Menu Foods Income Fund
TSX : MEW.UN

Menu Foods Income Fund

November 14, 2007 17:01 ET

Menu Foods Income Fund Announces 2007 Third Quarter Results

TORONTO, ONTARIO--(Marketwire - Nov. 14, 2007) -

Attention Business/Financial Editors:

NOT FOR RELEASE OVER US NEWSWIRE SERVICES

Menu Foods Income Fund (TSX:MEW.UN) announced its financial results for the third quarter ended September 30, 2007.

A conference call to review these results will take place tomorrow on Thursday, November 15, 2007 at 8:30 a.m. EST (Toronto time). The conference call will be chaired by Paul Henderson, Menu's President and Chief Executive Officer. Paul will be joined on the call by Mark Wiens, Menu's Executive Vice-President and Chief Financial Officer.

To access the conference call in real time, please call 416-850-9150 or 1-866-809-4939. A replay will be available from approximately one hour after the end of the conference call until November 28, 2007 by dialing 416-915-1035 or 1-866-245-6755, using passcode 933026 followed by the number sign. A live audio webcast of the conference call is also available, it can be accessed by entering http://events.onlinebroadcasting.com/menufoods/111507/index.php on an Internet browser. A replay of the webcast will be available for one year, it can be accessed by entering http://events.onlinebroadcasting.com/menufoods/111507/index.php on an Internet browser.

Management's Discussion and Analysis of Financial

Results For the quarter ended September 30, 2007

MESSAGE to UNITHOLDERS

Below we present, to unitholders of Menu Foods Income Fund, our report for the third quarter ended September 30, 2007. The table below reports selected highlights of the quarter's and the year-to-date's results:



Quarter ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
($ millions) ($ millions) ($ millions) ($ millions)

Sales 78.1 90.1 189.8 268.3
(Loss) income before
income taxes and
undernoted (1.8) 3.0 (7.4) 9.5
Recall expenses 11.1 - 52.1 -
Restructuring and
write-off of customer
relationship 15.9 - 15.9 -
(Loss) income
before non-
controlling interest (29.3) 2.1 (61.4) 7.4
EBITDA (excluding
recall expenses and
restructuring) 4.8 10.4 14.4 29.4


As previously advised, the recalls announced late in the first quarter and early in the second quarter of the year continued to affect the performance of the Fund during the third quarter of 2007. On a positive note, many of Menu's customers had resumed shipments of cuts and gravy formatted product by late in the second quarter or early in the third quarter of 2007. This was evident in the fact that average weekly sales in the third quarter of 2007 were approximately 79% greater than in the second quarter. On the negative side, the Fund has been informed that customers whose volume represented approximately 37% of sales in 2006 will no longer be purchasing these products from Menu. The effects of this lost business will be felt over time. Some customers, whose 2006 volumes accounted for almost 14% of sales, have already stopped doing business with Menu. Further business, which accounted for approximately 11% of volume in 2006, ceased on October 9, 2007. The remaining 12% will be lost over the remainder of 2007 and into 2008.

As expected, the activity during the third quarter was a firm indication that our customers were refilling their pipelines, and while we do not expect sales to continue at this level the rebuilding of inventory by our customers is the next logical step in re-establishing our business. The final step rests with the consumer and the extent to which they return to normal purchasing patterns. This will become clearer during the final quarter of the year and into the first quarter of 2008. Average weekly volume (expressed in cases of 24 cans or pouches) for the four weeks ended October 27, 2007 continued at 82% of the average weekly volume for the third quarter of 2007.

The recalls affected the "cuts and gravy" format which accounted for approximately 48% of sales in 2006. Many customers suspended shipments of most "cuts and gravy" products while the recall was in effect with the result that this format accounted for only 6.3% of volume during the second quarter of 2007. One of the customers who left Menu purchased only cuts and gravy. With this in mind, we are encouraged to report that this format had grown to 27.6% in the third quarter. General cost increases, diminished operating performance as a consequence of the loss of volumes and other variables have combined to reduce gross profit as a percentage of sales from 15.0% in 2006 to 9.7% in 2007. This is an improvement of 1.7% from the second quarter of 2007.

Late in the third quarter and early in the fourth quarter of 2007, the Canadian dollar strengthened significantly relative to the United States dollar. Although Menu has operations in both Canada and the United States, it generates a disproportionate amount of its cash in United States dollars. While the strengthening of the Canadian dollar has negatively impacted Menu's earnings since going public in 2002, this recent escalation, if maintained, will have a very significant negative effect on earnings in the fourth quarter of 2007 and into 2008.

On October 10, 2007 the Fund announced the completion of the previously disclosed sale of its production facility in North Sioux City, South Dakota to Mars Incorporated ("Mars"). The proceeds of sale will be used to reduce outstanding bank indebtedness. The sale of the South Dakota facility was a necessary step in right-sizing Menu's operations in line with ongoing business. In this same vein, also on October 10, 2007 the Fund announced a restructuring of its operations comprising a 10% to 15% reduction in its workforce, the write-off of certain pre-recall packaging and finished goods inventory, the write-off of a previously capitalized customer relationship, the write-down of certain take-or-pay receivables and the write-down of idle assets. In aggregate, these initiatives, together with the previously announced release of contractual obligations with Mars, will result in a net accounting loss of approximately $0.2 million, while contributing almost $19 million in cash.

It is unfortunate that a fraud committed half-way around the world has had such a profound impact on people who have done nothing wrong. I want to take this opportunity to thank the 14% of our workforce who have joined Mars as well as the 10% to 15% who will be affected by the restructuring for their hard work on Menu's behalf over the years. I truly wish we could have had a different outcome, but these actions have proven to be unavoidable, since without them Menu would not be positioned to address the challenges that lie ahead.

Also on October 10, 2007, the Fund announced that it has further revised its estimate of recall costs from $45 million to $55 million. This adjustment arises principally because the volume of customer returns and associated costs are now estimated to be much greater than originally expected.

On October 19, 2007 the Fund concluded an agreement with its bank and the holders of its senior secured notes, which modify the terms and conditions of existing lending agreements to enable the Fund to manage through these difficult times. We appreciate the continued support of our Lenders and the confidence they are showing in Menu's management team and business.

The Fund was one of at least 10 pet food manufacturers in North America who purchased vegetable proteins that had been deliberately contaminated with melamine and/or related compounds by Chinese manufacturers. This fraud on manufacturers and consumers was unlike anything seen before in the pet or human food businesses. As pet owners ourselves, we have been saddened by the events of the last seven months. Menu has been working with government, other industry members, pet food experts and customers to ensure that pet food remains safe and healthy.

Throughout the past few months, the Fund has been buoyed by the support of its many customers and suppliers. We value the relationships that have grown over Menu's 36 year history and thoroughly appreciate the support during these difficult times. While our focus has always been on quality we wish to once again reaffirm our commitment to producing quality products and emphasize that this remains our number one priority going forward.

We look forward to reporting our progress next quarter.



Paul K. Henderson
President and Chief Executive Officer
Menu Foods GenPar Limited Administrator of Menu Foods Income Fund


Management's Discussion and Analysis of Financial Results

(For the quarter ended September 30, 2007)

Presentation of Financial Information

The following discussion and analysis of the financial results of Menu Foods Income Fund (the "Fund") is dated as of November 14, 2007 and is supplementary to and should be read in conjunction with the unaudited consolidated financial statements for the quarters ended September 30, 2007 and 2006.

Menu Foods Income Fund (the "Fund") is the indirect owner of Menu Foods Limited ("Menu"), the leading North American private label/contract manufacturer of wet pet food products. The Fund's results include those of Menu, its subsidiaries, affiliates and the partnerships which conduct its day-to-day business.

Where applicable, financial information contained herein is prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and is reported in Canadian dollars.

Certain statements in this Management's Discussion and Analysis of Financial Results are "forward-looking statements", which reflect management's expectations regarding the Fund and Menu's future growth, results of operations, performance, business prospects and opportunities. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. Many factors could cause results to differ materially from the results discussed in the forward-looking statements, such as risks related to issues associated with the product recall, including litigation related matters; key customer performance; dependence on key suppliers; economic conditions; competition; regulatory matters/changes; foreign exchange rates and interest rates, among others. Although the forward-looking statements are based on what management believes to be reasonable assumptions, the Fund and Menu cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this report, and neither the Fund nor Menu assumes any obligation to update or revise them to reflect new events or circumstances.

Overall Performance and Results of Operations

The following table highlights selected comparative results (all figures, except per unit amounts, expressed in thousands of Canadian dollars)



For the For the nine
quarter ended months ended
September 30, September 30,
2007 2006 2007 2006

$ $ $ $
Sales 78,050 90,083 189,800 268,263
Cost of sales 70,472 76,582 170,680 230,624
-----------------------------------
Gross profit 7,578 13,501 19,120 37,639
Selling, general and administrative
expenses 5,030 7,024 16,957 19,944
-----------------------------------
Income before the under noted 2,548 6,477 2,163 17,695
Product recall 11,086 - 52,115 -
Restructuring 15,889 - 15,889 -
Financial expenses 4,393 3,469 9,528 8,239
-----------------------------------
Income (loss) before income taxes and
non-controlling interest (28,820) 3,008 (75,369) 9,456
-----------------------------------
Current income taxes 523 84 329 578
Future income taxes (42) 867 (14,337) 1,497
-----------------------------------
Total income taxes 481 951 (14,008) 2,075
-----------------------------------
Income (loss) before non-controlling
interest (29,301) 2,057 (61,361) 7,381
Non-controlling interest of Class B
Exchangeable Units (10,006) 711 (20,955) 2,760
-----------------------------------
Net (loss) income for the period (19,295) 1,346 (40,406) 4,621
-----------------------------------
-----------------------------------

Basic net (loss) income per Trust Unit (1.011) 0.071 (2.117) 0.253
Diluted net (loss) income per Unit (1.011) 0.071 (2.117) 0.253

Diluted distributable cash per Trust
Unit and Class B Unit 0.3228 0.4469 (0.0610) 0.6710
Basic weighted average number of
Trust Units outstanding (000's) 19,087 18,921 19,085 18,275

Diluted weighted average number
of Units outstanding (000's) 28,984 29,081 28,982 29,049

Average US/Cdn exchange rate per
Bank of Canada 0.9571 0.8915 0.9050 0.8828


Operating Results for the Quarter Ended September 30, 2007

The recalls announced late in the first quarter and early in the second quarter of 2007 continued to affect the performance of the Fund during the third quarter of 2007. As previously reported, many of Menu's customers had resumed shipments of cuts and gravy formatted product by late in the second quarter or early in the third quarter of 2007. This is evident in the fact that average weekly sales in the third quarter of 2007 were approximately 79% greater than in the second quarter. However, as previously reported, the Fund has been advised that customers whose volume represented approximately 37% of sales in 2006 will no longer be purchasing these products from Menu. The effects of this lost business will be felt over time, with almost 14% impacting the first three quarters of 2007, approximately 11% impacting the fourth quarter of 2007 and the remainder being lost over the next nine months. These developments should be considered when evaluating the Fund's performance during the third quarter of 2007 and assessing future performance.

Sales for the quarter ended September 30, 2007, were $78.1 million, down 13.4% or $12.0 million compared to the same quarter last year. This decrease is attributable to:

1. a 4.4% decrease in can volume resulting in a sales decrease of $2.1 million. Specifically, can volume of cuts and gravy style products was down 42.6% compared to the third quarter of 2006, while volume of loaf product was up by 8.5% over the same period in 2006. Together these result in a sales decrease of $2.1 million;

2. a 52.4% decrease in pouch volume resulting in a sales decrease of $10.0 million. Pouch product is almost exclusively in the cuts and gravy format;

3. the strengthening of the Canadian dollar relative to the United States dollar, which had the effect of reducing sales by $3.8 million relative to the third quarter of 2006; and

4. take-or-pay agreements in the third quarter of 2006, which did not effect 2007, had the effect of decreasing sales by $0.3 million. These decreases in sales were partially offset by:

5. the effect of pricing adjustments to pass through cost increases to Menu's contract manufacturing customers and the price increase initiated on aluminum can sales to Menu's United States private-label customers, together with changes to sales mix and other variables, had the effect of increasing sales by $4.2 million;

Overall, volume was down 16.3% compared to the quarter ended September 30, 2006. Approximately 93% of this decrease can be attributed to customers who had previously advised the Fund that they would no longer be purchasing products from Menu. Can volume, which represented 85.9% of Menu's volume in the third quarter of 2007 (75.2% in 2006), contracted by 4.4% (equating to a decrease in total volume of 3.3%). During the third quarter of 2007, case sales of the pouch product, which represented 14.1% of total volume (24.8% in 2006), decreased by 52.4% (equating to a decrease in total volume of 13.0%) compared to the third quarter of 2006.

The cuts and gravy format, which had accounted for only 6.3% of total volume in the second quarter of 2007, grew to 27.6% of total volume in the third quarter (44.5% in 2006). Allowing for the customers who had previously advised the Fund that they would no longer be purchasing products from Menu, based upon 2006 volumes, it was expected that 33.3% of total volume would be cuts and gravy format. This shortfall is in large part due to the fact that two of Menu's top three private-label customers have not yet resumed shipments of all cuts and gravy products and are not expected to do so until the first quarter of 2008.

Gross profit decreased by $5.9 million (or 43.9%) for the quarter ended September 30, 2007, compared to the prior year. This decrease is attributable to:

1. Effect of Change in Sales Volume. As previously noted, total volume for the third quarter decreased by 16.3%. This change in sales volume decreased gross profit by $2.6 million;

2. Price and Cost Increases/Adjustments. In February 2007, Menu again followed a leading national brand manufacturer and announced a price increase on aluminum canned products sold to its United States private-label customers. While costs continue to rise, this price increase, which was effective by late in the second quarter of 2007, should enable Menu to recover some of the cost increases experienced since the last price increase on the sale of aluminum cans to United States private-label customers.

