Second Cup Royalty Income Fund announces 2007 second quarter financial results

MISSISSAUGA, ON, July 25 /CNW/ - Second Cup Royalty Income Fund (the
"Fund") reported financial results for the second quarter ended June 30, 2007.
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 4.4% for the quarter and 5.2% year-to-
date.
- Distributable cash per unit, excluding reorganization costs and
changes in non-cash working capital, increased 6.4% on a per unit
basis compared to the second quarter of 2006.
- Basic earnings per unit, adjusted to exclude reorganization costs
and the impact of the reorganization and new tax legislation on non-
cash future income tax balances was $0.2787 for the quarter,
compared to $0.2644 for the comparable period a year ago,
representing a 5.4% increase on a per unit basis.
- Completion of previously announced reorganization of the Fund's
structure.
>>

"We continue to be pleased with the same café sales performance of cafés
in the Royalty Pool of 5.2% on a year to date basis. The achievement of 4.4%
in the second quarter was particularly challenging given that we were lapping
our menu board change, which moved many of our guests up one beverage size,
and increases to the prices of our blender beverage line up, both of which
occurred in mid May of last year," commented Bruce Elliot, President of The
Second Cup Ltd. ("Second Cup"). "We expect to modernize between 22 and 27
cafés in the third and fourth quarter which will put some pressure on same
café sales growth due to the temporary closure of these cafés for the period
of the renovation. However, we continue to expect to achieve our previously
stated range of 3 to 5% for the year on the strength of our summer, fall, and
holiday programs."

Reorganization of the Fund

As previously announced, on April 2, 2007, the Unitholder-approved
reorganization of the structure of the Fund effectively replaced its
subsidiary corporations, including Second Cup Trade-Marks Inc. ("MarksCo"),
with a newly formed trust (Second Cup GP Trust) and non-taxable limited
partnership (Second Cup Trade-Marks Limited Partnership, or "MarksLP"). As a
result of replacing MarksCo with a non-taxable limited partnership, $10,668 of
future income tax liabilities inherent in the equity accounted investment in
MarksCo by the Fund were eliminated, resulting in an increase to the Fund's
equity accounted earnings of MarksCo and its equity investment in MarksCo on
April 2, 2007.

Second Quarter Results

The Fund's "top line" structure means that its success and growth depends
primarily on Second Cup's ability to maintain and increase the overall system
sales of Royalty Pool Cafés. Same café sales growth is of particular
importance as it directly correlates to increased cash available for
distribution and is a key indicator of brand health and franchise
profitability.
Same café sales growth of cafés included in the Royalty Pool was 4.4% for
the quarter, representing the tenth consecutive quarter of sales growth since
the inception of the Fund. System sales were $48,149 in the quarter, as
compared to $45,812 in the first quarter of 2006, an increase of 5.1%. For the
six months ended June 30, 2007, system sales were $94,146 compared to $89,185
for the six months ended June 30, 2006, an increase of 5.6%, primarily due to
the same café sales growth of 5.2% achieved year-to-date.
Same café sales for the second quarter and year to date were positively
impacted by price increases implemented in 2006 and Second Cup's winter,
spring and summer promotional programs, which continued to shift the company's
sales mix to its higher priced blender and espresso-based beverages, which, in
turn, resulted in higher average transaction amounts versus 2006. Same café
sales growth was negatively impacted in the second quarter by the fact that
Second Cup was lapping both a cup sizing change, which moved many guests up a
size in drinks, and increased blender prices taken in early May of 2006.
Furthermore, same café sales were impacted in the quarter and year to date by
approximately 0.5% due to the temporary closure of 13 sites while they were
under renovation.
The Fund reported a net loss of $2,171 or $0.2236 per unit for the second
quarter, compared to net earnings of $2,160, or $0.2241 per unit in 2006.
Excluding the impact of the $10,668 (2006 - $nil) future income tax amounts
recorded in the equity earnings of the Fund's wholly owned subsidiary MarksCo
as a result of the reorganization discussed below; a $15,545 (2006 - $nil)
charge to earnings of the Fund related to the set up of a future income tax
liability as discussed below; costs incurred for the reorganization of nil
(2006 - $164); and a non-cash charge of $224 to the earnings of MarksCo in the
second quarter of 2006 resulting from a reduction in federal income tax rates,
net earnings for the second quarter would have been $2,706 or $0.2787 per unit
compared to $2,548 or $0.2644 per unit for the second quarter of 2006.

