CANWEST MEDIAWORKS INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006
AND FEBRUARY 28, 2005
(UNAUDITED)
April 6, 2006
TO THE AUDIT COMMITTEE OF CANWEST MEDIAWORKS INC.
In accordance with our engagement letter dated March 22, 2005, we have reviewed
the accompanying interim consolidated balance sheet of CANWEST MEDIAWORKS INC.
(the "Company") as at February 28, 2006 and 2005 and the related interim
consolidated statements of earnings (loss), retained earnings and cash flows for
the three and six month periods then ended. These interim consolidated financial
statements are the responsibility of the Company's management.
We performed our review in accordance with Canadian generally accepted standards
for a review of interim financial statements by an entity's auditor. Such an
interim review consists principally of applying analytical procedures to
financial data, and making enquiries of, and having discussions with, persons
responsible for financial and accounting matters. An interim review is
substantially less in scope than an audit, whose objective is the expression of
an opinion regarding the interim financial statements; accordingly, we do not
express such an opinion. An interim review does not provide assurance that we
would become aware of any or all significant matters that might be identified in
an audit.
Based on our review, we are not aware of any material modification that needs to
be made for these interim consolidated financial statements to be in accordance
with Canadian generally accepted accounting principles.
This report is solely for the use of the Audit Committee of the Company to
assist it in discharging its regulatory obligation to review these interim
consolidated financial statements, and should not be used for any other purpose.
Any use that a third party makes of this report, or any reliance or decisions
made based on it, are the responsibility of such third parties. We accept no
responsibility for loss or damages, if any, suffered by any third party as a
result of decisions made or actions taken based on this report.
(PRICEWATERHOUSECOOPERS LLP)
CHARTERED ACCOUNTANTS
CANWEST MEDIAWORKS INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2006 2005 2006 2005
------------ ------------ ------------ ------------
(REVISED (REVISED
NOTE 6) NOTE 6)
Revenue 645,615 680,192 1,494,030 1,541,501
Operating expenses 381,342 363,845 809,820 769,786
Selling, general and administrative expenses 183,358 169,484 370,106 339,607
Ravelston management contract termination -- 281 -- 562
------- ------- --------- ---------
80,915 146,582 314,104 431,546
Amortization of intangibles 4,887 4,958 10,462 9,897
Amortization of property, plant and equipment 24,242 22,962 47,642 44,311
Other amortization 1,358 1,318 2,832 2,482
------- ------- --------- ---------
Operating income 50,428 117,344 253,168 374,856
Interest expense (45,952) (61,084) (98,510) (133,850)
Interest income 526 1,036 1,246 1,877
Amortization of deferred financing costs (1,481) (3,120) (3,430) (5,321)
Interest rate and foreign currency swap losses (7,160) (4,902) (127,699) (49,500)
Foreign exchange gains (losses) 149 (8,596) (425) 1,903
Loan impairment recovery 3,052 -- 3,052 --
Investment gains, losses and write-downs (note 5) 1,839 (1,689) 103,057 (54)
Loss on debt extinguishment (note 4) (291) -- (116,880) (43,992)
------- ------- --------- ---------
1,110 38,989 13,579 145,919
Provision for (recovery of) income taxes (note 3) (992) (943) (55,864) 35,669
------- ------- --------- ---------
Earnings before the following 2,102 39,932 69,443 110,250
Minority interests (16,729) (17,968) (60,444) (56,375)
Interest in earnings (loss) of equity accounted affiliates (3) 596 827 1,047
Realized currency translation adjustments (1,664) (848) (1,780) (848)
------- ------- --------- ---------
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (16,294) 21,712 8,046 54,074
Earnings from discontinued operations (note 6) 1,737 1,585 6,579 4,942
------- ------- --------- ---------
NET EARNINGS (LOSS) FOR THE PERIOD (14,557) 23,297 14,625 59,016
======= ======= ========= =========
The notes constitute an integral part of the consolidated financial statements.
