CANWEST MEDIAWORKS INC.
INTERIM REPORT TO SHAREHOLDERS
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006
MANAGEMENT DISCUSSION AND ANALYSIS
April 6, 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.
Television
We have three 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 television segment operates 3 and C4 in New Zealand. Our Australian
television segment includes our interest in TEN Group Pty Limited ("TEN Group"),
which owns and operates TEN Television Network ("Network TEN").
We generate the majority of our television 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.
Publishing and Interactive
Our publishing and interactive segment includes our Canadian newspaper
operations as well as our internet operations including the canada.com web
portal. Our publishing and interactive revenues are primarily earned from
newspaper advertising and circulation revenues from our newspapers in Canada.
Our newspaper and interactive 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.
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.
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.
CanWest MediaWorks Income Fund
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 interactive
media businesses, with the exception of the National Post, to CanWest MediaWorks
Limited Partnership ("Limited Partnership") in exchange for units and
indebtedness of the Limited Partnership. As a consequence, the Fund now holds a
25.8% equity interest in the Limited Partnership, with CanWest holding the
remaining 74.2%. For more information refer to the "CanWest MediaWorks Income
Fund and related transactions" section of this report. 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 contained in our annual report for the year ended August
31, 2005, which is filed on SEDAR at www.sedar.com.
FOREIGN CURRENCY EFFECTS
Our Australia and New Zealand operations expose our segment revenues and
operating expenses to fluctuations between the Canadian dollar and the
Australian dollar and New Zealand dollar, 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 first six
months of fiscal 2006, the Canadian dollar appreciated against the Australian
dollar and the New Zealand dollar by 6%, as compared to currency translation
rates 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.
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.
FORTHCOMING CHANGES IN ACCOUNTING POLICIES
In December 2005, the Emerging Issues Committee ("EIC") issued EIC-159
Conditional Asset Retirement Obligations that clarifies that liabilities
associated with asset retirement obligations, the timing or settlement method of
which are conditional upon future events, should be recorded at fair value as
soon as fair value is reasonably estimable. EIC-159 also provides guidance on
the information required to reasonably estimate the fair value of the liability.
EIC-159 will be effective for interim periods ending after March 31, 2006.
Management is in the process of evaluating the impact, if any, EIC-159 will have
on the Company.
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 and six months
ended February 28, 2006. 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 the
"Reconciliation of Non-GAAP Financial Measures" section of this report.
RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006
The following is a table of segmented results for the three and six months ended
February 28, 2006 and February 28, 2005. See note 10 to our interim consolidated
financial statements:
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28 FEBRUARY 28
------------------- ---------------------
2006 2005 2006 2005
------- -------- --------- ---------
$000 $000 $000 $000
(REVISED (REVISED
NOTE 1) NOTE 1)
OPERATING SEGMENTS
REVENUE
Publishing and Interactive - Canada 301,096 289,467 642,394 615,226
------- ------- --------- ---------
Television
Canada 153,829 163,718 340,904 363,999
Australia-Network TEN 120,282 154,573 350,978 401,424
New Zealand 22,638 23,104 58,738 58,855
------- ------- --------- ---------
296,749 341,395 750,620 824,278
Radio - New Zealand 22,305 24,412 45,877 48,175
Outdoor-Australia 25,465 24,918 55,139 53,822
------- ------- --------- ---------
Total 645,615 680,192 1,494,030 1,541,501
======= ======= ========= =========
SEGMENT OPERATING PROFIT
Publishing and Interactive - Canada 47,511 55,211 129,135 140,862
------- ------- --------- ---------
Television
Canada (519) 25,671 28,451 81,163
Australia-Network TEN 32,607 58,773 137,097 178,965
New Zealand 1,586 1,967 13,861 16,496
------- ------- --------- ---------
33,674 86,411 179,409 276,624
Radio - New Zealand 6,733 7,957 13,751 15,695
Outdoor-Australia 4,696 4,904 12,165 12,697
Corporate and other (11,699) (7,901) (20,356) (14,332)
------- ------- --------- ---------
Total(2) 80,915 146,582 314,104 431,546
======= ======= ========= =========
(1) Revised to reflect the categorization of our Ireland TV segment as
discontinued operations.
(2) See Reconciliation of Non-GAAP Financial Measures.
CONSOLIDATED RESULTS
Revenues. Consolidated revenues were $646 million and $1,494 million for the
three and six months, respectively, which is a decrease of $35 million or 5% and
$47 million or 3%, respectively, compared to the same periods in fiscal 2005.
