FPI Limited releases second quarter financial results: Focus on margins, inventory controls and currency management improves profitability



    TSX: FPL
    www.fpil.com

    ST. JOHN'S, Aug. 7 /CNW/ - FPI Limited ("FPI" or "the Company") today
released its financial results for the twenty-six weeks ended June 30, 2007.
The Company reported net income of approximately $6.3 million in the quarter,
an increase of $3.5 million over the net income of approximately $2.8 million
reported for the same quarter in the previous year. Net income for the
twenty-six weeks ended June 30, 2007 was $9.1 million as compared to net
income of $0.1 million for the twenty-six weeks ended July 1, 2006.
Consolidated financial performance data represent the combined results of
FPI's two business units: the Primary Group and the Marketing and
Manufacturing Group.
    Strategic rationalization of product lines and focused management of
inventories contributed significantly to the continued improvement in gross
profits through the first half of 2007. While consolidated year to date
revenues of $329.5 million are approximately 16 per cent lower than those
reported in the first half of 2006, gross profit increased by 10.4 per cent to
$41.3 million over the same period. The $3.9 million increase in year to date
gross profit is the result of an improvement of $3.4 million in the Primary
Group, driven by a change in sales mix with a focus on higher margin species,
as well as a $0.5 million increase in the Marketing and Manufacturing Group,
resulting from lower volume, higher margin sales combined with lower
distribution expenses.
    Beverley Evans, Chief Financial Officer, noted the positive impact in the
quarter and year to date of FPI's focus on categories, products and customers
that generate higher returns. "Profitability has improved through the
execution of our strategy to eliminate low-margin products from our
portfolio," said Ms. Evans. "We are concentrating our energy where it makes
the most sense, and that approach has had the anticipated effect in gross
profit growth."
    Ms. Evans added that, in view of the strengthening of the Canadian dollar
relative to other currencies, especially the U.S. dollar, the Company's active
currency management program also contributed positively to the results for the
quarter.
    On July 26, 2007, FPI Limited announced the sale of its subsidiary in the
United Kingdom, The Seafood Company, to Young's Seafood Limited. Net proceeds
from the transaction will be used by FPI to reduce debt, and are not reflected
in the financial results reported in the Q2 2007 Report to Shareholders.
    As disclosed initially on January 11, 2007 and updated periodically
through news releases since that time, the Company is engaged in discussions
and has signed non-binding Letters of Intent with both High Liner Foods and
Ocean Choice International for the sale of FPI assets. These discussions are
ongoing, and there is no certainty that transactions will result. If and when
definitive agreements are reached with High Liner Foods and Ocean Choice
International, the approval of FPI shareholders would be required before any
transactions could occur.

    About FPI: FPI Limited is a Newfoundland and Labrador-based seafood
company engaged in harvesting, processing, global sourcing, and marketing a
wide selection of high quality seafood products.

    FPI Limited trades on the Toronto Stock Exchange under the symbol FPL.


    SECOND QUARTER REPORT TO SHAREHOLDERS
    -------------------------------------

    FINANCIAL RESULTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
    OF OPERATIONS AND CHANGES IN FINANCIAL CONDITION

    THIRTEEN AND TWENTY-SIX WEEKS ENDED JUNE 30, 2007

    This Management's Discussion and Analysis ("MD&A") contains statements
and other forward-looking information about potential future circumstances,
results, and developments related to FPI Limited ("FPI" or the "Company") and
its business and operations. 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, including, among other
things, uncertainties regarding the continued availability of seafood
products, the significant level of government regulation of the seafood
industry, the inherent limitations on the Company's ability to restructure and
grow its business operations arising from the limitations of the FPI Act,
foreign exchange risk associated with the international nature of the
Company's operations, the reliance of the Company on certain contractual
arrangements and the ability of the Company to renew or renegotiate such
contracts on favourable terms, increasing competition in the industry and
general industry and economic conditions. For additional information with
respect to certain of these risks or factors, reference should be made to the
Company's Annual Information Form in respect of the fiscal year ended
December 31, 2006 ("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 on the Company's website at www.fpil.com or
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
unaudited interim consolidated financial statements and the related MD&A for
the thirteen and twenty-six weeks ended July 1, 2006, and the Company's
audited comparative consolidated financial statements and the related MD&A
(the "Annual MD&A") as at and for the year ended December 31, 2006, including
the notes thereto, set forth in the Company's 2006 Annual Report to
Shareholders. This MD&A updates the disclosure contained in the Annual MD&A
and should be read in conjunction with such Annual MD&A.
    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 August 7th, 2007.

    FINANCIAL PERFORMANCE HIGHLIGHTS

    The following is a summary of FPI's consolidated financial performance
during the second quarter of 2007 and year to date, compared with the same
period of 2006.

    
    -------------------------------------------------------------------------
                                Thirteen Weeks Ended  Twenty-Six Weeks Ended
    -------------------------------------------------------------------------
    unaudited -
     dollars in thousands,       Jun. 30,     Jul. 1,    Jun. 30,     Jul. 1,
     except per share amounts       2007        2006        2007        2006
    -------------------------------------------------------------------------
    Sales                      $ 160,138     188,454     329,528     390,234
    Gross Profit                  19,479      19,850      41,347      37,368
    Net income                     6,273       2,771       9,133          95
    Net income per common share
      Basic                         0.46        0.19        0.67        0.01
      Diluted                       0.46        0.19        0.66        0.01
    -------------------------------------------------------------------------

    During the thirteen and twenty-six weeks ended June 30, 2007 the Company
recorded net income of $6.3 million and $9.1 million compared to net income of
$2.8 million and $0.1 million for the comparative periods ended 2006. The
significant improvement in consolidated net income year to date relates mainly
to an increase in gross profit of $3.9 million compared to the prior year,
which is a result of the execution of the strategy of the Company to eliminate
low margin products from its product portfolio by focusing on categories,
products and customers that provide improved returns to the Company. Also,
contributing to the increase in year to date net income is a $1.0 million
decrease in depreciation expense, a $2.5 million decrease in interest expense,
and an increase of $6.1 million as a result of foreign exchange gains.
Further, the amendment of the Primary Group and Marketing and Manufacturing
Group defined benefit plans to provide a defined contribution plan from
January 1, 2007 onward for all members of those plans resulted in a
$0.6 million pension curtailment gain. Offsetting those factors contributing
to an increase in net income is an increase in tax expense of $2.9 million.

    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 second quarter of 2007 are $160.1 million, a decrease of
$28.3 million from $188.4 million in the same quarter of the prior year. The
Primary Group's sales of globally sourced product decreased by $8.9 million
due to decreased sales volume. Value added sales in the Marketing and
Manufacturing Group decreased by $5.3 million as compared to the second
quarter of 2006 and globally sourced product sales decreased by $6.5 million
as a result of lower sales volumes and a weaker U.S. dollar.
    The Company's gross profit for the quarter ended June 30, 2007 is
$19.5 million as compared to $19.9 million in the second quarter of 2006. A
decrease in gross profit of $1.8 million in the Primary Group, offset by an
increase of $1.4 million in the Marketing and Manufacturing Group, resulted in
a total decrease of $0.4 million or 2.0% from the same period in the prior
year. Gross profit as a percentage of sales is 12.2%, an increase of
1.7 percentage points from 10.5% achieved in 2006.
    The Company's year to date sales of $329.5 million reflects a decrease of
$60.7 million as compared to sales of $390.2 million for the twenty-six weeks
ended July 1, 2006. This is the result of a $32.4 million decrease in sales in
the first quarter of 2007 as compared to the same quarter of 2006, plus a
decrease of $28.3 million in sales in the second quarter of 2007 as compared
to the same quarter of 2006.
    Gross profit for the twenty-six weeks ended June 30, 2007 is
$41.3 million, an increase of $3.9 million from $37.4 million for the same
period in the prior year. This increase results primarily from an increase of
$3.4 million in the Primary Group's gross profit and an increase of
$0.5 million in the Marketing and Manufacturing Group's gross profit. Gross
profit as a percentage of sales is 12.5%, an increase of 2.9 percentage points
as compared to 9.6% for the same period in the prior year.

    FOREIGN EXCHANGE IMPACT ON SALES. Foreign exchange had a net positive
impact on sales in the second quarter of 2007. The average effective U.S.
exchange rate for the quarter is 1.099, an overall decrease of approximately
200 basis points from the average effective rate of 1.121 in the same period
for the prior year. This has resulted in an effective decrease in sales of
$1.3 million when translating U.S. dollar sales to Canadian dollars. This is
offset by the positive impact of exchange rates for Euros and Pound Sterling
as both increased as compared to the second quarter of 2006, resulting in an
effective increase in sales of $3.0 million.

