Menu Foods Income Fund
TSX : MEW.UN

Menu Foods Income Fund

February 09, 2005 15:06 ET

Menu Foods Income Fund Announces 2004 Fourth Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Feb. 9, 2006) -

Attention Business/Financial Editors

NOT FOR RELEASE OVER US NEWSWIRE SERVICES

Menu Foods Income Fund (TSX: MEW.UN) announced today its financial results for
the quarter ended December 31, 2004.

A conference call to review these results will take place tomorrow
morning on Thursday, February 10, 2005 at 8:30 a.m. EST (Toronto time). The
conference call will be chaired by Serge Darkazanli, Menu's Chairman and Chief
Executive Officer. Serge will be joined on the call by Paul Henderson, Menu's
President and Chief Operating Officer and Mark Wiens, Menu's Executive
Vice-President and Chief Financial Officer.

To access the conference call in real time, please call 416-640-4127 or
1-800-814-4861. A replay will be available from approximately one hour after
the end of the conference call until February 24, 2005 by dialing 416-640-1917
or 1-877-289-8525, using passcode 21111835 followed by the number sign. A live
audio webcast of the conference call is also available, it can be accessed by
entering www.newswire.ca/webcast on an Internet browser. A replay of the
webcast will be available for 90 days, it can be accessed by entering
www.newswire.ca/webcast on an Internet browser.

The Fund also announced that Menu Foods GenPar Limited (the general
partner of Menu Foods Limited Partnership, a subsidiary of the Fund ("MFLP"))
will pay on or before February 10, 2005 the previously declared distribution
of 31.50 cents per Class B Exchangeable Unit for the fourth quarter of 2004 to
holders of Class B Exchangeable Units.


MESSAGE to UNITHOLDERS
-------------------------------------------------------------------------

We are pleased to present, to unitholders of Menu Foods Income Fund, our
report for the fourth quarter ended December 31, 2004. The table below reports
selected highlights of the quarter's results:

<<
Quarter ended Year ended
December 31, December 31,
2004 2003 2004 2003
($ millions) ($ millions) ($ millions) ($ millions)

Sales 91.3 89.4 380.7 320.9
Net income before
non-controlling
interest 5.8 5.1 23.1 14.1
EBITDA 11.6 7.6 46.2 33.1
Distributable cash 10.0 10.5 38.7 30.5
Distributions declared 9.0 9.0 35.4 32.2
Distributions declared
per Trust unit ($) 0.3150 0.3150 1.2600 1.2529
Distributions declared
per Class B unit ($) 0.3150 0.3800 1.2600 1.2529

Total distributions declared represented a pay-out ratio of approximately
90.1% for the quarter and 91.5% for the year.
Performance during the quarter reflects improved operating efficiencies,
the absence of last year's BSE problem coupled with volume growth over the
previous year. The fourth quarter highlights include:

- Sales grew by 2% or $1.9 million over last year. Were it not for the
rise of the Canadian dollar relative to the United States dollar,
sales would have increased by $8.4 million versus the prior year.

- EBITDA grew by 53% or $4.0 million over last year. Operating
efficiencies contributed $2.9 million, the absence of BSE related
costs contributed $1.1 million and the volume growth contributed
another $1.0 million while all other factors, including the
strengthening of the Canadian dollar, reduced EBITDA by $1.0 million.

- Volume (expressed in cases of 24 cans or pouches) increased by more
than 6% over last year, driven by the continued growth of the pouch
format.

- The decline in distributable cash in the current year can be
primarily attributed to a significant non-recurring tax recovery in
the prior year.

During the first quarter of 2005, the Fund initiated a price increase to
its Canadian customers, passing on the cost increases incurred during the past
two years. This increase follows price increases that we understand have been
taken by the national brand manufacturers.

On a full year basis, target distributions and EBITDA thresholds as set
out in the Menu Foods Limited Partnership Agreement were achieved.
Accordingly, the Class B Exchangeable units of the partnership are no longer
subordinated to the Trust units.

We continue to appreciate the support of investors, customers and
suppliers and the ongoing dedication of our employees.


Serge K. Darkazanli Robert W. Luba
Chairman and Chief Executive Officer Chairman, Board of Trustees
Menu Foods GenPar Limited Menu Foods Income Fund
Administrator of Menu Foods Income Fund



Management's Discussion and Analysis of Financial Results
(For the quarter and year ended December 31, 2004)

February 9, 2005

Presentation of Financial Information

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

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

On January 19, 2005 the Canadian Institute of Chartered Accountants
issued emerging issues committee abstract 151 ("EIC-151") which deals with the
accounting for exchangeable securities issued by subsidiaries of income
trusts. Specifically, EIC-151 describes conditions that must be met in order
to include exchangeable securities issued by subsidiaries of income trusts as
part of unitholders' equity. If these conditions are not met, the exchangeable
securities must be presented as non-controlling interest. EIC-151 must be
applied retroactively, with restatement of prior periods, to all financial
statements issued after January 19, 2005.

Notwithstanding management's and the exchangeable unitholders' view that
the Class B Exchangeable Units have substantially the same rights as the Trust
Units in terms of distributions and voting rights, and notwithstanding the
fact that the Fund's performance during 2004 resulted in the removal of the
subordination condition attributed to the Class B Exchangeable Units,
management determined that the Fund did not meet the specific conditions
contained in EIC-151 and has therefore retroactively reclassified the Class B
Exchangeable Units to non-controlling interest.

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


Overall Performance and Results of Operations

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

For the quarter ended For the year ended
December 31, December 31,
2004 2003 2004 2003
$ $ $ $
Sales 91,334 89,393 380,712 320,873
Cost of sales 77,423 79,760 324,667 278,671
-----------------------------------------------
Gross profit 13,911 9,633 56,045 42,202
Selling, general and
administrative expenses 6,198 5,869 25,231 22,958
-----------------------------------------------
Income before the
undernoted 7,713 3,764 30,814 19,244
Financial expenses 976 1,410 4,268 4,337
-----------------------------------------------
Income before income taxes 6,737 2,354 26,546 14,907
-----------------------------------------------
Current income taxes 308 (5,211) 1,194 (3,557)
Future income taxes 597 2,475 2,234 4,320
-----------------------------------------------
Total income taxes 905 (2,736) 3,428 763
-----------------------------------------------
Net income before
non-controlling interest 5,832 5,090 23,118 14,144
Non-controlling interest
of Class B Exchangeable
Units 2,572 2,495 10,401 6,946
-----------------------------------------------
Net income 3,260 2,595 12,717 7,198
-----------------------------------------------
-----------------------------------------------
Basic net income per
Trust Unit 0.205 0.198 0.828 0.550
Diluted net income per Unit 0.203 0.194 0.821 0.540
Distributions per
Trust Unit 0.3150 0.3150 1.2600 1.2529
Distributions per
Class B Unit 0.3150 0.3800 1.2600 1.2529
Basic weighted average
number of Trust Units
outstanding (000's) 15,925 13,138 15,354 13,078
Diluted weighted average
number of Units
outstanding (000's) 28,716 26,228 28,145 26,169
Average US/Cdn exchange
rate per Bank of Canada 0.8192 0.7505 0.7683 0.7135


Operating Results for the Quarter Ended December 31, 2004

Sales for the quarter ended December 31, 2004, were $91.3 million, up
2.2% or $1.9 million compared to the same quarter last year. This increase is
attributable to:

1. an increase in sales volume resulting in an increase of $8.4 million,
offset by;

2. the strengthening of the Canadian dollar relative to the United
States dollar as compared to that relationship for the same quarter
in the prior year. This change had the effect of reducing sales
relative to the prior year, by $6.5 million.

Overall, volume (expressed in cases of 24 cans or pouches) was up 6.3%
compared to the quarter ended December 31, 2003, which was entirely
attributable to sales to new customers. Established customers' volume (that
is, volume to customers who were also supplied throughout the fourth quarter
of 2003) declined by 7.0% versus 2003.

The pouch product, which represented 24.0% of Menu's volume in the fourth
quarter of 2004, grew by 63.7% compared to the prior year's fourth quarter.
Can volume, which represented 76.0% of Menu's volume in the fourth quarter of
2004, contracted by 4.4%. Management believes that some of this decline in can
volume is directly attributable to the growth Menu is generating in the sale
of pouches. Management also continues to believe that its larger United States
supermarket customers are losing wet pet food market share to the leading mass
merchandisers, pet-specialty retailers and to the discount or "dollar" stores
operating throughout the United States.

Gross profit increased by $4.3 million (or 44.4%) for the quarter ended
December 31, 2004, compared to the prior year. This increase is attributable
to:

1. Increase in Sales Volume. As previously noted, total volume for the
fourth quarter increased by 6.3%. This increase in volume contributed
$8.4 million in sales and $1.0 million in gross profit for the
quarter. It should be noted that the gross profit associated with
this increase in sales volume includes a reduction in sales and gross
profit of approximately $0.3 million, due to the payback to a
customer under a "take or pay" arrangement, reversing add-backs in
each of the first two quarters of 2004, as the customer "caught up"
on its overall commitment under the "take or pay" arrangement. In the
third and fourth quarters, this customer purchased volumes in excess
of its quantity commitments, which offset the earlier shortfalls.
Accordingly the Fund had to "reimburse" the amounts charged to the
customer in previous quarters. This "take or pay" arrangement ended
in the fourth quarter of 2004.