CANWEST MEDIAWORKS INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
AS AT AS AT
FEBRUARY 28, AUGUST 31,
2006 2005
------------ ----------------
(Revised note 6)
ASSETS
CURRENT ASSETS
Cash 57,021 17,264
Accounts receivable 443,808 459,172
Inventory 12,285 13,533
Investment in broadcast rights 238,161 183,114
Future income taxes 3,893 3,893
Other current assets 35,731 25,835
Assets of discontinued operations (note 6) 11,560 9,879
--------- ---------
802,459 712,690
Other investments 16,216 23,059
Investment in broadcast rights 25,786 20,139
Due from parent and affiliated companies 63,502 86,527
Property, plant and equipment 677,833 693,420
Future income taxes 179,430 53,101
Other assets 79,085 139,625
Intangible assets 1,117,609 1,142,118
Goodwill 2,403,090 2,420,851
Assets of discontinued operations (note 6) 13,210 12,896
--------- ---------
5,378,220 5,304,426
========= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable 109,820 171,035
Accrued liabilities 263,634 290,080
Income taxes payable 15,396 44,371
Broadcast rights accounts payable 98,591 68,439
Deferred revenue 35,983 36,774
Future income taxes 51,608 44,663
Current portion of long term debt and obligations
under capital leases 1,915 5,696
Liabilities of discontinued operations (note 6) 15,041 18,692
--------- ---------
591,988 679,750
Long term debt and related foreign currency swap
liability (note 4) 2,672,715 2,886,090
Interest rate and foreign currency swap liability 130,450 215,075
Obligations under capital leases 14,799 16,101
Other accrued liabilities 106,920 85,495
Future income taxes 103,864 74,694
Minority interests 493,241 90,581
Liabilities of discontinued operations (note 6) 958 958
--------- ---------
4,114,935 4,048,744
--------- ---------
Contingencies (note 9)
SHAREHOLDERS' EQUITY
Capital stock 438,838 438,838
Contributed surplus 133,390 132,953
Retained earnings 710,453 695,828
Cumulative foreign currency translation adjustments (19,396) (11,937)
--------- ---------
1,263,285 1,255,682
--------- ---------
5,378,220 5,304,426
========= =========
The notes constitute an integral part of the consolidated financial statements.
CANWEST MEDIAWORKS INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Retained earnings - beginning of period 725,010 726,672 695,828 690,953
Net earnings (loss) for the period (14,557) 23,297 14,625 59,016
------- ------- ------- -------
Retained earnings - end of period 710,453 749,969 710,453 749,969
======= ======= ======= =======
The notes constitute an integral part of the consolidated financial statements.
CANWEST MEDIAWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2006 2005 2006 2005
------------ ------------ ------------ ------------
(REVISED (REVISED
NOTE 6) NOTE 6)
CASH GENERATED (UTILIZED) BY:
OPERATING ACTIVITIES
Net earnings (loss) for the period (14,557) 23,297 14,625 59,016
Earnings from discontinued operations (1,737) (1,585) (6,579) (4,942)
Items not affecting cash
Amortization 31,968 32,358 64,366 62,011
Non-cash interest expense (income) (906) 2,915 355 26,523
Future income taxes 1,605 (3,731) (82,971) (17,485)
Realized currency translation adjustments 1,664 848 1,780 848
Interest rate and foreign currency
swap losses net of settlements 2,778 16,869 25,723 17,322
Loss on debt extinguishment 291 -- 116,880 43,992
Loan impairment recovery (3,052) -- (3,052) --
Investment gains, losses and write-downs (1,839) 1,689 (103,057) 54
Amortization and write-down of film and
television programs 280 3,264
Pension expense 248 3,186 4,181 5,967
Minority interests 16,729 17,968 60,444 56,375
Earnings (loss) from equity accounted
affiliates 3 (596) (827) (1,047)
Foreign exchange (gains) losses (166) 2,005 (892) (3,515)
Stock based compensation expense 1,411 706 2,051 2,115
-------- ------- ---------- --------
34,440 96,209 93,027 250,498
Changes in non-cash operating accounts (16,594) 78,930 (137,562) (45,292)
-------- ------- ---------- --------
Cash flows from operating activities of
continuing operations 17,846 175,139 (44,535) 205,206
Cash flows from operating activities of
discontinued operations 4,465 1,277 6,322 3,600
-------- ------- ---------- --------
Cash flows from operating activities 22,311 176,416 (38,213) 208,806
-------- ------- ---------- --------
INVESTING ACTIVITIES
Other investments (2,571) 209 (2,571) 292
Investment in broadcast licences -- (1,543) (1,066) (1,543)
Acquisitions -- -- -- (12,493)
Proceeds from divestitures (519) 515,285 --
Proceeds from sales of other investments 9,300 -- 9,300 2,171
Proceeds from sale of property, plant and
equipment -- 2,983 970 3,383
Purchase of property, plant and equipment (18,219) (20,674) (38,894) (38,520)
Proceeds from (advances to) parent and
affiliated companies 2,608 (105) 24,866 1,682
Investing activities from discontinued
operations (168) (454) (367) (617)
-------- ------- ---------- --------
(9,569) (19,584) 507,523 (45,645)
-------- ------- ---------- --------
FINANCING ACTIVITIES
Issuance of long term debt, net of financing
costs 126,644 -- 943,584 144,212
Repayment of long term debt (5,526) (91,967) (1,383,056) (258,878)
Advances (repayments) of revolving facilities,
net of financing costs (101,359) 3,740 481,267 78,006
Settlement of swap liabilities -- -- (354,205) --
Swap recouponing (payments) receipts -- 35,953 (48,726) (62,549)
Payments of capital leases (128) (118) (586) (538)
Issuance of share capital of Network TEN -- 3,852 498 5,317
Payment of distribution to minority interests (57,646) (47,757) (61,498) (47,757)
Financing activities from discontinued operations (3,362) (3,335) (5,020) (5,469)
-------- ------- ---------- --------
(41,377) (99,632) (427,742) (147,656)
-------- ------- ---------- --------
Foreign exchange gain (loss) on cash denominated
in foreign currencies (3,153) 780 (1,811) 942
-------- ------- ---------- --------
NET CHANGE IN CASH (31,788) 57,980 39,757 16,447
CASH - BEGINNING OF PERIOD 88,809 55,581 17,264 97,114
-------- ------- ---------- --------
CASH - END OF PERIOD 57,021 113,561 57,021 113,561
======== ======= ========== ========
The notes constitute an integral part of the consolidated financial statements.
