EX-99.2 3 y11134exv99w2.txt CONSOLIDATED FINANCIAL STATEMENTS EXHIBIT 2 CANWEST GLOBAL COMMUNICATIONS CORP. CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2005 AND 2004 (UNAUDITED) [PRICEWATERHOUSECOOPER LOGO] PRICEWATERHOUSECOOPER LLP CHARTERED ACCOUNTANTS One Lombard Place, Suite 2300 Winnipeg, Manitoba Canada R3B 0X6 Telephone +1 (204) 926 2400 Facsimile +1 (204) 944 1020 July 13, 2005 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 of May 31, 2005 and the related interim consolidated statements of earnings, retained earnings and cash flows for the three and nine months period then ended. These interim consolidated financial statements are the responsibility of the Company's management. We performed our review in accordance with Canadian generally accepted standards for a review of interim financial statements by an entity's auditor. Such an interim review consists principally of applying analytical procedures to financial data, and making enquiries of, and having discussions with, persons responsible for financial and accounting matters. An interim review is substantially less in scope than an audit, whose objective is the expression of an opinion regarding the interim financial statements; accordingly, we do not express such an opinion. An interim review does not provide assurance that we would become aware of any or all significant matters that might be identified in an audit. Based on our review, we are not aware of any material modification that needs to be made for these interim consolidated financial statements to be in accordance with Canadian generally accepted accounting principles. This report is solely for the use of the Audit Committee of the Company to assist it in discharging its regulatory obligation to review these interim consolidated financial statements, and should not be used for any other purpose. Any use that a third party makes of this report, or any reliance or decisions made based on it, are the responsibility of such third parties. We accept no responsibility for loss or damages, if any, suffered by any third party as a result of decisions made or actions taken based on this report. PRICEWATERHOUSECOOPER 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 separate and independent legal entity. CANWEST GLOBAL COMMUNICATIONS CORP. CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- MAY 31, MAY 31, 2004 2004 MAY 31, REVISED MAY 31, REVISED 2005 (NOTE 1) 2005 (NOTE 1) Revenue 809,722 783,941 2,371,005 2,246,410 Operating expenses 428,302 413,285 1,206,468 1,157,490 Selling, general and administrative expenses 183,806 168,289 528,622 492,659 --------- ------------- ------------ ----------- 197,614 202,367 635,915 596,261 Amortization of intangibles 4,988 4,552 14,885 13,640 Amortization of property, plant and equipment 23,623 24,088 68,628 69,786 Other amortization 1,291 1,281 3,788 3,670 --------- ------------- ------------ ----------- Operating income 167,712 172,446 548,614 509,165 Interest expense (59,003) (85,341) (193,337) (258,843) Interest income 725 291 2,210 6,242 Amortization of deferred financing costs (3,093) (2,043) (8,414) (6,060) Interest rate and foreign currency swap gains (losses) (12,584) 7,004 (79,790) (9,099) Foreign exchange gains (losses) 4,263 (1,360) 28,706 3,766 Investment gains, losses and write-downs (note 6) 285 354 231 (2,460) Loss on debt extinguishment (note 5) - - (43,992) - Dividend income - 2,323 - 3,738 --------- ------------- ------------ ----------- 98,305 93,674 254,228 246,449 Provision for income taxes (note 4) 18,127 19,290 54,186 47,186 --------- ------------- ------------ ----------- Earnings before the following 80,178 74,384 200,042 199,263 Minority interests (22,251) (16,691) (78,626) (62,290) Interest in earnings (loss) of equity accounted affiliates 504 (207) 1,551 (556) Realized currency translation adjustments 392 (5,011) (456) (1,885) --------- ------------- ------------ ----------- NET EARNINGS FROM CONTINUING OPERATIONS 58,823 52,475 122,511 134,532 Earnings (loss) from discontinued operations (note 7) (6,105) 1,862 (6,182) (209,976) --------- ------------- ------------ ----------- NET EARNINGS (LOSS) FOR THE PERIOD 52,718 54,337 116,329 (75,444) ========= ============= ============ =========== EARNINGS PER SHARE FROM CONTINUING OPERATIONS: BASIC $ 0.33 $ 0.30 $ 0.69 $ 0.76 DILUTED $ 0.33 $ 0.30 $ 0.69 $ 0.76 EARNINGS (LOSS) PER SHARE: BASIC $ 0.30 $ 0.31 $ 0.66 $ (0.43) DILUTED $ 0.30 $ 0.31 $ 0.65 $ (0.43)
The notes constitute an integral part of the consolidated financial statements. 2 CANWEST GLOBAL COMMUNICATIONS CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS)