Revenues for the three and six months reflected a 16% and 9% decrease,
respectively, in revenues from international media operations, a 6% decrease in
both periods for Canadian television revenues and a 4% increase in both periods
for Canadian Publishing and Interactive revenues. The decrease in the
international operations in part reflects the strengthening Canadian dollar
against the Australian and New Zealand dollars.
Operating expenses. Consolidated operating expenses (including selling, general,
and administrative expenses) before amortization for the three and six months
were $565 million and $1,180 million, respectively, which is an increase of 6%
in both periods. This increase reflects local currency expense increases in all
operations offset by the effect of the strengthening Canadian dollar.
Operating income before amortization. Consolidated operating income before
amortization for the three and six months ended February 28, 2006 was $81
million and $314 million, respectively, which is a decrease of 45% and 27%,
respectively, from the same periods in fiscal 2005. The decrease in operating
income before amortization reflects reduced operating results as well as the
impact of the strengthening Canadian dollar on conversion of results of our
international media operations.
Amortization. Amortization of intangibles was $5 million and $10 million for
both the three and six months ended February 28, 2006 and 2005. Amortization of
property plant and equipment was $24 million and $48 million for the three and
six months ended February 28, 2006 compared to $23 million and $44 million for
the same periods in fiscal 2005, reflecting additions made during both fiscal
2006 and 2005.
Interest expense. Interest expense was $46 million and $99 million for the three
and six months ended February 28, 2006 compared to $61 million and $134 million
for the same periods 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 both fiscal 2006 and 2005.
Interest rate and foreign currency swap losses. For the three and six months
ended February 28, 2006, we recorded losses of $7 million and $128 million,
respectively, 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 first quarter as a result of the debt settled. A
number of swaps were also settled in the first quarter as described in the
"CanWest MediaWorks Income Fund and related transactions" section of this
report, which reduced our exposure in the second quarter to fluctuations in fair
value. This compared to losses of $5 million and $50 million for the same
periods of fiscal 2005.
Foreign exchange gains (losses). We recorded a nominal foreign exchange gain for
the three months ended February 28, 2006 and a nominal loss in the six months
ended February 28, 2006. For the three and six months ended February 28, 2005,
we had net foreign exchange losses of $9 million and net foreign exchange gains
of $2 million which mainly arose on the translation of a portion of our U.S.
dollar debt which is not hedged.
Loan impairment recovery. We have loans due from Fireworks Entertainment Inc.
and its parent, CanWest Entertainment Inc., companies controlled by CanWest
Global Communications Corp. ("CanWest Global"), our parent company, in an
aggregate principal amount of $427 million. CanWest Global has completed the
sale of the assets of these operations. 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, we have a provision of $427
million against these loans. During the three months and six months ended
February 28, 2006, we recovered additional cash from these companies which
resulted in a recovery of $3 million.
Investment gains (losses). For the three and six months ended February 28, 2006,
we recorded investment gains of $2 million and $103 million, respectively,
compared to $2 million in losses and nominal investment losses for the same
periods the previous year. The gain for the three months ended February 28, 2006
was primarily due to an adjustment made to the dilution gain. The gain for the
six months ended February 28, 2006 relates to the dilution gain of $102 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 losses in 2005 were primarily due to losses on disposal of non-core
assets.
Loss on debt extinguishment. During the first quarter of fiscal 2006, 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 six months ended February 28, 2006 as
a loss on debt extinguishment of $117 million. During the first six months 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.
Income taxes. Our income tax recovery was $1 million for the three months ended
February 28, 2006 and $56 million for the six months ended February 28, 2006,
compared to a recovery of $1 million and an expense of $36 million for the same
periods of fiscal 2005. The negative effective tax rates for the three and six
months were below the Company's statutory rate of 35% due to adjustments in the
income tax expense including: $44 million reduction for the six months related
to the non-taxable dilution gain, $2 million expense for the three months and $6
million recovery for the six months, due to the resolution of certain tax
disputes, reductions of $4 million for the three months and $7 million for the
six months related to limited partnership earnings allocated to the minority
interest, and a nominal amount for the three months and a $5 million reduction
for the six months, 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 reconciliations.
Minority interests. For the three and six months ended February 28, 2006, we
recorded minority interests charges related to the 30% minority interests in
CanWest MediaWorks (NZ) of $1 million and $3 million, 43.6% minority interests
in TEN Group of $7 million and $39 million and 25.8% minority interests in the
Limited Partnership of $9 million and $18 million, respectively. The minority
interests charge related to TEN Group decreased by 60% and 25% and CanWest
MediaWorks (NZ) decreased by 51% and 29%, respectively, as a result of decreased
net earnings. There was no minority interests charge related to the Limited
Partnership during fiscal 2005 because it was wholly owned to October 12, 2005.
