-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OePhV6WJRxn5sxGN2S/Igv2cooZDqpe2YqR/HDN9Lb9YZAWgGD4ES5vhYB7d0HQ7 Aq7cniCUOe/GVKYzB3KUIw== 0000910680-99-000237.txt : 19990716 0000910680-99-000237.hdr.sgml : 19990716 ACCESSION NUMBER: 0000910680-99-000237 CONFORMED SUBMISSION TYPE: SC 13E3/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19990715 GROUP MEMBERS: ANTHONY SBARRO GROUP MEMBERS: JOSEPH SBARRO GROUP MEMBERS: JOSEPH SBARRO (1994) FAMILY LIMITED PARTNERSHIP GROUP MEMBERS: M. SBARRO & F. MONTGOMERY, NOT INDIVIDUALLY GROUP MEMBERS: SBARRO MARIO GROUP MEMBERS: SBARRO MERGER LLC SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SBARRO INC CENTRAL INDEX KEY: 0000766004 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 112501939 STATE OF INCORPORATION: NY FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: SC 13E3/A SEC ACT: SEC FILE NUMBER: 005-38230 FILM NUMBER: 99665283 BUSINESS ADDRESS: STREET 1: 401 BROADHOLLOW ROAD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5168640200 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SBARRO MARIO CENTRAL INDEX KEY: 0000941892 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13E3/A BUSINESS ADDRESS: STREET 1: C/O SBARRO INC STREET 2: 762 LARKFIELD RD CITY: COMMACK STATE: NY ZIP: 11725 MAIL ADDRESS: STREET 1: 763 LARKFIED RD CITY: COMMACK STATE: NY ZIP: 11725 SC 13E3/A 1 AMENDMENT NO.5 TO SBARRO SCHEDULE 13E3 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 5 TO SCHEDULE 13E-3 RULE 13E-3 TRANSACTION STATEMENT (PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934) Sbarro, Inc. (Name of Issuer) Sbarro, Inc. Sbarro Merger LLC Mario Sbarro Joseph Sbarro Anthony Sbarro Joseph Sbarro (1994) Family Limited Partnership Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants (Name of Person(s) Filing Statement) Common Stock, par value $.01 per share (Title of Class of Securities) 805844-10-7 (Cusip Numbers of Class of Securities) ---------------- Mario Sbarro, Chairman and President Sbarro, Inc. 401 Broadhollow Road Melville, New York 11747 Telephone Number: (516) 715-4100 Copies To: Richard A. Rubin, Esq. Steven J. Gartner, Esq. Arthur A. Katz, Esq. Parker Chapin Flattau & Klimpl, LLP Willkie Farr & Gallagher Warshaw Burstein Cohen 1211 Avenue of the Americas 787 Seventh Avenue Schlesinger & Kuh, LLP New York, New York 10036 New York, New York 10019 555 Fifth Avenue (212) 704-6000 (212) 728-8000 New York, New York 10017 (212) 984-7700
(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf Of Person(s) Filing Statement) This statement is filed in connection with (check the appropriate box): a. [X] The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. [ ] The filing of a registration statement under the Securities Act of 1933. c. [ ] A tender offer. d. [ ] None of the above. Check the following box if the soliciting materials or information statement referred to in checking box (a) are preliminary copies. [X] Calculation of Filing Fee - -------------------------------------------------------------------------------- Transaction Amount of Filing Fee* Valuation* $79,129.93 $395,649,643 [X] Check Box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. The entire filing fee was paid in connection with the original filing of the Schedule 13E-3 which was filed on February 26, 1999. - -------- * Determined by multiplying 13,467,649 (the number of outstanding shares of Common Stock of Sbarro, Inc. not owned by the persons filing this Schedule 13E-3) by $28.85 per share and adding the aggregate amount anticipated to be paid to persons holding options to purchase shares of Common Stock issued by the Company in consideration of cancellation of such options. ** Determined pursuant to Rule 0-11(b)(1) by multiplying $395,649,643 by 1/50 of 1%. -2- INTRODUCTION This Amendment No. 5 ("Amendment No. 5") to the Rule 13e-3 Transaction Statement on Schedule 13E-3 (the "Original Schedule 13E-3" and, as amended through this Amendment No. 5, this "Schedule 13E-3") is being filed by Sbarro, Inc., a New York corporation (the "Company"), Sbarro Merger LLC, a New York limited liability company ("Mergeco"), and Mario Sbarro, Joseph Sbarro, Anthony Sbarro, the Joseph Sbarro (1994) Family Limited Partnership and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 (the "Trust of Carmela Sbarro") for the benefit of Carmela Sbarro and her descendants (collectively, the "Continuing Shareholders"), pursuant to Section 13(e) of the Securities Exchange Act of 1934, as amended, and Rule 13e-3 thereunder, in connection with the proposed merger (the "Merger") of Mergeco with and into the Company, with the Company as the surviving corporation in the Merger (the "Surviving Corporation"). The Merger is to be effected pursuant to an Amended and Restated Agreement and Plan of Merger dated as of January 19, 1999, among the Company, Mergeco and the Continuing Shareholders (the "Restated Merger Agreement"). Mergeco was formed by the Continuing Shareholders in connection with the Merger and is owned solely by the Continuing Shareholders. Pursuant to the terms and conditions set forth in the Restated Merger Agreement, if the Merger is consummated, each outstanding share of Common Stock other than (i) shares of Common Stock then owned of record by the Continuing Shareholders or Mergeco and (ii) shares of Common Stock in the Company's treasury, if any, will be converted into the right to receive $28.85 per share in cash, without interest. As a result of the Merger, the Continuing Shareholders will own 100% of the capital stock of the Surviving Corporation. There is attached to this Amendment No. 5 a cross reference sheet supplied pursuant to Instruction F to Schedule 13E-3 to show the location in the definitive Proxy Statement filed with this Amendment No. 5 of the information required to be included in response to the items of Schedule 13E-3. The information in the definitive Proxy Statement is hereby expressly incorporated herein by reference, and capitalized terms used but not defined herein shall have the meanings ascribed thereto in the definitive Proxy Statement. -3-
SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------------------------------- Item 1. Issuer and Class of Security Subject to the Transaction. (a) .............................. Front Cover Page; "SUMMARY - Certain Definitions"; "SUMMARY - The Merger Parties; The Company"; "MANAGEMENT - Directors and Executive Officers of the Company". (b) .............................. Front Cover Page; "SUMMARY - Certain Definitions"; "SUMMARY - Information Concerning the Meeting; Record Date for the Meeting; Quorum Requirements"; "SUMMARY - Market Prices of and Dividends on the Common Stock". (c) .............................. "SUMMARY - Market Prices of and Dividends on the Common Stock". (d) .............................. "SUMMARY - Market Prices of and Dividends on the Common Stock"; "SPECIAL FACTORS - Financing of the Merger"; "SPECIAL FACTORS - Plans for the Company after the Merger". (e) .............................. Not Applicable. (f) .............................. "CERTAIN TRANSACTIONS IN THE COMMON STOCK". Item 2. Identity and Background. (a)-(d) .......................... "SUMMARY - Certain Definitions"; "SUMMARY - The Merger Parties"; "BUSINESS OF THE COMPANY"; "MANAGEMENT"; "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT". (e) and (f) ...................... Not Applicable. (g) .............................. "SUMMARY - The Merger Parties"; "MANAGEMENT". -4- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------------------------------- Item 3. Past Contacts, Trans actions or Negotiations. (a) (1) .......................... Not Applicable. (a) (2) and (b) .................. "SPECIAL FACTORS - Background of the Transaction"; "MANAGEMENT - Directors and Executive Officers of the Company"; "CERTAIN TRANSACTIONS IN THE COMMON STOCK". Item 4. Terms of the Transaction. (a) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Information Concerning the Meeting; Purpose of the Meeting"; "SUMMARY - Special Factors; Certain Effects of the Merger"; "SUMMARY - Special Factors; Litigation Pertaining to the Merger"; "SUMMARY - Special Factors; Financing of the Merger"; "SUMMARY - The Restated Merger Agreement"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS - Certain Effects of the Merger"; "SPECIAL FACTORS - Financing of the Merger"; "SPECIAL FACTORS - Regulatory Approvals"; "LITIGATION PERTAINING TO THE MERGER"; "THE RESTATED MERGER AGREEMENT". -5- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------------------------------- (b) .............................. "SUMMARY - Information Concerning the Meeting; Purpose of the Meeting"; "SUMMARY - Information Concerning the Meeting; Voting Requirements"; "SUMMARY - Special Factors; Certain Effects of the Merger"; "SUMMARY - Special Factors; Litigation Pertaining to the Merger"; "SUMMARY - The Restated Merger Agreement; The Merger Consideration"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS - Certain Effects of the Merger"; "LITIGATION PERTAINING TO THE MERGER Current Shareholder Litigation"; "THE RESTATED MERGER AGREEMENT - The Merger; Merger Consideration"; "THE RESTATED MERGER AGREEMENT Treatment of Options". Item 5. Plans or Proposals of the Issuer or Affiliate. (a) and (b) ...................... "SUMMARY - Special Factors; Plans for the Company after the Merger"; "SPECIAL FACTORS - Plans for the Company after the Merger". (c) .............................. "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company; Directors and Officers of the Surviving Corporation"; "THE RESTATED MERGER AGREEMENT - Directors and Officers, Certificate of Incorporation and By-Laws Following the Merger". -6- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------------------------------- (d)-(e) .......................... "SUMMARY - Special Factors; Plans for the Company after the Merger"; "SUMMARY - Special Factors; Financing of the Merger"; "SUMMARY - Market Prices of and Dividends on the Common Stock"; "SPECIAL FACTORS - Plans for the Company after the Merger"; "SPECIAL FACTORS - Financing of the Merger". (f)-(g) .......................... "SUMMARY - Special Factors; Certain Effects of the Merger"; "SPECIAL FACTORS - Certain Effects of the Merger". Item 6. Source and Amount of Funds or Other Consideration. (a) .............................. "SUMMARY - Special Factors; Financing of the Merger"; "SPECIAL FACTORS - Financing of the Merger". (b) .............................. "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company; Compensation of Special Committee Members"; "SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS - Financing of the Merger; Terms of Bear Stearns' Engagement"; "LITIGATION PERTAINING TO THE MERGER Current Shareholder Litigation"; "THE RESTATED MERGER AGREEMENT - Fees and Expenses". (c) .............................. "SUMMARY - Special Factors; Financing of the Merger"; "SPECIAL FACTORS - Certain Financial Projections"; "SPECIAL FACTORS - Plans for the Company after the Merger"; "SPECIAL FACTORS - Financing of the Merger". -7- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------------------------------- (d) .............................. "SUMMARY - Special Factors; Financing of the Merger"; "SPECIAL FACTORS - Financing of the Merger". Item 7. Purpose(s), Alternatives, Reasons and Effects. (a) and (c) ...................... "SUMMARY - Special Factors; Continuing Share holders' Purpose and Reasons for the Merger"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger". (b) .............................. "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - The Continuing Shareholders Purpose and Reasons for the Merger". (d) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Information Concerning the Meeting; Purpose of the Meeting"; "SUMMARY - Special Factors; Plans for the Company after the Merger"; "SUMMARY - Special Factors; Interests of Certain Persons in the Merger and the Company"; "SUMMARY - Special Factors; Certain Effects of the Merger"; "SUMMARY - Special Factors; Certain U.S. Federal Income Tax Consequences"; "SUMMARY - Special Factors; Accounting Treatment"; "SUMMARY - Special Factors; Financing of the Merger"; "SUMMARY - The Restated Merger Agreement; The Merger Consideration"; "SPECIAL FACTORS - The Continuing Shareholders Purpose and Reasons for the Merger"; "SPECIAL FACTORS - Certain Financial Projections"; "SPECIAL FACTORS - Plans for the Company after the Merger"; -8- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------------------------------- "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS - Certain Effects of the Merger"; "SPECIAL FACTORS - Certain U.S. Federal Income Tax Consequences"; "SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS - Accounting Treatment"; "SPECIAL FACTORS - Risk of Insolvency"; "THE RESTATED MERGER AGREEMENT - The Merger; Merger Consideration"; "THE RESTATED MERGER AGREEMENT - The Exchange Fund; Payment for Shares of Common Stock"; "THE RESTATED MERGER AGREEMENT - Treatment of Options"; "THE RESTATED MERGER AGREEMENT - Tax Withholding". Item 8. Fairness of the Transaction. (a) .............................. Front Cover Page; "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors; Recommendation of the Special Committee and the Board of Directors"; "SUMMARY - Special Factors; Presentation and Fairness Opinion of Prudential Securities"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendations of the Special Committee and the Board of Directors"; "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger"; "SPECIAL FACTORS - Presentation and Fairness Opinion of Prudential Securities". -9- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------------------------------- (b) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors; Recommendation of the Special Committee and the Board of Directors"; "SUMMARY - Special Factors; Factors Considered by the Special Committee and the Board of Directors"; "SUMMARY - Special Factors; Presentation and Fairness Opinion of Prudential Securities"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors"; "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger"; "SPECIAL FACTORS - Presentation and Fairness Opinion of Prudential Securities"; "SPECIAL FACTORS - Certain Financial Projections"; "LITIGATION PERTAINING TO THE MERGER Current Shareholder Litigation"; "THE RESTATED MERGER AGREEMENT - No Solicitation; Fiduciary Obligation of Directors"; "THE RESTATED MERGER AGREEMENT Conditions"; "THE RESTATED MERGER AGREEMENT Termination"; "THE RESTATED MERGER AGREEMENT Amendment and Waiver". -10- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------------------------------- (c) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Information Concerning the Meeting; Voting Requirements"; "SUMMARY - The Restated Merger Agreement; Conditions to, and Termination of, the Merger"; "SPECIAL FACTORS - Recommendations of the Special Committee and the Board of Directors"; "THE RESTATED MERGER AGREEMENT - The Merger; Merger Consideration; "THE RESTATED MERGER AGREEMENT Covenants"; "THE RESTATED MERGER AGREEMENT Conditions"; "THE RESTATED MERGER AGREEMENT Termination". (d) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors; Fairness Opinion of Prudential Securities"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors"; "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger"; "SPECIAL FACTORS - Presentation and Fairness Opinion of Prudential Securities". (e) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors"; "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger". (f) .............................. "SPECIAL FACTORS - Background of the Transaction". -11- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------------------------------- Item 9. Reports, Opinions, Appraisals and Certain Negotiations. (a) and (b)....................... "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors; Factors Considered by the Special Committee and the Board of Directors"; "SUMMARY - Special Factors; Fairness Opinion of Prudential Securities"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors"; "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger"; "SPECIAL FACTORS - Presentation and Fairness Opinion of Prudential Securities". (c) .............................. "AVAILABLE INFORMATION". Item 10. Interest in Securities of the Issuer. (a) .............................. "SUMMARY - Information Concerning the Meeting; Voting Requirements"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" (b) .............................. "CERTAIN TRANSACTIONS IN THE COMMON STOCK". -12- SCHEDULE 13E-3 Item 11. Contracts, Arrangements or Understandings With Respect to the Issuer's Securities........................ "SUMMARY - Information Concerning the Meeting; Voting Requirements"; "SUMMARY - The Restated Merger Agreement"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS - Financing of the Merger"; "THE RESTATED MERGER AGREEMENT". Item 12. Present Intention and Recommendation of Certain Persons with Regard to the Transaction. (a) .............................. "SUMMARY - Information Concerning the Meeting; Voting Requirements"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors"; "THE RESTATED MERGER AGREEMENT Covenants"; "CERTAIN TRANSACTIONS IN THE COMMON STOCK". (b) .............................. "SUMMARY - Special Factors; Recommendation of the Special Committee and the Board of Directors"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors". Item 13. Other Provisions of the Transaction. (a) .............................. "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - No Right of Appraisal"; "LITIGATION PERTAINING TO THE MERGER Current Shareholder Litigation". -13- SCHEDULE 13E-3 (b)-(c)........................... Not Applicable. Item 14. Financial Information. (a) .............................. "WHERE YOU CAN FIND MORE INFORMATION"; "CONSOLIDATED FINANCIAL STATEMENTS". (b) .............................. Not Applicable. Item 15. Persons and Assets Employed, Retained or Utilized. (a) .............................. Front Cover Page; "SUMMARY - Special Factors; Plans for the Company after the Merger"; "SUMMARY - Special Factors; Financing of the Merger"; "SPECIAL FACTORS - Plans for the Company after the Merger"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS - Financing of the Merger"; "THE RESTATED MERGER AGREEMENT Indemnification and Insurance"; "THE RESTATED MERGER AGREEMENT - Fees and Expenses". (b) .............................. Front Cover Page; "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company; Compensation of the Special Committee Members". Item 16. Additional Information. "SUMMARY - Information Concerning the Meeting"; Proxy Statement, together with the proxy card.
-14- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------- Item 17. Material to be Filed as Exhibits. (a) (1) ........................ Debt Financing Letter, dated as of January 19, 1999.* (b) (1) ........................ Presentation by Prudential Securities Incorporated to the Special Committee, dated January 19, 1999.* (b) (2) ........................ Opinion of Prudential Securities Incorporated, dated January 19, 1999 (set forth as Annex II to the Proxy Statement).* (b) (3) ........................ Presentation by Bear, Stearns & Co. Inc. to certain Continuing Shareholders, dated October 10, 1996 (in accordance with Rule 202 of Regulation S-T, Section II of the presentation is filed in paper pursuant to a continuing hardship exemption).* (b) (4) ........................ Presentation by Bear, Stearns & Co. Inc. to the Company's Board of Directors, dated January 15, 1997.* (b) (5) ..................... Presentation by Bear, Stearns & Co. Inc. to the Company's Board of Directors, dated January 23, 1997 (in accordance with Rule 202 of Regulation S-T, the financial models of this presentation are filed in paper pursuant to a continuing hardship exemption).* (b) (6) ........................ Presentation by Bear, Stearns & Co. Inc. to the Company's Board of Directors, dated July 20, 1998.* (b) (7) ........................ List of potential purchasers of the Company prepared in August 1998.* (b) (8) ........................ August 1998 confidential information memorandum sent to potential purchasers of the Company.* (b) (9) ........................ Presentation by Prudential Securities Incorporated to the Special Committee, dated March 3, 1998.* -15- SCHEDULE 13E-3 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT - --------------------------------------------- ----------------------------- (c) (1) ........................ Amended and Restated Agreement and Plan of Merger between Sbarro, Inc., Sbarro Merger LLC, Mario Sbarro, Joseph Sbarro, Anthony Sbarro, the Joseph Sbarro (1994) Family Limited Partnership and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro, dated as of January 19, 1999 (as amended June 17, 1999) (set forth as Annex I to the Proxy Statement).* (d) (1) ........................ Definitive Proxy Statement (including Annexes I and II), together with the proxy card.* (e) ............................ Not applicable. (f) ............................ As of the date of this Schedule 13E-3, no written instruction, form or other material has been furnished to any person making the actual oral solicitation or other recommendation for such person's use, directly or indirectly, in connection with this Rule 13e-3 transaction. (g) (1) ........................ Memorandum of Understanding, dated January 19, 1999.* (g) (2) ........................ Stipulation of Settlement dated April 7, 1999 among counsel to the plaintiffs and counsel to the defendants in the Current Shareholder Litigation (as defined in the Proxy Statement filed as Exhibit (d)(1).* (g) (3) ........................ Order and Final Judgment, dated July 14, 1999.* - -------------- * Filed herewith. -16- ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION. (a) The information set forth on the Front Cover Page and in "SUMMARY - Certain Definitions"; "SUMMARY - The Merger Parties; The Company"; and "MANAGEMENT Directors and Executive Officers of the Company" of the Proxy Statement is incorporated herein by reference. (b) The information set forth on the Front Cover Page and in "SUMMARY - Certain Definitions"; "SUMMARY - Information Concerning the Meeting; Record Date for the Meeting; Quorum Requirements"; and "SUMMARY - Market Prices of and Dividends on the Common Stock" of the Proxy Statement is incorporated herein by reference. (c) The information set forth in "SUMMARY - Market Prices of and Dividends on the Common Stock" of the Proxy Statement is incorporated herein by reference. (d) The information set forth in "SUMMARY - Market Prices of and Dividends on the Common Stock"; "SPECIAL FACTORS - Financing of the Merger"; and "SPECIAL FACTORS Plans for the Company after the Merger" of the Proxy Statement is incorporated herein by reference. (e) Not applicable. (f) The information set forth in "CERTAIN TRANSACTIONS IN THE COMMON STOCK" of the Proxy Statement is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. This Statement is being filed jointly by the Company (which is the issuer of the class of equity securities that is the subject of the Rule 13e-3 transaction), Mergeco and the Continuing Shareholders. (a) - (d) The information set forth in "SUMMARY - Certain Definitions"; "SUMMARY The Merger Parties"; "BUSINESS OF THE COMPANY"; "MANAGEMENT"; and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of the Proxy Statement is incorporated herein by reference. (e) During the last five years, neither the Company, nor, to the best of its knowledge, any of its directors, executive officers or controlling persons has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). During the last five years, neither Mergeco, nor any of its members has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). During the last five years, none of the individual Continuing Shareholders has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). During the last five years, the sole general partner of the Joseph Sbarro (1994) Family Limited Partnership has not been convicted in a criminal proceeding (excluding traffic violations or similar -17- misdemeanors). During the last five years, neither of the trustees of the Trust of Carmela Sbarro has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (f) During the last five years, neither the Company, nor, to the best of its knowledge, any of its directors, executive officers or controlling persons, was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining further violations of, or prohibiting activities, subject to, federal or state securities laws or finding any violation of such laws. During the last five years, neither Mergeco, nor any of its members was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining further violations of, or prohibiting activities, subject to, federal or state securities laws or finding any violations of such laws. During the last five years, none of the individual Continuing Shareholders was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining further violations of, or prohibiting activities, subject to, federal or state securities laws or finding any violations of such laws. During the last five years, the sole general partner of the Joseph Sbarro (1994) Family Limited Partnership was not a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining further violations of, or prohibiting activities, subject to, federal or state securities laws or finding any violations of such laws. During the last five years, neither of the trustees of the Trust of Carmela Sbarro was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining further violations of, or prohibiting activities, subject to, federal or state securities laws or finding any violations of such laws. (g) The information set forth in "SUMMARY - The Merger Parties"; and "MANAGEMENT" of the Proxy Statement is incorporated herein by reference. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS. (a) (1) Not applicable. (a) (2) and (b) The information set forth in "SPECIAL FACTORS - Background of the Transaction"; "MANAGEMENT - Directors and Executive Officers of the Company"; and "CERTAIN TRANSACTIONS IN THE COMMON STOCK" of the Proxy Statement is incorporated herein by reference. ITEM 4. TERMS OF THE TRANSACTION. (a) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Information Concerning the Meeting; Purpose of the Meeting"; "SUMMARY - Special Factors; Certain Effects of the Merger"; "SUMMARY Special Factors; Litigation Pertaining to the Merger"; "SUMMARY - Special Factors; Financing of -18- the Merger"; "SUMMARY - The Restated Merger Agreement"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS - Certain Effects of the Merger"; "SPECIAL FACTORS - Financing of the Merger"; "SPECIAL FACTORS - Regulatory Approvals"; "LITIGATION PERTAINING TO THE MERGER"; and "THE RESTATED MERGER AGREEMENT" of the Proxy Statement is incorporated herein by reference. (b) The information set forth in "SUMMARY - Information Concerning the Meeting; Purpose of the Meeting"; "SUMMARY - Information Concerning the Meeting; Voting Require ments"; "SUMMARY - Special Factors; Certain Effects of the Merger"; "SUMMARY - Special Factors; Litigation Pertaining to the Merger"; "SUMMARY - The Restated Merger Agreement; The Merger Consideration"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS - Certain Effects of the Merger"; "LITIGATION PERTAINING TO THE MERGER - Current Shareholder Litigation"; "THE RESTATED MERGER AGREEMENT - The Merger; Merger Consideration"; and "THE RESTATED MERGER AGREEMENT - Treatment of Options" of the Proxy Statement is incorporated herein by reference. ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. (a) and (b) The information set forth in "SUMMARY - Special Factors; Plans for the Company after the Merger"; and "SPECIAL FACTORS - Plans for the Company after the Merger" of the Proxy Statement is incorporated herein by reference. (c) The information set forth in "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company; Directors and Officers of the Surviving Corporation"; and "THE RESTATED MERGER AGREEMENT - Directors and Officers, Certificate of Incorporation and By-Laws Following the Merger" of the Proxy Statement is incorporated herein by reference. (d) - (e) The information set forth in "SUMMARY - Special Factors; Plans for the Company after the Merger"; "SUMMARY - Special Factors; Financing of the Merger"; "SUMMARY - Market Prices of and Dividends on the Common Stock"; "SPECIAL FACTORS - Plans for the Company after the Merger"; and "SPECIAL FACTORS - - Financing of the Merger" of the Proxy Statement is incorporated herein by reference. (f) - (g) The information set forth in "SUMMARY - Special Factors; Certain Effects of the Merger"; and "SPECIAL FACTORS - Certain Effects of the Merger" of the Proxy Statement is incorporated herein by reference. ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) The information set forth in "SUMMARY - Special Factors; Financing of the Merger"; and "SPECIAL FACTORS - Financing of the Merger" of the Proxy Statement is incorporated herein by reference. -19- (b) The information set forth in "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company; Compensation of Special Committee Members"; "SPECIAL FACTORS Fees and Expenses"; "SPECIAL FACTORS - Financing of the Merger; Terms of Bear Stearns' Engagement"; "LITIGATION PERTAINING TO THE MERGER - Current Shareholder Litigation"; and "THE RESTATED MERGER AGREEMENT - Fees and Expenses" of the Proxy Statement is incorporated herein by reference. (c) The information set forth in "SUMMARY - Special Factors; Financing of the Merger"; "SPECIAL FACTORS - Certain Financial Projections"; "SPECIAL FACTORS - Plans for the Company after the Merger"; and "SPECIAL FACTORS - Financing of the Merger" of the Proxy Statement is incorporated herein by reference. (d) The information set forth in "SUMMARY - Special Factors; Financing of the Merger"; and "SPECIAL FACTORS - Financing of the Merger" of the Proxy Statement is incorporated herein by reference. ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS. (a) and (c) The information set forth in "SUMMARY - Special Factors; Continuing Share holders' Purpose and Reasons for the Merger"; "SPECIAL FACTORS - - Background of the Transaction"; and "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger" of the Proxy Statement is incorporated herein by reference. (b) The information set forth in "SPECIAL FACTORS - Background of the Transaction" and "SPECIAL FACTORS - The Continuing Shareholders Purpose and Reasons for the Merger" of the Proxy Statement is incorporated herein by reference. (d) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Information Concerning the Meeting; Purpose of the Meeting"; "SUMMARY - Special Factors; Plans for the Company after the Merger"; "SUMMARY - Special Factors; Interests of Certain Persons in the Merger and the Company"; "SUMMARY - Special Factors; Certain Effects of the Merger"; "SUMMARY - Special Factors; Certain U.S. Federal Income Tax Consequences"; "SUMMARY - Special Factors; Accounting Treatment"; "SUMMARY - Special Factors; Financing of the Merger"; "SUMMARY - The Restated Merger Agreement; The Merger Consideration"; "SPECIAL FACTORS - The Continuing Shareholders Purpose and Reasons for the Merger"; "SPECIAL FACTORS - Certain Financial Projections"; "SPECIAL FACTORS - Plans for the Company after the Merger"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS Certain Effects of the Merger"; "SPECIAL FACTORS - Certain U.S. Federal Income Tax Consequences"; "SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS - Accounting Treatment"; "SPECIAL FACTORS - Risk of Insolvency"; "THE RESTATED MERGER AGREEMENT - The Merger; Merger Consideration"; "THE RESTATED MERGER AGREEMENT - The Exchange Fund; Payment for Shares of Common Stock"; "THE RESTATED -20- MERGER AGREEMENT - Treatment of Options"; and "THE RESTATED MERGER AGREEMENT - Tax Withholding" of the Proxy Statement is incorporated herein by reference. ITEM 8. FAIRNESS OF THE TRANSACTION. (a) The information set forth on the Front Cover Page and in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors; Recom mendation of the Special Committee and the Board of Directors"; "SUMMARY - Special Factors; Presentation and Fairness Opinion of Prudential Securities"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendations of the Special Committee and the Board of Directors"; "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger"; and "SPECIAL FACTORS - Presentation and Fairness Opinion of Prudential Securities" of the Proxy Statement is incorporated herein by reference. (b) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors; Recommendation of the Special Committee and the Board of Directors"; "SUMMARY - Special Factors; Factors Considered by the Special Committee and the Board of Directors"; "SUMMARY - Special Factors; Presentation and Fairness Opinion of Prudential Securities"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - - Recommendation of the Special Committee and the Board of Directors"; "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger"; "SPECIAL FACTORS - Presentation and Fairness Opinion of Prudential Securities"; "SPECIAL FACTORS - Certain Financial Projections"; "LITIGATION PERTAINING TO THE MERGER Current Shareholder Litigation"; "THE RESTATED MERGER AGREEMENT - No Solicitation; Fiduciary Obligation of Directors"; "THE RESTATED MERGER AGREEMENT - - Conditions"; "THE RESTATED MERGER AGREEMENT - Termination" and "THE RESTATED MERGER AGREEMENT - Amendment and Waiver" of the Proxy Statement is incorporated herein by reference. (c) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Information Concerning the Meeting; Voting Requirements"; "SUMMARY - The Restated Merger Agreement; Conditions to, and Termination of, the Merger"; "SPECIAL FACTORS - Recommendations of the Special Committee and the Board of Directors"; "THE RESTATED MERGER AGREEMENT - The Merger; Merger Consideration; "THE RESTATED MERGER AGREEMENT - Covenants"; "THE RESTATED MERGER AGREEMENT - Conditions"; and "THE RESTATED MERGER AGREEMENT - Termination" of the Proxy Statement is incorporated herein by reference. (d) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors; Fairness Opinion of ; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors"; "SPECIAL FACTORS - The Continuing -21- Shareholders' Purpose and Reasons for the Merger"; and "SPECIAL FACTORS - Presentation and Fairness Opinion of of the Proxy Statement is incorporated herein by reference. (e) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors"; and "SPECIAL FACTORS - The Continuing Shareholders' Purpose and Reasons for the Merger" of the Proxy Statement is incorporated herein by reference. (f) The information set forth in "SPECIAL FACTORS - Background of the Transaction" of the Proxy Statement is incorporated herein by reference. ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS. (a) and (b) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - Special Factors; Factors Considered by the Special Committee and the Board of Directors"; "SUMMARY - Special Factors; Fairness Opinion of ; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS Recommendation of the Special Committee and the Board of Directors"; "SPECIAL FACTORS The Continuing Shareholders' Purpose and Reasons for the Merger"; and "SPECIAL FACTORS Presentation and Fairness Opinion of of the Proxy Statement is incorporated herein by reference. (c) The information set forth in "AVAILABLE INFORMATION" of the Proxy Statement is incorporated herein by reference. ITEM 10. INTEREST IN SECURITIES OF THE ISSUER. (a) The information set forth in "SUMMARY - Information Concerning the Meeting; Voting Requirements"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of the Proxy Statement is incorporated herein by reference. (b) The information set forth in "CERTAIN TRANSACTIONS IN THE COMMON STOCK" of the Proxy Statement is incorporated herein by reference. ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S SECURITIES. The information set forth in "SUMMARY - Information Concerning the Meeting; Voting Requirements"; "SUMMARY - The Restated Merger Agreement"; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS - Financing of the Merger"; and "THE RESTATED MERGER AGREEMENT" of the Proxy Statement is incorporated herein by reference. -22- ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO THE TRANSACTION. (a) The information set forth in "SUMMARY - Information Concerning the Meeting; Voting Requirements"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors"; "THE RESTATED MERGER AGREEMENT - Covenants"; and "CERTAIN TRANSACTIONS IN THE COMMON STOCK" of the Proxy Statement is incorporated herein by reference. (b) The information set forth in "SUMMARY - Special Factors; Recommendation of The Special Committee and the Board of Directors"; "SPECIAL FACTORS - Background of the Transaction"; "SPECIAL FACTORS - Recommendation of the Special Committee and the Board of Directors" of the Proxy Statement is incorporated herein by reference. ITEM 13. OTHER PROVISIONS OF THE TRANSACTION. (a) The information set forth in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; "SUMMARY - No Right of Appraisal"; and "LITIGATION PERTAINING TO THE MERGER - Current Shareholder Litigation" of the Proxy Statement is incorporated herein by reference. (b) - (c) Not applicable. ITEM 14. FINANCIAL INFORMATION. (a) The information set forth in "WHERE YOU CAN FIND MORE INFORMATION"; and "CONSOLIDATED FINANCIAL STATEMENTS" of the Proxy Statement is incorporated herein by reference. (b) Not Applicable. ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAIN OR UTILIZED. (a) The information set forth on the Front Cover Page and in "SUMMARY - Special Factors; Plans for the Company after the Merger"; "SUMMARY - Special Factors; Financing of the Merger"; "SPECIAL FACTORS - Plans for the Company after the Merger; "SPECIAL FACTORS - Interests of Certain Persons in the Merger and the Company"; "SPECIAL FACTORS - Fees and Expenses"; "SPECIAL FACTORS - Financing of the Merger"; "THE RESTATED MERGER AGREEMENT Indemnification and Insurance"; and "THE RESTATED MERGER AGREEMENT - Fees and Expenses" of the Proxy Statement is incorporated herein by reference. (b) The information set forth on the Front Cover Page and in "CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER"; and "SPECIAL FACTORS - Interests of -23- Certain Persons in the Merger and the Company; Compensation of the Special Committee Members" of the Proxy Statement is incorporated herein by reference. ITEM 16. ADDITIONAL INFORMATION. The information set forth in "SUMMARY - Information Concerning the Meeting" of the Proxy Statement is incorporated herein by reference. Proxy Statement, together with the proxy card. ITEM 17. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Debt Financing Letter, dated as of January 19, 1999.* (b)(1) Presentation by Prudential Securities Incorporated to the Special Committee, dated January 19, 1999.* (b)(2) Opinion of Prudential Securities Incorporated, dated January 19, 1999 (set forth as Annex II to the Proxy Statement).* (b)(3) Presentation by Bear, Stearns & Co. Inc. to certain Continuing Shareholders, dated October 10, 1996 (in accordance with Rule 202 of Regulation S-T, Section II of the presentation is filed in paper pursuant to a continuing hardship exemption).* (b)(4) Presentation by Bear, Stearns & Co. Inc. to the Company's Board of Directors, dated January 15, 1997.* (b)(5) Presentation by Bear, Stearns & Co. Inc. to the Company's Board of Directors, dated January 23, 1997 (in accordance with Rule 202 of Regulation S-T, the financial models of this presentation are filed in paper pursuant to a continuing hardship exemption).* (b)(6) Presentation by Bear, Stearns & Co. Inc. to the Company's Board of Directors, dated July 20, 1998.* (b)(7) List of potential purchasers of the Company prepared in August 1998.* (b)(8) August 1998 confidential information memorandum sent to potential purchasers of the Company.* (b)(9) Presentation by Prudential Securities Incorporated to the Special Committee, dated March 3, 1998.* (c) (1) Amended and Restated Agreement and Plan of Merger between Sbarro, Inc., Sbarro Merger LLC, Mario Sbarro, Joseph Sbarro, Anthony Sbarro, the Joseph Sbarro (1994) Family Limited Partnership and Mario Sbarro and Franklin Montgomery, not -24- individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro, dated as of January 19, 1999 (as amended June 17, 1999) (set forth as Annex I to the Proxy Statement).* (d)(1) Definitive Proxy Statement (including Annexes I and II), together with the proxy card.* (e) Not applicable. (f) As of the date of this Schedule 13E-3, no written instruction, form or other material has been furnished to any person making the actual oral solicitation or other recommendation for such person's use, directly or indirectly, in connection with this Rule 13e-3 transaction. (g)(1) Memorandum of Understanding, dated January 19, 1999.* (g)(2) Stipulation of Settlement dated April 7, 1999 among counsel to the plaintiffs and counsel to the defendants in the Current Shareholder Litigation (as defined in the Proxy Statement filed as Exhibit (d)(1).* (g)(3) Order and Final Judgment, dated July 14, 1999.* - --------------------- * Filed herewith. -25- SIGNATURES After due inquiry and to the best of my knowledge and belief, the undersigned certify that the information set forth in this statement is true, complete and correct. SBARRO, INC. By: /s/ Mario Sbarro -------------------------------------------- Name: Mario Sbarro Title: President and Chief Executive Office SBARRO MERGER LLC By: /s/ Mario Sbarro ------------------------------------------- Name: Mario Sbarro Title: Member /s/ Mario Sbarro ------------------------------------------- Mario Sbarro /s/ Joseph Sbarro ------------------------------------------- Joseph Sbarro /s/ Anthony Sbarro ------------------------------------------ Anthony Sbarro JOSEPH SBARRO (1994) FAMILY LIMITED PARTNERSHIP /s/ Joseph Sbarro -------------------------------------------- Name: Joseph Sbarro Title: General Partner /s/ Mario Sbarro -------------------------------------------- Mario Sbarro, as trustee under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro /s/ Franklin Montgomery -------------------------------------------- Franklin Montgomery, as trustee under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro Dated: July 15, 1999 -26- EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- (a)(1) Debt Financing Letter, dated as of January 19, 1999.* (b)(1) Presentation by Prudential Securities Incorporated to the Special Committee, dated January 19, 1999.* (b)(2) Opinion of Prudential Securities Incorporated, dated January 19, 1999 (set forth as Annex II to the Proxy Statement).* (b)(3) Presentation by Bear, Stearns & Co. Inc. to certain Continuing Shareholders, dated October 10, 1996 (in accordance with Rule 202 of Regulation S-T, Section II of the presentation is filed in paper pursuant to a continuing hardship exemption).* (b)(4) Presentation by Bear, Stearns & Co. Inc. to the Company's Board of Directors, dated January 15, 1997.* (b)(5) Presentation by Bear, Stearns & Co. Inc. to the Company's Board of Directors, dated January 23, 1997 (in accordance with Rule 202 of Regulation S-T, the financial models of this presentation are filed in paper pursuant to a continuing hardship exemption).* (b)(6) Presentation by Bear, Stearns & Co. Inc. to the Company's Board of Directors, dated July 20, 1998.* (b)(7) List of potential purchasers of the Company prepared in August 1998.* (b)(8) August 1998 confidential information memorandum sent to potential purchasers of the Company.* (b)(9) Presentation by Prudential Securities Incorporated to the Special Committee, dated March 3, 1998.* (c) (1) Amended and Restated Agreement and Plan of Merger between Sbarro, Inc., Sbarro Merger LLC, Mario Sbarro, Joseph Sbarro, Anthony Sbarro, the Joseph Sbarro (1994) Family Limited Partnership and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro, dated as of January 19, 1999 (as amended June 17, 1999) (set forth as Annex I to the Proxy Statement).* (d)(1) Definitive Proxy Statement (including Annexes I and II), together with the proxy card.* (e) Not applicable. (f) As of the date of this Schedule 13E-3, no written instruction, form or other material has been furnished to any person making the actual oral solicitation or other recommendation for such person's use, directly or indirectly, in connection with this Rule 13e-3 transaction. (g) (1) Memorandum of Understanding, dated January 19, 1999.* (g)(2) Stipulation of Settlement dated April 7, 1999 among counsel to the plaintiffs and counsel to the defendants in the Current Shareholder Litigation (as defined in the Proxy Statement filed as Exhibit (d)(1).* (g)(3) Order and Final Judgment, dated July 14, 1999.* - --------------------- * Filed herewith. EX-99.1(A)(1) 2 DEBT FINANCING LETTER [LETTERHEAD OF BEAR STEARNS] As of January 19, 1999 Mr. Mario Sbarro Mr. Joseph Sbarro Mr. Anthony Sbarro The Trust of Carmela Sbarro Sbarro Merger LLC Gentlemen: We understand that Sbarro Merger LLC and Sbarro, Inc. (the "Company") have entered into an Agreement and Plan of Merger dated as of January 19, 1999, pursuant to which, among other things, all shareholders of the Company, other than the Continuing Shareholders (as defined in the Agreement and Plan of Merger), will receive $28.85 per share in cash (the "Transaction"). You have informed us that the aggregate cash purchase price, together with fees and expenses, will result in a total Transaction cost of approximately $408 million. You have informed us that the Transaction cost will be funded by: (A) approximately $138 million of cash and marketable securities which is expected to be available to the Company at the closing of the Transaction, (B) approximately $300 million of total debt financing, based in all material respects on the terms and conditions set forth in a term sheet delivered by you to the Special Committee of the Company's Board of Directors considering the Transaction (the "Debt Financing"). The Debt Financing shall include either a bank revolving credit facility, which shall have undrawn availability on the closing date of the Transaction, or excess cash to fund the Company's ongoing working capital needs, including capital expenditures. You have asked Bear, Stearns & Co. Inc. ("Bear Stearns") to act as placement agent and arranger in connection with the Debt Financing. This letter will confirm that, based upon and subject to (a) the foregoing, (b) the information concerning the Company supplied to us by the Continuing Shareholders and the Company, and (c) current market conditions, Bear Stearns is highly confident as of the date hereof of its ability to place and arrange the Debt Financing, subject to each of the following: (I) the negotiation of definitive language with respect to the terms and conditions of the senior notes included in the Debt Financing as set forth in the term sheet referred to above and the negotiation of other acceptable terms and conditions of the Debt Financing, including, but not limited to, interest rate, price and other covenants; (II) the negotiation of acceptable terms, and the execution of acceptable documentation, related to the Transaction and the Debt Financing; (III) no material adverse change in the business, prospects, condition (financial or otherwise) or results of operations of the Company; (IV) satisfactory completion of legal due diligence; (V) nothing coming to our Sbarro Merger LLC As of January 19, 1999 Page 2 attention which shall contradict or call into question (A) the information previously provided to us by the Continuing Shareholders or the Company or (B) the results of our financial due diligence investigation; (VI) no material adverse change in market conditions for new issues of high yield debt or syndicated bank loan facilities; (VII) no material adverse change in conditions of the financial and capital markets generally, and (VIII) the Continuing Shareholders' and the Company's full cooperation with respect to the marketing of the Debt Financing. The acceptability of each of the foregoing will be determined in the sole discretion of Bear Stearns' Commitment Committee. This letter does not constitute a commitment or undertaking on the part of Bear Stearns to provide any part of the Debt Financing described above and does not ensure the successful placement, arrangement or completion of the Debt Financing. Bear Stearns does not and shall not have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company, the Continuing Shareholders or any other person or entity in connection with this letter. You are hereby authorized to deliver a copy of this letter to the Continuing Shareholders' and the Company's respective affiliates and representatives; provided, however, that in connection with the Transaction and the related Debt Financing, no public reference to Bear Stearns or this letter shall be made by the Continuing Shareholders or the Company or any of its respective representatives or affiliates without our express written consent. Yours sincerely, BEAR, STEARNS & CO. INC. By: /s/ John T. Kilgallon ------------------------------ John T. Kilgallon Senior Managing Director EX-99.1(B)(1) 3 PRESENTATION BY PRUDENTIAL SEC. 01/19/99 PROJECT OREGANO Highly Confidential ------------------------------------------------------ Presentation to the Special Committee of the Board of Directors January 19, 1999 ------------------------------------------------------ PROJECT OREGANO Table of Contents I. Transaction Overview II. Company Overview and Historical Financial Information III. Valuation Summary A. Methodology B. Risk and Growth Rankings - Pizza and Value Priced Italian Restaurant Companies C. Risk and Growth Rankings - Fast Food Restaurant Companies D. Composite Implied Valuation E. Discounted Cash Flow Analysis F. Comparable Company Analysis G. Comparable Transactions Analysis H. Comparable Companies Valuation Update Appendix A. Comparable Companies Analysis B. Rule 13e-3 Premiums Analysis C. Weighted Average Cost of Capital 2 PROJECT OREGANO ----------------------- I. Transaction Overview ------------------------ PROJECT OREGANO TRANSACTION OVERVIEW Transaction Overview Synopsis: On January 20, 1998, the Sbarro family made an offer to take Sbarro, Inc., a New York corporation (the "Company" or "Sbarro"), private for $28.50 per share (the "Prior Offer"). In June 1998, negotiations regarding the Prior Offer were terminated and the Company announced it will explore various strategic alternatives. On November 25, 1998, the Company received a new proposal from members of the Sbarro family to take the Company private at $27.50 per share. In January 1999, the Sbarro family increased its offer to purchase, through a new company ("Mergeco"), each outstanding share not owned by the Sbarro family to $28.85. In addition, Mergeco will pay all transaction related expenses including $2 million in legal fees as part of an agreement to settle seven class action lawsuits prior to the closing of the transaction. Purchase Price: $28.85 per share, or in the aggregate $388.2 million for the 13.5 million shares (approximately 65.6% of the outstanding shares) of the Company's Common Stock not currently owned by the members of the Sbarro family. Accounting Treatment: Purchase Accounting Consideration: Cash 4 PROJECT OREGANO TRANSACTION OVERVIEW Transaction Overview Terms: The offer is subject, among other things, to: (i) entering into a definitive merger agreement; (ii) approval of the transaction by the special committee of the Board, the full Board of Directors, and the Company's shareholders; (iii) receipt of satisfactory financing for the transaction; (iv) continued suspension of dividends by the Company; and (v) receipt of a fairness opinion from the financial advisor to the special committee of the Board stating that the proposed transaction is fair from a financial point of view to the public shareholders. Financing: Management believes the transaction will be financed with approximately $138.4 million in cash on the Company's balance sheet and a total of $270.0 million in high yield debt. Concurrent with the execution of the merger agreement, Bear Stearns & Co. will provide the Company with a "highly confident" letter. 5 PROJECT OREGANO TRANSACTION OVERVIEW ($ in thousands, except offer price and EPS) Offer Price $28.85 LTM Operating Implied Sbarro Parameters (1) Multiple (5) ---------------------------- ------------------- --------------- LTM Revenues (2) $357,928 1.3x LTM EBITDA (2) 79,804 5.9x LTM EBIT (2) 56,825 8.3x LTM Net Income (3) 38,206 15.7x 1998 EPS (3) (4) 1.86 15.5x 1999 EPS (3) (4) 1.87 15.4x Tangible Book Value (3) 241,838 2.5x (1) As of 10/4/98. (2) Enterprise value multiple; assumes utilization $125.8 million of cash on balance sheet as of 10/4/98. (3) Equity value multiple. (4) Source: Company management. (5) All multiples assume offer price for 100% of Sbarro's outstanding shares. 6 PROJECT OREGANO TRANSACTION OVERVIEW Transaction Assumptions ($ in millions)
- ------------------------------------------------ -------------------------------------------------------------------- Sources Uses - ------------------------------------------------ -------------------------------------------------------------------- Number of Shares Outstanding (000s) 20,528 Number of Shares to be Repurchased (000s) 13,457 65.6% Excess Cash on Balance Sheet (1) $ 138.4 Purchase Price of Equity $ 388.2 Purchase Price of Options (2) 7.1 High Yield Debt 270.0 Non-Financing Costs (3) 4.6 ------------ ------------ Total Purchase Price $ 400.0 Financing Costs (3) $ 8.4 ------------ Total Sources of Funds $ 408.4 Total Uses of Funds $ 408.4 ============ ============ - ------------------------------------------------ -------------------------------------------------------------------- (1) Projected as of 12/31/98. (2) Options outstanding as of 12/2/98. Treasury stock method assumed. (3) Company estimate. Non-financing costs include $2 million of legal fees as part of litigation settlement.
7 PROJECT OREGANO TRANSACTION OVERVIEW Pro Forma Capitalization ($ in millions) - ------------------------------------------------------------------------------- Pro Forma Estimated % of Total Pro Forma Capitalization 12/31/98 Capitalization - ------------------------------------------------------------------------------- Cash & Cash Equivalents $ 6.6 0.0% High Yield Debt 270.0 79.4% ---------------- ------------------ Total Long Term Debt $ 270.0 79.4% Common Equity 70.1 20.6% ---------------- ------------------ Total Shareholders' Equity $ 70.1 20.6% Total Capitalization $ 340.1 100.0% ================ ================== - ------------------------------------------------------------------------------- 8 PROJECT OREGANO ------------------------------------------ II. Company Overview and Historical Financial Information ------------------------------------------- PROJECT OREGANO ---------------- A. Description ---------------- PROJECT OREGANO COMPANY OVERVIEW Description o The Company develops, operates, and franchises an international chain of family-style, cafeteria-type Italian restaurants under the "Sbarro" and "Sbarro The Italian Eatery" names. o Sbarro's menu consists of popular Italian food, including pizza, pasta, hot and cold Italian entrees, salads, sandwiches, and desserts. o The restaurants are located primarily in malls, and to a lesser extent, airports, hospitals, universities, toll roads, and office cafeterias. o As of October 4, 1998, the Company had 881 units in operation which consisted of: 625 Company-owned units and 256 franchised units of which 797 were domestic units and 84 were international units. o Since its initial public offering in 1985, the Company has expanded from 123 restaurants to 881 as of October 4, 1998. Over the past three years, Sbarro's compound annual growth rate in the number of restaurants added has slowed to approximately 5%, with franchised restaurants growing faster than company-owned locations. 11 PROJECT OREGANO COMPANY OVERVIEW Ownership and Management Summary o Sbarro family members and the Trust of Carmela Sbarro own 34.4% of the Company's outstanding common stock. o Certificate of Incorporation requires affirmative vote of holders of at least 66 2/3% of the total number of common shares outstanding to merge, consolidate, or sell 25% or more of the Company's assets. o Senior management includes: Mario Sbarro - Chairman of the Board, CEO, and President Anthony Sbarro - Vice Chairman of the Board Joseph Sbarro - Senior Executive VP and Secretary Gennaro A. Sbarro - Corporate Vice President Franchise Operations Gennaro J. Sbarro - Corporate Vice President Operations - East Anthony J. Missano - Corporate Vice President Operations - West Robert S. Koebele - Chief Financial Officer Leonard G. Skrosky - Senior Vice President - Real Estate George W. Herz - General Counsel 12 PROJECT OREGANO ---------------------- B. Financial Review ---------------------- PROJECT OREGANO FINANCIAL REVIEW Historical and Projected Balance Sheets (In 000's)
Historical (1) Projected (1) ---------------------------------- --------------------------------------------------------------- FY FY FY FY FY FY FY FY ASSETS 1996 1997 10/4/98 1998 1999 2000 2001 2002 2003 Cash and cash equivalents $ 114,818 $ 127,310 $ 125,805 $ 144,970 $ 168,923 $ 194,593 $ 222,612 $ 251,356 $ 281,332 Accounts receivables 1,865 2,375 3,887 2,484 2,551 2,653 2,759 2,865 2,973 Inventories 2,841 2,962 2,572 3,173 3,274 3,401 3,532 3,664 3,797 Prepaid expenses 1,409 1,768 6,025 1,888 1,938 2,016 2,096 2,177 2,259 Total current assets 120,933 134,415 138,289 152,515 176,687 202,664 230,999 260,063 290,361 Property and equipment, net 130,993 136,798 138,691 135,622 127,056 117,970 109,117 100,650 92,112 Deferred charges, net 1,633 1,596 NA 1,600 1,600 1,600 1,600 1,600 1,600 Other assets 5,100 5,840 6,129 5,800 5,800 5,800 5,800 5,800 5,800 Total assets $ 258,659 $ 278,649 $ 283,109 $ 295,536 $ 311,143 $ 328,034 $ 347,515 $ 368,112 $ 389,874 LIABILITIES AND EQUITY Accounts payable $ 7,173 $ 10,086 $ 6,560 $ 10,822 $ 11,166 $ 11,599 $ 12,045 $ 12,496 $ 12,950 Accrued expenses 22,663 26,025 23,998 27,930 28,816 29,935 31,087 32,250 33,422 Dividends payable 4,691 5,521 - 5,521 5,521 5,521 5,521 5,521 5,521 Income taxes 5,287 4,777 32 4,777 4,777 4,777 4,777 4,777 4,777 Total current liabilities 39,814 46,409 30,590 49,050 50,280 51,832 53,431 55,043 56,670 Deferred income taxes 13,645 11,801 10,681 10,301 8,801 7,301 7,301 7,301 7,301 Total liabilities 53,459 58,210 41,271 59,351 59,081 59,133 60,732 62,344 63,971 Common Stock 31,423 32,648 34,721 32,648 32,648 32,648 32,648 32,648 32,648 Retained earnings 173,777 187,791 207,117 203,538 219,414 236,252 254,136 273,120 293,254 Shareholders' equity 205,200 220,439 241,838 236,186 252,062 268,900 286,784 305,768 $ 325,902 Total liabilities and shareholders' equity $ 258,659 $ 278,649 $ 283,109 $ 295,536 $ 311,143 $ 328,034 $ 347,515 $ 368,112 $ 389,874
(1) Historical results from Company's 10-K. Projections provided by the Company. 14 PROJECT OREGANO FINANCIAL REVIEW HISTORICAL AND PROJECTED INCOME STATEMENTS ($ in 000's, except per share data)
Historical (1) Projected (1) ---------------------------------------- ------------------------------------------------------------ FY FY YTD YTD FY FY FY FY FY FY 1996 1997 10/5/97 10/4/98 1998 (2) 1999 2000 2001 2002 2003 C> Restaurant sales $ 319,315 $ 337,723 $ 244,903 $ 256,708 $ 353,564 $ 364,790 $ 378,954 $393,536 $ 408,250 $ 423,096 Franchise related income 6,375 7,360 5,152 6,192 9,038 7,600 8,396 9,209 10,045 10,890 Total revenues 325,690 345,083 250,055 262,900 362,602 372,391 387,350 402,745 418,295 433,986 Cost of food and paper products 68,668 69,469 50,289 54,068 74,248 76,606 79,580 82,643 85,733 88,850 Gross profit 257,022 275,614 199,766 208,832 288,354 295,785 307,770 320,103 332,563 345,136 Payroll and other benefits 78,258 84,910 63,045 68,161 91,043 93,933 97,581 101,336 105,124 108,947 Occupancy and other expenses 85,577 93,528 71,554 76,301 99,705 102,871 106,865 110,977 115,127 119,313 General and administrative 14,940 17,762 13,354 14,738 19,399 19,923 20,723 21,547 22,379 23,238 Unit closings and litigation charges - 3,300 - 6,055 - - - - - - Other income (3) (1,171) (1,653) (1,324) (2,242) (2,000) (3,500) (3,500) (3,500) (3,500) (3,500) Total costs and expenses 177,604 197,847 146,629 163,013 208,147 213,227 221,669 230,360 239,130 247,998 EBITDA 79,418 81,067 53,137 51,874 80,207 82,557 86,101 89,743 93,433 97,138 Depreciation 22,910 23,922 17,999 17,056 23,426 24,016 24,536 24,903 25,117 25,188 EBIT 56,508 57,145 35,138 34,818 56,780 58,542 61,564 64,840 68,316 71,951 Interest income 3,798 4,352 3,288 3,734 4,956 5,775 6,652 7,610 8,592 9,617 Income before taxes 60,306 58,197 38,426 32,497 61,736 64,316 68,216 72,450 76,909 81,568 Income taxes 22,916 22,115 14,602 12,349 23,460 25,727 27,287 28,980 30,764 32,627 NI - before unit closings provision & accounting change $ 37,390 $ 38,128 $ 23,824 $ 23,902 $ 38,276 $ 38,590 $ 40,930 $ 43,470 $ 46,145 $ 48,941 EPS, excludes unit closings provision & accounting change $ 1.83 $ 1.86 $ 1.16 $ 1.16 $ 1.86 $ 1.87 $ 1.99 $ 2.11 $ 2.24 $ 2.38
- --------------------- (1) Historical results from Company's 10-K. Projections provided by the Company. (2) Based on 52 week year -1998 will have 53 weeks and have EBIT of approximately $3 million for the 53rd week. (3) Includes income from joint ventures, income from two 20% owned stores, beverage rebates, insurance recoveries, and rental/leasing income before depreciation on new building. (4) Projected EPS assumes 20.6 million diluted shares outstanding, the same number of diluted shares outstanding as of 10/4/98. 15 PROJECT OREGANO FINANCIAL REVIEW HISTORICAL AND PROJECTED INCOME STATEMENT RELATIONSHIPS
Historical (1) Projected (1) ------------------------------------- -------------------------------------------------------- FY FY YTD YTD FY FY FY FY FY FY 1996 1997 10/5/97 10/4/98 1998 1999 2000 2001 2002 2003 Restaurant sales (2) 98.0% 97.9% 97.9% 97.6% 97.5% 98.0% 97.8% 97.7% 97.6% 97.5% Franchise related income (2) 2.0% 2.1% 2.1% 2.4% 2.5% 2.0% 2.2% 2.3% 2.4% 2.5% ------------------------------------- -------------------------------------------------------- Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of food and paper products (3) 21.5% 20.6% 20.5% 21.1% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% Gross Margin (3) 80.5% 81.6% 81.6% 81.4% 81.6% 81.1% 81.2% 81.3% 81.5% 81.6% Payroll and other benefits (3) 24.5% 25.1% 25.7% 26.6% 25.8% 25.8% 25.8% 25.8% 25.8% 25.8% Occupancy and other expenses (3) 26.8% 27.7% 29.2% 29.7% 28.2% 28.2% 28.2% 28.2% 28.2% 28.2% General and administrative (2) 4.6% 5.1% 5.3% 5.6% 5.4% 5.4% 5.4% 5.4% 5.4% 5.4% EBITDA (2) 24.4% 23.5% 21.3% 19.7% 22.1% 22.2% 22.2% 22.3% 22.3% 22.4% EBIT (2) 17.4% 16.6% 14.1% 13.2% 15.7% 15.7% 15.9% 16.1% 16.3% 16.6% Net income (2) 11.5% 11.0% 9.5% 9.1% 10.6% 10.4% 10.6% 10.8% 11.0% 11.3%
(1) Historical results from Company's 10-K. Projections provided by the Company. (2) As a percentage of total revenues. (3) As a percentage of restaurant sales. 16 PROJECT OREGANO FINANCIAL REVIEW Operating Performance (1)
FY FY YTD YTD FY FY FY FY FY FY Company-Owned Restaurants 1996 1997 10/5/97 10/4/98 1998 1999 2000 2001 2002 2003 Beginning number 571 597 597 623 623 633 655 677 699 721 Additions 29 30 19 19 25 25 25 25 25 25 Acquired from (sold to) franchisees 1 4 2 1 1 - - - - Divestitures (4) (8) (5) (18) (16) (3) (3) (3) (3) (3) Ending number 597 623 613 625 633 655 677 699 721 743 Percent of total 73.2% 72.3% 73.1% 70.9% 70.4% 68.5% 66.8% 65.3% 64.0% 62.8% Franchised Restaurants Beginning number 200 219 219 239 239 266 301 336 371 406 Additions 36 47 31 26 40 40 40 40 40 40 Purchases from (sold to) franchisees (1) (4) (2) (1) (1) - - - - - Divestitures (16) (23) (22) (8) (12) (5) (5) (5) (5) (5) Ending number 219 239 226 256 266 301 336 371 406 441 Percent of total 26.8% 27.7% 26.9% 29.1% 29.6% 31.5% 33.2% 34.7% 36.0% 37.2% All Restaurants Beginning number 771 816 816 862 862 899 956 1,013 1,070 1,127 Additions 65 77 50 45 65 65 65 65 65 65 Closed during period (20) (31) (27) (26) (28) (8) (8) (8) (8) (8) Ending number 816 862 839 881 899 956 1,013 1,070 1,127 1,184 Comparative Store Sales Growth -0.18% -0.36% -0.20% 0.90% 1.50% 0.50% 0.50% 0.50% 0.50% 0.50% Average Sales per Restaurant ($ in millions) $0.547 $0.554 NA NA $0.563$ 0.566 $ 0.569 $0.572$ 0.575 $ 0.578
(1) Information provided by the Company. 17 PROJECT OREGANO FINANCIAL REVIEW Operating Performance (1)
FY FY YTD YTD FY FY FY FY FY FY Total Systemwide Sales 1996 1997 10/5/97 10/4/98 1998 1999 2000 2001 2002 2003 ($ in millions) Company-Owned $ 319.3 $ 337.7 $ 244.9 $ 256.7 $ 353.6 $ 364.8 $ 379.0 $ 393.5 $ 408.3 $ 423.1 Franchised $ 118.3 $ 132.8 NA NA $ 142.2 $ 160.6 $ 181.2 $ 202.2 $ 223.4 $ 244.8 Total Systemwide Sales $ 437.6 $ 470.5 NA NA $ 495.7 $ 525.4 $ 560.2 $ 595.7 $ 631.6 $ 667.9 Franchise Royalty Fee (new) NA NA NA NA 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Franchise Royalty Fee (old) NA NA NA NA 7.5% 4.8% 4.8% 4.8% 4.8% 4.8% Avg. Franchise Fee per Store(2) $ 0.019 $ 0.026 NA NA $ 0.020 $ 0.020 $ 0.020 $ 0.020 $ 0.020 $ 0.020 Total Initial Franchise Fees $ 0.7 $ 1.2 NA NA $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8 Total Franchise Royalty Fee $ 5.7 $ 6.2 NA NA $ 8.2 $ 6.8 $ 7.6 $ 8.4 $ 9.2 $ 10.1 Total Revenue from Franchisees $ 6.4 $ 7.4 $ 5.2 $ 6.2 $ 9.0 $ 7.6 $ 8.4 $ 9.2 $ 10.0 $ 10.9 Total Revenue ($ in millions) Company-Owned $ 319.3 $ 337.7 $ 244.9 $256.7 $ 353.6 $ 364.8 $ 379.0 $ 393.5 $ 408.3 $ 423.1 Franchise Related Income $ 6.4 $ 7.4 $ 5.2 $ 6.2 $ 9.0 $ 7.6 $ 8.4 $ 9.2 $ 10.0 $ 10.9 Total Revenue $ 325.7 $ 345.1 $ 250.1 $262.9 $ 362.6 $ 372.4 $ 387.3 $ 402.7 $ 418.3 $ 434.0 Total Capital Expenditures ($ in millions) CapEx per New Restaurant NA NA NA NA $ 0.41 $ 0.41 $ 0.41 $ 0.41 $ 0.41 $ 0.41 New Restaurant CapEx $ 14.1 $ 15.9 NA NA $ 10.3 $ 10.3 $ 10.3 $ 10.3 $ 10.3 $ 10.3 Capital Expenditures (New Headquarters) $ 4.3 $ 5.0 NA NA $ 7.0 $ - $ - $ - $ - $ - Maintenance Capital Expenditures $ 7.5 $ 7.6 NA NA $ 5.0 $ 5.2 $ 5.2 $ 5.8 $ 6.4 $ 6.4
(1) Information provided by the Company. (2) FY'96 and FY'97 average franchise/development fee per store was calcuated based on total initial franchise fees and development fees divided by new franchise stores. Projected fees are provided by the Company. 18 PROJECT OREGANO FINANCIAL REVIEW WORKING CAPITAL RELATIONSHIPS
----------------------------------------------------------------------------------------------- Historical Projected ----------------------------------------------------------------------------------------------- FY FY FY FY FY FY FY FY 1996 1997 1998 1999 2000 2001 2002 2003 Inventory as days of COGS 15.1 15.6 15.6 15.6 15.6 15.6 15.6 15.6 Accounts receivable as days of sales 2.3 2.5 2.5 2.5 2.5 2.5 2.5 2.5 Prepaid expenses as days of sales 1.6 1.9 1.9 1.9 1.9 1.9 1.9 1.9 Accounts payable as days of COGS 38.1 53.0 53.2 53.2 53.2 53.2 53.2 53.2 Accrued expenses as days of COGS 120.5 136.7 137.3 137.3 137.3 137.3 137.3 137.3 Other assets $5,100 $5,840 $5,800 $5,800 $5,800 $5,800 $5,800 $5,800 Deferred charges, net (in 000s) $1,633 $1,596 $1,600 $1,600 $1,600 $1,600 $1,600 $1,600 Dividends payable (in 000's) $4,691 $5,521 $5,521 $5,521 $5,521 $5,521 $5,521 $5,521 Income taxes payable (in 000's) $5,287 $4,777 $4,777 $4,777 $4,777 $4,777 $4,777 $4,777 Deferred income taxes (in 000s) $13,645 $11,801 $10,301 $8,801 $7,301 $7,301 $7,301 $7,301 - ------------------------------------------------------------------------------------------------------------------------------------
19 PROJECT OREGANO FINANCIAL REVIEW (Graphic omitted) Graph depicting the daily prices of shares of Sbarro Inc. from January 12, 1998 to January 11, 1999. (Graphic omitted) Graph depicting the trading volume of shares of Sbarro Inc. from January 12, 1998 to January 11, 1999. Source: IDD Information Services/Tradeline 20 PROJECT OREGANO FINANCIAL REVIEW (Graphic omitted) Graph depicting the closing prices from January 13, 1998 to January 11, 1999 of the S&P 500, Sbarro Inc., Pizza & Italian, and Fast Food as a percentage of what their respective closing prices were on January 13, 1998. Pizza & Italian is a composite of CEC, DRI, NPCI, PZZI, and UNO. Fast Food is a composite of FM, YUM, SONC, and WEN. Source: IDD Information Services/Tradeline 21 PROJECT OREGANO FINANCIAL REVIEW (Graphic omitted) Graph depicting what percent of the total volume of shares, traded from January 12, 1998 to January 11, 1999, traded at specified prices. Graph shows 16,784,400 cumulative shares, 82% of the 20,528,000 shares outstanding as reported on 1/11/99. Source: IDD Information Services/ Tradeline 22 PROJECT OREGANO ----------------------- III. Valuation Summary ----------------------- PROJECT OREGANO ------------------------ A. Methodology ------------------------ PROJECT OREGANO VALUATION SUMMARY Methodology o Reviewed historical and projected operational information provided by Sbarro's management. Discussed the Company's historical results, future growth opportunities, and other matters which we considered relevant to our analysis with management. o Reviewed the Company's historical and projected financial information, as provided by the Company and its financial advisors. o Analyzed qualitative factors associated with the transaction, including existing management profile and stock ownership. o Reviewed the Company's Confidential Memorandum dated August 1998 and the written indications of interest received from prospective buyers. Discussed this information with the Company's financial advisers. o Valued the Company based on a discounted cash flow analysis. o Compared and analyzed the Company's financial and operational performance with certain publicly traded pizza and value priced Italian and fast food restaurants. Valued Sbarro based on comparable publicly traded pizza and value priced Italian and fast food restaurant companies. o Analyzed recent mergers and acquisitions involving restaurant companies and valued the Company based on implied multiples from these transactions. o Analyzed the premiums paid in selected Rule 13e-3 transactions. o Analyzed the stock trading history of Sbarro. 25 PROJECT OREGANO ----------------------------------- B. Risk and Growth Rankings - Pizza and Value Priced Italian Restaurant Companies ----------------------------------- PROJECT OREGANO RISK AND GROWTH RANKINGS (Graphic omitted) Graph comparing the sales growth of Sbarro to the range and mean of sales growth for CEC, DRI, NPCI, PZZI, and UNO over a period of eight quarters ending 11/29/98. 27 PROJECT OREGANO RISK AND GROWTH RANKINGS Comparable Pizza and Value Priced Italian Restaurant Companies -------------------------------------------------- Growth Factors -------------------------------------------------- =============================================== Projected Consensus EPS Growth Rate (Five (5) Year Growth) =============================================== CEC Entertainment, Inc. 22.0% NPC International, Inc. 21.0% Uno Restaurant Corporation 15.0% Darden Restaurants, Inc. 13.0% Pizza Inn, Inc. 11.0% Sbarro, Inc. 5.0% =============================================== Mean 16.4% Mean does not include Sbarro. For further information and detailed analysis, see pages 61-65. 28 PROJECT OREGANO RISK AND GROWTH RANKINGS
Comparable Pizza and Value Priced Italian Restaurant Companies ------------------------------------------------------------------------------------------------------ Growth Factors ------------------------------------------------------------------------------------------------------ ================================================ ================================================ Historical Sales Growth Historical EBITDA Growth (Two (2) Year CAGR ) (Two (2) Year CAGR ) ================================================ ================================================ NPC International, Inc. 18.4% CEC Entertainment, Inc. 64.2% CEC Entertainment, Inc. 15.2% NPC International, Inc. 18.8% Uno Restaurant Corporation 5.4% Pizza Inn, Inc. 8.2% Sbarro, Inc. 4.5% Sbarro, Inc. 6.7% Darden Restaurants, Inc. 1.5% Uno Restaurant Corporation 6.4% Pizza Inn, Inc. -0.6% Darden Restaurants, Inc. -6.2% ================================================ ================================================ Mean 8.0% Mean 18.3% ================================================ ================================================ Historical EBIT Growth Historical Net Income Growth (Two (2) Year CAGR ) (Two (2) Year CAGR ) ================================================ ================================================ CEC Entertainment, Inc. 301.2% Uno Restaurant Corporation 17.0% Uno Restaurant Corporation 18.9% Pizza Inn, Inc. 13.6% NPC International, Inc. 17.0% Sbarro, Inc. 10.1% Sbarro, Inc. 9.5% NPC International, Inc. 9.2% Pizza Inn, Inc. 6.8% Darden Restaurants, Inc. -9.2% Darden Restaurants, Inc. -9.1% CEC Entertainment, Inc. NA ================================================ ================================================ Mean 67.0% Mean 7.6%
Mean does not include Sbarro. For further information and detailed analysis, see pages 61-65. 29 PROJECT OREGANO RISK AND GROWTH RANKINGS
Comparable Pizza and Value Priced Italian Restaurant Companies ------------------------------------------------------------------------------------------------------ Risk Factors ($ in millions) ------------------------------------------------------------------------------------------------------ ================================================ ================================================ Total LTM Sales (1) Number of Restaurants (1) ================================================ ================================================ Darden Restaurants, Inc. $3,409.6 Darden Restaurants, Inc. 1,143 NPC International, Inc. $443.4 Sbarro, Inc. 881 CEC Entertainment, Inc. $380.3 NPC International, Inc. 649 Sbarro, Inc. $357.9 Pizza Inn, Inc. 505 Uno Restaurant Corporation $191.3 CEC Entertainment, Inc. 320 Pizza Inn, Inc. $68.2 Uno Restaurant Corporation 163 ================================================ ================================================ Mean $898.6 Mean 556 ================================================ ================================================ Equity Market Capitalization (2) Enterprise Value (2) (Equity Market Capitalization plus Net Debt) ================================================ ================================================ Darden Restaurants, Inc. $2,532.8 Darden Restaurants, Inc. $2,840.6 Sbarro, Inc. $521.2 CEC Entertainment, Inc. $480.4 CEC Entertainment, Inc. $463.7 Sbarro, Inc. $395.4 NPC International, Inc. $305.0 NPC International, Inc. $391.3 Uno Restaurant Corporation $73.0 Uno Restaurant Corporation $114.4 Pizza Inn, Inc. $48.0 Pizza Inn, Inc. $54.8 ================================================ ================================================ Mean $657.3 Mean $776.3
Mean does not include Sbarro. For further information and detailed analysis, see pages 61-65. (1) As of latest reported quarter. (2) As of 1/12/99. 30 PROJECT OREGANO RISK AND GROWTH RANKINGS
Comparable Pizza and Value Priced Italian Restaurant Companies ------------------------------------------------------------------------------------------------------ Risk Factors ------------------------------------------------------------------------------------------------------ ================================================ ================================================ LTM EBITDA Margins (1) LTM EBIT Margins (1) (EBITDA to Sales) (EBIT to Sales) ================================================ ================================================ Sbarro, Inc. 22.3% Sbarro, Inc. 15.9% CEC Entertainment, Inc. 21.9% CEC Entertainment, Inc. 14.8% NPC International, Inc. 16.4% NPC International, Inc. 10.2% Uno Restaurant Corporation 13.0% Pizza Inn, Inc. 9.9% Pizza Inn, Inc. 11.3% Uno Restaurant Corporation 6.5% Darden Restaurants, Inc. 9.8% Darden Restaurants, Inc. 6.0% ================================================ ================================================ Mean 14.5% Mean 9.5% ================================================ ================================================ Leverage (1) LTM Net Income Margins (1) (Total Debt to Total Cap.(book)) (Net Income to Sales) ================================================ ================================================ Sbarro, Inc. 0.0x Sbarro, Inc. 10.7% CEC Entertainment, Inc. 0.1x CEC Entertainment, Inc. 8.6% Darden Restaurants, Inc. 0.2x Pizza Inn, Inc. 6.5% Uno Restaurant Corporation 0.4x NPC International, Inc. 4.6% NPC International, Inc. 0.4x Darden Restaurants, Inc. 3.5% Pizza Inn, Inc. 0.5x Uno Restaurant Corporation 3.1% ================================================ ================================================ Mean 0.3x Mean 5.3%
Mean does not include Sbarro. For further information and detailed analysis, see pages 61-65. (1) As of latest reported quarter. 31 PROJECT OREGANO RISK AND GROWTH RANKINGS ------------------------------------------ C. Risk and Growth Rankings - Fast Food Restaurant Companies ------------------------------------------ PROJECT OREGANO RISK AND GROWTH RANKINGS (Graphic omitted) Graph comparing the sales growth of Sbarro to the range and mean of sales growth of FM, SONC, YUM, and WEN over a period of eight quarters ending 10/4/98. 33 PROJECT OREGANO RISK AND GROWTH RANKINGS Comparable Fast Food Restaurant Companies -------------------------------------------------------------------------- Growth Factors -------------------------------------------------------------------------- =============================================== Projected Consensus EPS Growth Rate (Five (5) Year Growth) =============================================== Foodmaker, Inc. 20.0% Sonic Corp. 17.0% Tricon Global Restaurants, Inc. 15.0% Wendy's International, Inc. 14.0% Sbarro, Inc. 5.0% =============================================== Mean 16.5% Mean does not include Sbarro. For further information and detailed analysis, see pages 72-76. 34 PROJECT OREGANO RISK AND GROWTH RANKINGS Comparable Fast Food Restaurant Companies
------------------------------------------------------------------------------------------------------ Growth Factors ------------------------------------------------------------------------------------------------------ ================================================ ================================================ Historical Sales Growth Historical EBITDA Growth (Two (2) Year CAGR ) (Two (2) Year CAGR ) ================================================ ================================================ Sonic Corp. 20.4% Sonic Corp. 20.9% Wendy's International, Inc. 8.1% Wendy's International, Inc. 15.1% Foodmaker, Inc. 5.3% Foodmaker, Inc. 10.1% Sbarro, Inc. 4.5% Sbarro, Inc. 6.7% Tricon Global Restaurants, Inc. -2.8% Tricon Global Restaurants, Inc. -4.9% ================================================ ================================================ Mean 7.8% Mean 10.3% ================================================ ================================================ Historical EBIT Growth Historical Net Income Growth (Two (2) Year CAGR ) (Two (2) Year CAGR ) ================================================ ================================================ Sonic Corp. 18.8% Foodmaker, Inc. 41.1% Wendy's International, Inc. 15.5% Sonic Corp. 16.0% Foodmaker, Inc. 13.3% Tricon Global Restaurants, Inc. 13.9% Sbarro, Inc. 9.5% Wendy's International, Inc. 11.1% Tricon Global Restaurants, Inc. 0.6% Sbarro, Inc. 10.1% ================================================ ================================================ Mean 12.1% Mean 20.5%
Mean does not include Sbarro. For further information and detailed analysis, see pages 72-76. 35 PROJECT OREGANO RISK AND GROWTH RANKINGS Comparable Fast Food Restaurant Companies
------------------------------------------------------------------------------------------------------ Risk Factors ($ in millions) ------------------------------------------------------------------------------------------------------ ================================================ ================================================ Total LTM Sales (1) Number of Restaurants (1) ================================================ ================================================ Tricon Global Restaurants, Inc. $8,732.0 Tricon Global Restaurants, Inc. 29,600 Wendy's International, Inc. $1,970.5 Wendy's International, Inc. 6,785 Foodmaker, Inc. $1,174.3 Sonic Corp. 1,847 Sbarro, Inc. $357.9 Foodmaker, Inc. 1,414 Sonic Corp. $219.1 Sbarro, Inc. 881 ================================================ ================================================ Mean $3,024.0 Mean 9,912 ================================================ ================================================ Equity Market Capitalization (2) Enterprise Value (2) (Equity Market Capitalization plus Net Debt) ================================================ ================================================ Tricon Global Restaurants, Inc. $7,656.0 Tricon Global Restaurants, Inc. $11,251.0 Wendy's International, Inc. $2,769.1 Wendy's International, Inc. $3,118.4 Foodmaker, Inc. $866.1 Foodmaker, Inc. $1,177.9 Sbarro, Inc. $521.2 Sonic Corp. $510.8 Sonic Corp. $443.5 Sbarro, Inc. $395.4 ================================================ ================================================ Mean $2,933.7 Mean $4,014.5
Mean does not include Sbarro. For further information and detailed analysis, see pages 72-76. (1) As of latest reported quarter. (2) As of 1/12/99. 36 PROJECT OREGANO RISK AND GROWTH RANKINGS
Comparable Fast Food Restaurant Companies ------------------------------------------------------------------------------------------------------ Risk Factors ------------------------------------------------------------------------------------------------------ ================================================ ================================================ LTM EBITDA Margins (1) LTM EBIT Margins (1) (EBITDA to Sales) (EBIT to Sales) ================================================ ================================================ Sonic Corp. 23.1% Sonic Corp. 17.5% Sbarro, Inc. 22.3% Sbarro, Inc. 15.9% Wendy's International, Inc. 17.9% Wendy's International, Inc. 12.5% Tricon Global Restaurants, Inc. 13.3% Tricon Global Restaurants, Inc. 8.1% Foodmaker, Inc. 11.4% Foodmaker, Inc. 7.8% ================================================ ================================================ Mean 16.4% Mean 11.5% ================================================ ================================================ Leverage (1) LTM Net Income Margins (1) (Total Debt to Total Cap.(book)) (Net Income to Sales) ================================================ ================================================ Sbarro, Inc. 0.0x Sbarro, Inc. 10.7% Sonic Corp. 0.3x Sonic Corp. 10.2% Wendy's International, Inc. 0.3x Wendy's International, Inc. 7.3% Foodmaker, Inc. 0.7x Foodmaker, Inc. 3.4% Tricon Global Restaurants, Inc. 1.6x Tricon Global Restaurants, Inc. 1.6% ================================================ ================================================ Mean 0.7x Mean 5.6%
Mean does not include Sbarro. For further information and detailed analysis, see pages 72-76. (1) As of latest reported quarter. 37 PROJECT OREGANO ------------------------------ D. COMPOSITE IMPLIED VALUATION ------------------------------ PROJECT OREGANO VALUATION SUMMARY COMPOSITE IMPLIED SHARE PRICE [GRAPHIC OMITTED] Graph comparing the offer price to the implied share price for Pizza & Value Priced Italian restaurants and Fast Food restaurants. The graph also compares the offer price to the implied share price based on discounted cash flows and comparable transactions. (1) The range of the above graph represents the mean values of the high, low, mean, and median indication of each valuation methodology. Implied values for each valuation approach are detailed on the following page. 39 PROJECT OREGANO VALUATION SUMMARY
SUMMARY OF IMPLIED PRICES OF ALL VALUATION METHODOLOGIES - --------------------------------- Offer Price $ 28.85 - --------------------------------- High Low Mean Median ----------------------------------------------- Discounted Cash Flows $ 31.92 $ 25.99 $ 28.80 $ 28.73 Comparable Companies Pizza and Value Priced Italian Restaurants LTM Revenue $ 27.81 $ 16.36 $ 21.15 $ 20.41 LTM EBITDA 38.56 23.77 30.11 28.18 LTM EBIT 43.95 28.22 32.45 29.70 LTM Net Income 38.53 19.97 26.85 25.96 1998 EPS 40.79 22.87 29.19 26.55 1999 EPS 35.13 21.65 26.50 22.72 Tangible Book Value 30.20 11.54 23.97 27.07 Mean $ 36.42 $ 20.63 $ 27.17 $ 25.80 Fast Food Restaurants LTM Revenue $ 46.22 $ 23.34 $ 32.78 $ 30.79 LTM EBITDA 44.84 39.86 42.04 41.72 LTM EBIT 49.83 40.59 43.52 41.83 LTM Net Income 39.92 35.47 37.30 36.50 1998 EPS 36.49 33.69 35.59 36.10 1999 EPS 35.13 28.94 31.98 31.93 Tangible Book Value 73.60 29.98 47.56 39.10 Mean $ 46.57 $ 33.13 $ 38.68 $ 36.85 Comparable Transactions LTM Revenue $ 30.25 $ 15.61 $ 21.22 $ 18.54 LTM EBITDA 38.41 31.99 34.73 34.23 LTM EBIT 50.98 30.63 39.26 40.30 LTM Net Income 51.49 22.93 35.54 33.48 Tangible Book Value 71.48 11.01 38.33 31.61 Mean $ 48.52 $ 22.43 $ 33.82 $ 31.63
40 PROJECT OREGANO ------------------------------------ E. DISCOUNTED CASH FLOW ANALYSIS ------------------------------------ PROJECT OREGANO VALUATION SUMMARY
PROJECTED UNLEVERED FREE CASH FLOWS (In 000's) Fiscal Years Ended December 31, -------------------------------------------------------------------- Free Cash Flow: 1999 2000 2001 2002 2003 Operating Income (EBIT) $ 58,542 $ 61,564 $ 64,840 $ 68,316 $ 71,951 Less: Income Taxes @ 40.0% (23,417) (24,626) (25,936) (27,327) (28,780) Tax-Adjusted Operating Income $ 35,125 $ 36,939 $ 38,904 $ 40,990 $ 43,170 Plus: Depreciation 24,016 24,536 24,903 25,117 25,188 Less: Capital Expenditures (15,450) (15,450) (16,050) (16,650) (16,650) Plus: Changes in Non-Cash Working Capital and Long- Term Assets and Liabilities Deferred Taxes (1,500) (1,500) - - - Receivables (67) (102) (105) (107) (107) Inventories (101) (127) (131) (132) (133) Prepaid Expenses (51) (78) (80) (81) (82) Deferred Charges - - - - - Other Assets - - - - - Accounts Payable and Accruals 1,230 1,552 1,598 1,613 1,627 - - - - - ------------------------------------------------------------------- Free Cash Flow: $ 43,202 $ 45,770 $ 49,039 $ 50,750 $ 53,013 -------------------------------------------------------------------
42 PROJECT OREGANO VALUATION SUMMARY
IMPLIED VALUATION Present Value of Projected Cash Flows and Terminal Values (In 000's, except per share data) ---------------------------------------------------------------------------------------------------------------------------- Terminal PV of PV of Value Free PV of Aggregate Less: PV of Equity Multiple of Discount Cash Flow Terminal Present Total Plus: Equity per 2003 EBITDA Rate (1) 1999-2003 (2) Value Value Debt (3) Cash (3) Value Share (4) - ----------------------------------------------------------------------------------------------------------------------------- 10.50% $183,674 $294,814 $478,488 $ - $ 125,805 $604,293 $ 29.09 11.50% 179,350 281,829 461,178 - 125,805 586,983 28.25 - ------------- --------------------------------------------------------------------------------------------------------------- 5.0x 12.50% 175,192 269,524 444,716 - 125,805 570,521 27.46 - ------------- --------------------------------------------------------------------------------------------------------------- 13.50% 171,193 257,858 429,051 - 125,805 554,856 26.71 14.50% 167,345 246,793 414,137 - 125,805 539,942 25.99 ------------- ----------- ------------- ----------- 10.50% $183,674 $353,777 $537,451 $ - $ 125,805 $663,256 $ 31.92 11.50% 179,350 338,195 517,544 - 125,805 643,349 30.97 - ----------------------------------------------------------------------------------------------------------------------------- 6.0x 12.50% 175,192 323,428 498,621 - 125,805 624,426 30.06 - ----------------------------------------------------------------------------------------------------------------------------- 13.50% 171,193 309,429 480,622 - 125,805 606,427 29.19 14.50% 167,345 296,151 463,496 - 125,805 589,301 28.36 ------------- ------------ (1) As of 1/12/99, weight average cost of capital was 2.16% based on Company's industry peer group. See calculation in appendix. (2) Assumes three-quarter year discounting. (3) As of 10/4/98 balance sheet. (4) Assumes fully diluted shares outstanding as of 12/2/98 of 20.776 million. mean $ 28.80
43 PROJECT OREGANO ------------------------------- F. COMPARABLE COMPANY ANALYSIS ------------------------------- PROJECT OREGANO VALUATION SUMMARY IMPLIED VALUATION - PIZZA AND VALUE PRICED ITALIAN COMPARABLE COMPANIES {GRAPHIC OMITTED] Graph comparing the offer price to the implied share price of Pizza and Value Priced Italian restaurants based on LTM revenue, LTM EBITDA, LTM EBIT, LTM new income, 1998 EPS, 1999 EPS and book value. 45 PROJECT OREGANO VALUATION SUMMARY COMPARABLE COMPANY SUMMARY VALUATION MATRIX - PIZZA AND VALUE PRICED ITALIAN RESTAURANTS (In thousands except per share) Offer Price $28.85
Enterprise Value/ Equity Value/ LTM(1) LTM(1) LTM(1) LTM(1) Revenue EBITDA EBIT Net Income 1998 EPS 1999 EPS Sbarro Operating Parameters (2) $357,928 $ 79,804 $ 56,825 $ 38,206 $ 1.86 $ 1.87 Comparable Company Valuation Multiples(3) Pizza and Value High 1.3x 8.5x 13.9x 21.0x 22.0x 18.8x Priced Italian Low 0.6 4.6 8.1 10.9 12.3 11.6 Comparables (4)Mean 0.9 6.3 9.7 14.6 15.7 14.1 Median 0.8 5.8 8.6 14.1 14.3 12.1 ------------------------------------------ Plus: Cash (5) $ 125,805 $ 125,805 $ 125,805 ------------------------------------------ Diluted Shares Outstanding (6) 20,776 20,776 20,776 20,776 - Implied Equity Value Per Share Pizza and Value High $ 27.81 $ 38.56 $ 43.95 $ 38.53 $ 40.79 $ 35.13 Priced Italian Low 16.36 23.77 28.22 19.97 22.87 21.65 Comparables Mean 21.15 30.11 32.45 26.85 29.19 26.50 Median 20.41 28.18 29.70 25.96 26.55 22.72 10/4/98 Book Value Sbarro Operating Parameters (2) $ 241,838 Comparable Company Valuation Multiples(3) Pizza and Value High 2.6x Priced Italian Low 1.0 Comparables (4)Mean 2.1 Median 2.3 Plus: Cash (5) Diluted Shares Outstanding (6) 20,776 Implied Equity Value Per Share Mean Pizza and Value High $ 30.20 $36.42 Priced Italian Low 11.54 20.63 Comparables Mean 23.97 27.17 Median 27.07 25.80 (1) Financial information for the latest twelve months ended 10/4/98. (2) Parameters exclude one-time charges. (3) Revenue, EBITDA, and EBIT are multiples of Enterprise Value. Net Income and Book Value are multiples of Equity Value. (4) Includes CEC Entertainment, Darden Restaurants, NPC International, Pizza Inn, and Uno Restaurant Corp. See Appendix for more detail. (5) As of 10/4/98 Form 10-Q. (6) Calculated using the treasury stock method.
46 PROJECT OREGANO SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES
(In millions, except per LTM FYE Shares share data) Ticker Date Date Out. ------ ---- ---- ------ CEC Entertainment, Inc. (b) CEC 10/04/98 01/02/98 18.0 Darden Restaurants, Inc. (c)(d) DRI 11/29/98 05/31/98 137.8 NPC International, Inc. (e)(f) NPCI 09/29/98 03/31/98 24.4 Pizza Inn, Inc. (g)(h)* PZZI 09/27/98 06/28/98 11.7 Uno Restaurant Corporation (i) UNO 09/27/98 09/27/98 10.3 Sbarro, Inc. (Trading (j)(k) SBA 10/4/98 12/28/97 20.5 Multiples) Summary Statistics Exclude Sbarro, Inc.
TABLE CONTINUED
Based on Latest Twelve Months Results ------------------------------------- Enterprise Value Market Values Multiples Equity Value Multiples ------------- ---------------- ---------------------- (In millions, except per 1/12/99 Book Net LTM share data) Per Share Equity Unlevered Sales EBITDA EBIT Value Income E.P.S. --------- ------ --------- ----- ------ ---- ----- ------ ------ CEC Entertainment, Inc. (b) $25.19 $463.7 $480.4 1.3x 5.8x 8.5x 2.6x 14.1x 14.3x Darden Restaurants, Inc. (c)(d) $18.00 $2,532.8 $2,840.6 0.8x 8.5x 13.9x 2.5x 21.0x 22.1x NPC International, Inc. (e)(f) $12.25 $305.0 $391.3 0.9x 5.4x 8.6x 2.1x 14.9x 15.1x Pizza Inn, Inc. (g)(h)* $3.94 $48.0 $54.8 0.8x 7.1x 8.1x 7.4x 10.9x 12.0x Uno Restaurant Corporation (i) $7.06 $73.0 $114.4 0.6x 4.6x 9.1x 1.0x 12.1x 12.8x Sbarro, Inc. (Trading (j)(k) $25.38 $521.2 $395.4 1.1x 5.0x 7.0x 2.2x 13.6x 13.6x Multiples)
TABLE CONTINUED
Based on Forward Results ------------------------ Equity Value Multiples ---------------------- 1999 P/E/ (In millions, except per 1998 1999 5yr share data) E.P.S. E.P.S. Growth ----- ------ -------- CEC Entertainment, Inc. (b) 14.0x 11.6x 0.5x Darden Restaurants, Inc. (c)(d) 22.0x 18.8x 1.4x NPC International, Inc. (e)(f) 14.6x 12.1x 0.6x Pizza Inn, Inc. (g)(h)* 12.3x NA NA Uno Restaurant Corporation (i) NA NA NA Sbarro, Inc. (Trading (j)(k) 13.7x 13.5x 2.7x Multiples) Summary Statistics Exclude High 1.3x 8.5x 13.9x 2.6x 21.0x 22.1x 22.0x 18.8x 1.4x Sbarro, Inc. Low 0.6x 4.6x 8.1x 1.0x 10.9x 12.0x 12.3x 11.6x 0.5x Mean 0.9x 6.3x 9.7x 2.1x 14.6x 15.2x 15.7x 14.1x 0.8x Median 0.8x 5.8x 8.6x 2.3x 14.1x 14.3x 14.3x 12.1x 0.6x Sbarro, Inc. (Implied 1.3x 5.9x 8.3x 2.5x 15.7x 15.5x 15.5x 15.4x NM Multiple at Offer Price)
See footnote descriptions on page 65. 47 PROJECT OREGANO VALUATION SUMMARY IMPLIED VALUATION - FAST FOOD RESTAURANT COMPARABLE COMPANIES [GRAPHIC OMITTED] Graph comparing the offer price to the implied share price of Fast Food restaurants based on LTM revenue, LTM EBITDA, LTM EBIT, LTM new income, 1998 EPS, 1999 EPS and book value. 48 PROJECT OREGANO VALUATION SUMMARY
Comparable Company Summary Valuation Matrix - Fast Food Restaurants (In thousands, except per share) Offer Price $28.85 Enterprise Value / Equity Value / --------------------------------------- -------------------------------------------- LTM (1) LTM (1) LTM (1) LTM (1) 10/4/98 Revenue EBITDA EBIT Net Income 1998 EPS 1999 EPS Book Value Sbarro Operating Parameters (2) $357,928 $ 79,804 $ 56,825 $ 38,206 $ 1.86 $ 1.87 $ 241,838 Comparable Company Valuation Multiples (3) Fast Food Restaurant High 2.3x 10.1x 16.0x 21.7x 19.6x 18.8x 6.3x Comparables (4)Low 1.0 8.8 12.6 19.3 18.1 15.4 2.6 Mean 1.6 9.4 13.7 20.3 19.2 17.1 4.1 Median 1.4 9.3 13.1 19.8 19.4 17.0 3.4 ----------------------------------- Plus: Cash (5) $ 125,805 $125,805 $ 125,805 ----------------------------------- Diluted Shares Outstanding (6) 20,776 20,776 20,776 20,776 - - 20,776 Implied Equity Value Per Share Mean Fast Food Restaurant High $ 46.22 $ 44.84 $ 49.83 $ 39.92 $ 36.49 $ 35.13 $ 73.60 $46.57 Comparables Low 23.34 39.86 40.59 35.47 33.69 28.94 29.98 33.13 Mean 32.78 42.04 43.52 37.30 35.59 31.98 47.56 38.68 Median 30.79 41.72 41.83 36.50 36.10 31.93 39.10 36.85 (1) Financial information for the latest twelve months ended 10/4/98. (2) Parameters exclude one-time charges. (3) Revenue, EBITDA, and EBIT are multiples of Enterprise Value. Net Income and Book Value are multiples of Equity Value. (4) Includes Foodmaker, Tricon Global Restaurants, Sonic Corp., and Wendy's. See Appendix for more detail. (5) As of 10/4/98 Form 10-Q. (6) Calculated using the treasury stock method.
49 PROJECT OREGANO SELECTED COMPARABLE FAST FOOD COMPANIES
(In millions, except per LTM FYE Shares share data) Ticker Date Date Out. ------ ---- ---- ---- Foodmaker, Inc. (b) FM 09/27/98 09/27/98 38.0 Tricon Global Restaurants, (c)(d)* YUM 09/05/98 12/27/97 152.9 Inc. Sonic Corp. (e) SONC 08/31/98 08/31/98 18.9 Wendy's International, Inc. (f)(g) WEN 10/04/98 12/28/97 124.4 Sbarro, Inc. (Trading (h)(i) SBA 10/4/98 12/28/97 20.5 Multiples)
TABLE CONTINUED
Based on Latest Twelve Months Results (In millions, except per 1/12/99 Book Net LTM share data) Per Share Equity Unlevered Sales EBITDA EBIT Value Income E.P.S. --------- ------ --------- ----- ------ ---- ----- ------ ------ Foodmaker, Inc. $21.94 $866.1 $1,177.9 1.0x 8.8x 12.8x 6.3x 21.7x 22.1x Tricon Global Restaurants, $49.88 $7,656.0 $11,251.0 1.3x 9.7x 16.0x NA 56.2x 57.1x Inc. Sonic Corp. $22.88 $443.5 $510.8 2.3x 10.1x 13.3x 3.4x 19.8x 20.2x Wendy's International, Inc. $22.00 $2,769.1 $3,118.4 1.6x 8.9x 12.6x 2.6x 19.3x 20.2x Sbarro, Inc. (Trading $25.38 $521.2 $395.4 1.1x 5.0x 7.0x 2.2x 13.6x 13.6x Multiples)
TABLE CONTINUED
Based on Forward Results ------------------------ Equity Value Multiples ---------------------- 1999 P/E/ (In millions, except per 1998 1999 5yr share data) E.P.S. E.P.S. Growth Foodmaker, Inc. 18.1x 15.4x 0.8x Tricon Global Restaurants, 19.6x 18.8x 1.3x Inc. Sonic Corp. 19.4x 16.3x NA Wendy's International, Inc. 19.5x 17.7x 1.3x Sbarro, Inc. (Trading 13.7x 13.5x 3.7x Multiples) High 2.3x 10.1x 16.0x 6.3x 21.7x 22.1x 19.6x 18.8x 1.3x Low 1.0x 8.8x 12.6x 2.6x 19.3x 20.2x 18.1x 15.4x 0.8x Mean 1.6x 9.4x 13.7x 4.1x 20.3x 20.8x 19.2x 17.1x 1.1x Median 1.4x 9.3x 13.1x 3.4x 19.8x 20.2x 19.4x 17.0x 1.3x 1.3x 5.9x 8.3x 2.5x 15.7x 15.5x 15.5x 15.4x NM See footnote descriptions on page 76.
50 PROJECT OREGANO ----------------------------------- G. COMPARABLE TRANSACTIONS ANALYSIS ------------------------------------ PROJECT OREGANO VALUATION SUMMARY IMPLIED VALUATION- COMPARABLE TRANSACTIONS (Graphic omitted) Graph comparing the offer price to the implied share price of comparable transactions based on LTM revenue, LTM EBITDA, LTM EBIT, LTM new income, 1998 EPS, 1999 EPS and book value. 52
PROJECT OREGANO VALUATION SUMMARY Comparable Transaction Summary Valuation Matrix (In thousands, except per share) Offer Price $28.85 Enterprise Value / Equity Value / --------------------------------------------- --------------------------- LTM (1) LTM (1) LTM (1) LTM (1) 10/4/98 Revenue EBITDA EBIT Net Income Book Value Sbarro Operating Parameters (2) $ 357,928 $ 79,804 $ 56,825 $ 38,206 $ 241,838 Comparable Transaction Valuation Multiples (3) High 1.4x 8.4x 16.4x 28.0x 6.1x Low 0.6 6.8 9.0 12.5 0.9 Mean 0.9 7.5 12.1 19.3 3.3 Median 0.7 7.3 12.5 18.2 2.7 Plus: Cash (4) $ 125,805 $ 125,805 $ 125,805 Diluted Shares Outstanding (5) 20,776 20,776 20,776 20,776 20,776 Implied Equity Value Per Share Mean High $ 30.25 $ 38.41 $ 50.98 $ 51.49 $ 71.48 $ 48.52 Low 15.61 31.99 30.63 22.93 11.01 22.43 Mean 21.22 34.73 39.26 35.54 38.33 33.82 Median 18.54 34.23 40.30 33.48 31.61 31.63 (1) Financial information for the latest twelve months ended 10/4/98. (2) Parameters exclude one-time charges. (3) Revenue, EBITDA, and EBIT are multiples of Enterprise Value. Net Income and Book Value are multiples of Equity Value. Includes Spaghetti Warehouse, Au Bon Pain, Pollo Tropical, Bertucci's, DavCo Restaurants, International Dairy Queen, Perkins Family Restaurants, Krystal Company, and Family Restaurants. See Appendix for more detail. (4) As of 10/4/98 Form 10-Q. (5) Calculated using the treasury stock method.
53 PROJECT OREGANO VALUATION SUMMARY
Comparable Transactions Valuation Summary ($ in millions) Target Target Anounced Offer Terms EV Acquiror Business Description Effective Attitude EPP - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Spaghetti Warehouse Operates 40 full service restaurants 9/18/98 Cash $ 50.7 casual-dining which compete in Pending Friendly $ 46.2 Consolidated Restaurant Cos the Italian segment. - -------------------------------------------------------------------------------------------------------------------- Au Bon Pain Co Inc. (2) Own 152 stores and franchises 111 8/13/98 Cash $ 73.0 quick-service restaurants worldwide Pending Friendly $ 73.0 Bruckmann Rosser Sherrill & Co. - -------------------------------------------------------------------------------------------------------------------- Pollo Tropical Inc Owns and operates 36, and franchise 6/4/98 Cash $ 95.1 19, quick-service restaurants. 7/20/98 Friendly $ 94.9 Carrols Corp - -------------------------------------------------------------------------------------------------------------------- Bertucci's (3) (4) Operates 84, full-service Italian 4/3/98 Cash $101.7 $ 140.3 restaurants in 11 states. 7/21/98 Friendly $ 93.5 0.7x NE Restaurant Co. - -------------------------------------------------------------------------------------------------------------------- DavCo Restaurants (5) (6) Operates 229 Wendy's International 9/5/97 Cash $202.2 $ 299.1 Restaurants and 34 Friendly's 3/24/98 Friendly $151.1 0.7x DavCo Acquisition Holding Inc. Restaurants. - -------------------------------------------------------------------------------------------------------------------- International Dairy Queen (7) Develops, licenses and services a 10/21/97 Stock $536.6 $ 421.1 chain of over 6,000 quick-service 1/8/98 Friendly $582.2 1.3x Berkshire Hathaway, Inc. restaurants - -------------------------------------------------------------------------------------------------------------------- Perkins Family Restaurants, L.P. Owns and)operates 135 restaurants 8/4/97 Cash $240.8 $ 262.8 (8)(9)(10) and 333 franchised restaurants 12/23/97 Friendly $186.4 0.9x The Restaurant Company in 32 states. - -------------------------------------------------------------------------------------------------------------------- Krystal Company (11) Owns and operates over 250 9/2/97 Cash $137.6 $ 248.2 franchised quick-service restaurants 9/29/97 Friendly $108.4 0.6x Port Royal Holdings, Inc. in 8 states - -------------------------------------------------------------------------------------------------------------------- Family Restaurants, Inc. (12)(13) Coco's operates 170 bakery 3/4/96 Cash $306.5 $ 501.2 (Coco's and Carrows) restaurants and Carrows 5/23/96 Friendly $135.0 0.6x Flagstar Companies, Inc. operates 157 family restaurants primarily in California. - -------------------------------------------------------------------------------------------------------------------- Table continued Target Revenue EBIT EBITDA Net Income TBV Acquiror EV/REV. EV/EBIT EV/EBITDA EPP/Net Inc. EPP/TBV - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Spaghetti Warehouse $ 66.0 $ 2.3 $ 6.1 $ 1.2 $129.6 0.8x 22.5x 8.3x 38.7x 0.4x Consolidated Restaurant Cos - ---------------------------------------------------------------------------------------------- Au Bon Pain Co Inc. (2) $ 190.7 NA NA NA NA 0.4x NA NA NA NA Bruckmann Rosser Sherrill & Co. - ------------------------------------------------------------------------------------------------ Pollo Tropical Inc $ 67.7 $ 9.8 $12.2 $ 5.9 $ 31.1 1.4x 9.7x 7.8x 16.0x 3.1x Carrols Corp - ------------------------------------------------------------------------------------------------ Bertucci's (3) (4) $ 140.3 $ 6.2 $14.9 $ 3.3 $ 72.3 0.7X 16.4x 6.8x 28.0x 1.3x NE Restaurant Co. - ------------------------------------------------------------------------------------------------ DavCo Restaurants (5) (6) $ 299.1 $15.1 $24.0 $ 6.3 $ 24.6 0.7x 13.4x 8.4x 23.8x 6.1x DavCo Acquisition Holding Inc. - ------------------------------------------------------------------------------------------------ International Dairy Queen (7) $ 421.1 $59.7 $66.2 $38.1 $ 97.9 1.3x 9.0x 8.1x 15.3x 5.9x Berkshire Hathaway, Inc. - ------------------------------------------------------------------------------------------------ Perkins Family Restaurants, L.P. $ 262.8 $19.2 $35.1 $ 9.1 NM (8)(9)(10) 0.9x 12.5x 6.9x 20.5x NM The Restaurant Company - ------------------------------------------------------------------------------------------------ Krystal Company (11) $ 248.2 9.3 $20.4 $ 3.4 $ 45.6 0.6x 14.8x 6.8x NM 2.4x Port Royal Holdings, Inc. - ------------------------------------------------------------------------------------------------ Family Restaurants, Inc. (12)(13) $501.2 $33.2 NA $ 10.0 $132.2 (Coco's and Carrows) 0.6x 9.2x NA 12.5x 0.9x Flagstar Companies, Inc. - ------------------------------------------------------------------------------------------------ Summary Statistics (excludes pending transactions) Legend High 1.4x 16.4x 8.4x 28.0x 6.1x EV = Enterprise Value Low 0.6x 9.0x 6.8x 12.5x 0.9x EPP = Equity Purchase Price Mean 0.9x 12.1x 7.5x 19.3x 3.3x LTM = Latest Twelve Months Median 0.7x 12.5x 7.3x 18.2x 2.7x TBV = Tangible Book Value Sbarro's Implied Multiple at Offer Price 1.3x 8.3x 5.9x 15.7x 2.5x 54 PROJECT OREGANO VALUATION SUMMARY Footnotes: - ------------------------------------ (1) Financial data excludes the results of discontinued operations, extraordinary gains, one-time charges and pending transactions. Unless otherwise noted, options are assumed to be cashed out based on the treasury stock method. (2) The management discussions in the relevant 10-K and 10-Qs were the source of the revenue for the Au Bon Pain business unit. (3) Outstanding shares as of the Form S-4 dated 11/5/98. (4) Financial data as of LTM ended 4/18/98. (5) Rule 13e-3 transaction. Buying group owned 48% of outstanding common stock. (6) Financial data as of fiscal year ended 9/27/97. (7) Depreciation and amortization not disclosed in Form 10-Q. Depreciation and amortization is from latest Form 10-K. (8) Company is a "pass through" entity. Tangible book value (TBV) has been excluded from summary statistics. (9) Net income is calculated based on an assumed 40% tax rate. (10) Rule 13e-3 transaction. (11) Company filed for bankruptcy in 1995, filed a plan of reorganization in Feb. 1997, and was acquired in September. Therefore, the net income multiple has been excluded from the summary statistics. (12) Family Restaurants was a private company at the time of the transaction. (13) Assumption of debt includes issuance of $150MM of senior notes to refinance target's outstanding balance on revolver and the assumption of capital lease obligations.
55 PROJECT OREGANO ---------------------------- H. COMPARABLE COMPANIES VALUATION UPDATE --------------------------- PROJECT OREGANO VALUATION SUMMARY
Comparable Companies - Valuation Update At 4/15/98 ------------------------------------------------------------------------ Company Name Symbol Stock Price LTM EPS/ PE FTM EPS/PE (1) 1998 EPS/PE 1999 EPS/PE - -------------------------------- ---------- ----------- -------------- ---------------- -------------- ------------- Sbarro, Inc. SBA $29.50 $1.86 $2.08 $1.86 $1.87 15.9x 14.2x 15.9x 15.7x Comparable Pizza and Value Priced Italian Food Companies CEC Entertainment, Inc. CEC $33.56 $1.34 $1.66 $1.66 $1.98 25.0x 20.2x 20.2x 17.0x Carden Restaurants, Inc. DRI $17.69 $0.53 $0.78 $0.74 $0.94 33.4x 22.7x 23.9x 18.8x NPC International, Inc. NPCI $13.00 $0.72 $0.94 $0.95 $1.18 18.1x 13.8x 13.7x 11.0x Pizza Inn, Inc. PZZI $5.50 $0.34 $0.42 $0.42 NA 16.2x 13.1x 13.1x NA Uno Restaurant Corporation UNO $7.50 $0.42 NA NA NA 17.9x NA NA NA ------------------------------------------------------------------------ - Excludes Mean 22.1x 17.5x 17.7x 15.6x Sbarro Median 18.1x 17.0x 17.0x 17.0x ------------------------------------------------------------------------ - Comparable Fast Food Companies Foodmaker, Inc. FM $20.25 $0.95 $1.16 $1.17 $1.40 21.3x 17.5x 17.3x 14.5x Tricon Global Restaurants, Inc. YUM $31.69 ($0.04) $1.86 $1.88 $2.12 NM 17.0x 16.9x 14.9x Sonic Corp. SONC $22.50 $0.99 $1.19 $1.15 NA 22.8x 18.9x 19.6x NA Wendy's International, Inc. WEN $22.00 $1.24 $1.14 $1.17 $1.34 17.7x 19.3x 18.8x 16.4x ------------------------------------------------------------------------ - Excludes Mean 20.6x 18.2x 18.1x 15.3x Sbarro Median 21.3x 18.2x 18.1x 14.9x ------------------------------------------------------------------------ - Table continued At 01/12/99 ----------------------------------------------------------- ------------- Company Name Stock Price LTM EPS/PE FTM EPS/PE (1) 1998 EPS/PE 1999 EPS/PE - -------------------------------- ------------ ------------- ----------------- ------------- ------------- Sbarro, Inc. . $25.38 $1.86 NA $1.86 $ 1.87 -14.0% 13.6x NA 13.7x 13.5x Comparable Pizza and Value Price Italian Food Companies CEC Entertainment, Inc. $25.19 $1.77 $2.08 $1.80 $ 2.18 -25.0% 14.3x 12.1x 14.0x 11.6x Carden Restaurants, Inc. $18.00 $0.82 $0.90 $0.82 $ 0.96 1.8% 22.1x 20.0x 22.0x 18.8x NPC International, Inc. $12.25 $0.81 $0.87 $0.84 $ 1.01 -5.8% 15.1x 14.1x 14.6x 12.1x Pizza Inn, Inc. $3.94 $0.33 NA $0.32 NA -28.4% 12.0x NA 12.3x NA Uno Restaurant Corporation $7.06 $0.55 NA NA NA -5.8% 12.8x NA NA NA ------------------------------------------------------------------- -12.6% 15.2x 15.4x 15.7x 14.1x -5.8% 14.3x 14.1x 14.3x 12.1x ------------------------------------------------------------------- Comparable Fast Food Companies Foodmaker, Inc. $21.94 $0.99 $1.33 $1.21 $1.42 8.3% 22.1x 16.5x 18.1x 15.4x Tricon Global Restaurants, Inc. $49.88 $0.87 $2.58 $2.54 $2.66 57.4% 57.1x 19.3x 19.6x 18.8x Sonic Corp. $22.88 $1.13 $1.32 $1.18 $1.40 1.7% 20.2x 17.3x 19.4x 16.3x Wendy's International, Inc. $22.00 $1.09 $1.22 $1.13 $1.24 0.0% 20.2x 18.0x 19.5x 17.7x ------------------------------------------------------------------------ 16.8% 20.8x (2) 17.8x 19.2x 17.1x 5.0% 20.2x (2) 17.7x 19.4x 17.0x ------------------------------------------------------------------------ - ------------------------------------------ Note: Earnings estimates from First Call except Sbarro estimates which are from Company provided projections. (1) Forward twelve months. (2) Excludes Tricon Global Restaurants.
57 PROJECT OREGANO -------------------- APPENDIX -------------------- PROJECT OREGANO --------------------------------- A. COMPARABLE COMPANIES ANALYSIS --------------------------------- PROJECT OREGANO -------------------------------------------------- 1. PIZZA AND VALUE PRICED ITALIAN RESTAURANTS --------------------------------------------------- PROJECT OREGANO APPENDIX Company Descriptions CEC Entertainment Inc. The company is engaged in the family restaurant/entertainment center business through its Chuck E. Cheese's Pizza restaurants which offer a variety of pizza, salad bar, sandwiches and desserts and feature musical and comic entertainment by life-size, computer-controlled robotic characters, family oriented games, rides and arcade-style activities. As of October 19, 1998, the company operated 259 restaurants and franchisees operated 61 restaurants located in 44 states. Darden Restaurants, Inc. The company is the world's largest full-service restaurant organization. As of August 30, 1998, the company operated 1,143 restaurants, including 642 domestic Red Lobster restaurants, 459 domestic The Olive Garden restaurants and 3 domestic Bahama Breeze restaurants. The company also operated 39 restaurants in Canada, including 34 Red Lobster and 5 The Olive Garden restaurants. All of its restaurants are company owned and operated. NPC International, Inc. The company is the largest Pizza Hut franchisee in the world. As of September 29, 1998, the company owned and operated 524 Pizza Hut restaurants and 125 Pizza Hut delivery units. Pizza Inn, Inc. The company is the franchisor and food/supplies distributor to a system of restaurants operating under the Pizza Inn name. As of September 9, 1998, the Pizza Inn system consisted of 505 units, including 3 company operated units and 502 franchised units. Pizza Inn units are located in 22 states and 19 foreign countries. Domestic units, which are comprised of 294 full-service units, 40 delivery/carry-out units and 98 express units, are located predominantly in the southern half of the United States, with Texas, North Carolina and Arkansas accounting for approximately 29%, 16% and 11%, respectively, of the total. Uno Restaurant Corporation As of October 12, 1998, the company owned and operated or franchised a total of 163 restaurants in 19 states, the District of Columbia and 3 foreign countries. These restaurants include 97 owned and 66 franchised casual dining, full-service restaurants under the Pizzeria Uno Chicago Bar & Grill name. The company also operates a consumer foods division, which supplies American Airlines, movie theaters, hotel restaurants and supermarkets in the Northeast with both frozen and refrigerated Pizzeria Uno brand products, as well as certain private label products. 61 PROJECT OREGANO SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES
Latest Twelve Month Results --------------------------- (In millions, except per share data) Rest. Net Book Sales Pft. EBITDA EBIT Inc. Assets Value Debt ROE -------- ------ ------ ------ ------ -------- -------- ------ ----- CEC Entertainment, Inc. $380.3 $139.6 $83.4 $56.5 $32.9 $244.4 $178.7 $27.0 19.2% Darden Restaurants, Inc. $3,409.6 $686.6 $335.7 $205.1 $120.9 $1,879.4 $1,000.4 $320.9 11.7% NPC International, Inc. $443.4 $78.8 $72.6 $45.3 $20.4 $314.4 $143.9 $90.2 16.3% Pizza Inn, Inc. $68.2 $11.5 $7.7 $6.8 $4.4 $20.5 $6.5 $7.8 50.7% Uno Restaurant $191.3 $38.5 $24.8 $12.5 $6.0 $143.2 $73.7 $43.4 8.3% Corporation Sbarro, Inc. (Trading $357.9 $96.4 $79.8 $56.8 $38.2 $283.1 $241.8 $0.0 16.8% Multiples)
TABLE CONTINUED
Latest Fiscal Year Results ------------------ (In millions, except per share data) Sales EBIT Net CEC Entertainment, Inc. $349.2 $44.4 $25.1 Darden Restaurants, Inc. $3,287.0 $173.8 $101.7 NPC International, Inc. $455.3 $45.6 $19.5 Pizza Inn, Inc. $68.6 $7.8 $5.0 Uno Restaurant $191.3 $12.5 $6.0 Corporation Sbarro, Inc. (Trading $345.1 $57.1 $38.1 Multiples)
TABLE CONTINUED
(In millions, except Per Share Results (a) EPS Growth per share data) --------------------- ---------- LTM 1998 1999 98-99 5-Yrs. CEC Entertainment, Inc. $1.77 $1.80 $2.18 21.1% 22.00% Darden Restaurants, Inc. $0.82 $0.82 $0.96 17.1% 13.00% NPC International, Inc. $0.81 $0.84 $1.01 20.2% 21.00% Pizza Inn, Inc. $0.33 $0.32 NA NA 11.00% Uno Restaurant $0.55 NA NA NA 15.00% Corporation Sbarro, Inc. (Trading $1.86 $1.86 $1.87 0.8% 5.04% Multiples) High 21.1% 22.0% Low 17.1% 11.0% Mean 19.5% 16.4% Median 20.2% 15.0% Summary Statistics Exclude Sbarro, Inc.
62 PROJECT OREGANO SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES
Latest Twelve Months -------------------- (In millions, except per Margins Credit share data) ------- ------ Rest. Crnt. Debt/ EBITDA/ Pft. S,G&A EBITDA EBIT Net Debt/Cap. Ratio EBITDA Int. ----- ----- ------ ---- ----- --------- ----- ------ ------ CEC Entertainment, Inc. 36.7% 21.9% 21.9% 14.8% 8.6% 0.1x 0.7x 0.3x 42.2x Darden Restaurants, Inc. 20.1% 14.1% 9.8% 6.0% 3.5% 0.2x 0.6x 1.0x 16.1x NPC International, Inc. 17.8% 7.8% 16.4% 10.2% 4.6% 0.4x 0.3x 1.2x 5.0x Pizza Inc, Inc. 16.9% 7.0% 11.3% 9.9% 6.5% 0.5x 1.8x 1.0x 16.3x Uno Restaurant Corporation 20.1% 13.5% 13.0% 6.5% 3.1% 0.4x 0.3x 1.8x 7.0x Sbarro, Inc. (Trading 26.9% 11.8% 22.3% 15.9% 10.7% 0.0x 4.5x NA NA Multiples)
TABLE CONTINUED
(In millions, except per Two Year Growth share data) Sales EBIT EBITDA Net Income ----- ----- ------ ---------- CEC Entertainment, Inc. 15.2% 301.2% 64.2% NA Darden Restaurants, Inc. 1.5% -9.1% -6.2% -9.2% NPC International, Inc. 18.4% 17.0% 18.8% 9.2% Pizza Inc, Inc. -0.6% 6.8% 8.2% 13.6% Uno Restaurant Corporation 5.4% 18.9% 6.4% 17.0% Sbarro, Inc. (Trading 4.5% 9.5% 6.7% 10.1% Multiples) Summary Statistics Exclude Sbarro, Inc.
High 36.7% 21.9% 21.9% 14.8% 8.6% 0.5x 1.8x 1.8x 42.2x Low 16.9% 7.0% 9.8% 6.0% 3.1% 0.1x 0.3x 0.3x 5.0x Mean 22.3% 12.8% 14.5% 9.5% 5.3% 0.3x 0.7x 1.1x 17.3x Median 20.1% 13.5% 13.0% 9.9% 4.6% 0.4x 0.6x 1.0x 16.1x
TABLE CONTINUED
High 18.4% 301.2% 64.2% 17.0% Low -0.6% -9.1% -6.2% -9.2% Mean 8.0% 67.0% 18.3% 7.6% Median 5.4% 17.0% 8.2% 11.4%
63 PROJECT OREGANO SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES Latest Twelve Months --------------------
(Dollars in millions except per unit date) Restaurants ----------- Owned Franchised Total ----- ---------- ----- CEC Entertainment, Inc. 259 61 320 Darden Restaurants, Inc. 1,143 - 1,143 NPC International, Inc. 649 - 649 Pizza Inn, Inc. 3 502 505 Uno Restaurant Corporation 97 66 163 Sbarro, Inc. (Trading Multiples) 625 256 881 Summary Statistics Exclude Sbarro, Inc. High 1,143 502 1,143 Low 3 61 163 Mean 430 210 556 Median 259 66 505
TABLE CONTINUED
(Dollars in millions except per unit date) Per Unit Data (1) ------------------------------------------------------------------------- Revenue EBIT EBITDA EBITDA+Rent ROI ------- ---- ------ ----------- --- CEC Entertainment, Inc. $1,437,000 NA NA NA NA Darden Restaurants, Inc. $2,883,000 $548,000 $657,000 $704,000 28.2% NPC International, Inc. $630,000 NA NA NA NA Pizza Inn, Inc. NA NA NA NA NA Uno Restaurant Corporation $1,856,000 $229,000 $348,000 NA NA Sbarro, Inc. (Trading Multiples) $548,922 $104,131 $138,328 $261,891 30.5% Summary Statistics Exclude Sbarro, Inc. High $2,883,000 $548,000 $657,000 NA NA Low $630,000 $229,000 $348,000 NA NA Mean $1,701,500 $388,500 $502,500 NA NA Median $1,646,500 $388,500 $502,500 NA NA
TABLE CONTINUED
(Dollars in millions except per unit date) New Store (1) ----------------------------- Growth Tot.Cost/Unit ------ -------------- CEC Entertainment, Inc. 2.2% $1,500,000 Darden Restaurants, Inc. -0.7% $2,500,000 NPC International, Inc. -5.7% $725,000 Pizza Inn, Inc. 2.2% NA Uno Restaurant Corporation -1.8% $2,350,000 Sbarro, Inc. (Trading Multiples) 4.3% $859,036 Summary Statistics Exclude Sbarro, Inc. High 2.2% $2,500,000 Low -5.7% $725,000 Mean -0.7% $1,768,750 Median -0.7% $1,925,000
(1) Unit level data from company financials and Credit Suisse First Boston industry research report dated 2/11/98. 64 PROJECT OREGANO SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD COMPANIES Footnotes * Indicates one or more parameters have been excluded from the summary statistics. (a) Earnings estimates from First Call except Sbarro estimates which are from company projections. (b) Gains and losses on property transactions in fiscal 1997, fiscal 1996 and fiscal 1995 were added back net of taxes based on the effective tax rate of the company. (c) Charges for restructuring and asset impairment in fiscal 1996 and 1997 were added back net of taxes based on the effective tax rate of the company. (d) Per unit data and comparative store sales data is for Olive Garden restaurants only. (e) Charges for restructuring and asset impairment in fiscal 1998 and 1996 were added back net of taxes based on the effective tax rate of the company. (f) Excludes gain on recapitalization of Romacorp which was incurred during second quarter of fiscal 1999. Romacorp restaurants excluded from unit data. (g) Provision for bad debt in fiscal 1998 and fiscal 1997 was added back net of taxes based on the effective tax rate of the company. (h) Restaurant count as of the latest fiscal year ended 6/28/98. (i) Special charges in fiscal 1997 and fiscal 1996 were added back net of taxes based on the effective tax rate of the company. (j) Provisions for unit closings in fiscal 1997 and fiscal 1996 were added back net of taxes based on the effective tax rate of the company. (k) Terminated transaction and litigation settlement charges incurred during the forty-weeks ended 10/4/98 were added back net of taxes based on the effective tax rate of the company. 65 PROJECT OREGANO APPENDIX CEC ENTERTAINMENT INC. (1) Daily Prices: July 13, 1998 to January 11, 1999 [GRAPHIC OMITTED] Graph depicting the daily prices of shares of CEC Entertainment Inc. from July 13, 1998 to January 11, 1999. [GRAPHIC OMITTED] Graph depicting the trading volume of shares of CEC Entertainment Inc. from July 13, 1998 to January 11, 1999. (1) Data prior to 7/9/98 is unavailable fromIDD Information Services/Tradeline as a result of the company's name change to CEC Entertainment Inc. Source: IDD Information Services/Tradeline 66 PROJECT OREGANO APPENDIX DARDEN RESTAURANTS INC Daily Prices: January 12, 1998 to January 11, 1999 [GRAPHIC OMITTED] Graph depicting the daily prices of shares of Darden Restaurants, Inc. from January 12, 1998 to January 11, 1999. [GRAPHIC OMITTED] Graph depicting trading volume of shares of Darden Restaurants, Inc. from January 12, 1998 to January 11, 1999. Source: IDD Information Services/Tradeline 67 PROJECT OREGANO APPENDIX NPC INTERNATIONAL INC Daily Prices: January 12, 1998 to January 11, 1999 [GRAPHIC OMITTED] Graph depicting the daily prices of shares of NPC International, Inc. from January 12, 1998 to January 11, 1999. [GRAPHIC OMITTED] Graph depicting trading volume of shares of NPC International, Inc. from January 12, 1998 to January 11, 1999. Source: IDD Information Services/Tradeline 68 PROJECT OREGANO APPENDIX PIZZA INN INC Daily Prices: January 12, 1998 to January 11, 1999 [GRAPHIC OMITTED] Graph depicting the daily prices of shares of Pizza Inn Inc. from January 12, 1998 to January 11, 1999. [GRAPHIC OMITTED] Graph depicting trading volume of shares of Pizza Inn Inc. from January 12, 1998 to January 11, 1999. Source: IDD Information Services/Tradeline 69 PROJECT OREGANO APPENDIX UNO RESTAURANT CORP Daily Prices: January 12, 1998 to January 11, 1999 [GRAPHIC OMITTED] Graph depicting the daily prices of shares of UNO Restaurant Corp. from January 12, 1998 to January 11, 1999. [GRAPHIC OMITTED] Graph depicting trading volume of shares of UNO Restaurant Corp. from January 12, 1998 to January 11, 1999. Source: IDD Information Services/Tradeline 70 PROJECT OREGANO -------------------------- 2. FAST FOOD RESTAURANTS -------------------------- PROJECT OREGANO APPENDIX Company Descriptions Foodmaker, Inc. The company owns, operates and franchises Jack in the Box restaurants, a fast-food chain located principally in the Western and Southwestern United States. Jack in the Box is a leading regional competitor in the fast-food segment of the restaurant industry. At September 28, 1997, there were 1,414 Jack in the Box restaurants, of which 1069 were operated by the company and 345 were franchised. TRICON Global Restaurants, Inc. The company is the world's largest quick service restaurant company based on number of units, with 29,600 units in 95 countries and territories. The company, owns, operates and franchises three of the most recognized restaurant concepts, Pizza Hut, Taco Bell and KFC. As of September 5, 1998, the company's system included 10,049 company operated/joint venture restaurants and 19,551 franchised/licensed restaurants. Sonic Corp. The company operates and franchises the largest chain of drive-in restaurants in the United States. As of August 31, 1998, the company had 1,847 restaurants in operation, consisting of 292 company-owned restaurants and 1,555 franchised restaurants, principally in the south central and southeastern United States. At a typical Sonic restaurant, a customer drives into one of 24 to 36 covered drive-in spaces, orders through an intercom, and has the food delivered by a carhop within an average of four minutes. Wendy's International, Inc. The company is primarily engaged in the business of operating, developing, and franchising a system of distinctive quick-service restaurants. At December 28, 1997, there were 5,207 Wendy's restaurants in operation in the United States and in 34 other countries and territories. Of these restaurants, 1,202 were operated by the company and 4,005 were franchised. During the same period, the company operated 124 Tim Hortons restaurants and its franchisees operated 1,454 in Canada and the United States. 72 PROJECT OREGANO SELECTED COMPARABLE FAST FOOD COMPANIES
Latest Twelve Month Results ------------------------------------------------------------------------------------------- (in millions, except Results per share data) ------------------------------------------------------------------------------------------- Sales Rest. EBITDA EBIT Net Assets Book Debt ROE Pft. Inc. Value ----- ---- ------ ---- --- ----- ------ ----- --- Foodmaker, Inc. $1,174.3 $179.4 $133.8 $91.7 $39.9 $743.6 $137.0 $321.7 35.5% Tricon Global $8,732.0 $1,612.0 $1,158.0 $703.0 $136.2 $4,616.0 ($1,375.0) $3,834.01 12.4% Restaurants, Inc. Sonic Corp. $219.1 $83.3 $50.6 $38.4 $22.3 $233.2 $132.0 $69.9 17.9% Wendy's International, $1,970.5 $523.7 $352.2 $246.9 $143.5 $1,794.7 $1,075.3 $451.7 12.6% Inc. Sbarro, Inc. (Trading $357.9 $96.4 $79.8 $56.8 $38.2 $283.1 $241.8 $0.0 16.8% Multiples)
TABLE CONTINUED
Latest Fiscal Year Results ----------------------- (in millions, except Results Per Share Results EPS Growth per share data) (a) ------------------------- --------------------- --------------- Sales EBIT Net LTM 1998 1999 98-99 5-Yrs. ----- ---- --- --- ---- ---- ----- ------ Foodmaker, Inc. $1,174.3 $91.7 $39.9 $0.99 $1.21 $1.42 17.4% 20.00% Tricon Global $9,681.0 $662.0 $141.6 $0.87 $2.54 $2.66 4.7% 15.00% Restaurants, Inc. Sonic Corp. $219.1 $38.4 $22.3 $1.13 $1.18 $1.40 18.6% 17.00% Wendy's International, $2,036.9 $295.3 $173.4 $1.09 $1.13 $1.24 9.7% 14.00% Inc. Sbarro, Inc. (Trading $345.1 $57.1 $38.1 $1.86 $1.86 $1.87 0.8% 3.66% Multiples) Summary Statistics Exclude Sbarro, Inc. High 18.6% 20.0% Low 4.7% 14.0% Mean 12.6% 16.5% Median 13.5% 16.0%
73 PROJECT OREGANO SELECTED COMPARABLE FAST FOOD COMPANIES
Latest Twelve Months --------------------------------------------------------------------------------------------------- (in millions, except per Margins Credit share data) --------------------------------------------- -------------------------------------------------- Rest. S,G&A EBITDA EBIT Net Debt/Cap. Crnt. Debt/EBITDA EBITDA/Int Pft. Ratio ----- ----- ------ ---- --- -------- ------ ----------- ---------- Foodmaker, Inc. 15.3% 7.8% 11.4% 7.8% 3.4% 0.7x 0.4x 2.4x 4.0x Tricon Global Restaurants, 18.5% 10.4% 13.3% 8.1% 1.6% 1.6x 0.4x 3.3x 4.0x Inc. Sonic Corp. 38.0% 20.5% 23.1% 17.5% 10.2% 0.3x 0.7x 1.4x 18.4x Wendy's International, Inc. 26.6% 14.0% 17.9% 12.5% 7.3% 0.3x 1.4x 1.3x 228.9x Sbarro, Inc. (Trading 26.9% 11.8% 22.3% 15.9% 10.7% 0.0x 4.5x NA NA Multiples)
TABLE CONTINUED
(in millions, except per Two Year Growth share data) ---------------------------------------------- Sales EBIT EBITDA Net Income Foodmaker, Inc. 5.3% 13.3% 10.1% 41.1% Tricon Global Restaurants, -2.8% 0.6% -4.9% 13.9% Inc. Sonic Corp. 20.4% 18.8% 20.9% 16.0% Wendy's International, Inc. 8.1% 15.5% 15.1% 11.1% Sbarro, Inc. (Trading 4.5% 9.5% 6.7% 10.1% Multiples)
Summary Statistics Exclude Sbarro, Inc.
