FP Newspapers Income Fund
TSX : FP.UN

FP Newspapers Income Fund

March 07, 2007 06:00 ET

FP Newspapers Income Fund Reports Fourth Quarter 2006 Results

WINNIPEG, MANITOBA--(CCNMatthews - March 7, 2007) - FP Newspapers Income Fund (TSX:FP.UN) announces financial results for the fourth quarter ended December 31, 2006. FP Newspapers Income Fund ("the Fund") owns securities entitling it to 49 per cent of the distributable cash of FP Canadian Newspapers Limited Partnership ("FPLP"), which owns the Winnipeg Free Press and Brandon Sun daily newspapers, Canstar Community News Limited ("Canstar") which operates five weekly community newspapers in the Winnipeg area as well as a delivery businesses in Winnipeg and Thunder Bay, and Rosebud Publications Ltd. ("Rosebud"), which publishes a weekly entertainment newspaper and a twice monthly newspaper aimed at age-50 plus readers, both serving the Winnipeg area.

Total revenue for FPLP for the three months ended December 31, 2006 was $32.6 million, a $0.7 million or 2.3 percent increase over the same period last year. The increase in revenue is primarily due to growth in the classified advertising and flyer distribution categories. Total EBITDA(1) of FPLP for the fourth quarter was $7.7 million, a $0.2 million or 2.3 percent increase from the same quarter last year. The partnership had net earnings of $3.6 million in the fourth quarter compared to $3.7 million in the same quarter last year.

The Fund had net earnings of $2.6 million, or $0.380 per Unit, during the three months ended December 31, 2006, compared to $2.7 million, or $0.391 per Unit, in the same quarter last year.

Operations

Advertising revenue in the fourth quarter was $22.9 million, a $0.4 million or 1.6 percent increase over the same quarter last year. Our largest advertising revenue category, display advertising including colour was $14.1 million for the quarter, a decrease of 1.7 percent, compared to $14.4 million for the same period last year. This decrease is primarily due to decreased spending in the telecommunication and the national automotive categories, and the impact of one less Saturday publishing day. Classified advertising revenue was $4.0 million compared to $3.7 million in the fourth quarter last year, an increase of 8.8 percent. Increased classified revenue was primarily the result of volume increases in the automobile and real estate categories together with rate increases in most categories. Advertising flyer distribution revenues increased $0.3 million or 6.5 percent compared to the same period last year resulting from higher flyer volumes and increased rates.

Operating expenses, excluding amortization for the fourth quarter were $24.9 million, a 2.3 percent increase from the $24.3 million in the fourth quarter last year. Employee compensation costs increased $0.4 million or 3.3 percent, primarily the result of the filling of vacant management positions, accruals under annual incentive plans and an increase in the defined benefit pension plan expense. Newsprint prices were slightly lower in the fourth quarter of 2006 when compared to the same quarter last year and newsprint expense for our own products increased by $0.1 million or 3.5 percent due primarily to increased pages for editorial content. Delivery costs were $5.1 million for the fourth quarter, a 6.4 percent increase from the $4.8 million reported for the same quarter last year. This increase was primarily due to contracted increases for delivery agents in Winnipeg, increased flyer volumes and higher fuel costs.

For two weeks starting in November, the Free Press published The Hermetic Code, a 15-part series on the mystical symbols built into the Manitoba Legislative Building. The project was a major initiative that took six months to plan and execute. Under the direction of Deputy Editor Margo Goodhand, writer Carolin Vesely and editor Buzz Currie knitted together a factual narrative based on the work of Winnipeg scholar Frank Albo. Their story covered everything from ancient Greek mythology to the early 20th century economic boom in Manitoba that fuelled construction of the magnificent monument to government. Few Manitobans knew the mystery surrounding the building at the heart of Winnipeg, or the significance of the symbols still embedded in it. The response to the series was overwhelming. People phoned stores on the morning of the first installment looking for the full book. The University of Winnipeg immediately signed up Mr. Albo to teach a course on his studies. The Manitoba government began looking into how The Hermetic Code could be incorporated into tours of the Legislative Building. The Free Press is publishing a book of the series, which will be available in April.

A number of our excellent writers and photographers were honoured with significant awards during the quarter. Sportswriter Paul Wiecek won his fourth Sovereign award for an in-depth story on how 50,000 Canadian horses, many of them retired racehorses, are slaughtered every year and shipped to Japan and Europe for human consumption. Free Press automobile writer Michael Clark was honoured with two national writing awards from the Automobile Journalists Association of Canada. Joe Bryksa, a Free Press Photographer was recognized by the world's premier sports magazine, when his shot of a wakeboarder on the Red River was part of a Sports Illustrated photo gallery of the most interesting sports pictures of 2006 from around the world.

Distributions

Distributable cash attributable to the Fund(2) for the three months ended December 31, 2006 was $3.1 million, or $0.454 per Unit compared to $3.0 million or $0.440 per Unit last year. For the twelve months ended December 31, 2006, FPLP has generated distributable cash attributable to the Fund of $1.434 per Unit, and the Fund has declared distributions of $1.290 per Unit, resulting in a payout ratio of 90.0 percent.

The Fund declared distributions to Unitholders of $0.323 per Unit for the fourth quarter, unchanged from the fourth quarter last year.

Outlook

Overall advertising revenues on a same store basis increased by 4.1 percent in the twelve months ended December 31, 2006 compared to the same period last year. Our largest revenue category, display advertising including colour was virtually unchanged from the prior year. The overall growth was primarily due to increased classified revenues, mainly in the employment category, together with increased flyer distribution revenues due primarily to increases in distribution rates. We are hopeful that advertising growth will continue in 2007, however advertising activity is driven by a number of factors that are difficult to predict.

During the year, significant improvements were made to our on-line products across all business units. In Winnipeg the What's on Winnipeg Entertainment site and the WFPStuff classified site were launched in addition to making other improvements to the core WFP Live breaking news site. While internet revenues currently are less than 1 percent of our total overall revenue, this is a growing area and work will continue to grow this revenue source. Circulation revenues for the year were 4.6 percent higher than last year, slightly exceeding our 2 to 4 percent forecast. Overall circulation revenue growth is expected to be in the 1 to 3 percent range in 2007 with the growth driven primarily by rate increases implemented during the fourth quarter.