On a comparative basis to the same quarter in 2006, the increase in costs of certain inputs to production, including raw and packaging materials and labour and benefits, have lead to higher cost of sales. More significantly, the 50.1% decline in volume during the second quarter of 2007 significantly increased the cost of manufacturing as production-runs were shortened which resulted in the factory overhead associated with the Fund's four production facilities being allocated over a reduced level of production. As a consequence of the lower overhead absorption, the cost of the Fund's inventory on hand at the end of the second quarter increased, which increased cost of sales during the third quarter, as that inventory was sold. This trend continued into the third quarter given the 16.3% decline in volume that is expected to adversely impact the fourth quarter of the year as inventory on hand at the end of the third quarter is sold. In general, the overhead associated with each case produced has increased as production has decreased. Going forward, the costs of production will be higher as the Fund has lost some of the benefits associated with higher capacity utilization. These increased costs and other variables, more than offset the selling price increases referred to above, as well as selling price increases to contract manufacturing customers and decreased gross profit by $3.8 million.

3. Take-or-Pay Agreement. In 2006, the quarter's sales included an accrual under a take-or-pay agreement having the effect of decreasing comparative gross profit by $0.3 million;

4. Foreign Exchange Effect on Sales. The strengthening of the Canadian dollar relative to the United States dollar during the quarter had the effect of reducing sales by approximately $3.8 million and that translated into a reduction in gross profit of $0.5 million for the quarter ended September 30, 2007; and

5. Decrease in Amortization. The amortization of capital projects completed in the past year was more than offset by the effect of fully amortized assets and the stronger Canadian dollar, resulting in a decrease in the amortization associated with the cost of goods sold of $1.3 million versus the third quarter of 2006.

Selling, general and administrative expenses for the quarter ended September 30, 2007 decreased by $2.0 million compared to the prior year. Since the product recall has such a significant effect on the overall operating performance of the Fund, performance bonuses will not be paid in 2007, which results in a bonus expense that is $0.9 million less than in the quarter ended September 30, 2006. Foreign exchange gains on the United States dollar exposure in working capital in Menu's Canadian operations increased by about $0.7 million compared to last year. Amortization was $0.3 million less than in 2006, largely as a result of fully depreciated assets during the period exceeding newly acquired assets being put into service and a stronger Canadian dollar.

Management had initially estimated that the total costs of the recall would approximate $45 million. This estimate has been updated, based upon more current information, to $55 million, with the result that a further $11.1 million (including $1.1 million in period costs) was expensed during the third quarter. This increase reflects a greater quantity of recalled product being returned than originally anticipated and the higher costs incurred affecting the recall itself.

In addition, as a consequence of the recall the Fund has had to restructure to better align costs with its ongoing business operations. The restructuring initiatives will take several forms and under Canadian generally accepted accounting principles, depending upon their nature, must be recognized either in the third quarter of 2007 or over future periods. In total, management estimates that the net restructuring expense will amount to approximately $0.2 million and the cash generated will amount to about $19.0 million (net of Lenders' fees of $1.4 million). Costs associated with the write-off or write-down of: redundant inventory, the customer relationship previously capitalized, take-or-pay receivables previously accrued and idle assets, together with severance and other restructuring related costs aggregate to approximately $15.9 million and have been reflected in the third quarter of 2007. The gains on the previously announced sales of the South Dakota production facility and certain other assets to Mars, Incorporated ("Mars") together with the settlement of certain other contractual obligations with Mars will amount to approximately $20.6 million and will be recognized in the fourth quarter of 2007. Other costs associated with the restructuring, amounting to approximately $4.9 million will be recognized either in the fourth quarter of 2007 or subsequently, depending upon their nature.

In order to have any meaningful discussion of EBITDA it is necessary to remove the impacts of the recall and the restructuring as described above. Adjusting for the $11.1 million in recall related costs and $15.9 million in restructuring costs, the foregoing resulted in an adjusted EBITDA (See Note A) of $4.8 million for the quarter ended September 30, 2007, a decrease of $5.6 million (or 53.6%) compared to the same period in 2006. The strengthening of the Canadian dollar, relative to the United States dollar, has decreased sales, gross margin, selling, general and administrative expenses, amortization, interest and EBITDA. Menu estimates that each change of $0.01 in the cost of the Canadian dollar changes EBITDA by approximately $0.125 million and Distributable Cash (see Note A) by approximately $0.95 million, on a quarterly basis.

Menu estimates that the strengthening of the Canadian dollar during the third quarter of 2007 versus the same period in 2006 decreased EBITDA by approximately $0.8 million and Distributable Cash by approximately $0.6 million.

Amortization (which is included in cost of sales and SG&A expense) in the third quarter of 2007 was $1.6 million lower than in 2006. This decrease is directly attributable to fully amortized assets and the effects of the strengthening of the Canadian dollar relative to the United States dollar offset by the additional amortization in 2007 on the $3.9 million of capital expenditures made during the twelve-month period ended September 30, 2007 together with the full-quarter amortization of the $2.2 million of capital expenditures made during the quarter ended September 30, 2006.

Financial expenses were $0.9 million higher during the quarter ended September 30, 2007, than in the second quarter of 2006, reflecting both the higher interest rates and the higher amounts borrowed this year.

The Fund operates using a number of different legal structures (e.g. partnerships, trusts, corporations etc.) in a number of jurisdictions. Each of these structures and jurisdictions is subject to income tax at different rates. The effective tax rate can vary from quarter-to-quarter, depending upon the taxing jurisdiction and the legal structure in which the income is earned.

Loss before non-controlling interest of Class B Exchangeable Units ("Class B Units") for the quarter ended September 30, 2007, was $29.3 million, compared to income of $2.1 million for the quarter ended September 30, 2006.

Operating Results for the Nine Months Ended September 30, 2007

As previously reported, on March 16, 2007 the Fund announced the recall of a portion of the dog and cat food it manufactured between December 3, 2006 and March 6, 2007. Furthermore, to ensure that consumers were adequately protected, on March 24, 2007 Menu asked its customers to withdraw all recalled pet food, regardless of the dates, thereby minimizing the risk that any recalled product might remain on the retailers' shelves. Menu subsequently expanded this recall to include additional dates and products, as more information became available. The various recalls initiated by the Fund primarily related to the "cuts and gravy" style pet food in cans and pouches manufactured and sold under private-label and contract-manufactured for some national brands.

While most of the expected costs associated with the recall were expensed by the Fund during the first quarter of 2007, since the recall took place so close to quarter-end, its impact on Menu's sales and operations to March 31, 2007 were minimized. By contrast, fewer recall related expenses arose in the second quarter of 2007, but significant impacts in terms of lost sales and higher operating costs were experienced as the Fund suspended shipments of most "cuts and gravy" products while the recall was in effect. To put things in context, the "cuts and gravy" style product, sold in cans and pouches, accounted for approximately 48% of the Fund's business in 2006. In addition, several of the Fund's customers, including its two largest private-label customers, suspended all purchases from Menu, regardless of format, until such time as the recall of their product was complete.

By the third quarter of 2007 the Fund had resumed shipping to most of its private-label customers (including its two largest private-label customers). As a result of the resumption of sales to these customers, weekly volume (expressed in cases of 24 cans or pouches) during the third quarter was about 79% more than the average weekly volume of the second quarter of 2007. The Fund recognizes that much of this demand is attributable to the need to refill the pipeline for those customers who have been without product for several months, and expects that once this process is complete, the level of sales will decline to a level that will reflect consumer's ongoing demand for the product. This was evident during the first period of the fourth quarter, when weekly sales averaged about 82% of the average weekly volume in the third quarter of 2007 (but still about 47% more than the second quarter of 2007). In addition, the Fund revisited the overall expected costs associated with the recall and increased its estimate by $10 million which, together with period costs of $1.1 million in period costs paid, aggregated to an additional expense of $11.1 million during the third quarter. This increase primarily reflects a greater quantity of recalled product being returned than originally anticipated and the higher costs incurred affecting the recall itself.

Furthermore, as a consequence of the recalls and the resulting loss of customers, the Fund has had to restructure its operations to better align them with its ongoing business. Accordingly, $15.9 million in restructuring and related charges were expensed during the third quarter of 2007. This process will continue in the fourth quarter of the year and possibly into 2008. Management estimates that after allowing for restructuring gains to be realized and recorded in the fourth quarter of 2007 the resultant net restructuring expense will be approximately $0.2 million.

The various recalls initiated by the Fund have had a significant impact on the Fund's results for the nine months ended September 30, 2007. In order to draw meaningful conclusions with respect to the Fund's performance in the first nine months of 2007, it is important to isolate the effects of the recalls and restructuring from the ongoing business.



The following table further evaluates the results noted above:

For the nine
2007 months ended
September 30,
Excluding Recall Costs 2007 2006
Recall and and
Restructuring Restructuring
Costs
$ $ $ $
Sales 204,120 (14,320) 189,800 268,263
Cost of sales 182,115 (11,435) 170,680 230,624
-----------------------------------------------
Gross profit 22,005 (2,885) 19,120 37,639
Selling, general and
administrative expenses 16,957 - 16,957 19,944
-----------------------------------------------
Income (loss) before the
under noted 5,048 (2,885) 2,163 17,695
Product recall expenses - 52,115 52,115 -
Restructuring expenses - 15,889 15,889
Financial expenses 9,528 - 9,528 8,239
-----------------------------------------------
(Loss) income before
income taxes and non
controlling interest (4,480) (70,889) (75,369) 9,456
-----------------------------------------------


While the specific sales lost as a result of the recall may never be quantified their impact on the Fund's business has been significant. Anecdotally, on a comparative basis, from March 16 to March 31 case sales, adjusted for recall returns, were down by 48.5% from the prior year. This trend continued through the second quarter of 2007, with sales volume down 50.1% from the same period in 2006. Sales of the "cuts and gravy" style of pet food in cans and pouches (the style primarily impacted by the recalls) accounted for approximately 48% of Menu's volume in 2006, so these results are to be expected. Sales in the third quarter of 2007 were better than in the second quarter as customers refilled their pipelines with products that had not been purchased for several months, though as a result of the loss of certain customers (as previously reported) volumes for the third quarter of 2007 were 16.3% down from the same period in 2006.

Sales for the nine months ended September 30, 2007, were $189.8 million, down 29.3% or $78.5 million compared to the same period last year. This decrease is attributable to:

1. a 21.1% decrease in can volume resulting in a sales decrease of $44.0 million primarily due to the recall. Upon announcing the recall, Menu and its customers suspended the sale and purchase, respectively, of the recalled products (primarily cuts and gravy products). This action was taken to minimize the risk of recalled products being confused with good products, and inadvertently being left on the retailer's shelves. These steps, together with the effect of lost customers, were the main reason for the decline in can sales;

2. a 57.9% decrease in pouch volume resulting in a sales decrease of $29.7 million. Similar to cans, Menu suspended the sales of most pouches at the time of the recall. With the resumption of pouch sales occurring late June, 2007, pouch sales were minimal during the quarter ended June 30, 2007 but recovered to account for 14.1% of total volume during the third quarter. The effects of these steps, together with lost customers, were the main reasons for the decline in pouch sales;

3. as a further consequence of the product recall $14.3 million in sales returns were received or accrued during the quarter ended March 31, 2007;

4. the strengthening of the Canadian dollar relative to the United States dollar, which had the effect of reducing sales by $3.1 million relative to the first nine months of 2006.

5. take-or-pay agreements during 2006, which did not affect 2007, had the effect of decreasing sales by $1.0 million. These decreased sales were partially offset by:

6 the impact of the price increases since the end of the first quarter of 2006 and the effect of pricing adjustments to pass through cost increases to Menu's contract manufacturing customers, together with changes to sales mix and other variables, had the effect of increasing sales by $13.6 million.

Overall, excluding actual returns arising from the product recall, volume (expressed in cases of 24 cans or pouches) was down 29.0% compared to the nine months ended September, 2006. Can volume, which represented 85.8% of Menu's volume in the first nine months of 2007 (76.4% in 2006), contracted by 21.1% (equating to a decrease in total volume of 15.9%). Virtually all customers who purchased the cuts and gravy style of products from Menu experienced decreased sales, which is directly attributable to the recall. However, the decline in sales is also reflective of the loss of customers, who left Menu as a consequence of the recall.

In addition to the decrease in case sales of canned wet pet food as described above, sales of Menu's pouch product, excluding actual returns arising from the product recall, also decreased over the same period in the prior year, since almost all customers stopped purchasing this product during the second quarter of 2007. During the first nine months of 2007, case sales of the pouch product, which represented 14.2% of total volume (23.6% in 2006), decreased by 57.9% (equating to a decrease in total volume of 13.1%) compared to the first nine months of 2006. As with cans, this decline is directly attributable to the recall and to the resulting loss of customers.

Gross profit decreased by $18.5 million (or 49.2%) for the nine months ended September 30, 2007, compared to the prior year. This decrease is attributable to:

1. Effect of Change in Sales Volume. As previously noted, excluding actual returns arising from the product recall, total volume for the first nine months of the year decreased by 29.0%. This change in sales volume decreased gross profit by $11.0 million.

2. Product Recall Impacts. As noted above, due to the product recall, $14.3 million in sales returns were received or accrued during the quarter ended March 31, 2007. The gross profit associated with these returns amounted to $2.9 million.

3. Price and Cost Increases/Adjustments. In January 2006 and again in the second quarter of 2006, Menu followed a leading national brand manufacturer and announced a price increase on canned and pouch products, respectively, sold to its United States private- label customers. These increases were effective from the beginning of the second and third quarters of 2006, respectively. In February 2007, Menu again followed a leading national brand manufacturer and announced a price increase on aluminum canned products sold to its United States private-label customers. While costs continue to rise, this price increase, which was effective in the second quarter of 2007, should enable Menu to recover some of the cost increases experienced since the last price increase on the sale of aluminum cans to United States private-label customers.

