XS Cargo Income Fund Reports 2006 Second Quarter Results

EDMONTON, ALBERTA--(CCNMatthews - Aug. 11, 2006) - XS Cargo Income Fund (TSX:XSC.UN) (the "Fund") today announced its results for the 2006 second quarter. 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 2006 second quarter, the Fund reported sales of $27.8 million; earnings before non-controlling interest of $3.1 million or $0.262 per unit outstanding; net earnings of $1.6 million or $0.262 per unit and EBITDA (1) of $4.0 million. Distributable cash (1) was $3.6 million or $0.30 per unit compared to distributions declared of $3.7 million or $0.31 per unit.

Michael McKenna, President and Chief Executive Officer of the Fund stated, "Our cross-Canada expansion continues to generate solid growth in sales, gross margin, EBITDA (1) and distributable cash (1). We expect that growth to continue as we have three new stores scheduled to open by the end of the year in addition to the 5 stores we have opened to date in 2006."

Highlights for the second quarter (2)

- Second quarter sales of $27.8 million, up 22.7% from the second quarter of 2005.

- Second quarter gross margin of $10.6 million, up 24.8% from the second quarter of 2005.

- Gross margin percentage of 38.0% compared to 37.3% for the second quarter of 2005.

- Earnings from operations of $4.1 million, up 13.9% from the second quarter of 2005.

- Four new stores were opened during the quarter in Barrie, Ontario; Port Coquitlam, British Columbia; Grande Prairie, Alberta; and Burlington, Ontario.

- Same store sales increases of 9.7% for the second quarter and 2.8% for the year-to-date, excluding three of our stores that experienced expected cannibalization from new stores opening in overlapping trading areas.

- Leases were signed for three new stores, which are scheduled to open in Halifax, Nova Scotia; St. John's, Newfoundland; and Vancouver, British Columbia in November 2006.

- Continued successful sales of two-year product replacement extended warranty plans ("PRPs"). During the nine months since implementation, $1.9 million of PRPs were sold, however only $0.4 million has been recognized as revenue to date and approximately $0.2 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 $0.30 per unit compared to distributions declared of $0.31 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. Our payout ratio (1) for the second quarter of close to 100% therefore implies solid growth in distributable cash (1) and an expected payout ratio (1) for the year in line with our target payout ratio of 85-90%.

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 32 closeout retail stores in Alberta, British Columbia, Manitoba, Saskatchewan and Ontario.

(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 calculated as described below. In the case of 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. In the case of the Vendor, earnings from operations have been derived by adding amortization expense, employee profit sharing plan contributions, interest expense, and income tax expense to net earnings (loss) 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.

(2) The Fund commenced business operations on May 17, 2005 after acquiring the business from the Vendor. For the purposes of the second quarter highlights, the results of operations of the Fund from April 1 to June 30, 2006 are compared to the unaudited combined results of operations of the Vendor and the Fund from April 1 to June 30, 2005.

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


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


                                                  June 30,  December 31,
                                                     2006          2005
                                               (unaudited)
                                                        $             $
Assets
Current
Cash and cash equivalents                               -     7,442,496
Rebate and other receivables                      306,158       501,486
Inventory                                      23,643,349    15,752,388
Deposits on inventory                           2,123,286     4,079,482
Prepaid expenses and deposits                     741,701       612,151
------------------------------------------------------------------------


                                               26,814,494    28,388,003
Deferred charges                                  218,979       124,414
Property and equipment                          3,809,833     2,730,783
Intangible assets                               7,314,000     7,910,000
Goodwill                                      101,788,426   101,788,426
------------------------------------------------------------------------


                                              139,945,732   140,941,626
------------------------------------------------------------------------
------------------------------------------------------------------------


Liabilities
Current
Bank indebtedness                               2,866,316             -
Accounts payable and accrued liabilities        4,910,379     7,094,948
Deferred revenue                                  945,168       417,152
Distributions payable to unitholders              629,681       572,438
Distributions payable to
 non-controlling interest                       1,102,247     1,000,943
------------------------------------------------------------------------


                                               10,453,791     9,085,481
Term loan                                      15,000,000             -
------------------------------------------------------------------------


                                               25,453,791     9,085,481
Term Loan                                               -    15,000,000
Deferred revenue                                  529,572       352,753
Unamortized lease inducements                     168,313       142,116
------------------------------------------------------------------------


                                               26,151,676    24,580,350
Non-controlling interest                       58,298,532    59,527,529
------------------------------------------------------------------------


                                               84,450,208    84,107,879
------------------------------------------------------------------------


