FP Resources Limited announces 2007 annual financial results of former operating company



    ST. JOHN'S, NL, March 28 /CNW/ - FP Resources Limited ("FPR"), the
amalgamated entity formed on March 14, 2008 upon the amalgamation of the
company FP Resources Limited, formerly known as FPI Limited (the "Company")
and 6916716 Canada Inc. today announced the financial results of the Company
for the year ended December 31, 2007. The Company reported net income for the
year of $78.0 million as compared to a net income of $1.9 million for the year
ended December 31, 2006. This performance reflects the combined results of the
Company's two business units: the Primary Group and the Marketing and
Manufacturing Group, as well as the gain on sale of the net operating assets
of the Company.
    The significant increase in net income is a result of the sale of
substantially all of the operating assets of the Company in 2007 (the "Sales
Transactions") resulting in a gain on the sale of the business of
$62.54 million. The Company reported a $24.7 million gain on sale of its
investment in The Seafood Company Limited and a $37.8 million gain on sale of
the Primary Group and the Marketing and Manufacturing Group net operating
assets.
    Sales revenues from operations for the year were $572.0 million, a
decrease of $180.9 million from the same period last year. Gross profit
decreased by $2.5 million to $81.1 million for the year to date compared to
the same period last year. The reduction is a result of the sale of The
Seafood Company Limited in August 2007 as well as focused and streamlined
product line rationalization in the operating divisions.
    The completion of the Sales Transactions, as described above, resulted in
the Company ceasing substantially all of its operating activities.
Accordingly, the Company underwent a restructuring transaction which included
the amalgamation with 6916716 Canada Inc. to form FPR (the "Restructuring
Transaction"). As news released on March 19, 2008, the Restructuring
Transaction is now complete. FPR now carries on the Company's business, which,
following the completion of the Sales Transactions was limited to those of an
investment holding company. As a result of this change in business the
historical operating revenue and expenses are no longer reflective of the
business.

    About FPR:

    FPR is a Newfoundland and Labrador-based investment holding company.

    For background on the Company and its former investment in its United
Kingdom subsidiary, The Seafood Company Limited, please refer to the news
releases of July 26, 2007 and August 2, 2007. For background on the Sales
Transactions, please refer to the news releases of April 30, May 2, August 24,
October 5, October 22, and December 20, 2007. For information on the
Restructuring Transactions, please refer to the news releases of February 4,
2008, March 11, 2008 and March 19, 2008. These news releases are available
through CNW Group at www.newswire.ca or through SEDAR at www.sedar.com.

    
    MANAGEMENT'S DISCUSSION AND ANALYSIS

    March 25, 2008

    This Management's Discussion and Analysis ("MD&A") contains statements and
other forward-looking information about potential future circumstances,
results, and developments related to the Company and its business. Such
statements and information are qualified in their entirety by the inherent
risks and uncertainties surrounding future expectations generally and may
differ materially from the Company's actual future results or events. There
are a number of factors that could cause results or events to differ from
current expectations. For information with respect to certain of these risks
or factors, reference should be made to the Company's Annual Information Form
("AIF") and other continuous disclosure materials filed from time to time by
the Company with Canadian securities regulatory authorities. The Company's AIF
is available through the SEDAR website of the Canadian Securities regulators
at www.sedar.com.
    The Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. This MD&A should be read in conjunction with the
Company's audited comparative consolidated financial statements as at and for
the year ended December 31, 2007, and the related notes thereto.
    All information reflected herein is expressed in Canadian dollars ("CAD")
and is determined on the basis of Canadian generally accepted accounting
principles ("GAAP"). Tabular amounts are expressed in thousands of dollars
except where otherwise noted.

    This MD&A has been prepared as of March 25, 2008.

    OVERVIEW

    FP Resources Limited ("FP" or the "Company"), formerly FPI Limited, is
continued under the Canada Business Corporations Act. The Company amalgamated
under the Canada Business Corporations Act effective March 14, 2008. Through
its subsidiary, Fishery Products International Limited, the Company operates
as an investment company. Since inception and until the completion of the sale
of substantially all of the assets of the Company (the "Sales Transactions")
on August 2, 2007 and December 20, 2007, as described below, the Company's
business was focussed primarily in the harvesting and global sourcing of raw
material for processing into both primary and value added seafood in its
primary and value added processing plants in North America and Europe. During
this time, the Company also globally sourced market-ready primary products for
marketing directly to its customers. Sales, marketing, and distribution of
products were carried on in Canada, the United States ("U.S."), Europe, Japan,
China, and Southeast Asia. The Company operated within two distinct business
units: the Primary Group and the Marketing and Manufacturing Group. The
Seafood Company Limited ("The Seafood Company"), a company based in the United
Kingdom ("U.K."), was managed as part of the international sales and marketing
of seafood products by the Primary Group and is therefore included in the
Primary Group's financial position and results.
    The completion of the Sales Transactions, as described below, resulted in
the Company ceasing substantially all of its operating activities. The
Company's business, subsequent to the completed transaction, is limited to
those of an investment holding company.

    SALE OF NET OPERATING ASSETS. The following describes each of the three
respective sales transactions completed in 2007, which consummates the sale of
substantially all of the net operating assets of the Company:

    (i)   On August 2, 2007, the Company sold its investment in The Seafood
          Company Limited to Young's Seafood Limited for proceeds of (pnds
          stlg)26.2 million (CAD $55.9 million). This transaction results
          in a $24.7 million gain. The Company availed of certain tax
          exemptions which result in the gain being treated as non-taxable
          and therefore, no tax expense is recorded on the gain. The
          net proceeds were used by the Company to reduce current levels of
          debt.  As part of the transaction, the Company provided a (pnds
          stlg)3.3 million (CAD $7.0 million) seven-year indemnity to the
          purchaser.

    (ii)  On December 20, 2007, the Company sold its harvesting and primary
          processing business, including substantially all of the Company's
          physical and resource assets in Atlantic Canada (excluding those
          assets described below as manufacturing assets) and the
          international (outside North America) seafood procurement and
          marketing business assets of the Company to Ocean Choice
          International L.P. ("OCI LP"), pursuant to the OCI purchase and
          sale agreement, for proceeds of $158.5 million in cash plus certain
          closing adjustments in the Company's favour less $5.0 million
          standby letter of credit to an escrow agent in accordance with
          the escrow agreement. As part of the transaction, the Company
          provided a $5.0 million six-month indemnity to the purchaser.

    (iii) On December 20, 2007, the Company sold its North American
          marketing and manufacturing business, including, among other
          assets, the processing facilities in Danvers, Massachusetts and
          Burin, Newfoundland and Labrador, 100% of the shares of Fishery
          Products International, Inc., the North American rights to the FPI
          brand and other brands and working capital to High Liner Foods
          Incorporated ("HLF"), pursuant to the HLF purchase and sale
          agreement, for proceeds of approximately $138.0 million subject to
          certain post closing adjustments. The HLF purchase price was paid
          as follows: (a) $83.2 million in cash of which $10.0 million is
          held in escrow by an escrow agent to secure certain obligations of
          the Company and Fishery Products International Limited (a
          subsidiary of the Company) under the HLF purchase and sale
          agreement; and (b) 3,000,000 HLF common shares and 1,200,000 HLF
          Series A shares with an estimated total value of $54.8 million. The
          Series A shares are convertible into common shares, at the option
          of the holder or issuer, at a conversion rate of 2.5 for each
          Series A share. As part of the transaction, the Company provided a
          $4.0 million six-month indemnity, and a $1.6 million two-year
          guarantee to the purchaser.

          The sale of the Primary Group's and Marketing and Manufacturing
          Group's net operating assets results in a $37.8 million gain, net
          of tax of $11.9 million.

    The Company's remaining principal assets are cash and cash equivalents and
investments, including short-term notes receivable and equity investments.
Effective December 20, 2007, the Company completed its transition from a
seafood marketing and manufacturing business to an investment holding company.
The principal business of the Company is investing the proceeds of the Sales
Transactions in equity or debt securities of other companies. The revenues and
expenditures are substantially reduced in the period following the Sales
Transactions. Further, the Company's employee base is reduced substantially,
with approximately 40 employees remaining with the Company as at December 31,
2007, the majority of which are focussing on transition of operations to new
owners.
    The effective date of the Company's name change to "FP Resources Limited"
from FPI Limited was December 21, 2007 and the Company's common shares began
trading under the new name "FP Resources Limited" on January 8, 2008. The
trading symbol on the Toronto Stock Exchange ("TSX") continues to be "FPL".
    The Company was continued under the Canada Business Corporations Act
effective March 12, 2008 and then amalgamated with 6916716 Canada Inc., a
wholly-owned subsidiary, effective March 14, 2008 to form an amalgamated
entity. The amalgamated entity is carrying on the Company's investment
business under the name "FP Resources Limited". The common shares of FP
Resources Limited were delisted from the TSX at the close of business on
March 24, 2008.
    The Company continues to be based in St. John's, Newfoundland and
Labrador, Canada.

    BUSINESS SEGMENTS. This MD&A discussion focuses on the results of the
Company's operations for its 2007 fiscal year, during which the Primary Group
and Marketing and Manufacturing Group were in operation for a significant
portion of the year. To facilitate the discussion on the Company's operations,
information on the Business Segments' business purpose, product offerings and
market channels while in operation during 2007 is discussed below.

    Marketing and Manufacturing Group. The Marketing and Manufacturing Group
managed the Company's value added processing operations, global seafood
sourcing, and culinary research and development. This business unit was also
the Company's North American sales and marketing arm, engaged in marketing
primary, value added, and globally sourced seafood products to customers
throughout Canada and the U.S.
    The Marketing and Manufacturing Group was headquartered in Danvers,
Massachusetts, and employed approximately 640 people. It operated two value
added processing facilities in North America: one in Burin, Newfoundland and
Labrador, and one in Danvers, Massachusetts. Value added processing means
adding ingredients such as breading, batter, glazes, sauces, and vegetables to
seafood, thereby enhancing value through presentation and taste. In 2006 and
2007, the Marketing and Manufacturing Group sourced less than one tenth of its
seafood raw material for value added processing from the Primary Group. The
business units transferred these products based on fair market pricing and the
best use of seafood raw material.
    The Marketing and Manufacturing Group's North American operations were
organized along two key market sectors - Away from Home and At Home - and
marketed value added, primary, and globally sourced seafood through a direct
sales force (major offices were in Danvers, Toronto, and Montreal; regional
offices throughout North America) and an extensive broker network in the U.S.
Company's Away from Home customer channels included foodservice operators in
multiple restaurant segments, broadline foodservice distributors, and
specialty seafood distributors. The Company's At Home customer channels
included supermarkets, specialty retailers, and club stores.

    The Primary Group. The Primary Group managed the Company's harvesting,
primary processing, and international sales and marketing. This Group operated
along five key product categories: groundfish, snow crab, sea scallops, cooked
and peeled coldwater shrimp (ice shrimp), and shell-on coldwater shrimp
produced on offshore freezer vessels. Included in the Primary Group's results
are the results of The Seafood Company a company based in the U.K.
    Headquartered in St. John's, Newfoundland and Labrador, the Primary Group
employed approximately 2,010 people in Atlantic Canada. The Primary Group had
five processing plants in Newfoundland and Labrador as well as a fleet of
groundfish, coldwater shrimp, and scallop vessels, and vessel service centres
in Newfoundland and Labrador and Nova Scotia. This Group marketed seafood to
customers internationally through its own sales efforts in Canada, the U.K.,
Germany, and Asia and utilized the services of the Marketing and Manufacturing
Group to distribute its products throughout North America. The Primary Group's
operations encompassed the harvesting, sourcing, processing, and marketing of
groundfish (such as flounder, sole, cod, turbot, and redfish) and shellfish
(such as coldwater shrimp, snow crab, and sea scallops) as well as pelagic
products (such as mackerel, capelin, and lumpfish). The Group's operations
included the processing of fish and shellfish into premium-quality,
market-ready products and seafood raw material for value added processing.
    In addition to its harvesting operations, the Primary Group purchased
groundfish and shellfish raw material from hundreds of independent harvesters
throughout Newfoundland and Labrador and also sourced groundfish raw material
through the Marketing and Manufacturing Group's global sourcing operations.
    The Primary Group was also involved in the global sourcing of finished
products, largely the purchase and resale of a wide variety of market-ready
seafood, including a significant volume of snow crab. Other globally sourced
products included coldwater shrimp, lobster, turbot, warmwater shrimp,
scallops, and crayfish.

    The Seafood Company. The Seafood Company was an importer, processor and
distributor of premium chilled, frozen and value added shellfish products in
the U.K. marketplace. The Seafood Company employed approximately 260 staff
operating from its sites in West Sussex and Norfolk, U.K. Its facilities
included a modern plant, cold storage facility, and office facilities at its
Cromer site in Norfolk, and a cold storage facility, plant, packing
facilities, commercial and administrative offices at its Anchor site in West
Sussex.
    The Seafood Company's operations included the sourcing, processing and
marketing of a wide range of premium shellfish including coldwater shrimp,
warmwater shrimp, lobster, crab, scallops and mussels along with a wide range
of value added seafood products.

    BUSINESS STRATEGY

    The nature and operations of the Company have changed fundamentally and
the Company has transitioned from a seafood harvesting, processing, global
sourcing and marketing business to an investment holding company. The
principal business of the Company is investing the net proceeds of the Sales
Transactions in equity and debt securities of other companies as well as
managing its remaining asset base to maximize value for its shareholders.

    FINANCIAL RESULTS

    The following is a summary of FP's consolidated financial performance for
    the year ended December 31, 2007, compared with 2006.

    Financial Performance Highlights

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    dollars in thousands, except per share amounts           2007      2006
    -------------------------------------------------------------------------
    Sales                                                 572,018   752,850
    Gross profit                                           81,078    83,551
    Net income                                             78,037     1,915
    Net income per common share
      Basic                                                  5.72      0.13
      Diluted                                                5.70      0.13
    -------------------------------------------------------------------------
    During the year ended December 31, 2007, the Company reports net income of
$78.0 million as compared to $1.9 million reported in 2006. While sales
decreased by $180.9 million year over year, gross profit remains strong,
decreasing by $2.5 million for the same period. The significant increase in
net income is a result of the sale of substantially all of the net operating
assets of the Company in 2007 for a gain on sale of business of $62.5 million
net of tax of $11.9 million. The Company reports a $24.7 million gain on sale
of its investment in The Seafood Company and a $37.8 million gain, net of tax
of $11.9 million on sale of the Primary Group and the Marketing and
Manufacturing Group net operating assets. Other, less significant, factors
contributing to the change in net income year over year are discussed in
detail in this MD&A.

    CONSOLIDATED SALES AND GROSS PROFIT

    Consolidated sales and gross profit reflect the combined results of the
Company's two business units: the Primary Group and the Marketing and
Manufacturing Group.
    Sales for the year end December 31, 2007 are $572.0 million, a decrease of
$180.9 million over the previous year's revenue of $752.9 million. The
reduction in revenue is a result of the sale of The Seafood Company in August
2007 as well as product line rationalization and a decrease in value added
sales volumes in the Marketing and Manufacturing Group.
    The Company's gross profit for the year ended December 31, 2007, is
$81.1 million as compared to $ 83.6 million in 2006, a decrease of
$2.5 million, or 3.0%. This is a result of a decrease in gross profit of
$1.4 million in the Primary Group and a decrease of $1.1 million in the
Marketing and Manufacturing Group. Gross profit as a percentage of sales is
14.2%, which is 3.1 percentage points higher than the 11.1% achieved in 2006.
Gross profit as a percentage of sales increased in both the Marketing and
Manufacturing Group and the Primary Group. The Marketing and Manufacturing
Group's gross profit of 11.5% is 1.9 percentage points higher than the prior
year and the Primary Group's gross profit of 18.9% is 5.6 percentage points
higher than that achieved in 2006. This increase is a result of a shift in
sales mix towards higher margin products for both divisions.
    Following the sale of the net operating assets of the Company,
substantially all revenue generating assets are sold and, as such, there will
be minimal operating revenue generated or costs of goods sold incurred by the
Company subsequent to December 20, 2007.

    FOREIGN EXCHANGE IMPACT ON SALES. Foreign exchange continues to adversely
impact sales throughout 2007. The Company's average effective U.S. exchange
rate in 2007 is 1.078, an overall decrease of 600 basis points from its
average effective rate of 1.136 in 2006. As the majority of the Company's
sales are denominated in U.S. dollars ("USD"), this results in an effective
reduction in sales of $19.5 million when translating U.S. dollar sales to
Canadian dollars. Further, the Company's average effective Euro exchange rate
increased from 2006, resulting in an effective gain on sales of $1.2 million
when translating Euros to Canadian dollars.

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

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                         2007                     2006
                                            Average                 Average
                                       %  Effective            %  Effective
    Currency                       Sales       Rate        Sales       Rate
    -------------------------------------------------------------------------
    U.S. dollar                     49.2      1.078         53.4      1.136
    Euro                             3.5      1.459          2.8      1.373
    Pound Sterling                  18.1      2.207         19.0      2.110
    Canadian dollar and other       29.2                    24.8
    -------------------------------------------------------------------------
                                   100.0%                  100.0%
    -------------------------------------------------------------------------

    BUSINESS SEGMENT SALES AND GROSS PROFIT

    THE MARKETING AND MANUFACTURING GROUP. The Marketing and Manufacturing
Group was responsible for sourcing customer requirements for seafood from
domestic and international supply partners and adding value to seafood through
further processing.
    The Marketing and Manufacturing Group's revenues for the year ended
December 31, 2007 are $368.0 million, a decrease of $84.9 million from the
$452.9 million in 2006. This decrease is mainly driven by a reduction of low
margin globally sourced business in the U.S. through rationalization of
certain of its product lines, in addition to lower volumes of value added
sales. The weakened U.S. dollar in 2007 also contributes to reduced sales in
the Marketing and Manufacturing Group by approximately $12.3 million. Globally
sourced product revenues are unfavorably impacted by a decrease in sales of
warmwater shrimp, king crab, and coldwater lobster. The decline in value added
product sales is primarily attributable to lower volumes of value added shrimp
products during 2007.
    Year-to-date gross profit of $42.5 million is $1.1 million lower than the
$43.6 million reported in the prior year. The currency impact of a weaker U.S.
dollar results in a negative impact on gross profit of $1.5 million on a
year-to-date basis. This fully offsets the operational improvements the Group
generated through the product rationalization and improved inventory
management processes.

