Second Cup Royalty Income Fund announces first quarter results and April distribution

MISSISSAUGA, ON, May 7 /CNW/ - Second Cup Royalty Income Fund (the
"Fund") reported today financial results for the first quarter ended March 31,
2008, 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.

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Highlights

- Same Café Sales growth of 1.4% in the quarter, the 13th consecutive
quarter of positive same café sales growth since the inception of the
Fund
- Basic earnings per unit was $0.2511 for the quarter, compared to
$0.2339 for the comparable quarter a year ago, an increase of 7.4%
- Basic earnings per unit, excluding non-cash expenses, and
reorganization costs in 2007, increased 2.9% to $0.2769 per unit from
$0.2691 for the comparable period in 2007
- Distributions declared in the quarter were $0.2790 per unit compared
to $0.2687 in 2007, an increase of 3.8%
>>

"The slowing growth trend we experienced in the last two quarters of
fiscal 2007 continued into the first quarter of 2008. In the first quarter we
achieved same café growth of 1.4% which is below our stated range of 2% to 4%
for the year. However, we believe that through a combination of selective
price increases and on the strength of our sales building initiatives, we will
be able to achieve our stated range and maintain our track record of
delivering positive quarterly same café sales growth. The sales results for
the quarter represented the 13th consecutive quarter for the Fund and the 18th
consecutive quarter of same café sales growth for Second Cup," commented
Gabriel Tsampalieros, Chairman and Chief Executive Officer of The Second Cup
Ltd. ("Second Cup"), and the President and Chief Executive Officer of Second
Cup GP Inc. ("GP Inc.").

First 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 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 for the first quarter
of 2007, are recorded on an equity-accounted basis in the Fund's financial
statements.
System sales for the first quarter of 2008 were $47,333 (2007 - $45,997)
and same café sales growth was 1.4% (2007 - 6.1%) for the same period. System
sales for the Period were positively impacted by a continuing shift in the
sales mix of Second Cup cafés to higher priced espresso-based beverages, food
and merchandise offerings, which, in turn, resulted in higher average
transaction amounts compared to 2007. Second Cup also implemented 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 in mid-March
increased the prices of many of its espresso-based beverages nationwide as
well as its brewed coffee offering in its Alberta market. These price
increases would have had a very minor impact on the first quarter results, and
are expected to deliver annualized same café sales growth of approximately 1%
to 1.5%. Same café sales and system sales were also positively impacted by the
additional day in February as a result of the leap year, however, offsetting
this was the negative impact of the inclement weather experienced in the first
few months of the year and a shift in the Easter holiday to the first quarter
in 2008 from the second quarter in 2007.
For the quarter, MarksLP earned total royalty revenue of $3,081 (2007 -
$2,999), representing an increase of 2.7% compared to 2007. Total general and
administrative expenses incurred by the Fund and MarksLP were $179 (2007 -
$185). Net interest expense for the Fund and MarksLP amounted to $166 in the
quarter compared to MarksCo's expense of $144 in 2007. The Fund also incurred
a non-cash charge of $171 relating to the movement in the fair value of its
interest rate swap (2007 - $nil) which fixes the interest rate on the term
loan. Non-cash amortization of deferred financing charges amounted to $13
(2007 - $13). During the first quarter of 2007, the Fund incurred expenses of
$301 or $0.031 per unit (2008 - $nil), related to the reorganization of the
structure of the Fund. Current tax expense for MarksLP was $nil, compared to
current income tax of $56 incurred by the Fund's wholly owned subsidiaries in
the first quarter of 2007. A non-cash future income tax provision of $71 was
made in the quarter, compared to $29 in the comparable quarter of 2007.
Net earnings of the Fund were $2,482 or $0.2511 per unit for the period,
compared to $2,271, or $0.2339 per unit in 2007. Excluding the non-cash future
income tax provision of $71 (2007 - $29); reorganization costs of $nil (2007 -
$301); and the non-cash movement in the fair value of the interest rate swap
$171 (2007 - $nil) and amortization of deferred financing charges of $13
(2007 - $13 in MarksCo), net earnings for the quarter were $2,737 or $0.2769
per unit compared to $2,614 or $0.2691 per unit in 2007, an increase of 2.9%
on a per unit basis.
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 was $2,781, or $0.2813 per unit compared to
$2,693, or $0.2774 per unit for the comparable period. Excluding the impact of
changes in non-cash working capital of the Fund, MarksCo and MarksLP, and the
reorganization costs, distributable cash would also have been $2,737, or
$0.2769 per unit, compared to $2,614, or $0.2691 per unit for the first
quarter of 2007.

