Liquor Stores Income Fund
TSX : LIQ.UN

Liquor Stores Income Fund

August 11, 2005 18:54 ET

Liquor Stores Income Fund Reports 2005 Second Quarter Earnings

EDMONTON, ALBERTA--(CCNMatthews - Aug. 11, 2005) - Liquor Stores Income Fund (the "Fund") (TSX:LIQ.UN) announced its second quarter results for 2005. The Fund reported earnings before non-controlling interest of $2.76 million or $0.27 per (weighted average) unit outstanding for the quarter ended June 30, 2005 and net earnings of $1.64 million or $0.27 per (weighted average) unit outstanding for the quarter ended June 30, 2005. Distributable cash flow for the quarter was $0.28 per unit. For the fourth quarter of 2004 and the first half of 2005 combined, distributable cash was $0.80 and distributions declared were $0.77 per unit. Distributions of $0.26 per unit were declared during the second quarter. Sales for the period were $38.5 million, including newly acquired stores which contributed $10 million to sales.

Store gross margin percentages were up 1.33% when compared to the same
quarter in 2004. Operating results from same stores showed a significant
improvement for the second consecutive quarter when compared to the same
quarters in the previous year.

Irv Kipnes, President and Chief Executive Officer of the Fund stated, "We
are pleased with the results for the second quarter of 2005. For the third
consecutive quarter the operating results from same stores have improved.
During the quarter we opened two stores in British Columbia and in July of
2005, we purchased one additional store in Calgary. The Fund is on track for
further growth and has 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 66 stores, 3 of which are located in British
Columbia. In 2005, the Fund completed the acquisition of 14 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 three and six month periods ended June 30, 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 dollars, 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 August 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 $1,341,536, and the net proceeds of $28,670,464 were used to repay
bank indebtedness, to acquire 13 stores and for general corporate purposes.
The purchase price of the assets of the 13 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 "Second 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,
income tax expense, amortization of property and equipment, intangibles and
pre-opening costs 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 ("MD & A")

To provide more meaningful information, the following MD & A refers to
the Second Quarter and year to date operating results of the Fund compared to
the results for the Vendors for similar operating accounts combined for the
Second Quarter 2004 and year to date 2004 (See "Non-GAAP Measures" above). 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 66
stores, 51 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 expenditures, 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 six month period
ended June 30, 2005:



Exchangeable LP Units
and
Fund Units Subordinated LP Units
--------------------- ---------------------

Record Payment Declared Paid Declared Paid
date date $ $ $ $


January 31, February 15,
2005 2005 358,190 358,190 172,848 172,848
February 28, March 15,
2005 2005 358,190 358,190 172,847 172,847

March 31, April 15,
2005 2005 510,629 510,629 703,885 703,885
April 29, May 16,
2005 2005 510,629 510,629 172,848 172,848
May 31, June 15,
2005 2005 549,126 549,126 185,878 185,878
June 30, July 15,
2005 2005 549,125 - 743,606 -
--------------------------------------------

2,835,889 2,286,764 2,151,913 1,408,306
--------------------------------------------
--------------------------------------------


Total
---------------------

Record Payment Declared Paid
date date $ $


January 31, February 15,
2005 2005 531,038 531,038
February 28, March 15,
2005 2005 531,037 531,037

March 31, April 15,
2005 2005 1,214,514 1,214,514
April 29, May 16,
2005 2005 683,477 683,477
May 31, June 15,
2005 2005 735,004 735,004
June 30, July 15,
2005 2005 1,292,731 -
----------------------

4,987,801 3,695,070
----------------------
----------------------

Distributions are paid on Fund Units, Liquor Stores LP Exchangeable LP
Units and Liquor Stores LP Subordinated LP Units. As of June 30, 2005 the
following number of units were outstanding:

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

10,330,000
----------
----------


During the six month period ended June 30, 2005, the Fund declared
distributions of $0.51236 per Fund Unit to Unitholders. The distributions in
the second quarter of 2005 were funded from cash flow generated from
operations. The Fund's IPO prospectus contemplated monthly distributions of
$0.0833 per unit or $1.00 per year in aggregate. The Fund increased its annual
distribution rate by $0.075 per unit from $1.00 to $1.075 ($0.08958 per
month), commencing with the distribution paid on June 15, 2005 to Unitholders
of record on May 31, 2005.

