Menu Foods Income Fund
TSX : MEW.UN

Menu Foods Income Fund

November 09, 2005 12:03 ET

Menu Foods Income Fund Announces 2005 Third Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Nov. 9, 2005) -

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 third quarter ended September 30, 2005.

A conference call to review these results will take place tomorrow,
November 10, 2005 at 8:30 a.m. EST (Toronto time). The conference call will be
chaired by Paul Henderson, Menu's President and Chief Executive Officer. Paul
will be joined on the call by 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
1-866-250-4910. A replay will be available from approximately one hour after
the end of the conference call until November 24, 2005 by dialing 416-640-1917
or 1-877-289-8525, using passcode 21160445 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
-------------------------------------------------------------------------

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

Quarter ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
($ millions) ($ millions) ($ millions) ($ millions)

Sales 93.6 102.0 262.1 289.4
Income before non-
controlling interest
and goodwill
impairment loss 0.3 5.4 4.0 17.3
Goodwill impairment
loss 70.3 - 70.3 -
EBITDA 6.2 11.4 19.4 34.6
Distributable cash 3.9 9.0 12.4 28.6
Distributions declared 3.8 9.0 19.4 26.4
Distributions declared
per Trust unit ($) 0.1900 0.3150 0.7900 0.9450
Distributions declared
(net of subordinated
amounts) per Class B
unit ($) 0.0416 0.3150 0.4984 0.9450

Performance during the quarter continues to reflect the challenging
business environment that has impacted the Fund during 2005. During the third
quarter:

- Sales declined by 8.2% or $8.4 million when compared with last year,
due in large part to the significant appreciation of the Canadian
dollar relative to the United States dollar.

- Volume (expressed in cases of 24 cans or pouches) decreased by 3.9%
compared to last year. Were it not for the decline in can sales to the
Fund's largest customer total volume would have been up by 1.8%. Pouch
volume continued to perform well, growing 20.3% over the same period
last year.

- EBITDA of $6.2 million was $5.2 million or 45.9% less than last year
and $1.3 million or 25.6% higher than in the second quarter. EBITDA
was negatively impacted by the factors above, together with continued
absorption of higher raw material and manufacturing costs that could
not be passed on to customers. The Fund believes that the national
brand manufacturers have experienced cost increases similar in
magnitude to its own. Historically, this situation has resulted in
price increases being initiated by the national brand manufacturers.

- The net loss reflected a $70.3 million impairment in goodwill that
arose upon application of the assessment required under Canadian
generally accepted accounting principles. This impairment charge had
no impact upon EBITDA or the Fund's ability to generate distributable
cash or the ability to pay future distributions or on its credit
agreements.


Total distributions declared during the third quarter of 2005 correspond
to a pay-out ratio of 98.9%. Had the current monthly distribution rate of
5.0 cents per Trust Unit, implemented in August, been in effect for the entire
quarter, the pay-out ratio would have been 80.6%.

As reported last quarter, the Fund has secured a new commitment from a
major customer that includes take-or-pay provisions that 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 new customers that have recently
launched programs or will be launching in late 2005 or early 2006, as well as
several customers who will be expanding their wet product offerings. The
combination of these new customers and expanded programs are expected to
positively impact the Fund's performance. Organization changes, including,
among other things, an enhanced management structure and a renewed focus on
increasing productivity and reducing costs, designed to reposition Menu to
deliver this new business, should translate into improved earnings in 2006.

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



Paul K. Henderson
President and Chief Executive Officer
Menu Foods GenPar Limited
Administrator of Menu Foods Income Fund


Management's Discussion and Analysis of Financial Results
(For the quarter and nine months ended September 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 November 9, 2005 and is
supplementary to and should be read in conjunction with the unaudited
consolidated financial statements for the quarters and nine months ended
September 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 nine months
ended September 30, ended September 30,
2005 2004 2005 2004
$ $ $ $
Sales 93,643 102,030 262,090 289,378
Cost of sales 86,368 88,997 236,626 247,244
-------------------------------------------
Gross profit 7,275 13,033 25,464 42,134
Selling, general and
administrative expenses 5,807 5,720 18,424 19,033
-------------------------------------------
Income before the undernoted 1,468 7,313 7,040 23,101
Goodwill impairment loss 70,295 - 70,295 -
Financial expenses 1,729 1,269 4,869 3,292
-------------------------------------------
Income (loss) before income
taxes and non-controlling
interest (70,556) 6,044 (68,124) 19,809
-------------------------------------------
Current income taxes (10) (67) (17) 886
Future income taxes (597) 744 (1,850) 1,637
-------------------------------------------
Total income taxes (607) 677 (1,867) 2,523
-------------------------------------------
Income (loss) before non-
controlling interest (69,949) 5,367 (66,257) 17,286
Non-controlling interest of
Class B Exchangeable Units (26,997) 2,380 (25,389) 7,829
-------------------------------------------
Net (loss) income for the
period (42,952) 2,987 (40,868) 9,457
-------------------------------------------
-------------------------------------------

Basic net (loss) income per
Trust Unit (2.425) 0.189 (2.426) 0.624
Diluted net (loss) income per
Unit (2.425) 0.186 (2.426) 0.613
Distributions per Trust Unit 0.1900 0.3150 0.7900 0.9450
Distributions (net of
subordinated amounts) per
Class B Unit 0.0416 0.3150 0.4984 0.9450

Basic weighted average number
of Trust Units outstanding
('000s) 17,713 15,829 16,845 15,162
Diluted weighted average
number of Units outstanding
('000s) 28,943 28,870 28,933 28,202

Average US/Cdn exchange rate
per Bank of Canada 0.8322 0.7650 0.8169 0.7529


Operating Results for the Quarter Ended September 30, 2005

Sales for the quarter ended September 30, 2005, were $93.6 million, down
8.2% or $8.4 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
$7.3 million relative to the third quarter of 2004;

2. a 9.9% decrease in can volume, combined with a 20.3% increase in
pouch volume resulting in an overall 3.9% decrease in volume and in a
net sales decrease of $4.0 million relative to the third quarter of
2004;

3. the impact of periodic price increases to pass the effects of
increasing costs onto Menu's co-pack customers, together with a price
increase to Menu's Canadian private label customers initiated in the
first quarter of 2005, changes to sales mix and other variables, had
the effect of increasing sales on a comparative basis by
$1.3 million; and,

4. the prior year's third quarter sales included a repayment under a
take-or-pay agreement (this agreement ended in the fourth quarter of
2004). The third quarter of 2005 reflected a receivable of
$0.5 million under a new take-or-pay agreement with the same
customer. The combined impacts of these payments in the third quarter
of 2005 had the effect of increasing sales by $1.6 million relative
to the same period last year.


