Liquor Stores Income Fund
TSX : LIQ.UN

Liquor Stores Income Fund

March 24, 2005 16:40 ET

Press Release- Liquor Stores Income Fund

EDMONTON,ALBERTA--(CCNMatthews - March 24, 2005) - Liquor Stores Income Fund
(the "Fund") (TSX: LIQ.UN) announced its December 31, 2004 year end results,
which include the results of operations for the 95 day period following its
initial public offering on September 28, 2004. The Fund reported earnings before
non-controlling interest of $2,956,626 and net earnings for the period of
$1,495,705 ($0.348 per unit). Distributable cash was $3,240,000 or $0.3812 per
unit. Total distributions of $0.2582 per unit were declared in the period. Sales
for the period were $35,542,909.

Total gross margin for 4th quarter 2004 was $7,814,388 compared to $6,896,880
for 4th quarter of 2003, an increase of $917,508. Sales for the 4th quarter of
2004 were $34,736,150 compared to $33,545,313 for the 4th quarter of 2003, an
increase of $1,190,837.

Irving Kipnes, President and Chief Executive Officer of the Fund stated, "We are
expecting continued sales and earnings growth in 2005 due to the accretive
nature of the acquisitions to date and our continuing program of acquisition and
new store development."

On February 14, 2005, the Fund announced its intention to increase annual
distributions 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. The increase
in Unitholder distributions is due to the continued strong financial performance
of the Fund.

On September 28, 2004 the Fund completed its initial public offering of trust
Units of the Fund. The Fund used the proceeds of its initial public offering to
acquire a 50.6% interest in Liquor Stores Limited Partnership ("Liquor Stores
LP"). On March 2, 2005, the Fund completed a private placement of 1,830,000
units at $16.40 per unit for gross proceeds of approximately $30,000,000 and
increased its interest in Liquor Stores LP to 59.34%. The funds from the private
placement are dedicated to current and future acquisitions.

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 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 63 stores, 1 of which is located in British Columbia. In the
first quarter of 2005, the fund completed the acquisition of 13 new liquor
stores in Alberta, and is currently completing the construction of two liquor
stores located in Kamloops and Richmond, British Columbia. Once construction is
complete the Fund will operate 65 Stores.

The Fund's trust units trade on the Toronto Stock Exchange under the symbol
LIQ.UN.

Additional information about Liquor Stores Income Fund is available at
www.liquorstoresincomefund.ca and www.sedar.com

Non-GAAP Measures

Distributable cash is not an earnings measure recognized by GAAP and does not
have standardized meaning prescribed by GAAP. Investors are cautioned that
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 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.

Disclaimer

Certain statements in this news release are "forward-looking statements", which
reflect management's expectations regarding the future growth, proposed
acquisitions, results of operations, performance, business prospects,
opportunities and the amount and timing of the payment of distributions of the
Fund. All statements other than statements of historical fact contained in this
news release are forward-looking statements. Such forward-looking statements
involve risks and uncertainties, as they reflect management's current beliefs
and are based on information currently available to management. Actual results
may differ materially from those anticipated in the statements made. The
forward-looking statements are expressly qualified in their entirety by this
cautionary statement. The forward-looking statements are made as of the date of
this news release and the Fund assumes no obligation to update or revise them to
reflect new events or circumstances. Further information regarding the
uncertainties and risks can be found in the disclosure documents filed by the
Fund with the securities regulatory authorities, available at www.sedar.com.

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
audited consolidated financial statements and accompanying notes of Liquor
Stores Income Fund (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 December
31, 2004 audited consolidated financial statements of the Fund.

This Management Discussion and Analysis is dated March 24, 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") (note 3) and Liquor
Stores LP used such net proceeds and funds from the new credit facilities (note
8 and note 10) 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.

Working Capital amounts as at September 28, 2004 have been finalized and
pursuant to the purchase agreements the purchase price has been adjusted to
reflect the actual amount of working capital purchased. The Fund has also
finalized its estimate of the fair value of assets acquired and liabilities
assumed. The purchase price allocated to the assets acquired and the liabilities
assumed based on their fair values, is as follows:


<<

Property and equipment $12,319,558
Goodwill 66,943,639
Intangible assets 429,000
Other assets 121,975
-----------

Total assets 79,814,172
Net working capital 17,631,534
-------------

$97,445,706
-------------
-------------

Consideration, being cash from IPO and new credit $55,445,706
Liquor Stores LP Subordinated LP Units 21,250,000
Liquor Stores LP Exchangeable LP Units 20,750,000
-------------

$97,445,706
-------------
-------------

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 18 b) and increased
its interest in Liquor Stores LP to 59.34%.