The Fund reviews its distribution policy on a periodic basis.

Management estimates that the portion of distributions that will be
tax-deferred to Unitholders in calendar 2005 is approximately 25% to 30%.

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

The following table summarizes the distributable cash of the Fund for 2005 and from the inception of the Fund on August 10, 2004, which includes the results of operations from September 28, 2004 to June 30, 2005. The Fund views distributable cash as an operating performance measure. The Fund's purchase of
property and equipment, required to maintain its existing stores, are minimal
and the Fund distributes a significant portion of its earnings, on an annual
basis, once adjusted for non-cash items. Therefore the Fund has selected net
earnings as the basis for the calculation of distributable cash.



April 1, Jan 1, Sept 28, From
2005 2005 2004 Inception
to June 30, to June 30, to Dec. 31, to June 30,
2005 2005 2004 2005

Net earnings for the
period $1,637,049 $2,132,412 $1,495,705 $3,628,117
Add: Interest expense 146,462 352,571 257,538 610,109
Add: Amortization of
property & equipment 282,981 557,784 249,728 807,512
Add: Amortization of
intangible assets 21,450 42,900 22,534 65,434
Add: Amortization of
pre-opening costs 17,308 17,308 - 0 - 17,308
Add: Future income taxes 8,700 9,800 6,000 15,800
---------- ---------- ---------- ----------

EBITDA 2,113,950 3,112,775 2,031,505 5,144,280

Add: Non-controlling
interest 1,122,777 1,537,606 1,460,921 2,998,527
Add: Proceeds on
disposal of property
and equipment - - 1,350 1,350
Less: Interest paid (193,397) (247,560) (135,321) (382,881)
Less: Purchase of
non-growth property
and equipment (see
table below) (165,857) (217,682) (115,786) (333,468)
---------- ---------- ---------- ----------

Distributable cash $2,877,473 $4,185,139 $3,242,669 $7,427,808
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Weighted average units
outstanding at the
end of the period 10,330,000 9,723,370 8,500,000 9,302,283
Distributable Cash per
Unit (weighted
average(1)) $0.279 $0.430 $0.381 $0.798

Distributions
declared $2,711,212 $4,987,801 $2,194,709 $7,182,510
Distributions declared
per unit $0.26246 $0.51236 $0.2582 $0.7706

Distributable cash less
distributions declared
as of June 30, 2005 $245,298
Distributable cash less
distributions per Unit
(weighted average(1)) $0.0263

Basic earnings per Unit $0.27 $0.39 $0.35
Diluted earnings per unit $0.27 $0.38 $0.35

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


For the Quarter ended June 30, 2005, the Fund had distributable cash of
$0.279 per weighted average number of units outstanding during the period.

Basic and diluted earnings were $0.27 per unit for the quarter ended June 30,
2005.The following table provides a reconciliation of the purchase of property
and equipment as reported on the Statement of Cash Flows to the purchase of
property and equipment as calculated in the distributable cash calculation
above:



April 1, Jan 1, Sept 28, From
2005 2005 2004 Inception
to June 30, to June 30, to Dec. 31, to June 30,
2005 2005 2004 2005

Purchase of property
and equipment from
the Statement of Cash
Flows $306,614 $985,186 $115,786 $1,100,972

Less: Amounts relating
to developed and
acquired stores (140,757) (767,504) - (767,504)
----------- ----------- ----------- -----------

Purchase of non-growth
property and equipment
per above calculation
of distributable cash $165,857 $217,682 $115,786 $333,468
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------


Amounts relating to developed and acquired stores are considered growth
expenditures. Growth expenditures are discretionary and represent cash outlays
intended to provide additional future cash flows. Growth expenditures will
provide benefit in future periods and they have been excluded from the
calculation of distributable cash.

