Press Releases
A&W Revenue Royalties Income Fund posts strong fourth quarter
A&W Revenue Royalties Income Fund will hold a conference call to discuss
fourth quarter and year end results on February 8, 2007 at 10:30 a.m.
Pacific Time (1:30 p.m. Eastern Time). The call can be accessed by
dialing toll-free 1-800-814-4941 or (416) 644-3418. A replay will be
available until February 22, 2007, by dialing toll-free 1-877-289-8525 or
(416) 640-1917 Passcode: 21218056 followed by the number sign.
TRADING SYMBOL: The Toronto Stock Exchange - AW.UN
VANCOUVER, Feb. 7 /CNW/ - A&W Revenue Royalties Income Fund (the Fund)
and A&W Trade Marks Inc. (Trade Marks) each reported today financial results
for the fourth quarter and year ended December 31, 2006.
It was another strong quarter with same store sales of the A&W
restaurants in the Royalty Pool increasing by 6.2%. This brought the full year
same store sales growth to 7.4%. As a result, royalty income and distributable
cash also posted strong increases over the prior year. Based on this strong
performance, as previously announced, the Trustees of the Fund have declared a
Special Distribution of 8 cents per unit payable on February 28, 2007 to
unitholders of record on February 15, 2007.
"The full year same store sales growth of 7.4% for 2006 is the strongest
performance since the inception of the Fund, and the fourth quarter marks the
fifteenth straight quarter of same store sales growth," said Paul Hollands,
President and Chief Executive Officer of A&W Food Services of Canada Inc. "Our
strategy of focussing on the baby boomers continued to generate great results
during 2006. We are pleased that this strong performance enabled the Fund to
not only increase the monthly distribution rate four times during 2006, but
also to provide a Special Distribution to its unitholders."
Sales reported by A&W restaurants in the Royalty Pool increased by 10.4%
to $191,474,000 for the fourth quarter compared to the fourth quarter of 2005
and by 11.1% to $598,551,000 for the year. The increase in sales and
corresponding increase in royalty income reflects the same store sales growth
and the increase in the number of restaurants in the Royalty Pool from 638
during 2005 compared to 654 during 2006.
HIGHLIGHTS
The following table sets out selected financial highlights of the Fund
and Trade Marks which should be read in conjunction with the attached
financial statements of the Fund and Trade Marks:(dollars in Period from Period from
thousands 16 week 16 week Jan 1, 2006 Jan 1, 2005
except per unit period ended period ended to to
amounts) Dec 31, 2006 Dec 31, 2005 Dec 31, 2006 Dec 31, 2005
Same store sales
growth 6.2% 8.2% 7.4% 5.0%
Number of
restaurants in the
Royalty Pool(1) 654 638 654 638
Sales reported by
the restaurants in
the Royalty Pool $191,474 $173,408 $598,551 $538,703
Royalty income $5,745 $5,202 $17,957 $16,161
General and
administrative
expenses $117 $101 $462 $421
Net third party
interest expense $138 $168 $495 $576
Large corporations
tax - $46 - $156
Trade Marks' net
earnings $500 $931 $1,184 $723
The Fund's net
earnings $4,355 $3,343 $11,008 $9,444
The Fund's basic
and diluted
earnings per unit
(8,340,000 units) $0.522 $0.401 $1.320 $1.132
Total distributable
cash generated for
distributions and
dividends(2) $5,490 $4,887 $17,000 $15,008
Distributable cash
per equivalent unit
(2006 - 13,138,455
units; 2005 -
12,579,462 units)(3) $0.418 $0.388 $1.294 $1.193
Distributions
declared per unit
(8,340,000 units) $0.397 $0.360 $1.155 $1.080
(1) The net six new restaurants added to the Royalty Pool on December 31,
2006 are excluded for purposes of presenting 2006 results as they
were not in the Royalty Pool during 2006.
(2) 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. This
information is provided as it identifies the amount of actual cash
available to pay distributions to unitholders and dividends to Food
Services.
(3) The number of equivalent units for 2006 excludes the 299,413 shares
issued on December 31, 2006.The Fund's net earnings for 2006 were $11,008,000 or $1.320 per unit,
compared to $9,444,000 or $1.132 per unit for the prior year. The increase in
the Fund's earnings is due to its investment in Trade Marks which is recorded
on the equity basis.
Trade Marks' 2006 net earnings increased by $461,000 to $1,184,000
compared to $723,000 for 2005, due primarily to the higher royalty income.
Cash available to pay distributions and dividends increased by 12.3% for
the quarter to $5,490,000 compared to the fourth quarter of 2005 and by 13.3%
for the full year to $17,000,000. Distributable cash per fully diluted unit
and equivalents increased from 38.8 cents for the fourth quarter in 2005 to
41.8 cents in 2006. Distributable cash per fully diluted unit for the year
increased from $1.193 to $1.294. Distributions of 39.7 cents per unit were
declared in the fourth quarter, bringing the total distributions for 2006 to
$1.155 per unit. Food Services earned dividends on its investment in Trade
Marks at the same rate.
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. This information is provided as
it identifies the amount of actual cash available to pay distributions to
unitholders and dividends to Food Services.
The number of restaurants in the Royalty Pool increased from 638 in 2005
to 654 at the beginning of 2006, and increased again on December 31, 2006 to
660 restaurants.
