Priszm reports third quarter 2010 financial results

Considering sale of certain restaurant assets

TORONTO, Oct. 19 /CNW/ - Priszm Income Fund (TSX: QSR.UN) ("Priszm" or the "Company") today reported its financial results for the third quarter of 2010.

"While 2010 has been a trying year for us, we are optimistic about our future.  Yum!, our franchisor, is introducing the Double Down sandwich in Canada, a great success in other countries. We are confident they will turn sales in Canada around as they continue to introduce new products they have tested and had success with internationally." said John Bitove, Executive Chairman of Priszm Income Fund. "While our sales in the third quarter are down, our operations team is doing a great job of managing costs."

"After an ongoing overview of our business, we have made the strategic decision to explore a refinancing option that could result in the sale of some assets so as to allow us to pay down our long-term debt and put the company in a stronger financial position," said Bitove.

Subsequent to the third quarter, as a result of management's continuing exploration of alternatives, the Company received preliminary, non-binding expressions of interest for the purchase of certain restaurant assets.  These proposals are being evaluated by the Company in the context of achieving a comprehensive plan that will set Priszm up for long-run success. 

Restaurant Sales
Restaurant sales from continuing operations of $106.2 million for the third quarter of 2010 were down $7.5 million from 2009 levels. This decrease was a direct result of a same store sales decline of 5.0 per cent during the quarter and operating 12 fewer restaurants than at the end of the corresponding period of 2009.  The SSSG for multi-branded restaurants, a 3.5 per cent decline, was better than single branded locations by approximately 150 basis points, consistent with historical trends.

Cost of Restaurant Sales
Cost of restaurant sales in the third quarter of 2010 increased by 40 basis points to 59.2 per cent of sales versus 58.8 per cent of sales in the third quarter of 2009. Food costs accounted for a decrease in cost of restaurant sales of 40 basis points. The implementation of the Harmonized Sales Tax in Ontario and British Columbia drove approximately 20 basis point reduction while focus on food cost controls in the restaurants, aided by software tools, continued to have positive impact. Labour cost increased by 80 basis points in the quarter driven by statutory increases to minimum wage and the loss of leverage on fixed labour components with lower sales volumes versus year ago. Year to date the cost of restaurant sales increased by 80 basis points over 2009.  Increased labour costs accounted for the balance due to minimum wage increases and lower operating leverage as described above. Year to date the Company has not taken any price increases to offset labour or food cost supply increases.

Income from Restaurant Operations
As a result of the factors discussed above and a smaller restaurant base, income from restaurant operations decreased by $3.1 million versus the prior year, generating operating income of $9.3 million in the third quarter of 2010 versus $12.4 million in 2009.

General and Administrative (G&A) Expense
G&A expense was $4.5 million for the third quarter of 2010, $0.2 million lower than the prior year. Consistent with the downward trend of the quarter, year to date G&A expense was down $1 million versus the first three quarters of 2009.  The decline is as a result of action taken by management at the end of 2009 to minimize corporate overhead, and is partially offset by additions to selective spending.

Interest Expense
Net interest expense of $1.9 million is down by $0.2 million in the third quarter of 2010 compared to the third quarter of 2009.  This decline in interest expense reflects savings due to principal repayments on the long term loan of $10 million year to date. On a year to date basis net interest expense was $6.1 million compared to $6.3 million in 2009.

Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
EBITDA for the third quarter of 2010 was $8.2 million compared to $13.7 million in the second quarter of 2009.

Liquidity
There are two primary issues, more fully described below, impacting the Fund's liquidity position.  First is the near term maturity of the Fund's $65.6 million senior debt facility and the second is the restaurant asset investment required in order to renew the bulk of the Fund's franchise agreements that expire over the next few years.