Net earnings (loss) from continuing operations. Our net earnings (loss) from
continuing operations for the three and six months ended February 28, 2006 ($16)
million and $8 million compared to $22 million and $54 million for the three and
six months ended February 28, 2005.
Discontinued operations. Net earnings from discontinued operations were $2
million and $7 million for the three and six months ended February 28, 2006.
During the second quarter of fiscal 2006, we have commenced a process to sell
our 45% interest in TV3 Ireland, resulting in the classification of its income
as income from discontinued operations and its assets and liabilities as assets
and liabilities of discontinued operations. These operations were previously
classified as the Ireland Television segment.
Net earnings (loss). Our net earnings (loss) for the three and six months ended
February 28, 2006 was ($15) million and $15 million compared to $23 million and
$59 million for the same periods in fiscal 2005.
SEGMENTED RESULTS
Publishing and Interactive
- - Revenue. Publishing and Interactive revenues for the three and six months
were $301 million and $642 million, respectively, compared to revenues of
$289 million and $615 million in the same periods of the previous year.
Advertising revenues increased by 4% and 5% for the three and six months as
a result of growth in revenues in the national and retail categories
primarily reflecting rate increases and increased insert volumes.
Significant growth in interactive classified revenue more than offset small
declines in print classified revenue. While circulation volume declined by
2% for both the three and six months, 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 interactive segment was
approximately 19% in the three and six months ended February 28, 2006
compared to 20% in the same periods in fiscal 2005. 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 interactive advertising. Circulation
revenues are expected to be consistent with 2005.
- - Operating expenses. Compared to the same periods last year, operating
expenses (including selling, general and administrative expenses) of our
Publishing and Interactive operations increased by $19 million and $39
million, or 8% and 8%, to $254 million and $513 million for the three and
six months ended February 28, 2006. This reflected higher payroll costs,
expenses related to the introduction of new interactive products and
increased distribution costs resulting from higher insert volumes and fuel
prices. In addition, the three and six months included increased employee
severance costs of $5 million in both the three and six month periods
related to management terminations that occurred during the second quarter.
Newsprint pricing increased by 4% and 2% for the three and six months ended
February 28, 2006 compared to the same periods of fiscal 2005. This price
increase was partially offset by a slight reduction in newsprint
consumption. 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
interactive product offerings) and due to normal wage escalation. The
newsprint expense trend is expected to continue to increase when compared
to fiscal 2005 as a result of increased newsprint pricing. Finally,
increased fuel prices and insert volumes are expected to result in
increased distribution costs.
- - Segment operating profit. As a result of increased revenues more than
offset by increased operating costs, our Publishing and Interactive
operations had a decrease of $8 million and $12 million, or 14% and 8%, in
segment operating profit to $48 million and $129 million for the three and
six months ended February 28, 2006 compared to $55 million and $141 million
for the same periods last year. These results included operating losses of
$3 million and $7 million relating to Dose and Metro, our newspaper start
up operations and the increase in employee severance of $5 million for the
three and six months ended February 28, 2006.
Canadian Television
- - Revenues. In total, for the three and six months ended February 28, 2006,
revenues from our Canadian Television operating segment of $154 million and
$341 million, respectively, were $10 million and $23 million or 6% lower
than in the same periods in fiscal 2005. This reflected 6% and 7% decreases
in airtime revenues for the three and six months, respectively. Subscriber
revenues from our specialty channels increased by 17% and 15% for the three
and six months as compared to the same periods in fiscal 2005, reflecting
13% increases in subscribers for both the three and six months. Ratings
have improved since spring 2005 and we have consistently had 5 programs in
the top twenty programs in the Toronto market and 6 programs in the top
twenty programs in the Vancouver market.
- - Operating expenses. For the three and six months ended February 28, 2006,
operating expenses (including selling, general and administrative expenses)
of $154 million and $312 million, respectively, at Canadian Television
operations were $16 million and $30 million higher than in the same periods
in 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 loss of $1
million and segment operating profit of $28 million for the three and six
months of fiscal 2006 were 102% and 65% less than the same periods in
fiscal 2005 as a result of the revenue decreases and the expense increases
described above.
Australian Television
- - Revenues. Segment revenues decreased by 22% and 13% to $120 million and
$351 million for the three and six months ended February 28, 2006, from
$155 million and $401 million during the same periods in the prior year. In
local currency, revenues decreased 13% and 7% for the three and six months,
respectively, reflecting a difficult advertising environment. TEN's ratings
remain strong for the three and six months ended February 28, 2006 compared
to the same periods in the prior year. The effect of the weakening local
currency relative to the Canadian dollar added to the decreases in revenue
for the three and six months ended February 28, 2006 by 9% and 6%,
respectively. While the market continues to be short and difficult to
predict, Network TEN believes the television advertising market in
Australia will show some growth in calendar 2006.
