Premium Brands Income Fund
TSX : PBI.UN

Premium Brands Income Fund

March 23, 2006 09:00 ET

Premium Brands Income Fund Announces Record Fourth Quarter Sales 'Up 21.7%' and EBITDA 'Up 40.6%' From Continuing Operations

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - March 23, 2006) - Premium Brands Income Fund (TSX:PBI.UN) a leading producer, marketer and distributor of specialty branded consumer food products announced today its fourth quarter and year-to-date results for the 14 week and 53 week periods ended December 31, 2005. Premium Brands Income Fund ("the Fund") acquired the business of Premium Brands Inc. ("the Company") on July 27, 2005 as part of an arrangement transaction that resulted in the Company being converted into an income trust.

HIGHLIGHTS FOR THE QUARTER

- From July 27, 2005, the date on which Premium Brands converted to an income trust, to the end of the fourth quarter the Fund generated $7.9 million or $0.5277 per unit of distributable cash and declared $7.6 million or $0.5058 per unit in cash distributions representing a payout ratio of 95.8%.

- The Fund posted net earnings from continuing operations for the fourth quarter of $2.3 million or $0.17 per unit versus a loss of $16.9 million or $1.62 per share in 2004. Included in 2004 was a $17.5 million charge for the write down of non-core investments.

- Sales from continuing operations for the quarter increased by 21.7% to $57.9 million as compared to the fourth quarter of 2004.

- EBITDA from continuing operations for the fourth quarter increased by 40.6% to $5.0 million and EBITDA, as a percentage of sales, rose to 8.6% from 7.5% in 2004.

- The Fund's discontinued operations posted a loss of $8.1 million or $0.61 per unit for the quarter due primarily to $6.7 million in non-cash charges relating to the write down of its assets to a net realizable value of $2.4 million and the accrual of $1.0 million for certain exit costs. The loss for the quarter after discontinued operations was $5.8 million or $0.44 per share versus a loss of $2.39 per share in 2004.

- The Fund provided guidance on its 2006 projected EBITDA, capital maintenance expenditures and net cash to be generated from discontinued operations and non-core investments. EBITDA is projected to be $22 million to $23 million while capital maintenance expenditures are projected to be $1.5 million to $1.8 million. The Fund's discontinued operation and non-core assets are projected to generate net cash flow of $1.0 million to $1.5 million in 2006.

- Subsequent to the quarter, the Fund announced the acquisition of a 60% interest in Washington based Hempler Foods Group LLC. Hempler was founded in 1934 and is one of the U.S. Pacific Northwest's leading specialty sausage and premium processed meats brands. This transaction is expected to have only a small positive impact on the Fund's distributable cash in 2006 as costs associated with the start up of its new production facility will offset a portion of the cash generated from its operations. Looking to 2007, the merger is expected to generate approximately 3.5 cents per unit in incremental distributable cash.



QUARTER SUMMARY

(in thousands of dollars) For the For the
14 Weeks Ended 13 Weeks Ended
Dec. 31, 2005 Dec. 25, 2004

Sales from continuing operations 57,891 47,584
EBITDA from continuing operations 5,005 3,559
Net earnings (loss) from continuing
operations 2,277 (16,903)
Loss from discontinued operations (8,103) (8,052)
Net loss (5,826) (24,955)
Total assets 155,683 156,163
Net funded debt 23,454 43,522


The Fund's sales from continuing operations for the fourth quarter increased by $10.3 million or 21.7% to $57.9 million while its EBITDA from continuing operations increased by $1.4 million or 40.6% to $5.0 million as compared to the same quarter of 2004. The growth in both sales and EBITDA was the result of the recent acquisition of Harlan Fairbanks and the continued successful implementation of the Fund's two core strategies:

- The development of branded specialty food businesses that have a leading position in a niche market segment.

- The diversification of the Fund's customer base through the development of unique distribution and wholesale networks that service a large variety of end users including niche retailers, convenience stores, delicatessens, restaurant chains, concession stands and small grocery chains. These networks provide the Fund's specialty food operations with proprietary access to a large and diversified customer base.

"Our results from continuing operations for the fourth quarter once again validate our unique branded specialty food products and customer diversification strategies. Since the sale of Fletcher's in October 2004 our continuing operations have consistently generated solid top and bottom line growth," said Mr. George Paleologou, President. "Looking forward we are very confident in our long term targeted sales growth of eight to ten percent and our projected EBITDA for 2006 of $22 million to $23 million."

Net earnings from continuing operations for the quarter were $2.3 million or $0.17 per unit versus a loss of $16.9 million or $1.62 per unit in 2004. Included in the 2004 loss was a $17.5 million charge for the write down of non-core investments. After discontinued operations, the Fund incurred a loss for the quarter of $5.8 million or $0.44 per unit due primarily to a $6.7 million non-cash write down of the Fund's discontinued operation's assets to their net realizable value of $2.4 million, and the accrual of $1.0 million for certain exit costs.

"Looking forward to 2006 we are projecting to generate net cash flow from discontinued operations and other non-core assets of $1.0 million to $1.5 million," said Mr. Paleologou.

At the end of 2005 Premium Brands had net funded debt of $23.5 million versus $43.5 million at the end of 2004. Based on projected EBITDA for 2006 of $22 million to $23 million, the Fund's net funded debt to EBITDA ratio is approximately one times EBITDA.

"Acquisitions have played a critical role in the development of our company and, looking ahead, will continue to do so. Our proven acquisition strategy, which focuses on companies with sales of $10 million to $50 million, one or more leading region or niche market focused brands and strong management teams, is working," said Mr. Paleologou. "Our strong balance sheet ensures that we have the flexibility and resources to act upon opportunities as they are identified."

"We are very pleased with the positive momentum developing in our company," said Mr. Fred Knoedler, CEO. "With our portfolio of leading branded specialty food businesses and our unique proprietary distribution and wholesale networks that service approximately 20,000 customers, we are very well positioned to provide the stable and growing cash flows necessary to be a successful income fund."

