Pizza Pizza Limited Management s Discussion and Analysis

Transcription

1 Pizza Pizza Limited Management s Discussion and Analysis This Management s Discussion and Analysis ( MD&A ) of financial conditions and results of operations of Pizza Pizza Limited ( PPL ) covers the 13-week (the Quarter ) and 52-week periods (the Year ) ended December 30, The MD&A should be read in conjunction with PPL s December 30, 2012 annual consolidated financial statements and notes thereto. PPL prepares its annual consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), applicable to annual financial statements. The MD&A has been prepared as of February 14, This document, along with other information about PPL and the Pizza Pizza Royalty Corp. ( PPRC ), formerly the Pizza Pizza Royalty Income Fund ( Fund ), including the Fund s Annual Information Form, can be accessed on the investor relations section of the website or on the SEDAR website for Canadian regulatory filings at OVERVIEW PPL, a privately-owned Canadian corporation, operates two brands, Pizza Pizza and Pizza 73. PPL acquired 100% of the shares of Pizza 73, Inc. ( Pizza 73 ) on July 24, Immediately following the acquisition, PPL and Pizza 73 amalgamated, continuing to operate as Pizza Pizza Limited. About the Pizza Pizza Brand Pizza Pizza restaurants operate primarily in the province of Ontario, where it dominates the pizza quick service restaurant ( QSR ) segment and is a franchise-oriented restaurant business. Of the 605 Pizza Pizza restaurants at December 30, 2012, 592 are franchised or licensed and thirteen are owned and operated as corporate restaurants. PPL provides a high level of service and operational support to its partners, including turn-key restaurants, a central food distribution centre which supplies all food and non-food items used in Pizza Pizza restaurant operations, and monitoring systems intended to ensure product and service quality and operational consistency across the chain. PPL has a modern restaurant system, with approximately 99% of the restaurants either new or substantially renovated. The centrally managed renovation or re-imaging program, funded by our franchisees, allows for the continuous renewal of the Pizza Pizza concept. About the Pizza 73 Brand Our second brand, Pizza 73, operates 89 locations in the QSR segment, principally in the province of Alberta. The majority of the Pizza 73 restaurants are not franchised, but instead owned and operated as independent businesses. Each restaurant is a corporation, of which 71 are jointly-owned by an independent owner/operator and PPL and one is owned and operated as a corporate restaurant. There are 17 non-traditional locations which have limited operating hours and a limited menu. Pizza 73 currently has five traditional locations outside of Alberta; four in Saskatchewan and one in British Columbia. Sales through its centralized call centre and on-line ordering, together, account for approximately 91% of Pizza 73 s system sales. The Pizza 73 business also includes two central food distribution centres and a call centre. Background PPL s three distinct revenue sources, food sales, royalty payments and profits from the 50% ownership in the Pizza 73 restaurants, are driven by changes in retail system sales at franchised, jointly controlled and company restaurants. Changes in system sales are driven by changes in same stores sales and store counts. We monitor both of these metrics closely, as they directly impact our revenues and profits, and we strive to consistently increase the related amounts. 1

2 We devote significant attention to our innovative marketing programs which are funded by the restaurant operators contribution to a marketing fund that is administered by PPL. In accordance with their franchise or operating agreements, each traditional Pizza Pizza restaurant contributes approximately 6% of system sales (in addition to the base royalty and other franchise fees) and each Pizza 73 restaurant contributes approximately 8% of system sales. The marketing fund is used to pay for the production of advertising and promotional material and media purchases. In 2005, the Fund completed its initial public offering and used the proceeds to indirectly acquire the trademarks and other intellectual property owned by PPL used in connection with the operation of all Pizza Pizza restaurants (together the PPL Rights ). The Fund also acquired a loan outstanding to PPL in the principal amount of $30 million (the PPL Loan ). The Fund, indirectly through the Pizza Pizza Royalty Limited Partnership (the Partnership ), has licensed the PPL Rights to PPL, for which PPL pays a 6% royalty on the system sales of those Pizza Pizza restaurants included in the specific listing of restaurants referred to as the Royalty Pool. There are 601 Pizza Pizza restaurants in the Royalty Pool for In July 2007, the Partnership acquired the Pizza 73 trademarks and other intellectual property associated with Pizza 73 (together, Pizza 73 Rights ). The purchase was funded by the net proceeds from the Fund s public offering, a private placement, and the net borrowings under the Partnership s credit facility (see Liquidity and Capital Resources). The Partnership licensed the Pizza 73 Rights to PPL for a 9% royalty on system sales of the Pizza 73 restaurants included in the Royalty Pool. For 2012, there are 89 Pizza 73 restaurants in the Royalty Pool. As at December 30, 2012, PPL owned an effective 26.5% interest in the fully diluted units of the Fund. PPL s 26.5% interest in the earnings of the Partnership is from its ownership of Class B, Class C and Class D Partnership units. Each of the Class B and Class D Units can be exchanged indirectly for that number of Fund units equal to the Class B and Class D Exchange Multiplier, respectively, (as defined in the Partnership s Limited Partnership Agreement) applicable at the date of the exchange. Class C Units can be exchanged by requiring the Pizza Pizza Holdings Trust (the Trust ) to purchase those Class C Units in consideration of the assumption by the Trust of an amount of the indebtedness under the PPL Loan equal to $10.00 per Class C Unit to be transferred. The Royalty Pool Annually, on January 1 (the Adjustment Date ), Pizza Pizza restaurants in the Royalty Pool are 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 permanently closed during the year. The change in the amount of the Pizza Pizza Royalty to be received by the Partnership as a result of changes in the system sales of the Royalty Pool will affect the extent of PPL s retained interest through the adjustment to the exchange rate at which the Class B Partnership units may ultimately be exchanged for units of the Fund, referred to as the Class B Exchange Multiplier, as defined in the Limited Partnership Agreement governing the Partnership (the Partnership Agreement ). On the Adjustment Date, the adjustment to the Class B Exchange Multiplier involves first calculating the Determined Amount, which is defined as 92.5% of the royalty revenue added to the Royalty Pool, divided by the yield of the Fund units. Beginning with the January 1, 2012 Vend-in, the Determined Amounts are now multiplied by a number equal to (1-Tax%) where Tax% is an estimate of the Fund s effective tax rate for the year. This estimate of the effective tax rate will be subject to an adjustment when the actual effective entity level tax rate of the Fund for the year is known. This material change was announced in The Determined Amount is next multiplied by 80%, then divided by the current market price of the units, and then further divided by the Class B Partnership units outstanding. This fraction is added to the Class B Exchange Multiplier from the preceding year, which was one on the closing of the initial public offering. On the following Adjustment Date, a second adjustment to the Class B Exchange Multiplier will be made in the same manner as the first adjustment once the actual system sales for new restaurants are known - 2 -