On a comparative basis to the same period in 2006, the increase in costs of certain inputs to production, including raw and packaging materials and labour and benefits, have lead to higher cost of sales. In addition, the 29.0% decline in volume during the first three quarters of 2007 significantly increased the cost of manufacturing as production-runs were shortened which resulted in the factory overhead associated with the Fund's four production facilities being allocated over a reduced level of production. As a consequence of the lower overhead absorption, the cost of the Fund's inventory increased, which increased cost of sales in the second and third quarters, as some of that inventory was sold. The price increases, referred to above, together with selling price increases to contract manufacturing customers combined to partially offset the increased costs resulting in decreased gross profit of $5.4 million.

4. Take-or-Pay Agreement. In 2006, the sales for the nine months ended September 30 included an accrual under a take-or-pay agreement having the effect of decreasing comparative gross profit by $1.0 million;

5. Foreign Exchange Effect on Sales. The strengthening of the Canadian dollar relative to the United States dollar during the nine months had the effect of reducing sales by approximately $3.1 million and that translated into a reduction in gross profit of $0.4 million for the nine months ended September 30, 2007; and

6. Decrease in Amortization. The amortization of capital projects completed in the past year was more than offset by the effect of fully-amortized assets and the stronger Canadian dollar, resulting in a $2.2 million decrease in the amortization associated with the cost of goods sold versus the nine months ended September 30, 2006

Selling, general and administrative expenses for the nine months ended September 30, 2007 decreased by $3.0 million compared to the prior year. Since the product recall has such a significant effect on the overall operating performance of the Fund, performance bonuses will not be paid in 2007, which results in a bonus expense that is $2.5 million less than in the nine months ended September 30, 2006. Foreign exchange gains on the United States dollar exposure in working capital in Menu's Canadian operations increased by almost $1.5 million compared to last year. The balance of the change is attributable to higher administrative costs incurred as a consequence of the recall, which more than offset the effect of the favorable impact that foreign exchange had on Menu's selling, general and administrative costs incurred in the United States.

Management estimates that the total costs associated with the recall will approximate $55 million. This expense principally comprises product collection, write-off and disposal costs of $46.5 million, the lost margin on returned product of $2.9 million discussed above, $2.4 million to establish and operate a call centre to respond to consumer concerns and $3.2 million in professional and associated fees necessary to manage through this difficult process. All of these costs have been reflected in the results for the nine months ended September 30, 2007.

Furthermore, as a consequence of the recalls and the resulting loss of customers, the Fund has had to restructure its operations to better align them with its ongoing business. Accordingly, $15.9 million in restructuring and related charges were expensed during the third quarter of 2007.

In order to have any meaningful discussion of EBITDA it is necessary to remove the impacts of the recall and restructuring as described above. Adjusting for the $55 million in recall related costs and the $15.9 million in restructuring related costs, the foregoing resulted in an adjusted EBITDA (See Note A) of $14.4 million for the nine months ended September 30, 2007, a decrease of $14.9 million (or 50.8%) compared to the same period in 2006. The strengthening of the Canadian dollar, relative to the United States dollar, has decreased sales, gross margin, selling, general and administrative expenses, amortization, interest and EBITDA. Menu estimates that each change of $0.01 in the cost of the Canadian dollar changes EBITDA by approximately $0.5 million and Distributable Cash (see Note A) by approximately $0.38 million, on an annual basis.

Menu estimates that the strengthening of the Canadian dollar during the first nine months of 2007 versus the same period in 2006 decreased EBITDA by approximately $0.8 million and Distributable Cash by approximately $0.6 million.

Amortization (which is included in cost of sales and SG&A expense) in the first nine months of 2007 was $2.3 million less than in 2006. This decrease is directly attributable to fully-amortized assets and the effects of the strengthening of the Canadian dollar relative to the United States dollar offset by the additional amortization in 2007 on the $3.9 million of capital expenditures made during the twelve-month period ended September 30, 2007 together with the full period amortization of the $4.2 million of capital expenditures made during the nine months ended September 30, 2006.

Financial expenses were $1.3 million greater during the nine months ended September 30, 2007, than in the same period in 2006. The amendments to the Agreements with the Fund's Lenders were such that under Canadian generally accepted accounting principles, for accounting purposes, they resulted in a deemed settlement of the original senior secured notes facility. As a consequence, it was necessary to write-off $1.1 million in costs associated with the establishment of the original facility. This write-off, together with higher average borrowings and higher interest rates during much of 2007 compared to 2006, offset by favourable foreign exchange rates accounts for the increase.

The Fund operates using a number of different legal structures (e.g. partnerships, trusts, corporations etc.) in a number of jurisdictions. Each of these structures and jurisdictions is subject to income tax at different rates. The effective tax rate can vary from quarter-to-quarter, depending upon the taxing jurisdiction and the legal structure in which the income is earned.

Loss before non-controlling interest of Class B Exchangeable Units ("Class B Units") for the nine months ended September 30, 2007, was $61.4 million, compared to income of $7.4 million for the nine months ended September 30, 2006.

Liquidity

During the nine months ended September 30, 2007, the Fund used cash flow in operations of $12.0 million, which was increased by a further $25.4 million as a result of changes in non-cash working capital items. The increase in non-cash working capital items related primarily to a $4.2 million decrease in accounts receivable, a $20.8 million increase in inventories and a $8.9 million decrease in accounts payable and accrued liabilities. These changes can largely be attributed to the recall announced on March 16, 2007 and the restructuring reserves established during the third quarter. The decrease in accounts receivable reflects a decrease in sales for the period together with the accrual of estimated sales returns of recalled product. Overall, inventory has declined. However, given the significant amount of inventory written-down as a consequence of both the recall and the restructuring it has been necessary to spend significant amounts to rebuild inventory to service ongoing business. This accounts for the increase in inventory from a working capital perspective. The decrease in accounts payable and accrued liabilities reflects the payment of other expenses associated with the restructuring and the recall.

No distributions were declared during the first nine months of 2007.

On May 15, 2007 the Fund reached agreement with its Lenders to modify the terms of its existing credit facilities. This arrangement modified the terms governing the US$30 million bank and US$85 million senior secured notes facilities and increased the bank facility by US$20 million. On October 19, 2007 the Fund reached agreement with its Lenders to further modify the terms of its credit facilities given changes in estimated recall costs and the restructuring of the Fund's operations. The available bank facility reduced by US$2.5 million on September 30, 2007 and by an additional US$2.5 million on October 19, 2007. The Fund had drawn or committed US$46,020 ($45,743) of the bank facility on September 30, 2007. Cash flow from operations, together with the US$17 million representing the balance of the proceeds from the sale of the South Dakota facility and the termination of certain supply agreements, the remaining unutilized bank facilities and working capital management, is expected to be sufficient to fund Menu's normal ongoing operating requirements and maintenance capital expenditures.

Various legal actions and investigations have been commenced against the Fund as a consequence of the product recall. It is possible that additional actions or investigations may arise in the future. The Fund may be required to expend significant amounts and devote considerable management time with regard to these matters. It is not possible to predict the amount of such expenses, the resolution of any claims or investigations, or the extent to which these items will be paid by insurance. Furthermore, if the actual cost of the recall and restructuring significantly exceed management's estimates of $55 million and $0.2 million respectively or if the replenishments following the re-launches for any significant customers and/or the degree to which business is re-established are unexpectedly low, the Fund may need to obtain additional credit facilities, although there can be no assurances that such facilities would be available.

Capital Resources

During the nine months ended September 30, 2007, Menu spent $3.0 million on property, plant and equipment. Capital expenditures of a maintenance nature, which totaled $1.1 million for the first three quarters of 2007, were financed from the cash flow of the business. These maintenance capital expenditures were over and above the $9.5 million (2006 - $10.9 million) for labour and parts expended by Menu for the ongoing repairs and maintenance of its plants that have been expensed as part of cost of sales.



Outstanding Units
The following table highlights the number of units outstanding:

Class B
Trust Units Exchangeable
Units

December 31, 2004 16,140,236 12,631,915
Conversion of Class B Units during the year 1,498,260 (1,498,260)
Options exercised during the year 127,663 -
-------------------------------
December 31, 2005 17,766,159 11,133,655
Conversion of Class B Units during the year 1,236,431 (1,236,431)
Options exercised during the year 74,683 -
-------------------------------
December 31, 2006 19,077,273 9,897,224
Options exercised during the period 9,746 -
-------------------------------
September 30, 2007 19,087,019 9,897,224
-------------------------------
-------------------------------


During the year ended December 31, 2006, 959,296 unit options with an exercise price of $4.56 were granted to 41 employees; 6,000 unit options with an exercise price of $5.25 were granted to one employee; 21,000 unit options with an exercise price of $5.00 were granted to one employee; 21,000 unit options with an exercise price of $6.20 were granted to one employee; 6,000 unit options with an exercise price of $6.55 were granted to one employee; and 57,000 unit options with an exercise price of $4.56 were forfeited by three employees. These options, of which 238,148 will vest after 36 months, with the balance vesting in equal annual amounts over three years and will expire 39 months after the date they were granted. On May 11, 2006 the option plan under which these options were granted, which authorizes 2,815,000 units, received Unitholder approval at the Annual and Special Meeting of Unitholders.

During the quarter ended March 31, 2007, 390,156 unit options with an exercise price of $7.34 were granted to 47 employees and during the quarter ended September 30, 2007, 18,390 unit options with an exercise price of $3.00 were granted to one employee. These options vest in equal annual amounts over three years and will expire 39 months after the day they were granted. During the quarter ended March 31, 2007, 9,746 options with an exercise price of $4.56 were exercised by one employee.

Controls and Procedures

Multilateral Instrument 52-109 ("MI 52-109") requires the Fund's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") to make certain certifications related to the information contained in the Fund's annual filings. Specifically, the CEO and CFO must acknowledge that they are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting for the Fund. In addition, in respect of:

(a) Disclosure Controls and Procedures

The CEO and CFO must certify that they have designed the disclosure controls and procedures, or caused them to be designed under their supervision, to provide reasonable assurance that material information relating to the Fund, including its consolidated subsidiaries, is made known to them in a timely manner.

As at September 30, 2007, the Fund's management, under the supervision of, and with the participation of the CEO and CFO evaluated the design of the disclosure controls and procedures. Based on this evaluation, the CEO and CFO have concluded that as at September 30, 2007, the Fund's disclosure controls and procedures were appropriately designed.

Consistent with the concept of reasonable assurance, the Fund recognizes that the relative cost of maintaining these controls and procedures should not exceed their expected benefits. As such, the Fund's disclosure controls and procedures can only provide reasonable, and not absolute, assurance that the objectives of such controls and procedures are met.

(b) Internal Controls over Financial Reporting

The CEO and CFO must certify that they have designed such internal controls over financial reporting, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles.

Consistent with the concept of reasonable assurance, the Fund recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. As such, the Fund's internal controls over financial reporting can only provide reasonable, and not absolute, assurance that the objectives of such controls are met.

No material changes were made to the design of the internal controls over financial reporting during the three and nine month periods ended September 30, 2007.

Outlook

Product Recall and Litigation

On March 16, 2007 the Fund announced the recall of a portion of the dog and cat food it manufactured between December 3, 2006 and March 6, 2007. This recall was primarily related to "cuts and gravy" style pet food in cans and pouches manufactured at two of the Fund's United States facilities. These products were both manufactured and sold under private-label and are contract-manufactured for some national brands.

On March 24, 2007 the Fund instituted a withdrawal of all varieties of recalled pet food, regardless of the dates, to reduce the risk that any recalled product might remain on the retailer's shelves. On April 5, 2007 Menu expanded the recall to include certain products manufactured by its Emporia, Kansas plant between November 8, 2006 and December 2, 2006. This was necessary to align the Fund's recall with that of the supplier of the adulterated ingredient. On April 10, 2007 Menu expanded the recall to include some limited production from its Streetsville, Ontario facility. Finally, on April 17, 2007, May 2, 2007 and May 22, 2007 the Fund made some further refinements to the list of recalled products.

Throughout this period of time, the Fund worked closely with regulatory authorities and its customers to learn as much as it could about the cause for the recall. It was ultimately determined that the contaminated ingredient was wheat gluten adulterated with melamine. This ingredient was imported from China by one broker in the United States. Subsequent to Menu's recall a number of other significant companies in the pet food industry, who had also purchased wheat gluten from this same broker, followed suit and instituted recalls of their own. As it transpired, the Fund, the pet food industry, our customers and consumers were all victims of a fraud of monumental proportions.

The Fund estimates that, based on currently available information, the direct costs associated with this recall, which will be financed from a combination of internally generated cash flow and bank credit facilities, will approximate $55 million, which will have a significant impact on the results for the year ending December 31, 2007.

On May 15, 2007 and again on October 19, 2007, the Fund reached agreement with its Lenders to modify the terms of its existing credit facilities and, on May 15, 2007, to increase the amount available under the bank facility. Management expects that the direct and indirect costs of the recall will lead to a further utilization of available credit facilities by the Fund. The amended agreements increase the rates of interest paid by the Fund. Both of these changes are expected to increase the Fund's financial expenses going forward.

Lawsuits have been initiated against the Fund and certain of its subsidiaries in the United States and in Canada, which seek to recover damages on behalf of the named plaintiffs and a purported class of pet owners. Furthermore, the U.S. Food and Drug Administration is conducting an investigation into the situation. The Assistant United States Attorney for the Western District of Missouri, based in Kansas City has informed Menu that it is the target of criminal investigations for possible violations of the U.S. federal Food, Drug and Cosmetic Act. It is possible that additional actions or investigations may arise in the future. The Fund expects to expend significant amounts and devote considerable management time with regard to these matters. The Fund cannot predict the amount of such expenses, the resolution of any claims or investigations, the extent to which these items will be paid by the Fund's insurers, or whether the Fund will have sufficient resources to pay any or all of these items.

Customers

The Fund has been advised that customers whose volume represented approximately 37% of sales in 2006 will no longer be purchasing these products from Menu. The effects of this lost business will be felt over time, with customers who accounted for almost 14% of 2006 volume impacting the first three quarters of 2007, approximately 11% impacting the fourth quarter of 2007 and the remainder being lost over the next nine months. Upon announcing the recall, Menu's customers suspended the purchase of most cuts and gravy products. Management expects that this business will be slowly re-established, with this process having started late in the second quarter, and that sales for the remainder of the year will be at less than historical levels, as the effects of the recall continue to be felt. Management cannot predict the effect the recall will have on its relationships with its other customers. The Fund believes that the recall did not cause it to violate any of its contracts with its customers because, among other things, the recall was caused by unforeseen circumstances beyond the Fund's control. However, it is possible that in the future Menu may be found to have breached contracts with one or more of its customers as a result of the recall.