CANWEST MEDIAWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006 AND FEBRUARY 28, 2005
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED)
1. SIGNIFICANT ACCOUNTING POLICIES
On November 18, 2004, 3815668 Canada Inc. amalgamated with its wholly-owned
subsidiary CanWest Media Inc. and was renamed CanWest Media Inc. On
September 1, 2005, CanWest Media Inc. amalgamated with twelve related
companies and continued as CanWest MediaWorks Inc. CanWest MediaWorks Inc.
("the Company") and its predecessor companies are wholly-owned subsidiaries
of CanWest Global Communications Corp. ("CanWest"). These transactions have
been accounted for on a "continuity of interests" basis. These financial
statements reflect the consolidated financial position and consolidated
results of all the amalgamated companies for all periods prior to the
transaction dates.
The Company 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. The Company's operating segments include television, publishing
and interactive operations, radio and outdoor advertising. In Canada, the
Television segment includes the operation of the Global Television Network,
Prime TV, various other conventional and specialty channels and Cool FM and
The Beat radio stations. The Australian Television segment includes TEN
Group Pty Limited's ("TEN Group") TEN Television Network ("Network TEN").
The Canadian Publishing and Interactive segment includes the publication of
a number of newspapers, including metropolitan daily newspapers and the
National Post, as well as operation of the canada.com web portal and other
web-based operations. The Company's 74.2% ownership of the publishing and
interactive operations, excluding the National Post, is held through
CanWest MediaWorks Limited Partnership ("Limited Partnership"). The New
Zealand Television segment includes CanWest MediaWorks (NZ) Limited's 3 and
C4 Television Networks. The New Zealand Radio segment includes CanWest
MediaWorks (NZ) Limited's RadioWorks operation, which is comprised of six
nationally-networked radio brands and two local radio brands. The
Australian Outdoor Advertising segment includes EyeCorp Pty Limited ("Eye
Corp"), an outdoor advertising operation which is wholly owned by TEN
Group. Corporate and Other includes various investments in media operations
and corporate costs.
The Company's broadcast customer base is comprised primarily of large
advertising agencies, which place advertisements with the Company on behalf
of their customers. Publishing and interactive revenues include
advertising, circulation and subscriptions which are derived from a variety
of sources. The Company's advertising revenues are seasonal. Revenues and
accounts receivable are highest in the first and third quarters, while
expenses are relatively constant throughout the year.
A summary of significant accounting policies followed in the preparation of
these consolidated financial statements is as follows:
BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada for interim financial
statements and reflect all adjustments which are, in the opinion of
management, necessary for fair statement of the results of the interim
periods presented. However, these interim financial statements do not
include all of the information and disclosures required for annual
financial statements. The accounting policies used in the preparation of
these interim financial statements are the same as those used in the most
recent annual financial statements. These interim financial statements
should be read in conjunction with the most recent annual financial
statements of the Company. All amounts are expressed in Canadian dollars
unless otherwise noted.
SHARE-BASED COMPENSATION
The Company has share-based compensation plans under which options of its
parent company, CanWest, are issued to certain employees. These options are
granted by CanWest with exercise prices equal to the market value of the
underlying stock on the date of grant. CanWest adopted the fair value
method of accounting recommended by the CICA in Section 3870, "Stock-based
compensation and other stock-based payments", prospectively for share-based
compensation awards granted after September 1, 2003. Accordingly, in the
period, the Company expensed $0.9 million (2005 - $1.8 million) and
credited due from parent and affiliated companies related to stock options
granted by CanWest to the employees of the Company. The fair value of the
options granted during the six months ended February, 2006, was estimated
using the Black-Scholes option pricing model with the assumptions of no
dividend yield (2005 - nil), an expected volatility of 31% (2005 - 42%),
risk free interest rates of 4.0% (2005 - 4.2%) and an expected life of 7
years (2005 - 7 years).
The total fair value of 982,750 stock options granted by the Company in the
six months ended February 28, 2006 with an average exercise price of $10.10
per option was $4.1 million, a weighted average fair value per option of
$4.17. During the six months ended February 28, 2005, 1,177,500 stock
options were granted with a total fair value of $6.3 million, and a
weighted average fair value per option of $5.35. During 2005, the Company
agreed to issue approximately 187,000 shares, which vest in two years, for
no consideration. The fair value of the shares at the time of issuance was
$10.40 per share. During the six months ended February 28, 2006, the
Company recorded compensation expense of $0.3 million (2005 - $0.2 million)
related to these shares.
