanding with any
person to participate in the distribution of your registered
notes within the meaning of the Securities Act and
o you are acquiring the registered notes in the ordinary course
of your business, whether or not you are the beneficial owner.
In the event that you cannot make the requisite representations to us,
you cannot rely on the interpretations by the staff of the SEC and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a resale transaction. Unless an exemption from registration
is otherwise available, any resale transaction must be covered by an effective
registration statement containing the selling security holders information
required by Item 507 of Regulation S-K under the Securities Act. This prospectus
may be used for an offer to resell, resale or other transfer of registered notes
only as specifically set forth under "Plan of Distribution."
INTEREST ON THE REGISTERED NOTES
The registered notes will bear interest at 11% per annum. Interest on
the registered notes is payable semi-annually, in arrears, on September 15 and
March 15 of each year. Holders of registered notes will receive interest on
September 15, 2000 from the date of initial issuance of the registered notes,
plus an amount equal to the accrued interest on the original notes from March
15, 2000, the most recent date to which interest has been paid on the original
notes, to the date of exchange thereof for registered notes. Interest on the
original notes accepted for exchange will cease to accrue upon issuance of the
registered notes.
PROCEDURES FOR TENDERING ORIGINAL NOTES
THE METHOD OF DELIVERY OF ORIGINAL NOTES, LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT YOUR ELECTION AND RISK. IF DELIVERY IS BY MAIL,
WE RECOMMEND YOU USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE TIMELY
DELIVERY. NO LETTERS OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE SENT TO US.
BOOK-ENTRY INTERESTS
The original notes were issued as global securities in fully registered
form without interest coupons. Beneficial interests in the global securities,
held by direct or indirect participants in DTC, are shown on, and transfers of
these interests are effected only through, records maintained in book-entry form
by DTC with respect to its participants.
If you hold your original notes in the form of book-entry interests and
you wish to tender your original notes for exchange pursuant to the exchange
offer, you must transmit to the exchange agent on or prior to the expiration
date either:
o a written or facsimile copy of a properly completed and duly
executed letter of transmittal, including all other documents
required by the letter of transmittal, to
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the exchange agent at the address set forth on the cover page
of the letter of transmittal; or
o a computer-generated message transmitted by means of DTC's
Automated Tender Offer Program system and received by the
exchange agent and forming a part of a confirmation of
book-entry transfer, in which you acknowledge and agree to be
bound by the terms of the letter of transmittal.
In addition, in order to deliver original notes held in the form of
book-entry interests:
o before the expiration date, the exchange agent must receive a
timely confirmation of book-entry transfer of your notes into
the exchange agent's account at DTC, pursuant to the procedure
for book-entry transfers described below under "-- Book-Entry
Transfer"; or
o you must comply with the guaranteed delivery procedures
described below under "-- Guaranteed Delivery Procedures."
CERTIFICATED ORIGINAL NOTES
Only registered holders of certificated original notes may tender those
notes in the exchange offer. If your original notes are certificated notes and
you wish to tender those notes for exchange pursuant to the exchange offer, you
must transmit to the exchange agent on or prior to the expiration date, a
written or facsimile copy of a properly completed and duly executed letter of
transmittal, including all other required documents, to the address set forth
below under "-- Exchange Agent." In addition, in order to validly tender your
certificated original notes:
o the certificates representing your original notes must be
received by the exchange agent prior to the expiration date,
or
o you must comply with the guaranteed delivery procedures
described below.
PROCEDURES APPLICABLE TO ALL HOLDERS
If you tender an original note and you do not withdraw the tender prior
to the expiration date, you will be deemed to have made an agreement with us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
If your original notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you wish to tender your
notes, you should contact the registered holder promptly and instruct the
registered holder to tender on your behalf. If you wish to tender on your own
behalf, you must, prior to completing and executing the letter of transmittal
and delivering your original notes, either make appropriate arrangements to
register ownership of the original notes in your name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
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Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed unless the original notes surrendered for exchange pursuant to a
letter of transmittal are tendered:
o by a registered holder of the original notes who has not
completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the letter of transmittal
or
o for the account of an eligible institution, as discussed
below.
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, the guarantee must be by one of the
following eligible institutions:
o firm that is a member of the National Association of
Securities Dealers, Inc.,
o a commercial bank or trust company having an office or
correspondent in the United States or
o an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act.
If original notes are registered in the name of a person other than a
signer of the letter of transmittal, the original notes surrendered for exchange
must be endorsed by, or accompanied by a duly executed written instrument of
transfer, in satisfactory form as determined by us in our sole discretion, duly
executed by the registered holder, in each case, with the signature on the
instrument of transfer guaranteed by an eligible institution.
We will determine, in our sole discretion, all questions as to the
following matters regarding letters of transmittal and original notes tendered
for exchange:
o validity,
o form,
o eligibility, including time of receipt, and
o acceptance.
We reserve the absolute right to:
o reject any and all tenders of any particular original note not
properly tendered or not accept any particular original note
that might, in our judgment or the judgment of our counsel, be
unlawful; and
o waive any defects or irregularities or conditions of the
exchange offer as to any particular tender either before or
after the expiration date, including the right to
26
<PAGE>
waive the ineligibility of any holder who seeks to tender
original notes in the exchange offer.
Our interpretation of the terms and conditions of the exchange offer as
to any particular tender either before or after the expiration date, including
the letter of transmittal and the instructions to the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with the tenders of original notes for exchange
must be cured within a reasonable period of time that we will determine. Neither
we nor the exchange agent nor any other person will be under any duty to give
notification of any defect or irregularity with respect to any tender of
original notes for exchange, nor will any of them incur any liability for
failure to give that notification.
If the letter of transmittal is signed by a person other than the
registered holders of original notes, the original notes must be endorsed or
accompanied by powers of attorney, in either case signed by the registered
holder exactly as the name of the registered holder appears on the original
notes.
If the letter of transmittal or any original notes or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, the signer should so indicate when signing, and, unless
waived by us, proper evidence satisfactory to us of the signer's authority to
act must be submitted with the letter of transmittal.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF REGISTERED NOTES
Upon satisfaction or waiver of the unsatisfied conditions to the
exchange offer, we will accept, promptly after the expiration date, properly
tendered original notes. We will issue the registered notes that you exchange
for the accepted original notes promptly after our acceptance of the original
notes. For a description of the conditions that you must satisfy or we must
waive for you to receive registered notes, see "-- Conditions of the Exchange
Offer" below. For purposes of the exchange offer, we will be deemed to have
accepted properly tendered original notes for exchange when, as and if we have
given oral or written notice of acceptance to the exchange agent, with written
confirmation of any oral notice to be given promptly.
For each original note accepted for exchange, the holder of that
original note will receive a registered note having a principal amount at
maturity equal to that of the surrendered original note.
In all cases, issuance of registered notes for original notes that are
accepted for exchange pursuant to the exchange offer will be made only after
timely receipt by the exchange agent of
o certificates for those original notes or a timely book-entry
confirmation of those original notes into the exchange agent's
account at The Depository Trust Company;
27
<PAGE>
o a properly completed and duly executed letter of transmittal
or, instead, an agent's message; and
o all other required documents.
If any tendered original notes are not accepted for any reason or if
original notes are submitted for a greater principal amount than the holder
wishes to exchange, the unaccepted or non-exchanged original notes will be
returned without expense to the tendering holder, or, in the case of original
notes tendered by book-entry transfer into the exchange agent's account at DTC
pursuant to the book-entry procedures described below, the unaccepted or
non-exchanged original notes will be credited to an account maintained with DTC
as promptly as practicable after the expiration or termination of the exchange
offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with
respect to the original notes at DTC for purposes of the exchange offer promptly
after the date of this prospectus. Any financial institution that is a
participant in DTC's system may make book-entry delivery of original notes by
causing DTC to transfer original notes into the exchange agent's account at DTC
in accordance with DTC's procedures for transfer. The participant using DTC's
procedures for transfer should transmit its acceptance to DTC on or prior to the
expiration date or comply with the guaranteed delivery procedures described
below. DTC will verify the participant's acceptance, execute a book-entry
transfer of the tendered original notes into the exchange agent's account at DTC
and then send to the exchange agent confirmation of the book-entry transfer,
including the agent's message confirming that DTC has received an express
acknowledgment from the participant that such participant has received and
agrees to be bound by the letter of transmittal and that we may enforce the
letter of transmittal against the participant. However, although delivery of
original notes may be effected through book-entry transfer at DTC, an agent's
message and any other required documents, must, in any case, be transmitted to
and received by the exchange agent at the address set forth below under "--
Exchange Agent" on or prior to the expiration date or there must be compliance
with the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If a holder of original notes desires to tender original notes and the
original notes being tendered are not immediately available, or time will not
permit the holder's original notes, the letter of transmittal or any other
required documents to reach the exchange agent before the expiration date, or
the procedure for delivery by book-entry transfer cannot be completed on a
timely basis, a tender may be effected if:
o the tender is made through an eligible institution;
o before the expiration date, the exchange agent received from
the eligible institution a notice of guaranteed delivery,
substantially in the form provided by us (by hand, overnight
courier, mail or facsimile transmission to the exchange
28
<PAGE>
agent), setting forth the name and address of the holder of
the original notes and the amount of original notes tendered,
stating that the tender is being made by sending the notice of
guaranteed delivery and guaranteeing that the eligible
institution will deposit the following documents with the
exchange agent within three New York Stock Exchange trading
days after the date of the execution of the notice of
guaranteed delivery:
o the certificates for all physically tendered original
notes, in proper form for transfer, or a book-entry
confirmation;
o a properly completed and duly executed appropriate
letter of transmittal;
o copy of the letter of transmittal or agent's message,
with any required signature guarantees; and
o any other required documents;
o The following documents are received by the exchange agent
within three NYSE trading days after the date of execution of
the notice of guaranteed delivery:
o the certificates for all physically tendered original
notes, in proper form for transfer, or a book-entry
confirmation, as the case may be;
o a copy of the letter of transmittal or agent's
message, with any required signature guarantees; and
o all other documents required by the letter of
transmittal.
WITHDRAWAL RIGHTS
Tenders of original notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the expiration date.
For a withdrawal to be effective, a written notice of withdrawal must
be received by the exchange agent at the address set forth below under "--
Exchange Agent" prior to 5:00 p.m., New York city time, on the expiration date.
Any notice of withdrawal must
o specify the name of the person who tendered the original notes
to be withdrawn;
o identify the original notes to be withdrawn, including the
certificate number or numbers and principal amount at maturity
of the original notes;
o contain a statement that the holder is withdrawing its
election to have the original notes exchanged;
29
<PAGE>
o be signed by the holder in the same manner as the original
signature on the letter of transmittal by which the original
notes were tendered, including any required signature
guarantees, or be accompanied by documents of transfer to have
the trustee register the transfer of the original notes in the
name of the person withdrawing the tender; and
o specify the name in which the original notes are registered,
if different from that of the person who tendered the original
notes being withdrawn.
If you tender original notes using the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn original notes
and otherwise comply with the procedures of DTC. We will determine, in our sole
discretion, all questions as to the following matters regarding notices of
withdrawal:
o validity;
o form; and
o eligibility, including time of receipt.
Any original notes that you validly withdraw will be deemed not to have
been validly tendered for exchange for purposes of the exchange offer and no
registered notes will be issued with respect to the withdrawn original notes
unless the original notes so withdrawn are, as described below, timely and
validly retendered. Any original notes that you have tendered for exchange but
that are not exchanged for any reason will be returned to you without cost to
you, or, in the case of original notes tendered by book-entry transfer into the
exchange agent's account at DTC pursuant to the book-entry transfer procedures
described above, the original notes will be credited to an account maintained
with DTC for the original notes, as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer. Properly withdrawn
original notes may retendered by following the procedures described under "--
Procedures for Tendering Original Notes" above at any time on or prior to 5:00
p.m., New York city time, on the expiration date.
CONDITIONS OF THE EXCHANGE OFFER
The exchange offer is not conditioned upon any minimum principal amount
at maturity of the original notes being tendered for exchange. However,
notwithstanding any other provisions of the exchange offer, we will not be
required to accept for exchange any original notes, and may terminate the
exchange offer as provided in this prospectus under "-- The Exchange Offer;
Period for Tendering Original Notes" before the acceptance of any original notes
for exchange, if:
o any action or proceeding is instituted or threatened in any
court or by or before any governmental agency with respect to
the exchange offer that, in our sole judgment, might
materially impair our ability to proceed with the exchange
offer;
30
<PAGE>
o any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is
interpreted by the staff of the SEC, which, in our sole
judgment, might materially impair our ability to proceed with
the exchange offer; or
o any governmental approval has not been obtained, if, in our
sole discretion, we deem that approval necessary for the
consummation of the exchange offer.
If we determine, in our sole discretion, that any of these conditions
are not satisfied, we may
o refuse to accept any original notes and return all tendered
original notes to the tendering holders;
o extend the exchange offer and retain all original notes
tendered prior to the expiration of the exchange offer,
subject, however, to the rights of holders who tendered
original notes to withdraw their tendered original notes; or
o waive unsatisfied conditions with respect to the exchange
offer and accept all properly tendered original notes that
have not been withdrawn.
These conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any condition or may be waived by
us in whole or in part at any time and from time to time in our sole discretion.
The failure by us at any time to exercise any of the foregoing rights shall not
be deemed a waiver or that right, and each right shall be deemed an ongoing
right which may be asserted by us at any time and from time to time.
In addition, we will not accept for exchange any original notes
tendered, and no registered notes will be issued in exchange for original notes,
if at such time any stop order shall be threatened or in effect with respect to
the registration statement of which this prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939.
EXCHANGE AGENT
We have appointed Firstar Bank, N.A. as the exchange agent for the
exchange offer. All executed letters of transmittal should be directed to the
exchange agent at the applicable address listed below. Questions and requests
for assistance, requests for additional copies of this prospectus or of the
letter of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent addressed as follows:
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<PAGE>
By hand, overnight courier or Facsimile transmission
registered or certified mail: (eligible institutions only):
Firstar Bank, N.A. (651) 229-6415
Corporate Trust Department
101 East Fifth Street, 12th Floor To confirm by telephone
St. Paul, Minnesota 55101 or for information call:
Attn: Frank P. Leslie (651) 229-2600
---------------------
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS
LISTED ABOVE OR TRANSMISSION OF INSTRUCTIONS BY FACSIMILE OTHER THAN AS LISTED
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF TRANSMITTAL.
FEES AND EXPENSES
We will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent's
reasonable and customary fees for its services and will reimburse it for its
reasonable out-of-pocket expenses in connection its services.
We will pay the cash expenses incurred by us in connection with our
performance and completion of the exchange offer. These expenses include fees
and expenses of the exchange agent and trustee, accounting and legal fees and
printing costs and related fees and expenses.
TRANSFER TAXES
Holders who tender their original notes for exchange will not be
obligated to pay any transfer taxes. If, however:
o certificates representing registered notes or original notes
for principal amounts not tendered or accepted for exchange
are to be delivered to, or are to be registered or issued in
the name of, any person other than the registered holder of
the original notes tendered hereby; or
o if tendered original notes are registered in the name of any
person other than the person signing the letter of
transmittal; or
o if a transfer tax is imposed for any reason other than the
exchange of original notes pursuant to the exchange offer;
then in each case the amount of any transfer taxes, whether imposed on the
registered holder or on any other persons, will be payable by the tendering
holder.
32
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of original notes who do not properly exchange their original
notes for registered notes in the exchange offer will continue to be subject to
the provisions in the indenture regarding transfer of the original notes and the
restrictions on transfer of the original notes arising because of the issuance
of the original notes under exemptions from the registration requirements of the
Securities Act and applicable state securities laws. As a result, original notes
not properly exchanged may be resold only in accordance with any applicable
securities laws of any state of the United States and only:
o to us, upon redemption or otherwise;
o under an effective registration statement under the Securities
Act;
o so long as the original notes are eligible for resale under to
Rule 144A, to a qualified institutional buyer within the
meaning of Rule 144A under the Securities Act in a transaction
meeting the requirements of Rule 144A; or
o under to another available exemption from the registration
requirements of the Securities Act.
Upon completion of the exchange offer, holders of original notes will
not be entitled to any further registration rights under the registration rights
agreement, except under limited circumstances. We do not currently anticipate
that we will register under the Securities Act the resale of any original notes
that remain outstanding after consummation of the exchange offer, subject to the
limited circumstances in the registration rights agreement, if applicable.
Holders of the original and registered notes which remain outstanding
after consummation of the exchange offer will vote together as a single class in
taking certain actions or exercising certain rights under the indenture.
ACCOUNTING TREATMENT
The registered notes will be recorded at the same carrying value as the
original notes as reflected in our accounting records on the date of the
exchange. As a result, we will not recognize any gain or loss for accounting
purposes because of the exchange offer.
33
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at January 2, 2000,
which reflects the going private transaction that occurred on September 28,
1999. We have not made any adjustment to give effect to the completion of the
exchange offer because the exchange offer will not result in any change to our
capitalization. You should read this table in conjunction with "Selected
Consolidated Historical Financial Data," "Unaudited Consolidated Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our audited consolidated financial statements and
their related notes for the year ended January 2, 2000 included elsewhere in
this prospectus.
AS OF JANUARY 2, 2000
---------------------
(DOLLARS IN THOUSANDS)
----------------------
Cash and cash equivalents............................... $ 33,514
==========
Credit facility (1)................................... $ --
----------
11% senior notes due 2009, net (2).................... 251,310
--------
Total long-term debt (3)......................... 251,310
Shareholders' equity (4)................................ 110,280
----------
Total capitalization.......................... $ 361,590
========
(1) We have a $30.0 million five-year credit facility with European
American Bank. As of January 2, 2000, we had undrawn availability under
our credit facility of approximately $27.5 million, net of outstanding
letters of credit and certain guarantees of reimbursement obligations
that currently aggregate approximately $2.5 million, subject to our
satisfaction of certain conditions. See "Description of Credit
Facility."
(2) We have recorded the registered notes at a discount of approximately
$3.7 million to the face amount, net of accumulated accretion, to
reflect the original issue discount on the original notes.
(3) Excludes an 8.4%, ten year, $16.0 million loan obtained by a restricted
subsidiary on March 3, 2000. The loan is secured by a mortgage on our
corporate headquarters building.
(4) Does not give effect to an $18.0 million dividend declared on March 13,
2000.
34
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following unaudited consolidated pro forma financial data have been
derived from our historical financial statements. The unaudited consolidated pro
forma income statements for the year ended January 2, 2000 give effect to the
going private transaction as if it had occurred at the beginning of the period
presented.
The unaudited consolidated pro forma financial data should be read in
conjunction with "Selected Consolidated Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our audited consolidated financial statements and their related
notes for the year ended January 2, 2000, included elsewhere in this prospectus.
The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable and are described in
the notes accompanying the unaudited consolidated pro forma financial
statements. The unaudited consolidated pro forma financial data do not purport
to represent what our results of operations or financial position would have
been had the going private transaction occurred on the date indicated, or to
project our results of operations or financial position for any future period or
date, nor does it give effect to any matters other than those described in the
notes to the unaudited consolidated pro forma financial statements. The going
private transaction was accounted for as a purchase for financial accounting
purposes.
The unaudited consolidated pro forma financial data presented in this
prospectus do not reflect our election to be taxed under the provisions of
Subchapter S of the Internal Revenue Code and, where applicable and permitted,
under similar state and local income tax provisions, beginning in fiscal 2000.
As a result of our S corporation election, our deferred income taxes may be
eliminated or reduced. For further discussion of the effects of our S
corporation election, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- After
the Transaction" and "Certain Relationships and Related Transactions."
All amounts set forth below reflect our unaudited consolidated
financial data, including certain subsidiaries that are presently unrestricted
subsidiaries under the indenture and that do not guarantee our obligations under
the registered notes.
35
<PAGE>
SBARRO, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 2, 2000
<TABLE>
<CAPTION>
TRANSACTION
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Restaurant sales........................................ $ 366,630 $ -- $ 336,630
Franchise related income................................ 9,006 -- 9,006
Interest income......................................... 3,828 (3,828)(a) --
----------- ---------- --------
Total revenues.................................. 379,464 (3,828) 375,636
---------- ---------- --------
Costs and expenses:
Cost of food and paper products......................... 73,986 -- 73,986
Restaurant operating expenses:
Payroll and other employee benefits.................. 97,174 -- 97,174
Occupancy and other.................................. 106,852 -- 106,852
Depreciation and amortization............................. 25,363 5,582(b) 30,945
General and administrative................................ 23,456 -- 23,456
Interest expense.......................................... 7,948 20,882(c) 31,226
1,344(d)
773(e)
279(f)
Provision for unit closings............................... 1,013 -- 1,013
Other income.............................................. (5,173) -- (5,173)
---------- -------- ----------
Total costs and expenses........................ 330,619 28,860 359,479
-------- -------- --------
Income before income taxes and cumulative effect of change
in method of accounting................................... 48,845 (32,688) 16,157
Income taxes.............................................. 19,322 (9,827)(g) 9,495
--------- ---------- ----------
Net income................................................ $ 29,523 $(22,861) $ 6,662
========= ========= ==========
</TABLE>
See notes to unaudited consolidated pro forma financial data
36
<PAGE>
SBARRO, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL DATA
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
We have made the following pro forma adjustments to arrive at our pro
forma consolidated statement of operations:
(a) Represents elimination of interest income due to the use of
substantially all of our cash on hand, or $159.8 million, as
partial consideration in the going private transaction.
(b) Represents amortization of the excess of the purchase price
over the fair value of net assets acquired arising as a result
of the going private transaction over a 30 year period, which
represents the average estimated useful life of the intangible
assets acquired in the transaction. The adjustments are based
on presently available information and on certain assumptions
and preliminary estimates that we believe are reasonable;
however, actual recording of the going private transaction
will be based upon appraisals, evaluations and estimates of
fair values.
(c) Represents cash interest expense as a result of the issuance
of the notes had the going private transaction been
consummated at the beginning of fiscal 1999.
(d) Represent interest expense as a result of the mortgage loan on
our corporate headquarters building as if it were issued at
the beginning of fiscal 1999.
(e) Represents accretion of deferred financing and transaction
costs over the life of the notes.
(f) Represents amortization of original issue discount over the
life of the notes.
(g) Reflects adjustments to our income tax provision and effective
tax rate as a result of the going private transaction. Our
effective tax rate after the going private transaction will be
higher than our historical effective tax rate primarily due to
the non-deductible amortization of the excess of the purchase
price over the fair value of net assets acquired arising as a
result of the going private transaction.
37
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table presents our selected consolidated historical
income statement data, other financial data and balance sheet data for the
periods and the dates indicated. Unless otherwise indicated, all amounts and
ratios set forth below reflect our consolidated financial results, including
certain subsidiaries that have initially been designated as unrestricted
subsidiaries under the indenture and that will not guarantee our obligations
under the notes. The selected consolidated historical financial data presented
below for fiscal years 1999 through 1997 were derived from, and are qualified by
reference to, our audited consolidated financial statements and their related
notes, which are included elsewhere in this prospectus. The selected
consolidated historical financial data presented below for fiscal years 1996 and
1995 were derived from, and are qualified by reference to, our audited
consolidated financial statements and their related notes, which are not
included elsewhere in this prospectus. The information presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our audited consolidated financial
statements and their related notes for the year ended January 2, 2000 included
elsewhere in this prospectus.
38
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
1999 1998(1) 1997 1996 1995
---- ------- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurant sales 366,630 $ 361,534 $ 337,723 $ 319,315 $ 310,132
Franchise related income 9.006 8,578 7,360 6,375 5,942
Interest income 3,828 5,120 4,352 3,798 3,081
--------- --------- --------- --------- ---------
379,464 375,232 349,435 329,488 319,155
Costs and expenses:
Costs of food and paper products . 73,986 76,572 69,469 68,668 67,361
Restaurant operating expenses:
Payroll and other employee
benefits 97,174 93,367 84,910 78,258 78,342
Occupancy and other 106,852 101,013 93,528 85,577 84,371
Depreciation and amortization 25,363 22,429 23,922 22,910 23,630
General and administrative 23,456 19,708 17,762 14,940 16,089
Provision for unit closings(2) 1,013 2,515 3,300 -- 16,400
Terminated transaction costs(3) -- 986 -- -- --
Litigation settlement and
related costs(4) -- 3,544 -- -- --
Loss on land to be sold(5) -- 1,075 -- -- --
Interest expense 7,948 -- --
Other income (5,173) (2,680) (1,653) (1,171) (1,359)
--------- --------- --------- --------- ---------
Total costs and expenses 330,619 318,529 291,238 269,182 284,834
Income before income taxes
and cumulative effect of
change in method of
accounting 48,845 56,703 58,197 60,306 34,321
Income taxes(6) 19,322 21,547 22,115 22,916 13,042
--------- --------- --------- --------- ---------
Income before cumulative
effect of change in
method of accounting 29,523 35,156 36,082 37,390 21,279
Cumulative effect of change in
method of accounting for
start-up costs -- (822) -- -- --
--------- --------- --------- --------- ---------
Net income $ 29,523 $ 34,334 $ 36,082 $ 37,390 $ 21,279
========= ========= ========= ========= =========
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
1999 1998(1) 1997 1996 1995
---- ------- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL AND RESTAURANT DATA:
Net cash provided by
operating activities(7) $ 62,005 $ 58,641 $ 61,026 $ 54,009 $ 54,580
Net cash provided by (used in)
investing activities(7) (25,044) (20,165) (26,022) (25,662) 11,139
Net cash used in
financing activities(7) (158,356) (3,377) (20,012) (17,030) (14,580)
EBITDA 78,328 $ 74,012 $ 77,767 $ 79,418 $ 54,870
EBITDA margin(8) 20.9% 20.0% 22.5% 24.4% 17.4%
Capital expenditures(9) 25,099 $ 27,717 $ 28,556 $ 25,928 $ 17,513
Ratio of earnings to fixed
charges(10) 2.4x 3.9x 4.2x 4.6x 3.1x
Number of restaurants at end
of period:
Company-owned 644 630 623 597 571
Franchised 286 268 239 219 200
--------- --------- --------- --------- ---------
Total number of restaurants 930 898 862 816 771
========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $ 417,833 $ 303,168 $ 278,649 $ 258,659 $ 242,730
Working capital (deficiency) (2,544) 121,380 88,006 73,619 57,645
Total debt 251,310 -- -- -- --
Shareholders' equity 110,280 256,917 220,439 205,200 185,666
</TABLE>
- ----------
(1) Our fiscal year ends on the Sunday nearest December 31. Our 1998 fiscal
year ended January 3, 1999 and contained 53 weeks. All other fiscal
years presented contained 52 weeks. As a result, our 1998 fiscal year
benefited from one additional week of operations over the other
reported fiscal years. The additional week contributed revenues, EBITDA
and net income of approximately $8.5 million, $2.7 million and $1.7
million, respectively.
(2) Represents provisions of (a) $16.4 million for the closing of
approximately 40 under-performing restaurants in fiscal 1995, (b) $3.3
million for the closing of two joint venture units in fiscal 1997,
(c) $2.5 million for the closing of 20 restaurants in fiscal 1998 and
(d) a special allocation of losses in fiscal 1999 which arose as a
result of the final disposition of two joint venture unit closings
recorded in 1997.
(3) Represents a charge for costs associated with the termination of a
prior going private proposal by the Sbarro family.
(4) Represents a charge in connection with the settlement of a lawsuit.
(5) Represents a write down of the carrying cost on a parcel of land that
we own.
40
<PAGE>
(6) We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and, where applicable and permitted, under
similar state and local income tax provisions beginning in fiscal 2000.
For a discussion of the distributions that we are permitted to make to
our shareholders to pay taxes on our income, see "Certain Relationships
and Related Transactions" and "Description of Notes -- Certain
Covenants -- Restricted Payments" and "-- Covenants Relating to Tax
Payment Agreement."
(7) For a more detailed presentation of our cash flow data, see our audited
consolidated financial statements and their related notes for the year
ended January 2, 2000 included elsewhere in this prospectus.
(8) EBITDA represents earnings before cumulative effect of change in
accounting method, interest income, interest expense, taxes,
depreciation and amortization. EBITDA includes the effect of the
unusual charges included in notes 2, 3, 4 and 5. EBITDA margin
represents EBITDA divided by the sum of restaurant sales and franchise
related income. EBITDA should not be considered in isolation from, or
as a substitute for, net income, cash flow from operations or other
cash flow statement data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Rather, EBITDA is presented because it is a widely accepted
supplemental financial measure, and we believe that it provides
relevant and useful information. Our calculation of EBITDA may not be
comparable to a similarly titled measure reported by other companies,
since all companies do not calculate this non-GAAP measure in the same
manner. Our EBITDA calculations are not intended to represent cash
provided by (used in) operating activities since they do not include
interest and taxes and changes in operating assets and liabilities, nor
are they intended to represent a net increase in cash since they do not
include cash provided by (used in) investing and financing activities.
(9) The following amounts related to the construction of our headquarters
are included as capital expenditures: $0.4 million in fiscal 1995, $4.2
million in fiscal 1996, $5.0 million in fiscal 1997, $4.8 million in
fiscal 1998, and $1.6 million in fiscal 1999.
(10) 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, which we deem to be a reasonable
approximation of the interest factor of this expense.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the consolidated
financial statements, the notes thereto and other data and information appearing
elsewhere in this prospectus.
RESULTS OF OPERATIONS
Our fiscal year ends on the Sunday nearest to December 31. The fiscal
year which ended on January 3, 1999 contained 53 weeks, while all other reported
fiscal years contained 52 weeks. As a result, our 1998 fiscal year benefited
from one additional week of operations over the other reported fiscal years,
with its year ending on January 3, 1999 as opposed to December 28, 1997. The
additional week in fiscal 1998 produced revenues of $8.5 million, and net income
of $1.7 million.
FISCAL 1999 COMPARED TO FISCAL 1998
Restaurant sales from Sbarro-owned units and consolidated joint venture
units increased 1.4% to $366.6 million from $361.5 million in the 1998 fiscal
year. The increase resulted primarily from a higher number of units in operation
in the current fiscal year than the comparable period in 1998 and selective menu
price increases of approximately 2.8%, 1.4% and .7% at Sbarro-owned units which
became effective in September 1999, September 1998 and February 1998,
respectively. Sales for 1998 included $8.5 million generated in the 53rd week of
the 1998 fiscal year. Comparable unit sales increased 0.8% in the fiscal 1999
year from the first 52 weeks of the 1998 fiscal year primarily as a result of
the menu price increases. Comparable restaurant sales are made up of sales at
locations that were open during the entire current and prior fiscal year.
Franchise related income increased 4.7% to $9.0 million in fiscal 1999
from $8.6 million in fiscal 1998. The increases resulted primarily from greater
continuing royalties due to a higher number of franchise units in operation in
the current year than in the 1998 fiscal year partially offset by lower area
development and initial franchise fees in fiscal 1999.
Interest income was approximately $3.8 million for fiscal 1999 compared
to $5.1 million in fiscal 1998. As discussed elsewhere in this prospectus, we
used substantially all of our available cash in order to fund the going private
transaction. Therefore, Sbarro generated a minimal amount of interest income for
the period from September 28, 1999, the date of the going private transaction,
to the end of the fiscal year. Sbarro will not realize the level of interest
income as it had in the past unless and until it rebuilds its cash position.
Cost of food and paper products as a percentage of restaurant sales
improved to 20.2% for fiscal 1999 compared to 21.2% for the 1998 fiscal year.
Cost of food and paper products as a percentage of restaurant sales declined
from the prior year due to lower average cheese prices during fiscal 1999 and
the impact of the menu price increases described above.
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Restaurant operating expenses - payroll and other benefits increased to
26.5% of restaurant sales in fiscal 1999 from 25.8% of restaurant sales in
fiscal 1998. This increase was primarily due to the tight labor market,
resulting in pressures on wages and salaries and associated increases in amounts
paid for payroll taxes. Congress has recently been considering increasing the
minimum wage by $1.00 per hour over a two to three year period beginning as
early as April 2000. Any such increases would increase our labor costs.
Restaurant operating expenses - occupancy and other expenses increased
to 29.1% of restaurant sales in fiscal 1999 from 27.9% in fiscal 1998. The
increase was attributable principally to increases in rent and other occupancy
related costs.
Depreciation and amortization expense increased by $2.9 million in
fiscal 1999 over fiscal 1998 primarily as a result of an increase in
depreciation and amortization of Sbarro's new headquarters building that was
completed in the fourth quarter of fiscal 1998 and amortization of the excess of
the purchase price over the cost of net assets acquired in connection with the
going private transaction.
General and administrative expenses were $23.5 million, or 6.2% of
total revenues, for the 1999 fiscal year, compared to $19.7 million, or 5.3% of
total revenues, for the 1998 fiscal year. The increase was primarily due to
higher payroll costs and costs associated with the administration of additional
Sbarro-owned restaurants, expanding joint venture operations, higher litigation
costs, increases in various field training and human resource functions and
costs associated with Sbarro's headquarters building, which was completed during
the fourth quarter of fiscal 1998.
