EXHIBIT 99.1
CANWEST GLOBAL COMMUNICATIONS CORP.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2006
AND MAY 31, 2005
(UNAUDITED)
(PRICEWATERHOUSECOOPERS LOGO)
PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS
One Lombard Place, Suite 2300
Winnipeg, Manitoba
Canada R3B 0X6
Telephone +1 (204) 926 2400
Facsimile +1 (204) 944 1020
July 6, 2006
TO THE AUDIT COMMITTEE OF CANWEST GLOBAL COMMUNICATIONS CORP.
In accordance with our engagement letter dated March 22, 2005, we have reviewed
the accompanying interim consolidated balance sheet of CANWEST GLOBAL
COMMUNICATIONS CORP. (the "Company") as at May 31, 2006 and the related interim
consolidated statements of earnings, retained earnings and cash flows for the
three and nine month periods ended May 31, 2006 and 2005. 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
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and the other member firms of PricewaterhouseCoopers International Limited, each
of which is a separate and independent legal entity.
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -----------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005
-------- -------- ---------- ----------
(REVISED (REVISED
NOTES NOTES
1 & 6) 1 & 6)
Revenue 731,144 799,336 2,225,174 2,340,837
Operating expenses 406,692 415,317 1,174,793 1,150,495
Selling, general and administrative expenses 208,097 190,154 619,922 564,369
Ravelston management contract termination -- 188 -- 750
-------- -------- ---------- ----------
116,355 193,677 430,459 625,223
Amortization of intangibles 676 4,988 11,138 14,885
Amortization of property, plant and equipment 24,575 23,454 72,618 68,160
Other amortization 3,335 1,291 6,167 3,773
-------- -------- ---------- ----------
Operating income 87,769 163,944 340,536 538,405
Interest expense (46,111) (58,796) (144,950) (192,572)
Interest income 350 792 1,602 2,277
Amortization of deferred financing costs (1,524) (3,093) (4,954) (8,414)
Interest rate and foreign currency swap losses (4,746) (7,530) (132,445) (57,030)
Foreign exchange gains (losses) (12,042) (791) (12,467) 5,946
Investment gains, losses and write-downs (note 5) 202 285 103,259 231
Loss on debt extinguishment (note 4) -- -- (116,880) (43,992)
-------- -------- ---------- ----------
23,898 94,811 33,701 244,851
Provision for (recovery of) income taxes (note 3) (5,260) 17,654 (60,285) 52,814
-------- -------- ---------- ----------
Earnings before the following 29,158 77,157 93,986 192,037
Minority interest (18,534) (22,251) (78,978) (78,626)
Interest in earnings of equity accounted affiliates 566 504 1,393 1,551
Realized currency translation adjustments (1,017) 392 (2,797) (456)
-------- -------- ---------- ----------
NET EARNINGS FROM CONTINUING OPERATIONS 10,173 55,802 13,604 114,506
Earnings (loss) from discontinued operations (note 6) 3,071 (3,105) 10,203 1,760
-------- -------- ---------- ----------
NET EARNINGS FOR THE PERIOD 13,244 52,697 23,807 116,266
======== ======== ========== ==========
EARNINGS PER SHARE FROM CONTINUING OPERATIONS (IN DOLLARS):
BASIC $ 0.06 $ 0.31 $ 0.08 $ 0.65
DILUTED $ 0.06 $ 0.31 $ 0.08 $ 0.64
EARNINGS PER SHARE (IN DOLLARS):
BASIC $ 0.07 $ 0.30 $ 0.13 $ 0.66
DILUTED $ 0.07 $ 0.30 $ 0.13 $ 0.65
The notes constitute an integral part of the consolidated financial statements.