Cost and Price Increases

In the United States, in early 2004, and in Canada, in early 2005, Menu initiated price increases to its private-label customers, following the price increases taken by the leading national brands. In January 2006 and again in the second quarter of 2006, Menu followed a leading national brand manufacturer and announced price increases on its canned and pouch products, respectively, sold to its United States private-label customers. In early 2007, Menu again followed a leading national brand manufacturer and increased prices on canned cat food sold in aluminum containers to its United States private-label customers. In all cases, these price increases enable Menu to recover some of the cost increases absorbed during the time since the last price increase.

Increasing input costs are a regular part of Menu's business. Rising costs of steel and aluminum mean higher can costs. Higher utility costs, together with increases in medical benefits (escalating at rates well above inflation) and labor push the cost of operating higher. Higher fuel costs, together with new legislation in the United States on work hours for truck drivers and trucking delays crossing the Canadian/United States border similarly increases the cost of delivery. Such cost increases have occurred routinely over the past number of years. Regular price increases are essential to mitigate the effect rising costs have on margins.

For the contract-manufacturing portion of Menu's business, most of these cost increases are automatically passed on to customers (albeit with some timing delays). However, for its private-label business, Menu's practice, with respect to price increases, has been to follow the national brand leaders. While this practice at times compresses Menu's margins, as it did in 2005, it none-the-less helps to ensure that Menu's products are competitively priced at retail. Absent regular price increases in the future, Menu expects that its margins will continue to be squeezed. Looking ahead to the remainder of 2007, the 16.3% decline in volume during the third quarter of 2007 significantly increased the cost of manufacturing during that quarter as production-runs were shortened which resulted in the factory overhead associated with the Fund's four production facilities being allocated over a reduced level of production. As a consequence of the lower overhead absorption, the cost of the Fund's inventory on hand at the end of the third quarter increased, which will increase cost of sales during the fourth quarter of 2007, as that inventory was sold.

Bovine Spongiform Encephalopathy ("BSE")

BSE surveillance continues to confirm an extremely low incidence of BSE in North America, with cases in both the U.S. and Canada. Both countries instituted a ruminant feed rule in 1997 as part of their prevention programs. Cases have been identified in Canada in cattle born after the feed ban. In response to this, Canada has announced a strengthening of the feed ban to prevent the addition of specified risk materials (those components of the animal thought to have the highest level of infectivity when consumed) in all animal feed, including pet food. The effective date of implementation was July 12, 2007. This change does not impact the Fund's formulations, as these risk materials are not currently used.

Additionally, the U.S. has published information stating that the BSE agents found in its cases come from a rare strain also seen in France, Sweden and Poland, which is harder to detect and mainly found in older cattle. It is possible that these cases form spontaneously in older cattle without consumption of ruminant material.

The U.S. currently requires companies to obtain import permits for Canadian pet food imported into the country. Canada has recently announced that it will institute a similar program. Publication in the Gazette, outlining the specifics of the program, occurred on December 16, 2006. On a positive note, the U.S. has opened the border to a wider range of Canadian cattle in recent months and there are signs that it may be willing to accept pet foods containing beef that can be certified coming from cattle less than 30 months of age. With the excellent identification programs present in Canada, it appears that this may be possible and Menu will explore this opportunity when the changes are effective. Furthermore, the added pressure brought about by the introduction of Canadian import permits may cause the U.S. to accelerate its review of the necessity for existing import permits.

Subordination and Distribution

The Fund has two classes of units: (a) publicly traded Trust Units and (b) privately held Class B Units. The Declaration of Trust established that the Class B Units' rights to distributions were subordinated to those of the public Trust Units until such time as certain conditions were satisfied. These conditions were met by February 2005, since which time, except as discussed below, the Class B Units have no longer been subordinated to the publicly traded Trust Units.

On May 11, 2005 certain holders of Class B Units (including senior management), representing more than 11 million units, agreed to forego a portion of their distributions until February 2006. Specifically, holders of approximately 3.4 million units agreed to forego all distributions, while holders of approximately 7.7 million units agreed to forego receipt of distributions in excess of $0.02 per unit. Such unitholders are entitled to a reimbursement of such foregone distributions, which at December 31, 2006 amounted to $4.2 million, only to the extent that the Fund generates sufficient Distributable Cash in the future and declares distributions in excess of 9 cents per unit, per month.

Financial Covenants

Most of the Fund's outstanding debt is represented by its bank facility and senior secured notes. As at September 30, 2007, the Fund had $44.9 million drawn on its bank facility and $74.8 million of senior secured notes outstanding. Each of these facilities has financial covenants and cross default provisions that must be met.

The costs associated with the recall announced on March 16, 2007 have been significant and resulted in the Fund not being in compliance with certain financial covenants with its Lenders as at March 31, 2007. Accordingly, on May 15, 2007, the Fund entered into amended Agreements with its Lenders, which among other things, define the terms and conditions governing the Fund's US$30 million bank and US$85 million senior secured notes facilities, going forward. In addition, the agreement with the bank was expanded to include a new US$20 million credit facility (subsequently reduced to US$15 million on October 19, 2007). Events after May 15, 2007 resulted in the Fund not being in compliance with these amended terms and on October 19, 2007 the Fund entered into amended Agreements with its Lenders, which among other things, define the terms and conditions governing the Fund's US$50 million bank and US$85 million senior secured notes facilities, going forward.

Legislative Changes

Like others in the trust sector, the Fund was impacted by the Canadian Government's decision on October 31, 2006 to introduce a tax on distributions made by publicly traded income trusts. Bill C-52, which, in part, imposes this new tax on income funds and other similar flow through entities, passed third reading in the House of Commons on June 12, 2007. It is too early in the process to be definitive on the impacts of this tax on the Fund. However, to put things in context, it is important to note that the majority of the Fund's business is conducted outside of Canada and that the Fund pays tax in each of the foreign jurisdictions in which it operates. Since the Fund's IPO, for the periods ended December 31, 2002, 2003, 2004 and 2005, the percentage of distributions that were considered "other taxable income" amounted to 22.79%, 22.38%, 21.05% and 34.98%, respectively. Given the difficult conditions experienced in 2005, management does not consider the composition of distributions in that year to be representative of future expectations. Distributions have been suspended since 2005, and the Fund's distribution strategy will not be revisited until such time as distributions are permitted under the covenants with its Lenders. Management's interpretation of the announcements made by the Department of Finance is that it is only this "other taxable income" that will be subject to the proposed tax of 31.5% starting in 2011.

Risks and Uncertainties

Menu and the Fund are subject to numerous risk factors in its ongoing business. These include reliance on key customers, absence of long-term sales contracts, customer performance and relationships, foreign exchange fluctuations, governmental regulations and restrictions, legislative changes, reliance on key suppliers, reliance on key personnel, among others. For a review of some of the risks affecting the business, please refer to notes 23 and 24 to the accompanying consolidated financial statements. Additional information about the Fund is available at www.sedar.com.

In the present economic climate, the most significant risks and uncertainties facing the Fund result from the product recall, including its ultimate final cost, the timing and extent of the resumption of normal business and the cost of any resulting litigation or investigations, including the extent to which these will be covered by insurance.

The continued strength of the Canadian dollar relative to the United States dollar, and the ongoing inability to pass input cost increases on to private-label customers in a timely manner are more traditional risks facing the Fund. Since a majority of the Fund's operations and assets are in the United States, a "natural" business hedge exists. However, while it is possible, for specified periods, to hedge distributable cash flow against future fluctuations in the currency (as has been done in the past during periods when distributions were being paid), it is not possible to hedge business operations, so a continuation of a strong Canadian dollar will have a negative impact on the relative contribution of the Fund's United States denominated business. Similarly, if the Fund must continue to absorb increased raw material and other costs without the benefit of a timely price increase to its private-label customers, gross margin will be depressed and profitability and the Fund's ability to pay distributions will be curtailed. Given the nature of the industry, price increases are largely beyond Menu's control.

The Fund's Lenders do not permit the Fund to make any monthly distributions unless it is in compliance with the covenants contained in the original Agreements with the Lenders, including a total debt to EBITDA ratio of 3 to 1 or less. There can be no assurance as to either when the Fund will resume monthly distributions, or the amount of the monthly distributions that will be paid at that time.

On October 31, 2006 the Department of Finance (Canada) announced the "Tax Fairness Plan" whereby the income tax rules applicable to publicly traded trusts and partnerships were significantly modified. Bill C-52, which imposes a new tax on distributions of income funds and other similar public flow through entities, passed third reading in the House of Commons on June 12, 2007 and is therefore considered substantially enacted under Canadian generally accepted accounting principles. The Fund is considering the possible impact of the new rules to the Fund. The new rules may adversely affect the marketability of the Fund's units and the ability of the Fund to undertake financings and acquisitions, and, at such time as the new rules apply to the Fund, the distributable cash of the Fund may be reduced.

On March 16, 2007 the Fund announced the recall of a portion of the pet food it manufactured between December 3, 2006 and March 6, 2007. Since March 16, 2007 the recall has been expanded on a number of occasions. The Fund estimates the cost of the recall will be significant. There can be no assurance that these costs will not exceed available resources or that customers affected by the recall will continue to purchase the Fund's products. In addition, there can be no assurance that the customers supplied by the Fund prior to the recall will continue to purchase from the Fund or purchase from the Fund at historical levels. As discussed above, several significant customers have discontinued, or stated their intent to discontinue, all or a portion of their business with Menu.

Lawsuits have been initiated against the Fund and certain of its subsidiaries in the United States and Canada, which seek to recover damages on behalf of the named plaintiffs and a purported class of affected pet owners. Furthermore, the U.S. Food and Drug Administration is conducting an investigation of the situation. The Assistant United States Attorney for the Western District of Missouri, based in Kansas City has informed Menu that it is the target of criminal investigations for possible violations of the U.S. federal Food, Drug and Cosmetic Act. It is possible that additional actions or investigations may arise in the future. The Fund expects to expend significant amounts and to devote considerable management time to these matters. We cannot predict the amount of such expenses, the resolution of any claims or investigations, or the extent to which these items will be paid by the Fund's insurers.

Note A: EBITDA is not a recognized measure under Canadian generally accepted accounting principles ("GAAP"). Management believes that in addition to net income, EBITDA is a useful supplemental measure of operating performance as it provides investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. EBITDA, as defined in the Menu Foods Limited Partnership Agreement, is Earnings Before Interest, Taxes, Depreciation, Amortization and Non-controlling Interest.

Distributable Cash is not a recognized measure under Canadian GAAP. Management believes that together with net income and EBITDA, Distributable Cash is a useful supplemental measure of operating performance, which provides investors with an indication of cash available for distribution after adjusting for maintenance capital expenditures and certain principal repayments. The computation of Distributable Cash in this Management's Discussion and Analysis is in all material respects in accordance with the guidance provided in the CICA's publication "Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities -Management's Discussion and Analysis Guidance on Preparation and Disclosure." and with Canadian Securities Administrator's National Policy 41-201 ("NP 41-201"). The disclosures of Distributable Cash are in all material respects in accordance with NP 41-201.

Distributable Cash per Trust Unit is not a recognized measure under Canadian GAAP. Management believes that together with net income, EBITDA and Distributable Cash, Distributable Cash per Trust Unit is a useful supplemental measure of operating performance. Distributable Cash per Trust Unit, is defined as Distributable Cash divided by the diluted weighted average number of Trust Units outstanding during the period.

Investors should be cautioned, however, that neither EBITDA nor Distributable Cash should be construed as an alternative to net income determined in accordance with GAAP as an indicator of Menu's performance or to cash flows from operating, investing and financing activities as a measure of liquidity and cash flow. Menu's method of calculating EBITDA and Distributable Cash may differ from other companies and, accordingly, EBITDA and Distributable Cash may not be comparable to measures used by other companies.

