Pizza Pizza Royalty Income Fund
TSX : PZA.UN

Pizza Pizza Royalty Income Fund

February 03, 2011 16:53 ET

Pizza Pizza Limited Adds 24 Restaurants to the Pizza Pizza Royalty Income Fund's Royalty Pool

TORONTO, ONTARIO--(Marketwire - Feb. 3, 2011) -

Attention: Business Editors

Pizza Pizza Royalty Income Fund (TSX:PZA.UN)(the "Fund") and Pizza Pizza Limited ("PPL") today announced that effective January 1, 2011, the pool of restaurants (the "Royalty Pool"), on which royalties are paid to the Fund by PPL, has been increased to include 24 new Pizza Pizza restaurants and seven new Pizza 73 restaurants. The Royalty Pool will decrease by seven Pizza Pizza restaurants closed during the year, of which one was a traditional location and six were non-traditional locations. Of the 24 new Pizza Pizza restaurants opened between January 1, 2010 and December 31, 2010, six are traditional restaurants and 18 are non-traditional locations. The seven Pizza 73 restaurants are non-traditional locations opened between September 2, 2009 and September 1, 2010. With the addition of the new restaurants, royalties are now paid to the Fund on 695 restaurants in the Royalty Pool.

In exchange for adding new restaurants to the Royalty Pool, PPL will be compensated in equivalent Units, using an agreed-upon formula, on account of the future royalties paid to the Fund from the additional restaurants. Additional details about this formula are provided in the following paragraphs.

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 the system sales of any Pizza 73 restaurants permanently closed during the calendar year. These Pizza 73 forecasted system sales are also reduced by any decrease in system sales attributable to certain Pizza 73 restaurants whose territory has been adjusted (an "adjusted restaurant" as defined in the Licence and Royalty Agreement for the Pizza 73 Royalty Pool restaurants).

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 Class B and Class D Exchange Multipliers for the coming year are determined in accordance with the Partnership's limited partnership agreement. This, in turn, impacts the number of equivalent Units held by PPL. The formula for determining the Exchange Multipliers, designed to be accretive to current Unitholders, is based on the forecasted system sales from new restaurants less system 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, additional equivalent Units resulting from a change in an Exchange Multiplier and distributions thereon. The final equivalent Units entitlement is determined following year-end when the restaurants' actual sales performance is known with certainty. At that time, if the actual system sales exceeded 80% of the forecasted system sales, PPL would be entitled to additional Unit equivalents to reflect that difference. Conversely, if the actual system sales are less than 80% of the forecasted system sales, PPL must return some of the Unit equivalents with which it was previously credited. In any given year, the calculated Exchange Multipliers cannot be less than they were at the end of the previous year.

Effective January 1, 2011, the Class B Exchange Multiplier is adjusted based on the 2011 forecasted system sales of $5.7 million from the 24 new Pizza Pizza restaurants, less sales of $1.1 million from seven permanently closed Pizza Pizza restaurants resulting in net, forecasted Pizza Pizza system sales of $4.6 million added to the Royalty Pool. The Class D Exchange Multiplier was not increased since the 2011 forecasted system sales of $1.1 million from the seven new Pizza 73 restaurants was offset by $3.4 million in system sales attributable to six restaurants which had their territory adjusted in a prior year.

In exchange for adding the 17 net, Pizza Pizza restaurants to the Royalty Pool, PPL has received 219,430 additional equivalent Units (through the change to the Class B Exchange Multiplier). These represent 80% of the forecasted equivalent Units entitlement to be received (274,287 equivalent Units represent 100%), with the final equivalent Units entitlement to be determined when the new restaurants' 2011, actual sales performance is known with certainty in early 2012. 

In any year that the forecasted system sales (less closed restaurant sales and other adjustments) is negative, no increase or decrease in the Exchange Multiplier is made. As a result, PPL's Class D equivalent Units entitlement is currently unchanged for 2011. PPL will only have an additional Class D equivalent Units entitlement for 2011 if the actual sales performance of the seven new Pizza 73 restaurants, less the sales of adjusted restaurants, is positive when actual sales performance is known with certainty in early 2012.

After giving effect to these additional equivalent Units entitlements at January 1, 2011, PPL now owns equivalent Units representing 26.5% of the fully diluted Units.