AS AT AS AT AUGUST 31, MAY 31, 2004 2005 REVISED (NOTE 1) ASSETS CURRENT ASSETS Cash 77,475 97,271 Accounts receivable 571,857 488,418 Inventory 12,480 13,449 Investment in film and television programs 232,145 194,099 Future income taxes 5,793 6,166 Other assets 24,138 22,574 Assets of discontinued operations (note 7) 52,496 89,094 ----------- --------------- 976,384 911,071 Other investments 23,119 26,830 Investment in film and television programs 27,184 35,157 Property, plant and equipment 697,015 708,311 Future income taxes 13,176 5,580 Other assets 214,018 144,141 Intangible assets 1,175,593 1,182,145 Goodwill 2,477,693 2,465,248 Assets of discontinued operations (note 7) 1,587 38,376 ----------- --------------- 5,605,769 5,516,859 =========== =============== LIABILITIES CURRENT LIABILITIES Accounts payable 138,129 158,461 Accrued liabilities (note 3) 262,356 240,502 Income taxes payable 36,710 27,419 Film and television program accounts payable 95,624 65,270 Deferred revenue 40,439 34,218 Future income taxes 6,072 6,072 Current portion of long term debt 22,285 33,204 Liabilities of discontinued operations (note 7) 18,962 69,716 ----------- --------------- 620,577 634,862 Long term debt and related foreign currency swap liability (note 5) 3,145,836 3,201,051 Interest rate and foreign currency swap liability 137,363 120,341 Other accrued liabilities 150,287 164,449 Future income taxes 135,598 139,280 Minority interests 112,755 77,456 ----------- --------------- 4,302,416 4,337,439 ----------- --------------- Contingencies (note 12) SHAREHOLDERS' EQUITY Capital stock 849,330 848,628 Contributed surplus 7,420 4,612 Retained earnings 456,330 340,001 Cumulative foreign currency translation adjustments (9,727) (13,821) ----------- --------------- 1,303,353 1,179,420 ----------- --------------- 5,605,769 5,516,859 =========== ===============
The notes constitute an integral part of the consolidated financial statements. 3 CANWEST GLOBAL COMMUNICATIONS CORP. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- MAY 31, MAY 31, 2004 2004 MAY 31, REVISED MAY 31, REVISED 2005 (NOTE 1) 2005 (NOTE 1) Retained earnings - beginning of period, as revised 403,612 223,698 340,001 353,479 Net earnings (loss) for the period 52,718 54,337 116,329 (75,444) --------- ------- -------- ------- Retained earnings - end of period 456,330 278,035 456,330 278,035 ========= ======= ======== =======
The notes constitute an integral part of the consolidated financial statements. 4 CANWEST GLOBAL COMMUNICATIONS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- MAY 31, MAY 31, 2004 2004 MAY 31, REVISED MAY 31, REVISED 2005 (NOTE 1) 2005 (NOTE 1) CASH GENERATED (UTILIZED) BY: OPERATING ACTIVITIES Net earnings from continuing operations for the period 58,823 52,475 122,511 134,532 Items not affecting cash Amortization 32,995 31,964 95,715 93,156 Non-cash interest expense 2,710 25,059 29,233 71,593 Future income taxes 4,711 6,791 (12,655) 6,857 Realized currency translation adjustments (392) 5,011 456 1,885 Interest rate and foreign currency swap losses (gains) net of settlements 7,597 (7,004) 24,919 9,099 Loss on debt extinguishment - - 43,992 - Investment gains, losses and write-downs (285) (354) (231) 2,460 Amortization and write-down of film and television programs 1,546 3,875 6,856 5,074 Pension expense 3,646 3,241 9,613 7,736 Minority interests 22,251 16,691 78,626 62,290 Other 1,038 1,191 (1,409) (3,182) Investment in film and television programs - - (4,178) (14,077) --------- -------- --------- --------- 134,640 138,940 393,448 377,423 Changes in non-cash operating accounts (61,692) (86,937) (126,699) (167,825) --------- -------- --------- --------- Cash flows from operating activities of continuing operations 72,948 52,003 266,749 209,598 Cash flows from operating activities of discontinued operations 10,350 23,959 34,806 13,733 --------- -------- --------- --------- Cash flows from operating activities 83,298 75,962 301,555 223,331 --------- -------- --------- --------- INVESTING ACTIVITIES Other investments 134 (42) 426 (168) Investment in broadcast licences (722) - (2,265) (5,813) Acquisition (note 2) - - (12,493) - Proceeds from sales of other investments - - 2,171 168 Proceeds from sale of property, plant and equipment - - 3,383 7,426 Purchase of property, plant and equipment (16,964) (15,970) (56,101) (45,776) --------- -------- --------- --------- (17,552) (16,012) (64,879) (44,163) --------- -------- --------- --------- FINANCING ACTIVITIES Issuance of long term debt - - 161,321 - Repayment of long term debt (25,880) (16,248) (290,549) (74,843) Advances (repayments) of revolving facilities (82,953) (49,000) (4,947) (50,656) Swap recouponing (payments) receipts 2,190 - (60,359) (27,957) Issuance of share capital 143 - 702 1,789 Issuance of share capital of TEN Group - 1,353 5,317 14,310 Payment of dividends to minority interests (2,517) - (50,274) (60,446) Financing activities of discontinued operations - (21,548) (18,354) (48,908) --------- -------- --------- --------- (109,017) (85,443) (257,143) (246,711) --------- -------- --------- --------- Foreign exchange gain on cash denominated in foreign currencies (271) (326) 671 2,349 --------- -------- --------- --------- NET CHANGE IN CASH (43,542) (25,819) (19,796) (65,194) CASH - BEGINNING OF PERIOD 121,017 99,828 97,271 139,203 --------- -------- --------- --------- CASH - END OF PERIOD 77,475 74,009 77,475 74,009 ========= ======== ========= =========
