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

Transcription

1 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fr the Three and Nine Mnths Ended September 30, 2008 As f Nvember 13, 2008

2 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management s discussin and analysis ( MD&A ) shuld be read in cnjunctin with the interim cnslidated financial statements (the Financial Statements ) and accmpanying ntes f Liqur Stres Incme Fund (the "Fund") fr the three and nine mnths ended September 30, 2008 and the annual cnslidated financial statements and accmpanying ntes f the Fund fr the year ended December 31, Results are reprted in Canadian dllars unless therwise stated and have been prepared in accrdance with Canadian generally accepted accunting principles ( GAAP ). Certain dllar amunts have been runded t the nearest hundred thusand dllars r thusand dllars. References t ntes are t ntes f the Financial Statements unless therwise stated. Thrughut this MD&A references are made t EBITDA, distributable cash, distributable cash befre nn-recurring items, perating margin, perating margin befre nn-recurring items, perating margin as a percentage f sales, payut rati and ther Nn-GAAP Measures. A descriptin f these measures and their limitatins are discussed n page 21 belw under Nn-GAAP Measures. See als Risk Factrs n page 20 and Frward-Lking Statements n page 22 f this MD&A. This MD&A is dated Nvember 13, Additinal infrmatin relating t the Fund, including the Fund s Annual Infrmatin Frm and ther public filings is available n SEDAR ( and n the Fund s website at HIGHLIGHTS (Third quarter 2008 cmpared with third quarter 2007) Operating margin increased t $12.4 millin, up 4.2% frm $11.9 millin. Adjusted grss margin increased t 25.5% frm 24.3%. Sales increased 1.5% t $123.9 millin. As a result f price harmnizatin f Liqur Barn stres t Fund stres, blended grss margin fr same stres was up substantially t 26.3% frm 25.2%. Distributable cash remained cnstant at $11.1 millin. Distributable cash per unit remained cnstant at $0.49. Distributins declared increased by 8% t $0.41. The imprvement in verall sales and margins has ffset a mderate decrease f 1.7% in same stre sales fr the nine mnths ended September 30, 2008 and 2.9% fr the third quarter f Price harmnizatin has accunted fr the increased margin and new stres fr the increased sales. Same stre sales fr Octber 2008 are up ver Octber RECENT DEVELOPMENTS On Nvember 5, 2008 the Fund cmpleted the acquisitin f 19 retail liqur stres frm Brwn Jug Inc. ( Brwn Jug ) in Anchrage, Alaska. Brwn Jug s 2007 sales were in excess f US $60 millin. On Nvember 13, 2008, the Bard f Directrs f Liqur Stres GP Inc. ( LSGP ), administratr f the Fund, appinted Rick Crk as President, Chief Executive Officer and Directr f LSGP. Mr. Kipnes, wh is currently CEO, will becme Executive Chairman f LSGP. Henry Bereznicki will cntinue as Bard Chairman. These changes are effective January 1, Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis - 1 -

3 OUTLOOK T date in 2008, the Fund has acquired r pened 34 stres including 19 Brwn Jug stres, giving the Fund 228 stres in which it is invested r perates. One stre was clsed in Octber The Fund s financial capacity fr grwth includes prceeds frm the issuance f cnvertible, unsecured, subrdinated debentures in late 2007 and early 2008 and the Fund s current credit facilities. The Fund currently has access t funding fr grwth as well as sufficient additinal financing t supprt crrespnding inventry grwth. OVERVIEW OF THE FUND The Fund is an unincrprated pen ended, limited purpse trust established under the laws f the Prvince f Alberta. The trust units ( Units ) f the Fund trade n the Trnt Stck Exchange under the symbl LIQ.UN. The Fund s 6.75% Cnvertible Unsecured Subrdinated Debentures ( 6.75% Debentures ) trade n the Trnt Stck Exchange under the symbl LIQ.DB. Thrugh its 81.69% indirect interest in Liqur Stres Limited Partnership ( Liqur Stres LP ), the Fund perates r has investments in 228 retail liqur stres. Management believes the Fund is the largest liqur stre peratr in Alberta by number f stres and revenue. Stres and Operatins As f Nvember 13, 2008, the Fund perates r has investments in 228 retail liqur stres lcated as fllws: Alberta British Clumbia Alaska Edmntn (1 ) Calgary (1) (2) Other Lwer Mainland Vancuver Island Interir Anchrage Other Ttal (3 ) Number f Stres Ntes: (1) References t Edmntn and Calgary are t stres lcated in r near thse urban centres. (2) Other cmmunities served in Alberta include, by regin, Nrthern (23), Suthern (8), Central (13) and Resrt cmmunities (4). (3) Ttal stres is net f ne stre clsure that ccurred in Octber Cmpetitive Envirnment The Prvince f Alberta is the nly prvince in Canada that has a fully privatized retail distributin system fr adult beverages. The Fund currently perates 174 liqur stres in Alberta where there are apprximately 1,100 liqur stres and 86 agency stres. The Fund perates 34 stres and fur small assciated pubs in British Clumbia. The Prvince f British Clumbia s mdel fr liqur distributin is a blend f apprximately 630 private stres and 200 gvernment perated stres. There are als apprximately 230 private agency stres that service small cmmunities. In the state f Alaska there are apprximately 380 retail liqur stres and apprximately 90 stres in the greater Anchrage area. There are n gvernment wned r perated liqur stres and the state limits the number f liqur stres in the state t ne per 3,000 peple in urban areas. The Fund currently perates 19 stres in Alaska. Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis - 2 -