Additional details on the purchases of the components of the property and equipment are as follows:



April 1, Jan 1, Sept 28, From
2005 2005 2004 Inception
to June 30, to June 30, to Dec. 31, to June 30,
2005 2005 2004 2005

Leasehold improvements
and fixtures $96,360 $118,650 $17,268 $135,918
Equipment 69,497 84,175 1,155 85,330
Vehicles - 14,857 97,363 112,220
----------- ----------- ----------- -----------
Total property and
equipment $165,857 $217,682 $115,786 $333,468
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------


Repairs and maintenance expenditures are expensed as incurred and have been deducted from earnings for the period. Repairs and maintenance expense
incurred is as follows:



April 1, Jan 1, Sept 28, From
2005 2005 2004 Inception
to June 30, to June 30, to Dec. 31, to June 30,
2005 2005 2004 2005

Repairs and maintenance $63,535 $105,412 $35,512 $140,924
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

Unitholders' Equity and Non-controlling Interest

Fund Units outstanding as of June 30, 2005 is as follows:

Non-
Unitholders' controlling
Units Issue Costs Equity Interest

Fund Units 6,130,000 $6,527,364 $66,484,636 -
Special Voting Units 4,200,000 - - -
Non-controlling
Interest 4,200,000 - - $41,762,174


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 $1,341,536 are recorded as unitholder's equity (note 6).

SELECTED FINANCIAL INFORMATION AND RESULTS FROM OPERATIONS

Second Quarter Operating Results

The following table shows the unaudited results of the Fund from April 1,
2005 to June 30, 2005 as well as the year to date results, and the combined
unaudited results for Liquor Depot and Liquor World (the "Vendors") for the
period from April 1, 2004 to June 30, 2004, as well as the 2004 year to date
results. Combined sales, cost of sales and administrative and operating
expenses of Liquor Depot and Liquor World for the period from April 1, 2004 to
June 30, 2004 as well as the year to date results, 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.



Fund Vendors Fund Vendors
2nd Quarter 2nd Quarter Year to Date Year to Date
2005 2004 2005 2004

Sales $38,505,474 $29,770,316 $65,324,198 $53,516,851
Cost of Sales 29,958,759 23,541,617 50,857,170 42,365,842
------------ ------------ ------------ ------------
Gross Margin 8,546,715 6,228,699 14,467,028 11,151,009

Administrative,
operating,
acquisition and
store development
expenses 5,318,688 4,049,389 9,827,246 7,758,627

Less: income tax
expense included in
operating expense 8,700 - 9,800 -
------------ ------------ ------------ ------------
5,309,988 4,049,389 9,816,646 7,758,627
------------ ------------ ------------ ------------

Earnings from
operations,
as defined(1) $3,236,727 $2,179,310 $4,650,382 $3,392,382
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

(1) 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 second quarter of 2005 to the Vendors' second
quarter results for 2004.

Second Quarter Sales

Second quarter sales increased to $38.5 from $29.8 million when compared
to the same period in 2004, although same store sales (stores open for a full
year when compared to another quarter) declined from $29.7 to $28.4 million.
Same store sales for the second quarter of 2005 were negatively impacted by
the timing of the Easter Holiday, which fell into the first quarter of 2005
and in the second quarter of 2004. Management believes that other factors that
contributed to the decline in same store sales include the continued effect of
a variety of factors such as: the implementation of a more stringent discount
and credit policy; cancellation of a third party customer affinity program;
increased competition at some locations; and the impact of no 2004-2005 NHL
season.

For the third consecutive quarter, same stores are being operated more
profitably and contributing more to distributable cash. Over the last nine
months same stores have contributed an additional $1,627,601 to distributable
cash as indicated by the table below. Management expects this trend to
continue throughout the balance of 2005.



