EXHIBIT 1
INFORM ENLIGHTEN ENTERTAIN
[LOGO]
CANWEST GLOBAL
COMMUNICATIONS CORP.
[CANWEST GLOBAL LOGO]
INTERIM REPORT TO SHAREHOLDERS
FOR THE NINE MONTHS ENDED MAY 31, 2005
[LOGO]
TO THE SHAREHOLDERS OF
CANWEST GLOBAL COMMUNICATIONS CORP.
Through the first three quarters of fiscal 2005, CanWest's results reflect
significant increases in EBITDA as compared to the same period in the previous
year. This growth has been fueled primarily by excellent performance of our
international operations, particularly the South Pacific television, radio and
out-of-home advertising properties. Results from Canadian operations reflected
growth in publishing and television revenues with a small increase in EBITDA in
publishing as a result of higher revenues offset by losses of the new
publications businesses in development and a decrease in EBITDA in television
primarily as of result of an increased investment in television programming and
promotion to rebuild audience ratings.
The results for the nine months ended May 31, 2005 reflect the impacts of
continued repayment and refinancing of debt, including a 25% decrease in
interest expense as well as significant one time costs related to refinancing
activities.
In New Zealand, TVWorks achieved strong third quarter growth while
absorbing the additional start-up costs associated with launching a new flagship
current affairs program Campbell Live, and re-launching the nightly 3 News.
Strong ratings for both programs bode well for the remainder of the fiscal year.
RadioWorks, CanWest's New Zealand radio operation also reported solid earnings
growth while absorbing costs associated with the start-up of Radio Live, a new
all talk radio network, and Kiwi FM, New Zealand's first all-domestic music
radio network.
In Australia, both television and out-of-home advertising operations
generated solid financial results. Network TEN again led in its target young
adult demographic of 16-39 year olds. Ratings continue to build through the
reporting period and into the fourth quarter, as most popular programs, such as
Big Brother, generated growing traction with viewers. During the most recent
ratings week, ended July 9, TEN scored 7 of the top 10 shows, and 12 of the top
20 among viewers in its young adult target audience. Eye Corp., the Company's
out-of-home advertising company maintained its upward growth momentum with a 38%
increase in revenues and a 43% increase in EBITDA for the quarter, compared to
the same period last year.
These excellent results led to TEN's announcement in June of a dividend
that resulted in distributions of A$47.6 million paid to CanWest in July, 2005.
The Republic of Ireland's TV3 continued its solid performance with a 43%
EBITDA increase on 10% revenue growth for the quarter ended May 31, 2005.
In Canada, publishing operations reported a 4% increase in revenues for
the quarter and a small increase in EBITDA in publishing as a result of higher
revenues offset by losses of the new publications businesses in development,
being the free-sheet magazine Dose, distributed in five Canadian cities and
CanWest's joint venture with Torstar and Metro SA under which CanWest holds a
one-third interest in free-sheet Metro which launched in Vancouver and Ottawa.
Both new publications launched during March and April. The Company continued to
make positive movement in a legal dispute over the acquisition of the Jerusalem
Post and its affiliated publications. In June, a Federal Court in New York
issued a preliminary injunction in CanWest's favour that prevents any
significant transactions that would affect CanWest's interests from occurring at
the Israeli properties until the completion of an arbitration process underway
in the US.
Canadian television continues to overhaul its prime time schedule which
has slipped to second place overall in ratings. Subsequent to the end of the
quarter, the Global and CH networks acquired a number of new programs for the
fall season, among them, highly anticipated dramas Prison Break and E-Ring
starring Benjamin Bratt and Dennis Hopper; Head Cases starring Chris O'Donnell
and ensemble dramas Reunion and Sex, Lies and Secrets. In addition the two
networks acquired new half-hour comedies including My Name is Earl, and Out of
Practice, starring Henry Winkler and Stockard Channing. Canadian television also
announced the launch of a number of new domestic productions including Falcon
Beach, House & Home with Lynda Reeves, and ReGenesis among others.
On April 29th, CanWest Entertainment International Division announced an
agreement to sell its international film and television program receivables and
rights. The transaction is expected to close in July 2005.
During the quarter the Company also announced several significant
appointments. In April, David Drybrough, F.C.A., was named interim Chair of the
Board of Directors replacing the Hon. Frank McKenna who resigned from the Board
to take up his diplomatic appointment as Canadian Ambassador to the United
States. The Company also appointed two new independent directors to the Board,
Lisa Pankratz, CA, CFA, of Vancouver and Derek Burney, OC, of Ottawa. Both have
outstanding reputations and bring a wealth of relevant experience to the CanWest
Board of Directors.
Following the end of the reporting period, CanWest announced the
appointment of Peter Viner, a long- time CanWest executive, as President,
CanWest MediaWorks, its Canadian media operations. Mr. Viner brings an intimate
knowledge of the Company and the Canadian media industry to the position and has
the full confidence of the Board of Directors to move CanWest's Canadian media
operations forward.
Respectfully Submitted
Leonard J. Asper
President and Chief Executive Officer
CWG 2005 INFORM : ENLIGHTEN : ENTERTAIN
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MANAGEMENT DISCUSSION AND ANALYSIS
JULY 13, 2005
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
CanWest is an international media company with interests in broadcast
television, publishing, radio, specialty cable channels, outdoor advertising and
Internet websites in Canada, Australia, New Zealand and Ireland. In each of our
markets we seek to develop a broad media platform that enables us to provide a
multimedia product offering to our customers. Our diversification within the
Canadian market and internationally has contributed to the stability of our
overall results.
This interim discussion should be read in conjunction with the Management
Discussion and Analysis contained in our annual report for the year ended August
31, 2004, which is filed on SEDAR at www.sedar.com.
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 interest in TEN Group Pty Limited ("TEN Group"), which owns and
operates TEN Television Network ("Network TEN").
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.
Following a 7% decline in advertising revenue in fiscal 2004 for Canadian
television, advertising revenues have increased by 1% for the nine months ended
May 31, 2005, compared to the same period in fiscal 2004. The revenue decrease
in 2004 reflected a slight reduction in television advertising purchases in
general as well as loss of market share resulting primarily from reduced ratings
performance. The advertising sales increases in fiscal 2005 were led by strong
increases in sales in the packaged goods sector somewhat offset by decreases in
the automotive and entertainment sectors. As our ratings and audience share have
not improved, we do not expect growth in our television revenues for the
remainder of the year relative to the same period in 2004.
Our Australian television broadcast segment continued to perform well in
the nine months ended May 31, 2005 as compared to the same period in fiscal
2004, with local currency revenues up by 13%. The effect of the weakening local
currency relative to the Canadian dollar offset the local currency increases in
revenue for the nine months ended May 31, 2005 by 4%. For the remainder of
fiscal 2005, we expect Network TEN to continue its growth relative to prior
years but at a lower growth rate than in the first nine months of the year
reflecting a slowing in the advertising market. Our New Zealand television
broadcast segment continued to perform well in the nine months ended May 31,
2005 as compared to the same period in fiscal 2004 with local currency revenues
up by 12%. The effect of the strengthening local currency relative to the
Canadian dollar contributed an additional 2% revenue increase for New Zealand,
when the local currency is converted into Canadian dollars. We expect revenue
growth for the remainder of fiscal 2005 to reflect growth similar to that
achieved in the first nine months. In our Irish television segment, revenues in
local currency for the nine months ended May 31, 2005 showed growth of 13%, as
compared to the same period last year.
Our principal television broadcast operating expenses are programming
costs and employee salaries. For the nine months ended May 31, 2005, segment
operating expenses increased by 3% in Canada as compared to the same period last
year, primarily as a result of increased promotion and programming costs. In
Canada, we expect this trend to continue throughout the remainder of fiscal 2005
as we continue to invest in our program schedule. For the nine months ended May
31, 2005, segment operating expenses in local currency, in Australia, increased
by 8% as compared to the same period last year, reflecting increased programming
costs. In New Zealand, segment operating expenses for the nine months in local
currency increased by 8%, as compared to the same period in
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
3
MANAGEMENT DISCUSSION AND ANALYSIS
JULY 13, 2005
the prior year as a result of increased programming costs. We expect that the
trend in the first nine months of the fiscal year will continue for the
remainder of fiscal 2005. For the nine months ended May 31, 2005, our Irish
broadcasting operation segment operating expenses increased 3%, as compared to
the same period last year.
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.
Combined advertising and circulation revenues for our newspapers were 3%
higher in the nine months ended May 31, 2005 as compared to the same period in
fiscal 2004. The advertising increase for the nine months resulted from
increases in pricing as lineage was slightly reduced from the prior year. For
the remainder of fiscal 2005, when compared to the same period in the prior
year, we expect moderate growth in revenue reflecting price increases with the
lineage remaining relatively flat. Circulation revenues were flat in the nine
months ended May 31, 2005 as compared to the same period in the prior year as
declines in circulation were offset by higher per copy revenue. We expect that
circulation revenues, which make up approximately 20% of total newspaper
revenues, will remain flat in the remainder of 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, and maintaining a higher per copy revenue.
Our principal operating expenses in the publishing and online segment are
salaries, newsprint and distribution expenses. Segment operating expenses
increased by 4% in the nine months ended May 31, 2005, primarily as the result
of increased payroll costs. Our newsprint, ink and outside printing expenditures
for the nine months ended May 31, 2005 decreased by approximately 3% as a result
of reduced pricing and a reduction in consumption. We expect our cost of
newsprint to remain relatively constant for the remainder of 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 7%, in local currency for the nine months ended May 31, 2005, as
compared to the same period in the prior fiscal year reflecting strong growth in
radio advertising expenditures in New Zealand. In addition, a strengthened New
Zealand currency contributed an additional 2% increase for the nine months. We
expect revenues in local currencies to continue to increase during 2005,
bolstered by the addition of new FM frequencies acquired in fiscal 2004 and
2005.
The principal operating expenses in the radio broadcast segment are
salaries, marketing costs and music royalties. Segment operating expenses in
local currency increased 11% for the nine months ended May 31, 2005 as compared
to the same period in fiscal 2004, due to the significant start up costs
associated with Radio Live and the branding costs related to Kiwi FM. As a
result of the strengthened New Zealand currency, this increase was 13% for the
nine months in Canadian dollars.
OUTDOOR ADVERTISING
Our outdoor advertising segment consists of TEN Group's wholly-owned
subsidiary, Eye Corp. 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 by 41% for the nine months ended
May 31, 2005 as compared to the same period in fiscal 2004, in part reflecting
the acquisition of the remaining 50% interest in the Eye Shop subsidiary. As
well, airport terminal advertising sales have increased with increased air
travel and increases in rates and inventories. The principal operating expenses
in this segment are salaries, site rental costs and production expenses. Segment
operating expenses have decreased to 78% as a percentage of revenues for the
nine months ended May 31, 2005 from 82% from the same period in fiscal 2004. We
expect that growth in revenues and expenses of our outdoor advertising segment
will continue at approximately the same rate for the remainder of fiscal 2005.
