Second Cup Royalty Income Fund announces second quarter results and July distribution



    MISSISSAUGA, ON, Aug. 8 /CNW/ - Second Cup Royalty Income Fund
(the "Fund") reported today financial results for the second quarter ended
June 30, 2008, and the approval of the July distribution payment. The Fund's
units are traded on the Toronto Stock Exchange under the symbol "SCU.UN". All
amounts in this news release are presented in thousands of Canadian dollars,
unless otherwise indicated.

    
    Highlights

    -   Same Café Sales growth of 0.9% in the quarter, the 14th consecutive
        quarter of positive same café sales growth since the inception of the
        Fund, and 1.1% year to date
    -   Distributable cash per unit of $0.2902 for the quarter, compared to
        $0.2771 in 2007, an increase of 4.7%
    -   Distributions declared in the quarter were $0.2820 per unit compared
        to $0.2730 in 2007, an increase of 3.3%
    -   Basic earnings per unit were $0.2951 for the quarter, compared to a
        loss of $0.2236 for the comparable quarter a year ago
    -   Basic earnings per unit, excluding non-cash movement in the fair
        value of the derivative interest rate swap, non-cash amortization and
        non-cash future income taxes were $0.2874 per unit for the quarter
        from $0.2869 for the comparable period in 2007
    

    "While modest, we are encouraged by the continuance of positive same café
sales growth in what appears to be a challenging economic environment. This
quarter represented the 14th consecutive quarter for the Fund and 19th
consecutive quarter of same café sales growth for Second Cup," commented
Stacey Mowbray, President of The Second Cup Ltd. ("Second Cup"). "We are
confident that with the selective price increases we have implemented thus far
and the strength of both our planned promotional programs and other sales
building initiatives we will be able to continue this trend of positive sales
growth for the balance of the year. As always, I would like to thank our
franchise partners and café operators for their continued efforts and support
in making Second Cup a Second Home for our guests."

