EXHIBIT 2
CANWEST GLOBAL COMMUNICATIONS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED AUGUST 31, 2004
NOVEMBER 24, 2004
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. Many of these factors
are beyond the control of the Company. Consequently, all forward-looking
statements made in this Management Discussion and Analysis or the Company's
documents referred to herein are qualified by this cautionary statement and
there can be no assurance that actual results or developments anticipated by the
Company will be realized.
OVERVIEW
In November 2000, we acquired our Canadian publications operations from
Hollinger, and in September 2001, we further expanded our publishing operations
by gaining effective control of the National Post. The addition of these
publishing and online assets to our existing national television network has
resulted in the creation of Canada's largest media company. Our broad media
platform has provided us the ability to provide a multimedia product offering to
our Canadian customers. In addition, we have pursued cost-cutting opportunities
through the integration of our operations as well as other restructuring
activities. Thus, we have levered the benefits of owning a broad media platform
to improve the profitability of our operations. Our diversification within the
Canadian market and internationally has improved the stability of our overall
results. At the same time, we have improved our financial position through debt
repayment using proceeds from the sale of non-core assets.
SELECTED ANNUAL INFORMATION
YEAR ENDED AUGUST 31
------------------------------------
2004 2003 2002
$000 $000 $000
Revenue 2,113,034 2,139,532 2,170,271
Net earnings from continuing operations 194,299 114,798 31,324
Net earnings (loss) (13,478) 46,088 13,018
Net earnings from continuing operations per share
Basic $ 1.10 $ 0.60 $ 0.18
Diluted $ 1.10 $ 0.60 $ 0.17
Net earnings (loss) per share
Basic $ (0.08) $ 0.22 $ 0.07
Diluted $ (0.08) $ 0.22 $ 0.07
Total Assets 4,882,125 5,318,792 5,495,074
Long term liabilities 3,248,894 3,494,266 3,616,204
KEY FACTORS AFFECTING SEGMENT REVENUES AND OPERATING INCOME
Television Broadcast
We have four television broadcast segments, one for each country in which we
carry on such operations. Our Canadian television segment includes our broadcast
television networks in Canada as well as specialty channels and two recently
launched radio stations. Our New Zealand and Irish television segments cover our
television operations in those countries. Our Australian television segment
includes our 56.6% economic interest in TEN Group Pty Limited ("TEN Group"),
which owns and operates TEN Television Network ("Network TEN"). Although Network
TEN's results are not consolidated into our financial statements, we do analyze
its results as part of our segment analysis. See note 23 to our audited
consolidated financial statements.
We generate the majority of our television broadcast revenues from the sale of
advertising, with the remainder generated from subscriber revenues earned by our
specialty channels and the sale of broadcast rights to our programming. Demand
for television advertising is driven primarily by advertisers in the packaged
goods, automotive, retail and entertainment industries and is strongly
influenced by general economic conditions. The attractiveness of our programs to
advertisers and the rates we charge are primarily a function of the size and
demographics of our viewing audience. The dependence of our advertising revenues
on the ratings performance of our television programs makes our television
broadcast revenues less predictable than our publishing revenues.
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Following 7% advertising revenue growth in fiscal 2003, advertising revenues
declined by 7% in our Canadian television broadcast segment in fiscal 2004,
reflecting a slight reduction in television advertising purchases in general as
well as loss of share resulting primarily from reduced ratings performance. The
performance relative to the prior year has progressively improved throughout
fiscal 2004. We believe that revenues will stabilize in early fiscal 2005
relative to the same period in fiscal 2004.
Our Australian and New Zealand television broadcast segments performed well for
fiscal 2004, with local currency revenues up by 14% in Australia and 6% in New
Zealand. The effect of the strengthening local currency relative to the Canadian
dollar contributed an additional 8% revenue increase for Australia and New
Zealand. In our Irish television segment, following five years of solid revenue
growth, revenues in local currency for fiscal 2004 showed growth of 4%.
Our principal television broadcast operating expenses are programming costs and
employee salaries. In fiscal 2004, segment operating expenses increased 6% in
Canada, primarily as a result of increased programming costs. In Canada, we
expect this trend to continue into fiscal 2005 as we continue to invest in our
program schedule. In New Zealand, segment operating expenses for the year ended
August 31, 2004 were flat as compared to the same period in the prior year as a
result of reduced programming costs, which partially resulted from the
purchasing power of a strong New Zealand dollar. In Australia, segment operating
expenses increased by 15%, reflecting increased programming costs. For our Irish
broadcasting operation, segment operating expenses increased 4% compared to
fiscal 2003.
Publishing and Online
Our publishing and online segment includes our Canadian newspaper operations as
well as our internet operations including the canada.com web portal. Our
publishing and online revenues are primarily earned from newspaper advertising
and circulation revenues from our newspapers in Canada. Our newspaper and online
advertising revenues are a function of the volume, or lineage, of advertising
sold and the rates we charge. Circulation revenues are produced from
home-delivery subscriptions for our newspapers and single-copy sales sold at
retail outlets and vending machines and are a function of the number of
newspapers we sell and the average per-copy prices we charge.
Excluding the effect of the sale of certain publishing assets in February 2003,
advertising and circulation revenues were higher in fiscal 2004. The advertising
increase resulted primarily from increases in pricing. Circulation revenues
increased marginally in fiscal 2004 as a result of higher per copy revenue,
partially offset by small declines in circulation. We expect that circulation
revenues, which make up approximately 21% of total newspaper revenues, will be
relatively flat in fiscal 2005 and that slight declines in newspaper circulation
will be somewhat offset by gaining paid circulation from our electronic editions
which were launched in all of our major markets in fiscal 2004.
Our principal operating expenses in the publishing and online segment are
salaries, newsprint and distribution expenses. Segment operating expenses,
excluding the effect of the sale of publishing assets, increased by 1% in fiscal
2004 as compared to fiscal 2003 but decreased as a percentage of revenues to 78%
in fiscal 2004 from 79% in fiscal 2003. The decrease in expenses, as a
percentage of revenues, was primarily the result of operational restructuring
completed in the last half of fiscal 2003. Such decreases are not expected to
continue. There was no substantive change in our newsprint expense in fiscal
2004. Slight cost increases were offset by reduced consumption. As a result of
the strong Canadian currency we expect our newsprint expense to remain
relatively constant into fiscal 2005.
Radio Broadcast
Our radio broadcast segment consists of our radio operations in New Zealand,
which earn substantially all of their revenues from advertising. Radio
advertising revenues are a function of overall radio advertising demand and
advertising rates. Radio advertising rates are determined based on the number
and demographics of our listeners. Our radio broadcast segment revenues
increased 10% in local currency in fiscal 2004, reflecting significant growth in
radio advertising expenditures in New Zealand. In addition, a strengthened New
Zealand currency contributed an additional 8% increase. We expect revenues in
local currencies to continue to increase during 2005, bolstered by the
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addition of new FM frequencies acquired in fiscal 2004.
The principal operating expenses in the radio broadcast segment are salaries,
marketing costs and music royalties. Segment operating expenses in local
currency increased 5% in fiscal 2004 as compared to fiscal 2003; as a result of
the strengthened New Zealand currency, this increase was 12% in Canadian
dollars.
Outdoor Advertising
Our outdoor advertising segment consists of TEN Group's wholly-owned subsidiary,
Eye Corp. Although Eye Corp.'s results are not consolidated into our financial
statements, we analyze its results as part of our segment analysis. See note 23
to our audited consolidated financial statements.
Eye Corp. generates its revenue from the sale of out-of-home advertising. Eye
Corp.'s advertising revenues are a function of overall outdoor advertising
demand and rates. Eye Corp.'s advertising rates are primarily a function of the
number and demographics of the audience for Eye Corp.'s displays. Segment
revenues increased during fiscal 2004, reflecting the impact on airport terminal
advertising sales of increased air travel as well as increased inventories and
rates. The principal operating expenses in this segment are salaries, site
rental costs and production expenses. Segment operating expenses decreased as a
percentage of revenues to 81% in fiscal 2004 from 93% in fiscal 2003 as a result
of a focus on cost containment.
Acquisitions and Divestitures
We have made a number of acquisitions and divestitures since the beginning of
fiscal 2002 that affect the comparability of our results from period to period.
- - In October 2001, we disposed of CKVU, a television station in Vancouver.
- - In September 2001, we gained effective control of the National Post and
began consolidating its financial results (we acquired the remaining 50% not
already owned in April 2002).
- - In August 2002 and February 2003, we disposed of certain community
newspapers.
- - In June 2004, we sold our 29.9% interest in Ulster Television.
- - In July 2004, we completed the initial public offering and refinancing of
our New Zealand operations, which reduced our ownership from 100% to 70%.
Foreign currency effects
Our Australia, New Zealand and Ireland operations expose our segment revenues
and operating expenses to fluctuations between the Canadian dollar and the
Australian dollar, New Zealand dollar and the Euro respectively. A decline in
the value of the Canadian dollar against those currencies increases the Canadian
dollar equivalent of the revenues and expenses we record in those currencies. An
increase in the value of the Canadian dollar has the opposite effect.
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CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with Canadian GAAP
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, as well as the disclosure
of contingent assets and liabilities. Management bases its estimates and
judgments on historical experience and other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
We have identified below the critical accounting estimates that we believe
require significant judgment in the preparation of our consolidated financial
statements. We consider these accounting estimates to be critical because
changes in the assumptions or estimates we have selected have the potential of
materially impacting our financial statements. For a summary of all of our
significant accounting policies, see note 1 to our audited consolidated
financial statements.
Goodwill and Intangible Assets
We estimate 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 material
impairment of the value and life of intangible assets and goodwill. As at August
31, 2004 we had $929 million of intangibles and $2,373 million of goodwill on
our balance sheet.
In performing the annual impairment testing of goodwill and intangibles,
management makes a number of assumptions and estimates in determining fair
value. The fair value definition used is the amount at which an asset could be
bought or sold in a current transaction between willing parties. Valuation
techniques used for reporting units include either a market approach or a
discounted cash flow ("DCF") approach. The market approach is used where
comparable public market data is available, or we have bona fide offers for
assets. The projections used in the DCFs represent management's best estimates
of expected future operating results of the reporting units for the first three
years and an extrapolation based on aggregate economic factors such as gross
domestic product growth rates and inflation, for the final two years of the
forecast period. Precedent transactions involving comparable companies and
market statistics for comparable companies are used to select appropriate
terminal value multiples. In addition, the expected risk-free and other rates of
return, general economic conditions, historical and forecasted operating
results, and valuations prepared by third parties are considered. The discount
rates used are based on the weighted average costs of capital using the capital
asset pricing model and adjusting for the size of the local reporting unit,
local tax rates and risk profile. Had different assumptions or valuation
techniques been used in performing the impairment testing at August 31, 2004,
the carrying value of intangibles and goodwill might have been different.
The valuation of one of our reporting units with a goodwill balance of
approximately $63 million was based on management's business plan that
anticipates achieving certain levels of profitability over the next three years.
Failure to achieve the targets established in its business plan may result in a
goodwill impairment.
Income Taxes
We are subject to income taxes in Canada and numerous foreign jurisdictions.
Significant judgment is required in determining the worldwide provision for
income taxes. During the ordinary course of business, there are many
transactions and calculations for which the ultimate tax determination is
uncertain. Management uses judgment and estimates in determining the appropriate
rates and amounts in recording future taxes, giving consideration to timing and
probability. Actual income taxes could vary from these estimates as a result of
future events, including changes in income tax law or the outcome of reviews by
tax authorities and related appeals. To the extent that the final tax outcome is
different from the amounts that were initially recorded, such differences will
impact the income tax provision in the period in which such determination is
made. Our income tax recovery was $10 million for the year ended August 31,
2004. Future tax assets were $119 million, while future tax liabilities were
$260 million at August 31, 2004. See note 14 to our audited consolidated
financial statements.
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Accounting for Pension and Other Benefit Plans
The cost of defined benefit pension and other retirement benefits earned by
employees is calculated based on management's estimates of expected plan
investment performance, salary escalation, retirement ages of employees, the
discount rate used in measuring the liability and expected healthcare costs. For
fiscal 2003 and 2004, based on experience and discussions with plan managers,
management estimated the long-term rate of return on plan assets to be 6.75% to
7.25%. For the same periods, the discount rate used in measuring the liability
was 6.5% to 6.75%. The discount rate was estimated by applying Canadian
corporate AA zero coupon bonds to the expected future benefit payments under the
plans. Management assumed that earnings would increase by 3.5% per year and that
price inflation would be 2% per year. The defined benefit pension and other
retirement benefit expense we recorded for the year ended August 31, 2004 was
$26.7 million. Use of different assumptions would vary results.
Broadcast Rights
At August 31, 2004, we had $95 million in broadcast rights. Broadcast rights
represent the right to air various forms of programming. Broadcast rights and
the corresponding payable are recorded when the license period begins and the
programs are available for air. Foreign programming is primarily acquired on a
"pay for play" basis, and is immediately aired, while some foreign and most
domestic programming may be carried in inventory and amortized over a series of
plays. Management must use estimates and judgment in determining the useful
lives and carrying values of broadcast rights. Estimates of useful life relates
to the expected number of plays over which the cost of acquiring the rights are
amortized, while estimates of value primarily relate to the time slots in which
the programs will be aired. Inventories are reviewed regularly to ensure
recoverability of the book value of broadcast rights.
CHANGES IN ACCOUNTING POLICIES
HEDGING RELATIONSHIPS
The Company adopted CICA Accounting Guideline 13, "Hedging Relationships"
effective September 1, 2003. In accordance with the new policy, the Company's
hedging relationships are documented and subject to effectiveness tests on a
quarterly basis for reasonable assurance that they are and will continue to be
effective. The adoption of this guideline had no impact on the financial
statements.
STOCK OPTIONS
We adopted the fair value method of accounting for share based compensation
recommended by the CICA in Section 3870, "Stock-based Compensation and Other
Stock Based Payments", on a prospective basis for options granted subsequent to
September 1, 2003. As a result of the adoption of this policy the fair value of
stock options granted is charged to earnings over the vesting period of the
options. In the year ended August 31, 2004 we recorded an expense of $1 million
for options granted in fiscal 2004.
REPORTING CIRCULATION REVENUE GROSS VERSUS NET
During the year ended August 31, 2004 we retroactively adopted the provisions of
the Emerging Issues Committee of the CICA (EIC-123), "Reporting Revenue Gross as
a Principal versus net as an Agent", which was effective for our fiscal year
commencing September 1, 2002. Under this provision, our circulation revenues are
reported on a gross basis. Previously we reported circulation revenues net of
certain of our distribution contract costs. As a result of this adoption we
revised our results to increase sales and operating expenses by $46.0 million
for the year ended August 31, 2004 ($44.2 million for the year ended August 31,
2003).
PROPOSED ACCOUNTING POLICIES
The Accounting Standards Board of the CICA issued AcG-15, Consolidation of
Variable Interest Entities. We have determined that we are the primary
beneficiary of TEN Group, a variable interest entity. Accordingly, we will
consolidate the results of TEN Group in fiscal 2005. We currently use the equity
method to account for our interest
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in TEN Group. Consolidation of TEN Group will have a significant impact on our
revenues, expenses, assets and liabilities. There will be no impact on our
shareholders' equity. Summarized results of TEN Group are included in note 3 of
our consolidated financial statements for the years ended August 31, 2003 and
2004. We will adopt this standard on a retroactive basis effective September 1,
2004 with restatement of prior periods.
OPERATING RESULTS
INTRODUCTORY NOTE
- - Segment operating profit. In the discussion that follows, we provide
information concerning our segment operating profit. We calculate segment
operating profit by determining segment operating income before
amortization as defined below and adding back restructuring charges. See
note 23 to our audited consolidated financial statements. Management
utilizes segment operating profit as a measure of segment profitability in
making strategic resource allocations. In addition, we and our lenders and
investors use segment operating profit to measure performance against our
various leverage covenants.
- - Operating income before amortization. We also discuss our consolidated
operating income before amortization. Operating income before amortization
is not a recognized measure of financial performance under Canadian
generally accepted accounting principles (GAAP). Investors are cautioned
that operating income before amortization should not be construed as an
alternative to operating income or net earnings determined in accordance
with GAAP as an indicator of our performance. Our method of calculating
operating income before amortization may differ from other companies and,
accordingly, operating income before amortization may not be comparable to
measures used by other companies.
FISCAL 2004 COMPARED TO FISCAL 2003
Following is a table of segmented results for the year ended August 31, 2004 and
August 31, 2003, including a reconciliation of segment operating profit to
operating income:
REVENUE SEGMENT OPERATING PROFIT
----------------------- ------------------------
2004 2003 2004 2003
$000 $000 $000 $000
OPERATING SEGMENTS
Publishing and Online - Canada 1,193,627 1,208,180 267,343 258,496
--------- --------- -------- -------
Television
Canada 690,302 730,407 147,430 216,346
Australia-Network TEN(1) 409,204 336,362 145,328 106,975
New Zealand 108,236 95,055 23,291 10,095
Ireland 34,152 32,490 10,591 9,729
--------- --------- -------- -------
1,241,894 1,194,314 326,640 343,145
Radio - New Zealand 86,717 73,400 27,488 20,751
Outdoor-Australia(1) 43,742 36,656 8,215 2,560
Corporate and other - - (27,110) (23,213)
--------- --------- -------- -------
Total operating segments 2,565,980 2,512,550 602,576 601,739
Restructuring and film and television
impairment expense(2) - - (2,445) (23,305)
Elimination of equity accounted
affiliates(1) (452,946) (373,018) (153,543) (99,219)
--------- --------- -------- -------
Total 2,113,034 2,139,532 446,588 479,215
========= ========= ======== =======
Operating income before amortization 446,588 479,215
Amortization 93,714 95,275
-------- -------
Operating income 352,874 383,940
======== =======
(1) Represents the Company's proportionate interest in TEN Group and its wholly
owned subsidiaries.
(2) For 2004, restructuring expenses relate to Canadian television operations.
For 2003, it includes Network TEN film and television impairment charges of
$10.3 million and Canadian media operations restructuring expenses of $13.0
million.
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The following discussion is based on the Company's consolidated results for the
year ended August 31, 2004. Comparisons with the prior year's results are
affected by corporate initiatives, including the divestiture of certain
newspaper publishing properties, accordingly, the Company provides certain pro
forma comparatives. Pro forma revenue, operating income before amortization and
operating income for fiscal 2003 exclude the results of newspaper publishing
assets sold in February 2003.
OPERATING
INCOME BEFORE OPERATING
REVENUE AMORTIZATION INCOME
For the year ended August 31, 2003 $000 $000 $000
As reported 2,139,532 479,215 383,940
Newspaper publishing properties sold (39,956) (10,105) (9,612)
--------- ------- -------
Pro forma 2,099,576 469,110 374,328
========= ======= =======
CONSOLIDATED RESULTS
Revenues. Consolidated revenues declined by $26 million to $2,113 million during
the year ended August 31, 2004. The decline resulted from the sale of publishing
assets in February 2003; these assets accounted for $40 million of our
consolidated revenues for fiscal 2003. The effect of the publishing asset sale
was partially offset by a $13 million, or 1%, increase in revenues from our
remaining assets. This increase was driven by significant increases in revenues
from our international media operations and an improvement in our continuing
operations in the publishing and online segment, which were partially offset by
a decrease in revenues from our Canadian television segment.
Operating expenses. Consolidated operating expenses (including selling, general,
and administrative expenses) before amortization increased by $6 million for the
year ended August 31, 2004 to $1,664 million. The assets sold to Osprey Media
accounted for $30 million of our consolidated operating expenses during fiscal
2003. Consolidated operating expenses attributable to operations not sold
increased $47 million, or 3%, from $1,617 million in fiscal 2003, as a result of
significant programming expense increases for our Canadian television segment as
well as general expense increases in other operating segments.
Restructuring charge. In fiscal 2004 we incurred $2 million in restructuring
expenses related to Canadian television operations. In fiscal 2003, we undertook
restructuring activities in our Canadian media operations that generated
restructuring expenses of $13 million. The restructuring expense related to the
following operating segments: Canadian television - $3 million, Canadian
publishing and online - $9 million and corporate and other - $1 million.
Operating income before amortization. Consolidated operating income before
amortization decreased by 7% in the year ended August 31, 2004 to $447 million
from $479 million in fiscal 2003. Of the $33 million decline in consolidated
operating income before amortization, $10 million was attributable to the sold
publishing assets. The remainder of the decrease reflects lower segment
operating profit in our Canadian television segment, which was partially offset
by increases in our New Zealand and Australian television segments and our
publishing and online segment.
Amortization. Amortization of intangibles was $18 million for both fiscal 2004
and 2003. Amortization of property, plant and equipment and was $71 million for
both fiscal 2004 and fiscal 2003.
Operating income. Consolidated operating income was $353 million in the year
ended August 31, 2004 compared to $384 million for fiscal 2003.
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Segment Results
Publishing and online
- - Revenues. Segment revenues for the year ended August 31, 2004 were $1,194
million, a decrease of $15 million, or 1%, from the revenues recorded in
the fiscal 2003. The decline reflects the publishing asset sale in
February 2003; the divested assets accounted for $40 million of our
publishing and online revenues during fiscal 2003. Our remaining
publishing assets recorded an increase of $25 million, or 2%, compared to
fiscal 2003. Excluding the impact of the publishing asset sales,
advertising revenues were up approximately 2% overall with flat lineage
and increased pricing. Lineage reflects strength in classified and retail
partially offset by decreases in national account lineage most
significantly in the automotive sector. The increase in rates reflects
increases for national accounts; the rates achieved for retail decreased
as a result of an increased use of inserts versus run of press. While
circulation numbers were flat, circulation revenue increased marginally as
a result of achieving an increase in revenue per copy.