Table 1 – Summary of Pizza Pizza Royalty Income Fund Outstanding and Fully-Diluted Units:
 
Units outstanding & issuable on December 31, 2010 Issued & Outstanding Units, and Equivalent Units Issued & Outstanding Units, Equivalent Units and Holdback of Equivalent Units  
Public float 21,818,392 21,818,392  
Class B equivalent Units held by PPL 6,108,089 6,108,089 (1)
PPL Additional Class B equivalent Units - Holdback as of December 31, 2010 N/A N/A (1)
Class D equivalent Units held by PPL 1,545,432 1,545,432 (2)
PPL Additional Class D equivalent Units - Holdback as of December 31, 2010 N/A N/A (2)
Fully-diluted Units 29,471,913 29,471,913  
Percentage available for exchange by PPL at December 31, 2010 26% 26%  
   
Units outstanding & issuable on January 1, 2011  
Public float 21,818,392 21,818,392  
Class B equivalent Units held by PPL 6,108,089 6,108,089 (1)
PPL Additional Class B equivalent Units - Holdback as of December 31, 2010 N/A N/A (1)
Class D equivalent Units held by PPL 1,545,432 1,545,432 (2)
PPL Additional Class D equivalent Units - Holdback as of December 31, 2010 N/A N/A (2)
       
Additional PPL Class B equivalent Units as of January 1, 2011 (80%) 219,430 219,430 (3)
Additional PPL Class B equivalent Units - Holdback as of January 1, 2011 (20%) N/A 54,857 (4)
Additional Class D equivalent Units issued to PPL on January 1, 2011 (80%) N/A N/A (3)
PPL Additional Class D equivalent Units - Holdback as of January 1, 2011 (20%) N/A N/A (5)
Number of fully-diluted Units 29,691,343 29,746,200  
Percentage available for exchange by PPL from January 1, 2011 26.5% 26.6%  
       
(1) The calculation of the final equivalent Units entitlement related to the 22 net Pizza Pizza restaurants that were added to the Royalty Pool on January 1, 2010 was completed and independently reviewed in early 2011, and became effective as of January 1, 2010. Actual Additional System Sales of new restaurants for 2010 were less than Forecasted Additional System Sales. As a result of the true-up, PPL returned 21,893 equivalent Units and the amount of 2010 distributions thereon to the Partnership effective January 1, 2010.
 
(2) The calculation of the final equivalent Units entitlement related to the 12 net Pizza 73 restaurants that were added to the Royalty Pool on January 1, 2010 was completed and independently reviewed in early 2011, and became effective as of January 1, 2010. Actual Additional System Sales of new restaurants for 2010, less System Sales attributable to an adjusted restaurant, was a negative number. As a result of the true-up, PPL returned 101,912 equivalent Units and the amount of 2010 distributions thereon to the Partnership effective January 1, 2010.
 
(3) Additional Class B equivalent Units available January 1, 2011 are shown in the table. Additional Class D equivalent Units are calculated as zero for 2011 as Forecasted Additional System Sales of new restaurants for 2011, less System Sales attributable to adjusted restaurants, was calculated to be a negative number. The final equivalent Units entitlement will be determined in early 2012, effective January 1, 2011, once actual sales of the restaurants are known.
 
(4) 20% holdback of equivalent Units from 17 net Pizza Pizza restaurants added to the Royalty Pool on January 1, 2011. The final equivalent Units entitlement will be determined in early 2012, effective January 1, 2011, once actual sales of the restaurants are known.
 
(5) Additional Class D equivalent Units are calculated as zero for 2011 as Forecasted Additional System Sales of new restaurants for 2011, less System Sales attributable to adjusted restaurants, was calculated to be a negative number. The final equivalent Units entitlement will be determined in early 2012, effective January 1, 2011, once actual sales of the restaurants are known.

Forward-Looking Statements

Certain statements in this press release, including those concerning 2011 forecasted sales performance of new restaurants and related adjustments to the Exchange Multipliers, may constitute "forward-looking" statements, which involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

When used in this press release, such statements include such words as "may", "will", "expect", "believe", "plan", and other similar meaning in conjunction with a discussion of future operating or financial performance. These statements reflect management's current expectations regarding future events and operating performance of the restaurants added to the Royalty Pool and speak only as of the date of this press release. The Forecasted Additional System Sales were approved on January 31, 2011. Material factors or assumptions reflected in the presentation of Forecasted Additional System Sales include: demographic and competitive studies, historical sales performance of similar stores and economic forecasts for the retail industry. These forward-looking statements involve a number of risks and uncertainties. The following are some factors that could affect the forecasted performance of these restaurants, causing actual results to differ materially from those expressed in or underlying such forward-looking statements: competition, the store owner's performance, changes in demographic trends, changing consumer preferences and discretionary spending patterns, changes in national and local business and economic conditions, and legislation and governmental regulation. The foregoing list of factors is not exhaustive and should be considered in conjunction with the other risks and uncertainties described in the Fund's Annual Information Form. The Fund assumes no obligation to update these forward looking statements, except as required by applicable securities laws.

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