3 with certainty. The adjustment for new restaurants added to the Royalty Pool is designed to be accretive for current unitholders. The Pizza 73 restaurants in the Royalty Pool are adjusted annually on the Adjustment Date to include Pizza 73 restaurants which were open on or prior to September 1 of the previous year and not permanently closed prior to the current Adjustment Date and which were not previously included in the Pizza 73 Royalty Pool. At the same time, the Pizza 73 Royalty Pool will be adjusted to remove restaurants that were included in the Pizza 73 Royalty Pool during the immediately preceding fiscal year but which have been permanently closed prior to the Adjustment Date. The change in the amount of the Pizza 73 Royalty to be received by the Partnership as a result of changes in the restaurants included in the Pizza 73 Royalty Pool will affect the extent of PPL s retained interest through the adjustment to the exchange rate at which the Class D Units may ultimately be exchanged for Units of the Fund, referred to as the Class D Exchange Multiplier, as defined in the Amended Partnership Agreement. On the closing of the Pizza 73 acquisition, Class D Units were not exchangeable for Fund units, thus the Class D Exchange Multiplier began at zero. The Class D Exchange Multiplier is adjusted on two occasions similar to adjustments of the Class B Exchange Multiplier Vend-in Adjustment Class B Exchange Multiplier In early January 2012, adjustments to royalty payments and Pizza Pizza s Class B Exchange Multiplier were made based on the actual performance of the 17 net new restaurants added to the Royalty Pool on January 1, As a result of the adjustments, the new Class B Exchange Multiplier is and Pizza Pizza s exchangeable units can be exchanged into 6,325,753 Fund units which is a decrease of 1,766 Fund units, effective January 1, Vend-in Adjustment Class D Exchange Multiplier In early January 2012, adjustments to royalty payments and Pizza Pizza s Class D Exchange Multiplier were made based on the actual performance of the seven new restaurants added to the Royalty Pool on January 1, As a result of the adjustments, there was no change to the Class D Exchange Multiplier from what was previously reported of , effective January 1, Vend-in Adjustment Class B Exchange Multiplier On January 1, 2012, six net, Pizza Pizza restaurants were removed from the Royalty Pool as a result of nine new restaurants opening and fifteen closing from January 1, 2011 to December 31, The additional system sales from the nine new restaurants are estimated at $4.1 million annually less sales of $3,863,000 from fifteen permanently closed Pizza Pizza restaurants resulting in net, estimated Pizza Pizza sales of $283,000 added to the Royalty Pool. The total number of Pizza Pizza restaurants in the Royalty Pool has decreased to 601. The yield of the Fund units was determined to be % calculated using $8.65 as a weighted average unit price. Weighted average unit price is calculated based on the market price of the units traded on the TSX during the period of twenty consecutive days ending on the fifth trading day before January 1, As a result of the contribution of the additional net sales to the Royalty Pool, Pizza Pizza s Class B Exchange Multiplier increased fractionally by 80% of the total adjustment or ; the new Class B Multiplier is This adjustment will also increase the entitlement of the holders of the Class B units to distributions of cash and allocations of income from the Partnership. The second adjustment to the Class B Exchange Multiplier will be adjusted to be effective January 1, 2012, once the actual performance of the new restaurants is determined in early Vend-in Adjustment Class D Exchange Multiplier On January 1, 2012, one new Pizza 73 restaurant was added to the Royalty Pool as a result of new restaurants opening between September 2, 2010 and September 1, The forecasted additional system sales from the one new restaurant is estimated at $25,000 annually. During the period, no restaurants were added to the Royalty Pool whose territory adjusted a previously existing restaurant. The total number of Pizza 73 restaurants in the Royalty Pool has increased to 89. The yield of and the weighted average unit price used in the calculation of the Class D multiplier is determined in the same manner as that of the Class B multiplier calculation at % and $8.65, respectively. As a result of the - 3 -

