Associated Brands Income Fund
TSX : ABF.UN

Associated Brands Income Fund

March 28, 2006 05:01 ET

Associated Brands Income Fund Announces Fourth Quarter and Year End 2005 Results

TORONTO, ONTARIO--(CCNMatthews - March 28, 2006) - Associated Brands Income Fund (the "Fund" or "Associated Brands") (TSX:ABF.UN) announced today the results of the Fund for the three months and year ended December 31, 2005.

Sales increased 6.2% in the fourth quarter of 2005 to $42.8 million from $40.3 million last year, the result of increased volumes with existing customers and new products introduced through the year to existing and new customers. For the year ended December 31, 2005, sales were $150.5 million compared to $156.1 million in the prior year. The decline in 2005 was due primarily to reduced contract manufacturing business in the United States and increased competition from branded products in the Canadian marketplace. The appreciation of the Canadian dollar compared to the U.S. dollar reduced reported sales by $0.9 million in the fourth quarter of 2005 and $6.0 million for the year ended December 31, 2005 compared to the same periods in 2004.

"We were pleased to see the positive momentum in our fourth quarter sales compared with the prior year," commented Rob Dougans, President and Chief Executive Officer. "Our turnaround must be led by growing our sales profitably, and we will continue to work with our customers to develop new, value-added products while also strengthening and restructuring our sales and marketing teams, primarily in the United States, where we have our largest opportunity to generate growth."

EBITDA in the fourth quarter of 2005 was $0.7 million, and for the year ended December 31, 2005 was $8.0 million compared to $14.9 million in 2004. EBITDA was negatively impacted in 2005 by a number of external and internal factors. Costs were higher for all industry participants due to inflation in the prices of commodities, ingredients, packaging, energy and freight. These increased costs were absorbed where they could not be passed on to customers. Unfavourable manufacturing variances were experienced during the year, due primarily to reduced productivity and higher labour costs. The unusually hot and humid weather experienced during the summer months of 2005 reduced plant productivity at the Toronto and Medina facilities. Reduced production volumes versus year ago also negatively affected fixed overhead absorption in 2005, and higher than expected levels of inventory obsolescence for products and packaging were experienced.

"One of our key objectives is to improve our operating margins by driving costs down, enhancing production efficiency, and better leveraging our operating and technology assets. A significant portion of our 2006 product input requirements are now price protected, and a renewed focus on cost reductions has resulted in specific action plans including plans relating to supplier resourcing, as well as product and process reengineering," Mr. Dougans added. "In addition, two of our accretive capital projects aimed at improving operating efficiency and costs have been planned for commercialization in 2006."

Selling, general and administrative expenses were moderately higher in 2005 than in the prior year due primarily to costs related to conforming labeling to new U.S. and Canadian regulations that were effective as of the end of 2005. This related to mandatory Health Canada nutritional labelling and reporting of trans-fat content on products sold in the U.S. as mandated by new FDA regulations. SG&A expenses in 2005 also include $0.2 million of consent fees paid to the Fund's lender in connection with its November 14, 2005 amended credit facility agreement and a waiver of several financial covenants at December 31, 2005.

With the reduction in earnings and cash flows in 2005, the Fund performed an assessment on goodwill and intangible assets for potential impairment and determined that a non-cash write-down of goodwill in the amount of $62.0 million was required and that a non-cash write-down of intangible assets in the amount of $1.2 million was required. These non-cash charges to income were taken in the third and fourth quarters of 2005.

Distributable cash in the fourth quarter of 2005 was negative $0.8 million or $(0.067) per Fund unit compared to $2.5 million or $0.215 per Fund unit last year. For the year ended December 31, 2005, distributable cash was $3.9 million or $0.335 per Fund unit compared to $10.5 million or $0.893 per Fund unit in 2004. Distributions were $0.110 per Fund unit in the fourth quarter of 2005, and $0.700 per Fund unit for the year ended December 31, 2005. In January 2006 the Fund suspended further monthly cash distributions until such time as the business performance of the Fund improves on a sustained basis.

Certain subsidiaries of the Fund are currently in default under their credit agreement with a Canadian chartered bank and under the exchangeable debentures of Associated Brands Holdings Limited Partnership. The credit agreement and the terms of the exchangeable debentures provide the bank and the debenture holders, respectively, with certain rights and remedies during the continuance of a default, including the right to accelerate the debt due under the credit agreement and the exchangeable debentures, respectively, and the right to realize upon security that has been granted by the Fund's subsidiaries. As part of the turnaround plan, the Fund intends to continue discussions with the bank and the debenture holders with respect to the Fund's ongoing credit relationship with such parties.

"Our performance in 2005 was disappointing, as we did not meet the growth and profitability targets we set at the beginning of the year," Mr. Dougans concluded. "Our immediate focus is to capitalize on Associated Brands' numerous strengths, and we are taking a number of specific steps to turnaround the business, and to deliver improved operating and financial results."



Financial Highlights:

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Three months ended Year ended
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($000, except unit and
per unit amounts) Dec. 31 Dec. 31, Dec. 31 Dec. 31,
2005 2004 2005 2004
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Sales 42,820 40,327 150,500 156,096
EBITDA 659 3,621 7,987 14,919
Earnings (Loss) before
under-noted items (615) 1,897 2,028 7,785
Earnings (Loss) per
unit - diluted $ (0.052) $0.145 $ 0.155 $ 0.596
Write-down of Goodwill
and Intangible Assets (32,000) - (63,245) -
Non-recurring Expenses (883) - (883) -
Non-controlling interest 3,350 - 6,210 -
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Net Earnings (Loss) (30,148) 1,897 (55,890) 7,785
Net Earnings (Loss)
per Unit (diluted) $ (2.563) $0.145 $(4.751) $ 0.596
Distributable Cash (786) 2,526 3,941 10,500
Distributable Cash per
Fund Unit $ (0.067) $0.215 $ 0.335 $ 0.893
Distributions Declared
per Fund Unit $ 0.110 $0.229 $ 0.700 $ 1.036
Weighted Average Fund
Units Outstanding 11,762,800 11,762,800 11,762,800 11,762,800
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The Fund has restated its unaudited interim financial information for its third quarter ended September 30, 2005 to correct its accounting for the non-controlling interest in accordance with EIC-151, "Exchangeable Securities Issued by Subsidiaries of Income Trusts". Based on the Class B Exchangeable Unit terms, the non-controlling interest does not participate in the income of the Fund but does participate in losses. As a result, the non-controlling interest should have been allocated its share of the net losses for the three months and nine months ended September 30, 2005. This error was discovered during the finalization of the Fund's audited consolidated financial statements for the year ended December 31, 2005.

The effect of the restatement is to reduce the net loss, increase the non-controlling interest share of loss and decrease the deficit on the Statement of Earnings (Loss) and Deficit for the three months and nine months ended September 30, 2005 by $2,860. Also the non-controlling interest and deficit on the Balance Sheet has been decreased by $2,860. As a result, the net loss per Fund unit has been restated from $2.622 to $2.378 per Fund unit. The restated third quarter interim financial information has been included in the Quarterly Results of Operations in the Management's Discussion and Analysis for the year ended December 31, 2005.

ASSOCIATED BRANDS INCOME FUND (TSX:ABF.UN), through its operating subsidiaries, is a leading North American manufacturer and supplier of private-label dry-blend food products and household products. Since beginning operations in 1985, Associated Brands has grown to become one of the three largest suppliers of a diverse range of private-label dry-blend food products in North America, producing over eleven million cases annually across multiple product categories currently sold to 44 of the 50 largest North American food retailers. Associated Brands plans to build unitholder value by leveraging its solid presence in the U.S. private-label market, expanding its product offerings to current and new customers and adding additional contract manufacturing business, and through accretive acquisitions that meet its strict operating and strategic criteria. More information can be obtained at www.associatedbrands.com.

This press release contains certain forward-looking information and statements. Forward-looking information typically contains statements with words such as "consider", "anticipate", "believe", "expect", "plan", "intend", "may", "likely" or similar words suggesting future outcomes or statements regarding an outlook for, or future changes in, the Fund's financial performance, results of operations or distributions or other expectations, future events or performance. Readers should not place undue reliance on forward-looking information and should be aware that forward looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements of the Fund to differ materially from those suggested by the forward-looking statements. These factors include, but are not limited to, the possible failure to successfully plan and execute business improvement strategies; restrictions and covenants contained in the Fund's credit agreement and under the terms of its exchangeable debentures and the occurrence of defaults under such covenants; the absence of long term sales contracts; possible failure to develop new product offerings; operating hazards; sensitivity of sales to weather conditions; product liability; compliance with or changes in environmental, health and safety and other regulations and guidelines; possible declines in vertical industry markets (grocery, foodservice, industrial and contract manufacturing); competition; reliance on key personnel; possible labour action; volatility in commodity prices and other input materials; prices; foreign exchange exposure; exposure to floating interest rates; exposures under derivative financial instruments; the possible failure to expand into the United States; changes in consumer preferences; and capital expenditures.

The above list of important factors affecting forward-looking information is not exhaustive, and reference should be made to the other risks discussed in the Fund's filings with Canadian securities regulatory authorities. The Fund undertakes no obligation, except as required by law, to update publicly or otherwise any forward-looking information, whether as a result of new information, future events or otherwise, or the above list of factors affecting this information.

Except as outlined below, financial information is in accordance with Canadian generally accepted accounting principles ("GAAP").

As used herein, "EBITDA" means earnings before interest, income taxes, depreciation, amortization, translation gains and losses arising on all monetary assets and liabilities of the Fund denominated in a foreign currency, goodwill and intangible assets write-down, non-recurring expenses and non-controlling interests. EBITDA is not a recognized measure under GAAP. Management believes that EBITDA is a useful supplemental measure to net earnings (loss), as it provides investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes.

Distributable cash is also not a defined term under GAAP. Distributable cash is equal to net earnings before amortization, future income taxes and translation gains and losses arising from all monetary assets and liabilities of the Fund denominated in a foreign currency, less capital expenditures and debt repayments and reserves that the trustees may consider appropriate. Management believes distributable cash is a useful supplemental measure of operating performance, as it provides investors with an indication of cash available for distribution.

Investors should be cautioned that neither EBITDA nor distributable cash should be construed as an alternative to net earnings (loss) determined in accordance with GAAP as an indicator of the Fund's performance or to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows. The Fund's method of calculating EBITDA and distributable cash may differ from the methods by which other issuers calculate EBITDA and distributable cash and, accordingly, EBITDA and distributable cash may not be comparable to measures used by other issuers.

Associated Brands' 2005 Consolidated Financial Statements and Management's Discussion and Analysis are attached and will be available on the investor relations page at www.associatedbrands.com and on SEDAR at www.sedar.com.


MANAGEMENT'S DISCUSSION AND ANALYSIS

QUARTER AND YEAR ENDED DECEMBER 31, 2005

The following management's discussion and analysis ("MD&A") of Associated Brands Income Fund (the "Fund") provides a review of business and market developments, results of operations and financial position for the years ended December 31, 2005, 2004 and 2003. This discussion should be read in conjunction with the Fund's audited consolidated financial statements and related notes thereto for the years ended December 31, 2005 and 2004 (the "2005 Annual Financial Statements"). Information contained in this MD&A is based on information available to management as of March 6, 2006.

Forward Looking Statements

The MD&A contains certain forward-looking information and statements. Forward-looking information typically contains statements with words such as "consider", "anticipate", "believe", "expect", "plan", "intend", "may", "will", "likely" or similar words suggesting future outcomes or statements regarding an outlook for, or future changes in, the Fund's financial performance, results of operations or distributions or other expectations, future events or performance. Although the Fund believes that the expectations reflected in these forward-looking statements are reasonable, readers should not place undue reliance on forward-looking information and should be aware that forward looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements of the Fund to differ materially from those suggested by the forward-looking statements. These factors include, but are not limited to, the possible failure to successfully plan and execute business improvement strategies; restrictions and covenants contained in the Fund's credit agreement and under the terms of its exchangeable debentures and the occurrence of defaults under such covenants; the absence of long term sales contracts; possible failure to develop new product offerings; operating hazards; sensitivity of sales to weather conditions; product liability; compliance with or changes in environmental, health and safety and other regulations; possible declines in vertical industry markets (grocery, foodservice, industrial and contract manufacturing); competition; reliance on key personnel; possible labour action; volatility in commodity prices and other input materials; prices; foreign exchange exposure; exposure to floating interest rates; exposures under derivative financial instruments; the possible failure to expand into the United States; changes in consumer preferences; and capital expenditures.

The above list of important factors affecting forward-looking information is not exhaustive, and reference should be made to the risks discussed in the MD&A under "Risk and Uncertainties" and in the Fund's filings with Canadian securities regulatory authorities. The Fund undertakes no obligation, except as required by law, to update publicly or otherwise any forward-looking information, whether as a result of new information, future events or otherwise, or the above list of factors affecting this information.

Overview

The Fund is an unincorporated open-ended trust established under the laws of the Province of Ontario. With the completion of the Fund's initial public offering ("IPO") and related transactions in November 2002, the Fund holds approximately 90% of the partnership interests of Associated Brands Holdings Limited Partnership ("ABHLP") which in turn owns 100% of Associated Brands Inc. The remaining partnership units of ABHLP are held by former shareholders of Associated Brands Inc. The Fund carries on business in Canada through Associated Brands Limited Partnership ("Associated Brands LP") and in the U.S. through Associated Brands, Inc.

The Fund is a leading North American manufacturer and supplier of private label dry-blend food products and household products, as well as a number of branded products, to most of North America's food retailers and mass merchandisers. Since beginning operations in 1985, it has grown to become one of North America's three largest suppliers of dry-blend private label food products. Management believes it is the largest private-label supplier of bouillon, artificial sweeteners and side dishes in the U.S., and in Canada holds the largest market share in ten private label categories. Its customer base includes 44 of the 50 largest North American food retailers.

Operating out of four production facilities in Canada and one in the U.S., the Fund offers a full range of support services, including packaging and product development, technical databanks on such elements as nutritional and allergen information, comprehensive quality assurance programs, efficient logistics and warehousing, and full Electronic Data Interchange (EDI) capabilities. The Fund's facilities are HACCP, CFIA, USDA and AIB approved, where appropriate.

The Fund's private label and branded dry-blend food products include flavoured drink mixes, iced tea, hot chocolate, various dessert mixes, soups, party snacks, baking powder, bouillon, side dishes and artificial sweeteners. These products represented approximately 82% of the Fund's sales in 2005. The Fund also manufactures a range of household products, including J-Cloth re-useable towels, plastic food wrap, sandwich and freezer bags, and fabric dyes, all of which accounted for approximately 7% of sales in 2005. Contract manufacturing and industrial revenues accounted for 9% of sales for the year, while other products, including cereals, accounted for the balance of sales in 2005.

