Prime Restaurants Royalty Income Fund

Prime Restaurants Royalty Income Fund

February 16, 2010 09:45 ET

Prime Restaurants Royalty Income Fund Announces Agreement in Principle to Combine With Prime Restaurants of Canada Inc. and PRC Trademarks Inc. and Convert to a Corporation

MISSISSAUGA, ONTARIO--(Marketwire - Feb. 16, 2010) - Prime Restaurants Royalty Income Fund (TSX:EAT.UN) (the "Fund") announced today that the Fund has reached an agreement in principle with Prime Restaurants of Canada Inc. ("PRC"), PRC's sole shareholder, Prime Restaurant Holdings Inc. ("PRH") and PRC Trademarks Inc. ("TradeMarkCo") regarding the principal terms of a proposed transaction (the "Combination Transaction") to combine and form a new, publicly-traded corporation to be named Prime Restaurants Inc. ("Amalco").

PRC also announced that an operational restructuring plan designed to improve its business of operating and franchising restaurants is being implemented.

Under the existing structure, TradeMarkCo receives licensing royalties generated by the Prime Restaurants. The Combination Transaction will consolidate ownership of the intellectual property for the Prime Restaurants (which is currently owned by TradeMarkCo) and the franchising business currently operated by PRC. The conversion to a corporation in conjunction with the Combination Transaction will also provide certainty to the unitholders of the Fund ("Unitholders") with respect to the 2011 effective date of tax legislation affecting income trusts and will simplify the structure of the combined business.

"We believe our unitholders will benefit from the combination of the Prime Restaurants and the related intellectual property, together with an early conversion to a corporation" said Steven Sharpe, Chairman of the Fund. "The combination will enable investors to more easily value our operations, our brands and our growth potential. The trustees of the Fund and the principals and management team at PRC believe that the interests of all parties are best served by a corporate structure that provides greater transparency, oversight of the operating business and access to financing. The proposed combination will result in a corporate structure that provides enhanced accountability to investors, and a more direct correlation between the performance of the operating business and the results and prospects of the public company. Under the proposed new structure, the current 'vend-in' formula for new restaurant additions to the royalty pool will be eliminated and the benefits of growth in the Prime Restaurant system will accrue to all investors. In conjunction with the operational restructuring well under way at Prime, we believe the future is bright for the combined businesses."

Principal Terms of the Proposed Combination Transaction

The new entity, Amalco, will be the result of the combination of PRC and TradeMarkCo. The Fund will be dissolved as part of the transaction and Unitholders will receive shares in Amalco. The definitive terms of the transaction are to be reflected in a combination agreement to be negotiated among the parties.

PRC has been in default of its royalty payment obligations under the license and royalty agreement between PRC and TradeMarkCo since October 2009, which resulted in a reduction of monthly distributions to Unitholders. The Combination Transaction will include the resolution of this default and all deferred amounts under current arrangements between the parties.

PRH's current indirect fully-diluted interest in the Fund (after the exercise of certain exchange rights by PRC) is approximately 36.7%. Amalco will have three classes of shares: (i) a class that is planned to be listed on the TSX and which will be held by PRH and the Unitholders (the "Public Shares"), (ii) a class held by PRH only and convertible into Public Shares if certain financial targets are met (the "B Shares") and (iii) a class held by PRH only, that is non-voting and non-participating and which is also convertible into the Public Shares if certain financial targets are met (the "C Shares"). Immediately after the completion of the Combination Transaction, PRH's interest in Amalco will be approximately 25% of the shares outstanding at closing (prior to factoring in the C Shares) and PRH will own approximately 7% of the Public Shares. The agreement in principle provides that PRH may convert its B Shares and C Shares into Public Shares if certain financial targets are met by Amalco (in whole or in part) over the next three to five years. If the financial targets are met in full by Amalco, PRH's interest in Amalco could grow to as much as 30% (taking into consideration the possible conversion of the C Shares). If the financial targets are not met, PRH's interest in Amalco could drop to as low as 23% of the shares outstanding. Immediately after the completion of the Combination Transaction, Unitholders of the Fund other than PRC will receive Public Shares, representing approximately 75% of shares outstanding on closing (prior to factoring in the C Shares) and approximately 93% of the Public Shares. All of the foregoing percentages are calculated prior to the implementation of a long-term incentive plan for employees and directors of Amalco which will have a dilutive effect on all shareholders.