4 contribution of the additional net sales to the Royalty Pool, Pizza Pizza s Class D Exchange Multiplier increased fractionally by 80% of the total adjustment or ; the new Class D Multiplier is Once the actual performance of the new restaurant is determined in early 2013, the Class D Exchange Multiplier may be adjusted to be effective January 1, PPL s Ownership of the Fund After giving effect to the additional equivalent unit entitlements at January 1, 2012, PPL now owns equivalent Units representing 26.5% of the fully diluted Units. The chart below shows the Fund units that would be outstanding if all of the Class B and D units were converted to Fund units after accounting for their respective multipliers. Issued & Outstanding units, and Exchangeable Units outstanding & issuable on December 30, 2012 Equivalent units Public float 21,818,392 Class B units held by PPL 6,327,519 PPL additional Class B units - True-up Holdback as of December 31, 2011 (1,766) PPL additional Class B equivalent units as of January 1, ,801 6,338,554 Class D units held by PPL 1,545,432 PPL additional Class D units - True-up Holdback as of December 31, PPL additional Class D equivalent units as of January 1, ,699 1,547,131 Number of fully diluted units 29,704,077 Proportion of all units outstanding available for exchange by PPL 26.5% - 4 -

5 SELECTED FINANCIAL DATA The selected financial data set forth below should be read in conjunction with the annual consolidated financial statements and related notes of PPL for the 13-week and 52-week periods ended December 30, PPL has a floating year-end of the Sunday closest to December 31, accordingly, quarters consist of four 13-week periods with an additional week added to the last quarter every 5 to 6 years which was the case in fiscal Consolidated Quarterly and Annual Financial Data and Adjusted EBITDA (1) Calculation For the 13-week period ended For the 13-week period ended December 30, 2012 January 1, 2012 For the 52-week For the 52-week period ended period ended December 30, 2012 January 1, 2012 (in thousands of dollars except for number of restaurants) System Sales (2) $ 125,737 $ 121,809 $ 479,940 $ 465,264 Same Store Sales Growth (SSSG) (3) 3.2% 1.4% 2.7% 2.6% Number of Restaurants: Traditional Non-traditional New restaurants opened Restaurants closed Revenues 60,241 58, , ,542 Cost of food sales (39,316) (37,947) (147,122) (143,295) General & administrative (14,474) (14,203) (51,305) (52,254) Equity income from the Partnership 1,855 1,841 7,077 6,513 Royalty payments (8,282) (8,031) (31,275) (30,375) Operating income (loss) 177 (156) 4,920 (1,237) Income taxes recovery (expense) (443) Income for the period 777 1,682 9,777 3,322 Add (deduct): Equity income from Partnership (1,855) (1,841) (7,077) (6,513) Royalty payments 8,282 8,031 31,275 30,375 Distribution on Class C Partnership Units (450) (450) (1,800) (1,800) Interest on loan from Pizza Pizza Holdings Trust ,800 1,800 Amortization of deferred gain (582) (582) (2,331) (2,330) Amortization ,430 4,170 Interest expense, net of interest income ,241 (Gain)/loss on sale of Company restaurants (437) 368 Provision for (recovery of) income taxes: Current 162 (24) Deferred 281 (856) (1,419) (1,321) Adjusted EBITDA (1) $ 8,218 $ 7,732 $ 36,918 $ 30,

6 Notes: (1) EBITDA is not a recognized measure under IFRS. References to EBITDA are to earnings determined in accordance with IFRS applicable to the financial statements before amounts for interest, taxes and depreciation and amortization. In addition, PPL has adjusted EBITDA for charges in an attempt to demonstrate PPL operations as if a recombination of PPL and the Fund occurred. Adjusted EBITDA excludes (Gain)/loss on sale of Company restaurants and other items resulting from its relationship with the Partnership. PPL believes that, in addition to net earnings, Adjusted EBITDA is a useful supplemental measure in evaluating its performance as it provides investors with an indication of cash available for debt service, working capital needs and capital expenditures. Investors are cautioned, however, that adjusted EBITDA should not be construed as an alternative to the statement of cash flows as a measure of liquidity and cash flows. The method of calculating adjusted EBITDA for the purposes of this report may differ from that used by other issuers and, accordingly, adjusted EBITDA in this report may not be comparable to adjusted EBITDA used by other issuers. (2) PPL has a floating year-end of the Sunday closest to December 31, accordingly, interim periods consist of four 13-week periods with an additional week added to the last interim period every 5 to 6 years. A 53 rd week was added to fiscal 2009 resulting in the year ending on January 3, System sales, as defined in the License and Royalty Agreements between PPL and the Partnership, reported by Pizza Pizza and Pizza 73 restaurants include the gross sales of PPL company-owned, jointly-controlled and franchised restaurants. (3) Same Store Sales Growth ( SSSG ) means the change in annual gross revenue of a particular Pizza Pizza or Pizza 73 restaurant as compared to sales in the previous year, where the restaurant has been open at least 13 months. Additionally, for a Pizza 73 restaurant whose Restaurant Territory was adjusted due to an Additional Restaurant, a Step-Out payment is, when appropriate, added to sales to arrive at SSSG. RESULTS OF OPERATIONS The following should be read in conjunction with the Selected Financial Data provided herein and in conjunction with the annual consolidated financial statements and related notes of PPL for the 52-week periods ended December 30, 2012 and January 1, (See Critical Accounting Policies and Estimates ) As previously discussed, PPL operates two brands. While each brand operates in a similar market segment, the pizza QSR segment, they are in different geographic markets of Canada. Pizza Pizza operates mainly in the Ontario and Quebec ( Eastern Canada ) pizza QSR segment, whereas Pizza 73 operates mainly in the Alberta ( Western Canada ) pizza QSR segment. Analysis of System Sales System sales for the quarter ended December 30, 2012 increased 3.3% to $125.8 million from $121.8 million for the quarter ended January 1, By brand for the quarter, the system sales include $104.7 million in Pizza Pizza retail sales and $21.1 million in Pizza 73 retail sales, as compared with system sales of $101.6 million and $20.2 million for Pizza Pizza and Pizza 73, respectively, for the comparable period in System sales for the 52-week period ended December 30, 2012 increased 3.2% to $480 million from $465.3 million for the 52-week period ended January 1, By brand for the period, the system sales include $401.2 million in Pizza Pizza retail sales and $78.8 million in Pizza 73 retail sales, as compared with system sales of $388.8 million and $76.5 million for Pizza Pizza and Pizza 73, respectively, for the comparable period in The increase in system sales is primarily attributed to the 2.7% SSSG plus new stores added less restaurant closures since January 1, SSSG increased by 3.2% (1.4% ) for the Quarter compared to the same period in 2011, and increased 2.7% (2.6% ) for the Year compared to the same period in For the Quarter, SSSG for the Pizza Pizza restaurants was 2.7% and was 5.7% for Pizza 73 restaurants (1.1% and 3%, respectively ). For the Year, SSSG for the Pizza Pizza restaurants was 2.5% and was 3.4% for the Pizza 73 restaurants (2.4% and 3.9%, respectively ). When comparing the Quarter and the Year to the corresponding periods in 2011, restaurant sales at both brands benefited from an increase in the average customer cheque and an increase in guest traffic

