Liquor Stores Income Fund
TSX : LIQ.UN

Liquor Stores Income Fund

May 12, 2005 20:07 ET

Liquor Stores Income Fund Reports 2005 First Quarter Earnings

EDMONTON, ALBERTA--(CCNMatthews - May. 12, 2005) - Liquor Stores Income Fund
(the "Fund") (TSX:LIQ.UN) announced its first quarter results for 2005. The Fund
reported earnings before non-controlling interest of $910,192 or $0.10 per
(weighted average) unit outstanding as of March 31, 2005. Distributable cash
flow for the first quarter of 2005 was $0.14 per unit. For the fourth quarter of
2004 and the first quarter of 2005 combined, distributable cash was $0.51 and
distributions declared were $0.50 per unit. Distributions of $0.25 per unit were
declared during the first quarter of 2005. Sales for the period were $26,818,724
and newly acquired stores contributed $3,728,282 to sales for the quarter. The
first quarter is historically the slowest quarter of the year in the industry
and contributes approximately 20% of annual sales. Same store gross margins were
up 1.35% when compared to the same quarter in 2004, resulting in an increase in
margin earned from same stores of $171,510. Operating results from same stores
showed a significant improvement for the second consecutive quarter when
compared to the same quarters in the previous year. Total gross margin for first
quarter of 2005 was $5,859,861 compared to $4,922,862 in the first quarter of
2004, an increase of approximately $937,000. Irv Kipnes, President and Chief
Executive Officer of the Fund stated, "We are pleased with the results for the
first quarter of 2005. For the second consecutive quarter the operating results
from same stores has improved. During the quarter we acquired 13 stores and
during the first week of May, 2005, we opened two additional stores in British
Columbia. We have positioned ourselves for further growth and have both the
manpower and the financial resources to allow us to continue to execute our
growth strategy."

About Liquor Stores Income Fund

The Fund is a publicly traded Canadian Income fund that participates in the
retail liquor industry in Alberta and British Columbia through its 59.34%
interest in Liquor Stores Limited Partnership ("Liquor Stores LP"). Liquor
Stores Income Fund is Canada's only publicly traded entity with interests
exclusively in the retailing of liquor products. The Fund is the largest liquor
retailer in Alberta by number of stores. The Fund currently operates 65 stores,
3 of which are located in British Columbia. In the first quarter of 2005, the
Fund completed the acquisition of 13 new stores in Alberta, and has recently
opened two new liquor stores in British Columbia. The Fund Units trade on the
Toronto Stock Exchange under the symbol LIQ.UN. Additional information about
Liquor Stores Income Fund is available at www.sedar.com and the Fund's website
at www.liquorstoresincomefund.ca.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

This management's discussion and analysis should be read in conjunction with the
unaudited consolidated interim financial statements and accompanying notes (the
"Interim Financial Statements") of Liquor Stores Income Fund (the "Fund") for
the period from January 1, 2005 to March 31, 2005 as well as the audited
consolidated financial statements and accompanying notes of the Fund for the
initial period from August 10, 2004 to December 31, 2004, which includes
business operations from September 28, 2004 to December 31, 2004. Results are
reported in Canadian dollars unless otherwise stated and have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP").
Certain dollar amounts have been rounded to the nearest hundred thousand dollar,
while other amounts have been rounded to the nearest thousand dollars.
References to notes are to the notes to the Interim Financial Statements of the
Fund unless otherwise stated. This Management Discussion and Analysis is dated
May 11, 2005.

OVERVIEW OF THE FUND

Issuance of Fund Units and Acquisition

The Fund is an unincorporated open ended, limited purpose trust established
under the laws of the Province of Alberta pursuant to a Declaration of Trust
dated August 10, 2004. The Fund commenced business operations on September 28,
2004, when it completed an initial public offering (the "IPO") of 4,300,000
trust units ("Fund Units"), at a price of $10 per unit, for aggregate gross
proceeds of $43,000,000. The costs of issuance of the units were $5,185,828
resulting in an addition to Unitholders Equity of $37,814,172. Concurrent with
the closing of the IPO, the Fund used the proceeds from the IPO to acquire a
50.6% indirect interest in Liquor Stores Limited Partnership ("Liquor Stores
LP") and Liquor Stores LP used such net proceeds and funds from the new credit
facilities to acquire the net assets (the "Acquired Business") of The Liquor
Depot Corporation ("Liquor Depot") and Liquor World Group Inc. ("Liquor World")
and other wholly owned subsidiaries or companies that were under common control
(collectively, the "Vendors"). The capital contributed by the Vendors is
represented by the Subordinated LP Units and Exchangeable LP Units more fully
described in Note 13 of the December 31, 2004 audited consolidated Financial
Statements of the Fund. On March 2, 2005, the Fund completed a private placement
of 1,830,000 Fund Units at $16.40 per unit for gross proceeds of $30,012,000
(note 3) and increased its interest in Liquor Stores LP to 59.34%. The cost of
the new issue was $1,332,678, and the net proceeds of $28,679,322 were used to
repay existing indebtedness and acquire 13 new stores. The purchase price of the
assets of the 13 new stores is allocated as follows:


<<
Property and equipment $ 3,034,208
Goodwill 7,473,665
--------------
10,507,873

Working capital $ 3,518,499
--------------
Cash Paid $ 14,026,372
--------------
--------------


The Fund Units trade on the Toronto Stock Exchange under the symbol LIQ.UN.

