Transat A.T. Inc. Results for Fiscal 2005 Year marked by surge in fuel prices, Return to profitability in Europe

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1 NEWS RELEASE TSX: TRZ.B; TRZ.RV.A Transat A.T. Inc. Results for Fiscal 2005 Year marked by surge in fuel prices, Return to profitability in Europe Revenues of $2.4 billion, up 7.5% over Margin 1 of $120.6 million, compared with $163.8 million in Net income of $54.5 million, or $1.31 per share (fully diluted) before a reversal of $0.9 million of restructuring charges, compared with $83.7 million, or $2.04 per share (fully diluted) excluding $11.4 million in restructuring charges in Cash and cash equivalents in the amount of $293.5 million, compared with $310.9 million in Montreal, December 13, 2005 Transat A.T. Inc., one of the largest holiday travel companies in the world and the leader in Canada, recorded revenues of $2,364.5 million for the year ended October 31, 2005, compared with $2,199.8 million in 2004, a 7.5% increase. The Corporation recorded a margin of $120.6 million, down 26.3% from $163.8 million in Excluding the effect of restructuring charges, a gain on the disposal of the Corporation's equity interest in Star Airlines and a gain on foreign exchange following the adoption of a new Accounting Guideline requiring for the consolidation of certain financial transactions, net income was $46.8 million ($1.14 per share on a fully diluted basis) in 2005, compared with $83.7 million ($2.04 per share on a fully diluted basis) in Travellers did show up in The year was marked by a surge in fuel prices and intensified competition, especially on Canada-U.K. routes, which negatively impacted margins. That said, we are satisfied with our overall performance. Our European operations have returned to profitability, and we continue to expect Look Voyages to be profitable in the second half of 2006, said Jean-Marc Eustache, President and Chief Executive Officer of Transat A.T. Inc. At year-end, the Corporation had $293.5 million in cash and cash equivalents compared with $310.9 million as at October 31, Working capital was $225.8 million compared with $204.3 million as at October 31, Total debt 2 levels as of October 31, 2005 decreased by $87.0 million compared with October 31, 2004, to reach $449.8 million. When deduction is made of cash and cash equivalents that are not in trust or otherwise reserved from total debt, the net debt 3 drops 30.8% from $225.9 million on October 31, 2004 to $156.3 million on October 31, Highlights of 2005 The overall increase in revenues is the result of a 13.3% increase in revenues from North America, offset in part by an 11.1% reduction of revenues from the Corporation's European operations. An 8.6% year-over-year increase in the number of travellers is the main factor behind the increase in revenues: it stems from an 11.6% increase in the number of travellers in North America, offset in part by a 7.9% decrease in Europe. The decrease in revenues in Europe was 1

2 amplified by the strength of the Canadian dollar versus the euro, as well as by Transat having phased out its air-only operations at Look Voyages in the course of Fiscal 2005 was marked by the surge in fuel prices and the impact of intensified competition on Canada/United Kingdom routes. The combination of pricing pressures and increased fuel prices compressed margins. In Europe, cost reduction efforts at Look Voyages continue and are successful. The Corporation's objective of reducing the loss of Look Voyages by half in 2005 was surpassed. North America In North America, revenues increased 11.9% in the 2005 winter season compared with 2004, largely due to a 14.9% increase in the number of travellers, offset in part by pricing pressures stemming from intense competition. Demand was strong for destinations to the Caribbean, and relatively stable to Florida. During the summer season, revenues increased 15.4%, mainly due to a 10.3% increase in the number of travellers and a solid performance by incoming tour operator Jonview Canada. Demand for European destinations, especially Greece, Italy and the United Kingdom, for which capacity had been increased, was strong. Higher prices also contributed to the increases. Europe In Europe, both revenues and expenses decreased during the 2005 winter season compared with The decrease in revenues is mainly due to a decrease in the number of air-only passengers, in the wake of Transat s decision to have Look Voyages abandon the air-only market segment. Competitive pressures have also negatively impacted sales volumes for long-haul travel from Europe to the Caribbean when compared to 2004 (packages). In Europe, restructuring efforts initiated in 2003 and acquisitions are generating results. Despite lower revenues during the summer, margins were positive, thanks to lower losses at Look Voyages and the good performance of Transat s other European subsidiaries. However, the weakness of the euro versus the Canadian dollar (year over year) negatively impacted the profitability of European operations. The number of travellers was down 2.4% compared with the summer of 2004, mainly due to weaker volumes on long-haul routes to the Caribbean. Moreover: In November 2004, Transat acquired 70% of the operations of Air Consultants Europe at a cost of one million euros. This Dutch company has been Air Transat s sole commercial representative in Germany and the Netherlands since 1991, as well as in Belgium. In January 2005, the Corporation redeemed debentures in the amount of $21.9 million. Theses debentures had a maturity date of January 2009 and were redeemable in advance as of January In April 2005, Transat completed the redemption of all its 9% Convertible Unsecured Subordinated Debentures pursuant to the notice of redemption given to the debenture holders on March 24, Following the notice of redemption, the Corporation issued 5,755,198 shares as a result of the conversion of debentures. 2

