Menu Foods Income Fund
TSX : MEW.UN

Menu Foods Income Fund

May 12, 2005 13:14 ET

Menu Foods Income Fund Announces 2005 First Quarter Results

TORONTO, ONTARIO--(CCNMatthews - May 12, 2005) -

Attention Business/Financial Editors:

NOT FOR RELEASE OVER U.S. NEWSWIRE SERVICES

Menu Foods Income Fund (TSX: MEW.UN)(the "Fund") announced today its financial
results for the quarter ended March 31,2005.

The financial results for the quarter ended March 31, 2005 will be
discussed at Menu Foods Income Fund's annual meeting. The annual meeting is to
be held today, May 12, 2005 at 2:00pm at the Metro Toronto Convention Centre,
Room 206BD, located at 255 Front Street West, Toronto, Ontario. The meeting
will be chaired by Robert Luba, Trustee of Menu Foods Income Fund. Robert will
be joined by Thomas Di Giacomo, Trustee; Serge Darkazanli, Trustee, Menu's
Chairman and Chief Executive Officer; Paul Henderson, Menu's President and
Chief Operating Officer; Randall Copeland, Menu's Executive Vice-President of
Operations; Dr. Richard Shields, Menu's Executive Vice-President of Technical
Services and Mark Wiens, Menu's Executive Vice President and Chief Financial
Officer.



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


Below we present, to unitholders of Menu Foods Income Fund, our report
for the first quarter ended March 31, 2005. The table below reports selected
highlights of the quarter's results:



Quarter ended
March 31,
2005 2004
($ millions) ($ millions)

Sales 84.8 90.6
Net income before non-controlling interest 3.0 5.8
EBITDA 8.3 11.5
Distributable cash 5.0 9.5
Distributions declared 9.1 8.4
Distributions declared per Trust unit ($) 0.3150 0.3150
Distributions declared per Class B unit ($) 0.3150 0.3150


Total distributions declared represented a pay-out ratio of approximately
182% for the quarter and 99% since the inception of the Fund.

Performance during the quarter reflects challenges resulting from an
unexpected drop in can volume, the rise of the Canadian dollar and the current
inability to pass on rising costs. The first quarter highlights include:



- Sales fell by 6.4% or $5.8 million over last year. Were it not for
the rise of the Canadian dollar relative to the United States dollar,
sales would have decreased by $0.4 million versus the prior year.

- Volume (expressed in cases of 24 cans or pouches) decreased by 2.3%
over last year. As previously disclosed on April 28, 2005, this
decline in volume is principally attributable to reduced can sales to
the Fund's largest customer. Were it not for this unexpected
development, volume would have risen by 3.7% over last year.

- EBITDA fell by 27.7% or $3.2 million over last year. Reduced can
sales to the Fund's largest customer contributed $1.3 million of the
shortfall. EBITDA was also negatively impacted by the continued
strength of the Canadian dollar, higher raw material costs that could
not be passed on to customers and inefficiencies within the
production process.


During the first quarter of 2005, the Fund initiated a price increase to
its Canadian customers (representing approximately 15% of total sales),
passing on the cost increases absorbed during the past two years and following
increases taken by the national brand manufacturers.

Since the close of the quarter, the Fund was able to secure a new
commitment from a major customer that includes take-or-pay provisions, which
is expected to compensate for most of the decline in can volume experienced in
the first quarter of 2005. These new arrangements are expected to be
implemented in early 2006.

After carefully assessing the performance of the Fund during the first
quarter of 2005, and having reached a payment ratio of nearly 100% since
inception, the Trustees have decided to reduce distributions from their
current rate of 10.5 cents per month to 9.0 cents per month, effective with
the distribution for the month of May 2005. In addition, certain holders of
Class B Exchangeable Units (including senior management) representing more
than 10 million units have agreed to forego receipt of 7.0 cents of the
9.0 cents and their entitlement to convert into Trust Units until at least the
February 2006 distribution. Such unitholders shall be entitled to a
reimbursement of such foregone distributions only to the extent the Fund
generates sufficient distributable cash. The management and Trustees of the
Fund remain dedicated to restoring distributions to previous levels as soon as
practically possible and are grateful for the support and confidence shown by
the Class B unitholders in taking this action.

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 ended March 31, 2005)

Presentation of Financial Information

The following discussion and analysis of the financial results of Menu
Foods Income Fund (the "Fund") is dated as of May 12, 2005 and is
supplementary to and should be read in conjunction with the unaudited
consolidated financial statements for the quarters ended March 31, 2005 and
2004.

