Foremost Income Fund

Foremost Income Fund

August 13, 2007 12:51 ET

Foremost Income Fund Reports Second Quarter Revenues and Earnings

CALGARY, ALBERTA--(Marketwire - Aug. 13, 2007) - Foremost Income Fund (TSX:FMO.UN) announces the financial results for the three and six months ended June 30, 2007.

(000's, except per trust
unit amounts)
for the THREE months for the SIX months
ended June 30, ended June 30,
2007 2006 2007 2006
Revenue $ 54,166 $ 67,222 $ 116,801 $ 132,827
Cost of sales 37,983 48,182 84,421 97,193
16,183 19,040 32,380 35,634
Selling, general and
administrative 5,497 6,425 11,670 11,702
Interest 364 93 660 314
Amortization 1,353 905 2,583 1,689
Foreign exchange (gain) loss 461 (95) 471 (162)
7,675 7,328 15,384 13,543
Income before income taxes 8,508 11,712 16,996 22,091
Future income tax recovery (19,105) (84) (19,368) (84)
Net income 27,613 11,796 36,364 22,175
Accumulated earnings,
beginning of period 58,900 43,522 58,165 37,950
Distributions to unitholders (8,121) (7,715) (16,137) (12,522)
Accumulated earnings, end of
period $ 78,392 $ 47,603 $ 78,392 $ 47,603
Earnings per trust unit
Basic $ 1.36 $ 0.61 $ 1.81 $ 1.16
Diluted $ 1.34 $ 0.60 $ 1.78 $ 1.13

Business conditions similar to Q1-2007 impacted Q2-2007's results. Specifically, these results reflect the benefits of continued strength in worldwide oil related markets offset by the ongoing slowdown in North American natural gas drilling. The demand for oilsands and heavy oil products remained strong resulting in record quarter revenues and net incomes for the business entities that manufacture these products. These gains partially offset the drop in quarter revenues and net incomes from those business entities focused on the manufacture of natural gas related products, principally 100- to 400-bbl shop tanks and gas separators.

In addition, the significant strengthening of the Canadian dollar resulted in a $461,000 foreign exchange loss during Q2-2007.

Legislation whereby the Fund's income distributions would be subject to income tax commencing in 2011 was passed by the Government of Canada on June 22, 2007. Accordingly, the future income tax effect of this legislation was recognized in accordance with Canadian generally accepted accounting principles. The effect of this is the Q2-2007 recognition, on a prospective basis, of a future income tax recovery and corresponding future income tax asset in the amount of $18.6 million.

Revenues for Q2-2007 were $54.2 million as compared to $67.2 million for Q2-2006. The Q2-2007 gross profit was $16.2 million (29.9%) compared to $19.0 million (28.3%) for Q2-2006, and income before income taxes was $8.5 million (15.7%) as compared to $11.7 million (17.4%). Q2-2007 net income, after recognition of the $19.1 million future income tax recovery, was $27.6 million as compared with $11.8 million in Q2-2006. Q2-2007 earnings per trust unit were $1.36 as compared to $0.61 for Q2-2006, with funds flow from operations amounting to $10.0 million versus $12.8 million for Q2-2006.

Revenues for YTD-2007 were $116.8 million as compared to $132.8 million for YTD-2006. The YTD-2007 gross profit was $32.4 million (27.7%) compared to $35.6 million (26.8%) and YTD-2007 income before income taxes was $17.0 million (14.6%) versus $22.1 million (16.6%) for YTD-2006. YTD-2007 net income, after taking into account the future income tax recovery, was $36.4 million as compared with $22.2 million for YTD-2006. YTD-2007 earnings per trust unit were $1.81 compared with $1.16 for YTD-2006, with funds flow from operations amounting to $19.8 million versus $24.2 million for YTD-2006. Q2-2007 revenues from oilsands and heavy oil products increased $5.6 million over Q2-2006 and contributed an additional $2.9 million in operating income in comparison with Q2-2006. Q2-2007 revenues from natural gas products decreased $14.8 million with related operating incomes decreasing $4.2 million. YTD-2007 revenues from oilsands and heavy oil products increased $15.7 million over YTD-2006 and contributed an additional $4.6 million in operating income relative to YTD-2006. YTD-2007 natural gas related products decreased $23.7 million with related operating incomes decreasing $7.8 million as compared to YTD-2006. The decline in revenues from coiled tubing drill rigs "CTR", partially offset by increases in revenues from mineral and geotechnical drills accounts for the remaining differences.

