EXHIBIT 3
CANWEST GLOBAL COMMUNICATIONS CORP.
INTERIM REPORT TO SHAREHOLDERS
FOR THE NINE MONTHS ENDED MAY 31, 2005
July 13, 2005
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.
1
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
2
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.
3
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 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.
4
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.
5
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. 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.
6
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.
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.
7
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
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.
8
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 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.
9
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 specialty 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.
10
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.
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.
11
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.
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.
12
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 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.
13
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.
14
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 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.
15
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.
16
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 163,881 160,489 168,289 160,732 653,391
expenses
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 83,592 (1,535) 52,475 59,767 194,299
operations
Earnings (loss) from discontinued (2,096) (209,742) 1,862 2,199 (207,777)
operations
------------ ------------ --------- ---------- -----------
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)
17
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
============ ============ ======= ========== =========
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.
18
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.
19
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 $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.
20
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.
21
The fair value of the swap contracts represents an estimate of the amount that
we would receive or pay if the contracts were closed out at a market price on
the balance sheet date. As of 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.
22
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 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, MAY 31, MAY 31, MAY 31,
2005 2004 2005 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.
23
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.