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

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

Certain statements in this Management's Discussion and Analysis of
Financial Results are "forward-looking statements," which reflect management's
expectations regarding the Fund and Menu's future growth, results of
operations, performance, business prospects and opportunities. Such
forward-looking statements reflect management's current beliefs and are based
on information currently available to management. Many factors could cause
results to differ materially from the results discussed in the forward-looking
statements, 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 March 31,
2005 2004
$ $
Sales 84,787 90,560
Cost of sales 74,602 76,209
----------------------
Gross profit 10,185 14,351
Selling, general and administrative expenses 5,581 6,253
----------------------
Income before the undernoted 4,604 8,098
Financial expenses 1,435 1,315
----------------------
Income before income taxes and non-controlling
interest 3,169 6,783
----------------------
Current income taxes 298 667
Future income taxes (123) 352
----------------------
Total income taxes 175 1,019
----------------------
Net income before non-controlling interest 2,994 5,764
Non-controlling interest of Class B
Exchangeable Units 1,313 2,719
----------------------
Net income for the period 1,681 3,045
----------------------
----------------------

Basic net income per Trust Unit 0.104 0.220
Diluted net income per Unit 0.104 0.214

Distributions per Trust Unit 0.3150 0.3150
Distributions per Class B Unit 0.3150 0.3150

Basic weighted average number of Trust Units
outstanding (000's) 16,160 13,832
Diluted weighted average number of Units
outstanding (000's) 28,918 26,901

Average US/Cdn exchange rate per Bank of Canada 0.8150 0.7588


Operating Results for the Quarter Ended March 31, 2005

Sales for the quarter ended March 31, 2005, were $84.8 million, down 6.4%
or $5.8 million compared to the same quarter last year. This decline is
attributable to:



1. the strengthening of the Canadian dollar relative to the
United States dollar had the effect of reducing sales by $5.4 million
relative to the first quarter of 2004;

2. an 8.7% decrease in can volume resulting in a net sales decrease of
$5.9 million primarily due to a 33.9% decline in can sales volumes to
Menu's largest customer. The decline in volume to this customer is
expected to continue to a similar extent for the remainder of 2005;

3. continued demand for the pouch product fueled a 29.3% increase in
pouch volume, resulting in an increase in sales of $4.5 million
relative to the first quarter of 2004. During the fourth quarter of
2004, Menu completed another phase of its pouch capacity expansion
project, which enabled this growth in demand to be accommodated.
During this first quarter, lower than expected efficiencies were
achieved in the start-up of this equipment resulting in higher costs
and lower production output. Menu estimates that absent these
inefficiencies sales would have increased by $1.9 million. The final
phase of Menu's pouch capacity expansion project will be completed in
early May 2005, after which time Menu expects to be able to fully
satisfy demand for its pouch product;

4. the impact of a price increase to Menu's United States private label
customers initiated in the second quarter of 2004, together with
changes to sales mix and other variables, had the effect of
increasing sales by $1.5 million; and,

5. the prior year's first quarter sales included a payment under a
take-or-pay agreement, which concluded in the fourth quarter of 2004.
The absence of such a payment in the first quarter of 2005 had the
affect of reducing sales by $0.5 million.


Overall, volume (expressed in cases of 24 cans or pouches) was down 2.3%
compared to the quarter ended March 31, 2004. Can volume, which represented
77.5% of Menu's volume in the first quarter of 2005, contracted by 8.7%
(equating to a decline in total volume of 7.3%). This decline was primarily
attributable to the 33.9% decline in the first quarter of 2005 in case volume
of canned wet pet food to Menu's largest customer, which reduced first quarter
can volume by 7.3%. In addition, two other key customers initiated an
inventory reduction program within their organizations and this had the effect
of reducing Menu's case sales of canned wet pet food to those customers by
43.6%. The impact to Menu of these inventory reduction initiatives was to
reduce its first quarter canned volume by 3.9% as compared to canned volume in
the first quarter of 2004. Sales of cans to new customers or increased sales
of cans to other existing customers, combined to represent an increase in can
volume of 2.5%.

The lower case sales of canned wet pet food as described above, was
partially offset by the continued growth in sales of Menu's pouch product.
During the first quarter of 2005, case sales of the pouch product, which
represented 22.5% of total volume, grew by 29.3% (equating to an increase in
total volume of 5.0%) compared to the first quarter of 2004.

