Premium Brands Income Fund
TSX : PBI.UN

Premium Brands Income Fund

May 12, 2006 13:19 ET

Premium Brands Income Fund Announces Record First Quarter Sales 'Up 14.4%' and EBITDA 'Up 59.1%'

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - May 12, 2006) - Premium Brands Income Fund (TSX:PBI.UN), a leading producer, marketer and distributor of specialty branded consumer food products, announced today its first quarter results for the 13 week period ended April 1, 2006.

HIGHLIGHTS FOR THE QUARTER

- The Fund's results for the first quarter of 2006 represent its fifth consecutive quarter of record sales and EBITDA from continuing operations.

- The Fund posted earnings from continuing operations for the first quarter of $2.1 million or $0.14 per unit versus $0.2 million or $0.01 per share in 2005. Earnings for the quarter were $1.8 million or $0.12 per unit for 2006 as compared to a loss of $0.3 million or $0.03 per share for 2005.

- Sales from continuing operations for the quarter increased by 14.4% to $47.1 million as compared to the first quarter of 2005.

- EBITDA from continuing operations for the quarter increased by 59.1% to $4.0 million and EBITDA, as a percentage of sales, rose to 8.5% from 6.1% in 2005.

- The Fund reaffirmed its guidance for 2006 including projected EBITDA of $22 million to $23 million.

- From July 27, 2005, the date on which Premium Brands converted to an income trust, to the end of the first quarter of 2006 the Fund has declared $12.0 million or $0.7998 per unit in cash distributions.

QUARTER SUMMARY



(in thousands of dollars) For the For the
13 Weeks Ended 13 Weeks Ended
April 1, 2006 March 26, 2005

Sales from continuing operations 47,120 41,204
EBITDA from continuing operations 4,018 2,525
Earnings from continuing operations
before non-controlling interest 2,105 182
Loss from discontinued operations (293) (439)
Net earnings 1,804 (285)


The Fund's sales from continuing operations for the first quarter increased by $5.9 million or 14.4% to $47.1 million while its EBITDA from continuing operations increased by $1.5 million or 59.1% to $4.0 million as compared to 2005. The solid growth in the Fund's sales and EBITDA was the direct result of the continued successful implementation of its two core business strategies:

- The acquisition and development of branded specialty food businesses that have a leading position in a niche market segment.

- The diversification of the Fund's customer base through the acquisition and development of unique distribution and wholesale networks that service a variety of end users including niche retailers, convenience stores, delicatessens, restaurant chains, concession stands and small grocery chains. These networks provide the Fund's specialty food businesses with proprietary access to a large and diversified customer base.

"I am very pleased to say that this is our fifth straight quarter of record sales and EBITDA from continuing operations," stated Mr. George Paleologou, President. "Looking forward we remain very confident on the future prospects for our businesses and are reaffirming our guidance for 2006, including projected EBITDA of $22 million to $23 million."

Earnings from continuing operations increased more than ten fold to $2.1 million or $0.14 per unit from $0.2 million or $0.01 per share in 2005. After discontinued operations, the Fund's net earnings were $1.8 million or $0.12 per unit versus a net loss of $0.3 million or $0.03 per share in 2005.

"I am particularly pleased with the Fund's results given that the first quarter is historically our weakest due to seasonal factors," stated Mr. Fred Knoedler, CEO. "This bodes well for the remainder of the year."

Premium Brands owns a broad range of leading branded specialty food businesses with manufacturing and distribution facilities located in British Columbia, Alberta, Saskatchewan, Manitoba and Washington. In addition, the Fund owns proprietary food distribution and wholesale networks through which it sells both its own products and those of third parties to approximately 20,000 customers. The Fund's family of brands includes Grimm's, Harvest, McSweeney's, Quality Fast Foods, Hempler's, Hygaard and Harlan's.

MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

The following discussion should be read in conjunction with the Fund's 2005 audited consolidated financial statements and the notes thereto, which are prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), the related Management's Discussion and Analysis, and the Fund's 2005 Annual Information Form. These documents, as well as additional information on the Fund, are filed electronically through the System for Electronic Document Analysis and Retrieval ("SEDAR") and are available online at www.sedar.com.

