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we love what we do
and it shows!
SIR Royalty Income Fund 2006 Strategy and Progress Report1
Inspiration
SIR stands for Service Inspired Restaurants® and to us it means
bringing people together, building lasting relationships and setting
a standard for best-in-class. Our employees share in our vision
to be the best and it shows. Our average weekly restaurant sales
are among the highest in the industry.
Agility
Our corporate ownership model provides us with the agility to
rapidly implement enhancements to our restaurants to drive same
store sales growth (“SSSG”). In 2006, we essentially finished
the system-wide evolution of Jack Astor’s® and completed
the evolution of all five Alice Fazooli’s!® restaurants. We also
completed major renovations at reds®. SIR’s Royalty Pooled
Restaurants generated 5.9% SSSG in 2006.
Stability
SIR Royalty Income Fund unitholder distributions are derived from
top line pooled restaurant revenue. In 2006, the Fund increased
its annualized cash distributions by 5% to $1.26 per trust unit
from $1.20 per trust unit, reflecting the strong performance of
restaurants in the Royalty pool. The Fund has paid monthly cash
distributions since its inception in October 2004.
$81,200
Average weekly sales per restaurant
5.9%
Same Store Sales Growth
$1.26
Annualized Cash Distribution per
Fund Unit
1
Building our brands
At SIR Corp. (“SIR”) we are passionate about what we do and it
shows. We thrive on creating, developing, and operating best-in-class
restaurants. This means we focus on hiring the best people, serving
the best food, and creating the best atmosphere at every one of our
restaurants. Everyone associated with our company lives and breathes
these values, and this commitment is reflected in the high standards and
attention to detail evident at all of our restaurants.
Building our brands is an ongoing process that is dependent on
our ability to continuously adapt and evolve, while maintaining our core
focus on being the best at what we do.
Our corporate restaurant ownership model gives us the agility to
continually build and strengthen our brands, while making sure our
restaurants keep pace with our guests’ preferences. We adapt more
quickly because we don’t have to convince restaurant franchisees of the
merits of restaurant enhancement initiatives, we just act when the time is
right. Some of our recent initiatives include the successful system-wide
evolutions of our Jack Astor’s® and Alice Fazooli’s!® Concept Restaurants,
and renovations at our Far Niente® and reds® Signature Restaurants
in downtown Toronto. Over the past two years, the renovations of Far
Niente® and reds® have resulted in solid same store sales growth, as
well as earning positive reviews. Toronto.com, Canada’s most popular
local search site, recently listed Far Niente® as one of Toronto’s Top
10 Restaurants.
We are very happy with the results of our Jack Astor’s® evolutions,
which has reinforced its irreverent and fun image, and its rare ability
to draw crowds for lunch and dinner, as well as after work drinks. As
our flagship concept brand, we are confident that Jack Astor’s® is now
well positioned to outperform in its market segment for years to come.
We are also very pleased with our refined Alice Fazooli’s!® concept. We
believe Alice Fazooli’s!® now represents the best, multi-unit, Italianinspired restaurant concept in Canada, in terms of quality, value, and
atmosphere. Our Canyon CreekTM restaurants continue their strong
performance as we work to enhance their position as casual and elegant
destinations that offer guests the many benefits of fine dining, without
the formality.
Great food is an essential part of building great restaurant brands.
We always go the extra mile to ensure our menus offer innovative and
pleasing selections that appeal to the varied tastes of our guests. Some
of our efforts in this area include consulting with leading chefs from
2
across North America and Europe to gather their insights on our menu
selections, and carrying out guest chef programs, where renowned
international chefs visit our restaurants and work with our people to
explore new ideas in food preparation and presentation.
Our multiple restaurant brand diversity offers our customers a variety
of options, ranging from casual to refined, but always inspired. Whether
our guests are looking for the casual, relaxed atmosphere of a Jack
Astor’s® or the fine dining experience of one of our Signature Restaurants,
they can be confident that they will be greeted with exceptional service
and great food, served in a warm, welcoming environment.
As we work to strengthen our brands, we are also elevating our
market exposure. With the growth of Jack Astor’s®, we now have the
scale to increase the scope of our promotional efforts. With this in mind,
we retained TAXI, an internationally recognized advertising firm, as our
agency of record for the past two years. TAXI developed our Jack Astor’s®
branding and launched a promotional radio advertising campaign for the
Greater Toronto Area, which won industry recognition at the prestigious
Canadian Marketing Awards.
We are committed to building lasting relationships with our existing
customers, while continuing to introduce new guests to our multiple
restaurant brands. With the ongoing expansion of our restaurant network, we look forward to broadening our relationships with discerning
Canadian diners. We opened three new Canyon CreekTM restaurants in
Ontario in 2006, and a new Jack Astor’s® in Hamilton, Ontario in March,
2007. We will be developing at least two more Jack Astor’s® in 2007, one
in Dartmouth, Nova Scotia and the other at a prime downtown Toronto
location, overlooking Dundas Square, at the intersection of Yonge and
Dundas streets.
Our passion for what we do is reflected in our restaurant brands
and our name, which stands for Service Inspired Restaurants®. It’s about
bringing people together, building lasting relationships and setting the
standard for best-in-class. Whatever your tastes, casual or refined, if you
enjoy exceptional service and great food, served in a warm, welcoming
environment, we have something for you.
3
4
Gordon Mackie – Executive Chef, Far Niente®
Chef Gordon Mackie’s lifelong love affair with food began at an early age.
Growing up in Grimsby, Ontario, he studied the careers of the world’s star
chefs the way most Canadian kids follow their favourite hockey players.
The son of a caterer, his future was clear by the time he was nine years
old, when he started cooking dinner for his entire family.
Classically trained at George Brown College, Gordon honed his
craft at leading restaurants in Toronto and London, England. It was while
studying under legendary chefs such as Jean-Georges Vongerichten
and Gordon Ramsay, that Chef Mackie developed his personal culinary
philosophy focusing on freshness, creativity and the reinterpretation of
classic ideas.
I love fish
5
6
Far Niente® gives Gordon the opportunity to indulge his culinary dreams,
creating a menu full of what he likes to call, “luxurious comfort food.” In
contrast to many restaurants in Toronto’s business district, Far Niente®
offers an array of unique seafood dishes, ranging from fresh New Zealand
sea bass to decadent lobster pot pie. Gordon believes a menu peppered
with fish and seafood allows him the fullest expression of his culinary
ideals. “I love the lightness and freshness of fish,” he says. “It gives me
great flexibility to create a wide variety of exciting dishes, full of colour
and energetic flavours.”
Cioppino, the dish shown here, is a perfect example of Gordon’s
philosophy. With roots that can be traced to Italy, Cioppino came to
prominence in San Francisco more than a century ago. Originally a
seafood soup made by local fishermen, Cioppino’s name is derived from
the Genoese word ciuppin, meaning “little soup.” Gordon’s version of
Cioppino maintains its traditional ingredients and flavours but gives the
dish a “Far Niente® twist,” turning it into a main course with a filet of
New Zealand sea bass as “the star of the show.”
There is no love
sincerer than the
love of food.
George Bernard Shaw
7
8
Steve Fletcher – Vice President of Development, SIR Corp.
When it comes to designing and building restaurants, Steve Fletcher is
of two minds. Trained as both an engineer and an architect, he struggles
to reconcile the often competing demands of form and function. It is
this dichotomy that makes him the perfect man to lead the ongoing
expansion of SIR’s restaurants.
After starting his career as a mechanical engineer, Steve discovered
his love of architecture while traveling the globe. It was while visiting the
cathedrals and mosques of Europe and Asia that he was first struck by
the powerful impact that could be wrought by an architect’s creative use
of light and space.
I love space
9
10
As SIR’s Vice President of Development, Steve oversaw the successful
renovations at reds® (photo at left) and is currently developing the rollout
plan for SIR’s ongoing restaurant expansion. In this role, Steve draws
on his unique background to act as a mediator between designers
and engineers, decorators and contractors, to ensure each restaurant
incorporates “engineering solutions that don’t compromise design.”
For new Concept Restaurants, Steve is focused on developing
“repeatable prototypes,” in order to maintain predictable costs. This is a
complicated task that involves considering every aspect of a restaurant’s
design – from how to maximize its sales per square foot, to the ergonomic
correctness of the kitchen. But his job doesn’t stop there. Some of SIR’s
restaurants are located in architecturally unique or historical buildings
and Steve’s task is to preserve the unique character of these spaces,
while allowing the restaurant’s brand character to shine through.
Steve’s position at SIR carries a great deal of responsibility but he
wouldn’t have it any other way. He believes in sweating the details and
staying focused on precision and process. Steve’s uncompromising
approach is perfectly suited to SIR’s restaurant expansion program. His
mantra is, “Do it right the first time and everyone wins.” We couldn’t
agree more.
The space within
becomes the
reality of the
building.
Frank Lloyd Wright
11
12
Ann John – General Manager, Jack Astor’s®, Richmond Hill
Ask Ann John the secret to her success and she will answer proudly, “It’s
the people, always the people.” Ann should know. She has been General
Manager of Jack Astor’s® Richmond Hill restaurant since 1993. Over
that time, Ann has developed a remarkable bond with both her staff and
regular guests, all of whom she regards as members of her own family,
“I do everything I can to make sure each guest feels relaxed and welcome
here,” she says.
It’s a relationship that begins on a new hire’s first day, and carries
on as long as they work at Jack Astor’s®. Ann readily admits to acting as
a mother figure to her employees, a sentiment echoed by her staff. It’s
a unique arrangement that clearly works; more than 10 percent of Ann’s
76 staff members have been with her for at least 10 years.
I love people
13
14
Being part of Ann’s Jack Astor’s® family means working hard, having
fun, and taking pride in what you do. She places great importance on
the quality of the people who work for her, actively involving herself in
the interview process and ensuring that she personally conducts each
employee’s initial orientation. Ann believes in empowering her staff, by
making sure they are exceptionally well trained and prepared to excel at
their jobs. Having faith in her employees gives her the freedom she needs
to focus on making sure guests walk away feeling good about their Jack
Astor’s® experience. “I work hard to make my job easier,” Ann says.
To Ann, working at Jack Astor’s® is the same as being in show
business, “The curtain goes up when the first guest arrives, everything
before that is rehearsal,” she says. To pull it all together, Ann’s team
uses an approach that is equal parts pride, teamwork, and attention to
detail. The end result is a restaurant where guests know what to expect:
friendly staff, exceptional service, and first rate food – in a fun, relaxing
environment.
Don’t open a shop
unless you like
to smile.
Chinese proverb
15
In 2006, we opened three new Canyon CreekTM restaurants in prime
Ontario locations including, Vaughan, Scarborough, and at the Fallsview
Casino Resort in Niagara Falls. With our new restaurants in Vaughan and
Scarborough, we continued our successful cluster development strategy,
locating multiple SIR Concept brands in the best GTA locations.
Toronto / Southern Ontario
Jack Astor’s®
Alice Fazooli’s!®
Canyon Creek™
reds®
Loose Moose Tap & Grill®
Newmarket
Armadillo Texas Grill®
Far Niente®
Soul of the Vine®
Brasserie Frisco™
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Vaughan
Richmond Hill
For 2007, we opened a new Jack Astor’s® in Hamilton, Ontario in
March, and have secured two new development sites for Jack Astor’s®;
one in Dartmouth, Nova Scotia and another in downtown Toronto at
the intersection of Yonge and Dundas streets, overlooking “Dundas
Square.”
Outside of the GTA, we are now looking at prime markets across
Canada where we can build our presence and gradually infill these
strategic markets with our Concept brands.
Halifax/
Dartmouth
Ottawa
Montreal
Calgary
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Concept Restaurants
SIR’s Concept Restaurants have multiple locations, reflecting their broad
demographic appeal. SIR concept brands include: Jack Astor’s® Bar and
Grill, with 23 locations in Canada; Alice Fazooli’s!® and Canyon Creek
Chop House®, with five and seven locations, respectively, throughout
southern Ontario. On a segmented basis, Jack Astor’s®, Alice Fazooli’s!®
and Canyon CreekTM contributed 64.3%, 12.5% and 10.9%, respectively,
to Royalty Pooled Revenue in 2006.
64.3%
SIR’s Concept Restaurants
cumulatively generated
87.7%
of Royalty Pooled Revenue
in 2006.
12.5%
18
10.9%
Signature Restaurants
SIR’s Signature Restaurants are one-of-a-kind brands located in prime
downtown Toronto locations and offer a range of consumer choices from
fine dining with award-winning menus, to a very active sports bar. Our
Signature Restaurants comprise the upscale reds®, Far Niente® & Soul
of the Vine®, Brasserie FriscoTM, the casual Armadillo Texas Grill® and the
Loose Moose Tap & Grill®.
SIR’s Signature Restaurants
cumulatively generated
12.3%
of Royalty Pooled Revenue
in 2006.