Gross profit decreased by $4.2 million (or 29.0%) for the quarter ended
March 31, 2005, compared to the prior year. This decrease is attributable to:



1. 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 $5.4 million and that
translated into a reduction in gross profit of $0.9 million for the
quarter ended March 31, 2005;

2. Effect of Change in Sales Volume. As previously noted, total can
volume for the first quarter declined by 8.7% while total pouch
volume increased by 29.3%. The net impact of this change in sales
volume reduced gross profit by $0.2 million.

3. Cessation of Take-or-Pay Agreement. In 2004, the quarter's sales
included a payment under a take-or-pay agreement (which concluded in
the fourth quarter of 2004) having the affect of reducing comparative
gross profit by $0.5 million;

4. Price and Cost Increases/Adjustments. During the past year, the cost
of certain inputs to production, including raw and packaging
materials, labour and benefits, utilities and freight increased and
adversely impacted cost of sales, when compared to the first quarter
of 2004. In addition, as reported in its annual report, two of Menu's
operations took a shutdown in the first quarter to install certain
capital equipment and, as a result, costs were negatively affected.
During the first quarter of 2004, Menu followed the national brands
and initiated a price increase to its United States customers to
recover cost increases realized to that point in time. The net result
of these activities in the first quarter of 2005, together with mix
and other variables, was to reduce gross profit by $2.4 million; and

5. Increase in Amortization. The amortization of capital projects
completed in the past year resulted in an increase in the
amortization associated with the cost of goods sold of $0.2 million
versus the first quarter of 2004.


Selling, general and administrative expenses for the quarter ended
March 31, 2005 decreased by $0.7 million compared to the prior year. This
decrease can be primarily attributed to an increase in the gain on foreign
currency forward contracts (which are "marked-to-market") entered into to
hedge distributions in 2005 together with a general reduction in
administrative spending.

The foregoing resulted in EBITDA (See Note A) of $8.3 million for the
quarter ended March 31, 2005, a decrease of $3.2 million (or 27.7%) compared
to the same period in 2004. The strengthening of the Canadian dollar, relative
to the United States dollar, has reduced sales, gross margin, selling, general
and administrative ("SG&A") expenses, amortization, interest and EBITDA. Menu
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.

Menu estimates that absent its hedging program, the strengthening of the
Canadian dollar during the first quarter of 2005 versus the same period in
2004 reduced EBITDA by approximately $0.8 million and Distributable Cash by
approximately $0.6 million. Under its program for hedging distributions, the
Fund entered into foreign exchange contracts for the period from February 2005
to October 2005. During the quarter ended March 31, 2005, the Fund realized a
nominal gain on matured contracts and had unrealized gains of $0.47 million on
contracts that had yet to mature. These gains are recorded in selling, general
and administration expenses. During the second quarter of 2005, the Fund
entered into additional foreign exchange contracts for the period through to
April 2006. These new contracts, together with those existing on March 31,
2005, have an average rate of $0.8107.

Amortization (which is included in cost of sales and SG&A expense) in the
first quarter of 2005 was $0.3 million higher than in 2004. This increase is
directly attributable to the $36.0 million of capital expenditures made during
the twelve months ended March 31, 2005 together with the full period
amortization of the $1.7 million of capital expenditures made during the
quarter ended March 31, 2004, offset by the effects of the strengthening of
the Canadian dollar relative to the United States dollar.

Financial expenses were $0.1 million greater during the quarter ended
March 31, 2005, than in the first quarter of 2004. This increase reflects
higher borrowings and the higher interest rates incurred in the first quarter
of 2005 versus the first quarter of 2004.

The Fund operates using a number of different legal structures (e.g.
partnerships, trusts, corporations etc.) in a number of jurisdictions. Each of
these structures and jurisdictions is subject to income tax at different
rates. The effective tax rate can vary from quarter-to-quarter, depending upon
the taxing jurisdiction and the legal structure in which the income is earned.
As a consequence, the Fund's effective tax rate decreased to 5.5% as compared
to the 12.9% effective rate of tax realized for all of fiscal 2004.

Current income taxes during this quarter amounted to 9.4% of the Fund's
pre-tax income, which is slightly less than the 9.8% in 2004. However, in 2004
future income taxes increased tax expense by 5.2%, whereas in 2005 they
decreased it by 3.9%. In the prior year, the United States had an incentive
program that provided "accelerated" tax depreciation in respect of capital
additions put in service during 2004. The absence of these tax incentives for
the current year has resulted in a draw-down of the future income taxes
deferred in prior years.

