Menu Foods Income Fund
TSX : MEW.UN

Menu Foods Income Fund

August 09, 2007 13:51 ET

Menu Foods Income Fund Announces Second Quarter Results

TORONTO, ONTARIO--(Marketwire - Aug. 9, 2007) -

NOT FOR RELEASE OVER US NEWSWIRE SERVICES

Attention Business/Financial Editors:

Menu Foods Income Fund (TSX:MEW.UN) announced today its financial results for the second quarter ended June 30, 2007.

A conference call to review these results will take place tomorrow, August 10, 2007 at 8:30 a.m. EST (Toronto time). The conference call will be chaired by Paul Henderson, Menu's President and Chief Executive Officer. Paul will be joined on the call by Mark Wiens, Menu's Executive Vice-President and Chief Financial Officer.

To access the conference call in real time, please call 416-850-9150 or 1-866-809-4939. A replay will be available from approximately one hour after the end of the conference call until August 24, 2007 by dialing 416-915-1035 or 1-866-245-6755, using passcode 713421 followed by the number sign. A live audio webcast of the conference call is also available, it can be accessed by entering http://events.onlinebroadcasting.com/menufoods/081007/index.php on an Internet browser. A replay of the webcast will be available for one year, it can be accessed by http://events.onlinebroadcasting.com/menufoods/081007/index.php on an Internet browser.



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


Below we present, to unitholders of Menu Foods Income Fund, our report for the second quarter ended June 30, 2007. The table below reports selected highlights of the quarter's and the year-to-date's results:



Quarter ended Six months ended
June 30, June 30,
2007 2006 2007 2006
($ millions) ($ millions) ($ millions) ($ millions)

Sales 47.2 84.3 111.8 178.2
Income before income
taxes, non-controlling
interest, recall
expenses, and write-off
of deferred financing fees (3.6) 4.4 (4.4) 6.4
Recall and write-off of
deferred financing fees 1.9 - 42.1 -
Net (loss) income before
non-controlling interest (5.5) 4.4 (46.5) 6.4
EBITDA (excluding direct
recall expenses) 1.2 10.1 9.6 18.9
Distributable cash (30.6) 5.4 (29.9) 6.5
Diluted distributable
cash per Trust Unit
and per Class B Unit ($) (1.0567) 0.1854 (1.0281) 0.2240


As anticipated in the message to unitholders for the last quarter, the previously announced recall of the Fund's "cuts and gravy" style pet food has had a very significant impact upon the results for the second quarter of 2007. While the first quarter of the year took the charge for much of the expected costs of the recall, second quarter performance reflects the impact of the recall on the Fund's operations. To give this matter some context, the "cuts and gravy" format accounted for approximately 48% of sales in 2006. Many customers suspended shipments of most "cuts and gravy" products while the recall was in effect, so the 50% decline in sales volume for the quarter is in line with expectations and consistent with the 48% decline in sales volume experienced in the first quarter of the year immediately following the initial recall. General cost increases, diminished operating performance as a consequence of the loss of volumes and other variables have combined to reduce gross profit as a percentage of sales from 14.6% in 2006 to 8.0% in 2007.

While I had hoped to report that sales of "cuts and gravy" products to customers were well underway by the end of June, this did not turn out to be the case. Many of our customers were justifiably cautious in getting back into this business. This took longer than we expected, but customers can rest assured that a thorough and comprehensive process was undertaken on their behalf. The contaminated Chinese wheat gluten was removed from Menu's production on March 7, 2007. All wheat gluten used in production since March 7, 2007 has been tested and confirmed as melamine-free.

On a positive note, late in the second quarter and in the third quarter we have resumed shipments of cuts and gravy products to most of our private label customers. Average weekly volume (expressed in cases of 24 cans or pouches) during the four week period ended July 28, 2007 was 82% greater than the average weekly volume for the second quarter of 2007. This is a firm indication that our customers are refilling their pipelines, and, while we do not expect sales to continue at this level, the rebuilding of inventory by our customers is the next logical step in reestablishing our business. The final step rests with the consumer, and the extent to which they return to normal purchasing patterns. This will become much clearer during the final quarter of the year.

As previously reported, during the quarter ended June 30, 2007, the Fund was advised that one of its customers, whose volume represented approximately 11.3% of total pouch sales in 2006 (2.7% of total sales), intended to discontinue this packaging format effective immediately. In addition, the Fund's largest customer announced on March 16, 2007 that it was putting on hold future orders for cuts and gravy product, which in 2006 accounted for approximately 11% of total sales. During the quarter ended June 30, 2007, this customer informed the Fund that it would no longer be purchasing these products from Menu.

Also during the quarter, as previously disclosed, the Fund was given notice by Mars, Incorporated ("Mars"), whose Royal Canin brand represented 2.4% of total can sales in 2006 (1.8% of total sales), intends to discontinue its contract manufacturing arrangement with Menu and self-manufacture its products.

Subsequently, on August 9, 2007 the Fund received formal notice from Mars, whose Nutro Products Inc. ("Nutro") brand represented 10.0% of total can sales and 13.1% of total pouch sales in 2006 (10.7% of total sales) that it intends to discontinue its contract manufacturing arrangement with Menu and self-manufacture its products. The Fund expects to lose the Nutro and Royal Canin volume over the next 12 months as products are moved to the brand owner's facilities.

Also, on August 9, 2007, the Fund entered into agreements with Mars to release it from certain contractual obligations to purchase product from Menu and to sell Mars Menu's production facility in North Sioux City, South Dakota and certain other assets. The decision to sell the facility in North Sioux City enables the Fund to better match its production capacity to its customer base on a go-forward basis. The Fund will receive a total of US$26.3 million under the terms of these transactions, which will be used to reduce indebtedness with secured lenders. The release is effective immediately. The sale of the plant is expected to close on or about October 1, 2007. Under the terms of the sale, Mars has agreed to offer employment to the employees at the facility on terms substantially similar to their existing employment.

The Fund was one of at least eleven pet food manufacturers in North America who purchased vegetable proteins that had been deliberately contaminated with melamine and/or related compounds by Chinese manufacturers. This fraud on manufacturers and consumers was unlike anything seen before in the pet or human food businesses. We have been working with government, other industry members, pet food experts and customers to ensure pet food remains safe and healthy. I am proud of the timely and professional manner in which our employees and management have dealt with this situation.

Throughout the past few months, the Fund has been buoyed by the support of its many customers and suppliers. We value the relationships that have grown over Menu's 36 year history and thoroughly appreciate their support during these difficult times. While our focus has always been on quality, we wish to once again reaffirm our commitment to producing quality products and emphasize that this remains our number one priority going forward.

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



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


Management's Discussion and Analysis of Financial Results

(For the quarter ended June 30, 2007)

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, 2007 and is supplementary to and should be read in conjunction with the unaudited consolidated financial statements for the quarters ended June 30, 2007 and 2006.

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 issues associated with the product recall, including litigation related matters; key customer performance; dependence on key suppliers; economic conditions; competition; regulatory matters/changes; foreign exchange rates and interest rates, 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,
2007 2006 2007 2006
$ $ $ $
Sales 47,244 84,326 111,750 178,180
Cost of sales 43,461 72,031 100,208 154,042
--------------------------------------
Gross profit 3,783 12,295 11,542 24,138
Selling, general and administrative
expenses 5,561 5,953 11,927 12,920
--------------------------------------
Income (loss) before the undernoted (1,778) 6,342 (385) 11,218
Product recall 1,914 - 41,029 -
Financial expenses 1,853 1,931 5,135 4,770
--------------------------------------
Income (loss) before income taxes
and non-controlling interest (5.545) 4,411 (46,549) 6,448
--------------------------------------
Current income taxes 20 278 (194) 494
Future income taxes (94) 928 (14,295) 630
--------------------------------------
Total income taxes (74) 1,206 (14,489) 1,124
--------------------------------------
Income (loss) before
non-controlling interest (5,471) 3,205 (32,060) 5,324
Non-controlling interest of Class B
Exchangeable Units (1,869) 1,233 (10,949) 2,049
--------------------------------------
Net (loss) income for the period (3,602) 1,972 (21,111) 3,275
--------------------------------------
--------------------------------------
Basic net income per Trust Unit (0.189) 0.109 (1.106) 0.182
Diluted net income per Unit (0.189) 0.109 (1.106) 0.182

Diluted distributable cash per
Trust Unit and Class B Unit (1.0567) 0.1854 (1.0281) 0.2240

Basic weighted average number of
Trust Units outstanding (000's) 19,087 18,125 19,084 17,947
Diluted weighted average number of
Units outstanding (000's) 28,984 28,997 29,091 28,992

Average US/Cdn exchange rate per
Bank of Canada 0.9104 0.8911 0.8810 0.8785


Operating Results for the Quarter Ended June 30, 2007

As previously reported, on March 16, 2007 the Fund announced the recall of a portion of the dog and cat food it manufactured between December 3, 2006 and March 6, 2007. Furthermore, to ensure that consumers were adequately protected, on March 24, 2007 Menu asked its customers to withdraw all recalled pet food, regardless of the dates, thereby minimizing the risk that any recalled product might remain on the retailers' shelves. Menu subsequently expanded this recall to include additional dates and products, as more information became available. The various recalls initiated by the Fund primarily related to the "cuts and gravy" style pet food in cans and pouches manufactured and sold under private-label and contract-manufactured for some national brands.

While most of the expected costs associated with the recall were expensed by the Fund during the first quarter of 2007, since the recall took place so close to quarter-end its impact on Menu's sales and operations to March 31, 2007 were minimized. By contrast, fewer recall related expenses arose in the second quarter of 2007, but significant impacts in terms of lost sales and higher operating costs were experienced as the Fund suspended shipments of most "cuts and gravy" products while the recall was in effect. To put things in context, the "cuts and gravy" style product, sold in cans and pouches, accounted for approximately 48% of the Fund's business in 2006.

