-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JbEeHxApg+2YPgqsOJDDRJ8Q+IQuu4CMAojPxsCTUhHlbU8TfQ/KPiGmjEyfE9ME Vz9ilMVUQf/f49hTsyg2yw== 0000950123-06-004559.txt : 20060412 0000950123-06-004559.hdr.sgml : 20060412 20060412123414 ACCESSION NUMBER: 0000950123-06-004559 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060410 FILED AS OF DATE: 20060412 DATE AS OF CHANGE: 20060412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANWEST GLOBAL COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001003565 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 000000000 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14148 FILM NUMBER: 06755292 BUSINESS ADDRESS: STREET 1: 3100 TD CENTRE STREET 2: 201 PORTAGE AVE CITY: WINNIPEG MANITOBA STATE: A2 BUSINESS PHONE: 2049562025 MAIL ADDRESS: STREET 1: 1981 MCGILL COLLEGE AVE CITY: MONTREAL STATE: A8 ZIP: H3A 3C7 6-K 1 y19646be6vk.txt FORM 6-K ================================================================================ FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 For the month of April 2006 Commission File Number: 001-14148 ---------- CANWEST GLOBAL COMMUNICATIONS CORP. (Translation of registrant's name into English) ---------- 3100 CANWEST GLOBAL PLACE 201 PORTAGE AVENUE WINNIPEG, MANITOBA, CANADA R3B 3L7 (204) 956-2025 (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F [ ] Form 40-F [X] Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):________ Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders. Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ___________. Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR. Indicate by check mark whether by furnishing the information contained in this Form the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes [ ] No [X] If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_________ ================================================================================ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANWEST GLOBAL COMMUNICATIONS CORP. Date: April 12, 2006 By: /s/ JOHN E. MAGUIRE ------------------------------------ John E. Maguire Chief Financial Officer EXHIBIT INDEX
Exhibit Number Description - ------- ----------- 1 CanWest Global Communications Corp. Interim Consolidated Financial Statements For the Three and Six Months Ended February 28, 2006 and February 28, 2005 (Unaudited). 2 CanWest Global Communications Corp. Interim Report to Shareholders For the Three and Six Months Ended February 28, 2006. 3 Canwest MediaWorks Inc. Interim Consolidated Financial Statements For the Three and Six Months Ended February 28, 2006 and February 28, 2005 (Unaudited). 4 Canwest MediaWorks Inc. Interim Report to Shareholders For the Three and Six Months Ended February 28, 2006.
EX-99.1 2 y19646bexv99w1.txt INTERIM CONSOLIDATED FINANCIAL STATEMENTS CANWEST GLOBAL COMMUNICATIONS CORP. INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006 AND FEBRUARY 28, 2005 (UNAUDITED) April 6, 2006 TO THE AUDIT COMMITTEE OF CANWEST 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 February 28, 2006 and 2005 and the related interim consolidated statements of earnings (loss), retained earnings and cash flows for the three and six month periods then ended. These interim consolidated financial statements are the responsibility of the Company's management. We performed our review in accordance with Canadian generally accepted standards for a review of interim financial statements by an entity's auditor. Such an interim review consists principally of applying analytical procedures to financial data, and making enquiries of, and having discussions with, persons responsible for financial and accounting matters. An interim review is substantially less in scope than an audit, whose objective is the expression of an opinion regarding the interim financial statements; accordingly, we do not express such an opinion. An interim review does not provide assurance that we would become aware of any or all significant matters that might be identified in an audit. Based on our review, we are not aware of any material modification that needs to be made for these interim consolidated financial statements to be in accordance with Canadian generally accepted accounting principles. This report is solely for the use of the Audit Committee of the Company to assist it in discharging its regulatory obligation to review these interim consolidated financial statements, and should not be used for any other purpose. Any use that a third party makes of this report, or any reliance or decisions made based on it, are the responsibility of such third parties. We accept no responsibility for loss or damages, if any, suffered by any third party as a result of decisions made or actions taken based on this report. (PRICEWATERHOUSECOOPERS LLP) CHARTERED ACCOUNTANTS CANWEST 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 SIX MONTHS ENDED ------------------------------- ------------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ---------------- ------------ ---------------- (REVISED NOTE 6) (REVISED NOTE 6) Revenue 645,615 680,192 1,494,030 1,541,501 Operating expenses 381,342 363,845 809,820 769,786 Selling, general and administrative expenses 183,358 169,484 370,106 339,607 Ravelston management contract termination -- 281 -- 562 ------- -------- ---------- ---------- 80,915 146,582 314,104 431,546 Amortization of intangibles 4,887 4,958 10,462 9,897 Amortization of property, plant and equipment 24,378 23,103 47,915 44,593 Other amortization 1,358 1,318 2,832 2,482 ------- -------- ---------- ---------- Operating income 50,292 117,203 252,895 374,574 Interest expense (46,327) (61,046) (98,839) (133,776) Interest income 737 839 1,252 1,485 Amortization of deferred financing costs (1,481) (3,120) (3,430) (5,321) Interest rate and foreign currency swap losses (7,160) (4,902) (127,699) (49,500) Foreign exchange gains (losses) 149 (3,759) (425) 6,737 Investment gains, losses and write-downs (note 5) 1,839 (1,689) 103,057 (54) Loss on debt extinguishment (note 4) (291) -- (116,880) (43,992) ------- -------- ---------- ---------- (2,242) 43,526 9,931 150,153 Provision for (recovery of) income taxes (note 3) (109) (1,351) (54,987) 35,231 ------- -------- ---------- ---------- Earnings (loss) before the following (2,133) 44,877 64,918 114,922 Minority interests (16,729) (17,968) (60,444) (56,375) Interest in earnings (loss) of equity accounted affiliates (3) 596 827 1,047 Realized currency translation adjustments (1,664) (848) (1,780) (848) ------- -------- ---------- ---------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (20,529) 26,657 3,521 58,746 Earnings from discontinued operations (note 6) 1,232 1,539 7,132 4,865 ------- -------- ---------- ---------- NET EARNINGS (LOSS) FOR THE PERIOD (19,297) 28,196 10,653 63,611 ======= ======== ========== ========== EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS (IN DOLLARS): BASIC ($0.12) $ 0.15 $ 0.02 $ 0.33 DILUTED ($0.12) $ 0.15 $ 0.02 $ 0.33 EARNINGS (LOSS) PER SHARE (IN DOLLARS): BASIC ($0.11) $ 0.16 $ 0.06 $ 0.36 DILUTED ($0.11) $ 0.16 $ 0.06 $ 0.36
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 FEBRUARY 28, AUGUST 31, 2006 2005 ------------ ---------------- (REVISED NOTE 6) ASSETS CURRENT ASSETS Cash 62,148 28,947 Accounts receivable 453,540 483,245 Inventory 12,285 13,533 Investment in broadcast rights 238,229 183,114 Future income taxes 3,893 3,893 Other current assets 34,628 26,013 Assets of discontinued operations (note 6) 11,560 12,729 --------- --------- 816,283 751,474 Other investments 16,216 23,059 Investment in broadcast rights 25,786 20,139 Property, plant and equipment 690,676 706,536 Future income taxes 180,295 53,101 Other assets 140,012 198,244 Intangible assets 1,117,609 1,142,118 Goodwill 2,403,090 2,420,851 Assets of discontinued operations (note 6) 13,210 12,896 --------- --------- 5,403,177 5,328,418 ========= ========= LIABILITIES CURRENT LIABILITIES Accounts payable 111,493 173,987 Accrued liabilities 264,663 291,395 Income taxes payable 23,633 51,764 Broadcast rights accounts payable 106,739 75,615 Deferred revenue 35,983 36,774 Future income taxes 51,608 44,663 Current portion of long term debt and obligations under capital leases 6,165 9,946 Liabilities of discontinued operations (note 6) 15,041 18,692 --------- --------- 615,325 702,836 Long term debt and related foreign currency swap liability (note 4) 2,672,715 2,886,090 Interest rate and foreign currency swap liability 130,450 215,075 Obligations under capital leases 14,799 16,101 Other accrued liabilities 167,322 143,574 Future income taxes 107,269 77,255 Minority interests 493,241 90,581 Liabilities of discontinued operations (note 6) 958 958 --------- --------- 4,202,079 4,132,470 --------- --------- Contingencies (note 11) SHAREHOLDERS' EQUITY Capital stock 850,216 849,909 Contributed surplus 9,334 7,685 Retained earnings 360,944 350,291 Cumulative foreign currency translation adjustments (19,396) (11,937) --------- --------- 1,201,098 1,195,948 --------- --------- 5,403,177 5,328,418 ========= =========
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 MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Retained earnings - beginning of period 380,241 375,416 350,291 340,001 Net earnings (loss) for the period (19,297) 28,196 10,653 63,611 ------- ------- ------- ------- Retained earnings - end of period 360,944 403,612 360,944 403,612 ======= ======= ======= =======
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 THREE MONTHS ENDED FOR THE SIX MONTHS ENDED ------------------------------- ------------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ---------------- ------------ ---------------- (REVISED NOTE 6) (REVISED NOTE 6) CASH GENERATED (UTILIZED) BY: OPERATING ACTIVITIES Net earnings (loss) for the period (19,297) 28,196 10,653 63,611 Earnings from discontinued operations (1,232) (1,539) (7,132) (4,865) Items not affecting cash Amortization 32,104 32,499 64,639 62,293 Non-cash interest expense (income) (906) 2,915 355 26,523 Future income taxes 1,617 (4,134) (82,968) (17,927) Realized currency translation adjustments 1,664 848 1,780 848 Interest rate and foreign currency swap losses net of settlements 2,778 16,869 25,723 17,322 Loss on debt extinguishment 291 -- 116,880 43,992 Investment gains, losses and write-downs (1,839) 1,689 (103,057) 54 Amortization and write-down of film and television programs -- 280 -- 3,264 Pension expense 248 3,186 4,181 5,967 Minority interests 16,729 17,968 60,444 56,375 Earnings (loss) from equity accounted affiliates 3 (596) (827) (1,047) Foreign exchange (gains) losses (166) 2,005 (892) (3,515) Stock based compensation expense 1,411 706 2,051 2,115 -------- -------- ---------- -------- 33,405 100,892 91,830 255,010 Changes in non-cash operating accounts (10,041) 71,434 (119,766) (47,640) -------- -------- ---------- -------- Cash flows from operating activities of continuing operations 23,364 172,326 (27,936) 207,370 Cash flows from operating activities of discontinued operations 1,961 10,104 4,876 30,542 -------- -------- ---------- -------- Cash flows from operating activities 25,325 182,430 (23,060) 237,912 -------- -------- ---------- -------- INVESTING ACTIVITIES Other investments (2,571) 209 (2,571) 292 Investment in broadcast licences -- (1,543) (1,066) (1,543) Acquisitions -- -- -- (12,493) Proceeds from divestitures (519) -- 518,135 -- Proceeds from sales of other investments 9,300 -- 9,300 2,171 Proceeds from sale of property, plant and equipment -- 2,983 970 3,383 Purchase of property, plant and equipment (18,219) (20,674) (38,894) (38,520) Investing activities from discontinued operations (168) (454) (367) (617) -------- -------- ---------- -------- (12,177) (19,479) 485,507 (47,327) -------- -------- ---------- -------- FINANCING ACTIVITIES Issuance of long term debt, net of financing costs 126,644 -- 943,584 144,212 Repayment of long term debt (5,526) (91,967) (1,383,056) (258,878) Advances (repayments) of revolving facilities, net of financing costs (101,359) 3,740 481,267 78,006 Settlement of swap liabilities -- -- (354,205) -- Swap recouponing (payments) receipts -- 35,953 (48,726) (62,549) Payments of capital leases (128) (118) (586) (538) Issuance of share capital 204 553 307 559 Issuance of share capital of Network TEN -- 3,852 498 5,317 Payment of distribution to minority interests (57,646) (47,757) (61,498) (47,757) Financing activities from discontinued operations (3,362) (9,099) (5,020) (23,823) -------- -------- ---------- -------- (41,173) (104,843) (427,435) (165,451) -------- -------- ---------- -------- Foreign exchange gain (loss) on cash denominated in foreign currencies (3,153) 780 (1,811) 942 -------- -------- ---------- -------- NET CHANGE IN CASH (31,178) 58,888 33,201 26,076 CASH - BEGINNING OF PERIOD 93,326 61,303 28,947 94,115 -------- -------- ---------- -------- CASH - END OF PERIOD 62,148 120,191 62,148 120,191 ======== ======== ========== ========
The notes constitute an integral part of the consolidated financial statements. CANWEST GLOBAL COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006 AND FEBRUARY 28, 2005 (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED) 1. SIGNIFICANT ACCOUNTING POLICIES The Company is an international media company with interests in broadcast television, publishing, radio, specialty cable channels, outdoor advertising, and Internet websites in Canada, Australia, New Zealand and Ireland. The Company's operating segments include television, publishing and interactive operations, radio and outdoor advertising. In Canada, the Television segment includes the operation of the Global Television Network, Prime TV, various other conventional and specialty channels and Cool FM and The Beat radio stations. The Australian Television segment includes TEN Group Pty Limited's ("TEN Group") TEN Television Network ("Network TEN"). The Canadian Publishing and Interactive segment includes the publication of a number of newspapers, including metropolitan daily newspapers and the National Post, as well as operation of the canada.com web portal and other web-based operations. The Company's 74.2% ownership of the publishing and interactive operations, excluding the National Post, is held through CanWest MediaWorks Limited Partnership ("Limited Partnership"). The New Zealand Television segment includes CanWest MediaWorks (NZ) Limited's 3 and C4 Television Networks. The New Zealand Radio segment includes CanWest MediaWorks (NZ) Limited's RadioWorks operation, which is comprised of six nationally-networked radio brands and two local radio brands. The Australian Outdoor Advertising segment includes EyeCorp Pty Limited ("Eye Corp"), an outdoor advertising operation which is wholly owned by TEN Group. Corporate and Other includes various investments in media operations and corporate costs. The Company's broadcast customer base is comprised primarily of large advertising agencies, which place advertisements with the Company on behalf of their customers. Publishing and interactive revenues include advertising, circulation and subscriptions which are derived from a variety of sources. The Company's advertising revenues are seasonal. Revenues and accounts receivable are highest in the first and third quarters, while expenses are relatively constant throughout the year. A summary of significant accounting policies followed in the preparation of these consolidated financial statements is as follows: BASIS OF PRESENTATION The consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada for interim financial statements and reflect all adjustments which are, in the opinion of management, necessary for fair statement of the results of the interim periods presented. However, these interim financial statements do not include all of the information and disclosures required for annual financial statements. The accounting policies used in the preparation of these interim financial statements are the same as those used in the most recent annual financial statements. These interim financial statements should be read in conjunction with the most recent annual financial statements of the Company. All amounts are expressed in Canadian dollars unless otherwise noted. 2. ACQUISITIONS AND DIVESTITURE Acquisitions On September 1, 2004, Eye Corp acquired the remaining 50% of Eye Shop Pty Limited (formerly Eye Village Joint Venture) for $12.5 million (A$13.4 million). In addition on July 1, 2005, Eye Corp acquired 100% of Eye Drive Melbourne Pty Limited (formerly Southcoast Pty Limited) for $7.0 million (A$7.8 million). The principal business activities of these companies is the sale of outdoor advertising. Eye Corp accounted for these acquisitions using the purchase method. As such, the results of operations reflect revenue and expenses of the acquired operations since the date of acquisition. A summary of the fair value of the assets and liabilities acquired is as follows: Current assets 5,872 Property, plant and equipment 5,224 Site licenses 3,931 Goodwill 9,633 Liabilities (1,607) ------ 23,053 ====== Consideration: Cash 19,487 Carrying value of investment at date of acquisition 3,566 ------ 23,053 ======
Divestiture On October 13, 2005, the Company transferred its investment in its newspaper and interactive operations (excluding the National Post) and certain shared service operations, which provide customer support and administrative services to the Company, (the "Publications Group") to a new entity, the Limited Partnership. In exchange, the Company received units of the Limited Partnership representing a 74.2% ownership interest and notes receivable of $1,339.5 million. Concurrently, the CanWest MediaWorks Income Fund (the "Fund") closed its initial public offering ("IPO") of units and invested the proceeds for units of the Limited Partnership representing a 25.8% interest. Total proceeds for the offering were $550 million and costs of the offering were $34.7 million and were paid by the Limited Partnership. In addition, the Limited Partnership obtained credit facilities in the amount of $1 billion and drew $830.0 million on the credit facilities. The Limited Partnership utilized the proceeds of the issuance of the units to the Fund and $822.5 million in drawings under its new credit facilities to repay the $1,339.5 million note payable to the Company. During the second quarter, the Company changed its accounting entries related to this transaction resulting in revisions to the interim financial statements as at November 30, 2005 and for the three months then ended. Initially, the minority interest was calculated based on the net liabilities recorded in the underlying subsidiary rather than net assets in the consolidated accounts which reflected fair value allocations from the prior acquisition of 100% of the publishing businesses. In the second quarter, the Company determined that the partial disposition of assets reflected in the first quarter was not necessary for the purpose of calculating the minority interest. This change did not have any effect on cash flows. The statement of earnings for the three months ended November 30, 2005 has been revised to increase investment gains by $16.1 million and decrease future income tax recovery by $16.1 million. The balance sheet as at November 30, 2005 has been revised as follows:
NOVEMBER 30, 2005 ----------------------------------- AS REPORTED REVISION AS REVISED ----------- -------- ---------- Current assets 940,083 -- 940,083 Property, plant and equipment 693,258 9,028 702,286 Other long term assets 379,013 -- 379,013 Intangible assets 1,040,680 90,354 1,131,034 Goodwill 2,006,426 413,599 2,420,025 --------- ------- --------- 5,059,460 512,981 5,572,441 ========= ======= ========= Current liabilities 724,878 (1,343) 723,535 Future income taxes 98,647 16,083 114,730 Minority interests 39,405 498,241 537,646 Other long term liabilities 2,973,051 -- 2,973,051 Shareholders' equity 1,223,479 -- 1,223,479 --------- ------- --------- 5,059,460 512,981 5,572,441 ========= ======= =========
Approximately 26% of the Company's units of the Limited Partnership are subordinated in the payment of distributions if the Limited Partnership does not have adequate resources on a quarterly basis to fund distributions. The subordination period ends October 31, 2007, at which time these units will have the same terms and conditions as the other partnership units. 3. INCOME TAXES The Company's provision for income taxes reflects an effective income tax rate which differs from the combined Canadian statutory rate as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Income taxes at combined Canadian statutory rate of 34.49% (2005 - 35.20%) (773) 15,321 3,425 52,854 Non-taxable portion of capital (gains) and losses (18) 241 (2,279) 1,600 Effect of valuation allowance on future tax assets 2,929 243 6,364 1,527 Effect of foreign income tax rates differing from Canadian income tax rates (318) (2,834) (5,118) (10,256) Incremental taxes on debt extinguishment -- (80) -- 5,697 Change in expected future tax rates (202) (164) (3,188) (4,338) Large corporations tax 759 491 1,693 1,440 Non-taxable dilution gain on disposition to Limited Partnership (466) -- (44,440) -- Limited Partnership net earnings allocated to minority interests (4,299) -- (6,905) -- Effect of uncertain tax positions 1,550 (4,899) (5,502) (4,899) Non-deductible expenses 707 629 1,728 1,338 Prior period temporary differences not previously tax effected -- (6,989)(1) -- (6,989)(1) Other 22 (3,310) (765) (2,743) ------ ------ ------- ------- Provision for (recovery of) income taxes (109) (1,351) (54,987) 35,231 ====== ====== ======= =======
(1) The provision for income taxes for the three and six months ended February 28, 2005, includes adjustments for prior period temporary differences not previously tax effected aggregating to $7.0 million ($6.2 million future income tax, and $0.8 million current income tax). The Company has determined these adjustments are not material to the reported results, accordingly, the adjustments were included in earnings. This adjustment has the effect of increasing basic and diluted earnings per share for the three and six months ended February 28, 2005, by $0.04 per share. 4. LONG TERM DEBT