The following are reconciliations of: Net income to EBITDA and of Cash Flow from Operating Activities to Distributable Cash for the third quarter:



For the Quarter ended
September 30,
2007 2006
$'000's $'000's
Net income (loss) (19,295) 1,346
Adjust for:
Non-controlling interest of Class B
Exchangeable Units (10,006) 711
Amortization of property, plant and equipment 2,252 3,813
Amortization of customer relationship 38 127
Future income taxes (42) 867
Current income taxes 523 84
Interest and financial expenses 4,393 3,469
---------------------
EBITDA (22,137) 10,417
Adjust for non-recurring items
Product recall 11,086 -
Restructuring and related expenses 15,889 -
---------------------
Adjusted EBITDA 4,838 10,417
---------------------

For the Quarter ended
September 30,
2007 2006
$'000's $'000's
Cash flow from operating activities (8,312) 14,326
Adjust for:

Maintenance capital expenditures (309) (1,324)
Principal repayments (i) (7) (6)
Adjust for non-recurring items
Product recall 16,361 -
Restructuring and related expenses 12,143 -
Associated income taxes (10,521) -
Distributable Cash from Operations 9,355 12,996
---------------------
---------------------



The following are reconciliations of: Net income to EBITDA and of Cash Flow
from Operating Activities to Distributable Cash for the year and since the
inception of the Fund:

Since Inception
For the Nine Months (May 22, 2002)
ended September 30, to September 30,
2007 2006 2007
$'000's $'000's $'000's
Net income (loss) (40,406) 4,621 (62,617)
Adjust for:
Goodwill impairment loss - - 93,415
Non-controlling interest of Class B
Exchangeable Units (20,955) 2,760 (28,027)
Amortization of property, plant
and equipment 9,089 11,268 76,437
Amortization of customer
relationship 298 388 2,789
Future income taxes (14,337) 1,497 (7,370)
Current income taxes 329 578 2,917
Interest and financial expenses 9,528 8,239 37,424
EBITDA (56,454) 29,351 114,968
-------------------------------------
Adjust for non-recurring items
Product recall 55,000 - 55,000
Restructuring and related expenses 15,889 - 15,889
-------------------------------------
Adjusted EBITDA 14,435 29,351 185,857
-------------------------------------
-------------------------------------

Since Inception
For the Nine Months (May 22, 2002)
ended September 30, to September 30,
2007 2006 2007
$'000's $'000's $'000's
Cash flow from operating activities (37,375) 21,830 78,069
Adjust for:

Maintenance capital expenditures (1,141) (2,321) (13,228)
Principal repayments (i) (20) (18) (587)
Adjust for non-recurring items
Product recall 46,137 - 46,137
Restructuring and related expenses 11,151 - 11,151
Associated income taxes (21,145) - (21,145)
Distributable Cash from Operations (2,393) 19,491 100,397
-------------------------------------
-------------------------------------

(i) principal repayments exclude amounts paid to the bank and noteholders
under the terms of amended Agreements



Menu Foods Income Fund
Consolidated Balance Sheets
(All figures expressed in thousands of Canadian dollars, unaudited)

As at
September 30, December 31,
2007 2006
$ $
Assets

Current assets
Cash 158 2,813
Accounts receivable
Trade 14,850 20,062
Other 777 2,175
Inventories (note 6) 32,100 49,576
Prepaid expenses and sundry assets 1,860 1,956
Assets held for resale (note 7) 4,854 -
Future income taxes (note 18) 812 1,657
---------------------------------------------------------------------------
Total Current Assets 55,411 78,239
Property, plant and equipment (note 7) 71,160 97,734
Goodwill (note 8) 71,972 71,972
Other assets (note 9) - 3,634
---------------------------------------------------------------------------
Total Assets 198,543 251,579
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities

Current liabilities
Bank indebtedness (note 10) 44,604 15,627
Accounts payable and accrued
liabilities (note 2) 26,563 19,806
Unearned deposit (note 3) 7,958 -
Income taxes payable 728 603
Current portion of long-term debt (note 11) 29 27
---------------------------------------------------------------------------
Total Current Liabilities 79,882 36,063
Long-term debt (note 11) 74,775 86,442
Future income taxes (note 18) 812 16,085
---------------------------------------------------------------------------
Total Liabilities 155,469 138,590
---------------------------------------------------------------------------

Class B Exchangeable Units (note 12) 3,544 27,823
---------------------------------------------------------------------------

Unitholders' Equity

Trust Units (note 13) 174,702 174,648
Contributed surplus (note 15) 610 272
Deficit (122,806) (82,400)
Accumulated other comprehensive loss (note 16) (12,976) (7,354)
---------------------------------------------------------------------------
Total Unitholders' Equity 39,530 85,166
---------------------------------------------------------------------------
Total Liabilities, Class B Exchangeable Units
and Unitholders' Equity 198,543 251,579
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial
statements.



Menu Foods Income Fund
Consolidated Statements of Operations and Deficit
(All figures, except Unit and per Unit amounts,
expressed in thousands of Canadian dollars, unaudited)

Quarter ended
September 30,
2007 2006

$ $

Sales 78,050 90,083
Cost of sales (note 19) 70,472 76,582
------------------------------------------------------------------------
Gross profit 7,578 13,501
Selling, general and administrative expenses 5,030 7,024
------------------------------------------------------------------------
Income before the undernoted 2,548 6,477
Product recall (note 2) 11,086 -
Restructuring and related expenses (note 3) 15,889 -
Financial expenses (note 17) 4,393 3,469
------------------------------------------------------------------------
(Loss) income before income taxes and
non-controlling interest (28,820) 3,008
------------------------------------------------------------------------
Current income taxes 523 84
Future income taxes (42) 867
------------------------------------------------------------------------
Total income taxes 481 951
------------------------------------------------------------------------
(Loss) income before non-controlling interest (29,301) 2,057
Non-controlling interest of Class B
Exchangeable Units (10,006) 711
------------------------------------------------------------------------
Net (loss) income for the period (19,295) 1,346
Deficit - beginning of period (103,511) (85,555)
------------------------------------------------------------------------
Deficit - end of period (122,806) (84,209)
------------------------------------------------------------------------
------------------------------------------------------------------------


Basic net (loss) income per Trust Unit $ (1.011) $ 0.071
Diluted net (loss) income per Trust Unit $ (1.011) $ 0.071

Basic weighted average number of Trust
Units outstanding (note 13) 19,087,019 18,920,845
Diluted weighted average number of
Trust Units outstanding (note 13) 28,984,243 29,080,937


Consolidated Statements of Other Comprehensive Income (Loss)
(All figures expressed in thousands of Canadian dollars, unaudited)


Quarter ended
September 30,
2007 2006
$ $

Net (loss) income for the period (19,295) 1,346
Other comprehensive (loss) income,
net of tax of $nil (2006 - $nil):
Unrealized (losses) gains on translating
financial statements of self-sustaining
foreign operations (5,361) 99
Gains (losses) on hedges of
unrealized foreign currency translation 3,495 (71)
---------------------------------------------------------------------
Comprehensive (loss) income for the period (21,161) 1,374
---------------------------------------------------------------------
---------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated
financial statements.



Menu Foods Income Fund
Consolidated Statements of Operations and Deficit

(All figures, except Unit and per Unit amounts, expressed
in thousands of Canadian dollars, unaudited)

Nine months ended
September 30,
2007 2006
$ $

Sales 189,800 268,263
Cost of sales (note 19) 170,680 230,624
------------------------------------------------------------------------
Gross profit 19,120 37,639
Selling, general and administrative expenses 16,957 19,944
------------------------------------------------------------------------
Income before the undernoted 2,163 17,695
Product recall (note 2) 52,115 -
Restructuring and related expenses (note 3) 15,889 -
Financial expenses (notes 2 and 17) 9,528 8,239
------------------------------------------------------------------------
(Loss) income before income taxes and
non-controlling interest (75,369) 9,456
------------------------------------------------------------------------
Current income taxes 329 578
Future income taxes (14,337) 1,497
------------------------------------------------------------------------
Total income taxes (14,008) 2,075
------------------------------------------------------------------------
(Loss) income before non-controlling interest (61,361) 7,381
Non-controlling interest of Class B Exchangeable
Units (note 12) (20,955) 2,760
------------------------------------------------------------------------
Net (loss) income for the period (40,406) 4,621
Deficit - beginning of period (82,400) (88,830)
------------------------------------------------------------------------
Deficit - end of period (122,806) (84,209)
------------------------------------------------------------------------
------------------------------------------------------------------------

Deficit comprises:
Accumulated net loss (62,617) (24,020)
Accumulated distributions (60,189) (60,189)
------------------------------------------------------------------------
(122,806) (84,209)
------------------------------------------------------------------------
------------------------------------------------------------------------

Basic net (loss) income per Trust Unit $ (2.117) $ 0.253
Diluted net (loss) income per Trust Unit $ (2.117) $ 0.253

Basic weighted average number of Trust
Units outstanding (note 13) 19,085,127 18,275,232
Diluted weighted average number
of Trust Units outstanding (note 13) 28,982,351 29,049,118


Consolidated Statements of Other Comprehensive
Income (Loss)

(All figures, except per Unit amounts, expressed
in thousands of Canadian dollars, unaudited)

Nine months ended
September 30,
2007 2006
$ $

Net (loss) income for the period (40,406) 4,621
Other comprehensive (loss) income,
net of tax of $nil (2006 - $nil):
Unrealized losses on translating financial
statements of self-sustaining
foreign operations (21,619) (4,708)
Gains on hedges of unrealized foreign
currency translation 15,997 3,101
------------------------------------------------------------------------
Comprehensive (loss) income for the period (46,028) 3,014
------------------------------------------------------------------------
------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated
financial statements.


Quarter ended
September 30,
2007 2006
$ $
Cash provided by (used in)

Operating activities
Net (loss) income for the period (19,295) 1,346
Adjustments for non-cash items
Non-controlling interest of Class B Exchangeable
Units (10,006) 711
Amortization of property, plant and equipment 2,252 3,813
Amortization of customer relationship 38 127
Amortization of deferred financing costs 67 87
Unit-based compensation 123 81
Recall costs not yet paid 2,112 -
Loss on sale of property, plant and equipment 134 -
Inventory write-off (notes 2 and 3) 11,385 -
Write-down of idle assets (note 3) 1,726 -
Write-down of customer relationship (note 3) 3,011 -
Marked-to- market adjustment 1,015 1,116
Future income taxes (42) 867
--------------------------------------------------------------------------
(7,480) 8,148
Change in non-cash working capital items
Accounts receivable (6,867) (2,048)
Inventories 6,806 3,535
Accounts payable and accrued liabilities (918) 4,804
Prepaid expenses and sundry assets 513 222
Income taxes (366) (335)
--------------------------------------------------------------------------
(8,312) 14,326
--------------------------------------------------------------------------
Financing activities
Change in bank indebtedness 711 (7,740)
Issuance of Trust Units, net - 32
Long-term debt repayments (7) (4,469)
Deferred financing charges (385) 4
--------------------------------------------------------------------------
319 (12,173)
--------------------------------------------------------------------------
Investing activities
Unearned deposit (note 3) 7,958 -
Purchase of property, plant and equipment (465) (2,153)
Proceeds from sale of property, plant and equipment 190 -
--------------------------------------------------------------------------
7,683 (2,153)
--------------------------------------------------------------------------
Decrease in cash (310) -
Cash - beginning of period 468 -
--------------------------------------------------------------------------
Cash - end of period 158 -
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Supplementary information

Income taxes paid 29 65
Interest paid 3,324 2,409

The accompanying notes are an integral part of these consolidated financial
statements.



Menu Foods Income Fund
Consolidated Statements of Cash Flows
(All figures expressed in thousands of Canadian dollars, unaudited)

Nine months ended
September 30,
2007 2006
$ $

Cash provided by (used in)
Operating activities
Net (loss) income for the period (40,406) 4,621
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units (20,955) 2,760
Amortization of property, plant and equipment 9,089 11,268
Amortization of customer relationship 298 388
Amortization of deferred financing costs 1,243 330
Unit-based compensation 348 486
Loss (gain) on sale of property,
plant and equipment 128 (29)
Inventory write-off (notes 2 and 3) 30,623 -
Write-off of take-or-pay receivable (note 3) 1,001 -
Recall costs not yet paid (note 2) 15,779 -
Write-down of idle assets (note 3) 1,726 -
Write-down of customer relationship (note 3) 3,011 -
Marked-to- market adjustment 426 219
Future income taxes (14,337) 1,497
-----------------------------------------------------------------------
(12,026) 21,540

Change in non-cash working capital items
Accounts receivable 4,185 (3,319)
Inventories (20,759) (1,093)
Accounts payable and accrued liabilities (8,869) 4,791
Prepaid expenses and sundry assets 19 (277)
Income taxes 75 188
-----------------------------------------------------------------------
(37,375) 21,830
-----------------------------------------------------------------------
Financing activities
Change in bank indebtedness 29,921 (16,657)
Issuance of Trust Units, net 44 40
Long-term debt repayments (20) (6,210)
Deferred financing charges (385) (636)
-----------------------------------------------------------------------
29,560 (23,463)
-----------------------------------------------------------------------
Investing activities
Unearned deposit (note 3) 7,958 -
Purchase of property, plant and equipment (3,018) (4,200)
Proceeds from sale of property, plant and
equipment 220 43
-----------------------------------------------------------------------
5,160 (4,157)
-----------------------------------------------------------------------
Decrease in cash (2,655) (5,790)
Cash - beginning of period 2,813 5,790
-----------------------------------------------------------------------
Cash - end of period 158 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Supplementary information

Income taxes paid 210 208
Interest paid 7,269 6,801

The accompanying notes are an integral part of these consolidated
financial statements.


Menu Foods Income Fund

Notes to Consolidated Financial Statements

September 30, 2007

(All figures, except Unit and per Unit amounts, expressed in thousands of Canadian dollars, unaudited)

1. Description of the business

Menu Foods Income Fund (the "Fund") is an unincorporated open-ended trust, established under the laws of the Province of Ontario by Declaration of Trust dated March 25, 2002 (the "Declaration of Trust"). The Fund was created to hold directly or indirectly, investments in entities engaged in the manufacture and sale of pet food products, including the securities or assets of Menu Foods Limited ("Menu").

Menu was incorporated on May 17, 1971 under the laws of the Province of Ontario. Menu is mainly engaged in the manufacture of wet pet food products, which are sold primarily to retail and wholesale operations in Canada and the United States.

2. Product recall, litigation and going concern

On March 16, 2007, the Fund announced the recall of a portion of the dog and cat food it manufactured between December 3, 2006 and March 6, 2007. Other products and dates of manufacture were added to the recall on April 5, April 10, April 17, May 2 and May 22, 2007 and the Fund announced a voluntary withdrawal of certain products on March 24, 2007. The recalls and withdrawal relate primarily to "cuts and gravy" style products manufactured by Menu, but include certain other products as well. These products were manufactured and sold under private-label and contract manufactured for some national brands.

Management originally estimated that the costs associated with the recalls and withdrawal noted above would amount to approximately $45,000. On October 10, 2007 this estimate was increased to $55,000. The costs associated with the recall, including the increase in the estimated cost, resulted in the Fund not being in compliance with certain existing financial covenants included in the loan agreements with its lenders. Accordingly, on May 15, 2007 and again on October 19, 2007, the Fund entered into amended agreements with its lenders, which among other things, define the terms and conditions governing the Fund's US$30,000 bank facility (expanded to US$50,000 with a new US$20,000 credit facility on May 15, 2007 and subsequently reduced to US$45,000 by October 19, 2007) and US$85,000 senior secured notes facilities. The amendments to the senior secured notes facility on May 15, 2007 were such that under Canadian generally accepted accounting principles they resulted in a deemed settlement of the original facility, necessitating a write-off of $1,101 in previously capitalized costs. This write-off, together with the estimated direct costs of the recall, a $56,101

The estimated product recall costs are based on the best information currently available to the management of the Fund. The ultimate determination of these costs is dependant on the amount of product actually returned and certain other factors. Accordingly, actual amounts could differ from these estimates and the differences could be significant. Furthermore, even with the new credit facility the estimated product recall costs could, depending upon the time required to resume normalized shipping to customers, have a significant effect on the liquidity of the Fund.

