DRAFT JANUARY 5, 2006
CANWEST MEDIAWORKS INC.
INTERIM REPORT TO SHAREHOLDER
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005
DRAFT JANUARY 5, 2006
MANAGEMENT DISCUSSION AND ANALYSIS
January 12, 2006
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 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.
On September 1, 2005, we amalgamated with twelve related companies and continued
as CanWest MediaWorks Inc.
On October 13, 2005, CanWest MediaWorks Income Fund (the "Fund") completed its
$550 million initial public offering. On the completion of the Fund's initial
public offering, CanWest transferred its Canadian newspaper and online media
businesses, with the exception of the National Post, to CanWest MediaWorks
Limited Partnership (the "Limited Partnership") in exchange for units and
indebtedness of the Limited Partnership. Substantially all of the indebtedness
was repaid by the Limited Partnership using $517 million in net proceeds of the
Fund's initial public offering, together with $823 million advanced under the
Limited Partnership's new $1 billion credit facility. As a consequence, the Fund
now holds a 25.8% equity interest in the Limited Partnership, with CanWest
holding the remaining 74.2%. We continue to consolidate the results of the
operations of the Limited Partnership.
This interim discussion should be read in conjunction with the Management
Discussion and Analysis for the year ended August 31, 2005.
KEY FACTORS AFFECTING SEGMENT REVENUES AND OPERATING INCOME
Television
We have four television segments, one for each country in which we carry on such
operations. Our Canadian television segment includes our television networks in
Canada as well as specialty channels and two 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").
DRAFT JANUARY 5, 2006
We generate the majority of our television 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
revenues less predictable than our publishing revenues.
Canadian television advertising revenues decreased 7% for the three months ended
November 30, 2005, compared to the same period in fiscal 2005. Ratings have
improved since spring 2005 and we have consistently had 9 programs in the top
twenty programs in the Toronto market and 8 programs in the top twenty programs
in the Vancouver market. While we expect to benefit from the improvement in
ratings in fiscal 2007, revenues for the balance of fiscal 2006 are expected to
fall short of the comparable period last year.
Our Australian television segment continued to perform well in the three months
ended November 30, 2005 as it recorded its second highest revenue ever in a
quarter and maintained its number one ratings within its targeted demographics.
However, the first quarter of fiscal 2005 was Network TEN's best quarter ever
and as projected, the advertising market has softened in Australia and revenues
decreased compared to the same period in fiscal 2005, with local currency
revenues down 4%. The effect of the weakening local currency relative to the
Canadian dollar added to the decreases in revenue for the three months ended
November 30, 2005 by 3%. While the market continues to be short and difficult to
predict Network TEN believes the television advertising market in Australia will
show growth in calendar 2006. Our New Zealand television segment continued to
perform well in the three months ended November 30, 2005 as compared to the same
period in fiscal 2005 with local currency revenues up by 4%. The effect of the
weakening local currency relative to the Canadian dollar offset the revenue
increases by 3%, when the local currency is converted into Canadian dollars. We
expect revenues in local currencies to continue to increase during 2006 and that
increased ratings in our television networks will act as a buffer against any
economic softening which may occur during fiscal 2006. In our Irish television
segment, revenues in local currency for the three months ended November 30, 2005
showed growth of 18%, as compared to the same period last year due to the strong
advertising market within Ireland.
Our principal television operating expenses are programming costs and employee
salaries. For the three months ended November 30, 2005, segment operating
expenses increased by 9% 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 2006 as we
continue to invest in and promote our program schedule. For the three months
ended November 30, 2005, segment operating expenses in local currency, in
Australia, increased by 3% as compared to the same period last year, reflecting
increased programming costs. In New Zealand, segment operating expenses for the
three months in local currency increased by 17%, as compared to the same period
in the prior year as a result of increased programming costs due the focus on
local programming in the first three months of fiscal 2006. We expect that the
trend in the first three months of the fiscal year will reverse over the
remaining of fiscal 2006. For the three months ended November 30, 2005, our
Irish television segment operating expenses increased 5%, as compared to the
same period last year.
DRAFT JANUARY 5, 2006
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 linage of advertising sold
and the rates we charge. Circulation revenues are produced from home-delivery
subscriptions for our newspapers and single-copy sales 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.