2. Non-recurrence of BSE Costs. During the prior year the Fund reported
that BSE related costs had reduced gross profit by $1.1 million in
the fourth quarter of 2003. These costs did not recur in 2004 and, as
such, the Fund's gross profit improved by this amount.

3. Foreign Exchange Effect on Sales. The strengthening of the Canadian
dollar relative to the United States dollar during the quarter had
the effect of reducing sales by approximately $6.5 million that
translated into a reduction in gross profit of $1.0 million for the
quarter ended December 31, 2004.

4. Operating Efficiencies. As reported in the fourth quarter of 2003,
the Fund had incurred $0.7 million at that time for excess labour and
operating costs directly traceable to worn equipment that was
replaced in the Fund's New Jersey operation. The absence of these
costs in 2004, combined with better operating efficiencies, resulted
in an increase in gross profit of $2.9 million.

5. Price and Cost Increases. During the past year, the cost of certain
inputs to production, including raw and packaging materials, labour
and benefits, property insurance, utilities and freight increased and
adversely impacted cost of sales, when compared to 2003. During the
first quarter of 2004, the Fund followed the national brands and
initiated a price increase to its United States customers to recover
a portion of these cost increases. The net result of these activities
in the fourth quarter was an increase in gross profit of
$0.3 million.

Selling, general and administrative expenses for the quarter ended
December 31, 2004 increased by $0.3 million compared to the prior year. This
increase resulted from a significantly reduced foreign exchange gain on
forward contracts entered into to hedge distributions in 2004 as compared to
the gain in 2003 together with the increase in costs associated with the new
facility in North Sioux City, South Dakota, which was in place for one extra
month in 2004 versus the fourth quarter of 2003, offset by the non-recurrence
of severance expenses incurred in the fourth quarter of 2003.

The foregoing resulted in EBITDA (See Note A) of $11.6 million for the
quarter ended December 31, 2004, an increase of $4.0 million (or 53.4%)
compared to the same period in 2003. The strengthening of the Canadian dollar,
relative to the United States dollar, has reduced sales, gross margin,
selling, general and administrative expenses, amortization, interest and
EBITDA. The Fund estimates that, before considering the impacts of its hedging
program, each change of $0.01 in the cost of the Canadian dollar changes
EBITDA by approximately $0.15 million and Distributable Cash (see Note A) by
approximately $0.115 million, on a quarterly basis.

The Fund estimates that absent its hedging program, the strengthening of
the Canadian dollar during the fourth quarter of 2004 versus the same period
in 2003 reduced EBITDA by approximately $1.0 million and Distributable Cash by
approximately $0.8 million. The realized benefit of the Fund's program for
hedging distributions amounted to $1.2 million for the fourth quarter.

Amortization (which is included in cost of sales and SG&A expense) in the
fourth quarter of 2004 was $0.1 million higher than in 2003. This increase is
directly attributable to the $31.7 million of capital expenditures made during
the year ended December 31, 2004 together with the full period amortization of
the $4.1 million of capital expenditures and the acquisition of the P&G/Iams
production facility in North Sioux City, South Dakota, both made during the
quarter ended December 31, 2003. The impact of amortization on these new
property, plant and equipment was largely offset by the effects of the
strengthening of the Canadian dollar, relative to the United States dollar.

Financial expenses were $0.4 million lower during the quarter ended
December 31, 2004, than in the fourth quarter of 2003. This decrease includes
the effects of the adoption by the Fund, on January 1, 2004, of the policy of
recording the unrealized gains and losses on its outstanding interest rate
swaps directly to the income statement. As at December 31, 2003, the Fund
disclosed these unrealized gains/losses in the notes to its financial
statements. In the fourth quarter of 2004, the Fund recorded an unrealized
gain of $0.1 million as a decrease to interest expense. In the fourth quarter
of 2003, the Fund expensed $0.3 million of unamortized deferred financing
costs that related to the original financing of the Fund on May 22, 2002, as a
result of the Fund refinancing its debt in the fourth quarter of 2003. This,
combined with the unrealized gain on the interest rate swap, accounted for the
change in financial expenses.

The overall effective tax rate of the Fund for the fourth quarter of 2004
was 13.4%, the majority of which was future taxes. Total income taxes for the
quarter ended December 31, 2004 amounted to $0.9 million. The Fund's
significant investment in machinery and equipment in the United States, has
enabled it to use "accelerated" tax depreciation to reduce current taxes for
the quarter. This "accelerated" depreciation was available to the Fund in
respect of capital additions put in service in the United States by December
31, 2004. The "accelerated" depreciation program ended in 2004.

Net income before non-controlling interest of Class B Exchangeable Units
for the quarter ended December 31, 2004, was $5.8 million, compared to
$5.1 million for the quarter ended December 31, 2003.


Operating Results for the Year Ended December 31, 2004

Sales for the year ended December 31, 2004, were $380.7 million, up 18.7%
or $59.8 million compared to last year. This increase is attributable to:

1. an increase in sales volume resulting in an increase of
$82.4 million, offset by;

2. the strengthening of the average Canadian dollar relative to the
United States dollar during the year. This change had the effect of
reducing sales relative to the prior year, by $22.6 million.

Overall, volume (expressed in cases of 24 cans or pouches) was up 22.6%
from the year ended December 31, 2003. Approximately 69.3% of this growth came
from shipments to P&G/Iams under the supply contract initiated in the final
quarter of 2003. This customer represents approximately 20% of consolidated
sales. The remaining growth came from new customer business and from the
increase in pouch sales.

The pouch product, which represented 19.1% of Menu's volume in 2004 grew
by 52.8% over the prior year's volume. Can volume, which represented 80.9% of
Menu's volume in 2004, grew by 17.1%. Excluding the growth attributable to the
P&G/Iams business, the Fund's can business declined by 1.4% versus a year ago.
Management believes that some of this decline in can sales is directly
attributable to the growth Menu is generating in the sale of pouches.
Management also continues to believe that its larger United States supermarket
customers are losing wet pet food market share to the leading mass
merchandisers, pet-specialty retailers and to the discount or "dollar" stores
operating throughout the United States.

Gross profit increased by $13.8 million (or 32.8%) for the year ended
December 31, 2004, compared to the prior year. This increase is attributable
to:

1. Increase in Sales Volume. As previously noted, total volume for the
year ended December 31, 2004 increased by 22.6%. This increase in
volume contributed $82.4 million in sales and $11.6 million in gross
profit for the year.

2. Non-recurrence of BSE Costs. During the prior year, the Fund reported
that BSE related costs had reduced gross profit by $5.3 million
during 2003. These costs did not recur in 2004 and, as such, the
Fund's gross profit improved by this amount.

3. Foreign Exchange Effect on Sales. The strengthening of the Canadian
dollar relative to the United States dollar during 2004 had the
effect of reducing sales by approximately $22.6 million that
translated into a reduction in gross profit of $4.0 million for the
year ended December 31, 2004.

4. Operating Efficiencies. As reported in the fourth quarter of 2003,
the Fund had incurred $0.7 million at that time for excess labour and
operating costs directly traceable to worn equipment that was
replaced in the Fund's New Jersey operation. The absence of these
costs in 2004, combined with better operating efficiencies, resulting
in a total increase in gross profit of $2.9 million for the year
ended December 31, 2004.

5. Price and Cost Increases. During the past year, the cost of certain
inputs to production, including raw and packaging materials, labour
and benefits, property insurance, utilities and freight increased and
adversely impacted cost of sales, when compared to 2003. During the
first quarter of 2004, the Fund followed the national brands and
initiated a price increase to its United States customers to recover
a portion of cost increases it had previously absorbed. The price
increase that was effected in the second quarter of 2004 allowed the
Fund to recover all of its cost increases realized in the second
quarter of 2004 but was not great enough to offset the full cost
increase incurred by the Fund. Accordingly, the net result was to
reduce gross profit by $0.4 million in 2004 versus 2003.

6. Increase in Amortization. The amortization of the P&G/Iams production
facility in North Sioux City, South Dakota, acquired in November of
2003, together with the amortization of the other capital projects
completed in the past year, resulted in an increase in the
amortization associated with the cost of goods sold of $1.6 million
versus 2003.

In accounting for its acquisition of the P&G/Iams production facility
in the fourth quarter of 2003, the Fund accrued US$5.5 million for
specific liabilities for involuntary terminations. During the third
quarter of 2004, the Fund determined that it would not terminate the
employees and, accordingly, finalized the acquisition equation
associated with this purchase by eliminating the liability and
reducing the value of the property, plant and equipment and the
supply contract.

