Premium Brands Income Fund
TSX : PBI.UN

Premium Brands Income Fund

October 28, 2005 09:00 ET

Premium Brands Income Fund Announces Record Third Quarter Sales and EBITDA from Continuing Operations

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Oct. 28, 2005) - Premium Brands Income Fund (TSX:PBI.UN) a leading producer, marketer and distributor of specialty branded consumer food products announced today its third quarter and year-to-date results for the 13 week and 39 week periods ended September 24, 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 third quarter the Fund generated $3.7 million or $0.2469 per unit of distributable cash and declared $3.2 million or $0.2118 per unit in cash distributions representing a payout ratio of 86%.

- The Fund posted net earnings from continuing operations for the third quarter of $3.5 million or $0.28 per unit, before $2.3 million in trust conversion costs, versus $1.1 million or $0.10 per share in 2004.

- After discontinued operations and trust conversion costs, the Fund posted net earnings for the third quarter of $0.6 million or $0.05 per unit versus net earnings of $0.7 million or $0.06 per share in 2004.

- Sales from continuing operations increased by 14.9% to $59.2 million from the same quarter in 2004.

- EBITDA from continuing operations increased by 39.7% to $6.1 million. EBITDA, as a percentage of sales, rose to 10.3% from 8.5% in 2004.

- As part of its conversion to an income trust, Premium Brands completed a treasury offering of 3,275,000 units raising net proceeds of $31.1 million. All of the proceeds were used to pay down debt.

- The Fund amicably resolved its outstanding legal dispute with Olymel S.E.C. resulting in a new long term supply agreement with Olymel.

- The Fund re-affirmed its guidance of an annual EBITDA run rate of between $21 million and $22 million.



QUARTER SUMMARY

(in thousands of dollars) For the 13 Weeks Ended
Sept 24, 2005 Sept 25, 2004

Sales from continuing operations 59,172 51,500
EBITDA from continuing operations 6,110 4,373
Net earnings from continuing operations
before trust conversion costs 3,543 1,095
Net earnings from continuing operations 1,205 1,095
Net earnings 601 661
Total assets 168,562 209,616
Net funded debt 19,646 50,975


The Fund's sales from continuing operations for the third quarter increased by $7.7 million or 14.9% to $59.2 million while its EBITDA from continuing operations increased by $1.7 million or 39.7% to $6.1 million as compared to the third quarter of 2004. The growth in both sales and EBITDA was the result of the recent acquisition of Harlan Fairbanks and the successful implementation of a number of specialty food and distribution initiatives, including the recent addition of incremental meat snack capacity at the Fund's Yorkton, SK production facility and the launch earlier this year of its McSweeney's meat snack line in Ontario.

Net earnings from continuing operations, before $2.3 million in trust conversion costs, were $3.5 million or $0.28 per unit as compared to $1.1 million or $0.10 per share for the third quarter of 2004. After trust conversion costs, which included $0.8 million for the write down of deferred costs associated with the Fund's previous banking structure and $1.5 million for professional and other fees, net earnings from continuing operations were $1.2 million or $0.10 per unit. Net earnings after discontinued operations and trust conversion costs were $0.6 million or $0.05 per unit for the quarter versus $0.7 million or $0.06 per share in 2004.

"Our specialty food and distribution businesses are continuing to build positive momentum. On a year-to-date basis our sales are up 17.3% to $158.1 million, our EBITDA is up 36.8% to $14.4 million and our net earnings from continuing operations before income trust conversion costs are up 153% to $5.9 million," said Mr. George Paleologou, President. "With the acquisition of Harlan Fairbanks occurring well into the second quarter, and the continuing success of our niche based product and distribution strategies, we are well positioned to continue generating strong top and bottom line growth," added Mr. Paleologou.

At the end of the third quarter Premium Brands had net funded debt of $19.6 million versus $51.0 million at the end of the third quarter of 2004. Based on an annual EBITDA run rate of $21 million to $22 million, this translates to a net funded debt to EBITDA ratio of approximately 0.9 : 1.

"Our very strong balance sheet provides us with the flexibility to pursue the acquisition based growth strategies that have played a significant role in the development of our business," stated Mr. Paleologou. "We will not, however, stray from the strict acquisition criteria that have made our past acquisitions so successful."

