Exhibit 2
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in this report may constitute forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
OVERVIEW
In August 2002, the Company’s Australian operating unit, Network TEN, purchased the remaining 40% of Eye Corp, Australia’s leading out-of-home advertising company, for aggregate cash consideration of approximately A$10 million.
In August 2002, CanWest sold 10 small-to-medium market daily newspapers — as well as certain community papers in Atlantic Canada and Saskatchewan — to G.T.C. Transcontinental Group Ltd. for aggregate cash consideration of approximately $257 million.
In March 2002, the Company completed the purchase of the 50% of the National Post it did not already own for nominal consideration in the form of cash and agreements
and undertakings. In October 2001, the Company sold its interest in CKVU (Vancouver) and received cash proceeds of approximately $133 million. In September 2001, the Company sold its 70% interest in CFCF (Montreal) for cash proceeds of $87 million. In August 2001, the Company sold its 50% interest in ROBTv for cash proceeds of $30 million.
In May 2001, the Company concluded the private placement of approximately $720 million in 10-year senior subordinated notes bearing a coupon of 10 5/8%, replacing interim financing arrangements.
In May 2001, through an amalgamation of subsidiaries, the Company acquired the 29.34% minority interest in CanWest Broadcasting Ltd. (“CBL”) which owned Global Television Network stations in British Columbia (CKVU), Manitoba (CKND) and Saskatchewan (CFRE and CFSK) in exchange for Series 2 preference shares of CanWest. CanWest has the option — exercisable for twelve months following the completion of the determination of value of the net sale proceeds of CKVU — to redeem the Series 2 preference shares for cash, or to convert the Series 2 preference shares into subordinate voting shares. The Company expects the redemption or conversion to occur within the next fiscal year. The redemption or conversion price, as the case may be, will be determined in accordance with a formula based on after-tax proceeds from the sale of CKVU, the value of the Manitoba and Saskatchewan television stations, and certain other factors, and has not yet been finally determined, but it is estimated by the Company to be $54.7 million. The former minority shareholders of CBL have commenced a lawsuit against CanWest and certain of its subsidiaries. See Notes 10 and 17 to the consolidated financial statements.
In March 2001, the Company completed a series of transactions through which Granada Media acquired a 45% interest in TV3 (Ireland). While the Company retains a 45% interest in TV3, control of its board of directors is shared with Granada Media.
In November 2000, the Company acquired CanWest Publications for an aggregate purchase price of approximately $3.1 billion, including certain costs associated with the transaction, and subject to adjustment for working capital. In May 2000, the Company acquired a 72% equity interest in New Zealand’s RadioWorks through a series of purchases on the New Zealand Stock Exchange and, in January 2001, acquired its remaining shares. The aggregate acquisition cost of RadioWorks was $74 million.
In 1997 and 1998, the Company acquired approximately 44% of WIC Western International Communications Inc. (“WIC”). On March 31, 2000, the Company completed a series of transactions with the other shareholders of WIC, which resulted in the division of WIC’s broadcasting, distribution and other businesses among certain of that company’s shareholders. Through these transactions, the Company acquired all of WIC’s shares and retained all of WIC’s broadcast television stations, as well as a 50% interest in ROBTv and certain other assets. The aggregate acquisition cost for the WIC assets acquired was approximately $861 million.
TRENDS
Feedback from both television and newspaper advertising markets suggest that the improvement in operating results evident in the latter half of fiscal 2002 should continue
through the next fiscal year. Bookings for the first quarter of 2003 and into the rest of the fiscal year indicate a sustained strengthening of television and print advertising.
CanWest’s Canadian television stations and metropolitan newspapers are generally the highest rated in prime time and most read papers in their respective markets. In management’s opinion, these attributes enable the Company to sustain its levels of revenue more successfully than its competitors.
APPLICATION OF ACCOUNTING PRINCIPLES
The preparation of financial statements in accordance with Canadian GAAP requires the use of estimates and assumptions that affect reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingencies. Future events could alter such estimates.
The Company operates in highly competitive markets. The Company has estimated the useful lives of intangible assets and the value of goodwill, based on historical customer patterns, industry trends and existing competitive factors. Significant long-term changes in these factors could result in a material impairment of the value and life of intangible assets and goodwill.
In addition, management estimates ultimate revenue from film and television program to determine amortization and fair values of investments in film and television programs. Actual revenues may differ from these estimates.
In September 2001, the Company, consistent with CICA guidelines, adopted new accounting policies related to accounting for goodwill and intangibles. Goodwill and indefinite life intangibles are no longer amortized and are subject to an annual value
MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
impairment test. As a result, the Company recorded a write down of $76 million related to Network TEN’s investment in Eye Corp., $45 million of which was charged to retained earnings at September 1, 2001. In September 2001, the Company adopted recommendations of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants related to “Accounting by Producers and Distributors of Films” (SOP 00-2). As a result of this change, an adjustment of $125 million was charged to opening retained earnings at September 1, 2001.
During 2001, the Company adopted new recommendations of the Canadian Institute of Chartered Accountants (“CICA”) relating to accounting for income taxes. A description of the impact of these changes in accounting policies, and a discussion of new accounting standards of the CICA which impact the Company, is provided in Note 1 to the Consolidated Financial Statements for the years ended August 31, 2002 and 2001.
The Company accounts for its economic interest in Network TEN using the equity method of accounting. Under this method, the Company’s interest in the net earnings (before interest on subordinated debentures) of Network TEN is included in the Company’s consolidated earnings, and an adjustment is made to the carrying value at which the investment is recorded on the consolidated balance sheet. The carrying value of this investment is reduced by any interest on subordinated debentures and dividends received by the Company.
In fiscal 2001, the Company accounted for its 50% interest in theNational Post using the equity method. In September 2001, the Company assumed control of theNational Postand, thereafter, the Company has consolidated its interest in theNational Post.
As a result of the restructuring effective March 31, 2001, the Company changed the accounting for its 45% interest in TV3 Ireland to proportionate consolidation.
THE COMPANY
• | the acquisition of CanWest Publications including online operations in November 2000; | |
• | the reorganization of the Company’s interest in TV3 Ireland in March 2001; | |
• | the acquisition of the remaining 50% interest in theNational Posteffective March 2002; and, | |
• | the sale of CKVU effective August 2001. |
The following is a reconciliation of actual revenue and EBITDA to pro forma revenue and EBITDA for the year ended August 31, 2001:
Revenue | EBITDA1 | |||||||
$000 | $000 | |||||||
As reported | 1,944,775 | 441,071 | ||||||
CanWest Publications | 269,717 | 87,256 | ||||||
Online operations | 1,804 | (3,214 | ) | |||||
National Post | 152,350 | (64,869 | ) | |||||
TV3 Ireland | (10,735 | ) | (1,014 | ) | ||||
CKVU | (68,170 | ) | (21,245 | ) | ||||
Pro forma | 2,289,741 | 437,984 | ||||||
1 | EBITDA is not a recognized measure under Canadian GAAP. Management believes that in addition to net income (loss), EBITDA is a useful supple-mental measure as it provides investors with an indication of cash available for distribution prior to debt service, capital expenditures and income taxes. Investors should be cautioned, however, that EBITDA should not be construed as an alternative to net income (loss) determined in accordance with GAAP as an indicator of the Company’s performance. The Company’s method of calculating EBITDA may differ from other companies and, accordingly, EBITDA may not be comparable to measures used by other companies. |
The Company reported consolidated revenues of $2,273 million for the year ended August 31, 2002, an increase of $328 million from the actual revenues reported for the previous year, but a decline of $17 million from pro forma revenues of $2,290 million.
The increase in actual revenue was primarily attributable to the inclusion of twelve months of Publications results in 2002 compared to only nine and a half months in 2001. Pro forma revenues reflect solid increases in Canadian television revenues offset by decreased revenues in Publications and Fireworks Entertainment.
Consolidated operating expenses (including selling, general, and administrative expenses) before amortization increased $299 million to $1,802 million as a result of the inclusion of a full year of the Publications results. On a pro forma basis, operating expenses (including selling, general, and administrative expenses) decreased $49 million, 3% from $1,852 million in the previous year, reflecting expense reductions in Publications offset by increased expenses in Canadian television operations.
Consolidated operating profits (EBITDA) increased by 7% to $470 million, from $441 million last year. The increase in actual operating profit is the result of the inclusion of twelve months of Publications results partially offset by a reduction due to the sale of CKVU. On a pro forma basis, operating profit increased by 7% over $438 million last year, primarily due to reductions in losses of theNational Post.
Actual revenues from Canadian television were down slightly to $688 million from $701 million recorded in the previous year. This was due entirely to the sale of CKVU (Vancouver) effective August 31, 2001. On a pro forma (same station) basis, Canadian television revenues increased by 9% compared to $633 million in fiscal 2001. BCTV was a substantial contributor to the growth in revenue in fiscal 2002, as a result of an additional 40 hours per week of airtime inventory being available for sale following it’s disaffiliation with the CTV network. Operating expenses at Canadian television increased by 5% to $493 million dollars, compared to $472 million in fiscal 2001. On a pro forma basis, which excluded operating expenses associated with CKVU in the previous year, the increase in operating expenses was 16% compared to fiscal
2001. The year-over-year increase reflected higher programming costs arising from the affiliation of BCTV in Vancouver with the Global Television Network, as well as substantial additional investment in programs designed to enhance future ratings performance. Examples include securing a new season of the top-rankedSurvivor series, PGA golf and “big event” programming for the Company’s CH stations.
In addition, as part of the CRTC approval, CanWest made substantial investments in local programming at the CH stations in Victoria and Hamilton, which included enhanced news programming and daytime programming. The additional investments resulted in a 6% decline in EBITDA for Canadian television operations to $195 million, from $208 million on a pro forma basis the year before.
The Company’s conventional television operations in Canada continued to be the market leaders in prime time ratings. Outside of high profile sports events, Global Television ranked number one in the country’s largest English speaking markets, with 8 of the top 10 shows in Toronto and 17 of the top 20 shows in Vancouver.
Revenues increased by 27% at Prime, the Company’s top-rated specialty cable channel, to $25 million from $19 million in fiscal 2001. The increase was attributable to a 44.9% increase in advertising sales revenue over the previous year, and an increase in the subscriber base of 6.6% over the previous year.
The Company launched six specialty digital channels in September 2001. Five of the new channels ranked in the top ten of the 47 new digital channels that went on air at that time. At the close of the fiscal year, the Company’s portfolio of Canadian digital channels had approximately 2,000,000 subscribers. Revenue from the specialty digital channels for the eight months following the end of the free preview period was $4 million, with expenses of $8 million, resulting in an operating loss of $4 million.
MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Global Television launched a new national news service during fiscal 2001 and attracts a substantial number of Canadian television viewers. According to the Broadcast Bureau of Measurement, an average of 773,000 adult Canadians, 18 years or older, tuned intoGlobal National with Kevin Newmanin the fall of 2001. By the spring of 2002,Global National with Kevin Newmanhad increased its adult audience to 802,000, overtaking the late eveningCBC National newscast with Peter Mansbridge in numbers of viewers.
Publications group revenues for fiscal 2002, including theNational Post, were $1,264 million, a decline of 6% from the pro forma revenues of $1,340 million for the previous year. Newspaper revenues were negatively affected by the impact of the September 11th tragedy on advertising expenditures and the lingering effects of a slowdown in overall advertising markets that began in April 2001. However, the decrease in advertising linage slowed and reversed through fiscal 2002. During the last four months of fiscal 2002, revenues were ahead of the corresponding months of the previous year. Consistent with the prior year, approximately 78% of newspaper revenues are derived from advertising, while circulation represents about 17% of the total.
Compared to last year, on a pro forma basis, operating expenses (including selling, general and administrative expenses) of the Company’s newspaper operations declined by 11% to $972 million as a result of restructuring at theNational Postand reduced manning at other newspapers, and an overall drop of 14% in average newsprint costs during the year. Operating costs include the start-up costs associated with the launch of the Reach Canada customer contact centre in Winnipeg which deals with customer service calls for all major newspapers in the group. EBITDA for the newspaper group increased by 18% to $292 million, from the $246 million recorded the previous year on a pro forma basis.
In August 2002, the Company sold a number of newspapers and related assets to G.T.C. Transcontinental Group Ltd. for aggregate cash proceeds of $257 million. The Company determined that these newspapers, which included eleven smaller market daily papers and certain community papers in Atlantic Canada and Saskatchewan, were not central to its multi-platform sales, content and promotion strategy. The newspapers and related assets included in the transaction generated approximately $95 million in revenue and $30 million in EBITDA in fiscal 2002.
The Company’s online operations achieved a significant improvement in EBITDA, cutting losses from $19 million in the previous fiscal year to $7 million in the current year on a pro forma basis. These operations include the web portal, canada.com, and other web based operations. Online revenues for the fiscal year decreased by $1 million to $7.4 million compared to the previous fiscal year on a pro forma basis. The Company achieved substantial efficiency gains, cutting operating expenses to $14 million from $28 million in the previous year on a pro forma basis as a result of technical and physical integration of its online properties.
Revenue from Fireworks Entertainment decreased to $157 million from $182 million recorded the previous year. Operating expenses at Fireworks also declined to $158 million from $168 million the previous year, producing an operating loss of $1 million compared to an operating profit of $14 million in the previous year.
Weak demand for television programming in Europe affected Fireworks’ distribution revenues, particularly in the fourth quarter. Entertainment revenues are also affected significantly by the timing of program and feature film releases which was another significant contributor to the revenue decline experienced in fiscal 2002.
Current action series includingAndromeda, now in production for its third season, andMutant X, in production for its second season, continue to be well received in the US and international markets. Following the end of the year, Fireworks launched several new television projects, includingAdventure Inc., Black Hole High,andA Wrinkle in Time.
Recent award-winning feature films for which Fireworks has secured international distribution rights includeThe Believer andAn American Rhapsody. Other feature film projects now or soon-to-be released includeThe Man from Elysian Fields with Andy Garcia and Mick Jagger,Me Without You,andRain.
CanWest’s 45% share of revenues at TV3 in the Republic of Ireland increased 39% to $28 million from $20 million the previous year. CanWest’s share of TV3’s EBITDA was $8 million, more than three times the level of the previous year. Ratings were up 13% in prime time viewing hours, with an 18% growth in all-day ratings at TV3. Improved ratings for locally produced programming, as well as the inclusion of top-rated entertainment programming from Granada Media, contributed substantially to the continued growth at TV3.
Revenues from TV3/4 New Zealand in fiscal 2002 increased by 18% to $69 million from $58 million the previous year. In local currency revenues increased by 9% to NZ$100 million from NZ$92 million in 2001. EBITDA also improved, from an EBITDA loss of $9 million in fiscal 2001 to an EBITDA loss of less than $2 million for the year ended August 31, 2002. Results from New Zealand have been translated at an average exchange rate of $0.6910, an increase of 8% over the prior year’s rate of exchange. A combination of factors contributed to the improved results, including higher ratings, improved advertising market conditions, and higher prices for advertising. A stronger New Zealand dollar also helped to reduce the cost of imported programming.
TV3 gained two points in ad market share to 25% compared to a 23% ad market share in the previous fiscal year. In the last quarter of the year, TV3 achieved the highest share in Auckland, New Zealand’s largest city, with an audience market share of 32.
CanWest Radio in New Zealand continued to make steady progress, increasing both its revenues and EBITDA. EBITDA grew by 14% to $16 million from $14 million in the previous year on revenues of $61 million. It recorded operating expenses of $44 million, a 4% reduction in costs from the previous year.
Financing costs were $377 million for the year ended August 2002, compared to $357 million in the previous year. The increase reflects a full twelve months of financing costs related to the acquisition of the publications properties which occurred late in the first quarter of last year, resulting in only nine and one-half months of the carrying cost associated with the acquisition, partially offset by reduced interest rates and debt repayments in 2002.
Amortization of intangibles and goodwill was reduced to $18 million in 2002, compared to $90 million in the previous year as a result of the adoption of the new accounting policy under which goodwill and indefinite life intangibles are no longer amortized. Amortization of property and equipment increased to $75 million from $61 million as a result of the acquisition of the publishing properties.
In 2002, the Company had investment gains, net of losses on write down of investments, of $32 million. This is comprised of a gain of the sale of CKVU of $68 million, a gain on the sale of Atlantic Canada and Saskatchewan community newspapers of $49 million offset by write downs of $86 million as a result of non temporary declines in fair value of other investments. In the previous year, the net investment gain was $29 million.
The provision for income taxes was $7 million in 2002, compared to a tax recovery of $59 million in 2001. The effective tax rate
MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
of 24% is significantly lower than the Company’s statutory rate of 38%, primarily as a result of the non-taxable portion of gains. The previous year’s recovery included a future income tax recovery of $71 million due to reductions in federal and provincial income tax rates enacted during 2001.
In 2002, the Company recorded a recovery from minority interest of $4 million, compared to a charge of $3 million in the prior year. In 2002, the credit is related to the minority interest in theNational Postfrom September 1, 2001 to March 2002. In the prior year the charge related to the minority interest in Radio Works to January 2001.