Employee compensation costs account for approximately 50 percent of our operating costs before amortization. In 2006 these costs increased by 3.6 percent, on a same store basis, which was in line with our 3 to 4 percent forecast from last year. Most of our employee compensations costs are covered under collective bargaining agreements and we expect employee compensation to be approximately 3 to 4 percent higher in 2007. Newsprint prices decreased effective January 1, 2007 and are expected to be approximately 5 percent lower in the first quarter of 2007 compared to the same period last year. Because we have agreed with our newsprint suppliers to hold these lower prices constant for 2007, we expect newsprint prices will be approximately 5.5 percent lower for the full year compared to the 2006 levels. Delivery costs are partly dependent on flyer volumes, but in the absence of unexpected volume changes, we expect a 2 to 4 percent increase in these costs in 2007.

In 2007 we are planning to complete a number of significant capital initiatives throughout our business units. In Winnipeg, an upgrade to the electronic press controls is planned for the two press lines. This initiative is required to upgrade the software systems on the presses to ensure the on-time production of our daily newspaper. In addition, at the Free Press an upgrade to the editorial system is planned to improve reliability and increase efficiencies. In addition to these two significant initiatives a number of other investments are planned to upgrade our technology across all our business units. The 2007 planned maintenance capital spending level is approximately $2.4 million. In 2008, we expect the annual maintenance capital spending level to be in the range of $1.6 million to $2.0 million.

In January we were pleased to have Bryan Metcalfe join our group as Publisher and General Manager of Canstar Community News Limited. Bryan comes to us with a number of years experience in the print advertising industry and we look forward to continuing to grow our weekly community newspaper business.

As we previously announced, Rudy Redekop will be retiring effective March 31, 2007 and has resigned as President effective March 6, 2007. Rudy made significant contributions to our newspapers during his career and his fellow directors thank him for his dedicated service. Rudy will continue to serve as a director of FPCN General Partner Inc., the managing general partner of FPLP.

Conference Call

FP Newspapers Income Fund invites you to participate in a conference call on Wednesday, March 7, 2007 at Noon Eastern (11:00 a.m. Central) to discuss results.

The dial-in number is 1-416-695-9706, or toll free at 1-800-766-6630. To ensure your participation, please dial in five minutes before the start of the conference call. The call will also be webcast 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 March 21, 2007. To access the rebroadcast, please dial 1-416-695-5275 or dial toll free at 1-888-509-0081, and use the verbal passcode 640215.

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 seven community and special interest 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 of 124,000 copies. The Brandon Sun also publishes seven days a week, serving the region with an average circulation of approximately 14,000 copies. Canstar Community News publishes weekly with an average circulation of approximately 206,000 copies. Based in Winnipeg, the businesses employ approximately 630 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.

Management's Discussion and Analysis

March 7, 2007

Overview

Management's Discussion and Analysis provides a review of significant developments that have affected the Fund's performance during the year January 1, 2006 to December 31, 2006. This review is based on financial information contained in the consolidated financial statements. Factors that could affect future operations are also discussed. These factors may be affected by known and unknown risks and uncertainties that may cause the actual future results to be materially different from those expressed in this discussion.

The following information provides analysis of the operations and financial position of the Fund and FPLP and should be read in conjunction with the consolidated financial statements and accompanying notes. The interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

Further information relating to the Fund is available at www.sedar.com.

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. The Fund is dependent on the operations of FPLP, its sole investment.

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. On July 13, 2004, FPLP acquired five weekly newspapers in the Winnipeg area, as well as delivery businesses in Winnipeg, Brandon and Thunder Bay and operates them under its wholly owned subsidiary Canstar Community News Limited ("Canstar"). In January 2006, the Canstar Brandon distribution operation was amalgamated within the Brandon Sun operations. On July 21, 2005 Canstar acquired the shares of Rosebud Publications Ltd. ("Rosebud"), the publisher of a weekly entertainment newspaper and a twice monthly newspaper aimed at age-50 plus readers, serving the Winnipeg area.

FP Newspapers Income Fund

The Fund is dependent on the operations of FPLP, its sole investment. The Fund earned $2,682,000 and $7,960,000 in income from its investment in FPLP for the three and twelve months ended December 31, 2006 compared to $2,757,000 and $8,055,000 for the same periods last year. Interest income on the 11.5% subordinated notes issued by FPLP to the Fund was $1,824,000 and $7,239,000 for the three and twelve months ended December 31, 2006 compared to $1,882,000 and $7,469,000 in the same periods last year. The Fund's equity interest from its Class A limited partnership units were $858,000 and $721,000 for the three and twelve months ended December 31, 2006 compared to $875,000 and $586,000 in the same periods last year (see "FP Canadian Newspapers Limited Partnership - Results of Operations" below). Administrative expenses incurred by the Fund were $64,000 and $287,000 for the three and twelve months ending December 31, 2006 compared to $59,000 and $251,000 in the same periods last year. Net earnings were $2,618,000 and $7,677,000 for the three and twelve month periods ending December 31, 2006 compared to $2,699,000 and $7,811,000 in the same periods last year.

The Fund declared distributions to Unitholders of $2,226,000 or $0.323 per Unit and $8,905,000 or $1.290 per Unit for the three and twelve months ended December 31, 2006 which is unchanged from the same periods last year. Cash available for distribution attributable to the Fund(2) was $3,134,000 or $0.454 per Unit and $9,896,000 or $1.434 per Unit for the three and twelve months ended December 31, 2006 compared to $3,039,000 or $0.440 per Unit and $9,325,000 or $1.351 per Unit in the same periods in the prior year. The increase in cash available for distribution attributable to the Fund(2) is primarily due to higher EBITDA(1) in FPLP as explained later in this discussion.