Vendors
Fund Total Total
Q4 2004 & Q4 2003 &
Same Stores Q1-Q2 2005 Q1-Q2 2004 Difference

Sales $81,505,185 $84,750,083 $(3,244,898)
COGS 63,254,305 67,230,931 (3,976,626)
----------- ----------- ------------
Margin 18,250,880 17,519,152 731,728

Operating Costs 8,869,199 9,765,072 895,873
----------- ----------- ------------

Total $9,381,681 $7,754,080 $1,627,601
----------- ----------- ------------
----------- ----------- ------------


Second Quarter Cost of Sales and Gross Margin

Gross margin increased by approximately $2.34 million from $6.2 million
to $8.6 million or 38%, when compared to the same period in 2004. The gross
margin increase was the result of a 29% increase in sales and an increase in
gross margin percentage of 1.3%. 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.

Second quarter cost of sales increased from approximately $23.5 million
to $30 million, when compared to the same quarter in 2004.

New stores and stores that were open for less than 12 months contributed
an additional $2.2 million to gross margin on $10.2 million of sales in the
second quarter of 2005.

Combined Administrative, Operating and Acquisition and Store Development Expense

Administrative; Operating; and Acquisition and Store Development expenses
increased by approximately $1.3 million from approximately $4.1 million to
$5.3 million when compared to the same period in 2004. The components of the
increased administrative and operating costs are as follows:



Additional expenses relating to a store not open for
the entire second quarter of 2004 and new stores $1,191,714
Savings obtained on same store operating costs (405,238)
Additional administrative expenses 531,351
-----------
Net increase in administrative and operating expenses $1,317,827
-----------
-----------


Administrative expenses increased in the second quarter of 2005, due to
an increase in the number of stores operated by the Fund to 65 when compared
to the same quarter in 2004 where the Vendors operated 45 stores, 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 increases in other operating costs relating to
additional stores. Payroll costs also increased as a consequence of annual
salary increases and the addition of seven new permanent employee positions in
the first quarter of 2005 to support the additional stores and the Fund's
growth plans.

Earnings from Operations (as defined)

Earnings from operations (as defined under Non-GAAP Measures above)
increased by approximately $1,029,614 from $2.2 million to $3.2 million or
47.2%, 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, 2004
(includes
results of
operations
June 30, March 31, from
2005 2005 September
(2nd Quarter) (1st quarter) 28, 2004)

Cash and cash
equivalents $265,785 $10,198,704 $178,672

Total assets 118,425,028 126,039,848 102,080,855

Bank indebtedness 0 7,444,907 11,397,240

Total current liabilities 2,996,258 10,669,395 14,106,849

Long-term debt 7,500,000 7,481,439 7,397,917

Unitholders' equity 66,484,636 66,493,494 37,814,172

Non-controlling interest 41,762,174 41,741,729 42,376,840

-------------------------------------------------------------------------
-------------------------------------------------------------------------

Sales $38,505,474 $26,818,724 $35,542,909
Gross Margin 8,546,715 5,920,314 7,971,151
Earnings before non-controlling
interest 2,759,826 910,192 2,956,626
Net earnings for the period 1,637,049 495,363 1,495,705
Basic earnings per unit $0.27 $0.10 $0.35
Diluted earnings per unit $0.27 $0.10 $0.35
Distributable cash per Unit $0.26 $0.14 $0.38

-------------------------------------------------------------------------
-------------------------------------------------------------------------


The second quarter of 2005 showed an improvement over the previous quarter. The first quarter is historically the industry's weakest in terms of sales, earnings and EBITDA and the Fund's results to date are following this pattern. Historically sales, earnings and EBITDA improve each quarter throughout a year with the fourth quarter producing the strongest results and the first and the second quarters being the weakest quarters. Results from stores open at the beginning of the year continue to be slightly better than managements' expectations.

Acquisitions primarily occurred in March and continue to have a positive
impact on cash flow. Two new locations opened in May in British Columbia have
had a small negative impact on contribution margin for the second quarter.
These results are expected for new locations, as they typically require a few
months to become established.

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.

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 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 increased distributions as intended.

