Transcontinental Inc.
TSX : TCL.B
TSX : TCL..A

Transcontinental Inc.

June 14, 2005 11:32 ET

Transcontinental Improves Earnings Before Unusual Items by 5% While Increasing Investments in its Future

MONTREAL, QUEBEC--(CCNMatthews - June 14, 2005) - Transcontinental Inc. (TSX:TCL.SV.A)(TSX:TCL.MV.B) - All amounts are expressed in Canadian dollars unless otherwise indicated.



- increase in revenue and operating income before depreciation,
amortization and unusual items due to acquisitions and to
organic growth in all three operating sectors
- 5% increase in earnings before unusual items, from $39 million
to $41 million or, on a per-common-share basis, from $0.44 to
$0.46
- implementation of several development and consolidation
projects for printing activities, resulting in unusual items,
most of which have already been announced, totalling
$5 million before taxes ($4 million after taxes), or $0.03
per share
- acquisition of the assets of U.S. direct marketer JDM, Inc.,
doubling Transcontinental's production capacity for direct
mail pieces in the United States
- signing of a 10-year contract, starting in the fall, to print
The New York Times for Ontario and Upstate New York
- solid financial position maintained to pursue growth in the
strategic niches identified by the Corporation, with a net
funded debt to total capitalization ratio of 33%


Thanks to the contribution from acquisitions, organic sales growth, efficiency improvements and cost reduction measures, Transcontinental Inc. today announced an increase in its operating results for the second quarter of fiscal 2005. These items more than offset the downward pressure on prices in some segments of the printing industry, the negative impact of the exchange rate, and the decrease in some categories of national advertising in newspapers and magazines.

"We had a good second quarter and we are especially proud that our three operating sectors contributed to organic growth in revenues and operating income before unusual items," said Luc Desjardins, president and chief executive officer of Transcontinental. "The acquisitions of Canadian magazine publisher Avid Media in 2004, and U.S. direct marketer JDM early in the second quarter of 2005, had a positive impact on operating results. Furthermore, our printing operations in Mexico are continuing their turnaround. We also want to highlight the excellent performance in our flyer and newspaper printing niches, as well as in our community newspaper publishing and advertising material distribution activities in Quebec.

"We also intensified our investments in the future, even though that meant adding to our costs in the short term," continued Mr. Desjardins. "Here I am referring to our special $53-million investment project to increase our competitive edge in the printing of books, catalogues and magazines; to the current integration of our direct marketing operations in the United States; to the consolidation of our book printing activities in Canada, which will result in the closure of our Peterborough plant and the transfer of its work primarily to Louiseville, east of Montreal, where we have started to build a larger and highly automated printing plant at a cost of $20 million; to the implementation of our pre-media vision, aimed at giving us a competitive advantage by offering our customers value-added services; to the investments in our newspaper and magazine brands, notably in Canadian Living and Coup de pouce; and, lastly, to the many sales-development and efficiency-improvement measures implemented under our Horizon 2005 business project."

Transcontinental's management maintains its earnings-per-share objective, excluding unusual items, at $1.74 to $1.82 for fiscal 2005, which represents growth of 2% to 6% over fiscal 2004. Year-to-date earnings-per-share growth is 7%, slightly above our annual objective. However, persistent pricing pressure in some segments of the printing industry, an increasingly negative foreign exchange impact compared to last year, and additional temporary costs related to the reorganization, integration and consolidation of plants will reduce the pace of growth in the second half of the year.

Financial Highlights

For the second quarter ended April 30, 2005, Transcontinental reported consolidated revenues of $558 million, up $38 million, or 7%, over revenues of $520 million in the same quarter in 2004, while operating income before depreciation, amortization and unusual items rose 2% to $97 million, compared to $95 million in 2004. This dual increase stems from acquisitions and organic growth, partially offset by the negative impact of exchange-rate fluctuations and downward pricing pressures.

Several unusual items were recorded during the quarter, totalling $5 million before taxes ($4 million after taxes), or $0.03 per share. In April, the Corporation announced that it was consolidating its book printing operations in Canada, planning to close its Peterborough plant by late October and transfer its production to other plants. This will result in a charge of $6 million before taxes related to the impairment of assets and termination benefits, of which $3 million, or $0.02 per share after taxes, was recorded during the quarter. Furthermore, in August 2004, the Corporation announced that it was consolidating its flyer printing activities in Winnipeg. Of the total charge of $4 million before taxes, $1 million was recorded in the second quarter. Note that in 2004, a restructuring charge of $3 million, or $0.02 per share after taxes, was recorded for workforce reductions. Lastly, the Corporation recorded $1 million before taxes for impairment of assets in Mexico. This equipment was no longer necessary as a result of the decision to shift the product mix to a greater proportion of magazine and catalogue work, which required the transfer of rebuilt equipment from Canada as part of the Corporation's revised manufacturing strategy.