FP Canadian Newspapers Limited Partnership

Results of Operations



Revenue: Three Months Twelve Months
Ended December 31, Ended December 31,
----------------------- ----------------------

2006 2005 2006 2005
--------- --------- --------- ---------
In thousands In thousands
Advertising $ 22,912 $ 22,541 $ 84,707 $ 80,936
Circulation 7,260 6,923 28,314 27,069
Commercial Printing 1,740 1,817 6,587 6,430
Promotions and Services 661 556 2,612 2,482
--------- --------- --------- ---------
$ 32,573 $ 31,837 $ 122,220 $ 116,917
--------- --------- --------- ---------
--------- --------- --------- ---------


Revenue for the three months ended December 31, 2006 was $32.6 million, an increase of $0.7 million, or 2.3% compared to the fourth quarter of 2005. Advertising revenues increased by $0.4 million or 1.6% compared to the same period last year. FPLP's largest advertising revenue category, display advertising including colour decreased by $0.2 million or 1.7%, primarily due to decreased spending in the telecommunication and national automotive categories, and the impact of one less Saturday publishing day. Flyer distribution revenues increased by $0.3 million or 6.5%, due to higher flyer volumes and increased rates. Classified advertising increased by $0.3 million or 8.8% in the fourth quarter due primarily to volume increases in the automobile and real estate categories together with rate increases in most categories. Circulation revenue increased by $0.3 million or 4.9% primarily due to rate increases implemented in the fourth quarter. Promotional and services revenue increased by $0.1 million or 18.9% primarily due to a new agreement relating to copyright royalties and an increase in internet revenue.

Revenue for the twelve months ended December 31, 2006 was $122.2 million, an increase of $5.3 million, or 4.5% compared to the same period last year. The acquisition of Rosebud during the third quarter of 2005 accounted for $0.5 million of this increase. Revenues, on a same store basis, increased by $4.8 million or 4.1% compared to the same twelve months of last year. Advertising revenues, excluding Rosebud, increased by $3.3 million or 4.1% compared to the same period last year. FPLP's largest advertising revenue category, display advertising including colour, on a same store basis, was virtually unchanged compared to last year. Flyer distribution revenues, excluding Rosebud, increased by $1.2 million or 8.4% due to a combination of increased volumes together with higher rates. Classified advertising, on a same store basis, increased by $2.0 million or 12.5% in the twelve months ending December 31, 2006 due primarily to rate increases in most categories and volume increases in the automobile and employment category. Circulation revenue, on a same store basis, increased by $1.2 million or 4.6% primarily due to rate increases implemented in the fourth quarter of 2005.



Operating expenses, excluding amortization:
Three Months Twelve Months
Ended December 31, Ended December 31,
----------------------- ----------------------

2006 2005 2006 2005
--------- --------- --------- ---------
In thousands In thousands
Employee Compensation $ 10,948 $ 10,591 $ 43,763 $ 42,107
Newsprint - Own Use 3,781 3,652 14,020 13,597
Newsprint - Commercial
Printing 617 750 2,392 2,380
Delivery of Newspapers 5,072 4,767 18,732 17,772
Other 4,483 4,574 17,846 16,986
--------- --------- --------- ---------
$ 24,901 $ 24,334 $ 96,753 $ 92,842
--------- --------- --------- ---------
--------- --------- --------- ---------


Operating expenses, excluding amortization in the three months ended December 31, 2006 were $24.9 million, an increase of $0.6 million or 2.3% over the fourth quarter of 2005. Employee compensation increased by $0.4 million or 3.4% due primarily to the filling of some vacant management positions, accruals under annual incentive plans and an increase in the defined benefit pension expense. Newsprint expense for FPLP's own publications increased by $0.1 million or 3.5%, the result of increased pages for editorial content partially offset by slightly lower newsprint prices. Newsprint expense for Commercial Printing decreased by $0.1 million or 17.7%, primarily due to fewer pages printed under contracts. Delivery costs increased by $0.3 million or 6.4% compared to the same quarter last year largely the result of contracted annual increases to unionized delivery agents at the Winnipeg Free Press, increased flyer volumes and higher fuel costs.

Operating expenses, excluding amortization in the twelve months ended December 31, 2006 were $96.8 million, an increase of $3.9 million or 4.2% over the same period in 2005. Operating expenses, excluding Rosebud, were $96.0 million, an increase of $3.5 million or 3.8% higher than the same period last year. Employee compensation, excluding Rosebud, increased by $1.5 million or 3.6% due primarily to an increase in accruals under annual incentive plans, the filling of vacant management positions and an increase in defined benefit pension expense. The increase in pension expense is mainly due to a reduction in the discount rate assumption used in the actuarial determination of the annual defined benefit pension plan expense. Newsprint expense for FPLP's own publications, excluding Rosebud, increased by $0.4 million or 3.1%, the result of increased newsprint prices partially offset by lower consumption. Delivery costs, excluding Rosebud, increased by $0.9 million or 5.2% compared to the same period last year largely the result of contracted annual increases to delivery agents at the Winnipeg Free Press, higher fuel costs and increased flyer volumes. Other expenses, excluding Rosebud, increased by $0.8 million or 4.8% over the same twelve month period last year primarily due to increased marketing costs to attract circulation subscribers and an increase in consulting costs.

EBITDA(1) for the three months ended December 31, 2006 was $7.7 million compared to $7.5 million for the same period in the prior year. EBITDA(1) for the year ended December 31, 2006, excluding Rosebud, was $25.2 million compared to $24.0 million for the same period in 2005. EBITDA(1) margin was 23.6% for both the three months ended December 31, 2006 and 2005, and 20.8% and 20.6% for the year ending December 31, 2006 and 2005 excluding Rosebud.

Interest expense on the notes payable, the subordinated notes and capital lease obligations for the three and twelve months ended December 31, 2006 was $2.6 million and $10.5 million compared to $2.7 million and $10.7 million in the same periods last year. Interest expense was lower in both the 3 and 12 month period ending December 31, 2006 compared to the prior year as there was a reduction in principal in the subordinated notes compared to the same periods in the prior year.

During the third quarter, FPLP recorded a non-cash loss of $1.3 million relating to the reduction of the carrying value of excess press components held for sale (see "Reclassification and Revaluation of Excess Press Components" under liquidity and capital resource section). Amortization of property, plant and equipment for the three and twelve months ended December 31, 2006 was $1.0 million and $3.7 million compared to $0.9 million and $3.5 million in the same periods last year. The increase in amortization of property, plant and equipment is mainly due to the re-commencement of amortization on $5.1 million of press components which were temporarily removed from service during 2004.