Monthly distributions to unitholders were increased four times in 2006.
The current monthly distribution rate of 10 cents per unit translates into an
annualized distribution of $1.20 per unit, an increase of 11.1% over the 2005
annual distribution of $1.08. Distributions in 2006 totalled $1.155 per unit
which is an increase of 6.9% over the 2005 amount.
As previously announced, on February 6, 2007 the Trustees of the Fund
approved the payment of a Special Distribution of 8 cents per unit. This
Distribution will be payable on February 28, 2007 to unitholders of record on
February 15, 2007.
Finally, many unitholders have expressed concern about the intention of
the Federal Government to impose a tax on the distributions from income funds,
effective for existing funds like the A&W Revenue Royalties Income Fund in
2011. We encourage any investors who are concerned about this tax to join the
Canadian Association of Income Trust Investors. Information on this
organization can be found at www.caiti.com.
The Fund is a limited purpose trust established to invest in Trade Marks,
which owns the A&W trade-marks used in the A&W quick service restaurant
business in Canada. The A&W trade-marks comprise some of the best-known brand
names in the Canadian foodservice industry. In return for licensing Food
Services to use its trade-marks, Trade Marks receives royalties equal to 3% of
the sales of A&W restaurants in the Royalty Pool. Same store sales growth of
the A&W restaurants in the Royalty Pool is therefore the primary driver of
growth in the Fund's revenue.
The Royalty Pool is adjusted in January of each year (except in 2006 when
the Royalty Pool was adjusted on January 5, 2006 and December 31, 2006, and
2007 in which there is no adjustment) to include the royalty stream from new
restaurants, net of the sales of any A&W restaurants that have permanently
closed. Trade Marks pays Food Services for the additional royalty stream in
the form of common shares and Class B shares of Trade Marks which are the
economic equivalent of units of the Fund. Food Services currently owns 38% of
the common shares of Trade Marks, and therefore owns the equivalent of 38% of
the units of the Fund on a fully-diluted basis.
Trade Marks' dividends to Food Services and the Fund, and the Fund's
distributions to unitholders are based on top-line revenues of the A&W
restaurants in the Royalty Pool, less interest, general and administrative
expenses of Trade Marks, and are thereby isolated from many of the factors
that impact an operating business.
Certain statements in this report may be forward-looking in nature. These
include references to liquidity, subordinated dividends, earnings and
anticipated earnings from growth in same store sales and new restaurant
openings. Actual results may differ materially from those expressed or implied
in these forward-looking statements. The forward-looking statements are based
on assumptions that management considered reasonable at the time they were
prepared. These forward-looking statements are subject to a number of risk
factors, including the ability of A&W Food Services of Canada Inc. to
implement its marketing strategies, the opening of new A&W restaurants,
general economic and business conditions, financial and political instability,
and other factors disclosed previously and from time to time in the Fund's
public filings.
Additional information relating to the Fund is on SEDAR at www.sedar.com
and on the Fund's website at www.awincomefund.ca.A&W Revenue Royalties Income Fund
Balance Sheets
As at December 31, 2006 and 2005
-------------------------------------------------------------------------
(in thousands of dollars)
2006 2005
$ $
Assets
Current assets
Cash 2 -
Due from A&W Trade Marks Inc. (note 6) 847 761
------------------
849 761
Investment in A&W Trade Marks Inc. (note 3) 77,110 75,735
------------------
77,959 76,496
------------------
------------------
Liabilities
Current liabilities
Distribution payable to Unitholders (note 4) 834 751
Due to A&W Trade Marks Inc. (note 6) 36 31
------------------
870 782
------------------
Unitholders' Equity
Capital contributions 77,115 77,115
Accumulated earnings 44,454 33,446
Accumulated distributions (note 4) (44,480) (34,847)
------------------
77,089 75,714
------------------
77,959 76,496
------------------
------------------
Subsequent event (note 7)
Approved by the Trustees
"signed" "signed"
--------------------------- Trustee --------------------------- Trustee
See accompanying notes to these financial statements.
A&W Revenue Royalties Income Fund
Statements of Earnings and Accumulated Earnings
For the years ended December 31, 2006 and 2005
-------------------------------------------------------------------------
(in thousands of dollars, except per Unit amounts)
2006 2005
$ $
Interest income 8,966 8,965
Equity in earnings of A&W Trade Marks Inc. 752 479
Dilution gain (note 3) 1,290 -
------------------
Net earnings for the year 11,008 9,444
Accumulated earnings - Beginning of year 33,446 24,002
------------------
Accumulated earnings - End of year 44,454 33,446
------------------
------------------
Basic and diluted earnings per Trust Unit
(8,340,000 Units; 2005 - 8,340,000 Units) 1.320 1.132
------------------
------------------
See accompanying notes to these financial statements.