Interest expense of $7.9 million in fiscal 1999 relates to the accrual
of interest, accretion of original issue discount and the amortization of
deferred financing charges with respect to the senior notes for the period
subsequent to their issuance on September 28, 1999 in financing the going
private transaction and the cost of the unused line of credit and the
amortization of deferred financing charges with respect to the bank credit
agreement entered into at that time. These charges and costs will continue while
the notes are outstanding.
The provision for unit closings is the result of a special allocation
of losses in fiscal 1999 of $1.0 million in connection with the final
disposition of two joint venture unit closings recorded in 1997 and $2.5 million
for the closing of 20 Sbarro restaurants in 1998.
Other income increased by $2.5 million to $5.2 million for the 1999
fiscal year compared to the 1998 fiscal year primarily as a result of increased
incentives from suppliers, income, net of expenses, generated from the leasing
of substantially all of Sbarro's corporate headquarters building not occupied by
Sbarro to third parties and an increase in equity earnings of joint ventures
accounted for under the equity method of accounting.
The effective income tax rate was 39.6% and 38.0% for fiscal 1999 and
fiscal 1998, respectively. The increase in the effective income tax rate is
primarily as a result of the non-deductible amortization expenses in connection
with the going private transaction.
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The cumulative effect of the change in method of accounting in fiscal
1998 resulted from Sbarro's implementation of Statement of Position 98-5 of the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants which required companies that had capitalized pre-opening and
similar costs to write off all those existing costs as a "cumulative effect of
accounting change" and to expense all those costs as incurred in the future. In
accordance with the early application provisions, Sbarro implemented SOP 98-5 as
of the beginning of our 1998 fiscal year and incurred a one-time charge of $0.8
million, net of an income tax benefit of $0.5 million, to write off all start-up
costs existing as of the beginning of that year.
FISCAL 1998 COMPARED TO FISCAL 1997
Our 1998 fiscal year benefited from one additional week of operations
over the prior fiscal year. The additional week in fiscal 1998 produced revenues
of $8.5 million, and net income of $1.7 million.
Restaurant sales from Sbarro-owned units and consolidated joint venture
units increased 7.1% to $361.5 million from $337.7 million in 1997. The
increases resulted primarily from a higher number of units in operation during
the 1998 fiscal year, selective menu price increases of approximately 1.4% and
0.7% which became effective in September 1998 and February 1998, respectively,
and sales generated in week 53 of the 1998 fiscal year. Comparable unit sales
increased 1.6% to $322.4 million for the first 52 weeks of the 1998 fiscal year
from $317.2 million in our 1997 fiscal year. Comparable restaurant sales are
made up of sales at locations that were open during the entire current and prior
fiscal years.
Franchise related income increased 16.5% to $8.6 million in 1998 from
$7.4 million in 1997. The increases resulted from greater continuing royalties
due to a larger number of franchise units in operation in 1998, an increase in
initial franchise and development fees due to opening more international
franchise units in 1998 than in 1997 and royalties generated in week 53 of the
1998 fiscal year. During the year ended January 3, 1999, 13 units were closed by
franchisees. These units did not produce material levels of sales and,
consequently, did not generate material amounts of royalty income to us. In
addition, we purchased one franchise unit.
Interest income increased to $5.1 million in 1998 from $4.4 million in
1997. This increase was due to larger amounts of cash being invested in 1998
than in 1997 and the length of the 1998 fiscal year. Interest rates were
comparable in both years.
Cost of food and paper products, as a percentage of restaurant sales,
increased to 21.2% in 1998 from 20.6% in 1997. Higher cheese prices during 1998
increased food costs by approximately $2.6 million or 0.7% of sales and was the
primary cause of the increase. The increase occurred during the last three
quarters of the fiscal year.
Restaurant operating expenses -- payroll and other employee benefits
increased to 25.8% of restaurant sales in 1998 from 25.1% of restaurant sales in
1997. This increase was attributable to the $1.2 million (or 0.3% of restaurant
sales) payroll and other employee benefit component of start-up costs expensed
as incurred during 1998 under SOP 98-5 implemented by us in the first
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quarter of fiscal 1998, which expenses in prior years were capitalized and
charged to amortization expense over a two year period. In addition, the effects
of the federal minimum wage, which became effective in September 1997, a strong
labor market and an increase in unemployment and other payroll taxes contributed
to the increase.
Restaurant operating expenses -- occupancy and other expenses increased
to 27.9% in 1998 from 27.7% in 1997. The increase is attributable principally to
such costs increasing at a rate faster than the increase in restaurant sales in
1998 from 1997.
Depreciation and amortization expenses decreased to $22.4 million from
$23.9 million principally as a result of the absence of amortization of
previously capitalized start-up costs which, as discussed below, were fully
written off as of the beginning of the year with the implementation of SOP 98-5.
Had we not implemented SOP 98-5, we would have incurred amortization expenses of
$1.2 million in 1998 for prior and current years' costs previously capitalized.
The balance of the decrease relates to the absence of depreciation and
amortization in 1998 on certain older units and also to the closing of certain
Sbarro-owned units, as discussed below.
General and administrative expenses increased to $19.7 million or 5.3%
of total revenues in 1998 from $17.8 million or 5.1% of revenues in 1997. The
increases were due to higher costs associated with the administration of
Sbarro-owned restaurants and additional supervisory, administrative and travel
expenses related to increased international franchising activities. In addition,
$0.8 million, or 0.2% of revenues, of the increase was attributable to the
general and administrative expense component of start-up costs incurred and
expensed during 1998 under SOP 98-5. These start-up expenses in prior years
would have been capitalized and charged to amortization expense over a two year
period.
Results for fiscal 1998 include one-time charges to operating income of
$2.5 million before tax, or $1.6 million after tax, for the closing of 20
Sbarro-owned restaurants and $1.0 million before tax, or $0.6 million after tax,
for costs associated with the terminated negotiations of the initial going
private proposal by the Sbarro family. The fiscal year results also include a
provision of $3.5 million before tax, or $2.2 million after tax, for costs
associated with the settlement approved and finalized in December 1998 of a
lawsuit under the Fair Labor Standards Act and a charge of $1.1 million before
tax, or $0.7 million after tax, for the difference between the carrying cost and
proposed selling price of a parcel of land sold by us.
Other income increased to $2.7 million in 1998 from $1.7 million in
1997 primarily as a result of increased incentives from suppliers.
The effective income tax rate was 38.0% for fiscal 1998 and 1997.
The cumulative effect of the change in method of accounting resulted
from our implementation of SOP 98-5 which requires companies that have
capitalized pre-opening and similar costs to write off all such existing costs,
net of tax benefit, as a "cumulative effect of accounting change" and to expense
all such costs as incurred in the future. As permitted by its early application
provisions, we implemented SOP 98-5 as of the beginning of our 1998 fiscal
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year. In addition to on-going start up costs incurred and expensed during 1998
with respect to restaurant operating expenses -- payroll and other employee
benefits and general and administrative expenses as discussed above, we incurred
a one-time charge during 1998 of $0.8 million, net of an income tax benefit of
$0.5 million, to write off all start-up costs existing as of the beginning of
the year.
IMPACT OF INFLATION AND OTHER FACTORS
Food, labor, rent, construction and equipment costs are the items most
affected by inflation in the restaurant business. Although for the past several
years inflation has not been a significant factor, there can be no assurance
that this trend will continue. In addition, food and paper product costs may be
temporarily or permanently affected by weather, economic and other factors
beyond our control that may reduce the availability and increase the cost of
these items. Historically, the price of cheese has fluctuated more than our
other food ingredients and related restaurant supplies.
SEASONALITY
Our business is subject to seasonal fluctuations, and the effects of
weather and economic conditions. Earnings have been highest in our fourth fiscal
quarter due primarily to increased volume in shopping malls during the holiday
shopping season. While the fourth fiscal quarter normally accounts for
approximately 40% of net income for the year, the length of the holiday shopping
period between Thanksgiving and New Year's Day and the number of weeks in our
fourth quarter result in fluctuations in fourth quarter financial results from
year to year. In addition, the effects of the going private transaction reduced
the net income for the fourth quarter of 1999 as a percentage of total 1999 net
income. The fourth quarter of 1999 accounted for 31% of net income for the 1999
fiscal year. Excluding the impact of the going private transaction, net income
for the fourth quarter of 1999 would have been approximately 39% of net income
for the 1999 fiscal year. The 1998 fiscal year, which contained 53 weeks, had a
13 week fourth quarter. Excluding the impact of the thirteenth week, the fourth
quarter of fiscal 1998 would have accounted for 38% of our net income, which is
consistent with the comparable prior year period.
ACCOUNTING PERIOD
Our fiscal year ends on the Sunday nearest to December 31. The fiscal
year which ended on January 3, 1999 contained 53 weeks. All other reported
fiscal years contained 52 weeks.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically not required significant working capital
to fund its existing operations and has financed its capital expenditures and
investments in its joint ventures through cash generated from operations.
Substantially all of our cash was used to complete the going private
transaction. As a result, at January 2, 2000 we had unrestricted cash and cash
equivalents of $33.5 million and a working capital deficit of $2.5 million.
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As part of the going private transaction, we issued the original notes
and entered into a $30.0 million bank credit facility. We have $27.5 million of
undrawn availability under the bank credit facility, net of outstanding letters
of credit and guarantees of reimbursement obligations currently aggregating
approximately $2.5 million. In March 2000 we obtained a $16.0 million 8.4%
mortgage loan on our corporate headquarters building and distributed an $18.0
million dividend to our shareholders, as discussed below.
Net cash provided by operating activities was $62.0 million and $58.6
million for the fiscal years ended January 2, 2000 and January 3, 1999,
respectively. Although net income decreased by $4.8 million, cash flow from
operations increased by $3.4 million as a result of increased depreciation and
amortization of $3.3 million and a $5.0 million net change in operating assets
and liabilities principally resulting from accrued interest of $7.5 million.
Net cash used in investing activities primarily relates to capital
expenditures, including investments made by our joint ventures. Net cash used in
investing activities was $25.0 million and $20.2 million for the years ended
January 2, 2000 and January 3, 1999, respectively. The increase in net cash used
in investing activities for the year ended January 2, 2000 from the year ended
January 3, 1999 was due mainly to a decrease in proceeds from the maturities of
marketable securities of $7.5 million, offset by a modest decrease in capital
expenditures from $27.7 million in fiscal 1998 to $25.1 million in fiscal 1999
principally related to the completion of our corporate headquarters in late
1998.
Net cash used in financing activities was $158.4 million for the fiscal
year ended January 2, 2000 compared to $3.4 million for the fiscal year ended
January 3, 1999. This increase primarily resulted from $410.0 million of cash
used, net of accrued or previously paid costs of the going private transaction,
to pay the public shareholders in the going private transaction and related
transaction costs, including financing costs, offset by approximately $251.2
million of net proceeds raised through the private placement of the senior
notes. Net cash used in financing activities for fiscal 1998 was comprised of
$5.5 million of cash dividends paid in fiscal 1998 that were declared in fiscal
1997 partially offset by $2.1 million of proceeds from the exercise of stock
options.
As a result of the going private transaction, we used substantially all
of our cash on hand and incurred approximately $255.0 million of debt. We expect
our other liquidity needs will relate to capital expenditures, working capital,
investments in joint ventures, distributions to shareholders as permitted under
the indenture and general corporate purposes. We expect our primary sources of
liquidity to meet these needs will be cash flow from operations and availability
under our credit facility.
Since we used substantially all of our cash on hand to consummate the
going private transaction, we will not realize the level of interest income as
in the past unless and until we rebuild our cash position. Further, we will
incur annual cash interest expense of approximately $29.7 million under the
senior notes and mortgage loan and may incur additional interest expense for
borrowings under our credit facility.
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We believe that aggregate restaurant capital expenditures and our
investments in joint ventures during the next twelve months will be moderately
higher than levels in recent fiscal years. Unpaid capital expenditure
commitments aggregated approximately $3.5 million at January 2, 2000.
Our effective tax rate after the going private transaction was higher
than our historical effective tax rate primarily due to the non-deductible
amortization of the excess of the purchase price over the fair value of net
assets acquired arising as a result of the going private transaction. In March
2000, we elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and, where applicable and permitted, under similar state
and local income tax provisions beginning January 3, 2000. Under the provisions
of Subchapter S, substantially all taxes on our income will be paid by our
shareholders. On a pro forma basis to give effect to the going private
transaction, if we were taxed as an S corporation as of the beginning of fiscal
1999, we and our shareholders would have had a tax liability on our income of
approximately $25.4 million or 50% of our income before taxes. This amount is
higher than the amount that is reflected in "Unaudited Consolidated Pro Forma
Financial Data" for the comparable period due to (i) differences in tax rates
between individual and corporate taxpayers, (ii) the timing differences
currently accounted for as deferred taxes in our financial statements (which
deferred taxes may be eliminated or reduced upon conversion to an S corporation,
in fiscal 2000) and (iii) the effect of double taxation in those state and local
jurisdictions that do not recognize S corporation status. The indenture and
credit facility permit distributions to shareholders for taxes on our earnings,
as discussed under " Certain Relationships and Related Transactions - Tax
Agreement."
Historically we have paid dividends on our common stock to our
shareholders. Quarterly dividends aggregated $22.1 million for fiscal 1997, the
last full fiscal year in which we paid a dividend. Our Board of Directors
suspended the payment of dividends commencing in the first quarter of 1998 in
connection with a prior going private proposal by the Sbarro family and the
consideration of other strategic alternatives. On March 13, 2000 our Board of
Directors declared a dividend of $18 million. We expect that our Board of
Directors will from time to time elect to pay dividends to our shareholders in
amounts that will be based upon a number of factors, including our working
capital needs, operating performance, debt service obligations and capital
expenditure requirements. Distributions are subject to the provisions of the
indenture discussed under "Certain Relationships and Related Transactions" and
"Description of Notes -- Certain Covenants -- Restricted Payments."
We do not have any principal repayment obligations under the notes or
our credit agreement for ten and five years, respectively. We believe that cash
flow from operations and funds available under our credit facility will be
sufficient to meet our liquidity needs.
MARKET RISKS
We have historically invested our cash on hand in short term, fixed
rate, highly rated and highly liquid instruments which mature and are reinvested
throughout the year. Although our existing investments are not considered at
risk with respect to changes in interest rates or markets
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for these instruments, our rate of return on short-term investments could be
affected at the time of reinvestment as a result of intervening events.
Our borrowings under our credit facility will be subject to
fluctuations in interest rates. However, we do not expect to enter into any
interest rate swaps or other instruments to hedge our borrowings under our
credit facility. See "Description of Credit Facility -- Interest" for
information concerning our credit facility.
We have not purchased future, forward, option or other instruments to
hedge against fluctuations in the prices of the commodities we purchase. As a
result, our future commodities purchases are subject to changes in the prices of
such commodities.
All of our transactions with foreign franchisees have been denominated
in, and all payments have been made in, United States dollars, reducing the
risks attendant in changes in the values of foreign currencies. As a result, we
have not purchased future contracts, options or other instruments to hedge
against changes in values of foreign currencies.
RECENT ACCOUNTING PRONOUNCEMENTS
Pursuant to Statement of Financial Accounting Standards ("SFAS") No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB
Statement No. 133," issued in June 1999, SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. Presently, we do not use derivative
instruments and therefore SFAS No. 133 is not currently applicable.
YEAR 2000
In 1999, we implemented a program with the objective of avoiding "year
2000" issues, which could arise in situations where computer software or
databases recognize the two digit year "00" as the year 1900 rather than the
year 2000. Our IT systems, which we use primarily for financial, accounting,
human resources, payroll, operations support and point-of-sales processing and
reporting, and our non-information technology systems, which we use principally
in communications systems, both use computer hardware, software and related
technology that could have been affected by year 2000 issues. This could have
resulted in system failures or miscalculations that could have caused
disruptions in business operations and increased costs in processing and
analyzing data. As part of program to avoid year 2000 issues, we reviewed our
in-house software developed by our IT department and packaged software purchased
from third parties, and remediated these where needed.
All software modification and testing was performed by our internal IT
department without the need to employ additional staff and without significant
interruption of the other functions performed by the department. We spent less
than $150,000 for testing, purchasing hardware and for other modification costs
to finish the project. We did not separately track internal costs which were
principally payroll and related costs of our IT systems department incurred as
part of our year 2000 project. We do not anticipate additional expenditures as
part of our year 2000 program.
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To date, we have experienced no significant year 2000 problems with
either the hardware or software used in our IT or non-IT systems, in interfacing
with our food and beverage suppliers or with the systems employed by the
landlords of the facilities in which we conduct business. We do not anticipate
any year 2000 problems in the future. Should any occur, we believe we could
quickly implement the contingency plans we developed in preparing for year 2000.
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BUSINESS
THE COMPANY
We are a leading owner, operator and franchisor of quick-service
restaurants, serving a wide variety of Italian specialty foods. Under the
"Sbarro" and "Sbarro The Italian Eatery" names, we developed one of the first
quick-service concepts that extended beyond offering one primary specialty item,
such as pizza or hamburgers. Our diverse menu offering includes pizza, pasta and
other hot and cold Italian entrees, salads, sandwiches, cheesecake and other
desserts and beverages. All of our entrees are prepared fresh daily in each
restaurant using special recipes developed by us. We focus on serving our
customers generous portions of high quality Italian-style food at attractive
prices. We believe that the Sbarro concept is unlike other quick-service Italian
restaurants due to its diverse menu selection and its fast, cafeteria-style
service.
Since our inception in 1959, we have focused on high customer traffic
venues due to the large number of captive customers who base their eating
decision primarily on impulse and convenience. We therefore do not have to incur
the significant advertising and promotional expenditures that certain of our
competitors incur to attract customers to their destination restaurants. These
factors, combined with adherence to strict cost controls, provide us with high
and stable operating margins. We initially located our restaurant sites in New
York and then, with the rapid expansion of enclosed shopping malls in the 1970s,
expanded into these facilities nationwide due to their high customer traffic and
impulse purchase characteristics. Over the past ten years, we have extended the
Sbarro concept to other high customer traffic venues, including toll roads,
airports, sports arenas, hospitals, convention centers, university campuses and
casinos. We believe the opportunity to open additional Sbarro units in these and
other new venues should continue to increase as companies, municipalities and
others seek to outsource their non-core food operations to companies with an
established brand name. As of January 2, 2000, the Sbarro system included 930
restaurants, consisting of 644 company-owned and 286 franchised restaurants
located in 48 States, the District of Columbia, the Commonwealth of Puerto Rico,
certain United States territories and 21 countries throughout the world. Of the
total 928 Sbarro units, 787 are located in enclosed shopping malls and the
remaining 143 are generally located in other high customer traffic venues,
including those described above.
We have demonstrated our ability to identify, develop and efficiently
operate restaurants and have increased our total restaurant base, including
franchised operations, from 103 restaurants at the time of our initial public
offering in 1985 to 930 at January 2, 2000. During the past decade, our growth
in shopping malls has been primarily derived from opportunities that have arisen
from the major renovation of existing shopping malls or the re-merchandising of
a mall's food operations and, to a lesser extent, the development of new
shopping malls. Historically, our strategy has been to own and operate our
restaurants directly whenever possible in order to closely control all aspects
of restaurant operations and, therefore, maximize restaurant profitability.
However, we have granted franchises to accomplish our expansion in international
markets in order to minimize our capital risk and have typically granted
franchises domestically only when necessary to open a unit in a desirable
location. For example, the food operations in many of the non-mall locations in
which we have units, such as toll roads and certain airports, are operated by
third-party food service management companies, such as Host Marriott Services
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Corporation, under separate franchise agreements with a number of quick-service
restaurant companies. We expect that a higher percentage of our future new unit
growth will come from franchised locations, as we believe opportunities to open
Sbarro units in non-mall venues will continue to increase, both domestically and
internationally. We have developed a qualification and training program that
provides strict operating standards for franchisees and we restrict the size of
territories granted to franchisees. We believe that our franchise units meet the
quality and customer service benchmarks of our Sbarro-owned units.
INDUSTRY OVERVIEW
The restaurant industry represents one of the largest sectors of the
economy, which the National Restaurant Association estimates were approximately
$338 billion in 1998, accounting for approximately 4% of the nation's gross
domestic product. Between 1990 and 1998, the National Restaurant Association
estimates that restaurant industry sales grew an average of approximately 5% per
year.
The quick-service restaurant industry includes hamburgers, pizza,
chicken, various types of sandwiches, and Mexican, Chinese and other ethnic
foods. According to the National Restaurant Association, sales at quick-service
restaurants reached approximately $107 billion in 1998, compared with
approximately $62 billion in 1988. This growth primarily reflects consumers'
increasing desire for a convenient, fast and reasonably priced restaurant
experience. In addition, the National Restaurant Association estimates that the
percentage of the average American family's food budget spent on meals consumed
away from home has increased from approximately 25% in 1955 to approximately 44%
in 1998. We believe this trend will continue as the number of dual income
households increases, consumers' disposable income increases and consumers'
leisure time decreases. Further, pizza, which accounts for approximately 50% of
Sbarro's revenues, continues to be one of the most popular fast food categories.
According to the U.S. Commerce Department, at the end of 1998, there were over
30,000 pizza restaurants in the United States, generating nearly $16 billion in
annual revenues.
COMPETITIVE STRENGTHS
We believe that our success in the quick-service restaurant industry is
attributable to the following key competitive strengths:
LEADING QUICK-SERVICE OPERATOR IN HIGH CUSTOMER TRAFFIC VENUES. We are
a leading owner, operator and franchisor of quick-service restaurants, having
developed over the course of the past 40 years a business model for high
customer traffic venues including, among others, shopping malls, airports and
toll roads. We have long-standing relationships with many of the major shopping
mall developers and real estate management companies, as well as with national
food service management companies that enter into restaurant franchise
agreements on behalf of owners. As a result of these relationships and our
significant presence in major shopping malls throughout the United States, we
believe that we have a competitive advantage in opening new units in high
customer traffic venues.
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STRONG, NATIONALLY RECOGNIZED BRAND NAME. The breadth of our operations
and the visibility of our units across many high customer traffic venues
throughout the United States and abroad have enabled us to forge strong brand
name recognition with our customers. Our consistent product quality and service,
diverse menu of attractively priced Italian food served in a cafeteria style
format, distinctive logo and clean and bright locations have become recognized
symbols of Sbarro
RECORD OF PROFITABILITY. We have a track record of consistent operating
performance and a high level of profitability. Our operating and cost controls
have resulted in a consistent revenue base and a relatively low cost structure.
As a result of our focus on high customer traffic venues, we do not need to
offer discounts or promotions to attract customers and do not incur significant
marketing expenditures. See "Selected Financial Data" for an overview of our
recent financial results.
EXPERIENCE IN ASSESSING HIGH CUSTOMER TRAFFIC VENUES. Over the course
of the past 40 years, our management team has developed and refined a business
model specifically for high customer traffic venues. We have extensive
experience in identifying and developing restaurant locations and in operating
these sites. We forecast the initial capital investment and pre-opening costs
associated with opening a new Sbarro restaurant as well as its expected sales
and profitability. Since the cost of food, paper products, payroll and other
employee benefits as a percentage of restaurant sales is generally consistent
from location to location by unit type, our forecasting focuses primarily on
projecting restaurant revenues and semi-variable costs. When forecasting
revenues for prospective locations, we consider such factors as the area's
demographics and the retail environment surrounding the location. We also have
developed standard restaurant operating procedures that specify all aspects of
restaurant management, including recipes, production processes, restaurant
design, customer service and staff training. This ensures system-wide
consistency of product and service quality, while maximizing profitability.
CAPITAL EXPENDITURE REQUIREMENTS. Approximately 96% of our 644 Sbarro
owned restaurants at January 2, 2000 are located in shopping malls. These units
are relatively small (500 to 3,000 square feet) and are less expensive to open
than fast food establishments in free standing locations. Additionally, the
majority of our locations have limited, if any, dedicated seating solely for
Sbarro customers due to their location in common area food courts, which further
minimizes initial and ongoing maintenance costs. A new Sbarro unit typically
requires a $0.3 million to $0.5 million initial capital investment with only
minimal annual maintenance expenditures thereafter. This relatively low initial
capital investment, when combined with our historically high unit operating
margins, generally enables us to recover our initial investment and pre-opening
costs for mall units in approximately 2.5 to 3.5 years, depending upon unit
type. Further, our franchisees typically fund the capital expenditures for their
units. As a result of these factors, we generate significant free cash flow.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT OWNERSHIP. Our experienced
management team has extensive experience in the restaurant industry and
represents one of our key competitive advantages. Our senior management team is
led by Mario Sbarro, Chairman and Chief Executive Officer, Anthony Sbarro, Vice
Chairman, and Joseph Sbarro, Senior Executive
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Vice President, all of whom have been with us since their father opened the
first Sbarro restaurant in 1959. As a result of the consummation of the going
private transaction, the Sbarro family owns all of our common stock.
BUSINESS STRATEGY
We continuously seek to provide high quality Italian food products to a
broad customer base. We have concentrated our product development on creating a
menu of healthy, attractively priced items that appeal to the tastes of our
customers and produce high margins. We intend to achieve further growth and
strengthen our competitive position through the continued implementation of the
following initiatives:
EXPAND TRADITIONAL SBARRO STORE BASE. We plan to continue to increase
our network of Sbarro-owned and franchised locations. We believe new
Sbarro-owned locations will primarily be driven by opportunities arising from
major renovations of existing shopping malls or the re-merchandising of a mall's
food operations and, to a lesser extent, the development of new shopping malls.
We also plan to increase the level of franchising in both international and
domestic markets.
INCREASE PENETRATION OF NEW HIGH CUSTOMER TRAFFIC VENUES. We began
targeting toll roads and airport locations in the early 1990s and subsequently
expanded our targeted venues to include sports arenas, hospitals, convention
centers, university campuses and casinos due to the similar high customer
traffic and impulse purchase characteristics that these venues share with our
core shopping mall locations. Approximately 15% of our Sbarro-owned and
franchise restaurants are located in these non-mall venues. We believe these
venues offer significant expansion potential as either the owners of these
facilities or, food service management companies with whom the owners have
contracted the operations increasingly seek to outsource their non-core food
service operations to companies with an established brand, such as Sbarro, in
order to simplify their own operations and potentially increase profitability.
Approximately 80.6% of our units in these locations are operated as franchises,
accounting for approximately 43.9% of our franchise related income in the year
ended January 2, 2000.
PURSUE NEW CONCEPTS. Since 1995, we have begun developing new
restaurant concepts primarily through joint ventures in an effort to leverage
our restaurant management expertise into other venues that we believe have
attractive growth opportunities. To date, these new concepts have primarily
established mid- and upper-priced Italian and steakhouse restaurants.
Additionally, we have recently acquired, through a joint venture, a two-unit
Mexican restaurant business and have established a joint venture that operates a
seafood restaurant. We or our joint ventures presently operate 28 new concept
restaurants. We have chosen to develop the joint ventures with restaurateurs
experienced in the particular food area. Our ownership interest in joint
ventures currently ranges from 25% to 80% and we are actively involved in the
operation and administration of all of these ventures. Our new concepts are in
various stages of development and expansion, and we are also considering
additional concepts for their development potential. Given the early development
stage of these concepts and their ownership structure, our existing new concepts
are, and our future new concepts are expected to be, initially designated as, or
held by, unrestricted subsidiaries under the indenture as discussed under
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"Description of Notes--Subsidiary Guarantees." Unrestricted subsidiaries will
not guarantee our obligations under the notes and will not be subject to the
restrictive covenants under the indenture. There can be no assurance as to the
performance of our new restaurant concepts or our ability to identify and
successfully develop other restaurant concepts.
RESTAURANT EXPANSION
We have expanded significantly in recent years, growing from 103
Sbarro-owned or franchised traditional type restaurants at the time of our
initial public offering in 1985 to 930 as of January 2, 2000.
From 1989 to 1994, we opened, on average, approximately 58 Sbarro-owned
locations per year. Before closings and units acquired from franchisees, we
opened 44 in 1995, 29 in 1996, 30 in 1997, 26 in 1998 and 24 in 1999. The actual
number and type of units that we open in the future will depend on the
availability of appropriate sites, as well as other factors.
The following table indicates the number of Sbarro-owned and franchised
restaurants, excluding new concepts in non-mall locations, in operation during
each period indicated.
<TABLE>
<CAPTION>
FISCAL YEAR
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
COMPANY-OWNED SBARRO RESTAURANTS:
Opened during period(1).................... 44 29 30 26 24
Acquired from (sold to) franchisees
during period......................... -- 1 4 1 (1)
Closed during period....................... (40) (4) (8) (20) (9)
Open at end of period(2)................... 571 597 623 630 644
FRANCHISED SBARRO RESTAURANTS:
Opened during period....................... 40 36 47 43 49
(Sold to) acquired from us during period... -- (1) (4) (1) 1
Closed or terminated during period......... (2) (16) (23) (13) (32)
Open at end of period...................... 200 219 239 268 286
ALL SBARRO RESTAURANTS:
Opened during period(1).................... 84 65 77 69 73
Closed or terminated during period......... (42) (20) (31) (33) (41)
Open at end of period(2)................... 771 816 862 898 930
Kiosks (all franchised) open at end of
period................................... 8 7 7 8 4
- ----------
</TABLE>
(1) Includes, in fiscal 1996, fiscal 1997, fiscal 1998 and fiscal 1999,
three, two, one and no mall locations, respectively, of a joint venture
which operates as Umberto of New Hyde Park. For the purpose of this
prospectus, we have included those restaurants with Sbarro restaurants.
(2) Includes, at the end of fiscal 1996, fiscal 1997, fiscal 1998 and
fiscal 1999, three, five, six and six joint venture mall locations,
respectively, which operate as Umberto of New Hyde Park.
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TRADITIONAL CONCEPT AND MENU
Sbarro restaurants are family oriented, offering quick, efficient,
cafeteria and buffet style service designed to minimize customer waiting time
and facilitate table turnover. The decor of a Sbarro restaurant incorporates
booth and table seating for "in-line" restaurants, with a contemporary motif
that blends with the characteristics of the surrounding area.
As of January 2, 2000, there were 259 "in-line" Sbarro restaurants and
664 "food court" Sbarro restaurants. In addition, franchisees operated seven
freestanding Sbarro restaurants, including two in the Middle East, three in
Minnesota and one in each of the Bahamas and Puerto Rico. "In-line" restaurants,
which are self-contained restaurants, usually occupy approximately 1,500 to
3,000 square feet, contain the space and furniture to seat approximately 60 to
120 people and employ 10 to 40 persons, including part-time personnel. "Food
court" restaurants are primarily located in areas of shopping malls designated
exclusively for restaurant use and share a common dining area provided by the
mall. These restaurants generally occupy approximately 500 to 1,000 square feet
and contain only kitchen and service areas. They frequently have a more limited
menu than an "in-line" restaurant and employ 6-30 persons, including part-time
personnel.
Sbarro restaurants are generally open seven days a week serving lunch,
dinner and, in a limited number of locations, breakfast, with hours conforming
to those of the major department stores or other large retailers in the mall or
trade area in which they are located. Typically, mall restaurants are open to
serve customers 10 to 12 hours a day, except on Sunday, when mall hours may be
more limited. For Sbarro-owned restaurants open a full year, average sales in
fiscal 1999 were $0.7 million for "in-line" restaurants and $0.5 million 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.
All of our entrees are prepared fresh daily in each restaurant
according to special recipes developed by us. We place emphasis on serving
generous portions of quality Italian-style food at attractive prices. Entree
selections, excluding pizza, generally range in price from $2.99 to $5.29. We
believe that pizza, which is sold predominantly by the slice, accounts for
approximately 50% of Sbarro restaurant sales.
Substantially all of the food ingredients and related restaurant
supplies used by the restaurants are purchased from a national independent
wholesale food distributor which is required to adhere to established product
specifications for all food products sold to our restaurants. Breads, pastries,
produce, fresh dairy and certain meat products are purchased locally for each
restaurant. Soft drink mixes are purchased from major beverage producers under
national contracts. We believe that there are other distributors who would be
able to service our needs and that satisfactory alternative sources of supply
are generally available for all items regularly used in our restaurants.
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RESTAURANT MANAGEMENT
Each Sbarro restaurant is managed by one general manager and one or two
co-managers or assistant managers, depending upon the size of the location.
Managers are required to participate in Sbarro training sessions in restaurant
management and operations prior to the assumption of their duties. In addition,
each restaurant manager is required to comply with an extensive operations
manual containing procedures for assuring uniformity of operations and
consistent high quality of products. We have a restaurant management bonus
program that provides the management teams of Sbarro-owned Sbarro restaurants
with the opportunity to receive a percentage of restaurant sales in cash bonuses
based on certain performance-related criteria of their location.
We also employ 70 to 75 area directors, each of whom is typically
responsible for the operations of 6 to 14 Sbarro-owned restaurants in a given
area. Before each new restaurant opening, we assign an area director to
coordinate opening procedures. Each area director reports to one of 12 regional
directors. The regional directors recruit and supervise the managerial staff of
all Sbarro-owned restaurants and report to one of four regional vice presidents.