The notes constitute an integral part of the consolidated financial statements. 5 CANWEST GLOBAL COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2005 AND 2004 (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, production and distribution of film and television programming and Internet websites in Canada, Australia, New Zealand and Ireland. The Company's operating segments include television and radio broadcasting, publishing and online operations and outdoor advertising. In Canada, the Television Broadcast segment includes the operation of the Global Television Network, Prime, various other conventional and specialty channels and Cool FM and The Beat radio stations. The Australian Television Broadcast segment includes the Company's interest in TEN Group Pty Limited ("TEN Group"), which owns and operates Australia's TEN Television Network ("Network TEN"). The Canadian Publishing and Online 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 New Zealand Television Broadcast segment includes CanWest MediaWorks NZ Limited's 3 and C4 Television Networks. The New Zealand Radio Broadcast segment includes CanWest MediaWorks NZ Limited's RadioWorks operation. The Irish Television Broadcast segment includes the Company's 45% interest in the Republic of Ireland's TV3 Television Network. The Australian Outdoor Advertising segment includes the Company's interest in EyeCorp, an outdoor advertising operation which is wholly owned by TEN Group. The Corporate and Other segment includes various investments in media operations. 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 Online revenues include advertising, circulation and subscriptions which are derived from a variety of sources. The Company's advertising revenues are seasonal. Revenues and accounts receivable are highest in the first and third quarters, while expenses are relatively constant throughout the year. A summary of significant accounting policies followed in the preparation of these consolidated financial statements is as follows: BASIS OF PRESENTATION The consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada for interim financial statements and reflect all adjustments which are, in the opinion of management, necessary for fair statement of the results of the interim periods presented. However, these interim financial statements do not include all of the information and disclosures required for annual financial statements. The accounting policies used in the preparation of these interim financial statements are the same as those used in the most recent annual financial statements except as indicated below. These interim 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. 6 CHANGES IN ACCOUNTING POLICIES REPORTING CIRCULATION REVENUE ON A GROSS BASIS During the year ended August 31, 2004, the Company retroactively adopted the provisions of the Emerging Issues Committee of the CICA, EIC - 123, "Reporting Revenue Gross as a Principal versus Net as an Agent" which was effective September 1, 2002. Accordingly, circulation revenues are reported on a gross basis. Previously the Company reported circulation revenue net of certain of its distribution contract costs. As a result of the adoption the Company has retroactively revised its results. The impact of the revision was to increase sales and operating expenses by $11.7 million and $34.7 million for the three and nine months ended May 31, 2004 respectively. There was no impact on net earnings. CONSOLIDATION OF VARIABLE INTEREST ENTITIES Effective September 1, 2004, the Company has adopted the provisions of The Accounting Standards Board of the Institute of Chartered Accountants of Canada, AcG-15, Consolidation of Variable Interest Entities. The Company has determined that it is the primary beneficiary of TEN Group, a variable interest entity. Accordingly, as required by AcG-15 the Company has consolidated the results of TEN Group. AcG-15 has been adopted on a retroactive basis with restatement of prior periods. Previously, the Company accounted for its investment in TEN Group using the equity method. As at May 31, 2005, the Company holds a 56.4% economic interest in TEN Group (56.6% at August 31, 2004). The interest held by the 43.6% minority is classified in minority interests. In addition, as a result of the adoption of AcG-15 the Company determined that an immaterial entity should not be consolidated in its results, and accordingly the results of the entity have been excluded from the consolidation on a retroactive basis. The effect of consolidating TEN Group and excluding the subsidiary from the consolidation on the consolidated balance sheets for the year ended August 31, 2004 is presented below. PROPOSED ACCOUNTING POLICIES The Accounting Standards Board of the Institute of Chartered Accountants of Canada has concurrently issued CICA 3855, Financial Instruments - Recognition and Measurement, CICA 3865, Hedges, and CICA 1530, Comprehensive Income, which must be applied by the Company for fiscal years beginning on or after October 1, 2006. CICA 3855 prescribes when a financial asset, financial liability, or non-financial derivative is to be recognized on the balance sheet and the measurement of such amount. It also specifies how financial instrument gains and losses are to be presented. CICA 3865 is applicable for designated hedging relationships and builds on existing Canadian GAAP guidance by specifying how hedge accounting is applied and what disclosures are necessary when it is applied. CICA 1530 introduces new standards for the presentation and disclosure of components of comprehensive income. Comprehensive income is defined as the change in net assets of an enterprise during a reporting period from transactions and other events and circumstances from non-owner sources. It includes all changes in net assets during a period except those resulting from investments by owners and distributions to owners. The Company is currently considering the impacts of the adoption of such standards. 7 CONSOLIDATED BALANCE SHEETS The following is a reconciliation of the Company's consolidated balance sheets reflecting the impact of the adoption of AcG-15. AS AT AUGUST 31, 2004
