2011 annual report - Postmedia Network Inc. Network Canada Corp. Annual Report 2011 Page 6 OCTOBER...

12011 annual report

Contents

President’s Message

Our Brands Page 4

Management’s Discussion and Analysis Page 5

Consolidated Financial Statements Page 67

Corporate Information Page 126

2011

2011 annual report

President’s Message to Shareholders

Fiscal 2011 – Our First Year

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Your Hometown Community Newspaper

TECUMSEH

Your community newspaper since 1884

print

Digital

Services

EDITORIAL SERVICES

Postmedia Network Canada Corp. Annual Report 2011 Page 5

POSTMEDIA NETWORK CANADA CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED AUGUST 31, 2011 AND

THE PERIOD ENDED AUGUST 31, 2010

Issued: October 27, 2011


OCTOBER 27, 2011

Important Information Financial information presented in this management’s discussion and analysis includes results of Postmedia (as defined below and referred to as the “Company”) for the year ended August 31, 2011 and the period ended August 31, 2010 and Canwest Limited Partnership (“Canwest LP” or the “Limited Partnership”), Postmedia’s predecessor company, for the periods ended May 31, 2010 and July 12, 2010 and the year ended August 31, 2009. The financial results of the predecessor company for the periods ended May 31, 2010 and July 12, 2010 and the year ended August 31, 2009 are in respect of the periods and year during which the predecessor company, and not Postmedia, owned the assets underlying the business of the Company. Also, the financial statements of the predecessor are that of another entity and Postmedia is not a continuation of the predecessor. The financial information for the periods ended May 31, 2010 and July 12, 2010 and the year ended August 31, 2009 is not comparable to our audited consolidated financial statements and does not represent and is not purported to represent the results that would have been achieved had Postmedia owned the assets of Canwest LP and shares of National Post Inc. at that time. MANAGEMENT’S DISCUSSION AND ANALYSIS This management’s discussion and analysis of financial condition and results of operations of Postmedia Network Canada Corp. and its subsidiary Postmedia Network Inc. (collectively, “we”, “our”, “us”, or “Postmedia”) should be read in conjunction with the audited consolidated financial statements and related notes of Postmedia for the year ended August 31, 2011 and the period ended August 31, 2010 and the audited financial statements and related notes of Canwest LP for the periods ended May 31, 2010 and July 12, 2010 and for the years ended August 31, 2009 and August 31, 2008. The audited consolidated financial statements of Postmedia for the year ended August 31, 2011 and the period ended August 31, 2010 are available on SEDAR at www.sedar.com and on the EDGAR system maintained by the U.S. Securities and Exchange Commission at www.sec.gov. The audited financial statements and related notes of Canwest LP for the periods ended May 31, 2010 and July 12, 2010 and the years ended August 31, 2009 and August 31, 2008 are included in our non-offering prospectus dated June 7, 2011 which is available on SEDAR at www.sedar.com. This discussion contains statements that are not historical facts and are forward-looking statements. These statements are subject to a number of risks described in the section entitled “Risk Factors”. Risks and uncertainties may cause actual results to differ materially from those contained in such forward-looking statements. Such statements reflect management’s current views and are based on certain assumptions. They are only estimates of future developments, and actual developments may differ materially from these statements due to a number of factors. Investors are cautioned not to place undue reliance on such forward-looking statements. No forward-looking statement is a guarantee of future results. We have included information from historical audited financial statements of Canwest LP in this management’s discussion and analysis to provide historical financial data of the operations we acquired. The historical information for Canwest LP contained in this management’s discussion and analysis is not comparable to our financial information. Readers are cautioned that Canwest LP’s historical financial information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business. In addition, Canwest LP adopted the liquidation basis of accounting as of May 31, 2010 and as a result, did not present a statement of earnings or statement of cash flows subsequent to May 31, 2010 or a balance sheet as at May 31, 2010 or subsequent thereto. All references to the year ended August 31, 2010 represent the operations of Canwest LP from September 1, 2009 to May 31, 2010 and from June 1, 2010 to July 12, 2010 and Postmedia from July 13, 2010 to August 31, 2010. All references to the three months ended August 31, 2010 represent the operations of Canwest LP from June 1, 2010 to July 12, 2010 and Postmedia from July 13, 2010 to August 31, 2010. Additionally, Canwest LP’s historical financial data included in this management’s discussion and analysis has been reclassified to be consistent with Postmedia’s revenue, expense and segment presentation.


All amounts are expressed in Canadian dollars unless otherwise noted. The financial statements of Postmedia and Canwest LP have been prepared in accordance with Canadian Generally Accepted Accounting Principles – Part V (“GAAP” or “Canadian GAAP”). In certain aspects US Generally Accepted Accounting Principles as applied in the United States (“US GAAP”) differ from Canadian GAAP. See “Differences between Canadian and US GAAP”. Non-GAAP Financial Measures To assist in assessing our financial performance this discussion also makes reference to operating profit before amortization, restructuring and other items, which is a non-GAAP financial measure. We believe this non-GAAP measure is useful to investors as it is an indicator of our operating performance and ability to incur and service debt. In addition, it allows us to meaningfully compare our results to our predecessor as it excludes both amortization expense, which is not comparable between Postmedia and our predecessor as a result of the changes in the value of our assets because of the Acquisition, and restructuring and other items expense, which relates mainly to severance costs related to the restructuring of the operations incurred as a result of the Acquisition which are not comparable to the restructuring expense recorded by our predecessor. Management uses this non-GAAP measure to make operating decisions as it is an indicator of how much cash is being generated by our operations and assists in determining the need for additional cost reductions, evaluation of personnel and resource allocation decisions. Finally, this non-GAAP measure is the primary measure used by our creditors to assess our performance and compute our financial maintenance covenants contained in our Senior Secured Term Loan Credit Facility. Non-GAAP financial measures do not have any standard meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. See “Reconciliation of Non-GAAP Financial Measures”. This management’s discussion and analysis is dated October 27, 2011 and does not reflect changes or information subsequent to this date. Additional information in respect of Postmedia is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov.

The Acquisition

On July 13, 2010, we acquired (the “Acquisition”) substantially all of the assets, including the shares of National Post Inc., and assumed certain liabilities of Canwest LP for $1,047.9 million (the “Acquisition Consideration”). The Acquisition Consideration consisted of cash consideration of $927.8 million and non-cash consideration, through the issuance of equity, of $120.1 million. We obtained proceeds to fund the cash portion of the Acquisition Consideration from the issuance of 12.5% Senior Secured Notes due 2018 (“Notes”), the issuance of shares, a Senior Secured Term Loan Credit Facility (the “Term Loan Facility”) and acquired cash. The Acquisition was accounted for using the acquisition method of accounting which required us to fair value the assets acquired and liabilities assumed. Additional information on the Acquisition is available in note 3 of our annual audited consolidated financial statements.


Overview and Background

We are the largest publisher of English-language paid daily newspapers by circulation in Canada, according to the Newspapers Canada 2010 Circulation Data Report. Our English-language paid daily newspapers have, in total, the highest weekly print readership of English-language paid dailies belonging to each of the other media organizations in Canada, based on the NADbank 2010 survey data. Our business consists of news and information gathering and dissemination operations, with products offered in most of the major markets and a number of regional and local markets in Canada through a variety of daily and community newspapers, online, digital and mobile platforms. The combination of these distribution platforms provides readers with a variety of mediums through which to access and interact with our content. In addition, the breadth of our reach and the diversity of our content enable advertisers to reach their target audiences, through the convenience of a single provider, on local, regional and national scales.

We have one reportable segment for financial reporting purposes, the Newspapers segment. The Newspapers segment is comprised of the Eastern newspapers operating segment and the Western newspapers operating segment which have been aggregated as permitted by GAAP. The Newspapers segment publishes daily and non-daily newspapers and operates the related newspaper websites. Its revenue is primarily from advertising and circulation. We also have other business activities and an operating segment which are not separately reportable and are referred to collectively as the All other category. Revenue in the All other category primarily consists of revenue from FPinfomart and canada.com.

On April 4, 2011 we entered into an agreement to amend certain terms of our Term Loan Facility. As a result amounts outstanding under the US Tranche of $238.0 million (US$247.0 million) and the Canadian Tranche of $107.3 million were repaid and replaced with Tranche C. Tranche C was issued for US$365.0 million (CDN$351.7 million) at a discount of 0.25% for net proceeds of $350.8 million, before financing fees of $5.4 million. As a result of this amendment the Term Loan Facility will bear interest at a reduced rate of (i) with respect to Libor rate loans, the Libor rate plus 5.0%, with a Libor rate floor of 1.25%, and (ii) with respect to base rate loans, the base rate plus 4.0%, with a base rate floor of 2.25%. Prior to the refinancing, the comparable interest rates were (i) with respect to Libor rate loans, the Libor rate plus 7.0%, with a Libor rate floor of 2.0%, and (ii) with respect to base rate loans, the base rate plus 6.0%, with a base rate floor of 3.0%. In addition, as a result of the amendment we have favourably modified our financial covenants. See “Liquidity and capital resources”.