4 BUSINESS STRATEGY Grwth - New Stres The Fund s strategy is t grw by attracting mre custmers t existing lcatins as well as thrugh new stre develpment and acquisitins. The Fund explres pprtunities t acquire and/r develp stres in Alberta, British Clumbia, and the United States where regulatry regimes permit private liqur stres. Management will cntinue t assess ptential acquisitins and stre develpment pprtunities fr their ability t add accretive cash flw and unithlder value. Stable Business The Fund perates in a stable business envirnment. The business is largely cash-based with liqur prducts accunting fr apprximately 99% f ttal sales in Canada and apprximately 90% in Brwn Jug peratins. The Fund and its predecessrs have demnstrated stable revenues and margins with cmpunded annual EBITDA grwth f 25.2% frm 1996 t September 30, Differentiatin: Operatinal Excellence Management will cntinue t fcus n differentiating the Fund s stres frm the cmpetitin by prmting peratinal excellence in all f its stres with emphasis n the in-stre custmer experience, technlgy, and marketing and brand develpment. In-Stre Experience The Fund uses a number f in-stre custmer experiences including signage and shelf talkers, custmer educatin events, merchandise presentatin and the installatin f Enmatics technlgy fr wine samplings in select stres. Technlgy T imprve efficiencies and enhance the custmer experience, management is currently wrking n a number f infrmatin systems initiatives that include a pint-f-sale system upgrade, the develpment f a custmer database as well as Internet prmtin. Marketing and Brand Develpment Management will cntinue t cncentrate marketing effrts n the current brand structure: Liqur Dept and Liqur Barn full service stres, Grapes n Grains specialty stres, and OK Liqur discunt stres. Financing The Fund has histrically financed its acquisitins, stre develpment csts and betterments with prceeds frm the issuance f Units frm treasury, the issuance f cnvertible debentures r thrugh available credit facilities. Financing f the Fund s investment in inventry is dne thrugh bank indebtedness. When prceeds frm the issuance f Units, cnvertible debentures r lng-term debt are received prir t being used t finance grwth, bank indebtedness is temprarily repaid and redrawn when required fr grwth expenditures. Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis - 3 -

5 FINANCIAL MEASURES Distributable Cash The Fund views distributable cash as an imprtant supplementary measure t assist unithlders in evaluating the Fund s perfrmance as the Fund s bjective is t prvide a stable and sustainable flw f distributable cash t unithlders. Cash available fr distributin is after cash required fr maintenance capital expenditures, wrking capital reserve, and ther reserves cnsidered advisable by the Fund, including prvisins fr the Fund s deferred cmpensatin plans. The plicy allws the Fund t make stable mnthly distributins t its unithlders based n estimates f annual distributable cash. The Fund pays cash distributins n r abut the 15th f each mnth t unithlders f recrd n the last business day f the previus mnth. The Fund s distributin plicy is based n distributable cash flw n an annualized basis; accrdingly, the seasnality f the Fund s individual quarterly results must be assessed in the cntext f annualized distributable cash flws. Histrically, apprximately 45% f the Fund s sales have ccurred in the first half f the year and 55% in the latter half. It is the Fund s plicy t pay cnsistent regular mnthly distributins thrughut the year based n estimated annual cash flws. The Fund reviews its histric and expected results n a regular basis giving cnsideratin t histrical, current and expected future perfrmance f existing and new stres, the cmpetitive envirnment and ecnmic cnditins, including labur market trends. In the first half f the year distributins typically exceed distributable cash and in the secnd half f the year distributable cash typically exceeds distributins such that the Fund has histrically distributed apprximately 90% f distributable cash n an annualized basis. Distributins declared during the three mnths ended September 30, 2008 were $9.1 millin r $0.405 per unit, cmpared with $8.4 millin r $0.375 per Unit a year earlier. On a weighted average basis, fr the third quarter f 2008 distributable cash including nn-recurring items was $0.49 per unit, cnsistent with the third quarter f Distributable cash befre nnrecurring items was $0.50 fr the third quarter f 2008, als cnsistent with the third quarter f Fr the nine mnths ended September 30, 2008, distributable cash was $24.0 millin, up 19% frm $20.2 millin in the cmparable perid in Fr a per weighted average unit cmparisn, the Fund has determined that using the weighted average number f units fr the year ended December 31, 2007 prvides a mre infrmative cmparisn because a nine-mnth weighted average unit calculatin des nt reflect the full dilutive effect f the units issued n June 7, 2007 in respect f the Liqur Barn acquisitin. On this basis, distributable cash per weighted average unit was $1.10 befre nn-recurring items fr the first nine mnths f 2008, cmpared with cumulative quarterly distributable cash per weighted average unit f $1.11 fr the same perid in After nn-recurring items, distributable cash per weighted average unit is $1.07 cmpared with cumulative quarterly distributable cash per weighted average unit f $1.09 fr the nine mnths ended September 30, Per Unit cash distributins frm the inceptin f the Fund have been made as fllws: Payment Perids Mnthly Annualized Nvember 15, 2004 t May 16, 2005 $ $1.000 June 16, 2005 t January 16, 2006 $ $1.075 February 15, 2006 t Octber 16, 2006 $ $1.200 Nvember 15, 2006 t March 15, 2007 $ $1.400 April 13, 2007 t December 14, 2007 $ $1.500 Cmmencing January 15, 2008 $ $1.620 Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis - 4 -

