Premium Brands Income Fund
TSX : PBI.UN

Premium Brands Income Fund

August 02, 2005 09:00 ET

Premium Brands Income Fund Announces Record Second Quarter Sales and EBITDA from Premium Brands Inc.'s Continuing Operations

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Aug. 2, 2005) - Premium Brands Income Fund (TSX:PBI.UN) a leading producer and marketer of specialty branded consumer food products announced today Premium Brands Inc.'s second quarter and year-to-date results for the 13 week and 26 week periods ended June 25, 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 structure from a corporate structure.

HIGHLIGHTS FOR THE QUARTER

- The Company posted net income from continuing operations of $2.2 million or $0.20 per share versus $0.9 million or $0.08 per share in 2004 representing a 150.8% increase. After discontinued operations, the Company posted net income for the second quarter of $1.8 million or $0.17 per share versus net earnings of $0.6 million or $0.05 per share in 2004.

- Sales from continuing operations increased by 22.3% to $55.6 million. Excluding the recent acquisitions of Hygaard Fine Foods and Harlan Fairbanks, sales from continuing operations were up 4.7% as compared to 2004.

- EBITDA from continuing operations increased by 54% to $5.8 million from $3.7 in 2004. Excluding recent acquisitions, EBITDA rose by 14.2% as compared to the prior year. EBITDA, as a percentage of sales, rose to a record 10.4% from 8.4% in 2004.

- Part way through the second quarter the Company completed the acquisition of Harlan Fairbanks for approximately $12.8 million in cash and 1,274,000 common shares.

- Subsequent to the quarter, the Fund completed a treasury offering of 3,275,000 units raising net proceeds of approximately $31.0 million. All of the proceeds were used to pay down debt resulting in the Fund having net funded debt at the completion of the offering of approximately $25.8 million.

- Post the acquisition of Harlan Fairbanks, the Fund estimates that its current annual EBITDA run rate is between $21 million and $22 million.



SECOND QUARTER SUMMARY

(in thousands of dollars) For the 13 Weeks Ended
June 25, 2005 June 26, 2004

Sales from continuing operations 55,611 45,478
EBITDA from continuing operations (1) 5,772 3,744
Net earnings from continuing operations 2,159 860
Net earnings 1,805 554
Net funded debt (2) 51,128 52,424

(1) EBITDA is not a term defined under generally accepted accounting
principles and may not be comparable to similarly titled amounts
reported by other issuers. The Fund defines EBITDA as earnings
before interest, income taxes, depreciation, amortization,
non-controlling interest and gains and losses on the sale of
assets.
(2) Net funded debt is not a term defined under generally accepted
accounting principles and may not be comparable to similarly
titled amounts reported by other issuers. The Fund defines net
funded debt as bank indebtedness and long term debt net of cash
and cash equivalents.


The Company's sales from continuing operations for the second quarter increased by $10.1 million or 22.3% to $55.6 million while its EBITDA from continuing operations increased by $2.0 million or 54.2% to $5.8 million as compared the second quarter of 2004.

The growth in both sales and EBITDA was the result of the recent acquisitions of Hygaard Fine Foods and Harlan Fairbanks, as well as a variety of the Company's specialty food and distribution initiatives. These initiatives included the successful start up of its new meat snack production capacity in April and the launch of the McSweeney's snack food lines at 520 convenience store outlets in Ontario in May.

EBITDA, as a percentage of sales, rose to a record 10.4% for the quarter as compared to 8.4% in 2004.

Net earnings from continuing operations were $2.2 million or $0.20 per share representing a 150.8% increase as compared to $0.9 million or $0.08 per share for the second quarter of 2004. Net earnings after discontinued operations were $1.8 million or $0.17 per share for the quarter versus $0.6 million or $0.05 per share in 2004.

