Second Cup Royalty Income Fund announces 2008 results and March distribution

MISSISSAUGA, ON, March 9 /CNW/ - Second Cup Royalty Income Fund (the
"Fund") reported today financial results for the fourth quarter and year ended
December 31, 2008, 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.

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Performance Highlights

- System sales for 2008 increased by 0.8% to $197,340
- Same store sales for 2008 grew 0.2% for the year
- Distributable cash per unit increased to $1.1510 per unit from
$1.1356
- After-tax non-cash impairment charge of $20,956 or $2.12 per unit
- Bank term loan extended to January 2011 at lower effective interest
rate
>>

"Like most of the retail sector, Second Cup experienced a softening of
same café sales throughout 2008 with the fourth quarter reflective of the
sharp downturn in the Canadian economy," commented Stacey Mowbray, President
of The Second Cup Ltd. ("Second Cup"). "That said, we are confident in the
strength of the Second Cup brand and are undertaking several initiatives
around product innovation, value promotions and café experience excellence
with a view to driving average cheque and consumer traffic. I would like to
thank our franchise partners and colleagues for their passion, teamwork and
commitment to Second Cup. We view our independently owned network as a great
asset in these more challenging economic times," added Ms. Mowbray.

Distribution Announcement

The Fund announced that its Board of Trustees has approved a cash
distribution of $0.0940 per unit for the month of February 2009 to be paid on
March 31, 2009 to Unitholders of record at the close of business on March 27,
2009.

2008 Year Analysis

System sales increased 0.8% to $197,340 from $195,750 in 2007. Same café
sales growth was 0.2% for the year. Same café sales for the year were
positively impacted by the extra leap year day; by Second Cup's promotional
programs and food innovation, which continued to shift its sales mix to food,
resulting in higher year over year average cheque amounts; and by a modest
price increase. On the other hand, the sharp downturn in the Canadian economy
had a negative impact on same café sales in the fourth quarter.
The source of revenue for the Fund is through its 100% ownership in
Second Cup Trade-Marks Limited Partnership ("MarksLP") and, prior to the 2007
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.
The Fund is required, at least on an annual basis, to assess potential
impairment by evaluating whether the carrying value of its assets exceed their
fair values. Driven primarily by a change in market conditions, the Fund
concluded the carrying value of its investment in MarksLP exceeded its fair
value as of December 31, 2008. As a result, the Fund recorded a pre-tax
non-cash charge in the fourth quarter and for the year ended December 31, 2008
reducing the carrying value of the non amortizable investment in MarksLP by
$24,349 to $88,500. After taking into account the related recovery of future
income taxes, the after-tax non-cash charge to income is $20,956 or $2.12 per
unit.
For the year, MarksLP earned royalty revenue of $12,991 (2007 - $12,829),
an increase of 1.3%. Aggregate general and administrative expenses incurred by
the Fund and MarksLP were $840 (2007 - $965 including MarksCo). The decrease
is primarily due to lower costs incurred for professional services. Net
interest expense for the Fund and MarksLP amounted to $683 in 2008 compared to
$569 in 2007 including MarksCo. The Fund also incurred a non-cash charge of
$269 relating to the movement in the fair value of its derivative interest
rate swap (2007 - $143) which fixes the interest rate on the term loan at
6.62%. Also, as noted above, the Fund recorded a non-cash impairment charge of
$24,349 in 2008. Non-cash amortization of deferred financing charges amounted
to $50 (2007 - $173 including MarkCo). In 2007 the Fund incurred expenses of
$312 related to the reorganization of its structure. The Fund has no current
income tax expense and recognized a non-cash future income tax recovery of
$3,664 in 2008 primarily related to the non-cash impairment charge. 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 in 2007 was $56
and related to income tax expense incurred by MarksCo up to the reorganization
of the Fund's structure in April 2007. Primarily as a result of the
reorganization and new legislation impacting income tax rates in 2011 and
onwards, the combined entities recognized a non-cash future income tax charge
of $2,865 in 2007.
The Fund recorded a net loss of $9,531 or $0.9642 per unit for 2008,
compared to net income of $8,196 or $0.8442 per unit in 2007. In 2008,
excluding the impact of the non-cash impairment charge of $24,349, non-cash
movements in the fair value of the interest rate swap of $269 and amortization
of deferred financing charges of $50, and the non-cash future income tax
recovery of $3,664, net earnings for the year were $11,473 or $1.1607 per
unit. In 2007, excluding the impact of the $2,865 non-cash future income tax
charge, reorganization costs of $312, the current income tax recovery of $450
relating to prior years as described above, and the non-cash movements in the
fair value of the interest rate swap of $143 and amortization of deferred
financing charges of $173, net earnings for the year were $11,239 or $1.1576
per unit. Using this measure, the Fund's improvement over 2007 was 0.3%.
During the final quarter of 2008 an agreement was reached between MarksLP
and Second Cup whereby the payment of certain royalties for 2008 was deferred.
This deferral (which is not included in distributable cash) which amounted to
$573 ($0.058 per unit) was requested by Second Cup to deal with a cash
shortfall it experienced resulting from Second Cup's commitment to open new
café locations made prior to the slowdown of the economy; the requirement for
Second Cup to take back café locations from franchisees that were
underperforming; and operational difficulties including restructuring costs
encountered as a result of the deterioration of economic conditions and the
reduction in consumer spending.
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, in
2007, MarksCo. Distributable cash was $11,377, or $1.1510 per unit compared to
$11,025, or $1.1356 per unit, for the prior year. Excluding the impact of
changes in non-cash working capital of the Fund, MarksLP and MarksCo, the
reorganization costs and the one-time recovery of income taxes relating to
prior years, distributable cash would have been $11,473, or $1.1607 per unit,
compared to $11,239, or $1.1576 per unit in 2007, which represents a 0.3%
increase in distributable cash per unit.