In addition, several of the Fund's customers, including its two largest private-label customers, suspended all purchases from Menu, regardless of format, until such time as the recall of their product was complete. The Fund has resumed shipping to most of its private-label customers (including its two largest private-label customers), although many did not begin receiving shipments until the third quarter of 2007. As a result of the resumption of sales to these customers weekly volume (expressed in cases of 24 cans or pouches) during the month of July was about 82% more than the average weekly volume of the second quarter of 2007. The Fund recognizes that much of this demand is attributable to the need to refill the pipeline for those customers who have been without product for several months and expects that once this process is complete, sales will decline to a level that will reflect consumers ongoing demand for the product.

The recall accounts for much of the change in performance from 2006, and since this is an underlying explanation it is not repeated in the commentary which follows.

Sales for the quarter ended June 30, 2007 were $47.2 million, down 44.0% or $37.1 million compared to the same quarter last year. This decrease is attributable to:

1. a 34.3% decrease in can volume resulting in a sales decrease of $22.9 million. Can volume of cuts and gravy style products was down 87.5% compared to the second quarter of 2006 resulting in a sales decrease of $16.1 million and accounting for most of the decline in can volume;

2. a 97.7% decrease in pouch volume, resulting in a sales decrease of $17.5 million;

3. the strengthening of the Canadian dollar relative to the United States dollar, which had the effect of reducing sales by $0.5 million relative to the second quarter of 2006; and

4. take-or-pay agreements in the second quarter of 2006, which did not effect 2007, had the effect of decreasing sales by $0.2 million. These decreases in sales were partially offset by:

5. the effect of pricing adjustments to pass through cost increases to Menu's contract manufacturing customers and the price increase initiated on can sales to Menu's United States private-label customers (both of which are discussed below), together with changes to sales mix and other variables, had the effect of increasing sales by $4.0 million;

Overall, volume was down 50.1% compared to the quarter ended June 30, 2006. Can volume, which represented 98.9% of Menu's volume in the second quarter of 2007 (75.0% in 2006), contracted by 34.3% (equating to a decrease in total volume of 25.7%). Sales of Menu's pouch product also decreased over the same period in the prior year, as virtually all customers suspended purchases of this format. During the second quarter of 2007 case sales of the pouch product, which represented 1.1% of total volume (25.0% in 2006), decreased by 97.7% (equating to a decrease in total volume of 24.4%) compared to the second quarter of 2006.

As previously reported, during the quarter ended June 30, 2007, the Fund was advised that one of its customers, whose volume represented approximately 11.3% of total pouch sales in 2006 (2.7% of total sales), intended to discontinue this packaging format effective immediately. In addition, the Fund's largest customer announced on March 16, 2007 that it was putting future orders for cuts and gravy product, which in 2006 accounted for approximately 11% of total sales, on hold. During the quarter ended June 30, 2007, this customer informed the Fund that it would no longer be purchasing these products from Menu.

Also during the quarter, as previously disclosed, the Fund was given notice by Mars, Incorporated ("Mars"), whose Royal Canin brand represented 2.4% of total can sales in 2006 (1.8% of total sales), intends to discontinue its contract manufacturing arrangement with Menu and self-manufacture its products.

Subsequently, on August 9, 2007 the Fund received formal notice from Mars, whose Nutro Products Inc. ("Nutro") brand represented 10.0% of total can sales and 13.1% of total pouch sales in 2006 (10.7% of total sales) intends to discontinue its contract manufacturing arrangement with Menu and self-manufacture these products. The Fund expects to lose the Nutro and Royal Canin volume over the next 12 months as products are moved to Mars' facilities.

Also, on August 9, 2007, the Fund entered into agreements with Mars to release it from certain contractual obligations to purchase product from Menu and to sell Mars Menu's production facility in North Sioux City, South Dakota and certain other assets. The decision to sell the facility in North Sioux City enables the Fund to better match its production capacity to its customer base on a go-forward basis. The Fund will receive a total of US$26.3 million under the terms of these transactions, which will be used to reduce indebtedness with secured lenders. The release is effective immediately. The sale of the plant is expected to close on or about October 1, 2007. Under the terms of the sale, Mars has agreed to offer employment to the employees at the facility on terms substantially similar to their existing employment.

Gross profit decreased by $8.5 million (or 69.2%) for the quarter ended June 30, 2007, compared to the prior year. This decrease is attributable to:

1. Effect of Change in Sales Volume. As previously noted, total volume for the second quarter decreased by 50.1%. This change in sales volume decreased gross profit by $7.8 million;

2. Price and Cost Increases/Adjustments. In January 2006 and again in the second quarter of 2006, Menu followed a leading national brand manufacturer and announced a price increase on canned and pouch products, respectively, sold to its United States private-label customers. These increases were effective from the beginning of the second and third quarter of 2006, respectively. In February 2007, Menu again followed a leading national brand manufacturer and announced a price increase on canned products sold to its United States private-label customers. While costs continue to rise, this price increase, which was effective in the second quarter of 2007, should enable Menu to recover some of the cost increases experienced since the last price increase on the sale of cans to United States private-label customers.

On a comparative basis to the same quarter in 2006, the increase in costs of certain inputs to production, including raw and packaging materials and labour and benefits, have lead to higher cost of sales. More significantly, the 50.1% decline in volume has significantly increased the cost of manufacturing as production-runs were shortened and the factory overhead associated with the Fund's four production facilities was allocated over a reduced level of production. As a consequence of the lower overhead absorption, the cost of the Fund's inventory increased, which increased cost of sales, as some of that inventory was sold. Cost of sales for the third quarter is also expected to be adversely effected as this higher-cost inventory is sold. These increased costs and other variables, more than offset the selling price increases referred to above, as well as selling price increases to contract manufacturing customers and decreased gross profit by $1.5 million.

3. Take-or-Pay Agreement. In 2006, the quarter's sales included an accrual under a take-or-pay agreement having the effect of decreasing 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 $0.5 million and that translated into a reduction in gross profit of $0.1 million for the quarter ended June 30, 2007; and

5. Decrease in Amortization. The amortization of capital projects completed in the past year was more than offset by the effect of fully amortized assets and the stronger Canadian dollar, resulting in a decrease in the amortization associated with the cost of goods sold of $1.1 million versus the second quarter of 2006.

Selling, general and administrative expenses for the quarter ended June 30, 2007 decreased by $0.4 million compared to the prior year. Since the product recall has such a significant effect on the overall operating performance of the Fund, performance bonuses will not be paid in 2007, which results in a bonus expense that is $0.9 million less than in the quarter ended June 30, 2006. Foreign exchange gains on the United States dollar exposure in working capital in Menu's Canadian operations increased by about $0.3 million compared to last year. Amortization was $0.4 million more than in 2006, largely as a result of newly acquired assets being put into service. The weaker United States dollar modestly reduced the cost of our selling general and administrative costs outside of Canada. Foreign exchange did not have a significant impact on expenses during the quarter, with a variety of items accounting for the remaining change in selling and administrative expenses.

In order to have any meaningful discussion of EBITDA it is necessary to remove the impacts of the recall as described above. Adjusting for the $1.9 million in recall related costs, the foregoing resulted in an adjusted EBITDA (see Note A) of $1.2 million for the quarter ended June 30, 2007, a decrease of $8.9 million (or 87.8%) compared to the same period in 2006. The strengthening of the Canadian dollar, relative to the United States dollar, has decreased sales, gross margin, selling, general and administrative expenses, amortization, interest and EBITDA. Menu estimates that each change of $0.01 in the cost of the Canadian dollar changes EBITDA by approximately $0.15 million and Distributable Cash (see Note A) by approximately $0.115 million, on a quarterly basis. Menu estimates that the strengthening of the Canadian dollar during the second quarter of 2007 versus the same period in 2006 decreased EBITDA by approximately $0.3 million and Distributable Cash by approximately $0.2 million.

Amortization (which is included in cost of sales and SG&A expense) in the second quarter of 2007 was $0.8 million lower than in 2006. 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 2007 on the $5.6 million of capital expenditures made during the twelve-month period ended June 30, 2007 together with the full-quarter amortization of the $1.3 million of capital expenditures made during the quarter ended June 30, 2006.

Financial expenses were $0.1 million lower during the quarter ended June 30, 2007 than in the second quarter of 2006.

The Fund operates using a number of different legal structures (e.g. partnerships, trusts, corporations etc.) in a number of jurisdictions. Each of these structures and jurisdictions is subject to income tax at different rates. The effective tax rate can vary from quarter-to-quarter, depending upon the taxing jurisdiction and the legal structure in which the income is earned.

Loss before non-controlling interest of Class B Exchangeable Units ("Class B Units") for the quarter ended June 30, 2007 was $5.5 million, compared to income of $3.2 million for the quarter ended June 30, 2006.

Operating Results for the Six Months Ended June 30, 2007

The various recalls initiated by the Fund during the first half of 2007 have had a significant impact on the Fund's results for the six months ended June 30, 2007. In order to draw meaningful conclusions with respect to the Fund's performance in the first half of 2007, it is important to isolate the effects of the recalls from the ongoing business.

The following table further evaluates the results noted above:




2007 For the six months
ended June 30,
Excluding Recall 2007 2006
Recall Costs
$ $ $ $

Sales 126,070 (14,320) 111,750 178,180
Cost of sales 111,643 (11,435) 100,208 154,042
---------------------------------------
Gross profit 14,427 (2,885) 11,542 24,138
Selling, general and
administrative expenses 11,927 - 11,927 12,920
---------------------------------------
Income before the under noted 2,500 (2,885) (385) 11,218
Product recall expenses - 41,029 41,029 -
Financial expenses 5,135 - 5,135 4,770
---------------------------------------
(Loss) income before income
taxes and non-controlling interest (2,635) (43,914) (46,549) 6,448
---------------------------------------


While the specific sales lost as a result of the recall may never be quantified their impact on the Fund's business has been significant. Anecdotally, on a comparative basis, from March 16 to March 31 case sales, adjusted for recall returns, were down by 48.5% from the prior year. As noted above, this trend continued through the second quarter of 2007, with sales volume down 50.1% from the same period in 2006. Sales of the "cuts and gravy" style of pet food in cans and pouches (the style primarily impacted by the recalls) accounted for approximately 48% of Menu's sales in 2006, so these results are to be expected.