AS AT AS AT FEBRUARY 28, AUGUST 31, 2006 2005 ------------ ---------- Senior Secured Credit facility(1) 377,437 -- Senior Secured Credit facility (2) -- 346,100 Senior unsecured notes (2) 284 237,420 Senior subordinated notes (2) 9,807 549,632 Senior subordinated notes 896,720 936,967 CanWest MediaWorks Limited Partnership Secured Credit facility(3) 825,000 -- Bank loan Australian $95,000 (Aug. 31, 2005 -Australian $180,000) 80,323 160,794 Senior unsecured notes US$125,000 (Aug. 31, 2005 - US$125,000) 142,242 148,609 Senior notes Australian $150,000(4) 126,825 -- Term bank loan NZ$179,700 (Aug. 31, 2005 - NZ$187,802) 135,620 154,824 Other 4,250 4,250 --------- --------- 2,598,508 2,538,596 Effect of foreign currency swaps (2) 78,457 356,241 --------- --------- Long term debt 2,676,965 2,894,837 Less portion due within one year (4,250) (8,747) --------- --------- Long term portion 2,672,715 2,886,090 ========= =========
Except for the changes noted in (1) (2) (3) and (4), the terms and conditions of the long term debt are the same as disclosed in the August 31, 2005 consolidated financial statements. (1) In October 2005, the Company obtained a new $500 million revolving term credit facility. During the second quarter, the Company finalized an amendment to the credit facility that increased the amount available to $600 million and revised certain of the financial covenants under the credit facility. As at February 28, 2006, the Company has $191.0 million, net of letters of credit of $31.0 million, available on this facility. The revolving facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. This facility is secured by substantially all of the Company's directly held assets including the assets of its Canadian broadcast operations, the National Post, partnership units of CanWest MediaWorks Limited Partnership, and shares of CanWest MediaWorks (NZ) Limited and TEN Group Pty Limited, excluding the convertible debenture held in TEN Group Pty Limited. (2) The Company settled debt and associated swaps as follows: i. In October 2005, the Company completed a tender offer for its 10.625% senior subordinated notes payable due in 2011 and its 7.625% senior unsecured notes payable due in 2013. Substantially all of the notes under these facilities were settled. Debt with a book value of $765.8 million was retired for cash of $849.7 million. In addition, deferred financing and other costs of $27.0 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $75.6 million, net of tax of $35.3 million. As a result of the repayment of these notes the Company recorded a swap loss of $34.5 million, net of tax of $19.0 million related to the associated cross currency interest rate swaps. The notes not settled under the tender offers are due on the original due dates and are subject to the same terms except that the covenants associated with these notes have been eliminated. ii. In October 2005, the Company retired its senior credit facility. Debt with a book value of $526.4 million was settled for cash of $526.4 million. In addition, deferred financing costs of $6.0 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $3.9 million, net of tax of $2.1 million. In addition, as a result of the settlement of this debt, the Company will record a loss of $46.3 million, net of tax of $25.4 million related to the associated interest rate and cross currency interest rate swaps. iii. In November 2005, the Company retired interest rate and cross currency interest rate swap contracts relating to the 7.625% notes, the 10.625% notes and 50% of the cross currency interest rate swap related to the senior secured credit facilities for cash of $364.0 million. (3) CanWest MediaWorks Limited Partnership obtained credit facilities in the amount of $1 billion consisting of an $825 million non-revolving term credit facility and a $175 million revolving term credit facility. The revolving facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The non-revolving facility matures in five years, and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The Limited Partnership has drawn $825.0 million on its non-revolving facility and nil on its revolving facility. The Limited Partnership has entered into five year interest rate swap contracts to fix the interest payments on a notional amount of $825.0 million for the first three years and $660.0 million for the remaining two years resulting in an effective interest rate of 5%. (4) In December 2005, TEN Group completed a private placement of floating rate senior notes due 2015 in the amount of A$150 million. Interest is due quarterly with the rate set at the beginning of each quarter and is calculated based upon the three month BBSW rate plus 0.69%. The notes are secured by a direct, unconditional and general obligation of TEN Group except that they are subordinated to the secured debt. Under its Senior Secured Credit facility the Company is required to maintain a fair value of its interest rate swaps and foreign currency and interest rate swaps above a prescribed minimum liability ($500 million). There are also prescribed minimum liabilities with individual counterparties, which have two-way recouponing provisions. The Company was required to make net recouponing payments of $119 million in the six months ended February 28, 2006 (2005 - $97 million), $69 million of this recouponing payment related to overhanging swaps and accordingly was reflected in cash flows from operating activities. Further strengthening of the Canadian currency and/or changes in interest rates may result in further payments to counterparties. The Company is subject to covenants under certain of the credit facilities referred to above, including thresholds for leverage and interest coverage and is also subject to certain restrictions under negative covenants. 5. INVESTMENT GAINS, LOSSES AND WRITE-DOWNS The Company has recorded the following investment gains and losses.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Dilution gain - sale of 25.8% of Limited Partnership 1,555 -- 101,688 -- Gain on sale of investments 138 -- 138 2,171 Dilution gain - TEN Group and CanWest MediaWorks (NZ) Limited 1 557 64 733 Other 145 (2,246) 1,167 (2,958) ----- ------ ------- ------ 1,839 (1,689) 103,057 (54) ===== ====== ======= ======
6. DISCONTINUED OPERATIONS 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. We expect this transaction to close within a year. Prior to the classification as a discontinued operation, the results of TV3 Ireland were reported within the Ireland television segment. The classification of TV3 Ireland as a discontinued operation has decreased earnings from continuing operations by $1.7 million and $6.6 million for the three and six months ended February 28, 2006, respectively, (2005 - three months $1.6 million, six months $4.9 million). In addition cash flows from continuing operations have been decreased by $1.6 million and $1.0 million for the three and six months ended February 28, 2006, respectively, (2005 - increased by, for the three months $0.7 million, six months $2.3 million). The earnings from discontinued operations are summarized as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Revenue 8,696 31,344 21,968 64,063 ====== ======= ======= ======= Earnings from discontinued operations before tax expense 1,842 2,413 8,302 6,548 Income tax expense 610 874 1,170 1,683 ------ ------- ------- ------- Earnings from discontinued operations(1) 1,232 1,539 7,132 4,865 ====== ======= ======= ======= Earnings from discontinued operations per share (in dollars): Basic $ 0.01 $ 0.01 $ 0.04 $ 0.03 Diluted $ 0.01 $ 0.01 $ 0.04 $ 0.03
(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 FEBRUARY 28, AS AT AUGUST 31, 2006 2005 ------------------ ---------------- Investment in broadcast rights 5,586 8,136 Other current assets 5,974 4,593 ------ ------ Total current assets 11,560 12,729 ------ ------ Investment in broadcast rights 2,841 1,058 Other non-current assets 10,369 11,838 ------ ------ Total non-current assets 13,210 12,896 ------ ------ Debt 6,470 12,270 Other current liabilities 8,571 6,422 ------ ------ Total current liabilities 15,041 18,692 ------ ------ Long term liabilities 958 958 ------ ------ Net assets 8,771 5,975 ====== ======
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 SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Basic weighted average shares outstanding during the period 177,423,783 177,309,310 177,412,035 177,294,320 Dilutive effect of options and shares 142,942 517,635 323,538 228,075 ----------- ----------- ----------- ----------- Diluted weighted average shares outstanding during the period 177,566,725 177,826,945 177,735,573 177,522,395 =========== =========== =========== =========== Options outstanding that would have been anti-dilutive 3,054,682 728,673 1,945,682 1,581,865 =========== =========== =========== ===========
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 six months ended February 28, 2006 of $0.9 million (2005 - $1.8 million). The fair value of the options granted during the six months ended February 28, 2006 was estimated using the Black-Scholes option pricing model with the assumptions of no dividend yield (2005 - nil), an expected volatility of 31% (2005 - 42%), risk free interest rates of 4.0% (2005 - 4.2%) and an expected life of 7 years (2005 - 7 years). The total fair value of 982,750 stock options granted by the Company in the six months ended February 28, 2006 with an average exercise price of $10.10 per option was $4.1 million, a weighted average fair value per option of $4.17. During the six months ended February 28, 2005, 1,177,500 stock options were granted with a total fair value of $6.3 million, and a weighted average fair value per option of $5.35. During 2005, the Company agreed to issue approximately 187,000 shares, which vest in two years, for no consideration. The fair value of the shares at the time of issuance was $10.40 per share. During the six months ended February 28, 2006, the Company recorded compensation expense, and a credit to contributed surplus, of $0.3 million (2005 - $0.2 million) related to these shares. The proforma cost of share compensation expense, for awards granted prior to September 1, 2003, for the three and six months ended February 28, 2006 would be $0.2 million and $0.5 million, respectively (2005 - $0.3 million and $0.6 million). A value of $1.1 million would be charged to proforma net earnings in future years according to the vesting terms of the options. The resulting proforma net earnings (loss) from continuing operations, basic and diluted earnings (loss) per share for the three months ended February 28, 2006, would be ($20.8) million, ($0.12) and ($0.12), respectively (2005 - $26.3 million, $0.15, and $0.15), and six months ended February 28, 2006, would be $3.0 million $0.02 and $0.02, respectively (2005 - $58.1 million, $0.33, and $0.33). The resulting proforma net earnings (loss), basic and diluted earnings (loss) per share for the three months ended February 28, 2006, would be ($19.5) million, ($0.11) and ($0.11), respectively (2005 - $27.9 million, $0.16, and $0.16), and six months ended February 28, 2006, would be $10.2 million, $0.06 and $0.06, respectively (2005 - $63.0 million, $0.36 and $0.35). 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 six months ended February 28, 2006, interest expense related to this debt totaled $0.7 million (2005 - $3.0 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 six months ended February 28, 2006, rent paid to this company amounted to $0.6 million (2005 - $0.5 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 PENSION BENEFITS BENEFITS --------------------------- --------------------------- FOR THE THREE MONTHS ENDED --------------------------------------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Current service cost 5,781 4,443 451 333 Employee contributions (1,535) (1,540) -- -- Accrued interest on benefits 6,153 6,108 631 587 Expected return on plan assets (5,800) (5,056) -- -- Amortization of transitional obligation 109 148 76 -- Amortization of past service costs 301 301 34 34 Amortization of net actuarial loss (gain) 1,368 757 14 (14) Changes in valuation allowance (21) (18) -- -- ------ ------ ----- --- Total pension and post retirement benefit expense 6,356 5,143 1,206 940 ====== ====== ===== === POST RETIREMENT PENSION BENEFITS BENEFITS --------------------------- --------------------------- FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Current service cost 11,562 8,886 902 665 Employee contributions (3,071) (3,080) -- -- Accrued interest on benefits 12,306 12,215 1,262 1,173 Expected return on plan assets (11,600) (10,111) -- -- Amortization of transitional obligation 217 295 152 -- Amortization of past service costs 603 603 68 68 Amortization of net actuarial loss (gain) 2,737 1,514 29 (27) Changes in valuation allowance (42) (35) -- -- ------- ------- ----- ----- Total pension and post retirement benefit expense 12,712 10,287 2,413 1,879 ======= ======= ===== =====
11. CONTINGENCIES (a) The Company has requested arbitration related to $86.5 million owed by Hollinger International Inc., Hollinger Inc. and certain related parties (collectively "Hollinger") related to certain unresolved adjustments and claims related to its November 15, 2000 acquisition of certain newspaper assets from Hollinger. Hollinger disputes this claim and claims that it and certain of its affiliates are owed $45 million by the Company. The outcome and recoverability of this claim is not determinable. (b) In March 2001, a statement of claim was filed against the Company and certain of the Company's subsidiaries by CanWest Broadcasting Ltd.'s ("CBL's") former minority shareholders requesting, among other things, that their interests in CBL be purchased without minority discount. In addition, the claim alleges the Company wrongfully terminated certain agreements and acted in an oppressive and prejudicial manner towards the plaintiffs. The action was stayed on the basis that the Ontario courts have no jurisdiction to try the claim. In April 2004, a statement of claim was filed in Manitoba by the same minority shareholders, which was substantially the same as the previous claim, seeking damages of $405 million. In June 2005, the Company filed a Statement of Defence and Counterclaim. In its Counterclaim, the Company is seeking a declaration of the fair value of the former minority shareholders' interest in CBL and repayment of the difference between the fair value and the redemption amount paid by the Company to the former shareholders. The Company believes the allegations in the Statement of Claim are substantially without merit and not likely to have a material adverse effect on its business, financial condition or results of operation. The outcome of this claim is not determinable and the Company intends to vigorously defend this lawsuit. (c) The Company is one of several defendants to a claim by a proposed class of freelance writers instituted in July 2003, in respect of works that they provided to newspapers and other print publications in Canada. The total amount claimed (by all plaintiffs against all defendants) is $500 million in compensatory damages and $250 million in exemplary and punitive damages. The outcome of this claim is not determinable. (d) CanWest MediaWorks (NZ) Limited has received a Notice of Proposed Adjustment from the New Zealand Inland Revenue covering the years 2002 to 2004 that proposes a potential tax liability of NZ$13.3 million on the treatment of its optional convertible notes. A Notice of Proposed Adjustment is an instrument through which the New Zealand Inland Revenue advises a taxpayer that it is considering amending its tax assessment from that in the tax return and is not a confirmation of liability. CanWest MediaWorks (NZ) Limited is confident that the tax treatment that it has applied to the notes is correct and does not believe that any material additional tax liability will result. The outcome of this situation is not determinable and CanWest MediaWorks (NZ) Limited intends to dispute the proposed adjustments. (e) The Company is involved in various legal matters arising in the ordinary course of business. The resolution of these matters is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows. 12. SEGMENTED INFORMATION The Company operates primarily within the publishing and interactive, television, radio, and outdoor advertising industries in Canada, New Zealand, Ireland and Australia. Segmented information has been retroactively revised to reflect the Company's classification of the Ireland television segment as discontinued. Each segment operates as a strategic business unit with separate management. Segment performance is measured primarily upon the basis of segment operating profit. The Company accounts for inter-segmented information as if the sales were to third parties. Segmented information and a reconciliation from segment operating profit to earnings before income taxes are presented below:
REVENUE(1) SEGMENT OPERATING PROFIT(2) --------------------------- --------------------------- FOR THE THREE MONTHS ENDED --------------------------------------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2005 2005 ------------ ------------ ------------ ------------ Publishing and Interactive-Canada 301,096 289,467 47,511 55,211 ------- ------- ------- ------- Television Canada 153,829 163,718 (519) 25,671 Australia-Network TEN 120,282 154,573 32,607 58,773 New Zealand 22,638 23,104 1,586 1,967 ------- ------- ------- ------- Total television 296,749 341,395 33,674 86,411 Radio - New Zealand 22,305 24,412 6,733 7,957 Outdoor - Australia 25,465 24,918 4,696 4,904 Corporate and other -- -- (11,699) (7,620) ------- ------- ------- ------- 645,615 680,192 80,915 146,863 ======= ======= Ravelston management contract termination -- (281) ------- ------- 80,915 146,582 Amortization of intangibles 4,887 4,958 Amortization of property, plant and equipment 24,378 23,103 Other amortization 1,358 1,318 ------- ------- Operating income 50,292 117,203 Interest expense (46,327) (61,046) Interest income 737 839 Amortization of deferred financing costs (1,481) (3,120) Interest rate and foreign currency swap losses (7,160) (4,902) Foreign exchange gains (losses) 149 (3,759) Investment gains, losses and write-downs 1,839 (1,689) Loss of debt extinguishment (291) -- ------- ------- Earnings (loss) before income taxes (2,242) 43,526 ======= ======= REVENUE (1) SEGMENT OPERATING PROFIT(2) --------------------------- --------------------------- FOR THE SIX MONTHS ENDED --------------------------------------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Publishing and Interactive-Canada 642,394 615,226 129,135 140,862 --------- --------- -------- -------- Television Canada 340,904 363,999 28,451 81,163 Australia-Network TEN 350,978 401,424 137,097 178,965 New Zealand 58,738 58,855 13,861 16,496 --------- --------- -------- -------- Total television 750,620 824,278 179,409 276,624 Radio - New Zealand 45,877 48,175 13,751 15,695 Outdoor - Australia 55,139 53,822 12,165 12,697 Corporate and other -- -- (20,356) (13,770) --------- --------- -------- -------- 1,494,030 1,541,501 314,104 432,108 ========= ========= Ravelston management contract termination -- (562) -------- -------- 314,104 431,546 Amortization of intangibles 10,462 9,897 Amortization of property, plant and equipment 47,915 44,593 Other amortization 2,832 2,482 -------- -------- Operating income 252,895 374,574 Interest expense (98,839) (133,776) Interest income 1,252 1,485 Amortization of deferred financing costs (3,430) (5,321) Interest rate and foreign currency swap losses (127,699) (49,500) Foreign exchange gains (losses) (425) 6,737 Investment gains, losses and write-downs 103,057 (54) Loss of debt extinguishment (116,880) (43,992) -------- -------- Earnings (loss) before income taxes 9,931 150,153 ======== ========