The income tax expense for the three and twelve months ended December 31, 2006 was $0.2 million and $0.1 million, an increase of $0.2 million and $0.3 million from the same periods last year. The income tax expense is due to an increase in taxable earnings of incorporated subsidiaries subject to tax.

FPLP's net earnings were $3.6 million and $9.0 million for the three and twelve months ended December 31, 2006 compared to $3.7 million and $9.0 for the same periods in 2005.

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 2004, 2005 and 2006 was as follows:



2006 2005 2004
-------- -------- --------
Revenue In thousands
-------
Quarter 1 $ 28,582 $ 26,805(ii) $ 25,674
Quarter 2 31,261 30,270(ii) 27,840
Quarter 3 29,804 28,005 27,283(ii)
Quarter 4 32,573 31,837 30,441(ii)
-------- -------- --------
$122,220 $116,917 $111,238
-------- -------- --------
-------- -------- --------

EBITDA(1)
--------
Quarter 1 $ 4,746 $ 4,302(iii) $ 5,387
Quarter 2 7,196 7,094 6,772
Quarter 3 5,853 5,176 5,167
Quarter 4 7,672 7,503 7,008
-------- -------- --------
$ 25,467 $ 24,075 $ 24,334
-------- -------- --------
-------- -------- --------

Net Earnings (loss)
------------------
Quarter 1 $ 1,038 $ 485(iii) $ 1,231
Quarter 2 3,492 3,320 (1,489)(i)
Quarter 3 827(iv) 1,420 1,077
Quarter 4 3,649 3,744 2,917
-------- -------- --------
$ 9,006 $ 8,969 $ 3,736
-------- -------- --------
-------- -------- --------


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 earnings in the second quarter of 2004 was due to the disposal and write-down in value of excess press components which resulted in a $4,264,000 charge against net earnings.

(ii) The increase in revenue from the same quarter(s) in the prior year(s) is primarily due to the revenue from the community newspapers and advertising distribution businesses acquired during the third quarter of 2004.

(iii) Decrease in EBITDA(1) and net earnings are primarily due to lower revenues due to two fewer publishing days and an 11.5% decline in Friday/Saturday publishing days.

(iv) The decline in earnings is the third quarter of 2006 was due to the write-down in value of excess press components held for sale which resulted in a $1,303,000 charge against net earnings.

Working Capital Position of FPLP

Total working capital at December 31, 2006 was $4.9 million up from $3.4 million at December 31, 2005. The increase in working capital is mainly due to the increase in cash balances resulting primarily from the increase in EBITDA(1).

Liquidity and Capital Resources of FPLP

Cash and cash equivalents at December 31, 2006 was $3.7 million compared to $1.7 million at December 31, 2005. Cash and cash equivalents may be used to pay future distributions, to reduce debt, to fund future capital expenditures, or for other general purposes. Operating activities provided $4.4 million in cash during the fourth quarter of 2006, while $0.3 million was used for investing activities and $3.0 million was used for financing activities. 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.

Cash Flow from Operating Activities

During the three and twelve months ended December 31, 2006, cash generated from operating activities was $4.4 million and $15.4 million, compared to $2.8 million and $14.0 million for the same periods last year. The net change in non-cash working capital in the three and twelve months ended December 31, 2006 was ($0.6) million and $0.4 million compared to ($1.9) million and $0.7 million for the same periods last year. The net change in non-cash working capital for the three month period is largely the result of the timing of receipts from customers as well as the timing of the payment of prepaid expenses and the lower inventory balances carried.

Investing Activities

Total capital purchases totalled $0.3 million and $1.6 million for the three and twelve months ended December 31, 2006 compared to $0.6 million and $1.1 million in the same periods in the prior year. Maintenance capital spending, representing the replacement of capital in order to sustain current business operations, for the three and twelve months ending December 31, 2006 was $0.2 million and $1.3 million compared to $0.6 million and $1.1 million for the same periods last year. Maintenance capital spending during the fourth quarter of 2006 consisted of the replacement of fleet vehicles, computer system hardware and software upgrades and a re-configuration of the Winnipeg Free Press advertising department to improve efficiencies.

During 2006 there was strategic capital spending of $0.2 million on website costs at the Winnipeg Free Press. For purposes of calculating distributable cash attributable to the Fund(2) this spending has been partially funded by a reduction in the reserve for strategic capital (see below).

Financing Activities

Distributions to partners of FPLP for the three and twelve months ended December 31, 2006 totalled $2.9 million and $11.5 million, of which $0.5 million and $1.9 million was paid to the Fund as holder of Class A limited partnership units. This is compared to $2.7 million and $10.8 million in the same periods the prior year of which $0.4 million and $1.5 million was paid to the Fund. The distributions to partners have been determined in accordance with the Amended and Restated Agreement of Limited Partnership dated May 3, 2005.

Reclassification and Revaluation of Excess Press Components

During the third quarter of 2006 FPLP reclassified press components with a carrying value of $0.6 million from the "equipment held for sale" category on the balance sheet to the "property, plant and equipment" category as it is the intention to re-utilize this equipment at a later date. In addition, it was determined that a write-down in value of the remaining "equipment held for sale" in the amount of $1.3 million was required and this write-down was recorded on FPLP's statement of earnings during the third quarter of 2006.

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

Under the terms of the Amended and Restated Agreement of Limited Partnership dated May 3, 2005, 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, 2006 and 2005 is as follows:



Three Months Twelve Months
Ended December 31, Ended December 31,
----------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
In thousands In thousands
Reserve at
beginning of period $ 310 $ 843 $ 516 $ 630
Increase in reserve 60 - 104 259
Decrease in reserve - (327) (250) (373)
--------- --------- --------- ---------
Reserve at end of
period $ 370 $ 516 $ 370 $ 516
--------- --------- --------- ---------
--------- --------- --------- ---------


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

During the second quarter of 2004 the Managing General Partner determined that it was desirable to establish a reserve in an amount of $1.0 million for purposes of future strategic capital, acquisitions and/or debt reduction. The amount of the reserve initially established was equal to the net proceeds received on the sale of surplus equipment in the third quarter of 2004. A summary of the reserve for strategic capital, acquisitions and/or debt reduction for the three and twelve months ended December 31, 2006 and 2005 is as follows:



Three Months Twelve Months
Ended December 31, Ended December 31,
----------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
In thousands In thousands
Reserve at
beginning of period $ - $ 157 $ 157 $ 510
Increase in reserve - - - -
Decrease in reserve - - (157) (353)
--------- --------- --------- ---------
Reserve at end of
period $ - $ 157 $ - $ 157
--------- --------- --------- ---------
--------- --------- --------- ---------


The reduction in the reserve in the twelve months ending December 31, 2006 relates to an investment in website development at the Winnipeg Free Press.