EFFECT OF THE AS PREVIOUSLY ADOPTION OF ACG-15 REPORTED (1) AS REVISED ASSETS CURRENT ASSETS Cash 81,092 16,179 97,271 Accounts receivable 361,978 126,440 488,418 Distributions receivable from TEN Group 36,567 (36,567) - Inventory 13,449 - 13,449 Investment in film and television programs 71,601 122,498 194,099 Future income taxes 6,166 - 6,166 Other assets 18,853 3,721 22,574 Assets of discontinued operations 89,094 - 89,094 --------- ------- --------- 678,800 232,271 911,071 Investment in TEN Group 39,929 (39,929) - Other investments 17,393 9,437 26,830 Investment in film and television programs 33,467 1,690 35,157 Property, plant and equipment 631,720 76,591 708,311 Future income taxes - 5,580 5,580 Other assets 140,211 3,930 144,141 Intangible assets 928,787 253,358 1,182,145 Goodwill 2,373,442 91,806 2,465,248 Assets of discontinued operations 38,376 - 38,376 --------- ------- --------- 4,882,125 634,734 5,516,859 ========= ======= ========= LIABILITIES CURRENT LIABILITIES Accounts payable 67,233 91,228 158,461 Accrued liabilities 199,143 41,359 240,502 Income taxes payable 17,697 9,722 27,419 Film and television program accounts payable 27,966 37,304 65,270 Deferred revenue 31,959 2,259 34,218 Future income taxes 6,072 - 6,072 Current portion of long term debt 31,712 1,492 33,204 Liabilities of discontinued operations 69,716 - 69,716 --------- ------- --------- 451,498 183,364 634,862 Long term debt and related foreign currency swap liability 2,840,591 360,460 3,201,051 Interest rate and foreign currency swap liability 120,341 - 120,341 Other accrued liabilities 131,360 33,089 164,449 Future income taxes 140,460 (1,180) 139,280 Minority interests 16,142 61,314 77,456 --------- ------- --------- 3,700,392 637,047 4,337,439 --------- ------- --------- SHAREHOLDERS' EQUITY Capital stock 848,628 - 848,628 Contributed surplus 4,612 - 4,612 Retained earnings 342,314 (2,313) 340,001 Cumulative foreign currency translation adjustments (13,821) - (13,821) --------- ------- --------- 1,181,733 (2,313) 1,179,420 --------- ------- --------- 4,882,125 634,734 5,516,859 ========= ======= =========
(1) The exclusion of the entity from the consolidation had the following effect on the consolidated balance sheet as at August 31, 2004: decreased cash by $444, decreased accounts receivable by $11, decreased other investments by $5,367, decreased other assets by $10, decreased accounts payable by $2,339, decreased future tax liability by $1,180 and decreased retained earnings by $2,313. The remainder of the effect was the result of consolidating TEN Group. 8 The following supplemental note disclosure relates to the effect that the consolidation of TEN Group has on certain balances as of and for the year ended August 31, 2004. INVESTMENT IN FILM AND TELEVISION PROGRAM RIGHTS
AS AT AUGUST 31, 2004 ---------------------- CURRENT LONG TERM Broadcast rights 122,003 1,690 Other 495 - ------- ----- 122,498 1,690 ======= =====
PROPERTY, PLANT AND EQUIPMENT
AS AT AUGUST 31, 2004 ----------------------------------- ACCUMULATED COST AMORTIZATION NET Land 4,834 - 4,834 Buildings 9,065 (2,105) 6,960 Leasehold improvements 4,931 (935) 3,996 Plant and equipment 173,074 (114,057) 59,017 Plant and equipment under lease 6,351 (4,567) 1,784 ------- -------- --------- 198,255 (121,664) 76,591 ======= ======== =========
INTANGIBLE ASSETS
AS AT AUGUST 31, 2004 ----------------------------------- ACCUMULATED COST AMORTIZATION NET Finite Life: Site licences 27,485 2,445 25,040 Indefinite Life: Broadcast licences 228,318 - 228,318 ------- ----- ------- 255,803 2,445 253,358 ======= ===== =======
Site licences represent outdoor site leases. These licences are amortized on a straight line basis over the term of the leases (approximately 20 to 40 years). GOODWILL As at August 31, 2004 goodwill of $54 million relates to the Australia - Outdoor advertising segment, and $38 million relates to the Australia Network TEN segment. There were no changes in the goodwill balances in the year ended August 31, 2004. 9
AS AT AUGUST 31, LONG TERM DEBT 2004 Unsecured Bank Loan (1) 163,048 Senior unsecured notes (2) 164,585 Other 3,169 ------- 330,802 Effect of foreign currency swap 31,150 ------- Total long term debt 361,952 Less portion due within one year 1,492 ------- Long term portion 360,460 =======
