Menu Foods Income Fund
TSX : MEW.UN

Menu Foods Income Fund

August 09, 2006 09:00 ET

Menu Foods Income Fund Announces Doubling of EBITDA in Second Quarter of 2006

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

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Menu Foods Income Fund (TSX:MEW.UN) announced today its financial results for the quarter ended June 30,2006.

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

To access the conference call in real time, please call 416-644-3427 or 1-866-250-4907. A replay will be available from approximately one hour after the end of the conference call until August 24, 2006 by dialing 416-640-1917 or 1-877-289-8525, using passcode 21196768 followed by the number sign. A live audio webcast of the conference call is also available, it can be accessed by entering www.newswire.ca/webcast on an Internet browser. A replay of the webcast will be available for 90 days, it can be accessed by entering www.newswire.ca/webcast on an Internet browser.



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

We are pleased to present, to unitholders of Menu Foods Income Fund, our
report for the second quarter ended June 30, 2006. The table below reports
selected highlights of the quarter's results:

Quarter ended Six months ended
June 30, June 30,
2006 2005 2006 2005
($ millions) ($ millions) ($ millions) ($ millions)

Sales 84.3 83.7 178.2 168.4
Income before
non-controlling
interest 3.2 0.7 5.3 3.7
EBITDA 10.1 4.9 18.9 13.2
Distributable cash 6.6 3.5 12.4 8.5
Diluted
distributable cash
per Trust Unit and
per Class B Unit ($) 0.2293 0.1225 0.4271 0.2950


The 2006 second quarter results continue the improved trend from the first quarter of the year. Specifically, the Fund more than doubled its EBITDA and almost doubled its Distributable cash when compared to the second quarter of 2005.

During the first half of 2006, the Fund initiated price increases with its United States private-label customers on both cans and pouches, in order to recover cost increases absorbed by the Fund in 2004 and 2005. The can price increase, which was effective in the second quarter of 2006, has favorably impacted the Fund's results. The pouch price increase, which goes into full effect during the third quarter of 2006, though small by comparison, is expected to positively contribute to the Fund's results in the last half of 2006.

In summary, on a comparative basis to the second quarter of 2005:

- Sales increased by 0.8% or $0.7 million, due in large part to a 4.9% increase in volume (expressed in cases of 24 cans or pouches), and to the price increases implemented during the quarter. These items contributed over $7.7 million in increased sales. The favourable impact of these events was largely offset by the continued effect of the stronger Canadian dollar.

- EBITDA of $10.1 million improved by $5.2 million or 105.9%. EBITDA was positively impacted by the same factors that impacted sales, as well as by improved operating efficiencies. Similar to sales, the favourable impact of these events were partially offset by the effects of the higher Canadian dollar as well as the effects of higher raw material costs that could not be passed on to private- label customers.

- The Fund generated $6.6 million in distributable cash, an improvement of $3.1 million. Since distributions have been suspended, the Fund used this distributable cash to fund operations and to reduce its outstanding indebtedness with its Lenders.

During the second quarter, the Fund reduced its bank and long-term indebtedness by $4.8 million, bringing its year-to-date repayments to $10.7 million. The trailing 12 months debt to the EBITDA ratio as at June 30, 2006 was 3.65 to 1, which compares favourably to 5.14 to 1 at December 31, 2005. The Fund remains committed to this strategy of reducing indebtedness and, absent unforeseen circumstances, expects to have its debt to EBITDA ratio below 3 to 1 by the end of 2006. When this level is reached, the Fund's board will consider future prospects and determine an appropriate ratio at which to resume distributions.

Management is encouraged by the positive events that are already impacting the Fund's 2006 results. The long-awaited United States price increases to private-label customers, increased sales and the improved operating performance of the Fund's production facilities are all expected to continue to positively contribute to the Fund's results in the second half of 2006.

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

Paul K. Henderson

President and Chief Executive Officer

Menu Foods GenPar Limited

Administrator of Menu Foods Income Fund

Presentation of Financial Information

The following discussion and analysis of the financial results of Menu Foods Income Fund (the "Fund") is dated as of August 9, 2006 and is supplementary to and should be read in conjunction with the unaudited consolidated financial statements for the quarters and six months ended June 30, 2006 and 2005.

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

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

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



Overall Performance and Results of Operations

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

For the quarter For the six months
ended June 30, ended June 30,
2006 2005 2006 2005
$ $ $ $

Sales 84,326 83,660 178,180 168,447
Cost of sales 72,031 75,656 154,042 150,258
----------------------------------------------------
Gross profit 12,295 8,004 24,138 18,189
Selling, general and
administrative
expenses 5,953 7,036 12,920 12,617
----------------------------------------------------
Income before the
undernoted 6,342 968 11,218 5,572
Financial expenses 1,931 1,705 4,770 3,140
----------------------------------------------------
Income (loss) before
income taxes and
non-controlling
interest 4,411 (737) 6,448 2,432
----------------------------------------------------
Current income taxes 278 (305) 494 (7)
Future income taxes 928 (1,130) 630 (1,253)
----------------------------------------------------
Total income taxes 1,206 (1,435) 1,124 (1,260)
----------------------------------------------------
Income before
non-controlling
interest 3,205 698 5,324 3,692
Non-controlling
interest of Class B
Exchangeable Units 1,233 295 2,049 1,608
----------------------------------------------------
Net income for the
period 1,972 403 3,275 2,084
----------------------------------------------------
----------------------------------------------------

Basic net income per
Trust Unit 0.109 0.024 0.182 0.127
Diluted net income
per Unit 0.109 0.024 0.182 0.127

Diluted distributable
cash per Trust Unit
and Class B Unit 0.2293 0.1225 0.4271 0.2950
Distributions per
Trust Unit - 0.2850 - 0.6000
Distributions per
Class B Unit - 0.1456 - 0.4634

Basic weighted average
number of Trust Units
outstanding (000's) 18,125 16,645 17,947 16,404
Diluted weighted average
number of Units
outstanding (000's) 28,997 28,926 28,992 28,919

Average US/Cdn exchange
rate per Bank of Canada 0.8911 0.8039 0.8785 0.8094


Operating Results for the Quarter Ended June 30, 2006

Sales for the quarter ended June 30, 2006, were $84.3 million, up 0.8% or $0.7 million compared to the same quarter last year. This increase is attributable to:

1. a 3.3% increase in can volume resulting in a sales increase of $2.2 million, primarily due to a 28.4% increase in can volume to Menu's largest customer. Management believes this customer is returning to more historical purchasing patterns and that the inventory buildup reported in the first quarter of 2006 did not continue in the second quarter;

2. a 10.2% increase in pouch volume resulting in a sales increase of $1.8 million;

3. the effect of pricing adjustments to pass through cost increases to Menu's co-pack customers and the price increase initiated on can sales to Menu's United States private-label customers, together with changes to sales mix and other variables, had the effect of increasing sales by $3.5 million; and,

4. take-or-pay agreements in the second quarter of 2006 had the effect of increasing sales by $0.2 million. These increases in sales were offset by:

5. the strengthening of the Canadian dollar relative to the United States dollar, which had the effect of reducing sales by $7.0 million relative to the second quarter of 2005.

Overall, volume (expressed in cases of 24 cans or pouches) was up 4.9% compared to the quarter ended June 30, 2005. In particular, it is important to note that, on a comparative basis, both can and pouch volumes grew in 2006.

Can volume, which represented 75.0% of Menu's volume in the second quarter of 2006, expanded by 3.3% (equating to an increase in total volume of 2.5%). This was primarily attributable to the 28.4% increase in case volume of canned wet pet food sold to Menu's largest customer, which had the effect of increasing second quarter can volume and total volume by 4.5% and 3.4%, respectively. While this is a significant improvement, it should be viewed in the context of a return to similar volume levels experienced for this customer in the same quarter in 2004. As a result of the can price increase to United States private-label customers initiated in the first quarter of 2006, Menu lost sales to one of its customers. During the second quarter of 2005, a Canadian co-pack customer who relied on Menu for its supply of certain products for sale in the Canadian market, opted to reduce its dependence on Menu and self-manufacture that product in its United States facilities. This decision, together with the lost business due to the price increase, reduced Menu's second quarter can volumes, relative to the second quarter of 2005, by 2.9%. Sales of cans to new customers or increased sales of cans to other existing customers, combined to increase can volume by 1.7%.

