FP Newspapers Income Fund

FP Newspapers Income Fund

March 04, 2005 06:00 ET

FP Newspapers Income Fund Reports Fourth Quarter 2004 Results


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: FP NEWSPAPERS INCOME FUND

TSX SYMBOL: FP.UN

MARCH 4, 2005 - 06:00 ET

FP Newspapers Income Fund Reports Fourth Quarter 2004
Results

WINNIPEG, MANITOBA--(CCNMatthews - March 4, 2005) - FP Newspapers Income
Fund (TSX:FP.UN) announces financial results for the fourth quarter
ended December 31, 2004. FP Newspapers Income Fund owns a 49 per cent
interest in FP Canadian Newspapers Limited Partnership ("FPLP"), which
owns the Winnipeg Free Press and Brandon Sun daily newspapers and six
weekly newspapers.

During the fourth quarter of 2004, FPLP retroactively adjusted
circulation subscription revenues to record them at the gross amount
whereas previously this revenue was reported net of certain delivery
expenses. All periods have been restated from the numbers previously
reported and there is no impact on net earnings of any period. (See note
3 of the consolidated financial statements of FPLP as at December 31,
2004).

Total revenue for FPLP for the three months ended December 31, 2004 was
$30.4 million, a $2.4 million or 8.6 per cent increase over the same
period last year. The acquisition during the third quarter of the
community newspapers and advertising distribution businesses accounted
for $1.8 million of this increase. Total EBITDA(1) of FPLP for the
fourth quarter was $7.0 million. Excluding the acquired businesses,
EBITDA(1) was $7.0 million for the fourth quarter compared to $7.3
million last year. The partnership had net earnings of $2.9 million in
the fourth quarter, a 3.8 per cent decrease compared to $3.0 million in
the same quarter last year.

The Fund earned $2.3 million, or $0.335 per Unit during the three months
ended December 31, 2004 which is a decrease of $0.1 million or 1.9 per
cent from the same quarter last year.

"Advertising revenue growth in the fourth quarter, excluding the
acquired businesses, was modest at 1.2%, as compared to 2.4% growth in
the first nine months of 2004," said Ronald Stern, Chairman of FPLP.

"The business generated distributable cash attributable to the Fund(2)
of $1.42 per Unit in 2004, up from $1.38 in 2003," Stern continued.
"Looking forward, we enter 2005 with strong reserves to support our
current distribution levels, and are working hard to improve operating
performance and further grow distributable cash."

Operations

Overall revenue in the fourth quarter, excluding the acquired
businesses, was slightly lower than expected at $28.6 million, a $0.6
million or 2.3 per cent increase from the same quarter last year.
Advertising revenue, excluding the acquired businesses, was $20.0
million, a $0.2 million or 1.2 per cent increase over the same quarter
last year. The trend of increased advertising flyer distribution
revenues continued in the fourth quarter with this category showing a
revenue increase of $0.3 million or 9.6 per cent compared to the same
period last year resulting from a combination of new flyer distribution
customers and a shift by some advertising display spending into this
category. Our largest advertising revenue category, display advertising
including colour, was $13.2 million for the quarter compared to $13.6
million for the same period last year. This decrease was primarily the
result of lower spending by one national automotive customer and lower
spending by two national department stores. Classified advertising
revenue, excluding the acquired businesses, continued to show strength,
with total revenue of $3.5 million compared to $3.1 million in the
fourth quarter last year, an increase of 12.1 per cent. Increased
classified revenue was primarily the result of strong growth in the
employment category together with an increase in the obituary category.
Commercial printing revenues for the fourth quarter were $1.6 million,
an increase of $0.3 million or 19.9 per cent primarily due to increased
recurring printing contract volume.

Operating expenses, excluding amortization were $23.4 million in the
fourth quarter. Excluding the acquired businesses, operating expenses
excluding amortization were $21.7 million, a 4.4 per cent increase from
$20.7 million reported for the fourth quarter last year. Employee
compensation costs accounted for $0.5 million of this increase, a result
of contracted annual rate increases, increased hours required to handle
increased flyer quantities and severance costs. Newsprint prices were
lower in the fourth quarter compared to last year and newsprint expense
for our own products excluding the acquired businesses decreased by $0.1
million or 2.8 per cent. Newsprint expense in the quarter for commercial
printing was $0.6 million, a 31.0 per cent increase over last year, the
result of an increase in recurring printing jobs at both the Winnipeg
and Brandon operations.

During the fourth quarter we launched two new on-line initiatives. The
Winnipeg Free Press and Workopolis have partnered to bring the
Workopolis brand and reach to our employment advertising customers
through a combined purchase with their print ad which provides seven day
exposure on one of Canada's leading employment web sites. The Winnipeg
Free Press also introduced an obituary web site called "Passages" which,
in addition to including obituary notices found in the printed
newspaper, allows individuals to electronically send tributes,
condolences and the ability to make donations to named charities. The
passages site's address is www.passagesmb.ca.

Distributions

Distributable cash attributable to the Fund(2) for the three months
ended December 31, 2004 was $2.9 million, or $0.412 per Unit compared to
$2.7 million or $0.390 per Unit last year. The increase is attributable
to a reduction in the reserve for future maintenance capital partially
offset by lower 2004 EBITDA(1). For the 12 months ending December 31,
2004 FPLP has generated distributable cash attributable to the Fund(2)
of $9.8 million or $1.415 per Unit and the Fund has declared
distributions of $1.265 per Unit, resulting in a payout ratio of 89.4
per cent. For the period from commencement of operations on May 28, 2002
to December 31, 2004, FPLP has generated distributable cash attributable
to the Fund of $3.553 per Unit, and the Fund has declared distributions
of $3.239 per Unit, resulting in a cumulative payout ratio of 91.2 per
cent.

The Fund declared distributions to unitholders of $0.320 per Unit for
the quarter, compared to $0.310 in the fourth quarter of 2003.

Outlook

Overall advertising revenues in 2004, excluding the acquired businesses,
increased by 2.1 per cent which is at the low end of our forecast of 2
to 4 per cent. Furthermore, the growth was weaker in the second half of
the year. The same 2 to 4 per cent advertising growth forecast is
reasonable for 2005, although we expect the first half growth to be
weaker than the second half. In particular, the first quarter of 2005
will be negatively effected by having only 23 Friday and Saturday
publishing dates, compared to 26 in 2004, due to the 2004 leap year and
the timing of the 2005 statutory holidays. Approximately 60 percent of
our weekly advertising revenue from daily newspapers is generated from
the Friday and Saturday editions. Both classified advertising and flyer
distribution revenue continues to be strong and we expect this to
continue into next year. However, display advertising revenue was down
slightly in the fourth quarter, and this trend has continued in the
first two months of 2005. Advertising revenue is very difficult to
forecast since advertising activity is driven by a number of factors,
including general economic growth, consumer spending, employment trends
and consumer confidence. We expect circulation revenue growth to be
modest, possibly up 1 per cent in 2005, and do not expect any growth in
commercial printing revenue.

