XS Cargo Income Fund
TSX : XSC.UN

XS Cargo Income Fund

August 10, 2007 06:00 ET

XS Cargo Income Fund Reports 2007 Second Quarter Results and Financing Plan

EDMONTON, ALBERTA--(Marketwire - Aug. 10, 2007) - XS Cargo Income Fund (the "Fund") (TSX:XSC.UN) today announced its results for the 2007 second quarter as well as the details of the financing plan which was announced on August 1, 2007. The Fund's consolidated interim financial statements and Management's Discussion and Analysis ("MD&A") can be found on XS Cargo's website at www.xscargo.com and on SEDAR at www.sedar.com.

For the 2007 second quarter, the Fund reported sales of $29.5 million; EBITDA (1) of $1.4 million; and net loss of $0.6 million or $0.09 per unit. The Fund had net earnings before non-controlling interest of $0.2 million prior to a non-cash charge on the initial recognition of future income taxes resulting from changes in the taxation of Trusts which will be effective in 2011. Distributable cash (1) was $0.8 million or $0.06 per unit compared to distributions declared of $1.8 million or $0.15 per unit.

The Fund finalized agreements for subordinated debt financing in the amount of $12,000,000, to be provided 50% by CIBC Leveraged Finance and 50% by Famous Brands Inc., a company owned by the Fund's President and Chief Executive Officer. The proceeds of the subordinated debt facilities will be used for working capital as well as to repay $10,000,000 of the Term Loan outstanding under the Fund's senior secured credit facility. The subordinated debt bears interest at 16%, half of which may be capitalized at the option of the Fund.

Michael McKenna, President and Chief Executive Officer of the Fund stated, "Although inventory allocation issues continued to negatively impact our sales and earnings, we are encouraged at the operational progress made during the quarter. Our new system implementation is progressing on schedule and we have been successful building out an inventory allocations team. We experienced a significant improvement in gross margin percentage compared to the first quarter and the rate of wage increases in Alberta has stabilized. We expect this measured improvement to continue throughout the third quarter, with the strong improvement anticipated after the system implementation in the fourth quarter."

Highlights for the second quarter

- Second quarter sales of $29.5 million, up 6.1% from the second quarter of 2006.

- Second quarter gross margin of $10.1 million, down 4.1% from the second quarter of 2006.

- Gross margin percentage of 34.3% compared to 30.5% in the first quarter of 2007 and 38.0% for the second quarter of 2006.

- Freight costs, which are included in cost of goods sold, were 9.2% of sales compared to 9.8% of sales in the first quarter and are expected to continue to improve throughout the second half of the year.

- Earnings from operations of $1.4 million, compared to earnings from operations of $4.1 million for the second quarter of 2006.

- Same store sales decrease of 15.7% for the second quarter compared to the second quarter of 2006. Despite the decline, same store sales showed significant improvement throughout the quarter.

- Two new stores opened: Belleville, Ontario on April 30 and Sarnia, Ontario on June 28.

- Continued successful sales of two-year product replacement extended warranty plans ("PRPs"). During the twenty-one months since implementation, $4.1 million of PRPs were sold, however only $2.0 million has been recognized as revenue to date and approximately $0.5 million was recognized during the quarter. Revenue from PRP sales is deferred and recognized on a straight-line basis over the two-year terms of the PRPs.

- Distributable cash (1) of $0.06 per unit compared to distributions declared of $0.15 per unit. Due to the seasonal nature of our business, over 40% of our annual distributable cash (1) is generated in the fourth quarter. Since the Fund declares equal monthly distributions throughout the year, it is expected that distributable cash (1) will be below distributions declared in the first three quarters.

- Commenced implementation of JDA® Software Group, Inc.'s Merchandise Management System and Distributed Store System for Windows. This integrated software solution includes: point-of-sale; inventory and distribution management; accounting and management reporting functions. Retail Process Engineering has been engaged to provide implementation services and has been onsite since April 11, 2007. The new system has a targeted completion by the end of the third quarter.