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

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 63 stores, 50 of
which are located in or near the urban centres of Calgary and Edmonton, and one
of which is in British Columbia. Two additional stores are currently under
construction in British Columbia. As of December 31, 2004 the Fund operated 50
Stores.

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
Subordinated LP
Fund Units Units
-------------------- --------------------
Date Date
distribution distribution Declared Paid Declared Paid
declared paid $ $ $ $

October 19, November 15,
2004 2004 393,886 393,886 190,070 190,070
November 9, December 15,
2004 2004 358,192 358,192 172,848 172,848
December 15, January 17,
2004 2005 358,190 - 721,523 -
--------------------------------------------
1,110,268 752,078 1,084,441 362,918
--------------------------------------------
--------------------------------------------


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

October 19, November 15,
2004 2004 583,956 583,956
November 9, December 15,
2004 2004 531,040 531,040
December 15, January 17,
2004 2005 1,079,713 -
----------------------
2,194,709 1,114,996
----------------------
----------------------

Distributions are paid on Fund Units, Liquor Stores LP Exchangeable LP
Units and Liquor Stores LP Subordinated LP Units. As of December 31, 2004 the
following Units were outstanding:

Fund Units (note 12) 4,300,000
Liquor Stores LP Exchangeable LP Units (note 13) 2,075,000
Liquor Stores LP Subordinated LP Units (note 13) 2,125,000
-------------

8,500,000
-------------
-------------

During the period, the Fund approved distributions of $0.2582 per Fund Unit to
Unitholders. 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 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. 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 (note 18b).

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)

Earnings from operations $ 3,214,164
Add: Amortization of property and equipment 249,728
Add: Amortization of intangible assets 22,534
Add: Proceeds on disposal of property and equipment 1,350
Add: Future Income taxes 6,000
Less: Interest paid (135,321)
Less: Purchase of property and equipment (115,786)
-------------
Distributable cash $ 3,239,969
-------------
Distributable cash per unit 0.3812

Distributions declared $ 2,194,709
-------------
Distributions declared per unit 0.2582

Amount available for future distributions and
not distributed as of December 31, 2004
($0.3812 per unit less $0.2582) $ 1,045,260
-------------

For the period, the Fund had distributable cash $0.3812 per unit, as
calculated above, and declared distributions of $0.2582 per unit. Basic and
diluted earnings per unit were $0.348 per unit for the period.

Unitholders' Equity and Non-controlling Interest

Fund Units outstanding as of December 31, 2004 is as follows:

Units Issue Costs Unitholders' Non-controlling
Equity Interest

Fund Units 4,300,000 $5,185,828 $37,814,172 -
Special Voting
Units 4,200,000 - - -
Non-controlling
Interest 4,200,000 - - $42,376,480

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
estimated at $1,500,000 will be recorded as unitholder's equity (note 18 b).


SELECTED FINANCIAL INFORMATION

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 "Fourth 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 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. Accordingly, the Fund's year end reporting
includes three days of business operations from the third quarter and a complete
fourth quarter.

To provide more meaningful information, the following MD & A refers to the
fourth quarter operating results of the Fund compared to the results for the
Vendors for similar operating accounts combined for the fourth quarter 2003 (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 to those of the Vendors.

Fourth Quarter Operating Results

The following table shows the audited results of the Fund from August 10, 2004
to December 31, 2004 (which includes results of operations from September 28,
2004 to December 31, 2004), the unaudited results of the Fund for the period
from October 1, 2004 to December 31, 2004 (the fourth quarter of 2004) and
unaudited results for Liquor Depot and Liquor World for the period from October
1, 2003 to December 31, 2003. Combined sales, cost of sales and administrative
and operating expenses of Liquor Depot and Liquor World for the period from
October 1, 2003 to December 31, 2003 have been derived from the unaudited
combined consolidated financial statements of Liquor World, and the unaudited
combined consolidated 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 Change
December 31, 4th Quarter 4th Quarter Q4 2003
2004 2003 2004 to Q4 2004
(95 days of
operations)

Sales $35,542,909 $33,545,313 $34,736,150 $1,190,837
Cost of Sales 27,571,758 26,648,433 26,921,763 273,330
------------ ------------ ------------ ------------
Gross Margin 7,971,151 6,896,880 7,814,388 917,508

Administrative and
Operating Expenses 4,484,725 4,006,844 4,349,900 343,056
------------ ------------ ------------ ------------
Earnings from
operations, as
defined below(*) $3,486,426 $2,890,036 $3,464,487 $574,451
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------


(*) Earnings from operations have been calculated as follows. In the case of the
Fund, earnings from operations has been derived by adding interest expense,
amortization of property and equipment and amortization of intangible assets to
earnings before non-controlling interest for the period. In the case of Liquor
Depot and Liquor World, earnings from operations has been derived by adding
amortization expense, charitable donations, management salaries to directors,
officers, and shareholders, any loss arising from subsidiaries accounted for on
an equity basis, 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 (See "Non-GAAP Measures").