High 38.0% 20.5% 23.1% 17.5% 10.2% 1.6x 1.4x 3.3x 228.9x Low 15.3% 7.8% 11.4% 7.8% 1.6% 0.3x 0.4x 1.3x 4.0x Mean 24.6 13.2% 16.4% 11.5% 5.6% 0.7x 0.7x 2.1x 63.9x Median 22.5% 12.2% 15.6% 10.3% 5.3% 0.5x 0.5x 1.9x 11.2x
TABLE CONTINUED
High 20.4% 18.8% 20.9% 16.0% Low -2.8% 0.6% -4.9% 11.1% Mean 7.8% 12.1% 10.3% 13.6% Median 6.7% 14.4% 12.6% 13.9%
74 PROJECT OREGANO SELECTED COMPARABLE FAST FOOD COMPANIES
Latest Twelve Months --------------------------------------------------------------------------------------------------- (Dollars in millions except per Restaurants Per Unit Data (1) unit data) ---------------------------------- --------------------------------------------------------------- Owned Franchised Total Revenue EBIT EBITDA EBITDA+Rent ROI ----- ---------- ----- ------- ---- ------ ----------- --- Foodmaker, Inc. 1,069 345 1,414 $1,114.228 NA NA NA NA Tricon Global Restaurants, Inc. 10,049 19,551 29,600 $630,000 NA NA NA NA Sonic Corp. 292 1,555 1,847 $707,000 NA NA NA NA Wendy's International, Inc. 1,326 5,459 6,785 $1,132,000 $107,000 $172,000 $201,000 20.6% Sbarro, Inc. (Trading Multiples) 625 256 881 $548,922 $104,131 $138,328 $261,891 30.5%
Summary Statistics Exclude Sbarro, Inc.
High 10,049 19,551 29,600 $1,132,000) NA NA NA NA Low 292 345 1,414 $630,000 NA NA NA NA Mean 3,184 6,728 9,912 $895,807 NA NA NA NA Median 1,198 3,507 4,316 $910,614 NA NA NA NA
TABLE CONTINUED
Latest Twelve Months -------------------------- (Dollars in millions except per New Store (1) unit data) ------------------------- Growth Tot.Cost/Unit ------ ------------- Foodmaker, Inc. 6.9% $1,300,000 Tricon Global Restaurants, Inc. -0.4% $725,000 Sonic Corp. 9.9% NA Wendy's International, Inc. 7.4% $975,000 Sbarro, Inc. (Trading Multiples) 4.3% $859,036
Summary Statistics Exclude Sbarro, Inc.
High 9.9% $1,300,000 Low -0.4% $0 Mean 6.0% $750,000 Median 7.1% $850,000
(1) Unit level data from company financials and Credit Suisse First Boston industry research report dated 2/11/98. 75 PROJECT OREGANO SELECTED COMPARABLE FAST FOOD COMPANIES Footnotes * Indicates one or more parameters have been excluded from the summary statistics. (a) Earnings estimates from First Call except Sbarro estimates which are from company projections. (b) Litigation settlement of $45.8 million in fiscal 1998 was removed net of taxes. (c) Unusual charges and gains/losses related to facility actions in fiscal 1997, fiscal 1996, fiscal 1995 and the interim periods ended 9/5/98 and 9/6/97 were added back net of taxes based on a 40% tax rate. (d) Joint venture restaurants are classified as company owned restaurants. Restaurant unit growth between 12/21/97-9/5/98. Per unit data is for Pizza Hut Restaurants only. (e) Provision for Impairment of long-lived assets and provision for litigation settlement in fiscal 1998, fiscal 1997 and fiscal 1996 were added back net of taxes based on the effective tax rate of the company. (f) Non-recurring charges in fiscal 1997 and special charges related to Hortons in fiscal 1995 were added back net of taxes based on the effective tax rate of the company. (g) Non recurring gains from sale of properties to franchisees in all periods was removed net of taxes. Restaurant count as of fiscal 1997. Comparable store growth is for domestic Wendy's restaurants only. (h) Provisions for unit closings in fiscal 1997 and fiscal 1995 were added back net of taxes based on the effective tax rate of the company. (i) Terminated transaction and litigation settlement charges incurred during the forty-weeks ended 10/4/98 were added back net of taxes based on the effective tax rate of the company. 76 PROJECT OREGANO APPENDIX FOODMAKER INC Daily Prices: January 12, 1998 to January 11, 1999 [GRAPHIC OMITTED] Graph depicting the daily prices of shares of Foodmaker Inc. from January 12, 1998 to January 11, 1999. [GRAPHIC OMITTED] Graph depicting trading volume of shares of Foodmaker Inc. from January 12, 1998 to January 11, 1999. Source: IDD Information Services/Tradeline 77 PROJECT OREGANO APPENDIX TRICON GLOBAL RESTAURANTS Daily Prices: January 12, 1998 to January 11, 1999 [GRAPHIC OMITTED] Graph depicting the daily prices of shares of Tricon Global Restaurants from January 12, 1998 to January 11, 1999. [GRAPHIC OMITTED] Graph depicting trading volume of shares of Tricon Global Restaurants from January 12, 1998 to January 11, 1999. Source: IDD Information Services/Tradeline 78 PROJECT OREGANO APPENDIX SONIC CORP Daily Prices: January 12, 1998 to January 11, 1999 [GRAPHIC OMITTED] Graph depicting the daily prices of shares of Sonic Corp. from January 12, 1998 to January 11, 1999. [GRAPHIC OMITTED] Graph depicting trading volume of shares of Sonic Corp. from January 12, 1998 to January 11, 1999. Source: IDD Information Services/Tradeline 79 PROJECT OREGANO APPENDIX WENDY'S INTERNATIONAL Daily Prices: January 12, 1998 to January 11, 1999 [GRAPHIC OMITTED] Graph depicting the daily prices of shares of Wendy's International Inc. from January 12, 1998 to January 11, 1999. [GRAPHIC OMITTED] Graph depicting trading volume of shares of Wendy's International Inc. from January 12, 1998 to January 11, 1999. Source: IDD Information Services/Tradeline 80 PROJECT OREGANO ----------------------------------- B. 13E-3 PREMIUMS ANALYSIS ----------------------------------- PROJECT OREGANO APPENDIX Selected Closed Rule 13e-3 Transactions - Transaction Size: $100 - $500 Million - Date Range: 1/1/92 - 12/2/98
----------------------------------------------------------------------------------------------------------------------------- Transaction Stock Premiums Value Offer Prior to Announcement Date ($ in Share -------------------------- Announced Target Name Acquiror Name Millions) Price 1 Day 1 Week 4 Weeks ----------------------------------------------------------------------------------------------------------------------------- 02/11/98 MTL Inc. Sombrero Acquisition Corp. $250.4 $40.00 37.9% 38.5% 56.1% (1) 08/04/97 Perkins Family Restaurant LP Restaurant Co 76.3 14.00 28.7 26.5 31.8 08/29/97 Rexel Inc Rexel SA(Pinault-Printemps) 302.0 22.50 19.2 30.0 21.6 08/29/96 Amtrol Inc Cypress Group LLC 227.2 28.25 71.2 56.9 56.9 08/14/97 Tuesday Morning Corp Madison Dearborn Partners 298.6 25.00 22.7 25.8 11.1 06/02/97 Acordia Inc(Anthem Inc) Anthem Inc 193.2 40.00 12.7 11.5 26.0 01/28/97 Calgene Inc(Monsanto Co) Monsanto Co 242.6 8.00 62.0 60.0 60.0 (2) 01/21/97 Mafco Consolidated Grp(Mafco) Mafco Holdings Inc 116.8 33.50 23.5 23.5 27.6 01/13/97 Zurich Reinsurance Centre Zurich Versicherungs GmbH 319.0 39.50 17.1 18.5 11.6 07/22/96 Telebit Corp Cisco Systems Inc 196.3 13.35 21.4 22.8 6.0 06/03/96 Univar Corp Pakhoed Holding NV 331.8 19.45 57.2 54.1 58.8 05/24/97 SyStemix Inc(Novartis AG) Novartis AG 107.6 19.50 4.7 69.6 59.2 10/26/95 Maxtor Corp Hyundai Electronics Industries 228.2 6.70 42.9 64.9 44.9 07/14/95 REN Corp-USA(COBE Labs Inc) COBE Laboratories(Gambro AB) 182.1 20.00 27.0 20.3 26.0 04/05/95 Club Med Inc Club Mediterranee SA 153.4 32.00 41.4 39.9 44.6 02/27/95 CCP Insurance Inc Conseco Inc 273.7 23.25 20.0 30.1 23.2 12/28/94 Fleet Mortgage Group Inc Fleet Financial Group Inc,MA 188.1 20.00 19.4 18.5 18.5 11/01/94 Pacific Telecom(PacifiCorp) PacifiCorp 159.0 30.00 23.7 23.7 23.7 09/14/94 Petrolane Inc(QFB Partners) AmeriGas Inc(UGI Corp) 109.6 16.00 48.8 50.6 45.5 09/08/94 Contel Cellular Inc(Contel) GTE Corp 254.3 25.50 43.7 37.8 36.0 09/21/92 MidSouth Corp Kansas City Southern Inds Inc 197.3 20.50 86.4 88.5 86.4 - ------------------------------------------------------------------------------------------------------------------------------------ Summary Statistics High $331.8 86.4% 88.5% 86.4% Low 76.3 4.7% 11.5% 6.0% Mean 207.9 34.8% 38.7% 36.9% Median 196.8 27.0% 30.1% 31.8% Source: Securities Data Corporation All companies are incorporated in states that have supermajority shareholder provisions, unless noted. (1) Transaction is below the range, but shares similar characteristics with the proposed transaction. (2) Acquiror purchased remaining 15% interest for $33.50 per share and paid a cash dividend of $10.00 per share.
82 PROJECT OREGANO ------------------------------------ C. WEIGHTED AVERAGE COST OF CAPITAL ------------------------------------- PROJECT OREGANO APPENDIX - WEIGHTED AVERAGE COST OF CAPITAL
---------------------------------------------------------------------------------------------------- Market Value Market Value Market Value Debt/ Equity/ Debt/ Historic Unlevered of Total Debt of Equity (1) of Total Capital Total Capital Total Capital Equity Beta (3) Beta (4) ---------------------------------------------------------------------------------------------------- CEC Entertainment $ 27.0 $ 463.7 $ 490.6 5.5% 94.5% 5.8% 1.07 1.05 Darden Restuarants, Inc. 320.9 2,532.8 2,853.7 11.2% 88.8% 12.7% 0.77 0.74 NPC International, Inc. 90.2 305.0 395.2 22.8% 77.2% 29.6% 0.82 0.75 Pizza Inn, Inc. 7.8 48.0 55.8 14.0% 86.0% 16.3% 0.45 0.43 Uno Restaurant Corporation 43.4 73.0 116.5 37.3% 62.7% 59.5% 0.61 0.53 Foodmaker, Inc. 321.7 866.1 1,187.8 27.1% 72.9% 37.1% 1.06 0.96 Tricon Global Restaurants, Inc. 3,834.0 7,656.0 11,490.0 33.4% 66.6% 50.1% 0.56 0.49 Sonic Corp. 69.9 443.5 513.4 13.6% 86.4% 15.8% 1.21 1.15 Wendy's International, Inc. 451.7 2,769.1 3,220.9 14.0% 86.0% 16.3% 0.71 0.67 - --------------------------------------------------------------------------------------------------------------------------------- Mean $ 574.1 $ 1,684.1 $ 2,258.2 19.9% 80.1% 27.0% 0.81 0.75 Median $ 90.2 $ 463.7 $ 513.4 14.0% 86.0% 16.3% 0.77 0.74 - --------------------------------------------------------------------------------------------------------------------------------- WACC Calculation Inputs: % Equity (%E) 80.0% Selected Unlevered Beta (Mean Value) 0.75 % Debt (%D) 20.0% Risk-Free Rate (Rf) (5) 5.55% Debt/Equity 25.0% Risk Premium (Rm-Rf) (6) 7.80% Tax Rate 40.00% Small Stock Risk Premium (SSR) (7) 1.70% Beta (Levered) ------------- BL=Bu*[1+((1-t)*D/E)] 0.86 ------------- Cost of Equity Cost of Debt ------------- Ke=Rf+BL*(Rm-Rf)+SSR 13.99% Pre-Tax Cost of Debt (Kd) (8) 8.06% ------------- - ------------------------------------------------------- WACC=[((Kd)*(%D))*(1-t)]+(Ke*(%E)) 12.16% - ------------------------------------------------------
(1) Market value of equity as of 1/12/99. (2) Market value of equity plus market value of total debt. (3) Source: Bloomberg adjusted beta calculation from five years of historical (monthly) price information compared to the S&P 500, excluding Tricon which is monthly since 9/30/97, Darden which is monthly since 5/31/95, and Pizza Inn which is monthly since 8/31/93. (4) Unlevered Beta=Beta/[1+((total debt)*(1-tax rate))/total equity value)] (5) 20-year Treasury as of 1/12/99 as reported on Bloomberg. (6) Source: Ibbotson Associates. Stock Bonds and Inflation, 1998 Yearbook. Large company common stocks total returns minus long term (20 year) government bond total returns. (7) Source: Ibbotson Associates. Stock Bonds and Inflation, 1998 Yearbook. Expected low capitalization equity size premium (capitalization between $261 million and $945 million). (8) Based on 300 basis points over the 6-month Libor Rate as of 1/12/99. 84 EX-99.1(B)(3) 4 PRESENTATION BY BEAR, STEARNS & CO. 10/10/96 PROJECT PIZZA PROJECT PIZZA: POSSIBLE ALTERNATIVE TRANSACTION STRUCTURE October 10, 1996 - -------------------------------------------------------------------------------- PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- I Transaction Overview A. Sources and Uses of Funds B. Pro Forma Capitalization C. Projected Financial Results D. Summary Selected Balance Sheet Items E. Pro Forma Financial Statements F. Pro Forma Equity Ownership II Financial Models A. $32 Price / 1,500,000 public shares left outstanding B. $32 Price / no public shares left outstanding C. $29 Price / 1,500,000 public shares left outstanding PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION I TRANSACTION OVERVIEW TRANSACTION OVERVIEW - -------------------------------------------------------------------------------- o If the self tender price is required to be above $29 per share, the Transaction outlined in our presentation becomes increasingly difficult to finance. o Under such circumstances, we would suggest considering a recapitalization structure whereby instead of offering cash for all of the publicly held shares, approximately 1.5 million shares are left outstanding. This can still be done through the same self tender mechanism, but with a ceiling on the number of shares the Company would accept. o We have modeled such a transaction at $32 per share and found it to be financeable at that level. o Under this structure, the Control Group would still achieve its objectives to: (i) cash out Anthony's shares and his interest in Carmela's Trust; (ii) $40 million in upfront distributions to the Control Group; (iii) $5 million in ongoing annual dividends to the Control Group; (iv) shifting of substantial equity interest to the descendants of the Control Group; and (v) significantly increasing the overall percentage ownership interest of the Control Group and its descendants. o The disadvantage of this alternative is that public shareholders maintain approximately a 30% ongoing interest. We would propose terminating dividends on the common stock. PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION I-A SOURCES AND USES OF FUNDS SOURCES AND USES OF FUNDS - -------------------------------------------------------------------------------- ($ IN MILLIONS) - ----------------------------------------- -------------------------------------- SOURCES OF FUNDS USES OF FUNDS - ----------------------------------------- -------------------------------------- Excess Cash on Balance Sheet(1) $108.0 Total Purchase Price Long Term Marketable Securities 7.5 (@$32 per share) $439.5(3) Distributions to Control Group Senior Debt: Shares Exchanged for Cash 40.0 Revolving Credit Facility 0.0(2) Stock Options Cashed out 1.3(4) Term Loan A 100.0 Term Loan B 52.0 Financing Costs 11.9 Senior Subordinated Notes 230.0 Non-Financing Costs 4.8 --------- ---------- Total New Long Term Debt 382.0 --------- TOTAL SOURCES OF FUNDS $497.5 TOTAL USES OF FUNDS $497.5 ========== =========== - ---- (1) Estimated at December 31, 1996. Includes $2.5 million of short-term marketable securities. (2) Assumes $40 to $50 million Revolving Credit Facility is undrawn at closing. (3) The purchase price of $32.00 per share represents a premium of 24.9% over the closing stock price of $25.625 per share as of October 9, 1996. Excludes shares tendered by Control Group. (4) Represents cash out of stock options owned by Anthony. PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION I-B PRO FORMA CAPITALIZATION PRO FORMA CAPITALIZATION - -------------------------------------------------------------------------------- ($ IN MILLIONS) % OF TOTAL PRO FORMA 12/31/96 CAPITALIZATION INTEREST RATE Senior Debt: Revolving Credit Facility $0.0 0% 8.25%(1) Term Loan A 100.0 99% 8.25%(1) Term Loan B 52.0 50% 8.75%(1) Senior Subordinated Notes 230.0 227% 11.50% ----------- ----------- ---------- TOTAL LONG TERM DEBT 382.0 377% Convertible Preferred Stock 60.6 60% Common Equity (341.3) (337%) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY (280.7) (277%) ----------- ----------- TOTAL CAPITALIZATION $101.3 100% =========== =========== - --------------------------------------- (1) Assumes six month LIBOR rate of 5.75%. PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION I-C PROJECTED FINANCIAL RESULTS PROJECTED FINANCIAL RESULTS(1) - -------------------------------------------------------------------------------- ($ IN MILLIONS)
PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------------------- LTM 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 --- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Revenues $321.4 $329.7 $359.4 $380.0 $401.4 $423.3 $445.6 $468.5 $491.8 $515.7 $540.1 EBITDA(2) 75.9 80.6 91.4 96.3 101.7 107.2 112.8 118.5 124.4 130.4 136.5 Income tax expense (current) 4.9 6.9 12.0 14.8 17.5 21.0 25.1 28.8 33.4 36.6 40.8 Net income 7.4 10.4 18.0 21.6 25.4 30.7 37.3 43.2 50.4 54.9 61.1 Additional dividends 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
- ---- (1) Assumes Subchapter C corporation status. (2) $562,500 in incremental annual rent expense assumed to result from sale of New Facility in mid 1997. PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION I-D SUMMARY SELECTED BALANCE SHEET ITEMS SUMMARY SELECTED BALANCE SHEET ITEMS - --------------------------------------------------------------------------------
($ IN MILLIONS) PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31, ------- ---------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Cash & Cash Equivalents $2.5 $2.5 $2.5 $2.5 $2.5 $29.3 $75.7 $126.0 $180.1 $239.0 ======= ====== ======= ====== ====== ====== ====== ====== ====== ====== Senior Debt Revolving Credit Facility - - - - - - - - - - Term Loan A $100.0 $58.1 $31.1 - - - - - - - Term Loan B 52.0 52.0 52.0 51.7 14.8 - - - - - Senior Subordinated Notes 230.0 230.0 230.0 230.0 230.0 230.0 230.0 230.0 230.0 230.0 ------- ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Debt $382.0 $340.1 $313.0 $281.7 $244.8 $230.0 $230.0 $230.0 $230.0 $230.0 ======= ====== ======= ====== ====== ====== ====== ====== ====== ====== Net Debt $379.5 $337.6 $310.5 $279.2 $242.3 $200.7 $154.3 $104.0 $49.9 $(9.0) ======= ====== ======= ====== ====== ====== ====== ====== ====== ======
PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION I-E PRO FORMA FINANCIAL STATEMENTS PRO FORMA FINANCIAL STATISTICS - -------------------------------------------------------------------------------- LTM ENDED COVERAGE AND LEVERAGE RATIOS JULY 14, 1996(2) 1996E(2) 1997E - ---------------------------- ---------------- -------- ----- EBITDA / Interest 1.93x 2.05x 2.44x EBITDA - CapEx / Interest 1.48 1.68 2.04 EBITDAR / Interest + Rents 1.41 1.46 1.58 Total Debt + Capitalized Leases (1)/EBITDAR 5.8x 5.6x 5.0x Total Debt + Preferred Stock/EBITDA 5.8x 5.5x 4.4x Total Debt / EBITDA 5.0 4.7 3.7 Net Debt / EBITDA 5.0 4.7 3.7 - -------------------------------------------- (1) Leases capitalized at 7.0x Rents for the relevant period. (2) Excludes planned capital expenditures attributable to the Company's corporate facilities. PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION I-F PRO FORMA EQUITY OWNERSHIP POTENTIAL CORPORATE STRUCTURES - -------------------------------------------------------------------------------- EQUITY OWNERSHIP - C-CORP. STRUCTURE
PURCHASE (REPURCHASE) AFTER PURCHASE OF PRE-TRANSACTION OF COMMON SHARES COMMON EQUITY AFTER ESTATE PLANNING ----------------- ---------------- ----------------- ------------------------------- VOTING SHARES % SHARES % SHARES % SHARES % INTEREST ------ --- ------- ---- ------ --- ------- ---- -------- INSIDERS Control Group (Mario and Joseph) 3,474,834 17.1% (1,250,000) -6.1% 2,224,834 41.3% 856,933(2) 17.1% 36.8% Anthony 1,223,300 6.0% (1,223,300) -6.0% - 0.0% - 0.0% 0.0% Trust of Carmela 2,497,884 12.3% (832,628) -4.1% 1,665,256 30.9% 1,665,256 33.2% 33.2% Descendants of Control Group - 0.0% - 0.0% - 0.0% 989,113 19.7% 0.0% PUBLIC SHAREHOLDERS(1) 13,177,724 64.7% (11,677,724) -57.3% 1,500,000 27.8% 1,500,000 29.9% 29.9% Shares Outstanding 20,373,742 100.0% (14,983,652) -73.5% 5,390,090 100.0% 5,011,302 100.0% 100.0%
|X| Assumes issuance of $60.6 million of 8.25% Convertible Preferred Stock to the Control Group in exchange for 1,893,939 shares of common stock. The Preferred Stock would be convertible into common stock at a price of $40 per share. Approximately $40 million of the Convertible Preferred Stock is placed in an Income Tax Defective Trust for the benefit of descendants. - ---- (1) Includes other officers and directors. (2) Excludes stock options. After exercise of outstanding stock options, share ownership increases to 1,556,434 or 27.3%, and total insider ownership is 4,210,803 or 73.7%. PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION II FINANCIAL MODELS PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION I-A $32 PRICE / 1,500,000 PUBLIC SHARES LEFT OUTSTANDING PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION II-B $32 PRICE / NO PUBLIC SHARES LEFT OUTSTANDING PROJECT PIZZA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTION II-C $29 PRICE / 1,500,000 PUBLIC SHARES LEFT OUTSTANDING EX-99.1(B)(4) 5 PRESENTATION BY BEAR, STEARNS & CO. 01/15/97 PROJECT WONTON Presentation to The Board of Directors Alternatives to Enhance Shareholder Value Highly Confidential Not To Be Reproduced or Discussed With Outsiders January 15, 1997 PROJECT WONTON - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- I Situation Assessment II Summary of Alternatives to Increase Shareholder Value III Recommendation Appendices ---------- A Summary Transaction Timetable B Ownership Summary C Traded Volume Analysis D Discounted Cash Flow Analysis E Description of Comparable Companies F Comparable M&A Transactions G Summary Term Sheets H Comparable Recapitalization Transactions - -------------------------------------------------------------------------------- PROJECT WONTON SECTION I SITUATION ASSESSMENT PROJECT WONTON - -------------------------------------------------------------------------------- SITUATION ASSESSMENT - -------------------------------------------------------------------------------- BEAR STEARNS IS PLEASED TO HAVE THIS OPPORTUNITY TO PRESENT OUR RECOMMENDATIONS TO WONTON'S BOARD OF DIRECTORS REGARDING ENHANCING SHAREHOLDER VALUE. AMONG THE FACTORS WE CONSIDERED IN OUR ANALYSIS ARE THE FOLLOWING ASPECTS OF THE COMPANY'S CURRENT SITUATION. o MARKET LEADER: Leading provider of quick service specialty foods in the U.S. and abroad o STABLE CASH FLOW: Proven format provides strong and stable cash flow o INTERNAL GROWTH CONSTRAINTS: Lack of availability of desirable locations may constrain new stores to 35-45 per year o NO BORROWINGS: Cash flow generation in excess of capital expenditures results in unlevered balance sheet o LIMITED ACQUISITION OPPORTUNITIES: Preference for internal development; few similar good concepts o SIGNIFICANT EXCESS CASH: Currently in excess of $100 million in cash - -------------------------------------------------------------------------------- Page 1 PROJECT WONTON - -------------------------------------------------------------------------------- SITUATION ASSESSMENT - -------------------------------------------------------------------------------- AS A RESULT OF CERTAIN OF THESE FACTORS, THE COMPANY'S COMMON STOCK HAS UNDERPERFORMED IN RECENT PERIODS. IN THE CURRENT MARKET ENVIRONMENT, EQUITY INVESTORS FAVOR: o GROWTH EMPHASIS: The equity market has a bias toward strong growth stories o DEPLOYING CASH: Excess cash is not highly valued by investors COMP STORE INCREASES: As organic growth has slowed, the Company's P/E Ratio has declined o SELECTIVE INDUSTRIES: Restaurants are an out of favor sector in the equity markets A CONTINUATION OF CURRENT INVESTOR SENTIMENT, COMBINED WITH POTENTIALLY AGGRESSIVE 1997 WALL STREET ESTIMATES, MAY LEAD TO CONTINUED UNDERPERFORMANCE. - -------------------------------------------------------------------------------- Page 2 PROJECT WONTON
- -------------------------------------------------------------------------------- HISTORICAL FINANCIAL REVIEW - -------------------------------------------------------------------------------- ($ IN MILLIONS) ANALYSTS ACTUAL PROJECTED (1)(2) ----------------------------------------------------- ---------------- 1991 1992 1993 1994 1995 CAGR 1996E 1997E ---- ---- ---- ---- ---- ---- ----- ----- REVENUES $208.0 $236.2 $264.0 $294.0 $316.1 11.0% $328.9 $356.7 % Growth 9.4% 13.6% 11.7% 11.4% 11.3% 4.0% 8.5% EBITDA $51.4 $53.7 $64.0 $73.0 $71.3 8.5% $79.3 $89.2 % Of Revenues 24.7% 22.7% 23.8% 24.4% 22.6% 24.1% 25.0% NET INCOME $21.8 $24.1 $28.3 $33.0 $31.4(3) 9.6% $37.4 $43.1 EARNINGS PER SHARE $1.07 $1.18 $1.45 $1.63 $1.55(3) 9.7% $1.84 $2.10 DIVIDENDS PER SHARE -- -- $0.52 $0.64 $0.76 $0.92 -- FORWARD P/E MULTIPLE 20.5x 17.3x 19.5x 14.0x 14.2x 14.0x 12.3x CAPITAL EXPENDITURES $23.9 $28.8 $31.9 $32.1 $17.5 -- -- STORES ANALYSIS --------------- OWNED STORE OPENINGS 63 58 59 53 44 29 45 OWNED STORES (EOP) 412 456 515 567 571 600 645 FRANCHISED STORES (EOP) 118 131 134 162 200 225 270
- ----------------------- (1) Source: Merrill Lynch research report dated November 12, 1996, except with respect to store information. (2) Source: Owned and franchised store information from Montgomery Securities research report dated August 19, 1996. (3) Excludes pre-tax provision of $16.4MM ($10.2MM after-tax) for closing of approximately 40 stores. - -------------------------------------------------------------------------------- Page 3 PROJECT WONTON
PROJECTED FINANCIAL PERFORMANCE ($ IN MILLIONS) Projected Fiscal Year Ended December 31, Actual ------------------------------------------------------------------------------- LTM(1) 1996 1997 1998 1999 2000 2001 2005 CAGR ------ ---- ---- ---- ---- ---- ---- ---- ---- REVENUES $323.9 $326.3 $354.0 $379.2 $405.1 $431.4 $458.2 $570.4 6.1% % Growth 3.2% 8.5% 7.1% 6.8% 6.5% 6.2% 5.3% EBITDA $77.4 $79.7 $87.0 $95.3 $101.8 $108.5 $115.3 $143.8 6.5% % Revenue 23.9% 24.4% 24.6% 25.1% 25.1% 25.2% 25.2% 25.2% NET INCOME $36.0 $37.5 $41.8 $45.0 $48.0 $52.4 $57.8 $79.7 8.4% EARNINGS PER SHARE $1.77 $1.84 $2.05 $2.17 $2.31 $2.51 $2.76 $3.76 7.9% DIVIDENDS PER SHARE(4) $0.88 $0.92 $1.06 $1.22 $1.40 $1.61 $1.85 $3.24 CAPITAL EXPENDITURES $25.4 $25.4 $25.4 $20.4 $22.9 $20.6 $21.9 $22.0 POSSIBLE FUTURE STOCK PRICE $39.00(2) $53.00(2) PRESENT VALUE OF FUTURE STOCK PRICE $28.00(3) $31.00(3) STORE ASSUMPTIONS ----------------- OWNED STORE OPENINGS (NET)(5) 18 27 37 37 37 37 37 37 OWNED STORES (EOP) 589 598 635 672 709 746 783 931 FRANCHISED STORES (EOP) 211 218 254 290 326 362 398 542
- ----------------------- Source: Company projections. (1) LTM = Latest twelve months ended October 6, 1996. (2) Assumes P/E multiple of 14.0x (same as current 1996 estimated multiple). (3) Present value of dividends and future stock price discounted at Wonton's weighted average cost of capital of 10.7%. (4) Assumes $0.92 annual dividend in 1996, increasing by 15% thereafter. (5) Assumes 40 new stores opened and 3 existing stores closed annually after 1996. - -------------------------------------------------------------------------------- Page 4 PROJECT WONTON
COMPARABLE PUBLIC COMPANIES - CURRENT MARKET VALUATION ($ IN MILLIONS, EXCEPT PER SHARE) LATEST FIVE YEAR TWELVE MONTHS PROJECTED % CHANGE ---------------------------------- EARNINGS IN STOCK PRICE ON VALUE OF 1996E 1997E GROWTH PRICE FROM 1/10/97 EQUITY REVENUES EBIT NET INCOME P/E(2) P/E(2) RATE(2) 1/1/96 -------- -------- -------- ---- ---------- ------ ------ ---------- ---------- Wonton $25.75 $525.1 $323.9 $54.3(1) $36.0(1) 14.0x 12.3x 14.3% 19.1% S&P 500 759.50 - - - - 18.7x 16.5x 12.4% 23.3% LIMITED SERVICE RESTAURANTS - --------------------------- CKE Restaurant $32.25 $780.6 $550.0 $41.3 $19.3 32.6x 25.9x 28.0% 123.8% Papa John's $31.38 $900.9 $338.7 $23.0 $16.4 31.4x 24.1x 37.7% 73.8% Wendy's $21.38 $2,764.7 $1,867.7 $251.9 $135.8 17.8x 15.2x 16.8% -0.6% Sonic $22.50 $305.3 $151.1 $32.0 $16.6 17.2x 15.0x 19.5% 23.3% Foodmaker $9.25 $359.3 $1,058.5 $67.2 $20.1 17.1x 14.2x 25.0% 1.4% Luby's Cafeterias $20.25 $471.2 $450.1 $64.7 $39.2 12.6x 11.4x 10.8% -9.5% Ryan's Family Steakhouse $7.50 $382.0 $558.8 $60.8 $36.4 10.7x 9.5x 13.4% 7.1% Buffets(3) $8.00 $360.7 $745.0 $51.2 $31.7 10.8x 8.6x 17.7% -43.1% - ------------------------------------------------------------------------------------------------------------------------------------ Harmonic Mean 16.0x 13.5x 18.3% - ------------------------------------------------------------------------------------------------------------------------------------
- ----------------------- (1) Excludes pre-tax provision of $16.4MM ($10.2 million after-tax) related to the closing of approximately 40 stores. (2) Source: First Call estimates. (3) Pro Forma for merger with Hometown Buffets completed September 20, 1996. - -------------------------------------------------------------------------------- Page 5 PROJECT WONTON
COMPARABLE PUBLIC COMPANIES - FINANCIAL RATIOS (LATEST TWELVE MONTHS) Valuation Multiples(1) Credit Statistics ---------------------------------------------------------- --------------------------------- Enterprise Value --------------------- Price to Price to Price to EBITDA/ Debt/ Total Debt/ LTM EBITDA LTM EBIT LTM EPS 1996 EPS 1997 EPS Interest Mkt. Cap. EBITDA ---------- -------- -------- -------- -------- -------- -------- ----------- Wonton 5.6x 7.9x 14.5x 14.0x 12.3x NM 0% 0x LIMITED SERVICE RESTAURANTS: CKE Restaurant 12.8x 20.3x 35.4x 32.6x 25.9x 6.6x 9.2% 1.1x Papa John's 24.7x 38.5x 52.6x 31.4x 24.1x NM 0.2% 0.1x Wendy's 8.5x 11.6x 20.0x 17.8x 15.2x NM 8.9% 0.7x Sonic 7.7x 9.8x 18.2x 17.2x 15.0x NM 5.4% 0.4x Foodmaker 6.9x 10.7x 18.1x 17.1x 14.2x 2.1x 110.8% 3.9x Luby's Cafeterias 6.1x 7.8x 12.2x 12.6x 11.4x NM 8.5% 0.5x Ryan's Family Steakhouse 5.8x 8.1x 10.8x 10.7x 9.5x NM 29.0% 1.3x Buffets(2) 4.1x 7.5x 11.5x 10.8x 8.6x NM 13.6% 0.5x - ---------------------------------------------------------------------------------------------- Harmonic Mean 7.3x 10.8x 17.1x 16.0x 13.5x - ----------------------------------------------------------------------------------------------
- ----------------------- (1) Based on 1/10/97 stock price. (2) Pro Forma for merger with Hometown Buffets completed September 20, 1996. - -------------------------------------------------------------------------------- Page 6 PROJECT WONTON HISTORICAL 5 YEAR STOCK PRICE PERFORMANCE WONTON VS. S&P 500 VS. RESTAURANT COMPOSITE INDEX JANUARY 10, 1992 THROUGH JANUARY 10, 1997 [GRAPHIC OMITTED] - ----------------- *Restaurant Composite Index includes: CKE Restaurant, Papa John's, Wendy's, Sonic, Luby's, Ryan's and Buffets. - -------------------------------------------------------------------------------- Page 7 HISTORICAL 12 MONTH STOCK PRICE PERFORMANCE WONTON VS. S&P 500 VS. RESTAURANT COMPOSITE INDEX JANUARY 10, 1996 THROUGH JANUARY 10, 1997 [GRAPHIC OMITTED] - ----------------------- * Restaurant Composite Index includes: CKE Restaurant, Papa John's, Wendy's, Sonic, Foodmaker, Luby's, Ryan's and Buffets. - -------------------------------------------------------------------------------- Page 8 PROJECT WONTON SECTION II SUMMARY OF ALTERNATIVES TO INCREASE SHAREHOLDER VALUE PROJECT WONTON ALTERNATIVES TO INCREASE SHAREHOLDER VALUE BEAR STEARNS HAS REVIEWED THE FOLLOWING ALTERNATIVES WITH CERTAIN COMPANY PRINCIPALS - -------------------------------------------------------------------------------- ALTERNATIVES Considerations - -------------------------------------------------------------------------------- Status Quo >> Cash continues to build without attractive use Earnings growth continues to slow Likely continued public valuation issue - -------------------------------------------------------------------------------- Sell >> Management believes Company is undervalued Certain insiders are not interested in selling - -------------------------------------------------------------------------------- Acquisition >> Strong strategic preference for developing new concepts and JV's internally Company has not historically made acquisitions Few concepts with strong business fit - -------------------------------------------------------------------------------- Management Buyout >> Highly leveraged capital structure Operating flexibility constrained - -------------------------------------------------------------------------------- Open Market Purchase >> Moderate repurchase would not have significant EPS impact Not generally effective for purchasing large percentages of public float - -------------------------------------------------------------------------------- Special Dividend >> Not tax efficient from individual shareholder standpoint - -------------------------------------------------------------------------------- Recapitalization >> Use of excess cash combined with modest borrowing Potential capital gains treatment for shareholders Use of leverage provides for accelerated earnings growth - -------------------------------------------------------------------------------- Page 9 PROJECT WONTON SECTION III RECOMMENDATION PROJECT WONTON RECOMMENDATION GIVEN THESE CONSIDERATIONS, BEAR STEARNS BELIEVES A LEVERAGED RECAPITALIZATION IS THE MOST ATTRACTIVE ALTERNATIVE TO INCREASE SHAREHOLDER VALUE. o ENHANCES SHAREHOLDER VALUE: o Shareholders can monetize holdings at a premium price o Potential capital gains treatment o Efficient use of cash on hand o Reduces cost of capital o New debt "supercharges" remaining equity going forward o TAKES ADVANTAGE OF CURRENT ROBUST DEBT MARKETS: o Attractive bank market o Strong public debt market -Treasury rates at relative historical lows -Tight corporate credit borrowing spreads o MODEST LEVERAGE MAINTAINS OPERATING FLEXIBILITY: o Downturn in operations o Unexpected opportunities - -------------------------------------------------------------------------------- Page 10 PROJECT WONTON RECOMMENDATION BASED ON THE COMPANY'S PROJECTIONS, A $250 - $300 MILLION LEVERAGED RECAPITALIZATION PROVIDES A HIGHER RETURN TO SHAREHOLDERS WHILE PROVIDING THE NECESSARY OPERATING FLEXIBILITY FOR MANAGEMENT. A $250 - $300 MILLION LEVERAGED RECAPITALIZATION WOULD CONSIST OF THE FOLLOWING: The Company would tender for $250 to $300 million of common shares MS and JS would sell 333,333 shares ($10 million), or slightly more, to the Company Tender price of approximately $29.00 - $30.00 per share (premium of 12.6% - 16.5% based on 1/10/97 closing price of $25.75) The tender would also be subject to certain conditions including financing and possibly a minimum number of shares being tendered Tender funded with: Cash and marketable securities on hand (approximately $110 million) New debt raised (between $150-$200 million) from banks and/or public debt market This structure has the flexibility to provide for a significant sale by other large shareholders - -------------------------------------------------------------------------------- Page 11 PROJECT WONTON - -------------------------------------------------------------------------------- LEVERAGED RECAPITALIZATION ALTERNATIVES - -------------------------------------------------------------------------------- BEAR STEARNS HAS DISCUSSED THE FOLLOWING LEVERAGED RECAPITALIZATION SCENARIOS WITH MANAGEMENT:
--------------------------------------------------------------------------------- ($ IN MILLIONS) SCENARIO A SCENARIO B SCENARIO C $250 RECAP $275 RECAP $300 RECAP --------------------------------------------------------------------------------- PRO FORMA CAPITAL STRUCTURE: $ Rate $ Rate $ Rate -- ---- -- ---- -- ---- Senior Bank Credit Facility: Revolver(1) - 8.00% - 8.00% - 8.00% Term Loan A $100.0 8.00% $75.0 8.00% $50.0 8.00% Term Loan B 50.0 8.25% - - Total Bank Debt 150.0 75.0 50.0 Senior Sub Notes - 100.0 9.75% 150.0 9.75% TOTAL DEBT $150.0 $175.0 $200.0 SOURCES OF FUNDS: Cash on Balance Sheet(2) $100.0 $100.0 $100.0 Senior Bank Credit Facility 150.0 75.0 50.0 Senior Subordinated Notes - 100.0 150.0 TOTAL SOURCES $250.0 $275.0 $300.0 ----------------------------------------------------------------------------------
- ----------------------- (1) $50.0 million undrawn revolving credit facility. (2) Does not include funds for estimated fees and expenses of $8 - $11 million. - -------------------------------------------------------------------------------- Page 12 PROJECT WONTON
PRO FORMA INCOME STATEMENT - $250 MILLION RECAPITALIZATION ($ IN MILLIONS) PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31, --------- ------------------------------------------------------ LTM(1) 1996 1997 1998 1999 2000 2001 2005 CAGR ------ ---- ---- ---- ---- ---- ---- ---- ---- REVENUES $323.9 $326.3 $354.0 $379.2 $405.1 $431.4 $458.2 $570.4 6.1% EBITDA 77.4 79.7 87.0 95.3 101.8 108.5 115.3 143.8 6.5% EBIT 54.3 57.0 63.4 69.6 73.6 79.7 87.7 120.6 8.4% NET INCOME $24.9 $26.5 $31.0 $36.3 $40.7 $46.5 $52.8 $76.3 11.9% - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE $2.00 $2.13 $2.47 $2.88 $3.20 $3.63 $4.11 $5.84 11.4% - ----------------------------------------------------------------------------------------------------------------------------------- DIVIDENDS PER SHARE(4) $0.30 $0.30 $0.30 $0.44 $0.53 $0.71 $1.85 $3.24 POSSIBLE FUTURE STOCK PRICE $58.00(2) $82.00(2) PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE $40.00(3) $46.00(3)
- ------------- (1) LTM = Latest twelve months ended October 6, 1996. (2) Assumes P/E multiple of 14.0x (same as current 1996 estimated multiple). (3) Present value of stock price discounted at Wonton's weighted average cost of capital of 9.1%. (4) Annual dividend is based on the amount that could be paid under bank agreements. As dividend availability increases, we assume dividend returns to the 15% annual increase on 1996's $0.92 per share. - -------------------------------------------------------------------------------- Page 13 PROJECT WONTON
- -------------------------------------------------------------------------------- PRO FORMA INCOME STATEMENT - $275 MILLION RECAPITALIZATION - -------------------------------------------------------------------------------- ($ IN MILLIONS) PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31, LTM(1) 1996 1997 1998 1999 2000 2001 2005 CAGR REVENUES $323.9 $326.3 $354.0 $379.2 $405.1 $431.4 $458.2 $570.4 6.1% EBITDA 77.4 79.7 87.0 95.3 101.8 108.5 115.3 143.8 6.5% EBIT 54.3 57.0 63.4 69.6 73.6 79.7 87.7 120.6 8.4% NET INCOME $22.8 $24.4 $28.8 $33.9 $37.8 $42.6 $48.2 $74.8 12.8% - -------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE $1.97 $2.11 $2.46 $2.88 $3.19 $3.57 $4.01 $6.13 12.1% - -------------------------------------------------------------------------------------------------------------------- DIVIDENDS PER SHARE(4) $0.49 $0.49 $0.49 $0.64 $0.61 $1.61 $1.85 $3.24 POSSIBLE FUTURE STOCK PRICE $56.00(2) $86.00(2) ========= ========= PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE $40.00(3) $48.00(3) ========= =========
- ----------------------- (1) LTM = Latest twelve months ended October 6, 1996. (2) Assumes P/E multiple of 14.0x (same as current 1996 estimated multiple). (3) Present value of stock price and dividends discounted at Wonton's weighted average cost of capital of 9.1%. (4) Annual dividend is based on the amount that could be paid under bank agreements. As dividend availability increases, we assume dividend returns to the 15% annual increase on 1996's $0.92 per share. - -------------------------------------------------------------------------------- Page 14 PROJECT WONTON
PRO FORMA INCOME STATEMENT - $300 MILLION RECAPITALIZATION ($ IN MILLIONS) PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31, ---------------- ----------------------------------------------------------- LTM(1) 1996 1997 1998 1999 2000 2001 2005 CAGR ------ ---- ---- ---- ---- ---- ---- ---- ---- REVENUES $323.9 $326.3 $354.0 $379.2 $405.1 $431.4 $458.2 $570.4 6.1% EBITDA 77.4 79.7 87.0 95.3 101.8 108.5 115.3 143.8 6.5% EBIT 54.3 57.0 63.4 69.6 73.6 79.7 87.7 120.6 8.4% NET INCOME $21.1 $22.7 $26.9 $31.7 $35.1 $39.6 $45.2 $73.5 13.4% - ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE $1.96 $2.11 $2.48 $2.89 $3.18 $3.57 $4.04 $6.45 12.5% - ---------------------------------------------------------------------------------------------------------------------------------- DIVIDENDS PER SHARE(4) $0.97 $0.97 $0.97 $1.22 $1.40 $1.61 $1.85 $3.24 POSSIBLE FUTURE STOCK PRICE $57.00(2) $90.00(2) ========= ========= PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE $42.00(3) $52.00(3) ========= =========
- ----------------------- (1) LTM = Latest twelve months ended October 6, 1996. (2) Assumes P/E multiple of 14.0x (same as current 1996 estimated multiple). (3) Present value of stock price and dividends discounted at Wonton's weighted average cost of capital of 9.1%. (4) Annual dividend is based on the amount that could be paid under bank agreements. As dividend availability increases, we assume dividend returns to the 15% annual increase on 1996's $0.92 per share. (Assumes current bank debt level is such that 25% of Excess Cash Flow test could be expanded to 50% of Excess Cash Flow) - -------------------------------------------------------------------------------- Page 15 PROJECT WONTON - -------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA - $250 MILLION RECAP - --------------------------------------------------------------------------------
($ IN MILLIONS) PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 2005 ---- ---- ---- ---- ---- ---- ---- CAPITAL EXPENDITURES $25.4 $25.4 $20.4 $22.9 $20.6 $21.9 $22.0 CASH FLOW AVAILABLE FOR DEBT AMORTIZATION(1) $23.1 $28.0 $38.0 $41.3 $47.8 $37.8 $40.0 DEBT AMORTIZATION: Term Loan Required Amort. - $15.0 $20.0 $20.0 $20.0 $25.0 - Additional Cash Sweep - 13.0 18.0 21.3 22.8 - - Senior Sub Notes - - - - - - - Total Debt Outstanding $150.0 $122.0 $84.0 $42.8 - - - ====== ====== ===== ===== ===== ===== ===== Cash & Cash Equivalents $2.8 $2.8 $2.8 $2.8 $7.8 $45.6 $202.9 ====== ====== ===== ===== ===== ===== ===== Shareholders' Equity ($45.1) ($17.7) $13.3 $47.5 $85.4 $115.6 $255.5 ====== ====== ===== ===== ===== ===== ===== CREDIT STATISTICS / LEVERAGE: LTM EBITDA / Interest 6.4x 6.6x 7.9x 11.4x 19.6x 61.5x NA NA - ---------------------------------------------------------------------------------------------------------------------------------- Fixed Charge Coverage (EBITDA)(2) 2.0x 2.2x 2.6x 2.6x 3.1x 4.0x 3.7x NA Fixed Charge Coverage (EBITDAR)(3) 1.4x 1.4x 1.5x 1.5x 1.6x 1.8x 1.7x 2.4x - ---------------------------------------------------------------------------------------------------------------------------------- Total Debt/EBITDA 1.9x 1.9x 1.4x 0.9x 0.4x NA NA NA Total Debt + Leases(4) / EBITDAR 3.9x 3.8x 3.5x 3.2x 2.9x 2.6x 2.6x 2.6x
- ----------------------- (1) Defined as Cash Flow from operating activities less capital expenditures. (2) Defined as EBITDA - CapEx divided by Interest + Required Principal Amortization. (3) Defined as EBITDAR - CapEx divided by Interest + Rents + Required Principal Amortization. (4) Capitalized rents at 7.0x. - -------------------------------------------------------------------------------- Page 16 PROJECT WONTON - -------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA - $275 MILLION RECAP - --------------------------------------------------------------------------------
($ IN MILLIONS) PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31, ------ ------------------------------------------------------- 1996 1997 1998 1999 2000 2001 2005 ---- ---- ---- ---- ---- ---- ---- CAPITAL EXPENDITURES $25.4 $25.4 $20.4 $22.9 $20.6 $21.5 $22.0 CASH FLOW AVAILABLE FOR DEBT AMORTIZATION(1) $18.8 $23.8 $33.6 $37.8 $34.2 $34.6 $41.3 DEBT AMORTIZATION: Term Loan Required Amort. - $5.0 $10.0 $15.0 $20.0 $25.0 - Additional Cash Sweep - 18.8 23.6 2.6 - - - Senior Sub Notes - - - - - - - Total Debt Outstanding $175.0 $151.2 $117.6 $100.0 $100.0 $100.0 - ====== ====== ===== ===== ===== ===== ===== Cash & Cash Equivalents $2.8 $2.8 $2.8 $23.0 $57.1 $91.7 $140.8 ====== ====== ===== ===== ===== ===== ===== Shareholders' Equity ($70.8) ($47.6) ($20.9) $9.9 $34.2 $61.4 $193.3 ====== ====== ===== ===== ===== ===== ===== CREDIT STATISTICS / LEVERAGE: LTM EBITDA / Interest 4.9x 5.1x 5.9x 7.6x 9.7x 11.1x 11.8x NA - ------------------------------------------------------------------------------------------------------------------------------- Fixed Charge Coverage (EBITDA)(2) 2.6x 2.9x 3.4x 3.3x 3.1x 3.0x 2.7x NA Fixed Charge Coverage (EBITDAR)(3) 1.5x 1.6x 1.6x 1.7x 1.6x 1.6x 1.6x 2.4x - ------------------------------------------------------------------------------------------------------------------------------ Total Debt/EBITDA 2.3x 2.2x 1.7x 1.2x 1.0x 0.9x 0.9x NA Total Debt + Leases(4) / EBITDAR 4.1x 4.0x 3.7x 3.4x 3.3x 3.2x 3.2x 2.6x
- ----------------------- (1) Defined as Cash Flow from operating activities less capital expenditures. (2) Defined as EBITDA - CapEx divided by Interest + Required Principal Amortization. (3) Defined as EBITDAR - CapEx divided by Interest + Rents + Required Principal Amortization. (4) Capitalized rents at 7.0x. - -------------------------------------------------------------------------------- Page 17 PROJECT WONTON - -------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA - $300 MILLION RECAP - --------------------------------------------------------------------------------
($ IN MILLIONS) PRO FORMA PROJECTED FISCAL YEAR ENDED DECEMBER 31, ---- -------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 2005 ---- ---- ---- ---- ---- ---- ---- CAPITAL EXPENDITURES $25.4 $25.4 $20.4 $22.9 $20.6 $21.5 $22.0 CASH FLOW AVAILABLE FOR DEBT AMORTIZATION(1) $12.3 $17.3 $25.8 $27.4 $32.6 $33.2 $42.6 DEBT AMORTIZATION: Term Loan Required Amort. - $5.0 $10.0 $10.0 $12.5 $12.5 - Additional Cash Sweep - 12.3 15.8 - - - - Senior Sub Notes - - - - - - - Total Debt Outstanding $200.0 $182.2 $156.9 $150.0 $150.0 $150.0 - ====== ====== ===== ===== ===== ===== ===== Cash & Cash Equivalents $2.8 $2.8 $2.8 $23.3 $55.9 $89.1 $85.9 ====== ====== ===== ===== ===== ===== ===== Shareholders' Equity ($95.5) ($78.9) ($60.0) ($39.6) ($16.9) $8.8 $138.4 ====== ====== ===== ===== ===== ===== ===== CREDIT STATISTICS / LEVERAGE: LTM EBITDA / Interest 4.2x 4.3x 4.9x 5.9x 6.9x 7.4x 7.9x NA - ------------------------------------------------------------------------------------------------------------------------------------ Fixed Charge Coverage (EBITDA)(2) 2.3x 2.5x 2.9x 2.9x 3.2x 3.2x 3.4x NA Fixed Charge Coverage (EBITDAR)(3) 1.4x 1.5x 1.6x 1.6x 1.6x 1.7x 1.7x 2.4x - ------------------------------------------------------------------------------------------------------------------------------------ Total Debt/EBITDA 2.6x 2.5x 2.1x 1.6x 1.5x 1.4x 1.3x NA Total Debt + Leases(4) / EBITDAR 4.3x 4.2x 4.0x 3.7x 3.6x 3.5x 3.4x 2.6x
- ----------------------- (1) Defined as Cash Flow from operating activities less capital expenditures. (2) Defined as EBITDA - CapEx divided by Interest + Required Principal Amortization. (3) Defined as EBITDAR - CapEx divided by Interest + Rents + Required Principal Amortization. (4) Capitalized rents at 7.0x. - -------------------------------------------------------------------------------- Page 18 PROJECT WONTON - -------------------------------------------------------------------------------- SUMMARY OF ALTERNATIVES - --------------------------------------------------------------------------------
($ IN MILLIONS, EXCEPT PER SHARE DATA) SCENARIO A SCENARIO B SCENARIO C STATUS QUO $250 RECAP $275 RECAP $300 RECAP INCOME STATEMENT DATA: YEAR 2001 ---------- ---------- ---------- ----------- - --------------------------------- Earnings Per Share $2.79 $4.11 $4.01 $4.04 GROWTH RATE(1) 9.1% 14.8% 14.6% 14.8% Dividends Per Share(2) $1.85 $1.85 $1.85 $1.85 Possible Future Stock Price(3) $39.00 $58.00 $56.00 $57.00 BALANCE SHEET DATA: YEAR 2001 Cash & Cash Equivalents $229.6 $45.6 $91.7 $89.1 Total Debt - - $100.0 $150.0 Shareholders' Equity $303.4 $115.6 $61.4 $8.8 CREDIT STATISTICS: YEAR 1997 EBITDA / Interest NA 7.9x 5.9x 4.9x - --------------------------------------------------------------------------------------------------- Fixed Charge Ratio (EBITDA)(4) NA 2.6x 3.4x 2.9x Fixed Charge Ratio (EBITDAR)(5) 2.1x 1.5x 1.6x 1.6x - --------------------------------------------------------------------------------------------------- Total Debt / EBITDA NA 1.4x 1.7x 2.1x Total Debt + Leases / EBITDA 2.7x 3.5x 3.7x 4.0x
- ----------------------- (1) Cumulative average growth rate between 1997 and 2001. (2) Assumes dividends grow at 15% per year beginning in 1998. (3) Assumes existing P/E multiple of 14.0x. (Same as current 1996 multiple). (4) Defined as EBITDA - CapEx divided by Interest + Required Principal Amortization. (5) Defined as EBITDA - CapEx divided by Interest + Rents + Required Principal Amortization. - -------------------------------------------------------------------------------- Page 19 PROJECT WONTON - -------------------------------------------------------------------------------- SUMMARY OF ALTERNATIVES - --------------------------------------------------------------------------------
($ IN MILLIONS, EXCEPT PER SHARE DATA) SCENARIO A SCENARIO B SCENARIO C STATUS QUO $250 RECAP $275 RECAP $300 RECAP ---------- ----------- ---------- ---------- INCOME STATEMENT DATA: YEAR 2005 Earnings Per Share $3.76 $5.84 $6.13 $6.45 GROWTH RATE(1) 8.9% 12.5% 13.3% 14.0% Dividends Per Share(2) $3.24 $3.24 $3.24 $3.24 Possible Future Stock Price(3) $53.00 $82.00 $86.00 $90.00 BALANCE SHEET DATA: YEAR 2005 Cash & Cash Equivalents $313.1 $202.9 $140.8 $85.9 Total Debt - - - - Shareholders' Equity $372.4 $255.5 $193.3 $138.4
- ----------------------- (1) Cumulative average growth rate between 1997 and 2005. (2) Assumes dividends grow at 15% per year beginning in 1998. (3) Assumes existing P/E multiple of 14.0x. (Same as current 1996 estimated multiple). (4) Defined as EBITDA - CapEx divided by Interest + Required Principal Amortization. (5) Defined as EBITDA - CapEx divided by Interest + Rents + Required Principal Amortization. - -------------------------------------------------------------------------------- Page 20 PROJECT WONTON - -------------------------------------------------------------------------------- COMPARISON OF FINANCING OPTIONS - --------------------------------------------------------------------------------
BANK FINANCING (SCENARIO A) PUBLIC DEBT FINANCING (SCENARIO B & C) --------------------------- --------------------------------------- INTEREST RATE: 8.00% - 8.25% (Libor + 250 - 275 bps) 9.75% - 10.00% (UST + 337.5 - 362.5 bps) AMORTIZATION: 5 - 7 year contractual amortization None (8 year bullet) PREPAYMENT: Prepayment at anytime Non-callable until end of year 4 COVENANTS: Maintenance based (quarterly compliance): Incurrence based (at time of elected Minimum interest coverage transaction): Minimum fixed charge coverage Debt incurrence Maximum leverage Limitation on : Limitation on: Restricted payments (e.g. - dividend Capital expenditures limitations) Restricted payments (e.g. - dividend Asset sales limitations) Affiliate transactions Asset sales Affiliate transactions Acquisitions TIMING: Additional 3-4 weeks for bank syndication Banks more likely to close before syndication likely
- -------------------------------------------------------------------------------- Page 21 PROJECT WONTON APPENDIX A SUMMARY TRANSACTION TIMETABLE PROJECT WONTON - -------------------------------------------------------------------------------- ILLUSTRATIVE TIMETABLE - RECAPITALIZATION (TENDER OFFER) - -------------------------------------------------------------------------------- - -------------------------- ------------------------ ------------------------- JANUARY 1997 February 1997 March 1997 - -------------------------- ------------------------ ------------------------- S M T W T F S S M T W T F S S M T W T F S - -------------------------- ------------------------ ------------------------- 1 2 3 4 1 1 5 6 7 8 9 10 11 2 3 4 5 6 7 8 2 3 4 5 6 7 8 12 13 14 15 16 17 18 9 10 11 12 13 14 15 9 10 11 12 13 14 15 19 20 21 22 23 24 25 16 17 18 19 20 21 22 16 17 18 19 20 21 22 26 27 28 29 30 31 23 24 25 26 27 28 23 24 25 26 27 28 29 30 31 - -------------------------- ------------------------ ------------------------- WEEK OF JANUARY 13: Present proposal to Board of Directors Board considers Recapitalization WEEK OF JANUARY 20: Board authorizes Recapitalization Begin confidential discussions with possible bank lenders Draft of internal financial statements available WEEK OF JANUARY 27: Legal counsel drafts tender offer documentation Legal counsel begins drafting debt Offering Circular and description of Notes Public information package sent to debt Rating Agencies Begin preparation of Rating Agency presentation WEEK OF FEBRUARY 3: Continue preparation of Rating Agency presentation Continue discussions with bank lenders Accountants sign-off on financial results WEEK FEBRUARY 10: Company issues press release announcing self tender Company commences tender offer Drafting of debt offering circular and description of notes continues Continue discussions with bank lenders Presentations to rating agencies Draft of GAAP financial statements available (excluding footnotes) Regularly scheduled dividend announcement - -------------------------------------------------------------------------------- Page 22 PROJECT WONTON - -------------------------------------------------------------------------------- ILLUSTRATIVE TIMETABLE - RECAPITALIZATION (TENDER OFFER) - -------------------------------------------------------------------------------- - -------------------------- ------------------------ ------------------------- JANUARY 1997 February 1997 March 1997 - -------------------------- ------------------------ ------------------------- S M T W T F S S M T W T F S S M T W T F S - -------------------------- ------------------------ ------------------------- 1 2 3 4 1 1 5 6 7 8 9 10 11 2 3 4 5 6 7 8 2 3 4 5 6 7 8 12 13 14 15 16 17 18 9 10 11 12 13 14 15 9 10 11 12 13 14 15 19 20 21 22 23 24 25 16 17 18 19 20 21 22 16 17 18 19 20 21 22 26 27 28 29 30 31 23 24 25 26 27 28 23 24 25 26 27 28 29 30 31 - -------------------------- ------------------------ ------------------------- WEEK OF FEBRUARY 17: Receive bank financing commitment and begin negotiating bank loan agreements Audited financial statements with footnotes available Finalize debt Offering Circular and description of Notes Debt offering circular printed and distributed to investors WEEK OF FEBRUARY 24: Presentation to debt salesforce Receive credit ratings from Rating Agencies Begin roadshow for debt offering WEEK OF MARCH 3: Complete roadshow for debt offering Finalize bank loan agreements(1) WEEK OF MARCH 10: Price debt offering Close debt offering Close bank financing Consummate tender offer - ----------------------- (1) Assumes bank lenders do not require syndication prior to closing. If syndication is required, additional time needed to syndicate is 3 to 4 weeks. - -------------------------------------------------------------------------------- Page 23 PROJECT WONTON APPENDIX B OWNERSHIP SUMMARY PROJECT WONTON - -------------------------------------------------------------------------------- PRO FORMA OWNERSHIP SUMMARY - -------------------------------------------------------------------------------- $250 MILLION RECAPITALIZATION - -------------------------------------------------------------------------------- PRE-TRANSACTION Post-Recapitalization SHARES % Shares % Insiders: Joseph and Mario S. 3,454,294 15.9% 3,120,961 23.1% Trust of Carmela S. 2,497,884 11.5% 2,497,884 18.5% Options (J. and M.) 570,000 2.6% 570,000 4.2% Other option holders 768,702 3.5% 768,702 5.7% Public Shareholders 14,440,065 66.4% 6,570,000 48.6% Total Shares Outstanding 21,730,945 100.0% 13,527,547 100.0% - -------------------------------------------------------------------------------- $275 MILLION RECAPITALIZATION - -------------------------------------------------------------------------------- PRE-TRANSACTION Post-Recapitalization SHARES % Shares % Insiders: Joseph and Mario S. 3,454,294 15.9% 3,120,961 24.6% Trust of Carmela S. 2,497,884 11.5% 2,497,884 19.7% Options (J. and M.) 570,000 2.6% 570,000 4.5% Other option holders 768,702 3.5% 768,702 6.1% Public Shareholders 14,440,065 66.4% 5,711,500 45.1% Total Shares Outstanding 21,730,945 100.0% 12,669,047 100.0% - -------------------------------------------------------------------------------- $300 MILLION RECAPITALIZATION - -------------------------------------------------------------------------------- PRE-TRANSACTION Post-Recapitalization SHARES % Shares % Insiders: Joseph and Mario S. 3,454,294 15.9% 3,120,961 26.3% Trust of Carmela S. 2,497,884 11.5% 2,497,884 21.1% Options (J. and M.) 570,000 2.6% 570,000 4.8% Other option holders 768,702 3.5% 768,702 6.5% Public Shareholders 14,440,065 66.4% 4,887,550 41.3% Total Shares Outstanding 21,730,945 100.0% 11,845,047 100.0% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Page 24 PROJECT WONTON OWNERSHIP SUMMARY TOP FIFTEEN INSTITUTIONAL OWNERS BY HOLDINGS(1) Shares % Dalton Greiner Hartman 762,700 3.7% Strong Capital Management 699,700 3.4% Lazard Freres 649,990 3.2% First Chicago NBD Corp. 462,460 2.3% Barclays Bank 423,929 2.1% Moody Aldrich & Sullivan 403,820 2.0% Wedge Capital Management LLP 372,900 1.8% Pacific Income Advisors 364,581 1.8% Chase Manhattan 334,365 1.6% Putnam Investment Management 325,800 1.6% Equitable Companies 312,550 1.5% Fidelity Management & Research 310,600 1.5% Hughes Investment Management 267,000 1.3% Travelers Inc. 265,465 1.3% Florida St. Board / Administration 225,000 1.1% TOP FIFTEEN INSTITUTIONS 6,180,860 30.3% Total Shares Outstanding 20,392,243 100.0% - ----------------------- Source: CDA / Spectrum. - -------------------------------------------------------------------------------- Page 25 PROJECT WONTON APPENDIX C TRADED VOLUME ANALYSIS PROJECT WONTON TRADED VOLUME ANALYSIS PROJECT WONTON JANUARY 10, 1996 TO JANUARY 10, 1997 [GRAPHIC OMITTED] - ----------------------- Source: Factset. - -------------------------------------------------------------------------------- Page 26 PROJECT WONTON APPENDIX D DISCOUNTED CASH FLOW ANALYSIS --------------------------------------------------------------------------- --------------------------------------------------------------------------- Project Wonton - DCF Analysis ("Status Quo" Case)
DCF Valuation - Terminal Value as a Multiple of EBITDA 1997 1998 1999 2000 2001 Term. Value ---- ---- ---- ---- ---- ----------- 4.0% Sales $354.0 $379.2 $405.1 $431.4 $458.2 EBITDA 87.0 95.3 101.8 108.5 115.3 EBIT 63.4 69.6 73.6 79.7 87.7 Taxes 40% (25.3) (27.8) (29.4) (31.9) (35.1) ------ ------ ------ ------ ------ Net Income 38.0 41.7 44.2 47.8 52.6 52.6 Depreciation & Amort. 23.6 25.7 28.2 28.7 27.6 27.6 Capital Expenditures (24.4) (19.4) (21.9) (19.6) (20.9) 20.9 Capitalized Store Opening Costs (1.0) (1.0) (1.0) (1.0) (1.0) (1.0 Change in Work Cap. 2.0 1.9 1.9 2.0 2.0 1.3 --- --- --- --- --- --- Free Cash Flow 38.3 48.9 51.4 58.0 60.3 59.6 ==== ==== ==== ==== ---- ==== NPV of Cash Flows @ 10.7% $187.3 Terminal Value Calculation -------------------------- PV of Terminal Value 6.5x 450.8 @ EBITDA Multiple of: ----- Year 2001 EBITDA $ 115.3 Total Enterprise Value $638.1 EBITDA Terminal Multiple 6.5x ------- Less: Debt Assumed - Terminal Value in 2000 $ 749.4 Plus: Cash (110.3) Plus: Equity Offsets 32.6 Value To Equity 560.4 Multiple of 2001 EBITDA 6.5x Fully Diluted Shares Outstanding 21.7 Multiple of 2001 EBIT 8.5x Value Per Share $25.79 Multiple of 2001 Net Inc. 14.2x Multiple of 2001 PCF 12.4x Sensitivity Table - DCF Value Per Share EBITDA Exit Multiple Implied Perp. Growth Rate 5.5x 6.0x 6.5x 7.0x 7.5x of Free Cash Flow (1)(2) 2.7x ---- ---- ---- ---- ---- 9.5% $ 23.87 $ 25.55 $ 27.24 $ 28.92 $ 30.61 --------------------------------- Discount 10.0% $ 23.33 $ 24.98 $ 26.62 $ 28.27 $ 29.92 (1) Normalizes cash flow for perpetuity. Rate 10.5% $ 22.80 $ 24.41 $ 26.02 $ 27.63 $ 29.24 11.0% $ 22.29 $ 23.86 $ 25.44 $ 27.01 $ 28.59 (2) Using Gordon Growth Model 11.5% $ 21.79 $ 23.33 $ 24.87 $ 26.41 $ 27.95 - ----------------- -------------- -------------- -------------- -------------
PROJECT WONTON APPENDIX E DESCRIPTION OF COMPARABLE COMPANIES PROJECT WONTON - -------------------------------------------------------------------------------- COMPARABLE PUBLIC COMPANIES - OPERATING DATA
($ IN MILLIONS) Number of % EBITDA Comp Store Unit Growth Revenue Growth Net Income Growth Locations Franchise Margin Sales Growth 1994-95 1995-96 1994-95 1995-96 1994-95 1995-96 Wonton 816 27% 23.9% 0.6% 7% 6% 8% 3% (5%) 19% LIMITED SERVICE RESTAURANTS CKE Restaurants 657 38% 11.9% 8.4% 1% 4% 5% 26% 742% 95% Papa John's 1,156 75% 10.6% 6.4% 39% 32% 57% 32% 56% 66% Wendy's Int'l 5,829 70% 18.4% 5.0% 7% 8% 10% 10% 16% 20% Sonic Corp. 1,567 85% 27.0% 5.0% 2% 3% 21% 22% 32% 25% Foodmaker 1,270 31% 9.8% 4.0% 2% 1% 4% NA NM 6% Luby's Cafeterias 204 - 18.3% (0.3%) 10% 15% 7% 27% 6% 9% Ryan's Family Steakhouse 257 10% 15.3% (0.1%) 6% NA 15% 11% 9% 10% Buffets 338 7% 12.5% (3.5%) 23% NA 37% NA 28% -
- ----------------------- Source: Wall Street Research, Company 10-Qs and 10Ks. - -------------------------------------------------------------------------------- Page 27 PROJECT WONTON DESCRIPTION OF COMPARABLE COMPANIES BUFFETS, INC. The Company and its subsidiaries owns and operates a chain of buffet restaurants under the name of Old Country Buffet and Country Buffet. On September 20, 1996, the Company merged with Hometown Buffet which also owns and operates a chain of buffet restaurants. The combined Company owns approximately 350 restaurants in 32 different states. The Company also franchises a number of restaurants. CKE RESTAURANTS The Company operates and franchises the Carl's Jr. restaurant chain primarily in the southwestern United States. The Company owns over 390 units and franchises over 240. The Company also operates Boston Chicken stores in CKE's California territory. FOODMAKER, INC. The Company operates and franchises Jack In The Box, a leading fast-food chain in western and the southwestern United States. The Company owns approximately 860 unit and franchises approximately 400 units. The Jack In The Box concept is also in five international locations: Mexico, Hong Kong, Indonesia, Egypt and the Philippines. LUBY'S CAFETERIAS, INC. The Company owns and operates over 200 cafeterias under the name "Luby's" located in suburban shopping areas in approximately 11 states located primarily in southern and the southwestern United States. - -------------------------------------------------------------------------------- Page 28 PROJECT WONTON DESCRIPTION OF COMPARABLE COMPANIES PAPA JOHN'S INTERNATIONAL The Company is a rapidly growing operator and franchiser of pizza delivery and carryout restaurants that operate under the trademark Papa John's. The Company owns approximately 220 restaurants and franchises approximately 660. RYAN'S FAMILY STEAK HOUSES, INC. The Company owns and franchises more than 260 restaurants largely in the southeastern United States. The Company's restaurants feature "Steaks, Buffet & Bakery." The Company also operates under three casual dining concepts on a test basis, consisting of Cliente Grille or Chilace Grille, Laredo Grill and Bellissimo's Italian Eatery. SONIC CORP. The Company operates and franchises more than 1,500 drive-in restaurants located principally in the south central and southeastern United States that feature fast service and a limited menu of moderately priced, cooked-to-order items. WENDY'S INTERNATIONAL The Company operates or franchises more than 4,400 Wendy's restaurants in the United States and 33 other countries. The Company also operates approximately 1,200 Tim Hortons restaurants, which offers coffee and a full line of fresh baked goods, as well as soups and sandwiches, primarily in Canada. - -------------------------------------------------------------------------------- Page 29 APPENDIX F COMPARABLE M&A TRANSACTIONS PROJECT WONTON
SELECTED COMPARABLE M&A TRANSACTIONS ($ IN MILLIONS) Date Annonced/ Status Enterprise Equity Premium Enterprise Value/ Equity Value/ (date completed) Target Acquiror Value Value Paid Revenue EBITDA EBIT Net Income Book Value - --------------- ------ -------- ---------- ------ ------- ------- ------ ---- ---------- ---------- 8/23/94 / Ground Round 399 Ventures $161.5 $104.2 41.2% 0.66x 6.0x 12.2x 16.7x 1.6x terminated Restaurants 8/15/95 / TPI Enterprises, Shoney's Inc. 158.8 54.5 -17.8% 0.57x 7.8x NM NM 0.8x 11/17/95 Inc. 11/6/95 / NPC International Management 301.5 221.5 44.0% 0.96 6.6x 11.7x 19.1x 2.7x withdrawn 3/4/96 / Cococ Restaurants, Flagstar Cos Inc. 306.5 275.0 NA 0.61x 5.0x 9.1x NM NM 5/23/96 Jojos Restau- rants, Carrows Restaurants, Inc. (Family Restau- rants) 5/2/96 / Houlihan's Restau- Zapata Corp. 157.0 85.2 33.3% 0.58x 5.0x 9.8x 20.5x 1.2x terminated rants Group 6/4/96 / Hometown Buffet Inc. Buffets Inc. 209.8 178.3 3.5% 1.09x 7.8x 14.6x 24.0x 2.3x 9/20/96 Harmonic Mean of 0.70x 6.2x 11.2x 19.7x 1.4x Transaction Multiples ----------------------------------------------------------------------------------------------------------------------- Wonton Management $509.0 $619.3 16.5% 1.57x 6.6x 9.4x 17.2x 3.2x -----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Page 30 APPENDIX G SUMMARY TERM SHEETS
PROJECT WONTON SUMMARY OF INDICATIVE TERMS FOR BANK FACILITY ($ IN MILLIONS) Scenario A Scenario B Scenario C $250 Million Recap $275 Million Recap $300 Million Recap Capitalization: Revolver $40 - 50 (Undrawn) $40 - 50 (Undrawn) $40 - 50 (Undrawn) Term Loan A $100 $75 $50 Term Loan B $50 -- -- EXPECTED PRICING: Revolver LIBOR + 250 LIBOR + 250 LIBOR + 250 Term Loan A LIBOR + 250 LIBOR + 250 LIBOR + 250 Term Loan B LIBOR + 275 -- -- MATURITY / AMORTIZATION: Revolver 5 year "evergreen" SAME SAME Term Loan A 5 year maturity; staggered SAME SAME principal amortization in years 1-5 Term Loan B 7 year maturity; equal principal -- -- amortization in years 6-7 OTHER: CASH SWEEP: 75% of Excess Cash Flow(3) 75% of Excess Cash Flow(3) 50% of Excess Cash Flow(2)(3) FEES: 1% commitment fee SAME SAME 1% closing fee RESTRICTED PAYMENTS / DIVIDENDS: Up to 25% of Excess Cash Flow Up to 25% of Excess Cash Flow Up to 50% of Excess Cash Flow may be paid in dividends may be paid in dividends may be paid in dividends(2)
- --------------------- (1) Negotiated terms may allow for a portion of the Bank facilities to be extended under the revolving credit line. (2) For Scenario C, the bank facilities should permit less than 75% cash flow sweep, thereby allowing greater than 25% excess cash flow for dividends. (3) Applied to repay Term Loans in inverse order of maturities ("cash flow sweep"). - -------------------------------------------------------------------------------- Page 31 PROJECT WONTON - -------------------------------------------------------------------------------- SUMMARY OF INDICATIVE TERMS FOR SENIOR SUB NOTES - -------------------------------------------------------------------------------- ISSUE: Senior Subordinated Notes (the "Notes") PRINCIPAL AMOUNT: $100 - 150 million MATURITY: 2005 (8 years) ASSUMED RATINGS: Strong to mid single B INDICATIVE COUPON: 9 3/4% - 10% (T + 337.5 - 362.5 bps), payable in cash semi-annually in arreaRS SECURITY: None RANKING: The Notes will be unsecured senior subordinated indebtedness of the Company and will rank subordinated in right of payment to all existing and future senior indebtedness of the Company and PARI PASSU with or senior to all existing and future subordinated indebtedness of the Company MANDATORY REDEMPTION None OPTIONAL REDEMPTION: Non-callable for four years. Until the end of year four, redeemable at the Company's option at any time, in whole or in part, at a premium equal to 50% of the coupon, declining ratably to par by the end of year seven. Also, 35% of the Principal Amount of the Notes may be redeemed by the Company within the first three years at a premium with the proceeds of an equity offering - -------------------------------------------------------------------------------- Page 32 APPENDIX H COMPARABLE RECAPITALIZATION TRANSACTIONS PROJECT WONTON - -------------------------------------------------------------------------------- UNITED STATIONERS MERGER WITH ASSOCIATED STATIONERS - -------------------------------------------------------------------------------- ASSOCIATED HOLDINGS ACQUIRED ON MARCH 30, 1995 A MAJORITY INTEREST IN UNITED STATIONERS WHICH MERGED WITH ASSOCIATED STATIONERS, A WHOLLY-OWNED SUBSIDIARY OF ASSOCIATED HOLDINGS o Associated Holdings offered to purchase up to 17.2 million shares (approximately 92.5% of the common shares outstanding) of United Stationers o Post-transaction, the shares not purchased by Associated Holdings comprised approximately 19% of the new common stock on a fully-diluted basis o The new Company expected to generate approximately $26.0 million in annual cost savings o Cash offer price of $15.50 per share, totaling $267 million offered in the purchase of United Stationer's shares. This price represented a 12.7% premium over the closing price of the Company's common stock ($13.75), on the day prior to the transaction's announcement o The Company's current stock price as of January 10, 1997 was $21.25 (37.1% appreciation over the purchase price) ------------------------------------------------------------------------- Page 33 PROJECT WONTON - -------------------------------------------------------------------------------- UNITED STATIONERS - -------------------------------------------------------------------------------- TRADING HISTORY POST-TRANSACTION MARCH 30, 1995 TO JANUARY 10, 1997 [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- Page 34 PROJECT WONTON - -------------------------------------------------------------------------------- HAYES WHEEL CORP. INTERNATIONAL MERGER WITH MOTOR WHEEL CORP. - -------------------------------------------------------------------------------- MWC HOLDING MERGER WITH HAYES WHEEL CORP. INTERNATIONAL ON AUGUST 2, 1996 MWC Holdings offered in consideration for each Hayes Wheel common share $28.80 in cash and .1 shares of the Company's new common stock. The total consideration per share of approximately $32.00 represented a 29.3% premium over the closing price of the Company's stock on the day prior to the announcement of the transaction ($24.75) Post-transaction, the original shareholders of Hayes Wheel Corp. stock owned approximately 15.8% of the Company's new common stock Cash consideration of $28.80 per share, totaling $506 million offered in the purchase of Hayes Wheel shares The Company's current stock price as of January 10, 1997 was $43.50(1) (35.9% appreciation over the purchase price) - -------------------- (1) Current price adjusted for 2:1 split on 1/7/97 (actual price was $21.75 on 1/10/97). - -------------------------------------------------------------------------------- Page 35 PROJECT WONTON HAYES WHEEL CORP. INTERNATIONAL TRADING HISTORY POST-TRANSACTION(1) AUGUST 2, 1996 TO JANUARY 10, 1997 [GRAPHIC OMITTED] - -------------------- (1) Historical prices adjusted for 2:1 split on January 7, 1997. - -------------------------------------------------------------------------------- Page 36 EX-99.1(B)(5) 6 PRESENTATION TO THE BOARD 01/23/97 PROJECT WONTON - -------------------------------------------------------------------------------- SUMMARY OF ALTERNATIVES
($ in millions, except per shate data) SCENARIO A SCENARIO B SCENARIO C NEW SCENARIO C SCENARIO D STATUS QUO 250 MM RECAP $275 MM RECAP $300 MM RECAP $300 MM RECAP $200 MM ---------- ------------ ------------- ------------- -------------- ----------- RECAP ----- INCOME STATEMENT DATA: YEAR 2001 - -------------------------------- Earnings Per Share $2.79 $4.11 $4.01 $4.04 $3.87 $3.45 CAGR(1) 7.7% 13.6% 13.0% 13.0% 12.6% 10.8% Dividends Per Share(2) $1.85 $1.85 $1.85 $1.85 $1.85 $1.85 Possible Future Stock $39.00 $58.00 $56.00 $57.00 $54.00 $48.00 Price(3) BALANCE SHEET DATA: YEAR 2001 - ----------------------------- Cash & Cash $229.6 $45.6 $91.7 $89.1 $131.0 $138.6 Equivalents Total Debt - - $100.0 $150.0 $200.0 $100.0 Shareholders' Equity $303.4 $115.6 $61.4 $8.8 $1.3 $107.4 CREDIT STATISTICS: YEAR 1997 - ---------------------------- EBITDA/Interest NA 7.9x 5.9x 4.9x 4.5x 9.2x Fixed Charge Ratio NA 2.6x 3.4x 2.9x 2.7x 7.0x (EBITDA)(4) Fixed Charge Ratio 2.1x 1.5x 1.6x 1.6x 1.5x 1.9x (EBITDAR)(5) - ---------------------------- ------------ ----------- --------------- ----------- ------------ ------------- Total Debt/EBITDA NA 1.4x 1.7x 2.1x 2.3x 1.1x Total Debt + 2.7x 3.5x 3.7x 4.0x 4.1x 3.4x Leases/EBITDA
- -------- (1) CAGR = Compounded Annual Growth Rate. (2) Assumes dividents grow at 15% per year beginning in 1997. (3) Assumes existing P/E multiple of 14.0x (Same as current 1996 multiple). (4) Defined as EBITDA - Caplix divided by Interest + Required Principal Amortization. (5) Defined as EBITDAR - Caplix divided by Interest + Rents + Required Principal Amortization.
PROJECT WONTON - -------------------------------------------------------------------------------- SUMMARY OF ALTERNATIVES SCENARIO A SCENARIO B SCENARIO C NEW SCENARIO C SCENARIO D STATUS QUO 250 MM RECAP $275 MM RECAP $300 MM RECAP $300 MM RECAP $200 MM RECAP ---------- ------------ ------------- ------------- -------------- ------------- INCOME STATEMENT DATA: YEAR 2005 - -------------------------------- Earnings Per Share $3.76 $5.84 $6.13 $6.45 $6.43 $5.20 CAGR(1) 7.9% 11.4% 12.1% 12.7% 13.1% 10.8% Dividends Per Share(2) $3.24 $3.24 $3.24 $3.24 $3.24 $3.24 Possible Future Stock $53.00 $82.00 $86.00 $90.00 $90.00 $73.00 Price(3) BALANCE SHEET DATE: YEAR 2005 - ----------------------------- Cash & Cash $313.1 $202.9 $140.8 $85.9 $72.1 $177.3 Equivalents Total Debt - - - - - - Shareholders' Equity $372.4 $255.5 $193.3 $138.4 $124.7 $229.6
- -------- (1) CAGR = Compounded Annual Growth Rate. (2) Assumes dividends grow at 15% per year beginning in 1997. (3) Assumes existing P/E multiple of 14.0x. (Same as current 1996 multiple). -2- EX-99.1(B)(6) 7 PRESENTATION BY BEAR, STEARNS & CO. DATED 07/20/97 PROJECT WONTON PRESENTATION TO THE BOARD OF DIRECTORS STRATEGIC ALTERNATIVES HIGHLY CONFIDENTIAL NOT TO BE REPRODUCED OR DISCUSSED WITH OUTSIDERS July 20, 1998 TABLE OF CONTENTS - -------------------------------------------------------------------------------- I Situation Assessment II Summary of Alternatives to Increase Shareholder Value III Leveraged Recapitalization A Company Sponsored Recapitalization B Financial Investor Sponsored Recapitalization IV Sale of the Company V Conclusion Appendices A Summary Transaction Timetables B Ownership Summary and Traded Volume Analysis C Discounted Cash Flow Analysis D Comparable Public Companies E Comparable Mergers and Acquisitions Transactions F Precedent Leveraged Recapitalization Transactions G Illustrative Company Sponsored Leveraged Recapitalization Model H Illustrative Financial Investor Sponsored Leveraged Recapitalization Model I Illustrative Leveraged Buyout Model J Illustrative Merger Model SECTION I SITUATION ASSESSMENT SITUATION ASSESSMENT - -------------------------------------------------------------------------------- BEAR STEARNS IS PLEASED TO HAVE THIS OPPORTUNITY TO AGAIN DISCUSS WITH WONTON'S BOARD OF DIRECTORS OUR EVALUATION OF ALTERNATIVES TO ENHANCE SHAREHOLDER VALUE FOR THE BENEFIT OF ALL SHAREHOLDERS. OUR EVALUATION OF ALTERNATIVES IS IMPACTED BY THE FOLLOWING KEY CONSIDERATIONS: o HIGH QUALITY RESTAURANT COMPANY: Proven concept with high operating margins and consistent financial performance are very unusual within restaurant sector. o ROBUST CAPITAL MARKETS: Ready liquidity and financing available at rates near to historic lows. o VERY SIGNIFICANT ACQUISITION ACTIVITY: Record levels of acquisition activity driven by desire for core earnings growth for corporate acquirers and the significant capital available for financial buyers. o COMPANY SHAREHOLDER BASE FOCUSED ON VALUE CREATION: The attempted going-private transaction has focused shareholders' attention on the Company's effort to enhance shareholder value. THE FOLLOWING INFORMATION PROVIDES AN ASSESSMENT OF THE CURRENT SITUATION AS IT RELATES TO THE COMPANY FOLLOWED BY A DISCUSSION OF THE COMPANY'S STRATEGIC ALTERNATIVES. Page 1 SITUATION ASSESSMENT - PUBLIC EQUITY MARKETS - -------------------------------------------------------------------------------- THE PUBLIC EQUITY MARKETS HAVE ENJOYED RECORD RETURNS OVER THE LAST SEVERAL YEARS AND ARE AT RECORD HIGHS IN TERMS OF VALUATION: o SHARE PRICE GAINS: S&P 500 has gained 108% over the last 3 years. o HIGH VALUATION MULTIPLES: Current P/E multiples for expected 1998 earnings of the S&P 500 are 27.8x. o LOW DIVIDEND YIELDS: Current dividend yield for S&P 500 companies is 1.35%. AS THE MARKETS HAVE MOVED TO THESE RECORD LEVELS, HOWEVER, INVESTORS HAVE FOCUSED ON SEVERAL KEY THEMES: o GROWTH EMPHASIS: The equity market has a bias toward strong growth stories. o DEPLOYING CASH: Excess cash is not highly valued by investors. o SELECTIVE INDUSTRIES: Restaurants are a relatively out-of-favor sector in the equity markets. o LEVERAGABLE BRAND: Investors value the ability to apply an existing brand and business model into new markets. Page 2 SITUATION ASSESSMENT - DEBT CAPITAL MARKETS - -------------------------------------------------------------------------------- THE DEBT CAPITAL MARKETS ARE CURRENTLY VERY ATTRACTIVE FOR ISSUERS DUE TO RECORD LIQUIDITY AT RATES NEAR HISTORIC LOWS: o LOW TREASURY YIELDS: The 10-year Treasury bond yield has decreased from a yield of 6.49% in January 1997 to 5.49% today. o TIGHTENING SPREADS: The average spread to worst for corporate high yield issues decreased from 9.8% to 9.2%. o RECORD HIGH YIELD ISSUANCE: YTD issuance of high yield bonds totals $101.2 billion, 80% greater than the 1997 period. BEAR STEARNS HIGH YIELD INDEX - YIELD TO WORST [GRAPHIC OMITTED] [GRAPHIC OMITTED] Page 3 SITUATION ASSESSMENT - RESTAURANT INDUSTRY - -------------------------------------------------------------------------------- OVERALL, THE RESTAURANT INDUSTRY HAS BEEN AN OUT-OF-FAVOR SECTOR IN RECENT YEARS WITH PUBLIC EQUITY INVESTORS DUE TO: o SLOWING GROWTH: Industry growth has slowed to 4.5% from 8.0% in the 1980s. o COMPETITION: Increased competition from new entrants. o HIGHER COSTS: Increasing labor costs. o EXCESS CAPACITY: General overcapacity after over-expansion in the early 1990s. THOSE RESTAURANT CONCEPTS THAT HAVE ACHIEVED AND SUSTAINED HIGH MARKET VALUATIONS POSSESS: o CONSISTENT EARNINGS GROWTH o HIGH VISIBILITY OF EARNINGS o SAME STORE SALES GROWTH o STRONG ROI PERFORMANCE RECENTLY, FINANCIAL INVESTORS HAVE BEGUN INVESTING AGGRESSIVELY IN THIS SECTOR AS IT PRESENTS ATTRACTIVE RELATIVE VALUATIONS TO OTHER INDUSTRY SECTORS. Page 4 SITUATION ASSESSMENT - THE COMPANY - -------------------------------------------------------------------------------- WONTON IS A UNIQUE AND VERY ATTRACTIVE RESTAURANT COMPANY WITH A WIDE RANGE OF STRATEGIC ALTERNATIVES. THE FOLLOWING FACTORS ARE THE KEY CONSIDERATIONS IN EVALUATING THE COMPANY'S STRATEGIC ALTERNATIVES: o MARKET LEADER: Leading provider of quick service specialty foods in the U.S. and abroad. Unique franchise in serving the "captive" customer. o STABLE CASH FLOW: Proven format provides strong and stable cash flow. o INTERNAL GROWTH CONSTRAINTS: Lack of availability of desirable locations for Wonton core business may constrain new stores to 25-35 per year. o NO BORROWINGS: Cash flow generation in excess of capital expenditures results in over "equitized" balance sheet. o LIMITED ACQUISITION OPPORTUNITIES: Preference for internal development; few similar good concepts. o SIGNIFICANT EXCESS CASH: Currently approximately $120 million in excess cash. o ABILITY TO EXTEND CONCEPT: Limited track record of extending concept to "non-captive" customer base. Page 5 SITUATION ASSESSMENT - GROWTH INITIATIVES - -------------------------------------------------------------------------------- WONTON MANAGEMENT HAS DEVELOPED SEVERAL RESTAURANT CONCEPTS TO PROVIDE FUTURE GROWTH OUTSIDE OF ITS WONTON CORE BUSINESS: o UMBERTO'S (80% OWNED): Upscale pizzeria and family-style Italian restaurant. o 3,500 - 4,000 square foot typical size in higher quality strip malls in suburban locations. o 70% take-out / self-service; 30% dine-in. o 5 existing locations. o Competes with neighborhood Italian restaurants and upscale family pizzerias. o BOULDER CREEK STEAKS & SALOON (40% OWNED): Family-style steakhouse. o 7,000 square foot typical size in standalone suburban locations. o 100% dine-in. o 4 existing locations. o Competes with family-style steak house restaurants (Outback, Lone Star) Page 6 SITUATION ASSESSMENT - GROWTH INITIATIVES - -------------------------------------------------------------------------------- o BICE (70% OWNED): Upscale Italian restaurant. o Typically urban locations. o 100% dine-in. o 3 existing locations. o Competes with wide variety of upscale Italian restaurants. o BAJA GRILL (PENDING ACQUISITION - WOULD BE 50% OWNED): South of the border cuisine. o 1,500 - 2,000 square foot typical size in strip malls in suburban locations. o In process of acquiring 2-store established business. o Competes with upscale, health conscience Mexican restaurants. Page 7
SITUATION ASSESSMENT - HISTORICAL FINANCIAL REVIEW - -------------------------------------------------------------------------------- ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ACTUAL 6 YEAR 3 YEAR 1991 1992 1993 1994 1995 1996 1997 CAGR CAGR ---- ---- ---- ---- ---- ---- ---- ------- ------ REVENUES $208.0 $236.2 $264.0 $294.0 $316.1 $325.7 $345.1 8.8% 5.5% % GROWTH 9.4% 13.6% 11.8% 11.4% 11.3% 3.0% 6.0% % COMP GROWTH (0.5%) (0.3%) 2.5% 3.1% 0.5% (0.2%) (0.4%) EBITDA $51.4 $53.7 $64.0 $73.0 $71.3(1) $79.5 $81.1(4) 7.9% 3.6% % OF REVENUES 24.7% 22.7% 24.8% 24.4% 22.6% 24.4% 23.5% NET INCOME $21.8 $24.1 $28.3 $33.0 $31.4(1) $37.4 $38.1(4) 9.8% 4.9% DILUTED EARNINGS PER SHARE $1.07 $1.18 $1.45 $1.63 $1.55(1) $1.84 $1.87(4) 9.8% 4.7% DIVIDENDS PER SHARE -- -- $0.52 $0.64 $0.76 $0.92 $1.08 FORWARD P/E MULTIPLE(2) 20.5x 17.3x 19.5x 14.0x 14.2x 14.8x 15.6x CAPITAL EXPENDITURES $23.9 $28.8 $31.9 $32.1 $17.5 $25.9 $28.6 STORES ANALYSIS OWNED STORE OPENINGS 63 58 59 53 44 29 30 NET OWNED STORE OPENINGS(3) 64 44 59 52 4 26 26 OWNED STORES (EOP) 412 456 515 567 571 597 623 7.1% 3.2% FRANCHISED STORES (EOP) 118 131 134 162 200 219 239 12.5% 13.8%
- -------------------- (1) Excludes pre-tax provision of $16.4MM ($10.2MM after-tax) for closing of approximately 40 stores. (2) Calculated using closing stock price and estimated EPS at respective year end. (3) Owned store openings, plus stores acquired from franchisees, less owned store closings. (4) Excludes pre-tax provision of $3.3 million ($2.0 million after-tax) for closing of several joint venture units. Page 8
SITUATION ASSESSMENT - PROJECTED FINANCIAL PERFORMANCE - -------------------------------------------------------------------------------- ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PROJECTED FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1998 1999 2000 2001 2002 CAGR ---- ---- ---- ---- ---- ---- REVENUES Core Business $360.4 $386.0 $417.5 $451.2 $485.9 7.8% Umberto's $4.3 $15.7 $34.4 $59.4 $91.3 Other Concepts(1) $12.6 $31.1 $55.1 $90.1 $135.8 ------ ------ ------ ------ ------- ----- Total $377.2 $432.8 $507.0 $600.8 $713.0 17.2% % GROWTH 9.5% 14.7% 17.1% 18.5% 18.7% % COMP GROWTH CORE BUSINESS 0.5% 1.5% 1.5% 1.5% 1.5% EBITDA Core Business $84.8 $91.1 $98.9 $107.2 $115.6 8.1% Umberto's $0.3 $2.6 $6.4 $11.6 $18.4 Other Concepts(1) $1.5 $4.2 $8.0 $14.0 $22.0 ------ ------ ------ ------ ------- ----- Total $86.7 $98.0 $113.3 $132.8 $156.1 15.8% % OF REVENUES CORE BUSINESS 23.5% 23.6% 23.7% 23.7% 23.8% % OF REVENUES UMBERTO'S 7.5% 16.7% 18.7% 19.6% 20.1% NET INCOME $41.1 $48.6 $59.3 $73.2 $90.6 21.9% DILUTED EARNINGS PER SHARE $1.97 $2.33 $2.85 $3.51 $4.35 21.9% CAPITAL EXPENDITURES Core Business $23.4 $21.7 $23.7 $24.3 $24.9 Umberto's $2.2 $5.4 $7.2 $9.0 $10.8 Other Concepts $4.1 $5.7 $9.5 $12.1 $15.3 ------ ------ ------ ------ ------ Total $29.6 $32.7 $40.4 $45.4 $51.0
- ------------------- Source: Company projections. (1) Consists of BICE, Boulder Creek and Baja Grill concepts. Page 9
SITUATION ASSESSMENT - PROJECTED FINANCIAL PERFORMANCE - -------------------------------------------------------------------------------- ACTUAL PROJECTED FISCAL YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1997 1998 1999 2000 2001 2002 CAGR -------- -------- -------- ------ ------ ------ ----- CORE BUSINESS STORE ASSUMPTIONS OWNED STORE OPENINGS (NET) 26 28 40 45 45 45 OWNED STORES (EOP) 623 651 691 736 781 826 5.8% FRANCHISED STORE OPENINGS (NET) 20 35 50 60 60 60 FRANCHISED STORES (EOP) 239 274 324 384 444 504 16.1% NEW CONCEPTS STORE ASSUMPTIONS UMBERTO'S OWNED STORES (EOP) 3 9 24 44 69 99 BOULDER CREEK OWNED STORES (EOP) 3 8 14 24 36 51 BICE OWNED STORES (EOP) 2 4 7 11 16 22 BAJA GRILL OWNED STORES (EOP) 0 2 7 17 32 52
- ---- Source: Company projections. Page 10 HISTORICAL 5 YEAR STOCK PRICE PERFORMANCE - -------------------------------------------------------------------------------- WONTON VS. S&P 500 AND RESTAURANT COMPOSITE INDEX (1) JULY 16, 1993 THROUGH JULY 17, 1998 [GRAPHIC OMITTED] - ---- (1) Restaurant Composite Index includes: Buffet's, Consolidated Products, Foodmaker, Lonestar, Luby's, Piccadilly, Ryan's and Ruby's. Page 11 HISTORICAL 12 MONTH STOCK PRICE PERFORMANCE - -------------------------------------------------------------------------------- WONTON VS. S&P 500 AND RESTAURANT COMPOSITE INDEX (1) JULY 16, 1997 THROUGH JULY 17, 1998 [GRAPHIC OMITTED] - ---- (1) Restaurant Composite Index includes: Buffet's, Consolidated Products, Foodmaker, Lonestar, Luby's, Piccadilly, Ryan's and Ruby's. Page 12
SITUATION ASSESSMENT - COMPARABLE PUBLIC COMPANIES - -------------------------------------------------------------------------------- ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FIVE YEAR LATEST TWELVE MONTHS PROJECTED % CHANGE IN ------------------------------ EARNINGS STOCK PRICE PRICE ON VALUE OF 1998 1999 GROWTH FROM 17-JUL-98 EQUITY EPS(1) EPS(1) RATE(2) 1/1/98 --------- ------- ------ ------ --------- ------------ REVENUES EBIT NET INCOME -------- ------ ---------- Project Wonton $26.31 $540.08 $351.47 $57.13 $38.20 $1.97 $2.05 13.50% 0.005 LIMITED SERVICE & CASUAL DINING - ------------------------------- RESTAURANTS - ----------- Buffets Inc. $15.06 $685.70 $824.62 $43.05 $32.25 $0.82 $0.95 16.50% 60.7% Consolidated Products $20.69 $432.34 $290.37 $31.29 $18.05 $0.96 $1.19 19.83% 26.3% Foodmaker, Inc. $16.38 $641.88 $1,154.95 $84.35 $37.21 $1.20 $1.41 19.57% 8.7% Lone Star Steakhouse $12.88 $530.42 $608.62 $99.24 $65.32 $1.01 $1.21 19.00% (26.4%) Luby's Cafeterias, Inc. $17.56 $408.69 $502.21 $54.93 $32.73 $1.32 - 9.00% 0.0% Piccadilly Cafeterias Inc. $13.06 $137.53 $312.49 $18.19 $10.07 $1.01 - - (0.5%) Ruby Tuesday $17.06 $281.23 $695.19 $72.37 $43.68 $0.90 $1.06 16.22% 32.5% Ryan's Family Steakhouse $10.94 $486.86 $605.95 $65.35 $38.31 $0.87 $0.96 12.33% 27.7%
- ---- (1) Source: First Call Calendar EPS Estimates. (2) Source: Bloomberg. Page 13 SITUATION ASSESSMENT - COMPARABLE PUBLIC COMPANIES' FINANCIAL RATIOS - --------------------------------------------------------------------------------
(ALL ESTIMATES ARE LATEST TWELVE MONTHS UNLESS NOTED) VALUATION MULTIPLES CREDIT STATISTICS -------------------------------------------------------- ----------------------------------------- ENTERPRISE VALUE ----------------- LTM LTM PRICE TO PRICE TO PRICE TO EBITDA/ TOTAL DEBT/ DEBT/ EBITDA EBIT LTM EPS 1998 EPS(1) 1999 EPS(1) INTEREST EBITDA MKT. CAP Project Wonton 5.2x 7.4x 14.1x 13.4x 12.8x NM 0.0 x 0.0% LIMITED SERVICE & CASUAL DINING - -------------------------------- RESTAURANTS - ----------- Buffets Inc. 8.0x 15.6x 21.2x 18.4x 15.9x 23.7x 0.5 x 6.8% Consolidated Products 10.1x 15.0x 25.5x 21.5x 17.4x 15.2 x 0.8 x 8.4% Foodmaker, Inc. 7.3x 10.8x 17.6x 13.6x 11.6x 3.3 x 2.8 x 38.3% Lone Star Steakhouse 3.0x 4.0x 8.3x 12.7x 10.6x NM 0.0 x 0.0% Luby's Cafeterias, Inc. 6.5 x 8.9 x 12.5 x 13.3 x - 15.3 x 1.1 x 17.5% Piccadilly Cafeterias Inc. 5.4x 9.0x 13.6x 12.9x - 14.2 x 0.9 x 16.0% Ruby Tuesday 3.2 x 5.0 x 13.7x 19.0x 16.1x 30.6 x 0.8 x 25.1% Ryan's Family Steakhouse 6.7x 9.4x 13.3x 12.6x 11.4x 16.0 x 1.4 x 21.2% Harmonic Mean 5.3x 8.0x 14.1x 14.9x 13.3x
- ---- (1) Source: First Call Calendar EPS Estimates. Page 14 SITUATION ASSESSMENT - OTHER RESTAURANT COMPANIES - -------------------------------------------------------------------------------- ($ IN MILLIONS)
THE MARKET HAS REWARDED CERTAIN RESTAURANT COMPANIES BASED ON A VARIETY OF FACTORS: P/E MULTIPLES ------------------------------------------------------------ EQUITY MARKET PRICE TO LTM PRICE TO 1998 PRICE TO 1999 RESTAURANT COMPANY CAPITALIZATION EPS EPS(1) EPS(1) COMMENTS ------------------ -------------- ------------- ------------- ------------- ------------------------------------------------ CKE $2,051 34.4x 25.8x 20.5x o Turning around operating and financial performance of once troubled concepts o Growth through acquisition McDonald's $50,354 31.4x 29.2x 25.7x o Strength of brand franchise o Global presence Papa John's $1,170 39.3x 32.4x 25.4x o High historical and projected growth in sales and earnings
- ---- (1) Source: First Call Calendar EPS Estimates. Page 15 SITUATION ASSESSMENT - M&A ACTIVITY - --------------------------------------------------------------------------------
IN THE LAST TWELVE MONTHS THERE HAS BEEN A SIGNIFICANT INCREASE IN ACQUISITION ACTIVITY IN THE RESTAURANT SECTOR. ($ IN MILLIONS) ENTERPRISE VALUE EQUITY VALUE DATE ------------------------- --------------------- ANNOUNCED / EQUITY ENTERPRISE REMIUM LTM LTM LTM NET BOOK COMPLETED Target/Acquiror VALUE VALUE PAID(1) REVENUE EBITDA EBIT INCOME VALUE ----------- --------------- ------ ---------- ------ ------- -------- ------ ------- ------------ 4/3/98 / Bertucci's Inc./ $96.5 $104.3 35.5% 0.76x 6.7x 16.0x 27.5x 1.4x Pending Investor Group 4/2/98 / Spaghetti Warehouse/ $51.2 $56.4 26.1% 0.87x 7.8x 16.3x 25.3x 1.1x Pending Conquest partners 3/13/98 / Pollo Tropical, Inc./ $94.0 $97.2 38.6% 1.50x 9.6x 12.4x 21.4x 3.3x Pending Management 1/15/98 / Hardee's (Advantica Restaurant Group)/ $381.0 $427.0 NA 0.78x 6.6x 14.5x NA NA 4/1/98 CKE Restaurants, Inc. 10/21/97 / International Dairy Queen Inc./ $596.3 $548.8 10.1% 1.30x 8.3x 9.2x 15.6x 3.1x 1/7/98 Berkshire Hathaway Inc. 9/23/97 / El Chico Restaurants, Inc./ $49.3 $59.4 21.4% 0.58x 5.8x 12.9x 17.1x 1.8x 1/22/98 Cracken, Harkey, Street & Co., L.L.C. 9/5/97 / DavCo Restaurants Inc./ $137.6 $186.5 49.5% 0.81x 7.5x 11.7x 21.7x 2.7x 4/3/98 Citicorp Venture Capital Ltd. 8/4/97 / Perkins Family Restaurant, L.P./ $146.7 $206.6 28.7% 0.80x 5.8x 10.5x 10.0x 2.4x 12/23/97 The Restaurant Company HARMONIC MEAN OF TRANSACTION MULTIPLES 0.85X 7.1X 12.5X 17.9X 1.9X
- ---- (1) Over stock price on day prior to announcement. Page 16 SECTION II SUMMARY OF ALTERNATIVES TO INCREASE SHAREHOLDER VALUE ALTERNATIVES TO INCREASE SHAREHOLDER VALUE - --------------------------------------------------------------------------------
WONTON HAS THE ABILITY TO PURSUE A WIDE VARIETY OF POSSIBLE STRATEGIC ALTERNATIVES. ALTERNATIVES CONSIDERATIONS Status Quo o Cash continues to build without attractive use o Earnings growth continues to slow o Likely continued public valuation issue o Significant pressure from shareholders Acquisition o Strong strategic preference for developing new concepts and JVs internally o Company has not historically made acquisitions o Few concepts with strong business fit Management Buyout o Family pursued previously but could not reach agreement Open Market Purchase o Moderate repurchase would not have significant EPS impact o Not generally effective for purchasing large percentages of public float Special Dividend o Not tax efficient from individual shareholder standpoint Leveraged Recapitalization o Use of excess cash combined with borrowing o Potential to provide significant liquidity to all shareholders while retaining equity ownership upside o Potential capital gains treatment for shareholders o Use of leverage provides for accelerated earnings growth Sale of Company o Opportunity for very attractive valuation given strength of the company and acquisition market o Only practical if Wonton family interested in selling o Presents significant issues including ongoing management
Page 17 ALTERNATIVES TO INCREASE SHAREHOLDER VALUE - -------------------------------------------------------------------------------- BEAR STEARNS BELIEVES THE TWO ALTERNATIVES THAT WOULD CREATE THE MOST SHAREHOLDER VALUE FOR ALL WONTON SHAREHOLDERS ARE: o SIGNIFICANT LEVERAGED RECAPITALIZATION o Can deliver significantly greater value than status quo scenario to all shareholders based on earnings projections - Shareholders can monetize a portion of their holdings at a premium price - Efficient use of cash on hand and reduces Company's cost of capital - New debt "supercharges" remaining equity going forward o Takes advantage of current robust debt markets o Can be done in conjunction with new equity investor o Consistent operating performance and modest levels of capital spending mitigate risk of significant debt o SALE OF COMPANY o Delivers immediate value to all shareholders o Likelihood of significant premium to current valuation o Significant interest on the part of strategic and financial buyers THE FOLLOWING INFORMATION SUMMARIZES OUR EVALUATION OF THESE TWO ALTERNATIVES. Page 18 Section III LEVERAGED RECAPITALIZATION OVERVIEW OF LEVERAGED RECAPITALIZATION - -------------------------------------------------------------------------------- A LEVERAGED RECAPITALIZATION COULD BE CONDUCTED BY THE COMPANY EXCLUSIVELY OR IN CONJUNCTION WITH A FINANCIAL INVESTOR. o Bear Stearns believes if a leveraged recapitalization is pursued, it should be significant thus maximizing the immediate value delivered to shareholders. The size of a recapitalization is also dependent on the family's desire for liquidity. o A leveraged recapitalization allows existing investors to receive substantial cash and retain ownership in ongoing entity. o A new Financial Investor should be considered if existing Family management wishes to exit and/or a very significant recapitalization is contemplated. o A new Financial Investor structure is typically used when a company seeks to execute a recapitalization that is very close to a sale in terms of shares repurchased and repurchase price, but allows existing owners to retain a small percentage of the still public company. o Financial Investors prefer this structure over a 100% sale because: o By qualifying for recapitalization accounting (typically requires existing owners to retain 7-10% of pro forma ownership), goodwill is avoided o Potential for liquidity increased due to company remaining public THE FOLLOWING PAGES PROVIDE AN ILLUSTRATIVE EXAMPLES OF EACH TYPE OF LEVERAGED RECAPITALIZATION. Page 19 Section III-A COMPANY SPONSORED RECAPITALIZATION OVERVIEW OF COMPANY SPONSORED RECAPITALIZATION - -------------------------------------------------------------------------------- THE FOLLOWING EXAMPLE ILLUSTRATES THE VALUE A COMPANY SPONSORED RECAPITALIZATION COULD DELIVER TO SHAREHOLDERS (EXAMPLE ASSUMES THE FAMILY WOULD PARTICIPATE): o The Company would tender for 14 million common shares at a price of approximately $32.00 per share (premium of 19% to current price). o Tender funded with: o Excess cash and marketable securities on hand (approximately $125 million) o New debt raised of approximately $340 million from banks and/or bond market o The tender would also be subject to certain conditions including financing and possibly a minimum number of shares being tendered. Page 20 COMPANY SPONSORED RECAPITALIZATION: $450 MILLION - -------------------------------------------------------------------------------- ($ IN MILLIONS) Sources of Funds Uses of Funds - ---------------- ------------- Excess Cash on Balance Sheet(1) $125.0 Purchase Price of Equity $450.0 Bank Debt / Senior Notes 340.0 Transaction Fees and Expenses 15.0 Total Sources $465.0 Total Uses $465.0 - ----------------------------------------- ------------------------------------- ========================================= ===================================== Pro Forma Capitalization (1) ---------------------------------------- Cash and Equivalents $6.0 Bank Debt / Senior Notes $340.0 Shareholders Equity ($228.1) ======================================== - ---- (1) Estimated as of 10/4/98. Page 21 COMPANY SPONSORED RECAPITALIZATION: $450 MILLION - --------------------------------------------------------------------------------
PRO FORMA INCOME STATEMENT: ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PROJECTED FYE DECEMBER 31, --------- ------------------------------------------ MANAGEMENT PROJECTIONS(1) 1998 1999 2000 2001 2002 CAGR ---- ---- ---- ---- ---- ---- REVENUES $365.7 $405.7 $460.4 $525.5 $600.0 13.2% EBITDA 85.2 94.4 106.9 121.7 138.6 12.9% EBIT 58.5 66.4 76.9 89.6 105.2 15.8% NET INCOME $15.0 $20.1 $27.1 $35.6 $46.1 32.3% DILUTED EARNINGS PER SHARE $2.22 $2.96 $4.00 $5.25 $6.80 32.3% POSSIBLE FUTURE STOCK PRICE(2) $30.36 $40.57 $54.76 $72.01 $93.17 PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE(3) $28.25 $32.27 $37.22 $41.84 $46.27 PROJECTED FYE DECEMBER 31, ------------------------------------------- SUMMARY CREDIT STATISTICS @ CLOSE 1999 2000 2001 2002 -------- ---- ---- ---- ---- TOTAL DEBT $340.0 $340.0 $340.0 $340.0 $340.0 NET DEBT $334.0 $308.1 $274.9 $232.0 $178.0 NET DEBT / EBITDA 3.92x 3.26x 2.57x 1.91x 1.28x EBITDA / INTEREST EXPENSE(4) 2.49x 2.76x 3.13x 3.56x 4.06x
- ---- (1) Includes projected results of Umberto, but excludes projected results of Boulder Creek, BICE and Baja Grill. (2) Assumes P/E multiple of 13.7x (same as current 1998 estimated multiple). (3) Present value of future stock price discounted at Wonton's assumed pro forma cost of equity of 17%. (4) Assumes all bond financing structure and interest rate of 9.75%. Page 22 COMPANY SPONSORED RECAPITALIZATION: SUMMARY - -------------------------------------------------------------------------------- BENEFITS - -------- o A large recapitalization can monetize a significant portion of investors' holdings at a premium to the market price. Based on $450 million recapitalization: o Approximately 68% of shares would receive $32 per share $22 weighted value o Approximately 32% of shares would have possible value of $30 (based on current multiple) $10 weighted value o Allows existing investors to participate in the equity upside on a "supercharged" basis due to leverage o Combined value of immediate cash and remaining ownership may exceed value obtained in a sale over a medium term time horizon ISSUES - ------ o Company must operate under significant debt load (4.1x trailing EBITDA based on $450 million recapitalization) o Trading characteristics of stock negatively impacted May lead to trading at a decreased multiple of earnings: o Significant decrease in liquidity o Likely reduction in research coverage o Negative net worth will preclude certain Institutions from ownership o Composition of institutional shareholder base will change income oriented funds will sell Page 23 Section III-B FINANCIAL INVESTOR SPONSORED RECAPITALIZATION OVERVIEW OF FINANCIAL INVESTOR SPONSORED RECAPITALIZATION - -------------------------------------------------------------------------------- TO MAXIMIZE THE UPFRONT CASH PROCEED AVAILABLE TO CURRENT INVESTORS IN A RECAPITALIZATION, THE COMPANY COULD SELL A CONTROLLING OWNERSHIP TO A NEW FINANCIAL INVESTOR. THE FOLLOWING IS AN EXAMPLE OF A STRUCTURE BEAR STEARNS BELIEVES COULD BE EXECUTED AND WOULD PROVIDE SHAREHOLDERS WITH SIGNIFICANT VALUE: o Wonton tenders for 18.9 million shares (90% of diluted shares) for $35.00 per share ($661 million recapitalization). Assumes the Wonton Family tenders 90% of their aggregate shares (tender amounts among different family constituencies may differ). o Tender is funded by: o $123 million excess cash o $430 new bank/bond debt o $125 million of new common equity from a Financial Investor (3.6 million new shares at $35.00 per share) o Pro forma ownership is as follows o Wonton Family 0.7 million shares (12.3%) o Existing Investors 1.4 million shares (24.6%) o Financial Investor 3.6 million shares (63.2%) --- 5.7 Page 24 FINANCIAL INVESTOR SPONSORED RECAPITALIZATION: $661 MILLION - --------------------------------------------------------------------------------
PRO FORMA INCOME STATEMENT: ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) PRO FORMA PROJECTED FYE DECEMBER 31, ----------------------------------------------------- MANAGEMENT PROJECTIONS(1) 1998 1999 2000 2001 2002 CAGR ---- ---- ---- ---- ---- ---- REVENUES $365.7 $405.7 $460.4 $525.5 $600.0 13.2% EBITDA 85.2 94.4 106.9 121.7 138.6 12.9% EBIT 58.5 66.4 76.9 89.6 105.2 15.8% NET INCOME $8.1 $13.3 $20.5 $29.3 $39.8 49.0% DILUTED EARNINGS PER SHARE $1.42 $2.34 $3.61 $5.17 $7.02 49.0% PROJECTED FYE DECEMBER 31, SUMMARY CREDIT STATISTICS @ CLOSE 1999 2000 2001 2002 TOTAL DEBT $430.0 $408.6 $380.9 $350.0 $350.0 NET DEBT $421.6 $401.6 $373.9 $335.9 $286.3 NET DEBT / EBITDA 4.95x 4.25x 3.50x 2.76x 2.07x EBITDA / INTEREST EXPENSE 1.88x 2.12x 2.52x 3.03x 3.57x
- ----------------- (1) Includes projected results of Umberto, but excludes projected results of Boulder Creek, BICE and Baja Grill. Page 25 FINANCIAL INVESTOR SPONSORED RECAPITALIZATION ISSUES THE FOLLOWING ADDITIONAL ISSUES ARE PRESENT IN A FINANCIAL INVESTOR SPONSORED RECAPITALIZATION: o CONTROL: The Financial Investor will likely require control of the board and final authority on business strategy and operating issues. o ONGOING EQUITY OWNERSHIP OF MANAGEMENT: If the Wonton Family desires to continue to manage Company, Financial Investor will want a "significant" continuing equity investment in Company. o RISK ASSOCIATED WITH REMAINING EQUITY "STUB": The more significant level of leverage magnifies the positive and negative issues associated with a leveraged recapitalization as discussed in the introduction. Page 26 Section IV SALE OF THE COMPANY SALE OF THE COMPANY BEAR STEARNS BELIEVES A SALE OF THE COMPANY COULD PROVIDE SHAREHOLDERS WITH A MONETIZATION OF ALL SHARES AT A SIGNIFICANT PREMIUM TO THE CURRENT MARKET PRICE IF THE WONTON FAMILY IS INTERESTED IN SELLING THEIR OWNERSHIP. BASED ON OUR REVIEW OF THE LIKELY INTERESTED BUYERS AND CURRENT MARKET CONDITIONS, BEAR STEARNS BELIEVES A SALE COULD PROVIDE SHAREHOLDERS WITH VALUES BETWEEN $34 AND $37 PER SHARE. THIS VALUATION ASSUMES THE FOLLOWING: o GROWTH POTENTIAL: Buyers are confident regarding the Company's growth prospects beyond its existing "captive customer" venues o MANAGEMENT: Buyers either have management or can retain new management to run the Company if Wonton Family management wants to leave Company o EXISTING LOCATIONS: Buyers are comfortable that existing leases will generally continue to be available on comparable terms o MARKET CONDITIONS: Assumes a continuation of the currently robust capital markets, especially for debt financings FOLLOWING IS A DISCUSSION OF SALE CONSIDERATIONS AND PROCESS. Page 27 POSITIONING OF COMPANY BEAR STEARNS BELIEVES THE MOST EFFECTIVE WAY TO MAXIMIZE SHAREHOLDER VALUE IN A SALE IS TO POSITION THE COMPANY IN THE FOLLOWING MANNER: o DOMINANT IN ATTRACTIVE CORE BUSINESS: Dominant position in quick service to the "captive customer" with a business model that is unusually stable and possesses high margins o SIGNIFICANT GROWTH POTENTIAL BEYOND CORE BUSINESS: Due to the strength of the Wonton brand and related new concepts (e.g. Umberto's), there are significant additional growth opportunities away from existing venues TO ACHIEVE A VALUATION AT THE HIGH END OF THE ESTIMATED PRICE RANGE, BEAR STEARNS BELIEVES A BUYER MUST BE CONFIDENT REGARDING THE COMPANY'S GROWTH POTENTIAL BEYOND ITS EXISTING "CAPTIVE" CUSTOMER BASE. o Primary growth vehicles to be emphasized: o Expansion to nontraditional venues without a "captive" customer base o "CoBranding" with other QSRs o Franchising o Expansion of Umberto's upscale concept under Umberto's or Wonton name o Increased international franchising Page 28 MARKETING PROCESS DUE TO THE QUALITY AND STRENGTH OF WONTON'S BUSINESS, BEAR STEARNS ANTICIPATES SIGNIFICANT INTEREST ON THE PART OF STRATEGIC AND FINANCIAL INVESTORS. IF THE WONTON BOARD OF DIRECTORS AUTHORIZES A SALE PROCESS, BEAR STEARNS RECOMMENDS A LIMITED AUCTION WITH THE FOLLOWING CHARACTERISTICS: o ONLY QUALIFIED BUYERS: All potential strategic and financial buyers would be qualified as to financial capability and demonstrated interest o TWO STAGE PROCESS: Initial bids based on Offering Memorandum would be used to further qualify buyers. Only buyers with significant and credible interest would be allowed to meet with management and have access to additional confidential information o TIMING: Bear Stearns believes a definitive agreement could be signed within 10 weeks of the Board's authorization of a sale process FOLLOWING IS A LIST OF THE TIER 1 FINANCIAL AND STRATEGIC BUYERS ALONG WITH ILLUSTRATIVE ACQUISITION MODELS (ADDITIONAL INTERESTED BUYERS LOCATED IN APPENDIX). Page 29
OVERVIEW OF FINANCIAL BUYERS: TIER 1 NAME RESTAURANT INVESTMENTS SIZE OF FUND(1) APOLLO o Family Restaurants, Inc. (80%) o Koo Koo Roo (pending) $3.6 billion CVC o Davco Restaurants, Inc. Internal(2) MCCOWN DE LEEUW o Papa Ginos o D'Angelos $750 million BRUCKMAN, ROSSER, SHERRILL o California Pizza Kitchen o Acapulco Restaurants o (formerly owned Restaurant Associates) $400 million CASTLE HARLAN o Charlie Brown's Steakhouse o (currently seeking restaurant investment) $610 million SAUNDERS KARP o California Cafe Corporation o Marie Callender Pie Shops o Souper Salad $600 million BOSTON VENTURES o Motown Cafe o Ground Round $800 million
- ------------- (1) Reflects recent fund raisings which are generally uninvested. (2) Funds for investment sourced from internal allocations within Citicorp. Current funds available unknown. Page 30 OVERVIEW OF STRATEGIC BUYERS: TIER 1
Company Existing Brands Financial Flexibility Comments - ------- --------------- --------------------- -------- CKE RESTAURANTS Carl's Jr. Equity Market Cap: $1.9 billion o Most acquisitive company in Hardee's Debt / EBITDA: 2.4x(1) restaurant sector Taco Bueno o Large percentage of companyowned locations o CEO plays active role in acquisition process Church's Chicken Restaurants Popeye's Chicken & Biscuits Equity Market Cap: NM o Recent restaurant acquisitions AFC ENTERPRISES Seattle's Best Coffee Debt / EBITDA: 4.2x o Demonstrated interest in franchise concepts o Freeman Spogli (LBO firm) Arby's Inc. major shareholder Mistic Brands Cable Car Beverage Corp. Royal Crown Co. Snapple Beverage Corp. Equity Market Cap: $676 million o Currently evaluating several TRIARC COMPANIES National Propane Corp. Debt / EBITDA: 6.6x(2) potential restaurant acquisitions o Sold all companyowned Arby's locations in 1997 o Prior interest in Wonton o Significant leverage reduces ability to consummate acquisition
- ----------------------- (1) Based on 1Q98 annualized EBITDA. (2) Pro forma for acquisitions and divestitures of assets which took place in 1997. Page 31 ILLUSTRATIVE LBO ANALYSIS: $36.00 PRICE PER SHARE(1) ASSUMING A $36 PURCHASE PRICE (7.7X TRAILING EBITDA), BEAR STEARNS HAS SUMMARIZED AN AGGRESSIVE TRANSACTION STRUCTURE THAT COULD BE EXECUTED BY A FINANCIAL BUYER IN TODAY'S MARKET.
