Menu Foods Income Fund
TSX : MEW.UN

Menu Foods Income Fund

November 12, 2008 13:36 ET

Menu Foods Income Fund Announces 2008 Third Quarter Results

TORONTO, ONTARIO--(Marketwire - Nov. 12, 2008) -

NOT FOR RELEASE OVER US NEWSWIRE SERVICES

Attention Business/Financial Editors:

Menu Foods Income Fund (TSX:MEW.UN) announced its financial results for the third quarter ended September 30, 2008.

A conference call to review these results will take place tomorrow, Thursday, November 13, 2008 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 416-850-9150 or 1-866-809-4939. A replay will be available from approximately one hour after the end of the conference call until November 27, 2008 by dialing 416-915-1035 or 1-866-245-6755, using passcode 972798 followed by the number sign. A live audio webcast of the conference call is also available, it can be accessed by entering http://events.onlinebroadcasting.com/menufoods/111308/index.php on an Internet browser. A replay of the webcast will be available for one year, it can be accessed by entering http://events.onlinebroadcasting.com/menufoods/111308/index.php on an Internet browser.

Message to Unitholders

The third quarter of 2008 represented further progress in this rebuilding year for Menu. While we continue to live with the consequences of the 2007 recall, I am pleased with the strides we have already made in strengthening our overall financial condition and in re-establishing our business with some of North America's largest food retailers.

As previously reported, the Fund's management and employees' near-term focus has been on cash flow generation and the day-to-day effective operation of the business. This approach has been quite effective through the first nine months of 2008, although its benefits have been reduced, in large part, due to the influence of market-wide material cost increases.

As a way to isolate the impacts of the recall, management believes that it is useful to assess the Fund's progress against the performance in the fourth quarter of 2007. In this regard, Menu's performance during the quarter ended September 30, 2008 was noteworthy for a number of reasons:

- Volume to the Fund's continuing customers once again increased when compared to the immediately preceding quarter. While the growth this quarter was modest, it builds on the 6.3% increase in volume to continuing customers during the second quarter and the 12.7% increase during the first quarter.

- The Fund achieved adjusted EBITDA of $3.6 million. This was accomplished despite the continued significant increases in the costs of raw and packaging materials, delivery and operational expenses of the Fund's production facilities in general. For the nine month period the Fund generated $13.8 million in adjusted EBITDA.

- In August the Fund followed the leading national brand and announced its second price increase of 2008. This should recover at least a portion of the previously noted increased costs that have negatively impacted this quarter's results. This price increase to private-label customers will be implemented during the fourth quarter of 2008, and should have the effect of increasing sales by more than 5.0%, on an annualized basis.

- Excluding the effect of foreign exchange, selling, general and administrative expenses decreased, largely as a result of the prior year's restructuring.

This quarter also witnessed continued progress with respect to the industry-wide pet food multi-district litigation. On October 14, 2008 the United States District Court for the District of New Jersey issued an oral order giving final approval of the cross-border settlement agreement in the pet food multi-district litigation. On November 3, 2008 there was a simultaneous hearing for final approval in the various Canadian courts. Formal final approval from all courts is expected in the near term, although there can be no assurances. If approved, this settlement will see that pet owners affected by the 2007 pet food recalls will receive compensation for their losses.

As we look ahead to the final quarter of 2008 and into 2009, we expect that the events that are affecting the North American economy will also have an impact on Menu. Since the end of the third quarter Menu has seen some raw material costs decline from their recent highs. However, this has not been widespread and, in general, costs remain above the levels being experienced when the latest price increase was announced. Consequently, even after the price increase, Menu's gross margin will be compressed if costs stay at their current levels. Furthermore, the Fund has been advised by its can supplier that it should expect a major increase in the price of steel cans in 2009. The Fund believes that the other participants in the wet pet food industry, including the leading national brands, will experience these same cost challenges and that this will, at least, necessitate a price increase on pet food sold in steel cans. Should an adequate increase not occur in a timely manner, then absent declines in the cost of other raw materials, the Fund's margins will be further adversely affected during 2009.

On a more positive note, generally, in recessionary times private-label products have historically benefited as consumers look to stretch their disposable income. While this is not a certainty, Menu is ready and able to serve its private-label customers should they see an increase in the demand for their products. Any increase in volume that might result from such a change in consumer demand should positively impact Menu's gross margin both from the incremental contribution of those sales and from better leveraging of its manufacturing assets.

We appreciate the continued support of our investors and I want to take this opportunity to thank our lenders, suppliers, customers and employees who are seeing us through these challenging times and have already helped Menu to strengthen its business foundation. I look forward to reporting the 2008 full-year results.



Paul Henderson, President & Chief Executive Officer

Menu Foods GenPar Limited

Administrator of Menu Foods Income Fund

Management's Discussion and Analysis of Financial Results
(For the quarter ended September 30, 2008)


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 12, 2008 and is supplementary to and should be read in conjunction with the unaudited consolidated financial statements for the quarters ended September 30, 2008 and 2007.

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 that conduct its day-to-day business.

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

Certain statements in this Management's Discussion and Analysis of Financial Results are "forward-looking statements", which reflect management's expectations regarding the Fund and Menu's future growth, results of operations, performance, business prospects and opportunities. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. Many factors could cause results to differ materially from the results discussed in the forward-looking statements, including risks related to issues associated with the product recall, including litigation related matters; key customer performance; dependence on key suppliers; economic conditions; competition; regulatory matters/changes; foreign exchange rates and interest rates, cost increases and the pricing environment, 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 For the nine
quarter months
ended ended
September September
30, 30,
2008 2007 2008 2007
$ $ $ $
Sales 61,625 78,050 177,536 189,800
Cost of sales 55,533 70,472 157,226 170,680
--------------------------------------
Gross profit 6,092 7,578 20,310 19,120
Selling, general and
administrative expenses 5,091 5,030 14,531 16,957
--------------------------------------
Income before the undernoted 1,001 2,548 5,779 2,163
Product recall expenses - 11,086 - 52,115
Restructuring and related expenses 10 15,889 182 15,889
Financial expenses 3,100 4,393 9,146 9,528
--------------------------------------
Loss before income taxes and
non-controlling interest (2,109) (28,820) (3,549) (75,369)
--------------------------------------
Current income taxes (60) 523 (31) 329
Future income taxes - (42) - (14,337)
--------------------------------------
Total income taxes (60) 481 (31) (14,008)
--------------------------------------
Loss before non-controlling
interest (2,049) (29,301) (3,518) (61,361)
Non-controlling interest of
Class B Exchangeable Units - (10,006) - (20,955)
--------------------------------------
Net loss for the period (2,049) (19,295) (3,518) (40,406)
--------------------------------------
--------------------------------------

Basic net loss per Trust Unit (0.101) (1.011) (0.173) (2.117)
Diluted net loss per Unit (0.101) (1.011) (0.173) (2.117)

Diluted distributable cash per
Trust Unit and Class B Unit (0.2335) (0.2977) (0.1399) (1.3296)

Basic weighted average number
of Trust Units outstanding (000s) 20,362 19,087 20,362 19,085
Diluted weighted average number
of Units outstanding (000s) 28,989 28,984 28,986 28,982
Average US/Cdn exchange rate per
Bank of Canada 0.9600 0.9571 0.9816 0.9050


Operating Results for the Quarter Ended September 30, 2008

Beginning on March 16, 2007, the Fund announced a series of recalls of a portion of the dog and cat food it manufactured between November 8, 2006 and March 7, 2007 (the "recall"). The recall primarily related to "cuts and gravy" style pet food in cans and pouches manufactured and sold under private-label and contract-manufactured for some national brands.

The Fund's investigation discovered that the timing of production associated with reported concerns and certain other events, coincided with the introduction of wheat gluten from a new supplier. Subsequent investigation has proved that the supplier's wheat gluten had in fact been adulterated with melamine and related compounds. Menu was the first of a number of companies within the pet food industry to recall product adulterated with melamine and related compounds in connection with one of the largest recalls in the industry's history. Menu, its competitors, its customers and consumers were all victims of a terrible fraud perpetuated on the pet food industry as a whole.

While a substantial portion of the expected costs of the recall were expensed by the Fund during the first quarter of 2007, since the recall happened so close to quarter-end, its impact on Menu's sales and operations to March 31, 2007 was minimized. By contrast, while fewer recall-related expenses arose in the second quarter of 2007, significant impacts in terms of lost sales and higher operating costs were experienced as the Fund suspended shipments of most "cuts and gravy" products while the recall was in effect. As reported during 2007, the impact of the recall on sales and operating costs was greatest during the second quarter as many customers significantly reduced or suspended purchases from Menu.

By the third quarter of 2007 the Fund had resumed shipping to most of its private-label customers and, in fact, benefited from an increase in demand as customers, who had been without product for several months, refilled their 'pipelines'. Sales in the fourth quarter of 2007 were considered to be more indicative of recurring volumes.

Comparative analyses between any quarter in 2008 and the same period during 2007 need to consider the factors set out above and much of the explanation for variances between the quarters will be attributed to the recall. All things considered, management believes that it is more meaningful to evaluate changes in sales and operating performance during 2008 relative to the trend in performance since the fourth quarter of 2007.

With this in mind, the results for the quarter ended September 30, 2008 have been evaluated in two ways:

1. relative to the trend in performance since the fourth quarter of 2007. It is this trend that management believes is more relevant in evaluating how Menu has recovered from the impacts of the recall of 2007; and

2. relative to the quarter ended September 30, 2007. Since the recall accounts for much of the change in performance compared to 2007, and since this is a comprehensive underlying explanation it is not repeated in the commentary.

Relative to the trend since the fourth quarter of 2007



For the quarter ended Trailing
September June March December Four
30, 2008 30, 2008 31, 2008 31, 2007 Quarters
$ $ $ $ $
Sales 61,625 60,330 55,581 55,001 232,537
Cost of sales 55,533 53,591 48,102 49,743 206,969
----------------------------------------------------
Gross profit 6,092 6,739 7,479 5,258 25,568
Selling, general and
administrative
expenses 5,091 4,582 4,858 6,029 20,560
Financial expenses 3,100 1,347 4,699 3,887 13,033
Income (loss) (1) (2,099) 810 (2,078) (4,658) (8,025)
----------------------------------------------------
----------------------------------------------------
Average US/Cdn
exchange rate 0.9600 0.9901 0.9955 1.0184 0.9910

(1) Income (loss) is before product recall expenses, restructuring and
related expenses, goodwill impairment, income taxes and non-controlling
interests and is not a recognized measure under GAAP


Quarter ended March 31, 2008 compared to the quarter ended December 31, 2007

Sales for the quarter ended March 31, 2008 were $55.6 million, up $0.6 million or 1.0% compared to the fourth quarter in 2007. This increase is attributable to:

1. Effect of Change in Sales Volume. A 3.4% decrease in volume resulting in a sales decrease of $1.7 million. Most of this decrease results from a 59.2% decline in volume sold to customers who had advised the Fund during 2007 that they would no longer be purchasing from Menu. The remaining volume to these customers will be lost throughout 2008 and into 2009. Volume to continuing customers increased by 12.6%.

2. Price and Cost Increases/Adjustments. The effect of pricing adjustments to pass through cost increases to Menu's contract manufacturing customers, together with changes to sales mix and other variables, had the effect of increasing sales by $1.3 million.

3. Foreign Exchange Effect on Sales. The strengthening of the United States dollar relative to the Canadian dollar had the effect of increasing sales by $1.0 million relative to the fourth quarter in 2007.

Gross profit increased by $2.2 million or 42.2% during the quarter ended March 31, 2008 compared to the fourth quarter of 2007. This increase is attributable to:

1. Effect of Change in Sales Volume. As previously noted, total volume during the first quarter of 2008 decreased by 3.4%. This change in sales volume decreased gross profit by $0.3 million.

2. Price and Cost Increases/Adjustments. On a comparative basis to the fourth quarter in 2007, the increase in costs of certain inputs to production, including raw and packaging materials and labour and benefits, lead to higher cost of sales. However, as the Fund has returned to more normal levels of production during the quarter ended March 31, 2008 it began to realize more typical operating efficiencies and, accordingly, reduced factory overhead. The increased costs and other variables were more than offset by the selling price increases to contract-manufacturing customers and the improved operating efficiencies, increasing gross profit by $2.1 million.

3. Foreign Exchange Effect on Sales. The strengthening of the United States dollar relative to the Canadian dollar during the quarter had the effect of increasing sales by approximately $1.0 million and that translated into an increase in gross profit of $0.2 million for the quarter ended March 31, 2008.

4. Decrease in Amortization. The amortization of capital projects completed in the past year was more than offset by the effect of fully amortized assets, resulting in a decrease in total amortization. Furthermore, higher finished goods inventory levels resulted in more amortization being included in inventory as part of factory overhead costs rather than expensed as part of cost of sales. Taken together, this resulted in a decrease in amortization included in the cost of sales of $0.2 million versus the fourth quarter in 2007.

Selling, general and administrative expenses for the quarter ended March 31, 2008 decreased by $1.2 million compared to the fourth quarter in 2007. This improvement was largely attributed to savings resulting from the Fund's restructuring initiatives announced on October 10, 2007 (including the sale of its production facility in North Sioux City, South Dakota), which became fully effective during the first quarter of 2008.

Financial expenses were $0.8 million higher during the quarter ended March 31, 2008 than in the fourth quarter of 2007. The Fund recorded a loss of $1.7 million on interest rate swaps during the first quarter of 2008 compared to a loss of $1.0 million in the fourth quarter last year. Excluding the effect of the accounting for the interest rate swaps, on a comparative basis, interest expense increased by $0.1 million during the quarter.

Quarter ended June 30, 2008 compared to the quarter ended March 31, 2008

Sales for the quarter ended June 30, 2008 were $60.3 million, up $4.7 million or 8.5% compared to the first quarter in 2008. This increase is attributable to:

1. Effect of Change in Sales Volume. A 4.2% increase in volume resulting in a sales increase of $2.7 million. Volume to continuing customers increased by 6.3% while volume sold to customers who had advised the Fund during 2007 that they would no longer be purchasing from Menu declined by 15.7%, continuing the trend noted in the first quarter of 2008.

2. Price and Cost Increases/Adjustments. The impact of the price increase to private-label customers that was implemented during the second quarter of 2008 and the effect of pricing adjustments to pass through cost increases to Menu's contract-manufacturing customers, together with changes to sales mix and other variables, had the effect of increasing sales by $1.7 million.