Premium Brands owns a broad range of leading branded specialty food businesses with manufacturing and distribution facilities located in British Columbia, Alberta, Saskatchewan, Manitoba and Washington. In addition, the Fund owns proprietary food distribution and wholesale networks through which it sells both its own products and those of third parties.

Forward-Looking Statements

This discussion and analysis includes forward-looking statements with respect to the Fund, including its business operations strategy and financial performance and condition. These statements generally can be identified by the use of forward-looking words such as "may", "could", "should", "would", "will", "expect", "intend", "plan", "estimate", "project", "anticipate", "believe" or "continue", or the negative thereof or similar variations. Although management believes that the expectations reflected in such forward-looking statements are reasonable and represent the Fund's internal expectations and belief at this time, such statements involve unknown risks and uncertainties which may cause the Fund's actual performance and results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the Fund's expectations include, among other things: (i) seasonal fluctuations in the Fund's sales; (ii) changes in the cost of raw materials used for the Fund's products; (iii) changes in consumer preferences for food products; (iv) competition from other food manufacturers and distributors; and (v) new government regulations affecting the Fund's business and operations. For additional details on these risks and uncertainties please refer to the Fund's Prospectus dated July 15, 2005 which is filed electronically through SEDAR. It and additional information on the Fund and the Company is available online at www.sedar.com.

The Fund disclaims any intention or obligations to revise forward-looking statements whether as a result of new information, future developments, or otherwise.

RESULTS OF OPERATIONS

Fourth Quarter

The Fund's sales from continuing operations for the fourth quarter of 2005 increased by $10.3 million or 21.7% to $57.9 million, as compared to the fourth quarter of 2004, due to the acquisition of Harlan Fairbanks on May 9, 2005, which accounted for $5.2 million of the increase; the continuing growth of the Fund's core specialty food product lines; and an extra week of sales resulting from the fourth quarter of 2005 having a 14 week accounting period versus a 13 week accounting period in the fourth quarter of 2004. These increases were partially offset by a decrease in sales of lower margin processed meat products.

The Fund's gross profit from continuing operations for the quarter increased to $19.0 million from $14.3 million in the fourth quarter of 2004 due to a combination of higher sales and improved selling margins. As a percentage of sales, the Fund's gross profit from continuing operations ("gross margin") improved to 32.8% from 30.0% in 2004 due primarily to a favourable sales mix shift to higher margin products.

The Fund's SG&A from continuing operations was $14.0 million for the quarter versus $10.7 million for the fourth quarter of 2004. The increase was due mostly to higher variable selling costs such as customer rebates, distribution costs and sales commissions associated with its higher sales volumes and incurring one additional week of expenses. As a percentage of sales, SG&A increased to 24.2% from 22.5% due to increased selling costs associated with certain higher gross margin product lines and higher freight and fuel costs offset partially by the relatively fixed nature of certain administration costs.

For the fourth quarter the Fund generated EBITDA of $5.0 million or, as a percentage of sales, an EBITDA margin of 8.6%. This compares to EBITDA of $3.6 million and an EBITDA margin of 7.5% in the fourth quarter of 2004. The improvement in the Fund's EBITDA and EBITDA margin is the result of both the Harlan Fairbanks acquisition as well as the continued successful execution of the Fund's specialty food products and distribution based strategies.

The Fund's interest expense for the fourth quarter of 2005 decreased to $0.4 million from $0.8 million in 2004 due to a lower average funded debt balance offset partially by a decrease in the interest allocated to discontinued operations and incurring an additional week of expense.

Amortization expense for the fourth quarter decreased by $0.3 million as compared to the corresponding period in 2004 due to the write down in 2004 of certain intangible assets resulting from the sale of the Fund's Mainstream Operations and the write off of $0.8 million in deferred finance fees as part of the income trust conversion on July 27, 2005.

The loss from discontinued operations was $8.1 million for both the fourth quarter of 2005 and the fourth quarter of 2004. The loss in the fourth quarter of 2005 was due primarily to a $7.7 million charge for the write down of Goodlife's remaining assets to net realizable value and the accrual of certain exit costs. The loss in the fourth quarter of 2004 was due to an $8.1 million write down of a variety of assets relating to discontinued operations.

Annual

For 2005, sales from continuing operations were up $33.6 million or 18.4% to $216.0 million as compared to $182.4 million in 2004. Acquisitions, which include the purchase of Harlan Fairbanks in May 2005 and the purchase of Hygaard Fine Foods in July, 2004, accounted for approximately $24.0 million of the increase with the balance coming from continued growth of the Fund's core specialty food product lines and an extra week of sales resulting from 2005 having a 53 week accounting period versus a 52 week accounting period in 2004, partially offset by reduced sales of lower margin processed meat products.

As a percentage of sales, the Fund's gross profit from continuing operations ("gross margin") improved to 32.3% from 30.7% in 2004 due primarily to a favourable sales mix shift to higher margin products and, to a lesser extent, the Fund's gross margin in 2004 being negatively impacted by a run up in a number of raw material input costs to historically high levels.

Selling, general and administrative expenses ("SG&A") for 2005 were $50.3 million versus $41.8 million representing an increase of $8.5 million. $5.3 million of the increase was due to acquisitions with the balance resulting primarily from higher variable selling costs associated with the Fund's increased sales, and to higher freight and fuel costs. As a percentage of sales, SG&A increased to 23.3% versus 22.9% in 2004 due to a change in the Fund's sales mix to products with higher gross margins but also higher variable selling costs, and increased freight and fuel costs, offset partially by the relatively fixed nature of certain administration costs.

The Fund's 2005 EBITDA and EBITDA margin were $19.4 million and 9.0%, respectively, versus $14.1 million and 7.7%, respectively, in 2004. The significant improvement in both the Fund's EBITDA and EBITDA margin was due primarily to the successful implementation of the Fund's core specialty food products and distribution strategies and to the acquisitions of Harlan Fairbanks and Hygaard Fine Foods.