Including these unusual items, net income decreased 4%, from $39 million in the second quarter of 2004, or $0.44 per share, to $38 million in 2005, or $0.43 per share. Excluding unusual items, net income on a per-common-share basis rose 5%, from $0.44 to $0.46.

For the first six months of fiscal 2005, Transcontinental's consolidated revenues grew to $1.075 billion compared to $980 million for the same period in 2004, an increase of $95 million, or 10%. Operating income before depreciation, amortization and unusual items increased to $176 million, up $7 million, or 4%, compared to $169 million reported in 2004. Excluding unusual items, net income rose 7%, from $66 million in 2004 to $70 million in 2005; on a per-common-share basis, it rose from $0.74 to $0.79. Including unusual items, net income increased 2%, up from $66 million to $67 million; on a per-common-share basis it went from $0.74 to $0.75.

Operating Highlights

The main operating highlights for the quarter are as follows:

- Transcontinental made its first breakthrough in the U.S. market with its unique outsourcing model for newspaper printing, signing a 10-year contract to print The New York Times for Ontario and Upstate New York. Winning this contract with one of the most prestigious daily papers in the world comes in the wake of the outstanding success of La Presse since Transcontinental started printing the Montreal daily two years ago. According to the Audit Bureau of Circulation, the North American reference in such matters, the circulation figures for La Presse between 2003 and 2005 grew more than those of any other major daily in Canada. Transcontinental has also started printing the daily Metro for the Ottawa market and part of the Toronto market. All these projects show the power of Transcontinental's outsourcing model and its significant potential for development.

- Direct marketing in the United States is another strategic development niche for the Corporation. On February 14, 2005, Transcontinental acquired the assets of JDM, Inc. This transaction increased the production capacity of its subsidiary, Transcontinental Direct U.S.A., to more than five billion direct mail pieces per year, while adding JDM's advanced production and control systems, logistics systems, leadership in high speed inkjet personalization technology and its strong management team. The five JDM facilities in Pennsylvania join Transcontinental's North American network of plants in the Philadelphia area, Los Angeles, Dallas/Ft. Worth, Toronto and Montreal. The addition of JDM's facilities poses, however, a challenge in the short term since it comes at a time when Transcontinental's direct marketing operations in the Philadelphia region are being consolidated. The additional and temporary expenses resulting from this process are required to improve efficiency over the long term. Once the integration is completed, Transcontinental will benefit fully from the previously identified synergies.

- The money spent on developing several of our media brands has already borne fruit, which bodes well for the future. The latest PMB survey identified Canadian Living and Coup de pouce as the top magazines in their categories in Canada, and noted the solid position of the magazine Canadian Home & Country, acquired from Avid Media in 2004. Also in the Media Sector, community newspapers and door-to-door distribution in Quebec had an excellent quarter and should continue to do well in the second half of the year.

Additional Information

Management's Discussion and Analysis for the second quarter of 2005, along with full financial statements, are posted on the home page of the Corporation's Web site at www.transcontinental.com.

Upon releasing its quarterly results, Transcontinental will hold a conference call with financial analysts today at 4:15 p.m. EDT. There will be a simultaneous audio broadcast on Transcontinental's website, which will be archived for 30 days.

Dividend Declared

At its June 14, 2005 meeting, the Corporation's Board of Directors voted a quarterly dividend of $0.055 per share on Class A Subordinate Voting Shares and Class B shares. These dividends are payable on July 28, 2005 to shareholders of record at the close of business on July 8, 2005.

Profile

Transcontinental Inc. is the seventh largest printer in North America and the fourth largest print media group in Canada. Transcontinental is Canada's leading printer in the flyer, book and newspaper niches, and a strong second in magazines, catalogues and other commercial products. Through its Canadian and U.S. direct marketing facilities, Transcontinental has the geographic platform and complete service offering needed to cover the entire North American market. Transcontinental is also Canada's leading publisher of consumer magazines, the country's second largest publisher of community newspapers, and a leader in the door-to-door distribution of advertising material. Transcontinental is a company whose values, including respect, innovation and integrity, are central to its operation.