Overall, volume (expressed in cases of 24 cans or pouches) was down 3.9%
compared to the quarter ended September 30, 2004. Can volume, which
represented 75.0% of Menu's volume in the third quarter of 2005, contracted by
9.9% (equating to a decline in total volume of 7.9%). This decline was
primarily attributable to the 30.2% decline in the third quarter of 2005 in
case volume of canned wet pet food to Menu's largest customer, which reduced
third quarter can volume by 7.1%. In addition, a Canadian co-pack customer who
had relied on 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 3.8% as compared to canned volume in the third
quarter of 2004. The volume of canned wet pet food sold to the balance of
Menu's customers increased by 1.3% (equating to a 1.0% increase in total
canned volume).

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
third quarter of 2005, case sales of the pouch product, which represented
25.0% of total volume, grew by 20.3% compared to the prior year's third
quarter. This increase in pouch case sales had the effect of increasing Menu's
volume for the quarter by 4.0%.

The Fund has certain expectations when looking ahead to the fourth
quarter of 2005. On a comparative basis to the fourth quarter of 2004, sales
of cans to its largest customer should improve since the prior year's fourth
quarter was the first quarter to show softness in this customer's can
purchases. However, it is anticipated that pouch sales to all customers in the
final quarter of 2005 will be at or slightly less than last year's levels.
This situation arose because the Fund's largest customer is endeavouring to
reduce the level of pouch inventory in its distribution system, and reflected
the fact that, in the fourth quarter of 2004, this same customer was building
inventory throughout its system to support a January 2005 launch of pouches.
Pouch sales to this customer are expected to recover by the second quarter of
2006, but until then a take-or-pay contract with that customer should
partially mitigate the impact of any shortfall on the Fund's performance.



Gross profit decreased by $5.8 million (or 44.2%) for the quarter ended
September 30, 2005, compared to the prior year. This decrease is attributable
to:

1. Foreign Exchange Effect on Sales and Cost of Sales. The
strengthening of the Canadian dollar relative to the United States
dollar during the quarter had the effect of reducing sales by
approximately $7.3 million and that translated into a reduction in
gross profit of $0.9 million for the quarter ended September 30,
2005;

2. Effect of Change in Sales Volume. As previously noted, total can
volume for the second quarter declined by 9.9% while total pouch
volume increased by 20.3%. The net impact of this change in sales
volume reduced gross profit by $0.6 million;

3. Cessation of Take-or-Pay Agreement. In 2004, the third quarter's
sales included a repayment under a take-or-pay agreement (which
concluded in the fourth quarter of 2004) which, together with an
amount due under a new take-or-pay agreement with the same customer,
had the effect of increasing comparative gross profit by
$1.6 million;

4. Price and Cost Increases. 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 third quarter of 2004. In
accordance with the arrangements with its co-pack customers, Menu has
been able to recover some of these cost increases through periodic
pricing adjustments. In addition, during the first quarter of 2005,
Menu followed the national brands and initiated a price increase to
its Canadian private label customers to recover cost increases
realized to that point in time. Unfortunately, the effects of price
increases have fallen far short of the cost increases experienced
during the quarter, with the net result of reducing gross profit in
the third quarter of 2005, by $5.3 million; and

5. Increase 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
increase in the amortization associated with the cost of goods sold
of $0.6 million versus the third quarter of 2004.


Selling, general and administrative ("SG&A") expenses for the quarter
ended September 30, 2005 were up marginally by $0.1 million when compared to
the prior year. Higher SG&A spending in the third quarter of 2005 as compared
to the third quarter of the prior year, benefited from the stronger Canadian
dollar as well as lower bonus expense reflecting the lower earnings in 2005.

The foregoing resulted in EBITDA (see Note A) of $6.2 million for the
quarter ended September 30, 2005, a decrease of $5.2 million (or 45.9%)
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 $0.12 million and
Distributable Cash (see Note A) by approximately $0.09 million, on a quarterly
basis. These estimates differ from those previously reported to reflect the
change in contribution by the Fund's United States dollar denominated business
during 2005.

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 third quarter of 2005 versus the same period in
2004 reduced EBITDA by approximately $0.8 million and Distributable Cash by
approximately $0.6 million. Under its program for hedging distributions, the
Fund has entered into foreign exchange contracts to hedge distributions in
2005 and through to July 2006. Each quarter these contracts are
marked-to-market, with the change in value charged to selling, general and
administrative expenses. During the quarter ended September 30, 2005, the Fund
realized a gain of $0.1 million on matured contracts and had unrealized gains
of $0.2 million on contracts that had yet to mature. These foreign exchange
contracts have an average rate of $0.8272.

Amortization (which is included in cost of sales and SG&A expense) in the
third quarter of 2005 was $0.6 million higher than in 2004. This principally
reflects the combined 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 $16.3 million of capital expenditures made during the
twelve months ended September 30, 2005 together with the full period
amortization on the $7.2 million of capital expenditures made during the
quarter ended September 30, 2004.