The regional vice presidents coordinate the activities of the regional directors
assigned to their areas of responsibility and report to the President of our
Quick Service Division.
FRANCHISE DEVELOPMENT
Growth in franchise operations occurs through the establishment of new
Sbarro restaurants by new franchisees and existing franchisees who have
multi-unit franchise agreements. We rely principally upon our reputation and the
strength of our existing restaurants to attract new franchisees as well as to
participate in national franchise conventions.
As of January 2, 2000, we had 286 franchised Sbarro restaurants
operated by 79 franchisees in 32 states of the United States as well as its
territories and in 22 countries throughout the world. We are presently
considering additional franchise opportunities in the United States and other
countries. In certain instances, we have established franchise locations under
territorial agreements in which we have 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.
We generally require payment of an initial fee and continuing royalties
at rates of 3.5% to 10.0% of gross revenues. Franchise agreements entered into
prior to 1988 generally have an initial term of 15 years with the franchisee
having a renewal option provided that the agreement has not been previously
terminated by either party for specified reasons. Since 1988, we have required
the franchise agreements to end at the same time as the underlying lease, but
generally not less than ten nor more than twenty years. Since 1990, the renewal
option has also been subject to conditions, including a remodel or image
enhancement requirement. Franchise agreements granted under territorial
agreements and those for non-traditional sites contain negotiated fees, royalty
rates and terms and conditions other than those contained in our basic franchise
agreement. The franchise and territorial agreements provide us with the right to
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terminate a franchisee for a variety of reasons, including insolvency or
bankruptcy, failure to operate its restaurant according to standards,
understatement of gross receipts, failure to pay fees, or material
misrepresentation on an application for a franchise.
We employ ten management level individuals responsible for overseeing
the operations of franchise units and for developing new units. These employees
report to our the President of our Franchising and Licensing Division.
NEW CONCEPT DEVELOPMENT
Since 1995, we have entered into several joint ventures to develop new
restaurant concepts and established one concept independently to provide growth
opportunities that leverage our restaurant management expertise. Our joint
ventures and other new concept presently operate 28 restaurants. We have chosen
to develop the joint ventures with restaurateurs experienced in the particular
food area and we are actively involved in the day-to-day operations of each
venture. Since January 2000, the President of our Casual and Fine Dining
Division, a newly formed position, has been overseeing these joint ventures and
other new concepts on our behalf. These concepts are in various stages of
development and expansion and we are considering additional concepts for
potential development.
Given the early development stage of these concepts and their ownership
structure, our existing joint ventures are initially, and our future joint
ventures and other new concepts are expected to be, designated as, or held by,
unrestricted subsidiaries under the indenture. Unrestricted subsidiaries will
not guarantee our obligations under the notes and will not be subject to the
restrictive covenants under the indenture. Our ability to invest in current and
future joint ventures and other new concepts is subject to the limitations
contained in the indenture regarding our ability to make investments in,
advances to, or provide guarantees or other credit enhancements to support
obligations of, our unrestricted subsidiaries.
The following is a summary of our existing joint ventures and other new
concept:
o We have a 100% interest in a new concept that presently
operates two moderately priced casual dining restaurants
serving Italian food under the name "Tony and Bruno's" in two
strip center locations. The restaurants primarily provide
table service and cater to families. Take-out service is also
available. We are planning to open additional sites of this
concept.
o We have an 80% interest in a joint venture that presently
operates moderately priced casual family restaurants serving
Italian food under the name "Umberto of New Hyde Park" in six
mall and eight strip center locations. The format is both
quick-service and table service. In the non-mall locations,
take-out service is also available. One non-mall location was
closed in 1998. In February 1999, we instituted an action
against the 20% partner in this venture, the resolution of
which is not expected to have a material adverse effect on the
operation of these restaurants. See "Legal Proceedings" for
further discussion of the action. We do not plan to open any
additional restaurants under this brand name at this time.
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o We have a 40% interest in a joint venture that presently
operates five casual dining restaurants with a Rocky Mountain
steakhouse motif under the name "Boulder Creek Steaks &
Saloon." This venture also operates two fine dining steak
restaurants under the names "Rothmann's Steakhouse" and
"Burton & Doyle." We are planning to open additional sites of
each type of restaurant.
o We have a 70% interest in two moderately priced, table service
restaurants featuring an Italian Mediterranean menu that
operate under the names "Salute" and "Cafe Medi" which are
located in New York City. During 1997, this venture closed two
other restaurants, resulting in a $3.3 million before tax, or
$2.0 million after tax, charge to our earnings. An additional
$1.0 million charge to earnings before tax, or $0.6 million
after tax, was recorded in 1999 when we subsequently agreed to
absorb a portion of our joint venture partners losses on these
units upon their disposition. We are planning to open
additional restaurants with this joint venture partner and
expect that our equity interest in these new ventures will be
50% or higher.
o We have a 50% interest in a joint venture which, in June 1999,
acquired two Mexican style restaurants operating in strip
centers under the name "Baja Grill." We are currently
evaluating whether to expand this concept.
o We have a 25% interest in a joint venture that was recently
formed for the purpose of establishing seafood restaurants and
is operating one unit under the name "Vincent's Clam Bar".
All joint venture restaurants, except four Umberto of New Hyde Park
mall units, are presently located in the New York City metropolitan area. We are
continually evaluating the operating performance of these ventures to assess
their feasibility and future growth potential. We intend to seek to expand our
existing ventures, if appropriate, and to develop new restaurant concepts either
independently or through existing or new joint ventures. There can be no
assurance as to the performance of the existing joint ventures or our ability to
successfully identify and develop new concepts.
All of our new concepts presently operate through unrestricted
subsidiaries as defined in the indenture. As such, we have certain restrictions
as to the financing we can provide to these new concepts and these entities are
not subject to the restrictions contained in the indenture and our revolving
credit facility.
As of January 2, 2000, we had an aggregate investment in our
unrestricted subsidiaries and related joint ventures of approximately $14.7
million, which does not include guarantees of indebtedness and reimbursement
obligations in respect of letters of credit in the aggregate amount of
approximately $17.5 million and guarantees of certain real property lease
obligations of these unrestricted subsidiaries and related joint ventures. In
addition, we have also sublet locations to, guaranteed all or portions of joint
venture location leases and provided other credit enhancements for these joint
ventures. Our joint ventures have current plans to invest
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<PAGE>
approximately $20.0 million, a portion of which is expected to be financed
and/or guaranteed by us, subject to the indenture.
EMPLOYEES
As of January 2, 2000, we employed approximately 8,800 persons,
exclusive of joint ventures, of whom approximately 4,000 were full-time field
and restaurant personnel, 4,600 were part-time restaurant personnel and 200 were
corporate administrative personnel. None of our employees are covered by
collective bargaining agreements. We believe our employee relations are
satisfactory.
COMPETITION
The restaurant business is highly competitive. Many of our direct
competitors operate within the pizza restaurant segment. We believe we compete
on the basis of price, service, location and food quality. Factors that affect
our and our franchisees' business operations include changes in consumer tastes,
national regional and local economic conditions, population, traffic patterns,
changes in discretionary spending priorities, demographic trends, consumer
confidence in food wholesomeness, handling and safety, weather conditions, the
type, number and location of competing restaurants and other factors. There is
also active competition for management personnel and attractive commercial
shopping mall, center city and other locations suitable for restaurants. We
compete in each market in which we operate with locally-owned restaurants, as
well as with national and regional restaurant chains. Factors, such as inflation
and increased food, beverage, labor, occupancy and other costs, could also
adversely affect us and others in the restaurant industry.
Although we believe we are well positioned to compete because of our
leading market position, focus and expertise in the quick-service Italian
specialty food business and strong national brand name recognition, we could
experience increased competition from existing or new companies and loss of
market share, which could have an adverse effect on our operations.
TRADEMARKS
Our Sbarro restaurants operate principally under the "Sbarro" and
"Sbarro The Italian Eatery" service marks, which are registered with the United
States Patent and Trademark Office for terms presently expiring in 2004 and
2001, respectively. Registered service marks may continually be renewed for 10
year periods. We have also registered or filed applications to register "Sbarro"
and "Sbarro The Italian Eatery" in several other countries. We believe that
these marks continue to be materially important to our business. The joint
ventures to which we are a party have also applied for United States trademarks
covering trade names used by them.
GOVERNMENTAL REGULATION
We are subject to various federal, state and local laws affecting our
business, as are our franchisees. Each of our restaurants and those owned by our
franchisees are subject to a variety of licensing and governmental regulatory
provisions relating to wholesomeness of food,
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sanitation, health, safety and, in certain cases, licensing of the sale of
alcoholic beverages. Difficulties in obtaining, or the failure to obtain,
required licenses or approvals can delay or prevent the opening of a new
restaurant in any particular area. Our operations and those of our franchisees
are also subject to federal laws, such as minimum wage laws, the Fair Labor
Standards Act and the Immigration Reform and Control Act of 1986. They are also
subject to state laws governing such matters as wages, working conditions,
employment of minors, citizenship requirements and overtime. Some states have
set minimum wage requirements higher than the federal level.
We are also subject to Federal Trade Commission regulations and various
state laws regulating the offer and sale of franchises. The FTC and various
state laws require us to furnish to prospective franchisees a franchise offering
circular containing prescribed information. We are currently registered to offer
and sell franchises in seven states and are currently exempt from the franchise
registration requirements in five states based upon "large franchisor"
exemptions, which are based upon our experience and meeting certain size tests,
generally requiring a net worth of at least $5 to $15 million (depending on the
state). The states in which we are registered, and a number of states in which
we may franchise, require registration of a franchise offering circular or a
filing with state authorities. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist in a substantial number of
states, and bills have been introduced in Congress from time to time which
provide for federal regulation of the franchisor-franchisee relationship in
certain respects. The state laws often limit, among other things, the duration
and scope of non-competition provisions and the ability of a franchisor to
terminate or refuse to renew a franchise.
We believe that we are in compliance in all material respects with the
laws to which we are subject.
Following the availability of our financial statements for the quarter
ended October 10, 1999, we amended our FTC franchise offering circular and,
where required, filed appropriate amendments to state franchise registrations to
reflect the going private transaction. Until the amendments are approved in
those states, we will not be able to sell or renew franchises in those states.
We currently expect, although there can be no assurance, that such amendments
will be approved and that any delay will not have a material adverse effect on
our business. Furthermore, state franchise examiners have discretion to
disapprove franchise registrations based on a franchisor's financial condition.
While we believe that, following completion of the going private transaction, we
continue to meet these financial requirements, there is little specific guidance
under state franchise laws as to acceptable levels of a franchisor's net worth,
and whether "net worth" includes or excludes intangible assets, and debt, and,
depending upon a franchisor's financial condition, state franchise examiners in
many states may require a franchisor to escrow initial franchise fees for a
limited period of time.
Although alcoholic beverage sales are not emphasized in our
restaurants, some of our larger restaurants serve beer and wine. Sales of beer
and wine contributed less than 1% of our total revenues during fiscal 1999. We
have submitted documents to amend our applications with the appropriate alcohol,
beverage and tobacco authorities in 14 of the 16 states in which we sell beer
and wine to reflect the Transaction and have filed part of an amendment that is
required in
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California. We expect to be able to continue to sell beer and wine
in most of the locations pending completion of the approval process, except that
we have discontinued selling beer and wine in Colorado. While we do not
anticipate the denial of any of our remaining applications, there can be no
assurance thereof.
PROPERTIES
All Sbarro restaurants are typically leased under ten-year leases that
often do not include an option to renew the lease. We have historically been
able to renew or extend leases on existing sites. As of January 2, 2000, we
leased 657 restaurants, of which 24 were subleased to franchisees under terms
which cover all of our obligations under the lease. The remaining franchisees
directly lease their restaurant spaces. Most of our restaurant leases provide
for the payment of base rents plus real estate taxes, utilities, insurance,
common area charges and certain other expenses, as well as contingent rents
generally ranging from 8% to 10% of net restaurant sales in excess of stipulated
amounts. Leases to which we were a party at January 2, 2000 have initial terms
expiring as follows:
<TABLE>
<CAPTION>
YEARS INITIAL LEASE NUMBER OF SBARRO- NUMBER OF FRANCHISED
TERMS EXPIRE OWNED RESTAURANTS RESTAURANTS
- ------------ ----------------- -----------
<S> <C> <C>
2000........................................ 28 2
2001........................................ 51 4
2002........................................ 65 3
2003........................................ 75 3
2004........................................ 50 1
Thereafter.................................. 364 11
</TABLE>
We own a four-story office building in Melville, New York with
approximately 100,000 square feet and a cafeteria style restaurant operated by
us. This building was purchased and renovated at a total cost of approximately
$20.8 million. Approximately 73% of the rentable square feet is currently under
lease to unaffiliated third parties. One floor of the building is occupied by us
as our principal executive offices. On March 3, 2000, we obtained a ten year,
8.4%, $16.0 million mortgage loan on this property.
We also occupy a two-story 20,000 square foot office building for
administrative support functions located in Commack, New York. We have leased
the building since May 1986 from a partnership owned by some of our shareholders
at an annual base rental of $0.3 million for the remainder of the lease term,
which expires in 2011. In addition, we pay real estate taxes, utilities,
insurance and certain other expenses for the facility. See "Certain
Relationships and Related Transactions" for a description of the lease.
In addition, our new restaurant concepts, including joint ventures, own
one facility and lease 27 facilities.
We have obtained consents to the going private transaction for
substantially all of the leased premises for which we are required to obtain
such consents.
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LEGAL PROCEEDINGS
In February 1999, the Umberto of New Hyde Park joint venture companies,
in which we have an 80% interest, began an action in the U.S. District Court for
the Eastern District of New York against Umberto Corteo, who owns the remaining
20% interest in the joint venture companies, and against three other restaurants
owned by Mr. Corteo. We alleged, among other things, that Mr. Corteo engaged in
unfair trade practices and in trademark infringement, thereby breaching the
joint venture agreements. We are seeking an accounting, compensatory and
punitive damages and injunctive relief. The answer filed by Mr. Corteo and his
co-defendants denies our claims and further alleges that non-competition
restrictions against Mr. Corteo in the joint venture agreements are
unenforceable. Mr. Corteo and his co-defendants have also counterclaimed against
us alleging misappropriation of trademark rights and failure to perform
administrative duties that amounted to a breach of the agreements. We believe
that our claims against Mr. Corteo will be proven and that we have substantial
defenses to his counterclaims.
On November 17, 1999, an action entitled Shan Wanli, Basem Tawill,
Abdul Hamid v. Sbarro, Inc. was filed in the Superior Court of the State of
Washington for King County. The plaintiffs allege that they served as store
managers, general managers, assistant managers or co-managers in our restaurants
in the State of Washington at various times since November 17, 1996 and that, in
connection with their employment, we violated the overtime pay provisions of the
State of Washington's Minimum Wage Act by treating them as overtime exempt
employees, breached alleged employment agreements and statutory provisions by
failing to record and pay for hours worked at the contract rates and/or
statutory minimum wage rates and failed to provide statutorily required meal
breaks and rest periods. The plaintiffs also seek to represent all of our
restaurant managers employed for any period of time on or after November 9, 1996
in the State of Washington. We currently own and operate 18 restaurants in the
State of Washington. The plaintiffs seek actual damages, exemplary damages and
costs of the lawsuit, including reasonable attorney's fees, each in unspecified
amounts, and injunctive relief. We believe that we have substantial defenses to
the claims and intend to vigorously defend this action.
On December 20, 1999, Antonio Garcia and eleven other current and
former general managers of Sbarro restaurants in California amended a complaint
filed in the Superior Court of California for Orange County. The complaint
alleges that the plaintiffs were improperly classified as exempt employees under
the California wage and hour law. The plaintiffs are seeking actual damages,
punitive damages and costs of the lawsuit, including reasonable attorney's fees,
each in unspecified amounts. Plaintiff's counsel has stated that he is in
contact with the plaintiff's counsel in the Wanali case and that he may attempt
to file a class action based upon alleged violations of the Fair Labor Standards
Act. We believe that we have substantial defenses to the claims and intend to
vigorously defend this action.
From time to time, we are a party to certain claims and legal
proceedings in the ordinary course of business, none of which, in our opinion,
would have a material adverse effect on our financial position or results of
operations.
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<TABLE>
<CAPTION>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mario Sbarro 58 Chairman of the Board, President, Chief
Executive Officer and Director
Anthony Sbarro 53 Vice Chairman of the Board, Treasurer and
Director
Joseph Sbarro 59 Senior Executive Vice President, Secretary
and Director
Carmela Sbarro 78 Vice President and Director
Anthony J. Missano 41 President-- Quick Service Division and Corporate
Vice President
Gennaro A. Sbarro 33 President -- Franchising and Licensing
Division and Corporate Vice President
Gennaro J. Sbarro 37 President -- Casual and Fine Dining Division and
Corporate Vice President
Robert G. Rooney 42 Senior Vice President and Chief Financial
Officer
Carmela N. Merendino 35 Vice President-- Administration
Joseph A. Fallarino 47 Vice President-- Human Resources
Henry G. Ciocca 53 Vice President and General Counsel
John Bernabeo 43 Vice President-- Architecture and
Engineering
Donald A. Dziomba 51 Vice President-- Management Information Services
Steven B. Graham 46 Vice President and Controller
Harold L. Kestenbaum 50 Director
Richard A. Mandell 57 Director
Terry Vince 71 Director
Bernard Zimmerman 67 Director
</TABLE>
EXECUTIVE AND CORPORATE OFFICERS
MARIO SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Chairman of our
board of directors and Chief Executive Officer for more than the past five
years. Mr. Sbarro re-assumed the position as our President in May 1996 (a
position he held for more than five years prior to December 1993).
ANTHONY SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Vice Chairman
of our board of directors since May 1996 and as President and Chief Operating
Officer from December 1993 through May 1996. For more than five years prior to
December 1993, Mr. Sbarro was an Executive Vice President. He has also served as
our Treasurer for more than the past five years.
JOSEPH SBARRO has been an officer, a director and a principal
shareholder of Sbarro since its organization in 1977, serving as Senior
Executive Vice President since December 1993.
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For more than five years prior thereto, Mr. Sbarro was an Executive Vice
President. He has also served as our Secretary for more than the past five
years.
CARMELA SBARRO has been one of our Vice Presidents since March 1985.
Mrs. Sbarro was a founder of Sbarro, together with her late husband, Gennaro
Sbarro. Mrs. Sbarro devotes a substantial portion of her time to recipe and
product development. Our board of directors elected Mrs. Sbarro as a director in
January 1998. Mrs. Sbarro previously served as a director from March 1985 until
December 1988, when she was elected director emeritus.
ANTHONY J. MISSANO has been a Corporate Vice President since August
1996 and was elected President of our Quick Service Division in January 2000.
From February 1995 until August 1996, he served as Vice President -- Operations
(West), and from June 1992 until February 1995 he served as a Zone Vice
President.
GENNARO A. SBARRO has been a Corporate Vice President since August 1996
and was elected President of our Franchising and Licensing Division in January
2000. From February 1995 until August 1996 he served as Vice President --
Franchising, and for more than five years prior thereto Mr. Sbarro served in
various capacities for us.
GENNARO J. SBARRO has been a Corporate Vice President since August 1996
and was elected President of our Casual and Fine Dining Division in January
2000. From February 1995 until August 1996, he served as Vice President --
Operations (East), and from June 1992 until February 1995 he served as a Zone
Vice President.
ROBERT G. ROONEY was elected Senior Vice President and Chief Financial
Officer in January 2000. From June 1999, when he joined us, until January 2000,
Mr. Rooney served as Vice President -- Finance and Chief Financial Officer. From
December 1996 until he joined us, Mr. Rooney was employed by Discovery Zone,
Inc. (a national family entertainment center chain), serving as Senior Vice
President, Chief Financial and Administrative Officer since February 1997. From
March 1994 until September 1996, Mr. Rooney served as Senior Vice President and
Chief Financial Officer of Victory Capital LLC (formerly Forschner Enterprises,
Inc.), a venture capital firm, and, from September 1992 to February 1994, served
as a director and consultant on behalf of various investors and investment funds
affiliated with Forschner Enterprises, Inc. Discovery Zone, Inc., which had
filed under Chapter 11 of the United States Bankruptcy Code prior to Mr.
Rooney's joining that company, again filed under that law on April 20, 1999. Mr.
Rooney has been a certified public accountant in New York for over 20 years.
CARMELA N. MERENDINO was elected Vice President -- Administration in
October 1988. Ms. Merendino joined us in March 1985 and performed a variety of
corporate administrative functions for us prior to her election as Vice
President -- Administration.
JOSEPH A. FALLARINO joined Sbarro in September 1998 and was elected
Vice President -- Human Resources in November 1998. Prior to joining us, from
April 1998 until September 1998, Mr. Fallarino served as Director of Human
Resources of Ogden Corporation, an international diversified service
corporation; from March 1996 until March 1998, he served as Senior Vice
President -- Human Resources of Arbor Management LLC, a provider of financial
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<PAGE>
services and healthcare services; and from January 1994 until February 1996, he
served as Vice President -- Human Resources of AMS Corporation, a national
outsourcing company.
HENRY G. CIOCCA joined Sbarro in January 2000 and serves as Vice
President and General Counsel. From August 1997 to April 1999, Mr. Ciocca was an
advisor to the President of The Thomson Corporation, a worldwide information and
publishing company. From September 1995 to June 1997, Mr. Ciocca was President,
Chief Executive Officer and a Director of Markborough Properties, Inc., a
publicly-traded commercial real estate company headquartered in Toronto; from
June 1993 to August 1995, Mr. Ciocca was President and Chief Executive Officer
of Markborough Development, a division of The Thomson Corporation that developed
master planned communities in the United States; and from June 1987 to June
1993, Mr. Ciocca held various positions with The Thomson Corporation, including
Executive Vice President and General Counsel. Mr. Ciocca is admitted to practice
law in Connecticut, Florida and New York.
JOHN BERNABEO joined Sbarro in August 1992 and served in various
capacities prior to his election as Vice President -- Architecture and
Engineering in May 1997.
DONALD A. DZIOMBA was elected Vice President - Management Information
Services in January 2000. Mr. Dziomba had served as our Director of Management
Information Systems since joining Sbarro in November 1993.
STEVEN B. GRAHAM was elected Vice President and Controller in January
2000. Mr. Graham has served as our Controller since joining Sbarro in April
1994. Mr. Graham has been a certified public accountant in New York for over 20
years.
HAROLD L. KESTENBAUM has been a practicing attorney in New York since
1976. He became a director of Sbarro in March 1985.
RICHARD A. MANDELL, a private investor, was a Managing Director of
BlueStone Capital Partners, L.P., an investment banking firm, from February
until April 1998 and Vice President -- Private Investments of Clariden Asset
Management (NY) Inc., a subsidiary of Clariden Bank, a private Swiss bank, from
January 1996 until February 1998. From 1982 until June 1995, Mr. Mandell served
as a Managing Director of Prudential Securities Incorporated, an investment
banking firm. He became a director of Sbarro in March 1986. Mr. Mandell is also
a director of Trend-Lines, Inc., U.S.A. Detergents, Inc. and Shells Seafood
Restaurants, Inc.
TERRY VINCE has been Chairman of the Board and President of Sovereign
Hotels, a company that operates hotels, since October 1991 and Chairman of the
Board of Fame Corp., a food service management company, since January 1994. Mr.
Vince became a director of Sbarro in December 1988.
BERNARD ZIMMERMAN has been President of Bernard Zimmerman and Co., Inc.
since October 1972 and was Senior Vice President of The Zimmerman Group, Inc.
from January 1991 to November 1996, financial and management consulting firms.
Mr. Zimmerman also served as President and a director of Beacon Hill Mutual
Fund, Inc. from December 1994 until
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October 1996. From September 1986 until September 1993, Mr. Zimmerman also
served as Chairman and President of St. Lawrence Seaway Corp., an owner and
manager of agricultural properties. Mr. Zimmerman has been a certified public
accountant in New York for more than the past thirty-five years. He became a
director of Sbarro in March 1985.
Under our certificate of incorporation, our board of directors is
divided into three classes as nearly equal in number as the then total number of
directors constituting the entire board permits. Our board of directors
presently consists of eight members, with each class being elected for a term of
three years. Anthony Sbarro and Harold L. Kestenbaum serve as class 1 directors,
Joseph Sbarro, Richard A. Mandell and Terry Vince serve as class 2 directors and
Mario Sbarro, Carmela Sbarro and Bernard Zimmerman serve as class 3 directors.
The terms of our class 1 directors and our class 2 directors will expire at our
next annual meeting of shareholders and the term of our class 3 directors will
expire at our annual meeting of shareholders in 2001. At each annual meeting,
directors are elected to succeed those in the class whose term expires at that
annual meeting, such newly-elected directors to hold office until the third
succeeding annual meeting and the election and qualification of their respective
successors.
Paul Vatter, who had, prior to the going private transaction, indicated
an intention to retire, resigned from the board effective on December 31, 1999.
As a result, our board of directors consists of eight members. To permit this,
our shareholders amended our by-laws so that the minimum number of directors
that can constitute our board is now six. The maximum number of directors that
could constitute our board remains twelve. There is no present intention to
replace Mr. Vatter as a director.
Our officers are elected annually by the board of directors at its
meeting held immediately after the annual meeting of our shareholders, and hold
their respective offices until their successors are duly elected and qualified.
Officers may be removed at any time by the board.
FAMILY RELATIONSHIPS
Mario, Anthony and Joseph Sbarro are the sons of Carmela Sbarro.
Carmela N. Merendino is the daughter, and Gennaro A. Sbarro is the son, of Mario
Sbarro. Gennaro J. Sbarro is the son, and Anthony J. Missano is the son-in-law,
of Joseph Sbarro.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation of our chief executive officer and other five most highly
compensated persons who were serving as executive officers at the end of our
1999 fiscal year for services in all capacities to us and our subsidiaries
during our 1999, 1998 and 1997 fiscal years. All of the options set forth on the
table under the caption "Long Term Compensation" were terminated in the going
private transaction in exchange for a cash payment equal to the number of shares
to the options thereto multiplied by the excess, if any, of $28.85 over the
applicable option exercise price. See "--Aggregated Option Exercises is Last
Fiscal Year" for information on amounts executive officers named in the Summary
Compensation Table received in connection with the termination of options that
they held.
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<PAGE>
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
NAME AND ------------ ------------
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)
- ------------------ ---- ------ ----- ----------
<S> <C> <C> <C> <C>
Mario Sbarro.......................................... 1999 $ 700,000 $ 300,000 --
Chairman of the Board, President and 1998 713,462 300,000 --
Chief Executive Officer 1997 700,000 160,000 250,000
Anthony Sbarro........................................ 1999 300,000 200,000 --
Vice Chairman of the Board and Treasurer 1998 305,769 200,000 --
1997 300,000 150,000 100,000
Joseph Sbarro......................................... 1999 300,000 200,000 --
Senior Executive Vice President and 1998 305,769 200,000 --
Secretary 1997 300,000 150,000 100,000
Anthony J. Missano.................................... 1999 200,000 150,000 --
President-- Quick Service Division 1998 203,846 100,000 --
1997 200,000 75,000 80,000
Gennaro A. Sbarro..................................... 1999 200,000 150,000 --
President-- and Licensing Division 1998 203,846 100,000 --
1997 200,000 75,000 80,000
Gennaro J. Sbarro..................................... 1999 200,000 150,000 --
President-- Casual and Fine Dining Division 1998 203,846 100,000 --
1997 200,000 75,000 80,000
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUES
All of the options held by each executive officer named in the Summary
Compensation Table were terminated in the going private transaction in exchange
for a cash payment equal to the number of shares subject to the options
multiplied by the excess of $28.85 over the applicable option exercise price.
The following table sets forth the number and value of shares of common stock
subject to those options and the amount received by the named executive officers
in exchange for the termination of their options. The executives did not have
any unexercised options at the end of our 1999 fiscal year. See "Certain
Relationships and Related Transactions" for more information about amounts
received in exchange for termination of options.
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<PAGE>
<TABLE>
<CAPTION>
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(1)
- ---- -------- --------
<S> <C> <C>
Mario Sbarro.................................................. 620,000(2) $2,221,987
Anthony Sbarro................................................ 265,000 1,145,242
Joseph Sbarro................................................. 300,000 1,323,743
Anthony J. Missano............................................ 93,500 348,000
Gennaro A. Sbarro............................................. 98,251 389,168
Gennaro J. Sbarro............................................. 93,500 348,000
</TABLE>
- ----------
(1) Represents the number of shares subject to the options multiplied by
the excess of $28.85 over the applicable option exercise price.
(2) No value was realized upon the termination of options covering 100,000
shares whose exercise price was in excess of $28.85 per share.
COMPENSATION OF DIRECTORS
Our non-employee directors currently receive a retainer at the rate of
$16,000 per annum, $1,000 for each meeting of the Board attended and $500 for
each meeting attended of a committee of the board on which they serve if the
meeting is not held on the same day as a meeting of the board, except that
members of the special committee that considered the merger and a prior proposal
for a similar transaction received additional compensation as described below.
Members of the board also are reimbursed for reasonable travel expenses incurred
in attending board and committee meetings. The regular compensation of our
employee directors covers compensation for services as a director. Our
non-employee directors earned the following cash compensation, exclusive of
travel reimbursements, from us during fiscal 1999 for services as members of the
board, other than for service on the special committee:
Harold L. Kestenbaum................................. $20,000
Richard A. Mandell................................... $20,000
Paul A. Vatter....................................... $20,000
Terry Vince.......................................... $20,000
Bernard Zimmerman.................................... $20,000
Each non-employee director held stock options under our 1993
non-employee director stock option plan to purchase an aggregate of 22,500
shares of common stock at exercise prices ranging from $21.50 to $28.875 per
share. The options and this plan were terminated upon consummation of the going
private transaction and our non-employee directors received cash in an amount
equal to the excess of $28.85 over the applicable exercise price per share of
the options held by them under this plan. For information regarding amounts that
our non-employee directors received in connection with the termination of
options granted under this plan, see "Certain Relationships and Related
Transactions."
As compensation for serving on the special committee, we agreed to pay
to each member of the special committee a fee equal to (1) $2,500 for services
rendered in any day on which the
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member expended four hours or more in performing services as a member of the
special committee and (2) $1,250 for each day in which the member expended a
reasonable amount of time, but less than four hours, in performing services as a
member of the special committee. In addition to the foregoing fees, Richard A.
Mandell, as chairman of the special committee, $10,000 with respect to the
special committee's consideration of the prior proposal and $10,000 with respect
to the special committee's consideration of the merger. Each member of the
special committee was reimbursed for all out-of-pocket expenses incurred in
performing his services. The members of the special committee earned the
following cash compensation, exclusive of travel reimbursements, from us in
connection with the merger and the prior proposal:
Harold L. Kestenbaum....................................... $14,750
Richard A. Mandell......................................... 48,500
Paul A. Vatter............................................. 9,750
Terry Vince................................................ 9,750
Bernard Zimmerman and Company, Inc., of which Bernard Zimmerman is
President and a majority shareholder, renders financial and consulting
assistance to us, for which it received fees of $474,000 during our 1999 fiscal
year. Harold L. Kestenbaum, P.C., of which Harold Kestenbaum is a principal,
received fees of $2,767 for legal services during our 1999 fiscal year.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are the sole tenant of an administrative office building, which is
leased from Sbarro Enterprises, L.P. The annual rent payable pursuant to the
sublease is $0.3 million each year for the remainder of the lease term, which
expires in 2011. In addition, we are obligated to pay real estate taxes,
utilities, insurance and certain other expenses for the facility. We believe
that our rent is comparable to the rent that would be charged by an unaffiliated
third party. 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:
o Carmela Sbarro, the mother of Mario, Anthony and Joseph
Sbarro, who was a co-founder of Sbarro and serves as Vice
President and a director, received $100,000 from us for
services rendered during fiscal 1999; and
o Carmela N. Merendino, a daughter of Mario Sbarro, who serves
as Vice President -- Administration, received $155,000 from us
for services rendered during fiscal 1999.
In addition, other members of the immediate families of Mario, Anthony,
Joseph and Carmela Sbarro, who are our employees, earned an aggregate of
$729,534 during fiscal 1999.
We, our subsidiaries and the joint ventures in which we have an
interest have purchased printing services from a corporation owned by a
son-in-law of Mario Sbarro for which they paid, in the aggregate, $396,947
during fiscal 1999. We believe that these services were provided on terms
comparable to those that would have been available from unrelated third parties.
On March 13, 2000, our board of directors authorized us to loan to
Mario Sbarro, our Chairman, President and Chief Executive Officer, $2.0 million
under a note that will be payable two years after we make the loan. The note
will bear interest at the rate of 6.45%, which will be payable annually. We
believe that the loan is on terms that are no less favorable to us than would
have been obtained in a comparable transaction by us with an unrelated person.