The Company’s interest in the loss of Network TEN for the year was $12 million, compared to income of $53 million the previous year. The Company’s share of earnings before TEN’s investment losses and write downs was $44 million in 2002, compared to $37 million in 2001, a $7 million, 19% increase. In 2002, our share of TEN’s non-recurring charges included a one-time income tax settlement of $17 million, a goodwill impairment loss related to Eye Corp. of $30 million, and a $9 million write down of investments to fair value. In the prior year, the Company’s share of non-recurring charges included gains on sale of investments of $29 million offset by a loss on the write down of the SCAPE investment of $13 million. Results from TEN have been translated at an average rate of $0.8311, up 4% from the average rate of exchange in 2001. See detailed discussion of Network TEN below.
The Company’s interest in losses of equity accounted affiliates was $2 million for 2002, compared to $14 million in 2001. The 2001 loss is primarily comprised of the Company’s share of theNational Postlosses. In 2002, theNational Postwas consolidated.
The Company incurred a $1 million loss from currency translation, realized on distributions declared by Network TEN in 2002, compared to a $7 million loss in 2001. Net earnings for the year were $13 million, or $0.07 per share,
compared to $47 million, or $0.27 per share in 2001. Adjusted earnings per share for 2001, excluding the amortization of goodwill and indefinite life intangibles, were $0.68 per share.
Fiscal 2001 Compared to Fiscal 2000
Total operating expenses (including selling, general and administrative expenses) before amortization, increased by $916 million, or 156%, to $1,504 million for the year ended August 31, 2001, from $587 million for the same period in 2000. This increase was primarily related to the acquisitions of WIC, RadioWorks and CanWest Publications.
EBITDA increased by $297 million, or 205%, to $441 million for the year ended August 31, 2001, from $145 million in the previous year. The increase was primarily attributable to the acquisitions of WIC, RadioWorks and CanWest Publications (excluding theNational Post). EBITDA of RadioWorks and CanWest Publications (excluding theNational Post) for the period were $10 million and $224 million respectively. Offsetting the effect of these acquisitions were declines in EBITDA from Global Television Network on a same station basis and declines in EBITDA from TV3 and TV4 in New Zealand.
In Canada, revenue from television operations increased $211 million, or 43% for the year, to $701 million from $490 million in fiscal 2000. This increase was due to higher airtime revenue of $236 million as a result of the contributions from the former WIC stations. Revenue from Global Prime increased $5 million, or 37%, from the same period in 2000. On a pro-forma, same station basis, revenue from conventional television decreased $19 million, or 27%. This decline was primarily the result of the 2000 Olympics, which were broadcast on a competing network and delayed the commencement of the fall programming schedule.
For Canadian broadcast operations, total operating expenses before amortization increased by $149 million, or 46%, to $472 million, from $323 million in the prior year as a result of the acquisition of the WIC television stations.
Revenue from Fireworks Entertainment increased $70 million, or 63%, to $182 million in fiscal 2001 compared to $112 million in fiscal 2000. Several developments contributed to revenue growth, including the delivery of two new television series,AndromedaandQueen of Swords, the success of the feature filmRat Race and increased film and television program library sales — including from the Endemol library, which was acquired in August 2000.
Operating expenses for Fireworks Entertainment increased $64 million, or 62%, to $168 million for fiscal 2001, from $104 million in fiscal 2000, reflecting increased participation by Fireworks in various production and distribution projects.
In New Zealand, revenue from television operations decreased $15 million, or 20%, to $58 million for the year from $73 million in fiscal 2000. Results from New Zealand have been translated at an average rate of $0.638 compared to $0.713 last year, a decline of 11% in the exchange value of the New Zealand currency. Revenue in local currency decreased to NZ$92 million, or 10%, from NZ$102 million in the prior year. The decline was primarily a result of a generally soft market environment and the impact of the Olympics in September 2000.
In New Zealand, total operating expenses before amortization for television operations decreased $5 million, or 7%, to $67 million, from $72 million in the same period the prior year. The decline was mainly attributable to the depreciating value of the New Zealand dollar against the Canadian dollar. In local currency terms, total operating expenses before amortization increased to NZ$106 million, or 5%, from NZ$101 million in fiscal 2000.
Revenue from radio operations in New Zealand increased $27 million, or 90%, to $57 million for the year, up from $30 million in fiscal 2000. The Company acquired 72% of RadioWork’s shares in May 2000 and the remaining 28% in January 2001. RadioWorks contributed $39 million to consolidated revenue in the year ended August 31, 2001. CanWest Radio NZ’s revenue in local currency was unchanged from the prior year.
Total operating expenses before amortization for radio operations in New Zealand increased to $43 million, or 85%, from $23 million in fiscal 2000. In local currency, the increase was NZ$34 million to NZ$67 million from NZ$33 million in the same period in the prior year. The increase was primarily the result of the RadioWorks’ acquisition. Total operating expenses before amortization for RadioWorks were NZ$45 million for the year ended August 31, 2001.
Revenue from TV3 Ireland increased $4 million, or 13%, to $31 million for the year ended August 31, 2001, from $27 million in the same period in fiscal 2000. In March 2001, the Company restructured its interest in TV3 Ireland. As a result, the accounting treatment was changed to a 45% proportionate consolidation from 100% consolidation in previous periods. Results from TV3 Ireland were converted to Canadian dollars at an average rate of $1.7167 for the 12 months, compared to $1.8243 for fiscal 2000, a 6% decline. On a local currency basis, TV3 Ireland’s total revenue grew 62% to Ire£24 million for the 12 months, from Ire£15 million for the same period in the prior year, as TV3 continued to build advertiser support.
TV3 Ireland’s total operating expenses before amortization decreased to $28 million, from $36 million for the same period last year, reflecting the change in accounting treatment from 100% consolidated to 45% on a proportionately consolidated basis. In local currency, TV3 Ireland’s operating expenses increased by Ire£3 million or 14% to Ire£23 million, from Ire£20 million in fiscal 2000.
MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Revenue of $918 million from the Company’s newspaper group (excluding theNational Post) was included in operations for the period from November 16, 2000 to August 31, 2001. On a pro forma basis for the twelve months ended August 31, 2001, the newspaper group generated revenues of $1,188 million, compared to $1,192 million in the previous period. The decline reflected a weakening in the advertising market, which commenced in April 2001, following comparatively strong first and second quarters. Approximately 78% of Publications’ revenues were derived from advertising, while circulation revenues represented 17% of total revenue.
Total operating expenses before amortization of $694 million for the Company’s newspaper group were included in operations for the year ended August 31, 2001, representing the period following the November 16, 2000 acquisition. On a pro forma basis for the twelve months ended August 31, 2001, total operating expenses for the newspaper group were $876 million, which represented no material change compared to the same twelve months in 2000.
A 13% year-over-year increase in newsprint prices was offset by the consolidation of regional printing operations and other cost efficiency gains.
EBITDA losses from CanWest Interactive were $16 million for the fiscal year 2001 on revenues of $7 million. In the fourth quarter, EBITDA losses were reduced to $3 million, reflecting the significant progress achieved in reducing costs through the consolidation and integration of technical platforms under the canada.com brand.
Amortization, including amortization of broadcast licences, circulation, goodwill and capital assets, increased by $113 million to $156 million for the year ended August 31, 2001, from $44 million in the previous year. The increase is a result of the WIC, RadioWorks and CanWest Publications acquisitions. Financing expenses increased $303 million to $357 million for
the year ended August 31, 2001, from $54 million in fiscal 2000. The increase reflected a higher level of debt outstanding as a result of the acquisitions of WIC in March 2000, Radio Works in May 2000, and CanWest Publications in November 2000.
Investment gains decreased $73 million to $29 million for the year ended August 31, 2001, from $101 million for the same period the previous year. For the year ended August 31, 2001, the Company recorded gains on the sale of investments of $8 million from the sale of publicly traded common shares of Alliance Atlantis Communications Inc., previously acquired for investment purposes, and of $21 million from the reorganization or the Company’s interest in TV3 Ireland. In fiscal 2000, the Company recorded a gain on the sale of its investment in publicly traded shares of CTV Inc. of $99 million. Dividend income included dividends from Ulster TV of $3 million for the year ended August 31, 2001, substantially unchanged compared to the previous year.
Recovery of income taxes increased $107 million to $59 million for the year ended August 31, 2001, from a charge of $48 million in the previous year. The provision for income taxes reflects a future income tax recovery of $71 million related to reductions in federal and provincial income tax rates enacted during 2001.
The net charge for minority interests increased by $5 million to $3 million, from a credit of $2 million in the same period last year. This increase was primarily the result of the depletion of the minority interest credit related to TV3 Ireland and the inclusion of a charge related to the 28% minority interest in RadioWorks until January 2001.
Interest in earnings from Network TEN declined $20 million, or 27%, to $53 million for the year ended August 31, 2001, from $72 million in the prior year. The decline was attributable to a reduction in revenue resulting from the impact of the 2000 Olympics, broadcast on a competing network, and a generally soft advertising market following the 2000 Olympics.
Network TEN and Village Roadshow discontinued SCAPE, their online partnership, in March 2001. As a result, Network TEN wrote off its investment in SCAPE in February 2001. The Company’s share of the loss amounted to $13 million. Partially offsetting these decreases were investment gains related to the sale of certain investments and other assets by Network TEN. The Company’s share of these gains was $29 million. Also affecting the result was a decline of 11% in the average rate of exchange of the Australian dollar.
The Company incurred a $7 million loss from currency translation realized on distributions declared by Network TEN
in the year ended August 31, 2001, compared to a loss of $1 million in the previous year.
The Company incurred losses from equity accounted affiliates of $15 million for the year ended August 31, 2001, representing the Company’s share of net earnings from CFCF and ROBTv of $2 million offset by its 50% share of losses for theNational Post.
Net earnings decreased $131 million, or 74%, to $47 million for the year ended August 31, 2001, compared to $178 million in the same period last year.
CONSOLIDATED QUARTERLY FINANCIAL RESULTS
2002 | 2001 | ||||||||||||||||||||||||||||||||
31-Aug | 31-May | 28-Feb | 30-Nov | 31-Aug | 31-May | 28-Feb | 30-Nov | ||||||||||||||||||||||||||
Revenue | 484,059 | 617,014 | 529,130 | 642,580 | 508,382 | 585,467 | 514,950 | 335,976 | |||||||||||||||||||||||||
Operating profit before amortization (EBITDA) | 52,512 | 154,829 | 91,875 | 171,090 | 65,772 | 158,260 | 113,448 | 103,591 | |||||||||||||||||||||||||
Amortization of intangibles and goodwill | 4,375 | 4,375 | 4,375 | 4,375 | 23,904 | 27,339 | 24,648 | 14,268 | |||||||||||||||||||||||||
Other amortization | 21,129 | 20,793 | 20,580 | 18,822 | 19,076 | 17,217 | 19,034 | 10,478 | |||||||||||||||||||||||||
Interest in earnings (loss) of Network TEN | (34,003 | ) | 7,989 | (5,243 | ) | 19,442 | 34,819 | 4,969 | (4,411 | ) | 17,190 | ||||||||||||||||||||||
Net earnings (loss) | (104,144 | ) | 30,688 | (21,660 | ) | 108,134 | (37,048 | ) | 32,192 | 10,473 | 41,016 | ||||||||||||||||||||||
Adjusted net earnings (loss)1 | (104,144 | ) | 30,688 | (21,660 | ) | 108,134 | (17,922 | ) | 47,123 | 32,463 | 55,518 | ||||||||||||||||||||||
Cash flow from operations2 | 18,228 | 80,354 | 99,388 | 79,761 | (9,436 | ) | 76,150 | 109,167 | 49,083 | ||||||||||||||||||||||||
Earnings per share | |||||||||||||||||||||||||||||||||
Net earnings (loss) per share | |||||||||||||||||||||||||||||||||
Basic | ($0.59 | ) | $ | 0.17 | ($0.12 | ) | $ | 0.61 | ($0.21 | ) | $ | 0.18 | $ | 0.06 | $ | 0.26 | |||||||||||||||||
Diluted | ($0.59 | ) | $ | 0.17 | ($0.12 | ) | $ | 0.60 | ($0.21 | ) | $ | 0.18 | $ | 0.06 | $ | 0.26 | |||||||||||||||||
Adjusted net earnings (loss) per share1 | |||||||||||||||||||||||||||||||||
Basic | ($0.59 | ) | $ | 0.17 | ($0.12 | ) | $ | 0.61 | ($0.10 | ) | $ | 0.27 | $ | 0.18 | $ | 0.36 | |||||||||||||||||
Diluted | ($0.59 | ) | $ | 0.17 | ($0.12 | ) | $ | 0.60 | ($0.10 | ) | $ | 0.26 | $ | 0.18 | $ | 0.35 | |||||||||||||||||
Cash flow from operations per share2 | |||||||||||||||||||||||||||||||||
Basic | $ | 0.10 | $ | 0.45 | $ | 0.56 | $ | 0.45 | ($0.05 | ) | $ | 0.43 | $ | 0.62 | $ | 0.31 | |||||||||||||||||
Diluted | $ | 0.10 | $ | 0.44 | $ | 0.55 | $ | 0.44 | ($0.05 | ) | $ | 0.43 | $ | 0.61 | $ | 0.31 |
There were no extraordinary items reported in the last eight quarters.
1 | Adjusted to exclude the amortization of goodwill and indefinite life intangibles. | |
2 | Before changes in non-cash operating accounts and amortization of and investment in film and television programs. |
MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Distributions of $61 million from Network TEN were included in cash flow from operations in 2002. As a result of losses incurred in 2002, Network TEN will not make a distribution of 2002 earnings. TEN has adopted a policy of interim and final dividends for 2003 which will allow for a distribution to be paid early in the 2003 calendar year.
Cash and short-term investments were $61 million at August 31, 2002, compared to $20 million as of August 31, 2001.
Capital expenditures were $53 million for the year ended August 31, 2002, compared to $50 million for the previous fiscal year. Capital spending in 2002 included investment spending related to the Company’s new printing plant in Montreal, and fit-out of the digital specialty operations, Reach Canada, the Company’s contact centre and the Company’s centralized business services and information technology units. Planned capital expenditures for fiscal 2003 amount to approximately $50 million, including $7 million related to the fit-out of the Company’s central services.
Proceeds from divestitures and the sale of investments, including CFCF, CKVU and community newspapers, amounted to $477 million during 2002. In September 2001, the Company suspended the payment of dividends in favor of debt reduction.
Long-term debt, including the current portion, decreased $402 million during the year ended August 31, 2002 to $3,510 million. The Company made principal payments during 2002 of $511 million, offset by the issuance of $106 million in junior subordinated notes in satisfaction of payment in-kind interest.
The total credit available under the Company’s senior credit facility is $2,397 million, of which the Company had drawn approximately $1,797 million as of August 31, 2002. The facility includes revolving and non-revolving tranches with terms ranging from 6 to 8.5 years. The senior credit facility is collateralized by certain assets of the Company. Scheduled repayments of the Company’s senior credit facility amount to $127 million in fiscal 2003. In addition, the Company has outstanding $720 million in senior subordinated notes maturing in 2011. The senior subordinated notes are guaranteed by certain subsidiaries.
Total leverage under the Company’s senior credit facility was 5.25 times EBITDA for the year ended August 31, 2002, compared to a covenant of 5.75 times.
On May 2002, the Company secured certain amendments to its senior secured credit facility which, under certain conditions, (1) allow greater flexibility to repay the junior subordinated notes, and (2) defer the scheduled step-down of the total leverage ratio from 5.75 times to 5.50 times until February 2004.
The Company has entered into currency and interest rate swaps with certain lenders under its senior indebtedness. The average cost of debt, including junior subordinated notes, after taking into account other financial instruments in place, was 10%.
At August 31, 2002 the junior subordinated notes payable were $949 million. These notes bear interest at 12 1/8% and mature in 2010. At the Company’s option, interest payments to November 2005 may be paid in cash, by the issuance of additional notes or, subject to conditions, by the issuance of non-voting shares of the Company.
At August 31, 2002, Fireworks Entertainment had term loans outstanding in the amount of US$17 million with maturity dates in 2003, collateralized by rights to certain film and television programs, including an assignment of related accounts receivable. In October 2002, Fireworks closed a US$110 million stand-alone credit facility with a syndicate of lenders. This facility was used to repay existing debt financing and to finance future growth. The facility is a three year revolving facility secured by all assets of Fireworks Entertainment Inc. The loan bears interest at floating rates of LIBOR + 2.25% to 3.5%.
The Company’s primary market risk exposures are interest rate and currency exchange rate risk. The Company is exposed to interest rate risk and currency exchange rate fluctuations resulting from the issuance of floating rate debt and debt denominated in U.S. dollars. In addition to monitoring the ratio of fixed-rate debt to long-term debt, the Company uses interest rate swaps to manage the proportion of total debt that is subject to variable rates. Cross-currency swaps are used to hedge both the interest rate and the currency exposure on debt originally issued in U.S. dollars. The Company does not enter into any derivatives for trading purposes.