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President’s Letter
Since completing our Initial Public Offering (“IPO”) in October 2004, we have been
investing in our Royalty Pooled Restaurants to strengthen our brands and drive
same store sales growth (“SSSG”). We have also been expanding our network
of Concept Restaurants to increase the number of restaurants that contribute to
the Royalty pool. These initiatives are aimed at generating stable and growing
distribution income for our unitholders.
We essentially completed the multi-year evolution of Jack Astor’s®, finished
our Alice Fazooli’s!® renovation program and a makeover of reds®. The average
sales performance of the two Jack Astor’s® added to the Royalty pool, effective
January 1, 2006, was significantly higher than the Jack Astor’s® system average
for the prior year. We also added three new Canyon CreekTM restaurants to the
Royalty pool, effective January 1, 2007. System-wide SSSG was 5.9% in 2006
and unitholder distributions were increased 5.0% during the year.
Our Jack Astor’s® evolution program is a prime example of investing in our
existing Royalty Pooled Restaurants to drive SSSG. With three additional Jack
Astor’s® evolutions completed in 2006, we have now evolved 19 of the 20 Jack
Astor’s® that were part of the Royalty pool at the time of our IPO. Jack Astor’s®
generated 5.5% SSSG in 2006.
We also completed renovations and menu enhancements at two Alice
Fazooli’s!® in 2006 and have now completed the system-wide evolution of this
concept brand. Alice Fazooli’s!® generated SSSG of 8.3% in 2006. Our renovation
at reds® during the third quarter, contributed to the Signature Restaurants’ 8.1%
SSSG in the fourth quarter of 2006 and SSSG of 4.2% for the year.
Our multiple brand diversity provides us a distinct competitive advantage
in executing our expansion strategy, as it allows us to successfully operate
multiple SIR brands in close proximity to one another in the best markets, without
cannibalizing sales. Single concept restaurant operators typically can only have
one restaurant in any given location. This ability to “cluster develop” our Concept
Restaurants has been a key to our successful expansion throughout the Greater
Toronto Area (“GTA”). Outside of the GTA, we are now looking at prime markets
across Canada where we can build our presence and gradually infill these strategic
markets with our Concept brands.
20
Canyon CreekTM was the focus of our expansion efforts in 2006, as we opened
three new Canyon CreekTM restaurants in prime locations including Vaughan,
Scarborough, and the Fallsview Casino Resort in Niagara Falls, Ontario. With our
new Canyon CreekTM restaurants in Vaughan and Scarborough, we continued our
successful cluster development strategy, locating multiple SIR Concept brands in
the best GTA locations. In Vaughan, our new Canyon CreekTM is in close proximity
to our existing Jack Astor’s® and Alice Fazooli’s!®, while in Scarborough, our
new Canyon CreekTM is near our existing Jack Astor’s® at the Scarborough Town
Centre.
For 2007, we opened a new Jack Astor’s® in Hamilton, Ontario in March, and
have secured two new development sites for Jack Astor’s®; one in Dartmouth,
Nova Scotia and another in downtown Toronto at the intersection of Yonge and
Dundas streets, overlooking “Dundas Square.” We expect to add the Hamilton and
Dartmouth locations to the Royalty pool in January, 2008, provided the Dartmouth
location is in operation 60 days prior to calendar year end. We continue to look
for additional strategic locations for our restaurant expansion program. Our longterm goal is to have 68 Royalty Pooled Restaurants by the end of 2010.
With our unique corporate ownership model and multiple brand diversity, and
through extensive investments in our existing Royalty Pooled Restaurants, we
believe we have created a strong foundation from which to continue building our
market presence. In carrying out our future expansion plans, we will maintain our
disciplined approach in terms of site selection and ensuring we have the strongest
possible platform to build upon. We believe this consistent approach will result in
stable and sustainable growth, which in turn will drive long-term value creation for
Fund unitholders.
Our vision is to be the best, and this guides our operating philosophy and
strategy every day. We believe we are creating a unique Canadian restaurant
company with distinct competitive strengths including a solid corporate ownership
structure, multiple industry-leading brands, and a committed management team
with dedicated employees who are inspired by quality, creativity and exceptional
service.
Looking ahead, we are confident that our operating strategy is closely aligned
with market opportunities and the best interests of our unitholders. Thank you for
your interest in the SIR Royalty Income Fund and the dynamic and distinct brands
that comprise Service Inspired Restaurants®.
Sincerely,
Peter Fowler
President & Chief Executive Officer, SIR Corp.
21
Chairman’s Letter
On behalf of the Trustees of the SIR Royalty Income Fund (the “Fund”), I am
pleased to present our 2006 annual report.
The two key factors that contribute to increasing the Fund’s distributable
cash are same store sales growth (“SSSG”) of Royalty Pooled Restaurants and
expanding the number of restaurants in the Royalty pool. In 2006, SIR delivered
on both fronts, adding two new Jack Astor’s® to the Royalty pool effective
January 1, 2006, and delivering SSSG of 5.9% compared to 2005.
With SIR’s success in investing in its existing Royalty Pooled Restaurants
to drive SSSG and adding new high-performing restaurants to the Royalty pool,
the Trustees of the Fund authorized a 5.0% increase to unitholder distributions
beginning with the distribution paid in June 2006, raising annualized distributions
to $1.26 per unit.
Distributable cash(2) for the year ended December 31, 2006 was $6.89 million,
or $1.29 per unit, and distributions paid were $6.62 million or $1.24 per unit,
representing a payout ratio(2) of 96.1% for the year. As a royalty trust, the Fund’s
payout ratio(2) is intended to average 100% per annum over time.
The successful Jack Astor’s® evolution, renovations and menu enhancements
to Alice Fazooli’s!® and the renovation of reds® during 2006, all demonstrate
SIR’s ongoing commitment to strengthening the SIR brands, driving SSSG and
increasing Royalty Pooled Revenue. SIR also opened three new Canyon CreekTM
restaurants in prime locations in 2006, including Vaughan, Scarborough and
Niagara Falls. These new restaurants were added to the Royalty pool, effective
January 1, 2007.
In addition to these initiatives to enhance the stability and growth of
distributable cash, the Fund also has a number of structural features that are
designed to support the stability of distributions. I would like to briefly review
these features with you:
• Unitholder distributions paid out by the Fund are derived from a
percentage of Royalty Pooled Revenue. SIR, the operating company, is
responsible for maintenance and growth capital expenditures.
(2)
See footnote (2) on page 30.
22
•
SIR owns the restaurants that contribute to the Royalty pool. As a result,
cash remaining in the operating company after royalties are paid out, is
available for SIR to reinvest in its restaurants to drive SSSG.
• In the event of a permanent closure of a Royalty Pooled Restaurant, SIR
is obligated to indirectly pay the Fund a “Make Whole Payment”. This
is intended to compensate for the loss in value of the decreased future
Royalty stream, as was the case with the Jack Astor’s® restaurant in Don
Mills, Ontario. We expect the Don Mills location to reopen at a later date,
following the completion of site redevelopment by the landlord at this
location.
• When the Fund acquires a royalty stream based on sales of a new SIR
restaurant, the purchase price is discounted to ensure the royalty stream
is accretive to the Fund.
On October 31, 2006, Canada’s Minister of Finance announced a “tax fairness
plan” for Canadians that will affect the tax treatment of trusts, such as the Fund
that were publicly traded prior to November 1, 2006.
The Trustees of the Fund and SIR’s senior management team have considered
these changes and continue to evaluate the possible impact of the new rules to
the Fund. We would like to emphasize that this development does not impact
SIR’s current operations or Pooled revenue. However, the new rules may adversely
affect the marketability of the Fund’s units and the use of these units to finance
future growth. The Trustees and management of SIR will continue to monitor this
development while carefully considering the best interests of Fund unitholders.
The Trustees of the Fund remain committed to governing the Fund in the best
interests of unitholders. We will continue to oversee discipline in managing Fund
operating costs, strict compliance with regulatory policies, and best practices in
disclosure. We look forward to reporting to you on SIR’s continued progress in
building value for Fund unitholders.
On behalf of the Trustees of the Fund, thank you for your support.
Sincerely,
John McLaughlin
Chairman, SIR Royalty Income Fund
23
SIR Royalty Income Fund Overview
SIR Corp.
6% Royalty on
Pooled Revenue
SIR Royalty
Limited
Partnership
Interest Income
from SIR Loan
Distribution Income
SIR Royalty
Income Fund
Monthly
Distributions
Unitholders
All trademarks related to the Concept and Signature brands are
used by SIR Corp. (“SIR”) under a license agreement with SIR
Royalty Limited Partnership (the “Partnership”) in consideration for
a Royalty equal to 6% of the revenue of the 38 restaurants included
in the Royalty pool as of January 1, 2007. SIR Royalty Income Fund
(the “Fund”) receives distribution income from its investment in the
Partnership and interest income from the SIR Loan. The Fund pays
distributions to unitholders on a monthly basis.
Note: the above illustration is for descriptive purposes only and is qualified in its entirety by
the description in the actual agreements and by the Fund’s prospectus on SEDAR.
24
SIR Royalty Income Fund
Management’s Discussion and Analysis
Year Ended December 31, 2006
(For the 12-month periods ended December 31, 2006)
Executive Summary
Highlights for the 3-month periods ended December 31, 2006 (“Q4”) and the
12-month periods ended December 31, 2006 (“YTD”), include:
Annual net earnings increased to $6.9 million in 2006, from $6.5 million in 2005
and in Q4 of 2006 decreased to $1.6 million, from $1.8 million in Q4 of 2005.
Annual net earnings per Fund Unit increased to $1.29 in 2006, from $1.21 in 2005
while net earnings per Fund Unit decreased to $0.31 in Q4 of 2006, from $0.33
in Q4 of 2005.
The annual payout ratio was 96.1% in 2006, compared to 99.4% in 2005 while
the payout ratio for Q4 of 2006 was 102.8%, compared to 91.0% in Q4 of 2005.
Please refer to footnotes 2 on page 30 and 12 on page 39 for the definition and
calculation of payout ratio.
The net earnings, distributable cash, and payout ratios for the fourth quarter were
affected by the $0.23 million Priority Special Conversion Distribution (“Conversion
Distribution”) paid by the SIR Royalty Limited Partnership (the “Partnership”). This
distribution was paid on the Class B GP Units that were converted to Class A GP
Units, effective January 1, 2007 related to the Second Incremental Adjustment for
the restaurants added to the Royalty pool effective January 1, 2006. As no new
restaurants were added to the Royalty pool effective January 1, 2005, there was
no similar adjustment in the fourth quarter of 2005.
Pooled Revenue increased by 9.9% in Q4 of 2006 to $38.7 million, from
$35.2 million in Q4 of 2005 and annual Pooled Revenue increased by 14.8% to
$149.5 million in 2006, from $130.2 million in 2005.
Same store sales growth(1) (“SSSG(1)”) for restaurants in the Royalty pool for Q4 of
2006 was 2.5% compared to Q4 of 2005 and annual SSSG(1) was 5.9% for 2006
compared to 2005.
(1)
Same store sales (“SSS”) and same store sales growth (“SSSG”) are non-GAAP financial measures that do
not have standardized meanings prescribed by GAAP. However, the Fund believes that SSS and SSSG are
useful measures and provide investors with an indication of the change in year-over-year sales. The Fund’s
method of calculating SSS and SSSG may differ from those of other issuers and, accordingly, SSS and
SSSG may not be comparable to measures used by other issuers.
SSS includes revenue from all SIR Restaurants except for the Jack Astor’s locations in Whitby, on Front
Street in Toronto and in Don Mills, Ontario because they were not open for the entire year of both 2005
and 2006. SSSG is the percentage increase in SSS over the prior comparable period.
25
SSSG(1) was positive in Q4 and the YTD of 2006 for all of SIR Corp.’s (“SIR”)
Concept Restaurants (Jack Astor’s®,Canyon CreekTM, and Alice Fazooli’s!®) as well
as for the downtown Toronto Signature Restaurants compared to prior year: Jack
Astor’s SSSG(1) was 0.3% for Q4 and 5.5% YTD; Canyon Creek SSSG(1) was 5.0%
for Q4 and 7.4% YTD, Alice Fazooli’s! SSSG(1) was 3.7% for Q4 and 8.3% YTD,
and the Signature Restaurants’ SSSG(1) was 8.1% for Q4 and 4.2% YTD.
Three Jack Astor’s evolutions were completed in 2006 (none in Q4). All but one of
the Jack Astor’s currently operating has now been evolved.
reds® was closed for 11 days in Q3 for renovations. Management is pleased with
the results of these renovations.
During 2006, two Alice Fazooli’s! restaurants were renovated (one completed in
the first quarter and the second completed in Q4). Now, all five Alice Fazooli’s!
restaurants have been renovated since the Initial Public Offering (“IPO”). The
renovated Alice Fazooli’s! restaurants are averaging revenue increases in the first
full year after the renovation in excess of 10%.
The two Jack Astor’s restaurants that opened in 2005 became part of the Royalty
pool effective January 1, 2006.