Companies owned by a son of Anthony Sbarro and a company owned by the
daughter of Joseph Sbarro paid royalties to us under franchise agreements
containing terms similar to those in agreements entered into by us with
unrelated franchisees. Royalties paid to us aggregated $111,166 and $38,860,
respectively, during fiscal 1999.
TAX AGREEMENT
We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and, where applicable and permitted, under similar state
and local income tax provisions, beginning in fiscal 2000. With certain limited
exceptions, we will not pay federal and state and local income taxes for periods
for which we are treated as an S corporation. Rather, our
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<PAGE>
shareholders will include their pro-rata share of our taxable income on their
individual income tax returns and thus will be required to pay taxes with
respect to their respective shares of our taxable income, whether or not it is
distributed to them.
We have entered into a tax payment agreement with our shareholders. The
tax payment agreement permits us to make periodic tax distributions to our
shareholders in amounts that are intended to approximate the income taxes,
including estimated taxes, that would be payable by our shareholders if their
only income were their pro-rata shares of our taxable income and that income was
taxed at the highest applicable federal and New York State marginal income tax
rates. We may only make the tax distributions with respect to periods in which
we are treated as an S corporation.
The tax payment agreement provides for adjustments of the amount of tax
distributions previously paid in respect of a year upon the filing of our
federal income tax return for that year, upon the filing of an amended federal
income tax return or as a result of an audit. In these circumstances, if it is
determined that the amount of tax distributions previously made for the year was
less than the amount computed based upon our federal income tax return, our
amended federal return or as adjusted based on the results of the audit, we may
make additional tax distributions which might include amounts to cover any
interest or penalties. Conversely, if it is determined in these circumstances
that the amount of tax distributions previously made for a year exceeded the
amount computed based on our federal income tax return, our amended federal
return or the results of an audit, as the case may be, our shareholders will be
required to repay the excess, with, in certain circumstances, interest. In
addition, our shareholders will be required to return, with interest, any tax
distributions previously distributed with respect to any taxable year for which
it is subsequently determined that we were not an S corporation.
GOING PRIVATE TRANSACTION
When we completed the going private transaction, we paid our public
shareholders merger consideration of $28.85 per share in cash. Other than the
continuing shareholders, our directors, executive officers, owners of more than
5% of our common stock and members of the immediate families of the foregoing
persons received the same $28.85 merger consideration for each share of our
common stock owned by them as the other public shareholders received. We also
terminated all outstanding stock options and paid in cash to each stock option
holder, whether or not the option holder's stock options were then vested or
exercisable, an amount in cash equal to the excess of $28.85 over the applicable
exercise price per share subject to the stock option. The following table sets
forth the amount received by our directors, our executive officers and owners of
more than 5% of our common stock, including entities controlled by them, upon
termination of their stock options:
<TABLE>
<CAPTION>
NAME RELATIONSHIP TO COMPANY AMOUNT
---- ----------------------- ------
<S> <C> <C>
Mario Sbarro Chairman of the Board, President, $ 2,221,987
Chief Executive
Officer and Director
Anthony Sbarro Vice Chairman of the Board, 1,145,242
Treasurer and Director
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME RELATIONSHIP TO COMPANY AMOUNT
---- ----------------------- ------
<S> <C> <C>
Joseph Sbarro Senior Executive Vice President, 1,323,743
Secretary and Director
John Bernabeo Vice President -- 9,312
Architecture and Engineering
Joseph A. Fallarino Vice President-- Human Resources 20,188
Carmela N. Merendino Vice President-- Administration 54,212
Anthony J. Missano President-- Quick Service Division 348,000
Gennaro A. Sbarro President-- Franchising and Licensing Division 389,168
Gennaro J. Sbarro President-- Casual and Fine Dining Division 348,000
Steven B. Graham Vice President and Controller 13,567
Donald A. Dziomba Vice President - Management Information Systems 11,917
Harold L. Kestenbaum Director 93,965
Richard A. Mandell Director 93,965
Paul A. Vatter Director 93,965
Terry Vince Director 93,965
Bernard Zimmerman Director 160,213
</TABLE>
Other members of the immediate family of Mario Sbarro, Anthony Sbarro
and Joseph Sbarro received $495,162, $7,350 and $696,000, respectively, in
connection with the termination of their stock options.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
ownership of shares of our common stock as of the date of this prospectus with
respect to (1) holders known to us to beneficially own more than five percent of
our outstanding common stock, (2) each of our directors, (3) our Chief Executive
Officer and our five next most highly compensated executive officers and (4) all
of our directors and executive officers as a group. We understand that, except
as noted below, each beneficial owner has sole voting and investment power with
respect to all shares attributable to such owner.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER NUMBER PERCENT
- ---------------- ------ -------
<S> <C> <C>
Mario Sbarro(1)........................................................ 1,524,730(2) 21.6%
Anthony Sbarro(1)...................................................... 1,233,800 17.5%
Joseph Sbarro(1)....................................................... 1,756,022(3) 24.8%
Trust of Carmela Sbarro(1)............................................. 2,497,884(4) 35.3%
Harold L. Kestenbaum................................................... -- --
Richard A. Mandell..................................................... -- --
Paul A. Vatter......................................................... -- --
Terry Vince............................................................ -- --
Bernard Zimmerman...................................................... -- --
Anthony J. Missano..................................................... 25,946(5) 0.4%
Gennaro A. Sbarro...................................................... -- --
Gennaro J. Sbarro...................................................... 25,946 0.4%
All directors and executive officers as a group
(19 persons)....................................................... 7,064,328 100.0%
</TABLE>
(1) The business address of each of Mario Sbarro, Joseph Sbarro, Anthony
Sbarro and the Trust of Carmela Sbarro is 401 Broadhollow Road,
Melville, New York 11747.
(2) Excludes the 2,497,884 shares held by the Trust of Carmela Sbarro, of
which trust Mario Sbarro serves as a co-trustee and as to which shares
Mr. Sbarro may be deemed a beneficial owner with shared voting and
dispositive power.
(3) Excludes 25,946 shares beneficially owned by each of Mr. Sbarro's son,
Gennaro J. Sbarro, reflected below, and daughter. Mr. Sbarro's daughter
is the wife of Anthony J. Missano.
(4) The trust was created by Carmela Sbarro for her benefit and for the
benefit of her descendants, including Mario, Joseph and Anthony Sbarro.
The trustees of the trust are Franklin Montgomery, whose business
address is 488 Madison Avenue, New York, New York 10022, and Mario
Sbarro. As trustees, Franklin Montgomery and Mario Sbarro may be deemed
to be the beneficial owners of these shares with shared voting and
dispositive power.
(5) Represents shares owned by Mr. Missano's wife. Mr. Missano disclaims
beneficial ownership of these shares.
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DESCRIPTION OF CREDIT FACILITY
On September 23, 1999, we entered into a credit agreement with European
American Bank providing an unsecured revolving credit facility to us that
enables us to borrow, on a revolving basis from time to time during its
five-year term, up to $30.0 million, including a $10.0 million sublimit for
standby letters of credit. The following brief description of our credit
agreement does not purport to be complete and is qualified in its entirety to
the credit agreement filed as an exhibit to the registration statement of which
this prospectus is a part.
SECURITY, GUARANTEES
None of our assets secure our credit facility. Each of our current and
future restricted subsidiaries under the indenture has also guaranteed our
obligations under our credit facility, as well as guaranteed our obligations
under the Notes.
INTEREST
At our option, the interest rates applicable to loans under our credit
facility will be either:
o the bank's prime rate plus a margin ranging from zero to 0.75%
(there is currently no margin) or
o reserve adjusted LIBOR plus a margin ranging from 1.5% to 2.5%
(the current margin is 1.75%).
In each case, the margin depends upon the ratio of our senior debt to
EBITDA.
FEES
We have agreed to pay certain fees in connection with our credit
facility, including an unused commitment fee at a rate per year that will vary
from 0.25% of the undrawn amount of the facility to 0.45% of the undrawn amount
of the facility per year, depending upon the ratio of our senior debt to EBITDA.
Currently, the unused commitment fee is 0.30% per year.
REPAYMENT
Our borrowings under our credit facility are repayable on September 28,
2004. In addition, we will be required to repay our loans and reduce commitments
under our credit facility using the proceeds of some asset sales and the future
issuance of some debt or equity securities by us or our restricted subsidiaries.
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COVENANTS
Our credit facility has affirmative and negative covenants, including,
but not limited to, limitations on liens, indebtedness, guarantees and other
contingent obligations, restricted payments, mergers, consolidations and
acquisitions of stock or assets, asset sales, investments and transactions with
affiliates. In addition, our credit facility contains provisions that may
prohibit redemptions or repurchases of the notes, including repurchases that
might otherwise be required pursuant to the terms of the indenture, and imposes
conditions on our amending or supplementing the indenture. Additionally, we will
have to maintain a minimum ratio of our consolidated EBITDA to our consolidated
interest expense of at least 2.0 to 1.0 and a ratio of our consolidated senior
debt to our consolidated EBITDA ranging from 4.5 to 1.0 until December 30, 2000
to 3.9 to 1.0 beginning December 29, 2002. These consolidated ratios will not
include our unrestricted subsidiaries but will include our restricted
subsidiaries.
EVENTS OF DEFAULT
Our credit facility contains events of default, including defaults for
non-payment of principal, interest, fees or reimbursement obligations with
respect to letters of credit, breaches of representations, warranties or
covenants, certain events of bankruptcy and insolvency, changes of control,
ERISA violations and cross-defaults to other significant indebtedness.
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Sbarro" refers only to Sbarro, Inc. and not to any of its subsidiaries.
GENERAL
Sbarro will issue the registered notes under the same indenture under
which the original notes were issued. The indenture was entered into on
September 28, 1999 among Sbarro, the subsidiaries of Sbarro that are
guaranteeing the notes and Firstar Bank, as trustee. The terms of the notes
include those that are stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939.
References to the original notes are to the notes that are presently
outstanding. References to the "registered notes" are to the notes that will be
issued in exchange for the original notes to those who accept the exchange
offer. References to the notes, without distinction between the original notes
and the registered notes, are to both the original notes and the registered
notes.
The following description is a summary of the material provisions of
the indenture. It does not restate that agreement in its entirety. We urge you
to read the following documents because they, and not this description, define
your rights as holders of the registered notes:
o the indenture;
o the tax payment agreement referred to under the subheading "--
Certain Covenants -- Covenant Relating to Tax Payment
Agreement," below and "Certain Relationships and Related
Transactions," above; and
o the registration rights agreement referred to under the
subheading "--Registration Rights; Liquidated Damages," below.
Copies of those documents were filed as exhibits to the registration
statement which includes this prospectus. For information as to how to review or
obtain a copy of any of those documents, see "Where You Can Find More
Information."
THE ORIGINAL NOTES AND THE REGISTERED NOTES WILL REPRESENT THE SAME DEBT
You can exchange your original notes for an equal principal amount of
registered notes by following the procedures described under "Exchange Offer."
The registered notes will evidence the same debt as the original notes and both
series of notes will be entitled to the benefits of the indenture and treated as
a single class of debt securities. The terms of the registered notes will be the
same in all material respects as the original notes except that:
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o the registered notes will be registered under the Securities
Act and, therefore, will not bear legends restricting their
transfer; and
o rights to register the registered notes under the Securities
Act provided under the registration rights agreement, are
different than those relating to the original notes and,
therefore, the defaults under the registration rights
agreement that may require Sbarro to pay additional interest
will be different for the registered notes than the original
notes. See "Registration Rights Agreement; Liquidated
Damages," for information regarding the registration rights
afforded to holders of the registered notes and the original
notes.
Holders of original notes who do not exchange their original notes for
registered notes will vote together with holders of the registered notes for all
relevant purposes under the indenture. Therefore, all references in this
description to specified percentages in aggregate principal amount of the
outstanding notes required to approve or authorize action are to percentages in
aggregate principal amount of the original notes and the registered notes
outstanding at the time of determining holders of notes entitled to vote on the
matter.
BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES
The notes:
o are general, unsecured obligations of Sbarro;
o rank pari passu in right of payment with all present and
future senior indebtedness of Sbarro;
o are senior in right of payment to all present and future
indebtedness of Sbarro that by its terms is expressly
subordinated to the notes;
o are effectively subordinated to all present and future secured
indebtedness of Sbarro to the extent of the assets securing
the secured indebtedness; and
o are effectively subordinated to claims of creditors of
Sbarro's subsidiaries, except to the extent that holders of
the notes may be creditors of those subsidiaries under a
Guarantee.
As of January 2, 2000, our aggregate consolidated indebtedness was
$251.3 million, which was the $255.0 million of original notes net of
unamortized original issue discount. This amount does not include guarantees of
indebtedness and guarantees of reimbursement obligations in respect of letters
of credit in the aggregate amount of approximately $17.5 million, guarantees of
real property lease obligations of our Unrestricted Subsidiaries listed below
and related joint ventures and a $16.0 million loan obtained on March 3, 2000,
which is secured by a mortgage on our corporate headquarters building. In
addition, we could have borrowed $27.5 million as of January 2, 2000 under our
$30.0 million Credit Facility provided we satisfy conditions contained in our
Credit Facility. None of our indebtedness was, and indebtedness
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under our Credit Facility will not be, subordinated by its terms to the notes.
The indenture permits us to incur additional Indebtedness in the future, subject
to certain restrictions. See "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock."
The notes are presently guaranteed by the following direct and indirect
subsidiaries of Sbarro:
Sbarro Properties, Inc.
Sbarro America, Inc.
Sbarro America Properties, Inc.
Sbarro's of Texas, Inc.
Italian Food Franchising, Inc.
Corest Management, Inc.
Franrest Management, Inc.
Larkfield Equipment Corp.
Sbarro Foods, Inc.
Sbarro of Roosevelt Field, Inc.
Sbarro of Virginia, Inc.
Demefac Leasing Corp.
Franchise Contracting and Equipment Corp.
Melville Advertising Agency Inc.
Sbarro Commack, Inc.
Sbarro Dominion Limited
Sbarro of Las Vegas, Inc.
Sbarro of Hawaii, Inc.
Sbarro Pennsylvania, Inc.
Sbarro Franchise Associates, Inc.
Sbarro H.D.F., Inc.
N.H.D., Inc.
Sbarro One World Trade, Inc.
401 Broad Hollow Realty Corp.
401 Broad Hollow Fitness Center Corp.
Sbarro Bistros, Inc.
Syosset Bistro, Inc.
The Guarantors are Restricted Subsidiaries under the indenture which
means that some of their activities are restricted by the restrictive covenants
contained in the indenture. The notes may also be guaranteed by future
subsidiaries of Sbarro and, if the circumstances described under the subheading
"Subsidiary Guarantees" and the last two paragraphs under the subheading
"Restricted Payments" are met, Guarantors may cease to be guarantors of the
notes.
The Guarantees of the notes:
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o are general, unsecured obligations of each Guarantor;
o rank pari passu in right of payment with all present and
future senior indebtedness of the Guarantor;
o are senior in right of payment to all present and future
indebtedness of the Guarantor that by its terms is expressly
subordinated to the Guarantees;
o are effectively subordinated to all present and future secured
indebtedness of the Guarantor to the extent of the assets
securing the secured indebtedness; and
o are effectively subordinated to claims of creditors of the
Guarantor's subsidiaries, except to the extent that holders of
the Guarantees may be creditors of those subsidiaries under a
Guarantee.
We have designated the following of our Subsidiaries as Unrestricted
Subsidiaries:
o Sbarro Venture, Inc., which has a 70% interest in the joint
venture that owns and operates the "Salute" and "Cafe Medi"
restaurants;
o Sbarro City Venture, Inc., which has a 50% interest in the
joint venture that is planning to open additional Italian
Mediterranean restaurants;
o Sbarro New Hyde Park Inc., which has an 80% interest in the
joint venture that owns and operates "Umberto of New Hyde
Park" restaurants;
o Sbarro Boulder Inc., which has a 40% interest in the joint
venture that owns and operates "Boulder Creek Steaks &
Saloon," "Rothmann's Steakhouse" and the "Burton & Doyle"
steakhouse;
o Mex-SS, Inc., which has a 50% interest in the joint venture
that owns and operates "Baja Grill" restaurant; and
o Sbarro Seafood Inc., which has a 25% interest in the recently
formed joint venture to establish an Italian seafood
restaurant.
Their subsidiaries are also Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not guarantee the notes and their
activities are not restricted by many of the restrictive covenants in the
indenture. In the event of a bankruptcy, liquidation or reorganization of any
Unrestricted Subsidiary, that Unrestricted Subsidiary will pay the holders of
its debt and its trade creditors before it will be able to distribute any of its
assets to us. Under the circumstances described under the last two paragraphs of
the definition of "Unrestricted Subsidiary," Unrestricted Subsidiaries may
become, and as described in the last
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paragraph under the subheading "Restricted Payments," we are also permitted to
designate Unrestricted Subsidiaries as, Restricted Subsidiaries.
Under the circumstances described under the subheading "Restricted
Payments," we are permitted to designate additional current or future
Subsidiaries as Unrestricted Subsidiaries.
For the fiscal year ended January 2, 2000, the Subsidiaries that are
Unrestricted Subsidiaries generated 3.9% of our consolidated revenues and had
EBITDA (as defined in Note (6) under "Prospectus Summary -- Summary Consolidated
Historical and Pro Forma Financial Data") of $0.7 million and EBITDA margin of
5.0%. As of January 2, 2000, our Unrestricted Subsidiaries held 2.4% of our
consolidated assets and we had an aggregate investment in our Unrestricted
Subsidiaries and related joint ventures of approximately $14.7 million, which
does not include guarantees of indebtedness and reimbursement obligations in
respect of letters of credit in the aggregate amount of approximately $17.5
million and guarantees of certain real property lease obligations of the
unrestricted subsidiaries and related joint ventures.
PRINCIPAL, MATURITY AND INTEREST
Sbarro sold $255.0 million aggregate principal amount of original notes
to partially fund the going private transaction. The notes are issued in
denominations of $1,000 and integral multiples of $1,000. The notes will mature
on September 15, 2009.
Subject to the covenants described below under the subheading "--
Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock," Sbarro may issue additional notes under the indenture. The original
notes, the registered notes and any additional notes that we subsequently issue
under the indenture will be treated as a single class for all purposes under the
indenture.
Interest on the notes accrues at the rate of 11% per annum and is
payable semi-annually in arrears on March 15 and September 15 of each year. We
will make each payment of interest to holders of record of notes on the
immediately preceding March 1 and September 1, respectively. Holders of
registered notes will receive interest on September 15, 2000 from the date of
initial issuance of the registered notes, plus an amount equal to the accrued
interest on the original notes from March 15, 2000, the most recent date to
which interest has been paid on the original notes, to the date of exchange
thereof for registered notes. Interest on the notes accrues from the most recent
date to which interest has been paid or, if no interest has been paid, from the
date of original issuance. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a holder of notes has given wire transfer instructions to Sbarro at
least five business days prior to the applicable payment date, we will make all
payments of principal, premium, interest and Liquidated Damages, if any, to the
holder by wire transfer of immediately available funds to the accounts specified
by the holder in its instructions. Otherwise, payments will be made at the
office or agency of Sbarro maintained for that purpose or, at the option of
Sbarro,
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payment of interest and Liquidated Damages may be made by check mailed to the
holder of the notes at the holder's address set forth in the register of holders
of notes. Until otherwise designated by Sbarro, Sbarro's office or agency will
be the office of the trustee maintained for that purpose which is presently
Firstar Bank, N.A., Corporate Trust Department, 101 Fifth Street, 12th Floor,
St. Paul, Minnesota 55101, Attn: Frank P. Leslie.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee will initially act as paying agent and registrar for the
notes. We may change the paying agent and registrar without prior notice to the
holders of the notes, and we or any of our Subsidiaries may act as paying agent
or registrar. See the subheadings " -- Transfer and Exchange," below for
information regarding how to transfer notes.
SUBSIDIARY GUARANTEES
Sbarro's payment obligations under the notes are jointly and severally
guaranteed by all of Sbarro's Restricted Subsidiaries. We sometimes refer to
these guarantees as the "Subsidiary Guarantees." If Sbarro or any of its
Subsidiaries acquire or create another Restricted Subsidiary, or any
Unrestricted Subsidiary ceases to be an Unrestricted Subsidiary and becomes a
Restricted Subsidiary, then that Subsidiary is to become a Guarantor of the
notes. The obligations of each Guarantor under its Subsidiary Guarantee are
limited to the maximum amount that would not result in the Subsidiary Guarantee
constituting a fraudulent conveyance under applicable law.
If:
o the transaction or designation described below is in
compliance with the indenture,
o immediately after giving effect to the transaction or
designation, no Default or Event of Default shall exist, and
o the Person being released and discharged is also released and
discharged from all obligations it might otherwise have under
guarantees of other Indebtedness of Sbarro or any of its
Restricted Subsidiaries,
then a Guarantor will be released and discharged from its obligations
under its Subsidiary Guarantee in the following circumstances:
(1) a merger or consolidation of the Guarantor with another Person
if, after giving effect to the transaction, the Person formed
by or surviving the merger or consolidation is neither Sbarro
nor a Restricted Subsidiary of Sbarro; or
(2) a sale or other disposition, whether by merger, consolidation
or otherwise, of all of the Equity Interests of a Guarantor at
the time owned by Sbarro and its Restricted Subsidiaries to
any Person that, after giving effect to the transaction, is
neither Sbarro nor a Restricted Subsidiary of Sbarro; or
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(3) if the Guarantor is effectively designated by the board of
directors of Sbarro as an Unrestricted Subsidiary under the
indenture.
A Guarantor may not consolidate with or merge with or into another
Person, whether or not the Guarantor is the surviving Person and whether or not
the surviving person is affiliated with the Guarantor, and may not sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to another Person,
unless:
(1) the Person formed by or surviving the consolidation or merger,
if other than the Guarantor, or to which the sale, assignment,
transfer, lease, conveyance or other disposition is made:
o is organized and existing under the laws of the
United States of America, any state of the United
States or the District of Columbia, except that this
condition does not apply if the Person formed by or
surviving the consolidation or merger or to which the
relevant sale, assignment, transfer, lease,
conveyance or other disposition is made is Sbarro, a
Guarantor or a Person that is not, after giving
effect to that transaction, a Restricted Subsidiary;
and
o expressly assumes all the obligations of that
Guarantor under the notes and the indenture under a
supplemental indenture reasonably satisfactory to the
trustee; and
(2) immediately after giving effect to that transaction, no Default or
Event of Default exists.
OPTIONAL REDEMPTION
Prior to September 15, 2002, Sbarro may on any one or more occasions
redeem up to 35% of the aggregate principal amount of notes originally issued,
including any additional notes issued, at a redemption price of 111% of the
principal amount of the notes redeemed, plus accrued and unpaid interest and
Liquidated Damages, if any, to the redemption date, with the net cash proceeds
of one or more Public Equity Offerings; provided that:
o at least 65% of the aggregate principal amount of notes
originally issued, including any additional notes, remain
outstanding immediately following the redemption; and
o the redemption occurs within 60 days of the closing of the
Public Equity Offering.
Prior to September 15, 2004, all or part of the notes may also be
redeemed upon not less than 30 nor more than 60 days' notice, at the Make-Whole
Price, plus accrued and unpaid interest and Liquidated Damages, if any, to the
applicable redemption date.
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Beginning September 15, 2004, Sbarro may redeem all or part of the
notes upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest and Liquidated Damages, if any, to the applicable
redemption date, if redeemed during the twelve-month period beginning on
September 15 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2004 105.500%
2005 103.667
2006 101.833
2007 and thereafter 100.000%
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, selection
of notes for redemption will be made by the trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
notes are listed, or, if the notes are not listed, on a pro rata basis, by lot
or by a method that the trustee deems fair and appropriate. No notes of $1,000
or less may be redeemed in part. Notices of redemption are to be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each holder of notes to be redeemed at the holder's registered address. Notices
of redemption may not be conditional. If any note is to be redeemed in part
only, the notice of redemption that relates to that note shall state the portion
of its principal amount to be redeemed. A new note in principal amount equal to
the unredeemed portion of the note will be issued in the name of the holder upon
cancellation of the original note. notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on the note or portion of it called for redemption.
MANDATORY REDEMPTION
Except as set forth below under the subheading "-- Repurchase at the
Option of holders," Sbarro is not required to make any mandatory redemption or
sinking fund payment with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, unless notice of redemption of the notes
in whole has been given as described above under the subcaption "-- Optional
Redemption," Sbarro must make a Change of Control Offer to each holder of notes.
In a Change of Control Offer Sbarro will offer to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of that holder's notes at a
Change of Control Payment in cash equal to 101% of the aggregate principal
amount of the notes repurchased, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. Within 30 days following a Change of
Control, Sbarro will mail a notice to
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each holder with a copy to the trustee describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
notes on the Change of Control Payment Date specified in the notice under the
procedures required by the indenture and described in such notice. The Change of
Control Payment Date may be no later than the third business day following the
expiration date of the Change of Control Offer. A Change of Control Offer must
remain open for at least 30 and not more than 40 days, unless otherwise required
by applicable law. In addition, Sbarro must comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent those laws and regulations are applicable in connection
with the repurchase of the notes as a result of a Change of Control.
On the Change of Control Payment Date, Sbarro will, to the extent
lawful:
(1) accept for payment all notes or portions of the notes properly
tendered under the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all notes or portions of the
notes properly tendered; and
(3) deliver or cause to be delivered to the trustee for
cancellation the notes accepted together with an officers'
certificate stating the aggregate principal amount of notes or
portions of the notes being purchased by Sbarro.
The Paying Agent will promptly mail or deliver to each holder of notes
properly tendered the Change of Control Payment for those notes, and the trustee
will promptly authenticate and mail, or cause to be transferred by book entry,
to each holder a new note equal in principal amount to any unpurchased portion
of the notes surrendered; provided that the new note will be in a principal
amount of $1,000 or an integral multiple thereof. Sbarro will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
The Change of Control provisions described above that require Sbarro to
make a Change of Control Offer following a Change of Control will be applicable
whether or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the notes to require that Sbarro
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction. However, restrictions in the indenture on the ability of
Sbarro and its Restricted Subsidiaries to incur additional Indebtedness, to
grant Liens on their respective properties, to make Restricted Payments and to
make Asset Sales may also make more difficult or discourage a takeover of
Sbarro, whether favored or opposed by the management of Sbarro. Completion of a
Change of Control, takeover, recapitalization or similar transaction may require
repurchase of the notes, and there can be no assurance that Sbarro or the
acquiring party will have sufficient financial resources to effect the
repurchase. These restrictions and the restrictions on transactions with
Affiliates may make more difficult or discourage any leveraged buyout of Sbarro
or any of its Subsidiaries by the management of Sbarro. While these restrictions
cover a wide variety of arrangements which have traditionally been used to
effect highly leveraged transactions, the
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indenture may not afford the holders of notes protection in all circumstances
from the adverse aspects of a future highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Credit Facility provides that a Change of Control without the prior
written consent of lenders holding a specified percentage of outstanding
obligations under the Credit Facility will be an event of default under the
Credit Facility and contain a covenant that would be breached by a repurchase of
notes under a Change of Control Offer. Any future credit agreements or other
agreements governing indebtedness to which Sbarro becomes a party may contain
similar restrictions and provisions. In the event a Change of Control occurs at
a time when Sbarro is prohibited from repurchasing notes, Sbarro could seek the
consent of its lenders to the repurchase of notes or could attempt to refinance
or repay the borrowings that contain the prohibition. If Sbarro does not obtain
the consents or repay those borrowings, Sbarro will remain prohibited from
repurchasing notes. In that case, Sbarro's failure to repurchase tendered notes
would be an Event of Default under the indenture which would, in turn, be a
default under the Credit Facility. A default would permit the lenders under the
Credit Facility to declare the Indebtedness under the Credit Facility to be due
and payable.
Sbarro will not be required to make a Change of Control Offer following
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by Sbarro and
purchases all notes validly tendered and not withdrawn under the Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of Sbarro and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
Sbarro to repurchase notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of Sbarro and its Subsidiaries
taken as a whole to another Person or group may be uncertain.
ASSET SALES
Sbarro will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, consummate an Asset Sale unless:
(1) Sbarro or the Restricted Subsidiary, as the case may be,
receives consideration at the time of the Asset Sale at least
equal to the fair market value, of the assets or Equity
Interests issued or sold or otherwise disposed of, with the
fair market value evidenced by a resolution of the board of
directors of Sbarro set forth in an officers' certificate
delivered to the trustee, and
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(2) at least 75% of the consideration received by Sbarro or the
Restricted Subsidiary for the assets or Equity Interests is in
the form of cash or Cash Equivalents. For purposes of this
provision, the amount of:
(a) any liabilities, as shown on Sbarro's or the
Restricted Subsidiary's most recent balance sheet, of
Sbarro or the Restricted Subsidiary, other than
contingent liabilities and liabilities that are by
their terms subordinated to the notes or any
Subsidiary Guarantee, that are assumed by the
transferee of any of the assets or Equity Interests
under a customary novation agreement that expressly
releases Sbarro or the Restricted Subsidiary from
further liability; and
(b) any securities, notes or other obligations received
by Sbarro or the Restricted Subsidiary from the
transferee that are converted by Sbarro or the
Restricted Subsidiary into cash within 30 days after
the Asset Sale, to the extent of the cash received,
shall be deemed to be cash for purposes of this
provision.
Within 365 days after the receipt of any Net Proceeds from an Asset
Sale, Sbarro may apply those Net Proceeds:
(1) to permanently reduce any Senior Debt of Sbarro and/or its
Wholly-Owned Restricted Subsidiaries, and to correspondingly
reduce commitments with respect to Senior Debt in the case of
revolving borrowings; or
(2) to the acquisition of a controlling interest in another
business, the making of a capital expenditure or the
acquisition of other assets, other than assets that would be
classified as current assets in accordance with GAAP, in each
case, in the same or a reasonably similar line of business as
Sbarro and its Restricted Subsidiaries were engaged in on
September 28, 1999 or in any business reasonably
complementary, related or incidental to the line of business
as determined in good faith by the board of directors of
Sbarro.
Pending the final application of any of those Net Proceeds, Sbarro may
apply those Net Proceeds to temporarily reduce borrowings under the Credit
Facility or invest those Net Proceeds in any manner that is not prohibited by
the indenture. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5.0 million,
Sbarro will make an Asset Sale Offer to all holders of notes to purchase the
maximum principal amount of notes that may be purchased out of the Excess
Proceeds. The offer price, which will be paid in cash, will be equal to 100% of
the principal amount of the notes, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase of the notes. The
Asset Sale Offer will be made under the procedures contained in the indenture.
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If any Excess Proceeds remain after completion of the Asset Sale Offer,
Sbarro may use the remaining Excess Proceeds for general corporate purposes. If
the aggregate principal amount of notes tendered by holders thereof exceeds the
amount of Excess Proceeds, the trustee is to select the notes to be purchased on
a pro rata basis, with adjustments as may be deemed appropriate by the trustee
so that only notes in denominations of $1,000 or integral multiples of $1,000
shall be purchased. Upon completion of an Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
The Asset Sale Offer must be commenced within 30 days following the
date on which the aggregate amount of Excess Proceeds exceeds $5.0 million and
remain open for at least 30 and not more than 40 days (unless otherwise required
by applicable law). Sbarro will comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations to the extent
those laws and regulations apply to the repurchase of notes under an Asset Sale
Offer. The Credit Facility limits Sbarro's ability to conduct an Asset Sale
Offer.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
Neither Sbarro nor any of its Restricted Subsidiaries may, directly or
indirectly,
(1) declare or pay any dividend or make any other payment or
distribution on account of Sbarro's Equity Interests,
including, without limitation, any payment in connection with
any merger, other than the going private transaction, or
consolidation involving Sbarro, or to any direct or indirect
holders of Sbarro's Equity Interests in their capacity as
holders of Sbarro's Equity Interests, other than dividends or
distributions (a) payable in Equity Interests, other than
Disqualified Stock, of Sbarro or (b) payable to Sbarro or any
Guarantor that is a Wholly-Owned Restricted Subsidiary of
Sbarro);
(2) except for Permitted Investments in Persons that are, or after
giving effect to the Investments become, Subsidiaries of
Sbarro, purchase, redeem or otherwise acquire or retire for
value, including without limitation, in connection with any
merger, other than the going private transaction, or
consolidation involving Sbarro, any Equity Interests of Sbarro
or any Affiliate of Sbarro, other than any Equity Interests
owned by Sbarro or any Wholly Owned Restricted Subsidiary of
Sbarro, any Equity Interests then being issued by Sbarro or a
Wholly Owned Restricted Subsidiary of Sbarro or any Investment
in a Person that, after giving effect to the Investment, is a
Wholly Owned Restricted Subsidiary of Sbarro;
(3) make any payment on or with respect to, or purchase, redeem,
repay, defease or otherwise acquire or retire for value, any
Indebtedness of Sbarro or any Guarantor that is subordinated
in right of payment to the notes or any Subsidiary Guarantee,
except a regularly scheduled payment of interest or principal;
or
(4) make any Restricted Investment
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The payments and other actions set forth in clauses (1) through (4)
above are collectively referred to as "Restricted Payments."