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 fourth quarter of 2004 to the Vendor's fourth quarter results
for 2003.

Fourth Quarter Sales

Fourth quarter sales increased to $34.7 from $33.5 million when compared to the
same period in 2003, although same store sales declined from $33.0 to $31.5
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; a Christmas
season where customers had fewer holiday days for shopping; increased
competition at some locations; and the impact of no 2004-2005 NHL season.

Notwithstanding the drop in same store sales gross margins improved by $918,000.

Fourth Quarter Cost of Sales and Gross Margin

Gross margin increased by approximately $918,000 from $6.9 million to $7.8
million or 13.3%. The gross margin increase was the result of a 3.5% increase in
sales and a 1.94% 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.

Fourth quarter cost of sales increased from approximately $26.6 million to $26.9
million. New stores and stores that were open for less than 12 months
contributed an additional $577,000 to gross margin on $2.6 million of sales in
the fourth quarter of 2004.

Combined Administrative and Operating Expense

Administrative and operating expenses increased by approximately $385,000 from
$3.96 million to $4.35 million. The components of the increase in administrative
and operating costs are as follows:

Additional expenses relating to 8 stores not
open for the entire fourth quarter of 2003 $330,000
Savings obtained on same store operating costs (200,000)
Additional Administrative expenses 220,000
----------
Net increase in administrative and operating expenses $350,000
----------
----------

A significant portion of the increased administrative and operating costs
that were incurred by the Fund in the fourth quarter of 2004 were expensed
over 95 days of operations but in the future will be expensed over a full
year.

Earnings from Operations (as defined)

Earnings from operations (as defined above) increased by approximately
$574,000 from $2.9 million to $3.5 million or 19.8%. The earnings increase is
as a result of higher gross margin, the addition of new stores, and the
savings achieved through synergies on combination of Liquor World and Liquor
Depot.

Financial Position December 31, 2004

Total assets $102,080,855

Total current liabilities 14,106,849

Long-term debt 7,397,917

Unitholders' equity 38,199,609

Non-controlling interest 42,376,480

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 $0.2582 per Fund Unit to
Unitholders. The total distributions declared on Fund Units for the period from
closing of the IPO on September 28, 2004 to December 31, 2004, was $1,110,268.
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 of May 31, 2005, subject
to the completion of the acquisition of 10 additional stores announced at that
time. These acquisitions have now been completed. 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 (note 18b).

Credit Facilities

At the time of its IPO, 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.
As a result of the various acquisitions the Fund completed in February of 2005
the $18 million demand revolving operating loan was increased to $24 million. As
of December 31, 2004, total indebtedness under all credit facilities has
increased to $18.8 million.

At the closing of the IPO, $7.5 million was drawn on the non-revolving capital
loan and $10.1 million was drawn on the demand revolving operating loan in order
to fund the purchase of the net working capital of the Vendors. Under the
purchase and sale agreements between Liquor Stores LP and the Vendors, the
purchase price was adjusted to reflect the actual working capital acquired.

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 18 b). 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.

A portion of the proceeds from the March 2, 2005 issue of Fund Units was used to
retire the acquisition debt. The Fund now has funds available from the issue of
the new units and its acquisition credit facility to fund future acquisitions.

Capital Expenditures

On September 28, 2004, the Fund indirectly acquired property and equipment
$12,319,558 (note 3) from the Vendors. During the period from September 28 to
December 31, 2004, the Fund incurred $115,786 in capital expenditures and
received $1,350 from the sale of property and equipment. Future capital
expenditures (other than acquisitions) will be funded from cash flow generated
from operations or from available credit facilities.

From February 18, 2005 to March 14, 2005 the Fund purchased the assets of 13
additional retail liquor stores (note 18 a) with cash from existing credit
facilities and the proceeds from the issuance of Fund Units (note 18 b). Two
additional retail liquor stores are currently under construction in British
Columbia.