(1) Represents revenue from third parties. In addition the following segments recorded intercompany revenues for the six months ended February 28, 2006: Canadian Television - $0.7 million (2005 - $0.4 million), Publishing and Interactive - Canada - $1.1 million (2005 - $0.6 million). (2) Corporate and other in 2005 has been reclassified to conform with the presentation adopted in the current year. 13. SUBSEQUENT EVENT In September 2005, the Company announced that a subsidiary of a Turkish partner was successful in its bids to acquire the assets of Super FM and Metro FM for aggregate consideration of US$56 million. In February 2006, the Company announced that the same group had been successful in its bid to acquire the assets of Joy FM and Joy Turk FM for consideration of US$5 million. In exchange for a payment of US$46 million, the Company will acquire a 75% economic interest in these radio stations. The Company has provided letters of credit in the aggregate amount of US$3.3 million to secure its share of these bids. The February transactions remain subject to regulatory approval by certain Turkish authorities and the Company is currently seeking to clarify certain aspects of the regulatory approvals already received in respect of Super FM and Metro FM. Subject to a relaxation of foreign ownership restrictions and the receipt of all necessary regulatory approvals, the Company has the right to convert its interest to a 75% equity interest. EX-99.2 3 y19646bexv99w2.txt INTERIM REPORT TO SHAREHOLDERS CANWEST GLOBAL COMMUNICATIONS CORP. INTERIM REPORT TO SHAREHOLDERS FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006 MANAGEMENT DISCUSSION AND ANALYSIS April 6, 2006 Certain statements in this report may constitute forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Many of these factors are beyond the control of the Company. Consequently, all forward-looking statements made in this Management Discussion and Analysis or the Company's documents referred to herein are qualified by this cautionary statement and there can be no assurance that actual results or developments anticipated by the Company will be realized. OVERVIEW CanWest is an international media company with interests in television, publishing, radio, specialty cable channels, outdoor advertising and Internet websites in Canada, Australia, New Zealand and Ireland. In each of our markets we seek to develop a broad media platform that enables us to provide a multimedia product offering to our customers. Television We have three television segments, one for each country in which we carry on such operations. Our Canadian television segment includes our television networks in Canada as well as specialty channels and two radio stations. Our New Zealand television segment operates 3 and C4 in New Zealand. Our Australian television segment includes our interest in TEN Group Pty Limited ("TEN Group"), which owns and operates TEN Television Network ("Network TEN"). We generate the majority of our television revenues from the sale of advertising, with the remainder generated from subscriber revenues earned by our specialty channels and the sale of broadcast rights to our programming. Demand for television advertising is driven primarily by advertisers in the packaged goods, automotive, retail and entertainment industries and is strongly influenced by general economic conditions. The attractiveness of our programs to advertisers and the rates we charge are primarily a function of the size and demographics of our viewing audience. The dependence of our advertising revenues on the ratings performance of our television programs makes our television revenues less predictable than our publishing revenues. Publishing and Interactive Our publishing and interactive segment includes our Canadian newspaper operations as well as our internet operations including the canada.com web portal. Our publishing and interactive revenues are primarily earned from newspaper advertising and circulation revenues from our newspapers in Canada. Our newspaper and interactive advertising revenues are a function of the volume or linage of advertising sold and the rates we charge. Circulation revenues are produced from home-delivery subscriptions for our newspapers and single-copy sales at retail outlets and vending machines and are a function of the number of newspapers we sell and the average per-copy prices we charge. Radio Our radio segment consists of our radio operations in New Zealand, which earn substantially all of their revenues from advertising. Radio advertising revenues are a function of overall radio advertising demand and advertising rates. Radio advertising rates are determined based on the number and demographics of our listeners. Outdoor Advertising Our outdoor advertising segment consists of TEN Group's wholly-owned subsidiary, Eye Corp. Eye Corp. generates its revenue from the sale of out-of-home advertising. Eye Corp.'s advertising revenues are a function of overall outdoor advertising demand and rates. Eye Corp.'s advertising rates are primarily a function of the number and demographics of the audience for Eye Corp.'s displays. CanWest MediaWorks Income Fund On October 13, 2005, CanWest MediaWorks Income Fund (the "Fund") completed its $550 million initial public offering. On the completion of the Fund's initial public offering, CanWest transferred its Canadian newspaper and interactive media businesses, with the exception of the National Post, to CanWest MediaWorks Limited Partnership ("Limited Partnership") in exchange for units and indebtedness of the Limited Partnership. As a consequence, the Fund now holds a 25.8% equity interest in the Limited Partnership, with CanWest holding the remaining 74.2%. For more information refer to the "CanWest MediaWorks Income Fund and related transactions" section of this report. We continue to consolidate the results of the operations of the Limited Partnership. This interim discussion should be read in conjunction with the Management Discussion and Analysis contained in our annual report for the year ended August 31, 2005, which is filed on SEDAR at www.sedar.com. FOREIGN CURRENCY EFFECTS Our Australia and New Zealand operations expose our segment revenues and operating expenses to fluctuations between the Canadian dollar and the Australian dollar and New Zealand dollar, respectively. A decline in value of the Canadian dollar against those currencies increases the Canadian dollar equivalent of the revenues and expenses we record in those currencies. An increase in the Canadian dollar has the opposite effect. During the first six months of fiscal 2006, the Canadian dollar appreciated against the Australian dollar and the New Zealand dollar by 6%, as compared to currency translation rates for the same period in the prior year. SEASONALITY Our advertising revenues are seasonal. Revenues are typically highest in the first and third quarters, while expenses are relatively constant throughout the year. CRITICAL ACCOUNTING POLICIES AND ESTIMATES There are no significant changes in the Company's accounting policies or estimates since August 31, 2005 as described in the Management Discussion and Analysis in the Company's 2005 Annual Report. FORTHCOMING CHANGES IN ACCOUNTING POLICIES In December 2005, the Emerging Issues Committee ("EIC") issued EIC-159 Conditional Asset Retirement Obligations that clarifies that liabilities associated with asset retirement obligations, the timing or settlement method of which are conditional upon future events, should be recorded at fair value as soon as fair value is reasonably estimable. EIC-159 also provides guidance on the information required to reasonably estimate the fair value of the liability. EIC-159 will be effective for interim periods ending after March 31, 2006. Management is in the process of evaluating the impact, if any, EIC-159 will have on the Company. OPERATING RESULTS Introductory note - - Segment operating profit. In the discussion that follows, we provide information concerning our segment operating profit. See note 12 to our interim consolidated financial statements for the three and six months ended February 28, 2006. Management utilizes segment operating profit as a measure of segment profitability in making strategic resource allocations. - - Operating income before amortization. We also discuss our consolidated operating income before amortization. We provide this measure because we and our lenders and investors use operating income before amortization to measure performance against our various leverage covenants. Operating income before amortization is not a recognized measure of financial performance under Canadian generally accepted accounting principles ("GAAP"). Investors are cautioned that operating income before amortization should not be construed as an alternative to net earnings determined in accordance with GAAP as an indicator of our performance. Our method of calculating operating income before amortization may differ from other companies and, accordingly, operating income before amortization may not be comparable to measures used by other companies. A reconciliation of operating income before amortization to net earnings, which is the most closely comparable GAAP measure, is set forth below under the "Reconciliation of Non-GAAP Financial Measures" section of this report. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006 The following is a table of segmented results for the three and six months ended February 28, 2006 and February 28, 2005. See note 12 to our interim consolidated financial statements:
THREE MONTHS ENDED SIX MONTHS ENDED FEBRUARY 28 FEBRUARY 28 -------------------------- ---------------------------- 2006 2005 2006 2005 ------- ---------------- --------- ---------------- $000 $000 $000 $000 (REVISED NOTE 1) (REVISED NOTE 1) OPERATING SEGMENTS REVENUE Publishing and Interactive - Canada 301,096 289,467 642,394 615,226 ------- ------- --------- --------- Television Canada 153,829 163,718 340,904 363,999 Australia-Network TEN 120,282 154,573 350,978 401,424 New Zealand 22,638 23,104 58,738 58,855 ------- ------- --------- --------- 296,749 341,395 750,620 824,278 Radio - New Zealand 22,305 24,412 45,877 48,175 Outdoor-Australia 25,465 24,918 55,139 53,822 ------- ------- --------- --------- Total 645,615 680,192 1,494,030 1,541,501 ======= ======= ========= ========= SEGMENT OPERATING PROFIT Publishing and Interactive - Canada 47,511 55,211 129,135 140,862 ------- ------- --------- --------- Television Canada (519) 25,671 28,451 81,163 Australia-Network TEN 32,607 58,773 137,097 178,965 New Zealand 1,586 1,967 13,861 16,496 ------- ------- --------- --------- 33,674 86,411 179,409 276,624 Radio - New Zealand 6,733 7,957 13,751 15,695 Outdoor-Australia 4,696 4,904 12,165 12,697 Corporate and other (11,699) (7,901) (20,356) (14,332) ------- ------- --------- --------- Total(2) 80,915 146,582 314,104 431,546 ======= ======= ========= =========
(1) Revised to reflect the categorization of our Ireland TV segment as discontinued operations. (2) See Reconciliation of Non-GAAP Financial Measures. CONSOLIDATED RESULTS Revenues. Consolidated revenues were $646 million and $1,494 million for the three and six months, respectively, which is a decrease of $35 million or 5% and $47 million or 3%, respectively, compared to the same periods in fiscal 2005. Revenues for the three and six months reflected a 16% and 9% decrease, respectively, in revenues from international media operations, a 6% decrease in both periods for Canadian television revenues and a 4% increase in both periods for Canadian Publishing and Interactive revenues. The decrease in the international operations in part reflects the strengthening Canadian dollar against the Australian and New Zealand dollars. Operating expenses. Consolidated operating expenses (including selling, general, and administrative expenses) before amortization for the three and six months were $565 million and $1,180 million, respectively, which is an increase of 6% in both periods. This increase reflects local currency expense increases in all operations offset by the effect of the strengthening Canadian dollar. Operating income before amortization. Consolidated operating income before amortization for the three and six months ended February 28, 2006 was $81 million and $314 million, respectively, which is a decrease of 45% and 27%, respectively, from the same periods in fiscal 2005. The decrease in operating income before amortization reflects reduced operating results as well as the impact of the strengthening Canadian dollar on conversion of results of our international media operations. Amortization. Amortization of intangibles was $5 million and $10 million for both the three and six months ended February 28, 2006 and 2005. Amortization of property plant and equipment was $24 million and $48 million for the three and six months ended February 28, 2006 compared to $23 million and $45 million for the same periods in fiscal 2005, reflecting additions made during both fiscal 2006 and 2005. Interest expense. Interest expense was $46 million and $99 million for the three and six months ended February 28, 2006 compared to $61 million and $134 million for the same periods in the previous year, reflecting a reduced level of debt as well as reduced interest rates achieved through our repayment and refinancing of debt in both fiscal 2006 and 2005. Interest rate and foreign currency swap losses. For the three and six months ended February 28, 2006, we recorded losses of $7 million and $128 million, respectively, to adjust the book value of certain swap instruments to fair value at the balance sheet date. Swaps that do not qualify for hedge accounting, primarily because the related debt has been settled, are marked to fair value through earnings. There was a substantial increase in the notional amount of such overhanging swaps in the first quarter as a result of the debt settled. A number of swaps were also settled in the first quarter as described in the "CanWest MediaWorks Income Fund and related transactions" section of this report, which reduced our exposure in the second quarter to fluctuations in fair value. This compared to losses of $5 million and $50 million for the same periods of fiscal 2005. Foreign exchange gains (losses). We recorded a nominal foreign exchange gain for the three months ended February 28, 2006 and a nominal loss in the six months ended February 28, 2006. For the three and six months ended February 28, 2005, we had net foreign exchange losses of $4 million and net foreign exchange gains of $7 million which mainly arose on the translation of a portion of our U.S. dollar debt which is not hedged. Investment gains (losses). For the three and six months ended February 28, 2006, we recorded investment gains of $2 million and $103 million, respectively, compared to $2 million in losses and nominal investment losses for the same periods the previous year. The gain for the three months ended February 28, 2006 was primarily due to an adjustment made to the dilution gain. The gain for the six months ended February 28, 2006 relates to the dilution gain of $102 million recorded on the sale of 25.8% of the Limited Partnership to the CanWest MediaWorks Income Fund and a gain of $1 million on the disposal of non-core assets. The losses in 2005 were primarily due to losses on disposal of non-core assets. Loss on debt extinguishment. During the first quarter of fiscal 2006, we completed a tender offer and consent solicitation through which we repaid our senior credit facilities and retired substantially all of our 10.625% Subordinated Debentures due May 2011 and our 7.625% Subordinated Debentures due April 2013. The excess of the cost of the tender offer and consent solicitation over the book value of the old debt together with certain costs of settling the debt has been charged to earnings for the six months ended February 28, 2006 as a loss on debt extinguishment of $117 million. During the first six months of fiscal 2005, we exchanged our 12.125% Junior Subordinated Notes for the 8% Senior Subordinated Notes and recorded a loss on debt extinguishment of $44 million. Income taxes. Our income tax recovery was nominal for the three months ended February 28, 2006 and $55 million for the six months ended February 28, 2006, compared to a recovery of $1 million and an expense of $35 million for the same periods of fiscal 2005. The negative effective tax rates for the three and six months were below the Company's statutory rate of 35% due to adjustments in the income tax expense including: $44 million reduction for the six months related to the non-taxable dilution gain, $2 million expense for the three months and $6 million recovery for the six months, due to the resolution of certain tax disputes, reductions of $4 million for the three months and $7 million for the six months related to limited partnership earnings allocated to the minority interest, and a nominal amount for the three months and a $5 million reduction for the six months, due to foreign income tax rates being lower than the Canadian income tax rates. See note 3 of our interim financial statements for the income tax rate reconciliations. Minority interests. For the three and six months ended February 28, 2006, we recorded minority interests charges related to the 30% minority interests in CanWest MediaWorks (NZ) of $1 million and $3 million, 43.6% minority interests in TEN Group of $7 million and $39 million and 25.8% minority interests in the Limited Partnership of $9 million and $18 million, respectively. The minority interests charge related to TEN Group decreased by 60% and 25% and CanWest MediaWorks (NZ) decreased by 51% and 29%, for the three and six months ended February 28, 2006, respectively, as a result of decreased net earnings. There was no minority interests charge related to the Limited Partnership during fiscal 2005 because it was wholly owned to October 12, 2005. Net earnings (loss) from continuing operations. Our net earnings (loss) from continuing operations for the three and six months ended February 28, 2006 was ($21) million and $4 million, or ($0.12) and $0.02 per share, compared to $27 million and $59 million, or $0.15 and $0.33 per share, for the three and six months ended February 28, 2005. Discontinued operations. Net earnings from discontinued operations were $1 million and $7 million for the three and six months ended February 28, 2006. In July 2005, we sold a substantial portion of our entertainment operations. The sale of the balance of this operation was completed in September 2005. During the second quarter of fiscal 2006, we have commenced a process to sell our 45% interest in TV3 Ireland, resulting in the classification of its income as income from discontinued operations and its assets and liabilities as assets and liabilities of discontinued operations. These operations were previously classified as the Ireland Television segment. Net earnings from discontinued operations relating to TV3 Ireland for the three and six months ended February 28, 2006 was $2 million and $7 million, respectively. Net earnings (loss). Our net earnings (loss) for the three and six months ended February 28, 2006 was ($19) million and $11 million, or ($0.11) and $0.06 per share, compared to $28 million and $64 million, or $0.16 and $0.36 per share, for the same periods in fiscal 2005. SEGMENTED RESULTS Publishing and Interactive - - Revenue. Publishing and Interactive revenues for the three and six months were $301 million and $642 million, respectively, compared to revenues of $289 million and $615 million in the same periods of the previous year. Advertising revenues increased by 4% and 5% for the three and six months as a result of growth in revenues in the national and retail categories primarily reflecting rate increases and increased insert volumes. Significant growth in interactive classified revenue more than offset small declines in print classified revenue. While circulation volume declined by 2% for both the three and six months, circulation revenue remained constant as a result of higher average per copy prices. Circulation revenue as a percentage of total revenues for the newspaper and interactive segment was approximately 19% in the three and six months ended February 28, 2006 compared to 20% in the same periods in fiscal 2005. For the remainder of fiscal 2006, advertising revenues are expected to continue this trend, primarily as a result of rate increases, growth in insert volumes as well as from significant increases in interactive advertising. Circulation revenues are expected to be consistent with 2005. - - Operating expenses. Compared to the same periods last year, operating expenses (including selling, general and administrative expenses) of our Publishing and Interactive operations increased by $19 million and $39 million, or 8% and 8%, to $254 million and $513 million for the three and six months ended February 28, 2006. This reflected higher payroll costs, expenses related to the introduction of new interactive products and increased distribution costs resulting from higher insert volumes and fuel prices. In addition, the three and six months included increased employee severance costs of $5 million in both the three and six month periods related to management terminations that occurred during the second quarter. Newsprint pricing increased by 4% and 2% for the three and six months ended February 28, 2006 compared to the same periods of fiscal 2005. This price increase was partially offset by a slight reduction in newsprint consumption. For the remainder of fiscal 2006, expenses are generally expected to increase moderately. Salary costs will increase due to increases in staffing to support certain key initiatives (e.g. increased interactive product offerings) and due to normal wage escalation. The newsprint expense trend is expected to continue to increase when compared to fiscal 2005 as a result of increased newsprint pricing. Finally, increased fuel prices and insert volumes are expected to result in increased distribution costs. - - Segment operating profit. As a result of increased revenues more than offset by increased operating costs, our Publishing and Interactive operations had a decrease of $8 million and $12 million, or 14% and 8%, in segment operating profit to $48 million and $129 million for the three and six months ended February 28, 2006 compared to $55 million and $141 million for the same periods last year. These results included operating losses of $3 million and $7 million relating to Dose and Metro, our newspaper start up operations and the increase in employee severance of $5 million for the three and six months ended February 28, 2006. Canadian Television - - Revenues. In total, for the three and six months ended February 28, 2006, revenues from our Canadian Television operating segment of $154 million and $341 million, respectively, were $10 million and $23 million or 6% lower than in the same periods in fiscal 2005. This reflected 6% and 7% decreases in airtime revenues for the three and six months, respectively. Subscriber revenues from our specialty channels increased by 17% and 15% for the three and six months as compared to the same periods in fiscal 2005, reflecting 13% increases in subscribers for both the three and six months. Ratings have improved since spring 2005 and we have consistently had 5 programs in the top twenty programs in the Toronto market and 6 programs in the top twenty programs in the Vancouver market. - - Operating expenses. For the three and six months ended February 28, 2006, operating expenses (including selling, general and administrative expenses) of $154 