Second Cup Income Fund Announces Third Quarter Results and October Distribution

MISSISSAUGA, ONTARIO--(Nov. 5, 2009) - Second Cup Income Fund (the "Fund") (TSX:SCU.UN) reported today financial results for the third quarter ended September 30, 2009, and the approval of the October 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

- Earnings for the quarter include The Second Cup Ltd. ("Second Cup") as a result of the Fund's acquisition of Second Cup through its wholly-owned subsidiary, Second Cup Trade-Marks Limited Partnership ("MarksLP"), which was completed as of June 27, 2009.

- Same cafe sales were down 4.5% in the quarter, and 4.1% year-to-date, with sales adversely affected by the continuing downturn in the economy, increased unemployment and discretionary consumer spending patterns.

- Basic earnings per unit were $0.2519 for the quarter vs. $0.2777 in the comparable quarter a year ago.

- Distributable cash per unit excluding changes in non-cash working capital was $0.2593 for the quarter vs $0.2800 in the comparable 2008 period.

- Distributions declared in the quarter were $0.2300 per unit compared to $0.2820 in 2008.

"Second Cup has continued to experience softer traffic versus a year ago, given the conditions of the Canadian economy and the retail sector, however, our guests are spending more, largely a result of our fresh food program and the expansion of that program into the breakfast and lunch dayparts," commented Stacey Mowbray, President and C.E.O. of Second Cup. "We were able to hold price increases to less than 1% in order to maintain value for our guests. It has truly been our customers' positive response to our premium beverages and food offerings that has helped drive average cheque. The holiday season is critical for our cafes. The cafes will be serving our delicious holiday beverages, as well as promoting themed merchandise and our unique assortment of quality coffee beans for gifting and in home consumption. I would like to thank our franchise partners for their care and commitment to their guests."

Analysis of System Sales and Same Cafe Sales Growth

System sales for the quarter were $45,706 compared to $47,315 for the Royalty Pool for the same quarter for 2008. This decrease was largely the result of negative same cafe sales in the quarter of 4.5%.

Year to date, system sales were $137,172, including $91,466 for the Royalty Pool for the first two quarters, compared to $143,778 for the Royalty Pool for the comparable nine months of 2008. This decrease was largely the result of negative same cafe sales of 4.1%.

The third quarter of 2009 witnessed a softening of cafe sales across Canada's major markets which resulted from among other things, lower customer traffic, which Second Cup believes is similar to the trend experienced in retail in general and reflective of the soft Canadian economy. The improvement in average cheque, as a result of the new food programs in the lunch and breakfast dayparts introduced last year, has continued to offset the same cafe sales decline noted above.

Income and Operating Expenses

Revenues for the quarter were $6,589, including revenues from company-owned cafes of $1,540. Second Cup ended the period with 17 company-owned cafes, seven of which were operated by franchisees. Other income for the period was $1,332. Other income includes: initial franchise fees, which are recognized as income when the new cafes are opened; renewal fees, which are recognized when an existing franchisee enters into a new franchise agreement; transfer fees earned on the sale of cafes from one franchisee to another; construction administration fees; and other income earned by Second Cup on the sale of its coffee through alternate channels.

Operating and administrative expenses include the general overhead expenses of Second Cup, as well as professional fees, public entity costs and trustee fees relating to the administration of the Fund. Operating costs and administrative expenses increased from $91 in the third quarter of 2008 to $2,244 in the current quarter largely as a result of the acquisition of Second Cup. In addition, the operating costs and expenses of company-owned cafes, amounting to $1,607 in the quarter, are now included.

The Fund incurred interest expense of $177 (2008 - $183) related to its term loan and $52 (2008 - $13) in amortization of financing charges also relating to the term loan. The Fund recorded a non-cash credit of $46 (2008 - charge of $10) 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 interest expense of $4 in the quarter, and earned bank interest income of $1 (2008 - $11). During the quarter, the Fund recorded a loss of $14 on the disposal of company-owned cafes. The Fund also recorded amortization of $51 on capital assets in the period, and amortization of $56 on franchise rights.