"Given that our first quarter is traditionally a slow one due to the seasonality of our business, this quarter is the first true indication of our potential post the sale of our last commodity business in October 2004," said Mr. George Paleologou, President. "Furthermore, I should note that our second quarter does not include a full quarter's results for our new Harlan Fairbanks business, which we acquired approximately half way through the quarter."

"We are very pleased with the progress we have made in completing our business and financial restructuring and are confident that our results will continue to improve as we go forward. The combination of our leading specialty brands sold through diversified distribution channels, including our unique proprietary distribution systems, has enabled us to accelerate our top line growth while improving our overall profitability," said Mr. Fred Knoedler, Chairman and CEO.

"Overall, we are very pleased with where our company is positioned today. With our stable of number one leading brands, our unique proprietary distribution systems that service approximately 20,000 customers, and our diverse group of specialty food products we are well positioned to provide the stable and growing cash flows necessary for a successful income fund," said Mr. Paleologou.

"Looking forward, we estimate that our current annual EBITDA run rate to be in the range of $21 million to $22 million which is well in excess of the $20.1 million that our initial cash distributions are based on. Furthermore, post our recent public offering our net funded debt will be approximately $25.8 million providing us with significant flexibility to grow this base EBITDA through accretive acquisitions and value enhancing capital projects," added Mr. Paleologou.

RESULTS OF OPERATIONS

The following discussion is on the results of operations of the Company for the 13 week and 26 week periods ending June 25, 2005. The Fund acquired the Company on July 27, 2005. For additional information please refer to the Fund's Prospectus dated July 15, 2005.

Sales: The Company's sales from continuing operations for the second quarter increased by $10.1 million or 22.3% to $55.6 million. The acquisition of Hygaard Fine Foods in the third quarter of 2004 and Harlan Fairbanks on May 9, 2005 accounted for $8.0 million of the increase with the balance resulting from a variety of distribution and specialty food initiatives. These initiatives included the successful start up of our new meat snack production capacity in April and the launch of the McSweeney's snack food lines at 520 convenience store outlets in Ontario in May.

On a year-to-date basis, sales from continuing operations were up 18.7% to $98.9 million as compared to $83.3 million in 2004. Acquisitions accounted for approximately 70% of the growth and organic initiatives for approximately 30% of the growth.

Gross Profit: The Company's gross profit for the quarter increased to $18.5 million from $14.4 million in the second quarter of 2004 due primarily to higher sales. As a percentage of sales, the Company's gross profit ("gross margin") improved to 33.3% from 31.7% in 2004 as prices for certain raw materials began to decrease from the historic highs experienced by the Company in the preceding four quarters.

On a year-to-date basis, the Company's gross margin was 31.5% versus 31.7% in 2004. Both the 2005 and 2004 year-to-date gross margins were below average due to high raw material costs that started in the second quarter of 2004 and continued through the first quarter of 2005. The Company's gross margin in the first quarter of 2005 was also impacted by approximately $0.3 million in start up costs associated its recently completed incremental meat snack capacity.

SG&A: The Company's selling, general and administrative expense from continuing operations ("SG&A") was $12.8 million versus $10.7 million for the second quarter of 2004. The increase was due primarily to the Company's growing sales base which resulted in higher variable selling costs such as customer rebates, distribution costs, and sales commissions. As a percentage of sales, SG&A decreased to 23.0% from 23.4% due to the relatively fixed nature of certain SG&A and lower SG&A, as a percentage of sales, associated with the Company's recently acquired Hygaard and Harlan Fairbanks businesses.

The same factors impacting SG&A in the second quarter apply to the Company's year-to-date results with SG&A increasing to $22.9 million for 2005 from $20.2 million in 2004 and SG&A, as a percentage of sales, falling to 23.1% in 2005 from 24.3% in 2004.

