EXHIBIT 2
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2005 AND 2004
(UNAUDITED)
[PRICEWATERHOUSECOOPER LOGO]
PRICEWATERHOUSECOOPER LLP
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.
PRICEWATERHOUSECOOPER 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 separate and independent legal entity.
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,
2004 2004
MAY 31, REVISED MAY 31, REVISED
2005 (NOTE 1) 2005 (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)
The notes constitute an integral part of the consolidated financial statements.
2
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
AS AT
AS AT AUGUST 31,
MAY 31, 2004
2005 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.
3
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,
2004 2004
MAY 31, REVISED MAY 31, REVISED
2005 (NOTE 1) 2005 (NOTE 1)
Retained earnings - beginning of period,
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.
4
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,
2004 2004
MAY 31, REVISED MAY 31, REVISED
2005 (NOTE 1) 2005 (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 and 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 of 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.
5
CANWEST GLOBAL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2005 AND 2004
(UNAUDITED)
(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.
6
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
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.
7
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 AT AUGUST 31, 2004
EFFECT OF THE
AS PREVIOUSLY ADOPTION OF ACG-15
REPORTED (1) AS 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.
8
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.
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
-----------------------------------
ACCUMULATED
COST 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
-----------------------------------
ACCUMULATED
COST 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.
9
AS AT AUGUST 31,
LONG TERM DEBT 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
====== ====== ====== ====== ====== ======
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.
10
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,
2004 2004
MAY 31, REVISED MAY 31, REVISED
2005 (NOTE 1) 2005 (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
======= ====== ======= =======
(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.
11
5. LONG TERM DEBT
AS AT
AS AT AUGUST 31,
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 (1) - 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
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, including a premium of $36 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.
12
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.
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.
13
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 to be sold is as follows:
AS AT MAY 31, AS AT AUGUST 31,
2005 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 (4,250) (23,571) (1)
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.
14
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.
15
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).
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
plans is June 30 of each year. Information regarding the components of net
periodic benefit cost for the 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
======= ======= ======= ======= ======= ======= ======= =======
16
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.
17
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 OPERATING SEGMENT OPERATING
REVENUE PROFIT REVENUE (1) 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, MAY 31, MAY 31, MAY 31,
2005 2004 2005 2004
Revised Revised
(note 1) (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)
========= ======== ========= =======
18