During the second quarter of 2006, case sales of the pouch product, which represented 25.0% of total volume, grew by 10.2% (equating to an increase in total volume of 2.4%) compared to the second quarter of 2005.

Gross profit increased by $4.3 million (or 53.6%) for the quarter ended June 30, 2006, compared to the prior year. This increase is attributable to:

1. Effect of Change in Sales Volume. As previously noted, total volume for the second quarter increased by 4.9%. This change in sales volume increased gross profit by $0.5 million;

2. Price and Cost Increases/Adjustments. In January 2006 Menu followed a leading national brand manufacturer and announced a price increase on canned products sold to its United States private-label customers. This increase was effective from the beginning of the second quarter of 2006. On a comparative basis to the same quarter in 2005, the costs of certain inputs to production, including raw and packaging materials, utilities, labour and benefits, as well as the cost of freight, have continued to rise and have increased cost of sales as a result. The price increase referred to above, together with selling price increases to co-pack customers amounted to $3.8 million, which, together with improved operating efficiencies and other variables, combined to more than offset these cost increases, and increased gross profit by $5.2 million;

During the second quarter of 2006, Menu again followed a leading national brand manufacturer and announced a price increase on pouch products sold to its United States private-label customers. While costs continue to rise, this price increase, which will take full effect in the third quarter of 2006, should enable Menu to recover much of the margin erosion experienced over the past two years on the sale of pouches to United States private-label customers. The annualized impact of this price increase is expected to increase sales by approximately 0.4%;

3. Take-or-Pay Agreement. In 2006, the quarter's sales included an accrual under a take-or-pay agreement having the effect of increasing comparative gross profit by $0.2 million;

4. 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 $7.0 million and that translated into a reduction in gross profit of $1.3 million for the quarter ended June 30, 2006; and

5. Increase in Amortization. The amortization of capital projects completed in the past year resulted in an increase in the amortization associated with the cost of goods sold of $0.3 million versus the second quarter of 2005.

Selling, general and administrative expenses for the quarter ended June 30, 2006 decreased by $1.1 million compared to the prior year. Since the majority of these expenses are incurred in the United States, the stronger Canadian dollar, relative to the United States dollar, had the effect of lowering selling, general and administrative expenses. Foreign exchange gains on Menu's United States dollar exposure in working capital improved $1.2 million relative to the same quarter last year, although it should be noted that the quarter ended June 30, 2005 also reflected mark-to-market losses on forward contracts entered into to hedge distributions. Amortization was $0.5 million less than in 2005, largely as a result of assets having been fully amortized in periods subsequent to the comparative quarter. The exception to this trend of lower expenses is an increase in the bonus expense in the second quarter of 2006 of $0.8 million, consistent with the significant year-over- year improvement in the operating results of the Fund.

The foregoing resulted in EBITDA (see Note A) of $10.1 million for the quarter ended June 30, 2006, an increase of $5.2 million (or 105.9%) compared to the same period in 2005. The strengthening of the Canadian dollar, relative to the United States dollar, has reduced sales, gross margin, selling, general and administrative expenses, amortization, interest and EBITDA. Management estimates that each change of $0.01 in the cost of the Canadian dollar changes EBITDA by approximately $0.15 million and Distributable Cash (see Note A) by approximately $0.115 million, on a quarterly basis.

Management estimates that absent the impacts of its hedging program in 2005, the strengthening of the Canadian dollar during the second quarter of 2006 versus the same period in 2005 reduced EBITDA by approximately $1.3 million and Distributable Cash by approximately $1.0 million. Under its program for hedging distributions, in 2005 the Fund entered into foreign exchange contracts for the period through July 2006. All outstanding contracts were settled in December 2005, following the decision to suspend distributions. During the quarter ended June 30 2005, the Fund realized a loss of $0.1 million on matured contracts and had unrealized losses of $0.3 million on contracts that had yet to mature. These losses are recorded in selling, general and administration expenses.

Amortization (which is included in cost of sales and SG&A expense) in the second quarter of 2006 was $0.2 million lower than in 2005. This decrease is directly attributable to fully amortized assets and the effects of the strengthening of the Canadian dollar relative to the United States dollar offset by the additional amortization in 2006 on the $4.5 million of capital expenditures made during the twelve-month period ended June 30, 2006 together with the full quarter amortization of the $1.9 million of capital expenditures made during the quarter ended June 30, 2005.

Financial expenses were $0.2 million greater during the quarter ended June 30, 2006, than in the second quarter of 2005. This increase reflects higher average borrowings in 2006 together with the higher interest rates and the amortization of the fees arising from the amended Agreements with its bankers and senior secured noteholders, which were concluded during the first quarter of 2006, offset by a $0.9 million comparative gain in mark-to-market value of an interest rate swap.

The Fund operates using a number of different legal structures (e.g. partnerships, trusts and corporations etc.) in a number of jurisdictions. Each of these structures and jurisdictions is subject to income tax at different rates. The effective tax rate can vary from quarter-to-quarter, depending on the taxing jurisdiction and the legal structure in which the income is earned. As a consequence, the Fund's effective tax rate is 27.3% during the quarter as compared to a recovery of income tax in the second quarter of 2005.

Income before non-controlling interest of Class B Exchangeable Units ("Class B Units") for the quarter ended June 30, 2006, was $3.2 million, compared to $0.7 million for the quarter ended June 30, 2005.

Operating Results for the Six Months Ended June 30, 2006

Sales for the six months ended June 30, 2006, were $178.2 million, up 5.8% or $9.7 million compared to the same quarter last year. This increase is attributable to:

1. an 8.2% increase in can volume resulting in a sales increase of $11.0 million primarily due to a 53.0% increase in can sales volumes to Menu's largest customer. Management believes that 35% to 45% of this increase can be attributed to a build in inventory by this customer during the first quarter of 2006, with the balance of the increase the result of a return to more historical purchasing patterns during the second quarter of 2006;

2. a 7.7% increase in pouch volume resulting in a sales increase of $2.5 million. This represents a resumption of growth in this packaging format, albeit at a slower rate than in prior years;

3. the effect of pricing adjustments to pass through cost increases to Menu's co-pack customers and the price increase initiated on can sales to Menu's United States private-label customers, together with changes to sales mix and other variables, had the effect of increasing sales by $7.9 million; and,

4. take-or-pay agreements in the first six months of 2006 had the affect of increasing sales by $0.6 million. The increases in sales were largely offset by:

5. the strengthening of the Canadian dollar relative to the United States dollar, which had the effect of reducing sales by $12.3 million relative to the first six months of 2005;

Overall, volume (expressed in cases of 24 cans or pouches) was up 8.1% compared to the six months ended June 30, 2005, with both packaging formats showing growth in 2006.

Can volume, which represented 77.0% of Menu's volume in the first six months of 2006, expanded by 8.2% (equating to an increase in total volume of 6.3%). This increase was primarily attributable to the 53.0% increase in the first six months of 2006 in case volume of canned wet pet food sold to Menu's largest customer, which increased can volume for the first six months and total volume by 8.3% and 6.4%, respectively. As noted above, this increase can be attributed to a build in inventory by this customer during the first quarter of 2006, coupled with a return to more historical purchasing patterns during the second quarter of 2006.

Following the can price increase to United States private-label customers initiated in the first quarter of 2006, Menu lost sales to one of its customers. During the second quarter of 2005, a Canadian co-pack customer who relied on Menu for its supply of certain products for sale in the Canadian market, opted to reduce its dependence on Menu and self-manufacture that product in its United States facilities. This decision, together with the lost business due to the price increase, reduced Menu's can volumes, relative to the first six months of 2005, by 2.7%. Sales of cans to new customers or increased sales of cans to other existing customers, combined to increase can volume by 2.6%. By comparison, during the first six months of 2005, can volume had been adversely affected by inventory reduction programs initiated by two other key customers, which had the effect of reducing can volumes by 3.0%, when compared to 2004. These inventory reduction programs did not recur in 2006

In addition to the increase in case sales of canned wet pet food as described above, sales of Menu's pouch product, following a period of comparative decline during the fourth quarter of 2005, once again increased over the same period in the prior year. During the first six months of 2006, case sales of the pouch product, which represented 23.0% of total volume, grew by 7.7% (equating to an increase in total volume of 1.8%) compared to the same period of 2005.

