Prime Restaurants Royalty Income Fund
TSX : EAT.UN

Prime Restaurants Royalty Income Fund

March 03, 2010 17:35 ET

Prime Restaurants Royalty Income Fund Announces Fourth Quarter and Year-End 2009 Results

MISSISSAUGA, ONTARIO--(Marketwire - March 3, 2010) - Prime Restaurants Royalty Income Fund (the "Fund") (TSX:EAT.UN) today reported results for the three months and year ended December 31, 2009.

Gross revenue reported by the royalty pooled restaurants in the fourth quarter of 2009 was $82.4 million compared to $82.1 million for the same period last year. For the year ended December 31, 2009, gross revenues were $333.1 million compared to $340.6 million in 2008. There are 161 royalty pooled restaurants in 2009 compared to 155 royalty pooled restaurants in 2008. For the three months and year ended December 31, 2009, royalty income from royalty pooled restaurants was $1.5 million and $9.6 million respectively, compared to $2.7 million and $11.1 million for the same periods last year.

Distributable cash available to Unitholders was $0.8 million and $6.3 million for the three months and year ended December 31, 2009. The Fund declared cash distributions of $0.8 million or $0.12 per unit in the quarter and $6.3 million or $0.97 per unit for the year, compared to $1.7 million or $0.28 per unit and $6.9 million or $1.13 per unit for the same periods in 2008.

Sales for the royalty pooled restaurants in 2009 have been affected by intense competition and the negative impact of the current economic recession on consumer's discretionary spending and the casual dining sector. As a result, while the decline in same store sales in the fourth quarter was less than the second and third quarters of the year, compared to the prior year's fourth quarter same store sales declined by 4.4%. By brand, Casey's and East Side Mario's posted same store sales declines of 0.8% and 6.3%, respectively in the quarter, while the Prime pubs posted flat same store sales growth ("SSSG"). On a regional basis, Western Canada, Ontario, Québec, and Atlantic Canada posted same store sales declines of 7.3%, 4.4%, 3.0%, and 0.5% respectively in the fourth quarter of 2009. For 2009, same store sales declined by 6.5% compared to the prior year. SSSG at Casey's, East Side Mario's, and the Prime Pubs were down 4.9%, 7.5%, and 2.6%, respectively. For the year ended December 31, 2009, Western Canada, Ontario, Québec, and Atlantic Canada posted negative SSSG of 11.9%, 6.0%, 6.1%, and 0.8% respectively.

"While 2009 was one of the most difficult periods in our 29 year history, we were able to take a number of positive steps to mitigate the impact of the challenging economy and, as a result, experienced an improving trend in same store sales through the fourth quarter," commented John Rothschild, Chairman and CEO of Prime Restaurants of Canada Inc. ("PRC") "Looking ahead, we believe these initiatives, combined with our multi-brand approach covering all segments of the casual dining and pubs business, position us strongly for solid growth as the economy recovers."

During the year, the Fund determined that its investment in PRC Trademarks Inc. ("TradeMarkCo") was impaired and, accordingly, the investment carrying amount has been reduced to an estimated realizable amount of $46,947,070. The estimated realizable amount was determined by discounting the expected future cash flows on the TradeMarkCo Notes at their original effective interest rate. An allowance for loan impairment of $16,255,560 has been established against the TradeMarkCo Note at year-end with a corresponding impairment charge recorded in the statement of earnings (loss) for the year. The CICA Handbook Section 3025, Impaired Loans, requires that an impairment loss be recognized as events or conditions indicating impairment occur. An impairment loss would occur if the Fund no longer has reasonable assurance of timely collection of the full amount of principal and interest on its investment in TradeMarkCo. The royalty deferral for PRC and the interest deferral for TradeMarkCo as announced in previous new releases, are still in effect. The impairment allowance is a non-cash transaction and will not have any impact on the Fund's cash flow.

Operational Review

Four restaurants were closed during the quarter; three East Side Mario's located in Ontario and one in Alberta.

