-----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, LH4mrVo1GCBW5IlRbZO6WRJM+iaHMfiz3uPx190NPna40WjzkOOIV/3qmtc/fZ2r YYTwJ11aQfvn6sdGN4sfSA== 0000950123-06-008848.txt : 20060711 0000950123-06-008848.hdr.sgml : 20060711 20060711164611 ACCESSION NUMBER: 0000950123-06-008848 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060430 FILED AS OF DATE: 20060711 DATE AS OF CHANGE: 20060711 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: 06956534 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 y23016ae6vk.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: July 11, 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 Nine Months Ended May 31, 2006 and May 31, 2005. (Unaudited) 2 CanWest Global Communications Corp. Interim Report to Shareholders For the Three and Nine Months Ended May 31, 2006.
EX-99.1 2 y23016aexv99w1.txt EX-99.1: CANWEST GLOBAL INTERIM CONSOLIDATED FINANCIALS EXHIBIT 99.1 CANWEST GLOBAL COMMUNICATIONS CORP. INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2006 AND MAY 31, 2005 (UNAUDITED) (PRICEWATERHOUSECOOPERS LOGO) PRICEWATERHOUSECOOPERS LLP CHARTERED ACCOUNTANTS One Lombard Place, Suite 2300 Winnipeg, Manitoba Canada R3B 0X6 Telephone +1 (204) 926 2400 Facsimile +1 (204) 944 1020 July 6, 2006 TO THE AUDIT COMMITTEE OF CANWEST GLOBAL COMMUNICATIONS CORP. In accordance with our engagement letter dated March 22, 2005, we have reviewed the accompanying interim consolidated balance sheet of CANWEST GLOBAL COMMUNICATIONS CORP. (the "Company") as at May 31, 2006 and the related interim consolidated statements of earnings, retained earnings and cash flows for the three and nine month periods ended May 31, 2006 and 2005. These interim consolidated financial statements are the responsibility of the Company's management. We performed our review in accordance with Canadian generally accepted standards for a review of interim financial statements by an entity's auditor. Such an interim review consists principally of applying analytical procedures to financial data, and making enquiries of, and having discussions with, persons responsible for financial and accounting matters. An interim review is substantially less in scope than an audit, whose objective is the expression of an opinion regarding the interim financial statements; accordingly, we do not express such an opinion. An interim review does not provide assurance that we would become aware of any or all significant matters that might be identified in an audit. Based on our review, we are not aware of any material modification that needs to be made for these interim consolidated financial statements to be in accordance with Canadian generally accepted accounting principles. This report is solely for the use of the Audit Committee of the Company to assist it in discharging its regulatory obligation to review these interim consolidated financial statements, and should not be used for any other purpose. Any use that a third party makes of this report, or any reliance or decisions made based on it, are the responsibility of such third parties. We accept no responsibility for loss or damages, if any, suffered by any third party as a result of decisions made or actions taken based on this report. PRICEWATERHOUSECOOPERS LLP CHARTERED ACCOUNTANTS PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. CANWEST GLOBAL COMMUNICATIONS CORP. CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED ------------------- ----------------------- MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005 2006 2005 -------- -------- ---------- ---------- (REVISED (REVISED NOTES NOTES 1 & 6) 1 & 6) Revenue 731,144 799,336 2,225,174 2,340,837 Operating expenses 406,692 415,317 1,174,793 1,150,495 Selling, general and administrative expenses 208,097 190,154 619,922 564,369 Ravelston management contract termination -- 188 -- 750 -------- -------- ---------- ---------- 116,355 193,677 430,459 625,223 Amortization of intangibles 676 4,988 11,138 14,885 Amortization of property, plant and equipment 24,575 23,454 72,618 68,160 Other amortization 3,335 1,291 6,167 3,773 -------- -------- ---------- ---------- Operating income 87,769 163,944 340,536 538,405 Interest expense (46,111) (58,796) (144,950) (192,572) Interest income 350 792 1,602 2,277 Amortization of deferred financing costs (1,524) (3,093) (4,954) (8,414) Interest rate and foreign currency swap losses (4,746) (7,530) (132,445) (57,030) Foreign exchange gains (losses) (12,042) (791) (12,467) 5,946 Investment gains, losses and write-downs (note 5) 202 285 103,259 231 Loss on debt extinguishment (note 4) -- -- (116,880) (43,992) -------- -------- ---------- ---------- 23,898 94,811 33,701 244,851 Provision for (recovery of) income taxes (note 3) (5,260) 17,654 (60,285) 52,814 -------- -------- ---------- ---------- Earnings before the following 29,158 77,157 93,986 192,037 Minority interest (18,534) (22,251) (78,978) (78,626) Interest in earnings of equity accounted affiliates 566 504 1,393 1,551 Realized currency translation adjustments (1,017) 392 (2,797) (456) -------- -------- ---------- ---------- NET EARNINGS FROM CONTINUING OPERATIONS 10,173 55,802 13,604 114,506 Earnings (loss) from discontinued operations (note 6) 3,071 (3,105) 10,203 1,760 -------- -------- ---------- ---------- NET EARNINGS FOR THE PERIOD 13,244 52,697 23,807 116,266 ======== ======== ========== ========== EARNINGS PER SHARE FROM CONTINUING OPERATIONS (IN DOLLARS): BASIC $ 0.06 $ 0.31 $ 0.08 $ 0.65 DILUTED $ 0.06 $ 0.31 $ 0.08 $ 0.64 EARNINGS PER SHARE (IN DOLLARS): BASIC $ 0.07 $ 0.30 $ 0.13 $ 0.66 DILUTED $ 0.07 $ 0.30 $ 0.13 $ 0.65
The notes constitute an integral part of the consolidated financial statements. CANWEST GLOBAL COMMUNICATIONS CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS)
AS AT AS AT MAY 31, AUGUST 31, 2006 2005 --------- ---------- (REVISED NOTES 1 & 6) ASSETS CURRENT ASSETS Cash 60,432 28,947 Accounts receivable 523,603 483,245 Income taxes recoverable 360 -- Inventory 11,991 13,533 Investment in broadcast rights 210,005 183,114 Future income taxes 3,893 3,893 Other current assets 34,456 26,013 Assets of discontinued operations (note 6) 12,301 12,729 --------- --------- 857,041 751,474 Other investments 16,950 23,059 Investment in broadcast rights 35,673 20,139 Property, plant and equipment 684,762 707,287 Future income taxes 181,590 53,285 Other assets 135,268 198,244 Intangible assets 1,163,441 1,142,118 Goodwill 2,401,820 2,420,851 Assets of discontinued operations (note 6) 11,854 12,896 --------- --------- 5,488,399 5,329,353 ========= ========= LIABILITIES CURRENT LIABILITIES Accounts payable 121,156 173,987 Accrued liabilities 279,143 291,395 Income taxes payable -- 51,764 Broadcast rights accounts payable 91,697 75,615 Deferred revenue 42,315 36,774 Future income taxes 51,597 44,663 Current portion of long term debt and obligations under capital leases 17,631 9,946 Liabilities of discontinued operations (note 6) 10,803 18,692 --------- --------- 614,342 702,836 Long term debt and related foreign currency swap liability (note 4) 2,746,858 2,886,090 Interest rate and foreign currency swap liability 137,352 215,075 Obligations under capital leases 12,490 16,101 Other accrued liabilities 169,017 147,179 Future income taxes 103,624 75,265 Minority interest (note 2) 494,084 90,497 Liabilities of discontinued operations (note 6) 2,181 2,181 --------- --------- 4,279,948 4,135,224 --------- --------- Commitments and contingencies (note 11) SHAREHOLDERS' EQUITY Capital stock 850,216 849,909 Contributed surplus 10,100 7,685 Retained earnings 372,279 348,472 Cumulative foreign currency translation adjustments (24,144) (11,937) --------- --------- 1,208,451 1,194,129 --------- --------- 5,488,399 5,329,353 ========= =========
The notes constitute an integral part of the consolidated financial statements. CANWEST GLOBAL COMMUNICATIONS CORP. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE THREE FOR THE MONTHS ENDED NINE MONTHS ENDED ----------------- ----------------- MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005 2006 2005 ------- ------- ------- ------- Retained earnings - beginning of period, as previously reported 360,944 403,612 350,291 340,001 Adjustment for adoption of new accounting pronouncement (note 1) (1,909) (1,776) (1,819) (1,734) ------- ------- ------- ------- Retained earnings - beginning of period, as restated 359,035 401,836 348,472 338,267 Net earnings for the period 13,244 52,697 23,807 116,266 ------- ------- ------- ------- Retained earnings - end of period 372,279 454,533 372,279 454,533 ======= ======= ======= =======