"Overall, we are very pleased with where our business is positioned today," said Mr. Fred Knoedler, CEO. "With our portfolio 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 to be a successful income fund."

"Looking forward, we are reaffirming our guidance on our current annual EBITDA run rate to be in the $21 million to $22 million range, which is well in excess of the $20.1 million that our current cash distributions are based on," stated Mr. Paleologou.

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, the Fund operates proprietary food distribution networks through which it distributes both its own products and those of third parties.

DISTRIBUTIONS

Distributable cash for the nine week period starting on July 27, 2005 (the date on which Premium Brands converted to an income trust) and ending on September 24, 2005 was $3.7 million or $0.2469 per unit as compared to declared distributions of $3.2 million or $0.2118 per unit for this same period, resulting in a payout ratio of 86%. The surplus in distributable cash was due to a combination of the Fund's estimated monthly cash distributions of $0.098 per unit being based on its historical results (adjusted for certain factors relating to changes in the Fund's capital structure, the acquisition of certain businesses and the expansion of certain production capacities) and the seasonality of the Fund's business which has its strongest operating results in the second and third quarters of the calendar year.

The following table provides a reconciliation of distributable cash to EBITDA for the period starting July 27, 2005 and ending at the quarter end date of September 24, 2005:



------------------------------------------------------------
(in thousands of dollars) 9 weeks from
date of the income
trust conversion to
Sept 24, 2005
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EBITDA 4,094
Payments on notes receivable 47
Less:
Interest 285
Cash taxes 21
Maintenance capital expenditures 117
Principal payments 14
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Distributable cash 3,704
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RESULTS OF OPERATIONS

Sales: The Fund's sales from continuing operations for the third quarter increased by $7.7 million or 14.9% to $59.2 million, as compared to the third quarter of 2004, due to the acquisition of Harlan Fairbanks on May 9, 2005, which accounted for $7.2 million of the increase, and a variety of the Fund's distribution and specialty food initiatives, which accounted for $3.1 million of the increase. These increases were partially offset by a $2.6 million decrease in lower margin processed meat sales.

On a year-to-date basis, sales from continuing operations were up 17.3% to $158.1 million as compared to $134.8 million in 2004. The Harlan Fairbanks acquisition accounted for approximately 50% of the growth and organic initiatives, net of reduced lower margin processed meat sales, for the remainder.

Gross Profit: The Fund's gross profit from continuing operations for the quarter increased to $19.5 million from $15.3 million in the third quarter of 2004 due to a combination of higher sales and improved selling margins. As a percentage of sales, the Company's gross profit from continuing operations ("gross margin") improved to 33.0% from 29.6% in 2004 due to a combination of a favourable sales mix shift to higher margin products and the third quarter of 2004 having below average gross margins due to historically high raw material prices.

On a year-to-date basis, the Fund's gross margin increased to 32.1% from 30.9% in 2004 due primarily to the 2004 gross margin being impacted by historically high raw material costs that occurred in the second quarter of 2004 and continued through to the first quarter of 2005. The 2005 year-to-date gross margins were also favourably impacted by sales mix changes that were partially offset by approximately $0.3 million in costs associated with the start up of new meat snack production capacity in the first quarter.

SG&A: The Fund's selling, general and administrative expense from continuing operations ("SG&A") was $13.4 million for the quarter versus $10.9 million for the third 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. As a percentage of sales, SG&A increased to 22.7% from 21.1% 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.

On a year-to-date basis SG&A costs were $36.3 million versus $31.1 million in 2004 and as a percentage of sales 23.0% versus 23.1% in 2004. Similar to the costs for the quarter, the increase in SG&A costs was primarily due to the variable selling costs associated with the Fund's higher sales levels while the decrease in SG&A as a percentage of sales was due mainly to the relatively fixed nature of certain administration costs.

EBITDA: For the third quarter the Fund generated EBITDA of $6.1 million or, as a percentage of sales, an EBITDA margin of 10.3%. This compares to EBITDA of $4.4 million and an EBITDA margin of 8.5% in the third 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.

