Menu Foods Income Fund
TSX : MEW.UN

Menu Foods Income Fund

August 12, 2005 13:29 ET

Menu Foods Income Fund Announces 2005 Second Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Aug. 12, 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 June 30, 2005.

A conference call to review these results will take place today,
August 12, 2005 at 2:00 p.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 August 26, 2005 by dialing 416-640-1917
or 1-877-289-8525, using passcode 21131805 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.


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


Below we present, to unitholders of Menu Foods Income Fund, our report
for the second quarter ended June 30, 2005. The table below reports selected
highlights of the quarter's results:



Quarter ended Six months ended
June 30, June 30,
2005 2004 2005 2004
($ millions) ($ millions) ($ millions) ($ millions)

Sales 83.7 96.8 168.4 187.3
Net income before non-
controlling interest 0.7 6.2 3.7 11.9
EBITDA 4.9 11.7 13.2 23.2
Distributable cash 3.5 10.2 8.5 19.7
Distributions declared 6.5 9.0 15.6 17.4
Distributions declared
per Trust unit ($) 0.2850 0.3150 0.6000 0.6300
Distributions declared
(net of subordinated
amounts) per Class B
unit ($) 0.1456 0.3150 0.4634 0.6300

Performance during the quarter is a reflection of the challenging
business environment facing the Fund during 2005. During the second quarter:

- Sales declined by 13.6% or $13.1 million when compared with last year,
principally due to the significant appreciation of the Canadian dollar
relative to the United States dollar during the quarter and a decline
in volume.

- Volume (expressed in cases of 24 cans or pouches) decreased by 6.5%
over last year, reflecting a 16.1% decline in can volume that more
than offset the 47.7% volume increase in the Fund's pouch product.
Were it not for the decline in can sales to the Fund's largest
customer, volume would have been down by less than 2.0%. On a more
positive note, based upon the shipments for the month of July 2005,
the sales declines experienced in the second quarter appear to have
reversed.

- EBITDA fell by 58.1% or $6.8 million over last year. EBITDA was
negatively impacted by the factors discussed above, together with
absorption by the Fund of higher raw material costs that could not be
passed on to customers and inefficiencies within the production
process arising from the newly commissioned pouch line.


As previously disclosed, during the quarter, the Fund secured a new
commitment from a major customer that includes take-or-pay provisions, which
should compensate for much of the decline in can volume experienced in the
first half of 2005. Sales under this new agreement should start to be
reflected in the Fund's results by early 2006. The Fund has also secured
several new customers who will launch during the second half of 2005 or early
2006 and whose volumes are expected to positively impact the Fund's
performance in the latter half of the year and into 2006. Despite the lack of
evidence of any pending price increase by the national brands, management
believes that such an increase will be forthcoming, as it is long overdue.

Total distributions declared represented a pay-out ratio of approximately
183% for the quarter and 102% since the inception of the Fund.

With a payout ratio of slightly more than 100% since inception, and the
continued increase in the cost of supplies and the ongoing uncertainty
concerning the timing of the overdue price increase, the Trustees believe it
prudent to reduce distributions on the Trust Units from their current rate of
9.0 cents to 5.0 cents, effective August 2005. This rate represents a payout
ratio of less than 100% of July's distributable cash, which will enable the
Fund to bolster its cash position during these challenging times. The Trustees
will consider increasing this level of payout when the expected improvement in
performance, as previously outlined, translates into an increased level of
distributable cash.

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



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 six months ended June 30, 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 August 12, 2005 and is
supplementary to and should be read in conjunction with the unaudited
consolidated financial statements for the quarters and six months ended
June 30, 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.

The nature of the Fund's operations does not give rise to critical
accounting estimates. The most significant accounts where such estimates might
apply are accounts receivable and inventory. In both cases required provisions
and/or reserves are specific in nature.

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 For the six months
ended June 30, ended June 30,
2005 2004 2005 2004
$ $ $ $
Sales 83,660 96,788 168,447 187,348
Cost of sales 75,656 82,038 150,258 158,247
--------------------------------------
Gross profit 8,004 14,750 18,189 29,101
Selling, general and administrative
expenses 7,036 7,060 12,617 13,313
--------------------------------------
Income before the undernoted 968 7,690 5,572 15,788
Financial expenses 1,705 708 3,140 2,023
--------------------------------------
Income (loss) before income taxes
and non-controlling interest (737) 6,982 2,432 13,765
--------------------------------------
Current income taxes (305) 286 (7) 953
Future income taxes (1,130) 541 (1,253) 893
--------------------------------------
Total income taxes (1,435) 827 (1,260) 1,846
--------------------------------------
Net income before non-controlling
interest 698 6,155 3,692 11,919
Non-controlling interest of Class B
Exchangeable Units 295 2,730 1,608 5,449
--------------------------------------
Net income for the period 403 3,425 2,084 6,470
--------------------------------------
--------------------------------------

Basic net income per Trust Unit 0.024 0.217 0.127 0.436
Diluted net income per Unit 0.024 0.213 0.127 0.428

Distributions per Trust Unit 0.2850 0.3150 0.6000 0.6300
Distributions (net of subordinated
amounts) per Class B Unit 0.1418 0.3150 0.4568 0.6300

Basic weighted average number of
Trust Units outstanding (000's) 16,645 15,818 16,404 14,825
Diluted weighted average number
of Units outstanding (000's) 28,926 28,861 28,919 27,868

Average US/Cdn exchange rate per
Bank of Canada 0.8039 0.7356 0.8094 0.7470


Operating Results for the Quarter Ended June 30, 2005

Sales for the quarter ended June 30, 2005, were $83.7 million, down 13.6%
or $13.1 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 as compared to that relationship for the same quarter
in the prior year had the effect of reducing sales by $6.9 million
relative to the second quarter of 2004;

2. a 16.1% decrease in can volume resulting in a net sales decrease of
$13.8 million primarily due to a 29.7% 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 47.7% increase in
pouch volume, resulting in an increase in sales of $5.9 million
relative to the second quarter of 2004. During the second quarter of
2005 the final phase of Menu's planned pouch capacity expansion
project was completed that enabled this growth in demand to be
accommodated. Lower than expected efficiencies were achieved in the
start-up of this equipment (as well as continued challenges on the
equipment installed in the fourth quarter of 2004) which resulted in
higher costs and lower production output.

During the final two weeks of the second quarter, the efficiencies of
the newly installed pouch equipment reached targeted levels, and as
such, should not adversely impact the final half of the year;

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 $2.6 million; and,

5. the prior year's second quarter sales included a payment under a
take-or-pay agreement (this agreement ended in the fourth quarter of
2004). The absence of such a payment in the second quarter of 2005
had the effect of reducing sales by $0.9 million.