3 In May, 2005, Transat acquired a 50.1% interest in Travel Superstores Inc. for a cash consideration of $4.5 million. Travel Superstores Inc. is based in Hamilton, Ontario and operates 10 travel agencies and a travel website under the tripcentral.ca name. In June 2005, Transat entered into an agreement that has resulted in the sale of its 44.27% participation in Star Airlines for 4.5 million euros. The transaction has resulted in a $5.7 million gain on disposal. In June 2005, Transat acquired 100% of the shares of Bennett Voyages, a French outgoing tour operator, for 1.8 million euros in cash. In October 2005, the Corporation acquired the assets of Turissimo Caribe & Excursiones C. Por A., a Dominican Republic-based incoming tour operator, for US$1.3 million in cash. In October 2005, the Corporation's Board of Directors approved a 3-year strategic plan that focuses on growth and aims at capitalizing on Transat's leadership position. Fourth Quarter Highlights For the fourth quarter, the Corporation posted revenues of $493.9 million, up $26.6 million or 5.7% from $467.3 million for the corresponding period of The increase is mainly attributable to increased business activity in North America and acquisitions made since 2004, offset in part by pricing pressures in the Ontario and United Kingdom markets, as well as a weaker euro. In the quarter, the Corporation recorded a margin of $23.4 million, or 4.7%, compared with $39.4 million, or 8.4%, in Higher operating expenses are due to the significant increase in fuel prices, combined with increased business activity. Net income in the fourth quarter was $18.0 million, or $0.44 per share on a fully diluted basis ($9.1 million, or $0.22 per share excluding the after-tax impact of the reversal of certain restructuring charges, the gain on disposal resulting from the sale of Transat's equity interest in Star Airlines and the foreign exchange gain resulting from the application of a new Accounting Guideline requiring for the consolidation of certain financial transactions), compared with $11.3 million, or $0.27 per share on a fully diluted basis ($22.7 million, or $0.54 per share on a fully diluted basis, excluding the after-tax impact of the restructuring charge) in Recent developments On November 14, 2005, Transat announced an offer to repurchase for cancellation up to $125 million of its Class A Variable Voting Shares and Class B Voting Shares, at a purchase price of not less than $17.50 per share and not more than $20.00 per share. This represents up to 7,142,857 of these shares or 18% of the Corporation s 40,156,450 total issued and outstanding Class A Variable Voting Shares and Class B Voting Shares. The offer expires on December 22, 2005, unless withdrawn or extended by the Corporation. On December 1 st, 2005, the Corporation completed the acquisition of the assets of 20 Carlson Wagonlit Travel (CWT) agencies in France, for a cash consideration of 2.9 million euros. 3

4 Appointments In May 2005, François Laurin was appointed Vice-President, Finance and Administration and Chief Financial Officer. Nelson Gentiletti, who was named Executive Vice-President of Transat Tours Canada in August 2004, had performed both functions until then. Outlook Over the next three years, Transat will focus mainly on growth both organic and from acquisitions, on improving margins, and on entering new markets. The Corporation expects to invest $300 million over three years to execute its development plan. In North America, bookings are down when compared to last year, due in part to the actual perceived of impact of hurricane Wilma on the Cancun area. The Corporation expects compressed margins, mainly due to fuel prices and the anticipated excess supply stemming from increased capacity, especially in Ontario. In Europe, reservations for the winter season are slightly higher than last year Overall, Transat expects reduced margins in the first half of 2006, compared with Transat A.T. Inc. with its head office in Montreal is an integrated company specializing in the organization, marketing, and distribution of holiday travel. The core of its business consists of tour operators in Canada and France. Transat is also involved in air transportation, value-added services at travel destinations, as well as in distribution through travel agency networks. Transat is listed on the Toronto Stock Exchange (TSX:TRZ.B, TRZ.RV.A). Non-GAAP measures Transat prepares its financial statements in accordance with Canadian generally accepted accounting principles ( GAAP ). We will occasionally refer to non-gaap financial measures in the news release. These non-gaap financial measures do not have any meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. They are furnished to provide additional information and should not be considered as a substitute for measures of performance prepared in accordance with GAAP. 1 Revenues less operating expenses (non-gaap financial measure used by management as an indicator to evaluate ongoing and recurring operational performance). 2 Debt plus off-balance sheet arrangements (non-gaap financial measure used by management to assess the Corporation s future liquidity requirements). 3 Total debt less cash and cash equivalents not in trust or otherwise reserved (non-gaap financial measure used by management to assess its liquidity position). 4