Depreciation for 2005 of $5.3 million was consistent with depreciation of $5.2 million in 2004 while interest decreased to $2.6 million from $3.0 million in 2004 due to a combination of lower average debt levels and lower overall borrowing costs partially offset by a $0.8 million reduction in interest allocated to discontinued operations.

Amortization of intangible and other assets for 2005 decreased by $1.1 million as compared to 2004 due to the write down in 2004 of certain intangible assets resulting from the sale of one of the Fund's discontinued operations and the write off of $0.8 million in deferred finance fees as part of the income trust conversion costs in 2005.

During 2005 the Fund expensed $3.0 million in trust conversion costs associated with the income trust conversion. Included in these costs are $1.6 million for professional and regulatory fees, $0.8 million for the write down of deferred costs associated with the Fund's previous banking structure and $0.6 million for management compensation resulting from the Fund's successful income trust conversion and concurrent public offering of units.

The Fund's income tax expense for 2005 was $1.9 million versus $1.8 million in 2004. The majority of the 2005 income tax expense related to the operating period prior to the Fund's income trust conversion on July 27, 2005. Post the income trust conversion, the Fund's 2005 income tax expense consisted only of capital taxes for its Canadian operations and a small future income tax provision for its U.S. operations.

Discontinued operations for 2005 include the financial results of the Fund's Goodlife Foods retail operation ("Goodlife") while discontinued operations for 2004 include the financial results of both Goodlife and the Fund's Fletcher's mainstream processed meats operations ("Mainstream Operations"), which were sold in October 2004.

In November 2004 the Fund started the process of seeking strategic alternatives for its Goodlife business on the basis that Goodlife's retail focus did not fit with its core competencies of manufacturing, wholesale marketing and distribution. The Fund is continuing to examine the strategic alternatives available to it with respect to Goodlife.



The loss from discontinued operations consists of the following:

(in thousands of dollars) 53 weeks 52 weeks
ended ended
Dec 31, 2005 Dec 25, 2004

Loss (gain) before the following 1,178 (499)
Amortization 608 3,087
Interest allocation 246 1,018
---------------------------------------------------------------------
2,032 3,606

Write down of capital assets 3,984 2,552
Write down of current assets 2,949 750
Accrual of exit costs 1,049 -
Write down of goodwill - 2,700
Write down of intangible assets - 2,097
Gain on sale of Mainstream Operations - (672)
Income tax recovery (514) (2,041)
---------------------------------------------------------------------

Loss 9,500 8,992
---------------------------------------------------------------------
---------------------------------------------------------------------


LIQUIDITY AND CAPITAL RESOURCES

Cash Flows from Operating Activities

For 2005 the Fund's continuing operations generated $14.5 million in cash and used $0.8 million for working capital. All of the cash used for working capital related to reduced accounts payable levels resulting from a variety of factors, including a general improvement in the time required to process amounts due to suppliers, partially offset by a general reduction, post the acquisition of Harlan Fairbanks, in inventory and accounts receivable levels. The Fund's December 31, 2005 accounts payable balance, as compared to the balance at December 25, 2004, decreased by $1.9 million.

In 2005 discontinued operations used $1.1 million in cash consisting of:



(in thousands of dollars) 53 weeks
ended
Dec 31, 2005

Mainstream Operations:
Reduction in payables remaining post the sale
of these operations (778)
---------------------------------------------------------------------

Goodlife:
Operations (1,178)
Interest allocation (246)
Changes in non-cash working capital (1,385)
Proceeds from the sale of capital assets 2,463
---------------------------------------------------------------------
(346)
---------------------------------------------------------------------

Cash flow from discontinued operations (1,124)
---------------------------------------------------------------------
---------------------------------------------------------------------


Looking forward, discontinued operations are expected to be a net generator of cash flow as any cash used by Goodlife's operations, including cash used for working capital purposes, is expected to be less than the cash generated from the continued sale of Goodlife's redundant assets.

Cash Flows from Financing Activities

During the fourth quarter of 2005, the Fund's financing activities generated a net cash flow of $4.7 million. This consisted primarily of the following activities:

- $31.1 million in net proceeds from a treasury offering. Concurrent with the income trust conversion, the Fund completed a treasury offering of 3,275,000 units at a price of $10.70 per unit resulting in gross proceeds of $35.0 million. Net proceeds of the treasury offering were $31.1 million after deducting the underwriters' fees and other expenses of the offering.

- $29.0 million in proceeds from new banking facilities including a new $7.0 million facility for the acquisition of Harlan Fairbanks and a $22.0 million draw on $54.0 million in new debt facilities that replaced the bank operating and term debt facilities that were in place prior to the income trust conversion.

- $48.7 million used to repay the Fund's operating and term facilities outstanding just prior to the completion of the income trust conversion and the New Facilities being put into place.

- $6.1 million in cash distributions to unitholders.

The Fund's distributable cash for the 23 week period starting on July 27, 2005, the date of the income trust conversion, and ending on December 31, 2005 was $7.9 million or $0.5277 per unit as compared to declared distributions of $7.6 million or $0.5058 per unit for this same period, resulting in a payout ratio of 95.8%.

The following table provides a reconciliation of distributable cash to EBITDA for the quarter and for the year to date period which started on July 27, 2005, the date of the income trust conversion, and ended on December 31, 2005:



(in thousands of dollars) 23 weeks from
14 weeks date of the income
ended trust conversion to
Dec 31, 2005 Dec 31, 2005

EBITDA 5,005 9,099

Payments on notes receivable 65 112
Interest and other financing costs (473) (758)
Maintenance capital expenditures (296) (413)
Principal debt repayments (28) (42)
Net cash income tax recovery (expense) 62 (82)
-------------------------------------------------------------------

Distributable cash 4,335 7,916
-------------------------------------------------------------------
-------------------------------------------------------------------


Cash Flows from Investing Activities

For 2005 the Fund used $17.0 million in cash for investing activities, including $14.4 million for acquisitions, $4.0 million for capital expenditures and $1.1 million for advances to Hempler Foods Group LLC as detailed below, partially offset by $2.8 million in proceeds from the collection of notes receivable. The $14.4 million for acquisitions was to complete two transactions: the purchase of Harlan Fairbanks, a distributor of concessionary products to approximately 8,000 customers in Western Canada, in May 2005 for $12.9 million and the issuance of 1,274,000 common shares; and the purchase of the remaining 10% non-controlling interest in the Fund's Quality Fast Foods operation, a Western Canadian based sandwich manufacturer, for $1.5 million in cash and 18,182 common shares.

