A&W Revenue Royalties Income Fund

Press Releases

A&W Revenue Royalties Income Fund announces restructuring

- A&W Revenue Royalties Income Fund to retain income trust structure

- Fund to restructure to reduce impact of income taxes

- Monthly cash distributions to be maintained at 10.6 cents per unit in 2010 and 2011

TRADING SYMBOL: The Toronto Stock Exchange - AW.UN

VANCOUVER, March 30 /CNW/ - A&W Revenue Royalties Income Fund (the Fund) (AW.UN) today announced plans to remain as an income trust and to seek unitholder approval to reorganize the capital structure of its subsidiary, A&W Trade Marks Inc. (Trade Marks), effective January 1, 2011 to maximize cash distributions to unitholders.


This reorganization is being initiated as a result of the Federal Government's announcement in October 2006 of a new "SIFT Tax" on income trusts, such as the Fund. Effective January 1, 2011 this new tax treats an income trust like a corporation, requiring it to pay tax on its taxable income.

The Trustees of the Fund have examined the alternatives available to maximize unitholder value in the face of this new tax, and are proposing the following reorganization.

Proposed Reorganization

A&W Revenue Royalties Income Fund is to remain as an income trust and is to reorganize the capital structure of its subsidiary - Trade Marks. The result of this reorganization is to minimize the impact of the new SIFT Tax and maximize amounts available for distribution to unitholders in light of the SIFT Tax.

The reorganization will replace the subordinated notes of Trade Marks (the A&W Notes) currently held by the Fund, with non-voting common shares of Trade Marks. As a result, the Fund will receive dividends paid by Trade Marks rather than interest paid on the A&W Notes. These dividends are not subject to the SIFT tax. Trade Marks' earnings (representing the royalty paid by A&W Food Services of Canada Inc. (Food Services) less general and administrative expenses and interest on its term loan) will therefore be taxed at an effective rate of 18% versus an approximate rate of 25% if the reorganization were not implemented. In effect this leaves 82% of Trade Mark's net income before income taxes available to be paid as dividends, instead of 75% if the reorganization were not implemented.

Additionally, the Fund is announcing its intention to continue to pay its regular monthly distributions (from dividends received from Trade Marks) at 10.6 cents per unit monthly ($1.272 per unit annualized) for the remainder of 2010 and 2011. As Trade Marks will now pay income taxes in 2011, it is currently anticipated that the Fund will not receive additional dividends from Trade Marks to enable the Fund to make special distributions in 2011. However, the amount of dividends paid by Trade Marks will be evaluated from time to time depending upon its financial performance at that time.

"Today's announcement should provide clarity and certainty surrounding the planned structure and distribution level of the Fund going forward", said John McLernon, Chairman of the Board of Trustees for the Fund. "The Fund will continue to distribute all of its available cash to unitholders and we are pleased that this structure maximizes cash distributions to unitholders".

Provided the reorganization is approved and implemented, commencing in 2011 distributions to unitholders will be taxed as non-eligible dividends, rather than "other" income. Investors who are entitled to dividend tax credits would be able to enhance their after-tax yield and reduce the after-tax impact of the reduction in distributions. The total amount of tax paid in 2011 by the Fund and an individual unitholder taxed in Canada at the highest marginal rate on distributions by the Fund, and the tax that would be paid by the unitholder on distributions by the Fund had the SIFT Tax not been implemented is approximately the same.

The proposed reorganization will also include the exchange of the Class A and Class B preferred shares of Trade Marks currently owned by Food Services with non-voting common shares of Trade Marks. Food Services will continue to be entitled to additional non-voting common shares of Trade Marks on the annual adjustment of the restaurants in the Royalty Pool. All of the voting and non-voting common shares to be held by the Fund and Food Services will be entitled to the same dividends per share.

The Trustees and management of the Fund believe that the proposed reorganization is in the best interests of the Fund and its unitholders, and that it can be expected to provide the following benefits:

-   a higher level of distributions to unitholders than available if the
        Fund were to convert to a public corporation or if the Fund and Trade
        Marks were to maintain their existing structures;
    -   avoids the high cost of converting to a public corporation;
    -   a simplified tax and legal structure, resulting in clearer alignment
        of interests between unitholders and Food Services;
    -   a small reduction in administrative costs due to the elimination of
        the A&W Notes.

The proposed reorganization will have no impact on Food Services' strategic and operational focus.

Reorganization Process

Unitholders of record as at March 12, 2010 will be asked to approve the proposed reorganization at the Fund's annual and special meeting on May 4, 2010. Details of the proposed reorganization will be included in the Fund's information circular which will be mailed and filed by the Fund on or before April 7, 2010 for use at the annual and special meeting.

The reorganization will be subject to approval by not less than two-thirds of the votes cast at the unitholders' meeting. Food Services, who is entitled to vote as if its shares of Trade Marks were exchanged for units of the Fund, and who holds approximately 43% of the units on a fully diluted basis, intends to vote in favour of the reorganization. The reorganization is also subject to customary conditions, including the receipt of applicable regulatory approvals. The Trustees intend to implement the reorganization on January 1, 2011.

The Board of Trustees of the Fund obtained legal and tax advice regarding the reorganization from Farris, Vaughan, Wills & Murphy LLP and PricewaterhouseCoopers LLP, respectively.


The Fund is a limited purpose trust established to invest in Trade Marks, which through its interest in the A&W Trade Marks Limited Partnership, owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The A&W trade-marks comprise some of the best-known brand names in the Canadian foodservice industry. In return for licensing Food Services to use its trade-marks, Trade Marks (through the partnership) receives royalties equal to 3% of the sales of A&W restaurants in the Royalty Pool. Food Services is the second largest quick-service hamburger restaurant chain in Canada. Operating coast-to-coast, A&W restaurants feature famous trade-marked menu items such as The Burger Family, Chubby Chicken and A&W Root Beer.

The Royalty Pool is adjusted annually to reflect sales from new restaurants, net of the sales of any A&W restaurants that have permanently closed. The limited partnership interest of Food Services is increased each year to reflect the annual adjustment. Food Services' limited partnership interest may be exchanged for additional shares of Trade Marks which are exchangeable for units of the Fund.

Food Services currently owns 43% of the common shares of Trade Marks, and therefore currently owns the equivalent of 43% of the units of the Fund on a fully-diluted basis.

Trade Marks' dividends to Food Services and the Fund, and the Fund's distributions to unitholders are based on top-line revenues of the A&W restaurants in the Royalty Pool, less interest, general and administrative expenses and current income taxes of Trade Marks, and are thereby isolated from many of the factors that impact an operating business.

Certain statements in this report may be forward-looking in nature. Actual results may differ materially from those expressed or implied in these forward-looking statements. The forward-looking statements are based on assumptions that management considered reasonable at the time they were prepared. These forward-looking statements are subject to a number of risk factors, including general economic and business conditions, unemployment, harmonization of sales taxes, financial and political instability, changes in income tax laws or their application to the Fund and other factors disclosed previously and from time to time in the Fund's public filings Forward-looking information is provided as of the date hereof and, except as required by law, we assume no obligation to update or revise forward-looking information to reflect new events or circumstances.

Additional information relating to the Fund is on SEDAR at www.sedar.com and on the Fund's website at www.awincomefund.ca.

For further information: Don Leslie, Chief Financial Officer: (604) 988-2141 or investorrelations@aw.ca