Foremost Income Fund

Foremost Income Fund

November 14, 2011 21:23 ET

Foremost Income Fund Reports Third Quarter 2011 Results, Proposal to Amend Trust Deed and Special Redemption of Trust Units

CALGARY, ALBERTA--(Marketwire - Nov. 14, 2011) - Foremost Income Fund ("Foremost" or the "Fund") announces the financial results for the nine months ended September 30, 2011. The Fund further announces that it has called a special meeting of its unitholders of record (the "Unitholders") to consider a proposal to amend the Fund's deed of trust (the "Deed of Trust") to provide for a process of special redemption of Trust Units.

FINANCIAL RESULTS:
Condensed Consolidated Interim Statements of Comprehensive Income
Unaudited
Three months ended Nine months ended
September 30, September 30,
(000's), except per Trust Unit amounts 2011 2010 2011 2010
Revenue $ 65,632 $ 42,241 $ 187,885 $ 124,384
Cost of sales 51,141 32,701 149,528 96,104
Gross profit 14,491 9,540 38,357 28,280
Administrative expenses 4,753 4,447 14,900 12,937
Depreciation and amortization 1,220 952 3,217 2,945
Other income (98 ) (653 ) (9 )
Income from operating activities 8,616 4,141 20,893 12,407
Net financing cost
Interest income (92 ) (14 ) (53 ) (59 )
Foreign exchange loss (gain) (34 ) 65 43 75
Income before income tax 8,742 4,090 20,903 12,391
Income tax expense
Net income and comprehensive income for the period $ 8,742 $ 4,090 $ 20,903 $ 12,391
Basic and diluted earnings per Trust Unit $ 0.42 $ 0.19 $ 1.00 $ 0.58

The September 30, 2011 financial statements are prepared in accordance with IFRSs and IFRS 1 First-time Adoption of International Financial Reporting Standards has been applied. The effects of the business conditions and operational responses by the Fund are found by comparing the 2011 and 2010 adjusted statements of income. The cumulative results of the steps undertaken by the Fund are found by comparing the September 30, 2011 and December 31, 2010 statements of financial position. The key elements from Q3 are:

  • Q3 revenues have increased 55.4% as a result of improvement in the domestic heavy oil markets and increased activity in the oil sands development. Q3 consolidated revenues were $65.6 million versus $42.2 million for 2010.

  • Q3 revenues generated outside of Canada have decreased from 15.2% to 13.0% of total revenues.

  • Q3 activities generated a Q3 gross profit percentage of 22.1% as compared with 22.6% in 2010; the lower margins are a result of residual low margin work carrying forward from 2010. Q3 gross profits were $14.5 million as compared with $9.5 million for 2010.

  • Q3 selling, general and administrative expenses decreased to 7.2% of revenue versus 10.5% of revenue in 2010 due to increased revenue levels and cost control efforts. Selling, general and administrative expenses were $4.8 million in 2011 and $4.4 million for 2010.

  • Fluctuations in the exchange rates between the Canadian dollar against the U.S. dollar resulted in a Q3 $34,000 exchange gain compared to a $65,000 loss in 2010.

  • Q3 income from operations increased 108.1% to $8.6 million versus $4.1 million for 2010.

  • Q3 comprehensive and net income was $8.7 million compared to a $4.1 million in 2010, Q3 comprehensive and net income includes a $0.1 million gain on sale of equipment.

  • Trust unit distributions remained suspended during Q3 as the Fund continues to evaluate changes to Canada's tax laws proposed in the June, 2011 Federal budget.

  • For the three month period ending September 30, 2011 the Fund redeemed 66,108 Trust Units, of which $0.3 million was paid in cash and $0.1 million being paid in cash in the subsequent month.

  • Q3 basic and diluted earnings per Trust Unit were $0.42 per trust unit as compared with $0.18 per trust unit in 2010. D

  • During Q3 the Fund acquired an 85,000 square foot manufacturing facility in Stettler, Alberta. The facility will be used to expand the Fund's separator manufacturing capacity and to facilitate the Fund's initiative to develop and build hydrovac equipment. The property, plant, and equipment have been recorded at preliminary value of $4.9 million in total.

The key financial elements for the year to date are:

  • Year to date revenue has increased 51.1% as a result of improved domestic heavy oil markets and increased activity in oil sands development. Year to date consolidated revenues were $187.9 million versus $124.4 million in 2010.

  • Year to date revenues generated outside of Canada have decreased from 16.7% to 12.9% of total revenues.

  • Year to date gross margin percentage is 20.4% as compared with 22.7% in 2010; the lower margins are a result of residual low margin work carrying forward from 2010. Year to date gross profits were $38.4 million as compared with $28.3 million for 2010.