Under Canadian generally accepted accounting principles, goodwill is
subject to an annual impairment test that, for the Fund, takes place as at
September 30 of each year. When the Fund purchased its interest in Menu Foods
Limited Partnership, $165.4 million of the purchase price was assigned as
goodwill in the consolidated financial statements. Since the Fund's units were
trading at September 30 and through to October 31 at lower than their book
value, the application of current accounting principles identified an
impairment in the carrying value of goodwill. Following a fair value
assessment of other assets, goodwill was written down by $70.3 million or
approximately 35.6% of the Fund's book value as presented in the consolidated
financial statements immediately prior to the write-down. This charge is a
non-cash item and does not impact EBITDA, distributable cash or the Fund's
credit facilities. No impairment in the value of the Fund's identifiable
intangible assets or property, plant and equipment has been identified.

Financial expenses were $0.5 million greater during the quarter ended
September 30, 2005, than in the third quarter of 2004. In the third quarters
of both 2004 and 2005 the Fund recorded a loss on its interest rate swaps of
$0.1 million. In the third quarter of 2005, financial expenses also included a
US$0.03 million consent fee and reflected the sliding scale of increased
interest rates agreed to by the Fund as part of the waiver arrangement with
its bankers. In addition, higher interest rates incurred on the Fund's
variable rated bank indebtedness and senior secured notes, together with
higher average amounts borrowed under the bank facility, when compared to the
prior year, accounted for virtually all of the increase in financial expenses.

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 on
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.

The loss before non-controlling interest of Class B Exchangeable Units
("Class B Units") for the quarter ended September 30, 2005, was $69.9 million,
compared to net income of $5.4 million for the quarter ended September 30,
2004.



Operating Results for the Nine Months Ended September 30, 2005

Sales for the nine months ended September 30, 2005, were $262.1 million,
down 9.4% or $27.3 million compared to the same period last year. This
decrease was attributable to:

1. the strengthening of the Canadian dollar relative to the United
States dollar as compared to that relationship for the same period in
the prior year had the effect of reducing sales by $19.6 million
relative to the first nine months of 2004;

2. an 11.6% decrease in can volume, combined with a 30.7% increase in
pouch volume resulted in a net sales decrease of $12.2 million
relative to the first nine months of 2004;

3. 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, as well as the effect of passing
through cost increases to Menu's co-pack customers, together with
changes to sales mix and other variables, had the effect of
increasing sales by $4.3 million; and

4. the net impact of payments under take-or-pay agreements has been to
increase sales by $0.2 million relative to the same period in 2004.


Overall, volume (expressed in cases of 24 cans or pouches) was down 4.2%
compared to the nine months ended September 30, 2004. Can volume, which
represented 76.2% of Menu's volume in the first nine months of 2005,
contracted by 11.6% (equating to a decline in total volume of 9.6%). This
decline was primarily attributable to the 31.3% decline, in the first nine
months of 2005, in case volume of canned wet pet food to Menu's largest
customer, which reduced the first nine months' can volume by 6.7%. Volume was
also negatively impacted during the first nine months of 2005 because: during
the first quarter, two other key customers, initiated an inventory reduction
program within their organizations and, during the second quarter, a Canadian
co-pack customer, who had relied on 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 together with reduced sales to existing customers, particularly
within the pet specialty and supermarket channels, whose private label sales
were impacted by the national brand promotional activity during the period,
accounted for the balance of the decline.

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 nine months of 2005, case sales of the pouch product, which
represented 23.8% of total volume, grew by 30.7% compared to the first nine
months of 2004. This increase in pouch case sales had the effect of increasing
Menu's volume for the first nine months of 2005 by 5.4%. This level of year-
over-year volume growth is unlikely to continue in the fourth quarter of 2005.

Gross profit decreased by $16.7 million (or 39.6%) for the nine months
ended September 30, 2005, compared to the prior year. This decrease was
attributable to:



1. Foreign Exchange Effect on Sales. The strengthening of the Canadian
dollar relative to the United States dollar during the first nine
months of 2005 had the effect of reducing sales by approximately
$19.6 million and that translated into a reduction in gross profit of
$2.7 million for the nine months ended September 30, 2005;

2. Effect of Change in Sales Volume. As previously noted, total can
volume for the first nine months declined by 11.6% while total pouch
volume increased by 30.7%. The net impact of this change in sales
volume reduced gross profit by $2.0 million;

3. Impact of Take-or-Pay Agreements. The net impact of take-or-pay
agreements during the first nine months of 2005 and 2004 has been to
increase comparative gross profit by $0.2 million;

4. Price and Cost Increases. 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 nine months of 2004. In
accordance with the arrangements with its co-pack customers, Menu has
been able to recover some of these cost increases through periodic
pricing adjustments. Furthermore, 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. Unfortunately,
the effects of these price increases have fallen far short of the
cost increases experienced during the first nine months of 2005, with
the net result of reducing gross profit by $11.6 million; and

5. Increase 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
increase in the amortization associated with the cost of goods sold
of $0.6 million versus first nine months of 2004.


SG&A expenses for the nine months ended September 30, 2005 decreased by
$0.6 million compared to the prior year. This decrease reflected savings of
approximately $0.8 million due to lower SG&A spending in the first nine months
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,
net of the mark-to-market gains on forward contracts entered into to hedge
distributions in 2005 and the first four months of 2006.

The foregoing resulted in EBITDA (see Note A) of $19.4 million for the
nine months ended September 30, 2005, a decrease of $15.2 million (or 44.0%)
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 $0.48 million and
Distributable Cash (see Note A) by approximately $0.36 million, on an annual
basis. These estimates differ from those previously reported to reflect the
change in contribution by the Fund's United States dollar denominated business
during 2005. The Fund estimates that the strengthening of the Canadian dollar
during the first nine months of 2005 versus the same period in 2004 reduced
EBITDA by approximately $2.3 million and Distributable Cash by approximately
$1.7 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 primarily 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 nine months of 2005 was $0.8 million higher than in 2004 on a year-to-
date basis. Amortization increased reflecting the amortization on the
$16.3 million of capital expenditures made during the twelve months ended
September 30, 2005 and the full period amortization for the $25.4 million of
capital expenditures made during the nine months ended September 30, 2004.
However, this increase was largely offset by the effects of the strengthening
of the Canadian dollar, relative to the United States dollar.