Advertising and circulation revenues for the publishing and online operations
were 5% higher for the three months ended November 30, 2005 compared to the same
period in fiscal 2005. The increase in advertising revenues resulted from
advertising rate increases as well as from growth in online classified revenues,
which increased to $5 million for the three months ended November 30, 2005
compared to $2 million for the same period in fiscal 2005. Average daily
newspaper circulation in Canada has declined, although the decline in
circulation has been offset by an increase in the median sale price for a
weekday edition of a Canadian daily newspaper. We believe that the circulation
revenues of the publishing operations are reflective of this general trend in
the newspaper industry. Circulation revenues were unchanged for the three months
ended November 30, 2005 compared to the same period in fiscal 2005, as declines
in circulation volumes were offset by higher per copy prices. Circulation
revenues constitute approximately 18% of total first quarter publishing and
online revenues and approximately 20% on an annualized basis. For the remainder
of fiscal 2006, advertising revenues are expected to continue this trend,
primarily as a result of rate increases, growth in insert volumes as well as
from significant increases in online advertising. Circulation revenues are
expected to be consistent with 2005.
The principal operating expenses for publishing and online are salaries,
newsprint and distribution expenses. Operating expenses increased by 8% in the
three months ended November 30, 2005 compared to the same period in fiscal 2005,
primarily as a result of increased payroll and distribution costs. Newsprint
expense for the three months ended November 30, 2005 was unchanged as a result
of reduced volume offset by a small increase in newsprint price. For the
remainder of fiscal 2006, expenses are generally expected to increase
moderately. Salary costs will increase due to increases in staffing to support
certain key initiatives (e.g. increased online product offerings) and due to
normal wage escalation. Newsprint expense trend is to continue to increase when
compared to fiscal 2005 as result of increased newsprint pricing. Finally,
increased fuel prices and insert volumes are expected to result in increased
distribution costs.
DRAFT JANUARY 5, 2006
Radio
Our radio 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 segment revenues increased 3% in local currency for the
three months ended November 30, 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 weaker New Zealand currency decreased its
contribution by 3% for the three months. We expect revenues in local currencies
to continue to increase during 2006 and the impact of any economic softening to
be minimal.
The principal operating expenses in the radio segment are salaries, marketing
costs and music royalties. Segment operating expenses in local currency
increased 8% for the three months ended November 30, 2005 as compared to the
same period in fiscal 2005, due to the continued start up costs associated with
Radio Live. As a result of the weakened New Zealand currency, this increase was
only 3% for the three months on translation to Canadian dollars.
Outdoor Advertising
Our outdoor advertising segment consists of TEN Group's wholly-owned subsidiary,
Eye Corp. Eye Corp. generates its revenue from the sale of out-of-home
advertising. Eye Corp.'s advertising revenues are a function of overall outdoor
advertising demand and rates. Eye Corp.'s advertising rates are primarily a
function of the number and demographics of the audience for Eye Corp.'s
displays. Segment revenues increased by 3% for the three months ended November
30, 2005 as compared to the same period in fiscal 2005, reflecting increases in
airport terminal advertising sales with increased air travel and increases in
rates and inventories. During the quarter, Eye Corp announced it was successful
in its bids for the advertising concessions at Singapore's Changi Airport and
the new terminal at Adelaide Airport. The principal operating expenses in this
segment are salaries, site rental costs and production expenses. Segment
operating expenses have increased by 5% for the three months ended November 30,
2005 from the same period in fiscal 2005 as we continued to invest in expansion
opportunities. 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 2006.
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 three months
of fiscal 2005, the Canadian dollar appreciated against the Australian dollar,
the New Zealand dollar and the Euro by 3%, 3% and 9%, respectively, as compared
to currency translation rated for the same period in the prior year.
SEASONALITY
Our advertising revenues are seasonal. Revenues are typically highest in the
first and third quarters, while expenses are relatively constant throughout the
year.
DRAFT JANUARY 5, 2006
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There are no significant changes in the Company's accounting policies or
estimates since August 31, 2005 as described in the Management Discussion and
Analysis in the Company's 2005 Annual Report.
OPERATING RESULTS
Introductory note
- - Segment operating profit. In the discussion that follows, we provide
information concerning our segment operating profit. See note 12 to our
interim consolidated financial statements for the three months ended
November 30, 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.
