FP Newspapers Inc
TSX : FP

March 18, 2011 06:00 ET

FP Newspapers Reports Fourth Quarter 2010 Results

WINNIPEG, MANITOBA--(Marketwire - March 18, 2011) - FP Newspapers Inc. (TSX:FP) (the "Corporation") announces financial results for FP Newspapers Income Fund ("the Fund") for the quarter ended December 31, 2010. The Fund was converted into the Corporation pursuant to a plan of arrangement effective after the close of business on December 31, 2010. The final fiscal year of the Fund ended on December 31, 2010.

The Corporation (formerly the Fund) owns securities entitling it to 49 percent of the distributable cash of FP Canadian Newspapers Limited Partnership ("FPLP"), which owns the Winnipeg Free Press and Brandon Sun daily newspapers, and Canstar Community News ("Canstar"), which operates six weekly newspapers, a weekly entertainment newspaper and a twice-monthly newspaper aimed at age 50-plus readers.

Total revenue for FPLP for the three months ended December 31, 2010 was $28.2 million, a $2.5 million or 8.2 percent decrease from the same period last year. Total EBITDA(1) of FPLP for the quarter was $6.6 million, a $1.4 million or 17.4 percent decrease from the same quarter last year. EBITDA(1) in the fourth quarter, excluding the 2009 restructuring charges of $0.8 million, decreased by $2.1 million or 24.5 percent. The decrease in EBITDA(1) is primarily the result of lower revenues as discussed below. The 2009 fourth quarter EBITDA(1) was a strong quarter as revenues were starting to improve and cost reduction initiatives had been implemented largely in previous quarters. FPLP had net earnings of $4.9 million in the quarter compared to $3.7 million in the same quarter last year. The increase in net earnings is primarily due to lower expenses due to savings from the restructuring initiatives, lower interest expense primarily from the settlement of the subordinated notes at the end of 2009, and a non-recurring Brandon production equipment impairment charge in 2009, partially offset by lower advertising and commercial print revenues.

The Fund had net earnings of $2.2 million, or $0.312 per Unit, during the three months ended December 31, 2010, compared to net earnings of $2.8 million, or $0.411 per Unit, in the same quarter last year. The decrease in the Fund's net earnings in the quarter is primarily due to the net decrease in earnings from FPLP as described in the FPLP section of this report.

Operations

Advertising revenues for the three months ended December 31, 2010 were $20.4 million, a $0.9 million or 4.3 percent decrease compared to the same period last year. FPLP's largest advertising revenue category, display advertising including colour, was $13.1 million, a decrease of $0.7 million or 5.3 percent from the same period in the prior year, primarily due to decreased spending in the financial and telecommunication categories, partially offset by increased spending in the local and national automotive categories. Classified advertising revenues for the fourth quarter decreased by $0.3 million or 10.2 percent compared to the same period last year, primarily due to a decrease in the employment and real estate categories. Flyer distribution revenues for the fourth quarter increased by $0.1 million or 3.1 percent compared to the same period last year, primarily due to delivery rate increases. Circulation revenues for the fourth quarter decreased by $0.6 million or 7.5 percent due primarily to lower paid-subscription and single-copy volumes. Commercial printing revenues for the fourth quarter decreased by $1.2 million or 89.4 percent, primarily due to the October 1, 2010 non-renewal of the Globe and Mail printing contract. Digital revenues for the fourth quarter increased by $0.1 million or 27.0 percent, primarily due to the increase in Winnipeg Free Press website banner advertising.

Operating expenses excluding amortization for the fourth quarter were $21.6 million, a $1.1 million or 5.0 percent decrease from $22.8 million in the same quarter last year. Operating expenses for the three months ended December 31, 2010, excluding amortization and excluding the 2009 restructuring charges, decreased by $0.4 million or 1.8 percent from the same quarter last year. Employee compensation costs, excluding the restructuring charges, for the fourth quarter remained virtually unchanged, due to reductions in labour costs associated with the consolidation of the Brandon Sun printing into the Winnipeg facility, offset by the 2 percent wage increases included in the collective bargaining agreements. Newsprint expense for FPLP's own publications for the fourth quarter increased by $0.2 million or 7.2 percent, primarily due to higher newsprint prices partially offset by slightly lower volumes. Newsprint expense for commercial printing for the fourth quarter decreased $0.2 million or 84.3 percent when compared to the same period in the prior year, primarily due to the October 1, 2010 non-renewal of the Globe and Mail printing contract. Delivery costs for the fourth quarter decreased by $0.1 million or 1.9 percent, primarily due to the October 2010 savings from the elimination of the Sunday Winnipeg Free Press home-delivered newspaper on November 1, 2009.

During the fourth quarter, Brandon and Winnipeg staff completed the consolidation of printing at our Winnipeg production facility. Friday October 1, 2010 saw the first edition of the Brandon Sun printed on the Winnipeg presses. The Brandon Sun is now trucked to Brandon daily after printing and inserting work has been completed. The transition was not without its challenges; however, through the hard work and dedication of staff at both ends, the changes that needed to be made as a result of the Globe and Mail not renewing its long-term print contract with the Brandon Sun were completed. Management continues to work on selling the Brandon production equipment. The remaining Brandon editorial, advertising, circulation and administration departments continue to work out of our owned building at 501 Rosser Avenue. A conditional offer was made to exchange our facility and a cash payment of $2.0 million for an office building located in downtown Brandon. Work is continuing on this potential transaction.

The Winnipeg Free Press continues to embrace the latest advancements in technology. In January, we launched the digital television channel WFPtv. Visitors to the Free Press website, www.winnipegfreepress.com, can go to WFPtv with the click of a mouse to see four-minute stories on lifestyle-branded content. WFPtv is designed to complement the video stories presented on the paper's home page, which will continue to be primarily hard news and sports. Production of the stories has been handled by a Winnipeg based production company and they will be told by Aisha Alfa, a young new Winnipeg star. Early into 2011, the Free Press has secured over 40 contracts for this digital advertising service.

In February, the Free Press joined Postmedia's new collective buying network called "SwarmJam" where companies across a wide range of consumer-focused sectors offer a discount promotion which is effected only if a predetermined number of people sign up online (if the quota is met, everybody gets the discount, if it is not, nobody does). SwarmJam is a natural extension of the Free Press's strong relationships with advertisers and our loyal audience. Participating companies get the added value of newspaper exposure in addition to the website. Individuals need to register to participate in the discount offer and early into 2011 the Free Press has had more than 12,000 people register, ranking us second out of ten major participating cities. To early March, 37 offers have been completed, along with maintaining an advanced booking queue of two weeks. The Free Press receives a revenue share for each successful offer.

In February 2011, the Winnipeg Free Press signed an agreement to partner with a local restaurateur who intends to operate Canada's first "News Café". The Winnipeg Free Press News Café is designed to be a community hub where customers can interact and engage with journalists working on-site. The News Café will have the added benefit of giving the Free Press a downtown presence, which it hasn't had since it moved to its current location in 1991.

The Free Press was very pleased when the Football Reporters of Canada selected Ed Tait to receive the prestigious honour of being named the Canadian Football Reporter of the Year. Tait has been with the Free Press and covered the Bombers and the Canadian Football League exclusively for the past 11 years. Tait is respected as one of the country's top sports writers.

A Free Press documentary that shed light on the inaccessibility of drinking water on Manitoba reserves was selected one of the featured films being shown at the "Reel Green Film Festival". "No Running Water" was part of a multimedia project produced by the Free Press in 2010, which examined the lack of clean drinking water and sewage facilities in several First Nations communities. The production was a collaboration among Free Press editorial staff including photographer Joe Bryksa, reporter Helen Falding and multimedia editor Tyler Walsh. "No Running Water" can be viewed online at www.winnipegfreepress.com/no-running-water.

In February, FP was very pleased to complete the acquisition of the Steinbach printing and publishing business which was founded and operated by the Derksen family. Derksen Printers Ltd. operates a commercial web and sheet-fed printing business and publishes the award-winning regional paid weekly newspaper 'The Carillon", originally founded in 1946. "The Carillon has been and continues to be a very important voice both for news, sports and entertainment coverage and also as a medium to deliver advertisers' messages to the communities it serves" said Ron Stern, Chairman of FP. "We're really excited about adding this dominant market leader to our existing base of solid Manitoba print and digital media properties" added Stern. Steinbach is located 65 kilometres southeast of Winnipeg and the business employs approximately 50 full-time staff and 10 part-time staff. The operation will continue to be run from the 26,500-square foot combined production and office building located on Main Street in Steinbach. Steinbach is located in the fastest growing region of Manitoba according to the most recent 2006 Census. From 2001 to 2006, the southeast region of the province reported population growth of 7.6 percent, growing from 86,552 residents in 2001 to 93,115 in 2006. Over that same period, the town of Steinbach reported a 19.9 percent increase in its population to just over 11,000 people. The business generates roughly half its revenue from commercial web and sheet-fed commercial printing jobs and half from the publishing business of The Carillon, which has a weekly circulation of approximately 8,000 copies.

On March 1, the Metro daily newspaper chain announced they will start publishing a weekday free publication starting on April 4.

Staff at the Brandon Sun were busy planning content and design of a new weekend tabloid, launched in January 2011 as part of the Saturday edition. The new tabloid is a mix of light reading including an interview with a local personality and a pictorial of a local home-of-the-week. Locally written columns on fitness, wine, food and fashion are popular. The Brandon Sun Weekend is also home to travel content, comics, and puzzles. Management anticipates that over time, it will generate additional Saturday readers and advertisers for the Sun.

The Sun's website - brandonsun.com - has been enhanced with a sponsored page entitled "All Things Wheat Kings" that encapsulates written and video coverage of the local junior hockey team. It is part of the locked-down portion of the Sun's site, available only to subscribers.

The Brandon Sun, always a good corporate citizen, raised nearly $60,000 for the local Christmas Cheer Board. The funds were put toward food hampers and a Christmas dinner for the less fortunate living in Brandon. The Sun also helped sell out a venue for a Singing for Supper concert, with proceeds to the local Samaritan House. The Sun was again involved with the United Way's annual campaign, producing several features during the fall and winter. The group later announced its annual campaign raised $700,000, more than ever before and a significant increase over the previous year.

Distributions

Distributable cash attributable to the Fund(2) for the three months ended December 31, 2010 was $2.1 million or $0.301 per Unit, compared to $3.3 million or $0.483 per Unit last year. For the trailing twelve months ended December 31, 2010, FPLP generated distributable cash attributable to the Fund(2) of $1.140 per Unit, and the Fund declared cash distributions of $0.720 per Unit, resulting in a payout ratio of 63.2 percent.

The Fund declared cash distributions to Unitholders of $0.180 per Unit for the fourth quarter, compared to $0.285 per Unit in the same quarter last year.

The Fund's Declaration of Trust required it to distribute all of its taxable income to its Unitholders prior to the end of its taxation year. On December 14, 2010, the Fund declared a special distribution in the amount of $0.34 per Unit to Unitholders of record at the close of business on December 31, 2010. The special distribution was paid on December 31, 2010 by way of the issuance of additional Fund Units, which were automatically consolidated immediately after the special distribution so that each Unitholder held the same number of Units after the consolidation as that Unitholder held immediately prior to the special distribution.