On a year-to-date basis, the Fund's 2005 EBITDA and EBITDA margin were $14.4 million and 9.1%, respectively, versus $10.5 million and 7.8%, respectively, in 2004. The Fund's 2005 year-to-date EBITDA margin, although significantly improved from the same period in 2004, is below its third quarter EBITDA margin due to lower margins in the first quarter that were the result of high raw material prices, $0.3 million in start up costs associated with the Fund's new meat snack capacity and the seasonality of the Fund's business which results in its first quarter being the slowest and the second and third quarters being its strongest.

Interest: The Fund's interest expense for the third quarter of 2005 decreased to $0.6 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. Year-to-date interest decreased to $2.1 million as compared to $2.3 million in 2004 as most of the benefits of a lower average debt balance were offset by a decrease in the interest allocated to discontinued operations. The lower allocations of interest to discontinued operations were the result of the sale of the Fund's Vancouver, B.C. and Algona, Washington mainstream processed meat plants ("the Mainstream Operations") in the fourth quarter of 2004.

Amortization: Amortization expense for the third quarter and year-to-date decreased by $0.3 million and $0.8 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 Fund's Mainstream Operations and the write off of $0.8 million in deferred bank fees as part of the income trust conversion on July 27, 2005.

Trust conversion costs: As a result of the Company's conversion into an income trust, the Fund incurred a charge of $2.3 million. Included in the charge is $0.8 million for the write down of deferred costs associated with the Fund's previous banking structure and $1.5 million for professional and other fees.

Discontinued 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 Mainstream Operations. Included in the loss from discontinued operations for the third quarter and year-to-date 2005 results are additional depreciation charges of $0.2 million and $0.4 million, respectively, resulting from accelerated depreciation of certain capital assets.

Net Earnings: The Fund generated net earnings of $0.6 million or $0.05 per unit for the third quarter as compared to net earnings of $0.7 million or $0.06 per share for the third quarter of 2004. On a year-to-date basis, the Fund generated net earnings of $2.1 million or $0.18 per unit versus $1.4 million or $0.13 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 Fund's current assets increased to $47.6 million from $37.3 million at the end of fiscal 2004 due to the July 27, 2005 public offering which resulted in a $4.1 million increase in cash, increased working capital levels associated with the Fund's higher sales levels and the Harlan Fairbanks acquisition. These increases were partially offset by $2.5 million in payments on notes receivable and the elimination of $2.7 million in current future income tax assets due to the new tax structure of the Fund.

Non-current Assets: The Fund's non-current assets increased to $121.0 million from $118.2 million at the end of fiscal 2004 due primarily to the acquisitions of Harlan Fairbanks and the 10% non-controlling interest in the Fund's Quality Fast Foods sandwich operation, which resulted in $18.8 million of additional goodwill. This increase was partially offset by the elimination of $10.0 million in future income tax assets due to the Fund's new tax structure and the sale of $2.4 million of the discontinued operation's capital assets.

Current Liabilities: The Company's current liabilities decreased to $24.1 million from $33.3 million at the end of fiscal 2004 due primarily to the Fund's July 27, 2005 public offering, the net proceeds of which were partially used to pay down bank indebtedness, and to the Fund's July 27, 2005 debt refinancing which eliminated principal payments on primarily all of the Fund's term debt, partially offset by a $1.5 million increase in distribution payable resulting from the unitholders' distribution declared on September 21, 2005.

Net Funded Debt: At the end of the third quarter of 2005, the Fund's net funded debt decreased to $19.6 million from $43.5 million at the end of fiscal 2004 due to debt repayments resulting from the July 27, 2005 public offering and from cash generated by both operations and the sale of non-core assets. These decreases were partially offset by an increase in net funded debt of $14.4 million due to the acquisitions of Harlan Fairbanks and the remaining 10% non-controlling interest in the Fund's Quality Fast Foods sandwich operation.

Outstanding Units: The total units and exchangeable units outstanding as of October 28, 2005 were 14,999,637 consisting of 14,399,637 units and 600,000 exchangeable units. There were no outstanding options as all options that were outstanding prior to the income trust conversion were purchased at a cost of $0.4 million. The Fund expensed $0.2 million of this cost as part of the trust conversion costs and charged $0.2 million to share capital.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows from Operating Activities: During the third quarter of 2005, the Fund generated $4.9 million in cash from operations consisting of $4.0 million from continuing operations, $1.2 million from changes in the working capital associated with its continuing operations partially offset by the use of $0.3 million in cash for discontinued operations. Cash generated from continuing operations was net of $1.5 million in cash costs for the income trust conversion.