Non-GAAP Measures

References to "EBITDA" are to earnings before interest, income taxes,
depreciation and amortization and references to "distributable cash" are to cash
available for distribution to Unitholders in accordance with the distribution
policies of the Fund. Management believes that, in addition to income or loss,
EBITDA is a useful supplemental measure of performance and cash available for
distribution before debt service, changes in working capital, capital
expenditures and income taxes. Specifically, management believes that EBITDA is
the appropriate measure from which to make adjustments to determine the
distributable cash of the Fund. Distributable cash of the Fund is a measure
generally used by Canadian open-ended trusts as an indicator of financial
performance. As one of the factors that may be considered relevant by
prospective investors is the cash distributed by the Fund relative to the price
of the Units, management believes that distributable cash of the Fund is a
useful supplemental measure that may assist prospective investors in assessing
an investment in the Fund. EBITDA and distributable cash are not earnings
measures recognized by GAAP and do not have standardized meanings prescribed by
GAAP. Investors are cautioned that EBITDA and distributable cash should not
replace net income or loss (as determined in accordance with GAAP) as an
indicator of the Fund's performance, of its cash flows from operating, investing
and financing activities or as a measure of its liquidity and cash flows. The
Fund's methods of calculating EBITDA and distributable cash may differ from the
methods used by other issuers. Therefore, the Fund's EBITDA and distributable
cash may not be comparable to similar measures presented by other issuers.
Earnings from operations for purposes of disclosure under "First Quarter
Operating Results" has been calculated as described below. In the case of the
Fund, earnings from operations have been derived by adding interest expense and
amortization of property and equipment and intangibles and non-controlling
interest to net earnings for the period. In the case of Liquor Depot and Liquor
World, earnings from operations have been derived by adding amortization
expense, charitable donations, management salaries to directors, officers and
shareholders, interest expense, income tax expense and non- controlling interest
to the net income for the period and subtracting from the resulting total income
taxes recovered and income arising from subsidiaries accounted for on an equity
basis. Earnings from operations as so calculated is not a measure recognized by
GAAP and does not have a standardized meaning prescribed by GAAP. Investors are
cautioned that earnings from operations as so calculated should not replace net
income or loss (as determined in accordance with GAAP) as an indicator of the
Fund's performance, of its cash flows from operating, investing and financing
activities or as a measure of its liquidity and cash flows. The Fund's method of
calculating earnings from operations as so calculated may differ from the
methods used by other issuers. Therefore, the Fund's earnings from operations as
so calculated may not be comparable to similar measures presented by other
issuers.

Basis of Management's Discussion and Analysis

The Fund was established on August 10, 2004 and acquired, indirectly, the
Acquired Business on September 28, 2004. To provide more meaningful information,
the following MD & A refers to the First Quarter operating results of the Fund
compared to the results for the Vendors for similar operating accounts combined
for the First Quarter 2004 (See "Non-GAAP Measures"). It is management's belief
that charitable donations and management salaries and bonuses incurred by Liquor
Depot and Liquor World are not relevant when compared to the Fund's operations
because of differences between the structure and policies of the Fund and those
of the Vendors.

The Business of the Fund

The Fund is the largest liquor store retailer in Alberta by number of stores and
the second largest by revenue. The Fund currently operates 65 stores, 50 of
which are located in or near the urban centres of Calgary and Edmonton, and
three of which are located in British Columbia. The Province of Alberta is the
only province in Canada that has a fully privatized retail distribution system
for adult beverages. The Province of British Columbia's model for liquor
distribution is a blend of private and government operated retail outlets.

Distributable Cash and Cash Distributions

The Fund's policy is to distribute annually to unitholders available cash from
operations after cash required for capital expenditure, working capital reserve,
growth capital reserve and other reserves considered advisable by the Trustees
of the Fund. The policy allows the Fund to make stable monthly distributions to
its Unitholders based on its estimate of distributable cash for the year. The
Fund pays cash distributions on or about the 15th of each month to Unitholders
of record on the last business day of the previous month.

The following table summarizes the distributions for the period:


Exchangeable LP Units
and
Fund Units Subordinated LP Units
--------------------- ---------------------
Date Date
distribution distribution Declared Paid Declared Paid
Declared Paid $ $ $ $

January 18, February 15,
2005 2005 358,190 358,190 172,848 172,848
February 16, March 15,
2005 2005 358,190 358,190 172,847 172,847
March 18, April 15,
2005 2005 510,629 - 703,885 -
-------------------------------------------
1,227,009 716,380 1,049,580 345,695
-------------------------------------------
-------------------------------------------

Total
---------------------
Date Date
distribution distribution Declared Paid
declared paid $ $

January 18, February 15,
2005 2005 531,038 531,038
February 16, March 15,
2005 2005 531,037 531,037
March 18, April 15,
2005 2005 1,214,514 -
---------------------
2,276,589 1,062,075
---------------------
---------------------