A&W Revenue Royalties Income Fund
Statements of Cash Flows
For the years ended December 31, 2006 and 2005
-------------------------------------------------------------------------
(in thousands of dollars)
2006 2005
$ $
Cash flows from operating activities
Net earnings for the year 11,008 9,444
Items not affecting cash
Equity in earnings of A&W Trade Marks Inc. (752) (479)
Dilution gain (1,290) -
------------------
8,966 8,965
Net changes in non-cash working capital 5 (2)
------------------
8,971 8,963
Cash flows from investing activities
Dividends received from A&W Trade Marks Inc. 581 42
Cash flows from financing activities
Distributions paid to Unitholders (note 4) (9,550) (9,007)
------------------
Increase (decrease) in cash for the year 2 (2)
Cash - Beginning of year - 2
------------------
Cash - End of year 2 -
------------------
------------------
Supplementary cash flow information
Interest received 8,966 8,963
------------------
------------------
See accompanying notes to these financial statements.
A&W Revenue Royalties Income Fund
Notes to Financial Statements
December 31, 2006 and 2005
-------------------------------------------------------------------------
(figures in tables are expressed in thousands of dollars,
except per Unit amounts)
1 Organization and nature of business
A&W Revenue Royalties Income Fund (the Fund) is a limited purpose
trust established with an unlimited number of Trust Units (Units)
under the laws of the Province of British Columbia pursuant to the
Declaration of Trust on December 18, 2001. The Fund was established
to invest in A&W Trade Marks Inc. (Trade Marks), which owns the A&W
trade-marks used in the A&W quick service restaurant business in
Canada.
The business of Trade Marks is the ownership of the A&W trade-marks
and, through the Licence and Royalty Agreement with A&W Food Services
of Canada Inc. (Food Services), exploitation of the A&W trade-marks
including the development of new A&W restaurants by Food Services,
and the collection of the royalty payable under the Licence and
Royalty Agreement. Food Services is a leading franchisor of hamburger
quick service restaurants in Canada.
2 Significant accounting policies
Basis of presentation
The Fund prepares its financial statements in accordance with
Canadian generally accepted accounting principles.
Basis of consolidation
Effective January 1, 2005, the Fund and its related entities adopted
the new Canadian Institute of Chartered Accountants' (CICA)
Accounting Guideline (AcG-15), "Consolidation of Variable Interest
Entities".
AcG-15 expanded upon existing accounting guidance in CICA Handbook
Section 1590 that addresses when an enterprise should consolidate
another entity in its financial statements. Under existing CICA 1590,
an enterprise generally consolidates another entity when it controls
the entity through a majority voting interest. AcG-15 clarified this
guidance when the entity being consolidated is a "Variable Interest
Entity" (VIE) which is defined to be an entity that, by design, does
not have sufficient equity at risk to finance its activities without
additional subordinated financial support. If the entity being
consolidated is a VIE, under AcG-15, the "primary beneficiary" of
that entity should consolidate the VIE and not necessarily the
shareholder with the majority voting interest.
The Fund determined that Trade Marks is a VIE, and that Food Services
is the primary beneficiary. As a result, effective January 1, 2005,
the Fund no longer consolidates Trade Marks but instead accounts for
its investment in Trade Marks using the equity method. Food Services
consolidates Trade Marks based on this same guideline.
Income taxes
The Fund is a unit trust for income tax purposes. As such, the Fund
is only taxable on any taxable income not allocated to the
Unitholders. During 2006 and 2005, all taxable income of the Fund has
been allocated to the Unitholders. Income tax obligations relating to
distributions from the Fund are the obligations of the Unitholders.
On October 31, 2006, the Federal Department of Finance proposed
modifications to income tax rules for income trusts that would result
in the Fund becoming taxable beginning in the year 2011. If these
changes are enacted as proposed, cash available for distributions to
Unitholders will be reduced beginning in 2011 by the amount of income
tax paid or payable by the Fund.
Earnings per Unit
The Fund's earnings per Unit are based on the weighted average number
of Units outstanding during the period. Diluted earnings per Unit are
calculated to reflect the dilutive effect, if any, of Food Services
exercising its right to exchange its Class A and Class B and common
shares of Trade Marks into Units of the Fund at the beginning of the
period.
Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain amounts reported in the
financial statements and accompanying notes. Accordingly, actual
amounts could differ from those estimates.
Financial instruments
The Fund's financial instruments consist of cash, due from Trade
Marks, investment in Trade Marks, distribution payable to
Unitholders, and due to Trade Marks. Unless otherwise noted, it is
management's opinion that the Fund is not exposed to significant
interest or credit risks arising from these financial instruments.
Management estimates that the fair values of these financial
instruments, except for the investment in Trade Marks, approximate
their carrying values. It is not practicable to determine the fair
value of the investment in Trade Marks given the many terms and
conditions that would influence such a determination.
3 Investment in A&W Trade Marks Inc.
The Fund's investment in Trade Marks is as follows:
2006 2005
$ $
Common shares 1 1
A&W notes receivable 83,399 83,399
Cumulative equity in loss (6,787) (7,539)
Cumulative dividends (793) (126)
Dilution gain 1,290 -
------------------
77,110 75,735
------------------
------------------
The Fund's 62.1% (2005 - 66.3%) investment in the common shares of
Trade Marks is recorded using the equity method. Trade Marks owns the
A&W trade-marks used in the A&W quick service restaurant business in
Canada. Concurrent with the purchase of the A&W trade-marks, Trade
Marks granted Food Services a licence to use the A&W trade-marks in
Canada for a term of 99 years, for which Food Services pays Trade
Marks a royalty of three per cent of the sales reported to Food
Services by A&W restaurants in the Royalty Pool. The Royalty Pool is
adjusted in January of each year (except in 2006 when the Royalty
Pool was adjusted on January 5, 2006 and December 31, 2006, and 2007
in which there is no adjustment) to include new restaurants, less any
restaurants that permanently closed. Trade Marks pays Food Services
for the additional royalty stream from the net new restaurants by
issuing additional common shares and Class B preferred shares. As a
result, the Fund's equity interest in Trade Marks is diluted as
annual adjustments to the Royalty Pool take place. In accordance with
Canadian generally accepted accounting principles, a dilution gain
was recognized in 2006 due to the value ascribed to the common shares
issued by Trade Marks to Food Services on December 31, 2006.