Uses of Funds Credit Statistics - ------------- ----------------- Purchase Price of Equity (at $36)(2) $756.3 AT CLOSE Transaction Fees and Expenses 20.0 Total Debt / EBITDA 6.0x Total Uses ------ EBITDA / Cash Interest Expense 1.9x $776.3 EBITDA / Total Interest Expense(4) 1.5x ====== Total Debt / Total Capitalization 78.5%
Sources of Funds Shareholder Returns: 4-Year IRR - ---------------- ------------------------------- Excess Cash on Balance Sheet (3) $126.3 IRR Bank Credit Facility 75.0 6.0x Exit EBITDA Multiple 29.5% Senior Notes 350.0 6.5x Exit EBITDA Multiple 34.6% Senior Discount Notes 85.0 7.0x Exit EBITDA Multiple 39.1% Common Equity 140.0 ----- Total Sources $776.3 =====
- ---------------- (1) Uses management projections which include results of Umberto but exclude results of Boulder Creek, BICE and Baja Grill. (2) Includes dilutive impact of 1.8 million options. (3) Estimated as of 10/4/98(including marketable securities). (4) Assumes interest rate on financing is 8.19% for bank loans, 10.75% for Senior Notes and 13.00% for Sr. Disc. Notes with 5% equity. Page 32 ILLUSTRATIVE ACQUISITION ANALYSIS: CKE'S PURCHASE AT $36.00 PER SHARE ASSUMING A $36 PURCHASE PRICE (7.7X TRAILING EBITDA), BEAR STEARNS HAS SUMMARIZED THE PRO FORMA IMPACT TO CKE FOR FISCAL YEAR 1999. ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) CKE(1) Wonton Adjust- Combined FYE 1/00 FYE 12/99 ments(3) Revenue $2,170.9 $405.7 $2,576.6 Cost Synergies(4) $5.0 $5.0 EBITDA $294.5 $94.4 $5.0 $393.9 MARGIN 13.6% 23.2% 15.3% EBIT $213.7 $66.4 ($8.4) $271.7 MARGIN 9.8% 16.3% 10.6% Goodwill Amortization $13.4 $13.4 Net Interest Expense $39.1 ($7.2) $59.9(5) $91.8 Net Income $106.9 $44.6 ($46.9) $104.6 - -------------------------------------------------------------------------------- Diluted EPS $2.16 $2.12 $2.11 - -------------------------------------------------------------------------------- % ACCRETION (2.1%) Total Debt $628.4(6) $0.0 $642.9 $1,271.3 Debt / EBITDA 2.1x NM 3.2x EBITDA / Interest Expense 7.5x NM 4.2x - ------------------ (1) Source: Merrill Lynch research report dated 3/19/98. EPS estimates from First Call. (2) Management projections including results of Umberto but excluding results of Boulder Creek, BICE and Baja Grill (3) Assumes purchase accounting treatment for 100% debtfinanced acquisition. (4) Preliminary estimate of possible cost synergies related to a strategic buyer. (5) Assumes 8.00% interest expense. (6) Actual as of 5/18/98. Page 33 ILLUSTRATIVE POOLING ANALYSIS: CKE'S PURCHASE AT $36.00 PER SHARE ASSUMING A $36 PURCHASE PRICE (7.7X TRAILING EBITDA), BEAR STEARNS HAS SUMMARIZED THE PRO FORMA IMPACT TO CKE FOR FISCAL YEAR 1999. ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) CKE(1) Wonton Adjust- Combined FYE 1/00 FYE 12/99 ments(3) Revenue $2,170.9 405.7 $2,576.6 Cost Synergies(4) $5.0 $5.0 EBITDA $294.5 $94.4 $5.0 $393.9 MARGIN 13.6% 23.2% 15.3% EBIT $213.7 $66.4 $5.0 $285.1 MARGIN 9.8% 16.3% 11.1% Goodwill Amortization $0.0 $0.0 Net Interest Expense $39.1 ($7.2) $0.3(5) $32.2 Net Income $106.9 $44.6 $2.9 $154.4 - -------------------------------------------------------------------------------- EPS $2.16 $2.12 $2.31 - -------------------------------------------------------------------------------- % ACCRETION 6.8% Total Debt $628.4(6) $0.0 $0.0 $628.4 Debt / EBITDA 2.1x NM 1.6x EBITDA / Interest Expense 7.5x NM 12.3x - --------------- (1) Source: Merrill Lynch research report dated 3/19/98. EPS estimates from First Call. (2) Management projections including results of Umberto but excluding results of Boulder Creek, BICE and Baja Grill. (3) Assumes pooling accounting treatment for 100% equityfinanced acquisition. (4) Preliminary estimate of possible cost synergies related to a strategic buyer. (5) Assumes 8.00% interest expense. (6) Actual as of 5/18/98. Page 34 ILLUSTRATIVE ACQUISITION ANALYSIS: CKE'S PURCHASE AT $36.00 PER SHARE THE FOLLOWING MATRICES REFLECT THE ACCRETION / DILUTION TO CKE BASED ON THE FOLLOWING SHARE PURCHASE PRICE AND COST SYNERGIES: Purchase Accounting Pooling Accounting Cost Synergies Cost Synergies $0MM $5MM $10MM $15MM $0MM $5MM $10MM $15MM -------------------------------- ---------------------------- $34 |(1.8%) | 1.1% | 3.9% | 6.8% $34 |6.4%| 8.5%|10.7% | 12.8% -------------------------------- ----------------------------- Share $36 |(5.0%) |(2.1%)| 0.7% | 3.6% $36 |4.7%| 6.8%| 9.0% | 11.1% Purchase -------------------------------- ----------------------------- Price $38 |(8.1%) |(5.3%)|(2.4%)| 0.4% $38 |3.2%| 5.2%| 7.3% | 9.4% -------------------------------- ----------------------------- $40 |(11.3%)|(8.5%)|(5.6%)|(2.8%) $40 |1.6%| 3.7%| 5.7% | 7.8% Page 35 KEY ISSUES RELATED TO A POSSIBLE SALE o DESIRE OF FAMILY RELATED TO SALE OF SHARES o MANAGEMENT ISSUES o Potential departure of key Family executives after transaction (issue is mitigated if it is a strategic buyer) o Depth of second tier management team o Buyer's need for key Family executives during transition period o UMBERTO'S OWNERSHIP STRUCTURE o Primary growth vehicle not whollyowned o NONCOMPETE AGREEMENT o Buyer's need for some form of noncompete agreement from Family o LISANTI (SUPPLIER) ISSUES o Absence of formal contract o Nature of relationship after departure of key senior managers Page 36 OTHER CONSIDERATIONS FOLLOWING ARE OTHER KEY CONSIDERATIONS RELEVANT TO THE BOARD'S EVALUATION OF A POSSIBLE SALE: o TYPE OF CONSIDERATION: Do shareholders receive cash, stock or a combination of both o TRANSACTION STRUCTURE: Is transaction structured as a taxfree reorganization or a taxable transaction (form of consideration is an integral part of this) o DISRUPTIVE PROCESS: While every effort will be made to limit dissemination of information and control process, a sale process will impact management, employees and suppliers. In addition, trading activity in the stock may necessitate Company comment / announcement Page 37 Section V CONCLUSION CONCLUSION IF THE WONTON FAMILY IS INTERESTED IN SELLING ITS ENTIRE OWNERSHIP, BEAR STEARNS BELIEVES THE MOST ATTRACTIVE ALTERNATIVE FOR ALL SHAREHOLDERS CAN BE OBTAINED THROUGH A SALE OF THE COMPANY. o IMMEDIATE MONETIZATION: All shareholders receive cash (or possibly liquid securities) for their ownership interest. o ATTRACTIVE VALUATION: Value estimates of $34 $37 per share represent significant premium to current valuation o HIGH LIKELIHOOD OF SUCCESS: Attractiveness of Company and strength of current market makes quick and successful sale highly likely IF THE WONTON FAMILY WISHES TO RETAIN ALL OR A PORTION OF ITS OWNERSHIP, BEAR STEARNS RECOMMENDS THE COMPANY PURSUE A LEVERAGED RECAPITALIZATION. Page 38 Appendix A SUMMARY TRANSACTION TIMETABLES PROCESS & TIMETABLE FOR SALE OF WONTON STEPS KEY SUCCESS FACTORS STEPS [GRAPHIC OMITTED][GRAPHIC OMITTED] Page 39 ILLUSTRATIVE TIMETABLE -- LEVERAGED RECAPITALIZATION (TENDER OFFER) - -------------------------------------------------------------------------------- JULY 1998 AUGUST 1998 SEPTEMBER 1998 - -------------------------------------------------------------------------------- S M T W T F S S M T W T F S S M T W T F S - -------------------------------------------------------------------------------- 1 2 3 4 1 1 2 3 4 5 5 6 7 8 9 10 11 2 3 4 5 6 7 8 6 7 8 9 10 11 12 12 13 14 15 16 17 18 9 10 11 12 13 14 15 13 14 15 16 17 18 19 19 20 21 22 23 24 25 16 17 18 19 20 21 22 20 21 22 23 24 25 26 26 27 28 29 30 31 23 24 25 26 27 28 29 27 28 29 30 30 31 - -------------------------------------------------------------------------------- -Begin confidential discussions with possible bank lenders WEEK 1: -Draft of internal financial statements available WEEK 2: -Legal counsel drafts tender offer documentation -Legal counsel begins drafting debt Offering Circular and description of Notes -Public information package sent to debt Rating Agencies -Begin preparation of Rating Agency presentation WEEK 3: -Continue preparation of Rating Agency presentation -Continue discussions with bank lenders -Accountants sign-off on financial results WEEK 4: -Company issues press release announcing self tender -Company commences tender offer -Drafting of debt offering circular and description of notes continues -Continue discussions with bank lenders -Presentations to rating agencies -Draft of GAAP financial statements available (excluding footnotes) -Regularly scheduled dividend announcement Page 40 ILLUSTRATIVE TIMETABLE LEVERAGED RECAPITALIZATION (TENDER OFFER) - -------------------------------------------------------------------------------- JULY 1998 AUGUST 1998 SEPTEMBER 1998 - -------------------------------------------------------------------------------- S M T W T F S S M T W T F S S M T W T F S - -------------------------------------------------------------------------------- 1 2 3 4 1 1 2 3 4 5 5 6 7 8 9 10 11 2 3 4 5 6 7 8 6 7 8 9 10 11 12 12 13 14 15 16 17 18 9 10 11 12 13 14 15 13 14 15 16 17 18 19 19 20 21 22 23 24 25 16 17 18 19 20 21 22 20 21 22 23 24 25 26 26 27 28 29 30 31 23 24 25 26 27 28 29 27 28 29 30 30 31 - -------------------------------------------------------------------------------- WEEK 5: -Receive bank financing commitment and begin negotiating bank loan agreements(1) -Audited financial statements with footnotes available -Finalize debt Offering Circular and description of Notes -Debt offering circular printed and distributed to investors WEEK 6: -Presentation to debt sales force -Receive credit ratings from Rating Agencies -Begin roadshow for debt offering WEEK 7: -Complete roadshow for debt offering -Finalize bank loan agreements(1) WEEK 8: -Price debt offering -Close debt offering -Close bank financing -Consummate tender offer - ------------------- (1) Assumes bank lenders do not require syndication prior to closing. If syndication is required, additional time needed to syndicate is 3 to 4 weeks. Page 41 Appendix B OWNERSHIP SUMMARY AND TRADED VOLUME ANALYSIS OWNERSHIP SUMMARY TOP FIFTEEN INSTITUTIONAL OWNERS BY HOLDINGS(1) Shares % ------ --- First Chicago NBD Corp. 1,096,500 5.4% Furman Selz LLC 961,700 4.7% Moody Aldrich & Sullivan 808,700 4.0% Wedge Capital Management LLP 602,400 3.0% Perry Corp. 546,400 2.7% Dalton Greiner Hartman 468,100 2.3% Travelers Inc. 424,800 2.1% Hughes Investment Management 389,600 1.9% Barclays Bank 378,600 1.9% Equitable Companies 370,400 1.8% Chase Manhattan Corp. 308,400 1.5% MH Davidson & Co. Inc. 251,400 1.2% College Retire Equities 250,600 1.2% Dimensional Fund Advs. 232,800 1.1% Florida St. Board/Administration 225,000 1.1% ----------- ----- TOP FIFTEEN INSTITUTIONS 7,315,400 35.8% Total Shares Outstanding 20,525,477 100.0% - -------------------------- (1) Source: CDA / Spectrum: as of March 31, 1998. Page 42 TRADED VOLUME ANALYSIS PROJECT WONTON JULY 10, 1997 TO JULY 10, 1998 [GRAPHIC OMITTED] - ------------------------ Source: FactSet. Page 43 Appendix C DISCOUNTED CASH FLOW ANALYSIS DISCOUNTED CASH FLOW ANALYSIS CORE BUSINESS(1) ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Present Vvalue of Equity - -------------------------------------------------------------------------------- PROJECTED ------------------------------------------------------------ Fiscal years ended December 31, 1999 2000 2001 2002 -------- -------- -------- -------- Revenues $386.0 $417.5 $451.2 $485.9 EBITDA 91.1 98.9 107.2 115.6 EBIT 63.7 70.2 77.3 85.6 Taxes @ 40% (25.5) (28.1) (30.9) (34.2) Unlevered Net Income 38.2 42.1 46.4 51.3 Plus: Depreciation & Amortization 27.4 28.8 29.9 30.1 Less: Capital Expenditures (21.7) (23.7) (24.3) (24.9) Less: Working Capital (Increase) Decrease 2.4 2.9 3.2 3.3 Unlevered Free Cash Flow 46.4 50.1 55.1 59.7 ======== ======== ======== =========
Present Value of Equity @ 12/31/98 - ----------------------------------- Present Value of 1999 2002 Free Cash Flows $158.6 Present Value of Terminal Value 440.9 Present Value of Total Enterprise $599.5 Plus: Cash and Cash Equivalents 131.0 Plus: Option Exercise Proceeds 46.2 Less: Total Debt -- Present Value of Gross Equity Value 776.7 ----- Present Value of Equity Per Share @ 12/31/98 $34.84 ===== DCF Assumptions - ----------------- Weighted Average Cost of Capital 12.0% Terminal EBITDA exit multiple 6.0x Fully Diluted shares outstanding 22.3 - ----------------- (1) Based on Wonton management projections. Page 44 DISCOUNTED CASH FLOW ANALYSIS UMBERTO(1) ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Present Value of Equity - -------------------------------------------------------------------------------- PROJECTED ------------------------------- Fiscal years ended December 31, 1999 2000 2001 2002 ----- ----- ----- ----- Revenues $15.7 $34.4 $59.4 $91.3 EBITDA 2.6 6.4 11.6 18.4 EBIT 2.2 5.4 9.9 15.7 Taxes @ 40% (0.9) (2.2) (3.9) (6.3) Unlevered Net Income 1.3 3.2 5.9 9.4 Plus: Depreciation & Amortization 0.5 1.0 1.8 2.7 Less: Capital Expenditures (5.4) (7.2) (9.1) (10.8) Less: Working Capital (Increase) Decrease 0.0 0.0 0.0 0.0 Unlevered Free Cash Flow (3.6) (2.9) (1.3) 1.3 ====== ===== ===== ======
Present Value of Equity @ 12/31/98 - ------------------------------------- Present Value of 1999 2002 Free Cash Flows $(5.3) Present Value of Terminal Value 66.4 ----- Present Value of Total Enterprise 61.0 Plus: Cash and Cash Equivalents -- Plus: Option Exercise Proceeds -- Less: Total Debt -- Present Value of Gross Equity Value 61.0 ----- Present Value of Equity Per Share @ 12/31/98 $2.74 ----- DCF Assumptions - -------------------- Weighted Average Cost of Capital 18.0% Terminal EBITDA exit multiple 7.0x Fully Diluted shares outstanding 22.3 - ------------------- (1) Based on Wonton management projections. Appendix D COMPARABLE PUBLIC COMPANIES DESCRIPTION OF COMPARABLE COMPANIES o BUFFETS, INC. The Company operates 364 restaurants under the names Old Country Buffet, Hometown Buffet, and Roadhouse Grill in 34 states. In addition, the Company has 24 franchised restaurants in operation in ten states. The Company also has a number of restaurants under franchise. o CONSOLIDATED PRODUCTS, INC. The Company is engaged primarily in the ownership, operation and franchising of Steak n Shake restaurants through its whollyowned subsidiary, Steak n Shake, Inc. Steak n Shake has 194 Companyoperated restaurants and 55 franchised restaurants, located in 14 midwestern and southeastern states. o FOODMAKER INC. The Company owns, operates and franchises 76 restaurants under the Jack In The Box restaurant concept. The company has restaurants located principally in the Western and Southwestern United States. In addition, the Company owns approximately 40% of Family Restaurants, Inc., the operator of full service family restaurants located primarily in California and parts of the Southwest under the Carrow's and Coco's formats and full service Mexican restaurants nationwide operated under the ChiChi's, El Torito and Casa Gallardo names. o LONE STAR STEAKHOUSE & SALOON, INC The company owns and operates a chain of 267 midpriced, full service, casual dining restaurants located in the United States which operate under the trade name Lone Star Steakhouse and Saloon. In addition, the Company owns and operates eight upscale steakhouse restaurants, three operating as Del Frisco's Double Eagle Steak House restaurants and five operating as Sullivan's Steakhouse restaurants. Internationally, the Company owns a 65% interest in a joint venture which operates 34 restaurants in Australia (the "Australian Joint Venture"), thirteen of which were opened in 1997. Page 46 DESCRIPTION OF COMPARABLE COMPANIES o LUBY'S CAFETERIAS, INC. The Company operates 232 cafeterias under the name "Luby's" located in suburban shopping areas in Arizona, Arkansas, Florida, Kansas, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, Tennessee, and Texas. Of the 232 cafeterias operated by the Company, 135 are at locations owned by the Company and 97 are on leased premises o PICCADILLY CAFETERIAS INC. The Company operates 129 cafeterias in 15 states. Of these, 56 are in suburban malls, 22 are in suburban strip centers, and 51 are freestanding suburban locations. Up to six new cafeterias are expected to be opened before the fiscal year end. o RUBY TUESDAY INC. The Company operates three separate and distinct casual dining concepts comprised of Ruby Tuesday, Mozzarella's and Tia's. As of May 31, 1997, the Company operated 393 casual dining restaurants in 33 states. o RYAN'S FAMILY STEAK HOUSES, INC. The Company is a South Carolina corporation that operates a chain of 272 Companyowned and 25 franchised Ryan's Family Steakhouse restaurants located principally in the southern and midwestern United States. Page 47 Appendix E COMPARABLE MERGERS AND ACQUISITIONS TRANSACTIONS COMPARABLE MERGERS AND ACQUISITIONS TRANSACTIONS ($ IN MILLIONS)
ENTERPRISE VALUE EQUITY VALUE DATE ------------------------- ------------- ANNOUNCED / EQUITY ENTERPRISE PREMIUM LTM LTM TM NET BOOK EFFECTIVE TARGET/ACQUIROR VALUE VALUE PAID(1) REVENUE EBITDA EBIT INCOME VALUE - ------------- --------------- ------- -------- --------- ------- -------- ----- ------ ----- 4/3/98 / Bertucci's Inc./ $96.5 $104.3 35.5% 0.76x 6.7x 16.0x 27.5x 1.4x Pending Investor Group 4/2/98 / Spaghetti Warehouse/ $51.2 $56.4 26.1% 0.87x 7.8x 16.3x 25.3x 1.1x Pending Conquest partners 3/13/98 / Pollo Tropical, Inc./ $94.0 $97.2 38.6% 1.50x 9.6x 12.4x 21.4x 3.3x Pending Management 1/15/98 / Hardee's (Advantica Restaurant Group)/ $381.0 $427.0 NA 0.78x 6.6x 14.5x NA NA 4/1/98 CKE Restaurants, Inc. 10/21/97 / International Dairy Queen Inc./ $596.3 $548.8 10.1% 1.30x 8.3x 9.2x 15.6x 3.1x 1/7/98 Berkshire Hathaway Inc. 9/23/97 / El Chico Restaurants, Inc./ $49.3 $59.4 21.4% 0.58x 5.8x 12.9x 17.1x 1.8x 1/22/98 Cracken, Harkey, Street & Co.,L.L.C. 9/5/97 / DavCo Restaurants Inc./ $137.6 $186.5 49.5% 0.81x 7.5x 11.7x 21.7x 2.7x Pending Citicorp Venture Capital Ltd. 8/4/97 / Perkins Family Restaurant, L.P./ $146.7 $206.6 28.7% 0.80x 5.8x 10.5x 10.0x 2.4x 12/23/97 The Restaurant Company 6/4/96 / HomeTown Buffet Inc./ $175.5 $214.5 3.3% 1.22x 8.9x 16.8x 25.4x 2.4x 9/20/96 Buffets Inc. 5/2/96 / Houlihan's Restaurant Group, Inc./ $85.2 $158.6 33.3% 0.59x 5.2x 10.1x 20.7x 1.2x Terminated Zapata Corporation 3/4/96 / Cocos Restaurants, Jojos Restaurants, Carrow Restaurants, Inc./ $275.0 $306.5 NA 0.61x 5.0x 9.1x NM NA 5/23/96 Flagstar Companies, Inc. - ------------------------------------ (1) Over stock price on day prior to announcement. Page 48 COMPARABLE MERGERS AND ACQUISITIONS TRANSACTIONS (CONT.) ($ IN MILLIONS) ENTERPRISE VALUE EQUITY VALUE DATE -------------------- ------------- ANNOUNCED / EQUITY ENTERPRISE PREMIUM LTM LTM LTM NET BOOK EFFECTIVE TARGET/ACQUIROR VALUE VALUE PAID(1) REVENUE EBITDA EBIT INCOME VALUE - -------------- --------------- ------ ---------- -------- ------- ------ ---- ------ ------- 11/6/95 / NPC International Inc./ $228.4 $306.1 44.0% 0.97x 6.7x 11.9x 32.0x 2.8x Withdrawn Management 9/5/95 / TPI Enterprises/ $73.4 $170.6 25.0% 0.60x 8.1x NM NM 1.1x 9/9/96 Shoney's 8/23/94 / Ground Round Restaurants, Inc./ $101.7 $156.6 41.2% 0.65x 6.0x 12.2x 17.0x 1.6x Terminated 399 Ventures Inc. HIGH 1.50X 9.55X 16.84X 32.00X 3.35X LOW 0.58X 4.99X 9.13X 9.96X 1.10X HARMONIC MEAN OF TRANSACTION MULTIPLES 0.79X 6.7X 12.1X 19.3X 1.8X
- --------------------- (1) Over stock price on day prior to announcement. Page 49 OVERVIEW OF STRATEGIC BUYERS: TIER 2
Company Existing Brands Financial Flexibility Comments - ----------------- ----------------- ----------------------- ------------------ INTERNATIONAL INC. Wendy's Equity Mkt Cap: $2.9 billion o Not historically acquisitive Tim Horton's Debt / EBITDA: 0.8x o Wall St. pressure for new growth initiatives o Family ownership of Wonton is a positive MCDONALD'S McDonald's Equity Mkt Cap: $50.2 billion o Wonton is relatively small Debt / EBITDA: 1.8x o No demonstrated interest outside core concept TRICON GLOBAL Pizza Hut Equity Mkt Cap: $5.0 billion o Currently focusing on existing businesses Taco Bell Debt / EBITDA: 5.7x o Looking to reduce company-owned restaurant Kentucky Fried Chicken count GRAND METROPOLITAN Burger King Equity Mkt Cap: NA o Adding restaurants unlikely a priority Pillsbury Debt / EBITDA: NA o Future ownership of Burger King unclear Haagen Dazs Green Giant J&B Rare Scotch Smirnoff Vodka Equity Mkt Cap: $670 million o High company-owned restaurant percentage FOODMAKER INC. Jack In The Box Debt / EBITDA: 2.0x o Limited financial flexibility Equity Mkt Cap: $1.0 billion o Highest growth in pizza sector PAPA JOHN'S Papa John's Debt / EBITDA: NA o Focusing on franchise expansion
Page 50 OVERVIEW OF FINANCIAL BUYERS: TIER 2 NAME RESTAURANT INVESTMENTS SIZE OF FUND(1) - ---- ---------------------- --------------- T.H. LEE o Cinnabon International, Inc. $3.0 billion o NY Restaurant Group (Smith & Wollensky) FREEMAN SPOGLI o AFC Enterprises 55% ownership $900 million Popeye's, Church's) J.H. WHITNEY o Briazz, Inc. $425 million J.W. CHILDS o Chevy's Restaurants $500 million CENTRE PARTNERS o Johnny Rockets Group $450 million SEAVER KENT o Bojangles Restaurants $110 million o Cafe Valley MADISON DEARBORN o Peter Piper, Inc. o Carrols (Burger King) $925 million LEONARD GREEN o Family Restaurants, Inc. (20%) $750 million BLACKSTONE o Expressed Interest in Wonton $3.8 billion HAMPSTEAD GROUP o Houlihan's Not specified QUAD C o Huddle House $300 million Page 51 OVERVIEW OF FINANCIAL BUYERS: TIER 2 OTHERS WITH EXPRESSED INTEREST IN RESTAURANT INVESTMENTS: - ---------------------------------------------------------- EVERCORE $195 million FENWAY $527 million STONINGTON $1.0 billion AMERICAN SECURITIES PARTNERS $100 million ODYSSEY PARTNERS $700 million - ------------------------------- (1) Reflects recent fund raisings which are generally uninvested. Page 52 Appendix F PRECEDENT LEVERAGED RECAPITALIZATION TRANSACTIONS UNITED STATIONERS MERGER WITH ASSOCIATED STATIONERS ASSOCIATED HOLDINGS ACQUIRED ON MARCH 30, 1995 A MAJORITY INTEREST IN UNITED STATIONERS WHICH MERGED WITH ASSOCIATED STATIONERS, A WHOLLYOWNED SUBSIDIARY OF ASSOCIATED HOLDINGS o Associated Holdings offered to purchase up to 17.2 million shares (approximately 92.5% of the common shares outstanding) of United Stationers o Posttransaction, the shares not purchased by Associated Holdings comprised approximately 23% of the new common stock o The new Company expected to generate approximately $26.0 million in annual cost savings o Cash offer price of $15.50 per share, totaling $267 million offered in the purchase of United Stationer's shares. This price represented a 12.7% premium over the closing price of the Company's common stock ($13.75), on the day prior to the transaction's announcement o The Company's current stock price as of July 17, 1998 was $71.63 (362% appreciation over the purchase price) Page 53 UNITED STATIONERS TENDER OFFER SUMMARY ($ IN MILLIONS) Sources of Funds Uses of Funds - ---------------------------------- ----------------------------------- Senior Credit Facilities $426.7 Purchase of Shares $266.6 Subordinated Bridge Facility 130.0 Debt Refinancing 268.6 Equity Investment 12.0 Fees, Expenses and Other(1) 33.5 ------- ------ Total Sources $568.7 Total Uses $568.7 ======= ====== Pro Forma Capitalization ----------------------------- Cash and Equivalents $ 6.7 Bank Debt $550.2 90.6% Shareholder's Equity $ 57.2 9.4% ------ ------ Total Capitalization $607.4 100.0% ====== ====== - ------------------------ (1) Includes $1,469 of other liabilities paid at offer closing. (2) Pro forma for the tender offer and subsequent merger of Associated Holdings and United Stationers. Page 54 UNITED STATIONERS OWNERSHIP SUMMARY (SHARES IN MILLIONS) Pre-Transaction Ownership Post-Transaction Ownership - ------------------------------------- ---------------------------------- | SHARES % | SHARES % ------ ---- | ------ ---- | Management and Directors 0.4 2.3% |Buying Group(2) 4.6 76.8% | HW Associates(1) 4.7 25.3% |HW Associates(1) 0.4 6.0% | Other Public Shareholders 13.5 72.4% |Management, Directors ----- ----- | and Other Public | Shareholders of | United(3) 1.0 17.2% | ---- ------ Total 18.6 100.0% | Total 6.0 100.0% ===== ====== | ==== ====== | - ----------------- (1) General partnership consisting of members of the Hecktman and Wolf families. (2) Includes Wingate Partners, ASI Partners, Cumberland Capital, Good Capital and former management of Associated Stationers. (3) Pro forma for tender offering. Page 55 UNITED STATIONERS SUMMARY FINANCIAL PERFORMANCE ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------- 1994 1995 1996 1997 LTM 1998(1) ------- -------- -------- ------- ----------- REVENUE $470.19 $1,751.46 $2,298.17 $2,558.14 $2,635.63 EBITDA(2) $23.51 $91.00 $139.05 $160.97 $167.86 EBIT(2) $18.12 $67.32 $113.00 $134.93 $140.92 NET INCOME(2) $4.21 $10.08 $30.25 $45.36 $50.90 DILUTED EPS(2) $0.51 $0.79 $2.03 $2.95 $3.18 Y/E SHARE PRICE $6.63 $27.75 $19.50 $48.13 $62.25 - ------------- (1) Period ended March 31, 1998. (2) Excludes the following pretax non recurring charges and extraordinary items: (i) a $9.7 million restructuring charge in 1995 related to the merger, (ii) a $59.4 million noncash charge in 1997 as a result of the vesting of certain incentive options, (iii) a $5.3 million charge in 1997 associated with the termination of certain management agreements, and (iv) a $5.9 million extraordinary loss in 1997 from the early extinguishment of debt. Page 56 UNITED STATIONERS TRADING HISTORY POSTTRANSACTION MARCH 30, 1995 TO JULY 17, 1998 [GRAPHIC OMITTED] [GRAPHIC OMITTED] Page 57 HAYES WHEELS INTERNATIONAL MERGER WITH MOTOR WHEEL CORP. MWC HOLDINGS MERGER WITH HAYES WHEELS INTERNATIONAL ON AUGUST 2, 1996 o MWC Holdings, a public company engaged in the business of manufacturing brakes and steel wheels for the automotive industry, and controlled by Joseph Littlejohn & Levy, offered in consideration for each Hayes Wheels International common share $28.80 in cash and .1 shares of the Company's new common stock. The total consideration per share of approximately $32.00 represented a 29.3% premium over the closing price of the Company's stock on the day prior to the announcement of the transaction ($24.75) o Posttransaction, the original shareholders of Hayes Wheels International stock owned approximately 15.8% of the Company's new common stock o Cash consideration of $28.80 per share, totaling $506 million offered in the purchase of Hayes Wheels International shares o The Company's current stock price as of July 17, 1998 was $76.63(1) (139% appreciation over the purchase price) - ----------------------- (1) Current price adjusted for 2:1 split on 1/7/97 (actual price was $38.31 on 7/17/98). Page 58 HAYES WHEELS INTERNATIONAL ($ IN MILLIONS) Sources of Funds Uses of Funds - -------------------------------- ----------------------------------------- Revolving Credit Facility $26.4 Purchase of Shares $506.1 Senior Term Debt 425.0 Debt Refinancing 274.1 Senior Subordinated Notes 250.0 Retirement of Mgt. Options 5.2 New Investors' Equity 200.0 Working Capital 75.0 Fees and Expenses 41.0 ------ ------ Total Sources $901.4 Total Uses $901.4 ====== ====== Pro-Forma Capitalization(1) ------------------------------------ Cash $78.2 Bank Debt 451.5 62.8% Senior Subordinated Notes 250.0 34.8% Shareholder's Equity 17.7 2.4% ------- ------ Total Capitalization $719.2 100.0% ======= ====== - ---------------------- (1) Pro forma for the merger of Hayes Wheels and MWC Holding. Page 59 HAYES WHEELS INTERNATIONAL OWNERSHIP SUMMARY (SHARES IN MILLIONS) Pre-Transaction Ownership Post-Transaction Ownership - --------------------------------------- -------------------------------------- SHARES % SHARES % ------ --- ------ --- Management, Directors and Other Public Shares 9.4 53.7% New Equity Investors(1) 8.1 2.7% Varity Corporation 8.1 46.3% Former Public Share- holders of MWC 1.3 11.5% Management, Directors and Other Public Shareholders of Hayes 0.9 8.5% Varity Corporation 0.8 7.3% ----- ------ ----- ------ Total 17.6 100.0% Total 11.1 100.0% ===== ====== ===== ====== - ---------------- (1) Includes Joseph Littlejohn & Levy, TSG Capital, CIBC WG Argosy and Chase Equity Partners. Page 60 HAYES WHEELS INTERNATIONAL - SUMMARY FINANCIAL PERFORMANCE - -------------------------------------------------------------------------------- ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FISCAL YEAR ENDED JANUARY 31, ------------------------------------- PRO FORMA (1) 1996 1997 1998 LTM 1998(2) ----------- -------- ---------- ----------- REVENUE $968.30 $778.20 $1,262.80 $1,426.50 EBITDA(3) $133.20 $109.50 $216.70 $222.20 EBIT(3) $84.30 $61.90 $145.50 $170.20 NET INCOME(3) $5.60 $8.58 $31.40 $42.30 DILUTED EPS(3) $0.50 $0.31 $1.12 $1.40 Y/E STOCK PRICE $24.25 $20.25 $23.88 $38.44 - --------------- (1) Pro forma for the merger of Hayes Wheels and MWC Holdings as if it occurred on January 31, 1995. (2) Period ended April 30, 1998. (3) Excludes pre-tax non recurring charges in fiscal 1996 of $36.6 million in connection with a plant restructuring at MWC Holdings and the following non recurring charges in fiscal 1997: (i) a $109 million charge in connection with the closing of a fabricated wheel facility, and (ii) a $6.4 million charge in connection with the merger with MWC Holdings. Page 61 HAYES WHEELS INTERNATIONAL - -------------------------------------------------------------------------------- TRADING HISTORY POST-TRANSACTION(1) AUGUST 2, 1996 TO JULY 17, 1998 [GRAPHIC OMITTED] [GRAPHIC OMITTED] - -------------- (1) Historical prices adjusted for 2:1 split on January 7, 1997. Page 62 SWING-N-SLIDE CORP. LEVERAGED RECAPITALIZATION - -------------------------------------------------------------------------------- SWING-N-SLIDE COMMENCED A TENDER OFFER FOR APPROXIMATELY 37.5% OF ITS COMMON SHARES OUTSTANDING ON NOVEMBER 14, 1994. o Cash offer price of $11.00 per share represented a 22% premium over the closing price of the Company's common stock ($9.00), on the day prior to the tender announcement. o On January 6, 1995, the Company announced that it had accepted 3.6 million shares for purchase at $11.00. On the same day, the closing price of the Company's stock was $7.50. An investor lawsuit was filed alleging management fraud and a scheme to enrich certain shareholders. o On January 5, 1996, GreenGrass Holdings, a partnership organized by institutional investors and senior management of the Company announced a tender offer to purchase 3.51 million shares (approximately 58.5% of total common shares outstanding) at a price of $6.50, a 44% premium to the closing price of the common stock ($4.50) on the previous day. o The tender was successfully completed on February 15, 1996. The closing price of the Company's common stock on this date was $5.44. o On April 29, 1998, the Company's name was changed to Playcore Inc. The Company's current stock price as of July 17, 1998 was $3.75 (a 66% decrease from the original recap tender price). Page 63 SWING-N-SLIDE - 1995 TENDER OFFER SUMMARY - -------------------------------------------------------------------------------- ($ IN MILLIONS) Sources of Funds Uses of Funds - --------------------------------- ----------------------------- Bank Debt $48.5 Purchase of Shares $42.0 ----- Dept Repayment 4.0 Total Sources $48.5 Fees and Expenses 2.5 ===== ===== Total Uses $48.5 Pro Forma Capitalization -------------------------------- Cash and Equivalents $0.0 Bank Debt $37.0 Shareholders' Equity ($1.3) ------- $35.7 ======= Page 64 SWING-N-SLIDE CORP. - -------------------------------------------------------------------------------- ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED DECEMBER 31, ---------------------------------------------- 1993 1994 1995 1996 1997 LTM 1998(1) ------ ------ ------ ------ ------ ----------- REVENUE $51.07 $51.82 $45.08 $41.87 $89.49 $103.90 EBITDA(2) $16.94 $14.68 $13.47 $12.06 $15.14 $15.60 EBIT(2) $13.79 $7.91 $11.13 $9.62 $11.57 $12.95 NET INCOME(2) $7.96 $4.59 $4.13 $1.57 $1.18 $2.43 DILUTED EPS(2) $0.83 $0.48 $0.67 $0.26 $0.29 $0.48 Y/E STOCK PRICE $13.00 $8.50 $4.00 $3.25 $4.00 $3.88
- ---------------------------- (1) Period Ended March 31,1998. (2) Excludes nonrecurring charges and extraordinary items. Page 65 SWING-N-SLIDE CORP. - -------------------------------------------------------------------------------- TRADING HISTORY POST-TRANSACTION NOVEMBER 15, 1994 TO JULY 17, 1998 [GRAPHIC OMITTED] [GRAPHIC OMITTED] Page 66 PROJECT WONTON Project Wonton APPENDIX G ILLUSTRATIVE COMPANY SPONSORED LEVERAGED RECAPITALIZATION MODEL BEAR STEARNS PROJECT WONTON C-CORP. MODEL $450 MILLION RECAPITALIZATION TRANSACTION
ASSUMPTIONS: PURCHASE OF APPROX. $450 MILLION IN EQUITY (14.063 MILLION SHARES PLUS OPTIONS) TENDER PRICE OF $32.00 PER SHARE. SOURCES AND USES OF FUNDS PRO FORMA CAPITALIZATION ($ in millions) ($ in millions) PRO FORMA(2) % OF TOTAL ESTIMATED 12/31/98 CAPITALIZATIONS INTEREST RATE ------------------------------------------------------ SOURCES OF FUNDS Cash & Cash Equivalent (incl. Marketable Securities) $6.0 -- 5.50%(3) - ---------------------------------- Senior Bank Debt: Excess Cash on Balance Sheet (1) $125.0 Revolving Credit Facility 0.0 0.0% 8.19% Senior Bank Debt: Senior Unsecured Notes 340.0 303.8% 9.75% Revolving Credit Facility 0.0 Other Long Term Debt 0.0 0.0% 9.00% Senior Unsecured Notes 340.0 -------- Total New Long Term Debt 340.0 TOTAL SOURCES OF FUNDS $465.0 TOTAL LONG TERM DEBT 340.0 303.8% ======== --------- --------- Common Equity (228.1) -203.8% --------- --------- TOTAL SHAREHOLDERS' EQUITY (228.1) -203.8% --------- --------- TOTAL CAPITALIZATION $111.9 100.0% ========= ========= Goodwill $0.0 USES OF FUNDS - ---------------------------------- ---------------------------------------------------------------------------------- ACQUISITION PRICE - $32.00 PER SHARE Number of shares outstanding 20.447 ($ in millions) Number of Shares to be Repurchased 14.063 68.8% PURCHASE PRICE PER SHARE $32.00 Implied Equity Value: $667.1 -------- Implied Enterprise Value(4) $536.1 Purchase Price of Equity $450.0 Purchase Price of Options 0.0 Goodwill: $0.0 Repayment of Existing Debt 0.0 Period (Years): 30 -------- Total Purchase Price 450.0
---------- ----------- ----------- FYE 1997A FYE 1998P FYE 1999P ----------- ----------- ----------- Multiple of: Financing Costs $10.2 Revenues 1.56x 1.47x 1.32x Non-Financing Costs 4.8 -------- EBITDA 6.60x 6.29x 5.68x TOTAL USES OF FUNDS $465.0 ======== EBITA 9.36x 9.17x 8.07x
- --------------------- Footnotes (1) Includes $7.5 million of marketable securities (2) Reflects proposed recapitalization. Assumes transaction closes on 12/31/98. (3) Interest is earned on cash balance above $7 million. (4) Reflects estimated 12/31/98 balance sheet. PROJECT WONTON C-CORP. MODEL
OPERATING COMPANY COVERAGE RATIOS FISCAL YEAR ENDED DECEMBER 31, ACTUAL PF 1997 1998 1999 2000 2001 2002 ------- ---- ---- ---- ---- ---- EBITDA/TOTAL INTEREST EXPENSE 2.38x 2.49x 2.76x 3.13x 3.56x 4.06x EBITDAR/TOTAL INTEREST EXPENSE PLUS RENT EXPENSE 1.53x 1.55x 1.62x 1.71x 1.80x 1.90x EBITDAR - CapEx/TOTAL INTEREST EXPENSE PLUS RENT EXPENSE 1.21 1.27 1.33 1.39 1.48 1.57 EBITDA - CapEx/TOTAL INTEREST EXPENSE 1.5x 1.73x 1.93x 2.17x 2.52x 2.93x EBITDA - CapEx/TOTAL INTEREST EXP. + REQ. AMORT. OF DEBT 1.54x 1.73x 1.93x 2.17x 2.52x 2.93x EBITDAR - CapEx/TOTAL INTEREST EXP. + REQ. AMORT. OF DEBT + RENT 1.21 1.27 1.33 1.39 1.48 1.57 TOTAL DEBT + CAPITALIZED LEASES (1) /EBITDAR 5.32x 5.21x 4.96x 4.67x 4.40x 4.15x TOTAL DEBT/EBITDA 4.19x 3.99x 3.60x 3.18x 2.79x 2.45x NET DEBT/EBITDA 4.11x 3.92x 3.26x 2.56x 1.88x 1.25x BANK DEBT/EBITDA 0.00x 0.00x 0.00x 0.00x 0.00x 0.00x - ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS ($ IN MILLIONS) FISCAL YEAR ENDED DECEMBER 31, ACTUAL ACTUAL PF 1996 PF 1997 1998 1999 2000 2001 2002 ------- ------- ---- ---- ---- ---- ---- Revenues $325.7 $344.4 $365.7 $405.7 $460.4 $525.5 $600.0 EBITDA 79.5 81.2 85.2 94.4 106.9 121.7 138.6 Rent Expense 49.6 54.5 57.9 62.6 68.5 75.1 82.2 Bank Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Interest Expense 34.2 34.2 34.2 34.2 34.2 34.2 34.2 Interest Income 0.0 0.0 0.0 0.7 2.3 4.5 7.2 Capital Expenditures 25.9 28.6 26.1 28.4 32.7 35.6 38.4 Capitalized Leases(1) 346.9 381.3 405.5 438.4 479.8 526.0 575.2 Total Debt 340.0 340.0 340.0 340.0 340.0 340.0 340.0 - ------------------------------------------------------------------------------------------------------------------------------------
FOOTNOTES (1) Leases capitalized at 7.0x Rent Expense for the relevant period. PROJECT WONTON C-CORP. MODEL
PRO FORMA BALANCE SHEET ADJUSTMENTS - ----------------------------------- ($ in millions) ACTUAL ESTIMATED TRANSACTION PRO FORMA 12/31/97 12/31/98 ADJUSTMENTS 12/31/98 -------- --------- ----------- --------- ASSETS CURRENT ASSETS CASH & CASH EQUIVALENTS (INCL. LONG-TERM MARKETABLE SECURITIES) $127.3 $131.0 ($125.0) $6.0 ACCOUNTS RECEIVABLE 2.4 2.5 2.5 INVENTORY 3.0 3.1 3.1 PREPAID EXPENSES 1.8 1.9 1.9 OTHER CURRENT ASSETS 0.0 0.0 0.0 --------- ------------ --------- TOTAL CURRENT ASSETS 134.4 138.5 13.5 GROSS PROPERTY, PLANT & EQUIPMENT 287.0 313.1 313.1 LESS ACCUMULATED DEPRECIATION 150.2 177.0 177.0 --------- ------------ --------- NET PROPERTY, PLANT & EQUIPMENT 136.8 136.1 136.1 GOODWILL 0.0 0.0 0.0 0.0 DEFERRED FINANCING FEES 0.0 0.0 10.2 10.2 DEFERRED CHARGES 1.6 1.6 1.6 OTHER ASSETS 5.8 5.8 5.8 TOTAL ASSETS 278.6 282.1 167.3 ========= ============ ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES ACCOUNTS PAYABLE $10.1 $10.7 $10.7 ACCRUED LIABILITIES 26.0 27.5 27.5 DIVIDENDS PAYABLE 5.5 0.0 0.0 OTHER CURRENT LIABILITIES 4.8 5.0 5.0 --------- ------------ --------- TOTAL CURRENT LIABILITIES 46.4 43.2 43.2 LONG-TERM DEBT SENIOR BANK DEBT: 0.0 0.0 0.0 0.0 REVOLVING CREDIT FACILITY 0.0 0.0 340.0 340.0 SENIOR UNSECURED NOTES: 0.0 0.0 0.0 --------- ------------ --------- OTHER LONG TERM DEBT 0.0 0.0 340.0 TOTAL LONG TERM DEBT DEFERRED TAXES 11.8 11.8 11.8 OTHER LIABILITIES 0.0 0.0 0.0 MINORITY INTEREST 0.0 0.4 0.4 STOCKHOLDERS' EQUITY COMMON EQUITY 220.4 226.7 (454.8) (228.1) --------- ------------ ---------- TOTAL STOCKHOLDERS' EQUITY 220.4 226.7 (228.1) TOTAL LIABILITIES AND EQUITY $278.6 $282.1 $167.3 ========= ============ ==========
Project Wonton PROJECTED CAPITALIZATION FISCAL YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- ($ IN MILLIONS) PROJECTED ----------------------------------------------------------------- 1998 1999 2000 2001 2002 ---------- ---------- ---------- ----------- ---------- CASH & CASH EQUIVALENTS (INCL. MARKETABLE SECURITIES): $6.0 $ 32.6 $66.7 $110.9 $166.6 =========== ========== ========== =========== ========== SENIOR BANK DEBT: REVOLVING CREDIT FACILITY 0.0 0.0 0.0 0.0 0.0 SENIOR UNSECURED NOTES 340.0 340.0 340.0 340.0 340.0 OTHER LONG TERM DEBT 0.0 0.0 0.0 0.0 0.0 ----------- ---------- ---------- ----------- ---------- TOTAL LONG TERM DEBT 340.0 340.0 340.0 340.0 340.0 STOCKHOLDERS' EQUITY COMMON EQUITY (228.1) (208.0) (180.9) (145.2) (99.1) ----------- ---------- ---------- ----------- ---------- TOTAL STOCKHOLDERS' EQUITY (228.1) (208.0) (180.9) (145.2) (99.1) ----------- ---------- ---------- ----------- ---------- TOTAL CAPITALIZATION $111.9 $132.0 $159.1 $194.8 $240.9 ========== ========== ========== =========== ========== CASH & CASH EQUIVALENTS (INCL. MARKETABLE SECURITIES) 5.4% 24.7% 41.9% 56.9% 69.2% LONG TERM DEBT SENIOR BANK DEBT: REVOLVING CREDIT FACILITY 0.0% 0.0% 0.0% 0.0% 0.0% SENIOR UNSECURED NOTES 303.8% 257.6% 213.7% 174.6% 141.2% OTHER LONG TERM DEBT 0.0% 0.0% 0.0% 0.0% 0.0% ---------- ---------- ---------- ----------- ---------- TOTAL LONG TERM DEBT 303.8% 257.6% 213.7% 174.6% 141.2% STOCKHOLDERS' EQUITY -203.8% -157.6% -113.7% -74.6% -41.2% ---------- ----------- ---------- ---------- ---------- COMMON EQUITY TOTAL STOCKHOLDERS' EQUITY -203.8% -157.6% -113.7% -74.6% -41.2% ---------- ----------- ---------- ---------- ---------- TOTAL CAPITALIZATION 100.0% 100.0% 100.0% 100.0% 100.0% ========== =========== ========== ========== ==========
PROJECT WONTON C-CORP. MODEL
SBARRO INCOME STATEMENT ASSUMPTIONS FISCAL YEAR ENDED DECEMBER 31, --------------------------------------- ACTUAL FISCAL YEAR ENDED DECEMBER 31, PROJECTED -------------------------------------- ACTUAL --------------------------------------- 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ------ ------ ------ ------ ------ ------ ------ ------ ------ ----- Revenue Growth Rate -- 11.39% 7.49% 3.04% 5.74% 6.20% 10.92% 13.50% 14.13% 14.17% Gross Profit Growth Rate -- 11.33% 7.13% 3.34% 7.05% 6.35% 10.72% 13.17% 13.74% 13.77% EBITDA Growth Rate -- 14.09% -2.36% 11.49% 2.20% 4.94% 10.79% 13.27% 13.80% 13.89% EBITA Growth Rate -- 13.09% -7.17% 18.70% 1.30% 2.05% 13.62% 15.76% 16.57% 17.42% EBIT Growth Rate -- 13.09% -7.17% 18.70% na 2.05% 13.62% 15.76% 16.57% 17.42% GROSS MARGIN(1) 78.61% 78.59% 78.27% 78.50% 79.43% 79.72% 79.72% 79.72% 79.72% 79.72% Payroll & Other Employee Benefits(1) 24.94% 24.54% 25.26% 24.51% 25.14% 25.40% 25.40% 25.40% 25.40% 25.40% Rent Expense(1) 15.07% 15.24% 15.82% 15.52% 16.18% 16.30% 16.30% 16.30% 16.30% 16.30% Occupancy and Other Expenses(1) 11.25% 11.20% 11.38% 11.27% 11.51% 11.60% 11.60% 11.60% 11.60% 11.60% General & Administrative 4.98% 4.61% 5.19% 4.68% 5.15% 5.30% 5.30% 5.30% 5.30% 5.30% -------- ------- ------- --------- ------- ------ ------ ------ ------ ------ Other Income (incl. startup costs) 0.47% 0.46% 0.43% 0.36% 0.48% 0.82% 0.68% 0.54% 0.43% 0.33% EBITDA MARGIN 24.24% 24.82% 22.55% 24.40% 23.58% 23.30% 23.27% 23.23% 23.16% 23.10% Depreciation & Amortization 7.05% 7.37% 7.48% 7.03% 6.95% 7.32% 6.90% 6.53% 6.10% 5.56% -------- ------- ------- --------- ------- ------ ------ ------ ------ ------ EBITA 17.19% 17.45% 15.07% 17.36% 16.64% 15.99% 16.37% 16.70% 17.06% 17.54% Amortization of Goodwill 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% -------- ------- ------- --------- ------- ------ ------ ------ ------ ------ EBIT MARGIN 17.19% 17.45% 15.07% 17.36% 16.64% 15.99% 16.37% 16.70% 17.06% 17.54%
WORKING CAPITAL ASSUMPTIONS FISCAL YEAR ENDED DECEMBER 31, ----------------------------------------------------- ACTUAL PROJECTED(2) -------------- ACTUAL -------------------------------------------- 1995 1996 1997(2) 1998 1999 2000 2001 2002 ----- ----- -------- ------ ------ ------ ------ ----- Days Receivable of Sales 3.0 2.1 2.5 2.5 2.5 2.5 2.5 2.5 Days Inventory of Cost of Goods Sold 15.0 15.1 15.6 15.6 15.6 15.6 15.6 15.6 Days Prepaid Expenses of Sales 2.0 1.6 1.9 1.9 1.9 1.9 1.9 1.9 Other Current Assets as a % of Sales 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Days Payable of Cost of Goods Sold 40.1 38.1 53.2 53.2 53.2 53.2 53.2 53.2 Days Accrued Liabilities of Cost of Goods Sold 146.3 120.5 137.2 137.2 137.2 137.2 137.2 137.2 Days Other Current Liabilities of Cost of Goods Sold 46.5 53.0 25.2 25.2 25.2 25.2 25.2 25.2
- ------------------------ FOOTNOTES (1) As a percentage of Company-owned restaurant revenue. (2) Years 1998-2002 assume same working capital ratios as pro forma year end 1997. PROJECT WONTON C-CORP. MODEL
SBARRO REVENUE DERIVATION Fiscal Year Ended December 31, - ------------------------- -------------------------------------------------------- ($ in millions) Actual Fiscal Year Ended December 31, Projected ------------------------------------ Actual ------------------------------------------------- 1993 1994 1995 1996 1997 1998 1999 2000 2001 20002 ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- NUMBER OF COMPANY-OWNED RESTAURANTS Beginning Balance 456 515 567 571 597 623 651 691 736 781 Restuarants Opened 59 53 44 29 30 35 40 45 45 45 Acquired (Sold) Franchisees 7 2 0 1 4 1 0 0 0 0 Restaurants Closed 7 3 40 4 8 8 0 0 0 0 ------ -------- -------- ------ ------ --------- --------- -------- ------ ------- Ending Balance 515 567 571 597 623 651 691 736 781 826 NUMBER OF FRANCHISED RESTAURANTS Beginning Balance 131 134 162 200 219 239 274 324 384 444 Restuarants Opened 24 38 40 36 47 40 50 60 60 60 Purchased (Sold) Company (7) (2) 0 (1) (4) (1) 0 0 0 0 Restaurants Closed 14 8 2 16 23 4 0 0 0 0 ------ -------- -------- -------- ------- --------- --------- -------- -------------- Ending Balance 134 162 200 219 239 274 324 384 444 504 TOTAL NUMBER OF RESTAURANTS Beginning Balance 587 649 729 771 816 862 925 1,015 1,120 1,225 Restuarants Opened 83 91 84 65 77 75 90 105 105 105 Restaurants Closed 21 11 42 20 31 12 0 0 0 0 ------ -------- -------- -------- ------- --------- --------- -------- -------------- Ending Balance 649 729 771 816 862 925 1,015 1,120 1,225 1,330 ====== ======= ======= ======= ======= ======== ======== ======= ============== SAME STORE SALES GROWTH - -0.04% 2.12% 0.31% 0.93% 0.50% 1.50% 1.50% 1.50% 1.50% AVERAGE SALES PER RESTAURANT $0.534 $0.534 $0.545 $0.547 $0.552 $0.555 $0.563 $0.571 $0.580 $0.589 TOTAL SYSTEMWIDE SALES Company-Owned $259.2 $288.8 $310.2 $319.3 $336.6 $353.3 $377.7 $407.7 $439.9 $473.0 Franchised 70.8 79.0 98.7 118.3 123.1 142.3 168.3 202.3 240.1 279.0 ------ ------- ------- ------- ------ ------- ------- ------- ------ ------- Total Systemwide Sales $330.0 $367.8 $408.8 $437.6 $459.7 $495.5 $546.0 $609.9 $680.0 $752.0 TOTAL REVENUE FROM FRANCHISEES FRANCHISE ROYALTY FEE (NEW STORES 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% FRANCHISE ROYALTY FEE (EXISTING) 5.5% 4.9% 4.9% 4.5% 5.7% 4.8% 4.8% 4.8% 4.8% 4.8% INITIAL FRANCHISE FEE PER STORE $0.035 $0.035 $0.035 $0.033 $0.032 $0.020 $0.020 $0.020 $0.020 $0.020 Total Initial Franchise Fee $0.8 $1.3 $1.4 $1.2 $1.5 $0.8 $1.0 $1.2 $1.2 $1.2 Total Franchise Royalty Fee 3.9 3.9 4.9 5.2 6.2 6.3 7.3 8.6 10.2 11.7 ------ ------- ------ -------- ------- ------- ------ ------- ------ ------- Total Revenue from Franchisees $4.8 $5.2 $5.9 $6.4 $7.8 $7.1 $8.3 $9.8 $11.4 $12.9 TOTAL REVENUE $259.2 $288.8 $310.2 $319.3 $336.6 $353.3 $377.7 $407.7 $439.9 $473.0 Company-Owned 4.8 5.2 5.9 6.4 7.8 7.1 8.3 9.8 11.4 12.9 ------ -------- -------- --------- -------- --------- -------- ------ ------ ------- Franchised $264.0 $294.0 $316.1 $325.7 $344.4 $360.4 $386.0 $417.5 $451.2 $485.9 ====== ======== ======= ======== ======== ========= ======== ====== ====== ======= Total Revenue TOTAL CAPITAL EXPENDITURES CapEx per New Restaurant $0.54 $0.60 $0.40 $0.40 $0.41 $0.41 $0.41 $0.41 $0.41 $0.41 Restaurant CapExp $31.9 $32.1 $17.5 $11.5 $12.3 $14.4 $16.5 $18.5 $18.5 $18.5 Other Capital Expenditures $0.0 $0.0 $0.0 $7.0 $6.2 $4.0 $0.0 $0.0 $0.0 $0.0
PROJECT WONTON C-CORP. MODEL
SBARRO INCOME STATEMENT - ----------------------- ($ in millions) FISCAL YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- PROJECTED ---------------------------------------------------------------------- 1998 1999 2000 2001 2002 --------- ----------- ---------- ---------- ---------- REVENUES $360.4 $386.0 $417.5 $451.2 $485.9 Cost of Goods Sold 71.6 76.6 82.7 89.2 95.9 --------- ---------- ---------- ---------- -------- GROSS PROFIT 288.7 309.4 334.8 362.0 390.0 GROSS PROFIT MARGIN 80.1% 80.2% 80.2% 80.2% 80.3% Payroll & Other Employee Benefits 89.7 95.9 103.5 111.7 120.1 Rent Expense 57.6 61.6 66.4 71.7 77.1 Other Operating Expenses 41.0 43.8 47.3 51.0 54.9 General & Administrative 19.1 20.5 22.1 23.9 25.8 --------- ---------- ---------- ---------- -------- Other Income 3.5 3.5 3.5 3.5 3.5 EBITDA 84.8 91.1 98.9 107.2 115.6 EBITDA MARGIN 23.5% 23.6% 23.7% 23.7% 23.8% Depreciation 26.6 27.4 28.8 29.9 30.1 --------- ---------- ---------- ---------- -------- EBITA 58.2 63.7 70.2 77.3 85.6 EBITA MARGIN 16.2% 16.5% 16.8% 17.1% 17.6%
PROJECT WONTON C-CORP. MODEL
UMBERTO INCOME STATEMENT - ------------------------ ($ in millions) FISCAL YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------- PROJECTED --------------------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 -------------- ------------- ------------- ------------- ------------------- REVENUES $5.4 $19.7 $42.9 $74.3 $114.1 Cost of Goods Sold 1.5 5.1 11.2 19.3 29.7 --- --- ---- ---- ---- GROSS PROFIT 3.9 14.5 31.8 55.0 84.4 Gross Profit Margin 72.4% 74.0% 74.0% 74.0% 74.0% Payroll & Other Employee Benefits 1.8 6.6 14.5 25.3 39.0 Rent Expense 0.3 1.1 2.1 3.4 5.1 Other Operating Expenses 0.5 1.8 3.9 6.5 9.8 General & Administrative 0.3 1.0 2.3 3.9 6.0 --- --- --- --- --- Other Income (incl. startup costs) (0.5) (0.8) (1.0) (1.3) (1.5) EBITDA 0.4 3.3 8.0 14.5 23.0 EBITDA Margin 7.5% 16.7% 18.7% 19.6% 20.1% Depreciation 0.1 0.6 1.3 2.2 3.3 --- --- --- --- --- EBITA 0.3 2.7 6.7 12.3 19.7 EBITA Margin 4.8% 13.8% 15.7% 16.6% 17.2% Income Taxes @ 38% 0.1 1.0 2.5 4.7 7.5 Net Income 0.2 1.7 4.2 7.7 12.2 Net Income Margin 2.9% 8.5% 9.7% 10.3% 10.7%
PROJECT WONTON C-CORP. MODEL
CONSOLIDATED INCOME STATEMENT - ----------------------------- FISCAL YEAR ENDED DECEMBER 31, ($ IN MILLIONS) ------------------------------------- ACTUAL FISCAL YEAR ENDED DECEMBER 31, FULL YEAR PRO FORMA PROJECTED ------------------------------------ ------------------- ------------------------------------- 1993 1994 1995 1996 1997A 1998E 1999 2000 2001 2002 ----- ----- --------- ------ ------ -------- ---- ---- ----- ---- REVENUES $264.0 $294.0 $316.1 325.7 $344.4 $365.7 $405.7 $460.4 $525.5 $600.0 Cost of Goods Sold 55.4 61.9 67.4 68.7 69.2 73.1 81.7 93.8 108.5 125.6 ------ ------ --------- ------ ------- -------- ------- ------- ------- -------- GROSS PROFIT 208.5 232.2 248.7 257.0 275.1 292.6 324.0 366.6 417.0 474.4 Payroll & Other Employee Benefits 64.7 70.8 78.3 78.3 84.6 91.5 102.5 118.1 137.0 159.2 Rent Expense 39.1 44.0 49.1 49.6 54.5 57.9 62.6 68.5 75.1 82.2 Other Operating Expenses 29.2 32.4 35.3 36.0 38.7 41.5 45.7 51.1 57.5 64.6 General & Administrative 12.9 13.3 16.1 14.9 17.7 19.4 21.5 24.4 27.9 31.8 ------ ------- -------- ----- ------- ------- ------ ------ ------ ------- Other Income (incl. startup costs) 1.2 1.4 1.4 1.2 1.7 3.0 2.8 2.5 2.3 2.0 EBITDA 64.0 73.0 71.3 79.5 81.2 85.2 94.4 106.9 121.7 138.6 Depreciation 18.6 21.7 23.6 22.9 23.9 26.8 28.0 30.1 32.1 33.4 ------ -------- -------- ------ ------- -------- ------- ------- ------- -------- EBITA 45.4 51.3 47.6 56.6 57.3 58.5 66.4 76.9 89.6 105.2 Amortization of Goodwill 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ------ --------- ------- ------ ------- -------- ------- ------- ------- -------- EBIT 45.4 51.3 47.6 56.6 57.3 58.5 66.4 76.9 89.6 105.2 Interest Income (5.50%) 0.0 0.0 0.7 2.3 4.5 7.2 Interest Expense: Revolving Credit Facility 0.0 0.0 0.0 0.0 0.0 0.0 Senior Unsecured Notes 33.2 33.2 33.2 33.2 33.2 33.2 Other Long Term Debt 0.0 0.0 0.0 0.0 0.0 0.0 Amortization of Deferred Debt Exp. 1.0 1.0 1.0 1.0 1.0 1.0 --- --- --- --- --- --- Total Interest Expense 34.2 34.2 34.2 34.2 34.2 34.2 ------- ------- ------ ------ ------ ------- PRETAX INCOME 23.1 24.3 32.9 45.1 60.0 78.3 Income Taxes @ 38% 8.8 9.2 12.5 17.1 22.8 29.8 Minority Interest @ 20% 0.0 0.0 0.3 0.8 1.5 2.4 NET INCOME TO COMMON $14.3 $15.0 $20.1 $27.1 $35.6 $46.1 ======= ======= ====== ====== ====== ======= FULLY DILUTED EARNINGS PER SHARE $0.69 $2.22 $2.96 $4.00 $5.25 $6.80 ======= ======= ====== ====== ====== ======= POSSIBLE FUTURE STOCK PRICE @ 13.7X(1) $30.36 $40.57 $54.76 $72.01 $93.17 ======= ====== ====== ====== ======= PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE @ 17% $28.25 $32.27 $37.22 $41.84 $46.27 ======= ======= ====== ====== =======
FOOTNOTES (1) Based on 1998 First Call estimate of $1.97 and stock price of $27.00. PROJECT WONTON C-CORP. MODEL
CONSOLIDATED CASH FLOW STATEMENT - -------------------------------- ($ IN MILLIONS) PROJECTED FISCAL YEAR ENDED DECEMBER 31, --------------------------------------------------- 1999 2000 2001 2002 -------- -------- -------- ---------- CASH FLOW FROM OPERATIONS NET INCOME TO COMMON $20.1 $27.1 $35.6 $46.1 DEPRECIATION 28.0 30.1 32.1 33.4 AMORTIZATION OF GOODWILL AND DEFERRED FINANCING FEES 1.0 1.0 1.0 1.0 DEFERRED INCOME TAXES 0.0 0.0 0.0 0.0 MINORITY INTEREST 0.3 0.8 1.5 2.4 CHANGE IN NET WORKING CAPITAL 4.2 6.0 7.3 8.5 -------- -------- -------- ---------- TOTAL CASH FLOW FROM OPERATIONS $53.7 $65.0 $77.5 $91.4 CASH FLOW FROM INVESTING ACTIVITIES CAPITAL EXPENDITURES (NEW SBARRO STORES) ($16.5) ($18.5) ($18.5) ($18.5) CAPITAL EXPENDITURES (MAINTENANCE OF EXISTING SBARRO STORES) (5.2) (5.2) (5.8) (6.4) CAPITAL EXPENDITURES (UMBERTO) (6.8) (9.0) (11.3) (13.5) CONTRIBUTION TO CAPITAL BY MINORITY INTEREST 1.4 1.8 2.3 2.7 COST TO COMPLETE BUILDING 0.0 0.0 0.0 0.0 -------- -------- -------- ---------- TOTAL CASH FLOW FROM INVESTING ACTIVITIES ($27.1) ($30.9) ($33.3) ($35.7) CASH FLOW FROM FINANCING ACTIVITIES BORROWINGS/(REPAYMENT) OF OTHER LONG TERM DEBT 0.0 0.0 0.0 0.0 -------- -------- -------- ---------- TOTAL CASH FLOW FROM FINANCING ACTIVITIES $0.0 $0.0 $0.0 $0.0 -------- -------- -------- ---------- INCREASE IN CASH BEFORE SWEEP $26.6 $34.1 $44.2 $55.7 ======== ======== ======== ========== BORROWINGS/(REPAYMENT) OF SENIOR BANK DEBT: REVOLVING CREDIT FACILITY 0.0 0.0 0.0 0.0 BORROWINGS/(REPAYMENT) OF SENIOR UNSECURED NOTES 0.0 0.0 0.0 0.0 NET INCREASE IN CASH (INCLUDES MARKETABLE SECURITIES) $26.6 $34.1 $44.2 $55.7 BEGINNING BALANCE OF CASH 6.0 32.6 66.7 110.9 -------- -------- -------- ---------- ENDING BALANCE OF CASH $32.6 $66.7 $110.9 $166.6 ======== ======== ======== ========== MINIMUM CASH BALANCE 7.0 7.0 7.0 7.0
PROJECT WONTON C-CORP. MODEL
CONSOLIDATED BALANCE SHEET - -------------------------- ($ IN MILLIONS) FISCAL YEAR ENDED DECEMBER 31, --------------------------------------------- ACTUAL ESTIMATED PROJECTED --------------------------------------------- 1997 1998 1999 2000 2001 2002 ---------- --------- ----------- --------- ----------- -------- ASSETS - ------ CURRENT ASSETS Cash & Cash Equivalents (incl. Marketable Securities) $127.3 $6.0 $32.6 $66.7 $110.9 $166.6 Accounts Receivable 2.4 2.5 2.8 3.2 3.6 4.1 Inventory 3.0 3.1 3.5 4.0 4.6 5.4 Prepaid Expenses 1.8 1.9 2.1 2.4 2.7 3.1 Other Current Assets 0.0 0.0 0.0 0.0 0.0 0.0 ---------- -------- -------- -------- --------- --------- Total Current Assets 134.4 13.5 41.0 76.2 121.9 179.2 GROSS PROPERTY, PLANT & EQUIPMENT 287.0 313.1 341.5 374.2 409.8 448.2 Less Accumulated Depreciation 150.2 177.0 205.0 235.0 267.1 300.5 ---------- -------- -------- -------- --------- --------- NET PROPERTY, PLANT & EQUIPMENT 136.8 136.1 136.5 139.2 142.7 147.7 GOODWILL 0.0 0.0 0.0 0.0 0.0 0.0 DEFERRED FINANCING FEES 0.0 10.2 9.2 8.2 7.1 6.1 DEFERRED CHARGES 1.6 1.6 1.6 1.6 1.6 1.6 OTHER ASSETS 5.8 5.8 5.8 5.8 5.8 5.8 ---------- -------- -------- -------- --------- --------- TOTAL ASSETS $278.6 $167.3 $194.1 $231.0 $279.1 $340.5 ========== ======== ======== ======== ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Accounts Payable $10.1 $10.7 $11.9 $13.7 $15.8 $18.3 Accrued Liabilities 26.0 27.5 30.7 35.3 40.8 47.2 Dividends Payable 5.5 0.0 0.0 0.0 0.0 0.0 Other Current Liabilities 4.8 5.0 5.6 6.5 7.5 8.7 ---------- -------- -------- -------- --------- --------- Total Current Liabilities 46.4 43.2 48.3 55.4 64.1 74.2 LONG-TERM DEBT Senior Bank Debt: Revolving Credit Facility 0.0 0.0 0.0 0.0 0.0 0.0 Senior Unsecured Notes 0.0 340.0 340.0 340.0 340.0 340.0 Other Long Term Debt 0.0 0.0 0.0 0.0 0.0 0.0 ---------- -------- -------- -------- --------- --------- Total Long Term Debt 0.0 340.0 340.0 340.0 340.0 340.0 DEFERRED TAXES 11.8 11.8 11.8 11.8 11.8 11.8 OTHER LIABILITIES 0.0 0.0 0.0 0.0 0.0 0.0 MINORITY INTEREST 0.0 0.4 2.1 4.7 8.5 13.6 STOCKHOLDERS' EQUITY Common Equity 220.4 (228.1) (208.0) (180.9) (145.2) (99.1) ---------- -------- -------- -------- --------- --------- Total Stockholders' Equity 220.4 (228.1) (208.0) (180.9) (145.2) (99.1) TOTAL LIABILITIES AND EQUITY $278.6 $167.3 $194.1 $231.0 $279.1 $340.5 ========== ======== ======== ======== ========= =========
PROJECT WONTON APPENDIX H ILLUSTRATIVE FINANCIAL INVESTOR SPONSORED LEVERAGED RECAPITALIZATION MODEL BEAR STEARNS PROJECT WONTON C-CORP. MODEL $661 MILLION RECAPITALIZATION TRANSACTION ASSUMPTIONS PURCHASE OF APPROX. $661 MILLION IN EQUITY (18.873 MILLION SHARES PLUS OPTIONS) TENDER PRICE OF $35.00 PER SHARE.
SOURCES AND USES OF FUNDS PRO FORMA CAPITALIZATION ($ IN MILLIONS) ($ IN MILLIONS) PRO FORMA (2) SOURCES OF FUNDS ESTIMATED % OF TOTAL INTEREST - ---------------- 12/31/98 CAPITALIZATION RATE ------------ -------------- -------- Excess Cash on Balance Sheet (1) $122.6 Cash & Cash Equivalents (incl. Marketable Securities) $8.4 -- 5.50%(3) Senior Bank Debt: Senior Bank Debt: Senior Credit Facility 80.0 Senior Credit Facility 80.0 68.8% 8.19% Senior Unsecured Notes 350.0 ----------- Total New Long Term Debt 430.0 Senior Unsecured Notes 350.0 300.8% 10.75% Other Long Term Debt 0.0 0.0% 9.00% New Common Equity 125.0 TOTAL SOURCES OF FUNDS $677.6 TOTAL LONG TERM DEBT 430.0 369.5% =========== -------- ------------ Common Equity (313.6) -269.5% --------- ------------ TOTAL SHAREHOLDERS' EQUITY (313.6) -269.5% --------- ------------ TOTAL CAPITALIZATION $116.4 100.0% ========= ============ USES OF FUNDS GOODWILL $0.0 ----------------------------------------------------------------------------- ACQUISITION PRICE - $35.00 PER SHARE Number of Diluted Shares Outstanding 20.970 ($ in millions) Number of Shares to be Repurchased 18.873 90.0% PURCHASE PRICE PER SHARE $35.00 Implied Equity Value: $752.3 --------- Implied Enterprise Value: (4) $621.3 Purchase Price of Equity $660.6 Goodwill: $0.0 Repayment of Existing Debt 0.0 Period (Years): 30 ----------- --------- --------- --------- Total Purchase Price $660.6 FYE 1997A FYE 1998P FYE 1999P Financing Costs $12.2 Multiple of: --------- --------- --------- Non-Financing Costs 4.8 Revenues 1.80x 1.70x 1.53x ----------- EBITDA 7.65x 7.29x 6.58x TOTAL USES OF FUNDS $677.6 EBITA 10.85x 10.63x 9.35x =========== Footnotes - ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes $7.5 million of marketable securities. (2) Reflects proposed recapitalization. Assumes transaction closes on 12/31/98. (3) Interest is earned on cash balance above $7 million. (4) Reflects estimated 12/31/98 balance sheet. PROJECT WONTON C-CORP. MODEL
OPERATING COMPANY COVERAGE RATIOS FISCAL YEAR ENDED DECEMBER 31, ACTUAL ----------------------------------- 1997 1998 1999 2000 2001 2002 ----- ---- ---- ---- ---- ---- EBITDA/TOTAL INTEREST EXPENSE 1.79x 1.88x 2.12x 2.52x 3.03x 3.57x EBITDAR/TOTAL INTEREST EXPENSE PLUS RENT EXPENSE 1.36x 1.39x 1.47x 1.58x 1.71x 1.82x EBITDAR - CAPEX/TOTAL INTEREST EXPENSE PLUS RENT EXPENSE 1.07 1.13 1.20 1.29 1.40 1.51 EBITDA - CAPEX/TOTAL INTEREST EXPENSE 1.16x 1.30x 1.48x 1.75x 2.15x 2.58x EBITDA - CAPEX/TOTAL INTEREST EXP. + REQ. AMORT. OF DEBT 1.16x 1.30x 1.48x 1.75x 2.15x 2.58x EBITDAR - CAPEX/TOTAL INTEREST EXP. + REQ. AMORT. OF DEBT + RENT 1.13 1.20 1.29 1.40 1.51 1.07 1.57 TOTAL DEBT + CAPITALIZED LEASES (1) /EBITDAR 5.98x 5.84x 5.39x 4.90x 4.45x 4.19x TOTAL DEBT/EBITDA 5.29x 5.05x 4.33x 3.56x 2.88x 2.52x NET DEBT/EBITDA 5.19x 4.95x 4.25x 3.50x 2.76x 2.07x BANK DEBT/EBITDA 0.99x 0.94x 0.62x 0.29x 0.00x 0.00x - --------------------------------------------------------------------------- ------- ------- ------ ------- ------
SUMMARY OF OPERATIONS
($ IN MILLIONS) FISCAL YEAR ENDED DECEMBER 31, ACTUAL ACTUAL PF 1996 PF 1997 1998 1999 2000 2001 2002 ------- ------- ---- ---- ---- ---- ---- Revenues $325.7 $344.4 $365.7 $405.7 $460.4 $525.5 $600.0 EBITDA 79.5 81.2 85.2 94.4 106.9 121.7 138.6 Rent Expense 49.6 54.5 57.9 62.6 68.5 75.1 82.2 Bank Interest Expense 6.6 6.6 6.6 5.7 3.7 1.3 0.0 Total Interest Expense 45.4 45.4 45.4 44. 5 42.5 40.1 38.8 Interest Income 0.0 0.0 0.0 0.0 0.0 0.2 1.8 Capital Expenditures 25.9 28.6 26.1 28.4 32.7 35.6 38.4 Capitalized Leases(1) 346.9 381.3 405.5 438.4 479.8 526.0 575.2 Total Debt 430.0 430.0 430.0 408.6 380.9 350.0 350.0 - ----------------------------------------------------------------------------------------------------
SUMMARY OF HYPOTHETICAL EQUITY RETURNS EXIT YEAR --------- ---------- --------- ASSUMED EXIT MULTIPLE OF TRAILING EBITDA 2000 2001 2002 --------- ---------- --------- 6.0x 15.1% 24.8% 28.0% 6.5x 26.3% 31.1% 31.9% 7.0x 36.6% 36.8% 35.6% 7.5x 46.1% 42.0% 39.0% 8.0x 55.0% 46.9% 42.1% - ----------------------------------------------------------------- --------- -------- ---------
FOOTNOTES (1) Leases capitalized at 7.0x Rent Expense for the relevant period. PROJECT WONTON C-CORP. MODEL
PRO FORMA BALANCE SHEET ADJUSTMENTS - ----------------------------------- ACTUAL ESTIMATED TRANSACTION PRO FORMA ($ in millions) 12/31/97 12/31/98 ADJUSTMENTS 12/31/98 -------- --------- ----------- --------- ASSETS - ------ Current Assets Cash & Cash Equivalent (incl. Long-term Marketable Securities) $127.3 $131.0 ($122.6) $8.4 Accounts Receivable 2.4 2.5 2.5 Inventory 3.0 3.1 3.1 Prepaid Expenses 1.8 1.9 1.9 Other Current Assets 0.0 0.0 0.0 -------- --------- -------- Total Current Assets 134.4 138.5 15.9 Gross Property, Plant & Equipment 287.0 313.1 313.1 Less Accumulated Depreciation 150.2 177.0 177.0 -------- --------- --------- Net Property, Plant & Equipment 136.8 136.1 136.1 Goodwill 0.0 0.0 0.0 0.0 Deferred Financing Fees 0.0 0.0 12.2 12.2 Deferred Charges 1.6 1.6 1.6 Other Assets 5.8 5.8 5.8 TOTAL ASSETS $278.6 $282.1 $171.7 ======== ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts Payable $10.1 $10.7 $10.7 Accrued Liabilities 26.0 27.5 27.5 Dividends Payable 5.5 0.0 0.0 Other Current Liabilities 4.8 5.0 5.0 -------- --------- --------- Total Current Liabilities 46.4 43.2 43.2 Long-Term Debt Senior Bank Debt: Senior Credit Facility 0.0 0.0 80.0 80.0 Senior Unsecured Notes 0.0 0.0 350.0 350.0 Other Long Term Debt 0.0 0.0 0.0 -------- --------- --------- Total Long Term Debt 0.0 0.0 430.0 Deferred Taxes 11.8 11.8 11.8 Other Liabilities 0.0 0.0 0.0 Minority Interest 0.0 0.4 0.4 Stockholders' Equity Common Equity 220.4 226.7 (540.4) (313.6) -------- --------- --------- Total Stockholders' Equity 220.4 226.7 (313.6) TOTAL LIABILITIES AND EQUITY $278.6 $282.1 $171.7 ======== ======== =========
PROJECT WONTON C-CORP. MODEL PROJECTED CAPITALIZATION - ------------------------ ($ in millions) FISCAL YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- PROJECTED --------------------------------------------------------------------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Cash & Cash Equivalents (incl. Marketable Securities) $8.4 $7.0 $7.0 $14.1 $63.7 ========= ============ ========= ============= ============ Senior Bank Debt: Senior Credit Facility 80.0 58.6 30.9 0.0 0.0 Senior Unsecured Notes 350.0 350.0 350.0 350.0 350.0 Other Long Term Debt 0.0 0.0 0.0 0.0 0.0 --------- ------------ --------- ---------------- ------------ TOTAL LONG TERM DEBT 430.0 408.6 380.9 350.0 350.0 STOCKHOLDERS' EQUITY Common Equity (313.6) (300.4) (279.9) (250.6) (210.8) --------- ------------ --------- ------------- ------------ TOTAL STOCKHOLDERS EQUITY (313.6) (300.4) (279.9) (250.6) (210.8) --------- ------------ --------- ------------- ------------ TOTAL CAPITALIZATION $116.4 $108.2 $101.0 $99.4 $139.2 ========= ============ ========= ============= ============ Cash & Cash Equivalents (incl. Marketable Securities) 7.2% 6.5% 6.9% 14.2% 45.8% Long Term Debt: Senior Bank Debt: Senior Credit Facility 68.8% 54.1% 30.6% 0.0% 0.0% Senior Unsecured Notes 300.8% 323.4% 346.4% 352.1% 251.4% Other Long Term Debt 0.0% 0.0% 0.0% 0.0% 0.0% --------- ------------ --------- ------------- ------------ TOTAL LONG TERM DEBT 369.5% 377.5% 377.0% 352.1% 251.4% STOCKHOLDERS' EQUITY Common Equity -269.5% -277.5% -277.0% -252.1% -151.4% --------- ------------ --------- ------------- ------------ TOTAL STOCKHOLDERS' EQUITY -269.5% -277.5% -277.0% -252.1% -151.4% --------- ------------ --------- ------------- ------------ TOTAL CAPITALIZATION 100.0% 100.0% 100.0% 100.0% 100.0% ========= ============ ========== ============= ============
PROJECT WONTON C-CORP. MODEL
SBARRO INCOME STATEMENT ASSUMPTIONS - ----------------------------------- ACTUAL FISCAL YEAR ENDED DECEMBER 31, FISCAL YEAR ENDED DECEMBER 31, ------------------------------------ ------------------------------------------------------ ACTUAL PROJECTED --------------------------------------------- 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ------- ------- ------- ------- ------ ------ -------- -------- -------- ------- Revenue Growth Rate -- 11.39% 7.49% 3.04% 5.74% 6.20% 10.92% 13.50% 14.13% 14.17% Gross Profit Growth Rate -- 11.33% 7.13% 3.34% 7.05% 6.35% 10.72% 13.17% 13.74% 13.77% EBITDA Growth Rate -- 14.09% -2.36% 11.49% 2.20% 4.94% 10.79% 13.27% 13.80% 13.89% EBITA Growth Rate -- 13.09% -7.17% 18.70% 1.30% 2.05% 13.62% 15.76% 16.57% 17.42% EBIT Growth Rate -- 13.09% -7.17% 18.70% na 2.05% 13.62% 15.76% 16.57% 17.42% Gross Margin (1) 78.61% 78.59% 78.27% 78.50% 79.43% 79.72% 79.72% 79.72% 79.72% 79.72% Payroll & Other Employee Benefits(1) 24.94% 24.54% 25.26% 24.51% 25.14% 25.40% 25.40% 25.40% 25.40% 25.40% Rent Expense (1) 15.07% 15.24% 15.82% 15.52% 16.18% 16.30% 16.30% 16.30% 16.30% 16.30% Occupancy and Other Expenses(1) 11.25% 11.20% 11.38% 11.27% 11.51% 11.60% 11.60% 11.60% 11.60% 11.60% General & Administrative 4.98% 4.61% 5.19% 4.68% 5.15% 5.30% 5.30% 5.30% 5.30% 5.30% ------- ------- ------- ------- ------ ------ -------- -------- -------- -------- Other Income (incl. startup costs) 0.47% 0.46% 0.43% 0.36% 0.48% 0.82% 0.68% 0.54% 0.43% 0.33% EBITDA MARGIN 24.24% 24.82% 22.55% 24.40% 23.58% 23.30% 23.27% 23.23% 23.16% 23.10% Depreciation & Amortization 7.05% 7.37% 7.48% 7.03% 6.95% 7.32% 6.90% 6.53% 6.10% 5.56% ------- ------- ------- ------- ------ ------ -------- -------- -------- -------- EBITA 17.19% 17.45% 15.07% 17.36% 16.64% 15.99% 16.37% 16.70% 17.06% 17.54% Amortization of Goodwill 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% ------- ------- ------- ------- ------ ------ -------- -------- -------- -------- EBIT MARGIN 17.19% 17.45% 15.07% 17.36% 16.64% 15.99% 16.37% 16.70% 17.06% 17.54% WORKING CAPITAL ASSUMPTIONS - --------------------------- FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------------------- ACTUAL ACTUAL PROJECTED(2) ------------------ ------------------------------------------- 1995 1996 1997(2) 1998 1999 2000 2001 2002 --------- -------- ------- ------- ------ ------ ----- ------ Days Receivable of Sales 3.0 2.1 2.5 2.5 2.5 2.5 2.5 2.5 Days Inventory of Cost of Goods Sold 15.0 15.1 15.6 15.6 15.6 15.6 15.6 15.6 Days Prepaid Expenses of Sales 2.0 1.6 1.9 1.9 1.9 1.9 1.9 1.9 Other Current Assets as a % of Sales 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Days Payable of Cost of Goods Sold 40.1 38.1 53.2 53.2 53.2 53.2 53.2 53.2 Days Accrued Liabilities of Cost of Goods Sold 146.3 120.5 137.2 137.2 137.2 137.2 137.2 137.2 Days Other Current Liabilities of Cost of Goods Sold 46.5 53.0 25.2 25.2 25.2 25.2 25.2 25.2
Footnotes - --------------- (1) As a percentage of Company-owned restaurant revenue. (2) Years 1998-2002 assume same working capital ratios as pro forma year end 1997. PROJECT WONTON C-CORP. MODEL SBARRO REVENUE DERIVATION ($ in millions)
FISCAL YEAR ENDED DECEMBER 31, --------------------------------------------------- ACTUAL FISCAL YEAR ENDED DECEMBER 31, PROJECTED ------------------------------------- ACTUAL ------------------------------------------- 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- NUMBER OF COMPANY-OWNED RESTAURANTS Beginning Balance 456 515 567 571 597 623 651 691 736 781 Restaurants Opened 59 53 44 29 30 35 40 45 45 45 Acquired (Sold) Franchisees 7 12 0 1 4 1 0 0 0 0 Restaurants Closed 7 3 40 4 8 8 0 0 0 0 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ending Balance 515 567 571 597 623 651 691 736 781 826 NUMBER OF FRANCHISED RESTAURANTS Beginning Balance 131 134 162 200 219 239 274 324 384 444 Restaurants Opened 24 38 40 36 47 40 50 60 60 60 Purchased (Sold) Company (7) (2) 0 (1) (4) (1) 0 0 0 0 Restaurants Closed 14 8 2 16 23 4 0 0 0 0 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ending Balance 134 162 200 219 239 274 324 384 444 504 TOTAL NUMBER OF RESTAURANTS Beginning Balance 587 649 729 771 816 862 925 1,015 1,120 1,225 Restaurants Opened 83 91 84 65 77 75 90 105 105 105 Restaurants Closed 21 11 42 20 31 12 0 0 0 0 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ending Balance 649 729 771 816 862 925 1,015 1,120 1,225 1,330 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== SAME STORE SALES GROWTH - -0.04% 2.12% 0.31% 0.93% 0.50% 1.50% 1.50% 1.50% 1.50% AVERAGE SALES PER RESTAURANT $0.534 $0.534 $0.545 $0.547 $0.552 $0.555 $0.563 $0.571 $0.580 $0.589 TOTAL SYSTEMWIDE SALES Company-Owned $259.2 $288.8 $310.2 $319.3 $336.6 $353.3 $377.7 $407.7 $439.9 $473.0 Franchised 70.8 79.0 98.7 118.3 123.1 142.3 168.3 202.3 240.1 279.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Systemwide Sales $330.0 $367.8 $408.8 $437.6 $459.7 $495.5 $546.0 $609.9 $680.0 $752.0 TOTAL REVENUE FROM FRANCHISEES FRANCHISE ROYALTY FEE (NEW STORES) 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% FRANCHISE ROYALTY FEE (EXISTING) 5.5% 4.9% 4.9% 4.5% 5.7% 4.8% 4.8% 4.8% 4.8% 4.8% INITIAL FRANCHISE FEE PER STORE $0.035 $0.035 $0.035 $0.033 $0.032 $0.020 $0.020 $0.020 $0.020 $0.020 Total Initial Franchise Fee $0.8 $1.3 $1.4 $1.2 $1.5 $0.8 $1.0 $1.2 $1.2 $1.2 Total Franchise Royalty Fee 3.9 3.9 4.9 5.2 6.2 6.3 7.3 8.6 10.2 11.7 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Revenue From Franchisees $4.8 $5.2 $5.9 $6.4 $7.8 $7.1 $8.3 $9.8 $11.4 $12.9 TOTAL REVENUE Company-Owned $259.2 $288.8 $310.2 $319.3 $336.6 $353.3 $377.7 $407.7 $439.9 $473.0 Franchised 4.8 5.2 5.9 6.4 7.8 7.1 8.3 9.8 11.4 12.9 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Revenue $264.0 $294.0 $316.1 $325.7 $344.4 $360.4 $386.0 $417.5 $451.2 $485.9 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== TOTAL CAPITAL EXPENDITURES CapEx per New Restaurant $0.54 $0.60 $0.40 $0.40 $0.41 $0.41 $0.41 $0.41 $0.41 $0.41 Restaurant CapExp $31.9 $32.1 $17.5 $11.5 $12.3 $14.4 $16.5 $18.5 $18.5 $18.5 Other Capital Expenditures $0.0 $0.0 $0.0 $7.0 $6.2 $4.0 $0.0 $0.0 $0.0 $0.0
PROJECT WONTON C-CORP. MODEL
SBARRO INCOME STATEMENT - ----------------------- ($ in millions) FISCAL YEAR ENDED DECEMBER 31 -------------------------------------------------------- PROJECTED -------------------------------------------------------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- REVENUES $360.4 $386.0 $417.5 $451.2 $485.9 COST OF GOODS SOLD 71.6 76.6 82.7 89.2 95.9 ----- ------ ------ ------ ------ GROSS PROFIT 288.7 309.4 334.8 362.0 390.0 GROSS PROFIT MARGIN 80.1% 80.2% 80.2% 80.2% 80.3% PAYROLL & OTHER EMPLOYEE BENEFITS 89.7 95.9 103.5 111.7 120.1 RENT EXPENSE 57.6 61.6 66.4 71.7 77.1 OTHER OPERATING EXPENSES 41.0 43.8 47.3 51.0 54.9 GENERAL & ADMINISTRATIVE 19.1 20.5 22.1 23.9 25.8 ----- ------ ------ ------ ------ OTHER INCOME 3.5 3.5 3.5 3.5 3.5 EBITDA 84.8 91.1 98.9 107.2 115.6 EBITDA MARGIN 23.5% 23.6% 23.7% 23.7% 23.8% DEPRECIATION 26.6 27.4 28.8 29.9 30.1 ----- ------ ------ ------ ------ EBITA 58.2 63.7 70.2 77.3 85.6 EBITA MARGIN 16.2% 16.5% 16.8% 17.1% 17.6%
PROJECT WONTON C-CORP. MODEL
UMBERTO INCOME STATEMENT - ------------------------ ($ IN MILLIONS) FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------------------ PROJECT ------------------------------------------------------ 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- REVENUES $5.4 $19.7 $42.9 $74.3 $114.1 COST OF GOODS SOLD 1.5 5.1 11.2 19.3 29.7 ---------- ------- ------- ------- ------ GROSS PROFIT 3.9 14.5 31.8 55.0 84.4 GROSS PROFIT MARGIN 72.4% 74.0% 74.0% 74.0% 74.0% PAYROLL & OTHER EMPLOYEE BENEFITS 1.8 6.6 14.5 25.3 39.0 RENT EXPENSE 0.3 1.1 2.1 3.4 5.1 OTHER OPERATING EXPENSES 0.5 1.8 3.9 6.5 9.8 GENERAL & ADMINISTRATIVE 0.3 1.0 2.3 3.9 6.0 ---------- ------- -------- ------- ------ OTHER INCOME (INCL. STARTUP COSTS) (0.5) (0.8) (1.0) (1.3) (1.5) EBITDA 0.4 3.3 8.0 14.5 23.0 EBITDA MARGIN 7.5% 16.7% 18.7% 19.6% 20.1% DEPRECIATION 0.1 0.6 1.3 2.2 3.3 ---------- ------- --------- ------- ------ EBITA 0.3 2.7 6.7 12.3 19.7 EBITA MARGIN 4.8% 13.8% 15.7% 16.6% 17.2% INCOME TAXES @ 38% 0.1 1.0 2.6 4.7 7.5 NET INCOME NET INCOME MARGIN 0.2 1.7 4.2 7.7 12.2 2.9% 8.5% 9.7% 10.3% 10.7%
PROJECT WONTON C-CORP. MODEL
CONSOLIDATED INCOME STATEMENT - ----------------------------- ($ in millions) FISCAL YEAR ENDED DECEMBER 31, --------------------------------- ACTUAL FISCAL YEAR ENDED DECEMBER 31, FULL YEAR PRO FORMA PROJECTED ------------------------------------- ------------------- --------------------------------- 1993 1994 1995 1996 1997A 1998E 1999 2000 2001 2002 ---- ---- ---- ---- ----- ----- ---- ---- ---- ---- REVENUES $264.0 $294.0 $316.1 $325.7 $344.4 $365.7 $405.7 $460.4 $525.5 $600.0 Cost of Goods Sold 55.4 61.9 67.4 68.7 69.2 73.1 81.7 93.8 108.5 125.6 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ GROSS PROFIT 208.5 232.2 248.7 257.0 275.1 292.6 324.0 366.6 417.0 474.4 PAYROLL & OTHER EMPLOYEE BENEFITS 64.7 70.8 78.3 78.3 84.6 91.5 102.5 118.1 137.0 159.2 RENT EXPENSE 39.1 44.0 49.1 49.6 54.5 57.9 62.6 68.5 75.1 82.2 OTHER OPERATING EXPENSES 29.2 32.4 35.3 36.0 38.7 41.5 45.7 51.1 57.5 64.6 GENERAL & ADMINISTRATIVE 12.9 13.3 16.1 14.9 17.7 19.4 21.5 24.4 27.9 31.8 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ OTHER INCOME (INCL. STARTUP COSTS) 1.2 1.4 1.4 1.2 1.7 3.0 2.8 2.5 2.3 2.0 EBITDA 64.0 73.0 71.3 79.5 81.2 85.2 94.4 106.9 121.7 138.6 DEPRECIATION 18.6 21.7 23.6 22.9 23.9 26.8 28.0 30.1 32.1 33.4 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ EBITA 45.4 51.3 47.6 56.6 57.3 58.5 66.4 76.9 89.6 105.2 AMORTIZATION OF GOODWILL 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ EBIT 45.4 51.3 47.6 56.6 57.3 58.5 66.4 76.9 89.6 105.2 INTEREST INCOME (5.50%) 0.0 0.0 0.0 0.0 0.2 1.8 INTEREST EXPENSE: SENIOR CREDIT FACILITY 6.6 6.6 5.7 3.7 1.3 0.0 SENIOR UNSECURED NOTES 37.6 37.6 37.6 37.6 37.6 37.6 OTHER LONG TERM DEBT 0.0 0.0 0.0 0.0 0.0 0.0 AMORTIZATION OF DEFERRED DEBT EXP. 1.2 1.2 1.2 1.2 1.2 1.2 ------ ------ ------ ------ ------- ------ TOTAL INTEREST EXPENSE 45.4 45.4 44.5 42.5 40.1 38.8 ------ ------ ------ ------ ------- ------ PRETAX INCOME 11.9 13.1 21.9 34.4 49.7 68.2 INCOME TAXES @ 38% 4.5 5.0 8.3 13.1 18.9 25.9 MINORITY INTEREST @20% 0.0 0.0 0.3 0.8 1.5 2.4 NET INCOME TO COMMON $7.4 $8.1 $13.3 $20.5 $29.3 39.8 ======= ====== ======= ====== ====== ====== FULLY DILUTED EARNINGS PER SHARE $0.35 $1.42 $2.34 $3.61 $5.17 $7.02 ======= ====== ======= ====== ====== ====== POSSIBLE FUTURE STOCK PRICE @ 13.7X (1) $19.51 $32.08 $49.51 $70.82 $96.27 ====== ======= ====== ====== ====== PRESENT VALUE OF POSSIBLE FUTURE STOCK PRICE @ 18% $18.08 $25.20 $32.96 $39.96 $46.03 ====== ======= ====== ====== ======
FOOTNOTES - ------------------- (1) BASED ON 1998 FIRST CALL ESTIMATE OF $1.97 AND STOCK PRICE OF $27.00 PROJECT WONTON C-CORP. MODEL
CONSOLIDATED CASH FLOW STATEMENT - -------------------------------- ($ in millions) PROJECTED FISCAL YEAR ENDED DECEMBER 31, ----------------------------------------------------- CASH FLOW FROM OPERATIONS 1999 2000 2001 2002 ---- ---- ---- ---- Net Income to Common $13.3 $20.5 $29.3 $39.8 Depreciation 28.0 30.1 32.1 33.4 Amortization of Goodwill and Deferred Financing Fees 1.2 1.2 1.2 1.2 Deferred Income Taxes 0.0 0.0 0.0 0.0 Minority Interest 0.3 0.8 1.5 2.4 Change in Net Working Capital 4.2 6.0 7.3 8.5 ------- ------- ------- ------- TOTAL CASH FLOW FROM OPERATIONS $47.0 $58.6 $71.4 $85.3 CASH FLOW FROM INVESTING ACTIVITIES Capital Expenditures (New Sharro Stores) ($16.5) ($18.5) ($18.5) ($18.5) Capital Expenditures (Maintenance of Existing Sbarro Stores) (5.2) (5.2) (5.8) (6.4) Capital Expenditures (Umberto) (6.8) (9.0) (11.3) (13.5) Contribution to Capital by Minority Interest 1.4 1.8 2.3 2.7 Cost to Complete Building 0.0 0.0 0.0 0.0 ------- ------- ------- ------- TOTAL CASH FLOW FROM INVESTING ACTIVITIES ($27.1) ($30.9) ($33.3) ($35.7) CASH FLOW FROM FINANCING ACTIVITIES Borrowings/ (Repayment) of Other Long Term Debt 0.0 0.0 0.0 0.0 ------- ------- ------- ------- TOTAL CASH FLOW FROM FINANCING ACTIVITIES $0.0 $0.0 $0.0 $0.0 ------- ------- ------- ------- INCREASE IN CASH BEFORE SWEEP $20.0 $27.7 $38.1 $49.6 ======= ======= ======= ======= Borrowings/ (Repayment) of Senior Bank Debt: Revolving Credit Facility (21.4) (27.7) (30.9) 0.0 Borrowings/ (Repayment) of Senior Unsecured Notes 0.0 0.0 0.0 0.0 NET INCREASE IN CASH (INCLUDES MARKETABLE SECURUTIES) ($1.4) $0.0 $7.1 $49.6 Beginning Balance of Cash 8.4 7.0 7.0 14.1 ------- ------- ------- ------- Ending Balance of Cash $7.0 $7.0 $14.1 $63.7 ======= ======= ======= ======= Minimum Cash Balance 7.0 7.0 7.0 7.0
PROJECT WONTON C-CORP. MODEL
CONSOLIDATED BALANCE SHEET FISCAL YEAR ENDED DECEMBER 31, -------------------------------------------------- ($ in millions) PROJECTED ACTUAL ESTIMATED -------------------------------------------------- 1997 1998 1999 2000 2001 2002 --------- ----------- -------- ------------- ----------- --------- ASSETS CURRENT ASSETS Cash & Cash Equivalents (incl. Marketable Securities) $127.3 $8.4 $7.0 $7.0 $14.1 $63.7 Accounts Receivable 2.4 2.5 2.8 3.2 3.6 4.1 Inventory 3.0 3.1 3.5 4.0 4.6 5.4 Prepaid Expenses 1.8 1.9 2.1 2.4 2.7 3.1 Other Current Assets 0.0 0.0 0.0 0.0 0.0 0.0 -------- ----------- ------- -------- -------- ---------- Total Current Assets 134.4 15.9 15.4 16.6 25.1 76.3 GROSS PROPERTY, PLANT & EQUIPMENT 287.0 313.1 341.5 374.2 409.8 448.2 Less Accumulated Depreciation 150.2 177.0 205.0 235.0 267.1 300.5 -------- ----------- ------- -------- -------- ---------- NET PROPERTY, PLANT & EQUIPMENT 136.8 136.1 136.5 139.2 142.7 147.7 GOODWILL 0.0 0.0 0.0 0.0 0.0 0.0 DEFERRED FINANCING FEES 0.0 12.2 11.0 9.8 8.6 7.3 DEFERRED CHARGES 1.6 1.6 1.6 1.6 1.6 1.6 OTHER ASSETS 5.8 5.8 5.8 5.8 5.8 5.8 -------- ----------- ------- -------- -------- ---------- TOTAL ASSETS $278.6 $171.7 $170.4 $173.0 $183.8 $238.8 ======== =========== ======= ======== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Accounts Payable $10.1 $10.7 $11.9 $13.7 $15.8 $18.3 Accrued Liabilities 26.0 27.5 30.7 35.3 40.8 47.2 Dividends Payable 5.5 0.0 0.0 0.0 0.0 0.0 Other Current Liabilities 4.8 5.0 5.6 6.5 7.5 8.7 -------- ----------- ------- -------- -------- ---------- Total Current Liabilities 46.4 43.2 48.3 55.4 64.1 74.2 LONG-TERM DEBT Senior Bank Debt: Senior Credit Facility 0.0 80.0 58.6 30.9 0.0 0.0 Senior Unsecured Notes 0.0 350.0 350.0 350.0 350.0 350.0 Other Long Term Debt 0.0 0.0 0.0 0.0 0.0 0.0 -------- ----------- ------- -------- -------- ---------- Total Long Term Debt 0.0 430.0 408.6 380.9 350.0 350.0 DEFERRED TAXES 11.8 11.8 11.8 11.8 11.8 11.8 OTHER LIABILITIES 0.0 0.0 0.0 0.0 0.0 0.0 MINORITY INTEREST 0.0 0.4 2.1 4.7 8.5 13.6 STOCKHOLDERS' EQUITY Common Equity 220.4 (313.6) (300.4) (279.9) (250.6) (210.8) -------- ----------- ------- -------- -------- ---------- Total Stockholders' Equity 220.4 (313.6) (300.4) (279.9) (250.6) (210.8) TOTAL LIABILITIES AND EQUITY $278.6 $171.7 $170.4 $173.0 $183.8 $238.8 ======== =========== ======= ======== ======== ==========
PROJECT WONTON C-CORP. MODEL EQUITY INTERNAL RATE OF RETURN - ------------------------------
2 YEAR EXIT CASE 2000 EBITDA $ 106.9 EBITDA Exit Multiple 6.0x 6.5x 7.0x 7.5x 8.0x TEV 641.7 695.1 748.6 802.1 855.6 Plus: Cash 7.0 7.0 7.0 7.0 7.0 Less: Debt 380.9 380.9 380.9 380.9 380.9 Less: Minority Interest 4.7 4.7 4.7 4.7 4.7 ------------- ------------- ------------- ------------- ------------- Total Equity 263.0 316.5 370.0 423.4 476.9 63% of Equity 165.7 199.4 233.1 266.8 300.5 12/31/98 12/31/99 12/31/00 IRR ---- 6.0x (125.0) 0.0 165.7 15.1% 6.5x (125.0) 0.0 199.4 26.3% 7.0x (125.0) 0.0 233.1 36.6% 7.5x (125.0) 0.0 266.8 46.1% 8.0x (125.0) 0.0 300.5 55.0% - ------------------------------------------ ------------- ------------- --------------- ---------------- --------------------------- 3 YEAR EXIT CASE 2001 EBITDA $ 121.7 EBITDA Exit Multiple 6.0x 6.5x 7.0x 7.5x 8.0x TEV 730.2 791.1 851.9 912.8 973.6 Plus: Cash 14.1 14.1 14.1 14.1 14.1 Less: Debt 350.0 350.0 350.0 350.0 350.0 Less: Minority Interest 8.5 8.5 8.5 8.5 8.5 ------------- ------------- -------------- -------------- ------------- Total Equity 385.8 446.7 507.6 568.4 629.3 63% of Equity 243.1 281.4 319.8 358.1 396.5 12/31/98 12/31/99 12/31/00 12/31/01 IRR ---- 6.0x (125.0) 0.0 0.0 243.1 24.8% 6.5x (125.0) 0.0 0.0 281.4 31.1% 7.0x (125.0) 0.0 0.0 319.8 36.8% 7.5x (125.0) 0.0 0.0 358.1 42.0% 8.0x (125.0) 0.0 0.0 396.5 46.9% - ------------------------------------------ ------------- ------------- --------------- -------------- ----------------------------- 4 YEAR EXIT CASE 2002 EBITDA $ 138.6 EBITDA Exit Multiple 6.0x 6.5x 7.0x 7.5x 8.0x TEV 831.7 901.0 970.3 1039.6 1108.9 Plus: Cash 63.7 63.7 63.7 63.7 63.7 Less: Debt 350.0 350.0 350.0 350.0 350.0 Less: Minority Interest 13.6 13.6 13.6 13.6 13.6 ----------- ----------- ------------- ------------ ------------ Total Equity 531.8 601.1 670.4 739.7 809.0 63% of Equity 335.0 378.7 422.4 466.0 509.7 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 IRR ---- 6.0x (125.0) 0.0 0.0 0.0 335.0 28.0% 6.5x (125.0) 0.0 0.0 0.0 378.7 31.9% 7.0x (125.0) 0.0 0.0 0.0 422.4 35.6% 7.5x (125.0) 0.0 0.0 0.0 466.0 39.0% 8.0x (125.0) 0.0 0.0 0.0 509.7 42.1% - ----------------------------------------- ------------- ------------ -------------- -------------- ----------------------------
PROJECT WONTON C-CORP. MODEL EQUITY OWNERSHIP - ----------------- OWNERSHIP SUMMARY - -----------------
PURCHASE (REPURCHASE) AFTER PURCHASE OF OWNERSHIP PRE-TRANSACTION OF COMMON SHARES COMMON EQUITY REDUCTION ----------------------- -------------------------- ---------------- ---------- INSIDERS: Mario 1,532,130 6.9% (1,371,504) -6.2% 160,626 89.5% Joseph 1,807,914 8.1% (1,618,375) -7.3% 189,539 89.5% Anthony 1,233,800 5.5% (1,104,450) -5.0% 129,350 89.5% ---------- --------- ------- -------- ------- Control Group (Mario, Joseph, and Anthony) 4,573,844 20.5% (4,094,329) -18.4% 479,515 89.5% Trust of Carmela 2,497,884 11.2% (2,236,010) -10.0% 261,874 89.5% Options Outstanding (Control Group) 1,185,000 5.3% (1,185,000) -5.3% - 100.0% Options Outstanding 659,589 3.0% (659,589) -3.0% - 100.0% FINANCIAL SPONSOR - 3,571,429 16.0% 3,571,429 - PUBLIC SHAREHOLDERS 13,374,926 60.0% (12,019,270) -53.9% 1,355,656 89.9% ----------- -------- ------------ ------ --------- ------- Shares outstanding 22,291,243 100.0% (16,622,770) -74.6% 5,668,473 74.6%
PROJECT WONTON APPENDIX I ILLUSTRATIVE LEVERAGED BUYOUT MODEL BEAR STEARNS PROJECT WONTON C-CORP. MODEL $756 MILLION LEVERAGED BUYOUT TRANSACTION ASSUMPTIONS Purchase of approx. $756 million in equity (20,447 milllion shares plus options); Purchasing Accounting Tender Price of $36.00 per share.
SOURCES AND USES OF FUNDS PRO FORMA CAPITALIZATION ($ IN MILLIONS) ($ IN MILLIONS) PRO FORMA(2) ESTIMATED % OF TOTAL INTEREST 12/31/98 CAPITALIZATION RATE ------------ -------------- -------- SOURCES OF FUNDS - ------------------------------------ Excess Cash on Balance Sheet(1) $125.7 Cash & Cash Equivalents (incl. Marketable Securities) $5.3 -- 5.50%(3) Senior Bank Debt: Senior Bank Debt: Bank Credit Facility 75.0 Bank Credit Facility 75.0 11.5% 8.19% Senior Notes 350.0 Senior Discount Notes 85.0 Senior Notes 350.0 53.8% 10.75% -------- Total New Long Term Debt 510.0 Senior Discount Notes 85.0 13.1% 13.00% New Common Equity 140.0 -------- --------- TOTAL LONG-TERM DEBT 510.0 78.5% TOTAL SOURCES OF FUNDS $775.7 ======== Common Equity 140.0 21.5% -------- --------- TOTAL SHAREHOLDER'S EQUITY 140.0 21.5% -------- --------- TOTAL CAPITALIZATION $650.0 100.0% ======== ========= USES OF FUNDS GOODWILL $ 534.3 - ------------------------------------ --------------------------------------------------------------------------------- ACQUISITION PRICE - $36.00 PER SHARE Number of Shares Outstanding 20.447 ($ IN MILLIONS) Number of Shares to be Repurchased 20.447 100.0% Purchase Price per Share $36.00 Implied Equity Value: $756.3 -------- Implied Enterprise Value: (4) $625.3 Purchase Price of Equity $736.1 Purchase Price of Options 20.2 Goodwill: $534.3 Repayment of Existing Debt 0.0 Period (Years): 30 -------- Total Purchase Price $756.3 ---------- ------------ ----------- FYE FYE FYE 1997A 1998P 199P ----------- ------------ ----------- Financing Costs $14.7 Multiple of: Non-financing Costs 4.8 Revenues 1.82x 1.71x 1.54x -------- TOTAL USES OF FUNDS $775.7 EBITDA 7.70x 7.34x 6.62x ======== EBITA 10.91x 10.70x 9.42x ====================================================================================================================================
FOOTNOTES - ----------------------- (1) Includes $7.5 million of marketable securities. (2) Reflects leveraged buyout. Assumes transaction closes on 12/31/98. (3) Interest is earned on cash balance above $7 million. (4) Reflects estimated 12/31/98 balance sheet. PROJECT WONTON C-CORP. MODEL
OPERATING COMPANY COVERAGE RATIOS FISCAL YEAR ENDED DECEMBER 31, ACTUAL ------------------------------------------------ PF 1997 1998 1999 2000 2001 2002 -------- ----- ---- ---- ----- ----- EBITDA/TOTAL INTEREST EXPENSE 1.43x 1.50x 1.69x 1.95x 2.23x 2.49x EBITDAR/TOTAL INTEREST EXPENSE PLUS RENT EXPENSE 1.22x 1.25x 1.33x 1.42x 1.52x 1.60x EBITDAR-CAPEX/TOTAL INTEREST EXPENSE PLUS RENT EXPENSE 0.96 1.02 1.09 1.16 1.24 1.32 EBITDA-CAPEX/TOTAL INTEREST EXPENSE 0.93x 1.04x 1.18x 1.35x 1.58x 1.80x EBITDA-CAPEX/TOTAL INTEREST EXP.+REQ. AMORT. OF DEBT 0.93x 1.04x 1.18x 1.35x 1.58x 1.80x EBITDAR-CAPEX/TOTAL INTEREST EXP.+REQ. AMORT. OF DEBT +RENT 0.96 1.02 1.09 1.16 1.24 1.32 TOTAL DEBT +CAPITALIZED LEASES (1)/ EBITDAR 6.57x 6.40x 5.97x 5.46x 5.08x 4.83x TOTAL DEBT/EBITDA 6.28x 5.98x 5.28x 4.47x 3.90x 3.54x NET DEBT/EBITDA 6.22x 5.92x 5.21x 4.41x 3.63x 2.90x BANK DEBT/EBITDA 0.92x 0.88x 0.55x 0.18x 0.00x 0.00x - --------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS ($ in millions) FISCAL YEAR ENDED DECEMBER 31, ----------------------------------------------- ACTUAL ACTUAL PF 1996 PF 1997 1998 1999 2000 2001 2002 -------- ------- ---- ---- ---- ---- ---- REVENUES $325.7 $344.4 $365.7 $405.7 $460.4 $525.5 $600.0 EBITDA 79.5 81.2 85.2 94.4 106.9 121.7 138.6 RENT EXPENSE 49.6 54.5 57.9 62.6 68.5 75.1 82.2 BANK INTEREST EXPENSE 6.1 6.1 6.1 5.2 2.9 0.8 0.0 TOTAL INTEREST EXPENSE 56.6 56.6 56.6 55.7 54.9 54.5 55.7 INTEREST INCOME 0.0 0.0 3.3 0.0 0.0 0.7 3.0 CAPITAL EXPENDITURES 25.9 28.6 26.1 28.4 32.7 35.6 38.4 CAPITALIZED LEASES (1) 346.9 381.3 405.5 438.4 479.8 526.0 575.2 TOTAL DEBT 510.0 510.0 510.0 498.5 478.3 474.0 490.7 - -----------------------------------------------------------------------------------------------------------
SUMMARY OF HYPOTHETICAL EQUITY RETURNS EXIT YEAR ---------------------------------- Assumed Exit Multiple of Trailing EBITDA 2000 2001 2002 ---- ---- ---- 6.0x 6.0% 23.8% 29.6% 6.5x 21.9% 32.2% 34.7% 7.0x 35.9% 39.7% 39.3% 7.5x 48.7% 46.4% 43.5% 8.0x 60.4% 52.6% 47.3% - ----------------------------------------------------------------------------------------------
Footnotes - ----------------- (1) Leases capitalized at 7.0x Rent Expense for the relevant period. PROJECT WONTON C-CORP. MODEL
PRO FORMA BALANCE SHEET ADJUSTMENTS - ----------------------------------- ($ in millions) ACTUAL ESTIMATED TRANSACTION PRO FORMA 12/31/97 12/31/98 ADJUSTMENTS 12/31/98 -------- --------- ----------- --------- ASSETS - ------ CURRENT ASSETS $127.3 $131.0 ($125.7) $5.3 Cash & Cash Equivalents (incl. Long-term Marketable Securities) Accounts Receivable 2.4 2.5 2.5 Inventory 3.0 3.1 3.1 Prepaid Expenses 1.8 1.9 1.9 Other Current Assets 0.0 0.0 0.0 -------- ------- -------- TOTAL CURRENT ASSETS 134.4 138.5 12.8 Gross Property, Plant & Equipment 287.0 313.1 313.1 Less Accumulated Depreciation 150.2 177.0 177.0 -------- ------- -------- NET PROPERTY, PLANT & EQUIPMENT 136.8 136.1 136.1 Goodwill 0.0 0.0 534.3 534.3 Deferred Financing Fees 0.0 0.0 14.7 14.7 Deferred Charges 1.6 1.6 1.6 Other Assets 5.8 5.8 5.8 TOTAL ASSETS $278.6 $282.1 $705.4 ======== ======= ======== LIABILITIES AND SHAREHOLDER'S EQUITY - ------------------------------------ Current Liabilities Accounts Payable $10.1 $10.7 $10.7 Accrued Liabilities 26.0 27.5 27.5 Dividends Payable 5.5 0.0 0.0 Other Current Liabilities 4.8 5.0 5.0 -------- ------- -------- TOTAL CURRENT LIABILITIES 46.4 43.2 43.2 LONG-TERM DEBT Senior Bank Debt: Bank Credit Facility 0.0 0.0 7.5 7.5 Senior Notes 0.0 0.0 350.0 350.0 Senior Discount Notes 0.0 0.0 85.0 85.0 -------- ------- -------- TOTAL LONG TERM DEBT 0.0 0.0 510.0 Deferred Taxes 11.8 11.8 11.8 Other Liabilities 0.0 0.0 0.0 Minority Interest 0.0 0.4 0.4 Stockholders' Equity Common Equity 220.4 226.7 (86.7) 140.0 -------- ------- -------- Total Stockholders' Equity 220.4 226.7 140.0 TOTAL LIABILITIES AND EQUITY $278.6 $282.1 $705.4 ======== ======= ========
PROJECT WONTON C-CORP. MODEL
PROJECTED CAPITALIZATION ($ in millions) FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------------------- PROJECTED ------------------------------------------------------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Cash & Cash Equivalents (incl. Marketable Securities) $5.3 $7.0 $7.0 $32.4 $89.1 ====== ======= ======== ======= ====== Senior Bank Debt: Bank Credit Facility 75.0 52.1 18.9 0.0 0.0 Senior Notes 350.0 350.0 350.0 350.0 350.0 Senior Discount Notes 85.0 96.4 109.3 124.0 140.7 ----- ------ ----- ----- ------ Total Long Term Debt 510.0 498.5 478.3 474.0 490.7 Stockholders' Equity Common Equity 140.0 128.5 123.4 126.2 138.5 ----- ----- ----- ----- ----- Total Stockholders' Equity 140.0 128.5 123.4 126.2 138.5 ----- ----- ----- ----- ----- TOTAL CAPITALIZATION $650.0 $627.0 $601.7 $600.3 $629.2 ====== ======= ======== ======= ====== Cash & Cash Equivalents(incl. Marketable Securities) 0.8% 1.1% 1.2% 5.4% 14.2% Long Term Debt: Senior Bank Debt: 11.5% 8.3% 3.1% 0.0% 0.0% Bank Credit Facility Senior Notes 5.38% 55.8% 58.2% 58.3% 55.6% Senior Discount Notes 13.1% 15.4% 18.2% 20.7% 22.4% ----- ----- ----- ----- ----- Total Long Term Debt 78.5% 79.5% 79.5% 79.0% 78.0% Stockholders' Equity Common Equity 21.5% 20.5% 20.5% 21.0% 22.0% ----- ----- ----- ----- ----- Total Stockholders' Equity 21.5% 20.5% 20.5% 21.0% 22.0% ----- ----- ----- ----- ----- TOTAL CAPITALIZATION 100.0% 100.0% 100.0% 100.0% 100.0% ====== ======= ======== ======= =======
PROJECT WONTON C-CORP. MODEL SBARRO INCOME STATEMENT ASSUMPTIONS
FISCAL YEAR ENDED DECEMBER 31, ---------------------------------------------------- ACTUAL FISCAL YEAR ENDED DECEMBER 31, PROJECTED --------------------------------------- ACTUAL ------------------------------------------- 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 --------- -------- -------- ------ ------- ----- ----- ----- ---- ----- ' Revenue Growth Rate -- 11.39% 7.49% 3.04% 5.74% 6.20% 10.92% 13.50% 14.13% 14.17% Gross Profit Growth Rate -- 11.33% 7.13% 3.34% 7.05% 6.35% 10.72% 13.17% 13.74% 13.77% EBITDA Growth Rate -- 14.09% -2.36% 11.49% 2.20% 4.94% 10.74% 13.27% 13.81% 13.90% EBITA Growth Rate -- 13.09% -7.17% 18.70% 1.30% 2.05% 13.55% 15.77% 16.58% 17.43% EBIT Growth Rate -- 13.09% -7.17% 18.70% na 2.97% 19.49% 21.55% 21.58% 21.75% Gross Margin(1) 78.61% 78.59% 78.27% 78.50% 79.43% 79.72% 79.72% 79.72% 79.72% 79.72% Payroll & Other Employee Benefit(1) 24.94% 24.54% 25.26% 24.51% 25.14% 25.40% 25.40% 25.40% 25.40% 25.40% Rent Expense(1) 15.07% 15.24% 15.82% 15.52% 16.18% 16.30% 16.30% 16.30% 16.30% 16.30% Occupancy and Other Expenses(1) 11.25% 11.20% 11.38% 11.27% 11.51% 11.60% 11.60% 11.60% 11.60% 11.60% General & Administrative 4.98% 4.61% 5.19% 4.68% 5.15% 5.30% 5.30% 5.30% 5.30% 5.30% --------- -------- -------- ------- ------- ------ -------- ------- ------- -------- Other Income (incl. startup costs) 0.47% 0.46% 0.43% 0.36% 0.48% 0.82% 0.68% 0.54% 0.43% 0.33% EBITDA Margin 24.24% 24.82% 22.55% 24.40% 23.58% 23.30% 23.26% 23.22% 23.15% 23.10% Depreciation & Amortization 7.05% 7.37% 7.48% 7.03% 6.95% 7.32% 6.90% 6.53% 6.10% 5.56% --------- -------- -------- ------- ------- ------ -------- ------- ------- -------- EBITA 17.19% 17.45% 15.07% 17.36% 16.64% 15.99% 16.36% 16.69% 17.05% 17.53% Amortization of Goodwill 0.00% 0.00% 0.00% 0.00% 5.17% 4.87% 4.39% 3.87% 3.39% 2.97% --------- -------- -------- ------- ------- ------ -------- ------- ------- -------- EBIT Margin 17.19% 17.45% 15.07% 17.36% 11.46% 11.11% 11.97% 12.82% 13.66% 14.57% WORKING CAPITAL ASSUMPTIONS FISCAL YEAR ENDED DECEMBER 31, ----------------------------------------------------- ACTUAL PROJECTED(2) ---------------- ACTUAL -------------------------------------------- 1995 1996 1997(2) 1998 1999 2000 2001 2002 ----- ------ ------- ------ ------ ------- ------- -------- Days Receivable of Sales 3.0 2.1 2.5 2.5 2.5 2.5 2.5 2.5 Days Inventory of Cost of Goods Sold 15.0 15.1 15.6 15.6 15.6 15.6 15.6 15.6 Days Prepaid Expenses of Sales 2.0 1.6 1.9 1.9 1.9 1.9 1.9 1.9 Other Current Assets as a % of Sales 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Days Payable of Cost of Good Sold 40.1 38.1 53.2 53.2 53.2 53.2 53.2 53.2 Days Accrued Liabilities of Cost of Goods Sold 146.3 120.5 137.2 137.2 137.2 137.2 137.2 137.2 Days Other Current Liabilities of Cost of Goods Sold 46.5 53.0 25.2 25.2 25.2 25.2 25.2 25.2
Footnotes - ------------------------------- (1) As a percentage of Company-owned restaurant revenue. (2) Years 1998-2002 assume same working capital ratios as pro forma year end 1997. PROJECT WONTON C-CORP. MODEL
SBARRO REVENUE DERIVATION Fiscal Year Ended December 31, - ------------------------- ------------------------------------------------- ($ in millions) Actual Fiscal Year Ended December 31, Projected ------------------------------------ Actual ------------------------------------------ 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- NUMBER OF COMPANY-OWNED RESTAURANTS Beginning Balance 456 515 567 571 597 623 651 691 736 781 Restuarants Opened 59 53 44 29 30 35 40 45 45 45 Acquired (Sold) Franchisees 7 2 0 1 4 1 0 0 0 0 Restaurants Closed 7 3 40 4 8 8 0 0 0 0 ------ -------- -------- ------ ------ --------- --------- -------- ------ ------- Ending Balance 515 567 571 597 623 651 691 736 781 826 NUMBER OF FRANCHISED RESTAURANTS Beginning Balance 131 134 162 200 219 239 274 324 384 444 Restuarants Opened 24 38 40 36 47 40 50 60 60 60 Purchased (Sold) Company (7) (2) 0 (1) (4) (1) 0 0 0 0 Restaurants Closed 14 8 2 16 23 4 0 0 0 0 ------ -------- -------- -------- ------- --------- --------- -------- --------------- Ending Balance 134 162 200 219 239 274 324 384 444 504 TOTAL NUMBER OF RESTAURANTS Beginning Balance 587 649 729 771 816 862 925 1,015 1,120 1,225 Restuarants Opened 83 91 84 65 77 75 90 105 105 105 Restaurants Closed 21 11 42 20 31 12 0 0 0 0 ------ -------- -------- -------- ------- --------- --------- -------- --------------- Ending Balance 649 729 771 816 862 925 1,015 1,120 1,225 1,330 ====== ======= ======= ======= ======= ======== ======== ======= =============== SAME STORE SALES GROWTH - -0.04% 2.12% 0.31% 0.93% 0.50% 1.50% 1.50% 1.50% 1.50% AVERAGE SALES PER RESTAURANT $0.534 $0.534 $0.545 $0.547 $0.552 $0.555 $0.563 $0.571 $0.580 $0.589 TOTAL SYSTEMWIDE SALES Company-Owned $259.2 $288.8 $310.2 $319.3 $336.6 $353.3 $377.7 $407.7 $439.9 $473.0 Franchised 70.8 79.0 98.7 118.3 123.1 142.3 168.3 202.3 240.1 279.0 ------ ------- ------- ------- ------ ------- ------- ------- ------ ------- Total Systemwide Sales $330.0 $367.8 $408.8 $437.6 $459.7 $495.5 $546.0 $609.9 $680.0 $752.0 TOTAL REVENUE FROM FRANCHISEES FRANCHISE ROYALTY FEE (NEW STORES 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% FRANCHISE ROYALTY FEE (EXISTING) 5.5% 4.9% 4.9% 4.5% 5.7% 4.8% 4.8% 4.8% 4.8% 4.8% INITIAL FRANCHISE FEE PER STORE $0.035 $0.035 $0.035 $0.033 $0.032 $0.020 $0.020 $0.020 $0.020 $0.020 Total Initial Franchise Fee $0.8 $1.3 $1.4 $1.2 $1.5 $0.8 $1.0 $1.2 $1.2 $1.2 Total Franchise Royalty Fee 3.9 3.9 4.9 5.2 6.2 6.3 7.3 8.6 10.2 11.7 ------ ------- ------ -------- ------- ------- ------ ------- ------ ------- Total Revenue from Franchisees $4.8 $5.2 $5.9 $6.4 $7.8 $7.1 $8.3 $9.8 $11.4 $12.9 TOTAL REVENUE $259.2 $288.8 $310.2 $319.3 $336.6 $353.3 $377.7 $407.7 $439.9 $473.0 Company-Owned 4.8 5.2 5.9 6.4 7.8 7.1 8.3 9.8 11.4 12.9 ------ -------- -------- ------- -------- --------- -------- ------ ------ ------- Franchised $264.0 $294.0 $316.1 $325.7 $344.4 $360.4 $386.0 $417.5 $451.2 $485.9 ====== ======== ======= ======= ======== ========= ======== ====== ====== ======= Total Revenue TOTAL CAPITAL EXPENDITURES CapEx per New Restaurant $0.54 $0.60 $0.40 $0.40 $0.41 $0.41 $0.41 $0.41 $0.41 $0.41 Restaurant CapExp $31.9 $32.1 $17.5 $11.5 $12.3 $14.4 $16.5 $18.5 $18.5 $18.5 Other Capital Expenditures $0.0 $0.0 $0.0 $7.0 $6.2 $4.0 $0.0 $0.0 $0.0 $0.0
PROJECT WONTON C-CORP. MODEL
SBARRO INCOME STATEMENT - ----------------------- ($ in millions) FISCAL YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- PROJECTED --------------------------------------------------------------------- 1998 1999 2000 2001 2002 --------- ----------- ---------- ---------- --------- REVENUES $360.4 $386.0 $417.5 $451.2 $485.9 Cost of Goods Sold 71.6 76.6 82.7 89.2 95.9 --------- ---------- ---------- ---------- -------- GROSS PROFIT 288.7 309.4 334.8 362.0 390.0 GROSS PROFIT MARGIN 80.1% 80.2% 80.2% 80.2% 80.3% Payroll & Other Employee Benefits 89.7 95.9 103.5 111.7 120.1 Rent Expense 57.6 61.6 66.4 71.7 77.1 Other Operating Expenses 41.0 43.8 47.3 51.0 54.9 General & Administrative 19.1 20.5 22.1 23.9 25.8 --------- ---------- ---------- ---------- -------- Other Income 3.5 3.5 3.5 3.5 3.5 EBITDA 84.8 91.1 98.9 107.2 115.6 EBITDA MARGIN 23.5% 23.6% 23.7% 23.7% 23.8% Depreciation 26.6 27.4 28.8 29.9 30.1 --------- ---------- ---------- ---------- -------- EBITA 58.2 63.7 70.2 77.3 85.6 EBITA MARGIN 16.2% 16.5% 16.8% 17.1% 17.6%
PROJECT WONTON C-CORP. MODEL
UMBERTO INCOME STATEMENT - ------------------------ ($ in millions) FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------ PROJECTED ------------------------------------------------------------------------------------ 1998 1999 2000 2001 2002 -------------- ------------- ------------- ------------- ----------- REVENUES $5.4 $19.7 $42.9 $74.3 $114.1 Cost of Goods Sold 1.5 5.1 11.2 19.3 29.7 --- --- ---- ---- ---- GROSS PROFIT 3.9 14.5 31.8 55.0 84.4 Gross Profit Margin 72.4% 74.0% 74.0% 74.0% 74.0% Payroll & Other Employee Benefits 1.8 6.6 14.5 25.3 39.0 Rent Expense 0.3 1.1 2.1 3.4 5.1 Other Operating Expenses 0.5 1.8 3.9 6.5 9.8 General & Administrative 0.3 1.0 2.3 3.9 6.0 --- --- --- --- --- Other Income (incl. startup costs) (0.5) (0.8) (1.0) (1.3) (1.5) EBITDA 0.4 3.3 8.0 14.5 23.0 EBITDA Margin 7.5% 16.7% 18.7% 19.6% 20.1% Depreciation 0.1 0.6 1.3 2.2 3.3 --- --- --- --- --- EBITA 0.3 2.7 6.7 12.3 19.7 EBITA Margin 4.8% 13.8% 15.7% 16.6% 17.2% Income Taxes @ 38% 0.1 1.0 2.5 4.7 7.5 Net Income 0.2 1.7 4.2 7.7 12.2 Net Income Margin 2.9% 8.5% 9.7% 10.3% 10.7%
PROJECT WONTON C-CORP. MODEL
CONSOLIDATED INCOME STATEMENT ($ in millions) FISCAL YEAR ENDED DECEMBER 31, ------------------------------------ ACTUAL FISCAL YEAR ENDED DECEMBER 31, FULL YEAR PRO FORMA PROJECTED --------------------------------------- -------------------- ------------------------------------ 1993 1994 1995 1996 1997A 1998E 1999 2000 2001 2002 ------ ------ ------ ------ ----- ------- ------ ------ ------ ----- REVENUES $264.0 $294.0 $316.1 $325.7 344.4 $365.7 $405.7 $460.4 $525.5 600.0 Cost of Goods Sold 55.4 61.9 67.4 68.7 69.2 73.1 81.7 93.8 108.5 125.6 ------ ------ ------- ------ ----- ------ ------- ------- ------- ----- GROSS PROFIT 208.5 232.2 248.7 257.0 275.1 292.6 324.0 366.6 417.0 474.4 Payroll & Other Employee Benefits 64.7 70.8 78.3 78.3 84.6 91.5 102.5 118.1 137.1 159.2 Rent Expense 39.1 44.0 49.1 49.6 54.5 57.9 62.6 68.5 75.1 82.2 Other Operating Expenses 29.2 32.4 35.3 36.0 38.7 41.5 45.7 51.1 57.5 64.6 General & Administrative 12.9 13.3 16.1 14.9 17.7 19.4 21.5 24.4 27.9 31.8 ------ ------ ------- ------ ----- ------ ------- ------- ------- ----- Other Income (incl. startup costs) 1.2 1.4 1.4 1.2 1.7 3.0 2.8 2.5 2.3 2.0 EBITDA 64.0 73.0 71.3 79.5 81.2 85.2 94.4 106.9 121.7 138.6 Depreciation 18.6 21.7 23.6 22.9 23.9 26.8 28.0 30.1 32.1 33.4 ------ ------ ------- ------ ----- ------ ------- ------- ------- ----- EBITA 45.4 51.3 47.6 56.6 57.3 58.5 66.4 76.9 89.6 105.2 Amortization of Goodwill 0.0 0.0 0.0 0.0 17.8 17.8 17.8 17.8 17.8 17.8 ------ ------ ------- ------ ----- ------ ------- ------- ------- ----- EBIT 45.4 51.3 47.6 56.6 39.5 40.6 48.6 59.0 71.8 87.4 Interest Income (5.50%) 0.0 3.3 0.0 0.0 0.7 3.0 Interest Expense: Bank Credit Facility 6.1 6.1 5.2 2.9 0.8 0.0 Senior Notes 37.6 37.6 37.6 37.6 37.6 37.6 Senior Discount Notes(1) 11.4 11.4 11.4 12.9 14.7 16.6 Amortization of Deferred Debt Exp. 1.5 1.5 1.5 1.5 1.5 1.5 --- --- --- --- --- --- Total Interest Expense 56.6 56.6 55.7 54.9 54.5 55.7 ------- ------- -------- -------- -------- ------ PRETAX INCOME (17.2) (12.7) (7.1) 4.1 17.9 34.6 Income Taxes @ 38% 0.2 1.9 4.1 8.3 13.6 19.9 Minority Interest @ 20% 0.0 0.0 0.3 0.8 1.5 2.4 Net Income to Common ($17.4) ($14.7) ($11.5) ($5.1) $2.8 $12.3 ======= ======== ======== ======== ========= ======
Footnotes - ------------------------------------- (1) Assumes an interest rate of 13.0% compounded semi-annually. PROJECT WONTON C-CORP. MODEL
CONSOLIDATED CASHFLOW STATEMENT - ------------------------------- ($ in millions) PROJECTED FISCAL YEAR ENDED DECEMBER 31, ----------------------------------------------- 1999 2000 2001 2002 --------- --------- --------- -------- CASH FLOW FROM OPERATIONS Net Income to Common ($11.5) ($5.1) $2.8 $12.3 Depreciation 28.0 30.1 32.1 33.4 Amortization of Goodwill and Deferred Financing Fees 19.3 19.3 19.3 19.3 Deferred Income Taxes 0.0 0.0 0.0 0.0 Non-cash Interest 11.4 12.9 14.7 16.6 Minority Interest 0.3 0.8 1.5 2.4 Change in Net Working Capital 4.2 6.0 7.3 8.5 --------- --------- --------- -------- TOTAL CASH FLOW FROM OPERATIONS $51.7 $64.0 $77.6 $92.4 CASH FLOW FROM INVESTING ACTIVITIES Capital Expenditures (New Sbarro Stores) ($16.5) ($18.5) ($18.5) ($18.5) Capital Expenditures (Maintenance of Existing Sbarro Stores) (5.2) (5.2) (5.8) (6.4) Capital Expenditures (Umberto) (6.8) (9.0) (11.3) (13.5) Contribution to Capital by Minority Interest 1.4 1.8 2.3 2.7 Cost to Complete Building 0.0 0.0 0.0 0.0 --------- --------- --------- -------- TOTAL CASH FLOW FROM INVESTING ACTIVITIES ($27.1) ($30.9) ($33.3) ($35.7) CASH FLOW FROM FINANCING ACTIVITIES Borrowings/(Repayment) of Senior Discount Notes 0.0 0.0 0.0 0.0 --------- --------- --------- -------- TOTAL CASH FLOW FROM FINANCING ACTIVITIES $0.0 $0.0 $0.0 $0.0 --------- --------- --------- -------- INCREASE IN CASH BEFORE SWEEP $24.7 $33.1 $44.3 $56.7 ========= ========= ========= ======== Borrowings/(Repayment) of Senior Bank Debt: Bank Credit Facility (22.9) (33.1) (18.9) 0.0 Borrowings/(Repayment) of Senior Notes 0.0 0.0 0.0 0.0 NET INCREASE IN CASH (INCLUDES MARKETABLE SECURITIES) $1.7 $0.0 $25.4 $56.7 Beginning Balance of Cash 5.3 7.0 7.0 32.4 --------- --------- --------- -------- Ending Balance of Cash $7.0 $7.0 $32.4 $89.1 ========= ========= ========= ======== Minimum Cash Balance 7.0 7.0 7.0 7.0
PROJECT WONTON C-CORP. MODEL
CONSOLIDATED BALANCE SHEET FISCAL YEAR ENDED DECEMBER 31, - -------------------------- ----------------------------------- ($ in millions) PROJECTED ACTUAL ESTIMATED ----------------------------------- 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- ASSETS - ------ CURRENT ASSETS Cash & Cash Equivalents (incl. Marketable Securities) $127.3 $5.3 $7.0 $7.0 $32.4 $89.1 Accounts Receivable 2.4 2.5 2.8 3.2 3.6 4.1 Inventory 3.0 3.1 3.5 4.0 4.6 5.4 Prepaid Expenses 1.8 1.9 2.1 2.4 2.7 3.1 Other Current Assets 0.0 0.0 0.0 0.0 0.0 0.0 Total Current Assets 134.4 12.8 15.4 16.6 43.3 101.7 ------- ------ ------ ------ ------ ------ GROSS PROPERTY, PLANT & EQUIPMENT 287.0 313.1 341.5 374.2 409.8 448.2 Less Accumulated Depreciation 150.2 177.0 205.0 235.0 267.1 300.5 ------- ------ ------ ------ ------ ------ NET PROPERTY, PLANT & EQUIPMENT 136.8 136.1 136.5 139.2 142.7 147.7 GOODWILL 0.0 534.3 516.5 498.7 480.9 463.1 DEFERRED FINANCING FEES 0.0 14.7 13.2 11.7 10.3 8.8 DEFERRED CHARGES 1.6 1.6 1.6 1.6 1.6 1.6 OTHER ASSETS 5.8 5.8 5.8 5.8 5.8 5.8 ------- ------ ------ ------ ------ ------ TOTAL ASSETS $278.6 $705.4 $689.1 $673.6 $684.6 $728.8 ======= ====== ====== ====== ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Accounts Payable $10.1 $10.7 $11.9 $13.7 $15.8 $18.3 Accrued Liabilities 26.0 27.5 30.7 35.3 40.8 47.2 Dividends Payable 5.5 0.0 0.0 0.0 0.0 0.0 Other Current Liabilities 4.8 5.0 5.6 6.5 7.5 8.7 Total Current Liabilities 46.4 43.2 48.3 55.4 64.1 74.2 ------- ------ ------ ------ ------ ------ LONG-TERM DEBT Senior Bank Debt: Bank Credit Facility 0.0 75.0 52.1 18.9 0.0 0.0 Bank Credit Facility Senior Notes 0.0 350.0 350.0 350.0 350.0 350.0 Senior Discount Notes 0.0 85.0 96.4 109.3 124.0 140.7 ------- ------ ------ ------ ------ ------ Total Long Term Debt 0.0 510.0 498.5 478.3 474.0 490.7 DEFERRED TAXES 11.8 11.8 11.8 11.8 11.8 11.8 OTHER LIABILITIES 0.0 0.0 0.0 0.0 0.0 0.0 MINORITY INTEREST 0.0 0.4 2.1 4.7 8.5 13.6 STOCKHOLDERS' EQUITY Common Equity 220.4 140.0 128.5 123.4 126.2 138.5 ------- ------ ------ ------ ------ ------ Total Stockholders' Equity 220.4 140.0 128.5 123.4 126.2 138.5 TOTAL LIABILITIES AND EQUITY $278.6 $705.4 $689.1 $673.6 $684.6 $728.8 ======= ====== ====== ====== ====== ======
PROJECT WONTON C-CORP. MODEL
EQUITY OWNERSHIP - ---------------- OWNERSHIP SUMMARY - ----------------- PURCHASE (REPURCHASE) AFTER PURCHASE OF OWNERSHIP PRE-TRANSACTION OF COMMON SHARES COMMON EQUITY REDUCTION ----------------------- ------------------------ ---------------- ---------- INSIDERS: Mario 1,532,130 6.9% (1,532,130) -6.9% - 100.0% Joseph 1,807,914 8.1% (1,807,914) -8.1% - 100.0% Anthony 1,233,800 5.5% (1,233,800) -5.5% - 100.0% --------- ---------- ----------- ---------- --- Control Group (Mario, Joseph and Anthony) 4,573,844 20.5% (4,573,844) -20.5% - 100.0% Trust of Carmela 2,497,884 11.2% (2,497,884) -11.2% - 100.0% Options outstanding (Control Group) 1,185,000 5.3% (1,185,000) -5.3% - 100.0% Options outstanding 659,589 3.0% (659,589) -3.0% - 100.0% PUBLIC SHAREHOLDERS 13,374,926 60.0% (13,374,926) -60.0% - 100.0% ---------- ---------- ------------ --------- --- Shares outstanding 22,291,243 100.0% (22,291,243) -100.0% - 100.0%
PROJECT WONTON C-CORP. MODEL EQUITY INTERNAL RATE OF RETURN - ------------------------------
2 YEAR EXIT CASE 2000 EBITDA $ 106.9 EBITDA Exit Multiple 6.0x 6.5x 7.0x 7.5x 8.0x TEV 641.4 694.9 748.3 801.8 855.2 Plus: Cash 7.0 7.0 7.0 7.0 7.0 Less: Debt 478.3 478.3 478.3 478.3 478.3 Less: Minority Interest 4.7 4.7 4.7 4.7 4.7 ------------- ------------- -------------------------- ------------- Total Equity 165.4 218.9 272.3 325.8 379.2 95% of Equity 157.2 207.9 258.7 309.5 360.3 12/31/98 12/31/99 12/31/00 IRR ---- 6.0x (140.0) 0.0 157.2 6.0% 6.5x (140.0) 0.0 207.9 21.9% 7.0x (140.0) 0.0 258.7 35.9% 7.5x (140.0) 0.0 309.5 48.7% 8.0x (140.0) 0.0 360.3 60.4% - ----------------- ------------------------ ------------ ------------- ---------------------------------------------------------- 3 YEAR EXIT CASE 2001 EBITDA $ 121.7 EBITDA Exit Multiple 6.0x 6.5x 7.0x 7.5x 8.0x TEV 730.0 790.8 851.6 912.5 973.3 Plus: Cash 32.4 32.4 32.4 32.4 32.4 Less: Debt 474.0 474.0 474.0 474.00 474.0 Less: Minority Interest 8.5 8.5 8.5 8.5 8.5 ------------- ------------------------------------------ -------------- Total Equity 279.9 340.7 401.5 462.3 523.2 95% of Equity 265.9 323.7 381.4 439.2 497.0 12/31/98 12/31/99 12/31/00 12/31/01 IRR ---- 6.0x (140.0) 0.0 0.0 265.9 23.8% 6.5x (140.0) 0.0 0.0 323.7 32.2% 7.0x (140.0) 0.0 0.0 381.4 39.7% 7.5x (140.0) 0.0 0.0 439.2 46.4% 8.0x (140.0) 0.0 0.0 497.0 52.6% - ----------------- ------------------------ ------------ ------------- ------------- --------------------------------------------- 4 YEAR EXIT CASE 2002 EBITDA $ 138.6 EBITDA Exit Multiple 6.0x 6.5x 7.0x 7.5x 8.0x TEV 831.4 900.7 970.0 1039.3 1108.6 Plus: Cash 89.1 89.1 89.1 89.1 89.1 Less: Debt 490.7 490.7 490.7 490.7 490.7 Less: Minority Interest 13.6 13.6 13.6 13.6 13.6 ----------- -------- -------- -------- -------- Total Equity 416.2 485.5 554.8 624.1 693.4 95% of Equity 395.4 461.3 527.1 592.9 658.7 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 IRR ---- 6.0x (140.0) 0.0 0.0 0.0 395.4 29.6% 6.5x (140.0) 0.0 0.0 0.0 461.3 34.7% 7.0x (140.0) 0.0 0.0 0.0 527.1 39.3% 7.5x (140.0) 0.0 0.0 0.0 592.9 43.5% 8.0x (140.0) 0.0 0.0 0.0 658.7 47.3% - ------------------------------------------------------------------------------------------------------------------------------------
SENIOR DISCOUNT NOTES INTERNAL RATE OF RETURN
2 YEAR EXIT CASE 2000 Senior Discount $ 109.3 Notes EBITDA Exit Multiple 6.0x 6.5x 7.0x 7.5x 8.0x 5% of Equity 8.3 10.9 13.6 16.3 19.0 Notes plus Equity 117.6 120.3 123.0 125.6 128.3 12/31/98 12/31/99 12/31/00 IRR ---- 6.0x (85.0) 0.0 117.6 17.6% 6.5x (85.0) 0.0 120.3 19.0% 7.0x (85.0) 0.0 123.0 20.3% 7.5x (85.0) 0.0 125.6 21.6% 8.0x (85.0) 0.0 128.3 22.9% - ------------------------------------------------------------------------------------------------------------------------------------ 3 YEAR EXIT CASE 2001 Senior Discount $ 124.0 Notes EBITDA Exit Multiple 6.0x 6.5x 7.0x 7.5x 8.0x 5% of Equity 14.0 17.0 20.1 23.1 26.2 Notes plus Equity 138.0 141.1 144.1 147.1 150.2 12/31/98 12/31/99 12/31/00 12/31/01 IRR ---- 6.0x (85.0) 0.0 0.0 138.0 17.5% 6.5x (85.0) 0.0 0.0 141.1 18.4% 7.0x (85.0) 0.0 0.0 144.1 19.2% 7.5x (85.0) 0.0 0.0 147.1 20.1% 8.0x (85.0) 0.0 0.0 150.2 20.9% - ------------------------------------------------------------------------------------------------------------------------------------ 4 YEAR EXIT CASE 2002 Senior Discount $ 140.7 Notes EBITDA Exit Multiple 6.0x 6.5x 7.0x 7.5x 8.0x 5% of Equity 20.8 24.3 27.7 31.2 34.7 Notes plus Equity 161.5 165.0 168.4 171.9 175.3 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 IRR ---- 6.0x (85.0) 0.0 0.0 0.0 161.5 17.4% 6.5x (85.0) 0.0 0.0 0.0 165.0 18.0% 7.0x (85.0) 0.0 0.0 0.0 168.4 18.6% 7.5x (85.0) 0.0 0.0 0.0 171.9 19.2% 8.0x (85.0) 0.0 0.0 0.0 175.3 19.8% - ------------------------------------------------------------------------------------------------------------------------------------
PROJECT WONTON APPENDIX J ILLUSTRATIVE MERGER MODEL BEAR STEARNS PROJECT WONTON C-CORP. MODEL
SUMMARY PRO FORMA MERGER ANALYSIS: CKE CKE ACQUIRES WONTON FOR $36.00 PER SHARE, 100% CASH, PURCHASE ACCOUNTING (in millions except per share data) SOURCES USES WONTON VALUATION - -------------------------- -------------------------------- ------------------------------------------------------------- PRICE PER SHARE $36.00 Wonton Cash(a) $131.0 Purchase of Wonton Equity $756.3 Val. of Outst. Shares (20.4 mil.) + Options (1.8 mil.) 802.5 New Debt @ 8.00% $642.9 Transaction Costs $17.7 Less: Option Proceeds 46.2 ------------------------------------------------------------- New Common Equity $0.0 EQUITY PURCHASE PRICE $756.3 - ------------------------- -------------------------------- TOTAL SOURCES $773.9 TOTAL USES $773.9 Plus: Total Debt $0.0 Less: Cash (131.0) ------------------------------------------------------------- ENTERPRISE VALUE $625.3 - ------------------------- ---------------------------------- ---------------------------------------------------------------
PRO FORMA PROJECTED INCOME STATEMENT PRO FORMA BALANCE SHEET - ---------------------------------------------------------------- ------------------------------------------------------------------- 1999 1999 ------------------- ------------------- COMBINED CKE(B) WONTON(C) ADJ.(D) COMBINED CKE(G) WONTON(H) ADJ. BALANCE SHEET --- ------ ---- -------- --- ------ ---- ------------ REVENUE $2,170.9 $405.7 $2,576.6 ASSETS Synergies Assumed 5.0 5.0 Cash(a) 51.7 131.0 (131.0) 51.7 -------- ------ --------- EBITDA 294.5 94.4 5.0 393.9 Accounts Receivable 23.2 2.5 25.7 Depreciation & Amortization 80.8 28.0 13.4 122.1 Inventory 23.1 3.1 26.2 -------- ------ --------- EBIT 213.7 66.4 (8.4) 271.7 Prepaid Expenses 11.0 1.9 12.9 Net Interest Expense 39.1 (7.2) 59.9 91.8 Other Current Assets 3.2 0.0 3.2 -------- ------ --------- ------- ----- ------- Pre-Tax Income 175.2 73.6 (68.3) 179.9 TOTAL CURRENT ASSETS 112.1 138.5 119.6 Income Taxes(f) 68.3 28.7 (21.4) 75.6 Net PP&E 1,026.6 136.1 1,162.7 Minority Income 0.0 0.3 0.3 Goodwill 200.4 0.0 534.5 734.9 -------- ------ --------- NET INCOME $106.9 $44.6 ($46.9) $104.6 Deferred Charges 0.0 1.6 1.6
CKE(B) WONTON(C) COMBINED - ------------------------ --------- -------- ------- -------- EPS $2.16 $2.12 $2.11 Deferred Financing Fees(j) 0.0 0.0 12.9 12.9 % ACCRETION (2.12%) Other Assets 108.5 5.8 114.3 ------- ------ --------- SHARES OUTSTANDING(I) 49.49 21.01 0.00 49.49 TOTAL ASSETS $1,447.7 $282.1 $2,146.1 - ------------------------ --------- -------- ------- ------- ======= ====== ========= Operating Statistics LIABILITIES - ------------------------ --------- -------- ------- ------- Accounts Payable 83.5 10.7 94.2 EBITDA MARGIN 13.56% 23.27% 15.29% Accrued Expenses 0.0 27.6 27.6 Deferred Income Taxes 5.7 0.0 5.7 EBIT MARGIN 9.84% 16.37% 10.55% Other Current Liabilities 111.5 5.1 116.6 ------ ------ --------- NET INCOME MARGIN 4.92% 10.99% 4.06% TOTAL CURRENT LIABILITIES 200.7 43.3 244.0 - ------------------------ --------- -------- ------- ------- Long Term Debt 628.4 0.0 642.9 1,271.3 Other Liabilities 98.6 11.8 110.4 ------ ------ --------- Credit Statistics TOTAL LIABILITIES 927.6 55.1 1,625.6 - ------------------------ --------- -------- ------- ------- SHAREHOLDERS EQUITY EBITDA/INTEREST EXPENSE 7.53x NM 4.29x Minority Interst 0.0 0.4 0.4 Preferred Stock 0.0 0.0 0.0 DEBT/EBITDA 2.13x NM 3.23x Common Equity 520.1 226.6 (226.6) 520.1 - ------------------------ --------- -------- ------- ------- ------ ------ --------- TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $1,447.7 $282.1 $2,146.1
FOOTNOTES (a) Includes $7.5m of marketable securities. (b) Source: First Call estimates and Merrill Lynch research dated 3/19/98. Fiscal year end 1/00. (c) Source: Wonton management estimates. Fiscal year end 12/99. (d) Adjustments for new debt interest, new shares issued (stock transactions), and new goodwill (under purchase accounting only). Assumes non tax- deductible amortization of new goodwill over 40 years. Also, assumes a forgone interest on cash used of 5.5% (e) CKE D&A based on historical percentage of revenues. (f) Assumes a tax rate of 39.0%. (g) Actual as of 5/18/98. (h) Estimated balance sheet as of 9/98. (i) Based on current fully diluted shares outstanding. (j) Based on 2.0% of new debt. Summary Pro Forma Merger Analysis: CKE
($ in millions except per share data) CKE Acquires Wonton for $36.00 per share, all stock, pooling-of-interest - ------------------------------------------------------------------------------------------------------------------------------------ Sources Uses Wonton Valuation Wonton Cash (a) $4.8 Purchase of Wonton Equity $756.3 Price per Share $36.00 New Debt @ $8.00% $0.0 Transaction Costs $4.8 Val. of Outst. Shares New Common Equity a2 $43.43 per share $756.3 (20.4 mil.) + Options (1.8 mil.) 802.5 Total Sources $761.1 Total Uses $761.1 Less: Option Proceeds 46.2 Equity Purchase Price $456.3 - -------------------------------------------- ---------------------------------- ----------------------------------------------- Plus: Total Debt $0.0 Less: Cash (131.0) Enterprise Value $625.3 Pro Forma Projected Income Statement Pro Forma Balance Sheet 1999 1999 CKE (b) Wonton (c) Adj(d) Combined Assets CKE (g) Wonton (h) Adj. Combined Balance Sheet ------- ---------- ------ -------- ------ --------- ---- ---------------------- Revenue $2,170.9 $405.7 $2,576.6 Cash (a) 51.7 131.0 (4.8) 177.9 Synergies Assumed 5.0 5.0 Accounts ----------------------- -------- Receivable 23.2 2.5 25.7 EBITDA 294.5 94.4 5.0 393.9 Inventory 23.1 3.1 26.2 Depreciation & Prepared Amortization 80.8 28.8 0.0 108.8 Expenes 11.0 1.9 12.9 ----------------------- -------- Other Current EBIT 213.7 66.4 5.0 285.1 Assets 3.2 0.0 3.2 Net Interest ---------------------- ---------------------- Expense 39.1 (7.2) 0.3 32.2 Total Current ----------------------- -------- Assets 112.1 138.5 245.8 Pre-tax Income 175.2 73.6 4.7 252.9 Net PP&E 1,026.6 136.1 1,162.7 Income Taxes (f) 68.3 28.7 1.8 98.9 Goodwill 200.4 0.0 0.0 200.4 Minority Income 0.0 0.3 0.3 Deferred ----------------------- -------- Charges 0.0 1.6 1.6 Net Income $106.9 $44.6 $2.9 $154.4 Deferred Financing Fees 0.0 0.0 0.0 0.0 CKE Wonton Combined Other Assets 108.5 5.8 114.3 - ------------------------------------------------------------------ ----------------------- ---------------------- EPS $2.16 $2.12 $2.31 Total Assets $1,447.7 $282.1 $1,724.9 % Accretion 6.84% ---------------------- ---------------------- Shares outstanding(j)49.49 21.01 17.41 66.92 Liabilities - ------------------------------------------------------------------ Accounts Operating Statistics Payable 83.5 10.7 94.2 EBITDA Margin 13.56% 23.27% 15.29% Accrued EBIT Margin 9.84% 16.37% 11.06% Expenses 0.0 27.6 27.6 Net Income Margin 4.925 10.99% 5.99% Deferred - ------------------------------------------------------------------ Income Taxes 5.7 0.0 5.7 Credit Statistics Other Current EBITDA/Interest Liabilities 111.5 5.1 116.6 Expense 7.53x NM 12.25x ---------------------- ---------------------- Debt/EBITDA 2.13x NM 1.60x Total Current - ------------------------------------------------------------------ Liabiliites 200.7 43.3 244.0 Long Term Debt 628.4 0.0 0.0 628.4 Other Liabilities 98.6 11.8 110.4 ---------------------- ---------------------- 927.6 55.1 982.7 Total Liabilities Shareholders Equity Minority Interest 0.0 0.4 0.4 Preferred Stock 0.0 0.0 0.0 Common Equity 520.1 226.6 (4.8) 741.9 ---------------------- ---------------------- Total Liabilities and Shareholders Equity $1,447.7 $282.1 $1,725.0 ====================== ====================== Footnotes - ------------------- (a) Includes $7.5m of marketable securities (b) Source: First Call estimates and Merrill Lynch reseach dated 3/19/98. Fiscal year end 1/00. (c) Source: Wonton managements estimates. Fiscal year end 12/99,. (d) Adjustments for new shares issued (stock transactons). Also, assumes a forgone intest on cash used of 5.5%. (e) CKE D&A based on historical pecentage of revenues (f) Assumes a tax rate of 39.0% (g) Actual as of 5/18/98. (h) Estimated balance sheet as of 9/98. (i) Based on current fully diluted shares outstanding. (j) Based on 2.0% of new debt.
