Pizza Pizza Royalty Income Fund
TSX : PZA.UN

Pizza Pizza Royalty Income Fund
Pizza Pizza Limited

Pizza Pizza Limited

February 03, 2010 16:00 ET

Pizza Pizza Limited Adds 34 Restaurants to the Fund's Royalty Pool and Increases Ownership of the Fund to 26.3%

TORONTO, ONTARIO--(Marketwire - Feb. 3, 2010) -

Attention: Business Editors

Pizza Pizza Royalty Income Fund (the "Fund") (TSX:PZA.UN) and Pizza Pizza Limited ("PPL") today announced that effective January 1, 2010, the pool of restaurants (the "Royalty Pool"), on which royalties are paid to the Fund by PPL, has been increased to include 31 new Pizza Pizza restaurants and 12 new Pizza 73 restaurants. Of the 31 new Pizza Pizza restaurants opened between January 1, 2009 and December 31, 2009, ten are traditional restaurants and 21 are non-traditional locations. The 12 Pizza 73 restaurants are comprised of ten traditional restaurants and two non-traditional locations opened between September 2, 2008 and September 1, 2009. The Royalty Pool will decrease by nine Pizza Pizza restaurants which were closed during the year, of which five were traditional and four non-traditional. With the addition of the 34 net, new restaurants, royalties are now paid to the Fund on 671 restaurants in the Royalty Pool.

The Fund indirectly owns the Pizza Pizza and Pizza 73 trademarks and trade names used by PPL in its restaurants. In 2005, the Pizza Pizza trademarks and trade names were licensed to PPL for 99 years, and in return PPL pays the Fund a 6% royalty on the Pizza Pizza Royalty Pool system sales. In 2007, the Fund licensed the Pizza 73 trademarks and trade names to PPL for 99 years, and in return PPL pays the Fund a 9% royalty on the Pizza 73 Royalty Pool system sales.

Annually, on January 1 (the "Adjustment Date"), the Royalty Pool is adjusted to include the forecasted system sales from new Pizza Pizza restaurants opened on or before December 31 of the prior year, less system sales from any Pizza Pizza restaurants that have been permanently closed during the year. Similarly, on the Adjustment Date, the Royalty Pool is adjusted to include the forecasted system sales from new Pizza 73 restaurants opened on or before September 1 of the prior year, less any Pizza 73 restaurants permanently closed during the calendar year and further reduced by any decrease in system sales attributable to certain Pizza 73 restaurants whose territory has been adjusted (See "Adjusted Restaurant" as defined in the "Licence and Royalty Agreement for the Pizza 73 Operations").

PPL holds Class B and Class D units of Pizza Pizza Royalty Limited Partnership (the "Partnership"), which are exchangeable for a number of Fund units ("Units") based on the Class B and Class D Exchange Multipliers (the "equivalent Units"). At each annual Adjustment Date, the number of equivalent Units held by PPL is adjusted in accordance with a formula which determines the Class B and Class D Exchange Multipliers for the upcoming year. The formula and terms are defined in the Partnership's Limited Partnership Agreement. The formula, designed to be accretive to current Unitholders, is based on the forecasted sales from new restaurants less sales from any closed and/or adjusted restaurants, multiplied by the royalty rate, divided by the yield of the Units, and discounted by 7.5%. From January 1, PPL is entitled to receive 80% of the calculated, equivalent Units and distributions thereon, with the balance of the equivalent Units to be determined when the restaurants' actual sales performance is known with certainty.

Effective January 1, 2010, the Class B Exchange Multiplier is adjusted based on the 2010 forecasted system sales of $10 million from the 31 new Pizza Pizza restaurants less sales of $3.1 million from nine permanently closed Pizza Pizza restaurants resulting in net, estimated Pizza Pizza sales of $6.9 million added to the Royalty Pool. The Class D Exchange Multiplier is adjusted based on 2010 forecasted system sales of $8.2 million from the 12 new Pizza 73 restaurants reduced by $6.8 million in system sales attributable to seven restaurants which had their territory adjusted resulting in net, estimated Pizza 73 sales of $1.4 million added to the Royalty Pool.

In exchange for adding the 34 net, new restaurants to the Royalty Pool, PPL has received 329,910 additional equivalent Units (through the Class B Exchange Multiplier) and 101,912 equivalent Units (through the Class D Exchange Multiplier). These units represent 80% of the forecasted Class B and Class D entitlements to be received (412,387 and 127,390 equivalent Units, respectively, represent 100%), with the balance to be received when the restaurants' 2010, actual sales performance is known with certainty in early 2011. 

Including these additional units, PPL now owns equivalent Units representing 26.3% of the Units, calculated on a fully-diluted basis; the controlling shareholder of PPL and his associates control an additional 5% of the Units.

Table 1 – Summary of Pizza Pizza Royalty Income Fund Outstanding and Fully-Diluted Units:

    Issued & Outstanding  
    Units,  
  Issued & Outstanding Equivalent Units  
  Units, and and Holdback of  
  Equivalent Units Equivalent Units  
Units outstanding & issuable on December 31, 2009    
Public float 21,818,392 21,818,392  
Class B equivalent Units held by PPL 5,743,931 5,743,931  
PPL Additional Class B equivalent Units  -    Holdback as of December 31, 2009 N/A 56,141 (1)
Class D equivalent Units held by PPL 1,460,355 1,460,355  
PPL Additional Class D equivalent Units  -    Holdback as of December 31, 2009 N/A 85,077 (2)
Fully-diluted Units 29,022,678 29,163,896  
Percentage available for exchange by PPL at December 31, 2009 24.8% 25.2%  
   
Units outstanding & issuable on January 1, 2010  
Public float 21,818,392 21,818,392  
Class B equivalent Units held by PPL 5,743,931 5,743,931  
PPL Additional Class B equivalent Units  -    Holdback as of December 31, 2009 56,141 56,141 (1)
Class D equivalent Units held by PPL 1,460,355 1,460,355  
PPL Additional Class D equivalent Units  -    Holdback as of December 31, 2009 85,077 85,077 (2)
       
Additional PPL Class B equivalent Units as of January 1, 2010  (80%) 329,910 329,910 (3)
Additional PPL Class B equivalent Units -    Holdback as of January 1, 2010  (20%) N/A 82,477 (4)
Additional Class D equivalent Units issued to PPL on January 1, 2010   (80%) 101,912 101,912 (3)
PPL Additional Class D equivalent Units  -    Holdback as of January 1, 2010 (20%) N/A 25,478 (5)
Number of fully-diluted Units 29,595,718 29,703,673  
Percentage available for exchange by PPL from January 1, 2010 26.3% 26.5%  

(1) The calculation of the actual holdback of equivalent Units related to the 9 net Pizza Pizza restaurants added to the Royalty Pool on January 1, 2009 was completed and independently reviewed in early 2010, and became effective as of January 1, 2009.

(2) The calculation of the actual holdback of equivalent Units related to the 19 net Pizza 73 restaurants added to the Royalty Pool on January 1, 2009 was completed and independently reviewed in early 2010, and became effective as of January 1, 2009.

(3) Equivalent Units available January 1, 2010

(4) 20% holdback of equivalent Units from 22 net Pizza Pizza restaurants added to the Royalty Pool on January 1, 2010. Actual number of equivalent Units will be determined in early 2011, effective January 1, 2010, once actual sales of the restaurants are known.

(5) 20% holdback of equivalent Units from 12 net Pizza 73 restaurants added to the Royalty Pool on January 1, 2010. Actual number of equivalent Units will be determined in early 2011, effective January 1, 2010, once actual sales of the restaurants are known.

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