5 Forward-looking statements This news release contains certain forward-looking statements with respect to the Corporation. These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by these forwardlooking statements. The Corporation considers the assumptions on which these forward-looking statements are based to be reasonable, but cautions the reader that these assumptions regarding future events, many of which are beyond its control, may ultimately prove to be incorrect since they are subject to risks and uncertainties that affect the Corporation. For additional information with respect to these and other factors, see the Annual Information Form and Annual Report (Management Discussion and Analysis) filed with Canadian securities commissions. The Corporation disclaims any intention or obligation to publicly update or revise any forwardlooking statements, whether as a result of new information, future events or otherwise. 30 For further information: Investors and Financial Analysts: François Laurin, Vice-President, Finance and Administration and Chief Financial Officer, Transat A.T. Inc., (514) , ext. 4029; Media: Sophie Lussier, Corporate Director, Communications, Transat A.T. Inc., (514) , ext

6 TRANSAT A.T. INC. CONSOLIDATED BALANCE SHEETS (in thousands of dollars) As at October 31, As at October 31, (Unaudited) (Unaudited) [restated note 2] $ $ ASSETS Current assets Cash and cash equivalents 293, ,875 Cash in trust or otherwise reserved [note 3] 182, ,678 Accounts receivable 69,611 72,745 Future income tax assets Inventories 7,524 4,053 Prepaid expenses 40,576 39,729 Current portion of deposits 29,259 28,830 Total current assets 622, ,496 Deposits 24,127 22,111 Future income tax assets 5,106 10,656 Property, plant and equipment [note 2] 195,131 93,128 Goodwill 93,741 86,966 Other assets 8,629 11, , ,389 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities 193, ,337 Income taxes payable 4,763 29,455 Customer deposits and deferred income 182, ,396 Debentures [note 4] 10,000 20,058 Current portion of obligations under capital leases 6,199 Total current liabilities 396, ,246 Obligations under capital leases [note 2] 87,414 Debentures [note 2] 3,156 13,156 Provision for engine and airframe overhaul in excess of deposits 63,809 62,818 Non-controlling interest and other liabilities 30,833 24,036 Future income tax liabilities 5,051 17, , ,283 Shareholders' equity Share capital [note 5] 179, ,306 Convertible debentures [note 6] 51,092 Retained earnings [note 2] 183, ,322 Contributed surplus Warrants 1,187 3,994 Deferred translation adjustments (2,591) , ,106 See accompanying notes to consolidated interim financial statements. 949, ,389 6

7 TRANSAT A.T. INC CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars, except per share amounts) (Unaudited) Three (3) months ended October 31 Year ended October [restated note 2] [restated note 2] $ $ $ $ Revenues 493, ,280 2,364,481 2,199,822 Operating expenses Direct costs 208, ,770 1,168,612 1,075,861 Salaries and employee benefits 62,687 60, , ,626 Aircraft fuel 61,586 39, , ,112 Commissions 21,075 29, , ,873 Aircraft maintenance 20,714 16,532 91,778 88,684 Airport and navigation fees 20,151 16,758 67,937 59,379 Aircraft rent 11,813 15,649 52,064 59,640 Other 64,250 55, , , , ,931 2,243,850 2,036,067 23,380 39, , ,755 Amortization 9,733 7,466 37,558 33,027 Restructuring charge (note 8) (934) 11,350 (934) 11,350 Interest on long-term debt, obligations under capital leases and debentures 2,112 1,825 10,815 7,712 Other interest and financial expenses ,708 1,907 Interest income (3,198) (2,930) (12,963) (11,307) Foreign exchange loss (gain) on long-term monetary items (2,768) 1,335 (2,309) 1,474 Gain on disposal of investment (5,747) (5,747) Share of net (income) loss of companies subject to significant influence (3) 58 (461) 1,509 (476) 19,280 27,667 45,672 Income before the following items 23,856 20,069 92, ,083 Income taxes (recovery of) Current 25,429 9,771 48,705 34,057 Future (20,217) (1,567) (12,403) 10,953 5,212 8,204 36,302 45,010 Income before non-controlling interest in subsidiaries results 18,644 11,865 56,662 73,073 Non-controlling interest in subsidiaries results (622) (527) (1,246) (753) Net Income for the period 18,022 11,338 55,416 72,320 Basic earnings per share Diluted earnings per share See accompanying notes to consolidated interim financial statements. 7