3. Foreign Exchange Effect on Sales. The strengthening of the United States dollar relative to the Canadian dollar during the quarter had the effect of increasing sales by $0.3 million relative to the first quarter in 2008.

Gross profit decreased by $0.7 million or 9.9% during the quarter ended June 30, 2008 compared to the first quarter of 2008. This decrease is attributable to:

1. Effect of Change in Sales Volume. As previously noted, total volume during the second quarter of 2008 increased by 4.2%. This change in sales volume increased gross profit by $0.4 million.

2. Price and Cost Increases/Adjustments. On a comparative basis to the first quarter in 2008, the increase in costs of certain inputs to production, particularly raw and packaging materials, have led to higher cost of sales. Furthermore, in order to reduce inventories and bank indebtedness the Fund reduced production with a resultant impact on operating efficiencies and an increase in factory overhead per case. These increased costs and other variables were only partially offset by the price increase to private-label customers and the selling price increases to contract-manufacturing customers, decreasing gross profit by $0.7 million.

3. Foreign Exchange Effect on Sales. The strengthening of the United States dollar relative to the Canadian dollar during the quarter had the effect of increasing sales by approximately $0.3 million and that translated into a nominal increase in gross profit for the quarter ended June 30, 2008.

4. Increase in Amortization. The reduction in finished goods inventory levels during the quarter resulted in less amortization of capital assets being included in inventory as part of factory overhead costs, and more being expensed as part of cost of sales. This contrasts with the first quarter, during which finished goods inventory levels increased resulting in less amortization of capital assets being expensed to cost of sales and more being included in the cost of inventory. The net effect was an increase in the amortization associated with the cost of sales of $0.4 million versus the first quarter in 2008.

Selling, general and administrative expenses for the quarter ended June 30, 2008 decreased by $0.3 million compared to the first quarter in 2008. This decrease can be attributed to a number of small decreases across a variety of expense categories.

Financial expenses were $3.4 million lower during the quarter ended June 30, 2008 than in the first quarter of 2008. The Fund recorded a gain of $1.5 million on interest rate swaps during the second quarter of 2008 compared to a loss of $1.7 million in the first quarter this year. Excluding the effect of the accounting for the interest rate swaps, on a comparative basis, interest expense decreased by $0.2 million during the quarter.

Quarter ended September 30, 2008 compared to the quarter ended June 30, 2008

Sales for the quarter ended September 30, 2008 were $61.6 million, up $1.3 million or 2.1% compared to the second quarter in 2008. This increase is attributable to:

1. Foreign Exchange Effect on Sales. The strengthening of the United States dollar relative to the Canadian dollar during the quarter had the effect of increasing sales by $1.5 million relative to the second quarter in 2008.

2. Effect of Change in Sales Volume. A 0.1% decrease in volume resulting in a sales decrease of $0.1 million. Volume to continuing customers increased by 0.2% while volume sold to customers who had advised the Fund during 2007 that they would no longer be purchasing from Menu declined by 3.7%, continuing the trend noted in the first and second quarters of 2008.

3. Price and Cost Increases/Adjustments. The full quarter impact of the price increase to private-label customers that was implemented during the second quarter of 2008 and the effect of pricing adjustments to pass through cost increases to Menu's contract-manufacturing customers were offset by changes to sales mix and other variables, with the effect of decreasing sales by $0.1 million.

Gross profit decreased by $0.6 million or 9.6% during the quarter ended September 30, 2008 compared to the second quarter of 2008. This decrease is attributable to:

1. Price and Cost Increases/Adjustments. On a comparative basis to the second quarter in 2008, the continued increase in costs of certain inputs to production, particularly raw and packaging materials, has led to higher cost of sales. This ongoing trend has resulted in the Fund implementing a price increase effective during the fourth quarter of 2008. These increased input costs, together with other variables, more than offset the full quarter impact of the price increase to private-label customers and the selling price increases to contract-manufacturing customers, decreasing gross profit by $1.0 million.

2. Foreign Exchange Effect on Sales. The strengthening of the United States dollar relative to the Canadian dollar during the quarter had the effect of increasing sales by approximately $1.5 million and that translated into a $0.2 million increase in gross profit for the quarter ended September 30, 2008.

3. Decrease in Amortization. Similar to the first quarter, the increase in finished goods inventory levels has resulted in less amortization of capital assets being expensed to cost of sales and more being included in the cost of inventory. The net effect was a decrease in the amortization associated with the cost of sales of $0.2 million versus the second quarter in 2008.

4. Effect of Change in Sales Volume. As previously noted, total volume during the second quarter of 2008 decreased by 0.1%. This change in sales volume had a negligible impact on gross profit.

Selling, general and administrative expenses for the quarter ended September 30, 2008 increased by $0.5 million compared to the second quarter in 2008, in large part due to additional costs associated with expanded public company disclosure requirements, together with an increase in foreign exchange losses on the United States dollar exposure in working capital in Menu's Canadian operations.

Financial expenses were $1.8 million higher during the quarter ended September 30, 2008 than in the second quarter of 2008. The Fund recorded a loss of $0.1 million on interest rate swaps during the third quarter compared to a gain of $1.5 million during the second quarter of 2008. Excluding the effect of the accounting for the interest rate swaps, on a comparative basis, interest expense increased by $0.2 million, due primarily to the strengthening of the United States dollar relative to the Canadian dollar during the quarter.

Relative to the quarter ended September 30, 2007

Sales for the quarter ended September 30, 2008, were $61.6 million, down 21.0% or $16.4 million compared to the same quarter last year. This decrease is attributable to:

1. Effect of Change in Sales Volume. A 24.6% decrease in volume resulting in a sales decrease of $18.6 million. As noted above, management considers the third quarter of 2007 to be an anomaly as customers, who had been without product for several months, refilled their 'pipelines'. In addition, volume to customers who had previously advised the Fund of their intent to cease purchasing products from Menu declined by 85.1% compared to the third quarter of 2007. Consequently, a year over year decline in volumes was not unexpected.

2. Price and Cost Increases/Adjustments. The impact of the price increase to private-label customers that was implemented during the second quarter of 2008 and the effect of pricing adjustments to pass through cost increases to Menu's contract-manufacturing customers, together with changes to sales mix and other variables, had the effect of increasing sales by $3.8 million.

3. Foreign Exchange Effect on Sales. The strengthening of the Canadian dollar relative to the United States dollar had the effect of decreasing sales by $1.6 million relative to the third quarter of 2007.

Overall, volume (expressed in cases of 24 cans or pouches) was down 24.6% compared to the quarter ended September 30, 2007. Can volume, which represented 87.6% of Menu's volume in the third quarter of 2008 (85.9% in 2007), declined by 23.1% (equating to a decrease in total volume of 19.8%) while pouch volume, which represented 12.4% of total volume (14.1% in 2007), declined by 33.7% (equating to a decrease in total volume of 4.8%) compared to the third quarter of 2007.

During 2007, the Fund was advised that customers whose volume represented approximately 37% of sales in 2006 and 33% of sales during the first quarter of 2007 would no longer be purchasing these products from Menu. The largest portion of this loss of business occurred in 2007, while the balance will be lost during 2008 and 2009. While volume to these customers increased during the third quarter of 2007 by 18.7% (relative to the first quarter of 2007) as certain of those departing customers bought-in inventory in advance of their termination, by the third quarter of 2008 it was down by 82.3% (relative to this same period). Overall, for the quarters ended September 30, 2007 and 2008, respectively, these customers accounted for 37.1% and 7.3% of total volume for the quarter. Compared to the third quarter of 2007, during the quarter ended September 30, 2008, volume to these customers decreased 85.1% (equating to 31.5% of total volume). This decrease more than offset the 11.0% increase (equating to 6.9% of total volume) in volume to the Fund's continuing customers.

Gross profit decreased by $1.5 million (or 19.6%) for the quarter ended September 30, 2008, compared to the prior year. This decrease is attributable to:

1. Effect of Change in Sales Volume. As previously noted, total volume for the third quarter decreased by 24.6%. This change in sales volume decreased gross profit by $2.3 million.

2. Price and Cost Increases/Adjustments. During the first quarter of 2008, Menu followed the leading national brands and announced a price increase to private- label customers that was implemented during the second quarter of 2008.

On a comparative basis to the same quarter in 2007, the increase in costs of certain inputs to production, including raw and packaging materials and labour and benefits, led to higher cost of sales. In addition, during 2007 the dramatic decline in sales due to the recall translated to a significant reduction in production, which resulted in factory overhead associated with the Fund's production facilities being allocated over a reduced number of cases, thereby further increasing the cost of the Fund's inventory, and in turn, its cost of sales as that inventory was sold. In contrast, during the fourth quarter of 2007, the Fund restructured its operations in order to better align its costs to its ongoing business. This restructuring had the effect of reducing production costs during the third quarter of 2008 as compared to the same quarter of 2007. These reduced costs of manufacturing, together with the selling price increases referred to above, as well as selling price increases to contract-manufacturing customers, more than offset the increases in input and other costs thereby increasing gross profit by $1.2 million.

Costs have continued to rise since the announcement of the price increase that was implemented during the second quarter and in August 2008 Menu again followed the leading national brand manufacturers and announced that it will be increasing prices to its private-label customers in both Canada and the United States. These price increases, which will be fully implemented during the fourth quarter, are expected to increase Menu's annualized sales by more than 5% and should enable it to recover some of the cost increases absorbed during the time since the last price increases.

3. Foreign Exchange Effect on Sales. The strengthening of the Canadian dollar relative to the United States dollar during the quarter had the effect of reducing sales by approximately $1.6 million and that translated into a reduction in gross profit of $0.2 million for the quarter ended September 30, 2008.

4. Increase in Amortization. The amortization associated with the South Dakota facility, which was sold during the third quarter of 2007, together with the effect of fully amortized assets, the write down of capital assets and the customer relationship as part of last year's restructuring by the Fund and the stronger Canadian dollar more than offset the additional amortization of capital projects completed in the past year, resulting in lower total amortization when compared to the third quarter of 2007. However, the increase in finished goods inventory levels during the third quarter of 2007 resulted in more amortization of capital assets being included in inventory as part of factory overhead costs, and less being expensed as part of cost of sales. This also happened during the third quarter of 2008, but to a much lesser extent. On a comparative basis the foregoing netted to an increase in the amortization associated with the cost of sales of $0.2 million versus the second quarter of 2007.

Selling, general and administrative expenses for the quarter ended September 30, 2008 increased by $0.1 million compared to the prior year. Savings resulting from the Fund's restructuring initiatives announced on October 10, 2007 (including the sale of its production facility in North Sioux City, South Dakota) resulted in a decrease of $0.7 million in selling and administrative expenses. Amortization was $0.1 million less than in 2007, largely as a result of the reduction in amortization associated with fully amortized assets during the period exceeding amortization associated with newly acquired assets being put into service and as a result of the stronger Canadian dollar. These savings were more than offset by the effect of foreign exchange losses on the United States dollar exposure in working capital in Menu's Canadian operations which increased by about $0.9 million compared to last year.

During the first quarter of 2007, management estimated that the total costs associated with the product recall would approximate $45 million. This estimate principally comprised product collection, write off and disposal costs of $36.5 million, lost margin on returned product of $2.9 million, $2.4 million to establish and operate a call centre to respond to customer concerns and $3.2 million in professional and associated fees necessary to manage through this difficult process. All but $3.0 million of these costs, which were expensed as incurred during 2007, were accrued in the first quarter of 2007. An additional $1.9 million (of the $3.0 million) in recall-related costs was expensed during the second quarter of 2007. The estimate for product recall costs was revised in the third quarter of 2007 and adjusted to $55 million with an additional $11.1 million being expensed.

As a consequence of the recall the Fund had to restructure its operations to better align costs with its ongoing business operations. The restructuring initiatives took several forms and under Canadian generally accepted accounting principles, depending upon their nature, would be recognized either in the third quarter of 2007 or over future periods. Costs associated with the write-off or write-down of: redundant inventory, the customer relationship previously capitalized take-or-pay receivables previously accrued and idle assets, together with severance and other restructuring related costs aggregated to approximately $15.9 million, which was reflected in the third quarter of 2007.

Adjusted EBITDA (see Note A) for the quarter ended September 30, 2008 amounted to $3.6 million as compared to adjusted EBITDA of $5.0 million in the third quarter of 2007 representing a decrease of $1.4 million (or 26.8%).

The value of the Canadian dollar, relative to the United States dollar, affects sales, gross margin, selling, general and administrative expenses, amortization, interest and EBITDA. Menu estimates that each change of $0.01 in the cost of the Canadian dollar changes EBITDA by approximately $0.095 million and Distributable Cash (see Note A) by approximately $0.070 million, on a quarterly basis. Menu estimates that the strengthening of the Canadian dollar during the third quarter of 2008 versus the same period in 2007 had only a nominal impact on EBITDA and Distributable Cash.

Amortization (which is included in cost of sales and selling, general and administrative expenses) in the third quarter of 2008 was $0.2 million higher than in 2007. This increase is directly attributable to fully amortized assets, the sale of the South Dakota facility, the write down of idle assets and the customer relationship and the effects of the strengthening of the Canadian dollar relative to the United States dollar, which were more than offset by the additional amortization in 2008 on the $3.6 million of capital expenditures made during the twelve-month period ended September 30, 2008 together with the full quarter amortization of the $0.5 million of capital expenditures made during the quarter ended September 30, 2007. Also, the increase in finished goods inventory levels during the third quarter of 2007 resulted in more amortization of capital assets being included in inventory as part of factory overhead costs, and less being expensed as part of cost of sales. This also happened during the third quarter of 2008, but to a much lesser extent.

Financial expenses were $1.3 million lower during the quarter ended September 30, 2008 than in the third quarter of 2007. The Fund recorded a loss of $0.1 million on interest rate swaps during the third quarter of 2008 compared to a loss of $1.0 million in the same quarter last year. Excluding the effect of the accounting for interest rate swaps, interest expense decreased by $0.4 million, reflecting both changes to interest rates and the lower amounts borrowed this year.

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.

Loss before non-controlling interest of Class B Exchangeable Units ("Class B Units") for the quarter ended September 30, 2008, was $2.0 million, compared to a loss of $29.3 million for the quarter ended September 30, 2007.