Subsequent to year-end, SIR opened a Jack Astor’s in Hamilton, Ontario on
March 26, 2007. SIR has also secured two additional sites for Jack Astor’s
restaurants, one of which is planned to open in 2007 and the other is planned to
open in 2008.
Three new Canyon Creek restaurants were opened in 2006. Each of these three
restaurants was added to the Royalty pool effective January 1, 2007.
On May 24, 2006 the Trustees authorized a 5.0% distribution increase to
Unitholders. The monthly distributions increased from $0.100 per Unit to $0.105
per Unit beginning with the distribution paid in June 2006. This will increase the
estimated annualized distribution from $1.20 to $1.26.
During Q2 of 2006, the Jack Astor’s in Don Mills, Ontario was closed. This location
has been demolished by the landlord and is to be redeveloped into a major
“lifestyle mall”. It is expected that this project will be completed in the second
half of 2008 and a new Jack Astor’s would open in this location at that time. SIR
was required to pay a Make-Whole Payment for this location from the date of the
closure until December 31, 2006. On January 1, 2007, the revenue of the closed
restaurant was netted against the revenue of the new SIR Restaurants opened
from November 2, 2005 to November 1, 2006, to determine the number of Class
B GP Units of the Partnership, held by SIR, which were converted into Class A GP
Units of the Partnership.
(1)
See footnote (1) on page 25.
26
On October 31, 2006, the Federal Department of Finance announced a plan that
proposes changes to the manner in which distributions from certain publicly listed
flow-through entities (“FTEs”) including income funds are taxed. However, existing
Income Trusts would not be subject to this proposed taxation of distributions until
the 2011 taxation year so long as the Fund meets the requirements for “normal
growth”. On December 21, 2006, the Federal Department of Finance issued draft
legislation on the proposed taxation legislation for public comment. On March 27,
2007, the Minister of Finance issued a Notice of Ways and Means Motion to
implement the draft legislation. The Trustees of the Fund and senior management
of SIR will continue to monitor this development.
While SIR is not owned by the Fund, the Fund is economically dependent upon
SIR. SIR files its interim and annual consolidated financial statements and MD&A
which, can be found on SEDAR under the Fund’s listing named “Other”. SIR’s
Q2 consolidated financial statements and MD&A are listed having a filing date of
March 28, 2007.
Same Store Sales Growth (1)
Same Store Sales Growth for the 3-month period ended December 31, 2006 vs
same period in prior year
(unaudited)
12%
8.1%
8%
5.0%
3.7%
4%
2.5%
0.3%
0
Jack Astor’s®
Canyon
Creek™
Alice
Fazooli’s!®
Signature
Total SIR
Restaurants
Same Store Sales Growth for the 12-month period ended December 31, 2006 vs
same period in prior year
15%
10%
7.4%
8.3%
5.9%
5.5%
5%
4.2%
0
Jack Astor’s®
(1)
Canyon
Creek™
Alice
Fazooli’s!®
Signature
Total SIR
Restaurants
See footnote (1) on page 25.
27
SIR reported to the Fund that SSSG(1) was 2.5% and 5.9%, respectively, for Q4 of
2006 and for the year versus the comparable periods in the prior year.
SIR’s Management attributes the strong annual performance of Jack Astor’s in
large part due to evolutions of existing restaurants. The evolution program started in
2004 and now only one of the Jack Astor’s currently operating remains to be evolved.
The evolved Jack Astor’s restaurants experienced strong average SSSG(1), averaging
over 10% in the first year following the year of evolution. Now that the program is near
completion and most of the evolved restaurants have been evolved for more than
one year, the velocity of Jack Astor’s SSSG(1) driven by evolutions is reduced. SIR’s
management believes that changes in smoking legislation in Ontario and Quebec are
negatively affecting bar sales, particularly in those restaurants that previously benefited
from Designated Smoking Rooms in their bars. SIR’s management believes that the
effect of the Smoke-Free Ontario Act will be mitigated over time and anticipates that
the effect will be lessened during the summer months when patios are open.
Canyon Creek continues to perform well, with SSSG(1) of 5.0% during Q4 2006
compared to the prior year. Annual SSSG(1) was 7.4% for 2006 compared to 2005.
The performance of Alice Fazooli’s! continues to improve. SSSG(1) in Q4 of 2006
was 3.7%. Annual SSSG(1) was 8.3% compared to the prior year. This annual growth
was achieved even though the dining room of the Alice Fazooli’s! in downtown
Toronto was closed for nine days during the first quarter for renovations and during
Q4, the Alice Fazooli’s! in Mississauga was closed also for nine days for renovations
and an expansion of the bar. All five of the Alice Fazooli’s! locations have now been
renovated since the IPO.
During Q4, the Signature Restaurants, which are located in downtown Toronto,
had SSSG(1) of 8.1%. Brasserie Frisco™ and Armadillo Texas Grill®/the Loose Moose
Tap & Grill® revenues were below the prior year during Q4. These declines in Q4 were
offset by positive SSSG(1) at Far Niente®/Soul of the Vine® and reds. Annual SSSG(1)
for the Signature Restaurants remains positive at 4.2%. During Q3 of 2006, reds
was closed 11 days for renovations. During Q4 of 2005, Far Niente was closed for
approximately three weeks for renovations.
During Q1 and part of Q2 of 2005, the NHL lockout had a significant negative
effect on the revenue of the Signature Restaurants. The same group of restaurants
benefited from the end of the lockout over the same period in 2006. In addition,
Signature Restaurants’ sales benefited from increased sales at Far Niente after the
major renovations in the fall of 2005.
(1)
See footnote (1) on page 25.
28
Restaurant Renovations and Advertising
SIR used a significant portion of the proceeds of the Fund’s IPO to invest in its existing
restaurants to drive SSSG(1). As at December 31, 2006, 19 Jack Astor’s restaurant
evolutions had been completed (four of these had been completed prior to the IPO).
These evolutions continue to drive sales in Jack Astor’s. The renovations at the five
Alice Fazooli’s! restaurants which were completed during 2005 and 2006 have also
delivered strong SSSG(1) on average, in excess of 10% in the first full year after the
renovation. A renovation was completed at reds during Q3 of 2006 (from August
28 to September 7, 2006). During mid-October 2005 through November 7, 2005,
extensive renovations were completed at Far Niente in downtown Toronto. These
renovations are driving increased guest counts and SSSG(1) going forward.
Since the IPO, SIR has increased its investment in marketing initiatives.
In particular, Jack Astor’s with 22 restaurants (which in Q4 of 2006 represents
approximately 61.5% of Pooled Revenue) has benefited from radio-based campaigns
created by a leading North American advertising agency.
New and Closed Restaurants
SIR opened two new restaurants during the Fund’s fiscal 2005 year: Jack Astor’s
at Front Street and University Avenue in downtown Toronto in February 2005, and
Jack Astor’s in Whitby, Ontario, at the end of August 2005. These restaurants
became part of the Royalty Pooled Restaurants on January 1, 2006, at which time the
Partnership paid SIR, in Partnership securities exchangeable for Units of the Fund, an
amount intended to reflect the value to the Partnership of the increased future Royalty
stream related to these restaurants, in accordance with the formula described in the
License and Royalty Agreement. This adjustment for new revenues that will be part
of the Royalty pool is designed to be accretive for Fund Unitholders.
During 2006, SIR opened three Canyon Creek restaurants (Scarborough, Ontario
in Q1, Vaughan, Ontario in Q2, and at the Fallsview Casino Resort in Niagara Falls,
Ontario in Q3). Each of these three restaurants was added to the Royalty Pooled
Restaurants subsequent to year-end on January 1, 2007.
One Royalty Pooled Restaurant has been closed since the IPO was completed.
On May 27, 2006, the Jack Astor’s in Don Mills, Ontario was closed. This location has
been demolished by the landlord and is to be redeveloped into a major “lifestyle mall”.
It is expected that this project will be completed in the second half of 2008 and that
a new Jack Astor’s would open in this location at that time. Under the terms of the
License and Royalty Agreement, SIR paid a Make-Whole Payment for this location
from the date of the closure until December 31, 2006. In accordance with the License
and Royalty Agreement, the revenue of the closed restaurant was netted against the
revenue of the new SIR Restaurants opened from November 2, 2005 to November 1,
2006, to reduce the number of Class B GP Units of the Partnership, held by SIR,
which were converted into Class A GP Units of the Partnership on January 1, 2007.
Subsequent to year-end, SIR opened a Jack Astor’s in Hamilton, Ontario
on March 26, 2007. SIR has also secured two additional sites for Jack Astor’s
restaurants, one of which is planned to open in Dartmouth, Nova Scotia during
2007 and the other at the corner of Dundas and Yonge streets in Toronto, Ontario
during 2008.
(1)
See footnote (1) on page 25.
29
Distributions
Distributions to Unitholders are intended to be made monthly in arrears based on
distributable cash and cash redemptions of Fund Units and subject to the Fund
retaining such reasonable working capital and other reserves as may be considered
appropriate by the Trustees of the Fund. The Fund’s intention, with the assistance
of SIR, is to pay even distributions, and if possible, allow the Fund to maintain
consistent monthly distributions to Unitholders. The Fund intends to make monthly
distributions of its available distributable cash to the extent possible and has paid
its expected monthly cash distribution of $0.10 per Unit per month since inception.
On May 24, 2006 the Trustees authorized a 5.0% distribution increase to Unitholders.
The monthly distributions increased from $0.10 per Unit to $0.105 per Unit beginning
with the distribution paid in June 2006. This will increase the estimated annualized
distribution from $1.20 to $1.26.
The payout ratio(2) of cash distributed to distributable cash(2) is intended to
average 100% per annum over the longer term. Since the Fund pays even monthly
distributions when its underlying cash flow from the Partnership is subject to
seasonal fluctuations (as experienced by SIR), there are times during the year when
the payout ratio(2) may exceed 100%. The payout ratio(2) for the fourth quarter of 2006
was affected by the $0.23 million Conversion Distribution paid by the Partnership.
YTD, the payout ratio(2) in 2006 was 96.1% compared to 99.4% for the same period
in 2005.
Overview and Business of the Fund
On October 1, 2004, SIR Royalty Income Fund (the “Fund”) filed a final prospectus for
a public offering of Units of the Fund. The net proceeds of the Offering of $51,166,670
were used by the Fund to acquire, directly, certain bank debt of SIR and indirectly,
through SIR Holdings Trust (the “Trust”), all of the Ordinary LP Units of the Partnership.
The Partnership owns the Canadian trademarks (the “SIR Rights”) formerly owned or
licensed by SIR or its subsidiaries and used in connection with the operation of the
majority of SIR’s restaurants in Canada. The Partnership has granted SIR a 99-year
license to use the SIR Rights in most of Canada in consideration for a Royalty, payable
by SIR to the Partnership, equal to 6% of the revenue of the restaurants included in
the Royalty pool (the “License and Royalty Agreement”). The Partnership also issued
its own securities to SIR in return for the SIR Rights acquired. The Fund indirectly
participates in the revenue generated under the License and Royalty Agreement
through its investment in the Partnership. The Partnership’s financial statements are
provided separately at www.sedar.com under the SIR Royalty Income Fund profile
and on SIR’s website at www.sircorp.com.
(2)
Distributable cash and payout ratio are non-GAAP financial measures and do not have a standardized
meaning prescribed by GAAP. However, the Fund believes that distributable cash and the payout ratio are
useful measures as they provide investors with an indication of cash available for distribution. The Fund’s
method of calculating distributable cash and the payout ratio may differ from that of other issuers and,
accordingly, distributable cash and the payout ratio may not be comparable to measures used by other
issuers. Investors are cautioned that distributable cash and the payout ratio should not be construed as an
alternative to the statement of cash flows as a measure of liquidity and cash flows of the Fund. The payout
ratio is calculated as cash distributed for the period as a percentage of the distributable cash for the period.
Distributable cash represents the amount of money which the Fund expects to have available for distribution
to Unitholders of the Fund, and is calculated as cash provided by operating activities of the Fund, adjusted for
the net change in non-cash working capital items.
30
The Fund intends to make monthly distributions of its available cash to the maximum
extent possible. During the year, monthly distributions of $535,667 or $0.10 per
Unit were declared and paid for each of the months of December 2005 through
April 2006. Monthly distributions of $562,450 or $0.105 per Unit were declared and
paid for each of the months of May 2006 through November 2006. Subsequent to
December 31, 2006, distributions of $0.105 per Unit were declared and paid for the
months of December 2006 and January 2007 and a distribution of $0.105 per Unit
was declared for the month of February 2007.
The Units of the Fund are publicly traded on the Toronto Stock Exchange under
the symbol SRV.UN.