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
value of the Canadian dollar against those currencies increases the Canadian
dollar equivalent of the revenues and expenses we record in those currencies.
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CWG 2005 INFORM : ENLIGHTEN : ENTERTAIN
An increase in the Canadian dollar has the opposite effect. During the nine
months of fiscal 2005, the Canadian dollar appreciated against the Australian
dollar by 4%, and declined against the New Zealand dollar by 2%. The Canadian
dollar/ Euro rate remained relatively constant for the period.
SEASONALITY
Our advertising revenues are seasonal. Revenues are typically highest in the
first and third quarters, while expenses are relatively constant throughout the
year.
CRITICAL ACCOUNTING
POLICIES AND ESTIMATES
Effective September 1, 2004 we implemented AcG-15 "Consolidation of Variable
Interest Entities" and, as a result, the Company has consolidated the operations
of the TEN Group. There are no other significant changes in the Company's
accounting policies or estimates since August 31, 2004 as described in the
Management Discussion and Analysis in the Company's 2004 Annual Report.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
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, effective
September 1, 2004, we have consolidated the results of TEN Group. We previously
used the equity method to account for our interest in TEN Group. The
consolidation of TEN Group has had a significant impact on our revenues,
expenses, assets and liabilities. There was no impact on our shareholders'
equity. The impact of the consolidation of TEN Group is disclosed in note 1 of
our interim consolidated financial statements. In addition, the restatement of
all the previous quarters is presented in Restated Quarterly Financial Results
of the Management Discussion and Analysis. On implementation of AcG-15 we
determined that an immaterial entity that was previously consolidated should be
excluded from our consolidation effective September 1, 2004.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 31, 2005
The following is a table of segmented results for the three months ended May 31,
2005 and May 31, 2004. See note 13 to our interim consolidated financial
statements:
REVENUE SEGMENT OPERATING PROFIT
------------------- -------------------------
2005 2004 2005 2004
$000 $000 $000 $000
Revised(1) Revised(1)
OPERATING SEGMENTS
Publishing and Online - Canada 323,383 311,419 74,956 74,269
------- ------- ------- -------
Television
Canada 200,696 207,483 56,849 61,322
Australia - Network TEN 194,452 188,766 52,929 55,491
New Zealand 30,948 26,610 6,023 4,748
Ireland 10,386 9,423 4,288 2,993
------- ------- ------- -------
Total television 436,482 432,282 120,089 124,554
Radio - New Zealand 23,054 20,833 5,120 5,927
Outdoor - Australia 26,803 19,407 5,327 3,737
Corporate and other - - (7,878) (6,120)
------- ------- ------- -------
Total 809,722 783,941 197,614 202,367
======= ======= ======= =======
(1) See note 1 to our interim consolidated financial statements
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
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JULY 13, 2005
OPERATING RESULTS
INTRODUCTORY NOTE
- - SEGMENT OPERATING PROFIT. In the discussion that follows, we provide
information concerning our segment operating profit. See note 13 to our
interim consolidated financial statements for the three and nine months
ended May 31, 2005. Management utilizes segment operating profit as a
measure of segment profitability in making strategic resource allocations.
- - OPERATING INCOME BEFORE AMORTIZATION. We also discuss our consolidated
operating income before amortization. We provide this measure because we
and our lenders and investors use operating income before amortization to
measure performance against our various leverage covenants. 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 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. A reconciliation of
operating income before amortization to net earnings, which is the most
closely comparable GAAP measure is set forth below under "Reconciliation
of Non-GAAP Financial Measures" section of this report.
CONSOLIDATED RESULTS
REVENUES. Consolidated revenues increased by $26 million or 3% to $810 million
for the three months ended May 31, 2005 from the consolidated revenues of $784
million for the same period in fiscal 2004. Revenues for the third quarter
reflected an 8% increase in revenues from international media operations, a 3%
decrease in Canadian television revenues and a 4% increase in Canadian
Publishing and Online revenues.
OPERATING EXPENSES. Consolidated operating expenses (including selling, general,
and administrative expenses) before amortization increased $31 million or 5% to
$612 million. This increase reflects expense increases in all operating
segments.
OPERATING INCOME BEFORE AMORTIZATION. Consolidated operating income before
amortization decreased by 2% to $198 million for the three months ended May 31,
2005 from $202 million for the same period last year. The decrease in operating
income before amortization reflected increases for international media
operations that were offset by decreases in operating income from the Canadian
media operations.
AMORTIZATION. Amortization of intangibles was $5 million in the third quarter of
both fiscal 2005 and 2004. Amortization of property plant and equipment was $24
million in the third quarter of both fiscal 2005 and 2004.
FINANCING COSTS. Interest expense was $59 million for the three months ended May
31, 2005 compared to $85 million in the previous year, reflecting a reduced
level of debt as well as reduced interest rates achieved through our refinancing
activities to date in fiscal 2005 and in fiscal 2004.
INTEREST RATE AND FOREIGN CURRENCY SWAP GAINS (LOSSES). For the three months
ended May 31, 2005, we recorded a $13 million loss equivalent to the change in
fair value of interest rate and foreign currency interest rate swaps on debt
that has been retired. This compared to a gain of $7 million for the third
quarter of fiscal 2004.
FOREIGN EXCHANGE GAINS (LOSSES). We recorded net foreign exchange gains of $4
million in the three months ended May 31, 2005. This reflects gains of $5
million on repayment of US dollar denominated debt net of a $1 million loss that
arose on the translation of a portion of our U.S. debt which is not hedged.
INVESTMENT GAINS. For the three months ended May 31, 2005, we recorded an
investment gain of $0.3 million, compared to $0.4 million gain for the same
period the previous year. The gain in 2005 relates to gains on disposal of
non-core assets. The gain in 2004 was primarily due to dilution gains on the
exercise of stock options at TEN Group and disposition of non- core assets.
INCOME TAXES. Our income tax expense was $18 million for the three months ended
May 31, 2005, compared to $19 million in the same period of fiscal 2004. The
effective tax rate of 18% was below the Company's statutory rate of 35% due to a
change in Australian tax legislation in the third quarter that allowed TEN Group
to record a future taxes recovery of $18 million.
MINORITY INTERESTS. For the three months ended May 31, 2005 we recorded minority
interests charges related to the 30% minority interests in MediaWorks (NZ) and
the 43.6% minority interests in TEN Group of $1 and $21 million, respectively.
The minority interests charge related to TEN Group increased by 24% as compared
to the $17 million charge for the same period in fiscal 2004 as a result of TEN
Group's increased net earnings. There was no minority interests charge related
to CanWest MediaWorks (NZ) for the third quarter
CWG 2005 INFORM : ENLIGHTEN : ENTERTAIN
6
of fiscal 2004 because it was wholly owned to July 2004.
NET EARNINGS FROM CONTINUING OPERATIONS. Our net earnings from continuing
operations for the three months ended May 31, 2005 were $59 million, or $0.33
per share, compared to $52 million, or $0.30 per share, for the three months
ended May 31, 2004.
DISCONTINUED OPERATIONS. On April 29, 2005, the Company announced an agreement
to sell certain assets and operations which comprise its film and television
program operations for net proceeds of approximately $28 million, subject to
closing adjustments. The transaction is expected to close in July 2005. Net loss
from discontinued operations was $6 million for the three months ended May 31,
2005 compared to earnings of $2 million for the same operations for the three
months ended May 31, 2004.
NET EARNINGS. Our net earnings for the three months ended May 31, 2005 were $53
million or $0.30 per share compared to $54 million or $0.31 per share for the
third quarter of fiscal 2004.
SEGMENTED RESULTS
PUBLISHING AND ONLINE
- - REVENUE. Publishing and Online revenues for the third quarter of 2005 were
$323 million compared to revenues of $311 million in same period the
previous year. Advertising revenues increased by 6% for the third quarter
reflecting increased rates as well as increased insert volumes. While
circulation volume declined by 4%, circulation revenue remained constant
as a result of higher average per copy prices. Circulation revenue
remained constant at approximately 20% of total revenues for the newspaper
group for the third quarter, when compared to the same period in 2004.
- - 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 $11 million, or 5%, to $248
million from $237 million. This reflected normal salary increases, the
increased cost of management compensation and increases in administrative
costs. Newsprint, ink and outside printing expenditures were flat in the
three months ended May 31, 2005 compared to the same period the prior
year, reflecting a decrease in our cost of newsprint as well as reduction
in newsprint usage offset by increases in outside printing expenditures.
- - SEGMENT OPERATING PROFIT. As a result of increased revenues offset by
increased operating costs, our Publishing and Online operations had an
increase of $1 million, or 1%, in segment operating profit to $75 million
for the three months ended May 31, 2005 compared to $74 million for the
same period last year. These results included operating losses of $3
million relating to Dose and Metro, our newspaper start up operations.
CANADIAN TELEVISION
- - REVENUES. In total, revenues from our Canadian Television operating
segment of $201 million were $6 million or 3% lower than the $207 million
recorded in the same period in fiscal 2004. This reflected a 2% decrease
in airtime revenues.
Subscriber revenues from our speciality channels increased by 22%
for the third quarter of fiscal 2005 as compared to the same period in
fiscal 2004, reflecting a 15% increase in subscribers.
- - OPERATING EXPENSES. Operating expenses (including selling, general and
administrative expenses) of $144 million at Canadian Television operations
were $2 million, or 2%, lower than in the same period the prior year
primarily the result of a reduction in program amortization expense.
Program amortization expense in the third quarter of fiscal 2004 was
relatively high as a result of certain season finales. In general, we
expect our program amortization expense to increase relative to the
previous year. Partially offsetting the decrease in expenses were
increases in promotional expenses of approximately $1 million and
approximately $2 million in severance expenses related to staffing
changes.
- - SEGMENT OPERATING PROFIT. Canadian television segment operating profit of
$57 million for the third quarter of fiscal 2005 was 7% less than the $61
million for the same period in fiscal 2004.
AUSTRALIAN TELEVISION
- - REVENUES. Segment revenues increased by 3% to $194 million for the three
months ended May 31, 2005, from $189 million during the same period in the
prior year. In local currency, revenues increased 8%, reflecting TEN's
strong rating performance in the quarter in a tough television advertising
environment.
- - OPERATING EXPENSES. Segment operating expenses increased 6% to $142
million for the three months ended May 31, 2005 compared to $133 million
for the same period in fiscal 2004, primarily reflecting increased
programming costs.
- - SEGMENT OPERATING PROFIT. Segment operating profit decreased by 5% to $53
million for the third quarter of 2005, compared to $55 million in the same
period in fiscal 2004.
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
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MD&A
JULY 13, 2005
NEW ZEALAND TELEVISION
- - REVENUES. Revenues from television broadcast operations for New Zealand's
3 and C4 television networks increased by 16% to $31 million for the third
quarter of fiscal 2005 from $27 million for the same period in fiscal 2004
reflecting improved audience share in a strong advertising environment. In
local currency, revenues increased 14%, reflecting New Zealand's strong rating
performance.