Transcontinental's shares are listed on the Toronto Stock Exchange under the ticker symbols TCL.SV.A and TCL.MV.B. The company has more than 14,000 employees in Canada, the United States and Mexico, and reported revenues of C$2.05 billion (US$1.7 billion) in 2004.

Note: This news release may contain forward-looking statements. Such statements, based on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown. Actual future results may differ materially. The risks, uncertainties and other factors that could influence actual results are described in Management's Discussion and Analysis for the second quarter of 2005, the same document for the fiscal year ended October 31, 2004, as well as in the Annual Information Form. The forward-looking information in this release is based on information available as of June 14, 2005.



HIGHLIGHTS
unaudited

(in thousands of dollars, except per share data)

Three months Six months
ended ended
April 30 April 30
---------------------------------------------------------------------
2005 2004 Change 2005 2004 Change
(restated)(2) % (restated)(2) %
---------------------------------------------------------------------
Operations
Revenues $558,430 $520,461 7 $1,075,111 $980,228 10
Operating
income before
depreciation,
amortization,
impairment of
assets and
restructuring
costs 97,406 95,574 2 176,350 169,183 4
Operating
income 63,779 66,158 (4) 114,971 113,778 1
Income from
continuing
operations 37,830 39,191 (4) 66,889 65,659 2
Income (loss)
from
discontinued
operations - 26 - - (13) -
Net income 37,830 39,217 (4) 66,889 65,646 2
Income from
continuing
operations
before
impairment of
assets and
restructuring
costs 41,328 39,191 5 70,387 65,659 7
Cash flow from
continuing
operations
before changes
in non-cash
operating
items 74,043 71,655 3 134,119 132,655 1
---------------------------------------------------------------------

Investments
Acquisitions of
property,
plant and
equipment, net
amount 41,809 16,763 - 67,881 27,724 -
Business acqui-
sitions(1) 101,945 3,168 - 101,945 193,663 (47)
---------------------------------------------------------------------

Financial condition
Total assets 2,109,854 1,878,373 12
Net indebtedness 516,647 531,642 (3)
Shareholders' equity 1,049,289 934,555 12
Net indebtedness /Total capitalization 33% 36% (3)
---------------------------------------------------------------------

Per common share
data (basic)
Income from
continuing
operations $0.43 $0.44 (4) $0.75 $0.74 2
Income (loss)
from
discontinued
operations - - - - - -
Net income 0.43 0.44 (4) 0.75 0.74 2
Income from
continuing
operations
before
impairment of
assets and
restructuring
costs 0.46 0.44 5 0.79 0.74 7
Cash flow from
continuing
operations
before changes
in non-cash
operating
items 0.83 0.81 3 1.51 1.49 1
Dividends on
common shares 0.055 0.045 22 0.10 0.08 25
Common
shareholders'
equity 11.75 10.52 12
---------------------------------------------------------------------

Average number of
common shares
outstanding
('000) 88,998 88,715 88,991 88,752
---------------------------------------------------------------------

Number of common
shares at end
of period
('000) 89,267 88,823
---------------------------------------------------------------------


(1) Total consideration in cash or otherwise for businesses acquired
through the purchase of shares or assets.

(2) The restatement of 2004 is related to a change in an accounting
policy, which is described in Note 2 to the consolidated
financial statements.




CONSOLIDATED STATEMENTS OF INCOME
unaudited

(in thousands of dollars, except per share data)

Three months ended Six months ended
April 30 April 30
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------

Revenues $558,430 $520,461 $1,075,111 $980,228
Operating costs 401,002 366,553 781,957 705,274
Selling, general and
administrative expenses 60,022 58,334 116,804 105,771
--------------------------------------------------------------------

Operating income before
depreciation,
amortization, impairment
of assets and
restructuring costs 97,406 95,574 176,350 169,183
Depreciation and
amortization 28,558 29,416 56,310 55,405
Impairment of assets and
restructuring costs
(Note 3) 5,069 - 5,069 -
--------------------------------------------------------------------
Write-down of goodwill
(Note 4) - - - -

Operating income 63,779 66,158 114,971 113,778
Financial expenses 7,235 7,900 12,569 14,434
Other expenses (Note 5) 1,447 1,172 3,072 2,897

Share in income of company
subject to significant
influence - (7) - (7)
--------------------------------------------------------------------