Employee compensation costs account for approximately 50 per cent of our
operating costs before amortization. Most of employee compensation costs
are subject to contractual increases contained in our labour agreements.
We expect employee compensation costs, on a same-store basis, to
increase 3-4 per cent overall in 2005. The components of the increase
include labour wage rate increases, part time costs for handling
increased insert volumes, and pension and benefit cost increases. As we
have previously reported, the timing of newsprint price increases are
difficult to predict, however we are not aware of a planned increase in
the first quarter of 2005. If prices remain at fourth quarter 2004
levels, the overall newsprint price is expected to be approximately 0.7
per cent lower in the first quarter of 2005 compared to last year.

Conference Call

FP Newspapers Income Fund invites you to participate in a conference
call on Friday, March 4, 2005 at 10:00 a.m. EST to discuss the results.

The dial-in number is 416-695-9724 or toll free at 1-877-323-2092. To
ensure your participation, please dial in five minutes before the start
of the conference call. The call will be webcast and the link can be
found at www.fpnewspapers.com. Management's presentation will be
followed by a question and answer period.

For those unable to participate, a taped rebroadcast will be available
to listeners upon completion of the call until midnight on March 18,
2005. To access the rebroadcast, please dial 416-695-5275 or dial toll
free at 1-888-509-0081.

About FP Newspapers Income Fund

FP Canadian Newspapers Limited Partnership owns the Winnipeg Free Press,
the Brandon Sun, and their related businesses as well as Canstar
Community News Limited, the publisher of five community newspapers in
the Winnipeg region. The Winnipeg Free Press newspaper publishes seven
days a week, serving Winnipeg and Manitoba with an average seven-day
circulation of approximately 128,000. The Brandon Sun also publishes
seven days a week, serving the region with an average circulation of
approximately 15,000. Canstar Community News publishes weekly with an
average circulation of approximately 182,000. Based in Winnipeg, the
businesses employ approximately 620 people in Winnipeg, Brandon and
Thunder Bay. Further information can be found at www.fpnewspapers.com
and in the disclosure documents filed by FP Newspapers Income Fund with
the securities regulatory authorities available at www.sedar.com.

Forward-looking statements

This document may contain forward-looking statements, relating to the
Fund's operations or to the environment in which it operates, which are
based on the Fund's operations, estimates, forecasts and projections.
These statements are not guarantees of future performance and involve
risks and uncertainties that are difficult to predict, and/or are beyond
the Fund's control. A number of important factors could cause actual
outcomes and results to differ materially from those expressed in these
forward-looking statements. These factors include those set forth in
other public filings. Consequently, readers should not place any undue
reliance on such forward-looking statements. In addition, these
forward-looking statements relate to the date on which they are made. FP
Newspapers Income Fund disclaims any intention or obligation to update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.

Management's Discussion and Analysis

March 4, 2005

Formation and Legal Entities

FP Newspapers Income Fund (the "Fund") was created on May 15, 2002 and
commenced operations on May 28, 2002 when it completed an Initial Public
Offering and purchased an interest in FP Canadian Newspapers Limited
Partnership ("FPLP"). The Fund owns securities entitling it to 49% of
the distributable cash of FPLP.

FPLP is a limited partnership formed on August 9, 1999. FPLP acquired
the business and assets and assumed certain liabilities of the Winnipeg
Free Press and Brandon Sun newspapers effective November 29, 2001.
Canstar Community News Limited is a wholly owned subsidiary of FPLP.

FP Newspapers Income Fund

The Fund is dependant on the operations of FPLP, its sole investment.
The Fund earned $2,377,000 and $5,602,000 in income from its investment
in FPLP for the three and twelve months ended December 31, 2004 compared
to $2,451,000 and $7,424,000 for the same periods last year. The decline
in earnings for the twelve months ended December 31, 2004 is related to
the $1,245,000 loss on sale of excess press components and further
$3,019,000 write down of additional excess assets by FPLP in the second
quarter (see "FP Canadian Newspapers Limited Partnership - Results of
Operations" below). Interest income on the 11.5% subordinated notes
issued by FPLP to the Fund was $1,934,000 and $7,698,000 for the three
and twelve months ended December 31, 2004 compared to $1,970,000 and
$7,815,000 for the same periods last year. The Fund's equity interest
from its Class A limited partnership units was $443,000 and ($2,096,000)
for the three and twelve months ended December 31, 2004 versus $481,000
and ($391,000) for the same periods in 2003 (see "FP Canadian Newspapers
Limited Partnership - Results of Operations" below). Operating expenses
incurred by the Fund were $65,000 and $262,000 for the three and twelve
month periods ended December 31, 2004 compared to $94,000 and $293,000
for the same periods last year and net earnings for the three and twelve
months ended December 31, 2004 was $2,315,000 and $5,350,000 versus
$2,359,000 and $7,133,000 for the same periods last year.

The Fund declared distributions to unitholders of $2,210,000 or $0.320
per Unit and $8,732,000 or $1.2650 per Unit for the three and twelve
months ended December 31, 2004 compared to $2,140,000 or $0.310 per Unit
and $8,352,000 or $1.21 per Unit in the same periods last year. Cash
available for distribution attributable to the Fund(2) was $2,844,000 or
$0.412 per Unit for the quarter ended December 31, 2004 and $9,765,000
or $1.415 per Unit for the twelve months ended December 31, 2004. Cash
available for distribution attributable to the Fund(2) for the three and
twelve months ended December 31, 2003 was $2,693,000 and $9,531,000 or
$0.390 and $1.381 per Unit.

FP Canadian Newspapers Limited Partnership

Results of Operations

During the fourth quarter of 2004, FPLP retroactively adjusted
circulation subscription revenues to record them at the gross amount
whereas previously this revenue was reported net of certain delivery
expenses. All periods have been restated from the numbers previously
reported and there is no impact on net earnings of any period. (See note
3 of the consolidated financial statements of FPLP as at December 31,
2004).



Revenue Three Months Ended Twelve Months Ended
December 31 December 31
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
$ Thousands $ Thousands
Advertising $ 21,698 $ 19,806 $ 76,777 $ 72,115
Circulation 6,715 6,640 26,682 26,455
Commercial Printing 1,576 1,314 5,981 5,063
Promotions and
Services 452 241 1,798 1,421
-------- -------- -------- --------
$ 30,441 $ 28,001 $111,238 $105,054
-------- -------- -------- --------
-------- -------- -------- --------


Revenue for the three months ended December 31, 2004 was $30.4 million,
an increase of $2.4 million, or 8.7% compared to the fourth quarter of
2003. The acquisition of the community newspapers and advertising
distribution businesses during the third quarter of 2004 accounted for
$1.8 million or 6.4% of this growth. Revenues, excluding the acquired
businesses, increased by $0.6 million or 2.3% versus the fourth quarter
last year. Advertising revenues, excluding the acquired businesses,
increased by $0.2 million or 1.2%. Flyer distribution revenues,
excluding the acquired businesses, increased $0.3 million or 9.6%
primarily resulting from increased flyer quantities. FPLP's largest
advertising revenue category, display advertising, including colour,
decreased by $0.4 million or 3.2% primarily the result of lower spending
by one national automotive customer and lower spending by two national
department stores. Classified advertising, excluding the acquired
businesses, increased by $0.4 million or 12.1% in the fourth quarter
primarily coming from increases in the employment and obituary
categories. Commercial printing revenues increased by $0.3 million or
19.9% resulting from an increase in printing work at both the Brandon
and Winnipeg operations. Circulation revenue was higher by $0.1 million
or 1.1% in the fourth quarter compared to last year resulting from the
net impact of increased home delivery and selective single copy prices,
offset by increased discounted bulk sales.

