MISSISSAUGA, ON, Jan. 12 /CNW/ - Second Cup Royalty Income Fund (the "Fund") and The Second Cup Ltd. ("Second Cup") announced today their annual adjustment to the number of Second Cup cafes in the royalty pool (the "Royalty Pool"). The system sales of Second Cup cafes in the royalty pool is the basis on which the Fund's wholly-owned subsidiary, Second Cup Trade-Marks Inc. ("MarksCo") receives royalty payments from The Second Cup Ltd. ("Second Cup").
The Royalty Pool is adjusted on January 1 of each year to include sales from new cafes that have been open for at least 60 days prior to November 1 of the preceding year, after deducting sales of any Second Cup cafes that have closed since the previous adjustment date. The Fund (through MarksCo) pays Second Cup for the additional royalty stream, if any, from the sales of the new cafes vended in to the Royalty Pool, based upon a formula set out in the licence and royalty agreement between Second Cup and MarksCo. The formula, designed to be accretive, is based on the sales from the new cafes and the yield of the Fund's units. The accretion is achieved by discounting the payment by 7.5%. The payment to Second Cup may be in the form of cash or additional units of the Fund.
Effective January 1, 2007, eleven cafes with estimated total annual system sales of $4.6 million in 2007 were vended in to the Royalty Pool. Twelve cafes having total system sales of $3.8 million were permanently closed in 2006 and removed from the Royalty Pool. This resulted in an estimated net system sales increase for the Royalty Pool of $0.8 million. As a result of this adjustment, the total number of cafes in the Royalty Pool as at January 1, 2007 is 351.
The estimated net system sales increase from this adjustment would result in additional annual royalty revenues to the Fund of $48,000. The initial payment by MarksCo to Second Cup for these estimated additional royalty revenues is $0.3 million. The initial payment is 80% of what will be owed by MarksCo to Second Cup based on the estimated system sales of the eleven cafes vended in to the Royalty Pool. MarksCo has elected to satisfy this payment by delivering 34,630 units of the Fund. These units were valued at $9.0920 per unit, calculated as the weighted average trading price of the units of the Fund for the 20 trading days ending December 21, 2006. A final adjustment payment will be made on January 1, 2008 based upon the actual system sales of the eleven new cafes during 2007.
Second Cup has advised the Fund that 9 new cafes were opened subsequent to September 2, 2006, bringing the total number of cafes opened in 2006 to 16. These 9 cafes will be eligible for inclusion in the Royalty Pool effective January 1, 2008, together with any cafes that are opened in 2007 prior to September 2, 2007.
The Fund is also pleased to announce that the actual system sales of the nine cafes added to the Royalty Pool on January 1, 2006 have now been determined. Actual system sales for the period ended December 31, 2006 were $4.4 million as compared to the original estimate of $4.0 million. As a result, a final adjustment payment of $0.4 million was made by MarksCo to Second Cup, which MarksCo satisfied by delivering 35,903 additional units of the Fund to Second Cup. These units were valued at $9.9043 per unit, calculated as the weighted average trading price of the units of the Fund for the 20 days ending December 22, 2005. In accordance with the license and royalty agreement, MarksCo also made a cash payment of $36,991 to Second Cup, representing the cash distributions that would have otherwise been earned by Second Cup on the 35,903 additional units above had they been issued on January 1, 2006.
As a result of the transactions described above, Second Cup now owns approximately 0.7% of the total outstanding units of 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 Second Cup in connection with the operation of Second Cup cafes in Canada. The Fund is listed on the Toronto Stock Exchange under the symbol SCU.UN. For more information on the Second Cup Royalty Income Fund please visit www.secondcupincomefund.com.
Second Cup is Canada's largest specialty coffee cafe franchisor and second largest retailer of specialty coffee, as measured by number of cafes. For the ultimate on-line coffee experience, visit www.secondcup.com.
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