On June 14, 2011, our Class C voting shares and our Class NC variable voting shares (“Shares”) began trading on the Toronto Stock Exchange under the symbols PNC.A for our Class C voting shares and PNC.B for our Class NC variable voting shares.

On June 20, 2011, we entered into a foreign currency interest rate swap of US$50.0 million to hedge part of the remaining foreign currency risk and interest rate risk associated with Tranche C. This foreign currency interest rate swap amortizes with principal payments on the debt until May 31, 2015 and has a notional amount outstanding at August 31, 2011 of US$48.1 million, a fixed currency exchange rate of US$1:$0.9845 and a fixed interest rate of 8.66%. We have designated this instrument as a hedge and utilize cash flow hedge accounting in our financial statements.

During the three months ended August 31, 2011, we made total long-term debt repayments of $8.0 million (US$8.2 million) including an optional principal repayment of US$6.0 million related to the Term Loan Facility. Aggregate long-term debt repayments since completion of the Acquisition total $82.1 million.

On October 18, 2011, we entered into an asset purchase agreement with affiliates of Glacier Media Inc. (the “Transaction”) to sell substantially all of the assets and liabilities of Lower Mainland Publishing Group, Victoria Times Colonist and Vancouver Island Newspaper Group, collectively herein referred to as the Disposed Properties, for gross proceeds of approximately $86.5 million subject to typical closing adjustments.


The gross proceeds less transaction costs (“net proceeds”) will be used to repay a portion of the outstanding loans under Tranche C in accordance with the terms and conditions of the Term Loan Facility and will result in a write off of certain financing fees being recognized in interest expense. The Disposed Properties are all within the Newspapers segment. The Transaction is subject to customary closing conditions and regulatory approvals and is currently expected to close on November 30, 2011. Simultaneous with the closing of the Transaction we will enter into agreements with the purchaser for the provision of certain services on an ongoing basis (“service agreements”). The expected gain on sale has not yet been determined as certain goodwill allocations, working capital, and other adjustments have not been finalized.

Operating profit before amortization and restructuring and other items (see “Non-GAAP Financial Measures”) adjusted for the removal of shared services costs historically allocated to the Disposed Properties, was approximately $16.9 million for the year ending August 31, 2011. The loss of future operating profit associated with the Disposed Properties will be partially offset by revenue associated with the service agreements and cost synergies resulting from the Transaction. These items are estimated to total approximately $2.0 to $2.5 million on an annualized basis. Annual cash interest savings resulting from the debt repayment described above is expected to total approximately $5.4 million on an annualized basis.


Selected Annual Information

Postmedia Canwest LP (1) ($ in thousands of Canadian dollars, except per share information)

For the year

ended August 31, 2011

For the period

from July 13, 2010

to August 31, 2010

For the period from

June 1, 2010 to July 12,

2010

For the period from

September 1, 2009 to May 31,

2010

For the

year ended

August 31, 2009

Revenue 1,019,125 122,094 119,229 811,180 1,099,075 Net earnings (loss) (12,938) (44,618) n/a(2) 94,869 (122,110) Net earnings (loss) per share Basic $(0.32) $(1.11) n/a(3) n/a(3) n/a(3) Diluted $(0.32) $(1.11) n/a(3) n/a(3) n/a(3) Total assets 1,180,243 1,266,204 n/a(2) n/a(2) 654,901 Total long-term financial liabilities 586,663 633,218 n/a(2) n/a(2) 3,696 Notes: (1) We have included historical consolidated financial information of Canwest LP to provide historical financial data of the operations we acquired. However, Canwest LP’s historical financial information is not comparable to our consolidated financial information and readers are cautioned that such information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business. (2) Canwest LP adopted the liquidation basis of accounting as at May 31, 2010 and, as a result, a consolidated balance sheet was not presented. As a result total assets and total long-term liabilities as at May 31, 2010 and July 12, 2010 have not been presented in the above table. As Canwest LP was under the liquidation basis of accounting for the period from June 1, 2010 to July 12, 2010, the supplementary financial information, which was prepared on a going concern basis, in note 5 of the audited financial statements of Canwest LP did not include a provision for income taxes. As a result net earnings (loss) have not been presented for the period from June 1, 2010 to July 12, 2010 in the above table. (3) Net earnings (loss) per share information has not been provided for the partnership units of Canwest LP.

Key Factors Affecting Operating Results

Revenue is earned primarily from advertising, circulation and digital sources. Print advertising revenue is a function of the volume, or linage, of advertising sold and rates charged. Print circulation revenue is derived from home-delivery subscriptions for newspapers and single copy sales at retail outlets and vending machines and is a function of the number of newspapers sold and the average price per copy. Digital revenue is comprised of revenue from national and local display advertising on our newspaper and other websites, including canada.com, and subscription and licensing revenue generated through FPinfomart.

Print advertising revenue was $145.6 million and $674.5 million for the three months and year ended August 31, 2011, representing 63.2% and 66.2% of total revenue for such periods, respectively. For the three months ended August 31, 2011 print advertising revenue by major category was as follows: national advertising 34.0%, retail advertising 26.8%, classified advertising 18.9%, insert advertising 16.3%, and other advertising 4.0%. For the year ended August 31, 2011 print advertising revenue by major category was as follows: national advertising 37.0%, retail advertising 26.2%, classified advertising 17.6%, insert advertising 15.4%, and other advertising 3.8%. Print advertising is influenced by the overall health of the economy. Over the last few years, significant print advertising declines have been driven by the economic downturn as well as a continuing shift in advertising dollars from newspaper advertising to advertising in other formats, including online and other digital platforms. During the three months and year ended August 31, 2011, we experienced print advertising revenue declines of 5.3% and 3.2% respectively, from the three months and year ended August 31, 2010.

Print circulation revenue was $58.0 million and $234.0 million for the three months and year ended August 31, 2011, representing 25.2% and 23.0% of total revenue for such periods, respectively. Declines in circulation volume have been experienced over the last few years and continued in the current quarter. Circulation volume decreases have been partially offset by price increases. We expect these trends to continue in fiscal 2012.


Digital revenue was $22.0 million and $90.3 million for the three months and year ended August 31, 2011, representing 9.6% and 8.9% of total revenue for such periods, respectively. We continued to experience growth in digital revenue, primarily in online advertising, and expect to see continued growth in fiscal 2012. We believe digital revenue represents a future growth opportunity for the Company and we continue to focus on many new initiatives in this area.

Other revenue was $4.7 million and $20.4 million for the three months and year ended August 31, 2011, representing 2.0% and 1.9% of total revenue for such periods, respectively. We continue to experience declines in other revenue as compared to the same periods in the prior year due to the termination of a commercial printing contract as of September 30, 2010. The loss of this commercial printing contract resulted in reduced revenue of $10.7 million in the year ended August 31, 2011. The operating income previously earned on this commercial printing contract was offset with corresponding cost reductions resulting from the closure of our commercial printing facility as well as savings achieved from outsourcing our production previously done by this facility. Accordingly, the loss of this commercial printing contract did not have a material impact on our overall operating profit.

Our principal operating expenses consist of compensation expenses, which are comprised of payroll and contractor expenses, newsprint expenses, and distribution expenses, which comprised 50.4%, 7.2% and 18.3%, respectively, of total operating expenses for the three months ended August 31, 2011 and 51.8%, 7.6% and 18.0%, respectively for the year ended August 31, 2011. We experienced declines in compensation expenses of 14.9% and 9.6%, respectively, in the three months and year ended August 31, 2011 from the three months and year ended August 31, 2010, due to restructuring initiatives as explained below and reduced defined benefit pension costs partially offset by increases in stock-based compensation expense. Defined benefit pension cost decreases are a result of increases in current service costs being offset by increases in expected returns on plan assets, reductions in amortization of actuarial losses, and the elimination of pension expense from pension plans not acquired in the Acquisition. Newsprint consumption decreased 23.3% and 17.2%, respectively, due to continued usage reduction efforts, outsourcing of production at certain newspapers as discussed earlier and lower newspaper circulation volume partially offset by increases in newsprint cost per tonne, resulting in an overall decrease in newsprint expense of 11.1% and 6.6%, respectively for the three months and year ended August 31, 2011, from the three months and year ended August 31, 2010. Distribution expenses increased $0.3 million and decreased $1.2 million, respectively, in the three months and year ended August 31, 2011 from the three months and year ended August 31, 2010.