- - Operating expenses. Segment operating expenses decreased by $8 million and
$9 million to $88 million and $214 million for the three and six months
ended February 28, 2006 compared to the same periods in fiscal 2005. This
primarily reflects increased programming costs which were more than offset
by a weaker Australian dollar.
- - Segment operating profit. Segment operating profit decreased by 45% and 23%
to $33 million and $137 million for the three and six months, compared to
$59 million and $179 million in the same periods in fiscal 2005.
New Zealand Television
- - Revenues. Revenues from television operations for New Zealand's TV3 and C4
television networks remained unchanged at $23 million and $59 million for
the three and six months ended February 28, 2006 compared to the same
periods in fiscal 2005. In local currency, revenues increased 8% and 6% for
the three and six months, reflecting New Zealand's strong rating
performance and audience share. The effect of the weakening local currency
relative to the Canadian dollar offset the revenue increases by 9% and 6%
for the three and six months, 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.
- - Operating expenses. Operating expenses remained unchanged at $21 million
for the three months and increased by 6% to $45 million for the six months
ended February 28, 2006. The increase in the first six months was due to
increased programming expenses due to the focus on local programming in the
first quarter of fiscal 2006. This trend started to reverse in the second
quarter and we expect that the trend will continue to reverse over the
remainder of fiscal 2006.
- - Segment operating profit. New Zealand's TV3 and C4 produced segment
operating profit of $2 million and $14 million for the three and six months
ended February 28, 2006, a 19% and 16% decrease from the results recorded
for the three and six months in fiscal 2005.
New Zealand Radio
RadioWorks continued its steady performance. During the three and six months
ended February 28, 2006, revenues decreased by 9% and 5% to $22 million and $46
million, respectively. This reflected increases of 1% and 2% in local currency
for the three and six months offset by the weakening New Zealand dollar. Segment
operating profit declined by 15% and 12% to $7 million and $14 million for the
three and six months ended February 28, 2006 as compared to the same periods the
previous year, due to the continued start up costs associated with Radio Live
and the weakening New Zealand dollar.
Outdoor Advertising
Segment revenues increased by 2% in both periods, to $25 million and $55 million
for the three and six months ended February 28, 2006. This increase reflected
12% and 9% 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% in both periods to $5
million and $12 million for the three and six months ended February 28, 2006 as
compared to the same periods in fiscal 2005 driven by continued investment in
expansion opportunities.
Corporate and Other
Corporate and other expenses have increased by $4 million and $6 million to $12
million and $20 million for the three and six months ended February 28, 2006
compared to $8 million and $14 million for the same periods in fiscal 2005. When
compared to prior periods for the three and six months ended February 28, 2006,
corporate and other increased by less than $1 million and $2 million for
corporate strategic initiatives, $1 million for compensation expenses in both
periods and $2 million and $3 million, respectively, for certain corporate
development activities.
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.
We expect to meet our cash needs for fiscal 2006 primarily through a combination
of operating cash flow and cash on hand.
CanWest MediaWorks Income Fund and related transactions
In October 2005, we transferred our investment in our newspaper and interactive
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. 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%. On closing of the IPO, the Limited Partnership drew $830 million
on its credit facilities.
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 us.
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 $102 million.
The net proceeds from the IPO and the Limited Partnership debt as well as
proceeds of $401 million from our credit facility were utilized to retire
certain debt and interest rate and cross currency interest rate contracts as
follows:
a. In October 2005, we completed a tender offer for our 10.625% senior
subordinated notes payable due in 2011 and our 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 $850 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 $76 million,
net of tax of $35 million. As a result of the repayment of these notes
we 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, we retired our 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, we have recorded 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.
Following the Income Fund transactions in October 2005, our cash flow from the
Limited Partnership has been diluted for the 25.8% interest held by the Income
Fund and will be received by way of distributions, 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 February 28, 2006, we had cash on hand
of $57 million including $23 million of Limited Partnership cash, $16 million of
TEN Group cash and $5 million of CanWest MediaWorks (NZ) cash. We had a cash
flow deficiency from operating activities of continuing operations of $45
million for the six months ended February 28, 2006 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 $191 million at February 28, 2006. TEN
Group had unused borrowing capacity of A$605 million under its credit
facilities.
