November 13, 2005

TorQuest Partners Invests $10 Million in Associated Brands

Associated Brands announces completion of $11.75 million exchangeable debenture offering and revised credit agreement, third quarter 2005 results and distribution reduction also announced.

Toronto, Ontario – Associated Brands Income Fund (TSX:ABF.UN) announced today that it has completed a private placement of $11.75 million of 9% exchangeable subordinated debentures (the Debentures”). TorQuest Partners Value Fund, L.P and TorQuest Partners Value Fund (Parallel Partnership No.1) L.P. have purchased $10 million of the offering and, as required by the TorQuest funds, certain trustees of Associated Brands Operating Trust have purchased the remaining $1.75 million of the Debentures.

Of the net proceeds, approximately $3.6 million will be invested in four accretive capital projects aimed at improving operational efficiency, enhancing manufacturing capacity and flexibility, and supporting customer service at the Fund’s plants. As these projects are completed through late 2006 and 2007 significant financial benefits are expected to result.

The balance of the proceeds will be used for financial restructuring purposes, including reducing existing debt under the Fund’s revolving credit and term credit facilities. With the completion of the private placement, the Fund’s current lenders have revised the existing credit facility and provided new credit terms and revisions to financial covenants. The new credit facility provides Associated Brands with terms better suited to the Fund’s business and current industry conditions.

We are pleased to have increased the size of the debenture offering from the $10 million originally contemplated, and with the strong vote of confidence expressed by our new financial partners and our lenders,” commented John Currie, Executive Chairman. We are confident that we now have the necessary financial and operating flexibility until the numerous initiatives underway restore our historical track record of growth and stable performance.”

We also welcome Eric Berke of TorQuest Partners as a new and valued member of the Board of Trustees of Associated Brands Operating Trust,” Mr. Currie added.

Eric Berke, Senior Partner at TorQuest Partners, expressed his enthusiasm over the transaction. We are excited about this investment and the potential for future investments in Associated Brands, as we anticipate the initiatives currently underway will result in much stronger financial results. We believe the partnership between Associated Brands and TorQuest will be a strong one. We look forward to supporting Associated Brands through our involvement on the Board of Trustees as it grows both organically and through acquisitions.”

Our immediate and longer-term goal is to deliver improved sustainable business results for our unitholders. The accretive capital investments we will fund, primarily focused on lower cost dry-blend packaging, will be phased into production over the next twenty-four months. Once completed, these projects are expected to enhance EBITDA and distributable cash, commencing in the latter half of 2006 and going forward,” stated Rob Dougans, President and Chief Executive Officer.

We are also very excited about our selection as the principal contract manufacturer for a leading consumer product, announced earlier today,” Mr. Dougans continued. The proposed $30 million investment we will make in a new manufacturing and warehousing facility in the United States will be substantially accretive to our base business once it comes on line in 2007.” The agreement is subject to certain conditions, including that the Fund obtain project financing for the new facility.

The Debentures, which mature on September 30, 2008, are subject to two one-year extensions and will bear interest at 9.0% per annum, payable semi-annually on March 30 and September 30. The Debentures will be exchangeable at the holder’s option into fully-paid Fund Units at any time prior to the maturity date at a price of $4.00 per unit. The agreements to purchase the Debentures were entered into at closing. Subject to unitholder approval and the need for additional financing, TorQuest will have the option to invest up to an additional $15 million in exchangeable subordinated debentures. The Fund has committed to seek unitholder approval within the next 90 days for potential subsequent investments by TorQuest.

Cash Distributions

The Board of Trustees announced today an adjustment in monthly cash distributions to $0.03 per unit from $0.05 per unit effective with the distribution to be paid in respect of the month of November to Unitholders of record on November 30, 2005 as a result of the financial results through the first nine months of 2005 discussed below.

This adjustment in monthly distributions should ensure that cash generated by operations will be at a sustainable level until our new capital projects and business improvement initiatives deliver their targeted results,” Mr. Currie stated.