- - OPERATING EXPENSES. Operating expenses increased by 14% to $25 million for
the third quarter of fiscal 2005 from $22 million, as a result of increased
programming expenses.
- - SEGMENT OPERATING PROFIT. New Zealand 3 and C4 produced segment operating
profit of $6 million, a $1 million or 27% increase from the results recorded
in the third quarter of 2004.
IRISH TELEVISION
Our 45% share of revenues at TV3 in the Republic of Ireland increased by 10% to
$10 million in the third quarter of fiscal 2005 compared to the third quarter of
fiscal 2004. Our share of TV3's segment operating profit increased by 43% to $4
million as compared to the same period in fiscal 2004.
NEW ZEALAND RADIO
CanWest RadioWorks continued its steady performance, increasing revenues for the
three months ended May 31, 2005. Revenue grew by 11% to $23 million from $21
million during the third quarter of the previous year. Segment operating profit
declined by 14% to $5 million for the three months ended May 31, 2005 as
compared to the same period the previous year, due to the significant start up
costs associated with Radio Live and the branding costs related to Kiwi FM.
OUTDOOR ADVERTISING
Segment revenues increased by $7 million, or 38%, to $27 million for the three
months ended May 31, 2005 from $20 million for the third quarter in fiscal 2004.
This increase reflected 44% growth in revenue in local currency. Our segment
operating profit from TEN Group's Outdoor Advertising operations increased by $2
million to $5 million as compared to the third quarter in fiscal 2004 driven by
Eye Corp.'s acquisition of the remaining 50% of Eye Shop as well as stronger
airport advertising revenues.
CWG 2005 INFORM : ENLIGHTEN : ENTERTAIN
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RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 31, 2005
The following is a table of segmented results for the nine months ended May 31,
2005 and May 31, 2004.
See note 13 to our interim consolidated financial statements:
REVENUE SEGMENT OPERATING PROFIT
-------------------- ------------------------
2005 2004 2005 2004
$000 $000 $000 $000
Revised(1) Revised(1)
OPERATING SEGMENTS
Publishing and Online - Canada 938,609 912,822 215,256 213,995
--------- --------- ------- -------
Television
Canada 564,695 559,712 138,012 147,450
Australia - Network TEN 595,876 545,832 231,894 197,628
New Zealand 89,803 78,554 22,819 17,661
Ireland 30,168 27,042 11,542 8,879
--------- --------- ------- -------
Total television 1,280,542 1,211,140 404,267 371,618
Radio - New Zealand 71,229 65,299 21,115 20,944
Outdoor-Australia 80,625 57,149 18,024 10,361
Corporate and other - - (22,747) (20,657)
--------- --------- ------- -------
Total 2,371,005 2,246,410 635,915 596,261
========= ========= ======= =======
(1) See note 1 to our interim consolidated financial statements.
CONSOLIDATED RESULTS
REVENUES. Consolidated revenues increased by $125 million or 6% to $2,371
million for the nine months ended May 31, 2005 from the consolidated revenues of
$2,246 million for the same period in fiscal 2004. Revenues for the nine months
reflected a 12% increase in revenues from international media operations, a 1%
increase in Canadian television revenues and a 3% increase in Canadian
Publishing and Online revenues.
OPERATING EXPENSES. Consolidated operating expenses (including selling, general,
and administrative expenses) before amortization increased $85 million or 5% to
$1,735 million. This increase reflects expense increases in all operating
segments.
OPERATING INCOME BEFORE AMORTIZATION. Consolidated operating income before
amortization increased by 7% to $636 million for the nine months ended May 31,
2005 from $596 million for the same period last year. The increase in operating
income before amortization reflected significant increases for international
media operations.
AMORTIZATION. Amortization of intangibles increased to $15 million in the first
nine months of fiscal 2005 from $14 million in the first nine months of fiscal
2004. Amortization of property and equipment decreased to $69 million from $70
million for the first nine months of fiscal 2005 compared to the first nine
months of fiscal 2004.
FINANCING COSTS. Interest expense was $193 million for the nine months ended May
31, 2005 compared to $259 million in the previous year, reflecting a reduced
level of debt as well as reduced interest rates achieved through our refinancing
activities to date in fiscal 2005 and in fiscal 2004.
INTEREST RATE AND FOREIGN CURRENCY SWAP LOSSES. For the nine months ended May
31, 2005, we recorded an $80 million loss equivalent to the change in fair value
of interest rate and foreign currency interest rate swaps on debt that has been
retired. This compared to a loss of $9 million for the nine months of fiscal
2004.
FOREIGN EXCHANGE GAINS. We recorded net foreign exchange gains of $29 million in
the nine months ended May 31, 2005 compared to $4 million for the same period in
fiscal 2004. This reflects gains of $24 million on repayment of US dollar
denominated debt and a $2 million gain that arose on the translation of a
portion of our U.S. debt which is not hedged.
INVESTMENT GAINS (LOSSES). For the nine months ended May 31, 2005, we recorded
an investment gain of $0.2 million, compared to an investment
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
9
MD&A
JULY 13, 2005
loss of $2 million for the same period the previous year. This reflects dilution
gains on the exercise of stock options at TEN Group offset by losses on disposal
of non-core assets. The loss in 2004 was primarily related to a write down on
other investments.
LOSS ON DEBT EXTINGUISHMENT. During the first quarter, we completed an exchange
offer and concurrent debt offering through which we settled our $904 million
12 1/8% Fixed Rate Subordinated Debentures due 2010 by issuance of $908 million
(US$761 million) of 8% Senior Subordinated Notes due 2012. The fair value of the
new debt on its settlement date was determined to be $944 million. The excess of
fair value of the new debt over the book value of the old debt together with
certain costs of settling the debt has been charged to earnings for the nine
months ended May 31, 2005 as a loss on debt extinguishment of $44 million. This
refinancing is expected to reduce cash interest expense by approximately $40
million per year.
INCOME TAXES. Our income tax expense was $54 million for the nine months ended
May 31, 2005, compared to $47 million in the same period of fiscal 2004. The
effective tax rate of 21% was below the Company's statutory rate of 35% as a
result of the impact of international tax rates which were lower than Canadian
tax rates, as well as the impact of (i) a $5 million recovery related to the
resolution of an uncertain tax position, (ii) a $7 million effect of recognizing
temporary differences which were not previously tax effected, and (iii) a change
in Australian tax legislation in the third quarter that allowed TEN Group to
record its future taxes recovery of $18 million. The $7 million of temporary
differences not previously tax effected related to earnings of periods prior to
fiscal 2005. We have determined that these adjustments are not material to the
reported results and accordingly, the amount has been included in current year's
earnings. This adjustment has the effect of increasing basic and diluted
earnings per share for the nine months ended May 31, 2005, by $0.04 per share.
MINORITY INTERESTS. For the nine months ended May 31, 2005 we recorded minority
interests charges related to the 30% minority interests in MediaWorks (NZ) and
the 43.6% minority interests in TEN Group of $6 and $73 million, respectively.
The minority interests charge related to TEN Group increased by 17% as compared
to the $62 million charge for the same period in fiscal 2004 as a result of TEN
Group's increased net earnings. There was no minority interests charge related
to CanWest MediaWorks (NZ) for the same period of fiscal 2004 because it was
wholly owned to July 2004.
NET EARNINGS FROM CONTINUING OPERATIONS. Our net earnings from continuing
operations for the nine months ended May 31, 2005 were $123 million, or $0.69
per share, compared to net earnings of $135 million, or $0.76 per share, for the
nine months ended May 31, 2004.
DISCONTINUED OPERATIONS. On April 29, 2005, the Company announced an agreement
to sell certain assets and operations which comprise its film and television
program operations for net proceeds of approximately $28 million, subject to
closing adjustments. The transaction is expected to close in July 2005. Net loss
from discontinued operations was $6 million for the nine months ended May 31,
2005 compared to $210 million for the same operations for the nine months ended
May 31, 2004.
NET EARNINGS (LOSS). Our net earnings for the nine months ended May 31, 2005
were $116 million or $0.66 per share compared to a net loss of $75 million or
($0.43) per share for the same period in fiscal 2004.
SEGMENTED RESULTS
PUBLISHING AND ONLINE
- - REVENUE. Publishing and Online revenues for the nine months were $939
million compared to revenues of $913 million in same period the previous
year, an increase of 3%. Advertising revenues increased by 4% for the nine
months reflecting increased rates as well as increased insert volumes.
While circulation numbers declined by 4%, circulation revenue remained
constant as a result of higher average per copy prices. Circulation
comprised approximately 20% of total revenues for the newspaper group for
the first nine months for fiscal 2005 and 2004.
- - 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 $24 million, or 4%, to $723
million from $699 million. This reflected normal salary increases, the
increased cost of management compensation and increases in administrative
costs. Newsprint ink and outside printing expenditures were 3% less in the
nine months ended May 31, 2005 than in the same period the prior year,
reflecting a decrease in our cost of newsprint as well as a reduction in
newsprint usage.
- - SEGMENT OPERATING PROFIT. Operating profit increases for the nine months
ended May 31, 2005 were largely offset by the $3 million in losses related
to Dose and Metro, our publications start up operations. Segment operating
profit for our Publishing and Online operations, including Dose and Metro,
of $215 million were 1% higher than the $214 million for the same period
of fiscal 2004.
CANADIAN TELEVISION
- - REVENUES. In total, revenues from our Canadian Television operating
segment of $565 million were $5 million or 1% higher than the $560
CWG 2005 INFORM : ENLIGHTEN : ENTERTAIN
10
million recorded in the same period in fiscal 2004. This reflected a 1%
increase in airtime revenues as well as a 24% increase in subscriber
revenues from our specialty television operations.
Our specialty channels achieved subscriber growth of 15% for the nine
months, increasing our total subscriber base to 8.5 million subscribers
for the nine months ended May 31, 2005 compared to 7.4 million for the
same period in fiscal 2004.
- - OPERATING EXPENSES. Operating expenses (including selling, general and
administrative expenses) of $427 million at Canadian Television operations
were $14 million, or 3%, higher than in the same period the prior year
primarily the result of increased promotion and program amortization
expenses and compensation cost increases associated with our new
management structure including $5 million in employee severance costs
related to staffing changes.
- - SEGMENT OPERATING PROFIT. Canadian television segment operating profit of
$138 million for the nine months was 6% less than the $147 million for the
same period in fiscal 2004.
AUSTRALIAN TELEVISION
- - REVENUES. Segment revenues increased by 9% to $596 million for the nine
months ended May 31, 2005, from $546 million during the same period in the
prior year. In local currency, revenues increased 13%, reflecting TEN's
strong rating performance in a tough television advertising environment.
- - OPERATING EXPENSES. Segment operating expenses increased 5% to $364
million for the nine months ended May 31, 2005 compared to $348 million
for the same period in fiscal 2004, reflecting increased programming
costs.