    THE PRIMARY GROUP. The Company's Primary Group was responsible for
harvesting and primary processing in Canada and Europe. This business unit
sold internally harvested and processed, as well as globally sourced seafood.
The Primary Group's sales consisted of shellfish, groundfish, and pelagic
species. The results of The Seafood Company are included in the results of the
Primary Group up to and including August 2, 2007, the date that The Seafood
Company was sold.
    Sales in the Primary Group for the year ended December 31, 2007 total
$204.0 million, a $96.0 million, or 32.0%, decrease from sales of
$300.0 million in 2006. The decrease in sales is primarily a result of the
sale of The Seafood Company in the third quarter of 2007 as well as lower
procurement activity throughout the year.
    The Primary Group contributes $38.6 million towards the Company's total
gross profit for the year, which is $1.4 million lower than the $40.0 million
contributed for the prior year. Gross profit as a percentage of sales is
18.9%, representing an increase of 5.6 percentage points from the 13.3% gross
profit percentage achieved in 2006. The increase in gross profit percentage
over the prior year is associated with a shift in sales mix towards higher
margin products.

    ADMINISTRATIVE AND MARKETING EXPENSES

    Administrative and marketing expenses are $45.7 million for the year ended
December 31, 2007; a $4.6 million decrease from the $50.3 million incurred for
the year ended 2006. This decrease is primarily due to gains realized on the
revaluation of foreign denominated intercompany accounts combined with reduced
discretionary spending on selling activities. These decreases are offset by an
increase in bad debt reserve for non-trade accounts receivable, an increase in
compensation costs related to the cashless stock option feature as discussed
in financing activities within the liquidity and capital resources section, as
well as severance costs associated with the termination of substantially all
of the Company's employees effective December 20, 2007, the date of the Sales
Transactions.
    Also offsetting the decrease in administrative costs in 2007 is the
recognition of a $1.1 million contingent liability in respect of a legal claim
filed against the Company in 2007.
    Following the Sales Transactions, administrative expenditures are reduced
substantially, and relate directly to the continuing operations of the Company
as an investment holding company.

    FOREIGN EXCHANGE DERIVATIVE GAINS (LOSSES)

    As a result of the Sales Transactions, none of the Company's foreign
exchange derivative contracts as at December 31, 2007 qualify for hedge
accounting. These derivatives result in gains of $7.5 million for the year
ended December 31, 2007 as compared to losses of $1.7 million for the year
ended December 31, 2006.

    DEPRECIATION AND AMORTIZATION

    Depreciation and amortization for the year ended December 31, 2007 is
$10.1 million, a decrease of $5.2 million as compared to $15.3 million
recorded in 2006. The primary contributors to this decrease are the sale of
the Newfoundland Otter in the first quarter of 2007 as well as the disposition
of The Seafood Company on August 2, 2007. Also contributing to this decrease
is a reduction in capital expenditures during 2007. Following the Sales
Transactions, depreciation and amortization expenses are minimal as all
capital assets, with the exception of computer equipment for remaining
employees, were sold.

    INTEREST EXPENSE

    Interest expense for the year ended December 31, 2007 totals $10.2
million, a decrease of $5.1 million as compared to $15.3 million for the same
period in 2006. In the third quarter of 2007, the Company used net proceeds on
the disposition of The Seafood Company to repay a significant portion of its
long-term debt and bank indebtedness. Accordingly, interest on bank
indebtedness decreased significantly by $3.9 million as compared to 2006.
Interest on long-term debt also decreased significantly, however was largely
offset by the write off of deferred financing costs in the third quarter as a
result of debt extinguishment using net proceeds on the sale of The Seafood
Company. Further, following the Sales Transactions on December 20, 2007, all
remaining debt obligations were repaid. Deferred financing costs associated
with the extinguished debt was expensed as part of the gain on sale of net
operating assets. Following the Sales Transactions, interest expense is
minimal as all of the Company's long-term debt and bank indebtedness was
repaid.

    INCOME TAXES

    The company's income tax expense on operating income (which excludes the
net gain of $62.5 Million on Sales Transactions) increased by $2.9 million
from $4.0 million in 2006 to $6.9 million in 2007. The effective tax rate on
operating income for the year ended December 31, 2007 is 30.8% compared to an
effective rate of 67.4% for the year ended December 31, 2006. The
significantly high effective tax rate for the year ended December 31, 2006 is
the result of a $1.9 million additional income tax expense recorded to reflect
the impact of Canadian tax rate reductions on the Company's future tax assets.
    The gain on Sales Transactions for the year ended December 31, 2007, of
$62.5 million, is net of income tax of $11.9 million. The resulting effective
income tax rate on this gain is 15.9%. This rate is reflective of the fact
that certain portions of the gain on the Sales Transactions are subject to
preferential tax rates.
    As at December 31, 2007 the Company has approximately $45.0 million in
non-capital loss carry forwards, which are available to reduce future Canadian
income tax otherwise payable. Because such utilization is uncertain, the
Company has recognized the benefit of only $0.7 million of these non-capital
loss carry forwards as a future income tax asset. As well, the Company has
approximately $4.5 million in capital loss carry forwards, which are available
to reduce the tax on future Canadian capital gains. No benefit for these
capital losses has been recognized.

    OTHER ITEMS

    WORKERS TRANSITION FUND. In discussion with the Government of Newfoundland
and Labrador in relation to the Sales Transactions, as prescribed by the
Fishery Products International Limited Act: An Act Respecting the Return of
the Business of Fishery Products International to the Private Sector, as
amended (the "FPI Act"), the Company agreed to fund a $3.0 million Workers
Transition Fund. This fund is used to supplement wages of Newfoundland plant
workers and was transferred to OCI and HLF, the purchasers of the Primary
Group and the Marketing and Manufacturing Group respectively, based upon their
proportionate share of the fund liability to its employees. This is fully
provided for in the 2007 financial results.

    PENSION CURTAILMENT GAIN. A $0.6 million pension curtailment gain is
recognized in 2007 resulting from the amendment of the Primary Group and the
Marketing and Manufacturing Group defined benefit plans to provide a defined
contribution accrual from January 1, 2007 onward for all members of those
plans.

    ARBITRATION SETTLEMENT. In 2006, pursuant to a claim against the shipyard
contracted to construct the motor vessel, the Newfoundland Lynx, the Company
received the report of the arbitrator, The London Court of International
Arbitration. The Company's claim included costs for additional work and
warranty associated with the completion of the vessel and consequential direct
and indirect losses. The award, totalling $3.6 million, specified $1.5 million
as relating to the vessel completion, which was applied to the cost of the
vessel, $1.9 million for direct and indirect losses associated with the 2004
and 2005 fiscal years and interest of $0.2 million.

    GAIN ON DISPOSAL OF VESSEL. In 2006, the Company disposed of one of its
vessels, the Newfoundland Marten. A gain of $1.0 million was recognized on
disposal. This gain, in addition to gains recognized on other vessel disposals
were recorded in gain on disposal of capital assets.

    IMPAIRMENT OF CAPITAL ASSETS. During 2006, the Company recognized an asset
impairment charge of $0.4 million representing a write-down in the carrying
value of a vessel, the Newfoundland Otter, to fair value.