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.

Business Risks and Uncertainties

Revenue

Advertising revenue, which accounts for approximately 69% 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 2008. Collective agreements covering unionized employees at the Brandon Sun expire December 31, 2008.

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 $16.4 million in 2006, compared to $16.0 million in 2005. 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.

Announced Taxation Changes

On October 31, 2006 the department of Finance (Canada) released details of proposed legislation that would implement a tax on distributions made by publicly listed flow-through entities ("FTE's") such as income trusts and limited partnerships. Draft legislation was released on December 21, 2006. The new tax, if it is passed into law, would be effective January 1, 2011 for the Fund, unless accelerated by the issuance of new equity, in certain circumstances. If enacted, it is expected that the new tax will reduce the amount of distributable cash otherwise available to the Fund for purposes of making distributions to Unitholders. Whether distributions to Unitholders will be reduced from current levels will depend on future events, including the results of operations during the years leading up to 2011 and the distributions to Unitholders during that period, the outlook for operations and expected cash flows for the year 2011 and beyond, the level of un-distributed distributable cash on hand at the time the new tax becomes effective, and the distribution policy adopted by the Trustees of the Fund at that time.

If the new tax is enacted, the Fund will study the expected impact in greater detail, and consider whether changes to the distribution policy or capital structure of the Fund are desirable. Because the draft legislation does not appear to have any effect on the 51% interest in FPLP held by the General Partners, the Fund and the General Partners may have conflicting interests with respect to available options to mitigate the impact of the proposed new tax on the Fund and its Unitholders. Similarly, because the proposed new tax is expected to have no net impact on Unitholders of the Fund who are taxable Canadian entities, there may be a conflict of interests among investors in the Fund. There can be no assurance that the Fund will be able to minimize the impact of the proposed new tax on the Fund or any of its Unitholders.

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 Twelve Months
Ended December 31, Ended December 31,
----------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
In thousands In thousands
Net earnings for
the period $ 3,649 $ 3,744 $ 9,006 $ 8,969
Add (subtract):
Amortization of
property, plant and
equipment 1,014 879 3,748 3,484
Amortization of
intangible assets 92 90 362 362
Interest 2,625 2,674 10,469 10,723
Amortization of deferred
financing costs 140 140 562 840
Interest income (31) (8) (78) (30)
Gain on sale of property,
plant and equipment - (6) (6) (32)
Write down of
property, plant and
equipment held for sale - - 1,303 -
Income tax
(expense) recovery 183 (10) 101 (241)
--------- --------- --------- ---------
EBITDA $ 7,672 $ 7,503 $ 25,467 $ 24,075
--------- --------- --------- ---------
--------- --------- --------- ---------


(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 Twelve Months
Ended December 31, Ended December 31,
----------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Distributable cash
of FPLP: In thousands In thousands
EBITDA(1) $ 7,672 $ 7,503 $ 25,467 $ 24,075
Interest income 31 8 78 30
Interest expense on
notes payable and
capital leases (801) (792) (3,230) (3,254)
Principal repayment
of capital leases (49) (69) (261) (270)
Maintenance capital
expenditures (240) (577) (1,346) (1,114)
Decrease (increase)
in reserve for
future maintenance
capital (60) 327 146 114
Strategic capital
expenditures (22) - (204) -
Decrease in reserve
for strategic
capital,
acquisitions,
and/or debt
reduction - - 157 -
Proceeds from sale
of property, plant
and equipment - 6 6 32
Current income and
capital taxes
payable (5) (85) (39) (85)
--------- --------- --------- ---------
$ 6,526 $ 6,321 $ 20,774 $ 19,528
--------- --------- --------- ---------

49% attributable to
the Fund $ 3,198 $ 3,097 $ 10,179 $ 9,569
Administration
expenses (64) (59) (287) (251)
Interest income - 1 4 7
--------- --------- --------- ---------
Distributable cash
attributable to the
Fund $ 3,134 $ 3,039 $ 9,896 $ 9,325
--------- --------- --------- ---------
--------- --------- --------- ---------
Distributable cash
attributable to the
Fund - per Unit $ 0.454 $ 0.440 $ 1.434 $ 1.351
--------- --------- --------- ---------
--------- --------- --------- ---------


A summary of distributable cash and distributions declared for the trailing twelve months to December 31, 2006 and for the period from commencement of the Fund on May 28, 2002 to December 31, 2006 is as follows:

Distributable Cash of FPLP:



Last Since
Twelve Months May 28, 2002
------------- ------------
In thousands
EBITDA(1) $ 25,467 $ 111,212
Interest income 78 325
Interest expense on notes payable
and capital leases (3,230) (14,293)
Principal repayment of capital leases (261) (621)
Maintenance capital expenditures (1,346) (4,471)
Decrease (increase) in reserve for
future maintenance capital expenditures 146 (370)
Strategic capital expenditures (204) (650)
Decrease (increase) in reserve for
strategic capital, acquisitions,
and/or debt reduction 157 (353)
Proceeds on disposal of property, plant
and equipment 6 1,070
Current income and capital tax payable (39) (124)
------------- ------------

Distributable cash of FPLP $ 20,774 $ 91,725
------------- ------------
------------- ------------


Distributable Cash Attributable to the Fund:



Last Since
Twelve Months May 28, 2002
------------- ------------
In thousands
49% of FPLP distributable cash $ 10,179 $ 44,945
Administration expenses (287) (1,218)
Interest income 4 22
------------- ------------

Distributable cash attributable to the Fund $ 9,896 $ 43,749
------------- ------------
------------- ------------