On a year-to-date basis the Fund's continuing operations generated $10.7 million in cash and have used $0.2 million for working capital. During this same period, the Company's discontinued operations used $0.2 million in cash before allocated interest of $0.2 million, resulting in net cash use of $0.4 million.

Cash Flows from Financing Activities: During the third quarter of 2005, the Fund generated $2.0 million in cash from financing activities. This consisted of $31.1 million in proceeds from the July 27, 2005 public offering and $22.0 million in proceeds from new banking facilities offset by $49.6 million used to pay down the Fund's previous bank facilities and $1.7 million in distributions to unitholders. On a year-to-date basis, the Fund generated $11.9 million of cash from financing activities, with the increase from the third quarter due mainly to the issuance of $7.0 million in bank term debt for the Harlan Fairbanks acquisition and the collection of $2.8 million in notes receivable.

Cash Flows from Investing Activities: During the quarter the Fund used $3.0 million in cash for investing activities. $1.5 million of the cash was for the acquisition of the remaining 10% non-controlling interest in the Fund's Quality Fast Foods sandwich operation and $1.5 million was for capital expenditures. Included in the capital expenditures were $1.2 million for capacity expansion/efficiency related projects and $0.3 million for capital maintenance.

On a year-to-date basis the Fund used $17.9 million in cash for investing activities, including $12.9 million for the acquisition of Harlan Fairbanks, $1.5 million for the acquisition of the 10% non-controlling interest in the Quality Fast Foods sandwich operation, and $3.4 million for capital expenditures. Included in the capital expenditures were $2.3 million for capacity expansion/efficiency related projects and $1.1 million for capital maintenance.

Liquidity: In conjunction with the income trust conversion, the Fund completed a treasury offering of 3,275,000 units raising net proceeds of approximately $31.1 million. All of the proceeds were used to pay down debt.

Concurrent with the public offering and the income trust conversion the Fund restructured its bank debt resulting in its previous debt facilities being replaced by: (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. As at September 24, 2005 the Fund had drawn $22.0 million of the $54.0 million in credit available under the new debt facilities.

The Fund expects to continue generating cash from the sale of assets associated with its discontinued business and projects to raise approximately $0.7 million from such sales in the fourth quarter. In general terms, the cash to be generated from the sale of discontinued operation assets is expected to exceed the cash required to finance its ongoing activities.

During the quarter the Fund amicably resolved an outstanding legal dispute with Olymel S.E.C. regarding Olymel's obligations to supply certain raw materials to the Fund at the Fund's option. As part of the resolution, the Fund entered into a new long term supply agreement with Olymel whereby it has the option to purchase certain fresh pork raw material inputs at defined market based prices. Neither the resolution of the legal dispute nor the terms of the new supply agreement are expected to have a material impact on the Fund's operating results.

ADDITIONAL INFORMATION

Additional information, including the Company's Annual Information Form, has been filed electronically through the System for Electronic Document Analysis and Retrieval (SEDAR) and is available online at www.sedar.com.

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.



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Premium Brands Income Fund
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CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)

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Sept 24, Dec 25, Sept 25,
2005 2004 2004
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Current assets:
Cash and cash equivalents $ 4,262 $ 124 $ 552
Accounts receivable 17,934 15,483 12,588
Notes receivable 435 2,893 699
Inventories 19,515 10,834 10,985
Prepaid expenses 1,568 1,955 2,077
Future income taxes 304 3,000 3,936
Current assets of discontinued
operations 3,557 2,993 20,303
----------------------------------------------------------------------
47,575 37,282 51,140