(1) Credit facility provides for a maximum of $652 million (A$700 million) in advances. At August 31, 2004 the TEN group had drawn A$175 million against this facility leaving an availability of A$525 million. This facility matures in December 2008. The TEN Group entered into interest rate swap contracts with a notional amount of A$250 million to fix the interest on this facility and subsequent facilities with maturities to 2011. The effective interest rate of this debt is approximately 5.7%. (2) The US$125 million unsecured notes mature in March 2013. The TEN Group has entered into a US$125 million cross currency interest rate swap resulting in floating rates and a fixed currency exchange rate of US$1:A$1.6807. The effective interest rate of this debt is approximately 6.4%. COMMITMENTS As at August 31, 2004 the TEN Group had the following commitments:
YEAR ENDED AUGUST 31, 2005 2006 2007 2008 2009 THEREAFTER Capital expenditures 2,735 464 - - - - Program expenditures 57,773 28,391 40,205 16,528 6,947 - Leases 35,254 28,649 22,341 15,174 7,042 39,108 ------ ------ ------ ------ ------ ------ Total 95,762 57,504 62,546 31,702 13,989 39,108 ====== ====== ====== ====== ====== ======
2. ACQUISITIONS In September 2004, TEN Group acquired the remaining 50% interest in Eye Shop not already owned for cash consideration of $12.5 million (A$13.4 million). The company's principal activity is the sale of advertising space in shopping centres. A summary of the fair value of assets acquired follows: Current assets 4,059 Property, plant and equipment 5,071 Goodwill 8,152 ------ Total assets 17,282 ------ Current liabilities 1,223 ------ Total liabilities 1,223 ------ 16,059 ====== Consideration: Cash 12,493 Carrying value of Eye Shop at date of acquisition 3,566 ------ 16,059 ======
This purchase equation is preliminary and may be adjusted. 10 3. RESTRUCTURING ACCRUALS For the nine months ended May 31, 2005, expenditures charged to the restructuring accruals were $2.7 million. The balance of the restructuring accruals is expected to be substantially disbursed by August 31, 2005.
LEASE/ CONTRACT SEVERANCE TERMINATION INTEGRATION OTHER TOTAL Balance August 31, 2004 5,018 159 250 999 6,426 Expenditures (2,603) (143) - - (2,746) ------ ---- --- --- ------ Balance May 31, 2005 2,415 16 250 999 3,680 ====== ==== === === ======
4. INCOME TAXES The Company's provision for income taxes reflects an effective income tax rate which differs from the combined Canadian statutory rate as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- MAY 31, MAY 31, 2004 2004 MAY 31, REVISED MAY 31, REVISED 2005 (NOTE 1) 2005 (NOTE 1) Income taxes at combined Canadian statutory rate of 35.20% (2004 - 35.59%) 34,603 33,338 89,488 87,711 Non-taxable portion of capital (gains) and losses 861 - 2,461 - Effect of valuation allowance on future tax assets - - 1,527 4,013 Effect of foreign income tax rates differing from Canadian income tax rates (1,632) (10,112) (13,089) (34,036) Tax costs of exchange note offer - - 5,697 - Change in expected future tax rates - - (4,338) - Large corporations tax 701 800 2,141 2,400 Effect of change in tax rates - - - 4,246 Effect of resolved uncertain tax positions and tax disputes - - (4,899) (7,000) Non-deductible expenses and withholding taxes 354 1,221 1,692 4,810 Prior period temporary differences not previously tax effected - - (6,989)(1) - Utilization of loss carry forwards not previously tax effected - (4,942) (12,328) Change in Australian tax consolidation legislation (17,710) - (17,710) - Other 950 (1,015) (1,795) (2,630) ------- ------ ------- ------- Provision for income taxes 18,127 19,290 54,186 47,186 ======= ====== ======= =======
(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 are not material to the reported results, accordingly, the adjustments have been included in the current year's earnings. This adjustment has the effect of increasing basic and diluted earnings per share for the nine months ended May 31, 2005, by $0.04 per share. 11 5. LONG TERM DEBT
AS AT AS AT AUGUST 31, MAY 31, 2004 2005 Revised (note 1) Senior Secured Credit facility 537,548 665,011 Senior unsecured notes 251,040 263,340 Senior subordinated notes 581,023 608,373 Senior subordinated notes - exchange offer (1) 989,086 - Bank loan Australian $170,000 (Aug. 31, 2004 -Australian $ 175,000) 161,313 163,048 Senior unsecured notes US$125,000 (Aug. 31, 2004 - US$125,000) 156,376 164,585 Term and demand loan (Euro)8,818 (Aug. 31, 2004 - (Euro)13,678) 13,623 21,943 Term bank loan NZ$198,000 (Aug. 31, 2004 - NZ$ 200,000) 174,933 173,120 Junior subordinated notes (1) - 881,116 Other 16,813 18,592 ---------- --------- 2,881,755 2,959,128 Effect of foreign currency swaps 286,366 275,127 ---------- --------- Long term debt 3,168,121 3,234,255 Less portion due within one year (22,285) (33,204) ---------- --------- Long term portion 3,145,836 3,201,051 ========== =========