Selling, general and administrative expenses for the year ended
December 31, 2004 increased by $2.3 million compared to the prior year. This
increase resulted from a significantly reduced foreign exchange gain on
forward contracts entered into to hedge distributions in 2004 as compared to
the gain in 2003 plus the increase in costs associated with the new facility
in North Sioux City, South Dakota offset by the non-recurrence of severance
expenses incurred in 2003.

The foregoing resulted in EBITDA of $46.2 million for the year ended
December 31, 2004, an increase of $13.1 million (or 39.5%) compared to the
same period in 2003. The strengthening of the Canadian dollar, relative to the
United States dollar, has reduced sales, gross margin, selling, general and
administrative expenses, amortization, interest and EBITDA. The Fund estimates
that, before considering the impact of its hedging program, each change of
$0.01 in the cost of the Canadian dollar changes EBITDA by approximately $0.6
million and Distributable Cash by approximately $0.46 million, on an annual
basis.

The Fund estimates that absent its hedging program, the strengthening of
the Canadian dollar during 2004 versus 2003 reduced EBITDA by approximately
$3.3 million and Distributable Cash by approximately $2.5 million. The
realized benefit of our program for hedging distributions amounted to
$1.6 million on a year-to-date basis.

Amortization (which is included in cost of sales and SG&A expense) in
2004 was $1.5 million higher than in 2003. This increase is directly
attributable to the prior year's acquisition of the P&G/Iams production
facility in North Sioux City, South Dakota, the $31.7 million of capital
expenditures made during the year ended December 31, 2004 and the full period
amortization for the $16.0 million of capital expenditures made during the
year ended December 31, 2003. The impact of amortization on these new
property, plant and equipment was largely offset by the effects of the
strengthening of the Canadian dollar, relative to the United States dollar.

Financial expenses were marginally lower ($0.1 million) during 2004
versus 2003. This decrease includes the effects of the adoption by the Fund,
on January 1, 2004, of the policy of recording the unrealized gains and losses
on its outstanding interest rate swaps directly to the income statement. As at
December 31, 2003, the Fund disclosed these unrealized gains/losses in the
notes to its financial statements. For all of 2004, the Fund recorded an
unrealized gain of $0.3 million as a reduction to interest expense. This,
combined with the additional borrowings of the Fund in 2004 versus 2003 offset
by the effects of a stronger Canadian dollar, resulted in the financial
expenses as reported.

The overall effective tax rate of the Fund for 2004 was 12.9%, the
majority of which was future income taxes. Total income taxes for the year
ended December 31, 2004 amounted to $3.4 million. The Fund's significant
investment in machinery and equipment, in the United States, enabled it to use
"accelerated" tax depreciation to reduce current taxes for the year ended
December 31, 2004. This "accelerated" depreciation was available, to the Fund,
in respect of capital additions put in service in the United States by
December 31, 2004. The "accelerated" depreciation program ended in 2004.

Net income before non-controlling interest of Class B Exchangeable Units
for the year ended December 31, 2004, was $23.1 million, compared to
$14.1 million for the year ended December 31, 2003.


Liquidity

During the year ended December 31, 2004, Menu generated cash flow from
operations of $41.3 million, offset by a reduction in cash flow of
$22.2 million as a result of changes in non-cash working capital items. The
increase in non-cash working capital items related primarily to an
$18.7 million increase in finished goods inventory, in both cans and pouches.
The increase in can inventory was in anticipation of specific capital projects
to be undertaken in the first quarter of 2005 in two of the Fund's United
States facilities. Pennsauken, New Jersey, will be shutting down its 13.2oz
production line to permit the installation of a new chain in its hydrostatic
cooker (similar to that undertaken in Q4 of 2003). The South Dakota facility
will also be shutting down to permit the investment of growth capital to
enhance that operation's production capability. The increase in inventory was
largely designed to maintain customer service levels during these scheduled
shutdowns.

For the year ended December 31, 2004, the Fund announced distributions on
the Trust Units of $19.5 million ($1.26 per unit) and paid $19.2 million
during the period with the difference reflected in an increase in
distributions payable. During this same period, the Fund announced
distributions on the Class B Units of $15.9 million ($1.26 per unit) and paid
$16.7 million. In the year ended December 31, 2004 the pay-out ratio
(including the distributions declared on the Class B Units) was 91.5%.

Consolidated cash and cash equivalents as at December 31, 2004, decreased
by $3.5 million, compared to the December 31, 2003 balance.

Cash flow from operations together with cash balances on hand and
existing unutilized operating credit facilities are expected to be sufficient
to fund Menu's operating requirements, capital expenditures and expected
distributions.


Capital Resources

During the year ended December 31, 2004, Menu spent $31.7 million on
property, plant and equipment. The largest expenditures during this period
were the purchases of two warehouses for a total cost of $14.3 million. These
warehouses are located in Pennsauken, New Jersey and Emporia, Kansas. The
other significant expenditures during this period reflected equipment
purchases and progress payments made against future equipment purchases to
expand pouch capacity. Sales of pouches have steadily increased since they
were first introduced in July 2001. During the second quarter, the Fund
completed negotiations with a customer for the supply of pouches, which
necessitated a further expansion of the Fund's pouch capacity in Emporia,
Kansas. This next phase of expansion, together with the expansion plan
announced with the Fund's fourth quarter results of 2003, is expected to cost
US$16.5 million, of which US$9.2 million was spent in 2004, and is expected to
increase pouch production capacity by approximately 80%. The final phase of
this capital project is targeted for completion during the second quarter of
2005.

As previously reported, Menu's 2004 capital expenditure program included
the addition of 3oz can production capability in the United States in order to
mitigate the possible effects of any future closure of the United States
border. During the first quarter of 2004, Menu completed that project,
investing $1.2 million in its 3oz canning capacity at its United States
plants.

In March 2004, the Fund announced the closing of a private placement of
2,500,000 Trust Units for total net proceeds of $36.0 million. Menu used these
funds to finance a number of growth oriented capital expenditures, including
the above-noted pouch expansion in Emporia, can expansions at a number of
production facilities and the acquisition of warehousing facilities. Capital
expenditures of a maintenance nature, which totaled $2.5 million for 2004,
were financed from the cash flow of the business. These maintenance capital
expenditures were over and above the $15.5 million for labour and parts
expended by the Fund for the ongoing repairs and maintenance of its plants
that have been expensed as part of cost of sales.

On November 5, 2004, Menu purchased the remaining US$1.6 million in
Industrial Revenue Bonds, issued by the City of Emporia to finance the
acquisition of its production facility in Emporia, Kansas, which were held by
third parties. Menu acquired the bonds using its available credit facility.
The net effect of this transaction was to replace 8.83% fixed rate financing
with lower cost variable rate financing from Menu's Canadian bankers.


Outstanding Units

The following table highlights the number of units outstanding:

Class B
Trust Units Exchangeable
Units

December 31, 2002 13,044,584 12,631,915
Options exercised during the year 215,239 -
-----------------------------
December 31, 2003 13,259,823 12,631,915
Options exercised during the year 380,413 -
Issuance during the year 2,500,000 -
-----------------------------
December 31, 2004 16,140,236 12,631,915
-----------------------------
-----------------------------

Menu Foods Corporation (the former parent company of Menu) had a stock
option plan pursuant to which there were outstanding options issued to 61 of
its directors, executive officers and key employees. In connection with the
initial public offering and acquisition, these options were exchanged for
Trust Unit options in the Fund having equivalent terms and conditions. As at
December 31, 2004, 200,138 vested Trust Unit options, having a weighted
average exercise price of $2.977 per unit, were outstanding. These Trust Unit
options expire in November and December 2006.


Outlook

Cost and Price Increases

Over the past three years, the Fund has experienced increases in certain
operating and administrative costs. Rising costs for steel and aluminum are
driving the Fund's can costs higher. Utility costs have steadily increased
over the past years. Higher fuel costs, together with new legislation on work
hours for truck drivers in the United States, and trucking delays crossing the
Canadian/United States border are further increasing the cost of delivery. In
addition, property insurance and medical benefit costs have both increased
well beyond the rate of inflation.

For the contract manufacturing portion of Menu's business, most of these
increases are automatically passed on to the customer. However, for its
private-label business, Menu's practice, with respect to price increases, has
been to follow the brand leaders. While this practice at times squeezes Menu's
margins (as it did in 2003 and for the first quarter of 2004), it
none-the-less helps to ensure that Menu's products are competitively priced at
retail. In the United States in early 2004, the leading national brands of wet
pet food took price increases, which the Fund understood to be in the order of
2 cents U.S. per container. Menu experienced the same type and magnitude of
cost increases as the national brands. Accordingly, early in 2004, Menu
initiated a similar price increase with its United States customers on its
private-label products, which became effective in the second quarter of 2004.

The shutdowns in the first quarter of 2005 as discussed above, could
adversely impact gross margins in the first quarter as compared to the same
quarter in 2004 as fixed costs are absorbed against reduced production
volumes.