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 8 and 10), 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. As a result of the
acquisition of the new stores subsequent to year-end (note 18 a); 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
December 31, 2004 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 3,340,113 3,250,575 2,948,816 2,774,691 6,549,074
Long Term Debt - 7,500,000 - - -
-----------------------------------------------------------
Total 3,340,113 10,750,575 2,948,816 2,774,691 6,549,074
-----------------------------------------------------------
-----------------------------------------------------------

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. As a result of the release of
EIC-151 entitled "Exchangeable Securities Issued by Subsidiaries of Income
Trusts" dated January 19, 2005 management reclassified the presentation of the
Liquor Stores LP Exchangeable LP Units and Liquor Stores LP Subordinated LP
Units from equity to non-controlling interest. 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 December 31, 2004, $427,373 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 actual amount of working capital
purchased.

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 trend of consolidation 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, which will be filed in March of 2004, and other public
filings, is available on SEDAR (www.sedar.com) and at
www.liquorstoresincomefund.com.

RISK FACTORS

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 in the
Fund's final prospectus dated September 17, 2004 and the Fund's Annual
Information Form, which will be filed in March of 2005, which are 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

December 31, 2004


March 10, 2005

(except for note 18(a), which is as of March 14, 2005)



Auditors' Report

To the Trustees of

Liquor Stores Income Fund

We have audited the consolidated balance sheet of Liquor Stores Income Fund as
at December 31, 2004 and the consolidated statements of earnings and cash flows
for the period from August 10, 2004 to December 31, 2004. These financial
statements are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Fund as at December 31, 2004
and the results of its operations and its cash flows for the period then ended
in accordance with Canadian generally accepted accounting principles.

(signed)

PricewaterhouseCoopers LLP

Chartered Accountants

PricewaterhouseCoopers refers to the Canadian firm of

PricewaterhouseCoopers LLP and the other member firms of

PricewaterhouseCoopers International Limited, each of which is a separate

and independent legal entity.

Liquor Stores Income Fund
Consolidated Balance Sheet
As at December 31, 2004
-------------------------------------------------------------------------

$
Assets

Current assets
Cash 178,672
Accounts receivable 666,130
Inventory 20,676,416
Pre-opening costs 164,954
Prepaid expenses and deposits 413,585
-------------

22,099,757
Equity investment (note 4) 432,728
Property and equipment (note 5) 12,184,265
Future income taxes (note 6) 14,000
Intangible assets (note 7) 406,466
Goodwill (note 3) 66,943,639
-------------

102,080,855
-------------
-------------

Liabilities

Current liabilities
Bank indebtedness (note 8) 11,397,240
Accounts payable and accrued liabilities (note 9) 1,629,896
Distributions payable to unitholders (note 12) 358,190
Distributions payable to non-controlling interest
(note 13) 721,523
-------------

14,106,849
Long-term debt (note 10) 7,397,917
-------------

21,504,766
-------------

Commitments (note 11)

Non-controlling interest (note 13) 42,376,480
-------------

Unitholders' Equity

Unitholders' equity (note 12)
Fund units 37,814,172
-------------

Cumulative earnings
Net earnings for the period 1,495,705
Distributions declared (note 14) (1,110,268)
-------------

385,437
-------------

38,199,609
-------------

102,080,855
-------------
-------------




Liquor Stores Income Fund
Consolidated Statement of Earnings
For the period from August 10, 2004, including operations from
September 28, 2004 (date of commencement of business operations) to
December 31, 2004
-------------------------------------------------------------------------

$

Sales 35,542,909

Cost of sales 27,571,758
-------------

Gross margin 7,971,151
-------------

Expenses
Operating 3,633,204
Administrative 851,521
Amortization of property and equipment 249,728
Amortization of intangible assets 22,534
-------------

4,756,987
-------------

Earnings from operations 3,214,164

Interest expense (257,538)
-------------

Earnings before non-controlling interest 2,956,626

Non-controlling interest (1,460,921)
-------------

Net earnings for the period 1,495,705
-------------
-------------

Basic and diluted earnings per unit (note 12) 0.348
-------------
-------------



Liquor Stores Income Fund
Consolidated Statement of Cash Flows
For the period from August 10, 2004, including operations from
September 28, 2004 (date of commencement of business operations) to
December 31, 2004
-------------------------------------------------------------------------

$

Cash provided by (used in)

Operating activities
Net earnings for the period 1,495,705
Items not affecting cash
Amortization 272,262
Future income taxes 6,000
Equity loss 1,942
Accrued interest 122,217
Non-controlling interest 1,460,921
-------------

3,359,047

Net change in non-cash working capital items (2,696,092)
-------------

662,955
-------------

Financing activities
Net proceeds from the issuance of Units 37,814,172
Proceeds of long-term debt 7,331,099
Bank indebtedness 11,341,841
Distributions paid to unitholders (752,078)
Distributions paid to non-controlling interest (362,918)
-------------

55,372,116
-------------

Investing activities
Business acquisitions (note 3) (55,445,706)
Cash acquired on acquisition 38,413
Purchase of property and equipment (115,786)
Proceeds on disposal of property and equipment 1,350
Advances to equity investee (334,670)
-------------

(55,856,399)
-------------

Increase in cash and cash at end of the period 178,672
-------------
-------------

Supplementary information
Interest paid 135,321
-------------
-------------


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.