Sales for the six months ended June 30, 2007 were $111.8 million, down 37.3% or $66.4 million compared to the same period last year. This decrease is attributable to:

1. a 29.3% decrease in can volume resulting in a sales decrease of $41.1 million primarily due to the recall. Upon announcing the recall, Menu and its customers suspended the sale and purchase, respectively, of the recalled products (primarily cuts and gravy products). This action was taken to minimize the risk of recalled products being confused with good products and inadvertently left on the retailer's shelves;

2. a 60.8% decrease in pouch volume resulting in a sales decrease of $20.3 million. Similar to cans, Menu suspended the sales of most pouches at the time of the recall. With the resumption of pouch sales occurring late June 2007, pouch sales were minimal during the quarter ended June 30, 2007; and

3. as a further consequence of the product recall $14.3 million in sales returns were received or accrued during the quarter ended March 31, 2007. These decreased sales were partially offset by:

4. the impact of the price increases since the end of the first quarter of 2006 and the effect of pricing adjustments to pass through cost increases to Menu's contract manufacturing customers, together with changes to sales mix and other variables, had the effect of increasing sales by $9.3 million.

Overall, excluding actual returns arising from the product recall, volume (expressed in cases of 24 cans or pouches) was down 35.4% compared to the six months ended June, 2006. Can volume, which represented 85.8% of Menu's volume in the first half of 2007 (77.0% in 2006), contracted by 29.2% (equating to a decrease in total volume of 22.6%). Virtually all customers experienced decreased sales. In particular, case volume of canned wet pet food sold to Menu's largest customer declined by 53.9%, which decreased can volume and total volume for the first six months of 2007 by 11.9% and 9.1%, respectively.

In addition to the decrease in case sales of canned wet pet food as described above, sales of Menu's pouch product, excluding actual returns arising from the product recall, also decreased over the same period in the prior year, since almost all customers stopped purchasing this product during the second quarter of 2007. During the first six months of 2007, case sales of the pouch product, which represented 14.2% of total volume (23.0% in 2006), decreased by 60.8% (equating to a decrease in total volume of 13.2%) compared to the first six months of 2006.

Gross profit decreased by $12.6 million (or 52.2%) for the six months ended June 30, 2007, compared to the prior year. This decrease is attributable to:

1. Effect of Change in Sales Volume. As previously noted, excluding actual returns arising from the product recall, total volume for the first half of the year decreased by 35.4%. This change in sales volume decreased gross profit by $11.2 million.

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

3. Price and Cost Increases/Adjustments. In January 2006 and again in the second quarter of 2006, Menu followed a leading national brand manufacturer and announced a price increase on canned and pouch products, respectively, sold to its United States private-label customers. These increases were effective from the beginning of the second and third quarters of 2006, respectively. In February 2007, Menu again followed a leading national brand manufacturer and announced a price increase on canned products sold to its United States private-label customers. While costs continue to rise, this price increase, which was effective in the second quarter of 2007, should enable Menu to recover some of the cost increases experienced since the last price increase on the sale of cans to United States private-label customers.

On a comparative basis to the same period in 2006, the increase in costs of certain inputs to production, including raw and packaging materials and labour and benefits, have lead to higher cost of sales. In addition, the 50.1% decline in volume during the second quarter of 2007 significantly increased the cost of manufacturing during that quarter as production-runs were shortened and the factory overhead associated with the Fund's four production facilities was allocated over a reduced level of production. As a consequence of the lower overhead absorption, the cost of the Fund's inventory increased, which increased cost of sales in the second quarter, as some of that inventory was sold. The price increases, referred to above, together with selling price increases to contract manufacturing customers combined to more than offset the increased costs and increased gross profit by $0.6 million.

4. Decrease in Amortization. The amortization of capital projects completed in the past year was more than offset by the effect of fully-amortized assets and the stronger Canadian dollar, resulting in a $0.9 million decrease in the amortization associated with the cost of goods sold versus the six months ended June 30, 2006.

Selling, general and administrative expenses for the six months ended June 30, 2007 decreased by $1.0 million compared to the prior year. Since the product recall has such a significant effect on the overall operating performance of the Fund, performance bonuses will not be paid for 2007, which results in a bonus expense that is $1.6 million less than in the six months ended June 30, 2006. Foreign exchange gains on the United States dollar exposure in working capital in Menu's Canadian operations increased by almost $0.8 million compared to last year. Amortization was $0.3 million more than in 2006, largely as a result of assets being put into service during the period. Foreign exchange did not have a significant impact on expenses during the period, with a variety of items accounting for the remaining change in selling and administrative expenses.

Management estimates that the total costs associated with the recall will approximate $45 million. This expense principally comprises product collection, write-off and disposal costs of $36.5 million, the lost margin on returned product of $2.9 million, $2.4 million to establish and operate a call centre to respond to consumer concerns and $3.2 million in professional and associated fees necessary to manage through this difficult process. All but $1.1 million of these costs, which must be expensed as incurred under Canadian generally accepted accounting policies, have been reflected in the results for the six months ended June 30, 2007.

In order to have any meaningful discussion of EBITDA it is necessary to remove the impacts of the recall as described above. Adjusting for the $43.9 million in recall related costs, the foregoing resulted in an adjusted EBITDA (see Note A) of $9.6 million for the six months ended June 30, 2007, a decrease of $9.4 million (or 49.5%) compared to the same period in 2006. The strengthening of the Canadian dollar, relative to the United States dollar, has decreased sales, gross margin, selling, general and administrative expenses, amortization, interest and EBITDA. Menu estimates that each change of $0.01 in the cost of the Canadian dollar changes EBITDA by approximately $0.6 million and Distributable Cash (see Note A) by approximately $0.46 million, on an annual basis.

Menu estimates that the strengthening of the Canadian dollar during the first half of 2007 versus the same period in 2006 decreased EBITDA by approximately $0.1 million and Distributable Cash by approximately $0.05 million.

Amortization (which is included in cost of sales and SG&A expense) in the first six months of 2007 was $0.6 million less than in 2006. 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 2007 on the $5.6 million of capital expenditures made during the twelve-month period ended June 30, 2007 together with the full period amortization of the $2.0 million of capital expenditures made during the six months ended June 30, 2006.

Financial expenses were $0.4 million greater during the six months ended June 30, 2007 than in the same period in 2006. The amendments to the Agreements with the Fund's Lenders were such that under Canadian generally accepted accounting principles, for accounting purposes, they resulted in a settlement of the original senior secured notes facility. As a consequence, it was necessary to write-off $1.1 million in costs associated with the establishment of the original facility. This write-off more than offset the lower average borrowings and lower interest rates during much of 2007 compared to 2006.

The Fund operates using a number of different legal structures (e.g. partnerships, trusts, corporations etc.) in a number of jurisdictions. Each of these structures and jurisdictions is subject to income tax at different rates. The effective tax rate can vary from quarter-to-quarter, depending upon the taxing jurisdiction and the legal structure in which the income is earned.

Loss before non-controlling interest of Class B Exchangeable Units ("Class B Units") for the six months ended June 30, 2007 was $32.1 million, compared to income of $5.3 million for the six months ended June 30, 2006.

Liquidity

During the six months ended June 30, 2007, the Fund used cash flow in operations of $38.4 million, net of $9.4 million in cash flow as a result of changes in non-cash working capital items. The decrease in non-cash working capital items related primarily to a $12.1 million decrease in accounts receivable, an $8.3 million increase in inventories and a $5.7 million increase in accounts payable and accrued liabilities. These changes can largely be attributed to the recall. The decrease in accounts receivable reflects a decrease in sales for the period following the recall together with the accrual of estimated sales returns of recalled product. In the case of inventory, while production was curtailed following the recall announcement, by the end of June 2007 inventory levels were increasing to support the re-launch of product, to most of the Fund's customers, commencing late in the second quarter or early in the third quarter of 2007. As a further consequence of the reduced production during the second quarter of 2007, overhead was allocated over a smaller number of cases, which together with higher input and manufacturing costs meant an increase in the unit cost of the Fund's inventory and resulted in a higher overall cost of inventory. The Fund expects to sell most of this higher-cost inventory during the third quarter of 2007. Over the remainder of the year, as the business stabilizes, the Fund will work hard to reduce the level of inventory it carries. The increase in accounts payable and accrued liabilities reflects the accrual of other expenses associated with the buildup of inventory and the recall.

No distributions were declared during the first half of 2007. Since inception, the pay-out ratio (including the distributions declared on the Class B Units) is 145.5%.

On May 15, 2007 the Fund reached agreement with its Lenders to modify the terms of its existing credit facilities. This arrangement modified the terms governing the US$30 million bank and US$85 million senior secured notes facilities and increased the bank facility by a further US$20 million. The Fund had drawn or committed US$42,910 ($45,716) of the bank facility on June 30, 2007. Cash flow from operations, together with the US$7.1 million ($7.6 million) in unutilized bank facilities and working capital management, is expected to be sufficient to fund Menu's normal ongoing operating requirements and maintenance capital expenditures.

Various legal actions and investigations have been commenced against the Fund as a consequence of the product recall. It is possible that additional actions or investigations may arise in the future. The Fund may be required to expend significant amounts and devote considerable management time with regard to these matters. It is not possible to predict the amount of such expenses, the resolution of any claims or investigations, or the extent to which these items will be paid by insurance. Furthermore, if the actual cost of the recall significantly exceeds management's estimate of $45 million or if the re-launches for any significant customers are unexpectedly curtailed the Fund may need to obtain additional credit facilities.

Capital Resources

During the six months ended June 30, 2007, Menu spent $2.6 million on property, plant and equipment. Capital expenditures of a maintenance nature, which totaled $0.8 million for the first half of 2007, were financed from the cash flow of the business. These maintenance capital expenditures were over and above the $6.4 million (2006 - $7.5 million) for labour and parts expended by Menu for the ongoing repairs and maintenance of its plants that have been expensed as part of cost of sales.