Overall, volume (expressed in cases of 24 cans or pouches) was down 6.5%
compared to the quarter ended June 30, 2004. Can volume, which represented
76.2% of Menu's volume in the second quarter of 2005, contracted by 16.1%
(equating to a decline in total volume of 13.7%). This decline was primarily
attributable to the 29.7% decline in the second quarter of 2005 in case volume
of canned wet pet food to Menu's largest customer, which reduced second
quarter can volume by 5.6%. In addition, a Canadian co-pack customer, who had
relied upon Menu for its supply of certain products for sale in the Canadian
market, opted to reduce its dependence on Menu and self-manufacture that
product in its United States facilities. This loss of business had the effect
of reducing can volume by 4.1% as compared to canned volume in the second
quarter of 2004. The balance of the decline in canned wet pet food volume
arises from reduced sales to existing customers whose private label sales were
adversely impacted by national brand promotional activity during the quarter,
particularly within the pet specialty and supermarket channels.

The lower case sales of canned wet pet food as described above was
partially offset by the continued growth of Menu's pouch product. During the
second quarter of 2005, case sales of the pouch product, which represented
23.8% of total volume, grew by 47.7% compared to the prior year's second
quarter. This increase in pouch case sales had the affect of increasing Menu's
second quarter volume by 7.2%.

Gross profit decreased by $6.7 million (or 45.7%) for the quarter ended
June 30, 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 $6.9 million and that
translated into a reduction in gross profit of $1.0 million for the
quarter ended June 30, 2005;

2. Effect of Change in Sales Volume. As previously noted, total can
volume for the second quarter declined by 16.1% while total pouch
volume increased by 47.7%. The net impact of this change in sales
volume reduced gross profit by $2.8 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 effect of reducing comparative
gross profit by $0.9 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 second quarter
of 2004. In addition, the lower than expected efficiencies
experienced with the start-up of the new pouch equipment resulted in
approximately $0.5 million of extra costs in the quarter. During the
first half 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. Similarly, during the first
quarter of 2005, Menu initiated a price increase to its Canadian
customers. The net result of these activities in the second quarter
of 2005, together with mix and other variables, was to reduce gross
profit by $2.2 million; and

5. Decrease in Amortization. The amortization of capital projects
completed in the past year offset by the rise in the value of the
Canadian dollar relative to its US counterpart, resulted in a modest
decrease in the amortization associated with the cost of goods sold
of $0.2 million versus the second quarter of 2004.


Selling, general and administrative ("SG&A") expenses for the quarter
ended June 30, 2005 were relatively constant when compared to the prior year.
Savings were realized in lower SG&A spending in the second quarter of 2005 as
compared to the second quarter of the prior year, primarily as a result of the
stronger Canadian dollar as well as lower bonus expense reflecting the lower
earnings in 2005. These savings were largely offset by the $0.5 million
increase in the foreign exchange losses on Menu's United States dollar
exposure in working capital, as well as mark-to-market losses on forward
contracts entered into to hedge distributions in 2005 and the first quarter of
2006.

The foregoing resulted in EBITDA (See Note A) of $4.9 million for the
quarter ended June 30, 2005, a decrease of $6.8 million (or 58.1%) compared to
the same period in 2004. The strengthening of the Canadian dollar, relative to
the United States dollar, has reduced: sales, gross margin, 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.

In order to mitigate the impacts of short term fluctuations in foreign
exchange on distributable cash, the Fund has implemented a hedging program
under which United States dollar denominated cash flow is hedged, for periods
of up to one year, by way of foreign currency forward contracts. This approach
removes some of the uncertainty associated with generating cash flow in United
States dollars while paying distributions in Canadian dollars. Since the
program hedges distributions, which are capital in nature, it does not qualify
for hedge accounting.

Menu estimates that, absent its hedging program, the strengthening of the
Canadian dollar during the second quarter of 2005 versus the same period in
2004 reduced EBITDA by approximately $1.0 million and Distributable Cash by
approximately $0.8 million. Under its program for hedging distributions, the
Fund has entered into foreign exchange contracts to hedge distributions in
2005 and through to April 2006. During the quarter ended June 30, 2005, the
Fund realized a loss of $0.1 million on matured contracts and had unrealized
losses of $0.3 million on contracts that had yet to mature. These losses are
recorded in selling, general and administration expenses. These foreign
exchange contracts have an average rate of $0.8111.

Amortization (which is included in cost of sales and SG&A expense) in the
second quarter of 2005 was $0.1 million lower than in 2004. This decrease is
directly attributable to the effects of the strengthening of the Canadian
dollar relative to the United States dollar as compared to the prior year,
offset by the amortization on the $21.4 million of capital expenditures made
during the twelve months ended June 30, 2005 together with the full period
amortization on the $16.5 million of capital expenditures made during the
quarter ended June 30, 2004.

Financial expenses were $1.0 million greater during the quarter ended
June 30, 2005, than in the second quarter of 2004. This increase is primarily
attributable to the Fund's policy of recording unrealized gains and losses on
its outstanding interest rate swaps directly to the income statement. In the
second quarter of 2004 the Fund recorded a gain on its interest rate swaps of
$0.5 million while, in the second quarter of 2005 the Fund recorded a loss of
$0.1 million resulting in a $0.6 million change. In addition, higher interest
rates incurred on the Fund's variable rated bank indebtedness and senior
secured notes, when compared to the prior year, represented $0.4 million of
the increase.

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

Current income taxes during this quarter reflect a recovery of amounts
paid in 2004 and amounts accrued during the first quarter of 2005. 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 June 30, 2005, was $0.7 million,
compared to $6.2 million for the quarter ended June 30, 2004.



Operating Results for the Six Months Ended June 30, 2005

Sales for the six months ended June 30, 2005, were $168.4 million, down
10.1% or $18.9 million compared to the same period last year. This decrease is
attributable to:

1. 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 had the effect of reducing sales by $12.2 million
relative to the first six months of 2004;

2. a 12.5% decrease in can volume resulting in a net sales decrease of
$20.8 million primarily due to a 31.9% 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 37.9% increase in
pouch volume, resulting in an increase in sales of $10.2 million
relative to the first six months of 2004. During the second quarter
of 2005 the final phase of Menu's planned pouch capacity expansion
project was completed, enabling this growth in demand to be
accommodated. Lower than expected efficiencies were achieved in the
start-up of this equipment (as well as continued challenges on the
equipment installed in the fourth quarter of 2004) which resulted in
higher costs and lower production output;

4. the impact of a price increase to Menu's private label customers
initiated in the second quarter of 2004 in the United States and the
first quarter of 2005 in Canada, together with changes to sales mix
and other variables, had the effect of increasing sales by
$5.3 million; and,

5. the prior year's first six months' sales included payments under a
take-or-pay agreement (this agreement ended in the fourth quarter of
2004). The absence of such a payment in the first six months of 2005
had the effect of reducing sales by $1.4 million.


