MISSISSAUGA, ON, March 18 /CNW/ - Second Cup Royalty Income Fund (the "Fund") reported today financial results for the period of October 22, 2004 to December 31, 2004 (the "Period"). As the Fund went public on December 2, 2004, there are no year-over-year comparables for the period. The Funds units are traded on the Toronto Stock Exchange under the symbol "SCU.UN".
System sales of the Royalty Pool Cafés during the period from December 2 to December 31, 2004 were $16.6 million and same café sales growth was 6.8%. The holiday period, generally considered to be the months of November and December in the retail industry, constitute slightly higher sales months than the rest of the year. On average, approximately 9% to 10% of annual system sales per month are generated in the months of November and December. While December is typically the highest system sales month, The Second Cup Ltd. ("Second Cup"), with renewed holiday merchandising programs, experienced a very strong final few weeks of the holiday season. The success of this program was a large factor in the achievement of same café sales growth of 6.8%. This same café sales growth performance is substantially better than the comparable periods in the last two years.
For the period, the Fund earned total royalty revenue of $1.1 million and incurred total of expenses $233,516 before income taxes. Expenses comprise of general and administrative expenses, interest on its term loan, and amortization of deferred financing fees associated with the term loan. General and administrative expenses consist primarily of professional fees, public entity costs, insurance premiums, and directors and trustees fees. Expenses, including the current portion of income tax expense, in the month were generally higher than what would normally be expected due to the disproportionate amount of costs associated with normal year-end related activities, including preparation of audited financial statements relative to the short 30 day operating period of the Fund. Net earnings after income taxes of the Fund were $783,582, or 8.18 cents per unit.
Distributable cash, a non-GAAP measurement, represents net earnings adjusted for future income taxes and non-cash amortization expenses, and was $807,308, or 8.42 cents per unit compared to the declared distribution of $786,745 or 8.21 cents per unit.
In late December, Second Cup did not renew the franchise agreements with two separate food service operators, resulting in the permanent closure of two of the Royalty Pool Cafés, leaving the Fund with 349 cafés as at December 31, 2004. Annualized system sales for these two locations were below the average of all the Royalty Pool Cafés and amounted to approximately $660,000 in total. Second Cup has opened four new cafés subsequent to September 12, 2004, the date of determination of the initial Royalty Pool Cafés. These cafés are expected to be vended in as Royalty Pool Cafés on January 1, 2006, the first adjustment date under the License and Royalty Agreement.
Highlights
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For the period October 22, 2004 to
December 31, 2004
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Number of cafés in Royalty Pool at inception 351
Number of cafés in Royalty Pool as at December 31, 2004 349
Same Café Sales Growth from December 2, 2004 to
December 31, 2004 6.8%
System Sales of royalty pooled cafés from December 2 to
December 31, 2004 $16,610,357
Net earnings $783,582
Basic and fully diluted earnings per unit $0.0818
Distributable cash per unit $0.0842
Distributions declared per unit $0.0821
Number of units outstanding as at December 31, 2004 9,582,760
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Outlook
The Fund's "top line" structure means that its success and growth depends
primarily on Second Cup's ability to maintain and increase the overall system
sales of Royalty Pool Cafés. Growth in overall system sales is dependant upon
same café sales growth, and adding net new cafés to the café network.
During 2005, Second Cup intends to continue to focus on growing same café
sales and expanding the number of new Second Cup cafés across Canada. Same
café sales growth is expected to be accomplished by continuing to focus on
operational excellence and by:
- Increasing marketing and development programs centered on espresso-
based beverages and blender drinks, which carry a higher average price
than Second Cup's other beverage offerings.
- Modernizing and renovating the café network. During 2005, Second Cup
expects to renovate and modernize 15 to 20 cafés.
- Introducing new products, including expanding Second Cup's
complimentary offerings such as snack foods and impulse items.
- Increasing prices of certain product offerings.
Second Cup is also positioning itself for successful new café growth in
Canada. To facilitate this growth, Second Cup is augmenting its administrative
resources in real estate, franchising and construction.
