Pizza Pizza Royalty Income Fund
TSX : PZA.UN

Pizza Pizza Royalty Income Fund

February 07, 2012 13:07 ET

Pizza Pizza Royalty Income Fund Announces Annual Royalty Pool Adjustment

TORONTO, ONTARIO--(Marketwire - Feb. 7, 2012) -

Attention: Business Editors

Pizza Pizza Royalty Income Fund (the "Fund") and Pizza Pizza Limited ("PPL") today announced that effective January 1, 2012, the pool of restaurants (the "Royalty Pool"), on which royalties are paid to the Fund by PPL, has been adjusted to reflect restaurant openings and closures. Effective January 1, 2012, nine new Pizza Pizza restaurants and one new Pizza 73 restaurant will be added to the Royalty Pool and 15 Pizza Pizza restaurants, comprising nine traditional restaurants and six non-traditional locations, will be removed from the Royalty Pool. Of the nine new Pizza Pizza restaurants opened during 2011, six were traditional restaurants and three were non-traditional locations. The one Pizza 73 restaurant was a non-traditional location opened during the period from September 2, 2010 to September 1, 2011. After this annual adjustment, the Royalty Pool decreases by a net five restaurants. During 2012, royalties will be paid to the Fund on 690 restaurants in the Royalty Pool.

In exchange for adding new restaurants to the Royalty Pool, PPL will be compensated in "equivalent Units" as described below, using an agreed-upon formula, on account of the future royalties paid to the Fund from the new 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, affects the number of equivalent Units 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 Units, and discounted by 7.5%. Beginning with the January 1, 2012 Adjustment Date, the Determined Amounts are now multiplied by a number equal to (1-Tax%) where "Tax%" is an estimate of the Fund's effective entity level tax rate for the year. This estimate of the effective tax rate will be subject to an adjustment when the actual tax rate of the Fund for the year is known. This change to the Royalty Pool calculations, which reflects the impact of the SIFT tax now applicable to the Fund and is intended to maintain the accretive effect of the Royalty Pool adjustments, was announced in November 2011.

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 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 Units 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 equivalent Units 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, 2012, the Class B Exchange Multiplier is adjusted based on the 2012 forecasted system sales of $4.2 million from the nine new Pizza Pizza restaurants, less sales of $3.9 million from 15 permanently closed Pizza Pizza restaurants resulting in net, forecasted Pizza Pizza system sales of $0.3 million added to the Royalty Pool. The Class D Exchange Multiplier is adjusted based on the 2012 forecasted system sales of $25,000 from one new Pizza 73 restaurant.

In exchange for adding the forecasted Pizza Pizza system sales to the Royalty Pool, PPL has received 12,801 additional equivalent Units through the change to the Class B Exchange Multiplier. These represent 80% of the forecasted equivalent Units entitlement to be received (16,002 equivalent Units represent 100%), with the final equivalent Units entitlement to be determined when the new restaurants' 2012, actual sales performance is known with certainty in early 2013.

In exchange for adding the forecasted Pizza 73 system sales to the Royalty Pool, PPL has received 1,699 additional equivalent Units through the change to the Class D Exchange Multiplier. These represent 80% of the forecasted equivalent Units entitlement to be received (2,123 equivalent Units represent 100%), with the final equivalent Units entitlement to be determined when the new restaurant's 2012 actual sales performance is known with certainty in early 2013.

After giving effect to these additional equivalent Units entitlements at January 1, 2012, 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, 2011
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 6,325,753 6,325,753 (1)
PPL Additional Class B equivalent Units - Holdback as of December 31, 2011 - - (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, 2011 - - (2)
Fully-diluted Units 29,689,577 29,689,577
Percentage available for exchange by PPL at December 31, 2011 26.5% 26.5%
Units outstanding & issuable on January 1, 2012
Public float 21,818,392 21,818,392
Class B equivalent Units held by PPL 6,325,753 6,325,753 (1)
Class D equivalent Units held by PPL 1,545,432 1,545,432 (2)
Additional PPL Class B equivalent Units as of January 1, 2012 (80%) 12,801 12,801
(3)
Additional PPL Class B equivalent Units - Holdback as of January 1, 2012 (20%) - 3,201
(4)
Additional PPL Class D equivalent Units as of January 1, 2012 (80%) 1,699 1,699 (3)
Additional PPL Class D equivalent Units - Holdback as of January 1, 2012 (20%) - 424 (5)
Number of fully-diluted Units 29,704,077 29,707,702
Percentage available for exchange by PPL from January 1, 2012 26.5% 26.6%
(1) The calculation of the final equivalent Units entitlement related to the 17 net Pizza Pizza restaurants that were added to the Royalty Pool on January 1, 2011 was completed and independently reviewed in early 2012, and became effective as of January 1, 2011. Actual Additional System Sales of new restaurants for 2011 were less than Forecasted Additional System Sales. As a result of the true-up, PPL returned 1,766 Class B equivalent Units and the amount of 2011 distributions thereon to the Partnership effective January 1, 2011.
(2) The calculation of the final equivalent Units entitlement related to the seven net Pizza 73 restaurants that were added to the Royalty Pool on January 1, 2011 was completed and independently reviewed in early 2012, and became effective as of January 1, 2011. Actual Additional System Sales of new restaurants for 2011, less System Sales attributable to adjusted restaurants, was a negative number. In any year that the actual system sales less closed restaurant sales and sales attributable to adjusted restaurants is negative, no increase or decrease in the Exchange Multiplier is made. As a result, PPL's Class D equivalent Units entitlement remains unchanged for 2011.
(3) Additional Class B and Class D equivalent Units available January 1, 2012 are shown in the table. The final equivalent Units entitlement will be determined in early 2013, effective January 1, 2012, once actual sales of the restaurants are known.
(4) 20% holdback of equivalent Units entitlements were calculated using the net, positive, forecasted sales from the addition of nine Pizza Pizza restaurants to the Royalty Pool less the closure of 15 Pizza Pizza restaurants subtracted from the Royalty Pool on January 1, 2012. The final equivalent Units entitlement will be determined in early 2013, effective January 1, 2012 once actual sales of the restaurants are known.
(5) 20% holdback of equivalent Units from one Pizza 73 restaurant added to the Royalty Pool on January 1, 2012. The final equivalent Units entitlement will be determined in early 2013, effective January 1, 2012 once actual sales of the restaurant is known.

Forward-Looking Statements

Certain statements in this press release, including those concerning 2012 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, 2012. 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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