million and $312 million, respectively, at Canadian Television operations were $16 million and $30 million higher than in the same periods in the prior year, primarily the result of an increase in program amortization and promotion expenses as we invested in our schedule in order to increase ratings. Throughout fiscal 2006, we expect our program amortization expense to increase at the same levels relative to the previous year. - - Segment operating profit. Canadian Television segment operating loss of $1 million and segment operating profit of $28 million for the three and six months of fiscal 2006 were 102% and 65% less than the same periods in fiscal 2005 as a result of the revenue decreases and the expense increases described above. Australian Television - - Revenues. Segment revenues decreased by 22% and 13% to $120 million and $351 million for the three and six months ended February 28, 2006, from $155 million and $401 million during the same periods in the prior year. In local currency, revenues decreased 13% and 7% for the three and six months, respectively, reflecting a difficult advertising environment. TEN's ratings remain strong for the three and six months ended February 28, 2006 compared to the same periods in the prior year. The effect of the weakening local currency relative to the Canadian dollar added to the decreases in revenue for the three and six months ended February 28, 2006 by 9% and 6%, respectively. While the market continues to be short and difficult to predict, Network TEN believes the television advertising market in Australia will show some growth in calendar 2006. - - Operating expenses. Segment operating expenses decreased by $8 million and $9 million to $88 million and $214 million for the three and six months ended February 28, 2006 compared to the same periods in fiscal 2005. This primarily reflects increased programming costs which were more than offset by a weaker Australian dollar. - - Segment operating profit. Segment operating profit decreased by 45% and 23% to $33 million and $137 million for the three and six months, compared to $59 million and $179 million in the same periods in fiscal 2005. New Zealand Television - - Revenues. Revenues from television operations for New Zealand's TV3 and C4 television networks remained unchanged at $23 million and $59 million for the three and six months ended February 28, 2006 compared to the same periods in fiscal 2005. In local currency, revenues increased 8% and 6% for the three and six months, reflecting New Zealand's strong rating performance and audience share. The effect of the weakening local currency relative to the Canadian dollar offset the revenue increases by 9% and 6% for the three and six months, when the local currency is converted into Canadian dollars. We expect revenues in local currencies to continue to increase during 2006 and that increased ratings in our television networks will act as a buffer against any economic softening which may occur during fiscal 2006. - - Operating expenses. Operating expenses remained unchanged at $21 million for the three months and increased by 6% to $45 million for the six months ended February 28, 2006. The increase in the first six months was due to increased programming expenses due to the focus on local programming in the first quarter of fiscal 2006. This trend started to reverse in the second quarter and we expect that the trend will continue to reverse over the remainder of fiscal 2006. - - Segment operating profit. New Zealand's TV3 and C4 produced segment operating profit of $2 million and $14 million for the three and six months ended February 28, 2006, a 19% and 16% decrease from the results recorded for the three and six months in fiscal 2005. New Zealand Radio RadioWorks continued its steady performance. During the three and six months ended February 28, 2006, revenues decreased by 9% and 5% to $22 million and $46 million, respectively. This reflected increases of 1% and 2% in local currency for the three and six months offset by the weakening New Zealand dollar. Segment operating profit declined by 15% and 12% to $7 million and $14 million for the three and six months ended February 28, 2006 as compared to the same periods the previous year, due to the continued start up costs associated with Radio Live and the weakening New Zealand dollar. Outdoor Advertising Segment revenues increased by 2% in both periods, to $25 million and $55 million for the three and six months ended February 28, 2006. This increase reflected 12% and 9% growth in revenue in local currency driven by additional inventory and stronger airport advertising revenues. Our segment operating profit from TEN Group's Outdoor Advertising operations decreased by 4% in both periods to $5 million and $12 million for the three and six months ended February 28, 2006 as compared to the same periods in fiscal 2005 driven by continued investment in expansion opportunities. Corporate and Other Corporate and other expenses have increased by $4 million and $6 million to $12 million and $20 million for the three and six months ended February 28, 2006 compared to $8 million and $14 million for the same periods in fiscal 2005. When compared to prior periods for the three and six months ended February 28, 2006, corporate and other increased by less than $1 million and $2 million for corporate strategic initiatives, $1 million for compensation expenses in both periods and $2 million and $3 million, respectively, for certain corporate development activities. LIQUIDITY AND CAPITAL RESOURCES Overview Our principal uses of funds at the CanWest MediaWorks Inc. level are for capital expenditures and repayment of debt. In addition, certain of our subsidiaries, including the TEN Group, CanWest MediaWorks (NZ) and the CanWest MediaWorks Limited Partnership make distributions to us as well as to their minority owners. We have historically met these requirements by using cash generated from operating activities and through short term and long term debt. We believe these sources of funds, together with our cash on hand, will continue to be adequate to meet our currently anticipated capital requirements. We also review acquisition and investment opportunities in the course of our business and will, if a suitable opportunity arises and is permitted by the terms of our debt instruments, make selected acquisitions and investments to implement our business strategy. We expect that the funding for any such acquisitions or investments would come from working capital, borrowing under our credit facility or future credit facilities, additional equity and debt financing, entering into joint ventures or a combination of these methods. Similarly, from time to time, we review opportunities to dispose of non-core assets, and may, if a suitable opportunity arises, sell certain non-core assets. We expect to meet our cash needs for fiscal 2006 primarily through a combination of operating cash flow and cash on hand. CanWest MediaWorks Income Fund and related transactions In October 2005, we transferred our investment in our newspaper and interactive operations (excluding the National Post) and certain shared service operations, which provide customer support and administrative services, to the Limited Partnership. In exchange, we received units of the Limited Partnership representing a 74.2% ownership interest and notes receivable of $1,339 million. Concurrently, the Fund closed its initial public offering ("IPO") of units and invested the net proceeds of $516 million for units of the Limited Partnership representing a 25.8% interest. In addition, the Limited Partnership obtained credit facilities in the amount of $1 billion, consisting of an $825 million non-revolving term credit facility and a $175 million revolving term credit facility. The revolving facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The non-revolving facility matures in five years, and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The Limited Partnership has entered into five year interest rate swap contracts to fix the interest payments on a notional amount of $825 million for the first three years and $660 million for the remaining two years resulting in an effective interest rate of 5.0%. On closing of the IPO, the Limited Partnership drew $830 million on its credit facilities. The Limited Partnership utilized the proceeds of the issuance of the units to the Fund and $823 million of drawings under its new credit facilities to repay the $1,339 million note payable to us. As a result of the transaction, we recorded a dilution gain on the sale of a 25.8% interest in the operations transferred to the Limited Partnership in the amount of $102 million. The net proceeds from the IPO and the Limited Partnership debt as well as proceeds of $401 million from our credit facility were utilized to retire certain debt and interest rate and cross currency interest rate contracts as follows: a. In October 2005, we completed a tender offer for our 10.625% senior subordinated notes payable due in 2011 and our 7.625% senior unsecured notes payable due in 2013. Substantially all of the notes under these facilities were settled. Debt with a book value of $766 million was retired for cash of $850 million. In addition, deferred financing and other costs of $27 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $76 million, net of tax of $35 million. As a result of the repayment of these notes we recorded a swap loss of $34 million, net of tax of $19 million, related to the associated cross currency interest rate swaps. The notes not settled under the tender offers are due on the original due dates and are subject to the same terms except that the covenants associated with these notes have been eliminated. b. In October 2005, we retired our senior credit facility. Debt with a book value of $526 million was settled for cash of $526 million. In addition, deferred financing costs of $6 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $4 million, net of tax of $2 million. In addition, as a result of the settlement of this debt, we have recorded a loss of $46 million, net of tax of $25 million related to the associated interest rate and cross currency interest rate swaps. c. In November 2005, we retired interest rate and cross currency interest rate swap contracts relating to the 7.625% notes, the 10.625% notes and 50% of the cross currency interest rate swap related to the senior secured credit facilities for cash of $364 million. Following the Income Fund transactions in October 2005, our cash flow from the Limited Partnership has been diluted for the 25.8% interest held by the Income Fund and will be received by way of distributions, a portion of which are subordinated. If distributable cash of the Limited Partnership is not sufficient to pay the entire distribution our share will be disproportionately affected by the shortfall. Sources of Funds Our principal sources of liquidity are cash and cash equivalents on hand and cash flows from operating activities. At February 28, 2006, we had cash on hand of $62 million including $23 million of Limited Partnership cash, $16 million of TEN Group cash and $5 million of CanWest MediaWorks (NZ) cash. We had a cash flow deficiency from operating activities of continuing operations of $28 million for the six months ended February 28, 2006 due to a large adjustment in non-cash operating accounts caused by the seasonality of our business. In addition to the above sources of liquidity, we had unused borrowing capacity under our revolving credit facility of $191 million at February 28, 2006. TEN Group had unused borrowing capacity of A$605 million under its credit facilities. Investment activities During the second quarter of fiscal 2006, we commenced a process to sell our 45% interest in TV3 Ireland as it was no longer considered a core operating asset. As a result, the results of these operations were classified as a discontinued operation in the consolidated statements of earnings, the net cash flows were classified as operating, investing and financing activities from discontinued operations in the consolidated statements of cash flows and the assets and liabilities were classified on the consolidated balance sheets as assets and liabilities of discontinued operations. Prior to the classification as a discontinued operation, the results of TV3 Ireland were reported within the Ireland television segment. Proceeds received on the sale will be applied to reduce debt. The classification of TV3 Ireland as a discontinued operations has decreased earnings from continuing operations by $2 million and $7 million for the three and six months ended February 28, 2006, respectively, (2005 - three months $2 million, six months $5 million). In addition cash flows from continuing operations have been decreased by $2 million and $1 million for the three and six months ended February 28, 2006, respectively, (2005 increased by, for the three months $1 million, six months $2 million). Uses of Funds Capital Expenditures For the three and six months ended February 28, 2006 our capital expenditures were $18 million and $39 million, respectively. In the remainder of fiscal 2006, we have revised our capital expenditure forecast and now expect to make additional capital expenditures of approximately $62 million. This amount includes $15 million in continued investment in a new broadcast traffic and sales management system, $5 million investment to upgrade other broadcast systems, and approximately $12 million to expand a print facility as well as expenditures for regular replacement. Investment transactions During the second quarter, we acquired a 30% interest in The New Republic, a weekly magazine based in Washington D.C., for US$2 million. In September 2005, we announced that a subsidiary of a Turkish partner was successful in its bids to acquire the assets of Super FM and Metro FM for aggregate consideration of US$56 million. In February 2006, we announced that the same group had been successful in its bid to acquire the assets of Joy FM and Joy Turk FM for consideration of US$5 million. In exchange for a payment of US$46 million, we will acquire a 75% economic interest in these radio stations. We have provided letters of credit in the aggregate amount of US$3.3 million to secure our share of these bids. The February transactions remain subject to regulatory approval by certain Turkish authorities and we are currently seeking to clarify certain aspects of the regulatory approvals already received in respect of Super FM and Metro FM. Subject to a relaxation of foreign ownership restrictions and the receipt of all necessary regulatory approvals, we have the right to convert our interest to a 75% equity interest. Distributions Our New Zealand and Australian operations make twice annual distributions. In May 2005, our New Zealand operations distributed a total of $8 million, $6 million to us and $2 million to other shareholders, and in November 2005, they distributed a total of $4 million, $3 million to us and $1 million to other shareholders. In July 2005, the TEN Group distributed $45 million to us and $35 million to other shareholders and in December 2005, they distributed $55 million to us and $42 million to other shareholders. The Limited Partnership has made monthly distributions since its inception in October 2005. The total distributions to February 28, 2006 were $80 million, $59 million to us and $21 million to the minority partner. Debt General At February 28, 2006, we had total outstanding consolidated debt of $2,677 million compared to debt of $2,895 million as at August 31, 2005. This included $377 million (August 31, 2005 - $346 million) advanced under our credit facility. Senior debt of our consolidated subsidiaries consisted of $825 million (August 31, 2005 - nil) of the Limited Partnership debt, $349 million (August 31, 2005 - $309 million) of TEN Group debt, and $135 million (August 31, 2005 - $155 million) of CanWest MediaWorks (NZ) debt. In addition, we had $10 million (August 31, 2005 - $787 million) in unsecured and subordinated notes. In December 2005, TEN Group completed a private placement of floating rate senior notes due 2015 in the amount of A$150 million. Interest is due quarterly with the rate set at the beginning of each quarter and is calculated based upon the three month BBSW rate plus 0.69%. The notes are secured by a direct, unconditional and general obligation of TEN Group except that they are subordinated to the secured debt. Credit Facility In October 2005, we obtained a new $500 million revolving term senior credit facility. During the second quarter, we finalized an amendment to the credit facility that increases the amount available to $600 million and revised certain of the financial covenants under the credit facility. The credit facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. This facility is secured by substantially all our directly held assets, including the assets of our Canadian broadcast operations and the National Post, partnership units of CanWest MediaWorks Limited Partnership, and shares of CanWest MediaWorks (NZ) Limited and TEN Group Pty Limited, excluding the convertible debenture held in TEN Group Pty Limited. At February 28, 2006, we have drawn $377 million on this facility. As at February 28, 2006, we have $191 million, net of letters of credit of $31 million, available on this facility. Under our senior credit facilities, we are required to maintain the fair value of our foreign currency and interest rate swaps above a prescribed minimum liability. In addition, there are prescribed minimums with individual counterparties. Prior to our swap settlements on November 3, 2005, we were required to make $119 million of recouponing payments related to overhanging swaps. On November 3, 2005, we settled a substantial portion of our swaps. Under our new credit facility, the minimum liability threshold is $500 million, as at February 28, 2006, the fair value of our interest rate swaps was $245 million. Further strengthening of the Canadian currency and/or changes in interest rates may result in further prepayment requirements. Total leverage as calculated under CanWest MediaWorks Inc.'s credit facility was 4.9 times cash flow for debt covenant purposes for the twelve months ended February 28, 2006, compared to a covenant of 6.0 times. FINANCIAL INSTRUMENTS Our primary market risk exposures are interest rate and foreign exchange rate risk. We are exposed to interest rate risk and foreign exchange rate fluctuations resulting from the issuance of floating rate debt and debt denominated in U.S. dollars. In addition to monitoring the ratio of fixed rate debt to total long term debt, we use interest rate swaps to manage the proportion of total debt that is subject to variable rates. Cross currency swaps are used to hedge both the interest rate and the currency exposure on debt originally issued in U.S. dollars. We do not enter into any derivatives for trading purposes. Further details of these arrangements are provided in note 4 to our unaudited interim consolidated financial statements for the three and six months ended February 28, 2006. Except as discussed in the "CanWest MediaWorks Income Fund and related transactions" section of this report, there have been no changes in the purpose or terms of these financial instruments during the six months ended February 28, 2006. The fair value of the swap contracts represents an estimate of the amount that we would receive or pay if the contracts were closed out at a market price on the balance sheet date. As of February 28, 2006, our outstanding swap contracts were in a net unrealized loss position of $281 million (including $45 million related to TEN Group and ($9) million related to the Limited Partnership). INDUSTRY RISKS AND UNCERTAINTIES The Company's risks and uncertainties have not materially changed from those described in the Company's annual filings. RELATED PARTY TRANSACTIONS In October 2005, senior subordinated notes payable to CanWest Communications Corporation, our parent company, were repaid pursuant to the tender offer and consent solicitation in the amount of US$42 million. Interest expense related to this debt totaled $1 million for the six months ended February 28, 2006 (2005 - three months -$2 million, six months - $3 million). A company which is an affiliate of CanWest Communications Corporation owns CanWest Global Place in Winnipeg, Manitoba, a building in which the Company is a tenant. Rent paid to this company for the three and six months ended February 28, 2006 amounted to $0.3 million and $0.6 million, respectively, (2005 - three months $0.2 million, six months - $0.5 million). All the related party transactions have been recorded at the exchange amount, which are representative of market rates. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Following is a reconciliation of operating income before amortization, a non-GAAP measure, to net earnings, its most closely comparable GAAP measure.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ $000 $000 $000 $000 Earnings (loss) before taxes (2,242) 43,526 9,931 150,153 Amortization 30,623 29,379 61,209 56,972 Interest and other financing expenses 47,808 64,166 102,269 139,097 Investment gains, losses, write-downs, and interest income (2,576) 850 (104,309) (1,431) Foreign exchange (gains) losses (149) 3,759 425 (6,737) Interest rate and foreign currency swap losses 7,160 4,902 127,699 49,500 Loss on debt extinguishment 291 -- 116,880 43,992 ------ ------- -------- ------- Operating income before amortization 80,915 146,582 314,104 431,546 ====== ======= ======== =======
OTHER Share Data As at April 6, 2006 we had the following number of shares outstanding: Multiple voting shares 76,785,976 Subordinate voting shares 98,947,911 Non-voting shares 1,696,788