Overall, based on the Second Cup initiatives outlined above and others,
the anticipated economic environment and market conditions affecting the
specialty coffee industry, the Fund expects a successful year for 2005.
Forward Looking Information
Certain statements in this news release may constitute forward-looking
statements. Forward-looking statements include words such as "may", "will",
"should", "expect", "anticipate", "believe", "plan", "intend" and other
similar words. These statements reflect current expectations regarding future
events and operating performance and speak only as of the date of this
release. These forward-looking statements should not be read as guarantees of
future performance or results and will not necessarily be accurate indications
of whether or not those results will be achieved. Forward looking statements
are subject to known and unknown risks, uncertainties and other factors that
may cause the Fund's actual results, performance or achievements, or those of
Second Cup cafés, or industry results to be materially different from any
future results, performance or achievements expressed or implied by those
forward looking statements.
Non-GAAP Terms
In addition to using financial measures prescribed by generally accepted
accounting principles ("GAAP"), non-GAAP financial measures and other terms
are used in this press release. These terms include "same café sales" and
"distributable cash". These terms are not financial measures recognized by
GAAP and do not have any standardized meaning prescribed by GAAP and therefore
may not be comparable to similar terms and measures presented by other similar
issuers. Distributable cash is presented in reference to the Fund's
distribution policy. The Fund believes that distributable cash is a useful
measure as it provides investors with an indication of cash available for
distribution. These non-GAAP measures and terms are intended to provide
additional information on the Fund's performance and should not be considered
in isolation or as a substitute for measures of performance prepared in
accordance with GAAP.
About the Fund
The Fund is an open-ended trust established under the laws of the
Province of Ontario. It holds, through an indirect wholly-owned subsidiary,
the Canadian trade-marks and other intellectual property and associated rights
used by The Second Cup Ltd. ("Second Cup") in connection with the operation of
Second Cup cafés in Canada. The trade marks are licensed to Second Cup for
99 years for which Second Cup pays the Fund 6.5% of system sales of royalty
pooled restaurants.
Additional information relating to the Fund is available on SEDAR at
www.sedar.com.
About Second Cup
Second Cup is Canada's largest specialty coffee café franchisor and
second largest retailer of specialty coffee, as measured by number of cafés.
For the ultimate on-line coffee experience, visit www.secondcup.com. Second
Cup is a wholly owned subsidiary of Cara Operations Limited, Canada's leading
integrated restaurant company.
Second Cup Royalty Income Fund
Consolidated Financial Statements
December 31, 2004
Second Cup Royalty Income Fund
Consolidated Balance Sheet
As at December 31, 2004
Assets $
Current assets
Cash and cash equivalents 3,449,205
Prepaid expenses 114,423
Royalty receivable 1,155,705
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4,719,333
Deferred charges 235,411
Trademark (note 2) 115,358,314
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120,313,058
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Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 8) 365,971
Income taxes payable 3,556,113
Distributions payable 786,745
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4,708,829
Term bank loan (note 6) 11,000,000
Future income taxes (note 5) 17,667,000
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33,375,829
Unitholders' Equity 86,937,229
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120,313,058
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Second Cup Royalty Income Fund
Consolidated Statement of Earnings
For the period from October 22, 2004, date of commencement,
to December 31, 2004
$
System sales of royalty pooled cafés of
The Second Cup Ltd. 16,610,357
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Revenue
Royalty income 1,080,098
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Expenses
General and administrative (note 8) 176,111
Amortization of deferred charges 6,726
Interest on term loan 50,679
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233,516
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Earnings before income taxes 846,582
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Income taxes (note 5)
Current 46,000
Future 17,000
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63,000
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Net earnings for the period 783,582
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Basic and diluted earnings per trust unit (9,582,760 units) 0.0818