A Restricted Payment can, however, be made if at the time of and after
giving effect to the Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence of the Restricted
Payment; and
(2) Sbarro would, at the time of the Restricted Payment and after
giving pro forma effect to the Restricted Payment as if such
Restricted Payment had been made at the beginning of the
applicable four-quarter period, have been permitted to incur
at least $1.00 of additional Indebtedness pursuant to the
Consolidated Interest Coverage Ratio test set forth in the
first paragraph of the covenant described below under the
subheading " -- Incurrence of Indebtedness and Issuance of
Preferred Stock" if the number 2.5 in that paragraph were 2.0;
and
(3) the Restricted Payment, together with the aggregate amount of
all other Restricted Payments declared or made by Sbarro and
its Restricted Subsidiaries after September 28, 1999,
excluding Restricted Payments permitted by clauses (2), (3),
(5), (6) and clause (8) of the paragraph that follows this
paragraph, if and to the extent that the reimbursement
obligations paid pursuant to clause (8) are direct obligations
of Sbarro or any of its Restricted Subsidiaries and are in
respect of letters of credit issued prior to September 28,
1999, is less than the sum, without duplication, of:
(a) 50% of the Adjusted Consolidated Net Income of Sbarro
for the period (taken as one accounting period) from
September 28, 1999 to the end of Sbarro's most
recently ended fiscal quarter for which internal
financial statements are available at the time of the
Restricted Payment, or, if the Adjusted Consolidated
Net Income for the period is a deficit, less 100% of
the deficit, plus
(b) 100% of the aggregate net cash proceeds received by
Sbarro from the issue or sale since September 28,
1999 of Equity Interests of Sbarro, other than
Disqualified Stock, or of Disqualified Stock or debt
securities of Sbarro that have been converted into
such Equity Interests, other than Equity Interests
(or Disqualified Stock or convertible debt
securities, sold to a Subsidiary of Sbarro and other
than Disqualified Stock or convertible debt
securities that have been converted into Disqualified
Stock), plus
(c) to the extent that any Restricted Investment, other
than any Committed Restricted Investment, that was
made after September 28, 1999 is sold for cash or
otherwise liquidated or repaid for cash, the lesser
of (I) the cash return of capital with respect to the
Restricted Investment, less the cost of
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disposition, if any, but only to the extent not
included in subclause (a) of this clause (3) or
applied to reduce Unrestricted Investments
Outstanding, and (II) the initial amount of the
Restricted Investment, plus
(d) to the extent that any Restricted Investment, other
than any Committed Restricted Investment, that was
made after September 28, 1999 in the form of a
guarantee of Indebtedness is reduced as a result of a
reduction in the maximum principal amount of
Indebtedness that may be guaranteed under the
guarantee, the amount of that reduction, plus
(e) to the extent that any Restricted Investment, other
than any Committed Restricted Investment, that was
made after September 28, 1999 in the form of the
furnishing of a letter of credit as security for
Indebtedness or other obligations is reduced as a
result of a reduction in the maximum reimbursement
obligations in respect of such letter of credit, the
amount of that reduction, plus
(f) to the extent that any Restricted Investment, other
than any Committed Restricted Investment, that was
made after September 28, 1999 Date in the form of the
guarantee of a lease has been amortized, as provided
in the definition of "Investments", the amount of
that amortization, plus
(g) to the extent that any Restricted Investment, other
than any Committed Restricted Investment, that was
made after September 28, 1999 in the form of a
guarantee of obligations other than Indebtedness or a
lease is reduced as a result of a reduction in the
maximum liability under that guarantee, the amount of
that reduction, plus
(h) if (I) any Unrestricted Subsidiary has been
effectively designated by the board of directors of
Sbarro as a Restricted Subsidiary under the indenture
and (II) immediately after giving effect to that
designation no Default or Event of Default has
existed and that Subsidiary shall have become a
Wholly-Owned Restricted Subsidiary of Sbarro, the
lowest of:
o an amount equal to the fair market, as
determined in good faith by the board of
directors of Sbarro, at the time of the
designation of the outstanding Investments
of Sbarro and its Restricted Subsidiaries in
the designated Subsidiary,
o an amount equal to the net book value of the
outstanding Investments at the time of the
designation and
o an amount equal to the amount of Restricted
Investments, other than Committed Restricted
Investments, made by Sbarro and its
Restricted Subsidiaries in the Subsidiary
after September 28, 1999 less the amount, if
any, of any amounts included in subclause
(c)
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(d), (e), (f) or (s) of this clause (3)
in respect of such Subsidiary, plus
(i) $20.0 million.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
its declaration, if at the date of declaration the payment
would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity
Interests of Sbarro in exchange for, or out of the net cash
proceeds of the substantially concurrent sale, other than to a
Subsidiary of Sbarro, of, other Equity Interests of Sbarro,
other than any Disqualified Stock, provided that the amount of
any of the net cash proceeds that are utilized for any of
these redemptions, repurchases, retirements, defeasances or
other acquisitions shall be excluded from clause (3) (b) of
the preceding paragraph;
(3) the redemption, repurchase, retirement, defeasance or other
acquisition of subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing
Indebtedness;
(4) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of Sbarro or any Restricted
Subsidiary of Sbarro held by any member of Sbarro's, or any of
its Restricted Subsidiaries') management or board of directors
or any employee stock ownership plan except that the aggregate
price paid for all those repurchased, redeemed, acquired or
retired Equity Interests may not exceed $1.0 million in any
twelve-month period;
(5) Tax Distributions in respect of periods when Sbarro is an S
Corporation;
(6) Committed Restricted Investments;
(7) Restricted Investments consisting of payments pursuant to
guaranties, not prohibited by the provisions of the indenture,
of Indebtedness;
(8) Restricted Investments consisting of payments pursuant to
reimbursement obligations in respect of letters of credit, not
prohibited by the provisions of the indenture, securing
Indebtedness or other obligations; and
(9) Restricted Investments consisting of payments pursuant to
guaranties, not prohibited by the provisions of the indenture,
of obligations, other than Indebtedness.
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Restricted Payments are permitted under clauses (1) through (4) above
only if no Default or Event of Default shall have occurred and be continuing at
the time of, and after giving effect to, that Restricted Payment
The amount of all Restricted Payments, other than cash, shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Sbarro or the Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined in good
faith by the board of directors whose resolution with respect to the
determination shall be delivered to the trustee. Notwithstanding the two
preceding sentences, the amount of any Restricted Investment that is a guarantee
of, or the furnishing of a letter or credit as security for, Indebtedness or
other obligations shall be as determined under the definition of "Investments."
Not later than the date of making any Restricted Payment, Sbarro will deliver to
the trustee an officers' certificate stating that the Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this "Restricted Payments" covenant were computed.
The board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if the designation would not cause a Default. For
purposes of making that determination, all outstanding Investments by Sbarro and
its Restricted Subsidiaries, except to the extent repaid in cash, in the
Subsidiary to be designated an Unrestricted subsidiary will be deemed to be
Restricted Payments at the time of the designation and will reduce the amount
available for Restricted Payments under the first paragraph of this subheading.
All of those outstanding Investments in the Subsidiary designated an
Unrestricted Subsidiary will be deemed to be Investments in an amount equal to
the sum of:
(a) the greater of (1) the net book value of those Investments at
the time of the designation and (2) the fair market value of
those Investments at the time of the designation and
(b) the amount of those Investments constituting a guarantee of,
or the furnishing of a letter of credit as security for,
Indebtedness or other obligations.
The designation will only be permitted if the Restricted Payment would
be permitted at that time and if the Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
Any designation by the board of directors of a Restricted Subsidiary as
an Unrestricted Subsidiary is to be evidenced to the trustee by filing with the
trustee a certified copy of the board Resolution giving effect to the
designation and an officers' certificate certifying that the designation
complied with the conditions in the preceding paragraph. If, at any time, any
Unrestricted Subsidiary would fail to meet the definition of an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the indenture and any Indebtedness of that Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of Sbarro as of that date (and,
if that Indebtedness is not permitted to be incurred as of that date under the
covenant described under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock," Sbarro shall be in default of that covenant).
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The board of directors of Sbarro may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary. If that designation is
made, it shall be deemed an incurrence of Indebtedness by a Restricted
Subsidiary of Sbarro of any outstanding Indebtedness of the Unrestricted
Subsidiary and the designation shall only be permitted if:
o the Indebtedness is permitted under the covenant described
under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock," calculated on a pro forma basis as if the
designation had occurred at the beginning of the four-quarter
reference period; and
o no Default or Event of Default would be in existence following
the designation.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
Neither Sbarro nor any of its Restricted Subsidiaries will, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Indebtedness, including Acquired Debt, and Sbarro's Restricted
Subsidiaries will not issue any shares of Preferred Stock, other than to Sbarro
or a Wholly Owned Restricted Subsidiary of Sbarro; provided, however, that
Sbarro and the Guarantors may incur Indebtedness, including Acquired Debt, if
the Consolidated Interest Coverage Ratio of Sbarro for Sbarro's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which the additional Indebtedness is
incurred would have been at least 2.5 to 1, determined on a pro forma basis, as
if the additional Indebtedness had been incurred at the beginning of that
four-quarter period and no Default or Event of Default shall have occurred and
be continuing at the time of, or would occur after giving effect on a pro forma
basis to, such incurrence.
However, the preceding covenant will not apply to the incurrence of any
of the following items of Indebtedness, which are "Permitted Debt":
(1) the incurrence by Sbarro and the Guarantors of Indebtedness
under:
(a) the Credit Facility;
(b) Capital Lease Obligations; or
(c) purchase money or mortgage financings;
provided that the aggregate amount of all Indebtedness
outstanding under this clause (1) after giving effect to the
incurrence, including all Permitted Refinancing Indebtedness
incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (1), does not exceed a
principal amount equal to $75.0 million less the aggregate
principal amount of all Indebtedness permanently repaid with
the Net Proceeds of any Asset Sale. Letters of credit are
deemed for all purposes of the indenture to have a principal
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amount equal to the maximum potential liability of Sbarro and
its Restricted Subsidiaries in respect to the letters of
credit.
(2) the incurrence by Sbarro and the Guarantors of Indebtedness
represented by the notes, the Guarantees thereof and the
indenture in the principal amount of notes originally issued
on September 28, 1999;
(3) the incurrence by Sbarro and its Restricted Subsidiaries of
the Existing Indebtedness;
(4) the incurrence by Sbarro and the Guarantors of additional
Indebtedness, other than Hedging Obligations, in an aggregate
principal amount not to exceed $10.0 million at any time
outstanding;
(5) the incurrence by Sbarro and the Guarantors of Indebtedness in
connection with the acquisition of assets or a new
Wholly-Owned Restricted Subsidiary; provided that:
(a) the Indebtedness was incurred by the prior owner of
the assets or the Restricted Subsidiary prior to the
acquisition by Sbarro and the Guarantors and was not
incurred in connection with, or in contemplation of,
the acquisition by Sbarro and the Guarantors; and
(b) the aggregate principal amount of Indebtedness
incurred pursuant to this clause (1) does not exceed
$5.0 million at any time outstanding;
(6) the incurrence by Sbarro and its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace
Indebtedness, other than Hedging Obligations and other than
Indebtedness permitted to be incurred pursuant to clause (6),
clause (7) or clause (9) of this paragraph, that was permitted
to be incurred;
(7) the incurrence by Sbarro or any of its Wholly Owned Restricted
Subsidiaries of intercompany Indebtedness between or among
Sbarro and its Wholly Owned Restricted Subsidiaries; provided,
however, that:
(a) any subsequent issuance or transfer of Equity
Interests that results in any of that Indebtedness
being held by a Person other than Sbarro or a Wholly
Owned Restricted Subsidiary of Sbarro, and
(b) any sale or other transfer of any of that
Indebtedness to a Person that is not either Sbarro or
a Wholly Owned Restricted Subsidiary of Sbarro,
shall be deemed, in each case, to be an incurrence of that
Indebtedness by Sbarro or such Restricted Subsidiary, as the
case may be;
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(8) the incurrence by Sbarro or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of
hedging against fluctuations in currency values or for the
purpose of fixing or hedging interest rate risk with respect
to any floating rate Indebtedness of Sbarro or any of its
Restricted Subsidiaries that is permitted by the terms of the
indenture to be outstanding, provided that the notional
principal amount of any Hedging Obligations does not exceed
the principal amount of Indebtedness to which the agreement
relates; and
(9) the Guarantee by Sbarro or any of its Restricted Subsidiaries
of Indebtedness of Sbarro or a Wholly Owned Restricted
Subsidiary of Sbarro that was permitted to be incurred by
another provision of this covenant.
For purposes of determining the amount of any Indebtedness of any
Person under this covenant:
o the principal amount of any Indebtedness of such Person
arising by reason of such Person having granted or assumed a
Lien on its property to secure Indebtedness of another Person
shall be the lower of the fair market value of the property
and the principal amount of that Indebtedness outstanding (or
committed to be advanced) at the time of determination;
o the amount of any Indebtedness of that Person arising by
reason of that Person having Guaranteed Indebtedness of
another Person where the amount of the Guarantee is limited to
an amount less than the principal amount of the Indebtedness
Guaranteed shall be the amount as limited; and
o Indebtedness shall not include a non-recourse pledge by Sbarro
or any of its Restricted Subsidiaries of Investments in any
Person that is not a Restricted Subsidiary of Sbarro to secure
the Indebtedness of that Person.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (9) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, Sbarro
will be permitted to classify that item of Indebtedness in any manner that
complies with this covenant and that item of Indebtedness will be treated as
having been incurred pursuant to only one of those clauses or pursuant to the
first paragraph of this covenant.
LIENS
Neither Sbarro nor any of its Restricted Subsidiaries may, directly or
indirectly, create, incur, assume or suffer to exist any Lien securing
Indebtedness or trade payables on any asset owned on September 28, 1999 or
acquired after that date, or any income or profits from those assets or assign
or convey any right to receive income from those assets, unless the notes are
equally and ratably secured with the Indebtedness or trade payables secured by
the Lien for so long as the Indebtedness or trade payables are secured;
provided, however, that the provisions of this sentence shall not prohibit
Permitted Liens.
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DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
Neither Sbarro nor any of its Restricted Subsidiaries may, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) (a) pay dividends or make any other distributions to Sbarro or
any of its Restricted Subsidiaries on its Capital Stock or
with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness or other
Obligations owed to Sbarro or any of its Restricted
Subsidiaries;
(2) make loans or advances to Sbarro or any of its Restricted
Subsidiaries;
(3) transfer any of its properties or assets to Sbarro or any of
its Restricted Subsidiaries;
(4) grant Liens on its assets as security for the notes or any
Guarantee thereof; or
(5) Guarantee the notes or any renewals or refinancings thereof.
However, the preceding covenant will not apply to encumbrances or
restrictions, other than encumbrances and restrictions in respect of clause (5)
of that paragraph, existing under or by reason of:
(a) Existing Indebtedness as in effect on September 28, 1999;
(b) the Credit Facility as in effect as of September 28, 1999, and
any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or
refinancings of that Credit Facility, provided that the
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no
more restrictive with respect to the dividend and other
payment restrictions than those contained in the Credit
Facility as in effect on September 28, 1999;
(c) the notes, any Guarantee of the notes and the indenture;
(d) applicable law;
(e) any instrument governing Indebtedness or Equity Interests of a
Person acquired by Sbarro or any of its Restricted
Subsidiaries as in effect at the time of the acquisition,
except to the extent the Indebtedness or Equity Interests were
incurred in connection with or in contemplation of the
acquisition, which encumbrance or restriction is not
applicable to any Person, or the Equity Interests, properties
or assets of any Person, other than the Person, or the Equity
Interests, property or assets of the Person, acquired,
provided that, in the case of
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Indebtedness, the Indebtedness was permitted by the terms of
the indenture to be incurred;
(f) by reason of customary nonassignment provisions, or provisions
prohibiting sublease, in leases entered into in the ordinary
course of business and consistent with past practices;
(g) purchase money or mortgage obligations permitted by the
indenture for property acquired in the ordinary course of
business that impose restrictions of the nature described in
clause (3) or (4) in the first paragraph of this covenant
above on the property acquired;
(h) customary restrictions in asset or stock sale agreements
limiting transfer of the assets or stock pending the closing
of the sale;
(i) customary non-assignment provisions in contracts entered into
in the ordinary course of business; or
(j) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing the
Permitted Refinancing Indebtedness are no more restrictive
than those contained in the agreements governing the
Indebtedness being refinanced.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Sbarro may not consolidate or merge with or into, whether or not Sbarro
is the surviving Person, or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions to, another Person unless:
(1) Sbarro is the surviving Person or the Person formed by or
surviving the consolidation or merger, if other than Sbarro,
or to which the sale, assignment, transfer, lease, conveyance
or other disposition shall have been made is a Person
organized or existing under the laws of the United States, any
state of the United States or the District of Columbia;
(2) the Person formed by or surviving the consolidation or merger,
if other than Sbarro, or the Person to which the sale,
assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of Sbarro
under the notes and the indenture under a supplemental
indenture in a form reasonably satisfactory to the trustee;
(3) immediately after giving effect to the transaction no Default
or Event of Default exists; and
(4) except in the case of a merger of Sbarro with or into a Wholly
Owned Restricted Subsidiary of Sbarro, Sbarro or the Person
formed by or surviving the
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consolidation or merger, if other than Sbarro, or to which the
sale, assignment, transfer, lease, conveyance or other
disposition shall have been made:
(a) will have Consolidated Net Worth immediately after
the transaction equal to or greater than
(b) will, at the time of the transaction and after giving
pro forma effect to the transaction as if the
transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur
at least $1.00 of additional Indebtedness pursuant to
the Consolidated Interest Coverage Ratio test set
forth in the first paragraph of the covenant
described above under the subheading "-- Incurrence
of Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
Neither Sbarro nor any of its Subsidiaries may make any payment to, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate of Sbarro (each, an "Affiliate
Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less
favorable to Sbarro or the Subsidiary than those that would
have been obtained in a comparable transaction by Sbarro or
the Subsidiary with an unrelated Person, and
(2) Sbarro delivers to the trustee:
(a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate
payments or consideration in excess of $1.0 million,
a resolution of the board of directors in an
officers' certificate certifying that the Affiliate
Transaction complies with clause (1) above and that
the Affiliate Transaction has been approved by a
majority of the independent members of the board of
directors, and
(b) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate
payments or consideration in excess of $5.0 million,
an opinion as to the fairness to Sbarro or the
Subsidiary of the Affiliate Transaction from a
financial point of view issued by an accounting,
appraisal or investment banking firm of national
standing.
However, the preceding covenant does not prohibit:
(1) any reasonable employment agreement or other compensation plan
or arrangement paid or made available to officers or employees
of Sbarro or its Subsidiaries for services actually rendered
or to be rendered and entered into by
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Sbarro or any Subsidiary in the ordinary course of business
and consistent with past practice;
(2) transactions between or among Sbarro and/or its Wholly Owned
Restricted Subsidiaries;
(3) any Remote Guarantee or Permitted Investment or any Restricted
Payment that is permitted by the provisions of the indenture
described above under the subheading "Restricted Payments";
(4) transactions between or among Unrestricted Subsidiaries of
Sbarro;
(5) the provision, in the ordinary course of business consistent
with past practice and for cash consideration not less than
its cost, of support services (such as accounting,
architectural, legal and administrative services) by Sbarro
and its Restricted Subsidiaries to Unrestricted Subsidiaries
of Sbarro and entities in which Sbarro has, directly or
indirectly, an equity interest of 20% or more;
(6) the Tax Payment Agreement;
(7) leases or subleases by Sbarro and its Restricted Subsidiaries
of real property to Unrestricted Subsidiaries or Persons in
which Unrestricted Subsidiaries have an equity interest to the
extent that the leases or subleases were in effect on
September 28, 1999;
(8) guarantees of Indebtedness or real property lease obligations
of Unrestricted Subsidiaries or entities in which Unrestricted
Subsidiaries have an equity interest to the extent that the
guarantees were in effect on September 28, 1999; or
(9) payments by Sbarro to Sbarro Enterprises, L.P. under the
sublease for Sbarro's administrative office building as in
effect on September 28, 1999.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED RESTRICTED
SUBSIDIARIES
Sbarro will not, and will not permit any or its Wholly Owned Restricted
Subsidiaries to, transfer, convey, sell, lease or otherwise dispose of any
Equity Interests or other ownership interests (including convertible debt
securities) of any Wholly Owned Restricted Subsidiary of Sbarro to any Person,
other than Sbarro or a Wholly Owned Restricted Subsidiary of Sbarro, unless:
(1) the transfer, conveyance, sale, lease or other disposition is
of all the Equity Interests and other ownership interests of
the Wholly Owned Restricted Subsidiary; and
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(2) the Net Proceeds from the transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant
described above under the subheading "-- Asset Sales."
In addition, Sbarro will not permit any Wholly Owned Restricted
Subsidiary of Sbarro to issue any of its Equity Interests or other ownership
interests, other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares, to any Person other than to Sbarro or a Wholly
Owned Restricted Subsidiary of Sbarro.
ADDITIONAL SUBSIDIARY GUARANTEES
If Sbarro or any of its Subsidiaries shall acquire or create another
Subsidiary after September 28, 1999, then the newly acquired or created
Subsidiary must become a Guarantor and deliver an opinion of counsel, in
accordance with the terms of the indenture; provided, however, that all
Subsidiaries that have been properly designated as Unrestricted Subsidiaries in
accordance with the indenture shall not be subject to this covenant for so long
as they continue to constitute Unrestricted Subsidiaries.
PAYMENTS FOR CONSENT
Neither Sbarro nor any of its Subsidiaries will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
indenture or the notes unless the consideration is offered to be paid and is
paid to all holders of the notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to the consent,
waiver or agreement.
COVENANTS RELATING TO TAX PAYMENT AGREEMENT
The indenture includes a number of covenants relating to the Tax
Payment Agreement, including agreements by Sbarro:
(1) if it elects to be treated as an S Corporation for federal
income tax purposes, to elect, to the extent permitted by
applicable law, to be treated as an S Corporation or its
equivalent for state and local income tax purposes;
(2) to give notice to the trustee if it learns of any termination
of its status as an S Corporation;
(3) to provide the trustee with certificates as to computations
under the Tax Payment Agreement, including an annual
certificate from Sbarro's independent accountants confirming
computations based on Sbarro's federal income tax return; and
(4) to cause its shareholders to make any repayments of Tax
Distributions required by the Tax Payment Agreement, with the
repayments to be treated as capital contributions which shall
not increase the amount available for Restricted
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Payments, except for any increase resulting from a repayment
causing an increase in Adjusted Consolidated Net Income.
REPORTS
Whether or not required by the rules and regulations of the SEC, so
long as any notes are outstanding, Sbarro will furnish to the holders of notes:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms
10-Q and 10-K if Sbarro were required to file those forms,
including:
(a) a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes
the financial condition and results of operations of
Sbarro and its consolidated Subsidiaries, showing in
reasonable detail, either on the face of the
financial statements or in the footnotes to the
financial statements, the financial condition and
results of operations of Sbarro and its Restricted
Subsidiaries separate from the financial information
and results of operations of the Unrestricted
Subsidiaries of Sbarro, and
(b) with respect to the annual information only, a report
on the financial statements, including the footnotes
to the financial statements, by Sbarro's then
certified independent accountants; and
(2) all current reports that would be required to be filed with
the SEC on Form 8-K if Sbarro were required to file those
reports.
In addition, whether or not required by the rules and regulations of
the SEC, Sbarro will, without being required to register the notes under Section
12 of the Exchange Act, file a copy of all of the information and reports
referred to in clauses (1) and (2) above with the SEC for public availability,
unless the SEC will not accept the filing, and make the information available to
securities analysts and prospective investors upon request.
Also, Sbarro and its Restricted Subsidiaries will, for so long as any
notes remain outstanding, furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the notes;
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(2) default in payment when due, whether payable at maturity, upon
redemption or otherwise, of the principal of or premium, if
any, on the notes;
(3) failure by Sbarro or any of its Restricted Subsidiaries to
comply with the provisions described under the subheadings "--
Change of Control," "-- Asset Sales," or "-- Merger,
Consolidation or Sale of Assets;"
(4) failure by Sbarro or any of its Restricted Subsidiaries to
comply with any of its other agreements in the indenture or
the notes, other than those referred to in clauses (1), (2) or
(3) above, for 30 days after written notice by the trustee or
the holders of at least 25% in principal amount of the then
outstanding notes;
(5) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by Sbarro or any
of its Restricted Subsidiaries (or the payment of which is
guaranteed by Sbarro or any of its Restricted Subsidiaries),
whether such Indebtedness or guarantee existed on September
28, 1999 or is created after September 28, 1999, if that
default:
(a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness
prior to the expiration of the grace period, if any,
provided in that Indebtedness on the date of the
default (a "Payment Default"), or
(b) results in the acceleration of that Indebtedness
prior to its express maturity
and, in each case, the principal amount of any of that
Indebtedness, together with the principal amount of any other
Indebtedness under which there has been a Payment Default or
the maturity of which has been accelerated, aggregates $5.0
million or more;
(6) failure by Sbarro or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $5.0 million and
either:
(a) any creditor commences enforcement proceedings upon
any of the judgments, or
(b) the judgments are not paid, discharged or stayed for
a period of 60 days;
(7) except as permitted by the indenture, any Guarantee of the
notes shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be
in full force and effect, or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Guarantee of the notes; and
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(8) certain events of bankruptcy or insolvency with respect to
Sbarro, any of its Significant Subsidiaries that is a
Restricted Subsidiary or any group of Restricted Subsidiaries
that, taken together, would constitute a Significant
Subsidiary.
If any Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding notes may
declare all the notes and all other Obligations under the notes to be due and
payable immediately. However, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to Sbarro, any
Significant Subsidiary that is a Restricted Subsidiary or any group of
Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary, all outstanding notes will become due and payable without further
action or notice.
Holders of the notes may not enforce the indenture or the notes except
as provided in the indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
holders of the notes notice of any continuing Default or Event of Default,
except a Default or Event of Default relating to the payment of principal,
premium, if any, interest or Liquidated Damages, if any, if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken or not taken by or on behalf of Sbarro or any
Guarantor with the intention of avoiding payment of the premium that Sbarro
would have had to pay if Sbarro then had elected to redeem the notes pursuant to
the optional redemption provisions of the indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the notes.
The holders of a majority in aggregate principal amount of the notes
then outstanding by notice to the trustee may on behalf of the holders of all of
the notes waive any existing Default or Event of Default and its consequences
under the indenture except a continuing Default or Event of Default in the
payment of principal, premium, if any, interest or Liquidated Damages, if any,
on the notes.
Sbarro is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, Sbarro is required to deliver to the trustee a statement
specifying the Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Sbarro
or any Guarantor, as such, shall have any liability for any obligations of
Sbarro or any Guarantor under the notes or the indenture or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
holder of notes by accepting a note waives and releases all of those
liabilities. The waiver and release are part of the consideration for issuance
of the notes. The waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the SEC that a waiver of
liabilities under the federal securities laws is against public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Sbarro may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all obligations
of the Guarantors discharged with respect to their Subsidiary Guarantees ("Legal
Defeasance") except for
(1) the rights of holders of outstanding notes to receive payments
in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on the notes when such
payments are due from the trust referred to below,
(2) Sbarro's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated,
destroyed, lost or stolen notes and the maintenance of an
office or agency for payment and money for security payments
held in trust,
(3) the rights, powers, trusts, duties and immunities of the
trustee, and Sbarro's obligations in connection therewith and
(4) the Legal Defeasance provisions of the indenture.
In addition, Sbarro may at any time elect to have the obligations of
Sbarro and the Guarantors released with respect to certain covenants that are
described in the indenture ("Covenant Defeasance") and thereafter any omission
to comply with those obligations shall not constitute a Default or Event of
Default with respect to the notes. In the event Covenant Defeasance occurs,
certain events, not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events, described under "Events of Default" will
no longer constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance
(1) Sbarro must irrevocably deposit with the trustee, in trust,
for the benefit of the holders of the notes, cash in U.S.
dollars, non-callable Government Securities, or a combination
of the two, in amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and
interest and Liquidated Damages, if any, on the outstanding
notes on the Stated Maturity or on the applicable redemption
date, as the case may be, and Sbarro must specify whether the
notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, Sbarro shall have delivered
to the trustee an opinion of counsel in the United States
reasonably acceptable to the trustee confirming that (a)
Sbarro has received from, or there has been published by, the
IRS a ruling or (b) since September 28, 1999, there has been a
change in the applicable federal income tax law, in either
case to the effect that, and based on the IRS ruling, the
opinion of counsel shall confirm that, the holders of the
outstanding notes will not recognize income, gain or loss for
federal income tax
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purposes, as a result of the Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if
the Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Sbarro shall have
delivered to the trustee an opinion of counsel in the United
States reasonably acceptable to the trustee confirming that
the holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a
result of the Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if the Covenant
Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to
be applied to the deposit) or, insofar as Events of Default
from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of
deposit;
(5) the Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or be a default under, any material
agreement or instrument (other than the indenture) to which
Sbarro or any of its Subsidiaries is a party or by which
Sbarro or any of its Subsidiaries is bound;
(6) Sbarro shall have delivered to the trustee an opinion of
counsel to the effect that after the 91st day following the
deposit, the trust fund will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally;
(7) Sbarro shall have delivered to the trustee an officers'
certificate stating that the deposit was not made by Sbarro
with the intent of preferring the holders of notes over the
other creditors of Sbarro or with the intent of defeating,
hindering, delaying or defrauding creditors of Sbarro or
others; and
(8) Sbarro shall have delivered to the trustee an officers'
certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect
as to all notes issued thereunder when:
(1) either:
(a) all notes that have been authenticated have been
delivered to the trustee for cancellation, except
notes that have been lost, stolen or destroyed and
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replaced or paid and notes for whose payment money
has previously been deposited in trust and later
repaid to Sbarro; or
(b) all notes that have not been delivered to the trustee
for cancellation:
o have become due and payable by reason of the giving
of a notice of redemption or otherwise, or
o will become due and payable within one year, or
o are to be called for redemption within one year under
irrevocable arrangements satisfactory to the trustee
for the giving of notice of redemption by the trustee
in the name of and at the expense of Sbarro
and, in each case, Sbarro has irrevocably deposited
or caused to be deposited with the trustee, in trust,
for the benefit of the holders of notes, cash in U.S.
dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be
sufficient, without consideration of any reinvestment
of interest, to pay and discharge the entire
indebtedness on the notes that had not previously
been delivered to the trustee for cancellation for
principal, premium and Liquidated Damages, if any,
and accrued interest to the date of maturity or
redemption;
(2) the deposit, if made pursuant to the preceding clause (1)(b),
will not result in a breach or violation of, or constitute a
default under, any material agreement or instrument to which
Sbarro or any of its Subsidiaries is a party or by which
Sbarro or any of its Subsidiaries is bound;
(3) Sbarro has paid or caused to be paid all sums payable by it
under the indenture;
(4) Sbarro has delivered irrevocable instructions to the trustee
to apply all money and Government Securities deposited
pursuant to the preceding clause (1)(b) toward the payment of
the notes at maturity or the redemption date, as the case may
be;
(5) Sbarro shall have delivered to the trustee an officers'
certificate stating that the deposit, if made pursuant to the
preceding clause 1(b), was not made by Sbarro with the intent
of preferring the holders of notes over the other creditors of
Sbarro or with the intent of defeating, hindering, delaying or
defrauding creditors of Sbarro or others;
(6) Sbarro shall have delivered to the trustee an officers'
certificate and an opinion of counsel, each stating that all
conditions relating to the satisfaction and discharge of the
indenture have been complied with; and
(7) the trustee shall have received such other documents and
assurances as the trustee shall reasonably require.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two paragraphs:
o the indenture or the notes may be amended or supplemented with
the consent of the holders of at least a majority in principal
amount of the notes then outstanding, including consents
obtained in connection with a purchase of, or tender offer or
exchange offer for, notes; and
o any existing default or compliance with any provision of the
indenture or the notes may be waived with the consent of the
holders of a majority in principal amount of the then
outstanding notes, including consents obtained in connection
with a tender offer or exchange offer for notes.