- - Operating expenses. Segment operating expenses (including selling, general
and administrative expenses) for the year ended August 31, 2004 declined
by $23 million compared to fiscal 2003. This decline reflects a $30
million decrease in operating expenses attributable to publishing assets
sold, partially offset by a $6 million increase in operating expenses
attributable to our continuing operations. The modest increase reflected
normal salary escalations and increases in certain administrative costs
including pension expense, partially offset by cost reductions
attributable to the restructuring undertaken in the latter part of fiscal
2003. Newsprint expenses increased approximately 1%, reflecting an
increase in the cost of newsprint partially offset by reduced consumption.
- - Segment operating profit. Segment operating profit for the year ended
August 31, 2004 increased by $9 million compared to the same period in the
prior year. Excluding the impact of the publishing assets sold to Osprey
Media, segment operating profit was $19 million, or 8%, higher than in
fiscal 2003, driven primarily by the increase in revenues.
- - Restructuring Expenses. $9 million were recorded in respect of this
segment for the year ended August 31, 2003 consisting of employee
severance costs. These charges are not reflected in segment operating
profit.
Canadian television
- - Revenues. Segment revenues for the year ended August 31, 2004 declined by
5%, or $40 million, to $690 million from $730 million recorded in fiscal
2003 as a result of a 7% decrease in airtime sales for the year ended
August 31, 2004. The decrease in airtime sales primarily reflects an
increasingly competitive market place, a decline in ratings and decreased
advertising from certain sectors, particularly packaged goods and retail.
Airtime revenue decreases were most significant in the first quarter of
fiscal 2004 at an 11% decrease compared to the first quarter of fiscal
2003.
This decrease was partially offset by an approximately $3 million increase
in revenues from the sale of program rights resulting from an increase in
television program production by Global Television. In addition, our seven
digital specialty channels reported increases in both subscriber and
advertising revenue. Overall, digital revenues increased by 22% to $10
million in the year ended August 31, 2004 compared to the same period in
the previous year. There are now more than 3.4 million subscribers to our
digital services, representing a 17% increase year to date in fiscal 2004.
Our seventh channel, Cool TV was launched in the first quarter of fiscal
2004.
- - Operating expenses. Segment operating expenses (including selling, general
and administrative expenses) of $543 million were 6%, or $29 million,
higher for the year ended August 31, 2004 than in the same period the
prior year. This reflected increases in expenses due to the following:
- program amortization, which comprises approximately 50% of segment
operating expenses, increased by approximately $14 million, or 6%,
for the year ended August 31, 2004 as compared to fiscal 2003,
including charges related to the discontinuance of certain
programming activities including the Mike Bullard Show as well as
increased costs of new program offerings;
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- increased pension expense primarily as a result of an increase in
the amortization of the actuarial loss in our defined benefit
pension plans; and
- increased levies for the Society of Composers, Authors and Music
Publishers of Canada, or SOCAN, were introduced resulting in an
expense increase of approximately $2 million for the year ended
August 31, 2004, including approximately $1.5 million which related
to retroactive assessment for prior fiscal years.
These increases were partially offset by cost reductions achieved through
savings as a result of operational restructuring activities which were
undertaken in the last half of fiscal 2003.
- - Segment operating profit. As a result of revenue decreases and expense
increases, Canadian television segment operating profit for the year ended
August 31, 2004 decreased 32% to $147 million compared to $216 million for
fiscal 2003.
- - Restructuring Expenses. Restructuring expenses of $2 million were recorded
in respect of this segment for fiscal 2004 and $3 million were recorded in
respect of this segment for fiscal 2003 consisting of employee severance
costs. These charges are not reflected in segment operating profit.
Australian television
- - Revenues. Segment revenues for the year ended August 31, 2004 increased by
22% to $409 million from $336 million for the same period in the prior
year. In domestic currency, segment revenues increased 14% reflecting
Network TEN's strong rating performance in a strong television advertising
environment. The strength of the Australian currency contributed an
additional 8% increase on translation to Canadian dollars.
- - Operating expenses. Segment operating expenses for the year ended August
31, 2004 increased 15% to $264 million compared to $229 million for the
same period in fiscal 2003. In domestic currency operating expenses
increased 7% primarily as a result of increased programming expenses. The
strength of the Australian currency added an additional 8% increase on
translation to Canadian dollars.
- - Segment operating profit. Segment operating profit increased by 36% to
$145 million for the year ended August 31, 2004 compared to $107 million
in the same period in fiscal 2003, as the increase in revenues more than
offset the increase in operating expenses.
New Zealand television. Revenues for New Zealand's 3 and C4 television networks
increased by 14% to $108 million for the year ended August 31, 2004 from $95
million the previous year. In local currency, revenues increased by 6%
reflecting growth in New Zealand television advertising expenditures. C4
(formerly TV4) was re-launched in the period as New Zealand's first free-to-air
music channel and is contributing to the increase in revenues. The stronger New
Zealand currency contributed an additional 8% increase. In local currency,
operating expenses for New Zealand's 3 and C4 television networks decreased by
6% primarily as a result of reduced programming costs partially due to the
increased purchasing power of the New Zealand dollar. In addition, in fiscal
2003 programming expense was higher as a result of the write-down of inventory
in anticipation of the C4 format change. On translation to Canadian dollars,
operating expenses for New Zealand's 3 and C4 television networks were flat as
compared to fiscal 2003, as a result of the strengthened New Zealand currency.
New Zealand's 3 and C4 produced segment operating profit of $23 million, a $13
million increase from $10 million recorded in the year ended August 31, 2003.
Irish television. Our 45% share of revenues at TV3 in the Republic of Ireland
increased by 5% to $34 million for the year ended August 31, 2004 from $32
million in fiscal 2003. As a result of increased revenues, our share of TV3's
segment operating profit increased by 9% to $11 million from $10 million
recorded in fiscal 2003.
New Zealand radio. CanWest RadioWorks in New Zealand continued its steady
performance, increasing revenues and segment operating profit for the year ended
August 31, 2004. Revenues grew by 18% to $87 million from $73 million in the
same period in the previous year. Revenues in domestic currency grew by 10%,
with an additional 8% increase as a result of translation to Canadian currency.
The revenue increase was driven principally by growth in radio advertising
expenditures in New Zealand. As a result of growth in revenue and a
strengthening New Zealand currency, RadioWorks' segment operating profit grew by
32% to $27 million from $21 million in fiscal 2003.
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Outdoor advertising. Segment revenues increased by $7 million, or 19%, to $44
million from $37 million for fiscal 2003. This increase reflected 11% growth in
revenue in domestic currency with a further 8% increase as a result of currency
translation. Segment operating profit increased by $6 million, or 221%, to $8
million, as compared to the year ended August 31, 2003.
Corporate and other. Segment expenses increased from $23 million in fiscal 2003
to $27 million fiscal 2004. Restructuring expenses of $1 million were incurred
in respect of this segment in the year ended August 31, 2003 consisting of
employee severance costs.
Interest Income and Expense
Interest expense was $311 million for the year ended August 31, 2004, compared
to $353 million in the same period in the previous year, reflecting a reduced
level of debt as well as reduced interest rates achieved through refinancing of
debt. Debt at August 31, 2004 was $2,872 million, $358 million less than the
debt outstanding at August 31, 2003 of $3,230 million. We refinanced our senior
secured debt in August 2003 and in June 2004 resulting in annual interest
savings of approximately $8 million and approximately $4.5 million,
respectively.
In the year ended August 31, 2004, we recorded a $111 million loss equivalent to
the change in fair value of interest rate and foreign currency and interest rate
swaps which have not been settled and which relate to debt that has been
retired. This compared to a loss of $23 million for the same period of fiscal
2003.
We recorded interest income of $9 million for the year ended August 31, 2004
primarily related to interest received on an income tax refund related to an
income tax issue which was resolved in the first quarter, interest received on
Network TEN distributions and interest on the National Post settlement.
Foreign Exchange Gains
We recorded net foreign exchange gains of $45 million in the year ended August
31, 2004. Approximately $36 million of this gain related to a gain on early
retirement of $US denominated debt in August 2004. In addition, we recorded
translation gains on U.S. dollar denominated debt which has not been hedged and
distributions receivable from Network TEN. This compared to a $4 million foreign
exchange gain recorded in the previous year.
Investments
For the year ended August 31, 2004 we recorded investment income of $111
million, compared to investment income of $9 million in fiscal 2003. In fiscal
2004, we recorded a gain on the sale of our interest in UTV of $52 million, a
gain of $66 million related to the New Zealand IPO, a dilution gain of $2
million as a result of Network TEN issuing shares pursuant to the exercise of
certain executive stock options which effectively diluted our economic interest
to 56.6%. These gains were partially offset by the write-down of financing and
other deferred costs of $8 million. For the year ended August 31, 2003, we
recorded a gain of $21 million on the sale of community newspapers and a
dilution gain of $2 million related to Network TEN offset by a loss of $11
million on the sale of our shares in SBS Broadcasting and the write-down of
deferred costs of $3 million. Dividend income of $4 million received from UTV in
fiscal 2004 was 6% higher than in fiscal 2003. In June 2004, we sold our
interest in UTV.
Income Taxes
The recovery of income taxes was $10 million for the year ended August 31, 2004,
compared to a provision of $3 million for the year ended August 31, 2003. The
negative effective tax rate of 11% in the year ended August 31, 2004 differed
from our statutory rate of 35% as a result of the non-taxable portion of capital
gains, the impact of international tax rates which are below Canadian rates and
a $20 million credit from the resolution of tax issues offset by the effect of
increases in future tax rates which caused a net increase in future tax
liabilities and resulted in a $9 million income tax expense.
Equity Interest in Network TEN
Our equity interest in earnings of Network TEN was $100 million for the year
ended August 31, 2004 compared to $101 million in the same period in fiscal 2003
as a result of the strong performance of Network TEN as well as the
11
strong Australian currency, as described above. Network TEN results are
discussed in more detail later in this report.
Currency Translation
We recorded net losses of $7 million related to the realization of currency
translation gains related to Network TEN distributions, currency translation
losses related to the repayment of inter-company loans by our New Zealand
operations and the divestiture of 30% of our interest in New Zealand. This
compared to a $1 million gain in the year ended August 31, 2003.
Net earnings from continuing operations
Net earnings from continuing operations for the year ended August 31, 2004 were
$194 million, or $1.10 per share, compared to net earnings of $115 million, or
$0.60 per share, for the year ended August 31, 2003.
Discontinued operations
The Company has commenced a process to sell all of Fireworks Entertainment's
production and distribution operations, resulting in the classification of these
operating results as a loss from discontinued operations and its assets and
liabilities as assets and liabilities of discontinued operations. These
operations were previously classified in the Canadian Entertainment segment.
Impairment charges of $211 million including goodwill impairment of $31 million
were recorded to adjust the assets to their fair values based upon recent
estimates less cost to dispose. Net loss from discontinued operations was $208
million for the year ended August 31, 2004 compared to $69 million for the same
operations for the year ended August 31, 2003. The Company expects to complete
the sale of these operations within the next six months.
Net Earnings (Loss)
Net loss for the year ended August 31, 2004 including the loss from discontinued
operations was $13 million or $0.08 per share compared to net earnings of $46
million or $0.22 per share for the year ended August 31, 2003.
FISCAL 2003 COMPARED TO FISCAL 2002
Following is a table of segmented results for the year ended August 31, 2003 and
August 31, 2002, including a reconciliation of segment operating profit to
operating income:
REVENUE SEGMENT OPERATING PROFIT
------------------------ ------------------------
2003 2002 2003 2002
$000 $000 $000 $000
OPERATING SEGMENTS
Publishing and Online - Canada 1,208,180 1,320,262 258,496 285,027
--------- --------- ------- -------
Television
Canada 730,407 691,888 216,346 190,752
Australia-Network TEN(1) 336,362 281,427 106,975 81,782
New Zealand 95,055 69,079 10,095 (1,938)
Ireland 32,490 28,317 9,729 7,654
--------- --------- ------- -------
1,194,314 1,070,711 343,145 278,250
Radio - New Zealand 73,400 60,724 20,751 16,361
Outdoor-Australia(1) 36,656 38,074 2,560 874
Corporate and other - - (23,213) (26,807)
--------- --------- ------- -------
Total operating segments 2,512,550 2,489,771 601,739 553,705
Restructuring and film and television
impairment expense(2) - - (23,305) -
Elimination of equity accounted
affiliates(1) (373,018) (319,500) (99,219) (82,656)
--------- --------- ------- -------
Total 2,139,532 2,170,271 479,215 471,049
========= ========= ======= =======
12
Operating income before amortization 479,215 471,049
Amortization 95,275 98,319
------- -------
Operating income 383,940 372,730
======= =======
(1) Represents the Company's proportionate interest in TEN Group and its wholly
owned subsidiaries.
(2) Includes Network TEN film and television impairment charges of $10.3 million
and Canadian media operations restructuring charges of $13.0 million.
Effect of divestitures
The following discussion is based on the Company's consolidated results for the
year ended August 31, 2003. Comparisons with the prior year's results are
affected by corporate initiatives, including the divestiture of certain
newspaper publishing properties, and accordingly, the Company provides certain
pro forma comparatives. Pro forma revenue, EBITDA and operating income for
fiscal 2002 exclude the results of the newspaper publishing interests sold to
GTC in August 2002 and exclude the results of the newspaper properties sold to
Osprey Media in February 2003 for the period from February 16, 2002 to August
31, 2002
OPERATING
INCOME BEFORE OPERATING
REVENUE AMORTIZATION INCOME
For the year ended August 31, 2002 $000 $000 $000
As reported 2,170,271 471,049 372,730
Newspaper publishing properties sold (141,807) (42,721) (39,167)
--------- ------- -------
Pro forma 2,028,464 428,328 333,563
========= ======= =======
CONSOLIDATED RESULTS
Revenues. We reported consolidated revenues of $2,140 million for the year ended
August 31, 2003, a decrease of $31 million from the prior year. The decrease
resulted from the sale of publishing assets. Excluding the impact of sold
publishings, revenues increased by $111 million. Revenues for 2003 reflected
strong results in our Canadian television and publishing operations and our New
Zealand broadcasting operations.
Operating expenses. Consolidated operating expenses (including selling, general,
and administrative expenses) before amortization and restructuring expenses
decreased $52 million to $1,647 million reflecting the publishing asset sales.
Excluding the sold publishing assets, operating expenses increased $47 million,
or 3%, from $1,600 million in the previous year, reflecting expense increases in
our publishing and online operations.
Restructuring charge. We recorded a restructuring charge of $13 million related
to employee severance expenses associated with the restructuring of our Canadian
media operations in fiscal 2003. The restructuring charge affected the following
operating segments: Canadian television - $3 million, Canadian publishing and
online - $9 million and corporate and other - $1 million.
Operating income before amortization. Consolidated operating income before
amortization increased by 2% to $479 million in fiscal 2003 from $471 million in
fiscal 2002. Excluding the impact of the sold publishing assets, operating
income before amortization increased by 12%. Substantial increases at broadcast
operations in Canada, New Zealand, and Ireland as well as in publishing and
online operations were partially offset by restructuring expenses.
Amortization. Amortization of intangibles was $18 million in both 2003 and 2002.
Amortization of property and equipment decreased to $71 million in fiscal 2003
from $74 million in the previous year, reflecting the sale of the publishing
assets.
Operating income. Operating income increased from $373 million in fiscal 2002 to
$384 million in fiscal 2003.
SEGMENT RESULTS
Canadian publishing and online.
13
- - Revenues. Segment revenues for fiscal 2003 declined from $1,320 million in
fiscal 2002 to $1,208 million in fiscal 2003. The decline primarily
reflects the sale of publishing assets. Excluding the revenues of the sold
papers, revenues increased by 3%. Newspaper advertising was bolstered by
robust activity in the automotive and technology sectors through the
second half of the fiscal year. Advertising and circulation comprised 76%
and 21%, respectively, of our newspaper revenues for fiscal 2003,
consistent with the prior year.
- - Operating expenses. Segment operating expenses (including selling, general
and administrative expenses) declined from $1,035 million in fiscal 2002
to $950 million in fiscal 2003, reflecting the sale of publishing assets.
Excluding expenses attributable to the sold publishing assets, segment
operating expenses increased by 1%. This reflects normal cost escalations,
particularly payroll and moderate increases in the price of newsprint.
- - Segment operating profit. Segment operating profit declined from $285
million in fiscal 2002 to $258 million in fiscal 2003, reflecting the sale
of publishing assets. Excluding the results of the sold newspapers,
segment operating profit increased by 7%. Our online operations achieved a
significant improvement in fiscal 2003 and for the first time recorded
positive operating profit of just under $1 million, compared to losses of
$4.5 million the previous year. The online properties are now more closely
aligned with other media properties and are contributing to overall
profitability.
- - Restructuring Expenses. Restructuring expenses of $9 million were incurred
in respect of this segment in fiscal 2003 related to the restructuring of
our Canadian media operations. This charge consists of $9 million in
employee severance costs. These charges are not reflected in segment
operating profit.
Canadian television
- - Revenues. Segment revenues were up by 6% to $730 million from $692 million
recorded in the previous year, reflecting in part, the strength of the
Canadian television advertising market. Revenues at conventional
television operations and at Global Prime increased by 5% in fiscal 2003
compared to fiscal 2002. Our six digital specialty channels saw revenues
double to $9 million in fiscal 2003, their second full year of operation.
Our portfolio of digital channels continue to perform well relative to
their peers, steadily gaining subscribers. Subsequent to year-end we
launched a seventh channel, CoolTV.
- - Operating expenses. Segment operating expenses (including selling, general
and administrative expenses) increased by 3% to $514 million in fiscal
2003, compared to $501 million in fiscal 2002. The increase primarily
reflects nominal inflationary increases and costs related to the start up
of Cool FM. Programming expenses were consistent with the previous year.
- - Segment operating profit. As a result of revenue increases and expense
control, our Canadian television segment operating profit increased 13% to
$216 million in fiscal 2003.
- - Restructuring expenses. Restructuring expenses of $3 million were incurred
in respect of this segment in fiscal 2003 consisting of employee severance
costs related to the restructuring of our Canadian media operations. These
charges are not reflected in segment operating profit.
Australian television. Segment operating revenues increased by $55 million to
$336 million in fiscal 2003, reflecting significant ratings gains for Network
TEN's prime time schedule in its target demographic of 16 to 39 year olds and
significant ratings gains related to Network TEN's acquisition of key sports
properties. Segment operating expenses increased by $30 million, primarily
reflecting higher programming expenses for sports and other programming. Segment
operating profit increased by $25 million, or 31%, to $107 million, as the
revenue gains more than offset the increase in operating expenses. Results from
Australia were converted at an average exchange rate of .8893, an increase of 7%
over the prior year rate of exchange.
New Zealand television. Revenues from television broadcast operations for New
Zealand's 3 and TV4 television networks increased by 38% to $95 million for
fiscal 2003 from $69 million the previous year. In local currency, revenues
increased by 22% compared to fiscal 2002. Segment operating profit also
improved, to $10 million for fiscal 2003 compared to a loss of $2 million in
fiscal 2002. Results from New Zealand were translated at an average exchange
rate of 0.7957, an increase of 15% over the prior year's rate of exchange. A
combination of factors
14
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. In
October 2003, TV4 was relaunched as C4 with a youth music format.
Irish television. Our 45% share of revenues at TV3 in the Republic of Ireland
increased 15% to $32 million in fiscal 2003 from $28 million the previous year.
Our share of TV3's segment operating profit was $10 million, up from $8 million
the previous year.
New Zealand radio. RadioWorks continued its steady performance, increasing
revenues and segment operating profit. Revenue grew by 21% to $73 million in
fiscal 2003 from $61 million the previous year. Segment operating profit grew by
27% to $21 million in fiscal 2003 from $16 million in the previous year.
Outdoor. Segment operating profit improved to $3 million in fiscal 2003 from $1
million in fiscal 2002, primarily reflecting lower operating expenses.
Corporate and other. Corporate and other segment expenses decreased by 13% to
$23 million in fiscal 2003 from $27 million in fiscal 2002. In addition,
restructuring expenses of $1 million were incurred in fiscal 2003 in respect of
this segment consisting of employee severance costs.
Financing Costs
Financing costs, including amortization of deferred financing costs, were $361
million for fiscal 2003, compared to $361 million in the previous year.
Investment Gain (Loss)
In fiscal 2003, we had investment gains of $9 million, primarily as a result of
the gain on the sale of community newspapers of $21 million offset by the loss
on the sale of our common share holdings in SBS Broadcasting S.A. of $11
million. We recorded a $23 million loss equivalent to the fair value of interest
rate swaps related to debt that was repaid during fiscal 2003. Dividend income
of $4 million from UTV was consistent with fiscal 2002.
Income Taxes
The provision for income taxes was $3 million in fiscal 2003, compared to $6
million in fiscal 2002.
Interest in Earnings of Network TEN
Our interest in earnings of Network TEN was $101 million in fiscal 2003 compared
to a loss of $12 million in fiscal 2002. Network TEN's operating income before
amortization increased to $173 million for fiscal 2003 compared to $144 million
for fiscal 2002. In fiscal 2003, Network TEN recorded a charge of $18 million
related to program inventory write-downs, and a recovery of future taxes of $56
million primarily as a result of new tax consolidation legislation in Australia.
In fiscal 2002, Network TEN recorded an investment write-down of $17 million, a
charge for Eye Corp. goodwill impairment of $56 million and a charge related to
the resolution of a taxation issue of $30 million. For fiscal 2003, results from
Network TEN were translated at an average exchange rate which is 7% higher than
the average rate of translation used in fiscal 2002.
Net earnings from continuing operations
Net earnings from continuing operations for the year ended August 31, 2003 were
$115 million, or $0.60 per share, compared to net earnings from continuing
operations of $31 million, or $0.17 per share, for the year ended August 31,
2002.
Discontinued operations
In fiscal 2004, we commenced a process to sell all of our Fireworks
Entertainment production and distribution operations. As a result, we have
classified these operating results as losses from discontinued operations and
the related assets and liabilities as assets and liabilities of discontinued
operations with restatement of prior periods. These operations were previously
classified in the Canadian Entertainment segment. Net loss from discontinued
15
operations was $69 million for the year ended August 31, 2003 compared to $18
million for the same operations for the year ended August 31, 2002.