The notes constitute an integral part of the consolidated financial statements. CANWEST GLOBAL COMMUNICATIONS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED ------------------ --------------------- MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005 2006 2005 ------- -------- ---------- -------- (REVISED (REVISED NOTES NOTES 1 & 6) 1 & 6) CASH GENERATED (UTILIZED) BY: OPERATING ACTIVITIES Net earnings for the period 13,244 52,697 23,807 116,266 (Earnings) loss from discontinued operations (3,071) 3,105 (10,203) (1,760) Items not affecting cash Amortization 30,110 32,826 94,877 95,232 Non-cash interest expense (income) (938) 2,710 (583) 29,233 Future income taxes (3,010) 4,314 (86,016) (13,684) Realized currency translation adjustments 1,017 (392) 2,797 456 Interest rate and foreign currency swap losses net of settlements 4,832 7,597 30,555 24,919 Loss on debt extinguishment -- -- 116,880 43,992 Investment gains, losses and write-downs (202) (285) (103,259) (231) Amortization and write-down of film and television programs -- 1,546 -- 4,810 Pension expense 3,635 3,646 7,816 9,613 Minority interest 18,534 22,251 78,978 78,626 Earnings from equity accounted affiliates (566) (504) (1,393) (1,551) Foreign exchange (gains) losses 12,451 849 11,559 (2,666) Stock based compensation expense 968 693 3,019 2,808 ------- -------- ---------- -------- 77,004 131,053 168,834 386,063 Changes in non-cash operating accounts (68,695) (59,872) (188,461) (107,512) ------- -------- ---------- -------- Cash flows from operating activities of continuing operations 8,309 71,181 (19,627) 278,551 Cash flows from operating activities of discontinued operations 3,488 12,863 8,364 43,405 ------- -------- ---------- -------- Cash flows from operating activities 11,797 84,044 (11,263) 321,956 ------- -------- ---------- -------- INVESTING ACTIVITIES Other investments (376) 134 (2,947) 426 Investment in broadcast licences (1,348) (722) (2,414) (2,265) Acquisitions (note 2) (72,668) -- (72,668) (12,493) Proceeds from divestitures -- -- 518,135 -- Proceeds from sales of other investments -- -- 9,300 2,171 Proceeds from sale of property, plant and equipment 443 -- 1,413 3,383 Purchase of property, plant and equipment (20,970) (16,753) (59,864) (55,273) Investing activities from discontinued operations (87) (211) (454) (828) ------- -------- ---------- -------- (95,006) (17,552) 390,501 (64,879) ------- -------- ---------- -------- FINANCING ACTIVITIES Issuance of long term debt, net of financing costs (2,293) (1,430) 941,291 142,782 Repayment of long term debt (215) (23,278) (1,376,817) (282,156) Advances (repayments) of revolving facilities, net of financing costs 102,257 (82,953) 577,070 (4,947) Settlement of swap liabilities -- -- (354,205) -- Swap recouponing (payments) receipts -- 2,190 (48,726) (60,359) Payments of capital leases (477) (438) (1,063) (976) Issuance of share capital -- 143 307 702 Issuance of share capital of Network TEN -- -- 498 5,317 Payment of distribution to minority interest (15,023) (2,517) (76,521) (50,274) Financing activities from discontinued operations (1,956) (2,302) (6,976) (26,125) ------- -------- ---------- -------- 82,293 (110,585) (345,142) (276,036) ------- -------- ---------- -------- Foreign exchange gain (loss) on cash denominated in foreign currencies (800) (271) (2,611) 671 ------- -------- ---------- -------- NET CHANGE IN CASH (1,716) (44,364) 31,485 (18,288) CASH - BEGINNING OF PERIOD 62,148 120,191 28,947 94,115 ------- -------- ---------- -------- CASH - END OF PERIOD 60,432 75,827 60,432 75,827 ======= ======== ========== ========
The notes constitute an integral part of the consolidated financial statements. CANWEST GLOBAL COMMUNICATIONS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2006 AND MAY 31, 2005 (UNAUDITED) (IN THOUSANDS OF CANADIAN DOLLARS EXCEPT AS OTHERWISE NOTED) 1. SIGNIFICANT ACCOUNTING POLICIES The Company is an international media company with interests in broadcast television, publishing, radio, specialty cable channels, outdoor advertising, and Internet websites in Canada, Australia, New Zealand, Turkey and Ireland. The Company's operating segments include television, publishing and interactive operations, radio and outdoor advertising. In Canada, the Television segment includes the operation of the Global Television Network, TVtropolis, various other conventional and specialty channels and Cool FM and The Beat radio stations. The Australian Television segment includes TEN Group Pty Limited's ("TEN Group") TEN Television Network ("Network TEN"). The Canadian Publishing and Interactive segment includes the publication of a number of newspapers, including metropolitan daily newspapers and the National Post, as well as operation of the canada.com web portal and other web-based operations. The Company's ownership of the publishing and interactive operations, excluding the National Post, is held through CanWest MediaWorks Limited Partnership ("Limited Partnership"). The New Zealand Television segment includes CanWest MediaWorks (NZ) Limited's TV3 and C4 Television Networks. The New Zealand Radio segment includes CanWest MediaWorks (NZ) Limited's RadioWorks operation, which is comprised of six nationally-networked radio brands and two local radio brands. The Turkey Radio segment is comprised of four radio brands: Super FM, Metro FM, Joy FM and Joy Turk FM. The Australian Outdoor Advertising segment includes EyeCorp Pty Limited ("Eye Corp"), an outdoor advertising operation which is wholly owned by TEN Group. The Company's economic interest in the Limited Partnership, TEN Group and CanWest MediaWorks (NZ) Limited is 74.2%, 56.4% and 70%, respectively. Corporate and Other includes various investments in media operations and corporate costs. The Company's broadcast customer base is comprised primarily of large advertising agencies, which place advertisements with the Company on behalf of their customers. Publishing and interactive revenues include advertising, circulation and subscriptions which are derived from a variety of sources. The Company's advertising revenues are seasonal. Revenues and accounts receivable are highest in the first and third quarters, while expenses are relatively constant throughout the year. A summary of significant accounting policies followed in the preparation of these consolidated financial statements is as follows: BASIS OF PRESENTATION The consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada for interim financial statements and reflect all adjustments which are, in the opinion of management, necessary for fair statement of the results of the interim periods presented. However, these interim financial statements do not include all of the information and disclosures required for annual financial statements. Except as noted below, the accounting policies used in the preparation of these interim financial statements are the same as those used in the most recent annual financial statements. These interim financial statements should be read in conjunction with the most recent annual financial statements of the Company. All amounts are expressed in Canadian dollars unless otherwise noted. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS Certain prior period amounts have been reclassified to conform with the financial statement presentation adopted in the current year. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT During the quarter, the Company applied the interpretations of the Canadian Institute of Chartered Accountants Emerging Issues Committee abstract 159 "Conditional Asset Retirement Obligations" (EIC-159). Under EIC-159, a liability should be recognized if the entity has sufficient information to reasonably estimate the fair value of the asset retirement obligation. The Company has determined that it has conditional asset retirement obligations on certain of its assets, and accordingly, has recognized a liability in the quarter. The change has been accounted for retroactively with restatement. The impact of the change has increased the cost of property plant and equipment by $1.3 million (as at August 31, 2005 - $1.3 million), increased accumulated amortization by $0.6 million (as at August 31, 2005 - $0.5 million), increased future tax asset by $0.2 million (as at August 31, 2005 - $0.2 million), increased asset retirement obligation by $3.7 million (as at August 31, 2005 - $3.6 million), decreased future income taxes liability by $0.8 million (as at August 31, 2005 - $0.8 million), decreased minority interest by $0.1 million (as at August 31, 2005 - $ 0.1 million), increased amortization expense for the three months ended May 31, 2006 by $0.1 million (2005 - $0.1 million) and for the nine months by $0.2 million (2005 - $0.2 million), decreased future tax expense for the three months ended May 31, by a nominal amount for 2006 and 2005 and for the nine months by $0.1 million (2005 - $0.1 million), and decreased net earnings by a nominal amount for the three months ended May 31, 2006 (2005 - nominal) and by $0.1 million (2005 - $0.1 million) for the nine months ended May 31, 2006, with no impact on the basic or diluted earnings per share for the three or nine month periods for 2006 and 2005. Opening retained earnings for the three months ended May 31 has been decreased by $1.9 million (2005 - $1.8 million), and for the nine months, opening retained earnings has been decreased by $1.8 million (2005 - $1.7 million). 2. ACQUISITIONS AND DIVESTITURE Acquisitions (a) On September 1, 2004, Eye Corp acquired the remaining 50% of Eye Shop Pty Limited (formerly Eye Village Joint Venture) for $12.5 million (A$13.4 million). In addition on July 1, 2005, Eye Corp acquired 100% of Eye Drive Melbourne Pty Limited (formerly Southcoast Pty Limited) for $7.0 million (A$7.8 million). The principal business activities of these companies are the sale of outdoor advertising. Eye Corp accounted for these acquisitions using the purchase method. As such, the results of operations reflect revenue and expenses of the acquired operations since the date of acquisition. A summary of the fair value of the assets and liabilities acquired is as follows: Current assets 5,872 Property, plant and equipment 5,224 Site licenses 3,931 Goodwill 9,633 Liabilities (1,607) ------ 23,053 ====== Consideration: Cash 19,487 Carrying value of investment at date of acquisition 3,566 ------ 23,053 ======
(b) On April 14, 2006, the Company completed its acquisition of Super FM, Metro FM, Joy FM and Joy Turk FM for cash consideration of $73 million, subject to final regulatory approval of certain aspects of the transaction. The principal business activity of these companies is the operation of radio stations and the operations will be presented in the Turkey radio segment. The Company will initially have a 20% equity stake in Super FM, the largest and most profitable of the four stations, but its subsidiaries will have the option of acquiring up to 100% of each station, subject to a relaxation in Turkish foreign ownership restrictions. The Company also entered into an agreement to provide operational, sales and advisory services to the stations on a fee-for-service basis. As a result of our equity interest, financing of the purchase and operational agreements, the Company has determined that it is the primary beneficiary as defined by CICA handbook's Accounting Guideline 15, Consolidation of Variable Interest Entities, of these radio stations and accordingly, the Company will consolidate the results of these acquisitions. As the transaction has just recently closed, the Company is currently in the process of determining the fair values of the assets acquired and identification of intangible assets. The Company will complete the allocation the purchase price equation once this process is complete. A summary of the preliminary fair values of the assets and liabilities acquired is as follows: Property, plant and equipment 240 Goodwill 11,800 Broadcast licenses 60,738 Liabilities (110) ------ 72,668 ======