DRAFT JANUARY 5, 2006
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2005
The following is a table of segmented results for the three months ended
November 30, 2005 and November 30, 2004. See note 12 to our interim consolidated
financial statements:
REVENUE SEGMENT OPERATING PROFIT
-------------------------------------------------------
2005 2004 2005 2004
$000 $000 $000 $000
OPERATING SEGMENTS
Publishing and Online - Canada 341,298 325,759 81,624 85,651
------- ------- ------- -------
Television
Canada 187,075 200,281 28,970 55,492
Australia 230,696 246,851 104,490 120,192
New Zealand 36,100 35,751 12,275 14,529
Ireland 12,046 11,321 5,725 4,641
------- ------- ------- -------
465,917 494,204 151,460 194,854
Radio - New Zealand 23,572 23,763 7,018 7,738
Outdoor - Australia 29,674 28,904 7,469 7,793
Corporate and other - - (8,657) (6,431)
------- ------- ------- -------
Total 860,461 872,630 238,914 289,605
======= ======= ======= =======
CONSOLIDATED RESULTS
Revenues. Consolidated revenues decreased by $13 million or 1% to $860 million
for the three months ended November 30, 2005 from consolidated revenues of $873
million for the same period in fiscal 2005. Revenues for the first quarter
reflected a 4% decrease in revenues from international media operations, a 7%
decrease in Canadian television revenues and a 5% increase in Canadian
Publishing and Online revenues.
Operating expenses. Consolidated operating expenses (including selling, general,
and administrative expenses) before amortization increased $38 million or 7% to
$621 million. This increase reflects expense increases in all operating
segments.
Operating income before amortization. Consolidated operating income before
amortization decreased by 18% to $239 million for the three months ended
November 30, 2005 from $290 million for the same period last year. The decrease
in operating income before amortization reflects reduced operating results from
all business units with the exception of TV3 Ireland and the impact of the
strengthening Canadian dollar on conversion of results of our international
media operations.
DRAFT JANUARY 5, 2006
Amortization. Amortization of intangibles was $6 million in the first quarter of
fiscal 2006 compared to $5 million in the first quarter of 2005, reflecting the
acquisitions made during 2005. Amortization of property plant and equipment was
$24 million in the first quarter of fiscal 2006 compared to $22 million in the
first quarter of fiscal 2005, reflecting additions made during fiscal 2005.
Interest expense. Interest expense was $53 million for the three months ended
November 30, 2005 compared to $73 million in the previous year, reflecting a
reduced level of debt as well as reduced interest rates achieved through our
repayment and refinancing of debt in fiscal 2006 and in fiscal 2005.
Interest rate and foreign currency swap losses. For the three months ended
November 30, 2005, we recorded a $121 million loss to adjust the book value of
certain swap instruments to fair value at the balance sheet date. Swaps that do
not qualify for hedge accounting, primarily because the related debt has been
settled, are marked to fair value through earnings. There was a substantial
increase in the notional amount of such overhanging swaps in the period as a
result of the debt settled. A number of swaps were also settled in the period as
described in the liquidity and capital resources and financial instruments
section, which will reduce our exposure to future fluctuations in fair value.
This compared to a loss of $45 million for the first quarter of fiscal 2005.
Foreign exchange losses. We recorded net foreign exchange losses of $1 million
in the three months ended November 30, 2005. This reflects a loss on translation
of US dollar denominated balances partially offset by a gain that arose on the
translation of a portion of our U.S. debt which is not hedged. For the three
months ended November 30, 2004, we had net foreign exchange gains of $10 million
of which $5 million arose on the translation of a portion of our U.S. dollar
debt which is not hedged.
Investment gains. For the three months ended November 30, 2005, we recorded an
investment gain of $85 million, compared to $2 million gain for the same period
the previous year. The gain in 2006 relates to the dilution gain of $84 million
recorded on the sale of 25.8% of the Limited Partnership to the CanWest
MediaWorks Income Fund and a gain of $1 million on the disposal of non-core
assets. The gain in 2005 was primarily due to gains on disposal of non-core
assets.