Distributions are paid on Fund Units, Liquor Stores LP Exchangeable LP
Units and Liquor Stores LP Subordinated LP Units. As of March 31, 2005 the
following number of units were outstanding:

Fund Units (note 7) 6,130,000
Liquor Stores LP Exchangeable LP Units (note 8) 2,075,000
Liquor Stores LP Subordinated LP Units (note 8) 2,125,000
--------------
10,330,000
--------------
--------------


During the period, the Fund approved distributions of $0.2499 per Fund Unit to
Unitholders. The distributions in the current period were funded from cash-flow
generated from operations since the Funds' inception. Distributions during the
period were consistent with the distributions contemplated in the Fund's IPO
prospectus. The prospectus contemplated monthly distributions of $0.0833 per
unit or $1.00 per year in aggregate. On February 14, 2005, the Fund announced
that it intended to increase its annual distribution by $0.075 per unit from
$1.00 to $1.075 ($0.08958 per month), commencing with the distribution to be
paid on June 15, 2005 to Unitholders of record on May 31, 2005, subject to the
completion of the acquisition of 10 additional stores announced at that time.
These acquisitions have now been completed and the Fund intends to proceed with
the increase in distributions. Management estimates that the portion of a
distribution that will be tax-deferred to a Unitholder in calendar 2005 is
approximately 25% to 30%. It is the Fund's policy to review the monthly
distributions on a periodic basis.

Distributable cash per unit (Fund Units, Exchangeable and Subordinated LP Units)

The following table summarizes the distributable cash of the Fund for its last
two reporting periods and from the inception of the Fund on August 10, 2004
which includes the results of operations from September 28, 2004 through to
March 31, 2005.


January 1, September 28,
2005 to 2004 to
March 31, December 31, From
2005 2004 Inception

Earnings from operations $1,116,301 $3,214,164 $4,330,465
Add: Amortization of property
and equipment 274,803 249,728 524,531
Add: Amortization of
intangible assets 21,450 22,534 43,984
Add: Future Income taxes 1,100 6,000 7,100
Add: Proceeds on disposal of
property and equipment - 1,350 1,350
Less: Interest paid (54,163) (135,321) (189,484)
Less: Purchase of property
and equipment (52,041) (115,786) (167,827)
-------------- -------------- --------------
Distributable cash $1,307,450 $3,242,669 $4,550,119
-------------- -------------- --------------
-------------- -------------- --------------
Average Units outstanding
at end of Period 9,110,000 8,500,000 8,798,370
Distributable Cash per Unit
(weighted average(*)) $0.14 $0.38 $0.51

Distributions declared $2,276,589 $2,194,709 4,471,298
Distributions declared per unit 0.2499 0.2582 0.5081

Distributable cash less
distributions declared
as of March 31, 2005 $78,821
Distributable cash less
distributions per Unit
(weighted average(*)) $0.0079

Basic and diluted earnings
per Unit $0.10 $0.35

(*) Weighted average number of units x number of days outstanding/number
of days in the period.

For the Quarter ended March 31, 2005, the Fund had distributable cash of
$0.14 per weighted average number of units outstanding during the period.
Basic and diluted earnings per unit were $0.10 per unit for the period.

Unitholders' Equity and Non-controlling Interest

Fund Units outstanding as of March 31, 2005 is as follows:

Non-
Unitholders' controlling
Units Issue Costs Equity Interest

Fund Units 6,130,000 $6,518,506 $66,493,494 -
Special Voting Units 4,200,000 - - -
Non-controlling
Interest 4,200,000 - - $41,741,729

On March 2, 2005, the Fund issued 1,830,000 Fund Units at $16.40 per Fund Unit
for gross proceeds of $30,012,000. The gross proceeds less issuance costs of
$1,332,678 are recorded as unitholder's equity (note 3 and 7).

SELECTED FINANCIAL INFORMATION AND RESULTS FROM OPERATIONS

First Quarter Operating Results

The following table shows the unaudited results of the Fund from January 1, 2005
to March 31, 2005, and unaudited results for Liquor Depot and Liquor World for
the period from January 1, 2004 to March 31, 2004 as if they have been combined.
Combined sales, cost of sales and administrative and operating expenses of
Liquor Depot and Liquor World for the period from January 1, 2004 to March 31,
2004, have been derived from the unaudited combined consolidated financial
statements of Liquor World, and the unaudited consolidated financial statements
of Liquor Depot. The results of operations for these periods are not necessarily
indicative of the results of operations to be expected in any given period.


Vendors Fund Change
1st Quarter 1st Quarter Q1 2005
2004 2005 to Q1 2004

Sales $23,746,535 $26,818,724 $3,072,189
Cost of Sales 18,823,674 20,898,410 2,074,736
-------------- -------------- --------------
Gross Margin 4,922,861 5,920,314 997,453

Administrative, Operating,
Acquisition and store
development expenses 3,701,448 4,507,760 806,312
-------------- -------------- --------------
Earnings from operations,
as defined(*) $1,221,413 $1,412,554 $191,141
-------------- -------------- --------------
-------------- -------------- --------------
(*) Earnings from operations have been calculated as described under
"Non-GAAP Measures" above.