The Company has fully hedged the currency exposure on all of its U.S. dollar denominated debt, and has fixed the interest rate for the majority of its floating rate debt by entering into a combination of cross-currency swaps and interest rate swaps.
In addition to foreign exchange rate risk on foreign currency denominated debt, the Company is also exposed to some currency risk as a result of having investments and carrying on business in currencies other than the Canadian dollar. All of the Company’s foreign operations are self sustaining, and therefore foreign exchange gains and losses are deferred as a separate component of shareholders’ equity. The Company translates the earnings of equity accounted subsidiaries and affiliates at the average rate of translation of the relevant period. The Company recognizes deferred translation gains and losses as appropriate upon dispositions and/or distributions from such operations. The Company’s primary currency exposure is to variations in the Australian dollar relative to the Canadian dollar as a result of its investment in Network TEN. Currently, the Company does not use derivative financial instruments to manage its exposure to fluctuations in foreign currency exchange rates.
Based on current operations, the Company believes that cash flow from operations, together with available borrowing capacity under the senior credit facility, will be adequate to meet its anticipated requirements for working capital, capital expenditures, interest payments and its potential obligation to redeem Series 2 preference shares.
Although the Company has no current undertakings or agreements with respect to material acquisitions or investments, from time to time potential acquisitions and investments are evaluated and, to the extent permitted by the terms of senior debt instruments, the Company may make such acquisitions or investments should attractive opportunities arise. The Company expects that the funding for any such acquisitions or investments would come from working capital, borrowing under the senior credit facility or future credit facilities, additional equity and debt financing, entering into joint ventures or a combination of these options.
MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NETWORK TEN
Set forth below is a discussion of Network TEN’s results of operations without giving effect to the Company’s proportionate interest in Network TEN.
Fiscal 2002 Compared to Fiscal 2001
Operating expenses of the Australian television operation increased by A$60 million, or 17%, to A$416 million for the year ended August 31, 2002, from A$356 million in the same period in the previous year. The increase reflected the investment in a winning program strategy that included the most watched Australian program,Big Brother, and sports programming with wide audience appeal, such as the AFL games.
EBITDA increased by A$22 million, or 15%, to A$172 million for the year ended August 31, 2002, from A$150 million for the same period in the previous year.
Revenue’s from Eye Corp., TEN’s out-of-home operation, increased by A$30 million, or 59%, to A$80 million for the year ended August 31, 2002, from A$50 million the previous year, which included only eight months of Eye Corp. results.
Operating expenses at Eye Corp. increased by 67% to A$78 million, from A$47 million the previous year due to the inclusion of a full year of Eye Corp. results in 2002 compared to eight months in 2001.
EBITDA of Eye Corp. decreased to A$2 million from A$4 million the previous year.
Shortly before the end of the fiscal year, Network TEN acquired the remaining 40% of Eye Corp. for A$10 million. The potential for growth and profits in the out-of-home market remains substantial, but the difficult advertising environment at this time has affected the out-of-home industry more than other media. Acquisition of full ownership and control of the company will enable TEN to make the necessary realignments of management and strategy to realize further efficiencies.
In 2002, Network TEN recorded an investment loss of A$20 million related to the write down of other investments to fair value. In 2001, Network TEN had a net investment income of A$35 million.
As a result of the adoption of new accounting policies under Canadian GAAP no amortization of goodwill and indefinite life intangibles was recorded. In the previous year, amortization of A$14 million was recorded. In 2002, Network TEN recognized a goodwill impairment loss of A$168 million related to its investment in Eye Corp. In accordance with the new accounting policy, A$102 million was recorded as a charge against opening retained earnings, and A$66 million charged against 2002 earnings. The decline in fair value is attributable to weaknesses in the out-of-home advertising market and to certain operational issues.
Financing expenses, excluding interest in respect of subordinated debentures, increased to A$27 million from A$18 million in the previous year, reflecting higher debt levels.
Income tax expense increased to A$71 million in 2002, compared to A$24 million in 2001 as a result of increased taxable income, as well as the A$36 million settlement with the Australian Tax Office, as described in the following section.
Network TEN’s earnings, excluding interest in respect of subordinated debentures, decreased to a loss of A$23 million for the year ended August 31, 2002, from earnings of A$123 million in the previous year.
Fiscal 2001 Compared to Fiscal 2000
Operating expenses before depreciation and amortization increased A$54 million, or 15%, to A$406 million for the year ended August 31, 2001, from A$353 million for the previous year. The increase is primarily attributable to the inclusion of A$47 million in Eye Corp. operating expenses, as well as increased operating costs associated with transmission of digital broadcast signals.
EBITDA decreased A$46 million, or 24%, to A$149 million for the year ended August 31, 2001, from A$195 million for the previous year.
Network TEN’s investment income totaled A$35 million for the year ended August 31, 2001. This included gains on sale of certain listed investments of A$57 million and sale of excess
real property of A$7 million. These gains were partially offset by a loss of A$29 million resulting from the write-off of certain of Network TEN’s online investments, primarily the result of the discontinuance of its SCAPE joint ventures.
Amortization expenses increased by A$12 million, to A$25 million for the year ended August 31, 2001, from A$14 million in the previous year. This increase was primarily attributable to the additional amortization resulting from the acquisition of 60% of Eye Corp.
Financing expenses, excluding interest in respect of subordinated debentures, increased to A$18 million for the year ended August 31, 2001, from A$2 million in the previous year, reflecting higher debt levels.
Income tax expense decreased by A$10 million, to A$24 million for the year ended August 31, 2001, from A$34 million in the previous year, as a result of the reduction in earnings.
Network TEN’s earnings, excluding interest in respect of subordinated debentures, decreased by A$25 million, or 17%, to A$123 million for the year ended August 31, 2001, from A$148 million in the previous year.
Liquidity and Capital Resources
Capital expenditures for replacement of capital assets were A$32 million for the year ended August 31, 2002, compared to A$23 million in the same period last year. As required by its existing broadcast licence, Network TEN converted to digital signal transmission in January 2001. The total capital cost of the conversion is estimated at A$80 million, which will be expended over a five year period.
MANAGEMENT DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In August 2002, Network TEN acquired the remaining interest in Eye Corp. that it did not already own for A$10 million.
In January 2002, Network TEN paid distributions aggregating A$139 million.
As a result of losses incurred in 2002, Network TEN will not make a distribution of 2002 earnings. TEN has adopted a policy of interim and final dividends for the 2003 fiscal year. This will allow a cash distribution to be paid early in the 2003 calendar year from earnings generated in the first half of fiscal 2003.
As of August 31, 2002, Network TEN had cash on hand of A$12 million, compared to A$22 million as of August 31, 2001.
Network TEN has a credit facility with a syndicate of banks providing for operating and term credit facilities in the aggregate amount of A$700 million. The credit facility is secured by a lien on substantially all of the assets of Network TEN and its subsidiaries. Outstanding loans under Network TEN’s credit facility totaled A$460 million on August 31, 2002.
A longstanding dispute between TEN and the Australian Tax Office (“ATO”) regarding the deductibility of debenture interest paid to CanWest was resolved in August 2002. As a result, the ATO will allow TEN to continue to deduct interest on its subordinated debentures until June 30, 2004. After that date, in accordance with new tax legislation in Australia that will come into effect on July 1, 2004, TEN will no longer be entitled to tax deductions for interest in respect of the subordinated debentures. The settlement resulted in a non-recurring income tax expense of A$36 million in 2002.
REGULATORY STRUCTURE
OUTLOOK
Integration of the newly acquired newspaper and interactive assets in Canada with the Company’s existing Canadian media assets is already well underway. Nevertheless, considerable additional scope remains to extract full value from the cost reduction and revenue enhancement opportunities available from combining television, newspaper and interactive assets on a national scale in Canada.
Over the past year, the Company has revamped its national and local sales organizations to take advantage of multi-platform sales opportunities. The Company has created a national promotions team to extract value from the cross-promotion of its various media. The Company also has strengthened its executive capacity to drive the integration of news and information content in order to enhance both the quantity and quality available for all our media outlets. Building on these initiatives will be top operating priorities in 2003.
Initiatives currently underway will provide the Company’s newspaper publishers with the means to improve overall information content with enhanced local reporting and access to more and better quality national and international reporting and quality features through the facilities of an expanded CanWest news service and national news network. The tremendous success ofGlobal National with Kevin Newman, and theGlobal Sundaycurrent affairs program also provide valuable platforms on which to build a more competitive television news and public affairs franchise. All of these initiatives will improve the competitive position of CanWest Canadian media operations and should contribute to improved earnings in future years.
Debt reduction remains the Company’s senior corporate priority. With a reduction of over $500 million in senior debt achieved over the past year, and with the expectation of improved operating results and significant additional potential to generate cash from the sale of other non-core assets, the Company anticipates a significant opportunity to reduce debt further in fiscal 2003.
Higher ratings and market shares of Canadian television operations at Global, as well as at the Company’s international operations, should contribute to continued increased revenues and EBITDA profits as advertising markets recover. In Canada
investments in new programming such asPGA Golf, acclaimed mini-series such asBand of Brothers and continued strong performance from the prime time schedules should help Global and CH to remain the first choice among conventional television alternative for Canadian advertisers. The success of the Company’s new digital specialty channels, in particular Fox SportsWorld and LoneStar, have diversified the Company’s offering to Canadian advertisers and will become increasingly important as the number of subscribers to digital television services continues to grow.
In March 2003, the Company will add to that diversified offering with the inclusion of a jazz themed digital channel, COOL TV and the launch of CanWest’s first Canadian radio station COOL 99.1 FM in the Company’s home city of Winnipeg. The inclusion of radio and music-themed television programming will add to the range of multi-platform offerings to Canadian advertisers.
In sum, the combination of reduced unit costs, solid ratings performance in television, improving advertising markets for both television and newspapers, the immediate prospects are for sustained positive momentum in revenues and EBITDA. Further progress in the reduction of corporate debt should reduce interest costs, improve the Company’s balance sheet and contribute to higher profits going forward.
Differences Between Canadian GAAP and U.S. GAAP
MANAGEMENT'S REPORT TO SHAREHOLDERS
The accompanying financial statements were prepared by the management of the Company, which is responsible for the integrity and objectivity of the information contained therein. The statements have been prepared by qualified personnel in accordance with policies and procedures established by management. The Company’s procedures and related internal control systems are designed to provide assurance that accounting records are reliable and to safeguard the Company’s assets.
In management’s opinion, the consolidated financial statements fairly reflect the financial position of the Company, the results of its operations and cash flow, and are prepared in accordance with generally accepted accounting principles.
In addition to the consolidated financial statements, management has prepared unaudited combined financial information, which includes the accounts of the Company’s investment in Network TEN on a proportionately consolidated basis, which are supplementary to the consolidated financial statements. Management believes that the unaudited combined financial information provide additional meaningful information regarding the magnitude and impact of the Company’s investment in Network TEN.
PricewaterhouseCoopers LLP, as the Company’s external auditors, have audited the consolidated financial statements, and their report can be found on page 37. Their opinion is based upon an examination conducted in accordance with generally accepted auditing standards in Canada and a review of certain of the Company’s accounting policies
and procedures and internal control systems. Based upon the evaluation of these systems, the external auditors conduct appropriate tests of the Company’s accounting records and obtain sufficient audit evidence to provide reasonable assurance that the financial statements are presented fairly, in all material respects, in accordance with Canadian generally accepted accounting principles.
The Audit Committee, none of the members of which are officers of the Company, meets at various times throughout the year and reviews the Company’s consolidated financial statements before recommending them to the Board of Directors for approval. It also reviews reports prepared by the external auditors of the Company on the Company’s accounting policies and procedures and internal control systems. The Audit Committee recommends the appointment of the Company’s external auditors, who are appointed annually by the Company’s shareholders.
JOHN MAGUIRE
V.P. FINANCE AND
CHIEF FINANCIAL OFFICER
NOVEMBER 1, 2002
November 1, 2002 | PricewaterhouseCoopers LLP | |
Chartered Accountants | ||
One Lombard Place | ||
Suite 2300 | ||
Winnipeg Manitoba | ||
Auditors’ Report | Canada R3B 0X6 | |
Telephone +1 (204) 926 2400 | ||
Facsimile +1 (204) 944 1020 |
To the Shareholders of
CanWest Global Communications Corp.
We have audited the consolidated balance sheets ofCanWest Global Communications Corp.as at August 31, 2002 and August 31, 2001 and the consolidated statements of earnings, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 2002 and August 31, 2001 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
November 1, 2002
Comments by Auditors on Canada-U.S. Reporting Difference
In the United States, reporting standards for auditors require the addition of an explanatory paragraph when there are changes in accounting principles that have a material effect on the comparability of the Company’s financial statements, such as the changes described in note 1 to the consolidated financial statements. Our report to the shareholders dated November 1, 2002 is expressed in accordance with Canadian reporting standards which do not require a reference to such changes in accounting principles in the auditors’ report when the changes are properly accounted for and adequately disclosed in the financial statements.
Chartered Accountants
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED AUGUST 31
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Revenue | 2,272,783 | 1,944,775 | |||||||
Operating expenses | 1,244,263 | 1,121,392 | |||||||
Selling general and administrative expenses | 558,214 | 382,312 | |||||||
470,306 | 441,071 | ||||||||
Amortization of intangibles and goodwill | 17,500 | 90,159 | |||||||
Amortization of property, plant and equipment | 74,654 | 60,565 | |||||||
Other amortization | 6,670 | 5,240 | |||||||
371,482 | 285,107 | ||||||||
Financing expenses | (376,632 | ) | (356,755 | ) | |||||
Investment gains net of write-down of investments | 32,043 | 28,630 | |||||||
Dividend income | 3,241 | 2,952 | |||||||
30,134 | (40,066 | ) | |||||||
Provision for (recovery of) income taxes | 7,108 | (59,019 | ) | ||||||
Earnings before the following | 23,026 | 18,953 | |||||||
Minority interests | 4,330 | (3,196 | ) | ||||||
Interest in earnings (loss) of Network TEN | (11,815 | ) | 52,567 | ||||||
Interest in loss of other equity accounted affiliates | (1,523 | ) | (14,491 | ) | |||||
Realized currency translation adjustments | (1,000 | ) | (7,200 | ) | |||||
Net earnings for the year | 13,018 | 46,633 | |||||||
Net earnings per share | |||||||||
Basic | $0.07 | $0.27 | |||||||
Diluted | $0.07 | $0.27 | |||||||
The notes constitute an integral part of the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31
2002 | 2001 | |||||||
$000 | $000 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | 61,090 | 19,489 | ||||||
Accounts receivable | 470,246 | 475,618 | ||||||
Income taxes recoverable | 33,334 | — | ||||||
Inventory | 19,836 | 30,817 | ||||||
Investment in film and television programs | 98,096 | 96,385 | ||||||
Future income taxes | 30,013 | 33,243 | ||||||
Other | 13,726 | 17,840 | ||||||
726,341 | 673,392 | |||||||
Investment in Network TEN | 4,494 | 107,210 | ||||||
Other investments | 162,361 | 415,413 | ||||||
Investment in film and television programs | 317,176 | 355,994 | ||||||
Property, plant and equipment | 679,224 | 707,811 | ||||||
Other assets | 103,975 | 130,966 | ||||||
Intangibles | 1,096,458 | 1,080,412 | ||||||
Goodwill | 2,631,099 | 2,828,022 | ||||||
5,721,128 | 6,299,220 | |||||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Bank loans and advances | — | 28,999 | ||||||
Accounts payable | 164,988 | 131,542 | ||||||
Accrued liabilities | 227,104 | 268,891 | ||||||
Income taxes payable | — | 1,175 | ||||||
Film and television program accounts payable | 64,834 | 45,084 | ||||||
Deferred revenue | 60,596 | 75,970 | ||||||
Current portion of long term debt | 172,753 | 116,500 | ||||||
690,275 | 668,161 | |||||||
Long term debt | 3,337,163 | 3,795,262 | ||||||
Other accrued liabilities | 86,217 | 88,809 | ||||||
Future income taxes | 431,562 | 440,992 | ||||||
4,545,217 | 4,993,224 | |||||||
SHAREHOLDERS’ EQUITY | ||||||||
Capital stock | 896,422 | 896,313 | ||||||
Contributed surplus | 3,647 | 3,647 | ||||||
Retained earnings | 317,376 | 475,053 | ||||||
Cumulative foreign currency translation adjustments | (41,534 | ) | (69,017 | ) | ||||
1,175,911 | 1,305,996 | |||||||
5,721,128 | 6,299,220 | |||||||
The notes constitute an integral part of the consolidated financial statements.
