Prime Restaurants Royalty Income Fund
TSX : EAT.UN

Prime Restaurants Royalty Income Fund

November 11, 2009 17:35 ET

Prime Restaurants Royalty Income Fund Announces Third Quarter 2009 Results, Declares Distribution and Appoints New Trustee

MISSISSAUGA, ONTARIO--(Marketwire - Nov. 11, 2009) - Prime Restaurants Royalty Income Fund ("the Fund") (TSX:EAT.UN) today reported results for the three and nine months ended September 30, 2009.

Gross revenue reported by the royalty pooled restaurants in the third quarter of 2009 was $88.1 million compared to $89.3 million for the same period last year. For the nine months ended September 30, 2009, gross revenues were $250.7 million compared to $258.4 million for the first nine months of 2008. There are 161 royalty pooled restaurants in 2009 compared to 155 royalty pooled restaurants in 2008. For the three and nine months ended September 30, 2009, royalty income from royalty pooled restaurants was $2.9 million and $8.1 million respectively, compared to $2.9 million and $8.4 million for the same periods last year.

Distributable cash available to Unitholders was $1.8 million and $5.4 million for the three and nine months ended June 30, 2009. The Fund declared cash distributions of $1.8 million or $0.28 per unit in the quarter and $5.5 million or $0.85 per unit for the first nine months of 2009 compared to $1.7 million and $5.2 million for the same periods last year. The increases in cash distributions declared are due to the new TradeMarkCo Note and the Limited Voting Units issued on January 1, 2009 in connection with TradeMarkCo's settlement of its obligation with PRC for new restaurants added to the list of royalty pooled restaurants.

The Fund also announced today that the cash distribution payable in the month of December 2009 will be $0.04 per Unit. The distribution for the period from November 1, 2009 to November 30, 2009 of $0.04 per Unit will be made on December 15, 2009 to Unitholders of record at the close of business on November 30, 2009. As disclosed on October 14, 2009, due to the difficult operating environment, Prime Restaurants of Canada ("PRC") requested that PRC Trademarks Inc. ("TradeMarkCo") defer collecting a portion of the royalty payable to it from PRC in the month of November 2009 under the Amended and Restated License and Royalty Agreement dated March 13, 2008 (the "Royalty Agreement"). PRC has since requested that the deferral continue for another month. TradeMarkCo has agreed to defer collecting a portion of the royalty payable in the months of November and December and to refrain from taking any actions under the Royalty Agreement until December 31, 2009 (or earlier in certain limited circumstances). This will not prejudice TradeMarkCo's rights and remedies after December 31, 2009 in respect of all amounts payable under the Royalty Agreement. TradeMarkCo has in turn advised the Fund that TradeMarkCo will be unable to pay the full amount of interest owing on the note of TradeMarkCo held by the Fund in the months of November and December 2009, which is the source of cash for distributions to Unitholders. As a result, the cash distributions payable to Unitholders on November 16, 2009 and December 15, 2009, will be reduced to $0.04 per unit. The Fund's Board of Trustees and TradeMarkCo's Board of Directors have begun considering a longer term distribution policy (although it is not anticipated that monthly cash distributions will be reduced below $0.04 per unit for the foreseeable future).

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 third quarter was less than the second quarter of the year, compared to the prior year's third quarter same store sales declined by 6.3%. By brand, Casey's, East Side Mario's, and the Prime pubs posted same store sales declines of 4.3%, 7.4%, and 3.0%, respectively in the quarter. On a regional basis, Western Canada, Ontario, Québec, and Atlantic Canada posted same store sales declines of 10.0%, 6.5%, 1.8%, and 2.0% respectively in the third quarter of 2009. For the first nine months of 2009, same store sales declined by 6.6% compared to the prior year. SSSG at Casey's, East Side Mario's, and the Prime Pubs were down 6.2%, 7.2%, and 3.4%, respectively. For the first nine months of 2009, Western Canada, Ontario, Québec, and Atlantic Canada posted negative SSSG of 10.2%, 6.4%, 7.0%, and 0.6% respectively.

"The third quarter was particularly challenging for Prime and the Canadian casual dining sector as a whole. While we are not satisfied with our results, we are cautiously optimistic that consumers are beginning to dine out again and that we will gradually see improved performance over the long term," commented John Rothschild, Chairman and CEO of Prime Restaurants of Canada Inc. "While we did see improvement in same store sales declines in the quarter compared with the second quarter of this year, we know there is still much work to be done in these challenging times to continue this positive trend."

Operational Review

Four restaurants were closed during the quarter; three East Side Mario's located in Ontario and Alberta, and one pub in Ontario. Additionally, one East Side Mario's restaurant underwent renovations during the quarter. SSSG at the renovated location increased by 7.0% from sales levels prior to the renovation.