Business Environment

In Canada, private label sales currently account for approximately 25% of total grocery sales. As large national grocery and retail chains expand their private label programs, it is anticipated this market share will increase over time. Management believes the Fund is Canada's leading provider of private label dry-blend food products.

While the private label business is reasonably well developed in Canada and the United Kingdom, where private label sales currently account for an estimated 25% and 41% of total grocery sales respectively, in the U.S. private label sales currently account for approximately 15 to 23% of total grocery sales. Management believes the U.S. market penetration for private label products will increase over time as consumer acceptance grows due to quality improvements, more aggressive marketing, a broader product range and lower retail prices. In addition, grocery retailers in the U.S. are recognizing that private-label programs differentiate them in the marketplace and generate more consistent retail margins for them than branded products.

Mission and Vision

A primary objective of the Fund is to deliver stable and sustainable cash distributions to its Unitholders while growing distributable cash and Unitholder value over time.

To meet this objective, management's goal is to become the "partner of choice" for private label development, sourcing, manufacturing and support with leading North American food retailers. The Fund's value proposition is based on closely collaborating with its customers to proactively provide ideas, products and services that meet their needs. It seeks to become the preferred single source supplier for its customers by providing the highest quality products and through a focus on solutions selling and industry-leading service.

Long-term Business Goals

1. To profitably grow sales in both its Canadian and U.S. markets
Management believes that sales in Canada and the U.S. will grow as the Fund introduces more of its products to its current customers, acquires new customers and leverages its strong reputation to build its contract manufacturing business for leading branded products in North America. In addition, the Fund continues to target growth opportunities and build its sales pipeline of potential new sales opportunities. In the markets within which the Fund operates, six to eighteen months can typically pass in converting a sales opportunity into new product shipments.

2. To increase operating contribution margins and distributable cash
Management's efforts to improve margins are focused on sourcing and procurement, manufacturing process improvements, supply chain management, business portfolio management, development of higher margin products, and strategic pricing.

3. To complete accretive acquisitions that meets its strategic criteria
Over the last three years the acquisition market has remained very competitive and valuations have continued to be too high to be accretive to Unitholders. While accretive acquisitions remain an important long-term goal, management intends to focus its immediate efforts on strengthening its core business.

Financial Statements and Accounting Policies

The Fund prepares its consolidated financial statements in Canadian dollars in accordance with Canadian generally accepted accounting principles ("GAAP"). The Fund's significant accounting policies are summarized in Note 2 of the 2005 Annual Financial Statements. The Fund also utilizes certain non-GAAP measures generally used by Canadian income funds as indicators of financial performance. EBITDA is not a recognized measure under GAAP, however management believes that EBITDA is a useful supplemental measure to net earnings as it provides investors and management with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. EBITDA is often the best measure of the Fund's ability to generate cash and service debt and is commonly used by the investment community. The Fund defines EBITDA as earnings before interest, income taxes, depreciation, amortization, translation gains and losses arising on monetary assets and liabilities of the Fund denominated in a foreign currency, goodwill and intangible asset write-downs, non-controlling interest and non-recurring expenses or income.

Distributable cash is also not a recognized measure under GAAP. Management believes that distributable cash is a useful supplemental measure of operating performance as it provides investors with an indication of cash available for distribution. Distributable cash is generally used by Canadian open-end trusts as an indicator of financial performance and is calculated as net earnings before depreciation, amortization, future income taxes, translation gains and losses arising on monetary assets and liabilities of the Fund denominated in a foreign currency less maintenance capital expenditures and scheduled debt repayments and reserves that the trustees of the Fund may consider appropriate.

These non-GAAP measures are not standardized measures. The Fund's methods of calculating EBITDA and distributable cash may differ from the methods utilized by other issuers and, accordingly, EBITDA and distributable cash as used by the Fund may not be comparable to similar measures used by others. These measures are intended to provide additional information to facilitate understanding of the Fund's results of operations and financial position. Investors should be cautioned that neither EBITDA nor distributable cash should be considered in isolation or construed as an alternative to net income determined in accordance with GAAP as an indicator of the Fund's performance or to cash flows from operating, investing and financing activities as a measure of the Fund's liquidity and cash flow.

The following tables reconcile net earnings to EBITDA and distributable cash.



Reconciliation of Net Earnings to EBITDA
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($000) 2005 2004 2003
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Net earnings (loss) for the year (55,890) 7,785 7,680
Income tax 63 1,738 2,402
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Earnings (loss) before income tax (55,827) 9,523 10,082
Adjust for:
Non-controlling interest(1) (6,210) - -
Interest expense 2,329 1,931 1,705
Exchange loss (gain) on translation
of monetary assets and liabilities
denominated in a foreign currency(2) 148 (119) 1,543
Amortization 3,419 3,584 3,578
Other expenses(3) 883 - -
Write-down of goodwill and
intangible assets 63,245 - -
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EBITDA 7,987 14,919 16,908
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Notes:

1. The non-controlling interest represents approximately 10% of the total outstanding units of the Fund (Class B exchangeable units and Fund units) at December 31, 2005. For the year ended December 31, 2005, the non-controlling interest has been allocated $6.2 million of the net loss for the year. No earnings have been allocated to the Class B exchangeable units in 2004 or 2003 since the distributable cash targets were not met.

2. Unrealized exchange losses (gains) arise on the translation of monetary assets and liabilities of the Fund denominated in a foreign currency. The components are described in Note 15 to the 2005 Annual Financial Statements.

3. The other expenses relate to a one-time charge to exit a contractual lease obligation and to write-off costs on termination of a manufacturing contract as described in Note 11 of the 2005 Annual Financial Statements.



Reconciliation of Net Earnings to Distributable Cash
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($000) 2005 2004 2003
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Net earnings (loss) for the year (55,890) 7,785 7,680
Adjust for:
Non-controlling interest(1) (6,210) - -
Amortization 3,419 3,584 3,578
Write-down of goodwill and
intangible assets 63,245 - -
Accretion expense on
exchangeable debentures 23 - -
Future income taxes (427) (71) 166
Exchange loss (gain) on translation
of monetary assets and liabilities
denominated in a foreign currency(2) 148 (119) 1,543
Maintenance capital expenditures (367) (679) (1,211)
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Distributable cash 3,941 10,500 11,756
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Notes

1. The non-controlling interest represents approximately 10% of the total outstanding units of the Fund (Class B exchangeable units and Fund units) at December 31, 2005. For the year ended December 31, 2005, the non-controlling interest has been allocated $6.2 million of the net loss for the year. No earnings have been allocated to the Class B exchangeable units in 2004 or 2003 since the distributable cash targets were not met.

2.Unrealized exchange losses (gains) arise on the translation of monetary assets and liabilities of the Fund denominated in a foreign currency. The components are described in Note 15 to the 2005 Annual Financial Statements.

Critical Accounting Estimates

The valuation of goodwill and intangible assets is a critical accounting estimate that requires management's judgment and estimates. Under GAAP, goodwill and intangible assets are not amortized, but instead, are assessed for impairment no less frequently than on an annual basis. Goodwill and intangible assets are assessed by management with assistance from an independent, third party valuation firm to determine whether their fair values are less than their carrying values. If the fair value of goodwill or intangible assets is less than its carrying value, the goodwill or intangible assets are considered impaired and an impairment charge will be recognized. The fair values of goodwill and intangible assets are determined from valuation models that consider various factors such as normalized and projected cash flows, cash flow multiples and discount rates. The Fund's management uses its best judgment in estimating fair values in this process. Imprecision in estimates can affect the valuation of trademarks and goodwill, which by their nature are subject to measurement uncertainty. Included in the Fund's audited annual consolidated financial statements for the year ended December 31, 2005, is a write-down of goodwill and intangible assets of $63.2 million. Note 5 to the 2005 Annual Financial Statements also provides information on this charge.



Selected Annual Information
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Year Ended December 31
($000, except unit and per
unit amounts) 2005 2004 2003
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Sales 150,500 156,096 158,601
EBITDA 7,987 14,919 16,908
Net earnings (loss) per Fund
Unit - diluted $(4.751) $0.596 $0.588
Total assets 95,290 160,877 163,727
Current portion of long-term
debt and exchangeable
subordinated debentures(1) 36,277 - -
Total long-term financial
liabilities - 29,544 30,372
Distributable cash 3,941 10,500 11,756
Distributable cash per Fund
Unit - diluted $ 0.302 $0.803 $0.999
Distributions per Fund Unit $ 0.700 $1.036 $1.075
Weighted average number
of Fund Units Outstanding(2) 11,762,800 11,762,800 11,762,800
Weighted average number of
Class B Exchangeable
Units outstanding 1,306,967 1,306,967 1,306,967
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Notes:

1. As further described under "Defaults Under Credit Agreement and Exchangeable Debentures", long-term debt and the exchangeable subordinated debentures have been included in the current portion of long-term debt due to certain covenant defaults at December 31, 2005.

2. On March 1, 2006, 83,423 Class B exchangeable units were exchanged for 83,423 Fund units.

As of March 23, 2006, the number of outstanding Fund units was 11,846,223 and the number of Class B exchangeable units was 1,223,544.



Overall Performance and Results of Operation of the Fund
---------------------------------------------------------------------
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Year Ended December 31
($000, except unit and per
unit amounts) 2005 2004 2003
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Sales 150,500 156,096 158,601
Gross profit 23,609 30,128 30,314
Selling, general and administrative 15,770 15,089 14,949
EBITDA 7,987 14,919 16,908
Amortization 3,419 3,584 3,578
Write-down of goodwill and
intangible assets 63,245 - -
Other expenses(1) 883 - -
Exchange loss (gain) on translation
of monetary assets and liabilities
denominated in a foreign currency(2) 148 (119) 1,543
Interest expense 2,329 1,931 1,705
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Earnings (loss) before income tax (62,037) 9,523 10,082
Income tax 63 1,738 2,402
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Earnings (loss) before
non-controlling interest (62,100) 7,785 7,680
Non-controlling interest 6,210 - -
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Net earnings (loss) (55,890) 7,785 7,680
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per unit-basic $(4.751) $0.662 $0.653
per unit-diluted $(4.751) $0.596 $0.588
Net earnings before goodwill
and intangible assets write-down
and non-controlling interest 1,145 7,785 7,680
per unit-basic $0.097 $0.662 $0.653
per unit-diluted $0.088 $0.596 $0.588
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Notes:

1. The other expenses relate to a one-time charge to exit a contractual lease obligation and to write-off costs on termination of a manufacturing contract as described in Note 11 of the 2005 Annual Financial Statements.

2. Unrealized exchange losses (gains) arise on the translation of monetary assets and liabilities of the Fund denominated in a foreign currency. The components are described in Note 15 to the 2005 Annual Financial Statements.



Geographic Breakdown of Sales of the Business
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Year Ended December 31 2005 % 2004 % 2003 %
($000)
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Canada 68,904 45.8 69,797 44.7 73,103 46.1
U.S. 81,596 54.2 86,299 55.3 85,498 53.9
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Total 150,500 100.0 156,096 100.0 158,601 100.0
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Sales

Consolidated sales volumes, as measured by cases shipped, increased 0.2% in 2005 after increasing 2.7% in 2004 from 2003. Sales volumes in the U.S. rose 0.7% in 2005 (2004: 8.1% increase), while in Canada, sales volumes decreased 0.6% in 2005 (2004: 5.3% decline). New products launched with existing customers drove growth in Canada in the second half of the year. This increase, however, was offset by the impact of reduced sales to the Fund's largest Canadian customer with respect to which orders were below year ago levels for the year.

The sales decline is largely due to lower contract manufacturing volumes in the U.S. resulting from an absence of repeat orders from a major branded manufacturer who, during 2004, purchased large quantities of low-carb drink mix in connection with the launch of a new product line. In addition, the Fund experienced lower sales of drink mixes, iced tea and hot chocolate to its largest Canadian customer. Management expects that sales to this customer will grow as the Fund expands its product portfolio with this customer which includes the launch of new instant potato and coffee creamer products in early 2006. Heavy promotional activity by branded competitors in Canada also reduced demand for certain private label offerings supplied by the Fund.

The sales pipeline of prospective customer opportunities was stronger in 2005 versus a year ago. As previously noted, these opportunities typically take six to eighteen months to convert to realized sales, therefore this activity resulted in increased sales in the last quarter of the year and is expected to continue to enhance 2006 sales. Throughout the year, the Fund introduced several customer-sponsored new products which generated increased 2005 sales of $5.3 million. In addition, the Fund was appointed as the Master Distributor for the Canadian foodservice market for Splenda®, North America's leading and fastest growing brand of no calorie sweetener.

The consolidated dollar value of sales in 2005 declined 3.6% from 2004, compared to a 1.6% decline from 2003. The appreciation of the Canadian dollar reduced reported U.S. sales by $6.0 million in the year compared to what they would have been if the exchange rates which existed during 2004 had prevailed in 2005. In U.S. dollars, U.S. sales in 2005 were $67.4 million compared to $66.3 million in 2004 and $61.1 million in 2003. The dollar value of sales in Canada during 2005 decreased 1.3% from 2004 after declining 4.5% in 2004 from 2003.

The majority of growth in U.S. sales in 2004 occurred in hot and cold beverage drink mixes, which was partially offset by a sales decline during 2004 due to the growth in market share of a competitor's branded sweetener. During 2004, demand from Canadian customers fell as unseasonable summer weather in eastern Canada reduced sales of cold beverages drink mixes and iced tea. In addition, certain of the Fund's major retail customers began promoting branded offerings to the detriment of their own private label products supplied by the Fund and two significant customers in the Canadian business began to purchase certain products from alternate sources.

Gross Profit

Gross profit earned in 2005 was $23.6 million or 15.7% of sales as compared to $30.1 million or 19.3% of sales in 2004 and $30.3 million or 19.1% of sales in 2003. High energy costs in 2005 continued to impact resin-based packaging and transportation costs. The cost of sugar consumed by the U.S. operations in 2005 was higher than in 2004 because of the unavailability of lower cost alternatives to the use of U.S. domestic sugar. Partially offsetting these cost increases were lower costs for certain commodities and the benefits from a stronger Canadian currency realized by the Fund's Canadian manufacturing operations on items purchased in U.S. dollars.