    Second Quarter Analysis

    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 on April 2, 2007, 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 (including
MarksCo for two days of the second quarter of 2007), are recorded on an equity
accounted basis in the Fund's consolidated financial statements.
    System sales for the second quarter were $49,130, compared to $48,149 for
the comparable period in 2007, representing an increase of $981 or 2.0%. Year
to date, System sales increased 2.5% from $94,146 to $96,463 in 2008. The
increase was the result of same café sales growth in the quarter of 0.9% (1.1%
year to date), and the net additional sales from the cafés added on the
January 1, 2008 adjustment date, net of the sales lost due to café closures in
the year. Same café sales were positively impacted by a continuing shift in
the sales mix of Second Cup cafés to higher priced espresso-based beverages,
food and merchandise offerings, which, in turn, resulted in higher average
cheque amounts compared to 2007. Second Cup also implemented some minor price
increases on its whole beans and ready-to-serve beverage category (i.e.,
bottled water, bottled juices, etc.) in early January, and in mid-March
increased the prices of many of its espresso-based beverages nationwide as
well as its brewed coffee offering in its Alberta market. Annualized, these
price increases are expected to increase average transaction size by
approximately 1.0% to 1.5%. Sales in the quarter were positively impacted by a
shift in the Easter holiday to the first quarter in 2008 from the second
quarter in 2007. Second Cup recognized a softening of café sales across its
major markets, which management of Second Cup believes is similar to the trend
being experienced in retail in general and reflective of the current Canadian
economy. System sales for the year to date were also positively impacted by
the additional day in February as a result of the leap year.
    For the quarter, MarksLP earned total royalty revenue of $3,210 (2007 -
$3,147), representing an increase of 2.0% compared to 2007. Total general and
administrative expenses incurred by the Fund and MarksLP were $197 (2007 -
$212). Net interest expense for the Fund and MarksLP amounted to $172 in the
quarter (2007 - $150). The Fund also incurred a non-cash gain of $88 relating
to the movement in the fair value of its derivative interest rate swap (2007 -
$55) which fixes the interest rate on the term loan. Non-cash amortization of
deferred financing charges amounted to $12 (2007 - $5, and $129 in MarksCo).
As a result of the reorganization on April 2, 2007, current tax expense was
$nil in the second quarter of 2008 and 2007. During the Period, the Fund did
not have any future income tax expense. In 2007, as a result of the
Reorganization, a net future income tax liability of $10,668 was reversed and
resulted in an increase to the income of the equity accounted investment in
MarksCo on April 2, 2007. In addition, on June 12, 2007 new tax legislation
was enacted that changed the rules applicable to publicly traded income trusts
in 2011. In 2011, income taxes payable will reduce net earnings of the Fund.
Prior to June 12, 2007, the Fund's financial statements did not include
provisions for Canadian income taxes. As the new trust tax legislation was
substantively enacted, the Fund was required to give accounting recognition to
these new rules. Future income taxes were recorded on the difference between
the accounting values of balance sheet assets and liabilities and the tax cost
basis of these assets and liabilities based on substantively enacted tax laws
and rates for differences that are expected to reverse after January 1, 2011.
As the Fund will not be liable for taxes until January 1, 2011, on June 12,
2007 the Fund recognized a non-cash future income tax expense amounting to
$15,545 arising from those temporary tax differences expected to reverse after
January 1, 2011.
    Accordingly, net earnings of the Fund were $2,917 or $0.2951 per unit for
the quarter, compared to a loss of $2,171, or a loss of $0.2236 per unit in
the second quarter of 2007. Excluding the non-cash future income tax of $nil
(2007 - a charge of $15,545 and a credit of $10,668 relating to the release of
future income tax liability as a result of the reorganization); non-cash
amortization of $12 (2007 - $134); and the non-cash gain on the movement in
the fair value of the derivative interest rate swap of $88 (2007 - $55), net
earnings for the quarter were $2,841 or $0.2874 per unit compared to $2,785 or
$0.2869 per unit in 2007, an increase of 0.2% on a per unit basis. This
increase in adjusted net earnings from $2,785 to $2,841 is due to an
additional $63 in royalty revenues earned by MarksLP on increased sales of
cafés in the Royalty Pool; a reduction of $15 in general and administrative
expenses of the Fund and its wholly-owned subsidiaries compared to 2007; net
of $22 in additional net interest expense relating primarily to the term loan.
    On a year-to-date basis, net earnings of the Fund were $5,399 or $0.5462
per unit, compared to $100, or $0.0103 per unit in 2007. Excluding the
non-cash future income tax charge of $71 (2007 - $4,877 in the Fund and $29 in
MarksCo); reorganization costs of $nil (2007 - $301); non-cash amortization of
$25 (2007 - $147); and the non-cash charge relating to the movements in the
fair value of the interest rate swap of $83 (2007 - gain of $55), net earnings
year to date were $5,578 or $0.5643 per unit compared to $5,399 or $0.5561 per
unit in 2007, an increase of 1.5% on a per unit basis. This increase in
adjusted net earnings from $5,399 to $5,578 is due to an additional $145 in
royalty revenues earned by MarksLP on increased sales of cafés in the Royalty
Pool, the elimination of current income tax expenses as a result of the
reorganization which amounted to $56 in 2007, a reduction of $22 in general
and administrative expenses of the Fund and its wholly owned subsidiaries
compared to 2007, net of $44 in additional net interest expense relating
primarily to the term loan.
    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 for the quarter was $2,869, or $0.2902 per unit,
as compared to $2,690, or $0.2771 per unit in the second quarter of 2007
representing an increase of 4.7% per unit. Non-cash working capital of the
Fund for the quarter increased by $20 and non-cash working capital of MarksLP
decreased by $47 compared to a decrease of $345 in the Fund and an increase of
$441 in MarksLP for the comparable period. Changes in non-cash working capital
are primarily due to the timing of payments. Excluding the impact of changes
in non-cash working capital, distributable cash would have been $0.2874 per
unit, compared to $0.2869 per unit for the second quarter of 2007, an increase
of 0.2%.
    On a year-to-date basis, distributable cash was $5,650, or $0.5716 per
unit, as compared to $5,384, or $0.5546 per unit in 2007, representing an
increase of 3.1% per unit. Non-cash working capital of the Fund year to date
decreased by $57 and non-cash working capital of MarksLP decreased by $14
compared to a decrease of $608 in the Fund and an increase of $323 in MarksCo
for the comparable period. Changes in non-cash working capital are primarily
due to the timing of payments. Excluding the impact of changes in non-cash
working capital and the reorganization costs of $nil (2007 - $301),
distributable cash would have been $0.5643 per unit, compared to $0.5561 per
unit for 2007, an increase of 1.5%.

    July Distribution Announcement

    The Fund also announced that its Board of Trustees approved a cash
distribution of $0.0940 per unit for the month of July, 2008 to be paid on
August 29, 2008 to Unitholders of record at the close of business on August
27, 2008.