Fourth Quarter Analysis

System sales for the fourth quarter of 2008 were $53,562 (2007 - $54,402)
and same café sales growth was -1.4% (2007: 0.7%) for the same period. This
quarter was affected by the sharp downturn in the Canadian economy that
impacted key seasonal sales drivers such as merchandise.
For the quarter, MarksLP earned royalty revenue of $3,574 (2007 -
$3,593), a decrease of 0.5% compared to 2007. Aggregate general and
administrative expenses incurred by the Fund and MarksLP were $275 (2007 -
$229). Net interest expense for the Fund and MarksLP amounted to $173 in the
quarter compared to $148 in 2007. The Fund also recorded a non-cash charge of
$176 relating to the movement in the fair value of its interest rate swap
(2007 - $179) which fixes the interest rate on the term loan at 6.62%. Also,
as noted above, the Fund recorded a pre-tax non-cash impairment charge of
$24,349 in the quarter. Non-cash amortization of deferred financing charges
amounted to $12 (2007 - $12). The Fund has no current income tax and, in the
fourth quarter of 2008, recognized a non-cash future income tax recovery of
$3,735. In the fourth quarter of 2007, as discussed above, MarksLP recorded a
recovery of $450 in current income tax. Also in 2007, primarily as a result of
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.
Therefore the Fund's net loss for the quarter was $17,675 or $1.7881 per
unit, compared to net income of $5,525, or $0.5691 per unit in 2007. Excluding
the non-cash impairment charge of $24,349; future income tax recovery of
$3,735 (2007 - non-cash future income tax recovery of $2,041 as described
above); current income tax recovery of $450 in 2007 relating to prior years as
described above; the non-cash movements in the fair value of the derivative
interest rate swap; and amortization of deferred financing charges of $188
(2007 - $191), net earnings for the quarter were $3,127 or $0.3163 per unit
compared to $3,225 or $0.3322 per unit in 2007, a decrease of 4.8% on a per
unit basis.
As noted above in the fourth quarter, an agreement was reached between
MarksLP and Second Cup to defer the payment of $573 ($0.058 per unit) of 2008
royalties. This amount is not included in the calculation of distributable
cash.
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, in
2007, MarksCo. Distributable cash was $2,551, or $0.2581 per unit compared to
$3,040, or $0.3131 per unit for the comparable period. Excluding the impact of
changes in non-cash working capital of the Fund and MarksLP in 2007, and the
recovery of income taxes relating to prior years, distributable cash would
have been $3,127, or $0.3163 per unit, compared to $3,225, or $0.3322 per unit
for the fourth quarter of 2007, representing a 4.8% decrease in distributable
cash per unit.