Extreme summer heat and humidity levels in the Fund's two major plants in Medina, New York and Toronto, Ontario, adversely impacted manufacturing yields and outputs from certain lines as well as labour productivity. A number of profit-improvement initiatives were commenced in 2005 to offset these business conditions, including the implementation of operational changes at the Fund's Toronto distribution facility, new sourcing and procurement programs and the outsourcing of logistics for the Fund's largest U.S. customer. These initiatives are expected to positively impact gross profit in 2006.

In addition, the Fund initiated selective price increases to its Canadian customers in the first quarter of 2005, however, the effect of these price increases fell well short of the higher commodity, ingredient packaging, energy and freight costs experienced as the year progressed.

In 2004, the Fund benefited from cost reduction initiatives, a stronger Canadian dollar, which has lowered the costs of U.S. denominated materials and ingredients consumed in the Canadian manufacturing operations, and a moderation in certain commodity costs. Largely offsetting these positive factors were higher distribution costs and a change in product mix in the Fund's U.S. markets.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses (which include exchange gains and losses on translation of monetary assets and liabilities of the Fund denominated in foreign currencies) increased in 2005 to $15.8 million compared to $15.1 million in 2004. SG&A costs were $0.2 million higher in 2004 than in 2003.

For the year ended December 31, 2005, SG&A expenses increased due to costs related to conforming labelling to new U.S. and Canadian regulations that were effective as of the end of 2005. This related to mandatory Health Canada nutritional labelling regulations and reporting of trans-fat content on products sold in the U.S. as mandated by new FDA regulations. SG&A expenses also included $0.2 million of consent fees paid to the Fund's bank in connection with its November 14, 2005 amended credit facility agreement and a waiver of certain defaults under such amended credit facility as at December 31, 2005 as described under "Defaults Under Credit Agreement and Exchangeable Debentures".

A stronger Canadian dollar in 2005 resulted in a recorded loss of $0.1 million on the translation of monetary assets and liabilities denominated in foreign currencies compared to a gain of $0.1 million in 2004.

As outlined in Note 2 to the 2005 Annual Financial Statements, the Fund accounts for packaging design costs as a prepaid item and charges these costs to the period in which products in the new packaging first commence shipping to customers in commercial quantities. Included in other assets at December 31, 2005 are $0.2 million of prepaid packaging costs.

SG&A expenses increased in 2004 to $15.1 million from $14.9 million in 2003. During 2004, there were higher costs associated with sales and marketing initiatives undertaken in the U.S.. Packaging design expenses were higher due to the cost of work that commenced during the year for the nutritional labelling noted above. Before a non-recurring gain of $0.3 million in 2003 on the sale of foreign exchange contracts and before unrealized exchange gains and losses from the translation of monetary assets and liabilities of the Fund denominated in foreign currencies, administration costs were $0.9 million higher in 2004. A consent fee levied by the Fund's lender in connection with its agreement to waive two defaults described in Note 7 to the Fund's 2004 consolidated financial statements, general salary increases, consulting fees, higher travel costs associated with U.S. sales initiatives and higher insurance premiums account for the majority of the increase in SG&A costs. As a result of converting $7.0 million of its Canadian dollar denominated term debt into U.S. dollar denominated term debt during 2004 and thereby reducing the Fund's net U.S. dollar monetary asset/liability exposure to currency fluctuations, an unrealized foreign exchange gain of $0.1 million was recorded from translating monetary assets and liabilities denominated in foreign currencies, compared to an unrealized loss of $1.5 million in 2003.

Impairment Charges

In 2005, the Fund's earnings and cash flows were negatively impacted by adverse business conditions. These conditions include the reduced contract manufacturing business, heightened competition in Canada from branded competitors, a less favourable sales mix in the U.S., higher raw material, manufacturing and transportation costs and higher levels of packaging development costs brought on by changes in nutritional labelling regulations in Canada and the U.S. As a result of these developments, the Fund performed an assessment on goodwill and intangible assets for potential impairment and determined that non-cash write-downs of $62.0 million for goodwill, and $1.2 million for intangible assets were required.

Interest

Interest expense relates to interest charges on the Fund's long-term debt and bank indebtedness. Interest expense was $2.3 million for the year ended December 31, 2005 compared to $1.9 million for 2004 and $1.7 million for 2003. The higher interest expense arises from a 0.25% per annum increase in the interest rates charged to the Fund by its bank on its borrowings following the January 19, 2005 waiver by the bank of two breaches of financial covenants at December 31, 2004 and $0.1 million of interest on the $11.75 million of exchangeable subordinated debentures issued on November 14, 2005. The exchangeable subordinated debentures bear interest at 9% per annum and are described in Note 9 to the Fund's 2005 Annual Financial Statements.

Income Taxes

Income taxes were $0.1 million for the year ended December 31, 2005 compared to $1.7 million for the prior year due to the lower levels of income. The effective income tax rate calculated prior to the non-deductible write-down of goodwill and intangible assets and non-controlling interest was 5.2% in 2005 compared to 18.3% in 2004. The effective tax rate varies with the proportion of total earnings taxed in Canada, where rates are lower. Earnings of Associated Brands LP, the subsidiary of the Fund, which operates the Canadian business, constituted a greater proportion of the Fund's total earnings in 2005 compared to 2004. Unrealized exchange gains and losses, which are non-taxable, also influence the effective tax rate.

Net Loss

Net earnings, before non-controlling interest and the non-cash goodwill and intangible assets write-down, was $1.1 million or $0.097 per unit basic ($0.088 per unit diluted) in 2005. The net loss for 2005 was $55.9 million compared to net earnings of $7.8 million in 2004. The net loss per unit basic and per unit diluted was $4.751 for the year ended December 31, 2005 compared to earnings per unit basic of $0.662 ($0.596 per unit diluted) for 2004.

Net earnings increased $0.1 million to $7.8 million in 2004 compared to $7.7 million in 2003. While EBITDA declined $2.0 million, net earnings rose in 2004 due to the non-recurrence of the sizeable unrealized foreign currency translation losses that occurred during 2003 and lower income tax expense partially offset by higher interest expense in 2004. Net earnings per unit basic were $0.662 ($0.596 diluted) in 2004 compared to $0.653 ($0.588 diluted) per unit in 2003.



Distributable Cash and Cash Distributions of the Fund
---------------------------------------------------------------------
---------------------------------------------------------------------
($000, except unit and per unit amounts) 2005 2004 2003
---------------------------------------------------------------------
Cash flow from operating activities 7,966 11,009 7,018
Amortization (3,419) (3,584) (3,578)
Write-down of goodwill and intangible
assets (63,245) - -
Lease termination charge (480) - -
Accretion expense on exchangeable
debenture (23) - -
Future income taxes 427 71 (166)
Translation Gain (Loss) on
Long-term Debt 310 828 734
Change in Non-Cash Working Capital (3,636) (539) 3,672
---------------------------------------------------------------------
Net earnings (loss) before
non-controlling interest (62,100) 7,785 7,680
Amortization 3,419 3,584 3,578
Write-down of goodwill and
intangible assets 63,245 - -
Accretion expense on exchangeable
debenture 23 - -
Future income taxes (427) (71) 166
Exchange loss (gain) on translation
of monetary assets and liabilities
denominated in a foreign currency(1) 148 (119) 1,543
Capital expenditures (367) (679) (1,211)
---------------------------------------------------------------------
Distributable cash 3,941 10,500 11,756
---------------------------------------------------------------------
Distributable cash per Fund unit and
Class B exchangeable unit $0.302 $0.803 $0.899
Distributable cash per Fund unit $0.335 $0.893 $0.999
Distributions per Fund unit $0.700 $1.036 $1.075
Distributions per Class B
exchangeable unit $ - $ - $ -
Payout ratio 208.9% 116.1% 107.6%
---------------------------------------------------------------------
---------------------------------------------------------------------


Note:

1.Unrealized exchange losses (gains) arise on the translation of monetary assets and liabilities of the Fund denominated in a foreign currency. The components are described in Note 15 to the 2005 Annual Financial Statements.

Operating activities generated $8.0 million of cash in 2005 compared to $11.0 million in 2004. For the year ended December 31, 2005; cash flow from operations before changes in non-cash operating working capital was $4.3 million compared to $10.5 million in 2004. (Please refer to "Financial Condition, Liquidity and Capital Resources" below for further details).

Distributable cash was $6.6 million lower in 2005 than in 2004 due to lower gross profit, and higher selling, general and administration and interest expenses, which were partially offset by lower cash taxes and capital expenditures. Distributable cash was $1.3 million lower in 2004 than 2003 due to similar factors.

Distributions declared and payable on the Fund's units declined in 2005 from 2004 after declining in 2004 versus the prior year. Monthly cash distributions were adjusted from $0.070 per Fund unit to $0.050 per Fund unit, effective with the monthly distributions declared in August 2005. A further reduction was made to $0.030 per Fund unit effective with monthly distributions declared in November 2005.

In January 2006, the Fund suspended further monthly distributions until such time as the business performance of the Fund improves on a sustained basis. Until distributions are resumed, available cash will be used to reduce outstanding debt and increase liquidity. Under the waiver and consent agreement with the Fund's bank dated March 6, 2006, no distributions to Unitholders can be made without the prior written consent of the bank. The arrangement is described further under "Defaults Under Credit Agreement and Exchangeable Debentures".

No distributions were declared on the Class B exchangeable units in 2005 or in 2004. In accordance with the waiver and consent agreement with the Fund's bank, no distributions can be made on the Class B exchangeable units without the prior written consent of the bank.



Quarterly Results of Operations (Unaudited)
---------------------------------------------------------------------
($000, except unit and
per unit amounts) 2005
-------------------------------------
Q4 Q3 Q2 Q1
Restated(1)
---------------------------------------------------------------------
Sales 42,820 35,504 36,217 35,959
Gross profit 5,271 5,687 6,568 6,083
Selling, general and
administrative 4,727 3,864 3,813 3,366
EBITDA 659 1,854 2,758 2,716
Amortization 827 851 868 873
Write-down of goodwill and
intangible assets 32,000 31,245 - -
Other expenses 883 - - -
Exchange loss (gain) on
translation of monetary
assets and liabilities
denominated in a foreign
currency 115 31 3 (1)
Interest expense 680 569 519 561
---------------------------------------------------------------------
Earnings (loss) before
income tax and
non-controlling interest (33,846) (30,842) 1,368 1,283
Income tax (348) (9) 133 287
---------------------------------------------------------------------
Earnings (loss) before
non-controlling interest (33,498) (30,833) 1,235 996
Non-controlling interest 3,350 2,860 - -
---------------------------------------------------------------------
Net earnings (loss) (30,148) (27,973) 1,235 996
per Unit- Basic ($2.563) ($2.378) $0.105 $0.085
per Unit- Diluted ($2.563) ($2.378) $0.095 $0.076
---------------------------------------------------------------------
Net earnings (loss) before
goodwill and intangible
assets write-down and
non-controlling interest (1,498) 412 1,235 996
per Unit-Basic ($0.127) $0.035 $0.105 $0.085
per Unit-Diluted ($0.127) $0.031 $0.095 $0.076
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
($000, except unit and
per unit amounts) 2004
-------------------------------------
Q4 Q3 Q2 Q1
---------------------------------------------------------------------
Sales 40,327 37,125 38,886 39,758
Gross profit 7,596 6,385 8,012 8,136
Selling, general and
administrative 3,883 3,442 3,934 3,830
EBITDA 3,621 2,999 4,070 4,229
Amortization 880 900 904 900
Write-down of goodwill and
intangible assets - - - -
Other expenses - - - -
Exchange loss (gain) on
translation of monetary
assets and liabilities
denominated in a foreign
currency (92) 58 (8) (77)
Interest expense 505 495 489 442
---------------------------------------------------------------------
Earnings (loss) before
income tax and
non-controlling interest 2,328 1,546 2,685 2,964
Income tax 431 295 399 613
---------------------------------------------------------------------
Earnings (loss) before
non-controlling interest 1,897 1,251 2,286 2,351
Non-controlling interest - - - -
---------------------------------------------------------------------
Net earnings (loss) 1,897 1,251 2,286 2,351
per Unit- Basic $0.161 $0.106 $0.195 $0.200
per Unit- Diluted $0.145 $0.096 $0.175 $0.180
---------------------------------------------------------------------
Net earnings (loss) before
goodwill and intangible
assets write-down and
non-controlling interest 1,897 1,251 2,286 2,351
per Unit-Basic $0.161 $0.106 $0.195 $0.200
per Unit-Diluted $0.145 $0.096 $0.175 $0.180
---------------------------------------------------------------------
---------------------------------------------------------------------


Note:

1. The Fund has restated its unaudited interim financial information for its third quarter ended September 30, 2005 to correct its accounting for non-controlling interest in accordance with EIC-151, "Exchangeable Securities Issued by Subsidiaries of Income Trusts". Based on the Class B Exchangeable Unit terms for 2005 and 2004, the non-controlling interest does not participate in the income of the Fund but does participate in losses. As a result, the non-controlling interest should have been allocated its share of the net losses for the three months and nine months ended September 30, 2005. The effect of the restatement is to reduce the net loss, increase the non-controlling interest share of loss and decrease the deficit on the Statement of Earnings (Loss) and Deficit for the three months and nine months ended September 30, 2005 by $2,860. The non-controlling interest and deficit on the Balance Sheet has been decreased by $2,860. As a result, the net loss per Fund unit has been restated from $2.622 to $2.378 per Fund unit.

Sales, gross profit and EBITDA in the first three quarters of 2005 trended below levels in the corresponding periods from the prior year. Reduced contract manufacturing business and competition in Canada from branded competitors, particularly at the Fund's largest Canadian customer, and higher manufacturing, transportation and raw material costs has negatively impacted results. A change in the sales mix in the Fund's U.S. operations reduced gross margin as sales of lower margin hot and cold beverages have increased while sales of higher profit artificial sweetener products, although growing, were at lower levels than in the same period for 2004.

In the third quarter of 2005, gross profit as a percentage of sales declined due to manufacturing inefficiencies arising during the summer months from extreme temperatures and humidity within the Fund's two major plants and start-up issues with respect to the outsourcing of logistics for its largest U.S. customer.

Revenues increased $2.5 million or 6.2% in the fourth quarter of 2005 as compared to the same period in the prior year. This reflects organic growth with existing customers and new products launched during 2005 with existing and new customers. Branded competitors in the Canadian market continued to impact sales in the fourth quarter of 2005. The strengthening of the Canadian dollar reduced reported U.S. dollar sales by $0.9 million or 1.8% compared to the fourth quarter of 2004.