In order to provide more meaningful information to the reader, the following
Management's Discussion and Analysis will compare the results of the Fund's
operations for the First Quarter of 2005 to the Vendors' First Quarter results
for 2004.

First Quarter Sales

First Quarter sales increased to $26.8 from $23.7 million when compared to the
same period in 2004, although same store sales declined from $23.7 to $23.1
million. Management believes that the decline in same store sales arose from a
variety of factors including: the implementation of a more stringent discount
and credit policy resulting in some sales loss but a significant increase in
margins; cancellation of a third party customer affinity program; increased
competition at some locations; and the impact of no 2004-2005 NHL season. For
the second consecutive quarter, same stores (stores open for a full year when
compared to another quarter) are being operated more profitably and contributing
more to distributable cash. Over the last six months same stores have
contributed an additional $1,097,000 to distributable cash as indicated by the
table below. Management expects this trend to continue throughout the balance of
2005.


Same Stores Vendors Total Fund Total
Q4 2003 & Q4 2004 &
Q1 2004 Q1 2005 Difference

Sales $56,662,745 $54,644,725 $(2,018,020)
COGS 45,015,242 42,415,419 (2,599,823)
-------------- -------------- --------------
Margin 11,647,503 12,229,306 581,803

Operating Costs 6,554,910 6,039,407 (515,503)
-------------- -------------- --------------
Total $5,092,593 $6,189,899 $1,097,306
-------------- -------------- --------------
-------------- -------------- --------------


First Quarter Cost of Sales and Gross Margin

Gross margin increased by approximately $997,000 from $4.9 million to $5.9
million or 20.3%, when compared to the same period in 2004. The gross margin
increase was the result of an 11.3% increase in sales and a 1.15% increase in
gross margin percentage. Factors that contributed to the increase in gross
margin included; a more stringent credit and discount policy, elimination of a
third party affinity program, and the harmonization of retail pricing. First
Quarter cost of sales increased from approximately $18.8 million to $20.9
million, when compared to the same quarter in 2004. New stores and stores that
were open for less than 12 months contributed an additional $765,000 to gross
margin on $3.7 million of sales in the First Quarter of 2005.

Combined Administrative, Operating and Acquisition and store development expense

Administrative, Operating, and Acquisition and store development expenses
increased by approximately $806,000 from $3.7 million to $4.5 million when
compared to the same period in 2004. The components of the increase
administrative and operating costs are as follows:


Additional expenses relating to a store not open
for the entire First Quarter of 2004 $12,000
Savings obtained on same store operating costs (313,000)
Operating expenses for 17 new locations 542,000
Additional administrative expenses 565,000
--------------
Net increase in administrative and operating expenses $806,000
--------------
--------------


Administrative expenses increased in Q1 2005 due to an increase in the number of
stores operated by the Fund when compared to the same quarter in 2004, public
company costs including non-recurring costs relating to acquisitions, bonuses
being accrued in 2005 that were not accrued in the comparable period in 2004,
increased insurance costs and other operating costs relating to additional
stores. In the first quarter of 2004 the vendors operated 45 stores. During the
first quarter of 2005 the Fund operated 63 stores (which includes one store
which is accounted for on an equity basis) and another two stores opened on May
6, 2005. In order to support current and future growth the Fund added additional
employees. Nine of the new positions were added in the first quarter of 2005 and
two of these new positions are temporary positions relating to the integration
of recent acquisitions. Payroll costs also increased when compared to the
previous quarter as a consequence of annual salary increases.

Earnings from Operations (as defined)

Earnings from operations (as defined under Non-GAAP Measures above) increased by
approximately $191,000 from $1.2 million to $1.4 million or 15.9%, when compared
to the same period in 2004. The increase in earnings from operations resulted
from higher gross margin, the addition of new stores, and the savings achieved
through synergies on combination of Liquor World and Liquor Depot.


Financial Position and Operating Results
December 31, March 31,
2004 2005
(includes (1st Quarter)
results of
operations
from
September 28,
2004)

Cash and cash equivalents $178,672 $10,198,704

Total assets 102,080,855 126,039,848

Bank indebtedness 7,444,907 11,397,240

Total current liabilities 14,106,849 10,669,395

Long-term debt 7,397,917 7,481,439

Unitholders' equity 38,199,609 66,493,494

Non-controlling interest 42,376,480 41,741,729

-------------------------------------------------------------------------
Sales $35,542,909 $26,818,724
Gross Margin 7,971,151 5,920,314
Earnings before non-controlling interest 2,956,626 910,192
Net earnings for the period 1,495,705 495,363
Basic and diluted earnings per unit $0.35 $0.10
Distributable Cash per Unit $0.38 $0.14
-------------------------------------------------------------------------


The first quarter is historically the industry's weakest in terms of sales,
earnings and EBITDA and the Fund's first quarter followed this pattern. Results
from stores existing at the beginning on the quarter were slightly better than
managements' expectations. Acquisitions during the quarter primarily occurred in
March and had a positive impact on cash flow. Historically sales, earnings and
EBITDA improve each quarter throughout a year with the fourth quarter producing
the strongest results and the first quarter being the weakest quarter.