  • Year to date selling, general and administrative expenses decreased to 7.9% of revenue versus 10.4% of revenue in 2010 due to increased revenue levels and cost control efforts. Selling, general and administrative expenses were $14.9 million in 2011 and $12.9 million for 2010.

  • Fluctuations in the exchange rates between the Canadian dollar against the U.S. dollar resulted in a year to date $43,000 exchange loss compared to a $75,000 loss in 2010.

  • Year to date income from operations increased 68.4% to $20.9 million versus $12.4 million for 2010.

  • Q3 comprehensive and net income was $20.9 million compared to $12.4 million in 2010, year to date comprehensive and net income includes a $0.7 million gain on sale of equipment.

  • Year to date Trust Unit distributions, which were suspended in Q2 and Q3, are $0.10 per Trust Unit or $2.1 million in 2011 and $0.30 per trust or $6.4 million in 2010. The 2011 and 2010 Trust Unit distributions were paid from cash reserves and cash generated by operating activities. For the nine month period ending September 30, 2011 the Fund redeemed 741,096 Trust Units, of which $4.7 million was paid in cash and an additional $0.1 million being paid in the subsequent month. The Trustee's do not intend to reinstate the quarterly cash distributions and instead intend to distribute income in an annual distribution event as outlined in Trust Deed Amendment section of this news release.

  • Year to date basic and diluted earnings per Trust Unit were $1.00 per trust unit as compared with $0.57 per trust unit in 2010.

Condensed Consolidated Interim Statement of Financial Position
Unaudited
September 30, December 31,
(000's) 2011 2010
Assets
Current assets
Cash $ 4,075 $ 21,766
Trade and other receivables 39,562 37,686
Inventories 66,740 41,275
Prepaid expenses 1,670 749
112,047 101,476
Property, plant and equipment 55,732 44,813
Deferred tax assets 30,010 30,010
Goodwill 3,154 3,154
Intangibles and other assets 1,478 1,628
$ 202,421 $ 181,081
Liabilities and Unitholders' Equity
Current liabilities
Trade and other payables $ 21,631 $ 15,560
Warranty provisions 692 835
Deferred revenue 12,066 10,747
Trust unit options 241 188
34,630 27,330
Unitholders' equity
Unitholders' capital 60,039 62,195
Accumulated earnings 107,752 91,556
167,791 153,751
$ 202,421 $ 181,081
  • Year to date cash flow generated from operations for 2011, calculated as comprehensive and net income adjusted for items not involving cash such as amortization, gains on disposals of property, plant and equipment, Trust Units based compensation and changes in non-cash working capital totaled $2.8 million versus $3.5 million of cash used for operations in 2010.

  • Non-cash working capital accounts consist of trade and other receivables, inventories, prepaid expenses, trade and other payables, warranty provisions, and deferred revenue. All of these account balances, with the exception of warranty provisions, have increased relative to December 31, 2010, reflecting the impact of increased business activity.

  • Cash has decreased $17.7 million to $4.1 million at September 30, 2011. This decrease was generated from a combination of $2.8 million of funds generated from operations, $13.7 million of net capital expenditures, $4.7 million of Trust Unit redemptions and $2.1 million of distributions to Trust Unit holders. Capital expenditures included the Fund's acquisition of a 65,000 square foot shop tank manufacturing facility located north of Bonnyville, Alberta, an 85,000 square foot manufacturing facility in Stettler, Alberta, and equipment to sustain operations in various business units.

  • Working capital, defined as current assets less current liabilities increased $3.2 million to $77.4 million as at September 30, 2011.

  • Property, plant and equipment at September 30, 2011 amounted to $55.7 million. The $10.9 million increase relative to 2010 reflects $14.9 million in acquisitions, $3.2 million decrease from amortization, and $0.8 million in disposals.

  • No short-term or long-term bank indebtedness existed at September 30, 2011 or December 31, 2010.

  • Unitholders' equity increased from $153.7 million at December 31, 2010 to $167.8 million at September 30, 2011. The increase relates primarily to strong earnings out pacing Trust Unit redemptions and distributions.

Trust Unit Redemptions:

For the Nine month period ending September 30, 2011 the Fund redeemed 742,859 Trust Units totaling $4.7 million paid in cash and $113,000 being paid in the subsequent month. Due to the continued strong financial performance of the Fund, the Trustees have determined that, as of the date of November 10, 2011 the Fund will redeem tendered Trust Units at tangible book value + 10% or $7.25 per unit.

SPECIAL MEETING TO CONSIDER TRUST DEED AMENDMENT:

The Fund is also giving notice that it is calling a special meeting (the "Meeting") of the Unitholders of the Fund to be held on Wednesday, December 14, 2011 at 2:00 p.m. (Mountain Standard Time) for the purpose of approving an amendment to the Deed of Trust regarding the redemption rights of Unitholders, and any other consequential amendments to the Deed of Trust.