The $4.0 million in capital expenditures consisted of $1.3 million for capital maintenance type expenditures and $2.7 million for project capital expenditures.

Looking forward

As an income trust, a key objective of the Fund is to maintain a steady cash distribution to its unitholders. This is acheived by basing its monthly cash distributions on an annual rate divided into twelve equal monthly payments. As a result, it is possible that in some months the cash distribution may exceed the Fund's distributable cash due to the seasonality of its business, or unexpected short term shocks to one or more of its operations, in which case the Fund's operating debt facility can be used to balance its cash needs. Longer term, the Fund's targeted payout ratio range is 85% to 90%.

The Fund's primary cash sources are through operations, unused debt facilities, the sale of redundant assets and non-core businesses, and the collection of notes receivable, the majority of which relate to previous sales of non-core businesses and/or investments. For 2006, the Fund expects cash flows from these sources to exceed its normal cash requirements, including budgeted capital expenditures, working capital fluctuations and distributions to unitholders.

Outside of normal operations, the Fund is also actively looking for acquisition opportunities to further round out its product and business portfolios. In general terms, the Fund's acquisition strategy targets small-to-medium sized businesses that complement its specialty food businesses and distribution based strategies.

Consistent with this strategy, in March 2006 the Fund completed the acquisition of a 60% interest in a Washington based manufacturer of premium, organic and natural processed meat products sold under the Hempler's brand name. The transaction was structured as a 50/50 merger of the Washington based operation with the Fund's Oregon based meat snack operation, with the Fund purchasing an additional 10% interest in the merged entity, operating as Hempler Foods Group LLC ("Hempler's"), for US$580,000. As part of the transaction, the Fund agreed to temporarily fund approximately US$3.0 million, or 50%, of the cost of a new 28,000 square foot state-of-the-art production facility in Ferndale, Washington. This facility will replace the production capacity of the Fund's Oregon operation and the original Washington based Hempler's plant, both of which will be shut down permanently.

Post the acquisition of Hempler's, the Fund is projecting the following ranges in respect of certain cash flows for 2006. Note that these amounts do not incorporate any potential additional acquisitions:



(in thousands of dollars) Projected Range
Source / (Use)

EBITDA 22,000 to 23,000

Capital maintenance expenditures (1,500) to (1,800)

Proceeds from the collection of notes receivable
and the sale of redundant discontinued assets
net of cash used for discontinued operations 1,000 to 1,500

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



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

Premium Brands Income Fund

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


NOTICE OF NO AUDITOR REVIEW OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Under National Instrument 51-102 "Continuous Disclosure Obligations", if an auditor has not performed a review of the interim financial statements, the financial statements must be accompanied by a notice indicating that they have not been reviewed by an auditor.

The accompanying unaudited interim consolidated financial statements of the Fund have been prepared by and are the responsibility of the Fund's management.

The Fund's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.

March 23, 2006



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

Premium Brands Income Fund

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

CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)


Dec 31, Dec 25,
2005 2004


Current assets:
Cash and cash equivalents $ 455 $ 124
Accounts receivable 16,894 15,483
Current portion of notes receivable (note 3) 431 2,893
Inventories 17,568 10,834
Prepaid expenses 1,419 1,773
Future income taxes 304 3,000
Current assets of discontinued operations
(note 9) 907 2,993
--------------------------------------------------------------------
37,978 37,100

Future income taxes 524 12,085
Capital assets 44,821 45,705
Goodwill 61,330 44,370
Intangible assets (note 2) 5,345 3,958
Other assets (note 3) 4,153 4,424
Non-current assets of discontinued operations
(note 9) 1,532 8,521
---------------------------------------------------------------------

$ 155,683 $ 156,163
---------------------------------------------------------------------
---------------------------------------------------------------------

Current liabilities:
Cheques outstanding $ 1,501 $ 1,340
Bank indebtedness - 7,447
Distributions payable (note 7) 1,470 -
Accounts payable and accrued liabilities 16,840 18,787
Current portion of long-term debt (note 4) 112 4,606
Current liabilities of discontinued
operations (note 9) 1,604 1,794
--------------------------------------------------------------------
21,527 33,974

Long-term debt (note 4) 22,296 30,253
---------------------------------------------------------------------

43,823 64,227

Non-controlling interest (note 8) - 235

Unitholders' equity:
Unitholders' capital (note 5) 127,810 -
Share capital (note 5) - 121,731
Contributed surplus - 10
Accumulated deficit (5,778) (27,741)
Accumulated distributions declared (note 7) (7,588) -
Cumulative translation adjustment (2,584) (2,299)
---------------------------------------------------------------------

111,860 91,701
---------------------------------------------------------------------

$ 155,683 $ 156,163
---------------------------------------------------------------------
---------------------------------------------------------------------



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

Premium Brands Income Fund

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

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
(Unaudited and in thousands)


14 weeks 13 weeks 53 weeks 52 weeks
ended ended ended ended
Dec 31, Dec 25, Dec 31, Dec 25,
2005 2004 2005 2004

Retained earnings (deficit),
beginning of period $ 48 $ (2,786) $(27,741) $ (4,159)

Loss for the period (5,826) (24,955) (3,705) (23,582)

Elimination of future
income taxes on trust
conversion - - (12,988) -
---------------------------------------------------------------------

Adjusted accumulated
deficit (5,778) (27,741) (44,434) (27,741)

Transfer to unitholders'
capital (a) - - 38,656 -
---------------------------------------------------------------------

Accumulated deficit,
end of period $ (5,778) $(27,741) $ (5,778) $(27,741)
---------------------------------------------------------------------
---------------------------------------------------------------------

(a) This represents the deficit of the Company at July 27, 2005,
the date of the income trust conversion. Under the continuity of
interest method of accounting this amount is netted against the
Company's share capital to calculate the opening unitholders'
capital of the Fund (note 1 and 5).