The following are proforma results reflecting the fair value based method
of accounting for share-based compensation for options issued prior to
September 1, 2003.
The proforma cost of share compensation expense, for awards granted prior
to September 1, 2003, for the three and six months ended February 28, 2006
would be $0.2 million and $0.5 million, respectively (2005 - $0.3 million
and $0.6 million). A value of $1.1 million would be charged to proforma net
earnings in future years according to the vesting terms of the options. The
resulting proforma net earnings (loss) from continuing operations for the
three months ended February 28, 2006, would be ($16.5) million, (2005 -
$21.4 million), and six months ended February 28, 2006, would be $7.6
million (2005 - $53.4 million). The resulting proforma net earnings (loss)
for the three months ended February 28, 2006, would be ($14.8) million
(2005 - $23.0 million), and six months ended February 28, 2006, would be
$14.1 million (2005 - $58.4 million).
The Company's proforma disclosure does not apply to awards prior to 1996.
2. ACQUISITIONS AND DIVESTITURE
Acquisitions
On September 1, 2004, Eye Corp acquired the remaining 50% of Eye Shop Pty
Limited (formerly Eye Village Joint Venture) for $12.5 million (A$13.4
million). In addition on July 1, 2005, Eye Corp acquired 100% of Eye Drive
Melbourne Pty Limited (formerly Southcoast Pty Limited) for $7.0 million
(A$7.8 million). The principal business activities of these companies is
the sale of outdoor advertising.
Eye Corp accounted for these acquisitions using the purchase method. As
such, the results of operations reflect revenue and expenses of the
acquired operations since the date of acquisition. A summary of the fair
value of the assets and liabilities acquired is as follows:
Current assets 5,872
Property, plant and equipment 5,224
Site licenses 3,931
Goodwill 9,633
Liabilities (1,607)
------
23,053
======
Consideration:
Cash 19,487
Carrying value of investment at date of acquisition 3,566
------
23,053
======
Divestiture
On October 13, 2005, the Company transferred its investment in its
newspaper and interactive operations (excluding the National Post) and
certain shared service operations, which provide customer support and
administrative services to the Company, (the "Publications Group") to a new
entity, the Limited Partnership. In exchange, the Company received units of
the Limited Partnership representing a 74.2% ownership interest and notes
receivable of $1,339.5 million.
Concurrently, the CanWest MediaWorks Income Fund (the "Fund") closed its
initial public offering ("IPO") of units and invested the proceeds for
units of the Limited Partnership representing a 25.8% interest. Total
proceeds for the offering were $550 million and costs of the offering were
$34.7 million and were paid by the Limited Partnership.
In addition, the Limited Partnership obtained credit facilities in the
amount of $1 billion and drew $830.0 million on the credit facilities.
The Limited Partnership utilized the proceeds of the issuance of the units
to the Fund and $822.5 million in drawings under its new credit facilities
to repay the $1,339.5 million note payable to the Company.
During the second quarter, the Company changed its accounting entries
related to this transaction resulting in revisions to the interim financial
statements as at November 30, 2005 and for the three months then ended.
Initially, the minority interest was calculated based on the net
liabilities recorded in the underlying subsidiary rather than net assets in
the consolidated accounts which reflected fair value allocations from the
prior acquisition of 100% of the publishing businesses. In the second
quarter, the Company determined that the partial disposition of assets
reflected in the first quarter was not necessary for the purpose of
calculating the minority interest. This change did not have any effect on
cash flows. The statement of earnings for the three months ended November
30, 2005 has been revised to increase investment gains by $16.1 million and
decrease future income tax recovery by $16.1 million.
The balance sheet as at November 30, 2005 has been revised as follows:
NOVEMBER 30, 2005
-----------------------------------
AS REPORTED REVISION AS REVISED
----------- -------- ----------
Current assets 922,706 -- 922,706
Property, plant and equipment 680,279 9,028 689,307
Other long term assets 382,113 -- 382,113
Intangible assets 1,040,680 90,354 1,131,034
Goodwill 2,006,426 413,599 2,420,025
--------- ------- ---------
5,032,204 512,981 5,545,185
========= ======= =========
Current liabilities 701,936 (1,343) 700,593
Future income taxes 95,289 16,083 111,372
Minority interests 39,405 498,241 537,646
Other long term liabilities 2,913,811 -- 2,913,811
Shareholders' equity 1,281,763 -- 1,281,763
--------- ------- ---------
5,032,204 512,981 5,545,185
========= ======= =========
Approximately 26% of the Company's units of the Limited Partnership are
subordinated in the payment of distributions if the Limited Partnership
does not have adequate resources on a quarterly basis to fund
distributions. The subordination period ends October 31, 2007, at which
time these units will have the same terms and conditions as the other
partnership units.