    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.
    The second quarter of 2008 represented the 14th consecutive quarter of
same café sales growth since the Fund's inception in December of 2004.
Second Cup has now achieved 19 consecutive quarters of positive same café
sales dating back to the fourth quarter of 2003. As a result of the sales
performance of its cafés to date and the current retail and economic
conditions across Canada, Second Cup has lowered its same café sales growth
target to 1% to 2% for the 2008 fiscal year from its previous range of 2% to
4%.
    Second Cup has a number of key initiatives in 2008 designed to build
sales and increase traffic, which include continuing to expand the successful
roll-out of both its regular and grilled sandwich program, introducing a new
hot breakfast sandwich program and launching an exciting new media based
advertising campaign promoting several of its premium priced low fat blender
beverages.
    On the development front, management of Second Cup has revised its
forecast and is now calling for renovations of approximately 30 existing cafes
and continues to expect to open 12 to 18 new cafes. The challenge, as it
relates to the café network in 2008, will be the number of closures. Under
normal circumstances Second Cup anticipates closures ranging from 10 to 14. An
added dynamic this year revolves around the higher number of cafés that are at
the end of their lease terms. The potential exists for landlords to redevelop
these locations as they look to rejuvenate their properties and change their
tenant portfolios, which in some cases may adversely affect the number of
closures. Second Cup now anticipates closing between 18 and 22 locations in
2008. Distributable cash is not impacted by café closures due to the
obligation that Second Cup has to make make-whole payments to the Fund, which
offset the lost royalty revenue on cafés permanently closed during the year.

    Financial Highlights

    The following table sets out selected financial information and other
data of the Fund and its wholly owned subsidiary, MarksLP (and MarksCo through
April 2, 2007), and should be read in conjunction with the audited
consolidated financial statements of the Fund.

    
    -------------------------------------------------------------------------
    (in thousands of dollars,     Three months ended       Six months ended
     except number of cafés and  June 30,    June 30,    June 30,    June 30,
     per unit amounts)             2008        2007        2008        2007
    -------------------------------------------------------------------------
    Number of cafés in Royalty
     Pool                            357         351         357         351

    Number of active cafés -
     end of period                   350         348         350         348

    Same café sales growth(3)        0.9%        4.4%        1.1%        5.2%

    System sales of cafés in
     the Royalty Pool(3)         $49,130     $48,149     $96,463     $94,146

    Royalty revenues earned by
     MarksLP and MarksCo(1)       $3,210      $3,147      $6,291      $6,146

    Earnings before
     reorganization expense,
     non-cash movement in fair
     value of derivative
     interest rate swap,
     non-cash amortization and
     non-cash future income
     taxes(2)                     $2,841      $2,785      $5,578      $5,399

    Reorganization expense             -           -           -        $301

    Amortization of deferred
     financing(1)                    $12        $134         $25        $147

    Non-cash (gain) loss
     relating to movement in
     fair value of derivative
     interest rate swap(1)          ($88)       ($55)        $83        ($55)

    Non-cash future income
     tax expense(1)                    -     $15,545         $71     $15,574

    Release of future income
     tax liability on
     reorganization                    -    ($10,668)          -    ($10,668)

    Net earnings (loss) for
     the period                   $2,917     ($2,171)     $5,399        $100

    Earnings per unit excluding
     reorganization costs,
     non-cash movement in fair
     value of derivative
     interest rate swap,
     non-cash amortization and
     non-cash future income
     taxes and release of
     future income tax
     liability on
     reorganization(3)           $0.2874     $0.2869     $0.5643     $0.5561

    Basic earnings (loss) per
     unit                        $0.2951    ($0.2236)    $0.5462     $0.0103

    Diluted earnings (loss) per
     unit                        $0.2946    ($0.2236)    $0.5452     $0.0103

    Distributable cash per unit
     excluding reorganization
     costs and changes in
     non-cash working capital(3) $0.2874     $0.2869     $0.5643     $0.5561

    Distributable cash per
     unit(3)                     $0.2902     $0.2771     $0.5716     $0.5546

    Distributions declared per
     unit                        $0.2820     $0.2730     $0.5610     $0.5417
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) "Royalty revenues earned by MarksLP and MarksCo", "Amortization of
        deferred financing", "Non-cash (gain) loss relating to movement in
        fair value of derivative interest rate swap", and "Non-cash future
        income tax expense" represent the combined amounts of the
        consolidated Fund and its wholly owned subsidiary, MarksLP (and
        MarksCo for the first quarter of 2007), 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 accounted basis in its interim consolidated financial
        statements, in accordance with GAAP.
    (2) "Earnings before reorganization expense, non-cash movement in fair
        value of derivative interest rate swap, non-cash amortization and
        non-cash future income taxes" is a non-GAAP measure and represents
        the earnings, before reorganization costs, non-cash movement in fair
        value of derivative interest rate swap, non-cash amortization and
        non-cash future income taxes, of the consolidated Fund and its wholly
        owned subsidiary, MarksLP (and MarksCo for the first quarter of
        2007), 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, non-cash
        movement in fair value of derivative interest rate swap, non-cash
        amortization and non-cash future income taxes and release of future
        income tax liability on reorganization", "Distributable cash per unit
        excluding reorganization costs and changes in non-cash working
        capital" and "Distributable cash per unit" are non-GAAP measures.
    

    The unaudited interim consolidated financial statements of the Fund,
together with its Management's Discussion and Analysis, are expected to be
available at www.sedar.com and on the Fund's website at
www.secondcupincomefund.com on or before August 11, 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.

    %SEDAR: 00021352E




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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