Revenue for the twelve months ended December 31, 2004 was $111.2
million, an increase of $6.2 million or 5.9% over the same period in
2003. The acquisition of the community newspapers and advertising
distribution business during the third quarter of 2004 accounted for
$3.5 million or 3.3% of this growth. Advertising revenues, excluding the
acquired businesses, increased by $1.5 million or 2.1% primarily the
result of an increase of $1.5 million or 14.4% in flyer distribution
revenues resulting from an increase in pieces delivered. Our largest
advertising category, display advertising including colour, excluding
the acquired businesses, was lower by $1.1 million or 2.3% in 2004
primarily the result of a shift of advertising spending by some
customers into flyer business. Classified revenues, excluding the
acquired businesses, increased by $1.1 million or 8.3% versus the same
twelve months last year, primarily the result of increased spending in
the employment, obituary and real estate categories. Commercial printing
revenues were higher by $0.9 million or 18.1% in 2004 due to increased
contract printing volume at both the Winnipeg and Brandon facilities.

Operating expenses, excluding amortization:



Three Months Ended Twelve Months Ended
December 31 December 31
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
$ Thousands $ Thousands
Employee
Compensation $ 10,552 $ 9,460 $ 39,925 $ 37,076
Newsprint - Own Use 3,600 3,523 13,335 13,389
Newsprint - Commercial
Printing 565 432 2,130 1,740
Delivery of
Newspapers 4,547 3,732 15,829 14,006
Other 4,169 3,590 15,685 14,593
-------- -------- -------- --------
$ 23,433 $ 20,737 $ 86,904 $ 80,804
-------- -------- -------- --------
-------- -------- -------- --------


Operating expenses, excluding amortization in the three months ended
December 31, 2004 were $23.4 million, an increase of $2.7 million or
13.0% over the fourth quarter of 2003. The acquisition of the acquired
businesses, accounted for $1.8 million or 8.6% of this increase.
Employee compensation, excluding the acquired businesses increased by
$0.5 million or 4.9% primarily the result of the contracted annual rate
increases, additional part time costs required to process the increased
quantities of flyer pieces, and increased pension expense for the
defined benefit pension plan at the Winnipeg Free Press resulting from
increased participation by part time employees and demographic changes
identified in an actuarial valuation completed during the third quarter.
Newsprint expense for FPLP's own publications, excluding the acquired
businesses, decreased by $0.1 million or 2.1% in the fourth quarter, the
result of an overall decrease of approximately 3.9% in the average price
of newsprint used offset by a small increase in consumption. Newsprint
expense for commercial printing increased by $0.1 million or 30.8%
largely the result of increased volumes due to the National Post
printing contract which started during the first quarter of 2004.
Delivery costs, excluding the acquired businesses, increased by $0.3
million or 7.2% compared to the same quarter last year largely the
result of the increase in flyer quantities. Other expenses, excluding
the acquired businesses, were $3.7 million, a $0.1 million or 3.4%
increase over the same quarter last year primarily resulting from
increased promotional activities to attract circulation subscribers.

Operating expenses, excluding amortization in the twelve months ended
December 31, 2004 were $86.9 million, an increase of $6.1 million or
7.5% over the same period last year. The acquisition of the acquired
businesses accounted for $3.3 million or 4.1% of this increase. Employee
compensation, excluding the acquired businesses, increased by $1.7
million or 4.6% largely the result of contracted annual increases,
additional compensation costs associated with the increased flyer
volumes, severance costs and strategic executive appointments made in
the second half of last year. Newsprint expense for FPLP's own
publications, excluding the acquired businesses, decreased by $0.2
million or 1.8% primarily the result of lower newsprint prices offset
partially by increased usage. Newsprint expense for commercial printing
increased by $0.4 million or 22.4% primarily the result of increased
usage relating to the National Post printing contract. Delivery costs
for the twelve months ended December 31, 2004, excluding the acquired
businesses, were $14.9 million, a $0.9 million or 6.2% increase over the
same period last year primarily the result of increased distribution
costs resulting from increased flyer volumes. Other expenses, excluding
the acquired businesses, were $14.6 million which is unchanged from last
year.

EBITDA(1) for the three and twelve months ended December 31, 2004 was
$7.0 million and $24.3 million. EBITDA(1) for the three and twelve
months ended December 31, 2004, excluding the acquired businesses, was
$7.0 million and $24.2 million, compared to $7.3 million and $24.3
million for the same periods in 2003. EBITDA(1) margin, excluding the
acquired businesses, was 24.5% and 22.4% for the three and twelve month
periods ended December 31, 2004 compared to 25.9% and 23.1% for the
same periods last year.

Interest expense on the term credit facility, the subordinated notes and
interest on capital lease obligations for the three and twelve months
ended December 31, 2004 was $2.7 million and $10.6 million compared to
$2.7 million and $10.9 million for the same periods last year. The
decrease in interest expense for the year is a result of lower effective
interest rates on the variable rate term loan together with a decrease
in the interest cost on the subordinated notes resulting from the $1.0
million decrease in the principal outstanding.

As reported in our June 30, 2004 Report to Unitholder's, during the
second quarter FPLP recorded a $1.2 million loss on the sale of excess
press components and recorded a further non cash loss of $3.0 million
relating to the reduction of the carrying value of additional excess
components which are being held for sale (see "Disposal and Future Sale
of Excess Press Components" under liquidity and capital resource
section).

FPLP's net earnings were $2.9 million and $3.7 million for the three and
twelve months ended December 31, 2004 compared to $3.0 million and $7.3
million for the same periods in 2003. The reduction in net earnings for
the twelve months ended December 31, 2004 is the result of the loss on
disposal and write-down of equipment discussed in the previous paragraph.

Newspaper publishing is, to a certain extent, a seasonal business with a
higher proportion of revenues and operating earnings occurring during
the second and fourth quarters of the calendar year. Revenue, EBITDA(1)
and net earnings of FPLP by quarter for 2002, 2003 and 2004 were as
follows:



2004 2003 2002
-------- -------- --------
Revenue $Thousands
Quarter 1 $ 25,674 $ 25,008 $ 24,820
Quarter 2 27,840 26,904 26,038
Quarter 3 27,283(iv) 25,141 23,943
Quarter 4 30,441(iv) 28,001 24,983(i)
-------- -------- --------
$111,238 $105,054 $ 99,784
-------- -------- --------
-------- -------- --------
EBITDA(1)
Quarter 1 $ 5,387 $ 5,204 $ 5,139
Quarter 2 6,772 6,501 6,403
Quarter 3 5,167 5,281 4,977
Quarter 4 7,008 7,264 5,458(i)
-------- -------- --------
$ 24,334 $ 24,250 $ 21,977
-------- -------- --------
-------- -------- --------
Net Earnings (loss)
Quarter 1 $ 1,231 $ 1,073 $ 2,646(ii)
Quarter 2 (1,489)(iii) 2,249 3,107(ii)
Quarter 3 1,077 983 674
Quarter 4 2,917 3,032 1,289
-------- -------- --------
$ 3,736 $ 7,337 $ 7,716
-------- -------- --------
-------- -------- --------


The distribution policy of FPLP is to make distributions in
approximately equal monthly amounts based on expected operating results
for each fiscal year.