Loss on debt extinguishment. Using the proceeds from the CanWest MediaWorks
Income Fund initial public offering and borrowings from our new credit
facilities, we completed a tender offer and consent solicitation through which
we repaid our senior credit facilities and retired substantially all of our
10.625% Subordinated Debentures due May 2011 and our 7.625% Subordinated
Debentures due April 2013. The excess of the cost of the tender offer and
consent solicitation over the book value of the old debt together with certain
costs of settling the debt has been charged to earnings for the three months
ended November 30, 2005 as a loss on debt extinguishment of $117 million. During
the first quarter of fiscal 2005, we exchanged our 12.125% Junior Subordinated
Notes for the 8% Senior Subordinated Notes and recorded a loss on debt
extinguishment of $44 million.
DRAFT JANUARY 5, 2006
Income taxes. Our income tax recovery was $70 million for the three months ended
November 30, 2005, compared to an expense of $37 million in the same period of
fiscal 2005. The negative effective tax rate was below the Company's statutory
rate of 35% due to reductions in the income tax expense including: $56 million
related to the non taxable dilution gain, $7 million due to the resolution of
certain tax disputes, and $6 million due to foreign income tax rates being lower
than the Canadian income tax rates. See note 3 of our interim financial
statements for the income tax rate reconciliation.
Minority interests. For the three months ended November 30, 2005 we recorded
minority interests charges related to the 30% minority interests in CanWest
MediaWorks (NZ), 43.6% minority interests in TEN Group and 25.8% minority
interest in the Limited Partnership of $3, $32 and $9 million, respectively. The
minority interests charge related to TEN Group and CanWest MediaWorks (NZ)
decreased by 9% and 25%, respectively, as a result of decreased net earnings.
There were no minority interests charge related to the Limited Partnership for
the first quarter of fiscal 2005 because it was wholly owned to October 12,
2005.
Net earnings. Our net earnings for the three months ended November 30, 2005 were
$29 million compared to $36 million for the first quarter of fiscal 2005.
SEGMENTED RESULTS
Publishing and Online
- - Revenue. Publishing and Online revenues for the first quarter of 2006 were
$341 million compared to revenues of $326 million in same period the
previous year. Advertising revenues increased by 5% for the first quarter
as a result of growth in revenues in the national and retail categories
primarily reflecting rate increases and increased insert volumes.
Significant growth in online classified revenue more than offset small
declines in print classified revenue. While circulation volume declined by
2%, circulation revenue remained constant as a result of higher average
per copy prices. Circulation revenue as a percentage of total revenues for
the newspaper and online segment was approximately 19% in the first
quarter of 2005 compared to 18% in the first quarter of 2005.
- - 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 $20 million, or 8%, to $260
million from $240 million. This reflected higher payroll costs, expenses
related to the introduction of new online products and increased
distribution costs resulting from higher insert volumes and fuel prices.
Newsprint pricing increased by 2% in the first quarter of fiscal 2006 as
compared to the first quarter of fiscal 2005. This price increase was
partially offset by a slight reduction in newsprint consumption.
- - Segment operating profit. As a result of increased revenues more than
offset by increased operating costs, our Publishing and Online operations
had a decrease of $4 million, or 5%, in segment operating profit to $82
million for the three months ended November 30, 2005 compared to $86
million for the same period last year. These results included operating
losses of $4 million relating to Dose and Metro, our newspaper start up
operations. Excluding losses related to these start up operations, segment
operating profit was flat compared to the first quarter of fiscal 2005.
DRAFT JANUARY 5, 2006
Canadian Television
- - Revenues. In total, revenues from our Canadian Television operating
segment of $187 million were $13 million or 7% lower than the $200 million
recorded in the same period in fiscal 2005. This reflected an 8% decrease
in airtime revenues. Subscriber revenues from our specialty channels
increased by 14% for the first quarter of fiscal 2006 as compared to the
same period in fiscal 2005, reflecting a 12% increase in subscribers.
- - Operating expenses. Operating expenses (including selling, general and
administrative expenses) of $158 million at Canadian Television operations
were $13 million, or 9%, higher than in the same period the prior year
primarily the result of an increase in program amortization and promotion
expenses as we invested in our schedule in order to increase ratings.
Throughout fiscal 2006, we expect our program amortization expense to
increase at the same levels relative to the previous year.