Gross profit increased by $5.9 million (or 32.7%) for the six months ended June 30, 2006, compared to the prior year. This increase is attributable to:

1. Effect of Change in Sales Volume. As previously noted, total volume for the six months ended June 30, 2006 increased by 8.1%. This change in sales volume increased gross profit by $1.8 million;

2. Price and Cost Increases/Adjustments. In January 2006, Menu followed a leading national brand manufacturer and announced a price increase on canned products sold to its United States private-label customers. This increase, which was effective from the beginning of the second quarter of 2006, together with selling price increases to co-pack customers, aggregated to $6.9 million, Compared to the first six months of 2005, the costs of certain inputs to production, including raw and packaging materials, utilities, labour and benefits, as well as the cost of freight, have continued to rise and have increased cost of sales as a result. The above-noted price increases, together with improvements in operating efficiencies were partially offset by the impact of these rising costs and resulted in a net increase in gross profit of $6.1 million. ;

During the second quarter of 2006, Menu again followed a leading national brand manufacturer and announced a price increase on pouch products sold to its United States private-label customers. While costs continue to rise, this price increase, which took full effect in the third quarter of 2006, should enable Menu to recover much of the margin erosion experienced over the past two years on the sale of pouches to United States private-label customers. The annualized impact of this price increase is expected to increase sales by approximately 0.4%;

3. Take-or-Pay Agreement. In 2006, sales for the six-month period included an accrual under a take-or-pay agreement having the effect of increasing comparative gross profit by $0.6 million;

4. 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 $12.3 million and that translated into a reduction in gross profit of $2.1 million for the six months ended June 30, 2006; and

6. Increase in Amortization. The amortization of capital projects completed in the past year resulted in an increase in the amortization associated with the cost of goods sold of $0.5 million versus the same period of 2005.

Selling, general and administrative expenses for the six months ended June 30, 2006 increased by $0.3 million compared to the prior year. This increase is largely attributable to the costs of terminating the former long- term incentive plan, which together with higher bonus expense consistent with the Fund's improved operating performance, aggregate to a $1.3 million increase compared to the six months ended June 30, 2005. Since the majority of these expenses are incurred in the United States, the stronger Canadian dollar, relative to the United States dollar, had the effect of lowering selling, general and administrative expenses, offsetting a significant portion of this increase.

The foregoing resulted in EBITDA (see Note A) of $18.9 million for the six months ended June 30, 2006, an increase of $5.7 million (or 43.4%) compared to the same period in 2005. The strengthening of the Canadian dollar, relative to the United States dollar, has reduced sales, gross margin, selling, general and administrative expenses, amortization, interest and EBITDA. Menu estimates that each change of $0.01 in the cost of the Canadian dollar changes EBITDA by approximately $0.60 million and Distributable Cash (see Note A) by approximately $0.46 million, on an annual basis.

Menu estimates that absent the impacts of its hedging program in 2005, the strengthening of the Canadian dollar during the first half of 2006 versus the same period in 2005 reduced EBITDA by approximately $2.1 million and Distributable Cash by approximately $1.6 million.

Amortization (which is included in cost of sales and SG&A expense) in the first half of 2006 was $0.1 million higher than in 2005. This increase is directly attributable to the additional amortization in 2006 on the $4.5 million of capital expenditures made during the twelve-month period ended June 30, 2006 together with the full period amortization of the $8.0 million of capital expenditures made during the half year ended June 30, 2005, offset by fully amortized assets and the effects of the strengthening of the Canadian dollar relative to the United States dollar.

Financial expenses were $1.6 million greater during the six months ended June 30, 2006, than in the same period of 2005. This increase reflects higher average borrowings in 2006 together with the higher interest rates and the amortization of the fees arising from the amended Agreements with its Lenders, which were concluded during the first quarter, offset by a $0.9 million gain in mark-to-market value of the interest rate swap.

The Fund operates using a number of different legal structures (e.g. partnerships, trusts, corporations etc.) in a number of jurisdictions. Each of these structures and jurisdictions is subject to income tax at different rates. The effective tax rate can vary from quarter-to-quarter, depending on the taxing jurisdiction and the legal structure in which the income is earned. As a consequence, the Fund's effective tax rate was 17.4% during the period as compared to a recovery of income tax in the first six months of 2005.

Income before non-controlling interest of Class B Exchangeable Units ("Class B Units") for the six months ended June 30, 2006, was $5.3 million, compared to $3.7 million for the same period of 2005.

Liquidity

During the six months ended June 30, 2006, the Fund generated cash flow from operations of $13.4 million, offset by a reduction in cash flow of $5.9 million as a result of changes in non-cash working capital items. The increase in non-cash working capital items related primarily to a $4.6 million increase in inventories and a $1.3 million increase in accounts receivable. During the first and second quarters of the year, the Fund typically builds its finished goods inventory in anticipation of the annual production shutdowns, which occur in the summer months. Accordingly, an inventory build- up, consistent with expected sales through to the completion of the production shutdowns is normal at this time of year. Correspondingly, inventories tend to decrease in the second half of the year as they are liquidated and turned into cash. The increase in accounts receivable is consistent with the sales activity in the final month of the period.

For the six months ended June 30, 2006, the Fund, as required by its amended Agreements with its Lenders, did not declare or pay any distributions on the Trust Units or on the Class B Exchangeable Units. The Fund will not be able to pay any distributions until it is in compliance with the covenants set out in its credit facilities, including a total debt to adjusted EBITDA ratio of 3 to 1 or less. As discussed in notes 7 and 8 to the consolidated financial statements, the Fund is expected to use a predefined portion of its excess cash to reduce its indebtedness until this level is reached. Accordingly, based on its performance during the first quarter of 2006, during the second quarter of 2006, the Fund offered to repay $2.1 million to its noteholders and offered to reduce its operating facility with its bank by $0.7 million. The bank declined the offer to reduce the operating facility and one of the noteholders declined the offer to repay $0.4 million. Consequently, a second offer was made to, and was accepted by, the other noteholders to repay them this $1.1 million. In June 2006, $1.7 million of notes were repaid with a further $1.1 million repaid in July 2006. Performance during the second quarter of 2006 will result in similar offers of $2.4 million and $0.9 million being made to the noteholders and bank, respectively.

Since inception, the pay-out ratio (including the distributions declared on the Class B Exchangeable Units) is 89.6%.

The Fund operates utilizing its US$30 million bank facility, of which US$18.9 million was drawn or committed at June 30, 2006. Cash flow from operations together with the unutilized operating credit facility are expected to be sufficient to fund Menu's ongoing operating requirements and maintenance capital expenditures.

Capital Resources

During the six months ended June 30, 2006, Menu spent $2.0 million on property, plant and equipment. Capital expenditures of a maintenance nature, which totaled $1.0 million for the first six months of 2006, were financed from the cash flow of the business. These maintenance capital expenditures were in addition to the $7.5 million (2005 - $7.4 million) for labour and parts expended by Menu for the ongoing repairs and maintenance of its plants that have been expensed as part of cost of sales.



Outstanding Units

The following table highlights the number of units outstanding:

Class B
Exchangeable
Trust Units Units

December 31, 2003 13,259,823 12,631,915
Options exercised during the year 380,413 -
Issuance during the year 2,500,000 -
--------------------------
December 31, 2004 16,140,236 12,631,915
Conversion of Class B Units during the year 1,498,260 (1,498,260)
Options exercised during the year 127,663 -
--------------------------
December 31, 2005 17,766,159 11,133,655
Conversion of Class B Units during the period 876,598 (876,598)
Options exercised during the period 2,575 -
--------------------------
June 30, 2006 18,645,332 10,257,057
--------------------------
--------------------------


Menu Foods Corporation (the former parent company of Menu) had a stock option plan pursuant to which there were outstanding options issued to 61 of its directors, executive officers and key employees. In connection with the initial public offering and acquisition, these options were exchanged for Trust Unit options in the Fund having equivalent terms and conditions. As at June 30, 2006, 72,108 vested Trust Unit options, having a weighted average exercise price of $2.977 per unit, were outstanding. These Trust Unit options expire in November and December 2006. In February 2005, 36,390 units were purchased under the Fund's Long-Term Incentive Plan for the benefit of 22 individuals.

During the six months ended June 30, 2006, 959,296 unit options with an exercise price of $4.56 were granted to 41 executives and employees, 6,000 unit options with an exercise price of $5.25 were granted to one employee, 21,000 unit options with an exercise price of $5.00 were granted to one employee and 15,000 unit options with an exercise price of $4.56 were cancelled. These options vest over three years and will expire 39 months after the date of grant. On May 11, 2006, the option plan under which these options were granted, which authorizes 2,815,000 units, received Unitholder approval at the Annual and Special Meeting of Unitholders.