Except for the change noted in (1), the terms and conditions of the long term debt are the same as disclosed in the August 31, 2004 consolidated financial statements. (1) On November 18, 2004, the Company completed an exchange offer to exchange a new series of 8% Senior Subordinated notes due 2012 for the outstanding 12 1/8% Senior notes due 2010 issued by the Hollinger Participation Trust. In the exchange offer, the holders of the trust notes received US$1,240 principal amount of new notes in exchange for each US$1,000 of trust notes. In addition, the Company completed a concurrent offer of notes, proceeds of which were used to retire the 12 1/8% junior subordinated notes held by Hollinger, which had not been participated to the Hollinger Participation Trust. The effect of these transactions replaced the Company's existing $903.6 million 12 1/8% junior subordinated notes (including accrued interest to November 18, 2004) with new US$761.1 million 8% senior subordinated notes. Also on November 18, 2004, 3815668 Canada Inc., a wholly-owned subsidiary of the Company and the issuer of the above-mentioned notes, amalgamated with CanWest Media Inc., which is also a wholly-owned subsidiary of the Company. The issuance of the new notes was recorded at their fair value at November 18, 2004 of $944 million, including a premium of $36 million. The difference between the fair value of the new notes and the book value of the junior subordinated notes together with certain other costs of settling the debt totaling $44 million, was charged to earnings as a loss on debt extinguishment. The Company has entered into a US$761.1 million cross-currency interest rate swap resulting in floating interest rates on its senior subordinated notes at interest rates based on CDOR plus a margin and a fixed currency exchange rate of US$1:$1.1932 until September 2012. 12 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. 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 $97.0 million in the nine months ended May 31, 2005 (2004 - $28.0 million), $36.6 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 declining interest rates may result in further payments to counterparties. 6. INVESTMENT GAINS, LOSSES AND WRITE-DOWNS The Company has recorded the following investment gains and losses.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED --------------------------- --------------------------- MAY 31, 2005 MAY 31, 2004 MAY 31, 2005 MAY 31, 2004 Gain on sale of investments - - 2,171 - Dilution gain - TEN Group - 172 733 1,873 Other 285 182 (2,673) (4,333) --- --- ------ ------ 285 354 231 (2,460) === === ====== ======
7. DISCONTINUED OPERATIONS Following a period of poor financial performance and continued weakness in international demand for its films and television programs, the Company commenced a process to sell its Fireworks Entertainment Division. As a result, the results of operations of Fireworks were classified as earnings (losses) from discontinued operations 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 held for sale. Prior to the classification as a discontinued operation, these results were reported within the Canadian Entertainment segment. On April 29, 2005, a subsidiary of the Company announced an agreement to sell certain assets and operations which comprise its film and television program operations for net proceeds of approximately $28 million, subject to closing adjustments. The transaction is expected to close in July 2005. This transaction excludes certain film and television program rights which the Company intends to dispose by sale as well as certain receivables and payables which will be settled by the Company. 13 The loss from discontinued operations of Fireworks are summarized as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- MAY 31, MAY 31, MAY 31, MAY 31, 2005 2004 2005 2004 Revenue 8,809 28,064 46,026 93,864 ====== ====== ====== ======== Earnings (loss) from discontinued operations before tax expense (5,958) 2,174 (5,180) (209,527) Income tax expense 147 312 1,002 449 ------ ------ ------ -------- Earnings (loss) from discontinued operations (6,105) 1,862 (6,182) (209,976) ====== ====== ====== ======== Earnings (loss) from discontinued operations per share: Basic $ (0.03) $ 0.01 $ (0.03) $ (1.19) Diluted $ (0.03) $ 0.01 $ (0.03) $ (1.19)
The carrying value of the net assets to be sold is as follows:
AS AT MAY 31, AS AT AUGUST 31, 2005 2004 Receivables 38,659 85,269 Investment in film and television programs 13,521 - Other current assets 316 3,825 -------- ------- Total current assets 52,496 89,094 -------- ------- Investment in film and television programs 1,587 37,971 Other assets - 405 -------- ------- Total non current assets 1,587 38,376 -------- ------- Debt (4,250) (23,571) (1) Other current liabilities (14,712) (46,145) -------- ------- Total current liabilities (18,962) (69,716) -------- ------- Net assets 35,121 57,754 ======== =======
(1) This included a three year revolving facility collateralized by certain assets of Fireworks Entertainment Inc. This loan was fully repaid and effective December 21, 2004, the facility has been terminated. 14 8. 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, 2005 2004 2005 2004 Basic weighted average shares outstanding during the period 177,333,133 177,275,947 177,307,400 177,222,140 Dilutive effect of options 483,673 160,171 331,925 173,411 ----------- ----------- ----------- ------------ Diluted weighted average shares outstanding during the period 177,816,806 177,436,118 177,639,325 177,395,551 =========== =========== =========== =========== Options outstanding that would have been anti-dilutive 691,412 1,940,571 977,303 1,860,889 =========== =========== =========== ============