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

Premium Brands Income Fund

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

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except per unit/share amounts)


14 weeks 13 weeks 53 weeks 52 weeks
ended ended ended ended
Dec 31, Dec 25, Dec 31, Dec 25,
2005 2004 2005 2004

Sales $ 57,891 $ 47,584 $ 215,959 $ 182,366
---------------------------------------------------------------------

Gross profit 18,999 14,286 69,718 55,942
Selling, general and
administrative expenses 13,994 10,727 50,306 41,817
---------------------------------------------------------------------

5,005 3,559 19,412 14,125
Depreciation of capital
assets 1,402 1,467 5,268 5,166
---------------------------------------------------------------------

3,603 2,092 14,144 8,959
Interest and other
financing costs 440 765 2,567 3,022
Amortization of intangible
and other assets 128 463 707 1,849
Loss (gain) on sale of
assets 1 - 11 (603)
---------------------------------------------------------------------

3,034 864 10,859 4,691
Trust conversion costs 705 - 3,043 -
Writedown of investments
(note 3) - 17,450 - 17,450
---------------------------------------------------------------------

Earnings (loss) from
continuing operations
before income taxes and
non-controlling interest 2,329 (16,586) 7,816 (12,759)
Income tax provision 52 316 1,935 1,782
---------------------------------------------------------------------

Earnings (loss) from
continuing operations 2,277 (16,902) 5,881 (14,541)
Non-controlling interest
- net of income taxes - 1 86 49
Loss from discontinued
operations - net of income
taxes (note 9) 8,103 8,052 9,500 8,992
---------------------------------------------------------------------

Loss for the period $ (5,826) $(24,955) $ (3,705)$ (23,582)
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings (loss) per
unit/share from continuing
operations:
Basic and diluted $ 0.17 $ (1.62) $ 0.47 $ (1.40)

Loss per unit/share from
discontinued operations:
Basic and diluted $ (0.61) $ (0.77) $ (0.76) $ (0.86)

Loss per unit/share:
Basic and diluted $ (0.44) $ (2.39) $ (0.29) $ (2.26)

Weighted average
units/shares outstanding 13,355 10,430 12,637 10,430



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

Premium Brands Income Fund

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)


14 weeks 13 weeks 53 weeks 52 weeks
ended ended ended ended
Dec 31, Dec 25, Dec 31, Dec 25,
2005 2004 2005 2004

Cash provided by (used for)
operations:
Earnings (loss) from
continuing operations
before non-controlling
interest $ 2,277 $ (16,902) $ 5,881 $ (14,541)
Items not involving cash:
Depreciation of capital
assets 1,402 1,467 5,268 5,166
Amortization of intangible
and other assets 128 463 707 1,849
Stock based compensation - 10 15 10
Loss (gain) on sale of
assets 1 - 11 (603)
Writedown of investments - 17,450 - 17,450
Writedown of deferred
finance fees - - 839 -
Future income taxes - 306 1,801 1,682
--------------------------------------------------------------------
3,808 2,794 14,522 11,013
Changes in operating assets
and liabilities (879) (4,442) (785) (4,781)
--------------------------------------------------------------------

Funds from continuing
operations 2,929 (1,648) 13,737 6,232
--------------------------------------------------------------------

Discontinued operations (488) (1,784) (1,542) 787
Changes in discontinued
assets and liabilities (229) (10,618) 418 (15,432)
--------------------------------------------------------------------

Funds from discontinued
operations (717) (12,402) (1,124) (14,645)
--------------------------------------------------------------------

2,212 (14,050) 12,613 (8,413)
--------------------------------------------------------------------

Cash provided by (used for)
financing:
Long-term debt - net (27) (6,220) (12,447) (8,483)
Proceeds from issuance of units
(net of issuance costs) - - 31,109 -
Distributions paid to
unitholders (4,411) - (6,118) -
Decrease in bank indebtedness
and cheques outstanding 20 (1,655) (7,286) (3,932)
Other - (225) (545) (1,128)
--------------------------------------------------------------------
(4,418) (8,100) 4,713 (13,543)
--------------------------------------------------------------------

Cash provided by (used for)
investments:
Proceeds from the sale of
assets - net 16 23,060 37 23,246
Proceeds from sale and
leaseback of assets - net - - - 8,416
Business acquisitions (6) (21) (14,430) (7,838)
Capital asset additions (603) (1,385) (3,958) (6,133)
Change in notes receivable 62 31 2,840 3,940
Advance (note 12) (1,070) - (1,070) -
Other - 37 (414) 262
--------------------------------------------------------------------
(1,601) 21,722 (16,995) 21,893
--------------------------------------------------------------------

Change in cash and cash
equivalents (3,807) (428) 331 (63)
Cash and cash equivalents,
beginning of period 4,262 552 124 187
---------------------------------------------------------------------

Cash and cash equivalents,
end of period $ 455 $ 124 $ 455 $ 124
---------------------------------------------------------------------
---------------------------------------------------------------------

Interest paid $ 473 $ 983 $ 2,801 $ 3,879

Net income taxes paid
(received) $ (110) $ 27 $ 82 $ (160)



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

Premium Brands Income Fund

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


Notes to the Consolidated Financial Statements

(Unaudited and in thousands except per unit/share amounts)

1. Conversion to an income fund and nature of operations

Premium Brands Income Fund (the Fund) is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of British Columbia pursuant to a Declaration of Trust dated June 8, 2005. The Fund was established for the purpose of investing in the food manufacturing and distribution businesses of Premium Brands Inc. (the Company). Through its wholly owned subsidiaries, the Fund owns a broad range of leading branded specialty food businesses with manufacturing and distribution facilities located in British Columbia, Alberta, Saskatchewan, Manitoba and Washington. In addition, the Fund owns proprietary food distribution and wholesale networks through which it sells both its own products and those of third parties.