Income from continuing
operations before
income taxes and
non-controlling
interest 55,097 57,093 99,330 96,454
Income taxes 17,267 17,902 31,616 29,873
--------------------------------------------------------------------

Income from continuing
operations before
non-controlling
interest 37,830 39,191 67,714 66,581
Non-controlling interest - - 825 922
--------------------------------------------------------------------
Income from continuing
operations 37,830 39,191 66,889 65,659
Income (loss) from
discontinued operations - 26 - (13)
--------------------------------------------------------------------
Net income $37,830 $39,217 $66,889 $65,646
--------------------------------------------------------------------
--------------------------------------------------------------------

Per common share (basic)
(Note 7)
Income from continuing
operations $0.43 $0.44 $0.75 $0.74
Income (loss) from
discontinued operations - - - -
Net income 0.43 0.44 0.75 0.74
--------------------------------------------------------------------
Per common share (diluted)
(Note 7)
Income from continuing
operations $0.42 $0.44 $0.75 $0.73
Income (loss) from
discontinued operations - - - -
Net income 0.42 0.44 0.75 0.73
--------------------------------------------------------------------

Average number of common
shares outstanding
('000) 88,998 88,715 88,991 88,752
--------------------------------------------------------------------


The notes are an integral part of the consolidated financial
statements.



CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
unaudited


Six months ended
(in thousands of dollars) April 30
--------------------------------------------------------------------
2005 2004
(restated)
--------------------------------------------------------------------

Balance, beginning of period, as
previously reported $585,855 $472,095
Asset Retirement Obligations (Note 2) (426) (426)
--------------------------------------------------------------------
Restated balance, beginning of period 585,429 471,669
Net income 66,889 65,646
--------------------------------------------------------------------
652,318 537,315

Dividends on common shares (8,912) (7,102)
--------------------------------------------------------------------
Balance, end of period $643,406 $530,213
--------------------------------------------------------------------
--------------------------------------------------------------------


The notes are an integral part of the consolidated financial
statements.



CONSOLIDATED BALANCE SHEETS



As at October 31
As at April 30 2004
(in thousands of dollars) 2005 (restated and
(unaudited) audited)
---------------------------------------------------------------------

Current assets
Cash and temporary investments $19,675 $139,855
Accounts receivable (Note 5) 225,477 151,134
Income taxes receivable 4,028 3,589
Inventories 81,738 87,976
Prepaid expenses and other
current assets 23,240 17,666
---------------------------------------------------------------------
354,158 400,220

Property, plant and equipment 711,014 665,762
Goodwill 831,601 749,258
Intangible assets 150,328 145,323
Future income tax assets 34,446 27,391
Other assets 28,307 26,165
---------------------------------------------------------------------
$2,109,854 $2,014,119
---------------------------------------------------------------------
---------------------------------------------------------------------

Current liabilities
Bank overdraft $2,060 $352
Accounts payable and accrued
liabilities 300,232 385,185
Income taxes payable 67,535 49,447
Deferred subscription revenues
and deposits 51,760 46,706
Current portion of long-term
debt (Note 6) 11,085 11,628
---------------------------------------------------------------------
432,672 493,318

Long-term debt (Note 6) 523,177 444,695
Future income tax liabilities 82,427 73,455
Other liabilities 21,539 21,532
---------------------------------------------------------------------
1,059,815 1,033,000
---------------------------------------------------------------------

Non-controlling interest 750 1,195
---------------------------------------------------------------------

Shareholders' equity
Capital stock 420,968 416,103
Contributed surplus 4,335 3,809
Foreign currency translation
adjustment (19,420) (25,417)
Retained earnings 643,406 585,429
---------------------------------------------------------------------
1,049,289 979,924
---------------------------------------------------------------------
$2,109,854 $2,014,119
---------------------------------------------------------------------
---------------------------------------------------------------------


The notes are an integral part of the consolidated financial
statements.