The issued and outstanding common shares of Trade Marks are as
follows:
The Fund Food Services Total
------------------ ------------------ -----------
Number Number Number
of shares % of shares % of shares
February 15, 2002 8,340,000 75.0 2,780,000 25.0 11,120,000
January 5, 2003
adjustment - (2.9) 452,469 2.9 452,469
January 5, 2004
adjustment - (3.0) 495,681 3.0 495,681
January 5, 2005
adjustment - (2.8) 511,337 2.8 511,337
January 5, 2006
adjustment - (2.8) 558,993 2.8 558,993
December 31, 2006
adjustment - (1.4) 299,413 1.4 299,413
-------------------------------------------------
8,340,000 62.1 5,097,893 37.9 13,437,893
-------------------------------------------------
-------------------------------------------------
The A&W notes, issued by Trade Marks, amount to $83,399,000, bear
interest at 10.75% per annum and mature on February 15, 2034.
Interest only payments are receivable monthly in arrears.
The A&W notes are unsecured debt obligations of Trade Marks and are
subordinated to all other indebtedness and liabilities of Trade
Marks.
Trade Marks has a demand operating loan facility of $2,000,000 to
fund working capital requirements and for general corporate purposes.
The operating loan bears interest at the bank prime rate plus 0.5%
and is repayable on demand. As at December 31, 2006, the full amount
of the facility was available.
Trade Marks has a term loan in the amount of $10,000,000. The term
loan is repayable on March 15, 2008 and bears interest at bank prime
rate plus between 0% and 0.5% depending on specified financial
ratios. An interest rate swap effective February 16, 2005 and
maturing February 18, 2008 fixes the interest rate on the term loan
at 5.81% per annum. Interest only is payable monthly, provided that
trailing earnings before interest, taxes, depreciation and
amortization (EBITDA) at any time are not less than $10,000,000. In
the event that EBITDA is less than $10,000,000, the term loan will be
fully amortized over the remaining term and repayment will be by way
of blended monthly instalments of principal and interest.
A general security agreement over the assets of Trade Marks has been
provided as security for Trade Marks' demand operating loan facility
and term loan.
4 Distributions
During the year ended December 31, 2006, the Fund declared
distributions to its Unitholders of $9,633,000 or $1.155 per Unit.
The record dates and amounts of these distributions are as follows:
Amount Per Unit
$ $
Year ended December 31, 2006
February 15 776 0.093
March 15 776 0.093
April 15 776 0.093
May 15 792 0.095
June 15 792 0.095
July 15 792 0.095
August 15 809 0.097
September 15 809 0.097
October 15 809 0.097
November 15 834 0.100
December 15 834 0.100
December 29 834 0.100
------------------
9,633 1.155
--------
--------
Accumulated distributions - Beginning of year 34,847
--------
Accumulated distributions - End of year 44,480
--------
--------
During December 2006, the Fund declared a distribution of $834,000
(2005 - $750,600) to Unitholders of record on December 29, 2006,
which was paid subsequent to year-end and is reported as a current
liability at December 31, 2006.
5 Trust Units
The Declaration of Trust provides that an unlimited number of Units
may be issued. Each Unit is transferable and represents an equal
undivided beneficial interest in any distributions of the Fund and in
the net assets of the Fund. All Units have equal rights and
privileges. Each Unit entitles the holder thereof to participate
equally in allocations and distributions and to one vote at all
meetings of Unitholders for each whole Unit held. The Units issued
are not subject to future calls or assessments.
Units are redeemable at any time at the option of the holder at
amounts related to market prices at the time, subject to a maximum of
$50,000 in cash redemptions by the Fund in any one month. The
limitation may be waived at the discretion of the Trustees of the
Fund. Redemption in excess of these amounts, assuming no waiving of
the limitation, shall be paid by way of distribution in specie of a
pro rata number of securities of Trade Marks held by the Fund. On
February 15, 2002, the Fund issued 8,340,000 Units at $10 per Unit
pursuant to a public underwriting.
As at December 31, 2006, 8,340,000 (2005 - 8,340,000) Units are
outstanding.
The Class A and Class B preferred shares of Trade Marks may be
redeemed at the option of Food Services into A&W notes of Trade Marks
on the basis of $10 principal amount of A&W notes for one Class A or
Class B preferred share, and, in turn, one common share of Trade
Marks and a $10 A&W note are exchangeable for a Unit in the Fund.