6 The fllwing table prvides the calculatin f the distributable cash f the Fund fr the three and nine mnths ended September 30, 2008 and 2007: Three mnths ended September 30, Nine mnths ended September 30, (expressed in thusands f Canadian dllars) Cash prvided by perating activities $ 10,465 $ (949) $ 16,766 $ 14,360 Net change in nn-cash wrking capital ,437 7,531 7,299 Incentive plan prvisins - (273) - (819) Prvisin fr nn-grwth prperty and equipment (75) (155) (266) (662) Distributable cash 11,126 11,060 24,031 20,178 Nn-recurring items (1) Distributable cash befre nn-recurring items $ 11,216 $ 11,337 $ 24,826 $ 20,637 Weighted average units utstanding # 22,556,969 # 22,507,826 # 22,544,952 # 16,167,155 Distributable cash befre nn-recurring items per weighted average Unit $ 0.50 $ 0.50 $ 1.10 $ (2) 1.11 Distributable cash per weighted average Unit $ 0.49 $ 0.49 $ 1.07 $ (2) 1.09 Distributins declared per Unit $ 0.41 $ 0.38 $ 1.22 $ 1.11 (1) See Operating Results belw fr a descriptin f nn-recurring items. (2) The Fund has used the 2007 annual weighted average number f units t calculate distributable cash fr the nine mnths ended September 30, 2007 t prvide a mre infrmative cmparisn. Distributable cash befre nn-recurring items per weighted average unit fr the nine mnths ended September 30, 2007, was $1.28 and after nn-recurring items $1.25, hwever, this des nt reflect the full dilutive effect f the units issued n June 7, 2007 in respect f the Liqur Barn acquisitin. When evaluating the cash available fr distributin t Unithlders, the Fund takes int cnsideratin the fllwing factrs: Maintenance f Prductive Capacity In rder t maintain its prductive capacity, the Fund incurs expenses fr rutine maintenance and makes expenditures fr the replacement f lng lived assets ( nn-grwth prperty and equipment ). In the determinatin f distributable cash, prvisins are made fr anticipated replacements f lng lived assets nt yet recrded in the accunts f the Fund. The fllwing table prvides an analysis f the ttal expenditures n prperty and equipment and the amunts reserved fr further nn-grwth expenditures: Three mnths ended September 30, Nine mnths ended September 30, (expressed in thusands f Canadian dllars) Purchase f prperty and equipment $ 795 $ 1,277 $ 3,727 $ 3,077 Grwth expenditures including amunts relating t develped stres (720) (972) (3,361) (2,265) Purchase f nn-grwth prperty and equipment Prvisin fr further nn-grwth prperty and equipment expenditures - (150) (100) (150) Ttal prvisin fr nn-grwth prperty and equipment Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis - 5 -

7 Net Change in Nn-cash Wrking Capital The Fund s investment in nn-cash wrking capital is primarily related t increased inventry levels. This increase includes the cst f purchasing inventry fr stres the Fund develps and pens, the cst f increasing inventry in acquired stres subsequent t their acquisitin date, and an increase in current inventry purchased at times when favurable buying cnditins exist. Inventry levels are als influenced by seasnal investments in inventry. Lng-Term Incentive Plans The Fund has histrically utilized lng-term incentive plan awards t reward certain emplyees fr significant perfrmance and assciated per unit cash flw grwth. Currently there are 78,650 units which have nt yet vested under the Lng-Term Incentive Plan and 2007 Incentive Plan. On May 8, 2008 the Fund adpted a new incentive plan, the Unit Award Incentive Plan ( UAIP ). Awards under the UAIP are discretinary and, as such, nt yet determinable. As a result, n UAIP prvisin has been made in the calculatin f distributable cash in respect t the 2008 year. Cmparable GAAP Measures Distributable cash is a Nn-GAAP Measure. Adjustments and prvisins related t nn-grwth prperty and equipment, incentive plan prvisins and nn-cash wrking capital are necessary t recncile distributable cash t its nearest GAAP measure, cash prvided by perating activities. The GAAP measure cmparable t distributable cash per unit is earnings per unit. Diluted earnings per Unit fr the three mnths ended September 30, 2008 were $0.34 cmpared t $0.31 in the same perid f Diluted earnings per Unit fr the nine mnths ended September 30, 2008 were $0.52 cmpared t $0.03 fr the nine mnths ended September 30, Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis - 6 -

8 Operating Results The retail liqur industry is subject t seasnal variatins with respect t sales. Sales are typically lwest early in the year and increase in the latter half. In 2007, 20% ( %) f annual same stre sales ccurred in the first quarter, 26% ( %) in the secnd quarter, 26% ( %) in the third quarter and 28% ( %) in the last quarter. The fllwing graphs shw ttal sales and EBITDA f the Fund by quarter fr the fur mst recent quarters cmpared t the same perids in the prir year. Sales by quarter EBITDA by quarter $ Millins $ Millins Q4 06 vs 07 Q1 07 vs 08 Q2 07 vs 08 Q3 07 vs 08 - Q4 06 vs 07 Q1 07 vs 08 Q2 07 vs 08 Q3 07 vs 08 Plicy n Same Stre Cmparisns Cmparable same stre sales is calculated t include sales fr stres that have been pen 12 full mnths at the beginning f the reprting perid. Same stres exclude stres which have significant whlesale business. Fr the third quarter f 2008, there were 101 Liqur Dept, Grapes n Grains and OK Liqur same stres (the Fund stres ) and 81 Liqur Barn same stres. Fr the nine mnths ended September 30, 2008, same stres included 99 Fund stres and 66 Liqur Barn stres. Sales fr Liqur Barn stres fr the nine mnths ended September 30, 2007 are n a prfrma basis. Same Stre Sales Fr the three mnths ended September 30, 2008, ttal same stre sales were $106.8 millin, dwn 2.9% frm $110.0 millin. The decrease cmprises: A decrease f $0.5 millin r 0.9% fr the 101 Fund stres. A decrease f $2.7 millin r 5.4% fr the 81 Liqur Barn stres. Fr the nine mnths ended September 30, 2008 ttal same stre sales were $266.3 millin, dwn 1.7% frm $271.0 millin. The decrease cmprises: An increase f $2.8 millin r 1.7 % in same stre sales fr 99 Fund stres. A decrease f $7.4 millin r 6.6% in same stre sales fr 66 Liqur Barn stres. Same stre sales fr the three and nine mnths ended September 30, 2008 were negatively affected by: The timing f the Canada Day lng weekend which fell n a weekday in 2008 and n a weekend in Extensive cnstructin activities which interrupted traffic rutes arund several stres; Drp in turism resulting frm high gasline prices, the strng Canadian dllar and financial uncertainty; Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis - 7 -

