Overview

Pizza Pizza Limited (referred to as the “Company”, “Pizza Pizza”, “PPL”, or in the first person notations of “we,” “us” and “our”), founded in Toronto in 1967, has grown to become Ontario’s number one pizza restaurant chain, fulfilling over 28 million customer orders annually. On July 24, 2007 Pizza Pizza purchased 100% of the outstanding shares of Pizza 73 Inc, and as a result, added 48 new Pizza 73 restaurants to the company. See "Acquisition of Pizza 73" for details of the transaction. At September 30, 2008, Pizza Pizza had 637 restaurants in its system, comprised of 432 traditional format restaurants and 205 non-traditional format restaurants located across Canada. Over its 40 year history, Pizza Pizza has established a strong brand name and reputation as the leader in Ontario in the pizza component of the quick service restaurant (‘‘QSR’’) segment. Recently Pizza Pizza has adopted strategies to reposition itself as a ‘‘restaurant with delivery’’, highlighting its food quality, menu choices and eat-in dining opportunities. Consistent with these strategies, Pizza Pizza’s sales mix, measured by revenue, has evolved from 90% delivery and 10% take-out in the mid-1980s to the current mix of 60% delivery and 40% eat-in and take-out. For the 52 weeks ended December 30, 2007, System Sales were in excess of $380 million. (System sales of 52 weeks are reported for comparability).

Pizza Pizza is a franchise-driven restaurant company. Of the 637 restaurants, 567 are Pizza Pizza branded and 70 are Pizza 73 branded restaurants. The Pizza Pizza restaurants are comprised of 369 traditional and 198 non-traditional restaurants. Pizza Pizza provides a high level of services and operational support to its franchisees, including turn-key restaurants, a central food distribution centre (the ‘‘Commissary’’) which provides all food and non-food items used in restaurant operations, and monitoring systems intended to ensure high product and service quality and operational consistency across the chain. Pizza Pizza has a modern restaurant system, with approximately 99% of our restaurants either new or substantially renovated in the past five years. Our centrally managed renovation or re-imaging program, funded by our franchisees, has added significantly to same restaurant sales growth capacity and allows for the continuous renewal of the Pizza Pizza concept.

Pizza Pizza has an established track record of innovation in the QSR segment and has adopted new technologies to support its take-out and delivery business. Pizza Pizza enjoys strong brand awareness in the QSR market with a memorable phone number (967-11-11 in the Greater Toronto Area) and accompanying jingle, featured prominently in our marketing campaigns. We were the first take-out and delivery restaurant chain in Canada to develop a one-number ordering system and computerize our call centres; we now offer internet ordering capabilities. Pizza Pizza is also a menu innovator, focusing on food quality and responding to consumer trends with product offerings such as multi-grain and trans fat-free dough.

The focus of the Pizza Pizza business continues to be our traditional format restaurants, which represented approximately 90% of System Sales for the 52 weeks ended December 30, 2007. Traditional restaurants are typically located in high traffic and high visibility areas and offer the full Pizza Pizza menu. The majority of renovated traditional restaurants provide seating for, on average, approximately 25 customers. Pizza Pizza also licenses non-traditional restaurants that serve a more limited menu and are targeted to ‘‘captured traffic’’ locations such as sports arenas and entertainment venues, food courts, universities and other institutional settings — including Paramount Canada’s Wonderland, the Air Canada Centre and cafeterias at the University of Alberta, the University of British Columbia and Dalhousie University. Non-traditional restaurants complement Pizza Pizza’s market penetration strategy, by building brand awareness and exposure while generating additional sales.

Sources of revenue

Pizza Pizza derives revenues from the following sources:

• Franchise Fees. Pizza Pizza collects an ongoing franchise fee from each Pizza Pizza franchisee. For traditional restaurants, the franchise fee varies depending upon the level of sales and is typically 6.0% of net sales, paid on a weekly basis. For non-traditional restaurants, the franchise fee averages approximately 5.1% of net sales. The weighted average franchise fee, including both traditional and non-traditional restaurants, was approximately 5.7% in fiscal 2007.
• Sales of Goods and Supplies. Pizza Pizza franchisees are required to purchase from Pizza Pizza all of the raw materials and supplies used and sold in their restaurants. These materials and supplies are sold by Pizza Pizza through the Commissary and Pizza Pizza is entitled to mark-up such sales by up to 18% of its costs. For the 52 weeks ended December 30, 2007, the mark-up averaged less than 18%. Pizza Pizza also earns revenue on company store sales.
• Initial and Renewal Franchise Fees. Pizza Pizza charges an initial franchise fee at the commencement of the initial term of the franchise agreement, and upon the renewal of such an agreement (typically after five years). The initial franchise fee is $30,000 per Pizza Pizza franchise and is payable in full at the commencement of the agreement. The renewal fee charged by Pizza Pizza to franchisees upon renewal of their franchise agreement is currently $7,500 (25% of the then-current initial franchise fee).
• Other Fees. Pizza Pizza charges franchisees fees for the transfer of a franchise, a 3% administration fee to Pizza 73 restaurants and providing plans and specifications for restaurant design and renovation.