Signed on behalf of the board
Director
Director
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED AUGUST 31
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Retained earnings — beginning of year, as previously reported | 475,053 | 529,112 | |||||||
Adjustment for adoption of new accounting pronouncements | (170,695 | ) | (5,164 | ) | |||||
Retained earnings — beginning of year, as adjusted | 304,358 | 523,948 | |||||||
Net earnings for the year | 13,018 | 46,633 | |||||||
Dividends | |||||||||
Cash | — | (49,003 | ) | ||||||
Stock | — | (46,525 | ) | ||||||
Retained earnings — end of year | 317,376 | 475,053 | |||||||
The notes constitute an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
CASH GENERATED (UTILIZED) BY: | |||||||||
Operating activities | |||||||||
Net earnings for the year | 13,018 | 46,633 | |||||||
Items not affecting cash | |||||||||
Amortization | 108,765 | 166,979 | |||||||
Interest paid in kind | 105,790 | 75,947 | |||||||
Future income taxes | 11,209 | (97,281 | ) | ||||||
Interest in (earnings) loss of Network TEN | 11,815 | (52,567 | ) | ||||||
Interest in loss of other equity accounted affiliates | 1,523 | 14,491 | |||||||
Minority interests | (4,330 | ) | 3,196 | ||||||
Realized currency translation adjustments | 1,000 | 7,200 | |||||||
Investment gains net of write-down of investments | (32,043 | ) | (28,630 | ) | |||||
Write-off of deferred financing fees | — | 17,900 | |||||||
Distributions from Network TEN | 60,984 | 71,096 | |||||||
277,731 | 224,964 | ||||||||
Investment in film and television programs | (194,619 | ) | (267,437 | ) | |||||
Amortization of film and television programs | 132,033 | 157,629 | |||||||
Other changes in non-cash operating accounts | (55,554 | ) | (51,406 | ) | |||||
159,591 | 63,750 | ||||||||
Investing activities | |||||||||
Acquisitions | — | (2,007,291 | ) | ||||||
Other investments | (5,187 | ) | (1,733 | ) | |||||
Proceeds from sale of other investments | 87,000 | 65,596 | |||||||
Proceeds from divestitures | 390,059 | 32,454 | |||||||
Purchase of property and equipment | (53,338 | ) | (49,641 | ) | |||||
418,534 | (1,960,615 | ) | |||||||
Financing activities | |||||||||
Dividends paid | — | (49,003 | ) | ||||||
Issuance of long term debt | 3,255 | 3,903,291 | |||||||
Repayment of long term debt | (510,889 | ) | (2,030,988 | ) | |||||
Issuance of share capital | 109 | 4,012 | |||||||
Net change in bank loans and advances | (28,999 | ) | 12,744 | ||||||
(536,524 | ) | 1,840,056 | |||||||
Net change in cash | 41,601 | (56,809 | ) | ||||||
Cash and cash equivalents — beginning of year | 19,489 | 76,298 | |||||||
Cash and cash equivalents — end of year | 61,090 | 19,489 | |||||||
Cash flow per share | |||||||||
Basic | $1.57 | $1.31 | |||||||
Diluted | $1.52 | $1.31 |
The notes constitute an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2002 AND 2001
1. SIGNIFICANT ACCOUNTING POLICIES
The Company is an international media company with interests in broadcast television, publishing, radio, specialty cable channels, out-of-home advertising, production and distribution of film and television programming and internet websites in Canada, Australia, New Zealand, Ireland and Northern Ireland. The Company’s operating segments include television and radio broadcasting, entertainment and publishing and online operations. In Canada, the Television Broadcasting segment includes the operation of the Global Television Network, Global Prime and various other conventional and specialty channels. The Canadian Publishing and Online segment includes the publication of a number of newspapers, including metropolitan daily newspapers, community newspapers and the National Post, as well as operation of the canada.com web portal and other web-based operations. The Entertainment segment includes the operation of Fireworks Entertainment, a producer and distributor of film and television programs. The New Zealand Television Broadcasting segment includes the operations of the TV3 and TV4 Television Networks. The New Zealand Radio Broadcasting segment includes the More FM and RadioWorks radio networks. The Irish Television Broadcasting segment includes the Company’s 45% interest in the Republic of Ireland’s TV3 Television Network. The Corporate and Other segment includes the Company’s 57.5% economic interest in The TEN Group Pty Limited, which owns and operates Australia’s TEN Television Network (“Network TEN”) and various portfolio investments in media operations, including a 29.9% equity interest in Northern Ireland’s Ulster Television plc (“UTV”).
The Company’s broadcast customer base is comprised primarily of large advertising companies who place advertisements with the Company on behalf of their customers. Publishing revenues include advertising, circulation and subscriptions which are derived from a variety of sources. The Company’s advertising revenues are seasonal. Revenues are highest in the first and third quarters, while expenses are relatively constant throughout the year.
A summary of significant accounting policies followed in the preparation of these consolidated financial statements is as follows:
BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION
INVESTMENTS
Other investments are recorded at the lower of cost and net realizable value. A provision for loss in value of other investments is made when the decline in current market values is considered other than temporary.
INVESTMENT IN FILM AND TELEVISION PROGRAM RIGHTS
b) Film and television programs
Costs of film and television programs in development represent expenditures made on projects prior to production, including investments in scripts. Advances or contributions received from third parties to assist in development are deducted from these costs. Upon commencement of production, development costs are reclassified to investment in film and television programs. Development costs are written off at the earlier of when determined not to be recoverable and three years following the year incurred. Costs of advertising and marketing are expensed as incurred.
Amortization of investment in completed films and television programs and accrual of participation costs are calculated using the individual film forecast computation method, based on the ratio that current period revenue earned from the film and television programs bears to management’s estimate of ultimate revenue expected to be recognized from the exploitation of the film or television program.
Estimates of ultimate future revenue are prepared on a title-by-title basis and reviewed periodically based on current market conditions. For episodic television series, until ultimate revenue estimates include revenues from secondary markets, capitalized costs for each episode are limited to the amount of revenue contracted for each episode. Ultimate revenue includes estimates of secondary market revenue only when the Company can demonstrate through its experience or industry norms, that the number of episodes already produced, plus those for which a firm commitment exists and the Company expects to deliver, can be licenced successfully in the secondary market. Ultimate revenue estimates include revenues for up to ten years for film and television programs produced by the Company, and up to 20 years for acquired libraries.
The valuation of film and television programs, including acquired film libraries, is reviewed on a title-by-title basis. When an event or change in circumstances indicates that the fair value of a film or television program is less than its unamortized cost, the fair value is determined using management’s estimate of discounted future cash flows. A write-down is recorded equivalent to the amount by which the unamortized costs exceeds the estimated fair value of the film or television program.
FOREIGN CURRENCY TRANSLATION
PROPERTY AND EQUIPMENT
Buildings | 2 1/2 | % | — | 5 | % | |||||||
Machinery and equipment | 4 | % | — | 33 1/3 | % | |||||||
Leasehold and land improvements | 2 1/2 | % | — | 20 | % |
INTANGIBLE ASSETS
Circulation and other finite life intangibles are amortized over periods from 5 to 40 years. Intangibles with indefinite lives are not subject to amortization and are tested for impairment annually. Impairment of indefinite life intangibles is tested by comparing the fair value of the intangible asset to its carrying value.
GOODWILL
PRE-OPERATING COSTS
REVENUE RECOGNITION
Revenue derived from the sale or licencing of film and television program distribution rights is recognized when all of the following conditions are met: persuasive evidence of a sale or licensing arrangement exists; the film is complete and has been delivered or is available for immediate and unconditional delivery; the licence period has begun; the fee is fixed or determinable and collection of the fee is reasonably assured.
Amounts received or receivable and not yet recognized as revenue are included in deferred revenue.
INCOME TAXES
Income taxes on unremitted earnings of Network TEN are provided at rates applicable to distributions. Income taxes on unremitted earnings of foreign operations other than Network TEN are not provided as such earnings are expected to be indefinitely reinvested.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
INVENTORY
PENSION PLANS AND POST RETIREMENT BENEFITS
CASH AND CASH EQUIVALENTS
PER SHARE CALCULATIONS
Diluted earnings and cash flow per share are calculated using the daily weighted average number of shares that would have been outstanding during the year had all potential common shares been issued at the beginning of the year, or when the underlying options or convertible securities were granted or issued, if later. The treasury stock method is employed to determine the incremental number of shares that would have been outstanding had the Company used proceeds from the exercise of options to acquire shares.
Basic earnings per share was calculated based on weighted average shares outstanding for 2002 of 176,957,000 (2001 — 171,421,000). The dilutive effect of outstanding stock options in 2002 is 27,000 shares (2001 — 130,000 shares). The dilutive effect of preference shares is 5,275,000 shares (2001 — 659,000 shares) resulting in a denominator for diluted earnings per share of 182,259,000 (2001 — 172,210,000). The Company had 1,721,000 options outstanding in 2002 which would have been anti-dilutive (2001 — 971,000 options).
STOCK-BASED COMPENSATION PLANS
The following are pro forma results as if the Company had applied the fair value based method of accounting for stock-based compensation.
The fair value of the options granted during 2002 was estimated using the Black-Scholes option pricing model with the assumptions of no dividend yield (2001 — 2%), an expected volatility of 40% (2001 — 60%), risk free interest rates of 4.8% to 5.4% (2001 — 5.4% to 5.6%) and an expected life of 6 to 9 years (2001 — 6 to 9 years).
The total fair value of 233,458 stock options that were granted by the Company during 2002 was $1,542,300 (during 2001, 240,440 stock options were granted with a total fair value of $1,969,000). The proforma cost of stock compensation expense for the year ended August 31, 2002 would be $2,303,000 (2001 — $1,229,000). A value of $4,548,000 will be charged to proforma net earnings in future years according to the vesting terms of the options. The resulting proforma net earnings and diluted earnings per share for the year ended August 31, 2002 are $10,715,000 and $0.06 respectively (2001 — $45,404,000 and $0.26).
The effects of applying this method in the proforma disclosure are not indicative of future amounts. The Company’s proforma disclosure does not apply to awards prior to 1996, and additional awards in future years are anticipated.
FINANCIAL INSTRUMENTS
USE OF ESTIMATES
The Company operates in highly competitive markets. The Company has estimated the useful lives of intangible assets and the value of goodwill, based on historical customer patterns, industry trends and existing competitive factors. Significant long-term changes in these factors could result in a material impairment of the value and life of intangible assets and goodwill.
In addition, management estimates ultimate revenue from film and television programs to determine amortization and fair values of investments in film and television programs. Actual revenues may differ from these estimates.
CHANGES IN ACCOUNTING POLICIES
b) Business combinations, intangibles and goodwill
Under Section 1581, all business combinations initiated after June 30, 2001, must be accounted for as a purchase. In addition, the standards require classification of carrying amounts of goodwill and other intangibles related to purchase business combinations in accordance with the new definitions of intangibles. The standard requires intangibles assets to be recognized separately from goodwill if an asset arises from contractual or other legal rights, or is separable. These provisions are applicable to business combinations consummated after June 30, 2001 and for any recognized intangibles acquired in a business combination prior to July 1, 2001 when Section 3062 is first applied. This section
was adopted by the Company on September 1, 2001 and applied prospectively.
On September 1, 2001, the Company adopted Section 3062,Goodwill and Other Intangibles. As a result of adopting the new standard, goodwill and certain intangibles with indefinite lives, including newspaper mastheads and broadcast licences, are no longer amortized. Circulation and other intangibles are amortized over periods from 5 to 40 years. As a result of applying the new standards, no impairment in intangibles with indefinite lives or goodwill have been identified at the Company or any of its subsidiaries. However, an initial goodwill impairment was identified by Network TEN in its reporting unit, Eye Corp., resulting in a charge to the Company’s retained earnings of $45.3 million (net of income tax recoveries of $2.5 million). In addition, as a result of events occurring after the beginning of 2001, a goodwill impairment of $30.2 million (net of income tax recoveries of $2.0 million) has been reflected in the Company’s interest in loss of Network TEN in the Company’s statement of earnings for the period ended August 31, 2002 (see note 3).
This change in accounting policy has been applied prospectively commencing September 1, 2001. The tables below provide a reconciliation of previously reported 2001 earnings to net earnings adjusted to exclude amortization of goodwill and intangible assets with indefinite lives.
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Reported net earnings for the year | 13,018 | 46,633 | |||||||
Amortization of goodwill and indefinite life intangibles, net of tax of $11,975 for the year ended August 31, 2001 | — | 64,338 | |||||||
Amortization of goodwill and indefinite life intangibles in equity accounted affiliates, net of tax of nil | — | 6,211 | |||||||
Net earnings for the year adjusted to exclude amortization expense recognized in 2001 | 13,018 | 117,182 | |||||||
Net earnings per share: | |||||||||
Reported net earnings | |||||||||
Basic | $0.07 | $0.27 | |||||||
Diluted | $0.07 | $0.27 | |||||||
Adjusted net earnings | |||||||||
Basic | $0.07 | $0.68 | |||||||
Diluted | $0.07 | $0.68 |
c) Accounting for film and television programs
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
The principal changes as a result of applying SOP 00-2 are as follows:
Cash outflows incurred to acquire, produce and develop film and television programs, which were previously presented under investing activities in the consolidated statement of cash flows, are presented under cash flows from operating activities.
Advertising and marketing participation costs, which were previously capitalized to investment in film and television programs and amortized using the individual film forecast method, are now expensed as incurred. This change resulted in a reduction of $26.0 million in investment in film and television programs and a reduction of $9.2 million in other assets.
Ultimate revenue includes estimates of revenue that are expected to be recognized from the exploitation, exhibition and sale of a film or program in all markets and territories, subject to certain limitations. These limitations include certain exclusions for estimates of secondary market revenue that were previously included by the Company in ultimate revenue. This change resulted in a reduction of $18.6 million to investment in film and television programs.
The valuation of investment in film and television programs is reviewed on a title-by-title basis when an event or change in circumstances indicate that the fair value of a film or television program is less than its unamortized cost. The fair value of the film or television program, previously determined using an undiscounted expected future revenue approach, is now determined using management’s future revenue estimates and a discounted cash flow approach. A write-down is recorded equivalent to the amount by which the unamortized costs exceed the estimated fair value of the film or television program. This change resulted in a reduction of $69.0 million in investment in film and television programs.
Development costs related to overall deals that cannot be identified with specific projects, which were previously capitalized, are now expensed as incurred. This change resulted in a reduction of $2.6 million in investment in film and television programs.
The effect of this change in accounting policy on the Company’s net earnings for 2002 is not readily determinable.
PROPOSED ACCOUNTING POLICIES
2. ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
b)In April 2001, through an amalgamation of CanWest Broadcasting Ltd. (“CBL”), the 29.34% minority interest in CBL was exchanged for 21,783 Series 2 preference shares of the Company, rendering CBL a wholly owned subsidiary. The redemption and conversion value of the shares is based on valuations which have not been finally determined and was estimated at $50.0 million. As at August 31, 2002, the estimated redemption and conversion value is $54.7 million.
c)In January 2001, the Company acquired the shares of RadioWorks that it did not already own. The cost to acquire this 28% interest was $21.8 million.
d)On November 16, 2000, the Company acquired substantially all of the Canadian newspaper and other Canadian media assets including a 50% interest in the National Post (“CanWest Publications”) of Hollinger International Inc. and certain of its affiliates (“Hollinger”) for consideration of approximately $3.1 billion, including certain costs related to the acquisition.
The purchase price is subject to adjustment based on the working capital of CanWest Publications at August 31, 2000 and the results of its operations from September 1, 2000 to November 16, 2000. The amount of such adjustment is subject to negotiation between the parties and has not been finally determined. When finalized, the working capital adjustment payable or refundable will increase or decrease the amount of goodwill recorded on the acquisition.
The Company partially financed the acquisition and refinanced certain existing credit facilities by entering into a new senior secured credit facility, of which the Company had drawn approximately $2.5 billion at closing. In addition, the Company issued US$425.0 million and $60.7 million in senior subordinated notes, and approximately $767.0 million in subordinated notes payable to Hollinger. The Company also issued 2.7 million Series 1 preferred shares and 24.3 million non-voting shares to Hollinger.
During the year ended August 31, 2002, the Company adjusted the allocation of the purchase price based on valuations of intangibles which were completed in the year. This resulted in an increase in mastheads, circulation and other intangibles, a reduction in goodwill and an increase in the future tax liability. The prior period was restated to reflect this reallocation.
The Company accounted for these acquisitions using the purchase method. As such, the results of operations reflect the revenues and expenses of the acquired operations since the dates of acquisition.