8 TRANSAT A.T. INC CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (in thousands of dollars) (Unaudited) Year ended October [restated note 2] $ $ Retained earnings, beginning of year as previously reported 135,322 70,336 Change in accounting policy [note 2] 12,151 Restated retained earnings, beginning of year 147,473 70,336 Net income for the year 55,416 72,320 Premium paid on redemption of shares (17,731) (4,161) Interest on equity component of debentures net of related income taxes of $648 [$1,446 in 2004] (1,440) (3,173) Retained earnings, end of year 183, ,322 8

9 TRANSAT A.T. INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (Unaudited) Three (3) months ended October 31 Year ended October [restated note 2] [restated note 2] $ $ $ $ OPERATING ACTIVITIES Net income for the period 18,022 11,338 55,416 72,320 Items not involving an outlay (receipt) of cash Amortization 9,733 7,466 37,558 33,027 Write-off of property, plant equipment and other assets [note 8] 3,031 3,031 Foreign exchange loss (gain) on long term monetary items (2,768) 1,335 (2,309) 1,474 Share of net (income) loss of companies subject to significant influence (3) 58 (461) 1,509 Non-controlling interest in subsidiaries results , Future income taxes (20,217) (1,567) (12,403) 10,953 Gain on disposal of investment (5,747) (5,747) Interest on debentures [note 4] 208 1, Compensation expense related to stock option plan Operating cash flow (185) 22,476 75, ,039 Net change in non-cash working capital balances related to operations (14,299) (32,760) (12,820) 41,991 Net change in deposits, expenses and provision for engine and airframe overhaul (3,062) (306) ,070 Cash flows relating to operating activities (17,546) (10,590) 63, ,100 INVESTING ACTIVITIES Increase in deposits (3,648) (4,221) (11,069) (12,720) Additions to property, plant and equipment (2,236) (6,390) (27,213) (20,902) Disposal of property, plant and equipment 5,001 Net change in other assets 357 3,337 (1,254) 3,143 Repayment of deposits 4,220 8,601 4,264 Disposal of investment 6,900 6,900 Cash and cash equivalents from acquired company [note 7] 9,637 5,905 Consideration paid for acquired company [note 7] (1,658) (9,203) (12,660) Cash flows relating to investing activities 3,935 (7,274) (18,600) (32,970) FINANCING ACTIVITIES Repayment of other long-term debt and obligations under capital leases (317) (203) (6,766) (36,172) Interest paid on convertible debentures (2,300) (2,868) (4,600) Proceeds from issue of shares 400 3,508 9,988 9,718 Redemption of shares (9,940) (4,871) (22,545) (4,961) Proceeds from issue of a debenture 3,156 Repayment of debentures [notes 4 and 6] (2,500) (21,900) (2,500) Net change in other liabilities 987 1,807 6,116 2,657 Cash flows relating to financing activities (8,870) (4,559) (37,975) (32,702) Net change in cash and cash equivalents for the period (22,481) (22,423) 7, ,428 Cash and cash equivalents, beginning of period 498, , , ,125 Cash and cash equivalents, end of period 475, , , ,553 See accompanying notes to consolidated interim financial statements. 9