The recall costs noted above include product collection, write-off and disposal costs of $46,475, lost margin on returned product of $2,885, $2,400 to establish and operate a call centre to respond to consumer concerns and $240 in professional and associated fees necessary to manage through this difficult process. Furthermore, to date, the Fund has spent $3,000 in period costs associated with the recall. As at September 30, 2007, the Fund has, incurred $39,221 of actual recall costs, including inventory write-offs, and has accrued a further $15,779 in accrued liabilities for costs not yet incurred in connection with the recall.

2. Product recall, litigation and going concern (continued)

Lawsuits have been initiated against the Fund and certain of its subsidiaries in the United States and Canada, which seek to recover damages on behalf of the named plaintiffs and a purported class of affected pet owners. Furthermore, the U.S. Food and Drug Administration is conducting an investigation of the situation. The Assistant United States Attorney for the Western District of Missouri based in Kansas City has informed Menu that it is the target of criminal investigations for possible violations of the U.S. Federal Food, Drug and Cosmetic Act. It is possible that additional actions or investigations may arise in the future. The Fund expects to expend significant amounts and to devote considerable management time to these matters. The Fund cannot predict the amount of such expenses, the resolution of any claims or investigations, or the extent to which these items will be paid by the Fund's insurers or whether the Fund will have sufficient resources to pay any of these claims. Accordingly, no amounts related to these actions have been accrued in these financial statements. Costs to the Fund are being expensed as incurred.

Given the restructuring activities (note 3) and based on current forecasts, management believes that the Fund will generate sufficient income and cash flows to discharge its obligations as they become due in the normal course of operations and that Menu will not require any significant additional credit facilities. However, given the significant uncertainty of this situation and the legal and regulatory matters referred to above, there is no assurance that additional financing will not be required.

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles on a going concern basis. The Fund's ability to continue as a going concern is dependent on the success of future operations; upon the continued support of the Fund's lenders, if necessary; and the outcome of litigation and investigations. If the going concern assumption was not appropriate for these consolidated financial statements, then adjustments would be necessary to the carrying values of assets, liabilities, the reported net loss and the balance sheet classifications used.

3. Restructuring and related expenses

As a consequence of the product recall, the Fund has had to restructure its operations to better align costs with its ongoing business operations. The restructuring initiatives take several forms and under Canadian generally accepted accounting principles, depending upon their nature, must be recognized either in the third quarter of 2007 or over future periods. The Fund expects that most of these initiatives will be accounted for in 2007, although some will likely not be completed until 2008. In aggregate these activities will result in a net restructuring expense of approximately $200, but will generate approximately $19,000 in cash (net of $1,142 in lenders' fees) over the third and fourth quarters of 2007 and into 2008.

Since March 16, 2007 the Fund has been advised that customers who represented approximately 37% of sales volume in 2006 will no longer be purchasing those products from Menu. This has caused the Fund to write-down certain assets associated with these customers and to write-down or sell other assets that are no longer required given the down-sizing of the business.

On August 9, 2007 Menu entered into agreements to release a customer from certain contractual obligations and to sell it a production facility and certain other assets for aggregate cash proceeds of US$26,300. Since all conditions associated with two of these agreements were not satisfied until October 9, 2007 and the third agreement has not yet been satisfied, these transactions will not be recognized until the fourth quarter of 2007.

On October 10, 2007 the Fund announced a formal plan to restructure operations. This plan identifies certain redundant assets as at September 30, 2007 and establishes formal severance arrangements for affected employees that will be primarily reflected in the fourth quarter of 2007.

3. Restructuring and related expenses (continued)

The approximate costs or gains associated with the restructuring have been or will be reflected in the consolidated financial statements as follows:



Quarter ended
September 30,
2007 Thereafter Total
$ $ $

Write-off of redundant inventory 9,768 - 9,768
Write-off of customer relationship (note) 3,011 - 3,011
Write-off take-or-pay receivable 1,001 - 1,001
Write-down of idle assets 1,726 - 1,726
Gain on settlement of customer contracts
and sale of assets (note 7) - (20,577) (20,577)
Severance and related costs 258 4,249 4,507
Professional fees 125 625 750
-----------------------------------
15,889 (15,703) 186
-----------------------------------
-----------------------------------


The Fund received a deposit of US$8,000 ($7,958) relating to the settlement of customer contracts and the sale of assets, during the quarter ended September 30, 2007.

On January 1, 2007, the Fund adopted Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments -Disclosure and Presentation; and Section 3865 - Hedges.

Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with Canadian generally accepted accounting principles.

Section 3855 prescribes when a financial asset or liability or non-financial derivative is to be recognized on the balance sheet and at what amount, requiring fair value or cost-based measures under different circumstances. Under Section 3855, financial instruments must be classified into one of these five categories; held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are measured at fair value except for loans and receivables, held to maturity investments and other financial liabilities, which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net earnings; available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired, at which time the amounts would be recorded in net earnings.

Section 3861 establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them.

Section 3865 describes when and how hedge accounting can be applied as well as the disclosure requirements. Hedge accounting enables the recording of gains, losses, revenues and expenses from derivative financial instruments in the same period as for those related to the hedged item.

Under the new standards, policies followed for periods prior to the effective date generally are not changed and, therefore, the comparative figures have not been restated, except for the requirement in Section 1530 to include the currency translation adjustment as part of other comprehensive income, which is included in a separate statement in these consolidated financial statements.

Upon adoption of Section 3855, the Fund designated its cash as held-for-trading, which is measured at fair value. Accounts receivable are classified as loans and receivables, which are measured at amortized cost. Bank indebtedness, accounts payable and accrued liabilities and long-term debt are classified as other financial liabilities, which are recorded at amortized cost. Derivative instruments are recorded in the statement of operations at fair value except for contracts entered into for the purposes of the Fund's own usage requirements. The Fund uses interest rate swaps (the "Swaps") to fix interest rates on a portion of its indebtedness. Previously the Swaps were marked-to-market, and consequently are unaffected by this new standard. The Fund established January 1, 2003 as its transition date for the purpose of identifying embedded derivatives. Consequently, only contracts or financial instruments entered into or modified after the transition date were examined for embedded derivatives. As at September 30, 2007 and December 31, 2006 the Fund does not have any embedded derivatives.

There was no impact on the Fund as a result of adopting Section 3865.

The CICA issued four new accounting standards: Section 1535 - Capital Disclosures, Section 3031- Inventories, Section 3862 - Financial Instruments - Disclosures, and Section 3863 - Financial Instruments - Presentation. Section 1535 establishes disclosure requirements about an entity's capital and how it is managed. The purpose of this section is to enable users of the financial statements to evaluate objectives, policies and processes for managing capital. Section 3031 will replace Section 3030 - Inventories, revising and enhancing guidance on the determination of inventory costing. Sections 3862 and 3863 will replace Section 3861- Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements while carrying forward its presentation requirements. These new sections will place increased emphasis on disclosure about the nature and extent of risks arising from financial instruments and how the entity manages those risks. The mandatory effective date is for annual and interim periods in fiscal years beginning on or after October 1, 2007 (January 1, 2008 for Section 3031). The Fund will begin application of these sections effective January 1, 2008.

5. Summary of significant accounting policies

a) Basis of presentation

The Fund prepares its consolidated financial statements in accordance with Canadian generally accepted accounting principles.

The consolidated financial statements include the accounts of the Fund and all of its subsidiaries. All inter-company transactions and accounts have been eliminated on consolidation.

These consolidated financial statements are based on accounting principles consistent with those used and described in the annual consolidated financial statements as at December 31, 2006 except as discussed in note 4, and should be read in conjunction with those consolidated financial statements. The disclosures contained in these unaudited interim consolidated financial statements may not include all requirements of Canadian generally accepted accounting principles for annual statements.

Accounting measurements at interim dates involve greater reliance on estimates than at year-end. In the opinion of management, the accompanying unaudited interim consolidated financial statements include all adjustments of a normal recurring nature to present fairly the financial position of the Fund as at September 30, 2007.

5. Summary of significant accounting policies (continued)

b) Use of estimates

The preparation of consolidated 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 the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

c) Cash and cash equivalents

Deposits in banks and short-term investments with original maturities of three months or less are considered cash and cash equivalents. Cash equivalents are carried at fair value.

d) Inventories

Inventories are valued at the lower of cost, determined on a first-in, first-out basis, and net realizable value.

e) Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated amortization. Cost represents the cost of acquisition or construction, including preparation and testing charges and direct financing costs incurred until the beginning of commercial production. An impairment loss is recognized when the asset's carrying value is no longer recoverable from estimated future undiscounted cash flows. When an impairment loss is recognized, the carrying value of the asset would be reduced to its estimated fair value. Amortization is calculated using the straight-line method applied to the cost of the assets, at annual rates based on their estimated useful lives, as follows:



Buildings 20 - 40 years
Machinery and equipment 3 - 10 years
Equipment under capital lease 3 - 10 years
Other property and equipment 3 - 20 years


Construction-in-progress represents expenditures incurred for uncompleted projects. Upon completion, the related construction-in-progress balance is transferred to the appropriate asset class and amortization commences.

f) Future income taxes

The Fund follows the liability method of accounting for future income taxes. Under the liability method, future income tax assets and liabilities are determined based on temporary differences (differences between the accounting basis and the tax basis of the assets and liabilities) and are measured using the currently enacted, or substantively enacted tax rates and laws expected to apply when these differences reverse. A valuation allowance is recorded against any future income tax asset, if it is more likely than not that the asset will not be realized. Applicable withholding taxes are accrued as foreign sourced income is earned to the extent that the repatriation of earnings from foreign subsidiaries is expected to occur.

g) Research and development

Research expenditures are expensed as incurred. Development expenditures are written off as incurred unless, in the view of management, the expenditures are incurred in the development of products or processes, which are expected to be commercially viable for a period that exceeds one year and have a long-term commercial future. In these cases, development costs are deferred and amortized over the estimated commercial life of the product or process on a straight-line basis, not to exceed five years.

h) Other financial liabilities and transaction costs

The Fund classified long-term debt as other financial liabilities, which are measured at amortized cost. Transaction costs, which are netted against the carrying value of the long-term debt are amortized using the effective interest rate method, and are included in financial expenses.

i) Goodwill

Goodwill reflects the price paid for the Menu business in excess of the fair market value of net tangible assets and identifiable intangible assets acquired. Menu operates as one reporting unit for purposes of allocating and evaluating goodwill. The Fund reviews goodwill on an annual basis or at any other time when events or changes have occurred that suggest an impairment of the carrying value. Impairment is recognized when the estimated fair value of the goodwill is lower than the carrying value.

j) Customer relationship

The customer relationship consisted of an exclusive agreement to supply a portion of a customer's canned wet pet food requirements in the United States and Canada. The customer relationship was carried at cost less accumulated amortization. Amortization was being charged to cost of sales, on a straight-line basis, over a ten-year period. The customer relationship was impaired and fully written off during the quarter ended September 30, 2007 when the customer advised the Fund that it would no longer be purchasing the products covered by the exclusive agreement (notes 3 and 9).

k) Foreign currency translation

Monetary assets and liabilities denominated in foreign currencies, except those of self-sustaining subsidiaries, are translated at the exchange rate in effect at the consolidated balance sheet date and non-monetary items are translated at historical exchange rates. Operating revenue and expenses are translated at average exchange rates prevailing during the period. Gains or losses arising from these translations are included in net income.

The assets and liabilities of all foreign subsidiaries, which are considered to be self-sustaining operations, are translated at the exchange rate in effect at the consolidated balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the period. The Fund has designated its United States' dollar indebtedness, to a maximum of US$85 million, as a hedge of its net investment in the United States. The indebtedness is translated at the exchange rate in effect at the consolidated balance sheet date. The resulting gains or losses, together with the related income taxes, are included in the foreign currency translation adjustment in the consolidated statement of comprehensive income.

l) Revenue recognition

The Fund recognizes revenue from the sale of manufactured goods at the time of product shipment. From time to time the Fund enters into contracts with customers to manufacture products on their behalf. In some instances the customers provide a portion of the inventory to be used in the manufacturing process. Accordingly, when the goods are shipped, the Fund includes in sales the invoice price to the customer and includes in cost of sales the Fund's portion of costs incurred.

The Fund enters into "take-or-pay" arrangements with certain customers, which equire the customer to make payments to Menu if their purchases do not meet or exceed contracted volumes. These arrangements are reflected in sales. As a consequence of the product recall (note 2), no revenue has been reflected from these arrangements during the quarter and nine months ended September 30, 2007 (2006 - $335 and $977, respectively) and any outstanding amounts receivable under these arrangements were written-off (note 3). As at September 30, 2007 the Fund has no such contracts outstanding.

m) Supplier rebates

Volume rebates on supplier purchases are recorded throughout the period as a reduction of inventory and cost of sales based on management's best estimate of the amounts that will ultimately be received.

n) Unit-based compensation

The Fund expenses awards made under its unit-based compensation plans in accordance with the fair value based method.

o) Asset retirement obligations

The fair value of any liability for an asset retirement obligation is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. The associated retirement costs are capitalized as part of the carrying amount of the long-lived assets and amortized over the life of the asset. As at September 30, 2007, the Fund has concluded that there were no asset retirement obligations associated with its assets.