A summary of the fair value of assets acquired is as follows:
2002 | 2001 | |||||||||||||||||||
National Post1 | CanWest Publications2 | RadioWorks | CBL | Total | ||||||||||||||||
$000 | $000 | $000 | $000 | $000 | ||||||||||||||||
Current assets | 50,257 | 324,382 | — | — | 324,382 | |||||||||||||||
Property, plant and equipment | 12,436 | 537,053 | — | — | 537,053 | |||||||||||||||
Other investments | — | 101,561 | — | — | 101,561 | |||||||||||||||
Other assets | — | 67,412 | — | — | 67,412 | |||||||||||||||
Circulation and other intangibles | 10,700 | 129,300 | — | — | 129,300 | |||||||||||||||
Newspaper mastheads and broadcast licences | 35,000 | 330,000 | — | 25,466 | 355,466 | |||||||||||||||
Goodwill | 62,987 | 2,101,619 | 16,928 | — | 2,118,547 | |||||||||||||||
Total assets | 171,380 | 3,591,327 | 16,928 | 25,466 | 3,633,721 | |||||||||||||||
Current liabilities | (50,665 | ) | (294,856 | ) | — | — | (294,856 | ) | ||||||||||||
Other accrued liabilities | — | (10,000 | ) | — | — | (10,000 | ) | |||||||||||||
Future income taxes | (14,600 | ) | (158,587 | ) | — | — | (158,587 | ) | ||||||||||||
Minority interests | (22,500 | ) | — | 4,842 | 3 | 24,534 | 3 | 29,376 | ||||||||||||
Total liabilities | (87,765 | ) | (463,443 | ) | 4,842 | 24,534 | (434,067 | ) | ||||||||||||
83,615 | 3,127,884 | 21,770 | 50,000 | 3,199,654 | ||||||||||||||||
Consideration: | ||||||||||||||||||||
Cash | — | 1,985,521 | 21,770 | — | 2,007,291 | |||||||||||||||
Shares | — | 375,516 | — | 50,000 | 425,516 | |||||||||||||||
Note payable | — | 766,847 | — | — | 766,847 | |||||||||||||||
Carrying value of The National Post Company investment at date of acquisition | 83,615 | — | — | — | — | |||||||||||||||
83,615 | 3,127,884 | 21,770 | 50,000 | 3,199,654 | ||||||||||||||||
1 | The remaining 50% interest at acquisition of control, September 1, 2001. | |
2 | Including a 50% interest in National Post. | |
3 | The allocation of consideration to minority interests represents the extinguishment of those interests. |
DIVESTITURES
b)On October 31, 2001, the Company completed the sale of CKVU Sub Inc., and received proceeds of $133.0 million. The accounting gain on the sale was $67.7 million; assets and liabilities disposed amounted to $84.1 million and $18.8 million, respectively.
c)On September 12, 2001, the Company completed the sale of CF Television Inc., and received proceeds of $87.0 million. No gain or loss arose from this transaction; assets and liabilities disposed amount to $87.0 million and nil, respectively.
d)On August 31, 2001 the Company sold its 50% interest in ROBTv for $30.0 million. No gain or loss arose from this sale; assets and liabilities disposed amount to $30.0 million and nil, respectively.
e)On March 28, 2001, the Company restructured its controlling interest in TV3 Ireland through a series of transactions, which included: (i) the repayment by TV3 Ireland of loans made by the Company and another minority investor, (ii) the exercise of certain call options by the Company and (iii) the acquisition by Granada Media plc of a 45% interest in TV3 Ireland from the Company and another minority investor. The Company received cash, net of the call price and including repayment of loans made to TV3 Ireland of $32.5 million and recorded a gain on disposition of $30.7 million. The Company and Granada Media plc also entered into a joint venture agreement to jointly control TV3 Ireland. As a result, effective March 28, 2001, the Company began to proportionately consolidate its 45% interest in TV3 Ireland.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
3. INVESTMENT IN NETWORK TEN
The Company owns approximately 15% of the issued ordinary shares and all of the convertible debentures and subordinated debentures of Network TEN, an Australian television broadcast network. The subordinated debentures have an aggregate principal amount of A$45.5 million and pay interest based on distributions to holders of Network TEN’s ordinary shares. The convertible debentures have an aggregate principal amount of A$45,500 and pay a market linked rate of interest. The combination of ordinary shares and subordinated debentures yield distributions equivalent to approximately 57.5% of all distributions paid by Network TEN. The convertible debentures are convertible, upon payment of an aggregate of A$45.5 million, into a number of ordinary shares which would represent 50% of the issued and outstanding shares of Network TEN at the time of conversion.
As a result of its contractual right to representation on Network TEN’s board of directors and other factors, the Company accounts for its interest in Network TEN on the equity basis. The Company has appointed three of the thirteen members of the board of directors of Network TEN.
The following selected consolidated financial information of Network TEN has been prepared in accordance with accounting principles generally accepted in Canada. The accounts have been translated to Canadian dollars using the current rate method.
SUMMARY CONSOLIDATED BALANCE SHEETS
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Assets | |||||||||
Current assets | 285,303 | 192,460 | |||||||
Other assets | 4,825 | 7,893 | |||||||
Property, plant and equipment | 71,875 | 61,967 | |||||||
Long term investments | 2,188 | 17,516 | |||||||
Intangibles | 246,305 | 245,721 | |||||||
Goodwill | 49,304 | 215,615 | |||||||
659,800 | 741,172 | ||||||||
Liabilities and Shareholders’ Equity | |||||||||
Current liabilities | 191,736 | 194,813 | |||||||
Other long term liabilities | 442,975 | 251,390 | |||||||
Minority interest | — | 54,433 | |||||||
Subordinated debentures issued to the Company | 40,154 | 40,154 | |||||||
Share capital | 40,146 | 40,146 | |||||||
Retained earnings (deficit) | (52,232 | ) | 177,251 | ||||||
Cumulative foreign currency translation adjustment | (2,979 | ) | (17,015 | ) | |||||
659,800 | 741,172 | ||||||||
OTHER CONSOLIDATED FINANCIAL DATA | |||||||||
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Cash flow from operations1 | 75,000 | 105,000 | |||||||
Distributions paid | 111,900 | 130,000 | |||||||
Capital expenditures | 25,700 | 18,600 | |||||||
1 | Cash flow from operations before changes in non-cash operating accounts. |
SUMMARY CONSOLIDATED STATEMENTS OF EARNINGS | ||||||||
2002 | 2001 | |||||||
$000 | $000 | |||||||
Revenue | 555,653 | 445,179 | ||||||
Operating expenses | 411,904 | 324,999 | ||||||
Operating profit before amortization | 143,749 | 120,180 | ||||||
Amortization of intangibles and goodwill | — | 10,802 | ||||||
Amortization of property, plant, equipment and other | 15,130 | 9,329 | ||||||
128,619 | 100,049 | |||||||
Investment income and gains of net losses on write-down investments | (17,221 | ) | 26,427 | |||||
Financing expenses | (28,270 | ) | (71,343 | ) | ||||
Goodwill impairment loss1 | (56,114 | ) | — | |||||
27,014 | 55,133 | |||||||
Provision for income taxes2 | 59,511 | 19,328 | ||||||
Earnings (loss) before the following | (32,497 | ) | 35,805 | |||||
Minority interests | 4,737 | 4,354 | ||||||
Interest in earnings of equity accounted affiliates | — | 940 | ||||||
Net earnings (loss) for the year | (27,760 | ) | 41,099 | |||||
Interest in respect of subordinated debentures held by the Company | 5,370 | 56,697 | ||||||
Earnings (loss) for the period before interest in respect of subordinated debentures3 | (22,390 | ) | 97,796 | |||||
SUMMARY STATEMENTS OF RETAINED EARNINGS | 2002 | 2001 | ||||||
$000 | $000 | |||||||
Retained earnings — beginning of year as previously reported | 177,251 | 220,853 | ||||||
Adjustment for adoption of new accounting pronouncements1 | (83,109 | ) | — | |||||
Retained earnings — beginning of year as adjusted | 94,142 | 220,853 | ||||||
Earnings (loss) for the year before interest in respect of subordinated debentures | (22,390 | ) | 97,796 | |||||
Distributions paid | (123,984 | ) | (141,398 | ) | ||||
Retained earnings (deficit) — end of year | (52,232 | ) | 177,251 | |||||
1 | On December 18, 2000, Network TEN acquired 60% of Eye Corp. for A$189.9 million. Under Australian generally accepted accounting principles (“GAAP”), on February 28, 2002 the Eye Corp. goodwill was written down by A$137.5 million to A$113.8 million. In August, 2002, Network TEN determined that there was a further impairment of Eye Corp. goodwill which resulted in an additional write down of A$40.9 million. Under Canadian GAAP, in accordance with the adoption of CICA Handbook Section 3062, the Eye Corp. goodwill impairment was recorded as a charge of $83.1 million to retained earnings as of September 1, 2001, with a further goodwill impairment loss of $56.1 million recorded as a charge to net earnings for year ended August 31, 2002. Under Canadian GAAP, the fair value of Eye Corp. has been determined on a discounted cash flow basis. The decline in fair value is attributable to weaknesses in the out-of-home advertising market and to certain operational issues. | |
2 | Network TEN had been in dispute with the Australian Tax Office (“ATO”) regarding the deductibility of debenture interest paid to the Company since 1997. Network TEN reached an agreement with the ATO during 2002. Under the agreement Network TEN will be entitled to deduct debenture interest until June 30, 2004. The settlement resulted in a non-recurring income tax expense charge of A$36.2 million to Network TEN in the year ended August 31, 2002. | |
3 | The Company’s economic interest in Network TEN’s earnings (loss) for the year ended August 31, 2002 is ($11.8) million (2001- $52.6 million). | |
At August 31, 2002 the Company’s share of undistributed earnings of Network TEN was nil, (August 31, 2001 — $101.9 million). The Company estimates that the market value of the Company’s investment in Network TEN, based on quoted market rates for Ten Network Holdings Limited at August 31, 2002, was approximately $842 million (August 31, 2001 — $810 million). |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
4. OTHER INVESTMENTS
2002 | 2001 | ||||||||||||||||
Cost | Market Value1 | Cost | Market Value1 | ||||||||||||||
$000 | $000 | $000 | $000 | ||||||||||||||
Investments in publicly traded companies — at cost | |||||||||||||||||
Ulster Television plc2 | 92,006 | 148,340 | 92,006 | 95,109 | |||||||||||||
Other | 59,160 | 52,355 | 118,741 | 73,781 | |||||||||||||
151,166 | 200,695 | 210,747 | 168,890 | ||||||||||||||
Investments in private companies — at cost | 8,602 | 34,052 | |||||||||||||||
Investments — on an equity basis | 2,593 | 170,614 | |||||||||||||||
162,361 | 415,413 | ||||||||||||||||
During 2002, the Company wrote down the value of various other investments by $85.5 million to reflect the non-temporary decline in market value.
1 | Market values are based on quoted closing prices at August 31. The Company considers the excess of cost over market value to be a temporary decline in value, the result of short-term market volatility. | |
2 | The Company’s 29.9% equity interest is accounted for at cost, as the Company has not been successful in its attempts to gain board representation or to influence UTV’s management. |
5. INVESTMENT IN FILM AND TELEVISION PROGRAMS
2002 | 2001 | ||||||||||||||||
Current | Long term | Current | Long term | ||||||||||||||
$000 | $000 | $000 | $000 | ||||||||||||||
Broadcast rights1 | 98,096 | 23,172 | 96,385 | 8,335 | |||||||||||||
Non-theatrical films and television programs: | |||||||||||||||||
Released1 | — | 112,297 | — | 109,312 | |||||||||||||
Acquired library1 | — | 90,314 | — | 123,018 | |||||||||||||
Programs in progress | — | 50,779 | — | 52,929 | |||||||||||||
Development costs | — | 1,520 | — | 2,311 | |||||||||||||
Theatrical films: | |||||||||||||||||
Released1 | — | 37,029 | — | 24,416 | |||||||||||||
Acquired library1 | — | 661 | — | 979 | |||||||||||||
Programs in progress | — | — | — | 32,666 | |||||||||||||
Development costs | — | 1,404 | — | 2,028 | |||||||||||||
98,096 | 317,176 | 96,385 | 355,994 | ||||||||||||||
1 | Net of accumulated amortization. |
The Company expects that 51% of the unamortized cost of released film and television programs will be amortized during the year ended August 31, 2003. The Company expects that 77% of the unamortized cost of released film and television programs will be amortized during the three year period ended August 31, 2005. The Company expects that over 80% of the amounts of all such programming will be amortized by August 31, 2006. The Company expects that acquired libraries will be fully amortized in 18 years. The Company expects that $1.4 million of participation liabilities will be paid during the year ended August 31, 2003.
The Company has entered into various agreements for the right to broadcast certain feature films and syndicated television programs in the future. These agreements, which range in term from one to five years, generally commit the Company to acquire specific programs or
films or certain levels of future productions. The acquisition of these additional broadcast rights is contingent on the actual production and/or the airing of the programs or films. Management estimates that these agreements will result in future annual broadcast rights expenditures of $250 million to $277 million.
In addition, the Company has entered into various agreements to acquire investments in film and television programs amounting to $17.5 million (US$11.2 million) (2001 — $55.7 million (US$36.0 million)). Subsidiaries of the Company have provided financial guarantees on certain credit facilities arranged for the acquisition of film and television programs. An amount of $17.7 million (US$11.4 million) (2001 — $18.6 million (US$12.0 million)) has been guaranteed, in addition to the guarantee of certain interest obligations on such facilities.
6. PROPERTY, PLANT AND EQUIPMENT
2002 | ||||||||||||
Cost | Accumulated amortization | Net | ||||||||||
$000 | $000 | $000 | ||||||||||
Land | 60,002 | — | 60,002 | |||||||||
Buildings | 170,302 | 36,630 | 133,672 | |||||||||
Machinery and equipment | 669,265 | 201,293 | 467,972 | |||||||||
Leasehold and land improvements | 29,293 | 11,715 | 17,578 | |||||||||
928,862 | 249,638 | 679,224 | ||||||||||
2001 | ||||||||||||
Cost | Accumulated amortization | Net | ||||||||||
$000 | $000 | $000 | ||||||||||
Land | 61,409 | — | 61,409 | |||||||||
Buildings | 212,497 | 35,426 | 177,071 | |||||||||
Machinery and equipment | 604,551 | 146,108 | 458,443 | |||||||||
Leasehold and land improvements | 18,550 | 7,662 | 10,888 | |||||||||
897,007 | 189,196 | 707,811 | ||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
7. INTANGIBLES AND GOODWILL
2002 | ||||||||||||
Cost | Accumulated amortization | Net | ||||||||||
$000 | $000 | $000 | ||||||||||
Intangibles | ||||||||||||
Finite life: | ||||||||||||
Circulation and other | 140,000 | 26,972 | 113,028 | |||||||||
Indefinite life: | ||||||||||||
Broadcast licences | 706,031 | 81,091 | 624,940 | |||||||||
Newspaper mastheads | 365,000 | 6,510 | 358,490 | |||||||||
1,071,031 | 87,601 | 983,430 | ||||||||||
Total intangibles | 1,211,031 | 114,573 | 1,096,458 | |||||||||
Goodwill | 2,753,967 | 122,868 | 2,631,099 | |||||||||
2001 | ||||||||||||
Cost | Accumulated amortization | Net | ||||||||||
$000 | $000 | $000 | ||||||||||
Intangibles | ||||||||||||
Finite life: | ||||||||||||
Circulation and other | 129,300 | 9,471 | 119,829 | |||||||||
Indefinite life: | ||||||||||||
Broadcast licences | 726,574 | 89,481 | 637,093 | |||||||||
Newspaper mastheads | 330,000 | 6,510 | 323,490 | |||||||||
1,056,574 | 95,991 | 960,583 | ||||||||||
Total intangibles | 1,185,874 | 105,462 | 1,080,412 | |||||||||
Goodwill | 2,958,716 | 130,694 | 2,828,022 | |||||||||
a) The divestiture of CKVU resulted in decreases in broadcast licences and goodwill of $22.4 million and $44.8 million respectively.
b) Sale of community newspapers and related assets in Atlantic Canada and Saskatchewan resulted in a decrease of goodwill of $187.9 million.
c) Acquisition of the remaining 50% interest in the National Post resulted in a net increase of goodwill of $32.4 million.
d) Changes in the currency translation rates used to translate the balances of goodwill and broadcast licences resulted in net increases in the balances of $2.2 million and $10.3 million respectively.
e) The resolution of an income tax issue related to a period prior to an acquisition resulted in a $13.4 million reduction in goodwill.
f) Amortization of circulation and other intangibles was $17.5 million for the year ended August 31, 2002.