    -------------------------------------------------------------------------
                     Thirteen Weeks Ended         Twenty-Six Weeks Ended
    -------------------------------------------------------------------------
    Unaudited  Jun. 30, 2007    Jul. 1, 2006   Jun. 30, 2007    Jul. 1, 2006
                   % Average       % Average       % Average       % Average
    Currency   Sales    Rate   Sales    Rate   Sales    Rate   Sales    Rate
    -------------------------------------------------------------------------
    U.S.
     dollar     40.3   1.099    51.4   1.121    47.5   1.141    57.7   1.138
    Euro         2.8   1.468     2.4   1.411     2.9   1.506     2.1   1.400
    Pound
     Sterling   27.9   2.185    16.0   2.051    25.5   2.234    14.2   2.037
    Canadian
     dollar
     and other  29.0            30.2            24.1            26.0
    -------------------------------------------------------------------------
               100.0%          100.0%          100.0%          100.0%
    -------------------------------------------------------------------------

    The average effective U.S. exchange rate of 1.141 in the first half of
2007 is slightly higher than the average effective rate of 1.138 in the first
half of 2006. This results in an effective increase in sales of $0.4 million
when translating U.S. dollar sales to Canadian dollars. Further, exchange
rates for Euros and Pound Sterling both increased as compared to the first
half of 2006, resulting in an effective increase in sales of $8.2 million.

    FINANCIAL PERFORMANCE BY BUSINESS SEGMENT

    -------------------------------------------------------------------------
                                Thirteen Weeks Ended  Twenty-Six Weeks Ended
    -------------------------------------------------------------------------
    unaudited -                  Jun. 30,     Jul. 1,    Jun. 30,     Jul. 1,
     dollars in thousands           2007        2006        2007        2006
    -------------------------------------------------------------------------
    Sales to External Customers

    Primary Group
      Primary processed
       product                 $  27,011      36,840   $  43,371      60,443
      Value added product         18,588      13,498      36,161      25,845
      Globally sourced product    26,159      35,105      52,337      67,793
      Foreign exchange gain
       (loss) on hedging
       contracts                      17       2,873        (548)      3,623
                               ----------------------------------------------
                                  71,775      88,316     131,321     157,704
    Marketing and
     Manufacturing Group
      Value added product         42,405      47,674     104,468     117,268
      Globally sourced product    45,958      52,464      93,739     115,262
                               ----------------------------------------------
                                  88,363     100,138     198,207     232,530

    -------------------------------------------------------------------------
    Total Sales                $ 160,138     188,454   $ 329,528     390,234
    -------------------------------------------------------------------------
    Gross Profit

    Primary Group
      Primary processed
       product                 $   2,902       2,755   $   6,802       1,483
      Value added product          2,572       2,454       4,526       4,552
      Globally sourced product     4,538       3,680       8,994       6,693
      Foreign exchange gain
       (loss) on hedging
       contracts                      17       2,873        (548)      3,623
                               ----------------------------------------------
                                  10,029      11,762      19,774      16,351
    Marketing and
     Manufacturing Group
      Value added product          6,183       5,643      15,944      15,046
      Globally sourced product     3,267       2,445       5,629       5,971
                               ----------------------------------------------
                                   9,450       8,088      21,573      21,017

    -------------------------------------------------------------------------
    Total Gross Profit         $  19,479      19,850  $   41,347      37,368
    -------------------------------------------------------------------------

    THE PRIMARY GROUP. The Company's Primary Group is responsible for
harvesting and primary processing in Canada, value added processing in Europe,
and international marketing of seafood products. This business unit sells
internally harvested and processed, as well as globally sourced seafood. The
Primary Group's sales consist of shellfish, groundfish, and pelagic species.
Included in the Primary Group are the results of The Seafood Company, a
company based in the United Kingdom ("U.K.") that was acquired during the
third quarter of 2005. The Seafood Company is a leading procurer, processor
and distributor of high quality chilled and frozen shellfish in the U.K.
retail marketplace. On July 26, 2007 a definitive agreement was reached with a
company based in the United Kingdom regarding the sale of The Seafood Company.
Further information regarding this transaction is included in note 16 to the
consolidated interim financial statements.
    Sales of the Primary Group for the quarter ended June 30, 2007 total $71.8
million, a $16.5 million, or 18.7% decrease from sales of $88.3 million in the
second quarter of 2006. This decrease is primarily a result of a decline in
sales volumes of primary processed product and globally sourced product.
Primary processed product external sales experienced a decline over the prior
year mainly due to the curtailment of groundfish production. Lower procurement
activity over the prior year has resulted in decreased external sales of
globally sourced product.
    Primary Group sales of $131.3 million for the first half of 2007 are $26.4
million, or 16.7%, lower than the $157.7 million achieved in the prior year.
As indicated above, the decrease in external sales over the prior year is
attributable to a decrease in sales volumes of primary processed and globally
sourced product partially offset by an increase in European sales.
    The Primary Group contributes $10.0 million toward the Company's total
gross profit for the quarter ended June 30, 2007, which is $1.8 million lower
than the $11.8 million contributed in the corresponding period in 2006. Gross
profit as a percentage of sales is 14.0%, representing an increase of
0.6 percentage points from the 13.4% gross profit percentage achieved in the
second quarter of the prior year. The decrease in gross profit over the prior
year is mainly attributable to the decreased volume of external sales and
lower foreign exchange gains achieved on hedging contracts. The increase in
gross profit percentage over the prior year is associated with a shift in
sales mix towards higher margin products within primary processed and globally
sourced products.
    The Primary Group's gross profit for the year to date is $19.8 million, a
$3.4 million increase from the prior year gross profit of $16.4 million. Gross
profit as a percentage of sales is 15.1% representing an increase of
4.7 percentage points from the 10.4% gross profit percentage achieved in the
first six months of the prior year. As discussed above, the increase in gross
profit is attributed to the Primary Group's change in sales mix, which
includes higher margin species within primary processed and globally sourced
product compared to the first half of 2006.
    The Primary Group experiences significant challenges with respect to
foreign exchange fluctuations, increasing competition from low cost producers,
such as China, and overhead and distribution costs. The Primary Group
continues to focus on various strategies to address these challenges and to
critically review the management of the Primary Group's operations with the
objective of enhancing profitability.

    MARKETING AND MANUFACTURING GROUP. The Marketing and Manufacturing Group
is responsible for sourcing customer demands for seafood from domestic and
international supply partners, adding value to seafood through further
processing and ensuring FPI seafood is on more plates, in more places, through
more channels.
    Sales in the Marketing and Manufacturing Group for the second quarter of
2007 total $88.4 million, as compared to $100.1 million in the second quarter
of 2006, a decrease of $11.7 million or 11.7%. This decrease is the result of
lower sales revenues of both value added and globally sourced products and a
weaker U.S. dollar. The decrease of $11.7 million is inclusive of a
$1.2 million negative impact of the weaker U.S. dollar when translating the
U.S. operations of the Marketing and Manufacturing Group for the quarter ended
June 30, 2007. Sales of value added products are $42.4 million, a decrease of
$5.3 million or 11.1% from the $47.7 million of sales achieved in the second
quarter of 2006. Sales of globally sourced products are $46.0 million, a
decrease of $6.5 million, or 12.4%, compared to second quarter sales in 2006
of $52.5 million.
    The decrease in value added product sales during the quarter is primarily
in the U.S. market, where value added revenues are down by 16%. The
introduction of new products within the Pan Seared Selects(TM) and
UpperCrust(TM) value added groundfish product lines resulted in increased
sales revenues in the U.S. Club, Grocery and Foodservice channels, which
compensated for the losses in the National Accounts channel. The net increases
in value added groundfish revenues are offset by sales declines in value added
shrimp products due to lost distribution at Club Stores, National Accounts and
Grocery channels. In Canada, revenue declines are mainly attributable to value
added groundfish at the Retail level.
    The decrease in globally sourced product sales resulted mainly from
reduced U.S. sales volumes of warmwater shrimp, king crab, salmon, and lobster
species, arising from product line rationalization that was undertaken during
2006 which focused on activities that maximized product returns for capital
employed. As a result, all species are below the prior year's sales within the
U.S. market. In Canada, the shortfall during the quarter is in the king crab
and sea bass species.
    Sales in the Marketing and Manufacturing Group for the twenty-six weeks
ended June 30, 2007 are $198.2 million, as compared to $232.5 million reported
for the same period of 2006. The $34.3 million net decrease is due to a
$21.5 million decrease in globally sourced product in addition to a
$12.8 million decline in the sales of value added product. The impact of the
fluctuating U.S. dollar in the current year had little impact on the
translation of the U.S. operations for the first half of 2007 as the average
rates are comparable with the previous year. As most of the decline in the
U.S. dollar occurred in the second quarter of 2007, globally sourced product
revenues coupled with reduced sales of warmwater shrimp, king crab, salmon and
lobster, are negatively impacted. The decline in value added product sales is
primarily attributable to lost distribution on certain value added shrimp
items and reduced National Account activity on value added groundfish, offset
in part by increased UpperCrust(TM) and Pan Seared Selects(TM) distribution
during the period.
    The Marketing and Manufacturing Group's gross profit of $9.5 million for
the quarter increased by $1.4 million or 17.3% compared to the same period
last year. Gross profit as a percentage of sales is 10.7% representing an
increase of 2.6 percentage points from the 8.1% gross profit achieved in the
second quarter of the prior year. This improvement is a result of increased
contribution margins on lower sales volumes, combined with lower distribution
and storage expenses associated with the product line rationalization and
management focus. The weaker U.S. dollar resulted in an exchange loss of
$0.1 million at the gross profit level in the current quarter. The factors
contributing to increased margins are partially offset by raw material costs
for certain value added groundfish which are higher in comparison to the prior
year.
    Year to date gross profit of the Marketing and Manufacturing Group of
$21.5 million is $0.5 million higher than the $21.0 million reported in the
same period of the prior year. Gross profit as a percentage of sales is 10.9%
representing an increase of 1.9 percentage points from the 9.0% gross profit
percentage achieved in the first six months of the prior year. Reduced sales
volumes at higher margins combined with lower distribution expenses, resulted
in an increase in the current year's gross profit.