FINANCIAL HIGHLIGHTS OF THE FUND:

 ($000's, except per unit data) Three months
ended 
 December 31,
2009
  Three months
ended
December 31,
2008
Year ended
December 31,
2009
  Year ended
December 31,
2008
     
     
     
 Interest and dividend income $ 1,294   $ 1,779 $ 7,369   $ 7,049
 Net earnings (15,629 ) 1,749 (10,157 ) 6,931
 Total assets 42,579   57,009 42,579   57,009
 Distributions to Unitholders 785   1,723 6,316   6,892
 Trust units – outstanding 6,538,174   6,110,000 6,538,174   6,110,000
 Trust units – diluted 9,749,794   9,321,620 9,749,794   9,321,620
 Basic earnings per Trust Unit ($ 2.38 ) $ 0.28 ($ 1.55 ) $ 1.13
 Diluted earnings per Trust Unit ($ 2.38 ) $ 0.28 ($ 1.55 ) $ 1.13
 Distributions paid per Trust Unit $ 0.12   $ 0.28 $ 0.97   $ 1.13

SELECTIVE YEAR-TO-DATE TRADEMARKCO FINANCIAL HIGHLIGHTS:

 ($000's except # of Royalty Pooled 2009 2008
 Restaurants)    
 # of Royalty Pooled Restaurants 161 155
 Gross Revenue Royalty Pooled Restaurants $ 333,093 $ 340,552
 Royalty Income 9,643 11,068
 Operating Expenses 733 585
 Impairment Provision (39,626)* -
 Dividends accrued on Class A and Class B shares 3,613 3,613
 Interest Expense 7,110 6,892

*In accordance with CICA Handbook Section 3064.64, TradeMarkCo is required to perform an annual test for impairment of the Trademarks, an intangible asset that is not subject to amortization, held by the Company. Impairment would be recognized when the estimated fair value of the Trademarks is lower than the carrying value. Management has determined that an impairment of the Trademarks has occurred in the current year, as it appears that there is a permanent reduction in the estimated fair value of the Trademarks. Accordingly, an impairment provision of $39.6 million has been recorded against the Trademarks asset with a corresponding impairment charge recorded in the statement of earnings (loss) for the year. However, on consolidation with PRC, there is no impact of this impairment on the audited consolidated financial statements of PRC.

The Fund's financial statements and Management's Discussion and Analysis ("MD&A") for the three months and year ended December 31, 2009 are available at www.primeincomefund.ca and www.sedar.com. Prime Restaurants of Canada Inc. ("PRC") consolidated financial statements, notes and MD&A can also be accessed at www.sedar.com under the "financial statements of operating entity" and "other" document types for the Fund.

Combination Agreement

As previously announced on February 26, 2009, the Fund has signed a definitive agreement with PRC, Prime Restaurant Holdings Inc ("PRH"), PRC's sole shareholder, and TradeMarkCo regarding the terms of a transaction to combine and form a new publicly-traded corporation to be named Prime Restaurants Inc. The Trustees of the Fund have unanimously recommended the transaction to the Fund's Unitholders, which will be submitted for approval by the Fund's Unitholders at a special meeting currently scheduled for March 30, 2010. An information circular is expected to be mailed to the Fund's Unitholders in early March 2010 containing the details of the transaction.

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 approximately 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 www.sedar.com and the Fund's website at www.primeincomefund.ca

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 new 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 2009 and beyond, our and PRC's strategies or planned future actions, our and PRC's targets or expectations for our financial performance and condition, PRC's ability to pay the Royalty and our ability to pay the distributions. 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 and PRC. 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 www.sedar.com. 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 and PRC and the markets in which they operate are considered in forecasting the Fund's and PRC's expected financial results, PRC's ability to pay the Royalty 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 Marks 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.

Definition of Distributable Cash and Non-GAAP Measures

Management views Distributable Cash as a useful supplemental measure of operating performance that provides investors with an indication of cash available for distribution. Management calculates Distributable cash as operating cash flows for the Fund (net earnings adjusted for non-cash items such as deferred revenue). Distributable Cash is not an earnings measure recognized under GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, Distributable Cash may not be comparable with similar measures presented by other entities.

For further information visit our web sites: www.primeincomefund.ca and www.primerestaurants.com.

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