    LIQUIDITY AND CAPITAL RE

SOURCES Since inception, the Company has financed its cash requirements primarily through its operations, the issuance of securities, long-term debt and bank indebtedness. The recent Sales Transactions also provides a source of working capital. The Company's activities, subsequent to the Sale Transactions, are limited to those of an investment holding company. Given the significant decrease in business activity, the capital and operating financial requirements are, accordingly, substantially reduced. OPERATING ACTIVITIES. The Company's cash provided by operating activities of $57.0 million for the year ended December 31, 2007 compares to $84.1 million cash provided for the year ended December 31, 2006. The decrease in cash provided by operating activities in the year is primarily a result of the various changes in non-cash working capital balances as discussed below. As at December 31, 2007, the Company has working capital of $181.8 million and a current ratio of 5.8:1. This compares to working capital of $109.5 million and a current ratio of 1.8:1 as at December 31, 2006. The significant improvement in the Company's working capital and current ratio is a result of the Sales Transactions and is discussed in more detail below. Accounts receivable at December 31, 2007 total $11.5 million, a $68.1 million decrease over the $79.6 million at December 31, 2006. The inventory balance at December 31, 2007 is $0.5 million, a decrease of $137.1 million compared to the balance of $137.6 million at December 31, 2006. Prepaid expenses at December 31, 2007 are $0.8 million, a decrease of $3.5 million over the balance of $4.3 million at December 31, 2006. The reductions in accounts receivable, inventory and prepaid expenses are the result of the sale of substantially all of the net operating assets of the Company as previously discussed. Remaining balances relate to account balances that were not sold as part of the Sales Transactions. Accounts payable and accrued liabilities at December 31, 2007 are $36.5 million, a decrease of $16.9 million from the balance of $53.4 million at December 31, 2006. This decrease is the result of the sale of substantially all of the net operating assets of the Company, as previously discussed. Remaining at December 31, 2007 are accounts payable relating primarily to the operational costs of the Primary and Marketing and Manufacturing Groups prior to December 20, 2007 which were paid subsequent to year-end, as well as professional expenses relating to the Sales Transactions. The operating expenditures of the Company are reduced substantially following the Sales Transactions. The Company expects that its ability to generate sufficient amounts of cash as needed in the short and long-term is adequate and there are no trends, demands, commitments, events, or uncertainties that are reasonably likely to impact the position by a material amount. If the Company is not able to adequately finance its working capital requirements, there may be a material adverse effect on the Company's financial condition and results of operation. INVESTING ACTIVITIES. Cash provided by investing activities for the year ended December 31, 2007 is $258.2 million, an increase of $237.6 million as compared to $20.6 million at December 31, 2006. The significant increase in cash provided by investing activities is mainly a result of net cash proceeds of $315.4 million received on the sale of substantially all of the Company's net operating assets, as previously discussed. Proceeds on the Sales Transactions were used to invest in debt and equity securities of other companies, including the purchase of notes receivable of $45.0 million from CFFI Ventures (Barbados) Inc., bearing an annual interest rate of 12.0% maturing on March 31, 2008. Long-term investments acquired as part of the Sales Transactions include an investment in High Liner Foods Incorporated totalling $54.8 million. In 2006, the primary sources of cash inflow were $10.6 million related to premiums and funds received on foreign exchange derivative instruments, $16.0 million proceeds on disposal of a vessel, the Newfoundland Marten, offset by the Company's purchase of two new vessels totalling $5.9 million. FINANCING ACTIVITIES. Cash applied to financing activities of $162.7 million for the year ended December 31, 2007 is $57.7 million higher than the $105.0 million applied in the year ended December 31, 2006. This increase is primarily a result of the Company's extinguishment of long-term debt and bank indebtedness using proceeds from the Sales Transactions. Deferred financing costs totalling $1.6 million were expensed in 2007 as a result of debt repayment of which $0.5 million is recognized in the gain on sale of net operating assets, and $1.1 million is included in interest expense on long-term debt. Further, prepayment penalties on long-term debt totalling $0.7 million, incurred as a result of early debt extinguishment, are recognized in the gain on sale of net operating assets. FP's overall capital structure is 100% funded by shareholder's equity at December 31, 2007, compared with 60.3% as at December 31, 2006. Long-term debt (excluding current portion) at December 31, 2007 is $nil as compared to $110.9 million at December 31, 2006. This decrease results from the repayment of all long-term debt as a result of the Sales Transactions. On December 4, 2006, the Company received approval from the Toronto Stock Exchange for the renewal of its normal course issuer bid, pursuant to which the Company may purchase up to 701,806 of its common shares during the one-year period commencing December 6, 2006. This bid expired as of December 4, 2007 and the Company did not apply for a renewal. As at December 31, 2007, the Company repurchased 688,068 shares pursuant to the renewal dated December 4, 2006, and 584,968 shares in the current fiscal year. The Company had approximately 13.5 million common shares outstanding as at December 31, 2007 (December 31, 2006; 13.9 million). Pursuant to the amalgamation, all outstanding common shares of the Company were automatically deemed to have been exchanged for redeemable preferred shares of the amalgamated entity on March 19, 2008 unless a shareholder of the Company elected to receive common shares of amalgamated entity. As of March 25, 2008, there are approximately 6,589 common shares outstanding. The Company has stock-based compensation plans for directors, executives, and certain senior management. The 2000 Performance Stock Option Plan allows the Company to grant options for the purchase of up to 1,395,000 common shares. These options have a maximum term of ten years and vest according to certain pre-defined percentage increases in the market price of the Company's common shares. In the second quarter of 2007, this plan was amended in order to provide a cashless option exercise feature whereby the Company agrees to repurchase an option for a purchase price equal to the market value of the common shares of the Company less the exercise price of the option. This amendment changed the substance of the financial and equity instruments underlying this agreement, as option holders, under the terms of the amended agreement, have the ability to exercise their options, with Board approval, for cash or common shares. The ability of the holder to exercise options for cash combined with the trends of Board approval results in the Company recognizing a financial liability for those stock options outstanding as at December 31, 2007. There were no options granted under this Plan in 2007 (2006; nil). Options to purchase common shares granted and outstanding under this Plan as at December 31, 2007 are 144,200 (2006; 808,700). At December 31, 2007, the Company has 918,500 common shares that remain available for issuance under this Plan. Subsequent to year-end all outstanding options under this plan were exercised utilizing the cashless exercise feature, and the plan was terminated. The Executive Stock Option Plan allows the Company to grant options for the purchase of up to 1,000,000 common shares. In the second quarter of 2007, this plan was amended in order to provide a cashless option exercise feature whereby the Company agrees to purchase an option for a purchase price equal to the market value of the common shares of the Company less the exercise price of the option. As consistent with the 2000 Performance Stock Option Plan, as discussed above, the Company recognized a financial liability for those stock options outstanding under this plan as at December 31, 2007. There were no options granted under this Plan during 2007 (2006; nil). Options to purchase common shares granted and outstanding under this Plan as at December 31, 2007, are nil (2006; 31,300). As at December 31, 2007, the Company has 4,000 shares remaining available for issuance under this Stock Option Plan. Subsequent to year-end this plan was terminated. There are no dividends declared or paid during 2007, as consistent with 2006, as the Company suspended payment of quarterly dividends during the first quarter of 2005. Shareholders' equity totals $249.8 million as at December 31, 2007, compared with $168.2 million at December 31, 2006. CONTRACTUAL OBLIGATIONS. The Company's contractual obligations are substantially eliminated following the Sales Transactions as all operating and contractual commitments were transferred to the respective purchasers or terminated as a result of the sale of the Company's net operating assets. All long-term debt was repaid using proceeds on the Sales Transactions. The continuing Company has operating leases entered into in the normal course of business, as described in note 24 of the consolidated financial statements. SUMMARY OF RESULTS FOR THE FOURTH QUARTER ENDED DECEMBER 31, 2007 The Company reports revenue for the fourth quarter of $106.7 million, representing a decrease of $81.4 million from the $188.1 million reported in the fourth quarter of 2006. Gross profit of $19.4 million is 18.2% of sales, as compared to 12.5% of sales in the fourth quarter of 2006. The Primary Group's sales for the fourth quarter of 2007 total $26.1 million, a $51.0 million or 66.1% decrease from sales of $77.1 million in 2006. This decrease is primarily a result of the sale of The Seafood Company in August 2007 combined with a reduction in sales of primary processed product. Lower average selling prices due to market conditions combined with the strengthened Canadian dollar, results in lower sales revenue across all product lines. Reduced sales volume of primary processed product throughout the quarter is primarily attributable to decreases experienced in the groundfish species. Decreases in sales pricing on certain shellfish species as a result of market conditions that continued through the quarter also contribute to lower sales. The Marketing and Manufacturing Group's revenues for the fourth quarter of 2007 total $80.6 million, a decrease of $30.4 million from revenues of $111.0 million in 2006 including a negative exchange rate impact of $8.0 million. This decrease was driven by a reduction in sales of value added shrimp, value added groundfish and commodity items including warm water shrimp, lobster and king crab. The Marketing and Manufacturing Group's value added product revenues decreased in both Canada and the United States in the fourth quarter of 2007. Lost distribution on value added shrimp products negatively impacted the U.S. Foodservice, Club, and Grocery channels. In Canada, sales decreased 7.8% primarily due to reduced value added and commodity sales across all channels. The Company's 2007 fourth quarter gross profit of $19.4 million is $4.2 million, or 17.8%, lower than 2006. Gross profit for the fourth quarter is unfavourably impacted by the prior quarter sale of The Seafood Company which accounted for gross profit of $6.0 million in the fourth quarter of 2006. The Primary Group contributes $9.6 million toward the Company's total gross profit for the quarter, which is $3.2 million lower than the $12.8 million contributed for the fourth quarter 2006. Gross profit as a percentage of sales is 36.8% representing a 20.2 percentage point increase from the 16.6% gross profit achieved for the fourth quarter 2006. Primary processed product and globally sourced product gross profits increased this quarter over the prior year as a result of a shift in sales mix towards higher margin products. The Marketing and Manufacturing Group's gross profit of $9.8 million for the fourth quarter of 2007 is $1.1 million lower than gross profit recorded in the fourth quarter of 2006. This reduction is primarily due to a combination of lower sales volumes at improved margins from the product rationalization process and lower distribution expenses offset by raw material costs for both value added groundfish and shrimp which have increased in comparison to the prior year. The 2007 fourth quarter net income is $40.3 million as compared to a net loss of $1.8 million for the fourth quarter of 2006. In addition to increased gross profits as previously discussed, the Company's financial results for the fourth quarter of 2007 are favourably impacted by a $37.8 million gain, net of tax of $11.9 million, on the Sales Transactions on December 20, 2007. QUARTERLY FINANCIAL INFORMATON The following section provides financial data for the eight most recently completed financial quarters of the Company. This financial information is derived from the Company's unaudited interim and audited annual financial statements for each of the quarters then ended. Reference should be made to the Company's quarterly and annual report to shareholders for each such quarter for the complete financial statements and MD&A of such operating results. Summmary of Quarterly Data ------------------------------------------------------------------------- Quarter ended ------------------------------------------------------------------------- unaudited - dollars in thousands, except per Mar. 31, Jun. 30, Sept. 29, Dec. 31, share data 2007 2007 2007 2007 ------------------------------------------------------------------------- Sales $ 169,390 160,138 135,747 106,743 Net income $ 2,860 6,273 28,652 40,252 Net income per common share Basic $ 0.21 0.46 2.11 2.94 Diluted $ 0.21 0.46 2.10 2.93 ------------------------------------------------------------------------- ------------------------------------------------------------------------- unaudited - dollars in thousands, except per Apr. 1, Jul. 1, Sept. 30, Dec. 31, share data 2006 2006 2006 2006 ------------------------------------------------------------------------- Sales $ 201,780 188,454 174,493 188,123 Net income (loss) $ (2,676) 2,771 3,568 (1,748) Net income (loss) per common share Basic $ (0.18) 0.19 0.25 (0.13) Diluted $ (0.18) 0.19 0.25 (0.13) ------------------------------------------------------------------------- The Company's operations and, therefore, its sales and cash flows, are seasonally affected. Inventory levels normally fluctuate in the following manner: increasing during the late spring/early summer with the seasonal fisheries, particularly those for coldwater shrimp and snow crab; peaking in September/October with the global sourcing of warmwater shrimp for pre-holiday sales in the fall; and declining in the late fall/early winter with strong sales and slower global sourcing/harvesting activity. Sales, particularly those of value added products, are strong in the early spring, largely as a result of the Lenten period. Through the late spring and summer months, the sales mix incorporates more primary and globally sourced products, such as snow crab and lobster, as seasonal fisheries are underway. The fall and winter months are also strong periods as a result of increased sales, largely of shellfish, during the holiday season. The Company's operations can also be affected by weather in the winter months when ice and poor weather conditions impact the harvesting of fish. With sales of $201.8 million in the first quarter of 2006, the Company began the year with higher revenues than the first quarter of 2005, largely as a result of increased sales volumes of globally sourced and value added products combined in part with continued growth in globally sourced product as part of the Company's strategy to expand its international and domestic customer base. Reduced margins in the Primary Group's groundfish operations, lower sales volumes of value added and globally sourced products in the Marketing and Manufacturing Group, and significant sales promotion allowances in the Marketing and Manufacturing Group resulted in lower gross profits than in the prior year. Sales of $188.5 million for the second quarter of 2006 were lower than the second quarter sales of $203.6 million in 2005 by $15.1 million. Lower sales of globally sourced and value added products during the second quarter of 2006 in the Marketing and Manufacturing Group and lower sales of primary processed product in Primary Group due to ceased production combined with a weaker U.S. dollar, significantly contributed to this decline from the prior year. Sales promotion allowances continued to reduce margins during the second quarter of 2006 as well as higher costs due to storage and distribution expenses, as did the delay in the opening of certain fisheries within the Primary Group and the continuing negative impact of foreign exchange rates. Sales of $174.5 million in the third quarter of 2006 were $31.7 million lower than third quarter sales of $206.2 million in 2005. Lower sales of globally sourced and value added products in the Marketing and Manufacturing Group, lower sales of primary processed product and globally sourced sales in Primary Group combined with negative foreign exchange rate impact were the primary factors contributing to the decrease from the prior year. Further, the reduction in sales and increase in gross profit was aligned with management's strategic plan to focus on profitability. Throughout 2006, the Company conducted a detailed evaluation of its customers and product portfolios, and concentrated on efforts to maximize returns. For the fourth quarter of 2006, the Company continued to focus on improved profitability. It reported sales of $188.1 million, a decrease of $51.1 million from the same period in 2005. Also contributing to the reduction of sales was the negative impact of exchange rates and the reduced sales and production of primary processed product which continued to influence the Company's results. With sales of $169.4 million in the first quarter of 2007, the Company began the year with lower revenues than the first quarter of 2006, largely as a result of decreased sales volumes of globally sourced and value added products and increased sales promotion allowances as the Company continued with its product rationalization initiative. Higher sales with significantly improved margins in the Primary Group's operations, offset by lower sales volumes of value added and globally sourced products in the Marketing and Manufacturing Group, resulted in higher gross profits than in the prior year. Sales of $160.1 million for the second quarter of 2007 were lower than the second quarter sales of $188.5 million by $28.4 million. Sales of Primary Group products and Marketing and Manufacturing Group products during the second quarter of 2007 were lower than sales of these same products during the second quarter of 2006, again as result of the Company's product rationalization strategy. Sales in the third quarter of 2007 were $135.7 million, $38.8 million below the 2006 comparable sales of $174.5 million. During the third quarter, the Company sold The Seafood Company which resulted in $19.3 million of the year over year shortfall in sales. A gain on sale of investment in The Seafood Company of $24.7 million was realized. Excluding the impact of the disposition, sales decreased by $20.0 million in the Marketing and Manufacturing Group from the third quarter of 2006, which was primarily a result of the product rationalization strategy. The Company's sales of $106.7 million for the fourth quarter of 2007 represents a decrease of $81.4 million from the fourth quarter of 2006. Sales of The Seafood Company during the last quarter of 2006 account for $48.7 million of the variance. The negative exchange rates continued to impact results into the fourth quarter of 2007. The Marketing and Manufacturing Group's North American sales of both value added and globally sourced product decreased significantly from the fourth quarter of 2006 as a result of lost distribution and the product rationalization strategy. The sale of the net operating assets and operations of the Primary Group and Marketing and Manufacturing Group in December 2007, results in a $37.8 million gain, net of tax of $11.9 million during the quarter. FINANCIAL INSTRUMENTS Up until the sale of its net operating assets on December 20, 2007, the Company used financial derivatives to manage its foreign currency and interest rate exposures. The purpose of these hedges was to provide an element of stability to cash flow in a volatile environment. The Company formally documented all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company had assessed and documented the effectiveness of its hedging relationships in accordance with the requirements of Canadian Institute of Chartered Accountants ("CICA") CICA Handbook Section 3865, Hedges. The Company periodically entered into forward foreign exchange contracts and option agreements to buy or sell various foreign currencies in order to manage its exposure to exchange rate fluctuations. The Company periodically entered into interest rate swap agreements to hedge the impact of rate changes on bank indebtedness and long-term debt. The terms of these contracts matched the terms associated with the underlying debt instruments. These contracts were used to fix the interest rates on the variable rate debt. Interest paid or received under such swap contracts was recognized over the life of the contracts as an adjustment to interest expense. As these instruments qualified for hedge accounting treatment, any unrealized gains or losses resulting from market movements were not recognized in the financial statements until maturity of the underlying financial instruments. All derivative instrument contracts are with banks listed on Schedule I to the Bank Act (Canada). On December 20, 2007, the Company sold its net operating assets of the Primary Group and the Marketing and Manufacturing Group, resulting in an ineffective hedge relationship on its foreign exchange and interest rate swap contracts. As such, the Company had no derivative financial instruments that qualify for hedge accounting as at December 31, 2007. All derivative financial instruments outstanding at the end of the year are, therefore, marked-to-market with the gain and loss recognized in income. In the months following the Sales Transactions, the Company expects to settle any outstanding derivative contracts. FOREIGN EXCHANGE. The Company prepares consolidated financial statements in CAD. See note 1 to the Company's consolidated financial statements for details. In 2007, approximately 67% of FP's consolidated sales are based in foreign currencies, with approximately 54% in USD. To a large extent, a natural hedge for movements in the USD against the CAD existed in FP's cost structure as: (i) international global sourcing of seafood products was primarily conducted in USD; (ii) a portion of the Company's long-term debt and short-term bank loans were denominated in USD; and (iii) the cost base of the Company's value added processing operations was largely in USD. However, there remained a net positive USD cash flow that impacted operating earnings as the CAD/USD exchange rate changes. The Company developed a risk management program to mitigate potential foreign currency risks. Foreign currency cash flows were permitted to be hedged to a maximum of 100%, 24 months into the future. The Company entered into foreign exchange contracts and option agreements to manage its exposure to foreign currency rate fluctuations, primarily from sales denominated in U.S. dollars, British pounds and Euros. Such contracts were formally documented and corresponded to forecasted cash flows. The derivatives were assessed to ensure they were effective in offsetting changes in the fair market value of the underlying position. Gains or losses on contracts are included in sales revenue in the period in which the underlying position occurs. In addition to the hedging of cash inflows, the Company hedged currency exposure in certain of its global sourcing operations and where there were fixed rate contracts with foreign currency provisions. The objective of these currency hedges was to preserve optimal margins. As previously discussed, none of the derivative financial instruments held by the Company as at December 31, 2007, qualify for hedge accounting. These instruments are accounted for using the mark-to-market method under which contracts are recorded at fair values in the Company's consolidated balance sheet. Changes in the consolidated balance sheet accounts result primarily from changes in the valuation of the portfolio of contracts, new transactions, and the maturity and settlement of certain contracts. The market prices used to value these transactions reflect management's best estimate considering various factors, including closing exchange and over-the-counter quotations, time value, and volatility factors underlying the commitments. Net gains and losses recognized on these derivative financial instruments in a period are separately disclosed in the Company's consolidated statements of operations. Please refer to note 25 of the Company's consolidated financial statements for a list of forward foreign exchange and option contracts outstanding at December 31, 2007. The fair market value of contracts which do not qualify for hedge accounting outstanding as at December 31, 2007, amount to a net liability of $1.1 million (2006; $9.6 million). During 2007, the Company recorded a gain of $7.5 million (2006; $1.7 million loss) related to its non-hedge contracts. The fair market value of all contracts that qualified for hedge accounting outstanding at December 31, 2006, amounted to a $1.3 million unrealized loss. The Company accounted for these contracts as fully effective hedges and no amount was included in the financial statements until the maturity of the hedge instrument. INTEREST RATE SWAP AGREEMENTS. The Company was exposed to market risk from changes in interest rates, related primarily to variable interest rates on current bank indebtedness and floating rate term debt. The Company managed its interest rate risk through interest rate swaps. The positions minimized the impact of future changes in interest rates on Canadian dollar and U.S. dollar floating rate debt. The interest rate swaps were based upon notional amounts that correspond generally to the Company's floating rate debt. The Company periodically entered into bond forwards to hedge against interest rate fluctuations during the negotiation of fixed rate term financing. The gain or loss on the bond forward is classified as either a deferred gain or deferred charge, in other assets, on the Company's consolidated balance sheets. The deferred amounts are amortized over the term to which they relate and are recorded in interest expense. Using proceeds on sale of its net operating assets, the Company repaid all long-term debt balances. As a result, all interest swap contracts became ineffective immediately. Subsequent to the Sales Transactions and before December 31, 2007, the Company settled all interest rate swap contracts, with the exception of one. The gain/loss realized upon settlement of these contracts is recorded in net income. The contract remaining at December 31, 2007 is marked-to-market with changes in fair value recorded in net income. The mark-to-market amount on outstanding contracts represent the amount to be paid by the Company if the transactions are terminated at December 31, 2007. For the year ended December 31, 2007, net interest revenue from interest rate swaps is less than $0.1 million (2006; $0.3 million expense). CREDIT RISK. In the normal course of business, the Company seeked to minimize credit risk by monitoring the financial condition of its customers and reviewing the credit history of each new trade customer. The Company was also exposed to credit risk in the event of non-performance by counterparties to its derivative financial instruments. Although collateral or other security to support financial instruments subject to credit risk was usually not obtained, customers and counterparties were of high credit quality and their credit standing or that of their guarantor was regularly monitored. As a result, losses due to customer or counterparty non-performance are not anticipated. The Company believes there are no significant concentrations of credit risk. The Company's consolidated sales result from a broad international customer base, in excess of 3,500 accounts. FP's largest customer represents approximately 13% of total sales. As a result of consolidation of large customers in recent years, the top ten customers represents approximately 44% of total annual consolidated sales. RELATED PARTY TRANSACTIONS In the normal course of business, the Company transacts with companies which have common directors and a company in which FP held an equity investment, as follows: ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Transactions Sales of product $ 130 457 Purchases of product and services 4,254 9,164 Net commissions and royalties 1,268 1,300 Interest revenue 452 - Other 109 164 ------------------------------------------------------------------------- These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. The balances outlined below are non-interest bearing and under normal credit terms, applied with unrelated parties, and arise from the transactions referred to above. These balances are included in accounts receivable and accounts payable on the Company's consolidated balance sheets. ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Balances Receivable from companies with common directors $ 7 191 Receivable from a company in which FP held an equity investment 1,311 3,007 Payable to companies with common directors 965 963 ------------------------------------------------------------------------- The Company holds notes receivable of $45.0 million from CFFI Ventures (Barbados) Inc. ("CBVI") bearing interest at 12.0% per annum, payable semi-annually, maturing March 31, 2008. Accrued interest on the notes receivable is $0.5 million at December 31, 2007. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTERNATIONAL OPERATIONS. The Company records transactions and prepares its financial statements in CAD. During the year-ended December 31, 2007, the Company maintained operations in the U.S., the U.K., and Germany, with business also conducted in other countries. As part of the Sales Transactions, the Company disposed of its wholly owned subsidiary in the U.S. which had previously been designated as a self-sustaining operation, its net operating assets in the U.K., a self-sustaining operation, and its net operating assets in Germany, an integrated operation. The remaining assets and liabilities of the Company's self-sustaining operations are translated into CAD at the year-end exchange rate. Revenues and expense items are translated into CAD at average exchange rates prevailing throughout the year. The resulting net gains and losses are accumulated in a separate component of shareholders' equity, described in the Company's consolidated balance sheet as foreign currency translation adjustment. The exchange gains and losses arising on the translation of the current monetary items of the Company's integrated operation are included in the determination of net income. Gains and losses on the translation of other foreign currency transactions are also included in the determination of net income. Given much of the Company's total revenues and expenses are transacted in currencies other than CAD, the Company is exposed to exchange rate risks. LEGAL PROCEEDINGS. In the ordinary course of business, the Company from time to time becomes involved in various claims and legal proceedings. The Company has no reason to believe that the disposition of any such current matters could reasonably be expected to have a material adverse impact on the Company's financial position, results of operations, or the ability to carry on any of its business activities. During 2006, charges were laid against the Company by the Government of Newfoundland and Labrador in relation to its export practices of Yellowtail Flounder. Management is presently not able to assess or predict the scope or outcome of these charges. Accordingly, no provision has been included on these financial statements. TAXES. The Company is subject to taxation in different jurisdictions throughout the world. The Company's future effective tax rate and tax liability are impacted by a number of factors, such as the amount of taxable income in particular jurisdictions, the tax rates in such jurisdictions, tax treaties between jurisdictions, the extent to which funds are transferred between jurisdictions and income is repatriated, and future changes in law. The tax liability for each legal entity is determined on a non-consolidated basis without regard to the taxable losses of non-consolidated affiliate entities. As a result, the Company may pay income taxes in certain jurisdictions, although on an overall basis a net loss for the period may be incurred. OTHER RISKS. As the Company sold substantially all of its assets in 2007 as a result of the sale of its operating divisions, it is no longer subject to risk associated with: - sales price volatility on its product lines; - global sourcing of groundfish; - operating within the seafood industry, a highly competitive market; and - the regulatory environment in Atlantic Canada and those regulations associated with importation and processing in North America. The Company would have been exposed to these risks throughout 2006 and 2007 up until December 20, 2007, the date of sale of substantially all net operating assets of the Company. Further, FP is no longer subject to the FPI Act, a statute of the Province of Newfoundland and Labrador, as the FPI Act was repealed upon completion of the Sales Transactions. For a detailed discussion of other risks that may impact on the Company's business and operations, reference should be made to the Company's AIF filed with Canadian securities regulatory authorities. This document is available on the SEDAR website at www.sedar.com. OFF-BALANCE SHEET ARRANGEMENTS GUARANTEES. For details pertaining to guarantees, refer to note 24 to the Company's consolidated financial statements. DERIVATIVE FINANCIAL INSTRUMENTS. For details pertaining to derivative financial instruments refer to the section entitled "Financial Instruments" in this MD&A. LETTERS OF CREDIT. For details pertaining to letters of credit, refer to note 24 to the Company's consolidated financial statements. CHANGES IN ACCOUNTING POLICIES INVESTMENT COMPANIES. Effective December 20, 2007, the date of sale of substantially all of the Company's assets, the Company adopted the recommendations of the CICA Accounting Guideline 18 (AcG-18) "Investment Companies", as Management determined, at that time, that the Company meets the definition of an investment company for accounting purposes. Accordingly, the Company's investments are recorded at fair value with changes in fair value recognized in net income in the period in which the change occurs. The fair value is estimated based on readily available market information in combination with the En Bloc valuation approach. Investments with no quoted market value in an active market are recorded at cost. FINANCIAL INSTRUMENTS-RECOGNITION AND MEASUREMENT, HEDGES AND COMPREHENSIVE INCOME. On January 1, 2007, the Company adopted, on a retroactive basis without restatement, three new accounting standards that were issued by the CICA: Handbook Section 3855, Financial Instruments - Recognition and Measurement; Handbook Section 1530, Comprehensive Income; and Handbook Section 3865, Hedges. These standards, and the impact on the Company's financial position is discussed in note 3 to the Company's consolidated financial statements. FUTURE CHANGES IN ACCOUNTING POLICIES The Company is currently evaluating the following proposed guidelines of the CICA: CAPITAL DISCLOSURES. In December 2006, the CICA issued Section 1535 - Capital Disclosures, which establishes standards for disclosing information about an entity's objectives, policies, and processes for managing capital, as well as quantitative data about capital and compliance with capital requirements. This Section will apply to interim and annual financial statements relating to the Company's fiscal year beginning on October 1, 2007. The Company is currently evaluating the implications of this Section. FINANCIAL INSTRUMENTS DISCLOSURES. In March 2007, the CICA issued Section 3862 - Financial Instruments - Disclosures ("Section 3862") and Section 3863 - Financial Instruments - Presentation ("Section 3863"). Section 3862 will be harmonized with International Financial Reporting Standard 7 - Financial Instruments: Disclosure and replaces the existing disclosure requirements contained in Section 3861 - Financial Instruments - Disclosure and Presentation ("Section 3861"). Section 3862 places emphasis on disclosure of risks associated with recognized and unrecognized financial instruments and how these risks are managed. Disclosures surrounding concentration, credit, liquidity and price risk are simplified. Section 3863 carries forward the existing presentation requirements contained in Section 3861. These Sections will apply to interim and annual financial statements relating to the Company's fiscal year beginning on October 1, 2007. The Company is currently evaluating the implications of these Sections. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS). In May 2007, the CICA published an updated version of its "Implementation Plan for Incorporating International Financial Reporting Standards ("IFRS") into Canadian GAAP". This plan includes an outline of the key decisions that the CICA will need to make as it implements the Strategic Plan for publicly accountable enterprises that will converge Canadian generally accepted accounting principles with IFRS. In February 2008, the Canadian Accounting Standards Board confirmed 2011 as the official changeover date for publicly listed Canadian companies to start using IFRS. IFRS will apply to interim and annual financial statements relating to the Company's fiscal year beginning on January 1, 2011. The Company is currently evaluating the implications of adopting IFRS. DISCLOSURE CONTROLS AND PROCEDURES Under the supervision and participation of Management, including the Chief Financial Officer of the Company, the Executive Vice President and Chief Operating Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings ("MI 52-109"), as of December 31, 2007. As the Company did not have an individual designated as Chief Executive Officer of the consolidated Company at such date, the Executive Vice President and Chief Operating Officer have filed the Chief Executive Officer's Form 52-109F1 for the purposes of MI 52-109. Based on that evaluation, such officers concluded that the Company's disclosure controls and procedures are effective in making known to them material information relating to the Company and its consolidated subsidiaries required to be disclosed in the reports filed or submitted under MI 52-109. Such officers certified the appropriateness of the financial disclosures in our annual filings with regulators, including this MD&A and the accompanying audited consolidated financial statements for the year ended December 31, 2007, and that they have caused disclosure controls and procedures to be designed. INTERNAL CONTROLS OVER FINANCIAL REPORTING During fiscal 2007, the Company continued the documentation and assessment of the design of internal controls over financial reporting. Similar to the evaluation of disclosure controls and procedures referred to above, the design of internal controls over financial reporting was evaluated as defined in Multilateral Instrument 52-109. Based on the results of this evaluation, the Chief Financial Officer of the Company and the Executive Vice President and Chief Operating Officer certified that the internal controls over financial reporting are effectively designed to provide reasonable assurance that its financial reporting is reliable and that the Company's consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles. Management also concluded that during the year ended December 31, 2007, no changes were made to internal controls over financial reporting that materially affect, or would be reasonably considered to materially affect, these controls. CRITICAL ACCOUNTING ESTIMATES The preparation of the Company's consolidated financial statements in accordance with Canadian GAAP requires Management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the period, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, Management reviews its estimates. Underlying estimates and assumptions are based on historical experience and other factors believed by Management to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ materially from these estimates. The following accounting policies require Management's significant judgments and estimates regarding matters that are highly uncertain. A change in these estimates may have a significant impact on the Company's consolidated financial statements. As such, these estimates are considered critical. The following assessment of critical accounting estimates is not meant to be exhaustive. These estimates and assumptions are subject to change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. The Company may realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies. CAPITAL ASSET AMORTIZATION. The Company's capital assets are carried at cost less accumulated amortization. Interest on debt incurred to finance the construction of a capital asset is included in the cost of the asset during the construction period. Amortization of capital assets is provided on a straight-line basis over their estimated useful lives. Management determines the useful life based on prior experience with similar assets. Assessing the reasonableness of the estimated useful lives of capital assets requires judgment and is based on currently available information. Changes in circumstances, such as technological advances, changes to the Company's business strategy or changes in the Company's capital strategy, may result in the actual useful lives differing from the Company's estimates. A change in the remaining useful life of an asset will affect the amortization rate used to amortize the asset and thus affect amortization expense as reported in the Company's results of operations. All capital assets, with the exception of computer equipment totalling $0.1 million, were sold as part of the Sales Transactions. IMPAIRMENT OF LONG-LIVED ASSETS. An impairment loss is recognized on a long-lived asset when its carrying value exceeds the total undiscounted cash flows expected from its use and disposition. The amount of the loss is determined by deducting the asset's fair value (based on discounted cash flows expected from its use and disposition) from its carrying value. The Company believes that accounting estimates related to impairment assessments are critical accounting estimates because: (i) they are subject to significant measurement uncertainty and are susceptible to change as Management is required to make forward-looking assumptions regarding market demand and pricing, cost of production, transportation costs, taxes and overhead costs, and (ii) any resulting impairment loss could have a material impact on the Company's consolidated income statement and the reported amount in the Company's consolidated balance sheet. All long-lived assets were sold as part of the Sales Transactions. For further details pertaining to the Company's impairment assessments during 2006 and 2007, refer to the section entitled "Other items" of this MD&A. INVENTORY VALUATION. The Company records a provision to reflect Management's best estimate of the net realizable value of inventory as at each consolidated balance sheet date. The Company reviews its inventory value in conjunction with its review of margins, aging of inventory, quality issues and overall inventory levels. The Company assesses the actual profit margins across the various inventory categories as compared to normal profit margins and determines the need for specific allowances. Management reviews the entire provision, to assess whether, based on economic conditions, it is adequate. At December 31, 2007, the reserve against inventory is less than $0.1 million (2006; $2.7 million). All inventory, with the exception of $0.5 million in crab inventory, was sold as part of the Sales Transactions. REVENUE RECOGNITION - SALES ALLOWANCES. The Company provides for estimated customer marketing costs including volume rebates, buying group rebates, and various other trade marketing costs. Sales allowances comprise a variety of customer spending/distributor incentives that serve to promote the movement of product through the channels of distribution. The Company utilizes internal software systems to calculate a liability against each sales transaction with a customer based on the programs in effect with the customer/distributor/broker. The volume of activity generates the level of the sales allowance. The utilization of demonstrations and coupons is an integral component of the Company's sales strategy. A pre-approved demonstration schedule is established with an agreed cost per location. Based on this information, an accrual is calculated. This accrual is primarily event related, with the remaining balance based on volume. Conversely, if a coupon is utilized, then an accrual can be established based upon best estimates and existing sales trends. The Company has considerable experience and history that allow a reasonable assessment of such estimates. As part of the Sales Transactions, accrued sales allowances were transferred to the purchasers. PENSIONS AND OTHER POST-RETIREMENT BENEFITS. The Company has retirement plans that provide for defined benefits for all non-unionized employees other than certain employee groups in the U.S., Canada and Europe who are members of defined contribution plans. The defined benefit plans are funded pension plans. The Company measures its benefit obligations and the fair value of plan assets as at October 31 of each year. Throughout 2007, the Company made substantial changes to its defined benefit and defined contribution plans, as outlined below: - Effective December 31, 2006, the Company amended certain of its Canadian defined benefit pension plans, in particular the Primary Group and Marketing and Manufacturing Group plans, to provide a defined contribution accrual from January 1, 2007 onward for all members of those plans. The members of these plans were given a one-time option to convert accrued defined benefits under these plans to an opening balance in the new defined contribution provisions. As the plan amendments curtailed defined benefit accrual starting in 2007, a curtailment gain was recognized in the year. This gain was offset against the Company's unamortized loss as at January 1, 2007. The settlement of the converted defined benefit obligation will be recognized once approval to convert has been received from the Newfoundland and Labrador Superintendent of Pension. - Effective December 20 2007, entitlement to post employment health and dental benefits ceased for all active and retired employees. Post retirement health benefits for eligible retirees have been transferred to the Government of Newfoundland and Labrador and an amount of $1.7 million was deposited in an Escrow Account to cover the transfer of liability in respect of the retirees. - The Company's pension plans were not sold as part of the Sales Transactions and, as such, pension accrual ceased for most employees terminated on December 20, 2007. Some employees continue to accrue pension as a result of employment continuation and/or salary continuance arrangements with the Company. The cessation of pension accrual will result in further settlements of the pension plans' liabilities in future years. - Effective December 31, 2007, as the result of an agreement between the Company and the Government of Newfoundland and Labrador, members of the Supplemental Executive Retirement Plan ("SERP") were provided with a cash settlement option in lieu of a retirement pension in monthly pay or a deferred pension. The cash settlement options will be funded by assets held in an Retirement Compensation Trust Fund and the Canada Revenue Agency (CRA). Cash Settlements will be paid to the SERP members as per the rules of the plan and as permitted by CRA. MEASUREMENT. The Company performs a valuation of the defined benefit plans at least every three years to determine the actuarial present value of the accrued pension and other retirement benefits. The cost of pensions and other post-retirement benefits earned by employees is actuarially determined using the projected benefit method prorated on services and Management's best estimates of expected plan investment performance, salary escalation, retirement ages of employees, and expected health care costs. While the Company's Management believes that these assumptions are reasonable, differences in actual results or changes in assumptions could materially affect employee benefit obligations and future net benefit plans costs. The two most significant assumptions used to calculate the net employee benefit plan costs are the discount rate used to determine the actuarial obligation of the plan and the expected long-term rate of return on plan assets. Discount Rate. The Company determines the appropriate discount rate at the end of each year. The discount rate was 5.75% at December 31, 2007, as compared to a rate of 5.25% at December 31, 2006. This rate is determined based on Corporate AAA/AA long-term bond rates. The table below shows the impact on the net benefit plan expense, for the year ended December 31, 2007, resulting from a 0.25% increase and a 0.25% decrease in the discount rate. Expected Long-Term Rate of Return on Plan Assets. The Company assumes a rate of return on plan assets of 7.5%. Over the long-term, the actual rate of return has, on average, been in excess of this amount. The table below illustrates the impact on the net benefit plan expense for the year ended December 31, 2007, of a 0.25% increase and a 0.25% decrease in the expected long-term rate of return on plan assets. Sensitivity of Assumptions on Net Employee Benefit Plans Cost ------------------------------------------------------------------------- Rate Change Impact on Net Employee Benefit Plans Cost ------------------------------------------------------------------------- 0.25% 0.25% unaudited - in thousands Increase Decrease ------------------------------------------------------------------------- Discount rate $ (2) 2 Expected rate of return on plan assets 65 (96) ------------------------------------------------------------------------- FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS. The Company utilizes financial derivatives to manage its foreign currency and interest rate exposures. For details pertaining to derivative financial instruments refer to the section entitled "Financial Instruments" in this MD&A. The Company discloses the estimated fair value of open hedging contracts as at the end of a reporting period. The Company writes foreign currency options. These securities, which according to GAAP do not act as a fully effective hedge, and which mature over a short period of time, are stated at estimated quoted market prices. The estimate of fair value for interest rate and foreign currency hedges is determined primarily through quotes from financial institutions. SELECTED ANNUAL INFORMATION The following section provides historical financial data for the Company's three most recently completed financial years. This financial data is derived from the Company's audited consolidated financial statements as at and for the years ended December 31. Reference should be made to the audited financial statements, notes thereto and accompanying MD&A of such operating results. Historical Financial Data ------------------------------------------------------------------------- in