6. Inventories



As at
September 30, 2007 December 31, 2006

$ $
Raw materials and packaging 12,134 13,498
Finished goods 19,966 36,078
----------------------------------------------------------------
32,100 49,576
----------------------------------------------------------------



7. Property, plant and equipment

As at September 30, 2007

Accumulated
Cost amortization Net
$ $ $

Land 4,807 - 4,807
Buildings 39,187 7,049 32,138
Machinery and equipment 80,837 45,300 35,537
Other property and equipment 16,020 13,437 2,583
Construction-in-progress 949 - 949
---------------------------------------------------------------------
141,800 65,786 76,014
---------------------------------------------------------------------
Less: Assets held for sale
Land 757 - 757
Buildings 1,922 317 1,605
Machinery and equipment 3,596 1,104 2,492
---------------------------------------------------------------------
6,275 1,421 4,854
---------------------------------------------------------------------
135,525 64,365 71,160
---------------------------------------------------------------------
---------------------------------------------------------------------

As at December 31, 2006

Accumulated
Cost amortization Net
$ $ $

Land 5,255 - 5,255
Buildings 44,174 6,752 37,422
Machinery and equipment 93,681 43,749 49,932
Other property and equipment 15,300 11,973 3,327
Construction-in-progress 1,798 - 1,798
---------------------------------------------------------------------
160,208 62,474 97,734
---------------------------------------------------------------------
---------------------------------------------------------------------


8. Goodwill

When the Fund purchased its interest in Menu Foods Limited Partnership, $165,387 of the purchase price was assigned as goodwill in the consolidated financial statements. Under Canadian generally accepted accounting principles, goodwill is subject to an annual impairment test, which, for the Fund, takes place as at September 30th of each year, unless events indicate that an impairment has arisen at some other time. Since the Fund's units were trading at lower than their book value, an assessment of the carrying value of goodwill was carried out in 2005, resulting in a writedown of $93,415. The carrying value of goodwill is $71,972 as at September 30, 2007 and December 31, 2006. The annual impairment test as at September 30, 2007 did not identify any further impairment.



9. Other assets
As at
September 30, 2007 December 31, 2006
Customer relationship $ $
Cost 5,157 5,846
Accumulated amortization (2,146) (2,212)
Write-off (note 3) (3,011) -
---------------------------------------------------------------------------
- 3,634
---------------------------------------------------------------------------
---------------------------------------------------------------------------


On August 14, 2007 the Fund received notice from the customer that the exclusive agreement to supply a portion of their canned wet pet food requirements in the United States and Canada would be terminated effective October 9, 2007. Accordingly the carrying value of the customer relationship was written off during the quarter ended September 30, 2007.

10. Bank indebtedness

The banking agreement provides the Fund with a US$50,000 operating facility of which $44,922 (US$45,195) was drawn upon as at September 30, 2007 (December 31, 2006 - $15,627 (US$13,409)). At September 30, 2007, the Fund has an outstanding letter of credit in the amount of $821 (US$825) (December 31, 2006 - $991 (US$850)) which further reduces the amount available under the facility.

The costs associated with the product recall first announced on March 16, 2007 (note 2) are significant and resulted in the Fund not being in compliance with certain financial covenants with its bank and senior secured noteholders (note 11) (the "Lenders") as at March 31, 2007 and for all of 2007. Accordingly, on May 15, 2007, the Fund entered into amended agreements (the "Agreements") with its Lenders that, among other things, defined the terms and conditions governing the Fund's US$30,000 bank and US$85,000 senior secured notes facilities going forward. In addition, the agreement with the bank was extended to June 30, 2009 and expanded to include a new US$20,000 credit facility.

Increases in the estimated costs associated with the product recall (note 2), together with the restructuring (note 3) necessary as a consequence of the product recall once again resulted in the Fund not being in compliance with certain financial covenants with its Lenders during the quarter ended September 30, 2007. On October 19, 2007 the Fund entered into amended agreements with its Lenders that, among other things, define the terms and conditions governing the Fund's bank operating and senior secured notes facilities going forward. Furthermore, on October 19, 2007 the new US$20,000 credit facility was reduced to US$15,000.

Pursuant to its amended banking agreement, this operating facility bears interest at Canadian prime rate (6.25% as at September 30, 2007) plus 3.5%, U.S. base rate (7.75% as at September 30, 2007) plus 3.5% or Euro rate (5.23% as at September 30, 2007) plus 4.75% (the "Base Rates") depending on the currency advanced. These interest rates will continue to apply until the additional US$20,000 facility is extinguished and the balance owing under the US$30,000 facility is less than US$15,000 for five consecutive business days and the Fund achieves a total debt to EBITDA (a non GAAP measure that is defined in the amended banking agreement) ratio (the "Leverage Ratio") on a trailing twelve months basis, of 3 to 1 or less, at which time the interest rates will revert to those set out in Menu's credit facilities prior to amendment, provided that there are no other defaults. The Fund is precluded from paying distributions to its Unitholders at any time the Leverage Ratio exceeds 3 to 1.

10. Bank indebtedness (continued)

The pre-existing covenants have been suspended until such time as the recall costs no longer impact the Fund's Leverage Ratio and until the additional US$20,000 facility is extinguished and the balance owing under the US$30,000 facility is less than US$15,000 for five consecutive business days and the Fund achieves a Leverage Ratio, on a trailing twelve months basis, of 3 to 1 or less. In addition, EBITDA before recall and restructuring costs and operating leases must be at least $1,000 for the quarter ending December 31, 2007; $5,000 for the quarter ending March 31, 2008; $10,000 for the six months ending June 30, 2008; $15,000 for the nine months ending September 30, 2008; and $20,000 on a trailing twelve-months basis, each quarter thereafter. Under the terms of the amended agreements, not more than $55,000 may be utilized by the Fund for recall-related costs. The amended agreement of May 15, 2007 required the Fund to pay fees to the bank of US$380, plus all associated professional costs. As at September 30, 2007 $318 (net of $67 amortization) in these transaction costs have been netted against the bank indebtedness. The amended agreement of October 2007 required the Fund to pay fees to the bank of $625, plus all associated professional costs

Certain bank indebtedness has been identified as priority indebtedness under an agreement between the bank and senior secured noteholders. Otherwise, the Fund has pledged, on a pari pasu basis with its senior secured noteholders, as security for bank indebtedness, all moveable property and book debts and, in addition, has signed a general security agreement.

11. Long-term debt



As at
September 30, 2007 December 31, 2006
$ $
Senior secured notes (a) 74,767 86,411
Obligation under capital lease (b) 37 58
------------------------------------------------------------------------
74,804 86,469
Less: Current portion 29 27
------------------------------------------------------------------------
74,775 86,442
------------------------------------------------------------------------
------------------------------------------------------------------------

a) Senior secured notes
As at
September 30, 2007 December 31, 2006
$ $
Senior secured notes obligation 74,767 87,587
Transaction costs - 1,176
------------------------------------------------------------------------
74,767 86,411
------------------------------------------------------------------------
------------------------------------------------------------------------


On October 31, 2003, the Fund closed a private placement offering for US$85,000 in floating rate senior secured notes (the "Notes Facility"). The notes, of which US$75,157 was outstanding at September 30, 2007 and December 31, 2006, are repayable on October 31, 2010, with interest payable quarterly. Certain bank indebtedness has been identified as priority indebtedness under an agreement between the bank and senior secured noteholders. Otherwise, the Fund has pledged, on a pari pasu basis with its bank, as security for its senior secured notes, all moveable property and book debts and, in addition, has signed a general security agreement.

The costs associated with the product recall first announced on March 16, 2007 (note 2) are significant and resulted in the Fund not being in compliance with certain financial covenants with its Lenders as at March 31, 2007. Accordingly, on May 15, 2007, the Fund entered into Agreements with its Lenders, which among other things, defined the terms and conditions governing the Fund's US$30,000 bank (note 10) and US$85,000 senior secured notes facilities going forward. In addition, the agreement with the bank was extended to June 30, 2009 and expanded to include a new US$20,000 credit facility.

Increases in the estimated costs associated with the product recall (note 2), together with the restructuring (note 3) necessary as a consequence of the product recall once again resulted in the Fund not being in compliance with certain financial covenants with its Lenders during the quarter ended September 30, 2007. On October 10, 2007 the Fund entered into amended agreements with its Lenders that, among other things, define the terms and conditions governing the Fund's bank operating and senior secured notes facilities going forward.

Pursuant to the terms of the Agreements, the Notes Facility now bears interest at floating rate, three-month LIBOR plus 580 basis points. This rate will continue to apply until the additional US$20,000 bank facility is extinguished and the balance owing under the US$30,000 bank facility is less than US$15,000 for five consecutive business days and the Fund achieves a Leverage Ratio, on a trailing twelve months basis, of 3 to 1 or less, at which time the interest rates will revert to those set out in Menu's existing Notes Facility, provided that there are no other defaults. The Fund is precluded from paying distributions to its Unitholders at any time the Leverage Ratio exceeds 3 to 1.

The pre-existing covenants have been suspended until such time as the recall costs no longer impact the Fund's Leverage Ratio and until the additional US$20,000 facility is extinguished and the balance owing under the US$30,000 facility is less than US$15,000 for five consecutive business days and the Fund achieves a Leverage Ratio, on a trailing twelve months basis, of 3 to 1 or less. In addition, EBITDA before recall and restructuring costs and operating leases must be at least $1,000 for the quarter ending December 31, 2007; $5,000 for the quarter ending March 31, 2008; $10,000 for the six months ending June 30, 2008; $15,000 for the nine months ending September 30, 2008; and $20,000, on a trailing twelve-months basis, each quarter thereafter. Under the terms of the amended agreements, not more than $55,000 may be utilized by the Fund for recall-related costs.

The amendments to the Agreements with the Fund's Lenders completed on May 15, 2007 were such that under Canadian generally accepted accounting principles, they resulted in a deemed settlement of the original senior secured notes facility. As a consequence, it was necessary to write-off $1,101 in costs associated with the establishment of the original facility that remained outstanding on March 31, 2007.

During the quarter ended March 31, 2006, the Fund fixed interest rates at 5.35% plus the applicable spread on US$50,000 through to October 2010 (note 23).

b) Obligation under capital lease

The Fund entered into a capital lease in December 2002, collateralized by certain computer equipment. The lease, which was modified in December 2005, provides for blended monthly payments of $3 (2006 - $14).



Minimum lease payments: As at
September 30, 2007 December 31, 2006
$ $

2007 8 32
2008 32 31
---------------------------------------------------------------------------
Total minimum lease payments 40 63
Less: Amounts representing interest at
10.40 % (6.60% - 2006) 3 5
---------------------------------------------------------------------------
Balance of obligation 37 58
Less: Current portion 29 27
---------------------------------------------------------------------------
8 31
---------------------------------------------------------------------------
---------------------------------------------------------------------------


12. Class B Exchangeable Units

Number Carrying
of units value
$

Class B Exchangeable Units of MFLP
December 31, 2005 11,133,655 27,268
Conversion of Class B Exchangeable
Units to Trust Units (note 13) (1,236,431) (3,700)
Foreign currency translation
adjustment attributed to conversion 491
Share of net income for the year 3,699
Share of net foreign currency
translation adjustment for the year 65
---------------------------------------------------------------------------
December 31, 2006 9,897,224 27,823
Share of net loss for the period (20,955)
Share of net foreign currency
translation adjustment for the period (3,324)
---------------------------------------------------------------------------
September 30, 2007 9,897,224 3,544
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Class B Exchangeable Units together with their related Special Trust Units (note 13) can be exchanged on a one-for-one basis with the Fund for Trust Units at the option of the holder.

A portion of the gains or losses arising from the translation of foreign subsidiaries is included in other comprehensive income in unitholders' equity. The foreign currency translation adjustment is allocated between the Class B Exchangeable units and unitholders' equity on a pro-rata basis.

During the second quarter of 2005, certain holders of Class B Exchangeable Units agreed to subordinate their entitlement to distributions for a ten-month period beginning with the distributions in respect of the month of May 2005 and ending with the distributions in respect of the month of February 2006. Distributions subordinated amounted to $4,151. Such Unitholders are entitled to a reimbursement of such subordinated distributions before distributions can be increased above 9 cents per unit, per month. No obligation arises to the Fund in respect of these subordinated amounts until it has generated sufficient distributable cash and declares distributions in excess of 9 cents per unit, per month, accordingly, no amount has been accrued in distributions payable at September 30, 2007 and December 31, 2006.

The Class B Units have economic and voting rights equivalent, in all material respects, to the Trust Units.



13. Trust Units

Authorized
Unlimited number of Trust Units
Unlimited number of Special Trust Units

Issued
Number of Gross Issuance Net
units proceeds costs proceeds
$ $ $
Trust Units
December 31, 2005 17,766,159 181,754 11,300 170,454
Conversion of Class B
Exchangeable
Units during the quarter ended
(note 12)
June 30, 2006 876,598 2,602 - 2,602
September 30, 2006 359,833 1,098 - 1,098
Exercise of options during
quarter ended (note 15)
March 31, 2006 2,575 17 - 17
September 30, 2006 11,037 73 - 73
December 31, 2006 61,071 404 - 404
---------------------------------------------------------------------------
December 31, 2006 19,077,273 185,948 11,300 174,648
Exercise of options
during the quarter ended
(note 15)
March 31, 2007 9,746 54 - 54
---------------------------------------------------------------------------
September 30, 2007 19,087,019 186,002 11,300 174,702
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Special Trust Units

Special Trust Units are used solely for providing voting rights to the holders of Class B Exchangeable Units ("Class B Units") (note 12) and by their terms have voting rights of the Fund. Special Trust Units are not transferable separately from the Class B Units to which they relate. Conversely, the Special Trust Units will automatically be transferred upon a transfer of the associated Class B Units. Each Special Trust Unit entitles the holder thereof to a number of votes at any meeting of Unitholders and holders of Special Trust Units equal to the number of Units that may be obtained upon the exchange of the Class B Units to which the Special Trust Unit relates, but do not otherwise entitle the holder to any rights with respect to the Fund's property or income. The Fund issued 12,631,915 Special Trust Units relating to the Class B Units at the date of acquisition of Menu. There were 9,897,224 Special Trust Units outstanding as at September 30, 2007 (note 12).