Subsequent to year-end, the Fund completed its previously-announced conversion from an income trust to a corporate structure pursuant to a plan of arrangement. FP Newspapers Inc. (TSX:FP) is the new corporation formed to hold the 49 percent investment in FPLP.

Outlook

Advertising revenue in the fourth quarter of 2010 decreased by 4.3 percent versus the same quarter last year. Many economic forecasts are calling for a continuation of improving overall growth in the economy for 2011. Excluding the revenue growth from the acquisition of the Steinbach publishing and printing business discussed above, we are budgeting for print advertising revenue growth of approximately 2 percent from our combined display and classified categories, however, advertising revenues are extremely difficult to forecast. We are budgeting for circulation revenue growth of slightly less than 1 percent from rate increases, partially offset by lower circulation unit sales, which we see as a long-term trend. Commercial printing revenues, excluding the impact of the Steinbach acquisition, are budgeted to be in the range of $1.0 million, down from the 2009 revenue of $3.6 million due to the full-year impact of the non-renewal of the Globe and Mail printing contract in Brandon, effective October 1, 2010. Digital revenues are expected to improve significantly due to the launching of our various new digital revenue initiatives, some of which are described above.

Employee compensation is our single biggest expense category and in 2010 was 49 percent of our total overall operating costs before amortization and restructuring charges. Compensation costs excluding restructuring charges and excluding the impact of the additional costs from the Steinbach acquisition are forecast to decrease by approximately 2 percent in 2011 primarily from the full-year savings from job reductions resulting from the closing of the Brandon production operation.

Newsprint prices have not changed since the last increase became effective in September 2010. If prices remain at the current level for the balance of 2011, the effective price increase over the 2010 year would be approximately 9 percent. Forecast newsprint usage in 2011 for our own products, excluding the impact of the Steinbach acquisition, should be slightly lower than in 2010 primarily due to fewer circulation copies printed. An increase or decrease in advertising space will affect newsprint volume usage. Newsprint expense for commercial printing is expected to be lower by approximately $0.5 million due to the non-renewal of the Globe and Mail printing contract. Delivery costs are expected to increase by approximately 2 percent resulting from extra costs relating to the Brandon Sun trucking from Winnipeg and Winnipeg contracted delivery rate increases, partially offset by fewer circulation copies delivered.

Maintenance capital spending for 2011 is forecast to be approximately $1.4 million, primarily made up of a number of various technology-related system upgrades in addition to normal replacements of fleet vehicles and editorial photography equipment.

Conference Call

The Corporation invites you to participate in a conference call on Friday, March 18, 2011 at 12:00 p.m. Eastern (11:00 a.m. Central) to discuss the fourth quarter results. 

The dial-in number is 416-340-8527, or toll free at 877-240-9772. To ensure your participation, please dial in five minutes before the start of the conference call. 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 April 1, 2011. To access the rebroadcast, please dial 416-695-5800 or dial toll free at 800-408-3053, and use the passcode 7717175.

About FP Newspapers

FP Canadian Newspapers Limited Partnership owns the Winnipeg Free Press and the Brandon Sun and their related businesses, as well as the Canstar Community News division, the publisher of eight community and special interest newspapers in the Winnipeg region, and, since February 2011, a Steinbach, Manitoba-based printing and publishing business. The Winnipeg Free Press publishes six days a week for delivery to subscribers and single-copy sales, serving Winnipeg and Manitoba with an average Monday through Saturday circulation of approximately 126,500 copies. On Sundays the Winnipeg Free Press publishes a tabloid-size newspaper sold through single-copy retail outlets and vending boxes. The Brandon Sun publishes seven days a week, serving the region with an average circulation of approximately 15,200 copies. Canstar Community News publishes weekly with an average circulation of approximately 200,000 copies. Based in Winnipeg, the businesses employ approximately 600 full-time equivalent employees in Winnipeg, Brandon and Steinbach. Further information can be found at www.fpnewspapers.com, and in the disclosure documents filed with the securities regulatory authorities, available at www.sedar.com.

Caution Regarding Forward-looking Statements

Certain statements in this management's discussion and analysis may constitute forward-looking statements within the meaning of applicable securities laws. All statements other than statements of historical fact are forward-looking statements. These statements include but are not limited to statements regarding management's intent, belief or current expectations with respect to market and general economic conditions, future costs and operating performance. Generally, but not always, forward-looking statements will be indicated by words such as "may", "will", "intend", "anticipate", "expect", "believe", "plan" or similar terminology. 

Forward-looking statements are subject to known and unknown risks and uncertainties that may cause the actual results, performance or achievements of the Corporation or FPLP, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the current general economic uncertainty, FPLP's ability to effectively manage growth and maintain its profitability, FPLP's ability to operate in a highly competitive industry, FPLP's ability to compete with other forms of media, FPLP's ability to attract advertisers, FPLP's reliance upon key personnel, FPLP's relatively high fixed costs, FPLP's dependence upon particular advertising customer segments, indebtedness incurred in making acquisitions, the availability of financing for capital improvements, costs related to capital expenditures, cyclical and seasonal variations in FPLP's revenues, acts of terrorism, the cost of newsprint, the potential for labour disruptions, the risk of equipment failure, and the effect of Canadian tax laws. Additional information about these and other factors is discussed under "Risk Factors" in the Corporation's Annual Information Form dated March 17, 2011, which is available at www.sedar.com.

In addition, although the forward-looking statements contained in this management's discussion and analysis are based upon what management of FPLP believes are reasonable assumptions, such assumptions may prove to be incorrect.

Forward-looking statements speak only as of the date hereof and, except as required by law, the Corporation and FPLP assume no obligation to update or revise them to reflect new events or circumstances. Because forward-looking statements are inherently uncertain, readers should not place undue reliance on them.

Management's Discussion and Analysis

Overview

Management's discussion and analysis, prepared as at March 17, 2011, provides a review of significant developments that affected the performance of FP Newspapers Income Fund (the "Fund") in the three months ended December 31, 2010. This review is based on financial information contained in the unaudited consolidated interim financial statements and accompanying notes for the three and twelve months ended December 31, 2010.

The following information should be read in conjunction with the most recent audited consolidated financial statements and accompanying notes and management's discussion and analysis for the year ended December 31, 2009. The consolidated interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"); however, the consolidated interim financial statements do not include all the information and disclosures required for annual financial statements.

This management's discussion and analysis contains "forward-looking statements" that are subject to risks and uncertainties set out below under the heading "Caution Regarding Forward-Looking Statements". The reader is cautioned not to place undue reliance on forward-looking statements.

Further information relating to the Fund (now FP Newspapers Inc.) is available under its profile at www.sedar.com.

Formation and Legal Entities

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").

Subsequent to the 2010 year-end, the Fund completed its previously-announced conversion from an income trust to a corporate structure pursuant to a plan of arrangement. Under the plan of arrangement, Unitholders of the Fund received, for each Unit of the Fund held, one common share of the resulting public corporation, FP Newspapers Inc. ("FPI"). Immediately after the completion of the conversion, there were 6,902,592 common shares of FPI issued and outstanding. The common shares of FPI commenced trading on the Toronto Stock Exchange on January 7, 2011 under the symbol "FP". Concurrently, the Fund's Units were delisted. Immediately following the closing of the arrangement, FPCN Holdings Trust and the Fund were wound up and dissolved. FPI has acquired all of the assets and assumed all of the liabilities of those entities. FPI owns securities entitling it to 49% of the distributable cash of FPLP. FPI is dependent on the operations of FPLP, its sole investment.

FPLP is a limited partnership formed on August 9, 1999. Effective November 29, 2001, FPLP acquired the business assets and assumed certain liabilities of the Winnipeg Free Press and the Brandon Sun. On July 13, 2004, FPLP acquired the business assets and liabilities of Canstar Community News ("Canstar"). On February 28, 2011, FPLP acquired the business assets and assumed certain liabilities of a commercial printing and publishing operation based in Steinbach, Manitoba.

FP Newspapers Income Fund

The Fund (now the Corporation) is dependent on the operations of FPLP, its sole investment. The Fund's net earnings were $2.2 million and $7.2 million for the three and twelve months ended December 31, 2010, compared to net earnings of $2.8 million and $6.9 million for the same periods last year. The decrease in net earnings for the three months ended December 31, 2010 is due to the net decrease in equity earnings from its investment in FPLP as described in the FPLP section of this report. The increase in net earnings for the twelve months ended December 31, 2010, is primarily due to the increased net earnings of FPLP, partially offset by the $0.3 million of costs associated with the agreement to convert the trust structure to a corporate structure, as approved by the Unitholders at the May 5, 2010 annual general meeting. There was no interest income earned from subordinated notes during the twelve months ended December 31, 2010, as the notes were settled in the fourth quarter of 2009. The Fund's equity interest from its Class A limited partner Units in FPLP was $2.4 million and $7.8 million for the three and twelve months ended December 31, 2010, compared to $0.9 million and $0.1 million in the same periods last year, due primarily to the settlement of the subordinated notes, which eliminated the portion of the Fund's return received in the form of interest income and increased its equity interest return.

The Fund declared cash distributions to Unitholders of $1.2 million or $0.180 per Unit and $5.0 million or $0.720 per Unit for the three and twelve months ended December 31, 2010, compared to $2.0 million or $0.285 per Unit and $7.9 million or $1.14 per Unit in the same periods last year. On December 31, 2010 the Fund paid a special Unit distribution in the amount of $0.34 per Unit, which, immediately after the distribution, was automatically consolidated so that each Unitholder held exactly the same number of Units after the consolidation as immediately prior to the distribution (see note 7 of the Fund's financial statements). Cash provided by operating activities of the Fund was $1.2 million and $4.4 million for the three and twelve months ended December 31, 2010, compared to $2.5 million and $8.3 million for the same periods last year. The reduction in cash provided by operating activities is a result of a decrease in the overall cash distributions by FPLP primarily due to its requirement to start making monthly principal repayments on its long-term debt facility as discussed in the FPLP section of this report. As a result of the settlement of the subordinated notes on December 31, 2009, for 2010 and going forward, the Fund (now the Corporation) receives its entire 49% share of FPLP cash payments in the form of distributions on its Class A limited partner Units in FPLP.

Working Capital Position of the Fund

The working capital deficiency at December 31, 2010 is primarily due to the fact that FPLP's distributions are payable by the end of the month following the respective month; accordingly, FPLP's distribution for December is not accrued as a liability on FPLP's December balance sheet nor recorded as a receivable on the Fund's December balance sheet. The Fund received FPLP's December 2010 distribution before the end of January 2011 and used a portion of this distribution to pay its distribution to Unitholders for December, which was paid on January 10, 2011. At December 31, 2009, the Fund's cash balance included the December interest on the subordinated notes which would have normally been paid in January but was accelerated as part of the settlement of those notes on December 31, 2009.