Divestiture On October 13, 2005, the Company transferred its investment in its newspaper and interactive operations (excluding the National Post) and certain shared service operations, which provide customer support and administrative services to the Company, (the "Publications Group") to a new entity, the Limited Partnership. In exchange, the Company received units of the Limited Partnership representing a 74.2% ownership interest and notes receivable of $1,339.5 million. Concurrently, the CanWest MediaWorks Income Fund (the "Fund") closed its initial public offering ("IPO") of units and invested the proceeds for units of the Limited Partnership representing a 25.8% interest. Total proceeds for the offering were $550 million and costs of the offering were $34.7 million and were paid by the Limited Partnership. In addition, the Limited Partnership obtained credit facilities in the amount of $1 billion and drew $830.0 million on the credit facilities. The Limited Partnership utilized the proceeds of the issuance of the units to the Fund and $822.5 million in drawings under its new credit facilities to repay the $1,339.5 million note payable to the Company. Approximately 26% of the Company's units of the Limited Partnership are subordinated in the payment of distributions if the Limited Partnership does not have adequate resources on a quarterly basis to fund distributions. The subordination period ends October 31, 2007, at which time these units will have the same terms and conditions as the other partnership units. 3. INCOME TAXES The Company's provision for income taxes reflects an effective income tax rate which differs from the combined Canadian statutory rate as follows:
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED ----------------- ----------------- MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005 2006 2005 ------- ------- ------- ------- Income taxes at combined Canadian statutory rate of 34.37% (2005 - 35.20%) 8,214 33,373 11,583 86,188 Non-taxable portion of capital (gains) and losses (23) 861 (2,302) 2,461 Effect of valuation allowance on future tax assets, net of reversals (5,635) -- 729 1,527 Effect of foreign income tax rates differing from Canadian income tax rates (1,053) (899) (6,171) (11,155) Incremental taxes on debt extinguishment -- -- -- 5,697 Change in expected future tax rates (227) -- (3,415) (4,338) Large corporations tax 620 701 2,314 2,141 Non-taxable dilution gain on disposition to Limited Partnership 55 -- (44,385) -- Limited Partnership net earnings allocated to minority interest (4,833) -- (11,738) -- Non-deductible foreign exchange losses 4,201 -- 4,201 -- Effect of uncertain tax positions (9,500) -- (15,002) (4,899) Non-deductible expenses 2,893 353 4,621 1,692 Prior period temporary differences not previously tax effected -- -- -- (6,989)(1) Change in Australian tax consolidation legislation -- (17,710) -- (17,710) Other 28 975 (720) (1,801) ------ ------- ------- ------- Provision for (recovery of) income taxes (5,260) 17,654 (60,285) 52,814 ====== ======= ======= =======
(1) The provision for income taxes for the nine months ended May 31, 2005, includes adjustments for prior period temporary differences not previously tax effected aggregating to $7.0 million ($6.2 million future income tax and $0.8 million current income tax). The Company has determined these adjustments were not material to the reported results, accordingly, the adjustments were included in earnings. This adjustment has the effect of increasing basic and diluted earnings per share for the nine months ended May 31, 2005 by $0.04 per share. 4. LONG TERM DEBT
AS AT AS AT MAY 31, AUGUST 31, 2006 2005 --------- ---------- Senior Secured Credit facility(1) 452,223 -- Senior Secured Credit facility (2) -- 346,100 Senior unsecured notes (2) 276 237,420 Senior subordinated notes (2) 9,634 549,632 Senior subordinated notes 870,059 936,967 CanWest MediaWorks Limited Partnership Secured Credit facility(3) 825,000 -- Bank loan AUS$115,000 (Aug. 31, 2005 - AUS$180,000) 95,335 160,794 Senior unsecured notes US$125,000 (Aug. 31, 2005 - US$125,000) 136,078 148,609 Senior notes AUS$150,000(4) 124,350 -- Term bank loan NZ$194,700 (Aug. 31, 2005 - NZ$187,802) 136,660 154,824 Other 4,250 4,250 --------- --------- 2,653,865 2,538,596 Effect of foreign currency swaps (2) 106,877 356,241 --------- --------- Long term debt 2,760,742 2,894,837 Less portion due within one year (13,884) (8,747) --------- --------- Long term portion 2,746,858 2,886,090 ========= =========
Except for the changes noted in (1)(2)(3) and (4), the terms and conditions of the long term debt are the same as disclosed in the August 31, 2005 consolidated financial statements. (1) In October 2005, the Company obtained a new $500 million revolving term credit facility. During the second quarter, the Company finalized an amendment to the credit facility that increased the amount available to $600 million and revised certain of the financial covenants under the credit facility. As at May 31, 2006, the Company has $119.0 million, net of letters of credit of $28.0 million, available on this facility of which we can draw $31 million. The revolving facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. This facility is secured by substantially all of the Company's directly held assets including the assets of its Canadian broadcast operations, the National Post, partnership units of CanWest MediaWorks Limited Partnership, and shares of CanWest MediaWorks (NZ) Limited and TEN Group Pty Limited, excluding the convertible debenture held in TEN Group Pty Limited. (2) The Company settled debt and associated swaps as follows: i. In October 2005, the Company completed a tender offer for its 10.625% senior subordinated notes payable due in 2011 and its 7.625% senior unsecured notes payable due in 2013. Substantially all of the notes under these facilities were settled. Debt with a book value of $765.8 million was retired for cash of $849.7 million. In addition, deferred financing and other costs of $27.0 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $75.6 million, net of tax of $35.3 million. As a result of the repayment of these notes the Company recorded a swap loss of $34.5 million, net of tax of $19.0 million related to the associated cross currency interest rate swaps. In May 2006, the Company gave notice that it was redeeming the remaining 10.625% notes payable, due in 2011. The notes with a book value of $9.7 million will be redeemed for cash of $10.2 million in June 2006. The transaction will result in a loss on debt retirement of $0.3 million, net of tax of $0.2 million. The notes not settled under the tender offers are due on the original due dates and are subject to the same terms except that the covenants associated with these notes have been eliminated. ii. In October 2005, the Company retired its senior credit facility. Debt with a book value of $526.4 million was settled for cash of $526.4 million. In addition, deferred financing costs of $6.0 million relating to these notes were written off. The transaction resulted in a loss on debt retirement of $3.9 million, net of tax of $2.1 million. In addition, as a result of the settlement of this debt, the Company will record a loss of $46.3 million, net of tax of $25.4 million related to the associated interest rate and cross currency interest rate swaps. iii. In November 2005, the Company retired interest rate and cross currency interest rate swap contracts relating to the 7.625% notes, the 10.625% notes and 50% of the cross currency interest rate swap related to the senior secured credit facilities for cash of $364.0 million. (3) CanWest MediaWorks Limited Partnership obtained credit facilities in the amount of $1 billion consisting of an $825 million non-revolving term credit facility and a $175 million revolving term credit facility. The revolving facility matures in five years, is subject to certain restrictions and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The non-revolving facility matures in five years, and bears interest at the prevailing prime rate, U.S. base rate, banker's acceptance rate or LIBOR plus, in each case, an applicable margin. The Limited Partnership has drawn $825.0 million on its non-revolving facility and nil on its revolving facility. The Limited Partnership has entered into five year interest rate swap contracts to fix the interest payments on a notional amount of $825.0 million for the first three years and $660.0 million for the remaining two years resulting in an effective interest rate of 5%. (4) In December 2005, TEN Group completed a private placement of floating rate senior notes due 2015 in the amount of A$150 million. Interest is due quarterly with the rate set at the beginning of each quarter and is calculated based upon the three month BBSW rate plus 0.69%. The notes are secured by a direct, unconditional and general obligation of TEN Group except that they are subordinated to the secured debt. Under its Senior Secured Credit facility the Company is required to maintain a fair value of its interest rate swaps and foreign currency and interest rate swaps above a prescribed minimum liability ($500 million). There are also prescribed minimum liabilities with individual counterparties, which have two-way recouponing provisions. The Company was required to make net recouponing payments of $119 million in the nine months ended May 31, 2006 (2005 - $97 million), $69 million of this recouponing payment related to overhanging swaps and accordingly was reflected in cash flows from operating activities. Further strengthening of the Canadian currency and/or changes in interest rates may result in further payments to counterparties. The Company is subject to covenants under certain of the credit facilities referred to above, including thresholds for leverage and interest coverage and is also subject to certain restrictions under negative covenants. 5. INVESTMENT GAINS, LOSSES AND WRITE-DOWNS The Company has recorded the following investment gains and losses.