CONSOLIDATED STATEMENTS OF CASH FLOWS
unaudited

(in thousands of dollars)

Three months ended Six months ended
April 30 April 30
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------

Operating activities
Income from continuing
operations $37,830 $39,191 $66,889 $65,659
Items not affecting
cash and cash
equivalents
Depreciation and
amortization 30,153 30,831 59,690 58,334
Impairment of assets
and restructuring
costs (Note 3) 4,387 - 4,387 -
Write-down of goodwill
(Note 4) - - - -
(Gain) loss on disposal
of assets (1,648) 47 (1,678) (43)
Future income taxes 3,408 969 3,315 6,260
Share in income of
company subject to
significant influence - (7) - (7)
Non-controlling interest - - 825 922
Unrealized foreign
exchange (gain) loss
on long-term monetary
items (527) 288 (202) 984
Other 440 336 893 546
---------------------------------------------------------------------
Cash flow from continuing
operations before
changes in non-cash
operating items 74,043 71,655 134,119 132,655
Changes in non-cash
operating items (63,712) (14,933) (148,450) (86,484)
---------------------------------------------------------------------
Cash flow from (used
in) continuing
operations 10,331 56,722 (14,331) 46,171
---------------------------------------------------------------------

Investing activities
Business acquisitions
(Note 8) (101,945) (3,168) (101,945) (191,562)
Business disposals
(Note 8) 1,709 - 1,709 -
Acquisitions of
property, plant and
equipment (41,619) (16,872) (68,647) (29,886)
Disposals of property,
plant and equipment 1,376 109 2,580 2,162
Other (3,291) (3,131) (7,335) (5,606)
---------------------------------------------------------------------
(143,770) (23,062) (173,638) (224,892)
---------------------------------------------------------------------

Financing activities
Increase in
long-term debt 59,431 4,353 59,431 4,353
Reimbursement of
long-term debt (1,911) (2,944) (3,839) (19,915)
Increase in
(reimbursement of)
revolving term credit
facility 12,000 (21,073) 12,000 121,762
Settlement of a
financial instrument - - - -
Dividends on
common shares (4,908) (3,997) (8,912) (7,102)
Issuance of common
shares 2,770 350 4,554 1,647
Other - - (825) (922)
---------------------------------------------------------------------
67,382 (23,311) 62,409 99,823
---------------------------------------------------------------------

Effect of exchange rate
changes on foreign cash
and cash equivalents 2,263 189 3,672 859
---------------------------------------------------------------------

Cash and cash equivalents
(used in) provided by
continuing operations (63,794) 10,538 (121,888) (78,039)
Cash and cash equivalents
provided by discontinued
operations - 90 - 37
---------------------------------------------------------------------
(Decrease) increase in
cash and cash
equivalents (63,794) 10,628 (121,888) (78,002)
Cash and cash
equivalents at
beginning of period 81,409 686 139,503 89,316
---------------------------------------------------------------------
Cash and cash equivalents
at end of period $17,615 $11,314 $17,615 $11,314
---------------------------------------------------------------------
---------------------------------------------------------------------

---------------------------------------------------------------------
Additional information
Interest paid $646 $1,441 $12,300 $14,416
Income taxes paid 7,330 6,622 11,187 9,498
---------------------------------------------------------------------
---------------------------------------------------------------------

The notes are an integral part of the consolidated financial
statements.



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
unaudited
For the three-month and six-month periods ended April 30
---------------------------------------------------------------------



1. Significant accounting policies

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, using the same accounting policies as outlined in Note 1 to the consolidated financial statements for the year ended October 31, 2004, except for the changes in accounting policies as indicated in Note 2. The operating results for the interim periods are not necessarily indicative of full-year results due to the seasonality of certain operations of the Corporation.

2. Changes in accounting policies

Asset Retirement Obligations

In 2003, the Canadian Institute of Chartered Accountants (CICA) issued Section 3110 of the CICA Handbook, Asset Retirement Obligations, which applies to fiscal years beginning on or after January 1, 2004. On November 1, 2004, the Corporation adopted these recommendations retroactively with restatement of prior periods. In accordance with these recommendations, a liability must be recorded at fair value in the period in which a legal obligation associated to the retirement of an asset is incurred. The obligation is initially measured at fair value using an expected present value technique and is subsequently adjusted for any changes resulting from the passage of time and any changes to the timing or the amount of the original estimate. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized as part of the carrying amount of the related asset by the same amount as the liability and is amortized into income over its remaining useful life.

Asset retirement obligations in connection with the adoption of Section 3110 were linked to removal obligations on certain buildings. The adoption of Section 3110 has decreased the opening retained earnings for fiscal 2005 and 2004 by $0.4 million and increased property, plant and equipment, future income tax assets and other liabilities as at November 1, 2004 and 2003 by $0.5 million, $0.2 million and $1.1 million, respectively.

The impact on the consolidated statements of income for the three-month and six-month periods ended April 30, 2005 and 2004 was negligible.