10 Notes to Consolidated Interim Financial Statements [The amounts are expressed in thousands, except for common shares, stock options, warrants and amounts per option or per share] [Unaudited] Note 1: Basis of Presentation The unaudited consolidated interim financial statements were prepared by the Corporation in accordance with Canadian generally accepted accounting principles applicable to interim financial statements and follow the same accounting policies and methods of their application as the most recent annual financial statements, except for the changes in accounting policies described in note 2. In the opinion of Management, all adjustments necessary for a fair presentation are reflected in the consolidated interim financial statements. Such adjustments are of a normal and recurring nature. The Corporation s operations are seasonal in nature; consequently, interim operating results do not necessarily proportionately reflect the operating results for a full year. The unaudited consolidated interim financial statements should be read in conjunction with the audited annual consolidated financial statements and notes thereto included in the Corporation s 2004 Annual Report. Note 2: Changes in Accounting Policies Consolidation of variable interest entities On November 1, 2004, the Corporation retroactively adopted, without restatement of prior periods, Accounting Guideline 15 Consolidation of Variable Interest Entities [ AcG-15 ], issued by the Canadian Institute of Chartered Accountants [ CICA ]. This new Guideline presents clarification on the application of consolidation principles to certain entities that are subject to control on a basis other than ownership of voting interests. AcG-15 provides guidance for determining when an enterprise includes the assets, liabilities and results of activities of a variable interest entity in its consolidated financial statements. As a general rule set out in AcG- 15, an enterprise should consolidate a variable interest entity when that enterprise has a variable interest, or combination of variable interests, that will absorb a majority of the entity s expected losses if they occur, receive a majority of the entity s expected residual returns if they occur, or both (the primary beneficiary ). The Corporation has conducted certain aircraft financing transactions whereby it guaranteed a portion of the residual value at the end of the lease term involving special purpose entities. These entities are considered variable interest entities and the Corporation is considered to be the primary beneficiary. The adoption of AcG-15 resulted in a $12,151 increase in the Corporation s retained earnings as at November 1, 2004, a $116,009 increase in property, plant and equipment, and a $103,858 increase in liabilities, including $101,773 [US$83,372] for longterm debt. The adoption of this Guideline had no impact on the Corporation s cash flows. However, it resulted in an increase of $1,708 in net income and $0.04 in basic earnings per share for the three-month period ended October 31, 2005 and a reduction of $2,034 in net income and $0.05 in basic earnings per share for the year ended October 31,

11 Debentures On November 1, 2004, the Corporation retroactively adopted, with restatement of prior periods, the changes contained in CICA Handbook Section 3860, Financial Instruments - Disclosure and Presentation. These changes require that certain obligations that must or could be settled with the issuer s own equity instruments be presented as liabilities. Previously, the liability and equity components related to these obligations had to be accounted for separately. The adoption of these changes resulted in the reclassification on the balance sheet as at October 31, 2004, of $2,422 of the equity component of a debenture, previously presented in shareholders equity and now presented under debentures in long-term liabilities. The adoption of these changes had no impact on retained earnings as at November 1, 2003, but resulted in a $30 decline in net income and interest expense related to the equity component of debentures, presented in the consolidated statement of retained earnings for the three-month period ended October 31, 2004 and in a $131 decline for the year ended at the same date. These changes had no impact on basic earnings per share for the same periods or on cash flows. The adoption of these changes had no material effect on the results for the three-and year ended October 31, Note 3: Cash in trust or otherwise reserved As at October 31, 2005, cash in trust or otherwise reserved included $140,675 [$118,146 as at October 31, 2004] in funds received from customers for services not yet rendered and $41,593 [$39,532 as at October 31, 2004] was pledged as collateral security against letters of credit and foreign exchange forward contracts. Note 4: Debentures On January 10, 2005, the Corporation redeemed debentures with a face value of $21,865 in advance. The early redemption resulted in a total payment of $30,009, including accrued interest amounting to $7,324 and an $820 penalty, which was recorded at redemption. Furthermore, this early redemption resulted in an additional non-cash charge at the redemption date of $1,644 corresponding to the difference between the nominal value of the debenture and its carrying amount at that time. Note 5: Share Capital a) Share capital Authorized Class A variable voting shares An unlimited number of Class A variable voting shares, participating, which may be owned or controlled by non-canadians, carrying one vote per Class A variable voting share unless (i) the number of issued and outstanding Class A variable voting shares exceeds 25% of the total number of all issued and outstanding voting shares (or any higher percentage that the Governor in Council may specify pursuant to the Canada Transportation Act [ CTA ]); or (ii) the total number of votes cast by or on behalf of holders of Class A variable voting shares at any meeting exceeds 25% (or any higher percentage that the Governor in Council may specify pursuant to the CTA) of the total number of votes that may be cast at such meeting. 11