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED ----------------- ----------------- MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005 2006 2005 ------- ------- ------- ------- Dilution gain - sale of 25.8% of Limited Partnership -- -- 101,688 -- Gain on sale of investments -- -- 138 2,171 Dilution gain - TEN Group and CanWest MediaWorks (NZ) Limited -- -- 64 733 Other 202 285 1,369 (2,673) --- --- ------- ------ 202 285 103,259 231 === === ======= ======
6. DISCONTINUED OPERATIONS In the year ended August 31, 2004, the Company commenced a process to sell its Fireworks Entertainment Division. In July and September 2005, a subsidiary of the Company sold certain assets, with a book value of $16.1 million, and operations which comprise the Fireworks Entertainment Division's film and television program operations for net proceeds of $16.1 million. $2.3 million of these proceeds are recorded in accounts receivable as they have been held in escrow to be released over a 30 month period. In September 2005, a subsidiary of the Company completed the sale of the Fireworks Entertainment Division's remaining film and television program rights with a book value of $2.9 million for net proceeds of $2.9 million. As the assets were carried at their fair values, no gain or loss was recorded on these transactions. Certain remaining accounts receivable and accounts payable will be settled by the Company. Prior to its classification as a discontinued operation the results of Fireworks Entertainment were reported in the Canadian Entertainment segment. During the second quarter of fiscal 2006, the Company commenced a process to sell its 45% interest in TV3 Ireland as it was no longer considered a core operating asset. As a result, the results of these operations were classified as a discontinued operation in the consolidated statements of earnings, the net cash flows were classified as operating, investing and financing activities from discontinued operations in the consolidated statements of cash flows and the assets and liabilities were classified on the consolidated balance sheets as assets and liabilities of discontinued operations. During the third quarter, the Company announced it reached a deal to sell its stake in TV3 Ireland for E138 million. The final amount of the proceeds is subject to various adjustments. The closing of the transaction is subject to a 90 day right of first refusal by one of the other shareholders and regulatory approval. Prior to the classification as a discontinued operation, the results of TV3 Ireland were reported within the Ireland television segment. The classification of TV3 Ireland as a discontinued operation has decreased earnings from continuing operations by $3.0 million and $9.6 million for the three and nine months ended May 31, 2006, respectively, (2005 - three months $3.0 million, nine months $7.9 million). Cash flows from continuing operations have been increased by $0.3 million and decreased by $0.6 million for the three and nine months ended May 31, 2006, respectively, (2005 - decreased by $0.8 million for the three months and increased by $1.5 million for the nine months). The earnings from discontinued operations are summarized as follows:
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED ----------------- ----------------- MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005 2006 2005 ------- ------- ------- ------- Revenue 10,081 19,195 32,049 76,195 ======= ====== ======= ======= Earnings (loss) from discontinued operations before tax expense 3,452 (2,520) 11,754 4,028 Income tax expense 381 585 1,551 2,268 ------- ------ ------- ------- Earnings (loss) from discontinued operations(1) 3,071 (3,105) 10,203 1,760 ======= ====== ======= ======= Earnings (loss) from discontinued operations per share (in dollars): Basic $ 0.02 ($0.01) $ 0.05 $ 0.01 Diluted $ 0.02 ($0.01) $ 0.05 $ 0.01
(1) The Company has not allocated interest on the parent company's debt to discontinued operations. The carrying values of the net assets related to the discontinued operations are as follows:
AS AT MAY 31, AS AT AUGUST 31, 2006 2005 ------------- ---------------- Investment in broadcast rights 5,279 8,136 Other current assets 7,022 4,593 ------ ------ Total current assets 12,301 12,729 ------ ------ Investment in broadcast rights 1,366 1,058 Other non-current assets 10,488 11,838 ------ ------ Total non-current assets 11,854 12,896 ------ ------ Debt 4,776 12,270 Other current liabilities 6,027 6,422 ------ ------ Total current liabilities 10,803 18,692 ------ ------ Long term liabilities 2,181 2,181 ------ ------ Net assets 11,171 4,752 ====== ======
7. EARNINGS PER SHARE The following table provides a reconciliation of the denominators used in computing basic and diluted earnings per share.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005 2006 2005 ------------ ----------- ----------- ----------- Basic weighted average shares outstanding during the period 177,430,675 177,333,133 177,418,316 177,307,400 Dilutive effect of options and shares 242,247 483,673 351,532 331,925 ----------- ----------- ----------- ----------- Diluted weighted average shares outstanding during the period 177,672,922 177,816,806 177,769,848 177,639,325 =========== =========== =========== =========== Options outstanding that would have been anti-dilutive 2,934,874 691,412 1,825,874 977,303 =========== =========== =========== ===========
8. STOCK BASED COMPENSATION The Company utilizes the fair value approach to account for stock based compensation on a prospective basis for options granted after September 1, 2003, and as a result, the Company has recorded compensation expense and a credit to contributed surplus for the nine months ended May 31, 2006 of $1.4 million (2005 - $2.4 million). The fair value of the options granted during the nine months ended May 31, 2006 was estimated using the Black-Scholes option pricing model with the assumptions of no dividend yield (2005 - nil), an expected volatility of 31% (2005 - 42%), risk free interest rates of 4.0% (2005 - 4.2%) and an expected life of 7 years (2005 - 7 years). The total fair value of 982,750 stock options granted by the Company in the nine months ended May 31, 2006 with an average exercise price of $10.10 per option was $4.1 million, a weighted average fair value per option of $4.17. During the nine months ended May 31, 2005, 1,177,500 stock options were granted with a total fair value of $6.3 million and a weighted average fair value per option of $5.35. During 2005, the Company agreed to issue approximately 187,000 shares, which vest in two years, for no consideration. The fair value of the shares at the time of issuance was $10.40 per share. During the nine months ended May 31, 2006, the Company recorded compensation expense, and a credit to contributed surplus, of $0.5 million (2005 - $0.4 million) related to these shares. The proforma cost of share compensation expense, for awards granted prior to September 1, 2003, for the three and nine months ended May 31, 2006 would be $0.2 million and $0.7 million, respectively (2005 - $0.3 million and $0.9 million). A value of $0.8 million would be charged to proforma net earnings in future years according to the vesting terms of the options. The resulting proforma net earnings from continuing operations, basic and diluted earnings per share for the three months ended May 31, 2006, would be $9.9 million, $0.06 and $0.06, respectively (2005 - $55.5 million, $0.31, and $0.31), and nine months ended May 31, 2006, would be $12.9 million $0.07 and $0.07, respectively (2005 - $113.6 million, $0.64, and $0.64). The resulting proforma net earnings, basic and diluted earnings per share for the three months ended May 31, 2006, would be $13.0 million, $0.07 and $0.07, respectively (2005 - $52.4 million, $0.30, and $0.29), and nine months ended May 31, 2006, would be $23.1 million, $0.13 and $0.13, respectively (2005 - $115.3 million, $0.65 and $0.65). 9. RELATED PARTY TRANSACTIONS In October 2005, the Company settled notes, payable to CanWest Communications Corporation, with a book value of $49.7 million (US$41.9 million) under the same terms offered to the unrelated senior subordinated note holders for $55.4 million. For the nine months ended May 31, 2006, interest expense related to this debt totaled $0.7 million (2005 - $4.5 million). A company which is owned by CanWest Communications Corporation owns CanWest Global Place in Winnipeg, Manitoba, a building in which the Company is a tenant. For the nine months ended May 31, 2006, rent paid to this company amounted to $0.8 million (2005 - $0.8 million) and is included in selling, general and administrative expenses. The obligations under these operating leases continue until August 2010. All the related party transactions have been recorded at the exchange amounts, which are representative of market rates. 10. EMPLOYEE BENEFIT PLANS The Company has a number of funded and unfunded defined benefit plans, as well as defined contribution plans, that provide pension, other retirement and post retirement benefits to its employees. The measurement date for the plans is June 30 of each year. Information regarding the components of net periodic benefit cost for the benefit plans is presented below:
