Second Cup Royalty Income Fund announces 2007 results and distribution increase



    MISSISSAUGA, ON, March 12 /CNW/ - Second Cup Royalty Income Fund (the
"Fund") reported today financial results for the fourth quarter and year ended
December 31, 2007, and other matters as discussed below. The Fund's units are
traded on the Toronto Stock Exchange under the symbol "SCU.UN". All amounts in
this news release are presented in thousands of Canadian dollars, unless
otherwise indicated.

    
    Highlights

        -  A 3.3% increase in monthly distributions to 9.4 cents per unit
           from 9.1 cents per unit, on an annualized basis this represents an
           increase in the distribution to $1.1280 per unit from
           $1.0920 per unit
        -  Same Café Sales growth of 3.0% for the year, 0.7% in the
           fourth quarter
        -  A one-time recovery of $450 by a subsidiary of the Fund pursuant
           to reassessments received on prior year income tax returns as
           discussed below
        -  A decrease in current income tax expense from $318 in 2006 to
           $56 for 2007, as a result of the reorganization of the Fund's
           structure on April 2, 2007
    

    "The deceleration in the rate of growth in same Café sales during the
fourth quarter while disappointing, is reflective of a similar trend in the
industry and the sector in general for the period. The principal contributing
factors to this were strong sales in the comparable quarter from a year ago; a
marginal slow down in the Canadian economy; and the inclement weather
experienced during the month of December which is our busiest month of the
year," commented Gabriel Tsampalieros, Chairman and Chief Executive Officer of
The Second Cup Ltd. ("Second Cup"), and the President and Chief Executive
Officer of Second Cup GP Inc. ("GP Inc."). "That said, given the various sales
growth initiatives underway and assuming a stable economy for the balance of
this year, we are confident that our track record of 17 consecutive quarters
of positive same café sales growth will continue. As always, I wish to thank
our franchise partners and colleagues for their significant role in attaining
and continuing this achievement," added Mr. Tsampalieros.

    Distribution Increase Announcement

    The Fund is pleased to announce that its Board of Trustees has approved a
3.3% increase to the monthly unitholder distribution effective for the
February 2008 distribution which will be paid on March 31, 2008 to holders of
record at the close of business on March 28, 2008. The change will increase
the monthly distribution rate from 9.1 cents per unit to 9.4 cents per unit,
or $1.1280 per unit on an annualized basis from $1.0920 per unit.

    Year to Date Analysis

    Same café sales growth, a key metric of growth for the Fund, was 3.0% for
the year. System sales increased 3.4% to $195,750 from $189,287 in 2006. Same
café sales for the year to date were positively impacted by price increases
implemented in 2006 and Second Cup's promotional programs, which continued to
shift the Company's sales mix to its higher priced blender and espresso-based
beverages, and, in turn, resulted in higher average cheque amounts versus
2006. Same café sales were negatively impacted by approximately 1.0% due to
the temporary closure of 40 cafés while under renovation.
    The source of revenue for the Fund is through its 100% ownership in
Second Cup Trade-Marks Limited Partnership ("MarksLP") and prior to the
reorganization Second Cup Trade-Marks Inc. ("MarksCo"), which, in turn,
receives royalty income from Second Cup under a Royalty and Licence Agreement
(the "Agreement"). The earnings of MarksLP and MarksCo are recorded on an
equity-accounted basis in the Fund's financial statements.
    For the year, MarksLP and MarksCo earned total royalty revenue of $12,829
(2006 - $12,421), representing an increase of 3.3%. Total general and
administrative expenses incurred by the Fund, MarksCo and MarksLP were $965
(2006 - $693). The increase is primarily due to additional costs incurred for
external legal and accounting advisory charges in the third quarter. Net
interest expense for the Fund, MarksCo and MarksLP amounted to $569 in 2007
compared to $587 in 2006. The Fund also incurred a non-cash charge of $143
relating to the movement in the fair value of its interest rate swap (2006 -
$nil) which fixes the interest rate on the term loan. Non-cash amortization of
deferred financing charges amounted to $173 (2006 - $86). During the year, the
Fund incurred expenses of $312 (2006 - $407), or $0.0321 per unit (2006 -
$0.0422 per unit), related to the reorganization of the structure of the Fund.
For 2007, the Fund and its wholly-owned subsidiaries recorded a current income
tax recovery of $394. In the fourth quarter of 2007, as a result of
reassessments obtained subsequent to a federal income tax audit relating to
its predecessor corporation, MarksLP recorded a recovery of $450 in current
income tax. Excluding this one-time recovery of $450, the balance of current
income tax expense was $56 and related to income tax expense incurred by
MarksCo up to the reorganization of the Fund's structure in April 2007.
Current income tax expense incurred by the Fund's subsidiary corporations in
2006 was $318. Primarily as a result of the reorganization and new legislation
impacting income tax rates in 2011 and onwards, the combined entities recorded
a non-cash future income tax charge of $2,865 in 2007 (2006 - $187).
    Net earnings of the Fund were $8,196 or $0.8442 per unit for the year,
compared to $10,143, or $1.0524 per unit in 2006. Excluding the impact of the
$10,668 (2006 - $nil) non-cash future income tax recovery as a result of the
reorganization in the second quarter and non-cash future income tax expense of
$29 in MarksCo prior to the reorganization (2006 - $187) recorded in the
equity earnings of MarksCo; the $13,504 non-cash charge to earnings of the
Fund related to the set up of a future income tax liability as a result of the
income tax legislation described above; reorganization costs of $312 (2006 -
$407); the current income tax recovery of $450 relating to prior years as
described above (2006 - $nil); the non-cash movements in the fair value of the
interest rate swap of $143 (2006 - $nil) and amortization of deferred
financing charges of $31 (2006 - $nil) in the Fund and $142 in MarksCo (2006 -
$86), net earnings for the year-to-date were $11,239 or $1.1576 per unit
compared to $10,823 or $1.1229 per unit in 2006, an increase of 3.1% on a per
unit basis.
    Distributable cash is not an earnings measure recognized by generally
accepted accounting principles ("GAAP") and therefore may not be comparable to
similar measures presented by other issuers. Distributable cash is based on
cash flows from the combined operating activities of the Fund, MarksLP and
MarksCo. Distributable cash was $11,025, or $1.1356 per unit compared to
$10,600, or $1.0998 per unit for the prior year. Excluding the impact of
changes in non-cash working capital of the Fund, MarksCo and MarksLP, the
reorganization costs and the one-time recovery of income taxes relating to
prior years, distributable cash would have been $11,239, or $1.1576 per unit,
compared to $10,823 or $1.1229 per unit in 2006, which represents a 3.1%
increase in distributable cash per unit.