EBITDA: EBITDA is defined as earnings from continuing operations before interest, taxes, depreciation, amortization, non-controlling interest and gains and losses on the sale of assets. EBITDA is a non-GAAP financial measure and correspondingly GAAP does not prescribe a standardized meaning for it. As a result, EBITDA as defined by the Fund may not be comparable to similarly titled measures presented by other publicly traded entities, nor should it be construed as an alternative to other earnings measures determined in accordance with GAAP. The Fund believes that EBITDA is a useful indicator of its operational performance and its ability to generate cash.

For the second quarter the Company generated EBITDA of $5.8 million or, as a percentage of sales, an EBITDA margin of 10.4%. This compares to EBITDA of $3.7 million and an EBITDA margin of 8.2% in the second quarter of 2004. The improvement in the Company's EBITDA and EBITDA margin is the result of both the Company's Hygaard and Harlan Fairbanks acquisitions as well as the continued successful execution of the Company's core specialty food products and distribution based strategies.

On a year-to-date basis, the Company's 2005 EBITDA and EBITDA margin were $8.3 million and 8.4%, respectively, versus $6.2 million and 7.4%, respectively, in 2004. The Company's 2005 year-to-date EBITDA margin, although significantly improved from the same period in 2004, is lower than its second quarter EBITDA margin due to a combination of factors including:

a. The year-to-date results include only seven weeks of earnings from Harlan Fairbanks, which was acquired on May 9, 2005.

b. Historically high raw material prices and $0.3 million in start up costs associated with the Company's new meat snack capacity in the first quarter of 2005.

c. The seasonality of the Company's business which results in its first quarter being the slowest, and the second and third quarters being the strongest.

Interest: The Company's interest expense for the second quarter of 2005 increased to $0.8 million from $0.7 million due primarily to a decrease in the interest allocated to discontinued operations partially offset by a lower average debt balance over the quarter. Similarly year-to-date interest increased to $1.6 million for 2005 as compared to $1.5 million in 2004 due to a decrease in the interest allocated to discontinued operations partially offset by lower average debt balances.

Amortization: Amortization expense in 2005 for the second quarter and year-to-date decreased by $0.2 million and $0.5 million, respectively, as compared to the corresponding periods in 2004. The decreases were due to the write down in 2004 of certain intangible assets resulting from the sale of the Company's Vancouver, B.C. and Algona, Washington mainstream processed meat plants ("the Mainstream Operations").

Discontinued Operations: Discontinued operations for 2005 include the financial results of the Company's Goodlife Foods retail operation ("Goodlife") while discontinued operations for 2004 include the financial results of both Goodlife and the Mainstream Operations.

Net Earnings: The Company generated net earnings of $1.8 million or $0.17 per share for the second quarter as compared to net earnings of $0.6 million or $0.05 per share for the second quarter of 2004. On a year-to-date basis, the Company generated net earnings of $1.5 million or $0.14 per share versus $0.7 million or $0.07 per share in 2004. Included in the 2004 year-to-date results is a gain of $0.6 million resulting from the sale of non-core assets.

FINANCIAL POSITION

Current Assets: The Company's current assets increased to $49.8 million from $37.3 million at the end of fiscal 2004 due primarily to the acquisition of Harlan Fairbanks and, to a lesser extent, increased working capital levels associated with the Company's higher sales level in general, and during the second quarter in particular.

Non-current Assets: The Company's non-current assets increased to $131.6 million from $118.2 million at the end of fiscal 2004 due primarily to the acquisition of Harlan Fairbanks, which resulted in $17.1 million of additional goodwill and $0.5 million in additional capital assets, partially offset by the sales of non-core assets by the Company's discontinued operations.

Current Liabilities: The Company's current liabilities increased to $38.0 million from $33.3 million at the end of fiscal 2004 due primarily to the acquisition of Harlan Fairbanks and, to a lesser extent, increased trade payables associated with the Company's higher sales level in general, and during the second quarter in particular.