Highlights of Operational Restructuring

PRC operates and franchises casual dining restaurants and premium pubs. In response the challenging economic conditions facing its corporate and franchised restaurants and pubs, PRC has implemented a restructuring plan designed to improve operations and financial results. The highlights of the operational restructuring include:

  1. reductions to office overhead and expenses;
  2. centralizing brand management and key support services for all brands, resulting in a unified operating methodology and processes; and
  3. introduction of key internal and external operating metrics, focusing on restaurant audits, mystery shoppers and web-based guest feedback.


In anticipation of the Combination Transaction, the Fund also announced today that monthly distributions to Unitholders are expected to remain at $0.04 per Unit effective until the distribution payable in April 2010 to Unitholders of record on March 31, 2010.

If the Arrangement receives all necessary approvals and is implemented, it is anticipated that Amalco will adopt a dividend policy to pay dividends on a quarterly basis on the Public Shares. It is currently anticipated that the amount of such quarterly dividend will initially be $0.12 per Public Share. The dividend policy will be subject to the discretion of the board of directors of Amalco and may vary depending on, among other things, Amalco's operating cash flow, financial requirements, restrictions under future credit facilities, the satisfaction of solvency tests imposed by the corporate legislation for the declaration of dividends and other conditions existing at such future time. As a result, no assurance can be given as to whether Amalco will pay dividends, or the frequency or amount of any such dividend.

Board of Directors and Management Team

The initial directors of Amalco will be Steven Sharpe, Paul Haggis and Michael Aronovici, current trustees of Prime, as well as John Rothschild and Sidney Horn, both of whom are currently directors of PRC and TradeMarkCo. Messrs. Sharpe, Haggis and Aronovici will all be independent directors of Amalco. Mr. Rothschild, currently the Chief Executive Officer of PRC, will be Chief Executive Officer of Amalco. The current management team at PRC will move to Amalco and continue to guide operations.

Approvals and Closing of the Transaction

Additional details of the Combination Transaction will be announced by way of news release and filings on SEDAR ( in the coming weeks. The Combination Transaction will be implemented through a plan of arrangement. Prime expects to mail an information circular to Unitholders in respect of the Combination Transaction and other business in early March 2010. The Unitholder vote in respect of the Combination Transaction will take place at the Annual and Special Meeting of the Fund, which is currently scheduled to be held on March 30, 2010. The record date for determining Unitholders entitled to vote on the Combination Transaction is expected to be February 26, 2010. The Combination Transaction is subject to, among other customary conditions, execution of definitive agreements and other required documentation, receipt by the trustees of the Fund of a satisfactory formal valuation and fairness opinion, approval by the Ontario Superior Court of Justice of the plan of arrangement by which the transaction will be implemented and a positive vote in favour of the Combination Transaction by the holders of at least 66 2/3% of Prime's voting units represented at the meeting (including a majority of the voting units held by disinterested Unitholders). If approved, the Combination Transaction is scheduled to close on or about April 5, 2010.

The trustees of the Fund have engaged Capital Canada Limited to prepare a formal valuation of PRC and the Fund as well as a fairness opinion on the Combination Transaction.

The Combination Transaction and listing of the Public Shares of Amalco are subject to all necessary regulatory approvals, including approval of the TSX.

About Prime Restaurants Royalty Income Fund

The Fund, through TradeMarkCo, is entitled to receive top-line royalties of 3.25% of the gross food and beverage revenue from pooled restaurants under the terms of a 99-year licence agreement between TradeMarkCo and PRC.