Without the consent of each holder affected, an amendment or waiver may
not, with respect to any notes held by a non-consenting holder:
(1) reduce the principal amount of notes whose holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any
note or alter the provisions with respect to the redemption of
the notes or, if Sbarro has become obligated to make a Change
of Control Offer or an Asset Sale Offer, amend, change or
modify the obligation of Sbarro to make or consummate the
Change of Control Offer or Asset Sale Offer;
(3) reduce the rate of or change the time for payment of interest
or Liquidated Damages, if any, on any note;
(4) waive a Default or Event of Default in the payment of
principal of or premium, interest or Liquidated Damages, if
any, on the notes, except a rescission of acceleration of the
notes by the holders of at least a majority in aggregate
principal amount of the notes and a waiver of the payment
default that resulted from the acceleration;
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in some of the provisions of the indenture
relating to waivers of past Defaults or the rights of holders
of notes to receive payments of principal of or premium,
interest or Liquidated Damages, if any, on the notes;
(7) waive a redemption payment with respect to any note;
(8) except as described in the second paragraph under the
subheading "-- Subsidiary Guarantees," release any Guarantor
from its Guarantee of the notes; or
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(9) make any change in the amendment and waiver provisions.
In any event, without the consent of any holder of notes, Sbarro, the
Guarantors and the trustee may amend or supplement the indenture or the notes:
o to cure any ambiguity, defect or inconsistency;
o to provide for uncertificated notes in addition to or in place
of certificated notes, to provide for the assumption of
Sbarro's or any Guarantor's obligations to holders of notes in
the case of a merger, consolidation or sale of assets;
o to provide security for the notes;
o to add a Guarantor
o to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely
affect the legal rights under the indenture of any such
holder, or
o to comply with requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust
indenture Act.
CONCERNING THE TRUSTEE
The trustee has been appointed by Sbarro as Registrar and Paying Agent
with respect to the notes.
The indenture contains limitations on the rights of the trustee, should
it become a creditor of Sbarro, to obtain payment of claims in certain cases, or
to realize on certain property received in respect of any the claim as security
or otherwise.
The holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to some
exceptions. If an Event of Default shall occur, which shall not be cured, the
trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to those
provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any holder of notes,
unless such holder shall have offered to the trustee security and indemnity,
satisfactory to the trustee, against any loss, liability or expense.
TRANSFER AND EXCHANGE
A holder may transfer or exchange notes in accordance with the
indenture. The Registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and Sbarro
may require a holder to pay any taxes and fees required by law or permitted by
the indenture. Sbarro is not required to transfer or exchange any note
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selected for redemption. Also, Sbarro is not required to transfer or exchange
any note for a period of 15 days before a selection of notes to be redeemed or
between a record date and the next succeeding Interest Payment Date.
The registered holder of a note will be treated as the owner of it for
all purposes.
BOOK-ENTRY, DELIVERY AND FORM
BOOK-ENTRY
Except for original or registered notes that are issued as described
below under "Certificated Securities," the original notes were and the
registered notes will be issued in the form of one or more notes fully
registered in global form.
The laws of some states require that certain persons take physical
delivery in certificated form of securities that they own. Consequently, the
ability to transfer beneficial interests in a global note to such persons will
be limited to that extent. The ability of a person having beneficial interest in
a global note to pledge those interests to persons or entities that do not
participate in The Depositary Trust Company's system, or otherwise take actions
in respect of those interests, may be affected by the lack of a physical
certificate evidencing those interests.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest
in a global note may, upon request to the trustee, exchange such beneficial
interest for notes in the form of definitive certificates registered on the
books and records of the Company (the "Certificated Securities"). In addition,
if:
(1) Sbarro notifies the trustee in writing that DTC is no longer
willing or able to act as a depositary and Sbarro is unable to
locate a qualified successor within 90 days,
(2) Sbarro, at its option, notifies the trustee in writing that it
elects to cause the issuance of notes in the form of
Certificated Securities under the indenture, or
(3) if a Default or Event of Default occurs and any owner of a
beneficial interest in a global note so requests,
then, upon surrender by the global note holder of a global note, notes
in the form of Certificated Securities will be issued to each person
that the global note holder and DTC identify as being the beneficial
owner of the related notes.
Upon the transfer of Certificated Securities to a person entitled to
hold an interest in a global note under the indenture, such Certificated
Securities may, unless a global note has previously been exchanged for
Certificated Securities, be exchanged for an interest in a global note
representing the principal amount of notes being transferred.
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REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Sbarro, the Guarantors and Bear Stearns have entered into the
registration rights agreement. Pursuant to the registration rights agreement,
Sbarro and the Guarantors have agreed to file with the SEC the registration
statement of which this prospectus is a part the appropriate form under the
Securities Act with respect to the registered notes. Upon the effectiveness of
the registration statement, Sbarro will offer to the holders of the original
notes who are able to make certain representations the opportunity to exchange
their original notes for registered notes. If:
(1) Sbarro is not required to file the registration statement or
is not permitted to consummate the exchange offer because the
exchange offer is not permitted by applicable law or SEC
policy or is not otherwise permitted by the SEC,
(2) for any reason the exchange offer is not consummated by April
25, 2000 or
(3) Bear Stearns is a holder of original notes and notifies Sbarro
prior to the 20th day following consummation of the exchange
offer that (a) it is prohibited by law or SEC policy from
participating in the exchange offer, (b) it may not resell the
notes acquired by it in the exchange offer to the public
without delivering a prospectus and the prospectus contained
in the registration statement is not appropriate or available
for such resales or (c) it is a broker-dealer and owns notes
acquired directly from Sbarro or an affiliate of Sbarro,
then in each case Sbarro and the Guarantors will file with the SEC a
shelf registration statement to cover resales of the notes by the
holders thereof who satisfy conditions relating to the provision of
information in connection with the shelf registration statement.
Sbarro and the Guarantors must use their best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the SEC.
The registration rights agreement provides that:
(1) Sbarro and the Guarantors will use their best efforts to have
the registration statement declared effective by the SEC on or
prior to March 26, 2000;
(3) unless the exchange offer would not be permitted by applicable
law or SEC policy, Sbarro and the Guarantors will commence the
exchange offer and use their best efforts to issue, on or
prior to 30 days after the date on which the registration
statement was declared effective by the SEC, registered notes
in exchange for all notes tendered prior thereto in the
exchange offer; and
(4) if obligated to file the shelf registration statement, Sbarro
and the Guarantors will use their best efforts to file the
shelf registration statement with the SEC on or prior to 60
days after such filing obligation arises and to cause the
shelf
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registration to be declared effective by the SEC on or prior
to 180 days after such obligation arises.
A "registration default" will be deemed to have occurred if:
(a) Sbarro and the Guarantors fail to file any of the Registration
Statements required by the registration rights agreement on or
before the date specified for such filing;
(b) any of the registration statements is not declared effective
by the SEC on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date");
(c) Sbarro and the Guarantors fail to consummate the exchange
offer within 30 days of the Effectiveness Target Date with
respect to the exchange offer registration statement; or
(d) any registration statement is declared effective but
thereafter ceases to be effective or usable in connection with
resales of original notes during the periods specified in the
registration rights agreement
Upon the occurrence of a registration default, Sbarro will pay an
amount ("Liquidated Damages") to each holder of notes, with respect to the first
90-day period immediately following the occurrence of the first Registration
Default, in an amount equal to $.05 per week per $1,000 principal amount of
notes held by such holder. The amount of the Liquidated Damages will increase by
an additional $.05 per week per $1,000 principal amount of notes with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum amount of Liquidated Damages of $.50 per week per $1,000
principal amount of notes. All accrued Liquidated Damages will be paid by Sbarro
on each Interest Payment Date to the global note holder by wire transfer of
immediately available funds or by federal funds check and to holders of
Certificated Securities by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of notes will be required to make certain representations to
Sbarro (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
CERTAIN DEFINITIONS
The following are certain defined terms used in the indenture.
Reference is made to the indenture for a full disclosure of all of the terms, as
well as any other capitalized terms used for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
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(1) Indebtedness or Preferred Stock of any other Person existing
at the time the other Person is merged with or into or became
a Subsidiary of the specified Person, including, without
limitation, Indebtedness or Preferred Stock incurred by the
other Person in connection with, or in contemplation of, the
other Person merging with or into or becoming a Subsidiary of
the specified Person, and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
the specified Person.
"Adjusted Consolidated Net Income" means, with respect to any Person
for any period, the sum of:
(1) the Consolidated Net Income of the Person for the period plus
(2) the aggregate amount of intangible amortization charges
resulting from the Merger to the extent that the intangible
amortization charges were deducted in computing the
Consolidated Net Income.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of the Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means
(1) the sale, lease, conveyance or other disposition (which we
refer to collectively as "dispositions" for purposes of this
definition) of any assets or rights (including, without
limitation, by way of a sale and leaseback), other than
dispositions of inventory in the ordinary course of business
consistent with past practices, provided that the disposition
of all or substantially all of the assets of Sbarro and its
Restricted Subsidiaries taken as a whole will be governed by
the provisions of the indenture described above under the
subheading "- Change of Control" and/or the provisions
described above under the subheading "- Merger, Consolidation
or Sale of Assets" and not by the provisions of the Asset Sale
covenant, and
(2) the issuance of Equity Interests by any Restricted Subsidiary
or the disposition by Sbarro or a Restricted Subsidiary of
Equity Interests in any of Sbarro's Restricted Subsidiaries,
other than directors' qualifying shares or shares required by
applicable law to be held by a Person other than Sbarro or a
Restricted Subsidiary of Sbarro;
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provided, however, that the term Asset Sale shall not include any
disposition of any assets or rights or any issuance or disposition of
Equity Interests if the transaction would have been an Asset Sale in
the absence of this proviso to the extent that the gross proceeds do
not exceed, in aggregate amount together with all other dispositions of
assets or rights or issuances or dispositions of Equity Interests, $3.0
million in any fiscal year of Sbarro, with the amount of proceeds, to
the extent non-cash, to be determined in good faith by the board of
directors of Sbarro.
The following will be deemed not to be Asset Sales:
(1) a transfer of assets or rights or Equity Interests by Sbarro
to a Wholly Owned Restricted Subsidiary or by a Wholly Owned
Restricted Subsidiary to Sbarro or to another Wholly Owned
Restricted Subsidiary;
(2) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to Sbarro or to another Wholly Owned Restricted
Subsidiary;
(3) a Permitted Investment or Restricted Payment that is permitted
by the covenant described above under the subheading "-
Restricted Payments";
(4) a disposition of Cash Equivalents solely for cash or other
Cash Equivalents; and
(5) a disposition of assets in a single transaction or group of
related transactions, the gross proceeds of which do not
exceed $10,000, with the amount of proceeds, to the extent
non-cash, to be determined in good faith by the board of
directors of Sbarro.
"Capital Lease Obligation" means, at the time any determination is to
be made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other
equivalents, however designated, of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests, whether general or
limited; and
(4) any other interest or participation that confers on a Person
the right to receive a share of the profits, other than
incentive compensation arrangements based upon profits, and
losses of, or distributions of assets of, the issuing Person.
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"Cash Equivalents" means
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured
by the United States government or any agency or
instrumentality of the United States government having
maturities of not more than six months from the date of
acquisition;
(3) certificates of deposit and Eurodollar time deposits with
maturities of six months or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any domestic
commercial bank having capital and surplus in excess of $500
million and a Keefe Bank Watch Rating of AB or better;
(4) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses
(2) and (3) entered into with any financial institution
meeting the qualifications specified in clause (3);
(5) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's, a
division of The McGraw Hill Companies, and in each case
maturing within six months after the date of acquisition; and
(6) Investments in money market funds substantially all the assets
of which are comprised of securities and other obligations of
the types described in clauses (1) through (5).
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, in
one or a series of related transactions, directly or
indirectly, of all or substantially all of the assets of
Sbarro and its Restricted Subsidiaries taken as a whole to any
Person or "group," as the term "group" is used in Section
13(d)(3) of the Exchange Act, other than to one or more
Permitted Holders;
(2) the adoption of a plan relating to the liquidation or
dissolution of Sbarro;
(3) the consummation of any transaction, including, without
limitation, any merger or consolidation, the result of which
is that any Person or group, other than one or more Permitted
Holders, becomes the "beneficial owner," as the term
"beneficial owner" is defined in Rule 13d-3 and Rule 13d-5
under the Exchange Act, except that a Person shall be deemed
to have "beneficial ownership" of all securities that the
Person has the right to acquire, whether the right is
currently exercisable or is exercisable only upon the
occurrence of a subsequent condition, directly or indirectly,
of more than 35% of the Voting Stock of Sbarro, measured by
voting power rather than number of shares; or
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(4) the first day on which a majority of the members of the board
of directors of Sbarro are not Continuing Directors.
"Closing Date" means the date of the closing of the sale of the notes
initially issued pursuant to the indenture.
"Committed Restricted Investments" means up to $13.9 million of
Investments that were, as of August 30, 1999, committed to be made by Sbarro and
its Restricted Subsidiaries and are listed in a Schedule to the indenture.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of the Person for the period plus, to the
extent deducted in computing Consolidated Net Income:
(1) an amount equal to any net loss realized in connection with an
Asset Sale;
(2) provision for taxes based on income or profits of the Person
and its Restricted Subsidiaries for the period and Tax
Distributions, if any;
(3) Consolidated Interest Expense; and
(4) depreciation and amortization, including amortization of
goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period, and
other non-cash expenses, excluding any non-cash expense to the
extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period, of the Person
and its Restricted Subsidiaries for the period to the extent
that the depreciation, amortization and other non-cash
expenses were deducted in computing Consolidated Net Income,
minus
(5) non-cash items increasing Consolidated Net Income for the
period, in each case, for the period without duplication on a
consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing:
(1) the provision for taxes based on the income or profits of, and
the depreciation and amortization and other non-cash charges
of, a Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent, and in the
same proportion, that the Net Income of the Person was
included in calculating Consolidated Net Income and
(2) the Net Income of any Unrestricted Subsidiary shall be
excluded, whether or not the Unrestricted Subsidiary has paid
any dividends or distributions to Sbarro or any of its
Restricted Subsidiaries.
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"Consolidated Interest Coverage Ratio" means, with respect to any
Person for any period, the ratio of the Consolidated Cash Flow of the Person for
the period to the Consolidated Interest Expense of the Person for the period. In
the event that Sbarro or any of its Restricted Subsidiaries incurs, assumes,
Guarantees, redeems or repays any Indebtedness, other than revolving credit
borrowings, subsequent to the commencement of the period for which the
Consolidated Interest Coverage Ratio is being calculated but prior to the date
on which the event for which the calculation of the Consolidated Interest
Coverage Ratio is made, then the Consolidated Interest Coverage Ratio shall be
calculated giving pro forma effect to the incurrence, assumption, Guarantee,
redemption or repayment of Indebtedness as if it had occurred at the beginning
of the applicable four-quarter reference period. We refer to the date for which
the calculation of Consolidated Interest Coverage Ratio is made as the
"Calculation Date."
In addition, for purposes of making the computation of the Consolidated
Interest Coverage Ratio:
(1) acquisitions that have been made by Sbarro or any of its
Restricted Subsidiaries, including through mergers or
consolidations and including any related financing
transactions, and other transactions completed by Sbarro or
any of its Restricted Subsidiaries with respect to which pro
forma effect may be given pursuant to Article 11 of Regulation
S-X under the Securities Act, in each case during the
four-quarter reference period or subsequent to the reference
period and on or prior to the Calculation Date shall be deemed
to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for the reference
period shall be calculated without giving effect to clause (3)
of the proviso set forth in the definition of Consolidated Net
Income;
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and
operations or businesses disposed of prior to the Calculation
Date, shall be excluded; and
(3) the Consolidated Interest Expense attributable to discontinued
operations, as determined in accordance with GAAP, and
operations or businesses disposed of prior to the Calculation
Date, shall be excluded, but only to the extent that the
obligations giving rise to the Consolidated Interest Expense
will not be obligations of the referent Person or any of its
Restricted Subsidiaries following the Calculation Date.
"Consolidated Interest Expense" means, with respect to any Person for
any period, the sum, without duplication, of:
(1) the consolidated interest expense of the Person and its
Restricted Subsidiaries for the period, whether paid or
accrued (including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest
payments, the interest component of any deferred payment
obligations, the interest component of all payments associated
with Capital Lease Obligations, commissions,
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discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations);
(2) the consolidated interest expense of the Person and its
Restricted Subsidiaries that was capitalized during the
period;
(3) any interest expense for the period on Indebtedness of another
Person that is Guaranteed by the Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of the
Person or one of its Restricted Subsidiaries (whether or not
the Guarantee or Lien is called upon), in each case, on a
consolidated basis and in accordance with GAAP; and
(4) the product of (x) any Preferred Stock dividends declared or
paid or payable in cash, and (y) a fraction, the numerator of
which is one and the denominator of which is one minus the
then current combined federal, state and local statutory tax
rate of the Person, expressed as a decimal, determined, in
each case, on a consolidated basis and in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of the Person and its Restricted
Subsidiaries for the period, on a consolidated basis, determined in accordance
with GAAP, less the amount of all Tax Distributions, if any, made by the Person
from the beginning of the period through the date that is 30 days after the end
of the period; provided that:
(1) the Net Income of any Person that is not a Restricted
Subsidiary of the Person or that is accounted for by the
equity method of accounting shall be excluded, except that the
Net Income of the Person shall be included to the extent of
the amount of dividends or distributions paid in cash by the
Person during the period to the referent Person or a Wholly
Owned Restricted Subsidiary thereof, other than any of those
dividends or distributions:
(x) which Sbarro elects not to include in the computation
of Consolidated Net Income at the time of the
computation; or
(y) which consist of payments to Sbarro referred to in
subclause (c) of clause (3) of the third paragraph
under "Certain Covenants -- Restricted Payments";
(2) the net income (but not loss) of any Restricted Subsidiary
shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that
Restricted Subsidiary of that net income is not at the date of
determination permitted without any prior governmental
approval that has not been obtained or, directly or
indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted
Subsidiary or its stockholders;
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(3) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of its
acquisition shall be excluded;
(4) the cumulative effect of a change in accounting principles
shall be excluded; and
(5) any non-cash write-off or charge (excluding any non-cash
write-off or charge to the extent it represents an accrual of
or reserve of cash expenses in any future period) in respect
of the disposition or write-down of fixed assets other than in
the ordinary course of business shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any
date, the sum of:
(a) the consolidated equity of the common stockholders of the
Person and its consolidated Restricted Subsidiaries as of that
date; plus
(b) the respective amounts reported on the Person's balance sheet
as of that date with respect to any series of Preferred Stock
(other than Disqualified Stock) that by its terms is not
entitled to the payment of dividends unless those dividends
may be declared and paid only out of net earnings in respect
of the year of declaration and payment, but only to the extent
of any cash received by the Person upon issuance of the
Preferred Stock; less
(i) all write-ups subsequent to the Closing Date in the
book value of any asset owned by the Person or a
consolidated Restricted Subsidiary of the Person,
other than write-ups resulting from foreign currency
translations and write-ups of tangible assets of a
going concern business made within 12 months after
the acquisition of such business;
(ii) all investments as of that date in unconsolidated
Subsidiaries and in Persons that are not Restricted
Subsidiaries; and
(iii) all unamortized debt discount and expense and
unamortized deferred charges as of that date, in each
case determined in accordance with GAAP.
"Continuing Director" means, as of any date of determination, any
member of the board of directors of Sbarro who:
(1) was a member of the board of directors of Sbarro on September
28, 1999; or
(2) was nominated for election or elected to the board of
directors of Sbarro with the approval of a majority of the
Continuing Directors who were members of such board at the
time of nomination or election.
"Credit Facility" means the Credit Agreement, dated as of September 23,
1999, by and among Sbarro, certain lenders and other financial institutions, and
European American Bank, as
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administrative agent for such lenders and other financial institutions,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection with that agreement, in each case as any of
them may be amended, extended, refinanced, renewed, increased, restated,
replaced or refunded from time to time.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms, or by
the terms of any security into which it is convertible or for which it is
exchangeable, or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of its holder, in whole or in part, on or prior to the date that is
91 days after the date on which the notes mature.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Existing Indebtedness" means up to $8.8 million in aggregate principal
amount of Indebtedness of Sbarro and its Restricted Subsidiaries, other than
Indebtedness under the Credit Facility, in existence on September 28, 1999 and
listed in a Schedule to the indenture, until that Indebtedness is repaid.
Existing Indebtedness includes:
(a) some Guarantees of obligations for borrowed money, including
Sbarro's Guarantee of 40% of up to $11.0 million of
Indebtedness from time to time outstanding of Boulder Creek
Holding LLC and Boulder Creek Venture LLC under loan
agreements with HSBC Bank U.S.A., as they may be amended and
in effect from time to time, which we refer to as the
"Borrowed Money Obligations";
(b) some Guarantees of reimbursement obligations in respect of
letters of credit;
(c) any Guarantee by Sbarro or any of its Restricted Subsidiaries
of Indebtedness issued in exchange for, or the net proceeds of
which are used to refund, refinance or replace, Borrowed Money
Obligations at the time guaranteed pursuant to a Guarantee
referred to in clause (a) above which we refer to as
"Guaranteed Refinancing Indebtedness", to the extent that:
(x) the principal amount of Guaranteed Refinancing
Indebtedness does not exceed the principal amount of
the guaranteed Borrowed Money Obligations refunded,
refinanced or replaced, and
(y) the obligor(s) of the Guaranteed Refinancing
Indebtedness are the same as the obligors on the
guaranteed Borrowed Money Obligations being refunded,
refinanced or replaced; and
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(d) any Guarantee of reimbursement obligations in respect of a
letter of credit issued in replacement for a letter of credit
in respect of which the reimbursement obligations are
guaranteed pursuant to a Guarantee referred to in clause (b)
above (which we refer to as a "Replacement Letter of Credit")
to the extent that:
(x) the amount of Indebtedness represented by the
Guarantee of reimbursement obligations in respect of
the Replacement Letter of Credit does not exceed the
amount of Indebtedness represented by the Guarantee
of reimbursement obligations in respect of the letter
of credit replaced, and
(y) the obligor(s) of the reimbursement obligations in
respect of the Replacement Letter of Credit are the
same as the obligor(s) of the reimbursement
obligations in respect of the letter of credit
replaced.
For purposes of the indenture,
(a) any Guarantee by Sbarro or any of its Restricted Subsidiaries
of Guaranteed Refinancing Indebtedness shall not be deemed to
be an additional Investment to the extent that:
(x) the provisions of subclauses (x) and (y) of clause
(c) of the preceding sentence are satisfied in
respect of the Guaranteed Refinancing Indebtedness,
and
(y) the Guarantee of the Borrowed Money Obligations
refunded, refinanced or replaced by the Guaranteed
Refinancing Indebtedness was entered into prior to
August 30, 1999 or constitutes a Committed Restricted
Investment; and
(b) any Guarantee by Sbarro or any of its Restricted Subsidiaries
of reimbursement obligations in respect of a Replacement
Letter of Credit shall not be deemed to be an additional
Investment to the extent that:
(x) the provisions of subclauses (x) and (y) of clause
(d) of the preceding sentence are satisfied in
respect of the Guarantee and the Replacement Letter
of Credit, and
(y) the Guarantee of the reimbursement obligations in
respect of the letter of credit replaced by the
Replacement Letter of Credit was entered into prior
to August 30, 1999 or constitutes a Committed
Restricted Investment.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by another
entity that is approved by a significant segment of the accounting profession,
which are in effect in the United States from time to time.
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"Guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner, including, without limitation, letters of credit and
reimbursement agreements in respect thereof, of all or any part of any
Indebtedness.
"Guarantor" means:
(1) each of Sbarro's Restricted Subsidiaries that was a party to
the indenture on September 28, 1999; and
(2) each other Person that becomes a guarantor of the obligations
of Sbarro under the notes and the indenture from time to time
in accordance with the provisions of the "Additional
Subsidiary Guarantees" covenant, and their respective
successors and assigns;
provided, however, that "Guarantor" shall not include any Person that is
released from its Guarantee of the obligations of Sbarro under the notes and the
indenture as described under "Subsidiary Guarantees."
Each of Sbarro's Restricted Subsidiaries existing on September 28, 1999
became a Guarantor, and each future Restricted Subsidiary of Sbarro is required
to become a Guarantor. See "Certain Covenants -- Additional Subsidiary
Guarantees."
"Hedging Obligations" means, with respect to any Person, the
obligations of the Person under:
(1) currency exchange or interest rate swap, cap or collar
agreements; and
(2) other agreements or arrangements designed to protect the
Person against fluctuations in currency exchange or interest
rates.
"Indebtedness" means with respect to any Person, without duplication:
(1) any indebtedness of the Person, whether or not contingent, in
respect of borrowed money or evidenced by bonds, notes,
debentures or similar instruments or letters of credit, or
reimbursement agreements in respect of letters of credit or
bankers acceptances or representing Capital Lease Obligations
or the balance deferred and unpaid of the purchase price of
any property or services or representing any Hedging
Obligations, except any balance that constitutes an accrued
expense or trade payable, if and to the extent any of the
foregoing indebtedness, other than letters of credit,
reimbursement agreements in respect of letters of credit and
Hedging Obligations, would appear as a liability upon a
balance sheet of the Person prepared in accordance with GAAP;
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(2) all indebtedness of others secured by a Lien on any asset of
the Person, whether or not the indebtedness is assumed by the
Person; and
(3) to the extent not otherwise included, the Guarantee by the
Person of any Indebtedness of any other Person.
"Investments" means, with respect to any Person, all investments by the
Person in other Persons, including Affiliates, in the forms of:
(a) direct or indirect loans, including guarantees of or the
furnishing of letters of credit as security for Indebtedness
or other obligations but excluding Remote Guarantees;
(b) advances or capital contributions, excluding:
(1) salary and bonus advances, and commission, travel and
similar advances, to officers and employees made in
the ordinary course of business consistent with past
practice, and
(2) amounts payable by shareholders of Sbarro pursuant to
the provisions of the Tax Payment Agreement;
(c) purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities; and
(d) payments pursuant to guarantees of Indebtedness or other
obligations, including payments pursuant to Remote Guarantees,
together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with
GAAP, excluding, however, trade accounts receivable and bank
deposits made in the ordinary course of business consistent
with past practice.
The amount of any Investment by any Person that constitutes a guarantee
of or the furnishing of a letter of credit as security for Indebtedness or other
obligations shall be deemed to be:
(a) if the Investment is a guarantee of Indebtedness, the maximum
principal amount of Indebtedness that may be guaranteed under
the guarantee;
(b) if the Investment is the furnishing of a letter of credit, the
maximum reimbursement obligation in respect of the letter of
credit;
(c) if such Investment is a guarantee of a lease, the lesser of:
(A) the sum of:
(i) the total amount of fixed rent provided for
in that lease during the term thereof,
excluding escalations resulting from a rise
in the
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consumer price index or similar index and
excluding amounts required to be paid for
insurance, taxes, gas, electricity, common
area charges and other similar charges; and
(ii) the product of:
(x) Sbarro's estimate, as determined in
good faith by the board of directors
whose resolution with respect to the
determination shall be delivered to
the trustee, of the amounts,
exclusive of fixed rent, that will
be payable under the lease in
respect of the first year of the
term of the lease, and
(y) the number of years of the term of
the lease, and
(B) the maximum liability of the Person under the
guarantee, as determined in good faith by the board
of directors of Sbarro whose resolution with respect
to the determination shall be delivered to the
trustee; and
(d) if the Investment is a guarantee of obligations other than
Indebtedness or a lease, the maximum liability of the Person
under the guarantee.
If an Investment by a Person consists of the guarantee of a lease and
the amount of the Investment is determined under:
(x) subclause (A) of clause (c) of the preceding
sentence, the Investment shall be deemed to be
amortized on a straight line basis over the term of
the lease (or the remaining term of the lease if the
Investment is made or deemed to have been made after
the commencement of the term of the lease), and
(y) under subclause (B) of clause (c) of the preceding
sentence, the Investment shall be deemed to be
amortized as and to the extent that the maximum
liability of the Person under the guarantee, as
determined in good faith by the board of directors of
Sbarro, whose resolution with respect thereto shall
be delivered to the trustee, is reduced.
Any unamortized portion of an Investment by a Person that consists of a
guarantee of a lease shall be deemed to be amortized on the date, if any, as the
Person has no further liability under the guarantee. If an Investment by a
Person consists of the guarantee of a lease and the fixed rent under the lease
is increased or the term of the lease is extended:
(a) the Person shall be deemed to have made a new Investment on
the date on which the action which increased the fixed rent or
extended the term occurred, and computed as if the term of the
lease commenced as of the date, and
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(b) the unamortized portion immediately prior to the date of the
Person's original Investment by reason of the guarantee shall
be deemed to be amortized on that date.
If Sbarro or any Restricted Subsidiary of Sbarro sells or otherwise
disposes of any Equity Interests of any direct or indirect Wholly Owned
Restricted Subsidiary of Sbarro in a manner that, after giving effect to any
sale or disposition, the Person is no longer a Wholly Owned Restricted
Subsidiary of Sbarro, Sbarro shall be deemed to have made an Investment on the
date of any sale or disposition equal to sum of:
(a) the fair market value of the Equity Interests of the
Restricted Subsidiary not sold or disposed of in an amount
determined as provided in the fourth from last paragraph of
the covenant described under the caption "Restricted
Payments," and
(b) the amount of the Investments by Sbarro and its Restricted
Subsidiaries constituting a guarantee of, or the furnishing of
a letter of credit as security for, Indebtedness or other
obligations of such Restricted Subsidiary.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of the asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional, sale or other title retention agreement, any lease in
the nature of a conditional sale or other title retention agreement, and any
option or other agreement to sell or give a Lien.
"Make-Whole Amount" means, with respect to any note, an amount equal to
the excess, if any, of:
(a) the present value of the remaining principal, premium and
interest payments that would be payable with respect to the
note if the note were redeemed on September 15, 2004, computed
using a discount rate equal to the Treasury Rate plus 50 basis
points, over
(b) the outstanding principal amount of the note.
"Make-Whole Average Life" means, with respect to any date of redemption
of notes, the number of years, calculated to the nearest one-twelfth, from the
redemption date to September 15, 2004.
"Make-Whole Price" means, with respect to any note, the greater of:
(a) the sum of the principal amount of and Make-Whole Amount with
respect to the note, and
(b) the redemption price of the note on September 15, 2004.
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"Merger" means the merger of Sbarro Merger LLC with and into Sbarro
which occurred on September 28, 1999 under the Amended and Restated Agreement
and Plan of Merger, dated as of January 19, 1999, among Sbarro, Sbarro Merger
LLC and Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited
Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not
individually but as trustees under the Trust Agreement dated April 28, 1984 for
the benefit of Carmela Sbarro and her descendants.
"Net Income" means, with respect to any Person, the net income (loss)
of the Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however:
(1) any gain, but not loss, together with any related provision
for taxes on the gain, but not loss, realized in connection
with:
(a) any Asset Sale, including, without limitation,
dispositions pursuant to sale and leaseback
transactions; or
(b) the disposition of any securities by the Person or
any of its Subsidiaries or the extinguishment of any
Indebtedness of the Person or any of its
Subsidiaries;
(2) any extraordinary gain or loss and any nonrecurring gain, but
not loss, together with any related provision for taxes on the
extraordinary gain or loss or nonrecurring gain, but not loss.
"Net Proceeds" means the aggregate cash proceeds received by Sbarro or
any of its Restricted Subsidiaries in respect of any Asset Sale, including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale but only as and when received,
net of:
(1) the direct costs relating to the Asset Sale, including,
without limitation, legal, accounting and investment banking
fees, and sales commissions, and any relocation expenses
incurred as a result of the Asset Sale,
(2) taxes paid or payable as a result of the Asset Sale, after
taking into account any available tax credits or deductions
and any tax sharing arrangements;
(3) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that
were the subject of the Asset Sale; and
(4) any reserve for adjustment in respect of the sale price of the
asset or assets established in accordance with GAAP.
"Obligations" means any principal, interest, including post-petition
interest, penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
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"Permitted Holder" means Mario Sbarro, Anthony Sbarro, Joseph Sbarro,
their respective spouses and lineal descendants, any spouse of any such lineal
descendant who is a full time employee of Sbarro or any of its Subsidiaries, any
trust for the benefit of one or more of those Persons, any Person in which one
or more of those Persons holds 80% or more of the Voting Stock measured by
voting power rather than number of shares, and the trust created under the Trust
Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her
descendants.
"Permitted Investments" means
(1) any Investment in Sbarro or in a Wholly Owned Restricted
Subsidiary of Sbarro;
(2) any Investment in Cash Equivalents;
(3) any Investment by Sbarro or any Restricted Subsidiary of
Sbarro in a Person, if as a result of the Investment (a) the
Person becomes a Wholly Owned Restricted Subsidiary of Sbarro
and a Guarantor or (b) the Person is merged, consolidated or
amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into,
Sbarro or a Wholly Owned Restricted Subsidiary of Sbarro;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and
in compliance with the covenant described above under the
subheading on "Repurchase at the Option of Holders -- Asset
Sales";
(5) any acquisition of assets received solely in exchange for the
issuance of Equity Interests (other than Disqualified Stock)
of Sbarro;
(6) Investments received in connection with the settlement of any
ordinary course obligations owed to Sbarro or any of its
Restricted Subsidiaries; and
(7) other Investments, including Investments in the form of
guarantees of or providing letters of credit as security for
Indebtedness or other obligations but excluding Committed
Restricted Investments, in businesses reasonably similar to
the business engaged in by Sbarro and its Restricted
Subsidiaries on September 28, 1999 or in businesses reasonably
complementary, related or incidental to a business which would
be excluded as a Committed Restricted Investment, as
determined in good faith by the board of directors of Sbarro
if, after giving effect to the Investment, the aggregate
amount of Unrestricted Investments Outstanding does not exceed
$20.0 million.