Net Working Capital: The Company's net working capital position increased to $11.8 million from $4.0 million at the end of fiscal 2004 due primarily to cash from both operations and the sale of redundant assets being used to reduce the Company's bank indebtedness. In addition, the Company's net working capital position was positively impacted by the restructuring of the Company's term debt facilities in the first quarter of 2005 (see Funded Debt analysis below).

Net Funded Debt: Net funded debt is a non-GAAP financial measure and correspondingly GAAP does not prescribe a standardized meaning for it. As a result, the Fund's definition of this term may not be comparable to similarly titled measures presented by other publicly traded companies. The Fund believes that funded debt is a useful indicator of its financial strength.

Net funded debt is defined as long-term debt, including any current portion, plus bank indebtedness less cash and cash equivalents. At the end of the second quarter of 2005, the Company's net funded debt increased to $51.1 million from $43.5 million at the end of fiscal 2004 due primarily to $12.9 million in incremental debt associated with the Harlan Fairbanks acquisition partially offset by cash generated from both operations and the sale of non-core assets.

During the first quarter of 2005 the Company completed a restructuring of its funded debt in order to: create debt capacity for potential acquisitions and other capital projects; extend the maturity date on its term facilities; and reduce its annual borrowing costs.

Outstanding Share Capital: As of August 2, 2005 the Fund had 14,399,626 outstanding units and 600,000 outstanding exchangeable limited partnership units. There were no outstanding options as all options that were outstanding prior to the conversion of the Company to an income trust structure were purchased by the Company at a cost of $0.4 million.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows from Operating Activities: During the second quarter of 2005, the Company generated $7.3 million in cash from operations consisting of $4.9 million from continuing operations, $1.3 million from changes in the working capital associated with its continuing operations and $1.1 million from discontinued operations. The cash generated from the Company's discontinued operations consisted of $2.0 million from the sale of non-core assets partially offset by a $0.7 million increase in net working capital, a $0.1 million EBITDA loss and $0.1 million in allocated interest expense.

On a year-to-date basis the Company's continuing operations generated $6.7 million in cash and have used $1.4 million for working capital increases associated with its higher sales levels. During this same period, the Company's discontinued operations generated $0.1 million in cash before allocated interest of $0.2 million, resulting in net cash use of $0.1 million.

Cash Flows from Financing Activities: During the second quarter of 2005, the Company generated $6.4 million in cash from financing activities, the majority of which came from the issuance of $7.0 million in debt to finance its acquisition of Harlan Fairbanks. On a year-to-date basis, the Company generated $9.9 million of cash from financing activities, the majority of which came from the issuance of the $7.0 million in term debt for the Harlan Fairbanks acquisition and $2.4 million received from the collection of notes receivable.

Cash Flows from Investing Activities: The Company used $13.6 million in cash during the second quarter and $14.8 million on a year-to-date basis for investing activities. $12.9 million of the cash invested was for the Harlan Fairbanks acquisition while the balance of the funds invested was mainly for capital expenditures. Capital maintenance expenditures were $0.3 million for the second quarter and $0.8 million for the year-to-date period.

Liquidity: Subsequent to the second quarter the Company completed an arrangement in which it was converted from a corporate structure into an income trust structure. In conjunction with the conversion the Fund completed a treasury offering of 3,275,000 units raising net proceeds of approximately $31.0 million. All of the proceeds were used to pay down debt resulting in a net funded debt balance of approximately $25.8 million as at the end of July 2005.

Concurrent with the public offering the Company restructured its bank debt resulting in the following debt facilities replacing its previous debt facilities: (i) a $25.0 million revolving facility to be used for general business purposes including minor capital expenditures and acquisitions; (ii) a $22.0 million non-revolving facility to be used to replace existing term debt; and (iii) a $7.0 million non-revolving facility to be used to fund project capital expenditures and acquisitions. The new debt facilities mature in July 2008 and have no interim principal payments.

The Fund also expects to continue generating cash from the sale of assets associated with its discontinued business.