Unitholders' Equity
Fund Units                                     56,131,876    56,131,876
Cumulative earnings                             7,308,776     4,983,399
Cumulative distributions declared              (7,945,128)   (4,281,528)
------------------------------------------------------------------------


                                               55,495,524    56,833,747
------------------------------------------------------------------------


                                              139,945,732   140,941,626
------------------------------------------------------------------------
------------------------------------------------------------------------





XS Cargo Income Fund
Consolidated Statements of Earnings


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


                                      Three   Period from           Six
                               Months ended  May 17, 2005  Months ended
                                    June 30,   to June 30,      June 30,
                                       2006          2005          2006
                                 (unaudited)   (unaudited)   (unaudited)


                                          $             $             $


Sales                            27,822,876    11,755,952    48,494,741


Cost of goods sold               17,255,921     7,328,286    30,325,263
------------------------------------------------------------------------


Gross margin                     10,566,955     4,427,666    18,169,478
------------------------------------------------------------------------


Expenses
Administrative and operating      6,537,933     2,663,932    12,011,072
Amortization of property
 and equipment                      212,820        60,030       387,677
Amortization of
 intangible assets                  298,000       149,000       596,000
------------------------------------------------------------------------


                                  7,048,753     2,872,962    12,994,749
------------------------------------------------------------------------


Earnings before the undernoted    3,518,202     1,554,704     5,174,729
------------------------------------------------------------------------


Other expenses
Interest on bank indebtedness        84,122             -       123,887
Interest on term loan               243,789        85,676       466,421
Foreign exchange loss                45,885         2,304        19,921
------------------------------------------------------------------------


                                    373,796        87,980       610,229
------------------------------------------------------------------------


Earnings before
 non-controlling interest         3,144,406     1,466,724     4,564,500


Non-controlling interest          1,542,574       719,428     2,239,123
------------------------------------------------------------------------


Net earnings for the period       1,601,832       747,296     2,325,377
------------------------------------------------------------------------
------------------------------------------------------------------------



Basic and diluted earnings
 per unit                             0.262         0.122         0.381
------------------------------------------------------------------------
------------------------------------------------------------------------





XS Cargo Income Fund
Consolidated Statements of Cash Flows


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


                                      Three   Period from           Six
                               Months ended  May 17, 2005  Months ended
                                    June 30,   to June 30,      June 30,
                                       2006          2005          2006
                                 (unaudited)   (unaudited)   (unaudited)


Cash provided by (used for)               $             $             $
 the following activities


Operating Activities
Net earnings for the period       1,601,832       747,296     2,325,377
Items not affecting cash:
 Non-controlling interest         1,542,574       719,428     2,239,123
 Amortization of property
  and equipment                     212,820        60,030       387,677
 Amortization of
  intangible assets                 298,000       149,000       596,000
 Unit based compensation             30,000       117,330        60,000
 Lease inducements received,
  net of amortization of
  lease inducements                  41,121        87,001        26,197
------------------------------------------------------------------------


                                  3,726,347     1,880,085     5,634,374


Net change in non-cash
 working capital                  3,849,669     4,212,164    (7,443,287)
------------------------------------------------------------------------


                                  7,576,016     6,092,249    (1,808,913)
------------------------------------------------------------------------


Financing Activities
Repayment of amounts due
 to Vendor                                -      (180,180)            -
Net proceeds from the
 issuance of Units                        -    56,396,400             -
Proceeds from bank indebtedness           -             -     6,043,348
Repayment of bank indebtedness   (3,177,032)            -    (3,177,032)
Proceeds from term loan                   -    15,000,000             -
Distributions paid on
 Fund Units                      (1,889,044)            -    (3,606,356)
Distributions paid to
 non-controlling interest        (1,773,577)            -    (3,426,816)
------------------------------------------------------------------------


                                 (6,839,653)   71,216,220    (4,166,856)
------------------------------------------------------------------------


Investing Activities
Purchases of property
 and equipment                     (736,363)      (25,281)   (1,466,727)
Business acquisition - net
 of cash acquired                         -   (71,332,305)            -
------------------------------------------------------------------------


                                   (736,363)  (71,357,586)   (1,466,727)
------------------------------------------------------------------------


Increase (decrease) in cash               -     5,950,883    (7,442,496)


Cash, beginning of period                 -             -     7,442,496
------------------------------------------------------------------------


Cash, end of period                       -     5,950,883             -
------------------------------------------------------------------------
------------------------------------------------------------------------



Supplementary cash flow information


Interest paid                       327,911        85,676       590,308