Restructuring of operations and other items was $2.9 million for the three months ended August 31, 2011 which consists of $3.1 million relating to severance costs, which include both involuntary terminations and voluntary buyouts, a recovery of $1.1 million which represents curtailment gains in respect of our pension and post-retirement plans related to such involuntary terminations and voluntary buyouts, and $0.9 million of expenses relating to the filing of a non-offering prospectus, expenses relating to complying with our contractual obligation to make an exchange offer for the Notes that is registered with the U.S. Securities and Exchange Commission (“SEC”), and management oversight expenses of our various restructuring initiatives. For the year ended August 31, 2011, total restructuring of operations and other items was $42.8 million, of which $41.9 million related to severance costs, which include both involuntary terminations and voluntary buyouts, a recovery of $2.3 million related to curtailment gains, as described above, and $3.2 million related to other items.

Our operating results are particularly sensitive to variations in the cost and availability of newsprint. Newsprint is the principal raw material used in the production of our daily newspapers and other print publications. It is a commodity that is generally subject to considerable price volatility. We take advantage of the purchasing power that comes with the large volume of newsprint we purchase, as well as our proximity to paper mills across Canada, to minimize our total newsprint expense. Changes in newsprint prices can significantly affect our operating results. A $50 per tonne increase or decrease in the price of newsprint would be expected to affect our operating expenses by approximately $5.5 million on an annualized basis. In the three months and year ended August 31, 2011, newsprint cost per tonne has increased 15.9% and 12.9%, respectively, due to both commodity price increases as well as increased use of specialty grades of newsprint.


Our total newsprint expense however, has decreased due to decreased newsprint consumption as a result of continued usage reduction efforts, outsourcing of our production at certain newspapers and lower newspaper circulation volume. We expect newsprint prices to remain the same or increase modestly in fiscal 2012.

Our distribution is primarily outsourced to third party suppliers. The key drivers of our distribution costs are fuel costs and circulation and flyer volumes. We expect distribution costs to remain flat or increase modestly relative to the prior year in fiscal 2012.

Other Factors

Seasonality

Revenue has experienced, and is expected to continue to experience, significant seasonality due to seasonal advertising patterns and seasonal influences on people’s media consumption habits. Typically, our advertising revenue is highest in the first and third fiscal quarters, while expenses are relatively constant throughout the fiscal year. These seasonal variations may lead to increased borrowing needs at certain points within the fiscal year.

Critical accounting estimates

The preparation of financial statements in accordance with GAAP requires our management to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Our management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We have identified below the critical accounting estimates that we believe require significant judgment in the preparation of our financial statements. These accounting estimates are considered critical as changes in the assumptions or estimates selected have the potential to materially impact the financial statements. For a summary of our accounting policies, see note 2 to our annual audited consolidated financial statements.

The Acquisition

Estimates were used in order to fair value the net assets acquired from Canwest LP on July 13, 2010, see note 3 to the annual audited consolidated financial statements of Postmedia for more information.

Intangible assets

As a result of the Acquisition, Postmedia has recorded a number of intangible assets. Intangible assets as of August 31, 2011 are comprised of newspaper mastheads of $248.6 million, domain names of $36.6 million, customer relationships of $9.3 million, subscriber lists of $114.6 million and software of $31.0 million (August 31, 2010 - $248.6 million, $37.0 million, $11.9 million, $144.2 million and $35.5 million, respectively).

Newspaper mastheads and the related domain names have indefinite lives and are not subject to amortization and are tested for impairment annually or when indicated by events or changes in circumstances. The fair value of our mastheads and the related domain names were estimated using a relief-from-royalty approach using the present value of expected after-tax royalty streams through licensing agreements. The key assumptions under this valuation approach are royalty rates, discount rates and expected future revenue.

Customer relationships, subscriber lists, software, and domain names not related to the newspaper mastheads are subject to amortization over a period of 4 to 5 years for customer relationships and subscriber lists, 2 to 10 years for software and 15 years for domain names. The fair value of the customer relationships and subscriber lists at Acquisition were estimated using the excess earnings approach. The key assumptions under this valuation method are churn rates, discount rates, expected future revenue and operating profit. The fair value of the domain names was estimated using a relief-from-royalty approach which is described above. The fair values attributable to software were estimated using depreciated replacement cost value.


Goodwill

Goodwill of $236.1 million was recognized on the Acquisition and consists of the assembled workforce, non-contractual customer relationships and expected cost savings and is computed as the Acquisition Consideration of $1,047.9 million less the fair value of net assets acquired of $811.8 million.

Goodwill is tested for impairment annually or when indicated by events or changes in circumstances by comparing the fair value of a particular reporting unit to its carrying value. When the carrying value exceeds its fair value, the fair value of the reporting unit’s goodwill is compared with its carrying value to measure any impairment loss.

For determining the fair value of its reporting units, the Company used the income approach. Under the income approach, management estimates the discounted future cash flows for three years and a terminal value for each of the reporting units. The future cash flows are based on management’s best estimates which take into consideration a multitude of factors, including historical growth rates and operating performance, related industry trends and economic conditions. The discount rate used was a weighted average cost of capital, and considers the risk free rate, market equity risk premium, size premium and a specific risk premium for possible variations from those projected by management. The terminal value is the value attributed to the reporting units operations beyond the projected period using a perpetual growth rate based on management’s long-term growth expectations and trends. The estimation process results in a range of values which management uses to determine the fair value of the reporting unit.

Pension and post-retirement/employment benefits

We offer a number of defined contribution and defined benefit pension and defined benefit post-retirement/employment plans to employees. The valuation of these plans include significant actuarial assumptions including, discount rates, rate of compensation increase, expected health care cost trend rate and expected long-term rate of return on pension plan assets for pension benefits. A change in the discount rate used in the valuation of the defined benefit plans could result in a significant increase or decrease in the valuation of accrued benefit obligations, affecting the reported funded status of our plans as well as the net benefit cost in subsequent fiscal years. As at August 31, 2011 a 50 basis-point decrease in the discount rate would increase our defined benefit obligations by $27.3 million and increase our expense for the year ended August 31, 2012 by $0.6 million. As at August 31, 2011 a 50 basis-point increase in the discount rate would decrease our defined benefit obligations by $25.9 million and decrease our expense for the year ended August 31, 2012 by $0.6 million.

The funding for the defined benefit pension plans is based on an actuarial funding valuation. The most recent actuarial funding valuation for the most significant of the defined benefit pension plans was as of December 31, 2010. The average remaining service period of employees covered by the defined benefit pension plans is 8 years (2010 - 8 years, 2009 - 9 years). For post-retirement and post-employment defined benefit plans the related benefits are funded by the Company as they become due. The average remaining service period of the employees covered by the post-retirement benefit plans is 12 years (2010 - 11 years; 2009 - 12 years). The average remaining service period of the employees covered by the post-employment benefit plans is 9 years (2010 - 7 years, 2009 - 7 years).

For the defined contribution plans, the pension expense is the amount to be contributed for the period.


Income taxes

We are subject to income taxes in Canada and significant judgment is required in determining the provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Management uses judgment in interpreting tax laws and determining the appropriate rates and amounts in recording future taxes, giving consideration to timing and probability. Actual income taxes could significantly vary from these estimates as a result of future events, including changes in income tax law or the outcome of reviews by tax authorities and related appeals. To the extent that the final tax outcome is different from the amounts that were initially recorded, such differences will impact the income tax provision in the period in which such determination is made.

The asset and liability method is used to account for future income taxes. Under this method, future income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Future income tax assets and liabilities are measured using substantively enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the substantive enactment date. Future income tax assets are recognized to the extent that realization is considered more likely than not.

Canwest LP was not a taxable entity. Income and capital taxes were payable only by its incorporated subsidiaries.

Proposed Accounting Policies

International Financial Reporting Standards

In 2006, the Accounting Standards Board (“AcSB”) published a strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the replacement of Canadian GAAP with International Financial Reporting Standards (“IFRS”) over an expected five year transitional period. In February 2008, the AcSB confirmed that IFRS will be used for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011 with appropriate comparative IFRS financial information for the prior fiscal year. We will be adopting IFRS in accordance with the AcSB standards, which will result in our interim consolidated statements for the three months ending November 30, 2011 being the first interim consolidated statements required to be prepared in accordance with IFRS.

In order to prepare for our transition date on September 1, 2011, we have created a plan to convert to IFRS. As part of this plan, the Company has designated an implementation team, which includes senior levels of management, and reports the status of the project to the Audit Committee on a quarterly basis. The conversion plan to IFRS consists of three phases, the diagnostic phase, impacts and solutions development phase and the implementation and review phase. These phases are described in more detail below.

Diagnostic phase

This phase involved a detailed review and initial scoping of accounting differences between Canadian GAAP and IFRS, a preliminary evaluation of IFRS 1 – First time Adoption of IFRS exemptions and a high-level assessment of potential consequences on financial reporting and internal controls. We have completed our diagnostic phase and based on our assessment, we have ranked potentially affected areas as high, medium or low priority.