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.
Concurrent with the closing of the IPO, the Fund acquired a 50.6% indirect
interest in Liquor Stores Limited Partnership ("Liquor Stores LP") (note 3) and
Liquor Stores LP acquired the net assets (the "Acquired Business") of The Liquor
Depot Corporation and Liquor World Group Inc. and other wholly owned
subsidiaries or companies that were under common control (collectively, the
"Vendors"). As at December 31, 2004, Liquor Stores LP operated 49 retail liquor
stores in Alberta and one retail liquor store in British Columbia.

2 Significant accounting policies

These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada and reflect the following
accounting principles.

The preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. For example,
goodwill is assessed for impairment based on the expected discounted future cash
flows of the related operations, and amortization of property and equipment is
based on their estimated useful lives. These estimates are reviewed periodically
and, as adjustments become necessary, they are reported in income in the period
in which they become known. These financial statements have, in management's
opinion, been properly prepared within reasonable limits of materiality and
within the framework of the accounting policies summarized below.

a) Basis of presentation

These consolidated financial statements include the accounts of the Fund, Liquor
Stores Operating Trust, Liquor Stores LP, Liquor Stores GP Inc. and several
subsidiaries thereof. All significant inter-entity balances and transactions
have been eliminated on consolidation.

Since the Fund commenced operations on September 28, 2004 with the purchase of
the Acquired Business, no comparative information is provided.

The Fund accounts for investments in which it has significant influence, but not
control, using the equity method.

b) Revenue recognition

Revenue is generated from sales to customers through retail stores and is
recognized at the point of sale.

c) Inventory

Inventory is valued at the lower of cost, determined on the first in, first out
basis, and net realizable value.

d) Pre-opening costs

Pre-opening costs represent direct costs incurred in acquiring and developing
new stores in British Columbia and Alberta. The Fund defers such expenditures
incurred during the pre-operating period for new stores. These costs are
amortized over two years when the new store commences operations. Where costs
have been incurred regarding locations that are subsequently abandoned, the
costs are expensed in that period.

e) Property and equipment

Property and equipment is recorded at cost. Amortization is provided for over
the estimated useful lives of assets on a straight-line basis at annual rates
disclosed in note 5. The Fund will test its property and equipment for
impairment when events and circumstances warrant such a review. An impairment
loss is recorded when it is determined that the carrying amount is no longer
recoverable and exceeds its fair value.

f) Goodwill

Goodwill represents the excess of the cost of an acquired business over the
estimated fair value of the identifiable net assets acquired. Goodwill is not
amortized, but is tested at least annually for impairment. If the carrying value
of the goodwill exceeds its fair value, an impairment loss is reported in income
of the current period.

g) Intangible assets

Intangible assets acquired at the time of the IPO represent management's
estimate of the fair value of customer relationships, existing retail liquor
licenses and business permits, including zoning permissions to operate a retail
liquor store and the value attributed to property leases acquired at less than
market rates.

The amount attributable to customer relationships is amortized over five years
and the amount attributable to property leases is amortized over the remaining
term of the lease. The Fund will assess the carrying value of limited life
intangible assets for impairment when events or circumstances warrant such a
review. An impairment loss is recorded when it is determined that the carrying
amount of the assets is not recoverable and exceeds their fair value.

Retail liquor licenses and business permits to operate a retail liquor store
have an indefinite life, therefore, the cost attributable to these items is not
amortized. The Fund will assess the carrying value of this unlimited life
intangible asset for impairment annually, or more frequently, if events or
changes in circumstances indicate that their carrying value may not be
recoverable. An impairment loss is recorded when it is determined that the
carrying amount is not recoverable and exceeds its fair value.

h) Future income taxes

Incorporated subsidiaries of the Fund use the asset and liability method of
accounting for future income taxes. Under this method, future income tax assets
and liabilities are recorded based on temporary differences between the carrying
amount of balance sheet items and their corresponding tax bases. In addition,
the future benefits of income tax assets, including unused tax losses, are
recognized, subject to a valuation allowance, to the extent that it is more
likely than not that such future benefits will ultimately be realized. Future
income tax assets and liabilities are measured using enacted tax rates and laws
expected to apply when the tax liabilities or assets are to be either settled or
realized.