Overview and Business of SIR and the Partnership
SIR is a private company amalgamated under the Business Corporations Act of
Ontario. As at December 31, 2006, SIR operated 38 Concept Restaurants and
Signature Restaurants in Canada (in Ontario, Quebec, Alberta and Nova Scotia). The
Concept Restaurants are Jack Astor’s Bar and Grill, Canyon Creek Chop House®
and Alice Fazooli’s!. The Signature Restaurants are reds, Far Niente/Soul of the Vine,
Brasserie Frisco, and the Armadillo Steak House/Loose Moose Tap & Grill. As at
December 31, 2006, 36 SIR Restaurants were included in the SIR Royalty Pooled
Restaurants. New Canyon Creek restaurants were opened in Scarborough, Ontario
in March 2006, in Vaughan, Ontario in May 2006, and at the Fallsview Casino Resort,
in Niagara Falls, Ontario in August 2006. Subsequent to year end, on January 1,
2007, these three new restaurants were added to the Royalty Pooled Restaurants.
The two new Jack Astor’s that were opened in 2005 (downtown Toronto, Ontario
in February and Whitby, Ontario in August) were added to the Royalty Pooled
Restaurants effective January 1, 2006. In May 2006, the Jack Astor’s in Don Mills,
Ontario was closed. Based on the terms of the License and Royalty Agreement, SIR
was required to pay a Make-Whole Payment in respect of the lost Royalty resulting
from the reduction in revenue of this closed restaurant. As a result, the Jack Astor’s
in Don Mills, Ontario effectively remained part of the Royalty Pooled Restaurants
until December 31, 2006. SIR owns 100% of all its Canadian restaurants, except for
Jack Astor’s Don Mills Limited (50%).
SIR also has an investment in one (2005 – two) Jack Astor’s restaurant in the
U.S., which is not included in the SIR Royalty Pooled Restaurants. During the year,
the Jack Astor’s restaurant located in Irving, Texas was sold to a local independent
restaurant operator and it will no longer operate as a Jack Astor’s restaurant.
SIR owned the land and building for this location that was financed by U.S. debt.
The proceeds from the sale were used to repay the associated U.S. debt.
The Partnership has granted SIR a 99-year license to use the SIR Rights in most
of Canada in consideration for a Royalty, payable by SIR to the Partnership, equal to
6.0% of the revenue of the restaurants included in the Royalty pool. The Partnership
also issued its own securities to SIR in return for the SIR Rights acquired.
On January 1 of each year (the “Adjustment Date”) following December 31, 2005,
the restaurants subject to the License and Royalty Agreement are adjusted for new
restaurants that have been open for at least 60 days prior to the Adjustment Date
and which were not previously included in the Royalty Pooled Restaurants. Under the
formula as defined in the Partnership Agreement, the number of Class A GP Units
issued to SIR on the Initial Adjustment date is equal to only 80% of the estimated value
31
of the additional Royalty revenue. Additional Class B GP Units may be converted to
Class A GP Units in respect of these new SIR Restaurants if the actual revenues of
the new SIR Restaurants exceed 80% of the January 1 Initial Adjustment’s estimated
revenue applied to the formula defined in the License and Royalty Agreement and the
Partnership Agreement. Conversely, Class A GP Units would be converted to Class B
GP Units by SIR if the actual revenues of the new SIR Restaurants are less than 80%
of the January 1 Initial Adjustment’s estimated revenue. In December of each year,
a Conversion Distribution will be payable to the Class B GP Unitholders based on
actual revenues of the new SIR Restaurants exceeding 80% of the Initial Adjustment’s
estimated revenue or there will be a reduction in the cash distributions to the Class
A GP Unitholders if revenues are less than 80% of the Initial Adjustment’s estimated
revenue. The Conversion Distribution results in an adjustment to SIR’s share of the
Partnership income to reflect the actual contribution of the revenues of the new SIR
Restaurants for the fiscal year. As this amount is not declared until December 31st,
when the actual revenues for the New Additional Restaurants are known, the effect
of this adjustment is not included in the results of quarters one through three.
On January 1, 2006, two new SIR Restaurants were added to the Royalty pool
in accordance with the License and Royalty Agreement. As consideration for the
additional Royalty associated with the addition of two new restaurants, SIR converted
438,820 Class B GP Units to 438,820 Class A GP Units based on the formula defined
in the Partnership Agreement. The 438,820 Class A GP Units have been recorded at
their estimated fair value of $4.1 million. As a result of this exchange, SIR’s interest
in the Partnership increased to 16.2% effective January 1, 2006. The revenues
of the new SIR Restaurants exceeded 80% of the Initial Adjustment’s estimated
revenue and, as a result, an Additional Distribution of $0.23 million was declared in
December 2006 and paid in cash to SIR in January 2007.
On January 1, 2007, three new SIR Restaurants were added to the Royalty
pool in accordance with the License and Royalty Agreement. As consideration for
the additional Royalty associated with the addition of three new restaurants on
January 1, 2007, as well as the Second Incremental Adjustment for the two new
SIR Restaurants added to the Royalty Pooled Restaurants on January 1, 2006, SIR
is able to convert its Class B GP Units into Class A GP Units based on the formula
defined in the Partnership Agreement. The number of Class B GP Units that SIR is
able to convert to Class A GP Units was reduced by an adjustment for the closure
of one SIR Restaurant during the year. The net effect of these adjustments to the
Royalty Pooled Restaurants was that SIR converted 421,004 Class B GP Units of the
Partnership into 421,004 Class A GP Units of the Partnership on January 1, 2007 at
an estimated fair value of $3.5 million. As a result of this exchange, SIR’s interest in
the Partnership increased to 21.4% effective January 1, 2007.
As at December 31, 2006, SIR retained a 16.2% (2005 – 10.0%) interest in the
Partnership as the holder of the 1,034,005 (2005 – 595,185) Class A GP Units of
the Partnership, representing SIR’s initial retained interest as at the closing date of
the Offering plus the Class A GP Units that were received as part of the conversion
that took place on January 1, 2006 when the two new Jack Astor’s were vended in
to the Royalty Pooled Restaurants. The Class A GP Units are entitled to receive a
pro rata share of all residual distributions of the Partnership and are exchangeable
into Units of the Fund on a one-for-one basis. SIR agreed to subordinate the initial
10% share (595,185 Units retained at the time of the Offering) of the distributions
for a minimum of two years, subject to certain terms. Subordination is expected
32
to continue until at least August 26, 2007. In addition, SIR is obligated to pay the
Partnership a “Make-Whole Payment”, subject to certain terms, initially equal to the
amount of the Royalty that otherwise would have been paid to the Partnership in the
event of a permanent closure of a restaurant in the Royalty pool. SIR is not required to
pay any “Make-Whole Payment” in respect of a closed restaurant in the Royalty pool
following the date on which the number of restaurants in the Royalty pool is equal to
or greater than 68, or following October 12, 2019, whichever occurs first. However,
other adjustments or payments may still be required in respect of closed restaurants
after such date by SIR, depending upon the circumstances.
SIR’s fiscal year is comprised of 13 periods of four weeks each, ending on the
last Sunday in August. To preserve this year-end, an additional week must be added
approximately every five years. Fiscal quarters of SIR consist of accounting periods
of 12, 12, 12 and 16 (or 17) weeks.
Consolidated financial statements of SIR can be found at www.sedar.com
under the SIR Royalty Income Fund profile, “other” category and on SIR’s website at
www.sircorp.com.
Seasonality
The full service restaurant sector of the Canadian foodservice industry, in which
SIR operates, experiences seasonal fluctuations in revenues. Favourable summer
weather generally results in increased revenues during SIR’s fourth quarter (ending
the last Sunday in August) when patios have been open for an extended period.
Additionally, certain holidays and observances also affect guest dining patterns both
favourably and unfavourably. Accordingly, distribution income recognized by the Fund
will vary in conjunction with the seasonality in revenue experienced by SIR. The Fund’s
intention, with the assistance of SIR, is to pay even distributions in order to reduce the
effect of seasonality, and if possible, allow the Fund to maintain consistent monthly
distributions to Unitholders.
Selected Consolidated Financial Information
The consolidated financial statements of the Fund are presented in Canadian
dollars, are prepared in accordance with Canadian generally accepted accounting
principles (“GAAP”) and include the accounts of the Fund and its subsidiaries, namely
the Trust and SIR GP Inc. The information in this Management’s Discussion and
Analysis should be read in conjunction with the annual audited consolidated financial
statements of the Fund, including the notes thereto. The Fund has been in existence
since August 23, 2004, and began operating on October 12, 2004 upon closing of
the Offering.
33
The following tables set out selected financial information of the Fund and the
Partnership:
Financial Highligh ts
(in thousands of dollars except restaurants and per Unit amounts)
Restaurants in the Royalty pool
Pooled Revenue generated by SIR
6% of Pooled Revenue
Make-Whole Payment (3)
Total Royalty income to Partnership
Partnership other income
Partnership expenses
Partnership earnings
SIR’s interest (Class A, B and C GP Units)
Partnership income allocated to Fund (4)
Interest income (5)
Total income of the Fund
General & administrative expenses
Net earnings for the period
Basic earnings per Fund Unit (5,356,667 Units)
Diluted earnings per Fund Unit (6,390,672 Units, 2005 – 5,951,852 Units)(6)
For the 12-month period from January 1, 2006 to December 31, 2006, the Fund
declared and paid a distribution of $0.10 per Unit for each of the months from
December 2005 through April 2006. Monthly distributions of $0.105 per Unit were
declared and paid for each of the months of May 2006 through November 2006.
Subsequent to December 31, 2006, the Fund declared and paid distributions of
$0.105 per Unit for the months of December 2006 and January 2007 and declared a
distribution of $0.105 per Unit for the month of February 2007.
34
12-month periods 12-month periods
ended Dec. 31,
ended Dec. 31,
2006
2005
$
$
36
34
149,529
130,246
8,972
7,815
104
—
9,076
7,815
47
31
(157)
(102)
8,966
7,744
(4,605)
(3,719)
4,361
4,025
3,000
3,000
7,361
7,025
(476)
(559)
6,885
6,466
1.29
1.21
1.29
1.21
On May 27, 2006 the Jack Astor’s in Don Mills, Ontario was closed. Under the terms of the License and
Royalty Agreement, SIR was required to pay a Make-Whole Payment for this location from the date of the
closure until December 31, 2006.
(4)
On October 12, 2004, the Fund, indirectly through the Trust, acquired all of the Ordinary LP Units of the
Partnership. The holders of the Ordinary LP Units and Class A GP Units are entitled to receive a pro rata
share of all residual distributions of the Partnership. The holders of the Ordinary LP Units have the right to
receive distributions in priority to the initial 595,185 Class A GP Units.
(5)
Interest income is the interest earned during the periods from the $40.0 million SIR Loan, which bears interest
at 7.5% per annum.
(6)
Diluted earnings per Fund Unit for the 12-month period ended December 31, 2006 is calculated as follows:
Net earnings for the 12-month period of $6.9 million (2005 – $6.5 million) plus the distributions related to the
Class A GP Units of $1.4 million (2005 – $0.7 million) for the 12-month period divided by the weighted average
number of Fund Units outstanding of 6,390,672 (2005 – 5,951,852). Weighted average number of Fund Units
outstanding represents Fund Units of 5,356,667 plus the convertible Class A GP Units of 1,034,005 (2005
– 595,185).
(3)
35
Summary of Quarterly Financial Information
(in thousands of dollars except restaurants and per Unit amounts)
Restaurants in the Royalty pool
Pooled Revenue generated by SIR
6.0% of Pooled Revenue
Make-Whole Payment (7)
Total Royalty income to Partnership
Partnership other income
Partnership expenses
Partnership earnings
SIR’s interest (Class A, B and C GP Units)
Partnership income allocated to Fund (8)
Interest income (9)
Total income of the Fund
General & administrative expenses
Net earnings for the period
Basic earnings per Fund Unit (5,356,667 Units)
Diluted earnings per Fund Unit (6,390,672 Units) (10)
On May 27, 2006 the Jack Astor’s in Don Mills, Ontario was closed. Under the terms of the License and
Royalty Agreement, SIR was required to pay a Make-Whole Payment for this location from the date of the
closure until December 31, 2006.
(8)
On October 12, 2004, the Fund, indirectly through the Trust, acquired all of the Ordinary LP Units of the
Partnership. The holders of the Ordinary LP Units and Class A GP Units are entitled to receive a pro rata
share of all residual distributions of the Partnership. The holders of the Ordinary LP Units have the right to
receive distributions in priority to the initial 595,185 Class A GP Units.
(9)
Interest income is the interest earned during the periods from the $40.0 million SIR Loan, which bears
interest at 7.5% per annum.