(i) The decline in revenue, EBITDA and net earnings in the fourth
quarter of 2002 resulted primarily from the loss of nine publishing days
at the Winnipeg Free Press due to a labour interruption.

(ii) The first and second quarters of 2002 reported higher earnings
primarily due to there being no interest expense on the subordinated
notes which were issued during the initial Public Offering in May 2002.

(iii) The decline in earnings in the second quarter was primarily due to
the impact of the sale of excess press components as discussed in the
"Disposal and Future Sale of Excess Press Components" section.

(iv) Third quarter 2004 revenue includes $1.7 million and fourth quarter
of 2004 includes $1.8 million from the community newspapers and
advertising distribution businesses acquired during the third quarter of
2004.


Liquidity and Capital Resources

Cash Flow from Operations

During the three months ended December 31, 2004, cash generated from
operating activities was $1.3 million, compared to $4.1 million for the
fourth quarter of 2003. The net change in non-cash working capital in
the fourth quarter of 2004 was $(3.0) million compared to $(0.5) million
for the same period of 2003. This decrease was largely the result of
timing differences relating to compensation costs and trade accounts
payable.

During the twelve months ended December 31, 2004, cash generated from
operating activities was $13.8 million compared to $13.4 million for the
same period last year. The net change in non-cash working capital in the
twelve months ended December 31, 2004 was $(0.3) million compared to
$1.3 million last year. The largest factors contributing to this
decrease were an increase in the prior year's trade accounts payable due
to newsprint delivery timing and timing differences relating to invoice
payments.

Capital Expenditures

Maintenance capital purchases representing the replacement of capital in
order to sustain current business operations, totaled $0.3 million and
$1.0 million for the three and twelve months ended December 31, 2004
compared to $0.2 million and $0.4 million for the same periods last
year. In addition to this maintenance capital spending which was largely
for technology upgrades, FPLP made a strategic capital investment of
$0.5 million during the third quarter of 2004 to acquire 60 new print
rolls for the mailroom at the Winnipeg Free Press. These print rolls are
used to process advertising flyer pieces into the daily newspaper and
will allow FPLP to more effectively keep up with the growth in flyer
volumes, reduce labour costs and help to reduce the risk of late
newspaper delivery.

Disposal and Future Sale of Excess Press Components

As reported in both the second and third quarter reports to Unitholders,
during the second quarter of 2004, FPLP sold some of the surplus
components from one of its three Winnipeg printing presses for total net
proceeds of $0.9 million. The resulting non cash accounting loss of $1.2
million was reported in FPLP's second quarter statement of earnings. In
addition to this, FPLP determined during the second quarter that certain
other surplus components of the same press would also be marketed for
sale. Based on the requirements of CICA Handbook Section 3475, "Disposal
of long-lived Assets and Discontinued Operations", these components were
revalued based on their estimated fair value less costs to sell. A non
cash accounting loss of $3.0 million was recorded in FPLP's second
quarter statement of earnings and as required, these assets have been
separately disclosed in FPLP's December 31, 2004 Consolidated Balance
Sheet at a carrying value of $2.3 million. During the fourth quarter
there were no further disposals of this equipment.

Acquisition of Businesses

On July 13, 2004 FPLP acquired all of the assets and assumed specified
liabilities of a weekly newspaper publishing business and an advertising
distribution business previously operated by Transcontinental Media, the
publishing arm of Transcontinental Inc. for total consideration of $7.2
million which included $0.2 million of acquisition costs. FPLP financed
the entire purchase price by drawing on its available operating
facility, and during the third quarter repaid the entire amount.

Reserves Related to Distributable Cash Attributable to the Fund(2)

Under the terms of the Amended and Restated Agreement of Limited
Partnership dated May 24, 2002, the Managing General Partner is required
to determine reserves which are necessary or desirable to withhold from
any distributions to Partners, including among other things for capital
expenditures and operating expenses. A summary of the reserve for
maintenance capital for the three and twelve months ended December 31 of
2004 and 2003 is as follows:



Three Months Ended Twelve Months Ended
December 31 December 31
-------------------- --------------------
$ Thousands $ Thousands
2004 2003 2004 2003
-------- -------- -------- --------
Reserve at beginning
of period $ 701 $ - $ 641 $ -
Increase in reserve - 641 155 641
Decrease in reserve (71) - (166) -
-------- -------- -------- --------
Reserve at end of
period $ 630 $ 641 $ 630 $ 641
-------- -------- -------- --------
-------- -------- -------- --------


Increases in the reserve for future maintenance capital is shown as a
deduction in determining distributable cash(2) of FPLP. Decreases in the
reserve for future maintenance capital are shown as an increase in the
determination of distributable cash(2).

During the second quarter of 2004 the Managing General Partner
determined that it was desirable to establish a reserve in the amount of
$1.0 million for purposes of future strategic capital, acquisitions
and/or debt reduction. The amount of the reserve initially established
during the second quarter is equal to the net proceeds received on the
sale of surplus equipment described above. As discussed above, during
the third quarter a strategic capital acquisition was made for mailroom
print rolls at the Winnipeg Free Press and this amount has been deducted
from this reserve. A summary of the reserve for strategic capital,
acquisitions and/or debt reduction is as follows:



Three Months Ended Twelve Months Ended
December 31 December 31
-------------------- --------------------
$ Thousands $ Thousands
2004 2003 2004 2003
-------- -------- -------- --------
Reserve at beginning
of period $ 510 $ - $ - $ -
Increase in reserve - - 956 -
Decrease in reserve - - (446) -
-------- -------- -------- --------
Reserve at end of
period $ 510 $ - $ 510 $ -
-------- -------- -------- --------
-------- -------- -------- --------


These reserves are non-GAAP measures established and utilized at the
discretion of the board of directors of FPLP, and have no impact on the
GAAP financial statements.

Financing Activities

Distributions to partners of FPLP for the three and twelve months ended
December 31, 2004 totaled $2.6 million and $10.6 million and have been
determined in accordance with the Amended and Restated Agreement of
Limited Partnership dated May 24, 2002. Distributions to partners for
the three and twelve months ended December 31, 2003 totaled $2.7 million
and $11.3 million.

Cash and cash equivalents at December 31, 2004 total $0.6 million. Cash
and cash equivalents may be used to pay future distributions, to reduce
debt, to fund future capital expenditures, or for other general
purposes. Cash flow from operations, together with cash balances on hand
and unutilized credit facilities, are expected to be sufficient to fund
FPLP's operating requirements, capital expenditures and anticipated
distributions.

During the fourth quarter FPLP entered into capital lease obligations
for certain production equipment. The total minimum lease payments
including interest over the next four years is $1.1 million and the
interest rates charged range from 5.3% to 6.9%.

At December 31, 2004 FPLP's current liabilities exceed its current
assets due to the requirement to classify the term loan as a current
liability as discussed in note 5 of FPLP's December 31, 2004
consolidated financial statements. It is management's intention to
complete the re-financing of this loan prior to its maturity and once
the terms are finalized this loan will be re-classified as a long term
liability.