Impact and solutions development phase

This phase involves a detailed review of accounting issues, quantifying the impact of the conversion to IFRS, reviewing and approving accounting policy choices, designing changes to information technology and data systems, assessing internal controls and disclosure controls and procedures, training requirements and updating internal accounting policies. It also involves reviewing the business implications of new accounting policy choices on financing arrangements, compensation arrangements, tax planning and other obligations. The adoption of IFRS does not impact the overall performance and underlying trends of our operations and as a result we currently have not discovered any current or future anticipated business activity that will be significantly impacted by the adoption of IFRS.

Accounting policies

During our impact and solutions development phase we determined that many of the differences between Canadian GAAP and IFRS are not expected to have a material impact on our operations or financial statements. We expect the following areas to have high significance and to the extent possible we have quantified the expected impact on our financial reporting.

IFRS 1 – First Time Adoption of IFRS

IFRS 1 provides entities adopting IFRS for the first time a number of optional exemptions and mandatory exceptions to the general requirement of full retrospective application of IFRS. We have analyzed the various optional exemptions available and have made conclusions regarding these options. Under IFRS 1 we will elect on transition, to recognize immediately cumulative actuarial losses, on a pre-tax basis, of $5.5 million from our defined benefit plans in opening retained earnings with a corresponding increase to pension, post-retirement, post-employment and other liabilities. All other optional exemptions are not significant or applicable due to the Acquisition on July 13, 2010 and early adoption of CICA Handbook Section 1582, “Business Combinations” at that date, which is harmonized with IFRS 3 – “Business Combinations”.

IAS 1 – Presentation of Financial Statements

IAS 1 prescribes the basis for presentation of financial statements and sets out guidelines for structure and minimum content requirements under IFRS. There is generally an increase in note disclosure under IFRS compared to Canadian GAAP since there is more judgment required under IFRS. As part of our implementation and review phase we have begun drafting IFRS financial statement content for November 30, 2011, our first interim reporting period under IFRS. These draft IFRS financial statements have been presented to senior management and the Audit Committee for review.

IAS 19 – Employee Benefits

Actuarial gains (losses) and past service costs

As mentioned above, on transition all unamortized actuarial losses related to our defined benefit pension and defined benefit post-retirement/employment plans will be recognized immediately in opening retained earnings with a corresponding increase to pension, post-retirement, post-employment and other liabilities. In addition, under Canadian GAAP, we used the corridor method whereby we amortized actuarial gains or losses in a period in which, as of the beginning of the period, the unamortized net actuarial gains or losses exceeded 10% of the greater of the accrued benefit obligation or the fair value of plan assets. Upon adoption of IFRS, we plan on recognizing actuarial gains and losses in other comprehensive income and retained earnings as they occur. As a result, compensation expense will decrease by a nominal amount in the statement of operations for the year ended August 31, 2011, due to the exclusion of amortization of actuarial losses as the losses will be charged to the opening deficit on transition to IFRS on September 1, 2010. Furthermore, under Canadian GAAP, unvested past service costs from plan amendments were amortized on a straight-line basis over the employee average remaining service period. Upon adoption of IFRS, unvested past service costs will be amortized on a straight-line


basis over the vesting period. The accounting difference regarding past service costs will not result in an adjustment upon adoption of IFRS nor for the year ended August 31, 2011.

As described above, actuarial gains and losses will be recognized in other comprehensive income and retained earnings. Under IFRS we will be required to assess on a quarterly basis the actuarial gains and losses related to our defined benefit obligations and the fair value of plan assets. Any significant fluctuations to our actuarial assumptions may result in a change to the actuarial gains and losses or to the fair value of plan assets which would result in a charge or recovery to comprehensive income and retained earnings, in the applicable quarter. The net actuarial gains that will be recognized in comprehensive income and retained earnings under IFRS for the year ended August 31, 2011 are $17.2 million with a corresponding decrease to pension, post-retirement, post-employment and other liabilities. We have engaged our actuaries to assess, on a quarterly basis, the actuarial gains and losses to be recognized in other comprehensive income.

Other long-term employee benefits and curtailment gains (losses)

Under IAS 19, long-term employee benefits that are not payable after the completion of employment should be accounted for in the same way as defined benefit pension and defined benefit post-retirement/employment benefits with the exception that actuarial gains and losses and past service costs are recognized immediately in the statement of operations. Under Canadian GAAP, we accounted for these plans similarly except we amortized actuarial gains and losses and unvested past service costs on a straight-line basis over the expected average remaining service life. As a result, for the year ended August 31, 2011, compensation expense will decrease by $2.0 million in the statement of operations with a corresponding decrease to pension, post-retirement, post-employment and other liabilities due to the recognition of actuarial gains related to these plans. Under Canadian GAAP, a curtailment gain or loss is recorded by first reversing any actuarial losses or gains, respectively. As described above, under IFRS we recognize actuarial gains and losses in other comprehensive income and retained earnings as they occur. As a result, for the year ended August 31, 2011, restructuring of operations and other items will decrease by $1.4 million as a result of curtailment gains that reduced actuarial losses under Canadian GAAP.

Additional minimum liability

IFRIC 14 "IAS 19 - The Limit of a Defined Benefit Asset, Minimum Funding Requirements and their Interaction" (“IFRIC 14”) addresses the application of paragraph 58 of IAS 19 which limits the measurement of a defined benefit asset to "the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan" plus past service cost. IFRIC 14 provides guidance regarding (a) when refunds or reductions in future contributions should be regarded as available in accordance with paragraph 58 of IAS 19, (b) how a minimum funding requirement might affect the availability of reductions in future contributions and (c) when a minimum funding requirement might give rise to a liability. The liability in respect of minimum funding requirements is determined using the projected minimum funding requirements based on management's best estimates of the actuarially determined funded status of the plan, market discount rates and salary escalation estimates. The liability in respect of the minimum funding requirement and any subsequent re-measurement of that liability are recognized immediately in other comprehensive income and retained earnings without subsequent reclassification to the statement of operations. There is Canadian GAAP guidance related to the limit on the carrying amount of an accrued benefit asset and recognition of a related valuation allowance. However, IFRS and Canadian GAAP have different methods of calculating the defined benefit asset limit. Furthermore, Canadian GAAP did not address accounting for an additional liability due to minimum funding requirements. We have determined that we do not have an additional minimum liability with respect to minimum funding requirements on adoption of IFRS on September 1, 2010 however for the year ended August 31, 2011, we have an additional minimum liability of $4.1 million which will decrease comprehensive income and retained earnings with a corresponding increase to pension, post-retirement, post-employment and other liabilities.


Presentation of pension expense

IAS 19 does not specify the presentation of current service cost, interest cost and the expected return on plan assets as components or a single item of income or expense. Accordingly, we will elect to present the components of pension cost separately on the statement of operations. Current service costs will continue to be recorded in compensation expenses, and interest costs and the expected return on plan assets will be recorded in financing costs. As a result of this presentation change, compensation expense will decrease by $3.0 million and financing costs will increase by $3.0 million in the statement of operations for the year ended August 31, 2011.

IAS 36 –Impairment of Assets

Upon adoption of IFRS, we are required to test our goodwill and indefinite life intangible assets for impairment in accordance with IAS 36. Furthermore, IFRS requires us to conduct an asset impairment test for finite life non-financial assets at the date of adoption of IFRS if indicators of impairment exist. In addition, impairment assessments will significantly change in the future as there are several differences that exist between current Canadian GAAP and IFRS for impairment of non-financial assets, which include the following:

• The test for finite life non-financial asset impairment, such as property and equipment and finite life intangible assets, requires the use of a discounted cash flow model at the level of cash generating unit which is the lowest level of cash generating unit that generates largely independent cash inflows, whereas Canadian GAAP requires impairment tests at the asset group level which is the lowest level of assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets or groups of assets and liabilities and uses a two-step impairment test which is first based on undiscounted cash flows and then discounted cash flows;

• Testing for impairment of indefinite life intangible assets occurs at the level of cash generating units, which is the lowest level of assets that generate largely independent cash inflows, whereas Canadian GAAP requires impairment tests at the individual asset level;

• Testing for goodwill impairment occurs at the goodwill cash generating unit which is the lowest level within the entity at which the goodwill is monitored for internal management and cannot be higher than an operating segment, whereas Canadian GAAP requires goodwill impairment test at the reporting unit level; and

• IFRS allows the reversal of previous impairment losses, with the exception of goodwill, whereas Canadian GAAP prohibits the reversal.