Credit Facilities

In September 2004 the Fund established credit facilities with a Canadian
chartered bank. These credit facilities consisted of an $18 million demand
operating loan, a $7.5 million committed non-revolving capital loan and a
$10 million committed non-revolving acquisition loan. As a result of the
various acquisitions during the year the $18 million demand operating loan was
increased to $24 million. The $10 million committed non-revolving acquisition
loan was unutilized as of June 30, 2005.

As of June 30, 2005, total indebtedness under all credit facilities has
decreased to $7.5 million from $18.8 million as of December 31, 2004, and cash
and cash equivalents have increased to $266,000 from $179,000 as of
December 31, 2004.

Capital Expenditures

Between February 18, 2005 and March 14, 2005 the Fund purchased the assets of 13 retail liquor stores (note 3) with cash from existing credit facilities and the proceeds from the issuance of Fund Units (note 6). In addition, two new stores, Liquor Depot Kamloops and Liquor Depot Richmond, opened in British Columbia on May 6, 2005. On July 12, 2005, the Fund purchased the assets of a retail liquor store located in Calgary.

Interest Rate Risk and Sensitivity

The Fund is not significantly impacted by interest rate changes. The
Fund's bank indebtedness and long-term debt (note 5), bear interest at
floating rates based on the bank's 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
as of June 30, 2005, has total credit facilities of $41.5 million. Excess
funds from the March 2, 2005 issue of Fund Units will be used to fund future
acquisitions and have temporarily reduced the amount of debt outstanding. A
1.0% increase in interest rates would have an impact of less than $243,000 on
distributable cash based on $24.3 million of debt outstanding on average
throughout the year. Based on operating 66 stores, management estimates that
the Fund would have approximately $24.3 million of debt ($16.7 million of
which would be operating debt) on average outstanding throughout a year.

Contractual Obligations

The table below sets forth the contractual obligations of the Fund as of
June 30, 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
January of 2007.



2005 2006 2007 2008 2009 and
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 $4,132,619 $11,321,821 $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
believes that there are no 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 consist of accounts receivable, bank indebtedness, accounts
payable and accrued liabilities and distributions payable. The financial
instruments 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

During the three and six months ended June 30, 2005, the Fund incurred
professional fees of $31,699 and $100,164 respectively 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 were
$40,596 (see note 4). Included in accounts payable are accrued liabilities of
$9,487 relating to these transactions.

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.

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 June 30, 2005, 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 is 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
except as required by law.



LIQUOR STORES INCOME FUND

Consolidated Financial Statements
June 30, 2005



Liquor Stores Income Fund
Consolidated Balance Sheets
-------------------------------------------------------------------------

June 30, December 31,
2005 2004
$ $
(Unaudited)

Assets

Current assets
Cash and cash equivalents 265,785 178,672
Accounts receivable 796,729 666,130
Inventory 25,953,905 20,676,416
Prepaid expenses and deposits 344,503 413,585
---------------------------

27,360,922 21,934,803
Pre-opening costs 257,845 164,954
Equity investment 380,102 432,728
Property and equipment 15,646,091 12,184,265
Future income taxes 4,200 14,000
Intangible assets 363,566 406,466
Goodwill 74,412,302 66,943,639
---------------------------

118,425,028 102,080,855
---------------------------
---------------------------

Liabilities

Current liabilities
Bank indebtedness - 11,397,240
Accounts payable and accrued liabilities 1,703,527 1,629,896
Distributions payable to unitholders (note 6) 549,125 358,190
Distributions payable to non-controlling
interest (note 7) 743,606 721,523
---------------------------

2,996,258 14,106,849
---------------------------

Long-term debt (note 5) 7,500,000 7,397,917
---------------------------

Non-controlling interest (note 7) 41,762,174 42,376,480
---------------------------

Unitholders' Equity

Unitholders' equity (note 6)
Fund units 66,484,636 37,814,172
---------------------------

Cumulative earnings
Cumulative earnings 2,517,849 1,495,705
Distributions declared (note 9) (2,835,889) (1,110,268)
---------------------------