Subsequent to the second quarter, the Company completed the acquisition of the remaining 10% non-controlling interest in its Quality Fast Foods sandwich operation for $1.5 million in cash and 18,182 common shares.

Premium Brands is a leading manufacturer and marketer of a broad range of branded specialty food products and has manufacturing facilities located in British Columbia, Alberta, Saskatchewan, Manitoba and Oregon. In addition, it operates proprietary food distribution networks through which it distributes both its own products and those of third parties.

Forward Looking Statements

Statements made by Premium Brands Income Fund ("the Fund") that look forward in time or include anything other than historical information, involve risks and uncertainties that may affect the Fund's actual results of 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.



Premium Brands Inc.

CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)

--------------------------------------------------------------------
June 25, Dec 25, June 26,
2005 2004 2004
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Current assets:
Cash and cash
equivalents $ 383 $ 124 $ 539
Accounts receivable 18,031 15,483 11,815
Notes receivable 782 2,893 493
Inventories 21,116 10,834 10,664
Prepaid expenses 2,747 1,955 2,385
Future income taxes 3,000 3,000 3,936
Current assets of
discontinued
operations 3,746 2,993 20,445
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49,805 37,282 50,277
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Notes receivable 1,082 1,336 1,653
Future income taxes 11,183 12,085 11,009
Investments in
associated companies 832 832 18,244
Capital assets 45,493 45,705 43,160
Goodwill 61,512 44,370 37,770
Other 5,444 5,384 8,303
Non-current assets of
discontinued
operations 6,100 8,521 31,401
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$ 181,451 $ 155,515 $ 201,817
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Current liabilities:
Bank indebtedness $ 9,321 $ 8,787 $ 7,357
Accounts payable and
accrued liabilities 21,361 18,139 16,653
Current portion of
long-term debt 6,115 4,606 7,326
Current liabilities
of discontinued
operations 1,248 1,794 14,989
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38,045 33,326 46,325
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Long-term debt 36,075 30,253 27,250
Deferred revenue and
other - - 685
Non-current liabilities
of discontinued
operations - - 10,249
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74,120 63,579 84,509

Non-controlling interest 321 235 400

Shareholders' equity 107,010 91,701 116,908
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$ 181,451 $ 155,515 $ 201,817
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Premium Brands Inc.

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


--------------------------------------------------------------------
13 weeks 13 weeks 26 weeks 26 weeks
ended ended ended ended
June 25, June 26, June 25, June 26,
2005 2004 2005 2004
--------------------------------------------------------------------

Sales $ 55,611 $ 45,478 $ 98,896 $ 83,282
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Gross profit 18,546 14,406 31,180 26,406
Selling, general and
administrative 12,774 10,662 22,883 20,247
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5,772 3,744 8,297 6,159
Depreciation 1,290 1,244 2,528 2,439
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4,482 2,500 5,769 3,720
Interest 822 669 1,564 1,450
Amortization of
intangible assets 225 462 423 910
Loss (gain) on sale
of assets (6) (1) 10 (637)
Non-controlling
interest 58 (13) 86 48
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3,383 1,383 3,686 1,949
Income tax provision 1,224 523 1,373 731
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Earnings from
continuing operations 2,159 860 2,313 1,218
Loss from discontinued
operations (354) (306) (793) (506)
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Net earnings $ 1,805 $ 554 $ 1,520 $ 712
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Earnings per share from
continuing operations:
Basic and diluted $ 0.20 $ 0.08 $ 0.21 $ 0.12

Loss per share from
discontinued operations:
Basic and diluted $ (0.03) $ (0.03) $ (0.07) $ (0.05)

Net earnings per share
Basic and diluted $ 0.17 $ 0.05 $ 0.14 $ 0.07

Weighted average
shares outstanding 11,090 10,430 10,761 10,430


Premium Brands Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)