As at September 1, 2010, there are no indicators of impairment with respect to finite life non-financial assets and as a result we did not perform impairment testing on these assets. We conducted our impairment testing of goodwill and indefinite life intangible assets as at September 1, 2010 and determined that no impairments exist. We have conducted our impairment testing of goodwill and indefinite life intangibles for our year ended August 31, 2011 under both Canadian GAAP and IFRS. The impairment testing indicated that no impairments of goodwill or indefinite life intangibles exist as at August 31, 2011. In conjunction with the impairment testing we determined that our data-systems are capable of producing the information required for testing under both basis of accounting.


Estimated adjustments to shareholders’ equity

($ in thousands of Canadian dollars) August 31, 2011

September 1, 2010

Shareholders’ equity under Canadian GAAP 304,342 315,402 IFRS adjustments Employee benefits, actuarial losses on transition (5,526) (5,526) Employee benefits, income statement impact 3,437 -

Employee benefits, net actuarial gains recognized in other comprehensive income

17,173

-

Employee benefits, additional minimum liability

(4,146) - Shareholders’ equity under IFRS 315,280 309,876

The estimated adjustments to shareholders’ equity are intended to highlight areas which we believe to be the most significant measurement adjustments. They should not be regarded as final.


Estimated adjustments to the statement of operations

Year ended August 31, 2011 ($ in thousands of Canadian dollars) Canadian

GAAP IFRS

adjustments IFRS Revenues Print advertising 674,451 - 674,451 Print circulation 233,984 - 233,984 Digital 90,282 - 90,282 Other 20,408 - 20,408 1,019,125 - 1,019,125 Operating expenses Compensation 423,512 (5,058)(1)(2) 418,454 Newsprint 62,125 - 62,125 Other operating 332,380 - 332,380 Amortization 75,092 - 75,092 Restructuring of operations and other items 42,775 (1,367)(3) 41,408 Operating income 83,241 6,425 89,666 Financing costs 80,315 2,988(1) 83,303 Loss on debt prepayment 11,018 - 11,018 Loss on disposal of property and equipment and intangible assets

175

-

175

Loss on derivative financial instruments 21,414 - 21,414 Foreign currency exchange gains (17,960) - (17,960) Acquisition costs 1,217 - 1,217 Earnings (loss) before income taxes (12,938) 3,437 (9,501) Provision for income taxes - - - Net earnings (loss) (12,938) 3,437 (9,501)

The estimated adjustments to the statement of operations are intended to highlight areas which we believe to be the most significant measurement adjustments. They should not be regarded as final.

Notes: (1) Compensation costs were decreased by $3.0 million with a corresponding increase to financing costs due to the reclassification of interest costs on the accrued benefit obligation and the expected return on plan assets. (2) Compensation costs decreased $2.1 million due to the recognition of actuarial gains immediately in the statement of operations for other long-term employee benefits. (3) Restructuring of operations and other items decreased $1.4 million due to curtailment gains that reduced actuarial losses under Canadian GAAP.


Estimated adjustments to the statement of comprehensive income (loss)

Year ended August 31, 2011 ($ in thousands of Canadian dollars) Canadian

GAAP IFRS

adjustments IFRS Net earnings (loss) (12,938) 3,437 (9,501) Other comprehensive income (loss) Unrealized loss on valuation of derivative financial instruments (1,573) - (1,573) IFRS adjustments Employee benefits, net actuarial gains - 17,173 17,173 Employee benefits, additional minimum liability - (4,146) (4,146) Comprehensive income (loss) (14,511) 16,464 1,953

The estimated adjustments to the statement of comprehensive income (loss) are intended to highlight areas which we believe to be the most significant measurement adjustments. They should not be regarded as final. Information technology and data-system requirements

We have performed an analysis of our data-system infrastructure and have concluded that transition to IFRS will not require a material modification to our information technology processes as a result of differences between Canadian GAAP and IFRS that we have identified to date.

Internal controls and disclosure controls and procedures

We are in the process of finalizing our analysis of the impact of the adoption of IFRS on our internal controls over financial reporting and our disclosure controls and procedures including the implementation of appropriate changes in internal controls as required to incorporate the changes in accounting policies and practices described below. However to date, we have not identified any changes that would materially affect, or are reasonably likely to materially affect, our internal controls over financial reporting or our disclosure controls and procedures.

Training requirements

Certain members of senior management have attended external training seminars on relevant IFRS standards and their potential impact. We are developing a training plan for our Board of Directors, Audit Committee and other employees, as appropriate. We anticipate that training will be completed by the issuance of our first interim financial statements under IFRS.


Financing arrangements

We have assessed the impact of IFRS on our financing arrangements and are satisfied that there will be no material impacts as a result of adopting IFRS.

Implementation and review phase

This phase involves implementing changes to systems, business processes, drafting IFRS financial statement content, including the opening IFRS transitional balance sheet and detailed reconciliations of Canadian GAAP to IFRS for the comparative figures in our fiscal 2012 financial statements.

As mentioned previously we have substantially completed drafting the financial statement content for our first interim reporting under IFRS.

The IFRS conversion project is progressing as planned. We continue to monitor and assess the impact of differences between Canadian GAAP and IFRS since the International Accounting Standards Board continues to issue new accounting standards during the conversion period. As a result, the final impact of IFRS can only be measured once all the applicable IFRS accounting standards at the conversion date are known.


Operating Results

Postmedia’s operating results for the three months ended August 31, 2011 compared to Postmedia’s operating results for the period ended August 31, 2010 and Canwest LP’s operating results for the period ended July 12, 2010

Postmedia Canwest LP($ in thousands of Canadian dollars) For the three

months ended August 31,

2011

For the period July 13, 2010 to August 31,

2010

For the period June 1, 2010 to July 12,

2010(1) Revenues Print advertising 145,586 75,624 78,190 Print circulation 58,001 31,721 27,770 Digital 22,048 10,751 9,624 Other 4,703 3,998 3,645 230,338 122,094 119,229 Operating expenses Compensation 99,065 62,422 54,014 Newsprint 14,055 8,175 7,639 Other operating 83,255 40,771 38,115 196,375 111,368 99,768 Operating profit before amortization, restructuring and other items (2)

33,963

10,726

19,461

Amortization 18,575 11,073 7,136 Restructuring of operations and other items 2,902 11,209 (518) Operating income (loss) 12,486 (11,556) 12,843 Interest expense 18,189 12,702 4,498 Other income - - (283) Loss on disposal of property and equipment and intangible assets

63

-

-

Gain on derivative financial instruments (8,059) (7,550) - Foreign currency exchange losses (gains) 4,605 9,607 (4,542) Acquisition costs - 18,303 - Earnings (loss) before reorganization costs and income taxes

(2,312)

(44,618)

13,170

Reorganization costs - - 16,500 Loss before income taxes (2,312) (44,618) (3,330) Provision for income taxes (3) - - n/a Net loss (3) (2,312) (44,618) n/a Notes: (1) We have included historical consolidated financial information of Canwest LP, to provide historical financial data of the operations we acquired. However, Canwest LP’s historical financial statements are not comparable to our consolidated financial statements and readers are cautioned that such information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business. Additionally, Canwest LP’s historical consolidated financial data has been reclassified to be consistent with Postmedia’s revenue and expense presentation. (2) See “Reconciliation of Non-GAAP Financial Measures”. (3) Under the liquidation basis of accounting for the period from June 1, 2010 to July 12, 2010, the supplementary financial information in note 5 of the audited financial statements of Canwest LP did not include a provision for income taxes.


Revenue

Print advertising

Print advertising revenue decreased $8.2 million, or 5.3%, to $145.6 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. This decrease relates to most of our major categories of print advertising revenue, including decreases from national advertising of 5.4%, retail advertising of 5.6%, and classified advertising of 13.2%. Partially offsetting these decreases was a 3.4% increase in insert advertising and a 4.2% increase in other advertising.

Print circulation

Print circulation revenue decreased $1.5 million, or 2.5%, to $58.0 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. Net paid circulation decreased 6.2% for the three months ended August 31, 2011, from the three months ended August 31, 2010, offset partially by price increases, resulting in a 2.5% decrease in overall circulation revenue.

Digital

Digital revenue increased $1.7 million, or 8.2%, to $22.0 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. The favourable variance was due to a 15.2% increase in online advertising revenue offset by a 4.7% decrease in digital circulation revenue and subscription revenue from FPinfomart.

Other

Other revenue decreased $2.9 million to $4.7 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. The decrease was due to the termination of a commercial printing contract in September 2010 as discussed earlier.

Operating expenses

Compensation

Compensation expenses, which are comprised of payroll and contractor expenses, decreased $17.4 million or 14.9%, to $99.1 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. Decreased compensation expenses are a result of previously discussed restructuring initiatives and reductions in defined benefit pension costs.