6 Related party transactions and balances
During the year ended December 31, 2006, interest income of
$8,966,000 (2005 - $8,965,000) was earned from Trade Marks on the A&W
notes receivable, of which $761,000 is receivable at December 31,
2006 (2005 - $761,000). During the year ended December 31, 2006,
dividend income of $667,000 (2005 - $42,000) was earned from Trade
Marks, of which $86,000 is receivable at December 31, 2006.
The Fund has entered into an administration agreement with Trade
Marks whereby Trade Marks, at its expense, provides or arranges for
the provision of services required in the administration of the Fund.
Amounts due from and to Trade Marks are without interest and due on
demand.
7 Subsequent event
On February 6, 2007, the Fund declared a distribution to Unitholders
of $0.10 per Unit or $834,000, payable on February 28, 2007 to
Unitholders of record as at February 15, 2007. On February 6, 2007,
the Fund also declared a Special Distribution to Unitholders of $0.08
per Unit or $667,000, payable on February 28, 2007 to Unitholders of
record as at February 15, 2007.
A&W Trade Marks Inc.
Balance Sheets
As at December 31, 2006 and 2005
-------------------------------------------------------------------------
(in thousands of dollars)
2006 2005
$ $
Assets
Current assets
Cash and cash equivalents 3,368 1,624
Accounts receivable (note 8) 1,547 1,351
Corporate taxes recoverable 65 18
Prepaid interest 90 48
------------------
5,070 3,041
Intangible assets (note 2) 149,459 137,271
Deferred financing fees 23 41
------------------
154,552 140,353
------------------
------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 8) 931 934
Dividends payable (notes 6 and 7) 567 -
------------------
1,498 934
Term loan (note 3) 10,000 10,000
Future income taxes (note 4) 11,157 9,483
A&W notes payable (note 5) 83,399 83,399
Class A and B preferred shares (note 6) 54,790 44,675
------------------
160,844 148,491
------------------
Shareholders' Deficiency
Common shares (notes 6 and 7) 1,714 1
Deficit (8,006) (8,139)
------------------
(6,292) (8,138)
------------------
154,552 140,353
------------------
------------------
Subsequent events (note 10)
Approved by the Board of Directors
"signed" "signed"
-------------------------- Director -------------------------- Director
See accompanying notes to the financial statements.
A&W Trade Marks Inc.
Statements of Earnings and Deficit
For the years ended December 31, 2006 and 2005
-------------------------------------------------------------------------
(in thousands of dollars)
2006 2005
$ $
Gross sales reported by A&W restaurants
in the Royalty Pool 598,551 538,703
------------------
------------------
Royalty income 17,957 16,161
------------------
Expenses
General and administrative 462 421
Amortization of deferred financing fees 18 18
Interest expense
Term loan and other (note 11) 495 576
A&W notes payable 8,966 8,965
Class A and B preferred share dividends 5,158 4,557
------------------
15,099 14,537
------------------
Earnings before income taxes 2,858 1,624
------------------
Provision for income taxes (note 4)
Large corporations tax - 156
Future income taxes 1,674 745
------------------
1,674 901
------------------
Net earnings for the year 1,184 723
Deficit - Beginning of year (8,139) (8,799)
Dividends declared (1,051) (63)
------------------
Deficit - End of year (8,006) (8,139)
------------------
------------------
See accompanying notes to the financial statements.
A&W Trade Marks Inc.
Statements of Cash Flows
For the years ended December 31, 2006 and 2005
-------------------------------------------------------------------------
(in thousands of dollars)
2006 2005
$ $
Cash flows from operating activities
Net earnings for the year 1,184 723
Items not affecting cash
Amortization of deferred financing fees 18 18
Provision for future income taxes 1,674 745
Change in accrued dividends (360) 25
------------------
2,516 1,511
Changes in non-cash working capital 142 (227)
------------------
2,658 1,284
Cash flows from financing activities
Dividends paid on common shares (914) (63)
------------------
Increase in cash and cash equivalents 1,744 1,221
Cash and cash equivalents - Beginning of year 1,624 403
------------------
Cash and cash equivalents - End of year 3,368 1,624
------------------
------------------
Supplementary cash flow information
Interest paid on term loan and A&W notes payable (9,495) (9,561)
------------------
------------------
Dividends paid on Class A and B preferred shares (5,088) (4,922)
------------------
------------------
Taxes paid (47) (92)
------------------
------------------
Non-cash financing activities
Issuance of Class B preferred and common shares 12,188 6,197
------------------
------------------
See accompanying notes to the financial statements.
A&W Trade Marks Inc.
Notes to Financial Statements
December 31, 2006 and 2005
-------------------------------------------------------------------------
(figures in tables are expressed in thousands of dollars)
1 Nature of operations and significant accounting policies
Nature of operations
The business of A&W Trade Marks Inc. (the company or Trade Marks) is
the ownership of the A&W trade-marks and, through a Licence and
Royalty Agreement with A&W Food Services of Canada Inc. (Food
Services), the exploitation of the A&W trade-marks including the
development of new A&W restaurants by Food Services, and the
collection of the royalty payable under the Licence and Royalty
Agreement. Food Services is a leading franchisor of hamburger quick
service restaurants in Canada.
The common shares of Trade Marks are owned by A&W Revenue Royalties
Income Fund (the Fund) (62.1%) and Food Services (37.9%) (note 7).
Basis of presentation
Trade Marks prepares its financial statements in accordance with
Canadian generally accepted accounting principles.