Input costs for Menu's products in both Canada and the United States
continue to rise and are squeezing Menu's margin relative to prior quarters.
During the first quarter of 2005, the Fund initiated a price increase to its
Canadian customers, passing on the cost increases incurred during the past two
years, which have not been fully recovered in prior price increases. This
increase follows price increases that we understand have been taken by the
national brand manufacturers.

Bovine Spongiform Encephalopathy ("BSE")

On May 20, 2003, a single case of BSE was discovered in Alberta, Canada.
This incident resulted in the closure of the United States border to
Canadian-made pet food. As discussed in previous releases, Menu's response to
this closure adversely impacted the Fund's financial performance for its
second, third and fourth quarters of 2003. On December 23, 2003, the USDA
announced the discovery of a single case of BSE in Washington State, USA. On
December 29, 2003, the Canadian Food Inspection Agency (the "CFIA") closed the
Canadian border to United States-made pet food. Subsequently, this closure was
modified to close the border only to pet food containing certain high risk
beef materials defined by CFIA as Specified Risk Materials. This modification
effectively opened the border to Menu pet foods manufactured in the United
States. However, there is a continued issue with respect to raw materials
whereby some ingredients allowable in the United States cannot be exported to
Canada, resulting in a continued adverse formula cost impact in the Fund's
Streetsville facility. The Fund continues to work with CFIA to eliminate these
inconsistencies.

Two additional cases of BSE were discovered in Canada on January 2nd and
11th, 2005. The latter case involved an animal born after the feed ban in
Canada should have prevented feed exposure to the animal. This has caused the
CFIA to carefully consider a more restrictive feed ban as well as the US to
reconsider a proposed reduction in restriction of animal and ingredient
shipments from Canada.

In addition to this Canadian border closure, Mexico closed its border to
United States-made pet food and, while only about 1% of Menu's sales are
transacted with customers in that country, continuation of the closure for a
long period of time, could see that business disappear. While there are recent
indications that the border could be reopened with raw material restrictions
similar to those in Canada, the Mexican government has been slow to define its
final regulations.

Subordination and Distribution

The Fund has two classes of units (a) publicly traded Trust Units and (b)
privately held Class B Exchangeable Units. The Declaration of Trust defines
that the Class B Exchangeable Units' rights to distributions are subordinated
to those of the public Trust Units. This Declaration of Trust also states that
the subordination shall stay in place until such time as certain financial
tests, relating to the Fund's level of EBITDA and its payment of
distributions, have been achieved.

With the Trustees' approval of the Fund's audited consolidated financial
statements for 2004, the board of directors of Menu Foods GenPar Limited (the
Administrator of the Fund) declared that the above mentioned financial tests
were achieved for 2004. Accordingly, the Class B Exchangeable Units' rights
are no longer subordinated to those of the publicly traded Trust Units and
monthly distributions will be made to both the Trust Units and Class B
Exchangeable Units.

Risks and Uncertainties

Menu is subject to numerous risk factors in its ongoing business. These
include reliance on a key customer, absence of long-term sales contracts,
customer performance and relationships, foreign exchange fluctuations,
governmental regulations and restrictions, reliance on key suppliers, reliance
on key personnel, among others. For a review of some of the risks affecting
the business, please refer to notes 20 and 21 to the accompanying consolidated
financial statements. Additional information about the Fund is available at
www.sedar.com.


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

Distributable Cash is not a recognized measure under GAAP. Management
believes that together with net income and EBITDA, Distributable Cash is
a useful supplemental measure of operating performance, which provides
investors with an indication of cash available for distribution after
adjusting for maintenance capital expenditures and certain principal
repayments.

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

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

For the Quarter ended
December 31

2004 2003
$'000's $'000's

Net income 3,260 2,595
Add:
Non-controlling interest of Class B
Exchangeable Units 2,572 2,495
Amortization of property, plant and equipment 3,633 3,726
Amortization of supply contract 263 76
Future income taxes 597 2,475
Current income taxes 308 (5,211)
Interest 976 1,410
-----------------------------
EBITDA 11,609 7,566
-----------------------------
-----------------------------


For the Quarter ended
December 31

2004 2003
$'000's $'000's

Cash flow from operating activities 5,052 13,657
Adjust for:
Change in non-cash working capital items 6,038 (2,069)
Maintenance capital expenditures (1,029) (1,098)
Principal repayments (49) (23)
-----------------------------
Distributable Cash(1) 10,012 10,467
-----------------------------
-----------------------------

(1) The 2003 Distributable Cash has been adjusted to reflect the
presentation adopted in the current year.


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

For the Year ended Since Inception
December 31 (May 22, 2002)
to December 31
2004 2003 2004
$'000's $'000's $'000's

Net income 12,717 7,198 26,197
Add:
Non-controlling interest of
Class B Exchangeable Units 10,401 6,946 23,265
Amortization of property, plant
and equipment 14,153 13,796 36,588
Amortization of supply contract 1,222 76 1,421
Future income taxes 2,234 4,320 7,878
Current income taxes 1,194 (3,557) 1,037
Interest 4,268 4,337 10,653
-------------------------------------
EBITDA 46,189 33,116 107,039
-------------------------------------
-------------------------------------


For the Year ended Since Inception
December 31 (May 22, 2002)
to December 31
2004 2003 2004
$'000's $'000's $'000's

Cash flow from operating activities 19,167 19,300 63,131
Adjust for:
Change in non-cash working
capital items 22,152 13,371 33,407
Maintenance capital expenditures (2,520) (2,506) (6,504)
Principal repayments (148) (138) (386)
-------------------------------------
Distributable Cash(1) 38,651 30,027 89,648
-------------------------------------
-------------------------------------
(1) The 2003 Distributable Cash has been adjusted to reflect the
presentation adopted in the current year.



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

As at
December 31,
2004 2003
(unaudited) (audited)
(note 3)
$ $
Assets

Current assets
Cash - 3,495
Accounts receivable
Trade 18,716 18,715
Other 2,316 1,895
Inventories (note 5) 59,120 44,611
Prepaid expenses and sundry assets 1,898 1,915
Income taxes recoverable 259 3,508
Future income taxes (note 15) 1,874 1,494
-------------------------------------------------------------------------
Total Current Assets 84,183 75,633
Property, plant and equipment (note 6) 116,130 107,413
Goodwill 165,387 165,387
Other assets (note 7) 6,053 14,300
-------------------------------------------------------------------------
Total Assets 371,753 362,733
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current liabilities
Bank indebtedness (note 8) 10,398 -
Accounts payable and accrued liabilities 21,735 33,868
Distributions payable (note 12) 5,674 6,192
Current portion of long-term debt (note 9) 157 334
-------------------------------------------------------------------------
Total Current Liabilities 37,964 40,394
Long-term debt (note 9) 102,434 113,936
Future income taxes (note 15) 17,381 16,209
-------------------------------------------------------------------------
Total Liabilities 157,779 170,539
-------------------------------------------------------------------------

Class B Exchangeable Units (note 10) 81,363 86,878
-------------------------------------------------------------------------

Unitholders' Equity

Trust Units (note 11) 160,372 121,180
Contributed surplus (note 13) 808 2,847
Deficit (19,182) (12,438)
Foreign currency translation adjustment (9,387) (6,273)
-------------------------------------------------------------------------
Total Unitholders' Equity 132,611 105,316
-------------------------------------------------------------------------
Total Liabilities and Unitholders' Equity 371,753 362,733
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.



Menu Foods Income Fund
Consolidated Statement of Income and Deficit
(All figures, except per Unit amounts, expressed in thousands of
Canadian dollars)
Quarter ended
December 31,
2004 2003
(unaudited) (unaudited)
$ $

Sales 91,334 89,393
Cost of sales (note 16) 77,423 79,760
-------------------------------------------------------------------------
Gross profit 13,911 9,633
Selling, general and administrative expenses 6,198 5,869
-------------------------------------------------------------------------
Income before the undernoted 7,713 3,764
Financial expenses (note 14) 976 1,410
-------------------------------------------------------------------------
Income before income taxes 6,737 2,354
-------------------------------------------------------------------------
Current income taxes 308 (5,211)
Future income taxes 597 2,475
-------------------------------------------------------------------------
Total income taxes (note 15) 905 (2,736)
-------------------------------------------------------------------------
Net income before non-controlling
interest (note 3) 5,832 5,090
Non-controlling interest of Class B
Exchangeable Units 2,572 2,495
-------------------------------------------------------------------------
Net income for the quarter 3,260 2,595
-------------------------------------------------------------------------
Deficit - beginning of quarter, as
previously reported (32,025) (15,935)
Change in accounting policy (note 3) 14,624 5,053
-------------------------------------------------------------------------
Deficit - beginning of quarter, as restated (17,401) (10,882)
-------------------------------------------------------------------------
Distributions (note 12) (5,041) (4,151)
-------------------------------------------------------------------------
Deficit - end of quarter (19,182) (12,438)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic net income per Trust Unit $ 0.205 $ 0.198
Diluted net income per Unit $ 0.203 $ 0.194