Operating Results for the Nine Months Ended September 30, 2008

The various recalls initiated by the Fund during the first half of 2007 had a significant impact on the Fund's results for the nine months ended September 30, 2007. In order to draw meaningful conclusions with respect to the Fund's performance in the first nine months of 2007 and thereby permit a meaningful comparison to the same period of 2008, it is important to isolate the effects of the recalls from the ongoing business.

The following table further evaluates the results noted above:



For the nine months ended September 30, 2007
2008 Total Recall Excluding
and Recall
Restructuring and
Expenses Restructuring
$ $ $ $
Sales 177,536 189,800 (14,320) 204,120
Cost of sales 157,226 170,680 (11,435) 182,115
-------------------------------------------------
Gross profit 20,310 19,120 (2,885) 22,005
Selling, general and
administrative expenses 14,531 16,957 - 16,957
-------------------------------------------------
Income (loss) before
the undernoted 5,779 2,163 (2,885) 5,048
Product recall expenses - 52,115 52,115 -
Restructuring and related
expenses 182 15,889 15,889 -
Financial expenses 9,146 9,528 - 9,528
-------------------------------------------------
Loss before income taxes
and non-controlling
interest (3,549) (75,369) (70,889) (4,480)
-------------------------------------------------
-------------------------------------------------


Sales for the nine months ended September 30, 2008, were $177.5 million, down 6.5% or $12.3 million compared to the same period last year. This decrease is attributable to:

1. Effect of Change in Sales Volume. A 10.5% decrease in volume resulting in a sales decrease of $18.7 million primarily due to the impact of the recall in the comparative period and the business that was lost, and fully reflected in 2008, as a result.

2. Foreign Exchange Effect on Sales. The strengthening of the Canadian dollar relative to the United States dollar during the nine-month period had the effect of reducing sales by approximately $14.4 million. These decreased sales were partially offset by the following two factors:

3. Effect of Product Recall. As a further consequence of the product recall, sales returns were received or accrued during the quarter ended March 31, 2007. There were no such returns during the nine months ended September 30, 2008, resulting in increased sales on a comparative basis of $14.3 million.

4. Price and Cost Increases/Adjustments. The impact of the price increases since the end of the first quarter of 2007 and the effect of pricing adjustments to pass through cost increases to Menu's contract manufacturing customers, together with changes to sales mix and other variables, had the effect of increasing sales by $6.5 million.

Overall, excluding actual returns arising from the product recall, volume (expressed in cases of 24 cans or pouches) was down 10.5% compared to the nine months ended September 30, 2007. Can volume, which represented 87.6% of Menu's volume in the first nine months of 2008 (85.8% in 2007), decreased by 8.7% (equating to a decrease in total volume of 7.5%) . Similarly, during the first nine months of 2008, case sales of the pouch product, which represented 12.4% of total volume (14.2% in 2007), decreased by 21.5% (equating to a decrease in total volume of 3.0%) compared to the first nine months of 2007. As noted previously, the pouch format, which is exclusively in the "cuts and gravy" style of product, was most significantly impacted by the recall.

During 2007, the Fund was advised that customers whose volume represented approximately 37% of sales in 2006 would no longer be purchasing these products from Menu. The largest portion of this loss of business occurred in 2007, while the balance is expected to be lost during 2008 and 2009. During the nine months ended September 30, 2008, volume to these customers decreased 77.0% as compared to the nine months ended September 30, 2007, which more than offset the 20.1% increase in volume to the Fund's continuing customers. Over this same period the significance of these lost customers has decreased as well, with their volumes accounting for only 8.0% of total volume in the first nine months of 2008 compared to 31.5% during the same period in 2007.

Gross profit increased by $1.2 million (or 6.2%) for the nine months ended September 30, 2008, compared to the prior year. This increase is attributable to:

1. Effect of Change in Sales Volume. As previously noted, excluding actual returns arising from the product recall, total volume for the first half of the year decreased by 10.5%. This change in sales volume decreased gross profit by $2.8 million.

2. Product Recall Impacts. As noted above, due to the product recall, $14.3 million in sales returns were received or accrued during the quarter ended March 31, 2007. The gross profit associated with these returns amounted to $2.9 million.

3. Price and Cost Increases/Adjustments. In February 2007, Menu followed a leading national brand manufacturer and announced a price increase on canned products sold to its United States private-label customers. This price increase was effective in the second quarter of 2007. During the first quarter of 2008, Menu followed the leading national brands and announced a price increase to private-label customers that was implemented during the second quarter of 2008.

On a comparative basis to the same period in 2007, the increase in costs of certain inputs to production, including raw and packaging materials and labour and benefits, have led to higher cost of sales. However, during 2007 and particularly during the second quarter of 2007, lower sales translated to lower levels of production, which necessitated that the factory overhead associated with the Fund's production facilities had to be allocated over fewer cases, thereby increasing the cost of the Fund's inventory, and in turn, its cost of sales as that inventory was sold. During the fourth quarter of 2007, the Fund restructured its operations in order to better align its costs to its ongoing business. This restructuring had the effect of reducing production costs during the first nine months of 2008 as compared to the same period of 2007. These reduced costs of manufacturing, together with the selling price increases referred to above, as well as selling price increases to contract- manufacturing customers, more than offset the increases in input and other costs thereby increasing gross profit by $2.4 million. Costs continued to rise since the announcement of the price increase that was implemented during the second quarter and in August 2008 Menu again followed the leading national brand manufacturers and increased prices to its private-label customers in both Canada and the United States. These price increases, which will be fully implemented during the fourth quarter, are expected to increase Menu's annualized sales by more than 5% and should enable it to recover some of the cost increases absorbed during the time since the last price increases.

4. Foreign Exchange Effect on Sales. The strengthening of the Canadian dollar relative to the United States dollar during the period had the effect of reducing sales by approximately $14.4 million and that translated into a reduction in gross profit of $2.2 million for the nine months ended September 30, 2008.

5. Decrease in Amortization. The amortization associated with the South Dakota facility, which was sold during the third quarter of 2007, together with the effect of fully amortized assets, the write down of capital assets and the customer relationship as part of last year's restructuring by the Fund, and the stronger Canadian dollar more than offset the additional amortization of capital projects completed in the past year, resulting in lower total amortization when compared to the first nine months of 2007. Furthermore, the reduction in finished goods inventory levels during the first nine months of 2008 has resulted in less amortization of capital assets being included in inventory as part of factory overhead costs, and more being expensed as part of cost of sales. This contrasts with the same period of 2007 during which finished goods inventory levels increased resulting in less amortization of capital assets being expensed to cost of sales. On a comparative basis the foregoing netted to a decrease in the amortization associated with the cost of sales of $0.9 million versus the first nine months of 2007.

Selling, general and administrative expenses for the nine months ended September 30, 2008 decreased by $2.4 million compared to the prior year. Savings resulting from the Fund's restructuring initiatives announced on October 10, 2007 (including the sale of its production facility in North Sioux City, South Dakota) accounted for the majority of the decrease. Amortization was $1.0 million less than in 2007, largely as a result of the reduction in amortization associated with fully-amortized assets during the period and resulting from the sale of the South Dakota facility exceeding amortization associated with newly acquired assets being put into service and as a result of the stronger Canadian dollar. Foreign exchange losses on the United States dollar exposure in working capital in Menu's Canadian operations increased by about $2.3 million compared to last year. Bonus expense, which was negligible in 2007 due to the recall, increased by $0.2 million, compared to the first nine months of last year.

During 2007, management estimated that the total costs associated with the recall would approximate $55 million. This estimate principally comprised product collection, write off and disposal costs of $46.5 million, the lost margin on returned product of $2.9 million discussed above, $2.4 million to establish and operate a call centre to respond to consumer concerns and $3.2 million in professional and associated fees necessary to manage this difficult process.

As a consequence of the recalls and the resulting loss of customers during 2007, the Fund had to restructure its operations to better align them with its ongoing business. This resulted in $15.9 million in restructuring and related charges being expensed during the nine months ended September 30, 2007.

In order to have any meaningful discussion of EBITDA it is necessary to remove the impacts of the recall and restructuring as described above. Adjusting for the $55.0 million in recall related costs and the $15.9 million in restructuring related costs, the foregoing resulted in an adjusted EBITDA (see Note A) of $14.8 million for the nine months ended September 30, 2007. This compares to adjusted EBITDA of $13.8 million (adjusted for restructuring and related expenses) for the nine months ended September 30, 2008, a decrease of $1.0 million (or 6.9%) over the same period in 2007.

The strengthening of the Canadian dollar, relative to the United States dollar, has decreased sales, gross margin, selling, general and administrative expenses, amortization, interest and EBITDA. Menu estimates that each change of $0.01 in the cost of the Canadian dollar changes EBITDA by approximately $0.38 million and Distributable Cash (see Note A) by approximately $0.28 million, on an annual basis. Menu estimates that the strengthening of the Canadian dollar during the first nine months of 2008 versus the same period in 2007 reduced EBITDA by approximately $2.2 million and Distributable Cash by approximately $1.6 million. Subsequent to September 30, 2008 the United States dollar has strengthened significantly relative to the Canadian dollar. Should this be sustained throughout the balance of the year there will be a reversal of the trends noted during the first three quarters of 2008.

Amortization (which is included in cost of sales and SG&A expense) in the first nine months of 2008 was $1.9 million less than in the same period in 2007. This decrease is directly attributable to fully amortized assets, the sale of the South

Dakota facility, the write down of idle assets, the write down of the customer relationship, and the effects of the strengthening of the Canadian dollar relative to the United States dollar offset by the additional amortization in 2008 on the $3.6 million of capital expenditures made during the twelve-month period ended September 30, 2008 together with the full period amortization of the $3.1 million of capital expenditures made during the nine months ended September 30, 2007.

Financial expenses were $0.4 million lower during the nine months ended September 30, 2008 than in the same period of 2007. The Fund recorded a loss of almost $0.3 million on interest rate swaps during the first nine months of 2008 compared to a loss of more than $0.4 million in the same period last year. Excluding the effect of accounting for the interest rate swaps, interest expense increased by $0.5 million, reflecting both the higher interest rates and the higher amounts borrowed this year. Offsetting this comparative increase, the amendments to the Agreements with the Fund's Lenders were such that under GAAP, for accounting purposes, they resulted in a settlement of the original senior secured notes facility. As a consequence, during the first half of 2007 it was necessary to write off $1.1 million in costs associated with the establishment of the original facility. The Fund amortized almost $0.5 million more in deferred commitment fees during the nine months ended September 30, 2008, than during the same period during 2007.

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. Since the Fund has approximately $69.5 million in available tax losses it is not expecting to pay any current income taxes for the foreseeable future.

Loss before non-controlling interest of Class B Units for the nine months ended September 30, 2008, was $3.5 million, compared to a loss of $61.3 million for the nine months ended September 30, 2007.

Liquidity

During the nine months ended September 30, 2008, the Fund generated cash flow from operations of $2.7 million. This amount was decreased by $5.2 million as a result of changes in non-cash working capital items. Specifically, accounts receivable increased by $2.5 million and inventories increased by $5.0 million, while accounts payable and accrued liabilities went up by $1.2 million and prepaid expenses and income taxes declined by $0.7 million and $0.4 million respectively. The increase in accounts receivable reflects the timing of sales near the end of the quarter. Inventories have been increased to improve service levels from those being experienced year-to-date. In addition, the cost of inventory reflects the increased cost of raw and packaging materials as compared to costs at December 31, 2007. The monitoring of inventory levels remains a priority of the Fund. The changes in accounts payable and accrued liabilities, prepaid expenses and income taxes all reflect the timing of transactions during the period.

No distributions were declared during 2008.

On May 14, 2007, the Fund reached an agreement with its lenders to modify the terms of its existing credit facilities. This arrangement modified the terms governing the US$30 million bank and the non-revolving US$85 million senior secured notes facilities and increased the bank facility by US$20 million. On October 19, 2007 the Fund reached agreement with its lenders to further modify the terms of its credit facilities given changes in estimated recall costs and the restructuring of the Fund's operations. The available bank facility was reduced by US$2.5 million on each of September 30, 2007, October 19, 2007 and March 31, 2008 and was to be further reduced by US$2.5 million on June 30, 2008, September 30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009 at which time the additional US$20 million facility will have been extinguished. During June 2008 the Fund agreed with its lenders to defer the reductions due on June 30, 2008 and September 30, 2008 until December 31, 2008, at which time the reductions in respect of the last three quarters of 2008 will still aggregate to US$7.5 million. The Fund had drawn or committed US$37,281 ($39,674) of the US$42.5 million bank facility on September 30, 2008.

As at September 30, 2008 the Fund had a working capital deficiency of $13.0 million. This deficiency arose as a result of the $55 million in recall related expenses incurred in 2007, which were funded by bank indebtedness and working capital management. Cash flow from operations, together with the remaining unutilized bank facilities, the expected proceeds from the sale of assets and working capital management, is expected to be sufficient to fund Menu's normal, ongoing operating requirements and maintenance capital expenditures. The Fund's US$30 million revolving operating facility expires on June 30, 2009. Management expects to be able to renew this facility at that time on terms and conditions acceptable to the Fund.

Various legal actions and investigations have been commenced against the Fund as a consequence of the product recall. A number of product liability class action lawsuits were commenced in the United States and Canada, over 100 of which were consolidated in what is known as the pet food multi-district litigation. On October 14, 2008, the United States District Court for the District of New Jersey (the "U.S. Court") issued an oral order giving final approval of the cross-border settlement agreement in the pet food multi-district litigation. On November 3, 2008 there was a simultaneous hearing for final approval in the various Canadian courts (the "Canadian courts"). Formal final approval from all courts is expected in the near term, although there can be no assurances. The settlement agreement would resolve more than 100 class action lawsuits filed in the U.S. and Canadian courts and is binding on all members of the settlement class, except for the 114 individuals who have validly opted out of the settlement and who thereby retain their individual claim against one or more of the defendants including Menu. Menu's contribution to the settlement fund is within the $55 million estimate of recall costs.