Distributions Increase

As previously announced on March 11, 2008, the Fund's Board of Trustees
approved a 3.3% increase to the monthly unitholder distribution. The change
increased the monthly distribution rate from 9.1 cents per unit to 9.4 cents
per unit, or $1.1280 per unit on an annualized basis from $1.0920 per unit.
Distributions of $0.2790 per unit were declared in the quarter, compared to
$0.2687 in 2007, an increase of 3.8%.

April Distribution Announcement

The Fund also announced that its Board of Trustees approved a cash
distribution of $0.0940 per unit for the month of April, 2008 to be paid on
May 30, 2008 to Unitholders of record at the close of business on May 28,
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.
Second Cup has now achieved 18 consecutive quarters of positive same café
sales dating back to the fourth quarter of 2003. Subject to stable economic
conditions across Second Cup's primary markets, Second Cup continues to expect
same café sales growth of approximately 2% to 4% for the 2008 fiscal year.
Second Cup has a number of key initiatives in 2008 designed to build
sales and increase traffic which include: continuing to expand the successful
roll-out of both its regular and grilled sandwich program; introducing a new
hot breakfast sandwich program; selectively expanding its food offerings as
part of an overall makeover and realignment of the menu to reduce operating
complexity and improve quality and consistency; and launching an exciting new
line-up of reformulated beverages which will be low in fat (containing 3 grams
of fat or less) and contain fewer calories.
On the development front, management of Second Cup believes it can
deliver on its target of renovating upwards of 40 existing cafes and opening
12 to 18 new cafes. The challenge, as it relates to the café network in 2008,
will be the number of closures. Under normal circumstances Second Cup
anticipates closures ranging from 10 to 14. An added dynamic this year
revolves around the higher number of cafés which are at the end of their lease
terms. The potential exists for landlords to redevelop these locations as they
look to rejuvenate their properties and change their tenant portfolios, which
in some cases may adversely affect the number of closures. Distributable cash
is not impacted by café closures due to the obligation that Second Cup has to
make make-whole payments to the Fund, which offset the lost royalty revenue on
cafés permanently closed during the year.

Financial Highlights

The following table sets out selected financial information and other
data of the Fund and its wholly owned subsidiary, MarksLP (and MarksCo for the
first quarter of 2007), and should be read in conjunction with the audited
consolidated financial statements of the Fund.

<<
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Three months ended
(in thousands of dollars, except number Mar. 31, Mar. 31,
of cafés and per unit amounts) 2008 2007
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Number of cafés in Royalty Pool 357 351

Number of active cafés - end of period 355 348

Same café sales growth(3) 1.4% 6.1%

System sales of cafés in the Royalty Pool(3) $47,333 $45,997

Royalty revenues earned by MarksLP and MarksCo(1) $3,081 $2,999

Earnings before Reorganization expense, non-cash
movement in interest rate swap and amortization of
deferred financing charges and income taxes(2) $2,737 $2,670

Reorganization expense - $301

Non-cash movement in interest rate swap and
amortization of deferred financing charges(1) $184 $13

Current income taxes(1) - $56

Non-cash future income tax expense(1) $71 $29

Net earnings for the period $2,482 $2,271

Earnings per unit excluding Reorganization costs,
non-cash movement in interest rate swap and
amortization of deferred financing charges and
non-cash future income taxes(3) $0.2769 $0.2691

Basic earnings per unit $0.2511 $0.2339

Diluted earnings per unit $0.2502 $0.2337

Distributable cash per unit excluding Reorganization
costs and changes in non-cash working capital(3) $0.2769 $0.2691

Distributable cash per unit(3) $0.2813 $0.2774

Distributions declared per unit $0.2790 $0.2687

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(1) "Royalty revenues earned by MarksLP and MarksCo", "Non-cash movement
in interest rate swap and amortization of deferred financing
charges", "Current income taxes" 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 consolidated financial statements, in
accordance with GAAP.
(2) "Earnings before Reorganization expense, non-cash movement in
interest rate swap and amortization of deferred financing charges and
income taxes" is a non-GAAP measure and represents the earnings,
before Reorganization costs, non-cash movement in interest rate swap,
non-cash amortization of deferred financing charges and all income
tax expenses or recoveries, 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 interest rate swap and amortization of deferred financing
charges and non-cash future income taxes", "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 May 9, 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