About PRC and the Fund

PRC operates and franchises a diversified portfolio of leading brands of casual dining restaurants and premium pubs in Canada. As a pioneer in the Canadian casual dining industry since 1980, it is considered an important innovator in the development of strong brands, and today has three core brands: East Side Mario's, Casey's and Fionn MacCool's. PRC and its franchisees employ over 12,000 people across the country.

The Fund is a limited purpose trust authorised to issue an unlimited number of Trust Units and established to invest in TradeMarkCo. The source of revenue for the Fund is through its ownership in, and debt instrument issued by, TradeMarkCo. The Fund receives interest income on the TradeMarkCo Note which it distributes to its Unitholders. TradeMarkCo owns certain trade-marks and licenses their use to PRC which operates and franchises the restaurant and bar business. In return, TradeMarkCo receives royalty income from the royalty pooled restaurants operated and franchised by PRC. Additional information relating to the Fund, including the Fund's financial statements, the Annual Information Form of the Fund and PRC's MD&A and consolidated financial statements can be found at and the Fund's website at

Forward-Looking Statements

The public communications of the Fund often include written or oral forward-looking statements. Statements of this type are included in this news release, and may be included in filings with Canadian securities regulators, or in other communications. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives for 2010 and beyond, our, PRC's and Amalco's strategies or planned future actions, our, PRC's and Amalco's targets or expectations for our financial performance and condition, PRC's ability to pay royalty payments and our ability to pay distributions or dividends. All statements, other than statements of historical fact, contained in this new release are forward-looking statements, including, without limitation, statements regarding the future financial position and operations (including estimated revenue from royalty pooled restaurants and the estimated administrative and other operating expenses of the Fund), business strategy, distributions, plans and objectives of or involving the Fund, PRC and Amalco. Readers can identify many of these statements by looking for words such as "believe", "expects", "will", "intends", "projects", "anticipates", "estimates", "continues" and similar words or the negative thereof. Although management of the Fund and PRC believe that the expectations represented in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties including those discussed in the Fund's MD&A and the Fund's annual information form dated March 11, 2009, (the "AIF") under "Narrative Description of the Business – Risk Factors" which are available at There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this news release not to place undue reliance on our forward-looking statements because a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward- looking statements.

Assumptions and analysis about the performance of the Fund, PRC and Amalco and the markets in which they operate are considered in forecasting the Fund's, PRC's and Amalco's expected financial results, PRC's ability to pay royalty payments and the Fund's ability to pay distributions and in making related forward-looking statements. The key assumption in respect of the Fund's level of distributions is that the cumulative distributable cash will be able to support the Fund's current level of distributions. The Fund receives the cash it distributes from TradeMarkCo. TradeMarkCo receives all of the cash it pays to the Fund through a royalty from PRC. Accordingly, the ability of the Fund to pay its distributions depends on PRC's financial performance and ability to pay the royalty. In respect of the ability to maintain and grow the royalty pooled revenue and PRC's financial performance, key assumptions include those relating to the demand for the goods and services under the Prime trademarks and in respect of the Canadian markets in which the royalty pooled restaurants operate. Should any of these factors or assumptions vary, actual results may differ materially from the forward-looking statements.

The information set forth in the MD&A and AIF identifies factors that could affect the operating results and performance of the Fund and PRC. We caution that the list of factors discussed in the MD&A and the AIF is not exhaustive, and that, when relying on forward-looking statements to make decisions with respect to the Fund, investors and others should carefully consider the factors discussed, as well as other uncertainties and potential events, and the inherent risks and uncertainties of forward-looking statements.

The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this news release are made as of the date of this news release. Except as required by applicable securities laws, the Fund does not undertake to update any forward-looking statement, whether written or oral, that it may make or that may be made, from time to time, on its behalf.

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