3. INCOME TAXES
The Company's provision for income taxes reflects an effective income tax
rate which differs from the combined Canadian statutory rate as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Income taxes at combined Canadian statutory
rate of 34.49% (2005 - 35.20%) 383 13,724 4,683 51,363
Non-taxable portion of capital (gains) and losses (18) 241 (2,279) 1,600
Effect of valuation allowance on future tax assets 1,836 243 5,271 1,527
Effect of foreign income tax rates differing from
Canadian income tax rates 525 (2,834) (5,118) (10,256)
Incremental taxes on debt extinguishment -- (80) -- 5,697
Change in expected future tax rates (202) (164) (3,188) (4,338)
Large corporations tax 759 491 1,693 1,435
Non-taxable dilution gain on disposition to
Limited Partnership (466) -- (44,440) --
Limited Partnership net earnings allocated to
minority interests (4,299) -- (6,905) --
Effect of uncertain tax positions 680 (4,899) (6,372) (4,899)
Non-deductible expenses 707 629 1,728 1,338
Prior period temporary differences not previously
tax effected -- (6,989)(1) -- (6,989)(1)
Other (897) (1,305) (937) (809)
------ ------ ------- ------
Provision for (recovery of) income taxes (992) (943) (55,864) 35,669
====== ====== ======= ======
(1) The provision for income taxes for the three and six months ended February
28, 2005, includes adjustments for prior period temporary differences not
previously tax effected aggregating to $7.0 million ($6.2 million future
income tax, and $0.8 million current income tax). The Company has
determined these adjustments are not material to the reported results,
accordingly, the adjustments were included in earnings. This adjustment has
the effect of increasing basic and diluted earnings per share for the three
and six months ended February 28, 2005, by $0.04 per share.
4. LONG TERM DEBT
AS AT AS AT
FEBRUARY 28, AUGUST 31,
2006 2005
------------ ----------
Senior Secured Credit facility(1) 377,437 --
Senior Secured Credit facility (2) -- 346,100
Senior unsecured notes (2) 284 237,420
Senior subordinated notes (2) 9,807 549,632
Senior subordinated notes 896,720 936,967
CanWest MediaWorks Limited
Partnership Secured Credit facility(3) 825,000 --
Bank loan Australian $95,000
(Aug. 31, 2005 - Australian $180,000) 80,323 160,794
Senior unsecured notes US$125,000
(Aug. 31, 2005 - US$125,000) 142,242 148,609
Senior notes Australian $150,000(4) 126,825 --
Term bank loan NZ$179,700
(Aug. 31, 2005 - NZ$187,802) 135,620 154,824
--------- ---------
2,594,258 2,534,346
Effect of foreign currency swaps (2) 78,457 356,241
--------- ---------
Long term debt 2,672,715 2,890,587
Less portion due within one year -- (4,497)
--------- ---------
Long term portion 2,672,715 2,886,090
========= =========
Except for the changes noted in (1) (2) (3) and (4), the terms and conditions of
the long term debt are the same as disclosed in the August 31, 2005 consolidated
financial statements.
(1) In October 2005, the Company obtained a new $500 million revolving term
credit facility. During the second quarter, the Company finalized an
amendment to the credit facility that increased the amount available to
$600 million and revised certain of the financial covenants under the
credit facility. As at February 28, 2006, the Company has $191.0 million,
net of letters of credit of $31.0 million, available on this 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. This facility is secured by substantially all of the Company's
directly held assets including the assets of its Canadian broadcast
operations, 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.
(2) The Company settled debt and associated swaps as follows:
i. 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 $765.8
million was retired for cash of $849.7 million. In addition, deferred
financing and other costs of $27.0 million relating to these notes
were written off. The transaction resulted in a loss on debt
retirement of $75.6 million, net of tax of $35.3 million. As a result
of the repayment of these notes the Company recorded a swap loss of
$34.5 million, net of tax of $19.0 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.
ii. In October 2005, the Company retired its senior credit facility. Debt
with a book value of $526.4 million was settled for cash of $526.4
million. In addition, deferred financing costs of $6.0 million
relating to these notes were written off. The transaction resulted in
a loss on debt retirement of $3.9 million, net of tax of $2.1 million.
In addition, as a result of the settlement of this debt, the Company
will record a loss of $46.3 million, net of tax of $25.4 million
related to the associated interest rate and cross currency interest
rate swaps.
iii. In November 2005, the Company 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 $364.0 million.
(3) CanWest MediaWorks 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. The Limited
Partnership has drawn $825.0 million on its non-revolving facility and nil
on its revolving facility. The Limited Partnership has entered into five
year interest rate swap contracts to fix the interest payments on a
notional amount of $825.0 million for the first three years and $660.0
million for the remaining two years resulting in an effective interest rate
of 5%.