8. LONG TERM DEBT
Interest Rate1 | 2002 | Interest Rate1 | 2001 | |||||||||||||
$000 | $000 | |||||||||||||||
Term bank loans2 | 9.73 | % | 1,791,938 | 9.14 | % | 2,286,018 | ||||||||||
Senior subordinated notes3 | 7.8 | % | 705,700 | 9.08 | % | 703,585 | ||||||||||
Term loans US$17,162 (2001 - US$26,329)4 | 4.04 | % | 26,758 | 6.40 | % | 40,691 | ||||||||||
Term and demand loan€21,375 (2001 - IRE£16,505)5 | 5.8 | % | 32,686 | 5.32 | % | 29,486 | ||||||||||
Term and demand loan (2001 - NZ$7,275)6 | — | — | 6.50 | % | 4,938 | |||||||||||
Note payable due May, 20036 | 3.7 | % | 4,250 | 3.25 | % | 4,250 | ||||||||||
Junior subordinated notes7 | 12.125 | % | 948,584 | 12.125 | % | 842,794 | ||||||||||
Long term debt | 3,509,916 | 3,911,762 | ||||||||||||||
Less portion due within one year | (172,753 | ) | (116,500 | ) | ||||||||||||
Long term portion | 3,337,163 | 3,795,262 | ||||||||||||||
1 | The weighted average interest rate gives effect to interest rate swaps. | |
2 | Credit facilities provide for revolving and term loans in the maximum amounts of $600,000,000 and $1,796,500,000 respectively. At August 31, 2002, the Company had drawn on availabilities under all of its term facilities, including U.S. dollar loans of US$705,765,000 and had no amounts drawn under revolving facilities. The revolving credit facility matures in November 2006. The amount of credit available under the $1,796,500,000 term facilities decreases periodically until maturity between November 2006 and May 2009. Additional term facilities of $15,000,000, of which no amount was drawn at August 31, 2002, mature in August 2005. The loans bear interest at floating rates, and are collateralized by certain assets of the Company. | |
Up to $30,000,000 of the revolving credit facility is available on an operating basis, of which no amount was utilized at August 31, 2002. | ||
3 | The senior subordinated notes mature on May 15, 2011, bear interest at 10.625% and include loans of US$425,000,000 and Canadian dollar loans of $60,724,000. Most of the Canadian dollar loans are held by the majority shareholder of the Company. The notes rank junior to the Company’s senior credit facility and are guaranteed by certain subsidiaries of the Company. | |
4 | Consists of term bank loans with maturity dates commencing October 2002 to December 2003. The debt bears interest at floating rates of LIBOR + 2.0% and is collateralized by the Company’s rights to certain film and television programs including an assignment of accounts receivable and all expected future revenues from exploitation of the financed film and television programs. | |
5 | These credit facilities provide for demand bank loans at August 31, 2002 in the maximum amount of€47,500,000 (2001 — IRE£46,086,000). The debt bears interest at floating rates and is secured by a letter of credit provided by the Company. | |
6 | Note payable is due to a related party. The debt bears interest at prime less 2% and is unsecured. | |
7 | The junior subordinated notes mature in November 2010, bear interest at a fixed rate of 12.125%, and are redeemable at par until May 2003. At the Company’s option, interest payments to November 2005 may be paid in cash, the issuance of additional notes, or subject to conditions, the issuance of non-voting shares of the Company. The notes rank junior to senior debt and are collateralized by way of assets of certain subsidiaries of the Company. The notes include $104,676,928 in notes issued during 2002 in satisfaction of interest as well as an accrual of $9,977,511 for notes to be issued in January 2003, (2001 — $67,082,427 and $8,864,781 respectively). |
The Company has entered into various cross-currency interest rate and interest rate swaps resulting in fixed interest costs on its senior indebtedness, in the principal amount of $1,796,500,000 at August 31, 2002 at rates ranging from 5.7% to 6.63%, plus a margin, for terms matching the maturity of the loans. (At August 31, 2001 the Company had fixed $1,884,000,000 at interest rates ranging from 5.7% to 6.73%, plus a margin.) In addition, the Company has entered into swaps resulting in floating rates on the US$425,000,000 senior subordinated notes.
The Company is subject to covenants under certain of the credit facilities referred to above, including thresholds for leverage and interest coverage, and is also subject to certain restrictions under negative covenants.
Principal payments of long-term debt, based on terms existing at August 31, 2002 over the next five years, are:
$000 | ||||||||
Year ending August 31, | 2003 | 172,753 | ||||||
2004 | 141,190 | |||||||
2005 | 166,113 | |||||||
2006 | 204,800 | |||||||
2007 | 192,027 |
In addition to the facilities described above, the Company has additional operating loan facilities payable on demand of NZ$5,000,000 at floating rates. As at August 31, 2002, the Company’s indebtedness under these facilities was NIL (2001 — $728,000).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
9. BUSINESS COMBINATION RESTRUCTURING ACCRUALS
At August 31, 2000, the Company had restructuring accruals of $113.1 million related to the acquisition and integration of WIC Western International Communications Ltd. (“WIC”). This balance was made up of approximately $75 million in required regulatory benefits, payable over a 6-year period, $12.5 million in severance costs, $10.0 million related to integration and rebranding of WIC and $15.6 million in other restructuring costs.
During 2001, the Company recorded restructuring accruals of $43.0 million related to the acquisition and restructuring of its publishing operations. Restructuring activities include the centralization of certain call centres, integration of the Company’s interactive and news and editorial operations, and centralization of business, finance and information technology functions. This balance was made up of $23.8 million in involuntary severance costs, and $19.2 million in other restructuring costs.
In the year ended August 31, 2002, the Company established a restructuring accrual of $7.0 million related to its acquisition and restructuring of the National Post. This balance is primarily related to involuntary severance costs and contract cancellation costs.
For the year ended August 31, 2002, expenditures charged to the restructuring accruals were $43.9 million (August 31, 2001- $19.5 million). As at August 31, 2002, an aggregate balance of $99.7 million remains accrued for future expenditures.
10. CAPITAL STOCK
AUTHORIZED
Authorized capital consists of an unlimited number of preference shares issuable in series, multiple voting shares, subordinate voting shares and non-voting shares.
The multiple voting shares, the subordinate voting shares and the non-voting shares rank equally on a per share basis in respect of dividends and distributions of capital, and are subordinate to the preference shares. Subordinate voting shares carry one vote per share, and multiple voting shares carry ten votes per share. Non-voting shares do not vote, except at meetings where the holders of such shares would be entitled, by law, to vote separately as a class.
Multiple voting shares are convertible into subordinate voting shares and non-voting shares on a one-for-one basis at any time at the option of the holder. Subordinate voting shares are convertible into non-voting shares on a one-for-one basis at any time at the option of the holder. Non-voting shares are convertible into subordinate voting shares on a one-for-one basis provided the holder is Canadian.
Series 1 preference shares carry 19 votes per share, and carry preferential votes pertaining to the election of up to two directors of the Company. Each series 1 preference share is convertible, at the option of the holder, into 0.15 subordinate voting or non-voting shares.
Series 2 preference shares were issued on the amalgamation of subsidiaries of the Company, including CanWest Broadcasting Ltd. and are held by the former minority shareholders of CanWest Broadcasting Ltd. Series 2 preference shares are not eligible to vote. Series 2 preference shares are, at the option of the Company, redeemable for cash, or convertible to subordinate voting or non-voting shares based on the market value of the subordinate voting or non-voting shares at the date of conversion. The Company’s articles of incoporation state that in the event the Company does not redeem or convert the series 2 preference shares within a period of twelve months following the date on which the sale proceeds of CKVU are conclusively determined, they will convert automatically. The Company expects the redemption or conversion of the series 2 preference shares to occur within the next fiscal year. Should the series 2 preference shares be converted, a significant dilutive effect would occur. The redemption price or conversion value of the shares is determined in accordance with a formula contained in the articles. The formula amount is based, among other things, on the proceeds of the sale of CKVU (net of costs and inherent tax), the revenues of the Manitoba and Saskatchewan television stations for the twelve months ending October 31, 2001, and the value of certain other assets. The redemption or conversion price has not yet been finally determined, but is estimated by the Company at August 31, 2002, to be $54.7 million.
The series 1 and 2 preference shares are not entitled to dividends and distributions in the normal course or in respect of a liquidation on wind up, and have no right to vote separately as a class.
ISSUED | 2002 | 2001 | ||||||
$000 | $000 | |||||||
76,785,976 (2001 - 76,785,976) multiple voting shares | 3,199 | 3,199 | ||||||
98,371,658 (2001 - 70,545,434) subordinate voting shares | 816,418 | 419,583 | ||||||
1,903,401 (2001 - 29,308,918) non-voting shares | 26,805 | 417,375 | ||||||
Nil (2001 - 2,700,000) Series 1 preference shares | — | 6,156 | ||||||
21,783 (2001 - 21,783) Series 2 preference shares | 50,000 | 50,000 | ||||||
896,422 | 896,313 | |||||||
Changes in outstanding share capital during the two years ended August 31, 2002 were as follows:
Number of shares | $000 | ||||||||||
MULTIPLE VOTING SHARE CAPITAL: | |||||||||||
Balance — August 31, 2000 | 78,040,908 | 3,252 | |||||||||
Changes pursuant to: | |||||||||||
Conversion to non-voting shares | (1,254,932 | ) | (53 | ) | |||||||
Balance — August 31, 2001 and 2002 | 76,785,976 | 3,199 | |||||||||
SUBORDINATE VOTING SHARE CAPITAL: | |||||||||||
Balance — August 31, 2000 | 69,395,035 | 394,050 | |||||||||
Changes pursuant to: | |||||||||||
Share purchase plans | 69,502 | 836 | |||||||||
Exercise of stock options | 195,197 | 735 | |||||||||
Dividend reinvestment plan | 165,434 | 2,344 | |||||||||
Stock dividend | 760,917 | 18,050 | |||||||||
Conversion to non-voting shares — net | (40,651 | ) | 3,568 | ||||||||
Balance — August 31, 2001 | 70,545,434 | 419,583 | |||||||||
Changes pursuant to: | |||||||||||
Share purchase plans | 6,077 | 66 | |||||||||
Exercise of stock options | 9,645 | 43 | |||||||||
Redeemed fractions | (11 | ) | — | ||||||||
Conversion from Series 1 preference share | 405,000 | 6,156 | |||||||||
Conversion from non-voting shares — net | 27,405,513 | 390,570 | |||||||||
Balance — August 31, 2002 | 98,371,658 | 816,418 | |||||||||
NON-VOTING SHARE CAPITAL: | |||||||||||
Balance — August 31, 2000 | 2,607,837 | 22,958 | |||||||||
Changes pursuant to: | |||||||||||
Shares issued as consideration in an acquisition | 24,300,000 | 369,360 | |||||||||
Conversion from multiple voting shares | 1,254,932 | 53 | |||||||||
Stock dividend | 1,100,082 | 28,475 | |||||||||
Dividend reinvestment plan | 5,416 | 97 | |||||||||
Conversion from subordinate voting shares — net | 40,651 | (3,568 | ) | ||||||||
Balance — August 31, 2001 | 29,308,918 | 417,375 | |||||||||
Changes pursuant to: | |||||||||||
Redeemed fractions | (4 | ) | — | ||||||||
Conversion to subordinate voting shares — net | (27,405,513 | ) | (390,570 | ) | |||||||
Balance — August 31, 2002 | 1,903,401 | 26,805 | |||||||||
SERIES 1 PREFERENCE SHARE CAPITAL: | |||||||||||
Balance — August 31, 2000 | — | — | |||||||||
Shares issued as consideration in an acquisition | 2,700,000 | 6,156 | |||||||||
Balance — August 31, 2001 | 2,700,000 | 6,156 | |||||||||
Conversion to subordinate voting shares | (2,700,000 | ) | (6,156 | ) | |||||||
Balance — August 31, 2002 | — | — | |||||||||
SERIES 2 PREFERENCE SHARE CAPITAL: | |||||||||||
Balance — August 31, 2000 | — | — | |||||||||
Shares issued as consideration in an acquisition | 21,783 | 50,000 | |||||||||
Balance — August 31, 2001 and 2002 | 21,783 | 50,000 | |||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
SHARE COMPENSATION PLANS
Options vest over a five or six-year period, are fully exercisable on vesting and expire ten years after issuance, except that under certain specified conditions the options vest and become exercisable
Under management and employee share purchase plans, employees may purchase subordinate voting shares or non-voting shares from treasury at the market trading price using non-interest bearing short term loans provided by the Company. The shares are held as collateral by a trustee until the loans are repaid.
Changes in outstanding options to purchase subordinate voting shares or non-voting shares for the two years ended August 31 were as follows:
2002 | 2001 | ||||||||||||||||
Options | Average Price | Options | Average Price | ||||||||||||||
Options outstanding, beginning of year | 1,646,321 | 15.75 | 1,651,792 | 14.52 | |||||||||||||
Changes pursuant to: | |||||||||||||||||
Options granted | 233,458 | 11.52 | 240,440 | 14.66 | |||||||||||||
Options exercised | (9,645 | ) | 4.30 | (195,197 | ) | 3.77 | |||||||||||
Options expired | (50,866 | ) | 16.68 | (50,714 | ) | 16.88 | |||||||||||
Options outstanding, end of year | 1,819,268 | 15.24 | 1,646,321 | 15.75 | |||||||||||||
The following options to purchase subordinate voting shares or non-voting shares were outstanding and exercisable as at August 31, 2002:
Year Granted | Exercise Price | Expiry Date | Number Outstanding | Number Exercisable | ||||||||
1993 | $2.13 | 2003 | 9,651 | 9,651 | ||||||||
1994 | $3.53 | 2004 | 7,923 | 7,923 | ||||||||
1995 | $4.54 | 2005 | 12,024 | 12,024 | ||||||||
1996 | $7.12- $12.76 | 2006 | 551,870 | 551,870 | ||||||||
1997 | $14.07- $22.22 | 2007 | 150,466 | 150,466 | ||||||||
1998 | $22.67- $25.67 | 2008 | 149,332 | 140,050 | ||||||||
1999 | $18.70- $21.14 | 2009 | 62,783 | 41,557 | ||||||||
2000 | $16.00- $16.79 | 2010 | 411,551 | 170,644 | ||||||||
2001 | $12.03- $15.20 | 2011 | 233,138 | 52,505 | ||||||||
2002 | $8.14- $12.90 | 2012 | 230,530 | 158,106 | ||||||||
1,819,268 | 1,294,796 | |||||||||||
DIVIDEND REINVESTMENT PLAN
The Company has established a dividend reinvestment plan. Under the terms of this plan, shareholders may, under certain conditions, apply their cash dividends to the purchase of shares from treasury at a price equal to 95% of the average market trading price of the shares.
11. CUMULATIVE TRANSLATION ADJUSTMENTS
The cumulative foreign currency translation adjustments account reflects the net changes in the respective book values of the Company’s investments in self-sustaining foreign operations due to exchange rate fluctuations since the respective dates of their acquisition or start-up.
The changes in this account arise from changes in the Australian, New Zealand, Irish, Euro, and United States currencies relative to the Canadian currency, and changes in the Company’s net investment in the book values of international operations.
Changes in this account were as follows:
2002 | 2001 | |||||||
$000 | $000 | |||||||
Deferred loss, beginning of year | 69,017 | 87,728 | ||||||
Deferred foreign currency gain during the year | (26,483 | ) | (11,511 | ) | ||||
Realization of translation loss due to distributions | (1,000 | ) | (7,200 | ) | ||||
Deferred loss, end of year | 41,534 | 69,017 | ||||||
The balance of cumulative translation adjustments at the end of the year represents net unrealized losses (gains) as follows: | ||||||||
2002 | 2001 | |||||||
$000 | $000 | |||||||
Australian dollar | 8,120 | 19,759 | ||||||
New Zealand dollar | 40,266 | 55,467 | ||||||
Irish punt | — | (932 | ) | |||||
Euro | 272 | — | ||||||
United States dollar | (7,124 | ) | (5,277 | ) | ||||
41,534 | 69,017 | |||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
12. INCOME TAXES
The Company’s provision for income taxes reflects an effective income tax rate which differs from the combined Canadian statutory rate as follows:
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Income taxes at combined Canadian statutory rate of 38.7% (2001 — 41.3%) | 11,661 | (16,547 | ) | ||||||
Non-taxable portion of capital gains | (17,049 | ) | (11,716 | ) | |||||
Non-deductible amortization expense | 6,766 | 30,980 | |||||||
Effect of valuation allowance on future tax assets | 3,090 | 2,490 | |||||||
Effect of foreign income tax rates differing from Canadian income tax rates | (1,924 | ) | (995 | ) | |||||
Effect of substantively enacted income tax rate change on future tax balances | — | (70,573 | ) | ||||||
Large corporation tax | 3,250 | 1,788 | |||||||
Other | 1,314 | 5,554 | |||||||
Provision for (recovery of) income taxes | 7,108 | (59,019 | ) | ||||||
An analysis of earnings (loss) before tax by jurisdiction follows: | |||||||||
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Canada | 9,463 | (64,960 | ) | ||||||
Foreign | 20,671 | 24,894 | |||||||
Earnings (loss) before tax | 30,134 | (40,066 | ) | ||||||
An analysis of the provision for (recovery of) current and future income taxes by jurisdiction follows: | |||||||||
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Current income taxes | |||||||||
Canada | (2,047 | ) | 30,859 | ||||||
Foreign | 302 | 203 | |||||||
Net earnings (loss) before tax | (1,745 | ) | 38,262 | ||||||
Future income taxes | |||||||||
Canada | 8,703 | (94,819 | ) | ||||||
Foreign | 150 | (2,462 | ) | ||||||
8,853 | (97,281 | ) | |||||||
Provision for (recovery of) income taxes | 7,108 | (59,019 | ) | ||||||
Significant components of the Company’s future tax assets and liabilities are as follows:
August, 31, | |||||||||
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Future tax assets | |||||||||
Non-capital loss carryforwards | 107,909 | 47,984 | |||||||
Accounts payable and other accruals | 45,417 | 63,192 | |||||||
Pension and post retirement benefits | — | 5,660 | |||||||
Less: Valuation allowance | (61,439 | ) | (13,329 | ) | |||||
Total future tax assets | 91,887 | 103,507 | |||||||
Future tax liabilities | |||||||||
Tax depreciation in excess of book amortization | 56,407 | 73,504 | |||||||
Pension obligations | 14,823 | — | |||||||
Intangible assets | 408,797 | 413,126 | |||||||
Other assets | 13,409 | 24,626 | |||||||
Total future tax liabilities | 493,436 | 511,256 | |||||||
Net future tax liability | 401,549 | 407,749 | |||||||
Net current future tax asset | 30,013 | 33,243 | |||||||
Net long term future tax liability | 431,562 | 440,992 | |||||||
As at August 31, 2002 the Company had non capital loss carry forwards for income tax purposes of $408,061,000, that expire as follows:
2006 — $2,010,000, 2007 — $12,900,000, 2008 — $63,919,000, 2009 — $128,934,000, thereafter — $200,298,000.