thousands, except per share amounts 2007 2006 2005 ------------------------------------------------------------------------- Sales $ 572,018 752,850 833,661 Net income (loss) 78,037 1,915 (10,478) Net income (loss) per common share Basic 5.72 0.13 (0.70) Diluted 5.70 0.13 (0.70) Total assets 287,293 421,770 538,076 Total long-term financial liabilities - 110,909 93,973 Dividends declared per share - - 0.05 ------------------------------------------------------------------------- Decreased sales in 2007, are reflective of the Company's continued focus throughout the year on reducing the procurement and sale of lower margin products. With this objective in mind, the Marketing and Manufacturing Group experienced lower sales of both globally sourced and value added products. Also contributing to a reduction in sales revenue is the appreciation of the Canadian dollar. The Primary Group's sales of globally sourced and value added product decreased primarily due to the disposal of The Seafood Company in the third quarter of 2007, as well as a decrease in sales of primary processed product. The higher sales revenues in 2005 reflected a continued trend, at the time, of increasing revenues in the Marketing and Manufacturing Group, attributable to increased sales volumes in both globally sourced and value added products. The decline in sales in 2006, as compared to 2005, reflected the Company's focus throughout that year on reducing the procurement and sale of lower margin products. In 2005, the Company also acquired 100% of the outstanding shares of The Seafood Company. This acquisition significantly contributed to the Company's sales during both 2005 and 2006. Net income for the year was significantly impacted by the disposition of the operating assets of the Primary Group, the Marketing and Manufacturing Group and The Seafood Company during 2007. The sale of these businesses resulted in a gain of $62.5 million, net of tax of $11.9 million, during the year. Although net income increased in 2007, the Company's results continued to be significantly impacted by the appreciation of the Canadian dollar against the Pound Sterling, Euro, and U.S. dollar as it was in 2005 and 2006. Further impacting net income for 2006 was the $2.1 million arbitration settlement recognized in the fourth quarter in relation to the delayed commencement of operation of the Newfoundland Lynx in 2004 and 2005, as previously discussed. Furthermore, an asset impairment charge of $0.5 million was recognized during the year, mainly representing a write-down in the carrying value of a vessel, the Newfoundland Otter, to fair value. The Company's financial results for 2005 were significantly impacted by charges of $1.8 million for the settlement of certain plant closure obligations. The Company also expensed $1.3 million of costs related to an income trust transaction involving its Marketing and Manufacturing Group segment, which was terminated. An asset impairment charge of $2.9 million was also recognized, which represented a write-down in the carrying value of primary processing facility to fair value. There were also significant investments made in plant equipment and renovations during 2005 and 2006, however, the Company's increase in total assets in 2005 was primarily the result of the acquisition of The Seafood Company. The total assets of the Company have decreased from $421.8 million at December 31, 2006 to $287.3 million at December 31, 2007, as the Company completed the sale of the operating assets of the business and became an investment holding company. A portion of the proceeds from disposition has been used to retire debt of the Company. The remaining assets are held as cash and investments. Lower long-term financial liabilities in 2005 reflect a lower expenditure on capital asset additions in the year. The acquisition of The Seafood Company was financed through short-term bank indebtedness. The Company experienced a significant increase in long-term financial liabilities in 2006 as a result of its refinancing of its short-term credit facility used to finance the acquisition of The Seafood Company. Using net proceeds on the Sales Transactions, the Company repaid all long-term debt and bank indebtedness in 2007. SUBSEQUENT EVENTS RESTRUCTURING TRANSACTION. On March 11, 2008, at a special meeting of the shareholders of the Company, the shareholders approved proceeding with a restructuring transaction (the "Restructuring Transaction") that will enable shareholders to receive a cash amount of $17.19 per share or, at their election, to continue their investment in the Company in its new form as an investment holding company. The Company was continued under the Canada Business Corporations Act effective March 12, 2008 and then amalgamated with 6916716 Canada Inc., a wholly-owned subsidiary, effective March 14, 2008 to form an amalgamated entity. The amalgamated entity is carrying on the Company's investment business under the name "FP Resources Limited". The common shares of FP Resources Limited were delisted from the TSX at the close of business on March 24, 2008. The Company had approximately 13.5 million common shares outstanding as at December 31, 2007 (December 31, 2006; 13.9 million). Pursuant to the amalgamation, all outstanding common shares of the Company were automatically deemed to have been exchanged for redeemable preferred shares of the amalgamated entity on March 19, 2008 unless a shareholder of the Company elected to receive common shares of amalgamated entity. As of March 25, 2008, there are approximately 6,589 common shares outstanding. NOTE RECEIVABLE. On January 31, 2008 the Company's notes receivable from CVBI matured at which time the principal plus accrued interest of $45,899,000 was rolled into another note receivable maturing on March 31, 2008. On February 7, 2008, the Company purchased an additional $10,800,000 note receivable from CVBI bearing interest at a rate per annum equal to 12.0%, payable semi-annually and annually, maturing on March 31, 2008. CREDIT FACILITIES. On March 5, 2008 the Company entered into a credit facility with CIBC Commercial Banking with a maximum credit limit of $8,756,000 secured by cash collateral. This facility will be used to secure letters of credit and foreign exchange contracts. On March 11, 2008, the Company terminated its syndicated credit facility with CIT Business Credit Canada Inc. STOCK-BASED COMPENSATION PLANS. Subsequent to year-end all outstanding options under the Company's 2000 Performance Stock Option Plan were exercised utilizing the cashless exercise feature. On February 12, 2008, the Company cancelled its 2000 Performance Stock Option Plan and Executive Stock Option Plan. OUTLOOK FOR 2008 The Company and its business and operations are subject to a number of risks and uncertainties. During the year the nature and operations of the Company have changed fundamentally and the Company has transitioned to an investment holding company. The principal business of the Company is investing in equity and debt securities of other companies as well as managing its remaining asset base to maximize value for its shareholders. Risks and uncertainties associated with the Company's new business strategy as an investment company are described in detail in the Company's AIF filed with the Canadian securities regulatory authorities. INVESTOR INFORMATION Financial and related information about the Company, including annual and quarterly reports, annual information forms, and press releases are available electronically on the Internet through SEDAR at www.sedar.com. CONSOLIDATED FINANCIAL STATEMENTS MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING The accompanying consolidated financial statements were prepared by Management in accordance with Canadian generally accepted accounting principles, consistently applied, and include certain amounts based upon Management's best estimates and judgments. Any financial information contained elsewhere in the Annual Report conforms to the financial statements. Management is responsible for developing and maintaining the necessary systems of internal controls to provide reasonable assurance that transactions are authorized, assets safeguarded, and that the financial records form a reliable base for the preparation of accurate and timely financial information. The Board of Directors has established an Audit Committee, composed of three directors who are not officers or employees of the Company, to ensure that Management fulfills these responsibilities. The Audit Committee periodically meets privately with Management and the Company's external auditors to ensure that their respective responsibilities are properly discharged with respect to financial statement presentation and disclosure and recommendations on internal control. The Company's external auditors, Ernst & Young LLP, have audited the Company's consolidated financial statements in accordance with Canadian generally accepted auditing standards and their report follows. The external auditors have full unrestricted access to the Audit Committee to discuss their audit and their related findings as to the integrity of the financial reporting process. ON BEHALF OF THE COMPANY: (signed) (signed) Graham M. Roome Beverley A. Evans Executive Vice President and Chief Financial Officer Chief Operating Officer March 25, 2008 ERNST & YOUNG AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of FP Resources Limited (formerly FPI Limited) as at December 31, 2007, and 2006, and the consolidated statements of operations, retained earnings, comprehensive income, accumulated other comprehensive loss and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2007, and 2006, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. St. John's, Canada (signed) March 25, 2008 Chartered Accountants CONSOLIDATED BALANCE SHEETS As at December 31, ------------------------------------------------------------------------- dollars in thousands 2007 2006 ------------------------------------------------------------------------- Assets (note 1) Current assets Cash and cash equivalents (note 5) $ 161,452 9,103 Notes receivable (note 6) 45,000 - Accounts receivable (notes 7 and 26) 11,496 79,573 Inventories (note 8) 459 137,649 Prepaid expenses 840 4,269 Future income tax assets (note 20) 100 3,644 Derivative assets (note 3) - 475 Capital assets held for resale (note 9) - 10,647 ------------------------ Total current assets 219,347 245,360 Capital assets (note 9) 118 133,285 Future income tax assets (note 20) 123 12,837 Goodwill (note 10) - 10,447 Intangible assets (note 10) - 5,866 Investments (note 12) 55,943 - Other assets (note 13) 11,762 13,975 ------------------------ $ 287,293 421,770 ------------------------------------------------------------------------- Liabilities and Shareholders' Equity (note 1) Current liabilities Bank indebtedness (note 14) $ - 61,046 Accounts payable and accrued liabilities (note 26) 36,476 53,386 Current portion of long-term debt (note 15) - 10,135 Future income tax liabilities (note 20) - 1,212 Derivative liabilities (note 3) 1,066 10,070 ------------------------ Total current liabilities 37,542 135,849 Long-term debt (note 15) - 110,909 Deferred gains and other - 1,988 Future income tax liabilities (note 20) - 4,861 ------------------------ 37,542 253,607 ------------------------ Shareholders' equity Share capital (note 16) 45,893 46,564 Contributed surplus (note 17) 61,869 67,386 Retained earnings 145,368 68,119 Accumulated other comprehensive loss (note 19) (3,379) (13,906) ------------------------ 249,751 168,163 ------------------------------------------------------------------------- $ 287,293 421,770 ------------------------------------------------------------------------- Commitments and contingencies (note 24) Subsequent events (note 29) See accompanying notes to consolidated financial statements. ON BEHALF OF THE BOARD: (signed by) (signed by) Rex C. Anthony Stan W. Spavold Chair, Board of Directors Director CONSOLIDATED STATEMENTS OF OPERATIONS (note 1) Years ended December 31, ------------------------------------------------------------------------- dollars in thousands, except per share amounts 2007 2006 ------------------------------------------------------------------------- Sales $ 572,018 752,850 Cost of goods sold 490,940 669,299 ------------------------ Gross profit 81,078 83,551 Commission income 1,625 1,647 Interest income (notes 6 & 26) 572 - ------------------------ 83,275 85,198 Administrative and marketing expenses 45,712 50,342 Depreciation of capital assets 9,439 14,215 Amortization of intangible assets 657 1,057 Interest on bank indebtedness 3,831 7,704 Interest on long-term debt 6,394 7,554 Foreign exchange derivative (gain) loss (7,510) 1,726 Arbitration settlement (note 9) - (2,139) Pension curtailment gain (note 21) (572) - Gain on sales transactions (note 1) (62,521) - Workers transition fund (note 27) 3,000 - Gain on disposal of capital assets (note 9) (103) (1,136) ------------------------ Income before income taxes 84,948 5,875 Income tax expense (note 20) 6,911 3,960 ------------------------ Net income for the year $ 78,037 1,915 ------------------------------------------------------------------------- Earnings per share: Basic (note 23) $ 5.72 0.13 Diluted (note 23) $ 5.70 0.13 ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Years ended December 31, ------------------------------------------------------------------------- dollars in thousands 2007 2006 ------------------------------------------------------------------------- Retained earnings, beginning of year $68,119 66,204 Adjustment to retained earnings (net of tax of $0.2 million), beginning of year (note 3) (788) - ------------------------ Adjusted retained earnings (net of tax of $0.2 million), beginning of year 67,331 66,204 Net income for the year 78,037 1,915 Retained earnings, end of year $ 145,368 68,119 ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (note 1) Years ended December 31 ------------------------------------------------------------------------- dollars in thousands 2007 2006 ------------------------------------------------------------------------- Net income for the year $ 78,037 1,915 Unrealized gain on translating financial statements of self-sustaining foreign operations (note 19) 14,886 835 (Loss) gain on hedge of net investments in self-sustaining foreign operations, net of tax (note 19) (4,255) 924 ----------------------- Unrealized foreign currency translation gains, net of hedging activities 10,631 1,759 Unrealized gains on derivatives designated as cash flow hedges: Foreign exchange hedging instruments, net of tax 125 - Interest rate hedging instruments, net of tax 75 - Reclassification adjustment for losses included in net income: Foreign exchange hedging instruments, net of tax 754 - Interest rate hedging instruments, net of tax 74 - ------------------------ Other comprehensive income, net of tax 11,659 1,759 ------------------------ Comprehensive income $ 89,696 3,674 ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS Years ended December 31, ------------------------------------------------------------------------- dollars in thousands 2007 2006 ------------------------------------------------------------------------- Accumulated other comprehensive loss, beginning of year $ - - Adjustments to accumulated other comprehensive loss, beginning of year Cumulative adjustment on translation of financial statements of self-sustaining foreign operations (note 3) (13,906) (15,665) Cumulative adjustment on translation of financial statements of self-sustaining foreign operations -implementation of effective interest rate method (note 3) (84) - Cumulative unrealized losses on derivatives designated as cash flow hedges at January 1, 2007: Foreign exchange hedging instruments, net of tax of $0.4 million (note 3) (899) - Interest rate hedging instruments, net of tax of $0.1 million (note 3) (149) - ------------------------ Accumulated other comprehensive loss, beginning of year (15,038) (15,665) Other comprehensive income, net of tax 11,659 1,759 ------------------------ Accumulated other comprehensive loss, end of year $ (3,379) (13,906) ------------------------ ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (note 1) Years ended December 31, ------------------------------------------------------------------------- dollars in thousands 2007 2006 ------------------------------------------------------------------------- Operations Net income $ 78,037 1,915 Add (deduct) items not affecting cash Depreciation 10,096 15,272 Amortization of transaction costs 2,784 1,509 Future income tax 3,787 (1,187) Net gain on disposal of capital assets (103) (1,136) Net gain on sales transactions (62,521) - Foreign exchange derivative gain (7,510) 1,726 Pension curtailment gain (572) - Stock based compensation (567) 237 Impairment of capital assets - 464 Changes in non-cash working capital balances (note 28) 32,128 66,948 Deferred gains on terminated forward contracts - (2,781) Foreign currency translation adjustments 716 821 Accrued benefit asset 696 299 ------------------------ Cash provided by operating activities 56,971 84,087 ------------------------------------------------------------------------- Investing - Additions to capital assets (2,561) (6,638) Proceeds from disposal of capital assets 10,832 16,338 Proceeds from sales transactions 315,423 - Increase in mortgages receivable (77) (200) Decrease in deferred revenues (27) (397) Premiums and funds received (paid) on foreign exchange derivative instruments (1,034) 10,645 Notes receivable (45,000) - Long-term investments (1,089) - Other investing activities (18,235) 843 ------------------------ Cash provided by investing activities 258,232 20,591 ------------------------------------------------------------------------- Financing Issue of long-term debt - 34,996 Repayment of long-term debt (103,600) (19,310) Change in bank indebtedness (53,493) (115,835) Issue of common shares 1,100 73 Repurchase of common shares (6,720) (4,903) ------------------------ Cash applied to financing activities (162,713) (104,979) ------------------------------------------------------------------------- Effect of exchange rate changes on cash (141) 625 ------------------------------------------------------------------------- Change in cash position during the year 152,349 324 Cash position, beginning of year 9,103 8,779 ------------------------ Cash position, end of year 161,452 9,103 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents are comprised of: Cash 5,483 9,103 Guaranteed investment certificates 116,900 - Restricted cash (note 5) 39,069 - ------------------------ $ 161,452 9,103 ------------------------------------------------------------------------- Supplemental cash flow information (note 28) See accompanying notes to consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 2007 and 2006 (tabular amounts expressed in thousands of dollars except where otherwise noted) ------------------------------------------------------------------------ 1. BASIS OF PRESENTATION AND NET OPERATING ASSET SALES TRANSACTIONS FP Resources Limited ("FP" or the "Company"), formerly FPI Limited, is continued under the Canada Business Corporations Act. The Company amalgamated under the Canada Business Corporations Act effective March 14, 2008. Through its subsidiary, Fishery Products International Limited, the Company operates an investment company. Since inception and until the completion of the sale of substantially all of the assets of the Company (the "Sales Transactions") on August 2, 2007 and December 20, 2007, as described below, the Company's business was focussed primarily in the harvesting and global sourcing of raw material for processing into both primary and value added seafood in its primary and value added processing plants in North America and Europe. During this time, the Company also globally sourced market-ready primary products for marketing directly to its customers. Sales, marketing, and distribution of products were carried on in Canada, the United States ("U.S."), Europe, Japan, China, and Southeast Asia. The Company operated within two distinct business units: the Primary Group and the Marketing and Manufacturing Group. The Seafood Company Limited, a company based in the United Kingdom ("U.K."), was managed as part of the international sales and marketing of seafood products by the Primary Group and is therefore included in the Primary Group's financial position and results. These consolidated financial statements include the accounts of the Company and those of its subsidiaries, together with the Company's proportionate share of the assets, liabilities, revenues, and expenses of a jointly controlled entity and a jointly controlled asset until December 20, 2007. Substantially all of these subsidiaries and jointly controlled assets have been disposed of as part of the Sales Transactions discussed below. The completion of the Sales Transactions, as described below, resulted in the Company ceasing substantially all of its operating activities. The Company's business, subsequent to the completed transaction, is limited to that of an investment holding company. The revenues and expenditures are substantially reduced in the period following the Sales Transactions. SALES OF NET OPERATING ASSETS. The following describes each of the three respective sales transactions completed in 2007, which consummates the sale of substantially all of the net operating assets of the Company: (i) On August 2, 2007, the Company sold its investment in The Seafood Company Limited to Young's Seafood Limited for cash proceeds of (pnds stlg)26,200,000 (CAD $55,880,000). This transaction results in a $24,667,000 gain. The Company availed of certain tax exemptions which result in the gain being treated as non-taxable and therefore, no tax expense is recorded on the gain. The net proceeds were used by the Company to reduce current levels of debt. As part of the transaction, the Company provided a (pnds stlg)3,300,000 (CAD $7,000,000) seven-year indemnity to the purchaser. (ii) On December 20, 2007, the Company sold its harvesting and primary processing business, including substantially all of the Company's physical and resource assets in Atlantic Canada (excluding those assets described below as manufacturing assets) and the international (outside North America) seafood procurement and marketing business assets of the Company to Ocean Choice International L.P. ("OCI LP"), pursuant to the OCI LP purchase and sale agreement, for proceeds of $158,500,000 in cash plus certain closing adjustments in the Company's favour less $5,000,000 standby letter of credit to an escrow agent in accordance with the escrow agreement. As part of the transaction, the Company provided a $5,000,000 six-month indemnity to the purchaser. (iii) On December 20, 2007, the Company sold its North American marketing and manufacturing business, including, among other assets, the processing facilities in Danvers, Massachusetts and Burin, Newfoundland and Labrador, 100% of the shares of Fishery Products International, Inc., the North American rights to the FPI brand and other brands and working capital to High Liner Foods Incorporated ("HLF"), pursuant to the HLF purchase and sale agreement, for proceeds of approximately $138,000,000 subject to certain post closing adjustments. The HLF purchase price was paid as follows: (a) $83,160,000 in cash of which $10,000,000 is held in escrow by an escrow agent to secure certain obligations of the Company and Fishery Products International Limited (a subsidiary of the Company) under the HLF purchase and sale agreement; and (b) 3,000,000 HLF common shares and 1,200,000 HLF Series A shares with an estimated total value of $54,840,000. The Series A shares are convertible into common shares, at the option of holder or issuer, at a conversion rate of 2.5 for each Series A share. As part of the transaction, the Company provided a $4,000,000 six-month indemnity, and a $1,600,000 two-year guarantee to the purchaser. The sale of the Primary Group and the Marketing and Manufacturing Group's net operating assets results in a $37,854,000 gain, net of tax of $11,854,000. The proceeds and the resulting net gain relating to the sale of substantially all of the assets of the Company are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash proceeds $297,540 Initial closing adjustments 17,883 ------------------------------------------------------------------------- 315,423 HLF shares 54,840 ------------------------------------------------------------------------- Net proceeds 370,263 Less: transaction costs (23,169) Less: realization of accumulated other comprehensive income (note 19) (27,912) ------------------------------------------------------------------------- 319,182 Net operating assets sold (244,807) ------------------------------------------------------------------------- Gain on sale of assets before taxes 74,375 Income tax expense 11,854 ------------------------------------------------------------------------- Net gain on sale of assets $ 62,521 ------------------------------------------------------------------------- The Company's remaining principal assets are cash and cash equivalents and investments, including short-term notes receivable and equity investments. Effective December 20, 2007, the Company transitioned from a seafood marketing and manufacturing business to an investment holding company. The principal business of the Company is investing the proceeds of the Sales Transactions in equity or debt securities of other companies. Effective December 21, 2007 the day following the Sales Transactions, the Company changed its name to FP Resources Limited. 2. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies of the Company and its consolidated subsidiary companies are set out below. These policies are in accordance with Canadian generally accepted accounting principles ("GAAP"). USE OF ESTIMATES. The preparation of the consolidated financial statements in accordance with Canadian GAAP requires Management to make estimates and assumptions based on currently available information. Such estimates and assumptions may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as at the reporting date, and the reported amounts of revenue and expenses during the fiscal period. Significant areas requiring the use of Management's estimates include capital asset amortization and impairment assessment, goodwill impairment assessment, intangible asset amortization and impairment assessment, inventory valuation, allowance for doubtful accounts, allowance for customer marketing costs, pensions and other post-retirement benefits, fair value of investments, and the fair value of derivative financial instruments. Actual results could differ from the estimates and assumptions used. CASH AND CASH EQUIVALENTS. Cash and cash equivalents are comprised of cash and guaranteed investment certificates with maturities of 90 days or less from the date of acquisition. Guaranteed investment certificates are carried at cost plus accrued interest, which approximates fair value. REVENUE RECOGNITION. Sales are recognized in income when the related products have been shipped to customers and collection is reasonably assured. Revenue is recorded net of various customer marketing costs including volume rebates, buying group rebates, and various other trade marketing costs. Investment income is recognized over time when persuasive evidence of a contract exists, the rate of return is fixed or determinable and collection is reasonably assured. COMMISSION INCOME. Commission income is recognized on sales arising from consignment arrangements entered into by the Company. INVENTORIES. Inventories of finished goods are valued at the lower of cost and net realizable value. Inventories of raw materials and supplies are valued at the lower of cost and replacement cost. Cost is determined on a weighted average basis. CAPITAL ASSETS. Capital assets are carried at cost. Interest on debt incurred to finance the construction of a capital asset is included in the cost of the asset during the construction period. Amortization of capital assets is provided on a straight-line basis over the following estimated useful lives of the assets: ------------------------------------------------------------------------- ------------------------------------------------------------------------- Years ------------------------------------------------------------------------- Buildings and wharves 8 - 50 Machinery and equipment 3 - 20 Vessels and vessel equipment 25 - 35 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Leasehold improvements are amortized over the term of the lease. VESSEL DRYDOCK COSTS. Estimated vessel drydock costs are provided for on a straight-line basis over the period to the next scheduled drydock. These provisions are recorded based on Management's best estimate of expected costs. These estimates could therefore vary by a material amount in the near term. Any variance between actual costs and amounts provided is accounted for in the consolidated statement of operations, in the period of the completion of the drydock. GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill represents the excess of the cost of investments in subsidiaries over the fair value of the net identifiable tangible and intangible assets acquired. Goodwill is not amortized. The Company reviews goodwill on at least an annual basis to ensure its fair value is in excess of its carrying value. Any impairment in the value of goodwill is charged to income in the period such impairment is determined. Other intangible assets are amortized on a straight-line basis over the expected period of benefit. Intangible assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted cash flows expected to result from the use of the asset plus net proceeds expected from the disposition of the asset (if any) are less than the carrying value of the asset. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value. EMPLOYEE FUTURE BENEFITS. For the year ended December 31, 2007 the Company has retirement plans that provide for defined benefits for all non-unionized employees, other than certain employee groups in the U.S., Canada and Europe who are members of defined contribution plans. Effective December 31, 2006, the Company amended certain of its Canadian defined benefit pension plans, in particular the Primary Group and Marketing and Manufacturing Group plans, to provide a defined contribution accrual from January 1, 2007 onward for all members of those plans. The members of these plans were given a one-time option to convert their accrued defined benefits under these plans to an opening balance in the new defined contribution provisions. Please refer to note 21 for further discussion on the changes to the Company's defined benefit and contribution plans in 2007, as well as the status of approval on proposed changes by the Newfoundland and Labrador Superintendent of Pension. The defined benefit plans are funded pension plans and provide pensions based on final average earnings. In addition, the Company sponsors defined benefit life insurance and health care plans for eligible retired employees. Obligations under the employee benefit plans are accrued as the employees render the service necessary to earn the pension and other employee future benefits. The Company's policies for accounting for future employee benefits are as follows: - The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method prorated on services and Management's best estimates of expected plan investment performance, salary escalation, retirement ages of employees, and expected health care costs. - For the purpose of calculating expected return on plan assets, those assets are valued at fair value. - Past service costs from plan amendments are amortized on a straight- line basis over the average remaining service life of employees active at the date of amendment. - The excess of the net actuarial gain (loss) over 10% of the greater of the accrued benefit obligation and the fair value of plan assets is amortized over the average remaining service life of active employees. - When a restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to settlement. INCOME TAXES. The Company follows the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities and are measured using substantively enacted tax rates and laws that are expected to be in effect in the periods in which the future tax assets or liabilities are expected to be realized or settled. The effect of a change in income tax rates on future income tax assets and liabilities is recognized in income in the period that the change occurs. Current income tax expense is recognized for the estimated income taxes payable for the current year. STOCK-BASED COMPENSATION PLANS. The Company has stock-based compensation plans for directors, executives, and certain senior managers, which are described in note 18. The Company records compensation expense upon issuance of stock options to employees calculated using the fair value method. Compensation expense recognition commences when stock options are issued, with full recognition over the estimated vesting period. The expense to be amortized over the vesting period is determined using the Black-Scholes model. The compensation cost for a stock option attributable to an employee who is eligible to retire at the grant date is recognized on the grant date if the employee can retire from the entity at any point and the ability to exercise the award does not depend on continued service. The compensation cost for a stock option award attributable to an employee who will become eligible to retire during the vesting period is recognized over the period from the grant date to the date the employee becomes eligible to retire. EARNINGS PER SHARE. The Company follows the treasury stock method of calculating diluted earnings per share. Accordingly, diluted earnings per share is computed based on the weighted average number of common shares outstanding and dilutive common share equivalents. ASSET RETIREMENT OBLIGATION. The fair value of legal obligations associated with the retirement of tangible long-lived assets is recognized in the financial statements in the period in which the liability is incurred. Upon initial recognition of a liability for an asset retirement obligation, a corresponding asset retirement cost is added to the carrying amount of the related asset, which is subsequently amortized to income over the remaining useful life of the asset. Following the initial recognition of an asset retirement obligation, the carrying amount of the liability is increased for the passage of time by applying an interest method of allocation to the liability with a corresponding accretion cost reflected in operating expenses. Revisions to either the timing or the amount of the original estimate of undiscounted cash flows are recognized each period as an adjustment to the carrying amount of the asset retirement obligation and the related long-lived asset. IMPAIRMENT OF LONG-LIVED ASSETS. Impairment of long-lived assets is assessed using a two-step approach. Under the first step, the impairment of capital assets and finite-life intangible assets is tested when events or changes in circumstances indicate that the asset's carrying value is not recoverable and may be in excess of its fair value. The carrying amount of a long-lived asset is not recoverable if its carrying value exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If the asset's carrying amount is in excess of the undiscounted cash flows, step two of the asset impairment test must be performed. Under step two of the test, impairment is measured as the excess of an asset's carrying value over fair value. Fair value is measured using a discounted cash flow approach. GOVERNMENT ASSISTANCE. Government grants received on the acquisition of capital assets are recorded in deferred gains and other and recognized in income on the same basis as the amortization of the capital assets to which they relate. RESEARCH AND PRODUCT DEVELOPMENT EXPENSES. Research costs are charged to expense as incurred. Development costs are charged to expense as incurred unless they meet generally accepted accounting criteria for deferral and amortization. In the opinion of Management, no development costs incurred to date meet all the criteria for deferral and amortization. Therefore, all development costs have been expensed as incurred. 3. CHANGES IN ACCOUNTING POLICIES INVESTMENT COMPANIES. Effective December 20, 2007, the date of sale of substantially all of the Company's assets, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants Accounting ("CICA") Guideline 18 (AcG-18) "Investment Companies", as Management determined, at that time, that the Company meets the definition of an investment company for accounting purposes. Accordingly, the Company's investments are recorded at fair value with changes in fair value recognized in net income in the period in which the change occurs. The fair value is estimated based on readily available market information in combination with the En Bloc valuation approach. Investments with no quoted market value in an active market are recorded at cost. FINANCIAL INSTRUMENTS. On January 1, 2007, the Company adopted CICA Section 3855, "Financial Instruments - Recognition and Measurement" and CICA Section 3861, "Financial Instruments - Disclosure and Presentation." These sections define the standards for recognizing and measuring financial instruments on the balance sheet and the standards for reporting gains and losses in the financial statements. Under CICA Section 3855, all financial instruments, with the exception of investments recorded in accordance with AcG-18 "Investment Companies", are classified into one of five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments and derivatives are initially recorded on the balance sheet at fair value. In subsequent periods, loans and receivables, held-to-maturity and other financial liabilities are measured at amortized cost; held-for-trading financial assets and liabilities are measured at fair value and changes in fair value are recognized in net income, and available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is settled. All derivative instruments, including embedded derivatives that are not closely related to the non-derivative host contract, are recorded on the balance sheet at fair value unless they qualify for the normal sale purchase exemption. All changes in fair value are recorded in income unless cash flow hedge accounting or hedge of a net investment in self-sustaining foreign operations is applicable, in which case changes in fair value are recorded in other comprehensive income. The Company has made the following classifications: i) Cash, cash equivalents and restricted cash are classified as held- for-trading financial assets. These assets are measured at fair value and changes in fair value are recognized in net income. ii) Trade accounts receivable are classified as loans and receivables and are measured at amortized cost. Due to the short-term nature of these assets and liabilities, the carrying amounts approximate amortized cost. iii) Fishermen mortgage receivables are classified as loans and receivables and are measured at amortized cost with interest accretion recorded in net income. These receivables have been disposed of as part of the Sales Transactions disclosed in note 1. iv) Notes receivable are classified as loans and receivables and are measured at amortized cost. Due to the short-term nature of these receivables, the carrying amounts approximate amortized cost. v) Bank indebtedness, accounts payable and accrued liabilities are classified as other financial liabilities and are measured at amortized cost. Due to the short-term nature of these assets and liabilities, the carrying amounts approximate amortized cost. vi) Long-term debt is classified as other financial liabilities and is measured at amortized cost, using the effective interest rate method. Transaction costs relating to other financial liabilities are applied against the carrying amount of the related financial liabilities, and are amortized into income using the effective interest rate method. As at January 1, 2007, the impact on the consolidated balance sheet of measuring the financial assets and liabilities using the effective interest rate method and of reclassifying the transaction costs directly attributable to the issuance of long-term debt and the acquisition of derivative liabilities are decreases of $4,057,000 in other assets, $3,084,000 in long-term debt, $73,000 in derivative liabilities, $788,000 in retained earnings, an $84,000 increase in the foreign currency translation account, and a $196,000 increase in future income tax asset. There is no material impact on the consolidated statement of operations in the current period. The Company's interest-free government loan is classified as other financial liabilities and is measured at amortized cost, using the effective interest rate method. The difference between the fair value of the loan at inception and the loan proceeds received is recorded as a government grant and is offset against capital assets. As at January 1, 2007, the impact on the consolidated balance sheet of measuring the Company's interest-free government loan at amortized cost is a decrease in capital assets and a decrease in long-term debt of $87,000. There is no material impact on the consolidated statement of operations in the current period. The Company's long-term debt and interest-free government loan have been repaid in 2007 using proceeds from the Sales Transactions. vii) Derivatives are recorded on the consolidated balance sheets at fair value with changes in fair value recorded in net income unless the derivative is designated as a cash flow hedge. Fair value of the forward exchange contracts and interest rate swap agreements reflect the cash flows due to or from the Company if settlement had taken place at the end of the period. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative are recorded in other comprehensive income. Any ineffectiveness within an effective cash flow hedge is recognized in income as it arises in the same account as the hedged items when realized. This new policy is adopted on a prospective basis with changes related to the prior fiscal year recorded in opening retained earnings or opening accumulated other comprehensive income. The impact on the consolidated balance sheet of measuring hedging derivatives at fair value at January 1, 2007 are increases in future income tax assets of $470,000, in derivative assets of $171,000, in derivative liabilities of $1,641,000, in future income tax liabilities of $48,000 and an increase in accumulated other comprehensive loss of $1,048,000. As at December 31, 2007, the Company has no derivative financial instruments that qualify for hedge accounting outstanding as a result of the Sales Transactions. The retroactive adoption of this section is completed without restatement of the consolidated financial statements of prior years. FOREIGN CURRENCY TRANSLATION. The majority of the Company's foreign subsidiary operations are classified as self-sustaining operations. Assets and liabilities are translated at exchange rates in effect at the consolidated balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. The resulting net gains or losses, together with those related to short-term and long-term borrowings in U.S. dollars ("USD") and designated as a hedge of the self-sustaining foreign subsidiary operations, are included in other comprehensive income. The Company has previously recorded these accumulated gains and losses in a separate component of shareholders' equity entitled foreign currency translation adjustment. Comparative consolidated financial statements have been reclassified to reflect the application of the new standards for foreign currency translation of self-sustaining foreign operations. The Company's foreign subsidiary sales operation based in Germany is classified as an integrated operation. Exchange gains or losses arising on the translation of the current and long-term monetary items of this operation are included in the determination of net income. Non-monetary assets and liabilities of this integrated operation are translated at historical exchange rates. There has been no change to the Company's accounting policy for integrated operations. As part of the Sales Transactions disclosed in note 1, the Company disposed of its wholly-owned subsidiary in the U.S. which had previously been designated as a self-sustaining operation. This results in crystallization of the accumulated net gains or losses recognized on the translation of the net investment in this subsidiary since inception, as disclosed in note 19. COMPREHENSIVE INCOME. On January 1, 2007, the Company adopted CICA Section 1530, "Comprehensive Income". This section describes reporting and disclosure recommendations with respect to comprehensive income and its components. Comprehensive income includes net earnings and other comprehensive income ("OCI"). OCI refers to changes in net assets from certain transactions and other events and circumstances, other than transactions with shareholders. These changes are recorded directly as a separate component of shareholders' equity and excluded from net earnings. The Company's OCI includes the foreign currency translation adjustment for its U.S. and U.K. subsidiaries that do not use the Canadian dollar as its measurement currency, the unrealized gain or loss on hedge of net investments on self-sustaining foreign operations and the change in cash flow on the effective portion of derivatives designated as cash flow hedges where the hedged item has not yet been recognized in income. The adoption of this section results in the Company presenting a consolidated statement of comprehensive income (loss) in the consolidated financial statements. HEDGES. On January 1, 2007, the Company adopted Section 3865 of the CICA Handbook, "Hedges". The recommendations of this section expand the guidelines required by Accounting Guideline 13 ("AcG-13"), "Hedging Relationships". This section describes when and how hedge accounting can be applied as well as the disclosure requirements. Hedge accounting enables the recording of gains, losses, revenues and expenses from derivative financial instruments in the same period as for those related to the hedged item. The following further outlines the Company's hedge relationships and derivative instruments: Hedging Relationships. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments. Changes in the fair value of the derivative must be highly effective in offsetting either changes in the fair value of on-balance sheet items or changes in the amount of future cash flows. Hedge effectiveness is evaluated at the inception of the hedge relationship and on an ongoing basis, both retrospectively and prospectively, using the critical terms method and quantitative statistical measures of correlation. If a hedge relationship is no longer effective, the derivative is no longer designated as a hedge. If the designated hedged item matures or is sold, extinguished or terminated, the derivative is reclassified with subsequent changes in fair value being reported in income on a mark-to-market basis. Forward Contracts and Option Agreements. The Company periodically enters into forward foreign exchange contracts and option agreements to buy or sell various foreign currencies in order to limit exposure to exchange rate fluctuations on foreign currency cash inflows and outflows. Foreign currency cash flow may be hedged up to a maximum of 100%, 24 months into the future. Gains or losses on translation of the hedge transactions are recognized in income in the same period as gains and losses on the underlying transactions are recognized. Interest Rate Risk Management. The Company periodically enters into interest rate swap agreements to hedge the impact of rate changes on bank indebtedness and long-term debt. The terms of these contracts generally match the terms associated with the underlying debt instruments. These contracts are used to fix the interest rates on the variable rate debt. Interest to be paid or received under such swap contracts is recognized over the life of the contracts as adjustments to interest expense. The Company enters into bond forward contracts to hedge against interest rate fluctuations during the negotiation of debt financing. Premiums received on bond forwards are classified as deferred gains and other on the consolidated balance sheets. Settlements paid on bond forwards are classified as deferred charges on the consolidated balance sheets. The deferred gains or deferred charges are amortized over the life of the debt to which it relates and is recorded as an adjustment to interest expense. Derivative Financial Instruments Outside Hedging Relationships. Certain derivative financial instruments held by the Company during 2006 and 2007 do not qualify as hedging instruments. These instruments are accounted for using the mark-to-market method. Under the mark-to-market method of accounting, contracts are recorded at fair value in the balance sheet. Changes in the balance sheet result primarily from changes in the valuation of the portfolio of contracts, new transactions, and the maturity and settlement of certain contracts. The market prices used to value these transactions reflect Management's best estimates considering various factors including closing exchange and over-the-counter quotations, time value, and volatility factors underlying the commitments. Net gains and losses recognized in a period are disclosed in the consolidated statements of operations. 4. FUTURE CHANGES IN ACCOUNTING POLICIES CAPITAL DISCLOSURES. In December 2006, the CICA issued Section 1535 - "Capital Disclosures", which establishes standards for disclosing information about an entity's objectives, policies, and processes for managing capital, as well as quantitative data about capital and compliance with capital requirements. This Section will apply to interim and annual financial statements relating to the Company's fiscal year beginning on October 1, 2007. The Company is currently evaluating the implications of this Section. FINANCIAL INSTRUMENTS DISCLOSURES AND PRESENTATION. In March 2007, the CICA issued Section 3862 - "Financial Instruments - Disclosures" ("Section 3862") and Section 3863 - "Financial Instruments - Presentation" ("Section 3863"). Section 3862 will be harmonized with International Financial Reporting Standard 7 - "Financial Instruments: Disclosure" and replaces the existing disclosure requirements contained in Section 3861 - "Financial Instruments - Disclosure and Presentation" ("Section 3861"). Section 3862 places emphasis on disclosure of risks associated with recognized and unrecognized financial instruments and how these risks are managed. Disclosures surrounding concentration, credit, liquidity and price risk are simplified. Section 3863 carries forward the existing presentation requirements contained in Section 3861. These Sections will apply to interim and annual financial statements relating to the Company's fiscal year beginning on October 1, 2007. The Company is currently evaluating the implications of these Sections. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS). In May 2007, the CICA published an updated version of its "Implementation Plan for Incorporating International Financial Reporting Standards ("IFRS") into Canadian GAAP". This plan includes an outline of the key decisions that the CICA will need to make as it implements the Strategic Plan for publicly accountable enterprises that will converge Canadian generally accepted accounting principles with IFRS. In February 2008, the Canadian Accounting Standards Board confirmed 2011 as the official changeover date for publicly listed Canadian companies to start using IFRS. IFRS will apply to interim and annual financial statements relating to the Company's fiscal year beginning on January 1, 2011. The Company is currently evaluating the implications of adopting IFRS. 5. RESTRICTED CASH Cash and cash equivalents include cash held in escrow and restricted cash totalling $39,069,000, in relation to: - $21,306,000 held in trust, with respect to the proceeds on the Sales Transactions, as required under the terms of the Sales Transactions. - $17,763,000 in restricted cash, including a $5,000,000 standby letter of credit as part of one of the Sale Transactions, a $2,100,000 letter of credit, and $6,000,000 of cash held as collateral relating to the Company's foreign exchange program. 