Our Annual Information Form is filed on SEDAR at www.sedar.com. EX-99.3 4 y19646bexv99w3.txt INTERIM CONSOLIDATED FINANCIAL STATEMENTS CANWEST MEDIAWORKS INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006 AND FEBRUARY 28, 2005 (UNAUDITED) April 6, 2006 TO THE AUDIT COMMITTEE OF CANWEST MEDIAWORKS INC. In accordance with our engagement letter dated March 22, 2005, we have reviewed the accompanying interim consolidated balance sheet of CANWEST MEDIAWORKS INC. (the "Company") as at February 28, 2006 and 2005 and the related interim consolidated statements of earnings (loss), retained earnings and cash flows for the three and six month periods then ended. These interim consolidated financial statements are the responsibility of the Company's management. We performed our review in accordance with Canadian generally accepted standards for a review of interim financial statements by an entity's auditor. Such an interim review consists principally of applying analytical procedures to financial data, and making enquiries of, and having discussions with, persons responsible for financial and accounting matters. An interim review is substantially less in scope than an audit, whose objective is the expression of an opinion regarding the interim financial statements; accordingly, we do not express such an opinion. An interim review does not provide assurance that we would become aware of any or all significant matters that might be identified in an audit. Based on our review, we are not aware of any material modification that needs to be made for these interim consolidated financial statements to be in accordance with Canadian generally accepted accounting principles. This report is solely for the use of the Audit Committee of the Company to assist it in discharging its regulatory obligation to review these interim consolidated financial statements, and should not be used for any other purpose. Any use that a third party makes of this report, or any reliance or decisions made based on it, are the responsibility of such third parties. We accept no responsibility for loss or damages, if any, suffered by any third party as a result of decisions made or actions taken based on this report. (PRICEWATERHOUSECOOPERS LLP) CHARTERED ACCOUNTANTS CANWEST MEDIAWORKS INC. CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ (REVISED (REVISED NOTE 6) NOTE 6) Revenue 645,615 680,192 1,494,030 1,541,501 Operating expenses 381,342 363,845 809,820 769,786 Selling, general and administrative expenses 183,358 169,484 370,106 339,607 Ravelston management contract termination -- 281 -- 562 ------- ------- --------- --------- 80,915 146,582 314,104 431,546 Amortization of intangibles 4,887 4,958 10,462 9,897 Amortization of property, plant and equipment 24,242 22,962 47,642 44,311 Other amortization 1,358 1,318 2,832 2,482 ------- ------- --------- --------- Operating income 50,428 117,344 253,168 374,856 Interest expense (45,952) (61,084) (98,510) (133,850) Interest income 526 1,036 1,246 1,877 Amortization of deferred financing costs (1,481) (3,120) (3,430) (5,321) Interest rate and foreign currency swap losses (7,160) (4,902) (127,699) (49,500) Foreign exchange gains (losses) 149 (8,596) (425) 1,903 Loan impairment recovery 3,052 -- 3,052 -- Investment gains, losses and write-downs (note 5) 1,839 (1,689) 103,057 (54) Loss on debt extinguishment (note 4) (291) -- (116,880) (43,992) ------- ------- --------- --------- 1,110 38,989 13,579 145,919 Provision for (recovery of) income taxes (note 3) (992) (943) (55,864) 35,669 ------- ------- --------- --------- Earnings before the following 2,102 39,932 69,443 110,250 Minority interests (16,729) (17,968) (60,444) (56,375) Interest in earnings (loss) of equity accounted affiliates (3) 596 827 1,047 Realized currency translation adjustments (1,664) (848) (1,780) (848) ------- ------- --------- --------- NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS (16,294) 21,712 8,046 54,074 Earnings from discontinued operations (note 6) 1,737 1,585 6,579 4,942 ------- ------- --------- --------- NET EARNINGS (LOSS) FOR THE PERIOD (14,557) 23,297 14,625 59,016 ======= ======= ========= =========
The notes constitute an integral part of the consolidated financial statements. CANWEST MEDIAWORKS INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS)
AS AT AS AT FEBRUARY 28, AUGUST 31, 2006 2005 ------------ ---------------- (Revised note 6) ASSETS CURRENT ASSETS Cash 57,021 17,264 Accounts receivable 443,808 459,172 Inventory 12,285 13,533 Investment in broadcast rights 238,161 183,114 Future income taxes 3,893 3,893 Other current assets 35,731 25,835 Assets of discontinued operations (note 6) 11,560 9,879 --------- --------- 802,459 712,690 Other investments 16,216 23,059 Investment in broadcast rights 25,786 20,139 Due from parent and affiliated companies 63,502 86,527 Property, plant and equipment 677,833 693,420 Future income taxes 179,430 53,101 Other assets 79,085 139,625 Intangible assets 1,117,609 1,142,118 Goodwill 2,403,090 2,420,851 Assets of discontinued operations (note 6) 13,210 12,896 --------- --------- 5,378,220 5,304,426 ========= ========= LIABILITIES CURRENT LIABILITIES Accounts payable 109,820 171,035 Accrued liabilities 263,634 290,080 Income taxes payable 15,396 44,371 Broadcast rights accounts payable 98,591 68,439 Deferred revenue 35,983 36,774 Future income taxes 51,608 44,663 Current portion of long term debt and obligations under capital leases 1,915 5,696 Liabilities of discontinued operations (note 6) 15,041 18,692 --------- --------- 591,988 679,750 Long term debt and related foreign currency swap liability (note 4) 2,672,715 2,886,090 Interest rate and foreign currency swap liability 130,450 215,075 Obligations under capital leases 14,799 16,101 Other accrued liabilities 106,920 85,495 Future income taxes 103,864 74,694 Minority interests 493,241 90,581 Liabilities of discontinued operations (note 6) 958 958 --------- --------- 4,114,935 4,048,744 --------- --------- Contingencies (note 9) SHAREHOLDERS' EQUITY Capital stock 438,838 438,838 Contributed surplus 133,390 132,953 Retained earnings 710,453 695,828 Cumulative foreign currency translation adjustments (19,396) (11,937) --------- --------- 1,263,285 1,255,682 --------- --------- 5,378,220 5,304,426 ========= =========
The notes constitute an integral part of the consolidated financial statements. CANWEST MEDIAWORKS INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Retained earnings - beginning of period 725,010 726,672 695,828 690,953 Net earnings (loss) for the period (14,557) 23,297 14,625 59,016 ------- ------- ------- ------- Retained earnings - end of period 710,453 749,969 710,453 749,969 ======= ======= ======= =======
The notes constitute an integral part of the consolidated financial statements. CANWEST MEDIAWORKS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ (REVISED (REVISED NOTE 6) NOTE 6) CASH GENERATED (UTILIZED) BY: OPERATING ACTIVITIES Net earnings (loss) for the period (14,557) 23,297 14,625 59,016 Earnings from discontinued operations (1,737) (1,585) (6,579) (4,942) Items not affecting cash Amortization 31,968 32,358 64,366 62,011 Non-cash interest expense (income) (906) 2,915 355 26,523 Future income taxes 1,605 (3,731) (82,971) (17,485) Realized currency translation adjustments 1,664 848 1,780 848 Interest rate and foreign currency swap losses net of settlements 2,778 16,869 25,723 17,322 Loss on debt extinguishment 291 -- 116,880 43,992 Loan impairment recovery (3,052) -- (3,052) -- Investment gains, losses and write-downs (1,839) 1,689 (103,057) 54 Amortization and write-down of film and television programs 280 3,264 Pension expense 248 3,186 4,181 5,967 Minority interests 16,729 17,968 60,444 56,375 Earnings (loss) from equity accounted affiliates 3 (596) (827) (1,047) Foreign exchange (gains) losses (166) 2,005 (892) (3,515) Stock based compensation expense 1,411 706 2,051 2,115 -------- ------- ---------- -------- 34,440 96,209 93,027 250,498 Changes in non-cash operating accounts (16,594) 78,930 (137,562) (45,292) -------- ------- ---------- -------- Cash flows from operating activities of continuing operations 17,846 175,139 (44,535) 205,206 Cash flows from operating activities of discontinued operations 4,465 1,277 6,322 3,600 -------- ------- ---------- -------- Cash flows from operating activities 22,311 176,416 (38,213) 208,806 -------- ------- ---------- -------- INVESTING ACTIVITIES Other investments (2,571) 209 (2,571) 292 Investment in broadcast licences -- (1,543) (1,066) (1,543) Acquisitions -- -- -- (12,493) Proceeds from divestitures (519) 515,285 -- Proceeds from sales of other investments 9,300 -- 9,300 2,171 Proceeds from sale of property, plant and equipment -- 2,983 970 3,383 Purchase of property, plant and equipment (18,219) (20,674) (38,894) (38,520) Proceeds from (advances to) parent and affiliated companies 2,608 (105) 24,866 1,682 Investing activities from discontinued operations (168) (454) (367) (617) -------- ------- ---------- -------- (9,569) (19,584) 507,523 (45,645) -------- ------- ---------- -------- FINANCING ACTIVITIES Issuance of long term debt, net of financing costs 126,644 -- 943,584 144,212 Repayment of long term debt (5,526) (91,967) (1,383,056) (258,878) Advances (repayments) of revolving facilities, net of financing costs (101,359) 3,740 481,267 78,006 Settlement of swap liabilities -- -- (354,205) -- Swap recouponing (payments) receipts -- 35,953 (48,726) (62,549) Payments of capital leases (128) (118) (586) (538) Issuance of share capital of Network TEN -- 3,852 498 5,317 Payment of distribution to minority interests (57,646) (47,757) (61,498) (47,757) Financing activities from discontinued operations (3,362) (3,335) (5,020) (5,469) -------- ------- ---------- -------- (41,377) (99,632) (427,742) (147,656) -------- ------- ---------- -------- Foreign exchange gain (loss) on cash denominated in foreign currencies (3,153) 780 (1,811) 942 -------- ------- ---------- -------- NET CHANGE IN CASH (31,788) 57,980 39,757 16,447 CASH - BEGINNING OF PERIOD 88,809 55,581 17,264 97,114 -------- ------- ---------- -------- CASH - END OF PERIOD 57,021 113,561 57,021 113,561 ======== ======= ========== ========
The notes constitute an integral part of the consolidated financial statements. CANWEST MEDIAWORKS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006 AND FEBRUARY 28, 2005 (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED) 1. SIGNIFICANT ACCOUNTING POLICIES On November 18, 2004, 3815668 Canada Inc. amalgamated with its wholly-owned subsidiary CanWest Media Inc. and was renamed CanWest Media Inc. On September 1, 2005, CanWest Media Inc. amalgamated with twelve related companies and continued as CanWest MediaWorks Inc. CanWest MediaWorks Inc. ("the Company") and its predecessor companies are wholly-owned subsidiaries of CanWest Global Communications Corp. ("CanWest"). These transactions have been accounted for on a "continuity of interests" basis. These financial statements reflect the consolidated financial position and consolidated results of all the amalgamated companies for all periods prior to the transaction dates. The Company is an international media company with interests in broadcast television, publishing, radio, specialty cable channels, outdoor advertising, and Internet websites in Canada, Australia, New Zealand and Ireland. The Company's operating segments include television, publishing and interactive operations, radio and outdoor advertising. In Canada, the Television segment includes the operation of the Global Television Network, Prime TV, various other conventional and specialty channels and Cool FM and The Beat radio stations. The Australian Television segment includes TEN Group Pty Limited's ("TEN Group") TEN Television Network ("Network TEN"). The Canadian Publishing and Interactive segment includes the publication of a number of newspapers, including metropolitan daily newspapers and the National Post, as well as operation of the canada.com web portal and other web-based operations. The Company's 74.2% ownership of the publishing and interactive operations, excluding the National Post, is held through CanWest MediaWorks Limited Partnership ("Limited Partnership"). The New Zealand Television segment includes CanWest MediaWorks (NZ) Limited's 3 and C4 Television Networks. The New Zealand Radio segment includes CanWest MediaWorks (NZ) Limited's RadioWorks operation, which is comprised of six nationally-networked radio brands and two local radio brands. The Australian Outdoor Advertising segment includes EyeCorp Pty Limited ("Eye Corp"), an outdoor advertising operation which is wholly owned by TEN Group. Corporate and Other includes various investments in media operations and corporate costs. The Company's broadcast customer base is comprised primarily of large advertising agencies, which place advertisements with the Company on behalf of their customers. Publishing and interactive revenues include advertising, circulation and subscriptions which are derived from a variety of sources. The Company's advertising revenues are seasonal. Revenues and accounts receivable are highest in the first and third quarters, while expenses are relatively constant throughout the year. A summary of significant accounting policies followed in the preparation of these consolidated financial statements is as follows: BASIS OF PRESENTATION The consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada for interim financial statements and reflect all adjustments which are, in the opinion of management, necessary for fair statement of the results of the interim periods presented. However, these interim financial statements do not include all of the information and disclosures required for annual financial statements. The accounting policies used in the preparation of these interim financial statements are the same as those used in the most recent annual financial statements. These interim financial statements should be read in conjunction with the most recent annual financial statements of the Company. All amounts are expressed in Canadian dollars unless otherwise noted. SHARE-BASED COMPENSATION The Company has share-based compensation plans under which options of its parent company, CanWest, are issued to certain employees. These options are granted by CanWest with exercise prices equal to the market value of the underlying stock on the date of grant. CanWest adopted the fair value method of accounting recommended by the CICA in Section 3870, "Stock-based compensation and other stock-based payments", prospectively for share-based compensation awards granted after September 1, 2003. Accordingly, in the period, the Company expensed $0.9 million (2005 - $1.8 million) and credited due from parent and affiliated companies related to stock options granted by CanWest to the employees of the Company. The fair value of the options granted during the six months ended February, 2006, was estimated using the Black-Scholes option pricing model with the assumptions of no dividend yield (2005 - nil), an expected volatility of 31% (2005 - 42%), risk free interest rates of 4.0% (2005 - 4.2%) and an expected life of 7 years (2005 - 7 years). The total fair value of 982,750 stock options granted by the Company in the six months ended February 28, 2006 with an average exercise price of $10.10 per option was $4.1 million, a weighted average fair value per option of $4.17. During the six months ended February 28, 2005, 1,177,500 stock options were granted with a total fair value of $6.3 million, and a weighted average fair value per option of $5.35. During 2005, the Company agreed to issue approximately 187,000 shares, which vest in two years, for no consideration. The fair value of the shares at the time of issuance was $10.40 per share. During the six months ended February 28, 2006, the Company recorded compensation expense of $0.3 million (2005 - $0.2 million) related to these shares. The following are proforma results reflecting the fair value based method of accounting for share-based compensation for options issued prior to September 1, 2003. The proforma cost of share compensation expense, for awards granted prior to September 1, 2003, for the three and six months ended February 28, 2006 would be $0.2 million and $0.5 million, respectively (2005 - $0.3 million and $0.6 million). A value of $1.1 million would be charged to proforma net earnings in future years according to the vesting terms of the options. The resulting proforma net earnings (loss) from continuing operations for the three months ended February 28, 2006, would be ($16.5) million, (2005 - $21.4 million), and six months ended February 28, 2006, would be $7.6 million (2005 - $53.4 million). The resulting proforma net earnings (loss) for the three months ended February 28, 2006, would be ($14.8) million (2005 - $23.0 million), and six months ended February 28, 2006, would be $14.1 million (2005 - $58.4 million). The Company's proforma disclosure does not apply to awards prior to 1996. 2. ACQUISITIONS AND DIVESTITURE Acquisitions On September 1, 2004, Eye Corp acquired the remaining 50% of Eye Shop Pty Limited (formerly Eye Village Joint Venture) for $12.5 million (A$13.4 million). In addition on July 1, 2005, Eye Corp acquired 100% of Eye Drive Melbourne Pty Limited (formerly Southcoast Pty Limited) for $7.0 million (A$7.8 million). The principal business activities of these companies is the sale of outdoor advertising. Eye Corp accounted for these acquisitions using the purchase method. As such, the results of operations reflect revenue and expenses of the acquired operations since the date of acquisition. A summary of the fair value of the assets and liabilities acquired is as follows:
Current assets 5,872 Property, plant and equipment 5,224 Site licenses 3,931 Goodwill 9,633 Liabilities (1,607) ------ 23,053 ====== Consideration: Cash 19,487 Carrying value of investment at date of acquisition 3,566 ------ 23,053 ======
Divestiture On October 13, 2005, the Company transferred its investment in its newspaper and interactive operations (excluding the National Post) and certain shared service operations, which provide customer support and administrative services to the Company, (the "Publications Group") to a new entity, the Limited Partnership. In exchange, the Company received units of the Limited Partnership representing a 74.2% ownership interest and notes receivable of $1,339.5 million. Concurrently, the CanWest MediaWorks Income Fund (the "Fund") closed its initial public offering ("IPO") of units and invested the proceeds for units of the Limited Partnership representing a 25.8% interest. Total proceeds for the offering were $550 million and costs of the offering were $34.7 million and were paid by the Limited Partnership. In addition, the Limited Partnership obtained credit facilities in the amount of $1 billion and drew $830.0 million on the credit facilities. The Limited Partnership utilized the proceeds of the issuance of the units to the Fund and $822.5 million in drawings under its new credit facilities to repay the $1,339.5 million note payable to the Company. During the second quarter, the Company changed its accounting entries related to this transaction resulting in revisions to the interim financial statements as at November 30, 2005 and for the three months then ended. Initially, the minority interest was calculated based on the net liabilities recorded in the underlying subsidiary rather than net assets in the consolidated accounts which reflected fair value allocations from the prior acquisition of 100% of the publishing businesses. In the second quarter, the Company determined that the partial disposition of assets reflected in the first quarter was not necessary for the purpose of calculating the minority interest. This change did not have any effect on cash flows. The statement of earnings for the three months ended November 30, 2005 has been revised to increase investment gains by $16.1 million and decrease future income tax recovery by $16.1 million. The balance sheet as at November 30, 2005 has been revised as follows:
NOVEMBER 30, 2005 ----------------------------------- AS REPORTED REVISION AS REVISED ----------- -------- ---------- Current assets 922,706 -- 922,706 Property, plant and equipment 680,279 9,028 689,307 Other long term assets 382,113 -- 382,113 Intangible assets 1,040,680 90,354 1,131,034 Goodwill 2,006,426 413,599 2,420,025 --------- ------- --------- 5,032,204 512,981 5,545,185 ========= ======= ========= Current liabilities 701,936 (1,343) 700,593 Future income taxes 95,289 16,083 111,372 Minority interests 39,405 498,241 537,646 Other long term liabilities 2,913,811 -- 2,913,811 Shareholders' equity 1,281,763 -- 1,281,763 --------- ------- --------- 5,032,204 512,981 5,545,185 ========= ======= =========
Approximately 26% of the Company's units of the Limited Partnership are subordinated in the payment of distributions if the Limited Partnership does not have adequate resources on a quarterly basis to fund distributions. The subordination period ends October 31, 2007, at which time these units will have the same terms and conditions as the other partnership units. 3. INCOME TAXES The Company's provision for income taxes reflects an effective income tax rate which differs from the combined Canadian statutory rate as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Income taxes at combined Canadian statutory rate of 34.49% (2005 - 35.20%) 383 13,724 4,683 51,363 Non-taxable portion of capital (gains) and losses (18) 241 (2,279) 1,600 Effect of valuation allowance on future tax assets 1,836 243 5,271 1,527 Effect of foreign income tax rates differing from Canadian income tax rates 525 (2,834) (5,118) (10,256) Incremental taxes on debt extinguishment -- (80) -- 5,697 Change in expected future tax rates (202) (164) (3,188) (4,338) Large corporations tax 759 491 1,693 1,435 Non-taxable dilution gain on disposition to Limited Partnership (466) -- (44,440) -- Limited Partnership net earnings allocated to minority interests (4,299) -- (6,905) -- Effect of uncertain tax positions 680 (4,899) (6,372) (4,899) Non-deductible expenses 707 629 1,728 1,338 Prior period temporary differences not previously tax effected -- (6,989)(1) -- (6,989)(1) Other (897) (1,305) (937) (809) ------ ------ ------- ------ Provision for (recovery of) income taxes (992) (943) (55,864) 35,669 ====== ====== ======= ======
