Second Cup Royalty Income Fund announces 2007 results and distribution increase

    MISSISSAUGA, ON, March 7 /CNW/ - Second Cup Royalty Income Fund (the
"Fund") reported today financial results for the fourth quarter and year ended
December 31, 2006, 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.


    -   Same Café Sales growth of 6.2% for the year, 7.8% in the fourth
    -   Increase monthly distributions by 5% to $0.0910 per unit from
        $0.0867 per unit, on an annualized basis this represents an increase
        in the distribution to $1.0920 per unit from $1.0404 per unit
    -   Basic earnings per unit, before costs incurred for the reorganization
        and a non-cash income tax charge, was $1.1029 for fiscal 2006 as
        compared to $1.0473 for the prior year, representing a 5.3% increase
        over the prior year
    -   Basic earnings per unit was $1.0524 for fiscal 2006
    -   Implementation of the previously announced reorganization of the
        Fund's structure

    "Same café sales growth of 6.2% represents our strongest results in
almost 10 years at Second Cup," commented Bruce Elliot, President of The
Second Cup Ltd. "We have now experienced 13 consecutive quarters of same café
sales growth, a clear indication that our strategy to 'Make Second Cup your
Second Home' is resonating with our consumers."

    Year to Date Analysis

    Same café sales growth, a key metric of growth for the Fund, was 6.2% for
the year. System sales were $189,287 as compared to $177,527 in 2005.
    System sales and same café sales growth benefited from an increase in
average transaction size attributable to a number of operational and marketing
initiatives launched by Second Cup in 2005 and 2006. Second Cup experienced a
continuing shift in sales mix towards its premium priced espresso-based
beverages, food, and blender platforms which increased the average transaction
size in café. Second Cup made various price increases during the year, which
management estimates impacted same café sales by 2.0 to 2.5% in the year.
    The source of revenue for the Fund is through its 100% ownership in
Second Cup Trade-Marks Inc. ("MarksCo") which, in turn, receives royalty
income from The Second Cup Ltd. ("Second Cup") under a Royalty and Licence
Agreement (the "Agreement"). For the year, MarksCo earned total royalty
revenue of $12,421 (2005 - $11,606) and paid $9,547 in interest (2005 -
$9,487) and $1,135 (2005 - $575) in dividends to the Fund. The Fund incurred
total operating expenses of $304 (2005 - $301), excluding $475 (2005 - $441)
incurred by MarksCo. Operating expenses of the Fund and MarksCo are limited to
general and administrative expenses, term loan interest expense, and
amortization of deferred financing fees. During the year, the Fund incurred
expenses of $407, or $0.0422 per unit, related to the previously-announced
reorganization of the structure of the Fund. The year to date earnings of
MarksCo also reflect a non-cash tax expense of $80, or $0.0083 per unit,
incurred for the reduction in future income tax assets as a result of the
federal government substantially enacting new legislation which will result in
a reduction in federal income tax rates commencing 2008.
    Net earnings of the Fund were $10,143, or $1.0524 cents per unit, for the
year, compared to $10,036, or $1.0473 cents per unit, in 2005. Net earnings
excluding the above mentioned reorganization costs and the non-cash tax charge
were $10,630, or $1.1029 cents per unit.
    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 operating activities of the Fund and MarksCo. Cash flow from
operating activities of the Fund is adjusted to include cash flow from
operating activities of MarksCo. Distributable cash was $10,600, or $1.0998
per unit compared to distributions declared of $9,930 or $1.0303 per unit for
the year as compared to $10,117, or $1.0558 for the prior year. Excluding the
$407 in expenses relating to the reorganization of the Fund and changes in
non-cash working capital of MarksCo and the Fund, distributable cash increased
to $10,823, or $1.1229 per unit, compared to $10,242, or $1.0688 per unit, in
the prior year.
    The tax treatment of the 2006 distributions is approximately 13.5% return
of capital, 74.6% interest income, and 11.9% from non-eligible dividends.