12 If either of the above-noted thresholds is surpassed, the vote attached to each Class A variable voting share will decrease automatically, without further act or formality. Under the circumstance described in subparagraph (i) above, the Class A variable voting shares as a class cannot carry more than 25% (or any higher percentage that the Governor in Council may specify pursuant to the CTA) of the aggregate votes attached to all issued and outstanding voting shares of the Corporation. Under the circumstance described in subparagraph (ii) above, the Class A variable voting shares as a class cannot, for a given shareholders meeting, carry more than 25% (or any higher percentage that the Governor in Council may specify pursuant to the CTA) of the total number of votes that can be exercised at the said meeting. Each issued and outstanding Class A variable voting share shall be automatically converted into one Class B voting share automatically without any further act on the part of the Corporation or of the holder if: (i) the Class A variable voting share is or becomes owned and controlled by a Canadian; or (ii) the provisions contained in the CTA relating to foreign ownership restrictions are repealed and not replaced with other similar provisions. Class B voting shares An unlimited number of Class B voting shares, participating, which may be owned and controlled by Canadians only and shall confer the right to one vote per Class B voting share at all meetings of shareholders of the Corporation. Each issued and outstanding Class B voting share shall be converted into one Class A variable voting share automatically without any further act on the part of the Corporation or the holder if the Class B voting share is or becomes owned or controlled by a non-canadian. Preferred shares An unlimited number of preferred shares, non-voting, issuable in series, each series bearing the number of shares, designation, rights, privileges, restrictions and conditions as determined by the Board of Directors. Issued and outstanding On March 4, 2005, the Corporation s common shares were restructured into two classes of shares: Class A variable voting shares and Class B voting shares. Each issued and outstanding share which was not owned or controlled by a Canadian was converted into one Class A variable voting share of the share capital of the Corporation and cancelled. Each issued and outstanding share owned and controlled by a Canadian was converted into one Class B voting share of the share capital of the Corporation and cancelled. Immediately following the conversion, the numbers of Class A variable voting shares and Class B voting shares amounted to 7,818,212 and 27,228,227 respectively. The unissued common shares of the Corporation were cancelled and the Class A variable voting shares and Class B voting shares were substituted for the exercise of all rights to subscribe, purchase or convert the common shares thus cancelled. 12

13 The changes affecting the Class A variable voting shares and the Class B voting shares were as follows: Year ended October 31, 2005 Number of shares Amount ($) Common shares Balance as at October 31, ,954, ,306 Issued from treasury 23, Exercise of options 456,992 3,074 Exercise of warrants 967,550 9,338 Conversion of debentures 5,835,081 51,057 Repurchase of shares (1,081,100) (4,814) Balance as at October 31, ,156, ,438 As at October 31, 2005, the number of Class A variable voting shares and Class B voting shares amounted to 7,598,306 and 32,558,144 respectively. Normal course issuer bid On June 13, 2005, the Corporation renewed its normal course issuer bid in the normal course of business for a 12-month period. With this renewal, the Corporation intends to purchase for cancellation up to a maximum of 3,935,00 Class A Variable Voting Shares and Class B Voting Shares, representing less than 10% of the public float of Class A Variable Voting Shares and Class B Voting Shares at the offer date. Shares are purchased at market prices plus brokerage fees. In accordance with its normal course issuer bid, the Corporation redeemed, during the year ended October 31, 2005, a total of 1,081,100 voting shares, consisting of Class A variable voting shares and Class B voting shares, for a cash consideration of $22,545. b) Options Number of options Weighted average price ($) Balance as at October 31, ,125, Exercised (456,992) 6.52 Granted 127, Balance as at October 31, , Exercisable options as at October 31, ,

14 Pro forma disclosure of fair value of stock options Prior to November 1, 2003, the Corporation accounted for options granted under its stock option plan as capital transactions. The following table shows what the impact on the financial statements would have been had the Corporation recorded the options granted between November 1, 2002 and October 31, 2003 using the fair value method. The pro forma figures do not take into account stock options granted prior to November 1, Three (3) months ended October 31, 2005 $ Year ended October 31, 2005 $ Net income 18,022 55,416 Adjustment Stock based compensation (73) (292) Pro forma net income 17,949 55,124 Pro forma basic earnings per share Pro forma diluted earnings per share c) Warrants Number of warrants Amount ($) Balance as at October 31, ,377,025 3,994 Exercised (967,550) (2,807) Balance as at October 31, ,475 1,187 14