Basis of consolidation
Effective January 1, 2005, the Fund and its related entities adopted
the new Canadian Institute of Chartered Accountants' (CICA)
Accounting Guideline (AcG-15), "Consolidation of Variable Interest
Entities".
AcG-15 expanded upon existing accounting guidance in CICA Handbook
Section 1590 that addresses when an enterprise should consolidate
another entity in its financial statements. Under existing CICA 1590,
an enterprise generally consolidates another entity when it controls
the entity through a majority voting interest. AcG-15 clarified this
guidance when the entity being consolidated is a "Variable Interest
Entity" (VIE) which is defined to be an entity that, by design, does
not have sufficient equity at risk to finance its activities without
additional subordinated financial support. If the entity being
consolidated is a VIE, under AcG-15, the "primary beneficiary" of
that entity should consolidate the VIE and not necessarily the
shareholder with the majority voting interest.
The Fund determined that Trade Marks is a VIE, and that Food Services
is the primary beneficiary. As a result, effective January 1, 2005,
the Fund accounts for its investment in Trade Marks using the equity
method, and Food Services consolidates Trade Marks. These
non-consolidated financial statements of Trade Marks are presented
for information purposes to the Unitholders of the Fund.
Revenue recognition
Revenue comprises royalty income equal to three per cent of reported
sales from specific A&W restaurants in Canada (the Royalty Pool) and
is recognized on an accrual basis.
Intangible assets
Intangible assets, which have an indefinite life, comprise the A&W
trade-marks and are recorded at cost. Management reviews the carrying
value of the intangible assets at least annually for impairment. An
impairment loss is recorded if the carrying value of the intangible
assets exceeds their fair value, which is determined using forecast
future cash flows.
Deferred financing fees
Fees incurred in obtaining third party debt financing are deferred
and amortized on a straight-line basis over the term of the debt.
Income taxes
Income taxes are calculated using the asset and liability method of
tax accounting. Under this method, future income tax assets and
liabilities are recognized for temporary differences between the tax
basis of an asset or liability and its carrying amount on the balance
sheet. Future income tax assets and liabilities are calculated using
the substantively enacted tax rates anticipated to apply in the
periods that the temporary differences are expected to reverse.
Future income tax assets and liabilities are adjusted for the effect
of changes in tax laws and rates on the date of enactment or
substantive enactment.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, balances with
banks, and short-term investments with a maturity of three months or
less.
Hedging instruments
The company uses interest rate swap agreements to manage risks from
fluctuations in interest rates. All such instruments are used only
for risk management purposes. When the arrangement qualifies for
hedge accounting, the net receipts or payments arising from financial
instruments relating to the management of interest rate risks are
recognized in interest expense over the term of the instrument.
Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
2 Intangible assets
On February 15, 2002, Trade Marks acquired the A&W trade-marks used
in the A&W quick service restaurant business in Canada for
$152,676,000, of which $84,876,000 was paid in cash, and $27,800,000
was paid by the issuance of 2,779,975 Class A preferred shares and
2,780,000 common shares of Trade Marks. The balance of the purchase
price (the Balance) of $40,000,000 is due, without interest, on
January 31, 2010.
Concurrent with the purchase of the A&W trade-marks, Trade Marks
granted Food Services a licence to use the A&W trade-marks in Canada
for a term of 99 years, for which Food Services pays Trade Marks a
royalty of three per cent of the sales reported to Food Services by
A&W restaurants in the Royalty Pool (the Licence and Royalty
Agreement).
The Royalty Pool is adjusted in January of each year (except 2006
when the Royalty Pool was adjusted on January 5, 2006 and
December 31, 2006, and 2007 in which there is no adjustment) to
reflect sales from new A&W restaurants, net of the sales of any A&W
restaurants that have permanently closed. The Balance of the purchase
price will be reduced by all amounts Trade Marks is required to pay
Food Services in respect of these annual adjustments to the Royalty
Pool up to January 31, 2010. If the total annual adjustments are less
than the Balance, the obligation of Trade Marks to pay the remaining
Balance of the purchase price is extinguished. Accordingly, for
accounting purposes, the Balance is being recognized in the periods
such adjustments become payable. The annual adjustments to the
Royalty Pool are as follows:
New Closed Royalty
restaurants restaurants Pool
Initial
consideration
Cash 585 - 585
Shares - - -
Future income
taxes - - -
--------------------------------------
585 - 585
January 5, 2003
adjustment 27 (8) 19
January 5, 2004
adjustment 28 (12) 16
January 5, 2005
adjustment 27 (9) 18
January 5, 2006
adjustment 27 (11) 16
December 31, 2006
adjustment 19 (13) 6
--------------------------------------
713 (53) 660
--------------------------------------
--------------------------------------
Share consideration
--------------------------------------
Common Class A Class B Amount
shares shares shares $
Initial
consideration
Cash - - - 84,876
Shares 2,780,000 2,779,975 - 27,800
Future income
taxes - - - 8,080
---------------------------------------------------
2,780,000 2,779,975 - 120,756
January 5, 2003
adjustment 452,469 - 452,469 5,108
January 5, 2004
adjustment 495,681 - 495,681 5,210
January 5, 2005
adjustment 511,337 - 511,337 6,197
January 5, 2006
adjustment 558,993 - 558,993 6,915
December 31, 2006
adjustment 299,413 - 299,413 5,273
---------------------------------------------------
5,097,893 2,779,975 2,317,893 149,459
---------------------------------------------------
---------------------------------------------------
The issuance of the shares subsequent to the acquisition comprises
the payments of the Balance of the purchase price of the A&W
trade-marks and is recorded as an additional cost of the A&W
trade-marks.