"Permitted Liens" means
(1) Liens in favor of Sbarro or any of its Restricted
Subsidiaries;
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(2) Liens securing Obligations incurred pursuant to clause (1) of
the second paragraph of the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock"; provided, that
the outstanding principal amount of Indebtedness secured by
Liens, other than Liens on the real property and related
personal property owned by Sbarro and/or its Restricted
Subsidiaries located at 401 Broadhollow Road, Melville, New
York, permitted by this clause (2) shall not at any time
exceed $50.0 million;
(3) Liens on property or Equity Interests of a Person existing at
the time the Person is merged into or consolidated with Sbarro
or any Restricted Subsidiary of Sbarro; provided that the
Liens were in existence prior to the contemplation of the
merger or consolidation and do not extend to any assets or
Equity Interests other than those of the Person merged into or
consolidated with Sbarro;
(4) Liens on property existing at the time of acquisition of the
property by Sbarro or any Restricted Subsidiary of Sbarro;
provided that the Liens were in existence prior to the
contemplation of the acquisition;
(5) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations
of a like nature incurred in the ordinary course of business;
(6) Liens existing on September 28, 1999;
(7) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and
diligently concluded; provided that any reserve or other
appropriate provision as shall be required in conformity with
GAAP shall have been made therefor;
(8) Liens securing the notes or any Guarantee of the notes;
(9) Liens securing Permitted Refinancing Indebtedness to the
extent that the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded was permitted to be
secured by a Lien; provided that the Liens do not extend to
any assets other than those that secured the Indebtedness
being extended, refinanced, renewed, replaced, defeased or
refunded;
(10) Liens securing Indebtedness, including Capital Lease
Obligations, incurred pursuant to clause (4) of the second
paragraph of the covenant entitled "Incurrence of Indebtedness
and Issuance of Preferred Stock"; provided that the Liens
cover only assets acquired with the proceeds of that
Indebtedness; and
(11) Liens incurred in the ordinary course of business of Sbarro or
any Restricted Subsidiary of Sbarro with respect to
obligations that do not exceed $2.0 million at any one time
outstanding and that:
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(a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit, other
than trade credit in the ordinary course of business;
and
(b) do not in the aggregate materially detract from the
value of the property or materially impair the use of
the property in the operation of business by Sbarro
or the Restricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of Sbarro
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund, other Indebtedness of Sbarro or any of its Restricted Subsidiaries,
other than Hedging Obligations and other than Indebtedness permitted to be
incurred pursuant to clause (4) , clause (7) or clause (9) of the second
paragraph under "Incurrence of Indebtedness and Issuance of Preferred Stock";
provided that:
(1) the principal amount (or accreted value, if applicable) of the
Permitted Refinancing Indebtedness does not exceed the
principal amount of, or accreted value, if applicable, plus
premium and accrued interest on, the Indebtedness extended,
refinanced, renewed, replaced, defeased or refunded, plus the
amount of reasonable expenses incurred in connection with the
extension, refinancing, renewal, replacement, defeasance or
refunding;
(2) the Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of
payment to the notes or any Guarantee of the notes, the
Permitted Refinancing Indebtedness is subordinated in right of
payment to the notes or the Guarantee on terms at least as
favorable to the holders of notes as those contained in the
documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) the Permitted Refinancing Indebtedness is incurred either by
Sbarro or by the Restricted Subsidiary that is an obligor on
the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Person" means an individual, limited or general partnership,
corporation, limited liability company, association, unincorporated
organization, trust, joint stock company, joint venture or other entity, or a
government or any agency or political subdivision of a government.
"Preferred Stock" of any Person means Capital Stock of the Person of
any class or classes, however designated, that ranks prior, as to the payment of
dividends or as to the
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distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of the Person, to shares of Capital Stock of any other
class of the Person.
"Public Equity Offering" means a bona fide underwritten sale to the
public of common stock of Sbarro pursuant to a registration statement that is
declared effective by the SEC, other than on Form S-8 or any other form relating
to securities issuable under any benefit plan of Sbarro.
"Remote Guarantee" means a guarantee of a tenant's obligations under a
lease of real property which does not apply to obligations accruing in respect
of periods subsequent to the date on which the tenant surrenders possession of
the leased premises to the landlord, whether or not the surrender is authorized
by the terms of the lease, does not apply to any breach arising from any
surrender and does not apply to any obligations that may have been accelerated
under the provisions of the lease.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"S Corporation" means a corporation that is treated as an "S
corporation" for federal income tax purposes.
"Senior Debt" means Indebtedness of Sbarro or any of its Restricted
Subsidiaries that is not subordinated in right of payment to any other
Indebtedness of Sbarro or the Restricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X
promulgated pursuant to the Securities Act, as that Regulation was in effect on
September 28, 1999.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the original documentation
governing the Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any interest or principal prior to the date
originally scheduled for the payment of interest or principal.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital
Stock entitled, without regard to the occurrence of any
contingency, to vote in the election of at least a majority of
the directors, managers or trustees of that entity is at the
time owned or controlled, directly or indirectly, by the
Person or one or more of the other Subsidiaries of the Person
(or a combination thereof); and
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(2) any partnership:
(a) the sole general partner or the managing general
partner of which is the Person or a Subsidiary of the
Person or
(b) the only general partners of which are the Person or
one or more Subsidiaries of the Person (or any
combination of those persons).
"Tax Distributions" means amounts paid or distributed to or for the
benefit of shareholders of Sbarro, net of amounts repaid by those shareholders,
pursuant to and in accordance with the Tax Payment Agreement as in effect on
September 28, 1999.
"Tax Payment Agreement" means the Tax Payment Agreement, dated as of
September 28, 1999, among Sbarro, Mario Sbarro, Joseph Sbarro, Joseph Sbarro
(1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin
Montgomery, not individually but as trustees under the Trust Agreement dated
April 28, 1984 for the benefit of Carmela Sbarro and her descendants, and any
future shareholders of Sbarro that may become parties to the Tax Payment
Agreement. See "Certain Relationships and Related Transactions" for a brief
description of the Tax Payment Agreement.
"Treasury Rate" means, at any time of computation, the yield to
maturity at that time of United States Treasury securities with a constant
maturity most nearly equal to the Make-Whole Average Life, with the yield to
maturity being as compiled by and published in the most recent Federal Reserve
Statistical Release H.15(519), which has become publicly available at least two
business days prior to the date of the redemption notice or, if such Statistical
Release is no longer published, any publicly available source of similar market
data); provided, however, that if the Make-Whole Average Life is not equal to
the constant maturity of the United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation, calculated to the nearest one-twelfth of a year, from the weekly
average yields of United States Treasury securities for which the yields are
given, except that if the Make-Whole Average Life is less than one year, the
weekly average yield on actually traded United States Treasury securities
adjusted to a constant maturity of one year shall be used.
"Unrestricted Investments Outstanding" means, at any time of
determination, in respect of any Permitted Investments made in any Person
pursuant to clause (7) of the definition of the term Permitted Investments, and
any Investments other than Committed Restricted Investments, made in the Person
by Sbarro or any of its Restricted Subsidiaries during the period from August
30, 1999 to September 28, 1999, the difference between:
(1) the sum of all Permitted Investments previously made by Sbarro
or any Restricted Subsidiary in the Person on or after
September 28, 1999 under clause (7) of the definition of
Permitted Investments plus the sum of all Investments, other
than Committed Restricted Investments, made by Sbarro or any
Restricted Subsidiary in the Person during the period from
August 30, 1999 to September 28, 1999, minus
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(2) the sum of, without duplication:
(a) the amount of all dividends and distributions paid in
cash by the Person after August 30, 1999 to Sbarro or
a Restricted Subsidiary of Sbarro. to the extent that
Sbarro does not elect to include the amount of those
dividends and distributions in the computation of
Consolidated Net Income pursuant to subclauses (x)
and (y) of clause (1) of the definition of
Consolidated Net Income at the time of determination;
(b) all repayments after August 30, 1999 by the Person of
the principal amount of loans or advances that
constitute Permitted Investments prior to the
repayment made by Sbarro or any of its Restricted
Subsidiaries in the Person pursuant to clause (7) of
the definition of Permitted Investments or that
constitute loans or advances, other than Committed
Restricted Investments, made by Sbarro or any of its
Restricted Subsidiaries in the Person during the
period from August 30, 1999 to September 28, 1999;
(c) any other reduction made in cash of the Investments
by Sbarro or any of its Restricted Subsidiaries in
the Person;
(d) if (x) any Permitted Investment made in the Person by
Sbarro or any of its Restricted Subsidiaries under
clause (7) of the definition of the term Permitted
Investments, or (y) if any Investment, other than
Committed Restricted Investments, made in the Person
by Sbarro or any of its Restricted Subsidiaries
during the period from August 30, 1999 to September
28, 1999, was in the form of a guarantee of
Indebtedness, the amount of any reduction in the
maximum principal amount of Indebtedness that may be
guaranteed under the guarantee;
(e) if (x) any Permitted Investment made in the Person by
Sbarro or any of its Restricted Subsidiaries under
clause (7) of the definition of the term Permitted
Investments, or (y) if any Investment, other than
Committed Restricted Investments, made in the Person
by Sbarro or any of its Restricted Subsidiaries
during the period from August 30, 1999 to September
28, 1999, was in the form of the furnishing of a
letter of credit as security for Indebtedness or
other obligations, the amount of any reduction in the
maximum reimbursement obligations in respect of the
letter or credit;
(f) if (x) any Permitted Investment made in the Person by
Sbarro or any of its Restricted Subsidiaries under
clause (7) of the definition of the term Permitted
Investments, or (y) if any Investment, other than
Committed Restricted Investments, made in the Person
by Sbarro or any of its Restricted Subsidiaries
during the period from August 30, 1999 to September
28, 1999, was in the form of the guarantee of a
lease, the
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amount of amortization (as provided in the definition
of "Investments") of the Investment; and
(g) if (x) any Permitted Investment made in the Person by
Sbarro or (y) any of its Restricted Subsidiaries
under clause (7) of the definition of the term
Permitted Investments, or if any Investment, other
than Committed Restricted Investments, made in the
Person by Sbarro or any of its Restricted
Subsidiaries during the period from August 30, 1999
to September 28, 1999, was in the form of a guarantee
of obligations other than Indebtedness or a lease,
the amount of any reduction in the maximum liability
under the guarantee;
provided that (x) the amount of Unrestricted
Investments Outstanding in respect of any Person in
respect of the Investments shall at no time be a
negative amount and (y) the amount of Unrestricted
Investments Outstanding in respect of any Permitted
Investments previously made in any Person under
clause (7) of the definition of the term Permitted
Investments and any Investments, other than Committed
Restricted Investments, made in the Person by Sbarro
or any of its Restricted Subsidiaries during the
period from August 30, 1999 to September 28, 1999,
shall be zero if, at the time of determination, the
Person is a Wholly-Owned Restricted Subsidiary of
Sbarro.
"Unrestricted Subsidiary" means each of the Subsidiaries of Sbarro
listed in the third paragraph under "Brief Description of the Notes and the
Guarantees" and any other Subsidiary that, subject to the provisions described
in the second to last paragraph under "-- Restricted Payments," is designated by
the board of directors as an Unrestricted Subsidiary pursuant to a board
Resolution, but only to the extent that the Subsidiary:
(a) is not party to any agreement, contract, arrangement or
understanding with Sbarro or any Restricted Subsidiary of
Sbarro unless the terms of the agreement, contract,
arrangement or understanding comply with the covenant set
forth under "Affiliate Transactions";
(b) is a Person with respect to which neither Sbarro nor any of
its Restricted Subsidiaries has any direct or indirect
obligation:
(1) to subscribe for additional Equity Interests; or
(2) to maintain or preserve the Person's financial
condition or to cause the Person to achieve any
specified levels of operating results; and
(c) is not a guarantor of, and is not otherwise directly or
indirectly providing credit support for, any Indebtedness of
Sbarro or any of its Restricted Subsidiaries.
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Any designation by the board of directors of an Unrestricted Subsidiary
shall be evidenced to the trustee by filing with the trustee a certified copy of
the board Resolution giving effect to the designation and an officers'
certificate certifying that the designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"-- Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the indenture and any
Indebtedness of the Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of Sbarro as of that date (and, if the Indebtedness is not permitted
to be incurred as of that date under the covenant described under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock," Sbarro shall be
in default of such covenant).
The board of directors of Sbarro may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that the
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of Sbarro of any outstanding Indebtedness of the Unrestricted
Subsidiary and the designation shall only be permitted if:
(1) the Indebtedness is permitted under the covenant described
under the caption "-- Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if the
designation had occurred at the beginning of the four-quarter
reference period; and
(2) no Default or Event of Default would be in existence following
the designation.
"Voting Stock" of any Person as of any date means the Capital Stock of
the Person that is at the time entitled to vote in the election of at least a
majority of the directors, managers, trustees or other governing body of the
Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying:
(a) the amount of each then remaining installment,
sinking fund, serial maturity or other required
payments of principal, including payment at final
maturity, in respect of the Indebtedness, by
(b) the number of years, calculated to the nearest
one-twelfth, that will elapse between the applicable
date and the making of the payment, by
(2) the then outstanding principal amount of the Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of the Person all of the outstanding Capital Stock and other Equity
Interests or other ownership interests, including convertible debt securities,
of which, other than directors' qualifying shares,
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shall at the time be owned by the Person and/or by one or more Wholly Owned
Restricted Subsidiaries of the Person.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives registered notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the registered notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of registered notes received in
exchange for original notes acquired as a result of market-making activities or
other trading activities. Any such broker-dealer who intends to use this
prospectus in connection with the resale of registered notes received in
exchange for original notes pursuant to the Exchange Offer must notify, or cause
us to be notified, on or prior to the expiration date of the exchange offer,
that it is a broker-dealer required to use this prospectus for resale of
registered notes. Although the registration rights agreement that we entered
into when we issued the original notes only requires us to deliver a prospectus
to broker-dealers for a maximum of 30 days from the date of this prospectus, we
will make this prospectus, as it may be amended or supplemented, available to
any dealer for use in connection with any resale of the registered notes for 90
days after the date of this prospectus.
We will not receive any proceeds from the issuance of the registered
notes or from any sale of registered notes by broker-dealers. registered notes
received by broker-dealers for their own account under the exchange offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
registered notes or a combination of those methods of resale, at market prices
prevailing at the time of resale, at prices related to prevailing market prices
or negotiated prices. Any resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from the broker-dealer and/or the purchasers of any
registered notes. Any broker-dealer that resells registered notes that were
received by it for its own account under the exchange offer and any
broker-dealer that participates in a distribution of registered notes may be
deemed to be an "underwriter" within the meaning of the Securities Act, and any
profit on any resale of registered notes and any commissions or concessions
received may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that, by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
We will promptly furnish a reasonable number of additional copies of
this prospectus, and any amendment or supplement to this prospectus, to any
broker-dealer that requests this document in the letter of transmittal for a
period ending on the earlier of 90 days from the date of the prospectus and the
date on which a broker-dealer is no longer required to deliver a prospectus in
connection with market making or other trading activities. We have agreed to pay
all expenses of the exchange offer other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the registered notes,
including any broker-dealers, against specified liabilities, including
liabilities under the Securities Act. We note, however, that, in the opinion of
the SEC, indemnification against liabilities arising under federal securities
laws is against public policy and may be unenforceable.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a discussion of certain United States federal income
tax consequences of the acquisition, ownership and disposition of the notes. We
are not receiving a legal opinion in respect to the U.S. federal income tax
consequences of the acquisition, ownership and disposition of the notes. This
summary applies only to notes held as capital assets within the meaning of
Section 1221 of the Internal Revenue Code. It does not discuss all of the tax
consequences that may be relevant to a holder of notes in light of its
particular circumstances or to holders of notes subject to special rules, such
as holders of notes that are tax-exempt organizations, dealers in securities or
foreign currencies, financial institutions, life insurance companies, or
regulated investment companies, holders of notes whose functional currency is
not the U.S. dollar, persons that hold the notes as part of a synthetic
security, conversion transaction, or certain "straddle," hedging transactions or
other risk reduction or constructive sale transactions, non-U.S. holders that
are subject to net-basis U.S. federal income tax on income or gain derived from
the notes because such income or gain is effectively connected with the conduct
of a U.S. trade or business, or expatriates of the United States, including
former citizens and residents of the United States. In addition, it does not
consider state, local or foreign taxes, the effect of tax treaties or other U.S.
federal taxes, including the alternative minimum tax.
The U.S. federal income tax considerations set forth below are based
upon the Code and related regulations, rulings and judicial decisions as of the
date of this prospectus. Those authorities may be repealed, revoked, modified or
subject to different interpretation, possibly with retroactive effect, so as to
result in U.S. federal income tax consequences different from those presented
below. No ruling has been requested from the Internal Revenue Service. The IRS
or a court may disagree with this discussion.
For purposes of this discussion, a "U.S. holder" is a holder of notes
that is an individual who is a citizen or resident of the United States, a
corporation or a partnership that is organized in or under the laws of the
United States or any state thereof, an estate the income of which is includible
in gross income for U.S. tax purposes regardless of its source, or a trust, the
administration of which is subject to the primary supervision of a court within
the United States and as to which one or more United States persons have the
authority to control all substantial decisions of the trust.
U.S. HOLDERS
INTEREST. Interest on a note will be taxable to a U.S. holder as
ordinary interest income in accordance with the U.S. holder's method of
accounting for U.S. federal income tax purposes. Although the notes were issued
at a discount, the notes will not be treated as issued with original issue
discount for federal income tax purposes since the discount from the principal
amount of the notes was de minimis for those purposes.
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ADDITIONAL AMOUNTS. As more fully described in the registration rights
agreement, in the event of a registration default with respect to the notes, we
will be required to pay additional amounts to the holders of the notes as
liquidated damages. Since we believe that the likelihood of the imposition of
liquidated damages is remote, any liquidated damages should be included as
ordinary income to a U.S. holder in accordance with its regular method of
accounting. Similarly, we intend to take the position that the likelihood of a
redemption or a repurchase upon a "change of control" is remote. We believe that
the likelihood of optional redemption giving rise to original issue discount is
remote. Accordingly, any premium with respect thereto should be included in the
U.S. holder's income as part of the redemption or repurchase in accordance with
its regular method of accounting. In this regard, our determination is binding
on a U.S. holder unless the U.S. holder explicitly discloses on its timely filed
U.S. federal income tax return for the year in which the note was acquired that
it is taking a position contrary to us.
MARKET DISCOUNT. If a U.S. holder purchases a note for an amount that
is less than its principal amount, the amount of the difference will be treated
as "market discount" for U.S. federal income tax purposes, unless the difference
is less than a specified de minimus amount. Under the market discount rules, a
U.S. holder will be required to treat any full or partial principal payment on,
or any gain on the sale, exchange, retirement or other disposition of, a note as
ordinary income to the extent of the market discount that has not previously
been included in income and is treated as having accrued on the note at the time
of the payment or disposition. In addition, the U.S. holder may be required to
defer, until the maturity of the note or its earlier disposition in a taxable
transaction, the deduction of all or a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry the note. Any market
discount will be considered to accrue ratably during the period from the date of
acquisition to the maturity date of the note, unless the U.S. holder elects to
accrue on a constant interest method. A U.S. holder may elect to include market
discount in income currently as it accrues, on either a ratable or constant
interest method, in which case the rule described above regarding deferral of
interest deductions will not apply. This election to include market discount in
income currently, once made, applies to all market discount obligations acquired
on or after the first taxable year to which the election applies and may not be
revoked without the consent of the IRS.
AMORTIZABLE BOND PREMIUM. A U.S. holder that purchases a note for an
amount in excess of the principal amount will be considered to have purchased
the note at a "premium." A U.S. holder generally may elect to amortize the
premium over the remaining term of the note on a constant yield method. However,
if the note is purchased at a time when the note may be optionally redeemed for
an amount that is in excess of its principal amount, special rules would apply
that could result in a deferral of the amortization of bond premium until later
in the term of the note. The amount amortized in any year will be treated as a
reduction of the U.S. holder's interest income from the note. Bond premium on a
note held by a U.S. holder that does not make this election will decrease the
gain or increase the loss otherwise recognized on disposition of the note. The
election to amortize premium on a constant yield method, once made, applies to
all debt obligations held or subsequently acquired by the electing U.S. holder
on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the IRS.
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SALE, EXCHANGE OR REDEMPTION OF NOTES. A U.S. holder will recognize
gain or loss on the sale, exchange, redemption, retirement or other taxable
disposition of a note in an amount equal to the difference, if any, between the
U.S. holder's adjusted tax basis in the note and the amount received for the
note, other than amounts attributable to accrued and unpaid interest on the
notes, which will be treated as interest for U.S. federal income tax purposes.
The gain or loss should be capital gain or loss, which will be long-term if the
note was held for more than one year as of the date of disposition. A U.S.
holder's basis in a note generally will be the amount paid for the note,
increased by any market discount previously included in income by the U.S.
holder and decreased by any principal payments received by the U.S. holder and
by any amortizable bond premium.
Prospective investors should be aware that the resale of a note may be
affected by the "market discount" rules of the Code discussed above, which may
recharacterize a portion of the subsequent U.S. holder's gain upon the U.S.
holder's sale or other taxable disposition of the note as ordinary income.
EXCHANGE OF ORIGINAL NOTES FOR REGISTERED NOTES. An exchange of an
original note for a registered note will not be treated as an event in which
gain or loss, if any, is realized for U.S. federal income tax purposes because
the terms of the registered notes do not differ materially in kind or extent
from the terms of the original notes. As a result, a U.S. holder should not
recognize any gain or loss for U.S. federal income tax purposes if the U.S.
holder participates in an exchange offer, and the registered note received in an
exchange offer should be treated as a continuation of the original note
surrendered in the exchange offer. The U.S. holder will have the same basis and
holding period in its registered note as the U.S. holder had in the original
note.
BACKUP WITHHOLDING AND INFORMATION REPORTING. A U.S. holder of a note
may be subject to information reporting and possible backup withholding. If
applicable, backup withholding would apply at a rate of 31% with respect to
interest on, or the proceeds of a sale, exchange, redemption, retirement or
other disposition of, the note, unless the U.S. holder:
(1) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or
(2) provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise
complies with applicable backup withholding rules.
Backup withholding is not an additional tax. Any amount so withheld may
be allowed as a refund or credited against the U.S. holder's U.S. federal income
tax liability provided the required information is furnished to the IRS. A U.S.
holder who fails to furnish a correct taxpayer identification number may also be
subject to penalties imposed by the IRS. We will report annually to the IRS and
the U.S. holder the amount of any "reportable payment" under the note and any
tax withheld therefrom.
138
<PAGE>
NON-U.S. HOLDERS
PORTFOLIO INTEREST EXCEPTION. The payment of interest on a note to a
non-U.S. holder generally will not be subject to U.S. federal income tax, or to
withholding of such tax, if either:
(1) the beneficial owner of the note certifies to us or our agent,
under penalties of perjury, that it is not a U.S. Holder and
provides its name and address on U.S. Treasury Form W-8 or
Form W-8BEN or on a suitable substitute form or
(2) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary
course of its trade or business and holds the note certifies
under penalties of perjury that a Form W-8 or Form W-8BEN or
suitable substitute form has been received from the beneficial
owner by it or by a financial institution between it and the
beneficial owner and furnishes the payer with a copy thereof.
Recently adopted treasury regulations will change the methods for
satisfying the certification requirement. The final withholding regulations also
will require, in the case of notes held by a foreign partnership, that:
(1) this certification generally be provided by the partners
rather than by the foreign partnership and
(2) the partnership provide certain information, including a
United States employer identification number.
A look through rule would apply in the case of tiered partnerships. The
final withholding regulations will become effective for payments made after
December 31, 2000, subject to transition rules.
SALE, EXCHANGE OR REDEMPTION OF NOTES. A non-U.S. holder generally will
not be subject to U.S. federal income tax on any gain realized in connection
with the sale, exchange redemption, retirement or other disposition of a note,
unless the non-U.S. holder is an individual who is present in the United States
for 183 or more days in the taxable year of the disposition and certain other
requirements are met. Prospective holders should be aware that the resale of a
note to a U.S. holder could be affected by the "market discount" provisions
under the Code discussed above.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Interest payments on the
notes made by us or our paying agent to certain non-U.S. holders generally will
not be subject to information reporting or "backup withholding" if the
certification described under "-- Non-U.S. Holders -- Portfolio Interest
Exception" above is received.
Payment of proceeds from a sale of a note to or through the U.S. office
of a broker is subject to information reporting and backup withholding unless
the non-U.S. holder certifies as to its non-U.S. status or otherwise establishes
an exemption from information reporting and
139
<PAGE>
backup withholding. Payment outside the United States of the proceeds of the
sale of a note to or through a foreign office of a "broker," as defined in
applicable U.S. treasury regulations should not be subject to information
reporting or backup withholding, except that if the broker is a U.S. person, a
controlled foreign corporation for U.S. federal income tax purposes or a foreign
person 50% or more of whose gross income is from a U.S. trade or business,
information reporting should apply to such payment unless the broker has
documentary evidence in its records that the beneficial owner is not a U.S.
holder and certain other conditions are met or the beneficial owner otherwise
establishes an exemption. Any amount so withheld may be allowed as a refund or
credited against the non-U.S. holder's U.S. federal income tax provided the
required information is furnished to the IRS.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE
APPLICABLE TO A PARTICULAR HOLDER'S SITUATION. PERSONS CONSIDERING A PURCHASE OF
THE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF THE NOTES, INCLUDING THE TAX
CONSEQUENCES UNDER U.S., STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS AND
THE POSSIBLE EFFECTS OF CHANGES, POSSIBLY INCLUDING RETROACTIVE CHANGES, IN U.S.
FEDERAL AND OTHER TAX LAWS.
140
<PAGE>
LEGAL MATTERS
Parker Chapin LLP, New York, New York will pass upon the validity of
the registered notes offered by us and the registered guarantees offered by our
restricted subsidiaries in connection with the exchange offer. Certain matters
relating to Texas law have been passed upon by Jenkens & Gilchrist, a
Professional Corporation, Houston, Texas. Certain matters relating to New
Brunswick, Canada law have been passed upon by Stewart McKelvey Stirling Scales,
Saint John, New Brunswick, Canada. Certain matters relating to Virginia and
Pennsylvania law have been passed upon by Buchanan Ingersoll Professional
Corporation, Philadelphia, Pennsylvania.
INDEPENDENT PUBLIC ACCOUNTANTS
The historical consolidated financial statements of Sbarro, Inc. and
its subsidiaries as of January 2, 2000 and January 3, 1999 and for each of the
three fiscal years in the period ended January 2, 2000 included in this
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a registration statement on Form
S-4 (Registration No. 333-90817) that we filed with the SEC under the Securities
Act of 1933. This prospectus does not contain all of the information set forth
in the registration statement and the exhibits to the registration statement,
certain parts of which are omitted in accordance with the rules and regulations
of the SEC. For further information with respect to our company and the
registered notes offered by this prospectus, please refer to the registration
statement. Any statements made in this prospectus concerning the provisions of
certain documents are not necessarily complete and, in each instance, we urge
you to refer to the copy of the documents filed as an exhibit to the
registration statement otherwise filed with the SEC. All of our statements
concerning those documents are qualified in their entirety by such reference.
We will file and have in the past filed annual, quarterly and other
reports and other information with the SEC. You may read and copy any document
we file at SEC's public reference facility at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of those materials can also be obtained by mail at prescribed
rates from the Public Reference Section of the SEC, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The SEC maintains a web site
(http://www.sec.gov) that contains reports and other information electronically
filed through the SEC's Electronic Data Gathering, Analysis and Retrieval
system, which is called "EDGAR."
141
<PAGE>
We have agreed that, whether or not required by the rules and
regulations of the SEC, so long as any notes are outstanding, we will furnish to
the holders of the Notes, and file with the SEC, unless the SEC will not accept
the filing:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC under the
Securities Exchange Act of 1934 on Forms 10-Q and 10-K if we
were required to file those forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," in each case that describes our financial
condition and results of operations and a report by our
independent public accountants with respect to our annual
financial statements and related notes only, and
(2) all current reports that would be required to be filed with
the SEC on Form 8-K if we were required to file those reports.
In addition, for so long as any notes remain outstanding, we will make
available to any prospective purchaser of the notes, or any beneficial owner of
the notes in connection with any sale of notes, the information required by Rule
144A(d)(4) under the Securities Act.
142
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
YEAR-END FINANCIAL STATEMENTS (AUDITED)
<S> <C>
Report of Independent Public Accountants............................................................. F-2
Consolidated Balance Sheets at January 2, 2000 and January 3, 1999................................... F-3
Consolidated Statements of Income for each of the fiscal years in the three-year
period ended January 2, 2000.................................................................... F-4
Consolidated Statements of Shareholders' Equity for each of the fiscal years in the three-year period
ended January 2, 2000........................................................................... F-5
Consolidated Statements of Cash Flows for each of the fiscal years in the three-year period ended
January 2, 2000................................................................................. F-6
Notes to Consolidated Financial Statements........................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sbarro, Inc.:
We have audited the accompanying consolidated balance sheets of Sbarro, Inc. (a
New York corporation) and subsidiaries as of January 2, 2000 and January 3,
1999, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three fiscal years in the period ended January 2,
2000. 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 auditing standards generally
accepted in the United States. 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 2, 2000 and January 3, 1999, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 2, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
New York, New York
March 13, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 2000 JANUARY 3, 1999
--------------- ---------------
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.................................... $33,514 $154,909
Restricted cash for untendered shares (Note 2)............... 298 --
Receivables, net of allowance for doubtful
accounts of $419 in 1999
Franchise................................................. 1,429 1,342
Other..................................................... 2,938 2,185
---------- ---------
4,367 3,527
Inventories.................................................. 3,686 3,122
Prepaid expenses............................................. 1,905 1,291
---------- ----------
Total current assets...................................... 43,770 162,849
Property and equipment, net (Note 4).............................. 137,232 138,126
Other assets:
Excess of purchase price over the cost
of net assets acquired, net of accumulated
amortization of $2,000 (Note 2)........................... 220,681 --
Deferred financing costs, net of accumulated
amortization of $277 (Note 7)............................. 9,553 --
Other assets, net............................................ 6,597 6,630
-------- --------
$417,833 $307,605
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 9,673 $ 11,559
Amounts due for untendered shares (Note 2).................. 298 --
Accrued expenses (Note 5)................................... 35,589 25,764
Income taxes payable (Note 6)............................... 754 4,146
---------- -----------
Total current liabilities................................ 46,314 41,469
Deferred income taxes (Note 6)................................... 9,929 9,219
Long term debt, net of original issue discount (Note 7).......... 251,310 --
Commitments and contingencies (Note 8)
Shareholders' equity (Notes 2 and 10):
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
7,064,328 shares at January 2, 2000 and
20,531,643 shares at January 3, 1999..................... 71 205
Additional paid-in capital.................................. 10 34,587
Retained earnings........................................... 110,199 222,125
-------- --------
110,280 256,917
-------- --------
$417,833 $307,605
======== ========
See notes to consolidated financial statements
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED
----------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
------------------ ------------------ ------------------
(52 WEEKS) (53 WEEKS) (52 WEEKS)
(IN THOUSANDS)
Revenues:
<S> <C> <C> <C>
Restaurant sales............................. $ 366,630 $ 361,534 $ 337,723
Franchise related income..................... 9,006 8,578 7,360
Interest income.............................. 3,828 5,120 4,352
---------------- --------------- ---------------
Total revenues............................. 379,464 375,232 349,435
--------------- ------------- -------------
Costs and expenses:
Cost of food and paper products.............. 73,986 76,572 69,469
Restaurant operating expenses:
Payroll and other employee benefits........ 97,174 93,367 84,910
Occupancy and other expenses............... 106,852 101,013 93,528
Depreciation and amortization................ 25,363 22,429 23,922
General and administrative................... 23,456 19,708 17,762
Provision for unit closings (Note 11)........ 1,013 2,515 3,300
Terminated transaction costs (Note 2)........ -- 986 --
Litigation settlement and related
costs (Note 8)............................. -- 3,544 --
Loss on land to be sold (Note 4)............. -- 1,075 --
Interest expense (Note 7).................... 7,948 -- --
Other income................................. (5,173) (2,680) (1,653)
---------------- -------------- ---------------
Total costs and expenses................... 330,619 318,529 291,238
-------------- ------------ --------------
Income before income taxes and
cumulative effect of change in method
of accounting for start-up costs............. 48,845 56,703 58,197
Income taxes (Note 6)............................ 19,322 21,547 22,115
---------------- ------------- ---------------
Income before cumulative effect
of accounting change......................... 29,523 35,156 36,082
Cumulative effect of change in method of
........accounting for start-up costs, net of
income taxes of $504 (Note 1)................ (822)
------------------ ---------------
-- --
Net income....................................... $ 29,523 $ 34,334 $ 36,082
=============== ============== ==============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NUMBER OF ADDITIONAL
SHARES OF PAID-IN
COMMON STOCK AMOUNT CAPITAL EARNINGSD TOTAL
------------ ------ ------- --------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at
<S> <C> <C> <C> <C> <C>
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
Exercise of stock options............. 17,337 -- 426 -- 426
Net income............................ -- -- -- 29,523 29,523
Shares repurchased and
retired in going private
transaction (Note 2)............... (13,484,652) (134) (35,003) -- (35,137)
Adjustment to original
cost basis of continuing
shareholders (Note 2).............. (141,449) (141,449)
------------------- --------- ------------ -------- --------
Balance at January 2, 2000............ 7,064,328 $71 $10 $110,199 $110,280
================== ======== =========== ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
(52 WEEKS) (53 WEEKS) (52 WEEKS)
-----------------------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $29,523 $34,334 $36,082
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................................ 25,740 22,429 23,922
Increase (decrease) in deferred income taxes................. 710 (2,078) (1,844)
Provision for unit closings.................................. 1,013 2,515 3,300
Loss on land to be sold...................................... -- 1,075 --
Changes in operating assets and liabilities:
Increase in receivables...................................... (839) (1,152) (510)
Increase in inventories...................................... (564) (160) (121)
(Increase) decrease in prepaid expenses...................... (615) 477 (359)
Increase in other assets..................................... (1,814) (817) (2,468)
Increase in accounts payable and accrued expenses............ 10,243 1,827 3,534
Decrease in income taxes payable............................. (1,392) (631) (510)
---------- --------- --------
Net cash provided by operating activities.................... 62,005 58,641 61,026
-------- -------- -------
INVESTING ACTIVITIES:
Proceeds from maturities of marketable securities............ -- 7,500 2,500
Purchases of property and equipment.......................... (25,099) (27,717) (28,556)
Proceeds from disposition of property and equipment.......... 55 52 34
--------- -------- --------
Net cash used in investing activities........................ (25,044) (20,165) (26,022)
--------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options...................... 426 2,144 1,225
Proceeds from long-term debt................................. 251,211 -- --
Cost of merger and related financing......................... (411,000) -- --
Accrued and previously paid merger costs..................... 1,007 -- --
Cash dividends paid.......................................... - (5,521) (21,237)
---------- ------ -------
Net cash used in financing activities........................ (158,356) (3,377) (20,012)
---------- ------ ------
(Decrease) increase in cash and cash equivalents............. (121,395) 35,099 14,992
Cash and cash equivalents at beginning of year............... 154,909 119,810 104,818
--------- --------- ---------
Cash and cash equivalents at end of year..................... $33,514 $154,909 $119,810
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The consolidated financial statements include the accounts of Sbarro,
Inc., its wholly-owned subsidiaries and the accounts of its joint
ventures (together, "we", "our", "us", or "Sbarro"). All intercompany
accounts and transactions have been eliminated.