6. NOTES RECEIVABLE Notes receivable represent a $45,000,000 receivable from CFFI Ventures (Barbados) Inc ("CVBI") bearing interest at a rate per annum equal to 12.0%, payable semi-annually, maturing on March 31, 2008, recorded at amortized cost. 7. ACCOUNTS RECEIVABLE ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Trade $ 6,734 65,595 Income tax 49 56 Consignment sales (note 26) 1,311 3,007 Mortgages (note 13) - 1,607 Arbitration settlement receivable (note 9) - 3,643 Other 3,402 5,665 ---------------------- $ 11,496 79,573 ------------------------------------------------------------------------- Included in accounts receivable other are various insurance claim receivables of $717,000 (2006; $1,469,000), commodity tax receivables of $941,000 (2006; $1,169,000) and miscellaneous other accounts receivable totalling $1,744,000 (2006; $3,027,000) 8. INVENTORIES ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Finished goods $ 459 106,763 Raw materials and supplies - 30,886 ---------------------- $ 459 137,649 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 9. CAPITAL ASSETS ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Buildings, wharves and land $ - 76,870 Machinery and equipment 638 135,559 Vessels and vessel equipment - 49,623 ---------------------- 638 262,052 ------------------------------------------------------------------------- Less accumulated depreciation Buildings and wharves $ - 38,254 Machinery and equipment 520 89,209 Vessels and vessel equipment - 2,264 ---------------------- 520 129,727 ------------------------------------------------------------------------- Deactivated plants, vessels and vessel equipment - 960 ------------------------------------------------------------------------- Net book value $ 118 133,285 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As described in note 1, the completion of the Sales Transactions resulted in the Company ceasing the operating activities of the Primary Group and Marketing and Manufacturing Group and accordingly the sale of substantially all of the operations and net operating assets of those business units. Capital assets were amortized throughout 2007 in accordance with the Company's policy until the completion of the Sales Transactions. The remaining capital assets represent computer equipment and are recorded at cost. Included in vessels and vessel equipment for 2006 is an amount of $5,869,000 pertaining to two vessels purchased by the Company and held in escrow as at December 31, 2006. Depreciation charges were not recognized on these vessels in 2006. These vessels were sold as part of the Sales Transactions. In December 2006, pursuant to a claim against the shipyard contracted to construct the motor vessel, the Newfoundland Lynx, the Company received the report of the arbitrator, The London Court of International Arbitration. The Company's claim included costs for additional work and warranty associated with the completion of the vessel and consequential direct and indirect losses. The award, totalling $3,643,000, specified $1,504,000 as relating to the vessel completion, which was applied to the cost of the vessel, $1,899,000 for direct and indirect losses associated with the 2004 and 2005 fiscal years and interest of $240,000. In the 2006, the Company disposed of one of its vessels, the Newfoundland Marten. A gain of $1,044,000 was recognized on disposal. Also included in the gain on disposal of capital assets in 2006 are gains on the disposition of the Triano and Ruby Elaine. As at December 31, 2006 a vessel held for resale of $10,647,000 was excluded from the above balances and had been recorded in current assets. This vessel was sold in 2007 for cash. The Company recognized an asset impairment charge in 2006 of $419,000 representing a write-down in the carrying value of this vessel to fair value. The fair values of the impaired assets are determined based on expected future discounted cash flows. 10. GOODWILL AND OTHER INTANGIBLE ASSETS GOODWILL. As described in note 1, the Company's Primary Group sold its investment in The Seafood Company Limited in 2007. Goodwill related to this investment was realized upon its sale. FINITE-LIFE INTANGIBLES ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Customer relationships - 5,321 Favourable lease terms - 545 ------------------------------------------------------------------------- ------------------------------------------------------------------------- $ - 5,866 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Customer relationships and favourable lease terms are intangible assets that have a limited life. The customer relationships intangible asset represents the underlying worth of the Company's customer relationships, the ability of customers to generate revenues beyond an initial sale, and is amortized on a straight-line basis over the expected period of benefit of six years. The favourable lease terms intangible asset represents lease terms that are more favourable than those currently available in the marketplace, and is amortized on a straight-line basis over the expected period of benefit of ten years. As described in note 1, the completion of the sale of the Primary Group's investment in The Seafood Company Limited in 2007 resulted in the transfer of its intangible assets to the purchaser. Aggregate amortization expense related to intangible assets for the year ended December 31, 2007 is $657,000 (2006; $1,057,000). 11. JOINT VENTURES JOINTLY CONTROLLED ENTITY. As described in note 1, the completion of the Sales Transactions resulted in the Company ceasing the operating activities of the Primary Group and Marketing and Manufacturing Group and accordingly the sale of substantially all of the operations and net operating assets of those business units. As part of the Primary Group Sales Transaction the Company disposed of its 25% interest in a jointly controlled entity, Katsheshuk Fisheries Limited ("KFL"). The consolidated financial statements for 2007 include the Company's proportionate share of the revenues and expenses of KFL up until December 20, 2007. The consolidated financial statements for 2006 include the Company's proportionate share of the assets, liabilities, revenues and expenses of KFL. The material elements of the Company's proportionate share of KFL are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Current assets $ - 531 Capital assets, net book value - 3,394 ---------------------- $ - 3,925 ------------------------------------------------------------------------- Current liabilities $ - 1,481 Long-term liabilities - 2,042 ---------------------- $ - 3,523 ------------------------------------------------------------------------- Sales $ 1,228 2,852 Expenses 1,313 3,188 ---------------------- Net loss $ (85) (336) ------------------------------------------------------------------------- Cash flow generated from (applied to): Operating activities $ 304 280 Investing activities $ (57) (68) Financing activities $ - (165) ------------------------------------------------------------------------- ------------------------------------------------------------------------- JOINTLY CONTROLLED ASSET. As part of the Primary Group Sales Transaction the Company disposed of its 40% ownership interest in a jointly controlled asset. The consolidated financial statements for 2007 include the Company's share of the expense pertaining to the ongoing operations and maintenance of the jointly controlled asset. The consolidated financial statements for 2006 include the Company's share of the jointly controlled assets as well as its share of liabilities and expenses. The material elements of the Company's proportionate share are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Capital assets, net book value $ - 4,420 ------------------------------------------------------------------------- Current liabilities $ - 505 Long-term liabilities - 2,283 ---------------------- $ - 2,788 ------------------------------------------------------------------------- Expenses 426 549 ---------------------- Net loss $ (426) (549) ------------------------------------------------------------------------- Cash applied to: Operating activities $ (804) (1,410) Investing activities $ - (3) Financing activities $ (66) (131) ------------------------------------------------------------------------- 12. INVESTMENTS Investments in securities that have no quoted market value in an active market are recorded at a cost of $1,103,000 (2006; $nil). Cost equates fair value as the transactions occurred during the last quarter of 2007 and are representative of the amount to be paid by knowledgeable, arms-length third parties. Investment in High Liner Foods Incorporated is recorded at fair value of $54,840,000 that was determined using readily available market information in combination with a valuation opinion of an independent third party as part of the execution of the purchase and sale agreement as discussed in notes 1 and 3. 13. OTHER ASSETS ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Accrued benefit asset (note 21) $ 7,508 7,639 Mortgages receivable - 1,526 Deferred financing costs, less accumulated amortization of $nil (2006; $2,547,000) (notes 14 and 15) - 3,984 Deferred bond forward contract costs (note 15) - 735 Deferred severance and termination costs 3,854 - Other 400 91 ---------------------- $ 11,762 13,975 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Deferred severance and termination costs represent costs associated with severing management and staff maintained during the transitional period subsequent to the Sales Transactions. These costs will be recognized in income on a rational basis throughout the remaining term of employment for those employees. Mortgages receivable, sold as part of the Sales Transactions, represented advances to independent fish harvesters and were secured by vessels. The current portion of mortgages receivable included in accounts receivable in 2006 amounted to $1,607,000. Mortgages receivable bear interest at rates that fluctuated with prime and had repayment terms of up to seven years. The carrying amount of the mortgages receivable approximated fair value based on the variable interest rates charged on the mortgages. Repayment terms for mortgages receivable were based on the Company retaining between 5 to 30 percent of the value of the vessel landings. 14. BANK INDEBTEDNESS As described in note 1, the Company used net proceeds on the Sales Transactions to repay outstanding banker's acceptance and bank operating loans in 2007 and, as such, bank indebtedness balances as at December 31, 2007 are $nil (2006; $61,046,000 bearing interest at rates ranging from 6.0% to 8.75%). The Company's credit facility, a syndicated facility with a group of lenders, is secured primarily by inventories and receivables and has a maximum credit limit of $148,000,000, subject to availability under a defined borrowing base. This credit facility bears interest at variable rates, based on the Canadian prime rate and banker's acceptance rates for Canadian dollar loans, and base rates and LIBOR rates for U.S. dollar loans. The syndicated credit facility includes a capacity for letters of credit, foreign exchange contracts, and interest rate swap contracts. Bank indebtedness denominated in foreign currencies at December 31, 2007 amounts to USD $nil (2006; USD $31,826,000) and (pnds stlg)nil (2006; (pnds stlg)8,462,000). Interest on bank indebtedness in the consolidated statements of operations includes amortization of deferred financing costs of $800,700 for the year ended December 31, 2007 (2006; $1,031,000). 15. LONG-TERM DEBT ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- 6.38% marine mortgage (2007 - USD $nil; 2006 - USD $10,523) $ - 12,262 6.23% secured bank term loan - 23,512 4.85% secured bank term loan (2007 - USD $nil; 2006 - USD $11,765) - 13,710 5.68% - 6.54% secured bank term loan - 21,302 7.74% marine mortgage - 9,303 Atlantic Canada Opportunities Agency non-interest bearing unsecured loan - 500 Secured bank term loan facility (2007 - (pnds stlg)nil; 2006 - (pnds stlg)10,686) - 24,390 Secured revolving credit facility (2007 - (pnds stlg)nil; 2006 - (pnds stlg)6,000) - 13,694 Joint venture debt (proportionate amount) - 2,371 ---------------------- $ - 121,044 Less current portion - 10,135 ---------------------- $ - 110,909 ------------------------------------------------------------------------- The Company used net proceeds on the Sales Transactions to repay long-term debt in 2007 and, as such, long-term debt balances as at December 31, 2007 are $nil. Prepayment penalties totalling $738,000 were incurred as a result of early debt extinguishment and are recorded in the gain on sale of net operating assets. Included in interest on long-term debt is the amortization of deferred gains pertaining to a bond forward in the amount of $120,000 (2006; $64,000), the amortization of deferred costs pertaining to a hedge on a long-term debt in the amount of $73,000 (2006; $132,000), and the amortization of deferred financing costs of $1,877,000 (2006; $300,000) pertaining to the credit facilities. The estimated fair value of the Company's long-term debt, including the current portion, at December 31, 2007, and 2006, is $nil and $119,993,000, respectively. Fair value is estimated based on discounting expected future cash flows at discount rates that represent borrowing rates presently available to the Company for loans with similar terms and maturities. 16. SHARE CAPITAL AUTHORIZED Unlimited number of voting common shares without par value. Unlimited number of non-voting preference shares without par value, issuable in series. ISSUED. ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Number of Number of Common Stated Common Stated Shares Capital Shares Capital ------------------------------------------------------------------------- Balance, beginning of year 13,933,753 $ 46,564 14,759,730 $ 49,292 Issued under employee and executive share purchase plans 140,800 1,277 15,085 73 Repurchased by the Company (584,968) (1,948) (841,062) (2,801) ------------------------------------------------------------------------- Balance, end of year 13,489,585 $ 45,893 13,933,753 $ 46,564 ------------------------------------------------------------------------- ------------------------------------------------------------------------- SHARE REPURCHASE. The Company acquired 584,968 (2006; 841,062) common shares pursuant to a normal course issuer bid in 2007. These shares were purchased for cancellation at an aggregate cost of $6,720,000 (2006; $4,903,000), of which $1,948,000 (2006; $2,801,000) was charged to share capital, based on the average per share amount in the share capital account at the date of purchase, and the balance of $4,772,000 (2006; $2,102,000) was charged to contributed surplus. The normal course issuer bid was not renewed in 2007. 17. CONTRIBUTED SURPLUS ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Contributed surplus, beginning of year $ 67,386 69,251 Acquisition of common shares; normal course issuance bid (4,772) (2,102) Stock option expense 51 237 Stock option liability accrual (269) - Exercise of options (527) - ---------------------- Contributed surplus, end of year $ 61,869 67,386 ------------------------------------------------------------------------- 18. STOCK-BASED COMPENSATION PLANS 2000 PERFORMANCE STOCK OPTION PLAN. Under the 2000 Performance Stock Option Plan, the Company may grant options to directors, executives and certain senior managers for up to 1,395,000 common shares. The Company has 918,500 shares remaining to be granted under this stock option plan. The exercise price of each option will be the closing market price of the common shares on the trading day immediately preceding the date of grant. These options have a maximum term of 10 years and vest as to 20% when the market price has increased 12% over the exercise price, and exceeds that level for 20 consecutive trading days, and an additional 20% of options for each additional 12% increase in the market price. Options that have not vested within five years after the date of grant will expire. In the second quarter of 2007, this plan was amended in order to provide a cashless option exercise feature whereby the Company agrees to repurchase an option for a purchase price equal to the market value of the common shares of the Company less the exercise price of the option. This amendment changes the substance of the financial and equity instruments underlying this agreement, as option holders, under the terms of the amended agreement, have the ability to exercise their options, with Board approval, for cash or common shares. The ability of the holder to exercise options for cash combined with the recent trends of Board approval, results in the Company recognizing a financial liability for those stock options outstanding as at December 31, 2007. A summary of the status of the Company's 2000 Performance Stock Option Plan as of December 31, 2007 and 2006, and changes during the years ended on those dates, is presented below. ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Options Price Options Price ------------------------------------------------------------------------- Outstanding at beginning of year 808,700 $ 8.62 1,273,200 $ 8.68 Exercised (314,500) 8.26 - - Forfeited - - (464,500) 8.77 Cancelled (350,000) 9.02 - - ----------------------------------------------- Outstanding at end of year 144,200 $ 8.46 808,700 $ 8.62 ------------------------------------------------------------------------- The options outstanding at December 31, 2007, have exercise prices ranging from $7.80 to $9.20, or $8.46 weighted average. EXECUTIVE STOCK OPTION PLAN. Under the Executive Stock Option Plan, the Company may grant options to executives and certain senior managers for up to 1,000,000 common shares. The Company has 4,000 shares remaining to be granted under this stock option plan and no options were granted under this plan in 2007. The exercise price of each option equals the market price of the Company's stock on the date of grant and the maximum term of an option is 10 years. Options to purchase shares of the Company vest as to 25% on the date of grant and 25% on each of the three succeeding anniversaries of the date of grant. In the second quarter of 2007, this plan was amended in order to provide a cashless option exercise feature whereby the Company agrees to repurchase an option for a purchase price equal to the market value of the common shares of the Company less the exercise price of the option. This amendment changes the substance of the financial and equity instruments underlying this agreement, as option holders, under the terms of the amended agreement, have the ability to exercise their options, with Board approval, for cash or common shares. The ability of the holder to exercise options for cash combined with the recent trends of Board approval, results in the Company recognizing a financial liability for those stock options outstanding as at December 31, 2007. A summary of the status of the Company's Executive Stock Option Plan as of December 31, 2007, and 2006, and changes during the years ended on those dates, is presented below. ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Options Price Options Price ------------------------------------------------------------------------- Outstanding at beginning of year 31,300 $ 6.39 41,300 $ 5.93 Exercised 31,300 6.39 (10,000) 4.79 ----------------------------------------------- Outstanding at end of year - - 31,300 6.39 ----------------------------------------------- Options exercisable at end of year - $ - 19,000 $ 5.69 ------------------------------------------------------------------------- ------------------------------------------------------------------------- There are no options outstanding at December 31, 2007. EMPLOYEE SHARE PURCHASE PLAN. During 2006, the Company cancelled the Employee Share Purchase Plan and, as such, there were no common shares issued under this plan in 2007 (2006; 5,085). There are no shares reserved under this plan at December 31, 2007 and 2006. STOCK-BASED COMPENSATION EXPENSE. During the year, the Company recorded $2,727,000 (2006; $237,000) in stock-based compensation expense. Weighted average assumptions used for grants are presented below: ------------------------------------------------------------------------- ------------------------------------------------------------------------- Assumption ------------------------------------------------------------------------- Dividend yield 0.0% Expected volatility 22.7% Risk-free interest rate 4.2% Expected life 7.5 years ------------------------------------------------------------------------- ------------------------------------------------------------------------- 19. ACCUMULATED OTHER COMPREHENSIVE LOSS Included in Accumulated Other Comprehensive Loss is the foreign currency translation adjustment which represents net gains or losses on translation of net assets of self-sustaining foreign operations, as well as, net gains or losses related to short-term and long-term borrowings in USD designated as hedges of net investments in the self-sustaining foreign operations. As part of the Sales Transactions disclosed in note 1, the Company disposed of its wholly owned subsidiary in the U.S. that was designated as a self-sustaining operation. This results in crystallization of an accumulated net loss of $35,177,000 recognized on the translation of the net investment in this subsidiary since inception and realization of an accumulated gain of $7,265,000 in relation to the Company's hedge of its net investment, as this hedge became ineffective immediately following the sale of the Company's U.S. subsidiary. The net accumulated loss of $27,912,000 is reclassified out of Accumulated Other Comprehensive Loss and is included in the gain on the Sales Transactions. 20. INCOME TAXES As discussed in note 1, the gain on sale of net operating assets of $62,521,000 is net of income tax expense of $11,854,000. The major components of income tax expense on operations, excluding those related to the gain on the Sales Transactions, are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Current $ 3,124 5,147 Future income tax recovery relating to origination and reversal of temporary differences 3,644 (1,789) Future income tax expense resulting from change in valuation allowance 143 602 ---------------------- $ 6,911 3,960 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As the Company operates in several tax jurisdictions, its income is subject to various rates of taxation. The provision for income taxes differs from the amount that would have resulted from applying the statutory income tax rates to income before taxes, excluding the net gain on the Sales Transactions, as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Amount % Amount % ------------------------------------------------------------------------- Income tax expense computed at statutory rates $8,100 36.1 $ 2,122 36.1 Effect of differing foreign tax rates (367) (1.6) (247) (4.2) Manufacturing and processing tax credit (394) (1.8) 169 2.9 Effect of future tax rate reductions - - 1,900 32.3 Change in valuation allowance 143 0.6 (602) (10.3) Permanent differences 138 0.6 198 3.4 Other tax differences (709) (3.1) 420 7.2 ------------------------------------------------------------------------- $6,911 30.8 $ 3,960 67.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The tax effects of temporary differences that give rise to significant portions of the future income tax assets and future income tax liabilities at December 31, 2007, and 2006 are presented below. ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Future income tax assets Capital assets $ - 16,765 Accounts payable and accrued liabilities 1,391 1,332 Derivatives - 2,607 Loss carryforwards 16,974 1,774 Other 485 2,782 ---------------------- 18,850 25,260 Less valuation allowance (16,320) (8,550) ---------------------- Future income tax assets $ 2,530 16,710 ------------------------------------------------------------------------- Future income tax liabilities Capital assets $ 28 - Derivatives 307 - Accrued benefit costs 1,972 2,077 Inventory - 1,936 Intangibles - 1,680 Deferred exchange - 343 Other - 266 ---------------------- Future income tax liabilities $ 2,307 6,302 ---------------------- Net future tax asset $ 223 10,408 ------------------------------------------------------------------------- Classified as: Future income tax assets - current $ 100 3,644 Future income tax assets - non-current 123 12,837 ---------------------- $ 223 16,481 ---------------------- Future income tax liabilities - current - 1,212 Future income tax liabilities - non-current - 4,861 ---------------------- $ - 6,073 ------------------------------------------------------------------------- $ 223 10,408 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company holds approximately $45,000,000 in non-capital loss carryforwards, which are available to reduce future Canadian income taxes otherwise payable. The Company has recognized $656,000 of these non-capital loss carryforwards. These losses all arise in the current year and therefore do not expire until 2027. In addition, the Company holds approximately $4,500,000 in capital loss carryforwards, which are available to reduce future Canadian taxable capital gains. None of these capital losses have been recognized. 