Other actions and investigations remain outstanding, and it is possible that additional actions or investigations may arise in the future. The Fund may be required to expend significant amounts and to devote considerable management time to these matters. It is not possible to predict the amount of such expenses, the resolution of such claims or investigations, or the extent to which these items will be paid by insurance. Furthermore, if the actual cost of the recall and restructuring exceed management's estimates of $55 million and $5.4 million, respectively or if the degree to which business is re-established is unexpectedly low, the Fund may need to obtain consent from its lenders and/or additional credit facilities, although there can be no assurances that such consents or facilities would be provided or available.

In common with most other companies, recent events in the world credit markets and the world economy could have a significant impact on the Fund going forward. In particular, the recent strengthening of the United States dollar relative to the Canadian dollar, if it continues, would have a positive impact on earnings, EBITDA, Distributable Cash and net assets. The Fund estimates that, on an annual basis, each change of $0.01 in the cost of the Canadian dollar changes earnings by approximately $0.04 million, EBITDA by $0.38 million and Distributable Cash by $0.28 million. Due to changes in credit markets, terms and conditions applicable to the renewal of the Fund's revolving operating facility may change from the existing facility, but it is not possible to predict the nature or extent of such changes. Management does not expect these developments to have a significant impact on either sales volumes or the creditworthiness of its customers, although it is not possible to be certain in this regard.

Capital Resources

During the nine months ended September 30, 2008, Menu spent $2.3 million, net of the proceeds of sale, on capital assets. Capital expenditures, which the Fund defines as being of a maintenance nature for purposes of determining Distributable Cash, which totalled $1.4 million for the nine months ended September 30, 2008, were financed from the cash flow of the business. These maintenance capital expenditures were over and above the $6.8 million (2007 - $9.5 million) for labour and parts expended by Menu for the ongoing repairs and maintenance of its three plants (four in 2007) that have been expensed as part of cost of sales. Capital expenditures of a growth nature totalled $1.2 million for the nine months ended September 30, 2008.

Outstanding Units

The following table highlights the number of units outstanding:



Class B
Exchangeable
Trust Units Units
December 31, 2005 17,766,159 11,133,655

Conversion of Class B Units during the year 1,236,431 (1,236,431)
Options exercised during the year 74,683 -
----------------------------
December 31, 2006 19,077,273 9,897,224
Conversion of Class B Units during the year 1,274,635 (1,274,635)
Options exercised during the year 9,746 -
----------------------------
December 31, 2007 and September 30, 2008 20,361,654 8,622,589
----------------------------


During the year ended December 31, 2007, 390,156 unit options with an exercise price of $7.34 were granted to 47 employees; 18,390 unit options with an exercise price of $3.00 were granted to one employee; 1,189,300 unit options with an exercise price of $1.82 were granted to 70 employees; and 21,000 unit options with an exercise price of $0.92 were granted to one employee. These options vest in equal annual amounts over three years and will expire 39 months after the day they were granted. During the year ended December 31, 2007, 219,416 unit options with an exercise price of $4.56; 21,000 unit options with an exercise price of $5.00; 21,000 unit options with an exercise price of $6.20; 6,000 unit options with an exercise price of $6.55; and 87,588 unit options with an exercise price of $7.34 were forfeited. During the year ended December 31, 2007, 9,746 options with an exercise price of $4.56 were exercised by one employee.

During the quarter ended June 30, 2008; 27,900 unit options, with an exercise price of $1.35 were granted to five employees and 21,000 unit options with an exercise price of $1.10 were granted to one employee. During the quarter ended September 30, 2008, 15,300 unit options, with an exercise price of $1.37 were granted to three employees. All options granted during 2008 vest in equal annual amounts over three years and will expire 39 months after the day they were granted. During the nine months ended September 30, 2008, 63,000 unit options with an exercise price of $4.56; 31,200 unit options with an exercise price of $7.34; and 54,000 unit options with an exercise price of $1.82 were forfeited.

On June 30, 2008, the Fund agreed to issue 1 million five-year Trust Unit warrants in the Fund as part of the settlement of certain claims against the Fund relating to the recall. The Trust Unit warrants were issued on August 22, 2008 and are exercisable at $1.33, the fair market value on that date.

Controls and Procedures

In accordance with Multilateral Instrument No. 52-109 ("MI 52-109"), the Fund's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") acknowledge that they are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting for the Fund. In addition, in respect of:

(a) Disclosure Controls and Procedures

As at September 30, 2008, the Fund's management, under the supervision of, and with the participation of the CEO and CFO, evaluated the design of the disclosure controls and procedures. Based on this evaluation, the CEO and CFO have concluded and certify that as at September 30, 2008, the Fund's disclosure controls and procedures provide reasonable assurance that material information relating to the Fund, including its consolidated subsidiaries, is made known to them in a timely manner.

Consistent with the concept of reasonable assurance, the Fund recognizes that the relative cost of maintaining these controls and procedures should not exceed their expected benefits. As such, the Fund's disclosure controls and procedures can only provide reasonable, and not absolute, assurance that the objectives of such controls and procedures are met.

(b) Internal Controls over Financial Reporting

The CEO and CFO further certify that they have designed such internal controls over financial reporting, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Consistent with the concept of reasonable assurance, the Fund recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. As such, the Fund's internal controls over financial reporting can only provide reasonable, and not absolute, assurance that the objectives of such controls are met.

During the third quarter of 2008, management enacted a change to internal controls that could materially affect, or could be reasonably considered to materially affect, the internal controls over financial reporting. Specifically, the Fund is undertaking, on a company-wide basis, a software conversion to a new inventory tracking system which better integrates with the Fund's existing enterprise system. Eventually this system will be used to track both finished goods and raw materials and packaging inventories. During the quarter ended September 30, 2008 this system was implemented, in respect of finished goods, in the Fund's Canadian plant. During the fourth quarter of 2008 and the first quarter of 2009 this system will be implemented, in respect of finished goods, in the Fund's two United States plants. Once this conversion is successfully completed it is expected that a similar staged implementation will be undertaken with respect to raw materials and packaging inventories. This change arises from the Fund's ongoing efforts to improve the efficiency and effectiveness of its existing internal controls.

Recent Canadian accounting pronouncements issued and not yet adopted

The Accounting Standards Board has adopted a strategic plan that will have GAAP converge with International Financial Reporting Standards ("IFRS") effective January 2011. The Fund began the planning for its transition from GAAP to IFRS during the third quarter of 2008.

Outlook

Product Recall and Litigation

Between March 16, 2007 and May 22, 2007 the Fund instituted a series of recalls of certain products, manufactured between November 8, 2006 and March 6, 2007, which were suspected of containing an adulterated ingredient. In addition, the Fund instituted a withdrawal of all varieties of recalled product, regardless of its date of manufacture, in order to reduce the risk that any recalled product might remain on the retailer's shelves.

Throughout this period of time, the Fund worked closely with regulatory authorities and its customers to learn as much as it could about the cause for the recall. It was ultimately determined that the adulterated ingredient was wheat gluten adulterated with melamine and related compounds. This ingredient was imported from China by a broker in the United States. Subsequent to Menu's recall a number of other significant companies in the pet food industry, who had also purchased wheat gluten from this same broker, followed suit and instituted recalls of their own. As it transpired, the Fund, the pet food industry, our customers and consumers were all victims of a fraud of monumental proportions.

The Fund estimates that, based on currently available information, the direct costs associated with this recall, which will be financed from a combination of internally generated cash flow, proceeds from asset sales and bank credit facilities, will approximate $55 million, which had a significant impact on the results for the year ended December 31, 2007.

On May 14, 2007 the Fund reached an agreement with its lenders to increase the amount available under the bank facility and on May 14, 2007 and again on October 19, 2007 to modify the terms of its existing facility in order to provide funding for the direct and indirect costs of the recall. The amended agreements increase the rates of interest paid by the Fund. Both of these changes have increased the Fund's financial expenses and are expected to continue to do so going forward.

Lawsuits have been initiated against the Fund and certain of its subsidiaries in the United States and in Canada, which seek to recover damages on behalf of the named plaintiffs and a purported class of pet owners. On October 14, 2008, the U.S. Court issued an oral order giving final approval of the cross-border settlement agreement in the pet food multi-district litigation which consolidated over 100 of the class action product liability civil suits commenced. On November 3, 2008 there was a simultaneous hearing for final approval in the various Canadian courts. Formal final approval from all courts is expected in the near term, although there can be no assurances. The settlement agreement would resolve more than 100 class action lawsuits filed in the U.S. and Canadian courts and is binding on all members of the settlement class, except for the 114 individuals who have validly opted out of the settlement and who thereby retain their claims against one or more of the defendants, including Menu.

The settlement agreement would create a settlement fund of US$24 million that will allow a potential recovery of up to 100% of all economic damages incurred by pet owners, subject to certain limitations. The settlement fund, administered by a neutral claims administrator, will be available to persons in the United States and Canada who purchased or obtained, or whose pets used or consumed, recalled pet food. Pursuant to the settlement agreement, the settlement fund would be funded by the defendants, including Menu Foods Income Fund and its product liability insurer. The Fund's corporate contribution to the settlement is within its previously recorded recall provision of $55 million.

Other actions and investigations remain outstanding, and it is possible that additional actions or investigations may arise in the future. The U.S. Food and Drug Administration is conducting an investigation into the situation. The United States Attorney for the Western District of Missouri, based in Kansas City, has informed Menu that it is the target of a criminal investigation for possible violations of the U.S. Federal Food, Drug and Cosmetic Act. It is possible that additional actions or investigations may arise in the future. The Fund may be required expend significant amounts and to devote considerable management time to these matters. It is not possible to predict the amount of such expenses, the resolution of such claims or investigations, or the extent to which these items will be paid by insurance.

Customers

During 2007, the Fund was advised that customers whose volume represented approximately 37% of sales in 2006 would no longer be purchasing these products from Menu. Much of this business was lost during 2007 and by the third quarter of 2008 these customers were only accounting for about 8.1% of the Fund's total volume. This remaining business will be lost over the remainder of 2008 and into 2009. Business with our remaining customers continues to be re-established. The Fund believes that the recall did not cause it to violate any of its contracts with its customers because, among other things, the recall was caused by unforeseen circumstances beyond the Fund's control. However, it is possible that in the future Menu may be found to have breached contracts with one or more of its customers as a result of the recall.

Cost and Price Increases

In respect of its private-label business, in both the United States and Canada, Menu's practice, in order to help ensure that the Fund's products are competitively priced at retail, has been to initiate price increases once leading national brand manufacturers have announced price increases on their products. Typically these increases follow a period of rising costs and consequently are preceded by a time of compressed margins. In some instances, as has been the case in the past, outside factors can allow the period of compression to continue for much longer than would otherwise be the case. Absent regular price increases in the future, Menu expects that the margins on its private-label business will continue to be compressed from time-to-time.

Increasing input costs are a regular part of Menu's business. Rising costs of steel and aluminum mean higher can costs. Higher utility costs, together with increases in medical benefits (escalating at rates well above inflation) and labour, push the cost of operating higher. Higher fuel costs, together with legislation in the United States on work hours for truck drivers and trucking delays crossing the Canadian/United States border similarly increases the cost of delivery. Rising costs for meats and grain products also increased the cost of products. Such cost increases have occurred routinely over the past number of years and continue to occur in 2008. Regular price increases are essential to mitigate the effect rising costs have on margins.

For the contract-manufacturing portion of Menu's business, most of these cost increases are automatically passed on to customers (albeit with some timing delays). Consequently, the degree of margin compression is not as severe as it can be in the case of the private-label business.

In January 2008 and again in August 2008, Menu followed the leading national brand manufacturers and increased prices to its private-label customers. Taken together, these two price increases are expected to increase Menu's sales by more than 8% and should enable Menu to recover some of the cost increases absorbed during the time since the previous price increase. Subsequent to these increases, the costs of such inputs as meat, labour, certain utilities and medical benefits have continued to escalate. Most significantly, the cost of tinplate used in the manufacture of steel cans is expected to increase dramatically on January 1, 2009, increasing the cost of steel cans by as much as 50%. As in the past, these continued increases are expected to adversely impact the Fund's margin until such time as national brand price increases permit the Fund to once again increase prices.

Bovine Spongiform Encephalopathy ("BSE")

The US and Canada have been categorized by OIE, the World Organization for Animal Health, as having minimal risk for BSE. Both countries, however, continue to enhance their feed safety systems to further reduce this risk. Effective July 12, 2007, Canada announced an enhanced feed rule whereby specified risk materials (i.e. those components of the animal thought to have the highest level of infectivity when consumed) are banned in all animal feed, including pet food. This rule includes the elimination of tissues from animals that did not pass both pre- and post-mortem inspection. While having immediate impact on some pet food raw materials, the impact on finished pet food will not be felt until Part IV of the Canadian Food Inspection Agency's ("CFIA") Health of Animals Regulations is revised. This implementation date for these changes could be as early as October 2008, with publication in the Canada Gazette a pre-requisite. On April 27, 2008, the US announced a revised BSE Feed Rule, which becomes effective in 2009, that has the same objective but allows for some tissues to be recovered from animals which did not pass the inspections noted above.

Since 2003, import permits have been required to allow the transport of some raw materials and all finished pet foods from Canada to the United States. These permits preclude the use of Canadian beef in Menu's Streetsville facility. As a consequence, it is expected that import permits will soon be required in order to ship product from the US to Canada. The regulations appear to preclude the presence of any specified risk materials in the facility (using the CFIA definition of such materials, which is more restrictive than the US definition). This does not present an issue to Menu since our US facilities have already been inspected in anticipation of these regulation changes.

The equivalence regarding BSE status may ultimately allow some relaxation of existing requirements. Until that time Menu Foods is well placed, having facilities on both sides of the border and having a long-standing policy of specifying absence of specified risk materials in its plants.

Subordination and Distributions

The Fund has two classes of units: (a) publicly traded Trust Units; and (b) privately held Class B Units. The Declaration of Trust established that the Class B Units' rights to distributions were subordinated to those of the public Trust Units until such time as certain conditions were satisfied. These conditions were met by February 2005, and since that time, except as discussed below, the Class B Units have no longer been subordinated to the publicly traded Trust Units.

On May 11, 2005, certain holders of Class B 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 agreed to forego all distributions, while holders of approximately 7.7 million units agreed to forego receipt of distributions in excess of $0.02 per unit. Such unitholders are entitled to a reimbursement of such foregone distributions, which at September 30, 2008 amounted to $4.2 million, only to the extent that the Fund generates sufficient Distributable Cash in the future and declares distributions in excess of 9 cents per unit, per month.