    Fourth Quarter Analysis

    System sales for the fourth quarter of 2007 were $54,402 (2006 - $53,759)
and same café sales growth was 0.7% (2006 - 7.8%) for the same period. The
poor weather across Canada in the month of December, compared to a very mild
December the year before, also had a negative impact on sales during the most
important sales period of the year. Same café sales were also negatively
impacted by approximately 0.5% due to the temporary closure of 10 cafés while
under renovation.
    For the quarter, MarksLP earned total royalty revenue of $3,593 (2006 -
$3,551), representing an increase of 1.2% compared to 2006. Total general and
administrative expenses incurred by the Fund and MarksLP were $229 (2006 -
$180). Net interest expense for the Fund and MarksLP amounted to $138 in the
quarter compared to $148 in 2006. The Fund also incurred a non-cash charge of
$179 relating to the movement in the fair value of its interest rate swap
(2006 - $nil) which fixes the interest rate on the term loan. Non-cash
amortization of deferred financing charges amounted to $12 (2006 - $17).
During the fourth quarter of 2006, the Fund incurred expenses of $40 or
$0.0042 per unit (2007 - $nil), related to the reorganization of the structure
of the Fund. In the fourth quarter of 2007, as a result of reassessments
obtained subsequent to a federal income tax audit relating to its predecessor
corporation, MarksLP recorded a recovery of $450 in current income tax.
Excluding this tax recovery, current tax expense for MarksLP was $nil,
compared to current income tax of $171 incurred by MarksCo in the fourth
quarter of 2006. Primarily as a result new legislation reducing future income
tax rates commencing in 2011 and onwards, the combined entities recorded a
non-cash future income tax recovery of $2,041 in the quarter (2006 - $116).
    Net earnings of the Fund were $5,525 or $0.5691 per unit for the period,
compared to $3,111, or $0.3228 per unit in 2006. Excluding the non-cash future
income tax recovery of $2,041 (2006 - $116) related to the revision to the
future income tax liability as a result of the income tax legislation
described above; reorganization costs of $nil (2006 - $40); the one-time
current income tax recovery of $450 (2006 - $nil) relating to prior years; and
the non-cash movements in the fair value of the interest rate swap $179 (2006
- $nil) and amortization of deferred financing charges of $12 (2006 - $17 in
MarksCo), net earnings for the quarter were $3,225 or $0.3322 per unit
compared to $3,052 or $0.3167 per unit in 2006, an increase of 4.9% on a per
unit basis.
    Distributable cash is not an earnings measure recognized by generally
accepted accounting principles ("GAAP") and therefore may not be comparable to
similar measures presented by other issuers. Distributable cash is based on
cash flows from the combined operating activities of the Fund, MarksLP and
MarksCo. Distributable cash was $3,040, or $0.3131 per unit compared to
$2,979, or $0.3091 per unit for the comparable period. Excluding the impact of
changes in non-cash working capital of the Fund, MarksCo and MarksLP, the
reorganization costs and the recovery of income taxes relating to prior years,
distributable cash would have been $3,225, or $0.3322 per unit, compared to
$3,052, or $0.3167 per unit for the fourth quarter of 2006, which represents a
4.9% increase in distributable cash per unit.