Gross profit declined by $2.3 million to $5.3 million in the fourth quarter of 2005 from $7.6 million in the fourth quarter of 2004. As a percentage of sales, gross profit declined to 12.3% in the fourth quarter from 18.8% in the fourth quarter of 2004. The reduction is attributable to continued cost increases in raw materials and packaging, energy and distribution costs which could not be passed onto customers through price increases. Manufacturing costs were further impacted by lower production levels in the Fund's two major plants resulting from some softening of sales with the Fund's largest customer and a focus on reducing inventory levels. Management is focused on the supply chain in order to manage costs and achieve manufacturing improvements. Planned selling price increases, that will take effect in the second quarter of 2006, are expected to offset commodity, energy and other inflationary cost increases. The appreciation of the Canadian dollar as described above reduced margins by 2.2%.

Gross profit in the fourth quarter of 2005 was also impacted by $0.1 million of finished product and packaging write-offs arising from non-compliance with the new nutritional labelling and trans-fat content regulations. Lower production in its manufacturing facilities and sales that were below forecasted levels prevented the Fund from running out packaging as planned before the new regulations were effective.

SG&A expenses (which include exchange gains and losses on monetary assets and liabilities) increased by $0.8 million in the fourth quarter to $4.7 million from $3.9 million in the fourth quarter of 2004. Administration costs were higher in the fourth quarter of 2005 compared to the same period in 2004 due to the filling of certain vacant key personnel positions and a consent fee levied by the Fund's lender in connection with its agreement to waive certain defaults until March 27, 2006 as described under "Defaults Under Credit Agreement and Exchangeable Debentures". Marketing expenses were higher in the fourth quarter of 2005 by $0.7 million compared to the same quarter of 2004 as the Fund substantially completed its nutritional labelling and trans-fat content packaging requirements. Offsetting these increases was a reduction in the foreign exchange loss by $0.3 million in the fourth quarter of 2005.

SG&A expenses over the last two years include a total of $2.3 million in expenses in connection with converting the nutritional information contained on the Fund's products sold in Canada to conform with new mandatory Health Canada nutritional labelling regulations which came into effect at the end of 2005 and in reporting trans-fat content on its products sold in the U.S. in accordance with new FDA regulations that also came into effect at the end of 2005. Conversion work commenced in the first quarter of 2004. Once the last of the converted products commence shipping in new packaging (expected to be the second quarter of 2006) management estimates that the Fund will have incurred total expenses of approximately $2.5 million. It is expected that the remaining expenses will be incurred in the first quarter of 2006, after which packaging design expenses are expected to revert to 2003 levels.

SG&A expenses also include exchange gains and losses on translation of monetary assets and liabilities denominated in foreign currencies. Since converting $7.0 million of its Canadian dollar denominated term debt into U.S. denominated term debt during the third quarter of 2004, these exchange gains and losses have become less significant as the Fund's net U.S. dollar monetary asset/liability exposure to currency fluctuations has been reduced.

Non-recurring costs were recorded in the fourth quarter of 2005 to exit a contractual lease obligation and to write-off costs associated with the termination of a contract manufacturing agreement. These charges are described in Note 11 of the 2005 Annual Financial Statements.

The Fund's earnings and cash flows have been impacted as a result of adverse business conditions. These include reduced contract manufacturing business, heightened competition in Canada from branded competitors, a less favourable sales mix in the U.S., higher manufacturing and transportation costs and higher levels of packaging development costs brought on by changes in nutritional labelling regulations in Canada and the U.S. As a result of these developments, the Fund performed an assessment on goodwill for potential impairment and determined that a further non-cash write-down was required. This charge had no impact on EBITDA.

Interest expense relates to interest charges on the Fund's long-term debt and bank indebtedness. Since the third quarter of 2004 interest expense has increased due to the Fund entering into interest-rate swap agreements to fix the interest expense on $22.0 million (2004 - $26.4 million) of its long-term debt and an increase of 0.25% per annum in the interest rate charged to the Fund by its bank on its borrowings following the January 19, 2005 waiver by the bank of certain violations of covenants at December 31, 2004. Interest on the exchangeable subordinated debentures of ABHLP issued on November 14, 2005 and bearing interest at 9% per annum resulted in a further $0.1 million increase in the interest expense in the fourth quarter of 2005.

Variations in the Fund's effective tax rate on a quarter-over-quarter comparison are due to the proportion of total earnings taxed in Canada in each quarter, where rates are lower, and the levels and direction of unrealized exchange gains and losses, which are non-taxable.

As a result of the business conditions described above, the net loss in the fourth quarter of 2005 was $1.5 million, excluding the impact of the $32.0 million charge for goodwill and intangible assets write-downs and non-controlling interest, compared to net earnings of $1.9 million in the fourth quarter of 2004.

The net loss per unit-basic, excluding the impact of the goodwill and intangible assets write-down and non-controlling interest, was $0.127 in the fourth quarter of 2005, compared to net earnings per unit-basic of $0.161.



Distributable Cash and Cash Distributions by Quarter
---------------------------------------------------------------------
($000, except unit and
per unit amounts) 2005
-------------------------------------
Q4 Q3 Q2 Q1
Restated(1)
---------------------------------------------------------------------
Cash flow from operating
activities 1,002 (2,017) 2,409 6,572
Amortization (827) (851) (868) (873)
Write-down of goodwill and
intangible assets (32,000) (31,245) - -
Future income taxes 135 54 182 56
Lease termination charge (480) - - -
Accretion expense (23) - - -
Translation gain (loss)
on long-term debt(1) (2) 498 (82) (104)
Change in non-cash
working capital(1) (1,303) 2,728 (406) (4,655)
---------------------------------------------------------------------
Earnings (loss) before
non-controlling interest (33,498) (30,833) 1,235 996
Amortization 827 851 868 873
Write-down of goodwill
and intangible assets 32,000 31,245 - -
Future income taxes (135) (54) (182) (56)
Accretion expense on
exchangeable debentures 23 - - -
Exchange loss (gain) on
translation of monetary
assets and liabilities
denominated in a foreign
currency(1) 115 31 3 (1)
Capital expenditures (118) (67) (71) (111)
---------------------------------------------------------------------
Distributable cash (786) 1,173 1,853 1,701
---------------------------------------------------------------------
Distributable cash per Fund
unit and Class B Exchangeable
Unit ($0.067) $0.090 $0.142 $0.130
Distributable cash per
Fund unit ($0.067) $0.100 $0.157 $0.145
Distributions per Fund unit $0.110 $0.170 $0.210 $0.210
Distributions per Class B
exchangeable unit $ - $ - $ - $ -
Payout ratio trailing 12 months n/a 132.9% 132.8% 124.1%
---------------------------------------------------------------------

---------------------------------------------------------------------
($000, except unit and
per unit amounts) 2004
-------------------------------------
Q4 Q3 Q2 Q1
---------------------------------------------------------------------
Cash flow from operating
activities 2,127 3,990 3,036 1,856
Amortization (880) (900) (904) (900)
Write-down of goodwill and
intangible assets - - - -
Future income taxes (41) (30) 72 70
Lease termination charge - - - -
Accretion expense - - - -
Translation gain (loss)
on long-term debt(1) 479 419 (23) (47)
Change in non-cash
working capital(1) 212 (2,228) 105 1,372
---------------------------------------------------------------------
Earnings (loss) before
non-controlling interest 1,897 1,251 2,286 2,351
Amortization 880 900 904 900
Write-down of goodwill
and intangible assets - - -
Future income taxes 41 30 (72) (70)
Accretion expense on
exchangeable debentures - - - -
Exchange loss (gain) on
translation of monetary
assets and liabilities
denominated in a foreign
currency(1) (92) 58 (8) (77)
Capital expenditures (200) (188) (125) (166)
---------------------------------------------------------------------
Distributable cash 2,526 2,051 2,985 2,938
---------------------------------------------------------------------
Distributable cash per Fund
unit and Class B Exchangeable
Unit $0.193 $0.157 $0.228 $0.225
Distributable cash per
Fund unit $0.215 $0.174 $0.254 $0.250
Distributions per Fund unit $0.229 $0.269 $0.269 $0.269
Distributions per Class B
exchangeable unit $ - $ - $ - $ -
Payout ratio trailing 12 months 116.1% 106.2% 99.0% 102.3%
---------------------------------------------------------------------


Notes:

1 Unrealized exchange losses (gains) arise on the translation of monetary assets and liabilities of the Fund denominated in a foreign currency. The components are described in Note 15 to the 2005 Annual Financial Statements.

2 The Fund has restated its unaudited interim financial information for its third quarter ended September 30, 2005 to correct its accounting for the non-controlling interest in accordance with EIC-151, "Exchangeable Securities Issued by Subsidiaries of Income Trusts". Based on the Class B Exchangeable Unit terms for 2005 and 2004, the non-controlling interest does not participate in the income of the Fund but does participate in losses. As a result, the non-controlling interest should have been allocated its share of the net losses for the three months and nine months ended September 30, 2005. The effect of the restatement is to reduce the net loss, increase the non-controlling interest share of loss and decrease the deficit on the Statement of Earnings (Loss) and Deficit for the three months and nine months ended September 30, 2005 by $2,860. Also, the non-controlling interest and deficit on the Balance Sheet have been decreased by $2,860. As a result, the net loss per Fund unit has been restated from $2.622 to $2.378 per Fund unit.

Distributable cash was $3.3 million lower in the fourth quarter of 2005 than in the same period in 2004 as a result of increased cost of sales and other expenses including general and administration, interest and non-recurring expenses.

Distributions declared and payable on the Fund's units in the fourth quarter of 2005 were lower than in previous quarters due to an adjustment in monthly distributions to $0.030 per Fund unit from $0.050 per Fund unit effective with the monthly distributions declared in November 2005. The Fund had previously reduced distributions from $0.070 per Fund unit to $0.050 per Fund unit effective commencing with the distribution declared in August 2005.

In January 2006, the Fund suspended further monthly distributions until such time as the business performance of the Fund improves on a sustained basis. Until distributions are resumed, available cash will be used to reduce outstanding debt and increase liquidity. Under the waiver and consent agreement with the Fund's bank dated March 6, 2006, no distributions to Unitholders can be made without the prior written consent of the bank as further described under "Defaults Under Credit Agreement and Exchangeable Debentures".

In accordance with the waiver and consent agreement with the Fund's bank, no distributions can be made on the Class B exchangeable units without the bank's prior written consent. There were no quarterly distributions declared on the Class B exchangeable units in 2005 or 2004.



Financial Condition, Liquidity and Capital Resources
--------------------------------------------------------------------
--------------------------------------------------------------------
($000) Dec 31 Oct 1 Dec 31 Dec 31
2005 2005 2004 2003
Restated
(2)
--------------------------------------------------------------------
Current assets 35,747 39,207 36,792 36,970
Property plant & equipment 21,163 21,587 23,723 26,347
Goodwill and intangible
assets 36,334 68,334 99,579 99,579
Other assets 1,478 440 443 619
Future income taxes 568 541 340 212
--------------------------------------------------------------------
95,290 130,109 160,877 163,727
--------------------------------------------------------------------
--------------------------------------------------------------------

Current liabilities(1) 53,633 25,397 20,311 17,932
Long-term liabilities(1) 390 29,232 29,544 30,372
Non-controlling interest 5,814 9,164 12,024 12,024
Unitholders' equity 35,453 66,316 98,998 103,399
--------------------------------------------------------------------
95,290 130,109 160,877 163,727
--------------------------------------------------------------------
--------------------------------------------------------------------


Notes:

1. Current liabilities at December 31, 2005 includes the current portion of the long-term debt in the amount of $25,033 and exchangeable subordinated debentures in the amount of $11,196.

2. The Fund has restated its unaudited interim financial information for its third quarter ended September 30, 2005 to correct its accounting for the non-controlling interest in accordance with EIC-151, "Exchangeable Securities Issued by Subsidiaries of Income Trusts". Based on the Class B Exchangeable Unit terms, the non-controlling interest does not participate in the income of the Fund but does participate in losses. As a result, the non-controlling interest should have been allocated its share of the net losses for the three months and nine months ended September 30, 2005. The effect of the restatement is to reduce the net loss, increase the non-controlling interest share of loss and decrease the deficit on the Statement of Earnings (Loss) and Deficit for the three months and nine months ended September 30, 2005 by $2,860. Also the non-controlling interest and deficit on the Balance Sheet have been decreased by $2,860.

For the year ended December 31, 2005 the Fund generated $4.3 million of operating cash flow before changes in non-cash operating working capital compared to $10.5 million in 2004. Changes in non-cash working capital generated $3.6 million in cash compared to a $0.5 million in cash in 2004 as substantial decrease in inventories and increases in trade payables exceeded the increase in accounts receivable.

Capital expenditures of $0.5 million were incurred in 2005, a decrease of $0.2 million from $0.7 million in 2004. Management restricted capital spending in 2005 to priority projects, which included the installation of new labour-saving packaging equipment in the Winnipeg plant, replacement of worn equipment in the Toronto plant, and investment in mixing equipment in the Toronto plant to allow the Fund to enter into the muffin mix product category and in equipment to enable the production of liquid sweeteners in consumer-friendly plastic bottles. Capital commitments at December 31, 2005 were $0.6 million, primarily related to one specific growth capital project.

Current liabilities include the $2.3 million due to former owners at December 31, 2005. This amount represents the remaining balance from $2.5 million in proceeds of the Fund's initial public offering which were withheld by the Fund from former shareholders of the business in order to satisfy expected re-assessments of taxes and interest arising from a matter in respect of one of the Fund's Canadian subsidiaries raised by the Ontario Ministry of Finance for the fiscal years 1998 through 2000, plus interest received from the Ministry of Finance following a successful appeal of their assessments, less legal fees incurred in the appeal and taxes paid in respect of pre-IPO tax matters. Under the waiver and consent agreement with the Fund's bank, the amounts due to former owners may not be paid without the prior written consent of the bank (see discussion under "Defaults Under Credit Agreement and Exchangeable Debentures").

On November 14, 2005, ABHLP issued $11.75 million of exchangeable debentures in a private placement for net proceeds, after costs, of $10.6 million. Approximately $3.6 million of the net proceeds from the debentures will be invested in three growth capital projects in the Fund's manufacturing facilities in 2006 and 2007. The remaining proceeds were used for financial restructuring purposes, including reducing the existing debt under the Fund's subsidiaries' credit facilities by $4.2 million.