Distributable cash attributable
to the Fund per unit $ 1.434 $ 6.338
Distributions declared by the Fund per unit $ 1.290 $ 5.820

Payout Ratio 90.0% 91.8%


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 Twelve Months
Ended December 31, Ended December 31,
----------------------- ----------------------

2006 2005 2006 2005
--------- --------- --------- ---------
In thousands In thousands
Cash flow from
operating
activities of FPLP $ 4,424 $ 2,843 $ 15,387 $ 13,995
Add (subtract):
Interest on
subordinated notes (i) 1,824 1,882 7,239 7,469
Net change in
non-cash working
capital items (ii) 654 1,994 (311) (613)
Maintenance capital
expenditures (240) (577) (1,346) (1,114)
Decrease (increase)
in reserve for
future maintenance
capital (iii) (60) 327 146 114
Strategic capital
expenditures (22) - (204) -
Decrease in reserve
for future
strategic capital (iii) - - 157 -
Principal repayment
of capital leases (49) (69) (261) (270)
Proceeds from sale
of property, plant
and equipment (iv) - 6 6 32
Current income and
capital taxes
payable (5) (85) (39) (85)
--------- --------- --------- ---------
Distributable cash
of FPLP $ 6,526 $ 6,321 $ 20,774 $ 19,528
--------- --------- --------- ---------
--------- --------- --------- ---------

(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) Increase in the reserve for future maintenance capital is shown as
a deduction in determining distributable cash. A decrease in the
reserve is 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,
2006 2005
--------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 221 $ 184
Interest receivable from subordinated notes 581 634
Due from FPCN Media Funding Inc. 26 -
Prepaid expenses 15 18
--------------------------------------------------------------------------
843 836

Investment in FPCN General Partner Inc. 20 10
Investment in FP Canadian Newspapers Limited
Partnership (note 2) 60,464 61,689
--------------------------------------------------------------------------
$ 61,327 $ 62,535
--------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 96 $ 77
Distribution payable (note 3) 742 742
--------------------------------------------------------------------------
838 819
--------------------------------------------------------------------------

Unitholders' Equity:
Trust units 69,026 69,026
Cumulative earnings 31,632 23,955
Cumulative distributions (40,169) (31,265)
--------------------------------------------------------------------------
60,489 61,716
--------------------------------------------------------------------------
$ 61,327 $ 62,535
--------------------------------------------------------------------------

(See accompanying notes)


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

Three Months Twelve Months
Ended December 31, Ended December 31,
2006 2005 2006 2005
--------------------------------------------------------------------------
Earnings from
investment in FP
Canadian
Newspapers Limited
Partnership
Interest from
subordinated notes $ 1,824 $ 1,882 $ 7,239 $ 7,469
Equity interest
from Class A
limited partnership
units (note 2) 858 875 721 586
Other interest - 1 4 7
--------------------------------------------------------------------------
2,682 2,758 7,964 8,062

Administration
expenses (64) (59) (287) (251)

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

Net earnings for
the period $ 2,618 $ 2,699 $ 7,677 $ 7,811

Cumulative
earnings, beginning
of period 29,014 21,256 23,955 16,144
--------------------------------------------------------------------------
Cumulative
earnings, end of
period $ 31,632 $ 23,955 $ 31,632 $ 23,955
--------------------------------------------------------------------------

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

Net earnings per
trust unit $ 0.380 $ 0.391 $ 1.112 $ 1.132
--------------------------------------------------------------------------


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

Three Months Twelve Months
Ended December 31, Ended December 31,
2006 2005 2006 2005
--------------------------------------------------------------------------
Balance, beginning
of period $ 60,096 $ 61,242 $ 61,716 $ 62,809
Net earnings 2,618 2,699 7,677 7,811
Distributions
declared (2,225) (2,225) (8,904) (8,904)
--------------------------------------------------------------------------
Balance, end of
period $ 60,489 $ 61,716 $ 60,489 $ 61,716
--------------------------------------------------------------------------

(See accompanying notes)


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

Three Months Twelve Months
Ended December 31, Ended December 31,
2006 2005 2006 2005
--------------------------------------------------------------------------
Cash provided by
(used in):
Operating
activities:
Net earnings for
the period $ 2,618 $ 2,699 $ 7,677 $ 7,811
Item not affecting
cash:
Equity interest
from Class A units
of FP
Canadian Newspapers
Limited Partnership
(note 2) (858) (875) (721) (586)
Distributions
received on Class A
units of FP
Canadian Newspapers
Limited Partnership
(note 2) 518 374 1,946 1,484
Net change in
non-cash working
capital items 45 (46) 49 5
--------------------------------------------------------------------------

2,323 2,152 8,951 8,714
--------------------------------------------------------------------------
Financing
activities:
Distributions to
Unitholders (2,225) (2,225) (8,904) (8,904)
--------------------------------------------------------------------------

Investing
activities:
Investment in FPCN
General Partner
Inc. - - (10) (10)
--------------------------------------------------------------------------

Increase (decrease)
in cash and cash
equivalents 98 (73) 37 (200)
Cash and cash
equivalents,
beginning of period 123 257 184 384
--------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 221 $ 184 $ 221 $ 184
--------------------------------------------------------------------------

(See accompanying notes)


FP Newspapers Income Fund

Notes to Consolidated Financial Statements as at December 31, 2006

(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, 2005. 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, 2005.

FPLP's revenues are seasonal. As FPLP is the Fund's sole investment, the fund's Equity interest is seasonal as well. The Fund's equity interest from Class A limited partnership units is highest in the second and fourth quarters.

2. Investment in FP Canadian Newspapers Limited Partnership

On May 28, 2002, FPCN Holdings Trust subscribed for 6,573,897 Class A limited partnership units of FPLP and $65,670,000 principal amount of subordinated notes of FPLP. On June 27, 2002, FPCN Holdings Trust subscribed for a further 328,695 Class A limited partnership units of FPLP and $3,283,500 principal amount of subordinated notes of FPLP. FPCN Holdings Trust holds all of the Class A limited partnership units of FPLP, which, together with the subordinated notes, entitles it to 49% of the distributable cash (as defined in the Partnership Agreement) of FPLP.