Pursuant to a plan of arrangement (the Arrangement) that became effective July 27, 2005, the Fund indirectly acquired 100% of the shares of the Company in exchange for either units of the Fund or exchangeable limited partnership units (which are exchangeable into units of the Fund on a one-for-one basis) issued by Premium Brands Holdings Limited Partnership (Holdings LP), a subsidiary of the Fund. The Company and each of its Canadian subsidiaries were amalgamated and the Premium Brands business was transferred to Premium Brands Operating Limited Partnership (the Partnership). The transfer of the common shares of the Company to the Fund was recorded at the carrying values of the Company's assets and liabilities on July 27, 2005 in accordance with the continuity of interest method of accounting as the Fund is considered to be a continuation of the Company. Accordingly $38.6 million was transferred from deficit to unitholders' capital. The result of these transactions was to convert the Company and its business from a corporate structure to an income trust structure. The results of operations, cash flows and financial position for all periods prior to July 27, 2005 are those of the Company. During 2005, the Fund incurred and expensed professional fees and other costs of $3.0 million in respect of the creation of the Fund.

Concurrent with the Arrangement the Fund issued 3,275,000 Fund units in an initial public offering at a price of $10.70 per unit for gross proceeds of $35.0 million and incurred issuance costs of $3.9 million. Concurrent with the initial public offering, a significant unitholder of the Fund undertook a secondary offering of 639,307 Fund units. The Fund received no proceeds on the sale of these units.

The common shares of the Company had previously traded on the Toronto Stock Exchange (TSX). On July 27, 2005, units of the Fund (TSX symbol PBI.UN) commenced trading on the TSX in place of the common shares of the Company (TSX symbol FFF).



2. Intangible assets

December 31, 2005
Accumulated
Cost amortization Net
$ $ $

Customer supply agreement 5,210 1,715 3,495
Customer relationships 1,850 - 1,850
---------------------------------------------------------------------

7,060 1,715 5,345
---------------------------------------------------------------------
---------------------------------------------------------------------

December 25, 2004
Accumulated
Cost amortization Net
$ $ $

Customer supply agreement 5,494 1,536 3,958
---------------------------------------------------------------------
---------------------------------------------------------------------



3. Other assets

2005 2004
$ $

Notes receivable - net of current portion
of $431,000 (2004 - $2,893,000) 1,750 1,336
Investments 79 832
Advance (note 12) 1,070 -
Deferred financing fees - net of amortization - 726
Pension benefit asset 224 182
Other 1,030 1,348
---------------------------------------------------------------------

4,153 4,424
---------------------------------------------------------------------
---------------------------------------------------------------------



Notes receivable

The notes receivable bear interest at rates ranging from nil% to
8.5% (2004 - nil% to 8.5%) and are due as follows:

$

2006 431
2007 491
2008 412
2009 847
---------------------------------------------------------------------

2,181
---------------------------------------------------------------------
---------------------------------------------------------------------


Included in notes receivable is a non-interest bearing subordinated note due from Tapp Technologies Inc. (Tapp) with a carrying value of $800,000, a face value of $3.0 million and a maturity date in December 2009. In early 2005, Tapp completed an extensive financial restructuring which resulted in the Fund's investment in Tapp being exchanged for this note. At the end of 2004, the Fund wrote its investment in Tapp down by $2.6 million to an estimated fair value of $800,000 in anticipation of the restructuring.

Investments

In 2004, the Fund wrote down its 30.5% interest in hog producer Community Pork Ventures Inc. (CPV) by $14.9 million to $nil based on there being a permanent impairment in its value. In late 2004, CPV was forced to seek protection under the Companies' Creditors Arrangement Act after an extended period of historically low hog prices. This investment is accounted for using the cost method.

4. Long-Term Debt

Concurrent with its public offering and income trust conversion, the Fund restructured its bank debt resulting in its previous debt facilities being replaced by:

a) a $25.0 million revolving facility to be used for general business purposes including capital expenditures and acquisitions;

b) a $22.0 million non-revolving facility to be used to replace existing term debt; and

c) a $7.0 million non-revolving facility to be used to fund capital expenditures and acquisitions.

The Fund's debt facilities are secured by an assignment of inventories, accounts receivable, insurance policies, fixed charges on capital assets, and a general lien on all other assets of the Fund; bear interest at prime to prime plus 0.5% or at the banker's acceptance rate plus 1.0% to 2.0%, depending on the Fund's cash flow; mature in July 2008; and require no principal payments until maturity. In addition, they contain financial covenants that require the maintenance of certain ratios regarding working capital, fixed charge coverage and debt to cash flow. At December 31, 2005, the Fund was in compliance with all such covenants.