On January 5, 2006, the number of A&W restaurants for which royalties
are paid to Trade Marks was increased by 27 new restaurants, less 11
restaurants that permanently closed during 2005. The consideration
Trade Marks provided to Food Services for the additional net 16
restaurants added to the Royalty Pool consisted of shares of Trade
Marks, based upon a formula set out in the Licence and Royalty
Agreement. The formula is based on the sales from the net new
restaurants and the current yield on the Units of the Fund,
discounted by 7.5%. The consideration provided by Trade Marks to Food
Services for this additional royalty stream was $6,915,000, by the
issuance of 558,993 Class B preferred shares valued at $6,915,000 and
558,993 common shares which were given a nominal value.
On December 31, 2006, the number of A&W restaurants for which
royalties are paid to the company was increased by 19 new restaurants
less 13 restaurants that permanently closed during 2006. The company
paid Food Services $5,273,000, by issuance of 299,413 Class B
preferred shares valued at $3,560,000 and 299,413 common shares
valued at $1,713,000, as initial consideration for the estimated
royalty stream from the 6 net restaurants added to the Royalty Pool.
A final adjustment to the share consideration will be made in
December 2007 based upon the actual annual sales reported by the new
restaurants. Until then, 20% of the shares will be held in escrow.
The shares issued on January 5, 2006 and December 31, 2006 comprise
the fourth and fifth payments of the Balance of the purchase price on
the acquisition of the A&W trade-marks and were recorded as an
additional cost of the A&W trade-marks.
3 Term loan and operating bank line of credit
Trade Marks has a demand operating loan facility of $2,000,000 to
fund working capital requirements and for general corporate purposes.
The operating loan bears interest at the bank prime rate plus 0.5%
and is repayable on demand. As at December 31, 2006, the full amount
of the facility was available.
Trade Marks has a term loan in the amount of $10,000,000. The term
loan is repayable on March 15, 2008 and bears interest at bank prime
rate plus between 0% and 0.5% depending on specified financial
ratios. Interest only is payable monthly, provided that trailing
earnings before interest, taxes, depreciation and amortization
(EBITDA) at any time are not less than $10,000,000. In the event that
EBITDA is less than $10,000,000, the term loan will be fully
amortized over the remaining term and repayment will be by way of
blended monthly instalments of principal and interest.
An interest rate swap effective February 16, 2005 and maturing
February 18, 2008 fixes the interest rate on the term loan at 5.81%
per annum.
A general security agreement over the assets of Trade Marks has been
provided as security for the demand operating loan facility and term
loan.
4 Income taxes
a) The provision for income taxes included in the statements of
earnings is as follows:
2006 2005
$ $
Large corporations tax - 156
Future income taxes
Non-current 1,674 745
------------------
1,674 901
------------------
------------------
b) The provision for income taxes shown in the statements of
earnings differs from the amount obtained by applying statutory
tax rates to the earnings before income taxes for the following
reasons:
2006 2005
Statutory combined federal and provincial
income tax rates on investment income 21.12% 21.12%
------------------
------------------
$ $
Provision for income taxes based on
statutory income tax rates 604 343
Large corporations tax - 156
Share dividends not deductible 1,089 963
Rate change on future income taxes (19) (561)
------------------
Provision for income taxes 1,674 901
------------------
------------------
c) Future income taxes comprise the following:
2006 2005
$ $
Long-term assets
Share issue costs - 320
Non-capital losses 2,440 2,758
------------------
2,440 3,078
Long-term liability
Intangible assets (13,597) (12,561)
------------------
(11,157) (9,483)
------------------
------------------
At December 31, 2006, the company has non-capital losses available to
carry forward of approximately $11,547,000 (2005 - $13,057,000). Of
these losses, $4,007,000 expire in 2009, $4,157,000 in 2010,
$2,700,000 in 2014, and $683,000 in 2015.
5 A&W notes payable
The A&W notes, held by the Fund, amount to $83,399,000, bear interest
at 10.75% per annum and mature on February 15, 2034. Interest only is
payable monthly in arrears.
The A&W notes are unsecured debt obligations of Trade Marks and are
subordinated to all other indebtedness and liabilities of Trade
Marks.