Business Risks and Uncertainties

Revenue

Advertising revenue, which accounts for greater than 70% of total
revenue, is historically dependant upon general economic conditions and
the specific spending plans of high volume advertisers. A significant
downturn in the national or regional economy would likely decrease
advertising revenue earned by our newspapers. Similarly, a change in
promotional strategy by significant users of newspaper advertising, such
as the automotive industry, financial services industry and national
retailers, could reduce or increase revenue.

Employee Relations

The majority of FPLP's employees are unionized and their employment is
governed by the terms of collective agreements. A work stoppage could
restrict or eliminate the ability of FPLP to earn revenue from its
publishing business during the stoppage. Contracts are now in place with
unionized employees at the Winnipeg Free Press which run to October
2005. Collective agreements covering unionized employees at the Brandon
Sun expire December 31, 2005.

Expenses

Newspaper publishing is both capital and labour intensive, and as a
result newspapers have relatively high fixed cost structures. During
periods of declining revenue, significant portions of costs may remain
fixed, resulting in decreased earnings. Newsprint is a significant cost
for FPLP, accounting for $15.5 million of expenses in 2004. Newsprint
costs vary widely from time to time. If newsprint costs rise rapidly,
there is no assurance that advertising and circulation revenues can be
increased to offset the increased newsprint expense.

Outlook

The outlook for operations is described earlier in this document.

Non GAAP Measures

(1) EBITDA

EBITDA is not a recognized measure under Canadian generally accepted
accounting principles (GAAP). FPLP believes that in addition to net
earnings, EBITDA is a useful supplemental measure as it provides
investors with an indication of cash available for distribution prior to
debt service and capital expenditures. Investors should be cautioned
that EBITDA should not be construed as an alternative to net earnings
determined in accordance with GAAP as an indicator of FPLP's
performance. FPLP's method of calculating EBITDA may differ from other
issuers and, accordingly, EBITDA may not be comparable to measures used
by other issuers. FPLP determines EBITDA as follows:



Three Months Ended Twelve Months Ended
December 31 December 31
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
$ Thousands $ Thousands
Net earnings for
the period $ 2,917 $ 3,032 $ 3,736 $ 7,337
Add (subtract):
Amortization of
property, plant and
equipment 1,064 1,092 4,171 4,353
Amortization of
intangible assets 90 90 362 362
Interest 2,676 2,730 10,563 10,929
Amortization of
deferred financing
costs 346 346 1,382 1,382
Interest income (4) (24) (61) (98)
(Loss)/gain on
disposal of
property, plan and
equipment (1) (2) 1,242 (15)
Write down of
equipment held for
sale - - 3,019 -
Future income taxes (80) - (80) -
-------- -------- -------- --------
EBITDA $ 7,008 $ 7,264 $ 24,334 $ 24,250
-------- -------- -------- --------
-------- -------- -------- --------


(2) Distributable Cash Attributable to the Fund

The Fund believes that in addition to the disclosure of cash flow from
operations, distributable cash attributable to the Fund is an important
supplemental measure of cash flow. This measure is a useful supplemental
measurement as it provides investors with an indication of the amount of
cash available for distribution to unitholders and because such
calculations are required by the terms of the partnership agreement
governing FPLP and by the terms of the deed of trust governing the Fund.
Distributable cash attributable to the Fund is not a defined term under
Canadian GAAP and it should not be construed as an alternative to using
net earnings or the statement of cash flows as measures of profitability
and cash flow. Readers should be cautioned that the method of
calculating distributable cash may not be comparable to similar measures
presented by other issuers. Management has determined distributable cash
attributable to the Fund as follows:



Three Months Ended Twelve Months Ended
December 31 December 31
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Distributable cash
of FPLP: $ Thousands $ Thousands
EBITDA(1) $ 7,008 $ 7,264 $ 24,334 $ 24,250
Interest income 4 24 61 98
Interest expense on
term loan and
capital leases ( 742) (760) (2,865) (3,114)
Principal repayment
of capital leases (90) - (90) -
Maintenance capital
expenditures (320) (205) (1,017) (401)
Decrease (increase)
in reserve for
future maintenance
capital 71 (641) 11 (641)
Strategic capital
expenditures - - (446) -
(Increase) in
reserve for future
strategic capital,
acquisitions,
and/or debt
reduction - - (510) -
Proceeds from sale
of property, plant
and equipment - 2 965 57
-------- -------- -------- --------
$ 5,931 $ 5,684 $ 20,443 $ 20,249

49% attributable to
the Fund 2,906 2,785 10,017 9,922
Administration
expenses (65) (94) (262) (293)
Loan from related
party - - - (100)
Interest income 3 2 10 2
-------- -------- -------- --------
Distributable cash
attributable to the
Fund $ 2,844 $ 2,693 $ 9,765 $ 9,531
-------- -------- -------- --------
-------- -------- -------- --------

Distributable cash
attributable to the
Fund - per Unit $ 0.412 $ 0.390 $ 1.415 $ 1.381
-------- -------- -------- --------
-------- -------- -------- --------


A summary of distributable cash and distributions declared for the
trailing twelve months to December 31, 2004 and for the period from
commencement of the Fund on May 28, 2002 to December 31, 2004 is as
follows:

Distributable Cash of FPLP:

Last Since
Twelve May 28,
Months 2002
-------- --------
$ Thousands
EBITDA(1) $ 24,334 $ 61,670
Interest income 61 217
Interest expense on term loan and
capital leases (2,865) (7,809)
Principal repayment of capital
leases (90) (90)
Maintenance capital expenditures (1,017) (2,011)
Decrease (increase) in reserve
for future maintenance capital
expenditures 11 (630)
Strategic capital expenditures (446) (446)
Proceeds on disposal of property,
plant and equipment 965 1,032
Increase in reserve for strategic
capital, acquisitions, and/or
debt reduction (510) (510)
-------- --------

Distributable cash of FPLP $ 20,443 $ 51,423
-------- --------
-------- --------


Distributable Cash Attributable to the Fund:

Last Since
Twelve May 28,
Months 2002
-------- --------
$ Thousands
49% of FPLP distributable cash $ 10,017 $ 25,197
Administration expenses (262) (680)
Interest income 10 10
-------- --------

Distributable cash attributable
to the Fund $ 9,765 $ 24,527
-------- --------
-------- --------

Distributable cash attributable
to the Fund per unit $ 1.415 $ 3.553
Distributions declared by the
Fund per unit $ 1.265 $ 3.239

Payout Ratio 89.4% 91.2%


A reconciliation of FPLP's distributable cash to cash flows from
operating activities, as reported in FPLP's three and twelve month
Consolidated Statements of Cash Flows is as follows:

Three Months Ended Twelve Months Ended
December 31 December 31
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
$ Thousands $ Thousands
Cash flow from
operating
activities of FPLP $ 1,328 $ 4,103 $ 13,529 $ 14,749
Add (subtract)
Interest on
subordinated notes(i) 1,934 1,970 7,698 7,815
Net change in
non-cash working
capital items(ii) 3,008 455 303 (1,330)
Maintenance capital
expenditures (320) (205) (1,017) (401)
Principal repayment
of capital leases (90) - (90) -
Strategic capital
expenditures - - (446) -
Decrease (increase)
in reserve for
future maintenance
capital(iii) 71 (641) 11 (641)
(Increase) in
reserve for future
strategic capital,
acquisitions,
and/or debt
reduction(iii) - - (510) -
Proceeds from sale
of property, plant
and equipment(iv) - 2 965 57
-------- -------- -------- --------
Distributable cash
of FPLP $ 5,931 $ 5,684 $ 20,443 $ 20,249
-------- -------- -------- --------
-------- -------- -------- --------


(i) Distributable cash of FPLP is determined before deduction of
interest on the subordinated notes, since these amounts are paid to the
Fund as holder of the subordinated notes.