Overall, volume (expressed in cases of 24 cans or pouches) was down 4.4%
compared to the six months ended June 30, 2004. Can volume, which represented
76.9% of Menu's volume in the first six months of 2005, contracted by 12.5%
(equating to a decline in total volume of 10.5%). This decline was primarily
attributable to the 31.9% decline in the first six months of 2005 in case
volume of canned wet pet food to Menu's largest customer, which reduced the
first six month can volume by 6.4%. In addition, two other key customers
initiated an inventory reduction program within their organizations and this
had the effect of reducing the first six month's canned volume by 3.0% as
compared to the canned volume in the first half of 2004. During the second
quarter of 2005, a Canadian co-pack customer, who had relied upon Menu for its
supply of certain products for sale in the Canadian market, decided to reduce
its dependence on Menu and self-manufacture that product in its United States
facilities. This loss of business had the effect of reducing can volume by
0.8% as compared to canned volume in the first half of 2004. The balance of
the decline in canned wet pet food volume represents reduced sales to existing
customers whose private label sales were impacted by the national brand
promotional activity during the quarter, particularly within the pet specialty
and supermarket channels.

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 six months of 2005, case sales of the pouch product, which
represented 23.1% of total volume, grew by 37.9% compared to the first six
months of 2004. This increase in pouch case sales had the effect of increasing
Menu's first half volume by 6.1%.

Gross profit decreased by $10.9 million (or 37.5%) for the six months
ended June 30, 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 first six
months of 2005 had the effect of reducing sales by approximately
$12.2 million and that translated into a reduction in gross profit of
$1.9 million for the six months ended June 30, 2005;

2. Effect of Change in Sales Volume. As previously noted, total can
volume for the first six months declined by 12.5% while total pouch
volume increased by 37.9%. The net impact of this change in sales
volume reduced gross profit by $4.2 million.

3. Cessation of Take-or-Pay Agreement. In 2004, the first six months'
sales included a payment under a take-or-pay agreement (which
concluded in the fourth quarter of 2004) having the effect of
reducing comparative gross profit by $1.4 million; and

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 six
months of 2004. In addition, the lower than expected efficiencies
experienced with the start-up of the new pouch equipment resulted in
approximately $0.5 million in the second quarter. 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. Similarly, during the first
quarter of 2005, Menu initiated a price increase to its Canadian
customers. The net result of these activities in the first six months
of 2005, together with mix and other variables, was to reduce gross
profit by $3.4 million.


SG&A expenses for the six months ended June 30, 2005 decreased by
$0.7 million compared to the prior year. This decrease reflects savings of
approximately $0.9 million due to lower SG&A spending in the first half of
2005 as compared to the prior year, primarily as a result of the stronger
Canadian dollar as well as lower bonus expense reflecting the lower earnings
in 2005. These savings were offset by the $0.2 million increase in the foreign
exchange losses on Menu's United States dollar exposure in working capital, as
well as mark-to-market losses on forward contracts entered into to hedge
distributions in 2005 and the first quarter of 2006.

The foregoing resulted in EBITDA (See Note A) of $13.2 million for the
six months ended June 30, 2005, a decrease of $10.0 million (or 43.1%)
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 expenses, amortization, interest and
EBITDA. The Fund estimates that each change of $0.01 in the cost of the
Canadian dollar changes EBITDA by approximately $0.6 million and Distributable
Cash (see Note A) by approximately $0.46 million, on an annual basis. The Fund
estimates that the strengthening of the Canadian dollar during the first half
of 2005 versus the same period in 2004 reduced EBITDA by approximately
$1.9 million and Distributable Cash by approximately $1.4 million.

In order to mitigate the impacts of short term fluctuations in foreign
exchange on distributable cash, the Fund has implemented a hedging program
under which United States dollar denominated cash flow is hedged, for periods
of up to one year, by way of foreign currency forward contracts. This approach
removes some of the uncertainty associated with generating cash flow in United
States dollars while paying distributions in Canadian dollars. Since the
program hedges distributions, which are capital in nature, it does not qualify
for hedge accounting.

Amortization (which is included in cost of sales and SG&A expense) in the
first six months of 2005 was marginally higher than in 2004 ($0.2 million) on
a year-to-date basis. Amortization increased reflecting the amortization on
the $21.4 million of capital expenditures made during the twelve months ended
June 30, 2005 and the full period amortization for the $18.3 million of
capital expenditures made during the half year ended June 30, 2004. However,
this increase was largely offset by the effects of the strengthening of the
Canadian dollar, relative to the United States dollar.

Financial expenses were $1.1 million greater during the six months ended
June 30, 2005, than in the first half of 2004. This increase is primarily
attributable to higher interest rates incurred on the Fund's variable rated
bank indebtedness and senior secured notes when compared to the prior year
which represented $0.8 million of the increase. In addition, the Fund's policy
of recording unrealized gains and losses on its outstanding interest rate
swaps directly to the income statement had the Fund recording a gain of
$0.3 million in the first half of 2004, while in the first half of 2005 the
Fund recorded a nominal loss resulting in a net change of $0.3 million.

The Fund operates using a number of different legal structures
(e.g. partnerships, trusts, corporations, etc.) in a number of jurisdictions,
each of which is subject to income tax at different rates. This means that the
effective tax rate can vary from quarter-to-quarter, and year-to-year,
depending upon the taxing jurisdiction and the legal structure in which the
income is earned. During the six months ended June 30, 2005, the Fund's
effective tax rate fluctuated materially as a result, and reflects a
significant recovery as compared to the 12.9% effective tax rate for all of
fiscal 2004 and an effective tax rate of 13.4% for the first six months of
2004.

Net income before non-controlling interest of Class B Exchangeable Units
("Class B Units") for the six months ended June 30, 2005, was $3.7 million,
compared to $11.9 million for the six months ended June 30, 2004.