POST RETIREMENT POST RETIREMENT PENSION BENEFITS BENEFITS PENSION BENEFITS BENEFITS ----------------- ----------------- ----------------- ----------------- FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ------------------------------------- ------------------------------------- MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005 2006 2005 2006 2005 2006 2005 ------- ------- ------- ------- ------- ------- ------- ------- CURRENT SERVICE COST 5,781 4,443 451 333 17,343 13,329 1,353 998 Employee contributions (1,535) (1,540) -- -- (4,606) (4,620) -- -- Accrued interest on benefits 6,153 6,108 631 587 18,459 18,323 1,893 1,760 Expected return on plan assets (5,800) (5,056) -- -- (17,400) (15,167) -- -- Amortization of transitional obligation 109 148 76 -- 326 443 228 -- Amortization of past service costs 301 301 34 34 904 904 102 102 Amortization of net actuarial loss (gain) 1,368 757 14 (14) 4,105 2,271 43 (41) Changes in valuation allowance (21) (18) -- -- (63) (53) -- -- ------ ------ ----- --- ------- ------- ----- ----- Total pension and post retirement benefit expense 6,356 5,143 1,206 940 19,068 15,430 3,619 2,819 ====== ====== ===== === ======= ======= ===== =====
11. COMMITMENTS AND CONTINGENCIES COMMITMENTS (a) In May 2006, the television segments entered into commitments for new programming. Management estimates that these new commitments will result in future annual broadcast rights expenditures of approximately $65 million. CONTINGENCIES (b) The Company has requested arbitration related to $94.5 million owed by Hollinger International Inc., Hollinger Inc. and certain related parties (collectively "Hollinger") related to certain unresolved adjustments and claims related to its November 15, 2000 acquisition of certain newspaper assets from Hollinger. Hollinger disputes this claim and claims that it and certain of its affiliates are owed $45 million by the Company. The outcome and recoverability of this claim is not determinable. (c) In March 2001, a statement of claim was filed against the Company and certain of the Company's subsidiaries by CanWest Broadcasting Ltd.'s ("CBL's") former minority shareholders requesting, among other things, that their interests in CBL be purchased without minority discount. In addition, the claim alleges the Company wrongfully terminated certain agreements and acted in an oppressive and prejudicial manner towards the plaintiffs. The action was stayed on the basis that the Ontario courts have no jurisdiction to try the claim. In April 2004, a statement of claim was filed in Manitoba by the same minority shareholders, which was substantially the same as the previous claim, seeking damages of $405 million. In June 2005, the Company filed a Statement of Defence and Counterclaim. In its Counterclaim, the Company is seeking a declaration of the fair value of the former minority shareholders' interest in CBL and repayment of the difference between the fair value and the redemption amount paid by the Company to the former shareholders. The Company believes the allegations in the Statement of Claim are substantially without merit and not likely to have a material adverse effect on its business, financial condition or results of operation. The outcome of this claim is not determinable and the Company intends to vigorously defend this lawsuit. (d) The Company is one of several defendants to a claim by a proposed class of freelance writers instituted in July 2003, in respect of works that they provided to newspapers and other print publications in Canada. The total amount claimed (by all plaintiffs against all defendants) is $500 million in compensatory damages and $250 million in exemplary and punitive damages. The outcome of this claim is not determinable. (e) CanWest MediaWorks (NZ) Limited has received a Notice of Proposed Adjustment from the New Zealand Inland Revenue covering the years 2002 to 2004 that proposes a potential tax liability of NZ$13.3 million on the treatment of its optional convertible notes. A Notice of Proposed Adjustment is an instrument through which the New Zealand Inland Revenue advises a taxpayer that it is considering amending its tax assessment from that in the tax return and is not a confirmation of liability. CanWest MediaWorks (NZ) Limited is confident that the tax treatment that it has applied to the notes is correct and does not believe that any material additional tax liability will result. The outcome of this situation is not determinable and CanWest MediaWorks (NZ) Limited intends to dispute the proposed adjustments. (f) The Company is involved in various legal matters arising in the ordinary course of business. The resolution of these matters is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows. 12. SEGMENTED INFORMATION The Company operates primarily within the publishing and interactive, television, radio, and outdoor advertising industries in Canada, Australia, New Zealand, Turkey and Ireland. Segmented information has been retroactively revised to reflect the Company's classification of the Ireland television segment as discontinued. Each segment operates as a strategic business unit with separate management. Segment performance is measured primarily upon the basis of segment operating profit. The Company accounts for inter-segmented information as if the sales were to third parties. Segmented information and a reconciliation from segment operating profit to earnings before income taxes are presented below:
SEGMENT OPERATING SEGMENT OPERATING REVENUE(1) PROFIT(2) REVENUE (1) PROFIT(2) ----------------- ----------------- --------------------- ------------------- FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ------------------------------------- ------------------------------------------- MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005 2006 2005 2006 2005 2006 2005 ------- ------- ------- ------- --------- --------- -------- -------- Publishing and Interactive-Canada 322,850 323,383 66,417 75,144 965,244 938,609 195,552 216,006 ------- ------- ------- ------- --------- --------- -------- -------- Television Canada 187,661 200,696 24,070 56,849 528,565 564,695 52,521 138,012 Australia-Network TEN 148,748 194,452 21,470 52,929 499,726 595,876 158,567 231,894 New Zealand 24,716 30,948 4,978 5,868 83,454 89,803 18,839 22,364 ------- ------- ------- ------- --------- --------- -------- -------- Total television 361,125 426,096 50,518 115,646 1,111,745 1,250,374 229,927 392,270 Radio - New Zealand 18,704 23,054 4,595 4,965 64,581 71,229 18,346 20,660 Radio - Turkey 2,246 -- 1,376 -- 2,246 -- 1,376 -- Outdoor - Australia 26,219 26,803 3,493 5,327 81,358 80,625 15,658 18,024 Corporate and other -- -- (10,044) (7,217) -- -- (30,400) (20,987) ------- ------- ------- ------- --------- --------- -------- -------- 731,144 799,336 116,355 193,865 2,225,174 2,340,837 430,459 625,973 ======= ======= ========= ========= Ravelston management contract termination -- (188) -- (750) ------- ------- -------- -------- 116,355 193,677 430,459 625,223 Amortization of intangibles 676 4,988 11,138 14,885 Amortization of property, plant and equipment 24,575 23,454 72,618 68,160 Other amortization 3,335 1,291 6,167 3,773 ------- ------- -------- -------- Operating income 87,769 163,944 340,536 538,405 Interest expense (46,111) (58,796) (144,950) (192,572) Interest income 350 792 1,602 2,277 Amortization of deferred financing costs (1,524) (3,093) (4,954) (8,414) Interest rate and foreign currency swap losses (4,746) (7,530) (132,445) (57,030) Foreign exchange gains (losses) (12,042) (791) (12,467) 5,946 Investment gains, losses and write-downs 202 285 103,259 231 Loss of debt extinguishment -- -- (116,880) (43,992) ------- ------- -------- -------- Earnings before income taxes 23,898 94,811 33,701 244,851 ======= ======= ======== ========
(1) Represents revenue from third parties. In addition the following segments recorded intercompany revenues for the nine months ended May 31, 2006: Canadian Television - $1.1 million (2005 - $0.7 million), Publishing and Interactive - Canada - $2.5 million (2005 - $0.6 million). (2) Corporate and other in 2005 has been reclassified to conform with the presentation adopted in the current year. EX-99.2 3 y23016aexv99w2.txt EX-99.2: CANWEST GLOBAL INTERIM REPORT TO SHAREHOLDERS EXHIBIT 99.2 CANWEST GLOBAL COMMUNICATIONS CORP. INTERIM REPORT TO SHAREHOLDERS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2006 MANAGEMENT DISCUSSION AND ANALYSIS July 6, 2006 This Management Discussion and Analysis contains certain comments or forward-looking statements about our objectives, strategies, financial conditions, results of operations and businesses. Statements that are not historical facts are forward-looking and are subject to important risks, uncertainties and assumptions. These statements are based on our current expectations about our business and the markets we operate in, and on various estimates and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events if known or unknown risks, trends or uncertainties affect our business, or if our estimates or assumptions turn out to be inaccurate. As a result, there is no assurance that the circumstances described in any forward-looking statement will materialize. Significant and reasonably foreseeable factors that could cause our results to differ materially from our current expectations are discussed in the section entitled "Risk Factors" contained in our Annual Information Form for the year ended August 31, 2005 dated November 28, 2005 filed by CanWest Global Communications Corp. with the Canadian securities commissions (available on SEDAR at www.sedar.com) and updated in the "Industry Risk and Uncertainties" section of this report. We disclaim any intention or obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason. OVERVIEW CanWest is an international media company and is Canada's largest media company. CanWest is Canada's largest publisher of daily newspapers, and owns, operates and/or holds substantial interests in free-to-air and subscription-based television networks, out-of-home advertising, web sites, and radio stations and networks in Canada, New Zealand, Australia, Ireland, Singapore, Malaysia, Turkey and the United Kingdom. 