FORWARD-LOOKING STATEMENTS

This discussion and analysis includes forward-looking statements with respect to the Fund, including its business operations strategy and financial performance and condition. These statements generally can be identified by the use of forward-looking words such as "may", "could", "should", "would", "will", "expect", "intend", "plan", "estimate", "project", "anticipate", "believe" or "continue", or the negative thereof or similar variations. Although management believes that the expectations reflected in such forward-looking statements are reasonable and represent the Fund's internal expectations and belief at this time, such statements involve unknown risks and uncertainties which may cause the Fund's actual performance and results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the Fund's expectations include, among other things: (i) seasonal fluctuations in the Fund's sales; (ii) changes in the cost of raw materials used for the Fund's products; (iii) changes in consumer preferences for food products; (iv) competition from other food manufacturers and distributors; and (v) new government regulations affecting the Fund's business and operations.

The Fund disclaims any intention or obligations to revise forward-looking statements whether as a result of new information, future developments, or otherwise.

SUPPLEMENTAL DISCLOSURE

EBITDA and distributable cash are not terms defined under GAAP. As a result, these terms as defined by the Fund may not be comparable to similarly titled measures presented by other publicly traded entities, nor should they be construed as alternatives to other earnings measures determined in accordance with GAAP. The Fund believes that EBITDA is a useful indicator of the amount of cash generated by the Fund's operating businesses and that distributable cash is a useful indicator of the amount of cash available for distribution to unitholders.

EBITDA and distributable cash were calculated as follows:



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(in thousands of dollars) 13 weeks ended 13 weeks ended
Apr 1, 2006 Mar 26, 2005
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Earnings from continuing operations
before non-controlling interest 2,105 182
Depreciation of capital assets 1,269 1,238
Interest and other financing costs 515 742
Amortization of intangible and
other assets 119 198
Loss on sale of assets - 16
Income tax provision 10 149
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EBITDA 4,018 2,525
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(in thousands of dollars) 36 weeks from
date of the
income trust
13 weeks ended conversion to
Apr 1, 2006 Apr 1, 2006
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EBITDA 4,018 13,117
Payments on notes receivable 76 188
Interest and other financing costs (491) (1,249)
Maintenance capital expenditures (379) (792)
Principal debt repayments (32) (74)
Net cash income tax expense (54) (136)
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Distributable cash 3,138 11,054
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RESULTS OF OPERATIONS

For the first quarter of 2006, sales from continuing operations were up $5.9 million or 14.4% to $47.1 million as compared to $41.2 million in the same quarter of 2005. The increase in sales was due to a combination of the acquisition of Harlan Fairbanks in May 2005, which accounted for $5.1 million of the increase, and a $3.9 million increase in sales of the Fund's core specialty food products, partially offset by a $3.1 million decrease in sales of mainstream processed meats. The increase in the Fund's core specialty food products was driven by a combination of favourable weather conditions and a strong economy in Western Canada. The decrease in sales of mainstream processed meats was due to the Fund's decision to exit from certain lower margin business.

As a percentage of sales, gross profit from continuing operations ("gross margin") for the first quarter of 2006 improved to 32.5% from 25.6% in 2005 due to a combination of a favourable sales mix shift resulting from the acquisition of Harlan Fairbanks and the Fund's exit from certain lower margin mainstream processed meats business; lower raw material input costs; and production efficiencies associated with increased sales of internally manufactured specialty food products. The impact of lower raw material input costs was due to a combination of below average commodity input costs in the first quarter of 2006 and above average commodity input costs in the first quarter of 2005.

As a percentage of sales, selling, general and administrative expenses for the first quarter of 2006 increased to 23.9% from 19.5% in 2005 due primarily to a shift in the Fund's sales mix to higher margin products that have higher selling costs associated with them. Higher fuel, freight and wage costs also contributed to the increase.

The Fund's EBITDA and EBITDA margin for the first quarter of 2006 were $4.0 million and 8.5%, respectively, versus $2.5 million and 6.1%, respectively, in the first quarter of 2005. The significant improvement in both the Fund's EBITDA and EBITDA margin was due primarily to the successful implementation of the Fund's core specialty food products and distribution strategies and to a lesser extent lower raw material input costs.

Net earnings for the first quarter of 2006 were $1.8 million or $0.12 per unit as compared to a loss of $0.3 million or $0.03 per share in 2005. The loss from discontinued operations decreased to $0.3 million or $0.02 per unit in the first quarter of 2006 compared to a loss of $0.4 million or $0.04 per share in 2005.

DISTRIBUTIONS

Distributable cash for the 13 week period ended on April 1, 2006 was $3.1 million or $0.2092 per unit as compared to declared distributions of $4.4 million or $0.2940 for this same period. Distributable cash for the 36 week period starting on July 27, 2005, the date of the income trust conversion, and ending on April 1, 2006 was $11.1 million or $0.7370 per unit as compared to declared distributions of $12.0 million or $0.7998 per unit for this same period.