The debentures have a maturity date of September 30, 2008. This maturity date, however, may be extended up to two times, in each case for an additional one-year period from the maturity date then in effect, at the option of the holders of the debentures. Provided that certain conditions are met, the debentures may be redeemed at the option of ABHLP, during the periods that the maturity date is so extended, at a redemption price equal to the principal amount plus accrued and unpaid interest. The debentures bear interest from the date of issuance at a rate of 9.0% per annum payable semi annually in arrears on March 30 and September 30 of each year, commencing on March 30, 2006. Security is provided by a mortgage and pledge of all present and future property of ABHLP and by guarantees from, and a mortgage and pledge of all present and future property of, each of Associated Brands LP and Associated Brands, Inc. The payment of principal and interest on the debentures is subordinate to the Fund's subsidiaries' credit facilities with their bank. The debentures can be exchanged by the holders for units of the Fund at an exchange price of $4.00 per unit at any time prior to maturity or immediately preceding the date fixed for redemption. The trust indenture under which the debentures were issued provides for the adjustment of the exchange price in certain events.

The holders of the debentures may require ABHLP to purchase all or a portion of such holder's debentures at a price equal to 101% of the principal amount plus accrued and unpaid interest upon the occurrence of a change of control of the Fund or upon ABHLP ceasing to be a subsidiary of the Fund. If (i) a change of control has occurred but a holder of a debenture has not exercised its right to require ABHLP to purchase such debenture, (ii) the change of control has resulted from an offer to all unitholders to purchase units at a price less than $5.00 per unit, and (iii) an event of default under the trust indenture has occurred subsequent to the change of control, ABHLP will be required to pay to such holder on the date that repayment of such debenture is demanded pursuant to the trust indenture, or on such later date that the payment is permitted by the subordination agreement applicable to the debentures, in addition to the principal amount of such debenture and all accrued and unpaid interest thereon, a make-whole amount equal to (i) $0.27 multiplied by the principal amount of such debenture less (ii) all interest paid on such debenture on or prior to the repayment thereof.

Defaults under Credit Agreement and Exchangeable Debentures

In January 2006, the Fund determined that, due to poor financial results in the fourth quarter of 2005, certain subsidiaries of the Fund were in default at December 31, 2005 under certain financial covenants, and a covenant limiting distributions, in their credit agreement with a Canadian chartered bank.

Following discussions with their bank with respect to such defaults, such subsidiaries of the Fund and their bank entered into a waiver and consent agreement dated March 6, 2006. Under this waiver and consent agreement, the bank agreed to waive the defaults that had then been identified under the credit agreement until March 27, 2006 and the Fund's subsidiaries agreed to certain additional covenants in favour of the bank.

The additional covenants from the Fund's subsidiaries included a covenant to restrict further payments or distributions to certain third parties (including to the Fund for distribution to unitholders and to the holders of exchangeable debentures) without the consent of the bank and a covenant to make monthly repayments to the bank under the Canadian term facility from the bank until the bank agrees that such payments may be discontinued. There can be no assurance as to the date by which, or the conditions (including an improvement in the financial condition of the Fund) under which, the bank would be prepared to provide its consent to the reinstatement of such payments and distributions or the discontinuance of such mandatory monthly repayments. The monthly repayments required to be made under the Canadian term facility are to begin on March 31, 2006 and each monthly repayment is to be in an amount that is equal to the amount, if any, by which earnings (before interest, taxes, depreciation and amortization) for the calendar month that is two months prior to the month in which the applicable repayment is due exceed fixed charges (defined as capital expenditures, payments in respect of taxes, scheduled principal payments on interest bearing indebtedness, interest payments and capital lease payments) for such calendar month.

The default waiver under the above referenced waiver and consent agreement expired on March 27, 2006.

In connection with the finalization of the Fund's audited financial statements for its 2005 fiscal year and, among other things, the non cash write-down of goodwill as at December 31, 2005 and the Fund's categorization of the debt under its subsidiaries' credit agreement and the exchangeable debentures as current liabilities, the Fund determined that the Fund's subsidiaries were in default under additional financial covenants under their credit agreement with the bank.

The defaults under the Fund's subsidiaries' credit agreement with the bank have also resulted in a default under the terms of the exchangeable debentures. In addition, if the bank does not consent to the payment of any applicable amount that is payable on the exchangeable debentures, then the failure to pay such amount when due will result in a default under the exchangeable debentures. The next interest payment under the exchangeable debentures is due on March 30, 2006. There can be no assurance that the bank will provide its consent to this interest payment being made.

The defaults under the Fund's subsidiaries' credit agreement with the bank have also resulted in a default under the ISDA Master Agreement between a subsidiary of the Fund and the bank.

The credit agreement and the terms of the exchangeable debentures provide the bank and the debenture holders, respectively, with certain rights and remedies during the continuance of a default, including the right to accelerate the debt due under the credit agreement and the exchangeable debentures, respectively, and the right to realize upon security that has been granted by the Fund's subsidiaries.

As part of its turn around plan, the Fund intends to continue discussions with the bank and the debenture holders with respect to the Fund's ongoing credit relationships with such parties.

There can be no assurance that the bank or the debenture holders will not exercise their respective rights and remedies during the continuance of any defaults under the credit agreement or the exchangeable debentures, as applicable. In addition, if the bank or the debenture holders exercise their rights and remedies under the credit agreement or the exchangeable debentures, as applicable, there can be no assurance that a replacement facility can be obtained in order to permit the repayment of indebtedness under the credit agreement or the exchangeable debentures, as applicable, or that, if such a replacement facility is obtained, it will be obtained at costs, or on terms and conditions, comparable to those of the Fund's current indebtedness.



Contractual Obligations
---------------------------------------------------------------------
---------------------------------------------------------------------
Payments due by Less 1 to 3 4 to 5 After 5
Period ($000) Total Than 1yr yrs yrs yrs
---------------------------------------------------------------------
Payable to former
owners 2,288 2,288 - - -
Current portion of
long-term debt 25,033 25,033 - - -
Exchangeable
subordinated
debenture 11,750 11,750
Other long -term
obligations 480 90 56 46 288
Operating leases 4,909 1,163 1,606 682 1,458
Purchase obligations 8,979 8,979 - - -
---------------------------------------------------------------------
Total contractual
obligations 53,439 49,303 1,662 728 1,746
---------------------------------------------------------------------
---------------------------------------------------------------------


Long-term debt is reflected on the Fund's consolidated balance sheet while operating leases and purchase commitments are not.

Related Party Transactions

As outlined in Note 21 to the 2005 Annual Financial Statements, John R. Currie, the Executive Chairman of Associated Brands LP, Chairman and a trustee of the Fund and a trustee of Associated Brands Operating Trust ("ABOT"), and Donald A. Crombie, a trustee of ABOT, are shareholders of Crombie Kennedy Nasmark Inc., one of Canada's largest independent food brokers. Donald Crombie is also President of Crombie Kennedy Nasmark Inc. The services of Crombie Kennedy Nasmark Inc. are used in connection with sales of private-label products to a large Canadian food retailer and sales of branded products to all customers in Canada. These services, for which the Fund incurred expenses of $0.4 million during 2005 and $0.4 million in 2004, are provided at market rates. The unrelated ABOT trustees have reviewed and approved the terms under which such services are provided.

As outlined in Note 21 to the 2005 Annual Financial Statements, $10.0 million of the exchangeable subordinated debentures issued by ABHLP on November 14, 2005 were issued to investment funds managed by Torquest Partners Inc. Eric Berke, a managing partner of Torquest Partners Inc. was appointed a trustee of ABOT following issuance of such debentures. The remaining $1.75 million of the debentures were issued to the trustees of ABOT.

Risk and Uncertainties

Cash distributions to Unitholders of the Fund depend upon the ability of the Fund's subsidiaries to pay cash distributions, which will depend, in part, on the ability of the business of the Fund to generate income. The business of the Fund is susceptible to a number of risks. These risks, and other risks associated with an investment in Fund units, include, but are not limited to, the following. Additional risks associated with an investment in Fund units are described in the Fund's Annual Information Form.

Defaults Under Credit Agreement and Exchangeable Debentures

Certain subsidiaries of the Fund are currently in default under their credit agreement with a Canadian chartered bank and under the exchangeable debentures of ABHLP (see discussion under "Defaults under Credit Agreement and Exchangeable Debentures").

The credit agreement and the terms of the exchangeable debentures provide the bank and the debenture holders, respectively, with certain rights and remedies during the continuance of a default, including the right to accelerate the debt due under the credit agreement and the exchangeable debentures, respectively, and the right to realize upon security that has been granted by the Fund's subsidiaries.

There can be no assurance that the bank or the debenture holders will not exercise their respective rights and remedies during the continuance of any defaults under the credit agreement or the exchangeable debentures, as applicable. In addition, if the bank or the debenture holders exercise their rights and remedies under the credit agreement or the exchangeable debentures, as applicable, there can be no assurance that a replacement facility can be obtained in order to permit the repayment of indebtedness under the credit agreement or the exchangeable debentures, as applicable, or that, if such a replacement facility is obtained, it will be obtained at costs, or on terms and conditions, comparable to those of the Fund's current indebtedness.

Absence of Long-Term Sales Contracts

As is general industry practice, the Fund typically does not enter into long-term contracts with its customers. As a result, customers may terminate their relationship with the Fund or vary the volume of products they purchase from the Fund. To mitigate this risk, management fosters close working relationships with its customers, and the Fund continually seeks to diversify and grow its customer base both in Canada and the U.S., while at the same time increasing the number of products and product categories it sells to each customer.

Failure to Develop New Product Offerings

The Fund strives to match successfully established branded products with its own private label products that are similar in taste, quality and packaging. The Fund's sales and earnings from certain sweetener products have been adversely impacted by changing consumer tastes and preferences for an alternative branded sweetener product, which the Fund has been unable to match because of patents on the competing product. There can be no assurance of the Fund's ability to continue to develop products that are competitive with brand name products, that the products developed by the Fund will receive widespread acceptance or that new products will yield favourable profit margins. Management has been successful in the past in achieving growth through the introduction of new products, and believes it will continue to develop new products and product categories that meet the needs of customers.

Operating Hazards

The Fund's revenues are dependent on the continued operation of its facilities. The operation of facilities involves some risks, including the failure or substandard performance of equipment, natural disasters, suspension of operations, the effect of new regulatory requirements regarding the operation of such facilities and claims of injury by employees or members of the public.

Sensitivity of Sales to Weather Conditions

Certain of the products of the Fund are sold primarily during particular seasons. These include iced tea and cold drink mixes, for which most sales occur during the summer months, and hot drink mixes and soups, for which most sales occur during the winter months. Unseasonable weather during these seasons may result in reduced demand for these products.

Product Liability

The Fund is subject to potential product liability claims relating to its dry-blend food products. While the Fund attempts to minimize this risk through a rigid segregation of product mixes, label warnings of potential trace elements (where appropriate) and product liability insurance, there can be no assurance that the Fund will always be adequately protected against product liability claims.

Regulatory Scrutiny

The Fund is subject to extensive laws and regulations in respect of the production, processing, preparation, packaging, labelling and distribution of food products. Changes to these laws and regulations could have a significant impact on the Fund's business. There can be no assurance that the Fund will be able to cost-effectively comply with any future laws and regulations. In addition, the Fund voluntarily submits to guidelines set by certain private industry associations. Failure to comply with such guidelines or to adopt more stringent guidelines set by such associations in the future may result in lower sales in certain retail markets.

Environmental, Health and Safety Regulations

The Fund's operations have been and are subject to extensive and increasingly stringent laws relating to environmental, health and safety matters, including the storage, handling, processing, transportation and disposal of various substances and wastes, emissions to the air, discharges to water and other impacts on the environment. The Fund's ownership, management and control of its properties, also carries the risk of potential uninsured or underinsured environmental liability. Although the Fund has not incurred significant capital or operating expenses to comply with environmental, health and safety laws, it is possible that changes to such laws, or more rigorous enforcement, could require the Fund to do so and have a material adverse effect on the Fund's financial condition and results of operations. Further, additional environmental, health and safety issues relating to matters that are currently not known to management may result in unanticipated liabilities and expenditures and may adversely affect the Fund's financial condition and results of operations.

Decline in Supermarket Retail Markets

A significant portion of the Fund's sales is made to supermarkets. It is believed that supermarket retailers have been losing market share recently to mass merchandisers, and as such the Fund's supermarket customer base may erode and sales to this sector may decline. To mitigate this possible risk, the Fund is successfully developing relationships and building sales volumes to these mass merchandisers.

Competitive Environment

The packaged food industry in North America is highly competitive. In recent years the Fund has experienced increased competition in the U.S. in certain of its products. In response to competition, the Fund's strategy is to provide its customers with the highest level of service and value. In order to be successful the Fund has an active cost reduction program and aggressively pursues new opportunities. In most instances the Fund has been successful in defending its business by lowering selling prices in certain instances and converting new business opportunities. There can be no assurance that the Fund will be able to compete successfully against its current or future competitors or that such competition will not have a material adverse effect on results and the amount of cash available for distributions.

Reliance on Key Personnel

The Fund's operations are dependent on the abilities, experience and efforts of its senior management team. The Fund's success is also dependent upon its ability to attract and retain qualified employees and personnel to meet its needs from time to time. No assurance can be given that the Fund will be able to attract or retain qualified employees and personnel. The Fund's ability to attract or retain qualified employees and personnel could have a material adverse affect on the business, results of operations or the financial condition of the Fund.

Labour Action

The success of the Fund's business depends on a large number of employees, over a third of whom are unionized. Any organized work stoppage or other similar job action at one or more of its facilities may have a material adverse effect on the Fund's financial condition and results of operations. The Fund has never experienced a work stoppage resulting from job action, and believes it has a strong and mutually respectful relationship with its labour unions. The collective agreement covering the Fund's unionized workforce at its Judson Street Toronto plant and adjoining distribution centre in Toronto expires on May 30, 2006. The employees at the Fund's Hamilton, Ontario plant are covered by a collective agreement that expires on November 30, 2007.

Volatility in Commodity Prices

The Fund purchases large quantities of sugar and cocoa for its production requirements. Historically, world market prices for these commodities undergo unpredictable and, at times, material fluctuations. While the Fund purchases much of its required supply of these commodities in forward markets, there may be a negative impact on financial performance due to delays between the time when raw material prices increase and the time when those cost increases can be passed on to customers. In order to mitigate this risk, the Fund has entered into commodity contracts and fixed cost commitments with suppliers to cover its anticipated sugar and cocoa needs. Furthermore, the estimated sugar and cocoa needs of Canadian manufacturing operations are covered for all of 2006. Approximately 70% of the estimated sugar needs of the U.S. manufacturing operations in 2006 are also covered. The Fund also consumes certain materials such as packaging and incurs certain expenses such as transportation where prices and rates are sensitive to energy prices. There is no assurance that such cost increases when they occur can be fully recovered through selling price increases or cost improvement initiatives.