(4) In December 2005, TEN Group completed a private placement of floating rate
senior notes due 2015 in the amount of A$150 million. Interest is due
quarterly with the rate set at the beginning of each quarter and is
calculated based upon the three month BBSW rate plus 0.69%. The notes are
secured by a direct, unconditional and general obligation of TEN Group
except that they are subordinated to the secured debt.
Under its Senior Secured Credit facility the Company is required to maintain a
fair value of its interest rate swaps and foreign currency and interest rate
swaps above a prescribed minimum liability ($500 million). There are also
prescribed minimum liabilities with individual counterparties, which have
two-way recouponing provisions. The Company was required to make net recouponing
payments of $119 million in the six months ended February 28, 2006 (2005 - $97
million), $69 million of this recouponing payment related to overhanging swaps
and accordingly was reflected in cash flows from operating activities. Further
strengthening of the Canadian currency and/or changes in interest rates may
result in further payments to counterparties.
The Company is subject to covenants under certain of the credit facilities
referred to above, including thresholds for leverage and interest coverage and
is also subject to certain restrictions under negative covenants.
5. INVESTMENT GAINS, LOSSES AND WRITE-DOWNS
The Company has recorded the following investment gains and losses.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Dilution gain - sale of 25.8% of Limited
Partnership 1,555 -- 101,688 --
Gain on sale of investments 138 -- 138 2,171
Dilution gain - TEN Group and
CanWest MediaWorks (NZ) Limited 1 557 64 733
Other 145 (2,246) 1,167 (2,958)
----- ------ ------- ------
1,839 (1,689) 103,057 (54)
===== ====== ======= ======
6. DISCONTINUED OPERATIONS
During the second quarter of fiscal 2006, the Company commenced a process
to sell its 45% interest in TV3 Ireland as it was no longer considered a
core operating asset. As a result, the results of these operations were
classified as a discontinued operation in the consolidated statements of
earnings, the net cash flows were classified as operating, investing and
financing activities from discontinued operations in the consolidated
statements of cash flows and the assets and liabilities were classified on
the consolidated balance sheets as assets and liabilities of discontinued
operations. We expect this transaction to close within a year. Prior to the
classification as a discontinued operation, the results of TV3 Ireland were
reported within the Ireland television segment.
The classification of TV3 Ireland as a discontinued operation has decreased
earnings from continuing operations by $1.7 million and $6.6 million for
the three and six months ended February 28, 2006, respectively, (2005 -
three months $1.6 million, six months $4.9 million). The Company has not
allocated interest on the parent company's debt to discontinued operations.
In addition cash flows from continuing operations have been decreased by
$1.6 million and $1.0 million for the three and six months ended February
28, 2006, respectively, (2005 - increased by, for the three months $0.7
million, six months $2.3 million).
The earnings from discontinued operations are summarized as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue 8,263 8,461 20,309 19,782
===== ===== ====== ======
Earnings from discontinued
operations before tax expense 2,279 1,812 7,677 5,770
Income tax expense 542 227 1,098 828
----- ----- ------ ------
Earnings from discontinued operations 1,737 1,585 6,579 4,942
===== ===== ====== ======
The carrying values of the net assets related to the discontinued
operations are as follows:
AS AT FEBRUARY 28, AS AT AUGUST 31,
2006 2005
------------------ ----------------
Investment in broadcast rights 5,586 5,615
Other current assets 5,974 4,264
------ ------
Total current assets 11,560 9,879
------ ------
Investment in broadcast rights 2,841 1,058
Other non-current assets 10,369 11,838
------ ------
Total non-current assets 13,210 12,896
------ ------
Debt 6,470 12,270
Other current liabilities 8,571 6,422
------ ------
Total current liabilities 15,041 18,692
------ ------
Long term liabilities 958 958
------ ------
Net assets 8,771 3,125
====== ======
7. RELATED PARTY TRANSACTIONS
Due from parent and affiliated companies consist of the following:
AS AT AS AT
FEBRUARY 28, AUGUST 31,
2006 2005
------------ ----------
Due from parent, CanWest - non-interest bearing 63,502 75,051
Due from various affiliated companies
CanWest Entertainment Inc. - non-interest
Bearing 60,835 60,771
Fireworks Entertainment Inc. - non-interest
bearing 366,249 380,841
Provision for loan impairment (427,084) (430,136)
-------- --------
Due from parent and affiliated companies 63,502 86,527
======== ========
These advances have no fixed repayment terms.
The Company has loans due from Fireworks Entertainment Inc. and its parent,
CanWest Entertainment Inc., companies controlled by CanWest in the amount
of $427.1 million. Following a period of poor financial performance and
increasing concern about the significant decline in the marketability of
Fireworks products internationally, in fiscal 2004 CanWest commenced a
process to sell its Fireworks Entertainment Division. A comprehensive
revaluation of the fair value of the assets and liabilities of Fireworks
Entertainment was completed which resulted in the determination of a fair
value that was significantly below the book value of the loans, and
accordingly, the Company established a provision of $427.1 million against
these loans.