    ADMINISTRATIVE AND MARKETING EXPENSES

    Administrative and marketing expenses are $9.8 million for the second
quarter of 2007, and $23.2 million year to date of 2007, a decrease of
$2.2 million from the $12.0 million incurred in the second quarter and
$25.4 million incurred year to date of 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, offset by
an increase in compensation costs recognized during the period due to the
cashless stock option feature as discussed in financing activities within
liquidity and capital resources.

    DEPRECIATION

    Depreciation of capital assets during the second quarter of 2007 is
$3.1 million, a decrease of $0.4 million as compared to $3.5 million in the
second quarter of the prior year. Depreciation of capital assets for the
twenty-six weeks ended June 30, 2007 is $6.1 million, a decrease of
$1.0 million as compared to $7.1 million incurred in the first half of 2006.
The primary contributor to this decrease was the sale of the Newfoundland
Otter in the first quarter of 2007.

    INTEREST EXPENSE

    Interest expense during the second quarter of 2007 is $2.4 million, a
decrease of $1.2 million as compared to $3.6 million in the second quarter of
the prior year. Interest expense year to date totals $5.6 million, a decrease
of $2.5 million, as compared to $8.1 million in the first half of 2006. This
decrease primarily relates to a $1.2 million decrease in interest on bank
indebtedness in the quarter, and $2.8 million year to date, as a result of a
significant decrease in the Company's bank indebtedness due to lower inventory
levels, as well as the refinancing of the short-term bridge loan for The
Seafood Company during the second quarter of 2006.

    INCOME TAXES

    The Company's consolidated income tax expense is $3.2 million in the
second quarter of 2007, an increase of $0.2 million as compared to the second
quarter of 2006. Income tax expense is $5.0 million for the twenty-six weeks
ended June 30, 2007, an increase of $2.9 million as compared to the same
period in 2006. The Company's increase in income tax expense is due to the
improved profitability reported for year to date as compared to the same
period of 2006. The effective tax rate for the quarter is 33.5%, compared to
an effective rate of 52.2% for the quarter ended July 1, 2006. The effective
tax rate for the first half of 2007 is 35.2% as compared to 95.7% in the first
half of 2006. The increase in the Company's effective tax rate in 2006 was
largely due to a revaluation of the Company's net future tax asset. The
revaluation was a direct result of a decrease in the anticipated tax recovery
rate due to legislative rate changes enacted by the Federal Government in the
second quarter of 2006.