Basic weighted average number of
Trust Units outstanding (note 11) 15,925,006 13,137,626

Diluted weighted average number of
Units outstanding (note 11) 28,715,655 26,228,300

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



Menu Foods Income Fund
Consolidated Statement of Income and Deficit
(All figures, except per Unit amounts, expressed in thousands of
Canadian dollars)
Year ended
December 31,
2004 2003
(unaudited) (unaudited)
$ $

Sales 380,712 320,873
Cost of sales (note 16) 324,667 278,671
-------------------------------------------------------------------------
Gross profit 56,045 42,202
Selling, general and administrative
expenses 25,231 22,958
-------------------------------------------------------------------------
Income before the undernoted 30,814 19,244
Financial expenses (note 14) 4,268 4,337
-------------------------------------------------------------------------
Income before income taxes 26,546 14,907
-------------------------------------------------------------------------
Current income taxes 1,194 (3,557)
Future income taxes 2,234 4,320
-------------------------------------------------------------------------
Total income taxes (note 15) 3,428 763
-------------------------------------------------------------------------
Net income before non-controlling
interest (note 3) 23,118 14,144
Non-controlling interest of Class B
Exchangeable Units 10,401 6,946
-------------------------------------------------------------------------
Net income for the year 12,717 7,198
-------------------------------------------------------------------------
Deficit - beginning of year, as
previously reported (22,954) (4,872)
Change in accounting policy (note 3) 10,516 1,635
-------------------------------------------------------------------------
Deficit - beginning of year, as restated (12,438) (3,237)
-------------------------------------------------------------------------
Distributions (note 12) (19,461) (16,399)
-------------------------------------------------------------------------
Deficit - end of year (19,182) (12,438)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Deficit comprises:
Accumulated net income 26,024 13,307
Accumulated distributions (45,206) (25,745)
-------------------------------------------------------------------------
(19,182) (12,438)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic net income per Trust Unit $ 0.828 $ 0.550
Diluted net income per Unit $ 0.821 $ 0.540

Basic weighted average number of Trust
Units outstanding (note 11) 15,354,036 13,077,847

Diluted weighted average number of
Units outstanding (note 11) 28,145,498 26,168,568

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



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

Quarter ended
December 31,
2004 2003
(unaudited) (unaudited)
$ $
Cash provided by (used in)
Operating activities
Net income for the quarter 3,260 2,595
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units (note 3) 2,572 2,495
Amortization of property, plant and equipment 3,633 3,726
Amortization of supply contract 263 76
Mark-to-market adjustment 757 (199)
Amortization of deferred financing costs 73 420
Gain on sale of property, plant and equipment (65) -
Future income taxes 597 2,475
-------------------------------------------------------------------------
11,090 11,588
Change in non-cash working capital items
Accounts receivable 7,226 1,142
Inventories (6,085) 2,481
Prepaid expenses and sundry assets 135 (635)
Income taxes recoverable 243 (5,867)
Accounts payable and accrued liabilities (7,557) 4,948
-------------------------------------------------------------------------
5,052 13,657
-------------------------------------------------------------------------
Financing activities
Advance (repayment) of bank indebtedness 10,398 (15,599)
Issuance of trust units, net 924 536
Long-term debt repayments (2,320) (83,437)
Proceeds from long-term debt - 113,371
Distributions to Trust Units (5,008) (4,133)
Distributions to Class B Exchangeable Units (3,979) (3,158)
-------------------------------------------------------------------------
15 7,580
-------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (6,288) (4,062)
Other assets (77) (1,414)
Proceeds from sale of property,
plant and equipment 164 -
Acquisitions (note 4) - (13,186)
-------------------------------------------------------------------------
(6,201) (18,662)
-------------------------------------------------------------------------
Increase (decrease) in cash during the quarter (1,134) 2,575
Cash - beginning of quarter 1,134 920
-------------------------------------------------------------------------
Cash - end of quarter - 3,495
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information

Income taxes paid 1,653 874
Interest paid (4,507) 282

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



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

Year ended
December 31,
2004 2003
(unaudited) (unaudited)
$ $
Cash provided by (used in)
Operating activities
Net income for the year 12,717 7,198
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units (note 3) 10,401 6,946
Amortization of property, plant and equipment 14,153 13,796
Amortization of supply contract 1,222 76
Mark-to-market adjustment 210 (476)
Amortization of deferred financing costs 447 811
Gain on sale of property, plant and equipment (65) -
Future income taxes 2,234 4,320
-------------------------------------------------------------------------
41,319 32,671
Change in non-cash working capital items
Accounts receivable (1,540) 652
Inventories (18,748) (12,436)
Prepaid expenses and sundry assets (65) (527)
Income taxes recoverable 2,745 (5,201)
Accounts payable and accrued liabilities (4,544) 4,141
-------------------------------------------------------------------------
19,167 19,300
-------------------------------------------------------------------------
Financing activities
Advance (repayment) of bank indebtedness 10,398 (8,389)
Issuance of trust units, net 37,153 640
Long-term debt repayments (2,702) (59,812)
Proceeds from long-term debt - 113,371
Distributions to Trust Units (19,158) (16,284)
Distributions to Class B Exchangeable Units (16,737) (14,734)
-------------------------------------------------------------------------
8,954 14,792
-------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (31,700) (16,014)
Other assets (80) (1,455)
Proceeds from sale of property,
plant and equipment 164 -
Acquisitions (note 4) - (13,186)
-------------------------------------------------------------------------
(31,616) (30,655)
-------------------------------------------------------------------------
Increase (decrease) in cash during the year (3,495) 3,437
Cash - beginning of year 3,495 58
-------------------------------------------------------------------------
Cash - end of year - 3,495
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information

Income taxes paid (refunded) (1,593) 2,599
Interest paid 3,792 2,818

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



Menu Foods Income Fund
Notes to Consolidated Financial Statements
December 31, 2004
(All figures, except per Unit amounts, expressed in thousands of Canadian
dollars, unaudited)


1. Description of the business

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

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

2. Summary of significant accounting policies

a) Basis of presentation

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

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

Certain comparative figures have been reclassified to conform to the
presentation adopted during the period.

b) Use of estimates

The preparation of consolidated financial statements in conformity
with Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.

c) Cash and cash equivalents

Deposits in banks and short-term investments with original maturities
of three months or less are considered cash and cash equivalents.
Cash equivalents are carried at cost, which approximates fair market
value, due to the short-term nature of these instruments.

d) Inventories

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

e) Property, plant and equipment

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

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

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

f) Future income taxes

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

g) Research and development

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

h) Deferred financing charges

Costs associated with the arrangement of long-term financing are
deferred and amortized on a straight-line basis over the term of the
debt. The amortization is included in financial expenses.

i) Goodwill

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

j) Supply contract

The supply contract (the "Contract") consists of an exclusive
agreement to supply all the canned wet pet food requirements for
Proctor & Gamble/Iams ("P&G/Iams") in the United States and Canada.
The Contract is carried at cost less accumulated amortization.
Amortization, which is charged to cost of sales, is computed over the
estimated term of the Contract, which is ten years. The Contract is
evaluated for impairment whenever events or changes in circumstances
indicate the carrying value may not be recoverable. An impairment
loss is recognized when estimated undiscounted cash flows expected to
result from the Contract are less than its carrying value. When an
impairment loss is recognized, the carrying amount of the Contract
would be reduced to its estimated fair value.

k) Foreign currency translation

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

The assets and liabilities of all subsidiaries, which are considered
to be self-sustaining operations, are translated at the exchange rate
in effect at the consolidated balance sheet date. Revenues and
expenses are translated at average exchange rates prevailing during
the period. The Fund has designated its United States' dollar loans
as a hedge of its net investment in the United States. The loans are
translated at the exchange rate in effect at the consolidated balance
sheet date. The resulting gains or losses are included in the foreign
currency translation adjustment in unitholders' equity.

l) Revenue recognition

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

m) Supplier rebates

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

n) Unit based compensation

The Fund expenses awards made under its long-term incentive plan in
accordance with the fair value based method.

o) Derivative instruments

Any trading, speculative or non-qualifying hedging derivative
financial instruments are recognized in the consolidated balance
sheet and measured at fair value, with changes in fair value
recognized in net income.

p) Asset retirement obligations

Effective January 1, 2004, the Fund adopted CICA Section 3110 "Asset
Retirement Obligations." This section requires that the fair value of
a liability for an asset retirement obligation, be recognized in the
period in which it is incurred, if a reasonable estimate of fair
value can be made. The associated retirement costs are capitalized as
part of the carrying amount of the long-lived assets and amortized
over the life of the asset. As at December 31, 2004, the Fund has
concluded that there were no asset retirement obligations associated
with its assets.