EX-99.1(B)(7) 8 LIST OF POTENTIAL PURCHASERS TARGET LIST OF POTENTIAL BUYERS AFC ENTERPRISES CKE RESTAURANTS, INC. TRIARC COMPANIES ALLIED DOMECQ BRINKER DARDEN FOODMAKER MCDONALDS'S PAPA JOHN'S TRICON GLOBAL RESTAURANTS INC. WENDY'S INTERNATIONAL INC. APOLLO MANAGEMENT, L.P. BOSTON VENTURES MANAGEMENT, INC. BRUCKMANN, ROSSER, SHERRILL & CO., INC. CASTLE HARLAN, INC. CITICORP VENTURE CAPITAL, LTD. MCCOWN DE LEEUW & CO. SAUNDERS KARP & MEGRUE, L.P. AMERICAN SECURITIES CAPITAL PARTNERS THE BLACKSTONE GROUP L.P. BAIN CAPITAL CENTRE PARTNERS EVERCORE PARTNERS INC. FREEMAN, SPOGLI AND CO. HARVEST PARTNERS THE HAMPSTEAD GROUP, INC. J.H. WHITNEY & CO. J.W. CHILDS ASSOCIATES, L.P. JACOBSON PARTNERS KELSO & COMPANY, L.P. KKR LEONARD GREEN MADISON DEARBORN ODYSSEY PARTNERS QUAD C STONINGTON PARTNERS, INC. THOMAS H. LEE COMPANY HOST MARRIOTT SERVICES EX-99.1(B)(8) 9 AUGUST 1998 CONFIDENTIAL INFORMATION MEMORANDUM Book # ........... [GRAPHIC OMITTED] - -------------------------------------------------------------------------------- CONFIDENTIAL MEMORANDUM - -------------------------------------------------------------------------------- AUGUST 1998 [GRAPHIC OMITTED] CONFIDENTIAL EVALUATION MATERIAL Sbarro, Inc. ("Sbarro" or the "Company") is considering the sale of all or substantially all of the Company (the "Proposed Transaction"). This Confidential Memorandum (the "Memorandum") is being furnished, on a confidential basis, to a limited number of parties for the purpose of evaluating the Proposed Transaction. This Memorandum is based on information supplied by Sbarro and is being furnished through Bear, Stearns & Co. Inc. ("Bear Stearns"), as Sbarro's exclusive financial advisor, in connection with the Proposed Transaction. This Memorandum is being provided solely for use by prospective parties in connection with their consideration of the Proposed Transaction. Use of this Memorandum (and of all related and ancillary information subsequently provided) is governed by the terms of the Confidentiality Agreement which each recipient has previously executed and which strictly limits the use, circulation and copying of the information embodied herein. This Memorandum constitutes "Evaluation Material," as defined in such Confidentiality Agreement. Persons in possession of the Memorandum should familiarize themselves with such Confidentiality Agreement before reading, circulating or using any information contained in this Memorandum. This Memorandum may not be distributed, reproduced or used without the prior written consent of Sbarro for any purpose other than the evaluation of the Company and the Proposed Transaction by the person to whom this Memorandum has been delivered. This Memorandum has been prepared to assist interested parties in making their own evaluations of the Company and does not purport to be all-inclusive or to contain all of the information that a prospective investor may desire. Prospective investors are urged to conduct their own independent investigation and evaluation of the Company and the Proposed Transaction. Bear Stearns has not independently verified any of the information, including the projections, contained herein. Bear Stearns, Sbarro or any of their respective employees, affiliates or representatives do not make any representation or warranty, express or implied, as to the accuracy or completeness of any of the information contained herein or any other written or oral communications transmitted or made available to a prospective purchaser or for any omissions from this Memorandum or any other supplemental information, and Bear Stearns, Sbarro and their respective affiliates, employees and representatives expressly disclaim any and all liability based on or relating to the use of such information and communications by the prospective purchaser or any of its affiliates or representatives. Only those particular representations and warranties, if any, which may be made to the purchaser in one or more definitive written agreements, when and if executed, and subject to such limitations and restrictions as may be specified in such definitive written agreements, shall have any legal effect. This Memorandum presents information with respect to the Company as of the date hereof. Delivery of this Memorandum at any later time shall not, under any circumstances, create any implication that there has been no change in the information set forth herein or in the affairs of the Company since the date hereof. The information contained herein is subject to change, completion or amendment without notice. Neither Bear Stearns or Sbarro intends to update or otherwise revise this Memorandum following its distribution. The financial estimates and projections presented in this Memorandum represent the subjective views of the management of Sbarro and are current estimates of future performance based on assumptions which management believes are reasonable, but which may not prove to be correct. There can be no assurance that management's estimates and projections will be realized. ii Neither this Memorandum nor its delivery to any prospective purchaser shall constitute an offer to sell any asset or security or to enter into any other transaction or commercial agreement. Sbarro reserves the right to: (i) negotiate with one or more prospective purchasers at any time and to enter into a definitive agreement regarding the Proposed Transaction without prior notice to any recipient or to any other prospective purchaser; (ii) terminate, at any time, the process or terminate the further participation in such process by any party; (iii) modify, at any time, or for any reason, any procedure relating to such process; and (iv) amend or replace the Memorandum and reserve the right to take any action, whether or not in the ordinary course of business, which they deem necessary or prudent. Under no circumstances should the management or employees of Sbarro be contacted directly. All communications, inquiries and requests for information should be directed to one of the Bear Stearns representatives listed below. Certain statements contained in this Memorandum are forward-looking statements which are subject to a number of known and unknown risks and uncertainties that could cause the Company's actual results and performance to differ materially from those described or implied in the forward-looking statements. These risks and uncertainties, many of which are not within the Company's control, include, but are not limited to, general economic, weather and business conditions; the availability of suitable restaurant sites in appropriate regional shopping malls and other locations on reasonable rental terms; changes in consumer tastes; changes in population and traffic patterns; ability to continue to attract franchisees; the success of its present, and any future, joint ventures and other expansion opportunities; the availability of food (particularly cheese and tomatoes) and paper products at reasonable prices; no material increase occurring in the Federal minimum wage; and the Company's ability to attract competent restaurant and executive managerial personnel. BEAR, STEARNS & CO. INC. 245 Park Avenue New York, New York 10167 Telephone: (212) 272-2000 Facsimile: (212) 272-3092 - -------------------------------------------------------------------------------- RANDALL PAULSON JOHN KIMM Senior Managing Director Vice President (212) 272-6778 (212) 272-6813 iii - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- SECTION PAGE - ------- ---- I. EXECUTIVE SUMMARY Company Description.............................................1 Strategy........................................................2 Restaurant Industry.............................................4 Summary Financial Results.......................................4 II. INVESTMENT CONSIDERATIONS...........................................5 III. COMPANY OVERVIEW Company Description and History.................................7 Operations......................................................7 New Restaurant Concepts........................................12 Properties.....................................................12 Employees......................................................13 Ownership......................................................15 IV. BUSINESS STRATEGY Operational Strategy...........................................16 Growth Strategy - Core Business................................17 Growth Strategy - New Restaurant Concepts......................19 V. INDUSTRY AND COMPETITIVE OVERVIEW Restaurant Industry............................................21 Quick Service Restaurant Industry..............................21 Pizza Restaurant Segment.......................................22 VI. FINANCIAL OVERVIEW Historical Financial Performance...............................24 Projected Financial Performance................................29 VII. APPENDIX Form 10-K Dated December 28, 1997 Form 10-Q Dated April 19, 1998 Proxy Statement Dated July 17, 1998 iv SBARRO, INC. - -------------------------------------------------------------------------------- I. EXECUTIVE SUMMARY - -------------------------------------------------------------------------------- COMPANY DESCRIPTION Sbarro, Inc. ("Sbarro" or the "Company") was founded by the Sbarro family in 1959 and today is the leading operator and franchiser of quick service restaurants serving a wide variety of Italian specialties. Under the "Sbarro" and "Sbarro The Italian Eatery" names, the Company developed one of the first quick service concepts that extended beyond offering one primary specialty item (e.g., pizza or hamburgers) and also developed an exhibition kitchen where customers could watch the preparation of many of the Company's fresh food products. The Company's menu includes pizza, pasta and other hot and cold Italian entrees, salads, sandwiches, cheesecake and other desserts and beverages. As of July 12, 1998, the Sbarro system included 873 Company-operated and franchised restaurants with operations in 21 countries. For the last twelve months ended April 19, 1998, the Company generated systemwide sales of $476.6 million. Revenues and EBITDA for the same period were $351.5 million and $80.7 million, respectively. As of April 19, 1998, the Company's balance sheet contained no debt and cash and marketable securities of approximately $116.7 million. Since its inception, the Company has focused almost exclusively on high customer traffic venues to take advantage of the customer density and impulse nature of the customer purchase that such locations offer. The Company initially located its restaurant sites in Manhattan and then, with the rapid expansion of enclosed shopping malls in the 1970's, extended its concept into these facilities due to their similar high traffic characteristics. Over the past several years, the Company has expanded the Sbarro concept to new high traffic venues including toll roads and airports and has recently begun targeting sports arenas, hospitals, convention centers, university campuses and casinos. As of July 12, 1998, the Company owned and operated 626 restaurants and franchised 247 restaurants located in 48 states throughout the United States and 20 countries worldwide. The Company has demonstrated its ability to identify, develop and operate profitable restaurants and has increased its total restaurant base (including franchised operations) from 587 locations at the end of 1992 to 873 at July 12, 1998, representing a compounded annual growth rate of approximately 7.5%. Over the past decade, the Company's growth in shopping malls has been primarily derived from opportunities that have arisen from the major renovation of an existing shopping mall or the re-merchandising of the mall's food operations and, to a lesser extent, the development of new shopping malls. Historically, the Company's strategy has been to own and operate its restaurants whenever possible in order to closely control all aspects of restaurant operations and maximize profitability. To expand its growth opportunities through franchising while mitigating the associated risks, the Company has developed a rigorous qualification and training program that defines strict operating standards for franchisees and also severely restricts the size of territories granted to franchisees. The Company believes that franchised units meet the quality and customer service benchmarks of Company-owned units, and expects a more significant portion of future new unit growth will come from franchised locations as the Company continues to expand the Sbarro concept into new venues, both domestically and internationally. The Company's Common Stock is listed on the New York Stock Exchange under the symbol "SBA." As of July 17, 1998, the closing stock price was $26.31 and 20,528,309 shares of its 1 common stock and 1,584,184 options (at a weighted average exercise price of $25.88) were outstanding. STRATEGY BUSINESS STRATEGY Since its founding, the Company has sought to deliver high quality, affordably priced Italian food products to a broad customer base. Sbarro has concentrated its product development on creating a menu of healthy, popularly priced items which appeal to the tastes of its customers and also afford the Company high gross margins. It has continued to emphasize the freshness of its food through its exhibition kitchens and has also developed a restaurant operations model which specifies all aspects of restaurant management, including recipes, production processes, restaurant design, customer service and staff training. This model ensures consistency of product and service and provides the Company with consistent operating performance. The Sbarro concept is unlike typical quick service restaurants because of its diverse menu of Italian foods, nor does it compare to other Italian / pizza restaurants because of its fast, cafeteria style service. The Company has historically focused on high customer traffic venues such as shopping malls due to the dense base of captive customers who base their eating decision primarily on impulse and convenience and who are thus relatively less price sensitive than normal quick service restaurant customers. This provides the Company more flexibility in pricing and allows the Company to avoid the advertising and promotional spending that would be required to attract customers to standalone units. These factors, combined with tight cost controls, provide Sbarro with very high and stable operating margins relative to other restaurant companies. The Company has become the dominant Italian quick service restaurant concept in high customer traffic venues and its strong relationships with shopping center developers and operators give it preferential access to attractive locations. The Company has thus developed a strong, nationally recognized brand name. GROWTH STRATEGY The Company expects future growth to be driven by (i) further penetrating high customer traffic venues, (ii) increased franchising, (iii) expansion into traditional quick service restaurant venues and (iv) expansion of a recently developed Italian casual dining concept that is similar to the Sbarro business model. New High Customer Traffic Venues The Company began targeting toll roads and airport locations in the early 1990's due to the similar characteristics (e.g., customer density, impulse purchase) between these venues and the Company's significant base of shopping mall locations. Approximately 7% of the Company's existing restaurants are located in these venues and recently the Company has targeted other high customer traffic venues including sports arenas, hospitals, convention centers, universities and casinos. The Company believes these venues offer significant expansion potential as the operators of these facilities increasingly look to outsource their food service operations to companies with an established brand in order to simplify their own operations and maximize profitability. 2 Franchising The Company plans to increase the level of franchising with selected franchisees in both international and domestic markets. The Company has developed a comprehensive qualification and training process for franchisees which prescribes strict operating standards that it believes will provide Sbarro with the level of control necessary to meet the Company's customer service and quality requirements. The Company's large base of foreign business partners which currently numbers 21 will facilitate accelerated international expansion. Traditional Quick Service Restaurant Venues The Company believes there is significant opportunity to expand the Sbarro concept into traditional quick service restaurant markets. The SBARRO name is well recognized with consumers and its strong brand identity is able to attract significant customer traffic. The likely method of penetrating this market in the near term is through co-branding with other restaurant concepts in standalone locations. By combining two concepts, lease and overhead expenses are shared while customer traffic is enhanced, significantly improving the overall economics of the particular unit. The Company has commenced this co-branding strategy in 12 Minnesota locations, working with a franchisee to combine Sbarro and Arby's restaurants. Based on the successful results to date, the Company plans to expand the program to other locations. New Concepts The Company has also sought to develop new restaurant concepts that possess similarities to the successful Sbarro business model. One such concept is UMBERTO'S OF NEW HYDE PARK, a casual dining Italian concept that is an extension of the Sbarro model and is being successfully applied to upscale strip locations. Umberto's has been developed with a 20% joint venture partner and offers a more diverse menu of Italian specialties at a moderate price point and high quality level with both dine-in and counter/takeout service. The Company currently operates five Umberto's units in Long Island, New York that have generated attractive economics that are comparable to its core Sbarro units. RESTAURANT INDUSTRY(1) The restaurant industry is one of the largest sectors of the economy, with estimated industry sales of approximately $336 billion in 1998, accounting for more than 4% of the nation's gross domestic product. Between 1990 and 1997, restaurant industry sales grew an average of 4.5% annually. The National Restaurant Association projects continued industry growth, as the increasing percentage of dual-earner households and higher disposable incomes combined with decreasing leisure time, continue to increase the percentage of meals eaten away from the home. - ------------- (1) Source: National Restaurant Association, unless otherwise noted. 3 QUICK SERVICE RESTAURANT INDUSTRY The quick service sector of the restaurant industry accounts for over 31% of total restaurant revenues. Between 1993 and 1997, the number of quick service units grew at a 5.3% annual rate, while revenues grew at 5.4%. The National Restaurant Association predicts that sales at quick service restaurants will reach approximately $106 billion in 1998. PIZZA RESTAURANT SEGMENT(2) Approximately 50% of Sbarro's revenues are derived from pizza, and thus many of the Company's most direct competitors operate within the pizza restaurant segment. At the end of 1997, there were over 30,000 pizza restaurants in operation, generating nearly $16 billion in revenues. Pizza restaurant segment revenues have recently declined, with revenue growth among smaller pizza chains being more than offset by revenue declines among the largest pizza chains. According to Euromonitor Market Direction, a market research firm, this has been partially driven by changing consumer preferences toward better quality pizza and a wider variety of product offerings. SUMMARY FINANCIAL RESULTS The following charts present a summary of the historical revenues and EBITDA of the Company from 1994 to the latest quarter ended April 19, 1998: REVENUE EBITDA ($ IN MILLIONS) ($ IN MILLIONS) [GRAPHIC OMITTED] [GRAPHIC OMITTED] - ------------------ (1) Source: Euromonitor Market Direction. (2) Excludes a $16.4 million pre-tax provision for the closing of certain underperforming units. (3) Excludes a $3.3 million pre-tax provision for the closing of certain joint venture units. 4 SBARRO, INC. - -------------------------------------------------------------------------------- II. INVESTMENT CONSIDERATIONS - -------------------------------------------------------------------------------- LEADING QUICK SERVICE OPERATOR IN HIGH CUSTOMER TRAFFIC VENUES The Company, through its "Sbarro" and "Sbarro The Italian Eatery" brands, is the dominant brand of Italian quick service restaurant operating in shopping malls, airports, toll roads and other high customer traffic locations. The Company has developed a proven and unique business model for operating in these high customer traffic locations and faces limited competition from other quick service Italian restaurants in these venues. The Company has developed close relationships with major mall developers and operators, as well as national food service companies that franchise restaurants in other high traffic locations, which gives it preferential access to attractive locations. STRONG, NATIONALLY RECOGNIZED BRAND NAME The breadth of Sbarro's operations and the visibility of its units across many high customer traffic locations have enabled the Company to forge strong brand name recognition with consumers. The Sbarro concept is unusual among quick service restaurants, with its varied menu of quality, popularly priced Italian food served in a cafeteria style format. Its exhibition kitchens, distinctive logo and clean and bright locations have become recognized symbols of the Company. CONSISTENT RECORD OF GROWTH AND PROFITABILITY Sbarro has a track record of consistent operating performance and a high level of profitability that is unusual in the restaurant industry. Its strict operating and cost controls and proven business model have resulted in a consistent revenue base and a low cost structure. Revenues and EBITDA have increased from $236.2 million and $53.7 million, respectively, in fiscal 1992 to $351.5 million and $80.7 million, respectively, for the last twelve months ended April 19, 1998. This increase represents compound annual growth rates of 7.9% and 8.1% for revenue and EBITDA, respectively. Its EBITDA margins of 23.0% are among the highest and most consistent in the restaurant industry. PROVEN BUSINESS MODEL In its almost 40 years of operations, Sbarro management has developed and refined a business model that is unique for high traffic customer venues. The Company has extensive experience in identifying attractive restaurant locations and developing these sites. The Company has developed a forecasting approach that enables it to project, with relative precision, the capital and pre-opening costs associated with opening new Sbarro restaurants, as well as to determine whether a prospective location has a high likelihood of success. Since the cost of food, paper products, payroll and other employee benefits is generally within a small range as a percentage of restaurant sales from location to location, the Company's model focuses on projected restaurant revenues and the fixed and semi-variable costs expected to be incurred. The Company's 5 forecasting approach also projects a prospective restaurant's revenues based on such factors as the area's demographics and the retail environment surrounding the location. Based on an initial investment of approximately $350,000 for a typical food court unit and an annual store level contribution of approximately $100,000 per year, the Company typically realizes a first year cash on cash return of approximately 29% and a ten year IRR of approximately 26% after periodic capital improvement expenditures. For a typical in-line/downtown restaurant with an average investment of approximately $450,000 and an annual store level contribution of approximately $112,000, the Company realizes a first year cash on cash return of approximately 25% and a ten year IRR of 21% after periodic capital improvement expenditures. SIGNIFICANT GROWTH OPPORTUNITIES The Company plans to pursue a growth strategy that combines a full schedule of new unit openings in its traditional high customer traffic venues with selected openings in traditional quick service restaurant locations (some of which will be through co-branding), and development of a new casual Italian restaurant concept under the name Umberto's. The Company expects to increase the number of Company-owned and franchised units by 63 in 1998 and 90 in 1999. In addition to continued expansion in shopping malls, the Company plans to focus on other dense customer venues such as toll roads, airports, sports arenas, hospitals, convention centers, universities and casinos. With the strength of the Sbarro brand name, the Company believes that it can also expand into traditional quick service restaurant venues. Co-branding with other restaurant concepts will be pursued and the Company's franchising activity will be expanded. Internationally, the Company will continue to work with major foreign franchisees to expand into new markets as well as increase penetration in existing markets. The Company has recently developed a new casual Italian restaurant concept called Umberto's of New Hyde Park that offers a broader menu than the core Sbarro restaurants at a slightly higher quality level and price point. The Umberto's restaurants are designed for a mixture of sit-down dining, self service and take-out service. The Company believes a moderately priced, comfortable Italian restaurant is very appealing to its suburban, middle-class target customer base. Early results for existing units have generated attractive economics, and the Company believes that Umberto's has significant growth potential. LIMITED COMPETITION FROM OTHER NATIONAL ITALIAN CHAINS Sbarro is the only national Italian chain focused on high customer traffic locations. The other national chains, including Pizza Hut and Little Caesars, have attempted to replicate their stand-alone concept in malls and other locations but have experienced relatively poor performance and, as a result, have reduced the scope of their operations in these venues. As a result, the Company has a significant competitive advantage in opening new units in malls and other dense customer traffic locations. 6 SBARRO, INC. - -------------------------------------------------------------------------------- III. COMPANY OVERVIEW - -------------------------------------------------------------------------------- COMPANY DESCRIPTION AND HISTORY The Company was founded by the Sbarro family in 1959 at which time the family owned and operated several gourmet Italian delicatessens and provided catering for family and business events. Under the "Sbarro" and "Sbarro The Italian Eatery" names, the Company developed one of the first quick service concepts that extended beyond offering one primary specialty item (e.g., pizza or hamburgers) and also developed an exhibition kitchen where customers could watch the preparation of many of the Company's fresh food products. The Company's menu includes pizza, pasta and other hot and cold Italian entrees, salads, sandwiches, beverages and desserts, including the Company's "signature" cheesecake prepared in its original kitchen in Brooklyn, New York. With the development of enclosed shopping centers in the 1970s, the Company opened its first mall restaurant. Today, Sbarro is the leading brand of Italian quick service restaurants operating in high customer traffic venues. As of July 12, 1998, there were a total of 873 Sbarro restaurants in operation, 626 Company-owned and 247 franchised. These restaurants are located in 48 states throughout the United States and the District of Columbia, as well as Aruba, Australia, the Bahamas, Belgium, Canada, Chile, Cyprus, France, Guam, Israel, Japan, Korea, Kuwait, Lebanon, New Zealand, the Philippines, Puerto Rico, Russia, Saudi Arabia and the United Kingdom. In addition, since 1995, the Company has created and operated other restaurant concepts for the purpose of developing growth opportunities in addition to its core Sbarro format. The Company was incorporated in New York in 1977. Its Common Stock is listed on the New York Stock Exchange under the symbol "SBA." As of July 17, 1998, the closing stock price was $26.31 and 20,528,309 shares of its common stock and 1,584,184 options (at a weighted average exercise price of $25.88) were outstanding. OPERATIONS RESTAURANT EXPANSION AND FINANCIAL REVIEW As illustrated below, the Company has posted a consistent record of growth, as evidenced by both unit count and systemwide sales. Since its inception, Sbarro management has focused on profitable growth. The number of Sbarro units has grown at a compounded annual rate of 7.5% since 1992. Systemwide sales (which includes sales from franchised units) have grown at a compounded annual rate of approximately 8.6% during this same period, driven by the increase in new units and the consistent performance of existing units. Sbarro's revenues and EBITDA have increased at a compound annual rate of 7.9% and 8.1%, respectively, over this same period. For the last twelve months ended April 19, 1998, the Company's EBITDA margin was 23.0%. 7 UNIT COUNT AND SYSTEMWIDE SALES REVENUE EBITDA ($ IN MILLIONS) ($ IN MILLIONS) [GRAPHIC OMITTED] [GRAPHIC OMITTED] - ------------------------ (1) Excludes a $16.4 million provision for the closing of certain underperforming units. (2) Excludes a $3.3 million provision for the closing of certain joint venture units. 8 Company-owned units comprised approximately 72% of total systemwide sales for the last twelve months ended April 19, 1998 with the remaining 28% of systemwide sales related to franchised units. Revenues from Company-owned units comprised 97.8% of total operating revenues for the last twelve months ended April 19, 1998. The remaining 2.2% of Sbarro's operating revenues were derived from fees and royalties from franchisees. The standard franchise agreement includes an initial franchise fee of $35,000 and ongoing royalty fees which are typically 5% - - 7% of gross revenues. The following charts represent systemwide sales and total revenues for the last twelve months ended April 19, 1998: SYSTEMWIDE SALES COMPOSITION COMPANY REVENUE COMPOSITION(1) [GRAPHIC OMITTED] [GRAPHIC OMITTED] [GRAPHIC OMITTED] CONCEPT AND MENU Sbarro restaurants offer quick, efficient, cafeteria and buffet style service designed to minimize customer waiting time and facilitate table turnover. The decor of a Sbarro restaurant incorporates booth and table seating (for "in-line" restaurants), with a contemporary design using consistent signage and color schemes shared across virtually all units. As of July 12, 1998, there were 258 "in-line" Sbarro restaurants and 608 "food court" Sbarro restaurants. In addition, franchisees operated seven freestanding Sbarro restaurants. "In-line" restaurants, which are self-contained, usually occupy approximately 1,500-3,000 square feet, contain the space and furniture to seat approximately 60-120 people and employ 10-40 persons, including part-time personnel. "Food court" restaurants are primarily located in areas of shopping malls and airports designated exclusively for restaurant use and share a common dining area provided by the facility. These restaurants generally occupy approximately 500-1,000 square feet and contain only kitchen and service areas. They frequently have a more limited menu than an "in-line" restaurant and employ 6-30 persons, including part-time personnel. Sbarro restaurants are generally open seven days a week serving lunch, dinner and, in a limited number of locations, breakfast, with hours conforming to those of the major department stores or - ------------------ (1) Revenues exclude interest income. 9 other large retailers in the mall or trade area. Typically, mall restaurants are open to serve customers 10 to 12 hours a day, except on Sunday, when mall hours may be more limited. For Company-owned restaurants open a full year, average sales in 1997 were $693,000 for "in-line" restaurants and $493,000 for "food court" restaurants. Sbarro restaurants feature a menu of popular Italian food, including pizza with a variety of toppings, a selection of pasta dishes and other hot and cold Italian entrees, salads, sandwiches, cheesecake and other desserts. In addition to soft drinks, some of the larger restaurants serve beer and wine, although alcoholic beverage sales are not emphasized. All food products are prepared fresh daily in each restaurant according to special recipes developed by the Sbarro family. Emphasis is placed on serving generous portions of quality Italian-style food at value prices. Entree selections, excluding pizza, generally range in price from $2.99 to $5.29. The Company believes that pizza, which is sold predominately by the slice, accounts for approximately one-half of Sbarro restaurant sales. The Company's "signature" cheesecakes are prepared in its original kitchen located in Brooklyn, New York. Substantially all of the food ingredients and related restaurant supplies used by the restaurants are purchased from major manufacturers and suppliers, who ship these items to a national independent food distributor who warehouses and ships to the Sbarro restaurants as needed. Breads, pastries, produce, fresh dairy and certain meat products are purchased locally for each restaurant. The Company requires that the manufacturers and suppliers adhere to established product specifications for all food products sold to its restaurants. The Company believes that there are other companies who would be able to service the Company's distribution needs and that satisfactory alternative sources of supply are generally available for all items regularly used in Sbarro restaurants. RESTAURANT MANAGEMENT Each Sbarro restaurant is managed by one General Manager and one or more Co-Managers or Assistant Managers. Managers are required to participate in Company training sessions in restaurant management and operations prior to the assumption of their duties. In addition, each restaurant Manager is required to comply with an extensive operations manual containing procedures for assuring uniformity of operations and consistent product quality. The Company has a Restaurant Management Bonus Program that provides the management teams of Company-owned restaurants with the opportunity to receive a percentage of restaurant sales as a bonus based on certain performance-related criteria. The Company also employs approximately 75 Area Directors, each of whom is typically responsible for the operations of 7 - 15 Company-owned restaurants in a given area. Before each new restaurant opening, the Company assigns an Area Director to coordinate opening procedures. Each Area Director reports to one of the nine Regional Directors who recruit and supervise the managerial staff of all Company-owned restaurants and report to one of the five Regional Vice Presidents. The Regional Vice Presidents coordinate the activities of the Regional Directors assigned to their areas of responsibility and report to one of two Corporate Vice Presidents. The Corporate Vice Presidents have total operating and financial responsibility for their geographic areas. 10 REAL ESTATE Sbarro restaurants are very attractive mall tenants due to the Company's leading position within high customer traffic venues and the favorable economics that real estate owners realize as a result of the Company's high sales per square foot. Sbarro has developed and maintains very strong relationships with the leading real estate developers and operators. Members of the Company's executive management maintain these relationships and are responsible for the key aspects of Sbarro's real estate activity including the identification of sites for new units and the negotiation of lease terms. FRANCHISE DEVELOPMENT While the Company continues to emphasize expansion through Company-owned units, it plans to grow franchise operations through the development of new franchisees and by existing franchisees capable of multi-unit operations. The Company relies principally upon its reputation and the strength of its existing restaurants to attract new franchisees. As of July 12, 1998, the Company had 247 franchised Sbarro restaurants operated by 79 franchisees in 31 states as well as franchisees operating international locations in the following countries: Aruba, Australia, the Bahamas, Belgium, Canada, Chile, Cyprus, France, Guam, Israel, Japan, Korea, Kuwait, Lebanon, New Zealand, the Philippines, Puerto Rico, Russia, Saudi Arabia and the United Kingdom. The Company is presently considering additional franchise opportunities in other countries. In certain instances, franchise locations have been established through territorial agreements under which the Company granted, for specified time periods, exclusive rights to enter into franchise agreements for restaurant units in certain geographic areas, primarily in foreign countries, or for specified non-mall locations (such as for certain toll roads or airports) in the United States or foreign countries. The Company's basic franchise agreement generally requires payment of an initial license fee of $35,000 and requires continuing payments of royalty fees of 5% - 7% of gross revenues. Franchise agreements entered into prior to 1988 generally have an initial term of 15 years with the franchisee having a renewal option, provided that the agreement has not been previously terminated by either party for specified reasons. Since 1988, the Company has required the franchise agreements to be coterminous with the underlying lease, but generally not less than ten or more than twenty years. Since 1990, the Company has granted a renewal option in the Franchise Agreement subject to certain conditions, including a remodel or image enhancement requirement. Franchise agreements granted under territorial agreements contain negotiated terms and conditions other than those contained in the Company's basic franchise agreement. The agreements also provide the Company with the right to terminate a franchisee for a variety of reasons, including insolvency or bankruptcy, failure to operate its restaurant according to standards, understatement of gross receipts, failure to pay fees, or material misrepresentation on an application for a franchise. SEASONALITY The Company's business is subject to seasonal fluctuations, the effects of weather and economic conditions. Earnings have been highest in its fourth fiscal quarter due primarily to increased 11 customer traffic during the holiday shopping season. The fourth fiscal quarter typically accounts for approximately 40% of annual net income. The length of the holiday shopping period between Thanksgiving and Christmas and the number of weeks in the fourth quarter also impacts the fourth quarter earnings relationship from year to year. NEW RESTAURANT CONCEPTS During 1995, the Company began developing three new restaurant concepts. The first is a casual dining concept under the name Umberto's of New Hyde Park, featuring pizza and other Italian-style foods. The Company has an 80% interest in this restaurant business. Umberto's currently operates five restaurants on Long Island, New York, with three additional units planned for 1998 openings and five food court units in regional shopping malls in Chicago, Las Vegas, White Plains and Long Island, New York. The Company is also developing with joint venture partners a family-style steakhouse concept and an upscale, table-service Italian restaurant, and is analyzing the market potential of a new concept that would offer healthy, South-of-the-Border cuisine. PROPERTIES All Sbarro restaurants are operated in leased premises. As of December 28, 1997, the Company leased 641 restaurants, of which 34 were subleased to franchisees under terms which cover all obligations of the Company under the lease. The remaining franchisees directly lease their restaurant space. Most of the Company's restaurant leases provide for the payment of base rents plus real estate taxes, utilities, insurance, common area charges and certain other expenses, as well as contingent rents generally ranging from 8% to 10% of net restaurant sales in excess of stipulated amounts. Leases to which the Company was a party at December 28, 1997 have initial terms expiring as follows: Years Initial Lease Number of Company- Number of Franchised Terms Expire Owned Restaurants Restaurants ------------ ----------------- ----------- 1998 26 4 1999 - 2003 336 25 2004 - 2008 239 5 2009 - 2012 6 0 Since May 1986, the Company's headquarters have been located in a two-story 20,000 square foot office building located in Commack, New York, which is leased for a period of fifteen years at a current annual base rent of $337,000. The Company pays real estate taxes, utilities, insurance and certain other expenses for the facility. In March 1994, the Company purchased a 100,000 square foot office building in Melville, New York, for $5,350,000 and recently completed the renovation of the building at an estimated additional cost of approximately $15 million. The Company intends to occupy approximately 25% of the building in late-1998 as its corporate headquarters and lease the remainder of the building. The Company has entered into leases with unaffiliated third parties to occupy approximately 50% of the total space in the facility. 12 EMPLOYEES WORKFORCE DESCRIPTION As of December 28, 1997, the Company (exclusive of joint ventures to which the Company is a party) employed approximately 7,500 persons, of whom approximately 2,700 were full-time field and restaurant personnel, 4,600 were part-time restaurant personnel and 200 were headquarters office personnel. None of the Company's employees are covered by collective bargaining agreements. The Company believes its employee relations are satisfactory. MANAGEMENT BIOGRAPHIES MARIO SBARRO, 56, has been an officer, a director and a principal shareholder of the Company since its organization in 1977, serving as Chairman of the Board of Directors and Chief Executive Officer for more than the past five years. Mr. Sbarro re-assumed the position of President of the Company in May 1996 (a position he held for more than five years prior to December 1993). Mr. Sbarro is Chairman of the Executive Committee of the Board. ANTHONY SBARRO, 52, has been an officer, a director and a principal shareholder of the Company since its organization in 1977, serving as Vice Chairman of the Board of Directors since May 1996 and as President and Chief Operating Officer from December 1993 through May 1996. For more than five years prior to December 1993, Mr. Sbarro was an Executive Vice President of the Company. He has also served as Treasurer of the Company for more than the past five years. Mr. Sbarro is a member of the Executive Committee of the Board. JOSEPH SBARRO, 58, has been an officer, a director and a principal shareholder of the Company since its organization in 1977, serving as Senior Executive Vice President since December 1993. For more than five years prior thereto, Mr. Sbarro was an Executive Vice President of the Company. He has also served as Secretary of the Company for more than the past five years. Mr. Sbarro is a member of the Executive Committee of the Board. 13 CARMELA SBARRO, 76, has been Vice President of the Company since March 1985. Mrs. Sbarro devotes a substantial portion of her time to recipe and product development. Mrs. Sbarro was a founder of the Company, together with her late husband, Gennaro Sbarro. The Board of Directors elected Mrs. Sbarro as a director of the Company in January 1998. Mrs. Sbarro previously served as a director of the Company from March 1985 until December 1988, when she was elected Director Emeritus of the Company. ANTHONY J. MISSANO, 39, was elected Corporate Vice President - Operations in August 1996, prior to which he served as Vice President - Operations (West) from February 1995, and as a Zone Vice President from June 1992 until February 1995. Mr. Missano served as a consultant to the Company from June 1992 until he became a full time employee at the end of fiscal 1993. From November 1988 until he joined the Company, Mr. Missano served as President of Anaton Corp., a franchisee of the Company. GENARRO A. SBARRO, 31, was elected Corporate Vice President - Franchising in August 1996, prior to which he served as Vice President - Franchising since February 1995. For more than five years prior thereto, Mr. Sbarro served in various operational positions for the Company. GENARRO J. SBARRO, 36, was elected Corporate Vice President - Operations in August 1996, prior to which he served as Vice President - Operations (East) since February 1995. For more than five years prior thereto, Mr. Sbarro served in various capacities for the Company. JOHN BERNABEO, 41, joined the Company in August 1992 and served in various capacities prior to his election as Vice President - Architecture and Engineering in May 1997. GEORGE W. HERZ II, 43, joined the Company in November 1995 and was elected Vice President and General Counsel in February 1996. Prior to joining the Company, Mr. Herz served as General Counsel (from 1993) and Corporate Counsel (from 1982 until 1992) of Minuteman Press International, Inc. (a franchiser of printing centers). ROBERT S. KOEBELE, 54, has served as Vice President - Finance and Chief Financial Officer of the Company for more than the past five years. Mr. Koebele has been a certified public accountant in New York for more than the past twenty-five years. CARMELA N. MERENDINO, 33, was elected Vice President - Administration in October 1988. Ms. Merendino joined the Company in March 1985 and performed a variety of corporate administrative functions for the Company prior to her election as Vice President - Administration. 14 OWNERSHIP The following table presents the ownership of the Company as of July 17, 1998: ----------------------------------------------------------------------- EXISTING FULLY DILUTED SHARE OWNERSHIP (AMOUNTS IN MILLIONS) SHARES % TOTAL ------------ -------- Sbarro Family 7.08 32.0% Public Shareholders 13.45 60.8 Mgmt./Director Options 1.58 7.2 Total 22.11 100.0% ------------------------------- ========== ======== 15 SBARRO, INC. - -------------------------------------------------------------------------------- IV. BUSINESS STRATEGY - -------------------------------------------------------------------------------- OPERATIONAL STRATEGY RESTAURANT OPERATIONS The Company's product development efforts have concentrated on creating food products which satisfy the demands of consumers in terms of flavor, price and nutrition, while at the same time establishing price points and a restaurant operations model which afford the Company high gross margins. The Company's operations model provides detailed specifications for the creation of all of its menu items, thereby ensuring that consistent ingredients and production processes are utilized across its restaurant system. The Company believes that the consistent design and layout of its restaurants, including similar design, signage and color schemes for virtually all restaurants, has helped it to establish a strong brand identity for customers. Operational processes, including food preparation, customer service and other major functions, are designed to optimize productivity and are implemented and updated across all restaurants. Training of restaurant managers and other staff is emphasized, ensuring that all units consistently operate using the "Sbarro formula." The Company has long-standing relationships with many food manufacturers and suppliers who provide the Company with food ingredients, paper products and other restaurant supplies to all Sbarro units. One national food distributor warehouses and delivers nearly all key raw ingredients to Sbarro units, minimizing the Company's distribution costs and also helping to ensure a high level of service and product consistency. Sbarro's business model is adaptable to a wide range of restaurant sizes (i.e., from 600 to 5000 square feet), while still maintaining high operating margins. HIGH CUSTOMER TRAFFIC VENUES A key success factor for Sbarro has been its traditional focus on high customer traffic venues such as shopping malls, which offer several advantages. The high customer density and the impulse nature of the customer purchase allow the Company to minimize advertising and promotional expenses that would otherwise be required to attract customers to its restaurants. These factors also result in customers being less price sensitive than customers that frequent "destination" restaurants. Sbarro is the dominant quick service Italian restaurant within high traffic customer venues, and has a long track record of satisfying demand in terms of quality and value. As food becomes an increasingly important part of the merchandising of high customer traffic venues, especially malls, Sbarro's reputation and track record make it a very desirable component to a venue's food offering. This, combined with the strong relationships the Company has with mall developers and operators, gives the Company preferential access to most new mall sites that become available either through new construction or refurbishment of existing shopping centers. OPERATING COSTS The Company has always maintained a strong focus on its cost structure and believes that this is a primary reason for the relatively high operating margins it generates. The Company believes it purchases its food ingredients and other restaurant supplies at very attractive prices due to its 16 large and consistent volumes. By using a single distributor for maintaining and shipping restaurant supplies for all its restaurants, the Company maintains close control over the distribution function and also obtains very favorable pricing for these distribution services. Sbarro also enters into joint marketing arrangements in certain situations, most notably with soft drink manufacturers, aimed at increasing sales and decreasing expenses. The Company has also tightly controlled its general and administrative expenses, which should continue to provide operating leverage as the Company expands its business. GROWTH STRATEGY - CORE BUSINESS HIGH CUSTOMER TRAFFIC VENUES Over the past decade, the Company's growth in new shopping mall locations has been primarily derived from opportunities that have arisen as a result of either the complete renovation of a shopping mall or the re-merchandising of its food operations, and to a lesser extent the development of new shopping malls. Because of the large number of existing malls and their normal cycle of refurbishment, there will continue to be opportunities for the Company to expand into new sites or relocate within existing units. As the food service operations of malls have become increasingly important drivers of customer traffic, mall developers and operators have increased their efforts to attract proven restaurant concepts. In the early 1990's, the Company began to focus on other high customer traffic venues outside of its traditional mall base. These locations, such as airport and toll roads, have similar characteristics to shopping malls and thus are very well suited to the Company's business model. More recently, the Company has pursued new high customer traffic venues including sports arenas, hospitals, convention centers, universities and casinos. Operators of these facilities are increasingly seeking to outsource their food service operations to recognized branded concepts in an effort to simplify their own operations and improve profitability. The Company believes there is substantial opportunity to expand in these types of locations. FRANCHISING The Company has traditionally sought to operate its own restaurants whenever possible, franchising its brand only in situations where it is either required or is a practical necessity, such as international locations and concessions (airports and toll roads). The Company operated in this manner because it believed it could best control product quality and customer experience by operating its own units, and it further avoided the problems associated with granting exclusive territories as the Company expanded its business. To mitigate the issues associated with franchising, the Company has designed a thorough qualification and training process for franchisees and has developed a franchise agreement that prescribes strict operating standards and limits exclusive territories. With these changes, the Company believes it can significantly increase its franchising activity while maintaining the high quality and service standards that its customers expect. The Company works with major franchisees worldwide to promote the Sbarro concept and to date, has franchised restaurants in Aruba, Australia, the Bahamas, Belgium, Canada, Chile, Cyprus, France, Guam, Israel, Japan, Korea, Kuwait, Lebanon, New Zealand, the Philippines, Puerto Rico, Russia, Saudi Arabia and the United Kingdom. The Company continues to expand 17 existing franchise relationships and forge new relationships with attractive foreign business partners. TRADITIONAL QUICK SERVICE RESTAURANT VENUES The Company believes there is significant opportunity to expand the Sbarro concept into traditional quick service restaurant markets. The SBARRO name is well recognized with consumers and its strong brand identity is able to attract significant customer traffic. The likely method of penetrating this market in the near term is through co-branding with other restaurant concepts in standalone locations. By combining two concepts, lease and overhead expenses are shared while customer traffic is enhanced, significantly improving the overall economics of the particular unit. The Company has commenced this co-branding strategy in 12 Minnesota locations, working with a franchisee to combine Sbarro and Arby's restaurants. Based on the successful results to date, the Company plans to expand the program to other locations. PROJECTED UNIT EXPANSION The following table shows the projected unit openings of both Company-owned and franchised Sbarro restaurants through 2002: ------------------------------------------------------------------------------- PROJECTED SBARRO RESTAURANT OPENINGS FISCAL YEAR ----------------------------------------------------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- COMPANY-OWNED Beginning Units 623 651 691 736 781 Openings (net) 28 40 45 45 45 ---- ---- ---- ---- ---- Ending Units 651 691 736 781 826 ==== ==== ==== ==== ==== FRANCHISED Beginning Units 239 274 324 384 444 Openings (net) 35 50 60 60 60 ---- ---- ---- ---- ---- Ending Units 274 324 384 444 504 ==== ==== ==== ==== ==== TOTAL Beginning Units 862 925 1,015 1,120 1,225 Openings (net) 63 90 105 105 105 ---- ---- ---- ---- ---- Ending Units 925 1,015 1,120 1,225 1,330 ==== ==== ==== ==== ==== 18 GROWTH STRATEGY - NEW RESTAURANT CONCEPTS UMBERTO'S OF NEW HYDE PARK The Company has also sought to develop new restaurant concepts that possess similarities to the successful Sbarro business model. One such concept is UMBERTO'S OF NEW HYDE PARK, a casual dining Italian concept that is an extension of the Sbarro model and is being successfully applied to upscale strip locations. Umberto's has been developed with a 20% joint venture partner and offers a more diverse menu of Italian specialties at a moderate price point and high quality level with both dine-in and counter/takeout service. Currently, there are five Umberto's units in operation in Long Island, New York. The four existing Umberto's restaurants with at least several months of operational history are expected to achieve average 1998 revenues and EBITDA of $1.3 million and $288,000, respectively, which the Company believes it can improve as it continues to refine its business model. Based on its current business model, the Company projects that a typical Umberto's unit would generate $1.2 million in annual revenues and $308,000 in annual EBITDA before the allocation of corporate overhead expenses (resulting in an EBITDA margin of 25.7%). The Company believes that the main competitors to Umberto's are small, individually owned Italian restaurants, and that its target suburban, middle class customer base does not have a wide selection of restaurants to choose from that offer a similar menu of high quality, reasonably priced Italian dishes in comfortable surroundings. The Company believes the high percentage of counter service is also an indication of the potential for a quality, ready-to-eat, at-home Italian meal for consumers. The following table shows the projected revenues and profitability of the Company's business model for new Umberto's units as well as for the existing units with several months of operational history:
- -------------------------------------------------------------------------------- PROJECTED 1998 PROFIT AND LOSS STATEMENTS(1) UMBERTO'S UNITS (DOLLARS IN THOUSANDS) BUSINESS MODEL UNIT 1 UNIT 2 UNIT 3 UNIT 4 -------- ------ ------ ------ ------ Opening Date NA 4/96 12/97 3/98 4/98 Revenues $1,200 $1,222 $1,274 $1,764 $936 EBITDA (before Startup Costs) $308 $311 $273 $384 $185 Operating Profit (before Startup Costs) $268 $270 $252 $355 $162 Startup Costs $50 $0 $80 $138 $105 ---- ---- ---- ---- ---- Operating Profit (after Startup Costs) $218 $270 $172 $217 $57 ==== ==== ==== ==== ==== Margins (before Startup Costs) EBITDA 25.7% 25.5% 21.4% 21.8% 19.8% Operating 22.3% 22.1% 19.8% 20.1% 17.3%
- ----------------- (1) Excludes allocation of general and administrative expenses. 19 OTHER RESTAURANT CONCEPTS The Company is also developing other restaurant concepts that are in the initial stages of development. It has entered into two joint venture agreements to create a family style steakhouse concept and an upscale Italian restaurant concept. It is also analyzing the market opportunity for a concept that would offer healthy, South-of-the-Border cuisine. These additional restaurant concepts share the Sbarro strategy of offering high value, high quality food in clean and comfortable surroundings. 20 SBARRO, INC. - -------------------------------------------------------------------------------- V. INDUSTRY AND COMPETITIVE OVERVIEW - -------------------------------------------------------------------------------- RESTAURANT INDUSTRY(6) The restaurant industry is one of the largest sectors of the economy, accounting for more than 4% of the nation's gross domestic product. Because of consumers' increasing propensity to eat away from home, restaurant industry sales growth in the 1980s was rapid, approximating 8% on a nominal basis and 3% on a real basis. Factors contributing to the growth included a proliferation of two-wage earner families, more households which sought increasing convenience as lifestyles became more active, and attitudinal changes toward eating away from home. These trends have continued into the 1990's, although the industry's average annual rate of growth has slowed to a 4.5% nominal and 2.1% real rate during this decade. The National Restaurant Association forecasts that total industry sales will reach approximately $336 billion in 1998, constituting a 4.7% nominal and 1.8% real growth rate over 1997 figures. There are approximately 799,000 restaurant outlets nationwide (up from 155,000 in 1972) and the industry employs approximately 9.5 million people. The entire restaurant industry is expected to continue to benefit from growth in disposable incomes and the attractive value proposition that restaurants offer to consumers. Households with incomes above $40,000, although they only make up 1/3 of all households, account for 58% of total spending on food away from home. As the number of higher-income households increases, restaurant demand is expected to continue to expand. In addition, according to a 1997 consumer survey conducted by the National Restaurant Association, 65% of fast-food customers and 86% of sit-down restaurant customers were positively surprised by the price they paid. This has provided restaurant operators with additional pricing flexibility without significantly affecting volume. At the same time, wholesale food prices have largely remained stable, allowing operators to realize higher gross margins. QUICK SERVICE RESTAURANT INDUSTRY(7) Since quick service restaurants were introduced in the mid-1950's, they have grown to account for over 31% of total restaurant industry revenues. Although the traditional hamburger concepts still account for 63% of the quick service restaurant sector, it has expanded to include pizza, chicken, Chinese food, Mexican food, ice cream/yogurt, donuts and various types of sandwiches. During the period 1993 - 1997, annual unit and revenue growth in the quick service restaurant industry totaled 5.3% and 5.4%, respectively. The National Restaurant Association predicts that sales at quick service restaurants will reach approximately $106 billion in 1998, a 5.1% increase relative to 1997. - ------------------- (1) Source: National Restaurant Association. (2) Source: Euromonitor Market Direction, unless otherwise noted. 21 The following charts show the expansion in units and revenues of the quick service restaurant sector from 1993-1997: UNITS(1) REVENUES(1) (IN THOUSANDS) (IN $ BILLIONS) [GRAPHIC OMITTED] [GRAPHIC OMITTED] Growth in the quick service sector is expected to continue, although at a slower rate than historical levels. The National Restaurant Association projects growth rates averaging approximately 4% over the 1998-2002 period. Customers have developed more sophisticated tastes and are increasingly demanding higher quality food and better value. Restaurant chains that are positioned to deliver variety and value should benefit from these trends. PIZZA RESTAURANT SEGMENT (1) In 1997, the pizza segment of the quick service restaurant sector experienced a decline in the number of units as well as overall revenues for the first time in decades. Pizza outlets constituted 21.5% of quick service outlets in 1993 but fell in share to 19.3% in 1997. Much of the decline was driven by the largest chains reorganizing their operations and closing underperforming units. For example, Pizza Hut (a subsidiary of Tricon Global Restaurants), the largest pizza restaurant company in the U.S. in terms of sales and number of units, closed 212 restaurants (approximately 2.4% of its outstanding units) in 1997. Domino's, the number two pizza chain, halted its unit growth. In contrast, pizza restaurants other than the largest quick service chains mentioned above have continued to grow their businesses. Part of the reason for the success of these concepts is their ability to meet changing consumer preferences toward better quality pizza and a wider variety of product offerings. Sbarro, largely because of its diverse menu and also its focus on high customer traffic venues, has also continued its expansion and increased its market share during the past several years. Evolving customer demand is also a key reason for the Company's development of the Umberto's concept. - ---------------------------- (1) Source: Euromonitor Market Direction. 22 The following charts show the number of units and revenues of the pizza segment from 1993-1997: UNITS(1) REVENUES(1) (IN THOUSANDS) (IN $ BILLIONS) [GRAPHIC OMITTED] [GRAPHIC OMITTED] The following tables show the market shares of the top pizza chains between 1993-1997, both in terms of units and revenues:
SHARE OF UNITS(1) 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Pizza Hut 30.3% 29.7% 29.1% 29.0% 28.7% Domino's Pizza 15.6 14.6 13.9 14.0 14.6 Little Caesar's Pizza 16.2 15.9 15.5 13.0 13.2 Papa John's Pizza 1.4 2.2 2.9 3.8 4.7 Sbarro 2.4 2.5 2.4 2.5 2.7 Others 34.1 35.2 36.3 37.8 36.1 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
SHARE OF REVENUE(1) 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Pizza Hut 33.7% 34.4% 33.4% 30.6% 29.0% Domino's Pizza 12.8 12.8 13.2 14.3 14.2 Little Caesar's Pizza 14.7 11.1 9.8 8.8 9.2 Papa John's Pizza 1.1 2.0 2.9 3.8 5.5 Sbarro 2.4 2.5 2.5 2.5 2.7 Others 35.3 37.2 38.2 39.9 39.6 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
- ---------------------- (1) Source: Euromonitor Market Direction. 23 SBARRO, INC. - -------------------------------------------------------------------------------- VI. FINANCIAL OVERVIEW - -------------------------------------------------------------------------------- HISTORICAL FINANCIAL PERFORMANCE The following tables show summary financial statements for the Company for the fiscal years 1994-1997, as well as the last twelve months ending April 19, 1998:
(DOLLARS IN MILLIONS) FISCAL YEAR LTM ------------------------------------------ --------- 1994 1995(2) 1996 1997(3) 4/19/98(4) ---- ------- ---- ------- ---------- Total Systemwide Sales (1) $384.0 $416.3 $437.6 $463.1 $476.6 ====== ====== ====== ====== ====== Revenues $294.0 $316.1 $325.7 $345.1 $351.5 Cost of Food and Paper $61.9 $67.4 $68.7 $69.5 $71.2 ------ ------- ------ ------- ------ Gross Profit $232.1 $248.7 $257.0 $275.6 $280.3 GROSS MARGIN % 79.0% 78.7% 78.9% 79.9% 79.7% Other Cash Operating Expenses $159.1 $177.4 $177.6 $194.6 $199.6 ------ ------- ------ ------- ------ EBITDA $73.0 $71.3 $79.4 $81.0 $80.7 EBITDA MARGIN % 24.8% 22.6% 24.4% 23.5% 23.0% Depreciation & Amortization $21.7 $23.6 $22.9 $23.9 $23.6 ------ ------- ------ ------- ------ Operating Profit $51.3 $47.6 $56.5 $57.1 $57.1 OPERATING MARGIN % 17.5% 15.1% 17.4% 16.6% 16.2% Interest Income $1.9 $3.1 $3.8 $4.4 $4.5 ------ ------- ------ ------- ------ Income Before Taxes $53.3 $50.8 $60.3 $61.5 $61.6 Taxes $20.2 $19.4 $22.9 $23.4 $23.4 ------ ------- ------ ------- ------ Net Income $33.0 $31.4 $37.4 $38.1 $38.2 ====== ====== ====== ====== ====== Cash Dividends Paid $12.5 $14.8 $17.9 $21.2 $16.6(5) OTHER DATA: Capital Expenditures $32.1 $17.5 $25.9 $28.6 $28.0 Comparable Store Sales Growth 3.1% 0.5% 0.0% (0.4%) 0.1% BALANCE SHEET DATA (END OF PERIOD): Cash & Marketable Securities $49.9 $101.0 $112.3 $127.3 $116.7 Gross Property & Equipment $235.1 $235.3 $260.3 $286.4 $295.8 Total Assets $232.1 $242.7 $258.7 $278.6 $271.4 Total Debt $0.0 $0.0 $0.0 $0.0 $0.0 Shareholders' Equity $179.6 $185.7 $205.2 $220.4 $229.6
-------------------- (1) Represents combined sales of Company-owned and franchised locations. (2) Excludes a $16.4 million provision ($10.2 million after tax) for the closing of certain under-performing restaurants that did not meet the performance criteria set by the Company. Including such charge, net income was $21.3 million. (3) Excludes a $3.3 million provision ($2.0 million after tax) for the closing of certain joint venture units. Including such charge, net income was $36.1 million. (4) Net income excludes effect of change in accounting treatment for pre-opening costs. (5) The Company discontinued its quarterly dividend in January 1998. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS(1) 1997 Compared to 1996 Restaurant sales from Company-owned units and consolidated joint venture units increased 5.8% to $337.7 million in 1997 from $319.3 million in 1996. The increase resulted from a higher number of units in operation during 1997 and the effect of a full year of selective menu price increases of approximately 0.5% and 1%, which became effective in mid April 1996 and mid July 1996, offset, in part, by a decrease in comparable unit sales of 0.4%. Comparable unit sales decreased to $305.2 million in 1997 from $306.3 million in 1996. Comparable restaurant sales are made up of sales at locations that were open during the entire current year and entire prior fiscal year. Franchise related income increased 15.5% to $7.4 million in 1997 from $6.4 million in 1996. This increase resulted from a higher number of units in operation in 1997 than in 1996 and an increase in initial franchise and development fees due to the opening of more franchise units in 1997 than in 1996. During the year ended December 28, 1997, 23 units were closed by franchisees. These units did not produce material levels of sales and, consequently, did not generate material amounts of royalty income to the Company. In addition, four franchise units were purchased by the Company. Comparable sales at franchise locations did not change significantly in fiscal 1997 from fiscal 1996. Interest income increased to $4.4 million in 1997 from $3.8 million in 1996. This increase was due to higher amounts of cash available for investment in 1997 than in 1996 at comparable interest rates. Cost of food and paper products decreased as a percentage of restaurant sales to 20.6% in 1997 from 21.5% in 1996. This improvement resulted from lower food prices, primarily of cheese from the fourth quarter of fiscal 1996 into the fourth quarter of fiscal 1997, lower prices of various paper products and the effect of a full year of the selective menu price increases implemented in mid 1996. Cheese prices have risen since the middle of the fourth quarter of fiscal 1997 and currently remain at prices higher than those in the comparable prior year period. Restaurant operating expenses - payroll and other employee benefits increased to 25.1% of restaurant sales in 1997 from 24.5% of restaurant sales in 1996. This percentage increase was attributable to the higher costs of providing benefits to employees and, to a lesser extent, the effects of the two increases in the Federal minimum wage which became effective in September 1997 and 1996, as well as the decrease in comparable unit sales in fiscal 1997. Restaurant operating expenses occupancy and other expenses increased to 27.7% of restaurant sales in 1997 from 26.8% of restaurant sales in 1996. This percentage increase was primarily attributable to rent and rent related charges increasing at a faster rate than sales. Depreciation and amortization expenses increased to $23.9 million in 1997 from $22.9 million in 1996. This increase was primarily the result of additional Company owned units in operation during 1997 over the number of units in operation during 1996. General and administrative expenses were $17.8 million in 1997 or 5.1% of revenues and $14.9 million in 1996 or 4.5% of revenues. This increase was due to hiring additional personnel in anticipation of the Company's development plans and increases in executive compensation and legal fees. - --------------------------------------- (1) Source: Company SEC Filings. 25 In 1997, a provision of $3.3 million before tax ($2.0 million or $.10 after tax) relating to the Company's investment in one of its joint ventures was established for the closing of certain joint venture units. The effective income tax rate was 38.0% for 1997 and 1996. 1996 Compared to 1995 Restaurant sales from Company-owned units increased 3.0% to $319.3 million in 1996 from $310.1 million in 1995. The increase resulted from the higher contribution to sales in 1996 than in 1995 from units opened during 1995 together with the contribution to sales from units opened during 1996, offset, in part, by the loss of sales from underperforming units closed at the end of 1995. Another factor affecting sales was the selective menu price increases of approximately 0.5% and 1% in mid April 1996 and mid July 1996. Comparable unit sales remained relatively unchanged at $292.1 million in 1996 and $292.6 million in 1995. Comparable restaurant sales are made up of sales at locations that were open during the entire current year and entire prior fiscal year. Franchise related income increased 7.3% to $6.4 million in 1996 from $5.9 million in 1995. This increase resulted from higher royalties due principally to a larger number of franchise units in operation in the current year than in 1995, offset somewhat by lower initial franchise licensing fees due to less unit openings. Comparable sales at franchise locations did not change significantly. Interest income increased to $3.8 million in 1996 from $3.1 million in 1995. This increase was primarily due to larger amounts of cash invested, offset somewhat by slightly lower yields on cash equivalents and marketable securities for the fiscal year. Cost of food and paper products decreased as a percentage of restaurant sales to 21.5% in 1996 from 21.7% in 1995. This improvement resulted principally from the effects of the closing of underperforming units in late 1995, which had higher food cost relationships than more typical Company locations, lower prices of various paper products and food items and, to a limited extent, the selective menu price increases, offset by higher cheese prices during the second and third quarters of 1996, which increased food costs by approximately $1.8 million. Restaurant operating expenses - payroll and other employee benefits decreased to 24.5% of restaurant sales in 1996 from 25.3% of restaurant sales in 1995. Restaurant operating expenses - occupancy and other expenses decreased to 26.8% of restaurant sales in 1996 from 27.2% of restaurant sales in 1995. These improvements were principally due to the Company's program of closing underperforming units which had higher payroll and other restaurant cost relationships, improved supervision and controls over costs and, to a limited extent, the impact of menu price increases. Depreciation and amortization expenses decreased to $22.9 million in 1996 from $23.6 million in 1995. This decrease was principally due to the closing of underperforming units in late 1995, offset somewhat from new unit openings in 1996. General and administrative expenses were $14.9 million in 1996 or 4.5% of revenues and $16.1 million in 1995 or 5.0% of revenues. The decrease in dollars was principally due to improved controls in supervising and administering restaurants. The decrease in this category of expenses as a percentage of revenues was, in addition to the dollar decrease, favorably impacted by the spreading of non-variable costs over a larger revenue base. 26 The effective income tax rate was 38.0% for 1996 and 1995. 1995 Compared to 1994 Restaurant sales from Company-own units increased by $21.3 million of 7.4% to $310.1 million in 1995 from $288.8 million in 1994. The increase resulted primarily from the higher number of units in operation during 1995, in addition to a 0.5% increase in comparable restaurant sales to $273.9 million from $272.5 million in 1994. In March 1995, the Company selectively increased menu prices which did not materially affect 1995 sales. Comparable unit sales are made up of sales at locations that were open during the entire current and prior fiscal year. Franchise related income increased 13.5% to $5.9 million in 1995 from $5.2 million in 1994. This increase resulted from higher royalties due to a larger number of franchise units in operation in the current year than in 1994 on relatively stable comparable unit sales, as well as an increase in the number of new franchise units resulting in higher initial franchise fees. Interest income increased to $3.1 million in 1995 from $1.9 million in 1994. This increase was primarily due to larger amounts of cash invested and higher investment yields on invested cash and marketable securities for the fiscal year. Cost of food and paper products increased as a percentage of restaurant sales to 21.7% in 1995 from 21.4% in 1994. This increase was primarily due to higher prices of cheese and paper products in 1995. Restaurant operating expenses - payroll and other employee benefits increased to 25.3% of restaurant sales in 1995 from 24.5% of restaurant sales in 1994. This percentage increase was attributable to the higher costs of providing benefits to employees and a slower growth in comparable unit sales in 1995. Restaurant operating expenses - occupancy and other expenses increased to 27.2% of restaurant sales in 1995 from 26.4% of restaurant sales in 1994. This percentage increase was attributable to higher occupancy related charges and a slower growth in comparable unit sales in 1995. Depreciation and amortization increased to $23.6 million in 1995 from $21.7 million in 1994. The increase was the result of the number of additional Company-owned units in operation during 1995 over the number of units in operation during 1994. General and administrative expenses were $16.1 million in 1995 or 5.0% of revenues and $13.3 million in 1994 or 4.5% of revenues. This increase was primarily due to increased costs associated with supervising and administering the additional restaurants in operation and adding management level personnel. 27 In 1995, a provision of $16.4 million before tax ($10.2 million or $0.50 per share after tax) was established for the closing of approximately 40 underperforming restaurants. These units produced sales of approximately $8.0 million in 1995 and pretax losses of approximately $3.2 million ($2.0 million or $0.10 per share after tax). The effective income tax rate was 38.0% for 1995 and 1994. 28 PROJECTED FINANCIAL PERFORMANCE The following tables show summary projected financial performance for Sbarro on a consolidated basis as well as separate projections for the Umberto's and Sbarro core business operations. Note that the other restaurant concepts currently under development are not included in this analysis.
SBARRO, INC. CONSOLIDATED FINANCIAL PROJECTIONS(1) ------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS) FISCAL YEAR --------------------------------------------------------- 1998E 1999E 2000E 2001E 2002E ----- ----- ----- ----- ----- Total Systemwide Sales (2) $501.0 $568.7 $668.5 $795.6 $947.3 ====== ====== ======= ====== ====== Revenues $365.8 $405.7 $460.4 $525.5 $600.0 EBITDA $85.2 $94.4 $106.9 $121.7 $138.6 EBITDA MARGIN % 23.3% 23.3% 23.2% 23.2% 23.1% Depreciation & Amortization $27.1 $28.3 $30.4 $32.4 $33.7 ------ ------ ------ ------ ------ Operating Profit $58.2 $66.1 $76.6 $89.3 $104.9 ------ ------ ------ ------ ------ OPERATING MARGIN % 15.9% 16.3% 16.6% 17.0% 17.5% Capital Expenditures $29.1 $28.4 $32.7 $35.6 $38.4 STORE DATA: Company-Owned Beginning Units 625 659 714 779 849 Openings (net) 34 55 65 70 75 ----- ----- ----- ----- ----- Ending Units 659 714 779 849 924 ===== ===== ===== ===== ===== Franchised Beginning Units 239 274 329 404 489 Openings (net) 35 55 75 85 95 ----- ----- ----- ----- ----- Ending Units 274 329 404 489 584 ===== ===== ===== ===== ===== Total Beginning Units 864 933 1,043 1,183 1,338 Openings (net) 69 110 140 155 170 ----- ----- ----- ----- ----- Ending Units 933 1,043 1,183 1,338 1,508 ===== ===== ===== ===== =====
- -------------------------- (1) Includes 100% of the financial results of Umberto's (the Company's 80% owned restaurant venture). (2) Represents combined sales of Company-owned and franchised locations. 29
UMBERTO'S OF NEW HYDE PARK DIVISIONAL FINANCIAL PROJECTIONS(1) (DOLLARS IN MILLIONS) FISCAL YEAR ---------------------------------------------------------- 1998E 1999E 2000E 2001E 2002E ----- ----- ----- ----- ----- Total Systemwide Sales (2) $5.5 $22.7 $58.5 $115.7 $195.3 ====== ======= ======= ======= ====== Revenues $5.5 $19.7 $42.9 $74.3 $114.1 EBITDA $0.4 $3.3 $8.0 $14.5 $23.0 EBITDA MARGIN % 7.8% 16.7% 18.7% 19.6% 20.1% Depreciation & Amortization $0.1 $0.6 $1.3 $2.2 $3.3 ------ ------- ------- ------- ------- Operating Profit $0.3 $2.7 $6.7 $12.3 $19.7 ------ ------- ------- ------- ------- OPERATING MARGIN % 5.1% 13.8% 15.7% 16.6% 17.2% OTHER DATA: Capital Expenditures $2.7 $6.8 $9.0 $11.3 $13.5 Comparable Store Sales Growth 2.0% 2.0% 2.0% 2.0% 2.0% STORE DATA: Company-Owned Beginning Units 2 8 23 43 68 Openings (net) 6 15 20 25 30 ------ ------- ------- ------- ------ Ending Units 8 23 43 68 98 ====== ====== ====== ====== ====== Franchised Beginning Units 0 0 5 20 45 Openings (net) 0 5 15 25 35 ------ ------- ------- ------- ------ Ending Units 0 5 20 45 80 ====== ====== ====== ====== ====== Total Beginning Units 2 8 28 63 113 Openings (net) 6 20 35 50 65 ------ ------- ------- ------- ------ Ending Units 8 28 63 113 178 ====== ====== ====== ====== ======
-------------------- (1) Represents 100% of the financial results of Umberto's (the Company's 80% owned restaurant venture). (2) Represents combined sales of Company-owned and franchised locations. 30
SBARRO CORE BUSINESS DIVISIONAL FINANCIAL PROJECTIONS ----------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS) FISCAL YEAR ----------------------------------------------------------- 1998E 1999E 2000E 2001E 2002E ----- ----- ----- ----- ----- Total Systemwide Sales (1) $495.5 $546.0 $609.9 $680.0 $752.0 ====== ====== ====== ====== ====== Revenues $360.4 $386.0 $417.5 $451.2 $485.9 Cost of Food and Paper $71.6 $76.6 $82.7 $89.2 $95.9 ------ ------ ------ ------ ------ Gross Profit $288.7 $309.4 $334.8 $362.0 $390.0 GROSS MARGIN % 80.1% 80.2% 80.2% 80.2% 80.3% Other Cash Operating Expenses $203.9 $218.3 $235.9 $254.8 $274.4 ------ ----- ------ ------ ------ EBITDA $84.8 $91.1 $98.9 $107.2 $115.6 EBITDA MARGIN % 23.5% 23.6% 23.7% 23.7% 23.8% Depreciation & Amortization $26.6 $27.4 $28.8 $29.9 $30.1 ------ ----- ----- ------ ----- Operating Profit $58.2 $63.7 $70.2 $77.3 $85.6 ------ ----- ----- ------ ----- OPERATING MARGIN % 16.2% 16.5% 16.8% 17.1% 17.6% OTHER DATA: Capital Expenditures $26.4 $21.7 $23.7 $24.3 $24.9 Comparable Store Sales Growth 0.5% 1.5% 1.5% 1.5% 1.5% STORE DATA: Company-Owned Beginning Units 623 651 691 736 781 Openings (net) 28 40 45 45 45 ------ ----- ----- ------ ----- Ending Units 651 691 736 781 826 ====== ===== ====== ====== ===== Franchised Beginning Units 239 274 324 384 444 Openings (net) 35 50 60 60 60 ------ ----- ----- ------ ----- Ending Units 274 324 384 444 504 ====== ===== ====== ====== ===== Total Beginning Units 862 925 1,015 1,120 1,225 Openings (net) 63 90 105 105 105 ------ ----- ------ ------ ----- Ending Units 925 1,015 1,120 1,225 1,330 ====== ====== ====== ====== =====
- ---------------- (1) Represents combined sales of Company-owned and franchised locations. 31 DISCUSSION OF KEY PROJECTION ASSUMPTIONS - CORE BUSINESS Store Openings The Company expects to accelerate the new store openings to approximately 50 owned and 60 franchised units annually versus its current 1998 plan of 35 owned and 45 franchised units. This growth in unit openings is going to be accomplished by (i) focusing on high customer traffic venues where the Company currently has little presence (e.g., college campuses), (ii) expanding into traditional standalone quick service restaurant venues, in particular through co-branding arrangements, and (iii) increasing the pace of its international expansion. Store Revenues The Company believes it can increase the comparable store revenues for both Company-owned and franchised units by approximately 1.5% annually. This will be accomplished through selective price increases and assumes modest increases in store traffic. For new franchised units opened, the Company has assumed $20,000 in initial franchise fees per restaurant and royalties of 4% of revenues which are significantly lower than most of the current franchise arrangements which call for $35,000 in initial fees and royalties of 5%-7% of sales. Overall, revenues from core business units (including franchise revenues) are projected to grow to approximately $485.9 million by 2002, implying a compounded annual growth rate of 7.1% over 1997 revenues of $344.4 million. Operating Costs The Company has used existing costs as a percentage of revenue as the basis for projecting its future operating costs. These cost assumptions are generally conservative due to the high cheese prices in 1998, which accounts for 30% of total food and paper products costs. These prices have averaged 25% higher than during the comparable period in 1997, which generally represented a normalized price level for cheese. Secondly, a substantial portion of the Company's overhead is fixed, and therefore the Company should realize a degree of operating leverage as revenues increase. This is particularly true of general & administrative expenses, which should decrease as a percentage of sales over the projection period. Other income of $3.5 million annually is assumed, primarily as a result of joint marketing programs and rent to be received from subleasing space in the new headquarters building. Overall, EBITDA margins for the Sbarro core business are expected to increase from 23.5% in 1998 to 23.8% in 2002. Although operating costs are expected to remain constant as a percent of sales for Company operated restaurants, the growth in higher margin franchising operations will increase overall margins slightly. Depreciation & amortization expense, which is based on the current depreciable asset base and the future projected capital expenditures required, are projected to increase at a slower rate than revenues. Consolidated operating margins are forecast to increase from 16.2% in 1998 to 17.6% in 2002. Capital expenditures for new restaurants are assumed to total approximately $450,000 per unit. In addition, capital expenditures of $5.0 million, $5.2 million, $5.2 million, $5.8 million and $6.4 million for 1998-2002, respectively, are assumed for the maintenance of existing units. The $7 32 million of 1998 capital expenditures required to complete the construction of the new headquarters building has already been incurred. Umberto's The projected financial performance of Umberto's is based on its unit expansion plan and the pro forma financial model the Company has developed for individual stores. The Company plans to rapidly expand the Umberto's concept resulting in a unit base of 98 Company-operated and 80 franchised restaurants by 2002. Based on its analysis of the market environment and the fact that few companies currently serve this niche, the Company believes its unit growth projections are reasonable. New units opened in 1998 are projected to generate $1.2 million in annualized revenues, with an assumed increase of 2% per year through 2002. The Company bases this comparable store sales increase on the more upscale nature of the product offering and the assumption that the increasing strength of the Umberto's brand will also allow for modest price increases. For franchised restaurants, a $30,000 initial franchise fee and a 6% royalty are assumed. Based on this projected unit growth, total revenues for Umberto's are expected to reach approximately $114.1 million by 2002. In developing the Umberto's financial plan, the Company has categorized all expenses as either variable or fixed. Variable costs include food and paper products, payroll and benefits, repairs and maintenance, restaurant supplies, linen and uniforms, office supplies and credit card discounts. Fixed costs include rent and rent-related costs, utilities, telephone, insurance, carting and armored car/bank charges. The Company's pro forma financial model assumes that all variable costs grow at the same rate as revenues while fixed costs remain constant. Pre-opening costs are estimated to total $50,000 per store, and are expensed as incurred. Depreciation is based on an assumed capital investment of $450,000 per new restaurant. A restaurant management bonus is also assumed at 20% of restaurant pre-tax earnings. 33 EX-99.1(B)(9) 10 PRESENTATION BY PRUDENTIAL SEC 03/03/98 ________________________________________________________________________________ ___________________________________________________ Project Oregano Presentation to the Special Committee of the Board of Direetors March 1998 ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ TABLE OF CONTENTS I. Financial Data II. Valuation Summary A. Composite Implied Valuation B. Discounted Cash Flow Analysis C. Comparable Transactions Analysis D. Comparable Companies Analysis E. Leveraged Buy-Out Analysis Appendix A. Comparable Companies Analysis 1. Comparable Companies (Pizza and Value Priced Italian Restaurants) 2. Comparable Companies (Fast Food Restaurants) B. Leveraged Buy-Out Analysis [LOGO] Prudential Securities Section I ________________________________________________________________________________ ___________________________________________________ I. Financial Data ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ FINANCIAL DATA HISTORICAL AND PROJECTED BALANCE SHEETS
HISTORICAL (1) PROJECTED (1) ---------------------- --------------------------------------------------------- (In 000's) FY FY FY FY FY FY FY ASSETS 1996 1997 1998 1999 2000 2001 2002 Cash and cash equivalents $ 114,818 $127,310 $134,350 $159,352 $186,766 $217,539 $250,312 Accounts receivables 1,865 2,375 2,242 2,364 2,492 2,621 2,751 Inventories 2,841 2,962 2,929 3,086 3,251 3,416 3,584 Prepaid expenses 1,409 1,768 1,560 1,645 1,734 1,823 1,914 --------- -------- -------- -------- -------- -------- -------- Total current assets 120,933 134,415 141,081 166,447 194,242 225,400 258,561 Property and equipment, net 130,993 136,798 139,254 132,015 123,805 115,175 106,003 Deferred charges, net 1,633 1,596 1,600 1,600 1,600 1,600 1,600 Other assets 5,100 5,840 6,500 6,500 6,500 6,500 6,500 --------- -------- -------- -------- -------- -------- -------- Total assets $ 258,659 $278,649 $288,435 $306,562 $326,147 $348,675 $372,664 ========= ======== ======== ======== ======== ======== ======== LIABILITIES AND EQUITY Accounts payable $ 7,173 $ 10,086 $ 7,391 $ 7,788 $ 8,202 $ 8,620 $ 9,042 Accrued expenses 22,663 26,025 23,376 24,630 25,940 27,262 28,597 Dividend payable (2) 4,691 5,521 5,521 5,521 5,521 5,521 5,521 Income taxes (2) 5,287 4,777 4,777 4,777 4,777 4,777 4,777 --------- -------- -------- -------- -------- -------- -------- Total current liabilities 39,814 46,409 41,065 42,715 44,439 46,180 47,937 Deferred income taxes 13,645 11,801 10,301 8,801 7,301 7,301 7,301 --------- -------- -------- -------- -------- -------- -------- Total liabilities 53,459 58,210 51,366 51,516 51,740 53,481 55,238 Retained earnings 173,777 220,439 237,069 255,045 274,407 295,194 317,425 --------- -------- -------- -------- -------- -------- -------- Shareholders' equity 205,200 220,439 237,069 255,045 274,407 295,194 317,425 Total liabilities and shareholders' equity $ 258,659 $278,649 $288,435 $306,562 $326,147 $348,675 $372,664 ========= ======== ======== ======== ======== ======== ======== (1) Historical results from Comnpany's 1O-K. Projections provided by the Company. (2) Assumes that projected dividends payable and income taxes accounts will stay at 12/28/97 level through 2002.
3 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ FINANCIAL DATA HISTORICAL AND PROJECTED INCOME STATEMENTS
Historical (1) Projected (1) ---------------------- --------------------------------------------------------- FY FY FY FY FY FY FY (in 000's except per share data) 1996 1997 1998 1999 2000 2001 2002 Existing restaurant sales $ 319,315 $ 337,723 $ 349,149 $ 367,875 $ 387,436 $ 407,189 $ 427,134 Existing franchise related income 6,375 7,360 6,664 7,345 8,043 8,749 9,462 --------- --------- --------- --------- --------- --------- --------- Total revenues 325,690 345,083 355,813 375,220 395,479 415,938 436,596 Cost of food and paper products 68,668 69,469 70,807 74,605 78,572 82,578 86,623 --------- --------- --------- --------- --------- --------- --------- Gross profit 257,022 275,614 285,006 300,615 316,907 333,360 349,973 Gross margin as % of sales 80.5% 81.6% 81.6% 81.7% 81.8% 81.9% 81.9% Payroll and other benefits 78,258 84,910 86,589 91.233 96,084 100,983 105,929 Occupancy and other expenses 85,577 93,528 40,187 42,342 44,594 46,867 49,163 Rent expense -- -- 56,911 59,964 63,152 66,372 69,623 General and administrative 14,940 17,762 18,303 19,301 20,343 21,396 22,459 Provision for unit closings -- 3,300 -- -- -- -- -- Other income (2) (1,171) (1,653) (1,466) (1,800) (1,800) (1,800) (1,800) --------- --------- --------- --------- --------- --------- --------- Total costs and expenses 177,604 197,847 200,524 211,040 222,374 233,818 245,374 EBITDA 79,418 81,067 84,482 89,574 94,534 99,542 104,600 EBITDA margin 24.4% 23.5% 23.7% 23.9% 23.9% 23.9% 24.0% Depreciation 22,910 23,922 26,094 26,790 27,759 28,781 29,922 EBIT 56,508 57,145 58,388 62,785 66,774 70,762 74,678 Interest income 3,798 4,352 6,811 7,692 9,133 10,733 12,481 --------- --------- --------- --------- --------- --------- --------- Income before taxes 60,306 58,197 65,199 70,476 75,908 81,495 87,159 Income taxes 22,916 22,115 24,776 26,781 28,845 30,968 33,120 --------- --------- --------- --------- --------- --------- --------- Net income $ 37,390 $ 38,128 $ 40,423 $ 43,695 $ 47,063 $ 50,527 $ 54,038 ========= ========= ========= ========= ========= ========= ========= Net income margin 11.5% 11.0% 11.4% 11.6% 11.9% 12.1% 12.4% (1) Historical results from Company's 10-K. Projections provided by the Company. (2) Includes income from joint ventures, income from two 20% owned stores, beverage rebates, and insurance recoveries.
4 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ RESTAURANT OPENING ASSUMPTIONS/(1)/
FY FY FY FY FY COMPANY OWNED RESTAURANTS 1998 1999 2000 2001 2002 - ------------------------- ---- ---- ---- ---- ---- Beginning number 627 659 691 723 755 Additions 35 35 35 35 35 Acquired from (sold to) franchisees -- -- -- -- -- Divestitures (3) (3) (3) (3) (3) ------ ------ ------ ------ ------ Ending number 659 691 723 755 787 Percent of total 71.6% 70.2% 69.1% 68.0% 67.l% FRANCHISED RESTAURANTS - ---------------------- Beginning number 231 262 293 324 355 Additions 35 35 35 35 35 Purchases from (sold to) franchisees -- -- -- -- -- Divestitures (4) (4) (4) (4) (4) ------ ------ ------ ------ ------ Ending number 262 293 324 355 386 Percent of total 28.4% 29.8% 30.9% 32.0% 32.9% ALL RESTAURANTS - --------------- Beginning number 858 921 984 1,047 1,110 Additions 70 70 70 70 70 Closed during period (7) (7) (7) (7) (7) ------ ------ ------ ------ ------ Ending number 921 984 1,047 1,110 1,173 SAME STORE SALES GROWTH 0.50% 0.50% 0.50% 0.50% 0.50% AVERAGE SALES PER RESTAURANT ($ IN MILLIONS) $ 0.543 $ 0.545 $ 0.548 $ 0.551 $ 0.554 (table continued) FY FY FY FY FY TOTAL SYSTEMWIDE SALES ($ IN MILLIONS) 1998 1999 2000 2001 2002 - -------------------------------------- ---- ---- ---- ---- ---- Company-Owned $ 349.1 $ 367.9 $ 387.4 $ 407.2 $ 427.1 Franchises-existing (old) 76.3 74.4 72.6 70.8 69.0 Franchises-existing (new) 38.6 57.8 77.3 97.0 116.9 Franchises-new stores 19.0 19.1 19.2 19.3 19.4 ------ ------- ------- ------- ------- Total Systemwide Sales 483.0 519.1 556.5 594.3 632.4 TOTAL REVENUE FROM FRANCHISEES ($ IN MILLIONS) - -------------------------------------------- FRANCHISE ROYALTY FEE (NEW) 4.0% 4.0% 4.0% 4.0% 4.0% FRANCHISE ROYALTY FEE (OLD) 4.8% 4.8% 4.8% 4.8% 4.8% INITIAL FRANCHISE FEE PER STORE/(2)/ $ 0.020 $ 0.020 $ 0.020 $ 0.020 $ 0.020 Total Initial Franchise Fee $ 0.7 $ 0.7 $ 0.7 $ 0.7 $ 0.7 Franchise Royalty Fee-existing $ 5.2 $ 5.9 $ 6.6 $ 7.3 $ 8.0 Franchise Royalty Fee-new stores $ 0.8 $ 0.8 $ 0.8 $ 0.8 $ 0.8 ------ ------- ------- ------- ------- Total Revenue from Franchisees $ 6.66 $ 7.34 $ 8.04 $ 8.75 $ 9.46 TOTAL REVENUE ($ IN MILLIONS) - ----------------------------- Company-Owned $ 349.1 $ 367.9 $ 387.4 $ 407.2 $ 427.1 Franchises $ 6.7 $ 7.3 $ 8.0 $ 8.7 $ 9.5 ------ ------- ------- ------- ------- Total Revenue $ 355.8 $ 375.2 $ 395.5 $ 415.9 $ 436.6 TOTAL CAPITAL EXPENDITURES ($ IN MILLIONS) - ------------------------------------------ CapEx per New Restaurant $ 0.41 $ 0.41 $ 0.41 $ 0.41 $ 0.41 Restaurant CapEx $ 14.4 $ 14.4 $ 14.4 $ 14.4 $ 14.4 Capital Expenditures (New Headquarters) $ 9.0 $ - $ - $ - $ - Maintenance Capital Expenditures $ 5.2 $ 5.2 $ 5.2 $ 5.8 $ 6.4 Investments in Joint Ventures $ - $ - $ - $ - $ -
Notes: (1) Information provided by the Company. (2) Represents weighted average fee which takes into account all franchise types. 5 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ FINANCIAL DATA Working Capital Assumptions
HISTORICAL PROJECTED ------------------- ---------------------------------------------------- FY FY FY FY FY FY FY 1996 1997 1998 1999 2000 2001 2002 Inventory as days of COGS 15.1 15.6 15.1 15.1 15.1 15.1 15.1 Accounts receivable as days of sales 2.3 2.5 2.3 2.3 2.3 2.3 2.3 Prepaid expenses as days of sales 1.6 1.9 1.6 1.6 1.6 1.6 1.6 Accounts payable as days of COGS 38.1 53.0 38.1 38.1 38.1 38.1 38.1 Accrued expenses as days of COGS 120.5 136.7 120.5 120.5 120.5 120.5 120.5 Other assets as days of sales (1) 5.7 6.2 6,500 6,500 6,500 6,500 6,500 Deferred charges, net (in 000s) 1,633 1,596 1,600 1,600 1,600 1,600 1,600 Dividends payable 4,691 5,521 5,521 5,521 5,521 5,521 5,521 Income taxes payable 5,287 4,777 4,777 4,777 4,777 4,777 4,777 Deferred income taxes (in 000s) 13,645 11,801 10,301 8,801 7,301 7,301 7,301
(1) Historical numbers are days of sales. Projected assumptions were provided by the Company. 6 [LOGO] Prudential - --- Securities Section II ________________________________________________________________________________ ___________________________________________________ II. Valuation Summary ___________________________________________________ [LOGO] Prudential Securities ________________________________________________________________________________ ___________________________________________________ A. Composite Implied Valuation ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY COMPOSITE IMPLIED VALUATION SHARE PRICE [Graphic] 9 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY SUMMARY OF IMPLIED PRICES OF ALL VALUATION METHODOLOGIES OFFER PRICE $ 28.50 ------------------------ HIGH LOW MEAN MEDIAN ----------------------------------- DISCOUNTED CASH FLOWS $ 36.68 $ 30.00 $ 33.18 $ 33.11 COMPARABLE TRANSACTIONS LTM Revenue $ 28.85 $ 16.36 $ 22.22 $ 21.45 LTM EBITDA 41.31 33.03 37.17 37.17 LTM EBIT 40.76 31.66 35.40 33.76 LTM Net Income 37.72 22.99 30.37 30.39 Tangible Book Value 37.01 10.08 23.54 23.54 ------- ------- ------- ------- Mean $ 37.13 $ 22.82 $ 29.74 $ 29.27 COMPARABLE COMPANIES Pizza and Value Priced Italian Restaurants LTM Revenue $ 34.95 $ 17.05 $ 24.50 $ 25.42 LTM EBITDA 42.30 26.01 37.01 40.19 LTM ESIT 56.44 34.70 42.69 39.33 LTM Net Income 56.12 26.40 37.53 29.33 Tangible Book Value 69.94 10.51 33.12 28.00 ------- ------- ------- ------- Mean $ 51.95 $ 22.93 $ 34.97 $ 32.46 Fast Food Restaurants LTM Revenue $ 42.79 $ 13.86 $ 25.97 $ 22.95 LTM EBITDA 42.84 19.92 34.88 37.35 LTM EBIT 74.03 23.91 43.10 40.94 LTM Net Income 119.01 30.93 52.27 37.44 Tangible Book Value 92.09 11.65 35.06 25.82 ------- ------- ------- ------- Mean $ 74.15 $ 20.05 $ 38.26 $ 32.90 LBO ANALYSIS $ 33.00 $ 29.00 $ 31.00 $ 31.00 10 [LOGO] Prudential - --- Securities ________________________________________________________________________________ ___________________________________________________ B. Discounted Cash Flow Analysis ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ DISCOUNTED CASH FLOW ANALYSIS IMPLIED VALUATION PRESENT VALUE OF PROJECTED CASH FLOWS AND TERMINAL VALUES (IN 000'S, EXCEPT PER SHARE DATA) ---------------------------------------------------------
TERMINAL PV OF PV OF VALUE FREE PV OF AGGREGATE LESS: PV OF EQUITY MULTIPLE OF DISCOUNT CASH FLOW TERMINAL PRESENT TOTAL PLUS: EQUITY PER 2002 EBITDA RATE (1) 1998-2002 VALUE VALUE DEBT(2) CASH(2) VALUE SHARE ---------------------------------------------------------------------------------------------------------------------- 11.00% $175,566 $392,399 $567,965 $ - $ 127,310 $ 695,275 $ 33.52 12.00% $171,522 $376,877 548,400 - 127,310 675,710 $ 32.58 -------------- ----------------------------------------------------------------------------------------------------- 6.0x 13.00% $167,630 $362,100 529,730 - 127,310 657,040 $ 31.68 -------------- ----------------------------------------------------------------------------------------------------- 14.00% $163,883 $348,024 511,907 - 127,310 639,217 $ 30.82 15.00% $160,274 $334,612 494,885 - 127,310 622,195 $ 30.00 ---------- ------- 11.00% $175,566 $457,799 $633,365 $ - $ 127,310 $ 760,675 $ 36.68 12.00% $171,522 $439,690 611,212 - 127,310 738,522 $ 35.61 -------------- ----------------------------------------------------------------------------------------------------- 7.0x 13.00% $167,630 $422,450 590,080 - 127,310 717,390 $ 34.59 -------------- ----------------------------------------------------------------------------------------------------- 14.00% $163,883 $406,028 569,911 - 127,310 697,221 $ 33.62 15.00% $160,274 $390,380 550,654 - 127,310 677,964 $ 32.69 ---------- -------
(1) As of 2/24/98, Company's weighted average cost of capital was 12.73%. (2) As of 12/28/97 balance sheet. (3) Assumes fully diluted shares outstanding as of 12/28/97 of 20,739,373. 12 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ DISCOUNTED CASH FLOW ANALYSIS PROJECTED UNLEVERED FREE CASH FLOWS
(in 000's) FISCAL YEARS ENDED DECEMBER 31, ------------------------------------------------------------- FREE CASH FLOW: 1998 1999 2000 2001 2002 Operating Income (EBITA) $ 58,388 $ 62,785 $ 66,774 $ 70,762 $ 74,678 Less: Income Taxes @ 38.0% (22,188) (23,858) (25,374) (26,889) (28,378) ---------- ---------- ---------- ---------- --------- Tax-Adjusted Operating Income $ 36,201 $ 38,926 $ 41,400 $ 43,872 $ 46,300 plus: Depreciation 26,094 26,790 27,759 28,781 29,922 less: Capital Expenditures (28,550) (19,550) (19,550) (20,150) (20,750) plus: (Increases)/Decreases in Non- Cash Working Capital Deferred Taxes (1,500) (1,500) (1,500) - - Receivables 133 (122) (128) (129) (130) Inventories 33 (157) (164) (166) (167) Prepaid Expenses 208 (85) (89) (90) (91) Deferred Charges (4) -- -- -- -- Other Assets (660) -- -- -- -- Accounts Payable and Accruals (5,344) 1,650 1,724 1,741 1,758 Free Cash Flow: $ 26,611 $ 45,952 $ 49,453 $ 53,859 $ 56,842 ---------- ---------- ---------- ---------- ---------
13 [LOGO] Prudential - --- Securities ________________________________________________________________________________ ___________________________________________________ C. Comparable Transactions Analysis ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY COMPARABLE TRANSACTIONS SUMMARY VALUATION MATRIX ($ in thousands, except per share) Offer Price $ 28.50 ----------------------------------
Enterprise Value/ Equity Value/ --------------------------------------- ------------------------ REVENUE EBITDA EBIT NET INCOME BOOK VALUE ------- ------ ---- ---------- ---------- SBARRO 1997 OPERATING PARAMETERS(1) $345,083.0 $ 81,067.0 $ 57,145.0 $ 38,128.0 $ 220,439.0 ------------------------------------------------------------------ COMPARABLE TRANSACTION VALUATION MULTIPLES(2) HIGH 1.4x 9.0x 12.5x 20.5x 3.5x LOW 0.6 6.9 9.2 12.5 0.9 MEAN 1.0 7.9 10.6 16.5 2.2 MEDIAN 0.9 7.9 10.0 16.5 2.2 ------------------------------------------------------------------ PLUS: CASH (3) $ 127,310 $ 127,310 $ 127,310 --------------------------------------- FULLY DILUTED SHARES OUTSTANDING(4) 20,679.0 20,679.0 20,679.0 20,679.0 20,679.0 ------------------------------------------------------------------ IMPLIED EQUITY VALUE PER SHARE MEAN HIGH $ 28.85 $ 41.31 $ 40.76 $ 37.72 $ 37.01 $ 37.13 LOW 16.36 33.03 31.66 22.99 10.08 22.82 MEAN 22.22 37.17 35.40 30.37 23.54 29.74 MEDIAN 21.45 37.17 33.78 30.39 23.54 29.27 ------------------------------------------------------------------ -------- SBARRO'S IMPLIED MULTIPLE AT OFFER PRICE 1.7x 7.3x 10.3x 15.5x 2.7x ------------------------------------------------------------------
(1) Financial information for the fiscal year ended 12/28/97. Source: Company submitted information. (2) Revenue, EBITDA, and EBIT are multiples of Enterprise Value. Net Income and Book Value are multiples of Equity Value. Includes Perkins Family Restaurants, International Dairy Queen, Family Restaurants. (3) As of 12/28/97. (4) Calculated using the Treasury Method 15 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY COMPARABLE TRANSACTIONS VALUATION SUMMARY
($ in millions) Target Target Announced Offer Terms EV Revenue EBIT EBITDA Net Income TBV Acquiror Business Description Effective Status EPP EV/Rev. EV/EBIT EV/EBITDA EPP/Net Inc. EPP/TBV - ------------------------------------------------------------------------------------------------------------------------------------ International Dairy Queen (2) Develops, licenses and 10/21/97 Stock $559.1 $411.2 $55.9 $62.3 $35.4 $168.1 services a chain of 1/8/98 Friendly $583.6 1.4x 10.0x 9.0x 16.5x 3.5x restaurants. Berkshire Hathaway, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ Perkins Family Restaurants, Owns and operates 8/4/97 Cash $240.8 $262.8 $19.2 $35.1 $ 9.1 $ 37.7 L.P.(3)(4) franchised restaurants. 12/23/97 Completed $186.4 0.9x 12.5x 6.9x 20.5x 4.9x The Restaurant Company - ------------------------------------------------------------------------------------------------------------------------------------ Family Restaurants, Inc.(5)(6) Coco's operates 170 3/4/96 Cash $306.5 $501.2 $33.2 NA $10.0 $132.2 (Coco's and Carrows) bakery restaurants and 5/23/98 Completed $125.0 0.6x 9.2x NA 12.5x 0.9x Flagstar Companies, Inc. operates 157 family restaurants primarily in California. - ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY STATISTICS LEGEND HIGH 1.4x 12.5x 9.0x 20.5x 3.5x EV = ENTERPRISE VALUE LOW 0.6x 9.2x 6.9x 12.5x 0.9x EPP = EQUITY PURCHASE PRICE MEAN 1.0x 10.6x 7.9x 16.5x 2.2x LTM = LATEST TWELVE MONTHS MEDIAN 0.9x l0.0x 7.9x 16.5x 2.2x TBV = TANGIBLE BOOK VALUE
Footnotes: - ----------------------------------------------------------------------- (1) Financial data excludes the results of discontinued operations, extraordinary gains and one-time charges. Unless otherwise noted, options are assumed to be cashed out based on the treasury stock method. (2) Depreciation and amortization not disclosed in 10-Q. Depreciation and amortization is from latest 10-K. (3) Company is a "pass through" entity, i.e, S-Corp or Partnership. Tangible book value (TBV) has been excluded from summary statistics. (4) Net income is calculated based on an assumed 40% tax rate. (5) Denotes a private company. (6) Assumption of debt includes issuance of $150MM of senior notes to refinance target's outstanding balance on revolver and the assumption of capital lease obligations. 16 [LOGO] Prudential - --- Securities ________________________________________________________________________________ ___________________________________________________ D. Comparable Companies Analysis ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY COMPARABLE COMPANIES SUMMARY VALUATION MATRIX - PIZZA AND VALUE PRICED ITALIAN RESTAURANTS ($ in thousands, except per share) Offer Price $ 28.50 ----------------------------------
Enterprise Value/ Equity Value/ --------------------------------------- ------------------------ REVENUE EBITDA EBIT NET INCOME BOOK VALUE ------- ------ ---- ---------- ---------- SBARRO 1997 OPERATING PARAMETERS(1) $345,083 $ 81,067 $ 57,145 $ 38,128 $ 220,439 ------------------------------------------------------------------ COMPARABLE COMPANY VALUATION MULTIPLES(2) PIZZA AND VALUE HIGH 1.7x 9.2x 18.2x 30.4x 6.6x PRICED ITALIAN LOW 0.7 5.1 10.3 14.3 1.0 COMPARABLES(3) MEAN 1.1 7.9 13.2 20.4 3.1 MEDIAN 1.2 8.7 12.0 15.9 2.6 ------------------------------------------------------------------ PLUS: CASH (4) $ 127,310 $ 127,310 $ 127,310 --------------------------------------- FULLY DILUTED SHARES OUTSTANDING(1) 20,679.0 20,679.0 20,679.0 20,679.0 20,679.0 ------------------------------------------------------------------ IMPLIED EQUITY VALUE PER SHARE MEAN PIZZA AND VALUE HIGH $ 34.95 $ 42.30 $ 56.44 $ 56.12 $ 69.94 $ 51.95 PRICED ITALIAN LOW 17.05 26.01 34.70 26.40 10.51 22.93 COMPARABLES MEAN 24.50 37.01 42.69 37.53 33.12 34.97 MEDIAN 25.42 40.19 39.33 29.33 28.00 32.46 ------------------------------------------------------------------ -------- SBARRO IMPLIED MULTIPLE AT OFFER PRICE 1.7x 7.3x 10.3x 15.5x 2.7x ------------------------------------------------------------------
(1) Financial information for the fiscal year ended 12/28/97. Source: Company submitted information. (2) Revenue, EBITDA, and EBIT are multiples of Enterprise Value and Net Income is a multiple of Equity Value. Per l0/5/97 10-Q, includes held to maturity marketable maturities, which mature in 1998. (3) Includes Darden Restaurants, NPC International, Pizza Inn, Showbiz Pizza, and Uno Restaurant Corp. (4) As of 12/28/97. 18 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY COMPARABLE COMPANIES SUMMARY VALUATION MATRIX - FAST FOOD RESTAURANTS ($ in thousands, except per share) Offer Price $ 28.50 ----------------------------------
Enterprise Value/ Equity Value/ --------------------------------------- ------------------------ REVENUE EBITDA EBIT NET INCOME BOOK VALUE ------- ------ ---- ---------- ---------- SBARRO 1997 OPERATING PARAMETERS(1) $345,083 $ 81,067 $ 57,145 $ 38,128 $ 220,439 ------------------------------------------------------------------ COMPARABLE COMPANY VALUATION MULTIPLES(2) FAST FOOD RESTAURANT HIGH 2.2x 9.4x 24.6x 64.5x 8.6x COMPARABLES(3) LOW 0.5 3.5 6.4 16.8 1.1 MEAN 1.2 7.3 13.4 28.3 3.3 MEDIAN 1.0 8.0 12.6 20.3 2.4 ------------------------------------------------------------------ PLUS: CASH (4) $ 127,310 $ 127,310 $ 127,310 --------------------------------------- FULLY DILUTED SHARES OUTSTANDING(1) 20,679.0 20,679.0 20,679.0 20,679.0 20,679.0 ------------------------------------------------------------------ IMPLIED EQUITY VALUE PER SHARE MEAN FAST FOOD RESTAURANT HIGH $ 42.79 $ 42.84 $ 74.03 $ 119.01 $ 92.09 $ 74.15 COMPARABLES LOW 13.86 19.92 23.91 30.93 11.65 20.05 MEAN 25.97 34.88 43.10 52.27 35.06 38.26 MEDIAN 22.95 37.35 40.94 37.44 25.82 32.90 ------------------------------------------------------------------ -------- SBARRO IMPLIED MULTIPLE AT OFFER PRICE 1.7x 7.3x 10.3x 15.5x 2.7x ------------------------------------------------------------------
(1) Financial information for the fiscal year ended 12/28/97. Source: Company submitted information. (2) Revenue, EBITDA, and EBIT are multiples of Enterprise Value and Net Income is a multiple of Equity Value. Per l0/5/97 10-Q, includes held to maturity marketable securities, which mature in 1998. (3) Includes Au Bon Pain, Foodmaker, Tricon Global Restaurants, Sonic Corp., and Wendy's. (4) As of 12/28/97. 19 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS
(Dollars in millions, except per share data) LTM FYE Shares Ticker Date Date Out. ------ -------- -------- ----- Darden Restaurants, Inc. (b)(c)(d) DRI 11/23/97 5/25/97 148.6 NPC International, Inc. (e)(f)(g) NPCI 12/23/97 3/25/97 24.7 Pizza Inn, Inc. (h)(i)(j) PZZI l2/28/97 6/29/97 12.7 Showbiz Pizza Time, Inc. (e)(k) SHBZ 9/26/97 12/27/96 18.7 Uno Restaurant Corporation (e)(l)(m) UNO 12/28/97 9/28/97 10.9 Sbarro, Inc. (n) SBA 12/28/97 12/28/97 20.4 SUMMARY STATISTICS EXCLUDE SBARRO, INC. (table continued) Based on Latest Twelve Months Results ----------------------------------------------------------------------------------------- Market Values Enterprise Value Multiples Equity Value Multiples ----------------------------- --------------------------- --------------------------- (Dollars in millions, except per share data) 2/27/98 Book Net LTM Per Share Equity Unlevered Sales EBITDA EBIT Value Income E.P.S. --------- -------- --------- ------- ------ -------- --------- ------- ------ Darden Restaurants, Inc. $13.50 $2,041.4 $2,393.1 0.8x 9.0x 18.2x 1.9x 30.4x 30.9x NPC International, Inc. $11.50 $289.4 $495.3 1.2x 7.4x 12.0x 2.6x 15.9x l5.9x Pizza Inn, Inc. $5.31 $72.6 $78.4 1.2x 9.2x 10.3x 6.6x 15.6x 15.6x Showbiz Pizza Time, Inc. $29.00 $562.2 $571.3 1.7x 8.7x 14.3x 3.4x 25.5x 25.0x Uno Restaurant Corporation $6.50 $71.1 $118.0 0.7x 5.1x 11.3x l.0x 14.3x 15.3x Sbarro, Inc. $29.50 $611.8 $484.5 1.4x 6.0x 8.5x 2.8x l6.0x 15.9x SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 1.7x 9.2x 18.2x 6.6x 30.4x 30.9x LOW 0.7x 5.lx 10.3x 1.0x 14.3x 15.3x MEAN 1.lx 7.9x 13.2x 3.lx 20.4x 20.5x MEDIAN 1.2x 8.7x 12.0x 2.6x 15.9x l5.9x ADJ. MEAN 1.0x 8.4x 12.5x 2.7x l9.0x 18.9x COUNT 5 5 5 5 5 5 (table continued) Based on Forward Results ------------------------------- Equity Value Multiples ------------------------------- (Dollars in millions, except per sharem data) 1997 1998 1998P/E/ E.P.S. E.P.S. 5yr Growth --------- ------ ---------- Darden Restaurants, Inc. 27.0x 19.6x l.6x NPC International, Inc. 15.9x 12.lx 0.6x Pizza Inn, Inc. 15.6x 12.6x 0.8x Showbiz Pizza Time, Inc. 21.8x 17.7x 1.0x Uno Restaurant Corporation 15.3x NA NA Sbarro, Inc. 15.9x 15.0x 1.2x SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 27.0x 19.6x 1.6x LOW 15.6x 12.lx 0.6x MEAN 20.1x 15.5x 1.0x MEDIAN 18.9x 15.2x 0.9x ADJ. MEAN 18.9x 15.2x 0.9x COUNT 4 4 4
20 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ SELECTED COMPARABLE FAST FOOD COMPANIES (Dollars in millions, except per share data)
LTM FYE Shares Ticker Date Date Out. ------ ---- ---- ---- Au Bon Pain Co., Inc. (b)(c)(d) ABPCA 10/4/97 12/28/96 11.8 Foodmaker, Inc. (c)(e) FM 9/28/97 9/28/97 39.1 Tricon Global Restaurants, Inc. (c)(f)(g) YUM 9/6/97 12/30/96 151.8 Sonic Corp. (h) SONC 10/30/97 8/31/97 12.8 Wendy's International, Inc. (i)(j) WEN 9/28/97 12/29/96 132.2 Sbarro, Inc. (k) SBA 12/28/97 12/28/97 20.4 SUMMARY STATISTICS EXCLUDE SBARRO, INC. (table continued) BASED ON LATEST TWELVE MONTHS RESULTS ------------------------------------------------------------------------------------------------- (Dollars in millions, except per share data) Market Values Enterprise Value Multiples Equity Value Multiples ------------------------------ -------------------------- ------------------------- 2/27/98 Book Net LTM Per Share Equity Unlevered Sales EBITDA EBIT Value Income E.P.S. --------- ------ --------- ----- ------ ---- ----- ------ ------ Au Bon Pain Co., Inc. $8.38 $100.0 $177.2 0.7x 7.2x 24.6x 1.1x 64.5x 63.7x Foodmaker, Inc. $18.81 $759.2 $1,078.3 1.0x 8.6x 12.6x 8.6x 21.5x 21.2x Tricon Global Restaurants, Inc. $28.50 $4,325.6 $4,444.6 0.5x 3.5x 6.4x 1.2x 19.9x 20.3x Sonic Corp. $29.25 $381.2 $423.5 2.2x 9.4x 12.6x 3.1x 19.2x 19.7x Wendy's International, Inc. $21.69 $2,916.5 $3,140.4 1.6x 8.0x 10.7x 2.4x 16.4x 16.8x Sbarro, Inc. $29.50 $611.8 $484.5 1.4x 6.0x 8.5x 2.8x 16.0x 15.9x SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 2.2x 9.4x 24.6x 8.6x 64.5x 63.7x LOW 0.5x 3.5x 6.4x 1.1x 16.4x 16.8x MEAN 1.2x 7.3x 13.4x 3.3x 28.3x 28.3x MEDIAN 1.0x 8.0x 12.6x 2.4x 19.9x 20.3x ADJ. MEAN 1.1x 7.9x 12.0x 2.2x 20.2x 20.4x COUNT 5 5 5 5 5 5 (table continued) BASED ON FORWARD RESULTS --------------------------------- (Dollars in millions, except per share data) Equity Value Multiples --------------------------------- 1997 1998 1998P/E/ E.P.S. E.P.S. 5yr Growth ----- ----- ---------- Au Bon Pain Co., Inc. 44.1x 26.2x 1.5x Foodmaker, Inc. 19.8x 16.8x 0.8x Tricon Global Restaurants, Inc. NA 14.9x 1.1x Sonic Corp. 19.6x 17.1x 1.1x Wendy's International, Inc. 16.3x 18.1x 1.2x Sbarro, Inc. 15.9x 15.0x 1.2x SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 44.1x 26.2x 1.5x LOW 16.3x 14.9x 0.8x MEAN 25.0x 18.6x 1.2x MEDIAN 19.7x 17.1x 1.1x ADJ. MEAN 19.7x 17.3x 1.1x COUNT 4 5 5
21 [LOGO] Prudential - --- Securities ________________________________________________________________________________ ___________________________________________________ E. Leveraged Buy-Out Analysis ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY LEVERAGED BUY-OUT ANALYSIS BASE CASE SCENARIO - ANALYSIS ASSUMES 0.5% COMPARATIVE STORE SALES GROWTH AND 70 NEW STORES, PER ANNUM.