(1) The provision for income taxes for the three and six months ended February 28, 2005, includes adjustments for prior period temporary differences not previously tax effected aggregating to $7.0 million ($6.2 million future income tax, and $0.8 million current income tax). The Company has determined these adjustments are not material to the reported results, accordingly, the adjustments were included in earnings. This adjustment has the effect of increasing basic and diluted earnings per share for the three and six months ended February 28, 2005, by $0.04 per share. 4. LONG TERM DEBT
AS AT AS AT FEBRUARY 28, AUGUST 31, 2006 2005 ------------ ---------- Senior Secured Credit facility(1) 377,437 -- Senior Secured Credit facility (2) -- 346,100 Senior unsecured notes (2) 284 237,420 Senior subordinated notes (2) 9,807 549,632 Senior subordinated notes 896,720 936,967 CanWest MediaWorks Limited Partnership Secured Credit facility(3) 825,000 -- Bank loan Australian $95,000 (Aug. 31, 2005 - Australian $180,000) 80,323 160,794 Senior unsecured notes US$125,000 (Aug. 31, 2005 - US$125,000) 142,242 148,609 Senior notes Australian $150,000(4) 126,825 -- Term bank loan NZ$179,700 (Aug. 31, 2005 - NZ$187,802) 135,620 154,824 --------- --------- 2,594,258 2,534,346 Effect of foreign currency swaps (2) 78,457 356,241 --------- --------- Long term debt 2,672,715 2,890,587 Less portion due within one year -- (4,497) --------- --------- Long term portion 2,672,715 2,886,090 ========= =========
Except for the changes noted in (1) (2) (3) and (4), the terms and conditions of the long term debt are the same as disclosed in the August 31, 2005 consolidated financial statements. (1) In October 2005, the Company obtained a new $500 million revolving term credit facility. During the second quarter, the Company finalized an amendment to the credit facility that increased the amount available to $600 million and revised certain of the financial covenants under the credit facility. As at February 28, 2006, the Company has $191.0 million, net of letters of credit of $31.0 million, available on this facility. The revolving facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. This facility is secured by substantially all of the Company's directly held assets including the assets of its Canadian broadcast operations, the National Post, partnership units of CanWest MediaWorks Limited Partnership, and shares of CanWest MediaWorks (NZ) Limited and TEN Group Pty Limited, excluding the convertible debenture held in TEN Group Pty Limited. (2) The Company settled debt and associated swaps as follows: i. In October 2005, the Company completed a tender offer for its 10.625% senior subordinated notes payable due in 2011 and its 7.625% senior unsecured notes payable due in 2013. Substantially all of the notes under these facilities were settled. Debt with a book value of $765.8 million was retired for cash of $849.7 million. In addition, deferred financing and other costs of $27.0 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $75.6 million, net of tax of $35.3 million. As a result of the repayment of these notes the Company recorded a swap loss of $34.5 million, net of tax of $19.0 million related to the associated cross currency interest rate swaps. The notes not settled under the tender offers are due on the original due dates and are subject to the same terms except that the covenants associated with these notes have been eliminated. ii. In October 2005, the Company retired its senior credit facility. Debt with a book value of $526.4 million was settled for cash of $526.4 million. In addition, deferred financing costs of $6.0 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $3.9 million, net of tax of $2.1 million. In addition, as a result of the settlement of this debt, the Company will record a loss of $46.3 million, net of tax of $25.4 million related to the associated interest rate and cross currency interest rate swaps. iii. In November 2005, the Company retired interest rate and cross currency interest rate swap contracts relating to the 7.625% notes, the 10.625% notes and 50% of the cross currency interest rate swap related to the senior secured credit facilities for cash of $364.0 million. (3) CanWest MediaWorks Limited Partnership obtained credit facilities in the amount of $1 billion consisting of an $825 million non-revolving term credit facility and a $175 million revolving term credit facility. The revolving facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The non-revolving facility matures in five years, and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The Limited Partnership has drawn $825.0 million on its non-revolving facility and nil on its revolving facility. The Limited Partnership has entered into five year interest rate swap contracts to fix the interest payments on a notional amount of $825.0 million for the first three years and $660.0 million for the remaining two years resulting in an effective interest rate of 5%. (4) In December 2005, TEN Group completed a private placement of floating rate senior notes due 2015 in the amount of A$150 million. Interest is due quarterly with the rate set at the beginning of each quarter and is calculated based upon the three month BBSW rate plus 0.69%. The notes are secured by a direct, unconditional and general obligation of TEN Group except that they are subordinated to the secured debt. Under its Senior Secured Credit facility the Company is required to maintain a fair value of its interest rate swaps and foreign currency and interest rate swaps above a prescribed minimum liability ($500 million). There are also prescribed minimum liabilities with individual counterparties, which have two-way recouponing provisions. The Company was required to make net recouponing payments of $119 million in the six months ended February 28, 2006 (2005 - $97 million), $69 million of this recouponing payment related to overhanging swaps and accordingly was reflected in cash flows from operating activities. Further strengthening of the Canadian currency and/or changes in interest rates may result in further payments to counterparties. The Company is subject to covenants under certain of the credit facilities referred to above, including thresholds for leverage and interest coverage and is also subject to certain restrictions under negative covenants. 5. INVESTMENT GAINS, LOSSES AND WRITE-DOWNS The Company has recorded the following investment gains and losses.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Dilution gain - sale of 25.8% of Limited Partnership 1,555 -- 101,688 -- Gain on sale of investments 138 -- 138 2,171 Dilution gain - TEN Group and CanWest MediaWorks (NZ) Limited 1 557 64 733 Other 145 (2,246) 1,167 (2,958) ----- ------ ------- ------ 1,839 (1,689) 103,057 (54) ===== ====== ======= ======
6. DISCONTINUED OPERATIONS During the second quarter of fiscal 2006, the Company commenced a process to sell its 45% interest in TV3 Ireland as it was no longer considered a core operating asset. As a result, the results of these operations were classified as a discontinued operation in the consolidated statements of earnings, the net cash flows were classified as operating, investing and financing activities from discontinued operations in the consolidated statements of cash flows and the assets and liabilities were classified on the consolidated balance sheets as assets and liabilities of discontinued operations. We expect this transaction to close within a year. Prior to the classification as a discontinued operation, the results of TV3 Ireland were reported within the Ireland television segment. The classification of TV3 Ireland as a discontinued operation has decreased earnings from continuing operations by $1.7 million and $6.6 million for the three and six months ended February 28, 2006, respectively, (2005 - three months $1.6 million, six months $4.9 million). The Company has not allocated interest on the parent company's debt to discontinued operations. In addition cash flows from continuing operations have been decreased by $1.6 million and $1.0 million for the three and six months ended February 28, 2006, respectively, (2005 - increased by, for the three months $0.7 million, six months $2.3 million). The earnings from discontinued operations are summarized as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Revenue 8,263 8,461 20,309 19,782 ===== ===== ====== ====== Earnings from discontinued operations before tax expense 2,279 1,812 7,677 5,770 Income tax expense 542 227 1,098 828 ----- ----- ------ ------ Earnings from discontinued operations 1,737 1,585 6,579 4,942 ===== ===== ====== ======
The carrying values of the net assets related to the discontinued operations are as follows:
AS AT FEBRUARY 28, AS AT AUGUST 31, 2006 2005 ------------------ ---------------- Investment in broadcast rights 5,586 5,615 Other current assets 5,974 4,264 ------ ------ Total current assets 11,560 9,879 ------ ------ Investment in broadcast rights 2,841 1,058 Other non-current assets 10,369 11,838 ------ ------ Total non-current assets 13,210 12,896 ------ ------ Debt 6,470 12,270 Other current liabilities 8,571 6,422 ------ ------ Total current liabilities 15,041 18,692 ------ ------ Long term liabilities 958 958 ------ ------ Net assets 8,771 3,125 ====== ======
7. RELATED PARTY TRANSACTIONS Due from parent and affiliated companies consist of the following:
AS AT AS AT FEBRUARY 28, AUGUST 31, 2006 2005 ------------ ---------- Due from parent, CanWest - non-interest bearing 63,502 75,051 Due from various affiliated companies CanWest Entertainment Inc. - non-interest Bearing 60,835 60,771 Fireworks Entertainment Inc. - non-interest bearing 366,249 380,841 Provision for loan impairment (427,084) (430,136) -------- -------- Due from parent and affiliated companies 63,502 86,527 ======== ========
These advances have no fixed repayment terms. The Company has loans due from Fireworks Entertainment Inc. and its parent, CanWest Entertainment Inc., companies controlled by CanWest in the amount of $427.1 million. Following a period of poor financial performance and increasing concern about the significant decline in the marketability of Fireworks products internationally, in fiscal 2004 CanWest commenced a process to sell its Fireworks Entertainment Division. A comprehensive revaluation of the fair value of the assets and liabilities of Fireworks Entertainment was completed which resulted in the determination of a fair value that was significantly below the book value of the loans, and accordingly, the Company established a provision of $427.1 million against these loans. The Company made operating lease payments of $1.6 million to CanWest and affiliated companies for the six months ended February 28, 2006 (2005 - $1.6 million), which are included in selling general and administrative expenses.. For the six months ended February 28, 2005, the Company acquired broadcast rights for television programs from Fireworks in the amount of $0.5 million, which are included in operating expenses. Senior subordinated notes payable to CanWest Communications Corporation, the parent company of CanWest, with a book value of $49.7 million (US$41.9 million) were settled in October 2005, under the same terms offered to the unrelated senior subordinated note holders for $55.4 million. For the six months ended February 28, 2006, interest expense related to this debt totaled $0.7 million (2005 - $3.0 million). All the related party transactions have been recorded at the exchange amounts, which are representative of market rates. 8. EMPLOYEE BENEFIT PLANS The Company has a number of funded and unfunded defined benefit plans, as well as defined contribution plans, that provide pension, other retirement and post retirement benefits to its employees. The measurement date for the plans is June 30 of each year. Information regarding the components of net periodic benefit cost for the benefit plans is presented below:
POST POST PENSION BENEFITS RETIREMENT BENEFITS PENSION BENEFITS RETIREMENT BENEFITS ------------------ ------------------- ------------------ ------------------- FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------------------- --------------------------------------- FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY 28, 2006 28, 2005 28, 2006 28, 2005 28, 2006 28, 2005 28, 2006 28, 2005 -------- -------- -------- -------- -------- -------- -------- -------- Current service cost 5,781 4,443 451 333 11,562 8,886 902 665 Employee contributions (1,535) (1,540) -- -- (3,071) (3,080) -- -- Accrued interest on benefits 6,153 6,108 631 587 12,306 12,215 1,262 1,173 Expected return on plan assets (5,800) (5,056) -- -- (11,600) (10,111) -- -- Amortization of transitional obligation 109 148 76 -- 217 295 152 -- Amortization of past service costs 301 301 34 34 603 603 68 68 Amortization of net actuarial loss (gain) 1,368 757 14 (14) 2,737 1,514 29 (27) Changes in valuation allowance (21) (18) -- -- (42) (35) -- -- ------ ------ ----- --- ------- ------- ----- ----- Total pension and post retirement benefit expense 6,356 5,143 1,206 940 12,712 10,287 2,413 1,879 ====== ====== ===== === ======= ======= ===== =====
9. CONTINGENCIES (a) The Company has requested arbitration related to $86.5 million owed by Hollinger International Inc., Hollinger Inc. and certain related parties (collectively "Hollinger") related to certain unresolved adjustments and claims related to its November 15, 2000 acquisition of certain newspaper assets from Hollinger. Hollinger disputes this claim and claims that it and certain of its affiliates are owed $45 million by the Company. The outcome and recoverability of this claim is not determinable. (b) In March 2001, a statement of claim was filed against the Company and certain of the Company's subsidiaries by CanWest Broadcasting Ltd.'s ("CBL's") former minority shareholders requesting, among other things, that their interests in CBL be purchased without minority discount. In addition, the claim alleges the Company wrongfully terminated certain agreements and acted in an oppressive and prejudicial manner towards the plaintiffs. The action was stayed on the basis that the Ontario courts have no jurisdiction to try the claim. In April 2004, a statement of claim was filed in Manitoba by the same minority shareholders, which was substantially the same as the previous claim, seeking damages of $405 million. In June 2005, the Company filed a Statement of Defence and Counterclaim. In its Counterclaim, the Company is seeking a declaration of the fair value of the former minority shareholders' interest in CBL and repayment of the difference between the fair value and the redemption amount paid by the Company to the former shareholders. The Company believes the allegations in the Statement of Claim are substantially without merit and not likely to have a material adverse effect on its business, financial condition or results of operation. The outcome of this claim is not determinable and the Company intends to vigorously defend this lawsuit. (c) The Company is one of several defendants to a claim by a proposed class of freelance writers instituted in July 2003, in respect of works that they provided to newspapers and other print publications in Canada. The total amount claimed (by all plaintiffs against all defendants) is $500 million in compensatory damages and $250 million in exemplary and punitive damages. The outcome of this claim is not determinable. (d) CanWest MediaWorks (NZ) Limited has received a Notice of Proposed Adjustment from the New Zealand Inland Revenue covering the years 2002 to 2004 that proposes a potential tax liability of NZ$13.3 million on the treatment of its optional convertible notes. A Notice of Proposed Adjustment is an instrument through which the New Zealand Inland Revenue advises a taxpayer that it is considering amending its tax assessment from that in the tax return and is not a confirmation of liability. CanWest MediaWorks (NZ) Limited is confident that the tax treatment that it has applied to the notes is correct and does not believe that any material additional tax liability will result. The outcome of this situation is not determinable and CanWest MediaWorks (NZ) Limited intends to dispute the proposed adjustments. (e) The Company is involved in various legal matters arising in the ordinary course of business. The resolution of these matters is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows. 10. SEGMENTED INFORMATION The Company operates primarily within the publishing and interactive, television, radio and outdoor advertising industries in Canada, New Zealand, Ireland and Australia. Segmented information has been retroactively revised to reflect the Company's classification of the Ireland television segment as discontinued. Each segment operates as a strategic business unit with separate management. Segment performance is measured primarily upon the basis of segment operating profit. The Company accounts for inter-segmented information as if the sales were to third parties. Segmented information and a reconciliation from segment operating profit to earnings before income taxes are presented below:
SEGMENT SEGMENT REVENUE(1) OPERATING PROFIT(2) REVENUE (1) OPERATING PROFIT(2) ------------------ ------------------- -------------------- ------------------- FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------------------- ---------------------------------------- FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY 28, 2006 28, 2005 28, 2005 28, 2005 28, 2006 28, 2005 28, 2006 28, 2005 -------- -------- --------- -------- --------- --------- -------- -------- Publishing and Interactive-Canada 301,096 289,467 47,511 55,211 642,394 615,226 129,135 140,862 ------- ------- ------- ------- --------- --------- -------- -------- Television Canada 153,829 163,718 (519) 25,671 340,904 363,999 28,451 81,163 Australia-Network TEN 120,282 154,573 32,607 58,773 350,978 401,424 137,097 178,965 New Zealand 22,638 23,104 1,586 1,967 58,738 58,855 13,861 16,496 ------- ------- ------- ------- --------- --------- -------- -------- Total television 296,749 341,395 33,674 86,411 750,620 824,278 179,409 276,624 Radio - New Zealand 22,305 24,412 6,733 7,957 45,877 48,175 13,751 15,695 Outdoor - Australia 25,465 24,918 4,696 4,904 55,139 53,822 12,165 12,697 Corporate and other -- -- (11,699) (7,620) -- -- (20,356) (13,770) ------- ------- ------- ------- --------- --------- -------- -------- 645,615 680,192 80,915 146,863 1,494,030 1,541,501 314,104 432,108 ======= ======= ========= ========= Ravelston management contract termination -- (281) -- (562) ------- ------- -------- -------- 80,915 146,582 314,104 431,546 Amortization of intangibles 4,887 4,958 10,462 9,897 Amortization of property, plant and equipment 24,242 22,962 47,642 44,311 Other amortization 1,358 1,318 2,832 2,482 ------- ------- -------- -------- Operating income 50,428 117,344 253,168 374,856 Interest expense (45,952) (61,084) (98,510) (133,850) Interest income 526 1,036 1,246 1,877 Amortization of deferred financing costs (1,481) (3,120) (3,430) (5,321) Interest rate and foreign currency swap losses (7,160) (4,902) (127,699) (49,500) Foreign exchange gains (losses) 149 (8,596) (425) 1,903 Loan impairment recovery 3,052 -- 3,052 -- Investment gains, losses and write-downs 1,839 (1,689) 103,057 (54) Loss of debt extinguishment (291) -- (116,880) (43,992) ------- ------- -------- -------- Earnings (loss) before income taxes 1,110 38,989 13,579 145,919 ======= ======= ======== ========