The goodwill impairment loss of $70.3 million arose in the third quarter
of 2005 upon application of the annual impairment assessment required under
Canadian generally accepted accounting principles.

Financial expenses were $1.6 million greater during the nine months ended
September 30, 2005, than in the first nine months of 2004. Interest expense
during the third quarter of 2005 reflects the sliding scale of increased
interest rates agreed to by the Fund as part of the waiver arrangement with
its bankers. Higher interest rates incurred on the Fund's variable rated bank
indebtedness and senior secured notes, together with higher average amounts
borrowed under the bank facility, when compared to the prior year, accounted
for virtually all 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 $0.2 million in the
first nine months of 2004, while in the first nine months of 2005 the Fund
recorded a loss of $0.1 million 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 the effective
tax rate can vary from quarter-to-quarter, and year-to-year, depending on the
taxing jurisdiction and the legal structure in which the income is earned.
During the nine months ended September 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 12.7% for the first nine months of 2004.

The loss before non-controlling interest of Class B Exchangeable Units
("Class B Units") for the nine months ended September 30, 2005, was
$66.3 million, compared to net income of $17.3 million for the nine months
ended September 30, 2004.

Liquidity

During the nine months ended September 30, 2005, the Fund generated cash
flow from operations of $14.6 million, coupled with an increase in cash flow
of $7.7 million as a result of changes in non-cash working capital items. The
decrease in non-cash working capital items primarily resulted from a
$12.3 million reduction in inventory offset by a $0.9 million increase in
accounts receivable and a $3.8 million reduction in accounts payable. The
reduction in inventory and accounts payable reflected the expected result as
the Fund completed its annual production shutdowns. The increase in accounts
receivable was consistent with the sales activity.

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 nine months ended September 30, 2005, the Fund
announced distributions on the Trust Units of $13.2 million ($0.790 per unit)
and paid $14.0 million. During this same period, the Fund announced
distributions on the Class B Units of $9.6 million ($0.790 per unit). Certain
Class B Unitholders agreed to subordinate their right to $3.3 million of
distributions and the Fund paid $9.7 million in distributions. Such
unitholders shall be entitled to a reimbursement of such subordinated
distributions before distributions can be increased above 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
February 2006.
During the third quarter, the pay-out ratio was 98.9% while for the nine
months ended September 30, 2005, the pay-out ratio (including the
distributions on the Class B Units) was 156.5% (and 101.8% since inception).
The Fund's financial results for the third quarter caused the Fund to
breach certain covenants in its credit agreement with its bankers. On
November 9, 2005, the Fund's bankers waived these breaches, with the
stipulation (first introduced for the distributions in respect of the month of
August 2005) 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 and third quarters, 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. Management believes that the cash on hand, together with cash
that it is generating, 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 generated in these quarters.
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 nine months ended September 30, 2005, Menu spent $10.0 million
on property, plant and equipment. The largest expenditures during this period
($6.8 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 and all related costs
have now been reflected as capital additions.
Capital expenditures of a maintenance nature, which totaled $2.1 million
for the first nine months of 2005, were financed from the cash flow of the
business. These maintenance capital expenditures were over and above the
$11.0 million (2004 - $11.2 million) for labour and parts expended by Menu for
the ongoing repairs and maintenance of its plants that had been expensed
during the first nine months 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
Issuance during the year 380,413 -
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 127,663 -
------------------------
September 30, 2005 17,766,159 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
September 30, 2005, 74,683 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.

Largely as a consequence of the recent hurricane season in the United
States, commencing in the third quarter of 2005 and continuing into the fourth
quarter, the Fund has experienced significant increases in delivery costs, as
well as in the cost of natural gas used in its production process. While some
abatement in fuel surcharges has occurred, the demand for truckers in the
hurricane affected regions of the United States means that it will remain
challenging to hire truckers for reasonable rates. The Fund anticipates this
situation will continue, at least, for the balance of 2005.

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 nine months
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 in the United States over the past year.

The most recent case is significant as it clearly identified BSE as a
North American rather than Canadian issue and supports the claim 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. The Fund has attempted to address the issue by presenting
offerings that do not use beef and therefore bypass the regulatory issues.
Products have been registered and Menu is in the process of re-opening this
channel of trade.

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 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 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 September 30, 2005, the Fund had
$29,309 drawn on its operating facility and $98,830 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 either June 30 or
September 30, 2005. However, the Fund's bankers have provided it with waivers
of its breaches, stipulating that, commencing with distributions declared for
the month of August 2005, 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 nine months of 2005 makes it likely that
the Fund will continue to breach these covenants in the fourth 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.

Tax Related Risks Arising from Recent Federal Government Initiatives

On September 8, 2005, the federal Department of Finance released a
consultation paper and launched public consultations on tax and other issues
related to publicly listed flow-through entities ("FTEs"), including income
funds. The focus of the paper, among other things, is to, assess whether the
tax system should be modified. In the consultation paper, the Department of
Finance identified three possible policy responses to issues relating to FTEs:
(i) limiting deductibility of interest expense by operating entities; (ii)
taxing FTEs in a manner similar to corporations; or (iii) making the tax
system more neutral with respect to all forms of business organization by
better integrating the personal and corporate tax system. The Department of
Finance indicated that this was not an exhaustive list of the possible policy
responses. It is possible that no changes will be made to the Canadian tax
system as a result of the consultation paper and the public consultations. In
addition, if changes are made to the Canadian tax system to implement a
particular policy response, it cannot be determined at this time whether or
how such changes will affect the holding by a particular holder of the Fund
Units.