Notes receivable 1,007 1,336 1,273
Future income taxes 524 12,085 10,785
Investments in associated companies 832 832 18,244
Capital assets 45,635 45,705 44,947
Goodwill 63,172 44,370 43,235
Intangible assets 4,204 5,384 9,694
Non-current assets of discontinued
operations 5,613 8,521 30,298
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$ 168,562 $ 155,515 $ 209,616
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Current liabilities:
Cheques outstanding $ 1,473 $ 1,340 $ 1,119
Bank indebtedness - 7,447 9,323
Accounts payable and accrued
liabilities 20,108 18,139 18,452
Distribution payable (note 7) 1,470 - -
Current portion of long-term debt
(note 3) 110 4,606 8,111
Current liabilities of discontinued
operations 949 1,794 12,657
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24,110 33,326 49,662

Long-term debt (note 3) 22,325 30,253 32,974
Non-current liabilities of discontinued
operations - - 9,867
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46,435 63,579 92,503

Non-controlling interest - 235 400

Unitholders' equity (note 4):
Unitholders' capital 127,810 - -
Share capital - 121,731 121,731
Retained earnings (deficit) 48 (27,741) (2,785)
Contributed surplus - 10 -
Cumulative translation adjustment (2,554) (2,299) (2,233)
Accumulated distributions (3,177) - -
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122,127 91,701 116,713
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$ 168,562 $ 155,515 $ 209,616
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Premium Brands Income Fund
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
(Unaudited and in thousands)

-----------------------------------------------------------------------
13 weeks 13 weeks 39 weeks 39 weeks
ended ended ended ended
Sept 24, Sept 25, Sept 24, Sept 25,
2005 2004 2005 2004
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Deficit, beginning of period $ (26,221) $ (3,446) $ (27,741) $ (4,158)

Earnings for the period 601 661 2,121 1,373

Adjustments related to income
trust conversion:

Elimination of future income
taxes (12,988) - (12,988) -
Transfer of contributed
surplus 25 - 25 -
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Adjusted deficit (38,583) (2,785) (38,583) (2,785)

Transfer to unitholders'
capital (1) 38,631 - 38,631 -
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Retained earnings (deficit),
end of period $ 48 $ (2,785) $ 48 $ (2,785)
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(1) This represents the retained earnings of the Company up to July 27,
2005, the date of the income trust conversion. Under the continuity
of interest method of accounting this amount is netted with the
Company's share capital to calculate the opening unitholders'
capital for the Fund (note 1).


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

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13 weeks 13 weeks 39 weeks 39 weeks
ended ended ended ended
Sept 24, Sept 25, Sept 24, Sept 25,
2005 2004 2005 2004
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Sales $ 59,172 $ 51,500 $ 158,068 $ 134,782
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Gross profit 19,539 15,250 50,719 41,656
Selling, general and
administrative 13,429 10,877 36,312 31,124
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6,110 4,373 14,407 10,532
Depreciation 1,338 1,260 3,866 3,699
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4,772 3,113 10,541 6,833
Interest 563 807 2,127 2,257
Amortization of intangible
assets 156 476 579 1,386
Loss (gain) on sale of assets - - 10 (637)
Non-controlling interest - - 86 48
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4,053 1,830 7,739 3,779
Trust conversion costs 2,338 - 2,338 -
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1,715 1,830 5,401 3,779
Income tax provision 510 735 1,883 1,466
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Earnings from continuing
operations 1,205 1,095 3,518 2,313
Loss from discontinued
operations (604) (434) (1,397) (940)
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Net earnings $ 601 $ 661 $ 2,121 $ 1,373
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Earnings per unit/share from
continuing operations:
Basic and diluted $ 0.10 $ 0.10 $ 0.30 $ 0.22

Loss per unit/share from
discontinued operations:
Basic and diluted $ (0.05) $ (0.04) $ (0.12) $ (0.09)

Net earnings per unit/share
Basic and diluted $ 0.05 $ 0.06 $ 0.18 $ 0.13

Weighted average units/shares
outstanding 12,469 10,430 11,789 10,430


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Premium Brands Income Fund
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