--------------------------------------------------------------------
13 weeks 13 weeks 26 weeks 26 weeks
ended ended ended ended
June 25, June 26, June 25, June 26,
2005 2004 2005 2004
--------------------------------------------------------------------

Cash provided by (used
for) operations:
Earnings from
continuing
operations $ 2,159 $ 860 $ 2,313 $ 1,218
Items not involving
cash:
Depreciation 1,290 1,244 2,528 2,439
Amortization of
intangible assets 225 462 423 910
Non-controlling
interest 58 (13) 86 48
Stock based
compensation 6 - 11 -
Loss (gain) on sale
of assets (6) (1) 10 (637)
Future income taxes 1,203 556 1,322 689
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4,935 3,108 6,693 4,667

Discontinued
operations:
Loss from
discontinued
operations (354) (306) (793) (506)
Items not involving
cash 177 850 108 1,707
Changes in assets
and liabilities 1,282 (369) 608 (558)
Changes in operating
assets and liabilities 1,220 (1,109) (1,411) (602)
-------------------------------------------------------------------
7,260 2,174 5,205 4,708
-------------------------------------------------------------------

Cash provided by (used
for) financing:
Proceeds from long-
term debt 7,000 - 12,114 -
Principal payments
on long-term debt (267) (1,267) (4,783) (8,777)
Bank indebtedness (151) 1,200 542 (5,362)
Notes receivable 191 205 2,365 3,837
Other (388) (379) (371) (120)
-------------------------------------------------------------------
6,385 (241) 9,867 (10,422)
-------------------------------------------------------------------

Cash provided by (used
for) investments:
Proceeds from the sale
of assets 7 54 21 8,582
Acquisitions (12,903) - (12,903) -
Capital asset
additions (737) (1,836) (1,831) (2,516)
Other - - (100) -
-------------------------------------------------------------------
(13,633) (1,782) (14,813) 6,066
-------------------------------------------------------------------

Change in cash and cash
equivalents 12 151 259 352
Cash and cash
equivalents, beginning
of period 371 388 124 187
--------------------------------------------------------------------

Cash and cash
equivalents, end of
period $ 383 $ 539 $ 383 $ 539
--------------------------------------------------------------------
--------------------------------------------------------------------


Interest paid $ 902 $ 885 $ 1,702 $ 1,945

Net income taxes paid $ 115 $ (127) $ 174 $ (118)


Premium Brands Inc.

Notes to the Consolidated Financial Statements
(Unaudited and in thousands except per share amounts)


1. Significant accounting policies:

These interim consolidated financial statements include the accounts of Premium Brands Inc. and its subsidiaries (the "Company") and have not been reviewed by the Company's external auditors. They do not include all disclosures required by Canadian generally accepted accounting principles for annual financial statements, and accordingly, should be read in conjunction with the 2004 audited consolidated financial statements and notes thereto.

The accompanying financial information follows the same accounting policies and methods of application used in the Company's audited annual consolidated financial statements at and for the year ended December 25, 2004 except for the adoption of the new Canadian accounting standard for Asset Retirement Obligations. This new standard deals with the recognition, measurement and disclosure of asset retirement obligations and requires the recognition of all legal obligations associated with the retirement of an asset, whether by sale, abandonment, recycling or other disposal method. The application of this standard had no significant impact on the Company's interim consolidated financial statements.

Due to the seasonal nature of the Company's business, the results of operations for any interim period are not necessarily indicative of the results to be expected for other interim periods or the full year. In general, the Company's first quarter is weakest, and its third and fourth quarters are strongest.