As at December 31, 2005 the Fund had the following long-term debt outstanding:



December 31, December 25,
2005 2004
$ $

Non-revolving term loan with no principal
payments until maturity in July 2008. The
Fund has entered into an interest rate swap
transaction that fixes the interest rate on
$20.0 million of the loan until maturity at
an effective rate of 3.54% plus 1.0% to
2.0%, based on the Fund's ratio of debt to
cash flow calculated quarterly. The balance
of the loan bears interest at prime to
prime plus 0.5% or at the banker's
acceptance rate plus 1.0% to 2.0% 22,000 -

Secured term loan bearing interest at
prime to prime plus 1.5%, depending on
the Company's ratio of debt to cash flow - 17,536

$14.7 million secured revolving term loan
bearing interest at prime to prime plus
1.5%, depending on the Company's debt to
cash flow ratio - 8,600

Secured term loans bearing interest at a
five year weighted average fixed rate of
6.95% to 8.10% depending on the Company's
debt to cash flow ratio - 8,230

Other, including capital lease obligations 408 493
---------------------------------------------------------------------

22,408 34,859
Less: Current portion 112 4,606
---------------------------------------------------------------------

22,296 30,253
---------------------------------------------------------------------
---------------------------------------------------------------------



The principal due on long-term debt within each of the next five
years is as follows:

Long-term Capital lease
debt obligations Total
$ $ $

2006 41 71 112
2007 43 20 63
2008 22,045 - 22,045
2009 47 - 47
2010 141 - 141
---------------------------------------------------------------------

22,317 91 22,408
---------------------------------------------------------------------
---------------------------------------------------------------------

During 2005, the Fund incurred interest expense of $1.7 million
(2004 - $1.7 million) on its long-term debt.



5. Unit and shareholders' capital

The following is a summary of changes in unitholders' and
shareholders' capital from December 27, 2003 to December 31, 2005:

---------------------------------------------------------------------
---------------------------------------------------------------------
The Company The Fund units and
common shares exchangeable units
Number Amount Number Amount Total
$ $ $

Balance at December
27, 2003 and
December 25, 2004 10,430,455 121,731 - - 121,731
Exercise of options 2,000 16 - - 16
Issued on
acquisition of
Harlan Fairbanks 1,274,000 13,613 - - 13,613
Issued on
acquisition of 10%
interest in
Quality Fast
Foods 18,182 200 - - 200
Shares exchanged
for trust units (11,124,637)(128,406) 11,124,637 128,406 -
Shares exchanged
for exchangeable
limited
partnership units (600,000) (6,926) 600,000 6,926 -
Purchase of options
(note 6) - (228) - - (228)
Units issued in
initial public
offering for
cash - - 3,275,000 35,043 35,043
Unit issuance
costs - - - (3,934) (3,934)
Transfer of
deficit and
contributed
surplus (note 1) - - - (38,631)(38,631)
---------------------------------------------------------------------

Balance at
December 31, 2005 - - 14,999,637 127,810 127,810
---------------------------------------------------------------------
---------------------------------------------------------------------


The authorized share capital of the Company consisted of an unlimited number of common shares.

On May 9, 2005, the Company issued 1,274,000 common shares as part of the consideration for the acquisition of Harlan Fairbanks (note 8).

On June 30, 2005, the Company issued 18,182 common shares as part of the consideration for the acquisition of the remaining 10% non-controlling interest in Quality Fast Foods (note 8).

On July 27, 2005, the Fund acquired 100% of the shares of the Company in exchange for units of the Fund and exchangeable limited partnership units issued by Holdings LP, a subsidiary of the Fund. Concurrent with this transaction, the Fund issued 3,275,000 units in an initial public offering at a price of $10.70 per unit for gross proceeds of $35.0 million and incurred issuance costs of $3.9 million.

6. Unit and share based compensation

Concurrent with the income fund conversion on July 27, 2005, the Fund purchased all of the Company's 345,506 outstanding options for $0.4 million and put in place a new long-term incentive plan (LTIP) for officers and key employees. Of this amount, $0.2 million was expensed and included in trust conversion costs and $0.2 million was recorded as an adjustment to unitholders' equity (note 5). Pursuant to the LTIP, the Fund will set aside a pool of funds based upon the amount, if any, by which the distributable cash per unit exceeds certain defined threshold amounts. The set aside funds will be used by the Fund to purchase units in the open market which, after a set vesting period, will be distributed to the participants of the LTIP. No accrual has been made in respect of the LTIP for 2005 as the plan was not implemented until subsequent to 2005.

A summary of the Company's share option plan prior to the conversion to an income fund is as follows:



2005 2004
------------------------- ------------------------

Weighted Weighted
average average
Options exercise price Options exercise price
(in 000's) $ (in 000's) $

Balance - beginning
of year 415 16.96 523 16.71

Granted - - 8 9.12
Exercised (2) 8.10 - -
Expired (68) 23.09 - -
Cancelled (345) 15.79 (116) 15.28
---------------------------------------------------------------------

Balance - end
of year - - 415 16.96
---------------------------------------------------------------------
---------------------------------------------------------------------

Options
exercisable at
year-end - - 357 18.18
---------------------------------------------------------------------
---------------------------------------------------------------------


7. Distributions

During 2005, the Fund declared distributions to unitholders of $7,284,000 or $0.5058 per unit and Holdings LP declared distributions of $304,000 or $0.5058 per unit to ELP unitholders. The aggregate amounts and record dates of these distributions are as follows:



Amount Per unit
Record date $ $

August 31, 2005 (a) 1,708 0.1138
September 30, 2005 1,470 0.0980
October 31, 2005 1,470 0.0980
November 30, 2005 1,470 0.0980
December 30, 2005 1,470 0.0980
---------------------------------------------------------------------

7,588 0.5058
---------------------------------------------------------------------
---------------------------------------------------------------------

(a) Represents an extended distribution period from July 27, 2005
to August 31, 2005.


During December 2005, the Fund and Holdings LP declared aggregate distributions of $1.5 million to unitholders and ELP unitholders of record on December 30, 2005, which was paid subsequent to year end and is reported as a current liability at December 31, 2005.

8. Acquisitions

On May 9, 2005, the Company completed the acquisition of the assets of H.F. Distributors Limited Partnership and Harlan Fairbanks Co. LLC (Harlan Fairbanks) for $12.9 million in cash and 1,274,000 common shares. Harlan Fairbanks is the largest provider of concession products and equipment to independent foodservice operators in Western Canada. The acquisition has been accounted for by the purchase method and the results of Harlan Fairbanks have been included in the Fund's consolidated financial statements from the date of acquisition.

