Second Cup Royalty Income Fund
TSX : SCU.UN

Second Cup Royalty Income Fund

August 14, 2009 16:05 ET

Second Cup Royalty Income Fund Announces Second Quarter Results and July Distribution

MISSISSAUGA, ONTARIO--(Marketwire - Aug. 14, 2009) - Second Cup Royalty Income Fund (the "Fund") (TSX:SCU.UN) reported today financial results for the second quarter ended June 30, 2009, and the approval of the July distribution payment. The Fund's units are traded on the Toronto Stock Exchange under the symbol "SCU.UN". All amounts in this news release are presented in thousands of Canadian dollars, unless otherwise indicated.

Highlights

- The Fund's acquisition of The Second Cup Ltd. ("Second Cup") through its wholly-owned subsidiary, Second Cup Trade-Marks Limited Partnership ("MarksLP"), was completed as of June 27, 2009.

- Same cafe sales were down 4.7% in the quarter, and 3.9% year-to-date, with sales adversely affected by the continuing downturn in the economy, increased unemployment and discretionary consumer spending patterns.

- Basic earnings per unit were $0.2337 for the quarter ($0.2717 before transaction costs related to the acquisition of Second Cup and an income tax recovery related to prior years), vs. $0.2951 in the comparable quarter a year ago.

- Distributable cash per unit was $0.2704 for the quarter vs $0.2902 in the comparable 2008 period ($0.2721 before transaction costs related to the acquisition of Second Cup, an income tax recovery related to prior years, and changes in non-cash working capital, compared to $0.2874 in the comparable quarter a year ago).

- Distributions declared in the quarter were $0.2300 per unit compared to $0.2820 in 2008.

"While the impact of the economy in Canada continues to adversely affect same cafe sales for Second Cup, we continue to focus on the outstanding quality of our products," commented Stacey Mowbray, President and C.E.O. of Second Cup. "We will continue to launch innovative, sustainable and profitable products as we did with our teas, tea lattes, bagels, iced coffees and yogurt smoothie, to build customer traffic. I would like to thank our cafe owner operator network and their sales associates for their tireless support and commitment to their guests and to Second Cup."

ACQUISITION OF SECOND CUP BY MARKSLP

On June 27, 2009, MarksLP, on behalf of the Fund, completed the acquisition of all the outstanding shares of Second Cup for total consideration of $1 (one Dollar) cash paid on closing, plus transaction costs incurred of approximately $480. The transaction costs were expensed in the second quarter by MarksLP.

The acquisition has been accounted for using the purchase method and the operating results are included in the Consolidated Statement of Earnings and Comprehensive Income from the effective date of June 28, 2009. The preliminary purchase price allocation of the net assets based on their fair values is as follows:



Cash $ 2,966
Accounts receivable 2,141
Other assets 745
Property, plant and equipment 1,171
Franchise rights(i) 898
Future income taxes 375
Accounts payable and accruals (5,808)
Deposits from Franchisees (1,493)
Lease payable (32)
Other long-term liabilities(i) (1,234)
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Fair value of assets acquired $ (271)
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Less: Consideration (One Dollar) $ -
Settlement of pre-existing liability 1,670
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Goodwill(i) $ 1,941
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(i)Goodwill represents the difference between the purchase price and the net
fair value of the identifiable assets and liabilities. The allocation of the
purchase price is based on preliminary information which will be finalized
prior to year-end.


As a result of the acquisition of Second Cup, the Fund's consolidated financial statements for the quarter also include the financial results of Second Cup for the three days ending June 30, 2009. The results for the quarter also include the consolidated results for MarksLP for the three days ending June 30, 2009. Previously, the results of MarksLP were consolidated with Second Cup in accordance with Accounting Guideline 15.

The acquisition accounting as noted is preliminary, and has been determined based on the estimated fair values of assets acquired and liabilities assumed, pending the completion of a valuation of intangible assets acquired and the fair value of certain lease obligations assumed, which the Fund expects to be completed prior to year-end. Accordingly, the fair value of assets acquired and liabilities assumed could differ from the amounts presented in the consolidated financial statements.

Analysis of System Sales and Same Cafe Sales Growth

System sales for the quarter were $46,474, compared to $49,130 for the same quarter for 2008, a decrease of $2,656 or 5.4%. This decrease was mainly the result of lower same cafe sales in the quarter of 4.7% and by the shift in the timing of Easter from Q1 in 2008 to Q2 in 2009.

Year to date, system sales were $91,466, compared to $96,463 for the same quarter for 2008, a decrease of $4,997 or 5.2%. This decrease was mainly the result of lower same cafe sales of 3.9% and one less day in the period as a result of the leap year in 2008, as well as the effect of fewer open cafes in 2009.

