Second Cup Income Fund Announces First Quarter Results and April Distribution

MISSISSAUGA, ONTARIO--(May 12, 2010) - Second Cup Income Fund (the "Fund") (TSX:SCU.UN) reported today financial results for the first quarter ended March 31, 2010, and the approval of the April 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.

• Same café sales growth of 1.1% in the quarter.
• Basic earnings per unit of $0.1944 for the quarter, down from $0.2578 in the comparable quarter a year ago.
• Distributable cash per unit was $0.3635 for the quarter vs. $0.2436 in the comparable 2009 period.
• Monthly distribution maintained at $0.07667 per unit.

"We are pleased with the return to positive same café sales growth in the quarter. Advertising our quality standards, which includes taste testing our "little beans" 112 times before they ever reach a guest's cup, helped drive transactions in the cafes. In addition, we featured our specialty lattes in café - some old time favourites like our Maple Latte, and some new ones that were the result of a contest among our baristas across the country. We will continue to focus on the premium quality of our products, supported with our beverage guarantee and will introduce new innovative products to delight our guests and drive transactions for the cafés.", commented Stacey Mowbray, President and CEO of The Second Cup Ltd. ("Second Cup" or "Company").

First Quarter Analysis

Basis of presentation

The unaudited interim consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries Second Cup Trade Marks Limited Partnership ("MarksLP"), Second Cup GP Trust, Second Cup GP Inc. and Second Cup.

Prior to the acquisition of Second Cup on June 27, 2009 (the "Acquisition"), the Fund's source of revenue was royalty income collected by MarksLP from Second Cup. Royalty income was equal to 6.5% of system sales of Second Cup cafés in the royalty pool. After the Acquisition, the Fund's revenues are made up of royalties and other franchise fees, revenue from Company operated cafés and other income. The Fund's expenses now also include the general overhead expenses of Second Cup. Therefore the financial results for the first quarter of 2010 are not directly comparable to the corresponding period last year.

Analysis of System Sales and Same Café Sales Growth

System sales for the first quarter of 2010 were $45,340, compared to $44,992 for the same quarter for 2009, representing an increase of $348 or 0.7%.

The first quarter of 2010 showed growth in same café sales of 1.1% after declines in the previous five quarters. This growth is as a result of a return to transaction growth and continued average cheque improvement. Advertising, an aggressive direct mail coffee program, an in-store focus on lattes, along with an overall improvement in the economy, were all factors in driving same café sales.

Analysis of Revenues

Revenues for the quarter were $5,929 and consisted of royalties and other franchise fees, revenue from Company operated cafés and other income. In 2009 revenue consisted of earnings and interest from the equity accounted investment in MarksLP and amounted to $2,828.

Royalties for the quarter were $3,779. Excluding sales from Company operated cafés, the effective royalty rate was 8.5%.

Revenues from Company operated cafés were $914 for the quarter. Second Cup ended the quarter with six Company operated cafés.

Other franchise related income for the quarter was $1,236, which includes initial franchise fees; renewal fees; transfer fees earned on the sale of cafés from one franchisee to another; purchasing coordination fees earned; and other income earned by Second Cup on the sale of its coffee through alternate channels.

Operating, Administrative and Corporate Café Operating Expenses

Operating and administrative expenses include the general overhead expenses of Second Cup, as well as the public entity costs relating to the administration of the Fund. Operating costs and administrative expenses amounted to $2,908 in the current quarter and include $282 relating to non recurring expenses such as the franchisee convention and other employment costs. In addition, the operating costs and expenses of Company operated cafés, amounting to $816 in the quarter, are now included. The Fund also recorded amortization of $50 on property and equipment in the quarter and amortization of $71 on franchise rights.

Other Income and Expenses

The Fund incurred interest expense of $177 (2009 - $178) related to its term loan and $39 (2009 - $13) in amortization of financing charges also relating to the term loan. The Fund also recorded a non-cash credit of $19 (2009 - charge of $13) for the movement in the fair value of the derivative interest rate swap which fixes the interest rate on the Fund's term loan. The Fund incurred other net interest expense of $7 (2009 – income $2). During the quarter, the Fund recorded a gain of $13 on the disposal of three Company owned cafés and a gain of $22 on the sale of Fund treasury units.

Net Earnings

The Fund's net earnings for the quarter were $1,915 or $0.1944 per unit, compared to $2,553 or $0.2578 per unit in 2009. Prior to the Acquisition, the Fund's indirect source of revenue was royalty income collected by MarksLP from Second Cup. Royalty income was equal to 6.5% of system sales of Second Cup cafés in the royalty pool. As a result, same café sales growth was the key performance indicator for the Fund. Following the Acquisition, the Fund's quarterly net earnings will also fluctuate based on items that are not limited to seasonality of system sales; timing of initial franchise fees, renewal fees and transfer fees; timing of purchasing coordination fees; operating and administrative expenses; and opening and closing of cafés.

Café network

During the quarter, five cafés were renovated and there were two café openings and four café closures, with 342 cafés open as at March 31, 2010.

Distributable Cash

Distributable cash for the current quarter was $3,581, or $0.3635 per unit, compared to $2,412, or $0.2436 per unit, in the first quarter of 2009. This increase is wholly due to the changes in non-cash working capital, which for the quarter decreased by $1,650 compared to an increase of $137 in the Fund and MarksLP in the comparable 2009 quarter. The change in non-cash working capital is primarily due to the timing of collection of accounts receivable by Second Cup. Excluding the impact of changes in non-cash working capital, distributable cash would have been $1,931, or $0.1960 per unit, compared to $2,549, or $0.2574 per unit, for the first quarter of 2009, a decrease of 23.8%.

April Distribution Announcement

The Fund also announced that its board of trustees approved a cash distribution of $0.07667 per unit for the month of April, 2010 to be paid on May 31, 2010 to unitholders of record at the close of business on May 27, 2010.

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.

Second Cup expects to continue growth with positive same café sales and the addition of net new cafés. The focus will be on driving traffic into cafés through external messaging, sampling and product news. In café, the focus will be on operational excellence, training and promotion of the brand's quality credentials.

In terms of 2010 network expansion, Second Cup expects: (1) to open 18 to 24 new cafés in Canada; (2) to close approximately 15 cafés during 2010, the majority of which have sales below the average performance of cafés; and (3) approximately 30 of its cafés will be renovated.

FINANCIAL HIGHLIGHTS

The following table sets out selected pro forma and non-GAAP financial information and other data of the Fund and its wholly owned subsidiaries, and should be read in conjunction with the unaudited consolidated financial statements of the Fund for the three months ended March 31, 2010.

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 May 14, 2010.

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 the Canadian trade-marks and other intellectual property and associated rights used in connection with the operation of Second Cup cafés in Canada. Second Cup, an indirect wholly owned subsidiary of the Fund, is Canada's largest specialty coffee café franchisor, as measured by number of cafés. For the ultimate on-line coffee experience, visit www.secondcup.com.