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13 weeks 13 weeks 39 weeks 39 weeks
ended ended ended ended
Sept 24, Sept 25, Sept 24, Sept 25,
2005 2004 2005 2004
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Cash provided by (used for)
operations:
Earnings from continuing
operations $ 1,205 $ 1,095 $ 3,518 $ 2,313
Items not involving cash:
Depreciation 1,338 1,260 3,866 3,699
Amortization of intangible
assets 156 476 579 1,386
Non-controlling interest - - 86 48
Stock based compensation 4 - 15 -
Loss (gain) on sale of assets - - 10 (637)
Writedown of deferred
finance fees 839 - 839 -
Future income taxes 479 687 1,801 1,376
----------------------------------------------------------------------
4,021 3,518 10,714 8,185
Changes in operating assets
and liabilities 1,192 522 (220) (80)
Discontinued operations:
Loss from discontinued
operations (604) (434) (1,397) (940)
Items not involving cash 235 901 343 2,608
Changes in assets and
liabilities 39 (3,353) 647 (3,911)
----------------------------------------------------------------------

4,883 1,154 10,087 5,862
----------------------------------------------------------------------

Cash provided by (used for)
financing:
Proceeds from long-term debt 22,000 13,300 34,114 13,300
Payments on long-term debt (41,751) (6,786) (46,534) (15,563)
Issuance of units (net
of issuance costs) 31,109 - 31,109 -
Distributions to unitholders (1,707) - (1,707) -
Bank indebtedness (7,848) 3,085 (7,306) (2,277)
Other (174) (783) (545) (903)
----------------------------------------------------------------------
1,629 8,816 9,131 (5,443)
----------------------------------------------------------------------

Cash provided by (used for)
investments:
Proceeds from the sale of
assets - 20 21 8,602
Acquisitions (1,521) (7,817) (14,424) (7,817)
Capital asset additions (1,525) (2,232) (3,355) (4,748)
Notes receivable 413 72 2,778 3,909
Other - - (100) -
----------------------------------------------------------------------
(2,633) (9,957) (15,080) (54)
----------------------------------------------------------------------

Change in cash and cash
equivalents 3,879 13 4,138 365
Cash and cash equivalents,
beginning of period 383 539 124 187
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Cash and cash equivalents,
end of period $ 4,262 $ 552 $ 4,262 $ 552
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Non-cash financing and investing activities (notes 4, 7 and 9)

Interest paid $ 626 $ 951 $ 2,328 $ 2,896

Net income taxes paid
(received) $ 18 $ (69) $ 192 $ (187)


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Premium Brands Income Fund
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Notes to the Consolidated Financial Statements
(Unaudited and in thousands except per unit/share amounts)


1. Organization 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 July 27, 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 operates primarily in Canada as a leading manufacturer and marketer of a broad range of branded specialty food products and distributes these products to its approximately 20,000 customers in the retail and foodservice segments through its proprietary food distribution networks.

Pursuant to a plan of arrangement ("the Arrangement") which became effective 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 (which are exchangeable into units of the Fund on a one for one basis) issued by a subsidiary of the Fund. 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).

Additionally, pursuant to 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 holder of the Fund units undertook a secondary offering of 639,307 Fund units.

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.

2. Significant Accounting Policies

The accompanying interim consolidated financial statements of the Fund have been prepared in accordance with accounting principles generally accepted in Canada for interim reporting. Accordingly, these interim consolidated financial statements do not include all of the financial statement disclosures required by Canadian generally accepted accounting principles for annual financial statements and, accordingly, should be read in conjunction with the Company's annual audited financial statements and notes for the year ended December 25, 2004 filed on SEDAR at www.sedar.com. The unaudited consolidated interim financial statements follow the same accounting policies and methods of computation as used in the 2004 annual financial statements of the Company, except as disclosed below.

Effective December 26, 2004 the Fund adopted the 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 Fund's interim consolidated financial statements.

Also effective December 26, 2004, the Fund adopted the new guidelines of the CICA Accounting Guideline 13, Hedging Relationships (AcG-13). Under this new standard the Fund must formally document all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. This process includes linking all derivatives to forecasted transactions. The Fund must also formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

Realized and unrealized gains or losses associated with derivative instruments, which have been terminated for hedge accounting purposes or cease to be effective prior to maturity, are deferred on the balance sheet and recognized in income in the period in which the underlying hedged transaction is recognized. In the event a designated hedged item is sold, extinguished or matures prior to the termination of the related derivative instrument, any realized or unrealized gain or loss on such derivative instrument is recognized in income.