LIQUIDITY AND CAPITAL RESOURCES

Distributable Cash and Cash Distributions

The Fund's policy is to make stable monthly distributions to its Unitholders
based on its estimate of distributable cash for the year. It has a policy to pay
cash distributions on or about the 15th of each month to Unitholders of record
on the last business day of the previous month. During the period, the Fund
approved distributions of $0.2499 per Fund Unit to Unitholders. The total
distributions declared on Fund Units for the period was $2,276,589. These
distributions are consistent with the distributions contemplated in the Fund's
IPO prospectus. On February 14, 2005 the Fund announced that it intends to
increase its annual distribution by $0.075 per unit from $1.00 to $1.075
($0.08958 per month) commencing with the distribution to be paid to unitholders
of record on May 31, 2005, subject to the completion of the acquisition of 10
additional stores announced at that time. These acquisitions have now been
completed and the Fund intends to proceed with the increase in distributions.

Credit Facilities

In September 2004 the Fund established credit facilities with a Canadian
chartered bank. These credit facilities consisted of an $18 million demand
revolving operating loan, a $7.5 million committed non-revolving capital loan
(due April 29, 2006) and a $10 million committed non-revolving acquisition loan.
In connection with the various acquisitions the Fund completed in February 2005
the $18 million demand revolving operating loan was increased to $24 million. On
March 2, 2005, the Fund issued 1,830,000 Fund Units at $16.40 per Fund Unit for
gross proceeds of $30,012,000 (see Note 7). The amounts borrowed under the
acquisition loan in February, and a portion of the operating line was then
repaid with the net proceeds received from the issuance of 1,830,000 Fund Units
from treasury. As of March 31, 2005, total indebtedness under all credit
facilities has decreased to $14.9 million from $18.8 million as of December 31,
2004, and cash and cash equivalents have increased to $10.2 million from
$179,000 as of December 31, 2004.

Capital Expenditures

From February 18, 2005 to March 14, 2005 the Fund purchased the assets of 13
additional retail liquor stores (note 3) with cash from existing credit
facilities and the proceeds from the issuance of Fund Units (note 7). In
addition, two new stores, Liquor Depot Kamloops and Liquor Depot Richmond
commenced retail operations in British Columbia on May 6, 2005.

Interest Rate Risk and Sensitivity

The Fund is not significantly impacted by interest rate changes. The Fund's bank
indebtedness and long-term debt (notes 4 and 6), bear interest with floating
rates based on bank prime rate or at short term banker's acceptance rates, thus
exposing the Fund to some interest rate fluctuations. During the period, in
connection with acquisitions, the Fund increased the amount available under its
operating line from $18 million to $24 million and now has total credit
facilities of $41.5 million. Based on operating 65 stores, management estimates
that the Fund would normally have approximately $24 million of debt ($16.5
million of which would be operating debt) on average outstanding throughout a
year. Excess funds from the March 2, 2005 issue of Fund Units will be used to
fund future acquisitions and will temporarily reduce the amount of debt
outstanding. A 1.0% increase in interest rates would have an impact of less than
$240,000 on distributable cash based on $24 million of debt outstanding on
average throughout the year.

Contractual Obligations

The table below sets forth the contractual obligations of the Fund as of March
31, 2005 due in the years indicated, which relate to various premises operating
leases and the $7,500,000, non-revolving loan that is repayable in April of
2006.


2009 and
2005 2006 2007 2008 thereafter

Operating Leases 3,130,619 4,132,619 3,821,821 3,594,047 9,482,814
Long Term Debt - 7,500,000 - - -
-------------------------------------------------------
Total 3,130,619 11,632,619 3,821,821 3,594,047 9,482,814
-------------------------------------------------------
-------------------------------------------------------


Off-Balance Sheet Arrangements

The Fund has not entered into any off-balance sheet arrangements.

Critical Accounting Estimates

Because of the nature of the Fund's business and assets, management does believe
that there are critical accounting policies that rely on estimates.

Changes in Accounting Policies

Management is not aware of any recent accounting pronouncements or developments
that will affect the Fund's financial statements. Management will continue to
monitor and assess the impact of accounting pronouncements on the financial
statements of the Fund as they become available.

Financial Instruments

Due to the nature of its business, the Fund does not engage in activities or
hold assets that would require the Fund to acquire financial instruments for
hedging or speculative purposes. The financial instruments that are held by the
Fund are held in the normal course of operations and as a result no significant
accounting policies need to be adopted or assumptions made in reporting the
Fund's financial instruments.

Transactions with Related Parties

Transactions with related parties include Liquor Stores LP's purchase of the
assets of the business from the Vendors. As of March 31, 2005, $331,186 was due
to the Vendors. This amount arose as a result of the difference between the
September 17, 2004 estimated amount of working capital that would be purchased
by the Fund as of September 28, 2004 and the actual amount of working capital
purchased, and will be paid in May 2005. During the period the Fund incurred
professional fees of $9,400 to a law firm where one of the partners is a
director of a subsidiary of the Fund. The Fund also leases a warehouse from a
company controlled by a director of a subsidiary and one retail location is
leased from a company that two directors of a subsidiary are shareholders. Total
lease payments under these agreements are $6,300 per month (see note 9). The
Fund has a conflict of interest policy that requires the disclosure of potential
conflicts and excludes persons with a material conflict of interest from any
related decision making process.

