MISSISSAUGA, ON, Nov. 1 /CNW/ - Second Cup Royalty Income Fund (TSX:
SCU.UN) is pleased to report its third quarter results. All amounts in this
news release are presented in thousands of dollars, except cafDes and per unit
amounts.
Same cafDe sales growth of cafDes in the Royalty Pool was 5.7% for the
quarter ended September 30, 2006 and 5.6% for the year to date. System sales
of cafDes in the Royalty Pool were $46,343 for the quarter compared to $43,727
for the comparable period. System sales benefited from a continuing
improvement in sales mix, driven by increased sales of premium beverages, food
and merchandise. Sales for the quarter reflect the seasonality of the business
and were in line with management's expectations.
"We are very pleased with the same cafDe sales performance experienced by
our cafDes year to date," said Bruce Elliot, President of The Second Cup Ltd.
"Should sales growth continue at its current rate throughout the holiday
season, we would expect to exceed our previously stated same cafDe sales growth
of 3% to 5% for the year."
Net earnings of the Fund before cash distributions benefited from the
sales growth achieved in the period, and were $2,627 or $0.2716 per unit on a
fully diluted basis for the quarter, representing a 5.7% increase over fully
diluted earnings per unit of $0.2570 for the third quarter of 2005. For the
year to date, net earnings were $7,032 or $0.7270 per unit on a fully diluted
basis. During the year, the Fund incurred expenses amounting to $367 related
to the previously-announced proposed reorganization of the structure of the
Fund; $10 of these costs were incurred in the third quarter. The year to date
earnings also reflect a non-cash tax expense of $224, or $0.0232 per unit,
incurred in the second quarter for the reduction in future income tax assets
as a result of the federal government substantially enacting new legislation
which will result in a reduction in federal income tax rates commencing 2008.
Excluding these items, net earnings for the Fund before cash distributions
were $7,623 for the year to date, or $0.7881 per unit on a fully diluted
basis, representing a 4.4% increase over the comparable period in 2005.
Commencing in the current reporting period, the Fund has adjusted the way
it presents distributable cash flows to conform with recommendations of the
Canadian Securities Administrators ("CSA"), see "~Distributable Cash" below
for a reconciliation of distributable cash for the quarter and year to date.
The source of revenue for the Fund is its ownership of Second Cup
Trade-Marks Inc. ("MarksCo") which, in turn, receives royalty income from The
Second Cup Ltd. ("Second Cup") under a Licence and Royalty Agreement. For the
quarter, MarksCo earned total royalty revenue of $3,046. The Fund incurred
ongoing operating expenses of $70, which excludes expenses incurred by MarksCo
of $78. In addition, expenses of $10 were incurred in the quarter related to
the previously-announced proposed reorganization of the Fund. Ongoing
operating expenses of the Fund and MarksCo are limited to general and
administrative expenses, term loan interest expense, and amortization of
deferred financing fees, and were in line with management's expectations.
During the quarter, three cafDes from the Royalty Pool were closed.
Annualized system sales for these cafDe were below the average of all cafDes in
the Royalty Pool, and totaled approximately $955. Effective as of their dates
of closure, Second Cup has paid MarksCo make-whole payment amounts in
accordance with the Licence and Royalty Agreement. During the third quarter,
make-whole payments on cafDes that closed during the year to date totaled $34.
<<
Highlights
(in thousands Three months Three months Nine months Nine months
of dollars except ending ending ending ending
cafDes and per Sept. 30, Sept. 30, Sept. 30, Sept. 30,
unit amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
Number of active cafDes
in Royalty Pool 345 346 345 346
Same cafDe sales growth 5.7% 4.6% 5.6% 4.2%
System sales of cafDes in
the Royalty Pool $46,343 $43,727 $135,528 $127,753
Net earnings for the
period excluding
reorganization costs
and non-cash income
tax expense(1) 2,637 2,464 7,623 7,232
Net earnings for the
period 2,627 2,464 7,032 7,232
Basic earnings per
unit excluding
reorganization costs
and non-cash income
tax expense(1) $0.2736 $0.2570 $0.7909 $0.7547
Basic earnings per
unit $0.2726 $0.2570 $0.7296 $0.7547
Fully diluted earnings
per unit excluding
reorganization costs
and non-cash income
tax expense(1) $0.2726 $0.2570 $0.7881 $0.7547
Fully diluted earnings
per unit $0.2716 $0.2570 $0.7270 $0.7547
Distributable cash per
unit excluding
reorganization costs
and changes in
non-cash working
capital(2),(3) $0.2785 $0.2624 $0.8063 $0.7707
Distributable cash
per unit(3) $0.2783 $0.2541 $0.7907 $0.7733
Distributions declared
per unit $0.2601 $0.2499 $0.7702 $0.7499
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(1) Reorganization costs and non-cash tax expense are discussed in the
4th paragraph above.