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
AS AT AS AT
MAY 31, AUGUST 31,
2006 2005
--------- ----------
(REVISED
NOTES
1 & 6)
ASSETS
CURRENT ASSETS
Cash 60,432 28,947
Accounts receivable 523,603 483,245
Income taxes recoverable 360 --
Inventory 11,991 13,533
Investment in broadcast rights 210,005 183,114
Future income taxes 3,893 3,893
Other current assets 34,456 26,013
Assets of discontinued operations (note 6) 12,301 12,729
--------- ---------
857,041 751,474
Other investments 16,950 23,059
Investment in broadcast rights 35,673 20,139
Property, plant and equipment 684,762 707,287
Future income taxes 181,590 53,285
Other assets 135,268 198,244
Intangible assets 1,163,441 1,142,118
Goodwill 2,401,820 2,420,851
Assets of discontinued operations (note 6) 11,854 12,896
--------- ---------
5,488,399 5,329,353
========= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable 121,156 173,987
Accrued liabilities 279,143 291,395
Income taxes payable -- 51,764
Broadcast rights accounts payable 91,697 75,615
Deferred revenue 42,315 36,774
Future income taxes 51,597 44,663
Current portion of long term debt and obligations under capital leases 17,631 9,946
Liabilities of discontinued operations (note 6) 10,803 18,692
--------- ---------
614,342 702,836
Long term debt and related foreign currency swap liability (note 4) 2,746,858 2,886,090
Interest rate and foreign currency swap liability 137,352 215,075
Obligations under capital leases 12,490 16,101
Other accrued liabilities 169,017 147,179
Future income taxes 103,624 75,265
Minority interest (note 2) 494,084 90,497
Liabilities of discontinued operations (note 6) 2,181 2,181
--------- ---------
4,279,948 4,135,224
--------- ---------
Commitments and contingencies (note 11)
SHAREHOLDERS' EQUITY
Capital stock 850,216 849,909
Contributed surplus 10,100 7,685
Retained earnings 372,279 348,472
Cumulative foreign currency translation adjustments (24,144) (11,937)
--------- ---------
1,208,451 1,194,129
--------- ---------
5,488,399 5,329,353
========= =========
The notes constitute an integral part of the consolidated financial statements.
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE THREE FOR THE
MONTHS ENDED NINE MONTHS ENDED
----------------- -----------------
MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005
------- ------- ------- -------
Retained earnings - beginning of period, as previously reported 360,944 403,612 350,291 340,001
Adjustment for adoption of new accounting pronouncement (note 1) (1,909) (1,776) (1,819) (1,734)
------- ------- ------- -------
Retained earnings - beginning of period, as restated 359,035 401,836 348,472 338,267
Net earnings for the period 13,244 52,697 23,807 116,266
------- ------- ------- -------
Retained earnings - end of period 372,279 454,533 372,279 454,533
======= ======= ======= =======
The notes constitute an integral part of the consolidated financial statements.
CANWEST GLOBAL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ---------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005
------- -------- ---------- --------
(REVISED (REVISED
NOTES NOTES
1 & 6) 1 & 6)
CASH GENERATED (UTILIZED) BY:
OPERATING ACTIVITIES
Net earnings for the period 13,244 52,697 23,807 116,266
(Earnings) loss from discontinued operations (3,071) 3,105 (10,203) (1,760)
Items not affecting cash
Amortization 30,110 32,826 94,877 95,232
Non-cash interest expense (income) (938) 2,710 (583) 29,233
Future income taxes (3,010) 4,314 (86,016) (13,684)
Realized currency translation adjustments 1,017 (392) 2,797 456
Interest rate and foreign currency swap losses net of
settlements 4,832 7,597 30,555 24,919
Loss on debt extinguishment -- -- 116,880 43,992
Investment gains, losses and write-downs (202) (285) (103,259) (231)
Amortization and write-down of film and television programs -- 1,546 -- 4,810
Pension expense 3,635 3,646 7,816 9,613
Minority interest 18,534 22,251 78,978 78,626
Earnings from equity accounted affiliates (566) (504) (1,393) (1,551)
Foreign exchange (gains) losses 12,451 849 11,559 (2,666)
Stock based compensation expense 968 693 3,019 2,808
------- -------- ---------- --------
77,004 131,053 168,834 386,063
Changes in non-cash operating accounts (68,695) (59,872) (188,461) (107,512)
------- -------- ---------- --------
Cash flows from operating activities of continuing operations 8,309 71,181 (19,627) 278,551
Cash flows from operating activities of discontinued operations 3,488 12,863 8,364 43,405
------- -------- ---------- --------
Cash flows from operating activities 11,797 84,044 (11,263) 321,956
------- -------- ---------- --------
INVESTING ACTIVITIES
Other investments (376) 134 (2,947) 426
Investment in broadcast licences (1,348) (722) (2,414) (2,265)
Acquisitions (note 2) (72,668) -- (72,668) (12,493)
Proceeds from divestitures -- -- 518,135 --
Proceeds from sales of other investments -- -- 9,300 2,171
Proceeds from sale of property, plant and equipment 443 -- 1,413 3,383