For both the quarter and the 36 week period ended April 1, 2006 the Fund's declared distributions exceeded its distributable cash due to the seasonality of its business combined with the fact that its current estimated monthly cash distribution of $0.098 per unit is based on an annual estimated amount averaged over twelve months. The Fund's first and fourth quarters, which make up 27 weeks of the 36 week period ended April 1, 2006, are its weakest due primarily to poor weather conditions in Western Canada, which result in reduced outdoor activities by consumers and, in turn reduced consumption of the Fund's products. Furthermore, the first quarter is the Fund's weakest due to there being few festive holiday occasions to help partially offset the impact of reduced outdoor activities.

Overall for 2006 the Fund expects to achieve a payout ratio of approximately 93% to 94%. Its long-term targeted payout ratio is 85% to 90%.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows from Operating Activities

For the first quarter of 2006 continuing operations generated $3.5 million in cash and used $1.4 million for working capital. The cash used for working capital related primarily to an increase in inventory of $3.6 million, which was in turn the result of the 2006 Easter holiday falling in the second quarter versus the first quarter in 2005, and an increased emphasis on building inventory for the Fund's busier spring and summer months in order to compensate for certain internal capacity restraints. The cash impact resulting from the higher inventory levels was partially offset by a $2.6 million increase in accounts payable amounts, which were used primarily to finance a portion of the Fund's inventory build up costs.

Discontinued operations used $0.3 million in cash, most of which was used to fund operations. For 2006 the Fund is still projecting for its discontinued operations to be a net generator of cash as the loss incurred by its operations is expected to be less than cash generated from the sale of its redundant assets.

Cash Flows from Financing Activities

During the first quarter of 2006, financing activities generated a net cash flow of $0.7 million as $4.9 million in draws on the Fund's credit facilities were used to fund cash shortfalls resulting from its operating and investing activities and the pay out of distributions.

Cash Flows from Investing Activities

For the first quarter of 2006 investing activities used $2.6 million in cash, $1.0 million of which was for capital expenditures and $1.5 million for advances for the construction of a new 28,000 square foot production facility in Ferndale, Washington for Hempler Foods Group LLC ("Hempler's"), a Washington based manufacturer of premium, organic and natural processed meat products. During the quarter the Fund acquired a 50% interest in Hempler's as part of a 50/50 merger of Hempler's with the Fund's Oregon based meat snack operation. The transaction involved the merger of two equivalent businesses and therefore there was no cash component to it other than professional and advisory fees.

Under the terms of this transaction, the Fund has advanced a total of $2.6 million to the builder of the Ferndale production facility, $1.1 million of which was advanced in 2005. These advances will be repaid later this year when Hempler's completes a long-term debt financing, the proceeds of which will be used to purchase the facility from the builder. Accordingly the advances have been accounted for as a current note receivable.

The new Ferndale production facility, which is currently leased by Hempler's, was completed during the first quarter of 2006 and replaced the production capacity of the Fund's Oregon operation and Hempler's older Washington based plant, both of which have been shut down.

The Fund has accounted for the acquisition of its interest in Hempler's using the purchase method and has consolidated Hempler's and recorded preliminary estimates for goodwill and non-controlling interest.

Subsequent to the quarter, the Fund completed the acquisition of an additional 10% interest in Hempler's for US$580,000 in cash increasing its total interest in Hempler's to 60%.



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Premium Brands Income Fund

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CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)

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Apr 1, 2006 Dec 31, 2005 Mar 26, 2005

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Current assets:
Cash and cash equivalents $ 407 $ 455 $ 371
Accounts receivable 16,932 16,894 14,622
Current portion of
notes receivable 2,998 1,501 776
Inventories 21,200 17,568 10,971
Prepaid expenses 2,483 1,419 2,031
Future income taxes 304 304 3,000
Current assets of
discontinued operations 770 907 3,114
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45,094 39,048 34,885

Future income taxes 524 524 12,199
Capital assets 45,079 44,821 45,520
Goodwill 62,237 61,330 44,367
Intangible assets 4,586 5,345 3,846
Other assets 2,990 3,083 3,499
Non-current assets of
discontinued operations 1,485 1,532 8,415
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$ 161,995 $ 155,683 $ 152,731
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Current liabilities:
Cheques outstanding $ 1,777 $ 1,501 $ 1,490
Bank indebtedness 4,899 - 7,990
Distributions payable (note 4) 1,470 1,470 -
Accounts payable and accrued
liabilities 19,432 16,840 14,875
Current portion of
long-term debt 97 112 4,113
Current liabilities of
discontinued operations 1,418 1,604 1,290
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29,093 21,527 29,758