Outstanding Units

The following table highlights the number of units outstanding:



Class B
Trust Units Exchangeable
Units

December 31, 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 year 1,236,431 (1,236,431)
Options exercised during the year 74,683 -
-------------------------
December 31, 2006 19,077,273 9,897,224
Options exercised during the period 9,746 -
-------------------------
June 30, 2007 19,087,019 9,897,224
-------------------------
-------------------------


During the year ended December 31, 2006, 959,296 unit options with an exercise price of $4.56 were granted to 41 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; 21,000 unit options with an exercise price of $6.20 were granted to one employee; 6,000 unit options with an exercise price of $6.55 were granted to one employee; and 57,000 unit options with an exercise price of $4.56 were forfeited by three employees. These options, of which 238,148 will vest after 36 months, with the balance vesting in equal annual amounts over three years and will expire 39 months after the date they were granted. 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.

During the quarter ended March 31, 2007, 390,156 unit options with an exercise price of $7.34 were granted to 47 employees. These options vest in equal annual amounts over three years and will expire 39 months after the day they were granted. During the quarter ended March 31, 2007, 9,746 options with an exercise price of $4.56 were exercised by one employee.

Outlook

Product Recall and Litigation

On March 16, 2007 the Fund announced the recall of a portion of the dog and cat food it manufactured between December 3, 2006 and March 6, 2007. This recall was primarily related to "cuts and gravy" style pet food in cans and pouches manufactured at two of the Fund's United States facilities. These products were both manufactured and sold under private-label and contract-manufactured for some national brands.

On March 24, 2007 the Fund instituted a withdrawal of all varieties of recalled pet food, regardless of the dates, thereby minimizing the risk that any recalled product might remain on the retailers' shelves. On April 5, 2007 Menu expanded the recall to include certain products manufactured by it Emporia, Kansas plant between November 8, 2006 and December 2, 2006. This was necessary to align the Fund's recall with that of the supplier of the adulterated ingredient. On April 10, 2007 Menu expanded the recall to include some limited production from its Streetsville, Ontario facility. Finally, on April 17, 2007, May 2, 2007 and May 22, 2007 the Fund made some further refinements to the list of recalled products.

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

The Fund estimates that, based on currently available information, the direct costs associated with this recall, which will be financed from a combination of internally generated cash flow and bank credit facilities, will approximate $45 million, which will have a significant impact on the results for the year ending December 31, 2007.

On May 15, 2007 the Fund reached agreement with its Lenders to modify the terms of its existing credit facilities and to increase the amount available under the bank facility. The direct and indirect costs of the recall have lead to an increase in the levels of borrowings by the Fund. The amended agreement will increase the rates of interest paid by the Fund. Both of these changes are expected to increase the Fund's financial expenses going forward.

The Fund estimates the cost of the recall will be significant. There can be no assurance that these costs will not exceed available resources or that customers affected by the recall will continue to purchase the Fund's products. In addition, there can be no assurance that the customers supplied by the Fund prior to the recall will continue to purchase from the Fund or purchase from the Fund at historical levels. As discussed above, several significant customers have discontinued, or stated their intent to discontinue, all or a portion of their business with Menu.

Lawsuits have been initiated against the Fund and certain of its subsidiaries in the United States and in Canada, which seek to recover damages on behalf of the named plaintiffs and a purported class of pet owners. Furthermore, the U.S. Food and Drug Administration is conducting an investigation of the situation. The offices of two United States Attorneys have informed Menu that it is the target of criminal investigations for possible violations of the U.S. federal Food, Drug and Cosmetic Act. It is possible that additional actions or investigations may arise in the future. The Fund expects to expend significant amounts and to devote considerable management time to these matters. The Fund cannot predict the amount of such expenses, the resolution of any claims or investigations, or the extent to which these items will be paid by the Fund's insurers or whether the Fund will have sufficient resources to pay any of these items.

Customers

The Fund has been advised that one of its customers, whose pouch volume accounted for approximately 2.7% of total sales in 2006, has discontinued this packaging format; and that another customer whose volume represented 1.8% of total sales in 2006, intends to discontinue its contract manufacturing arrangement with Menu. These are in addition to the Fund's largest customer who announced on March 16, 2007 that it was putting future orders for cuts and gravy product, which in 2006 accounted for approximately 11% of total sales, on hold. This customer has since confirmed that they will not resume purchasing this product from the Fund. Upon announcing the recall, Menu's customers suspended the purchase of most of its cuts and gravy products. Management expects that this business will be slowly re-established, with this process having started late in the second quarter, and that sales for the remainder of the year will be at less than historical or budgeted levels, as the effects of the recall continue to be felt. Management cannot predict the effect the recall will have on its relationships with its other customers. The Fund believes that the recall did not cause it to violate any of its contracts with its customers because, among other things, the recall was caused by unforeseen circumstances beyond the Fund's control. However, it is possible that in the future Menu may be found to have breached contracts with one or more of its customers as a result of the recall.

Cost and Price Increases

In 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. In January 2006 and again in the second quarter of 2006, Menu followed a leading national brand manufacturer and announced price increases on its canned and pouch products, respectively, sold to its United States private-label customers. In early 2007, Menu again followed a leading national brand manufacturer and increased prices on canned cat food sold in aluminum containers to its United States private-label customers. In all cases, these price increases enable Menu to recover some of the cost increases absorbed during the time since the last price increase.

Increasing input costs are a regular part of Menu's business. Rising costs of steel and aluminum mean higher can costs. Higher utility costs, together with increases in medical benefits (escalating at rates well above inflation) push 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 similarly increases the cost of delivery. Such cost increases have occurred routinely over the past number of years. Regular price increases are essential to mitigate the effect rising costs have on margins.

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

Looking ahead to the remainder of 2007, Menu expects that input costs for its products in both Canada and the United States will continue to rise. In particular, aluminum cans, labour and medical benefits to employees are expected to increase in cost in 2007. Absent regular price increases in the future, Menu expects that its margins will continue to be squeezed.

Bovine Spongiform Encephalopathy ("BSE")

BSE surveillance continues to confirm an extremely low incidence of BSE in North America, with cases in both the U.S. 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 strengthened 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. This does not impact the Fund's formulations, as these risk materials are not currently used.

Additionally, the U.S. 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 form spontaneously in older cattle without consumption of ruminant material.

The U.S. currently requires companies to obtain import permits for Canadian pet food imported into the country. Canada has recently announced that it will institute a similar program. Publication in the Gazette, outlining the specifics of the program, occurred on December 16, 2006. On a positive note, the U.S. has opened the border to a wider range of Canadian cattle in recent months, and there are signs that it 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. Menu will explore this opportunity when the changes are effective. Furthermore, the added pressure brought about by the introduction of Canadian import permits may cause the U.S. to accelerate its review of the necessity for existing import permits.

Subordination and Distribution

The Fund has two classes of units: (a) publicly traded Trust Units and (b) privately held Class B Units. The Declaration of Trust established that the Class B Units' rights to distributions were subordinated to those of the public Trust Units until such time as certain conditions were satisfied. These conditions were met by February 2005, 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 are entitled to a reimbursement of such foregone distributions, which at December 31, 2006 amounted to $4.2 million, only to the extent that the Fund generates sufficient Distributable Cash in the future and declares distributions in excess of 9 cents per unit, per month.

Financial Covenants

Most of the Fund's outstanding debt is represented by its bank facility and senior secured notes. As at June 30, 2007, the Fund had $44.8 million drawn on its bank facility and $80.1 million of senior secured notes outstanding. Each of these facilities has financial covenants and other covenants that must be met and has cross-default provisions for the other facility.

The costs associated with the recall announced on March 16, 2007 will be significant and resulted in the Fund not being in compliance with certain financial covenants with its lenders as at March 31, 2007. Accordingly, on May 15, 2007, the Fund entered into amended agreements with its lenders, which among other things, define the terms and conditions governing the Fund's US$30 million bank and US$85 million senior secured notes facilities, going forward. In addition, the agreement with the bank was expanded to include a new US$20 million credit facility.

Legislative Changes

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

Risks and Uncertainties

Menu and the Fund are subject to numerous risk factors in its ongoing business. These include reliance on key customers, absence of long-term sales contracts, customer performance and relationships, foreign exchange fluctuations, governmental regulations and restrictions, legislative changes, reliance on key suppliers, reliance on key personnel, among others. For a review of some of the risks affecting the business, please refer to notes 22 and 23 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 result from the product recall, including its ultimate final cost, the timing and extent of the resumption of normal business and the cost of any resulting litigation or investigations, including the extent to which these will be covered by insurance.

On March 16, 2007 the Fund announced the recall of a portion of the pet food it manufactured between December 3, 2006 and March 6, 2007. Since March 16, 2007 the recall has been expanded on a number of occasions. The Fund estimates the cost of the recall will be significant. There can be no assurance that these costs will not exceed available resources or that customers affected by the recall will continue to purchase the Fund's products. In addition, there can be no assurance that the customers supplied by the Fund prior to the recall will continue to purchase from the Fund or purchase from the Fund at historical levels. As discussed above, several significant customers have discontinued, or stated their intent to discontinue, all or a portion of their business with Menu.

Lawsuits have been initiated against the Fund and certain of its subsidiaries in the United States and Canada, which seek to recover damages on behalf of the named plaintiffs and a purported class of affected pet owners. Furthermore, the U.S. Food and Drug Administration is conducting an investigation of the situation. The offices of two United States Attorneys have informed Menu that it is the target of criminal investigations for possible violations of the U.S. federal Food, Drug and Cosmetic Act. It is possible that additional actions or investigations may arise in the future. The Fund expects to expend significant amounts and to devote considerable management time to these matters. The Fund cannot predict the amount of such expenses, the resolution of any claims or investigations, or the extent to which these items will be paid by the Fund's insurers or whether the Fund will have sufficient resources to pay any of these items.

The continued strength of the Canadian dollar relative to the United States dollar, and the ongoing inability to pass input cost increases on to private-label customers in a timely manner are more traditional risks facing the Fund. Since a majority of the Fund's operations and assets are in the United States, a "natural" business hedge exists. However, while it is possible, for specified periods, to hedge Distributable Cash flow against future fluctuations in the currency (as has been done in the past during periods when distributions were being paid), it is not possible to hedge business operations, so a 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 be depressed and profitability and the Fund's ability to pay distributions will be curtailed. Given the nature of the industry, price increases are largely beyond Menu's control.