    LIQUIDITY AND CAPITAL RE

SOURCES OPERATING ACTIVITIES. The Company's cash provided by operating activities decreased by $16.7 to $12.0 million for the quarter ended June 30, 2007. Year to date cash provided by operating activities is $37.0 million, a $40.4 million decrease from the same period ended July 1, 2006. The decrease in cash provided by operating activities in both the quarter and year to date is primarily a result of various changes in non-cash working capital balances discussed below. As at June 30, 2007, the Company has working capital of $91.2 million and a current ratio of 2.0:1. This compares to working capital of $92.5 million and a current ratio of 1.7:1 as at July 1, 2006, and working capital of $109.5 million and a current ratio of 1.8:1 as at December 31, 2006. The significant movement in the current assets and liabilities of the Company since July 1, 2006 and December 31, 2006 has resulted in a decrease in working capital of $1.3 million and $18.3 million respectively, yet resulted in an improvement in the current ratio of 0.3:1 and 0.2:1 respectively. The Company's refinancing of its short-term bridge loan for The Seafood Company is the main contributor to a decrease in working capital. There are also substantial decreases in accounts receivable and inventory balances. The Company's decrease in working capital of $18.3 million since the year ended December 31, 2006 is largely the result of the disposal of the Newfoundland Otter, a vessel held for resale and included in current assets at December 31, 2006, which was sold in the first quarter of 2007. Accounts receivable at June 30, 2007 is $58.3 million, a $15.1 million decrease from $73.4 million at July 1, 2006. This decrease is primarily a result of a $10.8 million decrease in trade receivables arising from a decrease in sales revenues for the thirteen weeks ended June 30, 2007 as compared to the same period ended July 1, 2006. Also contributing to this decrease is a $6.0 million decrease in the Atlantic Queen Seafoods ("AQS") receivable due to timing differences. Partially offsetting these decreases is a $4.3 million increase in other accounts receivable as compared to the same quarter of the prior year. Accounts receivable decreased by $21.3 million from the balance of $79.6 million at year-end. This decrease is primarily a result of a $22.0 million decrease in trade accounts receivable resulting from a decrease in sales in the second quarter of 2007. Partially offsetting these decreases are increases of $0.7 million in income tax receivable, $0.5 million in government receivables and $1.1 million in the AQS receivable compared to December 31, 2006. The inventory balance at June 30, 2007 is $116.9 million, a decrease of $15.3 million as compared to the balance of $132.2 million as at July 1, 2006. Consistent with the first quarter of 2007, this decrease is primarily due to management's continued focus on reducing its inventory position through reduced procurement, a continuous initiative to maintain lower stock levels and streamlined purchasing efforts. The decrease of $20.7 million in inventories as compared to the balance of $137.6 million at December 31, 2006 is reflective of management's continuing strategy to reduce inventory levels as previously discussed. Prepaid expenses at June 30, 2007 are $3.8 million, a decrease of $0.6 million from $4.4 million at July 1, 2006, and a decrease of $0.5 million from $4.3 million at December 31, 2006. The decrease in prepaid expenses for the quarter as compared to the same period in 2006 is largely the result of a decrease in prepaid insurance. The decrease as compared to December 31, 2006, is a result of regular amortization of prepaid insurance recognized during the first half of 2007. Accounts payable and accrued liabilities at June 30, 2007 are $50.2 million, a decrease of $2.2 million from $52.4 million at July 1, 2006. Accounts payable and accrued liabilities decreased by $3.2 million as compared to $53.4 million at December 31, 2006. Trade accounts payable at June 30, 2007 are lower as compared to December 31, 2006 and July 1, 2006 as a result of decreased procurement activity during the first half of 2007. Accumulated Other Comprehensive Loss at June 30, 2007 is $23.8 million representing a $9.9 million increase as compared to the balance of $13.9 million at December 31, 2006. This increase results primarily from a $9.2 million unrealized loss, recognized in the thirteen weeks ended June 30, 2007, on translating the financial statements of the Company's self-sustaining foreign operations, mainly its U.S. subsidiary. The Company expects that its ability to generate sufficient amounts of cash as needed in the short-term and the long-term, and to maintain financial capacity and flexibility for its operating activities is adequate and there are no trends, demands, commitments, events, or uncertainties that are reasonably likely to impact the cash 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 operations. INVESTING ACTIVITIES. Cash applied to investing activities for the quarter ended June 30, 2007 is $0.7 million, a change of $4.4 million as compared to $3.7 million provided by investing activities at July 1, 2006. This brings year to date cash provided by investing activities to $4.1 million, as compared to $10.3 million provided by investing activities for the same period of 2006. This change is partially due to premiums received upon settlement of foreign exchange derivative instruments of $0.9 million during the second quarter of 2007, as compared to premiums received of $4.7 million for the same period in 2006. The year to date decrease in settlement of foreign exchange derivative instruments for the twenty-six weeks ended June 30, 2007 is $13.3 million compared to the same period in the prior year. Also, contributing to this change is a $2.8 million increase in cash applied to other investing activities. Offsetting those factors contributing to a decrease in cash provided by investing activities is the proceeds of $10.6 million received on the disposition of the Newfoundland Otter in the first quarter of 2007. FINANCING ACTIVITIES. Cash applied to financing activities of $12.0 million for the quarter ended June 30, 2007 is $23.5 million lower than the $35.5 million applied to financing activities in the same quarter in the prior year. Year to date, cash applied to financing activities totals $48.4 million, as compared to $88.4 million applied in the same period of the prior year. Bank indebtedness of $31.9 million at June 30, 2007 is $25.1 million lower than the balance of $57.0 million balance at July 1, 2006. This is primarily due to management's focus on reducing inventory levels through reduced procurement and management of safety stock levels. Further, during the second quarter of 2006, the Company refinanced its secured credit facility, which was used to finance the acquisition of The Seafood Company during September 2005. The refinanced secured credit facilities consist of: (i) a three year term loan facility of up to (pnds stlg)11,000,000 (CAD $23,466,300) at an interest rate of LIBOR plus an applicable margin; and (ii) a three year revolving credit facility of up to (pnds stlg)11,500,000 (CAD $24,532,950) at an interest rate of LIBOR plus an applicable margin. In the fourth quarter of 2006, the Company amended the aforementioned revolving credit facility and was granted a temporary increase in the amount of (pnds stlg)7,500,000 (CAD $15,999,750) to a maximum of (pnds stlg)19,000,000 (CAD $40,532,700) until January 31, 2007, at which time it was reduced by (pnds stlg)5,000,000 (CAD $10,666,500) to a maximum of (pnds stlg)14,000,000 (CAD $29,866,200) until April 30, 2007 when this temporary increase expired. Of the total drawn revolving credit facility of (pnds stlg)9,162,000 (CAD $19,545,295), the amount of (pnds stlg)6,000,000 (CAD $12,799,800) has been excluded from current liabilities because the Company intends that at least that amount would remain outstanding under this agreement for an uninterrupted period extending beyond one year from the consolidated balance sheet date. The remaining balance of (pnds stlg)3,162,000 (CAD $6,745,495) is included in bank indebtedness. The new credit facility is secured by the assets of the Company. Canadian equivalent balances previously disclosed have been revalued as at the date of this consolidated balance sheet. Bank indebtedness at June 30, 2007 is $29.1 million lower than the balance as at December 31, 2006. This is a result of a decrease in inventory and accounts receivable balances as compared to year end, which is consistent with the seasonality of the Company's operations and management's continued effort to reduce inventory levels. FPI's overall capital structure is 35.9% funded by long-term debt (excluding current portion) at June 30, 2007, compared with 42.1% as at July 1, 2006 and 39.7% as at December 31, 2006. Long-term debt (excluding current portion) at June 30, 2007 totalled $89.9 million as compared to $121.0 million at July 1, 2006 and $110.9 million at December 31, 2006. The Company disposed of the Newfoundland Otter in the first quarter of 2007 for proceeds of $10.6 million. This vessel was held as security on certain of the Company's secured bank term loans, and therefore, proceeds upon disposition were paid directly to the Company's third party lender for application against long-term debt. This, in addition to the Company's scheduled long-term debt repayments, is the primary reason for the significant decrease in long-term debt since year end. 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. As at June 30, 2007, the Company had purchased 584,268 shares pursuant to this bid at an average cost of $11.49. As at August 7, 2007, the Company had purchased 687,468 shares pursuant to this bid at an average cost of $10.76 per share. The Company had approximately 13.6 million common shares outstanding as at June 30, 2007 (July 1, 2006; 14.6 million). As at August 7, 2007, common shares outstanding were approximately 13.5 million. 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 Corporation agrees to repurchase an option for a purchase price equal to the market value of the common shares of the Corporation 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 recent trends of Board approval, has resulted in the Company recognizing a financial liability for those stock options outstanding as at June 30, 2007. There were no options granted under the Performance Stock Option Plan in the second quarter of 2007 (2006; nil). Options to purchase common shares granted and outstanding under this Plan as at June 30, 2007, were 196,600 (2006; 1,015,200). At June 30, 2007, the Company has 918,500 shares that remain available for issuance under this Plan. As at August 7, 2007, the Company has 918,500 shares available for grant under this plan. 