Outlook

Management believes there will continue to be a consolidation trend in the
industry. The Fund expects continued sales and earnings growth in 2005 due to
the accretive nature of acquisitions to date and the Fund's program of
acquisition and new store development. To this end, the Fund has added
additional staff to focus on acquisitions and new store development.

Additional information

Additional information relating to the Fund, including the Fund's Annual
Information Form and other public filings is available on SEDAR (www.sedar.com)
and on the Fund's website at www.liquorstoresincomefund.com.

RISK FACTORS

As at March 31, 2004, there are no material changes in the Fund's risks or risk
management activities since the time of the initial public offering. The Fund's
results of operations, business prospects, financial condition, cash
distributions to Unitholders and the trading price of the Fund's units are
subject to a number of risks. These risk factors include: risks relating to
government regulation; competition; Liquor Stores LP's ability to locate and
secure acceptable store sites and to adapt to changing market conditions; risks
relating to future acquisitions and development of new stores; dependence on key
personnel; supply interruption; reliance on information and control systems;
absence of an operating history as a public company; dependence on capital
markets to fund Liquor Stores LP's growth strategy beyond its available credit
facilities; dependence of the Fund on Liquor Stores LP; leverage and restrictive
covenants in agreements relating to current and future indebtedness of Liquor
Stores LP; restrictions on the potential growth of Liquor Stores LP as a
consequence of the payment by Liquor Stores LP of substantially all of its
operating cash flow; income tax related risks; and the Vendors' right to approve
certain material transactions. For a discussion of these risks and other risks
associated with an investment in Fund Units, see "Risk Factors" detailed the
Fund's Annual Information Form, which is available at www.sedar.com.

FORWARD LOOKING STATEMENTS

This management's discussion and analysis contains forward-looking statements.
All statements other than statements of historical fact contained in this
management's discussion and analysis are forward-looking statements, including,
without limitation, statements regarding the future financial position, cash
distributions, business strategy, proposed acquisitions, budgets, litigation,
projected costs and plans and objectives of or involving the Fund or Liquor
Stores LP. You can identify many of these statements by looking for words such
as "believes", "expects", "will", "intends", "projects", "anticipates",
"estimates", "continues" or similar words or the negative thereof. These
forward-looking statements include statements with respect to the amount and
timing of the payment of the distributions of the Fund. There can be no
assurance that the plans, intentions or expectations upon which these forward-
looking statements are based will occur. Forward- looking statements are subject
to risks, uncertainties and assumptions, including, but not limited to, those
discussed elsewhere in this management's discussion and analysis. There can be
no assurance that such expectations will prove to be correct. Some of the
factors that could affect future results and could cause results to differ
materially from those expressed in the forward-looking statements contained
herein include, but are not limited to, those discussed under 'Risk Factors".
The information contained in this management's discussion and analysis,
including the information set forth under "Risk Factors", identifies additional
factors that could affect the operating results and performance of the Fund and
Liquor Stores LP.

The forward-looking statements contained herein are expressly qualified in their
entirety by this cautionary statement. The forward-looking statements included
in this management's discussion and analysis are made as of the date of this
management's discussion and analysis and the Fund assumes no obligation to
update or revise them to reflect new events or circumstances.


Liquor Stores Income Fund

Consolidated Financial Statements
March 31, 2005


Liquor Stores Income Fund
Consolidated Balance Sheet
-------------------------------------------------------------------------
March 31, December 31,
2005 2004
(unaudited)
Assets $ $

Current assets
Cash and cash equivalents 10,198,704 178,672
Accounts receivable 658,611 666,130
Inventory 23,686,807 20,676,416
Prepaid expenses and deposits 421,774 413,585
-------------- --------------
34,965,896 21,934,803
Pre-opening costs 244,129 164,954
Equity investment 392,145 432,728
Property and equipment 15,622,458 12,184,265
Future income taxes 12,900 14,000
Intangible assets 385,016 406,466
Goodwill 74,417,304 66,943,639
-------------- --------------
126,039,848 102,080,855
-------------- --------------
-------------- --------------
Liabilities

Current liabilities
Bank indebtedness (note 4) 7,444,907 11,397,240
Accounts payable and accrued liabilities 2,009,974 1,629,896
Distributions payable to unitholders (note 7) 510,629 358,190
Distributions payable to non-controlling
interest (note 8) 703,885 721,523
-------------- --------------
10,669,395 14,106,849
-------------- --------------
Long-term debt (note 6) 7,481,439 7,397,917

Non-controlling interest (note 8) 41,741,729 42,376,480
-------------- --------------
Unitholders' Equity

Unitholders' equity (note 7)
Fund units 66,493,494 37,814,172
-------------- --------------
Cumulative earnings
Cumulative earnings 880,800 1,495,705
Distributions declared (note 9) (1,227,009) (1,110,268)
-------------- --------------
(346,209) 385,437
-------------- --------------
66,147,285 38,199,609
-------------- --------------
126,039,848 102,080,855
-------------- --------------
-------------- --------------