- - Segment operating profit. Canadian Television segment operating profit of
$29 million for the first quarter of fiscal 2006 was 48% less than the $55
million for the same period in fiscal 2005 as a result of the revenue
decreases and the expense increase described above.
Australian Television
- - Revenues. Segment revenues decreased by 7% to $231 million for the three
months ended November 30, 2005, from $247 million during the same period
in the prior year. In local currency, revenues decreased 4%, reflecting a
difficult advertising environment. Network TEN's ratings remain strong for
the three months ended November 30, 2005 compared to the same period in
the prior year.
- - Operating expenses. Segment operating expenses remained unchanged at $126
million for the three months ended November 30, 2005 compared to the same
period in fiscal 2005. This primarily reflects increased programming costs
offset by a weaker Australian dollar.
- - Segment operating profit. Segment operating profit decreased by 13% to
$104 million for the first quarter of 2006, compared to $120 million in
the same period in fiscal 2005.
New Zealand Television
- - Revenues. Revenues from television operations for New Zealand's 3 and C4
television networks remained unchanged at $36 million for the first
quarter of fiscal 2006 compared to the same period in fiscal 2005. In
local currency, revenues increased 4%, reflecting New Zealand's strong
rating performance and audience share.
- - Operating expenses. Operating expenses increased by 12% to $24 million for
the first quarter of fiscal 2006, as a result of increased programming
expenses due to the increased focus on local programming in the first
three months of fiscal 2006. Expense increases are not expected to
continue at this level for the remainder of fiscal 2006.
- - Segment operating profit. New Zealand 3 and C4 produced segment operating
profit of $12 million, a $2 million or 16% decrease from the results
recorded in the first quarter of 2005.
DRAFT JANUARY 5, 2006
Irish Television
Our 45% share of revenues at TV3 in the Republic of Ireland increased by 6% to
$12 million in the first quarter of fiscal 2006 compared to the first quarter of
fiscal 2005. Our share of TV3's segment operating profit increased by 23% to $6
million as compared to the same period in fiscal 2005. These results reflect
strong ratings performance and a robust Irish economy.
New Zealand Radio
CanWest RadioWorks continued its steady performance. During the first quarter of
fiscal 2006, revenue remained consistent with the same period of fiscal 2005 at
$24 million. This reflected an increase of 3% in local currency offset by the
weakening New Zealand dollar. Segment operating profit declined by 9% to $7
million for the three months ended November 30, 2005 as compared to the same
period the previous year, due to the continued start up costs associated with
Radio Live.
Outdoor Advertising
Segment revenues increased by 3%, to $30 million for the three months ended
November 30, 2005 from $29 million for the first quarter in fiscal 2005. This
increase reflected 6% growth in revenue in local currency driven by additional
inventory and stronger airport advertising revenues. Our segment operating
profit from TEN Group's Outdoor Advertising operations decreased by 4% to $7
million as compared to the first quarter in fiscal 2005 driven by continued
investment in expansion opportunities.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal uses of funds at our level are for capital expenditures and
repayment of debt. In addition, certain of our subsidiaries, including the TEN
Group, CanWest MediaWorks (NZ) and the CanWest MediaWorks Limited Partnership
make distributions to us as well as to their minority owners. We have
historically met these requirements by using cash generated from operating
activities and through short term and long term debt. We believe these sources
of funds, together with our cash on hand, will continue to be adequate to meet
our currently anticipated capital requirements.
We also review acquisition and investment opportunities in the course of our
business and will, if a suitable opportunity arises and is permitted by the
terms of our debt instruments, make selected acquisitions and investments to
implement our business strategy. We expect that the funding for any such
acquisitions or investments would come from working capital, borrowing under our
credit facility or future credit facilities, additional equity and debt
financing, entering into joint ventures or a combination of these methods.
Similarly, from time to time, we review opportunities to dispose of non-core
assets, and may, if a suitable opportunity arises, sell certain non-core assets.
For the remainder of 2006, our major non-operating cash requirements include
expected capital expenditures of approximately $95 million. In addition, we have
entered into agreements to acquire Turkish radio operations for approximately
US$42 million. We expect the transaction to close in February 2006. We expect to
meet our cash needs for fiscal 2006 primarily through a combination of operating
cash flow and cash on hand.
