Kentucky Fried Chicken (Bermuda) Ltd. saw its profits fall some 38 percent in the last fiscal year, according to chairman Donald Lines' latest shareholder report.

The company reported net earnings of $234,656 for the year ended January 31, 2010, down sharply from the $379,835 recorded the previous year.

Operating expenses for the company increased over 5 percent year-over-year, largely due to a hike in payroll costs by 5.7 percent.

Meanwhile, KFC saw only a marginal increase in sales at 1.18 percent, which the company attributed fluctuations in menu pricing.

While conceding it had been a "difficult year" for the company, Mr. Lines told shareholders that there was reason to be optimistic.

"We look forward to the balance of the 2011 fiscal year with hope that improved economic prosperity will return to Bermuda sooner rather than later," he wrote.

He cautioned shareholders, however, that despite cost-cutting efforts, "inflationary increases in certain expenditures will be unavoidable and will continue to pressure net income for fiscal 2011."

Mr. Lines added that despite declining profits the company remained strongly capitalized - with total cash and marketable investments of $2,456,183.

"This healthy cash position and liquidity should provide your company with the necessary resources to continue to meet its obligations to its staff, customers, and shareholders during a difficult operating environment," added Mr. Lines.