Financial Covenants

Most of the Fund's outstanding debt is represented by its bank facility and senior secured notes. As at September 30, 2008, the Fund had $38.9 million drawn on its bank facility and $79.6 million of senior secured notes outstanding. Each of these facilities has financial covenants and cross- default provisions that must be met.

The costs associated with the recall announced on March 16, 2007 have been significant and resulted in the Fund not being in compliance with certain financial covenants with its lenders as at March 31, 2007. Accordingly, on May 14, 2007, the Fund entered into amended Agreements with its lenders, which among other things, define the terms and conditions governing the Fund's US$30 million bank and non-revolving US$85 million senior secured notes facilities, going forward. In addition, the agreement with the bank was expanded to include a new US$20 million credit facility (subsequently reduced to US$15 million on October 19, 2007 and to US$12.5 million on March 31, 2008). Events after May 14, 2007 resulted in the Fund not being in compliance with these amended terms and on October 19, 2007 the Fund entered into amended Agreements with its lenders which, among other things, define the terms and conditions governing the Fund's bank and senior secured notes facilities, going forward.

Legislative Changes

Like others in the trust sector, the Fund was impacted by the Canadian Government's decision on October 31, 2006 to introduce a tax on distributions made by publicly traded income trusts. Bill C-52 which, in part, imposes this new tax on income funds and other similar flow through entities, passed fourth reading in the House of Commons on June 12, 2007. To put things in context, it is important to note that the majority of the Fund's business is conducted outside of Canada and that the Fund is taxable in each of the foreign jurisdictions in which it operates. Since the Fund's IPO, for the periods ended December 31, 2002, 2003, 2004 and 2005, the percentage of distributions that were considered "other taxable income" amounted to 22.79%, 22.38%, 21.05% and 34.98%, respectively. Given the difficult conditions experienced in 2005, management does not consider the composition of distributions in that year to be representative of future expectations. Distributions have been suspended since 2005, and the Fund's distribution strategy will not be revisited until such time as distributions are permitted under the covenants with its lenders. Management's interpretation of the announcements made by the Department of Finance is that it is only this "other taxable income" that will be subject to the proposed tax of 31.5% starting in 2011.

Risks and Uncertainties

Menu and the Fund are subject to numerous risk factors in its ongoing business. These risk factors include adequacy of credit facilities, the ability to obtain price increases in the face of rising costs, reliance on key customers, absence of long-term sales contracts, customer performance and relationships, foreign exchange fluctuations, governmental regulations and restrictions, legislative changes, 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 24 and 25 to the accompanying consolidated financial statements. Additional information about the Fund is available at www.sedar.com.

Many of the risks and uncertainties facing the Fund result from the product recall, including its ultimate final cost, the timing and extent of the resumption of normal business, the extent of any fines or penalties that may be assessed, the cost of any resulting litigation or investigations, including the extent to which these costs will be covered by insurance, and the impacts of the foregoing on liquidity.

The strength of the Canadian dollar relative to the United States dollar and the ongoing inability to pass input cost increases on to private-label customers in a timely manner are more traditional risks facing the Fund. 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, for specified periods, to hedge distributable cash flow against future fluctuations in the currency (as has been done in the past during periods when distributions were being paid), it is not possible to hedge business operations, so a strong Canadian dollar will have a negative impact on the relative contribution of the Fund's United States dollar denominated business. Similarly, if the Fund absorbs increased raw material and other costs without the benefit of a timely price increase to its private-label customers, gross margin will be depressed and profitability and the Fund's ability to pay distributions will be curtailed. Given the nature of the industry, price increases are largely beyond Menu's control.

The Fund's lenders do not permit the Fund to make any monthly distributions unless it is in compliance with the covenants contained in the original Agreements with the lenders, including a total debt to EBITDA ratio of 3 to 1 or less. There can be no assurance as to either when the Fund will resume monthly distributions, or the amount of the monthly distributions that will be paid at that time.

On October 31, 2006 the Department of Finance (Canada) announced the "Tax Fairness Plan" whereby the income tax rules applicable to publicly traded trusts and partnerships were significantly modified. Bill C-52, which imposes a new tax on distributions of income funds and other similar public flow through entities, passed fourth reading in the House of Commons on June 12, 2007 and is therefore considered substantively enacted under GAAP. The Fund is considering the possible impact of the new rules. The new rules may adversely affect the marketability of the Fund's units and the ability of the Fund to undertake financings and acquisitions, and, at such time as the new rules apply to the Fund, the distributable cash of the Fund may be reduced.

Various legal actions and investigations have been commenced against the Fund as a consequence of the product recall. A number of product liability class action lawsuits were commenced in the United States and Canada, over 100 of which were consolidated in what is known as the pet food multi-district litigation. On October 14, 2008, the U.S. Court issued an oral order giving final approval of the cross-border settlement agreement in the pet food multi-district litigation. On November 3, 2008 there was a simultaneous hearing for final approval in the various Canadian courts. Formal final approval from all courts is expected in the near term, although there can be no assurances. The settlement agreement would resolve more than 100 class action lawsuits filed in the U.S. and Canadian courts and is binding on all members of the settlement class, except for the 114 individuals who have validly opted out of the settlement and who thereby retain their individual claim against one or more of the defendants including Menu. Menu's contribution to the settlement fund is within the $55 million estimate of recall costs.

Other actions and investigations remain outstanding, and it is possible that additional actions or investigations may arise in the future. The Fund may be required expend significant amounts and to devote considerable management time to these matters. It is not possible to predict the amount of such expenses, the resolution of such claims or investigations, or the extent to which these items will be paid by insurance.

In addition to the matters noted above, the Fund is involved in various claims and litigation both as plaintiff and defendant. In the opinion of management, the resolution of claims against the Fund will not result in a material effect on the consolidated financial position of the Fund. Any settlements or awards will be reflected in the consolidated statement of operations as the matters are resolved.

Note A: EBITDA is not a recognized measure under 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. Adjusted EBITDA restates EBITDA by removing the effects of non-recurring items.

Distributable Cash is not a recognized measure under Canadian 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. The computation and disclosure of Distributable Cash in this Management's Discussion and Analysis is in all material respects in accordance with the guidance provided in the CICA's publication "Distributable Cash in Income Trusts and Other Flow-Through Entities - Guidance on Preparation and Disclosure in Management's Discussion and Analysis - Draft Interpretive Release."

Distributable Cash per Trust Unit is not a recognized measure under Canadian GAAP. Management believes that together with net income, EBITDA and Distributable Cash, Distributable Cash per Trust Unit is a useful supplemental measure of operating performance. Distributable Cash per Trust Unit, is defined as Distributable Cash divided by the diluted weighted average number of Trust Units outstanding during the period.

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

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



For the Quarter ended
September 30,
2008 2007
$ '000's $ '000's
Net income (loss) (2,049) (19,295)
Adjust for:
Non-controlling interest of Class B
Exchangeable Units - (10,006)
Amortization of property, plant
and equipment 2,494 2,252
Amortization of customer relationship - 38
Unit based compensation 137 123
Future income taxes - (42)
Current income taxes (60) 523
Financial expenses 3,100 4,393
----------------------
EBITDA 3,622 (22,014)
Product recall - 11,086
Restructuring and related expenses 10 15,888
----------------------
Adjusted EBITDA 3,632 4,960
----------------------
----------------------


For the Quarter ended
September 30,
2008 2007
$ '000's $ '000's
Cash flow from operating activities (6,737) (8,312)
Adjust for:
Maintenance capital expenditures (23) (309)
Principal repayments (7) (7)
----------------------
Distributable Cash from Operations (6,767) (8,628)
----------------------
----------------------



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


Since
For the Nine Inception
Months ended (May 22, 2002)
September 30, to September
2008 2007 30, 2008
$ '000's $ '000's $ '000's
Net loss (3,518) (40,406) (87,858)
Adjust for:
Goodwill impairment loss - - 124,030
Non-controlling interest of Class B
Exchangeable Units - (20,955) (30,210)
Amortization of property, plant
and equipment 7,530 9,089 86,643
Amortization of customer relationship - 298 2,789
Unit based compensation 448 348 1,091
Future income taxes - (14,337) (7,370)
Current income taxes (31) 329 2,971
Financial expenses 9,146 9,528 50,457
----------------------------------
EBITDA 13,575 (56,106) 142,543
Product recall - 55,000 55,000
Restructuring and related expenses 182 15,888 4,618
----------------------------------
Adjusted EBITDA 13,757 14,782 202,161
----------------------------------
----------------------------------



Since
For the Nine Inception
Months ended (May 22, 2002)
September 30 to September
2008 2007 30, 2008
$ '000's $ '000's $ '000's
Cash flow from operating activities (2,677) (37,375) 73,655
Adjust for:
Maintenance capital expenditures (1,355) (1,141) (15,102)
Principal repayments (21) (20) (615)
----------------------------------
Distributable Cash from Operations (4,053) (38,536) 57,937
----------------------------------
----------------------------------



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

As at
September 30, December 31,
2008 2007
$ $
Assets

Current assets
Cash 203 25
Accounts receivable
Trade 16,014 13,458
Other 1,443 772
Inventories (note 6) 39,246 31,161
Prepaid expenses and sundry assets 1,514 2,194
----------------------------------------------------------------------------
Total Current Assets 58,420 47,610
Property, plant and equipment (note 7) 56,938 65,915
Assets held for sale (note 7) 11,317 3,339
Goodwill (note 8) 41,357 41,357
Other assets (note 9) 458 840
----------------------------------------------------------------------------
Total Assets 168,490 159,061
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities

Current liabilities
Bank indebtedness (note 10) 38,892 33,770
Accounts payable and accrued liabilities
(notes 2 and 3) 30,652 31,339
Income taxes payable 1,210 776
Current portion of long-term debt (note 11) 10 30
----------------------------------------------------------------------------
Total Current Liabilities 70,764 65,915
Long-term debt (note 11) 79,623 74,017
----------------------------------------------------------------------------
Total Liabilities 150,387 139,932
----------------------------------------------------------------------------

Class B Exchangeable Units (note 12) - -
----------------------------------------------------------------------------

Unitholders' Equity

Trust Units (note 13) 176,004 176,004
Warrants (note 13) 648 -
Contributed surplus (note 15) 1,106 658
Deficit (147,341) (144,529)
Accumulated other comprehensive loss
(note 17) (12,314) (13,004)
----------------------------------------------------------------------------
Total Unitholders' Equity 18,103 19,129
----------------------------------------------------------------------------
Total Liabilities, Class B Exchangeable
Units and Unitholders' Equity 168,490 159,061
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(Contingencies and Commitments - notes 2, 3 and 21)

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



Menu Foods Income Fund
Consolidated Statements of Operations and Deficit
(All figures, except Unit and per Unit amounts,
expressed in thousands of Canadian dollars, unaudited)

Quarter ended September 30,
2008 2007
$ $
Sales 61,625 78,050
Cost of sales (note 20) 55,533 70,472
----------------------------------------------------------------------------
Gross profit 6,092 7,578
Selling, general and administrative expenses 5,091 5,030
----------------------------------------------------------------------------
Income before the undernoted 1,001 2,548
Product recall (note 2) - 11,086
Restructuring and related expenses (note 3) 10 15,889
Financial expenses (note 18) 3,100 4,393
----------------------------------------------------------------------------
Loss before income taxes and
non-controlling interest (2,109) (28,820)
----------------------------------------------------------------------------
Current income taxes (60) 523
Future income taxes - (42)
----------------------------------------------------------------------------
Total income taxes (60) 481
----------------------------------------------------------------------------
Loss before non-controlling interest (2,049) (29,301)
Non-controlling interest of Class B
Exchangeable Units (note 12) - (10,006)
----------------------------------------------------------------------------
Net loss for the period (2,049) (19,295)
Deficit - beginning of period (145,292) (103,511)
----------------------------------------------------------------------------
Deficit - end of period (147,341) (122,806)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic net loss per Trust Unit $ (0.101) $ (1.011)
Diluted net loss per Trust Unit $ (0.101) $ (1.011)

Basic weighted average number of Trust
Units outstanding (note 13) 20,361,654 19,087,019
Diluted weighted average number of
Trust Units outstanding (note 13) 28,989,383 28,984,243



Consolidated Statements of Comprehensive Loss
(All figures expressed in thousands of Canadian dollars, unaudited)

Quarter ended September 30,
2008 2007
$ $
Net loss for the period (2,049) (19,295)
Other comprehensive income (loss), net of tax
of $nil (2007 - $nil):
Unrealized gains (losses) on translating
financial statements of self
sustaining foreign operations 2,594 (5,361)
Gains (losses) on hedges of unrealized
foreign currency translation (2,305) 3,495
----------------------------------------------------------------------------
Comprehensive loss for the period (1,760) (21,161)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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



Menu Foods Income Fund
Consolidated Statements of Operations and Deficit
(All figures, except Unit and per Unit amounts,
expressed in thousands of Canadian dollars, unaudited)

Nine months ended September 30,
2008 2007
$ $
Sales 177,536 189,800
Cost of sales (note 20) 157,226 170,680
----------------------------------------------------------------------------
Gross profit 20,310 19,120
Selling, general and administrative
expenses 14,531 16,957
----------------------------------------------------------------------------
Income before the undernoted 5,779 2,163
Product recall (note 2) - 52,115
Restructuring and related expenses
(note 3) 182 15,889
Financial expenses (note 18) 9,146 9,528
----------------------------------------------------------------------------
Loss before income taxes and
non-controlling interest (3,549) (75,369)
----------------------------------------------------------------------------
Current income taxes (31) 329
Future income taxes - (14,337)
----------------------------------------------------------------------------
Total income taxes (31) (14,008)
----------------------------------------------------------------------------
Loss before non-controlling interest (3,518) (61,361)
Non-controlling interest of Class B
Exchangeable Units (note 12) - (20,955)
----------------------------------------------------------------------------
Net loss for the period (3,518) (40,406)
Deficit - beginning of period,
as previously reported (144,529) (82,400)
Impact of change in accounting
policies (note 4) 706 -
----------------------------------------------------------------------------
Deficit - end of period (147,341) (122,806)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Deficit comprises:
Accumulated net loss (87,152) (62,617)
Accumulated distributions (60,189) (60,189)
----------------------------------------------------------------------------
(147,341) (122,806)
----------------------------------------------------------------------------