Income tax obligations relating to distributions of the Fund are the obligations
of the Unitholders and, accordingly, no provision for income taxes has been made
in respect of the assets and liabilities of the Fund.

3 Issuance of Units and business acquisitions

On September 28, 2004, the Fund completed the IPO for aggregate proceeds of
$43,000,000. The costs of issuance of the units was $5,185,828, resulting in net
proceeds of $37,814,172. Concurrent with the closing of the IPO, the Fund used
the net proceeds from the IPO to acquire an indirect 50.6% interest in Liquor
Stores LP, represented by 4,300,000 Ordinary LP Units. Liquor Stores LP combined
these funds with funds from new credit facilities (notes 8 and 10) and
contributions by the Vendors, to acquire, through a series of transactions, 100%
of the net business assets of the Vendors.

The acquisition of the Fund's interest in the Acquired Business has 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 12,319,558
Goodwill 66,943,639
Intangible assets 429,000
Other assets 121,975
-------------

79,814,172

Net working capital 17,631,534
-------------

97,445,706
-------------
-------------


$

Consideration, being cash from
IPO and new credit facilities 55,445,706
Liquor Stores LP Exchangeable
LP Units 20,750,000
Liquor Stores LP Subordinated
LP Units 21,250,000
-------------

97,445,706
-------------
-------------

4 Equity investment
$

Shares - 50% 1
Equity (loss) (1,942)
Advances 434,669
-------------

432,728
-------------
-------------


The advances are non-interest bearing and have no specified repayment
terms.

5 Property and equipment

Accumulated Net book
Rate Cost amortization value
% $ $ $

Leasehold improvements 7 11,067,903 205,060 10,862,843
Operating equipment 10 254,525 6,597 247,928
Office equipment and
fixtures 10 360,933 9,461 351,472
Computer equipment 20 216,075 11,232 204,843
Automotive 20 133,163 6,931 126,232
Shelving and racking 10 401,394 10,447 390,947
---------------------------------------

12,433,993 249,728 12,184,265
---------------------------------------
---------------------------------------

6 Future income taxes

The Fund has recognized future income taxes related to non-capital
losses of $63,078 available in a subsidiary to offset income of
future years. If not utilized, the losses will expire in 2011.

The Fund records income taxes relating to temporary differences and
income earned by corporate subsidiaries of the Fund. The Fund does
not record income taxes relating to the remaining temporary
differences nor the remaining income earned by the Fund. Unitholders
of the Fund will be responsible for these income taxes. The
temporary differences relating to assets and liabilities of the Fund
for which income taxes are not recorded are as follows:

$

Goodwill (26,491,523)
Property and equipment (6,650,993)
Deferred lease inducements 9,486
-------------
(33,133,030)
-------------
-------------

7 Intangible assets

Accumulated
Cost amortization Net
$ $ $

Customer relationships 93,000 4,650 88,350
Retail liquor licenses and
business permits 11,000 - 11,000
Leases 325,000 17,884 307,116
--------------------------------------
429,000 22,534 406,466
--------------------------------------
--------------------------------------

8 Bank indebtedness

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

$

Bankers' acceptances 11,341,841
Accrued interest 55,399
-------------
11,397,240
-------------
-------------

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 December 31, 2004, bank indebtedness consists of
bankers' acceptances of $6,500,000 at an effective rate of 4.34%
expiring on April 18, 2005 and $5,000,000 at an effective rate of
4.13% expiring on February 3, 2005.

9 Related party transactions

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. Rent paid to companies controlled by directors of a
subsidiary of the Fund amounted to $17,600. Included in accounts
payable and accrued liabilities is $7,100 relating to these
transactions.

Included in accounts payable and accrued liabilities is $427,373 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.

10 Long-term debt
$
Non-revolving bank loan
Bankers' acceptance 7,331,099
Accrued interest 66,818
-------------
7,397,917
-------------
-------------

Interest is payable at the lender's prime rate plus 0.50% or at the
bankers' acceptance rate plus 1.75%. As of December 31, 2004, the
Fund had borrowed the entire amount by way 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
$86,236.

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.

