Second Cup Royalty Income Fund announces third quarter results and October distribution

MISSISSAUGA, ON, Nov. 5 /CNW/ - Second Cup Royalty Income Fund
(the "Fund") reported today financial results for the third quarter ended
September 30, 2008, and the approval of the distribution payment for October.
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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Highlights

- Same café sales growth of 0.1% in the quarter and 0.8% year to date
- Distributable cash per unit of $0.3213 for the quarter, compared to
$0.2696 in 2007, an increase of 19.2%
- 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 $0.2777 for the quarter, compared to
$0.2648 for the comparable quarter a year ago, an increase of 4.9%
- 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 $0.2800 per unit for the quarter
as compared to $0.2692 in 2007, an increase of 4.0%
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"Same café sales, although challenging, remained positive as we achieved
0.1% for the quarter, representing the 15th consecutive quarter of growth for
the Fund," commented Stacey Mowbray, President of Second Cup Ltd. "In the
third quarter we launched our new hot breakfast sandwiches in select markets
and continued the roll out of our grilled lunch sandwich program," continued
Ms. Mowbray. "Recently, we have launched our pre-packaged retail bean program
in café and are featuring a new Fair Trade™, organic 'Discovery' series
coffee, Cuzco™, which we believe will boost our brewed offering and
contribute to sales in the latter part of the year along with our wonderful
holiday merchandise and specialty beverages. I would like to thank our
franchise partners and café operators for their caring commitment to our
guests and their passion in delivering quality products and experiences every
day."

Third 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 third quarter were $47,315, compared to $47,202 for
the comparable period in 2007, representing an increase of $113 or 0.2%. Year
to date, System sales increased 1.7% from $141,348 to $143,778 in 2008. Second
Cup continued to recognize a softening of café sales across its major markets
resulting from lower customer traffic in its cafés, which management of Second
Cup believes is similar to the trend being experienced in retail in general
and reflective of the current Canadian economy. Offsetting this trend, system
sales for the quarter and year to date were positively impacted by (1) a
continuing shift in the sales mix of Second Cup cafés to higher priced food
and merchandise offerings, which, in turn, resulted in higher average cheque
amounts compared to 2007 and (2) the implementation of 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 (3) in mid-March
prices of many of its espresso-based beverages were increased 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%. 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 $3,126 (2007 -
$3,090), representing an increase of 1.2% compared to 2007. Total general and
administrative expenses incurred by the Fund and MarksLP were $189 (2007 -
$336). Net interest expense amounted to $172 in the quarter (2007 - $149). The
Fund also incurred a non-cash expense of $10 relating to the movement in the
fair value of its derivative interest rate swap (2007 - $19) which fixes the
interest rate on the term loan. Non-cash amortization of deferred financing
charges amounted to $13 (2007 - $13). As a result of the reorganization on
April 2, 2007, current tax expense was $nil in the third quarter of 2008 and
2007. 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.
For the quarter, net earnings of the Fund were $2,745 or $0.2777 per
unit, compared to $2,571, or $0.2648 per unit in 2007. Excluding
reorganization costs of $nil (2007 - $11), non-cash amortization of $13 (2007
- $13), and the non-cash charge on the movement in the fair value of the
derivative interest rate swap of $10 (2007 - $19), net earnings for the
quarter were $2,768 or $0.2800 per unit compared to $2,614 or $0.2692 per unit
in 2007, an increase of 4.0% on a per unit basis. This increase in adjusted
net earnings from $2,614 to $2,768 is due to an additional $36 in royalty
revenues earned by MarksLP on increased sales of cafés in the Royalty Pool, a
reduction of $148 in general and administrative expenses of the Fund and its
wholly-owned subsidiaries compared to 2007, net of $30 in additional net
interest expense relating primarily to the term loan.
Net earnings of the Fund year to date were $8,144 or $0.8239 per unit,
compared to $2,671, or $0.2751 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 - $312), non-cash amortization of $38 (2007
- $160), and the non-cash charge relating to the movement in the fair value of
the interest rate swap of $93 (2007 - gain of $36), net earnings year to date
were $8,346 or $0.8443 per unit compared to $8,013 or $0.8253 per unit in
2007, an increase of 2.3% on a per unit basis. This increase in adjusted net
earnings from $8,013 to $8,346 is due to an additional $181 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 $170 in general
and administrative expenses of the Fund and its wholly owned subsidiaries
compared to 2007, net of $74 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 $3,176, or $0.3213 per unit,
as compared to $2,617, or $0.2696 per unit in the third quarter of 2007,
representing an increase of 19.2% per unit. Non-cash working capital of the
Fund decreased by $74 and of MarksLP decreased by $335 compared to a decrease
of $147 in the Fund and an increase of $133 in MarksCo for the comparable 2007
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 - $11), distributable cash would have been
$0.2800 per unit, compared to $0.2692 per unit for 2007, an increase of 4.0%.
Distributable cash year to date was $8,826, or $0.8929 per unit, as
compared to $7,985, or $0.8225 per unit in 2007, representing an increase of
8.6% per unit. Non-cash working capital of the Fund year to date decreased by
$131 (2007- $755) and non-cash working capital of MarksLP decreased by $349
(2007- increase of $472 in MarksLP andMarksCo). 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
- $312), distributable cash would have been $0.8443 per unit, compared to
$0.8253 per unit for 2007, an increase of 2.3%.