Outlook

Cost and Price Increases

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

In January 2006, following a price increase announced by a leading national brand manufacturer, Menu announced a price increase on its canned products sold to its private-label customers in the United States. During the second quarter of 2006, Menu again followed a leading national brand manufacturer and announced a price increase, this time on pouch products sold to its United States private-label customers. The first price increase was effective during the second quarter of 2006, while the second will be fully effective during the third quarter of 2006. While costs continue to rise, these price increases should enable Menu to recover much of the margin erosion experienced over the past two years on the sale of cans and pouches to United States private-label customers.

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). However, for its private-label business, Menu's practice, with respect to price increases, has been to follow the brand leaders. While this practice at times squeezes Menu's margins (as it did in 2005), it none-the-less helps to ensure that Menu's products are competitively priced at retail.

Menu expects that input costs for its products in both Canada and the United States will continue to rise. The price increase announced in January 2006 helps to mitigate the impact that rising costs over the past two years have had on margins. However, absent regular price increases in the future, Menu expects that its margins will be squeezed until such time as offsetting price increases can be passed on to its private-label customers.

Bovine Spongiform Encephalopathy ("BSE")

BSE surveillance continues to confirm an extremely low incidence of BSE in North America, with cases in both the US and Canada. Both countries instituted a ruminant feed rule in 1997 as part of their prevention programs. Cases have been identified in Canada in cattle born after the feed ban. In response to this, Canada has announced a strengthening of the feed ban to prevent the addition of specified risk materials (those components of the animal thought to have the highest level of infectivity when consumed) in all animal feed including pet food. The effective date of implementation is currently set at July 12, 2007. This change does not impact the Fund's formulations, as these risk materials are not currently used in the formulations.

Additionally, the US has published information stating that the BSE agents found in its cases come from a rare strain also seen in France, Sweden and Poland, which is harder to detect and mainly found in older cattle. It is possible that these cases may form spontaneously in older cattle without consumption of ruminant material.

The US currently requires companies to obtain import permits for Canadian pet food imported into their country. Canada has recently announced that it will institute a similar program. Publication in the Gazette is expected either late in 2006 or early 2007 outlining the specifics of the program. On a positive note, the US has opened the border to a wider range of Canadian cattle in recent months and there are signs that they may be willing to accept pet foods containing beef that can be certified coming from cattle less than 30 months of age. With the excellent identification programs present in Canada, it appears that this may be possible and Menu is pursuing this opportunity.

Subordination and Distribution

The Fund has two classes of units: (a) publicly traded Trust Units and (b) privately held Class B Exchangeable Units (the "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, since which 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 shall be entitled to a reimbursement of such foregone distributions, which at June 30, 2006 amounted to $4.2 million, only to the extent that the Fund generates sufficient Distributable Cash in the future.

Financial Covenants

Most of the Fund's outstanding debt is represented by its bank facility and senior secured notes. As at June 30, 2006, the Fund had $20.4 million drawn on its bank facility and $93.2 million of senior secured notes outstanding. Each of these facilities has financial covenants and cross default provisions that must be met.

On February 28, 2006, the Fund reached agreement with its Lenders to continue its bank facility and senior secured notes under modified terms and conditions. As a consequence, the Fund agreed to suspend distributions until it is in compliance with the covenants specified in the original Agreements, to pay consent and amendment fees amounting to US$0.5 million, to change certain covenants and cross-default provisions, and to change the method of charging interest, whereby the rates charged by its Lenders increase as the ratio of debt to adjusted EBITDA increases. Management believes that it will be able to comply with these amended terms and conditions throughout 2006.

Risks and Uncertainties

Menu and the Fund are subject to numerous risk factors in its ongoing business. These include reliance on a key customer, absence of long-term sales contracts, customer performance and relationships, foreign exchange fluctuations, governmental regulations and restrictions, reliance on key suppliers, reliance on key personnel, among others. For a review of some of the risks affecting the business, please refer to notes 19 and 20 to the accompanying consolidated financial statements. Additional information about the Fund is available at www.sedar.com.

In the present economic climate, the most significant risks and uncertainties facing the Fund and its ability to re-establish distributions at historic levels, result from the continued strength of the Canadian dollar relative to the United States dollar, and from the ongoing inability to pass input cost increases on to private-label customers in a timely manner. Since a majority of the Fund's operations and assets are in the United States, a "natural" business hedge exists. However, while it is possible to hedge Distributable Cash flow against future fluctuations in the currency (as has been done in the past), it is not possible to hedge business operations, so a continuation of a strong Canadian dollar will have a negative impact on the relative contribution of the Fund's United States denominated business. Similarly, if the Fund must continue to absorb increased raw material and other costs without the benefit of a timely price increase to its private- label customers, gross margin will remain 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 will no longer permit the Fund to make any monthly distributions until it is in compliance with the covenants contained in the original Agreements with the Lenders, including a total debt to adjusted EBITDA ratio of 3 to 1 or less. There can be no assurance as to either when the Fund can resume monthly distributions, or the amount of the monthly distributions that can be paid at that time.

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

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

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

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



For the Quarter ended
June 30
2006 2005
$'000's $'000's
Net income 1,972 403
Adjust for:
Non-controlling interest of Class B
Exchangeable Units 1,233 295
Amortization of property, plant and equipment 3,632 3,796
Amortization of supply contract 129 142
Future income taxes 928 (1,130)
Current income taxes 278 (305)
Financial expenses 1,931 1,705
--------------------------
EBITDA 10,103 4,906
--------------------------
--------------------------

For the Quarter ended
June 30
2006 2005
$'000's $'000's
Cash flow from operating activities 6,098 8,096
Adjust for:
Change in non-cash working capital items 1,273 (4,083)
Maintenance capital expenditures (716) (428)
Principal repayments (6) (41)
--------------------------
Distributable Cash 6,649 3,544
--------------------------
--------------------------


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

Since
Inception
(May 22,
For the Six Months 2002)
ended June 30, to June 30,
2006 2005 2006
$'000's $'000's $'000's

Net income 3,275 2,084 (25,193)
Adjust for:
Goodwill impairment loss - - 93,415
Non-controlling interest of
Class B Exchangeable Units 2,049 1,608 (8,722)
Amortization of property,
plant and equipment 7,455 7,352 59,745
Amortization of supply contract 261 279 2,235
Future income taxes 630 (1,253) 5,528
Current income taxes 494 (7) 1,600
Financial expenses 4,770 3,140 22,339
--------------------------------------
EBITDA 18,934 13,203 150,947
--------------------------------------
--------------------------------------


Since
Inception
(May 22,
For the Six Months 2002)
ended June 30, to June 30,
2006 2005 2006
$'000's $'000's $'000's

Cash flow from operating activities 7,504 11,191 95,621
Adjust for:
Change in non-cash working capital
items 5,888 (1,061) 33,204
Maintenance capital expenditures (997) (1,521) (9,933)
Principal repayments (12) (78) (555)
--------------------------------------
Distributable Cash 12,383 8,531 118,337
--------------------------------------
--------------------------------------



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

As at
June 30, December 31,
2006 2005
$ $

Assets

Current assets
Cash - 5,790
Accounts receivable
Trade 17,772 17,298
Other 2,430 2,133
Inventories (note 3) 52,359 49,475
Prepaid expenses and sundry assets 1,797 1,318
Income taxes recoverable - 550
Future income taxes (note 14) 1,528 1,701
-------------------------------------------------------------------------
Total Current Assets 75,886 78,265
Property, plant and equipment (note 4) 98,653 107,622
Goodwill (note 5) 71,972 71,972
Other assets (note 6) 5,066 5,374
-------------------------------------------------------------------------
Total Assets 251,577 263,233
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities

Current liabilities
Bank indebtedness (note 7) 20,423 29,309
Accounts payable and accrued liabilities 18,043 18,803
Income taxes payable 9 -
Current portion of long-term debt (note 8) 5,879 24
-------------------------------------------------------------------------
Total Current Liabilities 44,354 48,136
Long-term debt (note 8) 87,349 98,912
Future income taxes (note 14) 14,002 13,996
-------------------------------------------------------------------------
Total Liabilities 145,705 161,044
-------------------------------------------------------------------------