7 New Restaurant Development As at December 30, 2012, there were 386 traditional Pizza Pizza restaurants and 72 traditional Pizza 73 restaurants; there were 219 non-traditional Pizza Pizza locations and 17 non-traditional Pizza 73 locations. During the current quarter, PPL opened four traditional restaurants and four non-traditional Pizza Pizza locations and closed five non-traditional locations, bringing the total number of Pizza Pizza restaurants to 605. There was no movement in Pizza 73 restaurants during the Quarter, maintaining the total number of Pizza 73 locations at 89. During the comparable 13-week period in 2011, PPL opened four traditional locations and closed one non-traditional, bringing the total number of Pizza Pizza restaurants to 601. No Pizza 73 restaurants opened or closed during the prior year quarter, maintaining the total number of Pizza 73 restaurants at 89. During the Year PPL opened ten traditional restaurants and eleven non-traditional Pizza Pizza locations; seventeen non-traditional locations were closed. Of the ten traditional PPL restaurants opened, three were in Nova Scotia, three in Manitoba, three in Quebec and one in Ontario. One Pizza 73 non-traditional location opened and one non-traditional closed during the 52-week period. During the comparable 52- week period in 2011, PPL opened six traditional and four non-traditional Pizza Pizza restaurants and closed nine traditional and six non-traditional locations. There was one non-traditional Pizza 73 restaurant opened during the comparative 52-week period. Revenues Food sales, royalties, franchise fees and related revenue for the Quarter increased to $60.2 million from $58.2 million for the 13-week quarter ended January 1, Food sales for the Quarter increased $1.9 million to $53.6 million from $51.7 million for the prior year quarter directly related to the 3.7% increase in the Quarter s SSSG. Royalties, franchise fees and other revenue from restaurants were $6.6 million for the Quarter and were $6.5 million for the prior year quarter. By geographic market, for the Quarter, food sales, royalties and franchise fees in Eastern Canada were $49.5 million as compared with $48.2 million for the comparable quarter in 2011, and in Western Canada were $10.7 million for the Quarter as compared with $10 million for the comparable quarter in Food sales in Eastern Canada for the Quarter increased 3.1% to $43.3 million compared to $42 million for Royalties, franchise fees and other revenue for Eastern Canada were $6.2 million in the Quarter as compared to $6.2 million for the same period in For the Quarter, food sales in Western Canada were $10.3 million compared to $9.7 million in the comparable period of Administration and accounting fee revenue earned in Western Canada increased to $0.4 million in the Quarter compared to $0.3 million in Food sales, royalties, franchise fees and related revenue for the Year were $227.1 million, compared with $218.5 million for Food sales for the Year increased $7.7 million, or 4%, to $201.6 million from $193.9 million in The increase is related to the 2.7% increase in year-to-date SSSG plus new restaurant openings. Royalties, franchise fees and other revenue from restaurants were $25.5 million for the Year and were $24.6 million in By geographic market, for the Year, food sales, royalties and franchise fees in Eastern Canada were $187.5 million as compared with $180.4 million in 2011, and were $39.6 million as compared with $38.1 million in Western Canada. Food sales in Eastern Canada for the Year were $163.3 million compared to $157 million for Royalties, franchise fees and other revenue for Eastern Canada were $24.2 million as compared to $23.4 million for For the Year, food sales in Western Canada were $38.3 million, compared with $36.9 million in Administration and accounting fee revenue earned in Western Canada was $1.3 million for the Year compared to $1.2 million in