Basic net loss per Trust Unit $ (0.173) $ (2.117)
Diluted net loss per Trust Unit $ (0.173) $ (2.117)

Basic weighted average number of
Trust Units outstanding (note 13) 20,361,654 19,085,127
Diluted weighted average number of Trust
Units outstanding (note 13) 28,986,500 28,982,351



Consolidated Statements of Comprehensive Loss
(All figures expressed in thousands of Canadian dollars, unaudited)

Nine months ended September 30,
2008 2007
$ $
Net loss for the period (3,518) (40,406)
Other comprehensive (loss) income,
net of tax of $nil (2007 - $nil)
Unrealized gains (losses) on translating
financial statements of self
sustaining foreign operations 6,835 (21,619)
Gains (losses) on hedges of unrealized
foreign currency translation (6,145) 15,997
----------------------------------------------------------------------------
Comprehensive loss for the period (2,828) (46,028)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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



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

Quarter ended September 30,
2008 2007
$ $
Cash provided by (used in)
Operating activities
Net loss for the period (2,049) (19,295)
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units - (10,006)
Amortization of property, plant and equipment 2,494 2,252
Amortization of customer relationship - 38
Amortization of deferred financing fees 192 67
Unit-based compensation 137 123
Loss on sale of property, plant and equipment - 134
Write-down of idle assets (note 3) - 1,726
Write-down of customer relationship (note 3) - 3,011
Inventory write-off (notes 2 and 3) - 11,385
Recall and restructuring costs (notes 2 and 3) (1,352) 2,112
Marked-to-market adjustment (note 24) 108 1,015
Future income taxes - (42)
----------------------------------------------------------------------------
(470) (7,480)
Change in non-cash working capital items
Accounts receivable (2,686) (6,867)
Inventories (5,306) 6,806
Accounts payable and accrued liabilities 1,803 (918)
Prepaid expenses and sundry assets (259) 513
Income taxes 181 (366)
----------------------------------------------------------------------------
(6,737) (8,312)
----------------------------------------------------------------------------
Financing activities
Change in bank indebtedness 6,976 711
Long-term debt repayments (7) (7)
Deferred financing charges - (385)
----------------------------------------------------------------------------
6,969 319
----------------------------------------------------------------------------
Investing activities
Unearned deposit (note 3) - 7,958
Purchase of property, plant and equipment (280) (465)
Proceeds from sale of property, plant and
equipment - 190
----------------------------------------------------------------------------
(280) 7,683
----------------------------------------------------------------------------
Decrease in cash (48) (310)
Cash - beginning of period 251 468
----------------------------------------------------------------------------
Cash - end of period 203 158
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplementary information

Income taxes paid 130 29
Interest paid 2,827 3,324


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



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

Nine months ended September 30,
2008 2007
$ $
Cash provided by (used in)
Operating activities
Net loss for the period (3,518) (40,406)
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units - (20,955)
Amortization of property, plant and equipment 7,530 9,089
Amortization of customer relationship - 298
Amortization of deferred financing fees 556 1,243
Unit-based compensation 448 348
(Gain) loss on sale of property, plant
and equipment (116) 128
Inventory write-off (notes 2 and 3) - 30,623
Write-off of take-or-pay receivable (note 3) - 1,001
Write-down of idle assets (note 3) - 1,726
Write-down of customer relationship (note 3) - 3,011
Recall and restructuring costs
(notes 2 and 3) (2,702) 15,779
Marked-to-market adjustment (note 24) 273 426
Future income taxes - (14,337)
----------------------------------------------------------------------------
2,471 (12,026)
Change in non-cash working capital items
Accounts receivable (2,467) 4,185
Inventories (5,047) (20,759)
Accounts payable and accrued liabilities 1,235 (8,869)
Prepaid expenses and sundry assets 706 19
Income taxes 425 75
----------------------------------------------------------------------------
(2,677) (37,375)
----------------------------------------------------------------------------
Financing activities
Change in bank indebtedness 5,177 29,921
Issuance of Trust Units, net - 44
Long-term debt repayments (21) (20)
Deferred financing charges - (385)
----------------------------------------------------------------------------
5,156 29,560
----------------------------------------------------------------------------
Investing activities
Unearned deposit (note 3) - 7,958
Purchase of property, plant and equipment (2,575) (3,018)
Proceeds from sale of property, plant and
equipment 274 220
----------------------------------------------------------------------------
(2,301) 5,160
----------------------------------------------------------------------------
Increase (decrease) in cash 178 (2,655)
Cash - beginning of period 25 2,813
----------------------------------------------------------------------------
Cash - end of period 203 158
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplementary information

Income taxes (refunded) paid (51) 210
Interest paid 8,410 7,269


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



Menu Foods Income Fund
Notes to Consolidated Financial Statements September 30, 2008
(All figures, except Unit and 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").

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

2. Product recall, litigation and going concern

On March 16, 2007, the Fund announced the recall of a portion of the dog and cat food it manufactured between December 3, 2006 and March 6, 2007. Other products and dates of manufacture were added to the recall on April 5, April 10, April 17, May 2 and May 22, 2007 and the Fund announced a voluntary withdrawal of certain products on March 24, 2007. The recalls and withdrawal related primarily to "cuts and gravy" style products manufactured by Menu, but included certain other products as well. These products were manufactured and sold under private-label and contract manufactured for some national brands.

Management originally estimated that the costs associated with the recalls and withdrawal noted above would amount to approximately $45,000. On October 10, 2007 this estimate was increased to $55,000. The costs associated with the recall, including the increase in the estimated cost, resulted in the Fund not being in compliance with certain financial covenants included in the loan agreements with its lenders.

Accordingly, on May 14, 2007 and again on October 19, 2007, the Fund entered into amended agreements with its lenders, which among other things, defined the terms and conditions governing the Fund's US$30,000 revolving bank facility (expanded to US$50,000 with a new US$20,000 credit facility on May 14, 2007 and subsequently reduced to US$45,000 on October 19, 2007 and further reduced to US$42,500 on March 31, 2008) and non- revolving US$85,000 senior secured notes facility. The amendments to the senior secured notes facility on May 14, 2007 were such that under Canadian generally accepted accounting principles ("GAAP") they resulted in a deemed settlement of the original facility, necessitating a write off of $1,101 in previously capitalized costs (note 11).

The estimated product recall costs are based on the best information currently available to the management of the Fund. The above-noted estimate of $55,000 remains unchanged as at September 30, 2008. The ultimate determination of these costs is dependent on the amount of product actually returned, the actual extent of customer fines and penalties and certain other factors. Accordingly, actual amounts could differ from these estimates and the differences could be material. Furthermore, even with the new credit facility the ongoing impact of the product recall, especially as it relates to returning to normalized business, could have a material effect on the liquidity of the Fund.

The recall costs noted above include product collection, customer fines and penalties, write off and disposal costs of $46,455, lost margin on returned product of $2,885, $2,400 to establish and operate a call centre to respond to consumer concerns and $3,260 in professional and associated fees necessary to manage through this difficult process. As at September 30, 2008, the Fund has incurred $44,817 of actual recall costs, including inventory write offs, and has accrued a further $9,535 in accrued liabilities for costs not yet incurred in connection with the recall.

Lawsuits have been initiated against the Fund and certain of its subsidiaries in the United States and in Canada, which seek to recover damages on behalf of the named plaintiffs and a purported class of pet owners. On October 14, 2008, the U.S. Court issued an oral order giving final approval of the cross-border settlement agreement in the pet food multi-district litigation which consolidated over 100 of the class action product liability civil suits commenced. On November 3, 2008 there was a simultaneous hearing for final approval in the various Canadian courts. Formal final approval from all courts is expected in the near term, although there can be no assurances. The settlement agreement would resolve more than 100 class action lawsuits filed in the U.S. and Canadian courts and is binding on all members of the settlement class, except for the 114 individuals who have validly opted out of the settlement and who thereby retain their claims against one or more of the defendants.

The settlement agreement would create a settlement fund of US$24 million that will allow a potential recovery of up to 100% of all economic damages incurred by pet owners, subject to certain limitations. The settlement fund, administered by a neutral claims administrator, would be available to persons in the United States and Canada who purchased or obtained, or whose pets used or consumed, recalled pet food. Pursuant to the settlement agreement, the settlement fund would be funded by the defendants, including Menu Foods Income Fund and its product liability insurer. The Fund's corporate contribution to the settlement is within its previously recorded recall provision of $55 million.

Other actions and investigations remain outstanding, and it is possible that additional actions or investigations may arise in the future. The U.S. Food and Drug Administration is conducting an investigation into the situation. The United States Attorney for the Western District of Missouri, based in Kansas City, has informed Menu that it is the target of a criminal investigation for possible violations of the U.S. Federal Food, Drug and Cosmetic Act. It is possible that additional actions or investigations may arise in the future. The Fund may be required expend significant amounts and to devote considerable management time to these matters. It is not possible to predict the amount of such expenses, the resolution of such claims or investigations, or the extent to which these items will be paid by insurance.

Given the restructuring activities (note 3) and based on current forecasts, management believes that the Fund will generate sufficient income and cash flows to discharge its obligations as they become due in the normal course of operations and that the Fund will not require any significant additional credit facilities. However, given the significant uncertainty of this situation and the legal and regulatory matters referred to above, there is no assurance that additional financing will not be required, or that it will be available to the Fund, if needed. As a result of this uncertainty there may be significant doubt as to the ability of the Fund to continue as a going concern.

These consolidated financial statements have been prepared in accordance with GAAP on a going concern basis. The Fund's ability to continue as a going concern is dependent on the success of future operations, being able to timely dispose of assets held for sale, the continued support of the Fund's lenders and the outcome of litigation and investigations. If the going concern assumption was not appropriate for these consolidated financial statements, then adjustments, which could be material, would be necessary to the carrying values of assets, liabilities, the reported net loss and the balance sheet classifications used.

3. Restructuring and related expenses

As a consequence of the product recalls, the Fund had to restructure its operations to better align costs with its ongoing business. The restructuring initiatives took several forms and under GAAP, depending upon their nature, were recognized in 2007, the first three quarters of 2008 or will be recognized in future periods. While most of these initiatives have already been accounted for, some will not be completed until later in 2008 or thereafter. To date, in aggregate these activities resulted in a net restructuring expense of $4,619, of which $10 and $182 were expensed during the quarter and nine months ended September 30, 2008, respectively, and, principally as a result of sales of assets, have generated approximately $22,020 in cash (net of $1,142 in lenders' fees). As at September 30, 2008, the accrual for restructuring, which primarily comprises costs associated with inventory disposal together with severance costs, amounted to $1,016 (December 31, 2007 - $1,666).

Specifically:

a) Since March 16, 2007, the Fund has been advised that customers who represented approximately 37% of sales volume in 2006 would no longer be purchasing those products from Menu. This caused the Fund to write down certain assets associated with these customers and to write down or undertake to sell other assets that are no longer required given the down-sizing of the business;

b) On August 9, 2007, Menu entered into agreements to release a customer from certain contractual obligations and to sell it a production facility and certain other assets for aggregate cash proceeds of US$26,300; and

c) On October 10, 2007, the Fund announced a formal plan to restructure operations.

4. Changes in accounting policies and new accounting pronouncements

On January 1, 2008, the Fund adopted The Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1400, General Standards of Financial Statement Presentation; Section 1535, Capital Disclosures; Section 3031, Inventories; Section 3064, Goodwill and Intangible Assets; Section 3862, Financial Instruments - Disclosures; and Section 3863, Financial Instruments - Presentation.

Section 1400 provides revised guidance related to management's responsibility to assess and disclose the ability of an entity to continue as a going concern. Management's assessment of these matters is included in note 2.

Section 1535 establishes disclosure requirements about an entity's capital and how it is managed. The purpose of this section is to enable users of the financial statements to evaluate objectives, policies and processes for managing capital.

Section 3031 replaces Section 3030, Inventories, revising and enhancing guidance on the disclosure and determination of inventory costing.

Section 3064 replaces Section 3062, Goodwill and Other Intangible Assets; and Section 3450, Research and Development Costs. This new section establishes standards for the recognition, measurement and disclosure of goodwill and other intangible assets.

Sections 3862 and 3863 replace Section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements while carrying forward its presentation requirements. These new sections place increased emphasis on disclosure about the nature and extent of risks arising from financial instruments and how the entity manages those risks.

These new standards have generally enhanced the disclosures in these financial statements when compared to the disclosures in the financial statements for the year ended December 31, 2007. Comparative figures have not been restated and have not affected the Fund's results or cash flows from operations. The opening deficit was decreased by $706 upon adoption of Section 3031.

5. Summary of significant accounting policies

a) Basis of presentation

The Fund prepares its consolidated financial statements in accordance with GAAP.

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, 2007 except as discussed in note 4, 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 GAAP 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, 2008.

b) Use of estimates

The preparation of consolidated financial statements in conformity with GAAP 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 fair value.

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 value of the asset is 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 balance is transferred to the appropriate asset class and amortization commences.

f) Income taxes

The Fund follows the liability method of accounting for 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) Other financial liabilities and transaction costs

The Fund classified long-term debt as other financial liabilities, which are measured at amortized cost. Transaction costs, which are netted against the carrying value of the long-term debt are amortized using the effective interest rate method, and are 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 tested by comparing the Fund's carrying value of goodwill to its fair value. If the carrying value exceeds the fair value, then there is a potential impairment of goodwill. Any impairment in goodwill is measured by allocating the fair value of the Fund in a manner similar to a purchase price allocation and comparing the notional goodwill from the fair value allocation to the carrying value of the goodwill.

j) 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. Revenues and expenses are translated at average exchange rates prevailing during the period. Gains or losses arising from these translations are included in net comprehensive income (loss).