Long-term debt 22,279 22,296 31,343
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51,372 43,823 61,101

Non-controlling interest 1,759 - 263

Unitholders' equity:
Unitholders' capital 127,779 127,810 -
Share capital - - 121,748
Contributed surplus - - 16
Accumulated deficit (3,974) (5,778) (28,026)
Accumulated distributions
declared (11,998) (7,588) -
Cumulative translation
adjustment (2,943) (2,584) (2,371)
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108,864 111,860 91,367
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$ 161,995 $ 155,683 $ 152,731
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Premium Brands Income Fund

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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except per unit/share amounts)

--------------------------------------------------------------------
13 weeks ended 13 weeks ended
Apr 1, 2006 Mar 26, 2005
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Sales $ 47,120 $ 41,204
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Gross profit 15,292 10,553
Selling, general and administrative
expenses 11,274 8,028
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4,018 2,525
Depreciation of capital assets 1,269 1,238
Interest and other financing costs 515 742
Amortization of intangible and
other assets 119 198
Loss on sale of assets - 16
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2,115 331
Income tax provision 10 149
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Earnings from continuing operations
before non-controlling interest 2,105 182
Non-controlling interest - net of
income taxes 8 28
Loss from discontinued operations - net
of income taxes 293 439
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Earnings (loss) for the period $ 1,804 $ (285)
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Earnings per unit/share from continuing
operations:
Basic and diluted $ 0.14 $ 0.01

Loss per unit/share from discontinued
operations:
Basic and diluted $ (0.02) $ (0.04)

Earnings (loss) per unit/share
Basic and diluted $ 0.12 $ (0.03)

Weighted average units/shares outstanding 15,000 10,431

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Premium Brands Income Fund

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

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13 weeks ended 13 weeks ended
Apr 1, 2006 Mar 26, 2005
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Cash flows from operating activities:
Earnings from continuing operations
before non-controlling interest $ 2,105 $ 182
Items not involving cash:
Depreciation of capital assets 1,269 1,238
Amortization of intangible and
other assets 119 198
Stock-based compensation - 5
Loss on sale of assets - 16
Future income taxes - 119
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3,493 1,758
Change in continuing non-cash
working capital (1,365) (2,631)
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Funds from continuing operations 2,128 (873)
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Discontinued operations (295) (1,182)
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1,833 (2,055)
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Cash flows from financing activities:
Long-term debt - net (32) 598
Bank indebtedness and cheques
outstanding 5,175 693
Distributions paid to unitholders (4,410) -
Other (30) 2,191
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703 3,482
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Cash flows from investing activities:
Change in notes receivable - net (1,421) -
Proceeds from sales of assets - net - 14
Capital asset additions (1,028) (1,094)
Other (135) (100)
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(2,584) (1,180)
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Change in cash and cash equivalents (48) 247
Cash and cash equivalents, beginning
of period 455 124
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Cash and cash equivalents, end of period $ 407 $ 371
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Interest paid $ 491 $ 800

Net income taxes paid $ 54 $ 59


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

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Premium Brands Income Fund

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Notes to the Consolidated Financial Statements
(Unaudited and in thousands except per unit/share amounts)


1. Conversion to an Income Fund and Nature of Operations

Premium Brands Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of British Columbia pursuant to a Declaration of Trust dated June 8, 2005. The Fund was established for the purpose of investing in the food manufacturing and distribution businesses of Premium Brands Inc. (the "Company"). Through its wholly owned subsidiaries, the Fund owns a broad range of leading branded specialty food businesses with manufacturing and distribution facilities located in British Columbia, Alberta, Saskatchewan, Manitoba and Washington. In addition, the Fund owns proprietary food distribution and wholesale networks through which it sells both its own products and those of third parties.

Pursuant to a plan of arrangement (the "Arrangement") that became effective July 27, 2005, the Fund indirectly acquired 100% of the shares of the Company in exchange for either units of the Fund or exchangeable limited partnership units (which are exchangeable into units of the Fund on a one-for-one basis) issued by Premium Brands Holdings Limited Partnership ("Holdings LP"), a subsidiary of the Fund. The Company and each of its Canadian subsidiaries were amalgamated and the Premium Brands business was transferred to Premium Brands Operating Limited Partnership (the "Partnership"). The transfer of the common shares of the Company to the Fund was recorded at the carrying values of the Company's assets and liabilities on July 27, 2005 in accordance with the continuity of interest method of accounting as the Fund is considered to be a continuation of the Company. Accordingly, $38.7 million was transferred from accumulated deficit to unitholders' capital. The result of these transactions was to convert the Company and its business from a corporate structure to an income trust structure. The results of operations, cash flows and financial position for all periods prior to July 27, 2005 are those of the Company.

