MISSISSAUGA, ON, Jan. 17 /CNW/ - Second Cup Royalty Income Fund (the "Fund") and The Second Cup Ltd. ("Second Cup") announced today their unaudited same cafe sales results for the fourth quarter and the 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 indirect wholly-owned limited partnership, Second Cup Trade-Marks Limited Partnership ("MarksLP") receives royalty payments from Second Cup. The Fund expects to release its audited annual financial results on or before March 14, 2008.
Unaudited Same Cafe Sales Growth
Same cafe sales growth for cafes in the Royalty Pool for the fourth quarter and the year ended December 31, 2007 is expected to be 0.7% and 3.0% respectively.
"Same cafe sales growth was particularly challenging in the quarter given the comparatively strong results from the fourth quarter of 2006," commented Bruce Elliot, President of Second Cup. "The poor weather across Canada in the month of December, compared to a very mild December the year before, also had a negative impact on our cafes during our most important sales period of the year. Cafes located on street fronts and strip centres, which comprise more then 40% of our network, were the most affected."
The same cafe sales growth achieved in the fourth quarter represents the 12th consecutive quarter of positive same cafe sales growth since the inception of the Fund, and the 17th consecutive quarter for Second Cup. Second Cup also reported that cafes undergoing renovations in the quarter negatively impacted sales by approximately 0.5% due to their temporary closure while under renovation. In total, 40 cafes were renovated in 2007 compared to 11 in 2006.
Royalty Pool Adjustment
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 MarksLP) 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 MarksLP. 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, 2008, fifteen cafes with estimated total annual system sales of $6,750,000 in 2008 were vended in to the Royalty Pool. Nine cafes having total system sales of $3,513,000 were permanently closed in 2007 and removed from the Royalty Pool. This resulted in an estimated net system sales increase for the Royalty Pool of $3,237,000. As a result of this adjustment, the total number of cafes in the Royalty Pool as at January 1, 2008 is 357.
The estimated net system sales increase from this adjustment would result in additional annual royalty revenues to the Fund of $210,000. The initial payment by MarksLP to Second Cup for these estimated additional royalty revenues is $1,346,000. The initial payment is 80% of what will be owed by MarksLP to Second Cup based on the estimated system sales of the fifteen cafes vended in to the Royalty Pool. MarksLP has elected to satisfy this payment by delivering 143,712 units of the Fund. These units were valued at $9.37 per unit, calculated as the weighted average trading price of the units of the Fund for the 20 trading days ending December 20, 2007. A final adjustment payment will be made on January 1, 2009 based upon the actual system sales of the fifteen new cafes during 2008.
Second Cup has advised the Fund that 8 new cafes were opened subsequent to September 2, 2007, bringing the total number of cafes opened in 2007 to 14. These 8 cafes will be eligible for inclusion in the Royalty Pool effective January 1, 2009, together with any cafes that are opened in 2008 prior to September 2, 2008.
The Fund is also pleased to announce that the actual system sales of the eleven cafes added to the Royalty Pool on January 1, 2007 have now been determined. Actual system sales for the period ended December 31, 2007 were $4,960,000 as compared to the original estimate of $4,555,000. As a result, a final adjustment payment of $295,000 will be made by MarksLP to Second Cup, which MarksLP will satisfy by delivering 32,412 additional units of the Fund to Second Cup. These units were valued at $9.09 per unit, calculated as the weighted average trading price of the units of the Fund for the 20 days ending December 21, 2006. In accordance with the license and royalty agreement, MarksLP will also make a cash payment of $35,000 to Second Cup, representing the cash distributions that would have otherwise been earned by Second Cup on the 32,412 additional units above had they been issued on January 1, 2007.
Subsequent to the transactions described above, Second Cup will own approximately 2.5% of the total outstanding units of the Fund. Also, Mr. Gabriel Tsampalieros, who controls Second Cup, will directly and indirectly control a total of 993,496 units (including the 245,657 units owned by Second Cup) which are held for investments purposes and which represent 10.1% of the total outstanding units of the Fund.
December Distribution
As previously announced, on January 31, 2008 the Fund will make a distribution payment of $0.0910 per unit for the month of December 2007 to unitholders of record at the close of business on December 31, 2007.
The Fund is an open-ended trust established under the laws of the Province of Ontario. It holds, through an indirect wholly-owned limited partnership, 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. 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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