16
Net Earnings
Net loss for the year ended August 31, 2003 including the loss from discontinued
operations was $46 million or $0.22 per share compared to net earnings of $13
million or $0.07 per share for the year ended August 31, 2002.
CONSOLIDATED QUARTERLY FINANCIAL RESULTS
FOR THE THREE MONTH PERIODS ENDED (IN THOUSANDS OF DOLLARS, EXCEPT AS NOTED)
2004
31-AUG 31-MAY 28-FEB 30-NOV
Revenue 469,607 564,599 499,709 567,950
Operating profit before amortization 58,316 143,139 91,451 153,682
Amortization of intangibles 4,375 4,375 4,375 4,375
Amortization of property, plant,
and equipment and other 16,191 20,645 19,671 19,707
Interest in earnings (loss) of TEN 22,724 20,573 17,699 38,893
Net earnings (loss) from continuing operations 59,767 52,475 (1,535) 83,592
Net earnings (loss) 61,966 54,337 (211,277) 81,496
Cash flow from continuing operating activities 149,731 21,103 174,265 (33,345)
Cash flow from operating activities 151,989 45,062 165,366 (34,672)
Net earnings (loss) from continuing operations per share
Basic $ 0.34 $ 0.30 $ (0.01) $ 0.47
Diluted $ 0.34 $ 0.30 $ (0.01) $ 0.47
Net earnings (loss) per share
Basic $ 0.35 $ 0.31 $ (1.19) $ 0.46
Diluted $ 0.35 $ 0.31 $ (1.19) $ 0.46
2003
31-AUG 31-MAY 28-FEB 30-NOV
Revenue 464,378 558,497 507,948 597,606
Operating profit before amortization 66,323 141,534 96,920 174,888
Amortization of intangibles 4,375 4,375 4,375 4,375
Amortization of property, plant,
and equipment and other 17,839 18,698 20,771 20,467
Interest in earnings (loss) of TEN 52,250 12,428 10,884 25,777
Net earnings from continuing operations 8,040 26,059 12,810 67,889
Net earnings (loss) (44,712) 12,484 9,881 68,435
Cash flow from continuing operating activities 99,388 49,447 179,160 (40,087)
Cash flow from operating activities 96,052 64,338 171,359 (100,959)
Net earnings from continuing operations per share
Basic $ 0.05 $ 0.15 $ 0.03 $ 0.38
Diluted $ 0.05 $ 0.15 $ 0.03 $ 0.36
Net earnings (loss) per share
Basic $ (0.25) $ 0.07 $ 0.01 $ 0.39
Diluted $ (0.25) $ 0.07 $ 0.01 $ 0.36
Effect of divestitures
Quarterly results for the two years ended August 31, 2004 were affected by the
sale of community newspapers in February 2003.
Seasonality
The Company's advertising revenues are seasonal. Revenues are highest in the
first and third quarters, while expenses are relatively constant throughout the
year.
17
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 2004
Following is a table of segmented results for the three months ended August 31,
2004 and August 31, 2003, including a reconciliation of segment operating profit
to operating income:
REVENUE SEGMENT OPERATING PROFIT
--------------------- ------------------------
2004 2003 2004 2003
$000 $000 $000 $000
OPERATING SEGMENTS
Publishing and Online - Canada 280,807 276,290 53,348 51,986
------- ------- ------- -------
Television
Canada 130,590 136,946 (20) 9,513
Australia - Network TEN(1) 99,284 90,366 33,054 29,511
New Zealand 29,682 26,426 5,630 3,032
Ireland 7,110 5,970 1,712 1,078
------- ------- ------- -------
Total Television 266,666 259,708 40,376 43,134
Radio - New Zealand 21,418 18,746 6,544 5,583
Outdoor - Australia(1) 11,301 8,715 2,330 454
Corporate and other - - (6,453) (6,016)
------- ------- ------- -------
Total operating segments 580,192 563,459 96,145 95,141
Restructuring expenses - - (2,445) (9,169)
Elimination of equity accounted affiliates(1) (110,585) (99,081) (35,384) (19,649)
------- ------- ------- -------
Total 469,607 464,378 58,316 66,323
======= ======= ======= =======
Operating income before amortization 58,316 66,323
Amortization expense (20,566) (22,214)
------- -------
Operating income 37,750 44,109
======= =======
(1) Represents the Company's 56.6% proportionate interest in Network TEN and its
wholly owned subsidiaries.
CONSOLIDATED RESULTS
Revenues. Consolidated revenues increased by $5 million or 1% to $470 million
for the three months ended August 31, 2004 from the consolidated revenues
reported for the same period in fiscal 2003. Revenues for the fourth quarter
reflected solid increases in revenues from international media operations, a 2%
increase in Canadian Publishing and Online revenues offset by a 5% decrease in
Canadian television revenues.
Operating expenses. Consolidated operating expenses (including selling, general,
and administrative expenses) before amortization increased $10 million or 2% to
$409 million. This increase reflects moderate expense increases in all
operations.
Restructuring expense. We recorded a restructuring expense of $2 million in the
three months ended August 31, 2004 related to restructuring of our Canadian
television operations.
Operating income before amortization. Consolidated operating income before
amortization decreased by 12% to $58 million from $66 million for the same
period last year. The decrease in operating income before amortization reflected
significant declines in operating income before amortization in Canadian
Television, partially offset by increases at broadcast operations in New Zealand
and in Publishing and Online operations, as well as the effect of the $2 million
restructuring expense recorded in the three months ended August 31, 2004.
SEGMENTED RESULTS
Publishing and Online
- - Revenue. Publishing and Online revenues for the fourth quarter of fiscal
2004 were $281 million compared to revenues of $276 million in same period
the previous year. Advertising revenues increased by 1% for the fourth
quarter, reflecting small decreases in volumes offset by higher rates.
While circulation numbers were marginally down, circulation revenue
increased as a result of increased revenue per copy. Circulation comprised
18
approximately 21% of total revenues for the newspaper group for the fourth
quarter, consistent with the same period for the prior year.
- - Operating expenses. Compared to the same period last year, operating
expenses (including selling, general and administrative expenses) of our
Publishing and Online operations increased by $3 million, or 1%, to $227
million from $224 million. This reflected cost reductions resulting from
restructuring activities undertaken in the latter part of fiscal 2003,
partially offset by normal salary escalations, and increases in certain
administrative costs. Newsprint expenditures were 1% less in the three
months ended August 31, 2004 than in the same period the prior year,
reflecting a marginal increase in the cost of newsprint offset by reduced
consumption.
- - Segment operating profit. As a result of increased revenues and cost
containment, our Publishing and Online operations achieved an increase of
$1 million, or 3%, in segment operating profit to $53 million for the
three months ended August 31, 2004 compared to $52 million for the same
period last year.
Canadian Television
- - Revenues. In total, revenues from our Canadian Television operating
segment of $131 million were $6 million or 5% lower than the $137 million
recorded in the same period in fiscal 2003. This reflected a 7% decrease
in advertising revenues partially offset by increases in subscription
revenues from our specialty television operations.
CanWest's conventional television revenues for the fourth quarter were 5%
below the prior year as a result of reduced advertising sales. This
represented an improvement over the results in the first half of the year,
where revenues were 9% lower than in the first six months of fiscal 2003.
Revenues from the Company's seven digital specialty channels increased by
33% to $2 million in the fourth quarter compared to the same period in the
previous year.
- - Operating expenses. Operating expenses (including selling, general and
administrative expenses) of $131 million at Canadian Television operations
were $3 million, or 2%, higher than in the same period the prior year.
Expenses related to the digital specialty channels increased by $2 million
primarily as a result of the launch of Cool TV in the first quarter of
2004.
- - Segment operating profit. Canadian television segment operating profit
decreased to a break even for the fourth quarter of fiscal 2004 compared
to $10 million in the fourth quarter of fiscal 2003.
- - Restructuring expenses Restructuring expenses of $2 million were recorded
for this segment for the three months ended August 31, 2004 related to the
centralization of master control and traffic operations. These charges are
not reflected in segment operating profit.
Australian Television
- - Revenues. Segment revenues increased by 10% to $99 million for the three
months ended August 31, 2004, from $90 million during the same period in
the prior year. In domestic currency, revenues increased 6%, reflecting
TEN's strong rating performance in a continuing strong television
advertising environment. The strength of the Australian currency
contributed an additional 4% on translation to Canadian dollars.
- - Operating expenses. Segment operating expenses increased 9% to $66 million
for the three months ended August 31, 2004 compared to $61 million for the
same period in fiscal 2003, reflecting a strengthening Australian currency
as well as increased programming costs.
- - Segment operating profit. Segment operating profit increased by 12% to $33
million for the fourth quarter of 2004, compared to $30 million in the
same period in fiscal 2003.
New Zealand television. Revenues from television broadcast operations for New
Zealand's 3 and C4 television networks increased by 12% to $30 million for the
fourth quarter of fiscal 2004 from $26 million for the same period in fiscal
2003. In local currency, revenues increased by 5%, reflecting growth in the
advertising market. C4 was re-
19
launched in the first quarter of fiscal 2004 as New Zealand's first free-to-air
music channel and is contributing increased revenues. The strengthening New
Zealand currency contributed an additional 7% on translation to Canadian
dollars. Operating expenses increased by 3% to $24 million, primarily as a
result of the 7% increase on translation of New Zealand dollars to Canadian
dollars partially offset by reduced programming expenses. New Zealand 3 and C4
produced segment operating profit of $6 million, a $3 million increase from the
results recorded in the fourth quarter of 2003.
Irish television. Our 45% share of revenues at TV3 in the Republic of Ireland
increased by 19% to $7 million in the fourth quarter of fiscal 2004 compared to
the fourth quarter of fiscal 2003. Our share of TV3's segment operating profit
increased by $1 million to $2 million as compared to the same period in fiscal
2003.
New Zealand radio. CanWest RadioWorks continued its steady performance,
increasing revenues and segment operating profit for the three months ended
August 31, 2004. Revenue grew by 14% to $21 million from $19 million during the
fourth quarter of the previous year, reflecting a 7% increase in revenue in
domestic currency and an additional 7% increase as a result of currency
translation. Segment operating profit grew by 17% to $7 million for the three
months ended August 31, 2004 from $6 million for the same period the previous
year.
Outdoor advertising. Segment revenues increased by $3 million, or 30%, to $11
million for the three months ended August 31, 2004 from $9 million for the
fourth quarter in fiscal 2003. This increase reflected 26% growth in revenue in
domestic currency with a further 4% increase as a result of currency
translation. Our segment operating profit from TEN's Outdoor Advertising
operations increased by $2 million to $2 million as compared to the fourth
quarter in fiscal 2003.
Amortization
Amortization of intangibles was $4 million in the third quarter of both fiscal
2004 and 2003. Amortization of property and equipment decreased to $15 million
from $16 million for the fourth quarter of fiscal 2004 compared to the fourth
quarter of fiscal 2003.
Financing Costs
Interest expense was $73 million for the three months ended August 31, 2004
compared to $84 million in the previous year, reflecting a reduced level of debt
as well as reduced interest rates achieved through our refinancing activities in
fiscal 2003 and fiscal 2004.
Interest Rate and Foreign Currency Swap Loss
For the three months ended August 31, 2004, we recorded at $101 million loss
equivalent to the change in fair value of interest rate and foreign currency and
interest rate swaps on debt that has been retired. This compared to a loss of $9
million for the fourth quarter of fiscal 2003.
Foreign Exchange Gains
We recorded net foreign exchange gains of $41 million in the three months ended
August 31, 2004 compared to $5 million for the same period in fiscal 2003. $36
million of this gain arose on the extinguishment of US dollar debt.
Investment Income
For the three months ended August 31, 2004, we recorded investment income of
$113 million, compared to a loss of $11 million for the same period the previous
year. The gain in 2004 was primarily related to a gain on sale of UTV shares of
$52 million, a gain of $66 million related to our New Zealand IPO partially
offset by the writedown of deferred financing costs of $5 million.
Income Taxes
Our income tax recovery was $23 million for the three months ended August 31,
2004, compared to a recovery of $13 million in the same period of fiscal 2003.
The negative effective tax rate of 116% was below the Company's statutory rate
of 35% as a result of the effect of non taxable capital gains, utilization of
losses for which tax recoveries were not recorded and the impact of
international tax rates which were lower than Canadian rates.
Currency Translation Adjustments
20
We recorded losses of $5 million primarily associated with the realization of
currency translation adjustments related to the repayment of inter-company loans
by our New Zealand operations. This compared to a gain on realization of
currency translation adjustments of $0.2 million in the fourth quarter of fiscal
2003.
Interest in Earnings of Network TEN
Our equity interest in earnings of Network TEN was $23 million for the fourth
quarter of fiscal 2004 compared to $52 million in fiscal 2003 as a result of the
strong performance of Network TEN, as well as the strong Australian currency
performance, as described above.
Net Earnings from Continuing Operations
Our net earnings from continuing operations for the three months ended August
31, 2004 were $60 million, or $0.34 per share, compared to net earnings of $8
million, or $0.05 per share, for the three months ended August 31, 2003.
Discontinued Operations
We have commenced a process to sell all of our Fireworks Entertainment
production and distribution operations, resulting in the classification of these
operating results as earnings (loss) from discontinued operations and its assets
and liabilities as assets and liabilities of discontinued operations. These
operations were previously classified in the Canadian Entertainment segment. Net
earnings from discontinued operations were $2 million for the three months ended
August 31, 2004 compared to a loss of $53 million for the same operations for
the three months ended August 31, 2003. We expect to complete the sale of these
operations within the next six months.
Net Earnings
Our net earnings for the three months ended August 31, 2004 including the
earnings from discontinued operations were $62 million or $0.35 per share
compared to a net loss of $45 million or $0.25 per share for the fourth quarter
of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our principal uses of funds are for capital expenditures and repayment of debt.
We have historically met these requirements by using cash generated from
operating activities and through short-term and long-term debt. We believe these
sources of funds, together with our cash on hand, will continue to be adequate
to meet our currently anticipated capital requirements.
We also review acquisition and investment opportunities in the course of our
business and will, if a suitable opportunity arises and is permitted by the
terms of our debt instruments, make selected acquisitions and investments to
implement our business strategy. We expect that the funding for any such
acquisitions or investments would come from working capital, borrowing under our
credit facility or future credit facilities, additional equity and debt
financing, entering into joint ventures or a combination of these methods.
Similarly, from time to time, we review opportunities to dispose of non-core
assets, and may, if a suitable opportunity arises, sell certain non-core assets.
For fiscal 2005, our major non-operating cash requirements include expected
capital expenditures of approximately $90 million, swap recouponing payments as
discussed below in swap transactions, and repayment of $10 million in principal
payments on long-term debt due in 2004 and 2005, assuming we refinance $22
million in TV3 Ireland debt at its maturity in December 2004. We expect to meet
our cash needs for fiscal 2005 primarily through a combination of operating cash
flow and cash on hand.
SOURCES OF FUNDS
Our principal sources of liquidity are cash and cash equivalents on hand and
cash flows from operating activities. At August 31, 2004, we had cash on hand of
$81 million. We generated cash flows from operating activities of $328 million
in fiscal 2004 and $231 million in fiscal 2003. This amount includes cash
distributions from Network TEN of $105 million in fiscal 2004 and $33 million in
the fiscal 2003. As a result of dividends declared by Network TEN in June 2004
we are entitled to receive $37 million in December 2004. In addition we expect
to receive additional distributions from Network TEN in December 2004 and July
2005.
21
In addition to the above sources of liquidity, we had unused borrowing capacity
under our revolving credit facility of $413 million at August 31, 2004.
Investing activities
In fiscal 2004, we received proceeds of $144 million on the sale of our shares
in UTV. In addition we received net proceeds of $83 million from the New Zealand
IPO and we received $168 million through new financing in New Zealand. Proceeds
from the sales and refinancing in New Zealand, in total amounting to $395
million were applied to our Senior Credit facility. Repayments of an additional
$235 million were made from our operating cash flow.
USES OF FUNDS
Capital Expenditures
In fiscal 2004, our capital expenditures amounted to $53 million. We also
invested $6 million in the acquisition of new FM radio frequencies related to
our New Zealand radio operations. In fiscal 2005, we expect to increase our
capital expenditure budget to approximately $90 million. This amount includes an
$18 million investment in a new broadcast traffic and sales management system,
$8 million for a new classified system to support our Canadian publishing
operations, and approximately $9 million to support the growth of our online
operations as well as expenditures for regular replacement.
Swap transactions
Under our credit facility, we are required to maintain the fair value of our
foreign currency and interest rate swaps above a prescribed minimum liability
($500 million at August 31, 2004, subsequent to year end this increased to $600
million). In addition, there are prescribed minimums with individual
counterparties. Under these agreements, which have two-way recouponing
provisions, we were required to make net recouponing payments of $28 million in
the year ended August 31, 2004. Subsequent to year end, we were required to make
further recouponing payments of $137 million. Further strengthening of the
Canadian currency and/or declining interest rates may result in further
prepayment requirements.
DEBT
General
At August 31, 2004, we had total outstanding debt of $2,872 million, including
junior subordinated notes payable of $881 million. For additional information
concerning our indebtedness see note 9 to our audited consolidated financial
statements for the year ended August 31, 2004.
Credit Facility
Total credit available under our senior secured credit facility was $1,078
million as of August 31, 2004, of which we had drawn $665 million. The facility
includes revolving and non-revolving tranches with terms ranging from two and a
half to five years. The credit facility is collateralized by substantially all
of our assets.
Total leverage as calculated under our credit facility was 3.61 times cash flow
for debt covenant purposes for the twelve months ended August 31, 2004, compared
to a covenant of 6.0 times. The total debt covenant will remain at 6.0 times
until it decreases to 5.75 times for May 31, 2006 and 5.50 times for February
28, 2007.
Refinancing of Junior Subordinated Notes
In November 2004, we successfully completed the refinancing of our Junior
Subordinated notes. These notes were issued to Hollinger as consideration for
the purchase of our publishing operations in November 2000. Interest obligations
under these notes to November 2005 were payable via the issuance of additional
notes. The $903 million (including accrued interest to November 18, 2004) 12
1/8% notes due November 2000 were effectively settled through the issuance of
$908 million (US$761 million) in senior subordinated notes due 2012. The premium
on the old notes will be expensed in our first quarter of 2005. The new notes
carry an interest rate coupon of 8%,
22
which will be settled in cash on a semi-annual basis, and will result in annual
interest savings of approximately $46 million.
The new notes will form part of total debt for covenant purposes. Our total
leverage under our senior secured credit facility would have been 5.4 times if
these notes had been issued as at August 31, 2004.
Maturity Profile of Long-Term Debt
The following table summarizes the expected maturity profile of our long-term
debt at August 31, 2004.
YEAR ENDING AUGUST 31, PRINCIPAL AMOUNT
- ---------------------- ----------------
(thousands of dollars)
2005 31,712
2006 9,726
2007 10,671
2008 10,546
2009 921,583
thereafter 1,888,065
The provisions of the credit facility require that, for fiscal years in which
the credit rating for the credit facility is below a prescribed level, we must
make a prepayment of our credit facility equal to 50% of our free cash flow, as
defined under the facility, for such fiscal year subject to certain limitations.
We were required to make a prepayment of $42 million in January 2004 in respect
of fiscal 2003. In fiscal 2004 we made a voluntary prepayment, the result of
which we will not be required to make a prepayment under this provision in
respect of fiscal 2004.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company's obligations under firm contractual arrangements, including
commitments for future payments under long term debt arrangements, operating
lease arrangements, purchase commitments and other long term liabilities as at
August 31, 2004 are summarized below.
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------
LESS THAN
TOTAL 1 YEAR 1 - 3 YEARS 3 - 5 YEARS THEREAFTER
$000 $000 $000 $000 $000
Long term debt 2,872,303 31,712 20,397 932,129 1,888,065
Operating leases 153,942 27,554 46,156 34,668 45,564
Purchase obligations(1) 652,451 329,853 237,774 84,592 232
Pension funding obligations 71,348 10,454 26,219 34,675 --
Other long term liabilities 251,701 -- 61,158 101,023 88,920
--------- ------- ------- --------- ---------
Total 4,001,745 399,573 392,304 1,187,087 2,022,781
========= ======= ======= ========= =========
(1) Purchase obligations represent an estimate of our contractual commitments to
purchase broadcast rights and to make investments in television programs, our
contractual commitments to purchase capital assets, as well as our management
services agreement with The Ravelston Corporation Limited.
FINANCIAL INSTRUMENTS
Our primary market risk exposures are interest rate and foreign exchange rate
risk. We are exposed to interest rate risk and foreign 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 total long-term debt, we use 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. We do not enter into any derivatives for
trading purposes.
We have fully hedged the currency exposure on our U.S. dollar denominated debt
with the exception of senior and senior subordinated notes in the amount of
US$42 million, and have fixed the interest rate of 100% of our floating rate
debt by entering into a combination of cross currency swaps and interest rate
swaps.
23
As of August 31, 2004, we have entered into interest rate swap contracts to pay
fixed rates of interest (at an average rate of 8.28%) and receive floating rates
of interest (at an average rate of 4.16%) on a notional amount of $528 million.
We have entered into pay fixed receive floating cross currency swap contracts at
an average rate of 8.63% on a notional amount of $1,062 million and receive
floating rates of 4.0% on a notional amount of US$686 million. We have also
entered into pay floating receive fixed cross currency swap contracts at an
average floating rate of 6.62% on a notional amount of $954 million and an
average fixed rate of 9.7% on a notional amount of US$625 million.
Based on the current swap contracts outstanding and the current level of
variable rate debt, we estimate that a 1% increase in floating interest rates
will increase annual interest expense by $9.5 million. This estimate is based on
the assumption of a constant variable rate debt and swap level and an immediate
rate increase with no subsequent rate changes in the remaining term to maturity.
The fair value of the swap contracts represents an estimate of the amount that
we would receive or pay if the contracts were closed out at a market price on
the balance sheet date. As of August 31, 2004, our outstanding swap contracts
were in a net unrealized loss position of $432 million.