3. Change in accounting policy

On January 19, 2005, the CICA issued Emerging Issues Committee
abstract 151 ("EIC-151") which deals with the accounting for
exchangeable securities issued by subsidiaries of income trusts.
Specifically, EIC-151 describes conditions that must be met in order
to include exchangeable securities issued by subsidiaries of income
trusts as part of unitholders' equity. If these conditions are not
met, the exchangeable securities must be presented as
non-controlling interest. EIC-151 must be applied retroactively, with
restatement of prior periods, to all financial statements issued
after January 19, 2005.

Notwithstanding management's and the exchangeable unitholders' view
that the Class B Exchangeable Units have substantially the same
rights as the Trust Units in terms of distributions and voting
rights, and notwithstanding the fact that the Fund's performance
during 2004 resulted in the removal of the subordination condition
attributed to the Class B Exchangeable Units, management determined
that the Fund did not meet the specific conditions contained in
EIC-151 and has therefore retroactively reclassified the Class B
Exchangeable Units to non-controlling interest.

The change in accounting policy resulted in non-controlling interest
of Class B Exchangeable Units being recorded as an expense in the
statement of income in the amount of $10,401 (2003 - $6,946), with a
corresponding decrease in net income for the year. This change did
not impact either basic or diluted net income per Unit. See note 10
for the changes to Class B Exchangeable Units.

4. P&G/Iams production assets

On October 31, 2003, Menu completed its acquisition of P&G/Iams'
production facility in North Sioux City, South Dakota. The Fund
acquired inventory and property, plant and equipment and assumed all
the employees of that facility. Concurrent with the acquisition, the
Fund entered into an agreement to supply, on an exclusive basis, all
of P&G/Iams' canned wet pet food requirements in the United States
and Canada. The acquisition was accounted for using the purchase
method with the results of operations included in net income from
November 1, 2003. The assets acquired and the consideration given as
determined on November 1, 2003 were as follows:

At fair value: $ US$
Inventory 2,220 1,651
Supply contract 13,294 9,886
Property, plant and equipment 5,079 3,777
Accrued liabilities (7,407) (5,508)
---------------------------------------------------------------------
Cash consideration 13,186 9,806
---------------------------------------------------------------------
---------------------------------------------------------------------

In certain circumstances, specific liabilities of involuntary
termination could have arisen under the terms of the asset purchase
agreement. The maximum incremental liabilities were included in the
acquisition equation. During the third quarter of 2004, it was
determined that these accruals would not be required. The values
attributed to property, plant and equipment and the supply contract
were reduced accordingly. The final acquisition equation is as
follows:

At fair value: $ US$
Inventory 2,220 1,651
Supply contract 6,746 5,017
Property, plant and equipment 4,323 3,215
Accrued liabilities (103) (77)
---------------------------------------------------------------------
Cash consideration 13,186 9,806
---------------------------------------------------------------------
---------------------------------------------------------------------

The values attributed to property, plant and equipment and the supply
contract were reduced prospectively during the quarter ended
September 30, 2004 to reflect the revised acquisition equation.

5. Inventories
December 31, December 31,
2004 2003
(unaudited) (audited)
$ $

Raw materials and packaging 15,794 14,038
Finished goods 43,326 30,573
---------------------------------------------------------------------
59,120 44,611
---------------------------------------------------------------------
---------------------------------------------------------------------

6. Property, plant and equipment
December 31, 2004 (unaudited)
Accumulated
Cost amortization Net
$ $ $

Land 5,319 - 5,319
Buildings 37,157 3,079 34,078
Building under capital lease 7,839 468 7,371
Machinery and equipment 77,711 21,761 55,950
Other property and equipment 14,107 7,520 6,587
Equipment under capital lease 809 578 231
Construction-in-progress 6,594 - 6,594
---------------------------------------------------------------------
149,536 33,406 116,130
---------------------------------------------------------------------
---------------------------------------------------------------------


December 31, 2004 (audited)
Accumulated
Cost amortization Net
$ $ $

Land 3,643 - 3,643
Buildings 27,598 1,964 25,634
Building under capital lease 8,725 297 8,428
Machinery and equipment 72,145 13,710 58,435
Other property and equipment 13,293 4,395 8,898
Equipment under capital lease 809 335 474
Construction-in-progress 1,901 - 1,901
---------------------------------------------------------------------
128,114 20,701 107,413
---------------------------------------------------------------------
---------------------------------------------------------------------

During the year ended December 31, 2004, the Fund capitalized
interest of $nil (2003 - $799) in machinery and equipment.

7. Other assets

December 31, 2004 (unaudited)
Accumulated
Cost amortization Net
$ $ $

Supply contract 6,030 1,184 4,846
Deferred financing charges 1,711 504 1,207
---------------------------------------------------------------------
7,741 1,688 6,053
---------------------------------------------------------------------
---------------------------------------------------------------------


December 31, 2003 (audited)
Accumulated
Cost amortization Net
$ $ $

Supply contract 12,925 199 12,726
Deferred financing charges 1,631 57 1,574
---------------------------------------------------------------------
14,556 256 14,300
---------------------------------------------------------------------
---------------------------------------------------------------------

8. Bank indebtedness

The banking agreement provides the Fund with a US$30,000 operating
facility of which US$7,241 ($8,704) was drawn as at December 31, 2004
(2003 - $293). This operating facility bears interest at Canadian
prime rate (4.25% as at December 31, 2004), US base rate (5.25% as at
December 31, 2004) or Euro rate plus 1.50% (4.60% as at December 31,
2004) depending on the currency advanced. The Fund has pledged, as
security for bank indebtedness, all moveable property and book debts
and, in addition, has signed a general security agreement. The Fund
must adhere to certain restrictive covenants and required financial
ratios in order to satisfy its obligations under the terms of its
financing agreements with both its bankers and senior secured
noteholders (note 8). The fund is in compliance with these covenants
at December 31, 2004.

9. Long-term debt
December 31, December 31,
2004 2003
(unaudited) (audited)
$ $

Senior secured notes(a) 102,170 111,129
Obligation under capital lease
Equipment - secured(b) 238 386
Building - secured(c) - 2,358
Forgivable loan(d) 183 397
---------------------------------------------------------------------
102,591 114,270
Less: Current portion 157 334
---------------------------------------------------------------------
102,434 113,936
---------------------------------------------------------------------
---------------------------------------------------------------------

a) Senior secured notes

On October 31, 2003, the Fund closed a private placement offering for
US$85,000 in floating rate, three-month LIBOR plus 155 basis points,
(3.71% as at December 31, 2004 and 2.72% as at December 31, 2003)
senior secured notes. The notes are repayable on October 31, 2010
with interest payable quarterly commencing January 31, 2004. The Fund
has pledged, as security for its senior secured notes, all moveable
property and book debts and, in addition, has signed a general
security agreement. The Fund must adhere to certain restrictive
covenants and required financial ratios in order to satisfy its
obligations under the terms of its financing arrangements with both
its bankers (note 7) and senior secured noteholders. The Fund is in
compliance with these covenants at December 31, 2004.

The Fund has fixed interest rates at 2.93% or 2.97% plus a stamping
fee of 155 basis points on US$22,500 through to December 2005.

b) Obligation under capital lease - equipment

The Fund entered into a capital lease, collateralized by certain
computer equipment. The lease, which matures in 2006, provides for
blended monthly payments of $14.

Future minimum lease payments are as follows:

December 31, December 31,
2004 2003
(unaudited) (audited)
$ $
2004 - 168
2005 168 168
2006 84 84
---------------------------------------------------------------------
Total minimum lease payments 252 420
Less: Amounts representing interest at 6.60% 14 34
---------------------------------------------------------------------
Balance of obligation 238 386
Less: Current portion 157 147
---------------------------------------------------------------------
81 239
---------------------------------------------------------------------
---------------------------------------------------------------------

c) Obligation under capital lease - building

During 2002, Menu purchased the majority of the outstanding 8.83%
Industrial Revenue Bonds, maturing in August 2012, issued in 1997 by
the City of Emporia to finance the construction of the Emporia,
Kansas facility. Menu had operated the facility under an operating
lease since inception. As a result of this purchase, and because of
the virtual certainty of ownership by Menu at the end of the lease,
the Fund commenced accounting for this arrangement as a capital
lease.

During the fourth quarter of 2004, Menu purchased, for the face value
of $1,949 (US$1,600), the remaining outstanding Industrial Revenue
Bonds held by third parties. As at December 31, 2004, a total face
value of $nil (2003 - $2,358 (US$1,800)), was owned by third parties
while the remaining face value of $6,599 (US$5,490) (2003 - $5,426
(US$4,150)), was held by Menu. Principal and interest payments occur
semi-annually, on February 1 and August 1.

d) Forgivable loan

During 2002, the Fund finalized an incentive agreement whereby the
City of Emporia provided incentive money in the form of a
non-interest bearing forgivable loan. As at December 31, 2004,
$183 (US$151) was outstanding (2003 - $397 (US$303)). The remainder
of the loan is forgivable provided that the Fund maintains certain
employment levels in its Emporia facility in 2005. The Fund only
recognizes the forgiven amount upon the test being met and agreed to
by the City of Emporia. The incentive arrangement was provided to
assist in the construction of the building. The Fund reduces its
property, plant and equipment by the amount forgiven, as it is
forgiven.