Year to date, revenues were $12,204, including revenues of $6,779 from Second Cup subsequent to the June 27, 2009 acquisition date, compared to earnings and interest from equity accounted investment in MarksLP of $9,119 in 2008. Operating costs and administrative expenses increased from $263 in 2008 to $2,581 in 2009 largely as a result of the acquisition of Second Cup. In addition, the operating costs and expenses of company-owned cafes amounted to $1,669.

Year to date, the Fund incurred interest expense of $530 (2008 - $544) related to its term loan and $96 (2008 - $38) in amortization of financing charges also relating to the term loan. The Fund recorded a non-cash credit of $57 (2008 - charge of $93) 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 interest expense of $4 and earned bank interest income of $5 (2008 - $34). The Fund also recorded amortization of $107 on capital assets and franchise rights year to date and recorded a loss of $14 on write-downs and disposals of company-owned cafes.

Income Taxes

An income tax recovery related to prior years of $47 was recorded in the quarter. No income taxes were recorded in the comparable 2008 quarter. Year to date, in addition to the prior years' income tax recovery of $47, and a similar $103 recovery by MarksLP included in equity accounted income, a future income tax recovery of $33 was recorded, compared to a charge of $71 in 2008.

Net Earnings

The Fund's net earnings for the quarter were $2,478 or $0.2519 per unit, compared to $2,745 or $0.2777 per unit in 2008. Excluding the current income tax recovery of $47 (2008 - $nil) related to prior years, net earnings for the quarter were $2,431 or $0.2471 per unit compared to $2,745 or $0.2777 per unit in 2008, a decrease of 11.0%.

The Fund's net earnings for the nine month period to September 30, 2009 were $7,345, or $0.7433 per unit, compared to $8,144, or $0.8239 per unit in 2008. Excluding the transaction costs of $480 (2008 - $nil) and the current income tax recoveries of $150 (2008 - $nil) related to prior years, net earnings were $7,675 or $0.7767 per unit compared to $8,144 or $0.8239 per unit in 2008, a decrease of 5.7%.

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 and its subsidiaries. Distributable cash for the quarter was $1,984, or $0.2016 per unit, as compared to $3,176, or $0.3213 per unit in the third quarter of 2008. Excluding the changes in non-cash working capital, distributable cash would have been $0.2593 per unit, compared to $0.2800 per unit for the second quarter of 2008, a decrease of 7.4%.

On a year-to-date basis, distributable cash was $7,173 or $0.7259 per unit, as compared to $8,826, or $0.8929 per unit in 2008, a decrease of 18.7%. Excluding the changes in non-cash working capital, distributable cash would have been $0.7507 per unit, compared to $0.8443 per unit for 2008, a decrease of 11.1%. This is partly due to transaction costs of $480 ($0.048 per unit) relating to the acquisition of Second Cup.

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 and nine month periods ended September 30, 2009.
 

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(in thousands of dollars, except      Three months ended Nine months ended
 number of cafes and per unit               September 30      September 30
 amounts)                                  2009     2008     2009     2008
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System sales of cafes(1,4)              $45,706  $47,315 $137,172  143,778


Number of cafes - end of period(1)          346      345      346      345


Same cafe sales growth(1,4)                (4.5%)    0.1%    (4.1%)    0.8%


Total revenue(3)                         $6,589   $3,031  $12,204   $9,119


Earnings before items noted below(2)     $2,431   $2,745   $7,675   $8,144


 Transaction costs(3)                         -        -     $480        -


 Current income tax (recovery) re prior
   years(3)                                ($47)       -    ($150)       -


Net earnings for the period              $2,478   $2,745   $7,345   $8,144


Earnings per unit before transaction
 costs and current income tax (recovery)
 re prior years(4)                      $0.2471  $0.2777  $0.7767  $0.8239