Liquidity

During the six months ended June 30, 2005, the Fund generated cash flow
from operations of $10.1 million, coupled with an increase in cash flow of
$1.1 million as a result of changes in non-cash working capital items. The
decrease in non-cash working capital items related primarily to a $2.8 million
reduction in accounts receivable offset by a $1.5 million increase in
inventory. The reduction in accounts receivable is consistent with the change
in sales. The increase in inventory is largely attributed to the increase in
empty pouch inventory (which has a longer lead-time than can purchases) for
the new business to be serviced by the new pouch line equipment that was
installed in the second quarter. In addition, during the first and second
quarters of the year, the Fund typically builds its finished goods inventory
in anticipation of the annual production shutdowns, which occur in the summer
months. Accordingly, an inventory build-up, consistent with expected sales
through to the completion of the production shutdowns is normal at this time
of year. Correspondingly, inventories tend to decrease in the second half of
the year as they are liquidated and turned into cash.

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. However, in the second quarter of 2005,
certain holders of Class B Units agreed to forego their entitlement to the
majority of their distributions beginning with the distribution payable for
the month of May 2005 and ending with the distribution payable for the month
of February 2006. Such Unitholders are entitled to a reimbursement of such
foregone distributions only to the extent that the Fund generates sufficient
distributable cash. For the six months ended June 30, 2005, the Fund announced
distributions on the Trust Units of $9.8 million ($0.600 per unit) and paid
$9.9 million. During this same period, the Fund announced distributions on the
Class B Units of $7.4 million ($0.600 per unit), certain Class B Unitholders
agreed to subordinate their right to $1.7 million of distributions and the
Fund paid $8.0 million in distributions.

In the six months ended June 30, 2005, the pay-out ratio (including the
distributions on the Class B Units) was 183.4% and 101.9% since inception.

The Fund's financial results for the second quarter caused the Fund to
breach certain covenants in its credit agreement with its bankers. On
August 12, 2005, the Fund's bankers waived these breaches, with the
stipulation that monthly distributions be limited to the amount of
distributable cash generated in the preceding calendar month. Having obtained
this waiver from its bankers, the Fund is in compliance with the covenants
contained in its credit agreement with its noteholders. However, as a result
of the Fund's performance for the second quarter, the Fund's subsidiaries are
not permitted to incur additional indebtedness without the prior written
consent of the banks and the noteholders.

The Fund is currently operating using cash on hand and cash generated by
the business. As discussed above, as regularly scheduled plant shutdowns are
completed, the inventory that has been "built up" to facilitate the shutdowns
will be converted back into cash. Management believes that the cash it has on
hand, that it is generating and that it will generate upon liquidation of its
inventory, will be sufficient to fund ongoing operations.

During the first and second quarters of 2005, the Fund paid out
distributions in excess of its distributable cash. As noted above, this will
not be permitted in the future. To the extent that the Fund does not generate
distributable cash sufficient to sustain the current rate of distributions
being paid, it will be necessary to reduce monthly distributions accordingly.

Capital Resources

During the six months ended June 30, 2005, Menu spent $8.0 million on
property, plant and equipment. The largest expenditures during this period
($5.5 million) reflected equipment purchases to expand pouch capacity as part
of a multi-phase expansion initiated in 2004. The final phase of this capital
project was completed during the second quarter of 2005.

Capital expenditures of a maintenance nature, which totaled $1.5 million
for the first six months of 2005, were financed from the cash flow of the
business. These maintenance capital expenditures were over and above the
$6.8 million (2004 - $7.1 million) for labour and parts expended by Menu for
the ongoing repairs and maintenance of its plants that have been expensed
during the first half of 2005 as part of cost of sales.



Outstanding Units

The following table highlights the number of Units outstanding:

Class B
Exchangeable
Trust Units 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
Conversion of Class B Units during the period 1,498,260 (1,498,260)
Options exercised during the period 50,402 -
---------------------------
June 30, 2005 17,688,898 11,133,655
---------------------------
---------------------------


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
June 30, 2005, 151,944 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

In the United States, in early 2004, and in Canada, in early 2005, Menu
initiated price increases to its private-label customers, following the price
increases taken by the leading national brands. Since the time of those
increases, Menu has continued to experience increases in certain operating and
administrative costs. Rising costs of steel and aluminum mean higher can
costs, while the strengthening of the Euro has increased the cost of empty
pouches purchased by Menu. Higher utility costs, together with increases in
property insurance and medical benefits (both escalating at rates well above
inflation) have pushed the cost of operating higher. Higher fuel costs,
together with new legislation in the United States on work hours for truck
drivers and trucking delays crossing the Canadian/United States border have
increased the cost of delivery.

For the contract-manufacturing portion of Menu's business, most of these
increases are automatically passed on to customers (albeit with some timing
delays). However, for its private-label business, Menu's practice, with
respect to price increases, has been to follow the brand leaders. While this
practice at times squeezes Menu's margins (as it did in the first half of
2005), it none-the-less helps to ensure that Menu's products are competitively
priced at retail.

Menu expects that input costs for its products in both Canada and the
United States will continue to rise. Absent a price increase, Menu expects
that its margins will continue to be squeezed. At the present time, there are
indications that some of the smaller market participants are attempting to
increase the price of wet pet food products. While such increases are
considered by management to be overdue, Menu has no indication that the
leading national brand participants are contemplating an increase nor are
there indications as to when such an increase may be forthcoming.

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 previously, Menu's response to this
closure adversely impacted the Fund's financial performance for its second,
third and fourth quarters of 2003. Two additional cases of BSE were discovered
in Canada on January 2 and 11, 2005. The latter case involved an animal born
after the feed ban in Canada should have prevented feed exposure to the
animal.

On December 23, 2003, the USDA announced the discovery of a single case
of BSE in Washington State, USA. This animal was subsequently found to be of
Canadian origin. The first case of BSE in a cow born in the United States was
a 12-year old Brahma-cross beef cow harvested on November 15, 2004. Because of
some testing method results discrepancies the case was not made public until
June 2005. This was the first cow identified in nearly 400,000 cattle which
had been tested over the past year.

The most recent case is significant as it clearly identifies BSE as a
North American rather than Canadian issue and supports that the incidence is
likely quite low.

With respect to finished product, the border remains open to pet food
transfer. However, there remain serious discrepancies with respect to raw
material supply in Canada compared to the United States. The former can only
use beef materials originating in the United States or BSE-free countries such
as New Zealand, and with respect to the United States, only certain materials
approved by the Canadian Food Inspection Agency (CFIA). The United States, on
the other hand, can use any beef materials other than certain tissues
identified as Specified Risk Materials which are thought to be highly
infective with respect to BSE. The source of these raw materials can even
include Canadian cattle.