On July 27, 2005, units of the Fund (TSX symbol PBI.UN) commenced trading on the TSX in place of the common shares of the Company (TSX symbol FFF).

2. Significant Accounting Policies

The accompanying interim consolidated financial statements of the Fund have been prepared in accordance with accounting principles generally accepted in Canada for interim reporting. Accordingly, these interim consolidated financial statements do not include all of the financial statement disclosures required by Canadian generally accepted accounting principles for annual financial statements and should be read in conjunction with the Fund's annual audited financial statements and notes for the year ended December 31, 2005 filed on SEDAR at www.sedar.com. These unaudited interim consolidated financial statements follow the same accounting policies and methods of computation as used in the 2005 annual financial statements of the Fund, except as disclosed below.

Effective January 1, 2006, the Fund retroactively adopted the Canadian Institute of Chartered Accountants ("CICA") Emerging Issues Committee Abstract 156, "Accounting by a Vendor for Consideration Given to a Customer (including a reseller of the vendor's products)" which requires vendors to classify certain consideration provided to customers as a reduction of sales rather than as a cost of goods sold or a selling, general and administrative expense ("SG&A") unless the vendor receives, or will receive, an identifiable benefit in exchange for the consideration. The adoption of this standard resulted in a reduction of sales, gross profit and SG&A during the quarter of approximately $2.0 million (2005 - $2.1 million).

Due to the seasonal nature of the Fund's business, the results of operations for any interim period are not necessarily indicative of the results to be expected for other interim periods or the full year. In general, the Fund's first quarter is weakest, and its second and third quarters are strongest.

3. Unit based Compensation

Concurrent with the income fund conversion on July 27, 2005, the Fund put in place a new long term incentive plan ("LTIP") for officers and key employees. Pursuant to the LTIP, the Fund will set aside a pool of funds based upon the amount, if any, by which the distributable cash per unit exceeds certain defined threshold amounts. The set aside funds will be used by the Fund to purchase units in the open market which, after a set vesting period, will be distributed to the participants of the LTIP. As at April 1, 2006 an accrual of $0.1 million had been recorded in respect of the LTIP.

4. Distributions

During the fiscal period ended April 1, 2006, the Fund declared distributions to unitholders of $4,234,000 or $0.294 per unit and Holdings LP declared distributions of $176,000 or $0.294 per unit to ELP unitholders. The aggregate amounts and record dates of these distributions are as follows:



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Amount Per unit
Record date $ $
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January 31, 2006 1,470 0.098
February 28, 2006 1,470 0.098
March 31, 2006 1,470 0.098
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4,410 0.294
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During March 2006, the Fund and Holdings LP declared aggregate distributions of $1.5 million to unitholders and ELP unitholders of record on March 31, 2006, which was paid subsequent to the quarter end and is reported as a current liability as at April 1, 2006.

5. Acquisitions

In February 2006 the Fund merged its U.S. based meat snack operation with Hempler Foods LLC ("Hempler's"), a Washington based manufacturer of premium, organic and natural processed meat products. Under the terms of the merger, both the Fund and Hempler's moved their respective U.S. production facilities into a new 28,000 square foot facility located in Ferndale, Washington. As at April 1, 2006, the Fund had a 50% interest in the merged entity and had advanced $2.6 million to the builder of the new Ferndale production facility for construction costs.

This transaction was accounted for as an acquisition using the purchase method and the results of the acquired operations were consolidated from the date of acquisition. The Fund has not yet completed the determination of the fair values of the individual assets acquired and liabilities assumed, and accordingly the allocation of the purchase cost is preliminary and subject to possible changes.

Subsequent to April 1, 2006, the Fund acquired an additional 10% interest in Hempler's for US$580,000 in cash increasing its equity interest in Hempler's to 60%.

6. Comparative Figures

Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in 2006.


Contact Information

  • Premium Brands Income Fund
    George Paleologou
    President
    (604) 656-3100
    or
    Premium Brands Income Fund
    Will Kalutycz
    CFO
    (604) 656-3100