Unrealized gains related to foreign exchange on U.S. dollar denominated debt
amounted to $244 million as at August 31, 2004.
As of August 31, 2004, assuming all other variables are held constant, a 10
basis point parallel upward shift in the Canadian and U.S. fixed yield would
result in a $0.4 million improvement in the mark to market value of all swaps. A
$0.001 change in the value of the Canadian dollar against the U.S. dollar,
assuming all other variables are held constant, would result in a $1.6 million
change in the mark to market value of the cross currency swaps.
In November 2004, we entered into swaps related to our new $908 million (US$761
million) notes to pay floating rates of approximately 7% (at November 18, 2004)
on C$908 million and receive 8% fixed on a notional amount of US$761 million.
Adjusted to include the new debt and related swaps, a 1% increase in floating
rates would increase our annual interest expense by $18.6 million. Further,
assuming all other variables are constant a 10 basis point increase in the
Canadian/US fixed yield would result in a $5 million deterioration in the fair
value of our swaps.
NETWORK TEN
The Company has a 56.6% economic interest in TEN Group, one of Australia's three
private sector owned national television broadcast networks. While TEN Group's
results are not consolidated into the Company's financial statements, the
Company receives interest payments under TEN Group's outstanding subordinated
debentures, all of which are owned by the Company and dividend payments in
respect of the TEN Group shares owned by the Company.
Set forth below is a discussion of TEN Group's results of operations without
giving effect to the Company's proportionate interest in TEN Group.
FISCAL 2004 COMPARED TO FISCAL 2003
Network TEN television operations in Australia reported the third consecutive
record year in terms of revenues and operating profit as a result of increased
advertising revenues due primarily to its strong programming schedule. Total
revenues increased by 14% to A$752 million, from A$661 million the previous
year.
Operating expenses of the Australian television operation increased by A$33
million, or 7%, to A$484 million for the year ended August 31, 2004, from A$450
million in the previous year. This was the result of an increase in program
costs and licence fees.
24
Operating income before amortization and write down of program inventory at the
broadcasting operations increased by A$57 million, or 27%, to A$268 million for
the year ended August 31, 2004, from A$211 million for the same period in the
previous year.
Revenues from Eye Corp., TEN's out-of-home operation, increased by A$8 million,
or 11%, to A$80 million for the year ended August 31, 2004, from A$72 million
the previous year. The increase reflects strong media sales.
Operating expenses at Eye Corp. decreased by 3% to A$65 million, from A$67
million the previous year, as a result of the removal of unprofitable
concessions and a focus on cost containment. Operating income before
amortization of Eye Corp. increased to A$15 million from A$5 million the
previous year.
In 2003, Network TEN recorded an A$20 million write down of program inventory to
fair value.
Financing expenses, excluding interest in respect of subordinated debentures,
was A$29 million in fiscal 2004 compared to A$27 million in fiscal 2003.
Network TEN recorded an income tax provision of A$45 million in 2004, compared
to an income tax recovery of A$61 million in fiscal 2003. As a result of a
ruling by the Australian tax authority, effective June 2004 Network TEN can no
longer deduct interest expenses related to the subordinated debentures. The tax
recovery in fiscal 2003 resulted from the introduction of a new tax
consolidation regime in Australia and the consequent impact on future income
taxes.
Network TEN's earnings, excluding interest in respect of subordinated
debentures, decreased to A$194 million for the year ended August 31, 2004, from
A$212 million in the previous year.
FISCAL 2003 COMPARED TO FISCAL 2002
Network TEN television operations in Australia reported the second consecutive
record year in terms of revenues and operating profit after significant ratings
gains for its prime time schedule in both its target demographics of 16-39 year
olds and 24-54 year olds and significant gains related to TEN's successful
acquisition of key sports properties. Total revenues increased by 13% to A$661
million, from A$587 million the previous year.
Operating expenses of the Australian television operation increased by A$34
million, or 8%, to A$450 million for the year ended August 31, 2003, from A$416
million in the same period in the previous year. The increase reflected the
investment in a winning program strategy that included sports programming with
wide audience appeal, such as the Australian Football League games, including
the AFL Grand Final.
Operating income before amortization and write down of program inventory at the
broadcasting operations increased by A$39 million, or 23%, to A$211 million for
the year ended August 31, 2003, from A$172 million for the same period in the
previous year. Revenues from Eye Corp., TEN's out-of-home operation, decreased
by A$8 million, or 10%, to A$72 million for the year ended August 31, 2003, from
A$80 million the previous year.
Operating expenses at Eye Corp. decreased by 14% to A$67 million, from A$78
million the previous year. Operating income before amortization of Eye Corp.
increased to A$5 million from A$2 million the previous year.
In 2003, TEN Group recorded an A$20 million write down of program inventory to
fair value.
Financing expenses, excluding interest in respect of subordinated debentures,
was A$27 million in 2002 and 2003.
TEN Group recorded an income tax recovery of A$61 million in 2003, compared to
an income tax provision of A$71 million in 2002. The current year's recovery
resulted in the introduction of a new tax consolidation regime in Australia and
the consequent impact on future income taxes.
TEN Group's earnings, excluding interest in respect of subordinated debentures,
increased to A$212 million for the year ended August 31, 2003, from a loss of
A$23 million in the previous year.
25
RELATED PARTY TRANSACTIONS
Senior subordinated notes held by CanWest Communications Corporation, the parent
company of CanWest Global Communications Corp. totaled $55.0 million (US$41.9
million) at August 31, 2004 (2003 - $58.1 million). This debt, issued in May
2001, matures May 15, 2011 and bears interest at 10.625%. Interest expense
related to this debt totaled $6.3 million in fiscal 2004 (2003 - $6.4 million).
During 2003, CanWest Communications Corporation exchanged these Canadian dollar
denominated notes for United States dollar denominated notes. The exchange was
completed pursuant to the provisions of the original note indenture.
In June 2003, a company in which an affiliate of CanWest Communications
Corporation holds a 50% interest, acquired the TD Centre in Winnipeg, Manitoba,
a building in which the Company is a tenant. Rent paid to this company in fiscal
2004 amounted to $1.1 million (2003 - $0.2 million).
DIFFERENCES BETWEEN CANADIAN GAAP AND U.S. GAAP
The preceding discussion and analysis has been based upon financial statements
prepared in accordance with Canadian GAAP, which differs in certain respects
from United States GAAP. The significant differences relevant to the Company are
discussed in detail in note 25 of Notes to the Consolidated Financial Statements
for the years ended August 31, 2004 and August 31, 2003.
OTHER
SHARE DATA
As at November 24, 2004 we had the following number of shares outstanding:
Multiple voting shares 76,785,976
Subordinate voting shares 99,052,678
Non-voting shares 1,441,965
Our AIF is filed on SEDAR at www.sedar.com.
26
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004 AND 2003
[PRICEWATERHOUSECOOPERS LOGO]
November 10, 2004, except for note 24 which is as of November 18, 2004
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
CANWEST GLOBAL COMMUNICATIONS CORP.
We have audited the consolidated balance sheets of CanWest Global Communications
Corp. as at August 31, 2004 and August 31, 2003 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 audits 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, 2004
and August 31, 2003 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.
PriceWaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
November 10, 2004
COMMENTS BY AUDITORS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion 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 notes 1 and 25 to the consolidated financial statements and
revisions to the financial statements as described in notes 1, 7, and 25. Our
report to the shareholders dated November 10, 2004, except for note 24, which is
as of November 18, 2004, 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.
PriceWaterhouseCoopers LLP
CHARTERED ACCOUNTANTS
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
FOR THE YEARS ENDED AUGUST 31
(IN THOUSANDS OF CANADIAN DOLLARS)
2004 2003
REVISED (NOTE 1 (C))
Revenue 2,113,034 2,139,532
Operating expenses 1,124,543 1,115,849
Selling, general and administrative expenses 539,458 531,479
Restructuring expenses (note 10) 2,445 12,989
------------- -------------
446,588 479,215
Amortization of intangibles (note 8) 17,500 17,500
Amortization of property, plant and equipment 71,179 70,688
Other amortization 5,035 7,087
------------- -------------
Operating income 352,874 383,940
Interest expense (310,572) (352,966)
Interest income 9,141 -
Amortization of deferred financing costs (7,864) (8,247)
Interest rate and foreign currency swap losses (note 9) (110,860) (23,015)
Foreign exchange gains (note 9) 45,104 3,918
Investment gains and losses, net of write-down (note 15) 110,794 9,240
Dividend income 3,738 3,532
------------- -------------
92,355 16,402
Provision for (recovery of) income taxes (note 14) (10,181) 2,533
------------- -------------
Earnings before the following 102,536 13,869
Minority interest (478) -
Interest in earnings of Network TEN (note 3) 99,889 101,339
Interest in loss of other equity accounted affiliates (625) (1,332)
Realized currency translation adjustments (note 13) (7,023) 922
------------- -------------
NET EARNINGS FROM CONTINUING OPERATIONS 194,299 114,798
Loss from discontinued operations (note 16) (207,777) (68,710)
------------- -------------
NET EARNINGS (LOSS) FOR THE YEAR (13,478) 46,088
============= =============
EARNINGS PER SHARE FROM CONTINUING OPERATIONS (NOTE 12):
BASIC $ 1.10 $ 0.60
DILUTED $ 1.10 $ 0.60
EARNINGS (LOSS) PER SHARE (NOTE 12):
BASIC $ (0.08) $ 0.22
DILUTED $ (0.08) $ 0.22
The notes constitute an integral part of the consolidated financial statements.
2
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31
(IN THOUSANDS OF CANADIAN DOLLARS)
2004 2003
Revised (note 7)
ASSETS
CURRENT ASSETS
Cash 81,092 121,922
Accounts receivable 361,978 370,783
Distributions receivable from Network TEN 36,567 20,909
Inventory 13,449 14,509
Investment in film and television programs (note 5) 71,601 82,912
Future income taxes (note 14) 6,166 20,223
Other assets 18,853 10,483
Assets of discontinued operations (note 16) 89,094 123,812
------------- -------------
678,800 765,553
Investment in Network TEN (note 3) 39,929 55,546
Other investments (note 4) 17,393 113,022
Investment in film and television programs (note 5) 33,467 30,960
Property, plant and equipment (note 6) 631,720 639,081
Other assets (note 18) 140,211 126,764
Intangible assets (note 8) 928,787 939,162
Goodwill (note 7) 2,373,442 2,366,776
Assets of discontinued operations (note 16) 38,376 281,928
------------- -------------
4,882,125 5,318,792
============= =============
LIABILITIES
CURRENT LIABILITIES
Accounts payable 67,233 101,034
Accrued liabilities (note 10) 199,143 203,325
Income taxes payable 17,697 36,799
Film and television program accounts payable 27,966 30,507
Deferred revenue 31,959 30,066
Future income taxes (note 14) 6,072 6,072
Current portion of long term debt (note 9) 31,712 63,078
Liabilities of discontinued operations (note 16) 69,716 178,028
------------- -------------
451,498 648,909
Long term debt and related foreign currency swap liability (note 9) 2,840,591 3,167,311
Interest rate and foreign currency swap liability (note 9) 120,341 24,646
Other accrued liabilities (note 18) 131,360 128,601
Future income taxes (note 14) 140,460 173,708
Minority interest 16,142 -
------------- -------------
3,700,392 4,143,175
------------- -------------
Commitments, contingencies and guarantees (note 22)
SHAREHOLDERS' EQUITY
Capital stock (note 11) 848,628 846,824
Contributed surplus 4,612 3,647
Retained earnings 342,314 355,792
Cumulative foreign currency translation
adjustments (note 13) (13,821) (30,646)
------------- -------------
1,181,733 1,175,617
------------- -------------
4,882,125 5,318,792
============= =============
/s/ JALYNN BENNETT /s/ FRANK MCKENNA
- -------------------- --------------------
Director Director
The notes constitute an integral part of the consolidated financial statements.
3
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED AUGUST 31
(IN THOUSANDS OF CANADIAN DOLLARS)
2004 2003
RETAINED EARNINGS - BEGINNING OF YEAR 355,792 317,376
Excess of redemption price over carrying
value of preferred shares (note 11) - (7,672)
Net earnings (loss) for the year (13,478) 46,088
-------- --------
RETAINED EARNINGS - END OF YEAR 342,314 355,792
======== ========
The notes constitute an integral part of the consolidated financial statements.
4
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31
(IN THOUSANDS OF CANADIAN DOLLARS)
2004 2003
CASH GENERATED (UTILIZED) BY:
OPERATING ACTIVITIES
Net earnings from continuing operations for the year 194,299 114,798
Items not affecting cash
Amortization 101,578 103,522
Interest paid in kind 97,951 108,385
Future income taxes (23,191) (20,057)
Interest in earnings of Network TEN (99,889) (101,339)
Realized currency translation adjustments 7,023 (922)
Interest rate and foreign currency swap losses net of settlements 98,056 23,015
Investment gains and losses, net of write-down (110,794) (9,240)
Amortization of film and television programs 5,656 -
Pension expense 6,276 7,609
Minority interest 478 -
Other 158 1,332
Distributions from Network TEN 104,855 33,378
Investment in film and television programs (12,234) (3,680)
-------- --------
370,222 256,801
Changes in non-cash operating accounts (note 17) (58,468) 31,107
-------- --------
Cash flows from operating activities of continuing operations 311,754 287,908
Cash flows from operating activities of discontinued operations 15,991 (57,118)
-------- --------
Cash flows from operating activities 327,745 230,790
-------- --------
INVESTING ACTIVITIES
Other investments - (4,311)
Investment in broadcast licences (5,813) (2,325)
Proceeds from sales of other investments 143,832 44,113
Proceeds from divestitures 83,316 193,500
Proceeds from sale of property, plant and equipment 7,426 1,492
Purchase of property, plant and equipment (53,167) (38,438)
Investing activities from discontinued operations - (117)
-------- --------
175,594 193,914
-------- --------
FINANCING ACTIVITIES
Issuance of long term debt 167,500 294,700
Repayment of long term debt (630,261) (651,603)
Swap recouponing payments (27,957) (3,000)
Issuance of share capital 1,804 402
Preferred share redemption (note 11) - (57,672)
Financing activities from discontinued operations (57,644) 53,301
-------- --------
(546,558) (363,872)
-------- --------
Foreign exchange gain on cash denominated in foreign currencies 2,389 -
-------- --------
NET CHANGE IN CASH (40,830) 60,832
CASH - BEGINNING OF YEAR 121,922 61,090
-------- --------
CASH - END OF YEAR 81,092 121,922
======== ========
The notes constitute an integral part of the consolidated financial statements.
5
CANWEST GLOBAL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2004 AND 2003
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Company is an international media company with interests in broadcast
television, publishing, radio, specialty cable channels, outdoor
advertising, production and distribution of film and television
programming and Internet websites in Canada, Australia, New Zealand and
Ireland. The Company's operating segments include television and radio
broadcasting, publishing and online operations and outdoor advertising. In
Canada, the Television Broadcast segment includes the operation of the
Global Television Network, Prime, various other conventional and specialty
channels and Cool FM and The Beat radio stations. The Australian
Television Broadcast segment includes the Company's 56.6% economic
interest in TEN Group Pty Limited ("TEN Group"), which owns and operates
Australia's TEN Television Network ("Network TEN"). The Canadian
Publishing and Online segment includes the publication of a number of
newspapers, including metropolitan daily newspapers and the National Post,
as well as operation of the canada.com web portal and other web-based
operations. The New Zealand Television Broadcast segment includes CanWest
MediaWorks NZ Limited's 3 and C4 Television Networks. The New Zealand
Radio Broadcast segment includes CanWest MediaWorks NZ Limited's,
RadioWorks operation, which is comprised of five nationally-networked
radio brands and 27 local radio stations. The Irish Television Broadcast
segment includes the Company's 45% interest in the Republic of Ireland's
TV3 Television Network. The Australian Outdoor Advertising segment
includes the Company's economic interest in EyeCorp, an outdoor
advertising operation which is wholly owned by TEN Group. The Corporate
and Other segment includes various investments in media operations,
including a 29.9% interest in Northern Ireland's Ulster Television plc
("UTV") (sold in June 2004).
The Company's broadcast customer base is comprised primarily of large
advertising agencies, which place advertisements with the Company on
behalf of their customers. Publishing and Online revenues include
advertising, circulation and subscriptions which are derived from a
variety of sources. The Company's advertising revenues are seasonal.
Revenues and accounts receivable 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:
6
BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada. All amounts are
expressed in Canadian dollars unless otherwise noted. A reconciliation to
accounting principles generally accepted in the United States is provided
in note 25.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, and the Company's pro rata 45% share of the assets,
liabilities, and results of operations of TV3 Ireland and its pro rata 50%
share of the assets, liabilities and results of operations of Mystery
(effective June 1, 2004).
INVESTMENTS
The Company accounts for its investment in Network TEN and mentv using the
equity method. Other investments are recorded at cost. A provision for
loss in value of investments is made when a decline in value is considered
other than temporary.
INVESTMENT IN FILM AND TELEVISION PROGRAM RIGHTS
(a) BROADCAST RIGHTS
The Company has entered into various agreements for the rights to
broadcast certain feature films and television programs. The Company
records a liability for broadcast rights and the corresponding asset when
the programs are available for telecast. Broadcast rights are charged to
operations as programs are telecast over the anticipated period of use. A
loss is recognized when the carrying amount exceeds net realizable value.
(b) FILM AND TELEVISION PROGRAMS
Investment in film and television programs represents the unamortized
costs of film and television programs that have been produced by the
Company, or for which the Company has acquired distribution rights.
Included in investment in film and television programs are film and
television programs in progress and in development. Film and television
programs in progress represent the accumulated costs of productions that
have not yet been completed by the Company.
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 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 estimates
include 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.
7
The valuation of film and television programs 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
The Company's operations in Australia, New Zealand and Ireland represent
self-sustaining foreign operations, and the respective accounts have been
translated into Canadian dollars in accordance with the current rate
method. Assets and liabilities are translated at the exchange rates
prevailing at the balance sheet dates, and revenue and expenses are
translated on the basis of average exchange rates during the periods. Any
gains or losses arising from the translation of these accounts are
deferred and included as a component of shareholders' equity as cumulative
foreign currency translation adjustments. An applicable portion of these
deferred gains and losses is included in the determination of net earnings
when there is a reduction of the net investment.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Amortization is
provided over the assets' estimated useful lives on a straight-line basis
at the following annual rates:
Buildings 2 1/2% - 5%
Machinery and equipment 4% - 33 1/3%
Leasehold and land improvements 2 1/2% - 20%
IMPAIRMENT OF LONG LIVED ASSETS
Impairment of long lived assets is recognized when an event or change in
circumstances causes the assets' carrying value to exceed the total
undiscounted cash flows expected from its use and eventual disposition.
The impairment loss is calculated by deducting the fair value of the asset
from its carrying value.
DISPOSAL OF LONG-LIVED ASSETS AND DISCONTINUED OPERATIONS
Long-lived assets are classified as held for sale when specific criteria
are met, in accordance with CICA Handbook Section 3475, "Disposal of
Long-Lived Assets and Discontinued Operations". Assets held for sale are
measured at the lower of their carrying amounts and fair values less costs
to dispose and are no longer amortized. The fair value of film and
television programs are estimated on a discounted cash flow basis. Assets
and liabilities classified as held for sale are reported separately on the
balance sheet. A component of the Company that is held for sale is
reported as a discontinued operation if the operations and cash flows of
the component will be eliminated from the ongoing operations as a result
of the disposal transaction and the Company will not have a significant
continuing involvement in the operations of the component after the
disposal transaction.
DEFERRED CHARGES
Certain pre-operating costs incurred in new business undertakings are
deferred prior to the commencement of commercial operations, which is
generally the time at which subscriber
8
revenues commence. Pre-operating costs are amortized over a period of
five years. Costs related to debt financing are deferred and amortized
over the term of the debt.
CAPITALIZATION OF INTEREST
Interest is capitalized as part of the cost of certain assets while they
are being prepared for use. Interest in the amount of $3.8 million was
capitalized in 2004 (2003 - $3.7 million).
INTANGIBLE ASSETS
Broadcast licences, newspaper mastheads, circulation and other intangible
assets are recorded at their cost which, for business acquisitions,
represents the fair market value at the date of the acquisition.
Circulation and other finite life intangibles are amortized over periods
from 5 to 40 years. Finite life intangibles are tested for impairment when
events or changes in circumstances indicate that the carrying value may
not be recoverable. Intangibles with indefinite lives are not subject to
amortization and are tested for impairment annually or when indicated by
events or changes in circumstances. Impairment of an intangible asset is
recognized in an amount equal to the difference between the carrying value
and the fair value of the related intangible asset.
GOODWILL
Goodwill represents the cost of acquired businesses in excess of the fair
value of net identifiable assets acquired. Goodwill is tested for
impairment annually or when indicated by events or changes in
circumstances by comparing the fair value of a particular reporting unit
to its carrying value. When the carrying value exceeds its fair value, the
fair value of the reporting unit's goodwill is compared with its carrying
value to measure any impairment loss.
REVENUE RECOGNITION
Revenue derived from broadcasting activities consists primarily of the
sale of airtime which is recognized at the time commercials are broadcast.
Circulation and advertising revenue from publishing activities is
recognized when the newspaper is delivered. Subscription revenue is
recognized on a straight-line basis over the term of the subscription.
Revenue from the sale or licencing of film and television programs is
recognized when all of the following conditions are met: persuasive
evidence of a sale or licencing arrangement exists, the film is complete,
the contractual delivery arrangements have been satisfied, the licence
period has begun, the fee is fixed or determinable and collection of the
fee is reasonably assured.
Amounts received that do not meet all of the above criteria are recorded
as deferred revenue.
INCOME TAXES
The asset and liability method is used to account for income taxes. Under
this method, future income tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities including equity accounted investments. Future income tax
assets and liabilities are measured using substantively enacted tax rates
in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on future income tax assets and
liabilities of a change in tax rates is recognized in income in the period
9
that includes the enactment date. Future income tax assets are recognized
to the extent that realization is considered more likely than not.