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 TV3 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. 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 two radio segments consist of our radio operations in New Zealand and Turkey, 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. Acquisitions and Divestitures 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. On April 14, 2006, we completed our acquisition of Super FM, Metro FM, Joy FM and Joy Turk FM for cash consideration of $73 million (US$64 million), subject to final regulatory approval of certain aspects of the transaction. The principal business activity of these companies is the operation of radio stations. We will initially have a 20% equity stake in Super FM, the largest and most profitable of the four stations, and we have the option of acquiring up to 100% of each station, subject to a relaxation in Turkish foreign ownership restrictions. We also entered into an agreement to provide operational, sales and advisory services to the stations on a fee-for-service basis. As a result of our equity interest, financing of the purchase and operational agreements, we have determined that we are the primary beneficiary as defined by CICA handbook's Accounting Guideline 15, Consolidation of Variable Interest Entities, of these radio stations and accordingly, we have consolidated the results of these acquisitions. 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, New Zealand and Turkey operations expose our segment revenues and operating expenses to fluctuations between the Canadian dollar and the Australian dollar, New Zealand dollar and New Turkish Lira, 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 nine months of fiscal 2006, the Canadian dollar appreciated against the Australian dollar by 8% and the New Zealand dollar by 11%, as compared to currency translation rates for the same period in the prior year. Since the completion of our acquisition, the Canadian dollar has appreciated against the New Turkish Lira by 18%. 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 our accounting policies or estimates since August 31, 2005 as described in the Management Discussion and Analysis in our 2005 Annual Report. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT During the quarter, we applied the interpretations of the Canadian Institute of Chartered Accountants Emerging Issues Committee abstract 159 "Conditional Asset Retirement Obligations" (EIC-159). Under EIC-159, a liability should be recognized if the entity has sufficient information to reasonably estimate the fair value of the asset retirement obligation. We have determined that we have conditional asset retirement obligations on certain of our assets, and accordingly, have recognized a liability in the quarter. The change has been accounted for retroactively with restatement. The impact of the change has increased the cost of property plant and equipment by $1.3 million (as at August 31, 2005 - $1.3 million), increased accumulated amortization by $0.6 million (as at August 31, 2005 - $0.5 million), increased future tax asset by $0.2 million (as at August 31, 2005 - $0.2 million), increased asset retirement obligation by $3.7 million (as at August 31, 2005 - $3.6 million), decreased future income taxes liability by $0.8 million (as at August 31, 2005 - $0.8 million), decreased minority interest by $0.1 million (as at August 31, 2005 - $ 0.1 million), increased amortization expense for the three months ended May 31, 2006 by $0.1 million (2005 - $0.1 million) and for the nine months by $0.2 million (2005 - $0.2 million), decreased future tax expense for the three months ended May 31, by a nominal amount for 2006 and 2005 and for the nine months by $0.1 million (2005 - $0.1 million), and decreased net earnings by a nominal amount for the three months ended May 31, 2006 (2005 - nominal) and by $0.1 million (2005 - $0.1 million) for the nine months ended May 31, 2006 with no impact on the basic or diluted earnings per share for the three or nine month periods for 2006 and 2005. Opening retained earnings for the three months ended May 31, 2006 has been decreased by $1.9 million (2005 - $1.8 million), and for the nine months, opening retained earnings has been decreased by $1.8 million (2005 - $1.7 million). 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 nine months ended May 31, 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 earnings before income taxes, 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 NINE MONTHS ENDED MAY 31, 2006 The following is a table of segmented results for the three and nine months ended May 31, 2006 and May 31, 2005. See note 12 to our interim consolidated financial statements:
THREE MONTHS NINE MONTHS ENDED MAY 31 ENDED MAY 31 ----------------- --------------------- 2006 2005(1) 2006 2005(1) ------- ------- --------- --------- $000 $000 $000 $000 OPERATING SEGMENTS REVENUE Publishing and Interactive - Canada 322,850 323,383 965,244 938,609 ------- ------- --------- --------- Television Canada 187,661 200,696 528,565 564,695 Australia - Network TEN 148,748 194,452 499,726 595,876 New Zealand 24,716 30,948 83,454 89,803 ------- ------- --------- --------- 361,125 426,096 1,111,745 1,250,374 Radio - New Zealand 18,704 23,054 64,581 71,229 Radio - Turkey 2,246 -- 2,246 -- Outdoor - Australia 26,219 26,803 81,358 80,625 ------- ------- --------- --------- Total 731,144 799,336 2,225,174 2,340,837 ======= ======= ========= ========= SEGMENT OPERATING PROFIT Publishing and Interactive - Canada 66,417 75,144 195,552 216,006 ------- ------- --------- --------- Television Canada 24,070 56,849 52,521 138,012 Australia - Network TEN 21,470 52,929 158,567 231,894 New Zealand 4,978 5,868 18,839 22,364 ------- ------- --------- --------- 50,518 115,646 229,927 392,270 Radio - New Zealand 4,595 4,965 18,346 20,660 Radio - Turkey 1,376 -- 1,376 -- Outdoor - Australia 3,493 5,327 15,658 18,024 Corporate and other (10,044) (7,405) (30,400) (21,737) ------- ------- --------- --------- Total(2) 116,355 193,677 430,459 625,223 ======= ======= ========= =========
(1) Revised to reflect the classification of our Ireland TV segment as discontinued operations. (2) See Reconciliation of Non-GAAP Financial Measures. CONSOLIDATED RESULTS Revenues. Consolidated revenues were $731 million and $2,225 million for the three and nine months ended May 31, 2006, respectively, which is a decrease of $68 million or 9% and $116 million or 5%, respectively, compared to the same periods in fiscal 2005. Revenues for the three and nine months reflected a 20% and 13% decrease, respectively, in revenues from international media operations, a 6% decrease in both periods for Canadian television revenues and a nominal decrease in the three months and a 3% increase in the nine months 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 nine months ended May 31, 2006 were $615 million and $1,795 million, respectively, which is an increase of 2% for the three months and a 5% for the nine months. This increase reflects local currency expense increases in all operations offset by the effect of the strengthening Canadian dollar on conversion of operating expenses of our international operations. Operating income before amortization. Consolidated operating income before amortization for the three and nine months ended May 31, 2006 was $116 million and $430 million, respectively, which is a decrease of 40% and 31%, 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 $1 million and $11 million for the three and nine months ended May 31, 2006 compared to $5 million and $15 million for the same periods in fiscal 2005. Amortization of intangibles decreased as one intangible asset was fully amortized by the end of the second quarter of 2006. Amortization of property plant and equipment was $25 million and $73 million for the three and nine months ended May 31, 2006 compared to $23 million and $68 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 $145 million for the three and nine months ended May 31, 2006 compared to $59 million and $193 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 nine months ended May 31, 2006, we recorded losses of $5 million and $132 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 to fluctuations in fair value. This compared to losses of $8 million and $57 million for the same periods of fiscal 2005. Foreign exchange losses. We recorded foreign exchange losses of $12 million for both the three and nine months ended May 31, 2006, related to our intercompany advances to our Turkish operations as a result of the weakening New Turkish Lira relative to the Canadian dollar. Investment gains. We recorded nominal investment gains for the three months ended May 31, 2006, and investment gains of $103 million for the nine months ended May 31, 2006, compared to nominal investment gains for the same periods the previous year. The gain for the nine months ended May 31, 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 gains in 2005 were primarily due to gains 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 nine months ended May 31, 2006 as a loss on debt extinguishment of $117 million. During the first nine 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 $5 million and $60 million for the three