(2) Excluding the impact of the reorganization costs noted above and
changes in non-cash working capital explained further in
"~Distributable Cash" below.
(3) See "~Distributable Cash" below for an analysis of distributable
cash amounts.
>>
Distributable Cash
In common with other royalty income trusts in Canada, management believes
distributable cash is an appropriate measure of performance of the Fund as the
amount of cash available to pay distributions to unitholders is determined
with reference to distributable cash. Management believes that, in addition to
net income, distributable cash is a useful supplemental measure in evaluating
the Fund's performance as it provides investors with an indication of cash
available for distributions. Investors are cautioned, however, that
distributable cash should not be construed as an alternative to the statement
of cash flows as a measure of liquidity and cash flows. The method of
calculating distributable cash for the purposes of this news release may
differ from that used by other issuers and, accordingly, distributable cash in
this new release may not be comparable to distributable cash used by other
issuers.
Commencing in the current reporting period, the Fund has adjusted the way
it presents distributable cash to conform with the CSA's recommendations as
set out in CSA Staff Notice 52-306 (Revised) - Non GAAP Financial Measures. In
prior reporting periods, distributable cash was presented as net earnings of
the Fund before future income taxes and amortization expense of the Fund and
MarksCo, a wholly-owed subsidiary of the Fund accounted for as an equity
investment in the Fund's consolidated financial statements. For purposes of
this news release, distributable cash is based on cash flows from operating
activities, the GAAP measure reported in the Fund's consolidated statement of
cash flows. Cash flow from operating activities of the Fund is adjusted to
include cash flow from operating activities of MarksCo.
<<
Three months ended Three months ended
September 30, 2006 September 30, 2005
------------------ ------------------
Cash flow from operating
activities of the Fund $ 2,303 $ 2,334
Add:
Cash flow from operating
activities of MarksCo 379 101
------------------ ------------------
Distributable cash for
the Fund $ 2,682 $ 2,435
------------------ ------------------
------------------ ------------------
Distributable cash per unit $ 0.2783 $ 0.2541
------------------ ------------------
------------------ ------------------
Distributions declared $ 2,506 $ 2,397
------------------ ------------------
------------------ ------------------
Distributions declared
per unit $ 0.2601 $ 0.2501
------------------ ------------------
------------------ ------------------
>>
Excluding $10 of expenses related to the proposed reorganization,
distributable cash for the Period would have been $2,692, or $0.2793 per unit.
For the three months ended September 30, 2006, non-cash working capital
increased by $8 compared to a decrease of $80 for the comparable period.
Changes in non-cash working capital are primarily due to timing of payments
from related parties and payments of income tax amounts. Excluding the impact
of changes in non-cash working capital and the reorganization costs noted
above, distributable cash would have been $2,684 or $0.2785 per unit compared
to $2,515 or $0.2624 per unit, which represents a 6.1% increase in
distributable cash per unit from the third quarter of 2005. The increase in
distributable cash is primarily due to positive same cafDe sales growth of 5.7%
in the third quarter.
<<
Year to date
Nine months ended Nine months ended
September 30, 2006 September 30, 2005
------------------ ------------------
Cash flow from operating
activities of the Fund $ 6,491 $ 6,931
Add:
Cash flow from operating
activities of MarksCo 1,130 (3,021)
Income tax payment relating
to Fund's IPO - 3,500
------------------ ------------------
Distributable cash for the Fund $ 7,621 $ 7,410
------------------ ------------------
------------------ ------------------
Distributable cash per unit $ 0.7907 $ 0.7733
------------------ ------------------
------------------ ------------------
Distributions declared $ 7,423 $ 7,186
------------------ ------------------
------------------ ------------------
Distributions declared per unit $ 0.7702 $ 0.7499
------------------ ------------------
------------------ ------------------
>>
Excluding $367 of expenses related to the proposed reorganization,
distributable cash for the year-to-date would have been $7,988, or $0.8288 per
unit. For the nine months ended September 30, 2006, non-cash working capital
decreased by $217 compared to an increase of $3,475 for the comparable period.