Income taxes on undistributed earnings of Network TEN and CanWest
MediaWorks NZ Limited are provided at rates applicable to distributions.
Income taxes on undistributed earnings of foreign operations, other than
Network TEN and CanWest MediaWorks NZ Limited, are not provided as such
earnings are expected to be indefinitely reinvested.
INVENTORY
Inventory, consisting primarily of printing materials, is valued at the
lower of cost and net realizable values.
PENSION PLANS AND POST RETIREMENT BENEFITS
The Company maintains a number of defined benefit and defined contribution
pension and other post retirement benefit plans. For the defined benefit
plans, the cost of pension and other retirement benefits earned by
employees is determined using the projected benefit method pro rated on
service and management's estimate of expected plan investment performance,
salary escalation, retirement ages of employees, expected health care
costs, and other costs. For the purpose of calculating the expected return
on plan assets, those assets are valued at fair value. Past service costs
from plan amendments are amortized on a straight line basis over the
average remaining service period of employees active at the date of the
amendment. For each plan, the excess of the net actuarial gain or loss
over 10% of the greater of the accrued benefit obligation and the fair
value of plan assets at the beginning of the year is amortized over the
average remaining service period of active employees. The transitional
obligation is being amortized on a straight line basis over the average
remaining service life of the employees expected to receive benefits under
the plan as of September 1, 2000. Gains or losses arising from the
settlement of a pension plan are only recognized once responsibility for
the pension obligation has been relieved. The average remaining service
period of employees covered by the pension plans is 15 years (2003 - 15
years). The average remaining service period of the employees covered by
the post retirement benefit plans is 15 years (2003 - 15 years). The
Company also maintains post retirement defined benefit plans for certain
of its employees, the cost of which is expensed as benefits are earned by
the employees. For the defined contribution plans, the pension expense is
the Company's contribution to the plan.
CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, cash includes cash and
short-term investments with maturities at the date of purchase of up to
three months.
SHARE-BASED COMPENSATION
The Company has share-based compensation plans as described in note 11.
The Company utilizes the fair value approach to account for stock options
issued subsequent to August 31, 2003. The fair value of share based
compensation is recorded as a charge to net earnings based on the vesting
period with a credit to contributed surplus. No compensation expense was
recorded for stock options issued prior to August 31, 2003 The Company's
proforma results, reflecting the fair value based method of accounting for
stock-based compensation, are disclosed in note 11.
DERIVATIVE FINANCIAL INSTRUMENTS
10
Derivative financial instruments are used to reduce foreign currency and
interest rate risk on the Company's debt. The Company does not enter into
financial instruments for trading or speculative purposes. The Company's
policy is to designate each derivative financial instrument as a hedge of
a specifically identified debt instrument at the time the Company enters
into the derivative financial instrument.
Interest rate swap agreements are used as part of the Company's program to
manage the fixed and floating interest rate mix of the Company's total
debt portfolio and related overall cost of borrowing. The interest
differential to be paid or received under interest rate swap agreements is
recognized as an adjustment to interest expense.
Foreign currency interest rate swap agreements are used to manage exchange
and interest rate exposures related to debt instruments denominated in
foreign currencies. Translation gains and losses on the principal swapped
are offset by corresponding translation losses and gains on the related
debt in earnings. The Company translates its foreign currency denominated
debt that is hedged by foreign currency interest rate swaps at the rate
implicit in the swap agreement.
Gains and losses on terminations of interest rate and foreign currency
interest rate swap agreements are deferred and amortized as an adjustment
to interest expense related to the underlying debt over the remaining term
of the original contract life of the terminated swap agreement.
In the event of early extinguishment of the debt obligations, the Company
may continue to hold the related derivative financial instruments. The
realized or unrealized gain or loss from these swaps is recognized in
earnings, and the swaps are recorded on the balance sheet at fair value.
Subsequent changes in the fair value of overhanging swaps are recognized
in earnings.
CHANGES IN ACCOUNTING POLICIES
(a) HEDGING RELATIONSHIPS
The Company adopted CICA Accounting Guideline 13, "Hedging Relationships",
(AcG 13) effective September 1, 2003. In accordance with the new policy,
the Company's hedging relationships are documented and subject to
effectiveness tests on a quarterly basis for reasonable assurance that
they are and will continue to be effective. Any derivative that does not
qualify for hedge accounting is reported on a mark to market basis in
earnings. The adoption of this guideline had no impact on the financial
statements.
(b) STOCK OPTIONS
The Company adopted the fair value method of accounting recommended by the
CICA in Section 3870, "Stock-based Compensation and Other Stock Based
Payments", prospectively for stock-based compensation awards granted after
September 1, 2003. The impact of this policy is described in note 11.
(c) REPORTING CIRCULATION REVENUE ON A GROSS BASIS
During the year ended August 31, 2004 the Company retroactively adopted
the provisions of the Emerging Issues Committee of the CICA, EIC - 123,
"Reporting Revenue Gross as a Principal versus Net as an Agent" which was
effective September 1, 2002. Under this provision circulation revenues are
reported on a gross basis. Previously the Company reported circulation
revenue net of certain of its distribution contract costs. As a result of
the adoption the Company has retroactively revised its results. The impact
of the revision was to
11
increase sales and operating expenses by $46.0 million for the year ended
August 31, 2004 ($44.2 million for the year ended August 31, 2003). There
was no impact on net earnings.
PROPOSED ACCOUNTING POLICIES
The Accounting Standards Board of the Institute of Chartered Accountants
of Canada issued AcG-15, Consolidation of Variable Interest Entities,
which must be applied by the Company no later than the quarter ended
February 28, 2005. The Company has determined that it is the primary
beneficiary of TEN Group, a variable interest entity. Accordingly, the
Company will consolidate the results of TEN Group effective September 1,
2004. The Company currently uses the equity method to account for its
interest in TEN Group. Consolidation of TEN Group will have a significant
impact on the Company's revenues, expenses, assets and liabilities. There
will be no impact on shareholders' equity. Summarized results of TEN Group
are included in note 3. The Company will adopt this standard retroactively
with restatement of prior periods. The consolidation of Network TEN would
have had the following impact on the Company's consolidated balance sheet
as at August 31, 2004: current assets increase $232.7 million, investment
in Network TEN decrease $39.9 million, property plant and equipment
increase $76.6 million, other non current assets increase $20.4 million,
intangible assets increase $253.4 million, goodwill increases $91.8
million, current liabilities increase $185.7 million, long term debt
increases $360.5 million, other liabilities increase $27.5 million and
minority interest increases $61.3 million. There is no impact on
shareholder's equity.
2. ACQUISITIONS AND DIVESTITURES
Acquisitions
(a) 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. As a result of the
inability to resolve disagreements with Hollinger of amounts owing, the
Company has referred a claim of $76.8 million to arbitration. When
finalized, the working capital adjustment payable or refundable will
increase or decrease the amount of goodwill recorded on the acquisition.
Divestitures
(a) In July 2004, through a series of transactions, the Company
transferred its net assets in its New Zealand media operations to CanWest
MediaWorks (NZ) Limited for 70% of the ordinary shares of CanWest
Mediaworks (NZ) Limited and repayment of inter-company debt. Concurrent
with the transfer of the net assets, CanWest MediaWorks (NZ) Limited
completed a Initial Public Offering for 30% of its ordinary shares for
NZ$104 million, net of costs of NZ$4 million (net proceeds of $83.3
million). In addition, CanWest MediaWorks (NZ) Limited issued a term bank
loan of NZ$200,000. For these consolidated financial statements, the
transfer of the net assets to CanWest MediaWorks (NZ) Limited has been
accounted for at their carrying values. As a result of the reduction in
the Company's interest in the New Zealand media operations, the Company
recorded a gain of $65.5 million.
(b) In February 2003, the Company sold its interest in community
newspapers and related assets in Southern Ontario for cash proceeds of
$193.5 million. The gain on this sale was
12
$21.3 million; assets and liabilities disposed of amounted to $179.6
million and $7.4 million, respectively.
3. INVESTMENT IN NETWORK TEN
The Company owns approximately 14.5% of the issued ordinary shares and all
of the convertible debentures and subordinated debentures of TEN Group, an
Australian television broadcasting network. The subordinated debentures
have an aggregate principal amount of A$45.5 million and pay interest
based on distributions to holders of the ordinary shares. The convertible
debentures have an aggregate partially paid-up principal amount of
A$45,500 and pay a market linked rate of interest. The convertible
debentures are convertible, upon payment of an aggregate of A$45.5
million, into a number of ordinary shares which would represent 49.2% of
the issued and outstanding shares of TEN Group at the time of conversion.
The combination of ordinary shares and subordinated debentures yield
distributions equivalent to approximately 56.6% of all distributions paid
by TEN Group.
As a result of its contractual right to representation on TEN's board of
directors and other factors, the Company accounts for its interest in TEN
Group on the equity basis. The Company has appointed three of the thirteen
members of the Board of Directors of TEN Group.
During the year ended August 31, 2004 TEN Group issued 7.4 million (2003 -
7.1 million) shares for proceeds of A$14.7 million (2003 - A$14.4 million)
as a result of the exercise of management stock options. This effectively
diluted the Company's economic interest in TEN Group to 56.6% at August
31, 2004 from 57.1% at August 31, 2003 (2003 - to 57.1% from 57.5%) and
resulted in an investment gain of $1.9 million (2003 - $1.9 million).
Based on the number of issued stock options the maximum dilution of the
Company's interest in Network TEN is 56.4%
The following selected consolidated financial information of TEN Group 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.
13
SUMMARY CONSOLIDATED BALANCE SHEETS
2004 2003
Assets
Current assets 269,293 241,822
Other assets 5,630 37,367
Property, plant and equipment 76,591 79,288
Long term investments 14,804 11,421
Intangibles 253,358 244,418
Goodwill 91,806 88,752
---------- ----------
711,482 703,068
========== ==========
Liabilities and Shareholders' Equity
Current liabilities 222,270 188,633
Long term debt 360,460 349,326
Other long term liabilities 27,509 48,721
Subordinated debentures issued to the Company 40,171 40,171
Share capital 68,076 53,150
Undistributed earnings (deficit) (7,335) 22,577
Cumulative foreign currency translation
adjustment 331 490
---------- ----------
711,482 703,068
========== ==========
SUMMARY CONSOLIDATED STATEMENTS OF EARNINGS
2004 2003
Revenue 798,364 650,952
Operating expenses 527,852 459,842
Write down of program inventory - 18,082
---------- ----------
Operating profit before amortization 270,512 173,028
Amortization of property, plant, equipment and other 18,570 16,329
---------- ----------
251,942 156,699
Financing expenses (121,209) (102,124)
Interest in earnings of equity accounted affiliates 3,356 -
---------- ----------
134,089 54,575
Provision for (recovery of) income taxes(1) 47,639 (55,969)
---------- ----------
Earnings before the following 86,450 110,544
Minority interests 20 48
---------- ----------
Net earnings for the year 86,470 110,592
========== ==========
Net earnings for the year 86,470 110,592
Interest in respect of subordinated debentures held
by the Company 93,338 78,056
---------- ----------
Earnings for the period before interest in respect of
subordinated debentures(2) 179,808 188,648
========== ==========
14
SUMMARY STATEMENTS OF UNDISTRIBUTED EARNINGS
2004 2003
Undistributed earnings (deficit) - beginning of year 22,577 (65,291)
Earnings for the period before interest in respect of
subordinated debentures(2) 179,808 188,648
Distributions paid and payable (209,720) (100,780)
---------- ----------
Undistributed earnings (deficit) - end of period (7,335) 22,577
========== ==========
(1) During 2003, TEN Group and its wholly controlled Australian entities
implemented a new income tax consolidation regime provided for under
enacted changes to Australian tax law. In addition, the new regime allowed
for the uplift in the tax value of certain assets; as a result a
non-recurring income tax recovery of $63.9 million was recorded related to
the reduction of future tax liabilities. In conjunction with the
application of the new regime, the Company determined that previous tax
balances at the acquisition date were not appropriately reflected and
accordingly, the balance sheet was revised to reflect additional goodwill
and intangible assets of approximately $47.3 million and equivalent
additional future income tax liabilities.
(2) The Company's economic interest in TEN Group's earnings for the year
ended August 31, 2004 was $99.9 million (2003 - $101.3 million), comprised
of its 14.5% interest in net earnings and its interest in the subordinated
debentures.
The Company estimates that the market value of the Company's investment in
TEN Group, based on quoted market rates for Ten Network Holdings Limited
at August 31, 2004, was approximately $1,648 million (2003 - $1,091
million).
4. OTHER INVESTMENTS
2004 2003
------------------- ------------------
MARKET MARKET
COST VALUE(1) COST VALUE(1)
INVESTMENTS IN PUBLICLY TRADED
SECURITIES - AT COST
Ulster Television plc - - 92,006 108,841
Other 5,369 5,369 3,742 3,742
------ -------- ------- --------
5,369 5,369 95,748 112,583
====== ======== ======= ========
INVESTMENTS IN PRIVATE COMPANIES - AT COST 10,454 10,981
INVESTMENTS - ON AN EQUITY BASIS 1,570 6,293
------ -------
17,393 113,022
====== =======
During 2003, the Company sold its investment in SBS Broadcasting S.A. for
proceeds of $44.1 million resulting in an investment loss of $11.0
million.
15
In June 2004, the Company sold its investment in Ulster Television for
proceeds of $143.8 million resulting in an investment gain of $51.7
million.
(1) The market value for publicly traded securities is based on quoted
market prices.
5. INVESTMENT IN FILM AND TELEVISION PROGRAMS
2004 2003
------------------- -------------------
CURRENT LONG TERM CURRENT LONG TERM
Broadcast rights (1) 71,601 23,210 82,912 27,281
Non- theatrical films and
television programs:
Released (1) - 4,482 - 3,679
Programs in progress - 5,775 - -
------- --------- ------- --------
71,601 33,467 82,912 30,960
======= ========= ======= ========
(1) Net of accumulated amortization.
The Company expects that 40% of the unamortized cost of released film and
television programs will be amortized during the year ended August 31,
2005. The Company expects that 87% of the unamortized cost of released
film and television programs will be amortized during the three year
period ended August 31, 2007. The Company expects that $0.5 million of
participation liabilities will be paid during the year ended August 31,
2005.
6. PROPERTY, PLANT AND EQUIPMENT
2004
-----------------------------------
ACCUMULATED
COST AMORTIZATION NET
Land 60,425 - 60,425
Buildings 197,343 33,415 163,928
Machinery and equipment 695,674 304,853 390,821
Leasehold and land improvements 33,283 16,737 16,546
------- ------------ --------
986,725 355,005 631,720
======= ============ ========
2003
-----------------------------------
ACCUMULATED
COST AMORTIZATION NET
Land 58,703 - 58,703
Buildings 179,214 29,972 149,242
Machinery and equipment 672,962 258,392 414,570
Leasehold and land improvements 29,707 13,141 16,566
------- ------------ --------
940,586 301,505 639,081
======= ============ ========
Property, plant and equipment located in Canada was $586.0 million (2003 -
$595.0 million) and in foreign jurisdictions was $45.7 million (2003 -
$44.1 million).
16
7. GOODWILL
2003
OPERATING SEGMENT REVISED ADDITIONS DIVESTITURES OTHER 2004
- ----------------- --------- --------- ------------ ---------- -----------
Television - Canada 510,876 - - - 510,876
Television - New Zealand 43,672(4) - - 1,196(2) 44,868
Television - Ireland 4,280(4) - - - 4,280
Radio - New Zealand 100,353(4) - - 5,470(2) 105,823
Publishing and Online - Canada 1,707,595(4) - - - 1,707,595
--------- --------- ------------ ---------- -----------
Total 2,366,776 - - 6,666 2,373,442
========= ========= ============ ========== ===========
2002 2003
OPERATING SEGMENT REVISED ADDITIONS DIVESTITURES OTHER REVISED
Television - Canada 515,437 - - (4,561)(1) 510,876
Television - New Zealand 42,346(4) - - 1,326(2) 43,672(4)
Television - Ireland 4,280(4) - - - 4,280(4)
Radio - New Zealand 94,617(4) - - 5,736(2) 100,353(4)
Publishing and Online - Canada 1,856,075(4) - (147,673)(3) (807)(1) 1,707,595(4)
--------- --------- ------------ ---------- -----------
Total 2,512,755 - (147,673) 1,694 2,366,776
========= ========= ============ ========== ===========
(1) Decrease in goodwill was primarily related to the adjustment in WIC
and CanWest Publications purchase equations to reflect the reversal of
certain unutilized restructuring provisions (note 10).
(2) Increase in goodwill was related to increase in currency translation
rates.
(3) In February 2003, the Company sold its interest in community
newspapers and related assets in Southern Ontario resulting in a reduction
of the goodwill related to that operating unit of $147.7 million.
(4) During the year, the Company restated its balances for goodwill,
intangibles, future income tax liabilities and other liabilities for prior
years to reflect the following:
(i) The original allocation of purchase price discrepancies related
to Television - New Zealand, Television - Ireland, Radio - New
Zealand, and Publishing and Online - Canada overlooked certain
information available at the time. In addition, upon adoption of
CICA 3062, Goodwill and Other Intangibles, the Company changed the
useful life of certain intangibles to indefinite life; however, the
future income tax liabilities related thereto were not adjusted.
These matters affected the following balances as of August 31, 2003:
goodwill reduced by $72.3 million (2002 - $77.0 million), broadcast
licences reduced by $132.8 million (2002 - $122.8 million), other
assets increased by $1.4 million (2002 - $1.4 million), accrued
liabilities increased by $3.1 million (2002 - $3.1 million), income
taxes payable increased by $12.7 million (2002 - $12.7 million), and
future income tax liabilities reduced by $219.5 million (2002 -
$214.2 million).
(ii) On the divestiture of certain publishing assets from the
Publishing and Online - Canada segment in 2002 and 2003, entries to
record the disposals were allocated to goodwill as opposed to
circulation, mastheads, and goodwill. As of August 2003, goodwill
has been increased by $14.4 million (2002 - $10.7 million),
circulation and other has been decreased by $2.3 million (2002 -
$1.6 million), newspaper mastheads have been decreased by $19.6
million (2002 - $14.7 million), and future income tax liabilities
have been decreased by $7.5 million (2002 - $5.6 million). These
changes did not have an impact on previously reported income.
17
8. INTANGIBLE ASSETS
2004
-----------------------------------
ACCUMULATED
COST AMORTIZATION NET
Finite life:
Circulation and other 137,466 61,732 75,734
Indefinite life:
Broadcast licences 514,167
Newspaper mastheads 338,886
-------
853,053
-------
TOTAL INTANGIBLE ASSETS 928,787
=======
2003
--------------------------------------
ACCUMULATED
COST AMORTIZATION NET
REVISED(1) REVISED(1) REVISED(1)
Finite life:
Circulation and other 137,466 44,232 93,234
Indefinite life:
Broadcast licences 507,042
Newspaper mastheads 338,886
----------
845,928
----------
TOTAL INTANGIBLE ASSETS 939,162
==========
Amortization of intangible assets of $17.5 million was recorded in 2004
and 2003.
(1) Balances at August 31, 2003 have been revised to reflect the
adjustments described in note 7(4).
18
9. LONG TERM DEBT
INTEREST INTEREST
RATE (1) 2004 RATE (1) 2003
-------- --------- -------- ---------
Senior secured credit facility (2) 8.6% 665,011 9.7% 1,311,139
Senior unsecured notes (3) 6.3% 263,340 7.2% 277,020
Senior subordinated notes (4) 7.3% 608,373 8.2% 638,899
Term and demand loan
(euro)13,678 (2003 -(euro)17,201) (5) 3.4% 21,943 2.7% 26,177
Term bank loan
NZ$200,000 (2003 - nil) (6) 6.2% 173,120 -
Junior subordinated notes (7) 12.1% 881,116 12.1% 783,165
Other 15,423 -
--------- ---------
2,628,326 3,036,400
Effect of foreign currency swap 243,977 193,989
--------- ---------
Long term debt 2,872,303 3,230,389
Less portion due within one year (31,712) (63,078)
--------- ---------
Long term portion 2,840,591 3,167,311
========= =========
(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 $413.1 million and $665.0 million, respectively. At August 31,
2004 the Company had drawn on availabilities under its term facilities,
including U.S. dollar loans of US$488.6 million, Canadian dollar loans of
$21.8 million, and had nil drawn under revolving facilities. The revolving
credit facility matures in November 2006. The amount of credit available
under the $665.0 million term facilities decreases periodically based on
scheduled repayments until maturity in August 2009. This credit facility
is collateralized by substantially all the assets of the Company. The
Canadian dollar debt bears interest at CDOR plus a margin and the US
dollar debt bears interest at LIBOR plus a margin. During 2004, the
Company refinanced these loans resulting in the extension of maturity
dates and reduction of interest rates. In August 2004, the Company repaid
US$153.6 million under this credit facility which resulted in a foreign
exchange gain of $35.6 million, which has been included in foreign
exchange gains on the income statement.
The provisions of this credit facility require that, for fiscal years in
which the credit rating for the credit facility is below a prescribed
level, the Company make a prepayment of the credit facility equal to 50%
of its free cash flow, as defined under the facility, for such fiscal
year. The Company was required to make a prepayment of $41.5 million in
January 2004 in respect of fiscal 2003. There are no prepayment
requirements in respect of fiscal 2004 under this provision as a result of
voluntary repayments made during the year.