The Foremost Industries (30,000 ft2) expansion was completed and commenced operations in Q2-2007.

The Fund's Q2-2007 results are indicative of the current state of its core markets. The current strength of revenues and operating incomes from worldwide oil related products is expected to continue. North American natural gas drilling related product revenues and operating incomes are expected to remain lower than previously reported until drilling activity in this sector increases. Unlike Q1-2007 expectations for a third or fourth quarter recovery, the Fund's current assessment is that natural gas drilling activity will not increase until fiscal 2008. In response to this assessment the Fund has undertaken initiatives to transfer the manufacture of oil related products to certain gas related facilities to maintain its core workforce, utilize the benefits of its facility expansions and rebuild certain "deliver on demand" finished goods inventory. As a result of these initiatives the Fund shut down its non-essential Corlac "Nisku" facility and listed it for sale. Combining these expectations and initiatives with current assessments for other product revenues and related net income expectations; management expects revenue and net income for the full year ended December 31, 2007 to be lower than that for the 2006 full year results.

Several months ago unitholders were informed of the Board's intention to conduct a strategic alternatives review for the sole purpose of enhancing unitholder value. Throughout the process consideration was given to a number of different concepts including: several forms of business combinations with other public and private entities, the concept of selling all or a portion of the Fund or its business units plus other proposals. Often overlooked in this process is the consideration of continuing the current course of business.

Over the course of the last five years, the Fund has demonstrated its ability to significantly increase unitholder value by way of disciplined priced accretive acquisitions, conservative and sustainable distribution payouts, continual refinement of operations with our skilled management, the development of internal growth opportunities by way of complementary product lines and services, and the like.

The fact is these are areas where we have formidable expertise. Very few public entities have these in-depth, well-rounded skill sets. With these attributes in mind, the Trustees have concluded that given the strength of our balance sheet, the value of our business relative to others in the industry, our continued profitable operations, and the recent development of more properly priced acquisition opportunities, it is in the best interest of the unitholders to continue with what has been our success to date.

We will continue to keep you apprised of any and all other accretive growth opportunities as they develop.

The Fund is an unincorporated open end mutual fund trust conducting its business through Foremost Universal LP ("Universal") and Foremost Industries LP ("Foremost"). The Fund derives its operational income from both Universal and Foremost. Universal's overall business is focused on the oil and gas industry and contains the business units of: Universal Industries, a manufacturer of oil treating systems, shop and field storage tanks; Maloney Industries, a manufacturer of medium- to large-scale oil and gas process treating equipment;

Stettler Universal Limited Partnership, a gas separator manufacturer; Wilco Industries; Corlac Industries; Peace Land Fabricating and Supply Ltd. and De-In Industries Ltd., all shop tank manufacturers. Foremost is comprised of the business units of Foremost Industries, a manufacturer of custom equipment used for the oil and gas, construction, water-well and mining industries; and Mobile Drilling Company, Inc., a U.S. based business which manufactures and sells rigs and parts for the geotechnical industry.

On behalf of the Trustees
Foremost Income Fund

James T. Grenon, Trustee


Certain statements in this news release may constitute "forward-looking" statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this news release, such statements use words such as "may", "will", "expect", "believe", "plan" and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this news release. These forward-looking statements involve a number of risks and uncertainties, including: the impact of general economic conditions, industry conditions, changes in laws and regulations, increased competition, fluctuations in commodity prices and foreign exchange, and interest rates and stock market volatility.

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