(ii) While changes in non-cash working capital is a component in
determining cash flow from operations in the statements of cash flows,
changes in non-cash working capital are not normally included in the
calculation of distributable cash, as these changes can often be
financed with an available operating line of credit, or represent only a
temporary source of cash, due to seasonal fluctuations.

(iii) Increases in the reserves for future maintenance capital,
strategic capital, acquisitions, and/or debt reduction are shown as a
deduction in determining distributable cash. Decreases in the reserves
are shown as an increase in the determination of distributable cash.
Such reserves are non-GAAP measures established and utilized at the
discretion of the board of directors of FPLP, and have no impact on the
GAAP financial statements.

(iv) Proceeds from sale of property, plant and equipment is a component
of distributable cash, but is not included in cash flow from operating
activities because it is classified as an investing activity in the
statement of cash flows.



FP Newspapers Income Fund
Consolidated Balance Sheets
(unaudited, in thousands of Canadian dollars)

As at As at
December 31, December 31,
2004 2003
--------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 384 $ 330
Interest receivable from
subordinated notes 633 654
Prepaid expenses 21 24
--------------------------------------------------------------------
1,038 1,008
Investment in FP Canadian
Newspapers Limited Partnership 62,587 65,948
--------------------------------------------------------------------
$ 63,625 $ 66,956
--------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities $ 74 $ 40
Distribution payable (note 2) 742 725
--------------------------------------------------------------------
816 765
--------------------------------------------------------------------

Unitholders' equity:
Trust units 69,026 69,026
Cumulative earnings 16,144 10,794
Cumulative distributions (22,361) (13,629)
--------------------------------------------------------------------
62,809 66,191
--------------------------------------------------------------------
$ 63,625 $ 66,956
--------------------------------------------------------------------

(See accompanying notes)


FP Newspapers Income Fund
Consolidated Statements of Earnings and Cumulative Earnings
(unaudited, in thousands of Canadian dollars except for per unit
information)

Three months ended Twelve months ended
December 31, December 31,
2004 2003 2004 2003
--------------------------------------------------------------------
Earnings from investment
in FP Canadian
Newspapers Limited
Partnership
Interest from
subordinated notes $ 1,934 $ 1,970 $ 7,698 $ 7,815
Equity interest
from Class A units
(note 3) 443 481 (2,096) (391)
Other interest 3 2 10 2
--------------------------------------------------------------------
2,380 2,453 5,612 7,426

Administration
expenses (65) (94) (262) (293)

--------------------------------------------------------------------
Net earnings for
the period $ 2,315 $ 2,359 $ 5,350 $ 7,133
Cumulative
earnings, beginning
of period 13,829 8,435 10,794 3,661

--------------------------------------------------------------------
Cumulative
earnings, end of
period $ 16,144 $ 10,794 $ 16,144 $ 10,794
--------------------------------------------------------------------

Number of trust
units outstanding 6,902,592 6,902,592 6,902,592 6,902,592
--------------------------------------------------------------------

Earnings per trust
unit $ 0.335 $ 0.342 $ 0.775 $ 1.033
--------------------------------------------------------------------


FP Newspapers Income Fund
Consolidated Statements of Unitholders' Equity
(unaudited, in thousands of Canadian dollars)

Three months ended Twelve months ended
December 31, December 31,
2004 2003 2004 2003
--------------------------------------------------------------------
Balance beginning
of period $ 62,704 $ 65,972 $ 66,191 $ 67,410
Net earnings 2,315 2,359 5,350 7,133
Distributions to
Unitholders (2,210) (2,140) (8,732) (8,352)
--------------------------------------------------------------------
Balance end of
period $ 62,809 $ 66,191 $ 62,809 $ 66,191

--------------------------------------------------------------------
(See accompanying notes)


FP Newspapers Income Fund
Consolidated Statements of Cash Flows
(unaudited, in thousands of Canadian dollars)

Three months ended Twelve months ended
December 31, December 31,
2004 2003 2004 2003
--------------------------------------------------------------------
Cash provided by
(used in):
Operating activities:
Net earnings for
the period $ 2,315 $ 2,359 $ 5,350 $ 7,133
Item not affecting
cash:
Equity interest
from Class A units
of FP Canadian
Newspapers Limited
Partnership(note 3) (443) (481) 2,096 391
Distributions
received on Class A
units of FP
Canadian Newspapers
Limited Partnership 317 319 1,265 1,207
Net change in
non-cash working
capital items 48 62 58 (44)
--------------------------------------------------------------------
2,237 2,259 8,769 8,687
Financing
activities:
Distributions to
Unitholders (2,193) (2,105) (8,715) (8,317)
Loan from Related
Parties - - - (100)
--------------------------------------------------------------------
(2,193) (2,105) (8,715) (8,417)

Change in cash
balance 44 154 54 270
Cash balance,
beginning of period 340 176 330 60
--------------------------------------------------------------------
Cash balance, end
of period $ 384 $ 330 $ 384 $ 330
--------------------------------------------------------------------

(See accompanying notes)


FP Newspapers Income Fund
Notes to Consolidated Financial Statements as at December 31, 2004
(unaudited, tabular amounts in thousands of dollars)


1. Basis of presentation

FP Newspapers Income Fund (the "Fund") was created on May 15, 2002 and
commenced operations on May 28, 2002 when it completed an initial Public
offering and purchased an interest in FP Canadian Newspapers Limited
Partnership ("FPLP"). The Fund owns securities entitling it to 49% of
the distributable cash of FPLP.

These interim consolidated financial statements of the Fund have been
prepared by management in accordance with accounting principles
generally accepted in Canada for interim financial statements and
include the accounts of the Fund and its wholly-owned subsidiary, FPCN
Holdings Trust. However, these interim financial statements do not
include all the information and disclosures required for annual
financial statements. These statements have been prepared following the
same accounting policies and methods of computation as the consolidated
financial statements of the Fund as at December 31, 2003. These interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto and other
financial information contained in the audited consolidated financial
statements for the year ended December 31, 2003.

2. Distribution payable

The Fund recorded a distribution payable at December 31, 2004 of $0.1075
per unit. The distribution was paid January 28, 2005 to unitholders of
record on December 31, 2004 and is in respect of the month of December
2004.