Our competitive strengths

We believe that the success of the Pizza Pizza concept, and the consistent increases in same restaurant sales and System Sales over the past ten years, are driven by the following factors:

• Strong brand recognition. Pizza Pizza is a well known brand in its principal markets due in part to our memorable phone number (967-11-11 in the Greater Toronto Area) and accompanying jingle.
• Number one market position in Ontario. In 2008, Pizza Pizza announced market share grown reaching new heights in Ontario topping 50%. From a dollar standpoint and 52% in total traffic; well ahead of US-based companies and other competitors"
• An extensive and modern restaurant system. Approximately 98% of the traditional Pizza Pizza restaurants are either new or substantially renovated in the past five years. Pizza Pizza franchisees are obligated to renovate their restaurants and to contribute on an ongoing basis to a renovation fund.
• A proven track record of innovation. Since its inception, Pizza Pizza has adopted many innovative concepts including the one-number telephone ordering system, networked call centres, delivery guarantees, the monitoring of restaurants through a live web-feed.
• Centralized management and controls. Management oversees key aspects of the Pizza Pizza restaurant business allowing franchisees to focus on revenue-generating activities. Pizza Pizza also devotes substantial resources to franchisee support, training programs, product supply and quality initiatives.
• A strong committed management team. The seven members of senior management have an average of 20 years’ experience with Pizza Pizza.
• A history of stability of the franchise system. Pizza Pizza maintains a low closure rate throughout its restaurant chain; as of December 30, 2007, 14 traditional and 29 non-traditional restaurants had been permanently closed since 2000, whereas total restaurants increased from 413 to 559 during that same period.

Growth

Pizza Pizza is well positioned to continue to build presence in the Canadian pizza QSR segment. Consistent with our experience over the past decade, future growth is expected to come from a combination of same restaurant sales growth and new restaurant growth. The necessary conditions, such as system capacity and customer demand, exist to continue the level of growth achieved over recent years. We also believe that Pizza Pizza’s brand recognition, combined with the strength of the franchise system, will provide additional opportunities for growth in new markets across Canada. This growth strategy, if successfully realized, will have a positive effect on System Sales.

Pizza Pizza’s renovation/image campaign

Pizza Pizza franchisees are obligated to renovate or re-image their restaurants and to contribute on an ongoing basis to a renovation fund. We have implemented a re-imaging campaign aimed at increasing retail sales and market share through improved brand visibility. This campaign involves relocating selected restaurants, upgrading restaurants’ interiors, adding cooking capacity, adding new signs to draw attention to the restaurants and providing more contemporary uniforms for restaurant employees. If a restaurant is already in a desirable location, the signs and interiors are updated as needed. As of December 30, 2007, approximately 98% of our restaurants had been re-imaged or relocated as part of this campaign. We plan to complete this campaign in 2008.

Marketing operations

Pizza Pizza’s innovative marketing programs are supported by franchisee and operator contributions to a marketing fund that is administered by Pizza Pizza. In accordance with their franchise agreements or unanimous shareholder agreement each traditional Pizza Pizza restaurant contributes approximately 6% of net sales (in addition to the base royalty and other franchise fees) and each Pizza 73 restaurant contributes 8% of net sales. The marketing fund is used to pay for the production of advertising and promotional material and media purchases. Pizza Pizza seeks to develop and execute marketing programs that appeal to its customers by differentiating Pizza Pizza from its competitors, thereby attracting new customers, building customer loyalty and increasing frequency of visits. With a substantial restaurant presence in Ontario, we support the Pizza Pizza brand primarily with radio and print advertising such as flyers, as well as billboards at major venues such as Toronto’s Air Canada Centre and Ottawa's Scotia Bank Place. For the 52 weeks ended December 30, 2007, Pizza Pizza spent approximately $30 million on its promotional and advertising programs. Advertising funds are also directed towards the development of other materials, such as point of purchase promotions and coupons. Sales promotions and contests, coupons and special discounts, cross promotions with strategic partners and limited-time menu offerings are also used to stimulate purchases and introduce new products. In addition, the marketing fund supports local hockey teams, special events, public service programs and over 1,000 charitable fundraising events in local markets.