Effective July 27, 2005 the Fund adopted the CICA issued Emerging Issues Committee Abstract 151 (EIC151 - Exchangeable Securities Issues by Subsidiaries of Income Trusts). As the exchangeable limited partnership units (note 4) have substantially the same rights as the Fund units in terms of distributions, they have been accounted for in unitholders' equity.

The Fund qualifies as a mutual fund trust under the Income Tax Act (Canada). As such, the Fund is only taxable on income not allocated to unitholders. As substantially all of the taxable income is allocated to unitholders, no provision for income taxes has been made for earnings of the Fund.

Certain subsidiaries of the Fund follow the asset and liability method of accounting for income taxes whereby future income tax assets and liabilities are recognized based on differences between the bases of assets and liabilities used for financial and income tax purposes. Future income tax assets are recognized only to the extent that management determines that it is more than likely than not that the future income tax assets will be realized. Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment or substantive enactment.

Following the reorganization of the Company into the Fund, the provision for future income taxes was reduced by $13.0 million.

3. Long-Term Debt

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

As at September 24, 2005 the Fund had the following term debt amounts outstanding (all amounts in thousands of dollars):



A secured term loan with no principal payments
and the balance due 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 1.5%, based on the Fund's
ratio of funded debt to EBITDA calculated on a
quarterly basis. 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%
based on the Fund's ratio of funded debt to
EBITDA calculated on a quarterly basis. $ 22,000

Other 435
---------

Total term debt 22,435
Less current portion 110
---------

Long-term debt $ 22,325
---------
---------


The Fund'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 September 24, 2005 the Fund was in compliance with all such covenants.

The Fund'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 Fund.

4. Unitholders' Capital and Share Capital

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

On June 30, 2005, the Company issued 18,182 common shares as part of the acquisition of Quality Fast Foods (see note 9).

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 a subsidiary of the Fund. Concurrent with this transaction, 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.

The following is a summary of changes in unit/shareholders' equity from December 25, 2004 to September 24, 2005:



-----------------------------------------------------------------------
-----------------------------------------------------------------------
(in thousands Common stock Fund and Exchangeable Units
of dollars) Number Amount Number Amount Total
$ $ $
-----------------------------------------------------------------------

Balance at December
25, 2005 10,430,455 121,731 - - 121,731
Exercise of options 2,000 16 - - 16
Acquisition of
Harlan Fairbanks
(note 9) 1,274,000 13,613 - - 13,613
Acquisition of 10%
interest in
Quality Fast
Foods (note 9) 18,182 200 - - 200
Purchase of options - (228) - - (228)
Shares exchanged
for trust units (11,124,637) (128,406) 11,124,637 128,406 128,406
Shares exchanged
for exchangeable
limited
partnership units (600,000) (6,926) 600,000 6,926 -
Trust units issued
in an initial
public offering
for cash - - 3,275,000 35,043 35,043
Fund issuance costs - - - (3,934) (3,934)
Transfer of deficit - - - (38,631) (38,631)
-----------------------------------------------------------------------

Balance at September
24, 2005 - - 14,999,637 127,810 127,810
-----------------------------------------------------------------------
-----------------------------------------------------------------------


a. Fund Units: An unlimited number of units may be created and issued. Each unit is transferable and represents an equal undivided beneficial interest in any distributions from the Fund, whether of net income, net realized capital gains or other amounts and in the net assets of the Fund in the event of a termination or winding up of the Fund. Each unit entitles the holder thereof to one vote at all meetings of voting unitholders.

The units are redeemable at any time on demand by the holders thereof, subject to certain terms and conditions. The total amount payable by the Fund in respect of units tendered for redemption in the same calendar month shall not exceed $50,000, provided that the Trustees of the Fund may, in their sole discretion, waive this limitation.

b. Exchangeable Limited Partnership Units: An unlimited number of Exchangeable Limited Partnership ("ELP") units may be created and issued. Each ELP unit is intended to be, to the greatest extent possible, the economic equivalent of a Fund unit. Holders of ELP units are entitled to receive distributions that are, to the greatest extent practicable, equal to distributions paid by the Fund to holders of units. ELP units are exchangeable into an equal number of Fund units, are non-transferable, except in connection with an exchange for a Fund unit, and can be redeemed by the Fund under certain circumstances for an equal number of Fund units. In addition, for each ELP unit held the holder receives one special voting unit.

c. Special Voting Units: An unlimited number of special voting units may be created and issued. The holders of special voting units are not entitled to any beneficial interest in any distribution from the Fund or in the net assets of the Fund in the event of a termination or winding up of the Fund. Each special voting unit entitles the holder thereof to one vote at all meetings of voting unitholders. Special voting units are to be cancelled on the exchange of exchangeable limited partnership units for Fund units.