- JDA® Software Group, Inc. (NASDAQ:JDAS) is the enduring demand and supply chain partner to the world's leading retailers, manufacturers and suppliers, helping more than 5,500 customers in more than 60 countries realize real demand chain results.

Business of the Fund

The Fund commenced business operations on May 17, 2005, when it completed an initial public offering (the "IPO") of 6,106,000 trust units at a price of $10 per unit, for aggregate gross proceeds of $61,060,000. Concurrent with the closing of the IPO, the Fund acquired a 51% indirect interest in XS Cargo LP and XS Cargo LP acquired the net assets (the "Acquired Business") of Famous Brands (Edmonton) Inc. (the "Vendor"). XS Cargo LP operates 39 closeout retail stores in Alberta, British Columbia, Manitoba, Saskatchewan, Ontario, Newfoundland, Nova Scotia and New Brunswick.

(1) 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 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.

Earnings from operations have been derived by adding interest expense, amortization of property and equipment and intangible assets, unit-based compensation and non-controlling interest to net earnings for the period.

Payout ratio refers to the ratio of cash distributions declared to unitholders to distributable cash generated by the Fund.

EBITDA, distributable cash, earnings from operations and payout ratio are not earnings measures recognized by GAAP and do not have standardized meanings prescribed by GAAP. Investors are cautioned that EBITDA, distributable cash and earnings from operations 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, distributable cash, earnings from operations and payout may differ from the methods used by other issuers and may not be comparable to similar measures presented by other issuers.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements. All statements other than statements of historical fact contained in this press release are forward-looking statements. You can identify many of these statements by looking for words such as "believe", "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 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 the press release. 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" in the Fund's MD&A.

The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this press release are made as of the date of this press release and, except as required by law, the Fund assumes no obligation to update or revise them to reflect new events or circumstances.



XS Cargo Income Fund
Consolidated Balance Sheets

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June 30, December 31,
2007 2006
(unaudited)
$ $

Assets
Current
Cash and cash equivalents - 1,017,824
Rebate and other receivables 88,499 439,384
Inventory 22,951,282 22,288,806
Deposits on inventory 5,500,859 6,604,788
Prepaid expenses and deposits 802,335 828,775
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29,342,975 31,179,577
Deferred charges 336,157 331,799
Property and equipment 5,525,974 4,332,028
Intangible assets 6,091,900 6,718,000
Goodwill 101,788,426 101,788,426
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143,085,432 144,349,830
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Liabilities
Current
Bank indebtedness 7,176,988 -
Accounts payable and accrued liabilities 5,893,669 10,597,933
Deferred revenue 1,635,084 1,528,327
Distributions payable to unitholders
(Note 6) 286,219 629,681
Distributions payable to
non-controlling interest (Note 7) 163,725 1,103,235
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15,155,685 13,859,176
Term loan (Note 4) 21,250,000 2,500,000
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36,405,685 16,359,176
Term loan (Note 4) - 15,000,000
Deferred revenue 496,157 607,513
Unamortized lease inducements 403,908 317,975
Future income taxes (Notes 3 and 5) 1,269,160 -
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38,574,910 32,284,664
Non-controlling interest (Note 7) 54,417,628 57,493,942
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92,992,538 89,778,606
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Unitholders' Equity
Fund Units (Note 6) 56,131,876 56,131,876
Deficit (6,038,982) (1,560,652)
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50,092,894 54,571,224
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143,085,432 144,349,830
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XS Cargo Income Fund
Consolidated Statements of Earnings and Comprehensive Income
(Unaudited)