Prior Period Restatement

On June 12, 2007, Bill C-52 Budget Implementation Act 2007 was substantively enacted, which contained legislation to tax publicly traded income trusts in Canada. The new tax does not apply until 2011. However, the Fund was required to recognize the taxable temporary differences that were expected to reverse after 2010. Based on its assets and liabilities on December 31, 2008 and its share of the assets and liabilities of its investment in FPLP, the Fund had estimated temporary differences of $1.9 million. The Fund had initially determined, in error, that a valuation allowance was required on certain cumulative eligible capital balances. Upon further analysis, the Fund has determined that such deductible temporary differences will be realized through the future reversal of taxable temporary differences. As a result, the January 1, 2009 opening Cumulative Earnings has been increased by $0.7 million with a corresponding decrease in future income tax liabilities. The Fund has restated the Consolidated Balance Sheets as at December 31, 2009, Cumulative Earnings, and the Consolidated Statements of Unitholders' Equity for all periods presented. The restatement did not impact net earnings, comprehensive income, or net earnings per trust Unit for the three and twelve months ended December 31, 2010 and 2009.

Distributable Cash Attributable to the Fund(2)

Cash available for distribution attributable to the Fund(2) was $2.1 million or $0.301 per Unit and $7.9 million or $1.140 per Unit for the three and twelve months ended December 31, 2010, compared to $3.3 million or $0.483 per Unit and $8.9 million or $1.296 per Unit for the same periods last year. The decrease in cash available for distribution attributable to the Fund(2) for the three months ended December 31, 2010 is primarily due to the principal repayments required under the HSBC term loan, as well as by the decrease in EBITDA(1) of FPLP, as discussed in the FPLP section of this report. The decrease in cash available for distribution attributable to the Fund(2) for the twelve months ended December 31, 2010 is primarily due to the principal repayments required under the HSBC term loan as well as incurring costs in connection with the agreement to convert the trust structure to a corporate structure, partially offset by the increase in EBITDA(1) of FPLP.

The Fund monitored the cumulative cash available for distribution attributable to the Fund(2) as a factor in determining whether to make an adjustment to the level of monthly distributions. The Fund believed it was prudent to pay out cumulatively less than 100% of cash available for distribution attributable to the Fund(2).

From commencement of the Fund on May 28, 2002 until December 31, 2010, cumulative distributable cash attributable to the Fund(2) totalled $11.568 per Unit. During that period the Fund declared cash distributions to Unitholders of $10.223 per Unit, resulting in a cumulative-from-inception payout ratio of 88.4%. Because the Fund made an allowance for maintenance capital spending in an amount estimated to be sufficient to maintain the productive capacity of the business when calculating distributable cash attributable to the Fund(2), and because cumulative distributions declared were less than the cumulative distributable cash attributable to the Fund(2), the Fund believed there was no economic "return of capital".

FP Canadian Newspapers Limited Partnership

Results of Operations

Revenue:   Three Months
Ended December 31,
Twelve Months
Ended December 31,
    2010 2009 2010 2009
    In thousands In thousands
  Advertising $ 20,398 $ 21,322 $ 75,283 $ 76,692
  Circulation 6,915 7,475 28,391 29,570
  Commercial Printing 139 1,315 3,593 4,837
  Digital 578 455 1,978 1,877
  Other 216 213 787 887
    $ 28,246 $ 30,780 $ 110,032 $ 113,863

Revenue in the fourth quarter was $28.2 million, a decrease of $2.5 million or 8.2% from the same three months in the prior year. Advertising revenues for the three months ended December 31, 2010, were $20.4 million, a $0.9 million or 4.3% decrease compared to the same period last year. FPLP's largest advertising revenue category, display advertising including colour, was $13.1 million, a decrease of $0.7 million or 5.3% from the same period in the prior year, primarily due to decreased spending in the financial and telecommunication categories, partially offset by increased spending in the local and national automotive categories. Classified advertising revenues for the fourth quarter decreased by $0.3 million or 10.2% compared to the same period last year, primarily due to a decrease in the employment and real estate categories. Flyer distribution revenues for the fourth quarter increased by $0.1 million or 3.1% compared to the same period last year, primarily due to delivery rate increases. Circulation revenues for the fourth quarter decreased by $0.6 million or 7.5% due primarily to lower paid-subscription and single-copy volumes. Commercial printing revenues for the fourth quarter decreased by $1.2 million or 89.4%, primarily due to the October 1, 2010 non-renewal of the Globe and Mail printing contract. Digital revenues for the fourth quarter increased by $0.1 million or 27.0%, primarily due to the increase in Winnipeg Free Press website banner advertising.

Revenue in the twelve months ended December 31, 2010 was $110.0 million, a decrease of $3.8 million or 3.4% from the same period in the prior year. Advertising revenues for the twelve months were $75.3 million, a $1.4 million or 1.8% decrease compared to the same period last year. FPLP's largest advertising revenue category, display advertising including colour, for the twelve months was $47.9 million, an increase of $1.2 million or 2.6% from the same period in the prior year, primarily due to increased spending in the local and national automotive categories, partially offset by decreased spending in the financial and telecommunication categories. Classified advertising revenues for the twelve months decreased by $2.0 million or 14.1% compared to the same period last year, primarily due to a decrease in the employment, real estate and auto categories. Flyer distribution revenues for the twelve months decreased by $0.6 million or 3.8% compared to the same period last year, primarily due to decreased volumes due to the sale of the Thunder Bay distribution operation, partially offset by increasing rates in the Winnipeg Free Press operation. Circulation revenues for the twelve months decreased by $1.2 million or 4.0%, primarily due to lower paid-subscription and single copy volumes, partially offset by improved subscription rates primarily in the first quarter of 2010 due to the rate increase implemented during March 2009. Commercial printing revenues for the twelve months decreased by $1.2 million or 25.7% due primarily to the October 1, 2010 non-renewal of the Globe and Mail printing contract. Digital revenues for the twelve months increased by $0.1 million or 5.4%, primarily due to the increase in Winnipeg Free Press website banner advertising. Other revenues for the twelve months decreased by $0.1 million or 11.3% primarily due to lost revenue from the decision not to host the Career Expo trade show that was hosted in the prior year, as well as lower sales of the "Greatest Manitoban" book.

Operating expenses, excluding amortization: Three Months
Ended December 31,
Twelve Months
Ended December 31,
    2010 2009 2010 2009
    In thousands In thousands
  Employee Compensation, excluding Restructuring Charges $ 10,134 $ 10,160 $ 41,497 $ 41,806
  Newsprint - Own Use 2,466 2,301 8,769 9,991
  Newsprint - Commercial Printing 39 248 750 1,014
  Delivery of Newspapers 4,592 4,682 16,944 19,016
  Other 4,417 4,651 17,521 17,773
  $ 21,648 $ 22,042 $ 85,481 $ 89,600
  Restructuring Charges - 751 - 1,865
    $ 21,648 $ 22,793 $ 85,481 $ 91,465

Operating expenses excluding amortization for the fourth quarter were $21.6 million, a $1.1 million or 5.0% decrease from $22.8 million in the same quarter last year. Operating expenses for the three months ended December 31, 2010, excluding amortization and excluding the 2009 restructuring charges, decreased by $0.4 million or 1.8% from the same quarter last year. Employee compensation costs, excluding the restructuring charges, for the fourth quarter remained virtually unchanged, due to reductions in labour costs associated with the consolidation of the Brandon Sun printing to the Winnipeg facility, offset by the 2% wage increases included in the collective bargaining agreements and an increase in unanticipated short-term sick leave. Newsprint expense for FPLP's own publications for the fourth quarter increased by $0.2 million or 7.2%, primarily due to higher newsprint prices partially offset by slightly lower volumes. Newsprint expense for commercial printing for the fourth quarter decreased $0.2 million or 84.3% when compared to the same period in the prior year, primarily due to the October 1, 2010 non-renewal of the Globe and Mail printing contract. Delivery costs for the fourth quarter decreased by $0.1 million or 1.9%, primarily due to the October 2010 savings from eliminating the Sunday Winnipeg Free Press home-delivered newspaper on November 1, 2009. Other expenses for the fourth quarter decreased by $0.2 million or 5.0% when compared to the same period in the prior year, primarily due to reductions in marketing costs.

Operating expenses excluding amortization for the twelve months ended December 31, 2010 were $85.5 million, a $6.0 million or 6.5% decrease from $91.5 million in the same period last year. Operating expenses for the twelve months, excluding amortization and excluding the 2009 restructuring charges, decreased by $4.1 million or 4.6% from the same period last year. Employee compensation costs, excluding the restructuring charges, for the twelve months decreased by $0.3 million or 0.7%, due to reductions in labour costs associated with the fourth quarter consolidation of the Brandon Sun printing to the Winnipeg facility as well as other staff reductions and lower part-time hours, partially offset by the 2% wage increases included in the collective bargaining agreements and an increase in unanticipated short-term sick leave. Newsprint expense for FPLP's own publications for the twelve months decreased by $1.2 million or 12.2%, with approximately $1.0 million due to lower newsprint prices and $0.2 million due to lower consumption. Newsprint expense for commercial printing for the twelve months decreased $0.3 million or 26.0% when compared to the same period in the prior year, primarily due to the October 1, 2010 non-renewal of the Globe and Mail printing contract and lower newsprint prices. Delivery costs for the full year decreased by $2.1 million or 10.9%, primarily due to eliminating the Sunday Winnipeg Free Press home-delivered newspaper, reducing Winnipeg non-subscriber weekly flyer distribution by one day, and no longer incurring Thunder Bay costs due to the sale of that distribution business during the third quarter of 2009. Other expenses for the full year decreased by $0.3 million or 1.4% when compared to the same period in the prior year, due to lower marketing costs, partially offset by increased consulting costs.

EBITDA(1) for the three and twelve months ended December 31, 2010 were $6.6 million and $24.6 million compared to $8.0 million and $22.4 million for the same periods last year. EBITDA(1) for the three months ending December 31, 2010 excluding the restructuring charges decreased by $2.1 million or 24.5%, compared to the same period last year. EBITDA(1) for the twelve months ending December 31, 2010 excluding the restructuring charges was higher by $0.3 million or 1.2%, compared to the same period last year. EBITDA(1) margin excluding the restructuring charges for the three and twelve months ending December 31, 2010 were 23.4% and 22.3%, compared to 28.4% and 21.3% in the same periods last year.

Amortization of property, plant and equipment for the twelve months ended December 31, 2010 increased by $1.4 million compared to the prior year, primarily due to the requirement to accelerate amortization of the Brandon production equipment as a result of the decision to consolidate printing at the Winnipeg plant in the fourth quarter of 2010.

Interest expense for the three and twelve months ended December 31, 2010 decreased by $2.0 million and $7.9 million compared to the same periods last year, due primarily to the settlement of the subordinated notes at the end of the fourth quarter of 2009 and lower interest costs on the external debt.

During the first quarter of 2010, the Prudential notes were repaid in full. As FPCN Media Funding Inc.'s sole purpose was to hold those notes, it is no longer considered a variable interest entity as defined by the applicable accounting guideline and is therefore no longer consolidated into FPLP's financial statements. During the first quarter, FPLP recorded a loss of $0.1 million on its income statement as a result of this change.

During the fourth quarter of 2009, a non-cash asset impairment write-down of $0.5 million was recorded for the Brandon production equipment.

FPLP's net earnings were $4.9 million and $16.0 million for the three and twelve months ended December 31, 2010, compared to $3.7 million and $7.1 million for the same periods last year.