Investment activities
During the second quarter of fiscal 2006, we commenced a process to sell our 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. Prior to the classification as a
discontinued operation, the results of TV3 Ireland were reported within the
Ireland television segment. Proceeds received on the sale will be applied to
reduce debt.
The classification of TV3 Ireland as a discontinued operations has decreased
earnings from continuing operations by $2 million and $7 million for the three
and six months ended February 28, 2006, respectively, (2005 - three months $2
million, six months $5 million). In addition cash flows from continuing
operations have been decreased by $2 million and $1 million for the three and
six months ended February 28, 2006, respectively, (2005 increased by, for the
three months $1 million, six months $2 million).
Uses of Funds
Capital Expenditures
For the three and six months ended February 28, 2006 our capital expenditures
were $18 million and $39 million, respectively. In the remainder of fiscal 2006,
we have revised our capital expenditure forecast and now expect to make
additional capital expenditures of approximately $62 million. This amount
includes $15 million in continued investment in a new broadcast traffic and
sales management system, $5 million investment to upgrade other broadcast
systems, and approximately $12 million to expand a print facility as well as
expenditures for regular replacement.
Investment transactions
During the second quarter, we acquired a 30% interest in The New Republic, a
weekly magazine based in Washington D.C., for US$2 million.
In September 2005, we 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, we 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, we will acquire a 75% economic interest in these radio stations.
We have provided letters of credit in the aggregate amount of US$3.3 million to
secure our share of these bids. The February transactions remain subject to
regulatory approval by certain Turkish authorities and we are 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, we have the
right to convert our interest to a 75% equity interest.
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 February 28, 2006 were $80 million, $59 million to us and $21
million to the minority partner.
Debt
General
At February 28, 2006, we had total outstanding consolidated debt of $2,673
million compared to debt of $2,891 million as at August 31, 2005. This included
$377 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, $349 million (August
31, 2005 - $309 million) of TEN Group debt, and $135 million (August 31, 2005 -
$155 million) of CanWest MediaWorks (NZ) debt. In addition, we had $10 million
(August 31, 2005 - $787 million) in unsecured and subordinated notes.
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.
Credit Facility
In October 2005, we obtained a new $500 million revolving term senior credit
facility. During the second quarter, we finalized an amendment to the credit
facility that increases the amount available to $600 million and revised certain
of the financial covenants under the 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. At February 28, 2006, we have drawn $377 million on this facility.
As at February 28, 2006, we have $191 million, net of letters of credit of $31
million, available on this facility.
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 $119 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
February 28, 2006, the fair value of our interest rate swaps was $245 million.
Further strengthening of the Canadian currency and/or changes in interest rates
may result in further prepayment requirements.
Total leverage as calculated under our credit facility was 4.9 times cash flow
for debt covenant purposes for the twelve months ended February 28, 2006,
compared to a covenant of 6.0 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. Further details of these arrangements are provided in note 4
to our unaudited interim consolidated financial statements for the three and six
months ended February 28, 2006. Except as discussed in the "CanWest MediaWorks
Income Fund and related transactions" section of this report, there have been no
changes in the purpose or terms of these financial instruments during the six
months ended February 28, 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 February 28, 2006, our outstanding swap contracts
were in a net unrealized loss position of $281 million (including $45 million
related to TEN Group and ($9) million related to the Limited Partnership).
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 payable to CanWest Communications
Corporation, our parent company, were repaid pursuant to the tender offer and
consent solicitation in the amount of US$42 million. Interest expense related to
this debt totaled $1 million for the six months ended February 28, 2006 (2005 -
three months -$2 million, six months - $3 million).
A company which is an affiliate of CanWest Communications Corporation owns
CanWest Global Place in Winnipeg, Manitoba, a building in which the Company is a
tenant. Rent paid to this company for the three and six months ended February
28, 2006 amounted to $1 million and $2 million, respectively, (2005 - three
months $1 million, six months- $2 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 FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2006 2005 2006 2005
------------ ------------ ------------ ------------
$000 $000 $000 $000
Earnings (loss) before taxes 1,110 38,989 13,579 145,919
Amortization 30,487 29,238 60,936 56,690
Interest and other financing expenses 47,433 64,204 101,940 139,171
Investment gains, losses, write-downs, and
interest income (2,365) 653 (104,303) (1,823)
Foreign exchange (gains) losses (149) 8,596 425 (1,903)
Interest rate and foreign currency swap losses 7,160 4,902 127,699 49,500
Loan impairment recovery (3,052) -- (3,052) --
Loss on debt extinguishment 291 -- 116,880 43,992
------ ------- -------- -------
Operating income before amortization 80,915 146,582 314,104 431,546
====== ======= ======== =======