9. STOCK BASED COMPENSATION The Company adopted the fair value method of accounting for stock based compensation on a prospective basis for options granted subsequent to September 1, 2003, resulting in compensation expense and a credit to contributed surplus for the nine months ended May 31, 2005, of $2.4 million (2004 - $0.8 million). The fair value of the options granted during the nine months ended May 31, 2005, was estimated using the Black-Scholes option pricing model with the assumptions of no dividend yield (2004 - nil), an expected volatility of 42% (2004 - 52%), risk free interest rates of 4.2% (2004 - 4.5% to 4.9%) and an expected life of 7 years (2004 - 7 to 9 years). The total fair value of 1,177,500 stock options (2004 - 510,500) that were granted by the Company during the nine months ended May 31, 2005, was $6.4 million (2004 - $3.9 million), a weighted average fair value per option of $5.43 (2004 - $7.64). During the first nine months, 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, 2005, the Company recorded compensation expense of $0.4 million related to these shares. The following are proforma results reflecting the fair value based method of accounting for stock based compensation for options issued prior to September 1, 2003. The proforma cost of share compensation expense for the three and nine months ended May 31, 2005, would be $0.3 million and $0.9 million respectively (2004 - $0.4 million and $1.2 million). A value of $1.9 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, 2005, would be $58.5 million, $0.33 and $0.33 respectively (2004 - $52.1 million, $0.29, and $0.29), and nine months ended May 31, 2005, would be $121.6 million $0.69 and $0.68 respectively (2004 - $133.3 million, $0.75, and $0.75). The resulting proforma net earnings (loss), basic and diluted earnings per share for the three months ended May 31, 2005, would be $52.4 million, $0.30 and $0.29 respectively (2004 - $53.9 million, $0.30, and $0.30), and nine months ended May 31, 2005, would be $115.4 million, $0.65 and $0.65 respectively (2004 - ($76.6) million, ($0.43) and ($0.43)). The Company's proforma disclosure does not apply to awards prior to 1996. 15 10. RELATED PARTY TRANSACTIONS Senior subordinated notes held by CanWest Communications Corporation, the Company's parent, totaled $52.6 million (US$41.9 million) at May 31, 2005 (August 31, 2004 - $55.0 million (US$41.9 million)). This debt matures on May 15, 2011 and bears interest at 10.625%. For the nine months ended May 31, 2005, interest expense related to this debt totaled $4.5 million (2004 - $4.7 million). An affiliate of 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, 2005, rent paid to this company amounted to $0.8 million (2004 - $0.8 million). 11. 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 plans is June 30 of each year. Information regarding the components of net periodic benefit cost for the defined 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, 2005 2004 2005 2004 2005 2004 2005 2004 Current service cost 4,443 4,254 333 315 13,329 12,760 998 945 Employee contributions (1,540) (1,515) - - (4,620) (4,544) - - Accrued interest on benefits 6,108 5,610 587 583 18,323 16,829 1,760 1,750 Expected return on plan assets (5,056) (4,585) - - (15,167) (13,754) - - Amortization of transitional obligation 148 147 - - 443 442 - - Amortization of past service costs 301 301 34 76 904 904 102 229 Amortization of net actuarial loss (gain) 757 839 (14) 34 2,271 2,517 (41) 102 Changes in valuation allowance (18) (21) - - (53) (63) - - ------- ------- ------- ------- ------- ------- ------- ------- Total pension and post retirement benefit expense 5,143 5,030 940 1,008 15,430 15,091 2,819 3,026 ======= ======= ======= ======= ======= ======= ======= =======
16 12. CONTINGENCIES (a) On December 17, 2003, the Company filed a statement of claim against Hollinger International Inc., Hollinger Inc. and certain related parties in the amount of $25.7 million plus interest representing amounts owed to the Company related to its acquisition of 50% of The National Post Company partnership in March 2002. In August 2004, the Company obtained a summary judgment in respect of its claim against Hollinger for $22.5 million of this claim plus interest. A payment of $26.5 million was received in November 2004 in satisfaction of this claim. The Company has also requested arbitration related to a further $83.2 million owed by Hollinger International Inc. and Hollinger Canadian Newspapers Limited Partnership related to certain unresolved matters related to its November 15, 2000 acquisition of certain newspaper assets from Hollinger International Inc. and Hollinger Canadian Newspapers Limited Partnership. Hollinger International disputes this claim and claims that it and certain of its affiliates are owed $45 million by the Company. The outcome of this arbitration is not determinable. (b) The Company entered into a Management Services Agreement with The Ravelston Corporation Limited ("Ravelston"). The agreement provided for annual payments of $6.0 million. Under the terms of the agreement, either party may terminate the agreement upon six months notice. In the event of termination by Ravelston, a fee in the amount of $22.5 million is payable. The agreement also provides that either party may terminate the agreement upon notice to the other party if the other party, among other things, ceases to carry on business or is insolvent. No payment is required by CanWest where the agreement