Amendment to Deed of Trust

The trustees of the Fund (the "Trustees") propose to amend Article VI of the Deed of Trust (the "Redemption Amendment") to provide for the Trustees to offer, from time to time, at their discretion, a flexible special redemption of Trust Units by the Fund (a "Special Redemption").

Under the proposed amendment, the Trustees will be authorized to offer for redemption a portion of the Trust Units issued and outstanding at a stated redemption amount per Unit, to be redeemed from all Unitholders on a voluntary, pro rata basis.

Certain other incidental amendments to the Deed of Trust will be made to accommodate the Redemption Amendment, including certain amendments to the definitions in Section 1.1 of the Deed of Trust.

Proposed Redemption

If the Redemption Amendment is passed by Unitholders at the Meeting, the Trustees intend to cause the Fund to carry out the redemption contemplated therein and acquire for cancellation up to 2,275,149 Trust Units from Unitholders of record on the date of the Meeting (or 11% of the Trust Units issued and outstanding), at a redemption amount of $11.00 per Trust Unit, on a pro rata basis. The Special Redemption amount will substantially be a distribution of income of the Fund (expected to be $10.99 of income attributes, and $0.01 redemption proceeds). In accordance with the terms of the Redemption Amendment, registered Unitholders who do not wish to have any Trust Units redeemed will be entitled to opt out of the Special Redemption by providing notice to that effect to the Fund through Computershare Investor Services Inc., as depository.

Registered Unitholders will have the flexibility to "opt out" of the redemption by providing notice to that effect to the Fund or its agent.

Unitholders who hold Trust Units beneficially through their broker or another nominee will be required to obtain a separate Trust Unit certificate and become registered Unitholders if they intend to opt out of the Special Redemption. Beneficial Unitholders who do not wish to participate in the Special Redemption should speak to their brokers.

If all Unitholders participate in the Special Redemption, then 11% of the Trust Units held by each Unitholder will be redeemed, and no Unitholders pro rata interest will change. The Fund has not determined the fair market value of the Trust Units at this time, nor is the Fund making any representation regarding the same.

Rationale for Special Redemption

In determining to proceed with the Redemption Amendment and the Special Redemption, the Trustees considered the following advantages:

  1. the Special Redemption will distribute the income and capital gains of the Fund to Unitholders to allow the Fund to eliminate or minimize the Fund's liability for income taxes;

  2. and the participating Unitholders will receive substantial cash proceeds.

If the Redemption Amendment is approved by the Unitholders, and the Special Redemption is carried out, the Special Redemption will be in addition to, and will not affect, the existing right of Unitholders to cause the Fund to redeem their Trust Units at any given time under the Deed of Trust. This right is subject to a limit of $1.5 million per calendar month at a redemption price determined by the Trustees within 10% above or below the "tangible book value" per Unit, as calculated in accordance with Section 6.3 of the Deed of Trust.

The Fund will continue to review organizational structures and alternatives on an ongoing basis, and continue to conduct its business and attempt to expand as it currently does.

James T. Grenon, the major Unitholder of the Fund, has indicated that he intends to fully participate in of the Special Redemption.

The Fund intends to mail the information circular to its Unitholders in respect of the Meeting, on November 18, 2011. A copy of the information circular will be available for review on the Fund's profile on the SEDAR website at www.sedar.com at that time. Additional detailed information including the definitive text of the proposed amendments to the Deed of Trust, the process for opting out of the Special redemption and instructions for obtaining new certificates representing the Trust Units retained upon the completion of the Special Redemption will be included in the information circular.

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;

  • Universal Bonnyville, shop tank manufacturer

  • Maloney Industries, a manufacturer of medium- to large-scale oil and gas process treating equipment;

  • Stettler Universal Limited Partnership, a gas separator and hydrovac manufacturer;

  • Corlac Industries; Peace Land Fabricating and Supply Ltd. and De-In Industries Ltd., all shop tank manufacturers and

  • Brahma, a sub-200 horsepower compressor manufacturer.

  • Foremost is comprised of the business unit of Foremost Industries, a manufacturer of custom equipment used for the oil and gas, construction, water-well and mining industries.

On behalf of the Trustees Foremost Income Fund

James T. Grenon, Trustee

FORWARD-LOOKING STATEMENT

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 include statements the Fund's intention to proceed with a Unitholders' meeting and information regarding the Trustees' views of the future prospects and tax treatment of the Fund and tax treatment of the Special Redemption, the Fund's expectations regarding the future availability of cash to meet redemption requests and the Trustee's expectations for redemption prices in December 2011 and January 2012. 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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