A softening of cafe sales continued from 2008 into 2009 across Canada's major markets resulting from lower customer traffic, which management of Second Cup believes is similar to the trend experienced in retail in general and reflective of the continuing downturn in the Canadian economy. Continuing to offset the decline is improvement in average cheque as a result of the new food programs in the lunch and breakfast day-parts introduced last year and the bagel program launched in the first quarter of 2009.

Income and Operating Expenses

For the quarter, MarksLP earned total royalty revenue of $3,091 (2008 - $3,210) from Second Cup, representing a decrease of 3.7% compared to 2008. Total operating expenses incurred by the Fund were $297 (2008 - $89). The increase is primarily due to the inclusion of Second Cup for the period June 28 - 30, and the additional fees incurred by the Fund related to the acquisition of Second Cup. Interest expense for the Fund amounted to $174 in the quarter (2008 - $181), and interest income on short term deposits was $1 (2008 - $9) The Fund also incurred a non-cash gain of $27 (2008 - $88) relating to the movement in the fair value of the derivative interest rate swap which fixes the interest rate on the Fund's term loan. Non-cash amortization of deferred financing charges amounted to $31 (2008 - $12). During the quarter, MarksLP incurred and expensed $480 in transaction costs relating to the acquisition of Second Cup, and recorded an income tax recovery related to prior years of $103 (2008 - $nil).

Year-to-date, MarksLP earned total royalty revenue of $6,024 (2008 - $6,291) from Second Cup, representing a decrease of 4.2% compared to 2008. Total operating expenses incurred by the Fund were $400 (2008 - $172). The increase is primarily due to the inclusion of Second Cup for the period June 28 - 30, and the additional fees incurred by the Fund related to the acquisition of Second Cup. Interest expense for the Fund amounted to $352 for the six month period in 2009 (2008 - $361), and interest income on short term deposits was $3 (2008 - $23) The Fund also incurred a non-cash gain of $11 (2008 - a charge of $83) relating to the movement in the fair value of the derivative interest rate swap which fixes the interest rate on the Fund's term loan. Non-cash amortization of deferred financing charges amounted to $44 (2008 - $25). Year-to-date, MarksLP incurred and expensed $480 in transaction costs relating to the acquisition of Second Cup, and recorded an income tax recovery related to prior years of $103 (2008 - $nil).

Income Taxes

No income taxes were recorded by the Fund in the quarter, compared to a charge of $71 in 2008, related to changes in the impact of the future tax applicable in 2011. Year to date, a future income tax recovery of $33 was recorded, compared to the charge of $71 in 2008.

Net Earnings

The Fund's net earnings for the quarter were $2,314 or $0.2337 per unit, compared to $2,917, or $0.2951 per unit in 2008. Excluding the transaction costs of $480 (2008 - $nil) and the current income tax recovery of $103 (2008 - $nil) related to prior years, net earnings for the quarter were $2,691 or $0.2717 per unit compared to $2,917 or $0.2951 per unit in 2008, a decrease of 7.9%.

For the six month period, the Fund's net earnings were $4,867 or $0.4915 per unit, compared to $5,399, or $0.5462 per unit in 2007. Excluding the transaction costs of $480 (2008 - $nil) and the current income tax recovery of $103 (2008 - $nil) related to prior years, net earnings were $5,244 or $0.5295 per unit compared to $5,399 or $0.5462 per unit in 2008, a decrease of 3.1%.

Distributable cash

Distributable cash is not an earnings measure recognized by generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures presented by other issuers. Distributable cash is based on cash flows from the combined operating activities of the Fund and MarksLP. Distributable cash for the quarter was $2,678, or $0.2704 per unit, as compared to $2,869, or $0.2902 per unit in the second quarter of 2008 a decrease of 6.8% per unit. Excluding the impact of the transaction costs, the current income tax recovery related to prior years, and the changes in non-cash working capital, distributable cash would have been $0.2721 per unit, compared to $0.2874 per unit for the second quarter of 2007, a decrease of 5.3%.

On a year-to-date basis, distributable cash was $5,090 or $0.5140 per unit, as compared to $5,650, or $0.5716 per unit in 2008, a decrease of 10.1%. Excluding the impact of the transaction costs, the current income tax recovery related to prior years, and changes in non-cash working capital, distributable cash would have been $0.5295 per unit, compared to $0.5643 per unit for 2008, a decrease of 6.2%.

July Distribution Announcement

The Fund also announced that its Board of Trustees approved a cash distribution of $0.07667 per unit for the month of July, 2009 to be paid on August 31, 2009 to Unitholders of record at the close of business on August 28, 2009.

FINANCIAL HIGHLIGHTS

The following table sets out selected pro forma and non-GAAP financial information and other data of the Fund and its wholly owned subsidiaries, and should be read in conjunction with the unaudited consolidated financial statements of the Fund for the three and six month periods ended June 30, 2009.