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 2010, 2009 and 2008 were as follows:

  2010 2009 2008
Revenue In thousands
Quarter 1 $ 26,370 $ 26,838 (**) $ 29,998
Quarter 2 28,946 29,691 (**) 32,409
Quarter 3 26,470 26,554 (**) 30,975
Quarter 4 28,246 30,780 27,730 (*)
  $ 110,032 $ 113,863 $ 121,112
EBITDA(1)      
Quarter 1 $ 5,529 $ 3,170 (**) $ 6,025
Quarter 2 7,068 6,581 (**) 7,468
Quarter 3 5,356 4,660 (**) 6,212
Quarter 4 6,598 7,987 (***) 3,276 (*)
  $ 24,551 $ 22,398 $ 22,981
Net earnings (loss)      
Quarter 1 $ 3,018 (****) $ (496) (**) $ 2,338
Quarter 2 4,878 (****) 2,838 (**) 3,653
Quarter 3 3,152 (****) 1,122 (**) 2,492
Quarter 4 4,925 (****) 3,653 (***) (526) (*)
  $ 15,973 $ 7,117 $ 7,957
 
(*) The decrease in revenue, EBITDA(1) and net earnings in the fourth quarter of 2008 is primarily due to the missed publishing days during the strike at the Winnipeg operation and lower advertising revenues resulting from the economic slowdown.
 
(**) The decrease in revenue, EBITDA(1) and net earnings in the first three quarters of 2009 is primarily the result of reduced advertising revenues resulting from the economic slowdown. EBITDA(1) and net earnings were also lower due to restructuring charges of $1.1 million in the first three quarters of 2009.
 
(***) EBITDA(1) and net earnings in the fourth quarter of 2009 were impacted by restructuring charges of $0.8 million relating to severance costs largely for employee reductions planned to result from the 2010 consolidation of production in Winnipeg.
 
(****) The increase in net earnings during 2010 is primarily due to the settlement of the subordinated notes at the end of the fourth quarter of 2009 resulting in lower interest costs on the external debt.

The distribution policy of FPLP is to make distributions in approximately equal monthly amounts based on expected operating results for each fiscal year. Distribution levels are reviewed regularly by management and the Board of Directors of the managing general partner and are subject to change based on a number of factors including the overall operating results and capital requirements of the business.

Working Capital Position of FPLP

Total working capital at December 31, 2010 was $7.1 million, compared to $6.4 million at December 31, 2009. Working capital increased primarily due to FPLP's earnings partially offset by the transfer of $5.0 million of cash to restricted cash as a requirement of the HSBC long-term debt agreement, and the net effect of $4.6 million of term loan repayments partially offset by lower distributions.

Liquidity and Capital Resources of FPLP

Cash and cash equivalents, excluding the restricted cash, at December 31, 2010 was $6.5 million compared to $9.2 million at December 31, 2009. 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 $2.0 million during the fourth quarter, while $0.2 million was used for investing activities and $4.0 million was used for financing activities. Cash flow from operations, together with cash balances on hand, are currently expected to be sufficient to fund FPLP's operating requirements, capital expenditures, required principal repayments under FPLP's HSBC credit facility (see "Financing Activities" section) and anticipated distributions, assuming that advertising revenues do not materially deteriorate beyond management's current expectations.

Cash Flow from Operating Activities

During the three and twelve months ended December 31, 2010, cash generated from operating activities was $2.0 million and $18.3 million, compared to $3.9 million and $11.3 million for the same periods last year. The net earnings for the three and twelve months ended December 31, 2010 were $4.9 million and $16.0 million, compared to $3.7 million and $7.1 million for the same periods in the prior year. The main factors contributing to the change in net earnings are outlined in the FPLP section of this report. The change in the amortization of property, plant and equipment and intangibles in the twelve months ended December 31, 2010 was an increase of $1.4 million from the same period last year as a result of the accelerated amortization of the Brandon production equipment. During the fourth quarter of 2009, a non-cash asset impairment write-down of $0.5 million was recorded for the Brandon production equipment. The net change in non-cash working capital in the three and twelve months ended December 31, 2010 was a decrease of $3.7 million and $3.1 million compared to $1.4 million and $1.1 million for the same periods last year. The net change in non-cash working capital for the three and twelve month periods are primarily the result of the timing of receipts from customers and payments to suppliers. Specifically, deposits to suppliers of $2.0 million for two production equipment upgrades have been included in prepaid expenses and other assets (see "Investing Activities" section).

Investing Activities

Capital purchases totalled $0.2 million and $0.6 million for the three and twelve months ended December 31, 2010, compared to $0.3 million and $0.7 million for the same periods in the prior year. Maintenance capital spending during the fourth quarter consisted of software development upgrades to the advertising system as well as general computer hardware upgrades.

During the first quarter of 2011, we plan to complete the lease agreements for the Winnipeg production equipment upgrades. This investment in pre-press and mailroom equipment is approximately $2.2 million, of which $2.0 million has been internally funded and is included in prepaid expenses and other assets on FPLP's balance sheet at December 31, 2010. When the lease agreements are finalized, FPLP will be reimbursed for the entire amount of these capital investments. FPLP plans to repay the lease financing over a 60-month period.

Financing Activities

Distributions to partners of FPLP for the three and twelve months totalled $2.7 million and $10.7 million, of which $1.3 million and $5.0 million were paid to the Fund as holder of Class A limited partner Units. This is compared to $2.4 million and $9.5 million in the same period last year, of which $0.3 million and $1.2 million were paid to the Fund as holder of Class A limited partner Units. The increased distribution to the Fund is a result of the settlement of the subordinated notes in the fourth quarter of 2009, as a result of which the Fund receives its share of FPLP's distributions entirely as a distribution on its Class A limited partner Units. The distributions to partners were determined in accordance with the limited partnership agreement that governs FPLP (the "LP Agreement").

The principal repayments of the HSBC term loan for the three and twelve months ended December 31, 2010 totalled $1.3 million and $4.6 million. Prior to the HSBC term loan, there was no requirement to make regular principal repayments on FPLP's long-term debt facility.

Contractual Obligations

Effective December 31, 2009, FPLP signed a credit agreement with HSBC to replace FPLP's $60.0 million term facility with Prudential, which was due on June 5, 2010. On January 8, 2010, the security documentation and funding was completed and the proceeds were used to repay the Prudential notes in full. In January 2010, FPLP made an initial cash deposit of $5.0 million into a separate HSBC guarantee account with a second $5.0 million guarantee account deposit made by FP Funding Corporation ("FundingCo"), a company controlled indirectly by Ronald Stern and Robert Silver, who together indirectly control 51% of FPLP. FPLP and FundingCo have entered into a Credit Support Agreement and a Credit Support Fee Agreement outlining the terms of FundingCo's guarantee. Under the terms of the Credit Support Fee Agreement, FPLP is required to pay FundingCo a guarantee fee on the $5.0 million account deposit calculated at 3.0% per annum over the rate charged to FPLP by HSBC for Facility A.

FPLP has entered into supplier agreements to upgrade certain equipment at the Winnipeg Free Press as part of the $2.2 million project to consolidate FPLP's production operations. Deposits of $2.0 million have been paid as of December 31, 2010 and are included in prepaid expenses and other assets on FPLP's balance sheet. FPLP plans to enter into a capital lease agreement to finance this equipment once the projects are completed, which is anticipated to occur during the first quarter of 2011. In connection with these equipment purchases, during the second quarter, FPLP entered into a $0.4 million annual five-year agreement to purchase production supplies.

Other than as discussed above, there have been no significant changes to contractual obligations since December 31, 2009.

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

Under the terms of the LP Agreement, the managing general partner of FPLP 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, 2010 and 2009 is as follows:

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
  In thousands In thousands
Reserve at beginning of period $ 1,500 $ 1,500 $ 1,500 $ 1,480
Increase in reserve - - - 20
Decrease in reserve - - - -
Reserve at end of period $ 1,500 $ 1,500 $ 1,500 $ 1,500

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).

The use of a reserve for maintenance capital in calculating distributable cash attributable to the Fund(2) is intended to provide an allowance for estimated annual capital expenditures required to maintain the productive capacity of the business. The level of the annual allowance for maintenance capital is reviewed periodically based on historical spending levels and future plans, and adjusted based on reasonable and supportable assumptions. Actual future capital expenditures necessary to maintain the current productive capacity of the business may vary, perhaps materially, from the allowance used in determining distributable cash(2) due to technological change, unexpected equipment failure, changes in customer service expectations and other reasons. FPLP has established a maintenance capital maximum reserve policy, the maximum reserve level under which is $1.5 million.

This reserve is a non-GAAP measure established and utilized at the discretion of the board of directors of FPLP, and has no impact on the GAAP financial statements.

Debt Covenants

The HSBC credit facility (see "Financing Activities" section) includes negative covenants which must be observed in order to avoid an accelerated termination of the agreement. These covenants include certain restrictions on paying distributions, the sale of assets, the purchase of investments and acquisitions, share capital, allowing encumbrances and certain issuances of loans or financial assistance. FPLP is restricted from making distributions which exceed distributable cash by more than $1 million annually, as defined in the credit agreement. FPLP is required to maintain a leverage ratio of no greater than 3.5 to 1.0, a fixed charge coverage ratio of no less than 2.0 to 1.0, and a current ratio of no less than 1.2 to 1.0, all as defined in the agreement and measured quarterly on a trailing 12-month basis. Financial amounts used in the calculations are specifically defined in the credit agreement, but are substantially equal to the corresponding terms used in the external financial reports filed by FPLP. The following financial ratios are calculated in accordance with the HSBC credit agreement:

Twelve Months Ended Leverage ratio Fixed Charge ratio Current ratio
December, 31, 2010 1.8 3.6 3.4
September 30, 2010 1.7 4.5 3.2
June 30, 2010 1.8 5.3 3.1
March 31, 2010 1.9 6.5 2.3
December 31, 2009 2.3 7.3 1.7

Related Party Transactions

FPLP purchases a portion of its newsprint from Alberta Newsprint Company ("ANC"), a related party as disclosed under the related party transaction section of FPLP's Annual Management's Discussion and Analysis at December 31, 2009. There have been no changes during 2010 to the process for selection of newsprint suppliers or the quarterly review by the Audit Committee of newsprint purchases. Total newsprint purchases from ANC for the three and twelve months ended December 31, 2010 were $1.1 million and $3.8 million, compared to $1.3 million and $5.8 million for the same periods last year.

FPLP pays FundingCo a guarantee fee as FundingCo has made an initial $5.0 million deposit into a HSBC guarantee account (as discussed in the "Contractual Obligations" section) held as collateral until the term loan is repaid. The guarantee fee in the three and twelve months ending December 31, 2010 was $0.1 million and $0.3 million.

Internal Controls over Financial Reporting

During the third quarter, management identified and remediated a deficiency in the Fund's internal controls over financial reporting with regard to its future income tax liability calculation (see "Prior Period Restatement" section). This deficiency resulted in a prior period restatement presented on the Fund's consolidated financial statements.

Other than the above, there have been no significant changes in internal controls over financial reporting since December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Fund's or FPLP's internal controls over financial reporting.

Critical Accounting Estimates

There have been no significant changes in the Fund's or FPLP's critical accounting estimates since December 31, 2009.

Initial Adoption of New Accounting Pronouncements

In February 2008, the Canadian Accounting Standards Board ("AcSB") announced that International Financial Reporting Standards ("IFRS") will be used for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The Fund (now the Corporation) and FPLP will begin reporting under IFRS starting with the interim period ended March 31, 2011, with restatement for comparative purposes of amounts reported for the corresponding periods in 2010.