- - SEGMENT OPERATING PROFIT. Segment operating profit increased by 17% to
$232 million for the nine months, compared to $198 million in the same
period in fiscal 2004.
NEW ZEALAND TELEVISION
- - REVENUES. Revenues from television broadcast operations for New Zealand's
3 and C4 television networks increased by 14% to $90 million for the nine
months from $79 million for the same period in fiscal 2004. In local
currency, revenues increased by 12%, reflecting improved audience share in
a strong advertising environment. The strong New Zealand currency
contributed an additional 2% on translation to Canadian dollars.
- - OPERATING EXPENSES. Operating expenses increased by 10% to $67 million, as
a result of the 2% increase on translation of New Zealand dollars to
Canadian dollars as well as increased programming expenses, which includes
costs related to the development and start up of a new weeknight current
affairs program - Campbell Live - and the re-launch of 3 News.
- - SEGMENT OPERATING PROFIT. New Zealand 3 and C4 produced segment operating
profit of $23 million, a $5 million or 29% increase from the results
recorded in the same period in fiscal 2004.
IRISH TELEVISION
Our 45% share of revenues at TV3 in the Republic of Ireland increased by 12% to
$30 million compared to the same period in fiscal 2004. Our share of TV3's
segment operating profit increased by $3 million to $12 million as compared to
the same period in fiscal 2004.
NEW ZEALAND RADIO
CanWest RadioWorks continued its steady performance, increasing revenues for the
nine months ended May 31, 2005. Revenue grew by 9% to $71 million from $65
million during the nine months of the previous year, reflecting a 7% increase in
revenue in local currency and an additional 2% increase as a result of currency
translation. Segment operating profit remained flat for the first nine months,
due to the significant start up costs associated with Radio Live and the
rebranding costs related to the launch of Kiwi FM.
OUTDOOR ADVERTISING
Segment revenues increased by $23 million, or 41%, to $80 million for the nine
months ended May 31, 2005 from $57 million for the same period in fiscal 2004.
This increase reflected 46% growth in revenue in local currency. Our segment
operating profit from TEN's Outdoor Advertising operations increased by $8
million to $18 million as compared to the same period in fiscal 2004 driven by
Eye Corp.'s acquisition of the remaining 50% of Eye Shop as well as stronger
airport advertising revenues.
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
11
MD&A
JULY 13, 2005
RESTATED QUARTERLY FINANCIAL RESULTS
As a result of the adoption of AcG-15 effective September 1, 2004 we have
consolidated the results of TEN Group on a retroactive basis. As a result, we
have restated our quarterly financial results for the year ended August 31,
2004 as follows:
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------
NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31,
2003 2004 2004 2004 TOTAL
$000 $000 $000 $000 $000
Revenue 800,604 661,865 783,941 664,990 2,911,400
Operating expenses 386,324 357,881 413,285 380,976 1,538,466
Selling, general and administrative expenses 163,881 160,489 168,289 160,732 653,391
Restructuring expenses - - - 2,445 2,445
--------- -------- ------- -------- ----------
Operating income before amortization 250,399 143,495 202,367 120,837 717,098
Amortization of intangibles 4,538 4,550 4,552 4,542 18,182
Amortization of property, plant, equipment and other 23,877 24,210 25,369 20,646 94,102
--------- -------- ------- -------- ----------
Operating income 221,984 114,735 172,446 95,649 604,814
Interest expense (87,281) (86,221) (85,341) (79,685) (338,528)
Interest income 4,700 1,251 291 2,899 9,141
Amortization of deferred financing costs (2,118) (1,899) (2,043) (2,081) (8,141)
Interest rate and foreign currency swap gains (losses) 1,320 (17,423) 7,004 (101,759) (110,858)
Foreign exchange gains (losses) 4,690 436 (1,360) 41,207 44,973
Investment gains and losses net of write-down 249 (3,063) 354 113,746 111,286
Dividend income 1,415 - 2,323 - 3,738
--------- -------- ------- -------- ----------
144,959 7,816 93,674 69,976 316,425
Provision for (recovery of) income taxes 30,450 (2,554) 19,290 (9,701) 37,485
--------- -------- ------- -------- ----------
Earnings before the following 114,509 10,370 74,384 79,677 278,940
Minority interests (31,254) (14,345) (16,691) (18,057) (80,347)
Interest in earnings (loss) of equity accounted
affiliates (163) (186) (207) 3,285 2,729
Realized currency translation adjustments 500 2,626 (5,011) (5,138) (7,023)
--------- -------- ------- -------- ----------
Net earnings (loss) from continuing operations 83,592 (1,535) 52,475 59,767 194,299
Earnings (loss) from discontinued operations (2,096) (209,742) 1,862 2,199 (207,777)
--------- -------- ------- -------- ----------
Net earnings (loss) for the period 81,496 (211,277) 54,337 61,966 (13,478)
========= ======== ======= ======== ==========
Earnings (loss) per share from continuing operations:
Basic $ 0.47 ($ 0.01) $ 0.30 $ 0.34 $ 1.10
Diluted $ 0.47 ($ 0.01) $ 0.30 $ 0.34 $ 1.10
Earnings (loss) per share:
Basic $ 0.46 ($ 1.19) $ 0.31 $ 0.35 ($0.08)
Diluted $ 0.46 ($ 1.19) $ 0.31 $ 0.35 ($0.08)
CWG 2005 INFORM : ENLIGHTEN, ENTERTAIN
12
RESTATED QUARTERLY OPERATING SEGMENT RESULTS
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------
NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31,
2003 2004 2004 2004 TOTAL
$000 $000 $000 $000 $000
REVENUE
Publishing and Online-Canada 315,101 286,302 311,419 280,807 1,193,629
------- ------- ------- ------- ---------
Television
Canada 191,252 160,977 207,483 130,590 690,302
Australia - Network TEN 212,960 144,106 188,766 175,415 721,247
New Zealand 30,381 21,563 26,610 29,682 108,236
Ireland 9,860 7,759 9,423 7,110 34,152
------- ------- ------- ------- ---------
Total Television 444,453 334,405 432,282 342,797 1,553,937
------- ------- ------- ------- ---------
Radio - New Zealand 21,358 23,108 20,833 21,418 86,717
Outdoor - Australia 19,692 18,050 19,407 19,968 77,117
------- ------- ------- ------- ---------
Total 800,604 661,865 783,941 664,990 2,911,400
======= ======= ======= ======= =========
SEGMENT OPERATING PROFIT
Publishing and Online-Canada 83,153 56,573 74,269 53,348 267,343
------- ------- ------- ------- ---------
Television
Canada 56,170 29,958 61,322 (20) 147,430
Australia - Network TEN 92,350 49,787 55,491 58,405 256,033
New Zealand 9,861 3,052 4,748 5,630 23,291
Ireland 3,724 2,162 2,993 1,712 10,591
------- ------- ------- ------- ---------
Total Television 162,105 84,959 124,554 65,727 437,345
------- ------- ------- ------- ---------
Radio - New Zealand 7,087 7,930 5,927 6,544 27,488
Outdoor - Australia 4,367 2,257 3,737 4,116 14,477
Corporate and other (6,313) (8,224) (6,120) (6,453) (27,110)
------- ------- ------- ------- ---------
250,399 143,495 202,367 123,282 719,543
Restructuring expenses - - - (2,445) (2,445)
------- ------- ------- ------- ---------
Total 250,399 143,495 202,367 120,837 717,098
======= ======= ======= ======= =========
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
13
MD&A
JULY 13, 2005
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 the remainder of 2005, our major non-operating cash requirements
include expected capital expenditures of approximately $18 million, and swap
recouponing payments if required as discussed below in swap transactions. 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 May 31, 2005, we had cash on hand of
$77 million including $21 million of TEN Group cash and $7 million of CanWest
MediaWorks (NZ) cash. We generated cash flows from operating activities of
continuing operations of $79 million and $273 million for the three and nine
months ended May 31, 2005, respectively.
The Company is expecting to receive net proceeds of approximately $28
million, subject to closing adjustments related to the sale of its film and
television program operations. The net proceeds will be used to reduce the
outstanding balance of our senior credit facility.
In addition to the above sources of liquidity, we had unused borrowing
capacity under our revolving credit facility of $386 million at May 31, 2005.
TEN Group had unused borrowing capacity of A$318 million under its credit
facilities.
USES OF FUNDS
CAPITAL EXPENDITURES
For the three and nine months ended May 31, 2005 our capital expenditures were
$17 million and $56 million respectively. In the remainder of fiscal 2005, we
expect to make additional capital expenditures of approximately $18 million.
This amount includes a $6 million investment in a new broadcast traffic and
sales management system, $5 million investment to upgrade other broadcast
systems, and approximately $3 million to expand a print facility 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 of
$600 million. In addition, there are prescribed minimums with individual
counterparties. Under these agreements, which have two-way recouponing
provisions, we were not required to make any recouponing payments related to
overhanging swaps for the three months ended May 31, 2005. However for the nine
months ended May 31, 2005 we have made net recouponing payments of $37 million.
This payment related to the overhanging swap and accordingly was reflected in
cash flows from operating activities. Further strengthening of the Canadian
currency and/or declining interest rates may result in further prepayment
requirements.
DISTRIBUTIONS
Our New Zealand and Australian operations make twice annual distributions. Our
New Zealand operations distributed a total of $8 million in May 2005, $6 million
to us and $2 million to other shareholders, New Zealand's next scheduled
distribution will be in November 2005 and will be funded by cash flow from
operating activities. The TEN Group distributed a total of $147 million in
December 2004, $99 million to us and $48 million to other shareholders. In July
2005, subsequent to our quarter end, TEN made a second distribution of $80
million, $45 million to us and $35 million to other shareholders.
DEBT
GENERAL
At May 31, 2005, we had total outstanding consolidated debt of $3,168 million
compared to debt of $3,234 million as at August 31, 2004. This included $659
million (August 31, 2004 - $778 million) advanced under our credit facility.
Senior debt of our consolidated subsidiaries consisted of $363 million (August
31, 2004 $361 million) of TEN Group debt, $175 million (August 31, 2004 - $173
million) of CanWest Media Works (NZ) debt and $14 million (August 31, 2004 - $22
million) in TV3 Ireland debt. In addition, we had $1,943 million (August 31,
2004 - $1,884 million) in unsecured and subordinated notes. During the nine
months ended May 31, 2005 we made net repayments of our senior credit facility
of $119 million, funded primarily through the receipt of $99 million in cash
distributions from TEN Group. TEN Group's debt decreased by A$6 million,
reflecting the payment of distributions to us and
CWG 2005 INFORM : ENLIGHTEN, ENTERTAIN
14
$48 million to its other shareholders offset by cash flow from operations. Our
subordinated debt increased by $40 million related to the refinancing of our 12
1/8% Junior Subordinated Notes as described below and $22 million as a result in
interest paid in kind prior to the refinancing. For additional information
concerning our indebtedness see note 9 to our audited consolidated financial
statements for the year ended August 31, 2004 and note 5 to our interim
consolidated financial statements for the nine months ended May 31, 2005.