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 19 and 20 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 third quarter of
the Fund:



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

Net (loss) income (42,952) 2,987
Adjust for:
Goodwill impairment loss 70,295 -
Non-controlling interest of Class B
Exchangeable Units (26,997) 2,380
Amortization of property, plant and equipment 4,555 3,819
Amortization of supply contract 139 264
Future income taxes (597) 744
Current income taxes (10) (67)
Interest 1,729 1,269
-------------------------
EBITDA 6,162 11,396
-------------------------
-------------------------


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

Cash flow from operating activities 11,147 15,477
Adjust for:
Change in non-cash working capital items (6,642) (5,745)
Maintenance capital expenditures (593) (717)
Principal repayments (37) (36)
-------------------------
Distributable Cash 3,875 8,979
-------------------------
-------------------------


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:

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

Net (loss) income (40,868) 9,457 (14,671)
Adjust for:
Goodwill impairment loss 70,295 - 70,295
Non-controlling interest of
Class B Exchangeable Units (25,389) 7,829 (2,124)
Amortization of property,
plant and equipment 11,907 10,520 48,495
Amortization of supply contract 418 959 1,839
Future income taxes (1,850) 1,637 6,028
Current income taxes (17) 886 1,020
Interest 4,869 3,292 15,522
--------------------------------------
EBITDA 19,365 34,580 126,404
--------------------------------------
--------------------------------------


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

Cash flow from operating activities 22,338 14,115 85,469
Adjust for:
Change in non-cash working capital
items (7,703) 16,114 25,704
Maintenance capital expenditures (2,114) (1,491) (8,618)
Principal repayments (115) (99) (501)
--------------------------------------
Distributable Cash 12,406 28,639 102,054
--------------------------------------
--------------------------------------



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

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

$ $
Assets

Current assets
Cash 7,146 -
Accounts receivable
Trade 20,240 18,716
Other 1,153 2,316
Inventories (note 3) 45,697 59,120
Prepaid expenses and sundry assets 1,563 1,898
Income taxes recoverable 472 259
Future income taxes (note 14) 2,842 1,874
-------------------------------------------------------------------------
Total Current Assets 79,113 84,183
Property, plant and equipment (note 4) 111,296 116,130
Goodwill (note 5) 95,092 165,387
Other assets (note 6) 5,591 6,053
-------------------------------------------------------------------------
Total Assets 291,092 371,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current liabilities
Bank indebtedness (note 7) 29,309 10,398
Accounts payable and accrued liabilities 18,049 21,735
Distributions payable 1,353 5,674
Current portion of long-term debt (note 8) 123 157
-------------------------------------------------------------------------
Total Current Liabilities 48,834 37,964
Long-term debt (note 8) 99,006 102,434
Future income taxes (note 14) 16,094 17,381
-------------------------------------------------------------------------
Total Liabilities 163,934 157,779
-------------------------------------------------------------------------

Class B Exchangeable Units (note 9) 40,595 81,363
-------------------------------------------------------------------------

Unitholders' Equity

Trust Units (note 10) 170,454 160,372
Contributed surplus (note 12) 272 808
Deficit (73,257) (19,182)
Foreign currency translation adjustment (10,906) (9,387)
-------------------------------------------------------------------------
Total Unitholders' Equity 86,563 132,611
-------------------------------------------------------------------------
Total Liabilities and Unitholders' Equity 291,092 371,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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
September 30,
2005 2004

$ $

Sales 93,643 102,030
Cost of sales (note 15) 86,368 88,997
-------------------------------------------------------------------------
Gross profit 7,275 13,033
Selling, general and administrative expenses 5,807 5,720
-------------------------------------------------------------------------
Income before the undernoted 1,468 7,313
Goodwill impairment loss (note 5) 70,295 -
Financial expenses (note 13) 1,729 1,269
-------------------------------------------------------------------------
Income (loss) before income taxes and non-
controlling interest (70,556) 6,044
-------------------------------------------------------------------------
Current income taxes (10) (67)
Future income taxes (597) 744
-------------------------------------------------------------------------
Total income taxes (note 14) (607) 677
-------------------------------------------------------------------------
Income (loss) before non-controlling interest (69,949) 5,367
Non-controlling interest of Class B Exchangeable
Units (26,997) 2,380
-------------------------------------------------------------------------
Net (loss) income for the quarter (42,952) 2,987
Deficit - beginning of quarter (26,938) (15,402)
Distributions (note 11) (3,367) (4,986)
-------------------------------------------------------------------------
Deficit - end of quarter (73,257) (17,401)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic net (loss) income per Trust Unit $ (2.425) $ 0.189
Diluted net (loss) income per Trust Unit $ (2.425) $ 0.186

Basic weighted average number of Trust Units
outstanding (note 10) 17,713,252 15,829,207
Diluted weighted average number of Trust
Units outstanding (note 10) 28,942,840 28,869,595

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)

Nine months ended
September 30,
2005 2004

$ $

Sales 262,090 289,378
Cost of sales (note 15) 236,626 247,244
-------------------------------------------------------------------------
Gross profit 25,464 42,134
Selling, general and administrative expenses 18,424 19,033
-------------------------------------------------------------------------
Income before the undernoted 7,040 23,101
Goodwill impairment loss (note 5) 70,295 -
Financial expenses (note 13) 4,869 3,292
-------------------------------------------------------------------------
Income (loss) before income taxes and non-
controlling interest (68,124) 19,809
-------------------------------------------------------------------------
Current income taxes (17) 886
Future income taxes (1,850) 1,637
-------------------------------------------------------------------------
Total income taxes (note 14) (1,867) 2,523
-------------------------------------------------------------------------
Income (loss) before non-controlling interest (66,257) 17,286
Non-controlling interest of Class B Exchangeable
Units (25,389) 7,829
-------------------------------------------------------------------------
Net (loss) income for the period (40,868) 9,457
Deficit - beginning of period (19,182) (12,438)
Distributions (note 11) (13,207) (14,420)
-------------------------------------------------------------------------
Deficit - end of period (73,257) (17,401)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Deficit comprises:
Accumulated net (loss) income (14,844) 22,764
Accumulated distributions (58,413) (40,165)
-------------------------------------------------------------------------
(73,257) (17,401)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic net (loss) income per Trust Unit $ (2.426) $ 0.624
Diluted net (loss) income per Trust Unit $ (2.426) $ 0.613