Tax Treatment of Distributions

The tax treatment of the 2009 distributions is approximately 18.1% return
of capital and 81.9% other taxable income.

Term Loan Extension

The Fund also announced that, on March 4, 2009, its term loan and
operating credit facilities including an extension of the maturity of the
credit facilities to January 2, 2011 were renegotiated. The revised $12,000
credit facilities are comprised of an $11,000 non-revolving term credit
facility, fully drawn, and an undrawn $1,000 revolving credit facility,
bearing interest at prime or base rate plus 2.5% or LIBOR advances or bankers'
acceptances plus 3.5%. The derivative interest rate swap was also extended to
January 2, 2011. As a result, the effective interest rate as of March 2, 2009
has been reduced from 6.62% to 6.41%.

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 system sales is dependent on
same café sales growth and adding new cafés to the café network.
Given the uncertainty in the retail and economic environment across
Canada and Second Cup's dependence upon consumer discretionary spending,
management is not providing specific guidance on same café sales for 2009.
Management believes fiscal 2009 will be challenging and therefore, a number of
initiatives are planned to strengthen the long term success of the Second Cup
brand and its franchisees.

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- Second Cup will continue its focus on operational excellence at the
café level, which it believes will yield increasing consistency
across the chain and improve the overall guest experience.
- In an effort to drive loyalty among specialty coffee customers,
Second Cup's promotional strategies will focus on targeted branding
initiatives promoting and innovating around its premium priced
specialty beverages, brewed coffees, tea, food and merchandise. Value
added offers will also be a core part of the promotional calendar.
- Second Cup will also be taking selective price increases on several
of its products during the year.
- 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 continuing its
concentration on the delivery of cost savings to franchisees.
>>

In terms of 2009 network expansion, Second Cup expects: (1) to open 10 to
15 new cafés in Canada; (2) to close 15 to 20 cafés during 2009, the majority
of which have sales below the average performance of cafés in the Royalty
Pool; and (3) approximately 24 of its cafés will be renovated.

FINANCIAL HIGHLIGHTS

The following table sets out selected proforma and non-GAAP financial
information and other data of the Fund and its wholly owned subsidiaries and
should be read in conjunction with the audited consolidated financial
statements of the Fund.

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(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) 2008 2007 2008 2007
-------------------------------------------------------------------------

System sales of cafés in
the Royalty Pool(3) $53,562 $54,402 $197,340 $195,750

Number of cafés in Royalty Pool 357 351 357 351
(359 cafés post January, 2009
adjustment)

Number of active cafés -
end of period 341 342 341 342

Same café sales growth(3) -1.4% 0.7% 0.2% 3.0%

Royalty revenues earned by
MarksLP and MarksCo(1) $3,574 $3,593 $12,991 $12,829

Earnings before items
noted below(2) $3,127 $3,225 $11,473 $11,239

Reorganization expense - - - $312

Non-cash impairment charge(1) $24,349 - $24,349 -

Non-cash movement in fair
value of the derivative
interest rate swap and
non-cash amortization of
deferred financing fees(1) $188 $191 $319 $316

Recovery of income taxes
relating to prior years(1) - ($450) - ($450)

Non-cash future income tax
expense (recovery)(1) ($3,735) ($2,041) ($3,664) $2,865

Net earnings (loss) for
the period ($17,675) $5,525 ($9,531) $8,196

Earnings per unit before
Reorganization expense,
non-cash impairment charge,
non-cash movement in fair value
of the derivative interest rate
swap, non-cash amortization,
recovery of income taxes
relating to prior years, and
non-cash future income taxes(3) $0.3163 $0.3322 $1.1608 $1.1576