(7)
36
3-month periods ended
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30,
2006
2006
2006
2006
2005
2005
$
$
$
$
$
$
(10)
Jun. 30, Mar. 31,
2005
2005
$
$
36
36
36
36
34
34
34
34
38,716
36,447
37,506
36,859
35,219
32,385
32,923
29,719
2,323
2,190
2,250
2,212
2,113
1,943
1,975
1,783
42
41
18
—
—
—
—
—
2,365
2,231
2,268
2,212
2,113
1,943
1,975
1,783
13
13
12
9
8
8
8
8
(45)
(21)
(41)
(50)
(25)
(40)
(23)
(14)
2,333
2,223
2,239
2,171
2,096
1,911
1,960
1,777
(1,343)
(1,090)
(1,090)
(1,082)
(946)
(899)
(946)
(928)
990
1,133
1,149
1,089
1,150
1,012
1,014
849
750
750
750
750
750
750
750
750
1,740
1,883
1,899
1,839
1,900
1,762
1,764
1,599
(99)
(123)
(135)
(119)
(134)
(107)
(202)
(116)
1,641
1,760
1,764
1,720
1,766
1,655
1,562
1,483
0.31
0.33
0.33
0.32
0.33
0.31
0.29
0.28
0.31
0.33
0.33
0.32
0.33
0.31
0.29
0.28
Diluted earnings per Fund Unit is calculated as follows: Net earnings for the period plus the distributions
related to the Class A GP Units, which together total $1.7 million, $1.7 million, $1.8 million and $2 million for
the 3- month periods ended March 31, 2006, June 30, 2006, September 30, 2006 and December 31, 2006,
respectively, divided by the weighted average number of Fund Units outstanding of 6,390,672. Weighted
average number of Fund Units outstanding represents Fund Units of 5,356,667 plus the convertible Class A
GP Units of 1,034,005. Diluted earnings per Fund Unit for the prior year is calculated as follows: Net earnings
for the period plus the distributions related to the Class A GP Units, which together total $1.7 million,
$1.7 million, $1.8 million and $2.0 million for the 3-month periods ended March 31, 2005, June 30, 2005,
September 30, 2005 and December 31, 2005, respectively, divided by the weighted average number of
Fund Units outstanding of 5,951,852. Weighted average number of Fund Units outstanding represents Fund
Units of 5,356,667 plus the convertible Class A GP Units of 595,185.
37
Distributable Cash (2)
(in thousands of dollars except per Unit amounts and payout ratio)
(unaudited)
Cash provided by operating activities
Add/(deduct): net change in non-cash working capital items
Distributable cash (2)
Cash distributed for the period
Surplus/(shortfall) of distributable cash (2)
Payout ratio (2)(11)
Distributable cash per Fund Unit basic (5,356,667 Units)
Distributable cash per Fund Unit diluted (6,390,672 Units;
2005 – 5,951,852 Units) (13)
Distributable Cash (2)
(in thousands of dollars except per Unit amounts and payout ratio)
(unaudited)
Cash provided by operating activities
Add/(deduct): net change in non-cash
working capital items
Distributable cash
(2)
Cash distributed for the period
Surplus/(shortfall) of
distributable cash (2)
Payout ratio
38
12-month periods
ended December
31, 2006
$
12-month periods
ended December
31, 2005
$
6,615
6,428
270
38
6,885
6,466
6,615
6,428
270
38
96.1%
99.4%
Distributable cash per Fund Unit
basic (5,356,667 Units)
1.29
1.21
Distributable cash per Fund Unit
diluted (6,390,672 Units,
2005 – 5,951,852 Units) (13)
1.29
1.21
(2)(11)
3-month periods ended
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30,
2006
2006
2006
2006
2005
2005
$
$
$
$
$
$
Jun. 30, Mar. 31,
2005
2005
$
$
1,687
1,687
1,634
1,607
1,607
1,607
1,607
1,607
(46)
73
130
113
159
48
(45)
(124)
1,641
1,760
1,764
1,720
1,766
1,655
1,562
1,483
1,687
1,687
1,634
1,607
1,607
1,607
1,607
1,607
(46)
73
129
113
159
48
(45)
(124)
102.8%
95.9%
92.6%
93.4%
91.0%
97.1%
102.9%
108.4%
0.31
0.33
0.33
0.32
0.33
0.31
0.29
0.28
0.31
0.33
0.33
0.32
0.33
0.31
0.29
0.28
(12)
See footnote (2) on page 30.
It is the Fund’s intention, with the assistance of SIR, to pay even distributions to reduce the effect of
seasonality. Higher payout ratios during the colder months of the year are expected with the pattern of
seasonality in the business, and it is anticipated that the payout ratio will decrease on average during the
warm weather months.
(12)
The payout ratio for the fourth quarter was affected by the $0.23 million Priority Special Conversion
Distribution paid by the Partnership. This distribution was paid on the Class B GP Units that were converted
to Class A GP Units, effective January 1, 2007 related to the Second Incremental Adjustment for the
restaurants added to the Royalty pool effective January 1, 2006. As no new restaurants were added to the
Royalty pool effective January 1, 2005, there was no similar adjustment in the fourth quarter of 2005.
(13)
Diluted distributable cash per Fund Unit for the 3-month periods is calculated as follows: Distributable
cash plus the distributions related to the Class A GP Units, which together total $2.0 million, $2.1 million,
$2.1 million, $2.0 million, $2.0 million, $1.8 million, $1.7 million, and $1.7 million for the 3-month periods
ended December 31, 2006, September 30, 2006, June 30, 2006, March 31, 2006, December 31, 2005,
September 30, 2005, June 30, 2005 and March 31, 2005, respectively, divided by the weighted average
number of Fund Units outstanding of 6,390,672 and 5,951,852 for the 3-month periods ended in fiscal
2006 and 2005, respectively. Weighted average number of Fund Units outstanding represents Fund Units of
5,356,667 plus the convertible Class A GP Units of 1,034,005 and 595,185 for the periods ended
in fiscal 2006 and 2005, respectively.
(2)
(11)
39
Distributions to Unitholders are intended to be made monthly in arrears based on
distributable cash (2) and cash redemptions of Fund Units and subject to the Fund
retaining such reasonable working capital and other reserves as may be considered
appropriate by the Trustees of the Fund. The Fund’s intention, with the assistance of
SIR, is to pay even distributions, and if possible, allow the Fund to maintain consistent
monthly distributions to Unitholders. The Fund intends to make monthly distributions
of its available distributable cash to the extent possible and has paid its expected
minimum monthly cash distribution of $0.10 per Unit per month since inception.
On May 24, 2006, the Trustees Authorized a 5% distribution increase to Unitholders.
The monthly distributions increased from $0.10 per Unit to $0.105 per Unit beginning
with the distribution paid in June 2006. This will increase the estimated annualized
distribution from $1.20 to $1.26.
The payout ratio (2) of cash distributed to distributable cash (2) is intended to
average 100% per annum. Since the Fund pays even monthly distributions when
its underlying cash flow from the Partnership is subject to seasonal fluctuations (as
experienced by SIR), there are times during the year when the payout ratio (2) may
exceed 100%. For the 12 months ended December 31, 2006 and December 31,
2005, the payout ratio (2) was 96.1% and 99.4%, respectively.
Balance Sheet
The below table shows total assets and Unitholders’ equity of the Fund:
Dec.
31,
2006
$
Sept.
30,
2006
$
June
30,
2006
$
Mar.
31,
2006
$
Dec.
31,
2005
$
Sept.
30,
2005
$
June
30,
2005
$
Mar.
31,
2005
$
Total assets 52,106 52,155 52,042 51,958 51,817 51,730 51,665 52,627
Unitholders’
equity
51,982 52,028 51,955 51,826 51,712 51,552 51,505 51,549
(2)
See footnote (2) on page 30.
40
Results of Operations – Fund
The Fund’s revenue of $7.4 million for the 12-month period ended December 31,
2006 is comprised of distribution income from the Partnership of $4.4 million and
interest income of $3.0 million. Revenue of $7.0 million for the 12-month period
ended December 31, 2005 is comprised of distribution income from the Partnership
of $4.0 million and interest income of $3.0 million. Distribution income from the
Partnership is the pro rata share of the residual distributions of the Partnership for
the 12-month periods ended December 31, 2006 and December 31, 2005. Interest
income is interest earned for the 12-month periods ended December 31, 2006 and
December 31, 2005 from the $40.0 million SIR Loan which bears interest at 7.5%
per annum.
The Fund’s operating expenses are limited to general and administration
expenses and total $0.5 million and $0.6 million for the 12-month periods ended
December 31, 2006 and December 31, 2005, respectively. These expenses include
professional fees, directors’ and officers’ liability insurance premium, Trustees’ fees,
certain public company costs and other administrative fees.
Net earnings for the 12-month periods ended December 31, 2006 and
December 31, 2005 were $6.9 million, or $1.29 per Fund Unit on both a basic and
diluted basis, and $6.5 million or $1.21 per Fund Unit on both a basic and diluted
basis, respectively.
Pooled Revenue
The Fund is indirectly dependent on the amount of the Royalty paid by SIR to
the Partnership. The amount of this Royalty is dependent on Pooled Revenue.
Pooled Revenue is the revenue of the SIR restaurants included in the Royalty
Pooled Restaurants. As at December 31, 2006, there were 35 restaurants included
in Pooled Revenue. Increases or decreases in Pooled Revenue are derived from
same store revenue growth or decline, and new or closed SIR Restaurants subject
to the SIR Rights. Pooled Revenue is affected by the risks associated with the
operations and financial condition of SIR, the commercial foodservice industry
generally and the casual and fine dining segment of the commercial foodservice
industry in particular. The following table sets out Pooled Revenue for the 3- and
12-month periods ended December 31, 2006 and December 31, 2005:
41
Summary of Pooled Revenue
(in thousands of dollars except number of restaurants included in
Pooled Revenue)
(Unaudited)
3-month periods ended
December 31, 2006
Jack Astor’s®
Alice Fazooli’s!
Restaurants
included
in Pooled
Revenue(14)
23,791
22
5,083
5
Canyon Creek™
4,671
4
Signature
5,171
4
38,716
35
®
®
Total included in Pooled Revenue
(14)
Pooled
Revenue
$
For the 12-month periods ended December 31, 2006, 36 SIR Restaurants were included in the SIR Royalty
Pooled Restaurants. In May 2006, the Jack Astor’s in Don Mills, Ontario was closed. Based on the terms
of the License and Royalty Agreement, SIR is required to pay a Make-Whole Payment in respect of the lost
Royalty resulting from the reduction in revenue of this closed restaurant. As a result of the Make-Whole
Payment, the Jack Astor’s in Don Mills, Ontario effectively remains part of the Royalty Pooled Restaurants
until December 31, 2006. The $38.7 million in Pooled Revenue for the 3-month periods ended December 31,
2006 was generated by the remaining 35 open restaurants in the Royalty pool.
Liquidity and Capital Resources
The Fund has no third-party debt and SIR currently has minimal third-party debt
(excluding the $40 million SIR Loan owed by SIR to the Fund and for which SIR
can surrender its Class C GP Units in the Partnership as consideration for principal
payments under the loan, and certain debt related to U.S. operations which is
recorded on the consolidated financial statements of SIR). The Fund does not have
bank lines of credit. The Fund therefore relies on the payments of the distributions
from the Partnership and interest income from SIR to meet its obligations to pay
the distributions. The Fund believes that the distributions from the Partnership and
interest payments will be sufficient to meet its current distribution intentions, subject
to seasonal fluctuations. However, the actual amounts distributed will depend upon
numerous factors, including the payment of the distributions from the Partnership and
interest by SIR, and could fluctuate based on performance. The Fund intends, with
the assistance of SIR, to maintain even distributions in order to reduce the effect of
fluctuations in revenue and, if possible, allow the Fund to maintain consistent monthly
distributions to Unitholders. Under the terms of the License and Royalty Agreement,
SIR is required to pay the 6.0% Royalty to the Partnership 21 days after the end of the
four-week period for which the Royalty is determined. During the 12-month periods
ended December 31, 2006 and December 31, 2005, $6.6 million and $6.4 million
was distributed to Unitholders, respectively. Subsequent to December 31, 2006,
distributions of $0.6 million ($0.105 per Unit) were declared and paid for the months
of December 2006 and January 2007, and a distribution of $0.6 million ($0.105 per
Unit) was declared for the month of February 2007.
42
3-month periods ended
December 31, 2005
12-month periods ended
December 31, 2006
12-month periods ended
December 31, 2005
Pooled
Revenue
$
Restaurants
included
in Pooled
Revenue
Pooled
Revenue
$
Restaurants
included in
Pooled
Revenue(14)
Pooled
Revenue
$
Restaurants
included
in Pooled
Revenue
21,086
21
96,107
23
80,120
21
4,900
5
18,752
5
17,313
5
4,448
4
16,247
4
15,125
4
4,785
4
18,422
4
17,688
4
35,219
34
149,528
36
130,246
34
The Fund did not have any capital expenditures in 2006 and by its nature is not
expected to have significant capital expenditures in the future. Capital expenditures
related to the Royalty Pooled Restaurants are borne at the operating company (SIR)
level. The Fund’s operating and administrative expenses are expected to be fairly
stable and predictable and are considered to be in the ordinary course of business.
Management believes that there are sufficient cash resources retained in the
Fund in order to meet its obligations and pay distributions to its Unitholders.