The investment in FPLP is summarized as follows:



Class A
Subordinated limited
Notes partner units Total
$ $ $
Balance at September 30, 2006 62,954 (2,830) 60,124
Repayment of Subordinated Notes (3,450) - (3,450)
Additional Contribution - 3,450 3,450
Equity interest - 858 858
Distributions received - (518) (518)
--------------------------------------------------------------------------
Balance at December 31, 2006 59,504 960 60,464
--------------------------------------------------------------------------


The equity interest from the Fund's investment in Class A limited partnership units of FPLP is calculated as follows:



Three months Twelve months
Ended December 31, Ended December 31,
2006 2005 2006 2005

Net earnings of FPLP $ 3,649 $ 3,744 $ 9,006 $ 8,969
Plus: Interest on
subordinated notes 1,824 1,882 7,239 7,469
--------------------------------------------------------------------------
Net earnings before
interest on
subordinated notes $ 5,473 $ 5,626 $ 16,245 $ 16,438
--------------------------------------------------------------------------

49% interest
attributable to the
Fund 2,682 2,757 7,960 8,055
Less: Interest from
subordinated notes (1,824) (1,882) (7,239) (7,469)
--------------------------------------------------------------------------
Equity interest
from Class A
limited partnership
units $ 858 $ 875 $ 721 $ 586
--------------------------------------------------------------------------


3. Distribution Payable

The Fund recorded a distribution payable at December 31, 2006 of $0.1075 per unit. The distribution was paid January 30, 2007 to Unitholders of record on December 29, 2006 and is in respect of the month of December 2006.

4. Proposed Taxation Change

On October 31, 2006, the Federal Government of Canada announced proposed changes to the taxation of income trusts. If enacted, the legislation would cause certain distributions of publicly traded trusts, such as the Fund, to be taxed at a special rate. The Fund is currently evaluating the impacts of the proposed legislation. If enacted as proposed, certain of the Fund's distributions will be subject to tax beginning in 2011.

The anticipated accounting impact of the proposed taxation changes, if substantively enacted, would be to trigger the recognition of the future income tax assets and liabilities with a corresponding impact on future tax expense. The amount would be based on temporary differences expected to reverse after the date that the taxation changes take effect and would be measured using income tax rates substantively enacted at the balance sheet date.



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

As at As at
December 31, December 31,
2006 2005
--------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,729 $ 1,674
Accounts receivable 13,495 13,746
Income tax receivable 10 -
Inventories 1,021 1,064
Prepaid expenses 690 838
Future income taxes 174 222
--------------------------------------------------------------------------
19,119 17,544

Equipment held for sale (note 6) 400 2,289

Property, plant and equipment (note 6) 52,400 54,012

Future income taxes 205 219

Deferred financing costs 2,728 3,290

Intangible assets 8,465 8,827

Goodwill 71,160 71,160
--------------------------------------------------------------------------
$ 154,477 $ 157,341

LIABILITIES AND UNITHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 10,627 $ 10,879
Income taxes payable 16 85
Prepaid subscriptions and deferred revenue 3,114 2,875
Current obligations under capital leases 318 284
--------------------------------------------------------------------------
14,075 14,123
--------------------------------------------------------------------------
Long-Term Liabilities:
Subordinated notes 59,504 62,954
Notes Payable 60,000 60,000
Obligations under capital leases 197 492
--------------------------------------------------------------------------
119,701 123,446
--------------------------------------------------------------------------
133,776 137,569
--------------------------------------------------------------------------

Unitholders' Equity:
Partnership units 40,243 36,793
Cumulative earnings 39,128 30,122
Cumulative distributions (58,670) (47,143)
--------------------------------------------------------------------------
20,701 19,772
--------------------------------------------------------------------------

$ 154,477 $ 157,341
--------------------------------------------------------------------------

(See accompanying notes)


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

Three Months Twelve Months
Ended December 31, Ended December 31,
2006 2005 2006 2005
--------------------------------------------------------------------------

Revenue $ 32,573 $ 31,837 $ 122,220 $ 116,917

Operating expenses,
excluding
amortization (24,901) (24,334) (96,753) (92,842)
--------------------------------------------------------------------------
7,672 7,503 25,467 24,075

Amortization of
property, plant and
equipment (1,014) (879) (3,748) (3,484)
Amortization of
intangible assets (92) (90) (362) (362)
--------------------------------------------------------------------------

Earnings before the
under-noted 6,566 6,534 21,357 20,229

Interest (note 5) (2,625) (2,674) (10,469) (10,723)
Amortization of
deferred financing
costs (140) (140) (562) (840)
Interest income 31 8 78 30
Gain on sale of
property, plant and
equipment - 6 6 32
Write down of
property, plant and
equipment held for
sale (note 6) - - (1,303) -
--------------------------------------------------------------------------

Net earnings before
income taxes 3,832 3,734 9,107 8,728

Income tax
(expense) recovery:
- Current (5) (85) (39) (85)
- Future (178) 95 (62) 326
--------------------------------------------------------------------------

Net earnings for
the period 3,649 3,744 9,006 8,969

Cumulative earnings -
beginning of period 35,479 26,378 30,122 21,153
--------------------------------------------------------------------------

Cumulative earnings -
end of period $ 39,128 $ 30,122 $ 39,128 $ 30,122
--------------------------------------------------------------------------

(See accompanying notes)


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

Class A
General limited
partner partner
units units Total
$ $ $
--------------------------------------------------------------------------

Unitholders' equity -
December 31, 2004 $ 17,042 $ 2,582 $ 19,624
Net earnings for the period 421 64 485
Distributions paid (2,300) (352) (2,652)
--------------------------------------------------------------------------
Unitholders' equity - March 31, 2005 15,163 2,294 17,457
--------------------------------------------------------------------------

Net earnings for the period 2,867 453 3,320
Distributions paid (2,354) (379) (2,733)
--------------------------------------------------------------------------
Unitholders' equity - June 30, 2005 15,676 2,368 18,044
--------------------------------------------------------------------------

Net earnings for the period 1,222 198 1,420
Distributions paid (2,354) (379) (2,733)
--------------------------------------------------------------------------
Unitholders' equity -
September 30, 2005 14,544 2,187 16,731
--------------------------------------------------------------------------