3. Equity interest from Class A limited partnership units

FP Newspapers Income Fund owns securities entitling it to 49% of the
distributable cash of FPLP. For accounting purposes, the equity interest
from the Fund's investment in Class A limited partnership units of FPLP
is calculated as follows:



Three months ended Twelve months ended
December 31, December 31,
2004 2003 2004 2003
--------------------------------------------------------------------
Net earnings of FPLP $ 2,917 $ 3,032 $ 3,736 $ 7,337
Plus: Interest on
subordinated notes 1,934 1,970 7,698 7,815
--------------------------------------------------------------------
Net earnings before
interest on
subordinated notes $ 4,851 $ 5,002 $ 11,434 $ 15,152
--------------------------------------------------------------------

49% interest
attributable to the
fund 2,377 2,451 5,602 7,424
Less: Interest from
subordinated notes (1,934) (1,970) (7,698) (7,815)
--------------------------------------------------------------------
Equity interest
from Class A
limited partnership
units $ 443 $ 481 $ (2,096) $ (391)
--------------------------------------------------------------------


FP Canadian Newspapers Limited Partnership
Consolidated Balance Sheets
(unaudited, in thousands of Canadian dollars)

As at As at
December 31, December 31,
2004 2003
ASSETS
Current Assets:
Cash and cash equivalents $ 571 $ 5,434
Accounts receivable 12,506 11,088
Inventories 976 988
Prepaid expenses and deposits 1,138 1,395
Future income tax asset 80 -
--------------------------------------------------------------------
15,271 18,905

Equipment held for sale (note 6) 2,289 -

Property, plant and equipment 56,365 65,194

Deferred financing costs 3,378 4,760

Intangible Assets 9,179 9,331

Goodwill (note 8) 70,860 64,805
--------------------------------------------------------------------

$157,342 $162,995
--------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities $ 9,289 $ 9,148
Prepaid subscriptions and
deferred revenue 2,828 2,798
Current obligations under capital
leases 270 -
Term loan (note 5) 59,600 -
--------------------------------------------------------------------
71,987 11,946

--------------------------------------------------------------------
Long-term liabilities:
Term loan (note 5) - 59,600
Subordinated notes 64,954 66,954
Obligations under capital leases 776 -
--------------------------------------------------------------------
65,730 126,554

--------------------------------------------------------------------
137,717 138,500
--------------------------------------------------------------------

Unitholders' equity:
Partnership units 34,793 32,793
Cumulative earnings 21,153 17,417
Cumulative distributions (36,321) (25,715)
--------------------------------------------------------------------
19,625 24,495
--------------------------------------------------------------------

$157,342 $162,995
--------------------------------------------------------------------

(See accompanying notes)


FP Canadian Newspapers Limited Partnership
Consolidated Statements of Earnings and Cumulative Earnings
(unaudited, in thousands of Canadian dollars)

Three months ended Twelve months ended
December 31, December 31,
2004 2003 2004 2003
--------------------------------------------------------------------

Revenue (note 3) $ 30,441 $ 28,001 $111,238 $105,054

Operating expenses,
excluding
amortization (23,433) (20,737) (86,904) (80,804)
--------------------------------------------------------------------
7,008 7,264 24,334 24,250

Amortization of
property, plant and
equipment (1,064) (1,092) (4,171) (4,353)
Amortization of
intangible assets (90) (90) (362) (362)
--------------------------------------------------------------------

Earnings before the
undernoted and
future income taxes 5,854 6,082 19,801 19,535

Interest (note 9) (2,676) (2,730) (10,563) (10,929)
Amortization of
deferred financing
costs (346) (346) (1,382) (1,382)
Interest income 4 24 61 98
(Loss)/gain on
disposal of
property, plant and
equipment (note 6) 1 2 (1,242) 15
Write down of
equipment held for
sale (note 6) - - (3,019) -
--------------------------------------------------------------------

Earnings for the
period before
future income taxes 2,837 3,032 3,656 7,337
Future income tax
benefit 80 - 80 -
--------------------------------------------------------------------
Net earnings for
the period 2,917 3,032 3,736 7,337
--------------------------------------------------------------------

Cumulative earnings
- beginning of
period 18,236 14,385 17,417 10,080
--------------------------------------------------------------------

Cumulative earnings
- end of period $ 21,153 $ 17,417 $ 21,153 $ 17,417
--------------------------------------------------------------------

(See accompanying notes)


FP Canadian Newspapers Limited Partnership
Consolidated Statements of Unitholders' Equity
(unaudited, in thousands of Canadian dollars)

Limited
General partner
partner Class A
units units Total
Unitholders' equity -
Jan. 1, 2003 26,620 823 27,443
Net earnings for
the period 1,064 9 1,073
Distributions paid (2,716) (22) (2,738)
-------------------------------------------------------------------
Unitholders' equity -
March 31, 2003 24,968 810 25,778
-------------------------------------------------------------------

Net earnings for
the period 1,965 284 2,249
Distributions paid (2,558) (490) (3,048)
-------------------------------------------------------------------
Unitholders' equity -
June 30, 2003 24,375 604 24,979
-------------------------------------------------------------------

Net earnings for
the period 831 152 983
Distributions paid (2,444) (379) (2,823)
-------------------------------------------------------------------
Unitholders' equity -
Sept. 30, 2003 22,762 377 23,139
-------------------------------------------------------------------

Contributions - 1,000 1,000
Net earnings for
the period 2,692 340 3,032
Distributions paid (2,360) (316) (2,676)
-------------------------------------------------------------------
Unitholders' equity -
Dec. 31, 2003 23,094 1,401 24,495
-------------------------------------------------------------------

Net earnings for
the period 1,087 144 1,231
Distributions paid (2,324) (308) (2,632)
-------------------------------------------------------------------
Unitholders' equity -
March 31, 2004 21,857 1,237 23,094
-------------------------------------------------------------------

Net (loss) for
the period (1,314) (175) (1,489)
Distributions paid (2,348) (320) (2,668)
-------------------------------------------------------------------
Unitholders' equity -
June 30, 2004 18,195 742 18,937
-------------------------------------------------------------------

Net earnings for
the period 949 128 1,077
Distributions paid (2,348) (320) (2,668)
-------------------------------------------------------------------
Unitholders' equity -
September 30, 2004 16,796 550 17,346
-------------------------------------------------------------------

Contributions - 2,000 2,000
Net earnings for
the period 2,568 349 2,917
Distributions paid (2,322) (316) (2,638)
-------------------------------------------------------------------
Unitholders' equity -
December 31, 2004 17,042 2,583 19,625
-------------------------------------------------------------------

(See accompanying notes)


FP Canadian Newspapers Limited Partnership
Consolidated Statements of Cash Flows
(unaudited, in thousands of Canadian dollars)

Three months ended Twelve months ended
December 31, December 31,
2004 2003 2004 2003
--------------------------------------------------------------------

Cash provided by
(used in)

Operating
activities:
Net earnings for
the period $ 2,917 $ 3,032 $ 3,736 $ 7,337
Items not affecting
cash:
Amortization 1,500 1,528 5,915 6,097
Future income taxes (80) - (80) -
Loss/(gain) on
disposal of
property, plant and
equipment (note 6) (1) (2) 1,242 (15)
Write down of
equipment (note 6) - - 3,019 -
--------------------------------------------------------------------
4,336 4,558 13,832 13,419

Net change in
non-cash working
capital items (3,008) (455) (303) 1,330
--------------------------------------------------------------------
1,328 4,103 13,529 14,749