Addressing the senior debt facility, along with a plan to address franchise renewal obligations is a key priority.  Subsequent to the end of the third quarter, as a result of management's exploration of alternatives, the Company received preliminary, expressions of interest for the purchase of certain restaurant assets.  At this point in time no decisions have been taken with regard to the sale of assets and quantification of any impact on financial performance is not immediately available.  There is no certainty that any sale will result from these initial non-binding expressions of interest, but the Company is working diligently to assess such.

The Fund currently believes that negotiations with lenders and the franchisor will lead to a comprehensive plan for debt refinancing and facilities development, however, success cannot be assured as outlined in the Risks and Uncertainty section of the MD&A.

While the Fund has been generating positive net cash from operating activities on an annual basis, these near term commitments, along with recent financial events raise doubt as to the ability of the Fund to meet its obligations as they come due and, accordingly, the ultimate appropriateness of the use of accounting principles applicable to a going concern.  Details of these financial events and near term commitments are summarized below as well as in Note 1 of the Fund's consolidated financial statements and in the related MD&A.

The Fund has three debt components: two tranches of term debt, with $63.6 million and $2.0 million to be repaid on December 31, 2010, as well as $30.0 million of convertible unsecured subordinated debentures maturing on June 30, 2012.  The Fund has experienced financial performance in the last nine periods that has been below budgeted expectations due to same store sales declines in YUM! Canada's KFC and Taco Bell brands. As a result, during the third quarter, the Fund was unable to comply with a minimum level of EBITDA financial covenant and after consideration of analysis of performance, projections and forecasts incorporating anticipated promotional activities, management believes that it is unlikely that the Company will be in compliance with the financial performance covenant for the balance of the year.  The consequence of this non-compliance is that the term loans are now callable by the lender although there has been no indication in discussions with the lender that it will exercise this right at this time.  Although the Fund continues to aggressively pursue various refinancing and capital raising strategies it does not, at the present time, have sufficient liquid resources to retire its current and long-term debt obligations.

At September 5, 2010, the Company had cash on hand of $13.4 million, an increase of $1.7 million during the quarter. The net cash position was aided by the Company's decision to suspend capital investment activities under the franchise renewal program with Yum! pending renegotiation of development obligations and securing a financing agreement. The Company is required to invest in its assets in accordance with its franchise agreements as more fully described below.

Loans
The Company amended its long-term loans effective March 12, 2010. This latest covenant amendment required the Fund to repay $10.0 million of the long-term debt during the first three quarters of 2010 which it has completed lowering the debt to $65.6 million. 

The most recent amendment to the long term loan also required the Fund to deliver a fully executed letter of intent on or before June 30, 2010, from a bona fide lender, committing to refinance the outstanding amount on both tranches of long-term debt on or before December 31, 2010. While the Fund did not deliver a letter of intent by June 30, 2010, the Fund had received some expressions of interest from potential lenders that may be willing to take part in one or more refinancing alternatives. Management remains in active discussions with both current and prospective lenders and continues to work diligently with its investment banker to identify additional opportunities while concurrently exploring the potential sale of certain restaurant assets. However, there is no certainty that a financing or sale arrangement can be concluded in an amount, upon terms, or within a timeline that is acceptable or will not have a significant negative impact upon the Company's financial performance.