8 The increase in food sales in for the Quarter and Year is attributed to an increase in SSSG, in addition to the new restaurants opened and restaurants closed since January 1, Cost of Food Sales The cost of food sales increased to $39.3 million during the Quarter from $38 million in the 13-week period of 2011, or 3.7%, which is in line with the increase in food sales. By geographic market, the cost of food for Eastern Canada was $35 million for the Quarter as compared to $33.8 million in the comparable quarter of 2011; cost of food for Western Canada for the Quarter was $4.3 million as compared to $4.2 million in the comparable quarter of The increase in the cost of food is in line with the increase in sales. The cost of food increased to $147.1 million during the Year from $143.3 million in the 52-week period of 2011, or 3.8%. By geographic market, the cost of food for Eastern Canada was $131.5 million for the Year as compared to $128 million in the comparable 52-week period of 2011; cost of food for Western Canada for the Year was $15.6 million as compared to $15.3 million in the comparable 52-week period of General and Administrative ( G&A ) Expenses G&A increased slightly in the Quarter to $14.5 million from $14.2 million when compared to the prior year quarter. The Quarter s G&A expense for Eastern, including company store expenses, increased slightly by approximately $400,000 from $9.7 million in the comparative quarter to $10.1 million for the 13-week period ended December 30, The Quarter s G&A expense for Western Canada, including company store expenses, were consistent at $4.4 million compared to $4.4 million in the comparative quarter. In the Year, G&A decreased over the prior year to $51.3 million from $52.2 million. G&A expense for the Year in Eastern and Western Canada, including company store expenses, were $34.2 million and $17.1 million, respectively, as compared to the prior year s comparable 52-week period of $35.4 million and $16.8 million, respectively. The decrease in G&A expense in Eastern Canada is mainly due to a lower provision for doubtful accounts. Royalty Payments As per the License & Royalty Agreements, PPL pays the Partnership a royalty based on the System Sales generated at the Pizza Pizza and Pizza 73 restaurants in the Royalty pool. For the Quarter and Year ended December 30, 2012, total royalty payments were $8.3 million and $31.3 million, respectively, compared to $8 million and $30.4million in the prior year comparable periods. By brand, PPL paid a 6% royalty on the System Sales from Pizza Pizza restaurants in the Royalty pool, or $6.4 million for the Quarter and $24.4 for the Year, compared to $6.2 million and $23.5 million for the comparable periods in PPL paid a 9% royalty on the System Sales from the Pizza 73 restaurants in the Royalty pool, or $1.9 million for the Quarter and $7.1 million for the Year, compared to $1.9 million and $6.9 million for the comparable periods in Equity income from Pizza Pizza Royalty Limited Partnership PPL accounts for its investment in the Partnership using the equity method of accounting. As at December 30, 2012, PPL owned an effective 26.5% interest in the Fund, compared to 26.5% for the comparative year ended January 1, PPL s 26.5% interest in the earnings of the Partnership is from its ownership of Class B and Class D units of the Partnership. For the Quarter and Year, equity income earned was $1.9 million and $7.1 million, respectively, compared to $1.8 million and $6.5 million for the comparable periods in In the prior year ended January 1, 2012, the Partnership expenses were higher than this year due to incurring breakage costs on the interest rate swap of $1.2 million; no such cost were incurred in the current 52-week period ended December 30, Gain/Loss on Sale of Company Restaurants and Jointly-Controlled Restaurants - 8 -

9 For the Quarter, three company restaurants were sold for a gain of $153,000 compared to the 13-week period ended January 1, 2012, when PPL sold one company restaurant for a loss of $61,000. For the Year, PPL sold seven company restaurants, its share in one Pizza 73 jointly-owned restaurant and made selling price adjustments on previous restaurant sales for a net gain of $437,000 compared to the 52- week quarter ended January 1, 2012, in which the company sold two company restaurants for a loss of $368,000. Interest and Other Income Interest and other income earned by PPL was $467,000 during the Quarter and $2 million during the Year, compared to $389,000 and $2 million in the prior year comparable periods. The interest income was earned on notes receivable from franchisees, which are unsecured and are repayable in varying monthly principal amounts. Distributions on Class C Partnership units PPL holds 3,000,000 Class C units of the Partnership on which it receives distributions of $450,000 quarterly and $1.8 million annually. Interest Expense on Borrowings Interest expense paid on bank term loans and notes payable during the quarter was $6,000 and 40,000 during the 52-week period compared to $13,000 and $67,000 paid for the prior year comparable periods. Interest Expense on loan from Pizza Pizza Holdings Trust Quarterly interest payments to the Trust of $450,000 are on the $30 million loan which bears interest at 6.0% per annum, payable monthly, secured by a general security interest and a securities pledge, subject to certain exceptions, in all present and acquired property of PPL and may not be assigned without the prior consent of PPL. The full principal amount was due July 2025, with option for extension at renewal. However, in conjunction with the Conversion of the Fund to a corporation, subsequent to PPL s year end, PPL, as the holder of 3,000,000 Class C Partnership units, on December 31, 2012, exercised its right to transfer all such units to the Trust in consideration for the assumption by the Trust of, and the concurrent release of PPL of its obligations with respect to, an amount of the indebtedness under the PPL loan equal to $10.00 for each Class C Partnership unit transferred. Income for the period During the Year, PPL reported earnings of $9.8 million compared to earnings of $3.3 million in the 52- week period ended January 1, The overall fluctuation in earnings is largely attributable to an increase in gross margin by $3.8 million, a reduction in general and administrative expenses by $949,000, and an increase in income tax recovery of $609,000. Shareholders Deficiency The $108.8 million shareholders deficiency shown in the consolidated statement of financial position at December 30, 2012 is largely a result of PPL having paid $107.5 million in capital dividends to shareholders in 2005, $16.8 million in capital dividends during 2007 and $7.2 million in capital dividends during The source of dividends to shareholders was the proceeds received from the Partnership in payment for the PPL Rights plus funds from operations since the PPL Rights sale. PPL has a deferred gain on the original sale of the PPL Rights of $213.2 million, which is being amortized into earnings over a term of 99 years

