Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

February 04, 2016 16:30 ET

Pizza Pizza Royalty Corp. Adds Restaurants to the Royalty Pool

TORONTO, ONTARIO--(Marketwired - Feb. 4, 2016) -

Attention: Business Editors

Pizza Pizza Royalty Corp. (the "Company") (TSX:PZA) and Pizza Pizza Limited ("PPL") today announced that effective January 1, 2016, the number of restaurants on which royalties are paid to the Company by PPL (the "Royalty Pool") has been adjusted to include 26 new restaurants opened in 2015; 20 restaurants were closed and removed from the Royalty Pool.

By brand, 24 new Pizza Pizza restaurants and two new Pizza 73 restaurants were added to the Royalty Pool; there were 18 Pizza Pizza restaurants and two Pizza 73 restaurants closed and removed from the Royalty Pool. For 2016, the Royalty Pool will consist of 636 Pizza Pizza restaurants and 100 Pizza 73 restaurants, or 736 restaurants in total.

The Company, indirectly through the Pizza Pizza Royalty Limited Partnership (the "Partnership"), owns the trademarks and trade names used by PPL in its Pizza Pizza and Pizza 73 restaurants. The Pizza Pizza trademarks and other intellectual property were licensed to PPL in 2005 for 99 years, for which PPL pays the Partnership a royalty equal to 6% of the System Sales of its Pizza Pizza restaurants in the Royalty Pool. In 2007, the Partnership acquired the trademarks and other intellectual property of Pizza 73 and licensed them to PPL for 99 years, for which PPL pays a royalty equal to 9% of the System Sales of the Pizza 73 restaurants in the Royalty Pool.

Annually, on January 1 (the "Adjustment Date"), the Royalty Pool is adjusted to include the forecasted System Sales from the net restaurants added to the Royalty Pool. In exchange for adding new restaurants to the Royalty Pool, PPL will be compensated in equivalent Shares using an agreed-upon formula which is designed to be accretive to current shareholders.

Generally, when additional restaurants are added to the Royalty Pool, the forecasted increase to PPL's System Sales (and thus, the Company's royalty income) will result in an increase in PPL's interest in the Company, reflected in an increase to the Class B and/or Class D Exchange Multipliers. Additional details about this formula can be found in Table 1 below and in the Company's most recent Annual Information Form.

After the January 1, 2016 Adjustment Date, PPL now owns equivalent Shares representing 20.4% of the Company's fully diluted shares (see Table 1 below). Prior to this adjustment, PPL's ownership was 19.9%. PPL's ownership is through its holdings of Class B and Class D units of the Partnership, which are exchangeable for a number of Company shares ("Shares") based on the Class B and Class D Exchange Multipliers (the "equivalent Shares").

On January 1, 2016, in exchange for adding a net of $1.3 million forecasted system sales to the Royalty Pool ($4.9 million from the 24 new Pizza Pizza restaurants less sales of $3.6 million from 18 permanently closed Pizza Pizza restaurants), PPL has received 54,001 additional equivalent Shares (through the change to the Class B Exchange Multiplier). These represent 80% of the forecasted equivalent Shares entitlement to be received (67,501 equivalent Shares represent 100%), with the final equivalent Shares entitlement to be determined when the actual sales of the new restaurants are known with certainty in early 2017.

Additionally, in exchange for adding a net of $0.6 million forecasted system sales to the Royalty Pool ($1.1 million from the two new Pizza 73 restaurants less sales of $0.5 million from two permanently closed Pizza 73 restaurants), PPL has received 35,975 additional equivalent Shares (through the change to the Class D Exchange Multiplier). These represent 80% of the forecasted equivalent Shares entitlement to be received (44,969 equivalent Shares represent 100%), with the final equivalent Shares entitlement to be determined when the actual sales of the new restaurants are known with certainty in early 2017.

After giving effect to these additional, equivalent Shares entitlements PPL now owns equivalent Shares representing 20.4% of the Company's fully diluted Shares.

