Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

January 23, 2014 08:00 ET

Pizza Pizza Royalty Corp. Increases the Royalty Pool of Restaurants by 28 Restaurants

TORONTO, ONTARIO--(Marketwired - Jan. 23, 2014) - Pizza Pizza Royalty Corp. (TSX:PZA) (the "Company") and Pizza Pizza Limited ("PPL") today announced that effective January 1, 2014, the number of restaurants on which royalties are paid to the Company by PPL (the "Royalty Pool") has been adjusted to include 34 new restaurants opened in 2013; six restaurants were closed and removed from the Royalty Pool in 2013.

By brand, 30 new Pizza Pizza restaurants and four new Pizza 73 restaurants were added to the Royalty Pool; there were six Pizza Pizza locations closed and removed from the Royalty Pool. For 2014, the Royalty Pool will consist of 629 Pizza Pizza restaurants and 93 Pizza 73 restaurants, or 722 restaurants in total.

Paul Goddard, Chief Executive Officer of PPL, commented that: "Pizza Pizza has surpassed a major milestone by growing the Royalty Pool to over 700 restaurants in 2013; it's a testament to the strength of our two brands. Growing same store sales and the Royalty Pool are the two main drivers of shareholder value. In 2014, our national expansion strategy will continue as we target opening 25 restaurants."

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 (as described below) and/or cash using an agreed-upon formula, designed to be accretive to current shareholders, which includes estimating future royalties to be paid to the Company based on the new restaurant sales. Generally, where additional restaurants are added to the Royalty Pool, their forecasted contribution 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 2012 Annual Information Form.

After the January 1, 2014 Adjustment Date, PPL effectively now owns equivalent Shares representing 28.0% of the Company's fully diluted shares (see Table 1 below). Prior to this adjustment, PPL's ownership was 27.1%. 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").

At each annual Adjustment Date, after determining the number of equivalent Shares issuable through an increase to the Class B or Class D Exchange Multiplier (in accordance with the existing terms of the Amended and Restated Limited Partnership Agreement), the Partnership and PPL could agree to leave one or both of the multipliers unchanged. Alternatively, PPL could receive a cash payment equal to the number of equivalent Shares issuable as a result of the multiplier change, multiplied by the market price of a Share applicable at the relevant Adjustment Date. Any subsequent adjustment to the applicable multiplier, based on actual system sales of the Royalty Pool, would similarly be settled by a cash payment to PPL or the Partnership, as applicable.

On January 1, 2014, in exchange for adding a net of $8.1 million forecasted system sales to the Royalty Pool ($9.5 million from the 30 new Pizza Pizza restaurants less sales of $1.4 million from six permanently closed Pizza Pizza restaurants), PPL has received 377,240 additional equivalent Shares (through the change to the Class B Exchange Multiplier). These equivalent Shares represent 80% of the forecasted equivalent Shares entitlement to be received (471,550 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 2015.

Additionally, in exchange for adding $1.2 million in forecasted system sales from four new Pizza 73 restaurants to the Royalty Pool, PPL and the Company's board of directors have agreed to compensate PPL in cash in lieu of PPL receiving 85,571 equivalent Shares, for what would have been an increase in the Class D Exchange Multiplier. Instead, the Class D Exchange Multiplier remains unchanged and a cash payment of $1,136,383 has been made to PPL, representing 80% of the forecasted amount due. This payment has been determined by multiplying the 85,571 equivalent Shares (80% of forecasted equivalent Shares entitlement) by the market price of a Share applicable at the January 1, 2014 Adjustment Date which was determined to be $13.28. The final cash payment will be determined when the actual sales of the new restaurants are known with certainty in early 2015.

In deciding to pay cash in lieu of increasing PPL's equivalent Shares, the Company's board of directors concluded that the transaction is accretive to shareholders and that the working capital reserve balance after the payment would be at an appropriate level. Over the past three years, largely as a result of consistent same store sales growth, the Company's working capital reserve has increased from $1.2 million in 2011 to $5.1 million at December 31, 2013. The reserve is available to stabilize dividends and fund other expenditures in the event of short- to medium-term variability in System Sales and, thus, the Company's royalty income. The Company does not have capital expenditure requirements or employees.

After giving effect to these additional, equivalent Share entitlements and cash payment at January 1, 2014, PPL now owns equivalent Shares representing 28.0% 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, 2013 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 6,567,813 6,567,813 (1)
PPL Additional Class B equivalent Shares - 20% Holdback as of December 31, 2013 - (10,781) (1)
Class D equivalent Shares held by PPL 1,548,071 1,548,071 (2)
PPL Additional Class D equivalent Shares - 20% Holdback as of December 31, 2013 - - (2)
Number of fully-diluted Shares 29,934,276 29,923,495
Percentage of fully-diluted Shares available for exchange by PPL at December 31, 2013 27.1% 27.1%
Shares outstanding & issuable after January 1, 2014 Annual Adjustment
Public float 21,818,392 21,818,392
Class B equivalent Shares held by PPL 6,557,032 6,557,032 (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, 2014 (80%) 377,240 377,240
(3)
Additional PPL Class B equivalent Shares - 20% Holdback as of January 1, 2014 - 94,310
(4)
Additional PPL Class D equivalent Shares as of January 1, 2014 (80%) - - (3)
Additional PPL Class D equivalent Shares - 20% Holdback as of January 1, 2014 - - (4)
Number of fully-diluted Shares 30,300,735 30,395,045
Percentage of fully-diluted Shares available for exchange by PPL at January 1, 2014 28.0% 28.2%

(1) The final calculation of the equivalent Shares entitlement related to the four net Pizza Pizza restaurants that were added to the Royalty Pool on January 1, 2013 was completed and independently reviewed in early 2014, and became effective as of January 1, 2013. Actual Additional System Sales of new restaurants for 2013 were less than Forecasted Additional System Sales. As a result of the true-up, PPL's Class B equivalent Shares decreased by 10,781 and 2013 distributions thereon were returned to the Partnership by PPL in January 2014.

(2) The final calculation of the equivalent Shares entitlement related to one Pizza 73 restaurant added to and one removed from the Royalty Pool on January 1, 2013 was completed and independently reviewed in early 2014, and became effective as of January 1, 2013. As there was no adjustment to the Class D equivalent Shares on January 1, 2013, there was no true-up required.

(3) Additional Class B and Class D equivalent Shares available January 1, 2014 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 Partnership Units Outstanding

New Class B Exchange Multiplier = 1.702444 (80%)
Tax% = 19.5%
Net Additional System Sales = $8, 100,608
Royalty rate = 6%
Share yield = 5.78%
Class B Partnership Units Outstanding = 4,073,128
Class D Exchange Multiplier = 15.48071 is unchanged in lieu of $1.1 million cash payment
Tax% = 19.5%
Net Additional System Sales = $1,225,000
Royalty rate = 9%
Share yield = 5.78%
Class D Partnership Units Outstanding = 100,000

The final equivalent Shares and cash entitlement will be determined in early 2015, effective January 1, 2014, once actual sales of the restaurants are known

(4) A preliminary calculation of the 20% holdback of equivalent Shares and cash entitlement was done as of January 1, 2014 using the net, positive, 2014 forecasted sales. The final Class B and D equivalent Shares entitlement will be determined in early 2015, effective January 1, 2014 once actual sales of the restaurants are known.

Forward-Looking Statements

Certain statements in this press release, including those concerning targeted restaurant openings in 2014, 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. These factors could also affect the Company'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 2012 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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