Basic weighted average number of Trust Units
outstanding (note 10) 16,845,019 15,162,323
Diluted weighted average number of Trust
Units outstanding (note 10) 28,933,356 28,202,000

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
September 30,
2005 2004

$ $

Cash provided by (used in)
Operating activities
Net (loss) income for the quarter (42,952) 2,987
Adjustments for non-cash items
Goodwill impairment loss 70,295 -
Non-controlling interest of Class B
Exchangeable Units (26,997) 2,380
Amortization of property, plant and equipment 4,555 3,819
Amortization of supply contract 139 264
Amortization of deferred financing costs 96 126
Vesting of long-term incentive plan 117 -
Mark-to-market adjustment (151) (588)
Future income taxes (597) 744
-------------------------------------------------------------------------
4,505 9,732
Change in non-cash working capital items
Accounts receivable (3,655) (6,074)
Inventories 13,794 (2,129)
Prepaid expenses and sundry assets 212 (279)
Income taxes recoverable (110) 1,781
Accounts payable and accrued liabilities (3,599) 12,446
-------------------------------------------------------------------------
11,147 15,477
-------------------------------------------------------------------------
Financing activities
Issuance of Trust Units, net 230 12
Long-term debt repayments (37) (171)
Distributions to Trust Units (4,070) (4,986)
Distributions to Class B Exchangeable Units (1,770) (3,979)
-------------------------------------------------------------------------
(5,647) (9,124)
-------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (2,059) (7,150)
Other assets 68 -
-------------------------------------------------------------------------
(1,991) (7,150)
-------------------------------------------------------------------------
Increase (decrease) in cash 3,509 (797)
Cash - beginning of quarter 3,637 1,931
-------------------------------------------------------------------------
Cash - end of quarter 7,146 1,134
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary information

Income taxes paid (refunded) 15 (1,916)
Interest paid 1,511 897

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)

Nine months ended
September 30,
2005 2004

$ $
Cash provided by (used in)
Operating activities
Net (loss) income for the period (40,868) 9,457
Adjustments for non-cash items
Goodwill impairment loss 70,295 -
Non-controlling interest of Class B
Exchangeable Units (25,389) 7,829
Amortization of property, plant and
equipment 11,907 10,520
Amortization of supply contract 418 959
Amortization of deferred financing costs 199 374
Vesting of long-term incentive plan 183 -
Mark-to-market adjustment (260) (547)
Future income taxes (1,850) 1,637
-------------------------------------------------------------------------
14,635 30,229
Change in non-cash working capital items
Accounts receivable (865) (8,766)
Inventories 12,337 (12,663)
Prepaid expenses and sundry assets 320 (200)
Income taxes recoverable (313) 2,502
Accounts payable and accrued liabilities (3,776) 3,013
-------------------------------------------------------------------------
22,338 14,115
-------------------------------------------------------------------------
Financing activities
Increase in bank indebtedness 18,777 -
Issuance of Trust Units, net 380 36,229
Long-term debt repayments (115) (382)
Distributions to Trust Units (14,013) (14,150)
Distributions to Class B Exchangeable Units (14,013) (14,150)
Distributions to Class B Exchangeable Units (9,728) (12,758)
-------------------------------------------------------------------------
(4,699) 8,939
-------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (10,016) (25,412)
Other assets (477) (3)
-------------------------------------------------------------------------
(10,493) (25,415)
-------------------------------------------------------------------------
Increase (decrease) in cash 7,146 (2,361)
Cash - beginning of period - 3,495
-------------------------------------------------------------------------
Cash - end of period 7,146 1,134
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary information

Income taxes paid (refunded) 372 (1,653)
Interest paid 4,275 2,914

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



Menu Foods Income Fund
Notes to Consolidated Financial Statements
September 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 as at December 31, 2004, and should
be read in conjunction with those consolidated financial statements.
The disclosures contained in these unaudited interim consolidated
financial statements may not include all requirements of Canadian
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 September 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 the disclosure of contingent
assets and liabilities at the date of the consolidated 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 direct
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 September 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
September 30, December 31,
2005 2004

$ $
Raw materials and packaging 15,203 15,794
Finished goods 30,494 43,326
---------------------------------------------------------------------
45,697 59,120
---------------------------------------------------------------------
---------------------------------------------------------------------

4. Property, plant and equipment

September 30, 2005
Accumulated
Cost amortization Net
$ $ $
Land 5,248 - 5,248
Buildings 43,819 4,689 39,130
Machinery and equipment 89,125 28,713 60,412
Other property and equipment 14,876 9,808 5,068
Equipment under capital lease 809 760 49
Construction-in-progress 1,389 - 1,389
---------------------------------------------------------------------
155,266 43,970 111,296
---------------------------------------------------------------------
---------------------------------------------------------------------


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. Goodwill

Under Canadian generally accepted accounting principles goodwill is
subject to an annual impairment test which, for the Fund, takes place
as at September 30 of each year. When the Fund purchased its interest
in Menu Foods Limited Partnership, $165,387 of the purchase price was
assigned as goodwill in the consolidated financial statements. Since
the Fund's units were trading at September 30 and through to
October 31 at much lower than their book value, the application of
current accounting principles identified an impairment in the
carrying value of goodwill. Following a fair value assessment of
other assets, goodwill was written down by $70,295 or approximately
35.6% of the Fund's book value as presented in the consolidated
financial statements immediately prior to the write-down. This charge
is a non-cash item and does not impact the Fund's credit facilities.
No impairment in the value of the Fund's identifiable intangible
assets or property, plant and equipment has been identified.