5. Financial Instruments

The Fund has exposure to U.S. dollar currency exchange risk due to annual inventory purchases of approximately US$5 million from U.S. based suppliers. In order to reduce the risk associated with currency fluctuations the Fund will, from time to time, enter into foreign exchange contracts. The Fund does not hold or issue financial instruments for trading purposes.

As of September 24, 2005, the Fund had outstanding foreign exchange contracts for the purchase of US$7.6 million over the next 28 months at a rate of C$1.2028. The fair value of these contracts, which the Fund has designated as hedges, as at September 24, 2005 represented an unrealized loss of $0.3 million.

During the quarter, the Fund also entered into an interest rate swap transaction that fixes the interest rate on $20.0 million of its long term debt for the three years ending July 27, 2008 at an effective rate of 3.54% plus 1.0% to 2.0%, based on the Fund's ratio of funded debt to EBITDA calculated on a quarterly basis. The fair value of the swap as at September 24, 2005 represented an unrealized loss of $0.1 million.

6. Earnings per Unit / Share

Earnings per unit is calculated using the weighted average number of Fund units and exchangeable limited partnership units outstanding for the period.

7. Distributions

On August 22, 2005, the Fund declared a distribution of 11.38 cents per unit for the period from July 27, 2005 to August 31, 2005, payable on September 15, 2005. On September 21, 2005, the Fund declared a distribution of 9.8 cents per unit for the month ending September 30, 2005, payable on October 15, 2005.

8. Unit / Stock-based Compensation

Concurrent with the income fund conversion on July 27, 2005, the Fund purchased all of the Company's 345,006 outstanding options for $0.4 million and initiated a new long term incentive plan ("LTIP") for officers and key employees. 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.

9. 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.

On June 30, 2005 the Company completed the acquisition of the remaining 10% interest in Brydor Business Enterprises Ltd. (dba 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 the acquisitions noted above (all amounts in thousands of dollars):



Net working capital $ 8,877
Capital assets 514
Goodwill 18,846
--------

Total purchase cost $ 28,237
--------
--------


The Fund 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.

10. Discontinued Operations

The Fund 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 Fund is continuing to seek strategic alternatives for its Goodlife business.

The loss from discontinued operations consists of the following amounts:



-----------------------------------------------------------------------
13 weeks 13 weeks 39 weeks 39 weeks
ended ended ended ended
Sept 24, Sept 25, Sept 24, Sept 25,
(in thousands of dollars) 2005 2004 2005 2004
-----------------------------------------------------------------------

Sales $ 1,816 $ 27,811 $ 5,377 $ 78,116
-----------------------------------------------------------------------

Pre-tax loss 709 1,139 1,911 1,820
Income tax recovery (105) (705) (514) (880)
-----------------------------------------------------------------------
Loss from discontinued
operations $ 604 $ 434 $ 1,397 $ 940
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Included in the pre-tax loss from discontinued operations for the third 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 - $0.6 million).

11. Employee Future Benefits

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



-----------------------------------------------------------------------
13 weeks 13 weeks 39 weeks 39 weeks
ended ended ended ended
Sept 24, Sept 25, Sept 24, Sept 25,
(in thousands of dollars) 2005 2004 2005 2004
-----------------------------------------------------------------------

Current service costs $ 34 $ 57 $ 102 $ 163
Interest cost 72 72 216 214
Expected return on plan assets (82) (84) (246) (246)
Amortization of net loss - 4 - 12
-----------------------------------------------------------------------

Net benefit cost $ 24 $ 49 $ 72 $ 143
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Company contributions $ 44 $ 35 $ 132 $ 131
-----------------------------------------------------------------------
-----------------------------------------------------------------------


12. Seasonal Trends

Due to the seasonal nature of the Fund'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 Fund's first quarter is its weakest, and its second and third quarters are its strongest.

13. 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