13. STATEMENTS OF CASH FLOWS
The following amounts comprise the net change in non-cash operating accounts included in the statements of cash flows:
2002 | 2001 | |||||||
$000 | $000 | |||||||
CASH GENERATED (UTILIZED) BY: | ||||||||
Accounts receivable | 6,415 | 55,986 | ||||||
Broadcast rights | (25,733 | ) | (55,395 | ) | ||||
Inventory | 12,342 | (7,342 | ) | |||||
Other current assets | 1,400 | (5,825 | ) | |||||
Other assets | 10,379 | 25,121 | ||||||
Accounts payable and accrued liabilities | (54,347 | ) | (35,928 | ) | ||||
Income taxes payable | (6,724 | ) | (49,125 | ) | ||||
Deferred revenue | (18,620 | ) | 5,046 | |||||
Film and program accounts payable | 19,334 | 16,056 | ||||||
(55,554 | ) | (51,406 | ) | |||||
The following amounts were paid on account of interest and income taxes: | ||||||||
2002 | 2001 | |||||||
$000 | $000 | |||||||
Interest | 261,265 | 241,618 | ||||||
Income taxes | 23,961 | 73,796 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
14. RETIREMENT ASSETS AND OBLIGATIONS
Information on the Company’s pension and post retirement benefit plans follows:
Pension Benefits | Post Retirement Benefits | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
$000 | $000 | $000 | $000 | |||||||||||||
Plan Assets | ||||||||||||||||
Fair value — beginning of year | 220,346 | 96,351 | — | — | ||||||||||||
Plan assets acquired | 8,163 | 132,425 | — | — | ||||||||||||
Investment income | 3,739 | (2,444 | ) | — | — | |||||||||||
Employer contributions | 3,699 | 609 | 400 | — | ||||||||||||
Employee contributions | 5,800 | 4,475 | — | — | ||||||||||||
Benefits, refund of contributions and administrative expenses | (7,027 | ) | (11,070 | ) | (400 | ) | — | |||||||||
Fair value — end of year | 234,720 | 220,346 | — | — | ||||||||||||
The valuation of the plan net assets is based on market values with unrealized gains and losses averaged over a five year period | ||||||||||||||||
Plan Obligations | ||||||||||||||||
Accrued benefit obligation — beginning of year | 226,361 | 77,704 | 35,121 | 5,816 | ||||||||||||
Obligation acquired | 8,084 | 132,425 | — | 26,927 | ||||||||||||
Accrued interest on benefits | 18,252 | 13,814 | 2,503 | 1,959 | ||||||||||||
Current service cost | 15,174 | 10,586 | 1,198 | 419 | ||||||||||||
Past service costs | 11,868 | — | — | — | ||||||||||||
Benefits, refund of contributions | (7,027 | ) | (10,499 | ) | (400 | ) | — | |||||||||
Experience loss | 4,900 | 2,331 | 2,744 | — | ||||||||||||
Accrued benefit obligation — end of year | 277,612 | 226,361 | 41,166 | 35,121 | ||||||||||||
The Company’s accrued benefit asset is determined as follows: | ||||||||||||||||
Plan deficit | (42,892 | ) | (6,015 | ) | (41,166 | ) | (35,121 | ) | ||||||||
Unamortized net actuarial loss | 41,662 | 21,069 | 2,752 | — | ||||||||||||
Unamortized transitional (asset) obligation | (5,573 | ) | (5,029 | ) | 4,938 | 5,377 | ||||||||||
Unamortized past service costs | 11,542 | — | — | — | ||||||||||||
Valuation allowance | (916 | ) | (1,002 | ) | — | — | ||||||||||
Accrued plan asset | 3,823 | 9,023 | (33,476 | ) | (29,744 | ) | ||||||||||
The valuation allowance represents the amount of surplus not recognized on the Company’s balance sheet | ||||||||||||||||
The Company’s benefit expense is determined as follows: | ||||||||||||||||
Current service cost | 15,174 | 10,586 | 1,198 | 419 | ||||||||||||
Employee contributions | (5,800 | ) | (4,475 | ) | — | — | ||||||||||
Accrued interest on benefits | 18,252 | 13,814 | 2,503 | 1,959 | ||||||||||||
Expected return on plan assets | (19,174 | ) | (16,451 | ) | — | — | ||||||||||
Amortization of transitional (asset) obligation | (358 | ) | (358 | ) | 439 | 439 | ||||||||||
Amortization of past service costs | 527 | — | — | — | ||||||||||||
Amortization of net experience losses | 57 | — | — | — | ||||||||||||
Changes in valuation allowance | (86 | ) | (61 | ) | — | — | ||||||||||
Benefit expense | 8,592 | 3,055 | 4,140 | 2,817 | ||||||||||||
Employer contribution to the defined contribution plan | 1,552 | 463 | — | — | ||||||||||||
Total pension and post retirement benefit expense | 10,144 | 3,518 | 4,140 | 2,817 | ||||||||||||
Significant actuarial assumptions in measuring the Company’s accrued benefit obligations are as follows: | ||||||||||||||||
Discount rate | 6.75-7.25 | % | 7.25 | % | 7.25 | % | 7.00 | % | ||||||||
Expected long-term rate of return on pension plan assets | 7.00-7.25 | % | 7.25-8.00 | % | 7.00 | % | 7.00 | % | ||||||||
Rate of compensation increase | 3.50-4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % |
15. FINANCIAL INSTRUMENTS
Financial instruments consist of the following:
2002 | 2001 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
$000 | $000 | $000 | $000 | |||||||||||||
Short term assets | 578,396 | 578,396 | 512,947 | 512,947 | ||||||||||||
Other investments | 162,361 | 209,515 | 415,413 | 410,838 | ||||||||||||
Short term liabilities | 629,679 | 629,679 | 591,016 | 591,016 | ||||||||||||
Long term debt | 3,337,163 | 3,281,163 | 3,795,262 | 3,701,198 | ||||||||||||
Other long term liabilities | 86,217 | 86,217 | 88,809 | 88,809 | ||||||||||||
Unrealized net loss on interest rates swaps | — | 56,000 | — | 94,064 |
The fair value of short-term assets and liabilities, which include cash and short-term investments, accounts receivable, income taxes recoverable, and other assets, bank loans and advances, accounts payable and accrued liabilities and film and program accounts payable approximate their fair value due to the short-term nature of these financial instruments.
The fair value of other investments is primarily based on quoted market prices for publicly traded securities, and the most recent purchase transactions and agreements for non-listed securities.
The fair value of long-term debt subject to floating interest rates approximates the carrying value. The fair value of long-term debt, subject to fixed interest rates, is estimated by discounting future cash flows, including interest payments, using rates currently available for debt of similar terms and maturity.
The fair values of other long-term liabilities, including business combination restructuring accruals, and film and television program accounts payable, approximates their carrying values.
The fair values of unrealized net gains and losses on interest rate and cross-currency swaps are based on the amounts at which they could be settled based on estimates of market rates.
CREDIT RISK
INTEREST RATE RISK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
16. JOINTLY CONTROLLED ENTERPRISE
The following amounts included in the consolidated financial statements represent the Company’s proportionate interest in TV3 Ireland.
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Balance sheets | |||||||||
Assets | |||||||||
Current assets | 9,329 | 7,106 | |||||||
Long term assets | 12,732 | 12,801 | |||||||
22,061 | 19,907 | ||||||||
Liabilities | |||||||||
Current liabilities | 32,906 | 5,700 | |||||||
Long term liabilities | 4,643 | 29,486 | |||||||
37,549 | 35,186 | ||||||||
Statements of earnings | |||||||||
Revenue | 25,643 | 9,542 | |||||||
Expenses | 24,630 | 8,051 | |||||||
Net earnings | 1,013 | 1,491 | |||||||
Statements of cash flows | |||||||||
Cash generated (utilized) by: | |||||||||
Operating activities | (1,936 | ) | 207 | ||||||
Investing activities | (130 | ) | (227 | ) | |||||
Financing activities | 2,903 | 334 | |||||||
Net increase in cash | 837 | 314 | |||||||
17. COMMITMENTS AND CONTINGENCIES
a) The Company’s future minimum payments under the terms of its operating lease commitments for the next five years are as follows:
2003 | 26,216,987 | |||
2004 | 23,265,207 | |||
2005 | 20,926,748 | |||
2006 | 17,807,462 | |||
2007 | 15,553,883 |
b) On March 5, 2001, a statement of claim was filed against the Company and certain of the Company’s subsidiaries by CBL’s former minority interests requesting, among other things, that their interests in CBL be purchased without minority discount. In addition, the claim alleges the Company wrongfully terminated certain agreements and acted in an oppressive and prejudicial matter towards the plaintiffs. The lawsuit seeks damages in excess of $345 million. The Company
believes the allegations are substantially without merit and not likely to have a material adverse effect on its business, financial condition or results of operation. The Company intends to vigorously defend this lawsuit.
c)The Company is involved in various legal matters arising in the ordinary course of business. The resolution of these matters is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
18. EVENTS SUBSEQUENT TO AUGUST 31, 2002
In October 2002, Fireworks Entertainment closed a US$110 million stand-alone credit facility with a syndicate of lenders. This facility was used to repay existing Fireworks financing of US$26 million and will finance future growth. The facility is a three-year revolving facility secured by all assets of Fireworks, and bears interest at LIBOR plus 2.25% to 3.5%.
19. SEGMENTED INFORMATION
The Company operates primarily within the publishing, online, broadcasting and entertainment industries in Canada, New Zealand, Ireland and Australia.
Each segment reported below operates as a strategic business unit with separate management. Segment performance is measured primarily on the basis of operating profit. There are no significant inter-segment transactions. Segmented information in Canadian dollars is as follows:
Publishing | Corporate | |||||||||||||||||||||||||||||||
and online | Broadcasting | Entertainment | and other | Consolidated | ||||||||||||||||||||||||||||
Canada | Canada | New Zealand | Ireland | Canada | ||||||||||||||||||||||||||||
TV | Radio | |||||||||||||||||||||||||||||||
$000 | $000 | $000 | $000 | $000 | $000 | $000 | $000 | |||||||||||||||||||||||||
Revenue from external customers | ||||||||||||||||||||||||||||||||
2002 | 1,270,336 | 691,888 | 69,079 | 60,724 | 28,317 | 152,439 | – | 2,272,783 | ||||||||||||||||||||||||
2001 | 919,923 | 701,027 | 58,436 | 56,864 | 31,056 | 177,469 | – | 1,944,775 | ||||||||||||||||||||||||
Operating profit (loss) before amortization | ||||||||||||||||||||||||||||||||
2002 | 288,028 | 191,092 | (1,938 | ) | 16,361 | 7,654 | (743 | ) | (30,148 | ) | 470,306 | |||||||||||||||||||||
2001 | 207,804 | 226,458 | (8,939 | ) | 14,301 | 2,748 | 13,551 | (14,852 | ) | 441,071 | ||||||||||||||||||||||
Amortization of intangibles and goodwill | ||||||||||||||||||||||||||||||||
2002 | 17,500 | – | – | – | – | – | – | 17,500 | ||||||||||||||||||||||||
2001 | 50,504 | 33,645 | 2,246 | 2,834 | 61 | 840 | 29 | 90,159 | ||||||||||||||||||||||||
Amortization of capital assets and other | ||||||||||||||||||||||||||||||||
2002 | 44,986 | 25,924 | 2,574 | 2,086 | 1,869 | 505 | 3,380 | 81,324 | ||||||||||||||||||||||||
2001 | 32,649 | 24,195 | 2,731 | 1,919 | 3,046 | 386 | 879 | 65,805 | ||||||||||||||||||||||||
Financing expenses (revenue) | ||||||||||||||||||||||||||||||||
2002 | 238,521 | 125,170 | 261 | 188 | 1,728 | 15,933 | (5,169 | ) | 376,632 | |||||||||||||||||||||||
2001 | 227,464 | 113,751 | 104 | 234 | 3,374 | 16,618 | (4,790 | ) | 356,755 | |||||||||||||||||||||||
Investment gains net of write downs and dividend income | ||||||||||||||||||||||||||||||||
2002 | – | – | – | – | – | – | 35,284 | 35,284 | ||||||||||||||||||||||||
2001 | – | – | – | – | – | – | 31,582 | 31,582 | ||||||||||||||||||||||||
Earnings (loss) before taxes | ||||||||||||||||||||||||||||||||
2002 | (12,979 | ) | 31,898 | (4,898 | ) | 14,087 | 3,809 | (17,181 | ) | 15,398 | 30,134 | |||||||||||||||||||||
2001 | (100,046 | ) | 42,536 | (14,298 | ) | 9,314 | (3,733 | ) | (4,292 | ) | 30,453 | (40,066 | ) | |||||||||||||||||||
Capital expenditures | ||||||||||||||||||||||||||||||||
2002 | 17,063 | 14,392 | 1,518 | 1,207 | 479 | 396 | 18,283 | 53,338 | ||||||||||||||||||||||||
2001 | 21,932 | 16,465 | 2,163 | 1,090 | 86 | 1,481 | 6,424 | 49,641 | ||||||||||||||||||||||||
Property, plant and equipment | ||||||||||||||||||||||||||||||||
2002 | 490,932 | 122,956 | 22,635 | 8,481 | 4,183 | 2,245 | 27,792 | 679,224 | ||||||||||||||||||||||||
2001 | 523,381 | 130,211 | 22,099 | 8,781 | 4,288 | 2,312 | 16,739 | 707,811 | ||||||||||||||||||||||||
Intangibles | ||||||||||||||||||||||||||||||||
2002 | 478,439 | 491,157 | 47,657 | 75,333 | 2,219 | – | 1,653 | 1,096,458 | ||||||||||||||||||||||||
2001 | 450,239 | 513,807 | 43,851 | 70,020 | 1,330 | – | 1,165 | 1,080,412 | ||||||||||||||||||||||||
Goodwill | ||||||||||||||||||||||||||||||||
2002 | 1,920,333 | 604,752 | 19,613 | 54,323 | 1,223 | 30,855 | – | 2,631,099 | ||||||||||||||||||||||||
2001 | 2,060,559 | 662,733 | 19,613 | 53,039 | 1,223 | 30,855 | – | 2,828,022 | ||||||||||||||||||||||||
Total assets | ||||||||||||||||||||||||||||||||
2002 | 3,219,846 | 1,588,000 | 141,677 | 150,176 | 21,530 | 425,146 | 174,753 | 5,721,128 | ||||||||||||||||||||||||
2001 | 3,360,423 | 1,721,356 | 133,018 | 141,761 | 21,950 | 518,168 | 402,544 | 6,299,220 | ||||||||||||||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
Publishing | Corporate | |||||||||||||||||||||||||||||||
and online | Broadcasting | Entertainment | and other | Consolidated | ||||||||||||||||||||||||||||
Canada | Canada | New Zealand | Ireland | Canada | ||||||||||||||||||||||||||||
TV | Radio | |||||||||||||||||||||||||||||||
$000 | $000 | $000 | $000 | $000 | $000 | $000 | $000 | |||||||||||||||||||||||||
Reconciliation of net earnings before taxes to net earnings – year ended August 31, 2002 | ||||||||||||||||||||||||||||||||
Earnings (loss) before income tax | (12,979 | ) | 31,898 | (4,898 | ) | 14,087 | 3,809 | (17,181 | ) | 15,398 | 30,134 | |||||||||||||||||||||
(Provision for) recovery of income taxes | (8,731 | ) | (6,595 | ) | 42 | 94 | (612 | ) | (1,125 | ) | 9,819 | (7,108 | ) | |||||||||||||||||||
Minority interests | 4,330 | – | – | – | – | – | – | 4,330 | ||||||||||||||||||||||||
Interest in loss of Network TEN1 | – | – | – | – | – | – | (11,815 | ) | (11,815 | ) | ||||||||||||||||||||||
Interest in loss of other equity accounted affiliates | – | (1,523 | ) | – | – | – | – | – | (1,523 | ) | ||||||||||||||||||||||
Realized translation adjustments | – | – | – | – | – | – | (1,000 | ) | (1,000 | ) | ||||||||||||||||||||||
Net earnings (loss) for the year | (17,380 | ) | 23,780 | (4,856 | ) | 14,181 | 3,197 | (18,306 | ) | 12,402 | 13,018 | |||||||||||||||||||||
Reconciliation of net earnings before taxes to net earnings – year ended August 31, 2001 | ||||||||||||||||||||||||||||||||
Earnings (loss) before income tax | (100,046 | ) | 42,536 | (14,298 | ) | 9,314 | (3,733 | ) | (4,292 | ) | 30,453 | (40,066 | ) | |||||||||||||||||||
(Provision for) recovery of income taxes | 18,304 | 35,099 | 2,821 | (614 | ) | 269 | (73 | ) | 3,213 | 59,019 | ||||||||||||||||||||||
Minority interests | – | (2,531 | ) | – | (665 | ) | – | – | – | (3,196 | ) | |||||||||||||||||||||
Interest in earnings of Network TEN1 | – | – | – | – | – | – | 52,567 | 52,567 | ||||||||||||||||||||||||
Interest in earnings (loss) of other equity accounted affiliates | (16,385 | ) | 1,894 | – | – | – | – | – | (14,491 | ) | ||||||||||||||||||||||
Realized translation adjustments | – | – | – | – | – | – | (7,200 | ) | (7,200 | ) | ||||||||||||||||||||||
Net earnings (loss) for the year | (98,127 | ) | 76,998 | (11,477 | ) | 8,035 | (3,464 | ) | (4,365 | ) | 79,033 | 46,633 | ||||||||||||||||||||
1 | Selected financial information for Network TEN is presented in note 3. |
20. UNITED STATES ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with Canadian GAAP. In certain aspects GAAP as applied in the United States (“U.S.”) differs from Canadian GAAP.