    Fourth Quarter Analysis

    System sales for the fourth quarter of 2006 were $53,759 (2005 - $49,774)
and same café sales growth was 7.8% (2005 - 5.6%) for the same period. System
sales growth benefited from various price increases implemented during the
year as described above, and a price increase of 5 to 35 cents per cup on
several of its espresso-based beverages and its brewed coffee beverages in
mid-November 2006. Management estimates that the impact of the price increase
made in mid-November, plus the smaller price increases made earlier in the
year, positively impacted sales by approximately 3 to 4% in the quarter.
Second Cup experienced yet another strong holiday season, driven by the
continued success of its holiday merchandise program and sales of its
reloadable payment card.
    Total operating expenses of the Fund in the fourth quarter of 2006 were
$57 (2005 - $80). Total operating expenses of the Fund were in line with
management's expectations. During the quarter the Fund incurred costs of $40
related to the previously-announced reorganization of the structure of the
    The Fund recorded after-tax income of $805 during the quarter (2005 -
$495) from its equity-accounted investment in MarksCo, a wholly-owned
subsidiary of the Fund. This represents the net earnings of MarksCo during the
period. Net earnings of MarksCo included general and administrative expenses
of $123 (2005 - $65) and amortization expense of $17 (2005 - $24). Income tax
expenses of MarksCo were $52 (2005 - $150), comprised of current tax expense
of $168 (2005 - $121) and future tax recovery of $116 (2005 - expense of $29).
Following the detailed review of the annual income tax provision of MarksCo by
management, a non-cash future income tax recovery of $116 was recorded in the
fourth quarter.
    During the quarter, the Fund incurred an income tax expense of $3 (2005 -
$2). After taking into account distributions declared of $2,507 (2005 -
$2,397), which are not subject to tax in the Fund, the overall income tax
expense reflects the annual expected effective tax rate of 23% applicable to
the Fund's wholly-owned subsidiary corporations.
    Net earnings of the Fund were $3,111, or $0.3228 cents per unit, for the
quarter, compared to $2,804, or $0.2927 cents per unit, for the comparable
quarter. Net earnings for the quarter excluding the above mentioned
reorganization costs and the non-cash tax charge were $3,007, or $0.3120 cents
per unit.
    Distributable cash, excluding changes in working capital and costs
incurred related to the previously-announced reorganization of the structure
of the Fund, increased to $3,052, or $0.3167 per unit, for the fourth quarter
of 2006 as compared to $2,858, or $0.2982 per unit, for the comparable period.

    Distribution Increase Announcement

    The Fund is also pleased to announce that its Board of Trustees has
approved a 5% increase in the monthly unitholder distribution effective for
the February 2007 distribution which will be paid on March 30, 2007 to holders
of record at the close of business on March 28, 2007. The change will increase
the monthly distribution rate from $0.0867 to $0.0910 per unit.

    Reorganization of Fund Structure

    The Fund also announced that MarksCo, as administrator for the Fund,
together with the Fund's advisors, have completed their review of the
favourable Advance Tax Ruling regarding the proposed reorganization of the
Fund's structure, as referred to in the Fund's January 18, 2007 news release.
It has been determined that it remains in the best interests of the Fund and
its unitholders to proceed with the reorganization of the Fund's structure
notwithstanding the proposed tax legislation regarding income trusts announced
by the Federal Government on October 31, 2006. It is anticipated that the
reorganization will be implemented in the Fund's second quarter of 2007.

    Financial Highlights

    The following table sets out selected financial information and other
data of the Fund and should be read in conjunction with the Fund's
consolidated income statements.

                                          Three months       Twelve months
    (in thousands of dollars, except         ending              ending
     number of cafés and per unit      Dec. 31,  Dec. 31,  Dec. 31,  Dec. 31,
     amounts)                            2006      2005      2006      2005
    Number of cafés in Royalty Pool
     (351 cafés post the January 1,
     2007 adjustment)                      352       351       352       351

    Number of active cafés -
     end of period                         340       343       340       343

    Same café sales growth                7.8%      5.6%      6.2%      4.6%

    System sales of cafés in the
     Royalty Pool                     $ 53,759  $ 49,774  $189,287  $177,527

    Interest income from MarksCo         2,406     2,391     9,547     9,487

    Net earnings for the period
     excluding reorganization costs
     and non-cash tax item(1)            3,007     2,804    10,630    10,036

    Net earnings for the period          3,111     2,804    10,143    10,036

    Basic earnings per unit excluding
     reorganization costs and non-cash
     tax item(1)                      $ 0.3120  $ 0.2927  $ 1.1029  $ 1.0473

    Basic earnings per unit           $ 0.3228  $ 0.2927  $ 1.0524  $ 1.0473

    Diluted earnings per unit         $ 0.3216  $ 0.2927  $ 1.0485  $ 1.0473

    Distributable cash per unit
     excluding reorganization costs
     and changes in non-cash working
     capital(2)                       $ 0.3167  $ 0.2982  $ 1.1229  $ 1.0688

    Distributable cash per unit       $ 0.3091  $ 0.2825  $ 1.0998  $ 1.0558

    Distributions declared per unit   $ 0.2601  $ 0.2501  $ 1.0303  $ 1.0000

    (1) "Net earnings for the period excluding reorganization costs and non-
        cash item" and "Basic earnings per unit excluding reorganization
        costs and non-cash item" for 2006 represent non-GAAP measures and are
        calculated by adding back to net earnings costs incurred related to
        the reorganization and the non-cash income tax charge, as discussed
    (2) "Distributable cash", "Distributable cash per unit" and
        "Distributable cash per unit excluding reorganization costs and
        changes in non-cash working capital" represent non-GAAP measures.
        "Distributable cash per unit excluding reorganization costs and
        changes in non-cash working capital" in 2006 is calculated by taking
        the Distributable cash calculated as described above in this news
        release, and adding back costs incurred related to the reorganization
        and excluding changes in non-cash working capital balances of the
        Fund and MarksCo. Distributable cash in 2005 excludes a $3,500 income
        tax payment incurred in connection with the Fund's IPO and is
        unrelated to cash generated by operations during the period.