(1) Represents revenue from third parties. In addition the following segments recorded intercompany revenues for the six months ended February 28, 2006: Canadian Television - $0.7 million (2005 - $0.4 million), Publishing and Interactive - Canada - $1.1 million (2005 - $0.6 million). (2) Corporate and other in 2005 has been reclassified to conform with the presentation adopted in the current year. 11. SUBSEQUENT EVENT In September 2005, the Company announced that a subsidiary of a Turkish partner was successful in its bids to acquire the assets of Super FM and Metro FM for aggregate consideration of US$56 million. In February 2006, the Company announced that the same group had been successful in its bid to acquire the assets of Joy FM and Joy Turk FM for consideration of US$5 million. In exchange for a payment of US$46 million, the Company will acquire a 75% economic interest in these radio stations. The Company has provided letters of credit in the aggregate amount of US$3.3 million to secure its share of these bids. The February transactions remain subject to regulatory approval by certain Turkish authorities and the Company is currently seeking to clarify certain aspects of the regulatory approvals already received in respect of Super FM and Metro FM. Subject to a relaxation of foreign ownership restrictions and the receipt of all necessary regulatory approvals, the Company has the right to convert its interest to a 75% equity interest. EX-99.4 5 y19646bexv99w4.txt INTERIM REPORT TO SHAREHOLDERS CANWEST MEDIAWORKS INC. INTERIM REPORT TO SHAREHOLDERS FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006 MANAGEMENT DISCUSSION AND ANALYSIS April 6, 2006 Certain statements in this report may constitute forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Many of these factors are beyond the control of the Company. Consequently, all forward-looking statements made in this Management Discussion and Analysis or the Company's documents referred to herein are qualified by this cautionary statement and there can be no assurance that actual results or developments anticipated by the Company will be realized. OVERVIEW CanWest is an international media company with interests in television, publishing, radio, specialty cable channels, outdoor advertising and Internet websites in Canada, Australia, New Zealand and Ireland. In each of our markets we seek to develop a broad media platform that enables us to provide a multimedia product offering to our customers. On September 1, 2005, we amalgamated with twelve related companies and continued as CanWest MediaWorks Inc. Television We have three television segments, one for each country in which we carry on such operations. Our Canadian television segment includes our television networks in Canada as well as specialty channels and two radio stations. Our New Zealand television segment operates 3 and C4 in New Zealand. Our Australian television segment includes our interest in TEN Group Pty Limited ("TEN Group"), which owns and operates TEN Television Network ("Network TEN"). We generate the majority of our television revenues from the sale of advertising, with the remainder generated from subscriber revenues earned by our specialty channels and the sale of broadcast rights to our programming. Demand for television advertising is driven primarily by advertisers in the packaged goods, automotive, retail and entertainment industries and is strongly influenced by general economic conditions. The attractiveness of our programs to advertisers and the rates we charge are primarily a function of the size and demographics of our viewing audience. The dependence of our advertising revenues on the ratings performance of our television programs makes our television revenues less predictable than our publishing revenues. Publishing and Interactive Our publishing and interactive segment includes our Canadian newspaper operations as well as our internet operations including the canada.com web portal. Our publishing and interactive revenues are primarily earned from newspaper advertising and circulation revenues from our newspapers in Canada. Our newspaper and interactive advertising revenues are a function of the volume or linage of advertising sold and the rates we charge. Circulation revenues are produced from home-delivery subscriptions for our newspapers and single-copy sales at retail outlets and vending machines and are a function of the number of newspapers we sell and the average per-copy prices we charge. Radio Our radio segment consists of our radio operations in New Zealand, which earn substantially all of their revenues from advertising. Radio advertising revenues are a function of overall radio advertising demand and advertising rates. Radio advertising rates are determined based on the number and demographics of our listeners. Outdoor Advertising Our outdoor advertising segment consists of TEN Group's wholly-owned subsidiary, Eye Corp. Eye Corp. generates its revenue from the sale of out-of-home advertising. Eye Corp.'s advertising revenues are a function of overall outdoor advertising demand and rates. Eye Corp.'s advertising rates are primarily a function of the number and demographics of the audience for Eye Corp.'s displays. CanWest MediaWorks Income Fund On October 13, 2005, CanWest MediaWorks Income Fund (the "Fund") completed its $550 million initial public offering. On the completion of the Fund's initial public offering, CanWest transferred its Canadian newspaper and interactive media businesses, with the exception of the National Post, to CanWest MediaWorks Limited Partnership ("Limited Partnership") in exchange for units and indebtedness of the Limited Partnership. As a consequence, the Fund now holds a 25.8% equity interest in the Limited Partnership, with CanWest holding the remaining 74.2%. For more information refer to the "CanWest MediaWorks Income Fund and related transactions" section of this report. We continue to consolidate the results of the operations of the Limited Partnership. This interim discussion should be read in conjunction with the Management Discussion and Analysis contained in our annual report for the year ended August 31, 2005, which is filed on SEDAR at www.sedar.com. FOREIGN CURRENCY EFFECTS Our Australia and New Zealand operations expose our segment revenues and operating expenses to fluctuations between the Canadian dollar and the Australian dollar and New Zealand dollar, respectively. A decline in value of the Canadian dollar against those currencies increases the Canadian dollar equivalent of the revenues and expenses we record in those currencies. An increase in the Canadian dollar has the opposite effect. During the first six months of fiscal 2006, the Canadian dollar appreciated against the Australian dollar and the New Zealand dollar by 6%, as compared to currency translation rates for the same period in the prior year. SEASONALITY Our advertising revenues are seasonal. Revenues are typically highest in the first and third quarters, while expenses are relatively constant throughout the year. CRITICAL ACCOUNTING POLICIES AND ESTIMATES There are no significant changes in the Company's accounting policies or estimates since August 31, 2005 as described in the Management Discussion and Analysis in the Company's 2005 Annual Report. FORTHCOMING CHANGES IN ACCOUNTING POLICIES In December 2005, the Emerging Issues Committee ("EIC") issued EIC-159 Conditional Asset Retirement Obligations that clarifies that liabilities associated with asset retirement obligations, the timing or settlement method of which are conditional upon future events, should be recorded at fair value as soon as fair value is reasonably estimable. EIC-159 also provides guidance on the information required to reasonably estimate the fair value of the liability. EIC-159 will be effective for interim periods ending after March 31, 2006. Management is in the process of evaluating the impact, if any, EIC-159 will have on the Company. OPERATING RESULTS Introductory note - - Segment operating profit. In the discussion that follows, we provide information concerning our segment operating profit. See note 12 to our interim consolidated financial statements for the three and six months ended February 28, 2006. Management utilizes segment operating profit as a measure of segment profitability in making strategic resource allocations. - - Operating income before amortization. We also discuss our consolidated operating income before amortization. We provide this measure because we and our lenders and investors use operating income before amortization to measure performance against our various leverage covenants. Operating income before amortization is not a recognized measure of financial performance under Canadian generally accepted accounting principles ("GAAP"). Investors are cautioned that operating income before amortization should not be construed as an alternative to net earnings determined in accordance with GAAP as an indicator of our performance. Our method of calculating operating income before amortization may differ from other companies and, accordingly, operating income before amortization may not be comparable to measures used by other companies. A reconciliation of operating income before amortization to net earnings, which is the most closely comparable GAAP measure, is set forth below under the "Reconciliation of Non-GAAP Financial Measures" section of this report. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2006 The following is a table of segmented results for the three and six months ended February 28, 2006 and February 28, 2005. See note 10 to our interim consolidated financial statements:
THREE MONTHS ENDED SIX MONTHS ENDED FEBRUARY 28 FEBRUARY 28 ------------------- --------------------- 2006 2005 2006 2005 ------- -------- --------- --------- $000 $000 $000 $000 (REVISED (REVISED NOTE 1) NOTE 1) OPERATING SEGMENTS REVENUE Publishing and Interactive - Canada 301,096 289,467 642,394 615,226 ------- ------- --------- --------- Television Canada 153,829 163,718 340,904 363,999 Australia-Network TEN 120,282 154,573 350,978 401,424 New Zealand 22,638 23,104 58,738 58,855 ------- ------- --------- --------- 296,749 341,395 750,620 824,278 Radio - New Zealand 22,305 24,412 45,877 48,175 Outdoor-Australia 25,465 24,918 55,139 53,822 ------- ------- --------- --------- Total 645,615 680,192 1,494,030 1,541,501 ======= ======= ========= ========= SEGMENT OPERATING PROFIT Publishing and Interactive - Canada 47,511 55,211 129,135 140,862 ------- ------- --------- --------- Television Canada (519) 25,671 28,451 81,163 Australia-Network TEN 32,607 58,773 137,097 178,965 New Zealand 1,586 1,967 13,861 16,496 ------- ------- --------- --------- 33,674 86,411 179,409 276,624 Radio - New Zealand 6,733 7,957 13,751 15,695 Outdoor-Australia 4,696 4,904 12,165 12,697 Corporate and other (11,699) (7,901) (20,356) (14,332) ------- ------- --------- --------- Total(2) 80,915 146,582 314,104 431,546 ======= ======= ========= =========
(1) Revised to reflect the categorization of our Ireland TV segment as discontinued operations. (2) See Reconciliation of Non-GAAP Financial Measures. CONSOLIDATED RESULTS Revenues. Consolidated revenues were $646 million and $1,494 million for the three and six months, respectively, which is a decrease of $35 million or 5% and $47 million or 3%, respectively, compared to the same periods in fiscal 2005. Revenues for the three and six months reflected a 16% and 9% decrease, respectively, in revenues from international media operations, a 6% decrease in both periods for Canadian television revenues and a 4% increase in both periods for Canadian Publishing and Interactive revenues. The decrease in the international operations in part reflects the strengthening Canadian dollar against the Australian and New Zealand dollars. Operating expenses. Consolidated operating expenses (including selling, general, and administrative expenses) before amortization for the three and six months were $565 million and $1,180 million, respectively, which is an increase of 6% in both periods. This increase reflects local currency expense increases in all operations offset by the effect of the strengthening Canadian dollar. Operating income before amortization. Consolidated operating income before amortization for the three and six months ended February 28, 2006 was $81 million and $314 million, respectively, which is a decrease of 45% and 27%, respectively, from the same periods in fiscal 2005. The decrease in operating income before amortization reflects reduced operating results as well as the impact of the strengthening Canadian dollar on conversion of results of our international media operations. Amortization. Amortization of intangibles was $5 million and $10 million for both the three and six months ended February 28, 2006 and 2005. Amortization of property plant and equipment was $24 million and $48 million for the three and six months ended February 28, 2006 compared to $23 million and $44 million for the same periods in fiscal 2005, reflecting additions made during both fiscal 2006 and 2005. Interest expense. Interest expense was $46 million and $99 million for the three and six months ended February 28, 2006 compared to $61 million and $134 million for the same periods in the previous year, reflecting a reduced level of debt as well as reduced interest rates achieved through our repayment and refinancing of debt in both fiscal 2006 and 2005. Interest rate and foreign currency swap losses. For the three and six months ended February 28, 2006, we recorded losses of $7 million and $128 million, respectively, to adjust the book value of certain swap instruments to fair value at the balance sheet date. Swaps that do not qualify for hedge accounting, primarily because the related debt has been settled, are marked to fair value through earnings. There was a substantial increase in the notional amount of such overhanging swaps in the first quarter as a result of the debt settled. A number of swaps were also settled in the first quarter as described in the "CanWest MediaWorks Income Fund and related transactions" section of this report, which reduced our exposure in the second quarter to fluctuations in fair value. This compared to losses of $5 million and $50 million for the same periods of fiscal 2005. Foreign exchange gains (losses). We recorded a nominal foreign exchange gain for the three months ended February 28, 2006 and a nominal loss in the six months ended February 28, 2006. For the three and six months ended February 28, 2005, we had net foreign exchange losses of $9 million and net foreign exchange gains of $2 million which mainly arose on the translation of a portion of our U.S. dollar debt which is not hedged. Loan impairment recovery. We have loans due from Fireworks Entertainment Inc. and its parent, CanWest Entertainment Inc., companies controlled by CanWest Global Communications Corp. ("CanWest Global"), our parent company, in an aggregate principal amount of $427 million. CanWest Global has completed the sale of the assets of these operations. A comprehensive revaluation of the fair value of the assets and liabilities of Fireworks Entertainment was completed which resulted in the determination of a fair value that was significantly below the book value of the loans, and accordingly, we have a provision of $427 million against these loans. During the three months and six months ended February 28, 2006, we recovered additional cash from these companies which resulted in a recovery of $3 million. Investment gains (losses). For the three and six months ended February 28, 2006, we recorded investment gains of $2 million and $103 million, respectively, compared to $2 million in losses and nominal investment losses for the same periods the previous year. The gain for the three months ended February 28, 2006 was primarily due to an adjustment made to the dilution gain. The gain for the six months ended February 28, 2006 relates to the dilution gain of $102 million recorded on the sale of 25.8% of the Limited Partnership to the CanWest MediaWorks Income Fund and a gain of $1 million on the disposal of non-core assets. The losses in 2005 were primarily due to losses on disposal of non-core assets. Loss on debt extinguishment. During the first quarter of fiscal 2006, we completed a tender offer and consent solicitation through which we repaid our senior credit facilities and retired substantially all of our 10.625% Subordinated Debentures due May 2011 and our 7.625% Subordinated Debentures due April 2013. The excess of the cost of the tender offer and consent solicitation over the book value of the old debt together with certain costs of settling the debt has been charged to earnings for the six months ended February 28, 2006 as a loss on debt extinguishment of $117 million. During the first six months of fiscal 2005, we exchanged our 12.125% Junior Subordinated Notes for the 8% Senior Subordinated Notes and recorded a loss on debt extinguishment of $44 million. Income taxes. Our income tax recovery was $1 million for the three months ended February 28, 2006 and $56 million for the six months ended February 28, 2006, compared to a recovery of $1 million and an expense of $36 million for the same periods of fiscal 2005. The negative effective tax rates for the three and six months were below the Company's statutory rate of 35% due to adjustments in the income tax expense including: $44 million reduction for the six months related to the non-taxable dilution gain, $2 million expense for the three months and $6 million recovery for the six months, due to the resolution of certain tax disputes, reductions of $4 million for the three months and $7 million for the six months related to limited partnership earnings allocated to the minority interest, and a nominal amount for the three months and a $5 million reduction for the six months, due to foreign income tax rates being lower than the Canadian income tax rates. See note 3 of our interim financial statements for the income tax rate reconciliations. Minority interests. For the three and six months ended February 28, 2006, we recorded minority interests charges related to the 30% minority interests in CanWest MediaWorks (NZ) of $1 million and $3 million, 43.6% minority interests in TEN Group of $7 million and $39 million and 25.8% minority interests in the Limited Partnership of $9 million and $18 million, respectively. The minority interests charge related to TEN Group decreased by 60% and 25% and CanWest MediaWorks (NZ) decreased by 51% and 29%, respectively, as a result of decreased net earnings. There was no minority interests charge related to the Limited Partnership during fiscal 2005 because it was wholly owned to October 12, 2005. Net earnings (loss) from continuing operations. Our net earnings (loss) from continuing operations for the three and six months ended February 28, 2006 ($16) million and $8 million compared to $22 million and $54 million for the three and six months ended February 28, 2005. Discontinued operations. Net earnings from discontinued operations were $2 million and $7 million for the three and six months ended February 28, 2006. During the second quarter of fiscal 2006, we have commenced a process to sell our 45% interest in TV3 Ireland, resulting in the classification of its income as income from discontinued operations and its assets and liabilities as assets and liabilities of discontinued operations. These operations were previously classified as the Ireland Television segment. Net earnings (loss). Our net earnings (loss) for the three and six months ended February 28, 2006 was ($15) million and $15 million compared to $23 million and $59 million for the same periods in fiscal 2005. SEGMENTED RESULTS Publishing and Interactive - - Revenue. Publishing and Interactive revenues for the three and six months were $301 million and $642 million, respectively, compared to revenues of $289 million and $615 million in the same periods of the previous year. Advertising revenues increased by 4% and 5% for the three and six months as a result of growth in revenues in the national and retail categories primarily reflecting rate increases and increased insert volumes. Significant growth in interactive classified revenue more than offset small declines in print classified revenue. While circulation volume declined by 2% for both the three and six months, circulation revenue remained constant as a result of higher average per copy prices. Circulation revenue as a percentage of total revenues for the newspaper and interactive segment was approximately 19% in the three and six months ended February 28, 2006 compared to 20% in the same periods in fiscal 2005. For the remainder of fiscal 2006, advertising revenues are expected to continue this trend, primarily as a result of rate increases, growth in insert volumes as well as from significant increases in interactive advertising. Circulation revenues are expected to be consistent with 2005. - - Operating expenses. Compared to the same periods last year, operating expenses (including selling, general and administrative expenses) of our Publishing and Interactive operations increased by $19 million and $39 million, or 8% and 8%, to $254 million and $513 million for the three and six months ended February 28, 2006. This reflected higher payroll costs, expenses related to the introduction of new interactive products and increased distribution costs resulting from higher insert volumes and fuel prices. In addition, the three and six months included increased employee severance costs of $5 million in both the three and six month periods related to management terminations that occurred during the second quarter. Newsprint pricing increased by 4% and 2% for the three and six months ended February 28, 2006 compared to the same periods of fiscal 2005. This price increase was partially offset by a slight reduction in newsprint consumption. For the remainder of fiscal 2006, expenses are generally expected to increase moderately. Salary costs will increase due to increases in staffing to support certain key initiatives (e.g. increased interactive product offerings) and due to normal wage escalation. The newsprint expense trend is expected to continue to increase when compared to fiscal 2005 as a result of increased newsprint pricing. Finally, increased fuel prices and insert volumes are expected to result in increased distribution costs. - - Segment operating profit. As a result of increased revenues more than offset by increased operating costs, our Publishing and Interactive operations had a decrease of $8 million and $12 million, or 14% and 8%, in segment operating profit to $48 million and $129 million for the three and six months ended February 28, 2006 compared to $55 million and $141 million for the same periods last year. These results included operating losses of $3 million and $7 million relating to Dose and Metro, our newspaper start up operations and the increase in employee severance of $5 million for the three and six months ended February 28, 2006. Canadian Television - - Revenues. In total, for the three and six months ended February 28, 2006, revenues from our Canadian Television operating segment of $154 million and $341 million, respectively, were $10 million and $23 million or 6% lower than in the same periods in fiscal 2005. This reflected 6% and 7% decreases in airtime revenues for the three and six months, respectively. Subscriber revenues from our specialty channels increased by 17% and 15% for the three and six months as compared to the same periods in fiscal 2005, reflecting 13% increases in subscribers for both the three and six months. Ratings have improved since spring 2005 and we have consistently had 5 programs in the top twenty programs in the Toronto market and 6 programs in the top twenty programs in the Vancouver market. - - Operating expenses. For