Class B Exchangeable Units (note 9) 31,086 31,639
-------------------------------------------------------------------------

Unitholders' Equity

Trust Units (note 10) 173,073 170,454
Contributed surplus (note 12) 374 272
Deficit (85,555) (88,830)
Foreign currency translation adjustment (13,106) (11,346)
-------------------------------------------------------------------------
Total Unitholders' Equity 74,786 70,550
-------------------------------------------------------------------------
Total Liabilities and Unitholders' Equity 251,577 263,233
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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 per Unit amounts, expressed in
thousands of Canadian dollars, unaudited)


Quarter ended
June 30,
2006 2005
$ $

Sales 84,326 83,660
Cost of sales (note 15) 72,031 75,656
-------------------------------------------------------------------------
Gross profit 12,295 8,004
Selling, general and administrative expenses 5,953 7,036
-------------------------------------------------------------------------
Income before the undernoted 6,342 968
Financial expenses (note 13) 1,931 1,705
-------------------------------------------------------------------------
Income (loss) before income taxes and
non-controlling interest 4,411 (737)
-------------------------------------------------------------------------
Current income taxes 278 (305)
Future income taxes 928 (1,130)
-------------------------------------------------------------------------
Total income taxes (note 14) 1,206 (1,435)
-------------------------------------------------------------------------
Income before non-controlling interest 3,205 698
Non-controlling interest of Class B
Exchangeable Units (note 9) 1,233 295
-------------------------------------------------------------------------
Net income for the period 1,972 403
Deficit - beginning of period (87,527) (22,594)
Distributions (note 11) - (4,747)
-------------------------------------------------------------------------
Deficit - end of period (85,555) (26,938)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic net income per Trust Unit $ 0.109 $ 0.024
Diluted net income per Trust Unit $ 0.109 $ 0.024

Basic weighted average number of Trust Units
outstanding (note 10) 18,125,153 16,644,752
Diluted weighted average number of Trust
Units outstanding (note 10) 28,997,255 28,925,871

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 per Unit amounts, expressed in
thousands of Canadian dollars, unaudited)

Six months ended
June 30,
2006 2005
$ $


Sales 178,180 168,447
Cost of sales (note 15) 154,042 150,258
-------------------------------------------------------------------------
Gross profit 24,138 18,189
Selling, general and administrative expenses 12,920 12,617
-------------------------------------------------------------------------
Income before the undernoted 11,218 5,572
Financial expenses (note 13) 4,770 3,140
-------------------------------------------------------------------------
Income before income taxes and non-controlling
interest 6,448 2,432
-------------------------------------------------------------------------
Current income taxes 494 (7)
Future income taxes 630 (1,253)
-------------------------------------------------------------------------
Total income taxes (note 14) 1,124 (1,260)
-------------------------------------------------------------------------
Income before non-controlling interest 5,324 3,692
Non-controlling interest of Class B
Exchangeable Units (note 9) 2,049 1,608
-------------------------------------------------------------------------
Net income for the period 3,275 2,084
Deficit - beginning of period (88,830) (19,182)
Distributions (note 11) - (9,840)
-------------------------------------------------------------------------
Deficit - end of period (85,555) (26,938)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Deficit comprises:
Accumulated net (loss) income (25,366) 28,108
Accumulated distributions (60,189) (55,046)
-------------------------------------------------------------------------
(85,555) (26,938)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic net income per Trust Unit $ 0.182 $ 0.127
Diluted net income per Trust Unit $ 0.182 $ 0.127

Basic weighted average number of Trust Units
outstanding (note 10) 17,947,074 16,403,707
Diluted weighted average number of Trust
Units outstanding (note 10) 28,991,636 28,919,059

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
June 30,
2006 2005
$ $

Cash provided by (used in)
Operating activities
Net income for the period 1,972 403
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units 1,233 295
Amortization of property, plant and equipment 3,632 3,796
Amortization of supply contract 129 142
Amortization of deferred financing costs 178 52
Unit-based compensation 80 49
Mark-to-market adjustment (781) 406
Future income taxes 928 (1,130)
-------------------------------------------------------------------------
7,371 4,013
Change in non-cash working capital items
Accounts receivable 5,944 3,712
Inventories 1,327 748
Prepaid expenses and sundry assets (103) 225
Income taxes recoverable 213 (476)
Accounts payable and accrued liabilities (8,654) (126)
-------------------------------------------------------------------------
6,098 8,096
-------------------------------------------------------------------------
Financing activities
Change in bank indebtedness (3,011) 3,674
Issuance of Trust Units, net - 26
Long-term debt repayments (1,766) (41)
Deferred financing charges (15) -
Distributions paid to Trust Units - (4,855)
Distributions paid to Class B
Exchangeable Units - (1,326)
-------------------------------------------------------------------------
(4,792) (2,522)
-------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (1,306) (1,927)
Other assets - (10)
-------------------------------------------------------------------------
(1,306) (1,937)
-------------------------------------------------------------------------
Increase in cash - 3,637
Cash - beginning of period - -
-------------------------------------------------------------------------
Cash - end of period - 3,637
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary information

Income taxes paid 183 249
Interest paid 2,574 1,532

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)

Six months ended
June 30,
2006 2005
$ $
Cash provided by (used in)
Operating activities
Net income for the period 3,275 2,084
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units 2,049 1,608
Amortization of property, plant and equipment 7,455 7,352
Amortization of supply contract 261 279
Amortization of deferred financing costs 243 103
Unit-based compensation 405 66
Gain on sale of property, plant and equipment (29) -
Mark-to-market adjustment (897) (109)
Future income taxes 630 (1,253)
-------------------------------------------------------------------------
13,392 10,130
Change in non-cash working capital items
Accounts receivable (1,271) 2,790
Inventories (4,628) (1,457)
Prepaid expenses and sundry assets (499) 108
Income taxes recoverable 523 (203)
Accounts payable and accrued liabilities (13) (177)
-------------------------------------------------------------------------
7,504 11,191
-------------------------------------------------------------------------
Financing activities
Change in bank indebtedness (8,886) 18,777
Issuance of Trust Units, net 8 150
Long-term debt repayments (1,772) (78)
Deferred financing charges (640) -
Distributions paid to Trust Units - (9,943)
Distributions paid to Class B Exchangeable Units - (7,958)
-------------------------------------------------------------------------
(11,290) 948
-------------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (2,047) (7,957)
Other assets - (545)
Proceeds from sale of property, plant and equipment 43 -
-------------------------------------------------------------------------
(2,004) (8,502)
-------------------------------------------------------------------------
Increase (decrease) in cash (5,790) 3,637
Cash - beginning of period 5,790 -
-------------------------------------------------------------------------
Cash - end of period - 3,637
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplementary information

Income taxes paid 143 357
Interest paid 4,392 2,764


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


Menu Foods Income Fund

Notes to Consolidated Financial Statements

June 30, 2006

(All figures, except per Unit amounts, expressed in

thousands of Canadian dollars, unaudited)

1. Description of the business

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

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

2. Summary of significant accounting policies

a) Basis of presentation

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

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

These consolidated financial statements are based on accounting principles consistent with those used and described in the annual consolidated financial statements as at December 31, 2005, and should be read in conjunction with those consolidated financial statements. The disclosures contained in these unaudited interim consolidated financial statements may not include all requirements of Canadian generally accepted accounting principles for annual statements.

Accounting measurements at interim dates involve greater reliance on estimates than at year-end. In the opinion of management, the accompanying unaudited interim consolidated financial statements include all adjustments of a normal recurring nature to present fairly the financial position of the Fund as at June 30, 2006.

b) Use of estimates

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

c) Cash and cash equivalents

Deposits in banks and short-term investments with original maturities of three months or less are considered cash and cash equivalents.

Cash equivalents are carried at cost, which approximates fair market value, due to the short-term nature of these instruments.

d) Inventories

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

e) Property, plant and equipment

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



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


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

f) Future income taxes

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

g) Research and development

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

h) Deferred financing charges

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

i) Goodwill

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

j) Supply contract

The supply contract (the "Contract") consists of an exclusive agreement to supply a portion of a customer's canned wet pet food requirements in the United States and Canada. The Contract is carried at cost less accumulated amortization. Amortization is charged to cost of sales on a straight-line basis, over the estimated term of the Contract, which is ten years. The Contract is evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. An impairment loss is recognized when estimated undiscounted cash flows expected to result from the Contract are less than its carrying value. Should an impairment loss be recognized, the carrying amount of the Contract would be reduced to its estimated fair value.

k) Foreign currency translation

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

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

l) Revenue recognition

The Fund recognizes revenue from the sale of manufactured goods at the time of product shipment. From time to time the Fund enters into contracts with customers to manufacture products on their behalf. In some instances the customers provide a portion of the inventory to be used in the manufacturing process. Accordingly, 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.

