Pizza Pizza Royalty Corp.

TSX : PZA


Pizza Pizza Royalty Corp.

February 01, 2013 09:29 ET

Pizza Pizza Royalty Corp. Announces Annual Royalty Pool Increase

TORONTO, ONTARIO--(Marketwire - Feb. 1, 2013) -

Attention: Business Editors

Pizza Pizza Royalty Corp. (the "Company") (TSX:PZA) and Pizza Pizza Limited ("PPL") today announced that effective January 1, 2013, the pool of restaurants (the "Royalty Pool"), on which royalties are paid to the Company by PPL, has been adjusted to reflect restaurant openings and closures.

Effective January 1, 2013, 21 new Pizza Pizza restaurants and one new Pizza 73 restaurant were added to the Royalty Pool. There were 18 non-traditional locations closed and removed from the Royalty Pool. Of the 21 new Pizza Pizza restaurants opened during 2012, ten were traditional restaurants and eleven were non-traditional locations. The one new Pizza 73 restaurant was a non-traditional location opened during the period from September 2, 2011 to September 1, 2012. Of the 18 non-traditional closures, 17 were Pizza Pizza locations and one was a Pizza 73 location.

After this annual adjustment, the 2013 Royalty Pool increases by a net of four restaurants to 694. In exchange for adding new restaurants to the Royalty Pool, PPL will be compensated in equivalent shares using an agreed-upon formula which includes estimating future royalties to be paid to the Company based on the new restaurant sales. 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 prior calendar year. These Pizza 73 forecasted system sales may also be reduced by any decrease in system sales attributable to certain Pizza 73 restaurants whose territory may have been adjusted during the year (an "adjusted restaurant" as defined in the License 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 Company shares ("Shares") based on the Class B and Class D Exchange Multipliers (the "equivalent Shares"). 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, affects the number of equivalent Shares held by PPL. The formula for determining the Exchange Multipliers is based on the Determined Amounts which are calculated using the forecasted system sales from new restaurants less system sales from any closed and adjusted restaurants, multiplied by the applicable royalty rate, divided by the yield of the Shares, and discounted by 7.5%.

Beginning with last year's Adjustment Date on January 1, 2012 and going forward, the Determined Amounts are multiplied by a number equal to (1-Tax%) where "Tax%" is an estimate of the Company's effective entity level tax rate for the year. This maintains the accretive effect to shareholders of the annual Royalty Pool adjustment. This estimate of the effective tax rate will be subject to an adjustment when the year's actual tax rate of the Company is known.

From January 1 Adjustment Date, PPL is entitled to receive 80% of the calculated, additional equivalent Shares and distributions thereon resulting from a change in an Exchange Multiplier. The final equivalent Shares entitlement is determined following the 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 equivalent Shares to reflect that difference. Conversely, if the actual system sales are less than 80% of the forecasted system sales, PPL must return a calculated portion of the equivalent Shares with which it was previously credited. In any given year, the calculated Exchange Multipliers cannot be less than at the end of the previous year.

Effective January 1, 2013, the Class B Exchange Multiplier is adjusted based on the 2013 forecasted system sales of $6.6 million from the 21 new Pizza Pizza restaurants, less sales of $3.4 million from 17 permanently closed Pizza Pizza non-traditional restaurants resulting in net, forecasted Pizza Pizza system sales of $3.2 million added to the Royalty Pool. The Class D Exchange Multiplier will not be adjusted at this time since the 2013 forecasted additional system sales from the one new Pizza 73 non-traditional restaurant, estimated at $100,000, is offset by $100,000 in sales from one permanently closed non-traditional restaurant, resulting in no estimated sales being added to the Royalty Pool.

In exchange for adding the forecasted Pizza Pizza system sales to the Royalty Pool, PPL has received 163,054 additional equivalent Shares (through the change to the Class B Exchange Multiplier). These represent 80% of the forecasted equivalent Shares entitlement to be received (203,817 equivalent Shares represent 100%), with the final equivalent Shares entitlement to be determined when the new restaurants' 2013 actual sales performance is known with certainty in early 2014.