Table 1 - Summary of the Company's Outstanding and Fully-Diluted Shares, including an analysis before and after the 20% entitlement holdback:

Issued & Outstanding
Shares, and
Equivalent Shares
Issued & Outstanding
Shares,
Equivalent Shares
and Holdback of
Equivalent Shares
Shares outstanding & issuable on December 31, 2015
Public float 24,618,392 24,618,392
Class B equivalent Shares held by PPL 4,487,900 4,487,900 (1 )
PPL Additional Class B equivalent Shares - 20% Holdback as of December 31, 2015 - 17,641 (1 )
Class D equivalent Shares held by PPL 1,636,233 1,636,233 (2 )
PPL Additional Class D equivalent Shares - 20% Holdback as of December 31, 2015 - 71,099 (2 )
Number of fully-diluted Shares 30,742,525 30,831,265
Percentage of fully-diluted Shares available for exchange by PPL at December 31, 2015 19.9 % 20.2 %
Shares outstanding & issuable after January 1, 2016 Annual Adjustment
Public float 24,618,392 24,618,392
Class B equivalent Shares held by PPL 4,505,541 4,505,541 (1 )
Class D equivalent Shares held by PPL 1,707,332 1,707,332 (2 )
Additional PPL Class B equivalent Shares as of January 1, 2016 (80%) 54,001 54,001
(3
)
Additional PPL Class B equivalent Shares - 20% Holdback as of January 1, 2016 - 13,500
(4
)
Additional PPL Class D equivalent Shares as of January 1, 2016 (80%) 35,975 35,975 (3 )
Additional PPL Class D equivalent Shares - 20% Holdback as of January 1, 2016 - 8,994 (4 )
Number of fully-diluted Shares 30,921,241 30,943,735
Percentage of fully-diluted Shares available for exchange by PPL at January 1, 2016 20.4 % 20.4 %
(1) The final calculation of the equivalent Shares entitlement related to the one net Pizza Pizza restaurant that was added to the Royalty Pool on January 1, 2015 was completed and independently reviewed in early 2016, and became effective as of January 1, 2015. Actual Additional System Sales of new restaurants for 2015 were more than Forecasted Additional System Sales. As a result of the true-up, PPL's Class B equivalent Shares increased by 17,641 and 2015 distributions thereon were paid by the Partnership to PPL in January 2016.
(2) The final calculation of the equivalent Shares entitlement related to the seven net Pizza 73 restaurants that were added to the Royalty Pool on January 1, 2015 was completed and independently reviewed in early 2016, and became effective as of January 1, 2015. Actual Additional System Sales of new restaurants for 2015 were more than Forecasted Additional System Sales. As a result of the true-up, PPL's Class D equivalent Shares increased by 71,099 and 2015 distributions thereon were paid by the Partnership to PPL in January 2016.
(3) Additional Class B and Class D equivalent Shares available January 1, 2016 are shown in the table and determined by the following three steps:
(a) Determined Amount = 92.5% x (1-Tax%) x [(Additional System Sales of Additional Restaurants - System Sales of Closed Restaurants) x Royalty rate]
Share Yield
(b) Exchange Multiplier increase = (80% of Determined Amount / Market Price of Shares determined on the Adjustment Date)
Class B Partnership Units Outstanding
(c) Issuable Equivalent Shares = Exchange Multiplier increase amount x Class B or D Partnership Units Outstanding
New Class B Exchange Multiplier = 1.817826 (80%)
Tax% = 21.1%
Net Additional System Sales = $1,257,080
Royalty rate = 6%
Share yield = 5.89%
Class B Partnership Units Outstanding = 2,508,239
New Class D Exchange Multiplier = 17.43307 (80%)
Tax% = 21.1%
Net Additional System Sales = $558,309
Royalty rate = 9%
Share yield = 5.89%
Class D Partnership Units Outstanding = 100,000
(4) A preliminary calculation of the 20% holdback of equivalent Shares was done as of January 1, 2016 using the net, positive, 2016 forecasted sales. The final Class B and D equivalent Shares entitlement will be determined in early 2017, effective January 1, 2016 once actual sales of the restaurants are known.

Forward-Looking Statements

Certain statements in this press release, including those concerning 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 terminology 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. 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. These factors could also affect PPL's ability to develop new restaurants. The foregoing list of factors is not exhaustive and should be considered in conjunction with the other risks and uncertainties described in the Company's most recent Annual Information Form. The Company assumes no obligation to update these forward-looking statements, except as required by applicable securities laws.

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