Net income before non-controlling interest of Class B Exchangeable Units
("Class B Units") for the quarter ended March 31, 2005, was $3.0 million,
compared to $5.8 million for the quarter ended March 31, 2004.

Liquidity

During the quarter ended March 31, 2005, the Fund generated cash flow
from operations of $6.1 million, offset by a reduction in cash flow of
$3.0 million as a result of changes in non-cash working capital items. The
increase in non-cash working capital items related primarily to a $2.2 million
increase in packaging and finished goods inventory. The increase in packaging
inventory is largely attributed to the increase in empty pouch inventory
(which has a longer lead-time than can purchases) in anticipation of the new
business to be serviced by the new pouch line equipment being installed in the
second quarter. The increase in finished goods inventory was as a result of
the significant decline in sales of canned wet pet food to three of Menu's
largest customers as discussed above. Menu has adjusted its production to
reflect this change in demand and a decline in the level of finished goods
inventory is expected in subsequent quarters.

For the quarter ended March 31, 2005, the Fund announced and paid
distributions on the Trust Units of $5.1 million ($0.315 per unit). During
this same period, the Fund announced distributions on the Class B Units of
$4.0 million ($0.315 per unit) and paid $6.6 million with the difference
reflected in distributions payable. 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
Class B Units were no longer subordinate to the Trust Units. Accordingly, in
the first quarter of 2005, the Class B Unitholders were paid distributions
monthly rather than quarterly resulting in the one-time acceleration of the
distributions paid out. In the quarter ended March 31, 2005, the pay-out ratio
(including the distributions declared on the Class B Units) was 181.9% and
98.9% since inception.

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

Capital Resources

During the quarter ended March 31, 2005, Menu spent $6.0 million on
property, plant and equipment. The largest expenditures during this period
($4.5 million) reflected equipment purchases and deposits made against future
equipment purchases to expand pouch capacity as part of a multi-phase
expansion initiated in 2004. The final phase of this capital project is
targeted for completion during the second quarter of 2005.

Capital expenditures of a maintenance nature, which totaled $1.1 for the
first quarter of 2005, were financed from the cash flow of the business. These
maintenance capital expenditures were over and above the $3.4 million (2004 -
$3.5 million) for labour and parts expended by Menu for the ongoing repairs
and maintenance of its plants that have been expensed as part of cost of
sales.

Outstanding Units

The following table highlights the number of Units outstanding:



Class B
Trust Units Exchangeable
Units

December 31, 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
Options exercised during the quarter 41,573 -
---------------------------
---------------------------
March 31, 2005 16,181,809 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
March 31, 2005, 160,773 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. In February 2005, 36,390 units were
purchased under the Fund's Long-Term Incentive Plan for the benefit of
22 individuals.

Outlook

Cost and Price Increases

Over the past three years, Menu has experienced increases in certain
operating and administrative costs. Rising costs for steel and aluminum are
driving 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 (with some timing
delays). 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 was
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. During the first quarter of 2005, Menu
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.

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.
The continuation of this trend could adversely impact the financial results of
the Fund.

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. Menu 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 U.S. 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 are made to both the Trust Units and Class B
Exchangeable Units.

Financial Covenants

Most of the Fund's outstanding debt is represented by its operating
facility and senior secured notes. As at March 31, 2005, the Fund had $26,246
drawn on its operating facility and $102,816 of senior secured notes
outstanding. Each of these facilities has financial covenants and cross
default provisions that must be met. The Fund is in compliance with these
financial covenants as at March 31, 2005. However, if the performance trend of
the first quarter of 2005 were to continue, without corrective action being
taken, the Fund may be unable to meet the financial covenants that govern the
operating facility. Should the Fund be unable to meet such covenants, it will
require a bank waiver to enable it to continue to operate this facility. The
Fund is confident that such a waiver could be obtained, however, there can be
no certainty in this regard.

Risks and Uncertainties

Menu and the Fund are 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 18 and 19 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 first
quarter and since the inception of the Fund:


For the Quarter ended Since
March 31 Inception
(May 22,
2002) to
March 31
2005 2004 2005
$'000's $'000's $'000's

Net income 1,681 3,045 27,878
Add:
Non-controlling interest of Class B
Exchangeable Units 1,313 2,719 24,578
Amortization of property, plant
and equipment 3,556 3,080 40,144
Amortization of supply contract 137 301 1,558
Future income taxes (123) 352 7,755
Current income taxes 298 667 1,335
Interest 1,435 1,315 12,088
----------------------------------
EBITDA 8,297 11,479 115,336
----------------------------------
----------------------------------