Newsprint

Newsprint expenses decreased $1.8 million, or 11.1%, to $14.1 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. Newsprint consumption decreased 23.3% due to continued usage reduction efforts, outsourcing of our production at certain newspapers as discussed earlier and lower newspaper circulation volume, partially offset by a 15.9% increase in newsprint cost per tonne, resulting in an overall decrease in newsprint expense of 11.1% in the three months ended August 31, 2011, from the three months ended August 31, 2010.

Other operating

Other operating expenses increased $4.4 million or 5.5%, to $83.3 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. Increases in other operating expenses are primarily related to increased outsourced production costs, marketing expenses and consulting fees.


Operating profit before amortization, restructuring and other items

Operating profit before amortization, restructuring and other items increased $3.8 million or 12.5%, to $34.0 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. The increase relates primarily to decreased compensation costs partially offset by decreases in revenue, as discussed above.

Amortization

Amortization increased $0.4 million to $18.6 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. Amortization is not comparable between Postmedia and Canwest LP as amortization is higher in Postmedia due to the higher carrying values of both tangible and intangible assets subject to amortization as a result of the fair values ascribed on the Acquisition. During the three months ended August 31, 2011, amortization expense related to property and equipment and definite life intangible assets was $7.2 million and $11.4 million, respectively.

Restructuring of operations and other items

Restructuring of operations and other items for the three months ended August 31, 2011 decreased $7.8 million to $2.9 million from the three months ended August 31, 2010. Restructuring of operations and other items is not comparable between Postmedia and Canwest LP. Restructuring of operations and other items in the three months ended August 31, 2011 include $3.1 million relating to severance costs, which include both involuntary terminations and voluntary buyouts, a recovery of $1.1 million which represents curtailment gains in respect of our pension and post-retirement plans related to such involuntary terminations and voluntary buyouts, and $0.9 million of expenses relating to the filing of a non-offering prospectus, expenses relating to complying with our contractual obligation to make an exchange offer for the Notes that is registered with the SEC, and management oversight expenses of our various restructuring initiatives. Restructuring of operations and other items in the three months ended August 31, 2010 include $10.2 million relating to severance costs, which include both involuntary terminations and voluntary buyouts.

Operating income (loss)

Operating income for the three months ended August 31, 2011 was $12.5 million. Operating income (loss) is not comparable between Postmedia and Canwest LP due to different capital structures.

Interest expense

Interest expense for the three months ended August 31, 2011 was $18.2 million. Interest expense is not comparable between Postmedia and Canwest LP due to different capital structures.

Other income

Other income for the three months ended August 31, 2010 represented a charge to Canwest Global Communications Corp., the ultimate parent company of Canwest LP, for the use of shared equipment.

Gain on derivative financial instruments

Gain on derivative financial instruments for the three months ended August 31, 2011 was $8.1 million. Gain on derivative financial instruments is not comparable between Postmedia and Canwest LP due to different capital structures. The gain in the three months ended August 31, 2011 includes a gain of $2.7 million related to a foreign currency interest rate swap that was not designated as a hedge and a gain of $5.4 million related to a variable prepayment option on the Notes that represents an embedded derivative. The gain on derivative financial instruments for the three months ended August 31, 2010 includes a gain of $3.3 million related to a foreign currency interest rate swap that was not designated as a hedge and a gain of $4.3 million related to a variable prepayment option on the Notes that represents an embedded derivative.


Foreign currency exchange losses (gains)

Foreign currency exchange losses for the three months ended August 31, 2011 were $4.6 million. Foreign currency exchange losses (gains) are not comparable between Postmedia and Canwest LP due to different capital structures. For the three months ended August 31, 2011 foreign currency exchange losses include $3.9 million of unrealized losses related to the outstanding principal amount on Tranche C of our Term Loan Facility that is not subject to hedge accounting and $0.6 million of realized losses on contractual principal settlements of our foreign currency interest rate swap not designated as a hedge. The foreign currency exchange loss related to Postmedia for the three months ended August 31, 2010 includes realized losses of $1.1 million and unrealized losses of $8.7 million related to US dollar denominated debt under the Term Loan Facility.

Reorganization costs

Reorganization costs represent costs that were directly associated with the reorganization of Canwest LP. During the period ended July 12, 2010, Canwest LP incurred $16.5 million of reorganization costs. These costs consisted of professional fees, advisory fees, management incentive plan and key employee retention plan costs, and foreign currency exchange losses resulting from translating monetary items that are subject to compromise at the period end compared to translated amounts at January 8, 2010, the date of Canwest LP’s Companies’ Creditors Arrangement Act filing (“CCAA filing”), and amounts related to resolution of legal claims outstanding on the date of Canwest LP’s CCAA filing.

Loss before income taxes

Loss before income taxes for the three months ended August 31, 2011 was $2.3 million. Loss before income taxes is not comparable between Postmedia and Canwest LP due to different capital structures. The loss before income taxes for the three months ended August 31, 2011 is primarily due to the seasonality of our business. The loss before income taxes of $44.6 million of Postmedia for the period ended August 31, 2010 is primarily due to acquisition costs, restructuring of operations and other items and seasonality.

Provision for income taxes

For the three months ended August 31, 2011, we did not record an income tax provision or recovery. Income taxes are not comparable between Postmedia and Canwest LP due to different organizational structures. Our effective tax rate for the three months ended August 31, 2011, was different than our statutory tax rate of 27.6% as a result of adjustments to the income tax expense, including a $1.1 million increase related to changes in our valuation allowance, a $0.3 million increase related to non-deductible expenses, a $0.1 million increase related to changes in future tax rates, partially offset by a $0.9 million decrease related to the non-deductible portion of a capital gain. The effective tax rate of Postmedia for the period ended August 31, 2010 was different than its statutory tax rate of 29.0% as a result of adjustments to the income tax expense, including a $10.4 million increase related to changes in our valuation allowance, a $2.1 million increase related to non-deductible expenses, and a $0.5 million increase related to the non-deductible portion of capital losses.

Net loss

Net loss for the three months ended August 31, 2011 was $2.3 million, or $0.06 per share. Net loss is not comparable between Postmedia and Canwest LP due to different capital structures. The net loss for the three months ended August 31, 2011 is primarily due to the seasonality of our business.


Results of Postmedia’s segment operations for the three months ended August 31, 2011 compared to Postmedia’s segment operations for the period ended August 31, 2010 and Canwest LP’s segment operations for the period ended July 12, 2010

Postmedia Canwest LP($ in thousands of Canadian dollars) For the three

months ended August 31,

2011


2010


2010 (1) Revenue Newspapers 222,028 117,694 115,968 All other 9,297 5,244 3,710 Intersegment elimination (987) (844) (449) 230,338 122,094 119,229 Operating expenses Newspapers 181,034 100,036 93,668 All other 7,623 6,024 3,462 Corporate 8,705 6,152 3,087 Intersegment elimination (987) (844) (449) 196,375 111,368 99,768 Operating profit (loss) before amortization, restructuring and other items (2)

Newspapers 40,994 17,658 22,300 All other 1,674 (780) 248 Corporate (8,705) (6,152) (3,087) 33,963 10,726 19,461 Notes: (1) We have included historical segment information of Canwest LP to provide historical financial data of the operations we acquired. However, Canwest LP’s historical segment information is not comparable to our segment information and readers are cautioned that such information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business. Additionally, Canwest LP’s segment information has been reclassified to reflect our segmented reporting. (2) See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of operating profit before amortization, restructuring and other items to net earnings (loss). Newspapers

Revenue

Revenue for the Newspapers segment decreased $11.6 million, or 5.0%, to $222.0 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. The decrease in revenue is due to decreases in print advertising revenue, declines in circulation volume, and decreases in commercial printing revenue partially offset by increases in digital advertising revenue.

The total advertising linage and the average line rate decreased 6.0% and 1.6%, respectively, from the three months ended August 31, 2010. National advertising revenue decreased 5.4%, retail advertising revenue decreased 5.6% and classified advertising revenue decreased 13.2% from the three months ended August 31, 2010. Insert revenue increased 3.4% primarily related to volume increases of 4.7% from the three months ended August 31, 2010. A 6.2% decrease in print circulation volume was partially offset by increases in per copy pricing, resulting in a 2.5% decrease in print circulation revenue from the three months ended August 31, 2010. Newspaper digital advertising revenue increased 12.4% for the three months ended August 31, 2011, from the three months ended August 31, 2010 and digital circulation and subscription revenue increased nominally, resulting in an overall digital revenue increase of 12.7%. Other revenue decreased $3.5 million which primarily relates to the termination of a commercial printing contract in September 2010 as discussed earlier.


Operating expenses

Operating expenses for the Newspapers segment decreased $12.7 million or 6.5%, to $181.0 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. The decrease in expenses was primarily due to the impact of restructuring and cost reduction initiatives implemented since the Acquisition. In particular compensation expense decreased $14.3 million or 15.2% and newsprint and production expense decreased $0.2 million or 0.7%. The newsprint and production expense decrease is comprised of newsprint expense decreases of 11.1% partially offset by increases in external production costs due to outsourcing. Offsetting these decreases was an increase of $0.3 million or 0.7% in distribution expense and an increase of $0.3 million or 6.5% in marketing expense for the three months ended August 31, 2011 from the three months ended August 31, 2010.