The Fund enters into "Take-or-pay" arrangements with certain customers which require the customer to make payments to Menu if their purchases do not exceed contracted volumes. These arrangements are reflected in sales - $245 and $642 for the quarter and six months ended June 30, 2006, respectively (2005 - $nil and $nil).

m) Supplier rebates

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

n) Unit-based compensation

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

o) Derivative instruments

Any non-qualifying hedging derivative financial instruments are recognized in the consolidated balance sheet and measured at fair value, with changes in fair value recognized in net income as a charge or credit to selling, general and administrative expenses.

p) 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 June 30, 2006, the Fund has concluded that there were no asset retirement obligations associated with its assets.



3. Inventories

As at
June 30, December 31,
2006 2005
$ $

Raw materials and packaging 14,764 16,462
Finished goods 37,595 33,013
---------------------------------------------------------------------
52,359 49,475
---------------------------------------------------------------------
---------------------------------------------------------------------

4. Property, plant and equipment

June 30, 2006
Accumulated
Cost amortization Net
$ $ $
Land 5,126 - 5,126
Buildings 42,263 5,726 36,537
Machinery and equipment 87,935 36,689 51,246
Other property and equipment 14,464 10,681 3,783
Equipment under capital lease 97 83 14
Construction-in-progress 1,947 - 1,947
---------------------------------------------------------------------
151,832 53,179 98,653
---------------------------------------------------------------------
---------------------------------------------------------------------

December 31, 2005
Accumulated
Cost amortization Net
$ $ $
Land 5,248 - 5,248
Buildings 43,671 5,094 38,577
Machinery and equipment 90,563 32,275 58,288
Other property and equipment 14,069 9,619 4,450
Equipment under capital lease 97 81 16
Construction-in-progress 1,043 - 1,043
---------------------------------------------------------------------
154,691 47,069 107,622
---------------------------------------------------------------------
---------------------------------------------------------------------


5. Goodwill

When the Fund purchased its interest in Menu Foods Limited Partnership, $165,387 of the purchase price was assigned as goodwill in the consolidated financial statements. Under Canadian generally accepted accounting principles, goodwill is subject to an annual impairment test which, for the Fund, takes place as at September 30 of each year. Since the Fund's units were trading at lower than their book value at September 30, 2005 and through December 31, 2005, the application of current accounting principles identified an impairment in the carrying value of goodwill. Following a fair value assessment of other assets, goodwill was written down by $93,415 during the year ended December 31, 2005.

6. Other assets



June 30, 2006
Accumulated
Cost amortization Net
$ $ $
Supply contract 5,600 1,864 3,736
Deferred financing charges 2,487 1,157 1,330
Deferred long-term incentive
plan (note 12) 518 518 -
---------------------------------------------------------------------
8,605 3,539 5,066
---------------------------------------------------------------------
---------------------------------------------------------------------


December 31, 2005
Accumulated
Cost amortization Net
$ $ $
Supply contract 5,834 1,677 4,157
Deferred financing charges 1,842 925 917
Deferred long-term incentive
plan (note 12) 518 218 300
---------------------------------------------------------------------
8,194 2,820 5,374
---------------------------------------------------------------------
---------------------------------------------------------------------


7. Bank indebtedness

The banking agreement provides the Fund with a US$30,000 operating facility of which $20,423 (US$18,297) was drawn as at June 30, 2006 (December 31, 2005 - $29,309 (US$25,201)).

The Fund must adhere to certain restrictive covenants and required financial ratios in order to satisfy its obligations under the terms of its financing agreements with both its bankers and senior secured noteholders (note 8) (the "Lenders"). During 2005, the Fund was not in compliance with certain covenants contained in these agreements. The Fund obtained waivers of these breaches from its bankers and forbearance from its senior secured noteholders and on February 28, 2006 entered into amended agreements (the "Agreements") with its Lenders. The Agreements, among other things, define the terms and conditions governing the Fund's US$30,000 operating facility and US$85,000 senior secured notes facilities, going forward. The Fund is in compliance with its covenants at June 30, 2006. As part of these renegotiations, the Fund agreed to pay US$75 in fees to the bank, plus all associated legal expenses. The bank operating facility is a 364-day revolving term facility, which expires on February 27, 2007.

Pursuant to its amended banking agreement, when the Fund's total debt to EBITDA ratio (the "Leverage Ratio"), as defined in the amended banking agreement, is less than or equal to 3 to 1, this operating facility bears interest at Canadian prime rate (6.00% as at June 30, 2006), U.S. base rate (8.25% as at June 30, 2006) or Euro rate plus 1.50% (7.01% as at June 30, 2006) (the "Base Rates") depending on the currency advanced. When the Leverage Ratio increases above 3 to 1, but is less than or equal to 4 to 1 the Base Rates increase by 1%. Similarly, should the Leverage Ratio be greater than 4 to 1 the Base Rates increase by 1.25%. In addition, the Fund is precluded from paying distributions to its Unitholders at any time the Leverage Ratio exceeds 3 to 1. In the meantime, the Fund is required to use a portion of its excess cash to reduce its indebtedness until this Leverage Ratio is achieved. Specifically, the amended agreement requires the Fund to offer 50% of its excess cash (as defined in the amended agreement) to its Lenders each quarter, with a further 25% to be offered after the year end or after the first quarter that the Leverage Ratio of 3 to 1 is achieved. In the case of the bank, the reduction takes the form of a reduction in the operating facility. For the quarter ended June 30, 2006 this amounts to $887. For the quarter ended March 31, 2006 the bank was offered $748 in accordance with this arrangement but declined the offer to reduce the operating facility.

The Fund has pledged, on a pari pasu basis with its noteholders, as security for bank indebtedness, all moveable property and book debts and, in addition, has signed a general security agreement.

At June 30, 2006, the Fund has an outstanding letter of credit in the amount of $619 (US$555) (December 31, 2005 - $645 (US$555)).



8. Long-term debt
As at
June 30, December 31,
2006 2005
$ $
Senior secured notes(a) 93,158 98,855
Obligation under capital lease(b) 70 81
---------------------------------------------------------------------
93,228 98,936
Less: Current portion 5,879 24
---------------------------------------------------------------------
87,349 98,912
---------------------------------------------------------------------
---------------------------------------------------------------------


a) Senior secured notes

On October 31, 2003, the Fund closed a private placement offering for US$85,000 in floating rate senior secured notes (the "Notes Facility"). The notes are repayable on October 31, 2010, with interest payable quarterly. The Fund has pledged, on a pari pasu basis with its banker, as security for its senior secured notes, all moveable property and book debts and, in addition, has signed a general security agreement. The Fund must adhere to certain restrictive covenants and required financial ratios in order to satisfy its obligations under the terms of its financing arrangements with both its banker (note 7) and senior secured noteholders.

During 2005, the Fund was not in compliance with certain covenants contained in these agreements. The Fund obtained waivers of these breaches from its bankers and forbearance from its senior secured noteholders and on February 28, 2006 entered into amended Agreements with its Lenders. The Agreements, among other things, define the terms and conditions governing the Fund's US$85,000 senior secured notes facilities and US$30,000 operating facility, going forward. The Fund is in compliance with its covenants at June 30, 2006. As part of the renegotiations, the Fund agreed to pay, in 2006, US$468 in fees to the noteholders, plus all associated legal expenses.

Pursuant to the terms of the amended agreement, when the Fund's Leverage Ratio is less than or equal to 3 to 1, the Notes Facility bears interest at floating rate, three-month LIBOR plus 155 basis points. When the Leverage Ratio increases above 3 to 1, but is less than or equal to 4 to 1 this rate increases to three-month LIBOR plus 255 basis points. Similarly, should the Leverage Ratio be greater than 4 to 1 this rate increases to three- month LIBOR plus 305 basis points. From January 1, 2006 until April 29, 2006 the interest rate was fixed at three-month LIBOR plus 355 basis points. From April 30, 2006 until July 29, 2006, based on the Leverage Ratio for the quarter ended March 31, 2006, the interest rate was fixed at three-month LIBOR plus 305 basis points. In addition, the Fund is precluded from paying distributions to its Unitholders at any time the Leverage Ratio exceeds 3 to 1.