The Company made operating lease payments of $1.6 million to CanWest and
affiliated companies for the six months ended February 28, 2006 (2005 -
$1.6 million), which are included in selling general and administrative
expenses.. For the six months ended February 28, 2005, the Company acquired
broadcast rights for television programs from Fireworks in the amount of
$0.5 million, which are included in operating expenses.
Senior subordinated notes payable to CanWest Communications Corporation,
the parent company of CanWest, with a book value of $49.7 million (US$41.9
million) were settled in October 2005, under the same terms offered to the
unrelated senior subordinated note holders for $55.4 million. For the six
months ended February 28, 2006, interest expense related to this debt
totaled $0.7 million (2005 - $3.0 million).
All the related party transactions have been recorded at the exchange
amounts, which are representative of market rates.
8. EMPLOYEE BENEFIT PLANS
The Company has a number of funded and unfunded defined benefit plans, as
well as defined contribution plans, that provide pension, other retirement
and post retirement benefits to its employees. The measurement date for the
plans is June 30 of each year. Information regarding the components of net
periodic benefit cost for the benefit plans is presented below:
POST POST
PENSION BENEFITS RETIREMENT BENEFITS PENSION BENEFITS RETIREMENT BENEFITS
------------------ ------------------- ------------------ -------------------
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------------------- ---------------------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 2006 28, 2005 28, 2006 28, 2005 28, 2006 28, 2005 28, 2006 28, 2005
-------- -------- -------- -------- -------- -------- -------- --------
Current service cost 5,781 4,443 451 333 11,562 8,886 902 665
Employee contributions (1,535) (1,540) -- -- (3,071) (3,080) -- --
Accrued interest on benefits 6,153 6,108 631 587 12,306 12,215 1,262 1,173
Expected return on plan assets (5,800) (5,056) -- -- (11,600) (10,111) -- --
Amortization of transitional
obligation 109 148 76 -- 217 295 152 --
Amortization of past service
costs 301 301 34 34 603 603 68 68
Amortization of net actuarial
loss (gain) 1,368 757 14 (14) 2,737 1,514 29 (27)
Changes in valuation allowance (21) (18) -- -- (42) (35) -- --
------ ------ ----- --- ------- ------- ----- -----
Total pension and post
retirement benefit expense 6,356 5,143 1,206 940 12,712 10,287 2,413 1,879
====== ====== ===== === ======= ======= ===== =====
9. CONTINGENCIES
(a) The Company has requested arbitration related to $86.5 million owed by
Hollinger International Inc., Hollinger Inc. and certain related
parties (collectively "Hollinger") related to certain unresolved
adjustments and claims related to its November 15, 2000 acquisition of
certain newspaper assets from Hollinger. Hollinger disputes this claim
and claims that it and certain of its affiliates are owed $45 million
by the Company. The outcome and recoverability of this claim is not
determinable.
(b) In March 2001, a statement of claim was filed against the Company and
certain of the Company's subsidiaries by CanWest Broadcasting Ltd.'s
("CBL's") former minority shareholders requesting, among other things,
that their interests in CBL be purchased without minority discount. In
addition, the claim alleges the Company wrongfully terminated certain
agreements and acted in an oppressive and prejudicial manner towards
the plaintiffs. The action was stayed on the basis that the Ontario
courts have no jurisdiction to try the claim. In April 2004, a
statement of claim was filed in Manitoba by the same minority
shareholders, which was substantially the same as the previous claim,
seeking damages of $405 million. In June 2005, the Company filed a
Statement of Defence and Counterclaim. In its Counterclaim, the
Company is seeking a declaration of the fair value of the former
minority shareholders' interest in CBL and repayment of the difference
between the fair value and the redemption amount paid by the Company
to the former shareholders. The Company believes the allegations in
the Statement of Claim are substantially without merit and not likely
to have a material adverse effect on its business, financial condition
or results of operation. The outcome of this claim is not determinable
and the Company intends to vigorously defend this lawsuit.
(c) The Company is one of several defendants to a claim by a proposed
class of freelance writers instituted in July 2003, in respect of
works that they provided to newspapers and other print publications in
Canada. The total amount claimed (by all plaintiffs against all
defendants) is $500 million in compensatory damages and $250 million
in exemplary and punitive damages. The outcome of this claim is not
determinable.
(d) CanWest MediaWorks (NZ) Limited has received a Notice of Proposed
Adjustment from the New Zealand Inland Revenue covering the years 2002
to 2004 that proposes a potential tax liability of NZ$13.3 million on
the treatment of its optional convertible notes. A Notice of Proposed
Adjustment is an instrument through which the New Zealand Inland
Revenue advises a taxpayer that it is considering amending its tax
assessment from that in the tax return and is not a confirmation of
liability. CanWest MediaWorks (NZ) Limited is confident that the tax
treatment that it has applied to the notes is correct and does not
believe that any material additional tax liability will result. The
outcome of this situation is not determinable and CanWest MediaWorks
(NZ) Limited intends to dispute the proposed adjustments.
