Welcome to a S Atisfying Experience
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THE KEG ROYALTIES INCOME FUND ANNUAL REPORT 2006 Welcome to a Satisfying Experience KR7010_AR_cover 3/1/07 1:24 PM Page 3 FINANCIAL HIGHLIGHTS Oct. 1 Oct. 1 Jan. 1 Jan. 1 to Dec. 31, to Dec. 31, to Dec. 31, to Dec. 31, ($000’s except per unit amounts) 2006 2005 2006 2005 Restaurants in the Royalty Pool 91 86 91 86 Gross sales reported by Keg restaurants in the Royalty Pool . $ 98,684 $ 85,217 $ 372,472 $ 325,717 Royalty income (1) . $ 4,038 $ 3,449 $ 15,097 $ 13,138 Partnership expenses (2) . (105) (89) (456) (441) Partnership earnings . 3,933 3,360 14,641 12,697 KRL’s interest (3) . (1,876) (1,756) (7,306) (6,965) Equity income (4) . 2,057 1,604 7,335 5,732 Interest income (5) . 1,083 1,079 4,289 4,281 Total income . 3,140 2,683 11,624 10,013 Interest and financing expenses (6) . (234) (192) (900) (711) Earnings for the period . $ 2,906 $ 2,491 $ 10,724 $ 9,302 Earnings per Fund unit (7) . $ .321 $ .296 $ 1.200 $ 1.124 Distributable cash per Fund unit (7)(8) . $ .322 $ .297 $ 1.203 $ 1.127 Distributions declared per Fund unit (7) . $ .382 $ .367 $ 1.139 $ 1.092 Notes: (1) The Fund, indirectly through the Partnership, earns royalty income equal to 4% of gross sales of Keg restaurants included in the Royalty Pool. (2) The Fund, indirectly through the Partnership, incurs administrative expenses and interest on an operating line of credit, to the extent utilized. (3) Represents the interest of KRL in the earnings of the Partnership from the Class A, entitled Class B and Class C Partnership units. The Class A and entitled Class B Partnership units are exchangeable into Fund units on a one-for-one basis. (4) The Fund directly earns equity income from its investment in the Partnership. (5) The Fund directly earns interest income on the $57.0 million Keg Loan, with interest income accruing at 7.5% per annum, payable monthly. (6) The Fund directly incurs interest expenses on the long-term debt and amortization of deferred financing charges. (7) All per unit amounts are calculated based on the weighted average number of Fund units outstanding, which are those units held by public unitholders during the respective period. The weighted average number of Fund units outstanding for the three months ended December 31, 2006 was 9,053,500 (2005 – 8,403,500) and for the year ended December 31, 2006 was 8,934,185 (2005 – 8,277,473). (8) Distributable cash is not an earnings measure recognized by generally accepted accounting principles (“GAAP”) and therefore may not be comparable to similar measures presented by other issuers. Distributable cash per unit is computed as earnings for the period plus non-cash items, divided by the weighted average number of Fund units issued and outstanding. Dec. 31, Dec. 31, 2006 2005 Total assets . $ 106,580 $ 97,671 Total liabilities . 14,943 14,836 KR7010_AR_06 3/1/07 1:29 PM Page 1 Staying TRUE to what you DO BEST For more than 35 years, The Keg Steakhouse & Bar has set itself apart with a strong commitment to quality, comfort and value. By far the number-one choice for a steak dinner in Canada, The Keg is a powerhouse brand. One key to The Keg’s success is its ability to change with the times and with evolving tastes, yet stay true to its steakhouse heritage. This singular focus is communicated both inside the restaurants and through The Keg’s advertising and promotional materials. Since the first Keg restaurant opened in North Vancouver in 1971, The Keg has grown to more than 95 locations across North America. With a comfortable atmosphere, friendly service, and mouth-watering steaks, Kegs are a home away from home, where customers are guests, and you are sure to be welcomed with a smile. ANNUAL REPORT 2006 | 1 KR7010_AR_06 3/1/07 1:29 PM Page 2 FUND CHAIRMAN’S REPORT to UNITHOLDERS On behalf of the Trustees of The and its Unitholders. While the Keg Royalties Income Fund (the Fund has administrative and “Fund”), I am pleased to present interest expenses of its own to our Annual Report for the year manage on behalf of Unitholders, ended December 31, 2006. those expenses are relatively minor. The Fund is also designed A PROVEN STRUCTURE - to ensure that the interests of KRL ROYALTY TRUSTS and its management are aligned When the Fund was launched in with the Fund without fees, May 2002, we chose the royalty incentives or other remuneration trust structure as we believed it to achieve that alignment. KRL best suited our business and remained the largest investor in would be most beneficial to the Fund during 2006 with a fully Unitholders. Since the Fund’s diluted interest of 22.64%, up revenue is