    Tax Treatment of Distributions

    The tax treatment of the 2007 distributions is approximately 15.5% return
of capital, 82.6% other taxable income (equivalent to interest income), and
1.9% from non-eligible dividends.

    Outlook

    The information contained in this "Outlook" is forward-looking
information. Please see "Forward-Looking Information" below for a discussion
of the risks and uncertainties in connection with forward-looking information.
    The Fund's "top line" structure means that its success and growth depend
primarily on Second Cup's ability to maintain and increase the overall system
sales of cafés in the Royalty Pool. Growth in overall system sales is
dependent on same café sales growth and adding new cafés to the café network.
    Second Cup has now achieved 17 consecutive quarters of positive same café
sales dating back to the fourth quarter of 2003. Subject to stable economic
conditions across Second Cup's primary markets, Second Cup expects to achieve
same café sales growth of approximately 2% to 4% for the 2008 fiscal year. To
achieve this growth, Second Cup has planned a number of growth initiatives to
strengthen the long-term success of the Second Cup brand and its franchisees:
    
        -  In 2008, Second Cup will put an even stronger focus on operational
           excellence at the café level, which it believes will yield even
           better consistency across the chain and in doing so improve the
           overall guest experience and help drive same café sales growth.

        -  In an effort to drive loyalty among specialty coffee customers,
           Second Cup's promotional strategies will focus on targeted
           branding initiatives leveraging its premium priced specialty
           beverages, food and merchandise innovations, and value added
           offers. Second Cup will also selectively enhance the nutritional
           quality of its grab and go food, and beverage offerings, including
           the launch of a beverage platform with lower fat and calorie
           claims in mid-2008.

        -  Second Cup will continue to improve upon in-café food offerings,
           and will be launching a premium hot breakfast sandwich in its
           Ontario and Quebec markets in early 2008.

        -  Second Cup will also be taking selective price increases on
           several of its products throughout the year, which is expected to
           have an impact of 1% to 2% on same café sales growth, depending on
           the timing and amount of pricing taken.

        -  Second Cup will continue to develop and build neighbourhood cafés
           with a focus on expansion in key urban markets utilizing a
           disciplined café development process, and the delivery of cost
           savings to franchisees in the build out of their new and
           renovated cafés.
    

    In terms of network expansion, Second Cup expects to open 12 to 18 new
cafés in Canada during the 2008 fiscal year. Second Cup also expects to close
10 to 14 cafés during 2008, the majority of which have sales below the average
performance of cafés in the Royalty Pool. Furthermore, Second Cup expects that
approximately 35 of its cafés will be renovated during 2008. Accordingly,
development of the Second Cup café network has been and continues to be a
strategic initiative for Second Cup.
    Overall, based on the initiatives outlined above and others, the
anticipated economic environment and market conditions affecting the specialty
coffee industry, the Fund expects a successful year in 2008.

    Financial Highlights

    The following table sets out selected financial information and other
data of the Fund and its wholly-owned subsidiaries, MarksLP and MarksCo, and
should be read in conjunction with the Fund's consolidated income statements.

    
    -------------------------------------------------------------------------
    (in thousands of dollars,       Three months ended       Year ended
     except number of cafés and     Dec. 31,   Dec. 31,   Dec. 31,   Dec. 31,
     per unit amounts)                2007       2006       2007       2006
    -------------------------------------------------------------------------
    Number of cafés in
     Royalty Pool                       351        352        351        352
    (357 cafés post the
     January 1, 2008 adjustment)

    Number of active cafés
     - end of period                    342        340        342        340

    Same café sales growth(3)           0.7%       7.8%       3.0%       6.2%

    System sales of cafés in
     the Royalty Pool(3)            $54,402    $53,759   $195,750   $189,287

    Royalty revenues earned by
     MarksLP and MarksCo(1)          $3,593     $3,551    $12,829    $12,421