In the meantime, the Fund is required to use a portion of its excess cash to reduce its indebtedness until this level of leverage is achieved. Specifically, the amended agreement requires the Fund to offer 50% of its excess cash (as defined in the amended agreement) to its Lenders each quarter, with a further 25% to be offered after the year end or after the first quarter that the leverage ratio of 3 to 1 is achieved. In the case of the noteholders, this equated to $3,178 and $3,657 for the quarters ended March 31, 2006 and June 30, 2006, respectively. Since the bank did not accept the reduction in its facility (note 7), the agreements require Menu to offer the reduction to the noteholders. This amounted to an additional $748 (US$666). Accordingly, $1,729 (US$1,540) was repaid to the noteholders on June 30, 2006 and $1,138 (US$1,014) on July 14, 2006.

During the quarter ended March 31, 2006, the Fund fixed interest rates at 5.35% on US$50,000 through to October 2010 (note 19).

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 (2005 - $14).



Minimum lease payments:
As at
June 30, December 31,
2006 2005

$ $

2006 16 32
2007 32 32
2008 31 31
---------------------------------------------------------------------
Total minimum lease payments 79 95
Less: Amounts representing interest at
10.40 % (6.60% - 2005) 9 14
---------------------------------------------------------------------
Balance of obligation 70 81
Less: Current portion 25 24
---------------------------------------------------------------------
45 57
---------------------------------------------------------------------
---------------------------------------------------------------------

9. Class B Exchangeable Units
Number Carrying
of units value
$
Class B Exchangeable Units of MFLP
December 31, 2004 12,631,915 81,363
Conversion of Class B Exchangeable Units
to Trust Units (note 10) (1,498,260) (9,166)
Share of net loss for the year (34,036)
Distributions for the year (6,522)
---------------------------------------------------------------------
December 31, 2005 11,133,655 31,639
Conversion of Class B Exchangeable Units
to Trust Units (note 10) (876,598) (2,602)
Share of net income for the period 2,049
---------------------------------------------------------------------
June 30, 2006 10,257,057 31,086
---------------------------------------------------------------------
---------------------------------------------------------------------


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

During the second quarter 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, accordingly, no amount has been accrued in distributions payable at June 30, 2006.



10. Trust Units

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

Issued
Number Gross Issuance Net
of units proceeds costs proceeds
$ $ $
Trust Units
December 31, 2004 16,140,236 171,672 11,300 160,372
Conversion of Class B
Exchangeable Units during
the quarter ended
June 30, 2005 (note 9) 1,498,260 9,166 - 9,166
Exercise of options during
quarter ended (note 12):
March 31, 2005 41,573 347 - 347
June 30, 2005 8,829 58 - 58
September 30, 2005 77,261 511 - 511
---------------------------------------------------------------------
December 31, 2005 17,766,159 181,754 11,300 170,454
Conversion of Class B
Exchangeable Units during
the quarter ended
June 30, 2006 (note 9) 876,598 2,602 - 2,602
Exercise of options during
the quarter ended (note 12)
March 31, 2006 2,575 17 - 17
---------------------------------------------------------------------
June 30, 2006 18,645,332 184,373 11,300 173,073
---------------------------------------------------------------------
---------------------------------------------------------------------


Special Trust Units

Special Trust Units are used solely for providing voting rights to the holders of Class B Exchangeable Units ("Class B Units") (note 9) and by their terms have voting rights of the Fund. Special Trust Units are not transferable separately from the Class B Units to which they relate. Conversely, the Special Trust Units will automatically be transferred upon a transfer of the associated Class B Units. Each Special Trust Unit entitles the holder thereof to a number of votes at any meeting of Unitholders and holders of Special Trust Units equal to the number of Units that may be obtained upon the exchange of the Class B Units to which the Special Trust Unit relates, but do not otherwise entitle the holder to any rights with respect to the Fund's property or income. The Fund issued 12,631,915 Special Trust Units relating to the Class B Units at the date of acquisition of Menu. There were 10,257,057 Special Trust Units outstanding as at June 30, 2006 (note 9).

Weighted average number of Units outstanding

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

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



Quarter ended June 30,
2006 2005

Weighted average number of Trust Units
outstanding - basic 18,125,153 16,644,752
Weighted average number of Class B Units
outstanding - basic (note 9) 10,777,236 12,170,912
Dilutive effect of options (note 12) 94,866 110,207
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,997,255 28,925,871
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended June 30,
2006 2005

Weighted average number of Trust Units
outstanding - basic 17,947,074 16,403,707
Weighted average number of Class B Units
outstanding - basic (note 9) 10,954,461 12,400,140
Dilutive effect of options (note 12) 90,101 115,212
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,991,636 28,919,059
---------------------------------------------------------------------
---------------------------------------------------------------------


11. Distributions

No distributions were declared to Trust Units during the quarter and six months ended June 30, 2006 (2005 - $4,747 ($0.2850 per unit) and $9,840 ($0.6000 per unit), respectively).

No distributions were declared to Class B Units during the quarter and six months ended June 30, 2006 (2005 (net of subordinated distributions) - $1,770 ($0.1456 per unit) and $5,749 ($0.4634 per unit), respectively).

12. Unit-based compensation

Unit option plan

Menu Foods Corporation (the former parent company of Menu) had an executive stock option plan pursuant to which there were outstanding options issued to 61 of its directors, executive officers and key employees. In connection with the Fund's Initial Public Offering and the acquisition of Menu, these options were exchanged for Trust Unit options in the Fund having equivalent terms and conditions.

The fair value of the Trust Unit options was determined as part of the cost of the acquisition of Menu Foods Limited Partnership ("MFLP") using the Black-Scholes model, incorporating a 4.25% risk free interest rate, at a 35% volatility factor and 11.75% expected distributions. On this basis, each Trust Unit option was valued at $5.36. The valuation of total Trust Unit options, after allowing for expected forfeitures, aggregated to $4,776, which was included as contributed surplus at the acquisition date. These options expire in November and December 2006.

During the quarter ended March 31, 2006, 959,296 unit options with an exercise price of $4.56 were granted to 41 employees and 6,000 unit options with an exercise price of $5.25 were granted to one employee. During the quarter ended June 30, 2006, 21,000 unit options with an exercise price of $5.00 were granted to one employee and 15,000 unit options with exercise price of $4.56 were forfeited. These options, of which 238,148 will vest after 36 months, with the balance vesting equally over 36 months, will expire 39 months after the date of grant, if not exercised. 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 $80 and $111 were recognized for the quarter and six months ended June 30, 2006, respectively, which was added to contributed surplus. Total compensation expense to be recognized under these awards is estimated to be $985.

The fair value of the Trust Unit options was determined using the Black-Scholes model, incorporating a 3.90% risk free interest rate, at a 34% volatility factor, 3.33% expected distributions and expected life 39 months. On this basis, each Trust Unit option was valued at $1.02.



A summary of option activities since January 1, 2005 is as follows:

Number Range of Weighted average
of options exercise prices exercise prices

December 31, 2004 202,346 2.977 2.977
Exercise of options
during quarter ended
March 31, 2005 (41,573) 2.977 2.977
June 30, 2005 (8,829) 2.977 2.977
September 30, 2005 (77,261) 2.977 2.977
---------------------------------------------------------------------
December 31, 2005 74,683 2.977 2.977
Options granted during
quarter ended
March 31, 2006 965,296 4.560-5.250 4.564
June 30, 2006 21,000 5.000 5.000
Options forfeited during
quarter ended
June 30, 2006 (15,000) 4.560 4.560
Exercise of options during
quarter ended
March 31, 2006 (2,575) 2.977 2.977
---------------------------------------------------------------------
Ending balance 1,043,404 2.977-5.250 4.463
---------------------------------------------------------------------
---------------------------------------------------------------------

The outstanding options are summarized as follows:


Options outstanding Vested options outstanding
Number Weighted average Number Weighted average
remaining life remaining life

Exercise price
2.977 72,108 6 months 72,108 6 months
4.560 944,296 35 months -
5.250 6,000 35 months -
5.000 21,000 38 months -
---------------------------------------------------------------------
1,043,404 72,108
---------------------------------------------------------------------
---------------------------------------------------------------------

Contributed surplus attributed to Trust Unit options

June 30, December 31,
2006 2005
$ $

Opening balance 272 808
Compensation expense recognized for unit options 111 -
Options exercised (9) (536)
---------------------------------------------------------------------
Ending balance 374 272
---------------------------------------------------------------------
---------------------------------------------------------------------

As the Trust Unit options are exercised, the associated contributed
surplus is reclassified to Trust Units (note 10).