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Second Cup Royalty Income Fund
Consolidated Statement of Unitholders' Equity
For the period from October 22, 2004, date of commencement, to
December 31, 2004
Unitholders' Accumulated
capital earnings Distributions Total
$ $ $ $
Balance - Beginning
of period - - - -
Issuance of trust units
(notes 1 and 7) 95,827,600 - - 95,827,600
Issuance costs
(notes 1 and 7) (8,887,208) - - (8,887,208)
Net earnings for the
period - 783,582 - 783,582
Distributions (note 4) - - (786,745) (786,745)
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Balance - End of
period 86,940,392 783,582 (786,745) 86,937,229
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Second Cup Royalty Income Fund
Consolidated Statement of Cash Flows
For the period from October 22, 2004, date of commencement,
to December 31, 2004
$
Cash provided by (used in)
Operating activities
Net earnings for the period 783,582
Amortization of deferred charges 6,726
Future income taxes 17,000
Change in non-cash working capital items
Prepaid expenses (114,369)
Royalty receivable (1,155,705)
Accounts payable and accrued liabilities 365,971
Income taxes payable 46,000
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(50,795)
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Investing activities
Acquisition of Second Cup Marks - net of cash acquired
(note 2) (83,440,392)
-----------
Financing activities
Issuance of trust units (note 1) 95,827,600
Cost of issuing trust units (note 1) (8,887,208)
-----------
86,940,392
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Increase in cash and cash equivalents during the period 3,449,205
Cash and cash equivalents - Beginning of period -
-----------
Cash and cash equivalents - End of period 3,449,205
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1 The Fund
Second Cup Royalty Income Fund (the Fund) is an open-ended trust
established under the laws of the Province of Ontario. An unlimited
number of units may be issued pursuant to the declaration of trust.
Units are redeemable by the holder at any time. The Fund issued ten
initial units on October 22, 2004 for cash proceeds of $100. These
initial units were redeemed prior to the Fund commencing operations
on December 2, 2004. Income tax obligations related to distributions
by the Fund are obligations of the unitholders.
On December 2, 2004 the Fund completed an initial public offering of
9,582,760 units at $10.00 per unit pursuant to a prospectus for
aggregate proceeds of $95,827,600 before issuance costs of
$8,887,208.
As discussed below, the Fund, on December 2, 2004 used the net
proceeds from the initial public offering of trust units, to
indirectly acquire the successor, by amalgamation, to The Second Cup
Ltd. (MarksCo), (subsequently this company changed its name to Second
Cup Trade-Marks Inc.) whose primary asset at that time was the
trademarks and associated rights (the Second Cup Marks) used by
Second Cup Cafés in Canada. MarksCo, prior to its acquisition, had
granted to a subsidiary of Cara Operations Limited (Cara), referred
to herein as The Second Cup Ltd. (Second Cup or New Second Cup), a
licence, under the License and Royalty Agreement (the Agreement), to
use the Second Cup Marks in all provinces and territories of Canada
(except Nunavut) for a period of 99 years for a royalty payable by
Second Cup to MarksCo equal to 6.5% of the system sales reported from
certain specifically identified Second Cup Cafés in Canada (Royalty
Pooled Cafés).
The number of cafés in the Royalty Pooled Cafés will be adjusted
annually on January 1 of each year (the adjustment date), to include
Second Cup Cafés, which on November 1 of the previous year had been
open for at least 60 days and were not previously included in the
Royalty Pooled Cafés. Thereafter, the gross revenue of the additional
Second Cup Cafés will be added to the revenue of the original Royalty
Pooled Cafés for the purposes of calculating the royalty payment.
Payment to Second Cup for these new cafés can be made at MarksCo's
election by: (i) the issuance of new trust units based on the then
market price; or (ii) in cash. The first such adjustment will be made
on January 1, 2006.
According to the terms of the Agreement, Second Cup is required to
remit Make-Whole Payments (as part of royalty payments) for Royalty
Pooled Cafés that become permanently closed during a reporting
period. These payments are calculated as 6.5% of the permanently
closed café's system sales for the first 52 weeks that the café was
included in the Royalty Pooled Café. If the permanently closed café
was included in the Royalty Pooled Cafés for less than 52 weeks, an
appropriate adjustment is made to annualize the initial revenues.
One-twelfth of the Make-Whole Payment will be paid every month for
the remainder of the year in which the permanent closure occurred, up
to the next adjustment date (pro-rated for partial months). However,
the Make-Whole Payments can be reduced, or eliminated, by royalty
payments from the addition of new Royalty Pooled Cafés.