For the Quarter ended Since
March 31 Inception
(May 22,
2002) to
March 31
2005 2004 2005
$'000's $'000's $'000's

Cash flow from operating activities 3,095 (7,605) 66,226
Adjust for:
Change in non-cash working capital items 3,022 17,339 36,429
Maintenance capital expenditures (1,093) (236) (7,597)
Principal repayments (37) (24) (423)
----------------------------------
Distributable Cash 4,987 9,474 94,635
----------------------------------
----------------------------------



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

As at As at
March 31, December 31,
2005 2004
` (unaudited) (audited)

$ $
Assets

Current assets
Accounts receivable
Trade 19,482 18,716
Other 2,536 2,316
Inventories (note 3) 61,779 59,120
Prepaid expenses and sundry assets 2,019 1,898
Income taxes recoverable - 259
Future income taxes (note 13) 2,586 1,874
-------------------------------------------------------------------------
Total Current Assets 88,402 84,183
Property, plant and equipment (note 4) 119,004 116,130
Goodwill 165,387 165,387
Other assets (note 5) 6,423 6,053
-------------------------------------------------------------------------
Total Assets 379,216 371,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current liabilities
Bank indebtedness (note 6) 25,207 10,398
Accounts payable and accrued liabilities 21,589 21,735
Income taxes payable 14 -
Distributions payable (note 10) 3,026 5,674
Current portion of long-term debt (note 7) 160 157
-------------------------------------------------------------------------
Total Current Liabilities 49,996 37,964
Long-term debt (note 7) 103,041 102,434
Future income taxes (note 13) 18,036 17,381
-------------------------------------------------------------------------
Total Liabilities 171,073 157,779
-------------------------------------------------------------------------

Class B Exchangeable Units (note 8) 78,697 81,363
-------------------------------------------------------------------------

Unitholders' Equity

Trust Units (note 9) 160,718 160,372
Contributed surplus (note 11) 586 808
Deficit (22,594) (19,182)
Foreign currency translation adjustment (9,264) (9,387)
-------------------------------------------------------------------------
Total Unitholders' Equity 129,446 132,611
-------------------------------------------------------------------------
Total Liabilities and Unitholders' Equity 379,216 371,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
March 31,
2005 2004
(unaudited) (unaudited)
$ $


Sales 84,787 90,560
Cost of sales (note 14) 74,602 76,209
-------------------------------------------------------------------------
Gross profit 10,185 14,351
Selling, general and administrative expenses 5,581 6,253
-------------------------------------------------------------------------
Income before the undernoted 4,604 8,098
Financial expenses (note 12) 1,435 1,315
-------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 3,169 6,783
-------------------------------------------------------------------------
Current income taxes 298 667
Future income taxes (123) 352
-------------------------------------------------------------------------
Total income taxes (note 13) 175 1,019
-------------------------------------------------------------------------
Net income before non-controlling interest 2,994 5,764
Non-controlling interest of Class B
Exchangeable Units 1,313 2,719
-------------------------------------------------------------------------
Net income for the period 1,681 3,045
-------------------------------------------------------------------------
Deficit - beginning of period (19,182) (12,438)
Distributions (note 10) (5,093) (4,449)
-------------------------------------------------------------------------
Deficit - end of period (22,594) (13,842)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Deficit comprises:
Accumulated net income 27,705 16,352
Accumulated distributions (50,299) (30,194)
-------------------------------------------------------------------------
(22,594) (13,842)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic net income per Trust Unit $ 0.104 $ 0.220
Diluted net income per Unit $ 0.104 $ 0.214

Basic weighted average number of Trust Units
outstanding (note 9) 16,159,984 13,832,109

Diluted weighted average number of Trust Units
outstanding (note 9) 28,918,087 26,901,252

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
March 31,
2005 2004
(unaudited) (unaudited)
$ $