CREDIT FACILITY
Total credit available under the CanWest Media senior secured credit facility
was $1,072 million as of May 31, 2005, of which we had drawn $659 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 the CanWest Media credit facility was
5.2 times cash flow for debt covenant purposes for the twelve months ended May
31, 2005, 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.
The provisions of our senior secured 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. In fiscal 2004 we made a voluntary prepayment,
the result of which we were not required to make a prepayment under this
provision in respect of fiscal 2005.
REFINANCING OF JUNIOR SUBORDINATED NOTES
In November 2004, we successfully completed the refinancing of our 12 1/8%
Fixed Rate 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 $904 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 issuance of the new notes was recorded at their fair value
at November 18, 2004 of $944 million. The premium recorded over the fair value
of the notes will be amortized to income over the life of the notes resulting in
reduced cash interest expense. This refinancing is expected to result in
reduced cash interest expense of approximately $40 million per year. The new
notes carry an interest rate coupon of 8%, which will be settled in cash on a
semi-annual basis. We entered into cross currency interest rate swaps related to
the new notes to pay floating rates which are currently approximately 7% on
C$908 million.
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 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. In
addition, we have converted our senior unsecured notes and senior subordinated
notes from a fixed rate to floating rates by entering into interest rate
swaps. We have also fixed the interest rate on our Canadian dollar floating
rate senior secured credit facility by entering into interest rate swaps.
As of May 31, 2005, we have entered into interest rate swap contracts to
pay fixed rates of interest (at an average rate of 6.5%) and receive floating
rates of interest (at an average rate of 2.6%) on a notional amount of $448
million. We have entered into pay fixed receive floating cross currency swap
contracts at an average rate of 6.7% on a notional amount of $1,051 million and
receive floating rates of 5.5% on a notional amount of US$679 million. We have
also entered into pay floating receive fixed cross currency swap contracts at
an average floating rate of 7.0% on a notional amount of $1,861 million and an
average fixed rate of 8.8% on a notional amount of US$1,386 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 $18.6 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
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
15
MD&A
JULY 13, 2005
contracts were closed out at a market price on the balance sheet date. As of May
31, 2005, our outstanding swap contracts were in a net unrealized loss position
of $348 million, including $50 million related to TEN Group.
Net unrealized gains related to foreign exchange on U.S. dollar
denominated debt amounted to $286 million as at May 31, 2005.
As of May 31, 2005, 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 $4.5 million deterioration 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 $2.5 million
change in the mark to market value of the cross currency swaps.
We are also exposed to foreign exchange and interest rate risk as a result
of debt and related swaps issued by CanWest MediaWorks (NZ), TV3 Ireland and TEN
Group. As at May 31, 2005, our share of TV3 Ireland debt was $13.6 million
((Euro) 8.8 million). TV3 has entered into swaps of (Euro)10 million that
swapped to a fixed rate (at an average rate of 3.23%). As at May 31, 2005,
CanWest MediaWorks (NZ)had $174.9 million (NZ$198 million) of debt. NZ$180
million of this debt was swapped to a fixed rate (at an average rate of 6.48%
until 2006), and the remainder of the debt bears interest at a floating rate.
As at May 31, 2005, TEN Group had long term debt of $362.7 million
(A$382.2 million). TEN Group has entered into pay floating receive fixed cross
currency swap contracts at an average floating rate of 7.1% on a notional
amount of A$210.1 million and receive fixed rates on a notional amount of
US$125 million. TEN Group has also entered into interest rate swap contracts to
pay fixed rates of interest (at an average rate of 5.72%) on a notional amount
of A$275.0 million. Based on current swap contracts outstanding, the current
level of variable rate debt and consistent foreign exchange rates, we estimated
that a 1% increase in floating interest rates will increase annual interest
expense by approximately $1.7 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.
In addition to foreign exchange rate risk on foreign currency denominated
debt, we are also exposed to some currency risk as a result of having
investments and carrying on business in currencies other than the Canadian
dollar. All of our foreign operations are self-sustaining, and therefore foreign
exchange gains and losses are deferred as a separate component of shareholders'
equity. We translate the earnings of equity accounted subsidiaries and
affiliates at the average rate of translation of the relevant period. We
recognize deferred translation gains and losses as appropriate upon dispositions
and/or distributions from such operations. Our primary currency exposures are to
variations in the Australian and New Zealand currencies relative to the Canadian
dollar as a result of our investment in TEN Group and our New Zealand television
and radio operations.
INDUSTRY RISKS AND UNCERTAINTIES
The Company's risks and uncertainties have not materially changed from those
described in the Company's annual filings.
RELATED PARTY TRANSACTIONS
Senior subordinated notes held by CanWest Communications Corporation, our parent
company, totaled $52.6 million (US$41.9 million) at May 31, 2005 (as at August
31, 2004 - $55.0 million - US$41.9
CWG 2005 INFORM : ENLIGHTEN, ENTERTAIN
16
million). This debt, issued in May 2001, matures May 15, 2011 and bears interest
at 10.625%. Interest expense related to this debt totaled $1.5 million and $4.5
million for the three and nine months ended May 31, 2005 (2004 - three months -
$1.5 million, nine months - $4.7 million).
A company which is an affiliate of CanWest Communications Corporation owns
CanWest Global Place in Winnipeg, Manitoba, a building in which the Company is a
tenant. Rent paid to this company for the three and nine months ended May 31,
2005 amounted to $0.3 million and $0.8 million, respectively (2004 - three
months $0.3 million, nine months $0.8 million).
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
Following is a reconciliation of operating income before amortization, a
non-GAAP measure, to net earnings, its most closely comparable GAAP measure.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- --------------------------
MAY 31, 2005 MAY 31, 2004 MAY 31, 2005 MAY 31, 2004
$000 $000 $000 $000
Revised(1) Revised(1)
------------ ------------ ------------ ------------
Net earnings (loss) 52,718 54,337 116,329 (75,444)
Amortization 29,902 29,921 87,301 87,096
Interest and other financing expenses 74,680 80,380 281,541 274,002
Investment gains, losses and interest and dividend income (1,010) (2,968) (2,441) (7,520)
Foreign exchange (gains) losses (4,263) 1,360 (28,706) (3,766)
Loss on debt extinguishment - - 43,992 -
Provision for income tax expense 18,127 19,290 54,186 47,186
Interest in earnings of equity accounted affiliates and other (504) 207 (1,551) 556
Minority interests 22,251 16,691 78,626 62,290
Realized currency translation adjustments (392) 5,011 456 1,885
Loss (earnings) from discontinued operations 6,105 (1,862) 6,182 209,976
------- ------- ------- -------
Operating income before amortization 197,614 202,367 635,915 596,261
======= ======= ======= =======
(1) See note 1 to our interim consolidated financial statements.
OTHER
Share Data
As at July 13, 2005 we had the following number of shares outstanding:
Multiple voting shares 76,785,976
Subordinate voting shares 98,803,851
Non-voting shares 1,749,092
Our AIF is filed on SEDAR at www.sedar.com.
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
17
PricewaterhouseCoopers LLP
[PRICEWATERHOUSECOOPERS LOGO] Chartered Accountants
One Lombard Place
Suite 2300
Winnipeg Manitoba
Canada R3B 0X6
Telephone +1 (204) 926 2400
Facsimile +1 (204) 944 1020
July 13, 2005
TO THE AUDIT COMMITTEE OF CANWEST GLOBAL COMMUNICATIONS CORP.
In accordance with our engagement letter dated March 22, 2005, we have reviewed
the accompanying interim consolidated balance sheet of CANWEST GLOBAL
COMMUNICATIONS CORP. (the "Company") as of May 31, 2005 and the related interim
consolidated statements of earnings, retained earnings and cash flows for the
three and nine months period then ended. These interim consolidated financial
statements are the responsibility of the Company's management.
We performed our review in accordance with Canadian generally accepted standards
for a review of interim financial statements by an entity's auditor. Such an
interim review consists principally of applying analytical procedures to
financial data, and making enquiries of, and having discussions with, persons
responsible for financial and accounting matters. An interim review is
substantially less in scope than an audit, whose objective is the expression of
an opinion regarding the interim financial statements; accordingly, we do not
express such an opinion. An interim review does not provide assurance that we
would become aware of any or all significant matters that might be identified in
an audit.
Based on our review, we are not aware of any material modification that needs to
be made for these interim consolidated financial statements to be in accordance
with Canadian generally accepted accounting principles.
This report is solely for the use of the Audit Committee of the Company to
assist it in discharging its regulatory obligation to review these interim
consolidated financial statements, and should not be used for any other purpose.
Any use that a third party makes of this report, or any reliance or decisions
made based on it, are the responsibility of such third parties. We accept no
responsibility for loss or damages, if any, suffered by any third party as a
result of decisions made or actions taken based on this report.
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and the other member firms of PricewaterhouseCoopers International Limited, each
of which is a separate and independent legal entity.
18
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(UNAUDITED)
(In thousands of Canadian dollars except as otherwise noted)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2005 2004 2005 2004
Revised Revised
(note 1) (note 1)
Revenue 809,722 783,941 2,371,005 2,246,410
Operating expenses 428,302 413,285 1,206,468 1,157,490
Selling, general and administrative expenses 183,806 168,289 528,622 492,659
---------- ---------- --------- ----------
197,614 202,367 635,915 596,261
Amortization of intangibles 4,988 4,552 14,885 13,640
Amortization of property, plant and equipment 23,623 24,088 68,628 69,786
Other amortization 1,291 1,281 3,788 3,670
---------- ---------- --------- ----------
Operating income 167,712 172,446 548,614 509,165
Interest expense (59,003) (85,341) (193,337) (258,843)
Interest income 725 291 2,210 6,242
Amortization of deferred financing costs (3,093) (2,043) (8,414) (6,060)
Interest rate and foreign currency swap gains (losses) (12,584) 7,004 (79,790) (9,099)
Foreign exchange gains (losses) 4,263 (1,360) (28,706) 3,766
Investment gains, losses and write-downs (note 6) 285 354 231 (2,460)
Loss on debt extinguishment (note 5) - - (43,992) -
Dividend income - 2,323 - 3,738
---------- ---------- --------- ----------
98,305 93,674 254,228 246,449
Provision for income taxes (note 4) 18,127 19,290 54,186 47,186
---------- ---------- --------- ----------
Earnings before the following 80,178 74,384 200,042 199,263
Minority interests (22,251) (16,691) (78,626) (62,290)
Interest in earnings (loss) of equity accounted
affiliates 504 (207) 1,551 (556)
Realized currency translation adjustments 392 (5,011) (456) (1,885)
---------- ---------- --------- ----------
NET EARNINGS FROM CONTINUING OPERATIONS 58,823 52,475 122,511 134,532
Earnings (loss) from discontinued operations (note 7) (6,105) 1,862 (6,182) (209,976)
---------- ---------- --------- ----------
NET EARNINGS (LOSS) FOR THE PERIOD 52,718 54,337 116,329 (75,444)
========== ========== ========= ==========
EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
BASIC $ 0.33 $ 0.30 $ 0.69 $ 0.76
DILUTED $ 0.33 $ 0.30 $ 0.69 $ 0.76
EARNINGS (LOSS) PER SHARE:
BASIC $ 0.30 $ 0.31 $ 0.66 ($0.43)
DILUTED $ 0.30 $ 0.31 $ 0.65 ($0.43)
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
(In thousands of Canadian dollars)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2005 2004 2005 2004
Revised (note 1) Revised (note 1)
------- ---------------- ------- ----------------
RETAINED EARNINGS - BEGINNING OF YEAR, AS REVISED 403,612 223,698 340,001 353,479
------- ------- ------- -------
Net earnings (loss) for the period 52,718 54,337 116,329 (75,444)
------- ------- ------- -------
RETAINED EARNINGS - END OF PERIOD 456,330 278,035 456,330 278,035
======= ======= ======= =======
The notes constitute an integral part of the consolidated financial statements.