While SIR is not owned by the Fund, the Fund’s income is derived from interest
income on the SIR Loan and distributions from the Partnership and accordingly, the
Fund is economically dependent upon SIR. For information regarding SIR and its
liquidity, SIR files its interim and annual consolidated financial statements and MD&A
which, can be found on SEDAR under the Fund’s listing named “Other”. The most
recent consolidated financial statements and MD&A for SIR’s second quarter are
listed having a filing date of March 28, 2007. The following table is an excerpt of the
previous eight quarters of SIR’s consolidated statement of cash flows information:
43
SIR’s Selected Consolidated Statement of Cash Flows Information (15)
(in thousands of dollars)
(unaudited)
2nd Quarter
Ended
February 11,
2007
(12 weeks)
1st Quarter
Ended
November
19, 2006
(12 weeks)
Net cash from (used in) continuing operations
3,087
136
Net cash used in continuing investing activities
(2,309)
(2,847)
Net cash from (used in) continuing
financing activities
(122)
(642)
Increase (decrease) in cash and cash equivalents
during the period
661
(3,357)
Cash and cash equivalents – Beginning of period
4,855
8,212
Cash and cash equivalents – End of period
5,516
4,855
** Prior period balances reflect the reclassification of SIR’s discontinued operation.
(15)
Information presented is derived solely from documents filed with the Canadian securities regulatory
authorities by SIR in its interim Q2 MD&A filed on March 28, 2006 and has not been approved by the Fund
or its trustees, officers, SIR GP Inc., or SIR Holdings Trust, or their respective trustees, managing general
partners, directors, or officers.
Controls and Procedures
As at the financial year ended December 31, 2006, an evaluation was carried out
under the supervision of and with the participation of the SIR GP Inc. management,
including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of
the effectiveness of the Fund’s disclosure controls and procedures. Based on that
evaluation, the CEO and the CFO concluded that, to their knowledge, the design
and operation of these disclosure controls and procedures were effective as at
December 31, 2006 to provide reasonable assurance that material information
relating to the Fund and its consolidated subsidiaries would be made known to them
by others within those entities.
An evaluation was carried out under the supervision of and with management,
including the CEO and CFO, of internal controls over financial reporting as at
December 31, 2006. Based on this evaluation, the CEO and the CFO have
concluded that, internal controls over financial reporting have been designed to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in accordance
with GAAP.
The Fund does not own, control or consolidate SIR and therefore, the Fund’s
disclosure controls and procedures and the internal controls over financial reporting
do not encompass SIR or SIR’s disclosure controls and procedures or SIR’s internal
controls over financial reporting.
44
4th Quarter
Ended
August 27,
2006
(16 weeks)
3rd Quarter 2nd Quarter
Ended
Ended
May 7, February 12,
2006
2006
(12 weeks) (12 weeks)
1st Quarter
Ended
November
20, 2005**
(12 weeks)
4th Quarter
Ended
August 28,
2005
(16 weeks)
3rd Quarter
Ended
May 8,
2005**
(12 weeks)
2,400
1,420
2,388
(269)
24
(2,116)
(3,286)
(3,897)
(3,479)
(3,610)
(3,222)
(3,876)
4,924
(86)
(80)
(84)
(126)
(555)
4,060
(2,548)
(1,498)
(4,055)
(3,990)
(6,576)
4,152
6,700
8,198
12,253
16,243
22,819
8,212
4,152
6,700
8,198
12,253
16,243
Off-Balance Sheet Arrangements
The Fund does not have any off-balance sheet arrangements.
Transactions with Related Parties
During the 12-month period ended December 31, 2006, the Fund earned distribution
income of $4.4 million from the Partnership (December 31, 2005 – $4.0 million).
The Fund, indirectly through the Trust, is entitled to receive a pro rata share of all
residual distributions. The Fund’s distribution income is dependent upon the revenue
generated by the SIR Restaurants subject to the License and Royalty Agreement.
During the 12-month period ended December 31, 2006, the Fund earned
interest income of $3.0 million from the SIR Loan (December 31, 2005 – $3.0 million).
A description of the terms of the SIR Loan is included in the notes to the Consolidated
Financial Statements of the Fund for the 12-month periods ended December 31,
2006 and December 31, 2005.
As at December 31, 2006, the Fund had amounts receivable from SIR of
$0.2 million (December 31, 2005 – $0.2 million) and amounts receivable from
the Partnership of $0.7 million (December 31, 2005 – $0.4 million). The amounts
receivable from SIR consist mainly of interest owing to the Fund on the SIR Loan
for the month of December. The amounts due from the Partnership represent
distributions receivable of $1.4 million (December 31, 2005 – $0.9 million) partially
offset by advances payable of $0.7 million (December 31, 2005 – $0.5 million). All
advances were conducted as part of the normal course of business operations.
45
Critical Accounting Estimates
Income taxes
The Fund is a Unit Trust for income tax purposes. As such, the Fund is only taxable on
income not distributed to Unitholders. As substantially all taxable income is intended
to be allocated to Unitholders, no provision for income taxes has been made for
earnings of the Fund. The Fund’s subsidiaries, which consist of the Trust and SIR GP
Inc., also are not required to pay tax on their earnings and, accordingly, no provision
for income taxes has been made for the earnings of the Fund’s subsidiaries.
Investment and loan receivable
The investment in the Partnership is recorded at cost and written down to its
estimated realizable amount when there is evidence of impairment. Investment
income is recorded to the extent of distributions declared by the Partnership. The loan
receivable from SIR is reviewed for impairment. If impairment were identified, would
be reduced to its estimated recoverable amount measured by expected future cash
flows. The accrual of interest would be suspended if collections become doubtful.
Management believes that there is no impairment of the investment or loan receivable
at December 31, 2006 and December 31, 2005.
Changes in Accounting Policies, Including Initial Adoption
CICA Handbook Section 3855, Recognition and Measurement, prescribes when a
financial asset, financial liability, or non-financial derivative is to be recognized on
the balance sheet, and at what amount – in certain instances using fair value and in
others using cost-based measures. It also specifies how financial instrument gains
and losses are to be presented. Section 3855 applies to interim and annual financial
statements relating to fiscal years beginning on or after October 1, 2006. The Fund
has adopted this standard effective January 1, 2007. Transitional provisions for
this section are complex and vary based on the type of financial instrument under
consideration. The Fund has elected to classify its loan receivable as held to maturity
and accordingly, it will be recorded at its amortized cost. The investment in the
Partnership does not have a quoted market price in an active market and accordingly,
will be accounted for at cost.
CICA Handbook Section 1530, Comprehensive Income, introduces a new
requirement to temporarily present certain gains and losses outside net income.
Section 1530 applies to interim and annual financial statements relating to fiscal years
beginning on or after October 1, 2006. The Fund will adopt this standard effective
January 1, 2007. Financial statements of prior periods are required to be restated
for certain comprehensive income items. In addition, an enterprise is encouraged,
but not required, to present reclassification adjustments in comparative financial
statements provided for earlier periods. This standard will not have an impact on
the Fund.
46
CICA Handbook Section 3865, Hedges, establishes standards for when and how
hedge accounting may be applied. Hedge accounting is optional. This Section
applies for interim and annual financial statements relating to fiscal years beginning
on or after October 1, 2006. Retroactive application is not permitted. The Fund will
adopt this standard effective January 1, 2007. The Fund has no arrangements for
hedging and the adoption of this standard will not have an impact on the Fund’s
financial statements.
Financial Instruments and Other Instruments
The Fund’s financial instruments consist of cash and cash equivalents, the loan
receivable from SIR, investment in the Partnership, accounts payable and accrued
liabilities, and amounts due to and from related parties. 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 approximate their carrying values due to their
short-term maturity except for the loan receivable from SIR and the investment in the
Partnership. The fair values of the loan receivable from SIR and the investment in the
Partnership could only be determined through a valuation of the individual assets.
The aggregate fair value of the SIR Loan and the Investment in the Partnership is
approximately $46,174,000 based on the market value of the Fund units as of the
close of business on December 29, 2006.
Disclosure of Outstanding Unit Data
The following summarizes the ownership structure of the Fund as at March 29, 2007,
December 31, 2006 and December 31, 2005:
March 29, 2007
Number
of Units
Amount
$
Units
issued 5,356,667 51,166,670
December 31, 2006
December 31, 2005
Number
of Units
Number
of Units
Amount
$
5,356,667 51,166,670
Amount
$
5,356,667 51,166,670
47
Risks and Uncertainties
The performance of the Fund is dependent upon distributions from the Partnership
and indirectly the Royalty that the Partnership receives from SIR. The amount of the
Royalty is dependent upon the revenue of the SIR Restaurants in the Royalty pool.
Pooled Revenue is affected by the risks associated with the operations and financial
condition of SIR, the commercial foodservice industry generally, and the casual
and fine dining segment of the commercial foodservice industry in particular. The
restaurant industry generally and, in particular, the casual and fine dining segment
of the industry, is intensely competitive with respect to price, service, location, food
quality and qualified staff. Competition has increased in the mid-price, full service,
casual and fine dining sectors in which many of the SIR restaurants operate. If SIR is
unable to successfully compete in the casual and fine dining sectors of the restaurant
industry, Pooled Revenue may be adversely affected, the amount of the Royalty
reduced and the ability of SIR to pay the Royalty may be impaired. Please refer to the
prospectus dated October 1, 2004 and its March 30, 2007 Annual Information Form
for further discussion on risks and uncertainties related to the Fund and SIR.
The income of the Fund must be computed and will be taxed in accordance
with Canadian tax laws. There is no assurance that Canadian federal income tax laws
respecting the treatment of trusts will not be changed in a manner which adversely
affects Unitholders. On October 31, 2006, the Federal Department of Finance
announced a plan that proposes changes to the manner in which distributions from
certain publicly listed flow-through entities (“FTEs”) including income funds are taxed.
The proposed changes to the current legislation would have certain distributions of
FTEs’ income subject to tax at corporate income tax rates and investors in the FTE
would be taxed as though the distributions were dividends. Existing Income Trusts
would not be subject to this proposed taxation of distributions until the 2011 taxation
year so long as the Fund meets the requirements for “normal growth”. On December
15, 2006, the Federal Department of Finance released guidance provisioning the
amount of growth that FTEs are permitted to experience without jeopardizing its
deferral of these new proposed taxation rules. The 2011 date will hold for those FTEs
whose equity capital growth does not exceed the greater of $50 million and the FTEs
market capitalization as of the end of trading on October 31, 2006. On December
21, 2006, the Federal Department of Finance issued draft legislation on the proposed
taxation legislation for public comment. On March 27, 2007, the Minister of Finance
issued a Notice of Ways and Means Motion to implement the draft legislation. These
proposed changes to the income tax legislation have not been approved at this time.
The Fund is considering this announcement and the possible impact of the
proposed rules to the Fund. The proposed rules may adversely affect the value and
marketability of the Fund’s Units and the ability to undertake financings, and at such
time as the proposed rules apply to the Fund, the distributable cash of the Fund
may be materially reduced. The proposed rules may as a result adversely affect the
Fund and its Unitholders as well as SIR, as the holder of Partnership interests, and
the Fund intends to continue to assess and plan for their expected impact. Changes
may prove necessary to seek to adapt to any new tax laws with a view to attempting,
where practicable, to minimize their overall adverse effects.
48
Outlook
SIR has advised the Fund that it intends to continue to focus on growing existing
restaurant revenues and expanding the number of SIR Restaurants subject to the
SIR Rights in Canada. As part of that expansion plan, SIR has opened six new
restaurants since the Fund’s Initial Public Offering. Two Jack Astor’s restaurants (one
on the corner of Front Street and University Avenue in downtown Toronto, Ontario
and a second one in Whitby, Ontario) in fiscal 2005. Three Canyon Creek restaurants
were opened (in Scarborough, Ontario, in Vaughan, Ontario, and at the Fallsview
Casino Resort in Niagara Falls, Ontario) in fiscal 2006. On March 26, 2007, the new
Jack Astor’s located in Hamilton, Ontario opened. On January 1, 2006, the two
Jack Astor’s locations that were opened in fiscal 2005 were added to SIR’s Royalty
Pooled Restaurants. In exchange for the additional Royalty stream from these new
net restaurants, 438,820 Class B GP Units were converted to 438,820 Class A GP
Units based on a formula defined in the Partnership Agreement. On May 27, 2006,
the Jack Astor’s in Don Mills, Ontario was closed. This location has been demolished
by the landlord and is to be redeveloped into a major “lifestyle mall”. It is expected
that this project will be completed in the second half of 2008 and a new Jack Astor’s
restaurant would open in this location at that time. Under the terms of the License
and Royalty Agreement, SIR was required to pay a Make-Whole Payment for this
location from the date of the closure until December 31, 2006. Subsequent to
December 31, 2006, the three new Canyon Creek restaurants were added to SIR’s
Royalty Pooled Restaurants. In accordance with the License and Royalty Agreement,
as consideration for the additional Royalty associated with the addition of these
three new restaurants, SIR is able to convert its Class B GP Units into Class A GP
Units. The number of Class B GP Units that were converted to Class A GP Units on
January 1, 2007 was a result of the Second Incremental Adjustment for the two new
restaurants added to the Royalty Pooled Restaurants on January 1, 2006, the three
new restaurants that were added to the Royalty Pooled Restaurants on January 1,
2007, and an adjustment for the closure of one SIR Restaurant during the year.