11 Commitments

The Fund occupies its retail locations under lease agreements with
varying terms from five to fifteen years, expiring from March 2005 to
October 2019. The leases provide for minimum annual lease payments
over the next five years as follows:

$
Years ending December 31
2005 3,340,113
2006 3,250,575
2007 2,948,816
2008 2,774,691
2009 1,992,303
Thereafter 4,556,771
-------------
18,863,269
-------------
-------------

12 Unitholders' equity

Fund Units

Units outstanding and capital contributions are as follows:

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

Fund Units 4,300,000 5,185,828 37,814,172
--------------------------------------
--------------------------------------

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 $0.2582 per Fund Unit ($1,110,268) were declared by the
Fund for the period ended December 31, 2004. Distributions of
$752,078 were paid and distributions of $358,190 were payable for the
period ended December 31, 2004.

13 Non-controlling interest

Liquor Liquor
Stores LP Stores LP
Exchangeable Subordinated
LP LP
Units 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
--------------------------------------
--------------------------------------

$ $ $

Units - Amount 20,750,000 21,250,000 42,000,000

Fund Special Voting Units -
Amount - - -

Non-controlling interest 721,765 739,156 1,460,921

Distributions declared (535,766) (548,675) (1,084,441)
--------------------------------------
20,935,999 21,440,481 42,376,480
--------------------------------------
--------------------------------------

Liquor Stores LP Exchangeable LP Units ("Exchangeable LP Units")

The Exchangeable LP Units issued by Liquor Stores LP have economic and voting
rights equivalent to the Fund Units (note 12), except in connection with the
exchangeability terms as described below. They are exchangeable, directly or
indirectly, on a one-for-one basis for Fund Units at the option of the holder,
under the terms of the Exchange Agreement. The Exchangeable LP Units are not
required to be exchanged for Fund Units before transferring to third parties. As
a result, they have been treated as non-controlling interest, in accordance with
the CICA Emerging Issues Committee Abstract No. 151, dated January 19, 2005.

Each Exchangeable LP Unit entitles the holder to receive distributions from
Liquor Stores LP pro rata with distributions made by Liquor Stores LP on Fund
Units.

Liquor Stores LP Subordinated LP Units ("Subordinated LP Units")

The Subordinated LP Units have economic and voting rights equivalent to the Fund
Units (note 12), except in connection with the subordination terms as described
below. As a result, they have been treated as non-controlling interest, in
accordance with the CICA Emerging Issues Committee Abstract No. 151, dated
January 19, 2005.

Distributions are to be made monthly on the Ordinary LP Units (note 12) and
Exchangeable LP Units equal to $0.0833 per Unit to the extent cash is available
to make cash distributions. Distributions on the Subordinated LP Units are
subordinated and are made quarterly in an amount equal to the amount distributed
per Ordinary LP Units and Exchangeable LP Units during such fiscal quarter, only
after the distributions have been made on the Ordinary LP Units and Exchangeable
LP Units and to the extent cash is available to make such distributions.

The Subordinated LP Units will be automatically exchanged for Exchangeable LP
Units on a one-for-one basis (and the subordination provisions will only apply
until) as at the end of any fiscal year ending on or after December 31, 2007 if,
for that fiscal year, the Fund has earned EBITA (earnings before interest, taxes
and amortization) of at least $9.836 million and the Fund has paid distributions
of at least $1.00 per LP Unit for such fiscal year.

In the event that a take-over bid by a person acting at arm's length to the
holders of the Subordinated LP Units is accepted by holders of the Fund Units
representing 20% or more of the issued and outstanding Units of the Fund on a
fully diluted basis, or in the event of certain other acquisition transactions
in respect of the Fund, the subordination provisions will terminate and the
Subordinated LP Units will automatically convert into Exchangeable LP Units on a
one-for-one basis.

Fund Special Voting Units

Fund Special Voting Units are non-participating and are used solely for
providing voting rights to persons holding Exchangeable LP Units and
Subordinated LP Units. Fund Special Voting Units are not transferable separately
from Exchangeable LP Units and Subordinated LP Units to which they relate. Fund
Special Voting Units will automatically be transferred upon a transfer of the
Exchangeable LP Units or the Subordinated LP Units to which they relate. The
Fund Special Voting Units are not entitled to any beneficial interest in any
distribution from the Fund or in the net assets of the Fund in the event of a
termination or winding up of the Fund. Each Fund Special Voting Unit entitles
the holder thereof to one vote at all meetings of Unitholders.

If the Exchangeable LP Units or the Subordinated LP Units are purchased in
accordance with the Exchange Agreement, a like number of Fund Special Voting
Units will be redeemed by the Fund for a nominal amount. The Fund issued
4,200,000 Fund Special Voting Units relating to the 2,075,000 Exchangeable LP
Units and 2,125,000 Subordinated LP Units that were issued at the time of the
IPO.