15 d) Earnings per share Earnings per share and the diluted earnings per share were computed as follows: [In thousands, except amounts per share] Three (3) months ended October $ 2004 $ 2005 $ Year ended October 2004 $ Numerator Net income 18,022 11,338 55,416 72,320 Interest on convertible debentures (791) (1,440) (3,173) Income attributable to voting shareholders 18,022 10,547 53,976 69,147 Interest on convertible debentures 791 1,440 3,173 Interest on debentures that may be settled in voting shares Income used to calculate diluted earnings per share 18,054 11,356 55,545 72,415 Denominator Weighted average number of outstanding shares 40,479 33,937 37,863 33,374 Convertible debentures 5,841 2,668 5,841 Debentures that may be settled in voting shares Stock options Warrants Adjusted weighted average number of outstanding shares used in computing diluted earnings per share 41,299 41,770 41,684 41,156 Basic earnings per share Diluted earnings per share In computing diluted earnings per share for the year ended October 31, 2005, 137,383 stock options were excluded from the computation because the exercise price of these options exceeded the average price of the Corporation s shares. Note 6: Convertible debentures On March 24, 2005, the Corporation sent a redemption notice to the holders of its nonguaranteed convertible subordinated debentures. Under the notice, the Corporation redeemed at their nominal value, on April 25, 2005, $35 of such debentures, representing all debentures outstanding as at that date. During the year ended October 31, 2005, but prior to the redemption date, a total of $51,057 in convertible debentures was converted into 5,835,081 voting shares, consisting of Class A variable voting shares and Class B voting shares. 15

16 Note 7: Business acquisitions and disposal Business acquisitions During the year, the Corporation acquired several businesses. These acquisitions were recorded using the purchase method. The results of these businesses were included in the Corporation s results as of their date of acquisition. On November 1, 2004, the Corporation acquired a 70% ownership interest in Air Consultants Europe [ ACE ], a Dutch outgoing tour operator, for a total consideration of 1,050 [$1,634]. An amount of 950 [$1,473] was paid out on the date of acquisition. The balance of 100 will be payable before November 1 st, As a result of this acquisition, goodwill increased by $1,579. On May 1, 2005, the Corporation acquired a 50.1% ownership interest in Travel Superstore Inc., a Canadian company operating a travel agency network, for a cash consideration of $4,478. As a result of this acquisition, goodwill increased by $2,799. On June 26, 2005, the Corporation acquired 100% ownership interest in Bennett Voyages, an outgoing tour operator, for a total consideration of 1,773 [$2,629]. An amount of 1,075 [$1,594] was paid out on the date of acquisition. The balance of 698 will be payable before December 31 st, As a result of this acquisition, goodwill increased by $1,971. On August 1, 2005, the Corporation acquired the assets of Blenus Travel Service Limited and Fundy Travel Limited, both Canadian companies operating a travel agency network, for a total consideration of $1,259. On the date of acquisition, an amount equal to $260 was paid out and the balance of $999 is payable over a five year period without interest. As a result of this acquisition, goodwill increased by $1,117. On October 31, 2005, the Corporation acquired the assets of Turissimo Caribe & Excursiones C. Por A, an incoming tour operator in the Dominican Republic, for a cash consideration of US$1,185 [$1,398]. As a result of this acquisition, goodwill increased by $1,075. Business disposal On June 6, 2005, Transat announced that it entered into an agreement to sell its 44.27% participation in Star Airlines for 4,500 [$6,900], subject to the approval of the French regulatory authorities. On August 5, 2005, the French regulatory authorities approved the transaction which resulted in a gain on disposal of $5,747. Note 8: Restructuring Charge 2004 Restructuring program During the year ended October 31, 2004, the Corporation made changes to Look Voyages S.A. s management structure and carried out a reorganization in order to reposition this subsidiary. The restructuring costs related to this program were charged to the 2004 fiscal year. In 2005, the review of the execution of the restructuring initiatives approved during the year ended October 31, 2004, resulted in a reversal of $934. This reversal is mostly due to lower reallocation and employee training fees, as required by French law, lower negotiation fees on the cancellation of contracts, and earlier than expected departures of certain employees. 16

17 The following table highlights the activity and balance of the 2004 restructuring provision for the year ended October 31, Employee termination benefits Contract termination costs Other costs Total $ $ $ $ Balance as at October 31, ,590 2,526 1,115 8,231 Amount incurred during the year ended October 31, 2005 Cumulative drawdowns : Cash 4, ,456 Non-cash Provision reversal Foreign currency changes Balance as at October 31, , , Restructuring program During the year ended October 31, 2003, the Corporation made changes to its management structure and carried out a reorganization that affected both the nature and focus of its operations in France and Canada resulting in the development of a restructuring program. The restructuring costs related to this program were charged to the 2003 fiscal year. The following table highlights the activity and balance of the 2003 restructuring provision for the year ended October 31, Employee termination benefits Contract termination costs Other costs Total $ $ $ $ Balance as at October 31, , ,716 Amount incurred during the year ended October 31, 2005 Cumulative drawdowns : Cash 1, ,132 Non-cash Balance as at October 31, ,584 1,584 17