6. Other assets

September 30, 2005
Accumulated
Cost amortization Net
$ $ $
Supply contract 5,833 1,544 4,289
Deferred financing charges 1,669 702 967
Deferred long-term incentive
plan (note 12) 518 183 335
---------------------------------------------------------------------
8,020 2,429 5,591
---------------------------------------------------------------------
---------------------------------------------------------------------


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

7. Bank indebtedness

The banking agreement provides the Fund with a US$30,000 operating
facility of which $29,309 (US$25,208) was drawn as at September 30,
2005 (December 31, 2004 - US$7,241 ($8,704)). This operating facility
bears interest at Canadian prime rate (4.50% as at September 30,
2005), U.S. base rate (6.75% as at September 30, 2005) or Euro rate
plus 1.50% (5.91% as at September 30, 2005) depending on the currency
advanced. The facility is a 364-day revolving term facility, which
has been extended to December 31, 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 8), which presently limit borrowings under this
facility to the amount drawn as at September 30, 2005 of $29,309.

Performance during the third quarter has caused the Fund to breach
certain covenants in its credit agreement with its bankers. On
November 9, 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$60 consent
fee and to accept a sliding scale of increased interest rates, which
apply whenever previously specified covenants are exceeded. The
year-to-date performance in 2005 makes it likely that the Fund will
continue to breach these covenants in the fourth quarter and will
once again require a waiver from its bankers.

8. Long-term debt
September 30, December 31,
2005 2004
$ $
Senior secured notes (a) 98,830 102,170
Obligation under capital lease (b) 123 238
Forgivable loan (c) 176 183
---------------------------------------------------------------------
99,129 102,591
Less: Current portion 123 157
---------------------------------------------------------------------
99,006 102,434
---------------------------------------------------------------------
---------------------------------------------------------------------

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,
(5.24% as at September 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 7) and senior
secured noteholders. The Fund, having obtained a waiver from its
bankers (note 7), is in compliance with these covenants at
September 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:

September 30, December 31,
2005 2004
$ $

2005 42 168
2006 84 84
---------------------------------------------------------------------
Total minimum lease payments 126 252
Less: Amounts representing interest at 6.60% 3 14
---------------------------------------------------------------------
Balance of obligation 123 238
Less: Current portion 123 157
---------------------------------------------------------------------
- 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 September 30, 2005, $176 (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.

9. 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 10) (1,498,260) (9,166)
Share of net loss for the period (25,389)
Distributions for the period (note 11) (6,213)
---------------------------------------------------------------------
September 30, 2005 11,133,655 40,595
---------------------------------------------------------------------
---------------------------------------------------------------------

Except as described below, the Class B Units together with their
related Special Trust Units (note 10) can be exchanged on a
one-for-one basis with the Fund for Trust Units at the option of the
holder.

During the second 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 above 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 February 2006.


10. 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 9) 1,498,260 9,166 - 9,166
Exercise of options
during the quarter
ended (note 12)
March 31, 2005 41,573 347 - 347
June 30, 2005 8,829 58 - 58
September 30, 2005 77,261 511 - 511
---------------------------------------------------------------------
September 30, 2005 17,766,159 181,754 11,300 170,454
---------------------------------------------------------------------
---------------------------------------------------------------------

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 9)
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
September 30, 2005 (note 9).

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 12), 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 number of units
outstanding:

Quarter ended September 30,
2005 2004

Weighted average number of Trust Units
outstanding - basic 17,713,252 15,829,207
Weighted average number of Class B Units
outstanding - basic (note 9) 11,133,655 12,631,915
Dilutive effect of options (note 12) 95,933 408,473
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,942,840 28,869,595
---------------------------------------------------------------------
---------------------------------------------------------------------

Nine months ended
September 30,
2005 2004

Weighted average number of Trust Units
outstanding - basic 16,845,019 15,162,323
Weighted average number of Class B Units
outstanding - basic (note 9) 11,973,339 12,631,915
Dilutive effect of options (note 12) 114,998 407,762
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,933,356 28,202,000
---------------------------------------------------------------------
---------------------------------------------------------------------

11. Distributions

Distributions declared during the period ended September 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
July 29, 2005 1,592 0.0900 August 15, 2005
August 31, 2005 886 0.0500 September 15, 2005
September 30, 2005 889 0.0500 October 17, 2005
---------------------------------------------------------------------
13,207 0.7900
---------------------------------------------------------------------
---------------------------------------------------------------------

During the quarter and nine months ended September 30, 2004,
distributions to Trust Units amounted to $4,986 ($0.315 per unit) and
$14,420 ($0.945 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
July 29, 2005 1,002 0.0900 November 15, 2005
August 31, 2005 557 0.0500 November 15, 2005
September 30, 2005 557 0.0500 November 15, 2005
---------------------------------------------------------------------
9,560 0.7900
Distributions subordinated
(note 9) (3,347)
---------------------------------------------------------------------
6,213
---------------------------------------------------------------------
---------------------------------------------------------------------

During the quarter and nine months ended September 30, 2004,
distributions to Class B Units amounted to $3,979 ($0.315 per unit)
and $11,937 ($0.945 per unit), respectively.

12. 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
September 30, 2005, 74,683 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.

September 30, December 31,
2005 2004
$ $

Opening balance 202,346 582,759
Exercised (127,663) (380,413)
---------------------------------------------------------------------
Ending balance 74,683 202,346
---------------------------------------------------------------------
---------------------------------------------------------------------

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

September 30, December 31,
2005 2004
$ $

Opening balance 808 2,847
Options exercised (536) (2,039)
---------------------------------------------------------------------
Ending balance 272 808
---------------------------------------------------------------------
---------------------------------------------------------------------

As the Trust Unit options are exercised, the associated contributed
surplus is reclassified to Trust Units (note 10). During the quarter
and nine months ended September 30, 2005, $281 and $536 were
reclassified to Trust Units (2004 - $19 and $374).

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 of Menu Foods GenPar
Limited's Board of Directors (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.