(318,040) 385,437
---------------------------

66,166,596 38,199,609
---------------------------

118,425,028 102,080,855
---------------------------
---------------------------



Liquor Stores Income Fund
CONSOLIDATED STATEMENT OF EARNINGS AND CUMULATIVE EARNINGS
For the Period from January 1, 2005 to June 30, 2005
-------------------------------------------------------------------------

Three-month Six-month
period ended period ended
June 30, June 30,
2005 2005
$ $
(Unaudited) (Unaudited)


Sales 38,505,474 65,324,198

Cost of sales 29,958,759 50,857,170
---------------------------

Gross margin 8,546,715 14,467,028
---------------------------

Expenses
Operating 4,340,442 7,854,418
Administrative 889,313 1,767,130
Amortization of property and equipment 282,981 557,784
Acquisition and store development 88,933 204,899
Amortization of intangible assets 21,450 42,900
Amortization of pre-opening costs 17,308 17,308
---------------------------

5,640,427 10,444,439
---------------------------

Earnings before the undernoted 2,906,288 4,022,589
---------------------------

Interest
Bank indebtedness (56,651) (179,238)
Long-term debt (89,811) (173,333)
---------------------------

(146,462) (352,571)
---------------------------

Earnings before non-controlling interest 2,759,826 3,670,018

Non-controlling interest (1,122,777) (1,537,606)
---------------------------

Net earnings for the period 1,637,049 2,132,412

Cumulative earnings - Beginning of period 880,800 385,437
---------------------------

Cumulative earnings - End of period 2,517,849 2,517,849
---------------------------
---------------------------

Basic earnings per unit (note 8) 0.27 0.39
---------------------------
---------------------------

Diluted earnings per unit (note 8) 0.27 0.38
---------------------------
---------------------------



Liquor Stores Income Fund
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from January 1, 2005 to June 30, 2005
-------------------------------------------------------------------------

Three-month Six-month
period ended period ended
June 30, June 30,
2005 2005
$ $
(Unaudited) (Unaudited)


Cash provided by (used in)

Operating activities
Net earnings for the period 1,637,049 2,132,412
Items not affecting cash
Amortization 321,739 617,992
Future income taxes 8,700 9,800
Equity income (4,491) (7,348)
Accrued interest 21,489 105,011
Non-controlling interest 1,122,777 1,537,606
---------------------------

3,107,263 4,395,473

Net change in non-cash working capital items (2,637,320) (1,749,802)
---------------------------

469,943 2,645,671
---------------------------

Financing activities
Net proceeds from the issuance of Units (8,858) 28,670,464
Bank indebtedness (7,444,907) (11,397,240)
Distributions paid to unitholders (1,570,384) (2,644,954)
Distributions paid to non-controlling interest (1,062,611) (2,129,830)
---------------------------

(10,086,760) 12,498,440
---------------------------

Investing activities
Business acquisitions (note 3) 5,002 (14,021,587)
Purchase of property and equipment (306,614) (985,186)
Pre-opening costs (31,024) (110,199)
Repayment from equity investee 16,534 59,974
---------------------------

(316,102) (15,056,998)
---------------------------

(Decrease) increase in cash and
cash equivalents (9,932,919) 87,113

Cash and cash equivalents
- Beginning of period 10,198,704 178,672
---------------------------

Cash and cash equivalents - End of period 265,785 265,785
---------------------------
---------------------------

Supplementary information
Interest paid 193,397 247,560
---------------------------
---------------------------


Liquor Stores Income Fund
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $1,341,536, resulting in net proceeds of
$28,670,464. The Fund used the net proceeds from the issuance to
acquire 13 stores, to repay existing bank indebtedness and for
general corporate purposes.

The acquisitions of the 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 3,034,424
Goodwill 7,473,665
-------------

10,508,089
Net working capital 3,518,283
-------------

Cash paid 14,026,372
-------------
-------------

4 Related party transactions

During the three and six month period ended June 30, 2005, the Fund
incurred professional fees of $31,699 and $100,164 respectively, to a
law firm where one of the partners is a director of a subsidiary of
the Fund. During the three and six month period June 30, 2005, the
Fund paid rent to companies controlled by directors of a subsidiary
of the Fund in the amount $20,298 and $40,596 respectively. Included
in accounts payable and accrued liabilities is $9,487 relating to
these transactions.