Both governments have been made aware of this discrepancy and hopefully
logic will prevail to once again allow the use of Canadian beef in Canadian
pet food manufacturing facilities.

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 remains 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 subject to the temporary agreement among the Class B
Unitholders as discussed below.

On May 11, 2005 certain holders of Class B Exchangeable Units (including
senior management) representing more than 11 million units, agreed to forego a
portion of their distributions until at least February 2006. Specifically,
holders of approximately 3.4 million units have agreed to forego all
distributions, while holders of approximately 7.7 million units have agreed to
forego receipt of distributions in excess of $0.02 per unit. In addition,
those same holders of more than 11 million Class B Exchangeable Units have
agreed to forego their entitlement to convert into Trust Units until at least
February 2006. Such unitholders shall be entitled to a reimbursement of such
foregone distributions only to the extent that the Fund generates sufficient
distributable cash in the future.

Financial Covenants

Most of the Fund's outstanding debt is represented by its operating
facility and senior secured notes. As at June 30, 2005, the Fund had $29,309
drawn on its operating facility and $104,176 of senior secured notes
outstanding. Each of these facilities has financial covenants and cross
default provisions that must be met. The Fund was not in compliance with the
financial covenants relating to its operating facility as at June 30, 2005.
However, the Fund's bankers have provided it with a waiver of its breaches,
stipulating that monthly distributions be limited to the amount of
distributable cash generated in the preceding calendar month. As conditions of
the bankers providing the waiver and permitting further distributions to
unitholders, the Fund agreed to the payment of a nominal consent fee and to a
change in the method for charging interest, whereby the rates charged increase
as the ratio of debt to EBITDA increases. The Fund continues to work with its
bankers regarding its operating facility.

Menu's performance in the first half of 2005 makes it likely that the
Fund will continue to breach these covenants in the third quarter and will
once again require a waiver from its bankers. 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.

In the present economic climate, the most significant risks and
uncertainties facing the Fund and its ability to sustain distributions at
current levels, result from the continued strength of the Canadian dollar
relative to the United States dollar, and from the ongoing inability to pass
input cost increases on to customers. Since a majority of the Fund's
operations and assets are in the United States, a "natural" business hedge
exists. However, while it is possible to hedge distributable cash flow against
future fluctuations in the currency (as has been done), it is not possible to
hedge business operations, so a continuation of a strong Canadian dollar will
have a negative impact on the relative contribution of the Fund's United
States denominated business. Similarly, if the Fund must continue to absorb
increased raw material costs without the benefit of a price increase to its
customers, gross margin will remain depressed and profitability and the Fund's
ability to increase distributions will be curtailed. Given the nature of our
industry, price increases are largely beyond Menu's control.

Furthermore, stipulations made by the Fund's bankers now require that
monthly distributions be limited to the amount of distributable cash generated
in the preceding calendar month. This means that the Fund can no longer borrow
from available credit facilities to bridge any volatility in distributable
cash and could introduce a measure of volatility in the amount of the monthly
distributions that can be paid.

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 second quarter of
the Fund:



For the Quarter ended
June 30
2005 2004
$'000's $'000's

Net income 403 3,425
Add:
Non-controlling interest of Class B Exchangeable
Units 295 2,730
Amortization of property, plant and equipment 3,796 3,646
Amortization of supply contract 142 369
Future income taxes (1,130) 541
Current income taxes (305) 286
Interest 1,705 708
---------------------
EBITDA 4,906 11,705
---------------------
---------------------


For the Quarter ended
June 30
2005 2004
$'000's $'000's

Cash flow from operating activities 8,096 6,244
Adjust for:
Change in non-cash working capital items (4,083) 4,519
Maintenance capital expenditures (428) (538)
Principal repayments (41) (39)
---------------------
Distributable Cash 3,544 10,186
---------------------
---------------------


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

For the
six months ended Since Inception
June 30 (May 22, 2002)
to June 30
2005 2004 2005
$'000's $'000's $'000's

Net income 2,084 6,470 28,281
Add:
Non-controlling interest of Class B
Exchangeable Units 1,608 5,449 24,873
Amortization of property, plant
and equipment 7,352 6,701 43,940
Amortization of supply contract 279 695 1,700
Future income taxes (1,253) 893 6,625
Current income taxes (7) 953 1,030
Interest 3,140 2,023 13,793
----------------------------------------
EBITDA 13,203 23,184 120,242
----------------------------------------
----------------------------------------


For the
six months ended Since Inception
June 30 (May 22, 2002)
to June 30
2005 2004 2005
$'000's $'000's $'000's

Cash flow from operating activities 11,191 (1,361) 74,322
Adjust for:
Change in non-cash working capital
items (1,061) 21,858 32,346
Maintenance capital expenditures (1,521) (774) (8,025)
Principal repayments (78) (63) (464)
----------------------------------------
Distributable Cash 8,531 19,660 98,179
----------------------------------------
----------------------------------------



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

As at As at
June 30, December 31,
2005 2004

$ $
Assets

Current assets
Cash 3,637 -
Accounts receivable
Trade 17,321 18,716
Other 1,173 2,316
Inventories (note 3) 61,870 59,120
Prepaid expenses and sundry assets 1,836 1,898
Income taxes recoverable 626 259
Future income taxes (note 13) 3,670 1,874
-------------------------------------------------------------------------
Total Current Assets 90,133 84,183
Property, plant and equipment (note 4) 119,087 116,130
Goodwill 165,387 165,387
Other assets (note 5) 6,239 6,053
-------------------------------------------------------------------------
Total Assets 380,846 371,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current liabilities
Bank indebtedness (note 6) 29,309 10,398
Accounts payable and accrued liabilities 22,512 21,735
Distributions payable (note 10) 3,362 5,674
Current portion of long-term debt (note 7) 162 157
-------------------------------------------------------------------------
Total Current Liabilities 55,345 37,964
Long-term debt (note 7) 104,362 102,434
Future income taxes (note 13) 18,299 17,381
-------------------------------------------------------------------------
Total Liabilities 178,006 157,779
-------------------------------------------------------------------------

Class B Exchangeable Units (note 8) 68,056 81,363
-------------------------------------------------------------------------

Unitholders' Equity

Trust Units (note 9) 169,943 160,372
Contributed surplus (note 11) 553 808
Deficit (26,938) (19,182)
Foreign currency translation adjustment (8,774) (9,387)
-------------------------------------------------------------------------
Total Unitholders' Equity 134,784 132,611
-------------------------------------------------------------------------
Total Liabilities and Unitholders' Equity 380,846 371,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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, unaudited)