The net effect of these adjustments to the Royalty Pooled Restaurants was that on
January 1, 2007, 421,004 Class B GP Units of the Partnership were converted into
421,004 Class A GP Units of the Partnership. This adjustment for new revenues that
will be part of the Royalty pool is designed to be accretive for Fund Unitholders.
In December of each year, a Conversion Distribution will be payable to the Class
B GP Unitholders based on actual revenues of the new SIR Restaurants exceeding
80% of the Initial Adjustment’s estimated revenue at the time that the restaurants
are added to SIR’s Royalty Pooled Restaurants or there will be a reduction in the
cash distributions to the Class A GP Unitholders if revenues are less than 80%
of the Initial Adjustment’s estimated revenue. The revenues of the two new Jack
Astor’s restaurants added to SIR’s Royalty Pooled Restaurants on January 1, 2006
exceeded the initial estimated amount and as a result, a Conversion Distribution of
$0.23 million was declared in December 2006. This Conversion Distribution affects
the net earnings, distributable cash(2) and the payout ratios(2) in Q4. This distribution
was paid subsequent to December 31, 2006.
(2)
See footnote (2) on page 30.
49
Following the successful renovations of the Alice Fazooli’s! locations in Richmond Hill,
Oakville, and Vaughan in fiscal 2005, SIR completed a renovation at the downtown
location in February 2006 and the fifth of the five Alice Fazooli’s! locations was
renovated in October 2006. SIR has experienced average revenue increases in
excess of 10% over the prior year during the first year following their renovations of
Alice Fazooli’s! restaurants.
reds was closed for 11 days for major renovations during the Fund’s third quarter
of fiscal 2006 and management is pleased with the results of these renovations.
In Q4 of the prior year, Far Niente was closed for approximately three weeks for
renovations. Management expects to continue to focus on improving revenue and
earnings in Brasserie Frisco and the Armadillo Steak House/the Loose Moose Tap
& Grill.
Management believes that the Smoke-Free Ontario Act (effective May 30, 2006)
has had a negative impact on bar sales in Q4, especially in restaurants that previously
had Designated Smoking Rooms. Management expects this to continue, but
believes that the negative effect of this Smoke-Free Ontario Act will be mitigated over
time as non-smoking guests replace smoking guests and smoking guests return.
Management anticipates that the effect will also lessen during the summer months
when patios which allow smoking can be opened.
On May 24, 2006, SIR (the operating company) announced that it had raised
$5 million in new capital through the issuance of SIR common shares that were
purchased by certain existing shareholders of SIR. SIR will use the new capital to
support its future restaurant growth plans.
SIR has secured two additional sites for Jack Astor’s restaurants which, are
planned to open in fiscal 2007. These sites are located in Hamilton, Ontario and
Dartmouth, Nova Scotia. The Hamilton, Ontario location opened subsequent to year
end and began its operations on March 26, 2007. SIR has also secured a third site
located at the corner of Dundas and Yonge Streets in Toronto, Ontario, which is
planned to open in fiscal 2008.
50
Forward-Looking Information
Certain statements in this MD&A may constitute “forward-looking” statements which
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Fund to be materially different
from any future results, performance or achievements expressed or implied by such
forward-looking statements. When used in this document, such statements are such
words as “may”, “will”, “expect”, “believe”, “plan”, “anticipate”, “intend”, “estimate”
and other similar terminology. These statements reflect SIR Management’s current
expectations regarding future events and operating performance and speak only as
of the date of this document. The Fund and SIR expressly disclaim any obligation
or undertaking to publicly release any updates or revisions to any forward-looking
statements contained herein to reflect any change in expectations with regard thereto
or any changes in events, conditions or circumstances on which any statement is
based. In formulating the forward-looking statements contained herein, management
has assumed that business and economic conditions affecting SIR’s restaurants and
the Fund will continue substantially in the ordinary course, including without limitation
with respect to industry conditions, general levels of economic activity (including in
downtown Toronto), regulations (including those regarding employees, food safety,
tobacco and alcohol), weather, taxes, foreign exchange rates and interest rates, that
there will be no pandemics or other outbreaks of disease or safety issues affecting
humans or animals or food products, and that there will be no unplanned material
changes in its facilities, equipment, customer and employee relations, or credit
arrangements. In particular, in estimating the revenues for the three new Canyon
Creek restaurants, management has assumed that they will operate consistent with
other Canyon Creek restaurants. For more information concerning the Fund’s risks
and uncertainties, please refer to the October, 2004 prospectus and/or its March 30,
2007 Annual Information Form.
Additional information related to the Fund, the Partnership and SIR can be
found at www.sedar.com under SIR Royalty Income Fund and on SIR’s website at
www.sircorp.com.
51
Management’s Responsibility
for Financial Reporting
March 26, 2007
These consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles. Management
is responsible for their integrity, objectivity and reliability, and for the maintenance
of financial and operating systems, which include effective controls, to provide
reasonable assurance that the Fund’s assets are safeguarded and that reliable
financial information is produced.
The Board of Trustees is responsible for ensuring that management
fulfills its responsibilities for financial reporting and internal control. The Board
exercises these responsibilities through its Audit Committee, all members of
which are not involved in the daily activities of the Fund. The Audit Committee
meets with management and, as necessary, with the independent auditors,
PricewaterhouseCoopers LLP, to satisfy itself that management’s responsibilities
are properly discharged and to review and report to the Board on the consolidated
financial statements.
In accordance with Canadian generally accepted auditing standards, the
independent auditors conduct an examination each year in order to express a
professional opinion on the consolidated financial statements.
Peter Fowler
President & Chief Executive Officer
52
Jeff Good
Chief Financial Officer
Auditors’ Report to the
Unitholders of SIR Royalty Income Fund
March 26, 2007
We have audited the consolidated balance sheets of SIR Royalty Income Fund
as at December 31, 2006 and 2005 and the consolidated statements of earnings,
unitholders’ equity and cash flows for the years then ended. These financial
statements are the responsibility of the Fund’s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Fund as at December 31, 2006 and
2005 and the results of its operations and its cash flows for the years then ended
in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
Hamilton, Ontario
53
SIR Royalty Income Fund
Consolidated Balance Sheet
As at December 31, 2006 and 2005
2006
$
2005
$
18
—
77,072
32,577
862,593
617,962
939,683
650,539
Loan receivable from SIR Corp.
(note 3)
40,000,000
40,000,000
Investment in SIR Royalty Limited
Partnership (note 4)
11,166,671
11,166,671
52,106,354
51,817,210
124,183
105,025
51,982,171
51,712,185
52,106,354
51,817,210
Assets
Current assets
Cash and cash equivalents
Prepaid expenses and other assets
Amounts due from related parties
(note 7)
Liabilities
Current liabilities
Accounts payable and accrued
liabilities
Unitholders’ Equity (note 5)
Subsequent event (note 7)
The accompanying notes are an integral part of these consolidated financial statements
Approved by the Board of Trustees
Peter Luit
Trustee
54
Peter Fowler
Trustee
SIR Royalty Income Fund
Consolidated Statements of Earnings
For the years ended December 31, 2006 and 2005
2006
$
2005
$
Distribution income from Partnership
(notes 4 and 7)
4,361,428
4,025,112
Interest income (note 3)
3,000,000
3,000,000
7,361,428
7,025,112
475,958
558,663
6,885,470
6,466,449
$1.29
$1.21
Investment income
Expenses
General and administrative (note 7)
Net earnings for the year
Basic and diluted earnings per
Fund unit (note 6)
The accompanying notes are an integral part of these consolidated financial statements
55
SIR Royalty Income Fund
Consolidated Statements of Unitholders’ Equity
For the years ended December 31, 2006 and 2005
2006
$
2005
$
51,712,185
51,673,736
Net earnings for the year
6,885,470
6,466,449
Distributions declared and paid
(note 5)
(6,615,484)
(6,428,000)
51,982,171
51,712,185
Balance – Beginning of year
Balance – End of year
The accompanying notes are an integral part of these consolidated financial statements
SIR Royalty Income Fund
Consolidated Statements of Cash Flows
For the years ended December 31, 2006 and 2005
2006
$
2005
$
6,885,470
6,466,449
(269,968)
(38,449)
6,615,502
6,428,000
(6,615,484)
(6,428,000)
Change in cash and
cash equivalents
18
—
Cash and cash equivalents
– Beginning of year
—
—
Cash and cash equivalents
– End of year
18
—
Cash provided by (used in)
Operating activities
Net earnings for the year
Net change in non-cash working
capital items (note 8)
Financing activities
Distributions paid
The accompanying notes are an integral part of these consolidated financial statements
56
SIR Royalty Income Fund
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
1
Nature of operations and seasonality
Nature of operations
SIR Royalty Income Fund is a trust established on August 23, 2004 under the laws
of the Province of Ontario.
On October 1, 2004, SIR Royalty Income Fund (the “Fund”) filed a final prospectus
for a public offering of units of the Fund. The net proceeds of the offering to the Fund
of $51,166,670 were used by the Fund to acquire, directly, certain bank debt of
SIR Corp. (the “SIR loan”) and indirectly, through SIR Holdings Trust (the “Trust”),
all of the Ordinary LP units of SIR Royalty Limited Partnership (the “Partnership”).
The Partnership owns the Canadian trademarks (the “SIR Rights”) formerly owned
or licensed by SIR Corp. (“SIR”) or its subsidiaries and used in connection with the
operation of the majority of SIR’s restaurants in Canada (the “SIR restaurants”).
The Partnership has granted SIR a 99-year license to use the SIR Rights in most
of Canada in consideration for a Royalty, payable by SIR to the Partnership, equal
to 6% of the revenue of the restaurants included in the Royalty pool (the “License
and Royalty Agreement”). The Fund, indirectly, participates in the revenue generated
under the License and Royalty Agreement through its investment in the Partnership
(note 4).
Seasonality
The full-service restaurant sector of the Canadian foodservice industry in which
SIR operates experiences seasonal fluctuations in revenues. Favourable summer
weather generally results in increased revenue during SIR’s fourth quarter (ending
the last Sunday in August) when patios can be open. Additionally, certain holidays
and observances also affect dining patterns both favourably and unfavourably.
Accordingly, distribution income recognized by the Fund will vary in conjunction with
the seasonality in revenue experienced by SIR.
2
Summary of significant accounting policies
These consolidated financial statements are prepared in accordance with Canadian
generally accepted accounting principles and include the accounts of the Fund and
its subsidiaries, namely the Trust and SIR GP Inc. All intercompany accounts and
transactions have been eliminated.
Use of estimates
The preparation of these financial statements requires management to make
estimates and assumptions that affect income and expenses during the reporting
periods, in addition to the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements. Actual results could differ
materially from those estimates in the near term.
57
Cash and cash equivalents
Cash is defined as cash and short-term investments with original maturities of three
months or less.
Earnings per Fund unit
The earnings per Fund unit are based on the weighted average number of Fund units
outstanding during the period. Diluted earnings per Fund unit are calculated to reflect
the dilutive effect, if any, of SIR exercising its right to exchange its Class A GP units of
the Partnership into Fund units at the beginning of the period.
Distributions
Distributions to unitholders are intended to be made monthly in arrears and are
recorded when declared by the Trustees of the Fund.
Financial instruments
The Fund’s financial instruments consist of cash and cash equivalents, loan
receivable from SIR, investment in the Partnership, accounts payable and accrued
liabilities and amounts due to and from related parties. 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 approximate their carrying values due to their
short-term maturity except for the loan receivable from SIR and the investment in the
Partnership. The fair values of the loan receivable from SIR and the investment in the
Partnership could only be determined through the valuation of the individual assets.
The aggregate fair value of the SIR Loan and the Investment in the Partnership is
approximately $46,174,000 based on the market value of the Fund units as of the
close of business on December 29, 2006.
Income taxes
The Fund is a unit trust for income tax purposes. As such, the Fund is only taxable on
income not distributed to unitholders. As substantially all taxable income is allocated
to unitholders, no provision for income taxes has been made for earnings of the Fund.
On December 21, 2006, the Minister of Finance of Canada released draft legislation
relating to the Federal income taxation of certain publicly traded income trusts
commencing with taxation years ending on or after 2011. If enacted, the Fund will
be subject to income taxes on income earned from its investments beginning in 2011.
The Fund’s subsidiaries also are not required to pay tax, and accordingly,
no provision for income taxes has been made for the earnings of the Fund’s
subsidiaries.
