MISSISSAUGA, ON, Nov. 4 /CNW/ - Second Cup Royalty Income Fund
(the "Fund") reported today financial results for the third quarter ended
September 30, 2005. As the Fund went public on December 2, 2004, there are no
year-over-year comparables for the period. The Fund's units are traded on the
Toronto Stock Exchange under the symbol "SCU.UN".
System sales of the Royalty Pool CafDes during the quarter were
$43.7 million and same cafDe sales growth was 4.6%. System sales growth
benefited from a price increase implemented in the first quarter. The increase
was applied to certain product offerings and accounted for approximately
3.0 percentage points of the same cafDe sales growth for the third quarter.
System sales have also benefited from an improvement in sales mix, driven by
stronger premium beverage sales. In addition, a high-volume cafDe situated in a
major Toronto-area retail center was temporarily closed during the quarter due
to a major mall renovation. This adversely impacted system sales by 0.6%
during the quarter. Year-to-date sales reflect the seasonality of the business
and continue to be in line with management's expectations.
The source of revenue for the Fund is through its ownership in Second Cup
Trade-Marks Inc. (MarksCo) which, in turn, receives royalty income from The
Second Cup Ltd. (Second Cup) under a Royalty and Licence Agreement (the
"Agreement"). For the quarter, MarksCo earned total royalty revenue of
$2,858,000 and paid $2,391,000 in interest and $60,000 in dividends up to the
Fund. The Fund incurred total operating expenses of $74,000, excluding
$273,000 incurred by MarksCo. 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. Net earnings of the Fund before any cash
distribution were $2,464,000 or 25.70 cents per unit for the quarter.
Distributable cash, a non-GAAP measurement, represents net earnings of
the Fund adjusted for future income taxes and non-cash amortization expenses
of the Fund and its wholly-owned subsidiary, MarksCo, and was $2,515,000, or
26.24 cents per unit compared to distributions declared of $2,395,000 or
24.99 cents per unit for the quarter.
During the quarter, two additional cafDes from the initial Royalty Pool
were closed. Annualized system sales for these cafDe were below the average of
all the Royalty Pool cafDes and amounted to $720,000.
<<
Three months Nine months
ending ending
(in thousands of dollars except September 30, September 30,
cafDes and per unit amounts) 2005 2005
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Number of cafDes in Royalty Pool 346 346
Same cafDe sales growth 4.6% 4.2%
System sales of Royalty Pool CafDes $ 43,727 $ 127,753
Net earnings for the period 2,464 7,232
Basic and fully diluted earnings per unit $ 0.2570 $ 0.7547
Distributable cash per unit $ 0.2624 $ 0.7707
Distributions declared per unit $ 0.2499 $ 0.7499
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The consolidated financial statements of the Fund, together with its
Management's Discussion and Analysis, will be available at www.sedar.com and
on the Fund's website at www.secondcupincomefund.com on or before November 7,
2005.
Adjustment to Royalty Pool
On January 1, 2006, the number of Second Cup CafDes for which royalties
are paid by Second Cup to the Fund will be adjusted based on provisions of the
Agreement. Second Cup expects to vend in eight to nine additional cafDes into
the Royalty Pool less a similar number of projected cafDe closures. Additional
cafDes include four new cafDes that were opened in 2004 after the determination
of the Initial Royalty Pool and two new cafDes that were opened in 2005. CafDes
need to open for 60 consecutive days prior to November 1st, 2005 to be
considered for inclusion into the Royalty Pool on January 1, 2006. In
addition, there are a number of existing cafDes that were excluded from the
Initial Royalty Pool due to uncertainty regarding the potential to renew lease
agreements that were set to expire in 2005. Second Cup has renewed or expects
to renew the agreements of two to three of these cafDes and vend them into the
Royalty Pool on January 1, 2006. Conversely five cafDes included in the Initial
Royalty Pool have closed to date. An additional three to four existing cafDes
are projected to close before the end of the year based on their lease terms
and economic viability.
Outlook
Recently the Federal Government of Canada announced that it was
conducting a review of flow-through entities, including income trusts, which
may have an impact on how such entities are taxed. Until that process is
completed, the impact, if any, for Second Cup, the Fund or any of its
subsidiaries is not determinable.
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 CafDes. Growth in overall system sales is dependant upon
same cafDe sales growth, and adding net new cafDes to the cafDe network.
In connection with Second Cup's previously-stated growth strategies, the
Fund can report on the following Second Cup initiatives:
- Second Cup completed the rollout of its reloadable convenience card
(the "Second Cup CafDe Card") across its major Canadian markets in
October of 2005. The card allows customers to load a dollar amount on
the card at a cafDe and redeem it not only for their daily purchases
at participating cafDes, but also at Cara Operations Limited full
service restaurant brands including Swiss Chalet, Kelsey's,
Milestone's and Montana's.
- As part of its commitment to focus on premium products, Second Cup
recently launched its reformulated latte, with a revised recipe that
creates a perfectly balanced latte made for the Canadian palate. The
new recipe is based on extensive research into what Canadians want
and was launched with significant print advertising and media
coverage.
- Over the next three years, in excess of 70 cafDes are expected to be
renovated. Historically, given that renovated cafDes typically
experience above average same cafDe sales growth, cafDe modernizations
are a significant ongoing initiative. To this end, the Company has
renovated 14 cafDes to date and continues to expect that it will
modernize 15 to 20 cafDes during 2005.
- During the quarter, Second Cup opened two new cafDes. Previously the
Company had expected 8 to 10 new cafDe openings during the year. Due
to a variety of reasons that have resulted in construction delays,
the Company now expects that it will open 4 to 6 new cafDes during the
current fiscal year.
Overall, based on the Second Cup initiatives underway and the performance
of the Fund through the first three quarters of the year, the Fund expects a
successful conclusion to the 2005 fiscal year.
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 cafDes, or industry results to be materially different from any
future results, performance or achievements expressed or implied by those
forward-looking statements.
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 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. Second
Cup is a wholly-owned subsidiary of Cara Operations Limited, Canada's leading
integrated restaurant company.
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%SEDAR: 00021352E