The preparation of our financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that may affect the amounts reported in
the financial statements and accompanying notes. Our 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:
We classified our investments in marketable securities as "held to
maturity". These investments were stated at amortized cost, which
approximated market, and were comprised primarily of direct obligations
of the U.S. Government and its agencies. All previous investments in
marketable securities matured during fiscal 1998.
INVENTORIES:
Inventories, consisting primarily of food, beverages and paper
supplies, are stated at cost, which is determined by the first-in,
first-out method.
PROPERTY AND EQUIPMENT AND DEPRECIATION:
Property and equipment are stated at cost. Depreciation is provided for
by the straight-line method over the estimated useful lives of the
assets. Amortization of leasehold improvements is provided for by the
straight-line method over the estimated useful lives of the assets or
the lease term, whichever is shorter. One-half year of depreciation and
amortization is recorded in the year in which the restaurant commences
operations.
DEFERRED CHARGES:
We account 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 required companies to write off all such
F-7
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
costs, net of tax benefit, as a "cumulative effect of accounting
change" upon adoption and to expense all of those costs as
incurred in the future. In accordance with its early application
provisions, we implemented the SOP as of the beginning of our
1998 fiscal year which resulted in a charge of $1.2 million
before tax or $0.8 million after tax.
COMPREHENSIVE INCOME:
In the first quarter of 1998, we 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 our
net income or shareholders' equity. For the 1999, 1998 and 1997 fiscal
years, our operations did not give rise to items includible in
comprehensive income which were not already included in net income.
Therefore, our comprehensive income is the same as our net income for
all periods presented.
FRANCHISE RELATED INCOME:
Initial franchise fees are recorded as income as restaurants are opened
by the franchisee and we have performed substantially all services.
Development fees are recognized 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 were 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 paid to acquire the
stock (Note 10). All option plans were terminated upon the completion
of the going private transaction (Note 2).
INCOME TAXES:
We file a consolidated federal income tax return. Deferred income taxes
result primarily from differences between financial and tax reporting
of depreciation and amortization.
ACCOUNTING PERIOD:
Our fiscal year ends on the Sunday nearest to December 31. Our 1998
fiscal year ended January 3, 1999 and contained 53 weeks. All other
reported fiscal years contained 52 weeks.
F-8
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PER SHARE DATA:
The provisions of SFAS No. 128, "Earnings Per Share" became
effective for Sbarro'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. After the
going private transaction (Note 2), we are not subject to the
provisions of SFAS No. 128.
LONG-LIVED ASSETS:
Impairment losses are recorded on long-lived assets on a restaurant by
restaurant basis whenever impairment factors are determined to be
present, the undiscounted cash flows estimated to be generated by those
assets are less than the carrying value of such assets and events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS Statement No.
133 - an Amendment of SFAS Statement No. 133," issued in June
1999, SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. Presently, we do not use derivative instruments
and therefore we do not expect SFAS No. 133 to be applicable when
it is adopted in fiscal 2000.
RECLASSIFICATIONS:
Certain items in the fiscal 1998 and 1997 financial statements have
been reclassified to conform to the fiscal 1999 presentation.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
(IN THOUSANDS)
------------------------------------------------------
Cash paid for:
<S> <C> <C> <C>
Income taxes.............................. $20,054 $24,235 $24,297
======= ======= =======
Interest.................................. $ 30 $ -- $ --
======= ======== =======
</TABLE>
2. GOING PRIVATE TRANSACTION:
On September 28, 1999, members of the Sbarro family (who prior thereto
owned approximately 34.4% of the Company's common stock) became the
holders of 100% of our issued and outstanding common stock under an
Amended and Restated Agreement
F-9
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
and Plan of Merger dated as of January 19, 1999. Under to the terms of
the merger agreement (i) a company owned by the members of the Sbarro
family merged with and into Sbarro, (ii) our shareholders (other than
the members of the Sbarro family and the company owned by them)
received the right to receive $28.85 per share in cash in exchange for
the approximately 13.5 million shares of our common stock not owned by
the members of the Sbarro family, and (iii) all outstanding stock
options, including stock options held by the members of the Sbarro
family, were terminated in exchange for a cash payment equal to the
number of shares subject to the options multiplied by the excess, if
any, of $28.85 over the applicable option exercise price. The cost of
the merger, including amounts to pay related fees and expenses of the
transaction, was approximately $411.0 million and was funded using
substantially all of our cash on hand and the sale of $255 million of
11% Senior Notes (Note 7).
As of January 2, 2000, there was $0.3 million remaining on deposit with
a third party paying agent for untendered shares to be redeemed as part
of the merger consideration. That amount is shown as restricted cash
and amounts due for untendered shares in the consolidated balance
sheet. Should any shares remain untendered after one year from
September 28, 1999, the related funds will be returned to us to be held
until claimed or escheated to the appropriate jurisdictions.
The acquisition of all the outstanding shares of common stock not owned
by the Sbarro family and all outstanding stock options have been
accounted for under the purchase method of accounting. As a result, the
remaining shares of common stock owned by the Sbarro family are
presented in shareholder's equity at their original basis in the
accompanying consolidated balance sheet. The final purchase price
allocations have not been completed and are subject to adjustment based
on fair market appraisals and other fair market value estimates as of
the date of the merger. The excess of purchase price over the cost of
assets acquired is being amortized on a straight line basis over an
estimated weighted average useful life of 30 years.
Summarized below are our unaudited pro forma results of operations for
the year ended January 2, 2000 and January 3, 1999 as if the merger had
taken place as of the beginning of each year. Adjustments have been
made for the amortization of the excess of the purchase price over the
cost basis of net assets acquired, interest expense, including interest
on the $16 million mortgage issued subsequent to year end to one of the
guaranteeing subsidiaries (Note 15) and related changes in income tax
expense.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
---------------------------------------
JANUARY 2, 2000 JANUARY 3, 1999
---------------------------------------
(IN THOUSANDS)
Pro Forma:
<S> <C> <C>
Revenues.............................. $375,636 $370,112
========= ========
Income before cumulative effect of accounting change $ 6,662 $ 5,143
========= ========
Net income............................ $ 6,662 $ 4,348
========== ========
F-10
</TABLE>
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
These pro forma results of operations are not necessarily indicative of
the actual results of operations that would have occurred had the
merger taken place at the beginning of the periods presented or of
results which may occur in the future.
In connection with the termination of negotiations for the initial
proposal of our acquisition of all shares of common stock not owned by
such members of the Sbarro family we recorded a charge of $1.0 million
before tax, or $0.6 million after tax, in our 1998 financial
statements.
3. DESCRIPTION OF BUSINESS:
We and our 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
world, principally in shopping malls and other high traffic locations.
THE FOLLOWING SETS FORTH THE NUMBER OF UNITS IN OPERATION AS OF:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
---- ---- ----
<S> <C> <C> <C>
Sbarro-owned...................... 644 630 623
Franchised........................ 286 268 239
--- --- ---
930 898 862
=== === ===
</TABLE>
4. PROPERTY AND EQUIPMENT, NET:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land and improvements (a)............................. $ 3,364 $ 3,364
Leasehold improvements................................ 203,296 187,828
Furniture, fixtures and equipment..................... 111,235 107,891
Construction-in-progress.............................. 3,031 2,662
--------- -------
320,926 301,745
Less accumulated depreciation and amortization........ 183,694 163,619
------- -------
$137,232 $138,126
========== ========
</TABLE>
-----------------
(a) During 1998, we recorded a charge of $1.1
million before tax, $0.7 million after tax,
for the difference between the carrying cost
and proposed selling price of a parcel of
land which is being offered for sale.
F-11
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Interest............................................. $7,487 $ -
Compensation......................................... 6,169 4,109
Payroll and sales taxes.............................. 5,219 3,193
Rent................................................. 7,514 6,786
Provision for unit closings (Note 11)................ 863 2,867
Other................................................ 8,337 8,809
--------- ---------
$35,589 $25,764
======= =======
</TABLE>
6. INCOME TAXES:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
----------------------------------------------------------------
(IN THOUSANDS)
Federal:
<S> <C> <C> <C>
Current.......................... $14,758 $19,421 $19,868
Deferred......................... 557 (2,209) (1,557)
-------- ------ ---------
15,315 17,212 18,311
------ ------ --------
State and local:
Current.......................... 3,854 4,708 4,091
Deferred......................... 153 (373) (287)
----------- ---------- ----------
4,007 4,335 3,804
--------- --------- ---------
$19,322 $21,547 $22,115
========= ======= =======
</TABLE>
Deferred income taxes are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
2000 1999
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Depreciation and amortization..................................... $15,397 $15,805
Deferred charges.................................................. 11 -
Other............................................................. 495 101
-------- --------
Gross deferred tax liabilities.................................... 15,903 15,906
------- --------
Accrued expenses.................................................. (2,070) (4,776)
Deferred income................................................... (3,496) (1,483)
Other............................................................. (408) (428)
-------- --------
Gross deferred tax assets......................................... (5,974) (6,687)
--------- --------
$ 9,929 $ 9,219
========= ========
</TABLE>
F-12
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Actual tax expense differs from "expected" tax expense (computed by
applying the Federal corporate rate of 35% for the fiscal years ended
January 2, 2000, January 3, 1999, and December 28, 1997) as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
----------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense............ $17,096 $19,382 $20,369
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of Federal 2,605 2,725 2,429
income tax benefit......................
Tax exempt interest income and dividends (1,002) (1,198) (978)
received deduction......................
Amortization of excess purchase price over 700 -- --
the cost of net assets acquired
Other, net................................. (77) (638) 295
-------- -------- ---
$19,322 $21,547 $22,115
======== ======= =======
</TABLE>
Deferred income taxes are provided for temporary differences between
financial and tax reporting. These differences and the amount of the
related deferred tax benefit are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
---------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization................ $(408) $(1,891) $(1,824)
Accrued expenses............................. 2,706 (261) (624)
Other........................................ (1,588) (430) 604
---------- ---------- -------
$ 710 $ (2,582) $(1,844)
======= ========= =======
</TABLE>
In March, 2000, we filed elections to change our tax status from a C
Corporation to Subchapter "S" corporation effective fiscal 2000. As a
result, in lieu of federal and certain state corporate income taxes,
the shareholders will be taxed on their proportionate shares of income,
or receive the benefit of any losses individually. In the future, our
income tax provision will be significantly reduced and substantially
all taxes on our income will be paid by shareholders. We will make
distributions to shareholders for taxes owed by them on our earnings
pursuant to a tax agreement with shareholders. During fiscal 2000, we
may reduce or eliminate a portion of our deferred tax liability as a
consequence of this change in status.
F-13
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. LONG-TERM DEBT:
(a) The cost of the merger, including fees and expenses, was
funded through the use of substantially all of our cash on
hand and the placement of $255 million of 11.0% Senior Notes
due September 15, 2009 sold at a price of 98.514% of par to
yield 11.25% per annum. The Senior Notes were issued under an
Indenture dated September 28, 1999 (the "Indenture"). We also
entered into a five year, $30 million unsecured senior
revolving bank credit facility under a bank credit agreement
dated as of September 23, 1999.
Interest on the Senior Notes is payable semi-annually on March
15 and September 15 of each year commencing on March 15, 2000.
Our payment obligations under the Senior Notes are jointly,
severally, unconditionally and irrevocably guaranteed by all
of Sbarro's current Restricted Subsidiaries (as defined in the
Indenture) and is to be similarly guaranteed by our future
Restricted Subsidiaries. The Senior Notes and the subsidiary
guarantees are senior unsecured obligations of Sbarro and the
guaranteeing subsidiaries, respectively, ranking pari passu in
right of payment to all of our and their respective present
and future senior debt, including amounts outstanding under
the bank credit agreement. The Indenture permits redemption of
the Senior Notes at our option at varying redemption prices
and requires us to offer to purchase Senior Notes in the event
of a Change of Control and in connection with certain Asset
Sales (each as defined). The Indenture contains various
covenants on our part and the guarantor subsidiaries,
including, but not limited to, restrictions on our payment of
dividends, stock repurchases, certain investments and other
restricted payments, the incurrence of indebtedness and liens
on our assets, affiliate transactions, asset sales and
mergers.
In connection with the issuance of the Senior Notes, Sbarro
and the guaranteeing subsidiaries have agreed to offer the
holders of the Senior Notes the right to exchange those Senior
Notes for 11% Senior Notes due 2009 with the same terms as the
existing Senior Notes but which are to be registered under the
Securities Act of 1933, as amended. If we do not timely comply
with our obligations to effectuate such registration, we will
be required to pay liquidated damages until cured to each
holder of the Senior Notes beginning at $.05 per $1,000 of
notes per week for the first 90 days increasing every ninety
days up to a maximum of $.50 per $1,000 of notes per week. The
initial deadline under the registration rights agreement is
March 27, 2000.
The discount at which the Senior Notes were issued, an
aggregate of approximately $3.8 million, is being accreted to
the Senior Notes over the original ten year life of the Senior
Notes.
(b) The bank credit agreement provides us with an unsecured senior
revolving credit facility that enables us to borrow, on a
revolving basis from time to time during its
F-14
<PAGE>
-1-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
five-year term, up to $30 million, including a $10 million
sublimit for standby letters of credit. No amounts were
outstanding under the credit facility as of January 2, 2000.
Each of our current guaranteeing subsidiaries (the same
entities as the Restricted Subsidiaries under the Indenture)
have agreed to, and the future guaranteeing subsidiaries are
to, unconditionally and irrevocably guarantee our obligations
under the bank credit agreement on a joint and several basis.
All borrowings under the bank credit agreement are repayable
on September 28, 2004. In addition, we will be required to
repay our loans and reduce the lenders' commitments under the
bank credit agreement using the proceeds of certain asset
sales and issuances of certain equity interests of, and sales
of equity interests in, the guaranteeing subsidiaries.
At our option, the interest rates applicable to loans under
the bank credit agreement will be at either (a) the bank's
prime rate (8.75% at February 28, 2000) plus a margin ranging
from zero to 0.75% (there is no margin at February 28, 2000)
or (b) reserve adjusted LIBOR (5.88% at February 28, 2000)
plus a margin ranging from 1.5% to 2.5% (the margin at
February 28, 2000 is 1.75%). In each case, the margin depends
upon the ratio of our senior debt (as defined) to its earnings
before interest, taxes and depreciation and amortization
("EBITDA"). We have agreed to pay certain fees in connection
with the bank credit agreement, including an unused commitment
fee at a rate per year that will vary from 0.25% of the
undrawn amount of the facility to 0.45% of the undrawn amount
of the facility per year, depending upon the ratio of our
senior debt to EBITDA. The unused commitment fee is 0.30% per
year.
The bank credit agreement contains various covenants on our
part and on the part of the guaranteeing subsidiaries,
including, but not limited to, restrictions on the payment of
dividends and making stock repurchases, certain investments
and other restricted payments, the incurrence of indebtedness,
guarantees, other contingent obligations, and liens on assets,
affiliate transactions, asset sales and mergers,
consolidations and acquisitions of stock or assets by us and
our guaranteeing subsidiaries. The bank credit agreement also
contains provisions which, under certain circumstances,
prohibit redemptions or repurchases of the Senior Notes,
including repurchases that might otherwise be required
pursuant to the terms of the Indenture, and imposes certain
conditions on our amending or supplementing the Indenture. In
addition, we are required to maintain a minimum ratio of
consolidated EBITDA to consolidated interest expense (in each
case with the guaranteeing subsidiaries) of at least 2.0 to
1.0 and a ratio of consolidated senior debt to consolidated
EBITDA (in each case with the guaranteeing subsidiaries)
ranging from 4.5 to 1.0 in 1999 to 3.9 to 1.0 beginning
December 29, 2002. We are in compliance with the various
covenants contained in the agreement as of January 2, 2000.
(c) The costs of issuing the Senior Notes and establishing the
bank credit agreement,
F-15
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
an aggregate of approximately $9.3 million and $0.6 million,
respectively, were capitalized as deferred financing costs
and are being amortized over the ten and five year lives,
respectively, of the Senior Notes and the credit agreement,
respectively. The accretion and amortization will result in
an increase in reported interest expense above amounts
payable in cash.
8. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS:
We conduct all of our operations in leased facilities. Most of our
restaurant leases provide for the payment of base rents plus real
estate taxes, utilities, insurance, common area charges and certain
other expenses, as well as contingent rents generally ranging from 8%
to 10% of net restaurant sales in excess of stipulated amounts.
Rental expense under operating leases, including common area charges,
other expenses and additional amounts based on sales, are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
2000 1999 1997
-------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals............................ $46,682 $43,387 $40,365
Common area charges........................ 13,763 13,314 12,541
Contingent rentals......................... 3,134 3,011 2,910
----------- --------- ---------
$63,579 $59,712 $55,816
======== ======= =======
</TABLE>
Future minimum rental and other payments required under non-cancelable
operating leases for Sbarro-operated restaurants that were open on
January 2, 2000 and the existing leased administrative and support
function office (Note 9) are as follows (in thousands):
FISCAL YEARS ENDING:
December 31, 2000............................. $68,989
December 30, 2001............................. 67,505
December 29, 2002............................. 64,222
December 28, 2003............................. 60,316
January 2, 2005............................... 56,392
Later years................................... 155,858
We are 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 2, 2000 are as follows (in thousands):
F-16
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FISCAL YEARS ENDING:
December 31, 2000.......................... $1,631
December 30, 2001.......................... 1,567
December 29, 2002.......................... 1,291
December 28, 2003.......................... 1,165
January 3, 2005............................ 1,067
Later years................................ 3,250
As of February 28, 2000, future minimum rental payments required under
non-cancelable operating leases for restaurants which had not as yet
opened as of January 2, 2000 are as follows (in thousands):
FISCAL YEARS ENDING:
December 31, 2000........................ $1,522
December 30, 2001........................ 2,180
December 29, 2002........................ 2,516
December 28, 2003........................ 2,656
January 3, 2005.......................... 2,737
Later years.............................. 25,825
We are a party to contracts aggregating $3.9 million with respect to
the construction of restaurants. Payments of approximately $0.4 million
have been made on those contracts as of January 2, 2000.
We are the guarantor of $2.3 million of letters of credit and for our
pro rata interests of up to $8.9 million for loans, a mortgage and a
line of credit for certain of our joint ventures.
CONTINGENCIES:
In February 1999, the Umberto of New Hyde Park joint venture companies,
in which we have an 80% interest, began an action in the U.S. district
Court for the Eastern District of New York against Umberto Corteo, who
owns the remaining 20% interest in the joint venture companies, and
against three other restaurants owned by Mr. Corteo. We alleged, among
other things, that Mr. Corteo engaged in unfair trade practices and in
trademark infringement, thereby breaching the joint venture agreements.
We are seeking an accounting, compensatory and punitive damages and
injunctive relief. The answer filed by Mr. Corteo and his co-defendants
denies our claims and further alleges that non-competition restrictions
against Mr. Corteo in the join t venture agreements are unenforceable.
Mr. Corteo and his co-defendants have also counterclaimed against us
alleging misappropriation of trademark rights and failure to perform
administrative duties that amounted to a breach of the agreements. We
believe that our claims against Mr. Corteo will be proven and that we
have substantial defenses to his counterclaims.
F-17
<PAGE>
-1-
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
On November 17, 1999, certain former managers of restaurant units in
the State of Washington instituted a lawsuit against Sbarro alleging
that they served as store managers, general managers, assistant
managers or co-managers in our restaurants in the State of Washington
at various times since November 17, 1996 and that, in connection with
their employment, we violated the overtime pay provisions of the State
of Washington's Minimum Wage Act by treating them as overtime exempt
employees, breached alleged employment agreements and statutory
provisions by failing to record and pay for hours worked at the
contract rates and/or statutory minimum wage rates and failed to
provide statutorily required meal breaks and rest periods. The
plaintiffs also seek to represent all of our restaurant managers
employed for any period of time on or after November 9, 1996 in the
State of Washington. We currently own and operate 18 restaurants in the
State of Washington. The plaintiffs seek actual damages, exemplary
damages and costs of the lawsuit, including reasonable attorney's fees,
each in unspecified amounts, and injunctive relief. We believe that we
have substantial defenses to the claims and intend to vigorously defend
this action.
On December 20, 1999, twelve current and former general managers of
Sbarro restaurants in California amended a complaint filed in the
Superior Court of California for Orange County. The amended complaint
alleges that the plaintiffs were improperly classified as exempt
employees under the California wage and hour law. The plaintiffs are
seeking actual damages, punitive damages and costs of the lawsuit,
including reasonable attorney fees, each in unspecified amounts.
Plaintiffs' counsel has stated that they are in contact with the
plaintiffs' counsel in the case discussed above and that he may attempt
to file a class action based upon alleged violations of the Fair Labor
Standards Act. We believe that we have substantial defenses to the
claims and intend to vigorously defend this action.
In December 1998, the Court approved, and we completed, the settlement
of an action that was pending in the United States District Court for
the Southern District of New York whereby the plaintiffs, former
restaurant level management employees, alleged that we required general
managers and co-managers to reimburse us for cash and certain other
shortages sustained by us 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
$3.5 million before tax, or $2.2 million after tax, in fiscal 1998.
From time to time we are also a party to certain claims and legal
proceedings in the ordinary course of business, none of which, in our
opinion, would have a material adverse effect on our financial position
or results of operations.
9. TRANSACTIONS WITH RELATED PARTIES:
We are the sole tenant of an administrative office building which is
leased from a partnership owned by certain of Sbarro's shareholders.
F-18
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
For each of the 1999, 1998 and 1997 fiscal years, the annual rent paid
pursuant to the sublease was $0.3 million. The annual rent payable
pursuant to the sublease is $0.3 million each year for the remainder of
the lease term which expires in 2011. In addition, we are obligated to
pay real estate taxes, utilities, insurance and certain other expenses
for the facility. We believe that our rent is comparable to the rent
that would be charged by an unaffiliated third party.
A member of our Board of Directors acts as a consultant to us for which
he received $0.5 million, $0.1 million and $0.1 million in the 1999,
1998 and 1997 fiscal years, respectively.
10. STOCK OPTIONS:
Our Board of Directors adopted, and our shareholders had 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"). As part of the going
private transaction, all outstanding options and option plans were
terminated in exchange for a cash payment equal to the number of shares
subject to the stock option multiplied by the excess, if any, of $28.85
over the option's exercise price (Note 2).
Under the 1991 Plan, we were able to grant, until February 2001,
incentive stock options and non-qualified stock options, alone or in
tandem with stock appreciation rights ("SARS"), to our employees and
consultants. Options and SARs were not able to be granted at exercise
prices of less than 100% of the fair market value of our common stock
on the date of grant. The Board of Directors and the Board's Committee
were 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 provided 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 had a ten year
term and was exercisable in full commencing one year after grant at
100% of the fair market value of our common stock on the date of grant.
In each of fiscal 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 fiscal 1997, options to
purchase an aggregate of 11,250 shares granted to a deceased director
were exercised at prices ranging from $21.50 to $23.71.
A summary of the status of our option plans is presented in the table
below:
F-19
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding,
<S> <C> <C> <C> <C> <C> <C>
beginning of period......... 1,560,432 $25.87 1,638,339 $25.85 934,836 $25.57
Granted........................ N/A 23,750 $24.22 777,750 $25.96
-0-
Exercised...................... (17,337) $24.58 (84,989) $25.23 (53,745) $22.78
Terminated for cash
(Note 2).................... (1,391,095) N/A - -
Canceled or expired............ (152,000) $28.83 (16,668) $25.15 (20,502) $24.66
------------ ------ -------- ------ -------- ------
Options outstanding,
end of period............... N/A 1,560,432 $25.87 1,638,339 $25.85
-0-
Options exercisable,
end of period............... N/A N/A 617,515 $25.99 573,880 $26.05
</TABLE>
The foregoing table includes options granted in fiscal 1997 under the
1991 Plan to our 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 our 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 fiscal 1996 to
our 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 fiscal 1993 under the 1991
Plan to our 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 our common stock on the date of grant
and was exercisable for 10 years from the date of grant. As part of the
going private transaction, those such options were terminated in
exchange for a cash payment equal to the number of shares subject to
the stock option multiplied by the excess, if any, of $28.85 over the
option exercise price (Note 2).
In addition to the foregoing, in fiscal 1990, shareholders approved
options were granted to our 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 our common stock on the date of grant, for a
period of 10 years from the date of grant. As part of the going private
transaction, these options were also terminated in exchange for a cash
payment equal to the number of shares subject to the stock option
multiplied by the excess, if any, of $28.85 over the option's exercise
price (Note 2).
Sbarro adopted the pro forma disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation
cost has been recognized in the accompanying financial statements for
the stock option plans. No calculation is presented for fiscal 1999 as
a result of the termination of all outstanding options in
F-20
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
connection with the going private transaction (Note 2). Had
compensation cost for our stock option plans been determined
under SFAS No. 123 for the years ended January 3, 1999 and
December 28, 1997, our net income would have approximated
the pro forma amounts below:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
JANUARY 3, DECEMBER 28,
1999 1997
---- ----
Net income:
<S> <C> <C>
As Reported................................. 34,334 36,082
====== ======
Pro Forma................................... 33,770 35,089
====== ======
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Expected life (years)....................... 0.5 1.5
Interest rate............................... 5.15% 5.82%
Volatility.................................. 31% 21%
Dividend yield.............................. 0.00% 4.00%
Weighted average fair value
of options granted...................... $2.38 $2.79
===== =====
</TABLE>
11. PROVISION FOR UNIT CLOSINGS:
In connection with the final disposition of two joint venture units
closings recorded in fiscal 1997, we agreed to a special allocation of
losses which resulted in an additional $1.0 million charge before tax,
or $0.6 million after tax, to earnings in fiscal 1999.
A provision for restaurant closings of $2.5 million before tax, or $1.6
million after tax, was established in fiscal 1998 relating to the
closing of 20 restaurant locations.
A provision for restaurant closings in the amount of $3.3 million
before tax, or $2.0 million after tax, relating to our investment in
one of our joint ventures was established in fiscal 1997 for the
closing of certain of the joint venture's units.
12. DIVIDENDS:
In fiscal 1997, we declared quarterly dividends of $.27 per share
aggregating $22.1 million or $1.08 per share. Dividends were thereafter
suspended pending consideration by the Company of various proposals by
certain members of the Sbarro family for the going private transaction
(Note 2).
F-21
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
On March 13, 2000, the Board of Directors declared an $18 million
dividend to shareholders (Note 15).
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
FISCAL YEAR 1999
<S> <C> <C> <C> <C>
Revenues.................................. $104,451 $81,556 $89,444 $104,013
Gross profit (a).......................... 79,390 62,680 68,026 82,548
Net income (b) ........................... 6,912 6,234 7,563 8,814
========= ========== ========= ========
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
===== ===== ===== ======
</TABLE>
---------------------
(a) Gross profit represents the difference between restaurant sales and
the cost of food and paper products.
(b) See Notes 8 and 11 for information regarding unusual charges.
14. SUMMARIZED CONDENSED FINANCIAL INFORMATION:
The following tables present condensed summary financial information
for Sbarro's subsidiaries that guarantee the parent company's
obligations under the Senior Notes and bank credit agreement and
exclude the parent company and non-guarantor subsidiaries. The
non-guaranteeing subsidiaries represent less than 3% of consolidated
pre-tax income and assets on an individual and combined basis. Each of
the guaranteeing subsidiaries is our direct or indirect wholly owned
subsidiary and each has fully and unconditionally guaranteed the Senior
Notes and the bank credit agreement on a joint and several basis. We
have determined that presenting separate financial statements and other
disclosures concerning each guaranteeing subsidiary is not material to
investors. As described in Note 2, we have not completed final purchase
price allocations. Accordingly, the condensed summary guarantor
subsidiary financial information presented below does not give effect
to any final purchase price allocations.
F-22
<PAGE>
SBARRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
CONDENSED SUMMARY GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
BALANCE SHEET DATA
JANUARY 2, 2000 JANUARY 3, 1999
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Current assets.................................................. $6,805 $7,623
Intercompany receivables........................................ 172,744 147,903
------- -------
Total current assets.............................. 179,549 155,526
Property and equipment, net..................................... 82,214 80,787
Other assets, net............................................... 707 573
--- ---
$262,470 $236,886
======== ========
Current liabilities............................................. $ 579 $453
Intercompany payables-- long term............................... 19,897 19,909
Shareholders' equity............................................ 241,994 216,524
------- -------
$262,470 $236,886
======== ========
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
FOR THE FISCAL YEARS ENDED
--------------------------
JANUARY 2, 2000 JANUARY 3, 1999 DECEMBER 28, 1997
--------------- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues $ 189,321 $ 187,690 $ 178,758
================ ================ ===============
Gross profit(a) $ 149,428 $ 146,376 $ 140,554
================ ================ ===============
Income before cumulative effect of change in
method of accounting(b) $ 25,470 $ 26,935 $ 25,663
================ ================ ===============
Net income(b) $ 25,470 $ 26,935 $ 25,663
================ ================ ===============
</TABLE>
(a) Gross profit represents the difference between restaurant sales and the cost
of food and paper products.
(b) No portion of the cumulative effect of the
change in accounting principles pertained to the guaranteeing subsidiaries
(Note 1).
15. SUBSEQUENT EVENTS:
On March 3, 2000, a 100% wholly owned subsidiary of Sbarro obtained a
8.4%, ten year, $16,000,000 mortgage loan that is collateralized by a
building which is owned by one of the guaranteeing subsidiaries of our
Senior Notes issued in connection with the going private transaction.
The loan is being paid based on a thirty year amortization schedule.
On March 13, 2000, the Board of Directors declared an $18 million
dividend to shareholders and granted our Chairman of the Board and
President a $2.0 million, 6.45%, two year loan.
F-23
<PAGE>
SBARRO, INC.
[LOGO]
UNTIL JUNE 22, 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, WILL BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