10 SUMMARY OF QUARTERLY RESULTS 13 weeks ended December 30, weeks ended September 30, weeks ended July 1, weeks ended April 1, weeks ended January 1, weeks ended October 2, weeks ended July 3, weeks ended April 3, 2011 (in thousands of dollars) Revenues $ 60,241 $ 55,536 $ 55,443 $ 55,888 $ 58,245 $ 54,002 $ 53,540 $ 52,755 Net income $ 777 $ 2,637 $ 5,113 $ 1,250 $ 1,682 $ 1,312 $ 267 $ 61 Adjusted EBITDA (1) $ 8,218 $10,018 $ 8,871 $ 9,811 $ 7,732 $ 9,222 $ 6,533 $ 6,353 (1) A reconciliation of Adjusted EBITDA to Net Income appears in PPL s MD&A filed in respect of the respective periods presented above with comparatives for prior periods. The Pizza Pizza and Pizza 73 restaurants are subject to seasonal variations in their business; system sales for the quarter ended March 31 have generally been the softest and the December 31 quarter system sales have been the strongest. LIQUIDITY & CAPITAL RESOURCES The following table provides an overview of the cash flows for the 52-week periods: For the 52-week period ended December 30, 2012 For the 52-week period ended January 1, 2012 Operating activities $ 7,671 $ (3,898) Investing activities 1,842 3,991 Financing activities (1,548) (2,628) Increase (decrease) in cash $ 7,965 $ (2,535) As of December 30, 2012, PPL had working capital of $23.6 million and cash and cash equivalents were $25.6 million. Historically, PPL has, at times, operated with negative working capital primarily because its receivable collection periods and inventory turn rates are faster than the normal payment terms of current liabilities. We collect most of our receivables within seven days from the date of the related sale and pay the payables within 30 days; we generally experience over 100 turns of inventory per year. These factors, coupled with significant and ongoing cash flows from operations, which are used primarily to pay the Partnership the royalty on the Royalty Pool system sales, may reduce our working capital amounts. Our primary sources of liquidity are cash flows from operations and distributions received on PPL s interest in the Fund. We have historically funded capital expenditures and debt repayments from cash flows from operations and proceeds from the disposal of Company-owned restaurants. We did not have any material commitments for capital expenditures as of December 30, Cash provided by operating activities for the 52-week period was $7.7 million compared with $3.9 million used in operating activities for the 52-week period ended January 1, The $11.6 million increase is largely due to the increase in income by $6.7 million and the $5.8 million change in working capital. Cash provided by investing activities for the 52-week period was $1.8 million compared $4 million for the 52-week period ended January 1, When compared to the prior year, the $2.2 million decrease is

11 largely attributed to the issuance of notes receivable, off-set by an increase in proceeds from sale of company stores and a decrease in net renovation fund disbursements. Cash used in financing activities for the 52-week period was $1.5 million, compared to $2.6 million for the comparable period in The decrease in cash used by financing activities is due to lower net longterm debt repayments and advances from related parties, offset by dividend paid to shareholder. Certain bank covenants must be maintained by PPL related to the Partnership s credit facility, all of which were met as of December 30, Based upon our current level of operations and anticipated growth, we believe that the cash generated from our operations will be adequate to pay the Partnership a 6% royalty on the Pizza Pizza Royalty Pool system sales and a 9% royalty on the Pizza 73 Royalty Pool system sales, and meet our anticipated debt service requirements, our capital expenditures and our working capital needs. Our ability to continue to fund these items could be adversely affected by the occurrence of any of the events described in the Risks and Uncertainties section that follows herein and the matters described in the Fund s 2011 Annual Information Form under the heading Risk Factors. Our future operating performance and our ability to pay the Partnership a 6% royalty on the Royalty Pool system sales, a 9% royalty on the Pizza 73 Royalty Pool system sales and meet our anticipated debt service requirements will be subject to future economic conditions and to financial, business and other factors, many of which may be beyond our control. However, to offset the factors that are beyond our control, PPL has the ability to convert its current Class B and Class D units into common shares of Pizza Pizza Royalty Corp. and sell them to the public to generate cash proceeds. At the Fund's annual and special meeting of unitholders held May 30, 2012 in Toronto, Ontario, unitholders of the Fund approved the Fund's conversion from an income trust to a corporation, Pizza Pizza Royalty Corp., by way of a plan of arrangement (the "Conversion"). The special resolution was adopted with 99.7 per cent of the units voted at the meeting voting in favour. The Ontario Superior Court of Justice approved the Conversion which became effective on December 31, Pursuant to the Conversion, unitholders received, for each unit held, one common share of Pizza Pizza Royalty Corp. on the effective date of the Conversion. Concurrent with the conversion, the $30 million loan payable by PPL to the Trust was settled by the Trust s assumption of the Class C Units of the Partnership. OFF-BALANCE SHEET ARRANGEMENTS PPL is a sub lessor under the head lease for all restaurant locations, other than locations operated by certain Licensees. Should franchisees fail to meet their obligations under the terms of their sublease, PPL would become liable for the obligations under the related head leases. The gross lease obligations are summarized in the following table: Payments due by Period Thereafter (in thousands of dollars) Minimum lease obligation $ 24,769 $ 23,076 $ 20,374 $ 14,722 $ 9,741 $ 23,025 Less: Sublease to franchisees $ 20,891 $ 19,159 $ 15,668 $ 11,725 $ 8,021 $ 10,185 Net lease obligation $ 3,878 $ 3,917 $ 4,706 $ 2,997 $ 1,720 $ 12,840 PPL has provided certain guarantees as disclosed in note 18 of the annual consolidated financial statements with respect to certain franchisee loans. We believe that guarantees of franchisee loans are a low risk since PPL has, historically, been able to replace a defaulting franchisee with a new franchisee