Cash provided by (used in)
Operating activities
Net income for the period 1,681 3,045
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units 1,313 2,719
Amortization of property, plant and equipment 3,556 3,080
Amortization of supply contract 137 301
Mark-to-market adjustment (515) 125
Amortization of deferred financing costs 51 112
Vesting of long-term incentive plan 17 -
Future income taxes (123) 352
-------------------------------------------------------------------------
6,117 9,734
Change in non-cash working capital items
Accounts receivable (922) (847)
Inventories (2,205) (10,382)
Prepaid expenses and sundry assets (117) (107)
Income taxes recoverable 273 618
Accounts payable and accrued liabilities (51) (6,621)
-------------------------------------------------------------------------
3,095 (7,605)
-------------------------------------------------------------------------
Financing activities
Increase of bank indebtedness 15,103 -
Issuance of Trust Units, net 124 36,117
Long-term debt repayments (37) (172)
Distributions to Trust Units (5,088) (4,182)
Distributions to Class B Exchangeable Units (6,632) (4,800)
-------------------------------------------------------------------------
3,470 26,963
-------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (6,030) (1,737)
Other assets (535) 3
-------------------------------------------------------------------------
(6,565) (1,734)
-------------------------------------------------------------------------
Increase in cash during the period - 17,624
Cash - beginning of period - 3,495
-------------------------------------------------------------------------
Cash - end of period - 21,119
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary information

Income taxes paid (refunded) 108 (53)
Interest paid 1,232 1,119

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


Menu Foods Income Fund
Notes to Consolidated Financial Statements
March 31, 2005

(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.

These consolidated financial statements are based upon accounting
principles consistent with those used and described in the annual
consolidated financial statements at December 31, 2004, and should be
read in conjunction with those financial statements. The disclosures
contained in these unaudited interim consolidated financial
statements may not include all requirements of generally accepted
accounting principles for annual statements.

Accounting measurements at interim dates involve greater reliance on
estimates than at year end. In the opinion of management, the
accompanying unaudited interim consolidated financial statements
include all adjustments of a normal recurring nature to present
fairly the financial position of the Fund as at March 31, 2005.

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
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

The fair value of a liability for an asset retirement obligation, is
recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. The associated retirement costs
are capitalized as part of the carrying amount of the long-lived
assets and amortized over the life of the asset. As at March 31,
2005, the Fund has concluded that there were no asset retirement
obligations associated with its assets.

q) Non-controlling interest

Effective in its fourth quarter of 2004, the Fund adopted the
requirements of the Emerging Issues Committee of The Canadian
Institute of Chartered Accountants Abstract 151. This abstract
described circumstances whereby exchangeable units, previously
included in unitholders' equity, be shown as non-controlling
interest. This change in accounting policy was given retroactive
application.


3. Inventories
March 31, December 31,
2005 2004
(unaudited) (audited)
$ $

Raw materials and packaging 16,827 15,794
Finished goods 44,952 43,326
---------------------------------------------------------------------
61,779 59,120
---------------------------------------------------------------------
---------------------------------------------------------------------

4. Property, plant and equipment

March 31, 2005 (unaudited)
Accumulated
Cost amortization Net
$ $ $

Land 5,370 - 5,370
Buildings 45,258 3,977 41,281
Machinery and equipment 78,062 24,312 53,750
Other property and equipment 14,589 8,288 6,301
Equipment under capital lease 809 640 169
Construction-in-progress 12,133 - 12,133
---------------------------------------------------------------------
156,221 37,217 119,004
---------------------------------------------------------------------
---------------------------------------------------------------------


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

Land 5,319 - 5,319
Buildings 44,996 3,547 41,449
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
---------------------------------------------------------------------
---------------------------------------------------------------------

5. Other assets

March 31, 2005 (unaudited)
Accumulated
Cost amortization Net
$ $ $

Supply contract 6,068 1,319 4,749
Deferred financing charges 1,728 555 1,173
Deferred long-term incentive plan
(note 11) 518 17 501
---------------------------------------------------------------------
8,314 1,891 6,423
---------------------------------------------------------------------
---------------------------------------------------------------------


December 31, 2004 (audited)
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
---------------------------------------------------------------------
---------------------------------------------------------------------

6. Bank indebtedness

The banking agreement provides the Fund with a US$30,000 operating
facility of which US$21,698 ($26,246) was drawn as at March 31, 2005
(December 31, 2004 - US$7,241 ($8,704)). This operating facility
bears interest at Canadian prime rate (4.25% as at March 31, 2005),
U.S. base rate (5.75% as at March 31, 2005) or Euro rate plus 1.50%
(5.34% as at March 31, 2005) depending on the currency advanced. The
facility is a 364 day revolving term facility, which currently
expires on October 30, 2005. 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 7). The fund is in compliance with these covenants at March 31,
2005.