PRINCIPAL DIFFERENCES AFFECTING THE COMPANY
COMPREHENSIVE INCOME
Comprehensive income, defined as all changes in equity other than those resulting from investments by owners and distributions to owners, must be reported under U.S. GAAP. There is no similar requirement under Canadian GAAP.
PRE-OPERATING COSTS
In the U.S., pre-operating costs are expensed in the period incurred. In accordance with Canadian GAAP, the Company defers pre-operating costs until commencement of commercial operations and amortizes the deferred costs over a period of five years.
FOREIGN CURRENCY TRANSLATION
In the U.S., distributions from self-sustaining foreign operations do not result in a realization of the cumulative translation adjustments account. Realization of such foreign currency translation adjustments occur only upon the sale of all or a part of the investment giving rise to the translation adjustments. In accordance with Canadian GAAP, reductions in the net investment in self-sustaining foreign operations result in a proportionate reduction in the cumulative foreign currency translation adjustment accounts.
PROGRAMMING COMMITMENTS
Under Canadian GAAP, certain programming commitments related to an acquisition imposed by regulatory requirements were accrued in the purchase equation. Under U.S. GAAP, these costs are expensed as incurred.
EQUITY ACCOUNTED AFFILIATES
Under U.S. GAAP, investments placed in trust due to regulatory requirements must be accounted for at cost. Under Canadian GAAP, these investments are accounted as cost, equity or consolidated investments based on the level of influence that the investor has over the investment.
INVESTMENT IN WIC ON AN EQUITY BASIS
Under Canadian GAAP, the investment in WIC was accounted for using the equity method during the period that this investment was held in trust pending completion of the regulatory approval process. Under US GAAP, the investment was accounted for on a cost basis then, as a result of receiving approval to complete the purchase of WIC, the Company changed its method of accounting for WIC to the equity method. The change in accounting policy was retroactively applied as required under APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. Effective July 6, 2000, the Company consolidated its investment in WIC for both Canadian and US GAAP purposes.
IMPAIRMENT OF LONG-LIVED ASSETS
Under U.S. GAAP, the Company recognizes an impairment loss on property, equipment and broadcast licences and circulation if the undiscounted expected future cash flows are less than the carrying value. The impairment loss recognized would be an amount equal to the difference between the carrying amount and the fair value of the assets. Under Canadian GAAP, the impairment loss would be equal to the difference between the carrying amount and the undiscounted expected future cash flows.
Under U.S. GAAP, goodwill associated with assets acquired in a purchase business combination is included in impairment evaluations of other long-lived assets when events or circumstances exist that indicate the carrying value of those assets may not be recoverable. In addition, impairments of goodwill would be recognized when a review indicates that the goodwill will not be recoverable, as determined based on projected income and cash flows on an undiscounted basis from the underlying operations. In such circumstances, the goodwill will be reduced to the estimated recoverable amount. Under Canadian GAAP, prior to the acquisition of WIC and Southam Publications, the Company has not had any significant goodwill arising on its acquisitions.
The Company regularly assesses the carrying value of its assets and has determined that there is no impairment in long-lived assets at this time.
INVESTMENT IN MARKETABLE SECURITIES
In the U.S., investment assets classified as “available for sale” are carried at market, and unrealized temporary gains and losses are included, net of tax, in accumulated comprehensive income. In accordance with Canadian GAAP, the Company carries its investment in marketable securities at lower of cost and net realizable value. A provision for loss in value of marketable securities is made when a decline in market value is considered other than temporary.
EFFECT OF TAX RATE CHANGES
Under U.S. GAAP, changes in tax rates are applied to reduce or increase future income tax assets or liabilities when the proposed tax rate change has received legislative approval. Under Canadian GAAP, tax rate changes are applied when the change in tax rate is considered substantively enacted.
CASH FLOW STATEMENT
The Canadian accounting standard for the preparation of cash flow statements is consistent with the guidance provided under IAS 7, and accordingly, the cash flow statements presented herein have not been reconciled to U.S. GAAP under the accommodation provided by the Securities and Exchange Commission of the United States (“SEC”).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
PROPORTIONATE CONSOLIDATION
In the U.S., investments in jointly controlled entities are accounted as equity investments. Canadian GAAP requires the accounts of jointly controlled enterprises to be proportionately consolidated. This accounting difference applies to the Company’s investment in TV3 Ireland.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES
Under U.S. GAAP, entities are required to recognize all derivative instruments as either assets or liabilities in the balance sheet, and measure those instruments at fair value. The changes in fair value of the derivative are included either in the statement of earnings or other comprehensive income, depending on the nature of the instrument. Under Canadian GAAP, hedging derivatives are eligible for hedge accounting if certain criteria are met. Non-hedging derivatives are recognized at their fair value as either assets or liabilities.
CUMULATIVE EFFECT OF THE PROSPECTIVE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Under U.S. GAAP, the transitional impairment of goodwill related to Network TEN is recorded as a charge to net earnings in accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangibles, whereas under Canadian GAAP it is recorded as a charge to opening retained earnings. The principles and methods for computing impairment in accordance with FAS 142 are similar to those prescribed under Canadian GAAP, as described in notes 1 and 3.
DEBT CLASSIFICATION
Effective for 2002, in accordance with new requirements under Canadian GAAP, which are consistent with US GAAP, the Company has classified all debt maturing in the following twelve months as current if refinancing was not in place. Previously under Canadian GAAP, debt which the Company intended to refinance was classified as long-term. For 2001, under US GAAP this debt was reclassified as current.
INTEGRATION COSTS RELATED TO CANWEST PUBLICATIONS
Under Canadian GAAP certain integration costs related to the CanWest Publications acquisition were accrued in the purchase equation. Under US GAAP, these costs are expensed as incurred.
NEW ACCOUNTING STANDARDS
a) Accounting for asset retirement obligations
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations. FAS 143 requires that an asset retirement obligation be recognized as a liability, measured at fair value, in the period in which the obligation is incurred or a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long lived assets and amortized to expense over the useful life of the asset. FAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently considering the impact of FAS 143.
b) Accounting for the impairment or disposal of long-lived assets
In fiscal 2003, the Company will adopt new standards approved by the Financial Accounting Standards Board, Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Standard requires that an impairment loss should be recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value for assets in use. Long-lived assets classified as held for sale should be measured at the lower of their carrying amount or fair value less cost to sell. The standard also changes the criteria for classification of operating results as discontinued operations. FAS 144 is effective for financial statements prepared beginning on or after December 15, 2001. The Company is currently considering the impact of FAS 144.
c) Technical corrections
In April 2002, Statement of Financial Accounting Standard No. 145 was issued rescinding the requirement to include gains and losses on the settlement of debt as extraordinary items. FAS 145 is applicable for fiscal years beginning on or after May 15, 2002. The standard has been adopted by the Company with no impact.
d) Accounting for costs associated with exit or disposal activities
In June, 2002, Statement of Financial Accounting Standard No. 146 was issued. The standard requires that liabilities for exit or disposal activity costs be recognized and measured at fair value when the liability is incurred. This standard is effective for disposal activities initiated after December 31, 2002.
RECONCILIATION TO US GAAP
Consolidated Statements of Earnings
The following is a reconciliation of net earnings reflecting the
differences between Canadian and U.S. GAAP:
2002 | 2001 | ||||||||
$000 | $000 | ||||||||
Net earnings in accordance with Canadian GAAP | 13,018 | 46,633 | |||||||
Pre-operating costs net of tax of $1,331 (2001 – ($1,175)) | (100 | ) | 3,337 | ||||||
Realization of cumulative translation adjustments net of tax of nil | 1,000 | 7,200 | |||||||
Programming costs imposed by regulatory requirement net of tax of $2,438 (2001 – $774) | (3,232 | ) | (1,026 | ) | |||||
Integration costs related to CanWest Publications net of tax of $827 | (1,470 | ) | – | ||||||
Reversal of amortization of goodwill related to future programming costs imposed by regulatory requirement on business combination net of tax of nil | – | 938 | |||||||
Equity accounted affiliates in trust net of tax of nil | 3,375 | (3,375 | ) | ||||||
Investment in WIC on an equity basis, net of tax of nil (2001 – $2,758) | – | (4,138 | ) | ||||||
Amortization of WIC goodwill adjustment resulting from retroactive equity accounting of WIC upon regulatory approval, net of tax of nil | – | (1,572 | ) | ||||||
Net earnings in accordance with U.S. GAAP before cumulative effect of adoption of new accounting policies | 12,591 | 47,997 | |||||||
Cumulative effect of adoption of new accounting policies net of tax of $2,500 | (170,695 | ) | – | ||||||
Net earnings (loss) in accordance with U.S. GAAP | (158,104 | ) | 47,997 | ||||||
Amortization of goodwill and indefinite life intangibles, net of tax of ($11,975) | – | 64,972 | |||||||
Amortization of goodwill and indefinite life intangibles in equity accounted affiliates, net tax of nil | – | 6,211 | |||||||
Net earnings (loss) in accordance with U.S. GAAP adjusted to exclude amortization expense recognized in 2001 | (158,104 | ) | 119,180 | ||||||
Earnings per share: | |||||||||
Net earnings before cumulative effect of adoption of new accounting policies Basic | $0.07 | $0.28 | |||||||
Diluted | $0.07 | $0.28 | |||||||
Net earnings (loss) Basic | ($0.89 | ) | $0.28 | ||||||
Diluted | ($0.89 | ) | $0.28 | ||||||
Adjusted net earnings (loss) Basic | ($0.89 | ) | $0.70 | ||||||
Diluted | ($0.89 | ) | $0.69 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
STATEMENTS OF COMPREHENSIVE INCOME
Comprehensive income (loss) – current periods:
2002 | 2001 | |||||||||
$000 | $000 | |||||||||
Net earnings (loss) in accordance with U.S. GAAP | (158,104 | ) | 47,997 | |||||||
Other comprehensive income, net of tax: | ||||||||||
Foreign currency translation gain | 26,483 | 11,511 | ||||||||
Unrealized gains (losses) on securities, available for sale, net of tax of nil (2001 – $5,755) | 31,387 | (73,178 | ) | |||||||
Realization of prior years unrealized (gains) losses on sale / write-down of securities available for sale, net of tax of nil (2001 – $486) | 60,000 | (987 | ) | |||||||
91,387 | (74,165 | ) | ||||||||
Unrealized gains (losses) on interest rate and cross currency interest rate swaps, net of tax of ($16,748) (2001 – $41,388), | 21,316 | (52,676 | ) | |||||||
Less: Reclassification of foreign currency translation gains on US denominated debt to statement of earnings, net of tax of $3,478 (2001 – ($404)) | (4,427 | ) | 515 | |||||||
16,889 | (52,161 | ) | ||||||||
134,759 | (114,815 | ) | ||||||||
Comprehensive income | (23,345 | ) | (66,818 | ) | ||||||
COMPREHENSIVE INCOME (LOSS) – ACCUMULATED BALANCES:
Foreign currency | Unrealized gains on | Unrealized gains | ||||||||||||||
translation | securities | (losses) on swaps | Total | |||||||||||||
Balance, August 31, 2000 | (85,958 | ) | 32,307 | – | (53,651 | ) | ||||||||||
Change during 2001 | 11,511 | (74,165 | ) | (52,161 | ) | (114,815 | ) | |||||||||
Balance, August 31, 2001 | (74,447 | ) | (41,858 | ) | (52,161 | ) | (168,466 | ) | ||||||||
Change during 2002 | 26,483 | 91,387 | 16,889 | 134,759 | ||||||||||||
Balance, August 31, 2002 | (47,964 | ) | 49,529 | (35,272 | ) | (33,707 | ) | |||||||||
CONSOLIDATED BALANCE SHEETS
Balance sheet captions restated to reflect the above items are
presented below:
2002 | 2001 | |||||||
$000 | $000 | |||||||
ASSETS | ||||||||
Current assets | 683,677 | 640,149 | ||||||
Investment in Network TEN | 4,494 | 107,210 | ||||||
Property, plant and equipment | 675,041 | 687,811 | ||||||
Intangibles and goodwill | 3,743,404 | 3,946,499 | ||||||
Other investments | 196,253 | 370,180 | ||||||
Other assets | 407,080 | 476,008 | ||||||
5,709,949 | 6,227,857 | |||||||
LIABILITIES | ||||||||
Current liabilities | 621,609 | 729,624 | ||||||
Long term debt | 3,339,507 | 3,732,710 | ||||||
Other liabilities | 115,160 | 147,343 | ||||||
Future income taxes | 416,266 | 377,537 | ||||||
4,492,542 | 4,987,214 | |||||||
SHAREHOLDERS’ EQUITY | ||||||||
Capital stock | 896,422 | 896,313 | ||||||
Contributed surplus | 3,647 | 3,647 | ||||||
Retained earnings | 351,045 | 509,149 | ||||||
Accumulated other comprehensive income (loss) | (33,707 | ) | (168,466 | ) | ||||
1,217,407 | 1,240,643 | |||||||
5,709,949 | 6,227,857 | |||||||
A reconciliation of shareholders’ equity reflecting the differences
between Canadian and U.S. GAAP is set out below:
2002 | 2001 | |||||||
$000 | $000 | |||||||
Shareholders’ equity in accordance with Canadian GAAP | 1,175,911 | 1,305,996 | ||||||
Adjustments relating to pre-operating costs, net of tax of $3,608 (2001 – $2,277) | (6,473 | ) | (6,373 | ) | ||||
Adjustment to goodwill resulting from retroactive equity accounting of WIC upon regulatory approval net of tax of nil | 38,503 | 38,503 | ||||||
Programming costs imposed by regulatory requirement on business combination net of tax of $3,212 (2001 – $774) | (4,258 | ) | (1,026 | ) | ||||
Integration costs related to CanWest Publications net of tax of $827 | (1,470 | ) | – | |||||
Reversal of amortization of goodwill related to future programming costs imposed by regulatory requirement on business combination net of tax of nil | 938 | 938 | ||||||
Adjustment to reflect losses on interest rate and cross currency swaps net of tax of $24,640 (2001 – $41,388) | (31,360 | ) | (52,676 | ) | ||||
Foreign exchange gain on US$denominated debt net of tax of $3,074 (2001 – ($404)) | (3,913 | ) | 514 | |||||
Equity accounted affiliates in trust net of tax of nil | – | (3,375 | ) | |||||
Unrealized gain (loss) on other investments net of tax of nil | 49,529 | (41,858 | ) | |||||
Shareholders’ equity in accordance with U.S. GAAP | 1,217,407 | 1,240,643 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...
OTHER
The following amounts are included in accounts receivable:
2002 | 2001 | |||||||
$000 | $000 | |||||||
Allowance for doubtful accounts | 14,800 | 14,500 | ||||||
The following amounts are included in operating expenses: | ||||||||
2002 | 2001 | |||||||
$000 | $000 | |||||||
Bad debt expense | 5,700 | 7,800 | ||||||
Rent expense | 17,300 | 12,700 | ||||||
The following amounts are included in accrued liabilities: | ||||||||
2002 | 2001 | |||||||
$000 | $000 | |||||||
Accrued salaries | 63,000 | 57,000 |
Amortization expense related to existing finite life intangibles will be $17.5 million per year to 2005, and $8.8 million and $1.5 million in 2006 and 2007 respectively.