The Company has entered into an interest rate swap in the notional amount
of $250 million to fix the interest payments on this revolving facility
and subsequent revolving facilities until November 2009, resulting in an
effective interest rate of 6.7% plus a margin. As a result of debt
repayments a notional amount of $250 million was overhanging as at August
31, 2004 (2003 - nil) and its fair value was recognized in earnings. The
Company has entered into an interest rate swap to fix the interest
payments on its Canadian dollar term loans, until maturity, with a
notional value of $278.3 million (2003 - $338.8 million) resulting in an
effective interest rate of 6.3% plus a margin. As a result of debt
repayments a notional amount of $256.5 million was overhanging as at
August 31, 2004 (2003 - $174.9 million) and its fair value was
19
recognized in earnings. The Company has also entered into a cross currency
interest rate swap to fix its payments on its U.S. dollar term loans,
until maturity, with a notional value of $1,061.5 million (2003 - $1,072.5
million) resulting in an effective interest rate of 6.4% plus a margin and
a fixed currency exchange rate of US$1:$1.5485. As a result of debt
repayments a notional amount of $305.0 million was overhanging as at
August 31, 2004 (2003 - $67.9 million) and its fair value was recognized
in earnings. For the year ended August 31, 2004, total overhanging swap
losses of $110.9 million (2003 - $23.0 million) were charged to earnings.
The resulting overhanging swap liability as at August 31, 2004 was $120.3
million (2003 - $24.6 million).
(3) The US$200.0 million senior unsecured notes mature on April 3, 2013
and bear interest at 7.625%. The notes are redeemable at the Company's
option, in whole at any time or in part from time to time, on or after
April 15, 2008. The Company has entered into a US$200 million
cross-currency interest rate swap resulting in floating interest rates on
its senior unsecured notes at interest rates based on CDOR plus a margin
and a fixed currency exchange rate of US$1:$1.4735 until May 2013.
(4) The senior subordinated notes include loans of US$425.0 million and
loans held by the majority shareholder of the Company in the amount of
US$41.9 million (2003 - US$41.9 million) which mature on May 15, 2011 and
bear interest at 10.625%. The notes rank junior to the Company's senior
credit facility and are guaranteed by certain subsidiaries of the Company.
The notes are redeemable at the Company's option, in whole at any time or
in part from time to time, on or after May 15, 2006. The Company has
entered into a US$425 million cross-currency interest rate swap resulting
in floating interest rates on its senior subordinated notes at interest
rates based on CDOR plus a margin and a fixed currency exchange rate of
US$1:$1.5505.
(5) These credit facilities provide for demand bank loans maturing
December 2004 in the maximum amount of (euro)38.5 million (2003 -
(euro)40.7 million). This facility is expected to be renewed annually. The
debt bears interest at floating rates and is partially secured by a letter
of credit provided by the Company. The Company has entered into an
interest rate swap to fix the interest payments on (euro)10.0 million of
its loan resulting in an effective interest rate of 3.23% until March
2008.
(6) These credit facilities provide for revolving working capital and
revolving term loans in the amount of NZ$25 million and NZ$200 million
respectively. The working capital facility matures July 2007 and the term
facility matures July 2009. No amounts were drawn under the working
capital facility as at August 31, 2004. The debt bears interest at
floating rates. The Company has entered into an interest rate swap to fix
the interest payments on NZ$50 million of its New Zealand term bank loan
resulting in an effective interest rate of 6.17% until July 2006.
(7) The junior subordinated notes mature in November 2010, and bear
interest at a fixed rate of 12.125%. 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 guaranteed by
certain subsidiaries of the Company. The notes include $96.9 million in
notes issued during 2004 in satisfaction of interest as well as an accrual
of $9.2 million for notes to be issued in January 2005 (2003 - $110.1
million and $8.2 million respectively). Subsequent to year end these notes
were settled through the issuance of new 8% Senior Subordinated notes (see
note 24).
Under its Senior Secured Credit facility the Company is required to
maintain a fair value of its interest rate swaps and foreign currency and
interest rate swaps above a prescribed minimum liability ($500 million as
at August 31, 2004, increased to $600 million subsequent to year end).
There are also prescribed minimum liabilities with individual
counterparties, which have
20
two-way recouponing provisions. The Company was required to make net
recouponing payments of $28.0 million during 2004 (2003 - $3.0 million).
Further strengthening of the Canadian currency and/or declining interest
rates may result in further payments to counterparties.
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, 2004 over the next five years, are:
Year ending August 31, 2005 31,712
2006 9,726
2007 10,671
2008 10,546
2009 921,583
10. RESTRUCTURING ACCRUALS
As at August 31, 2002, the Company had restructuring accruals of $46.5
million related to its acquisition and restructuring of the National Post,
WIC Western International Communications Ltd. ("WIC") and its publishing
properties.
In 2003, the Company undertook restructuring activities in its Canadian
Media and Entertainment operations. The restructuring expense related to
the following operating segments: Canadian Broadcasting - $3.0 million,
Canadian Publishing and Online - $8.9 million, and Corporate and Other -
$1.1 million.
In 2003, the Company reversed certain unutilized restructuring accruals in
the amount of $8.1 million as a result of changes in estimates. The
reversal was recorded as a reduction of goodwill.
In 2004, the Company restructured certain other Canadian broadcast
operations including the centralization of traffic and master control
operations. The $2.4 million cost consisted of employee severance.
For the year ended August 31, 2004, expenditures charged to the
restructuring accruals were $11.2 million (August 31, 2003 - $36.2
million). The balance of the restructuring accruals is expected to be
substantially disbursed by August 31, 2005.
LEASE/
CONTRACT
SEVERANCE TERMINATION INTEGRATION OTHER TOTAL
--------- ----------- ----------- --------- ---------
Balance August 31, 2002 22,966 2,721 250 20,575 46,512
Canadian Media operations 12,989 - - - 12,989
Expenditures - 2003 (21,635) (293) - (14,301) (36,229)
Reversals (4,117) - - (3,934) (8,051)
--------- ----------- ----------- --------- ---------
Balance August 31, 2003 10,203 2,428 250 2,340 15,221
Canadian television 2,445 - - - 2,445
Expenditures - 2004 (7,630) (2,269) - (1,341) (11,240)
--------- ----------- ----------- --------- ---------
Balance August 31, 2004 5,018 159 250 999 6,426
========= =========== =========== ========= =========
21
22
11. 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 shares 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 were held by the
former minority shareholders of CanWest Broadcasting Ltd. Series 2
preference shares are not eligible to vote. Series 2 preference shares
were, 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. On
December 18, 2002 the Company elected to redeem all of its outstanding
series 2 preference shares recorded at $50.0 million for an aggregate
redemption price of $57.7 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 or
wind-up and have no right to vote separately as a class.
ISSUED 2004 2003
76,785,976 (2003 - 76,785,976)
multiple voting shares 3,199 3,199
98,667,438 (2003 - 98,280,291)
subordinate voting shares 820,625 815,545
1,825,718 (2003 - 2,066,248)
non-voting shares 24,804 28,080
------- -------
848,628 846,824
======= =======
23
Changes in outstanding share capital during the two years ended August 31,
2004 were as follows:
NUMBER OF
SHARES $
MULTIPLE VOTING SHARE CAPITAL:
Balance - August 31, 2003 and 2004 76,785,976 3,199
=========== ===========
SUBORDINATE VOTING SHARE CAPITAL:
Balance - August 31, 2002 98,371,658 816,418
Changes pursuant to:
Share purchase plans 58,454 369
Exercise of stock options 13,031 33
Redeemed fractions (4) -
Conversion to non-voting shares - net (162,848) (1,275)
----------- -----------
Balance - August 31, 2003 98,280,291 815,545
Changes pursuant to:
Share purchase plans 32,561 446
Exercise of stock options 114,056 1,358
Conversion from non-voting shares - net 240,530 3,276
----------- -----------
Balance - August 31, 2004 98,667,438 820,625
=========== ===========
NON-VOTING SHARE CAPITAL:
Balance - August 31, 2002 1,903,401 26,805
Changes pursuant to:
Redeemed fractions (1) -
Conversion from subordinate voting shares - net 162,848 1,275
----------- -----------
Balance - August 31, 2003 2,066,248 28,080
Changes pursuant to:
Conversion to subordinate voting shares - net (240,530) (3,276)
----------- -----------
Balance - August 31, 2004 1,825,718 24,804
=========== ===========
SERIES 2 PREFERENCE SHARE CAPITAL:
Balance - August 31, 2002 21,783 50,000
Redemption of shares (21,783) (50,000)
----------- -----------
Balance - August 31, 2003 and 2004 - -
=========== ===========
SHARE COMPENSATION PLANS
The Company's board of directors has approved share compensation plans,
the purpose of which is to provide employees and certain directors of the
Company and its subsidiaries with the opportunity to participate in the
growth and development of the Company through the granting of options and
share purchase loans. At any time, the number of subordinate voting and
non-voting shares reserved and set aside for purposes of the plans may not
exceed 10% of the issued shares of the Company.
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 immediately.
The exercise price represents the market trading price at the date on
which the option was granted.
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.
The Company adopted the fair value method of accounting for share based
compensation on
24
a prospective basis for options granted subsequent to September 1, 2003,
resulting in compensation expense and a credit to contributed surplus of
$1.0 million for the year ended August 31, 2004. The fair value of the
options granted during the year ended August 31, 2004 was estimated using
the Black-Scholes option pricing model with the assumptions of no dividend
yield, an expected volatility of 52% (2003 - 54%), risk free interest
rates of 4.4% to 4.9% (2003 - 4.5% to 4.9%) and an expected life of 7 to 9
years (2003 - 7 to 9 years).
The total fair value of 523,000 stock options granted by the Company in
the year ended August 31, 2004 with an exercise price of $12.85 per option
was $4.0 million, a weighted average fair value per option of $7.58.
During 2003, 394,500 stock options were granted with a total fair value of
$1.5 million, and a weighted average fair value per option of $3.81
The following are proforma results reflecting the fair value based method
of accounting for share-based compensation for options issued prior to
September 1, 2003.
The proforma cost of share compensation expense if the Company had adopted
the fair value method retroactively for the year ended August 31, 2004
would be $1.6 million (2003 -$1.6 million). A value of $2.8 million would
be charged to proforma net earnings in future years according to the
vesting terms of the options. The resulting proforma net earnings from
continuing operations, basic and diluted earnings per share for the year
ended August 31, 2004 would have been $192.7 million, $1.09 and $1.09
respectively (2003 - $113.2 million, $0.60, and $0.60). The resulting
proforma net earnings (loss), basic and diluted earnings per share for the
year ended August 31, 2004 would have been ($15.0) million, ($0.09) and
($0.09) respectively (2003 - $44.5 million, $0.21, and 0.21).
The Company's proforma disclosure does not apply to awards prior to 1996.
Changes in outstanding options to purchase subordinate voting shares or
non-voting shares for the two years ended August 31 were as follows:
2004 2003
----------------------- ---------------------
AVERAGE AVERAGE
OPTIONS PRICE OPTIONS PRICE
Options outstanding, beginning of year 2,075,561 13.95 1,819,268 15.24
Changes pursuant to:
Options granted 523,000 12.85 394,500 7.21
Options exercised (114,056) 11.91 (13,031) 2.51
Options expired (5,798) 15.22 (52,313) 14.88
Options forfeited (118,224) 15.21 (72,863) 10.98
--------- ---------
Options outstanding, end of year 2,360,483 13.74 2,075,561 13.95
========= =========
Options exercisable as at August 31 1,314,380 15.45 1,343,030 15.15
25
The following options to purchase subordinate voting shares or non-voting
shares were outstanding and exercisable as at August 31, 2004:
RANGE OF WEIGHTED WEIGHTED WEIGHTED
EXERCISE AVERAGE AVERAGE AVERAGE
PRICES NUMBER REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
$ OUTSTANDING YEARS $ EXERCISABLE $
1 - 5 5,346 0.3 4.54 5,346 4.54
5 - 10 412,353 8.1 7.32 59,603 7.19
10 - 15 1,150,945 5.5 12.78 667,545 12.76
15 - 20 504,791 5.6 16.23 294,838 16.43
20 - 25 280,369 3.6 22.54 280,369 22.54
25 and over 6,679 3.3 25.67 6,679 25.67
----------- -----------
2,360,483 5.7 13.74 1,314,380 15.45
=========== ===========
12. EARNINGS PER SHARE
Basic earnings per share are calculated using the daily weighted average
number of shares outstanding.
Diluted earnings 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.
The following table provides a reconciliation of the numerators and
denominators used in computing basic and diluted earnings per share.
2004 2003
Net earnings from continuing operations 194,299 114,798
Excess of redemption price over carrying value of preferred
shares - (7,672)
------------ ------------
Net earnings from continuing operations 194,299 107,126
Net loss from discontinued operations (207,777) (68,710)
------------ ------------
Net earnings (loss) available to common shareholders (13,478) 38,416
============ ============
Basic weighted average shares outstanding during the year 177,235,944 177,108,738
Dilutive effect of options 158,074 8,025
------------ ------------
Diluted weighted average shares outstanding during the year 177,394,018 177,116,763
============ ============
Options outstanding that would have been anti-dilutive 1,930,283 2,056,178
============ ============
26
13. 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, Euro and U.S. 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:
2004 2003
Deferred loss, beginning of year 30,646 41,534
Deferred foreign currency gain during the year (9,802) (11,810)
Realization of translation gain (loss) due to distributions
and divestitures (7,023) 922
-------- --------
Deferred loss, end of year 13,821 30,646
======== ========
The balance of cumulative translation adjustments at the end of the year
represents net unrealized losses (gains) as follows:
2004 2003
Australian dollar 8,242 5,705
New Zealand dollar (1,102) 21,506
Euro 1,032 282
United States dollar 5,649 3,153
-------- --------
13,821 30,646
======== ========
14. 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:
2004 2003
Income taxes at combined Canadian statutory
rate of 35.2% (2003 - 36.6%) 32,527 5,998
Non-taxable portion of capital gains (36,733) (3,705)
Effect of valuation allowance on future tax assets 2,200 (8,057)
Effect of foreign income tax rates differing from
Canadian income tax rates (4,821) (1,477)
Large corporation tax 4,567 3,853
Effect of future tax rates differing from current rates 9,398 3,011
Non deductible expenses 2,824 1,832
Effect of resolved tax dispute (19,667) -
Other (476) 1,078
-------- --------
Provision for (recovery of) income taxes (10,181) 2,533
======== ========
27
An analysis of net earnings (loss) from continuing operations before tax
by jurisdiction follows:
2004 2003
Canada (85,550) (7,854)
Foreign 177,905 24,256
-------- --------
Net earnings before tax 92,355 16,402
======== ========
An analysis of the provision for (recovery of) current and future income
taxes by jurisdiction follows:
2004 2003
Current income taxes
Canada 9,704 22,219
Foreign 3,306 371
-------- --------
13,010 22,590
-------- --------
Future income taxes
Canada (23,149) (20,319)
Foreign (42) 262
-------- --------
(23,191) (20,057)
-------- --------
Provision for (recovery of) income taxes (10,181) 2,533
======== ========
Significant components of the Company's future tax assets and liabilities
are as follows:
2004 2003
REVISED(1)
FUTURE TAX ASSETS
Non-capital loss carryforwards 151,130 132,311
Net-capital loss carryforwards 2,200 -
Accounts payable, other accruals and interest rate
and foreign currency swap liability 48,219 29,756
Pension and post retirement benefits 9,028 7,139
Less: Valuation allowance (91,140) (62,620)
--------- ----------
Total future tax assets 119,437 106,586
--------- ----------
FUTURE TAX LIABILITIES
Capital cost allowances in excess of book
amortization 82,314 75,112
Pension obligations 2,428 2,404
Intangible assets 164,397 160,232
Other assets 11,069 28,395
--------- ----------
Total future tax liabilities 260,208 266,143
--------- ----------
Net future tax liability 140,771 159,557
Current future tax asset 6,166 20,223
Current future tax liability (6,072) (6,072)
Discontinued operations' future tax liability (405) -
--------- ----------
Net long term future tax liability 140,460 173,708
========= ==========
(1)Balances for future tax liabilities as at August 31, 2003 have been
revised to reflect the adjustments described in note 7(4).
As at August 31, 2004, the Company had non-capital loss carry forwards for
income tax
28
purposes of $583.1 million, that expire as follows: 2006 - $2.0 million,
2007 - $9.2 million, 2008 - $31.1 million, 2009 - $62.1 million, 2010 -
$110.2 million, thereafter - $368.5 million.
The recognition and measurement of the current and future tax assets and
liabilities involves dealing with uncertainties in the application of
complex tax regulations in a number of jurisdictions and in the assessment
of the recoverability of future tax assets. Actual income taxes could vary
from these estimates as a result of future events, including changes in
income tax laws or the outcome of tax reviews by tax authorities and
related appeals. To the extent that the final tax outcome is different
from the amounts that were initially recorded such differences will impact
the income tax provision in the period in which the determination is made.
15. INVESTMENT GAINS, LOSSES AND WRITE-DOWNS
The Company has recorded the following investment gains, losses and
writedowns.
2004 2003
Gain on sale of investment in UTV (note 4) 51,717 -
Gain on New Zealand transaction (note 2) 65,515 -
Gain on sale of community newspapers (note 2) - 21,269
Loss on sale of SBS Broadcasting S.A. (note 4) - (10,952)
Dilution gain - TEN Group (note 3) 1,889 1,895
Other gains (losses) and write-downs (3,827) (2,972)
Write-off deferred financing costs (4,500) -
------- -------
110,794 9,240
======= =======
16. DISCONTINUED OPERATIONS
Following a period of poor financial performance and continued weakness in
international demand for its films and television programs, the Company
has commenced a process to sell its Fireworks Entertainment Division. As a
result, the results of operations of Fireworks have been classified as
loss from discontinued operations in the consolidated statements of
earnings, the net cash flows are classified as operating, investing and
financing activities from discontinued operations in the consolidated
statements of cash flows and the assets and liabilities have been
classified on the consolidated balance sheets as assets and liabilities of
discontinued operations. An impairment charge of $211.0 million including
goodwill impairment of $30.9 million was recorded to adjust the assets to
fair value based on recent estimates less cost to dispose. Included in the
loss from discontinued operations is a charge of $1.1 million related to
the estimated transaction costs. The consolidated balance sheets as at
August 31, 2003 and the consolidated statements of earnings and the
consolidated statements of cash flows for the year ended August 31, 2003
have been restated for purposes of comparability. Prior to the
classification as a discontinued operation, these results were reported
within the Canadian Entertainment segment. The Company expects to complete
a sale transaction within the next six months.
29
The loss from discontinued operations of Fireworks are summarized as
follows:
2004 2003
Revenue 115,852 182,255
========= ========
Loss from discontinued operations before
tax expense (207,078) (68,138)
Income tax expense 699 572
--------- --------
Loss from discontinued operations (207,777) (68,710)
========= ========
Loss from discontinued operations per share:
Basic and diluted ($ 1.18) ($ 0.38)
The carrying value of the net assets related to the discontinued Fireworks
Entertainment division is as follows:
2004 2003
Accounts receivable 85,269 123,122
Other current assets 3,825 690
-------- --------
Total current assets 89,094 123,812
-------- --------
Property, plant and equipment - 951
Investment in film and television programs 37,971 239,346
Goodwill - 30,856
Other assets 405 10,775
-------- --------
Total non current assets 38,376 281,928
-------- --------
Debt (1) (23,571) (84,308)
Other current liabilities (46,145) (93,720)
-------- --------
Total current liabilities (69,716) (178,028)
-------- --------
Net assets 57,754 227,712
======== ========
(1). The three year revolving facility is collateralized by certain assets
of Fireworks Entertainment Inc., matures in May 2005 and bears interest at
floating rates of LIBOR plus a margin. The availability under this
facility is based on acceptable receivables; as at August 31, 2004 US$14.7
million was advanced (August 31, 2003 - US$57.8 million). The facility
contains profitability and financial ratio covenants, certain of which
were not met at August 31, 2004 and accordingly, the debt has been
classified as current.
30
17. STATEMENTS OF CASH FLOWS
The following amounts comprise the net change in non-cash operating
accounts included in the statements of cash flows excluding non-cash
operating accounts related to discontinued operations:
2004 2003
CASH GENERATED (UTILIZED) BY:
Accounts receivable 9,884 4,796
Investment in film and television programs 15,842 7,396
Inventory 1,060 4,681
Other current assets (4,944) 2,673
Other assets (5,405) (4,006)
Accounts payable and accrued liabilities (49,104) (50,085)
Income taxes payable (19,102) 58,846
Deferred revenue 1,892 1,360
Film and program accounts payable (8,591) 5,446
------- -------
(58,468) 31,107
======= =======
The following amounts were paid on account of interest and income taxes:
2004 2003
Interest 204,328 315,908
Income taxes 26,648 9,383
31
18. RETIREMENT ASSETS AND OBLIGATIONS
The Company has a number of funded and unfunded defined benefit plans, as
well as defined contribution plans, that provide pension, other retirement
and post retirement benefits to its employees. Its defined benefit pension
plans are based on years of service and final average salary. Pension
benefits are indexed to the rate of inflation. Information on the
Company's pension and post retirement benefit plans follows:
POST RETIREMENT
PENSION BENEFITS (1) BENEFITS (2)
---------------------------- ------------------------
2004 2003 2004 2003
PLAN ASSETS
Fair value - beginning of year 250,877 254,906 - -
Divestiture (25) (1,330) - -
Actual return (loss) on plan assets 19,538 (10,368) - -
Employer contributions 13,883 10,693 277 275
Employee contributions 6,125 6,322 - -
Benefits paid and administrative expenses (13,691) (9,346) (277) (275)
----------- ----------- ---------- ----------
Fair value - end of year 276,707 250,877 - -
=========== =========== ========== ==========
PLAN OBLIGATIONS
Accrued benefit obligation - beginning of
year 337,436 277,612 30,724 40,429
Divestiture - (2,000) - -
Amendment to plan - 16,808 - -
Settlements - - - (3,195)
Accrued interest on benefits 22,413 20,622 2,334 2,868
Current service cost 17,078 17,055 1,260 1,235
Benefits paid (13,064) (9,346) (277) (275)
Actuarial loss (gain) 2,286 16,685 944 (10,338)
----------- ----------- ---------- ----------
Accrued benefit obligation - end of year 366,149 337,436 34,985 30,724
=========== =========== ========== ==========
The Company's accrued benefit asset
(liability) is determined as follows:
Accrued benefit obligation 366,149 337,436 34,985 30,724
Fair value of plan assets 276,707 250,877 - -
----------- ------------ ---------- ----------
Plan deficit (89,442) (86,559) (34,985) (30,724)
Unamortized net actuarial loss (gain) 82,609 84,481 (7,930) (8,870)
Unamortized transitional obligation 5,786 6,220 3,026 3,329
Unamortized past service costs 14,936 16,142 973 1,110
----------- ----------- ---------- ----------
Accrued plan asset (liability) 13,889 20,284 (38,916) (35,155)
Valuation allowance (722) (770) - -
----------- ----------- ---------- ----------
Accrued plan asset (liability), net of
valuation allowance 13,167 19,514 (38,916) (35,155)
=========== =========== ========== ==========
The accrued pension benefit asset is included in long term other assets and the
accrued post retirement benefit liability is included in other long term
liabilities in the Consolidated balance sheet.