Changes in non-cash working capital are primarily due to timing of payments
from related parties and payments of income tax amounts. In 2004, an income
tax liability amounting to $3,500, incurred in connection with the
transactions relating to the Fund's IPO in 2004, was recorded and funded at
the time of closing of the IPO. This income tax liability was paid in the
first quarter of 2005 by MarksCo and is the primary reason for the increase in
non-cash working capital of $3,475 in the comparable period. As this liability
was incurred in connection with the Fund's IPO and is unrelated to the cash
generated by operations during the period, it is excluded from the calculation
of distributable cash for the nine months ended September 30, 2006. Excluding
the impact of changes in non-cash working capital and the reorganization costs
noted above, distributable cash would have been $7,771 or $0.8063 per unit
compared to $7,385 or $0.7707 per unit, which represents a 4.6% increase in
distributable cash per unit versus the comparable period. The increase in
distributable cash is primarily due to positive same cafDe sales growth of 5.6%
for the year to date.
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 cafDes in the Royalty Pool. Growth in overall system sales is
dependent on same cafDe sales growth, and adding net new cafDes to the cafDe
network.
Based on the results achieved to date and initiatives planned or already
in place, Second Cup is confident that it will meet or possibly exceed its
previously-stated same cafDe sales growth target of 3% to 5% for the 2006
fiscal year. In addition, based on cafDe development to date, Second Cup
expects to open 13 to 15 new cafDes by December 31, 2006 and close 10 to 13
cafDes currently included in the Fund's Royalty Pool during the 2006 fiscal
year. Before taking into account cafDe closures for the fiscal year, Second Cup
expects to add 11 units to the Royalty Pool on January 1, 2007. CafDes
scheduled for closure are expected to have average system sales that are
significantly lower than the average system sales of cafDes expected to be
added to the Royalty Pool on January 1, 2007. Therefore, Second Cup expects to
have an increase in the Royalty Pool's system sales as a result of the next
Royalty Pool adjustment.
For a more detailed discussion of these results and Second Cup's
initiatives, refer to the Management's Discussion and Analysis for the
quarter, which, along with the consolidated financial statements of the Fund
and Second Cup, will be available at www.sedar.com and on the Fund's website
at www.secondcupincomefund.com on or about November 3, 2006.
Distribution Announcement
As announced on October 17, 2006, the Board of Trustees has approved a
cash distribution of $0.0867 per unit effective for the month of September
2006 to be paid on October 31, 2006 to unitholders of record on October 27,
2006.
Forward Looking Information
Certain statements in this press release may constitute forward-looking
information within the meaning of applicable securities legislation.
Forward-looking information can be identified by words such as "may", "will",
"should", "expect", "anticipate", "believe", "plan", "intend" and other
similar words. Forward-looking information reflects current expectations
regarding future events and operating performance and speaks only as of the
date of this press release. It should not be read as a guarantee of future
performance or results and will not necessarily be an accurate indication of
whether or not those results will be achieved. Forward-looking information is
based upon a number of assumptions and is subject to known and unknown risks,
uncertainties and other factors, many of which are beyond the Fund's control,
that may cause the Fund's actual results, performance or achievements, or
those of MarksCo, Second Cup, Second Cup cafDes, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking information. The following are
some of the factors that could cause actual results to differ materially from
those expressed in or underlying forward-looking information: competition;
availability of premium quality coffee beans; the ability to attract qualified
franchisees; the location of Second Cup cafDes; the ability to exploit and
protect the Second Cup Marks; changing consumer preferences and discretionary
spending patterns; reporting of system sales by franchisees; and the results
of operations and financial condition of Second Cup. The foregoing list of
factors is not exhaustive, and investors should refer to the risks described
in the Fund's latest Annual Information Form.
Although the forward-looking information contained in this press release
is based upon what management believes are reasonable assumptions, there can
be no assurance that actual results will be consistent with this
forward-looking information. Certain assumptions made in preparing
forward-looking information include the assumption that the Canadian economy
will remain stable or expand at a moderate pace in 2006 and that inflation
will remain relatively low. The Fund has also assumed that interest rates will
gradually increase in 2006 and that demand for specialty coffee will be
comparable with demand in 2005.
As this forward-looking information is made as of the date of this press
release, the Fund does not undertake to update any such forward-looking
information whether as a result of new information, future events or
otherwise. Additional information about these assumptions and risks and
uncertainties is contained in the Fund's filings with securities regulators.
These filings are also available on the Fund's website at
www.secondcupincomefund.com.
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 Second Cup in connection with the operation of Second Cup cafDes 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 cafDes. For
further information on the Fund, visit www.secondcupincomefund.com.
About Second Cup
Second Cup is Canada's largest specialty coffee cafDe franchisor and
second largest retailer of specialty coffee, as measured by number of cafDes.
For the ultimate on-line coffee experience, visit www.secondcup.com.
%SEDAR: 00021352E