Consolidation of Variable Interest Entities

In 2003, the CICA issued Accounting Guideline 15 (AcG-15), Consolidation of Variable Interest Entities, which applies to fiscal years and interim periods beginning on or after November 1, 2004 and provides guidance on the application of the standards set out in CICA Handbook Section 1590, Subsidiaries, for certain entities defined as variable interest entities (VIEs). VIEs are entities in which equity investors do not have controlling financial interest or the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties. AcG-15 requires the consolidation of a VIE by its primary beneficiary, i.e., the party that receives the majority of the expected residual returns and/or absorbs the majority of the entity's expected losses. The application of this Guideline has no impact on the consolidated financial statements.

3. Impairment of assets and restructuring costs

During the second quarter, the Corporation reviewed its manufacturing strategy for the Mexico operations in the Information Products Printing sector. Certain equipment no longer necessary in the ongoing operations of the Corporation were identified. An impairment of $1.2 million was charged to income for the three-month and six-month periods ended April 30, 2005.

On April 5, 2005, the Corporation announced the consolidation of certain book printing operations in the Information Products Printing sector which will result in an impairment of assets and total restructuring costs of $6.1 million. Certain equipment no longer necessary in the ongoing operations of the Corporation were identified as part of this consolidation and an impairment of $2.3 million was charged to income for the three-month and six-month periods ended April 30, 2005. In addition, total restructuring costs expected over the twelve-month period following the announcement are $3.8 million, of which $1.2 million are for workforce reductions and $2.6 million for the transfer of printing equipment and other costs. Amounts of $0.5 million and $0.2 million for contractual termination benefits and for special termination benefits, respectively, were charged to income for the three-month and six-month periods ended April 30, 2005. No amount has been paid as at April 30, 2005.

On November 16, 2004, the Corporation announced a major investment project to purchase equipment in the Information Products Printing and Marketing Products Printing sectors. As part of the review of the manufacturing strategy which resulted in this investment project, certain equipment no longer necessary in the ongoing operations of the Corporation were identified. The resulting expense charged to income for fiscal 2004 was $7.5 million, of which $4.9 million and $1.9 million represent asset impairment in the Information Products Printing and Marketing Products Printing sectors, respectively, and $0.3 million and $0.4 million represent contractual termination benefits in the Information Products Printing and Marketing Products Printing sectors, respectively. No amounts have been paid as at April 30, 2005.

On August 19, 2004, the Corporation announced the consolidation of its Winnipeg printing operations in the Marketing Products Printing sector. Total restructuring costs expected over the period of twelve months following the announcement are $4 million, of which $2.7 million are for workforce reductions and $1.3 million for the transfer of printing equipment and other costs. An amount of $2.7 million for contractual termination benefits was charged to income for fiscal 2004 of which $1.8 million has been paid as at April 30, 2005. An amount of $0.9 million for the transfer of printing equipment and other costs was charged to income for the three-month and six-month periods ended April 30, 2005 of which $0.7 million has been paid as at April 30, 2005.

4. Employee benefits

Pension plans

The Corporation offers various contributory and non-contributory defined benefit pension plans and defined contribution pension plans to its employees and those of its participating subsidiaries. The cost related to those plans is as follows:



(in thousands of dollars) Three months ended Six months ended
April 30 April 30
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------

Pension plans
Defined benefit
pension plans $4,856 $3,893 $8,687 $7,757
Defined contribution
pension plans 503 386 812 458
---------------------------------------------------------------------
$5,359 $4,279 $9,499 $8,215
---------------------------------------------------------------------
---------------------------------------------------------------------


Share unit plan

On January 18, 2005, the Corporation established a share unit plan for certain senior executives. Currently, the President and Chief Executive Officer is the only participant in this plan. Under this plan, a portion of their annual incentive compensation is received in the form of units. The share units are granted under the form of deferred share units (DSU) or restricted share units (RSU). The number of units that can vest is usually dependant on the Corporation's relative financial performance versus the median of the comparator group of companies over a three year period. A DSU is paid to an executive upon termination of employment and a RSU may be paid on or after the vesting date which is usually three years after the grant date. Vested DSUs and RSUs will be paid, at the Corporation's option, in cash or with Class A Subordinate Voting Shares of the Corporation purchased on the open market. The compensation cost of the DSUs and RSUs of the Corporation is recognized over the vesting period and is re-measured at fair market value at each reporting period, until settlement (in the case of DSUs) or until the vesting date (in the case of RSUs), using the trading price of the Corporation's Class A Subordinate Voting Share. As at April 30, 2005, 17,197 DSUs were outstanding. The impact on the consolidated statements of income for the three-month and six-month periods ended April 30, 2005 was negligible and there was no amount paid as at April 30, 2005.