2 Initial public offering and acquisition of Second Cup Marks
On December 2, 2004, the Fund used the proceeds from an offering of
units under a prospectus dated November 23, 2004, to subscribe for
common shares and notes of 1636433 Ontario Inc. (AcquisitionCo), a
newly created subsidiary of the Fund, which in turn used the proceeds
to acquire from Cara all of the issued and outstanding shares of
MarksCo. At the time the interest in MarksCo was acquired, its
primary asset was the Second Cup Marks. The acquisition, which was
accounted for as a purchase, comprises the following:
$
Cash 3,500,000
Prepaid expenses 54
Deferred charges 242,137
Trademark 115,358,314
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119,100,505
Income taxes payable (3,510,113)
Term bank loan (11,000,000)
Future income taxes (17,650,000)
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Net assets acquired 86,940,392
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3 Summary of significant accounting policies
a) Basis of presentation
These consolidated financial statements include the accounts of
the Fund and its wholly owned subsidiaries, AcquisitionCo and
MarksCo. These consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles. All significant intercompany transactions have been
eliminated.
b) Revenue recognition
Revenue comprises royalty income equal to 6.5% of system sales
from the Royalty Pooled Cafés, including any Make-Whole Payments
under the Agreement. The revenue is received on or before the 21st
day of the following calendar month and is recognized on an
accrual basis. Second Cup recognizes revenue from corporate and
franchised cafés when services are rendered and collection is
reasonably assured.
c) Cash and cash equivalents
Deposits in banks and short-term investments with original
maturities of three months or less are considered cash and cash
equivalents. Cash equivalents are carried at cost, which
approximates fair market value.
d) Deferred charges
Deferred charges represent costs associated with the term bank
loan and are being amortized over the term of the debt.
e) Trademarks
Trademarks, trade names, operating procedures and systems and
other intellectual property used in connection with the operation
of the Second Cup Cafés in Canada (collectively the Second Cup
Marks) are recorded at cost. The trustees of the Fund review the
carrying value of the trademarks at least annually for impairment
taking into consideration any events or circumstances that might
have impaired the carrying value. If there is an impairment,
trademarks are written down to their estimated fair value.
f) Future income taxes
Future income taxes are calculated using the liability method of
tax accounting. Temporary differences arising from the differences
between the tax basis of an asset or liability and its carrying
amount on the consolidated balance sheet are used to calculate
future income tax assets or liabilities. Future income tax assets
or liabilities are calculated using the substantially enacted tax
rates anticipated to apply in the periods that the temporary
differences are expected to reverse.
g) Earnings per trust unit
The earnings per unit are based on the weighted average number of
units outstanding during the period. Diluted earnings per unit are
calculated to reflect the dilutive effect, if any, of any other
outstanding equity investments.
h) Distribution to unitholders
The amount of cash to be distributed annually to unitholders is
determined with reference to distributable cash, which is
calculated as net earnings adjusted for future income taxes.
Distributions to unitholders are intended to be made monthly in
arrears based on estimated annualized distributable cash less cash
redemptions of units, if any, and subject to the Fund retaining
such reasonable working capital reserves as may be considered
appropriate by the trustees of the Fund.
i) Use of estimates
Preparation of the consolidated financial statements in conformity
with Canadian generally accepted accounting principles requires
the trustees to make estimates and assumptions that affect the
reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
j) Derivative instruments
The Fund uses a swap contract to manage its exposure to movements
in interest rates on its variable interest term loan.
The Fund has adopted Accounting Guideline 13, Hedging
Relationships (AcG 13) issued by The Canadian Institute of
Chartered Accountants that establishes the criteria for applying
hedge accounting for derivative instruments. Derivatives, that
have been designated, and function effectively as hedges in
accordance with AcG 13 are accounted for using hedge accounting
principles. These principles require that the realized current
period income or expense generated by the swap contracts are
recognized as adjustments to interest expenses.