On January 1, 2013, PPL added no Pizza 73 system sales to the Royalty Pool due to one non-traditional Pizza 73 restaurant opening and one closing. Therefore, PPL has received no additional Class D equivalent Shares. Final Class D equivalent Shares will be determined when the new restaurant's 2013 actual sales performance is known with certainty in early 2014.

After giving effect to these additional, equivalent Share entitlements at January 1, 2013, PPL now owns equivalent Shares representing 27.1% 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:

Shares outstanding & issuable on December 31, 2012 Issued & Outstanding
Shares, and
Equivalent Shares
Issued & Outstanding
Shares,
Equivalent Shares
and Holdback of
Equivalent Shares
Public float 21,818,392 21,818,392
Class B equivalent Shares held by PPL 6,338,554 6,338,554 (1)
PPL Additional Class B equivalent Shares - 20% Holdback as of December 31, 2012 - 66,205 (1)
Class D equivalent Shares held by PPL 1,547,131 1,547,131 (2)
PPL Additional Class D equivalent Shares - 20% Holdback as of December 31, 2012 - 940 (2)
Fully-diluted Shares 29,704,077 29,771,222
Percentage of fully-diluted Shares available for exchange by PPL at December 31, 2012 26.5 % 26.7 %
Shares outstanding & issuable after January 1, 2013 Annual Adjustment
Public float 21,818,392 21,818,392
Class B equivalent Shares held by PPL 6,404,759 6,404,759 (1)
Class D equivalent Shares held by PPL 1,548,071 1,548,071 (2)
Additional PPL Class B equivalent Shares as of January 1, 2013 (80%) 163,054 163,054 (3)
Additional PPL Class B equivalent Shares - 20% Holdback as of January 1, 2013 - 40,763 (4)
Additional PPL Class D equivalent Shares as of January 1, 2013 (80%) - - (3)
Additional PPL Class D equivalent Shares - 20% Holdback as of January 1, 2013 - - (4)
Number of fully-diluted Shares 29,934,276 29,975,039
Percentage of fully-diluted Shares available for exchange by PPL at January 1, 2013 27.1 % 27.2 %
(1) The final calculation of the equivalent Shares entitlement related to the six net Pizza Pizza restaurants that were removed from the Royalty Pool on January 1, 2012 was completed and independently reviewed in early 2013, and became effective as of January 1, 2012. Actual Additional System Sales of new restaurants for 2012 were greater than Forecasted Additional System Sales. As a result of the true-up, PPL's Class B equivalent Shares increased by 66,205 and 2012 distributions thereon were paid to PPL in January 2013 from the Partnership effective January 1, 2012.
(2) The final calculation of the equivalent Shares entitlement related to the one net Pizza 73 restaurant that was added to the Royalty Pool on January 1, 2012 was completed and independently reviewed in early 2013, and became effective as of January 1, 2012. Actual Additional System Sales of the new restaurant for 2012 was slightly higher than Forecasted Additional System Sales. As a result of the true-up, PPL's Class D equivalent Shares increased by 940 and 2012 distributions thereon were paid to PPL in January 2013 from the Partnership effective January 1, 2012.
(3) Additional Class B and Class D equivalent Shares available January 1, 2013 are shown in the table. The final equivalent Shares entitlement will be determined in early 2014, effective January 1, 2013, once actual sales of the restaurants are known. Note that forecasted Pizza 73 system sales added to the Royalty Pool were zero due to one non-traditional Pizza 73 restaurant opening and one closing. Therefore, PPL has received no additional Class D equivalent Shares on January 1, 2013.
(4) A preliminary calculation of the 20% holdback of equivalent Shares entitlement was done as of January 1, 2013 using the net, positive, forecasted sales from the addition of 22 restaurants to the Royalty Pool less the closure of 18 non-traditional restaurants subtracted from the Royalty Pool on January 1, 2013. The final Class B and D equivalent Shares entitlement will be determined in early 2014, effective January 1, 2013 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 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. 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 2011 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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