10. Class B Exchangeable Units

Number of units
December 31, December 31,
2004 2003

Class B Exchangeable Units of MFLP 12,631,915 12,631,915
---------------------------------------------------------------------
---------------------------------------------------------------------


December 31, December 31,
2004 2003
(unaudited) (unaudited)
$ $
Balance - beginning of year, as
previously reported 97,394 97,394
Change in accounting policy (note 3) (10,516) (1,635)
---------------------------------------------------------------------
Balance - beginning of year, as restated 86,878 95,759
Share of net income for the year 10,401 6,946
Distributions for the year (note 12) (15,916) (15,827)
---------------------------------------------------------------------
Balance - end of year 81,363 86,878
---------------------------------------------------------------------
---------------------------------------------------------------------

The Partnership Agreement sets out the terms under which the Class B
Exchangeable Units ("Class B Units") will no longer be subordinate
(the "First Conversion Date") to the Trust Units. The First
Conversion Date is defined as the date on which the Trustees have
approved annual audited consolidated financial statements of the Fund
in which monthly distributions have averaged at least $0.0979 per
Unit (including Class B Units) and the Fund earned EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization and
Non-controlling Interest) in excess of $45,800 for calendar year
2004. The Fund earned EBITDA of $46,189 for the year ended
December 31, 2004 and maintained average monthly distributions per
Unit of $0.105. Consequently, the Fund met the requirement for
conversion and the Class B Units will no longer be subordinated to
the Trust Units. The Class B Units will now be exchangeable on a
one-for-one basis with the Fund for Trust Units at the option of the
holder.

The Class B Units have economic and voting rights equivalent, in all
material respects, to the Trust Units. After the First Conversion
Date, an equivalent monthly distribution per unit will be made to
both the Trust Units and the Class B Units.

11. Trust Units

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

Issued
Number Gross Issuance Net
of units proceeds costs proceeds
$ $ $

Trust Units
December 31, 2002
(audited) 13,044,584 130,206 10,820 119,386
Exercise of
options during
quarter ended:
March 31, 2003 - - - -
June 30, 2003 23,735 198 - 198
September 30,
2003 11,037 92 - 92
December 31,
2003 180,467 1,504 - 1,504
---------------------------------------------------------------------
December 31, 2003
(audited) 13,259,823 132,000 10,820 121,180
Issued during the
quarter ended
March 31, 2004 2,500,000 36,500 480 36,020
Exercise of
options during
the quarter
ended (note 12)
March 31, 2004 32,377 270 - 270
June 30, 2004 33,848 282 - 282
September 30,
2004 3,679 31 - 31
December 31,
2004 310,509 2,589 - 2,589
---------------------------------------------------------------------
December 31, 2004
(unaudited) 16,140,236 171,672 11,300 160,372
---------------------------------------------------------------------
---------------------------------------------------------------------

Special Trust Units

Special Trust Units are used solely for providing voting rights to
the holders of Class B Exchangeable Units ("Class B Units") (note 10)
and by their terms have voting rights of the Fund. Special Trust
Units are not transferable separately from the Class B Units to which
they relate. Conversely, the Special Trust Units will automatically
be transferred upon a transfer of the associated Class B Units. Each
Special Trust Unit entitles the holder thereof to a number of votes
at any meeting of Unitholders and holders of Special Trust Units
equal to the number of Units that may be obtained upon the exchange
of the Class B Units to which the Special Trust Unit relates, but do
not otherwise entitle the holder to any rights with respect to the
Fund's property or income. The Fund issued 12,631,915 Special Trust
Units relating to the Class B Units at the date of acquisition of
Menu (note 10).

Weighted average number of Units outstanding

Basic net income per Unit is computed by dividing net income for the
period by the weighted average number of Trust Units and Class B
Units (collectively the "units") outstanding during the period.
Diluted net income per unit includes the effect of exercising unit
options (note 12), only if dilutive.

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

Quarter ended December 31,
2004 2003
(unaudited) (unaudited)
Weighted average number
of Trust Units 15,925,006 13,137,626
Class B Units (note 10) 12,631,915 12,631,915
Dilutive effect of options (note 13) 158,734 458,759
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,715,655 26,228,300
---------------------------------------------------------------------
---------------------------------------------------------------------


Year ended December 31,
2004 2003
(unaudited) (audited)

Weighted average number of Trust Units 15,354,036 13,077,847
Class B Units (note 10) 12,631,915 12,631,915
Dilutive effect of options (note 13) 159,547 458,806
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,145,498 26,168,568
---------------------------------------------------------------------
---------------------------------------------------------------------

12. Distributions

Distributions announced during the year ended December 31, 2004 were
as follows:

Unitholder record date Total Per unit Paid or payable
$ $
Trust Units
January 30, 2004 1,395 0.1050 February 16, 2004
February 27, 2004 1,395 0.1050 March 15, 2004
March 31, 2004 1,659 0.1050 April 15, 2004
April 30, 2004 1,661 0.1050 May 17, 2004
May 31, 2004 1,662 0.1050 June 15, 2004
June 30, 2004 1,662 0.1050 July 15, 2004
July 30, 2004 1,662 0.1050 August 16, 2004
August 31, 2004 1,662 0.1050 September 15, 2004
September 30, 2004 1,662 0.1050 October 15, 2004
October 29, 2004 1,662 0.1050 November 15, 2004
November 30, 2004 1,684 0.1050 December 15, 2004
December 31, 2004 1,695 0.1050 January 17, 2005
---------------------------------------------------------------------
19,461 1.2600
------------------------------------------------

Class B Units
March 31, 2004 3,979 0.3150 May 14, 2004
June 30, 2004 3,979 0.3150 August 12, 2004
September 30, 2004 3,979 0.3150 November 12, 2004
December 31, 2004 3,979 0.3150 February 10, 2005
---------------------------------------------------------------------
15,916 1.2600
------------------------------------------------

During the quarter and the year ended December 31, 2003,
distributions to Trust Units amounted to $4,151 ($0.315 per unit) and
$16,399 ($1.2529 per unit), respectively. On November 19, 2003, a
distribution of $3,158 ($0.250 per unit) was declared to all holders
of Class B Units on September 30, 2003, and on December 17, 2003, a
distribution of $4,800 ($0.380 per unit) was declared to all holders
of Class B Units on December 31, 2003.

13. Unit based compensation

Unit option plan

Menu Foods Corporation (the former parent company of Menu) had an
executive stock option plan pursuant to which there were outstanding
options issued to 61 of its directors, executive officers and key
employees. In connection with the Fund's Initial Public Offering and
the acquisition of Menu, these options were exchanged for Trust Unit
options in the Fund having equivalent terms and conditions. As at
December 31, 2004, 200,138 Trust Unit options, all of which were
vested and have a weighted average exercise price of $2.977 per unit,
were outstanding. The Trust Unit options will expire in November and
December 2006.
December 31, December 31,
2004 2003
(unaudited) (audited)

Opening balance 580,551 798,008
Exercised (380,413) (215,239)
Forfeited - (2,218)
---------------------------------------------------------------------
Ending balance 200,138 580,551
---------------------------------------------------------------------
---------------------------------------------------------------------

The fair value of the Trust Unit options was determined as part of
the cost of the acquisition of Menu Foods Limited Partnership
("MFLP") using the Black-Scholes model, incorporating a 4.25% risk
free interest rate, at a 35% volatility factor and 11.75% expected
distributions. On this basis, each Trust Unit option was valued at
$5.36. The valuation of total Trust Unit options, after allowing for
expected forfeitures, aggregated to $4,776, which was included as
contributed surplus at the acquisition date.

Contributed surplus attributed to Trust Unit options

December 31, December 31,
2004 2003
(unaudited) (audited)
$ $
Opening balance 2,847 4,001
Options exercised (2,039) (1,154)
---------------------------------------------------------------------
Ending balance 808 2,847
---------------------------------------------------------------------
---------------------------------------------------------------------

As the Trust Unit options are exercised, the associated contributed
surplus is reclassified to Trust Units (note 9). During the quarter
and year ended December 31, 2004, $1,664 and $2,039, respectively was
reclassified to Trust Units (2003 - $968 and $1,154, respectively).