Liquor Stores Income Fund
Consolidated Statement of Earnings and Cumulative Earnings
For the Period January 1, 2005 to March 31, 2005
-------------------------------------------------------------------------

$

Sales 26,818,724

Cost of sales 20,898,410
--------------

Gross margin 5,920,314
--------------

Expenses
Operating 3,513,976
Administrative 877,818
Amortization of property and equipment 274,803
Acquisition and store development 115,966
Amortization of intangible assets 21,450
--------------
4,804,013
--------------

Earnings from operations 1,116,301

Interest expense (206,109)
--------------
Earnings before non-controlling interest 910,192

Non-controlling interest (414,829)
--------------

Net earnings for the period 495,363

Cumulative earnings, beginning of period 385,437
--------------

Cumulative earnings, end of period 880,800
--------------
--------------

Basic and diluted earnings per unit (note 7) 0.10
--------------
--------------



Liquor Stores Income Fund
Consolidated Statement of Cash Flows
For the Period January 1, 2005 to March 31, 2005
-------------------------------------------------------------------------

$
Cash provided by (used in)

Operating activities
Net earnings for the period 495,363
Items not affecting cash
Amortization 296,253
Future income taxes 1,100
Equity income (2,857)
Accrued interest 151,946
Non-controlling interest 414,829
--------------
1,356,634

Net change in non-cash working capital items 887,516
--------------
2,244,150
--------------
Financing activities
Net proceeds from the issuance of Units 28,679,322
Bank indebtedness (4,020,757)
Distributions paid to unitholders (1,074,570)
Distributions paid to non-controlling interest (1,067,218)
--------------
22,516,777
--------------
Investing activities
Business acquisitions (note 3) (14,026,372)
Purchase of property and equipment (678,788)
Pre-opening costs (79,175)
Repayment from equity investee 43,440
--------------
(14,740,895)
--------------
Increase in cash and cash equivalents 10,020,032
Cash and cash equivalents balance, beginning of period 178,672
--------------
Cash and cash equivalents balance, end of period 10,198,704
--------------
--------------
Supplementary information
Interest paid 54,163
--------------
--------------



Liquor Stores Income Fund
Notes to Consolidated Financial Statements
March 31, 2005
-------------------------------------------------------------------------

1 Nature of operations and organization

Liquor Stores Income Fund (the "Fund") is an unincorporated, open
ended, limited purpose trust established under the laws of the
Province of Alberta pursuant to a Declaration of Trust dated
August 10, 2004.

2 Basis of presentation

The accompanying unaudited interim consolidated financial statements
have been prepared by management in accordance with Canadian
generally accepted accounting principles ("GAAP") for interim
financial statements. The accounting principles and methods of
computation adopted in these financial statements are the same as
those of the audited financial statements for the year ended
December 31, 2004. However, these interim consolidated financial
statements do not include all information and footnote disclosures
required under Canadian GAAP for annual financial statements.
Accordingly, these unaudited consolidated interim financial
statements should be read in conjunction with the audited financial
statements and notes thereto, for the year ended December 31, 2004.

3 Issuance of Units and business acquisitions

On March 2, 2005, the Fund issued 1,830,000 Fund Units at $16.40 per
Fund Unit for aggregate proceeds of $30,012,000. The cost of issuance
of the units was $1,332,678, resulting in net proceeds of
$28,679,322. The Fund used the net proceeds from the issuance to
acquire 13 new stores, to repay existing indebtedness and for general
corporate purposes.

The acquisitions of the new stores have been accounted for using the
purchase method.

The purchase price allocated to the assets acquired and the
liabilities assumed, based on their fair values, is as follows:

$

Property and equipment 3,034,208
Goodwill 7,473,665
-------------
10,507,873
Net working capital 3,518,499
-------------
Cash paid 14,026,372
-------------
-------------

4 Bank indebtedness

The Fund has credit facilities with a Canadian chartered bank
consisting of:

$

Operating line 960,113
Bankers' acceptance 6,361,633
Accretion 123,161
-------------
7,444,907
-------------
-------------

The bank indebtedness is collateralized by a general security
agreement covering all present and after acquired personal property
of Liquor Stores LP and also by a floating charge over all of Liquor
Stores LP's present and after acquired real property and an
assignment of Liquor Stores LP's insurance. Interest is payable at
the lender's prime rate plus 0.25% or at the banker's acceptance rate
plus 1.50%. As of March 31, 2005, bank indebtedness consists of
bankers' acceptances of $6,500,000 at an effective rate of 4.34%
which matures on April 18, 2005.

5 Related party transactions

During the period, the Fund incurred professional fees of $68,465 to
a law firm where one of the partners is a director of a subsidiary of
the Fund. Rent paid to companies controlled by directors of a
subsidiary of the Fund amounted to $20,298. Included in accounts
payable and accrued liabilities is $48,995 relating to these
transactions.

Included in accounts payable and accrued liabilities is $329,833 in
amounts owing to the Vendors related to the acquisition of the assets
at the time of the IPO. No interest is charged on these amounts.