12 who has assumed the obligations of the defaulting franchisee. Subsequent events 2012 and 2013 Royalty Pool Adjustment a Royalty Pool Adjustment In early January 2013, adjustments to royalty payments and PPL s Class B Exchange Multiplier were made based on the actual performance of the nine new restaurants added to the Royalty Pool on January 1, As a result of the adjustments, the new Class B Exchange Multiplier is and exchangeable units can be exchanged into 6,404,759 shares which is an increase of 66,205 shares, effective January 1, In early January 2013, adjustments to royalty payments and PPL s Class D Exchange Multiplier were made based on the actual performance of the one Pizza 73 restaurant added to the Royalty Pool on January 1, As a result of the adjustments, the new Class D Exchange Multiplier is and exchangeable units can be exchanged into 1,548,071 shares which is an increase of 690 shares, effective January 1, b. Pizza Pizza Royalty Corp. Outstanding Shares 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 Units entitlement to be received (203,817 equivalent shares represent 100%), with the final equivalent Share entitlements to be determined when the new restaurants 2013 actual sales performance is known with certainty in early PPL added zero forecasted Pizza 73 system sales to the Royalty Pool due to one non-traditional Pizza 73 restaurant opening and one closing. Therefore, PPL has received zero additional equivalent Shares. Final equivalent Share entitlements will be determined when the new restaurant s 2013 actual sales performance is known with certainty in early 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. c Royalty Pool Adjustment Class B Exchange Multiplier On January 1, 2013, four net Pizza Pizza restaurants were added to the Royalty Pool as a result of 21 new restaurants opening and 17 closing from January 1, 2012 to December 31, The additional system sales from the 20 new restaurants are estimated at $6,625 annually less sales of $3,382 from 17 permanently closed Pizza Pizza restaurants resulting in net, estimated Pizza Pizza sales of $3,243 added to the Royalty Pool. The total number of Pizza Pizza restaurants in the Royalty Pool has increased to 605. The yield of the shares was determined to be 7.13% calculated using $10.01 as a weighted average share price. Weighted average share price is calculated based on the market price of the shares traded on the TSX during the period of twenty consecutive days ending on the fifth trading day before January 1, As a result of the contribution of the additional net sales to the Royalty Pool, PPL s Class B Exchange Multiplier increased fractionally by 80% of the total adjustment or ; the new Class B Multiplier is This adjustment will also increase the entitlement of the holders of the Class B units to distributions of cash and allocations of income from the Partnership. The second adjustment to

13 the Class B Exchange Multiplier will be adjusted to be effective January 1, 2013, once the actual performance of the new restaurants is determined in early d Royalty Pool Adjustment Class D Exchange Multiplier On January 1, 2013, zero net new Pizza 73 restaurants were added to the Royalty Pool as a result of one new nontraditional restaurant opening between September 2, 2011 and September 1, 2012 and one closing from January 1, 2012 to December 31, The forecasted additional system sales from the one new restaurant is estimated at $100 annually less sales of $100 from one permanently closed non-traditional Pizza 73 restaurant resulting in net, estimated Pizza 73 sales of zero added to the Royalty Pool. During the period, no restaurants were added to the Royalty Pool whose territory adjusted a previously existing restaurant. Once the actual performance of the new restaurant is determined in early 2014, the Class D Exchange Multiplier will be adjusted to be effective January 1, The total number of Pizza 73 restaurants in the Royalty Pool remains at 89. The yield of and the weighted average share price used in the calculation of the Class D multiplier is determined in the same manner as that of the Class B multiplier calculation at 7.13% and $10.01, respectively. As a result of zero additional net sales to the Royalty Pool, PPL s Class D Exchange Multiplier remains at The chart below shows the Company shares that would be outstanding if all of the Class B and D units held by PPL were converted to Company shares after accounting for their respective multipliers. Shares outstanding and issuable on January 1, 2013 Public float 21,818,392 Class B units held by PPL at December 31, ,338,554 PPL additional Class B units - True-up Holdback as of December 31, ,205 Additional PPL Class B equivalent units as of January 1, ,054 6,567,813 Class D units held by PPL at December 31, ,547,131 PPL additional Class D units - True-up Holdback as of December 31, Additional PPL Class D equivalent units as of January 1, ,548,071 Number of fully diluted shares 29,934,276 PPL s Proportion of all shares outstanding available for exchange 27.1% Fund Conversion On December 31, 2012, the Fund completed the conversion from an income trust to a corporation through the incorporation of PPRC. Pursuant to a plan of arrangement under the Business Corporations Act (Ontario) (the Arrangement ), PPRC issued shares to the unitholders of the Fund in exchange for units of the Fund on a one-for-one basis. Immediately subsequent to the Conversion, the Trust and the Fund were dissolved and their assets and liabilities were assumed by, the Fund and PPRC, respectively. PPRC continues to carry on business of the Fund unchanged except that PPRC is subject to tax as a corporation. PPRC s Board of directors are the former Trustees of the Fund. As part of the Conversion, at December 31, 2012, PPL sold all of the Class C Units to the Trust in repayment of the PPL Loan, which Class C Units were subsequently purchased by the partnership and cancelled, in exchange for the issuance to the Trust by the Partnership of Class C LP Units in accordance with the exchange agreement