Basic earnings (loss) per unit ($1.7881) $0.5691 ($0.9642) $0.8442

Diluted earnings (loss) per unit ($1.7881) $0.5672 ($0.9642) $0.8414

Distributable cash per unit
excluding Reorganization costs,
changes in non-cash working
capital, and recovery of income
taxes relating to prior years(3) $0.3163 $0.3322 $1.1607 $1.1576

Distributable cash per unit(3) $0.2581 $0.3131 $1.1510 $1.1356

Distributions declared per unit $0.2820 $0.2730 $1.1250 $1.0877
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(1) "Royalty revenues earned by MarksLP and MarksCo", "Non-cash
impairment charge", "Non-cash movement in fair value of the
derivative interest rate swap and amortization of deferred financing
fees", "Recovery of income taxes relating to prior years" 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-
accounted basis in its consolidated financial statements, in
accordance with GAAP.
(2) "Earnings before items noted below" is a non-GAAP measure and
represents the earnings, before Reorganization expense, non-cash
impairment charge, non-cash movements in fair value of the derivative
interest rate swap, non-cash amortization of deferred financing fees
and non-cash future income taxes and recovery of income taxes
relating to prior years, 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) "System sales of cafés in the Royalty Pool", "Same café sales
growth", "Earnings per unit before Reorganization expense, non-cash
impairment charge, non-cash movement in fair value of the derivative
interest rate swap, non-cash amortization, recovery of income taxes
relating to prior years, 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 13, 2009.

Income Tax effective in 2011

On June 12, 2007, new income tax legislation regarding the taxation of
income trusts that were publicly traded prior to November 1, 2006 was enacted
by the federal government. As a result of the legislation, the Fund will be
taxed on earnings before distributions to Unitholders commencing January 1,
2011. On December 14, 2007, new legislation was substantively enacted reducing
the income tax rate from 31.5% to 29.5% in 2011 and 28% for 2012 onwards.
Under the legislation, 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 new tax laws 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. There can be no assurances that
the Fund will be able to undertake any measures to minimize such impact.

Forward Looking Information

Certain statements in this report may constitute forward-looking
information within the meaning of applicable securities legislation.
Forward-looking information can be identified by words such as "may", "will",
"should", "expect", "anticipate", "believe", "plan", "intend" and other
similar words. Forward-looking information reflects current expectations
regarding future events and operating performance and speaks only as of the
date of this report. It should not be read as a guarantee of future
performance or results and will not necessarily be an accurate indication of
whether or not those results will be achieved. Forward-looking information is
based on a number of assumptions and is subject to known and unknown risks,
uncertainties and other factors, many of which are beyond the Fund's control,
that may cause the Fund's actual results, performance or achievements, or
those of the Fund, MarksLP, Second Cup cafés, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking information. The following are
some of the factors that could cause actual results to differ materially from
those expressed in or underlying forward-looking information: competition;
availability of premium quality coffee beans; the ability to attract qualified
franchisees; the location of Second Cup cafés; the closure of Second Cup
cafes; loss of key personnel; compliance with government regulation; potential
litigation; the ability to exploit and protect the Second Cup Marks; changing
consumer preferences and discretionary spending patterns including, but not
restricted to, the impact of weather and economic conditions on such patterns;
reporting of system sales by franchisees; and the results of operations and
financial condition of Second Cup. The foregoing list of factors is not
exhaustive, and investors should refer to the risks described under "Risks and
Uncertainties" above and in the Fund's Annual Information Form, which is
available at www.sedar.com.
Although the forward-looking information contained in this report is
based on what management believes are reasonable assumptions, there can be no
assurance that actual results will be consistent with this forward-looking
information and, as a result, the forward-looking information may prove to be
incorrect.
As these forward-looking statements are made as of the date of this
report, the Fund does not undertake to update any such forward-looking
information whether as a result of new information, future events or
otherwise. Additional information about these assumptions and risks and
uncertainties is contained in the Fund's filings with securities regulators.
These filings are also available on the Fund's website at
www.secondcupincomefund.com.

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