7. Long-term debt
March 31, December 31,
2005 2004
(unaudited) (audited)
$ $
Senior secured notes(a) 102,816 102,170
Obligation under capital lease(b) 201 238
Forgivable loan(c) 184 183
---------------------------------------------------------------------
103,201 102,591
Less: Current portion 160 157
---------------------------------------------------------------------
103,041 102,434
---------------------------------------------------------------------
---------------------------------------------------------------------

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,
(4.29% as at March 31, 2005 and 3.71% as at December 31, 2004) senior
secured notes. The notes are repayable on October 31, 2010 with
interest payable quarterly. 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 6) and senior secured
noteholders. The Fund is in compliance with these covenants at
March 31, 2005.

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

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:

March 31, December 31,
2005 2004
(unaudited) (audited)
$ $

2005 126 168
2006 84 84
---------------------------------------------------------------------
Total minimum lease payments 210 252
Less: Amounts representing interest at 6.60% 9 14
---------------------------------------------------------------------
Balance of obligation 201 238
Less: Current portion 160 157
---------------------------------------------------------------------
41 81
---------------------------------------------------------------------
---------------------------------------------------------------------



c) 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 March 31, 2005,
$184 (US$151) was outstanding (December 31, 2004 - $183 (US$151)).
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.



8. Class B Exchangeable Units

Number of units
March 31, December 31,
2005 2004
(unaudited) (audited)

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


March 31, December 31,
2005 2004
(unaudited) (audited)
$ $

Balance - beginning of period 81,363 86,878
Share of net income for the period 1,313 10,401
Distributions for the period (note 10) (3,979) (15,916)
---------------------------------------------------------------------
Balance - end of period 78,697 81,363
---------------------------------------------------------------------
---------------------------------------------------------------------



The Class B Units together with their related Special Trust Units
(note 9) can be exchanged on a one-for-one basis with the Fund for
Trust Units at the option of the holder.



9. 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, 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 quarter ended:
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
(audited) 16,140,236 171,672 11,300 160,372
Exercise of options
during the quarter
ended
March 31, 2005 (note 11) 41,573 346 - 346
---------------------------------------------------------------------
March 31, 2005
(unaudited) 16,181,809 172,018 11,300 160,718
---------------------------------------------------------------------
---------------------------------------------------------------------



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 8)
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 8).

Weighted average number of Units outstanding

Basic net income per Trust Unit is computed by dividing net income
for the period by the weighted average number of Trust Units
outstanding during the period. Diluted net income per Trust Unit
includes the effect of exercising unit options (note 11), only if
dilutive and includes the Class B Exchangeable Units using the "if
converted" method.

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



Quarter ended March 31,
2005 2004
(unaudited) (unaudited)
Weighted average number of Trust Units
outstanding - basic 16,159,984 13,832,109
Class B Units (note 8) 12,631,915 12,631,915
Dilutive effect of options (note 11) 126,188 437,228
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,918,087 26,901,252
---------------------------------------------------------------------
---------------------------------------------------------------------

10. Distributions

Distributions announced during the quarter ended March 31, 2005 were
as follows:

Unitholder record date Total Per unit Paid or
(unaudited) (unaudited) payable
$ $

Trust Units
January 31, 2005 1,696 0.1050 February 15, 2005
February 28, 2005 1,697 0.1050 March 15, 2005
March 31, 2005 1,700 0.1050 April 15, 2005
------------------------------------------------
5,093 0.3150
------------------------------------------------

Class B Units

January 31, 2005 1,326 0.1050 February 15, 2005
February 28, 2005 1,327 0.1050 March 15, 2005
March 31, 2005 1,326 0.1050 April 15, 2005
------------------------------------------------
3,979 0.3150
------------------------------------------------

During the quarter ended March 31, 2004, distributions to Trust Units
and Class B Units amounted to $4,449 ($0.315 per unit) and $3,979
($0.315 per unit), respectively.

11. 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
March 31, 2005, 160,773 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.


March 31, December 31,
2005 2004
(unaudited) (audited)

Opening balance 202,346 582,759
Exercised (41,573) (380,413)
---------------------------------------------------------------------
Ending balance 160,773 202,346
---------------------------------------------------------------------
---------------------------------------------------------------------

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

March 31, December 31,
2005 2004
(unaudited) (audited)
$ $

Opening balance 808 2,847
Options exercised (222) (2,039)
---------------------------------------------------------------------
Ending balance 586 808
---------------------------------------------------------------------
---------------------------------------------------------------------

As the Trust Unit options are exercised, the associated contributed
surplus is reclassified to Trust Units (note 9). During the quarter
ended March 31, 2005, $222 was reclassified to Trust Units
(2004 - $173).

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. In February 2005, 36,390 Trust
Units were purchased for $518 for the benefit of 22 individuals.