Purchase of property, plant and equipment (20,970) (16,753) (59,864) (55,273)
Investing activities from discontinued operations (87) (211) (454) (828)
------- -------- ---------- --------
(95,006) (17,552) 390,501 (64,879)
------- -------- ---------- --------
FINANCING ACTIVITIES
Issuance of long term debt, net of financing costs (2,293) (1,430) 941,291 142,782
Repayment of long term debt (215) (23,278) (1,376,817) (282,156)
Advances (repayments) of revolving facilities, net of
financing costs 102,257 (82,953) 577,070 (4,947)
Settlement of swap liabilities -- -- (354,205) --
Swap recouponing (payments) receipts -- 2,190 (48,726) (60,359)
Payments of capital leases (477) (438) (1,063) (976)
Issuance of share capital -- 143 307 702
Issuance of share capital of Network TEN -- -- 498 5,317
Payment of distribution to minority interest (15,023) (2,517) (76,521) (50,274)
Financing activities from discontinued operations (1,956) (2,302) (6,976) (26,125)
------- -------- ---------- --------
82,293 (110,585) (345,142) (276,036)
------- -------- ---------- --------
Foreign exchange gain (loss) on cash denominated in foreign
currencies (800) (271) (2,611) 671
------- -------- ---------- --------
NET CHANGE IN CASH (1,716) (44,364) 31,485 (18,288)
CASH - BEGINNING OF PERIOD 62,148 120,191 28,947 94,115
------- -------- ---------- --------
CASH - END OF PERIOD 60,432 75,827 60,432 75,827
======= ======== ========== ========
The notes constitute an integral part of the consolidated financial statements.
CANWEST GLOBAL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2006 AND MAY 31, 2005
(UNAUDITED)
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Company is an international media company with interests in broadcast
television, publishing, radio, specialty cable channels, outdoor
advertising, and Internet websites in Canada, Australia, New Zealand,
Turkey 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, TVtropolis, 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
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 TV3 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 Turkey Radio segment is comprised of four radio
brands: Super FM, Metro FM, Joy FM and Joy Turk FM. The Australian Outdoor
Advertising segment includes EyeCorp Pty Limited ("Eye Corp"), an outdoor
advertising operation which is wholly owned by TEN Group. The Company's
economic interest in the Limited Partnership, TEN Group and CanWest
MediaWorks (NZ) Limited is 74.2%, 56.4% and 70%, respectively. 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. Except as noted below, 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.
RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain prior period amounts have been reclassified to conform with the
financial statement presentation adopted in the current year.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
During the quarter, the Company applied the interpretations of the Canadian
Institute of Chartered Accountants Emerging Issues Committee abstract 159
"Conditional Asset Retirement Obligations" (EIC-159). Under EIC-159, a
liability should be recognized if the entity has sufficient information to
reasonably estimate the fair value of the asset retirement obligation. The
Company has determined that it has conditional asset retirement obligations
on certain of its assets, and accordingly, has recognized a liability in
the quarter. The change has been accounted for retroactively with
restatement. The impact of the change has increased the cost of property
plant and equipment by $1.3 million (as at August 31, 2005 - $1.3 million),
increased accumulated amortization by $0.6 million (as at August 31, 2005 -
$0.5 million), increased future tax asset by $0.2 million (as at August 31,
2005 - $0.2 million), increased asset retirement obligation by $3.7 million
(as at August 31, 2005 - $3.6 million), decreased future income taxes
liability by $0.8 million (as at August 31, 2005 - $0.8 million), decreased
minority interest by $0.1 million (as at August 31, 2005 - $ 0.1 million),
increased amortization expense for the three months ended May 31, 2006 by
$0.1 million (2005 - $0.1 million) and for the nine months by $0.2 million
(2005 - $0.2 million), decreased future tax expense for the three months
ended May 31, by a nominal amount for 2006 and 2005 and for the nine months
by $0.1 million (2005 - $0.1 million), and decreased net earnings by a
nominal amount for the three months ended May 31, 2006 (2005 - nominal) and
by $0.1 million (2005 - $0.1 million) for the nine months ended May 31,
2006, with no impact on the basic or diluted earnings per share for the
three or nine month periods for 2006 and 2005. Opening retained earnings
for the three months ended May 31 has been decreased by $1.9 million (2005
- $1.8 million), and for the nine months, opening retained earnings has
been decreased by $1.8 million (2005 - $1.7 million).