5. Accounts receivable

As at April 30, 2005, $280 million of accounts receivable, including C$196 million and US$70 million, ($282 million as at October 31, 2004) had been sold under the accounts receivable securitization program, of which $89 million ($37 million as at October 31, 2004) were kept by the Corporation as retained interest, resulting in a net consideration of $191 million, including C$100 million and US$76 million ($245 million as at October 31, 2004). As at April 30, 2005, the maximum net consideration the Corporation could have obtained in accordance with the program terms and conditions was $242 million ($245 million as at October 31, 2004). The retained interest is recorded in the Corporation's accounts receivable at the lower of cost and fair market value. Under the program, the Corporation recognized an aggregate discount on sales of receivables of $1.4 million and $3.1 million, respectively, for the three-month and six-month periods ended April 30, 2005 ($1.2 million and 2.9 million, respectively, for the same periods in 2004), which is included in "Other expenses" in the consolidated statements of income.

6. Long-term debt

On March 1, 2005, the Corporation received US$47.5 million, the second and final portion of US$100 million of Unsecured Senior Notes issued to a group of investors through a private placement in the United States on October 27, 2004.

7. Capital stock

Stock option plan

On January 18, 2005, the Corporation modified its stock option plan for the benefit of certain of its officers and senior executives. The number of Class A Subordinate Voting shares authorized for issuance was increased by 3 million, and all options granted after March 30, 2005 will start to vest after one year of their granting at a rate of 25 % per year, and must be exercised no later than seven years after the grant date.

As at April 30, 2005, 1,896,188 stock options had been granted, of which, 560,588 could be exercised.

There were no stock options granted for the three-month periods ended April 30, 2005 and 2004. For the six-month periods ended April 30, 2005 and 2004, 404,800 and 383,800 stock options were granted with a weighted average exercise price of $22.41 and $22.02, respectively.

The table below summarizes the assumptions used to calculate the fair value of options granted on the date of the grant using the Black-Scholes model for the six-month periods ended April 30 :



2005 2004
---------------------------------------------------------------------

Weighted average fair value of options $9.11 $9.23

Assumptions:
---------------------------------------------------------------------
Dividend rate 0.8% 0.8%
Expected volatility 30.0% 30.0%
Risk-free interest rate 3.92% 4.39%
Expected life 7 years 7 years


The stock-based compensation cost of $0.3 million ($0.00 per share) and $0.3 million ($0.00 per share) were charged to income for the three-month periods ended April 30, 2005 and 2004, respectively. For the six-month periods ended April 30, 2005 and 2004, $0.8 million ($0.01 per share) and $0.5 million ($0.00 per share) were charged to income, respectively.

When officers and senior executives exercise their stock options, the amounts received from them are credited to capital stock. For stock options granted since November 1, 2002, the amount previously accounted for as an increase to contributed surplus, is also transferred to capital stock. For the three-month and six-month periods ended April 30, 2005, the amount received was $2.8 million and $4.6 million, respectively, and nil and $0.3 million, respectively, were transferred from contributed surplus to capital stock. For the three-month and six-month periods ended April 30, 2004, the amount received was $0.3 million and $1.6 million and no amount was transferred from contributed surplus to capital stock.

Earnings per share

The table below shows the calculation of basic and diluted earnings per share from continuing operations:



(in thousands of dollars, except per share data)

Three months Six months
ended ended
April 30 April 30
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------

Numerator
Income from continuing
operations $37,830 $39,191 $66,889 $65,659
--------------------------------------------------------------------
Denominator (in thousands)
Weighted average number
of shares 88,998 88,715 88,991 88,752
Dilutive effect of stock
options and warrants 562 759 496 692
--------------------------------------------------------------------
Weighted average diluted
number of shares 89,560 89,474 89,487 89,444

--------------------------------------------------------------------
--------------------------------------------------------------------
Basic earnings per common
share from continuing
operations $0.43 $0.44 $0.75 $0.74
--------------------------------------------------------------------
--------------------------------------------------------------------
Diluted earnings per common
share from continuing
operations $0.42 $0.44 $0.75 $0.73
--------------------------------------------------------------------
--------------------------------------------------------------------


No options and no warrants were considered to be anti-dilutive in the calculation of the diluted earnings per share for the three-month periods ended April 30, 2005 and 2004 and January 31, 2005 and 2004.