18 Note 9: Segmented Information The Corporation has determined that it conducts its activities in a single industry segment, namely holiday travel. Therefore, the consolidated statements of income include all the required information. With respect to geographic areas, the Corporation operates mainly in North America and in Europe. Three (3) months ended October 31, 2005 Year ended October 31, 2005 North America Europe Total North America Europe Total $ $ $ $ $ $ Revenues 372, , ,900 1,896, ,994 2,364,481 Operating expenses 352, , ,520 1,776, ,039 2,243,850 20,165 3,215 23, , ,631 Amortization 8, ,733 34,200 3,358 37,558 Additions to property, plant and equipment 2, ,236 26,042 1,171 27,213 Property, plant and equipment and goodwill [1] 234,882 53, ,872 Three (3) months ended October 31, 2004 Year ended October 31, 2004 North America Europe Total North America Europe Total $ $ $ $ $ $ Revenues 324, , ,280 1,673, ,292 2,199,822 Operating expenses 288, , ,931 1,495, ,096 2,036,067 36,068 3,281 39, ,559 (13,804) 163,755 Amortization 6,354 1,112 7,466 28,585 4,442 33,027 Additions to property, plant and equipment 6,390 6,390 19,819 1,083 20,902 Property, plant and equipment and goodwill [2] 127,485 52, ,094 [1] As at October 31, 2005 [2] As at October 31, 2004 Note 10: Guarantees In the normal course of business, the Corporation has entered into agreements that contain features which meet the definition of a guarantee. These agreements provide for indemnification and guarantees to counterparties in transactions such as operating leases, irrevocable letters of credit, and security contracts. These agreements may require the Corporation to compensate the counterparties for costs and losses incurred as a result of various events including breaches of representations and warranties, loss of or damages to property, claims that may arise while providing services and environmental liabilities. 18

19 Notes 4, 10, 11, 13, and 21 to the 2004 audited consolidated financial statements provide information relating to some of these agreements. The following constitutes additional disclosure. Operating leases The Corporation s subsidiaries have general indemnity clauses in many of their airport and other real estate leases whereby they, as lessee, indemnify the lessor against liabilities related to the use of the leased property. These leases mature at various dates until The nature of the agreements varies based on the contracts and therefore prevents the Corporation from estimating the total potential amount its subsidiaries would have to pay to lessors. Historically, the Corporation s subsidiaries have not made any significant payments under such agreements and have liability insurance protecting them for the obligations undertaken. Irrevocable letters of credit The Corporation has entered into irrevocable letters of credit guarantees with some of its suppliers. The Corporation guarantees the payment of certain tourist services such as hotel rooms that it has undertaken to pay for whether it sells the services or not. These agreements, which are entered into for significant blocks of tourist services, typically cover a one year period and are renewed annually. The corporation has also issued letters of credit to provincial regulatory agencies in Ontario and British Columbia guaranteeing amounts to the Corporation s clients for the performance of its obligations. The amount guaranteed totals $17,238 as at October 31, Historically, the Corporation has not made any significant payments under such letters of credit. Security contracts The Corporation has entered into security contracts whereby it has guaranteed a prescribed amount to its clients at the request of regulatory agencies for the performance of the obligations given in mandates by its clients during the term of the licenses granted to the Corporation for its travel agent and wholesaler activities in the province of Quebec. These agreements typically cover a one-year period and are renewed annually. The amount guaranteed totals $1,260 as at October 31, Historically, the Corporation has not made any significant payments under such agreements. As at October 31, 2005, no amounts have been accrued with respect to the above-mentioned agreements. Note 11: Subsequent events On November 14, 2005, the Corporation announced an offer to repurchase for cancellation up to $125 million of its Class A Variable Voting Shares and Class B Voting Shares, at a purchase price of not less than $17.50 per share and not more than $20.00 per share. This represents up to 7,142,857 of these shares or 18% of the Corporation s 40,156,450 total issued and outstanding Class A Variable Voting Shares and Class B Voting Shares. The offer expires on December 22, 2005, unless withdrawn or extended by the Corporation. On December 1st, 2005, the Corporation completed the acquisition of the assets of 20 Carlson Wagonlit Travel (CWT) agencies in France, for a cash consideration of 2,900 [$3,990]. 19