    The audited consolidated financial statements of the Fund, together with
its Managements Discussion and Analysis, are expected to be available at and on the Fund's website at on or
before March 16, 2007.

    Adjustments to Royalty Pool

    On January 18, 2007, the Fund announced its second adjustment to the
Royalty Pool, effective January 1, 2007. 11 cafés with estimated total annual
system sales of $4,555 were vended into the Royalty Pool. 12 cafés having
total system sales of $3,815 were permanently closed in 2006 and removed from
the Royalty Pool. This resulted in an estimated net system sales increase for
the Royalty Pool of $740 and an ending number of cafés in the Royalty Pool of
351. As a result of this adjustment to the Royalty Pool, the Fund, through its
indirect wholly owned subsidiary MarksCo, made a payment of $314 to Second Cup
representing 80% of the obligation based on the forecasted net system sales.
This payment was satisfied by the Fund's issuance of 34,630 units to MarksCo,
which were then delivered to Second Cup. After a full year of performance of
the new cafés, the Fund expects to issue additional units to satisfy the
remaining obligation.
    On January 18, 2007 the Fund also announced that the actual annual system
sales of the nine cafés added to the Royalty Pool on January 1, 2006 were
$4,421 as compared to the original estimate of $4,055. As a result, a final
payment of $356 was owing to Second Cup. This payment was satisfied by MarksCo
delivering to Second Cup 35,903 additional units of the Fund which were issued
to MarksCo by the Fund on January 1, 2007.

    Proposed Tax Changes

    On October 31, 2006, the federal government announced proposed changes to
income taxes, that if enacted, would significantly change the income tax
treatment of most publicly traded income trusts and the distributions from
these entities to their unitholders. The proposals were released in draft
legislative form on December 21, 2006. Under the proposals, certain income
earned by these entities will be taxed in a manner similar to income earned by
a corporation and distributions or allocations made by these entities to
unitholders will be taxed similar to dividends from taxable Canadian
corporations. The deemed dividends will be eligible for the proposed new
enhanced dividend tax credit if paid or allocated to a resident of Canada.
These proposals will generally be effective beginning in the 2011 taxation
year for income trusts that were publicly traded prior to November 1, 2006,
such as the Fund. The Fund is currently reviewing these proposals and the
possible impact they will have on the Fund and its unitholders, and what, if
any, steps to take in respect of the Fund. However, these proposals are not
expected to have an immediate impact on the Fund's tax treatment, or
distribution policy or the tax treatment of distributions to unitholders.
Until final legislation implementing the proposed changes is introduced, the
exact impact of changes to the Fund is unknown and no action, if any, will be
taken. There can be no assurances that the Fund will be able to undertake any
measures to minimize such impact.


    The Fund's "top line" structure means that its success and growth depends
primarily on Second Cup's ability to maintain and increase the overall system
sales of Royalty Pool Cafés. Growth in overall system sales is dependent on
same café sales growth, and adding net new cafés to the café network.
    During 2006, Second Cup made significant progress in implementing its
previously announced strategies aimed at increasing same café sales growth.
This is evidenced by the achievement of 6.2% same café sales growth for the
year, following 4.6% same café sales growth for the year ended December 31,
2005. Second Cup has now achieved 13 consecutive quarters of positive same
café sales dating back to the fourth quarter of 2003. Subject to healthy
economic conditions continuing across the company's primary markets, Second
Cup believes it can continue this trend and expects to achieve same café sales
growth of approximately 3 to 5% for the 2007 fiscal year.
    In terms of network expansion, Second Cup expects to open 14 to 18 new
cafés in Canada during the 2007 fiscal year. Second Cup also expects to close
8 to 12 cafés during 2007, the majority of which have sales below the average
performance of cafés in the Royalty Pool. Second Cup also expects that
approximately 30 of its cafés will be renovated during the year.
    Overall, based on the Second Cup initiatives outlined above and others,
the anticipated economic environment and market conditions affecting the
specialty coffee industry, the Fund looks forward to a successful year in

    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 subsidiary,
the Canadian trade-marks and other intellectual property and associated rights
used by The Second Cup Ltd. ("Second Cup") in connection with the operation of
Second Cup cafés in Canada. The trade marks are licensed to Second Cup for 99
years for which Second Cup pays the Fund 6.5% of system sales of royalty
pooled cafés. For further information on the Fund, visit

    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

    %SEDAR: 00021352E

For further information:

For further information: Stephen Devito, Chief Financial Officer, (905)
405-6516, or

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