and nine months ended May 31, 2006 compared to income tax expenses of $18 million and $53 million for the same periods of fiscal 2005. The negative effective tax rates for the three and nine months were below our statutory rate of 35% due to adjustments in the income tax expense including: $44 million recovery for the nine months related to the non-taxable dilution gain, $10 million recovery for the three months and $15 million recovery for the nine months due to the resolution of certain tax disputes, recoveries of $5 million for the three months and $12 million for the nine months related to limited partnership earnings allocated to the minority interest, a recovery of a valuation allowance on capital losses of $6 million for the three months and an expense of $1 million for the nine months and $1 million recovery for the three months and $6 million recovery for the nine 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 interest. For the three and nine months ended May 31, 2006, we recorded minority interest charges related to the 30% minority interest in CanWest MediaWorks (NZ) Limited ("CanWest MediaWorks (NZ)") of $1 million and $5 million, 43.6% minority interest in TEN Group of $5 million and $43 million and 25.8% minority interest in the Limited Partnership of $12 million and $31 million, respectively. The minority interest charge related to TEN Group decreased by 79% and 41% and CanWest MediaWorks (NZ) remained flat for the three months and decreased by 21%, for the nine months ended May 31, 2006, as a result of decreased net earnings. There was no minority interest charge related to the Limited Partnership during fiscal 2005 because it was wholly owned to October 12, 2005. Net earnings from continuing operations. Our net earnings from continuing operations for the three and nine months ended May 31, 2006 were $10 million and $14 million, or $0.06 and $0.08 per share, compared to $56 million and $115 million, or $0.31 and $0.65 per share, for the three and nine months ended May 31, 2005. Discontinued operations. Net earnings from discontinued operations were $3 million and $10 million for the three and nine months ended May 31, 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 third quarter, we announced that we received an offer 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. Our net earnings for the three and nine months ended May 31, 2006 were $13 million and $24 million, or $0.07 and $0.13 per share, compared to $53 million and $116 million, or $0.30 and $0.66 per share, for the same periods in fiscal 2005. SEGMENTED RESULTS Publishing and Interactive - - Revenue. Publishing and Interactive revenues for the three and nine months ended May 31, 2006 were $323 million and $965 million, respectively, compared to revenues of $323 million and $939 million in the same periods of the previous year. Advertising revenues remained consistent for the three months and increased by 3% for nine months as a result of growth in revenues reflecting a slowdown in national and classified advertising revenues offset by increased insert volumes. Significant growth in interactive classified revenue partially offset declines in print classified revenue. While circulation volume declined by 3% for both the three and nine 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 nine months ended May 31, 2006 compared to 20% in the same periods in fiscal 2005. For the remainder of fiscal 2006, we expect growth in advertising revenues as a result of higher advertising rates and increased insert volumes which will be partially offset by a continuation of the reduced level of activity in classified we have experienced in the past several quarters. Circulation revenues are expected to be consistent with 2005. - - Operating expenses. Compared to the same periods last year, operating expenses of our Publishing and Interactive operations increased by $8 million and $47 million, or 3% and 7%, to $256 million and $770 million for the three and nine months ended May 31, 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 nine months included increased employee severance costs of $2 million and $8 million, respectively, related to terminations that occurred during the second and third quarters. Newsprint pricing increased by 7% and 4% for the three and nine months ended May 31, 2006 compared to the same periods of fiscal 2005. This price increase was partially offset by a slight reduction in newsprint consumption. Salary costs will increase due to increases in staffing to support certain key initiatives 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. Our Publishing and Interactive operations had a decrease of $9 million and $20 million, or 12% and 9%, in segment operating profit to $66 million and $196 million for the three and nine months ended May 31, 2006 compared to $75 million and $216 million for the same periods last year. These results included operating losses of $4 million and $11 million relating to Dose and Metro, our newspaper start up operations, and the increase in employee severance of $2 million and $8 million for the three and nine months ended May 31, 2006. During the quarter, we announced that we ceased production of the printed publication of Dose while moving dose.ca to the interactive division which will contribute to increasing the segment operating profit relative to the prior year in the fourth quarter. Canadian Television - - Revenues. For the three and nine months ended May 31, 2006, revenues from our Canadian Television operating segment of $188 million and $529 million, respectively, were $13 million and $36 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 nine months, respectively. Subscriber revenues from our specialty channels increased by 16% for both the three and nine months as compared to the same periods in fiscal 2005, reflecting 16% increases in subscribers for both the three and nine months. We have consistently had 7 programs in the top twenty programs in the Vancouver and Toronto markets. - - Operating expenses. For the three and nine months ended May 31, 2006, operating expenses (including selling, general and administrative expenses) of $164 million and $476 million, respectively, at Canadian Television operations were $20 million and $49 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 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 profit of $24 million and $53 million for the three and nine months of fiscal 2006 were 58% and 62% 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 24% and 16% to $149 million and $500 million for the three and nine months ended May 31, 2006, from $194 million and $596 million during the same periods in the prior year. In local currency, revenues decreased 13% and 9% for the three and nine months, respectively, reflecting a difficult advertising environment. Network TEN's ratings remain strong for the three and nine months ended May 31, 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 nine months ended May 31, 2006 by 12% and 8%, respectively. - - Operating expenses. Segment operating expenses decreased by $14 million and $23 million to $127 million and $341 million for the three and nine months ended May 31, 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 59% and 32% to $21 million and $159 million for the three and nine months ended May 31, 2006, compared to $53 million and $232 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 decreased by 20% and 7% to $25 million and $83 million for the three and nine months ended May 31, 2006, from $31 million and $90 million during the same periods in the prior year. In local currency, revenues remained flat for the three months and increased by 4% for the nine months, reflecting a short and discounted advertising market in New Zealand. The effect of the weakening local currency relative to the Canadian dollar offset the revenue increases by 20% and 11% for the three and nine months, when the local currency is converted into Canadian dollars. We expect the market to continue to be short and discounted for the remainder of fiscal 2006. - - Operating expenses. Operating expenses decreased by 21% to $20 million and by 4% to $65 million for the three and nine months ended May 31, 2006. The decrease in the first nine months was due to increased programming expenses more than offset by the weakening local currency relative to the Canadian dollar. - - Segment operating profit. New Zealand's TV3 and C4 produced segment operating profit of $5 million and $19 million for the three and nine months ended May 31, 2006, a 15% and 16% decrease from the results recorded for the three and nine months in fiscal 2005. New Zealand Radio RadioWorks continued its steady performance. During the three and nine months ended May 31, 2006, revenues decreased by 19% and 9% to $19 million and $65 million, respectively. This reflected revenue increases of 1% and 2% in local currency for the three and nine months offset by the weakening New Zealand dollar. Segment operating profit declined by 7% and 11% to $5 million and $18 million for the three and nine months ended May 31, 2006 as compared to the same periods the previous year, due the weakening New Zealand dollar. Turkey Radio Turkey radio started its operations on April 14, 2006. During the period ended May 31, 2006, revenues were $2 million and segment operating profit was $1 million. Outdoor Advertising Segment revenue remained flat in both periods, at $26 million and $81 million for the three and nine months ended May 31, 2006. This increase reflected 11% and 10% growth in revenue in local currency driven by additional inventory and stronger airport advertising revenues offset by the weakening Australian dollar. Our segment operating profit from TEN Group's Outdoor Advertising operations decreased by 34% and 13% to $3 million and $16 million for the three and nine months ended May 31, 2006 as