Long-term incentive plan

In 2003, the Fund adopted a discretionary long-term incentive plan
(the "Incentive Plan") in which trustees, directors, officers and
employees (collectively the "Participants") are all eligible to
participate. Pursuant to the Incentive Plan, the Fund may contribute
an amount, equal to 14.286% of the amount by which distributable
cash, as defined by the Declaration of Trust for a calendar year
exceeds $33,500 and $34,000 for calendar years 2004 and 2005,
respectively, to a trust on behalf of the Participants in the
Incentive Plan. The trust will then purchase Units, on the open
market, equal in value to the amount contributed. Units will be
awarded to Participants based on determinations made by the
Compensation and Corporate Governance Committee (the "Committee").
Once purchased, the Committee will determine the number of Units
acquired on behalf of each Participant based on the amount
contributed to the Trust on their behalf. Units awarded will vest
over a three-year period, subject to the provisions of the Incentive
Plan. If the employment of a Participant is terminated prior to the
final vesting of the Units attributed to such Participant, such
Participant's unvested Units shall be sold and the net proceeds
returned to the Fund. The Fund intends to review the Incentive Plan
for calendar year 2006 and beyond. No awards have been granted
to-date.

14. Financial expenses
Quarter ended December 31,
2004 2003
(unaudited) (unaudited)
$ $

Interest on senior secured notes 879 485
Interest on term loans and bank indebtedness 105 398
Interest on capital leases 10 78
Net gain on interest rate swap (104) -
Amortization of deferred financing charges 73 420
Other, net 13 29
---------------------------------------------------------------------
976 1,410
---------------------------------------------------------------------
---------------------------------------------------------------------


Year ended December 31,
2004 2003
(unaudited) (audited)
$ $

Interest on senior secured notes 3,299 485
Interest on term loans and bank indebtedness 596 2,749
Interest on capital leases 197 293
Net gain on interest rate swap (266) -
Amortization of deferred financing charges 447 811
Other, net (5) (1)
---------------------------------------------------------------------
4,268 4,337
---------------------------------------------------------------------
---------------------------------------------------------------------

15. 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 provision for income taxes in the consolidated statement of
income and deficit reflects an effective rate that differs from the
combined Canadian federal and provincial rates for the following
reasons:

Quarter ended December 31,

2004 2003
(unaudited) (unaudited)
$ $

Income before income taxes 6,737 2,354
Income of the Fund subject
to tax in the hands of
recipients (2,584) (5,188)
-------------------------------------- --------
Income of subsidiary entities
subject to tax 4,153 (2,834)
-------------------------------------- --------
Income taxes at statutory rate 1,432 34.48 % (956) 33.73 %
Increase (decrease) resulting
from:
Rate change in quarter - 0.00 % 51 (1.80)%
Effect of foreign tax rate (528) (12.72)% (917) 32.36 %
Large corporations tax 45 1.08 % 63 (2.22)%
Unused tax loss
carry-forward/tax loss not
previously recognized 424 10.23 % (678) 23.92 %
Other and permanent
differences (468) (11.27)% (299) 10.55 %
---------------------------------------------------------------------
905 21.79 % (2,736) 96.54 %
---------------------------------------------------------------------
---------------------------------------------------------------------


Year ended December 31,
2004 2003
(unaudited) (audited)
$ $

Income before income taxes 26,546 14,907
Income of the Fund subject
to tax in the hands of
recipients (11,258) (12,968)
-------------------------------------- --------
Income of subsidiary entities
subject to tax 15,288 1,939
-------------------------------------- --------
Income taxes at statutory rate 5,271 34.48 % 654 33.73 %
Increase (decrease) resulting
from:
Effect of foreign tax rate (1,969) (12.88)% (1,429) (73.70)%
Large corporations tax 205 1.34 % 146 7.53 %
Unused tax loss
carry-forward/tax loss not
previously recognized 53 0.34 % 1,034 53.32 %
Other and permanent
differences (132) (0.86)% 358 18.46 %
---------------------------------------------------------------------
3,428 22.42 % 763 39.36 %
---------------------------------------------------------------------
---------------------------------------------------------------------

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

December 31, December 31,
2004 2003
(unaudited) (audited)
$ $
Current future income tax assets:
Accounts receivable, accounts payable
and accrued liabilities 373 552
Inventory provisions 1,903 1,296
Less: Share of net partnership income
not yet subject to tax (402) (354)
---------------------------------------------------------------------
1,874 1,494
---------------------------------------------------------------------
---------------------------------------------------------------------
Long-term future income tax liabilities:
Property, plant and equipment 18,030 17,559
Withholding tax on foreign retained
earnings 245 -
Tax benefits of loss carry-forwards (3,332) (3,648)
Valuation allowance 2,394 2,153
Other 44 145
---------------------------------------------------------------------
17,381 16,209
---------------------------------------------------------------------
---------------------------------------------------------------------

The benefits of these future tax loss carry-forwards expire between
2008 and 2010.

16. Other expenses and income

Research and development expenses amounted to $69 for the quarter
ended December 31, 2004, and $295 for the year ended December 31,
2004 ($75 and $300, respectively for 2003). These expenses are
included in cost of sales.

17. Obligations under operating leases

Future minimum payments under operating leases at December 31, 2004
are as follows:
(unaudited)
$

2005 1,553
2006 1,007
2007 185
2008 77
2009 4
Thereafter -
---------------------------------------------------------------------
2,826
---------------------------------------------------------------------
---------------------------------------------------------------------

18. Employee benefit plans

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

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

The total expense related to these plans was $339 and $1,654 for the
quarter and year ended December 31, 2004, respectively ($348 and
$1,462 for the quarter and year ended December 31, 2003,
respectively).

19. Segmented information

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

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

Quarter ended December 31,
2004 2003
(unaudited) (unaudited)
$ $
Sales
Canada
Domestic 14,405 17,050
Foreign 22,192 12,264
Intersegment transfers 5,235 4,623
---------------------------------------------------------------------
41,832 33,937
---------------------------------------------------------------------
United States
Domestic 57,547 63,152
Foreign 230 421
Intersegment transfers 21,349 15,333
---------------------------------------------------------------------
79,126 78,906
---------------------------------------------------------------------
120,958 112,843
Elimination of intersegment transfers (26,584) (19,956)
Discounts (3,040) (3,494)
---------------------------------------------------------------------
91,334 89,393
---------------------------------------------------------------------
---------------------------------------------------------------------


Year ended December 31,
2004 2003
(unaudited) (audited)
$ $
Sales
Canada
Domestic 54,079 61,632
Foreign 96,220 16,246
Intersegment transfers 15,149 15,506
---------------------------------------------------------------------
165,448 93,384
---------------------------------------------------------------------
United States
Domestic 242,726 257,508
Foreign 1,347 967
Intersegment transfers 95,558 39,481
---------------------------------------------------------------------
339,631 297,956
---------------------------------------------------------------------
505,079 391,340
Elimination of intersegment transfers (110,707) (54,987)
Discounts (13,660) (15,480)
---------------------------------------------------------------------
380,712 320,873
---------------------------------------------------------------------
---------------------------------------------------------------------


December 31, December 31,
2004 2003
(unaudited) (audited)
$ $
Property, plant and equipment
Canada 33,117 31,188
United States 116,419 96,926
---------------------------------------------------------------------
149,536 128,114
Less: Accumulated amortization 33,406 20,701
---------------------------------------------------------------------
116,130 107,413
---------------------------------------------------------------------
---------------------------------------------------------------------

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

20. Financial instruments

Credit risk

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

Foreign exchange and interest rate risks

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

As at December 31, 2004, the Fund had no foreign currency forward
contracts outstanding (December 31, 2003 - foreign currency forward
contracts to receive Canadian dollars amounted to $16,400, and
resulted in an unrealized gain of $476, which was credited to
selling, general and administrative expenses).

Subsequent to December 31, 2004, the Fund entered into foreign
currency forward contracts to receive Canadian dollars of $22,266 at
the weighted average contractual exchange rate of $1.2370 and the
settlement dates of outstanding contracts were all less than one
year. The exchange rate as at December 31, 2004 was $1.2020.

The Fund has fixed interest rates on a portion of its indebtedness
(note 8). The mark-to-market value of the contracts as at
December 31, 2004 was an unrealized gain of $17 (2003 - $nil)and
resulted in a gain, including the impact of the amortization on the
transitional amount, of $105 for the quarter ended and a gain of $266
for the year ended December 31, 2004, which were charged to interest
expense during the periods.

Fair value of financial instruments

The carrying values of cash, trade and other receivables, accounts
payable and accrued liabilities, distributions payable and income
taxes payable and recoverable approximate their fair values because
of the near maturity of these instruments. The carrying value of
long-term debt bearing interest at variable rates approximates its
fair value because effective rates represent the rates that would be
used to calculate fair value.

The carrying value of long-term debt, bearing interest at a fixed
rate, approximates its fair value.

The interest free loan referred to in note 8(d), if it attracted
interest at the rate of the Fund's other comparable long-term debt,
would have an approximate fair value of $176 ($360 as at December 31,
2003).

21. Economic dependence

The Fund has approximately 20% of its sales to one customer. Other
than this one customer, the Fund does not have a significant exposure
to any individual customer. The Fund relies on a single supplier for
the majority of its can requirements. Should this supplier fail to
deliver in a timely manner, delays and or shutdowns of the Fund's
operations could result.

Contact Information

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