FINANCIAL HIGHLIGHTS OF THE FUND:

($000's, except per unit data)Three monthsThree monthsNine monthsNine months
 endedendedendedended
 SeptemberSeptemberSeptemberSeptember
 30, 200930, 200830, 200930, 2008
Interest and dividend income$ 1,803$ 1,785$ 5,565$ 5,270
Net earnings1,7721,7565,4725,182
Total assets59,17656,98359,17656,983
Distributions to Unitholders1,8441,7235,5315,169
Trust units – outstanding6,538,1746,110,0006,538,1746,110,000
Trust units – diluted9,749,7949,321,6209,749,7949,321,620
Basic earnings per Trust Unit$ 0.27$ 0.29$ 0.84$ 0.85
Diluted earnings per Trust Unit$ 0.28$ 0.29$ 0.84$ 0.85
Distributions paid per Trust Unit$ 0.28$ 0.28$ 0.85$ 0.85

SELECTIVE YEAR-TO-DATE TRADEMARKCO FINANCIAL HIGHLIGHTS:

($000's except # of Royalty Pooled Restaurants)20092008
# of Royalty Pooled Restaurants161155
Gross Revenue Royalty Pooled Restaurants$ 250,680$ 258,410
Royalty Income8,1478,398
Operating Expenses490531
Dividends accrued on Class A and Class B shares2,7022,712
Interest Expense5,3185,160

Outlook

At Casey's, a new "Food First" marketing and operating strategy was introduced in 2009 with a commitment to operational excellence while maintaining Casey's heritage of delivering a value proposition built on quality. During the fourth quarter, Casey's will introduce a new direct mail promotional campaign, providing consumers within the area of a Casey's restaurant with a $10.00 Gift Card with an option to "top-up" with an extra $5.00 by registering the card on a branded website. This promotion was test marketed in eight locations across Ontario and generated significant top line sales growth and increased guest traffic, driven by a 14% redemption rate. During the holiday season Casey's will also be reintroducing its very successful gift card program.

In the pubs business, a new winter menu will be introduced in the fourth quarter, complimented by a Scotch and Whiskey pairing in continued support of its premium pub experience. Also during the fourth quarter, Prime Pubs will be bringing back its gift card program, offering guests a complimentary $5.00 or $10.00 gift card with the purchase of a $30.00 or $50.00 gift card.

At East Side Mario's, management continues to roll out the new refreshed and high energy design, taking the brand back to its roots to provide an authentic taste of Little Italy. With a twenty-year heritage of providing fun and value to Canadian families, East Side Mario's has a well-established identity with an 81% brand loyalty factor as measured by an independent survey. For the balance of 2009, planned initiatives include a group sales package in order to capture the holiday party business as well as the reintroduction of its popular gift card promotion. These programs will be supported by radio and newspaper advertisements.

Looking ahead, management believes that over the near-term consumer concerns about the economic slowdown in Canada will continue to impact restaurant sales across all sectors of the industry. However, as economic conditions improve, management believes the casual dining sector will benefit as consumers return to dining out, and that Prime's multi-brand approach covering all spectrums of the Canadian casual dining and pubs business will prove beneficial. In addition, management believes its ongoing renovation programs, new restaurant openings, new menus and other sales initiatives, combined with its rigorous focus on customer service, will continue to attract new and repeat guests to all of its brands.

Appointment of New Trustee

The Fund also announced today that Mr. Michael Aronovici has been appointed a Trustee of the Fund and a Director of TrademarkCo. Mr. Aronovici is the President of Interaction Restaurants Group Inc., a restaurant management and holding company that has been operating in the Canadian restaurant industry for twenty years, and has been involved with several leading brands such as Pizza Hut and Starbucks Coffee amongst others. Mr. Aronovici is also the past Chairman of the Canadian Restaurant and Foodservice Association and a member of the board of directors of the American National Restaurant Association. With Mr. Aronovici's appointment, it was also announced that Mr. John Rothschild has re- joined the Board of Directors of TradeMarkCo.

The Fund's Board of Trustees and TradeMarkCo's Board of Directors are continuing the strategic review announced on June 29, 2009 to examine various alternatives, including the possible combination of the Fund with TradeMarkCo and PRC in order to reduce costs, maximize operating synergies, and enhance cash available for distribution. There can be no assurance that such a combination or any other transaction will result from the strategic review.

The Fund's financial statements and Management's Discussion and Analysis ("MD&A") for the three and nine months ended September 30, 2009 are available at www.primeincomefund.ca and www.sedar.com.

PRC's Consolidated Financial Statements and MD&A

Prime Restaurants of Canada Inc. ("PRC") consolidated financial statements, notes and MD&A can be accessed at www.sedar.com under the "financial statements of operating entity" and "other" document types for the Fund.

Quarterly Conference Call

The Fund will host a conference call on Thursday, November 12, 2009 at 10:00 a.m. ET to discuss the results of the Fund and operations and performance of PRC. Interested participants may dial (416) 849- 2698 or toll-free at (1-866) 400-2270 to access the call. The conference call will also be broadcast over the Fund's website at www.primeincomefund.ca.

The Fund is a limited purpose trust authorised to issue an unlimited number of Trust Units ("Units") and established to invest in PRC Trademarks Inc. ("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.

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.

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