Quarter ended
June 30,
2005 2004

$ $

Sales 83,660 96,788
Cost of sales (note 14) 75,656 82,038
-------------------------------------------------------------------------
Gross profit 8,004 14,750
Selling, general and administrative expenses 7,036 7,060
-------------------------------------------------------------------------
Income before the undernoted 968 7,690
Financial expenses (note 12) 1,705 708
-------------------------------------------------------------------------
Income (loss) before income taxes and
non-controlling interest (737) 6,982
-------------------------------------------------------------------------
Current income taxes (305) 286
Future income taxes (1,130) 541
-------------------------------------------------------------------------
Total income taxes (note 13) (1,435) 827
-------------------------------------------------------------------------
Net income before non-controlling interest 698 6,155
Non-controlling interest of Class B
Exchangeable Units 295 2,730
-------------------------------------------------------------------------
Net income for the quarter 403 3,425
Deficit - beginning of quarter (22,594) (13,842)
Distributions (note 10) (4,747) (4,985)
-------------------------------------------------------------------------
Deficit - end of quarter (26,938) (15,402)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic net income per Trust Unit $ 0.024 $ 0.217
Diluted net income per Trust Unit $ 0.024 $ 0.213

Basic weighted average number of Trust
Units outstanding (note 9) 16,644,752 15,818,326

Diluted weighted average number of Trust
Units outstanding (note 9) 28,925,871 28,860,698

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, unaudited)

Six months ended
June 30,
2005 2004

$ $

Sales 168,447 187,348
Cost of sales (note 14) 150,258 158,247
-------------------------------------------------------------------------
Gross profit 18,189 29,101
Selling, general and administrative expenses 12,617 13,313
-------------------------------------------------------------------------
Income before the undernoted 5,572 15,788
Financial expenses (note 12) 3,140 2,023
-------------------------------------------------------------------------
Income before income taxes and non-controlling
interest 2,432 13,765
-------------------------------------------------------------------------
Current income taxes (7) 953
Future income taxes (1,253) 893
-------------------------------------------------------------------------
Total income taxes (note 13) (1,260) 1,846
-------------------------------------------------------------------------
Net income before non-controlling interest 3,692 11,919
Non-controlling interest of Class B Exchangeable
Units 1,608 5,449
-------------------------------------------------------------------------
Net income for the period 2,084 6,470
Deficit - beginning of period (19,182) (12,438)
Distributions (note 10) (9,840) (9,434)
-------------------------------------------------------------------------
Deficit - end of period (26,938) (15,402)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Deficit comprises:
Accumulated net income 28,108 19,777
Accumulated distributions (55,046) (35,179)
-------------------------------------------------------------------------
(26,938) (15,402)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic net income per Trust Unit $ 0.127 $ 0.436
Diluted net income per Trust Unit $ 0.127 $ 0.428

Basic weighted average number of Trust Units
outstanding (note 9) 16,403,707 14,825,217

Diluted weighted average number of Trust Units
outstanding (note 9) 28,919,059 27,868,061

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, unaudited)

Quarter ended
June 30,
2005 2004

$ $

Cash provided by (used in)
Operating activities
Net income for the quarter 403 3,425
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units 295 2,730
Amortization of property, plant and equipment 3,796 3,646
Amortization of supply contract 142 369
Mark-to-market adjustment 406 (84)
Amortization of deferred financing costs 52 136
Vesting of long-term incentive plan 49 -
Future income taxes (1,130) 541
-------------------------------------------------------------------------
4,013 10,763
Change in non-cash working capital items
Accounts receivable 3,712 (1,845)
Inventories 748 (152)
Prepaid expenses and sundry assets 225 186
Income taxes recoverable (476) 103
Accounts payable and accrued liabilities (126) (2,811)
-------------------------------------------------------------------------
8,096 6,244
-------------------------------------------------------------------------
Financing activities
Increase in bank indebtedness 3,674 -
Issuance of Trust Units, net 26 100
Long-term debt repayments (41) (39)
Distributions to Trust Units (4,855) (4,161)
Distributions to Class B Exchangeable Units (1,326) (4,800)
-------------------------------------------------------------------------
(2,522) (8,900)
-------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (1,927) (16,525)
Other assets (10) (7)
-------------------------------------------------------------------------
(1,937) (16,532)
-------------------------------------------------------------------------
Increase in cash 3,637 (19,188)
Cash - beginning of quarter - 21,119
-------------------------------------------------------------------------
Cash - end of quarter 3,637 1,931
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary information

Income taxes paid 249 316
Interest paid 1,532 921

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



Six months ended
June 30,
2005 2004

$ $

Cash provided by (used in)
Operating activities
Net income for the period 2,084 6,470
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units 1,608 5,449
Amortization of property, plant and
equipment 7,352 6,701
Amortization of supply contract 279 695
Mark-to-market adjustment (109) 41
Amortization of deferred financing costs 103 248
Vesting of long-term incentive plan 66 -
Future income taxes (1,253) 893
-------------------------------------------------------------------------
10,130 20,497
Change in non-cash working capital items
Accounts receivable 2,790 (2,692)
Inventories (1,457) (10,534)
Prepaid expenses and sundry assets 108 79
Income taxes recoverable (203) 721
Accounts payable and accrued liabilities (177) (9,432)
-------------------------------------------------------------------------
11,191 (1,361)
-------------------------------------------------------------------------
Financing activities
Increase in bank indebtedness 18,777 -
Issuance of Trust Units, net 150 36,217
Long-term debt repayments (78) (211)
Distributions to Trust Units (9,943) (8,343)
Distributions to Class B Exchangeable Units (7,958) (9,600)
-------------------------------------------------------------------------
948 18,063
-------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (7,957) (18,262)
Other assets (545) (4)
-------------------------------------------------------------------------
(8,502) (18,266)
-------------------------------------------------------------------------
Increase in cash 3,637 (1,564)
Cash - beginning of period - 3,495
-------------------------------------------------------------------------
Cash - end of period 3,637 1,931
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary information

Income taxes paid 357 263
Interest paid 2,764 2,017

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



Menu Foods Income Fund
Notes to Consolidated Financial Statements
June 30, 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 on 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 June 30, 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 disclosure 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 suggest an impairment of the carrying
value. Impairment is recognized when the estimated fair value of the
goodwill is lower than the carrying value.

j) 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. Should an
impairment loss be 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 June 30, 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, should be shown as non-controlling
interest. This change in accounting policy was given retroactive
application.