2. Long-term debt:

During the first quarter of 2005, the Company restructured its long-term debt facilities resulting in the following amounts outstanding at June 25, 2005 (all amounts in thousands of dollars):



Secured term loans bearing interest at prime to prime
plus 1.0%, depending on the Company's funded debt to
cash flow ratio, quarterly principal payments of $1.25
million and the balance due in 2008 $ 34,000

A secured term loan bearing interest at a five year
weighted average rate of 6.9% to 8.1%, depending on the
Company's funded debt to cash flow ratio, quarterly
principal payments of $250,000 and the balance due in 2014 7,730

Capital leases 131

Other 329
--------

Total term debt 42,190
Less current portion 6,115
--------

Long-term debt $ 36,075
--------
--------


The Company's various debt agreements contain financial covenants that require the maintenance of certain ratios regarding working capital, fixed charge coverage and cash flow to debt. At June 25, 2005 the Company was in compliance with all such covenants.

The Company's term loans are secured by an assignment of inventories, accounts receivable and insurance policies; fixed charges on capital assets; and a general lien on all other assets of the Company.

Subsequent to the quarter and concurrent with the Arrangement and treasury offering (see note 3), the Company's remaining debt was restructured resulting in the following new debt facilities replacing its previous debt facilities: (i) a $25.0 million revolving facility to be used for general business purposes including minor capital expenditures and acquisitions; (ii) a $22.0 million non-revolving facility to be used to replace existing term debt; and (iii) a $7.0 million non-revolving facility to be used to fund capital expenditures and acquisitions. The new debt facilities mature in July 2008 and have no interim principal payments.


3. Share Capital

On May 9, 2005 the Company issued 1,274,000 common shares as part of the acquisition of Harlan Fairbanks (see note 5) resulting in a total of 11,706,444 shares outstanding at the end of the second quarter. Subsequent to the quarter, the following transactions occurred:

a. On June 30, 2005, the Company issued 18,182 common shares as part of the acquisition of Brydor (see note 5).

b. On July 27, 2005, Premium Brands Income Fund (the "Fund"), the Company, Premium Brands Holdings Trust, Premium Brands Holdings GP Inc., Premium Brands Holdings Limited Partnership, Premium Brands Operating Limited Partnership, Premium Brands Holdings Inc., 6263666 Canada Ltd., PB Distribution Inc., Harvest Meats Co. Ltd., Grimm's Fine Foods Ltd., Direct Plus Food Group Ltd., Brydor Business Enterprises Ltd., Hygaard Fine Foods Ltd. and 6391907 Canada Ltd. completed an arrangement (the "Arrangement") that resulted in the conversion of the Company and its business from a corporate structure to an income trust structure. As part of the Arrangement the shareholders of the Company transferred each of their common shares to the Fund or Premium Brands Holdings Limited Partnership in consideration for fund units or exchangeable limited partnership units (which are exchangeable into an equal number of Fund units) or, in certain circumstances, a combination of both.

Concurrent with the Arrangement the Fund completed a treasury offering of 3,275,000 units at a unit price of $10.70 resulting in gross proceeds of $35.0 million. The net proceeds of the treasury offering of $31.0 million, after deducting the underwriters' fee and expenses of the offering of $4.0 million, were used to pay down the Company's debt (see note 2).

As a result of the above, the Fund had 14,399,626 units and 600,000 exchangeable limited partnership units outstanding as at July 27, 2005.


4. Stock-based compensation:

The Company elected to adopt the fair value method of accounting for stock option awards prospectively at the beginning of fiscal 2004. Under the new policy, the fair value of stock options issued is amortized to income over the vesting period of the related options.

Excluding options granted subsequent to the Company adopting the fair value method, since December 30, 2001, the Company has granted 178,209 stock options at a weighted average price per share of $11.21. The effect of these stock option awards, had they been charged to earnings during the quarter on a fair value basis, would have been an expense of $9,000 (2004 - $44,000) with a related reduction to diluted earnings per share of $0.00 (2004 - $0.00). On a year-to-date basis, the effect would have been an expense of $18,000 (2004 - $89,000) with a related reduction to diluted earnings per share of $0.00 (2004 - $0.01).

During the quarter, 1,500 options at a weighted average exercise price of $19.42 expired resulting in 397,606 options outstanding at a weighted average exercise price of $16.94.