In order to prepare for the transition date on January 1, 2011, the Corporation and FPLP are finalizing the evaluation of this new requirement and have created a detailed plan to converge to IFRS. The detailed plan includes an analysis of the project structure and governance, resources and training, analysis of key GAAP differences and a phased approach to the assessment of current accounting policies and implementation. The current status of the key elements of our detailed plan for adopting IFRS is as follows:

Project Structure and Governance – The transition process is monitored by senior finance management. Management continues to update the Audit Committee quarterly on the status of the project.

Resources and Training – The Corporation and FPLP have identified key finance staff and such finance staff have attended external IFRS training events and have been involved in the IFRS conversion process and have obtained the requisite knowledge and experience such that additional training will not be required.

Analysis of Significant GAAP Differences – The Corporation and FPLP have completed the planning phase and initial conversion diagnostic between GAAP and IFRS. The Corporation and FPLP have identified the key areas, which include:

  • IFRS 1 – First-time Adoption of International Financial Reporting Standards:

Most adjustments required on transition to IFRS will be made retrospectively against opening cumulative earnings at the date of the first comparative balance sheet. Transitional adjustments relating to those standards where comparative figures are not required to be restated will only be made as of the first day of the fiscal year of adoption.

IFRS 1 provides entities adopting IFRS for the first time with a number of optional exceptions and mandatory exceptions to the general requirement for the full retrospective application of IFRS. The Corporation and FPLP are analyzing the various accounting policy options available and will implement those we determine to be most appropriate for our specific circumstances. We have made preliminary conclusions regarding these options but they will be subject to ongoing assessment during the transition year. The Corporation's and FPLP's current intentions are as follows:

    • Business Combinations – This exemption allows an entity to carry forward its previous GAAP accounting for business combinations prior to the transition date of January 1, 2010. The exemption is optional and can be applied to any business combination transaction prior to the transition date. However, should an entity choose to adjust a prior business combination to comply with IFRS, all business combinations subsequent to the date of the adjusted transaction must also be retrospectively adjusted. The Corporation and FPLP intend to apply this exemption to all acquisitions and not retroactively revise past business combinations prior to January 1, 2010.
    • Fair value or revaluation as deemed cost – This exemption allows FPLP to revalue Property, Plant and Equipment at fair value at the transition date and use this fair value as the deemed transition cost. This election applies to individual assets. FPLP does not intend to apply this exemption.
    • Employee Benefits – This exemption allows an entity to recognize all cumulative actuarial gains and losses at the date of transition as a direct entry to cumulative earnings rather than retrospectively applying IFRS pension guidance and recalculating amounts on transition. FPLP intends to apply this exemption. The cumulative actuarial gains to be recognized in equity on transition are $146,000. Furthermore, an additional minimum liability of $1,287,000 will be recognized in accordance with IFRIC 14 (the limit under a defined benefit asset, minimum funding requirements and their interaction). Accordingly, a cumulative increase in pension liability and corresponding reduction in equity of $1,141,000 will be recognized on transition to IFRS.
    • Borrowing costs – This exemption allows an entity to adopt IAS 23 prospectively to projects for which the capitalization commencement date is after the transition date. FPLP intends to apply this exemption to the extent possible.
  • Property, plant and equipment – IFRS requires an entity to identify significant component parts within fixed assets and depreciate those parts over their respective useful lives. Canadian GAAP only requires componentization to the extent practicable. FPLP has finalized its review of its fixed assets to identify whether any additional components are required to be recognized on transition to IFRS. The annual impact of the additional componentization is insignificant.
  • Impairment of assets – Upon adoption of IFRS, FPLP is required to test goodwill and mastheads for impairment in accordance with IAS 36. Furthermore, IFRS requires FPLP to conduct an asset-impairment test at the date of adoption of IFRS if indicators of impairment exist. There are several differences that exist between current Canadian GAAP and IFRS for impairment of non-financial assets, which include:
    • the test for non-financial asset impairment (for finite lived tangible and intangible assets) requires the use of a discounted cash flow model, whereas Canadian GAAP uses a two-step impairment test which is first based on undiscounted cash flows and then discounted cash flows;
    • testing for impairment occurs at the level of cash-generating units, which is the lowest level of assets that generate largely independent cash inflows, whereas Canadian GAAP requires impairment tests at the asset group level; and
    • IFRS allows the reversal of previous impairment losses, with the exception of goodwill, whereas Canadian GAAP prohibits the reversal of non-financial asset impairments.
  FPLP is finalizing its IAS 36 impairment assessments related to its recognized goodwill and indefinite lived intangible assets at January 1, 2010 and December 31, 2010. Preliminary conclusions indicate that no impairment charge would be recognized under IFRS.
  • Presentation of financial statements – The Corporation and FPLP have prepared a draft set of IFRS financial statements excluding any quantitative financial information. Such financial information has been reviewed by senior management and has been provided in draft to the Audit Committee. Management may continue to refine their presentation and disclosures up to March 31, 2011.

Information technology and data systems – As part of the identification of significant differences between Canadian GAAP and IFRS, we will evaluate the sufficiency of information technology and data systems. The Corporation and FPLP have not identified any significant changes required to date.

Internal controls over financial reporting and disclosure controls and processes – The Corporation and FPLP are in the process of identifying the impact of divergences on our internal controls. Any significant impacts we identify will be disclosed in future filings when the assessment is finalized. The Corporation and FPLP have prepared a draft set of IFRS financial statements to ascertain whether any amendments to internal controls over financial reporting and disclosure controls and procedures are required. As management continues to review the draft financial statements, we will disclose any requisite updates to controls. The Corporation and FPLP have not identified any change that would materially affect, or is reasonably likely to materially affect, our internal controls over financial reporting or disclosure controls and procedures.

IFRS uses a conceptual framework similar to Canadian GAAP, but there are certain differences in recognition, measurement and disclosures. In the period leading to the changeover, the AcSB may continue to issue new accounting standards that are aligned with IFRS, which will reduce the impact of adopting IFRS on the transition date. The International Accounting Standards Board will also continue to issue new accounting standards during the conversion period. As a result of the upcoming changes, the final impact of IFRS on our consolidated financial statements can only be determined once all of the IFRS applicable as of December 31, 2011 are known.

Additional disclosure on the impact of the adoption of IFRS on our consolidated financial statements will be provided in future MD&As.

Historical Distributions Paid Analysis

FPLP: Three Months
ended December 31,
2010
Twelve Months ended December 31,
2010
Twelve months ended December 31, 2009 Twelve Months ended December 31, 2008
  In thousands
Cash provided by operating activities $ 1,964 $ 18,304 $ 11,316 $ 11,933
Net earnings 4,925 15,973 7,117 7,957
Distributions paid during the period 2,712 10,749 9,477 11,820
         
(Shortfall) excess of cash provided by operating activities over cash distributions paid $ (748) $ 7,555 $ 1,839 $ 113
         
Excess (shortfall) of net earnings over cash distributions paid $ 2,213 $ 5,224 $ (2,360) $ (3,863)

Cash distributions paid in two of the four periods exceeded net earnings. FPLP does not use net earnings as a basis for determining the level of distributions to Unitholders. Distributions are determined in accordance with the LP Agreement. Because amortization charged as an expense in calculating net earnings in accordance with GAAP exceeds capital expenditures charged as a reduction of distributable cash in all periods, this result is not unexpected.

Cash distributions paid in the three months ended December 31, 2010 exceeded cash provided by operating activities due to the supplier agreements to upgrade certain equipment at the Winnipeg Free Press as part of the $2.2 million project to consolidate FPLP's production operations. Deposits of $2.0 million have been paid as of December 31, 2010 and are included in prepaid expenses and other assets on FPLP's balance sheet, thereby decreasing cash provided by operating activities.

The Fund: Three Months
ended December 31,
2010
Twelve Months ended December 31,
 2010
Twelve Months ended December 31,
2009
Twelve months ended December 31, 2008
  In thousands
Cash provided by operating activities $ 1,190 $ 4,439 $ 8,259 $ 8,819
Net earnings 2,159 7,168 6,853 6,682
Cash distributions paid during the period 1,243 5,212 7,869 8,732
         
(Shortfall) excess of cash provided by operating activities over cash distributions paid $ (53) $ (773) $ 390 $ 87
         
Excess (shortfall) of net earnings over cash distributions paid $ 916 $ 1,956 $ (1,016) $ (2,050)

Cash distributions paid in two of the four periods exceeded net earnings. The Fund does not use net earnings as a basis for determining the level of distributions to Unitholders. Distributions are determined by the Trustees in accordance with the Deed of Trust of the Fund and are primarily dependent upon the amount of distributions (and interest on the subordinated notes prior to December 31, 2010) received from FPLP. Because amortization charged as an expense in calculating net earnings of FPLP in accordance with GAAP has exceeded capital expenditures charged as a reduction of distributable cash of FPLP in all periods, this result is not unexpected.

Cash distributions paid in the three months ended December 31, 2010 exceeded cash provided by operating activities due to the non-recurring administration expenses relating to the conversion of the Fund to the Corporation. This is a temporary deficiency; going forward, monthly distributions from FPLP will exceed the Corporation's administration costs and distributions declared by the Corporation, as has been the case in prior periods.

Cash distributions paid in the twelve months ended December 31, 2010 exceeded cash provided by operating activities due primarily to the settling of the subordinated notes at December 31, 2009 and the non-recurring administration expenses relating to the conversion of the Fund to the Corporation (see note 8 of the Fund's financial statements). The subordinated notes were settled effective December 31, 2009 and interest owing on those notes was paid on that date, when it would normally have been paid in January 2010. This had the effect of increasing the Fund's cash balance at December 31, 2009 and decreasing the cash that would have otherwise been received in January 2010 and was the primary contributing factor to the temporary shortfall between distributions paid and cash provided by operating activities. This is a temporary deficiency; going forward, monthly distributions from FPLP will exceed the Corporation's administration costs and distributions declared by the Corporation, as has been the case in prior periods.

Business Risks and Uncertainties

Revenue

Advertising revenues, which account for approximately 68% of total revenue, are historically dependent upon general economic conditions and the specific spending plans of high-volume advertisers. A significant downturn in the national or regional economy, like the one which started in 2008, decreases advertising revenue earned by our newspapers. Similarly, a shift from newspaper and/or flyer advertising to internet advertising could adversely affect total revenue. A change in promotional strategy by significant users of newspaper advertising, such as the automotive industry, financial services industry, national retailers and employment advertisers could adversely affect total revenue.