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 Corporation agrees to purchase an option for a purchase price equal to the market value of the common shares of the Corporation less the exercise price of the option. As consistent with the 2000 Performance Stock Option Plan, as discussed above, the Company has recognized a financial liability for those stock options outstanding under this plan as at June 30, 2007. There were no options granted under Executive Stock Option Plan during the second quarter of 2007 (2006; nil). Options to purchase common shares granted and outstanding under this Plan as at June 30, 2007, were 15,000 (2006; 31,300). The Company has 4,000 shares remaining available for grant under this stock option plan as at June 30, 2007. As at August 7, 2007, the Company has 4,000 shares remaining available for grant under the stock option plan. Shareholders' equity totalled $160.2 million as at June 30, 2007, compared with $166.6 million at July 1, 2006 and $168.2 million at December 31, 2006. CONTRACTUAL OBLIGATIONS. The Company has long-term debt with contractual maturities ranging between 2012 and 2024 as set out in the Annual MD&A. The Company also has operating leases and purchase obligations entered into in the normal course of business. Purchase obligations include purchase orders outstanding relating primarily to inventories and capital assets. There have been no significant changes to the Company's contractual obligations during the second quarter of 2007 that were outside the ordinary course of business. SUMMARY OF QUARTERLY RESULTS The following section provides financial data for the eight most recently completed financial quarters of the Company. The following financial data is derived from the Company's unaudited interim and audited annual financial statements both prepared in accordance with Canadian GAAP 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. Summary of Quarterly Data ------------------------------------------------------------------------- Quarter ended ------------------------------------------------------------------------- unaudited - dollars in thousands, Sept. 30, Dec. 31, Mar. 31, Jun. 30, except per share data 2006 2006 2007 2007 ------------------------------------------------------------------------- Sales $ 174,493 188,123 169,390 160,138 Net income (loss) $ 3,568 (1,748) 2,860 6,273 Net income (loss) per common share Basic $ 0.25 (0.13) 0.21 0.46 Diluted $ 0.25 (0.13) 0.21 0.46 ------------------------------------------------------------------------- ------------------------------------------------------------------------- unaudited - dollars in thousands, Oct. 1, Dec. 31, Apr. 1, Jul. 1, except per share data 2005 2005 2006 2006 ------------------------------------------------------------------------- Sales $ 206,210 239,188 201,780 188,454 Net income (loss) $ (5,146) (3,045) (2,676) 2,771 Net income (loss) per common share Basic $ (0.35) (0.20) (0.18) 0.19 Diluted $ (0.35) (0.20) (0.18) 0.19 ------------------------------------------------------------------------- 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 processed 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. Sales of $206.2 million in the third quarter of 2005, were consistent with the same period of 2004 despite the fact that sales in the third quarter of 2005 included $6.8 million resulting from the operations of The Seafood Company, which had been newly acquired. Excluding the impact of the acquisition, sales decreased by $4.2 million from the second quarter of 2005, which was primarily a result of negative exchange rate impacts. Reduced margins, a capital asset impairment charge of $2.9 million, and a $1.3 million write-off of costs relating to the proposed Marketing and Manufacturing Group income trust transaction contributed to a $5.1 million net loss in the quarter. The Company reported sales of $239.2 million in the fourth quarter of 2005, an increase of $33.0 million over the third quarter of 2005. The Seafood Company accounted for $25.8 million of sales reported in the fourth quarter of 2005. The negative exchange rates continued to impact results in this quarter. Notwithstanding, the Marketing and Manufacturing Group's North American sales of both value added and globally sourced products increased significantly over the third quarter of 2005 as a result of strong fourth quarter sales that typically result from strong seasonal sales during that time of year. A $1.8 million charge for the settlement of obligations for closed plants significantly contributed to a loss in the quarter, as did continuing reduced margins and the strengthening Canadian dollar. 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 all impacted profitability in this quarter. Offsetting these factors were the results of The Seafood Company, which contributed to an overall increase in gross profit as compared to the prior year. Sales of $188.4 million for the second quarter of 2006 were lower than the second quarter sales in 2005 of $203.6 million by $15.2 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 and globally sourced product sales in the Primary Group, combined with negative foreign exchange rate impact, are the primary factors contributing to the decrease from the prior year. Further, the reduction in sales and increase in gross profit is 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 efforts to maximize returns. For the fourth quarter of 2006, the Company continued its focus on profitability. It reported sales of $188.1 million, a decrease of $51.1 million from the same period in 2005. 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 sales revenues than the first quarter of 2006, largely as a result of decreased sales volumes of globally sourced and value added products. Changes in the Primary Group's sales mix, within primary processed product, towards higher margin species resulted in a higher gross profit than in the prior year. This was offset with higher sales allowances and distribution expenses in the Marketing and Manufacturing Group resulting in lower gross profit in the division but a consolidated increase in gross profit as compared to the first quarter in 2006. Sales of $160.1 million in the second quarter of 2007 were lower than the second quarter sales in 2006 of $188.4 million by $28.3 million, largely as a result of lower sales volumes of globally sourced and value added products in the Marketing and Manufacturing Group and lower sales of primary processed and globally sourced products in the Primary Group. The Primary Group's continued focus on its sales mix, within primary processed product, towards higher margin products resulted in a higher gross profit as a percentage of sales than in the same period of the prior year. The Marketing and Manufacturing Group also had increased gross profit as a percentage of sales over the second quarter of 2006 through improved contribution margins on lower sales volumes combined with lower distribution and storage expenses associated with management's product line rationalization. FINANCIAL INSTRUMENTS The financial instruments used by the Company are described in the Annual MD&A. The following table outlines the significant hedge and non-hedge foreign exchange contracts held by the Company as at June 30, 2007, shown in the currency in which they are denominated. Forward Foreign Exchange and Option Contracts ------------------------------------------------------------------------- Outstanding To Average To Average unaudited - June 30, Expire Rate Expire Rate dollars in thousands 2007 2007 (CAD)(1) 2008 (CAD) ------------------------------------------------------------------------- North American Operations Hedge contracts USD sale - forwards 2,250 2,250 1.1291 - - USD purchase - forwards 2,974 1,498 1.1225 1,476 1.1266 GBP sale - forwards 17,500 17,500 2.1255 - - Non-hedge contracts USD sale written options 5,000 5,000 1.1400 - - Euro sale written options 8,000 8,000 1.4410 - - USD sale barrier options 20,000 20,000 1.1273 - - Euro sale barrier options 8,000 8,000 1.5202 - - (1) Yen sale barrier option (rate is USD) 1,000,000 1,000,000 116.50 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Outstanding To Average To Average unaudited - June 30, Expire Rate Expire Rate dollars in thousands 2007 2007 (GBP) 2008 (GBP) ------------------------------------------------------------------------- U.K. Operations Hedge Contracts USD purchase - collar options 12,000 12,000 1.9000 - - ------------------------------------------------------------------------- Mark-to-market exchange losses associated with contracts outstanding at June 30, 2007 amount to $0.5 million (2006; $2.8 million). INTEREST RATE SWAP AGREEMENTS. There has been no significant change to the Company's use of interest rate swap agreements during the quarter as compared to year end. Reference should be made to the Annual MD&A. OTHER RISKS LABOUR CONTRACTS. The Company currently has four collective agreements with labour unions, representing approximately 2,100 employees. Negotiations have concluded with respect to an Agreement covering six primary processing plants and one secondary processing plant in Newfoundland and Labrador; a new Collective Agreement is in effect until December 31, 2009. A Collective Agreement covering groundfish-harvesting operations in Newfoundland and Labrador was recently ratified and is in effect until June 30, 2009. A Collective Agreement covering scallop-harvesting operations in Nova Scotia is in effect until April 30, 2009. The fourth contract, covering offshore shrimp-harvesting operations in Newfoundland and Labrador, expired on December 31, 2006. There has been no significant change to the Company's other risks during the quarter as compared to year-end. Reference should be made to the Annual MD&A. OFF-BALANCE SHEET ARRANGEMENTS GUARANTEES. There have been no further significant changes to the Company's guarantees during the quarter, as compared to year-end other than as disclosed in Note 16 to the financial statements. Reference should be made to the Annual MD&A. LETTERS OF CREDIT. The Company has letters of credit outstanding as at June 30, 2007 of USD $1.9 million (2006; USD $10.5 million) related to the procurement of inventories. The Company also has various standby letters of credit outstanding as at June 30, 2007 of $3.5 million (2006; $3.6 million). CHANGES IN ACCOUNTING POLICY 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 Canadian Institute of Chartered Accountants ("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 are discussed in note 2 to the Interim Financial Statements. FUTURE CHANGES IN ACCOUNTING POLICIES FINANCIAL INSTRUMENTS DISCLOSURES. CICA Handbook Section 3862, Financial Instruments - Disclosures, increases the disclosures currently required that will enable users to evaluate the significance of financial instruments for an entity's financial position and performance, including disclosures about fair value. In addition, disclosure is required of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about liquidity risk and market risk. The quantitative disclosures must also include a sensitivity analysis for each type of market risk to which an entity is exposed, showing how net income and other comprehensive income would have been affected by reasonably possible changes in the relevant risk variable. This standard is effective for the Company for interim and annual financial statements beginning on January 1, 2008. The Company is currently evaluating the impact of this standard on its financial reporting. FINANCIAL INSTRUMENTS PRESENTATION. CICA Handbook Section 3863, Financial Instruments - Presentation, replaces the existing requirements on presentation of financial instruments which have been carried forward unchanged to this new section. This standard is effective for the Company for interim and annual financial statements beginning on January 1, 2008. The Company is currently evaluating the impact of this standard on its financial reporting. For details on other future changes in accounting policies that may have an impact on the Company's future financial reporting, reference should be made to the Annual MD&A. 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 of the Primary Group division and the Chief Operating Officer of the U.S. Marketing and Manufacturing Group division, 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 June 30, 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 of the Primary Group and Chief Operating Officer of the U.S. Marketing and Manufacturing Group have signed and filed the Chief Executive Officer's Form 52-109F1 for the purposes of MI 52-109 as they performed similar functions to a Chief Executive Officer in respect of their operating divisions. 