Financial Results for Three and Nine Months Ended October 1, 2005 

Reported sales in the third quarter of 2005 were $35.5 million compared to $37.1 million in the corresponding period in the prior year. For the nine months ended October 1, 2005, sales were $107.7 million compared to $115.8 million for the first nine months of the prior year. The decline in sales was due primarily to reduced contract manufacturing business in the United States and increased competition from branded products in the Canadian marketplace. The appreciation of the Canadian dollar compared to the U.S. dollar reduced reported sales by $1.6 million in the third quarter and $4.7 million through the first nine months of the year compared to the same periods in 2004.

While business conditions remain challenging in our markets, the recent launch of a significant number of new products, combined with new product listings scheduled to begin shipping during the fourth quarter, are expected to generate improved growth in revenues going forward,” Mr. Dougans commented. We have already begun to see some of the benefits of our sales and marketing initiatives as overall sales volumes increased approximately 1.3% during the third quarter compared to last year. This positive trend continued in October as sales volumes were above those for the same month in 2004.”

Earnings before interest, taxes, depreciation and amortization (EBITDA) in the third quarter of 2005 were $1.8 million compared to $3.0 million in the third quarter of 2004. EBITDA for the nine months ended October 1, 2005 was $7.3 million compared to $11.3 million for the first nine months of 2004. EBITDA in the third quarter of 2005 was impacted primarily by higher manufacturing, distribution logistics and packaging costs compared to last year’s third quarter. In particular, EBITDA and gross profit were reduced by one-time items including manufacturing issues at the Fund’s plants caused by the unusually hot and humid weather experienced during the summer months of 2005, and issues relating to the outsourcing of U.S. distribution during the period. As a percentage of sales, gross profit was 16% of sales in the third quarter of 2005, a decline over the 17.5% earned in the first two quarters of the year and the 17.2% of sales earned in the third quarter of 2004. Gross profit was 17.0% of sales through the first nine months of 2005 compared to 19.5% in the same period last year.

One of our key objectives is to improve our gross margins. We believe initiatives underway to enhance efficiency at our Toronto distribution facility, in addition to projected higher production levels and improved productivity at our manufacturing plants, should generate increased margins in the fourth quarter and into 2006,” Mr. Dougans added.

During the third quarter the Fund included a non-cash charge to income of $31.2 million to write down the value of goodwill and trademarks. Including this non-cash charge, the Fund generated a net loss of $30.8 million or $2.622 per unit (diluted) in the third quarter of 2005. Not including this charge, net earnings were $0.4 million or $0.031 per unit (diluted) in the third quarter of 2005 compared to $1.3 million or $0.096 per unit (diluted) in the third quarter last year. For the first nine months of 2005 the net loss, including the impairment charge, was $28.6 million or $2.432 per unit. For the first nine months of 2005 net earnings before the goodwill and trademark impairment charges were $2.6 million or $0.202 per unit (diluted) compared to $5.9 million or $0.451 per unit (diluted) in the same period last year.

Distributable cash in the third quarter of 2005 was $1.2 million or $0.100 per Fund unit compared to $2.0 million or $0.174 per Fund unit in the third quarter of last year. Distributions in the third quarter were $0.170 per Fund unit compared to $0.269 per Fund unit in the third quarter last year. For the first nine months of 2005 distributable cash was $4.7 million or $0.402 per Fund unit compared to $8.0 million or $0.678 per Fund unit for the comparable period in the previous year. For the first nine months of 2005, distributions were $0.590 per Fund unit compared to $0.806 per Fund unit in the same period last year.

While we are disappointed with our most recent results, we believe the reduction in cash distributions, combined with our exchangeable debenture financing, will provide a firm financial base for the Company to pursue its capital investment and business initiatives. The additional financial flexibility achieved through reducing our senior indebtedness and renegotiating our new credit facility will allow us to focus on operations with a view to increasing revenues, improving margins and strengthening our organization,” Mr. Dougans concluded.