2. ACQUISITIONS AND DIVESTITURE
Acquisitions
(a) 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 are 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
======
(b) On April 14, 2006, the Company completed its acquisition of Super FM,
Metro FM, Joy FM and Joy Turk FM for cash consideration of $73
million, subject to final regulatory approval of certain aspects of
the transaction. The principal business activity of these companies is
the operation of radio stations and the operations will be presented
in the Turkey radio segment. The Company will initially have a 20%
equity stake in Super FM, the largest and most profitable of the four
stations, but its subsidiaries will have the option of acquiring up to
100% of each station, subject to a relaxation in Turkish foreign
ownership restrictions. The Company also entered into an agreement to
provide operational, sales and advisory services to the stations on a
fee-for-service basis. As a result of our equity interest, financing
of the purchase and operational agreements, the Company has determined
that it is the primary beneficiary as defined by CICA handbook's
Accounting Guideline 15, Consolidation of Variable Interest Entities,
of these radio stations and accordingly, the Company will consolidate
the results of these acquisitions. As the transaction has just
recently closed, the Company is currently in the process of
determining the fair values of the assets acquired and identification
of intangible assets. The Company will complete the allocation the
purchase price equation once this process is complete. A summary of
the preliminary fair values of the assets and liabilities acquired is
as follows:
Property, plant and equipment 240
Goodwill 11,800
Broadcast licenses 60,738
Liabilities (110)
------
72,668
======
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.
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 FOR THE NINE
MONTHS ENDED MONTHS ENDED
----------------- -----------------
MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005
------- ------- ------- -------
Income taxes at combined Canadian statutory
rate of 34.37% (2005 - 35.20%) 8,214 33,373 11,583 86,188
Non-taxable portion of capital (gains) and losses (23) 861 (2,302) 2,461
Effect of valuation allowance on future tax
assets, net of reversals (5,635) -- 729 1,527
Effect of foreign income tax rates differing from
Canadian income tax rates (1,053) (899) (6,171) (11,155)
Incremental taxes on debt extinguishment -- -- -- 5,697
Change in expected future tax rates (227) -- (3,415) (4,338)
Large corporations tax 620 701 2,314 2,141
Non-taxable dilution gain on disposition to
Limited Partnership 55 -- (44,385) --
Limited Partnership net earnings allocated to
minority interest (4,833) -- (11,738) --
Non-deductible foreign exchange losses 4,201 -- 4,201 --
Effect of uncertain tax positions (9,500) -- (15,002) (4,899)
Non-deductible expenses 2,893 353 4,621 1,692
Prior period temporary differences not previously
tax effected -- -- -- (6,989)(1)
Change in Australian tax consolidation legislation -- (17,710) -- (17,710)
Other 28 975 (720) (1,801)
------ ------- ------- -------
Provision for (recovery of) income taxes (5,260) 17,654 (60,285) 52,814
====== ======= ======= =======
(1) The provision for income taxes for the nine months ended May 31, 2005,
includes adjustments for prior period temporary differences not
previously tax effected aggregating to $7.0 million ($6.2 million
future income tax and $0.8 million current income tax). The Company
has determined these adjustments were 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 nine months ended May 31, 2005 by $0.04 per share.
4. LONG TERM DEBT
AS AT AS AT
MAY 31, AUGUST 31,
2006 2005
--------- ----------
Senior Secured Credit facility(1) 452,223 --
Senior Secured Credit facility (2) -- 346,100
Senior unsecured notes (2) 276 237,420
Senior subordinated notes (2) 9,634 549,632
Senior subordinated notes 870,059 936,967
CanWest MediaWorks Limited Partnership Secured
Credit facility(3) 825,000 --
Bank loan AUS$115,000 (Aug. 31, 2005 -
AUS$180,000) 95,335 160,794
Senior unsecured notes US$125,000 (Aug. 31, 2005
- US$125,000) 136,078 148,609
Senior notes AUS$150,000(4) 124,350 --
Term bank loan NZ$194,700 (Aug.