Investment and loan receivable
The investment in the Partnership is recorded at cost. The investment is reviewed
for impairment and written down to its estimated realizable amount when there is an
impairment. Distribution income from the Partnership is recorded when distributions
are declared by the Partnership. Distributions in excess of the Fund’s share of the
Partnership’s income are recorded as a reduction in the amount of the investment.
58
The loan receivable from SIR is reviewed for impairment. If an impairment is identified
the loan would be reduced to its estimated realizable amount measured by the present
value of expected future cash flows. The accrual of interest would be suspended if
collection becomes doubtful.
At December 31, 2006 there is no impairment of the investment or loan
receivable.
Recently issued accounting pronouncements
Financial Instruments – Recognition and Measurement, Handbook Section 3855
Section 3855 prescribes when a financial asset, financial liability, or non-financial
derivative is to be recognized on the balance sheet and at what amount – in certain
instances using fair value and in others using cost-based measures. It also specifies
how financial instrument gains and losses are to be presented.
Section 3855 applies to interim and annual financial statements relating to fiscal
years beginning on or after October 1, 2006. The Fund will adopt this standard
effective January 1, 2007. Transitional provisions for this Section are complex and
vary based on the type of financial instrument under consideration. The Fund has
elected to classify its loan receivable as held to maturity and accordingly, it will be
recorded at its amortized cost. The investment in the Partnership does not have a
quoted market price in an active market and accordingly, will be accounted for at
cost. Accordingly, the adoption of this standard will not change the Fund’s current
policies for the investment and loan receivable.
Comprehensive Income, Handbook Section 1530
Section 1530 introduces a new requirement to temporarily present certain gains and
losses outside net income.
Section 1530 applies to interim and annual financial statements relating to fiscal
years beginning on or after October 1, 2006. Earlier adoption is permitted only as of
the beginning of a fiscal year ending on or after December 31, 2004. The Fund will
adopt this standard effective January 1, 2007. Financial statements of prior periods
are required to be restated for certain comprehensive income items. In addition, an
enterprise is encouraged, but not required, to present reclassification adjustments in
comparative financial statements provided for earlier periods. This standard will not
have an impact on the Fund.
Hedges – Handbook Section 3865
Section 3865 establishes standards for when and how hedge accounting may be
applied. Hedge accounting is optional. This Section applies for interim and annual
financial statements relating to fiscal years beginning on or after October 1, 2006.
Retroactive application is not permitted.
The Fund will adopt this standard effective January 1, 2007. The Fund has no
arrangements for hedging, and the adoption of this standard will not have any impact
on the Fund’s financial statements.
59
3
Loan receivable from SIR Corp.
The SIR loan bears interest at 7.5% per annum, is due October 12, 2044 and is
collateralized by a general security agreement covering substantially all of the assets
of SIR and its subsidiaries in Canada. Interest income of $3,000,000 was earned
during the year ended December 31, 2006 (December 31, 2005 – $3,000,000).
SIR has the right to require the Fund to, indirectly, purchase the Class C GP
units of the Partnership and assume a portion of the SIR loan as consideration for the
acquisition of the Class C GP units.
4
Investment in SIR Royalty Limited Partnership
On October 12, 2004, the Fund, indirectly through the Trust, acquired all of the
Ordinary LP units of the Partnership. The holders of the Ordinary LP and Class A GP
units are entitled to receive a pro rata share of distributions of the Partnership. The
holder of the Ordinary LP units have the right to receive distributions in priority to the
initial 595,185 Class A GP units. The subordination on the distributions on the Class
A GP units of the Partnership ends on the date that both of the following conditions
have been satisfied:
a) Revenue of the SIR restaurants subject to the License and Royalty Agreement
has not been less than $127.4 million for each of two consecutive years
commencing with SIR’s fiscal year ending August 28, 2005; and
b) Average monthly distributions of $0.10 per Fund unit have been paid by the
Fund and average quarterly cash distributions of at least $0.30 have been
paid by the Partnership to the Class A GP unitholders, in each case for the
immediately preceding 12-month period.
The subordination on the distributions on the initial Class A GP units of the
Partnership is expected to continue until at least August 26, 2007.
The distributions from the Partnership primarily comprise revenue earned by the
Partnership under the License and Royalty Agreement (note 1) less certain general
and administrative expenses. Distributions for the year ended December 31, 2006
amount to $4,361,428 (December 31, 2005 – $4,025,112).
5
Fund units
An unlimited number of Fund units may be issued pursuant to the declaration of
trust. Fund units are redeemable by the holder at a price equal to the lesser of 90%
of the market price of a unit during the 10 consecutive trading day period ending on
the trading day immediately prior to the date on which the units were surrendered
for redemption and an amount based on the closing price on the redemption date,
subject to certain restrictions. Each holder of units of the Fund participates pro rata
in any distributions from the Fund. Income tax obligations related to the distributions
by the Fund are obligations of the unitholders. The Fund issued one unit on August
23, 2004 for cash proceeds of $10. Upon completion of the initial public offering, the
initial unit was redeemed for $10.
60
On October 12, 2004, the Fund issued 5,356,667 units for cash proceeds of
$51,166,670, net of unit issuance costs of $2,400,000. As at December 31, 2006
and December 31, 2005, there are 5,356,667 units issued and outstanding. Each
unit is entitled to one vote at any meeting of unitholders.
During the year ended December 31, 2006, the Fund declared distributions
of $1.235 per unit (December 31, 2005 – $1.20 per unit). Subsequent to
December 31, 2006, the Fund declared a distribution of $0.105 per unit for the
month of December 2006.
6
Earnings per Fund unit
Basic earnings per Fund unit is computed by dividing net earnings by the weighted
average number of Fund units outstanding during the period.
Subject to the subordination provisions of the Class A GP units, SIR has the
right to convert the Class A GP units of the Partnership into units of the Fund. Diluted
earnings per Fund unit is calculated using the weighted average number of Fund
units outstanding adjusted to include the effect of the conversion of the Class A GP
units of the Partnership into Fund units.
The following table reconciles the basic and diluted weighted average number of
Fund units outstanding and basic and diluted earnings per Fund unit:
Adjustments
Basic for conversion
earnings per
of Class A
Fund unit
GP units
Diluted
earnings per
Fund unit
Net earnings for the year ended
December 31, 2006
$ 6,885,470
$ 8,259,227
Net earnings per Fund unit
for the year ended
December 31, 2006
$
Weighted average number
of Fund units outstanding
for the year ended
December 31, 2006
1.29
$
5,356,667
Net earnings for the year ended
December 31, 2005
$ 6,466,449
Net earnings per Fund unit for the
year ended December 31, 2005
$
Weighted average number of
Fund units outstanding for the
year ended December 31, 2005
$ 1,373,757
$
1,034,005
6,390,672
718,494
$ 7,184,943
1.21
5,356,667
1.29
$
595,185
1.21
5,951,852
61
7
Related party transactions and balances
During the year ended December 31, 2006, the Fund received distribution income
of $4,361,428 from the Partnership (December 31, 2005 – $4,025,112). The Fund,
indirectly through the Trust, is entitled to receive a pro rata share of all residual
distributions. The Fund’s distribution income is dependent upon the revenue generated
by SIR for the restaurants subject to the License and Royalty Agreement. Under the
terms of the License and Royalty Agreement, SIR may be required to pay a MakeWhole Payment in respect of the reduction in revenue for restaurants closed during
a reporting period. SIR is not required to pay any Make-Whole Payment in respect
of a closed restaurant following the date on which the number of restaurants in the
Royalty pool is equal to or greater than 68 or following October 12, 2019, whichever
occurs first. On January 1 of each year (the adjustment date), following December
31, 2005, the restaurants subject to the License and Royalty Agreement are adjusted
for new restaurants opened in the previous fiscal year. At each adjustment date, SIR
will be entitled to convert its Class B GP units of the Partnership to Class A GP units
of the Partnership based on a conversion formula defined in the License and Royalty
Agreement.
On January 1 of each year, Class B GP units are converted into Class A GP
units for new SIR Restaurants added to the Royalty pool based on 80% of the initial
estimated revenue and the formula defined in the Partnership Agreement. Additional
Class B GP units may be converted to Class A GP units in respect of these new SIR
Restaurants if actual revenues of the new SIR Restaurants exceeded 80% of the initial
estimated revenue and the formula defined in the Partnership Agreement. Conversely,
converted Class A GP units may be returned by SIR if the actual revenues of the new
SIR Restaurants are less than 80% of the initial estimated revenue. In December of
each year, an Additional Distribution will be payable to the Class B GP unitholders
provided that actual revenues of the new SIR Restaurants exceed 80% of the initial
estimated revenue or there will be a reduction in the distributions to the Class A GP
unitholders if revenues are less than 80% of the initial estimated revenue.
On January 1, 2006, two new SIR Restaurants were added to the Royalty pool
in accordance with the License and Royalty Agreement. As consideration for the
additional Royalty associated with the addition of two new restaurants, SIR converted
438,820 Class B GP units to 438,820 Class A GP units based on the formula defined
in the Partnership Agreement. The 438,820 Class A GP units have been recorded at
their estimated fair value of $4,063,473. The revenues of the new SIR Restaurants
exceeded 80% of the Initial Adjustment’s estimated revenue and, as a result, an
Additional Distribution of $231,351 was declared in December 2006 and paid in cash
to SIR in January 2007.
62
On January 1, 2007, three new SIR Restaurants were added to the Royalty Pooled
Restaurants in accordance with the License and Royalty Agreement. As consideration
for the additional Royalty associated with the addition of three new restaurants on
January 1, 2007, as well as the second incremental adjustment for the two new SIR
restaurants added to the Royalty Pooled Restaurants on January 1, 2006, SIR is able
to convert its Class B GP units into Class A GP units based on the formula defined
in the Partnership Agreement. The number of Class B GP units that SIR is able to
convert to Class A GP units was reduced by an adjustment for the closure of one SIR
Restaurant during the year. The net effect of these adjustments to the Royalty Pooled
Restaurants was that SIR converted 421,004 Class B GP units of the Partnership into
421,004 Class A GP units of the Partnership on January 1, 2007. The 421,004 Class
A GP units will be recorded at their estimated fair value of $3,531,911.
The Partnership has entered into an arrangement with the Fund and the Trust
whereby the Partnership will provide or arrange for the provision of services required
in the administration of the Fund and the Trust. The Partnership has arranged for
these services to be provided by SIR GP Inc. in its capacity as the Managing General
Partner, or SIR as General Partner, of the Partnership. SIR, on behalf of SIR GP Inc.,
also provides services to the Partnership for its administration. For the year ended
December 31, 2006, the Partnership provided these services to the Fund and the
Trust for consideration of $24,000 (December 31, 2005 – $24,000), which was the
amount of consideration agreed to by the related parties.
Amounts due from (to) related parties consist of:
Distribution receivable
2006
$
2005
$
1,386,861
890,917
Advances payable
(738,669)
(503,243)
Amounts receivable from
SIR Royalty Limited Partnership
648,192
387,674
Interest receivable
250,000
250,000
(35,599)
(19,712)
Amounts receivable from SIR Corp.
Advances payable
214,401
230,288
Amounts due from related
parties – net
862,593
617,962
Amounts (due to) from related parties are non-interest bearing and due on demand.
All advances were conducted as part of the normal course of business operations.
63
8
Net change in non-cash working capital items
Net change in non-cash working capital items comprises:
Prepaid expenses and other assets
Amounts due from related parties
2006
$
2005
$
(44,495)
64,719
(244,631)
124,578
Accounts payable and accrued
liabilities
19,158
1,025
Amounts due to related parties
—
(228,771)
(269,968)
9
(38,449)
Economic dependence
The Fund’s income is derived from interest income on the SIR loan and distributions
from the Partnership and accordingly, the Fund is economically dependent upon
SIR.
64
UNITHOLDER INFORMATION
Corporate Head Office
SIR Corp.
5360 South Service Road, Suite 200
Burlington, Ontario L7L 5L1
Tel:
(905) 681-2997
Fax:
(905) 681-0394
Email:
info@sircorp.com
Website: www.sircorp.com
Board of Trustees
John McLaughlin, Chairman
Peter Fowler
Ken Fowler
Peter Luit
William Rogers
Transfer Agent
Computershare Trust Company
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
Tel:
(416) 263-9534
Auditors
PricewaterhouseCoopers LLP
Stikeman Elliott LLP
Market Data
Units of SIR Royalty Income Fund are listed on the Toronto Stock Exchange
under the Symbol: SRV.UN
Units issued and outstanding as at December 31, 2006: 5,356,667
Investor Contact
Bruce Wigle
The Equicom Group Inc.
Tel:
(416) 815-0700 ext. 228
Email:
bwigle@equicomgroup.com
Annual General Meeting
4:00 p.m., Wednesday, May 23rd, 2007
Soul of the Vine® (below Far Niente®)
187 Bay Street, Commerce Court West
Toronto, Ontario
Design and production provided by The Equicom Group Inc.
Legal Counsel
SIR Corp.
5360 South Service Road, Suite 200 Burlington, Ontario L7L 5L1
www.sircorp.com
66