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 $0.2582 per Exchangeable LP Unit ($535,766) and Subordinated LP Unit
($548,675) were declared by the Fund for the period ended December 31, 2004.
Distributions of $362,918 were paid and distributions of $721,523 were payable
for the period ended December 31, 2004.
14 Distributions
Exchangeable LP
Units and
Subordinated LP
Fund Units Units
-------------------- --------------------
Date Date
distribution distribution Declared Paid Declared Paid
declared paid $ $ $ $

October 19, November 15,
2004 2004 393,886 393,886 190,070 190,070
November 9, December 15,
2004 2004 358,192 358,192 172,848 172,848
December 15, January 17,
2004 2005 358,190 - 721,523 -
--------------------------------------------
1,110,268 752,078 1,084,441 362,918
--------------------------------------------
--------------------------------------------


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

October 19, November 15,
2004 2004 583,956 583,956
November 9, December 15,
2004 2004 531,040 531,040
December 15, January 17,
2004 2005 1,079,713 -
----------------------
2,194,709 1,114,996
----------------------
----------------------

15 Long-term incentive plan

The Fund has adopted a long-term incentive plan (the Plan) to provide
key senior management of the Fund with compensation opportunities
that will enhance the ability of the Fund to attract, retain and
motivate key personnel and reward these key employees for significant
performance and associated per unit cash flow growth. Fund bonuses,
in the form of units of the Fund, will be provided to eligible
employees on an annual basis where the distributable cash of the Fund
exceeds certain specified threshold amounts.

If the distributable cash flow per unit exceeds the base
distribution, a percentage of the distributable cash (the
participation rate) is contributed by the Fund into a long-term
incentive pool. The funds in the pool are used to purchase units of
the Fund in the open market, to be provided to eligible employees as
bonus compensation. Threshold amounts and participation rates are as
follows:

Excess percentage Proportion of excess percentage
paid to plan Trustee

5% or less Nil

Greater than 5% and up to 10% 10% of any excess over 5%

Greater than 10% and up to 20% 10% of any excess over 5%, plus 20%
of any excess over 10%

Greater than 20% 10% of any excess over 5%, plus 20%
of any excess over 10%, plus 25% of
any excess over 20%

The base distribution for the fiscal period ended December 31, 2004
is $0.2582 per Unit; for the fiscal years ending December 31, 2005
and 2006 is $1.00 per Unit and for the fiscal years ending
December 31, 2007 and thereafter, the base distribution will be set
by the compensation committee.

For the period ended December 31, 2004, the distributable cash flow
per unit did not exceed the base distribution. Accordingly, no
accrual has been made for any bonuses to be paid under the Plan.

16 Financial instruments

The Fund, as part of its operations, is party to a number of
financial instruments. These financial instruments include accounts
receivable, advances to equity investee, bank indebtedness, accounts
payable and accrued liabilities, distributions payable and long-term
debt. It is management's opinion that the Fund is not exposed to
significant interest, currency or credit risk arising from these
financial instruments, except as described below.

Interest rate risk

The Fund's bank indebtedness and its long-term debt, as described in
notes 8 and 10, bear interest with floating rates over prime or the
appropriate bankers' acceptance rate, thus exposing the Fund to
interest rate fluctuations.

Fair value disclosure

The carrying amount of accounts receivable, bank indebtedness,
accounts payable and accrued liabilities and distributions payable
approximate their fair value either due to their relatively
short-term maturities or interest rates which approximate market
rates. The fair value of advances to equity investees cannot be
determined since the advances do not have specified terms and no
active market for the advances exists. The carrying values of
long-term debt approximate the fair value of the long-term debt as
the interest rate affecting this amount approximates market rates.

17 Economic dependence

Under Alberta provincial legislation, the Fund is required to
purchase liquor and related products from the Alberta Gaming and
Liquor Commission. As the Fund's income is derived entirely from the
sale of liquor and related products, its ability to continue viable
operations is dependent upon maintaining its relationship with this
main supplier.

18 Subsequent events

a) Business acquisitions

During the period from February 18, 2005 to March 10, 2005, the
Fund completed the acquisition of the assets of 12 retail liquor
store businesses. On March 14, 2005, the Fund completed the
acquisition of the assets of an additional retail liquor store
business. The aggregate purchase price of the assets of the 13
retail liquor store businesses (including inventory) was
approximately $14,000,000 and was paid in cash from existing
facilities and the proceeds from the issuance of Fund Units.

The purchase price will be allocated to the fair value of the
acquired assets when determined.

b) Issuance of Fund Units

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 estimated at $1,500,000 will be
recorded as unitholders' equity.

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