31, 2005 - NZ$187,802) 136,660 154,824
Other 4,250 4,250
--------- ---------
2,653,865 2,538,596
Effect of foreign currency swaps (2) 106,877 356,241
--------- ---------
Long term debt 2,760,742 2,894,837
Less portion due within one year (13,884) (8,747)
--------- ---------
Long term portion 2,746,858 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 May 31, 2006, the Company
has $119.0 million, net of letters of credit of $28.0 million,
available on this facility of which we can draw $31 million. 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. In May 2006, the Company gave notice that it was
redeeming the remaining 10.625% notes payable, due in 2011. The
notes with a book value of $9.7 million will be redeemed for cash
of $10.2 million in June 2006. The transaction will result in a
loss on debt retirement of $0.3 million, net of tax of $0.2
million. 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 nine
months ended May 31, 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 FOR THE NINE
MONTHS ENDED MONTHS ENDED
----------------- -----------------
MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005
------- ------- ------- -------
Dilution gain - sale of 25.8% of Limited
Partnership -- -- 101,688 --
Gain on sale of investments -- -- 138 2,171
Dilution gain - TEN Group and CanWest
MediaWorks (NZ) Limited -- -- 64 733
Other 202 285 1,369 (2,673)
--- --- ------- ------
202 285 103,259 231
=== === ======= ======
6. DISCONTINUED OPERATIONS
In the year ended August 31, 2004, the Company commenced a process to sell
its Fireworks Entertainment Division. In July and September 2005, a
subsidiary of the Company sold certain assets, with a book value of $16.1
million, and operations which comprise the Fireworks Entertainment
Division's film and television program operations for net proceeds of $16.1
million. $2.3 million of these proceeds are recorded in accounts receivable
as they have been held in escrow to be released over a 30 month period. In
September 2005, a subsidiary of the Company completed the sale of the
Fireworks Entertainment Division's remaining film and television program
rights with a book value of $2.9 million for net proceeds of $2.9 million.
As the assets were carried at their fair values, no gain or loss was
recorded on these transactions. Certain remaining accounts receivable and
accounts payable will be settled by the Company. Prior to its
classification as a discontinued operation the results of Fireworks
Entertainment were reported in the Canadian Entertainment segment.
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. During the third quarter, the Company announced it reached a
deal to sell its stake in TV3 Ireland for E138 million. The final amount of
the proceeds is subject to various adjustments. The closing of the
transaction is subject to a 90 day right of first refusal by one of the
other shareholders and regulatory approval. 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 $3.0 million and $9.6 million for
the three and nine months ended May 31, 2006, respectively, (2005 - three
months $3.0 million, nine months $7.9 million). Cash flows from continuing
operations have been increased by $0.3 million and decreased by $0.6
million for the three and nine months ended May 31, 2006, respectively,
(2005 - decreased by $0.8 million for the three months and increased by
$1.5 million for the nine months).
The earnings from discontinued operations are summarized as follows:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
----------------- -----------------
MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005
------- ------- ------- -------
Revenue 10,081 19,195 32,049 76,195
======= ====== ======= =======
Earnings (loss) from discontinued
operations before tax expense 3,452 (2,520) 11,754 4,028
Income tax expense 381 585 1,551 2,268
------- ------ ------- -------
Earnings (loss) from discontinued
operations(1) 3,071 (3,105) 10,203 1,760
======= ====== ======= =======
Earnings (loss) from discontinued
operations per share (in dollars):
Basic $ 0.02 ($0.01) $ 0.05 $ 0.01
Diluted $ 0.02 ($0.01) $ 0.05 $ 0.01
(1) The Company has not allocated interest on the parent company's debt to
discontinued operations.