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

Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006

$ $ $ $

Sales 29,519,184 27,822,876 53,176,840 48,494,741

Cost of goods sold 19,383,595 17,255,921 35,821,536 30,325,263
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Gross margin 10,135,589 10,566,955 17,355,304 18,169,478
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Expenses
Administrative and
operating 8,755,270 6,537,933 16,794,615 12,011,072
Amortization of property
and equipment 313,302 212,820 608,280 387,677
Amortization of
intangible assets 328,100 298,000 626,100 596,000
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9,396,672 7,048,753 18,028,995 12,994,749
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Earnings (loss) before
the undernoted 738,917 3,518,202 (673,691) 5,174,729
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Other expenses
Interest on bank
indebtedness 87,986 84,122 175,415 123,887
Interest on term loan 359,155 243,789 702,097 466,421
Foreign exchange loss 113,481 45,885 130,960 19,921
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560,622 373,796 1,008,472 610,229
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Earnings (loss) before
non-controlling
interest and future
income taxes 178,295 3,144,406 (1,682,163) 4,564,500

Future income taxes
(Notes 3 and 5) 1,269,160 - 1,269,160 -
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(Loss) earnings before
non-controlling interest (1,090,865) 3,144,406 (2,951,323) 4,564,500

Non-controlling interest
(Note 7) (536,195) 1,542,574 (1,449,668) 2,239,123
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Net (loss) earnings and
comprehensive (loss)
income for the period (554,670) 1,601,832 (1,501,655) 2,325,377
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Basic and diluted (loss)
earnings per unit (Note 11) (0.09) 0.26 (0.25) 0.38
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XS Cargo Income Fund
Consolidated Statements of (Deficit) Retained Earnings
(Unaudited)

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

Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006

$ $ $ $

(Deficit) retained
earnings, beginning of
the period (4,339,437) (349,140) (1,560,652) 701,871

Net (loss) earnings for
the period (554,670) 1,601,832 (1,501,655) 2,325,377

Distributions declared
in the period (1,144,875) (1,889,044) (2,976,675) (3,663,600)
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Deficit, end of the
period (6,038,982) (636,352) (6,038,982) (636,352)
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XS Cargo Income Fund
Consolidated Statements of Cash Flows
(Unaudited)

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Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006

$ $ $ $

Cash provided by (used
for) the following
activities

Operating Activities
Net (loss) earnings for
the period (554,670) 1,601,832 (1,501,655) 2,325,377
Items not affecting
cash:
Non-controlling
interest (536,195) 1,542,574 (1,449,668) 2,239,123
Future income taxes 1,269,160 - 1,269,160 -
Amortization of
property and equipment 313,302 212,820 608,280 387,677
Amortization of
intangible assets 328,100 298,000 626,100 596,000
Unit based compensation
(Note 9) 29,860 30,000 73,360 60,000
Deferred charges, net
of costs recognized (5,322) (28,298) (4,358) (94,565)
Deferred revenue, net
of revenue recognized (25,182) 333,958 (4,598) 704,835
Lease inducements
received, net of
amortization of lease
inducements 37,125 41,121 85,933 26,197
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856,178 4,032,007 (297,446) 6,244,644

Net change in non-cash
working capital 191,304 3,544,009 (3,885,487) (8,053,557)
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1,047,482 7,576,016 (4,182,933) (1,808,913)
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Financing Activities
Net change in bank
indebtedness 2,529,695 (3,177,032) 7,176,988 2,866,316
Proceeds from term loan - - 3,750,000 -
Distributions paid on
Fund Units (1,431,094) (1,889,044) (3,320,136) (3,606,356)
Distributions paid to
non-controlling
interest (817,323) (1,773,577) (2,639,517) (3,426,816)
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281,278 (6,839,653) 4,967,335 (4,166,856)
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Investing Activities
Purchases of property
and equipment (1,328,760) (736,363) (1,802,226) (1,466,727)
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Decrease in cash and
cash equivalents - - (1,017,824) (7,442,496)

Cash and cash
equivalents, beginning
of period - - 1,017,824 7,442,496
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Cash and cash
equivalents, end of
period - - - -
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Supplementary cash flow
information

Interest paid 447,141 327,911 877,512 590,308


Contact Information

  • XS Cargo Income Fund
    Jeff Rootman
    Vice-President, Finance and Chief Financial Officer
    (780) 732-2112
    Website: www.xscargo.com