ACTUAL TARGET
------ ------
Plan assets consist of:
Equity securities 53% 60%
Debt securities 42% 40%
Other 5% -
--- ---
Total 100% 100%
=== ===
The pension plans have no investment in shares of the Company.
The Company measures its accrued benefit obligation and the fair value of plan
assets for accounting purposes as at June 30 of each year. The most recent
actuarial valuation for the
32
most significant of our pension plans, which make up over half of our accrued
benefit obligation, was as of January 1, 2001. The next required valuation will
be as of January 1, 2004 with an expected completion date of December 31, 2004.
The investment strategy for pension plan assets is to utilize a balanced mix of
equity and fixed income portfolios, with limited additional diversification, to
earn a long-term investment return that meets our pension plan obligations.
Active management strategies and style diversification strategies are utilized
in anticipation of realizing investment returns in excess of market indices.
Total cash payments for 2004, consisting of cash contributed by the Company to
its funded pension plans, cash payments to beneficiaries for its post-retirement
plans, and cash contributed to its defined contribution plans, was $16.6 million
(2003 - $13.3 million)
The Company's pension benefit expense is determined as follows:
Year ended August 31, 2004 Year ended August 31, 2003
------------------------------------ ------------------------------------
Incurred Matching Recognized Incurred Matching Recognized
in year adjustments(3) In year in year adjustments(3) In year
Current service cost 17,078 - 17,078 17,055 - 17,055
Employee contributions (6,125) - (6,125) (6,322) - (6,322)
Accrued interest on benefits 22,413 - 22,413 20,622 - 20,622
Return on plan assets (19,538) 1,227 (18,311) 10,368 (28,428) (18,060)
Plan amedment - - - 16,808 (16,808) -
Transitional obligation - 434 434 - 610 610
Past service costs - 1,206 1,206 - 808 808
Net actuarial loss 2,286 1,227 3,513 16,685 (15,169) 1,516
Changes in valuation allowance - (48) (48) - (146) (146)
---------- --------- -------- -------- -------- --------
Benefit expense 16,114 4,046 20,160 75,216 (59,133) 16,083
Employer contribution to the
defined contribution plan 2,476 - 2,476 2,299 - 2,299
---------- --------- -------- ------- ------- --------
Total pension benefit expense 18,590 4,046 22,636 77,515 (59,133) 18,382
========== ========= ======== ======== ======= ========
The Company's post retirement benefit expense is determined as follows:
Year ended August 31, 2004 Year ended August 31, 2003
----------------------------------- --------------------------------
Incurred Matching Recognized Incurred Matching Recognized
in year adjustments(3) In year in year adjustments(3) In year
Current service cost 1,260 - 1,260 1,235 - 1,235
Accrued interest on benefits 2,334 - 2,334 2,868 - 2,868
Transitional obligation - 303 303 - 1,609 1,609
Past service costs - 137 137 - (1,110) (1,110)
Net actuarial loss 944 (941) 3 (10,338) 10,370 32
---------- ---------- ------- ------- -------- --------
Total post retirement benefit
expense 4,538 (501) 4,037 (6,235) 10,869 4,634
========== ========== ======= ======= ======== ========
POST RETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------
2004 2003 2004 2003
Significant actuarial assumptions in measuring the Company's
accrued benefit obligations as at June 30 are as follows:
Discount rate 6.50% 6.50% 6.50% 6.50-6.75%
Rate of compensation increase 3.50% 3.50-4.50% - -
Significant actuarial assumptions in measuring
the Company's benefit costs as at June 30 are as follows:
Discount rate 6.50% 6.75% 6.50% 6.50-6.75%
Expected long-term rate of return on pension plan assets 7.25% 6.75-7.25% - -
Rate of compensation increase 3.50% 3.50% - -
The discount rate was estimated by applying Canadian corporate AA zero coupon
bonds to the expected future benefit payments under the plans. For fiscal 2005,
the expected long-term rate of return on plan assets will continue to be 7.25%,
based on experience and discussions with plan managers. In 2005, the Company
expects to contribute $13.2 million to its pension plans and $0.3 million to its
other postretirement benefit plans.
33
Benefit payments, which reflect expected future service, are expected to be paid
as follows for the years ending August 31:
Year ending August 31, 2005 10,454
2006 12,272
2007 13,947
2008 16,010
2009 18,665
2010-2014 135,287
(1) As at August 31, 2004 the Company has defined benefit pension plans that
are not fully funded. These plans have aggregate plan assets of $196.7
million (2003 - $208.7 million) and aggregate benefit obligations of
$291.0 million (2003 - $297.1 million)
(2) Includes post retirement health, dental, and life insurance benefits. The
assumed health care cost trend rates for the next year used to measure the
expected cost of benefits covered for the post retirement health and life
plans were 10.0% for medical and 7.0% for dental, decreasing to an
ultimate rate of 5.0% for medical and 6.0% for dental in 2009 and 2010,
respectively. A one percentage point increase in assumed health care cost
trend rates would have increased the service and interest costs and
obligation by $0.5 million and $5.5 million, respectively. A one
percentage point decrease in assumed health care cost trends would have
lowered the service and interest costs and the obligation by $0.4 million
and $4.4 million, respectively.
(3) Accounting adjustments to allocate costs to different periods so as to
recognize the long-term nature of employee future benefits.
19. FINANCIAL INSTRUMENTS
Financial instruments consist of the following:
2004 2003
------------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
Short term assets 479,637 479,637 513,614 513,614
Other investments 17,393 23,543 113,022 129,714
Short term liabilities 312,039 312,039 371,665 371,665
Long term debt 2,872,303 2,742,573 3,230,389 3,112,220
Other long term accrued
liabilities 92,444 92,444 112,960 112,960
Interest rate and cross-currency
swap liabilities 120,341 431,699 24,646 356,956
The fair values of short-term assets and liabilities, which include cash,
accounts receivable, distributions receivable from TEN Group, accounts
payable and accrued liabilities, income taxes payable and film and program
accounts payable approximate their fair values 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 and comparable valuations for non-listed
securities.
34
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 film and
television program accounts payable, approximate their carrying values.
The fair values of interest rate and cross-currency interest rate swaps
are based on the amounts at which they could be settled based on estimates
of market rates.
CREDIT RISK
The Company is exposed to credit risk, primarily in relation to accounts
receivable. Exposure to credit risk varies due to the concentration of
individual balances with large advertising agencies. The Company performs
regular credit assessments of its customers and provides allowances for
potentially uncollectible accounts receivable.
INTEREST RATE RISK
The Company manages its exposure to fluctuations in interest rates through
the use of interest rate and cross-currency interest rate swap agreements,
more fully described in note 9.
20. JOINTLY CONTROLLED ENTERPRISE
The following amounts included in the consolidated financial statements
represent the Company's proportionate interest in joint ventures.
2004 2003
BALANCE SHEETS
Assets
Current assets 11,140 10,182
Long term assets 9,695 9,823
------- -------
20,835 20,005
======= =======
Liabilities
Current liabilities 28,902 33,692
Long term liabilities - -
------- -------
28,902 33,692
======= =======
STATEMENTS OF EARNINGS
Revenue 31,634 29,461
Expenses 27,591 27,674
------- -------
Net earnings 4,043 1,787
======= =======
STATEMENTS OF CASH FLOWS
Cash generated (utilized) by:
Operating activities 7,633 6,833
Investing activities 117 (70)
Financing activities (5,230) (6,602)
------- -------
Net increase in cash 2,520 161
======= =======
35
21. RELATED PARTY TRANSACTIONS
Senior subordinated notes held by CanWest Communications Corporation, the
Company's parent, totaled $55.0 million (US$41.9 million) at August 31,
2004 (2003 - $58.1 million). This debt matures on May 15, 2011 and bears
interest at 10.625%. During 2004, interest expense related to this debt
totaled $6.3 million (2003 - $6.4 million). In 2003, CanWest
Communications Corporation exchanged these Canadian dollar denominated
notes for United States dollar denominated notes. The exchange was
completed pursuant to the provisions of the original note indenture.
In June 2003, a company in which an affiliate of CanWest Communications
Corporation holds a 50% interest, acquired the TD Centre in Winnipeg,
Manitoba, a building in which the Company is a tenant. During 2004, rent
paid to this company amounted to $1.1 million (2003 - $0.2 million).
22. COMMITMENTS, CONTINGENCIES AND GUARANTEES
COMMITMENTS
(a) The Company has entered into a Management Services Agreement with
The Ravelston Corporation Limited ("Ravelston"). The agreement
provides for annual payments of $6.0 million. Either party upon six
months notice may terminate the agreement. In the event of
termination by the Company, a fee of $45 million is payable. In the
event of termination by Ravelston, or in the event that Ravelston is
unable to perform the services in accordance with the agreement, a
fee in the amount of $22.5 million is payable.
(b) 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 $270 million.
(c) The Company's future minimum payments under the terms of its
operating leases are as follows:
2005 27,554
2006 24,527
2007 21,629
2008 16,839
2009 17,829
thereafter 45,564
CONTINGENCIES
(a) On December 17, 2003 the Company filed a statement of claim against
Hollinger International Inc., Hollinger Inc. and certain related
parties in the amount of $25.7 million plus interest representing
amounts owed to the Company related to its acquisition of 50% of The
National Post Company partnership in March 2002. In August 2004, the
Company obtained a summary judgment in respect of its claim against
Hollinger for $22.5 million of this claim plus interest. The
receivable and related accrued interest are classified as accounts
receivable. The Company has also requested arbitration related to a
further
36
$76.8 million owed by Hollinger International Inc. and Hollinger
Canadian Newspapers Limited Partnership related to certain
unresolved matters related to its November 15, 2000 acquisition of
certain newspaper assets from Hollinger International Inc. and
Hollinger Canadian Newspapers Limited Partnership (note 2).
Hollinger International disputes this claim and claims that it and
certain of its affiliates are owed $45 million by the Company.
(b) In March 2001, a statement of claim was filed against the Company
and certain of the Company's subsidiaries by CanWest Broadcasting
Ltd.'s ("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 manner towards the plaintiffs. The action was stayed on
the basis that the Ontario courts have no jurisdiction to try the
claim. In April 2004, a statement of claim was filed in Manitoba,
which was substantially the same as the previous claim, seeking
damages of $405 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.
GUARANTEES
In connection with the disposition of assets, the Company has provided
customary representations and warranties that range in duration. In
addition, as is customary, the Company has agreed to indemnify the buyers
of certain assets in respect of certain liabilities pertaining to events
occurring prior to the respective sales relating to taxation,
environmental, litigation and other matters. The Company is unable to
estimate the maximum potential liability for these indemnifications as the
underlying agreements often do not specify a maximum amount and the
amounts are dependent upon the outcome of future contingent events, the
nature and likelihood of which cannot be determined.
The Company has agreed to indemnify its current and former directors and
officers to the extent permitted by law against any and all charges,
costs, expenses, amounts paid in settlement and damages incurred by the
directors and officers as a result of any lawsuit or any other judicial,
administrative or investigative proceeding in which the directors and
officers are sued as result of their service. These indemnification claims
will be subject to any statutory or other legal limitation period. The
nature of such indemnification prevents the Company from making a
reasonable estimate of the maximum potential amount it could be required
to pay to counter parties. The Company has $30 million in directors' and
officers' liability insurance coverage.
23. SEGMENTED INFORMATION
The Company operates primarily within the publishing, online,
broadcasting, entertainment and outdoor advertising industries in Canada,
New Zealand, Ireland and Australia.
Each segment below operates as a strategic business unit with separate
management. Segment performance is measured primarily on the basis of
operating profit. Management includes its proportionate interest in the
results of its equity accounted Australian television and outdoor
operations in strategic decision making, therefore, these proportionate
results are
37
included in the following segmented disclosure. Segmented information in
Canadian dollars is as follows:
SEGMENT CAPITAL
REVENUE OPERATING PROFIT TOTAL ASSETS EXPENDITURES
OPERATING SEGMENTS ------------------------ ---------------------- ----------------------- ------------------
TELEVISION 2004 2003 2004 2003 2004 2003 2004 2003
Canada 690,302 730,407 147,430 216,346 1,073,459 1,297,263 22,840 9,364
Australia - Network TEN 409,204 336,362 145,328 106,975 391,748 372,039 3,976 11,097
New Zealand 108,236 95,055 23,291 10,095 123,459 130,049 2,962 3,056
Ireland 34,152 32,490 10,591 9,729 22,819 22,980 255 117
---------- ---------- -------- ---------- ---------- --------- ------- -------
1,241,894 1,194,314 326,640 343,145 1,611,485 1,822,331 30,033 23,634
Radio - New Zealand 86,717 73,400 27,488 20,751 138,591 130,756 3,231 2,666
Publishing and Online -
Canada 1,193,627 1,208,180 267,343 258,496 2,806,034 2,854,201 11,999 9,348
Outdoor - Australia 43,742 36,656 8,215 2,560 25,069 23,789 1,347 693
Corporate and other - - (27,110) (23,213) 513,797 401,349 11,880 13,887
---------- ---------- -------- ---------- ---------- --------- ------- -------
Total operating segments 2,565,980 2,512,550 602,576 601,739 5,094,976 5,232,426 58,490 50,228
Restructuring and film and
television impairment
expenses(1) - - (2,445) (23,305) - - - -
Elimination of equity
accounted affiliates(2) (452,946) (373,018) (153,543) (99,219) (340,321) (319,373) (5,323) (11,790)
Discontinued operations - - - - 127,470 405,739 - 117
---------- ---------- -------- ---------- ---------- --------- ------- -------
Total 2,113,034 2,139,532 446,588 479,215 4,882,125 5,318,792 53,167 38,555
========== ========== ======== ========== ========== ========= ======= =======
Amortization expense 93,714 95,275
-------- ----------
Operating income 352,874 383,940
======== ==========
(1) For 2004, this includes Canadian television restructuring expenses. For
2003 it includes Network TEN program impairment charges of $10.3 million
and Canadian media operations restructuring charges of $13.0 million.
(2) Elimination of proportionate interest in Australia's Network TEN and
Outdoor.
24. SUBSEQUENT EVENTS
In October 2004, the Company launched an exchange offer to exchange a new
series of 8% Senior Subordinated notes due 2012 for the outstanding 12
1/8% Senior notes due 2010 issued by the Hollinger Participation Trust. In
the exchange offer, the holders of the trust notes were offered US$1,240
principal amount of new notes in exchange for each US$1,000 of trust
notes. In addition, the Company launched a concurrent offer of notes,
proceeds of which were used to retire the 12 1/8% junior subordinated
notes held by Hollinger, which had not been participated to the Hollinger
Participation Trust. The effect of these transactions was to replace the
Company's existing $903.6 million 12 1/8% junior subordinated notes
(including accrued interest to November 18, 2004) with new $908.1 million
(US$760.1 million) 8% senior subordinated notes. These transactions were
completed on November 18, 2004. Also on November 18, 2004, 3815668 Canada
Inc., a wholly-owned subsidiary of CanWest and the issuer of the
above-mentioned notes, amalgamated with CanWest Media Inc., which is also
a wholly-owned subsidiary of CanWest.
The excess of the fair value of the 8% subordinated notes over the
carrying value of the 12 1/8% junior subordinated notes, which has not
been determined at this time will be expensed in the quarter ended
November 30, 2004.
38
25. 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 imposed by regulatory
requirements, related to an acquisition, completed prior to January 1,
2001, were accrued in the purchase equation resulting in additional
goodwill. This additional goodwill was amortized until August 31, 2001.
Under U.S. GAAP, these costs are expensed as incurred.
INVESTMENT IN A BROADCASTING OPERATION ON AN EQUITY BASIS
Under Canadian GAAP, the Company's investment in a broadcasting operation
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 U.S. GAAP, the investment was accounted for on a cost
basis; then, as a result of receiving approval to complete the purchase of
the broadcasting operation, the Company changed its method of accounting
for the investment 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., to the date that
the Company initially acquired its investment. This resulted in additional
equity in earnings related to the investment being recorded for U.S. GAAP,
whereas for Canadian GAAP, additional goodwill was recorded. Effective
July 6, 2000, the Company consolidated this investment for both Canadian
and U.S. GAAP purposes.
INTANGIBLE ASSETS
39
Under Canadian GAAP, certain costs related to the development of broadcast
licences, other than through a business combination, were recorded as
intangible assets. Under U.S. GAAP such costs are expensed as incurred.
INVESTMENT IN MARKETABLE SECURITIES
For U.S. GAAP, investment assets classified as "available for sale" are
carried at market, and unrealized temporary gains and losses are included,
net of tax, in other comprehensive income. In accordance with Canadian
GAAP, the Company carries its investment in marketable securities at cost.
PENSION VALUATION ALLOWANCES
Under Canadian GAAP a valuation allowance against pension assets is the
excess of the adjusted benefit asset over the expected future benefit.
Changes in the valuation allowance are recorded as adjustments to pension
expense. Under U.S. GAAP valuation allowances are not recorded.
PROPORTIONATE CONSOLIDATION
Canadian GAAP requires the accounts of jointly controlled enterprises to
be proportionately consolidated. Under U.S. GAAP, investments in jointly
controlled entities are accounted as equity investments. This accounting
difference applies to the Company's investment in TV3 Ireland and Mystery.
The proportionate interest is disclosed in note 20. Accordingly, under
accommodation provided by the SEC this difference is not included in the
following reconciliation.
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 in the statement of earnings. In addition, under
U.S. GAAP foreign denominated debt is adjusted through earnings to reflect
currency translation rates at each balance sheet date. Under Canadian GAAP
hedge accounting is applied for derivatives that are eligible for hedge
accounting if certain criteria are met. Non-hedging derivatives are
recognized at their fair value as either assets or liabilities. As a
result of adopting FAS 133 on September 1, 2001, the Company discontinued
hedge accounting. The fair value of derivatives designated as hedges
before August 31, 2000 have been included in a transitional adjustment and
are included in income when the hedged transaction is completed.
40
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 U.S.
GAAP, these costs are expensed as incurred.
RESOLUTION OF ACQUIRED TAX CONTINGENCIES
Under U.S. GAAP, the settlement of tax contingencies acquired through a
business acquisition result in an adjustment to the purchase equation. In
accordance with Canadian GAAP, the resolutions of such tax contingencies
are included in earnings once the purchase price allocation is finalized.
CHANGE IN ACCOUNTING POLICIES
VALUATION OF INTANGIBLES
In accordance with the SEC staff announcement released September 29, 2004,
the Company will utilize a direct approach in the valuation of intangible
assets for the purposes of impairment testing. Previously the Company
utilized a residual value approach in valuing certain broadcast licences.
The effect of the adoption of this policy has not been determined.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
For its year ended August 31, 2004 for U.S. GAAP the Company is required
to apply the Financial Accounting Standards Board (FASB) Interpretation
No. 46(R) (FIN 46), Consolidation of Variable interest Entities. The
Company has determined that it is the primary beneficiary of Network TEN
Group, a variable interest entity. Accordingly, for U.S. GAAP, as required
by FIN 46 the Company has consolidated the results of TEN Group on a
prospective basis effective May 31, 2004. Under Canadian GAAP, the Company
accounts for its investment in TEN Group using the equity method. As at
August 31, 2004 the Company holds a 56.6% economic interest in TEN Group.
The interest held by the 43.4% minority is classified in minority
interests. The effect of consolidating Network TEN for U.S. GAAP is
presented below. The following supplemental note disclosure relates to the
effect that the consolidation of TEN Group has on certain balances as of
and for the year ended August 31, 2004.
Income taxes
The TEN Group provision for taxes differs from the combined Canadian
statutory rate as follows:
TEN Group income taxes at the Company's
combined statutory rate of 35.2% 17,723
Effect of foreign income tax rates differing
from Canadian income tax rates (2,618)
Effect of deductibility of intercompany
interest elimination (2,388)
Withholding tax provided on distributions 267
Other 323
-------
Provision for income taxes 13,307
-------
Investment in film and television program rights
CURRENT LONG TERM
Broadcast rights 122,003 1,690
Other 495 -
------- -----
122,498 1,690
------- -----
41
ACCUMULATED
COST AMORTIZATION NET
Property, plant and equipment
Land 4,834 - 4,834
Buildings 9,065 (2,105) 6,960
Leasehold improvements 4,931 (935) 3,996
Plant and equipment 173,074 (114,057) 59,017
Plant and equipment under lease 6,351 (4,567) 1,784
------- -------- ------
Total property, plant and equipment 198,255 (121,664) 76,591
------- -------- ------
Intangible assets
Finite Life
Site licences (net of amortization of $2,445) 25,040
Indefinite Life
Broadcast licences 228,318
--------
Total intangible assets 253,358
--------
Amortization of $167 was recorded in the three months ended May 31, 2004.
Site licences represent outdoor site leases. These licences are being amortized
on a straight line basis over the term of the leases (approximately 20 to 40
years).
Goodwill
Goodwill of $91,806 relates to the Australia - Outdoor advertising segment.
There were no changes in the goodwill balances in the year ended August 31,
2004.