8. Business disposal and acquisition

On April 15, 2005, the Corporation sold its 51 % interest in Infinet Communications Inc., in the Marketing Products Printing sector, for a net consideration of $1.7 million.

On February 14, 2005, the Corporation completed the acquisition of the assets of JDM, Inc., a direct marketing company operating in the United States, in the Marketing Products Printing sector.

This transaction is summarized as follows:



--------------------------------------------------------------------
Assets acquired
Working capital $2,482
Property, plant and equipment 23,831
Goodwill 78,148
Amortizable intangible assets 6,048
Future income tax assets 1,475
--------------------------------------------------------------------
$111,984
--------------------------------------------------------------------
--------------------------------------------------------------------
Consideration
Net cash paid $101,945
Balance of sale payable of which $5 million bears
interest at 5 % 5,701
Short-term liabilities 4,338
--------------------------------------------------------------------
$111,984
--------------------------------------------------------------------
--------------------------------------------------------------------


The purchase price allocation is preliminary and is subject to changes once the final valuation of the assets acquired is completed and the final determination of the costs related to the acquisition has been made.

9. Segmented information

Sales between sectors of the Corporation are made at market conditions. Transactions, other than sales, are made at exchange amounts.



(in thousands of dollars)

Three months Six months
ended ended
April 30 April 30
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------
Revenues
Information Products
Printing $189,679 $185,943 $368,863 $350,462
Marketing Products
Printing 252,398 226,317 486,685 425,078
Media 143,470 134,059 273,136 251,425
Other activities and
unallocated amounts 1,621 1,559 3,258 2,807
Inter-segment sales (28,738) (27,417) (56,831) (49,544)
--------------------------------------------------------------------
$558,430 $520,461 $1,075,111 $980,228
--------------------------------------------------------------------
--------------------------------------------------------------------

Operating income before
depreciation,
amortization, impairment
of assets and
restructuring costs
Information Products
Printing $40,171 $39,933 $73,284 $70,049
Marketing Products
Printing 33,084 32,336 61,507 57,156
Media 27,157 25,429 47,673 45,254
Other activities and
unallocated amounts (3,006) (2,124) (6,114) (3,276)
--------------------------------------------------------------------
$97,406 $95,574 $176,350 $169,183
--------------------------------------------------------------------
--------------------------------------------------------------------
Operating income
Information Products
Printing $24,863 $27,982 $46,469 $47,297
Marketing Products
Printing 18,269 18,480 33,990 31,642
Media 24,622 23,098 42,616 40,747
Other activities and
unallocated amounts (3,975) (3,402) (8,104) (5,908)
--------------------------------------------------------------------
$63,779 $66,158 $114,971 $113,778
--------------------------------------------------------------------
--------------------------------------------------------------------
Acquisitions of property,
plant and equipment
Information Products
Printing $20,754 $5,551 $33,308 $11,967
Marketing Products
Printing 18,630 9,196 29,331 14,316
Media 2,615 1,957 4,741 2,899
Other activities and
unallocated amounts 1,186 168 3,081 704
--------------------------------------------------------------------
$43,185(1) $16,872 $70,461(1) $29,886
--------------------------------------------------------------------
--------------------------------------------------------------------

(1) These amounts include acquisitions of machinery and equipment
under capital leases of $1,566 and $1,814, respectively, for
the three-month and six-month periods ended April 30, 2005.


As at April 30 As at October 31
2005 2004
(restated and
audited)
--------------------------------------------------------------------
Assets
Information Products Printing $589,156 $544,933
Marketing Products Printing 755,889 639,003
Media 633,158 628,067
Other activities and
unallocated amounts 131,651 202,116
--------------------------------------------------------------------
$2,109,854 $2,014,119
--------------------------------------------------------------------
--------------------------------------------------------------------
Goodwill
Information Products Printing $129,488 $130,256
Marketing Products Printing 280,255 197,333
Media 420,806 420,806
Other activities and
unallocated amounts 1,052 863
--------------------------------------------------------------------
$831,601 $749,258
--------------------------------------------------------------------
--------------------------------------------------------------------


10. Comparative figures

Certain prior period figures have been reclassified to conform with the current period presentation.

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