6 Class A and B preferred shares
Authorized
Unlimited number of Class A exchangeable preferred shares
Unlimited number of Class B exchangeable preferred shares
Issued
The preferred shares are owned by Food Services and comprise:
2006 2005
-------------------- --------------------
Number of Amount Number of Amount
shares $ shares $
Class A shares - at cost 2,779,975 27,800 2,779,975 27,800
-----------------------------------------
Class B shares - at cost
January 5, 2003
adjustment 452,469 5,108 452,469 5,108
January 5, 2004
adjustment 495,681 5,210 495,681 5,210
January 5, 2005
adjustment 511,337 6,197 511,337 6,197
January 5, 2006
adjustment 558,993 6,915 - -
December 31, 2006
adjustment 299,413 3,560 - -
-----------------------------------------
2,317,893 26,990 1,459,487 16,515
-----------------------------------------
Accrued dividends - - - 360
-----------------------------------------
5,097,868 54,790 4,239,462 44,675
-----------------------------------------
-----------------------------------------
On January 5, 2006, Trade Marks issued 558,993 (2005 - 511,337)
Class B preferred shares valued at $6,915,000 and 558,993 common
shares which were given a nominal value, as consideration of
$6,915,000 (2005 - $6,197,000) for the royalty stream from the
16 (2005 - 18) net restaurants added to the Royalty Pool (note 2).
On December 31, 2006, Trade Marks issued 299,413 Class B preferred
shares valued at $3,560,000 and 299,413 common shares valued at
$1,713,000 as consideration of $5,273,000 for the royalty stream from
the six net restaurants added to the Royalty Pool on December 31,
2006 (note 2).
The Class A and Class B shares entitle Food Services to a fixed
cumulative preferential cash dividend at a rate of $1.075 per share
per annum. The Class A and Class B shares may be redeemed at the
option of Food Services into A&W notes of Trade Marks on the basis of
$10 principal amount of A&W notes for one Class A or Class B share,
and, in turn, one common share of Trade Marks and a $10 A&W note are
exchangeable for a Unit in the Fund. Accordingly, the Class A and
Class B shares are classified as liabilities of Trade Marks and the
cumulative dividends are classified as interest expense in the
statements of earnings.
During the year, Trade Marks declared dividends on Class A and B
preferred shares of $5,518,000, of which $360,000 was in respect of
2005 and $5,158,000 or $1.075 per share was in respect of 2006. The
December 2006 dividend of $430,000 was declared on December 18, 2006
and paid on January 31, 2007 and is reported as a current liability
at December 31, 2006.
7 Common shares
Authorized
Unlimited number of common shares
Issued
The common shares are owned by the Fund and Food Services:
The Fund Food Services Total
------------------ ------------------ ------------------
Number Number Number Amount
of shares % of shares % of shares $
February
15, 2002 8,340,000 75.0 2,780,000 25.0 11,120,000 1
January 5,
2003 adjustment - (2.9) 452,469 2.9 452,469 -
January 5,
2004 adjustment - (3.0) 495,681 3.0 495,681 -
January 5,
2005 adjustment - (2.8) 511,337 2.8 511,337 -
January 5,
2006 adjustment - (2.8) 558,993 2.8 558,993 -
December 31,
2006 adjustment - (1.4) 299,413 1.4 299,413 1,713
--------------------------------------------------------
8,340,000 62.1 5,097,893 37.9 13,437,893 1,714
--------------------------------------------------------
--------------------------------------------------------
During the year, Trade Marks declared dividends on its common shares
of $1,051,000 or $0.08 per share. The December 2006 dividend on
common shares of $137,000 was declared on December 18, 2006 and paid
on January 31, 2007 and is reported as a current liability of Trade
Marks at December 31, 2006.
8 Related party transactions and balances
During the year ended December 31, 2006, royalty income of
$17,957,000 (2005 - $16,161,000) was earned from Food Services, of
which $1,499,000 (2005 - $1,316,000) is receivable at December 31,
2006.
Trade Marks has entered into an administration agreement with the
Fund whereby Trade Marks, at its expense, provides or arranges for
the provision of services required in the administration of the Fund.
In turn, Trade Marks has arranged for certain of these services to be
provided by Food Services until 2011.
Interest expense on the A&W notes for the year ended December 31,
2006 was $8,966,000 (2005 - $8,965,000), of which $761,000
(2005 - $761,000) is payable to the Fund at December 31, 2006.
Included in accounts receivable is $36,000 (2005 - $31,000) due from
the Fund without interest and on demand.
9 Financial instruments
Fair values
The fair values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities and dividends payable
approximate their carrying values given the short term to maturity of
these instruments.
The fair value of the term loan approximates its carrying value due
to the floating interest rate. The fair value of the interest rate
swap is $20,000 unfavourable.
It is not practicable to determine the fair value of the A&W notes
payable and Class A and B preferred shares given the many terms and
conditions that would influence such a determination.
Credit risk exposure
The company's exposure to credit risk is as indicated by the carrying
amount of its accounts receivable. The majority of accounts
receivable relates to royalties due from Food Services.
Interest rate exposures
All of the company's financial instruments are non-interest bearing
except for the term loan, operating line of credit, the A&W notes
payable and the Class A and B preferred shares, which bear interest
as disclosed in notes 3, 5 and 6 respectively.
10 Subsequent events
On February 6, 2007, Trade Marks declared dividends on Class A and B
preferred shares of $457,000 and a dividend on common shares of
$140,000, payable on February 28, 2007. On February 6, 2007, Trade
Marks also declared an extraordinary dividend on common shares of
$0.08 per share or $1,075,000, payable on February 28, 2007.
11 Term loan and other interest
2006 2005
$ $
Interest expense 581 581
Interest income (86) (5)
------------------
495 576
------------------
------------------
For further information:
For further information: Don Leslie, Chief Financial Officer, (604) 988-2141, email: investorrelations@aw.ca