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 operating activities of the Fund and its wholly owned
subsidiaries, MarksCo and MarksLP. Cash flow from operating activities of the
Fund is adjusted to include cash flow from operating activities of MarksCo and
MarksLP. Excluding the impact of changes in non-cash working capital and
reorganization costs, distributable cash would have been $2,786 or $0.2870 per
unit compared to $2,599 or $0.2697 per unit, which represents a 6.4% increase
in distributable cash per unit versus the comparable period.

New Income Tax Legislation

On June 12, 2007 new tax legislation was enacted that changes the rules
applicable to publicly traded income trusts in 2011. In 2011, income taxes
payable will reduce net earnings of the Fund. As the new trust tax legislation
has been substantively enacted, the Fund is required to give accounting
recognition to these new rules. As a result, on June 12, 2007 the Fund
recognized a non-cash future income tax expense, and corresponding liability,
amounting to $15,545. This liability represents the difference between the
accounting values of the assets and liabilities of the Fund, primarily
relating to the Canadian trademarks owned by MarksLP, and the tax basis of
these same assets and liabilities.

Outlook

The Fund's "top line" structure means that its success and growth depends
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.
Subject to healthy economic conditions continuing across the company's
primary markets, Second Cup maintains its expectation to achieve same café
sales growth of approximately 3% to 5% for the 2007 fiscal year.
In terms of network expansion, Second Cup expects to open 14 to 16 new
cafés in Canada during the 2007 calendar year. Further, Second Cup expects it
will permanently close between 8 and 12 cafés during the year, the majority of
which have sales below the average performance of cafés in the Royalty Pool.
Second Cup also expects that renovations to approximately 35 to 40 of its
cafés will be completed during the year, 13 of which have been completed to
date.
Overall, based on the Second Cup initiatives outlined above and others,
the anticipated economic environment and market conditions affecting the
specialty coffee industry, the Fund continues to expect a successful 2007
fiscal year.

Financial Highlights

The following table sets out selected financial information and other
data of the Fund and should be read in conjunction with the Fund's unaudited
interim consolidated income statements for the second quarter.

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(in thousands of dollars Three months ending Six months ending
except cafés and June 30, June 30, June 30, June 30,
per unit amounts) 2007 2006 2007 2006
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Number of cafés in Royalty Pool 351 352 351 352

Number of active cafés -
end of period 348 348 348 348

Same café sales growth 4.4% 4.7% 5.2% 5.5%

System sales of cafés in the
Royalty Pool $48,149 $45,812 $94,146 $89,185

Royalty revenue earned by
MarksCo and MarksLP $ 3,147 $ 2,999 $ 6,146 $ 5,824

Net earnings for the period
excluding reorganization
costs and the impact of the
reorganization and new tax
legislation on non-cash
future income tax balances(1) $ 2,706 $ 2,548 $ 5,278 $ 4,986

Net (loss) earnings for
the period ($ 2,171) $ 2,160 $ 100 $ 4,405

Basic earnings per unit
excluding reorganization
costs and the impact of the
reorganization and new tax
legislation on non-cash
future income tax balances(1) $0.2787 $0.2644 $0.5436 $0.5173