9 Reduced natural gas and il explratin thrughut nrthern Alberta and reduced frestry activities in nrthern Alberta and British Clumbia; Inter-stre sales cannibalizatin by Fund and Liqur Barn stres as well as sme increased cmpetitin due t new stres pening in certain market areas; and Specific t the Liqur Barn stres, retail price harmnizatin with Fund stres resulted in a drp in sales vlume, but a substantive increase in margin f 2.6% fr the nine mnths ended September 30, 2008 cmpared with the same perid in Grss Margin The imprvements in grss margin ver 2007, 1.2% and 1.0% respectively fr the three and nine mnths ended September 30, 2008, ffset the same stre sales decrease experienced fr the same perids. Third Quarter 2008 Operating Results The fllwing table summarizes the perating results fr the three mnths ended September 30, 2008 and perating results fr the three mnths ended September 30, Three Mnths ended September 30, (expressed in thusands f Canadian dllars) $ % $ % (unaudited) (unaudited) Number f stres at September 30 (nte 1) Sales 123, % 122, % Adjusted grss margin (nte 2) 31, % 29, % Operating and administrative expense 19, % 17, % Operating margin (nte 3) 12, % 11, % Nn-recurring items (nte 4) % % Operating margin (nte 3) befre nn-recurring items 12, % 12, % Ntes: (1) The number f stres and crrespnding results fr 2008 includes partial mnths f peratins fr fur stres (2007-five) pened r acquired during the three mnths ended September 30, (2) Adjusted grss margin fr the 2007 Fund results excludes $0.9 millin in respect f the nn-cash amrtizatin f an inventry fair value adjustment related t the Liqur Barn acquisitin. (3) Operating margin has been calculated as described under "Nn-GAAP Measures. (4) Nn-recurring items fr the three mnths ended September 30, 2008 include prfessinal and cnsulting fees fr nn-recurring business matters and fr the 2007 results nn-recurring items were head ffice relcatin and Liqur Barn acquisitin expenses. Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis - 8 -

10 Third Quarter 2008 Operating Results Cmpared t Third Quarter 2007 Operating Results Sales Fr the three mnths ended September 30, 2008 sales were $123.9 millin, up 1.5 % frm $122.1 millin in the same perid last year. The sales increase cmprises: During the third quarter f 2007, fur stres were acquired. Sales fr these stres and stres with significant whlesale business increased t $12.3 millin fr the three mnths ended September 30, 2008 frm $12.1 millin fr the same perid in Due t the timing f the acquisitins and stre penings, these stres were nt peratinal fr the entire three mnth perid ended September 30, Stres pened r acquired subsequent t September 30, 2007 accunted fr $ 4.8 millin f the sales increase. Grss Prfit and Grss Margin Fr the three mnths ended September 30, 2008 grss prfit was $31.6 millin, up 6.4 % frm $29.7 millin fr the same perid last year. The margin increase includes: A decrease f $0.1 millin r 0.5% in Fund same stre grss margin. An increase f $0.4 millin r 3.7% in Liqur Barn same stre grss margin. As a result f retail price harmnizatin f Liqur Barn stres t Fund stres, blended grss margin was up substantially t 26.3% f same stre sales in the third quarter f 2008 frm 25.2% f same stre sales a year earlier. Operating and Administrative Expense An increase f 15 stres perated ver the number perated at the end f the third quarter f 2007 resulted in perating and administrative expense fr the three mnths ended September 30, 2008 f $19.1 millin, up 7.3% frm $17.8 millin a year earlier. Operatins invlved 208 stres in the third quarter f 2008, up 7.8% frm 193 stres during the same perid last year. Fr the three mnths ended September 30, 2008, perating and administrative expenses included $0.1 millin in nn-recurring cnsulting and prfessinal fees. Fr the three mnths ended September 30, 2007 perating and administrative expense included $0.3 millin in nn-recurring items including expenses assciated with the Liqur Barn acquisitin as well as the Fund s head ffice mve. Operating Margin Operating margin befre nn-recurring items fr the three mnths ended September 30, 2008 was $12.5 millin, up 2.5% frm $12.2 millin fr the same perid last year. The acquisitin f the Liqur Barn stres in the secnd quarter f 2007 and the measures subsequently taken t imprve the perfrmance f these stres has had a significant effect, as expected, n the perating results f the Fund resulting in an verall blended perating margin f 10.09%. Future Incme Taxes (a Nn-cash Charge) The Fund, in accrdance with GAAP, fllws the asset and liability methd f accunting. With the substantive enactment f the SIFT Rules in 2007, the asset and liability methd f accunting requires the Fund t recrd a nn-cash future tax prvisin. Determining future incme taxes invlves a number f assumptins and variables that culd reasnably change in the perid t January 1, 2011, including: the useful lives f recrded prperty, plant and equipment and intangible assets that determine the amunt f amrtizatin recrded theren; the amunt f discretinary tax deductins the Fund will claim frm its existing tax depreciatin pls, the rates f tax applicable in varius jurisdictins in which the Fund is taxable and the allcatin f taxable incme t thse jurisdictins; and the acceptance f the Fund's tax filing psitins by the taxatin authrities. Changes in these Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis - 9 -

11 assumptins and variables, which are re-evaluated at each balance sheet date, culd result in changes in the recrded amunt f future incme taxes, and these changes culd be material. The Fund has adpted CICA Emerging Issues Cmmittee Abstract #171 ( EIC-171 ) Future Incme Tax Cnsequences f Exchangeable Interests in an Incme Trust r Specified Investment Flw-Thrugh. EIC-171 states that future taxes related t temprary differences assciated with the assets and liabilities attributable t the exchangeable interests shuld nt be recrded prir t the cnversin f the exchangeable interest. The future incme taxes shuld be accunted fr as a capital transactin at the time f cnversin. The EIC abstract required retractive applicatin, which resulted in an increase t cumulative undistributed earnings f $94,297 in the third quarter. In the quarter ended September 30, 2008, the Fund updated its estimate f temprary differences pertaining primarily t certain gdwill, prperty, plant and equipment, and intangible assets, which resulted in a net increase in future incme taxes f $0.6 millin. Changes t future incme tax estimates represent a nn-cash charge against net earnings. Net Earnings befre Nn-cntrlling Interest and Net Earnings and Cmprehensive Incme Net earnings befre nn-cntrlling interest increased by $0.5 millin t $7.9 millin fr the three mnths ended September 30, 2008 cmpared with net earnings befre nn-cntrlling interest f $7.4 millin fr the same perid in Fr the quarter ended September 30, 2008, net earnings increased by $0.6 millin t $6.2 millin frm $5.6 millin fr the quarter ended September 30, Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis

12 Nine Mnths Ended September 30, 2008 Operating Results Basis f Cmparisn Management has chsen t cmpare the Fund s results fr the nine mnths ended September 30, 2008 t a prfrma derived by cmbining the results f the Fund and Liqur Barn Incme Fund fr the nine mnths ended September 30, As all cmparisns t the nine mnths ended September 30, 2007 cntain partial mnth results fr the stres acquired in the first nine mnths f 2007, management believes the prfrma prvides a mre infrmative cmparisn and thus is the basis f cmmentary f perfrmance in this MD&A. The fllwing table summarizes the perating results fr the nine mnths ended September 30, 2008, prfrma perating results based n prfrma financial statements fr the nine mnths ended September 30, 2007 fr Liqur Barn Incme Fund, and perating results fr the nine mnths ended September 30, Nine Mnths ended September 30, Fund Fund Fund Results Prfrma (nte 1) (nte 2) Results (expressed in thusands f Canadian dllars) $ % $ % $ % (unaudited) (unaudited) (unaudited) Number f stres at September 30 (nte 2) Sales 339, % 322, % 257, % Adjusted grss margin (nte 3) 84, % 76, % 62, % Operating and administrative expense 56, % 55, % 40, % Operating margin (nte 4) 27, % 21, % 22, % Nn-recurring items (nte 5) % 4, % % Operating margin (nte 4) befre nn-recurring items 28, % 26, % 22, % Ntes: (1) 2007 Fund Prfrma refers t the results f the Fund fr the nine mnths ended September 30, 2007, which include results frm Liqur Barn stres fr the perid June 8 t September 30, 2007 and Liqur Barn Incme Fund fr the perid January 1 t June 7, (2) Fr the nine mnths ended September 30, 2008, 2008 Fund Results include partial mnths f peratins fr 13 stres pened r acquired in Fund Prfrma results cntain partial mnths f peratins fr eight Fund stres pened r acquired in Fund Results cntain partial mnths f peratins fr 81 Liqur Barn stres and eight Fund stres pened r acquired in 2007 and are nt a gd basis fr cmparisn.. (3) Adjusted grss margin fr the 2007 Fund Prfrma and 2007 Fund Results excludes $2.2 millin in respect f the amrtizatin f an inventry fair value adjustment related t the Liqur Barn acquisitin. (4) Operating margin has been calculated as described under "Nn-GAAP Measures. (5) Nn-recurring items fr the nine mnths ended September 30, 2008 include recruitment and relcatin expenses as well as cnsulting and prfessinal fees related t nn-recurring business matters. Nn-recurring items in the first nine mnths f 2007 fr the 2007 Fund Prfrma were expenses incurred by Liqur Barn that related t the Fund s successful ffer; and fr the 2007 Fund Results, nn-recurring items were head ffice relcatin and Liqur Barn acquisitin expenses. Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis

13 Nine Mnths Ended September 30, 2008 Operating Results Cmpared t Nine Mnths Ended September 30, 2007 Prfrma Operating Results Sales Fr the nine mnths ended September 30, 2008, sales were $339.9 millin up 5.4% frm $322.6 millin fr the same perid in The sales increase cmprises: During the first nine mnths f 2007 the Fund pened r acquired 21 stres, including 15 Liqur Barn stres. Sales fr these stres were $33.5 millin fr the nine mnths ended September 30, 2008, up 65.8% frm $20.2 millin fr the same perid in Sales fr stres pened r acquired subsequent t September 30, 2007 and sales fr stres with significant whlesale business accunted fr $8.6 millin f the sales increase. Grss Prfit and Grss Margin Fr the nine mnths ended September 30, 2008 grss prfit was $84.3 millin, up 9.6% frm $76.9 millin n a prfrma basis frm The increase includes: An increase f $0.2 millin r 0.5% in Fund same stre grss margin. An increase f $1.2 millin r 4.9% in Liqur Barn same stre grss margin. Adjusted grss margin as a percentage f sales fr the nine mnths ended September 30, 2008 was 24.8% cmpared with 23.8% n a prfrma basis fr the same perid in The imprvement in grss margin as a percentage f sales relates principally t the harmnizatin f Liqur Barn retail prices with thse f the majrity f the Fund s ther stres. Operating and Administrative Expense Operating and administrative expense befre nn-recurring items was $55.9 millin, up 9.82% frm $50.9 millin fr the nine mnths ended September 30, 2008 and 2007, respectively. Fr the nine mnths ended September 30, 2008, perating and administrative expense including nn-recurring items was $56.7 millin, up 1.8% r $1.1 millin frm $55.7 millin n a prfrma basis fr the same perid in 2007 due t an increase in the number f stres perated. Operating Margin Fr the nine mnths ended September 30, 2008 perating margin befre nn-recurring items was $28.3 millin up 8.4% frm $26.1 millin n a prfrma basis fr the same perid in Annual perating margin as a percentage f sales fr 2008 is expected t be cmparable t that achieved in Imprvements in the remainder f the year relative t the three and nine mnths ended September 30, 2008 include: Nrmal seasnal imprvements as sales increase thrugh the year; A slwing pace fr labur cst inflatin; and Furth quarter synergies related t the acquisitin f the Liqur Barn stres. Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis

14 Nine Mnths Ended September 30, 2008 Operating Results Cmpared t Nine Mnths Ended September 30, 2007 Operating Results Sales Fr the nine mnths ended September 30, 2008 sales were $339.9 millin up 32.2% frm $257.1 millin fr the same perid in The sales increase cmprises: The sales fr 81 Liqur Barn stres acquired in the secnd quarter f 2007 f $72.3 millin. Other stres pened r acquired subsequent t September 30, 2007 and licensee stres accunted fr the remaining $8.5 millin sales increase. Same Stre Sales Fr the nine mnths ended September 30, 2008, there was an increase in same stre sales fr 99 Fund stres t $161.2 millin frm $159.2 millin r 1.73% cmpared t the prir year. Grss Prfit and Grss Margin Fr the nine mnths ended September 30, 2008 grss prfit was $84.3 millin, up 34.9 % frm $62.5 millin fr the same perid in As a result f sales harmnizatin f Liqur Barn stres t Fund stres, blended adjusted grss margin was 24.8% f sales fr the nine mnths ended September 30, 2008, up frm 24.3% f sales a year earlier. Operating and Administrative Expense Operating and administrative expense fr the nine mnths ended September 30, 2008 was $56.7 millin, up $16.5 millin r 41.0% frm $40.2 millin in the first three quarters f 2007 mainly due t the increased number f stres perated. Operating and administrative expense in 2008 reflects nine full mnths f peratins fr 81 Liqur Barn stres acquired n June 7, 2007, whereas fr September 30, 2007, the results reflect peratins frm June 8, 2007 nwards. As well, the Fund grew by an additinal 15 stres between September 30, 2007 and Fr the nine mnths ended September 30, 2008 perating and administrative expense included $0.8 millin in nn-recurring items including recruitment and relcatin expenses and nn-recurring cnsulting and prfessinal fees. Fr the nine mnths ended September 30, 2007 perating and administrative expense included $0.5 millin in nn-recurring items including expenses assciated with the Liqur Barn acquisitin as well as the Fund s head ffice mve. Operating Margin Fr the nine mnths ended September 30, 2008 perating margin befre nn-recurring items was $28.3 millin up 24.1% frm $22.8 millin in The acquisitin f the Liqur Barn stres in the secnd quarter f 2007 and the measures subsequently taken t imprve the perfrmance f these stres has had a significant effect, as expected, n the perating results f the Fund resulting in an verall blended perating margin befre nn-recurring items f 8.3%. Future Incme Taxes (a Nn-cash Charge) The Fund updated its estimate f temprary differences pertaining primarily t certain gdwill, prperty, plant and equipment, and intangible assets, resulting in future tax expense f $3.6 millin fr the nine mnths ended September 30, Net Earnings befre Nn-cntrlling Interest and Net Earnings and Cmprehensive Incme Net earnings befre nn-cntrlling interest increased by $8.8 millin t $12.7 millin fr the nine mnths ended September 30, 2008 cmpared with net earnings befre nn-cntrlling interest f $3.9 millin fr the same perid in The increase is Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis

15 attributed mainly t the recrding f the future incme tax adjustment f $10.6 millin during the nine mnths ended September 30, Fr the nine mnths ended September 30, 2008 net earnings increased by $9.1 millin t $9.5 millin frm $0.4 millin fr the same perid in 2007 mainly due t the recrding f a future tax adjustment f $10.6 millin during the quarter in Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis

16 Cndensed Quarterly Infrmatin (expressed in thusands f Canadian dllars, except per Unit amunts) Balance Sheet Sept 30 June 30 March 31 Dec 31 Sept 30 June 30 March 31 Dec 31 (restated) (restated) (restated) (restated) (restated) (nte 1) (nte 1) (nte 1) (nte 1) (nte 1) Cash and cash equivalents $ 810 $ 754 $ 768 $ 19,498 $ 6,891 $ 3,391 $ 1,715 $ 3,397 Ttal assets 442, , , , , , , ,097 Bank indebtedness 13,298 9, ,198 35,107 11,893 5,455 Ttal current liabilities 39,962 36,812 14,098 14,062 55,403 54,916 17,489 12,895 Lng-term debt 51,425 51,108 65,859 74,014 15, Statement f Earnings # stres Sales $ 123,913 $ 121,567 $ 94,422 $ 125,920 $ 122,097 $ 83,236 $ 51,809 $ 71,010 Future tax expense (recvery) ,499 (2,607) 685 9, Earnings (lss) befre nn-cntrlling interest 7,850 5,684 (857) 11,581 7,438 (5,913) 2,383 6,206 Net earnings (lss) fr the perid 6,228 4,466 (1,211) 9,550 5,600 (6,937) 1,766 4,627 Basic earnings (lss) per Unit $ 0.34 $ 0.24 $ (0.07) $ 0.52 $ 0.31 $ (0.58) $ 0.17 $ 0.45 Diluted earnings (lss) per Unit $ 0.34 $ 0.24 $ (0.07) $ 0.50 $ 0.31 $ (0.58) $ 0.17 $ 0.45 Distributable cash per Unit $ 0.49 $ 0.41 $ 0.17 $ 0.48 $ 0.49 $ 0.41 $ 0.20 $ 0.45 Distributable cash befre nn-recurring items per Unit $ 0.50 $ 0.41 $ 0.19 $ 0.49 $ 0.50 $ 0.41 $ 0.20 $ 0.45 Distributins declared per Unit $ $ $ $ $ $ $ $ 0.34 (1) Infrmatin fr the quarters has been restated in accrdance with the adptin f CICA Emerging Issues Cmmittee Abstract #171 Future Incme Tax Cnsequences f Exchangeable Interests in an Incme Trust r Specified Investment Flw-Thrugh. Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis

17 LIQUIDITY AND CAPITAL RESOURCES Unithlders Equity and Nn-cntrlling Interest The fllwing units were utstanding as f Nvember 13, 2008: Fund Units (1) 18,435,646 Liqur Stres LP Exchangeable LP Units 3,275,914 Liqur Stres LP Series 1 Exchangeable LP Units 845,409 Units Nte: (1) Includes 78,650 Treasury Units held in respect f lng-term incentive plans 22,556,969 The Liqur Stres Exchangeable and Series 1 Exchangeable LP Units represent a nn-cntrlling interest in the Fund. Credit Facilities The Fund has an available $90 millin perating line and an available $30 millin lng-term capital/acquisitin line. The Fund als has available a $3.5 millin demand nn-revlving lan t cver electrnic funds transfer payments, and a $4 millin bank guarantee facility t be used in day t day issuance f letters f guarantee fr peratins. The ttal f all available credit facilities is $127.5 millin. As f September 30, 2008, there was $13.3 millin utstanding n the perating line. There was $15.0 millin drawn n the lngterm Capital/Acquisitin facility with a term expiring May 31, 2009, which is expected t be renewed prir t that time. As acquisitins ccur and new stres are pened, credit facilities will be utilized as required. The Fund s indebtedness is subject t a number f external cvenants, but nne are capital related. Under the terms f the Fund s credit facility, the fllwing ratis are mnitred: adjusted debt t EBITDAR, current rati and fixed cverage rati. Fr the three mnths ended September 30, 2008, the Fund cntinues t be in cmpliance with all cvenants. The Fund als has $57.5 millin in 6.75% Debentures maturing n December 31, 2012 and $500 thusand 8.00% Debentures maturing n December 31, Capital Expenditures During the three mnths ended September 30, 2008, the Fund acquired ne stre and pened three stres. Subsequent t September 30, 2008, the Fund acquired r pened 20 stres, including 19 Brwn Jug stres in Alaska. The Fund clsed ne stre in Octber All acquisitins will be funded with existing credit facilities. The Fund will cntinue t pursue acquisitin pprtunities and t pen new stres. Effect f Trust Tax Legislatin On June 22, 2007, Bill C 52, including the prvisins related t the taxatin f incme trusts (the SIFT Rules ), received Ryal Assent. Pursuant t the SIFT Rules, cmmencing in 2011 earnings f the Fund distributed t unithlders will be subject t tax at a rate f 28% (currently zer). Taxable distributins (ther than return f capital) t unithlders will be characterized as eligible dividends, a change frm their current treatment as rdinary incme. Fr discussin f SIFT Rules and limitatins n grwth and expansin see Capital Expenditures belw. Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis

18 The SIFT Rules prvide that, while there is n intentin t prevent nrmal grwth during the transitinal perid, any undue expansin culd result in the transitin perid being revisited, presumably with the lss f the benefit t the Fund f that transitinal perid. As a result, the adverse tax cnsequences resulting frm the SIFT Rules culd be realized sner than January 1, On December 15, 2006, the Department f Finance issued guidelines with respect t what is meant by nrmal grwth in this cntext. Specifically, the Department f Finance stated that nrmal grwth wuld include equity grwth within certain safe harbur limits, measured by reference t a specified investment flw-thrugh trust r partnership's ( SIFT ) market capitalizatin as f the end f trading n Octber 31, 2006 (which wuld include nly the market value f the SIFT's issued and utstanding publicly-traded trust units, and des nt include any cnvertible debt, ptins r ther interests cnvertible int r exchangeable fr trust units). These guidelines have been incrprated int the SIFT Rules. Thse safe harbur limits are the greater f $50 millin r 20% f the market capitalizatin benchmark fr calendar years 2008, 2009 and Mrever, these limits are cumulative (ther than the $50 millin annual limit), s that any unused limit fr a perid carries ver int the subsequent perid. Additinal details f the Department f Finance's guidelines include the fllwing: (a) (b) (c) (d) new equity fr these purpses includes units and debt that is cnvertible int units (and may include ther substitutes fr equity if attempts are made t develp thse); replacing debt that was utstanding as f Octber 31, 2006 with new equity, whether by a cnversin int trust units f cnvertible debentures r therwise, will nt be cnsidered grwth fr these purpses and will therefre nt affect the safe harbur; and the exchange, fr trust units, f exchangeable partnership units r exchangeable shares that were utstanding n Octber 31, 2006 will nt be cnsidered grwth fr these purpses and will therefre nt affect the safe harbur where the issuance f the trust units is made in satisfactin f the exercise f the exchange right by a persn ther than the SIFT. the merger f SIFT s nt resulting in the issuance f additinal units d nt affect the safe harbur limits. The Fund's market capitalizatin, including that f Liqur Barn Fund, as f the clse f trading n Octber 31, 2006, having regard nly t issued and utstanding publicly-traded units, was apprximately $298 millin, which means the Fund's safe harbur equity grwth amunt fr the perid ended December 31, 2007 was apprximately $119 millin. Of this amunt, apprximately $69 millin was utilized thrugh new equity issuances which were partially ffset by debt replacement. Fr 2008, the available amunt is $109.6 millin which includes $50 millin carried ver frm As at September 30, 2008, $7.5 millin had been utilized leaving $102.1 millin available fr the remainder f the year. As a cnsequence, the Fund culd issue new units fr prceeds f $102.1 millin in 2008 and remain within the safe harbur guidelines. There is $59.6 millin available fr each f 2009 and The Fund believes that while the applicatin f the safe harbur guidelines are nt a practical cnstraint n its rdinary grwth prir t 2011, they culd adversely affect the cst f raising capital and the Fund's ability t undertake mre significant acquisitins. The lng-term effect f the SIFT Rules n the Fund is yet t be determined. The Fund cntinues t review the impact f the SIFT Rules n its business strategy and t evaluate strategic alternatives that it culd elect t pursue in respnse t the SIFT Rules. N assurance can be prvided that the Fund will nt undertake actins in the future that culd cause the SIFT Rules t apply t it prir t Credit Risk Credit risk is the risk that a third party t a financial instrument might fail t meet its bligatins under the terms f the financial instrument. The Fund s financial assets that are expsed t credit risk cnsist primarily f cash and cash equivalents and accunts receivable. The Fund maintains its cash and cash equivalents with a majr Canadian chartered bank. The Fund, in its nrmal curse f peratins, is expsed t credit risk frm its whlesale custmers in Alberta whse purchases represent apprximately 5% f the Fund s sales. Risk assciated with respect t accunts receivable is mitigated by credit management plicies. Histrically, bad debts frm these accunts have been insignificant. The Fund is nt subject t significant cncentratin f credit risk with respect t its custmers; hwever, all trade receivables are due frm rganizatins in the Alberta and British Clumbia hspitality industries. There were n bad debts recrded r significant past due accunts fr the three and nine mnths ended September 30, Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis

19 Interest Rate Risk and Sensitivity The Fund s indebtedness in respect f its credit facility bears interest at flating rates based n the bank s prime rate r at shrt term banker s acceptance rates. Interest payments with respect t the cnvertible unsecured subrdinated debentures are payable semi-annually based n the cupn rate f the debentures. The Fund manages its interest rate risk thrugh credit facility negtiatins and by identifying upcming credit requirements based n strategic plans. The fllwing table presents a sensitivity analysis t changes in market interest rates and their ptential annual impact n the Fund as at September 30, 2008, assuming a cmbined utstanding bank indebtedness and lng-term debt balance f $28.3 millin. (expressed in thusands f Canadian dllars) % % Increase (decrease) in interest expense $ 283 $ (283) Increase (decrease) in net earnings befre incme tax and nn-cntrlling interest (283) 283 Freign Exchange Risk In anticipatin f entering int the US market, the Fund entered int certain US dllar purchase cntracts, including a $10 millin US dllar currency frward cntract, which was settled in Octber 2008 and freign currency ptin cntracts exercised in Octber The fair value f the cntracts was recrded in the financial statements f the Fund at September 30, Fllwing the acquisitin f 19 Brwn Jug stres in Alaska, the Fund is party t freign exchange transactins as part f nrmal peratins between the Fund and its US subsidiaries. Cntractual Obligatins The table belw sets frth, as f September 30, 2008, the cntractual bligatins f the Fund due in the years indicated and relates t varius premises perating leases, lng-term debt and cnvertible unsecured subrdinated debentures. (expressed in thusands f Canadian dllars) and thereafter Operating leases $ 16,082 $ 16,232 $ 16,753 $ 17,432 $ 17,781 $ 27,766 Lng-term debt 15, Debentures , Ttal $ 31,082 $ 16,232 $ 17,253 $ 74,932 $ 17,781 $ 27,766 OFF BALANCE SHEET ARRANGEMENTS At September 30, 2008, the Fund had a $10 millin US dllar 120 day currency frward exchange cntract, which was settled in Octber 2008 and freign currency ptin cntracts, which were exercised in Octber As at Nvember 13, 2008, the Fund des nt have any ff balance sheet arrangements. CRITICAL ACCOUNTING ESTIMATES Gdwill Gdwill is nt amrtized and is assessed fr impairment at the reprting unit level. The impairment test is dne annually unless circumstances arise that wuld ptentially impair the carrying value f gdwill. Any ptential gdwill impairment is identified by cmparing the fair value f a reprting unit t its carrying value. If the fair value f the reprting unit exceeds its carrying value, gdwill is cnsidered nt t be impaired. If the carrying value f the reprting unit exceeds its fair value, ptential gdwill impairment has been identified and must be quantified by cmparing the estimated fair value f the reprting unit s Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis

20 gdwill t its carrying value. Any gdwill impairment will result in a reductin in the carrying value f gdwill n the cnslidated balance sheet and in the recgnitin f a nn-cash impairment charge in earnings. Amrtizatin Plicies and Useful Lives The Fund amrtizes prperty, equipment and intangible assets ver the estimated useful service lives f the assets. In determining the estimated useful life f these assets, significant judgment by management is required. In determining these estimates, the Fund takes int accunt industry trends and Fund-specific factrs, including changing technlgies and expectatin fr the in-service perid f these assets. The Fund assesses the estimated useful life f these assets n an annual basis t ensure they match the anticipated life f the asset frm a revenue prducing perspective. If the Fund determines that the useful life f an asset is different frm the riginal assessment, changes t amrtizatin will be applied prspectively. Purchase Price Allcatins The allcatin f the purchase price fr acquisitins invlves determining the fair values assigned t the tangible and intangible assets acquired. The Fund uses independent valuatrs t determine the fair value f the tangible assets and certain intangible assets f the acquired stres. Other intangible assets are allcated based n a calculatin f fair values by management. A discunted cash flw analysis is prepared t determine these fair values. Gdwill is calculated based n the purchase price less the fair value f the net tangible and intangible assets stated abve. Future incme taxes Determining future incme taxes invlves a number f assumptins and variables that culd reasnably change in the perid t January 1, 2011, including: the useful lives f recrded prperty, plant and equipment and intangible assets that determine the amunt f amrtizatin recrded theren; the amunt f discretinary tax deductins the Fund will claim frm its existing tax depreciatin pls, the rates f tax applicable t varius jurisdictins in which the Fund is taxable and the allcatin f taxable incme t thse jurisdictins; and the acceptance f the Fund's tax filing psitins by the taxatin authrities. Changes in these assumptins and variables, which are re-evaluated at each balance sheet date, culd result in changes in the recrded amunt f future incme taxes, and these changes culd be material. CHANGES IN ACCOUNTING POLICIES Capital Disclsures, Financial Instruments, and Inventries New accunting standards are in effect fr fiscal years beginning n r after January 1, 2008 fr capital disclsures, financial instruments and inventries. Effective January 1, 2008, the Fund has adpted Canadian Institute f Chartered Accuntants ( CICA ) Handbk sectins 1535 Capital Disclsures, 3862 Financial Instruments Disclsures, 3863 Financial Instruments Presentatin, and 3031 Inventries. While the adptin f these standards resulted in additinal financial statement presentatin and disclsures, which are included in ntes 12 and 17 and the statements f earnings, n accunting plicy changes r adjustments t amunts recrded in prir perids were necessary. Future Incme Taxes Effective September 30, 2008, the Fund has adpted CICA Emerging Issues Cmmittee Abstract #171 ( EIC-171 ) Future Incme Tax Cnsequences f Exchangeable Interests in an Incme Trust r Specified Investment Flw-Thrugh. EIC-171 states that future taxes related t temprary differences assciated with the assets and liabilities attributable t the exchangeable interests shuld nt be recrded prir t the cnversin f the exchangeable interest. The future incme taxes shuld be accunted fr as a capital transactin at the time f cnversin. The Fund has retrspectively applied EIC-171 with restatement f prir perids. The cumulative impact f the restatement resulted in an increase f $0.1 millin t unithlders equity (see nte 3 t the Financial Statements). Liqur Stres Incme Fund Third Quarter 2008 Management s Discussin and Analysis