October Distribution Announcement

The Fund also announced that its Board of Trustees approved a cash
distribution of $0.0940 per unit for the month of October, 2008 to be paid on
November 28, 2008 to Unitholders of record at the close of business on
November 26, 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.
As a result of the sales performance of its cafés to date and the current
retail and economic environment across Canada, management of Second Cup is
forecasting that same café sales will be approximately flat for the year
versus its previous estimated growth of 1.0% to 2.0%. Same café sales results
for the balance of the year are highly dependent upon the performance of
Second Cup's cafés during the holiday season and hence retail traffic in
general during this period.
On the development front, Second Cup has opened 12 cafés through
November 3, 2008 and does not anticipate any further openings. Management of
Second Cup expects to have renovated 27 existing cafés by the end of its
fiscal year. In terms of closures, management anticipates between 16 and 20
locations will close in 2008.

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 unaudited interim
consolidated financial statements of the Fund.

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

Number of active cafés -
end of period 345 344 345 344

Same café sales growth(3) 0.1% 1.2% 0.8% 3.8%

System sales of cafés in the
Royalty Pool(3) $47,315 $47,202 $143,778 $141,348

Royalty revenues earned by
MarksLP and MarksCo(1) $3,126 $3,090 $9,417 $9,236

Earnings before Reorganization
expense, 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(2) $2,768 $2,614 $8,346 $8,013

Reorganization expense - $11 - $312

Amortization of deferred
financing(1) $13 $13 $38 $160

Non-cash (gain) loss relating
to movement in fair value of
derivative interest rate swap(1) $10 $19 $93 ($36)

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

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

Net earnings (loss) for the
period $2,745 $2,571 $8,144 $2,671

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) $0.2800 $0.2692 $0.8443 $0.8253

Basic earnings (loss) per unit $0.2777 $0.2648 $0.8239 $0.2751

Diluted earnings (loss) per
unit $0.2774 $0.2641 $0.8229 $0.2744

Distributable cash per unit
excluding Reorganization
costs and changes in non-cash
working capital(3) $0.2800 $0.2692 $0.8443 $0.8253

Distributable cash per unit(3) $0.3213 $0.2696 $0.8929 $0.8225

Distributions declared per
unit $0.2820 $0.2730 $0.8430 $0.8147
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(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 and release of future income tax
liability on Reorganization" 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 and release of future income tax
liability on Reorganization, 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 November 7, 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