Subsequent to the quarter the Company re-purchased all of its outstanding options for $0.4 million as part of the Arrangement (see note 3).


5. Acquisitions:

On May 9, 2005 the Company completed the acquisition of the assets of H.F. Distribution Limited Partnership and Harlan Fairbanks Co. LLC ("Harlan Fairbanks"), a Western Canadian based specialty foodservice business, 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 with annual sales of approximately $24 million. The following table summarizes the estimated fair values of the assets acquired and obligations assumed as at May 9, 2005 (all amounts in thousands of dollars):



Net working capital $ 8,877
Capital assets 514
Goodwill 17,144
--------

Total purchase cost $ 26,535
--------
--------


The Company has not yet completed the determination of the fair values of the individual assets acquired and liabilities assumed, and accordingly the allocation of the purchase cost is preliminary and subject to possible changes.

Subsequent to the second quarter, on June 30, 2005, the Company completed the acquisition of the remaining 10% interest in its subsidiary Brydor Business Enterprises Ltd. ("Brydor") for $1.5 million in cash and 18,182 common shares. Brydor operates under the name Quality Fast Foods and is a manufacturer and distributor of pre-packaged sandwiches.


6. Discontinued operations:

The Company has recorded its Vancouver, B.C. and Algona, Washington mainstream processed meat operations ("the Mainstream Operation") and its Goodlife Foods retail operation ("Goodlife") as discontinued operations. The Mainstream Operation was sold in the fourth quarter of 2004. The Company is continuing to seek strategic alternatives for its Goodlife business and expects to complete a transaction in 2005.

The loss from discontinued operations consists of the following amounts:



--------------------------------------------------------------------
13 weeks 13 weeks 26 weeks 26 weeks
ended ended ended ended
(in thousands June 25, June 26, June 25, June 26,
of dollars) 2005 2004 2005 2004
--------------------------------------------------------------------

Sales $ 2,170 $ 26,945 $ 3,561 $ 50,305

Pre-tax loss 539 321 1,202 681
Income tax recovery (185) (15) (409) (175)
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Loss from discontinued
operations (354) (306) $ (793) $ (506)
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Included in the pre-tax loss from discontinued operations for the second quarter of 2005 is $0.1 million (2004 - $0.2 million) in interest expense. For the year-to-date, the interest expense included in the pre-tax loss from discontinued operations is $0.2 million (2004 - $0.5 million).


7. Employee future benefits:

The Company maintains a defined benefit pension plan which covers some salaried staff. Information about this plan is as follows:



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13 weeks 13 weeks 26 weeks 26 weeks
ended ended ended ended
(in thousands June 25, June 26, June 25, June 26,
of dollars) 2005 2004 2005 2004
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Current service costs $ 34 $ 57 $ 68 $ 102
Interest cost 72 72 144 143
Expected return on
plan assets (82) (84) (164) (166)
Amortization of net
loss - 4 - 8
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Net benefit cost $ 24 $ 49 $ 48 $ 87
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Company contributions $ 44 $ 35 $ 88 $ 89
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8. Contingency:

The Company has been involved in an on-going contractual dispute with Olymel LLP regarding Olymel's obligations to supply certain raw materials to the Company at the Company's option. On March 23, 2005, Olymel, acting unilaterally and without adhering to the required notice provisions stipulated in the supply agreement, terminated the supply agreement and sued for $3.3 million in damages relating to alleged breaches under the supply agreement. The Company rejects wholly any claim by Olymel that it has in any way breached the terms of the supply agreement and intends to take all necessary steps to enforce the supply agreement and to compel Olymel to honour the agreement.

Subsequent to the quarter, the Company and Olymel agreed to suspend their respective legal proceedings and are now at an advanced stage in the negotiation of a resolution to this dispute.


9. Comparative figures:

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


Contact Information

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