13. Financial expenses

Quarter ended September 30,
2005 2004
$ $
Interest on senior secured notes 1,293 837
Interest on term loans and bank indebtedness 318 135
Interest on capital leases 3 68
Net loss on interest rate swap 92 117
Amortization of deferred financing charges 96 126
Other, net (73) (14)
---------------------------------------------------------------------
1,729 1,269
---------------------------------------------------------------------
---------------------------------------------------------------------

Nine months ended
September 30,
2005 2004
$ $
Interest on senior secured notes 3,649 2,420
Interest on term loans and bank indebtedness 912 491
Interest on capital leases 9 187
Net loss (gain) on interest rate swap 133 (162)
Amortization of deferred financing charges 199 374
Other, net (33) (18)
---------------------------------------------------------------------
4,869 3,292
---------------------------------------------------------------------
---------------------------------------------------------------------

14. 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 September 30,
2005 2004
$ $
Income (loss) before income taxes (70,556) 6,044
Goodwill impairment loss 70,295 -
Income of the Fund subject to tax in the
hands of recipients (2,020) (3,539)
---------------------------------------------------------------------
Income (loss) of subsidiary entities subject
to tax (2,281) 2,505
--------------------------------------------------------------------
Income taxes at statutory rate (787) 864
Increase (decrease) resulting from:
Effect of foreign tax rate (525) (610)
Large corporations tax (5) 60
Unrecognized tax loss carry-forward 448 (60)
Other and permanent differences 262 423
---------------------------------------------------------------------
(607) 677
---------------------------------------------------------------------
---------------------------------------------------------------------

Nine months ended
September 30,
2005 2004
$ $

Income (loss) before income taxes (68,124) 19,809
Goodwill impairment loss 70,295 -
Income of the Fund subject to tax in the
hands of recipients (7,223) (8,675)
---------------------------------------------------------------------
Income (loss) of subsidiary entities subject
to tax (5,052) 11,134
---------------------------------------------------------------------
Income taxes at statutory rate (1,742) 3,839
Increase (decrease) resulting from:
Effect of foreign tax rate (1,613) (1,440)
Large corporations tax (205) 160
Unrecognized tax loss carry-forward 1,352 (372)
Other and permanent differences 341 336
---------------------------------------------------------------------
(1,867) 2,523
---------------------------------------------------------------------
---------------------------------------------------------------------

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

September 30, December 31,
2005 2004
$ $

Current future income tax assets:
Accounts receivable, accounts payable
and accrued liabilities 550 373
Inventory provisions 1,283 1,903
Share of net partnership loss (income)
not yet subject to tax 1,009 (402)
---------------------------------------------------------------------
2,842 1,874
---------------------------------------------------------------------
---------------------------------------------------------------------
Long-term future income tax liabilities:
Property, plant and equipment 16,947 18,030
Withholding tax on foreign retained
earnings 401 245
Tax benefits of loss carry-forwards (4,524) (3,332)
Valuation allowance 1,882 2,394
Other 1,388 44
---------------------------------------------------------------------
16,094 17,381
---------------------------------------------------------------------
---------------------------------------------------------------------

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

15. Other expenses and income

Research and development expenses amounted to $61 and $194 for the
quarter and nine months ended September 30, 2005 (2004 - $73 and
$226). These expenses are included in cost of sales.

16. Obligations under operating leases

Future minimum payments under operating leases at September 30, 2005
are as follows:
$
2005 406
2006 1,519
2007 729
2008 613
2009 540
Thereafter 228
---------------------------------------------------------------------
4,035
---------------------------------------------------------------------
---------------------------------------------------------------------

17. 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 $406 and $1,264 for the
quarter and nine months ended September 30, 2005 (2004 - $472 and
$1,315).

18. 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 September 30,
2005 2004
$ $
Sales
Canada
Domestic 13,130 13,845
Foreign 21,974 29,125
Intersegment transfers 3,060 2,622
---------------------------------------------------------------------
38,164 45,592
---------------------------------------------------------------------
United States
Domestic 60,848 61,202
Foreign 68 815
Intersegment transfers 24,712 31,102
---------------------------------------------------------------------
85,628 93,119
---------------------------------------------------------------------
123,792 138,711
Elimination of intersegment transfers (27,772) (33,724)
Discounts (2,377) (2,957)
---------------------------------------------------------------------
93,643 102,030
---------------------------------------------------------------------
---------------------------------------------------------------------

Nine months ended
September 30,
2005 2004
$ $
Sales
Canada
Domestic 39,305 39,674
Foreign 56,985 74,028
Intersegment transfers 7,377 9,914
---------------------------------------------------------------------
103,667 123,616
---------------------------------------------------------------------
United States
Domestic 173,175 185,179
Foreign 700 1,117
Intersegment transfers 60,604 74,209
---------------------------------------------------------------------
234,479 260,505
---------------------------------------------------------------------
338,146 384,121
Elimination of intersegment transfers (67,981) (84,123)
Discounts (8,075) (10,620)
---------------------------------------------------------------------
262,090 289,378
---------------------------------------------------------------------
---------------------------------------------------------------------

September 30, December 31,
2005 2004
$ $
Property, plant and equipment
Canada 34,037 33,117
United States 121,229 116,419
---------------------------------------------------------------------
155,266 149,536
Less: Accumulated amortization 43,970 33,406
---------------------------------------------------------------------
111,296 116,130
---------------------------------------------------------------------
---------------------------------------------------------------------

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.

19. 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 September 30, 2005, the net Canadian amounts to be received
under foreign currency forward contracts were $4,599 (December 31,
2004 - $nil), the weighted average contractual exchange rate was
$1.2686 and the settlement dates of outstanding contracts are all
less than one year. The exchange rate as at the quarter end was
$1.1627. The mark-to-market value of the contracts as at September
30, 2005 resulted in a gain of $393 (2004 - $861). These contracts do
not qualify for hedge 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 8). The mark-to-market value of the contracts as at
September 30, 2005 resulted in an unrealized gain of $70
(December 31, 2004 - $17) and resulted in a loss, including the
impact of the amortization on the transitional amount, of $92 and
$133 for the quarter and nine months ended September 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.

20. Economic dependence

The Fund has approximately 18% 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