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 interim filings with regulators, including this MD&A and the accompanying unaudited interim consolidated financial statements for the twenty-six weeks ended June 30, 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, the Executive Vice President and Chief Operating Officer of the Primary Group division and the Chief Operating Officer of the U.S. Marketing and Manufacturing Group division 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 GAAP. Management also concluded that during the quarter ended June 30, 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 There has been no significant change to the Company's critical accounting estimates during the quarter as compared to year-end other than the changes required in adopting new accounting standards as described in note 2 to the Interim Financial Statements. Reference should be made to the Annual MD&A. RELATED PARTY TRANSACTIONS In the normal course of business, the Company has transactions with companies with common directors and a company in which FPI holds an equity investment, as follows: ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - Jun. 30, Jul. 1, Jun. 30, Jul. 1, dollars in thousands 2007 2006 2007 2006 ------------------------------------------------------------------------- Transactions Sales of product $ 61 142 76 261 Purchases of product and services 857 3,282 1,464 5,563 Net commissions and royalties 303 488 369 703 ------------------------------------------------------------------------- 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 in the following tables 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 balance sheets. ------------------------------------------------------------------------- Jun. 30, Dec. 31, Jul. 1, 2007 2006 2006 ------------------------------------------------------------------------- Balances Receivable from companies with common directors $ 15 191 2 Receivable from a company in which FPI holds an equity investment 4,094 3,007 10,075 Payable to companies with common directors 274 963 187 ------------------------------------------------------------------------- OUTLOOK FOR 2007 The Company and its business and operations are subject to a number of risks and uncertainties. These risks and uncertainties, in addition to those described below, are described in detail in the Company's AIF filed with the Canadian securities regulatory authorities. The strategy of the Primary Group is to continue to seek to drive operational efficiencies with the view to achieving acceptable returns on the significant capital investments that have been made by the Company during the last number of years. Significant factors with respect to the availability of the natural resource, the stability of the U.S. dollar, Pound Sterling and Euro, the rising cost of fuel and the impact of low cost producers on the world marketplace, on an individual basis and in combination, have negatively impacted the Primary Group's business and will continue to negatively impact this business in 2007. Management continues to move forward aggressively on initiatives to improve productivity and reduce costs in several areas of the Primary Group's business in order to mitigate the impact of foreign currency fluctuations, the global competition and the availability of the natural resource. The business is achieving stronger sales volumes and increasing prices in certain of its shellfish and groundfish species. The Primary Group is committed to reducing harvesting and processing costs as well as administrative and selling costs and is aggressively targeting international market development to expand its customer base. A key factor in achieving acceptable and consistent performance is the stability of the inshore snow crab and coldwater shrimp industries in Newfoundland and Labrador, which require the maintenance of a structure and regulatory framework that is acceptable to all stakeholders. The Marketing and Manufacturing Group will continue the initiatives and disciplines that were adopted during 2006 to ensure a more stable earnings performance during 2007. It is anticipated that there will be challenges with respect to raw material cost and availability during the year. However, the Marketing and Manufacturing Group is anticipating that the impact of price increases, continued new product rollouts, realignment of procurement activities, combined with operational efficiencies should offset the earnings impact of the supply chain challenges. POTENTIAL SALE OF CERTAIN ASSETS In a series of public disclosure statements and status updates commencing January 11, 2007, the Company announced that preliminary discussions had been held with several interested parties with respect to the potential sale of certain FPI assets. An Independent Committee of the Board of Directors was struck to evaluate these offers. National Bank Financial and Glitnir Bank were engaged to assist and advise in this exercise. In accordance with its mandate, the Independent Committee reviewed the merits of each of these offers and prepared recommendations for the full Board of Directors. The Board subsequently met to consider the recommendations of the Independent Committee, and began a process of related discussions with the Government of Newfoundland and Labrador. Certain of these transactions would be subject to shareholder and government approvals, as well as the repeal of the FPI Act. On April 30, 2007, the Company confirmed that Letters of Intent for potential transactions had been reached with Ocean Choice International with respect to the transfer of certain FPI assets located in Atlantic Canada and Europe and with High Liner Foods in relation to the potential sale of certain FPI assets in Canada and the United States. Certain of these transactions would be subject to shareholder and government approvals, as well as the repeal of the FPI Act. SUBSEQUENT EVENT On July 26, 2007, the Company reached a definitive agreement with respect to the sale of The Seafood Company Limited and its subsidiaries to a company based in the United Kingdom. Net proceeds of the transaction will be used by the Company to reduce current levels of debt. Further disclosure can be found in note 16 of the financial statements. CONTINGENCIES 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 the second quarter of 2006, the Government of Newfoundland and Labrador laid charges against the Company 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 financial statements. FORWARD-LOOKING STATEMENTS This MD&A contains, in accordance with applicable Canadian securities laws and policies, certain forward-looking information about the Company's business and anticipated trends and developments. Such disclosures amount to forward-looking statements, which are subject to significant risks and uncertainties. These forward-looking statements arise out of Management's experience, perception of trends, current conditions, and expected future developments, as well as other factors. Readers are cautioned not to place undue reliance on forward-looking statements, as a number of important factors, as discussed herein and in the Company's other continuous disclosure documents, could cause actual results to differ materially from historical results and from the results contemplated by such forward-looking statements. The Company includes in publicly available documents, filed from time to time with Canadian securities regulatory authorities, a thorough discussion of the risk factors that could cause the Company's anticipated outcomes to differ from actual outcomes. 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 or on FPI's corporate website at www.fpil.com. CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------- unaudited - Jun. 30, Dec. 31, Jul. 1, dollars in thousands 2007 2006 2006 ------------------------------------------------------------------------- Assets Current assets Cash (note 13) $ 1,643 9,103 8,308 Accounts receivable (note 11) 58,323 79,573 73,448 Inventories 116,861 137,649 132,165 Prepaid expenses 3,817 4,269 4,354 Future income tax assets 4,012 3,644 1,187 Derivative assets (note 2) 643 475 533 Capital assets held for resale - 10,647 - ---------------------------------- Total current assets 185,299 245,360 219,995 Capital assets 126,246 133,285 158,714 Future income tax assets 10,758 12,837 13,278 Goodwill 9,766 10,447 9,435 Intangible assets 4,919 5,866 5,842 Other assets 13,348 13,975 14,913 ---------------------------------- $ 350,336 421,770 422,177 ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities Bank indebtedness $ 31,925 61,046 57,032 Accounts payable and accrued liabilities (note 11) 50,167 53,386 52,351 Current portion of long-term debt (note 4) 9,475 10,135 10,244 Future income tax liabilities 1,578 1,212 2,410 Derivative liabilities (note 2) 950 10,070 3,381 Current deferred gains - - 2,078 ---------------------------------- Total current liabilities 94,095 135,849 127,496 Long-term debt (note 4) 89,938 110,909 121,041 Deferred gains and other 1,867 1,988 2,420 Future income tax liabilities 4,188 4,861 4,589 ---------------------------------- 190,088 253,607 255,546 ---------------------------------- Shareholders' equity Share capital (note 3) 46,177 46,564 48,763 Contributed surplus (note 8) 61,631 67,386 69,003 Retained earnings 76,268 68,119 66,299 Accumulated other comprehensive loss (note 14) (23,828) (13,906) (17,434) ---------------------------------- 160,248 168,163 166,631 ------------------------------------------------------------------------- $ 350,336 421,770 422,177 ------------------------------------------------------------------------- Commitments and contingencies (note 12) Subsequent event (note 16) See accompanying notes to unaudited interim consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - dollars in thousands, Jun. 30, Jul. 1, Jun. 30, Jul. 1, except per share amounts 2007 2006 2007 2006 ------------------------------------------------------------------------- Sales $ 160,138 188,454 329,528 390,234 Cost of goods sold 140,659 168,604 288,181 352,866 ---------------------------------------------- Gross profit 19,479 19,850 41,347 37,368 Commission income 432 577 572 771 ---------------------------------------------- 19,911 20,427 41,919 38,139 Administrative and marketing expenses 9,832 12,018 23,214 25,414 Depreciation of capital assets 3,059 3,536 6,147 7,108 Amortization of intangible assets 277 259 567 515 Interest on bank indebtedness 837 1,999 2,017 4,862 Interest on long-term debt 1,560 1,599 3,602 3,202 Foreign exchange derivative gain (5,064) (4,766) (6,919) (5,006) Pension curtailment gain (note 9) - - (572) - Gain on disposal of capital assets (21) (18) (228) (160) ---------------------------------------------- Income before income taxes 9,431 5,800 14,091 2,204 Income tax expense (note 6) 3,158 3,029 4,958 2,109 ---------------------------------------------- Net income for the period $ 6,273 2,771 9,133 95 ------------------------------------------------------------------------- Earnings per share: Basic (note 7) $ 0.46 0.19 0.67 0.01 Diluted (note 7) $ 0.46 0.19 0.66 0.01 ------------------------------------------------------------------------- See accompanying notes to unaudited interim consolidated financial statements. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - Jun. 30, Jul. 1, Jun. 30, Jul. 1, dollars in thousands 2007 2006 2007 2006 ------------------------------------------------------------------------- Retained earnings, beginning of period $ 70,979 63,528 68,119 66,204 Adjustment to retained earnings, beginning of period (note 2) (984) - (984) - ---------------------------------------------- Adjusted retained earnings, beginning of period 69,995 63,528 67,135 66,204 Net income for the period 6,273 2,771 9,133 95 ---------------------------------------------- Retained earnings, end of period $ 76,268 66,299 76,268 66,299 ------------------------------------------------------------------------- See accompanying notes to unaudited interim consolidated financial statements. CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - Jun. 30, Jul. 1, Jun. 30, Jul. 1, dollars in thousands 2007 2006 2007 2006 ------------------------------------------------------------------------- Net income for the period $ 6,273 2,771 9,133 95 Unrealized loss on translating financial statements of self- sustaining foreign operations (9,240) (4,897) (10,519) (4,707) Gain on hedge of net investments in self- sustaining foreign operations, net of tax 861 2,938 1,066 2,938 ---------------------------------------------- Unrealized foreign currency translation losses, net of hedging activities (8,379) (1,959) (9,453) (1,769) Unrealized (losses) gains on derivatives designated as cash flow hedges: Foreign exchange hedging instruments, net of tax (27) - 53 - Interest rate hedging instruments, net of tax 120 - 153 - Reclassification adjustment for (gains) losses included in net income: Foreign exchange hedging instruments, net of tax of $0.1 million and $0.15 million (quarter and year to date respectively) (290) - 371 - Interest rate hedging instruments, net of tax 80 - 86 - ---------------------------------------------- Other comprehensive loss, net of tax (8,496) (1,959) (8,790) (1,769) ---------------------------------------------- Comprehensive (loss) income $ (2,223) 812 343 (1,674) ---------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to unaudited interim consolidated financial statements. CONSOLIDATED STATEMENT OF ACCUMULATED COMPREHENSIVE LOSS ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - Jun. 30, Jul. 1, Jun. 30, Jul. 1, dollars in thousands 2007 2006 2007 2006 ------------------------------------------------------------------------- Accumulated other comprehensive loss, beginning of period $ (15,248) (15,475) - - Adjustment to accumulated other comprehensive loss Cumulative adjustment on translation of financial statements of self-sustaining foreign operations (note 2) (84) - (13,990) (15,665) 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 2) - - (899) - Interest rate hedging instruments, net of tax of $0.1 million (note 2) - - (149) - ---------------------------------------------- Accumulated other comprehensive loss, beginning of period (15,332) (15,475) (15,038) (15,665) Other comprehensive loss, net of tax (8,496) (1,959) (8,790) (1,769) ---------------------------------------------- Accumulated other comprehensive