Financial Highlights:

Three months ended Nine months ended
($000, except unit and per unit amounts and percentages) October 1, 2005 October 2, 2004 October 1, 2005 October 2, 2004
Sales 35,504 37,125 107,680 115,769
EBITDA 1,854 2,999 7,328 11,298
Net Earnings Before Goodwill and Trademark Impairment Charge 412 1,251 2,643 5,888
Net Earnings per Unit (diluted) Before Goodwill and Trademark Impairment Charge $0.031 $0.096 $0.202 $0.451
Goodwill Impairment Charge (30,000) (30,000)
Trademark Impairment Charge (1,245) - (1,245) -
Net Earnings (Loss) (30,833) 1,251 (28,602) 5,888
Net Earnings (Loss) per Unit (diluted) (2.622) 0.096 (2.432) 0.451
Distributable Cash 1,173 2,051 4,728 7,974
Distributable Cash per Fund Unit 0.100 0.174 0.402 0.678
Distributions Declared per Fund Unit 0.170 0.269 0.590 0.806
Weighted Average Fund Units Outstanding 13,069,767 13,069,767 13,069,767 13,069,767

Associated Brands Income Fund (TSX:ABF.UN), through its operating subsidiaries, is a leading North American manufacturer and supplier of private-label dry-blend food products and household products. Since beginning operations in 1985, Associated Brands has grown to become one of the three largest suppliers of a diverse range of private-label dry-blend food products in North America, producing over eleven million cases annually across multiple product categories currently sold to 44 of the 50 largest North American food retailers. Associated Brands plans to build unitholder value by leveraging its solid presence in the U.S. private-label market, expanding its product offerings to current and new customers and adding additional contract manufacturing business, and through accretive acquisitions that meet its strict operating and strategic criteria. More information can be obtained at www​.asso​ci​at​ed​brands​.com.

TorQuest Partners Inc. is a Canadian-based manager of private equity funds. Its TorQuest Partners Value Fund, L.P., with a capitalization of over $180 million, is pursuing investments in middle and later stage companies with the goal of building value through opportune acquisitions, strategic leadership, and the timely use of financial expertise. More information can be obtained at www​.torquest​.com.

Certain statements in this press release may include forward-looking” statements which involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of Associated Brands Income Fund to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this press release, such statements use such words as may”, will”, expect”, anticipate”, project”, believe”, plan”, and other similar terminology. The risks and uncertainties are detailed from time to time in reports filed by the Fund with the securities regulatory authorities in all of the provinces and territories of Canada. New risk factors may arise from time to time and it is not possible for management to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual results, performance and achievements of the Fund to be materially different from those contained in forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Except as outlined below, financial information is in accordance with Canadian generally accepted accounting principles (“GAAP”).

As used herein, EBITDA” means earnings before interest, income taxes, depreciation, amortization, and translation gains and losses arising on all monetary assets and liabilities of the Fund denominated in a foreign currency. EBITDA is not a recognized measure under GAAP. Management believes that EBITDA is a useful supplemental measure to net earnings (loss), as it provides investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes.

Distributable cash is also not a defined term under GAAP. Distributable cash is equal to net earnings before amortization, future income taxes and translation gains and losses arising from all monetary assets and liabilities of the Fund denominated in a foreign currency, less capital expenditures and debt repayments and reserves that the trustees may consider appropriate. Management believes distributable cash is a useful supplemental measure of operating performance, as it provides investors with an indication of cash available for distribution.

Investors should be cautioned that neither EBITDA nor distributable cash should be construed as an alternative to net earnings (loss) determined in accordance with GAAP as an indicator of the Fund’s performance or to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows. The Fund’s method of calculating EBITDA and distributable cash may differ from the methods by which other issuers calculate EBITDA and distributable cash and, accordingly, EBITDA and distributable cash may not be comparable to measures used by other issuers.

Associated Brands’ Third Quarter 2005 Consolidated Financial Statements and Management’s Discussion and Analysis are available on the investor relations page at www​.asso​ci​at​ed​brands​.com and on SEDAR at www​.sedar​.com.

Source: Associated Brands Income Fund