The assets and liabilities of all foreign 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 indebtedness, to a maximum of US$85 million, as a hedge of its net investment in the United States. The indebtedness is translated at the exchange rate in effect at the consolidated balance sheet date. The resulting gains or losses, together with the related income taxes, are included in the foreign currency translation adjustment in the consolidated statement of other comprehensive income.

k) 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, when the goods are shipped, the Fund includes in sales the invoice price to the customer and includes in cost of sales the Fund's portion of costs incurred.

l) Supplier rebates

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

m) Unit-based compensation

The Fund expenses awards made under its unit-based compensation plans in accordance with the fair value based method.

n) Asset retirement obligations

The fair value of any 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, 2008, the Fund has concluded that there were no asset retirement obligations associated with its assets.

o) Assets held for sale

Assets held for sale are carried at the lower of fair value less the costs to sell, and carrying value.

p) Financial instruments

The Fund designates its cash as held-for-trading, which is measured at fair value. Accounts receivable are classified as loans and receivables, which are measured at amortized cost. Bank indebtedness, accounts payable and accrued liabilities and long-term debt are classified as other financial liabilities, which are recorded at amortized cost. Derivative instruments are recorded in the statement of operations at fair value except for contracts entered into for the purposes of the Fund's own usage requirements. The Fund uses interest rate swaps to fix interest rates on a portion of its indebtedness.



6. Inventories

As at September 30, As at December 31,
2008 2007
$ $
Raw materials and packaging 14,620 8,488
Finished goods 24,626 22,673
----------------------------------------------------------------------------
39,246 31,161
----------------------------------------------------------------------------
----------------------------------------------------------------------------

7. Property, plant and equipment

As at September 30, 2008

Accumulated
Cost amortization Net
$ $ $
Land 4,168 - 4,168
Buildings 39,068 8,322 30,746
Machinery and equipment 86,241 57,203 29,038
Other property and equipment 16,496 14,375 2,121
Construction-in-progress 2,182 - 2,182
----------------------------------------------------------------------------
148,155 79,900 68,255

Less:
Assets held for sale 13,075 1,758 11,317
----------------------------------------------------------------------------
135,080 78,142 56,938
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at December 31, 2007

Accumulated
Cost amortization Net
$ $ $
Land 4,044 - 4,044
Buildings 37,045 6,970 30,075
Machinery and equipment 79,429 48,079 31,350
Other property and equipment 16,201 13,475 2,726
Construction-in-progress 1,059 - 1,059
----------------------------------------------------------------------------
137,778 68,524 69,254
Less:
Assets held for sale 3,609 270 3,339
----------------------------------------------------------------------------
134,169 68,254 65,915
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. Goodwill

When the Fund purchased its interest in Menu Foods Limited Partnership ("MFLP"), $165,387 of the purchase price was assigned as goodwill in the consolidated financial statements. Under GAAP, goodwill is subject to an annual impairment test, which, for the Fund, takes place as at September 30th of each year, unless events indicate that an impairment has arisen at some other time. In 2005 and again during the fourth quarter of 2007, fair value assessment of the Fund's assets and liabilities resulted in write-downs of goodwill of $93,415 and $30,615 respectively. These charges were non-cash items and did not impact the Fund's credit facilities. The annual impairment test as at September 30, 2008 did not identify any further impairment. The carrying value of goodwill is $41,357 as at September 30, 2008 and December 31, 2007.

9. Other assets



As at September 30, As at December 31,
2008 2007
$ $
Deferred commitment fees (note 10)
Cost 1,053 1,037
Accumulated amortization (595) (197)
----------------------------------------------------------------------------
458 840
----------------------------------------------------------------------------
----------------------------------------------------------------------------


10. Bank indebtedness

The banking agreement provides the Fund with a US$42,500 (December 31, 2007 - US$45,000) operating facility of which $38,892 (US$36,546) was drawn upon as at September 30, 2008 (December 31, 2007 - $33,770 (US$34,066)). At September 30, 2008, the Fund had an outstanding irrevocable letter of credit in the amount of $782 (US$735) (December 31, 2007 - $818 (US$825)), which further reduces the amount available under the facility.

The costs associated with the product recalls first announced on March 16, 2007 (note 2) were significant and resulted in the Fund not being in compliance with certain financial covenants with its bank and senior secured noteholders (note 11) (the "Lenders") as at March 31, 2007. Accordingly, on May 14, 2007, the Fund entered into amended agreements (the "Agreements") with its Lenders that, among other things, defined the terms and conditions governing the Fund's US$30,000 bank and US$85,000 senior secured notes facilities (note 11) going forward. In addition, the agreement with the bank was extended to June 30, 2009 (note 24) and expanded to include a new US$20,000 credit facility.

Increases in the estimated costs associated with the product recall (note 2), together with the restructuring (note 3) necessary as a consequence of the product recall, once again resulted in the Fund not being in compliance with certain financial covenants with its Lenders during the quarter ended September 30, 2007. On October 19, 2007, the Fund entered into amended agreements with its Lenders that, among other things, define the terms and conditions governing the Fund's bank operating and senior secured notes facilities going forward. Furthermore, on October 19, 2007 the new US$20,000 credit facility was reduced to US$15,000 and on March 31, 2008 the credit facility was reduced by another US$2,500 and was to be reduced by US$2,500 on each calendar quarter end thereafter until this portion of the facility is extinguished. In June 2008 the bank agreed to defer the US$2,500 reductions in the facility due to occur in each of June and September of 2008 until the earlier of December 31, 2008 or until the sale of certain assets is completed.

Pursuant to its amended banking agreement, this operating facility bears interest at Canadian prime rate (4.75% as at September 30, 2008) plus 3.5%, US base rate (5.00% as at September 30, 2008) plus 3.5% or Euro rate (4.05% as at September 30, 2008) plus 4.75% (the "Base Rates") depending on the currency advanced. These interest rates will continue to apply until the additional US$20,000 facility is extinguished and the balance owing under the US$30,000 facility is less than US$15,000 for five consecutive business days and the Fund achieves a total debt to EBITDA (a non-GAAP measure that is defined in the amended banking agreement) ratio (the "Leverage Ratio"), on a trailing twelve-month basis, of 3 to 1 or less, at which time the interest rates will revert to those set out in the Fund's credit facilities prior to amendment, provided that there are no other defaults. The Fund is precluded from paying distributions to its Unitholders at any time the Leverage Ratio exceeds 3 to 1.

Certain of the pre-existing covenants have been suspended until such time as the recall costs no longer impact the Fund's Leverage Ratio and until the additional US$20,000 facility is extinguished and the balance owing under the US$30,000 facility is less than US$15,000 for five consecutive business days and the Fund achieves a Leverage Ratio, on a trailing twelve-month basis, of 3 to 1 or less. EBITDA before recall and restructuring costs and operating leases must be at least $5,000 for the quarter ended March 31, 2008; $10,000 for the six months ended June 30, 2008; $15,000 for the nine months ended September 30, 2008; and $20,000 on a trailing twelve-month basis each quarter thereafter. Under the terms of the amended agreements, not more than $55,000 may be utilized by the Fund for recall-related costs and restructuring costs should approximate $4,000, upon completion of the restructuring. These changes are consistent with the terms and conditions governing the senior secured notes (note 11).

The amended agreement of May 14, 2007 required the Fund to pay commitment fees to the bank of $378 (US$380), plus all associated professional costs. The amended agreement of October 19, 2007 required the Fund to pay commitment fees to the bank of $625, plus all associated professional costs. These fees are recorded in Other assets and are amortized on a straight-line basis over the life of the credit facility (note 9).

Certain bank indebtedness has been identified as priority indebtedness under an agreement between the bank and senior secured noteholders. Otherwise, the Fund has pledged, on a pari passu basis with its senior secured noteholders, as security for bank indebtedness, all moveable property and book debts and, in addition, has signed a general security agreement.

11. Long-term debt



As at September 30, As at December 31,
2008 2007
$ $
Senior secured notes (a) 79,623 74,017
Obligation under capital lease (b) 10 30
----------------------------------------------------------------------------
79,633 74,047
Less: Current portion 10 30
----------------------------------------------------------------------------
79,623 74,017
----------------------------------------------------------------------------
----------------------------------------------------------------------------

a) Senior secured notes
As at September 30, As at December 31,
2008 2007
$ $
Senior secured notes 79,982 74,504
Transaction costs (359) (487)
----------------------------------------------------------------------------
79,623 74,017
----------------------------------------------------------------------------
----------------------------------------------------------------------------


On October 31, 2003, the Fund closed a private placement offering for US$85,000 in non-revolving floating rate senior secured notes (the "Notes Facility"). The notes, of which US$75,157 was outstanding at September 30, 2008 and December 31, 2007, are repayable on October 31, 2010, with interest payable quarterly. Certain bank indebtedness has been identified as priority indebtedness under an agreement between the bank and senior secured noteholders. Otherwise, the Fund has pledged, on a pari passu basis with its bank, as security for its senior secured notes, all moveable property and book debts and, in addition, has signed a general security agreement.

The Fund was not in compliance with certain financial covenants with its Lenders as at March 31, 2007 and during the quarter ended September 30, 2007. Accordingly, on May 14, 2007 and again on October 19, 2007, the Fund entered into amended agreements with its Lenders that, among other things, define the terms and conditions governing the Fund's bank operating and senior notes facilities going forward. The amendments are more fully described in note 10.

Pursuant to the terms of the Agreements, the Notes Facility now bears interest at floating rate, three-month LIBOR plus 580 basis points. This rate will continue to apply until the additional US$20,000 bank facility is extinguished and the balance owing under the US$30,000 bank facility is less than US$15,000 for five consecutive business days and the Fund achieves a Leverage Ratio, on a trailing twelve-month basis, of 3 to 1 or less, at which time the interest rates will revert to those set out in the Fund's existing Notes Facility, provided that there are no other defaults. The Fund is precluded from paying distributions to its Unitholders at any time the Leverage Ratio exceeds 3 to 1.

Certain of the pre-existing covenants have been suspended on an identical basis with those of the bank, as described in note 10. Furthermore, under the terms of the amended agreements, not more than $55,000 may be utilized by the Fund for recall-related costs and restructuring costs should approximate $4,000 upon completion of the restructuring. The amended agreement of October 19, 2007 required the Fund to pay fees and expenses to the senior secured noteholders of $515 (US$517). These transaction costs are netted against the senior secured notes and are being amortized until October 31, 2010 using the effective interest method.

The amendments to the Agreements with the Fund's Lenders completed on May 14, 2007 were such that under GAAP, they resulted in a deemed settlement of the original senior secured notes facility. As a consequence, it was necessary to write off the remaining $1,101 in costs associated with the establishment of the original facility (note 2).

During the quarter ended March 31, 2006, the Fund fixed interest rates at 5.35% plus the applicable spread on US$50,000 through to October 2010 (note 24).

b) Obligation under capital lease

The Fund entered into a capital lease in December 2002, collateralized by certain computer equipment. The lease, which was modified in December 2005, provides for blended monthly payments of $3.



Minimum lease payments: As at September 30, As at December 31,
2008 2007
$ $

2008 10 31
----------------------------------------------------------------------------
Total minimum lease payments 10 31
Less: Amounts representing
interest at 10.40% - 1
----------------------------------------------------------------------------
Balance of obligation 10 30
Less: Current portion 10 30
----------------------------------------------------------------------------
- -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

12. Class B Exchangeable Units
Number Carrying
of units value
$
Class B Exchangeable Units
of MFLP January 1, 2007 9,897,224 27,823
Conversion of Class B Exchangeable
Units to Trust Units (note 13) (1,274,635) (1,302)
Share of net loss for the year (23,138)
Share of net foreign currency
translation adjustment for the year (3,383)
----------------------------------------------------------------------------
December 31, 2007 8,622,589 -
Share of net loss for the period -
Share of net foreign currency
translation adjustment
for the period -
----------------------------------------------------------------------------
September 30, 2008 8,622,589 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Class B Exchangeable Units together with their related Special Trust Units (note 13) can be exchanged on a one-for-one basis with the Fund for Trust Units at the option of the holder.

A portion of the gains or losses arising from the translation of foreign subsidiaries is included in accumulated other comprehensive loss in unitholders' equity. The foreign currency translation adjustment is allocated between the Class B Exchangeable units and unitholders' equity on a pro-rata basis.

Under GAAP, when the losses applicable to the non-controlling interest exceed their investment in the Fund's units, the excess and any further losses applicable to the non-controlling interest are allocated to the Trust Unitholders. This process continues until such time as all previously absorbed losses are recovered by the Trust Unitholders. As at September 30, 2008 these unabsorbed losses amount to $4,815 (December 31, 2007 - $4,084).

During the second quarter of 2005, 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. Distributions subordinated amounted to $4,151. Such Unitholders are 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 declares distributions in excess of 9 cents per unit, per month. Accordingly, no amount has been accrued in distributions payable at September 30, 2008 and December 31, 2007.

The Class B Units have economic and voting rights equivalent, in all material respects, to the Trust Units.



13. 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
January 1, 2007 19,077,273 185,948 11,300 174,648
Conversion of Class B
Exchangeable Units during the
quarter ended (note 12)
December 31, 2007 1,274,635 1,302 - 1,302
Exercise of options during the
quarter ended (note 15)
March 31, 2007 9,746 54 - 54
---------------------------------------------------------------------------
December 31, 2007 and September
30, 2008 20,361,654 187,304 11,300 176,004
---------------------------------------------------------------------------
---------------------------------------------------------------------------


On August 22, 2008, the Fund issued 1 million five-year Trust Unit warrants in the Fund as part of the settlement of certain claims against the Fund relating to the recall. The fair value of the Trust Unit warrants, which amounted to $648, has been determined using the Black-Scholes model, incorporating a 3.17% risk free interest rate, a 53% volatility factor, 0.0% expected distributions and expected life of 60 months. On this basis, each Trust Unit warrant was valued at $0.648. The cost is included in the Fund's $55,000 estimate for the overall recall costs (note 2). The Trust Unit warrants are exerciseable for $1.33, in minimum quantities of 10,000 warrants, at any time during the five-year period subsequent to issuance.

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 12) 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 8,622,589 Special Trust Units outstanding as at December 31, 2007 and September 30, 2008 (note 12).

Weighted average number of Units outstanding

Basic net income (loss) per Trust Unit is computed by dividing net income (loss) for the period by the weighted average number of Trust Units outstanding during the period. Diluted net income (loss) per Trust Unit includes the effect of exercising unit options (note 15) and warrants, 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,
2008 2007

Weighted average number of Trust Units
outstanding - basic 20,361,654 19,087,019
Weighted average number of Class B Units
outstanding - basic (note 12) 8,622,589 9,897,224
Dilutive effect of options (note 15) 5,140 -
----------------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,989,383 28,984,243
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine months ended September 30,
2008 2007

Weighted average number of Trust Units
outstanding - basic 20,361,654 19,085,127
Weighted average number of Class B Units
outstanding - basic (note 12) 8,622,589 9,897,224
Dilutive effect of options (note 15) 2,257 -
----------------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,986,500 28,982,351
----------------------------------------------------------------------------
----------------------------------------------------------------------------


14. Distributions

No distributions were declared on either the Trust Units or the Class B Units during the quarters and nine-month periods ended September 30, 2008 and 2007.