(e) The Company is involved in various legal matters arising in the
ordinary course of business. The resolution of these matters is not
expected to have a material adverse effect on the Company's financial
position, results of operations or cash flows.
10. SEGMENTED INFORMATION
The Company operates primarily within the publishing and interactive,
television, radio and outdoor advertising industries in Canada, New
Zealand, Ireland and Australia. Segmented information has been
retroactively revised to reflect the Company's classification of the
Ireland television segment as discontinued.
Each segment operates as a strategic business unit with separate
management. Segment performance is measured primarily upon the basis of
segment operating profit. The Company accounts for inter-segmented
information as if the sales were to third parties. Segmented information
and a reconciliation from segment operating profit to earnings before
income taxes are presented below:
SEGMENT SEGMENT
REVENUE(1) OPERATING PROFIT(2) REVENUE (1) OPERATING PROFIT(2)
------------------ ------------------- -------------------- -------------------
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------------------- ----------------------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 2006 28, 2005 28, 2005 28, 2005 28, 2006 28, 2005 28, 2006 28, 2005
-------- -------- --------- -------- --------- --------- -------- --------
Publishing and
Interactive-Canada 301,096 289,467 47,511 55,211 642,394 615,226 129,135 140,862
------- ------- ------- ------- --------- --------- -------- --------
Television
Canada 153,829 163,718 (519) 25,671 340,904 363,999 28,451 81,163
Australia-Network
TEN 120,282 154,573 32,607 58,773 350,978 401,424 137,097 178,965
New Zealand 22,638 23,104 1,586 1,967 58,738 58,855 13,861 16,496
------- ------- ------- ------- --------- --------- -------- --------
Total television 296,749 341,395 33,674 86,411 750,620 824,278 179,409 276,624
Radio - New Zealand 22,305 24,412 6,733 7,957 45,877 48,175 13,751 15,695
Outdoor - Australia 25,465 24,918 4,696 4,904 55,139 53,822 12,165 12,697
Corporate and other -- -- (11,699) (7,620) -- -- (20,356) (13,770)
------- ------- ------- ------- --------- --------- -------- --------
645,615 680,192 80,915 146,863 1,494,030 1,541,501 314,104 432,108
======= ======= ========= =========
Ravelston management
contract termination -- (281) -- (562)
------- ------- -------- --------
80,915 146,582 314,104 431,546
Amortization of intangibles 4,887 4,958 10,462 9,897
Amortization of property,
plant and equipment 24,242 22,962 47,642 44,311
Other amortization 1,358 1,318 2,832 2,482
------- ------- -------- --------
Operating income 50,428 117,344 253,168 374,856
Interest expense (45,952) (61,084) (98,510) (133,850)
Interest income 526 1,036 1,246 1,877
Amortization of deferred
financing costs (1,481) (3,120) (3,430) (5,321)
Interest rate and foreign
currency swap losses (7,160) (4,902) (127,699) (49,500)
Foreign exchange gains (losses) 149 (8,596) (425) 1,903
Loan impairment recovery 3,052 -- 3,052 --
Investment gains, losses
and write-downs 1,839 (1,689) 103,057 (54)
Loss of debt extinguishment (291) -- (116,880) (43,992)
------- ------- -------- --------
Earnings (loss) before
income taxes 1,110 38,989 13,579 145,919
======= ======= ======== ========
(1) Represents revenue from third parties. In addition the following segments
recorded intercompany revenues for the six months ended February 28, 2006:
Canadian Television - $0.7 million (2005 - $0.4 million), Publishing and
Interactive - Canada - $1.1 million (2005 - $0.6 million).
(2) Corporate and other in 2005 has been reclassified to conform with the
presentation adopted in the current year.
11. SUBSEQUENT EVENT
In September 2005, the Company announced that a subsidiary of a Turkish
partner was successful in its bids to acquire the assets of Super FM and
Metro FM for aggregate consideration of US$56 million. In February 2006,
the Company announced that the same group had been successful in its bid to
acquire the assets of Joy FM and Joy Turk FM for consideration of US$5
million. In exchange for a payment of US$46 million, the Company will
acquire a 75% economic interest in these radio stations. The Company has
provided letters of credit in the aggregate amount of US$3.3 million to
secure its share of these bids. The February transactions remain subject to
regulatory approval by certain Turkish authorities and the Company is
currently seeking to clarify certain aspects of the regulatory approvals
already received in respect of Super FM and Metro FM. Subject to a
relaxation of foreign ownership restrictions and the receipt of all
necessary regulatory approvals, the Company has the right to convert its
interest to a 75% equity interest.