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 $9.5 million in 2010. 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 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 are 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 December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
  In thousands In thousands
Net earnings for the period $ 4,925 $ 3,653 $ 15,973 $ 7,117
Add (subtract):        
Amortization of property, plant and equipment 893 979 5,259 3,819
Amortization of intangible assets 179 184 708 728
Interest expense 650 2,643 2,619 10,491
Interest income (49) (6) (151) (40)
Loss (gain) on sale of property, plant and equipment - 1 85 (297)
Loss on derecognition of Variable Interest Entity - - 58 -
Current income tax expense - 7 - 4
Future income tax expense - - - 50
Non-cash asset impairment charge - 526 - 526
EBITDA $ 6,598 $ 7,987 $ 24,551 $ 22,398

(2) Distributable Cash Attributable to the Corporation

The Corporation believes that in addition to the disclosure of cash flow from operations, distributable cash attributable to the Corporation is an important supplemental measure of cash flow because it provides investors with an indication of the amount of cash available for distribution to Shareholders and because such calculations are required by the terms of the partnership agreement governing FPLP. Distributable cash attributable to the Corporation 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 are cautioned that distributable cash as calculated by the Corporation may not be comparable to similar measures presented by other issuers. The Fund used this measure as a factor to determine whether to adjust its monthly distributions to Unitholders, and the Corporation will use it in determining its monthly dividends. Management has determined distributable cash attributable to the Fund for the stated periods as follows:

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
Distributable cash of FPLP: In thousands In thousands
EBITDA(1) $ 6,598 $ 7,987 $ 24,551 $ 22,398
Interest income 49 6 151 40
Interest expense on notes payable, term loan and guarantee, excluding accretion of related deferred financing costs (625) (780) (2,449) (3,120)
Principal repayment of term loan (1,251) - (4,587) -
Maintenance capital expenditures (193) (271) (616) (659)
Increase in reserve for future maintenance capital - - - (20)
Proceeds from sale of property, plant and equipment - - 242 163
Current income and capital taxes expense - (7) - (4)
  $ 4,578 $ 6,935 $ 17,292 $ 18,798
49% attributable to the Fund $ 2,243 $ 3,398 $ 8,473 $ 9,211
Administration expenses (168) (63) (606) (270)
Interest income - - 1 3
Distributable cash attributable to the Fund $ 2,075 $ 3,335 $ 7,868 $ 8,944
Distributable cash attributable to the Fund – per Unit $ 0.301 $ 0.483 $ 1.140 $ 1.296

A summary of distributable cash and distributions declared for the trailing twelve months to December 31, 2010 and for the period from commencement of the Fund on May 28, 2002 to December 31, 2010 is as follows:

Distributable Cash of FPLP:

  Last Twelve Months Since May 28, 2002
  In thousands
EBITDA(1) $ 24,551 $ 209,659
Interest income 151 1,036
Interest expense on notes payable and capital leases, excluding amortization of related deferred financing costs (2,449) (26,219)
Principal repayment of term loan (4,587) (4,587)
Principal repayment of capital leases - (1,136)
Maintenance capital expenditures (616) (8,636)
Increase in reserve for future maintenance capital expenditures - (1,500)
Strategic capital expenditures - (1,331)
Increase in reserve for strategic capital, acquisitions, and/or debt reduction - (353)
Proceeds on disposal of property, plant and equipment 242 1,539
Current income and capital tax expense - (196)
     
Distributable cash of FPLP $ 17,292 $ 168,276

Distributable Cash Attributable to the Fund:

  Last Twelve Months Since May 28, 2002
  In thousands
49% of FPLP distributable cash $ 8,473 $ 82,455
Administration expenses (606) (2,656)
Interest income 1 53
     
Distributable cash attributable to the Fund $ 7,868 $ 79,852
     
Distributable cash attributable to the Fund – per Unit $ 1.140 $ 11.568
Cash distributions declared by the Fund – per Unit $ 0.720 $ 10.223
     
Payout Ratio 63.2% 88.4%

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

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
  In thousands In thousands
Cash flow from operating activities of FPLP $ 1,964 $ 3,891 $ 18,304 $ 11,316
Add (subtract):        
  Interest on subordinated notes (*) - 1,694 - 6,722
  Net change in non-cash working capital items (**) 4,058 1,621 3,891 1,276
  Maintenance capital expenditures (193) (271) (616) (659)
  Increase in reserve for future maintenance capital(***) - - - (20)
  Principal repayment of term loan(****) (1,251) - (4,587) -
  Loss on derecognition of the Variable Interest Entity - - 58 -
  Proceeds from sale of property, plant and equipment (*****) - - 242 163
Distributable cash of FPLP $ 4,578 $ 6,935 $ 17,292 $ 18,798
 
This reconciliation is provided in order to comply with the guidance of the Canadian Securities Administrators National Policy 41-201. The Corporation does not use this information for any purpose other than compliance.
 
(*) 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.
 
(**) 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.
 
(***) Increase in the reserve for future 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. This reserve is a non-GAAP measure established and utilized at the discretion of the board of directors of FPLP, and has no impact on the GAAP financial statements.
 
(****) The monthly principal repayments of the term loan is a requirement under the HSBC Bank Canada term facility (see note 11 in FPLP's financial statements) and is therefore a reduction in determining the distributable cash of FPLP.
 
(*****) 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
(a predecessor to FP Newspapers Inc.)
Consolidated Balance Sheets
(unaudited, in thousands of Canadian dollars)

  As at December 31, As at December 31,
  2010 2009
    (Restated note 6)
ASSETS    
Current Assets    
  Cash and cash equivalents $ 43 $ 816
  Prepaid expenses and other assets 21 14
  64 830
     
Investment in FPCN General Partner Inc. 49 49
     
Investment in FP Canadian Newspapers Limited Partnership (note 2) 61,193 58,342
  $ 61,306 $ 59,221

LIABILITIES AND UNITHOLDERS' EQUITY
   
Current Liabilities    
  Accounts payable and accrued liabilities $ 191 $ 116
  Distribution payable (note 3) 414 656
  605 772
     
Long-Term Liabilities    
  Future income taxes 922 868
  1,527 1,640
     
Unitholders' Equity    
  Trust Units (note 7) 71,373 69,026
  Cumulative earnings 61,311 54,143
  Cumulative distributions (72,905) (65,588)
  59,779 57,581
  $ 61,306 $ 59,221

Subsequent event (note 8)

(See accompanying notes)

FP Newspapers Income Fund
(a predecessor to FP Newspapers Inc.)
Consolidated Statements of Earnings, Comprehensive Income and Cumulative Earnings
(unaudited, in thousands of Canadian dollars except per Unit amounts)

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
Earnings from investment in FP Canadian Newspapers Limited Partnership        
  Interest from subordinated notes $ - $ 1,694 $ - $ 6,722
  Equity interest from Class A limited partner Units (note 2) 2,413 926 7,827 59
Other interest - - 1 3
  2,413 2,620 7,828 6,784

Administration expenses (note 5)
(168) (63) (606) (270)
Net earnings before income taxes $ 2,245 $ 2,557 $ 7,222 $ 6,514
         
Future income tax (expense) recovery (86) 282 (54) 339
Net earnings and comprehensive income for the period $ 2,159 $ 2,839 $ 7,168 $ 6,853

Cumulative earnings, beginning of period as previously reported
59,152 51,304 53,415 46,562
Prior period restatement (note 6) - - 728 728
Cumulative earnings, beginning of period as restated 59,152 51,304 54,143 47,290
         
Cumulative earnings, end of period $ 61,311 $ 54,143 $ 61,311 $ 54,143
         
Number of Units outstanding 6,902,592 6,902,592 6,902,592 6,902,592
         
Net earnings per Unit $ 0.312 $ 0.411 $ 1.038 $ 0.993

FP Newspapers Income Fund
(a predecessor to FP Newspapers Inc.)
Consolidated Statements of Unitholders' Equity
(unaudited, in thousands of Canadian dollars)

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
         
Balance – beginning of period as previously reported $ 58,863 $ 56,709 $ 56,853 $ 57,869
Prior period restatement (note 6) - - 728 728
Balance – beginning of period as restated 58,863 56,709 57,581 58,597
         
Net earnings and comprehensive earnings for the period 2,159 2,839 7,168 6,853
Distributions to Unitholders (note 7) (3,590) (1,967) (7,317) (7,869)
Non-cash distribution (note 7) 2,347 - 2,347 -
Balance – end of period $ 59,779 $ 57,581 $ 59,779 $ 57,581

(See accompanying notes)

FP Newspapers Income Fund
(a predecessor to FP Newspapers Inc.)
Consolidated Statements of Cash Flows
(unaudited, in thousands of Canadian dollars)

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
Cash provided by (used in):        
Operating activities        
Net earnings for the period $ 2,159 $ 2,839 $ 7,168 $ 6,853
Items not affecting cash:        
Equity interest from Class A limited partner Units (note 2) (2,413) (926) (7,827) (59)
Future income tax expense (recovery) 86 (282) 54 (339)
Distributions received on Class A limited partner Units (note 2) 1,329 304 4,976 1,216
Net change in non-cash working capital items 29 557 68 588
  1,190 2,492 4,439 8,259

Financing activities
       
Distributions to Unitholders (1,243) (1,967) (5,212) (7,869)

Investment activities
       
Investment in FPCN General Partner Inc. - - - (9)
         
(Decrease) increase in cash and cash equivalents (53) 525 (773) 381

Cash and cash equivalents – beginning of period

96

291

816

435

Cash and cash equivalents – end of period

$ 43

$ 816

$ 43

$ 816

(See accompanying notes)

FP Newspapers Income Fund
(a predecessor to FP Newspapers Inc.)
Notes to Financial Statements as at December 31, 2010
(unaudited, tabular amounts in thousands of Canadian dollars)

1. Basis of presentation

FP Newspapers Income Fund (the "Fund") (a predecessor to FP Newspapers Inc. (note 8)) 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 ("the Trust"). However, these interim financial statements do not include all the information and disclosures required for annual financial statements. These interim financial statements have been prepared following the same accounting policies as the consolidated financial statements of the Fund as at December 31, 2009. 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, 2009.

FPLP's advertising 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 partner Units of FPLP is highest in the second and fourth quarters.

2. Investment in FP Canadian Newspapers Limited Partnership

On May 28, 2002, the Trust subscribed for 6,573,897 Class A limited partner Units of FPLP and $65,670,000 principal amount of subordinated notes of FPLP. On June 27, 2002, the Trust subscribed for a further 328,695 Class A limited partner Units of FPLP and $3,283,500 principal amount of subordinated notes of FPLP. On December 31, 2009, the subordinated notes were settled as a condition of the FPLP's HSBC credit facility (see FPLP note 11). The Trust holds all of the Class A limited partner Units of FPLP, which 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 limited partner Units
   
Balance at December 31, 2009 $ 58,342
   
Equity interest in the period 1,479
Distributions received (989)
Balance at March 31, 2010 $ 58,832
   
Equity interest in the period 2,390
Distributions received (1,329)
Balance at June 30, 2010 $ 59,893
   
Equity interest in the period 1,545
Distributions received (1,329)
Balance at September 30, 2010 $ 60,109
   
Equity interest in the period 2,413
Distributions received (1,329)
Balance at December 31, 2010 $ 61,193

The change in equity interest for the three and twelve months ended December 31, 2010 and 2009 from the Fund's investment in Class A limited partner Units and subordinated notes of FPLP is calculated as follows:

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
Net earnings of FPLP $ 4,925 $ 3,653 $ 15,973 $ 7,117
Plus: Interest on subordinated notes - 1,694 - 6,722
Net earnings before interest on subordinated notes $ 4,925 $ 5,347 $ 15,973 $ 13,839
         
49% interest attributable to the Fund 2,413 2,620 7,827 6,781
Less: Interest from subordinated notes - (1,694) - (6,722)
Equity interest from Class A limited partner Units $ 2,413 $ 926 $ 7,827 $ 59

3. Distribution payable

The Fund recorded a distribution payable at December 31, 2010 of $0.06 per Unit. The distribution was paid January 10, 2011 to Unitholders of record on December 31, 2010 in respect of the month of December 2010 (see note 7).