is terminated by CanWest pursuant to the provisions related to insolvency. In May 2005 Ravelston provided notice to terminate in six months, immediately prior to filing under the Canada Creditors' Arrangement Act ("CCAA"). The Company, prior to Ravelston's CCAA filing, provided notice of immediate termination of the agreement on the basis of Ravelston's insolvency. However, the court has imposed a stay of proceedings such that the termination of the agreement by CanWest has been stayed by the CCAA Order. The outcome of the issues raised by the termination of the agreement by CanWest and the delivery of the notice of termination by Ravelston cannot be determined at this time. Should the Company not be successful in its termination of the agreement, the Company would be required to make an additional payment of $25.5 million to Ravelston. (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 interests 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, which was substantially the same as the previous claim, seeking damages of $405 million. The Company believes the allegations are substantially without merit and not likely to have a material adverse effect on its business, financial condition or results of operation. The Company intends to vigorously defend this lawsuit. (d) 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. 17 13. SEGMENTED INFORMATION The Company operates primarily within the publishing, online, broadcasting and outdoor advertising industries in Canada, New Zealand, Ireland and Australia. Each segment below operates as a strategic business unit with separate management. Segment performance is measured primarily on the basis of operating profit. The 2004 results have been restated to reflect the consolidation of TEN Group in accordance with AcG-15 (see note 1). Segmented information in Canadian dollars is as follows:
SEGMENT OPERATING SEGMENT OPERATING REVENUE PROFIT REVENUE (1) PROFIT ------------------ ------------------ ----------------------- ----------------- 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, 2005 2004 2005 2004 2005 2004 2005 2004 Revised Revised Revised Revised (note 1) (note 1) (note 1) (note 1) Publishing and Online-Canada 323,383 311,419 74,956 74,269 938,609 912,822 215,256 213,995 ------- ------- ------- ------- --------- --------- ------- ------- Television Canada 200,696 207,483 56,849 61,322 564,695 559,712 138,012 147,450 Australia-Network TEN 194,452 188,766 52,929 55,491 595,876 545,832 231,894 197,628 New Zealand 30,948 26,610 6,023 4,748 89,803 78,554 22,819 17,661 Ireland 10,386 9,423 4,288 2,993 30,168 27,042 11,542 8,879 ------- ------- ------- ------- --------- --------- ------- ------- Total television 436,482 432,282 120,089 124,554 1,280,542 1,211,140 404,267 371,618 Radio - New Zealand 23,054 20,833 5,120 5,927 71,229 65,299 21,115 20,944 Outdoor - Australia 26,803 19,407 5,327 3,737 80,625 57,149 18,024 10,361 Corporate and other - - (7,878) (6,120) - - (22,747) (20,657) ------- ------- ------- ------- --------- --------- ------- ------- Total operating segments 809,722 783,941 197,614 202,367 2,371,005 2,246,410 635,915 596,261 ======= ======= ======= ======= ========= ========= ======= =======
(1) Represents revenue from third parties. In addition the following segments recorded intercompany revenues in the nine months ended May 31, 2005: Canadian Television - $0.7 million (2004 - $0.7 million), Publishing and Online - Canada - $0.6 million (2004 - nil). The following table reconciles segment operating profit to net earnings (loss):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- MAY 31, MAY 31, MAY 31, MAY 31, 2005 2004 2005 2004 Revised Revised (note 1) (note 1) Segment operating profit 197,614 202,367 635,915 596,261 Amortization of intangibles 4,988 4,552 14,885 13,640 Amortization of property, plant and equipment 23,623 24,088 68,628 69,786 Other amortization 1,291 1,281 3,788 3,670 --------- -------- --------- ------- Operating income 167,712 172,446 548,614 509,165 Interest expense (59,003) (85,341) (193,337) (258,843) Interest income 725 291 2,210 6,242 Amortization of deferred financing costs (3,093) (2,043) (8,414) (6,060) Interest rate and foreign currency swap gains (losses) (12,584) 7,004 (79,790) (9,099) Foreign exchange gains (losses) 4,263 (1,360) 28,706 3,766 Investment gains, losses and write-downs 285 354 231 (2,460) Loss on debt extinguishment - - (43,992) - Dividend income - 2,323 - 3,738 --------- -------- --------- ------- 98,305 93,674 254,228 246,449 Provision for income taxes 18,127 19,290 54,186 47,186 --------- -------- --------- ------- Earnings before the following 80,178 74,384 200,042 199,263 Minority interests (22,251) (16,691) (78,626) (62,290) Interest in earnings (loss) of equity accounted affiliates 504 (207) 1,551 (556) Realized currency translation adjustments 392 (5,011) (456) (1,885) --------- -------- --------- ------- Net earnings from continuing operations 58,823 52,475 122,511 134,532 Earnings (loss) from discontinued operations (6,105) 1,862 (6,182) (209,976) --------- -------- --------- ------- Net earnings (loss) for the period 52,718 54,337 116,329 (75,444) ========= ======== ========= =======
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