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

On October 31, 2006 the Department of Finance (Canada) announced the "Tax Fairness Plan" whereby the income tax rules applicable to publicly traded trusts and partnerships will be significantly modified. On June 12, 2007, the draft legislation, which was issued in December 2006 passed third reading in the House of Commons and as a result is considered substantially enacted under Canadian generally accepted accounting principles. Management has reviewed the new distribution tax legislation and reflected the impact thereof in the June 30, 2007 consolidated financial statements. The new rules may adversely affect the marketability of the Fund's units and the ability of the Fund to undertake financings and acquisitions, and, at such time as the Fund resumes paying distributions, the available distributable cash may be reduced.

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 Canadian GAAP. Management believes that together with net income and EBITDA, Distributable Cash is a useful supplemental measure of operating performance, which provides investors with an indication of cash available for distribution after adjusting for maintenance capital expenditures and certain principal repayments. The computation and disclosure of Distributable Cash in this Management's Discussion and Analysis is in all material respects in accordance with the guidance provided in the CICA's publication "Distributable Cash in Income Trusts and Other Flow-Through Entities - Guidance on Preparation and Disclosure in Management's Discussion and Analysis - Draft Interpretive Release."

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

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

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



For the Quarter ended
June 30,
2007 2006
$ '000's $ '000's
Net income (loss) (3,602) 1,972
Adjust for:
Non-controlling interest of Class B
Exchangeable Units (1,869) 1,233
Amortization of property, plant and
equipment 2,880 3,632
Amortization of customer relationship 127 129
Future income taxes (94) 928
Current income taxes 20 278
Interest and financial expenses 1,853 1,931
------------------------
EBITDA (685) 10,103
------------------------
------------------------


For the Quarter ended
June 30,
2007 2006
$ '000's $ '000's
Cash flow from operating activities (30,251) 6,098
Adjust for:

Maintenance capital expenditures (369) (716)
Principal repayments (i) (7) (6)
------------------------
Distributable Cash from Operations (30,627) 5,376
------------------------
------------------------


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



Since Inception
For the Six Months (May 22, 2002)
ended June 30, to June 30, 2007
2007 2006
$ '000's $ '000's $ '000's
Net income (loss) (21,111) 3,275 (43,322)
Adjust for:
Goodwill impairment loss - - 93,415
Non-controlling interest of
Class B Exchangeable Units (10,949) 2,049 (18,020)
Amortization of property,
plant and equipment 6,837 7,455 74,185
Amortization of customer
relationship 260 261 2,751
Future income taxes (14,295) 630 (7,328)
Current income taxes (194) 494 2,394
Interest and financial
expenses 5,135 4,770 33,031
-----------------------------------------
EBITDA (34,317) 18,934 137,106
-----------------------------------------
-----------------------------------------


Since Inception
For the Six Months (May 22, 2002)
ended June 30, to June 30, 2007
2007 2006
$ '000's $ '000's $ '000's
Cash flow from operating
activities (29,063) 7,504 86,381
Adjust for:
Maintenance capital
expenditures (832) (997) (12,919)
Principal repayments (i) (13) (12) (580)
-----------------------------------------
Distributable Cash from
Operations (29,908) 6,495 72,882
-----------------------------------------
-----------------------------------------

(i) principal repayments exclude amounts paid to the bank and
noteholders under the terms of amended agreements



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

As at
June 30, December 31,
2007 2006
$ $
Assets
Current assets
Cash 468 2,813
Accounts receivable
Trade (note 2) 8,807 20,062
Other (note 2) 599 2,175
Inventories (notes 2 and 5) 53,625 49,576
Prepaid expenses and sundry assets 2,409 1,956
Future income taxes (note 17) 742 1,657
----------------------------------------------------------------
Total Current Assets 66,650 78,239
Property, plant and equipment (note 6) 85,191 97,734
Goodwill (note 7) 71,972 71,972
Other assets (note 8) 3,078 3,634
----------------------------------------------------------------
Total Assets 226,891 251,579
----------------------------------------------------------------
----------------------------------------------------------------

Liabilities

Current liabilities
Bank indebtedness (note 9) 44,837 15,627
Accounts payable and accrued liabilities
(note 2) 25,255 19,806
Income taxes payable 445 603
Current portion of long-term debt
(note 10) 28 27
----------------------------------------------------------------
Total Current Liabilities 70,565 36,063
Long-term debt (note 10) 80,088 86,442
Future income taxes (note 17) 742 16,085
----------------------------------------------------------------
Total Liabilities 151,395 138,590
----------------------------------------------------------------

Class B Exchangeable Units (note 11) 14,929 27,823
----------------------------------------------------------------

Unitholders' Equity

Trust Units (note 12) 174,702 174,648
Contributed surplus (note 14) 487 272
Deficit (103,511) (82,400)
Accumulated other comprehensive loss
(note 15) (11,111) (7,354)
----------------------------------------------------------------
Total Unitholders' Equity 60,567 85,166
----------------------------------------------------------------
Total Liabilities, Class B Exchangeable
Units and Unitholders' Equity 226,891 251,579
----------------------------------------------------------------
----------------------------------------------------------------

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,
2007 2006
$ $

Sales 47,244 84,326
Cost of sales (note 18) 43,461 72,031
------------------------------------------------------------------
Gross profit 3,783 12,295
Selling, general and
administrative expenses 5,561 5,953
------------------------------------------------------------------
Income (loss) before the undernoted (1,778) 6,342
Product recall (note 2) 1,914 -
Financial expenses (note 16) 1,853 1,931
------------------------------------------------------------------
Income (loss) before income taxes and
non-controlling interest (5,545) 4,411
------------------------------------------------------------------
Current income taxes 20 278
Future income taxes (94) 928
------------------------------------------------------------------
Total income taxes (note 17) (74) 1,206
------------------------------------------------------------------
Income (loss) before non-controlling
interest (5,471) 3,205
Non-controlling interest of Class B
Exchangeable Units (note 11) (1,869) 1,233
------------------------------------------------------------------
Net (loss) income for the period (3,602) 1,972
Deficit - beginning of period (99,909) (87,527)
------------------------------------------------------------------
Deficit - end of period (103,511) (85,555)
------------------------------------------------------------------
------------------------------------------------------------------

Basic net (loss) income per Trust Unit $ (0.189) $ 0.109
Diluted net (loss) income per Trust Unit $ (0.189) $ 0.109

Basic weighted average number of Trust
Units outstanding (note 12) 19,087,019 18,125,153
Diluted weighted average number of Trust
Units outstanding (note 12) 28,984,243 28,997,255



Consolidated Statements of Other Comprehensive Income (loss)
(All figures expressed in thousands of
Canadian dollars, unaudited)
Quarter ended
June 30,
2007 2006
$ $
Net (loss) income for the period (3,602) 1,972
Other comprehensive income (loss), net
of tax of $nil (2006 - $nil):
Unrealized losses on translating
financial statements of self-sustaining
foreign operations (15,300) (5,195)
Gains on hedges of unrealized foreign
currency translation 11,895 3,433
------------------------------------------------------------------
Comprehensive (loss) income
for the period (7,007) 210
------------------------------------------------------------------
------------------------------------------------------------------

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,
2007 2006
$ $
Sales 111,750 178,180
Cost of sales (note 18) 100,208 154,042
------------------------------------------------------------------
Gross profit 11,542 24,138
Selling, general and
administrative expenses 11,927 12,920
------------------------------------------------------------------
Income (loss) before the undernoted (385) 11,218
Product recall (note 2) 41,029 -
Financial expenses (note 16) 5,135 4,770
------------------------------------------------------------------
Income (loss) before income taxes and
non-controlling interest (46,549) 6,448
------------------------------------------------------------------
Current income taxes (194) 494
Future income taxes (14,295) 630
------------------------------------------------------------------
Total income taxes (note 17) (14,489) 1,124
------------------------------------------------------------------
Income (loss) before non-controlling
interest (32,060) 5,324
Non-controlling interest of Class B
Exchangeable Units (note 11) (10,949) 2,049
------------------------------------------------------------------
Net (loss) income for the period (21,111) 3,275
Deficit - beginning of period (82,400) (88,830)
------------------------------------------------------------------
Deficit - end of period (103,511) (85,555)
------------------------------------------------------------------
------------------------------------------------------------------

Deficit comprises:
Accumulated net loss (43,322) (25,366)
Accumulated distributions (60,189) (60,189)
------------------------------------------------------------------
(103,511) (85,555)
------------------------------------------------------------------
------------------------------------------------------------------

Basic net (loss) income per Trust Unit $ (1.106) $ 0.182
Diluted net (loss) income per Trust Unit $ (1.106) $ 0.182

Basic weighted average number of Trust
Units outstanding (note 12) 19,084,165 17,947,074
Diluted weighted average number of Trust
Units outstanding (note 12) 29,090,942 28,991,636



Consolidated Interim Statements of Other
Comprehensive Income
(All figures, except per Unit amounts,
expressed in thousands of Canadian dollars, unaudited)

Year ended
December 31,
2007 2006
$ $
Net (loss) income for the period (21,111) 3,275
Other comprehensive income (loss), net
of tax:
Unrealized losses on translating
financial statements of self-sustaining
foreign operations (16,258) (4,807)
Gains on hedges of unrealized foreign
currency translation 12,502 3,172
------------------------------------------------------------------
Comprehensive (loss) income
for the period (24,867) 1,640
------------------------------------------------------------------
------------------------------------------------------------------