The carrying values of the net assets related to the discontinued
operations are as follows:
AS AT MAY 31, AS AT AUGUST 31,
2006 2005
------------- ----------------
Investment in broadcast rights 5,279 8,136
Other current assets 7,022 4,593
------ ------
Total current assets 12,301 12,729
------ ------
Investment in broadcast rights 1,366 1,058
Other non-current assets 10,488 11,838
------ ------
Total non-current assets 11,854 12,896
------ ------
Debt 4,776 12,270
Other current liabilities 6,027 6,422
------ ------
Total current liabilities 10,803 18,692
------ ------
Long term liabilities 2,181 2,181
------ ------
Net assets 11,171 4,752
====== ======
7. EARNINGS PER SHARE
The following table provides a reconciliation of the denominators used in
computing basic and diluted earnings per share.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005
------------ ----------- ----------- -----------
Basic weighted average shares
outstanding during the period 177,430,675 177,333,133 177,418,316 177,307,400
Dilutive effect of options and shares 242,247 483,673 351,532 331,925
----------- ----------- ----------- -----------
Diluted weighted average shares
outstanding during the period 177,672,922 177,816,806 177,769,848 177,639,325
=========== =========== =========== ===========
Options outstanding that would
have been anti-dilutive 2,934,874 691,412 1,825,874 977,303
=========== =========== =========== ===========
8. STOCK BASED COMPENSATION
The Company utilizes the fair value approach to account for stock based
compensation on a prospective basis for options granted after September 1,
2003, and as a result, the Company has recorded compensation expense and a
credit to contributed surplus for the nine months ended May 31, 2006 of
$1.4 million (2005 - $2.4 million). The fair value of the options granted
during the nine months ended May 31, 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
nine months ended May 31, 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 nine months ended May 31, 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 nine months ended May 31, 2006, the Company
recorded compensation expense, and a credit to contributed surplus, of $0.5
million (2005 - $0.4 million) related to these shares.
The proforma cost of share compensation expense, for awards granted prior
to September 1, 2003, for the three and nine months ended May 31, 2006
would be $0.2 million and $0.7 million, respectively (2005 - $0.3 million
and $0.9 million). A value of $0.8 million would be charged to proforma net
earnings in future years according to the vesting terms of the options. The
resulting proforma net earnings from continuing operations, basic and
diluted earnings per share for the three months ended May 31, 2006, would
be $9.9 million, $0.06 and $0.06, respectively (2005 - $55.5 million,
$0.31, and $0.31), and nine months ended May 31, 2006, would be $12.9
million $0.07 and $0.07, respectively (2005 - $113.6 million, $0.64, and
$0.64). The resulting proforma net earnings, basic and diluted earnings per
share for the three months ended May 31, 2006, would be $13.0 million,
$0.07 and $0.07, respectively (2005 - $52.4 million, $0.30, and $0.29), and
nine months ended May 31, 2006, would be $23.1 million, $0.13 and $0.13,
respectively (2005 - $115.3 million, $0.65 and $0.65).
9. RELATED PARTY TRANSACTIONS
In October 2005, the Company settled notes, payable to CanWest
Communications Corporation, with a book value of $49.7 million (US$41.9
million) under the same terms offered to the unrelated senior subordinated
note holders for $55.4 million. For the nine months ended May 31, 2006,
interest expense related to this debt totaled $0.7 million (2005 - $4.5
million).
A company which is owned by CanWest Communications Corporation owns CanWest
Global Place in Winnipeg, Manitoba, a building in which the Company is a
tenant. For the nine months ended May 31, 2006, rent paid to this company
amounted to $0.8 million (2005 - $0.8 million) and is included in selling,
general and administrative expenses. The obligations under these operating
leases continue until August 2010.
All the related party transactions have been recorded at the exchange
amounts, which are representative of market rates.