14 OUTLOOK PPL s management is pleased with the 3.2% SSSG generated in the fourth quarter and 2.7% SSSG generated for the year. Faced with economic and competitive pressures during the year, Pizza Pizza held to its core values of offering high quality, value-oriented menu selections, launching new relevant products, and improving customer service levels at all consumer contact points. This strategy has resulted in increased customer satisfaction and a growing market share. In 2013, the number of new restaurants is projected to increase 3% as compared to flat growth in Pizza Pizza s national restaurant expansion includes adding both traditional and non-traditional locations. For the coming year, the majority of traditional restaurant growth will be in Quebec, Manitoba and Nova Scotia where we continue to generate positive retail sales trends and are able to locate attractive retail real estate sites. Strategically, PPL will also continue expanding and developing its nontraditional portfolio of restaurants which account for approximately 10% of System Sales. PPL is targeting customer satisfaction and technological innovation in 2013 as the key to maintaining sales growth. PPL s time guarantees, hot and fresh promise, and modern restaurant network, are a few of Pizza Pizza s ongoing customer-focused strategies. TRANSACTIONS WITH RELATED PARTIES PPL has entered into related party transactions with companies under common control. These transactions are entered into in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Significant related party transactions include rent expense, distributions on Class B and Class D exchangeable units, management fees and food purchases as disclosed in note 24 of the annual consolidated financial statements of PPL. Distributions payable and advances to or from related parties and receipt of or repayments of advances from related parties are summarized in note 24 of the annual consolidated financial statements of PPL. CRITICAL ACCOUNTING POLICIES & ESTIMATES The preparation of the annual consolidated financial statements of Pizza Pizza requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to basis of consolidation, revenue recognition, long-lived and intangible assets and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. Changes in our estimates could materially impact our results of operations and financial condition for any particular period. We believe that our most critical accounting policies are: Investment in associate - PPL accounts for its 26.5% share interest in the Pizza Pizza Royalty Limited Partnership ( Partnership ) as an investment in an associate and applies equity accounting whereby PPL s investment is increased by its 26.5% share of profit for the period of the Partnership and reduced for distributions received during the Partnership s fiscal period. The Partnership s financial and fiscal periods differ from PPL s, as the Partnership operates on a calendar year-end. PPL assesses at each period-end whether there is any objective evidence that its interest in the Partnership is impaired. If impaired, the carrying value of PPL s share of the underlying assets of the

15 Partnership is written down to its estimated recoverable amount, being the higher of fair value less cost to sell and value in use, and charged to the consolidated statements of income. Investments in joint ventures - PPL s interests in jointly-controlled companies are accounted for by proportionate consolidation. PPL combines its share of the joint ventures individual revenue, expenses, assets, liabilities and cash flows on a line-by-line basis with similar items in PPL s consolidated financial statements. Allowance for doubtful accounts - PPL must make an assessment of whether receivable are collectible from customers. Accordingly, management establishes an allowance for estimated losses arising from non-payment and other adjustments, taking into consideration customer creditworthiness, current economic trends and past experiences. If future collections differ from estimates, future earnings will be affected. Provisions made and utilization of provisions is disclosed in note 3 of the annual consolidated financial statements of PPL for trade and other receivables and in note 4 of the annual consolidated financial statements of PPL for notes receivable. Impairment of goodwill - Determining whether goodwill is impaired requires an estimation of the recoverable amount of the cash generating unit to which goodwill has been allocated. The value-in-use calculation requires PPL to estimate the future cash flows expected to arise from the cash generating unit and a suitable pre-tax discount rate in order to calculate present value. The significant estimates and assumptions used in the goodwill impairment tests performed at December 30, 2012 and January 1, 2012 are disclosed in note 10 of the annual consolidated financial statements of PPL. Income taxes - PPL computes an income tax provision. However, actual amounts of income tax expense only become final upon filing and acceptance of the tax return by the relevant taxation authorities, which occur subsequent to the issuance of these consolidated financial statements. Additionally, the estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of the ability to use the underlying future tax deductions before they expire against future taxable income. The assessment is based upon existing tax laws and estimates of future taxable income. To the extent estimates differ from the final tax return, net income would be affected in a subsequent period. Revenue Recognition - Food sales are recognized when the products are delivered to the traditional and non-traditional restaurants. Franchise royalties and administrative and accounting fees are recognized as earned and are based on a percentage of the franchisees' sales as provided for in individual franchise agreements. Initial and renewal franchise fees are recognized at the commencement of the initial term of the franchise agreement and upon the renewal of such an agreement. The initial franchise fee is payable, in full, at the commencement of the agreement. The renewal fee is charged to franchisees upon renewal of their franchise agreement which is typically five years from the initial agreement. Company store sales are recognized when the services are rendered and the products are sold to the public. Construction fees are recognized when the costs are incurred. Interest and other income are recognized and accrued when earned. Sale of Rights and Marks and Annual Vend-ins - PPL has applied judgment in assessing the application of the revenue recognition accounting policy for the initial sale of Rights and Marks, described in note 15, and the annual vend-ins of restaurants in the Royalty Pool. In making their assessment, management considered the substance of these transactions and whether the risks and rewards of ownership have been transferred. Based on this assessment, management has determined that revenue relating to the sale will be deferred and amortized as earned and that the subsequent vend-ins will have no impact on PPL. Renovation Funds - PPL maintains a long-term renovation program whereby franchisees contribute towards future restaurant renovations and upgrades. The franchise owner acknowledges that the renovation fund contribution may be used by PPL, without interest or other compensation to the franchise