Operating profit before amortization, restructuring and other items, for the Newspapers segment increased $1.0 million or 2.6%, to $41.0 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. This increase was due to decreased operating expenses, partially offset by revenue decreases, as described above.

All other

Operating profit (loss) before amortization, restructuring and other items

Operating profit before amortization, restructuring and other items for the All other category increased $2.2 million to $1.7 million for the three months ended August 31, 2011, from an operating loss before amortization, restructuring and other items for the three months ended August 31, 2010. This increase was due to decreased operating expenses, in particular decreased compensation expenses as a result of previously discussed restructuring initiatives, as well as revenue increases of $0.4 million from the three months ended August 31, 2010.

Corporate

Operating expenses

Corporate expenses decreased $0.5 million to $8.7 million for the three months ended August 31, 2011, from the three months ended August 31, 2010. The decrease is due to a net decrease in compensation costs. During the three months ended August 31, 2011, salaries and benefit increases were offset by decreases in stock-based compensation expense and defined benefit pension costs as discussed earlier.


Postmedia’s operating results for the year ended August 31, 2011 compared to Postmedia’s operating results for the period ended August 31, 2010 and Canwest LP’s operating results for the periods ended May 31, 2010 and July 12, 2010

Postmedia Canwest LP ($ in thousands of Canadian dollars)

For the year

ended August 31,

2011


2010

For the

period June 1, 2010 to July 12, 2010 (1)

For the period

September 1, 2009 to May 31, 2010 (1)

Revenues Print advertising 674,451 75,624 78,190 542,680 Print circulation 233,984 31,721 27,770 181,320 Digital 90,282 10,751 9,624 63,801 Other 20,408 3,998 3,645 23,379 1,019,125 122,094 119,229 811,180 Operating expenses Compensation 423,512 62,422 54,014 352,219 Newsprint 62,125 8,175 7,639 50,673 Other operating 332,380 40,771 38,115 247,422 818,017 111,368 99,768 650,314 Operating profit before amortization, restructuring and other items (2)

201,108 10,726

19,461

160,866

Amortization 75,092 11,073 7,136 30,736 Restructuring of operations and other items 42,775 11,209 (518) 2,660 Operating income (loss) 83,241 (11,556) 12,843 127,470 Interest expense, excluding loss on debt prepayment

80,315 12,702

4,498

60,633

Loss on debt prepayment 11,018 - - - Other income - - (283) (1,501) Loss (gain) on disposal of property and equipment and intangible assets

175 -

-

(2)

Loss (gain) on derivative financial instruments 21,414 (7,550) - - Foreign currency exchange losses (gains) (17,960) 9,607 (4,542) (49,610) Acquisition costs 1,217 18,303 - - Earnings (loss) before reorganization costs and income taxes

(12,938) (44,618)

13,170

117,950

Reorganization costs - - 16,500 41,192 Earnings (loss) before income taxes (12,938) (44,618) (3,330) 76,758 Recovery of income taxes (3) - - n/a (18,111) Net earnings (loss) (3) (12,938) (44,618) n/a 94,869 Notes: (1) We have included historical consolidated financial information of Canwest LP, to provide historical financial data of the operations we acquired. However, Canwest LP’s historical financial statements are not comparable to our consolidated financial statements and readers are cautioned that such information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business. Additionally, Canwest LP’s historical consolidated financial data has been reclassified to be consistent with Postmedia’s revenue and expense presentation. (2) See “Reconciliation of Non-GAAP Financial Measures”. (3) Under the liquidation basis of accounting for the period from June 1, 2010 to July 12, 2010, the supplementary financial information in note 5 of the audited financial statements of Canwest LP did not include a provision for income taxes.


Revenue

Print advertising

Print advertising revenue decreased $22.0 million, or 3.2%, to $674.5 million for the year ended August 31, 2011, from the year ended August 31, 2010. This decrease relates to decreased revenue from national advertising of 0.6%, retail advertising of 6.7% and classified advertising of 8.2%, partially offset by increased revenue from insert advertising of 2.2% and other advertising of 1.7%.

Print circulation

Print circulation revenue decreased $6.8 million, or 2.8%, to $234.0 million for the year ended August 31, 2011, from the year ended August 31, 2010. Net paid circulation volume decreased 5.9% for the year ended August 31, 2011, from the year ended August 31, 2010, offset partially by price increases, resulting in a 2.8% decrease in overall circulation revenue.

Digital

Digital revenue increased $6.1 million, or 7.3%, to $90.3 million for the year ended August 31, 2011, from the year ended August 31, 2010. The favourable variance was due to a 14.0% increase in online advertising revenue offset by a 6.1% decrease in digital circulation revenue and subscription revenue from FPinfomart.

Other

Other revenue decreased $10.6 million, or 34.2%, to $20.4 million for the year ended August 31, 2011, as compared to the year ended August 31, 2010. The decrease was primarily due to the termination of a commercial printing contract in September 2010 as discussed earlier.

Operating expenses

Compensation

Compensation expenses, which are comprised of payroll and contractor expenses, decreased $45.1 million or 9.6%, to $423.5 million for the year ended August 31, 2011, from the year ended August 31, 2010. Decreased compensation expenses are a result of previously discussed restructuring initiatives and reductions in defined benefit pension costs, partially offset by increases in stock-based compensation expense of $4.4 million.

Newsprint

Newsprint expenses decreased $4.4 million, or 6.6%, to $62.1 million for the year ended August 31, 2011, from the year ended August 31, 2010. Newsprint consumption decreased 17.2% due to continued usage reduction efforts, outsourcing of production at certain newspapers as discussed earlier and lower newspaper circulation volume partially offset by a 12.9% increase in newsprint cost per tonne, resulting in an overall decrease in newsprint expense of 6.6% for the year ended August 31, 2011, from the year ended August 31, 2010.

Other operating

Other operating expenses increased $6.1 million, or 1.9%, to $332.4 million for the year ended August 31, 2011, from the year ended August 31, 2010. Increases in other operating expenses are primarily related to increased outsourced production costs, travel expenses and consulting fees, partially offset by decreases in marketing expenses, distribution expenses and repairs and maintenance expenses.



Operating profit before amortization, restructuring and other items increased by $10.1 million, or 5.3%, to $201.1 million for the year ended August 31, 2011, from the year ended August 31, 2010. The increase relates primarily to decreased compensation costs partially offset by decreases in revenue, as discussed above.

Amortization

Amortization was $75.1 million for the year ended August 31, 2011. Amortization is not comparable between Postmedia and Canwest LP as amortization is higher in Postmedia due to the higher carrying values of both tangible and intangible assets subject to amortization as a result of the fair values ascribed on the Acquisition. During the year ended August 31, 2011, amortization expense related to property and equipment and definite life intangible assets was $29.2 million and $45.9 million, respectively.


Restructuring of operations and other items for the year ended August 31, 2011 was $42.8 million. Restructuring of operations and other items is not comparable between Postmedia and Canwest LP. Restructuring of operations and other items in the year ended August 31, 2011 includes $41.9 million relating to severance costs, which include both involuntary terminations and voluntary buyouts, a recovery of $2.3 million which represents curtailment gains in respect of our pension and post-retirement plans related to such involuntary terminations and voluntary buyouts, and $3.2 million of expenses relating to the filing of a non-offering prospectus, expenses relating to complying with our contractual obligation to make an exchange offer for the Notes that is registered with the SEC, and management oversight expenses of our various restructuring initiatives. Restructuring of operations and other items in the year ended August 31, 2010 include $12.9 million relating to severance costs, which include both involuntary terminations and voluntary buyouts.

Operating income (loss)

Operating income for the year ended August 31, 2011 was $83.2 million. Operating income (loss) is not comparable between Postmedia and Canwest LP due to different capital structures.

Interest expense, excluding loss on debt prepayment

Interest expense for the year ended August 31, 2011 was $80.3 million. Interest expense is not comparable between Postmedia and Canwest LP due to different capital structures.

Loss on debt prepayment

For the year ended August 31, 2011, we recorded a loss on debt prepayment of $11.0 million. This amount includes cash costs of $1.4 million incurred on the prepayment of debt and a non-cash loss of $9.6 million of unamortized discounts and transaction costs related to the prepayment of debt.

Other income

Other income for the year ended August 31, 2010 represented a charge to Canwest Global Communications Corp., the ultimate parent company of Canwest LP, for the use of shared equipment.