DRAFT JANUARY 5, 2006
CanWest MediaWorks Income Fund and related transactions
In October 2005, we transferred our investment in our newspaper and online
operations (excluding the National Post) and certain shared service operations,
which provide customer support and administrative services, to the Limited
Partnership. In exchange, we received units of the Limited Partnership
representing a 74.2% ownership interest and notes receivable of $1,339 million.
Concurrently, the Fund closed its initial public offering ("IPO") of units and
invested the net proceeds of $516 million for units of the Limited Partnership
representing a 25.8% interest.
In addition, the Limited Partnership obtained credit facilities in the amount of
$1 billion, consisting of an $825 million non-revolving term credit facility and
a $175 million revolving term credit facility. The revolving facility matures in
five years, is subject to certain restrictions and bears interest at the
prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus,
in each case, an applicable margin. The non-revolving facility matures in five
years, and bears interest at the prevailing prime rate, U.S. base rate, banker's
acceptance rate or LIBOR plus, in each case, an applicable margin. On closing of
the IPO, the Limited Partnership drew $830 million on its credit facilities. The
Limited Partnership has entered into five year interest rate swap contracts to
fix the interest payments on a notional amount of $825 million for the first
three years and $660 million for the remaining two years resulting in an
effective interest rate of 5.0%.
The Limited Partnership utilized the proceeds of the issuance of the units to
the Fund and $823 million of drawings under its new credit facilities to repay
the $1,339 million note payable to the Company.
As a result of the transaction, we recorded a dilution gain on the sale of a
25.8% interest in the operations transferred to the Limited Partnership in the
amount of $87 million.
In October 2005, we entered into a new $500 million revolving term senior credit
facility, the terms of which are described in the debt section. On October 13,
2005, we drew $418 million on this facility.
DRAFT JANUARY 5, 2006
The net proceeds from the IPO and the Limited Partnership debt as well as
proceeds of $401 million from our new credit facility were utilized to retire
certain debt and interest rate and cross currency interest rate contracts as
follows:
a. In October 2005, the Company completed a tender offer for its
10.625% senior subordinated notes payable due in 2011 and its 7.625%
senior unsecured notes payable due in 2013. Substantially all of the
notes under these facilities were settled. Debt with a book value of
$766 million was retired for cash of $849 million. In addition,
deferred financing and other costs of $27 million relating to these
notes were written off. The transaction resulted in a loss on debt
retirement of $75 million, net of tax of $35 million. As a result of
the repayment of these notes the Company recorded a swap loss of $34
million, net of tax of $19 million related to the associated cross
currency interest rate swaps. The notes not settled under the tender
offers are due on the original due dates and are subject to the same
terms except that the covenants associated with these notes have
been eliminated.
b. In October 2005, the Company retired its senior credit facility.
Debt with a book value of $526 million was settled for cash of $526
million. In addition, deferred financing costs of $6 million
relating to these notes were written off. The transaction resulted
in a loss on debt retirement of $4 million, net of tax of $2
million. In addition, as a result of the settlement of this debt,
the Company will record a loss of $46 million, net of tax of $25
million related to the associated interest rate and cross currency
interest rate swaps.
c. In November 2005, we retired interest rate and cross currency
interest rate swap contracts relating to the 7.625% notes, the
10.625% notes and 50% of the cross currency interest rate swap
related to the senior secured credit facilities for cash of $364
million.
Upon closing of the above noted transactions, our consolidated debt was reduced
by approximately $400 million.
Following the Income Fund transactions in October 2005, our cash flow from the
Publications Group has been diluted for the 25.8% interest held by the Income
Fund and will be received by way of distributions from the Limited Partnership,
a portion of which are subordinated. If distributable cash of the Limited
Partnership is not sufficient to pay the entire distribution our share will be
disproportionately affected by the shortfall.
Sources of Funds
Our principal sources of liquidity are cash and cash equivalents on hand and
cash flows from operating activities. At November 30, 2005, we had cash on hand
of $94 million including $20 million of Limited Partnership cash, $47 million of
TEN Group cash and $7 million of CanWest MediaWorks (NZ) cash. We had a cash
flow deficiency from operating activities of $61 million for the three months
ended November 30, 2005 due to a large adjustment in non-cash operating accounts
caused by the seasonality of our business.