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
19
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands of Canadian dollars)
AS AT AS AT
MAY 31, AUGUST 31,
2005 2004
Revised (note 1)
ASSETS
CURRENT ASSETS
Cash 77,475 97,271
Accounts receivable 571,857 488,418
Inventory 12,480 13,449
Investment in film and television programs 232,145 194,099
Future income taxes 5,793 6,166
Other assets 24,138 22,574
Assets of discontinued operations (note 7) 52,496 89,094
--------- ---------
976,384 911,071
Other investments 23,119 26,830
Investment in film and television programs 27,184 35,157
Property, plant and equipment 697,015 708,311
Future income taxes 13,176 5,580
Other assets 214,018 144,141
Intangible assets 1,175,593 1,182,145
Goodwill 2,477,693 2,465,248
Assets of discontinued operations (note 7) 1,587 38,376
--------- ---------
5,605,769 5,516,859
========= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable 138,129 158,461
Accrued liabilities (note 3) 262,356 240,502
Income taxes payable 36,710 27,419
Film and television program accounts payable 95,624 65,270
Deferred revenue 40,439 34,218
Future income taxes 6,072 6,072
Current portion of long term debt 22,285 33,204
Liabilities of discontinued operations (note 7) 18,962 69,716
--------- ---------
620,577 634,862
Long term debt and related foreign currency swap liability (note 5) 3,145,836 3,201,051
Interest rate and foreign currency swap liability 137,363 120,341
Other accrued liabilities 150,287 164,449
Future income taxes 135,598 139,280
Minority interests 112,755 77,456
--------- ---------
4,302,416 4,337,439
--------- ---------
Contingencies (note 12)
SHAREHOLDERS' EQUITY
Capital stock 849,330 848,628
Contributed surplus 7,420 4,612
Retained earnings 456,330 340,001
Cumulative foreign currency translation adjustments (9,727) (13,821)
--------- ---------
1,303,353 1,179,420
--------- ---------
5,605,769 5,516,859
========= =========
The notes constitute an integral part of the consolidated financial statements.
20
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands of Canadian dollars)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2005 2004 2005 2004
Revised Revised
(note 1) (note 1)
CASH GENERATED (UTILIZED) BY:
OPERATING ACTIVITIES
Net earnings from continuing operations for the period 58,823 52,475 122,511 134,532
Items not affecting cash
Amortization 32,995 31,964 95,715 93,156
Non-cash interest expense 2,710 25,059 29,233 71,593
Future income taxes 4,711 6,791 (12,655) 6,857
Realized currency translation adjustments (392) 5,011 456 1,885
Interest rate & foreign currency swap losses (gains) net of
settlements 7,597 (7,004) 24,919 9,099
Loss on debt extinguishment - - 43,992 -
Investment gains, losses and write-downs (285) (354) (231) 2,460
Amortization and write-down of film and television programs 1,546 3,875 6,856 5,074
Pension expense 3,646 3,241 9,613 7,736
Minority interests 22,251 16,691 78,626 62,290
Other 1,038 1,191 (1,409) (3,182)
Investment in film and television programs - - (4,178) (14,077)
-------- ------ -------- -------
134,640 138,940 393,448 377,423
Changes in non-cash operating accounts (61,692) (86,937) (126,699) (167,825)
-------- ------ -------- -------
Cash flows from operating activities of continuing operations 72,948 52,003 266,749 209,598
Cash flows from operating activities of discontinued
operations 10,350 23,959 34,806 13,733
-------- ------ -------- -------
Cash flows from operating activities 83,298 75,962 301,555 223,331
-------- ------ -------- -------
INVESTING ACTIVITIES
Other investments 134 (42) 426 (168)
Investment in broadcast licences (722) - (2,265) (5,813)
Acquisition (note 2) - - (12,493) -
Proceeds from sales of other investments - - 2,171 168
Proceeds from sale of property, plant and equipment - - 3,383 7,426
Purchase of property, plant and equipment (16,964) (15,970) (56,101) (45,776)
-------- ------ -------- -------
(17,552) (16,012) (64,879) (44,163)
-------- ------ -------- -------
FINANCING ACTIVITIES
Issuance of long term debt - - 161,321 -
Repayment of long term debt (25,880) (16,248) (290,549) (74,843)
Advances (repayments) of revolving facilities (82,953) (49,000) (4,947) (50,656)
Swap recouponing (payments) receipts 2,190 - (60,359) (27,957)
Issuance of share capital 143 - 702 1,789
Issuance of share capital of TEN Group - 1,353 5,317 14,310
Payment of dividends to minority interests (2,517) - (50,274) (60,446)
Financing activities from discontinued operations - (21,548) (18,354) (48,908)
-------- ------ -------- -------
(109,017) (85,443) (257,143) (246,711)
-------- ------ -------- -------
Foreign exchange gain on cash denominated in foreign
currencies (271) (326) 671 2,349
-------- ------ -------- -------
NET CHANGE IN CASH (43,542) (25,819) (19,796) (65,194)
CASH - BEGINNING OF PERIOD 121,017 99,828 97,271 139,203
-------- ------ -------- -------
CASH - END OF PERIOD 77,475 74,009 77,475 74,009
======== ====== ======== =======
The notes constitute an integral part of the consolidated financial statements.
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005
21
CANWEST GLOBAL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2005 (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 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. 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 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.
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:
BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in Canada for interim financial statements and
reflect all adjustments which are, in the opinion of management, necessary for
fair statement of the results of the interim periods presented. However, these
interim financial statements do not include all of the information and
disclosures required for annual financial statements. The accounting policies
used in the preparation of these interim financial statements are the same as
those used in the most recent annual financial statements except as indicated
below. These interim statements should be read in conjunction with the most
recent annual financial statements of the Company. All amounts are expressed in
Canadian dollars unless otherwise noted.
CHANGES IN ACCOUNTING POLICIES
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. Accordingly, 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 increase
sales and operating expenses by $11.7 million and $34.7 million for the three
and nine months ended May 31, 2004 respectively. There was no impact on net
earnings.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Effective September 1, 2004, the Company has adopted the provisions of The
Accounting Standards Board of the Institute of Chartered Accountants of Canada,
AcG-15, Consolidation of Variable Interest Entities. The Company has determined
that it is the primary beneficiary of TEN Group, a variable interest entity.
Accordingly, as required by AcG-15 the Company has consolidated the results of
TEN Group. AcG-15 has been adopted on a retroactive basis with restatement of
prior periods. Previously, the Company accounted for its investment in TEN Group
using the equity method. As at May 31, 2005, the Company holds a 56.4% economic
interest in TEN Group (56.6% at August 31, 2004). The interest held by the 43.6%
minority is classified in minority interests.
In addition, as a result of the adoption of AcG-15 the Company determined that
an immaterial entity should not be consolidated in its results, and accordingly
the results of the entity have been excluded from the consolidation on a
retroactive basis. The effect of consolidating TEN Group and excluding the
subsidiary from the consolidation on the consolidated balance sheets for the
year ended August 31, 2004 is presented below.
PROPOSED ACCOUNTING POLICIES
The Accounting Standards Board of the Institute of Chartered Accountants
22
of Canada has concurrently issued CICA 3855, Financial Instruments - Recognition
and Measurement, CICA 3865, Hedges, and CICA 1530, Comprehensive Income, which
must be applied by the Company for fiscal years beginning on or after October 1,
2006. CICA 3855 prescribes when a financial asset, financial liability, or
non-financial derivative is to be recognized on the balance sheet and the
measurement of such amount. It also specifies how financial instrument gains and
losses are to be presented. CICA 3865 is applicable for designated hedging
relationships and builds on existing Canadian GAAP guidance by specifying how
hedge accounting is applied and what disclosures are necessary when it is
applied. CICA 1530 introduces new standards for the presentation and disclosure
of components of comprehensive income. Comprehensive income is defined as the
change in net assets of an enterprise during a reporting period from
transactions and other events and circumstances from non-owner sources. It
includes all changes in net assets during a period except those resulting from
investments by owners and distributions to owners. The Company is currently
considering the impacts of the adoption of such standards.
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005 23
CONSOLIDATED BALANCE SHEETS
The following is a reconciliation of the Company's consolidated balance sheets
reflecting the impact of the adoption of AcG-15.
AS PREVIOUSLY EFFECT OF THE ADOPTION AS
AS AT AUGUST 31, 2004 REPORTED OF AcG-15(1) REVISED
- ---------------------------------------------------------- ------------- ---------------------- ---------
ASSETS
CURRENT ASSETS
Cash 81,092 16,179 97,271
Accounts receivable 361,978 126,440 488,418
Distributions receivable from TEN Group 36,567 (36,567) -
Inventory 13,449 - 13,449
Investment in film and television programs 71,601 122,498 194,099
Future income taxes 6,166 - 6,166
Other assets 18,853 3,721 22,574
Assets of discontinued operations 89,094 - 89,094
--------- ------- ---------
678,800 232,271 911,071
Investment in TEN Group 39,929 (39,929) -
Other investments 17,393 9,437 26,830
Investment in film and television programs 33,467 1,690 35,157
Property, plant and equipment 631,720 76,591 708,311
Future income taxes - 5,580 5,580
Other assets 140,211 3,930 144,141
Intangible assets 928,787 253,358 1,182,145
Goodwill 2,373,442 91,806 2,465,248
Assets of discontinued operations 38,376 - 38,376
--------- ------- ---------
4,882,125 634,734 5,516,859
========= ======= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable 67,233 91,228 158,461
Accrued liabilities 199,143 41,359 240,502
Income taxes payable 17,697 9,722 27,419
Film and television program accounts payable 27,966 37,304 65,270
Deferred revenue 31,959 2,259 34,218
Future income taxes 6,072 - 6,072
Current portion of long term debt 31,712 1,492 33,204
Liabilities of discontinued operations 69,716 - 69,716
--------- ------- ---------
451,498 183,364 634,862
Long term debt and related foreign currency swap liability 2,840,591 360,460 3,201,051
Interest rate and foreign currency swap liability 120,341 - 120,341
Other accrued liabilities 131,360 33,089 164,449
Future income taxes 140,460 (1,180) 139,280
Minority interests 16,142 61,314 77,456
--------- ------- ---------
3,700,392 637,047 4,337,439
--------- ------- ---------
SHAREHOLDERS' EQUITY
Capital stock 848,628 - 848,628
Contributed surplus 4,612 - 4,612
Retained earnings 342,314 (2,313) 340,001
Cumulative foreign currency translation adjustments (13,821) - (13,821)
--------- ------- ---------
1,181,733 (2,313) 1,179,420
--------- ------- ---------
4,882,125 634,734 5,516,859
========= ======= =========
(1) The exclusion of the entity from the consolidation had the following
effect on the consolidated balance sheet as at August 31, 2004: decreased
cash by $444, decreased accounts receivable by $11, decreased other
investments by $5,367, decreased other assets by $10, decreased accounts
payable by $2,339, decreased future tax liability by $1,180 and decreased
retained earnings by $2,313. The remainder of the effect was the result of
consolidating TEN Group.