Capital Investment
Commencing in November 2009, the majority of the Company's franchise agreements, which cover the use of the KFC, Taco Bell and Pizza Hut trademarks, expire over a period of five years. Under the terms of the franchise agreement the Company is able to extend its rights for an additional ten years upon payment of a renewal fee and making capital investments to upgrade its restaurants to the standard specified by the franchisor. In the fourth quarter of 2009 the Company renewed the franchise agreements for the first group of restaurants, covering 69 locations and paid a renewal fee of $2.0 million. In addition, the Company undertook to upgrade 75 restaurants in 2010 for a planned minimum cost of $15.0 million, with the individual location amounts varying depending upon the scope of work required for individual assets to meet the franchisor requirements. Under the terms of the renewal agreement the Company was required to complete upgrades to 34 of its restaurants by July 15, 2010. The Company has retained a Canadian construction manager to oversee its upgrade program and while some of the upgrades have been completed, others are behind schedule due to the year to date sales shortfall from KFC and Taco Bell, management's focus on debt refinancing, liquidity and cash preservation, as well as some development related, logistical issues.  As such, the July 15, 2010 requirement has not been met. The Fund has suspended investments related to these facility upgrades and opted not to pay its franchise renewal fee that was due on August 10, 2010, pending sales recovery, resolution of future upgrade requirements and debt refinancing for the long term benefit of the Company. It is unlikely at this time that the Fund will be able to invest the minimum required capital to meet the upgrade requirements for its restaurants as required by the master franchise amending agreement contemplated and signed in November 2009. Consequently the Fund may be unable to renew all of its upcoming 75 restaurant franchise licenses, or will be required to secure relief from this commitment through negotiations with the franchisor.

Based upon management's forecasts, plans and cash flow assumptions it is anticipated that the funding of any capital investment stemming from the franchise agreement renewals over the next five years will need to come from one or more of: (i) improved sales performance of the KFC and Taco Bell brands that results in increased earnings; (ii) capital restructuring; (iii) a third party financing; (iv) asset sales; and v) negotiated cost and/or development commitment reductions.

About Priszm Income Fund
Priszm Income Fund (TSX: QSR.UN) holds approximately a 60 per cent interest in Priszm Limited Partnership, which owns and operates more than 400 quick service restaurants in seven provinces across Canada. The KFC, Taco Bell and Pizza Hut restaurants under Priszm serve more than one million customers a week and employ approximately 7,300 people. Approximately 100 locations are multi-branded, combining two or more of the Fund's restaurant concepts.

To find out more about Priszm Income Fund (TSX: QSR.UN), visit our website at http://www.priszm.com.

Forward-Looking Statements
Certain information in this document may constitute forward-looking statements within the meaning of securities laws that involve known and unknown risks, uncertainties, future expectations and other factors with respect to industry sector performance, business plans, activities, trends and events anticipated by the Priszm Income Fund (the "Company") and which may cause the Company's future performance and results to be materially different from those implied by the forward-looking information. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," or the negative of these terms or other comparable terminology concerning matters that are not historical facts. Forward-looking information is based on certain factors and assumptions regarding, among other things, the number of restaurants, the renewal of the franchise agreements, ability to meet capital expenditure requirements, the industry sector performance, business plans, activities, success of refinancing on commercially viable terms, trends and events anticipated by the Company. Although the Company believes that the assumptions underlying such statements are reasonable, any of the assumptions may prove to be inaccurate and, as a result, the forward-looking information may prove to be incorrect. The forward-looking information, assumptions and statements reflect the views of the Company's management with respect to future events and outcomes as of the date of this document and there should be no expectation that such information will be updated, revised and/or supplemented whether as a result of new information, changing circumstances, future events or other cause. Actual events or outcomes may be materially different and cause the performance of the Company to differ materially from any forward-looking statement.

Reconciliation of Net Income to EBITDA
The following table reconciles net income from the Company's consolidated statement of operations, which includes the results for both continuing and discontinued operations, to EBITDA:

	Third Quarter		Year to Date
(in thousands of dollars)	2010	2009	2010	2009
Net income (loss) for the period	1,817	3,226	(1,533)	2,389
Income tax (recovery) expense	(157)	57	(52)	(476)
Interest income	(8)	(1)	(14)	(9)
Interest expense (including accretion and amortization of deferred financing charges)	1,912	2,093	6,137	6,282
Non-controlling interest	1,121	2,187	(1,068)	1,259
Amortization and impairment	3,523	3,416	10,248	10,558
Unit-based compensation	-	52	-	170
EBITDA	8,208	11,030	13,718	20,173

%SEDAR: 00019884E

For further information:

Investors
Deborah Papernick
[phone]
[email protected]