In addition to the above sources of liquidity, we had unused borrowing capacity
under our revolving credit facility of $22 million at November 30, 2005. TEN
Group had unused borrowing capacity of A$570 million under its credit
facilities.
DRAFT JANUARY 5, 2006
Uses of Funds
Capital Expenditures
For the three months ended November 30, 2005 our capital expenditures were $21
million. In the remainder of fiscal 2006, we have revised our capital
expenditure forecast and now expect to make additional capital expenditures of
approximately $95 million. This amount includes $14 million in continued
investment in a new broadcast traffic and sales management system, $10 million
investment to upgrade other broadcast systems, and approximately $30 million to
expand a print facility as well as expenditures for regular replacement.
Swap transactions
Under our senior credit facilities, we are required to maintain the fair value
of our foreign currency and interest rate swaps above a prescribed minimum
liability. In addition, there are prescribed minimums with individual
counterparties. Prior to our swap settlements on November 3, 2005, we were
required to make $118 million of recouponing payments related to overhanging
swaps. On November 3, 2005, we settled a substantial portion of our swaps. Under
our new credit facility the minimum liability threshold is $500 million, as at
November 30 the fair value of our interest rate swaps was $214 million. Further
strengthening of the Canadian currency and/or declining interest rates may
result in further prepayment requirements.
Distributions
Our New Zealand and Australian operations make twice annual distributions. In
May 2005, our New Zealand operations distributed a total of $8 million, $6
million to us and $2 million to other shareholders and in November 2005, they
distributed a total of $4 million, $3 million to us and $1 million to other
shareholders. In July 2005 the TEN Group distributed $45 million to us and $35
million to other shareholders and in December 2005 they distributed $55 million
to us and $42 million to other shareholders. The Limited Partnership has made
monthly distributions since its inception in October 2005. The total
distributions to November 30, 2005 were $26 million, $19 million to us and $7
million to the minority partner.
DRAFT JANUARY 5, 2006
Debt
General
At November 30, 2005, we had total outstanding consolidated debt of $2,684
million compared to debt of $2,907 million as at August 31, 2005. This included
$447 million (August 31, 2005 - $346 million) advanced under our credit
facility. Senior debt of our consolidated subsidiaries consisted of $825 million
(August 31, 2005 - nil) of the Limited Partnership debt, $258 million (August
31, 2005 $309 million) of TEN Group debt, $153 million (August 31, 2005 - $155
million) of CanWest Media Works (NZ) debt and $10 million (August 31, 2005 - $12
million) in TV3 Ireland debt. In addition, we had $10 million (August 31, 2005 -
$787 million) in unsecured and subordinated notes. During the three months ended
November 30, 2005 we refinanced our senior credit facility as discussed in the
credit facility section of this report. TEN Group's debt decreased by A$50
million, reflecting cash flow from operations. For additional information
concerning our indebtedness see note 7 to our audited consolidated financial
statements for the year ended August 31, 2005 and note 4 to the unaudited
consolidated financial statements for the three months ended November 30, 2005.
Credit Facility
In October 2005, we obtained a new $500 million revolving term senior credit
facility. The credit facility matures in five years, is subject to certain
restrictions and bears interest at the prevailing prime rate, U.S. base rate,
banker's acceptance rate or LIBOR plus, in each case, an applicable margin. This
facility is secured by substantially all our directly held assets, including the
assets of our Canadian broadcast operations and the National Post, partnership
units of CanWest MediaWorks Limited Partnership, and shares of CanWest
MediaWorks (NZ) Limited and TEN Group Pty Limited, excluding the convertible
debenture held in TEN Group Pty Limited. The total leverage covenant under the
new facility is 5.0 times cash flow. We have initiated discussions with our
senior lenders to increase amounts available under this facility and to increase
the total leverage covenant. We expect these discussions to be successfully
concluded this month. At November 30, 2005, we have drawn $447 million on this
facility. In December 2005, we received distributions from the TEN Group of $55
million which were applied to this facility, which increased our availability
under this facility.
Total leverage as calculated under our credit facility was 4.0 times cash flow
for debt covenant purposes for the twelve months ended November 30, 2005,
compared to a covenant of 5.0 times.