Basic earnings per unit                 $0.2519  $0.2777  $0.7433  $0.8239


Diluted earnings per unit               $0.2519  $0.2774  $0.7433  $0.8229


Distributable cash per unit excluding
 changes in non-cash working capital(4) $0.2593  $0.2800  $0.7507  $0.8443


Distributable cash per unit(4)          $0.2016  $0.3213  $0.7057  $0.8929


Distributions declared per unit         $0.2300  $0.2820  $0.7247  $0.8430


Payout ratio excluding changes in
 non-cash working capital(4,5)             88.7%   100.7%    96.5%    99.8%


Payout ratio(4,6)                         114.1%    87.8%   102.7%    94.4%
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(1) "System sales of cafes", "Number of cafes - end of period" and "Same
    cafe sales growth" refer to active cafes in the Royalty Pool for
    periods prior to June 28, 2009, and refer to all Canadian cafes for all
    subsequent periods. As at the acquisition date of Second Cup, there were
    351 cafes in the cafe network that now makes up system sales. There were
    four cafe openings and nine closures in the period from the acquisition
    date to September 30, 2009. Year to date, there have been seven cafe
    openings and 22 closures. 
(2) "Earnings before items noted below" is a non-GAAP measure and
    represents the earnings, before transaction costs and current income
    tax (recovery) re prior years of the consolidated Fund and its wholly
    owned subsidiaries, including Second Cup since June 27, 2009, which are
    consolidated with the statements of Second Cup for reporting purposes
    in accordance with GAAP.
(3) "Total revenue", "Transaction costs" and "Current income tax (recovery)
    re prior years", represent the combined amounts of the consolidated
    Fund and its wholly owned subsidiary, MarksLP, which was, prior to June
    28, 2009, consolidated with the statements of Second Cup for reporting
    purposes in accordance with GAAP. Prior to June 28, 2009, the Fund had
    accounted for the earnings of MarksLP on an equity accounted basis in
    its consolidated financial statements, in accordance with GAAP.
(4) "System sales of cafes", "Same cafe sales growth", "Earnings per unit
    before transaction costs and current income tax (recovery) re prior
    years", "Distributable cash per unit excluding changes in non-cash
    working capital", "Distributable cash per unit", "Payout ratio
    excluding changes in non-cash working capital" and "Payout ratio"are
    non-GAAP measures.
(5) "Payout ratio excluding changes in non-cash working capital" is
    calculated as "Distributions declared per unit" as a percentage of
    "Distributable cash per unit excluding changes in non-cash working
    capital. 
(6) "Payout ratio" is calculated as "Distributions declared per unit" as a
    percentage of "Distributable cash per unit".

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 6, 2009.

October Distribution Announcement

The Fund also announced that its Board of Trustees approved a cash distribution of $0.07667 per unit for the month of October, 2009 to be paid on November 30, 2009 to Unitholders of record at the close of business on November 26, 2009.

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 will look to maximize sales during this critical period by continuing to focus on operations excellence. As well, the cafes will be promoting seasonal beverages and merchandise, while continuing to grow both food and retail bean sales.

In terms of 2009 network development, Second Cup has opened seven cafes year to date, and expects to open six new cafes in Canada in the fourth quarter. In terms of renovations, 20 cafes have been renovated to date, and a further three to five are expected to be renovated in the fourth quarter. Second Cup also anticipates closing a further three to five cafes, over and above the 22 closed to date, the majority of which have sales below the average performance of its cafes. As previously reported, management's decision to close unprofitable corporate-owned cafes is designed to improve the overall earnings of Second Cup.

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 cafes, 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 a direct 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 cafes in Canada. The fund also owns, indirectly, Second Cup. For more information on the Second Cup Income Fund please visit www.secondcupincomefund.com.

About Second Cup

Second Cup is Canada's largest specialty coffee cafe franchisor and second largest retailer of specialty coffee, as measured by number of cafes. For the ultimate on-line coffee experience, visit www.secondcup.com.