the three and six months ended February 28, 2006, operating expenses (including selling, general and administrative expenses) of $154 million and $312 million, respectively, at Canadian Television operations were $16 million and $30 million higher than in the same periods in the prior year, primarily the result of an increase in program amortization and promotion expenses as we invested in our schedule in order to increase ratings. Throughout fiscal 2006, we expect our program amortization expense to increase at the same levels relative to the previous year. - - Segment operating profit. Canadian Television segment operating loss of $1 million and segment operating profit of $28 million for the three and six months of fiscal 2006 were 102% and 65% less than the same periods in fiscal 2005 as a result of the revenue decreases and the expense increases described above. Australian Television - - Revenues. Segment revenues decreased by 22% and 13% to $120 million and $351 million for the three and six months ended February 28, 2006, from $155 million and $401 million during the same periods in the prior year. In local currency, revenues decreased 13% and 7% for the three and six months, respectively, reflecting a difficult advertising environment. TEN's ratings remain strong for the three and six months ended February 28, 2006 compared to the same periods in the prior year. The effect of the weakening local currency relative to the Canadian dollar added to the decreases in revenue for the three and six months ended February 28, 2006 by 9% and 6%, respectively. While the market continues to be short and difficult to predict, Network TEN believes the television advertising market in Australia will show some growth in calendar 2006. - - Operating expenses. Segment operating expenses decreased by $8 million and $9 million to $88 million and $214 million for the three and six months ended February 28, 2006 compared to the same periods in fiscal 2005. This primarily reflects increased programming costs which were more than offset by a weaker Australian dollar. - - Segment operating profit. Segment operating profit decreased by 45% and 23% to $33 million and $137 million for the three and six months, compared to $59 million and $179 million in the same periods in fiscal 2005. New Zealand Television - - Revenues. Revenues from television operations for New Zealand's TV3 and C4 television networks remained unchanged at $23 million and $59 million for the three and six months ended February 28, 2006 compared to the same periods in fiscal 2005. In local currency, revenues increased 8% and 6% for the three and six months, reflecting New Zealand's strong rating performance and audience share. The effect of the weakening local currency relative to the Canadian dollar offset the revenue increases by 9% and 6% for the three and six months, when the local currency is converted into Canadian dollars. We expect revenues in local currencies to continue to increase during 2006 and that increased ratings in our television networks will act as a buffer against any economic softening which may occur during fiscal 2006. - - Operating expenses. Operating expenses remained unchanged at $21 million for the three months and increased by 6% to $45 million for the six months ended February 28, 2006. The increase in the first six months was due to increased programming expenses due to the focus on local programming in the first quarter of fiscal 2006. This trend started to reverse in the second quarter and we expect that the trend will continue to reverse over the remainder of fiscal 2006. - - Segment operating profit. New Zealand's TV3 and C4 produced segment operating profit of $2 million and $14 million for the three and six months ended February 28, 2006, a 19% and 16% decrease from the results recorded for the three and six months in fiscal 2005. New Zealand Radio RadioWorks continued its steady performance. During the three and six months ended February 28, 2006, revenues decreased by 9% and 5% to $22 million and $46 million, respectively. This reflected increases of 1% and 2% in local currency for the three and six months offset by the weakening New Zealand dollar. Segment operating profit declined by 15% and 12% to $7 million and $14 million for the three and six months ended February 28, 2006 as compared to the same periods the previous year, due to the continued start up costs associated with Radio Live and the weakening New Zealand dollar. Outdoor Advertising Segment revenues increased by 2% in both periods, to $25 million and $55 million for the three and six months ended February 28, 2006. This increase reflected 12% and 9% growth in revenue in local currency driven by additional inventory and stronger airport advertising revenues. Our segment operating profit from TEN Group's Outdoor Advertising operations decreased by 4% in both periods to $5 million and $12 million for the three and six months ended February 28, 2006 as compared to the same periods in fiscal 2005 driven by continued investment in expansion opportunities. Corporate and Other Corporate and other expenses have increased by $4 million and $6 million to $12 million and $20 million for the three and six months ended February 28, 2006 compared to $8 million and $14 million for the same periods in fiscal 2005. When compared to prior periods for the three and six months ended February 28, 2006, corporate and other increased by less than $1 million and $2 million for corporate strategic initiatives, $1 million for compensation expenses in both periods and $2 million and $3 million, respectively, for certain corporate development activities. LIQUIDITY AND CAPITAL RESOURCES Overview Our principal uses of funds at our level are for capital expenditures and repayment of debt. In addition, certain of our subsidiaries, including the TEN Group, CanWest MediaWorks (NZ) and the CanWest MediaWorks Limited Partnership make distributions to us as well as to their minority owners. We have historically met these requirements by using cash generated from operating activities and through short term and long term debt. We believe these sources of funds, together with our cash on hand, will continue to be adequate to meet our currently anticipated capital requirements. We also review acquisition and investment opportunities in the course of our business and will, if a suitable opportunity arises and is permitted by the terms of our debt instruments, make selected acquisitions and investments to implement our business strategy. We expect that the funding for any such acquisitions or investments would come from working capital, borrowing under our credit facility or future credit facilities, additional equity and debt financing, entering into joint ventures or a combination of these methods. Similarly, from time to time, we review opportunities to dispose of non-core assets, and may, if a suitable opportunity arises, sell certain non-core assets. We expect to meet our cash needs for fiscal 2006 primarily through a combination of operating cash flow and cash on hand. CanWest MediaWorks Income Fund and related transactions In October 2005, we transferred our investment in our newspaper and interactive operations (excluding the National Post) and certain shared service operations, which provide customer support and administrative services, to the Limited Partnership. In exchange, we received units of the Limited Partnership representing a 74.2% ownership interest and notes receivable of $1,339 million. Concurrently, the Fund closed its initial public offering ("IPO") of units and invested the net proceeds of $516 million for units of the Limited Partnership representing a 25.8% interest. In addition, the Limited Partnership obtained credit facilities in the amount of $1 billion, consisting of an $825 million non-revolving term credit facility and a $175 million revolving term credit facility. The revolving facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The non-revolving facility matures in five years, and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The Limited Partnership has entered into five year interest rate swap contracts to fix the interest payments on a notional amount of $825 million for the first three years and $660 million for the remaining two years resulting in an effective interest rate of 5.0%. On closing of the IPO, the Limited Partnership drew $830 million on its credit facilities. The Limited Partnership utilized the proceeds of the issuance of the units to the Fund and $823 million of drawings under its new credit facilities to repay the $1,339 million note payable to us. As a result of the transaction, we recorded a dilution gain on the sale of a 25.8% interest in the operations transferred to the Limited Partnership in the amount of $102 million. The net proceeds from the IPO and the Limited Partnership debt as well as proceeds of $401 million from our credit facility were utilized to retire certain debt and interest rate and cross currency interest rate contracts as follows: a. In October 2005, we completed a tender offer for our 10.625% senior subordinated notes payable due in 2011 and our 7.625% senior unsecured notes payable due in 2013. Substantially all of the notes under these facilities were settled. Debt with a book value of $766 million was retired for cash of $850 million. In addition, deferred financing and other costs of $27 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $76 million, net of tax of $35 million. As a result of the repayment of these notes we recorded a swap loss of $34 million, net of tax of $19 million, related to the associated cross currency interest rate swaps. The notes not settled under the tender offers are due on the original due dates and are subject to the same terms except that the covenants associated with these notes have been eliminated. b. In October 2005, we retired our senior credit facility. Debt with a book value of $526 million was settled for cash of $526 million. In addition, deferred financing costs of $6 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $4 million, net of tax of $2 million. In addition, as a result of the settlement of this debt, we have recorded a loss of $46 million, net of tax of $25 million related to the associated interest rate and cross currency interest rate swaps. c. In November 2005, we retired interest rate and cross currency interest rate swap contracts relating to the 7.625% notes, the 10.625% notes and 50% of the cross currency interest rate swap related to the senior secured credit facilities for cash of $364 million. Following the Income Fund transactions in October 2005, our cash flow from the Limited Partnership has been diluted for the 25.8% interest held by the Income Fund and will be received by way of distributions, a portion of which are subordinated. If distributable cash of the Limited Partnership is not sufficient to pay the entire distribution our share will be disproportionately affected by the shortfall. Sources of Funds Our principal sources of liquidity are cash and cash equivalents on hand and cash flows from operating activities. At February 28, 2006, we had cash on hand of $57 million including $23 million of Limited Partnership cash, $16 million of TEN Group cash and $5 million of CanWest MediaWorks (NZ) cash. We had a cash flow deficiency from operating activities of continuing operations of $45 million for the six months ended February 28, 2006 due to a large adjustment in non-cash operating accounts caused by the seasonality of our business. In addition to the above sources of liquidity, we had unused borrowing capacity under our revolving credit facility of $191 million at February 28, 2006. TEN Group had unused borrowing capacity of A$605 million under its credit facilities. Investment activities During the second quarter of fiscal 2006, we commenced a process to sell our 45% interest in TV3 Ireland as it was no longer considered a core operating asset. As a result, the results of these operations were classified as a discontinued operation in the consolidated statements of earnings, the net cash flows were classified as operating, investing and financing activities from discontinued operations in the consolidated statements of cash flows and the assets and liabilities were classified on the consolidated balance sheets as assets and liabilities of discontinued operations. Prior to the classification as a discontinued operation, the results of TV3 Ireland were reported within the Ireland television segment. Proceeds received on the sale will be applied to reduce debt. The classification of TV3 Ireland as a discontinued operations has decreased earnings from continuing operations by $2 million and $7 million for the three and six months ended February 28, 2006, respectively, (2005 - three months $2 million, six months $5 million). In addition cash flows from continuing operations have been decreased by $2 million and $1 million for the three and six months ended February 28, 2006, respectively, (2005 increased by, for the three months $1 million, six months $2 million). Uses of Funds Capital Expenditures For the three and six months ended February 28, 2006 our capital expenditures were $18 million and $39 million, respectively. In the remainder of fiscal 2006, we have revised our capital expenditure forecast and now expect to make additional capital expenditures of approximately $62 million. This amount includes $15 million in continued investment in a new broadcast traffic and sales management system, $5 million investment to upgrade other broadcast systems, and approximately $12 million to expand a print facility as well as expenditures for regular replacement. Investment transactions During the second quarter, we acquired a 30% interest in The New Republic, a weekly magazine based in Washington D.C., for US$2 million. In September 2005, we announced that a subsidiary of a Turkish partner was successful in its bids to acquire the assets of Super FM and Metro FM for aggregate consideration of US$56 million. In February 2006, we announced that the same group had been successful in its bid to acquire the assets of Joy FM and Joy Turk FM for consideration of US$5 million. In exchange for a payment of US$46 million, we will acquire a 75% economic interest in these radio stations. We have provided letters of credit in the aggregate amount of US$3.3 million to secure our share of these bids. The February transactions remain subject to regulatory approval by certain Turkish authorities and we are currently seeking to clarify certain aspects of the regulatory approvals already received in respect of Super FM and Metro FM. Subject to a relaxation of foreign ownership restrictions and the receipt of all necessary regulatory approvals, we have the right to convert our interest to a 75% equity interest. Distributions Our New Zealand and Australian operations make twice annual distributions. In May 2005, our New Zealand operations distributed a total of $8 million, $6 million to us and $2 million to other shareholders, and in November 2005, they distributed a total of $4 million, $3 million to us and $1 million to other shareholders. In July 2005, the TEN Group distributed $45 million to us and $35 million to other shareholders and in December 2005, they distributed $55 million to us and $42 million to other shareholders. The Limited Partnership has made monthly distributions since its inception in October 2005. The total distributions to February 28, 2006 were $80 million, $59 million to us and $21 million to the minority partner. Debt General At February 28, 2006, we had total outstanding consolidated debt of $2,673 million compared to debt of $2,891 million as at August 31, 2005. This included $377 million (August 31, 2005 - $346 million) advanced under our credit facility. Senior debt of our consolidated subsidiaries consisted of $825 million (August 31, 2005 - nil) of the Limited Partnership debt, $349 million (August 31, 2005 - $309 million) of TEN Group debt, and $135 million (August 31, 2005 - $155 million) of CanWest MediaWorks (NZ) debt. In addition, we had $10 million (August 31, 2005 - $787 million) in unsecured and subordinated notes. In December 2005, TEN Group completed a private placement of floating rate senior notes due 2015 in the amount of A$150 million. Interest is due quarterly with the rate set at the beginning of each quarter and is calculated based upon the three month BBSW rate plus 0.69%. The notes are secured by a direct, unconditional and general obligation of TEN Group except that they are subordinated to the secured debt. Credit Facility In October 2005, we obtained a new $500 million revolving term senior credit facility. During the second quarter, we finalized an amendment to the credit facility that increases the amount available to $600 million and revised certain of the financial covenants under the credit facility. The credit facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. This facility is secured by substantially all our directly held assets, including the assets of our Canadian broadcast operations and the National Post, partnership units of CanWest MediaWorks Limited Partnership, and shares of CanWest MediaWorks (NZ) Limited and TEN Group Pty Limited, excluding the convertible debenture held in TEN Group Pty Limited. At February 28, 2006, we have drawn $377 million on this facility. As at February 28, 2006, we have $191 million, net of letters of credit of $31 million, available on this facility. Under our senior credit facilities, we are required to maintain the fair value of our foreign currency and interest rate swaps above a prescribed minimum liability. In addition, there are prescribed minimums with individual counterparties. Prior to our swap settlements on November 3, 2005, we were required to make $119 million of recouponing payments related to overhanging swaps. On November 3, 2005, we settled a substantial portion of our swaps. Under our new credit facility, the minimum liability threshold is $500 million, as at February 28, 2006, the fair value of our interest rate swaps was $245 million. Further strengthening of the Canadian currency and/or changes in interest rates may result in further prepayment requirements. Total leverage as calculated under our credit facility was 4.9 times cash flow for debt covenant purposes for the twelve months ended February 28, 2006, compared to a covenant of 6.0 times. FINANCIAL INSTRUMENTS Our primary market risk exposures are interest rate and foreign exchange rate risk. We are exposed to interest rate risk and foreign exchange rate fluctuations resulting from the issuance of floating rate debt and debt denominated in U.S. dollars. In addition to monitoring the ratio of fixed rate debt to total long term debt, we use interest rate swaps to manage the proportion of total debt that is subject to variable rates. Cross currency swaps are used to hedge both the interest rate and the currency exposure on debt originally issued in U.S. dollars. We do not enter into any derivatives for trading purposes. Further details of these arrangements are provided in note 4 to our unaudited interim consolidated financial statements for the three and six months ended February 28, 2006. Except as discussed in the "CanWest MediaWorks Income Fund and related transactions" section of this report, there have been no changes in the purpose or terms of these financial instruments during the six months ended February 28, 2006. The fair value of the swap contracts represents an estimate of the amount that we would receive or pay if the contracts were closed out at a market price on the balance sheet date. As of February 28, 2006, our outstanding swap contracts were in a net unrealized loss position of $281 million (including $45 million related to TEN Group and ($9) million related to the Limited Partnership). INDUSTRY RISKS AND UNCERTAINTIES The Company's risks and uncertainties have not materially changed from those described in the Company's annual filings. RELATED PARTY TRANSACTIONS In October 2005, senior subordinated notes payable to CanWest Communications Corporation, our parent company, were repaid pursuant to the tender offer and consent solicitation in the amount of US$42 million. Interest expense related to this debt totaled $1 million for the six months ended February 28, 2006 (2005 - three months -$2 million, six months - $3 million). A company which is an affiliate of CanWest Communications Corporation owns CanWest Global Place in Winnipeg, Manitoba, a building in which the Company is a tenant. Rent paid to this company for the three and six months ended February 28, 2006 amounted to $1 million and $2 million, respectively, (2005 - three months $1 million, six months- $2 million). All the related party transactions have been recorded at the exchange amount, which are representative of market rates. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Following is a reconciliation of operating income before amortization, a non-GAAP measure, to net earnings, its most closely comparable GAAP measure.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED --------------------------- --------------------------- FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ $000 $000 $000 $000 Earnings (loss) before taxes 1,110 38,989 13,579 145,919 Amortization 30,487 29,238 60,936 56,690 Interest and other financing expenses 47,433 64,204 101,940 139,171 Investment gains, losses, write-downs, and interest income (2,365) 653 (104,303) (1,823) Foreign exchange (gains) losses (149) 8,596 425 (1,903) Interest rate and foreign currency swap losses 7,160 4,902 127,699 49,500 Loan impairment recovery (3,052) -- (3,052) -- Loss on debt extinguishment 291 -- 116,880 43,992 ------ ------- -------- ------- Operating income before amortization 80,915 146,582 314,104 431,546 ====== ======= ======== =======
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