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.
24
INVESTMENT IN FILM AND TELEVISION PROGRAM RIGHTS AS AT AUGUST 31, 2004
- ------------------------------------------------ ---------------------
CURRENT LONG TERM
------- ---------
Broadcast rights 122,003 1,690
Other 495 -
------- -----
122,498 1,690
======= =====
PROPERTY, PLANT AND EQUIPMENT AS AT AUGUST 31, 2004
- ----------------------------- -----------------------------------------
COST ACCUMULATED AMORTIZATION NET
------- ------------------------ ------
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
------- -------- ------
198,255 (121,664) 76,591
======= ======== ======
INTANGIBLE ASSETS AS AT AUGUST 31, 2004
- ----------------- ------------------------------------------
COST ACCUMULATED AMORTIZATION NET
------- ------------------------ -------
Finite Life:
Site licences 27,485 2,445 25,040
Indefinite Life:
Broadcast licences 228,318 - 228,318
------- ----- -------
255,803 2,445 253,358
======= ===== =======
Site licences represent outdoor site leases. These licences are amortized on a
straight line basis over the term of the leases (approximately 20 to 40 years).
GOODWILL
As at August 31, 2004 goodwill of $54 million relates to the Australia - Outdoor
advertising segment, and $38 million relates to the Australia Network TEN
segment. There were no changes in the goodwill balances in the year ended August
31, 2004.
LONG TERM DEBT AS AT AUGUST 31, 2004
- -------------------------------- ---------------------
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 million (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. The
effective interest rate of this debt is approximately 5.7%.
(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. The
effective interest rate of this debt is approximately 6.4%.
COMMITMENTS
As at August 31, 2004 the TEN Group had the following commitments:
YEAR ENDED AUGUST 31 2005 2006 2007 2008 2009 THEREAFTER
- -------------------- ---- ---- ---- ---- ---- ----------
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
====== ====== ====== ====== ====== ======
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005 25
2. ACQUISITIONS
In September 2004, TEN Group acquired the remaining 50% interest in Eye
Shop not already owned for cash consideration of $12.5 million (A$13.4
million). The company's principal activity is the sale of advertising
space in shopping centres. A summary of the fair value of assets acquired
follows:
Current assets 4,059
Property, plant and equipment 5,071
Goodwill 8,152
------
Total assets 17,282
------
Current liabilities 1,223
------
Total liabilities 1,223
------
16,059
======
Consideration:
Cash 12,493
Carrying value of Eye Shop at date of acquisition 3,566
------
16,059
======
This purchase equation is preliminary and may be adjusted.
3. RESTRUCTURING ACCRUALS
For the nine months ended May 31, 2005, expenditures charged to the
restructuring accruals were $2.7 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, 2004 5,018 159 250 999 6,426
Expenditures (2,603) (143) - - (2,746)
------ ---- --- --- ------
Balance May 31, 2005 2,415 16 250 999 3,680
====== ==== === === ======
4. 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:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -----------------------------
MAY 31, MAY 31,
MAY 31, 2004 MAY 31, 2004
2005 Revised (note 1) 2005 Revised (note 1)
------- ---------------- ----------- ----------------
Income taxes at combined Canadian statutory rate of 35.20%
(2004 - 35.59%) 34,603 33,338 89,488 87,711
Non-taxable portion of capital (gains) and losses 861 - 2,461 -
Effect of valuation allowance on future tax assets - - 1,527 4,013
Effect of foreign income tax rates differing from Canadian
income tax rates (1,632) (10,112) (13,089) (34,036)
Tax costs of exchange note offer - - 5,697 -
Change in expected future tax rates - - (4,338) -
Large corporations tax 701 800 2,141 2,400
Effect of change in tax rates - - - 4,246
Effect of resolved uncertain tax positions and tax disputes - - (4,899) (7,000)
Non-deductible expenses and withholding taxes 354 1,221 1,692 4,810
Prior period temporary differences not previously tax effected - - (6,989)(1) -
Utilization of loss carry forwards not previously tax effected - (4,942) - (12,328)
Change in Australian tax consolidation legislation (17,710) - (17,710) -
Other 950 (1,015) (1,795) (2,630)
------- ------- ------- -------
Provision for income taxes 18,127 19,290 54,186 47,186
======= ======= ======= =======
26
(1) The provision for income taxes for the nine months ended May 31, 2005,
includes adjustments for prior period temporary differences not previously
tax effected aggregating to $7.0 million ($6.2 million future income tax,
and $0.8 million current income tax). The Company has determined these
adjustments are not material to the reported results, accordingly, the
adjustments have been included in the current year's earnings. This
adjustment has the effect of increasing basic and diluted earnings per
share for the nine months ended May 31, 2005, by $0.04 per share.
5. LONG TERM DEBT
AS AT AUGUST 31,
AS AT MAY 31, 2004
2005 Revised (note 1)
------------- ----------------
Senior Secured Credit facility 537,548 665,011
Senior unsecured notes 251,040 263,340
Senior subordinated notes 581,023 608,373
Senior subordinated notes - exchange offer (1) 989,086 -
Bank loan Australian $170,000 (Aug. 31, 2004 - Australian $175,000) 161,313 163,048
Senior unsecured notes US$125,000 (Aug. 31, 2004 - US$125,000) 156,376 164,585
Term and demand loan (Euro) 8,818 (Aug. 31, 2004 - (Euro) 13,678) 13,623 21,943
Term bank loan NZ$198,000 (Aug. 31, 2004 - NZ$200,000) 174,933 173,120
Junior subordinated notes - 881,116
Other 16,813 18,592
--------- ---------
2,881,755 2,959,128
Effect of foreign currency swaps 286,366 275,127
--------- ---------
Long term debt 3,168,121 3,234,255
Less portion due within one year (22,285) (33,204)
--------- ---------
Long term portion 3,145,836 3,201,051
========= =========
Except for the change noted in (1), the terms and conditions of the long
term debt are the same as disclosed in the August 31, 2004 consolidated
financial statements.
(1) On November 18, 2004, the Company completed 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 received US$1,240
principal amount of new notes in exchange for each US$1,000 of trust
notes. In addition, the Company completed 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 replaced 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$761.1 million) 8% senior subordinated notes. Also on November 18,
2004, 3815668 Canada Inc., a wholly-owned subsidiary of the Company and
the issuer of the above-mentioned notes, amalgamated with CanWest Media
Inc., which is also a wholly-owned subsidiary of the Company.
The issuance of the new notes was recorded at their fair value at November
18, 2004 of $944 million. The difference between the fair value of the new
notes and the book value of the junior subordinated notes together with
certain other costs of settling the debt totaling $44 million, was charged
to earnings as a loss on debt extinguishment.
The Company has entered into a US$761.1 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:$1.1932 until September 2012.
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. There are also
prescribed minimum liabilities with individual counterparties, which have
two-way recouponing provisions. The Company was required to make net
recouponing payments of $97.0 million in the nine months ended May 31,
2005 (2004 - $28.0 million), $36.6 million of this recouponing payment
related to overhanging swaps and accordingly was reflected in cash flows
from operating activities. Further strengthening of the Canadian currency
and/or declining interest rates may result in further payments to
counterparties.
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005 27
6. INVESTMENT GAINS, LOSSES AND WRITE-DOWNS
The Company has recorded the following investment gains and losses.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- --------------------------
MAY 31, 2005 MAY 31, 2004 MAY 31, 2005 MAY 31, 2004
------------ ------------ ------------ ------------
Gain on sale of investments - - 2,171 -
Dilution gain - TEN Group - 172 733 1,873
Other 285 182 (2,673) (4,333)
--- --- ------ ------
285 354 231 (2,460)
=== === ====== ======
7. DISCONTINUED OPERATIONS Following a period of poor financial performance
and continued weakness in international demand for its films and
television programs, the Company commenced a process to sell its Fireworks
Entertainment Division. As a result, the results of operations of
Fireworks were classified as earnings (losses) from discontinued
operations in the consolidated statements of earnings, the net cash flows
were classified as operating, investing and financing activities from
discontinued operations in the consolidated statements of cash flows and
the assets and liabilities were classified on the consolidated balance
sheets as assets and liabilities held for sale. Prior to the
classification as a discontinued operation, these results were reported
within the Canadian Entertainment segment. On April 29, 2005, a subsidiary
of the Company announced an agreement to sell certain assets and
operations which comprise its film and television program operations for
net proceeds of approximately $28 million, subject to closing adjustments.
The transaction is expected to close in July 2005. This transaction
excludes certain film and television program rights which the Company
intends to dispose by sale as well as certain receivables and payables
which will be settled by the company.
The loss from discontinued operations of Fireworks are summarized as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2005 2004 2005 2004
Revenue 8,809 28,064 46,026 93,864
======== ======= ======== ========
Earnings (loss) from discontinued operations before tax expense (5,958) 2,174 (5,180) (209,527)
Income tax expense 147 312 1,002 449
-------- ------- -------- --------
Earnings (loss) from discontinued operations (6,105) 1,862 (6,182) (209,976)
======== ======= ======== ========
Earnings (loss) from discontinued operations per share:
Basic ($ 0.03) $ 0.01 ($ 0.03) ($ 1.19)
Diluted ($ 0.03) $ 0.01 ($ 0.03) ($ 1.19)
-------- ------- -------- --------
The carrying value of the net assets related to be sold is as follows:
AS AT MAY 31, 2005 AS AT AUGUST 31, 2004
------------------ ---------------------
Receivables 38,659 85,269
Investment in film and television programs 13,521 -
Other current assets 316 3,825
------- -------
Total current assets 52,496 89,094
------- -------
Investment in film and television programs 1,587 37,971
Other assets - 405
------- -------
Total non current assets 1,587 38,376
------- -------
Debt (1) (4,250) (23,571)
Other current liabilities (14,712) (46,145)
------- -------
Total current liabilities (18,962) (69,716)
------- -------
Net assets 35,121 57,754
======= =======
(1) This included a three year revolving facility collateralized by certain
assets of Fireworks Entertainment Inc. This loan was fully repaid and
effective December 21, 2004, the facility has been terminated.