----------------------------------------------------------------------------
(in thousands of dollars, except Three months ended Six months ended
number of cafes and per unit June 30, June 30, June 30, June 30,
amounts) 2009 2008 2009 2008
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System sales of cafes in the
Royalty Pool(3) $46,474 $49,130 $91,466 $96,463

Number of cafes in Royalty Pool(5) 359 357 359 357

Number of active cafes - end of
period(5) 346 350 346 350

Same cafe sales growth(3) (4.7%) 0.9% (3.9%) 1.1%

Royalty revenues earned by
MarksLP(1) $3,091 $3,210 $6,024 $6,291

Earnings before items noted
below(2) $2,691 $2,917 $5,244 $5,399

Transaction costs(1) $480 - $480 -

Current income tax expense
(recovery) re prior years(1) ($103) - ($103) -

Net earnings for the period $2,314 $2,917 $4,867 $5,399

Earnings per unit before
transaction costs and current
income tax expense (recovery)
re prior years(3) $0.2717 $0.2951 $0.5295 $0.5462

Basic earnings (loss) per unit $0.2337 $0.2951 $0.4915 $0.5462

Diluted earnings (loss) per unit $0.2337 $0.2946 $0.4915 $0.5452

Distributable cash per unit
excluding transaction costs,
current income tax (recovery)
re prior years and changes
in non-cash working capital(3) $0.2721 $0.2874 $0.5295 $0.5643

Distributable cash per unit(3) $0.2704 $0.2902 $0.5140 $0.5716

Distributions declared per unit $0.2300 $0.2820 $0.4947 $0.5610

Payout ratio(3),(4) 85.1% 97.2% 96.2% 98.1%

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(1) "Royalty revenues earned by MarksLP", "Transaction costs", "Current
income tax expense (recovery) re prior years", represent the combined
amounts of the consolidated Fund and its wholly owned subsidiary,
MarksLP, which is consolidated with the statements of Second Cup for
reporting purposes in accordance with GAAP. Prior to June 28, 2009, the
Fund had accounted for the earnings of MarksLP on an equity accounted
basis in its consolidated financial statements, in accordance with GAAP.
(2) "Earnings before items noted below" is a non-GAAP measure and represents
the earnings, before transaction costs and current income tax expense
(recovery) re prior years, of the consolidated Fund and its wholly owned
subsidiary, MarksLP, which is consolidated with the statements of Second
Cup for reporting purposes in accordance with GAAP.
(3) "System sales of cafes in the Royalty Pool", "Same cafe sales growth",
"Earnings per unit before transaction costs and current income tax
expense (recovery) re prior years", "Distributable cash per unit
excluding transaction costs, current income tax expense (recovery) re
prior years and changes in non-cash working capital", "Distributable
cash per unit" and "Payout Ratio" are non-GAAP measures.
(4) "Payout ratio" is calculated as "Distributions declared per unit" as a
percentage of "Distributable cash per unit".
(5) As at the acquisition date of Second Cup there were 351 cafes in the
cafe network that now makes up system sales. There were no cafe openings
or closures in the period from June 28 to June 30, 2009.


The unaudited interim consolidated financial statements of the Fund, together with its Management's Discussion and Analysis, are expected to be available at www.sedar.com and on the Fund's website at www.secondcupincomefund.com on August 14, 2009.

OUTLOOK

The information contained in this "Outlook" is forward-looking information. Please see "Forward-looking Information" below for a discussion of the risks and uncertainties in connection with forward-looking information.

Given the continuing uncertainty in the retail and economic environment across Canada and Second Cup's dependence on consumer discretionary spending, management is not providing specific guidance on same cafe sales for 2009. Management believes the balance of fiscal 2009 will be challenging and therefore, a number of initiatives are planned and/or underway to strengthen the long-term success of the Second Cup brand and its franchisees.

- Second Cup will continue its focus on operational excellence at the cafe level, which it believes will yield increasing consistency across the chain and improve the overall guest experience.

- In an effort to drive loyalty among specialty coffee customers, Second Cup's promotional strategies will focus on targeted branding initiatives promoting and innovating around its premium-priced specialty beverages, brewed coffees, tea, food and merchandise. Value-added offers will also be a core part of the promotional calendar.

- Second Cup will continue to develop and build neighbourhood cafes with a focus on expansion in key urban markets utilizing a disciplined cafe development process, and continuing its concentration on the delivery of cost savings to franchisees.

In terms of 2009 network development, Second Cup expects to open 10 to 15 new cafes in Canada and to renovate 20 to 24 of its cafes. Second Cup also anticipates closing 25 to 30 cafes, the majority of which have sales below the average performance of its cafes. The revised closure forecast is based on management's decision to close unprofitable Company-owned cafes to improve the overall earnings of Second Cup.

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 cafes, 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 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. The fund also owns, indirectly, Second Cup. For more information on the Second Cup Royalty Income Fund please visit www.secondcupincomefund.com.

About Second Cup

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.

Contact Information