On June 30, 2005, the Company completed the acquisition of the remaining 10% interest in Brydor Business Enterprises Ltd. (Quality Fast Foods) for $1.5 million in cash and 18,182 common shares. Quality Fast Foods is a manufacturer and distributor of pre-packaged sandwiches.

The following table summarizes the estimated fair values of the assets acquired and obligations assumed for these acquisitions:



Net working capital $ 8,869
Capital assets 514
Goodwill 17,010
Customer relationships 1,850
--------

Total purchase cost $ 28,243
--------
--------

Cash 14,430
Common shares 13,813
--------

Total purchase cost $ 28,243
--------
--------


2004 acquisitions

On July 31, 2004, the Company completed the acquisition of Hygaard Fine Foods Ltd. (Hygaard) for $6.8 million. Hygaard is based in Western Canada and is a manufacturer and distributor of fresh and pre-packaged sandwiches. The acquisition has been accounted for using the purchase method and the results of Hygaard have been included in the Fund's consolidated financial statements from the date of acquisition.

Also on July 31, 2004, the Company exercised an option to acquire an additional 10% interest in its subsidiary Quality Fast Foods for $1.0 million.

The following table summarizes the estimated fair values of the assets acquired and obligations assumed for these acquisitions:



Net working capital $ 455
Capital assets 1,750
Goodwill 6,626
Future income taxes (590)
Other liabilities (406)
--------

Total purchase cost $ 7,835
--------
--------


9. Discontinued operations

Discontinued operations include the Fund's mainstream processed meats business (Mainstream Operation), which was sold on October 17, 2004 for proceeds of $24.7 million, and its Goodlife Foods retail operation (Goodlife). The carrying amounts of the major classes of assets and liabilities of the discontinued operations are as follows:



December 31, December 25,
2005 2004
$ $

Current assets 907 2,993
Long-term notes receivable - 153
Capital and other assets 1,532 8,368
Current liabilities (1,604) (1,794)
---------------------------------------------------------------------

835 9,720
---------------------------------------------------------------------
---------------------------------------------------------------------


The loss from discontinued operations, which includes Goodlife in 2005 and both the Mainstream Operation and Goodlife in 2004, consists of the following amounts:



14 weeks 13 weeks 53 weeks 52 weeks
ended ended ended ended
Dec 31, Dec 25, Dec 31, Dec 25,
2005 2004 2005 2004

Sales $ 1,659 $ 6,433 $ 7,036 $ 84,549
---------------------------------------------------------------------

Loss (gain) before the
following 182 1,515 1,178 (499)
Amortization 134 250 608 3,087
Interest allocation 65 65 246 1,018
---------------------------------------------------------------------

381 1,830 2,032 3,606

Writedown of capital assets 3,824 2,552 3,984 2,552
Writedown of current assets 2,849 750 2,949 750
Accrual of exit costs 1,049 - 1,049 -
Writedown of goodwill - 2,700 - 2,700
Writedown of intangible assets - 2,097 - 2,097
Gain on sale of Mainstream
Operation - (672) - (672)
Income tax recovery - (1,205) (514) (2,041)
---------------------------------------------------------------------
Loss from discontinued
operations $ 8,103 $ 8,052 $ 9,500 $ 8,992
---------------------------------------------------------------------
---------------------------------------------------------------------


10. Commitments and contingent liabilities

a. The Fund leases land, warehouses, offices and equipment under operating leases which expire from 2006 to 2014. The aggregate future minimum annual rental payments under these leases are as follows:



$

2006 2,860
2007 2,192
2008 1,506
2009 1,388
2010 and thereafter 3,052


b. The Fund has a commitment with Investment Saskatchewan to have made $15.0 million in qualified expenditures in the Province of Saskatchewan by December 31, 2004. The Fund claims to have made $18.5 million in qualified expenditures and therefore to have fulfilled its commitment. Investment Saskatchewan has challenged $6.7 million of the expenditures submitted by the Fund on the basis that these costs do not meet the definition of a qualified expenditure. The Fund and Investment Saskatchewan are currently attempting to negotiate a resolution to this difference. In the event that these negotiations are unsuccessful and it is determined that Investment Saskatchewan's interpretation of what meets the criteria of a qualified expenditure is correct, then the Fund would incur a penalty of approximately $0.9 million, payable in cash and/or Fund units.

c. As part of the sale of the Fund's Mainstream Operation (note 9), it assigned its interest in an operating lease (the Lease) for a plant located in Vancouver, B.C. to the purchaser (the Purchaser) of the business. The Fund has been fully indemnified by the Purchaser for any future liabilities under the Lease and has made application under the terms of the Lease to be released by the landlord from any continuing obligations. In the event that the Fund's application is not successful, it could be held responsible for future defaults under the Lease by the Purchaser. The payments due under the lease are $0.8 million per year for 2006 to 2014.

d. The Fund has been named as a defendant in several legal actions and is subject to various risks and contingencies arising in the normal course of business. Management is of the opinion that the outcome of these uncertainties will not have a material adverse effect on the Fund's financial position.

11. Comparative figures

Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in 2005.

12.
Subsequent event

Subsequent to December 31, 2005, the Fund merged its U.S. based meat snack operation with Hempler Foods, a specialty sausage and premium processed meats manufacturer based in Bellingham, Washington. Under the terms of the merger, both the Fund and Hempler Foods will move their respective U.S. production facilities into a new 28,000 square foot facility located in Ferndale, Washington. In addition, the Fund acquired an additional 10% interest in the merged entity for US$580,000 resulting in it owning a 60% equity interest. As at December 31, 2005, the Fund has advanced $1.1 million to Hempler Foods towards the construction of the new facility.

This transaction will be accounted for as an acquisition using the purchase method of accounting and the results of the acquired operations will be consolidated from the date of acquisition.

Contact Information

  • Premium Brands Income Fund
    George Paleologou
    President
    (604) 656-3100
    or
    Premium Brands Income Fund
    Will Kalutycz
    CFO
    (604) 656-3100