Foreign Exchange Exposure

The Fund has substantial U.S. dollar revenues from the sale of products to customers in the U.S. The Fund also incurs substantial costs from both its extensive operations in the U.S. and from purchases of U.S. dollar denominated ingredients, supplies and equipment that are used in its Canadian operations. Management periodically estimates the Fund's expected future U.S. dollar inflows and outflows. U.S. outflows are considered to include the costs and expenses of the Fund's U.S. operations, U.S. dollar denominated purchases by the Canadian manufacturing operations and purchases by the Canadian manufacturing operations of ingredients and materials in Canadian dollars where the underlying cost is influenced by the U.S. dollar.

When U.S. inflows are expected to exceed U.S. outflows, the Fund may choose to hedge its exposure to an appreciating Canadian dollar by entering into foreign exchange contracts to sell U.S. dollars. Since 2003 the Fund's U.S. inflows and U.S. outflows have been approximately in balance, creating a natural cash flow hedge in the business. This natural cash flow hedge may not protect the Fund's reported net earnings and distributable cash in short-term periods of volatile exchange rate change due to timing differences. The impact of exchange rate changes on purchases of ingredients and materials used in the Fund's Canadian manufacturing costs generally lag and are not reflected in reported results until the manufactured goods are sold.

The Fund's operations are constantly changing and as a result, the natural hedge currently existing in the business may not continue. To the extent that there is an imbalance in U.S. dollar revenues and costs, a change in the value of the Canadian dollar relative to the U.S. dollar may have a material adverse effect on the cash generated from operations and the amount available for distributions to Unitholders. Furthermore, management's estimates of expected future U.S. dollar inflows and outflows might not be accurate, which could lead to incorrect hedging decisions.

Exposure to Floating Interest Rates

A rise in interest rates may have an adverse effect on the amount of cash available for distribution to Unitholders. In order to reduce its sensitivity to increases in the cost of debt, the Fund entered into interest-rate swap agreements with its bank which fix the interest expense on $22.0 million (2004 - $26.4 million) of its long-term debt at 6.47% until April 2008. The balance of the Fund's long-term debt and all of its bank indebtedness remains at floating interest rates.

Interest rate swaps have a fair market value at all times and can be unwound prior to expiry of the term. In order to unwind these swaps, the Fund would be required to make a payment to the bank if prevailing swap rates decrease. Conversely, in unwinding a swap, the Fund would be entitled to a payment from the bank if market-swap rates increase.

Derivative Financial Instruments

The Fund may use derivative financial instruments from time to time, including foreign exchange contracts, interest rate swaps and forward commodity contracts to mitigate the adverse effect of fluctuations in exchange rates, interest rates and the cost of sugar consumed in its Canadian manufacturing operations, on cash generated from operations and the amount available for distributions to Unitholders. When entered into, these derivatives may be designated as hedges of anticipated transactions. To date the Fund has designated all of these instruments as hedges. Until they are settled, the fair market value of these derivative contracts will vary with underlying markets, giving rise to unrealized gains and losses which are not recorded in the consolidated financial statement of earnings until the anticipated transaction occurs.

As described in Note 23 of the 2005 Annual Financial Statements, the value of these contractual commitments was $3.4 million and their fair market value was $5.5 million at December 31, 2005. The mark-to-market value of interest-rate swap contracts outstanding at December 31, 2005 was a gain of $0.2 million.

Expansion into the United States

The Fund plans to expand sales of its products into the United States. Although the Fund has developed relationships with several leading U.S. food retailers, there is no assurance that this will result in increased sales or that the development of private-label food retailing in the United States will follow the pattern seen in Canada and Europe. Failure to expand into the United States may limit the growth of the Fund's business.

Changes in Consumer Preferences

Food products accounted for approximately 93% of the Fund's sales in 2005. Consumer preferences for food products change from time to time. Changes in consumer preferences for food products could result in reduced demand for the Fund's products and have a material adverse effect on the Fund's financial condition and results of operations and the amount of cash available for distribution to Unitholders.

Capital Expenditures

The business of the Fund requires ongoing capital maintenance. Moreover, opportunities may arise for capital upgrades providing cost savings that may not be realized in the immediate future but, rather, over several years. To the extent that capital expenditures are in excess of amounts budgeted, the amount of cash available for distributions may decrease.

Disclosure Controls and Procedures

The President and Chief Executive Officer and Vice President and Chief Financial Officer of Associated Brands LP have evaluated the Fund's disclosure controls and procedures as at December 31, 2005, and have concluded that such controls and procedures are effective.

Outlook

Management is not satisfied with the financial results delivered in 2005 and has taken specific and significant steps to improve financial performance in 2006. The key priorities underway include growing sales, improving margins, increasing cash flows and organization strengthening. Management believes that 2006 will be a year of turnaround for the Fund as it repositions itself for growth over the long-term.

Additional Information

Additional information with respect to the Fund, including a copy of the Fund's most recent Annual Information Form, is available on SEDAR at www.sedar.com


Auditors' Report

To the Unitholders of

Associated Brands Income Fund

We have audited the consolidated balance sheets of Associated Brands Income Fund as at December 31, 2005 and 2004, and the consolidated statements of earnings (loss) and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2005 and 2004, and the results of its operations and cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.



Markham, Canada
March 1, 2006 (except as to Notes (Signed)"Grant Thornton LLP"
8, 9, 10 and 13, for which Grant Thornton LLP
the date is March 6, 2006) Chartered Accountants


15 Allstate Parkway
Suite 200
Markham, Ontario
L3R 5B4
T (416) 366-0100
F (905) 475-8906
E Markham@GrantThornton.ca
W www.GrantThornton.ca

Canadian Member of Grant Thornton International



Associated Brands Income Fund
Balance Sheets
December 31
(All figures expressed in thousands of Canadian dollars)

2005 2004
---------------------------------------------------------------------
Assets
Current Assets
Accounts receivable $ 14,360 $ 12,645
Income taxes receivable 302 100
Inventories (Note 3) 19,859 22,406
Other current assets 775 1,389
Future income taxes (Note 12) 451 252
---------------------------------------------------------------------
35,747 36,792

Property, plant and equipment (Note 4) 21,163 23,723
Goodwill and intangible assets (Note 5) 36,334 99,579
Other long-term assets (Note 6) 1,478 443
Future income taxes (Note 12) 568 340
---------------------------------------------------------------------
$ 95,290 $ 160,877
---------------------------------------------------------------------
---------------------------------------------------------------------


Liabilities
Current Liabilities
Bank indebtedness (Note 7) $ 2,319 $ 7,238
Accounts payable and accrued liabilities 12,444 9,948
Cash distributions payable 355 823
Payable to former owners (Note 8) 2,288 2,302
Exchangeable subordinated debentures (Note 9) 11,194 -
Current portion of long-term debt (Note 10) 25,033 -
---------------------------------------------------------------------
53,633 20,311

Long-term debt (Note 10) - 29,544

Lease termination liability (Note 11) 390 -

Non-controlling interest (Note 13) 5,814 12,024

Unitholders' Equity
Fund units (Note 14) 108,216 108,216
Equity component of exchangeable subordinated
debentures (Note 9) 579 -
Deficit (73,342) (9,218)
---------------------------------------------------------------------
35,453 98,998
---------------------------------------------------------------------
$ 95,290 $ 160,877
---------------------------------------------------------------------
---------------------------------------------------------------------

Commitments (Note 18)
Subsequent events (Notes 8, 9, 10, 11 and 13)

On behalf of the Board


(Signed) "David M. Williams" (Signed) "Gary W. Goertz"

David M. Williams Gary W. Goertz
TRUSTEE TRUSTEE

See accompanying notes to the consolidated financial statements.


Associated Brands Income Fund
Consolidated Statements of Earnings (Loss) and Deficit
For the Year Ended December 31
(All figures, except per unit amounts, expressed in thousands of
Canadian dollars)

2005 2004
---------------------------------------------------------------------
Revenues $ 150,500 $ 156,096
Cost of sales 126,891 125,967
---------------------------------------------------------------------
23,609 30,129
---------------------------------------------------------------------

Selling, general and administrative (Note 15) 15,770 15,089
Amortization 3,105 3,303
---------------------------------------------------------------------
18,875 18,392
---------------------------------------------------------------------

Earnings before the under noted items 4,734 11,737
Other expenses (Note 11) 883 -
Write-down of goodwill and intangible
assets (Note 5) 63,245 -
Interest expense 2,643 2,214
---------------------------------------------------------------------

Earnings (loss) before income taxes and
non-controlling interest (62,037) 9,523
Income taxes (Note 12) 63 1,738
---------------------------------------------------------------------
Earnings (loss) before non-controlling
interest $ (62,100) $ 7,785
Non-controlling interest 6,210 -
---------------------------------------------------------------------
Net earnings (loss) for the year (55,890) 7,785
---------------------------------------------------------------------

Net earnings (loss) per Fund unit (Note 16)
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic $ (4.751) $ 0.662
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted $ (4.751) $ 0.596
---------------------------------------------------------------------
---------------------------------------------------------------------

Deficit, beginning of year $ (9,218) $ (4,817)
Net earnings (loss) for the year (55,890) 7,785
Distributions declared to Fund Unitholders
(Note 17) (8,234) (12,186)
---------------------------------------------------------------------
Deficit, end of year $ (73,342) $ (9,218)
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to the consolidated financial statements.


Associated Brands Income Fund
Consolidated Statements of Cash Flows
For the Year Ended December 31
(All figures expressed in thousands of Canadian dollars)

Cash provided by (used in) 2005 2004
---------------------------------------------------------------------

Operating Activities
Net earnings (loss) for the year $ (55,890) $ 7,785
Items not involving cash:
Non-controlling interest (6,210) -
Amortization of property, plant and equipment 3,105 3,303
Amortization of deferred financing 314 281
Accretion expense on exchangeable
subordinated debentures 23 -
Lease termination charge (Note 11) 480 -
Future income taxes (Note 12) (427) (71)
Write-down of goodwill and intangible assets 63,245 -
Translation gain on debt (310) (828)
Change in non-cash operating working capital
(Note 20) 3,636 539
---------------------------------------------------------------------
7,966 11,009
---------------------------------------------------------------------

Financing Activities
Proceeds (repayment) of bank indebtedness (4,919) 2,191
Payment of distributions to Unitholders (8,702) (12,417)
Repayment of long-term debt (4,200) -
Issuance of exchangeable subordinated
debentures 11,750 -
---------------------------------------------------------------------
(6,071) (10,226)
---------------------------------------------------------------------

Investing Activities
Purchase of property, plant and equipment (545) (679)
Increase in other assets (1,350) (104)
---------------------------------------------------------------------
(1,895) (783)
---------------------------------------------------------------------

Net change in cash and cash equivalents - -
Cash and cash equivalents, beginning of year - -
---------------------------------------------------------------------
Cash and cash equivalents, end of year $ - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to the consolidated financial statements.

Associated Brands Income Fund
Notes to the Consolidated Financial Statements
For the Year Ended December 31
(All figures, except for unit amounts, expressed in
thousands of Canadian dollars)


1. Organization

Associated Brands Income Fund (the "Fund") is an unincorporated open-ended trust established under the laws of the Province of Ontario pursuant to a Declaration of Trust dated September 25, 2002, as amended and restated on November 1, 2002. The Fund has been established to hold, directly or indirectly, investments in entities engaged in the manufacture and sale of dry-blend food and household products, including the securities or assets of Associated Brands Inc., which was acquired on November 15, 2002. Through its subsidiary entities, the Fund is a manufacturer and supplier of private label and branded food and household products to markets in Canada and the U.S.

2. Significant accounting policies

(a) Basis of presentation

These consolidated financial statements include the accounts of the Fund and its subsidiaries. All material intercompany transactions and balances have been eliminated.

Effective January 1, 2004, the Fund adopted Section 1100 of the Canadian Institute of Chartered Accountants ("CICA") Handbook, "Generally Accepted Accounting Principles" ("GAAP"). This section establishes standards for financial reporting in accordance with GAAP and provides guidance on sources to consult with when selecting accounting policies and determining the appropriate disclosures when an item is not explicitly dealt with in the primary sources of GAAP. The Fund also adopted Section 1400 of the CICA Handbook, "General Standards of Financial Statement Presentation". This section clarifies what constitutes "fair presentation in accordance with GAAP". The Fund also adopted Section 3063 of the CICA Handbook, "Impairment of Long Lived Assets". This section requires the Fund to measure and disclose impairments of long-lived assets. Adoption of these sections did not have a material impact on the Fund's financial statements.

(b) Cash and cash equivalents

The Fund considers cash on hand and balances with banks and highly liquid temporary money market instruments with original maturities of three months or less as cash or cash equivalents. Bank borrowings are considered to be financing activities.

(c) Inventories

Inventories are valued at the lower of cost and net realizable value, with cost being determined substantially on a first-in, first-out basis. Cost of finished goods includes direct material, direct labour and an allocation of variable and fixed manufacturing overhead.

(d) Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated amortization. Amortization is calculated using the straight-line method at the following rates, which are based on the expected useful lives of the assets:



Buildings and improvements Up to 40 years
Manufacturing and other equipment Up to 20 years
Leasehold improvements Over term of the lease


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

Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances suggest that the carrying amount of an asset may not be recoverable. An impairment is recognized when the carrying amount of an asset to be held and used exceeds the projected undiscounted future net cash flows expected from its use and disposal, and is measured as the amount by which the carrying amount of the asset exceeds its fair value.

(e) Goodwill and intangible assets

Goodwill represents the purchase price of an acquired business in excess of the fair value of the net identifiable assets acquired. Intangible assets, including trademarks, are recorded at their allocated cost at the date of acquisition. The cost incurred to enhance the service potential of an intangible asset is capitalized as a betterment. Costs incurred in the maintenance of the intangible asset are expensed as incurred.

Goodwill and intangible assets with indefinite lives are assessed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may be impaired. Impairment of goodwill is tested by comparing the carrying value to its fair value. When the carrying value exceeds the fair value, an impairment exists and is measured by comparing the carrying amount of goodwill to its fair value determined in a manner similar to a purchase price allocation. Impairment of indefinite life intangible assets is determined by comparing their carrying value to their fair values.

(f) Deferred financing costs

Costs incurred to obtain long-term debt financing are amortized to earnings on a straight-line basis over the term of such debt and are included in interest expense for the year.

(g) Revenue recognition

The Fund recognizes revenue from product sales, net of rebates, at the time of product shipment, when title passes to the customer. Rebates include various incentive and promotional programs with the Fund's customers.

(h) Packaging design costs

Packaging design costs are expensed in the period in which the products associated with the expense commence shipping to customers in commercial quantities.

(i) Income taxes

Income tax obligations relating to distributions from the Fund are obligations of the Unitholders and accordingly, no provision for income taxes has been made in respect of income of the Fund.