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,
2007 2006
$ $

Cash provided by (used in)
Operating activities
Net (loss) income for the period (3,602) 1,972
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units (1,869) 1,233
Amortization of property, plant and equipment 2,880 3,632
Amortization of customer relationship 127 129
Amortization of deferred financing costs - 178
Unit-based compensation 144 80
Marked-to- market adjustment (805) (781)
Future income taxes (94) 928
----------------------------------------------------------------------
(3,219) 7,371
Change in non-cash working capital items
Accounts receivable (8,921) 5,944
Inventories (7,544) 1,327
Prepaid expenses and sundry assets (680) (103)
Income taxes 759 213
Accounts payable and accrued liabilities (10,646) (8,654)
----------------------------------------------------------------------
(30,251) 6,098
----------------------------------------------------------------------
Financing activities
Change in bank indebtedness 30,991 (3,011)
Long-term debt repayments (7) (1,766)
Deferred financing charges - (15)
----------------------------------------------------------------------
30,984 (4,792)
----------------------------------------------------------------------
Investing activities
Purchase of property, plant and equipment (752) (1,306)
----------------------------------------------------------------------
(752) (1,306)
----------------------------------------------------------------------
Decrease in cash (19) -
Cash - beginning of period 487 -
----------------------------------------------------------------------
Cash - end of period 468 -
----------------------------------------------------------------------
----------------------------------------------------------------------

Supplementary information

Income taxes paid 105 183
Interest paid 2,080 2,574

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,
2007 2006
$ $
Cash provided by (used in)
Operating activities
Net (loss) income for the period (21,111) 3,275
Adjustments for non-cash items
Non-controlling interest of Class B
Exchangeable Units (10,949) 2,049
Amortization of property, plant and
equipment 6,837 7,455
Amortization of customer relationship 260 261
Amortization of deferred financing costs 1,176 243
Unit-based compensation 225 405
Gain on sale of property, plant and
equipment (6) (29)
Marked-to- market adjustment (589) (897)
Future income taxes (14,295) 630
-----------------------------------------------------------------------
(38,452) 13,392
Change in non-cash working capital items
Accounts receivable 12,052 (1,271)
Inventories (8,327) (4,628)
Prepaid expenses and sundry assets (494) (499)
Income taxes 441 523
Accounts payable and accrued liabilities 5,717 (13)
-----------------------------------------------------------------------
(29,063) 7,504
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Financing activities
Change in bank indebtedness 29,210 (8,886)
Issuance of Trust Units, net 44 8
Long-term debt repayments (13) (1,772)
Deferred financing charges - (640)
-----------------------------------------------------------------------
29,241 (11,290)
-----------------------------------------------------------------------

Investing activities
Purchase of property, plant and
equipment (2,553) (2,047)
Proceeds from sale of property, plant
and equipment 30 43
(2,523) (2,004)
-----------------------------------------------------------------------
Decrease in cash (2,345) (5,790)
Cash - beginning of period 2,813 5,790
-----------------------------------------------------------------------
Cash - end of period 468 -
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Supplementary information

Income taxes paid 181 143
Interest paid 3,945 4,392


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



Menu Foods Income Fund
Notes to Consolidated Financial Statements June 30, 2007

(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").

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

2. Product recall, litigation and liquidity

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

Management estimates that the costs associated with the recalls and withdrawal noted above will amount to approximately $45,000. This estimate includes $3,000 in costs which, under generally accepted accounting principles in Canada, will not be recognized until incurred. Approximately $1,914 in such costs were incurred during the quarter ended June 30, 2007. The costs associated with the recall resulted in the Fund not being in compliance with certain existing financial covenants included in the loan agreements with its lenders. Accordingly, on May 15, 2007 the Fund entered into amended agreements with its lenders, which among other things, define the terms and conditions governing the Fund's US$30,000 bank and US$85,000 senior secured notes facilities, going forward. The amendments to the senior secured notes facility were such that under Canadian generally accepted accounting principles they resulted in a settlement of the original facility, necessitating a write-off of $1,101 in previously capitalized costs. This write-off, together with the expected direct costs of the recall, aggregates to $46,101. In addition, the agreement with the bank was expanded to include a new US$20,000 credit facility.

The estimated product recall costs are based on the best information currently available to the management of the Fund. The ultimate determination of these costs is dependant on the amount of product actually returned and certain other factors. Accordingly, actual amounts could differ from these estimates and the differences could be significant. Furthermore, even with the new credit facility the estimated product recall costs could, depending upon the time required to resume normalized shipping to customers, have a significant effect on the liquidity of the Fund.

The Fund may be required to expend significant amounts and devote considerable management time with regard to recall related matters. It is not possible to predict the amount of such expenses, the resolution of any claims or investigations, or the extet to which these items will be paid by insurance. If these costs, if any, plus the direct costs of the recall exceed available resources the Fund may need to obtain additional credit facilities.

The recall costs noted above include product collection, write-off and disposal costs of $36,475, lost margin on returned product of $2,885, $2,400 to establish and operate a call centre to respond to consumer concerns and $240 in professional and associated fees necessary to manage through this difficult process. As at June 30, 2007, the Fund has incurred $14,508 of actual recall costs and has accrued a further $29,406 for costs not yet incurred in connection with the recall. These accruals have been reflected in various balance sheet accounts, as set out below:



As at June 30, 2007
$
Accounts receivable 3,218
Inventory 12,050
Accrued liabilities 14,138
---------------------------------------------------------------------
Total expenses accrued 29,406
Actual costs incurred 14,508
---------------------------------------------------------------------
Total cost of recall 43,914
---------------------------------------------------------------------
---------------------------------------------------------------------


In addition, the Fund expects to incur a further $1,086 of period expenses over the balance of 2007, bringing the total estimated cost of the recall to $45,000.

Lawsuits have been initiated against the Fund and certain of its subsidiaries in the United States and Canada, which seek to recover damages on behalf of the named plaintiffs and a purported class of affected pet owners. Furthermore, the U.S. Food and Drug Administration is conducting an investigation of the situation. The offices of two United States Attorneys have informed Menu that it is the target of criminal investigations for possible violations of the U.S. federal Food, Drug and Cosmetic Act. It is possible that additional actions or investigations may rise in the future. The Fund expects to expend significant amounts and to devote considerable management time to these matters. The Fund cannot predict the amount of such expenses, the resolution of any claims or investigations, or the extent to which these items will be paid by the Fund's insurers or whether the Fund will have sufficient resources to pay any of these claims. Accordingly, no amounts related to these actions have been accrued in these financial statements. Costs to the Fund are being expensed as incurred.

3. Changes in accounting policies

On January 1, 2007, the Fund adopted Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income; Section 3855, Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments - Disclosure and Presentation; and Section 3865 - Hedges.

Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with generally accepted accounting principles.

Section 3855 prescribes when a financial asset or liability or non-financial derivative is to be recognized on the balance sheet and at what amount, requiring fair value or cost-based measures under different circumstances. Under Section 3855, financial instruments must be classified into one of these five categories; held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are measured at fair value except for loans and receivables, held to maturity investments and other financial liabilities, which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net earnings; available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired, at which time the amounts would be recorded in net earnings.

Section 3861 establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them.

Section 3865 describes when and how hedge accounting can be applied as well as the disclosure requirements. Hedge accounting enables the recording of gains, losses, revenues and expenses from derivative financial instruments in the same period as for those related to the hedged item.

Under the new standards, policies followed for periods prior to the effective date generally are not changed and, therefore, the comparative figures have not been restated, except for the requirement in Section 1530 to include the currency translation adjustment as part of other comprehensive income, which is included in a separate statement in these consolidated financial statements.

Upon adoption of Section 3855, the Fund designated its cash as held-for-trading, which is measured at fair value. Accounts receivable are classified as loans and receivables, which are measured at amortized cost. Bank indebtedness, accounts payable and accrued liabilities and long-term debt are classified as other financial liabilities, which are recorded at amortized cost. Derivative instruments are recorded in the statement of operations at fair value except for contracts entered into for the purposes of the Fund's own usage requirements. The Fund uses interest rate swaps (the "Swaps") to fix interest rates on a portion of its indebtedness. Previously the Swaps were marked-to-market, and consequently are unaffected by this new standard. The Fund established January 1, 2003 as its transition date for the purpose of identifying embedded derivatives. Consequently, only contracts or financial instruments entered into or modified after the transition date were examined for embedded derivatives. As at June 30, 2007 and December 31, 2006 the Fund does not have any embedded derivatives.

There was no impact on the Fund as a result of adopting Section 3865.

4. 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, 2006 except as discussed in note 3, 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, 2007.

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 fair value.

d) Inventories

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

e) Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated amortization. Cost represents the cost of acquisition or construction, including preparation and testing charges and direct financing costs incurred until the beginning of commercial production. An impairment loss is recognized when the asset's carrying value is no longer recoverable from estimated future undiscounted cash flows. When an impairment loss is recognized, the carrying value of the asset 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) Other financial liabilities

The Fund classified long-term debt as other financial liabilities, which are measured at amortized cost. Transaction costs, which are netted against the carrying value of the long-term debt are amortized using the effective interest rate method, and are included in financial expenses.

i) Goodwill

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

j) Customer relationship

The customer relationship includes an exclusive agreement to supply a portion of a customer's canned wet pet food requirements in the United States and Canada. The customer relationship is carried at cost less accumulated amortization. Amortization is charged to cost of sales on a straight-line basis, over a ten-year period. The customer relationship 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 customer relationship are less than the carrying value of the customer relationship. Should an impairment loss be recognized, the carrying value of the customer relationship 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 foreign subsidiaries, which are considered to be self-sustaining operations, are translated at the exchange rate in effect at the consolidated balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the period. The Fund has designated a portion of its United States' dollar indebtedness as a hedge of its net investment in the United States. The indebtedness is translated at the exchange rate in effect at the consolidated balance sheet date. The resulting gains or losses, together with the related income taxes, are included in the foreign currency translation adjustment in the consolidated statement of comprehensive income.

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 meet or exceed contracted volumes. These arrangements are reflected in sales. As a consequence of the product recall (note 2), no revenue has been reflected from these arrangements during the quarter and six months ended June 30, 2007 (2006 - $245 and $642, respectively). At present the Fund has two such contracts that expire in September 2007 and December 2008.

m) Supplier rebates

Volume rebates on supplier purchases are recorded throughout the period as a reduction of inventory and 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) 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, 2007, the Fund has concluded that there were no asset retirement obligations associated with its assets.