loss, end of period $ (23,828) (17,434) (23,828) (17,434) ---------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to unaudited interim consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - Jun. 30, Jul. 1, Jun. 30, Jul. 1, dollars in thousands 2007 2006 2007 2006 ------------------------------------------------------------------------- Operations Net income $ 6,273 2,771 9,133 95 Add (deduct) items not affecting cash Amortization 3,336 3,795 6,714 7,623 Amortization of transaction costs 416 398 653 864 Future income tax 2,094 3,194 1,930 1,991 Net gain on disposal of capital assets (21) (18) (228) (160) Foreign exchange derivative gain (5,064) (4,766) (6,919) (5,006) Pension curtailment gain - - (572) - Stock based compensation (568) 74 (517) 156 Changes in non-cash working capital balances related to operations: Accounts receivable (179) 14,324 13,096 31,719 Inventories 4,836 7,588 14,380 62,736 Prepaid expenses 1,069 1,198 269 1,786 Accounts payable and accrued liabilities 204 (1,664) 103 (26,454) Deferred gains on terminated forward contracts - (856) - (702) Foreign currency translation adjustments 106 2,621 151 2,657 Accrued benefit asset (505) 82 (1,240) 115 ---------------------------------------------- Cash provided by operating activities 11,997 28,741 36,953 77,420 ------------------------------------------------------------------------- Investing Additions to capital assets (708) (372) (1,082) (680) Proceeds from disposal of capital assets 23 20 10,775 290 Increase in mortgages receivable (64) (9) (203) (131) (Decrease) increase in deferred revenues (12) (28) (24) 73 Premiums and funds received (paid) on foreign exchange derivative instruments 856 4,657 (2,821) 10,522 Other investing activities (758) (525) (2,564) 204 ---------------------------------------------- Cash (applied to) provided by investing activities (663) 3,743 4,081 10,278 ------------------------------------------------------------------------- Financing Issue of long-term debt - 34,884 - 34,884 Repayment of long-term debt (2,350) (1,893) (15,374) (3,714) Change in bank indebtedness (5,714) (68,480) (27,387) (118,651) Issue of common shares 379 2 1,257 56 Repurchase of common shares (4,308) (17) (6,882) (991) ---------------------------------------------- Cash applied to financing activities (11,993) (35,504) (48,386) (88,416) ------------------------------------------------------------------------- Effect of exchange rate changes on cash (145) 128 (108) 247 ------------------------------------------------------------------------- Change in cash position during the period (804) (2,892) (7,460) (471) Cash position, beginning of period 2,447 11,200 9,103 8,779 ---------------------------------------------- Cash position, end of period $ 1,643 8,308 1,643 8,308 ------------------------------------------------------------------------- Supplemental cash flow information ------------------------------------------------------------------------- unaudited - dollars in thousands ------------------------------------------------------------------------- Cash paid for: Interest $ 2,223 3,721 $ 5,159 8,296 Income taxes $ 1,701 992 $ 5,032 2,005 ------------------------------------------------------------------------- See accompanying notes to unaudited interim consolidated financial statements NOTES TO SECOND QUARTER 2007 INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited - tabular amounts expressed in thousands of dollars except where otherwise noted) ------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These unaudited interim consolidated financial statements and notes have been prepared by Management in accordance with Canadian generally accepted accounting principles ("GAAP") with respect to the preparation of interim consolidated financial statements and are based upon accounting policies and methods consistent with those used and described in the audited annual financial statements as at and for the year ended December 31, 2006 with the exception of the application of the accounting policies described in note 2. Not all disclosures required by GAAP for annual consolidated financial statements are presented and accordingly, the interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements as at and for the year ended December 31, 2006. 2. ADOPTION OF NEW ACCOUNTING POLICIES On January 1, 2007, the Company adopted Section 3855, "Financial Instruments - Recognition and Measurement." The section defines the standards for recognizing and measuring financial instruments in the balance sheet and the standards for reporting gains and losses in the financial statements. Under Section 3855, all financial instruments are classified into one of five categories: held-for-trading, held-to-maturity investments, 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 investments 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 in the balance sheet at fair value unless they qualify for the normal sale purchase exemption. All changes in their fair value are recorded in income unless cash flow hedge accounting or a hedge of a net investment in self-sustaining foreign operation is used, in which case changes in fair value are recorded in other comprehensive income (loss). The Corporation has made the following classifications: i) Cash and cash equivalents 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 measured at amortized cost with interest accretion recorded in net income. iv) Payables and accruals 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. v) 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 were decreases of $4,057,000 in other assets, $3,084,000 in long-term debt, $73,000 in derivative liabilities, $984,000 in retained earnings and a $84,000 increase in the foreign currency translation account. The transitional adjustment at January 1, 2007 in relation to recording the Company's long-term debt using the effective interest rate method was not recognized until the second quarter of 2007. The impact on the consolidated balance sheet in relation to the change in transitional adjustment from the first quarter of 2007 is an increase in long-term debt of $900,000, a decrease in opening retained earnings of $984,000 and an increase in foreign currency translation adjustment account of $84,000. There is no material impact on the consolidated statement of operations. vi) The Company's interest-free government loan 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. vii) Derivatives are recorded on the balance sheet 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 (loss) income. The impact on the consolidated balance sheet of measuring hedging derivatives at fair value at January 1, 2007 were increases in future tax assets of $471,200, in derivative assets of $171,300, in derivative liabilities of $1,641,300, in future tax liabilities of $48,300 and an increase in accumulated other comprehensive loss of $1,047,100. At June 30, 2007, the Company holds derivative contracts that hedge a portion of its exposure to variability in foreign currency cash flows until September 2008. The retroactive adoption of this section is completed without restatement of the consolidated financial statements of prior periods. An embedded derivative is a component of a financial instrument or another contract of which the characteristics are similar to a derivative. There is no material impact on the consolidated financial statements. 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 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 statements have been restated 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. Comprehensive income On January 1, 2007, the Company adopted 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 are 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 now presenting a consolidated statement of comprehensive (loss) income as part of the consolidated financial statements. Hedges On January 1, 2007, the Corporation adopted Section 3865 of the CICA Handbook, Hedges. The recommendations of this section expand the guidelines required by Accounting Guideline ("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 the derivative financial instruments in the same period as for those related to the hedged item. 3. SHARE CAPITAL SHARE DATA. Common shares issued and outstanding as at June 30, 2007 are 13,606,396 (14,595,103 at July 1, 2006). Options to purchase common shares granted and outstanding under the Executive Stock Option Plan and the 2000 Performance Stock Option Plan as at June 30, 2007 are 15,000 and 196,600 respectively (31,300 and 1,015,200 respectively, at July 1, 2006). SHARE REPURCHASE. Under a normal course issuer bid, which expires on December 5, 2007, the Company is authorized to purchase up to 701,806 common shares. In the second quarter of 2007, the Company purchased 316,568 common shares at an average cost of $13.47. This brings the year to date repurchase to 584,268 common shares at an average cost of $11.49. The total remaining common shares that can be purchased under the current normal course issuer bid is 14,438. The excess of the purchase price over the carrying value of the common shares purchased, amounting to $3,210,087 for the thirteen weeks ended June 30, 2007, and $4,764,987 for the twenty-six weeks ended June 30, 2007, has been charged to contributed surplus. 4. LONG-TERM DEBT The Company disposed of the Newfoundland Otter in the first quarter of 2007 for proceeds of $10,647,000. This vessel was held as security on certain of the Company's secured bank term loans, and therefore, proceeds upon disposition were paid directly to the Company's third party lender for application against long-term debt. 5. FINANCIAL INSTRUMENTS 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 June 30, 2007, March 31, 2007 and December 31, 2006 the estimated fair value of long-term debt, interest-free government loans and fisherman mortgage receivables corresponds to its carrying value. 6. INCOME TAXES Major components of income tax expense are as follows: ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - Jun. 30, Jul. 1, Jun. 30, Jul. 1, dollars in thousands 2007 2006 2007 2006 ------------------------------------------------------------------------- Current $ 1,063 (165) 3,028 118 Future 2,095 3,194 1,930 1,991 ---------------------------------------------- $ 3,158 3,029 4,958 2,109 ------------------------------------------------------------------------- 7. EARNINGS PER COMMON SHARE ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - dollars in thousands, Jun. 30, Jul. 1, Jun. 30, Jul. 1, except per share amounts 2007 2006 2007 2006 ------------------------------------------------------------------------- Net income for the period $ 6,273 2,771 9,133 95 Basic: Weighted average number of common shares outstanding 13,598 14,616 13,727 14,664 ---------------------------------------------- Per share amount $ 0.46 0.19 0.67 0.01 ---------------------------------------------- Diluted: Weighted average number of common shares outstanding 13,598 14,616 13,727 14,664 Impact of outstanding stock options 15 - 18 - ---------------------------------------------- 13,613 14,616 13,745 14,664 ---------------------------------------------- Per share amount $ 0.46 0.19 0.66 0.01 ------------------------------------------------------------------------- For the quarter ended July 1, 2006, common shares issuable under the terms of the Company's stock option plans were not included in the calculation of diluted earnings per share 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 the following weighted average assumptions used for grants: ------------------------------------------------------------------------- 2007 2006 Assumption (unaudited) (unaudited) ------------------------------------------------------------------------- Dividend yield 0.0% 0.0% Expected volatility 22.7% 22.7% Risk free interest rate 4.2% 4.2% Expected life 7.5 years 7.5 years ------------------------------------------------------------------------- The Company has stock-based compensation plans for directors, executives, and certain senior management. In the second quarter of 2007, these plans were amended in order to provide a cashless option exercise feature whereby the Corporation agrees to repurchase an option for a purchase price equal to the market value of the common shares of the Corporation 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 recent trends of Board approval, has resulted in the Company recognizing a financial liability for those stock options outstanding as at June 30, 2007. Stock option expense recognized as part of the liability and equity instruments discussed above for the thirteen weeks and twenty-six weeks ended June 30, 2007 amounted to $2,281,418 (2006; $74,000) and $2,332,018 (2006; $156,000), respectively. 