SENSITIVITY ANALYSIS - YEAR 2002 CASH OUT ------------------------------------------------ OFFER PRICE $29.00 $30.00 $31.00 $32.00 $33.00 CASH OUT MULTIPLE -EBITDA 6.0x 110% 51% 34% 25% 18% 7.0x 126% 63% 44% 34% 27% 8.0x 139% 72% 52% 42% 34%
23 [LOGO] Prudential - --- Securities Section III ________________________________________________________________________________ ___________________________________________________ III. Appendix ___________________________________________________ [LOGO] Prudential Securities ________________________________________________________________________________ ___________________________________________________ A. Comparable Companies Analysis ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY COMPARABLE RESTAURANT COMPANIES ANALYSIS(1)(2) SIZE FACTORS ($ IN MILLIONS) LTM SALES - ---------------------------------------- Tricon Global Restaurants, Inc. $9,625.0 Darden Restaurants, Inc. $3,172.1 Wendy's International, Inc. $2,013.4 Foodmaker, Inc. $1,071.7 NPC International, Inc. $409.8 SBARRO, INC. $345.1 Showbiz Pizza Time, Inc. $331.1 Au Bon Pain Co., Inc. $248.6 Sonic Corp. $192.9 Uno Restaurant Corporation $180.8 Pizza Inn, Inc. $68.0 - ---------------------------------------- MEAN $1,731.3 EQUITY VALUE AS OF 2/27/98 (EQUITY MARKET CAPITALIZATION) - ---------------------------------------- Tricon Global Restaurants, Inc. $4,325.6 Wendy's International, Inc. $2,916.5 Darden Restaurants, Inc. $2,041.4 Foodmaker, Inc. $759.2 SBARRO, INC. $611.8 Showbiz Pizza Time, Inc. $562.2 Sonic Corp. $381.2 NPC International, Inc. $289.4 Au Bon Pain Co., Inc. $100.0 Pizza Inn, Inc. $72.6 Uno Restaurant Corporation $71.1 - ---------------------------------------- MEAN $1,151.9 NUMBER OF RESTAURANTS - ---------------------------------------- Tricon Global Restaurants, Inc. 29,096 Wendy's International, Inc. 6,626 Sonic Corp. 1,717 Foodmaker, Inc. 1,323 Darden Restaurants, Inc. 1,151 NPC International, Inc. 876 SBARRO, INC. 858 Pizza Inn, Inc. 494 Showbiz Pizza Time, Inc. 314 Au Bon Pain Co., Inc. 289 Uno Restaurant Corporation 161 - ---------------------------------------- MEAN 4,205 ENTERPRISE VALUE AS OF 2/27/98 (EQUITY MARKET CAPITALIZATION PLUS NET DEBT) - ---------------------------------------- Tricon Global Restaurants, Inc. $4,444.6 Wendy's International, Inc. $3,140.4 Darden Restaurants, Inc. $2,393.1 Foodmaker, Inc. $1,078.3 Showbiz Pizza Time, Inc. $571.3 NPC International, Inc. $495.3 SBARRO, INC. $484.5 Sonic Corp. $423.5 Au Bon Pain Co., Inc. $177.2 Uno Restaurant Corporation $118.0 Pizza Inn, Inc. $78.4 - ---------------------------------------- MEAN $1,292.0 26 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY COMPARABLE RESTAURANT COMPANIES ANALYSIS(1)(2) GROWTH FACTORS AS OF FISCAL YEAR END SALES GROWTH (Two (2) Year CAGR) - ---------------------------------------- Sonic Corp. 21.9% Au Bon Pain Co., Inc. 13.8% Wendy's International, Inc. 9.2% Uno Restaurant Corporation 5.9% Pizza Inn, Inc. 5.6% Showbiz Pizza Time, Inc. 4.6% SBARRO, INC. 4.5% Foodmaker, Inc. 2.6% Tricon Global Restaurants, Inc. 1.4% Darden Restaurants, Inc. 0.1% NPC International, Inc. -3.6% - ---------------------------------------- MEAN 6.2% EBIT GROWTH (Two (2) Year CAGR) - ---------------------------------------- Showbiz Pizza Time, Inc. 127.3% Foodmaker, Inc. 51.7% Sonic Corp. 21.9% NPC International, Inc. 20.1% Wendy's International, Inc. 16.6% Pizza Inn, Inc. 15.8% SBARRO, INC. 9.5% Tricon Global Restaurants, Inc. 3.9% Uno Restaurant Corporation -13.3% Darden Restaurants, Inc. -27.6% Au Bon Pain Co., Inc. -61.2% - ---------------------------------------- MEAN 15.5% EBITDA GROWTH (Two (2) Year CAGR) - ---------------------------------------- Foodmaker, Inc. 28.9% Showbiz Pizza Time, Inc. 27.9% Sonic Corp. 27.9% Pizza Inn, Inc. 16.1% Wendy's International, Inc. 14.4% NPC International, Inc. 8.1% SBARRO, INC. 6.7% Tricon Global Restaurants, Inc. 1.9% Uno Restaurant Corporation -3.5% Darden Restaurants, Inc. -13.9% Au Bon Pain Co., Inc. -16.8% - ---------------------------------------- MEAN 9.1% NET INCOME GROWTH (Two (2) Year CAGR) - ---------------------------------------- Au Bon Pain Co., Inc. NM Foodmaker, Inc. NM Showbiz Pizza Time, Inc. 341.1% NPC International, Inc. 81.8% Pizza Inn, Inc. 26.1% Sonic Corp. 24.0% Wendy's International, Inc. 16.6% SBARRO, INC. 10.1% Tricon Global Restaurants, Inc. 4.9% Uno Restaurant Corporation -17.9% Darden Restaurants, Inc. -42.0% - ---------------------------------------- MEAN 54.3% 27 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY COMPARABLE RESTAURANT COMPANIES ANALYSIS(1)(2) GROWTH FACTORS (CONT'D) COMPARATIVE STORE SALES GROWTH (Trailing One (1) Year Growth) - ---------------------------------------- Showbiz Pizza, Inc. 9.6% Foodmaker, Inc. 6.5% Sonic Corp. 6.3% Wendy's International, Inc. 5.3% Darden Restaurants, Inc. 1.2% SBARRO, INC. -0.4% Au Bon Pain Co., Inc. -1.3% Uno Restaurant Corporation -1.7% Pizza Inn, Inc. -2.0% Tricon Global Restaurants, Inc. -4.0% NPC International, Inc. -7.5% - ---------------------------------------- MEAN 1.2% CONSENSUS FORWARD GROWTH RATE (Five (5) Year Growth) - ---------------------------------------- NPC International, Inc. 22.0% Foodmaker, Inc. 20.0% Au Bon Pain Co., Inc. 17.0% Showbiz Pizza Time, Inc. 17.0% Sonic Corp. 16.0% Wendy's International, Inc. 15.0% Pizza Inn, Inc. 15.0% Uno Restaurant Corporation 15.0% Tricon Global Restaurants, Inc. 13.0% Darden Restaurants, Inc. 12.0% SBARRO, INC. 12.0% - ---------------------------------------- MEAN 16.2% 28 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ VALUATION SUMMARY COMPARABLE RESTAURANT COMPANIES ANALYSIS(1)(2) RISK FACTORS EBITDA MARGINS (EBITDA to Sales) - ---------------------------------------- SBARRO, INC. 23.5% Sonic Corp. 23.5% Showbiz Pizza Time, Inc. 19.9% Wendy's International, Inc. 19.6% NPC International, Inc. 16.4% Tricon Global Restaurants, Inc. 13.2% Uno Restaurant Corporation 12.9% Pizza Inn, Inc. 12.5% Foodmaker, Inc. 11.7% Au Bon Pain Co., Inc. 9.9% Darden Restaurants, Inc. 8.4% - ---------------------------------------- MEAN 14.8% LEVERAGE (Total Debt to Total Cap. (book)) - ---------------------------------------- SBARRO, INC. 0.0X Tricon Global Restaurants, Inc. 0.1x Showbiz Pizza Time, Inc. 0.2x Darden Restaurants, Inc. 0.3x Sonic Corp. 0.3x Wendy's International, Inc. 0.3x Pizza Inn, Inc. 0.4x Uno Restaurant Corporation 0.4x Au Bon Pain Co., Inc. 0.5x NPC International, Inc. 0.7x Foodmaker, Inc. 0.8x - ---------------------------------------- MEAN 0.4X EBIT MARGINS (EBIT to Sales) - ---------------------------------------- Sonic Corp. 17.4% SBARRO, INC. 16.6% Wendy's International, Inc. 14.6% Showbiz Pizza Time, Inc. 12.1% Pizza Inn, Inc. 11.2% NPC International, Inc. 10.1% Foodmaker, Inc. 8.0% Tricon Global Restaurants, Inc. 7.2% Uno Restaurant Corporation 5.8% Darden Restaurants, Inc. 4.1% Au Bon Pain Co., Inc. 2.9% - ---------------------------------------- MEAN 9.3% NET INCOME MARGINS (Net Income to Sales) - ---------------------------------------- SBARRO, INC. 11.0% Sonic Corp. 10.3% Wendy's International, Inc. 8.9% Pizza Inn, Inc. 6.8% Showbiz Pizza Time, Inc. 6.7% NPC International, Inc. 4.4% Foodmaker, Inc. 3.3% Uno Restaurant Corporation 2.7% Tricon Global Restaurants, Inc. 2.3% Darden Restaurants, Inc. 2.1% Au Bon Pain Co., Inc. 0.6% - ---------------------------------------- MEAN 4.8% 29 [LOGO] Prudential - --- Securities Section I ________________________________________________________________________________ ___________________________________________________ 1. Comparable Companies (Pizza and Value Priced Italian Restaurants) ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS
LATEST TWELVE MONTH RESULTS -------------------------------------------------------------------------------------------------- Results -------------------------------------------------------------------------------------------------- (Dollars in millions, except per share data) Sales Rest. Pat. EBITDA EBIT Net Inc. Assets Book Value Debt ROE ----- ---------- ------ ---- -------- ------ ---------- ---- --- Darden Restaurants, Inc. $3,172.1 $603.9 $265.1 $131.5 $67.1 $1,981.6 $1,065.1 $373.7 5.9% NPC International, Inc. $409.8 $72.4 $67.3 $41.3 $18.2 $391.8 $110.2 $210.2 18.1% Pizza Inn, Inc. $68.0 $12.4 $8.5 $7.6 $4.6 $22.9 $11.1 $6.5 44.3% Showbiz Pizza Time, Inc. $331.1 $128.2 $65.8 $40.0 $22.1 $231.0 $163.2 $30.2 14.6% Uno Restaurant Corporation $180.8 $53.7 $23.3 $10.5 $5.0 $145.3 $72.1 $48.9 6.6% Sbarro, Inc. $345.1 $97.2 $81.1 $57.1 $38.1 $278.6 $220.4 $0.0 17.9% SUMMARY STATISTICS EXCLUDE SBARRO, INC. (table continued) LATEST FISCAL YEAR RESULTS Results Per Share Results (a) EPS Growth (Dollars in millions, except per share data) Sales EBIT Net LTM EPS 1997 EPS 1998 EPS 97-98 5-Yrs. ----- ---- --- ------- -------- -------- ----- ------ Darden Restaurants, Inc. $3,171.8 $97.7 $44.4 $0.44 $0.50 $0.69 38.0% 12.00% NPC International, Inc. $295.3 $34.5 $17.8 $0.72 $0.72 $0.95 31.6% 22.00% Pizza Inn, Inc. $69.1 $7.5 $4.5 $0.34 $0.34 $0.42 23.5% 15.00% Showbiz Pizza Time, Inc. $292.9 $25.7 $13.2 $1.16 $1.33 $1.64 23.3% 17.00% Uno Restaurant Corporation $178.0 $10.0 $4.9 $0.42 $0.42 NA NA 15.00% Sbarro, Inc. $345.1 $57.1 $38.1 $1.86 $1.86 $1.97 5.9% 12.00% SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 38.0% 22.0% LOW 23.3% 12.0% MEAN 29.1% 16.2% MEDIAN 27.6% 15.0% ADJ. MEAN 27.6% 15.7% COUNT 4 5
31 [LOGO] Prudential - --- Securities PROJECT OREGANO - --------------------------------------------------------------------------- SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS
LATEST TWELVE MONTHS ------------------------------------------------------------------------------------------------- (Dollars in millions, except per share data) Margins Credit ------------------------------------------- -------------------------------------------------- Rest. Pat. S, G &A EBITDA EBIT Net Debt/Cap. Crnt. Ratio Debt/EBITDA EBITDA/Int ---- ------- ------ ---- --- --------- ----------- ----------- ----------- Darden Restaurants, Inc. 19.0% 14.9% 8.4% 4.1% 2.1% 0.3x 0.7x 1.4x 12.5x NPC International, Inc. 17.7% 7.8% 16.4% 10.1% 4.4% 0.7x 0.4x 3.1x 5.2x Pizza Inn, Inc. 18.2% 7.0% 12.5% 11.2% 6.8% 0.4x 2.3x 0.8x 15.2x Showbiz Pizza Time, Inc. 38.7% 41.0% 19.9% 12.1% 6.7% 0.2x 1.4x 0.5x 22.0x Uno Restaurant Corporation 29.7% 23.4% 12.9% 5.8% 2.7% 0.4x 0.4x 2.1x 7.9x Sbarro, Inc. 28.2% 12.1% 23.5% 16.6% 11.0% 0.0x 2.9x 0.0x NM SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 38.7% 41.0% 19.9% 12.1% 6.8% 0.7x 2.3x 3.1x 22.0x LOW 17.7% 7.0% 8.4% 4.1% 2.1% 0.2x 0.4x 0.5x 5.2x MEAN 24.7% 18.8% 14.0% 8.7% 4.6% 0.4x 1.0x 1.6x 12.6x MEDIAN 19.0% 14.9% 12.9% 10.1% 4.4% 0.4x 0.7x 1.4x 12.5x ADJ. MEAN 22.3% 15.4% 13.9% 9.0% 4.6% 0.3x 0.8x 1.4x 11.9x COUNT 5 5 5 5 5 5 5 5 5 (table continued) (Dollars in millions, except per share data) Two Year Growth ------------------------------------- Net Sales EBIT EBITDA Income ----- ------- ------- -------- Darden Restaurants, Inc. 0.1% -27.6% -13.9% -42.0% NPC International, Inc. -3.6% 20.1% 8.1% 81.8% Pizza Inn, Inc. 5.6% 15.8% 16.1% 26.1% Showbiz Pizza Time, Inc. 4.6% 127.3% 27.9% 341.1% Uno Restaurant Corporation 5.9% 13.3% -3.5% -17.9% Sbarro, Inc. 4.5% 9.5% 6.7% 10.1% SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 5.9% 127.3% 27.9% 341.1% LOW -3.6% -27.6% -13.9% -42.0% MEAN 2.5% 24.5% 6.9% 77.8% MEDIAN 4.6% 15.8% 8.1% 26.1% ADJ. MEAN 3.4% 7.5% 6.9% 30.0% COUNT 5 5 5 5
32 [LOGO] Prudential - --- Securities PROJECT OREGANO - --------------------------------------------------------------------------- SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS
LATEST TWELVE MONTHS ------------------------------------------------------------------------------------ Restaurants Per Unit Data ------------------------ ------------------------------------------------------- (Dollars in millions except per unit data) Owned Franchised Total Revenue EBIT EBITDA EBITDA+Rent ROI ----- ---------- ------ ---------- -------- -------- ----------- ------ Darden Restaurants, Inc. 1,151 - 1,151 $2,675,000 $361,000 $468,000 $522,000 20.9% NPC International, Inc. 732 144 876 $665,000 $116,375 NA $206,510 31.0% Pizza Inn, Inc. 5 489 494 NA NA NA NA NA Showbiz Pizza Time, Inc. 245 69 314 $1,400,000 $117,600 $238,000 NA NA Uno Restaurant Corporation 95 66 161 $1,920,000 NA $407,250 NA 18.10% Sbarro, Inc. 627 231 858 $548,922 $104,131 $138,328 $261,891 30.5% SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 1,151.0 489.0 1,151.0 $2,675,000 $361,000 $468,000 $522,000 31.0% LOW 5.0 66.0 161.0 $665,000 $116,375 $238,000 $206,150 18.1% MEAN 445.6 192.0 599.2 $1,665,000 $198,325 $371,083 $364,075 23.3% MEDIAN 245.0 106.5 494.0 $1,660,000 $117,600 $407,250 $364,075 20.9% ADJ. MEAN 357.3 106.5 561.3 $1,660,000 $117,600 $407,250 NA 20.9% COUNT 5 4 5 4 3 3 2 3 (table continued) LATEST TWELVE MONTHS -------------------- New Store -------------------- (Dollars in millions except per unit data) Tot. Growth Cost/Unit ------- ---------- Darden Restaurants, Inc. -6.0% $2,500,000 NPC International, Inc. 60.7% $665,000 Pizza Inn, Inc. 5.1% NA Showbiz Pizza Time, Inc. -1.6% $1,300,000 Uno Restaurant Corporation 7.3% $2,250,000 Sbarro, Inc. 5.1% $859,036 SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 60.7% $2,500,000 LOW -6.0% $665,000 MEAN 13.1% $1,678,750 MEDIAN 5.1% $1,775,000 ADJ. MEAN 3.6% $1,775,000 COUNT 5 4
(1) Unit level data from Salomon Industry research report except for NPC International unit data which comes from A.G. Edwards & Sons company research report, Showbiz Pizza Time unit data which comes from Credit Suisse First Boston company research report and Uno Restaurant Corporation unit data which comes from NationsBanc Montgomery Securities Industry research report. 33 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ SELECTED COMPARABLE PIZZA AND VALUE PRICED ITALIAN FOOD RESTAURANTS Footnotes - --------- (a) Earnings estimates from First Call except Sbarro estimates which are from company projections. (b) Charges for restructuring and asset impairment in fiscal 1995, 1996 and 1997 were added back after tax effecting at the average tax rate of the company. (c) Exercise price of options assumed to be the average price of exercisable options. (d) Per unit data and comparative store sales data is for Olive Garden restaurants only. (e) Exercise price of outstanding options used as average exercise of exercisable options. (f) Impairment and loss provision for underperforming assets in fiscal 1996 and fiscal 1995 were added back after tax effecting at a 40% tax rate. (g) Per unit restaurant data and comparative store sales data is for Pizza Hut restaurants only. Comparative store sales are for the nine months ended 12/97. (h) Non-recurring gain in fiscal 1995 was added back after tax effecting at the average tax rate of the company. Dividend payout ratio is based on declared dividend rate at 12/97. (i) Restaurant count as of fiscal 1996. Comparative store sales information from Van Kasper & Company research report. (j) All outstanding options were assumed to be exercisable. (k) Restaurant count as of fiscal 1996. Comparative store growth for the nine months ended 9/97. (1) Asset impairment charges in fiscal 1996 and 1997 were added back after tax effecting at the average tax rate of the company. (m) Comparative store sales data information is for the year ended 9/97. (n) Provision for unit closings in fiscal 1995 and 1997 was added back after tax effecting at a 40% tax rate. 34 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ COMPARABLE COMPANIES COMPANY DARDEN RESTAURANTS, INC. DESCRIPTIONS ------------------------ The company is the world's largest full-service restaurant organization. In the United States, as of November 23, 1997, the company operated 1,111 restaurants in 49 states, including 649 Red Lobster restaurants, 460 The Olive Garden restaurants, and two Bahama Breeze restaurants. In addition, the company operated 40 restaurants in Canada, including 35 Red Lobster and 5 The Olive Garden restaurants. All of its restaurants in North America are company-operated. NPC INTERNATIONAL, INC. ------------------------ The company is the largest Pizza Hut franchisee in the world. The company, through its wholly owned subsidiary, Romacorp, Inc., is also the owner/franchisor of Tony Roma's, a casual theme restaurant. As of December 23, 1997, the company owned and operated 684 Pizza Hut restaurants and 45 Tony Roma's restaurants. Additionally, 145 Tony Roma's restaurants were franchised. PIZZA INN, INC. --------------- The company is the franchisor and food and supply distributor to a system of restaurants operating under the Pizza Inn name. At September 8, 1997, the Pizza Inn system consisted of 494 units, including five company operated units and 489 franchised units. Pizza Inn units are currently located in 18 states and 19 foreign countries. Domestic units are located predominantly in the southern half of the United States, with Texas, North Carolina and Arkansas accounting for approximately 30%, 15% and 11%, respectively, of the total. 35 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ COMPARABLE COMPANIES COMPANY SHOWBIZ PIZZA, INC. DESCRIPTIONS ------------------- The company is engaged in the family restaurant/ entertainment center business through its Chuck E. Cheese's restaurants which offer a variety of pizza, salad bar, sandwiches and desserts and feature musical and comic entertainment by life-size, computer-controlled robotic characters, family oriented games, rides and arcade-style activities. As of March 14, 1997, the company operated 245 restaurants and franchisees operated 69 restaurants located in 44 states. UNO RESTAURANT CORPORATION -------------------------- The Company owns and operates or franchises a total of 161 restaurants, including 95 owned and 66 franchised casual dining, full-servlce restaurants under the Pizzeria Uno ... Chicago Bar & Grill name. Company-owned restaurants are located primarily in major markets from New England to Virginia, Florida, Chicago and Denver and franchised restaurants are located throughout the United States as well as one restaurant in Seoul, Korea. 36 [LOGO] Prudential - --- Securities Section II ________________________________________________________________________________ ___________________________________________________ 2. Comparable Companies (Fast Food Restaurants) ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ SELECTED COMPARABLE FAST FOOD COMPANIES
LATEST TWELVE MONTH RESULTS ------------------------------------------------------------------------------------------- (Dollars in millions, except per share data) Results ------------------------------------------------------------------------------------------- Rest. Book Sales Pft. EBITDA EBIT Net Inc. Assets Value Debt ROE -------- -------- -------- ------ -------- -------- -------- ------ ------ Au Bon Pain Co., Inc. $248.6 $129.5 $24.5 $7.2 $1.5 $196.3 $91.6 $80.9 1.7% Foodmaker, Inc. $1,017.7 $166.0 $125.5 $85.6 $35.3 $681.8 $87.9 $347.7 50.7% Tricon Global Restaurants, Inc. $9,625.0 $1,568.0 $1,266.0 $692.0 $217.0 $5,865.0 $3,564.0 $299.0 NA Sonic Corp. $192.9 $75.2 $45.3 $33.6 $19.9 $188.8 $123.8 $46.5 16.7% Wendy's International, Inc. $2,013.4 $603.6 $394.7 $294.2 $178.3 $1,914.0 $1,204.2 $454.8 16.0% Sbarro, Inc. $345.1 $97.2 $81.1 $57.1 $38.1 $278.6 $220.4 $0.0 17.9% SUMMARY STATISTICS EXCLUDE SBARRO, INC. (table continued) LATEST FISCAL YEAR RESULTS ------------------------- (Dollars in millions, except per share data) Results Per Share Results (a) EPS Growth ------------------------- ---------------------------- ----------------- Sales EBIT Net LTM EPS 1997 EPS 1998 EPS 97-98 5-Yrs. ----- ---- --- ------- -------- -------- ----- ------ Au Bon Pain Co., Inc. $236.9 $2.3 ($1.7) $0.13 $0.19 $0.32 68.4% 17.00% Foodmaker, Inc. $1,071.7 $85.6 $35.3 $0.89 $0.95 $1.12 17.9% 20.00% Tricon Global Restaurants, Inc. $9,838.0 $628.0 $131.0 $1.40 ($0.56) $1.91 NA 13.00% Sonic Corp. $184.0 $32.2 $19.2 $1.48 $1.49 $1.71 14.8% 16.00% Wendy's International, Inc. $1,897.1 $261.6 $155.9 $1.29 $1.33 $1.20 -9.8% 15.00% Sbarro, Inc. $345.1 $57.1 $38.1 $1.86 $1.86 $1.97 5.9% 12.00% SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 68.4% 20.0% LOW -9.8% 13.0% MEAN 22.8% 16.2% MEDIAN 16.3% 16.0% ADJ. MEAN 16.3% 16.0% COUNT 4 5
38 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ SELECTED COMPARABLE FAST FOOD COMPANIES
LATEST TWELVE MONTHS ---------------------------------------------------------------------------------------------- (Dollars in millions, except per share data) Margins Credit ------------------------------------------- ----------------------------------------------- Rest. Crnt. Pft. S, G & A EBITDA EBIT Net Debt/Cap. Ratio Debt/EBITDA EBITDA/Int ----- -------- ------ ---- ----- --------- ------ ----------- ---------- Au Bon Pain Co., Inc. 52.1% 13.3% 9.9% 2.9% 0.6% 0.5x 1.3x 3.3x 3.5x Foodmaker, Inc. 15.5% 7.5% 11.7% 8.0% 3.3% 0.8x 0.5x 2.8x 3.1x Tricon Global Restaurants, Inc. 16.3% 10.0% 13.2% 7.2% 2.3% 0.1x 0.6x 0.2x 4.3x Sonic Corp. 39.0% 21.5% 23.5% 17.4% 10.3% 0.3x 0.9x 1.0x 22.8x Wendy's International, Inc. 30.0% 15.4% 19.6% 14.6% 8.9% 0.3x 2.0x 1.2x 76.7x Sbarro, Inc. 28.2% 12.1% 23.5% 16.6% 11.0% 0.0x 2.9x 0.0x NM SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 52.1% 21.5% 23.5% 17.4% 10.3% 0.8x 2.0x 3.3x 76.7x LOW 15.5% 7.5% 9.9% 2.9% 0.6% 0.1x 0.5x 0.2x 3.1x MEAN 30.6% 13.5% 15.6% 10.0% 5.1% 0.4x 1.1x 1.7x 22.1x MEDIAN 30.0% 13.3% 13.2% 8.0% 3.3% 0.3x 0.9x 1.2x 4.3x ADJ. MEAN 28.4% 12.9% 14.8% 9.9% 4.8% 0.3x 0.9x 1.7x 10.2x COUNT 5 5 5 5 5 5 5 5 5 (table continued) (Dollars in millions, except per share data) Two Year Growth ------------------------------------ Net Sales EBIT EBITDA Income ----- ----- ------ ------ Au Bon Pain Co., Inc. 13.8 -61.2 -16.8 NA Foodmaker, Inc. 2.6 51.7 28.9 NA Tricon Global Restaurants, Inc. 1.4 3.9 1.9 4.9 Sonic Corp. 21.9 21.9 27.9 24.0 Wendy's International, Inc. 9.2 16.6 14.4 16.6 Sbarro, Inc. 4.5% 9.5% 6.7% 10.1% SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 21.9% 51.7% 28.9% 24.0% LOW 1.4% -61.2% -16.8% 4.9% MEAN 9.8% 6.6% 11.2% 15.1% MEDIAN 9.2% 16.6% 14.4% 16.6% ADJ. MEAN 8.5% 14.1% 14.7% 16.6% COUNT 5 5 5 3
39 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ SELECTED COMPARABLE FAST FOOD COMPANIES
LATEST TWELVE MONTHS ---------------------------------------------------------------------------------------- Restaurants Per Unit Data(1)(2) ----------------------------- -------------------------------------------------------- (Dollars in millions, except per unit data) Owned Franchised Total Revenue EBIT EBITDA EBITDA+Rent ROI ------ ---------- ----- ------- ---- ------ ----------- --- Au Bon Pain Co., Inc. 231 58 289 $950,000 $74,000 $139,000 $237,000 13.5% Foodmaker, Inc. 963 360 1,323 $1,071,00 $108,171 $145,656 $224,900 17.3% Tricon Global Restaurants, Inc. 12,883 16,213 29,096 $665,000 $116,375 NA $206,150 31.0% Sonic Corp. 267 1,450 1,717 $600,000 $93,000 $128,000 $140,000 25.5% Wendy's International, Inc. 2,725 3,901 6,626 $975,000 $133,000 $176,000 $211,000 22.2% Sbarro, Inc. 627 231 858 $548,922 $104,131 $138,328 $261,891 30.5% SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 12,883.0 16,213.0 29,096.0 $1,071,000 $133,000 $176,000 $237,000 31.0% LOW 231.0 58.0 289.0 $600,000 $74,000 $128,000 $140,000 13.5% MEAN 3,413.8 4,396.4 7,810.2 $852,200 $104,909 $147,164 $203,810 21.9% MEDIAN 963.0 1,450.0 1,717.0 $950,000 $108,171 $142,328 $211,000 22.2% ADJ. MEAN 1,318.3 1,903.7 3,222.0 $863,333 $105,849 $142,328 $214,017 21.7% COUNT 5 5 5 5 5 4 5 5 (table continued) LATEST TWELVE MONTHS -------------------- New Store -------------------- (Dollars in millions, except per unit data) Tot. Growth Cost/Unit ------ ---------- Au Bon Pain Co., Inc. 13.3% $1,750,000 Foodmaker, Inc. 4.2% $1,300,000 Tricon Global Restaurants, Inc. NA $665,000 Sonic Corp. 8.2% $550,000 Wendy's International, Inc. 7.5% $950,000 Sbarro, Inc. 5.1% $859,036 SUMMARY STATISTICS EXCLUDE SBARRO, INC. HIGH 13.3% $1,750,000 LOW 4.2% $550,000 MEAN 8.3% $1,043,000 MEDIAN 7.8% $950,000 ADJ. MEAN 7.8% $971,667 COUNT 4 5
(1) Unit level data from Salomon Industry research report except for Foodmaker unit data which comes from Salomon Smith Barney company research report. 40 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ SELECTED COMPARABLE FAST FOOD COMPANIES FOOTNOTES - --------- (a) Earnings estimates from First Call except Sbarro estimates which are from company projections. (b) Reduction in carrying value of long-lived assets in fiscal 1995 and 1996 and facilities relocation charges in fiscal 1994, 1995 and 1996 were added back after tax effecting at a 40% tax rate. (c) Restaurant count as of fiscal 1996. (d) Per unit data is for Au Bon Pain restaurants only. (e) Equity in loss of FRI was added back in fiscal 1995 after tax effecting at a 40% tax rate. (f) Income statement results are pro forma for the spin off from PepsiCo. Gains from restaurant sales are not included in SG&A. Per unit restaurant data is for Pizza Hut restaurants only. (g) Unusual disposal charges in fiscal 1996 were added back after tax effecting at a 40% tax rate. Outstanding option information was not available. (h) Provision for impairment of long-lived assets in fiscal years 1995-1997 and the 3-months ended 11/97 were added back after tax effecting at a 40% tax rate. (i) Special charges in fiscal 1994 and 1995 and restructuring charges during the nine months ended 9/97 were added back after tax effecting at a 40% tax rate. (j) Comparable store sale information is from Legg Mason research report. (k) Provision for unit closings in fiscal 1995 and 1997 was added back after tax effecting at a 38% tax rate. 41 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ COMPARABLE COMPANIES COMPANY AU BON PAIN CO., INC. DESCRIPTIONS --------------------- The company owns, operates and franchises Au Bon Pain and Saint Louis Bread Company bakery cafes. Both concepts specialize in high quality food for breakfast and lunch. The company's bakery cafes are principally located in the northeastern and mid-Atlantic United States. As of December 28, 1996, there were 289 bakery cafes of which 231 were operated by the company (177 Au Bon Pain restaurants and 54 Saint Louis Bread Company restaurants) and 58 were franchised (48 Au Bon Pain restaurants and 10 Saint Louis Bread Company restaurants). FOODMAKER, INC. ---------------- The company owns, operates and franchises Jack in the Box restaurants, a fast-food chain located principally in the western and southwestern United States. Jack in the Box is a leading regional competitor in the fast-food segment of the restaurant industry. At September 28, 1997, there were 1,323 Jack in the Box restaurants, of which 963 were operated by the company and 360 were franchised. TRICON Global Restaurants, Inc. -------------------------------- The company is the world's largest quick service restaurant company based on number of units, with more than 29,000 units in 95 countries and territories. The company, owns, operates and franchises three of the most recognized restaurants concepts, Pizza Hut, Taco Bell and KFC. As of December 30, 1996, the company's system included 12,883 company operated/joint venture restaurants and 16,213 franchised restaurants. Of the total restaurants, 9,863 were KFC restaurants, 12,388 were Pizza Hut restaurants, and 6,845 were Taco Bell restaurants. 42 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ COMPARABLE COMPANIES COMPANY SONIC CORP. DESCRIPTIONS ----------- The company operates and franchises the largest chain of drive-in restaurants in the United States. As of November 30, 1997, the company had 1,717 restaurants in operation, consisting of 267 company-owned restaurants and 1,450 franchised restaurants, principally in the south central and southeastern United States. At a typical Sonic restaurant, a customer drives into one of 24 to 36 covered drive-in spaces, orders through an intercom, and has the food delivered by a carhop within an average of four minutes. WENDY'S INTERNATIONAL, INC. --------------------------- The company is primarily engaged in the business of operating, developing, and franchising a system of distinctive quick-service restaurants. At September 28, 1997, there were 5,133 Wendy's restaurants in operation in the United States and in 33 other countries and territories. Of these restaurants, 1,232 were operated by the company and 3,901 were franchised. During the same period, the company and its franchisees also operated 1,493 Tim Hortons restaurants in Canada and the United States. 43 [LOGO] Prudential - --- Securities ________________________________________________________________________________ ___________________________________________________ B. Leveraged Buy-Out Analysis ___________________________________________________ [LOGO] Prudential Securities PROJECT OREGANO ________________________________________________________________________________ LEVERAGED BUY-OUT ANALYSIS TRANSACTION ASSUMPTIONS (In millions, except offer price) OFFER PRICE $ 33.00 COMPARATIVE STORE SALES GROWTH 0.5% SOURCES AND USES OF FUNDS - ------------------------- SOURCES OF FUNDS - ---------------- Excess Cash on Balance Sheet $ 117.1 Bank Credit Facility 200.0 Senior Unsecured Notes 300.0 Equity Investment 103.1 ------------------ TOTAL SOURCES OF FUNDS $ 720.2 ================== USES OF FUNDS - ------------- Number of Fully Diluted Shares Outstanding 20,914 Number of Shares to be Repurchased 20,914 100.0% Purchase Price of Equity $ 690.2 Purchase Price of Options 15.4 Repayment of Existing Debt - ------------------ TOTAL PURCHASE PRICE $ 705.6 Financing Costs 9.8 Non-Financing Costs 4.8 ------------------ TOTAL USES OF FUNDS $ 720.2 ================== PRO FORMA % OF ESTIMATED TOTAL INTEREST PRO FORMA CAPITALIZATION 12/28/97 CAPITALIZATION RATE - ------------------------ Cash & Cash Equivalents $ 10.2 5.50% Bank Credit Facility 200.0 33.2% 8.00% Senior Unsecured Notes 300.0 49.7% 10.50% ------------ TOTAL LONG TERM DEBT $ 500.0 Common Equity $ 103.1 17.1% ------------ Total Shareholders' Equity 103.1 17.1% TOTAL CAPITALIZATION $ 603.1 100.0% ============ ================ Implied Equity Value $ 690.2 Implied Enterprise Value $ 572.2 Goodwill $ 484.4 Period (Years) 30 45 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ LEVERAGED BUY-OUT ANALYSIS INCOME STATEMENTS
-------------------------------------------------------------------------------------- PROJECTED FISCAL YEARS ENDING DECEMBER 31, -------------------------------------------------------------------------------------- (In 000's except per share data) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Existing restaurant sales $ 349,149 $ 368,358 $ 387,750 $ 407,326 $ 427,089 Existing franchise related income 6.664 7,353 8,049 8,752 9,461 ---------- ----------- ---------- ---------- ----------- Total revenues 355,813 375,711 395,799 416,078 436,550 Cost of food and paper products 70,807 74,703 78,636 82,606 86,614 ---------- ----------- ---------- ---------- ----------- Gross profit 285,006 301,008 317,163 333,472 349,937 Gross margin 81.6% 81.7% 81.8% 81.9% 81.9% Payroll and other benefits 86,589 91,353 96,162 101,017 105,918 Occupancy and other expenses 40,187 42,398 44,630 46,883 49,158 Rent expense 56,911 60,042 63,203 66,394 69,616 General and administrative 17,960 18,948 19,946 20,953 21,969 Provision for unit closings - - - - - Other income (1,466) (2,173) (2,171) (2,159) (2,135) ---------- ----------- ---------- ---------- ----------- Total costs and expenses 200,181 210,568 221,770 233,088 244,526 EBITDA 84,825 90,440 95,394 100,384 105,411 EBITDA margin 23.8% 24.1% 24.1% 24.1% 24.1% Depreciation 26,094 26,790 27,759 28,781 29,922 Amortization (1) 16,147 16,147 16,147 16,147 16,147 ---------- ----------- ---------- ---------- ----------- EBIT 42,584 47,503 51,487 55,456 59,342 Interest expense 48,320 47,560 45,960 43,960 41,760 Interest income 12 184 58 175 266 ---------- ----------- ---------- ---------- ----------- Income before taxes (5.,724) 127 5,585 11,671 17,848 Income taxes @ 40% 3,961 6,184 8,258 10,571 12,918 ---------- ----------- ---------- ---------- ----------- Net income $ (9,685) $ (6,057) $ (2,673) $ 1,100 $ 4,930 ========== =========== ========== ========== =========== Net income margin -2.8% -1.6% -0.7% 0.3% 1.2%
(1) Goodwill is not tax-deductible. 46 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ LEVERAGED BUY-OUT ANALYSIS BALANCE SHEETS
------------- --------------------------------------------------------------------- PRO FORMA PROJECTED FISCAL YEARS ENDING DECEMBER 31, ------------- --------------------------------------------------------------------- (In 000's) 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- ASSETS Cash and cash equivalents $ 10,214 $ 219 $ 3,343 $ 1,059 $ 3,174 $ 4,836 Accounts receivables 2,375 2,242 2,367 2,494 2,622 2,751 Inventories 2,962 2,929 3,090 3,253 3,417 3,583 Prepaid expenses 1,768 1,560 1,647 1,735 1,824 1,914 ------------ ------------ ------------ ----------- ------------- ------------ Total current assets 17,319 6,950 10,448 8,541 11,037 13,083 Property and equipment, net 136,798 139,254 132,015 123,805 115,175 106,003 Goodwill 484,418 468,271 452,124 435,976 419,829 403,682 Deferred financing fees 9,800 8,820 7,840 6,860 5,880 4,900 Deferred charges, net 1,596 1,600 1,600 1,600 1,600 1,600 Other assets 5,840 6,500 6,500 6,500 6,500 6,500 ------------ ------------ ------------ ----------- ------------- ------------ Total assets $ 655,771 $ 631,395 $ 610,526 $ 583,283 $ 560,021 $ 535,768 ============ ============ ============ =========== ============= ============ LIABILITIES AND EQUITY Accounts payable $ 10,086 $ 7,391 $ 7,798 $ 8,208 $ 8,623 $ 9,041 Accrued expenses 26,025 23,376 24,662 25,961 27,271 28,594 Dividend payable - - - - - - Income taxes 4,777 1,200 1,200 1,200 1,200 1,200 ------------ ------------ ------------ ----------- ------------- ------------ Total current liabilities 40,888 31,967 33,660 35,369 37,094 38,835 Deferred income taxes 11,801 10,031 8,526 7,247 6,160 5,236 Bank credit facility 200,000 196,000 181,000 156,000 131,000 101,000 Senior unsecured notes 300,000 300,000 300,000 300,000 300,000 300,000 ------------ ------------ ------------ ----------- ------------- ------------ Total liabilities 552,689 537,998 523,186 498,616 474,254 445,072 Retained earnings 103,082 93,397 87,340 84,667 85,767 90,696 ------------ ------------ ------------ ----------- ------------- ------------ Shareholders' equity 103,082 95,397 87,340 84,667 85,767 90,696 ------------ ------------ ------------ ----------- ------------- ------------ Total liabilities and shareholders' equity $ 655,771 $ 631,395 $ 610,526 $ 583,283 $ 560,021 $ 535,768 ============ ============ ============ =========== ============= ============
47 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ LEVERAGED BUY-OUT ANALYSIS CASH FLOW STATEMENTS
--------------------------------------------------------------- PROJECTED FISCAL YEARS ENDING DECEMBER 31, --------------------------------------------------------------- (In 000's) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Net Income $ (9,685) $ (6,057) $ (2,673) $ 1,100 $ 4,930 Depreciation and Amortization 43,221 43,917 44,887 45,908 47,049 Deferred taxes (1,770) (1,505) (1,279) (1,087) (924) Decrease (increase) in receivables 133 (125) (127) (128) (129) Decrease (increase) in inventories 33 (161) (163) (164) (166) Decrease (increase) in prepaid expenses 208 (87) (88) (89) (90) Decrease (increase) in deferred charges (4) - - - - Increase in other assets (660) - - - - (Decrease) increase in accounts payable and accruals (5,344) 1,693 1,709 1,725 1,742 (Decrease) increase in income taxes and dividends payable (3,577) - - - - ---------- ---------- ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 22,555 $ 37,674 $ 42,266 $ 47,265 $ 52,412 Capital expenditures (new stores) (14,350) (14,350) (14,350) (14,350) (14,350) Capital expenditures (maintenance) (14,200) (5,200) (5,200) (5,800) (6,400) Proceeds from sale of mark. sec - - - - - Proceeds from disposition of property & equip - - - - - ---------- ---------- ---------- ---------- ---------- NET CASH PROVIDED (USED IN) INVESTING ACTIVITIES (28,550) (19,550) (19,550) (20,150) (20,750) Proceeds (repayment) of bank credit facility (4,000) (15,000) (25,000) (25,000) (30,000) Proceeds (repayment) of unsecured debt - - - - - Payment of annual dividends - - - - - Transaction adjustments-assets - Transaction adjustments-equity Proceeds from exercise of stock options - - - - - Cash dividends paid - - - - - ---------- ---------- ---------- ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (4,000) (15,000) (25,000) (25,000) (25,000) Increase in cash (9,995) 3,124 (2,284) 2,115 1,662 Cash at beginning of year 10,214 219 3,343 1,059 3,174 ---------- ---------- ---------- ---------- ---------- Cash at end of year $ 219 $ 3,343 $ 1,059 $ 3,174 $ 4,836 ==============================================================
48 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ LEVERAGED BUY-OUT ANALYSIS LEVERAGED BUY-OUT CASH FLOWS
(In 000's except offer price) PROJECTED FISCAL YEARS ENDING DECEMBER 31, ------------------------------------------------------------------------------- Income Statement: 1998 1999 2000 2001 2002 - ----------------- ---- ---- ---- ---- ---- EBITDA $84,825 $90,440 $95,394 $100,384 $105,411 Depreciation 26,094 26,790 27,759 28,781 29,922 Amortization 16,147 16,147 16,147 16,147 16,147 OPERATING PROFIT (EBIT) 42,584 47,503 51,487 55,456 59,342 ------------------------------------------------------------------------------------------------------------------------ Interest Expense (Net)/(1)/ 48,308 47,376 45,902 43,785 41,494 -------- ------- ------- -------- -------- Pretax Income (5,724) 127 5,585 11,671 17,848 Taxes @40.00%/(2)/ 4,169 6,510 8,693 11,127 13,598 -------- ------- ------- -------- -------- Net Income $ (9,893) $(6,383) $(3,108) $ 543 $ 4,250 ======== ======= ======= ======== ======== Cash Flow: - --------- EBITA $58,731 $63,650 $67,634 $71,603 $75,489 Add: Depreciation 26,094 26,790 27,759 28,781 29,922 Less: Taxes (4,169) (6,510) (8,693) (11,127) (13,598) Capital Expenditures (28,550) (19,550) (19,550) (20,150) (20,750) Change in WC source/(use) (5,634) 1,319 1,332 1,344 1,357 -------- ------- ------- -------- -------- Cash Flow Available for Debt Service 46,472 65,699 68,482 70,451 72,420 Less: Net Interest Expense (48,308) (47,376) (45,902) (43,785) (41,494) -------- ------- ------- -------- -------- Cash Flow Available for Distribution $ (1,836) $18,323 $22,580 $26,665 $30,926 ======== ======= ======= ======== ======== Capital Structure: Rates - ----------------- ----- Cash $219 $3,343 $1,059 $3,174 $4,836 Bank Credit Facility 8.00% 196,000 181,000 156,000 131,000 101,000 Senior Unsecured Notes 10.50% 300,000 300,000 300,000 300,000 300,000 -------- ------- ------- -------- -------- Net Debt Outstanding $495,781 $477,657 $454,941 $427,826 $396,164 ======== ======= ======= ======== ======== Interest Expense: - ---------------- Bank Credit facility 8.00% $15,840 $15,080 $13,480 $11,480 $9,280 Senior Unsecured Notes 10.50% 31,500 31,500 31,500 31,500 31,500 -------- ------- ------- -------- -------- Total Interest Expense 47,340 46,580 44,980 42,980 40,780 Interest Income @ 5.50% 12 184 58 175 266 -------- ------- ------- -------- -------- Net Interest Expense 47,328 46,396 44,922 42,805 40,514 Deferred Financing Charges 980 980 980 980 980
Notes: - ----- (1) Includes amortization of deferred financing charges (2) Goodwill is not tax-deductible 49 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ LEVERAGED BUY-OUT ANALYSIS CREDIT STATISTICS
PRO FORMA PROJECTED FISCAL YEARS ENDING DECEMBER 31, --------- ----------------------------------------------------------- (In 000's, except offer price) 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- OPERATIONAL PARAMETERS EBIT $57,145 $42,584 $47,503 $51,487 $55,456 $59,342 EBITDA 81,067 84,825 90,440 95,394 100,384 105,411 Total Debt 500,000 496,000 481,000 456,000 431,000 401,000 Net Cash Interest Expense 47,328 47,328 46,396 44,922 42,805 40,514 Cash 10,214 219 3,343 1,059 3,174 4,836 COVERAGE STATISTICS: EBIT/Net Cash Interest Expense 1.21x 0.90x 1.02x 1.15x 1.30x 1.46x EBITDA/Total Cash Interest Expense 1.71x 1.79x 1.94x 2.12x 2.34x 2.58x EBITDA/Net Cash Interest Expense 1.71x 1.79x 1.95x 2.12x 2.35x 2.60x (EBITDA-CapEx)/Total Cash Interest Expense 1.11x 1.19x 1.52x 1.69x 1.87x 2.08x LEVERAGE STATISTICS: Total Net Debt/EBIT 8.57x 11.64x 10.06x 8.84x 7.71x 6.68x Total Net Debt/EBITDA 6.04x 5.84x 5.28x 4.77x 4.26x 3.76x Total Debt/EBITDA 6.17x 5.85x 5.32x 4.78x 4.29x 3.80x OFFER PRICE $33.00 COMPARATIVE STORE SALES GROWTH 0.5%
NOTES: - ----- Total Cash Interest Expense excludes deferred financing charges. Net Cash Interest Expense includes interest income, but excludes deferred financing charges. 50 [LOGO] Prudential - --- Securities PROJECT OREGANO ________________________________________________________________________________ LEVERAGED BUY-OUT ANALYSIS RETURNS ANALYSIS
PROJECTED FISCAL YEARS ENDING DECEMBER 31, ----------------------------------------------------------------- (In 000's, except offer price) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- EBITDA $84,825 $90,440 $95,394 $100,384 $105,411 ENTERPRISE VALUE Multiples of EBITDA 6.0 x $508,949 $542,641 $572,362 $602,303 $632,466 7.0 593,774 633,081 667,755 702,687 737,877 8.0 678,598 723,521 763,149 803,071 843,288 Net Debt Outstanding $495,781 $477,657 $454,941 $427,826 $396,164 EQUITY VALUE Multiples of EBITDA 6.0 x $13,168 $64,984 $117,421 $174,477 $236,301 7.0 97,993 155,424 212,815 274,861 341,712 8.0 182,818 245,864 308,208 375,245 447,123 OFFER PRICE $33.00 COMPARATIVE STORE SALES GROWTH 0.5%
51 [LOGO] Prudential - --- Securities EX-99.1(D)(1) 11 PROXY STATEMENT INCLUDING ANNEXES [SBARRO, INC. LOGO] SBARRO, INC. 401 BROADHOLLOW ROAD MELVILLE, NEW YORK 11747 July 15, 1999 Dear Fellow Shareholders: You are cordially invited to attend a Special Meeting of Shareholders of Sbarro, Inc. (the "COMPANY") to be held at the Carriage House at Milleridge Inn, 585 North Broadway on Routes 106 and 107 (Exit 41 North on the Long Island Expressway), Jericho, New York on Friday, August 13, 1999, at 11:00 a.m., local time. At the meeting, you will be asked to consider and vote upon a proposal to adopt an Amended and Restated Agreement and Plan of Merger (the "RESTATED MERGER AGREEMENT"), dated as of January 19, 1999, among the Company, Sbarro Merger LLC ("MERGECO"), and three members of the Sbarro family who are executive officers and directors of the Company and two of their affiliated entities (the "CONTINUING SHAREHOLDERS"). You can find the full text of the Restated Merger Agreement as Annex I at the back of the accompanying Proxy Statement, and we urge you to read it in its entirety. Your Board of Directors is seeking your vote on this important transaction. If the Restated Merger Agreement is adopted, upon completion of the transactions contemplated in the attached Proxy Statement, Mergeco, an entity owned by the Continuing Shareholders, will be merged with and into the Company (the "MERGER"). As a result, the entire equity interest in the Company will be owned by the Continuing Shareholders and you will be entitled to receive $28.85 in cash for each share of Common Stock of the Company that you then own. The Company will continue its operations following completion of the Merger. However, shareholders of the Company, other than the Continuing Shareholders, will no longer have an equity interest in the Company and, therefore, will not participate in any potential future earnings and growth of the Company. On November 25, 1998, to avoid any conflict of interest, your Board of Directors formed a Special Committee of its independent directors to consider and evaluate the fairness of the merger proposal. The Special Committee consists of Richard A. Mandell, Harold L. Kestenbaum, Paul A. Vatter and Terry Vince, none of whom is an employee of, or consultant to, the Company, Mergeco or the Continuing Shareholders and none of whom has any interest in the proposed Merger, other than as a holder of non-employee director stock options and, in some cases, as a public shareholder. EACH OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS PUBLIC SHAREHOLDERS. THE BOARD OF DIRECTORS HAS ADOPTED THE RESTATED MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE "FOR" ADOPTION OF THE RESTATED MERGER AGREEMENT. In arriving at its recommendation to the Board of Directors, the Special Committee gave careful consideration to a number of factors described in the accompanying Proxy Statement. One factor was the written opinion of Prudential Securities Incorporated, the financial advisor to the Special Committee, dated January 19, 1999, that as of that date and subject to the considerations, assumptions and limitations discussed in the opinion, the $28.85 per share cash merger price was fair to the Company's shareholders, other than the Continuing Shareholders, from a financial point of view. You can find the full text of this opinion as Annex II at the back of the accompanying Proxy Statement, and we urge you to read it in its entirety. Under the New York Business Corporation Law, the affirmative vote of at least two-thirds of the votes of all of the outstanding shares of Common Stock of the Company is required to adopt the Restated Merger Agreement. The Continuing Shareholders, who own approximately 34.4% of the Company's outstanding Common Stock, have agreed in the Restated Merger Agreement to vote their shares of Common Stock in favor of adoption of the Restated Merger Agreement. The Restated Merger Agreement further provides that it also must be adopted by the affirmative vote of a majority of the votes cast at the meeting, excluding votes cast by the Continuing Shareholders, abstentions and broker non-votes. The accompanying Proxy Statement explains the proposed Merger and provides specific information concerning the meeting. Please read it carefully. You may obtain additional information about the Company from documents that the Company has filed with the Securities and Exchange Commission. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED OR DISAPPROVED THE RESTATED MERGER AGREEMENT OR THE PROPOSED MERGER NOR HAVE THEY DETERMINED IF THE PROXY STATEMENT IS ADEQUATE OR ACCURATE. FURTHERMORE, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED THE FAIRNESS OR MERITS OF THE PROPOSED MERGER. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the meeting, we urge you to please complete, sign and date the enclosed proxy card and return it in the enclosed envelope as soon as possible. The envelope requires no postage if mailed in the United States. If you attend the meeting, you may vote your shares in person, even if you have previously submitted a proxy card. Your proxy may be revoked at any time before it is voted by submitting a written revocation or a proxy bearing a later date to the Secretary of the Company, or by attending and voting in person at the meeting. For shares held in "street name," you may revoke or change your vote by submitting instructions to your broker or nominee. Your prompt submission of a proxy card will be greatly appreciated. Sincerely, Mario Sbarro Chairman of the Board and Chief Executive Officer SBARRO, INC. 401 Broadhollow Road Melville, New York 11747 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AUGUST 13, 1999 To the Shareholders of Sbarro, Inc.: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "MEETING") of Sbarro, Inc. (the "COMPANY") will be held at the Carriage House at Milleridge Inn, 585 North Broadway on Routes 106 and 107 (Exit 41 North on the Long Island Expressway), Jericho, New York on Friday, August 13, 1999, at 11:00 a.m. local time to: 1. Consider and vote upon a proposal to adopt an Amended and Restated Agreement and Plan of Merger (the "RESTATED MERGER AGREEMENT"), dated as of January 19, 1999, among the Company, Sbarro Merger LLC ("MERGECO"), Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants (collectively, the "CONTINUING SHAREHOLDERS"), pursuant to which, among other things, Mergeco will merge with and into the Company (the "MERGER") and each outstanding share of the Company's Common Stock held by shareholders other than the Continuing Shareholders will be converted into the right to receive $28.85 in cash, without interest. The Restated Merger Agreement is more fully described in the accompanying Proxy Statement and the full text can be found as Annex I at the back of the accompanying Proxy Statement. 2. Consider such other matters as may properly come before the Meeting or any adjournments or postponements thereof. Information regarding the proposal to be acted upon at the Meeting is contained in the accompanying Proxy Statement. The close of business on June 25, 1999 (the "RECORD DATE") has been fixed as the record date for the determination of shareholders entitled to notice of, and to vote at, the Meeting or any adjournments or postponements thereof. Only holders of record at the close of business on the Record Date are entitled to notice of, and to vote at, the Meeting or any adjournments or postponements thereof. ADOPTION OF THE RESTATED MERGER AGREEMENT WILL REQUIRE THE AFFIRMATIVE VOTE OF AT LEAST TWO- THIRDS OF THE VOTES OF ALL OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK. WHILE NOT REQUIRED BY THE NEW YORK BUSINESS CORPORATION LAW OR THE COMPANY'S CERTIFICATE OF INCORPORATION OR BY-LAWS, THE RESTATED MERGER AGREEMENT PROVIDES THAT IT ALSO MUST BE ADOPTED BY AT LEAST A MAJORITY OF THE VOTES CAST AT THE MEETING, EXCLUDING VOTES CAST BY THE CONTINUING SHAREHOLDERS, ABSTENTIONS AND BROKER NON-VOTES. PLEASE DO NOT SEND ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME. INSTRUCTIONS FOR THE PURPOSE OF EXCHANGING YOUR SHARES FOR THE CONSIDERATION TO BE RECEIVED UPON CONSUMMATION OF THE MERGER WILL BE SENT TO YOU FOLLOWING THE EFFECTIVE TIME OF THE MERGER. YOUR BOARD OF DIRECTORS, BASED IN PART UPON THE UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS, RECOMMENDS THAT YOU VOTE "FOR" ADOPTION OF THE RESTATED MERGER AGREEMENT. By Order of the Board of Directors, JOSEPH SBARRO, Secretary Melville, New York July 15, 1999 IT IS ESPECIALLY IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. EACH SHAREHOLDER IS URGED TO, AS PROMPTLY AS PRACTICABLE, SIGN, DATE AND RETURN THE ENCLOSED FORM OF PROXY, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU HOLD SHARES DIRECTLY IN YOUR NAME AND ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON, EVEN IF YOU HAVE PREVIOUSLY SUBMITTED A PROXY CARD. YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED BY SUBMITTING A WRITTEN REVOCATION OR A PROXY BEARING A LATER DATE TO THE SECRETARY OF THE COMPANY, OR BY ATTENDING AND VOTING IN PERSON AT THE MEETING. FOR SHARES HELD IN "STREET NAME," YOU MAY REVOKE OR CHANGE YOUR VOTE BY SUBMITTING NEW VOTING INSTRUCTIONS TO YOUR BROKER OR NOMINEE. SBARRO, INC. 401 BROADHOLLOW ROAD MELVILLE, NEW YORK 11747 PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS AUGUST 13, 1999 This Proxy Statement is furnished to the holders of Common Stock of Sbarro, Inc. (the "COMPANY") in connection with the solicitation of proxies ("PROXIES") by the Board of Directors of the Company (the "BOARD") for use at the Special Meeting of Shareholders (the "MEETING") to be held on Friday, August 13, 1999, at 11:00 a.m., local time, at the Carriage House at Milleridge Inn, 585 North Broadway on Routes 106 and 107 (Exit 41 North on the Long Island Expressway), Jericho, New York, and at any adjournments or postponements thereof, for the purpose set forth in the accompanying Notice of Meeting. The cost of preparing, assembling, printing, mailing and distributing the Notice of Meeting, this Proxy Statement and Proxies is to be borne by the Company. The Company also will reimburse brokers, banks and other custodians, nominees and fiduciaries, who are holders of record of the Company's Common Stock, for their reasonable out-of-pocket expenses in forwarding proxy soliciting materials to the beneficial owners of shares of Common Stock. The Company has engaged Kissel-Blake, Wall Street Plaza, 88 Pine Street, New York, New York 10005 to assist in the distribution of proxy materials and the solicitation of votes. For its services, Kissel-Blake will receive a fee of $7,000, plus reimbursement of certain out-of-pocket expenses. In addition to the use of the mail, Proxies may be solicited without extra compensation by directors, officers and employees of the Company by personal interview, telephone, telegram, cablegram or other means of electronic communication. The approximate mailing date of this Proxy Statement is July 15, 1999. Unless otherwise specified, all Proxies received will be voted in favor of the proposal to adopt the Amended and Restated Agreement and Plan of Merger (the "RESTATED MERGER AGREEMENT"), dated as of January 19, 1999, among the Company, Sbarro Merger LLC ("MERGECO"), Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants (collectively, the "CONTINUING SHAREHOLDERS"), pursuant to which, among other things, Mergeco will merge with and into the Company (the "MERGER") and each outstanding share of the Company's Common Stock held by shareholders other than the Continuing Shareholders will be converted into the right to receive $28.85 in cash, without interest. A shareholder may revoke a Proxy at any time before its exercise by filing with the Secretary of the Company an instrument of revocation or a duly executed proxy bearing a later date, or by attendance at the Meeting and voting in person. Attendance at the Meeting, without voting in person, will not constitute revocation of a Proxy. The close of business on June 25, 1999 has been fixed by the Board as the record date (the "RECORD DATE") for the determination of shareholders entitled to notice of, and to vote at, the Meeting and any adjournments or postponements thereof. As of the Record Date, there were 20,534,313 shares of Common Stock of the Company outstanding. Each share of Common Stock outstanding on the Record Date will be entitled to one vote on the matters to come before the Meeting. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of the Company's Common Stock is required to constitute a quorum for the transaction of business at the Meeting. Proxies submitted which contain abstentions or broker non-votes will be deemed present at the Meeting for the purpose of determining the presence of a quorum. YOUR BOARD OF DIRECTORS HAS RECOMMENDED A VOTE "FOR" ADOPTION OF THE RESTATED MERGER AGREEMENT. CERTAIN QUESTIONS AND ANSWERS ABOUT VOTING AND THE MERGER Q: WHY AM I RECEIVING THESE Q: HOW CAN I VOTE SHARES HELD IN MY MATERIALS? BROKER'S NAME? A: The Board of Directors of Sbarro, A: If your broker holds your shares Inc. is providing these proxy in its name (or in what is materials to give you information commonly called "street name"), to determine how to vote in then you should give your broker connection with a special meeting instructions on how to vote. of shareholders which will take Otherwise your shares will not be place on Friday, August 13, 1999 voted. at Milleridge Inn, 585 North Broadway on Routes 106 and 107 Q: CAN I CHANGE MY VOTE? (Exit 41 North on the Long Island Expressway), Jericho, New York. A: You may change your proxy instructions at any time prior to Q: WHAT WILL BE VOTED ON AT THE the vote at the Meeting. For MEETING? shares held directly in your name, you may accomplish this by A: Whether to adopt the Restated completing a new proxy or by Merger Agreement pursuant to which attending the Meeting and voting Mergeco will merge with and into in person. Attendance at the the Company, with the Company as Meeting alone will not cause your the surviving corporation. previously granted proxy to be Following the Merger, the revoked unless you vote in person. Continuing Shareholders will own For shares held in "street name," all of the Company's capital you may accomplish this by stock. submitting new voting instructions to your broker or nominee. Q: WILL ANY OTHER MATTERS BE VOTED ON AT THE MEETING? Q: WHAT VOTE IS REQUIRED TO ADOPT THE RESTATED MERGER AGREEMENT? A: No. A: For the Merger to occur, two Q: WHO CAN VOTE? approvals are required. First, two-thirds of all outstanding A: All shareholders of record as of shares of Common Stock of the the close of business on June 25, Company must adopt the Restated 1999. Merger Agreement. Second, a majority of the votes cast, other Q: WHAT SHOULD I DO NOW? than votes of the Continuing Shareholders, abstentions and A: PLEASE VOTE. You are invited to broker non-votes, must be for attend the Meeting. However, you adoption of the Restated Merger should mail your signed and dated Agreement. proxy card in the enclosed envelope as soon as possible, so Q: HOW ARE VOTES COUNTED? that your shares will be represented at the Meeting in case A: You may vote "FOR", "AGAINST" or you are unable to attend. No "ABSTAIN." If you "ABSTAIN" or do postage is required if the proxy not vote, it has the same effect card is returned in the enclosed as a vote "AGAINST" with respect postage prepaid envelope and to the vote that requires the mailed in the United States. Restated Merger Agreement to be adopted by two-thirds of all Q: WHAT DOES IT MEAN IF I RECEIVE outstanding Common Stock of the MORE THAN ONE PROXY OR VOTING Company. An abstention or non-vote INSTRUCTION CARD? will have no effect with respect to the vote that requires adoption A: It means your shares are of the Restated registered differently or are held in more than one account. Please provide voting instructions for each proxy card that you receive. -i- Merger Agreement by a majority of Q: WHEN WILL THE MERGER TAKE PLACE? Public Shareholders. If you provide specific voting A: If the Restated Merger Agreement instructions, your shares will be is adopted, we expect that it voted as you instruct. If you sign could take up to six weeks after your proxy card or broker voting the Meeting to complete the instruction card with no further necessary financing arrangements. instructions, your shares will be However, the closing may take voted in accordance with the longer if the financing or other recommendation of the Board. closing conditions have not been then satisfied. Q: WHAT WILL I RECEIVE IN THE MERGER? Q: SHOULD I SEND IN MY STOCK A: You will be entitled to receive CERTIFICATES NOW? $28.85 per share in cash in exchange for each share of the A: No. After the Merger is Company's Common Stock owned by consummated, we will send you you. written instructions that will tell you how to exchange your Q: WHAT IS THE BOARD'S certificates for $28.85 per share RECOMMENDATION? in cash. PLEASE DO NOT SEND IN YOUR CERTIFICATES NOW OR WITH YOUR A: The Board recommends that you vote PROXIES. Hold your certificates your shares "FOR" adoption of the until you receive our Restated Merger Agreement. instructions. Q: WHY IS THE BOARD OF DIRECTORS Q: WHAT ARE THE U.S. FEDERAL INCOME RECOMMENDING THAT I VOTE TO ADOPT TAX CONSEQUENCES OF THE MERGER TO THE RESTATED MERGER AGREEMENT? ME? A: A Special Committee of the Board, A: Your receipt of cash in exchange consisting of four independent for your shares in the Merger directors, negotiated the terms of generally will be taxable for U.S. the Restated Merger Agreement with federal income tax purposes in the the Continuing Shareholders and, same manner as if you sold your based on a number of factors, shares for $28.85 per share in including a fairness opinion cash. To review the federal income received from Prudential tax consequences to shareholders Securities Incorporated, in greater detail, see pages 51 to unanimously concluded that the 52 and consult with your tax Merger is fair to, and in the best advisor. interests of, the Company and the Public Shareholders and Q: WILL I HAVE APPRAISAL RIGHTS? recommended its adoption by the full Board. In the opinion of your A: No. You will not have any Board, based in part upon the appraisal rights as a result of recommendation of the Special the Merger. Committee, the Merger is fair to, and in the best interests of, the Q: WHO CAN ANSWER MY QUESTIONS? Company and the Public Shareholders. To review the A: If you have more questions about background and reasons for the the Merger or would like Merger in greater detail, see additional copies of this Proxy pages 15 to 36. Statement, you should contact Kissel-Blake at 1-800-554-7733 (toll free in the United States) or 1-212-344-6733 (call collect). -ii- TABLE OF CONTENTS PAGE SUMMARY.......................................................................1 Certain Definitions..................................................1 Information Concerning the Meeting...................................3 The Merger Parties...................................................4 Special Factors......................................................4 The Restated Merger Agreement........................................7 No Right of Appraisal................................................9 Selected Consolidated Financial Data of the Company.................10 Market Prices of and Dividends on the Common Stock..................13 Forward-Looking Information.........................................14 SPECIAL FACTORS..............................................................15 Background of the Transaction.......................................15 Recommendations of the Special Committee and the Board of Directors.........................................................28 The Continuing Shareholders' Purpose and Reasons for the Merger.....34 Presentation and Fairness Opinion of Prudential Securities..........36 Certain Financial Projections.......................................42 Plans for the Company after the Merger..............................46 Conduct of the Business of the Company if the Merger is not Consummated.......................................................46 Interests of Certain Persons in the Merger and the Company..........47 Certain Effects of the Merger.......................................50 Certain U.S. Federal Income Tax Consequences........................51 Fees and Expenses...................................................52 Accounting Treatment................................................53 Financing of the Merger.............................................53 Regulatory Approvals................................................55 Risk of Insolvency..................................................56 Risk that the Merger will not be Consummated........................56 LITIGATION PERTAINING TO THE MERGER..........................................56 Initial Proposal Litigation.........................................56 Current Shareholder Litigation......................................57 THE RESTATED MERGER AGREEMENT................................................59 The Merger; Merger Consideration....................................59 The Exchange Fund; Payment for Shares of Common Stock...............59 Transfers of Common Stock...........................................60 Treatment of Stock Options..........................................60 Tax Withholding.....................................................60 Directors and Officers, Certificate of Incorporation and By-Laws Following the Merger.............................................61 Representations and Warranties......................................61 Covenants...........................................................61 Indemnification and Insurance.......................................62 No Solicitation; Fiduciary Obligations of Directors.................64 Conditions..........................................................64 Termination.........................................................66 Fees and Expenses...................................................66 Amendment and Waiver................................................67 -iii- TABLE OF CONTENTS (CONT'D) PAGE BUSINESS OF THE COMPANY....................................................68 Overview..........................................................68 Industry Overview ................................................69 Competitive Strengths.............................................69 Business Strategy.................................................70 MANAGEMENT.................................................................71 Directors and Executive Officers of the Company...................71 Family Relationships..............................................75 Background of the Continuing Shareholders.........................75 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................................75 CERTAIN TRANSACTIONS IN THE COMMON STOCK...................................78 INDEPENDENT PUBLIC ACCOUNTANTS.............................................79 SHAREHOLDER PROPOSALS......................................................79 WHERE YOU CAN FIND MORE INFORMATION........................................80 AVAILABLE INFORMATION......................................................81 OTHER MATTERS..............................................................81 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................F-1 Annex I -- Amended and Restated Agreement and Plan of Merger Annex II -- Opinion of Prudential Securities Incorporated -iv- SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE PROPOSED MERGER FULLY, AND FOR A MORE COMPLETE DESCRIPTION OF THE TERMS OF THE PROPOSED MERGER, YOU SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY, INCLUDING THE ANNEXES, AND THE OTHER DOCUMENTS TO WHICH WE REFER YOU. THOSE OTHER DOCUMENTS ARE LISTED IN THE SECTION HEADING "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 80. FOR FURTHER INFORMATION, ALSO SEE THE SECTION HEADING "AVAILABLE INFORMATION" ON PAGE 81. CERTAIN DEFINITIONS Instead of repeating certain full descriptions of certain terms throughout this Proxy Statement, we have used the following shortened terms. Certain other terms which are not used as frequently are defined within the document at their first use, with the defined term being italicized. BOARD means the full Board of Directors of the Company, consisting of Mario Sbarro, Joseph Sbarro, Anthony Sbarro, Carmela Sbarro, Harold J. Kestenbaum, Richard A. Mandell, Paul A. Vatter, Terry Vince and Bernard Zimmerman. COMMON STOCK means the Company's common stock, par value $.01 per share. COMPANY means Sbarro, Inc., a New York corporation of which you are presently a shareholder, as well as the Surviving Corporation after the Merger. CONTINUING SHAREHOLDERS means Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants. INITIAL PROPOSAL means the proposal made by the Continuing Shareholders on January 12, 1998, as amended, with respect to a merger transaction. MERGECO means Sbarro Merger LLC, a limited liability company formed in New York by the Continuing Shareholders solely for implementing the Merger. The Continuing Shareholders own all of the equity interests of Mergeco. MERGER means the merger of Mergeco with and into the Company pursuant to the Restated Merger Agreement, with the Company as the Surviving Corporation. MERGER AGREEMENT means the Agreement and Plan of Merger entered into on January 19, 1999 among the Company, Mergeco and the Continuing Shareholders. MERGER CONSIDERATION means the $28.85 per share in cash without interest, to be received by the Public Shareholders following consummation of the Merger. -1- PUBLIC SHAREHOLDERS means all of the shareholders of the Company other than the Continuing Shareholders. PUBLIC SHARES means the outstanding shares of Common Stock held by the Public Shareholders. RESTATED MERGER AGREEMENT means the Amended and Restated Agreement and Plan of Merger, dated as of January 19, 1999, among the Company, Mergeco and the Continuing Shareholders. The Restated Merger Agreement made certain non-economic and, except to extend the date after which either the Company or the Continuing Shareholders could terminate the transaction solely by reason of the Merger not having been consummated from June 30, 1999 to August 31, 1999, non-substantive changes to the Merger Agreement, and restated the Merger Agreement as so amended. REVISED PROPOSAL means the proposal made by the Continuing Shareholders on November 25, 1998 with respect to the Merger. SPECIAL COMMITTEE means the committee of the Board formed to consider and evaluate the proposal made by the Continuing Shareholders. The members of the Special Committee are Richard A. Mandell (Chairman), Harold L. Kestenbaum, Paul A. Vatter and Terry Vince, the four directors of the Company who are neither employees of, nor consultants to, the Company, Mergeco or the Continuing Shareholders, and have no interest in the proposed Merger, other than as holders of non-employee director Stock Options and, in some cases, as Public Shareholders. STOCK OPTIONS means all outstanding options to purchase Common Stock granted by the Company. SURVIVING CORPORATION means the Company following the Merger, as the surviving corporation of the Merger. References in this Proxy Statement to "we," "our" or "us" refers to the Company, not to Mergeco or the Continuing Shareholders. When we refer to the Company's management, we mean one or more of the Company's principal executive officers, Mario Sbarro (Chairman of the Board and President), Anthony Sbarro (Vice Chairman of the Board and Treasurer), Joseph Sbarro (Senior Vice President and Secretary) and Robert S. Koebele (Co-Vice President-Finance and Co-Chief Financial Officer). All information contained in this Proxy Statement relating to Mergeco and the Continuing Shareholders has been supplied by them for inclusion and has not been independently verified by the Company. No persons have been authorized to give any information or to make any representations other than those contained in this Proxy Statement. Certain statements contained in this Proxy Statement are forward-looking and are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those projected, expressed or implied. You should refer to "--Forward-Looking Information" on page 14. -2- INFORMATION CONCERNING THE MEETING TIME, DATE AND PLACE. The Meeting will be held on Friday, August 13, 1999 at 11:00 a.m., local time, at the Carriage House at Milleridge Inn, 585 North Broadway on Routes 106 and 107 (Exit 41 North on the Long Island Expressway), Jericho, New York. PURPOSE OF THE MEETING. At the Meeting, holders of Common Stock at the close of business on the Record Date will consider and vote upon a proposal to adopt the Restated Merger Agreement. If the Restated Merger Agreement is adopted at the Meeting and the Merger is consummated, Mergeco will be merged with and into the Company. The Company will be the surviving corporation of the Merger and the entire equity interest in the Company will be owned by the Continuing Shareholders. All shares of Common Stock outstanding immediately prior to the time when the Merger is consummated (the "EFFECTIVE TIME"), other than shares of Common Stock then (i) owned of record by the Continuing Shareholders or Mergeco and (ii) held in the Company's treasury, will be converted into the right to receive $28.85 in cash per share, payable to the holder thereof, without interest. Under the New York Business Corporation Law (the "NYBCL") and the Company's By-Laws, no other business may be transacted at the Meeting. RECORD DATE FOR THE MEETING; QUORUM REQUIREMENTS. The close of business on June 25, 1999 has been fixed as the Record Date for determining shareholders entitled to notice of, and to vote at, the Meeting. Each share of Common Stock outstanding on the Record Date is entitled to one vote at the Meeting. As of the Record Date, 20,534,313 shares of Common Stock were outstanding. The presence, in person or by proxy, of a majority of all outstanding Common Stock is required to constitute a quorum for the transaction of business at the Meeting. VOTING REQUIREMENTS. Under the NYBCL, the affirmative vote of at least two-thirds of all of the outstanding shares of Common Stock is required to adopt the Restated Merger Agreement. The Continuing Shareholders, who own approximately 34.4% of the Common Stock, have agreed in the Restated Merger Agreement to vote their Common Stock in favor of adoption of the Restated Merger Agreement. In addition, the Restated Merger Agreement provides that it is a condition to the consummation of the Merger that the Restated Merger Agreement also must be adopted by at least a majority of the votes cast at the Meeting, excluding votes cast by the Continuing Shareholders, abstentions and broker non-votes. PROXIES. A proxy card is enclosed for your use in voting by mail. A Proxy may be revoked at any time prior to its exercise at the Meeting. Common Stock represented by properly executed Proxies received at or prior to the Meeting, and which have not been revoked, will be voted in accordance with the instructions indicated on the Proxy. YOU SHOULD NOT SEND ANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK WITH YOUR PROXY CARD. IF THE MERGER IS CONSUMMATED, INFORMATION AS TO THE PROCEDURE FOR THE EXCHANGE OF YOUR CERTIFICATES WILL BE SENT TO YOU. SEE "THE RESTATED MERGER AGREEMENT -- THE EXCHANGE FUND; PAYMENT FOR SHARES OF COMMON STOCK" AND "THE RESTATED MERGER AGREEMENT -- TRANSFERS OF COMMON STOCK." -3- THE MERGER PARTIES THE COMPANY. The Company was organized in New York in 1977 and is the successor to a number of family food and restaurant businesses developed and operated by the Sbarro family. The Company develops and operates or franchises an international chain of family-style Italian restaurants principally under the "Sbarro" and "Sbarro The Italian Eatery" names. Sbarro restaurants are family-oriented cafeteria-style restaurants featuring a menu of popular Italian food, including pizza with a variety of toppings, a selection of pasta dishes and other hot and cold Italian entrees, salads, sandwiches, cheesecake and other desserts. As of April 25, 1999, there were 910 Sbarro restaurants of which 635 were Company-owned and 275 were franchise units. In addition, since 1995, the Company has created and operated, through joint ventures, other restaurant concepts for the purpose of developing growth opportunities. Its principal executive offices are located at 401 Broadhollow Road, Melville, New York 11747, and its telephone number is (516) 715-4100. MERGECO. Mergeco is a New York limited liability company organized on December 15, 1998 by the Continuing Shareholders for the purpose of effecting the Merger. The Continuing Shareholders are the only members of Mergeco. If the Merger is consummated, at the Effective Time, Mergeco will be merged with and into the Company, with the Company as the surviving corporation following the Merger. Mergeco has no material assets and has not engaged in any activities except in connection with entering into the Restated Merger Agreement and carrying out the transactions contemplated by the Restated Merger Agreement. The address of Mergeco is c/o Mario Sbarro, 401 Broadhollow Road, Melville, New York 11747, and its telephone number is (516) 715-4100. SPECIAL FACTORS FOR A COMPLETE DESCRIPTION OF THE SPECIAL FACTORS TO BE CONSIDERED IN THE MERGER, WE URGE YOU TO READ THE SECTION ENTITLED "SPECIAL FACTORS" BEGINNING ON PAGE 15. CONTINUING SHAREHOLDERS' PURPOSE AND REASONS FOR THE MERGER. The Continuing Shareholders desire to become the owners of all of the capital stock in the Company that they do not already own for the reasons described under the section entitled "SPECIAL FACTORS -- The Continuing Shareholders' Purpose and Reasons for the Merger" beginning on page 34. The Continuing Shareholders structured the transaction as a merger because it would enable the transaction to be completed in one step, which would minimize the risk that the contemplated transactions will not be finalized and reduce transaction costs. If the Merger is consummated, the Common Stock will cease to be publicly traded, the Public Shares will cease to be outstanding and the Public Shareholders will be entitled to receive the Merger Consideration of $28.85 per share in cash, without interest. Following the Merger, all of the outstanding capital stock of the Company, as the surviving corporation in the Merger, will be owned by the Continuing Shareholders. RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS. On January 19, 1999, the Merger Agreement was presented for consideration to a meeting of the Special Committee, consisting of four directors of the Company who are not employees of, or consultants to, the Company, Mergeco or the Continuing Shareholders and have no interest in the proposed Merger, other than as holders of non-employee director Stock Options and, in some cases, as Public Shareholders. The Special Committee unanimously concluded that the proposed Merger, as reflected in the Merger Agreement, and the terms and provisions of the Merger Agreement, including the Merger Consideration of $28.85 in cash per share, were fair to, and in the best interests of, the Company and the Public Shareholders, and unanimously resolved to recommend to the Board that it adopt the Merger Agreement. Thereafter, the Board, based in part upon the recommendation of the Special Committee, concluded that the Merger, as reflected in the Merger Agreement, and the terms and provisions of the Merger Agreement, including the Merger Consideration of $28.85 in cash per share, were fair to, and in the best interests of, the Company and the Public Shareholders, adopted the Merger Agreement, authorized the Company to enter into the Merger Agreement and resolved to recommend to the Public Shareholders that they vote to adopt the Merger Agreement. On June 17, 1999, the Company, Mergeco and the Continuing Shareholders made certain non-economic and, except to extend the date after which either the Company or the Continuing Shareholders could terminate the transaction solely by reason of -4- the Merger not having been consummated from June 30, 1999 to August 31, 1999, non-substantive changes to the Merger Agreement, and restated the Merger Agreement as so amended. The Special Committee and the Board each concluded that none of the changes made affected their prior actions and recommendations. The Special Committee addressed its recommendation to the Board and the Board specifically addressed its recommendation to the Public Shareholders as a separate individual class. Neither the Special Committee nor the Board addressed its recommendation to the Continuing Shareholders. See "SPECIAL FACTORS -- Recommendation of the Special Committee and the Board of Directors" beginning on page 28. FACTORS CONSIDERED BY THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS. The Special Committee, in reaching its decision to recommend adoption of the Merger Agreement to the Board, and the Board, in adopting the Merger Agreement and recommending adoption of the Merger Agreement by the Public Shareholders, each considered a number of factors. In considering the Restated Merger Agreement, the Special Committee and the Board each concluded that none of the changes made in the Restated Merger Agreement to the Merger Agreement affected their prior actions and recommendations. For a discussion of factors considered by the Special Committee and the Board of Directors in making their respective recommendations, see "SPECIAL FACTORS -- Recommendations of the Special Committee and the Board of Directors" beginning on page 28. PRESENTATION AND FAIRNESS OPINION OF PRUDENTIAL SECURITIES. Prudential Securities Incorporated ("PRUDENTIAL SECURITIES") delivered its written opinion, dated January 19, 1999, and addressed to the Special Committee, to the effect that, as of that date, based upon and subject to the various considerations, assumptions and limitations stated therein, the Merger Consideration of $28.85 per share in cash to be received by the Public Shareholders in the Merger was fair, from a financial point of view, to the Public Shareholders. Prudential Securities also has concluded that had the changes in the Restated Merger Agreement been in the Merger Agreement on January 19, 1999, they would not have caused Prudential Securities to alter its conclusion. The full text of the written opinion of Prudential Securities is set forth as Annex II at the back of this Proxy Statement. You should read this opinion carefully. See "SPECIAL FACTORS -- Presentation and Fairness Opinion of Prudential Securities" beginning on page 36. PLANS FOR THE COMPANY AFTER THE MERGER. None of the Continuing Shareholders, Mergeco or the Company currently have any plans or proposals that relate to or would result in an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving the Company or any of its subsidiaries, a sale or transfer of a material amount of assets of the Company or any of its subsidiaries or, except as indicated elsewhere in this Proxy Statement, any material change in the Company's capitalization, corporate structure or business or the composition of the Board or executive officers following consummation of the Merger. However, the Continuing Shareholders intend, from time to time, to evaluate and review the Company's businesses, operations, properties, composition of the Board, management and other personnel, corporate structure, dividend policy and capitalization, and to make such changes as are deemed appropriate. The Continuing Shareholders also intend to continue to explore joint ventures and other opportunities to expand the Company's business. See "SPECIAL FACTORS -- Plans for the Company after the Merger" beginning on page 46. CONDUCT OF THE BUSINESS OF THE COMPANY IF THE MERGER IS NOT CONSUMMATED. The Board has made no determination as to the direction of the Company should the Merger not be consummated. The Board currently expects that the Company's present management will continue to operate the Company's business substantially as presently operated. However, if the Merger is not consummated, management and the Board intend, from time to time, to evaluate and review the Company's businesses, operations, properties, management and other personnel, corporate structure, dividend policy and capitalization, and to make such changes as are deemed appropriate and to continue to explore joint ventures and other opportunities to expand the Company's business. See "SPECIAL FACTORS -- Conduct of the Business of the Company if the Merger is not Consummated" beginning on page 46. INTEREST OF CERTAIN PERSONS IN THE MERGER AND THE COMPANY. In considering the recommendations of the Special Committee and of the Board, you should be aware that the Continuing Shareholders and certain -5- executive officers and directors of the Company have certain relationships or interests in the Merger and the Company that are different from your interests as a shareholder and that may present actual or potential conflicts of interest. The Special Committee and the Board were aware of these potential or actual conflicts of interest and considered them in evaluating the proposed Merger. For a description of these and other interests, see "SPECIAL FACTORS -- Interests of Certain Persons in the Merger and the Company" beginning on page 47. For a discussion of certain agreements by the Company with respect to indemnification of, and insurance for, directors and officers of the Company, see "THE RESTATED MERGER AGREEMENT -- Indemnification and Insurance" beginning on page 62. CERTAIN EFFECTS OF THE MERGER. Upon consummation of the Merger, each Public Share will be converted into the right to receive $28.85 in cash, without interest. The Public Shareholders will no longer have any ownership interest in, and will not be shareholders of, the Company. As a result, they will no longer benefit from any increases in the value of the Company. Conversely, the Public Shareholders will no longer bear the risk of any decreases in value of the Company. As a result of the Merger, the Company will be privately held and there will be no public market for the Common Stock. Upon consummation of the Merger, the Common Stock will cease to be listed or quoted on the New York Stock Exchange ("NYSE") or otherwise, the registration of the Common Stock under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), will be terminated and the Common Stock will no longer constitute "margin securities" under the rules of the Board of Governors of the Federal Reserve System. See "SPECIAL FACTORS -- Certain Effects of the Merger" beginning on page 50. LITIGATION PERTAINING TO THE MERGER. Commencing on November 27, 1998, following the Company's announcement of the proposed Merger, seven class action lawsuits were instituted by shareholders against the Company, those Continuing Shareholders serving on the Board and, except in certain lawsuits, some or all of the other directors of the Company. The purported class consists of all record and beneficial owners of the Company's Common Stock during the period beginning with the close of business on November 25, 1998 and ending on the effective date of the Merger (the "CLASS"). While the complaints in each of the actions vary, in general, they allege that the Continuing Shareholders and the other directors breached fiduciary duties, that the then proposed consideration of $27.50 to be paid to Public Shareholders was inadequate and that there were inadequate procedural protections for the Public Shareholders. On January 19, 1999, counsel for all of the plaintiffs and counsel for all of the defendants entered into a Memorandum of Understanding, pursuant to which an agreement in principle to settle all of the lawsuits was reached and the Continuing Shareholders agreed to increase their offer of the Merger Consideration to $28.85 per share. On April 7, 1999, a Stipulation of Settlement was entered into embodying (and superseding) the Memorandum of Understanding (the "STIPULATION OF SETTLEMENT"). Following the consolidation of each of the pending lawsuits into one proceeding (the "CURRENT SHAREHOLDER LITIGATION") before the Supreme Court of the State of New York (the "COURT"), on May 11, 1999, the Court issued a Scheduling Order pursuant to which a hearing was scheduled to determine, among other things, whether the Court should approve the settlement. Notice of, among other things, the hearing before the Court, in which Public Shareholders were also afforded the option to timely request exclusion from the Class and/or oppose the settlement, was distributed on May 17, 1999. The hearing was held, as scheduled, on June 29, 1999. No opposition to the settlement was presented at the hearing and no shareholder requested exclusion from the Class. The Court signed an Order and Final Judgment on July 14, 1999, among other things, approving the Stipulation of Settlement and the settlement and adjudging the terms thereof to be fair, reasonable, adequate and in the best interests of the Class. The Stipulation of Settlement provides that the settlement will be considered final when the following three events have occurred: (i) entry of the Order and Final Judgment approving the Stipulation of Settlement (which is expected to occur on or about July 15, 1999); (ii) expiration of any applicable period for the appeal of the Order and Final Judgment (which will occur 30 days after entry of the Order and Final Judgment) without an appeal having been filed or, if an appeal is filed, entry of an order affirming the Order and Final Judgment appealed from and the expiration of -6- any applicable period for the reconsideration, rehearing or appeal of such affirmance without any motion for reconsideration or rehearing or further appeal having been filed; and (iii) consummation of the Merger. The obligation of Mergeco to consummate the Merger is subject to, among other things, the settlement becoming final. See "-- No Right of Appraisal" and "THE RESTATED MERGER AGREEMENT -- Conditions" beginning on page 64. See "SPECIAL FACTORS -- Background of the Transaction," beginning on page 15 and "LITIGATION PERTAINING TO THE MERGER" beginning on page 56 for further information concerning these lawsuits and similar lawsuits instituted with respect to a prior proposal made by the Continuing Shareholders in January 1998 and the terms and conditions of the Stipulation of Settlement. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES. You will generally be taxed on your receipt of the $28.85 per share cash Merger Consideration in the same manner as if you sold your shares for such amount. BECAUSE DETERMINING THE TAX CONSEQUENCES OF THE MERGER MAY DEPEND UPON YOUR PERSONAL CIRCUMSTANCES, YOU SHOULD CONSULT YOUR TAX ADVISOR IN ORDER TO UNDERSTAND FULLY HOW THE MERGER WILL AFFECT YOU. For a more detailed discussion of potential United States federal income tax consequences to you as a result of the Merger, see "SPECIAL FACTORS - -- Certain U.S. Federal Income Tax Consequences" beginning on page 51. ACCOUNTING TREATMENT. For accounting and financial reporting purposes, the Merger will be accounted for in accordance with the "purchase method" of accounting. FINANCING OF THE MERGER. Approximately $410 million will be required to pay the aggregate Merger Consideration to the Public Shareholders and to pay holders of Stock Options, and to pay the estimated fees and expenses associated with the Merger. An additional $30 million may be required to provide sufficient liquidity to fund the Company's ongoing working capital needs, including capital expenditures. It is anticipated that the sources of the required funds will be approximately $140 million of the Company's cash and marketable securities and up to $300 million to be obtained through debt financing (the "DEBT FINANCING"). Although different sources and types of financing may be obtained, the Debt Financing presently contemplates the placement of senior notes and may include either a bank revolving credit facility, which will have undrawn availability on the closing date of the Merger of up to $30 million, or excess cash from the senior note placement, to provide sufficient liquidity to fund the Company's ongoing working capital needs, including capital expenditures. Among the conditions to the obligation of the Continuing Shareholders to consummate the Merger is that the Company has obtained the Debt Financing on material terms and conditions no less favorable than those described in the Restated Merger Agreement and a term sheet delivered by Mergeco and the Continuing Shareholders to the Special Committee. Mergeco and the Continuing Shareholders have received, and delivered to the Special Committee, a letter dated as of January 19, 1999 (the "DEBT FINANCING LETTER") from Bear, Stearns & Co. Inc. ("BEAR STEARNS") that, as of that date, subject to certain conditions, including market conditions, Bear Stearns was "highly confident" of its ability to place or arrange the Debt Financing. See "SPECIAL FACTORS -- Financing of the Merger" beginning on page 53. Bear Stearns has advised Mergeco and the Continuing Shareholders that, if the changes in the Restated Merger Agreement had been included in the Merger Agreement on January 19, 1999, it would not have caused Bear Stearns to alter the statements made in the Debt Financing Letter. THE RESTATED MERGER AGREEMENT THE MERGER CONSIDERATION. If the Merger is consummated, each Public Share will be converted into the right to receive the Merger Consideration of $28.85 per share in cash, without interest. CONDITIONS TO, AND TERMINATION OF, THE MERGER. The conditions referred to below are only brief summaries of certain conditions and termination rights specified in the Restated Merger Agreement, and are qualified in their entirety by reference to the Restated Merger Agreement. See "THE RESTATED MERGER AGREEMENT" beginning on page 59 and Annex I at the back of this Proxy Statement for the complete text of the Restated Merger Agreement. -7- The Restated Merger Agreement will terminate: o automatically if the required shareholder votes are not obtained at the Meeting; or o if the Board (with the approval of the Special Committee) and Mergeco mutually agree to terminate the Restated Merger Agreement. Either the Board (with the approval of the Special Committee), on behalf of the Company, or the members of Mergeco, on behalf of Mergeco, may terminate the Restated Merger Agreement if: o the Special Committee withdraws or modifies, in a manner adverse to Mergeco, its approval or recommendation of the Merger, the Restated Merger Agreement or the transactions contemplated by the Restated Merger Agreement; o there occur certain adverse political or financial events affecting the United States which, in the terminating party's sole judgment, make it inadvisable or impractical to proceed with the Merger; o any third party consents or government approvals which are material have not been obtained; o with certain exceptions, the representations and warranties of the other are not true and correct in all material respects at the closing date of the Merger or the covenants and agreements to be performed and complied with by the other prior to the closing of the Merger have not been complied with or performed; o any law, regulation, court order or injunction prohibits the Merger or the transactions contemplated by the Restated Merger Agreement; or o the Merger is not consummated by August 31, 1999 without fault of the terminating party. Mergeco independently may terminate the Restated Merger Agreement if: o the Company does not obtain the Debt Financing in an amount of at least $300 million, on the material terms and conditions no less favorable than those set forth in the term sheet delivered by the Continuing Shareholders to the Special Committee and having a yield to maturity not in excess of 11.25% per annum (see "SPECIAL FACTORS -- Financing of the Merger"); o there is any material adverse change in the business, condition, properties, assets or prospects of the Company and its subsidiaries taken as a whole; o there occurs a material adverse change (or event reasonably likely to result in an adverse change) in the securities, financial or borrowing markets, or applicable tax or other laws or regulations, so as to (i) decrease in any material respect the benefits of the Merger to the Continuing Shareholders or (ii) make it impractical to proceed with the Merger or the transactions contemplated by the Restated Merger Agreement or by the Debt Financing; o any of Mario Sbarro, Anthony Sbarro, Joseph Sbarro or Carmela Sbarro or members of their families who are executive officers of the Company die or become disabled (see "MANAGEMENT"); o the settlement of the Current Shareholder Litigation in accordance with the Stipulation of Settlement has not become final (the settlement is expected to become final upon the expiration of any applicable period for the appeal of the Order and Final Judgment, which is expected to occur on or about August 16, 1999, without an appeal having been filed or, if an appeal is filed, entry of an order affirming the Order and Final Judgment appealed from and -8- the expiration of any applicable period for the reconsideration, rehearing or appeal of such affirmance without any motion for reconsideration or rehearing or further appeal having been filed, and consummation of the Merger) (see "LITIGATION PERTAINING TO THE MERGER"); o there is any other pending lawsuit or other action or proceeding or decision which could prevent or substantially delay the completion of the Merger or is reasonably likely to materially increase the Merger Consideration, result in material damages or cause rescission of the Merger; or o any law or regulation or court order imposes material limitations on the ability of the Continuing Shareholders to effectively exercise full rights to ownership of the new Common Stock to be issued to them in the Merger. NO SOLICITATION. The Company has agreed in the Restated Merger Agreement not to take any action to solicit, initiate or encourage any proposal for (i) a merger or other business combination involving the Company or any of its subsidiaries, (ii) the acquisition of an equity interest in the Company or any of its subsidiaries, or (iii) the sale of a substantial portion of the assets of the Company or any of its subsidiaries, or enter into negotiations with, or furnish information to, any other party with respect to those types of transactions. The Company may, however, enter into negotiations with, or furnish information to, any other party with respect to any such proposal but only to the extent that such action is taken by, or upon the authority of, the Board if, in the Board's good faith judgment: o the proposed transaction is more favorable to the Company's shareholders than the Merger, is achievable and is supported by creditable financing; and o failure to take such action would breach the Board's fiduciary duties to the Company's shareholders under applicable law. See "THE RESTATED MERGER AGREEMENT -- No Solicitation; Fiduciary Obligations of Directors" beginning on page 64. FEES AND EXPENSES. For a discussion of the obligations for the payment of fees and expenses in connection with the Merger, see "THE RESTATED MERGER AGREEMENT -- Fees and Expenses" beginning on page 66. NO RIGHT OF APPRAISAL The Common Stock is listed on the NYSE. As a consequence of such listing, under Section 910 of the NYBCL, appraisal rights will not be available to dissenting Public Shareholders. Accordingly, a Public Shareholder who objects to the Merger will not have the right to have a court determine and fix the fair value of the shareholder's Public Shares. A hearing was held before the Court on June 29, 1999 to determine, among other things, whether the Court should approve the settlement of the Current Shareholder Litigation as fair, reasonable, adequate and in the best interests of the Class. Notice of, among other things, the scheduled hearing before the Court and the requirements for appearing at the hearing and requesting exclusion from the Class was distributed on May 17, 1999. No opposition to the settlement was presented at the hearing and no shareholder requested exclusion from the Class. The Court signed an Order and Final Judgment on July 14, 1999, among other things, approving the Stipulation of Settlement and the settlement and adjudging the terms thereof to be fair, reasonable, adequate and in the best interests of the Class. Upon the settlement becoming final (after the expiration of the appeal period and the consummation of the Merger), all Class members will be bound by all determinations, orders and judgments of the Court in the actions. See "LITIGATION PERTAINING TO THE MERGER." -9- SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY The following table sets forth selected financial information for the Company and its subsidiaries as of and for the sixteen week first quarters ended April 25, 1999 and April 19, 1998, and as of and for each of the prior five fiscal years. The following financial information should be read in conjunction with the Company's Consolidated Financial Statements and related Notes included elsewhere in this Proxy Statement. See "INDEX TO CONSOLIDATED FINANCIAL STATEMENTS" on page F-1. The interim unaudited information for the Company and its subsidiaries for the sixteen weeks ended April 25, 1999 and April 19, 1998 reflect, in the opinion of management of the Company, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the information provided for such interim periods. The results of operations for such interim periods are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. -10-
SIXTEEN WEEKS ENDED FISCAL YEARS ENDED ------------------- -------------------------------------------------- APRIL 25, APRIL 19, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1, 1999 1998 1999(1) 1997 1996 1995 1995 ---- ---- ---- ---- ---- ---- ---- (UNAUDITED) INCOME STATEMENT DATA: (DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) Revenues: Restaurant sales......... $ 100,354 $ 98,131 $ 361,534 $ 337,723 $ 319,315 $ 310,132 $ 288,808 Franchise related income. 2,506 2,306 8,578 7,360 6,375 5,942 5,234 Interest income.......... 1,591 1,446 5,120 4,352 3,798 3,081 1,949 ----------- --------- ----------- ------------ ------------ ------------ ---------- Total revenues......... 104,451 101,883 375,232 349,435 329,488 319,155 295,991 Cost and expenses: Cost of food and paper products 20,964 20,668 76,572 69,469 68,668 67,361 61,877 Restaurant operating expenses: Payroll and other employee benefits... 28,103 26,551 93,367 84,910 78,258 78,342 70,849 Occupancy and other expenses....... 31,941 29,892 101,013 93,528 85,577 84,371 76,353 Depreciation and amortization... 6,700 6,670 22,429 23,922 22,910 23,630 21,674 General and administrative expenses....... 6,791 5,964 19,708 17,762 14,940 16,089 13,319 Provision for unit closings (2) -- -- 2,515 3,300 -- 16,400 -- Terminated transaction costs (3)...... -- -- 986 -- -- -- -- Litigation settlement and related costs (4) -- -- 3,544 -- -- -- -- Loss on sale of land to be sold (5)....... -- -- 1,075 -- -- -- -- Other income........... (1,197) (700) (2,680) (1,653) (1,171) (1,359) (1,351) ----------- --------- ----------- ------------ ------------ ------------ ---------- Total costs and expenses 93,302 89,045 318,529 291,238 269,182 284,834 242,721 ----------- --------- ----------- ------------ ------------ ------------ ---------- Income before income taxes and cumulative effect of accounting changes.................. 11,149 12,838 56,703 58,197 60,306 34,321 53,270 Income taxes................ 4,237 4,878 21,547 22,115 22,916 13,042 20,244 ----------- --------- ----------- ------------ ------------ ------------ ---------- Income before cumulative effect of accounting changes....... 6,912 7,960 35,156 36,082 37,390 21,279 33,026 Cumulative effect of accounting changes (6).............. -- (822) (822) -- -- -- -- ----------- --------- ----------- ------------ ------------ ------------ ---------- Net income.................. $6,912 $7,138 $34,334 $36,082 $37,390 $21,279 $33,026 =========== ========= =========== ============ ============ ============ ========== PER SHARE DATA (7): Basic earnings per share before cumulative effect of accounting changes.................. 0.34 0.39 $1.71 $1.77 $1.84 $1.05 $1.63 Cumulative effect of accounting changes (6).............. -- (.04) (.04) -- -- -- -- ----------- --------- ----------- ------------ ------------ ------------ ---------- Basic earnings per share.... $ 0.34 $ 0.35 $ 1.67 $ 1.77 $ 1.84 $ 1.05 $ 1.63 =========== ========= =========== ============ ============ ============ ========== Basic number of shares used in the computation.......... 20,532,200 20,491,93 20,516,890 20,426,678 20,369,128 20,336,809 20,310,283 =========== ========= =========== ============ ============ ============ ========== Diluted earnings per share before cumulative effect of accounting changes.................. 0.34 0.39 $1.71 $1.76 $1.83 $1.04 $1.62 Cumulative effect of accounting changes (6).............. -- (.04) (.04) -- -- -- -- ----------- --------- ----------- ------------ ------------ ------------ ---------- Diluted earnings per share.. $ 0.34 $ 0.35 $ 1.67 $ 1.76 $ 1.83 $ 1.04 $ 1.62 =========== ========= =========== ============ ============ ============ ========== Diluted number of shares used in the computation.......... 20,574,522 20,665,846 20,583,367 20,504,303 20,404,620 20,396,704 20,355,275 =========== ========== =========== ============ ============ ============ ==========
-11-
SIXTEEN WEEKS ENDED FISCAL YEARS ENDED ------------------- --------------------------------------------------------------- APRIL 25, APRIL 19, JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1, 1999 1998 1999(1) 1997 1996 1995 1995 ---- ---- ---- ---- ---- ---- ---- (UNAUDITED) BALANCE SHEET DATA: (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) Cash, cash equivalents and marketable securities.... $ 146,072 $ 116,650 $150,472 $ 127,310 $114,818 $ 103,501 $ 80,980 Total assets................ 301,990 271,350 303,168 278,649 258,659 242,730 232,051 Working capital............. 127,475 94,539 121,380 88,006 73,619 57,645 43,271 Shareholders' equity........ 263,876 229,568 256,917 220,439 205,200 185,666 179,580 Book value per share outstanding (8).......... 12.85 11.18 12.51 10.78 10.06 9.13 8.83 Ratio of earnings to fixed 3.44x 4.09x 5.03x 5.44x 5.99x 3.93x 6.13x charges (9)..............