10. 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 RETIREMENT POST RETIREMENT
PENSION BENEFITS BENEFITS PENSION BENEFITS BENEFITS
----------------- ----------------- ----------------- -----------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------------- -------------------------------------
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005 2006 2005 2006 2005
------- ------- ------- ------- ------- ------- ------- -------
CURRENT SERVICE COST 5,781 4,443 451 333 17,343 13,329 1,353 998
Employee contributions (1,535) (1,540) -- -- (4,606) (4,620) -- --
Accrued interest on benefits 6,153 6,108 631 587 18,459 18,323 1,893 1,760
Expected return on plan assets (5,800) (5,056) -- -- (17,400) (15,167) -- --
Amortization of transitional
obligation 109 148 76 -- 326 443 228 --
Amortization of past service
costs 301 301 34 34 904 904 102 102
Amortization of net actuarial
loss (gain) 1,368 757 14 (14) 4,105 2,271 43 (41)
Changes in valuation allowance (21) (18) -- -- (63) (53) -- --
------ ------ ----- --- ------- ------- ----- -----
Total pension and post
retirement benefit expense 6,356 5,143 1,206 940 19,068 15,430 3,619 2,819
====== ====== ===== === ======= ======= ===== =====
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
(a) In May 2006, the television segments entered into commitments for new
programming. Management estimates that these new commitments will
result in future annual broadcast rights expenditures of approximately
$65 million.
CONTINGENCIES
(b) The Company has requested arbitration related to $94.5 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.
(c) In March 2001, a statement of claim was filed against the Company and
certain of the Company's subsidiaries by CanWest Broadcasting Ltd.'s
("CBL's") former minority 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.
(d) 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.
(e) 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.
(f) 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.
12. SEGMENTED INFORMATION
The Company operates primarily within the publishing and interactive,
television, radio, and outdoor advertising industries in Canada, Australia,
New Zealand, Turkey and Ireland. 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 OPERATING SEGMENT OPERATING
REVENUE(1) PROFIT(2) REVENUE (1) PROFIT(2)
----------------- ----------------- --------------------- -------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------------- -------------------------------------------
MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31,
2006 2005 2006 2005 2006 2005 2006 2005
------- ------- ------- ------- --------- --------- -------- --------
Publishing and Interactive-Canada 322,850 323,383 66,417 75,144 965,244 938,609 195,552 216,006
------- ------- ------- ------- --------- --------- -------- --------
Television Canada 187,661 200,696 24,070 56,849 528,565 564,695 52,521 138,012
Australia-Network TEN 148,748 194,452 21,470 52,929 499,726 595,876 158,567 231,894
New Zealand 24,716 30,948 4,978 5,868 83,454 89,803 18,839 22,364
------- ------- ------- ------- --------- --------- -------- --------
Total television 361,125 426,096 50,518 115,646 1,111,745 1,250,374 229,927 392,270
Radio - New Zealand 18,704 23,054 4,595 4,965 64,581 71,229 18,346 20,660
Radio - Turkey 2,246 -- 1,376 -- 2,246 -- 1,376 --
Outdoor - Australia 26,219 26,803 3,493 5,327 81,358 80,625 15,658 18,024
Corporate and other -- -- (10,044) (7,217) -- -- (30,400) (20,987)
------- ------- ------- ------- --------- --------- -------- --------
731,144 799,336 116,355 193,865 2,225,174 2,340,837 430,459 625,973
======= ======= ========= =========
Ravelston management contract termination -- (188) -- (750)
------- ------- -------- --------
116,355 193,677 430,459 625,223
Amortization of intangibles 676 4,988 11,138 14,885
Amortization of property, plant and
equipment 24,575 23,454 72,618 68,160
Other amortization 3,335 1,291 6,167 3,773
------- ------- -------- --------
Operating income 87,769 163,944 340,536 538,405
Interest expense (46,111) (58,796) (144,950) (192,572)
Interest income 350 792 1,602 2,277
Amortization of deferred financing costs (1,524) (3,093) (4,954) (8,414)
Interest rate and foreign currency swap
losses (4,746) (7,530) (132,445) (57,030)
Foreign exchange gains (losses) (12,042) (791) (12,467) 5,946
Investment gains, losses and write-downs 202 285 103,259 231
Loss of debt extinguishment -- -- (116,880) (43,992)
------- ------- -------- --------
Earnings before income taxes 23,898 94,811 33,701 244,851
======= ======= ======== ========
(1) Represents revenue from third parties. In addition the following segments
recorded intercompany revenues for the nine months ended May 31, 2006:
Canadian Television - $1.1 million (2005 - $0.7 million), Publishing and
Interactive - Canada - $2.5 million (2005 - $0.6 million).
(2) Corporate and other in 2005 has been reclassified to conform with the
presentation adopted in the current year.