5. Inventories



As at
June 30, 2007 December 31, 2006
$ $
Raw materials and packaging 15,459 13,498
Finished goods 38,166 36,078
---------------------------------------------------------------------
53,625 49,576
---------------------------------------------------------------------
---------------------------------------------------------------------


6. Property, plant and equipment

As at June 30, 2007
Accumulated
Cost amortization Net
$ $ $
Land 4,992 - 4,992
Buildings 41,157 7,063 34,094
Machinery and equipment 87,199 45,460 41,739
Other property and equipment 15,733 13,182 2,551
Equipment under capital lease 97 83 14
Construction-in-progress 1,801 - 1,801
---------------------------------------------------------------------
150,979 65,788 85,191
---------------------------------------------------------------------
---------------------------------------------------------------------


As at June 30, 2006
Accumulated
Cost amortization Net
$ $ $
Land 5,255 - 5,255
Buildings 44,174 6,752 37,422
Machinery and equipment 93,681 43,749 49,932
Other property and equipment 15,203 11,890 3,313
Equipment under capital lease 97 83 14
Construction-in-progress 1,798 - 1,798
---------------------------------------------------------------------
160,208 62,474 97,734
---------------------------------------------------------------------
---------------------------------------------------------------------


7. 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 30th of each year, unless events indicate that an impairment has arisen at some other time. Since the Fund's units were trading at lower than their book value, an assessment of the carrying value of goodwill was carried out in 2005, resulting in a writedown of $93,415. The carrying value of goodwill is $71,972 as at June 30, 2007 and December 31, 2006.

8. Other assets



As at
June 30, 2007 December 31, 2006
Customer relationship $ $
Cost 5,345 5,846
Accumulated amortization 2,267 2,212
---------------------------------------------------------------------
3,078 3,634
---------------------------------------------------------------------
---------------------------------------------------------------------


9. Bank indebtedness

The banking agreement provides the Fund with a US$50,000 operating facility of which $44,837 (US$42,085) was drawn upon as at June 30, 2007 (December 31, 2006 - $15,627 (US$13,409)). At June 30, 2007, the Fund has an outstanding letter of credit in the amount of $879 (US$825) (December 31, 2006 - $991 (US$850)) which further reduces the facility.

The costs associated with the product recall first announced on March 16, 2007 (note 2) will be significant and resulted in the Fund not being in compliance with certain financial covenants with its bank and senior secured noteholders (note 10) (the "Lenders") as at March 31, 2007 and for all of 2007. Accordingly, on May 15, 2007, the Fund entered into amended agreements (the "Agreements") with its Lenders that, among other things, define the terms and conditions governing the Fund's US$30,000 bank and US$85,000 senior secured notes facilities going forward. In addition, the agreement with the bank was extended to June 30, 2009 and expanded to include a new US$20,000 credit facility.

Pursuant to its amended banking agreement, this operating facility bears interest at Canadian prime rate (6.25% as at June 30, 2007) plus 3.5%, U.S. base rate (8.25% as at June 30, 2007) plus 3.5% or Euro rate (5.36% as at June 30, 2007) plus 4.75% (the "Base Rates") depending on the currency advanced. These interest rates will continue to apply until the additional US$20,000 facility is extinguished and the balance owing under the US$30,000 facility is less than US$15,000 for five consecutive business days and the Fund achieves a total debt to EBITDA (a non GAAP measure that is defined in the amended banking agreement) ratio (the "Leverage Ratio") on a trailing twelve months basis, of 3 to 1 or less, at which time the interest rates will revert to those set out in Menu's credit facilities prior to amendment, provided that there are no other defaults. The Fund is precluded from paying distributions to its Unitholders at any time the Leverage Ratio exceeds 3 to 1.

The existing covenants have been suspended until such time as the recall costs no longer impact the Fund's Leverage Ratio and until the additional US$20,000 facility is extinguished and the balance owing under the US$30,000 facility is less than US$15,000 for five consecutive business days and the Fund achieves a Leverage Ratio, on a trailing twelve months basis, of 3 to 1 or less. In addition, the cumulative consolidated EBITDA before recall costs and operating leases must be at least $7,500 as at March 31, 2007; $8,000 as at June 30, 2007; $14,000 as at September 30, 2007; $18,500 as at December 31, 2007; $17,000 as at March 31, 2008 and $20,000 per quarter, on a trailing twelve-months basis, thereafter. Under the terms of the amended agreements, not more than $45,000 may be utilized by the Fund for recall-related costs. The amended agreements also require the Fund to pay fees to the bank of US$380, plus all associated professional costs.

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

10. Long-term debt



As at
June 30, 2007 December 31, 2006
$ $
Senior secured notes (a) 80,073 86,411
Obligation under capital lease (b) 43 58
---------------------------------------------------------------------
80,116 86,469
Less: Current portion 28 27
---------------------------------------------------------------------
80,088 86,442
---------------------------------------------------------------------
---------------------------------------------------------------------


a) Senior secured notes
As at
June 30, 2007 December 31, 2006
$ $
Senior secured notes obligation 80,073 87,587
Transaction costs - 1,176
---------------------------------------------------------------------
80,073 86,411
---------------------------------------------------------------------
---------------------------------------------------------------------


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, of which US$75,157 was outstanding at June 30, 2007 and December 31, 2006, are repayable on October 31, 2010, with interest payable quarterly. Certain bank indebtedness has been identified as priority indebtedness under an agreement between the bank and senior secured noteholders. Otherwise, the Fund has pledged, on a pari pasu basis with its bank, as security for its senior secured notes, all moveable property and book debts and, in addition, has signed a general security agreement.

The costs associated with the product recall first announced on March 16, 2007 (note 2) will be significant and resulted in the Fund not being in compliance with certain financial covenants with its Lenders as at March 31, 2007. Accordingly, on May 15, 2007, the Fund entered into Agreements with its Lenders, which among other things, define the terms and conditions governing the Fund's US$30,000 bank (note 9) and US$85,000 senior secured notes facilities going forward. In addition, the agreement with the bank was extended to June 30, 2009 and expanded to include a new US$20,000 credit facility.

Pursuant to the terms of the Agreements, the Notes Facility bears interest at floating rate, three-month LIBOR plus 530 basis points. This rate will continue to apply until the additional US$20,000 bank facility is extinguished and the balance owing under the US$30,000 bank facility is less than US$15,000 for five consecutive business days and the Fund achieves a Leverage Ratio, on a trailing twelve months basis, of 3 to 1 or less, at which time the interest rates will revert to those set out in Menu's existing Notes Facility, provided that there are no other defaults. The Fund is precluded from paying distributions to its Unitholders at any time the Leverage Ratio exceeds 3 to 1.

The existing covenants have been suspended until such time as the recall costs no longer impact the Fund's Leverage Ratio and until the additional US$20,000 facility is extinguished and the balance owing under the US$30,000 bank facility is less than US$15,000 for five consecutive business days and the Fund achieves a Leverage Ratio, on a trailing twelve months basis, of 3 to 1 or less. In addition, the cumulative consolidated EBITDA before recall costs and operating leases must be at least $7,500 as at March 31, 2007; $8,000 as at June 30, 2007; $14,000 as at September 30, 2007; $18,500 as at December 31, 2007; $17,000 as at March 31, 2008 and $20,000 per quarter, on a trailing twelve-month basis, thereafter. Under the terms of the amended agreements, not more than $45,000 may be utilized by the Fund for recall-related costs.

The amendments to the Agreements with the Fund's Lenders were such that under Canadian generally accepted accounting principles, they resulted in a settlement of the original senior secured notes facility. As a consequence, it was necessary to write-off $1,101 in costs associated with the establishment of the original facility that remained outstanding on March 31, 2007.

During the quarter ended March 31, 2006, the Fund fixed interest rates at 5.35% plus the applicable spread on US$50,000 through to October 2010 (note 22).

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 (2006 - $14).



Minimum lease payments: As at
June 30, 2007 December 31, 2006
$ $
2007 17 32
2008 31 31
---------------------------------------------------------------------
Total minimum lease payments 48 63
Less: Amounts representing interest at
10.40 % (6.60% - 2006) 5 5
---------------------------------------------------------------------
Balance of obligation 43 58
Less: Current portion 28 27
---------------------------------------------------------------------
15 31
---------------------------------------------------------------------
---------------------------------------------------------------------


11. Class B Exchangeable Units

Number Carrying
of units value
$

Class B Exchangeable Units of MFLP
December 31, 2005 11,133,655 27,268
Conversion of Class B Exchangeable
Units to Trust Units (note 12) (1,236,431) (3,700)
Foreign currency translation
adjustment attributed to conversion 491
Share of net income for the year 3,699
Share of foreign currency translation
adjustment for the year 65
December 31, 2006 9,897,224 27,823
Share of net loss for the period (10,949)
Share of foreign currency translation
adjustment for the period (1,945)
June 30, 2007 9,897,224 14,929


The Class B Exchangeable Units together with their related Special Trust Units (note 12) can be exchanged on a one-for-one basis with the Fund for Trust Units at the option of the holder.

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

During the second quarter of 2005, certain holders of Class B Exchangeable Units agreed to subordinate their entitlement to distributions for a ten-month period beginning with the distributions in respect of the month of May 2005 and ending with the distributions in respect of the month of February 2006. Distributions subordinated amounted to $4,151. Such Unitholders are entitled to a reimbursement of such subordinated distributions before distributions can be increased above 9 cents per unit, per month. No obligation arises to the Fund in respect of these subordinated amounts until it has generated sufficient distributable cash and declares distributions in excess of 9 cents per unit, per month, accordingly, no amount has been accrued in distributions payable at June 30, 2007 and December 31, 2006.

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

12. 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, 2005 17,766,159 181,754 11,300 170,454
Conversion of Class B
Exchangeable Units
during the quarter
ended (note 11)
June 30, 2006 876,598 2,602 - 2,602
September 30, 2006 359,833 1,098 - 1,098
Exercise of options
during quarter ended
(note 14)
March 31, 2006 2,575 17 - 17
September 30, 2006 11,037 73 - 73
December 31, 2006 61,071 404 - 404
---------------------------------------------------------------------
December 31, 2006 19,077,273 185,948 11,300 174,648
Exercise of options
during the quarter
ended (note 14)
March 31, 2007 9,746 54 54
---------------------------------------------------------------------
June 30, 2007 19,087,019 186,002 11,300 174,702
---------------------------------------------------------------------
---------------------------------------------------------------------


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 11) 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 9,897,224 Special Trust Units outstanding as at June 30, 2007 (note 11).