28
8. EARNINGS PER SHARE
The following table provides a reconciliation of the denominators used in
computing basic and diluted earnings per share.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Basic weighted average shares outstanding during the period 177,333,133 177,275,947 177,307,400 177,222,140
Dilutive effect of options 483,673 160,171 331,925 173,411
----------- ----------- ----------- -----------
Diluted weighted average shares outstanding during the period 177,816,806 177,436,118 177,639,325 177,395,551
=========== =========== =========== ===========
Options outstanding that would have been anti-dilutive 691,412 1,940,571 977,303 1,860,889
=========== =========== =========== ===========
9. STOCK BASED COMPENSATION
The Company adopted the fair value method of accounting for stock based
compensation on a prospective basis for options granted subsequent to
September 1, 2003, resulting in compensation expense and a credit to
contributed surplus for the nine months ended May 31, 2005, of $2.4
million (2004 - $0.8 million). The fair value of the options granted
during the nine months ended May 31, 2005, was estimated using the
Black-Scholes option pricing model with the assumptions of no dividend
yield (2004 - nil), an expected volatility of 42% (2004 - 52%), risk free
interest rates of 4.2% (2004 - 4.5% to 4.9%) and an expected life of 7
years (2004 - 7 to 9 years).
The total fair value of 1,177,500 stock options (2004 - 510,500)
that were granted by the Company during the nine months ended May 31,
2005, was $6.4 million (2004 - $3.9 million), a weighted average fair
value per option of $5.43 (2004 - $7.64). During the first nine months,
the Company agreed to issue approximately 187,000 shares, which vest in
two years, for no consideration. The fair value of the shares at the time
of issuance was $10.40 per share. During the nine months ended May 31,
2005, the Company recorded compensation expense of $0.4 million related to
these shares.
The following are proforma results reflecting the fair value based
method of accounting for stock based compensation for options issued prior
to September 1, 2003.
The proforma cost of share compensation expense for the three and
nine months ended May 31, 2005, would be $0.3 million and $0.9 million
respectively (2004 - $0.4 million and $1.2 million). A value of $1.9
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 three months ended May 31, 2005, would be $58.5 million, $0.33 and
$0.33 respectively (2004 - $52.1 million, $0.29, and $0.29), and nine
months ended May 31, 2005, would be $121.6 million, $0.69 and $0.68
respectively (2004 - $133.3 million, $0.75, and $0.75). The resulting
proforma net earnings (loss), basic and diluted earnings per share for the
three months ended May 31, 2005, would be $52.4 million, $0.30 and $0.29
respectively (2004 - $53.9 million, $0.30, and $0.30), and nine months
ended May 31, 2005, would be $115.4 million, $0.65 and $0.65 respectively
(2004 - ($76.6) million, ($0.43) and ($0.43)).
The Company's proforma disclosure does not apply to awards prior to
1996.
10. RELATED PARTY TRANSACTIONS
Senior subordinated notes held by CanWest Communications Corporation, the
Company's parent, totaled $52.6 million (US$41.9 million) at May 31, 2005
(August 31, 2004 - $55.0 million (US$41.9 million)). This debt matures on
May 15, 2011 and bears interest at 10.625%. For the nine months ended May
31, 2005, interest expense related to this debt totaled $4.5 million (2004
- $4.7 million).
An affiliate of CanWest Communications Corporation owns CanWest
Global Place in Winnipeg, Manitoba, a building in which the Company is a
tenant. For the nine months ended May 31, 2005, rent paid to this company
amounted to $0.8 million (2004 - $0.8 million).
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005 29
11. EMPLOYEE BENEFIT PLANS
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. The measurement date for
our plans is June 30 of each year. Information regarding the components of
net periodic benefit cost for our defined benefit plans is presented
below:
POST RETIREMENT POST RETIREMENT
PENSION BENEFITS BENEFITS PENSION BENEFITS BENEFITS
---------------- ---------------- ------------------ ----------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------------- ------------------------------------
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
2005 2004 2005 2004 2005 2004 2005 2004
------- ------- ------- ------- -------- -------- ------- -------
Current service cost 4,443 4,254 333 315 13,329 12,760 998 945
Employee contributions (1,540) (1,515) - - (4,620) (4,544) - -
Accrued interest on benefits 6,108 5,610 587 583 18,323 16,829 1,760 1,750
Expected return on plan assets (5,056) (4,585) - - (15,167) (13,754) - -
Amortization of transitional
obligation 148 147 - - 443 442 - -
Amortization of past service costs 301 301 34 76 904 904 102 229
Amortization of net actuarial loss
(gain) 757 839 (14) 34 2,271 2,517 (41) 102
Changes in valuation allowance (18) (21) - - (53) (63) - -
----- ----- --- ----- ------ ------ ----- -----
Total pension and post retirement
benefit expense 5,143 5,030 940 1,008 15,430 15,091 2,819 3,026
===== ===== === ===== ====== ====== ===== =====
12. 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. A payment of $26.5 million was received in
November 2004 in satisfaction of this claim. The Company has also
requested arbitration related to a further $83.2 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. Hollinger
International disputes this claim and claims that it and certain of its
affiliates are owed $45 million by the Company. The outcome of this
arbitration is not determinable.
(b) The Company entered into a Management Services Agreement with The
Ravelston Corporation Limited ("Ravelston"). The agreement provided for
annual payments of $6.0 million. Under the terms of the agreement, either
party may terminate the agreement upon six months notice. In the event of
termination by Ravelston, a fee in the amount of $22.5 million is payable.
The agreement also provides that either party may terminate the agreement
upon notice to the other party if the other party, among other things,
ceases to carry on business or is insolvent. No payment is required by
CanWest where the agreement is terminated by CanWest pursuant to the
provisions related to insolvency.
In May 2005 Ravelston provided notice to terminate in six months,
immediately prior to filing under the Canada Creditors' Arrangement Act
("CCAA"). The Company, prior to Ravelston's CCAA filing, provided notice
of immediate termination of the agreement on the basis of Ravelston's
insolvency. However, the court has imposed a stay of proceedings such that
the termination of the agreement by CanWest has been stayed by the CCAA
Order.
The outcome of the issues raised by the termination of the agreement
by CanWest and the delivery of the notice of termination by Ravelston
cannot be determined at this time. Should the Company not be successful in
its termination of the agreement, the Company would be required to make an
additional payment of $25.5 million to Ravelston.
(c) 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.
(d) 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.
30
13. SEGMENTED INFORMATION
The Company operates primarily within the publishing, online, broadcasting
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. The 2004 results have been restated to reflect the
consolidation of TEN Group in accordance with AcG-15 (see note 1).
Segmented information in Canadian dollars is as follows:
SEGMENT SEGMENT
REVENUE OPERATING PROFIT REVENUE(1) OPERATING PROFIT
----------------- ----------------- -------------------- -------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------------ -----------------------------------------
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
2005 2004 2005 2004 2005 2004 2005 2004
Revised Revised Revised Revised
(note 1) (note 1) (note 1) (note 1)
------- -------- ------- ------- --------- --------- --------- --------
Publishing and Online - Canada 323,383 311,419 74,956 74,269 938,609 912,822 215,256 213,995
------- ------- ------- ------- --------- --------- --------- -------
Television
Canada 200,696 207,483 56,849 61,322 564,695 559,712 138,012 147,450
Australia-Network TEN 194,452 188,766 52,929 55,491 595,876 545,832 231,894 197,628
New Zealand 30,948 26,610 6,023 4,748 89,803 78,554 22,819 17,661
Ireland 10,386 9,423 4,288 2,993 30,168 27,042 11,542 8,879
------- ------- ------- ------- --------- --------- --------- -------
Total television 436,482 432,282 120,089 124,554 1,280,542 1,211,140 404,267 371,618
Radio - New Zealand 23,054 20,833 5,120 5,927 71,229 65,299 21,115 20,944
Outdoor - Australia 26,803 19,407 5,327 3,737 80,625 57,149 18,024 10,361
Corporate and other - - (7,878) (6,120) - - (22,747) (20,657)
------- ------- ------- ------- --------- --------- --------- -------
Total operating segments 809,722 783,941 197,614 202,367 2,371,005 2,246,410 635,915 596,261
======= ======= ======= ======= ========= ========= ========= =======
(1) Represents revenue from third parties. In addition the following segments
recorded intercompany revenues in the nine months ended May 31, 2005:
Canadian Television - $0.7 million (2004 - $0.7 million), Publishing and
Online - Canada - $0.6 million (2004 - nil).
The following table reconciles segment operating profit to net earnings (loss):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
MAY 31, 2005 MAY 31, 2004 MAY 31, 2005 MAY 31, 2004
Revised (note 1) Revised (note 1)
------------ ---------------- ------------ ----------------
Segment operating profit 197,614 202,367 635,915 596,261
Amortization of intangibles 4,988 4,552 14,885 13,640
Amortization of property, plant and equipment 23,623 24,088 68,628 69,786
Other amortization 1,291 1,281 3,788 3,670
------- ------- ------- -------
Operating income 167,712 172,446 548,614 509,165
Interest expense (59,003) (85,341) (193,337) (258,843)
Interest income 725 291 2,210 6,242
Amortization of deferred financing costs (3,093) (2,043) (8,414) (6,060)
Interest rate and foreign currency swap gains (losses) (12,584) 7,004 (79,790) (9,099)
Foreign exchange gains (losses) 4,263 (1,360) 28,706 3,766
Investment gains, losses and write-downs 285 354 231 (2,460)
Loss on debt extinguishment - - (43,992) -
Dividend income - 2,323 - 3,738
------- ------- ------- -------
98,305 93,674 254,228 246,449
Provision for income taxes 18,127 19,290 54,186 47,186
------- ------- ------- -------
Earnings before the following 80,178 74,384 200,042 199,263
Minority interests (22,251) (16,691) (78,626) (62,290)
Interest in earnings (loss) of equity accounted
affiliates 504 (207) 1,551 (556)
Realized currency translation adjustments 392 (5,011) (456) (1,885)
------- ------- ------- -------
Net earnings from continuing operations 58,823 52,475 122,511 134,532
Earnings (loss) from discontinued operations (6,105) 1,862 (6,182) (209,976)
------- ------- ------- -------
Net earnings (loss) for the period 52,718 54,337 116,329 (75,444)
======= ======= ======= =======
INTERIM REPORT TO SHAREHOLDERS FOR THE NINE MONTHS ENDED MAY 31, 2005 31
[CANWEST GLOBAL COMMUNICATIONS CORP. LOGO]
CORPORATE OFFICES
3100 CanWest Global Place
201 Portage Avenue
Winnipeg, Manitoba
Canada R3B 3L7
Telephone: (204) 956-2025
Fax: (204) 947-9841
www.canwestglobal.com