    Earnings before reorganization
     expense, non-cash movements in
     interest rate swap, amortization
     of deferred financing fees and
     income taxes(2)                 $3,225     $3,223    $11,295    $11,141

    Reorganization expense                -        $40       $312       $407

    Non-cash movement of interest
     rate swap and amortization of
     deferred financing fees(1)        $191        $17       $316        $86

    Current income tax (recovery)
     expense(1)                       ($450)      $171      ($394)      $318

    Non-cash future income tax
     expense (recovery)(1)          ($2,041)     ($116)    $2,865       $187

    Net earnings for the period      $5,525     $3,111     $8,196    $10,143

    Earnings per unit excluding
     reorganization costs, recovery
     of income taxes relating to
     prior years, non-cash
     amortization and movements
     in the interest rate swap
     and non-cash future
     income taxes(3)                $0.3322    $0.3167    $1.1576    $1.1229

    Basic earnings per unit         $0.5691    $0.3228    $0.8442    $1.0524

    Diluted earnings per unit       $0.5672    $0.3216    $0.8414    $1.0485

    Distributable cash per unit
     excluding reorganization
     costs, changes in non-cash
     working capital, and
     recovery of income taxes
     relating to prior years(3)     $0.3322    $0.3167    $1.1576    $1.1229

    Distributable cash per unit(3)  $0.3131    $0.3091    $1.1356    $1.0998

    Distributions declared per unit $0.2730    $0.2601    $1.0877    $1.0303
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) "Royalty revenues earned by MarksLP and MarksCo", "Non-cash movement
        of interest rate swap and amortization of deferred financing fees",
        "Current income taxes" and "Non-cash future income tax expense
        (recovery)" represent the combined amounts of the consolidated Fund
        and its wholly-owned subsidiaries, MarksLP and MarksCo which are
        consolidated with the statements of Second Cup for reporting purposes
        in accordance with GAAP. The Fund accounts for the earnings of
        MarksLP and MarksCo on an equity-accounting basis in its consolidated
        financial statements, in accordance with GAAP.

    (2) "Earnings before reorganization expense, non-cash movements in
        interest rate swap and amortization of deferred financing fees and
        income taxes" is a non-GAAP measure and represents the earnings,
        before reorganization costs, non-cash movements in interest rate
        swap, non-cash amortization of deferred financing fees and all income
        tax expenses or recoveries, of the consolidated Fund and its wholly-
        owned subsidiaries, MarksLP and MarksCo which are consolidated with
        the statements of Second Cup for reporting purposes in accordance
        with GAAP.

    (3) "Same café sales growth", "System Sales of cafés in the Royalty
        Pool", "Earnings per unit excluding reorganization costs, recovery of
        income taxes relating to prior years, non-cash amortization and
        movements in the interest rate swap and non-cash future income
        taxes", "Distributable cash per unit excluding reorganization costs,
        changes in non-cash working capital, and recovery of income taxes
        relating to prior years" and "Distributable cash" are non-GAAP
        measures.
    
    The audited consolidated financial statements of the Fund, together with
its Managements Discussion and Analysis, are expected to be available at
www.sedar.com and on the Fund's website at www.secondcupincomefund.com on or
before March 14, 2008.

    Forward-Looking Information

    Certain statements in this news release may constitute forward-looking
statements. Forward-looking statements include words such as "may", "will",
"should", "expect", "anticipate", "believe", "plan", "intend" and other
similar words. These statements reflect current expectations regarding future
events and operating performance and speak only as of the date of this
release. These forward-looking statements should not be read as guarantees of
future performance or results and will not necessarily be accurate indications
of whether or not those results will be achieved. Forward-looking statements
are subject to known and unknown risks, uncertainties and other factors that
may cause the Fund's actual results, performance or achievements, or those of
Second Cup cafés, or industry results to be materially different from any
future results, performance or achievements expressed or implied by those
forward-looking statements.

    About the Fund

    The Fund is an open-ended trust established under the laws of the
Province of Ontario. It holds, through an indirect wholly-owned limited
partnership, the Canadian trade-marks and other intellectual property and
associated rights used by Second Cup in connection with the operation of
Second Cup cafés in Canada. For more information on the Second Cup Royalty
Income Fund please visit www.secondcupincomefund.com.

    About Second Cup

    Second Cup is Canada's largest specialty coffee café franchisor and
second largest retailer of specialty coffee, as measured by number of cafés.
For the ultimate on-line coffee experience, visit www.secondcup.com.





For further information:

For further information: Stephen Devito, Chief Financial Officer, (905)
362-1824, or investor@secondcup.com

Organization Profile

SECOND CUP INCOME FUND

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