- ----------------------------- (1) The Company's fiscal year ends on the Sunday nearest December 31. The Company's 1998 fiscal year ended January 3, 1999 and contained 53 weeks. All other reported fiscal years contained 52 weeks. Accordingly, the 1998 fiscal year benefitted from one additional week of operations over the prior reported fiscal years. The additional week in fiscal 1998 produced revenues of $8,534, net income of $1,666 and basic and diluted earnings per share of $.08. The Company's 1999 fiscal year began on January 4, 1999, six days later than its 1998 fiscal year, which began on December 29, 1997. Therefore, the first quarter of the 1999 fiscal year did not benefit from seasonally strong "post-Christmas" revenues and profit margins. The Company estimates that this resulted in decreases in first quarter fiscal 1999 revenues of approximately $1,300, net income of approximately $450 and basic and diluted earnings per share of approximately $.02. (2) In 1998, a provision of $2,515 before tax ($1,559 or $.08 basic and diluted earnings per share after tax) was established for the closing of 20 restaurants locations. In 1997, a provision of $3,300 before tax ($2,046 or $.10 basic and diluted earnings per share after tax) relating to the Company's investment in one of its joint ventures was established for the closing of certain joint venture units. In 1995, a provision of $16,400 before tax ($10,168 or $.50 basic and diluted earnings per share after tax) was established for the closing of approximately 40 under-performing restaurants. (3) The 1998 financial statements reflect a charge of $986 before tax ($611 or $.03 basic and diluted earnings per share after tax) for costs associated with the termination of negotiations of the Initial Proposal. (4) The 1998 financial statements reflect a charge of $3,544 before tax ($2,197 or $.11 basic and diluted earnings per share after tax) in connection with the settlement of a lawsuit under the Fair Labor Standards Act. (5) During 1998, the Company received an offer to sell a parcel of Company-owned land included in construction-in-progress for an amount less than the carrying cost and, accordingly, the 1998 financial statements reflect a reduction of such carrying cost of $1,075 ($667 or $.03 basic and diluted earnings per share after tax). (6) The cumulative effect of the change in method of accounting resulted from the Company's implementation of the Statement of Position 98-5 (SOP) of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants which required companies that had capitalized pre-opening and similar costs to write off all such existing costs, net of tax benefit, as a "cumulative effect of accounting change" and to expense all such costs as incurred in the future. In accordance with its early application provisions, the Company implemented the SOP as of the beginning of its 1998 fiscal year and incurred a one-time charge of $822 ($.04 basic and diluted earnings per share), net of an income tax benefit of $504, to write off all start-up costs existing as of the beginning of the year. (7) All share and per share data have been restated to give effect to Statement of Financial Accounting Standard No. 128, which became effective for the Company at the end of 1997, and have been adjusted to give effect to a 3-for-2 stock split in the form of a 50% stock dividend distributed on September 22, 1994. (8) Book value per share outstanding was computed by dividing shareholders' equity at the end of the reported period by the actual number of shares outstanding at the end of the reported period, and does not include the dilutive effect of Stock Options. (9) The ratio of earnings to fixed charges has been determined by dividing the total fixed charges into the sum of earnings before taxes on income and fixed charges. Fixed charges consist of interest expense and one-third of rental expense (deemed to be a reasonable approximation of the interest factor). -12- MARKET PRICES OF AND DIVIDENDS ON THE COMMON STOCK The Common Stock is listed on the NYSE under the symbol "SBA." The following table shows the range of high and low sales prices (rounded to the nearest cent) of the Common Stock for the periods indicated as reported on the NYSE Composite Tape: Fiscal Year 1997: High Low - ---------------- ---- --- First Quarter (ended April 20, 1997)........... $28.63 $25.13 Second Quarter (ended July 13, 1997)........... 29.75 26.25 Third Quarter (ended October 5, 1997).......... 29.44 26.06 Fourth Quarter (ended December 28, 1997)....... 29.75 26.00 Fiscal Year 1998: - ---------------- First Quarter (ended April 19, 1998)........... $30.13 $25.44 Second Quarter (ended July 12, 1998)........... 29.69 25.56 Third Quarter (ended October 4, 1998).......... 27.25 18.31 Fourth Quarter (ended January 3, 1999)......... 26.69 19.38 Fiscal Year 1999: - ---------------- First Quarter (ended April 25, 1999)........... 27.06 23.50 Second Quarter (through July 14, 1999)......... 27.69 26.00 The Revised Proposal was announced after the close of trading on the NYSE on November 25, 1998. The closing price of the Common Stock on the NYSE on November 25, 1998 was $24-13/16 per share. On January 19, 1999, the day before public announcement that the Merger Agreement had been entered into, the closing price of the Common Stock on the NYSE was $25-5/16. On July 14, 1999, the closing price of the Common Stock on the NYSE was $27 - 7/16 per share. YOU ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR YOUR SHARES OF COMMON STOCK. During 1997, the Company declared four quarterly dividends of $.27 per share. The Board has deferred the declaration of dividends for all quarterly periods subsequent to the fourth quarter of fiscal 1997 in response to the requirements of proposals made by the Continuing Shareholders regarding a "going private" transaction (both of which were conditioned upon, among other things, the suspension of dividends by the Company) and, during the interval between termination of the Initial Proposal and the receipt of the Revised Proposal, while it was considering strategic alternatives to enhance shareholder value. Under the terms of the Restated Merger Agreement, the Company has agreed, among other things, not to declare, set aside or pay any dividends prior to the Effective Time. As of the Record Date, there were approximately 425 holders of record of Common Stock, exclusive of shareholders whose shares were held by brokerage firms, banks, depositories and other institutional firms in "street name" for their customers. -13- FORWARD-LOOKING INFORMATION This Proxy Statement and the documents incorporated in this Proxy Statement by reference contain forward-looking statements, which are generally identified by words such as "may," "should," "seeks," "believes," "expects," "intends," "estimates," "projects," "strategy" and similar expressions or the negative of those words. Those statements appear in a number of places in this Proxy Statement and the documents incorporated in this Proxy Statement by reference and include statements regarding the intent, belief, expectation, strategies or projections of the Company, its management, Mergeco and the Continuing Shareholders at that time. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those projected, expressed or implied in the forward-looking statements. These risks and uncertainties, many of which are not within the Company's control, include, but are not limited to, general economic, weather and business conditions; the availability of suitable restaurant sites in appropriate regional shopping malls and other locations on reasonable rental terms; changes in consumer tastes; changes in population and traffic patterns; the ability to continue to attract franchisees; the success of the Company's present, and any future, joint ventures and other expansion opportunities; the availability of food (particularly cheese and tomatoes) and paper products at reasonable prices; no material increase occurring in the Federal minimum wage; the Company's ability to attract competent restaurant and executive managerial personnel; competition; government regulation; the Company's ability to successfully and timely complete compliance of its information systems for the Year 2000 and the ability of certain of its suppliers and landlords to be timely Year 2000 compliant; the Company's ability to generate adequate profits and cash flow to service its projected debt; and the availability of financing, if and when required, on favorable terms. The accompanying information contained in this Proxy Statement and in documents incorporated by reference identifies important factors that could cause expectations not to be met. Forward-looking statements speak only as of the date made, and none of the Company, Mergeco or the Continuing Shareholders undertake any obligation to update or revise any forward-looking statements. It is likely that if one or more of the risks and uncertainties materializes, the current expectations of the Company, its management, Mergeco and the Continuing Shareholders will not be recognized. -14- SPECIAL FACTORS BACKGROUND OF THE TRANSACTION Beginning in late 1995, informal discussions were held among members of the Executive Committee of the Board, consisting of Mario Sbarro, Chairman of the Board, Joseph Sbarro, Anthony Sbarro and Bernard Zimmerman, a director of the Company and president and a majority shareholder of a company which serves as a consultant to the Company, in light of the fact that, at that time, Anthony Sbarro was assessing his role with the Company. The Continuing Shareholders considered the feasibility of a transaction in which the Company would acquire all of the Common Stock owned by the Public Shareholders and Anthony Sbarro, one-third of the shares owned by The Trust of Carmela Sbarro and a portion of the shares owned by Mario and Joseph Sbarro. As a result of these discussions, it was determined to commence an overall assessment of the future direction of the Company. As part of this process, from time to time, Mario and Joseph Sbarro and Mr. Zimmerman met with the investment banking firms of Bear Stearns and Prudential Securities. In September 1996, they met with the investment banking firm of Montgomery Securities, as well as with Bear Stearns and Prudential Securities, concerning their potential retention by the Company or the Continuing Shareholders. On October 10, 1996, Mario Sbarro, Joseph Sbarro and Bernard Zimmerman met with Bear Stearns, which presented possible alternatives for accomplishing the transaction which the Continuing Shareholders were contemplating. Bear Stearns noted that, if the Company were to conduct a tender offer for all outstanding shares of Common Stock, other than most of those beneficially owned by Mario Sbarro and Joseph Sbarro, at a price above $29.00 per share, the transaction would become increasingly difficult to finance given the level of debt that would be required to consummate the transaction. Bear Stearns, therefore, suggested consideration of a leveraged recapitalization through a tender offer in which, among other things, the Company would acquire an aggregate of approximately 1.25 million of the shares owned by Mario and Joseph Sbarro, all 1.2 million shares owned by Anthony Sbarro, 0.8 million of the shares owned by The Trust of Carmela Sbarro and 11.7 million of the 13.2 million of the shares held by the Public Shareholders. In order to consider certain financial effects of the recapitalizations being contemplated, for illustrative and discussion purposes, Bear Stearns presented information assuming purchase prices of $29.00 per share (to be financed with $115.5 million of the Company's cash and approximately $339 million of debt financing) and $32.00 per share (to be financed with $115.5 million of the Company's cash and approximately $382 million of debt financing). Bear Stearns concluded that such a transaction could be financed based on then current market conditions. Also for illustrative and discussion purposes, Bear Stearns presented information assuming a tender offer for all Public Shares at $32.00 per share (to be financed with $115.5 million of the Company's cash and approximately $436 million of debt financing). The summary contained herein of the October 10, 1996 presentation by Bear Stearns to Mario Sbarro, Joseph Sbarro and Bernard Zimmerman is qualified in its entirety by reference to the full text of the presentation filed as an exhibit to the Schedule 13E- 3 transaction statement related to the Merger filed with the SEC (the "Schedule 13E-3"). See "AVAILABLE INFORMATION." On October 26, 1996, Mario and Joseph Sbarro, in their individual capacities, retained Bear Stearns to assist in exploring the advisability of proposing a transaction, as a result of which they or their affiliates would own at least a majority of the voting securities of the Company, with the understanding that, in the event a transaction was structured in a manner in which some or all of the purchase price was to be paid by the Company, they would use their best efforts to have the Company retain Bear Stearns, and the Continuing Shareholders would be released from their obligations under their engagement letter. It was also understood that, in the event the Continuing Shareholders were to propose a transaction between the Continuing Shareholders and the Company, the Company would retain another investment banking firm to act as the financial advisor to a special committee of the Board of Directors (consisting of the directors who were neither employees of, nor consultants to, the Company) and that the special committee would rely on the advice of such firm and not Bear Stearns with respect to such transaction. -15- Bear Stearns thereupon commenced an analysis of the Company's business, results of operations, financial position, structure and prospects, and discussed with the Continuing Shareholders various structural alternatives and analyses for consideration. Over the next two months, the Continuing Shareholders met with their advisors to consider legal, accounting, financing, tax and estate planning aspects of the alternatives presented by Bear Stearns. On November 19, 1996, Mario Sbarro informed the entire Board that the Continuing Shareholders were exploring a potential transaction which contemplated a program under which they would purchase or the Company would repurchase some or all of the then outstanding Common Stock. Subsequently, based upon their then concerns about long-term operating flexibility limitations under covenants likely to be contained in the agreements governing the high level of debt required, and tax and estate planning considerations, the Continuing Shareholders decided not to pursue a management buyout (going private) transaction, and asked Bear Stearns to conduct an analysis of strategic alternatives to increase shareholder value. On January 15, 1997, at a special meeting of the Board, Bear Stearns reviewed with the Board various strategic alternatives potentially available to the Company to increase shareholder value. The alternatives discussed by Bear Stearns were (i) maintaining the status quo, (ii) declaring a special cash dividend, (iii) repurchasing Common Stock in the open market, (iv) acquiring other businesses, (v) selling the Company, (vi) going private through a management buy out, and (vii) a leveraged recapitalization of the Company through a tender offer for a significant portion of outstanding Common Stock to be financed with the Company's cash position and the use of debt financing. Based in part upon operating and financial information provided to it and discussions with the Company's management, Bear Stearns cited the following considerations in its evaluation of the alternatives: o Maintenance of the status quo by the Company would likely result in a continued buildup of cash, which would not be highly valued by investors; o A special one-time cash dividend would not be tax efficient from an individual shareholder's standpoint, since it would be taxed at ordinary income, rather than capital gains, tax rates; o An open market stock repurchase program would not be an efficient mechanism for repurchasing a large number of shares of Common Stock and a moderate repurchase program would not have a significant impact on the Company's earnings per share; o As to acquisitions, management had expressed a strong strategic preference for developing new concepts and joint ventures internally, the Company had not historically made acquisitions and there appeared to be few concepts available that would provide a strong business fit with the Company; o Since the Continuing Shareholders had indicated that they were not interested in a sale of the Company, a sale of control of the Company without their participation was unlikely; and o A going private transaction would involve the incurrence of a significant level of debt resulting in a highly leveraged capital structure and constraints on operating flexibility as a result of requirements to comply with loan covenants governing the debt that would be incurred. In view of these considerations, Bear Stearns recommended consideration of a leveraged recapitalization of the Company in which the Company would purchase between $250-300 million of its outstanding Common Stock through a tender offer utilizing a substantial portion of its cash, together with $150-200 million of debt financing. Bear Stearns reviewed with the Board three leveraged recapitalization scenarios for consideration. The presentation contemplated $250, $275 and $300 million leveraged recapitalizations to be effectuated by a Company tender offer at a price of between $29.00 and $30.00 per -16- share (at a time when the market price of the Common Stock was approximately $25.75 per share) utilizing approximately $100 million of the Company's cash and between $150 and $200 million of debt financing. Under the three scenarios presented, the Company would have repurchased between 8.3 million and 10.0 million shares of Common Stock, with certain of the Continuing Shareholders tendering an aggregate of approximately 333,333 shares. Assuming, among other things, that (a) the Company achieved certain levels of financial performance, (b) the debt financing was effected at the assumed interest rates, (c) the Company's price/earnings multiple remained constant at 14.0 x (which was the then current multiple based on analysts' consensus estimates of the Company's 1996 earnings), and (d) the Company increased its dividend by 15% annually, it was estimated that the remaining outstanding Common Stock could have a possible future stock price at the end of 2001 and 2005 of $58 and $82 per share, respectively, under the $250 million recapitalization scenario; $56 and $86 per share, respectively, under the $275 million recapitalization scenario; and $57 and $90 per share, respectively, under the $300 million recapitalization scenario. Assuming a discount rate equal to the Company's estimated pro forma weighted average cost of capital for the scenarios, such possible future stock prices at the end of 2001 and 2005 would have an estimated present value of $40 and $46 per share, respectively, under the $250 million recapitalization scenario; $40 and $48 per share, respectively, under the $275 million recapitalization scenario; and $42 and $52 per share, respectively, under the $300 million recapitalization scenario. The presentation also included a status quo scenario based upon the foregoing assumptions (except that the Company would not engage in a leveraged recapitalization or borrow funds) which indicated possible stock prices of $39 and $53 per share at the end of 2001 and 2005, respectively, with an estimated present value (assuming the same discount rate as employed with the other scenarios) of $28 and $31 per share at the end of 2001 and 2005, respectively. The possible future stock prices were based on a number of assumptions and were for illustrative and discussion purposes only. Bear Stearns also discussed the possible disadvantages of a leveraged recapitalization, including reduced liquidity in the market for the Common Stock, reduced research coverage by analysts, the impact on the Company's shareholder base due to the elimination of, or reduction in, dividends and reduction in the Company's equity market capitalization, and the operating and financial constraints associated with leverage. The Board then requested Bear Stearns to provide it with (i) additional information in order to consider the Company's ability to service debt in the event of an economic or business downturn and (ii) customary financial covenants that could be expected in financing arrangements and that could impact the Company's operating flexibility. The summary contained herein of the January 15, 1997 presentation by Bear Stearns to the Board is qualified in its entirety by reference to the full text of the presentation filed as an exhibit to the Schedule 13E-3. See "AVAILABLE INFORMATION." At a special meeting of the Board held on January 23, 1997, Bear Stearns reviewed with the Board the Company's ability to service the various levels of debt contemplated under the leveraged recapitalization scenarios being considered based on several assumed levels of operating performance, including no growth in operating income and annual reductions in operating income. Bear Stearns presented, based on information provided by the Company, detailed analyses for $250, $275 and $300 million recapitalization scenarios containing projected balance sheets, income statements and cash flows for the ten years ending December 31, 2005, including various debt service ratios derived from the projected financial statements, to aid the Board in its analysis of the Company's ability to service the levels of debt being considered. The Board also received a summary of such alternatives, as well as a status quo scenario (no recapitalization or borrowing) and new $200 and $300 million recapitalization scenarios (based upon different financing structures). Bear Stearns also presented a comparative analysis of various terms and financial and operational covenants customary for both bank debt and high-yield debt. Following a discussion of the information presented and the potential effects that recapitalizations at various amounts could have on the Common Stock that would remain outstanding, the Board requested management to consider a recapitalization size that it might be willing to recommend to the Board. The summary contained herein of the July 23, 1997 presentation by Bear Stearns to the Board is qualified in its entirety by reference to the full text of the presentation filed as an exhibit to the Schedule 13E-3. See "AVAILABLE INFORMATION." -17- At a regularly scheduled meeting of the Board held on February 12, 1997, the Board continued to consider alternate recapitalization scenarios. The Board authorized management to proceed with an examination of the feasibility of a $250-$300 million leveraged recapitalization, which would utilize approximately $100 million of the Company's existing cash with the balance to be borrowed from banks and/or obtained in the bond market, with a revolving credit facility for working capital purposes. The Board then authorized the Company to formally retain Bear Stearns as the Company's financial advisor to consider a variety of strategic alternatives, including a recapitalization and a going private transaction. Bear Stearns was not engaged to render, and has not rendered, any opinion as to the fairness of any transaction presented to the Board, including the proposed Merger. See "-- Financing of the Merger" for information regarding the Company's engagement agreement with Bear Stearns. However, as a result of an increase in interest rates in late March 1997, along with other considerations, the Board at its regularly scheduled meeting on May 21, 1997 determined not to pursue a recapitalization transaction at that time. During the summer of 1997, as the interest rate environment became more settled, following informal discussions with other members of the Board, management, along with Mr. Zimmerman, asked Bear Stearns to present additional information concerning a recapitalization transaction. At the Board's regularly scheduled meeting held on August 19, 1997, management presented information to the Board concerning a possible repurchase of approximately $230 million of Common Stock to be financed, together with estimated expenses, with approximately $90 million of the Company's cash and $150 million in borrowings. On August 27, 1997, an informal meeting was held with Bear Stearns, at which certain members of the Board participated in person and others by telephone conference, to discuss the likely effects that the elimination of or a substantial reduction in dividends as part of the recapitalization transaction, would have on the Common Stock that would remain outstanding following a recapitalization. At the Board's regularly scheduled meeting held on November 18, 1997, the Board was apprised of the Company's negotiations for bank financing to fund a leveraged recapitalization. The Board was also advised that the Continuing Shareholders had requested Bear Stearns to provide information concerning a going private transaction. Mario Sbarro further informed the Board that the Continuing Shareholders had recently received an inquiry from a nationally recognized investment banking firm as to whether the Continuing Shareholders would be interested in selling their Common Stock to Triarc Companies, Inc., an unaffiliated food and beverage company, at a significant premium to the then market price of the Common Stock. The potential purchaser proposed a transaction in which a restaurant franchising business it owned would be merged into the Company in exchange for shares of Common Stock, and the Company would repurchase all of the Common Stock owned by the Continuing Shareholders at $44.50 per share using the Company's available cash and the combined companies' financing sources. The proposed transaction did not contemplate the acquisition of Common Stock held by the Public Shareholders. The proposed transaction would have resulted in the potential purchaser acquiring majority ownership of the Company. All discussions were preliminary, based only on publicly available information and did not result in any formal offer being made. Mr. Sbarro advised the Board that the Continuing Shareholders had not previously received any other proposals for the sale of their interests in the Company, had not had time to consider the inquiry and were not sure that they would entertain any such proposal. Because of the preliminary nature of discussions related to this inquiry, no transaction was presented for consideration by the Board. Both prior and subsequent to the Board's November 18, 1997 meeting, meetings and telephone discussions to explore a potential transaction were held among representatives and principals of the potential purchaser, Mario Sbarro and Mr. Zimmerman, and, in one instance, with Bear Stearns and Parker Chapin Flattau & Klimpl, LLP, counsel to the Company ("PARKER CHAPIN"), present. In late November 1997, the Continuing Shareholders determined that they were not interested in selling their Common Stock and determined to accelerate their consideration of a going private transaction. On December 1, 1997, the potential purchaser was advised of the Continuing Shareholders' decision not to proceed with a sale of their interest in the Company. -18- The Continuing Shareholders thereupon recommenced consideration of the legal, accounting, tax, estate planning and family continuity and succession aspects of a going private transaction with their advisors and Mr. Zimmerman. The Continuing Shareholders also discussed with Bear Stearns the feasibility, method and potential effects of various financing alternatives. At a special meeting of the Board held on January 12, 1998, the Continuing Shareholders submitted a proposal to the Board to acquire all of the outstanding Common Stock not owned by them for $28.50 in cash through a merger with a company to be owned by them. Completion of the transaction was conditioned on, among other things: o entering into a definitive agreement with the Company; o approval of the transaction by the Special Committee, the full Board and the Company's shareholders; o receipt of satisfactory financing for the transaction; and o receipt of a fairness opinion from a financial advisor to the Special Committee that the proposed transaction is fair from a financial point of view to the holders of Public Shares. The Continuing Shareholders also advised the Board that they had received a letter from Bear Stearns that stated that, subject to certain conditions, Bear Stearns was "highly confident" of its ability to place or arrange financing for the transaction. In addition, the Continuing Shareholders advised the Board that they were not interested in selling their Common Stock. They further advised the Board that their proposal contemplated an immediate suspension of the payment of cash dividends and, on January 20, 1998, the Continuing Shareholders amended their proposal to formally condition their offer on the immediate suspension of dividends by the Company. As amended, the proposal is referred to in this Proxy Statement as the "INITIAL PROPOSAL." At the January 12, 1998 meeting, the Board established the Special Committee consisting of Richard A. Mandell, Harold L. Kestenbaum, Paul A. Vatter and Terry Vince, the four directors who are neither employees of, nor consultants to, the Company, Mergeco or the Continuing Shareholders and had no interest in the proposed transaction other than as holders of non-employee director Stock Options and, in some cases, as Public Shareholders. The Special Committee was authorized to consider and evaluate the Initial Proposal, assess whether it would be in the best interests of the Company and the Public Shareholders to pursue a transaction with the Continuing Shareholders, make a recommendation to the Board with respect to acting on the Initial Proposal, and, if appropriate, enter into and conduct discussions concerning the Initial Proposal and negotiate a definitive agreement with respect to the Initial Proposal on behalf of the Company. The Board also authorized the Special Committee to retain, at the expense of the Company, legal counsel and an independent investment banking firm to assist and advise it in its work concerning the Initial Proposal. Immediately following the meeting, members of the Special Committee met with Parker Chapin, which reviewed with the members the Special Committee's duties and responsibilities. The Special Committee thereupon held its first meeting and appointed Mr. Mandell to serve as its Chairman and identified a number of investment banking and law firms to interview to act as financial advisor and legal counsel to the Special Committee. On January 14, 1998, Messrs. Mandell and Kestenbaum met to interview law firms to serve as the legal advisors to the Special Committee. After discussing the results of these interviews with the other members of the Special Committee, the Special Committee agreed to retain Willkie Farr & Gallagher ("WILLKIE FARR") as its legal counsel. The Special Committee made its determination based on Willkie Farr's experience and expertise in matters such as those contemplated in the Initial Proposal and its experience in advising other special committees of boards of directors in similar transactions. -19- On January 16, 1998, Messrs. Mandell and Kestenbaum, with the assistance of Willkie Farr, interviewed investment banking firms to act as the financial advisor to the Special Committee. On January 18, 1998, the Special Committee met by telephone conference to discuss the retention of a financial advisor and determined to retain Prudential Securities based on Prudential Securities' experience and expertise in matters such as those contemplated in the Initial Proposal, its experience in advising other special committees of boards of directors in similar transactions, its experience in the industry and the proposed terms of its engagement. Prudential Securities had served as the managing underwriter of the Company's initial public offering in 1985 and co-managing underwriter of a public offering of Common Stock by, among others, certain of the Continuing Shareholders in 1989. Prudential Securities had not been engaged by the Company in any capacity since 1989. Mr. Mandell, who had served as a Managing Director of Prudential Securities from 1982 until June 1995, informed the other members of the Special Committee of his prior affiliation with Prudential Securities and confirmed that he had no existing employment, consulting or other relationship with Prudential Securities. During the week of January 18, 1998, the Special Committee reviewed and negotiated the terms of engagement letters with Willkie Farr and Prudential Securities, and Prudential Securities held various discussions with representatives of the Company concerning the due diligence to be performed by the advisors to the Special Committee. On January 20, 1998, the Special Committee and the Company entered into an engagement letter with Prudential Securities, under which Prudential Securities was retained by the Special Committee to provide financial advice and assistance in connection with the Initial Proposal and, if requested by the Special Committee, to render an opinion as to the fairness, from a financial point of view, to the Public Shareholders of the consideration to be received by the Public Shareholders. See "-- Presentation and Fairness Opinion of Prudential Securities." On January 20, 1998, the Company issued a press release announcing the Initial Proposal and the conditions to completion of the then proposed merger, including the condition that dividends be suspended. In its press release, the Company also announced preliminary results of operations for its fourth quarter and year ended December 28, 1997, which were lower than earnings for the comparable periods in the prior year and stated that earnings would further be affected by a charge to earnings as a result of an evaluation of its investment in certain units of one of its joint ventures, but that it was premature to quantify the amount of the charge. Beginning on January 21, 1998, seven lawsuits were instituted against the Company, those Continuing Shareholders who are directors of the Company and, except in certain lawsuits, all or some of the other directors. In general, the complaints alleged that the defendants breached fiduciary duties, that the proposed price per share to be paid to Public Shareholders was inadequate and that the Initial Proposal served no legitimate business purpose of the Company. In September 1998, following termination of negotiations regarding the Initial Proposal, these lawsuits were discontinued, without prejudice and without costs. See "LITIGATION PERTAINING TO THE MERGER -- Initial Proposal Litigation." On February 12, 1998, the Special Committee met with its financial and legal advisors. Prudential Securities discussed the progress of its due diligence activities. Willkie Farr reviewed with the Special Committee members their fiduciary duties and the rights and powers of the Special Committee and its members under applicable law and under the Company's Certificate of Incorporation and By-Laws. The Special Committee was advised that its purpose was to negotiate at arms' length with the Continuing Shareholders in order to protect the interests of the Public Shareholders. The Special Committee was further advised that it was under no obligation to reach any agreement with the Continuing Shareholders, unless the Special Committee determined that such agreement was in the best interests of the Public Shareholders. At this meeting, the Special Committee reviewed the first draft of the then proposed Merger Agreement between the Company and the Continuing Shareholders that had been submitted to Willkie Farr by Warshaw Burstein Cohen Schlesinger & Kuh, LLP ("WARSHAW BURSTEIN"), counsel to the Continuing Shareholders, and Parker Chapin. -20- On February 19, 1998, the Special Committee held a telephonic meeting with Willkie Farr and Prudential Securities, in which Willkie Farr reviewed and discussed the significant terms of the draft Merger Agreement with the Special Committee. The Special Committee also discussed proposed changes to the draft Merger Agreement for submission to the Continuing Shareholders' advisors. During the week of February 23, 1998, upon the authorization of the Special Committee, Willkie Farr began negotiations on open issues with respect to the non-financial terms of the proposed Merger Agreement with Parker Chapin and Warshaw Burstein. On February 25, 1998, Prudential Securities met with management of the Company to discuss due diligence matters, including the financial status and the management of the Company and the operational aspects of the Company and the restaurant industry generally. On March 3, 1998, Prudential Securities and Willkie Farr again met with the Special Committee. Prudential Securities made a preliminary presentation to the Special Committee summarizing its work to date. The presentation discussed various approaches to valuation and included, among other things, a discounted cash flow analysis of the Company, analyses of comparable transactions and comparable companies and a leveraged buy-out (going private) analysis. Prudential Securities applied discount rates ranging from 11.0% to 15.0% and terminal value multiples of 6.0x and 7.0x in its discounted cash flow analysis, which resulted in an implied range of equity values per share of $30.00 to $36.68 with a median of $33.11 and a mean of $33.18. The comparable transactions analysis of the consideration paid in three then recent merger and acquisition transactions which Prudential Securities deemed to be reasonably similar to the Initial Proposal indicated an implied range of equity values per share of $22.82 to $37.13 with a median of $29.27 and a mean of $29.74. Prudential Securities' analysis of five selected pizza and Italian food comparable companies indicated an implied range of equity values per share of $22.93 to $51.95 with a median of $32.46 and a mean of $34.97. Prudential Securities' analyses of five selected fast food comparable companies indicated an implied range of equity values per share of $20.05 to $74.15 with a median of $32.90 and a mean of $38.26. Prudential Securities' leveraged buy-out analysis indicated an implied range of equity values per share of $29.00 to $33.00 with a median and mean of $31.00. The summary contained herein of the March 3, 1998 presentation by Prudential Securities to the Special Committee is qualified in its entirety by reference to the full text of the presentation filed as an exhibit to the Schedule 13E-3. See "AVAILABLE INFORMATION." Willkie Farr then discussed with the Special Committee a number of open issues relating to the proposed Merger Agreement. On March 24, 1998, Prudential Securities and Mr. Mandell met with Bear Stearns, Mario and Joseph Sbarro and Mr. Zimmerman to discuss various issues relating to the Initial Proposal and, on March 28, 1998, Mr. Mandell had a telephone conference with Mario Sbarro and Mr. Zimmerman to discuss Merger Agreement issues. Thereafter, Prudential Securities continued to gather information and conducted diligence concerning the Company and its results of operations, financial condition and prospects. Prudential Securities and Bear Stearns held discussions concerning the valuation methodologies employed by Prudential Securities in its analysis of the Company, and Willkie Farr, Parker Chapin and Warshaw Burstein continued to negotiate the non-financial terms of a proposed Merger Agreement. In addition, the Continuing Shareholders and the Special Committee negotiated various aspects of the Merger Consideration. During this period, at times with Bear Stearns, the Continuing Shareholders met with prospective financing sources. During the period from January 12, 1998 through June 16, 1998, the Special Committee held seven formal meetings, including four in which some or all Special Committee members participated by means of telephone conference. In addition, the members of the Special Committee held numerous informal discussions regarding price and terms among themselves and with Willkie Farr and Prudential Securities. -21- On June 16, 1998, Mario Sbarro met with Messrs. Mandell and Zimmerman. Mr. Sbarro advised Mr. Mandell that, while the matter would be further discussed at the meeting of the Board scheduled for the next day, it was apparent from ongoing discussions regarding the Initial Proposal that the Continuing Shareholders and the Special Committee were not going to reach an agreement on the terms and conditions of a merger. In addition to being unable to reach an agreement as to the Merger Consideration to be paid to Public Shareholders, the Continuing Shareholders and the Special Committee had been unable to agree upon, among other things, the method of handling unvested stock options, the circumstances under which each party would be entitled to reimbursement for its expenses in the event of termination of the then proposed Merger Agreement, the establishment of basic financing terms that the Continuing Shareholders would deem acceptable, indemnification and indemnification insurance provisions, and circumstances under which a party could terminate the proposed Merger Agreement. At a special meeting of the Board held on June 17, 1998, Mario Sbarro, on behalf of the Continuing Shareholders, advised the Board that, because the Continuing Shareholders and the Special Committee could not agree on mutually acceptable terms of a transaction, negotiations for a going private transaction would be terminated. Mr. Sbarro also expressed his belief that it would be in the best interests of all shareholders for the Company to review various other strategic alternatives available to the Company. The Board concurred and the Special Committee was then disbanded. A press release was then issued by the Company reporting that an agreement with the Continuing Shareholders concerning the terms of the proposed transaction could not be reached, that the suspension of dividends would continue and that the Company and its investment banker would explore various strategic alternatives for the benefit of all shareholders. The Board determined to continue the suspension of dividends while it considered other strategic alternatives to enhance shareholder value. On July 20, 1998, the Board held a special meeting at which Bear Stearns made a presentation to the Board regarding the strategic alternatives previously discussed at the Board's January 15, 1997 meeting. Bear Stearns noted that, since negotiations for the proposed going private transaction had not been successful, based on information provided by the Company and discussions with management, the two alternatives to consider for the creation of shareholder value for all shareholders of the Company were a significant leveraged recapitalization or a sale of the Company. Bear Stearns thereupon reviewed with the members of the Board the positive and negative effects of both types of transactions as they would pertain to shareholders. Bear Stearns concluded that, if the Continuing Shareholders would be interested in selling their entire interests in the Company, it believed the most attractive alternative for increasing shareholder value for all shareholders would be through a sale of the Company. Bear Stearns advised that a sale of the Company was only practical if the Continuing Shareholders were interested in selling their interests in the Company. Bear Stearns stated its belief that, if a leveraged recapitalization were pursued, it should be significant, thus maximizing the immediate value to shareholders. Bear Stearns also noted that a recapitalization which included a financial investor should be considered if the Continuing Shareholders determined to retain a small portion of their Common Stock or a very significant recapitalization was contemplated. For illustrative and discussion purposes, there were presented to the Board examples of a $450 million Company-sponsored recapitalization, a $661 million investor-sponsored recapitalization and the sale of the entire equity interest of the Company to a financial purchaser. In the example of the Company-sponsored $450 million recapitalization, the Company would tender for 14 million shares of Common Stock at a price of $32.00 per share (a 19% premium to the then current market price). This recapitalization would be financed with $125 million of the Company's cash and $340 million of debt. Assuming, among other things, that (a) the Company achieved certain levels of financial performance, (b) debt financing was effected at assumed interest rates, (c) the Company's price/earnings multiple remained constant at 13.7x (which was the then current multiple based on analysts' consensus estimates of the Company's 1998 earnings) and (d) no future dividends, it was estimated that the remaining outstanding Common Stock could have possible future stock prices at the end of 1998 and 2002 of $30.36 and $93.17, respectively, with estimated present values (assuming a discount rate equal to the Company's -22- estimated pro forma weighted average cost of capital for this scenario) at the end of 1998 and 2002, of $28.25 and $46.27, respectively. The illustrative $661 million investor-sponsored recapitalization assumed a tender offer for 18.9 million shares (90% of the Company's outstanding shares on a diluted basis) at $35.00 per share to be financed with $123 million of the Company's cash, $430 million of debt financing and $125 million of new common equity from a financial investor. This recapitalization would have resulted in the Continuing Shareholders, Public Shareholders and the financial investor owning 12.3%, 24.6% and 63.2%, respectively, of the Common Stock to be outstanding after the transaction. No possible future market price information was presented under the illustrative investor-sponsored transaction. The illustrative analysis of a sale of the Company to a financial purchaser assumed a price of $36.00 per share which would have required financing of approximately $775 million. Also presented to the Board were detailed financial models, including projected Company balance sheets, income statements and cash flows for the five years ending December 31, 2002, and calculations of various debt service ratios and other credit analysis statistics, for each of the three presented scenarios, as well as "exit case" information for the investor-sponsored leveraged recapitalization and financial purchaser business sale scenarios. Bear Stearns indicated that, based on its review of likely interested purchasers and current market conditions, it believed that if potential purchasers (a) were confident regarding the Company's growth prospects, (b) had either sufficient existing management or could retain new management if the Sbarro family wished to leave, and (c) were able to finance in excess of $500 million of the acquisition price in the debt capital markets, a sales process could provide shareholder value in the mid-$30s per share. Bear Stearns also noted that potential financial purchasers may look for continued participation in a transaction by principal shareholders in order to structure a transaction that would be entitled to recapitalization accounting treatment. The representatives of Bear Stearns were then excused from the meeting, at which time the directors who were Continuing Shareholders indicated to the Board that at price levels in the range of the mid-$30s per share, the Continuing Shareholders were willing to consider selling their interests in the Company. The Continuing Shareholders also advised the Board that, if a potential purchaser desired the Continuing Shareholders to participate in a transaction, they would consider doing so under mutually acceptable terms. The Board thereupon authorized Bear Stearns to determine the interests of potential strategic and financial purchasers in acquiring the Company, including the price that they would be willing to pay. The summary contained herein of the July 20, 1998 presentation by Bear Stearns to the Board is qualified in its entirety by reference to the full text of the presentation filed as an exhibit to the Schedule 13E-3. See "AVAILABLE INFORMATION." Bear Stearns then prepared a list of potential strategic and financial purchasers, which it reviewed with the Board and management. A confidential information memorandum was then prepared which was designed to solicit interest from potential purchasers of the Company by providing general information about the Company and ideas for the future growth of the Company. The information memorandum described many of the Company's strengths and strategies, noting that the Company's growth initiatives could be driven by (a) further penetrating high customer traffic venues, (b) increased franchising (particularly in international markets), (c) expansion into traditional quick service restaurant venues (including through co-branding with other restaurant concepts in stand-alone locations) and (d) significant expansion of the Company's recently developed Umberto of New Hyde Park joint venture concept (see "Business of the Company"). The memorandum also summarized information about the Company's business and management contained in the Company's public filings with the SEC and contained a detailed business description, strategy and growth initiatives and historical and projected financial information. The financial projections were considerably more optimistic than the Company's Operating Projections, as they anticipated a more aggressive expansion of the Company's business into new venues and of Umberto of New Hyde Park joint venture restaurants and increases in comparable store sales and operating margins. See "-- Certain Financial Projections." The summary contained herein of the Confidential Information Memorandum is qualified in its entirety by reference to the full text of the presentation filed as an exhibit to the Schedule 13E-3. See "AVAILABLE INFORMATION." On August 6, 1998, Bear Stearns began to contact potential purchasers. -23- Confidentiality agreements were then prepared and distributed to potential purchasers who orally had indicated having an interest in obtaining further information. On August 17, 1998, the Continuing Shareholders met with Messrs. Mandell and Zimmerman, and with Parker Chapin and Bear Stearns to review the status of the business sale process. At a meeting of the Board held on August 19, 1998, at which representatives of Bear Stearns participated by telephone conference, Bear Stearns updated the Board on the status of its contacts with potential purchasers. Bear Stearns also advised that it would provide the confidential information memorandum to potential purchasers who executed confidentiality agreements. Bear Stearns contacted 38 potential purchasers (12 potential strategic purchasers and 26 financial purchasers) during August 1998, including the third party that had expressed an interest in purchasing the Continuing Shareholders' Common Stock in 1997. A total of 17 potential purchasers signed confidentiality agreements and each received the confidential information memorandum. Potential purchasers were instructed to base their initial indications of interest on information contained in the confidential information memorandum and that, if their initial indications of interest were sufficient, they would be provided the opportunity to meet with management and perform detailed due diligence in preparation for a final bid. In early September 1998, Bear Stearns received four written preliminary indications of interest. The remaining potential purchasers indicated they were not interested in pursuing a transaction. Each of the four written preliminary indications of interest were from potential financial purchasers and reflected an interest in further exploring a proposed transaction. Each was subject to, among other things, conducting due diligence, obtaining financing and negotiating acceptable agreements. One indication of interest contemplated the forming of a new corporation with the Company's management and other investors to purchase the Company for a cash price of approximately $30.00-$32.50 per share. During subsequent discussions with Bear Stearns related to the contemplated amounts and type of debt and equity financing for the contemplated transaction, the potential purchaser reduced its indication of interest to approximately $28-$30 per share. A second indication of interest contemplated the merger of the Company with a financially troubled restaurant company controlled by a potential financial purchaser. This proposal contemplated consideration with a face value of $29.00-$31.00 per share, of which approximately $6.00 was to be in preferred and common stock of a newly-formed company, with the balance to be paid through the Company's existing cash and other financing to be sought. The potential financial purchaser would not commit new equity to the proposed transaction. The remaining two indications of interest contemplated cash prices of approximately $25.00 per share in one case and, in the other case, approximately $25.00-$29.00, with a requirement in the latter case that the Continuing Shareholders participate with the potential purchaser through the ownership of common stock in the acquiring entity. As part of the business sale process, Bear Stearns approached each party that had submitted a preliminary indication of interest to seek an increase in the contemplated price. None of the parties were willing to increase their original proposal from the prices indicated above. On October 7, 1998, in a telephone conference, Bear Stearns informed participating Board members as to the status of the sale process and the results of its discussions with the potential purchasers. The Continuing Shareholders noted that all the bids contemplated a price below the minimum price at which the Continuing Shareholders had previously indicated their willingness to consider selling their interests in the Company and indicated that they would not consider selling their Common Stock at the prices proposed in the preliminary indications of interest. Based on this information, the Board advised Bear Stearns to terminate the business sale process. On October 15, 1998, Mario Sbarro, Joseph Sbarro, Bernard Zimmerman, Robert S. Koebele (the Company's Chief Financial Officer), Parker Chapin, Bear Stearns, Richard A. Mandell, as Chairman of the former Special Committee of the Board, and Willkie Farr and Prudential Securities, which had served as legal and financial advisors, respectively, to the former Special Committee in connection with the Initial Proposal, met to determine whether Prudential Securities would give consideration to another offer from the Continuing -24- Shareholders. Prudential Securities indicated that it would need to obtain updated information concerning the Company, review the results of the business sales process which the Company had conducted through Bear Stearns and review the other factors it previously had considered before it could determine whether any offer that might be made would be fair to Public Shareholders from a financial point of view. At the Board's regularly scheduled quarterly meeting held on November 17, 1998, Mario Sbarro advised the Board that the Continuing Shareholders were, again, considering a going private transaction to acquire all of the Common Stock not owned by them. Mr. Sbarro also advised the Board that management had met with a major bank on behalf of the Continuing Shareholders to determine whether bank financing was available on acceptable terms and that the Continuing Shareholders also were considering high-yield debt financing. On November 18, 1998, a telephone conference was held among Mario Sbarro, Messrs. Zimmerman and Mandell, Willkie Farr, Parker Chapin and Bear Stearns to review then unresolved matters, other than the amount of the Merger Consideration, at the time the Initial Proposal had been terminated. The unresolved matters included the method of handling unvested options, the circumstances under which each party would be entitled to reimbursement for its expenses in the event of termination of the then proposed Merger Agreement, the establishment of basic financing terms that the Continuing Shareholders would deem acceptable, indemnification and indemnification insurance provisions, and the circumstances under which a party could terminate the previously proposed Merger Agreement. Between November 18, 1998 and November 25, 1998, the Continuing Shareholders consulted with Bear Stearns concerning potential financing for a going private transaction, and Parker Chapin reviewed with Willkie Farr matters that had not been resolved in the negotiation of the Merger Agreement at the time the Initial Proposal was withdrawn. On November 24, 1998, Mario Sbarro, on behalf of the Continuing Shareholders, met with Mr. Mandell and Parker Chapin to review open issues. At that meeting, Mr. Sbarro was advised that, before specific issues could be resolved, the Continuing Shareholders should make a formal proposal to the Board. After the close of business on November 25, 1998, a telephonic meeting of the Board (at which only Mario Sbarro, and Messrs. Kestenbaum, Mandell, Vatter and Zimmerman were able to participate due to the short notice given) was held, at which the Continuing Shareholders submitted a proposal for the Merger of a company to be formed by them with and into the Company, pursuant to which each Public Shareholder of the Company would receive $27.50 in cash in exchange for their shares of Common Stock. This proposal is referred to in this Proxy Statement as the "REVISED PROPOSAL." The Revised Proposal was, except for the proposed Merger Consideration, under terms similar to those contained in the Initial Proposal, including the same conditions. The Continuing Shareholders advised the Board that they had been informed that Bear Stearns was "highly confident" in its ability to place or arrange the financing for the Merger. At the November 25 meeting, the Board reappointed the Special Committee and, as it had with the Initial Proposal, authorized the Special Committee to consider and evaluate the Revised Proposal, assess whether it would be in the best interests of the Company and the Public Shareholders to pursue a transaction with the Continuing Shareholders, make a recommendation to the Board with respect to acting on the Revised Proposal and, if appropriate, enter into and conduct discussions concerning the Revised Proposal and negotiate a definitive agreement with respect to the Revised Proposal on behalf of the Company. In addition, the Special Committee was again authorized to retain, at the expense of the Company, legal counsel and an independent investment banking firm to assist and advise it in its work concerning the Revised Proposal. Following this meeting, the Company issued a press release announcing the Revised Proposal. Beginning on November 27, 1998, seven lawsuits were commenced against the Company, those Continuing Shareholders who are directors of the Company and, except in certain lawsuits, all or some of the other directors. Like the Initial Proposal Litigation, the lawsuits were purportedly brought by certain Public Shareholders as class actions on behalf of all Public Shareholders. In general, the new lawsuits allege that the defendants breached their fiduciary duties, that the proposed price to be paid Public Shareholders was -25- inadequate and that there were inadequate procedural protections for the Public Shareholders. These new actions are referred to in this Proxy Statement as the "CURRENT SHAREHOLDER LITIGATION." See "LITIGATION PERTAINING TO THE MERGER -- Current Shareholder Litigation." During the next several days, informal conversations were held among members of the Special Committee, in which the Special Committee determined to again retain Willkie Farr as its legal advisor and Prudential Securities as its financial advisor based, in large part, upon their respective experience, expertise and familiarity with the Company gained from participation in the Initial Proposal, and experience in advising special committees of boards of directors in similar transactions. Both firms were formally retained at a meeting of the Special Committee held on Tuesday, December 1, 1998. New engagement letters with Prudential Securities and Willkie Farr were approved. At the December 1 meeting, the Special Committee also discussed with its advisors the status of several outstanding issues. During the period from December 1, 1998 through January 18, 1999, representatives of Prudential Securities recommenced their due diligence review, including holding additional discussions with management of the Company concerning the Company's business, financial condition and prospects. In connection with this review, the Company provided to Prudential Securities copies of information relating to the business sale process, including the confidential information memorandum, which contained long-term projections prepared by the Company's management in August 1998 and contained in the confidential information memorandum utilized in the business sale process (the "BUSINESS SALE PROJECTIONS"), Bear Stearns' potential purchasers' log, and updated operating projections prepared by the Company's management in October 1998 to reflect then present and expected future business trends and conditions (the "OPERATING PROJECTIONS"). The Business Sale Projections and the Operating Projections are referred to collectively as the "PROJECTIONS." See " -- Certain Financial Projections." Telephone conference calls also took place in which Bear Stearns provided Prudential Securities with additional information concerning the business sale process. During this period, Company management held meetings with potential bank lenders and Bear Stearns regarding possible financing for the Merger. On December 3, 1998, Parker Chapin delivered to Willkie Farr a proposed Merger Agreement reflecting changes requested by the Continuing Shareholders and certain of the changes that had been requested by the Special Committee at the time negotiations of the Initial Proposal had terminated and that were acceptable to the Continuing Shareholders. On December 15, 1998, representatives of the Continuing Shareholders, Bear Stearns and the Special Committee met, and the Continuing Shareholders and the Special Committee negotiated various provisions in the proposed Merger Agreement. Since Prudential Securities had not completed its diligence concerning the Company, the Merger Consideration was not discussed. During the period from December 16, 1998 through January 18, 1999, various meetings and telephone conferences were held among representatives of the Continuing Shareholders and representatives of the Special Committee to negotiate various provisions in the proposed Merger Agreement, including the Merger Consideration. During this period, the Continuing Shareholders and members of the Special Committee received various drafts of the proposed Merger Agreement that were revised to reflect negotiated changes. In addition, meetings and telephone conferences also were held among the Continuing Shareholders, Parker Chapin and counsel to certain of the plaintiffs in the Current Shareholder Litigation. Separate discussions also were held between the Continuing Shareholders and Richard A. Mandell, Chairman of the Special Committee, as well as between the representatives of the Special Committee and counsel to those plaintiffs. During the week of January 8, 1999, Parker Chapin and counsel for the plaintiffs in the Current Shareholder Litigation discussed a possible basis for the settlement of the Current Shareholder Litigation. On January 11, 1999, the Continuing Shareholders and counsel for the plaintiffs reached a tentative -26- understanding under which the Continuing Shareholders would increase the price to be paid for the Public Shares to $28.85 per share. This understanding was then communicated to Mr. Mandell. During the next few days, further negotiations were held which resolved the remaining open issues in the proposed Merger Agreement. A revised draft of the proposed Merger Agreement and the presentation prepared by Prudential Securities analyzing the Merger and the Merger Consideration was distributed to all directors on January 15, 1999. Meanwhile, during the period from January 12, 1999 through January 19, 1999, representatives of the Continuing Shareholders and counsel for the plaintiffs in the Current Shareholder Litigation negotiated the remaining terms of a Memorandum of Understanding to set forth the proposed terms and conditions for the settlement of the Current Shareholder Litigation. On January 19, 1999, the Special Committee held a meeting to consider the Merger Agreement and determine whether to recommend its adoption to the full Board. The meeting was attended by all members of the Special Committee, with Paul A. Vatter attending by telephone conference. Representatives of Prudential Securities and Willkie Farr also attended the meeting. Willkie Farr advised the members of the Special Committee as to their fiduciary duties in considering this matter, reviewed the principal terms and conditions of the Merger Agreement and summarized the terms of the proposed settlement of the Current Shareholder Litigation. Prudential Securities made a presentation to the Special Committee, in which it discussed the information described under "-- Presentation and Fairness Opinion of Prudential Securities." Prudential Securities then rendered its oral opinion (confirmed in writing later that day) to the Special Committee that, as of such date, the Merger Consideration of $28.85 per share to be received by the Public Shareholders in the Merger was fair, from a financial point of view, to the Public Shareholders. At the conclusion of these presentations and after full discussion, including a discussion of the items discussed under "--Recommendations of the Special Committee and the Board of Directors," the Special Committee unanimously concluded that the Merger, as reflected in the Merger Agreement, and the terms and provisions of the Merger Agreement, including the Merger Consideration of $28.85 in cash per share, were fair to, and in the best interests of, the Company and the Public Shareholders and unanimously resolved to recommend to the Board that it adopt the Merger Agreement. Later in the day of January 19, 1999, a meeting of the Board was held to consider adopting the Merger Agreement. The meeting was attended by all members of the Board except Carmela Sbarro, with Paul A. Vatter attending by telephone conference. Representatives of Parker Chapin, Willkie Farr, Warshaw Burstein and Bear Stearns also attended the meeting. Parker Chapin advised the members of the Board as to their fiduciary duties and the provisions of the NYBCL pertaining to the approval of transactions with interested directors. Mr. Mandell presented a report from the Special Committee which described the process employed by the Special Committee and its advisors, as well as the Special Committee's reasons for recommending adoption of the Merger Agreement. Willkie Farr described for the Board the structure of the Merger and the principal terms of the Merger Agreement, including the more significant covenants and closing conditions, and provisions for termination, indemnification and expense reimbursement. The Board also was advised of the opinion of Prudential Securities. The Board further was advised by Parker Chapin that the Memorandum of Understanding to settle the Current Shareholder Litigation had been executed by counsel to the plaintiffs and contemplated a $28.85 in cash per share Merger Consideration. After discussion, based in part on the recommendation of the Special Committee and the fairness opinion received from Prudential Securities, the members of the Board present at the meeting, including all members of the Special Committee, unanimously concluded that the Merger, as reflected in the Merger Agreement, and the terms and provisions of the Merger Agreement, including the Merger Consideration of $28.85 in cash per share, were fair to, and in the best interests of, the Company and the Public Shareholders, unanimously adopted the Merger Agreement, authorized the Company to enter into the Merger Agreement and resolved to recommend to the Public Shareholders that they vote to adopt the Merger Agreement. See "--Recommendation of the Special Committee and the Board of Directors." -27- Certain directors may have actual or potential conflicts of interest in connection with this action and recommendation that are discussed below under "-- Interests of Certain Persons in the Merger and the Company." Following completion of the meeting of the Board, the Merger Agreement was executed. Prior to the commencement of trading in the Common Stock on January 20, 1999, the Company issued a press release announcing that the Merger Agreement and the Memorandum of Understanding to settle the Current Shareholder Litigation had been entered into. On April 7, 1999, a Stipulation of Settlement was entered into embodying (and superceding) the Memorandum of Understanding (the "Stipulation of Settlement"). On May 11, 1999, the Court issued a Scheduling Order, pursuant to which a hearing was scheduled to be held on June 29, 1999, to determine, among other things, whether the Court should approve the settlement of the Current Shareholder Litigation. Notice of, among other things, the scheduled hearing before the Court and as to requirements for appearing at the hearing and requesting exclusion from the Class on behalf of whom the actions were instituted was distributed beginning May 17, 1999. See "LITIGATION PERTAINING TO THE MERGER -- Current Shareholder Litigation." In mid-June 1999, it was proposed to extend the date after which either the Company or the Continuing Shareholders could terminate the transaction solely by reason of the Merger not having been consummated from June 30, 1999 to August 31, 1999 and to make certain other non-economic and non- substantive changes to the Merger Agreement. On June 17, 1999, the Special Committee held a telephonic meeting to consider the Restated Merger Agreement and determine whether to recommend its adoption to the full Board. Willkie Farr reviewed the amendments proposed to the Merger Agreement with the members of the Special Committee, following which the Special Committee unanimously approved the changes to the Merger Agreement and concluded that none of the changes made to the Merger Agreement affected its prior actions and recommendations. A telephonic meeting of the Board was then held to consider adopting the Restated Merger Agreement which was attended by all members of the Board except Carmela Sbarro. Parker Chapin reviewed the amendments proposed to the Merger Agreement with the Board. After discussion, the members of the Board present at the meeting, including all members of the Special Committee, unanimously approved the changes to the Merger Agreement and concluded that none of the changes made to the Merger Agreement affected its prior actions and recommendations, adopted the Restated Merger Agreement, authorized the Company to enter into the Restated Merger Agreement and resolved to recommend to the Public Shareholders that they vote to adopt the Restated Merger Agreement. On June 29, 1999, a hearing was held before the Court to determine, among other things, whether the Court should approve the settlement of the Current Shareholder Litigation. No opposition to the settlement was presented at the hearing and no shareholder requested exclusion from the Class. The Court signed an Order and Final Judgment on July 14, 1999, among other things, approving the Stipulation of Settlement and the settlement and adjudging the terms thereof to be fair, reasonable, adequate and in the best interests of the Class. RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS At a meeting of the Special Committee held on January 19, 1999, at which all members of the Special Committee were present, with Paul A. Vatter attending by telephone conference, the Special Committee met with its legal and financial advisors to review the proposed terms of the Merger. The Special Committee unanimously concluded that the Merger, as reflected in the Merger Agreement, and the terms and provisions of the Merger Agreement, including the Merger Consideration of $28.85 in cash per share, were fair to, and in the best interests of, the Company and the Public Shareholders, and unanimously resolved to recommend to the Board that it adopt the Merger Agreement. -28- At a special meeting of the Board held immediately following the Special Committee's determination, at which all directors of the Company were present, except for Carmela Sbarro, the Board considered the recommendation of the Special Committee. The Board members who were present unanimously concluded, based in part on the recommendation of the Special Committee, that the Merger, as reflected in the Merger Agreement, and the terms and provisions of the Merger Agreement, including the Merger Consideration of $28.85 in cash per share, were fair to, and in the best interests of the Company and the Public Shareholders, unanimously adopted the Merger Agreement, authorized the Company to enter into the Merger Agreement and unanimously resolved to recommend to the Public Shareholders that they vote to adopt the Merger Agreement. At a meeting of the Special Committee held by telephone conference on June 17, 1999, the Restated Merger Agreement was presented for consideration to the Special Committee, which unanimously approved the changes to the Merger Agreement and concluded that none of the changes made to the Merger Agreement affected the Special Committee's prior actions and recommendations. Thereafter, at a special meeting of the Board held by telephone conference at which all members of the Board were present, except Carmela Sbarro, the Board members who were present unanimously approved the changes to the Merger Agreement and concluded that none of the changes made to the Merger Agreement affected the Board's prior actions and recommendations, adopted the Restated Merger Agreement, authorized the Company to enter into the Restated Merger Agreement and resolved to recommend to the Public Shareholders that they vote to adopt the Restated Merger Agreement. The Special Committee addressed its recommendation to the Board and the Board specifically addressed its recommendation to the Public Shareholders as a separate individual class. Neither the Special Committee nor the Board addressed its recommendation to the Continuing Shareholders. SPECIAL COMMITTEE. In determining to recommend that the Board adopt the Merger Agreement, the Special Committee considered a number of factors. The material factors considered by the Special Committee were: (1) Prudential Securities' opinion that, as of January 19, 1999, the date of the Special Committee's meeting to consider the Merger, the Merger Consideration was fair, from a financial point of view, to the Public Shareholders. The full text of Prudential Securities' opinion, describing various considerations, assumptions and limitations stated therein, is set forth in Annex II to this Proxy Statement. The Special Committee also considered the presentations by Prudential Securities to the Special Committee regarding: o the Company's current financial condition, results of operations and future prospects (both as a public and a private company); o the industry in which the Company operates and the financial, operating and stock price history of the Company in comparison to certain pizza and value priced Italian restaurant companies and fast food restaurant companies, including considerations of current market prices, historical market prices, sales growth, discounted cash flow, enterprise value and equity value, as well as an analysis of the valuation of comparable transactions, all of which are reflected in the report presented by Prudential Securities to the Board on January 19, 1999; and o Bear Stearns' "highly confident" letter and the term sheet delivered by the Continuing Shareholders to the Special Committee. See "-- Presentation and Fairness Opinion of Prudential Securities." (2) The fact that the Merger Agreement and the Merger Consideration are the product of arms' length negotiations between the Continuing Shareholders and the Special Committee, as well -29- as between the Continuing Shareholders and counsel to the plaintiffs in the Current Shareholder Litigation. These extensive negotiations led to an increase in the proposed Merger Consideration from $27.50 to $28.85 per share, which the Continuing Shareholders agreed to on the condition that this price was final and there would be no further negotiations. The Continuing Shareholders made it clear in these discussions that $28.85 per share was the highest price that they would be willing to pay. (3) The solicitation of interest with respect to the possible sale of the Company in August and September 1998. Despite a solicitation conducted for the Company by Bear Stearns to 38 potential purchasers, the process yielded only four written preliminary indications of interest, none of which were acceptable to the Continuing Shareholders. The Special Committee recognized that, while the Merger Consideration was within the range of prices in certain of the preliminary indications of interest, other preliminary indications of interest were below the Merger Consideration. Further, it recognized that the prospective acquirors provided their indications based on the Business Sale Projections and without having conducted diligence and, therefore, there was a risk that they would lower their contemplated prices. The Special Committee also noted that, while certain of the preliminary indications included higher potential prices, that did not alter the fact that the Merger Consideration itself was fair. In addition, the Special Committee noted that any indications of interest were subject to obtaining financing and that any unaffiliated purchaser would need to purchase the shares held by the Public Shareholders as well as the Continuing Shareholders. Therefore, a purchase transaction would be more expensive for an unaffiliated party than for the Continuing Shareholders even at the same or somewhat lower per share merger consideration. The additional financing that would be required for such a purchase made the consummation of such a transaction with those submitting higher preliminary indications of interest even less likely. While the Special Committee recognized that, although bank financing was generally available, market conditions for obtaining certain financing structures that certain potential acquirors may have required to consummate an acquisition were less favorable during late August through November 1998 than earlier in the year, it did not believe that these conditions materially affected the number and nature of the indications of interest received. The Special Committee also was advised that none of Bear Stearns, the Company or the Continuing Shareholders had received any proposals for the purchase of the business or the Common Stock owned by the Continuing Shareholders since the termination of the business sale process on October 7, 1998. See "-- Background of the Transaction." (4) The terms and conditions of the Merger Agreement, including: o the ability of the Board to furnish information to, and enter into negotiations with, third parties with respect to unsolicited alternative offers or proposals if, in its good faith judgment, the proposal is more favorable to the Company's shareholders than the Merger, is achievable and supported by creditable financing, and the Board's failure to take these actions would otherwise breach its fiduciary duties to the Company's shareholders under applicable law (see "THE RESTATED MERGER AGREEMENT -- No Solicitation; Fiduciary Obligations of Directors"); o the requirement that the Merger Agreement be adopted by the affirmative vote of a majority of the votes cast at the Meeting, excluding votes cast by the Continuing Shareholders, abstentions and broker non-votes, as well as by two-thirds of the votes of all outstanding shares of Common Stock; o the requirement that the approval of the Special Committee is required for any action that may be taken by the Board pursuant to the Merger Agreement (including -30- any amendment or termination of the Merger Agreement or waiver of any of the Company's rights thereunder); and o the absence of any termination or "break up" fees payable by the Company and the fact that (i) the Company's only financial obligation to the Continuing Shareholders in the event of termination of the Merger Agreement would be the payment of the Continuing Shareholders' fees and expenses, up to $500,000, and that such payment would not be made if the Merger Agreement is terminated because of (a) failure of the Continuing Shareholders to obtain financing (unless resulting from a material adverse change in the securities, financial or borrowing markets) or (b) a breach by Mergeco or the Continuing Shareholders of their representations, warranties or covenants, and (ii) if the Merger Agreement is terminated due to failure of the Continuing Shareholders to obtain financing (unless resulting from a material adverse change in the securities, financial or borrowing markets), then Mergeco and the Continuing Shareholders would, jointly and severally, be obligated to pay the Company for 50% of the fees and expenses incurred by the Company, up to $500,000. (5) The receipt by the Continuing Shareholders and Mergeco of a "highly confident" letter from Bear Stearns with respect to the arrangement of the necessary financing for the Merger and the term sheet delivered by the Continuing Shareholders to the Special Committee. This procedure enabled the Special Committee to be assured that the "highly confident" letter would pertain to the same basic financing terms that the Continuing Shareholders agreed would limit their ability to terminate the Merger Agreement for a failure to obtain satisfactory financing. (6) The Merger Consideration of $28.85 per share, which represents a premium of 16.3% over $24-13/16, the closing price per share of the Common Stock on the NYSE on November 25, 1998, the day on which, following the close of trading, the Company announced the Revised Proposal. The Special Committee also considered that between January 1, 1994 and January 20, 1998, the date the Company announced the Initial Proposal, the Common Stock had traded in a relatively narrow price range between a low of $19.875 per share (on May 1, 1995) and a high of $29.9375 per share (on October 14, 1997), closing at $26.3125 per share on December 31, 1997 and $26.375 on January 16, 1998, the last trading day prior to January 20, 1998. The Special Committee also noted that, while following the announcement of the Initial Proposal, the market price of the Common Stock reached $30.125 per share on March 13, 1998, it believed this resulted from speculation that a higher merger consideration might be negotiated. The Special Committee also noted that the Common Stock traded as low as $18.3125 per share on September 21, 1998, approximately three months after the announcement of termination of the Initial Proposal. Accordingly, the Special Committee gave greater weight to the narrow price range at which the Common Stock traded between 1994 and 1997 and concluded that those prices were indicative of investors' view of the value of the Common Stock. (7) The Company's current financial condition, results of operations and future prospects (both as a public company and as a private company), as well as the strategic direction of its business and the trends in the restaurant industry, based upon the knowledge of the members of the Special Committee, each of whom has been a director of the Company for more than the past ten years. Specifically, the Special Committee concluded that, while the Company's results of operations and financial condition were strong, the fact that there has been a decline in the Company's rate of growth in both operating revenues (from 11.4% in 1994 to 6.0% in 1997, in each case over the preceding year) and operating income (from 13.1% in 1994 to 1.1% in 1997, in each case over the preceding year) in recent years and the fact that comparable unit sales and operating margins had remained relatively flat may limit the -31- potential for an increase in the market price of the Common Stock. The Special Committee also considered (i) the maturity of the Company's existing core business, (ii) the limited prospects of significant growth in the Company's core business and (iii) uncertain growth prospects of the Company's existing joint ventures and any future concepts the Company might develop. In reviewing the Company's future business prospects, the Special Committee reviewed both the Business Sale Projections contained in the confidential memorandum utilized in the business sale process in August 1998 and the Operating Projections discussed under "-- Certain Financial Projections". The Special Committee considered the fact that the Operating Projections constituted the material assumptions that underlay Prudential Securities' opinion (see "-- Presentation and Fairness Opinion of Prudential Securities") and recognized that the Business Sale Projections assumed an aggressive expansion strategy to solicit interest from potential purchasers by presenting the possibility for significant growth in both revenue and earnings before interest income, interest expense, taxes, depreciation and amortization, and non-recurring and extraordinary charges and credits ("EBITDA"). In particular, the Business Sale Projections assumed that the Company's future growth would be derived primarily from a significant increase in the opening of core Sbarro restaurant units and Umberto of New Hyde Park joint venture restaurants. The Special Committee believed these assumptions were not realistic. In addition, the Special Committee considered that the Business Sale Projections represented the opportunities a potential buyer of the Company might have with a different approach to operating the Company and a different management team. Therefore, the Special Committee concluded that the Business Sale Projections were not relevant to a going concern analysis and gave no weight to the Business Sale Projections in making its determination. The Special Committee viewed the Operating Projections as a more realistic view of the Company's future prospects in that the Operating Projections were more in line with the Company's historical financial trends. (8) The fact that no regulatory approvals are required in order for Mergeco and the Continuing Shareholders to consummate the Merger other than, in certain cases, obtaining approvals under alcohol and beverage licenses of the Company resulting from a technical "change of control" of the Company, which approvals are likely to be obtained since "control" would be passing to the Continuing Shareholders who were approved with respect to the Company. On the other hand, it is likely that, in addition to obtaining alcohol and beverage license approvals or transfers, other regulatory approvals (including under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended), not required with respect to the Merger, would be required if the Company were to be sold to others. See "-- Regulatory Approvals." The Special Committee did not attempt to determine the liquidation value of the Company and did not give significant weight to the per share book value of the Company (which was $11.78 at October 4, 1998, the end of the Company's last fiscal quarter for which such information was calculated prior to the Special Committee's determination), because there was no intention to liquidate the Company and because book value was, and liquidation value was believed to be, well below the Merger Consideration. The Special Committee considered the preliminary indications of interest received as part of the business sale process and the Merger Consideration negotiated with the Continuing Shareholders to be indicative of the Company's going concern value. In recommending that the Board adopt the Merger Agreement, the Special Committee was aware, and considered as a negative factor, that if the Merger is consummated, the Public Shareholders would no longer have an equity interest in the Company and, therefore, would not participate in any potential future earnings and growth of the Company. In this regard, the Special Committee also considered that if the Business Sale Projections contained in the confidential information memorandum utilized in the business sale process in August 1998 discussed under "-- Certain Financial Projections" are realized, the Common Stock could significantly increase in value. The Special Committee also noted that Prudential Securities, in rendering its opinion as to the fairness of the Merger Consideration to the Public Shareholders, relied on the -32- Company's updated Operating Projections and not the Business Sale Projections. The Special Committee concluded that, in light of its analysis of the Company, its business and its growth prospects, receiving a premium above the market price of the Common Stock by Public Shareholders is preferable to an uncertain future return. THE BOARD OF DIRECTORS. In reaching its determination that the Merger and Merger Consideration are fair to, and in the best interests of, the Company and the Public Shareholders, adopting the Merger Agreement and recommending that the Public Shareholders adopt the Merger Agreement, the Board considered and specifically adopted the conclusions and recommendation of the Special Committee and the factors described above which the Special Committee took into account in making its recommendation to the Board. The Company will continue its operations following completion of the Merger. However, shareholders of the Company, other than the Continuing Shareholders, will no longer have an equity interest in the Company and, therefore, will not participate in any potential future earnings and growth of the Company. In light of the number and variety of factors that the Special Committee and Board considered in their respective evaluations of the Merger, neither the Special Committee nor the Board found it practicable to assign relative weights to the foregoing factors and, accordingly, neither did so. Each of the Special Committee and the Board believes that the Merger is procedurally fair because, among other things, (i) the Special Committee consisted of independent directors appointed by the Board to represent solely the interests of, and to negotiate on behalf of, the Public Shareholders, (ii) the Special Committee retained and was advised by Willkie Farr as its own legal counsel, which assisted the Special Committee in its negotiations, (iii) the Special Committee retained Prudential Securities to assist it in evaluating the Merger Consideration and received an opinion from Prudential Securities as to the fairness of the Merger Consideration to the Public Shareholders from a financial point of view, (iv) the terms and conditions of the Merger Agreement, including the Merger Consideration, resulted from arms' length negotiations between the Special Committee and the Continuing Shareholders and their respective advisors, (v) the Merger Consideration was also negotiated between counsel to the plaintiffs in the Current Shareholder Litigation and the Continuing Shareholders and their respective advisors, and (vi) the Merger Agreement must be adopted by the affirmative vote of a majority of the votes cast at the Meeting excluding votes cast by Continuing Shareholders, abstentions and broker non-votes, in addition to the statutory requirement that the Merger Agreement be adopted by two-thirds of the votes of all outstanding shares of Common Stock. EACH OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND THE PUBLIC SHAREHOLDERS. THE BOARD OF DIRECTORS HAS ADOPTED THE RESTATED MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE "FOR" ADOPTION OF THE RESTATED MERGER AGREEMENT. Except to the extent a recommendation is made in a person's capacity as a director, no executive officer of the Company, nor any of the Continuing Shareholders or Mergeco has made any recommendation with respect to adoption of the Restated Merger Agreement or any other transaction contemplated by the Restated Merger Agreement. The Continuing Shareholders and Mergeco have agreed to vote their Common Stock in favor of adoption of the Restated Merger Agreement. The Continuing Shareholders, Mergeco and the Company have been informed by the other directors and executive officers of the Company, who owned an aggregate of 31,568 shares of Common Stock on the Record Date, that they plan to vote their Common Stock in favor of adoption of the Merger. -33- THE CONTINUING SHAREHOLDERS' PURPOSE AND REASONS FOR THE MERGER The Continuing Shareholders entered into the Restated Merger Agreement in order to become the sole owners of the Company. The transaction is structured as a merger, in which the equity interest in the Company of all the Public Shareholders would be extinguished in exchange for $28.85 in cash per share of Common Stock. A merger enables the transaction to be completed in one step, which would minimize the risk that the contemplated transactions will not be finalized and reduce transaction costs. The Continuing Shareholders believe that causing the Company to be closely held will: o Enable the Company's management to focus on long-term growth without having to meet the expectations of many Public Shareholders for short-term results. While the Company's management has been taking steps to address some of the Company's long-term issues by closing under-performing units, focusing on operating units more likely to succeed with less emphasis on revenue growth and seeking to expand through joint ventures to develop new restaurant concepts, this process had not resulted in an improvement in the market price of the Common Stock. o Provide the Continuing Shareholders with increased flexibility in dealing with matters of succession and estate planning. o Enable the Company to elect to be taxed under the provisions of Subchapter S under the Internal Revenue Code of 1986, as amended (the "CODE"), enabling equity owners the ability to avoid the double tax on distributions that presently exists on dividends paid by the Company (although each Continuing Shareholder will be taxed on his share of the Company's income whether or not it is distributed). o Afford the Continuing Shareholders the possible advantages of owning a "highly leveraged" entity, where any improvement in earnings, after interest expense (which would be tax deductible), inures to the benefit of shareholders and not lenders. The Continuing Shareholders recognize, however, that the transactions contemplated by the Restated Merger Agreement will involve a substantial risk to them because of the large amount of indebtedness to be incurred by the Surviving Corporation in connection with the consummation of the Merger. See "-- Financing of the Merger." o Reduce the Company's costs associated with publishing and distributing to its shareholders annual and quarterly reports and proxy statements, which the Continuing Shareholders estimate will result in annual savings to the Company of approximately $200,000, since the Company will no longer be subject to the proxy solicitation rules under the Exchange Act, although as a result of the proposed Debt Financing, the Company will be required to continue to file quarterly and annual reports with the SEC or deliver similar documents to investors in the Debt Financing. The Continuing Shareholders and Mergeco have concluded that the Merger, including the Merger Consideration of $28.85 per share in cash and the terms and conditions of the Restated Merger Agreement, are fair to the Company and the Public Shareholders based upon the following factors: (1) Prudential Securities rendered an opinion to the Special Committee to the effect that, as of January 19, 1999, based upon and subject to various considerations, assumptions and limitations stated therein, the Merger Consideration was fair, from a financial point of view, to the Public Shareholders. (2) The analysis and conclusions as to the fairness of the Merger Consideration of the Special Committee and the Board, which the Continuing Shareholders specifically adopted. -34- (3) The Special Committee, consisting solely of independent directors, unanimously recommended that the Board adopt the Restated Merger Agreement. (4) The Merger Consideration and the other terms and conditions of the Merger Agreement were the result of arms' length, good faith negotiations between the Special Committee and the Continuing Shareholders and their respective advisors, as well as, in the case of the Merger Consideration, between counsel to the plaintiffs in the Current Shareholder Litigation and the Continuing Shareholders and their respective advisors, that resulted in an increase in the Merger Consideration from $27.50 per share to $28.85 per share. (5) During the substantial period of time which would elapse between the announcement of entering into the Merger Agreement and the Effective Time, there would be ample time and opportunity for other persons to propose alternative transactions to the Merger, and that the Restated Merger Agreement permits the Board to furnish information to, and enter into negotiations with, third parties with respect to unsolicited alternative offers or proposals if, in the Board's good faith judgment, the proposal is more favorable to the Company's shareholders than the Merger, is achievable, is supported by creditable financing and the Board's failure to take these actions would otherwise breach its fiduciary duties to the Company's shareholders under applicable law. (6) The Merger Consideration represents a premium of 16.3% over the closing per share market price of the Common Stock on the NYSE on the date the Continuing Shareholders made the Revised Proposal. (7) The Continuing Shareholders reviewed the historical price range of the Common Stock and concluded that the price range of $20.375 to $29.9375, at which the Common Stock traded from January 1, 1994 until the Initial Proposal on January 20, 1998 (see "-- Recommenda tions of the Special Committee and the Board of Directors"), was indicative of investors' view of the value of the Common Stock. The Continuing Shareholders did not attempt to determine the liquidation value of the Company and did not give significant weight to the per share book value of the Company (which was $11.78 at October 4, 1998, the end of the Company's last fiscal quarter for which such information was calculated prior to the Special Committee's determination), because there is no intention to liquidate the Company and because both book value was, and liquidation value was believed to be, well below the Merger Consideration. The Merger Consideration was within the range of the high and low prices expressed in two of the four indications of interest received and was above the price expressed in a third indication of interest. The fourth indication of interest contemplated the merger of the Company with a financially troubled restaurant company controlled by a potential financial purchaser and, while it had contemplated consideration with a face value of $29.00- $31.00 per share, such consideration included $6.00 of preferred and common stock of a newly-formed company. See " -- Background of the Transaction." The Continuing Shareholders believe that the Merger Consideration of $28.85 in cash does not represent less than the Company's going concern value because it is within the range of the final preliminary indications of interest received as part of the business sale process and is the product of arms' length, good faith negotiations with the Special Committee and counsel to the plaintiffs in the Current Shareholder Litigation. The only alternative transactions considered by the Continuing Shareholders were a sale of the Company and a leveraged recapitalization. The Continuing Shareholders were willing to consider selling their interests in the Company at a price in the range of the mid-$30s per share. However, after the sale process failed to produce a potential purchaser in that price range, the Board abandoned this alternative. The Continuing Shareholders determined to pursue a going private transaction in which they would become owners of 100% of the equity interests in the Company through the Merger so that they could have greater control over the future direction of the Company, including with regard to ownership and estate planning, than they would if the Company pursued a leveraged recapitalization. -35- The Continuing Shareholders recognize that the Merger Consideration of $28.85 per share in cash is less than the price at which they were willing to consider selling their interests in the Company and below the per share price at which certain (and above the price at which other) third parties expressed a preliminary interest in acquiring the Company. The Continuing Shareholders were willing to consider a sale of their interests in the Company, which was founded by their family and bears their family name, only at a price which included a significant premium to the market price of the Common Stock. The Continuing Shareholders believe that the fact that the Merger Consideration is less than the premium price they were willing to consider does not render the Merger Consideration unfair. The Continuing Shareholders believe that the Merger will afford Public Shareholders the benefit of being able to determine, by a majority of the votes cast, other than votes of the Continuing Shareholders, abstentions and broker non-votes, whether to dispose of their Common Stock at a 16.3% premium over the market price of the Common Stock on the NYSE on November 25, 1998, the date the Continuing Shareholders made the Revised Proposal. The Continuing Shareholders noted that, over the five years ended December 31, 1997 (the end of the year preceding their Initial Proposal), the market price of the Company's Common Stock increased only 19%, while the Standard & Poor's Restaurant Index increased 80% and the Standard & Poor's 500 Index increased 123%. The Continuing Shareholders also recognized that the Operating Projections for the five years ending at the end of fiscal 2002 did not indicate a dramatic increase in the percentage of revenue growth, while the Company's EBITDA margin percentage was projected to remain steady and its operating margin percentage was projected to increase slightly (see "Certain Financial Projections"). The Continuing Shareholders concluded that, absent significant growth in these areas, it was unlikely that there would be significant increase in the market price of its Common Stock. The Continuing Shareholders recognize that, following the Merger, the Public Shareholders will no longer have an equity interest in the Company and, therefore, will not participate in any potential future earnings and growth of the Company. While this could be detrimental to the Public Shareholders if the Company successfully grows, the Continuing Shareholders noted that the market price of the Common Stock has been trading within a relatively narrow range with the reduction in the Company's rate of growth and believe that any significant business growth that would affect the market price of the Common Stock is uncertain and long-term. Accordingly, the Continuing Shareholders believe that offering Public Shareholders the opportunity to select, by majority action of the Public Shareholders (other than abstentions and broker non-votes), the present receipt of the Merger Consideration instead of a speculative future return is appropriate. PRESENTATION AND FAIRNESS OPINION OF PRUDENTIAL SECURITIES On January 19, 1999, the date the Merger Agreement was entered into, Prudential Securities delivered its opinion to the Special Committee to the effect that, as of such date, the Merger Consideration was fair, from a financial point of view, to the Public Shareholders. Prudential Securities presented the financial analysis underlying its opinion at a meeting of the Special Committee on January 19, 1999. The full text of the Prudential Securities opinion, which sets forth the assumptions made, matters considered and limits on the review undertaken, is attached to this Proxy Statement as Annex II and is incorporated herein by reference. The summary of the Prudential Securities opinion set forth below is qualified in its entirety by reference to the full text of the Prudential Securities opinion. You are urged to read the Prudential Securities opinion in its entirety. THE PRUDENTIAL SECURITIES OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION TO THE PUBLIC SHAREHOLDERS FROM A FINANCIAL POINT OF VIEW. IT DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW THAT SHAREHOLDER SHOULD VOTE AT THE MEETING OR AS TO ANY OTHER ACTION THAT SHAREHOLDER SHOULD TAKE REGARDING THE PROPOSED MERGER. -36- The summary contained herein of the presentation by Prudential Securities relating to its opinion is qualified in its entirety by reference to the full text of the presentation filed as an exhibit to the Schedule 13E-3. See "AVAILABLE INFORMATION." In conducting its analysis and arriving at its opinion, Prudential Securities reviewed such information and considered such financial data and other factors as Prudential Securities deemed relevant under the circumstances, including the following: o a draft, dated January 19, 1999, of the Merger Agreement, including the exhibits thereto; o a draft, dated January 19, 1999, of the "highly confident" letter from Bear Stearns to certain of the Continuing Shareholders and Mergeco; o certain publicly available historical, financial and operating data for the Company including, but not limited to, (i) the Annual Report to shareholders and Annual Report on Form 10-K for the fiscal year ended December 28, 1997, (ii) the Quarterly Report on Form 10-Q for the fiscal quarter ended October 4, 1998, (iii) Current Reports on Forms 8-K, filed with the SEC on June 18, 1998, September 22, 1998 and December 2, 1998, and (iv) the Proxy Statement relating to the Annual Meeting of Shareholders held on August 19, 1998; o historical stock market prices and trading volumes for the Common Stock; o certain information relating to the Company, including projected balance sheets, income statements and cash flow data for the 1998 through 2003 fiscal years, prepared by the management of the Company; o the Company's confidential information memorandum dated August 1998, and the preliminary written indications of interest received from prospective purchasers; o publicly available financial, operating and stock market data concerning certain companies engaged in businesses that Prudential Securities deemed comparable to the Company or otherwise relevant to its inquiry; o the financial terms of certain recent transactions, including "going private" transactions, that Prudential Securities deemed relevant to its inquiry; and o such other financial studies, analyses and investigations that Prudential Securities deemed relevant to its inquiry. Prudential Securities assumed, with the Company's consent, that the draft of the Merger Agreement that they reviewed would conform in all material respects to the definitive Merger Agreement. Prudential Securities discussed with management of the Company (i) the past and current operating results and financial condition of the Company, (ii) the prospects for the Company, (iii) management's estimates of the Company's future financial performance, and (iv) such other matters as Prudential Securities deemed relevant. Prudential Securities also considered qualitative factors associated with the proposed Merger, including the existing management profile and stock ownership. In connection with its review and analysis and in the preparation of its opinion, Prudential Securities relied upon the accuracy and completeness of the financial and other information publicly available or provided to it by the Company and has not undertaken any independent verification of such information or any independent valuation or appraisal of any of the assets or liabilities of the Company. With respect to certain financial forecasts of the Company that the Company's management provided to Prudential Securities, Prudential Securities assumed that such information, and the assumptions and bases therefor, represented the -37- Company's management's best then available estimate as to the future financial performance of the Company. Further, the Prudential Securities opinion was based on economic, financial and market conditions as they existed on the date the opinion was rendered and can only be evaluated as of such date, and Prudential Securities assumes no responsibility to update or revise the Prudential Securities opinion based upon events or circumstances occurring after that date. For purposes of its analysis and preparation of its opinion, Prudential Securities used the Operating Projections, rather than the Business Sale Projections, because the Business Sale Projections assumed an aggressive expansion strategy and were designed to solicit interest from potential purchasers by presenting the possibility for significant growth in both revenues and EBITDA. The Operating Projections represented management's then current view of the Company's future prospects in light of present and expected future business trends. The Operating Projections constitute the material assumptions that underlie the Prudential Securities opinion. See "-- Certain Financial Projections." The Prudential Securities opinion, including Prudential Securities' presentation of such opinion to the Special Committee, was one of the many factors that the Special Committee took into consideration in making its determination to recommend to the Board adoption of the Merger Agreement. See "-- Recommendations of the Special Committee and the Board of Directors." Consequently, Prudential Securities' analyses described below should not be viewed as solely determinative of the opinion of the Special Committee with respect to the Merger Consideration. In arriving at its opinion, Prudential Securities performed a variety of financial analyses, including those summarized in this Proxy Statement. The summary set forth below of the analyses presented to the Special Committee at the January 19, 1999 meeting does not purport to be a complete description of the analyses performed. The preparation of a fairness opinion is a complex process that involves various determinations as to the most appropriate and relevant methods of financial analyses and the application of these methods to the particular circumstance. Therefore, such an opinion is not necessarily susceptible to partial analysis or summary description. Prudential Securities believes that its analyses must be considered as a whole and selecting portions thereof or portions of the factors considered by it, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying its opinion. Prudential Securities made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company. Any estimates contained in Prudential Securities' analyses are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Additionally, estimates of the values of businesses and securities do not purport to be appraisals or necessarily reflect the prices at which businesses or securities may be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. Subject to the foregoing, the following is a summary of all the material financial analyses presented by Prudential Securities to the Special Committee on January 19, 1999. RISK AND GROWTH ANALYSIS. Prudential Securities reviewed and compared certain financial and operating information relating to the Company to corresponding financial and operating information for selected groups of certain companies that were considered by Prudential Securities to be reasonably similar to the Company. The first group of companies consisted of pizza and value priced Italian food companies, including CEC Entertainment, Inc. (which operates Chuck E. Cheese's pizza restaurants), Darden Restaurants, Inc. (which operates The Olive Garden restaurants), NPC International, Inc. (a franchisee of Pizza Hut restaurants and delivery units), Pizza Inn, Inc. (a franchisor of Pizza Inn restaurants), and Uno Restaurant Corporation (an owner/operator and franchisor of Pizzeria Uno Chicago Bar & Grill restaurants), referred to here as the "PIZZA AND ITALIAN FOOD COMPARABLE COMPANIES." While none of the restaurants owned, operated or franchised by the Pizza and Italian Food Comparable Companies operate cafeteria-style restaurants as does the Company, those restaurants offer menu options similar to those offered by the Company. The second group of companies consisted of fast food companies, including Foodmaker, Inc., Tricon Global Restaurants, Inc., Sonic Corp. and Wendy's International, Inc., referred to here as the "FAST -38- FOOD COMPARABLE COMPANIES." The Pizza and Italian Food Comparable Companies and the Fast Food Comparable Companies are referred to collectively as the "COMPARABLE COMPANIES." When compared to the Pizza and Italian Food Comparable Companies, Prudential Securities' analysis showed, among other things, that: o comparable restaurant sales growth over the trailing eight quarters ended between September 27, 1998 and November 29, 1998 ranged from - 9.7% to 14.2% compared to - 0.9% to 1.6% for the Company; o projected consensus earnings per share growth rate for five years ranged from 11% to 22% compared to 5.0% for the Company; o historical sales growth over two years ranged from - 0.6% to 18.4% compared to 4.5% for the Company; o historical EBITDA growth over two years ranged from - 6.2% to 64.2% compared to 6.7% for the Company; o historical earnings before interest and taxes ("EBIT") growth over two years ranged from - 9.1% to 301.2% compared to 9.5% for the Company; o historical net income growth over two years ranged from - 9.2% to 17% compared to 10.1% for the Company; o total latest twelve months ("LTM") sales as of the latest reported quarter prior to January 19, 1999 ranged from $68.2 million to $3,409.6 million compared to $357.9 million for the Company; o number of restaurants as of the latest reported quarter prior to January 19, 1999 ranged from 163 to 1,143 compared to 881 for the Company; o equity market capitalization as of January 12, 1999 ranged from $48.0 million to $2,532.8 million compared to $521.2 million for the Company; o enterprise value as of January 12, 1999 ranged from $54.8 million to $2,840.6 million compared to $395.4 million for the Company; o LTM EBITDA margins as of the latest reported quarter prior to January 19, 1999 ranged from 9.8% to 21.9% compared to 22.3% for the Company; o LTM EBIT margins as of the latest reported quarter prior to January 19, 1999 ranged from 6.0% to 14.8% compared to 15.9% for the Company; o total debt to total book capitalization as of the latest reported quarter prior to January 19, 1999 ranged from 0.5x to 0.1x compared to 0.0x for the Company; and o LTM net income margins as of the latest reported quarter prior to January 19, 1999 ranged from 3.1% to 8.6% compared to 10.7% for the Company. -39- When compared to the Fast Food Comparable Companies, Prudential Securities' analysis showed, among other things, that: o comparable restaurant sales growth over trailing eight quarters ending between August 31, 1998 and October 4, 1998 ranged from 2.0% to 10.3% compared to - 0.9% to 1.6% for the Company; o projected consensus earnings per share growth rate for five years ranged from 14.0% to 20.0% compared to 5.0% for the Company; o historical sales growth over two years ranged from - 2.8% to 20.4% compared to 4.5% for the Company; o historical EBITDA growth over two years ranged from - 4.9% to 20.9% compared to 6.7% for the Company; o historical EBIT growth over two years ranged from 0.6% to 18.8% compared to 9.5% for the Company; o historical net income growth over two years ranged from 11.1% to 41.1% compared to 10.1% for the Company; o total LTM sales as of the latest reported quarter prior to January 19, 1999 ranged from $219.1 million to $8,732.0 million compared to $357.9 million for the Company; o number of restaurants as of the latest reported quarter prior to January 19, 1999 ranged from 1,414 to 29,600 compared to 881 for the Company; o equity market capitalization as of January 12, 1999 ranged from $443.5 million to $7,656.0 million compared to $521.2 million for the Company; o enterprise value as of January 12, 1999 ranged from $510.8 million to $11,251.0 million compared to $395.4 million for the Company; o LTM EBITDA margins as of the latest reported quarter prior to January 19, 1999 ranged from 11.4% to 23.1% compared to 22.3% for the Company; o LTM EBIT margins as of the latest reported quarter prior to January 19, 1999 ranged from 7.8% to 17.5% compared to 15.9% for the Company; o total debt to total book capitalization as of the latest reported quarter prior to January 19, 1999 ranged from 1.6x to 0.3x compared to 0.0x for the Company; and o LTM net income margins as of the latest reported quarter prior to January 19, 1999 ranged from 1.6% to 10.2% compared to 10.7% for the Company. DISCOUNTED CASH FLOW ANALYSIS. Prudential Securities also considered the results of a discounted cash flow analysis of the Company. Prudential Securities calculated the net present value of the Company's projected five-year stream of unlevered free cash flows and projected terminal value multiple of 2003 EBITDA, based on the financial projections provided to Prudential Securities by the Company. Prudential Securities applied discount rates ranging from 10.50% to 14.50% and terminal value multiples of 5.0x and 6.0x. This analysis resulted in an implied range of per share value of $25.99 to $31.92. -40- COMPARABLE COMPANIES ANALYSIS. A comparable companies analysis was employed by Prudential Securities to establish a range of implied equity values per share of common stock. Prudential Securities analyzed publicly available historical and projected financial results, including: o current enterprise value as a multiple of: LTM revenues, LTM EBITDA and LTM EBIT. o current equity value as a multiple of: LTM net income, projected 1998 earnings per share ("1998 EPS"), projected 1999 earnings per share ("1999 EPS") and book value (at October 4, 1998); and The Pizza and Italian Food Comparable Companies were found to have a range of enterprise value as a multiple of LTM Revenues of 0.6x to 1.3x; a range of enterprise value as a multiple of LTM EBITDA of 4.6x to 8.5x; a range of enterprise value as a multiple of LTM EBIT of 8.1x to 13.9x; a range of equity value as a multiple of LTM net income of 10.9x to 21.0x; a range of equity value as a multiple of 1998 EPS of 12.3x to 22.0x; a range of equity value as a multiple of 1999 EPS of 11.6x to 18.8x; and a range of equity value as a multiple of book value of 1.0x to 2.6x. Applying such multiples to the Company's LTM revenues, LTM EBITDA, LTM EBIT, LTM net income, 1998 EPS, 1999 EPS and book value resulted in an implied range of equity value per share of $11.54 to $43.95 with a mean of $27.17 and a median of $25.80. The Merger Consideration of $28.50 per share falls within the range of implied equity value per share which Prudential Securities believes supports the Prudential Securities opinion. If such multiples are applied to the Company's LTM Revenues, LTM EBITDA, LTM EBIT, LTM net income, 1998 EPS and 1999 EPS, but not book value, the result is an implied range of equity values per share of $16.36 to $43.95 with a median of $25.69 and a mean of $27.71. Prudential Securities does not believe that book value is an appropriate measure of the value of a going concern and believes that applying such multiples to the Company's book value would not result in a meaningful analysis. The Fast Food Comparable Companies were found to have a range of enterprise value as a multiple of LTM Revenues of 1.0x to 2.3x; a range of enterprise value as a multiple of LTM EBITDA of 8.8x to 10.1x; a range of enterprise value as a multiple of LTM EBIT of 12.6x to 16.0x; a range of equity value as a multiple of LTM net income of 19.3x to 21.7x; a range of equity value as a multiple of 1998 EPS of 18.1x to 19.6x; a range of equity value as a multiple of 1999 EPS of 15.4x to 18.8x; and a range of equity value as a multiple of book value of 2.6x to 6.3x. Applying such multiples to the Company's LTM revenues, LTM EBITDA, LTM EBIT, LTM net income, 1998 EPS, 1999 EPS and book value resulted in an implied range of equity value per share of $23.34 to $73.60 with a mean of $38.68 and a median of $36.85. The Merger Consideration of $28.50 per share falls within the range of implied equity value per share which Prudential Securities believes supports the Prudential Securities opinion. If such multiples are applied to the Company's LTM Revenues, LTM EBITDA, LTM EBIT, LTM net income, 1998 EPS and 1999 EPS, but not book value, the result is an implied range of equity values per share of $23.34 to $49.83 with a median of $36.98 and a mean of $37.20. Prudential Securities does not believe that book value is an appropriate measure of the value of a going concern and believes that applying such multiples to the Company's book value would not result in a meaningful analysis. COMPARABLE TRANSACTIONS ANALYSIS. Prudential Securities also analyzed the consideration paid in several recent merger and acquisition transactions which Prudential Securities deemed to be reasonably similar to the Merger, and considered the multiple of the acquired entity's enterprise value to its LTM revenues, LTM EBITDA and LTM EBIT, and the multiple of the acquired entity's equity value to its LTM net income and book value at October 4, 1998 based upon publicly available information for such transactions. The transactions considered were the combinations of: (i) Spaghetti Warehouse and Consolidated Restaurant Cos, (ii) Au Bon Pain Co Inc. and Bruckman Rossner Sherrill & Co., (iii) Pollo Tropical and Carrols Corp., (iv) Bertucci's and NE Restaurant Co., (v) DavCo Restaurants and DavCo Acquisition Holding Inc., (vi) International Dairy Queen and Berkshire Hathaway, (vii) Perkins Family Restaurants, L.P. and The Restaurant Company, (viii) Krystal Company and Port Royal Holdings, Inc., and (ix) Family Restaurants and Flagstar Companies, Inc. (collectively, the "COMPARABLE TRANSACTIONS"). The -41- Comparable Transactions were found to imply for each acquired entity a range of enterprise value as a multiple of LTM revenues of 0.6x to 1.4x; a range of enterprise values as a multiple of LTM EBITDA of 6.8x to 8.4x; a range of enterprise value as a multiple of LTM EBIT of 9.0x to 16.4x; a range of equity value as a multiple of LTM net income of 0.5x to 28.0x; and a range of equity value as a multiple of book value of 0.9x to 6.1x. Applying such multiples to the Company's LTM revenues, LTM EBITDA, LTM EBIT, LTM net income and book value resulted in an implied range for the equity value per share of $11.01 to $71.48 with a mean of $33.82 and a median of $31.63. The Merger Consideration of $28.50 per share falls within the range of implied equity value per share which Prudential Securities believes supports the Prudential Securities opinion. If such multiples are applied to the Company's LTM Revenues, LTM EBITDA, LTM EBIT, LTM net income, but not book value, the result is an implied range of equity values per share of $15.61 to $51.49 with a median of $31.64 and a mean of $32.69. Prudential Securities does not believe that book value is an appropriate measure of the value of a going concern and believes that applying such multiples to the Company's book value would not result in a meaningful analysis. None of the Comparable Companies or acquired entities used in the above analyses for comparative purposes is, of course, identical to the Company. Accordingly, a complete analysis of the results of the foregoing calculations cannot be limited to a quantitative review of such results and involves complex considerations and judgments concerning differences in financial and operating characteristics of each of the Comparable Companies or the acquired entities and other factors that could affect the public trading value of the Comparable Companies or the consideration paid for each of the acquired entities as well as the proposed Merger Consideration for the Company. The Special Committee engaged Prudential Securities to be its exclusive financial advisor in connection with the Revised Proposal and to provide a fairness opinion because Prudential Securities is a nationally recognized investment banking firm engaged in the valuation of businesses and their securities in connection with merger and acquisition transactions, because of its familiarity with the Company, because it has substantial experience in transactions similar to the proposed Merger. Pursuant to an engagement letter dated November 30, 1998 among the Company, the Special Committee and Prudential Securities, the Company paid Prudential Securities a retainer of $500,000 on November 30, 1998 and an additional $250,000 upon the delivery of the fairness opinion of Prudential Securities. An additional fee of $225,000 will be payable upon the consummation of the Merger. Pursuant to an engagement letter dated January 20, 1998, in connection with the Initial Proposal, the Company paid Prudential Securities a retainer of $250,000 upon such initial retention. In addition, the November 30, 1998 engagement letter with Prudential Securities provides that the Company will reimburse Prudential Securities for its out-of-pocket expenses and will indemnify Prudential Securities and certain related persons against certain liabilities, including liabilities under securities laws, arising out of the Merger or its engagement. In the ordinary course of business, Prudential Securities may actively trade shares of the Common Stock for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. CERTAIN FINANCIAL PROJECTIONS The Company does not as a matter of course make public forecasts or projections as to future performance (including as to revenues, earnings, other income statement items and cash flows) or financial position. However, in August 1998, the Company's management prepared the long-term Business Sale Projections in connection with the engagement of Bear Stearns to solicit interest in the acquisition of the Company by third parties. See "-- Background of the Transaction." In October 1998, the Company's management prepared the updated Operating Projections to reflect then present and expected future business trends and conditions. The Business Sale Projections set forth below are the same as included in a confidential information memorandum provided to potential purchasers of the Company who indicated an interest in acquiring the Company and entered into confidentiality agreements (see "--Background of the Transaction"). The Operating Projections, which appear following the Business Sale Projections, are based on more detailed financial information. The Projections are included in this Proxy Statement solely because they were provided to Prudential Securities. -42- There are significant differences between the Business Sale Projections and the Operating Projections. The primary differences in the assumptions between the Business Sale Projections and the Operating Projections are that the Business Sale Projections reflected (i) higher comparable restaurant unit annual sales increases, (ii) increased openings of Sbarro restaurant units, (iii) higher operating margins, and (iv) a more rapid expansion of the Company's Umberto of New Hyde Park joint venture. The Business Sale Projections assumed an aggressive expansion strategy and were designed to solicit interest from potential purchasers by presenting the possibility for significant growth in both revenues and EBITDA that might be available to a potential buyer of the Company with a different approach to operating the Company and a different management team. The Operating Projections reflect management's then current view of the Company's future prospects in light of present and expected future business trends. The Projections were based upon numerous estimates and assumptions that are inherently subject to significant uncertainties, are difficult to predict and, in many cases, are influenced by factors beyond the Company's control. The material assumptions used in preparing the Projections are described in the respective Projections and footnotes to the Projections. Certain assumptions on which both the Business Sale Projections and the Operating Projections were based related to the achievement of strategic goals, objectives and targets over the applicable periods that were more favorable than recent historical results. Accordingly, there can be no assurance that the projected results will be realized or that actual results will not be significantly higher or lower than those predicted. See "SUMMARY--Forward-Looking Information." The Company's 1998 fiscal year consisted of 53 weeks. All projected years consist of 52 weeks. The projected financial results for the 1998 fiscal year in the Projections were based on the first 52-weeks of that fiscal year in order to provide comparability to the historical and projected periods. At the time the Projections were prepared, the Company's management estimated that approximately $8.0 million of revenue and $3.0 million of EBITDA would be generated during the 53rd week of fiscal 1998. Actual 1998 revenues and EBITDA for the 53rd week totaled $8.5 million and $1.7 million, respectively. -43-
BUSINESS SALE PROJECTIONS (1) (DOLLARS IN MILLIONS) FISCAL YEAR -------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Total Systemwide Sales (2) $947.3 $795.6 $668.5 $568.7 $501.0 ====== ====== ====== ====== ====== Revenues (3) $600.0 $525.5 $460.4 $405.7 $365.8 REVENUE GROWTH % 14.2% 14.1% 13.5% 10.9% 6.0% EBITDA $138.6 $121.7 $106.9 $94.4 $85.2 EBITDA MARGIN % 23.1% 23.2% 23.2% 23.3% 23.3% Depreciation and Amortization (4) $33.7 $32.4 $30.4 $28.3 $27.1 ------ ----- ----- ----- ----- Operating Profit $104.9 $89.3 $76.6 $66.1 $58.2 ====== ===== ===== ===== ===== OPERATING MARGIN % 17.5% 17.0% 16.6% 16.3% 15.9% Capital Expenditures $38.4 $35.6 $32.7 $28.4 $29.1 ASSUMED STORE DATA (5): Company-Owned Beginning Units 849 779 714 659 625 Unit Openings (net) 75 70 65 55 34 ------ ------ ------ ------ ------ Ending Units 924 849 779 714 659 ====== ====== ====== ====== ====== Franchised Beginning Units 489 404 329 274 239 Unit Openings (net) 95 85 75 55 35 ------- ------- ------- ------- ------ Ending Units 584 489 404 329 274 ======= ======= ======= ======= ====== Total Beginning Units 1,338 1,183 1,043 933 864 Unit Openings (net) 170 155 140 110 69 ------ ------ ------ ------ ------ Ending Units 1,508 1,338 1,183 1,043 933 ====== ====== ====== ====== ====== ASSUMED COMPARABLE UNIT REVENUES INCREASES: Company core units 1.5% 1.5% 1.5% 1.5% .5% Umberto of New Hyde Park 2.0% 2.0% 2.0% 2.0% 2.0% Units - --------------------
(1) Includes 100% of the projected financial results of Umberto of New Hyde Park (an 80% owned restaurant joint venture). (2) Represents combined projected sales of Company-owned and franchised locations. (3) Revenues are based on the assumed unit data and assumed comparable unit revenues increases set forth in the table. (4) Based upon the Company's then depreciable asset base and future projected capital expenditure requirements. (5) Includes both Umberto of New Hyde Park shopping mall and strip center units, in addition to the Company's core operation units. Actual unit openings for 1998 were 26 Company-owned and 43 franchised units, with net openings, after giving effect to unit closings during the year, of seven Company-owned and 29 franchised units. -44- OPERATING PROJECTIONS (1)
(DOLLARS IN MILLIONS) FISCAL YEAR -------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Total Systemwide Sales (2) $631.4 $595.7 $560.3 $525.2 $496.1 ======= ====== ====== ====== ====== Revenues (3) $418.3 $402.9 $387.6 $372.4 $362.9 REVENUE GROWTH % 3.8% 3.9% 4.1% 2.6% 5.3% EBITDA $93.6 $89.9 $86.3 $82.7 $80.3 EBITDA MARGIN % 22.4% 22.3% 22.3% 22.2% 22.1% Depreciation and Amortization (4) $25.1 $24.9 $24.5 $24.0 $23.5 ------- ----- ----- ----- ----- Operating Profit $68.4 $65.0 $61.7 $58.7 $56.8 ======= ===== ===== ===== ===== OPERATING MARGIN % 16.4% 16.1% 15.9% 15.8% 15.7% Capital Expenditures $13.4 $13.4 $13.4 $13.4 $10.7 ASSUMED STORE DATA (5): Company-Owned Beginning Units 699 677 655 633 623 Unit Openings (net) 22 22 22 22 10 ------ ------- ------- ------- ------- Ending Units 721 699 677 655 633 ====== ======= ======= ======= ======= Franchised Beginning Units 371 336 301 266 239 Unit Openings (net) 35 35 35 35 27 ------ ------- ------- ------- ------ Ending Units 406 371 336 301 266 ====== ====== ======= ======= ====== Total Beginning Units 1,070 1,013 956 899 862 Unit Openings (net) 57 57 57 57 37 ------ ------- ------- ------- ------- Ending Units 1,127 1,070 1,013 956 899 ====== ======= ======= ======= ======= ASSUMED COMPARABLE UNIT REVENUES INCREASES: Company core units .5% .5% .5% .5% .5% Umberto of New Hyde Park Units 0% 0% 0% 0% 0% - --------------------
(1) Included 100% of the financial results of Umberto of New Hyde Park (an 80% owned restaurant joint venture). (2) Represents combined projected sales of Company-owned and franchised locations. (3) Revenues are based on the assumed unit data and assumed comparable unit revenues increases set forth in the table. (4) Based upon the Company's then depreciable asset base and future projected capital expenditure requirements. (5) Includes both Umberto of New Hyde Park shopping mall and strip center units, in addition to the Company's core operation units. Actual unit openings for 1998 were 26 Company-owned and 43 franchised units, with net openings, after giving effect to unit closings during the year, of seven Company-owned and 29 franchised units. -45- While the Projections were prepared in good faith by the Company's management, no assurance can be made regarding future events. Therefore, neither the Business Sale Projections nor the Operating Projections can be considered a reliable prediction of future operating results and should not be relied on as such. Additionally, the Projections were prepared at the times indicated above and do not reflect any subsequent results or any changes that have occurred or may occur in the future regarding the business, assets, operations, properties, management, capitalization, corporate structure or policies of the Company, general economic or business conditions, or any other transaction or event that has occurred since the respective dates of preparation, or that may occur, and were not anticipated at the time such information was prepared. The Projections were not prepared to comply with the published guidelines of either the SEC regarding projections or forecasts or the American Institute of Certified Public Accountants' Guide for Prospective Financial Statements, nor in accordance with generally accepted accounting principles. The Company's independent auditors have not examined, compiled or performed any procedures regarding the Projections, nor have they expressed any opinion or given any assurance on such information or its achievability and, accordingly, they assume no responsibility for the Projections. None of the Company, Mergeco nor the Continuing Shareholders intends to update or supplement the Projections prior to the Meeting. Shareholders are cautioned not to place undue reliance on the Projections. PLANS FOR THE COMPANY AFTER THE MERGER None of the Continuing Shareholders, Mergeco or the Company currently have any plans or proposals that relate to or would result in an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving the Company or any of its subsidiaries, a sale or transfer of a material amount of assets of the Company or any of its subsidiaries or, except as indicated elsewhere in this Proxy Statement, any material change in the Company's capitalization, corporate structure or business or the composition of the Board or executive officers following the consummation of the Merger. However, the Continuing Shareholders intend, from time to time, to evaluate and review the Company's businesses, operations, properties, management and other personnel, corporate structure and capitalization, and to make such changes as are deemed appropriate. The Continuing Shareholders also intend to continue to explore joint ventures and other opportunities to expand the Company's business. In that regard, the Continuing Shareholders, after the Merger, may review proposals or may propose the acquisition or disposition of assets or other changes in the Company's business, corporate structure, capitalization, management or dividend policy which they consider to be in the best interests of the Company and its then shareholders. The Company and the Continuing Shareholders anticipate that the indebtedness to be incurred in connection with the Merger will be repaid primarily with cash generated from the operations of the business of the Company or a subsequent refinancing. However, subject to the terms of the Debt Financing and market and other conditions, the Company may, in the future, consider such other means of repaying such indebtedness as the Company and the Continuing Shareholders may determine in their sole and absolute discretion. If the Merger is consummated, the Continuing Shareholders currently intend to cause the Company to elect to be taxed under the provisions of Subchapter S of the Code commencing with the fiscal year 2000 and to have the Company make distributions to them in order to enable them to pay income taxes to be borne by them as a result of that election and to pay dividends to them to the extent permitted by the Debt Financing after taking into consideration the Company's capital requirements. See "-- Financing of the Merger" and "SUMMARY -- Market Prices of and Dividends on the Common Stock." CONDUCT OF THE BUSINESS OF THE COMPANY IF THE MERGER IS NOT CONSUMMATED The Board has made no determination as to the direction of the Company should the Merger not be consummated. The Board currently expects that the Company's present management will continue to operate the Company's business substantially as presently operated. However, even if the Merger is not consummated, management and the Board intend, from time to time, to evaluate and review the Company's businesses, operations, properties, management and other personnel, corporate structure, dividend policy and -46- capitalization, and make such changes as are deemed appropriate and to continue to explore joint ventures and other opportunities to expand the Company's business. INTERESTS OF CERTAIN PERSONS IN THE MERGER AND THE COMPANY In considering the recommendation of the Special Committee and of the Board, you should be aware that the Continuing Shareholders and certain executive officers and directors of the Company have certain relationships or interests in the Merger and the Company, including those referred to below, that are different from the interests of Public Shareholders and that may present actual or potential conflicts of interest. The Special Committee and the Board were aware of these potential and actual conflicts of interest and considered them in evaluating the proposed Merger. MERGER CONSIDERATION AND STOCK OPTIONS. As of the Record Date, the Continuing Shareholders owned an aggregate of 7,064,328 shares of Common Stock, representing approximately 34.4% of the total outstanding shares of Common Stock on that date. The Continuing Shareholders currently contemplate that, immediately prior to the Merger, each of them will purchase membership interests in Mergeco in proportion to their share ownership in the Company. In the Merger, those membership interests would be converted into new shares of the Company's Common Stock and the old shares of Common Stock then owned of record by the Continuing Shareholders will be canceled for no consideration. Following the Merger, the Continuing Shareholders will own all of the outstanding Common Stock of the Surviving Corporation. As of the Record Date, directors and executive officers of the Company and members of their immediate families, other than the Continuing Shareholders, owned an aggregate of 31,568 shares of Common Stock for each of which shares, they, as Public Shareholders, will be entitled to receive the Merger Consideration of $28.85 per share in cash. See "CERTAIN TRANSACTIONS IN THE COMMON STOCK" for information regarding the intention of certain executive officers to sell their Common Stock prior to the consummation of the Merger. In the Merger, all outstanding Stock Options, including those held by the Continuing Shareholders and the other directors and executive officers of the Company are to be terminated and the Company will pay to each Stock Option holder, whether or not such Stock Options are then vested or exercisable, an amount in cash equal to the excess, if any, of the Merger Consideration over the applicable exercise price per share of the Common Stock subject to the Stock Option, multiplied by the number of shares of Common Stock subject to such Stock Option. See "THE RESTATED MERGER AGREEMENT -- Treatment of Options" and "SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." -47- The following table sets forth the Merger Consideration and consideration to be received for the termination of Stock Options held by the following groups, in addition to the percentage of Stock Options held by each group.
Merger Cash to be Cash to be Percentage of Consideration (to received for received for total Common be received for currently Stock Options Stock subject outstanding exercisable not yet to Stock Common Stock) Stock Options exercisable Options (1) ----------------- -------------- -------------- --------------- Continuing Shareholders $ 0 $3,740,971 $950,000 5.29% Other directors, including members of the Special Committee and members of their immediate families 354,855 536,074 0 .67% Members of the immediate families of the Continuing Shareholders, including certain executive officers of the Company 593,445 570,229 628,283 1.39% Other executive officers of the 432,260 222,308 130,555 .61% Company
- ------------------ (1) Based on the total number of shares of Common Stock subject to all outstanding Stock Options as of the date of this Proxy Statement. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. Under the terms of the Restated Merger Agreement, upon consummation of the Merger, the current executive officers and directors of the Company will remain as the initial executive officers and directors of the Surviving Corporation, except that Robert S. Koebele, Co-Vice President - Finance and Co-Chief Financial Officer of the Company, has advised the Company that he intends to retire in the early part of the summer of 1999 whether or not the Merger is consummated, and Paul A. Vatter, a director, has advised the Company of his intention to retire upon consummation of the Merger or, if the Restated Merger Agreement is not adopted at the Meeting, upon the expiration of his current term at the next annual meeting of shareholders. The Continuing Shareholders, as owners of 100% of the capital stock of the Surviving Corporation, will have the ability to take action to terminate any officers and directors of the Surviving Corporation whom they choose. COMPENSATION OF DIRECTORS. Non-employee directors currently receive a retainer at the rate of $16,000 per annum, $1,000 for each meeting of the Board attended and $500 for each meeting attended of a Committee of the Board on which they serve, if such meeting is not held on the same day as a meeting of the Board, except that members of the Special Committee received additional compensation for service on that committee as described below. Members of the Board also are reimbursed for reasonable travel expenses incurred in attending Board and Committee meetings. The regular compensation of employee directors of the Company covers compensation for services as a director. -48- The non-employee directors earned the following cash compensation (exclusive of travel reimbursements) from the Company for services as members of the Board (other than for service on the Special Committee) during fiscal 1998: Harold L. Kestenbaum.......................................... $22,000 Richard A. Mandell............................................ 22,000 Paul A. Vatter................................................ 22,000 Terry Vince................................................... 21,000 Bernard Zimmerman............................................. 22,000 The Company's 1993 Non-Employee Director Stock Option Plan, as amended, which was approved by shareholders at the Company's 1993 Annual Meeting of Shareholders, provides for the automatic grant of an option to purchase 3,750 shares of Common Stock to each non-employee director in office immediately after each annual meeting of shareholders. Each option has a ten year term, is subject to early termination in certain instances, and is exercisable commencing one year following the date of grant at an exercise price equal to 100% of the fair market value of the Common Stock on the date of grant. As of the date of this Proxy Statement, each non-employee director of the Company, including each member of the Special Committee, holds Stock Options under this plan to purchase an aggregate of 22,500 shares of Common Stock at exercise prices ranging from $21.50 to $28.875 per share. This plan will be terminated upon consummation of the Merger. In consideration of such termination, the Company will pay each non-employee director, in cash and as full settlement for his Stock Options, whether or not then exercisable, an amount determined by multiplying (i) the excess, if any, of the Merger Consideration over the applicable exercise price per share of Common Stock subject to such Stock Options by (ii) the total number of shares of Common Stock subject to such Stock Options. COMPENSATION OF SPECIAL COMMITTEE MEMBERS. As compensation for serving on the Special Committee (and on the special committee which considered the Initial Proposal), the Company agreed to pay to each member of the Special Committee a fee equal to (i) $2,500 for services rendered in any day on which the member expended four hours or more in performing services as a member of the Special Committee and (ii) $1,250 for each day in which such member expended a reasonable amount of time, but less than four hours, in performing services as a member of the Special Committee. In addition to the foregoing fees, Mr. Mandell, as Chairman of the Special Committee, received $10,000 with respect to the Special Committee's consideration of the Initial Proposal and is entitled to receive $10,000 with respect to the Special Committee's consideration of the Revised Proposal. Each member of the Special Committee is being reimbursed for all out-of-pocket expenses incurred in performing his services. Through June 15, 1999, the members of the Special Committee have earned the following cash compensation (exclusive of travel reimbursements) from the Company in connection with the Initial Proposal and the Revised Proposal: Richard A. Mandell.......................................... $48,500 Harold L. Kestenbaum........................................ 14,750 Paul A. Vatter.............................................. 9,750 Terry Vince................................................. 9,750 INDEMNIFICATION ARRANGEMENTS. For a discussion of certain requirements in the Restated Merger Agreement for the indemnification of directors and officers of the Company and the maintenance of directors' and officers' insurance, see "THE RESTATED MERGER AGREEMENT -- Indemnification and Insurance." -49- CONSULTING ARRANGEMENT. Since 1986, a company of which Bernard Zimmerman, a director of the Company, is President and a majority shareholder, has rendered financial and consulting services to the Company. This company earned fees of $116,400 and $140,400 during fiscal 1997 and 1998, respectively. CERTAIN OTHER TRANSACTIONS. The Company is the sole tenant of its administrative office building, which is leased from the Suffolk County Industrial Development Agency (the "AGENCY") by Sbarro Enterprises, L.P., a Delaware limited partnership, and, in turn, subleased to the Company. The annual rent payable pursuant to the sublease is $337,000 for the last five years of the sublease term, which expires in 2001. In addition, the Company is obligated to pay real estate taxes, utilities, insurance and certain other expenses for the facility. The Company believes that such rents are comparable to the rents that would be charged by an unaffiliated third party. Principal and interest (the last of which payments is due in December 1999) and any premium on the bonds issued by the Agency to fund construction of the facility are the responsibility of Sbarro Enterprises, L.P. and are severally guaranteed by Mario, Joseph and Anthony Sbarro. The limited partners of Sbarro Enterprises, L.P. are Mario, Joseph, Anthony and Carmela Sbarro. In addition to the compensation of Mario, Anthony, Joseph, Gennaro A. and Gennaro J. Sbarro and Anthony J. Missano, as reflected in the Company's Annual Report on Form 10-K for the year ended January 3, 1999 (see "WHERE YOU CAN FIND MORE INFORMATION"), (i) Carmela Sbarro, the mother of Mario, Anthony and Joseph Sbarro, who was a co-founder of the Company and serves as Vice President and a director of the Company, and (ii) Carmela N. Merendino, a daughter of Mario Sbarro, who serves as Vice President - Administration of the Company, each received $100,000 from the Company for services rendered during fiscal 1997 and received $101,923 and $126,442, respectively, for services rendered during fiscal 1998. In addition, other members of the immediate families of Mario, Anthony, Joseph and Carmela Sbarro earned an aggregate of $467,823 (nine persons) and $523,423 (eleven persons) for services rendered as employees of the Company during fiscal 1997 and 1998, respectively. The Company, its subsidiaries and the joint ventures in which the Company has an interest have purchased printing services from a corporation owned by a son-in-law of Mario Sbarro for which they paid, in the aggregate, approximately $220,000 and $322,768 during fiscal 1997 and 1998, respectively. The Company believes that these services were provided on terms comparable to those that would have been available from unrelated third parties. Companies owned by a son of Anthony Sbarro and a company owned by the daughter of Joseph Sbarro paid royalties to the Company under franchise agreements containing terms similar to those in agreements entered into by the Company with unrelated franchisees. Such royalties paid to the Company aggregated approximately $71,660 and $33,053, respectively, during fiscal 1997 and approximately $95,151 and $10,406, respectively, during fiscal 1998. CERTAIN EFFECTS OF THE MERGER If the Merger is consummated, the entire equity in the Company will be owned by the Continuing Shareholders. The Public Shareholders will no longer have any ownership interest in, and will not be shareholders of, the Company. As a result, the Public Shareholders will no longer benefit from any increases in the value of the Company, nor will they bear the risk of any decreases in the value of the Company. Instead, upon consummation of the Merger, each Public Shareholder will have the right to receive $28.85 in cash for each share of Common Stock held. Following the Merger, the Continuing Shareholders will benefit from any increases in the value of the Company and also bear the risk of any decreases in the value of the Company. As the sole equity owners of the Company after the Merger, the investment in the Company of the Continuing Shareholders also will bear the risks associated with the significant amount of debt to be incurred by the Company in connection with the Merger. See " -- Financing of the Merger." Because the Common Stock will be closely held and cease to be publicly traded, the Continuing Shareholders believe that they will be able to focus on increasing the long-term value of the Company to a greater degree by reducing management's commitment of resources with respect to procedural and compliance -50- requirements of a company with publicly owned common stock. However, the Continuing Shareholders will bear the risks associated with the lack of liquidity of their continuing investment in the Company. Following the Merger, the Public Shareholders will have no continuing interest in the Company. As a result, the Common Shares will no longer meet the requirements of the NYSE for continued listing and will be delisted from the NYSE. The Common Stock currently constitutes "margin securities" under the regulations of the Board of Governors of the Federal Reserve System (the "FEDERAL RESERVE BOARD"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of the Common Stock. As a result of the Merger, the Common Stock will no longer constitute "margin securities" for purposes of the margin regulations of the Federal Reserve Board and, therefore, will no longer constitute eligible collateral for credit extended by brokers. The Common Stock is currently registered as a class of securities under the Exchange Act. Registration of the Common Stock under the Exchange Act may be terminated upon application of the Company to the SEC if the Common Stock is not listed on a national securities exchange or quoted on NASDAQ and there are fewer than 300 record holders of the outstanding shares. Termination of registration of the Common Stock under the Exchange Act would substantially reduce the information required to be furnished by the Company to its shareholders and to the SEC and would make certain provisions of the Exchange Act, such as the short-swing trading provisions of Section 16(b), the requirement of furnishing a proxy statement in connection with shareholders' meetings pursuant to Section 14(a) and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions no longer applicable to the Company. In addition, "affiliates" of the Company and persons holding "restricted securities" of the Company may be deprived of the ability to dispose of those securities pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended. It is the present intention of the Company to make an application for the termination of the registration of the Common Stock under the Exchange Act as soon as practicable after the Effective Time. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES The following is a general summary of the material United States federal income tax consequences of the Merger to the Public Shareholders under provisions of the Code, and existing regulations and administrative and judicial interpretations thereunder in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. The discussion applies only to shareholders who hold shares of Common Stock as capital assets within the meaning of Section 1221 of the Code. In addition, the discussion does not apply to any shareholder who is attributed any shares of a Continuing Shareholder under Section 318 of the Code (to whom the entire Merger Consideration may be treated as a dividend taxable at ordinary income tax rates), any shareholder who is not a U.S. person within the meaning of Section 7701(a)(30) of the Code, any shareholder who acquired shares in a compensatory transaction, including upon the exercise of an option, any shareholder who holds shares as part of a hedging or conversion transaction, straddle or other risk reduction transaction, and any other category of shareholder who is subject to special tax rules, such as financial institutions, insurance companies, broker-dealers and tax-exempt entities. In addition, the following discussion does not consider the effect of any state, local, foreign or other tax laws. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, YOU ARE ADVISED TO CONSULT WITH YOUR OWN TAX ADVISOR AS TO THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE MERGER TO YOU. If the Merger is consummated, each Public Shareholder will be treated as having sold shares for the Merger Consideration. As a result, a Public Shareholder will recognize capital gain or loss in an amount equal to the difference between the Merger Consideration and the Public Shareholder's adjusted tax basis in such Public Shares. Such capital gain or loss will be a long-term capital gain or loss if the Public Shareholder has held the Public Shares for more than one year on the Effective Date of the Merger even though the Merger Consideration is not paid to the Public Shareholder on the Effective Date. There are certain -51- limitations on the deductibility of capital losses. Gain or loss must be determined separately for each block of Common Stock (i.e., shares acquired at the same cost in a single transaction). To prevent backup withholding equal to 31% of the Merger Consideration payable to a Public Shareholder, the Public Shareholder must either (i) establish an exemption from backup withholding (e.g. because it is a corporation) or (ii) provide its taxpayer identification number to the Paying Agent, certify that the Public Shareholder is not subject to backup withholding and otherwise comply with the backup withholding rules under the Code. Backup withholding is not an additional tax; rather, any amount so withheld is creditable against the shareholder's federal income tax liability. See "THE RESTATED MERGER AGREEMENT -- Tax Withholding." Certain penalties may apply to a failure to furnish correct information. Public Shareholders should consult with their own tax advisors as to the qualifications for an exemption from withholding and the procedures for obtaining an exemption. Neither the Company, Mergeco nor any of the Continuing Shareholders will recognize gain or loss as a result of the Merger. FEES AND EXPENSES Estimated fees and expenses (rounded to the nearest thousand dollars) incurred or to be incurred by the Company, Mergeco and the Continuing Shareholders in connection with the Merger (including the Initial Proposal and the Revised Proposal) are approximately as follows: Investment banking fees and expenses - Prudential Securities.. $1,280,000 Investment banking fees and expenses - Bear Stearns........... 1,700,000 Debt financing discounts and commissions...................... 9,000,000(1) Legal fees and expenses....................................... 1,500,000 Accounting fees............................................... 125,000 SEC filing fee................................................ 79,000 Printing and mailing expenses................................. 150,000 Proxy solicitation agent fees and expenses.................... 10,000 Paying Agent fees............................................. 15,000 Special Committee fees and expenses........................... 100,000 Litigation settlement fees and expenses....................... 1,579,000 Miscellaneous................................................. 462,000 ------------ Total................................................ $16,000,000 -------------------- (1) Assumes that the entire contemplated $300 million of Debt Financing will be through the placement of senior notes. See "-- Financing of the Merger." The above fees and expenses include approximately $150,000, which represent fees and expenses incurred or to be incurred by or on behalf of Mergeco and/or the Continuing Shareholders in connection with the Merger that will, in effect, be borne by the Company if the Merger is consummated since, by operation of law, in a merger, the Surviving Corporation assumes and becomes liable for the obligations of the entity merging into it. The Restated Merger Agreement provides that, except in certain circumstances, in the event of termination of the Restated Merger Agreement without consummation of the Merger, the Company, on the one hand, and Mergeco and the Continuing Shareholders, on the other hand, will pay their own expenses. The fees and expenses to be borne by the Company will include those of financial advisors (including Bear Stearns and Prudential Securities), accountants and counsel for the Company and the Special Committee, and -52- fees and expenses for the preparation, printing, mailing and filing of documents used in connection with the Merger and the Debt Financing. The fees and expenses of Mergeco will include any commitment and other fees or expenses of any person providing or proposing to provide the Debt Financing and fees and expenses of counsel for Mergeco. If termination of the Restated Merger Agreement is not due to the failure to obtain the Debt Financing (or is due to a failure to obtain the Debt Financing as a result of a material adverse change in the securities, financial or borrowing markets) or a breach by Mergeco or the Continuing Shareholders of their representations, warranties or covenants in the Restated Merger Agreement, then the Company is to reimburse Mergeco and the Continuing Shareholders for the fees and expenses incurred by them in connection with the Merger, with the maximum reimbursement by the Company being $500,000. If, however, termination of the Restated Merger Agreement is due to failure to obtain the Debt Financing (unless resulting from a material adverse change in the securities, financial or borrowing markets), then Mergeco and the Continuing Shareholders will, jointly and severally, be obligated to reimburse the Company for 50% of the fees and expenses incurred by the Company in connection with the Merger, with the maximum reimbursement by Mergeco and the Continuing Shareholders being $500,000 in the aggregate. See "THE RESTATED MERGER AGREEMENT -- Fees and Expenses." For information regarding payment of fees and expenses to the Special Committee, see "-- Interests of Certain Persons in the Merger and the Company." For information regarding Prudential Securities' engagement by the Special Committee and the payment of fees and expense in connection with that engagement, see "-- Presentation and Fairness Opinion of Prudential Securities." For information regarding Bear Stearns' engagement by the Company and the payment of fees and expenses in connection with that engagement, see "-- Financing of the Merger." Neither Mergeco nor the Company will pay any fees or commissions to any broker or dealer or any other person (other than the Proxy Solicitation Agent) for soliciting Proxies pursuant to the Merger. Brokers, banks, and other custodians, nominees and fiduciaries will, upon request, be reimbursed by the Company for reasonable out-of-pocket expenses incurred by them in forwarding proxy soliciting materials to the beneficial owners of shares. ACCOUNTING TREATMENT For accounting and financial reporting purposes, the Merger will be accounted for in accordance with the "purchase method" of accounting. FINANCING OF THE MERGER Approximately $410 million will be required to pay the aggregate Merger Consideration to the Public Shareholders and to pay holders of Stock Options following consummation of the Merger, as well as estimated fees and expenses of the contemplated transactions. An additional $30 million may be required to provide sufficient liquidity to fund the Company's ongoing working capital needs, including capital expenditures. It is anticipated that the sources of the required funds will be $140 million of the Company's cash and marketable securities and up to $300 million to be obtained by the Company through the Debt Financing. Although different sources and types of financing may be obtained, the Debt Financing presently contemplates the placement of Senior Notes (the "SENIOR NOTES") and may include either a bank revolving credit facility, which will have undrawn availability on the closing date of the Merger of up to $30 million, or excess cash from the Senior Note placement, to provide sufficient liquidity to fund the Company's ongoing working capital needs, including capital expenditures. To date, no commitment has been obtained for a revolving credit facility. -53- It is a condition to the obligation of Mergeco to consummate the Merger that the Company has obtained the Debt Financing (i) in the amount of at least $300 million, (ii) on material terms and conditions no less favorable to the Company than those set forth in a term sheet that has been delivered to the Special Committee, and (iii) having a yield to maturity not to exceed 11.25% per annum. Mergeco and the Continuing Shareholders have received the Debt Financing Letter, dated as of January 19, 1999, from Bear Stearns which states that, as of the date of the Debt Financing Letter, based upon and subject to (i) the first paragraph under this heading, (ii) the information supplied to Bear Stearns by the Continuing Shareholders and the Company and (iii) current market conditions, Bear Stearns was "highly confident" of its ability to place or arrange the Debt Financing, subject to the negotiation of definitive language with respect to the terms and conditions set forth in a term sheet delivered to the Special Committee. The Debt Financing Letter does not discuss or specify interest rates. The summary contained herein of the Debt Financing Letter is qualified in its entirety by reference to the full text of the Debt Financing Letter filed as an exhibit to the Schedule 13E-3. The Debt Financing Letter also is subject to, among other things (i) negotiation of definitive language with respect to the terms and conditions of the Senior Notes and the negotiation of other acceptable terms and conditions of the Debt Financing, including, but not limited to, interest rate, price and other covenants, (ii) negotiation of acceptable terms, and the execution of acceptable documentation, related to the Merger and the Debt Financing, (iii) there having occurred no material adverse change in the business, prospects, condition (financial or otherwise) or results of operations of the Company, (iv) satisfactory completion of legal due diligence, (v) nothing coming to Bear Stearns' attention that contradicts or calls into question (a) the information previously provided to Bear Stearns by the Company or the Continuing Shareholders or (b) the results of Bear Stearns' financial due diligence investigation, (vi) no material adverse change in market conditions for new issues of high-yield debt or syndicated bank loan facilities, (vii) there having occurred no material adverse change in conditions of the financial and capital markets generally, and (viii) the Continuing Shareholders' and the Company's full cooperation with respect to the marketing of the Debt Financing. The satisfaction of the foregoing conditions is to be determined in the sole discretion of Bear Stearns' Commitment Committee. The Debt Financing Letter does not constitute a commitment on the part of Bear Stearns to provide the Debt Financing and does not ensure the successful completion of the Debt Financing. If the Debt Financing is not consummated, the Merger will not be consummated, even if the Public Shareholders adopt the Restated Merger Agreement at the Meeting. See "THE RESTATED MERGER AGREEMENT -- Conditions." It is presently contemplated (although no negotiations with respect to the Debt Financing has been had with any potential purchaser of Senior Notes) that the Senior Notes will be unsecured senior obligations of the Company; rank PARI PASSU with all existing and future senior indebtedness of the Company; be jointly and severally guaranteed on a senior unsecured basis by all present and future "restricted" subsidiaries of the Company; have a maturity of 10 years from the date of issuance, subject to the Company's right to call, and the holders' rights to require the Company to repurchase, the Senior Notes at an earlier date under certain circumstances; and bear interest at a rate to be determined at the time of pricing of the Senior Notes. The actual terms and conditions of the Senior Notes will depend upon market conditions at the time the Senior Notes are placed and upon negotiations with prospective purchasers of the Senior Notes. The Senior Notes will be governed by an indenture containing, among other things, covenants customary for this type of financing, including restrictions on dividends, stock repurchases, liens, indebtedness, affiliate transactions, asset sales and mergers. The indenture for the Senior Notes has not been finalized and, accordingly, the provisions described herein may change materially as a result of the negotiation of definitive agreements. TERMS OF BEAR STEARNS' ENGAGEMENT. On February 12, 1997, the Company engaged Bear Stearns as its exclusive financial advisor and agent in connection with exploring various alternatives to enhance shareholder value, including recapitalization and going private transactions. Bear Stearns' engagement by the -54- Company superseded an arrangement which it had entered into with certain of the Continuing Shareholders in October 1996. As a result, those Continuing Shareholders were released from their obligations under their engagement letter. The February 12, 1997 engagement letter provides that Bear Stearns is to receive a cash fee of $1.6 million from the Company in the event the Merger is consummated. Either the Company or Bear Stearns may terminate the Bear Stearns engagement letter at any time. If, however, either an agreement for specified transactions described in the engagement letter (including recapitalization and going private transactions) is entered into, or the Company consummates such a transaction, within six months following termination of the engagement letter, Bear Stearns remains entitled to its fee. If, with certain exceptions, certain other transactions not specified in the engagement letter that were proposed by Bear Stearns to the Company or its management as an option are authorized by the Board and either an agreement for such a transaction is entered into, or such a transaction is consummated, within six months after the termination of the engagement letter, Bear Stearns' fee arrangement is to be determined in good faith through negotiations with the Company. Bear Stearns was not engaged to render, and has not rendered, any opinion as to the fairness of any transaction presented to the Board, including the proposed Merger. In addition, in the engagement letter, the Company granted Bear Stearns the right to act as sole managing underwriter or exclusive agent in connection with the raising of financing for specified transactions. If Bear Stearns arranges, or itself provides, financing to consummate such a transaction on terms approved by the Company, Bear Stearns is to receive a fee equal to 3% of the gross proceeds raised through the issuance of any fixed rate debt financing in a registered offering or private placement under the Securities Act, and 1% of the amount of any bank or similar credit facility arranged (including any committed facility which is arranged but partially or wholly undrawn). If Bear Stearns elects not to act as sole managing underwriter or exclusive agent for the financing and the Company completes one of the transactions specified in the engagement letter with financing provided or arranged by a third party, Bear Stearns will be entitled to 50% of the fee it would otherwise be entitled to under the preceding paragraph if the specified transaction is completed on terms substantially similar to the specified transaction as proposed by Bear Stearns or, with certain exceptions, another transaction previously proposed by Bear Stearns. Bear Stearns is also to be reimbursed for its out-of-pocket expenses incurred up to $100,000 in the aggregate, but not for expenses related to its acting as underwriter or placement agent for any financing for the Company. The engagement letter provides that the Company will indemnify Bear Stearns and certain related parties against certain liabilities which may arise out of its engagement. REGULATORY APPROVALS The Company does not believe that any material federal or state regulatory approvals, filings or notices are required by the Company in connection with the Merger other than (i) filings required under the Exchange Act, (ii) filings of certificates of merger with the New York Department of State, (iii) filings to fulfill the delisting requirements of the NYSE, (iv) filings under applicable alcohol and beverage laws and regulations, and (v) filings in connection with any applicable transfer or other taxes in any applicable jurisdiction. The Company believes that none of such filings would present an obstacle to prompt completion of the Merger. The Company, the Continuing Shareholders and Mergeco do not believe that they are required to make a filing with the Department of Justice or the Federal Trade Commission pursuant to the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, although each agency has the authority to challenge the Merger on antitrust grounds before or after the Merger is consummated. The Company is in the process of obtaining consents or acknowledgments, where required, under certain leases to which it is a party. The Company does not believe there are any other material third party consents required by the Company under the Restated Merger Agreement. -55- RISK OF INSOLVENCY On a pro forma basis, assuming that the Merger and the Debt Financing had been completed on April 25, 1999, the close of the Company's first fiscal quarter of 1999, the Company would have had net worth of $97 million and a negative tangible net worth (net worth exclusive of the excess of cost over book value of assets acquired) of $140 million. If, as a result of the Merger, the fair value of the Company's assets is less than its actual and contingent liabilities, the Company has inadequate capital or the Company is unable to pay its debts as they become due, the transfer of funds representing the Merger Consideration payable to Public Shareholders upon consummation of the Merger may be deemed to be a "fraudulent conveyance" under applicable law and, therefore, may be subject to claims of creditors of the Company. If such a claim is asserted by the creditors of the Company after the Merger, there is a risk that Public Shareholders may be ordered by a court to turn over to the Company's trustee in bankruptcy all or a portion of the Merger Consideration they received. Based upon the projected capitalization of the Company at the Effective Time and projected results of operations and cash flow after the Merger, management of the Company has no reason to believe at this time that the Company will be insolvent immediately after giving effect to the Merger. RISK THAT THE MERGER WILL NOT BE CONSUMMATED Consummation of the Merger is subject to certain conditions, including, among other things, (i) shareholder adoption of the Restated Merger Agreement, (ii) receipt by the Company of financing for the transactions contemplated by the Restated Merger Agreement, and (iii) final settlement of the Current Shareholder Litigation. See "THE RESTATED MERGER AGREEMENT -- Conditions." Although Bear Stearns has provided a letter to the Continuing Shareholders and Mergeco to the effect that, based upon and subject to the conditions set forth therein, including current market conditions, it is "highly confident" in its ability to place or arrange the Debt Financing on terms at least as favorable to the Company as those set forth on the term sheet delivered by the Continuing Shareholders to the Special Committee, the Restated Merger Agreement provides that Mergeco is not obligated to consummate the Merger if, among other things, the Debt Financing would have a yield to maturity in excess of 11.25% per annum or if a material adverse change (or event or occurrence that is reasonably likely to result in an adverse change) in securities, financial or borrowing markets occurs. Bear Stearns' "highly confident" letter does not pertain to interest rates. Therefore, even if the requisite approval by shareholders is obtained, there can be no assurance that the Merger will be consummated. See " - -- Conduct of the Business of the Company if the Merger is not Consummated." See " -- Conduct of the Business of the Company if the Merger is not Consummated," and "THE RESTATED MERGER AGREEMENT -- Fees and Expenses" with respect to obligations of the Company, on the one hand, and Mergeco and the Continuing Shareholders, on the other hand, to reimburse each other for fees and expenses in certain instances if the Restated Merger Agreement is terminated. LITIGATION PERTAINING TO THE MERGER INITIAL PROPOSAL LITIGATION Following the Company's announcement of the Initial Proposal in January 1998, seven lawsuits were instituted by shareholders against the Company, those Continuing Shareholders who are directors of the Company and, except in certain of the lawsuits, all or some of the other directors of the Company. While the complaints varied, in general, they alleged that such directors breached fiduciary duties, that the proposed price per share to be paid to Public Shareholders was inadequate and that the proposal served no legitimate business purpose of the Company. Although varying, the complaints generally sought a declaration of class action status, damages in unspecified amounts alleged to be caused to the plaintiffs, other relief (including injunctive relief, rescission or rescissory damages if the transaction was consummated), and costs and -56- disbursements, including a reasonable allowance for counsel fees and expenses. In June 1998, the Continuing Shareholders withdrew the Initial Proposal and, in September 1998, all seven lawsuits, which were pending in the Supreme Court in New York County and Suffolk County, New York, were voluntarily discontinued, without prejudice, and without interest and costs. CURRENT SHAREHOLDER LITIGATION Following the Company's announcement of the Revised Proposal, seven class action lawsuits were instituted by shareholders against the Company, those Continuing Shareholders who are directors of the Company, and, except in certain of the lawsuits, all or some of the other directors of the Company. The lawsuits were instituted in the Supreme Court of the State of New York, New York County and Suffolk County. The lawsuits in Suffolk County were discontinued and subsequently refiled as one lawsuit in New York County (with one additional plaintiff) in anticipation of consolidating all lawsuits into one lawsuit. The purported Class consists of all record and beneficial owners of the Company's Common Stock during the period beginning with the close of business on November 25, 1998 and ending on the effective date of the Merger. While the complaints in each of the lawsuits vary, in general, they allege that the directors breached fiduciary duties, that the then proposed price of $27.50 to be paid to Public Shareholders was inadequate and that there were inadequate procedural protections for the Public Shareholders. Although varying, the complaints seek, generally, a declaration of a breach of, or an order requiring the defendants to carry out, their fiduciary duties to the plaintiffs, damages in unspecified amounts alleged to be caused to the plaintiffs, other relief (including injunctive relief or rescission or rescissory damages if the transaction is consummated), and costs and disbursements, including a reasonable allowance for counsel fees and expenses. On January 19, 1999, counsel for all of the plaintiffs and counsel for all of the defendants entered into a Memorandum of Understanding pursuant to which an agreement in principle to settle all of the lawsuits was reached and the Continuing Shareholders agreed to increase the Merger Consideration to $28.85 per share. The Memorandum of Understanding stated the plaintiffs' counsel intent to apply to the Court for an award of attorneys' fees and disbursements in an amount of no more than $2.1 million to be paid by the Company, which the defendants have agreed not to oppose (the Court's Order and Final Judgment fixed the award at $1,579,114). The defendants are also responsible for providing notice of the settlement to all Class members. Final settlement would result in the complete discharge and bar of all claims against, past, present and future officers and directors of the Company, and others associated with the Merger with respect to matters and issues of any kind that have been or could have been asserted in these lawsuits. The settlement is subject to, among other things, (i) completion of a formal stipulation of settlement, (ii) certification of the lawsuits as a class action covering all record and beneficial owners of the Common Stock during the period beginning on November 25, 1998 through the Effective Time, (iii) court approval of the settlement, and (iv) consummation of the Merger. It is also a condition to Mergeco's obligation under the Restated Merger Agreement that holders of no more than an aggregate of 1,000,000 shares of Common Stock (approximately 4.9% of the Company's presently outstanding shares) would request exclusion from the settlement. On April 7, 1999, the Stipulation of Settlement was entered into, embodying (and superseding) the terms of the Memorandum of Understanding. The foregoing is a summary of the Memorandum of Understanding and the Stipulation of Settlement and is qualified in its entirety by reference to the full text of the Memorandum of Understanding and the Stipulation of Settlement, respectively, which have been filed as exhibits to the Schedule 13E-3. On May 11, 1999, following the consolidation of the pending lawsuits into one action, the Court issued a Scheduling Order, pursuant to which a hearing was scheduled to be held on June 29, 1999, to determine (a) whether the Court should approve the settlement as fair, reasonable, adequate and in the best interest of the Class; (b) determine whether the Stipulation of Settlement and the terms and conditions of the settlement should be finally approved by the Court; (c) determine whether an Order and Final Judgment should be entered by the Court dismissing the actions as to all defendants with prejudice and on the merits as against the plaintiffs and all members of the Class except those persons who submitted a valid and timely request for exclusion from the Class, and extinguish, release and enjoin prosecution of any and all settled claims; (d) hear and determine such other matters as the Court may deem necessary; and (e) in the event the -57- Court approves the settlement and enters the Order and Final Judgment, to consider an application by counsel to the Class for an award of attorneys' fees and expenses. The Court reserved the right to approve the settlement at or after the settlement hearing with such modifications as may be consented to by the parties to the Stipulation of Settlement and without notice to the Class. Notices of the hearing and as to the procedures to be followed by shareholders to either elect to be excluded from the Class or to object to the settlement were sent to shareholders commencing on May 17, 1999 and a Summary Notice was published in The Wall Street Journal on May 20, 1999. On June 29, 1999, the hearing was held before the Court. No opposition to the settlement was presented at the hearing and no shareholder requested exclusion from the Class. The Court signed an Order and Final Judgment on July 14, 1999, among other things, approving the Stipulation of Settlement and the settlement and adjudging the terms thereof to be fair, reasonable, adequate and in the best interests of the Class. The Stipulation of Settlement provides that the settlement will be considered final when the following three events have occurred: (i) entry of the Order and Final Judgment approving the Stipulation of Settlement (which is expected to occur on or about July 15, 1999); (ii) expiration of any applicable period for the appeal of the Order and Final Judgment (which will occur 30 days after entry of the Order and Final Judgment) without an appeal having been filed or, if an appeal is filed, entry of an order affirming the Order and Final Judgment appealed from and the expiration of any applicable period for the reconsideration, rehearing or appeal of such affirmance without any motion for reconsideration or rehearing or further appeal having been filed; and (iii) consummation of the Merger. The obligation of Mergeco to consummate the Merger is subject to, among other things, the settlement becoming final. -58- THE RESTATED MERGER AGREEMENT The following is a summary of the material provisions of the Restated Merger Agreement. This summary is qualified in its entirety by reference to the full text of the Restated Merger Agreement, a copy of which is attached as Annex I to this Proxy Statement and incorporated herein by reference. Any capitalized terms used and not defined below have the meanings given to them in the Restated Merger Agreement. THE MERGER; MERGER CONSIDERATION The Restated Merger Agreement provides that the Merger will become effective at such time as Certificates of Merger are duly filed with the New York Department of State by both the Company and Mergeco or at such later time as is specified in the Certificates of Merger. If the Restated Merger Agreement is adopted at the Meeting by the affirmative vote of at least two-thirds of the votes of all outstanding shares of Common Stock and a majority of the votes cast at the Meeting, excluding votes cast by the Continuing Shareholders, abstentions and broker non-votes, and the other conditions to consummation of the Merger are satisfied, it is currently anticipated that the Merger will become effective as soon thereafter as practicable. See "-- Conditions." However, there can be no assurance as to the timing of the consummation of the Merger or that the Merger will be consummated. At the Effective Time, Mergeco will be merged with and into the Company, the separate corporate existence of Mergeco will cease, and the Company will continue as the Surviving Corporation. In the Merger, each share of Common Stock issued and outstanding immediately prior to the Effective Time (other than Common Stock then (i) held in the treasury of the Company or (ii) owned of record by Mergeco or the Continuing Shareholders) will, by virtue of the Merger and without any action on the part of the holder of the shares, be converted into the right to receive the Merger Consideration in cash, without interest, upon surrender of the stock certificate representing such Common Stock. At the Effective Time, the Public Shareholders will cease to have any rights as shareholders of the Company, except the right to receive the Merger Consideration. Each certificate representing a Public Share will, after the Effective Time, evidence only the right to receive, upon the surrender of such certificate, an amount of cash per share equal to the Merger Consideration multiplied by the number of Public Shares evidenced by such certificate. Each share of Common Stock issued and outstanding immediately prior to the Effective Time which is then (i) held in the treasury of the Company or (ii) owned of record by Mergeco or the Continuing Shareholders will automatically be canceled, retired and cease to exist and no payment will be made with respect to those shares. Each membership unit of Mergeco issued and outstanding immediately prior to the Effective Time will be converted into and become one share of Common Stock of the Surviving Corporation and will constitute the only issued or outstanding shares of capital stock of the Surviving Corporation immediately after the Effective Time. Accordingly, after the Merger, the Continuing Shareholders will be the only shareholders of the Surviving Corporation. THE EXCHANGE FUND; PAYMENT FOR SHARES OF COMMON STOCK As of or as soon as reasonably practicable following the Effective Time, the Surviving Corporation will deposit in trust with a bank or trust company with offices in New York City (the "PAYING AGENT"), for the benefit of the Public Shareholders, cash in an aggregate amount equal to the product of (i) the number of Public Shares issued and outstanding immediately prior to the Effective Time and (ii) the Merger Consideration (the "EXCHANGE FUND"). See "-- Tax Withholding." The Paying Agent will, pursuant to irrevocable instructions, make the payments provided for under the Restated Merger Agreement out of the Exchange Fund. Promptly after the Effective Time, the Surviving Corporation will cause the Paying Agent to mail to each holder of record of Public Shares as of the Effective Time a form letter of transmittal containing -59- instructions for use in surrendering certificates for payment in accordance with the Restated Merger Agreement in exchange for the Merger Consideration. NO SHAREHOLDER SHOULD SURRENDER ANY CERTIFICATES UNTIL THE SHAREHOLDER RECEIVES THE LETTER OF TRANSMITTAL AND OTHER MATERIALS FOR SUCH SURRENDER. Upon surrender of a certificate for cancellation, together with a properly completed and executed letter of transmittal, to the Paying Agent after the Effective Time, the holder of such certificate will be entitled to receive the Merger Consideration in exchange for each Public Share formerly represented by such certificate, without any interest, less any required withholding of taxes. See "-- Tax Withholding." The certificate so surrendered will be canceled. Until surrendered pursuant to the procedures described above, after the Effective Time each certificate will represent, for all purposes, the right to receive the Merger Consideration in cash multiplied by the number of Public Shares evidenced by such certificate, without any interest. Any portion of the Exchange Fund that remains unclaimed by the Public Shareholders one year after the Effective Time (including any interest, dividends, earnings or distributions received on the unclaimed funds) will be repaid to the Surviving Corporation, upon demand. Any Public Shareholders who have not complied with the procedures set forth above may look only to the Surviving Corporation for payment of their claim for the Merger Consideration, without any interest, but will have no greater rights against the Surviving Corporation than may be accorded to general creditors of the Surviving Corporation under New York law. Notwithstanding the foregoing, neither the Paying Agent nor any party to the Restated Merger Agreement will be liable to any holder of certificates formerly representing Public Shares for any amount paid to a public official pursuant to any applicable abandoned property, escheat or similar law. TRANSFERS OF COMMON STOCK After the Effective Time, there will be no transfers of Public Shares on the stock transfer books of the Company. If, after the Effective Time, certificates are presented to the Paying Agent or the Surviving Corporation, they will be canceled and exchanged for the Merger Consideration multiplied by the number of Public Shares evidenced by such certificates, without any interest. TREATMENT OF STOCK OPTIONS At the Effective Time, all outstanding Stock Options, including Stock Options held by the Continuing Shareholders, are to be terminated. In consideration of such termination, the Surviving Corporation will pay to the holder of each such Stock Option, in cash and as full settlement for such Stock Option, whether or not then exercisable, an amount determined by multiplying (i) the excess, if any, of the Merger Consideration over the applicable exercise price per share of Common Stock subject to such Stock Option by (ii) the total number of shares of Common Stock subject to such Stock Option. See " -- Tax Withholding." TAX WITHHOLDING The Surviving Corporation and the Paying Agent will be entitled to deduct and withhold from the amounts payable to any Public Shareholder or holder of Stock Options such amounts as Mergeco, the Surviving Corporation or the Paying Agent are required to deduct and withhold with respect to the making of such payment under applicable tax law. To the extent that amounts are so deducted and withheld by the Surviving Corporation or the Paying Agent, such amounts will be treated for all purposes of the Restated Merger Agreement as having been paid to the relevant Public Shareholder or holder of Stock Options. See "SPECIAL FACTORS -- Certain U.S. Federal Income Tax Consequences." -60- DIRECTORS AND OFFICERS, CERTIFICATE OF INCORPORATION AND BY-LAWS FOLLOWING THE MERGER The Restated Merger Agreement provides that the current directors and officers of the Company will be the initial directors and officers of the Surviving Corporation. However, Paul A. Vatter, a director of the Company, has advised the Company of his intention to retire upon consummation of the Merger or, if the Restated Merger Agreement is not adopted at the Meeting, upon expiration of his current term at the next annual meeting of shareholders. In addition, Robert S. Koebele, Co-Vice President - Finance and Co-Chief Financial Officer, has advised the Company that he intends to retire in the early part of the summer of 1999 whether or not the Merger is consummated. The Certificate of Incorporation of the Company in effect immediately prior to the Effective Time will be the Certificate of Incorporation of the Surviving Corporation until it is subsequently amended, and the By-Laws of the Company immediately prior to the Effective Time will be the By-Laws of the Surviving Corporation until it is subsequently amended. REPRESENTATIONS AND WARRANTIES The Restated Merger Agreement contains certain representations and warranties of the Company, Mergeco and the Continuing Shareholders. The representations of the Company relate to, among other things, its organization, capitalization, power and authority to enter into the Restated Merger Agreement and the transactions contemplated thereby, the binding effect of the Restated Merger Agreement, the fairness opinion of Prudential Securities, the recommendations by the Special Committee and by the Board, compliance with required filings and consents under applicable law, and the absence of conflicts with corporate documents and agreements. The representations of Mergeco and the Continuing Shareholders (which are joint and several) relate to, among other things, the organization of Mergeco, the ownership of Mergeco, the absence of obligations, liabilities or activities of Mergeco except in furtherance of the transactions contemplated by the Restated Merger Agreement, the power and authority of Mergeco and the Continuing Shareholders to enter into the Restated Merger Agreement and the transactions contemplated by the Restated Merger Agreement, the binding effect of the Restated Merger Agreement, required filings and consents and the Debt Financing Letter and sufficiency of the Debt Financing contemplated thereby. COVENANTS The Company has agreed that, prior to the Effective Time, neither the Company nor its subsidiaries will: (i) carry on their respective businesses other than in the usual, regular and ordinary course of business consistent with past practice, (ii) issue shares of Common Stock (other than pursuant to the exercise of Stock Options outstanding on January 19, 1999) or capital stock or options to purchase Common Stock or capital stock, (iii) declare, set aside or pay any dividend or other distribution in respect of its capital stock or other equity interest (with certain exceptions in the case of subsidiaries), or (iv) repurchase its capital stock, or agree to do any of the foregoing. The Company has agreed to use its best efforts to obtain the necessary adoption of the Restated Merger Agreement by the Public Shareholders. The Restated Merger Agreement provides that this Proxy Statement will include the recommendation of the Board to the Public Shareholders in favor of the adoption of the Restated Merger Agreement (and reflect that the Special Committee has made a similar recommendation to the Board), subject to the fiduciary duties under applicable law of such directors (including the directors constituting the Special Committee). Notwithstanding any other provision of the Restated Merger Agreement to the contrary, if the Board or the Special Committee determines, in good faith in the exercise of its fiduciary duties under applicable law, that it is required to withdraw, modify or amend its recommendation in favor of the Merger, such withdrawal, modification or amendment will not constitute a breach of the Restated Merger Agreement. The Continuing Shareholders have agreed (i) to vote at the Meeting all 7,064,328 shares of outstanding Common Stock owned of record by them for adoption of the Restated Merger Agreement (but only if at least a majority of the votes cast at the Meeting excluding votes cast by the Continuing Shareholders, abstentions and broker non-votes, are cast in favor of adoption of the Restated Merger -61- Agreement), (ii) not to grant a proxy to vote any shares other than to another Continuing Shareholder or to persons identified in a proxy card distributed on behalf of the Board, to vote such Continuing Shareholder's shares at the Meeting in the manner provided in clause (i), and (iii) not to sell, transfer or otherwise dispose of any of their shares (other than transfers of shares to Mergeco or any family members of Mario Sbarro, Anthony Sbarro or Joseph Sbarro or trusts for the benefit of such Continuing Shareholders or such family members, which shares may be so transferred only if the transferee agrees in writing to be bound by the terms of the agreements described in this paragraph). In the event of any transfer of such shares, such shares will be deemed owned of record by the Continuing Shareholders. Mergeco has agreed not to conduct any business or enter into any activities of any nature prior to the Effective Time, other than activities in connection with the Restated Merger Agreement and the transactions contemplated by the Restated Merger Agreement. Mergeco and the Continuing Shareholders have also agreed to use their best efforts to assist the Company in obtaining the Debt Financing on terms and conditions no less favorable to the Company than those described in the term sheet delivered to the Special Committee, and the Company has agreed to cooperate with, and use its best efforts to assist, Mergeco in obtaining the financing. In addition, Mergeco, the Company and the Continuing Shareholders have made further agreements regarding access to the Company's records, the calling of the Meeting, the preparation, filing and mailing of this Proxy Statement and the Schedule 13E-3, the obtaining of consents of third parties and governmental authorities and making public announcements. Subject to the terms and conditions provided in the Restated Merger Agreement and the fiduciary duties under applicable law of the directors of the Company, including directors constituting the Special Committee, as determined by such directors in good faith, each of the parties has agreed to use its best efforts consistent with applicable legal requirements to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary or proper and advisable under applicable laws and regulations to ensure that the conditions to consummation of the Merger are satisfied and to consummate and make effective, in a commercially reasonable manner, the transactions contemplated by the Restated Merger Agreement. Mergeco and the Company also have agreed to use their best efforts to obtain all material consents of third parties and governmental authorities, and to make all governmental filings, necessary for the consummation of the transactions contemplated by the Restated Merger Agreement. The Continuing Shareholders have agreed to use their best efforts to cause Mergeco to perform all of its obligations under the Restated Merger Agreement. INDEMNIFICATION AND INSURANCE The NYBCL permits, in general, a New York corporation, such as the Company, to indemnify any person made, or threatened to be made, a party to an action or proceeding by reason of the fact that he or she was a director or officer of the corporation, or served in any capacity at the request of the corporation, against any judgment, fines, amounts paid in settlement and reasonable expenses, including attorney's fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted in good faith, for a purpose he or she reasonably believe to be in, or, in the case of service for another entity, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his or her conduct was unlawful. The NYBCL also permits the corporation to pay in advance of a final disposition of such action or proceeding the expenses incurred in defending such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount as, and to the extent, required by law. The NYBCL provides that indemnification and advancement of expense provisions contained in the NYBCL are not exclusive of any rights to which a person seeking indemnification or advancement of expenses may be entitled, whether contained in the certificate of incorporation or the By-Laws of the corporation or, when authorized by such certificate of incorporation or By-Laws, (i) a resolution of shareholders, (ii) a resolution of directors or (iii) an agreement providing for indemnification. However, the NYBCL also provides that no indemnification may be made on behalf of any such person if a judgment or other final adjudication adverse to the person establishes that his -62- or her acts were committed in bad faith or were the result of active or deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained, in fact, a financial profit or other advantage to which he or she was not legally entitled. The Company's Certificate of Incorporation provides, in accordance with the NYBCL, that a director will not be personally liable to the Company or its shareholders for damages for any breach of duty as a director unless a judgment or other final adjudication adverse to the director establishes that (i) the director's acts or omissions were in bad faith or involved intentional misconduct or knowing violation of law, (ii) the director personally gained, in fact, a financial profit or other advantage to which the director was not legally entitled, or (iii) the director's acts violated provisions of the NYBCL that impose liability upon directors in certain instances for declarations of dividends, stock repurchases or redemptions, distributions of assets following a dissolution, or loans to directors, when made contrary to NYBCL provisions. The Company's By-Laws, adopted by shareholders at the Company's 1989 Annual Meeting of Shareholders, provide, among other things, that the Company will indemnify any officer or director (including officers and directors serving another entity in any capacity at the Company's request) to the fullest extent permitted by law. The Company is a party to indemnification agreements with each of its directors and certain of its officers confirming the indemnification granted under the Company's By-Laws. The Restated Merger Agreement provides that, until and for a period of six years after the Effective Time, the provisions of the Company's Certificate of Incorporation limiting the personal liability of directors for damages and the indemnification provisions of the Company's Certificate of Incorporation and By-Laws as they relate to those who have served as directors or officers of the Company at any time through the Effective Time will not be amended, repealed or otherwise modified in any manner that would make any of such provisions less favorable to the directors or officers of the Company or the Surviving Corporation than those that pertain to directors and officers on the date of the Restated Merger Agreement. Until and for a period of six years after the Effective Time (subject to extension until the final disposition of any claim asserted or made during such period), the Surviving Corporation will (i) indemnify, defend and hold harmless the present and former officers and directors of the Company and its subsidiaries, Mergeco and the members of Mergeco (collectively, the "INDEMNIFIED PARTIES"), from and against, and pay or reimburse the Indemnified Parties for, all losses, obligations, expenses, claims, damages or liabilities resulting from or arising out of actions or omissions of such Indemnified Parties occurring on or prior to the Effective Time (including, without limitation, the transactions contemplated by the Restated Merger Agreement) to the fullest extent permitted or required, as the case may be, under (a) applicable law, (b) the Company's Certificate of Incorporation or By-laws or the articles of organization or operating agreement of Mergeco in effect on the date of the Restated Merger Agreement, including, without limitation, provisions relating to advances of expenses incurred in the defense of any action or suit, (c) any indemnification agreement between the Indemnified Party and the Company, or (d) resolutions adopted by the shareholders or directors of the Company or the members of Mergeco and (ii) advance to any Indemnified Parties expenses incurred in defending any action or suit with respect to such matters upon receipt of an undertaking (which need not be secured) by or on behalf of such Indemnified Party to repay such amount as, and to the extent, it is not entitled to be indemnified, in each case to the fullest extent such Indemnified Party is entitled to indemnification or advancement of expenses under the Company's Certificate of Incorporation, By-Laws or indemnification agreements with its officers and directors or Mergeco's operating agreement in effect on the date hereof and subject to the terms of such Certificate of Incorporation, By-Laws, indemnification agreements or operating agreement. However, (i) no indemnification will be made to or on behalf of Mergeco or a member of Mergeco in his or its individual capacity or in his or its capacity as a member of Mergeco which arises as a result of the transactions contemplated in the Restated Merger Agreement if a judgment or other final adjudication adverse to Mergeco or such member of Mergeco, as the case may be, establishes that its or his acts constituted a breach of (a) its or his fiduciary duties to the Company or the shareholders of the Company or (b) any of Mergeco's or such member's representations, warranties or obligations under the Restated Merger Agreement which caused the Company to terminate the Restated Merger Agreement and (ii) -63- nothing in the Restated Merger Agreement may be construed as adversely affecting any such member's entitlement to indemnification from the Company as an officer or director of the Company. To support its indemnification obligation, the Surviving Corporation has agreed to use its best efforts to obtain, and maintain effective for a period of at least one year after the Effective Time, at least $5.0 million of directors' and officers' liability insurance (i) covering reimbursement of the Surviving Corporation for any obligation it may incur as a result of indemnification of directors and officers and (ii) providing insurance for directors and officers in cases where such reimbursement is not applicable, including in the event of insolvency of the Company. However, the Surviving Corporation is not required to pay a premium in excess of $100,000 for such insurance, but, if such premium would exceed such amount, the Surviving Corporation is to purchase as much coverage as possible for such amount. It is the Company's understanding that such insurance will not cover actions taken by directors and officers with respect to the transactions contemplated by the Restated Merger Agreement. NO SOLICITATION; FIDUCIARY OBLIGATIONS OF DIRECTORS The Company has agreed that it will not, and will not authorize or permit any of their representatives to, (i) take any action to solicit, initiate or encourage any offer or proposal for, or any indication of interest in, a merger or other business combination involving the Company or any subsidiary of the Company or the acquisition of any equity interest in, or the sale of a substantial portion of the assets of, the Company or any such subsidiary (a "TRANSACTION PROPOSAL"), except for the transactions contemplated under the Restated Merger Agreement or (ii) enter into negotiations with, or furnish information to, any other party with respect to any Transaction Proposal. However, the Company and their representatives will not be prohibited from taking any action described in clause (ii) above to the extent such action is taken by, or upon the authority of, the Board if, in the good faith judgment of the Board, (i) such Transaction Proposal is (after consultation with a financial advisor of a nationally recognized reputation) (a) more favorable to the Company's shareholders than the Merger, (b) achievable, and (c) supported by creditable financing, which may include a "highly confident" letter from a nationally recognized investment banking firm or nationally recognized lending institution and (ii) after consultation with counsel, failure to take such action would breach the Board's fiduciary duties to the Company's shareholders under applicable law. In addition, the Company is required to promptly provide Mergeco with a summary of the material terms of any Transaction Proposal and of any negotiations or communications between the Company or its subsidiaries or any of their respective representatives concerning any Transaction Proposal. The Company also is required to give Mergeco not less than three business days' written notice before providing any confidential information to any person (other than Mergeco, and prospective sources of the Debt Financing, and their respective representatives) concerning the business, properties or prospects of the Company and/or its subsidiaries. The Restated Merger Agreement does not prohibit the Company from making a statement to its shareholders that is required by Rule 14e-2(a) promulgated under the Exchange Act or from making any other disclosure to its shareholders if, in the good faith judgment of the Board, after consultation with counsel, failure to make such a disclosure would breach its fiduciary duties to the Company's shareholders under applicable law or would otherwise violate the Exchange Act, other applicable law or stock exchange regulations. CONDITIONS The respective obligations of each party to the Restated Merger Agreement to effect the Merger are subject to the following conditions: (i) the adoption of the Restated Merger Agreement at the Meeting by the affirmative vote of at least two-thirds of the votes of all outstanding shares of Common Stock and a majority of the votes cast at the Meeting, excluding votes cast by the Continuing Shareholders, abstentions and broker non-votes, (ii) there will not have occurred (a) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States or (b) commencement of a war, armed hostilities or other international or national calamity, directly involving the United States, that has a material adverse effect on the general economic conditions in the United States such as to make it, in the judgment of a party to the Restated Merger Agreement, inadvisable or impracticable to proceed with the Merger or the transactions contemplated by the Restated Merger Agreement or by the Debt Financing, or (iii) other than the filing of -64- Certificates of Merger, each of the Company and Mergeco will have obtained such consents from third parties and approvals from governmental instrumentalities as will be required for the consummation of the transactions contemplated by the Restated Merger Agreement, except for such consents the failure to obtain which would not have a "Material Adverse Effect." A "MATERIAL ADVERSE EFFECT" is defined in the Restated Merger Agreement as something that has a material adverse effect on the business, condition (financial or otherwise), properties, assets or prospects of the Company and its subsidiaries, taken as a whole. The obligations of Mergeco to effect the Merger are also subject to the additional conditions that: (i) with certain exceptions, the representations and warranties of the Company contained in the Restated Merger Agreement will be true and correct as of the date of the Restated Merger Agreement and as of the closing date of the Merger, (ii) each and all of the covenants and agreements of the Company contained in the Restated Merger Agreement will have been duly performed and complied with, except where the failure to comply (a) would not have a Material Adverse Effect or a material adverse effect on the ability of the Company to consummate the transactions contemplated by the Restated Merger Agreement, or (b) was the direct result of an act or omission of any of the Continuing Shareholders, (iii) there has been no (a) material adverse change in the business, condition (financial or otherwise), properties, assets or prospects of the Company and its subsidiaries taken as a whole, (b) death or disability of any of Mario Sbarro, Anthony Sbarro, Joseph Sbarro or Carmela Sbarro or any executive officer of the Company having a family relationship (as defined in Item 401 of Regulation S-K promulgated by the SEC) with a Continuing Shareholder, or (c) material adverse change, or event or occurrence that is reasonably likely to result in an adverse change, in securities, financial or borrowing markets, or applicable tax or other laws or regulations, such as to decrease in any material respect the benefits of the Merger to the Continuing Shareholders or make it impractical to proceed with the Merger or the transactions contemplated by the Restated Merger Agreement or by the Debt Financing, (iv) no statute, rule, regulation, or temporary, preliminary or permanent order or injunction will have been proposed, promulgated, enacted, entered, enforced or deemed applicable by any state, federal or foreign government or governmental authority or court or governmental agency of competent jurisdiction that (a) prohibits consummation of the Merger or the transactions contemplated by the Restated Merger Agreement or the Merger, or (b) imposes material limitations on the ability of the Continuing Shareholders effectively to exercise full rights of ownership with respect to the shares of Common Stock to be issued to them pursuant to the Restated Merger Agreement, (v) the settlement of the consolidated lawsuit, as reflected in the Stipulation of Settlement, will have been approved by the Court (the Court signed an Order and Final Judgment on July 14, 1999, among other things, approving the Stipulation of Settlement), final judgment will have been entered in accordance with the Stipulation of Settlement (which is expected to occur on or about July 15, 1999) and will have become final (the settlement is expected to become final upon the expiration of any applicable period for the appeal of the Order and Final Judgment, which will occur 30 days after entry of the Order and Final Judgment) without an appeal having been filed or, if an appeal is filed, entry of an order affirming the Order and Final Judgment appealed from and the expiration of any applicable period for the reconsideration, rehearing or appeal of such affirmance without any motion for reconsideration or rehearing or further appeal having been filed, and without costs to any party (except as provided in the Stipulation of Settlement) and no holders, or holders of no more than an aggregate of 1,000,000 shares of Common Stock, approximately 4.9% of the Company's presently outstanding shares, will have requested exclusion from the Class (no requests for exclusion from the Class were received) (see "LITIGATION PERTAINING TO THE MERGER"), (vi) neither (a) any action, suit or proceeding before any court or governmental body relating to the Merger or the transactions contemplated by the Restated Merger Agreement will be pending in which an unfavorable judgment or decree could prevent or substantially delay the consummation of the Merger, or is reasonably likely to (1) result in a material increase in the aggregate Merger Consideration, (2) result in an award of material damages, (3) cause the Merger to be rescinded, or (4) result in a material amount of rescissory damages, nor (b) any decision in any action, suit or proceeding relating to the Merger or the transactions contemplated by the Restated Merger Agreement will have been rendered by any court or governmental body which has any such effect, and (vii) the Company has obtained the Debt Financing (a) of at least $300 million, (b) on the material terms and conditions no less favorable to the Company than those set forth in the -65- term sheet delivered by the Continuing Shareholders to the Special Committee, and (c) having a yield to maturity not to exceed 11.25% per annum. The obligations of the Company to effect the Merger are also subject to the additional conditions that: (i) with certain exceptions, the representations and warranties of Mergeco contained in the Restated Merger Agreement will be true and correct as of the date of the Restated Merger Agreement and the closing date of the Merger, (ii) each and all of the covenants and agreements of Mergeco contained in the Restated Merger Agreement will have been duly performed and complied with in all material respects prior to the consummation of the Merger, except where the failure to comply would not have a material adverse effect on the ability of Mergeco to consummate the transactions contemplated by the Restated Merger Agreement, and (iii) no statute, rule, regulation, or temporary, preliminary or permanent order or injunction will have been proposed, promulgated, enacted, entered, enforced or deemed applicable by any state, federal or foreign government or governmental authority or court or governmental agency of competent jurisdiction that prohibits consummation of the Merger or the transactions contemplated by the Restated Merger Agreement or the Merger. TERMINATION The Restated Merger Agreement may be terminated at any time prior to the Effective Time, whether before or after approval by the shareholders of the Company: (i) by mutual consent of the Board and the members of Mergeco, (ii) automatically, if, at the Meeting, the Company's shareholders have not voted to adopt the Restated Merger Agreement by the requisite shareholder votes, (iii) by action of the Board or the members of Mergeco if, without the fault of the terminating party, the Merger has not been consummated on or prior to August 31, 1999, (iv) by action of the Board or the members of Mergeco, if the Special Committee has withdrawn or modified in a manner adverse to Mergeco its approval or recommendation of the Merger, the Restated Merger Agreement or the transactions contemplated by the Restated Merger Agreement, (v) by action of the members of Mergeco if the conditions to the obligations of Mergeco contained in the Restated Merger Agreement have not been satisfied prior to the consummation of the Merger or have become incapable of being satisfied or if the events the non-occurrence of which are a condition to obligations of Mergeco contained in the Restated Merger Agreement have occurred prior to the consummation of the Merger, and (vi) by action of the Board if the conditions to the obligations of the Company contained in the Restated Merger Agreement have not been satisfied prior to the consummation of the Merger or have become incapable of being satisfied or if the events, whose non-occurrence are a condition to the Company's obligations contained in the Restated Merger Agreement, have occurred prior to the consummation of the Merger. See "-- Conditions." The Restated Merger Agreement provides that, in the event of its termination, no party to the Restated Merger Agreement will have any liability or further obligation to any other party to the Restated Merger Agreement and the Merger will be abandoned. However (i) any termination by the Company arising out of a breach by Mergeco or the Continuing Shareholders of any representation, warranty, covenant or agreement contained in the Restated Merger Agreement will be without prejudice to the rights of the Company to seek damages with respect such breach, and (ii) any termination by Mergeco arising out of a breach by the Company of any representation, warranty, covenant or agreement contained in the Restated Merger Agreement, other than a breach by the Company that is the direct result of an act or omission of the Continuing Shareholders, will be without prejudice to the rights of Mergeco to seek damages with respect to such breach. The obligations described in this paragraph and the obligations of the parties with respect to the payment of fees and expenses described below survive any termination of the Restated Merger Agreement. FEES AND EXPENSES If the Restated Merger Agreement is terminated for any reason, except as discussed below, the Company, on the one hand, and Mergeco and the Continuing Shareholders, on the other hand, are each to pay their own fees and expenses. The fees and expenses of the Company will include fees and expenses of financial advisors (including Bear Stearns and Prudential Securities), accountants and counsel for the -66- Company and the Special Committee, and fees and expenses for the preparation, printing, mailing and filing of documents used in connection with the Merger and the Debt Financing. The fees and expenses of Mergeco will include any commitment and other fees or expenses of any person providing or proposing to provide the Debt Financing and fees and expenses of counsel for Mergeco. Except with respect to any stock transfer taxes payable by Public Shareholders, the Surviving Corporation will pay any transfer taxes (including any interest and penalties thereon and additions on any transfer taxes) payable in connection with the Merger and will be responsible for the preparation and filing of any required tax returns, declarations, reports, schedules, terms and information returns with respect to such transfer taxes. If termination of the Restated Merger Agreement is not due to the failure to obtain at least $300 million of Debt Financing on the material terms and conditions contemplated in the term sheet delivered by the Continuing Shareholders to the Special Committee (or is due to a failure to obtain the Debt Financing as a result of a material adverse change in the securities, financial or borrowing markets, or applicable tax or other laws or regulations) or a breach by Mergeco or the Continuing Shareholders of their representations, warranties or covenants, then the Company will reimburse Mergeco and the Continuing Shareholders for the fees and expenses incurred by them in connection with the Merger, with the maximum reimbursement by the Company being $500,000 in the aggregate. If termination of the Restated Merger Agreement is due to failure to obtain the Debt Financing (unless resulting from a material adverse change in the securities, financial or borrowing markets, or applicable tax or other laws or regulations), then Mergeco and the Continuing Shareholders will, jointly and severally, be obligated to reimburse the Company for 50% of the fees and expenses incurred by the Company in connection with the Merger, with the maximum reimbursement by Mergeco and the Continuing Shareholders being $500,000 in the aggregate. AMENDMENT AND WAIVER Subject to applicable law, the Restated Merger Agreement may be amended, modified or supplemented by the written agreement of the parties at any time prior to the Effective Time except that, in the case of the Company, such action must be approved by the Special Committee. In addition, after shareholder adoption of the Restated Merger Agreement has been obtained, no amendment may be made that reduces the amount or changes the form of the Merger Consideration or otherwise materially and adversely affects the rights of the Public Shareholders without further approval by the holders of such number of votes of Common Stock that are required to adopt the Restated Merger Agreement in accordance with the Restated Merger Agreement. The Company and Mergeco, respectively, may waive the satisfaction of any obligation, covenant, agreement or condition of the other under the Restated Merger Agreement. However, the waiver of any of the Company's rights under the Restated Merger Agreement requires the approval of the Special Committee. The Company has made no determination as to whether it would waive any condition and any such determination would be made on behalf of the Company by the Board based on the facts and circumstances existing at the time such waiver is requested. -67- BUSINESS OF THE COMPANY OVERVIEW The Company is a leading owner, operator and franchiser of quick-service restaurants, serving a wide variety of Italian specialty foods. Under the "Sbarro" and "Sbarro The Italian Eatery" names, the Company developed one of the first quick-service concepts that extended beyond offering one primary specialty item (i.e., pizza or hamburgers). The Company's menu includes pizza, pasta and other hot and cold Italian entrees, salads, sandwiches, cheesecake and other desserts and beverages. The Sbarro concept is unlike typical quick- service restaurants because of its diverse menu of Italian foods, and differentiates itself from other Italian/pizza restaurants because of its quick, cafeteria style service. As of April 25, 1999, the Sbarro system included 910 Sbarro restaurants, consisting of 635 Company-operated and mall-based Umberto of New Hyde Park restaurants and 275 franchised restaurants located in 48 States, the District of Columbia, the Commonwealth of Puerto Rico, certain United States territories and 21 countries throughout the world. For the year ended January 3, 1999, systemwide sales (including franchised locations, but excluding joint venture locations other than mall-based Umberto of New Hyde Park restaurants), Company operating revenues and Company EBITDA were $511.0 million, $370.1 million and $82.7 million, respectively. EBITDA margin for this period was approximately 22.2%, which is among the highest in the quick-service restaurant industry. Since its inception, the Company has focused on high customer traffic venues due to the large number of captive customers who base their eating decision primarily on impulse and convenience. This provides the Company more flexibility in pricing and allows the Company to avoid the significant advertising and promotional spending that certain of its competitors often employ to attract customers to destination restaurants. These factors, combined with adherence to strict cost controls, provide Sbarro with high and stable operating margins. The Company initially located its restaurant sites in New York and then, with the rapid expansion of enclosed shopping malls in the 1970s, expanded into these facilities due to their high traffic, impulse purchase characteristics. Over the past ten years, the Company has extended the Sbarro concept to other high traffic venues, including toll roads and airports, sports arenas, hospitals, convention centers, university campuses and casinos. The Company believes the opportunity to open Sbarro units in new venues should continue to expand in the future as companies, municipalities and others seek to outsource their non-core food operations. The Company has demonstrated its ability to identify, develop and efficiently operate restaurants and has increased its total restaurant base (including franchised operations) from 123 restaurants at the time of the Company's initial public offering of Common Stock in 1985 to 910 at April 25, 1999. Over the past decade, the Company's growth in shopping malls has been primarily derived from opportunities that have arisen from the major renovation of existing shopping malls or the re-merchandising of a mall's food operations and, to a lesser extent, the development of new shopping malls. Historically, the Company's strategy has been to operate its restaurants directly whenever possible in order to closely control all aspects of restaurant operations and, thus, maximize restaurant profitability. The Company has, however, granted franchises to expand in international markets and to minimize its capital risk, and has granted franchises domestically generally when necessary to open a unit in a desirable attractive location. The Company has developed a qualification and training program that provides strict operating standards for franchisees and also restricts the size of territories granted to franchisees. The Company believes that its franchised units meet the quality and customer service benchmarks of Company-owned units, and expects that a higher percentage of future new unit growth will come from franchised locations, as the Company seeks to expand the Sbarro concept into new venues, both domestically and internationally. For the year ended January 3, 1999, Company-operated restaurant revenues accounted for approximately 97.7% of total operating revenues, with franchise related income accounting for the balance. -68- INDUSTRY OVERVIEW The restaurant industry is one of the largest sectors of the economy, with estimated industry sales of approximately $338 billion in 1998, accounting for more than 4% of the nation's gross domestic product. Between 1990 and 1998 (the latest available information), restaurant industry sales grew an average of approximately 5% annually. The quick-service restaurant industry includes hamburgers, pizza, chicken, various types of sandwiches, and Mexican, Chinese and other ethnic foods. The National Restaurant Association estimates that sales at quick-service restaurants reached approximately $106 billion in 1998, compared with approximately $62 billion in 1988. This growth primarily reflects consumers' increasing desire for a convenient, reasonably priced restaurant experience. This trend is expected to continue as the increasing percentage of dual-earner households and higher disposable incomes, combined with decreasing leisure time, continue to increase the percentage of meals eaten away from the home. According to the National Restaurant Association, the percentage of the average family's food budget spent on meals consumed "away from home" increased from approximately 25% of the food budget in 1955 to approximately 44% in 1998 (the latest available information). Approximately 50% of Sbarro's revenues are derived from pizza. Many of the Company's most direct competitors operate within the pizza restaurant segment. At the end of 1998, there were over 30,000 pizza restaurants in operation, generating nearly $16 billion in annual revenues. COMPETITIVE STRENGTHS The Company believes its success in the quick-service restaurant industry is attributed to the following competitive strengths: LEADING QUICK SERVICE OPERATOR IN HIGH CUSTOMER TRAFFIC VENUES. The Company, through its "Sbarro" and "Sbarro The Italian Eatery" brands, is the leading Italian quick-service restaurant operator and franchisor, having developed a proven business model for operating in shopping malls, airports, toll roads and other high customer traffic locations. Several national quick-service chains have attempted to replicate their stand-alone concept in malls but have reduced the scope of their operations in these venues. Additionally, the Company has developed close relationships with many of the major shopping mall developers and operators, as well as national food service companies that franchise restaurants in other high traffic locations. As a result of these longstanding relationships, the Company believes that it has a competitive advantage in opening new units in locations that have high customer traffic patterns, such as shopping malls. STRONG, NATIONALLY RECOGNIZED BRAND NAME. The breadth of Sbarro's operations and the visibility of its units across many high customer traffic locations have enabled the Company to forge strong brand name recognition with consumers. The Company's consistent product quality and service, its varied menu of moderately priced Italian food served in a cafeteria style format, its distinctive logo and its clean and bright locations have become recognized symbols of the Company. CONSISTENT RECORD OF GROWTH AND PROFITABILITY. Sbarro has a track record of consistent operating performance and a high level of profitability. Its operating and cost controls and business model have resulted in a consistent revenue base and a relatively low cost structure. Company operating revenues and EBITDA have increased from $294.0 million and $73.0 million, respectively, in fiscal 1994 to $370.1 million and $82.1 million, respectively, for the fiscal year ended January 3, 1999 (which consisted of 53 weeks). The Company's EBITDA margin of approximately 22.2% for the year ended January 3, 1999 is among the highest in the restaurant industry. PROVEN BUSINESS MODEL. In the 40 years of operations of the Company and its Sbarro family owned predecessors, Sbarro management has developed and refined a business model for high traffic customer venues. The Company has extensive experience in identifying and developing restaurant locations and in operating these sites. The Company forecasts the initial capital investment and pre-opening costs associated -69- with opening new Sbarro restaurants, as well as estimated profitability. Since the cost of food, paper products, payroll and other employee benefits is generally within a small range as a percentage of restaurant sales from location to location, the Company's forecasting focuses on projected restaurant revenues and the fixed and semi-variable costs expected to be incurred. The Company's forecasting approach also projects a prospective restaurant's revenues based on such factors as the area's demographics and the retail environment surrounding the location. Additionally, the Company has developed a restaurant operations model which specifies all aspects of restaurant management, including recipes, production processes, restaurant design, customer service and staff training. This model ensures consistency of product and service and efficient ingredients usage, maximizing profitability. MODERATE CAPITAL EXPENDITURE REQUIREMENTS. Most Sbarro restaurant units have limited capital expenditure requirements for both their initial development and ongoing maintenance. Approximately 93% of the 635 Company-owned locations (including Umberto of New Hyde Park mall locations) are located in shopping malls and, as a result, the units are relatively small (500-3,000 square feet) and are inexpensive to establish, as compared to other fast food establishments, which primarily have larger, free standing locations. Additionally, the majority of the Company's locations have limited, if any, dedicated seating solely for Sbarro customers, as a result of their location in common area food courts, thus further minimizing the initial and ongoing maintenance costs. A new Sbarro unit typically requires a $300,000-$400,000 initial capital investment with minimal annual maintenance expenditures thereafter. Further, the Company's franchisees generally fund capital expenditures for their units. As a result of the limited capital expenditure requirements, along with immediate payment for all Company restaurant sales, the Company generates significant free cash flow. BUSINESS STRATEGY The Company continuously seeks to provide high quality, affordably priced Italian food products to a broad customer base. Sbarro has concentrated its product development on creating a menu of healthy, moderately priced items that appeal to the tastes of its customers and produce high gross margins. The Company intends to achieve further growth and strengthen its competitive position through the continued implementation of the following initiatives: EXPAND TRADITIONAL SBARRO STORE BASE. The Company plans to continue to increase its network of Company-operated and franchised Sbarro locations. New Company-operated locations will primarily be driven by opportunities arising from major renovations of existing shopping malls or the re-merchandising of a mall's food operations and, to a lesser extent, the development of new shopping malls. The Company also plans to increase the level of franchising with selected franchisees in both international and domestic markets. INCREASE PENETRATION OF NEW HIGH CUSTOMER TRAFFIC VENUES. The Company began targeting toll roads and airport locations in the early 1990s and, subsequently, sports arenas, hospitals, convention centers, university campuses and casinos due to the similar characteristics (i.e., customer density, impulse purchase, etc.) between these venues and the Company's significant base of shopping mall locations. Approximately 13% of the Company's existing restaurants (including franchise locations) are located in these non-mall venues. The Company believes these venues offer significant expansion potential as the operators of these facilities increasingly seek to outsource their non-core food service operations to companies with an established brand in order to simplify their own operations and maximize profitability. PURSUE STRATEGIC JOINT VENTURE ARRANGEMENTS. Since 1995, the Company has entered into several joint ventures to develop new restaurant concepts to provide potential future growth opportunities. To date, these joint ventures have established new popular, mid- and high-priced Italian (16 restaurants, including 13 Umberto of New Hyde Park units) and steakhouse restaurants (six restaurants). The Company has recently acquired, through a joint venture, a two unit Mexican restaurant business and is in the process of establishing a joint venture for seafood restaurants. The Company has chosen to develop these ventures with restaurateurs experienced in the particular food area. These joint ventures are in various stages of expansion, and the Company is considering additional types of restaurants for expansion. The Company continually evaluates -70- its existing joint ventures, and will evaluate new joint ventures, to determine where it is most advantageous to deploy its resources. A description of the Company's business, and other information about the Company, is contained in the Company's Annual Repot on Form 10-K for the year ended January 3, 1999, which is incorporated into this Proxy Statement by reference. See "Where You Can Find More Information." MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table contains the name and business address of each director and executive officer of the Company, the present principal occupation or employment of each of those persons and the name, principal business and address of the corporation or other organization in which the occupation or employment of each of those persons is conducted. Also set forth below are the material occupations, positions, offices and employment of each of those persons and the name, principal business and address of any corporation or other organization in which any material occupation, position, office or employment of each such person was held during the last five years. Mario Sbarro, Anthony Sbarro, Joseph Sbarro, Carmela Sbarro, Harold L. Kestenbaum, Richard A. Mandell, Paul A. Vatter, Terry Vince and Bernard Zimmerman are directors of the Company. Each person listed below is a citizen of the United States. Unless otherwise indicated below, the business address of each director and executive officer, for the past five years, has been at the principal executive office of the Company. Beginning five years prior to the date of this Proxy Statement and continuing until November 1998, the principal executive office of the Company was located at 763 Larkfield Road, Commack, New York 11725. Since November 1998, the Company's principal executive office has been 401 Broadhollow Road, Melville, New York 11747. BUSINESS ADDRESS AND NAME PRINCIPAL OCCUPATIONS ---- --------------------- MARIO SBARRO Mr. Sbarro has been an officer, a director and a principal shareholder of the Company since its organization in 1977, serving as Chairman of the Board and Chief Executive Officer for more than the past five years and President since May 1996. ANTHONY SBARRO Mr. Sbarro has been an officer, a director and a principal shareholder of the Company since its organization in 1977, serving as Vice Chairman of the Board since May 1996 and as President and Chief Operating Officer from December 1993 through May 1996. For more than five years prior to December 1993, Mr. Sbarro was an Executive Vice President of the Company. He also has served as Treasurer of the Company for more than the past five years. JOSEPH SBARRO Mr. Sbarro has been an officer, a director and a principal shareholder of the Company since its organization in 1977, serving as Senior Executive Vice President since December 1993. For more than five years prior thereto, Mr. Sbarro was an Executive Vice President of the Company. He also has served as Secretary of the Company for more than the past five years. -71- BUSINESS ADDRESS AND NAME PRINCIPAL OCCUPATIONS ---- --------------------- CARMELA SBARRO Mrs. Sbarro has been a Vice President of the Company since March 1985. Mrs. Sbarro was a founder of the Company, together with her late husband, Gennaro Sbarro. Mrs. Sbarro devotes a substantial portion of her time to recipe and product development. Mrs. Sbarro has served as a director of the Company since January 1998. HAROLD L. KESTENBAUM Mr. Kestenbaum has been a practicing attorney in New York since 1976. From October 1997 to the present, the business address of Mr. Kestenbaum has been 585 Stewart Avenue, Garden City, New York 11530. From five years prior to the date of this Proxy Statement through September 1997, the business address of Mr. Kestenbaum was 170 Old Country Road, Mineola, New York 11501. He became a director of the Company in March 1985. RICHARD A. MANDELL Mr. Mandell is a private investor. His residence address is 666 Greenwich Street, New York, New York 10014. Mr. Mandell was a Managing Director of the investment firm of BlueStone Capital Partners, L.P., 575 Fifth Avenue, New York, New York 10017, from February until April 1998 and Vice President - Private Investments of Clariden Asset Management (NY) Inc., 12 East 49th Street, New York, New York 10022, a subsidiary of Clariden Bank, a private Swiss bank, from January 1996 until February 1998. From 1982 until June 1995, Mr. Mandell served as a Managing Director of Prudential Securities, One New York Plaza, New York, New York 10292. He became a director of the Company in March 1986. Mr. Mandell is also a director of Trend-Lines, Inc., USA Detergents, Inc. and Shells Seafood Restaurants, Inc. PAUL A. VATTER Mr. Vatter has been Professor Emeritus since his retirement in 1995, and from 1970 until his retirement was Lawrence E. Fouraker Professor of Business Administration, at Harvard University's Graduate School of Business Administration, Cumnock Hall, Boston, Massachusetts 02163, where he served as a Professor since 1958. His residence address is 244 Clifton Street, Belmont, Massachusetts 02178. He became a director of the Company in March 1985. Mr. Vatter has advised the Company of his intention to retire upon consummation of the Merger or, if the Restated Merger Agreement is not adopted at the Meeting, upon the expiration of his current term at the next annual meeting of shareholders. -72- BUSINESS ADDRESS AND NAME PRINCIPAL OCCUPATIONS ---- --------------------- TERRY VINCE Mr. Vince has been Chairman of the Board and President of Sovereign Hotels, 591 North Avenue, Wakefield, Massachusetts 01880, a company that operates hotels, since October 1991 and Chairman of the Board of Fame Corp., 1400 State Street, Springfield, Massachusetts 01109, a food service management company, since January 1994. He became a director of the Company in December 1988. BERNARD ZIMMERMAN Mr. Zimmerman has been President of Bernard Zimmerman and Co., Inc. since October 1972 and was Senior Vice President of The Zimmerman Group, Inc. from January 1991 to November 1996, financial and management consulting firms. The address of Bernard Zimmerman and Co., Inc. and The Zimmerman Group, Inc. is 18 High Meadow Road, Weston, Connecticut 06883. Mr. Zimmerman also served as President and a director of Beacon Hill Mutual Fund, Inc., 75 Federal Street, Boston, Massachusetts 02110, from December 1994 until October 1996. From 1986 until September 1993, Mr. Zimmerman was Chairman and President of St. Lawrence Seaway Corp., an owner and manager of agricultural properties. Mr. Zimmerman has been a certified public accountant in New York for more than the past 35 years. He became a director of the Company in March 1985. JOHN BERNABEO Mr. Bernabeo joined the Company in August 1992 and served in various capacities prior to his election as Vice President - Architecture and Engineering in May 1997. JOSEPH A. FALLARINO Mr. Fallarino joined the Company in September 1998 and was elected Vice President - Human Resources in November 1998. Prior to joining the Company, Mr. Fallarino served as Senior Vice President - Human Resources of Arbor Management LLC, 333 Omni Building, Earl Ovington Boulevard, Uniondale, New York 11553 , a provider of financial services and healthcare services, from March 1996 until March 1998, and Vice President Human - Resources of AMS Corporation, 855 Avenue of the Americas, New York, New York 10001, a national outsourcing company, from January 1994 until February 1996, and Director of Human Resources of Ogden Corporation, 2 Penn Plaza, New York, New York, an international diversified services corporation, from April 1988 until September 1993. GEORGE W. HERZ II Mr. Herz joined the Company in November 1995 and was elected Vice President and General Counsel in February 1996. Prior to joining the Company, Mr. Herz served as General Counsel from 1993 and Corporate Counsel from 1982 until 1992 of Minuteman Press International, Inc., 1640 New Highway, Farmingdale, New York 11735, a franchisor of printing centers. -73- BUSINESS ADDRESS AND NAME PRINCIPAL OCCUPATIONS ---- --------------------- ROBERT S. KOEBELE Mr. Koebele has been Vice President - Finance and Chief Financial Officer of the Company for more than the past five years. Mr. Koebele has been a certified public accountant in New York for more than the past 30 years. Mr. Koebele has advised the Company that he intends to retire in the early part of the summer of 1999, whether or not the Merger is consummated. CARMELA N. MERENDINO Ms. Merendino has been Vice President - Administration of the Company for more than the past five years. Ms. Merendino joined the Company in March 1985 and performed a variety of corporate administrative functions for the Company prior to her election as Vice President - Administration. ANTHONY J. MISSANO Mr. Missano has been Corporate Vice President - Operations since August 1996, prior to which he served the Company as Vice President - Operations (West) since February 1995, and as a Zone Vice President from June 1992 until February 1995. ROBERT G. ROONEY Mr. Rooney joined the Company in June 1999 as Co-Vice President- Finance and Co-Chief Financial Officer and will become the Company's sole Vice President-Finance and Chief Financial Officer upon the retirement of Mr. Koebele. From December 1996 until he joined the Company, Mr. Rooney was employed by Discovery Zone, Inc. (a national family entertainment center chain), serving as Senior Vice President, Chief Financial and Administrative Officer since February 1997. From March 1994 until September 1996, Mr. Rooney served as Senior Vice President and Chief Financial Officer of Victory Capital LLC (formerly Forschner Enterprises, Inc.), a venture capital firm, and, from September 1992 to February 1994, served as a director and consultant on behalf of various investors and investment funds affiliated with Forschner Enterprises, Inc. Discovery Zone, Inc., which had filed under Chapter 11 of the United States Bankruptcy Code prior to Mr. Rooney's joining that company, again filed under that law on April 20, 1999. Mr. Rooney has been a certified public accountant in New York for over 15 years. GENNARO A. SBARRO Mr. Sbarro has been Corporate Vice President-Franchising of the Company since August 1996, prior to which he served the Company as Vice President - Franchising since February 1995. For more than five years prior thereto, Mr. Sbarro served the Company in various capacities with the Company. GENNARO J. SBARRO Mr. Sbarro has been Corporate Vice President - Operations of the Company since August 1996, prior to which he served as Vice President - Operations (East) since February 1995, and as a Zone Vice President from June 1992 until February 1995. -74- BUSINESS ADDRESS AND NAME PRINCIPAL OCCUPATIONS ---- --------------------- LEONARD G. SKROSKY Mr. Skrosky, who rejoined the Company in June 1996, has been Senior Vice President - Real Estate since November 1996. Mr. Skrosky was Senior Vice President - Real Estate and Lease Administration from February 1987 until December 1993. From January 1994 until June 1996, Mr. Skrosky was President of The Skrosky Company, 510 Hallet Road, East Stroudsburg, Pennsylvania 18301, a real estate firm dealing with site selection and lease negotiations for several restaurant and other companies. FAMILY RELATIONSHIPS Mario, Anthony and Joseph Sbarro are the sons of Carmela Sbarro. Carmela N. Merendino is the daughter, and Gennaro A. Sbarro is the son, of Mario Sbarro. Gennaro J. Sbarro is the son, and Anthony J. Missano is the son-in-law, of Joseph Sbarro. BACKGROUND OF THE CONTINUING SHAREHOLDERS The only members of Mergeco are Mario Sbarro, Joseph Sbarro and Anthony Sbarro, Joseph Sbarro (1994) Family Limited Partnership and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants (the "TRUST OF CARMELA SBARRO"). Information concerning Mario, Joseph and Anthony Sbarro is contained in "-- Directors and Executive Officers of the Company." Joseph Sbarro (1994) Family Limited Partnership is a New York partnership formed in June 1994, whose business address is c/o Joseph Sbarro, 401 Broadhollow Road, Melville, New York 11747. It holds investments of the family of Joseph Sbarro. The business address of the Trust of Carmela Sbarro is c/o Mario Sbarro, 401 Broadhollow Road, Melville, New York 11747. It was formed in April 1984 and is a trust for the benefit of Carmela Sbarro and her descendants. The trustees of the Trust of Carmela Sbarro are Mario Sbarro and Franklin Montgomery. Franklin Montgomery, a citizen of the United States, has been an attorney in sole practice for more than the past five years. His business address is 488 Madison Avenue, New York, New York 10022. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of Common Stock as of June 30, 1999 (except as noted below) with respect to (i) holders known to the Company to beneficially own more than five percent of the outstanding Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company, (iv) all directors and executive officers of the Company as a group and (v) each Continuing Shareholder. The Company understands that, except as noted below, each beneficial owner has sole voting and investment power with respect to all shares attributable to such owner. As of June 30, 1999, Mergeco did not beneficially own any shares of Common Stock. -75- Amount and Nature of Percent of Beneficial Owner Beneficial Ownership(1) Class (2) ---------------- ---------------------- ---------- Mario Sbarro (3).............................. 1,949,920 (4) 9.3% Anthony Sbarro (3)............................ 1,432,133 (5) 6.9% Joseph Sbarro (3)............................. 2,024,580 (6) 9.8% Trust of Carmela Sbarro (3)(7)................ 2,497,884 12.2% Carmela Sbarro................................ 400 * Harold L. Kestenbaum.......................... 29,250 (8) * Richard A. Mandell............................ 22,500 (9) * Paul A. Vatter................................ 24,750 (9) * Terry Vince................................... 25,800 (9) * Bernard Zimmerman............................. 64,450(10) * John Bernabeo................................. 833(11) * Joseph A. Fallarino........................... 0 -- George W. Herz II............................. 4,666(11) * Robert S. Koebele............................. 25,666(12) * Carmela N. Merendino.......................... 20,966(13) * Anthony J. Missano............................ 39,166(11) * Robert G. Rooney.............................. 0 -- Gennaro A. Sbarro............................. 54,187(14) * Gennaro J. Sbarro............................. 39,166(11) * Leonard G. Skrosky............................ 70,649(15) * Joel M. Greenblatt............................ 1,879,647(16) 9.2% Bank One Corporation.......................... 1,213,600(17) 5.9% All directors and executive officers as a 8,322,520(18) 38.3% group (19) persons.......................... - --------------- (1) Shares subject to Stock Options, for purposes of the table, are considered beneficially owned only to the extent currently exercisable or exercisable within 60 days after June 30, 1999. See "THE RESTATED MERGER AGREEMENT -- Treatment of Stock Options." (2) Asterisk indicates less than 1%. As of June 30, 1999, 20,534,313 shares of Common Stock were outstanding. Shares subject to Stock Options are considered outstanding only for the purpose of computing the percentage of outstanding Common Stock which would be owned by the optionee if such Stock Options were exercised, but (except for the calculation of beneficial ownership by all executive officers and directors as a group) are not considered outstanding for the purpose of computing the percentage of outstanding Common Stock owned by any other person. (3) The business address of each of Mario Sbarro, Joseph Sbarro, Anthony Sbarro and the Trust of Carmela Sbarro is 401 Broadhollow Road, Melville, New York 11747. (4) Includes (i) 740 shares owned by Mr. Sbarro's wife and 4,450 shares owned by a charitable foundation supported by Mr. Sbarro and his wife, of which Mr. Sbarro, his wife and another director of the Company are the directors (as to which shares, in each case, Mr. Sbarro disclaims beneficial ownership), and (ii) 420,000 shares subject to Stock Options. Excludes the 2,497,884 shares held by the Trust of Carmela Sbarro, of which trust Mr. Sbarro serves as a trustee (as to which shares Mr. -76- Sbarro may be deemed a beneficial owner with shared voting and dispositive power). See footnote (7) below. (5) Includes 198,333 shares subject to Stock Options. (6) Includes (i) 609,000 shares owned by Joseph Sbarro (1994) Family Limited Partnership, of which Mr. Sbarro is the sole general partner, and (ii) 216,666 shares subject to Stock Options. (7) The Trust of Carmela Sbarro was created by Carmela Sbarro for her benefit and for the benefit of her descendants, including Mario, Joseph and Anthony Sbarro. The trustees of the trust are Franklin Montgomery, whose business address is 488 Madison Avenue, New York, New York 10022, and Mario Sbarro. As trustees, Franklin Montgomery and Mario Sbarro may be deemed to be the beneficial owners of these shares with shared voting and dispositive power. (8) Represents (i) 6,750 shares owned by Mr. Kestenbaum's wife, as to which shares Mr. Kestenbaum disclaims beneficial ownership, and (ii) 22,500 shares subject to Stock Options. (9) Includes 22,500 shares subject to Stock Options. (10) Includes (i) 4,450 shares owned by a family foundation supported by Mario Sbarro and his wife, of which Mr. Zimmerman is a director (as to which shares Mr. Zimmerman disclaims beneficial ownership), and (ii) 22,500 and 37,500 shares subject to Stock Options held, respectively, by Mr. Zimmerman individually and Bernard Zimmerman and Company, Inc., a company of which Mr. Zimmerman is President and a majority shareholder. (11) Represents shares subject to Stock Options. (12) Includes 14,666 shares subject to Stock Options. (13) Includes (i) 4,730 shares owned by Ms. Meredino's husband and 1,840 shares owned by Ms. Merendino as custodian for her minor children (as to which shares, in each case, Ms. Merendino disclaims beneficial ownership), and (ii) 9,666 shares subject to Stock Options. (14) Includes (i) 3,140 shares owned by Mr. Sbarro's wife, as to which shares Mr. Sbarro disclaims beneficial ownership, and (ii) 44,917 shares subject to Stock Options. (15) Includes 66,666 shares subject to Stock Options. (16) Based solely upon information as of April 6, 1999 contained in a Schedule 13D dated April 19, 1999 filed with the SEC and the Company by Mr. Greenblatt, Gotham Capital V, LLC, Gotham Capital VI, LLC and Gotham Capital VII, LLC, each of whose address is 100 Jericho Quadrangle, Suite 212, Jericho, New York 11753. The Schedule 13G indicates that Mr. Greenblatt has sole voting and dispositive power with respect to 122,083 shares and that he shares voting and dispositive power with respect to 4,567 shares with Gotham Capital V, LLC, 315,495 shares with Gotham Capital VI, LLC and 412,502 shares with Gotham Capital VII, LLC. Includes 875,000 and 150,000 shares which have been transferred by Gotham V and Gotham VI, respectively, in connection with equity -77- swaps on such number of shares. Gotham V, Gotham VI and Mr. Greenblatt include the shares subject to such swaps in their Schedule 13D but disclaim beneficial ownership of those shares. (17) Based solely upon information as of December 31, 1998 contained in a Schedule 13G dated February 1, 1999 filed with the SEC and the Company by Bank One Corporation, One First National Plaza, Chicago, Illinois 60670 as parent holding company of NBD Bank (Indiana), NBD Bank (Michigan) and Pegasus Funds. The Schedule 13G indicates that Bank One Corporation had sole voting and dispositive power with respect to 1,209,900 shares and sole voting power with respect to another 3,700 shares. The Company believes Bank One Corporation may have sold some or all of the shares beneficially owned by it. (18) Includes (i) 4,450 shares owned by a charitable foundation, of which a director and executive officer of the Company, his wife and another director of the Company are directors, as to which shares each disclaims beneficial ownership, (ii) an aggregate of 17,200 shares owned by spouses, and as custodian for minor children, of directors and executive officers, as to which shares beneficial ownership is disclaimed and (iii) 1,135,994 shares subject to Stock Options. CERTAIN TRANSACTIONS IN THE COMMON STOCK There have been no transactions in the Common Stock effected since December 15, 1998 by (i) the Company or any majority-owned subsidiary of the Company, (ii) any director or executive officer of the Company, (iii) any persons controlling the Company, (iv) Mergeco, (v) any Continuing Shareholder, including the general partner of the Joseph Sbarro (1994) Family Limited Partnership or either trustee of the Trust of Carmela Sbarro, or (vi) any associate of any of the foregoing, except that the Company has issued an aggregate of 334 shares to employees (none of whom is within the foregoing categories of persons) upon the exercise of Stock Options under stock option plans of the Company. It is the present intention of the following persons (as well as other children of Mario Sbarro who own an aggregate of 7,170 shares of Common Stock) to sell the shares indicated opposite their names prior to the Effective Time in order to recognize capital gain tax treatment with respect to the disposition of their presently owned Common Stock rather than ordinary income tax treatment that would otherwise apply to them as a result of their family relationship to Mario Sbarro if they exchanged their shares in the Merger (see "SPECIAL FACTORS - -- Certain U.S. Federal Income Tax Consequences"):
RELATIONSHIP TO THE COMPANY AND NUMBER NAME CONTINUING SHAREHOLDERS OF SHARES - ---- ----------------------- --------- Annunziatina Sbarro Wife of Mario Sbarro 740 Carmela Sbarro Vice President, director and mother of Mario, Joseph and 400 Anthony Sbarro Carmela N. Merendino Vice President-Administration and daughter of Mario Sbarro 4,730 Gennaro A. Sbarro Vice President-Franchising and son of Mario Sbarro 6,130
Neither the Company nor any of the Continuing Shareholders (who are considered to be the only affiliates of the Company) have made any purchases of Common Stock since December 29, 1996. -78- On February 19, 1997, the Company granted Stock Options, exercisable at $25.125 per share, to the following current executive officers: Mario Sbarro (to purchase 100,000 shares); Anthony Sbarro (to purchase 100,000 shares); Joseph Sbarro (to purchase 100,000 shares); Gennaro A. Sbarro (to purchase 80,000 shares); Gennaro J. Sbarro (to purchase 80,000 shares); Anthony J. Missano (to purchase 80,000 shares); Carmela Merendino (to purchase 6,500 shares); Robert S. Koebele (to purchase 6,500 shares); George W. Herz II (to purchase 4,000 shares) and John Bernabeo (to purchase 2,500 shares). On May 21, 1997, Mario Sbarro was granted an additional Stock Option to purchase 150,000 shares of Common Stock at an exercise price of $28.875 per share. Following the Company's 1997 annual meeting of shareholders, held on May 21, 1997, Harold L. Kestenbaum, Richard A. Mandell, Paul A. Vatter, Terry Vince and Bernard Zimmerman, the Company's non-employee directors, were each granted Stock Options to purchase 3,750 shares of Common Stock at an exercise price of $28.875 per share and, following the 1998 annual meeting of shareholders, held on August 19, 1998, those non-employee directors were each granted options to purchase 3,750 shares of Common Stock at $24.0625 per share. On November 17, 1998, Joseph Fallarino was granted a Stock Option to purchase 5,000 shares of Common Stock at an exercise price of $24.8125 per share. INDEPENDENT PUBLIC ACCOUNTANTS The Company's consolidated financial statements as at January 3, 1999 and December 28, 1997 and for the three fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999 included in this Proxy Statement have been audited by Arthur Andersen LLP, independent public accountants, as stated in their report with respect thereto. It is expected that representatives of Arthur Andersen LLP will be present at the Meeting, both to respond to appropriate questions of shareholders of the Company and to make a statement if they desire. SHAREHOLDER PROPOSALS If the Merger is consummated, there no longer will be public shareholders of the Company and no public participation in any future meetings of shareholders of the Company. However, if the Merger is not consummated, the Company intends to hold its 1999 Annual Meeting of Shareholders on or about October 14, 1999. If a shareholder intends to present a proposal at the Company's 1999 Annual Meeting of Shareholders and wants that proposal to be included in the Company's Proxy Statement and proxy card for that meeting, the proposal should be received at the Company's principal executive offices not later than August 31, 1999. As to any proposal that a shareholder intends to present to shareholders without including it in the Company's Proxy Statement for the Company's 1999 Annual Meeting of Shareholders, the proxies named in management's proxy for that meeting will be entitled to exercise their discretionary authority on that proposal unless the Company receives notice of the matter to be proposed not later than August 31, 1999. Even if proper notice is received on or prior to August 31, 1999, the proxies named in management's proxy for that meeting may nevertheless exercise their discretionary authority with respect to such matter by advising shareholders of such proposal and how they intend to exercise their discretion to vote on such matter, unless the shareholder making the proposal solicits proxies with respect to such proposal as required by Rule 14a-4(c)(2) under the Exchange Act. -79- WHERE YOU CAN FIND MORE INFORMATION The SEC allows the Company to "incorporate by reference" information into its Proxy Statement, which means that the Company can disclose important information by referring you to another document filed separately with the SEC. The following documents are incorporated by reference in this Proxy Statement and are deemed to be a part hereof: (1) The Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1999; (2) The Company's Quarterly Report on Form 10-Q for the sixteen weeks ended April 25, 1999; and (3) The Company's Current Reports on Form 8-K dated (date of earliest event reported): January 19, 1999 and June 17, 1999. Any statement contained in a document incorporated by reference is deemed to be modified or superseded for all purposes to the extent that a statement contained in this Proxy Statement modifies or replaces such statement. The Company also incorporates by reference the information contained in all other documents the Company files with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy Statement and before the Meeting. The information contained in any such document will be considered part of this Proxy Statement from the date the document is filed and will supplement or amend the information contained in this Proxy Statement. The Company undertakes to provide by first class mail, without charge and within one business day of receipt of any request, to any person to whom a copy of this Proxy Statement has been delivered, a copy of any or all of the documents referred to above which have been incorporated by reference in this Proxy Statement, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference therein). -80- AVAILABLE INFORMATION The Company, Mergeco and the Continuing Shareholders have filed with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3 under the Exchange Act with respect to the Merger. This Proxy Statement does not contain all of the information set forth in the Schedule 13E-3 and the exhibits to the Schedule 13E-3, certain parts of which are omitted, as permitted in accordance with the rules and regulations of the SEC. The Company is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the SEC. Among other things, a copy of the written report presented by Prudential Securities to the Special Committee, including the opinion of Prudential Securities as to the fairness of the consideration to be received in the Merger, was filed as an exhibit to the Schedule 13E-3. Descriptions contained herein concerning any documents are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Schedule 13E-3. Each such statement is qualified in its entirety by reference to the document filed as an exhibit. Copies of the Schedule 13E-3 and all exhibits to the Schedule 13E-3. are available for inspection and copying at the principal executive offices of the Company during regular business hours by any interested shareholder of the Company, or a representative who has been so designated in writing, and may be inspected and copied, or obtained by mail, without charge, by written request directed to us at the following address: Robert G. Rooney, Co-Vice President - Finance Sbarro, Inc. 401 Broadhollow Road Melville, New York 11747 The Company is currently subject to the information requirements of the Exchange Act and in accordance therewith files periodic reports, proxy statements and other information with the SEC relating to its business, financial and other matters. Copies of such reports, proxy statements and other information, as well as the Schedule 13E-3, may be copied (at prescribed rates) at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the following Regional Offices of the SEC: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, Suite 1300, New York, New York 10048. For further information concerning the SEC's public reference rooms, you may call the SEC at 1-800-SEC-0330. Some of this information may also be accessed on the World Wide Web through the SEC's Internet address at "http://www.sec. gov." The Company's Common Stock is listed on the NYSE, and materials also may be inspected at the NYSE's offices at 20 Broad Street, New York, New York 10005. OTHER MATTERS At a special meeting, under the NYBCL and the Company's By-Laws, no matter may be considered which is not set forth in the notice for such meeting. As a result, no matter other than consideration of adoption of the Restated Merger Agreement may be brought before the Meeting. If any other matters or motions should properly come before the Meeting, the persons named in the Proxy intend to vote thereon in accordance with their discretion on such matters or motions, including any matters or motions dealing with the conduct of the Meeting. By Order of the Board of Directors, JOSEPH SBARRO, Secretary July 15, 1999 -81-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Page ---- Annual Financial Statements F-2 Report of Independent Public Accountants F-3 Consolidated Balance Sheets at January 3, 1999 and December 28, 1997 F-4 Consolidated Statements of Income for each of the years in the three-year period ended January 3, 1999 F-6 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended January 3, 1999 F-8 Consolidated Statements of Cash Flows for each of the years in the three-year period ended January 3, 1999 F-9 Notes to Consolidated Financial Statements F-11 Interim Financial Statements F-25 Consolidated Balance Sheets - April 25, 1999 (unaudited) and January 3, 1999 F-26 Consolidated Statements of Income (unaudited) - Sixteen Weeks ended April 25, 1999 and April 19, 1998 F-28 Consolidated Statements of Cash Flows (unaudited) - Sixteen Weeks ended April 25, 1999 and April 19, 1998 F-30 Notes to Unaudited Consolidated Financial Statements - April 25, 1999 F-32
F-1 ANNUAL FINANCIAL STATEMENTS F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Board of Directors and Shareholders of Sbarro, Inc.: We have audited the accompanying consolidated balance sheets of Sbarro, Inc. (a New York corporation) and subsidiaries as of January 3, 1999 and December 28, 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended January 3, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sbarro, Inc. and subsidiaries as of January 3, 1999 and December 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP New York, New York February 10, 1999 F-3 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
(In thousands) ---------------------------------------------- January 3, 1999 December 28, 1997 ----------------- ------------------- Current assets: Cash and cash equivalents $150,472 $119,810 Marketable securities - 7,500 Receivables: Franchisees 1,342 810 Other 2,185 1,565 ------------ ------------ 3,527 2,375 ------------ ------------ Inventories 3,122 2,962 Prepaid expenses 1,291 1,768 ------------ ----------- Total current assets 158,412 134,415 Property and equipment, net (Notes 3 and 10) 138,126 136,798 Other assets, net 6,630 7,436 ----------- ----------- $303,168 $278,649 =========== ===========
(continued) F-4 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands) ------------------------------------------ January 3, 1999 December 28, 1997 --------------- ------------------- Current liabilities: Accounts payable $ 7,122 $10,086 Accrued expenses (Note 4) 25,764 26,025 Dividend payable - 5,521 Income taxes (Note 5) 4,146 4,777 ---------- -------- Total current liabilities 37,032 46,409 Deferred income taxes (Note 5) 9,219 11,801 Commitments and contingencies (Notes 6 and 7) - - Shareholder's equity (Note 9): Preferred stock, $1 par value: authorized 1,000,000 shares; none issued - - Common stock, $.01 par value; authorized 40,000,000 shares; issued and outstanding 20,531,643 shares at January 3, 1999 and 20,446,654 shares at December 28, 1997 205 204 Additional paid-in capital 34,587 32,444 Retained earnings 222,125 187,791 --------- -------- 256,917 220,439 --------- -------- $303,168 $278,649 ======== ========
See notes to consolidated financial statements F-5 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) ------------------------------------------------ For the Years Ended ------------------------------------------------ January 3, December 28, December 29, 1999 1997 1996 --------- ----------- ----------- Revenues: Restaurant sales $361,534 $337,723 $319,315 Franchise related income 8,578 7,360 6,375 Interest income 5,120 4,352 3,798 ---------- ---------- ---------- Total revenues 375,232 349,435 329,488 ---------- ---------- ---------- Costs and expenses: Cost of food and paper products 76,572 69,469 68,668 Restaurant operating expenses: Payroll and other employee benefits 93,367 84,910 78,258 Occupancy and other expenses 101,013 93,528 85,577 Depreciation and amortization 22,429 23,922 22,910 General and administrative 19,708 17,762 14,940 Provision for unit closings (Note 10) 2,515 3,300 - Terminated transaction costs (Note 6) 986 - - Litigation settlement and related costs (Note 7) 3,544 - - Loss on sale of land to be sold (Note 3) 1,075 - - Other income (2,680) (1,653) (1,171) --------- --------- --------- Total costs and expenses 318,529 291,238 269,182 --------- --------- --------- Income before income taxes and cumulative effect of change in method of accounting for start-up costs 56,703 58,197 60,306 Income taxes (Note 5) 21,547 22,115 22,916 ------ ------ ------ Income before cumulative effect of accounting change 35,156 36,082 37,390 Cumulative effect of change in method of accounting for start-up costs, net of income taxes of $504 (822) - - --------- --------- --------- Net income $34,334 $36,082 $37,390 ========= ========= =========
(continued) F-6 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) For the Years Ended January 3, December 28, December 29, 1999 1997 1996 --------- ----------- ----------- Per share information: Net income per share: Basic: Income before accounting change $1.71 $1.77 $1.84 Accounting change (.04) - - ----- ----- ----- Net income $1.67 $1.77 $1.84 ===== ===== ===== Diluted: Income before accounting change $1.71 $1.76 $1.83 Accounting change (.04) - - ------ ------- ------- Net Income $1.67 $1.76 $1.83 ====== ======= ======= Shares used in computing net income per share: Basic 20,516,890 20,426,678 20,369,128 ========== ========== ========== Diluted 20,583,367 20,504,303 20,404,620 ========== ========== ========== Dividends declared (Note 11) - $1.08 $0.92 ========== ========== ===========
See notes to consolidated financial statements F-7 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data) --------------------------------------------------------------------- Common stock --------------------------------------------------------------------- Additional Number of paid-in Retained shares Amount capital earnings Total --------- ------ ---------- -------- ----- Balance at December 31, 1995 20,345,483 $203 $30,330 $155,133 $185,666 Exercise of stock options 47,426 1 889 890 Net income 37,390 37,390 Dividends declared (18,746) (18,746) --------------- -------- ---------- -------- -------- Balance at December 29, 1996 20,392,909 204 31,219 173,777 205,200 Exercise of stock options 53,745 1,225 1,225 Net income 36,082 36,082 Dividends declared (22,068) (22,068) --------------- -------- ------------ -------- -------- Balance at December 28, 1997 20,446,654 204 32,444 187,791 220,439 Exercise of stock options 84,989 1 2,143 2,144 Net income 34,334 34,334 --------------- -------- ------------ ---------- -------- Balance at January 3, 1999 20,531,643 $205 $34,587 $222,125 $256,917 =============== ======== ============ ========== ========
See notes to consolidated financial statements F-8 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) --------------------------------------------- For the Years Ended --------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 ---------- ------------ ------------ Operating activities: Net income $34,334 $36,082 $37,390 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in method of accounting for start-up costs 822 Depreciation and amortization 22,429 23,922 22,910 Decrease in deferred income taxes (2,078) (1,844) (442) Provision for unit closings 2,515 3,300 Loss on sale of land to be sold 1,075 Changes in operating assets and liabilities: (Increase) decrease in receivables (1,152) (510) 739 Increase in inventories (160) (121) (78) Decrease (increase) in prepaid expenses 477 (359) 268 Increase in other assets (817) (2,468) (3,048) (Decrease) increase in accounts payable and accrued expenses (2,610) 3,534 (4,309) (Decrease) increase in income taxes payable (631) (510) 579 ---------- --------- --------- Net cash provided by operating activities 54,204 61,026 54,009 --------- -------- ---------
(continued) F-9 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands) -------------------------------------------------- For the Years Ended -------------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 --------- ------------ ------------ Investing activities: Proceeds from maturities of marketable securities 7,500 2,500 Purchases of property and equipment (27,717) (28,556) (25,928) Proceeds from disposition of property and equipment 52 34 266 --------- ---------- --------- Net cash used in investing activities (20,165) (26,022) (25,662) ---------- ---------- --------- Financing activities: Proceeds from exercise of stock options 2,144 1,225 890 Cash dividends paid (5,521) (21,237) (17,920) -------- --------- ---------- Net cash used in financing activities (3,377) (20,012) (17,030) -------- ---------- ---------- Increase in cash and cash equivalents 30,662 14,992 11,317 Cash and cash equivalents at beginning of year 119,810 104,818 93,501 --------- --------- --------- Cash and cash equivalents at end of year $150,472 $119,810 $104,818 ========= ========= =========
See notes to consolidated financial statements F-10 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial statements include the accounts of Sbarro, Inc. and its wholly-owned subsidiaries (together, the "Company") and the accounts of its joint ventures. All intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS: All highly liquid debt instruments with a maturity of three months or less at the time of purchase are considered to be cash equivalents. MARKETABLE SECURITIES: The Company had classified its investments in marketable securities as "held to maturity". These investments were stated at amortized cost, which approximated market, and were comprised primarily of direct obligations of the U.S. Government and its agencies. All previous investments in marketable securities matured during fiscal 1998. INVENTORIES: Inventories, consisting primarily of food, beverages and paper supplies, are stated at cost which is determined by the first-in, first-out method. PROPERTY AND EQUIPMENT AND DEPRECIATION: Property and equipment are stated at cost. Depreciation is provided for by the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is provided for by the straight-line method over the estimated useful lives of the assets or the lease term, whichever is shorter. One-half year of depreciation and amortization is recorded in the year in which the restaurant commences operations. F-11 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): DEFERRED CHARGES: The Company accounts for pre-opening and similar costs in accordance with Statement of Position (SOP) 98-5 of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants which requires companies to write off all such costs, net of tax benefit, as a "cumulative effect of accounting change" and to expense all such costs as incurred in the future. In accordance with its early application provisions, the Company implemented the SOP as of the beginning of its 1998 fiscal year. Application of the SOP resulted in a charge of $1,226,000 ($822,000 or $.04 basic and diluted earnings per share after tax). COMPREHENSIVE INCOME: In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income", which establishes new rules for the reporting of comprehensive income and its components. The adoption of this statement had no impact on the Company's net income or shareholders' equity. For the 1998, 1997 and 1996 fiscal years, the Company's operations did not give rise to items includible in comprehensive income which were not already included in net income. Therefore, the Company's comprehensive income is the same as its net income for all periods presented. FRANCHISE RELATED INCOME: Initial franchise fees are recorded as income as restaurants are opened by the franchisee and all services have been substantially performed by the Company. Development fees are amortized over the number of restaurant openings covered under each development agreement. Royalty and other fees from franchisees are accrued as earned. Revenues and expenses related to construction of franchised restaurants are recognized when contractual obligations are completed and the restaurants are opened. STOCK BASED COMPENSATION PLANS: In accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. (See Note 9). INCOME TAXES: The Company files a consolidated Federal income tax return. Deferred income taxes result primarily from differences between financial and tax reporting of depreciation and amortization. ACCOUNTING PERIOD: The Company's fiscal year ends on the Sunday nearest to December 31. The Company's 1998 fiscal year ended January 3, 1999 and contained 53 weeks. All other reported fiscal years contained 52 weeks. F-12 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): PER SHARE DATA: The provisions of SFAS No. 128, "Earnings Per Share" became effective for the Company's quarter and year ended December 28, 1997. SFAS No. 128 requires the presentation of both basic and diluted earnings per share on the face of the income statement. SFAS No. 128 replaced primary and fully diluted earnings per share with basic and diluted earnings per share, respectively. Earnings per share is calculated using the weighted average number of shares of common stock outstanding for the period, with basic earnings per share excluding, and diluted earnings per share including, potentially dilutive securities, such as stock options that could result in the issuance of common stock. The number of shares of common stock subject to stock options included in diluted earnings per share were 66,477 in 1998, 77,625 in 1997 and 35,492 in 1996. LONG-LIVED ASSETS: SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" requires that long-lived assets, certain identifiable intangibles and goodwill be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. SFAS No. 121 did not have a material effect on the Company's results of operations or financial position in 1998, 1997 or 1996. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: (In Thousands) ------------------------------------------------ For The Years Ended ------------------------------------------------ January 3, December 28, December 29, 1999 1997 1996 ---- ---- ---- Cash paid for: Income taxes $24,235 $24,297 $23,143 ======= ======= ======= F-13 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. DESCRIPTION OF BUSINESS: The Company and its franchisees develop and operate family oriented cafeteria style Italian restaurants principally under the "Sbarro" and "Sbarro The Italian Eatery" names. The restaurants are located throughout the United States and overseas, principally in shopping malls and other high traffic locations. The following sets forth the number of units in operation as of: January 3, December 28, December 29, 1999 1997 1996 ---- ---- ---- Company-owned 630 623 597 Franchised 268 239 219 --- --- --- 898 862 816 === === === 3. PROPERTY AND EQUIPMENT: (In thousands) ----------------------------------------- January 3, December 28, 1999 1997 ---- ---- Leasehold improvements $191,192 $168,581 Furniture, fixtures and equipment 107,891 97,688 Construction-in-progress (A) 2,662 20,096 --------- --------- 301,745 286,365 Less accumulated depreciation and amortization 163,619 149,567 --------- --------- $138,126 $136,798 ========= ========= (A) During 1998 the Company recorded a charge of $1,075 before tax ($667 or $.03 basic and diluted earnings per share after tax) for the difference between the carrying cost and proposed selling price of a parcel of land being sold by the Company. As of December 28, 1997, construction in progress includes $15,651 related to the acquisition and improvement of the Company's new corporate headquarters. 4. ACCRUED EXPENSES: (In thousands) --------------------------------- January 3, December 28, 1999 1997 ---- ---- Compensation $4,109 $5,051 Payroll and sales taxes 3,193 3,494 Rent 6,786 6,699 Provision for unit closings (Note 10) 2,867 4,351 Other 8,809 6,430 --------- --------- $25,764 $26,025 ========= ========= F-14 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES: (In Thousands) ------------------------------------------------------ For The Years Ended ------------------------------------------------------ January 3, December 28, December 29, 1999 1997 1996 ---- ---- ---- Federal: Current $19,421 $19,868 $19,216 Deferred (2,209) (1,557) (322) --------- --------- --------- 17,212 18,311 18,894 --------- --------- --------- State and local: Current 4,708 4,091 4,142 Deferred (373) (287) (120) --------- --------- --------- 4,335 3,804 4,022 --------- --------- --------- $21,547 $22,115 $22,916 ========= ========= ========= Deferred income taxes are comprised of the following: (In thousands) ----------------------------------------- January 3, December 28, 1999 1997 ---- ---- Depreciation and amortization $15,805 $15,782 Deferred charges - 475 Other 101 60 -------- --------- Gross deferred tax liabilities 15,906 16,317 -------- --------- Accrued expenses (4,776) (2,431) Deferred income (1,483) (1,949) Other (428) (136) -------- --------- Gross deferred tax assets (6,687) (4,516) -------- --------- $9,219 $11,801 ======== ========= F-15 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED): Actual tax expense differs from "expected" tax expense (computed by applying the Federal corporate rate of 35% for the years ended January 3, 1999, December 28, 1997, and December 29, 1996) as follows: (In Thousands) ---------------------------------------- For The Years Ended ---------------------------------------- January 3, December 28, December 29, 1999 1997 1996 ---- ---- ---- Computed "expected" tax expense $19,382 $20,369 $21,108 Increase (reduction) in income taxes resulting from: State and local income taxes, net of Federal income tax benefit 2,725 2,429 2,614 Tax exempt interest income (43) (59) (63) Other, net (517) (624) (743) --------- --------- --------- $21,547 $22,115 $22,916 ========= ========= ========= Deferred income taxes are provided for temporary differences between financial and tax reporting. These differences and the amount of the related deferred tax benefit are as follows: (In Thousands) ---------------------------------------------- For The Years Ended ---------------------------------------------- January 3, December 28, December 29, 1999 1997 1996 ---- ---- ---- Depreciation and amortization $(1,891) $(1,824) $(1,397) Accrued expenses (261) (624) 1,791 Other (430) 604 (836) -------- --------- --------- $(2,582) $(1,844) $ (442) ======== ========= ======== F-16 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PROPOSED MERGER: On January 19, 1999, the Company entered into a merger agreement for the merger of a company owned by members of the Sbarro family, the Company's principal shareholders, with and into the Company in which all outstanding Common Stock of the Company not owned by those shareholders are to be converted into the right to receive $28.85 in cash. The shares to be purchased comprise approximately 65.6% of the Company's outstanding shares of Common Stock. In addition, all outstanding stock options, including those held by those members of the Sbarro family, will be terminated (see Note 9). For each such option, the holder thereof will be paid the difference between $28.85 and the exercise price per share, multiplied by the total number of shares of Common Stock subject to such option. The merger agreement contains certain conditions to closing, including, among other things, (i) approval by a majority of the votes cast (excluding votes cast by the Sbarro Family, abstentions and broker non-votes) at a meeting of the Company's shareholders to be called to consider adoption of the merger agreement, (ii) receipt of financing for the transactions contemplated by the merger agreement, (iii) the continued suspension of dividends by the Company and (iv) the settlement of shareholder class action lawsuits that have been filed relating to the merger. Following the Company's announcement of the proposal by members of the Sbarro family for the merger, seven class action lawsuits were instituted by shareholders against the Company, those members of the Sbarro family who are directors of the Company and all or some of the other directors of the Company. While the complaints in each of the lawsuits vary, in general, they allege that the directors breached fiduciary duties, that the then proposed price of $27.50 to be paid to shareholders other than the Sbarro family was inadequate and that there were inadequate procedural protections for those shareholders. Although varying, the complaints seek, generally, a declaration of a breach of, or an order requiring the defendants to carry out, their fiduciary duties to the plaintiffs, damages in unspecified amounts alleged to be caused to the plaintiffs, other relief (including injunctive relief or rescission or rescissory damages if the transaction is consummated), and costs and disbursements, including a reasonable allowance for counsel fees and expenses. On January 19, 1999, counsel for all of the plaintiffs and counsel for all of the defendants entered into a Memorandum of Understanding pursuant to which an agreement in principle to settle all of the lawsuits was reached and the Sbarro Family agreed to an increase in the merger consideration to $28.85 per share. The Memorandum of Understanding states that plaintiffs' counsel intend to apply to the Court for an award of attorneys' fees and disbursements in an amount of no more than $2.1 million to be paid by the Company, which the defendants have agreed not to oppose. The defendants are also responsible for providing notice of the settlement to all Class members. The settlement would result in the complete discharge and bar of all claims against, past, present and future officers and directors of the Company and others associated with the merger with respect to matters and issues of any kind that have been or could have been asserted in these lawsuits. The settlement is subject to, among other things, (i) completion of a formal stipulation of settlement, (ii) certification of the lawsuits as a class action covering all record and beneficial owners of the Common Stock during the period beginning on November 25, 1998 through the effective date of the merger, (iii) court approval of the settlement and (iv) consummation of the merger. It is a condition to the Sbarro family's obligations under the merger agreement that holders of no more than 1,000,000 shares of Common Stock request exclusion from the settlement. In connection with the termination of negotiations for the initial proposal of the Company's acquisition of all shares of common stock not owned by such members of the Sbarro family, in fiscal 1998, the Company recorded a charge of $986,000 ($611,000 or $.03 basic and diluted earnings per share after tax). F-17 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES: COMMITMENTS: The Company conducts all of its operations in leased facilities. Most of the Company's restaurant leases provide for the payment of base rents plus real estate taxes, utilities, insurance, common area charges and certain other expenses, as well as contingent rents generally ranging from 8% to 10% of net restaurant sales in excess of stipulated amounts. Rental expense under operating leases, including common area charges, other expenses and additional amounts based on sales, are as follows: (In thousands) ------------------------------------------ For the Years Ended ------------------------------------------ January 3, December 28, December 29, 1999 1997 1996 ---- ---- ---- Minimum rentals $43,387 $40,365 $36,383 Common area charges 13,314 12,541 11,303 Contingent rentals 3,011 2,910 2,819 --------- --------- ------- $59,712 $55,816 $50,505 ========= ========= ======= Future minimum rental and other payments required under non-cancelable operating leases for Company-operated restaurants that were open on January 3, 1999 and the existing leased administrative and support function office (Note 8) are as follows (in thousands): Years ending: ------------ January 2, 2000 $65,075 December 31, 2000 63,472 December 30, 2001 60,409 December 29, 2002 56,000 December 28, 2003 51,180 Later years 134,673 ------- $430,809 ======== F-18 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED): The Company is the principal lessee under operating leases for certain franchised restaurants which are subleased to the franchisee. Franchisees pay rent and related expenses directly to the landlord. Future minimum rental payments required under these non-cancelable operating leases for franchised restaurants that were open as of January 3, 1999 are as follows (in thousands): Years ending: ------------ January 2, 2000 $1,352 December 31, 2000 1,088 December 30, 2001 954 December 29, 2002 626 December 28, 2003 475 Later years 727 -------- $5,222 ======== As of February 10, 1999, future minimum rental payments required under non-cancelable operating leases for restaurants which had not as yet opened as of January 3, 1999 are as follows (in thousands): Years ending: ------------ January 2, 2000 $1,537 December 31, 2000 2,023 December 30, 2001 2,026 December 29, 2002 1,931 December 28, 2003 2,053 Later years 10,923 -------- $20,493 ======== The Company is a party to contracts aggregating $3,159,000 with respect to the construction of restaurants. Payments of approximately $385,000 have been made on those contracts as of January 3, 1999. One of the joint ventures in which the Company is a partner has entered into a contract to purchase the land on which a restaurant is located, at the end of its five year lease on such property in 2002, for $950,000. The Company is a guarantor of its pro rata interest (up to $4,400,000) of a line of credit granted to one of the joint ventures in which the Company is a partner. F-19 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMMITMENTS AND CONTINGENCIES (CONTINUED): CONTINGENCIES: In December 1998, the Court approved, and Company completed, the settlement of an action entitled Kenneth Hoffman and Gloria Curtis, on behalf of themselves and all others similarly situated v. Sbarro, Inc. that was pending in the United States District Court for the Southern District of New York. The plaintiffs, former restaurant level management employees, alleged that the Company required general managers and co-managers to reimburse the Company for cash and certain other shortages sustained by the Company and thereby lost their status as managerial employees exempt from the overtime compensation provisions of the Fair Labor Standards Act. The settlement resulted in a one-time charge of $3,544,000 before tax or $2,197,000 ($.11 basic and diluted earnings per share after tax) in fiscal 1998. 8. TRANSACTIONS WITH RELATED PARTIES: In May 1986, the Company entered into a fifteen year sublease with a partnership owned by certain shareholders of the Company in Commack for its present administrative and support function offices. For 1998 and 1997 and for each of the remaining years of the lease, the rent expense is $337,000 per year. In 1996, the Company incurred rent expense for such building of $298,000. Management believes that such rents are comparable to the rents that would be charged by an unaffiliated third party. A member of the Board of Directors acts as a consultant to the Company for which he received $140,400 in 1998, $116,400 in 1997 and $106,100 in 1996. 9. STOCK OPTIONS: The Company's Board of Directors has adopted, and its shareholders have approved, a 1991 Stock Incentive Plan (the "1991 Plan"), which replaced the Company's 1985 Incentive Stock Option Plan, and a 1993 Non-Employee Director Stock Option Plan (the "1993 Plan"). Under the 1991 Plan, the Company may grant, until February 2001, incentive stock options and non-qualified stock options, alone or in tandem with stock appreciation rights ("SARS"), to employees and consultants of the Company and its subsidiaries. Options and SARS may not be granted at exercise prices of less than 100% of the fair market value of the Company's common stock on the date of grant. The Board of Directors and the Board's Committee administering the 1991 Plan are empowered to determine, within the limits of the 1991 Plan, the number of shares subject to each option and SAR, the exercise price, and the time period (which may not exceed ten years) and terms under which each may be exercised. The 1993 Plan provides for the automatic grant to each non-employee director of an option to purchase 3,750 shares of common stock following each annual shareholders' meeting. Each option has a ten year term and is exercisable in full commencing one year after grant at 100% of the fair market value of the Company's common stock on the date of grant. In 1998, 1997 and 1996, each of the five non-employee directors were granted options to purchase 3,750 shares at $ 24.06, $28.88 and $26.88 per share, respectively. In 1997, options to purchase an aggregate of 11,250 shares granted to a deceased director were exercised at prices ranging from $21.50 to $23.71. F-20 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK OPTIONS (CONTINUED): A summary of the status of the Company's option plans is presented in the table below:
1998 1997 1996 ------------------------- --------------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Options outstanding, beginning of period 1,638,339 $25.85 934,836 $25.57 717,712 $24.97 Granted 23,750 $24.22 777,750 $25.96 378,750 $25.55 Exercised (84,989) $25.23 (53,745) $22.78 (47,426) $18.24 Canceled or expired (16,668) $25.15 (20,502) $24.66 (114,200) $24.84 -------------------------- -------------------------- ----------------------- Options outstanding, end of period 1,560,432 $25.87 1,638,339 $25.85 934,836 $25.57 Options exercisable, end of period 617,515 $25.99 573,880 $26.05 534,214 $25.89
Of the options outstanding at January 3, 1999, options to purchase 78,182 shares had exercise prices ranging from $15.17 to $21.83 per share, with a weighted average exercise price of $21.36 per share and a weighted average remaining contractual life of 5.53 years, of which options to purchase 76,515 shares were exercisable, with a weighted average exercise price of $21.36 per share. The remaining options to purchase 1,482,250 shares had exercise prices ranging from $23.05 to $28.88 per share, with a weighted average exercise price of $26.11 per share and a weighted average remaining contractual life of 6.8 years, of which options to purchase 541,000 shares are exercisable, with a weighted average exercise price of $26.65 per share. At January 3, 1999, there were an aggregate of 2,054,730 shares available for option grants under the 1991 and 1993 Plans. The foregoing table includes options granted in 1997 under the 1991 Plan to the Company's Chairman of the Board and President to purchase 100,000 and 150,000 shares at $25.13 and $28.88 per share, respectively, and to the Company's Vice Chairman of the Board and Senior Executive Vice President to purchase 100,000 and 100,000 shares, respectively, at $25.13 per share; options granted in 1996 to the Company's Chairman of the Board and President and Senior Executive Vice President to purchase 100,000 and 50,000 shares, respectively, at $24.75 per share; and options granted in 1993 under the 1991 Plan to the Company's Chairman of the Board and President, Vice Chairman of the Board and Senior Executive Vice President and one non-employee director to purchase 120,000, 90,000, 75,000 and 37,500 shares, respectively, at $27.09 per share. Each such option was granted at an exercise price equal to the fair market value of the Company's common stock on the date of grant and is exercisable for 10 years from the date of grant. Such options remain unexercised. In addition to the foregoing, in 1990, shareholder approved options were granted to the Company's Chairman of the Board and President, Vice Chairman of the Board and Senior Executive Vice President to purchase 150,000, 75,000 and 75,000 shares, respectively, at $20.67 per share, the fair market value of the Company's common stock on the date of grant, for a period of 10 years from the date of grant. Such options remain unexercised. See Note 6 for the effect of the proposed acquisition of all shares not owned by the Sbarro family on the options outstanding as of January 3, 1999. F-21 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK OPTIONS (CONTINUED): The Company has adopted the pro forma disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined under SFAS No. 123, the Company's net income and earnings per share would have approximated the pro forma amounts below: (In thousands, except per share data) Net income: 1998 1997 1996 ---- ---- ---- As Reported 34,334 36,082 37,390 ====== ====== ====== Pro Forma 33,770 35,089 37,160 ====== ====== ====== Per share information: Net income per share (as reported): Basic $1.67 $1.77 $1.84 ===== ===== ===== Diluted $1.67 $1.76 $1.83 ===== ===== ===== Net income per share (pro forma): Basic $1.65 $1.72 $1.82 ===== ===== ===== Diluted $1.64 $1.71 $1.82 ===== ===== ===== The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: 1998 1997 1996 ---- ---- ---- Expected life (years) .5 1.5 4 Interest rate 5.15% 5.82% 6.53% Volatility 31% 21% 28% Dividend yield 0.00% 4.00% 3.50% Weighted average fair value of options granted $2.38 $2.79 $5.75 ===== ===== ===== 10. PROVISION FOR UNIT CLOSINGS: A provision for restaurant closings of $2,515,000 ($1,559,000 or $.08 basic and diluted earnings per share after tax) was established in fiscal 1998 relating to the closing of 20 restaurant locations. A provision for restaurant closings in the amount of $3,300,000 ($2,046,000 or $.10 basic and diluted earnings per share after tax) relating to the Company's investment in one of its joint ventures was established in 1997 for the closing of certain of the joint venture's units. 11. DIVIDENDS: In 1997 and 1996, the Company declared quarterly dividends of $.27 per share and $.23 per share, respectively, aggregating $1.08 per share and $.92 per share for the respective years. Dividends were thereafter suspended pending consideration by the Company of proposals by certain members of the Sbarro family for the Company's acquisition of all Common Stock not owned by them and consideration of other strategic alternatives. F-22 SBARRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands, except share data) --------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter (b) -------- ------- ------- ---------- Fiscal year 1998 - ---------------- Revenues $101,883 $78,844 $85,907 $108,598 Gross profit (a) 77,463 60,142 65,035 82,322 Net income (b) 7,138 5,107 7,081 15,008 ========== ======== ======== ====== Per share information: Net income per share: Basic $.35 $.25 $.34 $.73 ==== ==== ==== ==== Diluted $.35 $.25 $.34 $.73 ==== ==== ==== ==== Shares used in computation of net income per share: Basic 20,491,939 20,526,633 20,528,309 20,529,006 ----------- ---------- ---------- ---------- Diluted 20,665,846 20,605,477 20,530,983 20,539,488 ----------- ---------- ----------- ----------- Fiscal year 1997 Revenues $95,364 $75,301 $82,678 $96,092 Gross profit (a) 73,324 57,976 63,314 73,640 Net income (c) 7,885 6,733 9,206 12,258 ======== ======== ======== ======= Per share information: Net income per share: Basic $.39 $.33 $.45 $.60 ==== ==== ==== ==== Diluted (d) $.39 $.33 $.45 $.60 ==== ==== ==== ==== Shares used in computation of net income per share: Basic 20,401,538 20,428,711 20,440,596 20,444,678 ---------- ---------- ---------- ---------- Diluted 20,454,534 20,599,676 20,526,757 20,529,233 ---------- ---------- ---------- ----------
(a) Gross profit represents the difference between restaurant sales and the cost of food and paper products. (b) See Notes 1, 3, 6, 7 and 10 for information regarding unusual charges. (c) See Note 10. (d) The sum of the quarters does not equal the full year per share amounts included in the accompanying statement of income due to the effect of the weighted average number of shares outstanding during the fiscal year as compared to the quarters. F-23 INTENTIONALLY LEFT BLANK F-24 INTERIM FINANCIAL STATEMENTS (UNAUDITED) F-25 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
(In thousands) ---------------------------------------------- April 25, 1999 January 3, 1999 -------------- --------------- (unaudited) Current assets: Cash and cash equivalents $146,072 $150,472 Receivables: Franchisees 1,396 1,342 Other 2,325 2,185 ---------------- ---------------- 3,721 3,527 Inventories 2,885 3,122 Prepaid expenses 3,868 1,291 ---------------- ---------------- Total current assets 156,546 158,412 Property and equipment, net 138,732 138,126 Other assets 6,712 6,630 ----------------- ---------------- $301,990 $303,168 ================= ================
(continued) F-26 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands) ------------------------------------ April 25, 1999 January 3, 1999 -------------- --------------- (unaudited) Current liabilities: Accounts payable $5,272 $ 7,122 Accrued expenses 23,762 25,764 Income taxes 37 4,146 -------------- --------------- Total current liabilities 29,071 37,032 Deferred income taxes 9,043 9,219 Shareholders' equity: Preferred stock, $1 par value; authorized 1,000,000 shares; none issued - - Common stock, $.01 par value; authorized 40,000,000 shares; issued and outstanding 20,533,645 shares at April 25, 1999 and 20,531,643 shares at January 3, 1999 205 205 Additional paid-in capital 34,634 34,587 Retained earnings 229,037 222,125 ------------- --------------- 263,876 256,917 ------------- --------------- $301,990 $303,168 ============= ===============
See notes to unaudited consolidated financial statements F-27 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data) ----------------------------------------- For the sixteen weeks ended: ----------------------------------------- April 25, 1999 April 19, 1998 -------------- -------------- Revenues: Restaurant sales $100,354 $98,131 Franchise related income 2,506 2,306 Interest income 1,591 1,446 ------------ ------------- Total revenues 104,451 101,883 ------------ ------------- Costs and expenses: Cost of food and paper products 20,964 20,668 Restaurant operating expenses: Payroll and other employee benefits 28,103 26,551 Occupancy and other 31,941 29,892 Depreciation and amortization 6,700 6,670 General and administrative 6,791 5,964 Other income (1,197) (700) ------------ ------------- Total costs and expenses 93,302 89,045 ------------ ------------- Income before income taxes and cumulative effect of change in method of accounting for start-up costs 11,149 12,838 Income taxes 4,237 4,838 ------------ ------------- Income before cumulative effect of accounting change 6,912 7,960 Cumulative effect of change in method of accounting for start-up costs, less income tax benefit of $504 - (822) ------------- ------------- Net income $ 6,912 $ 7,138 ============= =============
(continued) F-28 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data) ---------------------------------------- For the sixteen weeks ended: ---------------------------------------- April 25, 1999 April 19, 1998 -------------- -------------- Per share information: Net income per share: Basic: Income before accounting change $.34 $.39 Accounting change - (.04) ------ ------ Net income $.34 $.35 ====== ====== Diluted: Income before accounting change $.34 $.39 Accounting change - (.04) ------ ------ Net income $.34 $.35 ====== ====== Shares used in computing net income per share: Basic 20,532,200 20,491,939 ---------- ---------- Diluted 20,574,522 20,665,846 ---------- ----------
See notes to unaudited consolidated financial statements F-29 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) ------------------------------------ For the sixteen weeks ended: ------------------------------------ April 25, 1999 April 19, 1998 -------------- -------------- Operating activities: Net income $6,912 $7,138 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect in change in method of accounting for start-up costs 822 Depreciation and amortization 6,967 6,670 Provision for deferred income taxes (176) (205) Changes in operating assets and liabilities: (Increase) decrease in receivables (194) 66 Decrease in inventories 237 243 Increase in prepaid expenses (2,577) (1,783) Increase in other assets (135) (523) Decrease in accounts payable and accrued expenses (3,852) (5,853) Decrease in income taxes payable (4,109) (4,345) ---------- ----------- Net cash provided by operating activities 3,073 2,230 ---------- ----------- Investing activities: Purchases of property and equipment (7,520) (9,360) ---------- ------------ Net cash used in investing activities (7,520) (9,360) ---------- ------------
(continued) F-30 SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
(In thousands) ---------------------------------------- For the sixteen weeks ended: ---------------------------------------- April 25, 1999 April 19, 1998 -------------- -------------- Financing activities: Proceeds from exercise of stock options 47 1,991 Cash dividends paid - (5,521) --------------- -------------- Net cash provided by (used in) financing activities 47 (3,530) --------------- -------------- Decrease in cash and cash equivalents (4,400) (10,660) Cash and cash equivalents at beginning of period 150,472 119,810 --------------- -------------- Cash and cash equivalents at end of period $146,072 $109,150 =============== ============== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $8,432 $9,353 ================ =============
See notes to unaudited consolidated financial statements F-31 SBARRO, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Basis of presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Regulation S-X related to interim period financial statements and, therefore, do not include all information and footnotes required by generally accepted accounting principles. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the consolidated financial position of the Company and its subsidiaries at April 25, 1999 and their consolidated results of operations and cash flows for the sixteen weeks ended April 25, 1999 and April 19, 1998 have been included. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year. Reference should be made to the annual financial statements, including footnotes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1999. 2. Proposed merger: On January 19, 1999, the Company entered into a merger agreement for the merger of a company owned by members of the Sbarro family, the Company's principal shareholders, with and into the Company in which all outstanding Common Stock of the Company not owned by those shareholders are to be converted into the right to receive $28.85 in cash. The shares to be purchased comprise approximately 65.6% of the Company's outstanding shares of Common Stock. In addition, all outstanding stock options, including those held by those members of the Sbarro family, will be terminated. For each such option, the holder thereof will be paid the difference between $28.85 and the exercise price per share, multiplied by the total number of shares of Common Stock subject to such option. The merger agreement contains certain conditions to closing, including, among other things, (i) approval by a majority of the votes cast (excluding votes cast by those members of the Sbarro family, abstentions and broker non-votes) in addition to two-thirds of all outstanding Common Stock at a meeting of the Company's shareholders to be called to consider adoption of the merger agreement, (ii) receipt of financing for the transactions contemplated by the merger agreement, (iii) the continued suspension of dividends by the Company and (iv) the settlement of shareholder class action lawsuits that have been filed relating to the merger. Following the Company's announcement of the proposal by members of the Sbarro family for the merger, seven class action lawsuits were instituted by shareholders against the Company, those members of the Sbarro family who are directors of the Company and all or some of the other directors of the Company. The proposed Class consists of all record and beneficial owners of the Company's Common Stock during the period beginning with the close of business on November 25, 1998 and ending on the effective date of the merger. While the complaints in each of the lawsuits vary, in general, they allege that the directors breached fiduciary duties, that the then proposed price of $27.50 to be paid to shareholders other than those members of the Sbarro family was inadequate and that there were inadequate F-32 SBARRO, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) procedural protections for public shareholders. Although varying, the complaints seek, generally, a declaration of a breach of, or an order requiring the defendants to carry out, their fiduciary duties to the plaintiffs, damages in unspecified amounts alleged to be caused to the plaintiffs, other relief (including injunctive relief or rescission or rescissory damages if the transaction is consummated), and costs and disbursements, including a reasonable allowance for counsel fees and expenses. On January 19, 1999, counsel for all of the plaintiffs and counsel for all of the defendants entered into a Memorandum of Understanding pursuant to which an agreement in principle to settle all of the lawsuits was reached and the Sbarro family agreed to an increase in the merger consideration to $28.85 per share. The Memorandum of Understanding states that plaintiffs' counsel intend to apply to the Court for an award of attorneys' fees and disbursements in an amount of no more than $2.1 million to be paid by the Company, which the defendants have agreed not to oppose. The defendants are also responsible for providing notice of the settlement to all Class members. The settlement would result in the complete discharge and bar of all claims against, past, present and future officers and directors of the Company and others associated with the merger with respect to matters and issues of any kind that have been or could have been asserted in these lawsuits. On April 7, 1999, a Stipulation of Settlement was entered into embodying the terms of the Memorandum of Understanding. The settlement is subject to, among other things, court approval of the settlement and consummation of the merger. It is a condition to the Sbarro family's obligations under the merger agreement that holders of no more than 1,000,000 shares of Common Stock request exclusion from the settlement. The Court has scheduled a hearing for June 29, 1999 to consider the settlement. 3. Cumulative effect of accounting change: In accordance with its early application provisions, the Company implemented Statement of Position 98-5 (SOP) the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants as of the beginning of its 1998 fiscal year. This SOP required companies that capitalize pre-opening and similar costs to write off all existing such costs, net of tax benefit, as a "cumulative effect of accounting change" and to expense all such costs as incurred in the future. 4. Earnings per share: The number of shares of common stock subject to stock options included in diluted earnings per share were 42,322 and 173,907 in the sixteen week periods ended April 25, 1999 and April 19, 1998, respectively. 5. Comprehensive income: The Company's operations did not give rise to any items includible in comprehensive income which were not already included in net income for either of the sixteen week periods ended April 25, 1999 and April 19, 1998. F-33 ANNEX I AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER AMONG SBARRO MERGER LLC, SBARRO, INC., Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro AND Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants Dated as of January 19, 1999 AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER TABLE OF CONTENTS SECTION Page PARTIES................................................................1 PREAMBLE...............................................................1 ARTICLE I THE MERGER 1.1 The Merger....................................................2 1.2 Certificate of Incorporation..................................2 1.3 By-Laws.......................................................2 1.4 Directors and Officers........................................2 1.5 Effective Time................................................2 ARTICLE II CONVERSION OF SHARES 2.1 Company Common Stock..........................................3 2.2 Mergeco Membership Interests..................................3 2.3 Exchange of Shares............................................3 2.4 Stock Option Plans............................................5 2.5 Withholding Rights............................................5 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY 3.1 Organization..................................................5 3.2 Capitalization................................................6 3.3 Authorization of this Agreement; Recommendation of Merger.....6 3.4 Governmental Filings; No Conflicts............................7 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MERGECO AND THE CONTINUING SHAREHOLDERS 4.1 Organization..................................................8 4.2 Membership Interests..........................................8 4.3 Authorization of this Agreement...............................8 4.4 Governmental Filings; No Violations...........................8 4.5 Financing Arrangements........................................9 ARTICLE V COVENANTS 5.1 Conduct of the Business of the Company........................9 5.2 Activities of Mergeco........................................10 5.3 Access to Information........................................10 5.4 Financing....................................................10 5.5 Shareholders' Meeting........................................10 5.6 Proxy Statement and Schedule 13E-3...........................11 5.7 Best Efforts.................................................12 5.8 Consents.....................................................12 5.9 Public Announcements.........................................12 5.10 Indemnification..............................................13 5.11 No Solicitation..............................................15 5.12 Transfer Taxes...............................................16 ARTICLE VI CLOSING CONDITIONS 6.1 Conditions to the Obligations of Each Party..................16 6.2 Conditions to the Obligations of Mergeco.....................17 6.3 Conditions to the Obligations of the Company.................18 ARTICLE VII CLOSING 7.1 Time and Place...............................................19 7.2 Filings at the Closing.......................................19 ARTICLE VIII TERMINATION AND ABANDONMENT 8.1 Termination..................................................20 8.2 Procedure and Effect of Termination..........................21 ARTICLE IX MISCELLANEOUS 9.1 Amendment; Modification and Approval of Special Committee....21 9.2 Waiver of Compliance; Consents...............................21 9.3 Non-Survival of Representations and Warranties...............22 9.4 Notices......................................................22 9.5 Assignment; Parties in Interest..............................23 9.6 Costs and Expenses...........................................23 9.7 Specific Performance.........................................24 9.8 Governing Law................................................24 9.9 Counterparts.................................................24 9.10 Interpretation...............................................25 9.11 Entire Agreement.............................................25 9.12 Severability.................................................25 9.13 Headings.....................................................25 SIGNATURES............................................................26 AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of January 19, 1999 , among Sbarro Merger LLC, a New York limited liability company ("Mergeco"), Sbarro, Inc., a New York corporation (the "Company"), and Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants (collectively the "Continuing Shareholders"). WHEREAS, the Continuing Shareholders have proposed to the Board of Directors of the Company that Mergeco merge with and into the Company (the "Merger"), with the holders of all of the outstanding shares of Common Stock, par value $.01 per share, of the Company (the "Common Stock") not currently owned by the Continuing Shareholders receiving a cash payment in exchange for their shares of Common Stock; WHEREAS, a Special Committee of the Board of Directors of the Company (the "Special Committee") has determined that the Merger is fair to, and in the best interests of, the Public Shareholders (as defined in Section 2.1(a)), and has recommended the approval and adoption of this Agreement to the Board of Directors of the Company; WHEREAS, the Board of Directors of the Company and the members of Mergeco have approved and adopted this Agreement and approved the Merger upon the terms and subject to the conditions set forth herein; WHEREAS, the Board of Directors of the Company believes it is in the best interests of the Company and its shareholders to consummate the Merger upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, Mergeco, the Company and the Continuing Shareholders entered into an Agreement and Plan of Merger, dated as of January 19, 1999, and now desire to amend such agreement in certain respects, and, as so amended, restate such agreement with the same effect as if executed on January 19, 1999; NOW, THEREFORE, in consideration of the representations, warranties and agreements herein contained, the parties hereto agree as follows: I-1 ARTICLE I THE MERGER 1.1 The Merger. (a) As promptly as practicable following the satisfaction or waiver of the conditions set forth in Article VI hereof, and in accordance with the provisions of this Agreement and the provisions of the New York Business Corporation Law (the "NYBCL") and the New York Limited Liability Company Law (the "NYLLCL"), the parties hereto shall cause Mergeco to be merged with and into the Company. The Company shall be the surviving corporation (hereinafter sometimes called the "Surviving Corporation") and shall continue its corporate existence under the laws of the State of New York. At the Effective Time (as hereinafter defined), the separate existence of Mergeco shall cease. (b) The Merger shall have the effects specified in Section 906 of the NYBCL and Section 1004 of the NYLLCL. From and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, immunities, powers and purposes of Mergeco and the Company and shall assume and become liable for all the liabilities, obligations and penalties of the Company and Mergeco. 1.2 Certificate of Incorporation. The Certificate of Incorporation of the Company, as amended and in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended in accordance with the provisions thereof and the NYBCL. 1.3 By-Laws. The By-Laws of the Company in effect immediately prior to the Effective Time shall be the By-Laws of the Surviving Corporation until thereafter amended, altered or repealed as provided therein and in the NYBCL. 1.4 Directors and Officers. The directors and officers of the Company immediately prior to the Effective Time shall be the directors and officers, respectively, of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and the By-Laws of the Surviving Corporation. 1.5 Effective Time. As soon as practicable following the Closing (as defined in Section 7.1 of this Agreement), and provided that this Agreement shall not have been terminated pursuant to Article VIII hereof, the Company and Mergeco will cause certificates of merger (the "Certificates of Merger"), together with any other documents required by law to effectuate the Merger, to be executed, verified and delivered for filing by the New York Department of State as provided in Section 904-a of the NYBCL and Section 1003 of the NYLLCL, to the extent required. The Merger shall become effective on the date on which the second of the two Certificates of Merger is filed by the New York Department of State or such other date as shall be specified in the Certificates of Merger. The date and time when the Merger shall become effective is herein referred to as the "Effective Time." I-2 ARTICLE II CONVERSION OF SHARES 2.1 Company Common Stock. (a) Each share of Common Stock issued and outstanding immediately prior to the Effective Time, except for (i) shares of Common Stock then owned of record by Mergeco or the Continuing Shareholders and (ii) shares of Common Stock held in the Company's treasury, if any, shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive $28.85 in cash, payable to the holder thereof, without interest thereon, upon surrender of the certificate representing such share of Common Stock (such cash amount is referred to herein as the "Merger Consideration"; the shares of Common Stock for which the Merger Consideration is to be paid are referred to herein as the "Public Shares"; and the holders thereof are referred to herein as the "Public Shareholders"). (b) Each share of Common Stock issued and outstanding immediately prior to the Effective Time that is then owned of record by Mergeco or the Continuing Shareholders shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled and retired and cease to exist, and no payment shall be made with respect thereto. (c) Each share of Common Stock issued and held in the Company's treasury immediately prior to the Effective Time, if any, shall, by virtue of the Merger, be canceled and retired and cease to exist, and no payment shall be made with respect thereto. (d) At the Effective Time, the Public Shareholders shall cease to have any rights as shareholders of the Company except the right to receive the Merger Consideration. 2.2 Mergeco Membership Interests. Each membership unit of Mergeco (the "Mergeco Membership Interests") issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into one share of Common Stock of the Surviving Corporation. The Common Stock issued pursuant to this Section 2.2 shall, immediately after the Effective Time, constitute the only issued or outstanding shares of capital stock of the Surviving Corporation. 2.3 Exchange of Shares. (a) As of or as soon as reasonably practicable following the Effective Time, the Surviving Corporation shall deposit in trust with a bank or trust company that has offices in New York City and is designated by the Surviving Corporation (the "Paying Agent"), cash in an aggregate amount equal to the product of (x) the number of Public Shares issued and outstanding immediately prior to the Effective Time and (y) the Merger Consideration (such amount being hereinafter referred to as the "Exchange Fund"). The Paying Agent shall, pursuant to irrevocable instructions, make the payments provided for in Section 2.1(a) of this Agreement out of the Exchange Fund. The Paying Agent shall invest the Exchange Fund, as the Surviving Corporation directs, in direct obligations of the United States of America, obligations for which the full faith and I-3 credit of the United States of America is pledged to provide for the payment of all principal and interest or commercial paper obligations receiving the highest rating from either Moody's Investors Service, Inc. or Standard & Poor's, a division of The McGraw Hill Companies, or a combination thereof, provided that, in any such case, no such instrument shall have a maturity exceeding three months. Any net profit resulting from, or interest or income produced by, such investments shall be payable to the Surviving Corporation. The Surviving Corporation shall replace any monies lost through any investment made pursuant to this Section 2.3(a). The Exchange Fund shall not be used for any other purpose except as provided in this Agreement. (b) Promptly after the Effective Time, the Surviving Corporation shall cause the Paying Agent to mail to each record holder (as of the Effective Time) of an outstanding certificate or certificates that immediately prior to the Effective Time represented Public Shares (the "Certificates") a form letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent) and instructions for use in effecting the surrender of the Certificates for payment therefor. Upon surrender to the Paying Agent of a Certificate, together with a properly completed and executed letter of transmittal, the holder of such Certificate shall be entitled to receive in exchange therefor cash in an amount equal to the product of the number of Public Shares represented by such Certificate and the Merger Consideration, less any applicable withholding tax, and such Certificate shall forthwith be canceled. In the event any Certificate shall have been lost or destroyed, the Paying Agent, subject to such other reasonable conditions as the Surviving Corporation may impose (including the posting of an indemnity bond or other surety in favor of the Surviving Corporation with respect to the Certificates alleged to be lost or destroyed), shall be authorized to accept an affidavit from the record holder of such Certificate in a form reasonably satisfactory to the Surviving Corporation. No interest shall be paid or accrued on the cash payable upon the surrender of the Certificates. If payment is to be made to a person other than the person in whose name the Certificate surrendered is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such payment shall pay any transfer or other tax required by reason of the payment to a person other than the registered holder of the Certificate surrendered or establish to the satisfaction of the Paying Agent and the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered in accordance with the provisions of this Section 2.3, each Certificate shall represent for all purposes only the right to receive the Merger Consideration in cash multiplied by the number of Public Shares evidenced by such Certificate, without any interest thereon. (c) After the Effective Time, there shall be no transfers on the stock transfer books of the Surviving Corporation of Public Shares that were outstanding immediately prior to the Effective Time. (d) Any portion of the Exchange Fund that remains unclaimed by the Public Shareholders of the Company for one year after the Effective Time (including any interest, dividends, earnings or distributions received with respect thereto) shall be repaid to the Surviving Corporation, upon demand. Any Public Shareholders who have not theretofore satisfied the provisions of Section 2.3(b) I-4 shall thereafter look only to the Surviving Corporation for payment of their claim for the Merger Consideration, without any interest thereon, but shall have no greater rights against the Surviving Corporation than may be accorded to general creditors of the Surviving Corporation under New York law. Notwithstanding the foregoing, neither the Paying Agent nor any party hereto shall be liable to any holder of Certificates formerly representing shares of Common Stock for any amount paid with respect thereof to a public official pursuant to any applicable abandoned property, escheat or similar law. 2.4 Stock Option Plans. At the Effective Time, all outstanding Stock Options (as defined herein), including Stock Options held by the Continuing Shareholders, shall be terminated and, promptly following the Effective Time, the Surviving Corporation shall, to the extent permitted by the applicable Stock Option Plan (as defined herein) or agreement between the Company and the optionee related to the applicable Stock Option, subject to Section 2.5, pay to the holder of each such Stock Option, in cash and as full settlement for such Stock Option, whether or not then exercisable, the Stock Option Buyout Amount (as defined herein) for the shares of Common Stock subject to such Stock Option. As used herein: (i) with respect to any Stock Option, the "Stock Option Buyout Amount" shall mean (A) the excess, if any, of the Merger Consideration over the exercise price per share of such Stock Option, (B) multiplied by the total number of shares of Common Stock subject to such Stock Option; (ii) the "1991 Plan" shall mean the Company's 1991 Stock Incentive Plan, as amended to date; (iii) the "1993 Plan" shall mean the Company's 1993 Non-Employee Director Stock Option Plan, as amended to date (the 1991 Plan and the 1993 Plan being collectively referred to herein as the "Stock Option Plans"); and (iv) "Stock Options" shall mean all options to purchase shares of Common Stock under the Company's 1985 Incentive Stock Option Plan, the 1991 Plan and the 1993 Plan and options held by any of the Continuing Shareholders that were not granted under the Stock Option Plans. 2.5 Withholding Rights. The Surviving Corporation and the Paying Agent shall be entitled to deduct and withhold from the amounts payable (including the Merger Consideration) pursuant to this Agreement to any Public Shareholder or holder of Stock Options such amounts as Mergeco, the Surviving Corporation or the Paying Agent is required to deduct and withhold with respect to the making of such payment under applicable tax law. To the extent that amounts are so deducted and withheld by Mergeco, the Surviving Corporation or the Paying Agent, such amounts shall be treated for all purposes of this Agreement as having been paid to the relevant Public Shareholder or holder of Stock Options. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Mergeco as follows: 3.1 Organization. The Company is a corporation validly existing and in good standing under the laws of the State of New York and has all requisite power (corporate or otherwise) and I-5 authority to own, lease and operate its properties and to conduct its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not, individually or in the aggregate, have a material adverse effect on the business, condition (financial or otherwise), properties, assets or prospects of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). The Company was formed under the name Sbarro Licensing Inc. 3.2 Capitalization. The authorized capital stock of the Company consists of (i) 40,000,000 shares of Common Stock, of which, on January 15, 1999, there were 20,531,977 shares issued and outstanding, which number of outstanding shares may change by virtue of the exercise of outstanding Stock Options, and (ii) 1,000,000 shares of preferred stock, par value $1.00 per share, of which there are no shares issued and outstanding. Except for the Stock Option Plans, there are not now any existing stock option or similar plans and, except for currently outstanding Stock Options, there are not now any outstanding options, warrants, calls, subscriptions, preemptive rights or other rights or other agreements or commitments whatsoever obligating the Company to issue, transfer, deliver or sell, or cause to be issued, transferred, delivered or sold, any shares of capital stock or equity interests, as the case may be, of the Company or obligating the Company to grant, extend or enter into any such agreement or commitment. 3.3 Authorization of this Agreement; Recommendation of Merger. (a) The Company has all requisite corporate power and authority to execute and deliver this Agreement and, subject to approval by the shareholders of the Company, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized and approved by the Company's Board of Directors and, except for the adoption of this Agreement by the shareholders of the Company, no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Company and, subject only to adoption hereof by its shareholders (and assuming the due authorization, execution and delivery hereof by Mergeco and the Continuing Shareholders), this Agreement constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. (b) The Special Committee has received the opinion of Prudential Securities Incorporated ("Prudential Securities") dated January 19, 1999 that, as of the date of such opinion, the Merger Consideration to be received by the Public Shareholders pursuant to this Agreement is fair, from a financial point of view, to the Public Shareholders. (c) The Special Committee (at a meeting duly called and held at which a quorum was present) has determined that the Merger is fair to, and in the best interests of, the Public Shareholders, and has recommended the adoption of this Agreement to the Board of Directors of the Company, subject to the right of the Special Committee to withdraw, modify or amend such recommendation if the Special Committee determines, in good faith after consultation with legal counsel, that failure I-6 to take such action would be reasonably likely to result in a breach of its fiduciary duties to the Company's shareholders under applicable law. (d) The Board of Directors of the Company (at a meeting duly called and held at which a quorum was present) has determined that the Merger is fair to, and in the best interests of, the shareholders of the Company, has adopted this Agreement and has recommended the adoption of this Agreement by the shareholders of the Company, subject to the right of the Board of Directors of the Company to withdraw, modify or amend such recommendation to the extent that the Board of Directors of the Company determines, in good faith after consultation with legal counsel, that failure to take such action would be reasonably likely to result in a breach of its fiduciary duties to the Company's shareholders under applicable law. 3.4 Governmental Filings; No Conflicts. Except for (i) filings required under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), (ii) the filing and recordation of appropriate merger documents as required by the NYBCL and, if applicable, the laws of other states in which the Company is qualified to do business, (iii) filings, if any, under securities or blue sky laws or takeover statutes, (iv) filings to fulfill the delisting requirements of the New York Stock Exchange, (v) regulatory filings relating to the operation of the Company's business, (vi) filings in connection with any applicable transfer or other taxes in any applicable jurisdiction and (vii) filings under applicable alcohol and beverage laws and regulations, no filing with, and no permit, authorization, consent or approval of, any public body or authority is necessary for the consummation by the Company of the transactions contemplated by this Agreement, the failure to make or obtain which would have, individually or in the aggregate, a Material Adverse Effect or a material adverse effect on the ability of the Company to consummate the transactions contemplated hereby. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby nor compliance by the Company with any of the provisions hereof will (x) conflict with or result in any violation of any provision of the Certificate of Incorporation of the Company or By-Laws of the Company, as in effect on the date hereof, or (y) assuming the truth of the representations and warranties of Mergeco contained herein and its compliance with all agreements contained herein and assuming the due making of all filings and obtaining all permits, authorizations, consents and approvals referred to in the preceding sentence, violate any statute, rule, regulation, order, injunction, writ or decree of any public body or authority by which the Company or any of its assets or properties is bound, excluding from the foregoing clause (y) conflicts, violations, breaches or defaults which, either individually or in the aggregate, would not have a Material Adverse Effect or a material adverse effect on the Company's ability to consummate the transactions contemplated hereby. I-7 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MERGECO AND THE CONTINUING SHAREHOLDERS Mergeco and the Continuing Shareholders, jointly and severally, represent and warrant to the Company as follows: 4.1 Organization. Mergeco is a limited liability company duly organized, validly existing and in good standing under the laws of the State of New York and has all requisite power and authority to consummate the transactions contemplated hereby. Mergeco was formed solely for the purpose of engaging in the transactions contemplated by this Agreement. As of the date hereof and the Effective Time, except for obligations or liabilities incurred in connection with its organization and the transactions contemplated by this Agreement and, except for this Agreement, its Operating Agreement and any other agreements or arrangements contemplated by this Agreement or in furtherance of the transactions contemplated hereby, Mergeco has not and will not have incurred, directly or indirectly, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any person whatsoever. 4.2 Membership Interests. All of the outstanding Mergeco Membership Interests are owned by the Continuing Shareholders. There are not now, and, at the Effective Time there will not be, any other outstanding membership interests or rights or other agreements or commitments whatsoever obligating Mergeco or any of its subsidiaries, if any, to issue, transfer, deliver or sell, or cause to be issued, transferred, delivered or sold, to any other person any additional membership interests of Mergeco, or obligating Mergeco to grant, extend or enter into any such agreement or commitment. 4.3 Authorization of this Agreement. Mergeco and the Continuing Shareholders have all requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized and approved by the holders of all the membership interests of Mergeco, and no other proceedings on the part of Mergeco are necessary to authorize this Agreement or consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Mergeco and the Continuing Shareholders and adopted by the members of Mergeco, and (assuming the due authorization, execution and delivery hereof by the Company) constitutes a valid and binding agreement of Mergeco and the Continuing Shareholders. 4.4 Governmental Filings; No Violations. Except for (i) filings required by the applicable requirements of the Exchange Act, (ii) the filing and recordation of appropriate merger documents as required by the NYLLCL, (iii) filings, if any, under the securities or blue sky laws or takeover statutes, (iv) filings in connection with any applicable transfer or other taxes in any applicable jurisdiction and (v) filings under applicable alcohol and beverage laws and regulations, no filing with, and no permit, authorization, consent or approval of, any public body or authority is necessary for I-8 the consummation by Mergeco of the transactions contemplated by this Agreement, the failure to make or obtain which is reasonably likely to impair the ability of Mergeco to perform its obligations hereunder or to consummate the transactions contemplated hereby. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby nor compliance by Mergeco with any of the provisions hereof will (x) conflict with or result in any violation of any provision of the articles of organization or operating agreement of Mergeco, (y) result in a violation or breach of, or constitute a default (or give rise to any right of termination, cancellation or acceleration) under, any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which Mergeco is a party, or by which it or any of its properties or assets is bound or (z) assuming the truth of the representations and warranties of the Company hereunder and its compliance with all agreements contained herein and assuming the due making of all filings or obtaining of all permits, authorizations, consents and approvals referred to in the preceding sentence, violate any statute, rule, regulation, order, injunction, writ or decree of any public body or authority by which Mergeco or any of its properties or assets is bound, excluding from the foregoing clauses (y) and (z) conflicts, violations, breaches or defaults which, either individually or in the aggregate, are not reasonably likely to impair materially the ability of Mergeco to perform its obligations hereunder or to consummate the transactions contemplated hereby. 4.5 Financing Arrangements. Mergeco and the Continuing Shareholders have received a "highly confident" letter (the "Debt Financing Letter") dated as of January 19, 1999 from Bear, Stearns & Co. Inc. ("Bear Stearns"), a copy of which has heretofore been delivered to the Special Committee, relating to approximately $300 million of debt financing (the "Debt Financing"), which Debt Financing Letter is currently in effect. It is contemplated that the Debt Financing, together with the Company's cash and marketable securities immediately prior to the Effective Time (collectively with the Debt Financing, the "Financing"), will be sufficient to enable the Surviving Corporation to pay the Merger Consideration to all Public Shareholders, make any payments contemplated by Section 2.4 and otherwise to consummate the transactions contemplated hereby and to fund all costs and expenses of the Company and Mergeco incurred in connection with the Merger and the transactions contemplated hereby. The revolving credit facility, or the excess cash, referred to in the Debt Financing Letter is designed to fund the Surviving Corporation's ongoing working capital needs. ARTICLE V COVENANTS 5.1 Conduct of the Business of the Company. During the period from the date of this Agreement to the Effective Time, neither the Company nor any of its subsidiaries will (i) carry on their respective businesses other than in the usual, regular and ordinary course of business, consistent with past practice; (ii) issue any options to purchase shares of Common Stock or other capital stock or issue any shares of Common Stock (other than pursuant to the exercise of currently outstanding Stock Options) or other capital stock; or (iii) declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or equity interest, as the case may be, or repurchase or agree to repurchase any shares of its I-9 capital stock, or agree to do any of the foregoing; provided, however, that (x) any of the Company's wholly-owned direct or indirect subsidiaries may declare, set aside or pay any dividend or other distribution with respect to their capital stock, and (y) any other subsidiary of the Company may make a distribution to the Company or other owners of such subsidiary if and to the extent such subsidiary is required to do so by contract as in effect on the date hereof. 5.2 Activities of Mergeco. From the date of this Agreement to the Effective Time, Mergeco will not conduct any business or engage in any activities of any nature other than activities in connection with this Agreement or the transactions contemplated hereby. 5.3 Access to Information. During the period from the date of this Agreement to the Effective Time, during normal business hours, upon reasonable notice and in such a manner as will not unreasonably interfere with the conduct of the business of the Company, the Company will (i) give Mergeco and its authorized representatives, including representatives and advisors of persons proposing to provide the Debt Financing, reasonable access to all stores, offices and other facilities, and to all books and records, of the Company and its subsidiaries, (ii) permit Mergeco and its authorized representatives to make such inspections as it may reasonably require and (iii) cause its officers and those of its subsidiaries to furnish Mergeco with a copy of each report, schedule and other document filed or received by it during such period pursuant to the requirements of federal and state securities laws and such financial and operating data and other information with respect to the business and properties of the Company and its subsidiaries as Mergeco may from time to time reasonably request. Mergeco shall take reasonable steps to insure that any confidential information provided to it or its representatives and advisors remains confidential and is used for no purpose other than the transactions contemplated hereby. 5.4 Financing. Mergeco and the Continuing Shareholders shall use their best efforts to obtain the Debt Financing on terms and conditions no less favorable to the Company than those described in Section 6.2(g). The Company shall cooperate with, and use its best efforts to assist, Mergeco in obtaining the Financing. 5.5 Shareholders' Meeting. (a) As soon as practicable, the Company, acting through its Board of Directors, shall, in accordance with applicable law, take all steps necessary to duly call, give notice of, convene and hold a special or annual meeting of its shareholders (as same may be adjourned or postponed from time to time, the "Shareholders' Meeting") for the purpose of adopting this Agreement. The notice of such meeting shall contain the information required to be included therein pursuant to the NYBCL. (b) The Continuing Shareholders agree (i) to vote at the Shareholders' Meeting all 7,064,328 shares of outstanding Common Stock owned of record by them as of the date of this Agreement (the "Continuing Shareholder Shares") for adoption of this Agreement but only if at least a majority of the votes cast at the Shareholders' Meeting (excluding votes cast by the holders of the Continuing Shareholder Shares, abstentions and broker non-votes) are cast in favor of adoption of this Agreement, (ii) not to grant a proxy to vote any Continuing Shareholder Shares other than to I-10 another Continuing Shareholder or to persons identified in a proxy card distributed on behalf of the Company's Board of Directors to vote such Continuing Shareholder Shares at the Shareholders' Meeting in the manner provided in clause (i), and (iii) not to sell, transfer or otherwise dispose of any Continuing Shareholder Shares (other than transfers of Continuing Shareholder Shares to Mergeco or any family members of Mario Sbarro, Anthony Sbarro or Joseph Sbarro or trusts for the benefit of such Continuing Shareholders or such family members), which shares may be so transferred only if the transferee agrees in writing to be bound by the terms of the agreements contained in this Section 5.5(b). In the event of any transfer of Continuing Shareholder Shares after the date hereof, such shares shall remain Continuing Shareholder Shares and be deemed to be owned of record by the Continuing Shareholders for purposes of Article II of this Agreement and this Section 5.5(b). 5.6 Proxy Statement and Schedule 13E-3. (a) The Company will, as soon as practicable, prepare and file with the Securities and Exchange Commission (the "Commission") a proxy statement and a form of proxy, in connection with the vote of the Company's shareholders with respect to the Merger (such proxy statement, together with any amendments thereof or supplements thereto, in each case in the form or forms mailed to the Company's shareholders, being the "Proxy Statement"). The Company, Mergeco and the Continuing Shareholders shall together prepare and file a Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3") under the Exchange Act. Each of Mergeco, the Company and the Continuing Shareholders shall furnish all information required to be included about such person (as defined in Section 9.10) in the Proxy Statement and the Schedule 13E-3 and, after consultation with each other, shall respond promptly to any comments made by the Commission with respect to the Proxy Statement and any preliminary version thereof and the Schedule 13E-3. The Company shall cause the Proxy Statement to be mailed to its shareholders at the earliest practicable time. The Proxy Statement shall include the recommendation of the Company's Board of Directors to the shareholders of the Company (and reflect that the Special Committee has made a similar recommendation to the Company's Board of Directors), subject to the fiduciary duties under applicable law of such directors (including the directors constituting the Special Committee), as determined by such directors in good faith after consultation with counsel, in favor of the adoption of this Agreement. The Company shall use its best efforts to obtain the necessary adoption of this Agreement by its shareholders. Notwithstanding anything to the contrary in this Agreement, if the Board of Directors of the Company or the Special Committee determines, in good faith after consultation with counsel that, in the exercise of its respective fiduciary duties, under applicable law it is required to withdraw, modify or amend its recommendation in favor of the Merger, such withdrawal, modification or amendment shall not constitute a breach of this Agreement. (b) The information supplied by the Company for inclusion in the Proxy Statement or the Schedule 13E-3 shall not, at the time the Proxy Statement is mailed, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or, at the time of the Shareholders' Meeting, as then amended or supplemented, omit to state any material fact necessary to correct any statement originally supplied by the Company for inclusion in the Proxy Statement or the Schedule 13E-3 which has become false or misleading. If, at any time prior to the Effective Time, any event relating to the Company or any of its affiliates, or I-11 relating to their respective officers, directors or shareholders, should be discovered which should be set forth in an amendment of, or a supplement to, such Proxy Statement or Schedule 13E-3, the Company shall promptly so inform Mergeco and will furnish all necessary information to Mergeco relating to such event. All documents that the Company is responsible for filing with the Commission in connection with the transactions contemplated by this Agreement shall comply in all material respects, both as to form and otherwise, with the Exchange Act. (c) The information supplied or to be supplied by Mergeco and the Continuing Shareholders for inclusion in the Proxy Statement or the Schedule 13E-3 shall not, at the time the Proxy Statement is mailed, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or, at the time of the Shareholders' Meeting, as then amended or supplemented, omit to state any material fact necessary to correct any statement originally supplied by Mergeco and the Continuing Shareholders for inclusion in the Proxy Statement or the Schedule 13E-3 which has become false or misleading. If, at any time prior to the Effective Time, any event relating to Mergeco or any of its affiliates, or relating to the respective officers, directors or shareholders of Mergeco or its affiliates, as the case may be, should be discovered which should be set forth in an amendment of, or a supplement to, such Proxy Statement or Schedule 13E-3, Mergeco shall promptly so inform the Company and will furnish all necessary information to the Company relating to such event. All documents that Mergeco is responsible for filing with the Commission in connection with the transactions contemplated by this Agreement shall comply in all material respects, both as to form and otherwise, with the Exchange Act. 5.7 Best Efforts. Subject to the terms and conditions herein provided and the fiduciary duties under applicable law of the directors of the Company, including directors constituting the Special Committee, as determined by such directors in good faith after consultation with counsel, each of the parties hereto agrees to use its best efforts consistent with applicable legal requirements to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary or proper and advisable (including, but not limited to, executing any and all additional documents) under applicable laws and regulations to ensure that the conditions set forth in Article VI hereof are satisfied and to consummate and make effective, in a commercially reasonable manner, the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, the Continuing Shareholders shall use their best efforts to cause Mergeco to perform all of its obligations under this Agreement. 5.8 Consents. Mergeco and the Company each shall use their best efforts to obtain all material consents of third parties and governmental authorities, and to make all governmental filings, necessary for the consummation of the transactions contemplated by this Agreement. 5.9 Public Announcements. Mergeco and the Company will consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger, this Agreement and the transactions contemplated hereby, and shall not issue any such press I-12 release or make any such public statement prior to such consultation, except as may be required by law or in accordance with the Company's obligations incurred pursuant to its listing agreement with the New York Stock Exchange. 5.10 Indemnification. (a) Until and for a period of six years after the Effective Time, the provisions of the Certificate of Incorporation of the Company limiting the personal liability of directors for damages and the indemnification provisions of the Certificate of Incorporation and Bylaws of the Company as they relate to those who have served as directors or officers of the Company at any time through the Effective Time shall not be amended, repealed or otherwise modified in any manner that would make any of such provisions less favorable to the directors or officers of the Company or the Surviving Corporation than those that pertain to directors and officers on the date hereof. Until and for a period of six years after the Effective Time (provided that if any claim or claims are asserted or made under this Section 5.10 within such six-year period, all rights to indemnification in respect of each such claim shall continue until final disposition of such claim), the Surviving Corporation shall, (i) indemnify, defend and hold harmless the present and former officers and directors of the Company and its subsidiaries, Mergeco and the members of Mergeco (collectively, the "Indemnified Parties"), from and against, and pay or reimburse the Indemnified Parties for, all losses, obligations, expenses, claims, damages or liabilities (whether or not resulting from third-party claims and including interest, penalties, out-of-pocket expenses and attorneys' fees incurred in the investigation or defense of any of the same or in asserting any of their rights hereunder) resulting from or arising out of actions or omissions of such Indemnified Parties occurring on or prior to the Effective Time (including, without limitation, the transactions contemplated by this Agreement) to the fullest extent permitted or required, as the case may be, under (A) applicable law, (B) the Certificate of Incorporation or By-laws of the Company or the articles of organization or operating agreement of Mergeco in effect on the date of this Agreement, including, without limitation, provisions relating to advances of expenses incurred in the defense of any action or suit, (C) any indemnification agreement between the Indemnified Party and the Company, or (D) resolutions adopted by the shareholders or directors of the Company or the members of Mergeco; and (ii) advance to any Indemnified Parties expenses incurred in defending any action or suit with respect to such matters upon receipt of an undertaking (which need not be secured) by or on behalf of such Indemnified Party to repay such amount as, and to the extent, it is not entitled to be indemnified, in each case to the fullest extent such Indemnified Party is entitled to indemnification or advancement of expenses under the Company's Certificate of Incorporation, By-laws or indemnification agreements with its officers and directors or Mergeco's operating agreement in effect on the date hereof and subject to the terms of such Certificate of Incorporation, By-laws, indemnification agreements or operating agreement; provided, however, that (i) no indemnification shall be made to or on behalf of Mergeco or a member of Mergeco in his or its individual capacity or in his or its capacity as a member of Mergeco which arises as a result of the transactions contemplated herein if a judgment or other final adjudication adverse to Mergeco or such member of Mergeco, as the case may be, establishes that its or his acts constituted a breach of (x) its or his fiduciary duties to the Company or the shareholders of the Company, or (y) any of Mergeco's or such member's representations, warranties or obligations hereunder which caused the Company to I-13 terminate this Agreement; and (ii) nothing herein shall be construed as adversely affecting any such member's entitlement to indemnification from the Company as an officer or director of the Company. (b) The Surviving Corporation shall use its best efforts to maintain in effect for one year after the Effective Time one or more policies of directors' and officers' liability insurance covering (i) reimbursement of the Company for any obligation it incurs as a result of indemnification of directors and officers (the "Corporate Reimbursement Feature") and (ii) also providing insurance for directors and officers individually in cases where the Corporate Reimbursement Feature is not applicable, including in the event of the insolvency of the Company (the "Individual Feature"), with an aggregate limit of liability of not less than $5.0 million for the policy period for all such policies; provided, however, that the Surviving Corporation shall not be required to pay a premium therefor in excess of $100,000, but, if such premium would exceed such amount, the Surviving Corporation shall purchase as much coverage as possible for such amount. Such policy shall be on a "claims made" basis and shall have a retention amount of not more than $250,000 and no co-insurance with respect to the Corporate Reimbursement Feature, and retention and co-insurance amounts not greater than the minimum amounts required by New York state law with respect to the Individual Feature. The policies will cover and relate to any individual who is, becomes or was a director or officer of the Company. Such policies may be subject to additional customary conditions and exclusions, including an exclusion for any lawsuits pending at the time such policy is written or relating to the Merger. (c) Any Indemnified Party wishing to claim indemnification under Section 5.10(a) shall provide notice to the Surviving Corporation promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and the Indemnified Party shall permit the Surviving Corporation (at its expense) to assume the defense of any claim or any litigation resulting therefrom; provided, however, that (i) counsel for the Surviving Corporation, who shall conduct the defense of such claim or litigation, shall be reasonably satisfactory to the Indemnified Party and the Indemnified Party may participate in such defense at such Indemnified Party's expense, and (ii) the omission by or delay of any Indemnified Party to give notice as provided herein shall not relieve the Surviving Corporation of its indemnification obligation under this Agreement, except to the extent that such omission or delay results in a failure of actual notice to the Surviving Corporation or the Surviving Corporation is materially prejudiced as a result thereof. In the event that the Surviving Corporation does not accept the defense of any matter as above provided, or counsel for such Indemnified Party advises that there are issues that raise conflicts of interest between the Surviving Corporation and the Indemnified Party, the Indemnified Party may retain counsel satisfactory to it, and the Surviving Corporation shall pay all reasonable fees and expenses of such counsel for the Indemnified Party promptly as statements therefor are received; provided, however, that the Surviving Corporation shall not be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld); and provided, further, that the Surviving Corporation shall not be responsible for the fees and expenses of more than one counsel for all of the Indemnified Parties, unless such Indemnified Party concludes (based upon the written advice of counsel to such Indemnified Party) that there may be legal defenses available to such Indemnified Party that are different from or additional to those available to any other Indemnified Party, in which event the Indemnified Party making such conclusion shall be entitled to select separate counsel to I-14 assert such legal defenses and to otherwise participate in the defense of the matter, and the Surviving Corporation shall be liable to the Indemnified Party under this Section 5.10 for any such legal or other expenses incurred by the Indemnified Party in connection with such defense. In any event, the Surviving Corporation and the Indemnified Parties shall cooperate in the defense of any action or claim. The Surviving Corporation shall not, in the defense of any such claim or litigation, except with the consent of the Indemnified Party, consent to entry of any judgment or enter into any settlement that provides for injunctive or other nonmonetary relief affecting the Indemnified Party or that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability with respect to such claim or litigation. (d) This Section 5.10 is intended for the benefit of, and to grant third party rights to, persons entitled to indemnification under this Section 5.10 and/or the benefits of Article Seventh of the Certificate of Incorporation of the Company as in effect on the date hereof, whether or not parties to this Agreement, and each of such persons shall be entitled to enforce the covenants contained in this Section 5.10. (e) If the Surviving Corporation or any of its respective successors or assigns (i) reorganizes or consolidates with or merges into any other person and is not the resulting, continuing or surviving corporation or entity of such reorganization, consolidation or merger, or (ii) liquidates, dissolves or transfers all or substantially all of its properties and assets to any person or persons, then, and in such case, proper provision will be made so that the respective successors and assigns of the Surviving Corporation assume all of the obligations of the Surviving Corporation referred to in this Section 5.10. 5.11 No Solicitation. (a) The Company and its subsidiaries shall not, and shall not authorize or permit any of their officers, directors (including but not limited to directors who are members of the Special Committee), agents, representatives, advisors or affiliates (collectively, for the purposes of this Section 5.11, "Representatives") to, in each case whether or not in writing and whether or not communicated to the shareholders of the Company generally, (i) take any action to solicit, initiate or encourage any Transaction Proposal (as defined herein), or (ii) enter into negotiations with, or furnish information to, any other party with respect to any Transaction Proposal; provided, however, that the Company and the Representatives shall not be prohibited from taking any action described in clause (ii) above to the extent such action is taken by, or upon the authority of, the Board of Directors of the Company if, in the good faith judgment of the Board of Directors, (x) such Transaction Proposal is (after consultation with a financial advisor of a nationally recognized reputation) (A) more favorable to the Company's shareholders than the Merger, (B) achievable, and (C) supported by creditable financing, which may include a "highly confident" letter from a nationally recognized investment banking firm or nationally recognized lending institution, and (y) after consultation with counsel, failure to take such action would breach its fiduciary duties to the Company's shareholders under applicable law. For the purposes of this Agreement, "Transaction Proposal" means any offer or proposal for, or any indication of interest in, a merger or other business combination involving the Company or any subsidiary of the Company or the acquisition of any equity I-15 interest in, or the sale of a substantial portion of the assets of, the Company or any such subsidiary, except for the transactions contemplated hereby. (b) The Company shall promptly provide Mergeco with a summary of the material terms of any Transaction Proposal and of any negotiations or communications between the Company or its subsidiaries or any of their respective Representatives concerning any Transaction Proposal. (c) The Company shall give Mergeco not less than three business days' written notice before providing any confidential information to any person (other than Mergeco, the prospective sources of the Debt Financing and their respective representatives) concerning the business, properties or prospects of the Company and/or its subsidiaries. (d) Nothing contained in this Agreement shall prohibit the Company from making a statement to its shareholders that is required by Rule 14e-2(a) promulgated under the Exchange Act or from making any other disclosure to its shareholders if, in the good faith judgment of the Board of Directors, after consultation with counsel, failure to make such a statement would breach its fiduciary duties to the Company's shareholders under applicable law or would otherwise violate the Exchange Act, other applicable law or stock exchange regulation. 5.12 Transfer Taxes. Except to the extent otherwise contemplated in Section 2.3, the Surviving Corporation shall pay any transfer taxes (including any interest and penalties thereon and additions thereto) payable in connection with the Merger and shall be responsible for the preparation and filing of any required tax returns, declarations, reports, schedules, terms and information returns with respect to such transfer taxes. ARTICLE VI CLOSING CONDITIONS 6.1 Conditions to the Obligations of Each Party. The respective obligations of each party hereto to effect the Merger shall be subject to the satisfaction or waiver, at or prior to the Effective Time, of the following conditions: (a) the proposal to adopt this Agreement at the Shareholders' Meeting shall have been approved and adopted by the affirmative vote of at least two-thirds of the votes of all outstanding shares of Common Stock entitled to vote thereon in accordance with the NYBCL; (b) the proposal to adopt this Agreement shall have been approved and adopted by the affirmative vote of at least a majority of the votes cast at the Shareholders' Meeting excluding (i) votes cast by the holders of the Continuing Shareholder Shares, (ii) abstentions and (iii) broker non- votes; (c) there shall not have occurred (i) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States or (ii) a commencement of a war, armed hostilities or other international or national calamity, directly involving the United States, that I-16 has a material adverse effect on the general economic conditions in the United States such as to make it, in the judgment of a party hereto, inadvisable or impractical to proceed with the Merger or the transactions contemplated hereby or by the Debt Financing; and (d) other than the filing of the Certificates of Merger as contemplated in Section 1.5, each of the Company and Mergeco shall have obtained such consents from third parties and approvals from government instrumentalities as shall be required for the consummation of the transactions contemplated hereby, except for such consents the failure to obtain which would not have a Material Adverse Effect. 6.2 Conditions to the Obligations of Mergeco. The obligation of Mergeco pursuant to this Agreement to consummate the Merger is also subject to the satisfaction or waiver, at the Closing, of the following additional conditions: (a) the representations and warranties of the Company contained herein shall be true and correct in all respects (in the case of any representation or warranty containing any materiality qualification) or in all material respects (in the case of any representation or warranty without any materiality qualification) as of the date of this Agreement and as of the Closing with the same effect as though all such representations and warranties had been made as of the Closing, except (i) for any such representations and warranties made as of a specified date, which shall be true and correct as of such date, (ii) as expressly contemplated by this Agreement, and (iii) for breaches of representations or warranties that (x) would not have a Material Adverse Effect or a material adverse effect on the ability of the Company to consummate the transactions contemplated hereby, or (y) are known on the date hereof by any of the Continuing Shareholders; and Mergeco shall have received from the Company an officer's certificate to this effect at the Closing; (b) each and all of the covenants and agreements of the Company to be performed and complied with pursuant to this Agreement prior to the Closing shall have been duly performed and complied with, except where the failure to comply with such covenant or agreement (i) would not have a Material Adverse Effect or a material adverse effect on the ability of the Company to consummate the transactions contemplated hereby, or (ii) was the direct result of an act or omission of any of the Continuing Shareholders; and Mergeco shall have received from the Company an officer's certificate to this effect at the Closing; (c) there shall have been no (i) material adverse change in the business, condition (financial or otherwise), properties, assets or prospects of the Company and its subsidiaries taken as a whole; (ii) death or disability of any of Mario Sbarro, Anthony Sbarro, Joseph Sbarro or Carmela Sbarro or any executive officer of the Company named in the Company's Annual Report on Form 10- K/A for the year ended December 28, 1997 as stated therein to have a family relationship (as such term is defined in Item 401 of Regulation S-K promulgated by the Commission) with a Continuing Shareholder; or (iii) material adverse change, or event or occurrence that is reasonably likely to result in an adverse change, in securities, financial or borrowing markets, or applicable tax or other laws or regulations, such as to decrease in any material respect the benefits of the Merger to the Continuing I-17 Shareholders or make it impractical to proceed with the Merger or the transactions contemplated hereby or by the Debt Financing; (d) no statute, rule, regulation, or temporary, preliminary or permanent order or injunction shall have been proposed, promulgated, enacted, entered, enforced or deemed applicable by any state, federal or foreign government or governmental authority or court or governmental agency of competent jurisdiction that (i) prohibits consummation of the Merger or the transactions contemplated hereby or thereby, or (ii) imposes material limitations on the ability of the Continuing Shareholders effectively to exercise full rights of ownership with respect to the shares of Common Stock to be issued to them pursuant to Section 2.2 of this Agreement; (e) the seven class action lawsuits which have heretofore been instituted with respect to the transactions contemplated hereby shall have been consolidated into one action in the Supreme Court of the State of New York and the settlement of such actions, as reflected in that certain Memorandum of Understanding dated January 19, 1999 (the "Memorandum of Understanding") among the parties to such actions, shall have been approved by the Supreme Court of New York County, final judgment shall have been entered in accordance with the Settlement Agreement contemplated in the Memorandum of Understanding and shall have become final, such actions shall have been dismissed with prejudice and without costs to any party (except as provided in the Memorandum of Understanding) and no holders, or holders of no more than an aggregate of 1,000,000 shares of Common Stock, shall have requested exclusion from the "Class", as such term is defined in the Memorandum of Understanding. (f) neither (i) any action, suit or proceeding before any court or governmental body relating to the Merger or the transactions contemplated hereby shall be pending in which an unfavorable judgment or decree could prevent or substantially delay the consummation of the Merger, or is reasonably likely to (w) result in a material increase in the aggregate Merger Consideration, (x) result in an award of material damages, (y) cause the Merger to be rescinded or (z) result in a material amount of rescissory damages, nor (ii) any decision in any action, suit or proceeding relating to the Merger or the transactions contemplated hereby shall have been rendered by any court or governmental body which has any such effect; and (g) the Company shall have obtained the Debt Financing referred to in Section 4.5: (i) in at least the amount set forth in the Financing Letter, (ii) on the material terms and conditions no less favorable to the Surviving Corporation than those set forth in the term sheet heretofore delivered to the Special Committee, and (iii) having a yield to maturity not to exceed 11.25% per annum. 6.3 Conditions to the Obligations of the Company. The obligation of the Company pursuant to this Agreement to consummate the Merger is also subject to the satisfaction or waiver, at the Closing, of the following additional conditions: (a) the representations and warranties of Mergeco contained herein shall be true and correct in all respects (in the case of any representation or warranty containing any materiality I-18 qualification) or in all material respects (in the case of any representation or warranty without any materiality qualification) as of the date of this Agreement and as of the Closing with the same effect as though all such representations and warranties had been made as of the Closing, except (i) for any such representations and warranties made as of a specified date, which shall be true and correct as of such date, (ii) as expressly contemplated by this Agreement, and (iii) for breaches of representations or warranties that would not have a material adverse effect on the ability of Mergeco to consummate the transactions contemplated hereby; and the Company shall have received from Mergeco a member's certificate to this effect at the Closing; and (b) each and all of the covenants and agreements of Mergeco to be performed and complied with pursuant to this Agreement prior to the Closing shall have been duly performed and complied with in all material respects except where the failure to comply with such covenant or agreement would not have a material adverse effect on the ability of Mergeco to consummate the transactions contemplated hereby; and the Company shall have received from Mergeco a member's certificate to this effect at the Closing; and (c) no statute, rule, regulation, or temporary, preliminary or permanent order or injunction shall have been proposed, promulgated, enacted, entered, enforced or deemed applicable by any state, federal or foreign government or governmental authority or court or governmental agency of competent jurisdiction that prohibits consummation of the Merger or the transactions contemplated hereby or thereby. ARTICLE VII CLOSING 7.1 Time and Place. The closing of the Merger (the "Closing") shall take place at the offices of Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas, New York, New York, as soon as practicable following satisfaction or waiver of the conditions set forth in Article VI. The date on which the Closing actually occurs is herein referred to as the "Closing Date." 7.2 Filings at the Closing. Promptly following the Closing, the Company and Mergeco shall cause Certificates of Merger, together with any other documents required by law to effectuate the Merger, to be executed, verified and delivered for filing by the New York Department of State as provided by Section 904-a of the NYBCL and Section 1003 of the NYLLCL, respectively, to the extent required, and shall take any and all other lawful actions and do any and all other lawful things necessary to cause the Merger to become effective. I-19 ARTICLE VIII TERMINATION AND ABANDONMENT 8.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval by the shareholders of the Company: (a) by mutual consent of the Board of Directors of the Company (by action taken by the Company's Board of Directors) and the members of Mergeco; (b) automatically, without action by any party hereto, if, at the Shareholders' Meeting, the Company's shareholders shall have not voted to adopt this Agreement in accordance with the requirements set forth in Sections 6.1(a) and (b); (c) by action of the Board of Directors of the Company or the members of Mergeco if, without the fault of the terminating party, the Merger has not been consummated on or prior to August 31, 1999; (d) by action of the Board of Directors of the Company or the members of Mergeco if the Special Committee shall have withdrawn or modified in a manner adverse to Mergeco its approval or recommendation of the Merger, this Agreement or the transactions contemplated hereby; (e) by action of the Board of Directors of the Company or the members of Mergeco if (i) any of the events set forth in Section 6.1(c) shall have occurred or (ii) consents or approvals described in Section 6.1(d) shall not have been obtained prior to the Closing or shall have become incapable of being obtained, and, in the case of (i) or (ii), shall not have been, on or before the date of such termination, permanently waived by the Board of Directors of the Company or the members of Mergeco, as the case may be; (f) by action of the members of Mergeco if (i) any of the conditions set forth in Sections 6.2(a), (b), (e), or (g) that are required to be satisfied at or prior to the Closing shall not have been satisfied prior to the Closing or shall have become incapable of being satisfied or (ii) if any of the events set forth in Sections 6.2(c), (d) or (f) shall have occurred prior to the Closing and, in the case of (i) or (ii), shall not have been, on or before the date of such termination, permanently waived by Mergeco; provided, however, that, in the case of Sections 6.2(a) or (b), the Company shall not have cured such breach, in all material respects, within ten (10) business days following the receipt of written notice from Mergeco of such breach; and (g) by action of the Board of Directors of the Company if (i) any of the conditions set forth in Sections 6.3(a) or (b) that are required to be satisfied at or prior to the Closing shall not have been satisfied prior to the Closing or shall have become incapable of being satisfied or (ii) if any of the events set forth in Section 6.3(c) shall have occurred prior to the Closing and, in the case of (i) I-20 or (ii), shall not have been, on or before the date of such termination, permanently waived by the Board of Directors of the Company; provided, however, that, in the case of Sections 6.3(a) and (b), Mergeco and the Continuing Shareholders shall not have cured such breach, in all material respects, within ten (10) business days following the receipt of written notice from the Company of such breach. 8.2 Procedure and Effect of Termination. In the event of termination and abandonment of the Merger by either Mergeco or the Company pursuant to Section 8.1, written notice thereof shall forthwith be given to the other, and this Agreement shall terminate and the Merger shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated as provided herein, no party hereto shall have any liability or further obligation to any other party to this Agreement; provided, however, that (i) any termination by the Company arising out of a breach by Mergeco or the Continuing Shareholders of any representation, warranty, covenant or agreement contained in this Agreement shall be without prejudice to the rights of the Company to seek damages with respect thereto, and (ii) any termination by Mergeco arising out of a breach by the Company of any representation, warranty, covenant or agreement contained in this Agreement, other than a breach by the Company that is the direct result of an act or omission of the Continuing Shareholders, shall be without prejudice to the rights of Mergeco to seek damages with respect thereto; and provided, further, however, that the obligations set forth in this Section 8.2 and Section 9.6 shall in any event survive any termination. ARTICLE IX MISCELLANEOUS 9.1 Amendment; Modification and Approval of Special Committee. Subject to applicable law, this Agreement may be amended, modified or supplemented only by written agreement of Mergeco and the Continuing Shareholders, on the one hand, and the Company, on the other hand, at any time prior to the Effective Time with respect to any of the terms contained herein; provided, however, that (i) after this Agreement is adopted by the Company's shareholders pursuant to Section 5.5, no such amendment or modification shall be made that reduces the amount or changes the form of the Merger Consideration or otherwise materially and adversely affects the rights of the Public Shareholders hereunder without further approval by the holders of such number of votes of shares of Common Stock that are required to approve this Agreement pursuant to Sections 6.1(a) and (b), and (ii) the approval of the Special Committee shall be required for any action that may be taken by the Board of Directors pursuant to this Agreement, including without limitation, any determination to terminate this Agreement, any amendment or modification of this Agreement, any extension by the Company of the time for the performance of any obligations or other acts of Mergeco and any waiver of any of the Company's rights under this Agreement. 9.2 Waiver of Compliance; Consents. Any failure of Mergeco or the Company to comply with any obligation, covenant, agreement or condition herein may be waived by the other party, only by a written instrument signed by the party granting such waiver (and if required pursuant to Section 9.1(ii), by an authorized member of the Special Committee), but such waiver or failure to insist upon I-21 strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 9.2. 9.3 Non-Survival of Representations and Warranties. Each and every representation and warranty made in this Agreement shall expire with, and be terminated and extinguished by, the Merger. This Section 9.3 shall have no effect upon any other obligation of the parties hereto, whether to be performed before or after the Closing. 9.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if (i) delivered personally or by nationally-recognized overnight courier, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid or (iii) transmitted by facsimile, and in each case, addressed to the parties at the following addresses (or at such other address for a party as shall be specified by like notice: (a) if to Mergeco or the Continuing Shareholders, to: Sbarro Merger LLC 401 Broadhollow Road Melville, New York 11747 Facsimile: (516) 715-4190 Attention: Mario Sbarro with copies to Warshaw Burstein Cohen Schlesinger & Kuh, LLP 555 Fifth Avenue New York, New York 10017 Facsimile: (212) 972-9150 Attention: Arthur A. Katz, Esq. (b) if to the Company, to Sbarro, Inc. 401 Broadhollow Road Melville, New York 11747 Facsimile: (516) 715-4185 Attention: Robert S. Koebele, Vice President-Finance I-22 with copies to Parker Chapin Flattau & Klimpl, LLP 1211 Avenue of the Americas New York, New York 10036 Facsimile: (212) 704-6288 Attention: Richard A. Rubin, Esq. and to Special Committee of the Board of Directors of Sbarro, Inc. c/o Steven J. Gartner, Esq. Willkie Farr & Gallagher 787 Seventh Avenue New York, New York 10019 Facsimile: (212) 728-8111 with copies to Willkie Farr & Gallagher 787 Seventh Avenue New York, New York 10019 Facsimile: (212) 728-8111 Attention: Steven J. Gartner, Esq. Any notice so addressed shall be deemed to be given (x) three business days after being mailed by first-class, registered or certified mail, return receipt requested, postage prepaid and (y) upon delivery, if transmitted by personal delivery, nationally-recognized overnight courier or facsimile; provided, however, that notices of a change of address shall be effective only upon receipt thereof. 9.5 Assignment; Parties in Interest. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns; but neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any party without the prior written consent of the other parties. Except for Section 5.10, which is intended for the benefit of the Indemnified Parties, this Agreement is not intended to confer upon any person, except the parties, any rights or remedies under or by reason of this Agreement. 9.6 Costs and Expenses. Each party represents and warrants that it has not obligated either itself or any other party to incur any broker, finder or investment banking fees or related expenses, except for fees and expenses payable by the Company to Bear, Stearns and to Prudential Securities. In the event that this Agreement is terminated for any reason, the Company, on the one hand, and Mergeco and the Continuing Shareholders, on the other hand, shall each pay their own fees I-23 and expenses, it being understood that (a) the fees and expenses of the Company shall include (i) the fees and expenses of financial advisors (including Bear Stearns and Prudential Securities), (ii) any fees and expenses involved in the preparation, printing, mailing and filing of documents used in connection with the Merger or the Debt Financing, and (iii) the fees and expenses of accountants and counsel for the Company and the Special Committee, and (b) the fees and expenses of Mergeco shall include (i) any commitment and other fees or expenses payable to any person providing or proposing to provide the Debt Financing for the Merger, and (ii) the fees and expenses of counsel for Mergeco; provided, however, that in the event this Agreement is terminated for any reason other than pursuant to (A) Section 8.1(g) due to a breach of this Agreement under Sections 6.3(a) or (b), or (B) Section 8.1(f) by reason of the failure to obtain the Debt Financing on the terms contemplated in Section 6.2(g) other than by reason of circumstances described in Section 6.2(c)(iii), the Company shall pay and reimburse Mergeco and the Continuing Shareholders for the fees and expenses incurred by them in connection with the transactions contemplated hereby up to $500,000 in the aggregate; and provided, further, however, that if this Agreement is terminated pursuant to Section 8.1(f) by reason of the failure to obtain the Debt Financing on the terms contemplated in Section 6.2(g) other than by reason of circumstances described in Section 6.2(c)(iii), Mergeco and the Continuing Shareholders shall, jointly and severally, be obligated to pay and reimburse the Company for 50% of the fees and expenses incurred by the Company, provided that Mergeco and the Continuing Shareholders, together, shall not be obligated to so pay or reimburse the Company in excess of $500,000 in the aggregate. 9.7 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. Notwithstanding the foregoing, and without limiting the Company's obligations under Section 9.6, in the event of a breach of this Agreement by the Company, the sole and exclusive remedy of Mergeco or the Continuing Shareholders shall be to either (i) terminate this Agreement pursuant to Section 8.1 (and seek any remedy provided them under Section 8.2), or (ii) pursue specific performance pursuant to this Section 9.7. 9.8 Governing Law. This Agreement shall be governed by the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies. 9.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. I-24 9.10 Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. As used in this Agreement, (i) the term "person" shall mean and include an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization and a government or any department or agency thereof; (ii) the terms "affiliate" and "associate" shall have the meanings set forth in Rule 12b- 2 of the General Rules and Regulations promulgated under the Exchange Act; (iii) the term "subsidiary" of any specified corporation shall mean any corporation, limited liability company or other entity that is controlled, directly or indirectly, by the Company; (iv) "best efforts" shall mean the commercially reasonable efforts that a prudent person desirous of achieving a result would use in similar circumstances to ensure that such result is timely achieved; provided, however, that a person required to use his best efforts under this Agreement will not be required to take actions that would result in a materially adverse change in the benefits to such person of this Agreement and the transactions contemplated hereby; and (v) the words "hereunder," "herein," "hereof" and words or phrases of similar import shall refer to each and every term and provision of this Agreement. 9.11 Entire Agreement. This Agreement, including the schedules hereto, embodies the entire agreement and understanding of the parties in respect of the subject matter contained herein and supersedes all prior agreements and the understandings between the parties with respect to such subject matter. 9.12 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in effect and shall in no way be affected, impaired or invalidated. 9.13 Headings. The Article and Section headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of any provision of this Agreement. [THE NEXT PAGE IS THE SIGNATURE PAGE] I-25 IN WITNESS WHEREOF, Mergeco, the Company and the Continuing Shareholders have caused this Agreement to be signed, by their respective duly authorized officers or directly, as of the date first above written. SBARRO MERGER LLC By: /s/ Mario Sbarro ----------------------------------- Name: Mario Sbarro Title: Member SBARRO, INC. By: /s/ Robert S. Koebele ---------------------------------- Name: Robert S. Koebele Title: Vice President-Finance The Continuing Shareholders: /s/ Mario Sbarro --------------------------------------- Mario Sbarro /s/ Joseph Sbarro --------------------------------------- Joseph Sbarro JOSEPH SBARRO (1994) FAMILY LIMITED PARTNERSHIP By /s/ Joseph Sbarro ----------------------------------- Joseph Sbarro, General Partner /s/ Anthony Sbarro --------------------------------------- Anthony Sbarro /s/ Franklin Montgomery --------------------------------------- Franklin Montgomery, not individually but as trustee under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants Mario Sbarro, not individually but as trustee under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants I-26 ANNEX II [LOGO] Prudential Prudential Securities Incorporated One New York Plaza, New York, NY 10292 (212) 778-1000 January 19, 1999 The Special Committee of the Board of Directors Sbarro, Inc. 401 Broadhollow Road Melville, NY 11747 Members of the Special Committee of the Board of Directors: We understand that Sbarro, Inc., a New York corporation ("Sbarro" or the "Company"), Sbarro Merger LLC, a New York limited liability company ("Mergeco"), and Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not individually but as trustees under that certain Trust Agreement dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants (collectively the "Continuing Stockholders") propose to enter into an Agreement and Plan of Merger (the "Agreement"), pursuant to which Mergeco will merge with and into the Company (the "Merger"). In the Merger, each outstanding share of Sbarro common stock, par value $.01 per share (the "Company Common Stock"), other than shares held by Mergeco or the Continuing Stockholders or in the Company's treasury, will be converted into the right to receive $28.85 in cash (the "Merger Consideration"). You have requested our opinion as to the fairness from a financial point of view of the Merger Consideration to be received by the Public Stockholders (defined as all holders of Company Common Stock other than the Continuing Stockholders). In conducting our analysis and arriving at the opinion expressed herein, we have reviewed such materials and considered such financial and other factors as we deemed relevant under the circumstances, including: (i) a draft, dated January 19, 1999, of the Agreement, including the exhibits thereto; (ii) a draft, dated January 19, 1999, of the Bear, Stearns & Co. Inc. "highly confident" letter (the "Highly Confident Letter"); (iii) certain publicly available historical, financial and operating data for the Company including, but not limited to, (a) the Annual Report to shareholders and Annual Report on Form 10-K for the fiscal year ended December 28, 1997, (b) the Quarterly II-1 [LOGO] Prudential Prudential Securities Incorporated Report on Form 10-Q for the fiscal quarter ended October 4, 1998, (c) Reports on Forms 8-K, dated June 18, 1998, September 22, 1998 and December 2, 1998, and (d) the Proxy Statement relating to the Annual Meeting of Shareholders held on August 19, 1998; (iv) historical stock market prices and trading volumes for the Company Common Stock; (v) certain information relating to the Company, including projected balance sheet, income statement and cash flow data for the 1998 through 2003 fiscal years, prepared by the management of the Company; (vi) the Company's Confidential Memorandum dated August 1998 and the preliminary written indications of interest received from prospective buyers; (vii) publicly available financial, operating and stock market data concerning certain companies engaged in businesses that we deemed comparable to Sbarro or otherwise relevant to our inquiry; (viii) the financial terms of certain recent transactions, including "going private" transactions, that we deemed relevant to our inquiry; and (ix) such other financial studies, analyses and investigations that we deemed relevant to our inquiry. We have assumed, with your consent, that the draft of the Agreement we reviewed will conform in all material respects to the Agreement when in final form. We have met with the senior management of the Company to discuss (i) the past and current operating and financial condition of the Company, (ii) the prospects for the Company, (iii) their estimates of the Company's future financial performance and (iv) such other matters we deemed relevant. In connection with our review and analysis and in arriving at our opinion, we have relied upon the accuracy and completeness of the financial and other information provided to us by the Company and have not undertaken any independent verification of such information or any independent valuation or appraisal of any of the assets or liabilities of the Company. With respect to certain financial forecasts provided to us by the Company, we have assumed that such information (and the assumptions and bases therefor) represents the Company's best currently available estimate as to the future financial performance of the Company. Further, our opinion is necessarily based on economic, financial and market conditions as they exist and can only be evaluated as of the date hereof. II-2 [LOGO] Prudential Prudential Securities Incorporated Our opinion does not address nor should it be construed to address the relative merits of the Merger or alternative business strategies that may be available to the Company. As you know, we have been retained by the Company to render this opinion and will receive a fee for such service, a portion of which fee is contingent upon the consummation of the Merger. In the ordinary course of business we may actively trade the shares of Company Common Stock for our own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. This letter and the opinion expressed herein are for the use of the Special Committee of the Board of Directors of the Company. This opinion does not constitute a recommendation to the stockholders of the Company as to how such stockholders should vote in connection with the Merger or as to any other action such stockholders should take regarding the Merger. This opinion may not be reproduced, summarized, excerpted from or otherwise publicly referred to or disclosed in any manner without our prior written consent; except that the Company may include this opinion in its entirety in any proxy statement relating to the Merger sent to the Company's stockholders and filed with the Securities and Exchange Commission. Based upon and subject to the foregoing, we are of the opinion that, as of the date hereof, the Merger Consideration to be received by the Public Stockholders in the Merger is fair from a financial point of view. Very truly yours, PRUDENTIAL SECURITIES INCORPORATED 3 PRELIMINARY COPY SUBJECT TO COMPLETION, DATED JUNE 18, 1999 PROXY SBARRO, INC. (Solicited on behalf of the Board of Directors) The undersigned holder of Common Stock of SBARRO, INC., revoking all proxies heretofore given, hereby constitutes and appoints Mario Sbarro and Anthony Sbarro, and each of them, Proxies, with full power of substitution, for the undersigned and in the name, place and stead of the undersigned, to vote all of the undersigned's shares of said stock, according to the number of votes and with all the powers the undersigned would possess if personally present, at the Special Meeting of Shareholders of SBARRO, INC., to be held at the Carriage House at Milleridge Inn, 585 North Broadway on Routes 106 and 107, Jericho, New York on Friday, August 13, 1999 at 11:00 a.m., local time, and at any adjournments or postponements thereof. The undersigned hereby acknowledges receipt of the Notice of Meeting and Proxy Statement relating to the meeting and hereby revokes any proxy or proxies heretofore given. Each properly executed Proxy will be voted in accordance with the specification made on the reverse side of this Proxy and in the discretion of the Proxies on such other matters that may properly come before the meeting or any adjournments or postponements thereof. Where no choice is specified, this Proxy will be voted FOR adoption of the Amended and Restated Agreement and Plan of Merger. PLEASE MARK, DATE AND SIGN THIS PROXY ON REVERSE SIDE PLEASE MARK |X| The Board of Directors recommends a vote FOR adoption of the YOUR CHOICE Amended and Restated Agreement and Plan of Merger. LIKE THIS IN BLACK OR BLUE INK Adoption of the Amended and Restated |_| FOR |_| AGAINST |_| ABSTAIN Agreement and Plan of Merger, dated as of January 19, 1999, among the Company, Sbarro Merger LLC, Mario Sbarro, Joseph Sbarro, Joseph Sbarro (1994) Family Limited Partnership, Anthony Sbarro, and Mario Sbarro and Franklin Montgomery, not individually, but as trustees under that certain Trust Agreement, dated April 28, 1984 for the benefit of Carmela Sbarro and her descendants. Signatures(s)_________________________________________ Dated____________, 1999 (Signatures should conform to names as registered. For jointly owned shares, each owner should sign. When signing as attorney, executor, administrator, trustee, guardian or officer of a corporation, please give full title.) EX-99.1(G)(1) 12 MEMORANDUM OF UNDERSTANDING MEMORANDUM OF UNDERSTANDING WHEREAS, on or about November 25, 1998, Sbarro, Inc. ("Sbarro") announced that it had received a proposal from the Sbarro family (the "Acquisition Group") to acquire for $27.50 cash per share the Sbarro shares that they collectively did not already own in a transaction to be structured as a cash merger (the "Merger") with a company to be owned by the Acquisition Group (the "Merger Proposal"); and WHEREAS, five putative class action lawsuits challenging the Merger Proposal were filed by Sbarro shareholders and are pending in the Supreme Court of the State of New York, County of New York (the "Actions"); and WHEREAS, as a result of the pendency of the Actions, counsel for plaintiffs in the Actions and representatives of the Acquisition Group and Sbarro conducted negotiations in an effort to reach a settlement of the Actions in conjunction with the consideration of the Merger Proposal by the Special Committee of the Board of Directors of Sbarro appointed to consider the Merger Proposal (the "Special Committee"); and WHEREAS, as a result of discussions and negotiations that the Acquisition Group had with plaintiffs' counsel and with the Special Committee, the Acquisition Group has agreed to the terms of the revised Merger Proposal discussed below; NOW THEREFORE, as a result of the foregoing, the parties to the Actions, by their respective attorneys, have reached an agreement-in-principle providing for the settlement of the Actions (the "Settlement") on the terms and subject to the conditions set forth below in this memorandum of understanding (the "Memorandum"): 1. The purpose of this Memorandum is to set forth the agreement-in-principle of the parties to the Actions with respect to the matters addressed below. 2. In full settlement of any and all claims whatsoever which have been or could have been made in the Actions, all of which shall be released and discharged: a. Subject to the approval of a merger agreement (the "Merger Agreement") by the Special Committee, the board of directors of Sbarro, the Acquisition Group and the Sbarro stockholders, and the satisfaction or waiver of all conditions to closing thereunder, the Acquisition Group may proceed with the Merger in which the holders of Sbarro stock, other than the Acquisition Group, will receive $28.85 cash per share (the "Merger Consideration"). b. The parties to the Actions agree that the cash consideration of $28.85 per Sbarro share, representing a $1.35 per share increase over the initial Merger Proposal constitutes fair, adequate and reasonable consideration to be paid to the holders of Sbarro stock other than the Acquisition Group and for the settlement of all claims which were raised or could have been raised by plaintiffs or any members of the Class (as defined below) in the Actions. 3. The parties to the Actions will use their best efforts to complete the discovery contemplated by this Memorandum and to agree upon, execute and present to the Supreme Court, New York County, as soon as practicable, a formal Stipulation of Settlement and such other documents as may be necessary and appropriate in order to obtain the prompt approval by the Court of the Settlement and the dismissal with prejudice of the Actions and any other related actions in the manner contemplated herein and by the Stipulation of Settlement. Pending the negotiation and execution of the Stipulation of Settlement, all proceedings in the Actions, except for Settlement-related proceedings pursuant to this Memorandum of Understanding, shall be suspended. 4. The Stipulation of Settlement expressly will provide as follows: a. for the conditional certification of the Actions, for settlement purposes only, as a class action pursuant to Article 9 of the New York Civil Practice Law and Rules on behalf of a class consisting of all record and beneficial owners of Sbarro stock during the period beginning on and including the close of business on November 25, 1998 through and including the date of the consummation of the Merger, including any and all of their respective successors in interest, predecessors, representatives, trustees, executors, administrators, heirs, assigns or transferees, immediate and remote, and any person or entity acting for or on behalf of, or claiming under any of them, and each of them, and excluding the defendants in the Actions and any person, firm, trust, corporation or other entity related to or affiliated with any of the defendants (the "Class") b. for the complete discharge, dismissal with prejudice, settlement and release of, and an injunction barring, all claims, demands, rights, actions or causes of actions, rights, liabilities, damages, losses, obligations, judgments, suits, matters and issues of any kind or nature, that have been or could have been asserted in the Actions or in any court, tribunal or proceeding by or on behalf of any member of the Class, whether individual, class, representative, legal, equitable or any other type or in any capacity against defendants in the Actions or any of their families, parent entities, associates, affiliates or subsidiaries and each and all of their respective past, present or future officers, directors, stockholders, members, representatives, 2 employees, attorneys, financial or investment advisors, consultants, accountants, investment bankers, commercial bankers, engineers, advisors or agents, heirs, executors, trustees, general or limited partners or partnerships, personal representatives, estates, administrators, predecessors, successors and assigns (collectively, the "Released Persons"). c. that defendants in the Actions have denied, and continue to deny, that any of them have committed or have threatened to commit any violations of law or breaches of duty to the plaintiffs, the Class or anyone; d. that defendants in the Actions are entering into the Stipulation of Settlement in part because the Settlement would eliminate the distraction, burden and expense of further litigation; e. subject to the Order of the Court, pending final determination of whether the Settlement provided for in the Stipulation of Settlement should be approved, that plaintiffs and all members of the Class, and each of them, are barred and enjoined from commencing, prosecuting, instigating or in any way participating in the commencement or prosecution of any action asserting any released claim, either directly, representatively, derivatively or in any other capacity, against any defendant in the Actions which have been or could have been asserted, or which arise out of or relate in any way to any of the transactions or events described in any complaint or amended complaint in the Actions. f. defendants may withdraw from the settlement if the holders of more than 1,000,000 shares of common stock of Sbarro shall have requested exclusion from the Class. 5. The Settlement contemplated by this Memorandum of Understanding will not be binding upon any party until, and is otherwise subject to: a. the completion by plaintiffs in the Actions of such documentary discovery and/or oral depositions or interviews as reasonably are requested by them and agreed to by the respective party from whom discovery is requested; b. a formal Stipulation of Settlement (and such other documentation as may be required to obtain final approval by the Court of the Settlement) has been executed by counsel for the parties to the Actions, which Stipulation of Settlement shall include a provision permitting defendants to terminate the Settlement if, prior to the effective time of the Merger, any action is pending in any state or federal court which raises any settled claims against any of the Released Persons; c. the consummation of the Merger; 3 d. final approval by the Court of the Settlement (and the exhaustion of possible appeals, if any) and the dismissal of the Actions by the Court with prejudice and without awarding costs to any party (except as provided herein) have been obtained, and entry by the Court of a final order and judgment containing such release language as is negotiated by the parties and contained in the Stipulation of Settlement; and e. the determination by defendants in the Actions that the dismissal of the Actions in accordance with the Stipulation of Settlement will result in the release with prejudice of the settled claims. 6. This Memorandum of Understanding shall be null and void and of no force and effect should any of the conditions herein not be met or should plaintiffs' counsel determine in good faith, based upon the discovery contemplated by this Memorandum, that the proposed Settlement is not fair, reasonable and adequate; in such event, this Memorandum of Understanding shall not be deemed to prejudice in any way the positions of the parties with respect to the Actions nor to entitle any party to the recovery of costs and expenses incurred to implement this Memorandum of Understanding (except as provided in paragraph 7 hereof for the costs of notice of the Settlement). 7. Plaintiffs' counsel intend to apply to the Court for an award of attorneys' fees (inclusive of disbursements and fees), in an amount of no more than $2.1 million, to be paid by Sbarro pursuant to the terms of the Stipulation of Settlement following final Court approval of the Settlement and the entry of an order awarding fees and expenses by the Court. Defendants agree that they will not oppose such an application. Defendants shall be responsible for providing notice of the Settlement to the members of the Class and shall pay the costs and expenses relating to providing notice of the Settlement to the Class. 8. Neither this Memorandum of Understanding nor any provision hereof shall be deemed a presumption, concession or an admission by any defendant in the Actions of any fault, liability or wrongdoing as to any facts or claims alleged or asserted in the Actions, or any other actions or proceedings, and shall not be interpreted, construed, deemed, invoked, offered, or received in evidence or otherwise used by any person in the Actions, or in any other action or proceeding, whether civil, criminal or administrative. 9. This Memorandum of Understanding constitutes the entire agreement among the parties with respect to the subject matter hereof, and may not be amended nor any of its provisions waived except by a writing signed by all of the signatories hereto. 4 10. This Memorandum of Understanding and the Settlement contemplated by it shall be governed by, and construed in accordance with, the laws of the State of New York, regardless of laws that might otherwise govern under applicable conflict of laws principles. 11. This Memorandum will be executed by counsel for the parties to the Actions. This Memorandum may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. By signing this Memorandum, counsel for plaintiffs in the Actions represent that they have authority to act on behalf of all plaintiffs and their counsel in all of the actions constituting the Actions. 12. This Memorandum of Understanding shall be binding upon and shall inure to the benefit of the parties and their respective agents, successors, executors, heirs and assigns. IN WITNESS WHEREOF, the parties have executed this Memorandum effective as of the date set forth below. ABBEY GARDY & SQUITIERI, LLP PARKER CHAPIN FLATTAU & KLIMPL, LLP By: /s/ Arthur N. Abbey By: /s/ Richard Rubin --------------------------- ---------------------------- Arthur N. Abbey Richard Rubin 212 East 39th Street 1211 Avenue of the Americas New York, New York 10016 New York, New York 10036 (212) 889-3700 (212) 704-6000 BERNSTEIN LITOWITZ BERGER WILLKIE FARR & GALLAGHER & GROSSMANN LLP By: /s/ Jeffrey A. Klafter By: /s/ Stephen W. Greiner ----------------------------- --------------------------- Jeffrey A. Klafter Stephen W. Greiner 1285 Avenue of the Americas 787 Seventh Avenue New York, New York 19919 New York, New York 10019 (212) 554-1400 (212) 728-8000 5 GOODKIND LABATON RUDOFF WARSHAW BURSTEIN COHEN & SUCHAROW LLP SCHLESINGER & KUH, LLP By: /s/ Jonathan M. Plasse By: /s/ Arthur A. Katz ----------------------------- ----------------------------- Jonathan M. Plasse Arthur A. Katz 100 Park Avenue 555 Fifth Avenue New York, New York 10017 New York, New York 10017 (212) 907-0700 (212) 984-7700 On behalf of: ENTWISTLE & CAPPUCCI LLP 400 Park Avenue, 16th Floor New York, New York 10022 (212) 894-7200 WECHSLER HARWOOD HALEBIAN & FEFFER, LLP 488 Madison Avenue, 8th Floor New York, New York 10022 (212) 935-7400 WOLF POPPER, LLP 845 Third Avenue New York, New York 10022 (212) 759-4600 BERNSTEIN LIEBHARD & LIFSHITZ, LLP 10 East 40th Street New York, New York 10016 (212) 779-1414 LOWEY DANNENBERG BEMPORAD & SELINGER, P.C. The Gateway Building 1 North Lexington Avenue White Plains, New York 10601 (914) 997-0500 FINKELSTEIN THOMPSON & LOUGHRAN Suite 601 1055 Thomas Jefferson Street, N.W. Washington, D.C. 20007 (202) 337-8000 Dated: January 19, 1999 6 EX-99.1(G)(2) 13 STIPULATION OF SETTLEMENT SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - --------------------------------------------------) LEE BRENIN, On Behalf of Himself ) Index No. 98-605796 and All Others Similarly Situated, ) ) Plaintiff, ) ) STIPULATION OF SETTLEMENT v. ) ------------------------- ) MARIO SBARRO, ANTHONY SBARRO, ) CARMELA SBARRO, JOSEPH SBARRO, ) and SBARRO, INC. ) ) Defendants. ) - --------------------------------------------------) PETER SALIT, On Behalf of Himself ) Index No. 98-605801 and All Others Similarly Situated, ) ) Plaintiff, ) ) v. ) ) SBARRO, INC., JOSEPH SBARRO, ANTHONY ) SBARRO, MARIO SBARRO, CARMELLA ) SBARRO, TERRY VINCE, HAROLD ) KESTENBAUM, RICHARD A. MANDELL, ) PAUL A. VATTER AND BERNARD ) ZIMMERMAN, ) ) Defendants. ) - --------------------------------------------------) - ------------------------------------------------------) DAVID FINKELSTEIN, On Behalf of Himself ) Index No. 98-605827 and All Others Similarly Situated, ) ) Plaintiff, ) ) v. ) ) SBARRO, INC., JOSEPH SBARRO, ANTHONY ) SBARRO, MARIO SBARRO, CARMELLA ) SBARRO, TERRY VINCE, HAROLD ) KESTENBAUM, RICHARD A. MANDELL, ) PAUL A. VATTER AND BERNARD ) ZIMMERMAN, ) ) Defendants. ) - ------------------------------------------------------) BARRY ADELMAN, On Behalf of Himself ) Index No. 98-605847 and All Others Similarly Situated, ) ) Plaintiff, ) ) v. ) ) MARIO SBARRO, ANTHONY SBARRO, ) CARMELA SBARRO, JOSEPH SBARRO, ) and SBARRO, INC. ) ) Defendants. ) - ------------------------------------------------------) - ---------------------------------------------------------) CHARTER CAPITAL CORP., GRUNTAL ) FINANCIAL LLC SAVINGS PLAN A/C ) NORMAN EPSTEIN, HARBOR FINANCE ) PARTNERS, LIST, INC. and WAYNE CRIMI, ) On Behalf of Themselves and All Others Similarly ) Situated, ) ) Plaintiffs, ) Index No. 99-100884 ) - against - ) ) JOSEPH SBARRO, ANTHONY SBARRO, ) MARIO SBARRO, BERNARD ZIMMERMAN, ) PAUL VATTER, HAROLD KESTENBAUM, ) JERRY VINCE, RICHARD A. MANDELL and ) SBARRO, INC. ) ) Defendants. ) - ---------------------------------------------------------) The parties to the above-captioned actions (the "Actions"), by and through their respective attorneys, have entered into this Stipulation of Settlement (the "Stipulation") subject to the approval of the Supreme Court of the State of New York, County of New York (the "Court"). WHEREAS, A. Defendant Sbarro, Inc. ("Sbarro" or the "Company") is a New York corporation with its principal executive offices located at 401 Broadhollow Road, Melville, New York 11747. Sbarro operates a chain of family-style, cafeteria-type Italian restaurants under the "Sbarro" and "Sbarro The Italian Eatery" names. As of January 3, 1999, Sbarro had 630 Company-owned and 268 franchised restaurants in the United States and abroad. B. Defendants Mario Sbarro, Joseph Sbarro, Anthony Sbarro, Carmela Sbarro, Terry Vince, Harold L. Kestenbaum, Richard A. Mandell, Paul A. Vatter and Bernard Zimmerman (collectively, the "Individual Defendants" and together with Sbarro, the other defendant in the Actions, the "Defendants") are, and were at all times relevant to this litigation, officers and/or directors of Sbarro. C. On January 20, 1998, Sbarro announced that it had received a proposal from Defendants Mario Sbarro, Joseph Sbarro and Anthony Sbarro (including Joseph Sbarro (1994) Family Limited Partnership and The Trust of Carmela Sbarro (collectively, the "Sbarro Family") pursuant to which all other holders of Sbarro common stock (the "Public Shareholders") would receive $28.50 cash per share for their Sbarro shares in a transaction structured as a cash merger with a company to be owned by the Sbarro Family (the "Initial Merger Proposal"). The Sbarro Family are the owners of approximately 34.4% of Sbarro's presently outstanding common stock (Sbarro's only outstanding class of capital stock) and the Public Shareholders own the remaining 65.6%. The Initial Merger Proposal was terminated in June 1998. D. Following the close of business on November 25, 1998, Sbarro announced that it had received a proposal from the Sbarro Family pursuant to which the Public Shareholders would receive $27.50 cash per share for their Sbarro shares in a transaction to be structured as a cash merger of an entity to be owned by the Sbarro Family with and into the Company (the "Revised Merger Proposal"). Sbarro named a Special Committee of its Board of Directors, consisting of Defendants Richard A. Mandell, Harold L. Kestenbaum, Paul A. Vatter and Terry Vince, to consider the Revised Merger Proposal. -2- E. Following the announcement of the Revised Merger Proposal, the following putative class actions challenging the Revised Merger Proposal were filed by Sbarro shareholders in the Supreme Court of the State of New York, County of New York: Lee Brenin v. Mario Sbarro, et al., Index No. 98-605796; Peter Salit v. Sbarro, Inc. et al., Index No. 98-605801; David Finkelstein v. Sbarro, Inc. et al., Index No. 98-605827; Barry Adelman v. Mario Sbarro, et al., Index No. 98-605847; Charter Capital et al. v. Joseph Sbarro et al., Index No. 99-100884. In addition, the following putative class actions challenging the Revised Merger Proposal were filed by Sbarro shareholders in the Supreme Court of the State of New York, County of Suffolk: Charter Capital Corp. v. Joseph Sbarro et al., Index No. 98-27736; Harbor Finance Partners and List, Inc. v. Mario Sbarro et al., Index No. 98-27723; and Gruntal Financial LLC Savings Plan A/C Norman Epstein v. Richard A. Mandell et al., Index No. 98-27200. The actions filed in the County of Suffolk were voluntarily discontinued in order to pursue the litigation in the County of New York. The Actions challenged the Revised Merger Proposal alleging, among other things, that the $27.50 per share merger consideration to be paid to the Public Shareholders was inadequate. The Actions sought, among other things, to enjoin the consummation of the proposed transaction or, in the alternative, to rescind the transaction if it takes place, unspecified money damages and attorney's fees and expenses. F. Following the filing of the Actions, counsel for plaintiffs in the Actions ("plaintiffs' counsel") and their financial expert met with the Special Committee's Chairman, counsel and financial advisor, and conducted negotiations with the Sbarro Family, in an effort to reach a settlement of the Actions. -3- G. As a result of the discussions and negotiations that the Sbarro Family had with plaintiffs' counsel and with the Special Committee, the Sbarro Family agreed to raise the price to be paid to the Public Shareholders in the proposed Merger to $28.85 per share (the "Increased Merger Consideration"), or to an aggregate of approximately $388.6 million, representing an increase per share of $1.35, or an aggregate increase of approximately $18.2 million, from the Revised Merger Proposal announced on November 25, 1998 (the "Final Merger Proposal"). The Final Merger Proposal was made expressly contingent upon the adoption of the Agreement and Plan of Merger dated January 19, 1999 among the Company, Sbarro Mergeco LLC ("Mergeco") and the Sbarro Family (the "Merger" or "Merger Agreement") by the holders of a majority of the shares of Sbarro common stock owned by the Public Shareholders (the "Public Shareholders Voting Requirement"), as well as by two-thirds of all outstanding shares of Sbarro common stock (the "Statutory Voting Requirement"). H. On January 19, 1999, the following events occurred: 1. After receiving a written opinion from its financial advisor, Prudential Securities Incorporated ("Prudential"), that, as of the date of the Merger Agreement, the Increased Merger Consideration was fair, from a financial point of view, to the Public Shareholders, the Special Committee concluded that the Merger, as reflected in a proposed Merger Agreement, was fair to, and in the best interests of, the Company and the Public Shareholders, and unanimously resolved to recommend that Sbarro's Board of Directors adopt the Merger Agreement; 2. After a presentation by the Special Committee and based, in part, on the recommendation of the Special Committee and the fairness opinion received from Prudential, -4- Sbarro's Board of Directors also determined that the Merger was fair to, and in the best interests of, the Company and the Public Shareholders and adopted the Merger Agreement. Consummation of the Merger Agreement is conditioned upon, among other things: (i) fulfillment of the Public Shareholder Voting Requirement, as well as of the Statutory Voting Requirement; (ii) receipt of financing for the transactions contemplated by the Merger Agreement; (iii) the continued suspension of dividends by the Company; and (iv) settlement of the Actions; and 3. The parties to the Actions executed a Memorandum of Understanding (the "MOU"), which contemplates the settlement and dismissal of the Actions pursuant to this Stipulation. I. The Sbarro Family agreed to the Final Merger Proposal after considering the existence of the Actions and the desirability of satisfactorily addressing the claims set forth in the Actions. J. Pursuant to the Merger Agreement and subject to the terms and conditions thereof, Mergeco, a New York limited liability company formed by the Sbarro Family for the purpose of the Merger, will be merged with and into Sbarro with each then outstanding share of the Company's common stock, other than shares held of record by Mergeco or the Continuing Shareholders or in the Company's treasury, to be converted into the right to receive the Increased Merger Consideration in cash, without interest. In addition, all outstanding stock options, including those held by the Sbarro Family, will be terminated, with the holders thereof to be paid the difference between the Increased Merger Consideration and the applicable exercise price per share multiplied by the total number of shares of Sbarro common stock subject to such option. -5- K. Following execution of, and pursuant to, the MOU, plaintiffs' counsel: (i) continued their investigation and legal analysis of the matters alleged in the Actions and consulted with their financial advisor; (ii) engaged in additional discovery, including documentary discovery and the depositions of Defendant Mario Sbarro, Defendant Richard A. Mandell (Chairman of the Special Committee), and Dennis Kelly (a Managing Director of Prudential); and (iii) reviewed and commented upon a draft of the proxy statement which will be provided to Sbarro shareholders in connection with the Merger (the "Proxy Statement"). L. In light of the aforementioned investigation, the additional facts developed in discovery, the events, negotiations and agreements described above, and an analysis of applicable law, counsel for plaintiffs in the Actions have concluded that the terms and conditions of the settlement provided for in this Stipulation (the "Settlement") are fair, reasonable, adequate and in the best interests of the plaintiffs and the Class (as defined in paragraph 5(c) below). M. Plaintiffs are entering into this Stipulation after taking into account: (i) the substantial benefits to the members of the Class from the Merger Agreement, including the Increased Merger Consideration and the Public Shareholder Voting Requirement; (ii) the risks of continued litigation; and (iii) the conclusion of plaintiffs' counsel that the terms and conditions of the Settlement are fair, reasonable, adequate and in the best interests of the Public Shareholders. Plaintiffs and plaintiffs' counsel have agreed to the terms of the Settlement because, in their view, the Settlement achieves plaintiffs' principal objectives in the litigation, which are to maximize shareholder value for the Company's shareholders and to provide additional representation for the Public Shareholders. -6- N. All the defendants in the Actions have denied and continue to deny vigorously any liability with respect to any and all claims alleged in the Actions, expressly deny having engaged in any wrongful or illegal activity, or having violated any law or regulation or duty, and expressly deny that any person or entity has suffered any harm or damages as a result of the Settled Claims (as defined in paragraph 4 below). While denying any fault or wrongdoing, and relying on the provision of this Stipulation that it shall in no event be construed as or deemed to be evidence of an admission or concession on the part of Defendants or any Released Person (as defined in paragraph 4 below) of any fault or liability whatsoever, and without conceding any infirmity in their defenses against the claims alleged in the Actions, Defendants consider it desirable that the Actions be settled and dismissed, subject to the terms and conditions of this Stipulation, because the Settlement will (i) halt the substantial expense, inconvenience and distraction of continued litigation of plaintiffs' claims; (ii) finally put to rest those claims; and (iii) dispel any uncertainty that may exist as a result of this litigation. NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED, subject to the approval of the Court pursuant to Article 9 of the New York Civil Practice Law and Rules ("CPLR"), as follows: SETTLEMENT 1. In consideration for the full settlement, satisfaction, compromise and release of the Settled Claims, and in furtherance of the Final Merger Proposal and the Merger Agreement, the parties to the Actions have agreed to settle the Actions upon the terms described below. 2. The Sbarro Family has agreed to the payment of the Increased Merger Consideration upon consummation of the Merger as a result of the discussions and negotiations -7- described above, and after also considering the desirability of obtaining the dismissal, release and discharge of the Released Persons of and from all Settled Claims. 3. Plaintiffs' counsel have agreed to the Settlement after having reviewed a draft of the Proxy Statement to satisfy themselves that the Proxy Statement would fully and fairly disclose all material information. The Increased Merger Consideration in the Final Merger Proposal, as reflected in the terms of the Merger Agreement, together with the opportunity of plaintiffs' counsel to review and comment on the Proxy Statement, furnishes consideration for plaintiffs' agreement to release and discharge each of the defendants from the Settled Claims. Plaintiffs and their counsel shall take all reasonable steps necessary to support consummation of the Merger. SETTLED CLAIMS 4. Subject to the Settlement becoming final as contemplated in paragraph 8 below, any and all claims, demands, rights, actions or causes of action, rights, liabilities, damages, losses, obligations, judgments, suits, matters and issues of any kind or nature, known or unknown, that have been or could have been asserted in the Actions or in any court, tribunal or proceeding by or on behalf of any member of the Class (who has not elected to be excluded from the Class), whether individual, class, representative, derivative, legal, equitable or any other type or in any other capacity relating to the claims asserted in the Actions (collectively, the "Settled Claims") against Defendants in the Actions, Mergeco, the Sbarro Family or any of their families, parent entities, associates, affiliates or subsidiaries, and each and all of the foregoing's past, present or future officers, directors, shareholders, members, employees, attorneys, financial or investment advisors, consultants, accountants, investment bankers, commercial bankers, engineers, advisors or agents, general or limited partners or partnerships, and the personal representatives, heirs, -8- estates, administrators, executors, trustees, predecessors in interest, successors and assigns of each of the foregoing (collectively, the "Released Persons") shall be fully, finally and forever compromised, settled, discharged and dismissed with prejudice and on the merits and released pursuant to the terms and conditions set forth herein, provided however, that the parties hereto expressly reserve all rights and claims to enforce compliance with the terms of this Stipulation. With respect to any and all claims being settled and released, it is the intention of the parties hereto that, upon the Settlement becoming final, plaintiffs and each member of the Class who has not elected to be excluded from the Class, hereby expressly waive and relinquish, to the fullest extent permitted by law, the provisions, rights, and benefits of Section 1542 of the California Civil Code, which statute provides that: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. SUBMISSION AND APPLICATION TO COURT 5. As soon as practicable after the execution of this Stipulation, the parties hereto shall jointly apply to the Court for an order substantially in the form attached hereto as Exhibit A (the "Scheduling Order"), which shall include, among other things, provisions that: a. consolidate the Actions and appoint the signatories to this Stipulation on behalf of plaintiffs as Co-Lead Counsel for plaintiffs. b. preliminarily find the Settlement to be fair, reasonable, adequate and in the best interests of the Class, subject to a final determination based upon the record before the Court at the Settlement Hearing (as defined below); -9- c. provide for the certification of the Actions, for settlement purposes only, as a class action pursuant to CPLR Article 9 on behalf of a class consisting of all record and beneficial owners of Sbarro common stock during the period beginning on and including the close of business on November 25, 1998 through and including the date the Merger is consummated (the "Merger Date"), including any and all of their personal representatives, heirs, estates, administrators, executors, trustees, predecessors in interest, transferees, successors and assigns, immediate and remote, and any person or entity acting for or on behalf of, or claiming under, any of them, and each of them, but excluding the Defendants in the Actions, Mergeco, the Sbarro Family and their respective personal representatives, heirs, estates, administrators, executors, trustees, predecessors in interest, successors and assigns (the "Class"); d. certify the named plaintiffs in the Actions, on whose behalf the Stipulation has been executed, as representative parties for the Class; e. direct that a settlement hearing (the "Settlement Hearing") be held to determine whether the Court should (i) approve the Settlement pursuant to CPLR 908 as fair, reasonable, adequate and in the best interests of the Class, (ii) enter an Order and Final Judgment substantially in the form attached hereto as Exhibit B, dismissing the Actions with prejudice and on the merits, and with each party to bear its own costs (except as provided herein), and extinguish, release and enjoin prosecution of any and all Settled Claims, (iii) approve an application of counsel for plaintiffs for an award of fees and reimbursement of expenses, and (iv) hear such other matters as the Court may deem necessary and appropriate; and f. provide that (i) a copy of the Notice of Pendency of Class Action, Proposed Settlement of Class Action and Settlement Hearing (the "Notice"), substantially in the -10- form attached hereto as Exhibit A-1, is approved, (ii) a copy of the Summary Notice (the "Summary Notice"), substantially in the form attached hereto as Exhibit A-2, is approved, and (iii) the distribution of the Notice and Summary Notice, substantially in the manner set forth in the Scheduling Order, constitutes the best notice practicable under the circumstances, is due and sufficient notice of the Settlement Hearing and of all matters relating to the Settlement, and fully satisfies the requirements of due process, CPLR Article 9 and all other applicable law. COSTS OF NOTICE 6. All costs incurred in identifying on the stock records maintained by or on behalf of Sbarro and notifying the members of the Class of the Settlement, including the printing and copying of the Notice and publication of the Summary Notice as set forth in the Scheduling Order, will be paid by Sbarro. ORDER AND FINAL JUDGMENT 7. If the Settlement (including any modification thereto made with the consent of the parties as provided for herein) is approved by the Court, the parties shall promptly request the Court to enter an Order and Final Judgment substantially in the form attached hereto as Exhibit B, which will, among other things: a. determine that the Class has been adequately represented in the Actions and the Settlement; b. approve the Stipulation and the Settlement and adjudge the terms thereof to be fair, reasonable, adequate and in the best interests of the Class; c. determine that the requirements of CPLR Article 9 and due process have been satisfied in connection with notice to the Class; -11- d. dismiss, as to all Released Persons, the Actions with prejudice and without costs, except as herein provided, and extinguish, discharge and release any and all Settled Claims of each plaintiff and each other Class member, except those persons who submit a valid and timely request for exclusion from the Class in the manner described in the Notice ("Request for Exclusion"), said dismissal to be subject only to the Settlement becoming final as contemplated in paragraph 8 and compliance by the parties with the terms of this Stipulation and any Order of the Court concerning this Stipulation, and permanently enjoin plaintiffs and all other members of the Class, except those persons who submit a valid and timely Request for Exclusion, from asserting, commencing, prosecuting or continuing, either directly, individually, representatively, derivatively or in any other capacity, any of the Settled Claims against Mergeco, the Sbarro Family or any Released Person; and e. without affecting the finality of the Order and Final Judgment, reserve the Court's jurisdiction over all of the parties and the Class members, except those persons who submit a valid and timely Request for Exclusion, for the administration and consummation of the Settlement and this Stipulation and the application of plaintiffs' counsel for an award of attorneys' fees and expenses. FINALITY OF SETTLEMENT 8. The approval of the Settlement shall be considered final when the following three events have occurred: (i) entry of the Order and Final Judgment approving the Settlement; (ii) expiration of any applicable period for the appeal of the Order and Final Judgment without an appeal having been filed or, if an appeal is filed, entry of an order affirming the Order and Final Judgment appealed from and the expiration of any applicable period for the reconsideration, -12- rehearing or appeal of such affirmance without any motion for reconsideration or rehearing or further appeal having been filed; and (iii) consummation of the Merger. RIGHTS TO WITHDRAW FROM THE SETTLEMENT 9. Defendants, by action taken by a majority of Defendants Mario Sbarro, Joseph Sbarro and Anthony Sbarro, or plaintiffs, by action taken by plaintiffs' Co-Lead Counsel (as identified below), shall have the option to withdraw from and terminate the Settlement in the event that: (i) either the Scheduling Order or the Order and Final Judgment referred to above are not entered substantially in the forms specified in Exhibits A and B hereto, respectively, including such modifications thereto as may be ordered by the Court with the consent of the parties; (ii) the Settlement is not approved by the Court or is disapproved, or the Court or appellate court requests the parties to make a material modification to the Settlement to which the parties do not consent; (iii) the condition to finality of the Settlement set forth in clause (ii) of paragraph 8 above shall not have been satisfied; or (iv) the Merger Agreement is terminated. In order to exercise this option to withdraw from and terminate this Settlement, a party shall provide, by hand or facsimile, written notice of such withdrawal and the grounds therefor to all signatories to this Stipulation as soon as is practicable. 10. In the event the Settlement is not approved by the Court, or the Court approves the Settlement but such approval is reversed or vacated on appeal, reconsideration or otherwise and such order reversing or vacating the Settlement becomes final by lapse of time or otherwise, or in the event the Merger is not consummated on or before September 30, 1999, or if any of the conditions to such Settlement are not fulfilled, then the Settlement shall be of no further force and effect, and this Stipulation and any amendment thereof, and all negotiations, proceedings and -13- statements relating thereto, except for paragraph O, this paragraph and paragraphs 6 and 14, shall be null and void and without prejudice to any party, and each party shall be restored to his, her or its respective position as it existed prior to the execution of the MOU. ATTORNEYS' FEES 11. At or before the Settlement Hearing, plaintiffs' counsel will apply for an award of attorneys' fees (inclusive of expenses), not to exceed $2,100,000, subject to the Settlement becoming final, as contemplated in paragraph 8. Defendants agree they will not object to such an application by plaintiffs' counsel, but Defendants retain the right to oppose any other application for fees or disbursements by plaintiffs, plaintiffs' counsel or any other person. Any fee and expense award to plaintiffs' counsel shall be paid exclusively by Sbarro on behalf of and for the benefit of all Defendants. The fairness, reasonableness and adequacy of the Settlement, and whether the Settlement is in the best interests of the Public Shareholders, may be considered and ruled upon by the Court independently of its consideration of any award of attorneys' fees and expenses. No counsel for plaintiffs shall apply to any court for any fees and expenses except as provided for in this paragraph. 12. Subject to the terms and conditions of this Stipulation, such fees and expenses shall be paid within five (5) business days of the later of (i) the date on which the Settlement becomes final as provided in paragraph 8 above, or (ii) the date when the Order granting the application of plaintiffs' counsel for an award of fees and expenses ("Fee and Expense Order") has become final and, in either case, upon expiration of any period to file an appeal of the Fee and Expense Order without an appeal having been filed or, if an appeal is filed, entry of an order affirming the Fee and Expense Order and the expiration of any applicable period for the reconsideration, rehearing or -14- appeal of such affirmance without any motion for reconsideration or hearing or further appeal having been filed. Except as expressly provided herein, Defendants shall bear no other expenses, costs, damages or fees alleged or incurred by the named plaintiffs, or any member of the Class, or by any of their attorneys, experts, advisors, agents or representatives. AUTHORITY 13. Each of the attorneys executing this Stipulation on behalf of any party hereto warrants and represents that such attorney has been duly authorized and empowered to execute this Stipulation on behalf of such party. STIPULATION NOT AN ADMISSION 14. The provisions contained in this Stipulation and all negotiations, statements and proceedings in connection therewith shall not be deemed a presumption, a concession or an admission by any Defendant of any fault, liability or wrongdoing as to any facts or claims alleged or asserted in the Actions or any other action or proceeding, and shall not be interpreted, construed, deemed, invoked, or offered in evidence or otherwise used by any person in the Actions or in any other action or proceeding, whether civil, criminal or administrative, except in a proceeding to enforce the terms or conditions of this Stipulation. COUNTERPARTS 15. This Stipulation may be executed in any number of actual or telecopied counterparts and by each of the different parties thereto on several counterparts, each of which when so executed and delivered shall be an original. The executed signature page(s) from each actual or telecopied counterpart may be joined together and attached to one such original and shall constitute one and the same page and part of the same instrument. -15- WAIVER 16. The waiver by any party of any breach of any provision of this Stipulation shall not be deemed or construed as a waiver of any other breach, whether prior, subsequent or contemporaneous, or of any other provision of this Stipulation. ENTIRE AGREEMENT: AMENDMENTS 17. This Stipulation constitutes the entire agreement among the parties with respect to the subject matter hereof, and may not be amended, except by a writing executed by all of the parties hereto and no provision may be waived except by a writing executed by the party to be charged. 18. This Stipulation, upon becoming operative, shall be binding upon and inure to the benefit of the Released Persons, as well as the parties hereto and their respective heirs, estates, administrators, executors, trustees, successors and assigns and upon any corporation, partnership or entity into or with which any party may merge or consolidate or which may otherwise assume its obligations. 19. All of the exhibits hereto are incorporated herein by reference as if set forth herein verbatim, and the terms of all exhibits are expressly made part of this Stipulation. GOVERNING LAW 20. This Stipulation shall be construed and enforced in accordance with the laws of the State of New York, without regard to its principles of conflicts of laws other than Section 5-1401 of New York's General Obligation Law. -16- BEST EFFORTS 21. The parties hereto and their attorneys agree to cooperate fully with one another in seeking the Court's approval of this Stipulation and the Settlement and to use their best efforts to effect the confirmation of this Stipulation and the Settlement. Dated: April 7, 1999 ABBEY GARDY & SQUITIERI, LLP PARKER CHAPIN FLATTAU & KLIMPL, LLP By: /s/ Arthur N. Abbey By: /s/ Joel M. Wolosky -------------------------- ------------------------------ Arthur N. Abbey Joel M. Wolosky 212 East 39th Street 1211 Avenue of the Americas New York, NY 10016 New York, NY 10036 (212) 889-3700 (212) 704-6000 BERNSTEIN LITOWITZ BERGER ATTORNEYS FOR DEFENDANTS & GROSSMANN LLP SBARRO, INC. AND BERNARD ZIMMERMAN By: /s/ Jeffrey A. Klafter --------------------------- Jeffrey A. Klafter WILLKIE FARR & GALLAGHER 1285 Avenue of the Americas New York, NY 10019 (212) 554-1400 By: /s/ Stephen W. Greiner -------------------------- Stephen W. Greiner GOODKIND LABATON RUDOFF 787 Seventh Avenue & SUCHAROW LLP New York, NY 10019 (212) 728-8000 By: /s/ Jonathan M. Plasse ---------------------------- Jonathan M. Plasse ATTORNEYS FOR DEFENDANTS 100 Park Avenue RICHARD A. MANDELL, HAROLD L. New York, NY 10017 KESTENBAUM, PAUL A. VATTER AND (212) 907-0700 TERRY VINCE CO-LEAD COUNSEL FOR PLAINTIFFS AND THE CLASS -17- ENTWHISTLE & CAPPUCCI LLP WARSHAW BURSTEIN COHEN 400 Park Avenue, 16th Floor SCHLESINGER & KUH, LLP New York, NY 10022 (212) 894-7200 By: /s/ Arthur A. Katz -------------------------- WECHSLER HANWOOD HALEBIAN Arthur A. Katz & FEFFER, LLP 555 Fifth Avenue 488 Madison Avenue, 8th Floor New York, NY 10017 New York, NY 10022 (212) 984-7700 (212) 935-7400 ATTORNEYS FOR DEFENDANTS WOLF POPPER LLP JOSEPH SBARRO, ANTHONY 845 Third Avenue SBARRO, MARIO SBARRO AND New York, NY 10022 CARMELA SBARRO (212) 759-4600 BERNSTEIN LIEBHARD & LIFSHITZ, LLP 10 East 40th Street New York, NY 10016 (212) 779-1414 ATTORNEYS FOR PLAINTIFFS -18- PRESENT: HON. BEATRICE SHAINSWIT, JUSTICE At a ____ Term, Part _____, Supreme Court of the State of New York, County of New York, at the Courthouse, 60 Centre Street, New York, NY on the ___ day of May, 1999 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - -----------------------------------------------------) LEE BRENIN, On Behalf of Himself ) Index No. 98-605796 and All Others Similarly Situated, ) ) Plaintiff, ) ) SCHEDULING ORDER v. ) ---------------- ) MARIO SBARRO, ANTHONY SBARRO, ) CARMELA SBARRO, JOSEPH SBARRO, ) and SBARRO, INC. ) ) Defendants. ) - -----------------------------------------------------) PETER SALIT, On Behalf of Himself ) Index No. 98-605801 and All Others Similarly Situated, ) ) Plaintiff, ) ) v. ) ) SBARRO, INC., JOSEPH SBARRO, ANTHONY ) SBARRO, MARIO SBARRO, CARMELLA ) SBARRO, TERRY VINCE, HAROLD ) KESTENBAUM, RICHARD A. MANDELL, ) PAUL A. VATTER AND BERNARD ) ZIMMERMAN, ) ) Defendants. ) - -----------------------------------------------------) EXHIBIT A - ------------------------------------------------------) DAVID FINKELSTEIN, On Behalf of Himself ) Index No. 98-605827 and All Others Similarly Situated, ) ) Plaintiff, ) ) v. ) ) SBARRO, INC., JOSEPH SBARRO, ANTHONY ) SBARRO, MARIO SBARRO, CARMELLA ) SBARRO, TERRY VINCE, HAROLD ) KESTENBAUM, RICHARD A. MANDELL, ) PAUL A. VATTER AND BERNARD ) ZIMMERMAN, ) ) Defendants. ) - ------------------------------------------------------) BARRY ADELMAN, On Behalf of Himself ) Index No. 98-605847 and All Others Similarly Situated, ) ) Plaintiff, ) ) v. ) ) MARIO SBARRO, ANTHONY SBARRO, ) CARMELA SBARRO, JOSEPH SBARRO, ) and SBARRO, INC. ) ) Defendants. ) - -------------------------------------------------------) EXHIBIT A - ---------------------------------------------------------) CHARTER CAPITAL CORP., GRUNTAL ) FINANCIAL LLC SAVINGS PLAN A/C ) NORMAN EPSTEIN, HARBOR FINANCE ) PARTNERS, LIST, INC. and WAYNE CRIMI, ) On Behalf of Themselves and All Others Similarly ) Situated, ) ) Plaintiffs, ) Index No. 99-100884 ) - against - ) ) JOSEPH SBARRO, ANTHONY SBARRO, ) MARIO SBARRO, BERNARD ZIMMERMAN, ) PAUL VATTER, HAROLD KESTENBAUM, ) JERRY VINCE, RICHARD A. MANDELL and ) SBARRO, INC. ) ) Defendants. ) - ---------------------------------------------------------) The parties to the above-captioned actions (the "Actions") having applied pursuant to Article 9 of the New York Civil Practice Law and Rules ("CPLR") for an Order, among other things, (1) consolidating the Actions for all purposes and establishing an organizational structure for plaintiffs' counsel; (2) preliminarily finding the proposed settlement of the Actions described in the Stipulation of Settlement entered into by the parties, dated April 7, 1999 (the "Stipulation") to be fair, reasonable, adequate and in the best interests of the Class defined below; (3) determining solely for purposes of the Settlement that the Actions may be maintained as a class action; (4) certifying the plaintiffs in the Actions, on whose behalf the Stipulation has been executed, as representative parties for the Class; (5) scheduling a hearing to consider, among other things, final approval of the Settlement (the "Settlement Hearing"); and (6) directing notice of the Settlement EXHIBIT A to the Class; and the Court having read and considered the Stipulation and accompanying documents, the complaints filed, and the summons' served, in each of the Actions and all parties having consented to the entry of this Order, NOW, this day of May, 1999, upon application of all parties to the Actions, IT IS HEREBY ORDERED as follows: 1. Each of the Actions shall be consolidated pursuant to Rule 602 of the New York Civil Practice Law and Rules for all purposes. 2. Hereafter, the Actions shall bear Index No. 98-605796 and their caption shall be as set forth as: SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - ---------------------------------------------------------) PETER SALIT, BARRY ADELMAN, ) DAVID FINKELSTEIN, LEE BRENIN, CHARTER ) CAPITAL CORP., GRUNTAL FINANCIAL LLC ) SAVINGS PLAN A/C/ NORMAN EPSTEIN, HARBOR ) FINANCE PARTNERS, LIST, INC. and WAYNE ) CRIMI, On Behalf of Themselves and All Others ) Similarly Situated, ) ) Consolidated Plaintiffs, ) Index No. 98-605796 ) - against - ) ) SBARRO, INC., JOSEPH SBARRO, ANTHONY ) SBARRO, MARIO SBARRO, CARMELA SBARRO, ) TERRY VINCE, HAROLD KESTENBAUM, ) RICHARD A. MANDELL, PAUL A. VATTER ) and BERNARD ZIMMERMAN, ) ) Defendants. ) - ---------------------------------------------------------) EXHIBIT A -2- 3. All papers previously filed and served to date in any of the actions consolidated herein are hereby deemed as part of the record in the Actions unless and to the extent otherwise provided for herein. Co-lead Counsel for plaintiffs (identified below) shall serve a copy of this Order with notice of entry upon the Clerk of the Court (Room 141B) and the Clerk of the Trial Support Office (Room 158), who are directed to mark their records to reflect the consolidation. 4. The organizational structure of plaintiffs' counsel established in paragraph 5 hereof shall apply to all plaintiffs' counsel in the Actions and any other related action filed subsequent to or transferred to this Court following the date of this Order. 5. The law firms of Abbey, Gardy & Squitieri, LLP, Bernstein Litowitz Berger & Grossmann LLP and Goodkind Labaton Rudoff & Sucharow LLP shall constitute plaintiffs' Co- Lead Counsel and serve as Co-Lead Counsel for the Class ("Class Counsel"). 6. All motions and applications shall be made on behalf of all plaintiffs jointly. Plaintiffs shall serve only joint and consolidated sets of papers. Service on counsel for defendants shall be good and sufficient if made by hand delivery, facsimile transmission, or overnight delivery. 7. All notices, proposed orders, pleadings, motions, and memoranda shall be served upon Class Counsel. 8. Class Counsel are authorized to receive orders, notices, correspondence and telephone calls from the Court and the Clerk of the Court on behalf of all the plaintiffs. 9. The initial complaint filed in Lee Brenin v. Mario Sbarro, et al., Index No. 98- 605796, shall be the operative complaint of the Actions (the "Consolidated Complaint") bearing the caption and index number as provided above. EXHIBIT A -3- 10. Service of the Consolidated Complaint on defendants who have been served in any of the individual Actions shall be sufficient if served upon their attorneys of record in such Actions. 11. The Court adopts and incorporates the definitions in the Stipulation for purposes of this Order. 12. Solely for purposes of the Settlement, the Actions shall be maintained as a class action pursuant to CPLR Article 9 on behalf of a class consisting of all record and beneficial owners of Sbarro, Inc. ("Sbarro") common stock during the period beginning on and including the close of business on November 25, 1998 through and including the date the proposed merger of Sbarro Merger LLC ("Mergeco") with and into Sbarro is consummated (the "Merger Date"), including any and all of their personal representatives, heirs, estates, administrators, executors, trustees, predecessors in interest, transferees, successors and assigns, immediate and remote, and any person or entity acting for or on behalf of, or claiming under, any of them, and each of them, but excluding the Defendants in the Actions, Mergeco, the Sbarro Family and their respective personal representatives, heirs, estates, administrators, executors, trustees, predecessors in interest, successors and assigns (the "Class"); 13. The Court finds that (a) the Class is so numerous that joinder of all members is impracticable, (b) there are questions of law or fact common to the Class, (c) the claims of the named plaintiffs are typical of the claims of the Class, (d) the named plaintiffs and Class Counsel will fairly and adequately protect the interests of the Class and the named plaintiffs are certified as -4- representative parties for the Class, and (e) the Class meets the further requirements of CPLR Article 9. 14. The Court preliminarily finds the Settlement to be fair, reasonable, adequate and in the best interests of the Class, subject to a final determination based upon the record before the Court at the Settlement Hearing. 15. The Settlement Hearing shall be held on , 1999, at a.m./p.m. in the Supreme Court of the State of New York, County of New York, in Courtroom ___, 60 Centre Street, New York, New York 10007 to determine whether the Court should approve the Settlement pursuant to CPLR 908 as fair, reasonable, adequate and in the best interests of the Class, whether the Stipulation and the terms and conditions of the Settlement should be finally approved by the Court, and whether to enter an Order and Final Judgment dismissing the Actions as to all defendants with prejudice and on the merits and with each party to bear its own expenses (except as provided in the Stipulation) as against the plaintiffs and all members of the Class except those who submit a valid and timely request for exclusion from the Class and extinguish, release and enjoin prosecution of any and all Settled Claims, and to hear and determine such other matters as the Court may deem necessary. At the Settlement Hearing, Class Counsel may apply for an award of attorneys' fees and expenses as set forth in the Stipulation, subject to the Settlement becoming final, as contemplated in paragraph 8 of the Stipulation, which application shall be heard by the Court at the Settlement Hearing or at such time thereafter as the Court in its discretion deems appropriate. EXHIBIT A -5- 16. The Court reserves the right to adjourn the Settlement Hearing, including consideration of the application for attorneys' fees and expenses, without further notice other than by oral announcement at the Settlement Hearing or any adjournment thereof. 17. The Court reserves the right to approve the Settlement at or after the Settlement Hearing with such modification as may be consented to by the parties to the Stipulation and without further notice to the Class. 18. The Notice of Pendency of Class Action, Proposed Settlement of Class Action and Settlement Hearing (the "Notice"), substantially in the form attached as Exhibit A-1 to the Stipulation, and the Summary Notice (the "Summary Notice"), substantially in the form attached as Exhibit A-2 to the Stipulation, are approved. 19. a. Within five (5) business days of the date of this Order, defendant Sbarro shall cause to be mailed, by first-class mail, postage prepaid, the Notice, in substantially the form attached hereto as Exhibit A-1, to all members of the Class who can be identified with reasonable effort on the stock records maintained by or on behalf of Sbarro as of the fifth from last business day before the Notice is mailed. b. Within seven (7) business days of the date of this Order, Sbarro shall cause the Summary Notice, in substantially the form attached hereto as Exhibit A-2, to be published in the national edition of THE WALL STREET JOURNAL. c. Sbarro shall be solely responsible for the cost of printing and mailing the Notice to the Class and of publishing the Summary Notice as set forth herein. EXHIBIT A -6- 20. The form and method of distribution of the Notice and Summary Notice specified herein constitutes the best notice practicable under the circumstances and shall constitute due and sufficient notice of the Settlement Hearing and of all matters relating to Settlement to all persons entitled to receive such notice, and fully satisfies the requirements of due process, CPLR Article 9 and all other applicable law. Sbarro shall, on or before the date of the Settlement Hearing, file proof of mailing of the Notice and publication of the Summary Notice. 21. Requests for Exclusion from the Class must be postmarked on or before _________, 1999 and comply with the procedures set forth in the Notice. 22. Any member of the Class who does not request exclusion from the Class and who objects to the Stipulation, the Settlement, the Order and Final Judgment, and/or the application for attorneys' fees and expenses, or who otherwise wishes to be heard, may appear in person or by their attorney at the Settlement Hearing and present any evidence or argument that may be proper and relevant; provided however, that no person other than plaintiffs, Class Counsel, Defendants and counsel for Defendants in the Actions shall be heard, and no papers, briefs, pleadings or other documents submitted by any such person shall be received and considered by the Court (unless the Court in its discretion shall thereafter otherwise direct, upon application of such person and for good cause shown) unless no later than ten (10) days prior to the Settlement Hearing directed herein, such person files with the Court (a) written notice of their intention to appear; (b) a detailed statement of their objections to any matter before the Court; (c) the grounds therefor or the reasons why they desire to appear and to be heard; (d) a statement of the number of shares of Sbarro common stock owned by such persons as of the close of business on EXHIBIT A -7- November 25, 1998 and any transactions on Sbarro common stock from that date until the submission of their objection; and (e) documents and writings which such person desires the Court to consider, and, on or before or such filing, serves a copy of their filing by hand or overnight mail on the following counsel of record: Arthur N. Abbey Abbey Gardy & Squitieri LLP 212 East 39th Street New York, NY 10016 Jeffrey A. Klafter Bernstein Litowitz Berger & Grossmann LLP 1285 Avenue of the Americas New York, NY 10019 Jonathan M. Plasse Goodkind Labaton Rudoff & Sucharow LLP 100 Park Avenue New York, NY 10017 Class Counsel Joel M. Wolosky Parker Chapin Flatteau & Klimpl, LLP 1211 Avenue of the Americas New York, NY 10036 Attorneys for Defendants Sbarro, Inc. and Bernard Zimmerman EXHIBIT A -8- Stephen W. Greiner Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019 Attorneys for Defendants Richard A. Mandell, Harold L. Kestenbaum, Paul Vatter and Terry Vince Arthur A. Katz Warshaw Burstein Cohen Schlesinger & Kuh, LLP 555 Fifth Avenue New York, NY 10017 Attorneys for Defendants Joseph Sbarro, Anthony Sbarro, Mario Sbarro and Carmela Sbarro 23. Any person who fails to object in the manner prescribed above shall be deemed to have waived such objection and shall be forever barred from raising such objection in the Actions or any other action or proceedings. 24. Pending final determination of whether the Settlement should be approved, plaintiffs and all members of the Class are barred and enjoined from commencing, continuing, asserting or prosecuting any action or claim, either directly, individually, representatively, derivatively or in any other capacity, against Mergeco, the Sbarro Family or any Defendant which are Settled Claims. 25. In the event the Settlement is not approved by the Court, or the Court approves the Settlement but such approval is reversed or vacated on appeal, reconsideration or otherwise and such order reversing or vacating the Settlement becomes final by lapse of time or otherwise, or if any of the conditions to such Settlement are not fulfilled, then the Settlement shall be of no EXHIBIT A -9- further force and effect, and the Stipulation and any amendment thereof, and all negotiations, proceedings and statements relating thereto, except for paragraphs O, 6, 10 and 14 of the Stipulation, shall be null and void and without prejudice to any party hereto, and each party shall be restored to his, her or its respective position as it existed prior to January 19, 1999, the date of the execution of the Memorandum of Understanding among counsel to the plaintiffs and counsel to the Defendants related to the Stipulation and the Settlement. SO ORDERED: ----------------------------- J.S.C. -10- PRESENT: HON. BEATRICE SHAINSWIT, JUSTICE At a ____ Term, Part _____, Supreme Court of the State of New York, County of New York, at the Courthouse, 60 Centre Street, New York, NY on the ___ day of ____, 1999 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - ----------------------------------------------------------) PETER SALIT, BARRY ADELMAN, ) DAVID FINKELSTEIN, LEE BRENIN, CHARTER ) CAPITAL CORP., GRUNTAL FINANCIAL LLC ) SAVINGS PLAN A/C/ NORMAN EPSTEIN, HARBOR ) FINANCE PARTNERS, LIST, INC. and WAYNE ) CRIMI, On Behalf of Themselves and All Others ) Similarly Situated, ) Consolidated ) Plaintiffs, ) Index No. 98-605796 ) - against - ) ) SBARRO, INC., JOSEPH SBARRO, ANTHONY ) SBARRO, MARIO SBARRO, CARMELA SBARRO, ) TERRY VINCE, HAROLD L. KESTENBAUM, ) RICHARD A. MANDELL, PAUL A. VATTER ) and BERNARD ZIMMERMAN, ) ) Defendants. ) - ----------------------------------------------------------) ORDER AND FINAL JUDGMENT ------------------------ A hearing (the "Settlement Hearing") having been held before this Court (the "Court") on ________________, 1999, pursuant to the Court's order of April __, 1999 (the "Scheduling Order"), upon a Stipulation of Settlement dated April __, 1999 (the "Stipulation"), with respect to the above-captioned consolidated action (the "Actions"), it appearing that due notice of said EXHIBIT B hearing has been given in accordance with the aforesaid Scheduling Order; the respective parties having appeared by their attorneys of record; the Court having heard and considered evidence and memoranda in support of the proposed Settlement; the attorneys for the respective parties having been heard; an opportunity to be heard having been given to all other persons requesting to be heard in accordance with the Scheduling Order; the Court having determined that notice to the certified Class (as defined below), pursuant to the Scheduling Order, was adequate and sufficient; and the entire matter of the proposed Settlement having been heard and considered by the Court; IT IS HEREBY ORDERED, ADJUDGED AND DECREED this day of , 1999, that: 1. Unless otherwise defined herein, all defined terms shall be defined as set forth in the Stipulation. 2. The form of, and manner of giving, notice to the members of the Class is hereby determined to have been the best notice practicable under the circumstances, was due and sufficient notice of the Settlement Hearing and of all matters relating to the Settlement, and fully satisfied the requirements of due process, Article 9 of the New York Civil Practice Law and Rules ("CPLR") and all other applicable law. 3. The Stipulation and the Settlement are approved and the terms thereof are adjudged to be fair, reasonable, adequate and in the best interests of the Class. 4. The Class has been adequately represented in the Actions and the Settlement. 5. Subject to the Settlement becoming final as contemplated in paragraph 8 of the Stipulation, and compliance by the parties with the terms of the Stipulation and this Order, any 2 and all claims, demands, rights, actions or causes of action, rights, liabilities, damages, losses, obligations, judgments, suits, matters and issues of any kind or nature, known or unknown, that have been or could have been asserted in the Actions or in any court, tribunal or proceeding by or on behalf of any member of the Class, whether individual, class, representative, derivative, legal, equitable or any other type or in any other capacity relating to the claims asserted in the Actions (collectively, the "Settled Claims") against Defendants in the Actions, Mergeco, the Sbarro Family or any of their families, parent entities, associates, affiliates or subsidiaries, and each and all of the foregoing's past, present or future officers, directors, shareholders, members, employees, attorneys, financial or investment advisors, consultants, accountants, investment bankers, commercial bankers, engineers, advisors or agents, general or limited partners or partnerships, and the personal representatives, heirs, estates, administrators, executors, trustees, predecessors in interest, successors and assigns of each of the foregoing (collectively, the "Released Persons") are except as to those persons who are excluded from the Class, fully, finally and forever compromised, settled, discharged and dismissed with prejudice and on the merits and released pursuant to the terms and conditions set forth herein; provided, however, that the parties to the Stipulation expressly reserve all rights and claims to enforce compliance with the terms of the Stipulation and this Order and Final Judgment. With respect to any and all claims being settled and released, it is the intention of the parties hereto that, upon the Settlement becoming final, plaintiffs and each member of the Class (who has not elected to be excluded from the Class) hereby expressly waive and relinquish, to the fullest extent permitted by law, the provisions, rights, and benefits of Section 1542 of the California Civil Code, which statute provides that: 3 A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. 6. Only the persons identified in Exhibit 1 hereto are deemed to have validly and timely requested exclusion exclusion from the Class and are excluded from the Class 7. Subject to the Settlement becoming final pursuant to paragraph 8 of the Stipulation and compliance by the parties with the terms of the Stipulation and this Order, the Actions are dismissed as to all Released Persons with prejudice and on the merits and without costs except as provided in the Stipulation. 8. Subject to the Settlement becoming final, pursuant to paragraph 8 of the Stipulation and compliance by the parties with the terms of the Stipulation and this Order, the plaintiffs and all members of the Class, except those identified on Exhibit 1 hereto, are permanently barred and enjoined from commencing, continuing, asserting or prosecuting, either directly, individually, representatively, derivatively or in any other capacity, any of the Settled Claims against Mergeco, the Sbarro Family or any Released Person. 9. In the event the Merger is not consummated on or before September 30, 1999, unless otherwise agreed by the parties, this Order and Final Judgment shall be of no force and effect, and the Stipulation and any amendment thereof, and all negotiations, proceedings and statements relating thereto, except for paragraphs O, 6, 10 and 14 of the Stipulation, shall be null and void and without prejudice to any party, and each party shall be restored to his, her or its respective portion as it existed prior to January 19, 1999, the date of the execution of the EXHIBIT B 4 Memorandum of Understanding among counsel to the plaintiffs and counsel to the Defendants related to the Stipulation and the Settlement. 10. Without affecting the finality of this Order and Final Judgment in any way, this Court reserves jurisdiction over all of the parties and the Class members of all matters relating to the administration and consummation of the Settlement and the Stipulation and the application of plaintiffs' counsel for an award of attorneys' fees and expenses. Dated: _______________ , 1999 ------------------------------- J.S.C. EXHIBIT B 5 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - -----------------------------------------------------------) PETER SALIT, BARRY ADELMAN, ) DAVID FINKELSTEIN, LEE BRENIN, CHARTER ) CAPITAL CORP., GRUNTAL FINANCIAL LLC ) SAVINGS PLAN A/C/ NORMAN EPSTEIN, HARBOR ) FINANCE PARTNERS, LIST, INC. and WAYNE ) CRIMI, On Behalf of Themselves and All Others ) Similarly Situated, ) Consolidated ) Plaintiffs, )Index No. 98-605796 ) - against - ) ) SBARRO, INC., JOSEPH SBARRO, ANTHONY ) SBARRO, MARIO SBARRO, CARMELA SBARRO, ) TERRY VINCE, HAROLD L. KESTENBAUM, ) RICHARD A. MANDELL, PAUL A. VATTER ) and BERNARD ZIMMERMAN, ) ) Defendants. ) - -----------------------------------------------------------) NOTICE OF PENDENCY OF CLASS ACTION, PROPOSED SETTLEMENT OF CLASS ACTION AND SETTLEMENT HEARING ---------------------- TO: ALL RECORD AND BENEFICIAL OWNERS OF THE COMMON STOCK OF SBARRO, INC. DURING THE PERIOD BEGINNING ON AND INCLUDING THE CLOSE OF BUSINESS ON NOVEMBER 25, 1998 THROUGH AND INCLUDING THE DATE THE PROPOSED MERGER BETWEEN SBARRO AND AN ENTITY FORMED BY THE SBARRO FAMILY (AS DEFINED BELOW) IS CONSUMMATED (THE "MERGER DATE"), INCLUDING ANY AND ALL OF THEIR PERSONAL REPRESENTATIVES, HEIRS, ESTATES, ADMINISTRATORS, EXECUTORS, TRUSTEES, PREDECESSORS IN INTEREST, TRANSFEREES, SUCCESSORS AND ASSIGNS, IMMEDIATE AND REMOTE, AND ANY PERSON OR ENTITY ACTING FOR OR ON BEHALF OF, OR CLAIMING UNDER, ANY OF THEM, AND EACH OF THEM, BUT EXCLUDING THE DEFENDANTS IN THE ACTIONS, SBARRO MERGER LLC, THE SBARRO FAMILY AND THEIR RESPECTIVE PERSONAL EXHIBIT A-1 REPRESENTATIVES, HEIRS, ESTATES, ADMINISTRATORS, EXECUTORS, TRUSTEES, PREDECESSORS IN INTEREST, SUCCESSORS AND ASSIGNS. PLEASE READ THIS NOTICE CAREFULLY AND IN ITS ENTIRETY. YOUR RIGHTS WILL BE AFFECTED BY THE LEGAL PROCEEDINGS IN THIS LITIGATION. IF YOU WERE NOT THE BENEFICIAL HOLDER OF SBARRO STOCK BUT HELD SBARRO STOCK FOR A BENEFICIAL HOLDER, PLEASE TRANSMIT THIS DOCUMENT TO SUCH BENEFICIAL HOLDER. 1. This notice is given pursuant to Article 9 of the New York Civil Practice Law and Rules ("CPLR") and pursuant to an Order of this Court entered in the above-captioned consolidated actions (the "Actions") to all record and beneficial owners of Sbarro, Inc. ("Sbarro" or the "Company") common stock during the period beginning on and including the close of business on November 25, 1998 through and including the Merger Date, including any and all of their personal representatives, heirs, estates, administrators, executors, trustees, predecessors in interest, transferees, successors and assigns, immediate and remote, and any person or entity acting for or on behalf of, or claiming under, any of them, and each of them, but excluding the Defendants in the Actions, Mergeco, the Sbarro Family and their respective personal representatives, heirs, estates, administrators, executors, trustees, predecessors in interest, successors and assigns (the "Class"). 2. On May 11, 1999, the Court entered an order (the "Scheduling Order") which, among other things, (a) consolidated the Actions for all purposes; (b) preliminarily found the Settlement described herein (the "Settlement") to be fair, reasonable, adequate and in the best interests of the Class, subject to a final determination based upon the record before the Court at the Settlement Hearing described below; and (c) determined, solely for purposes of the Settlement, that the Actions may be maintained as a class action by the named plaintiffs as EXHIBIT A-1 -2- representatives of the Class, and naming the law firms of Abbey, Gardy & Squitieri, LLP, Bernstein Litowitz Berger & Grossmann LLP, and Goodkind Labaton Rudoff & Sucharow LLP as Co-Lead Counsel for the Class ("Class Counsel"). SETTLEMENT HEARING ------------------ 3. Members of the Class have an interest in these proceedings and are hereby notified that a hearing (the "Settlement Hearing") shall be held on June 29, 1999, at 10:30 a.m. in the Supreme Court of the State of New York, County of New York, Part 10, Room 222, 60 Centre Street, New York, New York 10007 to determine the following issues: a. whether the Court should approve the Settlement pursuant to CPLR 908 as fair, reasonable, adequate and in the best interest of the Class; b. whether the Stipulation of Settlement dated April 7, 1999 (the "Stipulation") and the terms and conditions of the Settlement should be finally approved by the Court; c. whether an Order and Final Judgment should be entered by the Court dismissing the Actions as to all defendants with prejudice and on the merits and with each party to bear its own expenses (except as provided in the Stipulation) as against the plaintiffs and all members of the Class except those persons who submit a valid and timely request for exclusion from the Class in the manner described below, and extinguish, release and enjoin prosecution of any and all Settled Claims (the "Order and Final Judgment"); d. to hear and determine such other matters as the Court may deem necessary; and EXHIBIT A-1 -3- e. in the event the Court approves the Settlement and enters the Order and Final Judgment, to consider an application by Class Counsel for an award of attorneys' fees and expenses, as described below. 4. The Court has reserved the right to adjourn the Settlement Hearing, including consideration of the application for attorneys' fees and expenses, without further notice other than by oral announcement at the Settlement Hearing or any adjournment thereof. The Court also has reserved the right to approve the Settlement at or after the Settlement Hearing with such modifications as may be consented to by the parties to the Stipulation and without further notice to the Class. SUMMARY OF SETTLEMENT --------------------- The Actions and the Settlement address claims arising out of a proposed merger of an entity formed by Defendants Mario Sbarro, Joseph Sbarro and Anthony Sbarro (including Joseph Sbarro (1994) Family Limited Partnership and The Trust of Carmela Sbarro, entities participating with such Defendants (collectively, the "Sbarro Family"), under which all outstanding common stock of Sbarro not owned by the Sbarro Family (the "Public Shares") would be exchanged for cash (the "Merger"). Pursuant to the Settlement described herein, the price to be paid for the Public Shares in the Merger has been increased to $28.85 per share, a $1.35 per share increase from the $27.50 per share previously proposed by the Sbarro Family. This per share increase represents an aggregate increase of approximately $18.2 million. In consideration of this increase to be paid for the Public Shares, among other things, plaintiffs in the Actions have agreed, subject to consummation of the Merger and the approval of the Settlement EXHIBIT A-1 -4- by the Court, to the dismissal of their claims relating to the Merger. A more complete description of the Settlement is set forth below. FACTUAL BACKGROUND ------------------ The following description of the Actions and the Settlement have been prepared by counsel for the parties. The Court has made no findings with respect to such matters, and this Notice is not an expression by the Court of any findings of fact or of law. A. Defendant Sbarro is a New York corporation with its principal executive offices located at 401 Broadhollow Road, Melville, New York 11747. Sbarro operates a chain of family-style, cafeteria-type Italian restaurants under the "Sbarro" and "Sbarro The Italian Eatery" names. As of January 3, 1999, Sbarro had 630 Company-owned and 268 franchised restaurants in the United States and abroad. B. Defendants Mario Sbarro, Joseph Sbarro, Anthony Sbarro, Carmela Sbarro, Terry Vince, Harold L. Kestenbaum, Richard A. Mandell, Paul A. Vatter and Bernard Zimmerman (collectively, the "Individual Defendants" and together with Sbarro, the other defendant in the Actions, the "Defendants") are, and were at all times relevant to this litigation, officers and/or directors of Sbarro. C. On January 20, 1998, Sbarro announced that it had received a proposal from the Sbarro Family, owners of approximately 34.4% of Sbarro's presently outstanding common stock (Sbarro's only outstanding class of capital stock), pursuant to which all other holders of Sbarro common stock (the "Public Shareholders") would receive $28.50 cash per share for their Sbarro EXHIBIT A-1 -5- shares in a transaction structured as a cash merger with a company to be owned by the Sbarro Family (the "Initial Merger Proposal"). The Initial Merger Proposal was terminated in June 1998. D. Following the close of business on November 25, 1998, Sbarro announced that it had received a proposal from the Sbarro Family pursuant to which the Public Shareholders would receive $27.50 cash per share for their Sbarro shares in a transaction to be structured as a cash merger of an entity to be owned by the Sbarro Family with and into the Company (the "Revised Merger Proposal"). Sbarro named a Special Committee of its Board of Directors, consisting of Defendants Richard A. Mandell, Harold L. Kestenbaum, Paul A. Vatter and Terry Vince, to consider the Revised Merger Proposal. E. Following the announcement of the Revised Merger Proposal, the following putative class actions challenging the Revised Merger Proposal were filed by Sbarro shareholders in the Supreme Court of the State of New York, County of New York: Lee Brenin v. Mario Sbarro, et al., Index No. 98-605796; Peter Salit v. Sbarro, Inc. et al., Index No. 98-605801; David Finkelstein v. Sbarro, Inc. et al., Index No. 98-605827; Barry Adelman v. Mario Sbarro, et al., Index No. 98-605847; Charter Capital et al. v. Joseph Sbarro et al., Index No. 99-100884. In addition, the following putative class actions challenging the Revised Merger Proposal were filed by Sbarro shareholders in the Supreme Court of the State of New York, County of Suffolk: Charter Capital Corp. v. Joseph Sbarro et al., Index No. 98-27736; Harbor Finance Partners and List, Inc. v. Mario Sbarro et al., Index No. 98-27723; and Gruntal Financial LLC Savings Plan A/C Norman Epstein v. Richard A. Mandell et al., Index No. 98-27200. The actions filed in the County of Suffolk were voluntarily discontinued in order to pursue the litigation in the County of EXHIBIT A-1 -6- New York. The Actions challenged the Revised Merger Proposal alleging, among other things, that the $27.50 per share merger consideration to be paid to the Public Shareholders was inadequate. The Actions sought, among other things, to enjoin the consummation of the proposed transaction or, in the alternative, to rescind the transaction if it takes place, unspecified money damages and attorney's fees and expenses. F. Following the filing of the Actions, counsel for plaintiffs in the Actions ("plaintiffs' counsel") and their financial expert met with the Special Committee's Chairman, counsel and financial advisor, and conducted negotiations with the Sbarro Family, in an effort to reach a settlement of the Actions. G. As a result of the discussions and negotiations that the Sbarro Family had with plaintiffs' counsel and with the Special Committee, the Sbarro Family agreed to raise the price to be paid to the Public Shareholders in the proposed Merger to $28.85 per share (the "Increased Merger Consideration"), or to an aggregate of approximately $388.6 million, representing an increase per share of $1.35, or an aggregate increase of approximately $18.2 million, from the Revised Merger Proposal announced on November 25, 1998 (the "Final Merger Proposal"). The Final Merger Proposal was made expressly contingent upon the adoption of the Agreement and Plan of Merger dated January 19, 1999 among the Company, Sbarro Mergeco LLC ("Mergeco") and the Sbarro Family (the "Merger Agreement") by the holders of a majority of the shares of Sbarro common stock owned by the Public Shareholders (the "Public Shareholders Voting Requirement"), as well as by two-thirds of all outstanding shares of Sbarro common stock (the "Statutory Voting Requirement"). EXHIBIT A-1 -7- H. On January 19, 1999, the following events occurred: 1. After receiving a written opinion from its financial advisor, Prudential Securities Incorporated ("Prudential"), that, as of the date of the Merger Agreement, the Increased Merger Consideration was fair, from a financial point of view, to the Public Shareholders, the Special Committee concluded that the Merger, as reflected in a proposed Merger Agreement, was fair to, and in the best interests of, the Company and the Public Shareholders, and unanimously resolved to recommend that Sbarro's Board of Directors adopt the Merger Agreement; 2. After a presentation by the Special Committee and based, in part, on the recommendation of the Special Committee and the fairness opinion received from Prudential, Sbarro's Board of Directors also determined that the Merger was fair to, and in the best interests of, the Company and the Public Shareholders and adopted the Merger Agreement. Consummation of the Merger Agreement is conditioned upon, among other things: (i) fulfillment of the Public Shareholder Voting Requirement, as well as of the Statutory Voting Requirement; (ii) receipt of financing for the transactions contemplated by the Merger Agreement; (iii) the continued suspension of dividends by the Company; and (iv) settlement of the Actions; and 3. The parties to the Actions executed a memorandum of understanding (the "MOU"), which contemplates the settlement and dismissal of the Actions pursuant to the Stipulation. EXHIBIT A-1 -8- I. The Sbarro Family agreed to the Final Merger Proposal after considering the existence of the Actions and the desirability of satisfactorily addressing the claims set forth in the Actions. J. Pursuant to the Merger Agreement and subject to the terms and conditions thereof, Mergeco, a New York limited liability company formed by the Sbarro Family for the purpose of the Merger, will be merged with and into Sbarro with each then outstanding share of the Company's common stock, other than shares held of record by Mergeco or the Continuing Shareholders or in the Company's treasury, to be converted into the right to receive the Increased Merger Consideration in cash, without interest. In addition, all outstanding stock options, including those held by the Sbarro Family, will be terminated, with the holders thereof to be paid the difference between the Increased Merger Consideration and the applicable exercise price per share multiplied by the total number of shares of Sbarro common stock subject to such option. K. Following execution of, and pursuant to, the MOU, plaintiffs' counsel: (i) continued their investigation and legal analysis of the matters alleged in the Actions and consulted with their financial advisor; (ii) engaged in additional discovery, including documentary discovery and the depositions of the Chairman and Chief Executive Officer of Sbarro, the Chairman of the Special Committee, and a Managing Director of Prudential; and (iii) reviewed and commented upon a draft of the proxy statement which will be provided to Sbarro shareholders in connection with the Merger (the "Proxy Statement"). L. In light of the aforementioned investigation, the additional facts developed in discovery, the events, negotiations and agreements described above, and analysis of applicable EXHIBIT A-1 -9- law, counsel for plaintiffs in the Actions have concluded that the terms and conditions of the Settlement provided for in the Stipulation are fair, reasonable, adequate and in the best interests of the plaintiffs and the Class. M. Plaintiffs entered into the Stipulation after taking into account: (i) the substantial benefits to the members of the Class from the Merger Agreement, including the Increased Merger Consideration and the Public Shareholder Voting Requirement; (ii) the risks of continued litigation; and (iii) the conclusion of plaintiffs' counsel that the terms and conditions of the Settlement are fair, reasonable, adequate and in the best interests of the Public Shareholders. Plaintiffs and plaintiffs' counsel have agreed to the terms of the Settlement because, in their view, the Settlement achieves plaintiffs' principal objectives in the litigation, which are to maximize shareholder value for the Company's shareholders and to provide additional representation for the Public Shareholders. N. All the defendants in the Actions have denied and continue to deny vigorously any liability with respect to any and all claims alleged in the Actions, expressly deny having engaged in any wrongful or illegal activity, or having violated any law or regulation or duty, and expressly deny that any person or entity has suffered any harm or damages as a result of the Settled Claims (as defined in paragraph 5 below). While denying any fault or wrongdoing, and relying on the provision of the Stipulation that it shall, in no event, be construed as or deemed to be evidence of an admission or concession on the part of Defendants or any Released Person (as defined in paragraph 5 below) of any fault or liability whatsoever, and without conceding any infirmity in their defenses against the claims alleged in the Actions, Defendants consider it desirable that the EXHIBIT A-1 -10- Actions be settled and dismissed, subject to the terms and conditions of the Stipulation, because the Settlement will (i) halt the substantial expense, inconvenience and distraction of continued litigation of plaintiffs' claims; (ii) finally put to rest those claims; and (iii) dispel any uncertainty that may exist as a result of this litigation. The Court has made no finding that Defendants engaged in any wrongdoing or wrongful conduct or otherwise acted improperly or in violation of any law or regulation or duty in any respect. THE SETTLEMENT TERMS -------------------- The following are the principal provisions set forth in the Stipulation: THE SETTLEMENT 1. In consideration for the full settlement, satisfaction, compromise and release of the Settled Claims (as defined below), and in furtherance of the Final Merger Proposal and the Merger Agreement, the parties to the Actions have agreed to settle the Actions upon the terms and conditions described below. 2. The Sbarro Family has agreed to the payment of the Increased Merger Consideration upon consummation of the Merger as a result of the discussions and negotiations described above, and after also considering the desirability of obtaining the dismissal, release and discharge of the Released Persons (as defined below) of and from all Settled Claims. 3. As further consideration for the Settlement, Sbarro has agreed to pay all costs incurred in identifying members of the Class and notifying by mail the members of the Class of the Settlement, including the printing and copying of this Notice and publication of the Summary Notice. EXHIBIT A-1 -11- 4. Class Counsel have agreed to the Settlement described herein after having reviewed a draft of the Proxy Statement to satisfy themselves that the Proxy Statement would fully and fairly disclose all material information. The Increased Merger Consideration in the Final Merger Proposal, as reflected in the terms of the Merger Agreement, together with the opportunity of plaintiff's counsel to review and comment on the Proxy Statement, furnishes consideration for plaintiffs' agreement to release and forever discharge each of the Defendants from the Settled Claims. SETTLED CLAIMS 5. Subject to the Settlement becoming final as contemplated in paragraph 8 below, any and all claims, demands, rights, actions or causes of action, rights, liabilities, damages, losses, obligations, judgments, suits, matters and issues of any kind or nature, known or unknown, that have been or could have been asserted in the Actions or in any court, tribunal or proceeding by or on behalf of any member of the Class (who has not elected to be excluded from the Class in the manner described below), whether individual, class, representative, derivative, legal, equitable or any other type or in any other capacity relating to the claims asserted in the Actions (collectively, the "Settled Claims") against Defendants in the Actions, Mergeco, the Sbarro Family or any of their families, parent entities, associates, affiliates or subsidiaries, and each and all of the foregoing's past, present or future officers, directors, shareholders, members, employees, attorneys, financial or investment advisors, consultants, accountants, investment bankers, commercial bankers, engineers, advisors or agents, general or limited partners or partnerships, and the personal representatives, heirs, estates, administrators, executors, trustees, predecessors in EXHIBIT A-1 -12- interest, successors and assigns of each of the foregoing (collectively, the "Released Persons") shall be fully, finally and forever compromised, settled, discharged and dismissed with prejudice and on the merits and released pursuant to the terms and conditions set forth herein, provided however, that the parties hereto expressly reserve all rights and claims to enforce compliance with the terms of the Stipulation. With respect to any and all claims being settled and released, it is the intention of the parties hereto that, upon the Settlement becoming final, plaintiffs and each member of the Class who has not elected to be excluded from the Class, hereby expressly waive and relinquish, to the fullest extent permitted by law, the provisions, rights, and benefits of Section 1542 of the California Civil Code, which statute provides that: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. RIGHTS TO WITHDRAW FROM THE SETTLEMENT 6. Defendants, by action taken by a majority of Defendants Mario Sbarro, Joseph Sbarro and Anthony Sbarro, or plaintiffs, by action taken by plaintiffs' Co-Lead Counsel, shall have the option to withdraw from and terminate the Settlement in the event that: (i) the Order and Final Judgment referred to below is not entered substantially in the form agreed, including such modifications thereto as may be ordered by the Court with the consent of the parties; (ii) the Settlement is not approved by the Court or is disapproved, or the Court or appellate court requests the parties to make a material modification to the Settlement to which the parties do not EXHIBIT A-1 -13- consent; (iii) the condition to finality of the Settlement set forth in clause (ii) of paragraph 8 below shall not have been satisfied; or (iv) the Merger Agreement is terminated. ORDER AND FINAL JUDGMENT 7. If the Settlement (including any modification thereto made with the consent of the parties) is approved by the Court, the parties shall promptly request the Court to enter an Order and Final Judgment, which will, among other things: a. determine that the Class has been adequately represented in the Actions and the Settlement; b. approve the Stipulation and the Settlement and adjudge the terms thereof to be fair, reasonable, adequate and in the best interests of the Class; c. determine that the requirements of CPLR Article 9 and due process have been satisfied in connection with notice to the Class; d. dismiss, as to all Released Persons, the Actions with prejudice and without costs except as herein provided, and extinguish, discharge and release any and all Settled Claims of each plaintiff and each other Class member, except those persons who submit a valid and timely Request for Exclusion, said dismissal to be subject only to the Settlement becoming final as contemplated in paragraph 8 below and compliance by the parties with the terms of the Stipulation and any Order of the Court concerning the Stipulation, and permanently enjoin plaintiffs and all other members of the Class, except those persons who submit a valid and timely Request for Exclusion, from asserting, commencing, prosecuting or continuing, either directly, EXHIBIT A-1 -14- individually, representatively, derivatively or in any other capacity, any of the Settled Claims against Mergeco, the Sbarro Family or any Released Person; and e. without affecting the finality of the Order and Final Judgment, reserve the Court's jurisdiction over all of the parties and the Class members, except those who submit a valid and timely Request for Exclusion, for the administration of the terms of the Settlement and the Stipulation and the application of plaintiffs' counsel for an award of attorneys' fees and expenses. FINALITY OF SETTLEMENT 8. The approval of the Settlement shall be considered final when the following three events have occurred: (i) entry of the Order and Final Judgment approving the Settlement; (ii) expiration of any applicable appeal period for the appeal of the Order and Final Judgment without an appeal having been filed or, if an appeal is filed, entry of an order affirming the Order and Final Judgment appealed from and the expiration of any applicable period for the reconsideration, rehearing or appeal of such affirmance without any motion for reconsideration or rehearing or further appeal having been filed; and (iii) consummation of the Merger. 9. In the event the Settlement is not approved by the Court, or the Court approves the Settlement but such approval is reversed or vacated on appeal, reconsideration or otherwise and such order reversing or vacating the Settlement becomes final by lapse of time or otherwise, or if any of the conditions to such Settlement are not fulfilled, then the Settlement shall be of no further force and effect, and the Stipulation and any amendment thereof (with certain exceptions provided therein), and all negotiations, proceedings and statements relating thereto, shall be null EXHIBIT A-1 -15- and void and without prejudice to any party, and each party shall be restored to his, her or its respective position as it existed prior to the execution of the MOU. ATTORNEYS' FEES 10. At or before the Settlement Hearing, plaintiffs' counsel will apply for an award of attorneys' fees (inclusive of expenses), not to exceed $2,100,000, subject to the Settlement becoming final, as contemplated in paragraph 8 above. Defendants have agreed that they will not object to such an application by plaintiffs' counsel, but Defendants retain the right to oppose any other application for fees or disbursements by plaintiffs, plaintiffs' counsel or any other person. Any fee and expense award to plaintiffs' counsel shall be paid exclusively by Sbarro on behalf of and for the benefit of all Defendants. The fairness, reasonableness and adequacy of the Settlement, and whether the Settlement is in the best interests of the Public Shareholders, may be considered and ruled upon by the Court independently of its consideration of any award of attorneys' fees and expenses. No counsel for plaintiffs shall apply to any court for any fees and expenses except as provided for in this paragraph. The award of attorneys' fees and expenses will not in any way reduce the amounts payable to Sbarro shareholders pursuant to the Merger. YOUR RIGHT TO APPEAR AT THE SETTLEMENT HEARING ---------------------------------------------- 11. Any member of the Class who does not request exclusion from the Class and who objects to the Stipulation, the Settlement, the Order and Final Judgment, and/or the application for attorneys' fees and expenses, or who otherwise wishes to be heard, may appear in person or by their attorney at the Settlement Hearing and present any evidence or argument that may be proper and relevant; provided however, that no person other than plaintiffs, Class Counsel, EXHIBIT A-1 -16- Defendants and counsel for Defendants in the Actions shall be heard, and no papers, briefs, pleadings or other documents submitted by any such person shall be received and considered by the Court (unless the Court in its discretion shall thereafter otherwise direct, upon application of such person and for good cause shown) unless no later than ten (10) days prior to the Settlement Hearing, such person files with the Court (i) written notice of their intention to appear; (ii) a detailed statement of their objections to any matter before the Court; (iii) the grounds therefor or the reasons why they desire to appear and to be heard; (iv) a statement of the number of shares of Sbarro common stock owned by such person as of the close of business on November 25, 1998 and any transactions in Sbarro common stock from that date until the submission of their objection; and (v) documents and writings which such person desires the Court to consider, and, on or before or such filing, serves a copy of their filing by hand or overnight mail on the following counsel of record: Arthur N. Abbey Abbey Gardy & Squitieri LLP 212 East 39th Street New York, NY 10016 Jeffrey A. Klafter Bernstein Litowitz Berger & Grossmann LLP 1285 Avenue of the Americas New York, NY 10019 Jonathan M. Plasse Goodkind Labaton Rudoff & Sucharow LLP 100 Park Avenue New York, NY 10017 EXHIBIT A-1 -17- Class Counsel Joel M. Wolosky Parker Chapin Flattau & Klimpl, LLP 1211 Avenue of the Americas New York, NY 10036 Attorneys for Defendants Sbarro, Inc. and Bernard Zimmerman Stephen W. Greiner Willkie Farr & Gallagher 787 Seventh Avenue New York, NY 10019 Attorneys for Defendants Richard A. Mandell, Harold L. Kestenbaum, Paul Vatter and Terry Vince Arthur A. Katz Warshaw Burstein Cohen Schlesinger & Kuh, LLP 555 Fifth Avenue New York, NY 10017 Attorneys for Defendants Joseph Sbarro, Anthony Sbarro, Mario Sbarro and Carmela Sbarro 12. Any person who fails to object in the manner prescribed above shall be deemed to have waived such objection and shall be forever barred from raising such objection in the Actions or any other action or proceedings. YOUR RIGHT TO EXCLUDE YOURSELF FROM THE SETTLEMENT -------------------------------------------------- 13. If you are a Class member, you will be bound by all determinations, orders and judgments of the Court in the Actions, whether favorable or unfavorable, unless you mail, by first class mail, a written request for exclusion from the Class, postmarked no later than June 18, 1999, EXHIBIT A-1 -18- addressed to counsel for all parties at the addresses listed in paragraph 11 above. You may not exclude yourself from the Class after that date. In order to be valid, your request must legibly set forth your name and address and a statement that you wish to be excluded from the Class. You must also provide the names in which your Sbarro shares were registered, your Social Security or Taxpayer Identification Number and the number of shares of Sbarro common stock you owned as of the close of business on November 25, 1998 and any transactions in Sbarro common stock from that date until the submission of your Request for Exclusion. Any member of the Class who requests exclusion from the Class must request exclusion with respect to all shares of which he, she or it is the beneficial owner, and any Class member who requests exclusion from the Class with respect to shares whose beneficial ownership is shared in any way must request exclusion together with all other persons with whom such ownership is shared. If signing a Request for Exclusion on behalf of any entity (such as a trust corporation, partnership, limited liability company or estate), you must enclose evidence of your authority to act for such entity and provide the foregoing information with respect to that entity. INTERIM INJUNCTION ------------------ 14. Pending final determination of whether the Settlement should be approved, plaintiffs and all members of the Class, are barred and enjoined from commencing, continuing, asserting or prosecuting any action or claims, either directly, individually, representatively, derivatively or in any other capacity, against Mergeco, the Sbarro Family or any Defendant which are Settled Claims. -19- SCOPE OF THIS NOTICE AND FURTHER INFORMATION -------------------------------------------- 15. This Notice does not purport to be a comprehensive description of the Actions, the allegations or transactions related thereto, the terms of the Stipulation, the Settlement or the Settlement Hearing. For a more detailed statement of the matters involved in this litigation, you may inspect the pleadings, the Stipulation, the Orders entered by the Court and other papers filed in the litigation, at the Office of the Clerk of the Supreme Court of the State of New York, County of New York, 60 Centre Street, New York, New York 10007 during regular business hours of each business day. DO NOT WRITE OR TELEPHONE THE COURT. NOTICE TO PERSON OR ENTITIES HOLDING RECORD OWNERSHIP ON BEHALF OF OTHERS ------------------------------------ 16. Brokerage firms, banks and other persons or entities who are members of the Class in their capacities as record owners, but not as beneficial owners, are requested to send this notice promptly to beneficial owners. Additional copies of this notice, for transmittal to beneficial owners, are available on request directed to: Sbarro, Inc. 401 Broadhollow Road, Melville, New York 11747, Attention: Vice President-Finance. Reasonable expenses of EXHIBIT A-1 -20- forwarding this notice to beneficial will be reimbursed by Sbarro and should be addressed to: Sbarro, Inc. 401 Broadhollow Road, Melville, New York 11747, Attention: Vice President- Finance. BY ORDER OF THE COURT: _______________________________ J.S.C. Dated: _________________ , 1999 EXHIBIT A-1 -21- SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - ---------------------------------------------------------) PETER SALIT, BARRY ADELMAN, ) DAVID FINKELSTEIN, LEE BRENIN, CHARTER ) CAPITAL CORP., GRUNTAL FINANCIAL LLC ) SAVINGS PLAN A/C/ NORMAN EPSTEIN, HARBOR ) FINANCE PARTNERS, LIST, INC. and WAYNE ) CRIMI, On Behalf of Themselves and All Others ) Similarly Situated, ) Consolidated ) Plaintiffs, ) Index No. 98-605796 ) - against - ) ) SBARRO, INC., JOSEPH SBARRO, ANTHONY ) SBARRO, MARIO SBARRO, CARMELA SBARRO, ) TERRY VINCE, HAROLD L. KESTENBAUM, ) RICHARD A. MANDELL, PAUL A. VATTER ) and BERNARD ZIMMERMAN, ) ) Defendants. ) - ---------------------------------------------------------) SUMMARY NOTICE OF PENDENCY OF CLASS ACTION, PROPOSED SETTLEMENT OF CLASS ACTION AND SETTLEMENT HEARING ---------------------- TO: ALL RECORD AND BENEFICIAL OWNERS OF THE COMMON STOCK OF SBARRO, INC. ("SBARRO") DURING THE PERIOD BEGINNING ON AND INCLUDING THE CLOSE OF BUSINESS ON NOVEMBER 25, 1998 THROUGH AND INCLUDING THE DATE THE PROPOSED MERGER BETWEEN SBARRO AND AN ENTITY FORMED BY THE SBARRO FAMILY (AS DEFINED BELOW) IS CONSUMMATED, INCLUDING ANY AND ALL OF THEIR PERSONAL REPRESENTATIVES, HEIRS, ESTATES, ADMINISTRATORS, EXECUTORS, TRUSTEES, PREDECESSORS IN INTEREST, TRANSFEREES, SUCCESSORS AND ASSIGNS, IMMEDIATE AND REMOTE, AND ANY PERSON OR ENTITY ACTING FOR OR ON BEHALF OF, OR CLAIMING UNDER, ANY OF THEM, AND EACH OF THEM, BUT EXCLUDING THE DEFENDANTS IN THE ACTIONS, SBARRO MERGER LLC, THE SBARRO FAMILY AND THEIR RESPECTIVE PERSONAL REPRESENTATIVES, HEIRS, ESTATES, ADMINISTRATORS, EXECUTORS, TRUSTEES, PREDECESSORS IN INTEREST, SUCCESSORS AND ASSIGNS (THE "CLASS"). EXHIBIT A-2 YOU ARE HEREBY NOTIFIED that the above-captioned consolidated actions (the "Actions") have been certified as a class action for settlement purposes only and that a settlement of the Actions has been proposed whereby the consideration per share to be paid to shareholders of Sbarro, other than Mario Sbarro, Joseph Sbarro, Anthony Sbarro, Joseph Sbarro (1994) Family Limited Partnership and The Trust of Carmela Sbarro (the "Sbarro Family"), in connection with a proposed merger of an entity formed by the Sbarro Family with and into Sbarro has been increased from $27.50 per share to $28.85 per share, representing an aggregate increase of approximately $18.2 million. A hearing will be held before the Honorable Beatrice Shainswit in the Supreme Court of the State of New York, County of New York, in Courtroom ____, 60 Centre Street, New York, New York 10007, on , 1999 at a.m./p.m., to determine, among other things, whether the proposed settlement should be approved by the Court as fair, reasonable, adequate and in the best interests of the Class, and to consider the application of plaintiffs' counsel for an award of attorneys' fees and expenses. IF YOU ARE A MEMBER OF THE CLASS DESCRIBED ABOVE, YOUR RIGHTS WILL BE AFFECTED BY THE HEARING. If you have not received the full printed Notice of Pendency of Class Action, Proposed Settlement of Class Action and Settlement Hearing (the "Notice"), you may obtain copies of these documents by writing to: Sbarro, Inc. 401 Broadhollow Road Melville, New York 11747 Attention: Vice President-Finance To exclude yourself from the Class you must do so in accordance with the instructions contained in the Notice no later than ____________________________________, 1999. If you EXHIBIT A-2 -2- are a Class member and do not validly and timely exclude yourself, you will be bound by the Order and Final Judgment of the Court and will be deemed to have released all Settled Claims as described in the Notice. You may obtain further information by writing to the address shown above. DO NOT CONTACT THE COURT OR THE CLERK'S OFFICE FOR INFORMATION. Dated: __________________________, 1999 BY ORDER OF THE COURT EXHIBIT A-2 -3- EX-99.1(G)(3) 14 ORDER AND FINAL JUDGMENT PRESENT: HON. BEATRICE SHAINSWIT, JUSTICE At a IAS Term, Part 10, Supreme Court of the State of New York, County of New York, at the Courthouse, 60 Centre Street, New York, NY on the 14th day of July, 1999 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - ----------------------------------------------------------) PETER SALIT, BARRY ADELMAN, ) DAVID FINKELSTEIN, LEE BRENIN, CHARTER ) CAPITAL CORP., GRUNTAL FINANCIAL LLC ) SAVINGS PLAN A/C/ NORMAN EPSTEIN, HARBOR ) FINANCE PARTNERS, LIST, INC. and WAYNE ) CRIMI, On Behalf of Themselves and All Others ) Similarly Situated, ) Consolidated ) Plaintiffs, ) Index No. 98-605796 ) - against - ) ) SBARRO, INC., JOSEPH SBARRO, ANTHONY ) SBARRO, MARIO SBARRO, CARMELA SBARRO, ) TERRY VINCE, HAROLD L. KESTENBAUM, ) RICHARD A. MANDELL, PAUL A. VATTER ) and BERNARD ZIMMERMAN, ) ) Defendants. ) - ----------------------------------------------------------) ORDER AND FINAL JUDGMENT ------------------------ A hearing (the "Settlement Hearing") having been held before this Court (the "Court") on June 29, 1999, pursuant to the Court's order of May 11, 1999 (the "Scheduling Order"), upon a Stipulation of Settlement dated April 7, 1999 (the "Stipulation"), with respect to the above-captioned consolidated action (the "Actions"), it appearing that due notice of said hearing has been given in accordance with the aforesaid Scheduling Order; the respective parties having 1 appeared by their attorneys of record; the Court having heard and considered evidence and memoranda in support of the proposed Settlement; the attorneys for the respective parties having been heard; an opportunity to be heard having been given to all other persons requesting to be heard in accordance with the Scheduling Order; the Court having determined that notice to the certified Class (as defined below), pursuant to the Scheduling Order, was adequate and sufficient; and the entire matter of the proposed Settlement having been heard and considered by the Court; IT IS HEREBY ORDERED, ADJUDGED AND DECREED this 14th day of July, 1999, that: 1. Unless otherwise defined herein, all defined terms shall be defined as set forth in the Stipulation. 2. The form of, and manner of giving, notice to the member so the Class is hereby determined to have been the best notice practicable under the circumstances, was due and sufficient notice of the Settlement Hearing and of all matters relating to the Settlement, and fully satisfied the requirements of due process, Article 9 of the New York Civil Practice Law and Rules ("CPLR") and all other applicable law. 3. The Stipulation and the Settlement are approved and the terms thereof are adjudged to be fair, reasonable, adequate and in the best interests of the Class. 4. The Class has been adequately represented in the Actions and the Settlement. 5. Subject to the Settlement becoming final as contemplated in paragraph 8 of the Stipulation, and compliance by the parties with the terms of the Stipulation and this Order, any and all claims, demands, rights, actions or causes of action, rights, liabilities, damages, losses, obligations, judgments, suits, matters and issues of any kind or nature, known or unknown, that 2 have been or could have been asserted in the Actions or in any court, tribunal or proceeding by or on behalf of any member of the Class, whether individual, class, representative, derivative, legal, equitable or any other type or in any other capacity relating to the claims asserted in the Actions (collectively, the "Settled Claims") against Defendants in the Actions, Mergeco, the Sbarro Family or any of their families, parent entities, associates, affiliates or subsidiaries, and each and all of the foregoing's past, present or future officers, directors, shareholders, members, employees, attorneys, financial or investment advisors, consultants, accountants, investment bankers, commercial bankers, engineers, advisors or agents, general or limited partners or partnerships, and the personal representatives, heirs, estates, administrators, executors, trustees, predecessors in interest, successor and assigns of each of the foregoing (collectively, the "Released Persons") are except as to those persons who are excluded from the Class, fully, finally and forever compromised, settled, discharged and dismissed with prejudice and on the merits and released pursuant to the terms and conditions set forth herein; provided, however, that the parties to the Stipulation expressly reserve all rights and claims to enforce compliance with the terms of the Stipulation and this Order and Final Judgment. With respect to any and all claims being settled and released, it is the intention of the parties hereto that, upon the Settlement becoming final, plaintiffs and each member of the Class (who has not elected to be excluded from the Class) hereby expressly waive and relinquish, to the fullest extent permitted by law, the provisions, rights, and benefits of Section 1542 of the California Civil code, which statute provides that: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. 3 6. There are no persons deemed to have validly and timely requested exclusion from the Class. 7. Subject to the Settlement becoming final pursuant to paragraph 8 of the Stipulation and compliance by the parties with terms of the Stipulation and this Order, the Actions are dismissed as to all Released Persons with prejudice and on the merits and without costs except as provided in the Stipulation. 8. Subject to the Settlement becoming final, pursuant to paragraph 8 of the Stipulation and compliance by the parties with terms of the Stipulation and this Order, the plaintiffs and all members of the Class are permanently barred and enjoined from commencing, continuing, asserting or prosecuting, either directly, individually, representatively, derivatively or in any other capacity, and any of the Settled Claims against Mergeco, the Sbarro Family or any Released Person. 9. In the event the Merger is not consummated on or before September 30, 1999, unless otherwise agreed by the parties, this Order and Final Judgment shall be of no force and effect, and the Stipulation and any amendment thereof, and all negotiations, proceedings and statements relating thereto, except for paragraphs 6, 10 and 14 of the Stipulation, shall be null and void and without prejudice to any party, and each party shall be restored to his, her or its respective portion as it existed prior to January 19, 1999, the date of the execution of the Memorandum of Understanding among counsel to the plaintiffs and counsel to the Defendants related to the Stipulation and the Settlement. 10. Subject to the provisions of paragraph 12 of the Stipulation, plaintiffs' counsel are hereby awarded attorneys' fees of $1,500,000 and expenses in the amount of $79,114.36. 4 Allocation of attorneys' fees shall be made by Plaintiffs' Co-Lead Counsel in a manner which they in good faith believe reflects the relative contributions of each Plaintiffs' counsel to the prosecution and settlement of the Actions. 11. Without affecting the finality of this Order and Final Judgment in any way, this Court reserves jurisdiction over all of the parties and the Class members of all matters relating to the administration and consummation of the Settlement and the Stipulation. ------------------------- J.S.C. -----END PRIVACY-ENHANCED MESSAGE-----