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, Xxxxxxx & Co. Inc. ("Bear Xxxxxxx"), 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 Xxxxxxx has not
independently verified any of the information, including the projections,
contained herein. Bear Xxxxxxx, 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 Xxxxxxx, 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 Xxxxxxx 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 Xxxxxxx 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, XXXXXXX & CO. INC.
000 Xxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
--------------------------------------------------------------------------------
XXXXXXX XXXXXXX XXXX XXXX
Senior Managing Director Vice President
(000) 000-0000 (000) 000-0000
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 00 xxxxxx
xxxxxxxxxx xxx Xxxxxx Xxxxxx 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
XXXXX XXXXXX, 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. Xx.
Xxxxxx 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). Xx. Xxxxxx is
Chairman of the Executive Committee of the Board.
XXXXXXX XXXXXX, 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, Xx. Xxxxxx was an Executive Vice President of the Company. He has also
served as Treasurer of the Company for more than the past five years. Xx. Xxxxxx
is a member of the Executive Committee of the Board.
XXXXXX XXXXXX, 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, Xx.
Xxxxxx was an Executive Vice President of the Company. He has also served as
Secretary of the Company for more than the past five years. Xx. Xxxxxx is a
member of the Executive Committee of the Board.
13
XXXXXXX XXXXXX, 76, has been Vice President of the Company since March 1985.
Xxx. Xxxxxx devotes a substantial portion of her time to recipe and product
development. Xxx. Xxxxxx was a founder of the Company, together with her late
husband, Xxxxxxx Xxxxxx. The Board of Directors elected Xxx. Xxxxxx as a
director of the Company in January 1998. Xxx. Xxxxxx previously served as a
director of the Company from March 1985 until December 1988, when she was
elected Director Emeritus of the Company.
XXXXXXX X. XXXXXXX, 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.
Xx. Xxxxxxx 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, Xx. Xxxxxxx served as President of Anaton Corp., a
franchisee of the Company.
XXXXXXX X. XXXXXX, 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, Xx. Xxxxxx served in
various operational positions for the Company.
XXXXXXX X. XXXXXX, 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, Xx. Xxxxxx served
in various capacities for the Company.
XXXX XXXXXXXX, 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.
XXXXXX X. XXXX XX, 43, joined the Company in November 1995 and was elected Vice
President and General Counsel in February 1996. Prior to joining the Company,
Xx. Xxxx served as General Counsel (from 1993) and Corporate Counsel (from 1982
until 1992) of Minuteman Press International, Inc. (a franchiser of printing
centers).
XXXXXX X. XXXXXXX, 54, has served as Vice President - Finance and Chief
Financial Officer of the Company for more than the past five years. Xx. Xxxxxxx
has been a certified public accountant in New York for more than the past
twenty-five years.
XXXXXXX X. XXXXXXXXX, 33, was elected Vice President - Administration in October
1988. Xx. Xxxxxxxxx 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 XXXX 0 XXXX 0 XXXX 0 XXXX 0
-------- ------ ------ ------ ------
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.
00
XXXXXXX'X XX XXX XXXX XXXX
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 Xxxxx 0 0 0 00 00
Xxxxxxxx (xxx) 0 5 15 25 35
------ ------- ------- ------- ------
Ending Units 0 5 20 45 80
====== ====== ====== ====== ======
Total
Beginning Xxxxx 0 0 00 00 000
Xxxxxxxx (xxx) 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