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.
DRAFT JANUARY 5, 2006
The Limited Partnership has entered into five year interest rate swap agreements
to fix interest payments on a notional amount of $825 million for 3 years and on
$660 million for an additional 2 years at an effective average interest rate of
5%.
We have hedged the currency exposure on our U.S. dollar denominated debt, with
the exception of the US$5 million of our 10.625% and 7.625% notes which were not
tendered. We have effectively fixed the interest rate of 100% of our floating
rate debt utilizing interest rate swaps.
In November 2005, we retired interest rate and cross currency interest rate swap
contracts relating to the 7.625% notes, the 10.625% notes and 50% of the cross
currency interest rate swap related to the senior secured credit facilities for
cash of $365 million.
As of November 30, 2005, we have entered into interest rate swap contracts to
pay fixed rates of interest (at an average rate of 6.6%) and receive floating
rates of interest (at an average rate of 2.9%) on a notional amount of $398
million. We have entered into pay fixed receive floating cross currency swap
contracts to pay an average rate of 3.7% on a notional amount of $523 million
and receive floating rates of 6.6% on a notional amount of US$338 million. We
have also entered into pay floating receive fixed cross currency swap contracts
to pay an average floating rate of 7.4% on a notional amount of $908 million and
receive an average fixed rate of 8% on a notional amount of US$761 million.
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 November 30, 2005, our share of the TV3 debt was $10 million
((euro)7 million). TV3 Ireland has entered into a (euro)10 million fixed rate
interest rate swap on their total debt at an average rate of 3.2%. As at
November 30, 2005, CanWest MediaWorks (NZ) had $153 million (NZ$186 million) of
debt; NZ$165 million of this debt was swapped to a fixed rate (at an average
rate of 6.5% until 2006), and the remainder of the debt bears interest at a
floating rate.
At November 30, 2005, TEN Group had long term debt of $258 million (A$299
million). TEN Group has entered into "pay floating receive fixed" cross currency
swap contracts at an average floating rate of 7.0% on a notional amount of A$210
million and "received fixed" swap contracts at an average rate of 5.4% on a
notional amount of US$ 125 million. TEN Group has also entered into interest
rate swap contracts to pay fixed rates of interest (at an average rate of 5.7%)
on a notional amount of A$285 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 $11 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.
DRAFT JANUARY 5, 2006
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 November 30, 2005, our outstanding swap contracts
were in a net unrealized loss position of $259 million (including $45 million
related to TEN Group). In addition, we have recorded the effect of hedging
instruments on the US$ principal balance of debt of $55 million (including $35
million related to TEN Group).
As of November 30, 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 $2 million deterioration in the mark to market value of all swaps,
excluding TEN Group. A $0.001 change in the value of the Canadian dollar against
the U.S. dollar, assuming all other variables are held constant, would result in
a $1 million change in the mark to market value of the cross currency swaps. A
$0.001 change in the value of the Australian dollar against the U.S. dollar,
assuming all other variables are held constant, would result in a $0.3 million
change in the mark to market value of the cross currency swaps.
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.
DRAFT JANUARY 5, 2006
INDUSTRY RISKS AND UNCERTAINTIES
The Company's risks and uncertainties have not materially changed from those
described in the Company's annual filings.
RELATED PARTY TRANSACTIONS
In October 2005, senior subordinated notes held by CanWest Communications
Corporation, our parent company, were repaid pursuant to the tender offer and
consent solicitation in the amount of US$41.8 million. Interest expense related
to this debt totaled $0.7 million for the three months ended November 30, 2005
(2005 - $1.5 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 months ended November 30, 2005
amounted to $0.3 million (2005 - $0.3 million).
All the related party transactions have been recorded at the exchange amount,
which are representative of market rates.
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
NOVEMBER 30, NOVEMBER 30,
2005 2004
$000 $000
Earnings (loss) before taxes 1,784 110,888
Amortization 30,640 27,657
Interest and other financing expenses 54,629 75,445
Investment gains, losses, write-downs, and interest income (85,841) (2,476)
Foreign exchange (gains) losses 574 (10,499)
Interest rate and foreign currency swap losses 120,539 44,598
Loss on debt extinguishment 116,589 43,992
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Operating income before amortization 238,914 289,605
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