--------------------------------------------------------------------
Investing
activities:
Acquisition (note 8) (24) - (7,198) -
Purchases of
property, plant and
equipment (320) (205) (1,463) (401)
Proceeds from sale
of property, plant
and equipment - 2 965 57
--------------------------------------------------------------------
(344) (203) (7,696) (344)

--------------------------------------------------------------------
Financing
activities:
Distributions to
partners (2,638) (2,676) (10,606) (11,285)
Operating loan
advance - - 7,100 -
Repayment of
operating loan - - (7,100) -
Principal repayment
of capital lease (90) - (90) -
--------------------------------------------------------------------
(2,728) (2,676) (10,696) (11,285)

--------------------------------------------------------------------
(Decrease) Increase
in cash and
cash equivalents (1,744) 1,224 (4,863) 3,120
Cash and cash
equivalents -
beginning of period 2,315 4,210 5,434 2,314
--------------------------------------------------------------------

Cash and cash
equivalents -
end of period $ 571 $ 5,434 $ 571 $ 5,434
--------------------------------------------------------------------

(See accompanying notes)


FP Canadian Newspapers Limited Partnership
Notes to Consolidated Financial Statements as at December 31, 2004
(unaudited, tabular amounts in thousands of dollars)


1. Basis of presentation

FP Canadian Newspapers Limited Partnership ("FPLP") is a limited
partnership formed on August 9, 1999 in accordance with the laws of
British Columbia. Canstar Community News Limited is a wholly owned
subsidiary of FPLP.

These financial statements include only the assets, liabilities,
revenues and expenses of FPLP and its subsidiary and do not include the
other assets, liabilities, revenues and expenses, including income
taxes, of the partners. The managing general partner of FPLP is FPCN
General Partner Inc.

The Partnership's advertising revenues are seasonal. Revenue and
accounts receivable are highest in the second and fourth quarters while
expenses are relatively constant.

2. Summary of significant accounting policies

Basis of presentation

These financial statements are prepared in accordance with accounting
principles generally accepted in Canada for interim financial statements
and reflect all adjustments which are, in the opinion of management,
necessary for fair statement of the results of the interim period
presented. However, these interim financial statements do not include
all the information and disclosures required for annual financial
statements. The accounting policies used in the preparation of these
interim financial statements are the same as those used in the most
recent annual financial statements except as indicated below. These
interim statements should be read in conjunction with the audited
financial statements of FPLP for the year ended December 31, 2003.

CICA Accounting Guideline 13 ("AcG 13")

FPLP adopted CICA Accounting Guideline 13, "Hedging Relationships"
effective January 1, 2004. In accordance with AcG 13 each of FPLP's
hedging relationships are documented and subject to an effectiveness
test on a quarterly basis for reasonable assurance that they are and
will continue to be effective. As required by this Guideline a
derivative that does not qualify for hedge accounting is reported on a
mark to market basis in earnings. The adoption of this guideline had no
impact on the financial statements.

Income taxes

FPLP is not a taxable entity, and accordingly, no provision for income
taxes relating to FPLP is included in the financial statements since all
income, deductions, gains, losses and credits are reportable on the tax
returns of the partners. FPLP's subsidiary is subject to tax and uses
the liability method for accounting for income taxes. Under this method,
future tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities
and are measured using substantially enacted tax rates and laws that
will be in effect when the differences are expected to reverse. FPLP's
subsidiary has non-capital losses in the amount of $226,000 which can be
used to reduce the company's taxable income in the future. The tax
benefit of this loss is estimated at $80,000 and has been recognized as
an asset in the consolidated balance sheet of FPLP. The non capital loss
expires in the year ending December 31, 2014.

3. Restatement of revenue and operating expenses, excluding amortization

During the fourth quarter, FPLP retroactively adopted the provisions of
the Emerging Issues Committee of the CICA, EIC 123, "Reporting Revenue
Gross as a Principal versus Net as an Agent". Under the provision,
circulation revenues for home delivered subscribers are reported on a
gross basis, whereas these revenue sources were previously reported net
of certain delivery costs. The impact of this change was to increase
both revenue and operating expenses, excluding amortization by
$1,571,000 and $5,615,000 for the three and twelve months ending
December 31, 2004 and $1,354,000 and $5,248,000 for the three and twelve
months ended December 31, 2003.

4. Allocation of net income

The amended and restated Agreement of Limited Partnership dated May 24,
2002 sets out the method for allocating net income between the general
and limited partner units. Net income is allocated to the general
partner units and the Class A limited partner units in proportion to the
distributions made to the partners over an annual basis ending December
31 each year. As the allocation is defined using an annual period,
quarterly allocations are determined by using a proportionate share of
cumulative distributions and cumulative net income to the end of each
quarter.

5. Term loan

The term loan matures in May 2005 and FPLP intends to refinance this
loan prior to its maturity. Since the terms of the re-financing have not
yet been completed the entire term loan has been classified as a current
liability on FPLP's balance sheet.

6. Loss on disposal and write down of assets held for sale

During the second quarter of 2004, FPLP sold certain surplus components
of one of its printing presses and realized a loss on disposal of
$1,245,000. FPLP also made the decision during the second quarter to
sell other surplus printing press components. The value of these
components, was written down to their estimated fair value less costs to
sell of $2,289,000 and the resulting loss on write down of $3,019,000 is
included in the second quarter statement of earnings.

7. Employee future benefit plans

The net future benefit plan costs included in operating expenses is as
follows:



Three months ended Twelve months ended
December 31, December 31,
2004 2003 2004 2003
-------- -------- -------- --------
Defined benefit
pension plan $ 330 $ 266 $ 1,320 $ 971


8. Acquisition

On July 13, 2004 FPLP acquired substantially all of the assets and
assumed specified liabilities of a weekly newspaper publishing business
and an advertising distribution business previously operated by
Transcontinental Media, the publishing arm of Transcontinental Inc.
Concurrent with the acquisition, FPLP entered into a license and use
agreement with its subsidiary Canstar Community News Limited, whereby
Canstar would license the acquired assets and operate the acquired
businesses.

The transaction has been accounted for by the purchase method and the
results of operations are included in FPLP's accounts from the date of
acquisition. Total consideration, including costs of acquisition was
$7,198,000 and was allocated based on the estimated fair values of the
assets acquired and liabilities assumed as follows:



Current assets $ 1,095
Property, plant and equipment 297
Mastheads 210
Goodwill 6,055
--------
7,657
Less current liabilities (459)
--------
7,198
--------
--------
Consideration:
Cash 6,986
Acquisition costs 212
--------
$ 7,198
--------
--------


9. Interest expense

Interest expense is summarized as follows:

Three months ended Twelve months ended
December 31, December 31,
2004 2003 2004 2003
-------- -------- -------- --------
Subordinated notes $ 1,934 $ 1,970 $ 7,698 $ 7,815
Term loan 722 760 2,845 3,114
Capital lease
obligations 20 - 20 -
-------- -------- -------- --------
2,676 2,730 10,563 10,929
-------- -------- -------- --------
-------- -------- -------- --------


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Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    FP Newspapers Income Fund
    Kevin Karr
    Vice President, Chief Financial Officer and Secretary
    (604) 646-3782
    (604) 681-8861 (FAX)
    www.fpnewspapers.com