Derivatives that do not qualify for hedge accounting are recorded
in the consolidated balance sheet at fair value. Changes in fair
value are recorded as an income or expense in the consolidated
statement of earnings.
k) Financial instruments
The Fund's financial instruments consist of cash, royalty
receivable, accounts payable and accrued liabilities, income taxes
payable and distributions payable to the unitholders. It is the
trustees' opinion that the Fund is not exposed to significant
interest or credit risk arising from these financial instruments.
The trustees of the Fund estimate that the fair values of these
financial instruments approximate their carrying values.
The Fund also has an interest rate swap contract that is a
derivative financial instrument. The fair value of the swap
contract is estimated to be nominal at December 31, 2004.
4 Distribution to unitholders
Distributable cash is not a defined term under Canadian generally
accepted accounting principles but is determined as earnings before
future income taxes.
$
Net earnings for the period 783,582
Amortization of deferred charges 6,726
Future income taxes 17,000
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Distributable cash 807,308
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Distributable cash per unit (9,582,760 units) 0.0842
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Distributable cash declared per unit
(9,582,760 units)(i) 0.0821
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i) This distribution was paid on January 31, 2005.
5 Future income taxes
The net future income tax liability of $17,667,000 relates to the
difference between the accounting value and the tax basis of the
trademark.
The reconciliation of the Fund's tax charge to statutory rates is as
follows:
$
Combined Canadian statutory rate 36.12%
Tax provision at statutory rates 305,785
Income accrued to unitholders not subject to tax in
the Fund (242,785)
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Income tax provision 63,000
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6 Term loan
On December 2, 2004, MarksCo, a subsidiary of the Fund, as borrower,
and the Fund and AcquisitionCo, as guarantors, entered into a term
credit agreement maturing on December 2, 2007. The credit facilities
total $12.0 million and are comprised of an $11.0 million non-
revolving term credit facility, and a $1.0 million operating credit
facility.
The $11.0 million non-revolving credit facility bears interest at
prime or base rate plus 0.75% or LIBOR advances or banker's
acceptances plus 1.75%. At December 31, 2004, the full amount of the
$11.0 million non-revolving credit facility was drawn with an
effective interest rate of 5.34% after taking into consideration the
interest rate swap described below.
The $1.0 million operating credit facility bears interest at prime or
base rate plus 0.50% or LIBOR advances or banker's acceptance plus
1.50%. At December 31, 2004, no advances had been drawn on this
facility.
The term credit facilities contain common and restrictive and
financial covenants including maintenance of a leverage ratio and
minimum EBITDA. The term credit facilities are collateralized by
substantially all the assets of the Fund, including the Agreement
pursuant to which the New Second Cup has provided a general security
agreement.
On December 2, 2004, MarksCo entered into an interest rate swap
agreement to fix the interest rate on the $11.0 million non-revolving
credit facility loan at 3.59% plus the variable margin noted above
until December 2, 2007. On December 31, 2004, this financial
instrument had a nominal market value.
7 Unitholders' equity trust units
The declaration of trust provides that an unlimited number of units
may be issued. Each unit is transferable, and represents an equal
undivided beneficial interest in any distribution of the Fund and in
the net assets of the Fund. All units have equal rights and
privileges. Each unit entitles the holder thereof to participate
equally in allocations and distributions and to one vote at all
meetings of unitholders for each whole unit held. The units are not
subject to future calls or assessments. Units are redeemable at any
time at the option of the unitholder at amounts related to market
prices at the time, subject to a maximum of $50,000 in cash
redemptions by the Fund in any one month. The limitation may be
waived at the discretion of the trustees of the Fund.
On December 2, 2004, the Fund issued 9,582,760 units at $10 per unit
pursuant to a public underwriting. Expenses of the offering amounted
to $8,887,208.
8 Related party transactions and balances
Included in accounts payable and accrued liabilities is an amount of
$102,504 due to Second Cup. This amount is non-interest bearing and
is due on demand and arose as a result of Second Cup paying for
certain general and administrative fees and providing accounting and
bookkeeping services.
9 Economic dependence
All of the Fund's revenue is derived from royalties payable by Second
Cup as described in note 3(b).
/For further information: please contact Rachel Douglas, Manager, Communications, (905) 405-6904/