compared to the same periods in fiscal 2005. Continued investment in expansion opportunities and the weakening Australian dollar decreased the segment operating profit. Corporate and Other Corporate and other expenses have increased by $3 million and $9 million to $10 million and $30 million for the three and nine months ended May 31, 2006. When compared to prior periods for the three and nine months ended May 31, 2006, corporate and other decreased by less than $1 million and increased by $1 million for corporate strategic initiatives, increased by less than $1 million and $2 million for compensation expenses and increased by $3 million and $6 million 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 May 31, 2006, we had cash on hand of $60 million including $33 million of Limited Partnership cash, $21 million of TEN Group cash and $6 million of CanWest MediaWorks (NZ) cash. We had a cash flow deficiency from operating activities of continuing operations of $20 million for the nine months ended May 31, 2006 due to a significant change 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 $31 million at May 31, 2006. TEN Group had unused borrowing capacity of A$585 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. During the third quarter, we announced that we reached an agreement to sell our stake in TV3 Ireland for E138 million. The final amount of the proceeds is subject to various adjustments. The closing of the transaction is subject to a 90 day right of first refusal by one of the other shareholders and regulatory approval. Uses of Funds Capital Expenditures For the three and nine months ended May 31, 2006 our capital expenditures were $21 million and $60 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 $30 million. This amount includes $2 million in continued investment in a new broadcast traffic and sales management system, $17 million investment to upgrade other broadcast systems, and approximately $6 million to expand a print facility as well as expenditures for regular replacement. For the three and nine months ended May 31, 2006, our wholly owned Canadian operations had capital expenditures of $11 million and $26 million, respectively, and for the remainder of fiscal 2006, we expect capital expenditures of $20 million related to these operations. Investment transactions On April 14, 2006, we completed the acquisition of the assets of Super FM, Metro FM, Joy FM and Joy Turk FM for consideration of $73 million (US$64 million), subject to final regulatory approval of certain parts of the transaction. We will initially have a 20% equity stake in Super FM, the largest and most profitable of the four stations, but we have the option of acquiring up to 100% of each station, subject to a relaxation in Turkish foreign ownership restrictions. We have also entered into agreements to provide operational, sales and advisory services to the stations on a fee-for-service basis. Distributions Our New Zealand and Australian operations make twice annual distributions. In May 2006, our New Zealand operations distributed a total of $7 million, $5 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. In June 2006, TEN Group declared a distribution payable in July 2006, which will result in a distribution to us of A$39 million. The Limited Partnership has made monthly distributions since its inception in October 2005. The total distributions to May 31, 2006 were $130 million, $96 million to us and $34 million to the minority partner. Debt General At May 31, 2006, we had total outstanding consolidated debt of $2,761 million compared to debt of $2,895 million as at August 31, 2005. This included $452 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, $356 million (August 31, 2005 - $309 million) of TEN Group debt, and $137 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. In May 2006, we gave notice that we are redeeming the remaining 10.625% senior subordinated notes payable due in 2011. The notes with a book value of $10 million were redeemed for cash in June 2006. 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 the Limited Partnership, and shares of CanWest MediaWorks (NZ) and TEN Group, excluding the convertible debenture held in TEN Group Pty Limited. At May 31, 2006, we have drawn $452 million on this facility. As at May 31, 2006, we have $119 million, net of letters of credit of $28 million, available on this facility of which we can draw $31 million. 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 May 31, 2006, the fair value of our interest rate swaps was $306 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 5.87 times cash flow for debt covenant purposes for the twelve months ended May 31, 2006, compared to a covenant of 6.0 times. CONTRACTUAL OBLIGATIONS AND COMMITMENTS In May 2006, the television segments entered into commitments for new programming. The new commitments are $65 million for less than a year, $119 million for 1 to 3 years, $142 million of 3 to five years and $323 million thereafter. 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 nine months ended May 31, 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 nine months ended May 31, 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 May 31, 2006, our outstanding swap contracts were in a net unrealized loss position of $336 million (including a loss of $48 million related to TEN Group and a gain of $18 million related to the Limited Partnership). INDUSTRY RISKS AND UNCERTAINTIES Our risks and uncertainties have not materially changed from those described in our Annual Information Form for the year ended August 31, 2005 dated November 28, 2005 filed by CanWest Global Communications Corp. with the Canadian securities commissions (available on SEDAR at www.sedar.com), except for risks specifically related to our acquisition in Turkey as discussed below. WE MAY BE ADVERSELY AFFECTED BY FOREIGN EXCHANGE FLUCTUATIONS. The New Turkish Lira has declined by 18% since our acquisition of these operations. Fluctuations relative to the Canadian dollar will affect the comparison of Canadian dollar translated amounts over periods of time. For example, our loans made to our Turkish operations have decreased in value as they are denominated in New Turkish Lira and we have recorded a $12 million foreign exchange loss on the translation of these loans. CHANGES IN GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS FROM OPERATIONS. The radio industry in Turkey is subject to government regulations and policies, including rules related to licensing, ownership, programming standards and the allocation of broadcasting frequency spectrum. Currently certain aspects relating to our acquisition have not received final approval by the regulator in Turkey. There can be no assurances that any changes to the rules or regulations or the final approval of our transaction will not have a material adverse affect on the business, financial condition or results of operations of our Turkish subsidiaries and investments or our ability to maintain our ownership interests in our Turkish subsidiaries and investments. THE TURKISH REGULATOR MAY NOT RENEW OUR EXISTING BROADCASTING LICENSES ON ACCEPTABLE TERMS, OR AT ALL The Turkish regulator provides a right to broadcast that must be renewed every five years. There are no significant costs to renew but the regulator charges each radio station fees on an on-going basis. Inability to renew our licenses on acceptable terms could have a material effect on our business, financial condition or results of operations WE DO NOT CONTROL AND ARE NOT PERMITTED TO CONTROL SOME OF OUR BROADCASTING ASSETS. We do not own a majority voting interest in the companies that own the Turkish broadcast licenses and we are not permitted under Turkish law to have an equity interest in more than one broadcast license and our ownership is restricted to 25% equity ownership of the license. 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$42.0 million. Interest expense related to this debt totaled $0.7 million for the nine months ended May 31, 2006 (2005 - three months $1.5 million, nine months $4.5 million). A company which is an affiliate of CanWest Communications Corporation owns CanWest Global Place in Winnipeg, Manitoba, a building in which we are a tenant. Rent paid to this company for the three and nine months ended May 31, 2006 amounted to $0.3 million and $0.8 million, respectively, (2005 - three months $0.3 million, nine months $0.8 million). All the related party transactions have been recorded at the exchange amounts, 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 earnings before income taxes, its most closely comparable GAAP measure.
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED ----------------- ------------------ MAY 31, MAY 31, MAY 31, MAY 31, 2006 2005(1) 2006 2005(1) ------- ------- -------- ------- $000 $000 $000 $000 Earnings before income taxes 23,898 94,811 33,701 244,851 Amortization 28,586 29,733 89,923 86,818 Interest and other financing expenses 47,635 61,889 149,904 200,986 Investment gains, losses, write-downs, and interest income (552) (1,077) (104,861) (2,508) Foreign exchange (gains) losses 12,042 791 12,467 (5,946) Interest rate and foreign currency swap losses 4,746 7,530 132,445 57,030 Loss on debt extinguishment -- -- 116,880 43,992 ------- ------- -------- ------- Operating income before amortization 116,355 193,677 430,459 625,223 ======= ======= ======== =======
(1) Revised to reflect the classification of our Ireland TV segment as discontinued operations and for the adoption of EIC-159 "Conditional Asset Retirement Obligations" (see note 1 to our interim consolidated financial statements). OTHER Share Data As at July 4, 2006 we had the following number of shares outstanding: Multiple voting shares 76,785,976 Subordinate voting shares 99,002,518 Non-voting shares 1,642,181
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