4. Financial instruments

The fair value of current assets and liabilities including cash and cash equivalents, accounts payable and accrued liabilities, and distribution payable approximates their carrying value due to the short-term nature of these financial instruments. Cash and cash equivalents at December 31, 2010 are $43,000 ($816,000 – December 30, 2009), and the Level 1 valuation technique is used to determine their fair value.

5. Corporate conversion costs

At the May 5, 2010 annual general meeting, the Unitholders approved an arrangement to convert the Fund from a trust structure to a corporate structure at the end of fiscal 2010. For the three and twelve month periods the Fund incurred expenses of $94,000 and $325,000 with regard to the arrangement.

6. Prior period restatement

On June 12, 2007, Bill C-52 Budget Implementation Act 2007 was substantively enacted, which contained legislation to tax publicly traded income trusts in Canada. The new tax does not apply until 2011. However, the Fund was required to recognize the taxable temporary differences that were expected to reverse after 2010. Based on its assets and liabilities on December 31, 2008 and its share of the assets and liabilities of its investment in FPLP, the Fund had estimated temporary differences of $1,935,000. In error, the Fund had initially determined that a valuation allowance was required on certain cumulative eligible capital balances. Upon further analysis, the Fund has determined that such deductible temporary differences will be realized through the future reversal of taxable temporary differences. As a result, the January 1, 2009 opening Cumulative Earnings has been increased by $728,000 with a corresponding decrease in future income tax liabilities. The Fund has restated the Consolidated Balance Sheet as at December 31, 2009, Cumulative Earnings and the Consolidated Statements of Unitholders' Equity for the year ended December 31, 2009. The restatement did not impact net earnings, comprehensive income, and net earnings per Unit for the twelve months ended December 31, 2010 and 2009.

7. Special distribution

A special distribution in the amount of $0.34 per Unit to Unitholders of record at the close of business on December 31, 2010, which was declared on December 14, 2010, was paid on December 31, 2010 by way of the issuance of an aggregate of 368,427.202511 additional Fund Units, based on the volume-weighted average trading price of the Units for the 10 trading days ended December 30, 2010. Immediately after the special distribution, the outstanding Units were automatically consolidated so that each Unitholder held exactly the same number of Units after the consolidation as that Unitholder held immediately prior to the special distribution.

8. Subsequent event

Subsequent to the year end, the Fund completed its previously-announced conversion from an income trust to a corporate structure pursuant to a plan of arrangement. Under the plan of arrangement, Unitholders of the Fund received, for each Unit of the Fund held, one common share of the resulting public corporation, FP Newspapers Inc. ("FPI"). Immediately after the completion of the conversion, there were 6,902,592 common shares of FPI issued and outstanding. The common shares of FPI commenced trading on the Toronto Stock Exchange on January 7, 2011 under the symbol "FP". Concurrently, the Fund's Units were delisted. Immediately following the closing of the arrangement, FPCN Holdings Trust and the Fund were wound up and dissolved. FPI acquired all of the assets and assumed all of the liabilities of those entities, including the obligation to pay out to Unitholders of the Fund of record at the close of business on December 31, 2010 the cash distribution of $0.06 per Unit that was declared by the Fund on December 14, 2010. Furthermore, subsequent to the conversion from an income trust to a corporate structure, FPI will become fully taxable based on its share of the taxable income of FPLP.

The conversion of the Fund Units to shares of FPI was recorded at the carrying value of the Fund's assets and liabilities subsequent to the Funds 2010 year-end, in accordance with the continuity of interest method of accounting as FPI is considered to be a continuation of the Fund.

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

  As at December 31, As at December 31,
  2010 2009
ASSETS    
Current Assets    
  Cash and cash equivalents $ 6,477 $ 9,178
  Accounts receivable (note 8) 13,026 12,991
  Inventories 956 993
  Prepaid expenses and other assets (note 12) 2,938 1,132
  23,397 24,294
     
Restricted cash (note 9) 5,000 -
     
Property, plant and equipment 37,867 42,968
     
Investment (note 4) - 136
     
Intangible assets 7,617 8,163
     
Goodwill 71,160 71,160
     
Accrued pension benefit asset 1,055 226
  $ 146,096 $ 146,947
     
LIABILITIES AND UNITHOLDERS' EQUITY    
Current Liabilities    
  Accounts payable and accrued liabilities $ 8,359 $ 9,728
  Prepaid subscriptions and deferred revenue 2,934 3,131
  Notes payable (note 11) - 5,000
  Term loan (note 11) 5,000 -
  16,293 17,859

Long-Term Liabilities
   
  Notes payable (note 11) - 54,930
  Term loan (note 11) 50,218 -
  50,218 54,930
  66,511 72,789
     
Unitholders' Equity    
  Partner Units 98,280 98,280
  Cumulative earnings 84,164 68,191
  Cumulative distributions (102,859) (92,110)
  Accumulated other comprehensive loss (note 4) - (203)
  79,585 74,158
  $ 146,096 $ 146,947

Subsequent event (note 13)

(See accompanying notes)

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

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009


Revenue


$ 28,246


$ 30,780


$ 110,032


$ 113,863
         
Operating expenses, excluding amortization and restructuring charges (21,648) (22,042) (85,481) (89,600)
Restructuring charges - (751) - (1,865)
         
  6,598 7,987 24,551 22,398
         
         
Amortization of property, plant and equipment (893) (979) (5,259) (3,819)
Amortization of intangible assets (179) (184) (708) (728)
         
Earnings before the under-noted 5,526 6,824 18,584 17,851
         
Interest expense (note 6) (650) (2,643) (2,619) (10,491)
Interest income 49 6 151 40
(Loss) gain on sale of property, plant and equipment - (1) (85) 297
Loss on derecognition of the variable interest entity (note 1) - - (58) -
Asset impairment write-down - (526) - (526)
         
Earnings before income taxes 4,925 3,660 15,973 7,171
         
Income tax expense:        
  - Current - (7) - (4)
  - Future - - - (50)

Net earnings for the period
$ 4,925 $ 3,653 $ 15,973
$ 7,117

Cumulative earnings – beginning of period

79,239

64,538

68,191

61,074

Cumulative earnings – end of period

$ 84,164

$ 68,191

$ 84,164

$ 68,191

Consolidated Statements of Comprehensive Income
(unaudited, in thousands of Canadian dollars)

  Three Months Ended
December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009

Net earnings for the period
$ 4,925 $ 3,653 $ 15,973
$ 7,117
         
Other comprehensive income        
  Unrealized gain (loss) on investment (note 4) 134 (17) 203 72
         
Comprehensive income for the period $ 5,059 $ 3,636 $ 16,176 $ 7,189

(See accompanying notes)

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

 

General partner Units
Class A limited partner Units

Total
Unitholders' equity – December 31, 2008 $ 11,562 $ 7,897 $ 19,459
Net loss for the period (432) (64) (496)
Distributions paid (2,035) (300) (2,335)
Other comprehensive loss (72) (11) (83)
Unitholders' equity – March 31, 2009 $ 9,023 $ 7,522 $ 16,545
Net earnings for the period 2,474 364 2,838
Distributions paid (2,083) (306) (2,389)
Other comprehensive income 112 17 129
Unitholders' equity – June 30, 2009 $ 9,526 $ 7,597 $ 17,123
Net earnings for the period 977 145 1,122
Distributions paid (2,083) (306) (2,389)
Other comprehensive income 37 6 43
Unitholders' equity – September 30, 2009 $ 8,457 $ 7,442 $ 15,899
Net earnings for the period 3,184 469 3,653
Distributions paid (2,060) (304) (2,364)
Other comprehensive loss (14) (3) (17)
Contributions - 56,987 56,987
Unitholders' equity – December 31, 2009 $ 9,567 $ 64,591 $ 74,158
Net earnings for the period 1,876 1,142 3,018
Distributions paid (1,624) (989) (2,613)
Other comprehensive loss (2) (2) (4)
Unitholders' equity – March 31, 2010 $ 9,817 $ 64,742 $ 74,559
Net earnings for the period 2,583 2,295 4,878
Distributions paid (1,383) (1,329) (2,712)
Other comprehensive income 41 32 73
Unitholders' equity – June 30, 2010 $ 11,058 $ 65,740 $ 76,798
Net earnings for the period 1,576 1,576 3,152
Distributions paid (1,383) (1,329) (2,712)
Other comprehensive income - - -
Unitholders' equity – September 30, 2010 $ 11,251 $ 65,987 $ 77,238
Net earnings for the period 2,544 2,381 4,925
Distributions paid (1,383) (1,329) (2,712)
Other comprehensive income 70 64 134
Unitholders' equity – December 31, 2010 $ 12,482 $ 67,103 $ 79,585

(See accompanying notes)

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

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
         
Cash provided by (used in):        
         
Operating activities        
  Net earnings for the period $ 4,925 $ 3,653 $ 15,973 $ 7,117
  Items not affecting cash:        
    Amortization of property, plant and equipment and intangible assets 1,072 1,163 5,967 4,547
    Pension contributions in excess of expense (400) (226) (829) (226)
    Accretion of notes payable/term loan related to financing costs (note 6) 25 169 170 649
    Future income tax expense - - - 50
    Loss (gain) on disposal of property, plant and equipment - 1 85 (297)
    Asset impairment write-down - 526 - 526
  5,622 5,286 21,366 12,366
         
Net change in non-cash working capital items (3,658) (1,395) (3,062) (1,050)
  1,964 3,891 18,304 11,316

Investing activities
       
  Purchases of property, plant and equipment (147) (222) (454) (506)
  Purchases of intangibles (46) (49) (162) (153)
  Proceeds from sale of property, plant and equipment - - 242 163
  Increase in restricted cash (note 9) - - (5,000) -
  (193) (271) (5,374) (496)
         
Financing activities        
  Distributions to partners (2,712) (2,364) (10,749) (9,477)
  Repayment of notes payable (note 11) - - (60,000) -
  Proceeds from term loan (note 11) - - 60,000 -
  Term loan refinancing costs - - (295) -
  Principal repayment of term loan (1,251) - (4,587) -
  (3,963) (2,364) (15,631) (9,477)
         
(Decrease) increase in cash and cash equivalents (2,192) 1,256 (2,701) 1,343
         
Cash and cash equivalents - beginning of period 8,669 7,922 9,178 7,835
         
Cash and cash equivalents - end of period $ 6,477 $ 9,178 $ 6,477 $ 9,178
         
Supplemental Cash Flow Information:        
  Interest paid during the period $ 623 $ 3,026 $ 2,643 $ 10,411

(See accompanying notes)

FP Canadian Newspapers Limited Partnership
Notes to Consolidated Financial Statements as at December 31, 2010
(unaudited, tabular amounts in thousands of Canadian 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 operating businesses owned by FPLP. During the first quarter, FPCN Media Funding Inc. ("Funding") was wound up as its sole purpose was to hold the Prudential notes payable, which were repaid in full on January 8, 2010, and therefore Funding is no longer considered a variable interest entity as defined by CICA AcG-15 and no longer consolidated into the FPLP financial statements. Based on a reassessment, and before any activity, FP Funding Corporation ("FundingCo"), which was previously disclosed to be a variable interest entity, has been determined not to be a variable interest entity and has not been consolidated. The FPLP Employee Benefits Plan Trust Fund ("Trust Fund") has been determined to be a variable interest entity, which has been consolidated into FPLP. The managing general partner of FPLP is FPCN General Partner Inc. ("FPGP"). These interim consolidated 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 periods presented. However, these interim consolidated 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 consolidated financial statements are the same as those used in the most recent annual consolidated financial statements, except as described below. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of FPLP for the year ended December 31, 2009.