6 Long-term debt

$

Non-revolving bank loan
Bankers' acceptance 7,331,099
Accretion 150,340
-------------

7,481,439
-------------
-------------

Interest is payable at the lender's prime rate plus 0.50% or at the
bankers' acceptance rate plus 1.75%. As of March 31, 2005 long-term
debt consisted of a bankers' acceptance at an effective rate of
4.59%, which matures on April 18, 2005 for $7,500,000. The loan does
not require principal repayments and is due on April 29, 2006.
Interest expense on long-term debt is $83,522.

The long-term debt is collateralized by a general security agreement
covering all present and after acquired personal property of Liquor
Stores LP and also by a floating charge over all of Liquor Stores
LP's present and after acquired real property and an assignment of
Liquor Stores LP's insurance.

7 Unitholders' equity

Fund Units

Units outstanding and capital contributions are as follows:

Net capital
Number contrib-
of units Issue costs utions
No. $ $

Units issued on initial public
offering 4,300,000 5,185,828 37,814,172
Units issued on March 2, 2005
(note 3) 1,830,000 1,332,678 28,679,322
--------------------------------------

Fund Units 6,130,000 6,518,506 66,493,494
--------------------------------------
--------------------------------------

An unlimited number of Fund Units may be created and issued pursuant
to the Declaration of Trust. Each Fund Unit is transferable and
represents an equal undivided beneficial interest in any
distributions from the Fund, whether of net income, net realized
capital gains or other amounts and in the net assets of the Fund in
the event of a termination or winding up of the Fund. All Fund Units
entitle the holder thereof to one vote and each Fund Unit has equal
voting rights and privileges.

The per trust unit amounts for 2005 were calculated based on the
weighted average number of units outstanding as of March 31, 2005.
The weighted average number of units outstanding is 4,910,000.

Distributions payable to Unitholders

Distributions to Unitholders are determined based on earnings, before
amortization, but reduced by capital expenditures. Distributions
totalling $1,227,009 ($0.2499 per Fund Unit) were declared by the
Fund for the period ended March 31, 2005. Of the distributions
declared during the period, $716,380 were paid and $510,629 were
payable as of March 31, 2005. Distributions of $1,074,570 were paid
during the period, which included $358,190 of distributions that were
declared and payable as of December 31, 2004.

8 Non-controlling interest

Liquor Liquor
Stores LP Stores LP
Exchangeable Subordinated
LP Units LP Units Total

No. No. No.

Number of Units 2,075,000 2,125,000 4,200,000
--------------------------------------
--------------------------------------

Fund Special Voting Units 2,075,000 2,125,000 4,200,000
--------------------------------------
--------------------------------------

$ $ $

Opening balance 20,935,999 21,440,481 42,376,480

Fund Special Voting Units -
Amount - - -

Non-controlling interest 204,945 209,884 414,829

Distributions declared (518,543) (531,037) (1,049,580)
--------------------------------------

20,622,401 21,119,328 41,741,729
--------------------------------------
--------------------------------------

Distributions payable to non-controlling interest

Distributions to non-controlling interest are determined based on
earnings, before amortization, but reduced by capital expenditures.
Distributions totalling $518,543 ($0.2499 per Exchangeable LP Unit)
and $531,037 ($0.2499 per Subordinated LP Unit) were declared by the
Fund for the period ended March 31, 2005. Of the distributions
declared during the period, $345,695 were paid and $703,885 were
payable as of March 31, 2005. Distributions of $1,067,218 were paid
during the period, which included $721,523 of distributions that were
declared and payable as of December 31, 2004.

9 Distributions
Exchangeable LP Units
and
Fund Units Subordinated LP Units
--------------------- ---------------------
Date Date
distribution distribution Declared Paid Declared Paid
Declared Paid $ $ $ $

January 18, February 15,
2005 2005 358,190 358,190 172,848 172,848
February 16, March 15,
2005 2005 358,190 358,190 172,847 172,847
March 18, April 15,
2005 2005 510,629 - 703,885 -
--------------------------------------------
1,227,009 716,380 1,049,580 345,695
--------------------------------------------
--------------------------------------------


Total
---------------------
Date Date
distribution distribution Declared Paid
Declared Paid $ $

January 18, February 15,
2005 2005 531,038 531,038
February 16, March 15,
2005 2005 531,037 531,037
March 18, April 15,
2005 2005 1,214,514 -
----------------------
2,276,589 1,062,075
----------------------
----------------------

10 Seasonal nature of the business

The Fund's results for the first quarter of 2005 are not necessarily
indicative of the results that maybe expected for the full year due
to seasonal variations in sales levels. The Fund historically
experiences a higher level of sales during the fourth quarter, while
the first quarter experiences lower sales levels due to seasonal
shopping patterns. Occupancy related expenses; general and
administrative expense, amortization and interest expense remain
relatively steady throughout the year.
>>


Contact Information

  • Liquor Stores GP Inc.
    Irv Kipnes
    Chief Executive Officer
    (780) 944-9994 ext. 6

    or

    Liquor Stores GP Inc.
    Tom Orysiuk
    Chief Financial Officer
    (780) 917-4179