Contributions - 2,000 2,000
Net earnings for the period 3,228 516 3,744
Distributions paid (2,329) (374) (2,703)
--------------------------------------------------------------------------
Unitholders' equity -
December 31, 2005 15,443 4,329 19,772
--------------------------------------------------------------------------

Net earnings for the period 881 157 1,038
Distributions paid (2,303) (409) (2,712)
--------------------------------------------------------------------------
Unitholders' equity - March 31, 2006 14,021 4,077 18,098
--------------------------------------------------------------------------

Net earnings for the period 2,898 594 3,492
Distributions paid (2,415) (495) (2,910)
--------------------------------------------------------------------------
Unitholders' equity - June 30, 2006 14,504 4,176 18,680
--------------------------------------------------------------------------

Net earnings for the period 681 146 827
Distributions paid (2,445) (524) (2,969)
--------------------------------------------------------------------------
Unitholders' equity -
September 30, 2006 12,740 3,798 16,538
--------------------------------------------------------------------------

Contributions - 3,450 3,450
Net earnings for the period 3,026 623 3,649
Distributions paid (2,418) (518) (2,936)
--------------------------------------------------------------------------
Unitholders' equity -
December 31, 2006 $ 13,348 $ 7,353 $ 20,701
--------------------------------------------------------------------------

(See accompanying notes)


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

Three Months Twelve Months
Ended December 31, Ended December 31,
2006 2005 2006 2005
--------------------------------------------------------------------------
Cash provided by (used in)

Operating
activities:
Net earnings for
the period $ 3,649 $ 3,744 $ 9,006 $ 8,969
Items not affecting
cash:
Amortization 1,246 1,109 4,672 4,686
Future income tax
expense (recovery) 178 (95) 62 (326)
Gain on disposal of
property, plant and
equipment - (6) (6) (32)
Write down of
property, plant and
equipment held for
sale (note 6) - - 1,303 -
--------------------------------------------------------------------------
5,073 4,752 15,037 13,297

Net change in
non-cash working
capital items (649) (1,909) 350 698
--------------------------------------------------------------------------
4,424 2,843 15,387 13,995
--------------------------------------------------------------------------

Investing
activities:
Acquisitions - - - (366)
Purchases of
property, plant and
equipment (262) (577) (1,550) (1,114)
Proceeds from sale
of property, plant
and equipment - 6 6 32
--------------------------------------------------------------------------
(262) (571) (1,544) (1,448)
--------------------------------------------------------------------------

Financing
activities:
Deferred financing
costs - - - (752)
Distributions to
partners (2,936) (2,703) (11,527) (10,822)
Principal repayment
of capital leases (49) (69) (261) (270)
Proceeds on
issuance of Series
A senior secured
notes - - - 60,000
Repayment of term
loan - - - (59,600)
--------------------------------------------------------------------------
(2,985) (2,772) (11,788) (11,444)
--------------------------------------------------------------------------

Increase (decrease)
in cash
and cash
equivalents 1,177 (500) 2,055 1,103
Cash and cash
equivalents -
beginning of period 2,552 2,174 1,674 571
--------------------------------------------------------------------------

Cash and cash
equivalents -
end of period $ 3,729 $ 1,674 $ 3,729 $ 1,674
--------------------------------------------------------------------------

Supplemental Cash
Flow Information:
Interest paid
during the period $ 2,639 $ 2,695 $ 10,478 $ 10,297
Taxes paid during
the period - - 118 -

(See accompanying notes)


FP Canadian Newspapers Limited Partnership

Notes to Consolidated Financial Statements as at December 31, 2006

(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.

These interim consolidated financial statements include the accounts of FPLP, Canstar Community News Limited ("Canstar"), and Rosebud Publications Ltd. ("Rosebud"). Rosebud is wholly owned by Canstar, which is wholly owned by FPLP. In addition, the FP Canadian Newspapers Limited Partnership Employee Benefits Plan Trust Fund ("Trust Fund") and FPCN Media Funding Inc. ("Funding") have been determined to be Variable Interest Entities ("VIE"), which also have been consolidated. The managing general partner of FPLP is FPCN General Partner Inc. These financial statements include only the assets, liabilities, revenues and expenses of FPLP and its subsidiaries and do not include the other assets, liabilities, revenues and expenses, including income taxes of the partners.

These interim consolidated 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. These interim consolidated financial statements should be read in conjunction with the audited financial statements of FPLP for the year ended December 31, 2005.

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

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 incorporated subsidiaries and Funding are subject to tax and use 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 subsidiaries have non-capital losses in the amount of approximately $1,148,000 which can be used to reduce the company's taxable income in the future. The tax benefit of these losses is estimated at approximately $379,000 and has been recognized as an asset in the consolidated balance sheet of FPLP. The expiration of the non-capital losses begin expiring in the current year and end in 2016, with 98% of the losses expiring in 2014, 2015 and 2016.

3. Allocation of net income

The amended and restated Agreement of Limited Partnership dated May 3, 2005 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.

4. Employee future benefit plans

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



Three Months Twelve Months
Ended December 31, Ended December 31,
2006 2005 2006 2005

Defined benefit
pension plan $ 374 $ 324 $ 1,538 $ 1,380
--------- --------- --------- ---------
--------- --------- --------- ---------


5. Interest expense

Interest expense is summarized as follows:



Three Months Twelve Months
Ended December 31, Ended December 31,
2006 2005 2006 2005

Subordinated notes $ 1,824 $ 1,882 $ 7,239 $ 7,469
Notes payable/term
loan 794 782 3,198 3,209
Capital lease
obligations 7 10 32 45
--------- --------- --------- ---------
$ 2,625 $ 2,674 $ 10,469 $ 10,723
--------- --------- --------- ---------
--------- --------- --------- ---------


6. Asset reclass and write down of assets held for sale

During the third quarter of 2006, FPLP reclassified $586,000 of excess press components carried in the equipment held for sale category into property, plant and equipment. This reclassification did not effect the statement of earnings. FPLP re-valued the remaining excess press components classified in the balance sheet as held for sale, based on their estimated fair value less costs to sell of $400,000. A non-cash accounting loss of $1,303,000 was recorded in FPLP's statement of earnings for the year ending December 31, 2006.

Contact Information

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