Long term debt
Unsecured Bank Loan (1) 163,048
Senior unsecured notes (2) 164,585
Other 3,169
-------
330,802
Effect of foreign currency swap 31,150
-------
Total long term debt 361,952
Less portion due within one year 1,492
-------
Long term portion 360,460
-------
1 Credit facility provides for a maximum of $652 (A$700) million in advances. At
August 31, 2004 the TEN group had drawn A$175 million against this facility
leaving an availability of A$525 million. This facility matures in December
2008. The TEN Group entered into interest rate swap contracts with a notional
amount of A$250 million to fix the interest on this facility and subsequent
facilities with maturities to 2011.
2. The US$125 million unsecured notes mature in March 2013. The TEN Group has
entered into a US$125 million cross currency interest rate swap resulting in
floating rates and a fixed currency exchange rate of US$1:A$1.6807.
Commitments
The TEN Group has the following commitments:
42
2005 2006 2007 2008 2009 THEREAFTER
YEAR ENDED AUGUST 31,
CAPITAL EXPENDITURES 2,735 464 - - - -
Program expenditures 57,773 28,391 40,205 16,528 6,947 -
Leases 35,254 28,649 22,341 15,174 7,042 39,108
--------- --------- --------- --------- --------- --------
Total 95,762 57,504 62,546 31,702 13,989 39,108
========= ========= ========= ========= ========= ========
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
The following is a reconciliation of net earnings (loss) reflecting the
differences between Canadian and U.S. GAAP:
2004
----------------------------------------------------------------- 2003
CANADIAN U.S. GAAP
GAAP TEN GROUP(*) ADJUSTMENTS U.S. GAAP U.S. GAAP
REVISED (**)
Revenue 2,113,034 195,382 - 2,308,416 2,139,532
Operating expenses 1,124,543 115,722 7,808 (1-5) 1,248,073 1,125,443
Selling, general and administrative expenses 539,458 17,139 556,597 531,479
Restructuring expenses 2,445 - 2,445 12,989
----------- ----------- ---------- ---------- -----------
446,588 62,521 (7,808) 501,301 469,621
Amortization of intangibles 17,500 167 - 17,667 17,500
Amortization of property, plant and equipment 71,179 4,455 - 75,634 70,688
Other amortization 5,035 - (1,471) (6) 3,564 2,376
----------- ----------- ---------- ---------- -----------
Operating income 352,874 57,899 (6,337) 404,436 379,057
Interest expense (310,572) (7,005) - (317,577) (352,966)
Interest income 9,141 - - 9,141 -
Amortization of deferred financing costs (7,864) (69) - (7,933) (8,247)
Interest rate and foreign currency swap losses (110,860) (1,099) 75,789 (7) (36,170) (93,960)
Foreign exchange gains 45,104 - - 45,104 3,918
Investment gains and losses, net of write-down 110,794 493 - 111,287 9,240
Dividend income 3,738 - - 3,738 3,532
----------- ----------- ---------- ---------- -----------
92,355 50,219 69,452 212,026 (59,426)
Provision for (recovery of) income taxes (10,181) 13,307 36,800 (8) 39,926 (30,458)
----------- ----------- ---------- ---------- -----------
Earnings before the following 102,536 36,912 32,652 172,100 (28,968)
Minority interest (478) (17,543) - (18,021) -
Interest in earnings of Network TEN 99,889 (22,724) (765) (9) 76,400 97,863
Interest in loss of other equity accounted
affiliates (625) 3,355 - 2,730 (1,332)
Realized currency translation adjustments (7,023) - 4,526 (10) (2,497) -
----------- ----------- ---------- ---------- -----------
NET EARNINGS FROM CONTINUING OPERATIONS 194,299 - 36,413 230,712 67,563
Loss from discontinued operations (207,777) - - (207,777) (68,710)
----------- ----------- ---------- ---------- -----------
NET EARNINGS (LOSS) FOR THE YEAR (13,478) - 36,413 22,935 (1,147)
=========== =========== ========== ========== ===========
EARNINGS PER SHARE FROM CONTINUING
OPERATIONS
BASIC $ 1.10 $ 1.30 $ 0.34
DILUTED $ 1.10 $ 1.30 $ 0.34
EARNINGS (LOSS) PER SHARE
BASIC $ (0.08) $ 0.13 ($ 0.05)
DILUTED $ (0.08) $ 0.13 ($ 0.05)
(*) Represents the adjustments to consolidate the Company's interest in
TEN Group in accordance with FIN 46 effective May 31, 2004. These
adjustments are based on Canadian GAAP. Any differences between Canadian
and U.S. GAAP have been presented in the U.S. GAAP adjustments column.
(**) As explained in Note 1(c), the Company revised the presentation of
revenues and operating expenses to conform to Emerging Issues Task Force
Abstract 99-19, Reporting Revenue Gross as a Principal vs. Net as an
Agent, which was applicable to the Company for its years ended August 31,
2000 and subsequent.
(1) Pre-operating costs incurred of $1,748 (2003 - $851), with related
tax effect of $305 (2003 - $366)
43
(2) Programming costs incurred as imposed by regulatory requirement of
$6,012 (2003 - $5,970), with related tax effect of $1,683 (2003 -
$2,567)
(3) Elimination of pension valuation allowances recorded under Canadian
GAAP of $48 (2003 - $146), with related tax effect of $19 (2003 -
$54)
(4) Integration costs incurred related to publishing properties of nil
(2003 - $302), with related tax effect of nil (2003 - $109)
(5) Development costs incurred related to intangible assets of nil (2003
- $2,325), with related tax effect of nil (2003 - $860)
(6) Amortization of pre-operating costs of ($1,471) (2003 - ($4,711)),
with related tax effect of ($646) (2003 - ($1,305))
(7) Gain (loss) on interest rate and cross-currency swaps and
translation of foreign denominated debt of $75,789 (2003 -
$(70,945)), with related tax effect of $31,161 (2003 - ($30,340))
(8) Resolution of acquired tax contingencies of $7,000 and income tax
related to above adjustments.
(9) U.S. GAAP adjustments in equity accounted affiliates of ($1,195)
(2003 - ($5,431), with related tax effect of ($430) (2003 -
($1,955))
(10) Reversal of realization of cumulative translation adjustments of
$4,526 (2003 - $(922)), net of tax of nil.
COMPARATIVE RECONCILIATION OF NET EARNINGS
The following is a reconciliation of net earnings reflecting the
differences between Canadian and U.S. GAAP:
2003
2004 REVISED
Net earnings in accordance with Canadian GAAP from
continuing operations 194,299 114,798
Pre-operating costs incurred net of tax of $305 (2003 - $939) (1,443) (485)
Amortization of pre-operating costs net of tax of $646 (2003 - $1,305) 825 3,406
Realization of cumulative translation adjustments net
of tax of nil 4,526 (922)
Programming costs imposed by regulatory requirement
net of tax of $1,683 (2003 - $2,567) (4,329) (3,403)
Integration costs related to publishing properties net of
tax of nil (2003 - $109) - (193)
Development costs re intangible assets net of tax of nil
(2003 - $860) - (1,465)
Pension valuation allowances net of tax of $19 (2003 - $54) (29) (92)
U.S. GAAP adjustments in equity accounted affiliates
net of tax of $430 (2003 - $1,955) (765) (3,476)
Gain (loss) on interest rate and cross currency swaps
and translation of foreign denominated debt net of
tax of $31,161 (2003 - $30,340) 44,628 (40,605)
Dissolution of acquired tax contingencies net of tax of nil (7,000) -
-------- --------
Net earnings (loss) from continuing operations in
accordance with U.S. GAAP 230,712 67,563
Loss from discontinued operations (207,777) (68,710)
-------- --------
Net earnings (loss) for the year in accordance with
U.S. GAAP 22,935 (1,147)
======== ========
44
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) - current periods
2004 2003
Net earnings (loss) in accordance with U.S. GAAP 22,935 (1,147)
------- -------
Unrealized foreign currency translation gain 9,802 11,810
Realized foreign currency translation loss 2,497 -
------- -------
Foreign currency translation gain 12,299 11,810
Unrealized gains (losses) on securities
available for sale net of tax of nil 34,883 (43,647)
Realized (gains) losses on securities
available for sale net of tax of nil (51,717) 10,952
Transition adjustment on swaps net of tax of
$177 (2003 - $68) 313 118
------- -------
(4,222) (20,767)
------- -------
Comprehensive income (loss) 18,713 (21,914)
======= =======
Comprehensive income (loss) - accumulated balances
FOREIGN UNREALIZED TRANSITION
CURRENCY GAINS (LOSSES) ADJUSTMENT ON
TRANSLATION ON SECURITIES SWAPS TOTAL
Accumulated other comprehensive income (loss)
- August 31, 2002 (47,964) 49,529 (2,348) (783)
Change during the year 11,810 (32,695) 118 (20,767)
------------ ------------ ------------ ------------
Accumulated other comprehensive income (loss)
- August 31, 2003 (36,154) 16,834 (2,230) (21,550)
Change during the year 12,299 (16,834) 313 (4,222)
------------ ------------ ------------ ------------
Accumulated other comprehensive income (loss)
- August 31, 2004 (23,855) - (1,917) (25,772)
============ ============ ============ ============
45
CONSOLIDATED BALANCE SHEETS
The following is a reconciliation of the Company's consolidated balance
sheet reflecting the differences between Canadian and U.S. GAAP:
2004 2003
---------------------------------------------------------------
CANADIAN U.S. GAAP U.S. GAAP
GAAP TEN GROUP(*) ADJUSTMENTS U.S. GAAP REVISED(**)
ASSETS
CURRENT ASSETS
Cash 81,092 16,623 - 97,715 121,922
Accounts receivable 361,978 126,451 - 488,429 370,783
Distributions receivable from Network
TEN 36,567 (36,567) - - 20,909
Inventory 13,449 - - 13,449 14,509
Investment in film and television
programs 71,601 122,498 - 194,099 82,912
Future income taxes 6,166 - - 6,166 20,223
Other assets 18,853 3,721 - 22,574 10,483
Assets of discontinued operations 89,094 - - 89,094 123,812
----------- ----------- ---------- ----------- ------------
678,800 232,726 - 911,526 765,553
Investment in Network TEN 39,929 (39,929) - - 52,070
Other investments 17,393 14,804 - 32,197 129,856
Investment in film and television
programs 33,467 1,690 - 35,157 30,960
Property, plant and equipment 631,720 76,591 - 708,311 639,081
Future income taxes - 5,580 - 5,580 -
Other assets 140,211 3,940 (5,776) 138,375 120,544
Intangible assets 928,787 253,358 (2,325) 1,179,820 936,837
Goodwill 2,373,442 91,806 171,566 2,636,814 2,545,342
Assets of discontinued operations 38,376 - - 38,376 281,927
----------- ----------- ---------- ----------- ------------
4,882,125 640,566 163,465 5,686,156 5,502,170
=========== =========== ========== =========== ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable 67,233 91,228 (1,154) 157,307 99,883
Accrued liabilities 199,143 43,698 - 242,841 203,321
Income taxes payable 17,697 9,722 - 27,419 36,799
Film and television program accounts
payable 27,966 37,304 - 65,270 30,507
Deferred revenue 31,959 2,259 - 34,218 30,067
Future income taxes 6,072 - - 6,072 6,072
Current portion of long term debt 31,712 1,492 - 33,204 63,078
Liabilities of discontinued operations 69,716 - - 69,716 178,027
----------- ------------ ---------- ----------- ------------
451,498 185,703 (1,154) 636,047 647,754
Long term debt 2,840,591 360,460 (261,605) 2,939,446 2,973,329
Interest rate and foreign currency
swap liability 120,341 - 330,279 450,620 356,955
Other accrued liabilities 131,360 33,089 (15,071) 149,378 106,748
Future income taxes 140,460 - (32,875) 107,585 113,242
Minority interest 16,142 61,314 - 77,456 -
----------- ------------ ----------- ------------ ------------
3,700,392 640,566 19,574 4,360,532 4,198,028
----------- ------------ ----------- ------------ ------------
SHAREHOLDERS' EQUITY
Capital stock 848,628 - - 848,628 846,824
Contributed surplus 4,612 - - 4,612 3,647
Retained earnings 342,314 - 155,842 498,156 475,221
Accumulated other comprehensive
income - - (25,772) (25,772) (21,550)
Cumulative foreign currency
translation adjustments (13,821) - 13,821 - -
----------- ----------- ---------- ----------- ------------
1,181,733 - 143,891 1,325,624 1,304,142
----------- ----------- ---------- ----------- ------------
4,882,125 640,566 163,465 5,686,156 5,502,170
=========== =========== ========== =========== ============
(*) Represents the adjustments to consolidate the accounts of TEN Group in
accordance with FIN 46 effective May 31, 2004. The adjustments reflect the
accounts of TEN Group under Canadian GAAP as presented in note 3 and the
elimination of the Company's investment in TEN Group; the distribution
receivable/payable of $36,567 included in the Company's current assets and
TEN Group's current liabilities, respectively; the debenture payable to
the company of $40,171.
46
(**) As discussed in footnote(4) to note 7, the Company restated its
balance sheet for certain items related to certain business acquisitions
and divestitures. Similar changes were made to the balance sheet as at
August 31, 2003, except that the changes to future tax balances upon the
adoption of FAS 142, Goodwill and Other Intangible Assets, should have
been reflected as a future income tax recovery in the year FAS 142 was
adopted. Under Canadian GAAP, upon adoption of CICA 3062, the Company
reflected the accounting change retroactively by adjusting the balance of
goodwill. The U.S. GAAP changes resulted in restating shareholders equity
as follows:
U.S. GAAP shareholders' equity as at August 31, 2003 as previously
reported
1,143,642
Adjustment for income tax recovery related to FAS 142 160,500
---------
U.S. GAAP shareholders' equity as restated 1,304,142
=========
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
2004 2003
------------
CANADIAN U.S. GAAP U.S. GAAP
GAAP TEN GROUP(*) ADJUSTMENTS U.S. GAAP REVISED
RETAINED EARNINGS - BEGINNING OF YEAR 355,792 119,429 475,221 484,040
Excess of redemption price over carrying
value of preferred shares - - - - (7,672)
Net earnings (loss) for the year (13,478) 36,413 22,935 (1,147)
----------- ---------- ----------- --------- ----------
RETAINED EARNINGS - END OF YEAR 342,314 155,842 498,156 475,221
=========== ========== =========== ========= ==========
(*) Represents the effect of consolidating the Company's interest in TEN
Group in accordance with FIN 46 effective May 31, 2004.
A reconciliation of shareholders' equity reflecting the differences
between Canadian and U.S. GAAP is set out below
2003
2004 REVISED
Shareholders' equity in accordance with
Canadian GAAP 1,181,733 1,175,617
Pre-operating costs incurred, net of tax of
$2,328 (2003 - $2,669)(1) (4,170) (3,552)
Goodwill adjustment related to retroactive
equity accounting of WIC upon regulatory
approval net of tax of nil(2) 38,503 38,503
Goodwill adjustment related to programming costs
incurred net of tax of $6,689 (2003 - $5,006) (3) (11,990) (7,661)
Goodwill adjustment related to integration costs of
CanWest Publications net of tax of $936(4) (1,663) (1,663)
Amortization of goodwill related to future
programming costs imposed by regulatory
requirement on business combination net of tax of
nil(5) 938 938
Costs to develop intangible assets expensed net of
tax of $860(6) (1,465) (1,465)
Pension valuation allowance net of tax of $266
(2003 - $285)(7) 456 485
Goodwill adjustment related to resolution of acquired
tax contingencies(8) (7,000) -
Adjustment related to treatment of accounting policy
change net of tax of nil(9) 160,500 160,500
Adjustments to equity accounted affiliates
net of tax of $1,955(10) - (3,476)
47
Adjustment to reflect losses on interest
rate and cross-currency swaps net of tax of
$37,308 (2003 - $66,084) (11) (28,301) (68,688)
Transition adjustment on interest rate swaps, net of
tax of $1,141 (2003 - $1,318) (11) (1,917) (2,230)
Unrealized gain (loss) on other investments net
of tax of nil (2003 - nil) (12) - 16,834
------------ ------------
Shareholders' equity in accordance with U.S. GAAP 1,325,624 1,304,142
============ ============
The following identifies the balance sheet effect of these adjustments:
(1) Reduced other assets by $6.5 million (2003 - $6.2 million), reduced
long term future tax liability by $2.3 million (2003 - $2.7
million).
(2) Increased goodwill by $38.5 million (2003 - $38.5 million).
(3) Reduced goodwill by $21.4 million (2003 - $21.4 million), increased
long term future tax liability by $9.4 million, (2003 - $11.1
million), reduced other long term accrued liabilities by $15.1
million (2003 - $21.1 million), and reduced current accrued
liabilities by $3.8 million (2003 - $3.8 million).
(4) Increased accrued liabilities by $2.6 million (2003 - $2.6 million),
and reduced future income tax liability by $0.9 million (2003 - $0.9
million).
(5) Increased goodwill by $0.9 million (2003 - $0.9 million).
(6) Reduced intangible assets by $2.3 million (2003 - $2.3 million),
reduced long term future tax liability by $0.9 million (2003 - $0.9
million).
(7) Increased long term other assets by $0.7 million (2003 - increased
other long term accrued liabilities by $0.8 million), and increased
long term future tax liability by $0.3 million (2003 - $0.3
million).
(8) Reduced goodwill by $7.0 million (2003 - nil)
(9) Increased goodwill by $160.5 million (2003 - $160.5 million)
(10) Increased investment in Network TEN by nil (2003 - $3.5 million).
(11) Combined effect was to increase long term swap liabilities by $330.3
million (2003 - $332.3 million), reduced long term debt by $261.6
million (2003 - $194.0 million), reduced future tax liabilities by
$38.5 million (2003 - $67.4 million).
(12) Increased other investments by nil (2003 - $16.8 million).
48
CONSOLIDATED STATEMENTS OF CASH FLOWS
The following is a reconciliation of the consolidated cash flows
reflecting the differences between Canadian and U.S. GAAP:
2004
------------------------------------------------------ 2003
CANADIAN TEN U.S. GAAP
GAAP GROUP(*) ADJUSTMENTS U.S. GAAP U.S. GAAP
CASH GENERATED (UTILIZED) BY:
OPERATING ACTIVITIES
Net earnings from continuing operations for the year 194,299 - 36,413 230,712 67,563
Items not affecting cash -
Amortization 101,578 4,691 (1,471) 104,798 98,811
Interest paid in kind 97,951 - - 97,951 108,385
Future income taxes (23,191) 2,503 29,800 9,112 (52,885)
Interest in earnings of Network TEN (99,889) 22,724 765 (76,400) (97,863)
Realized currency translation adjustments 7,023 - (4,526) 2,497 -
Interest rate and foreign currency swap losses 98,056 1,099 (75,789) 23,366 93,960
Investment gains and losses net of write-down (110,794) (493) - (111,287) (9,240)
Amortization of film and television programs 5,656 - - 5,656 -
Pension expense 6,276 - 48 6,324 7,755
Minority interest 478 17,543 - 18,021 -
Other 158 (3,355) - (3,197) 1,332
Distributions from Network TEN 104,855 (5,558) - 99,297 33,378
Investment in film and television programs (12,234) - - (12,234) (3,680)
--------- --------- --------- --------- ---------
370,222 39,154 (14,760) 394,616 247,516
Changes in non-cash operating accounts (58,468) 29,443 14,760** (14,265) 38,067
--------- --------- --------- --------- ---------
Cash flows from operating activities of continuing
operations 311,754 68,597 - 380,351 285,583
Cash flows from operating activities of discontinued
operations 15,991 - - 15,991 (57,118)
--------- --------- --------- --------- ---------
Cash flows from operating activities 327,745 68,597 - 396,342 228,465
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Other investments - (221) - (221) (4,311)
Investment in broadcast licences (5,813) - - (5,813) -
Proceeds from sales of other investments 143,832 127 - 143,959 44,113
Proceeds from divestitures 83,316 - - 83,316 193,500
Proceeds from sale of property, plant and equipment 7,426 - - 7,426 1,492
Purchase of property, plant and equipment (53,167) (2,641) - (55,808) (38,438)
Investing activities from discontinued operations - - - - (117)
--------- --------- --------- --------- ---------
175,594 (2,735) - 172,859 196,239
--------- ---------- --------- --------- ---------
FINANCING ACTIVITIES
Issuance of long term debt 167,500 51,750 - 219,250 294,700
Repayment of long term debt (630,261) (80,279) - (710,540) (651,603)
Swap recouponing payments (27,957) - - (27,957) (3,000)
Issuance of share capital 1,804 113 - 1,917 402
Payment of dividends to minority interests - (32,556) - (32,556) -
Preferred share redemption - - - - (57,672)
Financing activities from discontinued operations (57,644) - - (57,644) 53,301
--------- --------- --------- --------- ---------
(546,558) (60,972) - (607,530) (363,872)
--------- --------- --------- --------- ---------
Foreign exchange gain on cash denominated in foreign
currencies 2,389 - - 2,389 -
--------- --------- --------- --------- ---------
NET CHANGE IN CASH (40,830) 4,890 - (35,940) 60,832
CASH - BEGINNING OF PERIOD 121,922 11,733 - 133,655 61,090
--------- --------- --------- --------- ---------
CASH - END OF YEAR 81,092 16,623 - 97,715 121,922
========= ========= ========= ========= =========
(*) Represents adjustment to the cash flows of TEN Group in accordance
with FIN 46 effective May 31, 2004 and the elimination of intercompany
cash flows between TEN Group and the Company.
(**) Represents adjustments to U.S. GAAP statement of earnings and loss
not affecting cash and change in working capital
49
OTHER
The following amounts are included in accounts receivable:
2004 2003
Allowance for doubtful accounts - beginning of year 14,654 14,036
Bad debt expense 5,634 5,596
Write offs during the year (7,513) (5,263)
Foreign exchange 93 285
Effect of the consolidation of
TEN Group 6,789 -
------------ -----------
19,657 14,654
The following amounts are included in operating expenses:
2004 2003
Rent expense 19,819 20,545
The following amounts are included in accrued liabilities:
2004 2003
Employment related accruals 75,000 76,000
Amortization expense related to existing finite life intangibles will be
$18.2 million per year in 2005, $9.5 million in 2006 and $2.2 million in
2007 to 2009.
50