based solely on the top- from 22.50% a year ago. As of line revenues of Keg restaurants, January 1, 2007, as a result of the all operational expenses and annual roll-in of the sales of new capital expenditures associated Keg restaurants into the Fund, with the restaurant business KRL’s effective interest grew to remain the responsibility of Keg 25.43%. As David Aisenstat, Restaurants Ltd. (“KRL”) and its President & CEO of Keg franchisees. Thus those business Restaurants Ltd., will describe risks are eliminated for the Fund later in this report, KRL remains a strong and growing company. REVIEW AND OUTLOOK In 2006, The Keg once again reached a new sales record for the year. The gross sales reported by the 91 Keg restaurants in the Royalty Pool for 2006 were $372,472,000, an increase of $46,755,000 or 14.4% from 2005. The Fund generated earnings of $10,724,000 or $1.20/unit, compared with $9,302,000 or $1.12/unit during the prior year. Distributable cash available to pay distributions to unitholders increased by $1,420,000, to 2 | THE KEG ROYALTIES INCOME FUND KR7010_AR_06 3/5/07 9:40 AM Page 3 $10,748,000 or $1.20/unit from will remain focused on running $9,328,000 or $1.13/unit in the great steakhouses and bars, and prior year. increasing sales at both new locations and existing restaurants. The Canadian Restaurant and Foodservice Association (CRFA) has DELIVERING RESULTS projected growth in the full-service YEAR AFTER YEAR restaurant category, the category in We believe The Keg’s operational which The Keg operates, of 3.6% in strategies have demonstrated 2007. Management of KRL believes success throughout various that The Keg will continue to market cycles. Overall growth outperform the full-service category and same store sales growth with respect to overall growth. have continued, and Keg management remains committed DISTRIBUTION INCREASES to maintaining and improving the During 2006, the Trustees were legendary high standards that have pleased to authorize distribution come to define the brand. Most increases to Unitholders. The importantly, The Keg continues to Fund’s objective is to provide deliver consistently great overall consistent, monthly distributions experiences and, as a result, to Unitholders at the highest continues to enjoy the loyalty of sustainable level, and the Fund its guests. will continue to review distribution levels on an ongoing We are confident that with its basis to fulfill that objective. sound operations and continued innovation, The Keg will not only At the beginning of 2006, participate in the current distributions were set at 9.18¢ per favourable business environment, month or approximately $1.10 but will continue to be a leader. per annum; at the date of this For the Fund, that translates into report we are delighted to note consistent and growing that they have increased to 9.80¢ distribution payments. We look per month or approximately forward to its continued success. $1.18 annually. In closing, we would like to once FEDERAL GOVERNMENT again thank our Unitholders for TAX ON INCOME FUNDS the support demonstrated by their On October 31, 2006, The investment in The Keg Royalties Federal Department of Finance Income Fund. announced a new Distribution Tax on publicly traded income Sincerely, trusts. We are very disappointed with the government’s sudden about face on its tax treatment of C. C. Woodward income trusts, and are extremely Chairman, unhappy with the impact that this The Keg Royalties Income Fund has had on our Unitholders. That on behalf of the Board of Trustees having been said, we are confident March 22, 2007 that the management of The Keg ANNUAL REPORT 2006 | 3 KR7010_AR_06 3/6/07 3:15 PM Page 4 KEG RESTAURANTS LTD. REPORT to UNITHOLDERS On behalf of Keg Restaurants with the Fund which gives KRL Ltd., its management, the exclusive licence to use the franchisees and employees, Keg Rights for a period of 99 I am pleased to present the years in exchange for a royalty audited financial statements of payment of 4% of the sales of Keg KRL for its fiscal year ended restaurants in Canada and the October 1, 2006. U.S. KRL remains a private company which continues to THE KEG ROYALTIES operate The Keg restaurant INCOME FUND business, owns over 40 of the On May 31, 2002, KRL sold the individual Keg restaurants, and Keg Rights to the Fund. The Keg franchises over 50 additional Kegs. Rights are the trade marks, trade It is this underlying business names, operating procedures and which makes the monthly royalty systems and other intellectual payments to the Fund, which in property used in connection with turn pays distributions to the operation of The Keg Unitholders.