Long-term incentive plan

In 2003, the Fund adopted a discretionary long-term incentive plan (the "Incentive Plan") for the 2003, 2004 and 2005 financial years in which trustees, directors, officers and employees (collectively the "Participants") were all eligible to participate. Pursuant to the Incentive Plan, the Fund could contribute an amount, equal to 14.286% of the amount by which distributable cash, as defined by the Declaration of Trust for a calendar year exceeded $33,500 and $34,000 for the calendar years 2004 and 2005, respectively, to a trust on behalf of the Participants in the Incentive Plan. The trust would then purchase Units, on the open market, equal in value to the amount contributed. Units would be awarded to Participants based on determinations made by the Compensation and Corporate Governance Committee of Menu Foods GenPar Limited's Board of Directors (the "Committee").

Once purchased, the Committee would determine the number of Units acquired on behalf of each Participant based on the amount contributed to the Trust on their behalf. Units awarded vested over a three-year period, subject to the provisions of the Incentive Plan. If the employment of a Participant was terminated prior to the final vesting of the Units attributed to such Participant, such Participant's unvested Units were sold and the net proceeds returned to the Fund. In February 2005, 36,390 Trust Units were purchased for $518 for the benefit of 22 individuals of which 6,330 units had vested by December 31, 2005. The Compensation and Corporate Governance Committee determined that during the quarter ended March 31, 2006, all outstanding units vested to the participants and the Incentive Plan was replaced by the unit option plan discussed above.



13. Financial expenses

Quarter ended June 30,
2006 2005
$ $

Interest on senior secured notes 1,918 1,243
Interest on bank indebtedness 456 318
Interest on capital leases 2 3
Net (gain) loss on interest rate swap (781) 86
Amortization of deferred financing charges
and associated costs 328 52
Other, net 8 3
---------------------------------------------------------------------
1,931 1,705
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended June 30,
2006 2005
$ $

Interest on senior secured notes 3,904 2,356
Interest on bank indebtedness 857 594
Interest on capital leases 4 6
Net (gain) loss on interest rate swap (897) 41
Amortization of deferred financing charges
and associated costs 898 103
Other, net 4 40
---------------------------------------------------------------------
4,770 3,140
---------------------------------------------------------------------
---------------------------------------------------------------------

14. Income taxes

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 statement of
operations and deficit reflects an effective rate that differs from
the combined Canadian federal and provincial rates for the following
reasons:

Quarter ended June 30,
2006 2005
$ $
Income (loss) before income taxes and
non-controlling interest 4,411 (737)
Income of the Fund subject to tax in the
hands of recipients - (2,078)
---------------------------------------------------------------------
Income (loss) of subsidiary entities
subject to tax 4,411 (2,815)
---------------------------------------------------------------------
Income taxes at statutory rate 1,521 (970)
Increase (decrease) resulting from:
Effect of foreign tax rate (333) (672)
Large corporations tax - (270)
Deductions not previously recognized 179 135
Valuation allowance (618) -
Other and permanent differences 457 342
---------------------------------------------------------------------
1,206 (1,435)
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended June 30,
2006 2005
$ $
Income before income taxes and
non-controlling interest 6,448 2,432
Income of the Fund subject to tax in the
hands of recipients - (5,203)
---------------------------------------------------------------------
Income (loss) of subsidiary entities
subject to tax 6,448 (2,771)
---------------------------------------------------------------------
Income taxes at statutory rate 2,223 (955)
Increase (decrease) resulting from:
Effect of foreign tax rate (725) (1,088)
Large corporations tax - (200)
Deductions not previously recognized (580) 904
Valuation allowance 151 -
Other and permanent differences 55 79
---------------------------------------------------------------------
1,124 (1,260)
---------------------------------------------------------------------
---------------------------------------------------------------------

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

As at
June 30, December 31,
2006 2005
$ $
Current future income tax assets:
Accounts receivable, accounts payable and
accrued liabilities 398 290
Inventory provisions 1,130 1,411
---------------------------------------------------------------------
1,528 1,701
---------------------------------------------------------------------
---------------------------------------------------------------------
Long-term future income tax liabilities:
Property, plant and equipment 14,271 16,849
Withholding tax on foreign retained earnings 453 331
Tax benefits of loss carry-forwards (2,541) (5,984)
Valuation allowance 1,919 1,768
Other (100) 1,032
---------------------------------------------------------------------
14,002 13,996
---------------------------------------------------------------------
---------------------------------------------------------------------

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

15. Other expenses and income

Research and development expenses amounted to $65 and $130 for the
quarter and six months ended June 30, 2006, respectively (2005 - $65
and $133). These expenses are included in cost of sales.

16. Obligations under operating leases

Future minimum payments under operating leases at June 30, 2006 are
as follows:

$
2006 788
2007 805
2008 718
2009 541
2010 247
Thereafter 9
---------------------------------------------------------------------
3,108
---------------------------------------------------------------------
---------------------------------------------------------------------


17. Employee benefit plans

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

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

The total expense related to these plans was $407 and $821 for the quarter and six months ended June 30, 2006, respectively (2005 - $376 and $858).

18. 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 June 30,
2006 2005
$ $
Sales
Canada
Domestic 11,360 11,978
Foreign 21,663 18,686
Intersegment transfers 4,376 2,527
---------------------------------------------------------------------
37,399 33,191
---------------------------------------------------------------------
United States
Domestic 53,774 55,538
Foreign 399 221
Intersegment transfers 29,263 18,510
---------------------------------------------------------------------
83,436 74,269
---------------------------------------------------------------------
120,835 107,460
Elimination of intersegment transfers (33,639) (21,037)
Discounts (2,870) (2,763)
---------------------------------------------------------------------
84,326 83,660
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended June 30,
2006 2005
$ $
Sales
Canada
Domestic 23,696 26,175
Foreign 49,049 35,011
Intersegment transfers 7,769 4,317
---------------------------------------------------------------------
80,514 65,503
---------------------------------------------------------------------
United States
Domestic 110,681 112,327
Foreign 660 632
Intersegment transfers 61,841 35,892
---------------------------------------------------------------------
173,182 148,851
---------------------------------------------------------------------
253,696 214,354
Elimination of intersegment transfers (69,610) (40,209)
Discounts (5,906) (5,698)
---------------------------------------------------------------------
178,180 168,447
---------------------------------------------------------------------
---------------------------------------------------------------------


As at
June 30, December 31,
2006 2005
Property, plant and equipment $ $
Canada 33,917 33,423
United States 117,915 121,268
---------------------------------------------------------------------
151,832 154,691
Less: Accumulated amortization 53,179 47,069
---------------------------------------------------------------------
98,653 107,622
---------------------------------------------------------------------
---------------------------------------------------------------------

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


19. Financial instruments

Credit risk

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

Foreign exchange and interest rate risks

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

As at June 30, 2006 and December 31, 2005 the Fund did not have any outstanding foreign currency forward contracts.

The Fund has fixed interest rates on a portion of its indebtedness (note 8). The mark-to-market value of the contract at June 30, 2006 resulted in an unrealized gain of $897 (December 31, 2005 - $nil), which is included in accounts payable on the consolidated balance sheet, and credited to interest expense during the period.

Fair value of financial instruments

The carrying values of cash, trade and other receivables, bank indebtedness, accounts payable and accrued liabilities and income taxes payable and recoverable approximate their fair values because of the near maturity of these instruments. The carrying value of long-term debt bearing interest at variable rates (note 8) approximates its fair value because effective rates represent the rates that would be used to calculate fair value.

20. Economic dependence

The Fund has approximately 22.5% of its sales to one customer and has approximately 42.8% of its sales to its three largest customers. Other than these customers, the Fund does not have a significant exposure to any individual customer. The Fund relies on a single supplier for the majority of its can requirements. Should this supplier fail to deliver in a timely manner, delays and/or shutdowns of the Fund's operations could result.

%SEDAR: 00017624E

Contact Information

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