15. Unit-based compensation

Unit option plan

The option plan under which these options were granted, which authorizes 2,815,000 units, was approved by the Unitholders at the Annual and Special Meeting of the Fund held on May 11, 2006. Compensation expense of $137 and $448 was recognized for the quarter and nine months ended September 30, 2008 (2007 - $123 and $348), respectively, which was added to contributed surplus. Total compensation expense to be recognized under these awards is estimated to be $2,236. All options expire 39 months after the date of grant, if not exercised.

The fair value of the Trust Unit options issued in the quarter ended March 31, 2007 was determined using the Black-Scholes model, incorporating a 4.05% risk free interest rate, a 31% volatility factor, 4.2% expected distributions and expected life of 39 months. On this basis, each Trust Unit option was valued at $1.40.

The fair value of the Trust Unit options issued in the quarter ended December 31, 2007 was determined using the Black-Scholes model, incorporating a 3.92% risk free interest rate, a 43% volatility factor, 0.0% expected distributions and expected life of 39 months. On this basis, each Trust Unit option was valued at $0.63.

The fair value of the Trust Unit options issued in the quarter ended June 30, 2008 was determined using the Black-Scholes model, incorporating a 2.97% risk free interest rate, a 60% volatility factor, 0.0% expected distributions and expected life of 39 months. On this basis, each Trust Unit option was valued at $0.54.

The fair value of the Trust Unit options issued in the quarter ended September 30, 2008 was determined using the Black-Scholes model, incorporating a 2.94% risk free interest rate, a 63% volatility factor, 0.0% expected distributions and expected life of 39 months. On this basis, each Trust Unit option was valued at $0.62.



A summary of option activities since January 1, 2007 is as follows:

Weighted
Range of average
Number exercise exercise
of options prices prices
$ $
January 1, 2007 956,296 4.56-6.55 4.62
Options granted during the quarter ended
March 31, 2007 390,156 7.34 7.34
September 30, 2007 18,390 3.00 3.00
December 31, 2007 1,189,300 1.82 1.82
21,000 0.92 0.92
Options forfeited during the quarter ended
December 31, 2007 (219,416) 4.56 4.56
(21,000) 5.00 5.00
(6,000) 6.55 6.55
(21,000) 6.20 6.20
(87,588) 7.34 7.34
Options exercised during the quarter ended
March 31, 2007 (9,746) 4.56 4.56
----------------------------------------------------------------------------
December 31, 2007 2,210,392 0.92-7.34 3.42
Options forfeited during the quarter ended
March 31, 2008 (42,000) 4.56 4.56
(22,800) 7.34 7.34
(22,800) 1.82 1.82
June 30, 2008 (21,000) 4.56 4.56
(8,400) 7.34 7.34
(31,200) 1.82 1.82
Options issued during the quarter ended
June 30, 2008 27,900 1.35 1.35
21,000 1.10 1.10
September 30, 2008 15,300 1.37 1.37
----------------------------------------------------------------------------
September 30, 2008 2,126,392 0.92-7.34 3.31
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The outstanding options are summarized as follows:

Options outstanding Vested options outstanding
Number Weighted average Number Weighted average
remaining life remaining life
Exercise price
4.56 610,134 8 months 305,881 8 months
5.25 6,000 8 months 4,000 8 months
7.34 271,368 20 months 90,456 20 months
3.00 18,390 25 months - -
1.82 1,135,300 29 months - -
0.92 21,000 30 months - -
1.35 27,900 35 months - -
1.10 21,000 35 months - -
1.37 15,300 38 months - -
----------------------------------------------------------------------------
2,126,392 22 months 400,337 11 months
----------------------------------------------------------------------------

Contributed surplus attributed to Trust Unit options

As at September 30, As at December 31,
2008 2007
$ $
Opening balance 658 272
Compensation expense recognized
for unit options during the period 448 396
Options exercised - (10)
----------------------------------------------------------------------------
Ending balance 1,106 658
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As the Trust Unit options are exercised, the associated contributed surplus is reclassified to Trust Units (note 13).

16. Capital management

The Fund views its capital as the combination of its bank indebtedness and senior secured notes ("Indebtedness"), Class B Exchangeable Units and equity balances. In general, the overall capital of the Fund is determined and evaluated in the context of its financial objectives and its strategic plan.

The appropriate level of Indebtedness is assessed with reference to expected cash flows and the Fund's overall business needs and risks. In addition, the Fund's Indebtedness is subject to a number of covenants and restrictions including the requirement to meet certain financial ratios. One such ratio is the Leverage Ratio as defined in the Agreements with the Fund's Lenders. The Fund is precluded from paying distributions to its Unitholders at any time the Leverage Ratio, on a trailing twelve-month basis, exceeds 3 to 1. The $55,000 in recall related costs expensed in 2007, together with the impact of the recalls on the operations for the year, significantly increased the Fund's Indebtedness.

The Leverage Ratio for the twelve months ended September 30, 2008 was 3.88 (December 31, 2007 - 3.50). Furthermore, as described more fully in note 10, the Fund is required to have EBITDA before recall and restructuring costs and operating leases of: $5 million for the quarter ended March 31, 2008; $10 million for the six months ended June 30, 2008; $15 million for the nine months ended September 30, 2008; and $20 million on a trailing twelve-months basis each quarter thereafter.

In common with other income trusts, the Fund uses its cash flow from operations to invest in capital projects, repay Indebtedness and pay distributions to its Unitholders. For the foreseeable future, cash flow will primarily be used to reduce Indebtedness and finance maintenance capital expenditures until such time as the Leverage Ratio, on a trailing twelve-month basis, is less than 3 to 1.

For the time being, the equity component of capital, which was seriously depleted as a consequence of the events in 2007, will only increase by the amount of income earned and retained by the business. Since cash flow from operations generated by the Fund will be used to reduce the Indebtedness component of capital, the Fund's overall capital will decrease, but the Leverage Ratio should improve. The Fund will review its level of equity in light of its ongoing performance and future needs and opportunities and additional equity may be issued if deemed appropriate or necessary.

17. Accumulated other comprehensive loss



As at September 30, As at December 31,
2008 2007
$ $
Unrealized losses on translating
financial statements of
self-sustaining foreign operations (32,568) (39,403)
Gains on hedges of unrealized
foreign currency translation,
net of tax 20,254 26,399
----------------------------------------------------------------------------
(12,314) (13,004)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

18. Financial expenses
Quarter ended September 30,
2008 2007
$ $
Interest and accretion on senior
secured notes 2,131 2,225
Interest on bank indebtedness 861 1,152
Loss on interest rate swap 108 1,016
----------------------------------------------------------------------------
3,100 4,393
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Nine months ended September 30,
2008 2007
$ $
Interest and accretion on senior
secured notes 6,249 6,988
Interest on bank indebtedness 2,624 2,114
Loss on interest rate swap 273 426
----------------------------------------------------------------------------
9,146 9,528
----------------------------------------------------------------------------
----------------------------------------------------------------------------


19. Income taxes

On October 31, 2006, the Department of Finance (Canada) announced tax proposals pertaining to the taxation of income distributed by publicly listed trusts and the tax treatment of trust distributions to their unitholders. On June 12, 2007 the draft legislation, which had been issued on December 31, 2006 passed fourth reading in the House of Commons, and is therefore considered substantively enacted under GAAP. The new legislation will apply to the Fund effective January 1, 2011 and will result in a portion of the Fund's income being subject to tax at the trust level.

Until 2011, income tax obligations relating to distributions from the Fund are obligations of the Unitholders and, accordingly, no provision for income taxes is made in respect of distributed income of the Fund. A provision for income taxes is recognized for the Fund's subsidiaries that are subject to tax.

The provision for income taxes in the consolidated statements of operations and deficit reflects an effective rate that differs from the combined Canadian federal and provincial rates primarily as a result of lower taxes in foreign jurisdictions and valuation allowances taken against available tax losses.

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



As at September 30, As at December 31,
2008 2007
$ $
Current future income tax assets:
Accounts receivable, accounts
payable and accrued liabilities 321 348
Inventory provisions 453 414
Valuation allowance (774) (762)
----------------------------------------------------------------------------
- -
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Long-term future income tax (assets)
and liabilities:
Property, plant and equipment 8,236 12,394
Tax benefits of loss carry-forwards (23,606) (27,765)
Valuation allowance 16,353 17,524
Other (983) (2,153)
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- -
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The benefits of these future tax loss carry-forwards, which aggregate to approximately $69,500, expire between 2008 and 2028.

20. Other expenses and income

Research and development expenses amounted to $53 and $171 for the quarter and nine months ended September 30, 2008 (2007 - $57 and $179), respectively . These expenses are included in cost of sales.

21. Obligations under operating leases



Future minimum payments under operating leases at September 30, 2008
are as follows:

$
2008 292
2009 700
2010 396
2011 141
2012 52
Thereafter -
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1,581
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22. 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 these plans, contributions are made by plan members, with varying matching contributions from the Fund.

The total expense related to these plans was $72 and $252 for the quarter and nine months ended September 30, 2008 (2007 - $406 and $1,210), respectively .

23. Segmented information

The Fund's operations fall into one reportable business segment. The Fund is principally engaged in the manufacture of 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,
2008 2007
$ $
Sales
Canada
Domestic 11,949 10,818
Foreign 7,603 18,717
Intersegment transfers 3,578 1,827
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23,130 31,362
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United States
Domestic 44,067 50,500
Foreign 279 361
Intersegment transfers 10,473 19,657
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54,819 70,518
----------------------------------------------------------------------------
77,949 101,880
Elimination of intersegment transfers (14,051) (21,484)
Discounts (2,273) (2,346)
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61,625 78,050
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Nine months ended September 30,
2008 2007
$ $

Sales
Canada
Domestic 32,789 29,238
Foreign 22,332 47,814
Intersegment transfers 9,833 7,446
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64,954 84,498
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United States
Domestic 127,940 117,805
Foreign 1,055 1,045
Intersegment transfers 27,188 55,635
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156,183 174,485
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221,137 258,983
Elimination of intersegment transfers (37,021) (63,081)
Discounts (6,580) (6,102)
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177,536 189,800
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As at September 30, As at December 31,
2008 2007
$ $

Property, plant and equipment
Canada 41,305 37,027
United States 93,775 97,142
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135,080 134,169
Less: Accumulated amortization 78,142 68,254
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56,938 65,915
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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.

24. Financial instruments

The Fund has the following categories of financial instruments:

As at September 30, As at December 31,
2008 2007
$ $

Measured at fair value:
Cash 203 25
Interest rate swap (1,821) (1,548)
Measured at amortized cost:
Accounts receivable 17,457 14,230
Bank indebtedness (38,892) (33,770)
Accounts payable and
accrued liabilities (28,831) (29,791)
Long-term debt (79,633) (74,047)


The fair value of the interest rate swap, which is included in accounts payable and accrued liabilities, is calculated by discounting the anticipated cash flows at the period-end forward rates at the time the fair value is calculated.

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. Since the Fund's market is primarily in North America, credit risk is considered similar over all of the customer base.

On an ongoing basis the credit worthiness of customers is reassessed and provisions are made for amounts that are more than 30 days past due. This allowance for doubtful accounts amounted to $283 at September 30, 2008 ($591 - December 31, 2007) which management believes adquately addresses the Fund's credit risk. The net change during the quarter and nine months ended September 30, 2008 of ($24) and $307, respectively, has been included in selling, general and administrative expenses. The remaining balance of trade accounts receivable includes $2,065 that is 1 to 30 days past due and not impaired. Notwithstanding recent events in the international credit markets, management believes that its products, distribution channels and customers are such that these developments should not have a significant effect on credit risk.

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. The Fund's United States dollar denominated long-term senior secured notes have been designated as a hedge of the United States operations and act to reduce exposure to foreign exchange fluctuations. It is also subject to risks relating to interest rate fluctuations. In order to reduce these risks, the Fund may use derivative financial instruments, which are not held or issued for speculative purposes.

As at September 30, 2008 and December 31, 2007, the Fund did not have any outstanding foreign currency forward contracts.

The Fund has fixed interest rates on a portion of its indebtedness (note 11). The mark-to-market value of the contract at September 30, 2008 resulted in an unrealized loss of $273 (2007 - $426), which is included in financial expense during the nine-month period. The cumulative unrealized loss on the interest rate swap is $1,821 (December 31, 2007 - $1,548) and is included in accounts payable and accrued liabilities.

Liquidity risk

The Fund's banking agreement ($38,892 outstanding as at September 30, 2008) expires on June 30, 2009 (note 10) and its Notes Facility ($79,982 (US$75,157) outstanding as at September 30, 2008) expires on October 31, 2010 (note 11). The Fund expects to be in a position at that time to renew or replace these arrangements on their maturity at the prevailing market conditions then in place, which management expects to be similar to those contained in the existing Agreements. Furthermore, the Fund expects to liquidate its accounts payable and accrued liabilities ($30,652 outstanding as at September 30, 2008) within one year.

Market risk

The principal market risks of the Fund's financial instruments relate to fluctuations in: exchange rates between Canada and the United States and interest rates on floating rate debt. Market risks are best assessed in relation to the budgeted or expected performance of the Fund. On an annualized basis, for the current year, a one cent change in the exchange rate between Canada and the United States dollars will impact other comprehensive income by approximately $800, while having only a nominal impact on earnings, and a fifty basis point change in interest rates will impact earnings by approximately $245, net of fair value adjustments to the interest rate swap.

Fair value of financial instruments

The carrying values of cash, trade and other receivables, bank indebtedness and accounts payable and accrued liabilities approximate their fair values because of the short-term nature of these instruments. The carrying value of long-term debt bearing interest at variable rates (note 11) approximates its fair value because effective rates represent the rates that would be used to calculate fair value.

25. Economic dependence

For the nine months ended September 30, 2008, no single customer accounted for more than 10% of sales. The Fund relies on single suppliers for the majority of its can and pouch requirements. Should these suppliers 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