A provision for income taxes is recognized for the Fund's subsidiaries that are subject to tax, including large corporations tax. The Fund's subsidiaries use the asset and liability method of accounting for income taxes. Under this method, assets and liabilities are recorded for the future income tax consequences attributable to differences between the financial statement carrying values of assets and liabilities and their respective income tax bases. These future income tax assets and liabilities are recorded using enacted or substantively enacted income tax rates. The effect of a change in income tax rates on these future income tax assets or liabilities is included in income in the period in which the rate change occurs. The Fund records a valuation allowance when it is more likely than not that the future tax asset will not be realized prior to their expiration.

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.

(j) Foreign currency translation

Monetary assets and liabilities, including those of integrated subsidiaries, are translated into Canadian dollars at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical exchange rates. Operating revenues and expenses are translated at the average exchange rates prevailing during the year, except for amortization, which is translated at the same rates as those used in the translation of the corresponding assets. Translation gains or losses are included in net earnings.

(k) Employee future benefits

The Fund accrues its obligations and costs in respect of employee benefit plans. The cost of pension benefits earned by employees is actuarially determined using the projected benefit method prorated on service and management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. Changes in these assumptions could affect future pension expense. For the purpose of calculating the expected return on plan assets, those assets are valued at fair value. Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment.

Actuarial gains and losses in excess of 10% of the greater of the actuarial liabilities and the fair value of assets at the beginning of the year and all gains and losses due to changes in plan provisions are amortized on a straight-line basis over the expected average remaining service period of the active plan members. When the restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.

(l) Derivative financial instruments

The Fund uses derivatives to manage its exposure to fluctuations in raw material costs, interest rates and foreign exchange. For those that are designated as hedges of an anticipated transaction, being the purchase of raw materials, the fixing of interest rates or the conversion of U.S. currency into Canadian currency, unrealized gains or losses on anticipated transactions are not recorded in the consolidated financial statements until the transaction occurs. Any gains and losses relating to hedge ineffectiveness are recognized immediately in earnings. If not designated as hedges, derivatives are accounted for at fair value, with gains and losses recorded in the consolidated financial statements as changes in fair value occur.

(m) Use of estimates and measurement uncertainty

The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management of the Fund and its operating companies to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the audited annual consolidated financial statements, and the reported revenues and expenses during the reporting period. The Fund must also review its intangible assets and goodwill on an annual basis for impairment. By their nature, intangible assets and goodwill are subject to measurement uncertainty. Actual results could differ from these estimates.

(n) Comparative figures

Certain 2004 comparative figures have been reclassified to conform with the financial statement presentation adopted in 2005.



3. Inventories

2005 2004
---------------------------------------------------------------------
Raw materials and packaging $ 10,126 $ 10,542
Finished goods 9,733 11,864
---------------------------------------------------------------------
$ 19,859 $ 22,406
---------------------------------------------------------------------
---------------------------------------------------------------------


4. Property, plant and equipment

2005
Accumulated
Cost Amortization Net
---------------------------------------------------------------------
Land $ 1,408 $ - $ 1,408
Buildings 5,690 1,610 4,080
Manufacturing and other equipment 23,726 8,326 15,400
Leasehold improvements 67 34 33
Construction in progress 242 - 242
---------------------------------------------------------------------
$ 31,133 $ 9,970 $ 21,163
---------------------------------------------------------------------
---------------------------------------------------------------------

2004
Accumulated
Cost Amortization Net
---------------------------------------------------------------------
Land $ 1,408 $ - $ 1,408
Buildings 5,690 1,304 4,386
Manufacturing and other equipment 23,338 5,590 17,748
Leasehold improvements 67 23 44
Construction in progress 137 - 137
---------------------------------------------------------------------
$ 30,640 $ 6,917 $ 23,723
---------------------------------------------------------------------
---------------------------------------------------------------------


5. Goodwill and intangible assets

Intangible
Goodwill Assets Total
---------------------------------------------------------------------

Balance, December 31, 2003 and 2004 $ 84,264 $ 15,315 $ 99,579
Write-down (62,000) (1,245) (63,245)

---------------------------------------------------------------------
Balance, December 31, 2005 $ 22,264 $ 14,070 $ 36,334
---------------------------------------------------------------------
---------------------------------------------------------------------


6. Other long-term assets

2005 2004
---------------------------------------------------------------------

Deferred financing costs $ 2,143 $ 840
Accumulated amortization (898) (584)
---------------------------------------------------------------------
1,245 256
Pension asset (Note 19) 233 187
---------------------------------------------------------------------
$ 1,478 $ 443
---------------------------------------------------------------------
---------------------------------------------------------------------


7. Bank indebtedness

2005 2004
---------------------------------------------------------------------
(a) Canadian subsidiaries operating line of
$18,000, maturing November 15, 2007, bearing
interest at prime plus 0.75% per annum

(i) Operating indebtedness (cash) $ (27) $ 4,449
---------------------------------------------------------------------
---------------------------------------------------------------------

(b) U.S. subsidiary demand operating line of
US$3,500, bearing interest at LIBOR rates
plus 2.25% per annum 2,346 2,789
---------------------------------------------------------------------
---------------------------------------------------------------------
$ 2,319 $ 7,238
---------------------------------------------------------------------
---------------------------------------------------------------------


8. Payable to former owners

The amount payable to former owners on the balance sheet represents the remaining balance from $2,500 in proceeds of the Fund's initial public offering ("IPO"). This amount was withheld by the Fund from former shareholders of the business in order to satisfy expected re-assessments of taxes and interest arising from a matter in respect of one of the Fund's Canadian subsidiaries raised by the Ontario Ministry of Finance for fiscal years 1998 through 2000, and interest received from the Ontario Ministry of Finance following a successful appeal of their re-assessments, less legal fees incurred in the appeal and taxes paid in respect of pre-IPO tax matters.

On April 21, 2004, a summary opinion was received from the Ontario Ministry of Finance Appeals Branch ruling in favour of the subsidiary's original filing position. The Ontario Ministry of Finance subsequently refunded all amounts paid in respect of previous re-assessments on the matter. As no other re-assessments currently exist from tax authorities in respect of the pre-IPO tax matters, this balance has been re-categorized from taxes payable to amounts payable to former shareholders.

Under the waiver and consent agreement with the Fund's bank, the amounts due to former owners may not be paid without the prior written consent of the bank.

9. Exchangeable subordinated debentures

On November 14, 2005, Associated Brands Holdings Limited Partnership issued $11,750 of exchangeable subordinated debentures in a private placement for net proceeds, after costs, of $10,600. Approximately $3,600 of the net proceeds from the debentures will be invested in four growth capital projects in the Fund's manufacturing facilities in 2006 and 2007. The remaining proceeds were used for financial restructuring purposes, including reducing the existing debt under the Fund's subsidiaries' credit facilities by $4,200 (Note 10).

The liability component of the exchangeable debentures, in the amount of $11,171, is calculated as the present value of the principal, discounted at a rate approximating the interest rate that would have been applicable to non-convertible debt at the time the debt was issued. This portion of the exchangeable debentures is accreted over its term to the full face value by charges to interest expense. The equity element of the exchangeable debenture, in the amount of $579, is comprised of the value of the exchange option, being the difference between the face value of the exchangeable debenture and the liability element already calculated.

The exchangeable subordinated debentures have a maturity date of September 30, 2008. This maturity date, however, may be extended up to two times, in each case for an additional one-year period from the maturity date then in effect, at the option of the holders of the debentures. Provided that certain conditions are met, the debentures may be redeemed at the option of Associated Brands Holdings Limited Partnership, during the periods that the maturity date is so extended, at a redemption price equal to the principal amount plus accrued and unpaid interest.

The exchangeable subordinated debentures bear interest from the date of issuance at a rate of 9.0% per annum payable semi- annually in arrears on March 30 and September 30 of each year, commencing on March 30, 2006. Security is provided by a mortgage and pledge of all present and future property of Associated Brands Holdings Limited Partnership and by guarantees from, and a mortgage and pledge of all present and future property of, each of Associated Brands Limited Partnership and Associated Brands, Inc. The payment of principal and interest on the debentures is subordinate to the Fund's subsidiaries' credit facilities with their bank.

The debentures can be exchanged by the holders for units of the Fund at an exchange price of $4.00 per unit at any time prior to maturity or immediately preceding the date fixed for redemption. The trust indenture under which the debentures were issued provides for the adjustment of the exchange price in certain events.

The holders of the debentures may require Associated Brands Holdings Limited Partnership to purchase all or a portion of such holder's debentures at a price equal to 101% of the principal amount plus accrued and unpaid interest upon the occurrence of a change of control of the Fund or upon Associated Brands Holdings Limited Partnership ceasing to be a subsidiary of the Fund. If (i) a change of control has occurred but a holder of a debenture has not exercised its right to require Associated Brands Holdings Limited Partnership to purchase such debenture, (ii) the change of control has resulted from an offer to all unitholders to purchase units at a price less than $5.00 per unit, and (iii) an event of default under the trust indenture has occurred subsequent to the change of control, Associated Brands Holdings Limited Partnership will be required to pay to such holder on the date that repayment of such debenture is demanded pursuant to the trust indenture, or on such later date that the payment is permitted by the subordination agreement applicable to the debentures, in addition to the principal amount of such debentures and all accrued and unpaid interest thereon, a make-whole amount equal to (i) $0.27 multiplied by the principal amount of such debentures less (ii) all interest paid on such debentures on or prior to the repayment thereof.

Certain defaults under the Fund's subsidiaries' credit agreement with their bank have resulted in a default under the trust indenture under which the debentures were issued. In addition, under the waiver and consent agreement with the bank, amounts may not be paid under the debentures without the prior written consent of the bank. If the bank does not consent to the payment of any applicable amount that is payable on the debentures, then the failure to pay such amount when due will result in a default under the trust indenture under which the debentures were issued. The next interest payment under the debentures is due on March 30, 2006. There can be no assurance that the bank will provide its consent to this interest payment being made. Due to the existing default under the trust indenture under which the debentures were issued, the debentures have been classified as current liabilities. As at March 6, 2006, the debenture holders have not exercised their right to demand payment of the debentures.



10. Long-term debt
a) The Fund's subsidiaries have long-term debt as follows:

2005 2004
---------------------------------------------------------------------

Term loan with monthly interest payments only,
maturing November 15, 2007, bearing interest
at Bankers' Acceptance rates plus 2.25% per
annum. $ 15,800 $ 20,000

Term loan of USD$5,340 with monthly interest
payments only, maturing November 15, 2007,
bearing interest at LIBOR rates plus 2.75 %
per annum. The principal balance in Canadian
dollars fluctuates with exchange rates. 6,210 6,419

Term loan of USD$2,600 with monthly interest
payments only, maturing November 15, 2007,
bearing interest at either the U.S. base
rate plus 1.25% or LIBOR plus 2.75% per annum.
The principal balance in Canadian dollars
fluctuates with exchange rates. 3,023 3,125
---------------------------------------------------------------------
25,033 29,544
Less current portion (25,033) -
---------------------------------------------------------------------
$ - $ 29,544
---------------------------------------------------------------------
---------------------------------------------------------------------


In 2005, the Canadian term loan facility was reduced from $27,000 to $22,800 as a result of the Fund repaying $4,200 of the loans from the net proceeds from the exchangeable subordinated debenture issuance (Note 9). Of the remaining term loan facility, USD $7,000 can be obtained by way of USD borrowings.

At December 31, 2005, certain subsidiaries of the Fund were in default under their credit agreement with a Canadian chartered bank. As a result of these defaults, the long-term debt under this credit agreement has been reclassified as a current liability. These defaults under the credit agreement have also resulted in a cross default under the exchangeable debentures of Associated Brands Holdings Limited Partnership (Note 9).

On March 6, 2006, certain subsidiaries of the Fund entered into a waiver and consent agreement with their bank. Under this waiver and consent agreement, the bank agreed to waive the defaults that had then been identified under the credit agreement until March 27, 2006 and the Fund's subsidiaries agreed to certain additional covenants in favour of the bank.

The additional covenants from the Fund's subsidiaries under the waiver and consent agreement included a covenant to restrict further payments or distributions to certain third parties (including to the Fund for distribution to unitholders and to the holders of exchangeable debentures) without the consent of the bank and a covenant to make monthly repayments to the bank under the Canadian term facility from the bank until the bank agrees that such payments may be discontinued. There can be no assurance as to the date by which, or the conditions (including an improvement in the financial condition of the Fund) under which, the bank would be prepared to provide its consent to the reinstatement of such payments and distributions or the discontinuance of such mandatory monthly repayments. The monthly repayments required to be made under the Canadian term facility are to begin on March 31, 2006 and each monthly repayment is to be in an amount that is equal to the amount, if any, by which earnings (before interest, taxes, depreciation and amortization) for the calendar month that is two months prior to the month in which the applicable repayment is due exceed fixed charges (defined as capital expenditures, payments in respect of taxes, scheduled principal payments on interest bearing indebtedness, interest payments and capital lease payments) for such calendar month.

There can be no assurance that the bank or the debenture holders will not exercise their respective rights and remedies during the continuance of any defaults under the credit agreement or the exchangeable debentures, as applicable.

The Fund's subsidiaries' operating and term loan facilities mature on November 15, 2007. As security for the facilities under the credit agreement, the subsidiaries have pledged all present and future property and undertakings. Such credit facilities are subject to certain financial covenants and various positive and restrictive covenants, including covenants that restrict capital expenditures and distributions to unitholders.

(b) A subsidiary of the Fund has entered into an ISDA Master Agreement with its lender, for the purposes of allowing it to enter into interest rate swap transactions from time to time. During the year, the subsidiary entered into three interest rate swap transactions under the ISDA Master Agreement, which fix the interest rate on $22,010 of its term loans at 6.47% per annum until April 8, 2008. Certain defaults under the Fund's subsidiaries' credit agreement with their bank have resulted in a default under this ISDA Master Agreement. The balance of the Fund's debt remains at floating interest rates.



11. Other expenses

2005
---------------------------------------------------------------------
(a) Lease termination 480
(b) Costs associated with contract manufacturing agreement 403
---------------------------------------------------------------------
$ 883
---------------------------------------------------------------------
---------------------------------------------------------------------


(a) The Fund has recorded a charge of $480 in 2005 relating to the exit of a contractual lease obligation. The recognition of this charge required management to make certain judgements regarding the nature, timing and amounts associated with such exit activities, including estimating sublease income that could reasonably be obtained for the property. At the end of each reporting period, the Fund evaluates the appropriateness of the remaining accrued balance.

