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.