5 Long-term debt

Interest is payable at the bank's prime rate plus 0.50%. As of
June 30, 2005, the long-term debt rate of interest is 4.50%. The loan
matures on January 31, 2006 for $7,500,000. The loan does not require
principal repayments, but the bank has the right to demand the loan
to be repaid in full, three hundred and sixty four days from the
maturity of the current term. Therefore, the loan is due on
January 30, 2007.

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.

6 Unitholders' equity

Fund Units

Units outstanding and capital contributions are as follows:


Net capital
Number of contri-
units Issue costs butions
No. $ $

Units issued on initial
public offering 4,300,000 5,185,828 37,814,172
Units issued on March 2, 2005 1,830,000 1,341,536 28,670,464
-------------------------------------

Fund Units 6,130,000 6,527,364 66,484,636
-------------------------------------
-------------------------------------

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.

Distributions payable to unitholders

Distributions to unitholders are determined based on earnings, before
amortization, but reduced by capital expenditures. Distributions
totalling $1,608,880 ($0.26246 per Fund Unit) were declared by the
Fund for the quarter ended June 30, 2005. Of the distributions
declared during the quarter, $1,059,755 were paid and $549,125 were
payable as of June 30, 2005. Distributions of $1,570,384 were paid
during the quarter, which included $510,629 of distributions that
were declared and payable as of March 31, 2005.

7 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 759,651 777,955 1,537,606

Distributions declared (1,063,147) (1,088,765) (2,151,912)
--------------------------------------

20,632,503 21,129,671 41,762,174
--------------------------------------
--------------------------------------

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 $544,604 ($0.26246 per Exchangeable LP Unit)
and $557,728 ($0.26246 per Subordinated LP Unit) were declared by the
Fund for the quarter ended June 30, 2005. Of the distributions
declared during the quarter, $358,726 were paid and $743,606 were
payable as of June 30, 2005. Distributions of $1,062,611 were paid
during the quarter, which included $703,885 of distributions that
were declared and payable as of March 31, 2005.

8 Earnings per Unit

2005 2004
$ $

Net earnings (numerator utilized in
basic earnings per Unit) 1,637,049 2,132,412
Non-controlling interest 1,122,777 1,537,606
---------------------------

Earnings (numerator utilized in
diluted earnings per Unit) 2,759,826 3,670,018
---------------------------
---------------------------

Earnings per Unit
Basic 0.27 0.39
---------------------------
---------------------------

Diluted 0.27 0.38
---------------------------
---------------------------

Equivalent Units outstanding
- Beginning of year 6,130,000 4,300,000
Weighted average of equivalent Units issued - 1,223,370
---------------------------

Denominator utilized in basic earnings
per Unit 6,130,000 5,523,370

Exchangeable and Subordinated Units 4,200,000 4,200,000
---------------------------

Denominator utilized in diluted earnings
per Unit 10,330,000 9,723,370
---------------------------
---------------------------

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 510,629 510,629 703,885 703,885
April 15, May 16,
2005 2005 510,629 510,629 172,848 172,848
May 16, June 15,
2005 2005 549,126 549,126 185,878 185,878
June 16, July 15,
2005 2005 549,125 - 743,606 -
--------------------------------------------

2,835,889 2,286,764 2,151,912 1,408,306
--------------------------------------------
--------------------------------------------


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 1,214,514
April 15, May 16,
2005 2005 683,477 683,477
May 16, June 15,
2005 2005 735,004 735,004
June 16, July 15,
2005 2005 1,292,731 -
----------------------

4,987,801 3,695,070
----------------------
----------------------

10 Seasonal nature of the business

The Fund's results for the second 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 higher sales in the second quarter than the first
quarter, while the second quarter typically experiences lower sales
levels then the third and fourth quarters 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, CA
    Chief Financial Officer
    (780) 917-4179