(b) On November 15, 2005, the Fund entered into a long-term contract manufacturing agreement with a third party. Under the terms of the agreement, the Fund was to finance, design, construct and operate a manufacturing and warehousing facility for a range of products. The agreement was subject to certain conditions, including the Fund obtaining project financing for the new facility on terms that were beneficial to Unitholders by January 20, 2006. The Fund terminated the agreement on January 20, 2006, as it was unable to obtain the necessary financing. All costs incurred with respect to the agreement have been expensed at December 31, 2005.

12. Income taxes

The provision for income taxes in the consolidated statement of earnings varies from the amount that would be computed by applying the combined federal and provincial statutory income tax rates as a result of the following:



2005 2004
---------------------------------------------------------------------

Earnings (loss) before income taxes and
non-controlling interest $ (62,037) $ 9,523
Non-taxable goodwill and intangible assets
write-down 63,245 -
Earnings of the Fund subject to tax in the
hands of the Unitholders (1,607) (6,458)
---------------------------------------------------------------------
Earnings (loss) of the Fund subject to tax $ (399) $ 3,065
---------------------------------------------------------------------
---------------------------------------------------------------------

Income taxes expense (recovery) at the
statutory rate $ (144) $ 1,107

Increase (decrease) resulting from:
Effect of foreign tax rate (17) 182
Effect of foreign exchange rates on temporary
Differences 19 41
Foreign taxes withheld 251 350
Large corporations tax 24 12
Other (70) 46
---------------------------------------------------------------------
$ 63 $ 1,738
---------------------------------------------------------------------
---------------------------------------------------------------------

Income tax expense (recovery)
Current $ 490 $ 1,809
Future (427) (71)
---------------------------------------------------------------------
$ 63 $ 1,738
---------------------------------------------------------------------
---------------------------------------------------------------------

The tax effects of temporary differences that give rise to
significant components of the future tax assets and liabilities at
December 31 are as follows:
2005 2004
---------------------------------------------------------------------
Future tax assets (liabilities)
Allowances and provisions $ 451 $ 252
Non capital loss carried forward 641 236
Deferred financing fees and other payments 268 383
Intangible assets 891 863
Property, plant and equipment (323) (523)
---------------------------------------------------------------------
1,928 1,211
Valuation allowance (909) (619)
---------------------------------------------------------------------
$ 1,019 $ 592
---------------------------------------------------------------------
---------------------------------------------------------------------

Tax loss carry-forwards, in the amount of $1,721, expire between 2006
and 2015.

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


13. Non-controlling interest

Authorized:

Associated Brands Holdings Limited Partnership, a subsidiary of the Fund, may issue an unlimited number of subordinated Class B exchangeable units in series. The Class B exchangeable units have rights equivalent in all material respects to those of units of the Fund and are entitled to receive, where practicable, quarterly distributions equal to distributions made by the Fund on a unit in respect of the quarter, except that during the period in which the Class B exchangeable units were subordinated (which period expired on January 1, 2006), distributions on the Class B exchangeable units would not be paid in any year unless monthly cash distributions of $0.0896 per unit are paid on the Fund's units in that year. In accordance with the waiver and consent agreement with the Fund's bank, no distributions can be made on the Class B exchangeable units without the prior written consent of the Bank (Note 10). Effective as of January 1, 2006, Class B exchangeable units are exchangeable for units of the Fund at the option of the holder.

The non-controlling interest represents 10% of the total outstanding units of the Fund (Class B exchangeable units and Fund Units) at December 31, 2005. For the year ended December 31, 2005, the non-controlling interest has been allocated $6,210 of the net loss for the year. No earnings have been allocated to the Class B exchangeable units in 2004 since the distributable cash targets have not been met.



Issued:

Number of Units 2005 2004
---------------------------------------------------------------------
Issue of Class B
Exchangeable Units
Initial offering 1,306,967 $ 13,070 $ 13,070
Less issuance costs (1,046) (1,046)
Share of net loss for the year (6,210) -
---------------------------------------------------------------------
$ 5,814 $ 12,024
---------------------------------------------------------------------
---------------------------------------------------------------------

Subsequent to year end, 83,423 Class B exchangeable units were
exchanged for 83,423 units of the Fund (Note 14).

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


14. Fund units

Authorized:

An unlimited number of units may be issued by the Fund pursuant to the Fund's Declaration of Trust. Each unit is transferable and represents an equal undivided beneficial interest in the distributions of the Fund and in any net assets of the Fund in the event of termination or winding up of the Fund. All units of the Fund are of the same class with equal rights and privileges, are not subject to future calls or assessments, and entitle the holder to one vote for each whole unit held at all meetings of Unitholders. Units are redeemable at the option of the holder on terms and at a price determined pursuant to the Declaration of Trust.



Issued:
Number of Units 2005 2004
---------------------------------------------------------------------
Fund units 11,762,800
(Note 13) $ 108,216 $ 108,216
---------------------------------------------------------------------
---------------------------------------------------------------------


15. Selling, general and administrative expenses

Selling general and administrative expenses include unrealized foreign exchange gains and losses arising from the translation of monetary assets and liabilities of the Fund denominated in foreign currencies as set out below:



2005 2004

Loss on translation of monetary non-cash
working capital items $ (458) $ (709)

Gain on translation of long-term debt 310 828
---------------------------------------------------------------------
Net gain (loss) on translation of monetary
assets and liabilities of the Fund denominated
in foreign currencies $ (148) $ 119
---------------------------------------------------------------------
---------------------------------------------------------------------


16. Earnings (Loss) per Fund unit

Basic earnings per unit is computed by dividing the net earnings for the year by the weighted average number of Fund units outstanding during the year, which is 11,762,800 (2004 - 11,762,800).

Diluted earnings (loss) per unit is computed by dividing the net earnings for the year by the aggregate of the weighted average number of Fund units, Class B exchangeable units and the effect of the exchangeable debentures outstanding during the year. For 2005, the effect of Class B exchangeable units and exchangeable debentures is anti-dilutive. Accordingly, the weighted average number of Fund units for dilution purposes is 11,762,800. For 2004, the only dilution effect was from Class B exchangeable units. Accordingly, the weighted average number of Fund units for dilution purposes is 13,069,767.



17. Distributions to Unitholders

Distributions declared during the year ended December 31, 2005 were
as follows:

Distribution record date Total Per Unit Paid or Payable

January 31, 2005 $ 823 $ 0.07 February 15, 2005
February 28, 2005 823 0.07 March 15, 2005
March 31, 2005 823 0.07 April 15, 2005
April 29, 2005 823 0.07 May 13, 2005
May 31, 2005 823 0.07 June 15, 2005
June 30, 2005 823 0.07 July 15, 2005
July 29, 2005 823 0.07 August 15, 2005
August 31, 2005 588 0.05 September 15, 2005
September 30, 2005 588 0.05 October 14, 2005
October 31, 2005 588 0.05 November 15, 2005
November 30, 2005 354 0.03 December 15, 2005
December 30, 2005 355 0.03 January 13, 2006
---------------------------------------------------------------------
$ 8,234 $ 0.70
---------------------------------------------------------------------
---------------------------------------------------------------------

During the year ended December 31, 2004, distributions to Fund units
amounted to $12,186 ($1.04 per unit). No distributions were declared
or paid on the Class B exchangeable units in 2005 or 2004.


18. Commitments

(a) Commitments for operating lease payments for premises and
equipment that require minimum annual payments are as follows:

2006 $ 1,163
2007 866
2008 740
2009 602
2010 80
Thereafter 1,458
-----------------------------------------------------------------
$ 4,909
-----------------------------------------------------------------
-----------------------------------------------------------------

(b) The Fund has purchase commitments in the normal course of
business amounting to $8,979.


19. Pension plans

Defined contribution pension plan

The Fund sponsors a 401(K) retirement savings plan in the U.S. for all eligible employees and a registered defined contribution plan for all eligible Canadian employees. Current service costs under the defined contribution pension plans are charged to expense as they accrue. The total expense related to these plans for the year ended December 31, 2005 was $374 (2004 - $526).

Defined benefit pension plan

A subsidiary of the Fund sponsors a defined benefit pension arrangement that covers certain hourly paid employees. Expenses under the plan for the year ended December 31, 2005 were $204 (2004 - $138).

The subsidiary uses actuarial reports prepared by an independent actuary for funding and accounting purposes. The most recent valuation was performed as of November 30, 2005 and the next required valuation will be as of December 31, 2006.



2005 2004
---------------------------------------------------------------------
Accrued benefit obligation
Balance, beginning of year $ 1,867 $ 1,329
Current service costs 182 128
Employee contributions 125 129
Interest cost 135 103
Actuarial losses 413 191
Benefits paid (45) (13)
---------------------------------------------------------------------
Balance, end of year $ 2,677 $ 1,867
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
2005 2004

Plan Assets
Fair value, beginning of year $ 1,602 $ 1,228
Employer contributions 248 249
Employee contributions 125 129
Benefits paid (45) (13)
Actual return on plan assets 263 9
---------------------------------------------------------------------
Fair value, end of year $ 2,193 $ 1,602
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
Funded Status
Plan deficit $ (484) $ (265)
Employer contributions after measurement date 21 20
Unamortized actuarial losses 696 432
---------------------------------------------------------------------
Accrued benefit asset $ 233 $ 187
---------------------------------------------------------------------
---------------------------------------------------------------------

Amounts recognized on the consolidated
balance sheet
Pension Asset
Pension asset, beginning of year $ 187 $ 83
Employer contributions 250 242
Pension expense (204) (138)
---------------------------------------------------------------------
Pension asset, end of year $ 233 $ 187
---------------------------------------------------------------------
---------------------------------------------------------------------

Pension benefit expense
Current service cost $ 182 $ 127
Interest cost 135 103
Expected return on plan assets (127) (94)
Amortization of actuarial loss 14 2
---------------------------------------------------------------------
Net pension expense $ 204 $ 138
---------------------------------------------------------------------
---------------------------------------------------------------------

The significant actuarial assumptions adopted in measuring the Fund's
accrued benefit obligations are as follows:
2005 2004
---------------------------------------------------------------------
Expected rate of return on plan assets 7.10% 7.00%
Discount rate 5.20% 6.20%
Rate of compensation increase 3.00% 3.00%
Expected average remaining service lifetime 17.0 years 17.5 years

The pension assets are invested in the following asset categories at
December 31, 2005 and December 31, 2004:

Asset Category 2005 2004
---------------------------------------------------------------------
Equity Securities 49% 51%
Debt Securities 41% 40%
Real Estate Securities 10% 9%
---------------------------------------------------------------------
100% 100%
---------------------------------------------------------------------
---------------------------------------------------------------------


20. Supplementary cash flow information

Changes in non-cash operating working capital 2005 2004
---------------------------------------------------------------------

Accounts receivable $ (1,715) $ 971
Inventories 2,547 (1,032)
Other current assets 614 281
Accounts payable and accrued liabilities 2,406 (187)
Income taxes receivable/payable (202) (1,796)
Payable to former owners (14) 2,302
---------------------------------------------------------------------
$ 3,636 $ 539
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest paid $ 2,329 $ 1,931
---------------------------------------------------------------------
---------------------------------------------------------------------
Income taxes paid $ 691 $ 1,266
---------------------------------------------------------------------
---------------------------------------------------------------------


21. Related party information

(a) Selling, general and administrative expenses includes $420 in fees for the year ended December 31, 2005 (2004 - $429) for sales and brokerage services performed by a company, in the normal course of business that is controlled by two trustees of Associated Brands Operating Trust ("ABOT"), a subsidiary of the Fund. The unrelated ABOT trustees have reviewed and approved the terms under which services are provided. Amounts due to this related party at December 31, 2005 are $38 (2004 - $39).

(b) On November 14, 2006, the Fund issued $11,750 of exchangeable subordinated debentures, of which $10,000 were issued to an investment fund management company. One trustee of ABOT is a managing partner of this company. The remaining $1,750 of exchangeable subordinated debentures were issued to other trustees of ABOT.

22. Segmented information

(a) Operating segments

The Fund operates predominately in one industry segment, the manufacture and supply of private label dry-blend food products.

(b) Geographic information



2005 2004
---------------------------------------------------------------------
Sales to external customers
Canada and other $ 68,904 $ 69,797
United States 81,596 86,299
---------------------------------------------------------------------
Total $ 150,500 $ 156,096
---------------------------------------------------------------------
---------------------------------------------------------------------

Property, plant and equipment
Canada $ 10,278 $ 11,356
United States 10,885 12,367
---------------------------------------------------------------------
Total $ 21,163 $ 23,723
---------------------------------------------------------------------
---------------------------------------------------------------------


23. Financial instruments

Foreign currency risk

The Fund operates in Canada and the United States and therefore has sales and receivables denominated in U.S. dollars. The Fund's exposure to changes in the Canadian/U.S. dollar exchange rate is reduced by the existence of payables denominated in U.S. dollars. U.S. dollar cash flow contributes to the Fund's distributable cash.

Interest rate risk

The Fund is exposed to interest rate risk because the interest on certain of its debt is based on the lender's prime rate, which may vary from time to time.

Credit risk

Credit risk arises from the possibility that the customers to which the Fund sells products may experience financial difficulty and be unable to fulfill their obligations. This risk is mitigated by proactive credit management policies that include regular monitoring of each debtor's payment history and performance.

Fair values

The estimated fair value of cash and cash equivalents, receivables, bank indebtedness and payables approximates carrying value due to the relatively short-term nature of the instruments and/or floating interest rates on the instruments. The estimated fair value of the lease termination liability also approximates carrying value due to the discount rate applied to determine the liability. The estimated fair value of the long-term debt approximates the carrying value because the interest rates are floating. The estimated fair value of the convertible debentures approximates the carrying value because the fixed interest rate reflects the market rate for similar debt.

The fair value of the loan payable to the former owners is indeterminable as there is no market for such liabilities due to the lack of interest and definitive repayment terms.

Derivative financial instruments

The Fund uses forward contracts to fix the price at which certain raw materials are purchased. These activities serve to minimize, but not eliminate, the risk from fluctuations in the purchase price of the raw materials. At December 31, 2005, the Fund has committed to purchase contracts in the amount of $3,381. The fair market value of these contracts at December 31, 2005 was $5,515.

As outlined in Note 10, the Fund has entered into three interest-rate swap transactions to fix the interest rate on $22,010 (2004 - $16,419) of its long-term debt. The mark to market value of the swap positions as of the balance sheet date was a gain of $167 (2004 - $340).

24. Economic dependence

The Fund produces and sells a wide range of products to customers in the Canadian and U.S. markets. For the year ended December 31, 2005, approximately 20% (2004 - 21%) of its revenue was to one customer.

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