Weighted average number of Units outstanding

Basic net income (loss) per Trust Unit is computed by dividing net income (loss) for the period by the weighted average number of Trust Units outstanding during the period. Diluted net income (loss) per Trust Unit includes the effect of exercising unit options (note 15), only if dilutive and includes the Class B Exchangeable Units using the "if converted" method.

The following table reconciles the basic weighted average number of units outstanding to the diluted weighted average number of units outstanding:



Quarter ended September 30,
2007 2006

Weighted average number of Trust Units
outstanding - basic 19,087,019 18,920,845
Weighted average number of Class B Units
outstanding - basic (note 12) 9,897,224 9,987,182
Dilutive effect of options (note 15) - 172,910
-------------------------------------------------------------------------
Weighted average number of units
outstanding diluted 28,984,243 29,080,937
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Nine months ended September 30,
2007 2006

Weighted average number of Trust Units
outstanding - basic 19,085,127 18,275,232
Weighted average number of Class B Units
outstanding - basic (note 12) 9,897,224 10,628,492
Dilutive effect of options (note 15) - 145,394
-------------------------------------------------------------------------
Weighted average number of units
outstanding diluted 28,982,351 29,049,118
-------------------------------------------------------------------------
-------------------------------------------------------------------------


14. Distributions

No distributions were declared on the Trust Units during the quarter and nine months ended September 30, 2007 and 2006.

No distributions were declared on the Class B Units during the quarter and nine months ended September 30, 2007 and 2006.

15. Unit-based compensation

Unit option plan

During the quarter ended March 31, 2006, 959,296 unit options with an exercise price of $4.56 were granted to 41 employees and 6,000 unit options with an exercise price of $5.25 were granted to one employee. During the quarter ended June 30, 2006, 21,000 unit options with an exercise price of $5.00 were granted to one employee and 15,000 unit options with an exercise price of $4.56 were forfeited. During the quarter ended December 31, 2006, 21,000 unit options with an exercise price of $6.20 were granted to one employee, 6,000 unit options with an exercise price of $6.55 were granted to one employee and 42,000 unit options with an exercise price of $4.56 were forfeited. These options vest one-third annually over three years except for 238,148 which will vest after 36 months. During the quarter ended March 31, 2007, 390,156 unit options with an exercise price of $7.34 were granted to 47 employees and during the quarter ended September 30, 2007 18,390 unit options with an exercise price of $3.00 were granted to one employee. The fair value is estimated on the date of grant using the Black-Scholes fair value option pricing model. These options will vest one-third annually over three years. All options will expire 39 months after the date of grant, if not exercised.

The option plan under which these options were granted, which authorizes 2,815,000 units, was approved by the Unitholders at the Annual and Special Meeting of the Fund held on May 11, 2006. Compensation expense of $123 and $348 was recognized for the quarter and nine months ended September 30, 2007, respectively, (2006 - $81 and $192) which was added to contributed surplus. Total compensation expense to be recognized under these awards is estimated to be $1,520.

The fair value of the Trust Unit options issued in 2006 was determined using the Black-Scholes model, incorporating a 3.90% risk free interest rate, a 34% volatility factor, 3.33% expected distributions and expected life of 39 months. On this basis, each Trust Unit option was valued at $1.02.

The fair value of the Trust Unit options issued in 2007 was determined using the Black-Scholes model, incorporating a 4.05% risk free interest rate, a 31% volatility factor, 4.2% expected distributions and expected life of 39 months. On this basis, each Trust Unit option was valued at $1.40.



A summary of option activities since January 1, 2006 is as follows:

Number Range of Weighted average
of options exercise prices exercise prices
$ $

January 1, 2006 74,683 2.977 2.977
Options granted during
quarter ended
March 31, 2006 959,296 4.560-5.250 4.564
June 30, 2006 21,000 5.000 5.000
December 31, 2006 27,000 6.200-6.550 6.278
Options forfeited during
quarter ended
June 30, 2006 (9,000) 4.560 4.560
December 31, 2006 (42,000) 4.560 4.560
Exercise of options during
quarter ended
March 31, 2006 (2,575) 2.977 2.977
September 30, 2006 (11,037) 2.977 2.977
December 31, 2006 (61,071) 2.977 2.977
---------------------------------------------------------------------------
December 31, 2006 956,296 4.560-6.550 4.622
Options granted during
quarter ended
March 31, 2007 390,156 7.340 7.340
September 30, 2007 18,390 3.000 3.000
Exercise of options during
quarter ended
March 31, 2007 (9,746) 4.560 4.560
---------------------------------------------------------------------------
September 30, 2007 1,355,096 4.560-7.340 5.412
---------------------------------------------------------------------------




The outstanding options aresummarized as follows:

Options outstanding Vested options outstanding
Number Weighted average Number Weighted average
remaining life remaining life

Exercise
price
4.560 892,550 20 months 221,383 20 months
5.250 6,000 20 months 2,000 20 months
5.000 21,000 23 months 7,000 23 months
6.200 21,000 29 months - -
6.550 6,000 29 months - -
7.340 390,156 32 months - -
3.000 18,390 37 months - -
---------------------------------------------------------------------------
1,355,096 23.05 months 230,383 20.09 months
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Contributed surplus attributed to Trust Unit options

As at
September 30, 2007 December 31, 2006
$ $
Opening balance 272 272
Compensation expense
recognized for unit options during the 348 272
Options exercised (10) (272)
---------------------------------------------------------------------------
Ending balance 610 272
---------------------------------------------------------------------------
---------------------------------------------------------------------------


As the Trust Unit options are exercised, the associated contributed surplus is reclassified to Trust Units (note 13).

Long-term incentive plan

In 2003, the Fund adopted a discretionary long-term incentive plan (the "Incentive Plan") for the 2003, 2004 and 2005 financial years in which trustees, directors, officers and employees (collectively the "Participants") were all eligible to participate. Pursuant to the Incentive Plan, the Fund could contribute an amount, equal to 14.286% of the amount by which distributable cash, as defined by the Declaration of Trust for a calendar year exceeded $33,500 and $34,000 for the calendar years 2004 and 2005, respectively, to a trust on behalf of the Participants in the Incentive Plan. The trust would then purchase Units, on the open market, equal in value to the amount contributed. Units would be awarded to Participants based on determinations made by the Compensation and Corporate Governance Committee of Menu Foods GenPar Limited's Board of Directors (the "Committee").

Once purchased, the Committee would determine the number of Units acquired on behalf of each Participant based on the amount contributed to the Trust on their behalf. Units awarded vested over a three-year period, subject to the provisions of the Incentive Plan. If the employment of a Participant was terminated prior to the final vesting of the Units attributed to such Participant, such Participant's unvested Units were sold and the net proceeds returned to the Fund. In February 2005, 36,390 Trust Units were purchased for $518 for the benefit of 22 individuals of which 6,330 units had vested by December 31, 2005. The Compensation and Corporate Governance Committee determined that during the quarter ended March 31, 2006, all outstanding units vested to the participants and the Incentive Plan was replaced by the unit option plan discussed above. Consequently compensation expense of $300 was recognized during the quarter ended March 31, 2006.



16. Accumulated other comprehensive income (loss)

As at
September 30, 2007 December 31, 2006
$ $
Unrealized gains (losses) on
translating financial
statements of self-sustaining
foreign operations (37,549) (15,930)
Gains on hedges of unrealized foreign
currency translation, net of tax 24,573 8,576
---------------------------------------------------------------------------
(12,976) (7,354)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

17. Financial expenses

Quarter ended September 30,
2007 2006
$ $
Interest and accretion on senior secured notes 2,225 1,914
Interest on bank indebtedness 1,152 344
Net loss on interest rate swap 1,015 1,116
Amortization of deferred financing costs
and associated costs - 87
Other, net 1 8
---------------------------------------------------------------------------
4,393 3,469
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Nine months ended September 30,
2007 2006
$ $

Interest and accretion on senior
secured notes 6,982 5,818
Interest on bank indebtedness 2,114 1,201
Net loss on interest rate swap 426 219
Amortization of deferred financing charges
and associated costs - 985
Other, net 6 16
---------------------------------------------------------------------------
9,528 8,239
---------------------------------------------------------------------------
---------------------------------------------------------------------------


18. Income taxes

The provision for income taxes in the consolidated statement of operations and deficit reflects an effective rate that differs from the combined Canadian federal and provincial rates primarily as a result of lower taxes in foreign jurisdictions and valuation allowances taken against available tax losses.

The tax effects of temporary differences that give rise to the future tax assets and future tax liabilities are:



As at
September 30, December 31,
2007 2006
$ $
Current future income tax assets:
Accounts receivable, accounts payable
and accrued liabilities 305 335
Inventory provisions 507 1,322
--------------------------------------------------------------------
812 1,657
--------------------------------------------------------------------
--------------------------------------------------------------------
Long-term future income tax liabilities:
Property, plant and equipment 12,516 15,272
Withholding tax on foreign retained
earnings - 652
Tax benefits of loss carry-forwards (28,792) (4,229)
Valuation allowance 15,681 4,229
Other 1,407 161
--------------------------------------------------------------------
812 16,085
--------------------------------------------------------------------
--------------------------------------------------------------------

The benefits of these future tax loss carry-forwards expire between
2008 and 2027.


19. Other expenses and income

Research and development expenses amounted to $57 and $179 for the quarter and nine months ended September 30, 2007, respectively, (2006 - $64 and $194). These expenses are included in cost of sales.

20. Obligations under operating leases



Future minimum payments under operating leases at September 30, 2007 are
as follows:

$
2007 280
2008 1,128
2009 857
2010 360
2011 120
Thereafter 48
---------------------------------------------------------------------------
2,793
---------------------------------------------------------------------------
---------------------------------------------------------------------------


21. Employee benefit plans

The Fund sponsors a 401(K) retirement savings plan in the United States for all eligible employees and a registered defined contribution pension plan for all eligible Canadian employees. The Fund has no past service pension liabilities.

Under the above plans, contributions are made by plan members, with varying matching contributions from the Fund.

The total expense related to these plans was $406 and $1,210 for the quarter and nine months ended September 30, 2007, respectively, (2006 - $383 and $1,204).

22. Segmented information

The Fund's operations fall into one reportable business segment. The Fund is principally engaged in the manufacture of wet pet food products, where it serves major customers on a North American basis. Geographic segment information is presented below.

Accounting policies relating to each geographic operating segment are identical to those used for the purposes of these consolidated financial statements. Intersegment sales are made at values that approximate those prevailing in the markets, less a distribution margin. The point of invoicing and the location of the assets determine the geographic areas.



Quarter ended September 30,
2007 2006
$ $
Sales
Canada
Domestic 10,818 11,392
Foreign 18,717 27,060
Intersegment transfers 1,827 2,420
--------------------------------------------------------------
31,362 40,872
--------------------------------------------------------------
United States
Domestic 50,500 54,621
Foreign 361 114
Intersegment transfers 19,657 31,773
--------------------------------------------------------------
70,518 86,508
--------------------------------------------------------------
101,880 127,380
Elimination of intersegment transfers (21,484) (34,193)
Discounts (2,346) (3,104)
--------------------------------------------------------------
78,050 90,083
--------------------------------------------------------------
--------------------------------------------------------------



Nine months ended September 30,
2007 2006
$ $

Sales
Canada
Domestic 29,238 35,088
Foreign 47,814 76,109
Intersegment transfers 7,446 10,189
----------------------------------------------------------------------
84,498 121,386
----------------------------------------------------------------------
United States
Domestic 117,805 165,302
Foreign 1,045 774
Intersegment transfers 55,635 93,614
----------------------------------------------------------------------
174,485 259,690
----------------------------------------------------------------------
258,983 381,076
Elimination of intersegment transfers (63,081) (103,803)
Discounts (6,102) (9,010)
----------------------------------------------------------------------
189,800 268,263
----------------------------------------------------------------------
----------------------------------------------------------------------

As at
September 30, 2007 December 31, 2006

Property, plant and equipment $ $
Canada 36,619 35,203
United States 105,181 125,005
----------------------------------------------------------------------
141,800 160,208
Less: Accumulated amortization 65,786 62,474
----------------------------------------------------------------------
76,014 97,734
----------------------------------------------------------------------
----------------------------------------------------------------------



Given the nature of the Fund's operations, goodwill relates to the Fund as a whole and cannot practicably be allocated on a geographic basis.

23. Financial instruments

Credit risk

The Fund, in the normal course of business, reviews significant new customers' credit history and financial statements before extending credit and performs regular reviews of its existing credit performance.

Foreign exchange and interest rate risks

The Fund generates significant cash flows in foreign currency and is therefore exposed to risks relating to foreign exchange fluctuations. It is also subject to risks relating to interest rate fluctuations. In order to reduce these risks, the Fund uses derivative financial instruments, which are not held or issued for speculative purposes.

As at September 30, 2007 and December 31, 2006 the Fund did not have any outstanding foreign currency forward contracts.

The Fund has fixed interest rates on a portion of its indebtedness (note 11). The marked-to-market value of the contract at September 30, 2007 resulted in an unrealized loss of $426 (2006 - loss $219), which is included in accounts payable and in interest expense during the period.

Fair value of financial instruments

The carrying values of cash, trade and other receivables, bank indebtedness, accounts payable and accrued liabilities and income taxes payable approximate their fair values because of the short-term nature of these instruments. The carrying value of long-term debt bearing interest at variable rates (note 11) approximates its fair value because effective rates represent the rates that would be used to calculate fair value.

24. Economic dependence

For the nine months ended September 30, 2007, the Fund has approximately 14.4% and 12.0% of its sales to its two largest customers. The largest of these customers has discontinued purchasing products from the Fund effective October 9, 2007, while the other has indicated its intention to stop purchasing products from the Fund over the next nine months. Other than these customers, the Fund does not have a significant exposure to any individual customer. The Fund relies on single suppliers for the majority of its can and pouch requirements. Should these suppliers fail to deliver in a timely manner, delays and/or shutdowns of the Fund's operations could result.

Contact Information

  • Menu Foods GenPar Limited
    Mark Wiens
    Chief Financial Officer
    (905) 826-3870