Basic (loss) earnings per unit ($0.2236) $0.2241 $0.0103 $0.4570

Diluted (loss) earnings
per unit ($0.2236) $0.2234 $0.0103 $0.4556

Distributable cash per unit
excluding reorganization
costs and changes in
non-cash working capital(2) $0.2870 $0.2697 $0.5562 $0.5278

Distributable cash per unit $0.2771 $0.2409 $0.5546 $0.5124

Distributions declared
per unit $0.2730 $0.2601 $0.5417 $0.5101
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(1) "Net earnings for the period excluding reorganization costs and the
impact of the reorganization and new tax legislation on non-cash
future income tax balances" and "Basic earnings per unit excluding
reorganization costs and the impact of the reorganization and new tax
legislation on non-cash future income tax balances" represent
non-GAAP measures and are calculated by adding back to net earnings
expenses relating to the reorganization of $nil for the three months
and $301 for the six months ending June 30, 2007, and $164 for the
three months and $357 for the six months ending June 30, 2006; for
the three months and six months ended June 30, 2007, net earnings
exclude the non-cash recovery of future income taxes of $10,668
relating to the reorganization of the Fund, and a non-cash future
income tax charge of $15,545 relating to the new tax legislation
substantially enacted on June 12, 2007; and for the three months and
six months ended June 30, 3006, net earnings exclude a non-cash
income tax charge of $224 relating to a reduction of future income
tax rates recognized in the second quarter of 2006.

(2) "Distributable cash", "Distributable cash per unit" and
"Distributable cash per unit excluding reorganization costs and
changes in non-cash working capital" represent non-GAAP measures.
"Distributable cash per unit excluding reorganization costs and
changes in non-cash working capital" in 2007 and 2006 are calculated
by taking the Distributable cash calculated as described in the
Fund's MD&A, and adding back costs related to the reorganization of
$nil for three months and $301 for six months ending June 30, 2007
and $164 for three months and $357 for six months ending June 30,
2006 and excluding changes in non-cash working capital balances of
the Fund and MarksLP.
>>

The unaudited interim consolidated financial statements of the Fund,
together with its Management's Discussion and Analysis for the second quarter
of 2007, are expected to be available at www.sedar.com and on the Fund's
website at www.secondcupincomefund.com on or before July 30, 2007.

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.

Non-GAAP Terms

In addition to using financial measures prescribed by GAAP, non-GAAP
financial measures and other terms are used in this news release. These terms
include "system sales", "same café sales growth", "net earnings for the year
excluding reorganization costs and the impact of the reorganization and new
tax legislation on non-cash future income tax balances", "basic earnings per
unit excluding reorganization costs and the impact of the reorganization and
new tax legislation on non-cash future income tax balances", "distributable
cash per unit excluding reorganization costs and changes in non-cash working
capital" and "distributable cash". These terms are not financial measures
recognized by GAAP and do not have any standardized meaning prescribed by GAAP
and therefore may not be comparable to similar terms and measures presented by
other similar issuers. These non-GAAP measures and terms are intended to
provide additional information on the Fund's performance and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with GAAP.
System sales and same café sales growth are presented in reference to the
sales performance of the Royalty Pool Cafés. The Fund believes they are useful
measures as they provide an indication of the top-line sales on which the
royalty that is the Fund's indirect source of income is based. Distributable
cash is presented in reference to the Fund's distribution policy. The Fund
believes distributable cash is a useful measure as it provides investors with
an indication of cash available for distribution. Management believes, in
addition to net income, distributable cash is a useful supplemental measure in
evaluating the Fund's performance as it provides investors with an indication
of cash available for distributions and working capital needs. Investors are
cautioned, however, that distributable cash should not be construed as an
alternative to the statement of cash flows as a measure of liquidity and cash
flows. The method of calculating distributable cash for the purposes of this
news release may differ from that used by other issuers and, accordingly,
distributable cash in this news release may not be comparable to distributable
cash used by other issuers.

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 further information on Second Cup, visit www.secondcup.com.

%SEDAR: 00021352E