21. EMPLOYEE FUTURE BENEFITS The Company has retirement plans that provide for defined benefits for all non-unionized employees other than certain employee groups in the U.S., Canada and Europe who are members of defined contribution plans. The defined benefit plans are funded pension plans. The Company measures its benefit obligations and the fair value of plan assets as at October 31 of each year. Throughout 2007, the Company made substantial changes to its defined benefit and defined contribution plans, as outlined below: - Effective December 31, 2006, the Company amended certain of its Canadian defined benefit pension plans, in particular the Primary Group and Marketing and Manufacturing Group plans, to provide a defined contribution accrual from January 1, 2007 onward for all members of those plans. The members of these plans were given a one- time option to convert accrued defined benefits under these plans to an opening balance in the new defined contribution provisions. As the plan amendments curtailed defined benefit accrual starting in 2007, a curtailment gain of $572,000 is recognized in the year. This gain is offset against the Company's unamortized loss as at January 1, 2007. The settlement of the converted defined benefit obligation will be recognized once approval to convert has been received from the Newfoundland and Labrador Superintendent of Pension. - Effective December 20, 2007, entitlement to post-employment health and dental benefits ceased for all active and retired employees. Post retirement health benefits for eligible retirees have been transferred to the Government of Newfoundland and Labrador and an amount of $1,660,000 is deposited in an Escrow Account to cover the transfer of liability in respect of the retirees. - The Company's pension plans were not sold as part of the Sales Transactions and, as such, pension accrual ceased for most employees terminated on December 20, 2007. Some employees continue to accrue pension as a result of employment continuation and/or salary continuance arrangements with the Company. The cessation of pension accrual will result in further settlements of the pension plans' liabilities in future years. - Effective December 31, 2007, as the result of an agreement between the Company and the Government of Newfoundland and Labrador, members of the Supplemental Executive Retirement Plan ("SERP") are provided with a cash settlement option in lieu of a retirement pension in monthly pay or a deferred pension. The cash settlement options will be funded by assets held in a Retirement Compensation Trust Fund and the Canada Revenue Agency ("CRA"). Cash Settlements will be paid to the SERP members as per the rules of the plan and as permitted by CRA. The effective dates of the most recent actuarial valuations and those of compulsory future valuations to ensure the funded status of these plans are: ------------------------------------------------------------------------- ------------------------------------------------------------------------- Date of Most Recent Date of Compulsory Actuarial Valuation Actuarial Valuation ------------------------------------------------------------------------- Primary Group pension plan December 31, 2006 December 31, 2009 Marketing and Manufacturing Group pension plan December 31, 2006 December 31, 2009 Executive pension plan December 31, 2006 December 31, 2009 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table describes the Company's commitments and costs for these employee future benefits: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Other Other Pension Benefit Pension Benefit Plans Plans Plans Plans ------------------------------------------------------------------------- Plan assets Market value at beginning of year $ 78,613 74,919 Actual return on plan assets (452) 6,652 Employer contributions 3 13 Employee contributions 144 547 Obligation in respect of transfers - 132 Transfers to defined contribution (467) - Benefits paid (4,874) (3,650) Other (214) - ------------------------------------------------ Market value at end of year 72,753 78,613 ------------------------------------------------------------------------- Plan obligations Accrued benefit obligations at beginning of year 66,981 4,096 70,489 3,816 Adjustment to opening obligations due to change in service period - - (149) - Current service cost 455 173 2,591 173 Obligation in respect of transfers - - 132 - Interest cost 3,351 216 3,669 207 Benefits paid (4,874) (154) (3,650) (100) Actuarial gains (3,025) (302) (5,921) - Curtailment income (572) - (180) - Other (343) - - - ------------------------------------------------ Accrued benefit obligations at end of year 61,973 4,029 66,981 4,096 ------------------------------------------------------------------------- Plan surplus (deficit) End of year market value less accrued benefit obligations 10,780 (4,029) 11,632 (4,096) Valuation allowance (1,966) - - - Unamortized transitional (asset) obligation (4,969) 759 (5,875) 885 Unamortized net actuarial loss 6,454 479 4,282 811 ------------------------------------------------ Accrued benefit asset (obligation) $ 10,299 (2,791) 10,039 (2,400) ------------------------------------------------------------------------- Benefit plan expense (income) Current service cost, net of employee contributions $ 345 173 2,044 173 Interest cost 3,351 216 3,669 207 Actual return on plan assets 452 - (6,652) - Actuarial gains on benefit obligations (3,025) (302) (5,921) - Curtailment gain - - (88) - Change in valuation allowance 1,966 - - - ------------------------------------------------ Benefit (Income) cost before adjustments to recognize the long-term nature of plans 3,089 87 (6,948) 380 ------------------------------------------------------------------------- Adjustments to recognize the long-term nature of plans: Difference between expected return and actual return on plan assets for the year (5,913) - 1,431 - Difference between actuarial gains (losses) recognized for year and actual actuarial gains (losses) on benefit obligations for year 3,136 332 6,273 36 Amortization of transitional (asset) liability (907) 126 (907) 126 ------------------------------------------------------------------------- Net benefit plan (income) expense $ (595) 545 (151) 542 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Included in the above market value of plan assets and accrued benefit obligations at year end are the following amounts in respect of benefit plans with accrued benefit obligations in excess of plan assets. ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Market value of plan assets $ - 2,146 Accrued benefit obligations - 2,886 ------------------------------------------------------------------------- Funded status - plan deficit $ - (740) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Plan assets at year end consists of: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Asset Category Equity Securities(1) 72.5% 60.6% Debt Securities 27.1% 37.6% Other 0.4% 1.8% ------------------------------------------------------------------------- 100.0% 100.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Equity Securities do not include Company common shares. Weighted average actuarial assumptions used in the calculations of employee future benefits are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Other Other Pension Benefit Pension Benefit Plans Plans Plans Plans ------------------------------------------------------------------------- Benefit obligations as of December 31 Discount rate 5.75% 5.75% 5.25% 5.25% Rate of compensation increase 3.25% - 4.00% - Benefit costs for years ended on December 31 - Discount rate 5.25% 5.25% 5.25% 5.25% Expected long-term rate of return on plan assets 7.50% - 7.50% - Rate of compensation increase 3.25% - 4.00% - Annual rate of increase in covered health care benefits - 7.50% - 7.50% Remaining service period of active employees (years) 14-15 13 10-14 13 ------------------------------------------------------------------------- ------------------------------------------------------------------------- A 1% change in the expected health care cost trend rate would have the following impacts: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1% Increase 1% Decrease ------------------------------------------------------------------------- Impact on current service and interest costs $ 60 (52) Impact on accrued benefit obligations 604 (526) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash payments for employee future benefits for the years ended December 31 are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Pension benefit plan contributions $ 3 13 Benefits paid on other benefit plans 154 100 ------------------------------------------------------------------------- The total expense for the Company's defined contribution plans for 2007 is $1,218,000 (2006; $1,131,000). 22. SEGMENTED INFORMATION Until the completion of the sale of substantially all of the net operating assets of the Company resulting from the sale of its operating divisions on December 20, 2007, the Company operated within two distinct business units: the Primary Group and the Marketing and Manufacturing Group. The Seafood Company Limited was managed as part of the international sales and marketing of seafood products by the Primary Group and is therefore included in the Primary Group's financial position and results as at and for the periods ended December 31, 2006 and December 31, 2007. This structure supported a customer and product management focus and decentralized decision-making. Both business units had specific activities and mandates with the common goal of providing the best products and value to all FP customers. The Primary Group managed the Company's harvesting, primary processing, and international sales and marketing of seafood. The Marketing and Manufacturing Group managed the Company's value added processing operations, global seafood sourcing, and culinary research and development, and was also the Company's North American sales and marketing arm. The Company evaluated performance and allocated resources based on segment gross profit. All inter-segment transactions are recorded at an exchange amount and eliminate upon consolidation. SEGMENTED OPERATIONS AND ASSETS. ------------------------------------------------------------------------- 2007 ------------------------------------------------------------------------- Marketing and Primary Manufacturing Group Group Consolidated ------------------------------------------------------------------------- Total sales Canada $ 158,484 135,549 294,033 Inter-segment (104,402) (9,234) (113,636) ----------------------------------------- 54,082 126,315 180,397 ----------------------------------------- United States 856 246,916 247,772 Inter-segment (152) (5,252) (5,404) ----------------------------------------- 704 241,664 242,368 ----------------------------------------- Europe 146,696 - 146,696 Foreign exchange gain on hedging contracts 2,557 - 2,557 ----------------------------------------- Net sales to customers 204,039 367,979 572,018 ----------------------------------------- Segment gross profit $ 38,560 42,518 81,078 ------------------------------------------------------------------------- Capital expenditures $ 2,208 353 2,561 Depreciation of capital assets $ 6,580 2,859 9,439 Goodwill(1) $ - - - Total assets(1) $ - - - ------------------------------------------------------------------------- (1) As described in note 1, the completion of the Sales Transactions resulted in the Company ceasing the operating activities of the Primary Group and Marketing and Manufacturing Group and accordingly the sale of substantially all of the operations and net operating assets of those business units. Remaining assets represent corporate assets. ------------------------------------------------------------------------- 2006 ------------------------------------------------------------------------- Marketing and Primary Manufacturing Group Group Consolidated ------------------------------------------------------------------------- Total sales Canada $ 175,216 150,205 325,421 Inter-segment (93,037) (28,522) (121,559) ----------------------------------------- 82,179 121,683 203,862 ----------------------------------------- United States 33,045 335,766 368,811 Inter-segment (5,338) (4,576) (9,914) ----------------------------------------- 27,707 331,190 358,897 ----------------------------------------- Europe 184,251 - 184,251 ----------------------------------------- Foreign exchange gain on hedging contracts 5,840 - 5,840 ----------------------------------------- Net sales to customers 299,977 452,873 752,850 ----------------------------------------- Segment gross profit $ 40,001 43,550 83,551 ------------------------------------------------------------------------- Capital expenditures $ 6,174 464 6,638 Depreciation of capital assets $ 10,827 3,388 14,215 Goodwill $ 10,447 - 10,447 Total assets $ 315,357 106,413 421,770 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NET SALES TO CUSTOMERS BY PRODUCT CATEGORY. ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Primary Group Primary processed product Groundfish $ 13,493 19,524 Shellfish 70,138 73,915 Other 4,101 2,472 ---------------------- 87,732 95,911 ---------------------- Value added product Shellfish 41,513 63,738 ---------------------- 41,513 63,738 ---------------------- Globally sourced product Groundfish 2,383 14,449 Shellfish 68,335 117,583 Other 1,519 2,456 ---------------------- 72,237 134,488 ---------------------- Foreign exchange gain on hedging contracts 2,557 5,840 ---------------------- 204,039 299,977 ---------------------- Marketing and Manufacturing Group Value added product Groundfish 140,122 147,796 Shellfish 46,765 74,501 ---------------------- 186,887 222,297 ---------------------- Globally sourced product Shellfish 102,258 159,504 Other 78,834 71,072 ---------------------- 181,092 230,576 ---------------------- 367,979 452,873 ---------------------- Total sales $ 572,018 752,850 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- CAPITAL ASSETS BY GEOGRAPHIC AREA. ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Canada $ 118 105,195 United States - 15,094 Europe - 12,996 ---------------------- $ 118 133,285 ------------------------------------------------------------------------- 23. EARNINGS PER COMMON SHARE ------------------------------------------------------------------------- ------------------------------------------------------------------------- in thousands, except per share amounts 2007 2006 ------------------------------------------------------------------------- Earnings per share Net income for the year $ 78,037 1,915 Basic Weighted average number of common shares outstanding 13,638 14,429 ---------------------- Per share amount $ 5.72 0.13 ---------------------- Diluted Weighted average number of common shares outstanding 13,638 14,429 Impact of outstanding stock options 58 3 ---------------------- 13,696 14,432 ---------------------- Per share amount $ 5.70 0.13 ------------------------------------------------------------------------- All outstanding stock options at December 31, 2007 have a dilutive effect on earnings per share. Common shares totalling 821,000 issuable under the terms of the Company's stock option plans, were not included in the calculations of diluted earnings per share for the year ended December 31, 2006, as their effect was anti-dilutive. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with weighted average assumptions used for grants, as presented below: ------------------------------------------------------------------------- ------------------------------------------------------------------------- Assumption ------------------------------------------------------------------------- Dividend yield 0.0% Expected volatility 22.7% Risk-free interest rate 4.2% Expected life 7.5 years ------------------------------------------------------------------------- ------------------------------------------------------------------------- 24. COMMITMENTS AND CONTINGENCIES OPERATING LEASES. The Company has lease agreements for equipment, the latest of which expires in 2010. Future minimum lease payments under these operating leases for the next three years will be approximately as follows: ------------------------------------------------------------------------- 2008 $ 41 2009 29 2010 16 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LETTERS OF CREDIT. The Company has documentary letters of credit outstanding as at December 31, 2007, of USD $2,031,000 (2006; USD $3,924,000) related to the procurement of inventories. The Company has standby letters of credit outstanding of $8,245,000 as at December 31, 2007 (2006; $3,752,000). GUARANTEES. As part of the Sales Transactions, the Company provided guarantees and indemnities to the respective purchasers totalling $17,600,000 for periods ranging from six months to seven years in relation to the net operating assets and operations sold. Under the requirements of CICA Section 3855, "Financial Instruments - Recognition and Measurement", the Company recognized a liability of $4,400,000 for certain of these indemnities and guarantees as at December 31, 2007, using the discounted cash flow valuation method. CAPITAL ASSET COMMITMENTS. As at December 31, 2007, the Company has no outstanding commitments for various ongoing capital projects (2006; $275,000). LEGAL PROCEEDINGS. From time to time, the Company is involved in various litigation matters arising in the ordinary course of business. The Company has no reason to believe that the disposition of any such current matters could reasonably be expected to have a material adverse impact on the Company's financial position, results of operations, or the ability to carry on any of its business activities. During 2006, charges were laid against the Company by the Government of Newfoundland and Labrador in relation to its export practices of Yellowtail Flounder. Management is presently not able to assess or predict the scope or outcome of these charges. Accordingly, no provision has been included in these consolidated financial statements. 25. FINANCIAL INSTRUMENTS FORWARD EXCHANGE AND OPTION CONTRACTS. At December 31, 2007, the Company holds the following in forward exchange and option contracts, shown in the currency in which they are denominated: ------------------------------------------------------------------------- ------------------------------------------------------------------------- Outstanding To Average December 31, Expire Rate 2007 2008 (CAD)(1) ------------------------------------------------------------------------- Non-Hedge Contracts USD purchase forwards 1,476 1,476 1.1266 USD sale barrier options 10,000 10,000 1.0535 USD sale barrier options 10,000 10,000 0.9610 (1) Yen sale barrier options (rate is USD) 1,000,000 1,000,000 111.50 ------------------------------------------------------------------------- Mark-to-market exchange losses associated with contracts outstanding at December 31, 2007, amount to $1,049,000 (2006; $10,859,000). During 2007, the Company reported a gain of $7,510,000 (2006; $1,726,000 loss) relating to net realized and unrealized gains on its non-hedge contracts. INTEREST RATE RISK MANAGEMENT. The Company enters into interest rate swap agreements in order to manage the risk associated with interest rate movement on floating rate long-term debt. Using the proceeds on sale of its net operating assets and operations, the Company repaid all long-term debt balances. At this time, the interest rate swaps outstanding became ineffective hedge instruments. As at December 31, 2007, the Company has outstanding one interest rate swap, that does not qualify for hedge accounting, as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notional Currency Rate Mark-to-Market Expiry Date ------------------------------------------------------------------------- 7,789 CAD 4.58% (12) May 9, 2008 ------------------------------------------------------------------------- The mark-to-market amount represents the amounts that would be paid by the Company if the transaction was terminated at December 31, 2007. For the year ended December 31, 2007, net interest revenue from interest rate swaps amounts to $34,000 (2006; $267,000 expense). FAIR VALUES. Fair value estimates are made as of a specific point in time, using available information about the financial instruments and current market conditions. The estimates are subjective in nature involving uncertainties and significant judgment. The carrying values of financial instruments included in current assets and current liabilities in the consolidated balance sheets approximate their fair values, reflecting the short-term maturity and normal trade credit terms of these instruments. The fair value of long-term debt, interest-free government loans, and fishermen mortgage receivables is based on current pricing of financial instruments with comparable terms. This fair value reflects a point-in-time estimate that may not be relevant in predicting the Company's future income or cash flows. As at December 31, 2007 the estimated fair value of long-term debt, interest-free government loans and fisherman mortgage receivables corresponds to its carrying value. CREDIT RISK. The Company is exposed to credit risk with respect to accounts receivable from customers. The Company has credit evaluation, approval, and monitoring processes intended to mitigate potential credit risks and maintains provisions for potential credit losses that are assessed on an ongoing basis. FP's largest customer accounts for approximately 13% of total sales. As a result of consolidation of large customers in recent years, the top 10 customers now account for approximately 44% of total consolidated sales annually. 26. RELATED PARTY TRANSACTIONS In the normal course of business, the Company has transactions with companies with common directors and a company in which FP held an equity investment, as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Transactions Sales of product $ 130 457 Purchases of products and services 4,254 9,164 Commissions and royalties 1,268 1,300 Interest revenue 452 - Other 109 164 ------------------------------------------------------------------------- These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. The balance due to and due from affiliates outlined below are non-interest bearing and under normal credit terms, as would have applied with unrelated parties, and have arisen from the transactions referred to above. These balances are included in accounts receivable and accounts payable on the Company's consolidated balance sheets. ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Balances Receivable from companies with common directors $ 7 191 Receivable from a company in which FP held an equity investment 1,311 3,007 Payable to companies with common directors 965 963 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company holds notes receivable totalling $45,000,000 from CVBI bearing interest at 12.0% per annum, payable semi-annually, maturing March 31, 2008. Accrued interest on the notes receivable is $452,000 at December 31, 2007. 27. WORKERS TRANSITION FUND In discussion with the Government of Newfoundland and Labrador in relation to the Sales Transactions, as prescribed by the FPI Act, the Company agreed to fund a $3,000,000 Workers Transition Fund. This fund is being used to supplement wages of Newfoundland plant workers and was transferred to OCI LP and HLF, the purchasers of the Primary Group and Marketing and Manufacturing Group respectively, based upon their proportionate share of the fund liability to its employees. This is fully provided for in the 2007 financial results. 28. SUPPLEMENTAL CASH FLOW INFORMATION CHANGES IN NON-CASH WORKING CAPITAL BALANCES ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Accounts receivable $ 7,682 29,318 Inventories 17,970 64,135 Prepaid expenses 1,566 2,028 Accounts payable and accrued liabilities 4,910 (28,533) ---------------------- 32,128 66,948 ------------------------------------------------------------------------- CASH PAID FOR INTEREST AND INCOME TAXES ------------------------------------------------------------------------- 2007 2006 ------------------------------------------------------------------------- Cash paid during the year for: Interest $ 11,328 13,853 Income taxes 6,635 3,569 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 29. SUBSEQUENT EVENTS RESTRUCTURING TRANSACTION. On March 11, 2008, at a special meeting of the shareholders of the Company, the shareholders approved proceeding with a restructuring transaction (the "Restructuring Transaction") that will enable shareholders to receive a cash amount of $17.19 per share or, at their election, to continue their investment in the Company in its new form as an investment holding company. The Company was continued under the Canada Business Corporations Act effective March 12, 2008 and then amalgamated with 6916716 Canada Inc., a wholly-owned subsidiary, effective March 14, 2008 to form an amalgamated entity. The amalgamated entity is carrying on the Company's investment business under the name "FP Resources Limited". The common shares of FP Resources Limited were delisted from the TSX at the close of business on March 24, 2008. The Company had approximately 13.5 million common shares outstanding as at December 31, 2007 (2006; 13.9 million). Pursuant to the amalgamation, all outstanding common shares of the Company were automatically deemed to have been exchanged for redeemable preferred shares of the amalgamated entity on March 19, 2008 unless a shareholder of the Company elected to receive common shares of the amalgamated entity. As of March 25, 2008, there are approximately 6,589 common shares outstanding. CASH HELD IN ESCROW. As at March 25, 2008, funds remaining in escrow totalled $3,581,000. NOTES RECEIVABLE. On January 31, 2008 the Company's notes receivable from CVBI matured at which time the principal plus accrued interest of $45,899,000 was rolled into another note receivable maturing on March 31, 2008. On February 7, 2008, the Company purchased an additional $10,800,000 note receivable from CVBI bearing interest at a rate per annum equal to 12.0%, payable semi-annually, maturing on March 31, 2008. CREDIT FACILITIES. On March 5, 2008, the Company entered into a credit facility with CIBC Commercial Banking with a maximum credit limit of $8,756,000 secured by cash collateral. This facility will be used to secure letters of credit and foreign exchange contracts. On March 11, 2008, the Company terminated its syndicated credit facility with CIT Business Credit Canada Inc. STOCK-BASED COMPENSATION PLANS. Subsequent to year end all outstanding options under the Company's 2000 Performance Stock Option Plan were exercised utilizing the cashless exercise feature. On February 12, 2008, the Company cancelled its 2000 Performance Stock Option Plan and Executive Stock Option Plan. 30. COMPARATIVE FIGURES Certain amounts for 2006 have been reclassified to conform with the presentation adopted for 2007.

For further information:

For further information: Beverley Evans, Chief Financial Officer, (709)
570-0351, bevans@fpresources.ca

Organization Profile

FP RESOURCES LIMITED

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