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 14), 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,
2007 2006

Weighted average number of Trust Units
outstanding - basic 19,087,019 18,125,153
Weighted average number of Class B Units
outstanding - basic (note 11) 9,897,224 10,777,236
Dilutive effect of options (note 14) - 94,866
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 28,984,243 28,997,255
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended June 30,
2007 2006

Weighted average number of Trust Units
outstanding - basic 19,084,165 17,947,074
Weighted average number of Class B Units
outstanding - basic (note 11) 9,897,224 10,954,461
Dilutive effect of options (note 14) 109,553 90,101
---------------------------------------------------------------------
Weighted average number of units
outstanding - diluted 29,090,942 28,991,636
---------------------------------------------------------------------
---------------------------------------------------------------------


13. Distributions

No distributions were declared on the Trust Units during the quarter and six months ended June 30, 2007 and 2006.

No distributions were declared on the Class B Units during the quarter and six months ended June 30, 2007 and 2006.

14. Unit-based compensation

Unit option plan

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 an exercise price of $4.56 were forfeited. During the quarter ended December 31, 2006, 21,000 unit options with an exercise price of $6.20 were granted to one employee, 6,000 unit options with an exercise price of $6.55 were granted to one employee and 42,000 unit options with an exercise price of $4.56 were forfeited. These options vest one-third annually over three years except for 238,148 which will vest after 36 months. During the quarter ended March 31, 2007, 390,156 units with an exercise price of $7.34 were granted to 47 employees. These options will vest one-third annually over three years. All options 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 $144 and $225 was recognized for the quarter and six months ended June 30, 2007, respectively, (2006 - $80 and 111) which was added to contributed surplus. Total compensation expense to be recognized under these awards is estimated to be $1,510.

The fair value of the Trust Unit options issued in 2006 was determined using the Black-Scholes model, incorporating a 3.90% risk free interest rate, a 34% volatility factor, 3.33% expected distributions and expected life of 39 months. On this basis, each Trust Unit option was valued at $1.02.

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

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



Weighted
Range of average
Number exercise exercise
of options prices prices
$ $

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
December 31, 2006 27,000 6.200-6.550 6.278
Options forfeited during quarter ended
June 30, 2006 (15,000) 4.560 4.560
December 31, 2006 (42,000) 4.560 4.560
Exercise of options during quarter ended
March 31, 2006 (2,575) 2.977 2.977
September 30, 2006 (11,037) 2.977 2.977
December 31, 2006 (61,071) 2.977 2.977
---------------------------------------------------------------------
December 31, 2006 956,296 4.560-6.550 4.622
Options granted during quarter ended
March 31, 2007 390,156 7.340 7.340
Exercise of options during quarter ended
March 31, 2007 (9,746) 4.560 4.560
---------------------------------------------------------------------
June 30, 2007 1,336,706 4.560-7.340 5.416
---------------------------------------------------------------------
---------------------------------------------------------------------


The outstanding options are summarized as follows:

Options outstanding Vested options outstanding
Weighted Weighted
average average
remaining remaining
Number life Number life
Exercise price
4.560 892,550 23 months 221,383 23 months
5.250 6,000 23 months 2,000 23 months
5.000 21,000 26 months 7,000 26 months
6.200 21,000 32 months - -
6.550 6,000 32 months - -
7.340 390,156 35 months - -
---------------------------------------------------------------------------
1,336,706 26.73 months 230,383 23.09 months
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Contributed surplus attributed to Trust Unit options

As at
June 30, 2007 December 31, 2006
$ $
Opening balance 272 272
Compensation expense recognized
for unit options 225 272
Options exercised (10) (272)
----------------------------------------------------------------------
Ending balance 487 272
----------------------------------------------------------------------
----------------------------------------------------------------------


As the Trust Unit options are exercised, the associated contributed surplus is reclassified to Trust Units (note 12).

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. Consequently compensation expense of $300 was recognized during the quarter ended March 31, 2006.



15. Accumulated other comprehensive income (loss)

As at
June 30, 2007 December 31, 2006
$ $
Unrealized gains and losses on
translating financial statements of
self-sustaining foreign operations (32,188) (15,930)
Gains on hedges of unrealized foreign
currency translation 21,077 8,576
----------------------------------------------------------------------
(11,111) (7,354)
----------------------------------------------------------------------
----------------------------------------------------------------------



16. Financial expenses

Quarter ended June 30,
2007 2006
$ $
Interest and accretion on senior secured
notes 2,022 1,918
Interest on bank indebtedness 634 456
Interest on capital leases 2 2
Gain on interest rate swap (805) (781)
Amortization of deferred financing costs
and associated costs - 328
Other, net - 8
----------------------------------------------------------------------
1,853 1,931
----------------------------------------------------------------------
----------------------------------------------------------------------


Six months ended June 30,
2007 2006
$ $
Interest on senior secured notes 4,757 3,904
Interest on bank indebtedness 962 857
Interest on capital leases 3 4
Gain on interest rate swap (589) (897)
Amortization of deferred financing
charges and associated costs - 898
Other, net 2 4
----------------------------------------------------------------------
5,135 4,770
----------------------------------------------------------------------
----------------------------------------------------------------------


17. Income taxes

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 primarily as a result of lower taxes in foreign jurisdictions and valuation allowances taken against available tax losses.

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



As at
June 30, 2007 December 31, 2006
$ $
Current future income tax assets:
Accounts receivable, accounts payable
and accrued liabilities 296 335
Inventory provisions 446 1,322
----------------------------------------------------------------------
742 1,657
----------------------------------------------------------------------
----------------------------------------------------------------------
Long-term future income tax liabilities:
Property, plant and equipment 13,493 15,272
Withholding tax on foreign
retained earnings - 652
Tax benefits of loss carry-forwards (20,819) (4,229)
Valuation allowance 7,097 4,229
Other 971 161
----------------------------------------------------------------------
742 16,085
----------------------------------------------------------------------
----------------------------------------------------------------------


The benefits of these future tax loss carry-forwards expire between 2008 and 2027.

18. Other expenses and income

Research and development expenses amounted to $58 and $122 for the quarter and six months ended June 30, 2007, respectively, (2006 - $65 and $130). These expenses are included in cost of sales.

19. Obligations under operating leases

Future minimum payments under operating leases at June 30, 2007 are as follows:



$
2007 465
2008 910
2009 690
2010 370
2011 128
Thereafter 52
---------------------------------------------------------------------
2,615
---------------------------------------------------------------------
---------------------------------------------------------------------


20. 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 $388 and $804 for the quarter and six months ended June 30, 2007, respectively, (2006 - $407 and $821).

21. 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,
2007 2006
$ $
Sales
Canada
Domestic 7,817 11,360
Foreign 10,551 21,663
Intersegment transfers 2,078 4,376
----------------------------------------------------------------------
20,446 37,399
----------------------------------------------------------------------
United States
Domestic 29,740 53,774
Foreign 343 399
Intersegment transfers 12,742 29,263
----------------------------------------------------------------------
42,825 83,436
----------------------------------------------------------------------
63,271 120,835
Elimination of intersegment transfers (14,820) (33,639)
Discounts (1,207) (2,870)
----------------------------------------------------------------------
47,244 84,326
----------------------------------------------------------------------
----------------------------------------------------------------------


Six months ended June 30,
2007 2006
$ $
Sales
Canada
Domestic 18,420 23,696
Foreign 29,097 49,049
Intersegment transfers 5,619 7,769
----------------------------------------------------------------------
53,136 80,514
----------------------------------------------------------------------
----------------------------------------------------------------------
United States
Domestic 67,305 110,681
Foreign 684 660
Intersegment transfers 35,978 61,841
----------------------------------------------------------------------
103,967 173,182
----------------------------------------------------------------------
----------------------------------------------------------------------
157,103 253,696
Elimination of intersegment transfers (41,597) (69,610)
Discounts (3,756) (5,906)
----------------------------------------------------------------------
111,750 178,180
----------------------------------------------------------------------
----------------------------------------------------------------------



As at
June 30, 2007 December 31, 2006
Property, plant and equipment $ $
Canada 36,210 35,203
United States 114,769 125,005
----------------------------------------------------------------------
150,979 160,208
Less: Accumulated amortization 65,788 62,474
----------------------------------------------------------------------
85,191 97,734
----------------------------------------------------------------------
----------------------------------------------------------------------


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.

22. 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, 2007 and December 31, 2006 the Fund did not have any outstanding foreign currency forward contracts.

The Fund has fixed interest rates on a portion of its indebtedness (note 10). The marked-to-market value of the contract at June 30, 2007 resulted in an unrealized gain of $589 (2006 - $897), which is included in accounts payable and in 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 approximate their fair values because of the short-term nature of these instruments. The carrying value of long-term debt bearing interest at variable rates (note 10) approximates its fair value because effective rates represent the rates that would be used to calculate fair value.

23. Economic dependence

For the six months ended June 30, 2007, the Fund has approximately 15.3% of its sales to its largest customer. Other than this customer, the Fund does not have a significant exposure to any individual customer. The Fund relies on single suppliers for the majority of its can and pouch requirements. Should these suppliers fail to deliver in a timely manner, delays and/or shutdowns of the Fund's operations could result.

24 Subsequent event

On August 9, 2007, the Fund concluded agreements with a customer to settle certain contractual obligations arising from the customer's decision to discontinue their contract manufacturing arrangements with Menu, and to sell the Fund's production facility in North Sioux City, South Dakota. The Fund will receive a total of US$25 million under the terms of these agreements, of which US$8 million for the settlement was paid upon signing of the agreements and the remaining US$17 million (subject to adjustment as provided in the agreements) will be paid upon the closing of the sale of the plant, which is expected on or about October 1, 2007. In addition, the Fund has entered into a Transition Services Agreement which, among other things, sets out the terms of sale of certain other production assets to the customer. The proceeds of US$1.3 million arising under this arrangement will be paid upon delivery of the equipment by the Fund, which is expected to take place in the fourth quarter of 2007.

Contact Information

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