3. Inventories

June 30, December 31,
2005 2004
$ $

Raw materials and packaging 16,820 15,794
Finished goods 45,050 43,326
---------------------------------------------------------------------
61,870 59,120
---------------------------------------------------------------------
---------------------------------------------------------------------

4. Property, plant and equipment

June 30, 2005
Accumulated
Cost amortization Net
$ $ $

Land 5,412 - 5,412
Buildings 45,803 4,449 41,354
Machinery and equipment 92,724 27,153 65,571
Other property and equipment 14,674 8,958 5,716
Equipment under capital lease 809 699 110
Construction-in-progress 924 - 924
---------------------------------------------------------------------
160,346 41,259 119,087
---------------------------------------------------------------------
---------------------------------------------------------------------


December 31, 2004
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

June 30, 2005
Accumulated
Cost amortization Net
$ $ $

Supply contract 6,148 1,466 4,682
Deferred financing charges 1,711 606 1,105
Deferred long-term incentive plan
(note 11) 518 66 452
---------------------------------------------------------------------
8,377 2,138 6,239
---------------------------------------------------------------------
---------------------------------------------------------------------


December 31, 2004
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$23,914 ($29,309) was drawn as at June 30, 2005
(December 31, 2004 - US$7,241 ($8,704)). This operating facility
bears interest at Canadian prime rate (4.25% as at June 30, 2005),
U.S. base rate (6.00% as at June 30, 2005) or Euro rate plus 1.50%
(5.34% as at June 30, 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), which presently limit borrowings under this facility to the
amount drawn as at June 30, 2005.

Performance during the second quarter has caused the Fund to breach
certain covenants in its credit agreement with its bankers. On
August 12, 2005 the Fund's bankers waived these breaches, with the
stipulation that monthly distributions be limited to the amount of
distributable cash generated in the preceding calendar month. In
consideration for receiving this waiver and permitting further
distributions to unitholders, the Fund agreed to pay a US$30 consent
fee and to accept a sliding scale of increased interest rates, which
apply whenever previously specified covenants are exceeded. The
performance in the first half of 2005 makes it likely that the Fund
will continue to breach these covenants in the third quarter and will
once again require a waiver from its bankers.

7. Long-term debt

June 30, December 31,
2005 2004
$ $

Senior secured notes (a) 104,176 102,170
Obligation under capital lease (b) 162 238
Forgivable loan (c) 186 183
---------------------------------------------------------------------
104,524 102,591
Less: Current portion 162 157
---------------------------------------------------------------------
104,362 102,434
---------------------------------------------------------------------
---------------------------------------------------------------------


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 June 30, 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, having obtained a waiver from its bankers
(note 6), is in compliance with these covenants at June 30, 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:

June 30, December 31,
2005 2004
$ $

2005 84 168
2006 84 84
---------------------------------------------------------------------
Total minimum lease payments 168 252
Less: Amounts representing interest at 6.60% 6 14
---------------------------------------------------------------------
Balance of obligation 162 238
Less: Current portion 162 157
---------------------------------------------------------------------
- 81
---------------------------------------------------------------------
---------------------------------------------------------------------


c) Forgivable loan

During 2002, the Fund finalized an agreement whereby the City of
Emporia provided incentive money in the form of a non-interest
bearing forgivable loan. As at June 30, 2005, $186 (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 Carrying
of units value
$
Class B Exchangeable Units of MFLP
December 31, 2003 12,631,915 86,878
Share of net income for the period 10,401
Distributions for the period (15,916)
---------------------------------------------------------------------
December 31, 2004 12,631,915 81,363
Conversion of Class B units to Trust units
(note 9) (1,498,260) (9,166)
Share of net income for the period 1,608
Distributions for the period (note 10) (5,749)
---------------------------------------------------------------------
June 30, 2005 11,133,655 68,056
---------------------------------------------------------------------
---------------------------------------------------------------------

Except as described below, 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.

During the quarter, certain holders of Class B Exchangeable Units
agreed to subordinate their entitlement to distributions for a ten
month period beginning with the distributions in respect of the month
of May 2005 and ending with the distributions in respect of the month
of February 2006. Such unitholders shall be entitled to a
reimbursement of such subordinated distributions before distributions
can be increased from their current level of 9 cents per unit, per
month. No obligation arises to the Fund in respect of these
subordinated amounts until it has generated sufficient distributable
cash and, accordingly, no amount has been accrued in distributions
payable. These same unitholders have agreed to forego their
entitlement to convert into Trust units until at least February 2006.

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 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 16,140,236 171,672 11,300 160,372
Conversion of Class B Units
during the quarter ended
June 30, 2005 (note 8) 1,498,260 9,166 - 9,166
Exercise of options during
the quarter ended (note 11)
March 31, 2005 41,573 347 - 347
June 30, 2005 8,829 58 - 58
---------------------------------------------------------------------
June 30, 2005 17,688,898 181,243 11,300 169,943
---------------------------------------------------------------------
---------------------------------------------------------------------


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. There were 11,133,655 Special Trust Units outstanding as at
June 30, 2005 (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 June 30,
2005 2004

Weighted average number of Trust Units
outstanding - basic 16,644,752 15,818,326
Weighted average number of Class B Units
outstanding - basic (note 8) 12,170,912 12,631,915
Dilutive effect of options (note 11) 110,207 410,457
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,925,871 28,860,698
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended June 30,
2005 2004

Weighted average number of Trust Units
outstanding - basic 16,403,707 14,825,217
Weighted average number of Class B Units
outstanding - basic (note 8) 12,400,140 12,631,915
Dilutive effect of options (note 11) 115,212 410,929
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,919,059 27,868,061
---------------------------------------------------------------------
---------------------------------------------------------------------


10. Distributions

Distributions declared during the period ended June 30, 2005 were as
follows:

Total Per unit
Unitholder Record Date $ $ Paid or 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
April 29, 2005 1,699 0.1050 May 16, 2005
May 31, 2005 1,456 0.0900 June 15, 2005
June 30, 2005 1,592 0.0900 July 15, 2005
---------------------------------------------------------------------
9,840 0.6000
---------------------------------------------------------------------
---------------------------------------------------------------------


During the quarter and six months ended June 30, 2004, distributions
to Trust Units amounted to $4,985 ($0.315 per unit) and $9,434
($0.630 per unit), respectively.

Total Per unit
Unitholder Record Date $ $ Paid or payable

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
April 29, 2005 1,326 0.1050 August 15, 2005
May 31, 2005 1,137 0.0900 August 15, 2005
June 30, 2005 1,002 0.0900 August 15, 2005
---------------------------------------------------------------------
7,444 0.6000
Distributions subordinated
(note 8) (1,695)
---------------------------------------------------------------------
5,749
---------------------------------------------------------------------
---------------------------------------------------------------------


During the quarter and six months ended June 30, 2004, distributions
to Class B Units amounted to $3,979 ($0.315 per unit) and $7,958
($0.630 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
June 30, 2005, 151,944 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.