FPLP'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

Financial Instruments

FPLP has made the following additional classifications during the twelve months ended December 31, 2010:

Restricted cash is classified as "assets held for trading" and is measured at fair value.

Term loan is classified as "other financial liabilities" and is measured at amortized cost using the effective interest method.

3. Allocation of net earnings

The amended and restated Agreement of Limited Partnership dated May 3, 2005 sets out the method for allocating net earnings between the general and limited partner Units. Net earnings 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 earnings to the end of each quarter.

4. Investment

The Trust Fund held Units of the Fund, which were classified as "available for sale" and were measured at fair value, as determined by the published price quote. Gains and losses resulting from the periodic revaluation were recorded in other comprehensive income. During the year, 17,532 Units were distributed to participants while 8,952 Units were sold and returned to FPLP, leaving a balance of $nil as at December 31, 2010 (26,484 Units with a carrying value of $136,000 as at December 31, 2009). The accumulated other comprehensive loss related to this revaluation adjustment is $nil as at December 31, 2010 ($203,000 - December 31, 2009).

5. Employee future benefit plans

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

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
Defined benefit pension plan $ 187 $ 88 $ 965 $ 1,044

6. Interest expense

Interest expense is summarized as follows:

  Three Months
Ended December 31,
Twelve Months
Ended December 31,
  2010 2009 2010 2009
Subordinated notes $ - $ 1,694 $ - $ 6,722
Accretion of subordinated notes related to financing costs - 128 - 488
Notes payable - 780 173 3,120
Accretion of notes payable related to financing costs - 41 70 161
Term loan 533 - 1,938 -
Accretion of term loan related to financing costs 25 - 100 -
Guarantee fee (note 10) 92 - 338 -
  $ 650 $ 2,643 $ 2,619 $ 10,491

7. Capital management

FPLP's objective for managing the capital structure is to take advantage of leverage with the prudent use of debt, while maintaining flexibility through historically setting distribution levels that are less than the cumulative amounts available for distribution. There are no set quantitative targets established for monitoring the capital structure. Management continuously monitors capital markets in the context of the general economic environment, FPLP's financial position and outlook, and strategic development plans. Within the restrictions imposed by the credit facility FPLP can alter the mix of its capital structure by repaying debt, increasing debt, adjusting distributions to partners or raising additional equity.

FPLP's capital consists of cash and cash equivalents, debt and Unitholders' equity. The components at December 31, 2010 and December 31, 2009 were as follows:

  As at December 31, As at December 31,
  2010 2009
Notes payable $ - $ 59,930
Term loan 55,218 -
Cash and cash equivalents (6,477) (9,178)
Restricted cash (5,000) -
  External net debt 43,741 50,752
     
Unitholders' equity 79,585 74,158
  Total capitalization $ 123,326 $ 124,910
     
External net debt as a percentage of total capitalization 35.5% 40.6%

The credit facility includes negative covenants which must be observed in order to avoid an accelerated termination of the agreement. These covenants include certain restrictions on paying distributions, the sale of assets, the purchase of investments and acquisitions, share capital, allowing encumbrances and certain issuances of loans or financial assistance. FPLP is restricted from making distributions which exceed distributable cash by more than $1,000,000 annually, as defined in this agreement. FPLP is required to maintain a leverage ratio of no greater than 3.5 to 1.0, a fixed charge coverage ratio of no less than 2.0 to 1.0 and a current ratio of no less than 1.2 to 1.0, all defined in the agreement and measured quarterly on a trailing 12-month basis. Financial amounts used in the calculations are specifically defined in the credit agreement, but are substantially equal to the corresponding terms used in the external financial reporting. The following financial ratios are calculated in accordance with the HSBC credit agreement:

Twelve Months Ended Leverage ratio Fixed Charge ratio Current ratio
December 31, 2010 1.8 3.6 3.4
       
Minimum threshold 3.5 2.0 1.2

8. Financial instrument risk management

Credit Risk

As FPLP is in the business of publishing newspapers and performing printing services for third parties, included in accounts receivable are amounts owed from advertisers and advertising agencies, circulation customers and commercial print clients. FPLP does not hold collateral as security for these balances. FPLP's credit risk relating to these accounts receivable is spread over a large number of national and local advertising clients and advertising agencies, in addition to many circulation retail customers and third-party printing clients. FPLP manages credit risk on a customer by customer basis and establishes a reasonable allowance for non-collectible amounts with this allowance netted against the accounts receivable on the balance sheet. The adequacy of the allowance is reviewed on a regular basis, and is estimated based on past experience, specific risks associated with the customers and other relevant information. The ten largest receivable amounts total $5,587,000 as at December 31, 2010 ($4,607,000 - December 31, 2009) and approximately 84% of these balances are owed from national advertising agencies. The largest amount due from a single national agency is $1,358,000 as at December 31, 2010 ($791,000 - December 31, 2009), which represents approximately 10% of total receivables.

At December 31, 2010, FPLP estimates the value of impaired accounts receivable is $28,000. These amounts are included as part of the allowance for doubtful accounts.

The age of receivables and allowance for doubtful accounts is as follows:

  As at December 31, As at December 31,
  2010 2009
Accounts receivable:    
  Current $ 7,053 $ 7,485
  Up to three months past due 6,079 5,660
  Greater than three months past due 239 155
  Impaired 28 55
  13,399 13,355
     
  Allowance for doubtful accounts (373) (364)
  $ 13,026 $ 12,991

The movements in the allowance for doubtful accounts were as follows:

Balance, at December 31, 2009 $ (364)
   
Bad debt expense, net of recovery (71)
Written-off 17
   
Balance at March 31, 2010 $ (418)
   
Bad debt expense, net of recovery (49)
Written-off 13
Reserve reduction 50
   
Balance at June 30, 2010 $ (404)
   
Bad debt expense, net of recovery (48)
Written-off 40
   
Balance at September 30, 2010 $ (412)
   
Bad debt expense, net of recovery (61)
Written-off -
Reserve reduction 100
   
Balance at December 31, 2010 $ (373)

Liquidity Risk

The following are the contractual maturities of the financial liabilities:

  Payments due for the years ending December 31
  Total Less than 1 year 1 – 3 years 4 – 5 years After 5 years
           
Accounts payable and accrued liabilities $ 8,359 $ 8,359 $ - $ - $ -
Long-term debt principal 55,413 5,000 50,413 - -
           
Total $ 63,772 $ 13,359 $ 50,413 $ - $ -

Fair Value Hierarchy

Financial asset or liability Level 1 Level 2 Level 3 Total
         
December 31, 2010        
  Cash and cash equivalents $ 6,477 $ - $ - $ 6,477
  Restricted cash 5,000 - - 5,000
         
  $ 11,477 $ - $ - $ 11,477
December 31, 2009        
  Cash and cash equivalents $ 9,178 $ - $ - $ 9,178
  Investment 136 - - 136
         
  $ 9,314 $ - $ - $ 9,314

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates under the HSBC credit facility. FPLP will be exposed to fluctuations in interest rates as the amounts borrowed under the credit agreement (see note 11) are in the form of bankers' acceptances at varying interest rates. FPLP could manage the risk through the use of an interest rate swap facility which would fix the interest rate on all or a portion of the credit facility, however, FPLP has not entered into any interest rate swap agreements during the three and twelve months ended December 31, 2010.

An assumed 1% increase in FPLP's short-term borrowing rates during the three and twelve months ended December 31, 2010 would have decreased net income by $154,000 and $613,000, with an equal but opposite effect for an assumed 1% decrease in short-term borrowing rates.

9. Restricted cash

During the first quarter of 2010, FPLP made an initial cash deposit of $5,000,000 into a separate HSBC guarantee account pledged as a guarantee to HSBC based on the credit agreement. These restricted funds, which will remain in this HSBC account until the term loan is repaid, are presented as "Restricted Cash" on the balance sheet.

10. Related party transaction

For the three and twelve months ended December 31, 2010, FPLP incurred a guarantee fee of $92,000 and $338,000 to FundingCo (note 11). At December 31, 2010, the outstanding guarantee fee payable of $31,000 was included in accounts payable and accrued liabilities.

11. Refinancing

Effective December 31, 2009, FPLP signed a credit agreement with HSBC to replace FPLP's $60,000,000 notes payable to Prudential, which was due on June 5, 2010. On January 8, 2010, the security documentation and funding was completed and the proceeds were used to repay the Prudential notes payable in full. The HSBC credit agreement consists of two loan facilities, each with a three-year term expiring on January 31, 2013: Facility A in the amount of $50,000,000 and Facility B in the amount of $10,000,000. Amounts borrowed under both facilities will primarily be in the form of bankers' acceptances at varying interest rates and will mature over periods of 30 to 180 days. The interest rate spread above the bankers' acceptance rate varies based on the leverage ratio, as defined in the agreement, and was 3.00% and 0.375% on Facilities A and B respectively at December 31, 2010. An interest rate swap facility is also available under the credit agreement. Facility A includes principal repayments of $5,000,000 annually (payable monthly) over each of the three years of the agreement. Both facilities are secured by a charge over all the assets of FPLP as well as a cash deposit of $10,000,000. In January 2010, FPLP made an initial cash deposit of $5,000,000 into a separate HSBC guarantee account (see note 9) with a second $5,000,000 guarantee account deposit made by FundingCo, a company controlled indirectly by Ronald Stern and Robert Silver who together indirectly control 51% of FPLP. FPLP and FundingCo have entered into a Credit Support Agreement and a Credit Support Fee Agreement outlining the terms of FundingCo's guarantee. Under the terms of the Credit Support Fee Agreement, FPLP is required to pay FundingCo a guarantee fee on the $5,000,000 account deposit calculated at 3.0% per annum over the rate charged by HSBC for Facility A. The financial covenants which are included in the agreement are detailed in note 7.

12. Commitments and contingencies

During the third quarter, FPLP entered into supplier agreements to upgrade certain equipment at the Winnipeg Free Press as part of the $2,200,000 project to consolidate FPLP's production operations. Deposits of $1,965,000, paid as of December 31, 2010, are included in Prepaid Expenses and Other Assets on FPLP's balance sheet. FPLP intends to enter into a capital lease agreement to finance this equipment once the projects are completed in the first quarter of 2011. Related to these equipment purchases, during the second quarter, FPLP entered into a $400,000 annual five-year agreement to purchase production supplies.

13. Subsequent event

On February 28, 2011, FPLP acquired substantially all of the assets and assumed certain liabilities of a commercial printing and weekly newspaper publishing business. The combined purchase price was $3,412,000 in cash and is subject to adjustment based on the determination of certain working capital amounts on the closing date.

14. Prior Year Comparatives

Certain prior year comparatives have been reclassified to reflect current year's presentation.

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