8. CONTRIBUTED SURPLUS ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - Jun. 30, Jul. 1, Jun. 30, Jul. 1, dollars in thousands 2007 2006 2007 2006 ------------------------------------------------------------------------- Contributed surplus, beginning of period $ 65,754 68,935 67,386 69,251 Acquisition of common shares; normal course issuance bid (3,502) (6) (5,057) (404) Stock option expense - 74 51 156 Exercise of options (621) - (749) - ---------------------------------------------- Contributed surplus, end of period $ 61,631 69,003 $ 61,631 69,003 ------------------------------------------------------------------------- 9. EMPLOYEE FUTURE BENEFITS ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended ------------------------------------------------------------------------- unaudited - Jun. 30, Jul. 1, Jun. 30, Jul. 1, dollars in thousands 2007 2006 2007 2006 ------------------------------------------------------------------------- Defined benefit pension (income) expense $ (672) 52 $ (1,344) 104 Other benefit plans expense 137 135 274 270 ------------------------------------------------------------------------- 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 also given a one-time option to convert their accrued defined benefits under these plans to an opening balance in the new defined contribution provisions. As these plan amendments curtail defined benefit accrual, the Company recognized a $572,000 pension curtailment gain in the first quarter of 2007. Settlement of a portion of the defined benefit obligation is expected to occur later in 2007, at which time a settlement gain will be recognized upon conversion. Further, as a result of plan conversions, an estimated valuation allowance of $2,866,000 is expected to be recognized by the Company at year-end after an actuarial valuation is performed on October 31, 2007, the Company's measurement date. The total expense for the Company's defined contribution plans for the thirteen weeks and twenty-six weeks ended June 30, 2007 were $332,371 (2006; $540,000) and $636,171 (2006; $905,000), respectively. 10. BUSINESS SEGMENTS The Company operates within two distinct business segments: the Primary Group and the Marketing and Manufacturing Group. This structure supports a customer and product management focus and decentralized decision-making. Both business units have specific activities and mandates with the common goal of providing the best products and value to all FPI customers. The Company evaluates performance and allocates resources based on segment gross profit. All inter-segment transactions are recorded at an exchange amount and are eliminated upon consolidation. SEGMENTED OPERATIONS ------------------------------------------------------------------------- Thirteen Weeks ended Jun. 30, 2007 ----------------------------------- Marketing and Manufac- unaudited - Primary turing Consoli- dollars in thousands Group Group dated ------------------------------------------------------------------------- Total sales Canada $ 41,407 35,348 76,755 Inter-segment (23,151) (2,147) (25,298) ---------------------------------- 18,256 33,201 51,457 ---------------------------------- United States 211 57,008 57,219 Inter-segment - (1,846) (1,846) ---------------------------------- 211 55,162 55,373 ---------------------------------- Europe 53,291 - 53,291 ---------------------------------- Foreign exchange gain on hedging contracts 17 - 17 ---------------------------------- Net sales to customers 71,775 88,363 160,138 ---------------------------------- Segment gross profit $ 10,029 9,450 19,479 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Thirteen Weeks ended Jul.1, 2006 ------------------------------------------------------------------------- Marketing and Manufac- unaudited - Primary turing Consoli- dollars in thousands Group Group dated ------------------------------------------------------------------------- Total sales Canada $ 48,279 36,133 84,412 Inter-segment (13,125) (8,187) (21,312) ---------------------------------- 35,154 27,946 63,100 ---------------------------------- United States 11,822 72,240 84,062 Inter-segment (512) (48) (560) ---------------------------------- 11,310 72,192 83,502 ---------------------------------- Europe 38,979 - 38,979 ---------------------------------- Foreign exchange gain on hedging contracts 2,873 - 2,873 ---------------------------------- Net sales to customers 88,316 100,138 188,454 ---------------------------------- Segment gross profit $ 11,762 8,088 19,850 ------------------------------------------------------------------------- ------------------------------------------------------------------------- SEGMENTED OPERATIONS ------------------------------------------------------------------------- Twenty-Six weeks ended Jun. 30, 2007 ------------------------------------------------------------------------- Marketing and Manufac- unaudited - Primary turing Consoli- dollars in thousands Group Group dated ------------------------------------------------------------------------- Total sales Canada $ 75,104 67,095 142,199 Inter-segment (47,364) (5,679) (53,043) ---------------------------------- 27,740 61,416 89,156 ---------------------------------- United States 538 139,621 140,159 Inter-segment (2) (2,830) (2,832) ---------------------------------- 536 136,791 137,327 ---------------------------------- Europe 103,593 - 103,593 ---------------------------------- Foreign exchange gain on hedging contracts (548) - (548) ---------------------------------- Net sales to customers 131,321 198,207 329,528 ---------------------------------- Segment gross profit $ 19,774 21,573 41,347 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Twenty-Six Weeks ended Jul.1, 2006 ----------------------------------- Marketing and Manufac- unaudited - Primary turing Consol- dollars in thousands Group Group idated ------------------------------------------------------------------------- Total sales Canada $ 80,669 70,812 151,481 Inter-segment (27,764) (15,727) (43,491) ---------------------------------- 52,905 55,085 107,990 ---------------------------------- United States 27,059 177,742 204,801 Inter-segment (1,308) (297) (1,605) ---------------------------------- 25,751 177,445 203,196 ---------------------------------- Europe 75,425 - 75,425 ---------------------------------- Foreign exchange gain on hedging contracts 3,623 - 3,623 ---------------------------------- Net sales to customers 157,704 232,530 390,234 ---------------------------------- Segment gross profit $ 16,351 21,017 37,368 ------------------------------------------------------------------------- ------------------------------------------------------------------------- SEGMENTED ASSETS ------------------------------------------------------------------------- unaudited - Jun. 30, Dec. 31, Jul. 1, dollars in thousands 2007 2006 2006 ------------------------------------------------------------------------- Primary Group $ 285,448 315,357 309,926 Marketing and Manufacturing Group 64,888 106,413 112,251 ------------------------------------------------------------------------- $ 350,336 421,770 422,177 ------------------------------------------------------------------------- 11. RELATED PARTY TRANSACTIONS In the normal course of business, the Company has transactions with companies with common directors and a company in which FPI holds an equity investment, as follows: ------------------------------------------------------------------------- Thirteen Weeks Ended Twenty-Six Weeks Ended unaudited - Jun. 30, Jul. 1, Jun. 30, Jul. 1, dollars in thousands 2007 2006 2007 2006 ------------------------------------------------------------------------- Transactions Sales of product $ 61 142 76 261 Purchases of product and services 857 3,282 1,464 5,563 Net commissions and royalties 303 488 369 703 ------------------------------------------------------------------------- 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 in the following tables 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 balance sheets. ------------------------------------------------------------------------- unaudited - Jun. 30, Dec. 31, Jul. 1, dollars in thousands 2007 2006 2006 ------------------------------------------------------------------------- Balances Receivable from companies with common directors $ 15 191 2 Receivable from a company in which FPI holds an equity investment 4,094 3,007 10,075 Payable to companies with common directors 274 963 187 ------------------------------------------------------------------------- 12. COMMITMENTS AND CONTINGENCIES 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 the quarter ended July 1, 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. 13. RESTRICTED CASH Cash balances include restricted cash of $nil (2006; $1,713,787) in support of the Company's foreign exchange derivative contracts. 14. ACCUMULATED OTHER COMPREHENSIVE LOSS Included in accumulated other comprehensive loss are unrealized (losses) gains of ($454,196) and $86,134, net of tax, in relation to the Company's forward contracts and interest rate swap agreements, respectively, that the Company expects will be reclassified into income in the next 12 months. 15. POTENTIAL SALE OF CERTAIN ASSETS In a series of public disclosure statements and status updates commencing January 11, 2007, the Company announced that preliminary discussions had been held with several interested parties with respect to the potential sale of certain FPI assets. An Independent Committee of the Board of Directors was struck to evaluate these offers. National Bank Financial and Glitnir Bank were engaged to assist and advise in this exercise. In accordance with its mandate, the Independent Committee reviewed the merits of each of these offers and prepared recommendations for the full Board of Directors. The Board subsequently met to consider the recommendations of the Independent Committee, and began a process of related discussions with the Government of Newfoundland and Labrador. On April 30, 2007, the Company confirmed that Letters of Intent for potential transactions had been reached with Ocean Choice International with respect to the transfer of certain FPI assets located in Atlantic Canada and Europe and with High Liner Foods in relation to the potential sale of certain FPI assets in Canada and the United States. Certain of these transactions would be subject to shareholder and government approvals, as well as the repeal of the FPI Act. 16. SUBSEQUENT EVENT On July 26, 2007, the Company reached a definitive agreement in respect of the sale of The Seafood Company Limited and its subsidiaries to a company based in the United Kingdom. Upon completion of the transaction in the third quarter net proceeds will be used by the Company to reduce current levels of debt at which time the Company will provide a (pnds stlg)3.3 million (CAD $7.0 million) seven year guarantee to the purchaser. Below is a summary of the carrying value of the major classes of assets and liabilities as at June 30, 2007: ------------------------------------------------------------------------- Jun. 30, unaudited - dollars in thousands 2007 ------------------------------------------------------------------------- Assets Cash $ 2,470 Accounts receivable 11,507 Intercompany receivable 1,790 Inventories 26,097 Capital assets 10,532 Goodwill 5,137 ------------------------------------------------------------------------- $ 57,533 ------------------------------------------------------------------------- Liabilities Bank indebtedness $ 6,745 Accounts payable and accrued liabilities 10,617 Deferred revenue 1,835 Long-term debt 12,800 Future income tax liabilities 1,293 ------------------------------------------------------------------------- $ 33,290 ------------------------------------------------------------------------- 17. COMPARATIVE FIGURES Certain amounts as at and for the thirteen weeks and twenty-six weeks ended July 1, 2006 have been reclassified to conform with the presentation adopted for the current period. 18. SEASONALITY 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 processed 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 of product, largely shellfish, during the holidays. 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.

For further information:

For further information: Investors: Bev Evans, Chief Financial Officer,
(709) 570-0351, bevans@fpil.com; Media: Russ Carrigan, Corporate
Communications, (709) 570-0130, rcarrigan@fpil.com

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FP RESOURCES LIMITED

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