June 30, December 31,
2005 2004

Opening balance 202,346 582,759
Exercised (50,402) (380,413)
---------------------------------------------------------------------
Ending balance 151,944 202,346
---------------------------------------------------------------------
---------------------------------------------------------------------


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

June 30, December 31,
2005 2004
$ $

Opening balance 808 2,847
Options exercised (255) (2,039)
---------------------------------------------------------------------
Ending balance 553 808
---------------------------------------------------------------------
---------------------------------------------------------------------


As the Trust Unit options are exercised, the associated contributed
surplus is reclassified to Trust Units (note 9). During the quarter
and six months ended June 30, 2005, $33 and $255 was reclassified to
Trust Units (2004 - $182 and $355).

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 June 30,
2005 2004
$ $

Interest on senior secured notes 1,243 809
Interest on bank indebtedness 318 206
Interest on capital leases 3 59
Net loss/(gain) on interest rate swap 86 (484)
Amortization of deferred financing charges 52 136
Other, net 3 (18)
---------------------------------------------------------------------
1,705 708
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended June 30,
2005 2004
$ $

Interest on senior secured notes 2,356 1,583
Interest on term loans and bank indebtedness 594 356
Interest on capital leases 6 119
Net loss (gain) on interest rate swap 41 (279)
Amortization of deferred financing charges 103 248
Other, net 40 (4)
---------------------------------------------------------------------
3,140 2,023
---------------------------------------------------------------------
---------------------------------------------------------------------


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 June 30,
2005 2004
$ $

Income (loss) before income taxes (737) 6,982
Income of the Fund subject to tax in the hands
of recipients (2,078) (1,918)
---------------------------------------------------------------------
Income (loss) of subsidiary entities subject
to tax (2,815) 5,064
---------------------------------------------------------------------
Income taxes at statutory rate (970) 1,746
Increase (decrease) resulting from:
Effect of foreign tax rate (672) (425)
Large corporations tax (270) 47
Unrecognized tax loss carry-forward 135 (312)
Other and permanent differences 342 (229)
---------------------------------------------------------------------
(1,435) 827
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended June 30,
2005 2004
$ $

Income before income taxes 2,432 13,765
Income of the Fund subject to tax in the
hands of recipients (5,203) (5,136)
---------------------------------------------------------------------
Income (loss) of subsidiary entities subject
to tax (2,771) 8,629
---------------------------------------------------------------------
Income taxes at statutory rate (955) 2,975
Increase (decrease) resulting from:
Effect of foreign tax rate (1,088) (831)
Large corporations tax (200) 100
Unrecognized tax loss carry-forward 904 (312)
Other and permanent differences 79 (86)
---------------------------------------------------------------------
(1,260) 1,846
---------------------------------------------------------------------
---------------------------------------------------------------------


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

June 30, December 31,
2005 2004
$ $

Current future income tax assets:
Accounts receivable, accounts payable and
accrued liabilities 575 373
Inventory provisions 1,710 1,903
Less: Share of net partnership income not
yet subject to tax 1,385 (402)
---------------------------------------------------------------------
3,670 1,874
---------------------------------------------------------------------
---------------------------------------------------------------------
Long-term future income tax liabilities:
Property, plant and equipment 17,566 18,030
Withholding tax on foreign retained earnings 445 245
Tax benefits of loss carry-forwards (4,098) (3,332)
Valuation allowance 3,026 2,394
Other 1,360 44
---------------------------------------------------------------------
18,299 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 $65 and $133 for the
quarter and six months ended June 30, 2005 (2004 - $78 and $153).
These expenses are included in cost of sales.

15. Obligations under operating leases

Future minimum payments under operating leases at June 30, 2005 are
as follows:

$
2005 1,045
2006 1,726
2007 894
2008 774
2009 700
Thereafter 289
---------------------------------------------------------------------
5,428
---------------------------------------------------------------------
---------------------------------------------------------------------


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 $376 and $858 for the
quarter and six months ended June 30, 2005 (2004 - $428 and $842).

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 June 30,
2005 2004
$ $

Sales
Canada
Domestic 11,978 19,672
Foreign 18,686 16,592
Intersegment transfers 2,527 2,154
---------------------------------------------------------------------
33,191 38,418
---------------------------------------------------------------------
United States
Domestic 55,538 64,264
Foreign 221 -
Intersegment transfers 18,510 20,685
---------------------------------------------------------------------
74,269 84,949
---------------------------------------------------------------------
107,460 123,367
Elimination of intersegment transfers (21,037) (22,839)
Discounts (2,763) (3,740)
---------------------------------------------------------------------
83,660 96,788
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended June 30,
2005 2004
$ $

Sales
Canada
Domestic 26,175 32,818
Foreign 35,011 38,392
Intersegment transfers 4,317 7,292
---------------------------------------------------------------------
65,503 78,502
---------------------------------------------------------------------
United States
Domestic 112,327 123,801
Foreign 632 -
Intersegment transfers 35,892 43,107
---------------------------------------------------------------------
148,851 166,908
---------------------------------------------------------------------
214,354 245,410
Elimination of intersegment transfers (40,209) (50,399)
Discounts (5,698) (7,663)
---------------------------------------------------------------------
168,447 187,348
---------------------------------------------------------------------
---------------------------------------------------------------------


June 30, December 31,
2005 2004
$ $

Property, plant and equipment
Canada 34,305 33,117
United States 126,041 116,419
---------------------------------------------------------------------
160,346 149,536
Less: Accumulated amortization 41,259 33,406
---------------------------------------------------------------------
119,087 116,130
---------------------------------------------------------------------
---------------------------------------------------------------------


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

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 June 30, 2005, the net Canadian amounts to be received under
foreign currency forward contracts were $14,795 (December 31, 2004 -
$nil), the weighted average contractual exchange rate was $1.2329 and
the settlement dates of outstanding contracts are all less than one
year. The exchange rate as at the quarter end was $1.2256. The
mark-to-market value of the contracts as at June 30, 2005 resulted in
a gain of $149 (2004 - loss of $320). 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 June 30,
2005 resulted in an unrealized gain of $99 (December 31, 2004 - $17)
and resulted in loss, including the impact of the amortization on the
transitional amount, of $86 and $41 for the quarter and six months
ended June 30, 2005, respectively (2004 - gains of $484 and $279),
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 17% 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