12. Financial expenses

Quarter ended March 31,
2005 2004
(unaudited) (unaudited)
$ $
Interest on senior secured notes 1,113 774
Interest on bank indebtedness 276 150
Interest on capital leases 3 60
Net (gain)/loss on interest rate swap (45) 205
Amortization of deferred financing charges 51 112
Other, net 37 14
---------------------------------------------------------------------
1,435 1,315
---------------------------------------------------------------------
---------------------------------------------------------------------

13. 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 March 31,
2005 2004
(unaudited) (unaudited)
$ $

Income before income taxes 3,169 6,783
Income of the Fund subject to tax in the
hands of recipients (3,125) (3,218)
---------------------------------------------------------------------
Income of subsidiary entities subject to tax 44 3,565
---------------------------------------------------------------------
Income taxes at statutory rate 15 1,229
Increase (decrease) resulting from:
Effect of foreign tax rate (416) (406)
Large corporations tax 70 53
Unrecognized tax loss carry-forward 769 -
Other and permanent differences (263) 143
---------------------------------------------------------------------
175 1,019
---------------------------------------------------------------------
---------------------------------------------------------------------

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

March 31, December 31,
2005 2004
(unaudited) (audited)
$ $
Current future income tax assets:
Accounts receivable, accounts payable and
accrued liabilities 546 373
Inventory provisions 1,673 1,903
Less: Share of net partnership income not
yet subject to tax 367 (402)
---------------------------------------------------------------------
2,586 1,874
---------------------------------------------------------------------
---------------------------------------------------------------------
Long-term future income tax liabilities:
Property, plant and equipment 17,783 18,030
Withholding tax on foreign retained earnings 370 245
Tax benefits of loss carry-forwards (3,447) (3,332)
Valuation allowance 2,459 2,394
Other 871 44
---------------------------------------------------------------------
18,036 17,381
---------------------------------------------------------------------
---------------------------------------------------------------------

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

14. Other expenses and income

Research and development expenses amounted to $68 for the quarter
ended March 31, 2005 (2004 - $75). These expenses are included in
cost of sales.

15. Obligations under operating leases

Future minimum payments under operating leases at March 31, 2005 are
as follows:
(unaudited)
$
2005 1,097
2006 1,023
2007 196
2008 77
2009 4
Thereafter -
---------------------------------------------------------------------
2,397
---------------------------------------------------------------------
---------------------------------------------------------------------

16. 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 $482 for the quarter
ended March 31, 2005 (2004 - $365).

17. 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 March 31,
2005 2004
(unaudited) (unaudited)
$ $
Sales
Canada
Domestic 14,197 13,146
Foreign 16,325 21,800
Intersegment transfers 1,790 5,138
---------------------------------------------------------------------
32,312 40,084
---------------------------------------------------------------------
United States
Domestic 56,789 59,443
Foreign 411 94
Intersegment transfers 17,382 22,422
---------------------------------------------------------------------
74,582 81,959
---------------------------------------------------------------------
106,894 122,043
Elimination of intersegment transfers (19,172) (27,560)
Discounts (2,935) (3,923)
---------------------------------------------------------------------
84,787 90,560
---------------------------------------------------------------------
---------------------------------------------------------------------


March 31, December 31,
2005 2004
(unaudited) (audited)
$ $
Property, plant and equipment
Canada 33,608 33,117
United States 122,613 116,419
---------------------------------------------------------------------
156,221 149,536
Less: Accumulated amortization 37,217 33,406
---------------------------------------------------------------------
119,004 116,130
---------------------------------------------------------------------
---------------------------------------------------------------------

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.

18. 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 March 31, 2005, the Canadian amounts to be received under
foreign currency forward contracts were $19,798 (December 31,
2004 - $nil), the weighted average contractual exchange rate was
$1.2374 and the settlement dates of outstanding contracts are all
less than one year. The exchange rate as at the quarter end was
$1.2096. The mark-to-market value of the contracts as at March 31,
2005 resulted in a gain of $470 (2004 - $80). These contracts do not
qualify for hedging accounting and therefore the gain has been
credited to administrative expenses during the period.

The Fund has fixed interest rates on a portion of its indebtedness
(note 7). The mark-to-market value of the contracts as at March 31,
2005 resulted in an unrealized gain of $120 (December 31, 2004 - $17)
and resulted in a gain, including the impact of the amortization on
the transitional amount, of $45 for the quarter ended March 31, 2005
(March 31, 2004 - a loss of $205), 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.

19. Economic dependence

The Fund has approximately 16% 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