Loss (gain) on derivative financial instruments

Loss on derivative financial instruments for the year ended August 31, 2011 was $21.4 million. Loss (gain) on derivative financial instruments is not comparable between Postmedia and Canwest LP due to different capital structures. The loss for the year ended August 31, 2011 includes a loss of $21.1 million related to a foreign currency interest rate swap that was not designated as a hedge and a loss of $1.8 million which represents a payment made to amend the terms of our foreign currency interest rate swap that was not designated as a hedge. Partially offsetting these losses was a gain of $1.5 million related to a variable prepayment option on the Notes


that represents an embedded derivative. The gain on derivative financial instruments for the year ended August 31, 2010 includes a gain of $3.3 million related to a foreign currency interest rate swap that was not designated as a hedge and a gain of $4.3 million related to a variable prepayment option on the Notes that represents an embedded derivative.

Foreign currency exchange losses (gains)

Foreign currency exchange gains for the year ended August 31, 2011 were $18.0 million. Foreign currency exchange losses (gains) are not comparable between Postmedia and Canwest LP due to different capital structures. For the year ended August 31, 2011 foreign currency exchange gains consist primarily of net realized gains of $26.9 million related to the US Tranche that was prepaid on April 4, 2011. Partially offsetting these gains are unrealized losses of $5.7 million related to the outstanding principal amount on Tranche C of our Term Loan Facility that is not subject to hedge accounting and realized losses of $2.2 million on contractual principal settlements on the foreign currency interest rate swap not designated as a hedge.

Acquisition costs

During the year ended August 31, 2011 we incurred acquisition costs of $1.2 million related to the Acquisition of Canwest LP. During the period ended August 31, 2010, Postmedia incurred acquisition costs of $18.3 million. These costs were expensed as they were not directly related to either the issuance of debt or equity.


Reorganization costs represent costs that were directly associated with the reorganization of Canwest LP. During the periods ended May 31, 2010 and July 12, 2010, Canwest LP incurred reorganization costs of $41.2 million and $16.5 million, respectively. These costs consisted of professional fees, advisory fees, management incentive plan and key employee retention plan costs, and foreign currency exchange losses resulting from translating monetary items that were subject to compromise at the period end compared to translated amounts at January 8, 2010, the date of Canwest LP’s CCAA filing, and amounts related to resolution of legal claims outstanding on the date of Canwest LP’s CCAA filing.

Earnings (loss) before income taxes

Loss before income taxes for the year ended August 31, 2011 was $12.9 million. Earnings (loss) before income taxes is not comparable between Postmedia and Canwest LP due to different capital structures. The loss before income taxes for the year ended August 31, 2011 is primarily due to restructuring of operations and other items, and the loss on debt prepayment.

Recovery of income taxes

For the year ended August 31, 2011 we did not record an income tax provision or recovery. Income taxes are not comparable between Postmedia and Canwest LP due to different organizational structures. Our effective tax rate for the year ended August 31, 2011, was different than our statutory tax rate of 27.6% as a result of adjustments to the income tax expense, including a $2.4 million increase related to changes in our valuation allowance, a $3.1 million increase related to non-deductible expenses, partially offset by a $0.3 million decrease related to changes in future tax rates, a $0.8 decrease related to the non-deductible portion of a capital gain and a $0.8 million decrease related to adjustments in respect of the prior year.

Net earnings (loss)

Net loss for the year ended August 31, 2011 was $12.9 million, or $0.32 per share. Net earnings (loss) is not comparable between Postmedia and Canwest LP due to different capital structures. The net loss for the year ended August 31, 2011 is primarily due to restructuring of operations and other items, and the loss on debt prepayment.


Results of Postmedia’s segment operations for the year ended August 31, 2011 compared to Postmedia’s segment operations for the period ended August 31, 2010 and Canwest LP’s segment operations for the periods ended May 31, 2010 and July 12, 2010


For the year

ended August 31,

2011


2010

For the period June 1, 2010 to July 12, 2010 (1)

For the period

September 1, 2009 to May 31, 2010 (1)

Revenue Newspapers 984,660 117,694 115,968 785,903 All other 38,710 5,244 3,710 28,707 Intersegment elimination (4,245) (844) (449) (3,430) 1,019,125 122,094 119,229 811,180 Operating expenses Newspapers 761,872 100,036 93,668 616,282 All other 25,548 6,024 3,462 17,750 Corporate 34,842 6,152 3,087 19,712 Intersegment elimination (4,245) (844) (449) (3,430) 818,017 111,368 99,768 650,314 Operating profit (loss) before amortization, restructuring and other items (2)

Newspapers 222,788 17,658 22,300 169,621 All other 13,162 (780) 248 10,957 Corporate (34,842) (6,152) (3,087) (19,712) 201,108 10,726 19,461 160,866 Notes: (1) We have included historical segment information of Canwest LP to provide historical financial data of the operations we acquired. However, Canwest LP’s historical segment information is not comparable to our segment information and readers are cautioned that such information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business. Additionally, Canwest LP’s segment information has been reclassified to reflect our segmented reporting. (2) See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of operating profit before amortization, restructuring and other items to net earnings (loss). Newspapers

Revenue

Revenue for the Newspapers segment decreased $34.9 million, or 3.4%, to $984.7 million for the year ended August 31, 2011, from the year ended August 31, 2010. The decrease in revenue is due to decreases in print advertising revenue, declines in circulation volume, and decreases in commercial printing revenue partially offset by increases in digital advertising revenue.

The total advertising linage and the average line rate decreased 3.2% and 1.2%, respectively, from the year ended August 31, 2010. National, retail and classified advertising decreased 0.6%, 6.7% and 8.2%, respectively, from the year ended August 31, 2010. Insert volume increased by 2.6% but was partially offset by price decreases resulting in a 2.2% increase in insert revenue from the year ended August 31, 2010. A 5.9% decrease in print circulation volume was partially offset by increases in per copy pricing, resulting in a 2.8% decrease in print circulation revenue from the year ended August 31, 2010. Newspaper digital advertising revenue increased 13.9% for the year ended August 31, 2011, from the year ended August 31, 2010, offset partially by decreases in digital circulation and subscription revenue, resulting in an overall digital revenue increase of 12.5%.


Operating expenses

Operating expenses for the Newspapers segment decreased $48.1 million or 5.9%, to $761.9 million for the year ended August 31, 2011, from the year ended August 31, 2010. The decrease in expenses was primarily due to the impact of restructuring and cost reduction initiatives we implemented since the Acquisition. In particular compensation expense decreased $40.5 million or 10.6%, distribution expense decreased $1.2 million or 0.8% and marketing expense decreased $3.3 million or 12.7% for the year ended August 31, 2011, from the year ended August 31, 2010. Offsetting these decreases was an increase of $0.6 million or 0.5% in newsprint and production expense for the year ended August 31, 2011, from the year ended August 31, 2010. The newsprint and production expense increase is comprised of newsprint expense decreases of 6.6% offset by increases in external production costs due to outsourcing.


Operating profit before amortization, restructuring and other items, for the Newspapers segment increased $13.2 million or 6.3%, to $222.8 million for the year ended August 31, 2011, from the year ended August 31, 2010. This increase was due to decreased operating expenses, partially offset by revenue decreases, as described above.

All other


Operating profit before amortization, restructuring and other items for the All other category increased by $2.8 million to $13.2 million for the year ended August 31, 2011, from the year ended August 31, 2010. This increase was due to decreased operating expenses, in particular decreased compensation expenses as a result of previously discussed restructuring initiatives, as well as revenue increases of $1.0 million from the year ended August 31, 2010.

Corporate

Operating expenses

Corporate expenses increased $5.9 million to $34.8 million for the year ended August 31, 2011, from the year ended August 31, 2010. The increase is due to increases in compensation costs, which include an increase related to stock-based compensation expense, partially offset by decreases in defined benefit pension costs as discussed earlier.


Postmedia’s operating results for the period ended August 31, 2010 and Canwest LP’s operating results for the periods ended May 31, 2010 and July 12, 2010 compared to Canwest LP’s operating results for the year ended August 31, 2009



2010

For the period June 1, 2010 to July 12, 2010 (1)

For the period

September 1, 2009 to May 31, 2010 (1)

For the year

ended August 31,

2009 (1) Revenues Print advertising 75,624 78,190 542,680 740,058 Print circulation 31,721 27,770 181,320 246,060 Digital 10,751 9,624 63,801 79,091 Other 3,998 3,645 23,379 33,866 122,094 119,229 811,180 1,099,075 Operating expenses Compensation 62,422 54,014 352,219 480,493 Newsprint 8,175 7,639 50,673 92,688 Other operating 40,771 38,115 247,422 354,010 111,368 99,768 650,314 927,191 Operating profit before amortization, restructuring and other items (2) 10,726

19,461

160,866

171,884

Amortization 11,073 7,136 30,736 40,535 Restructuring of operations and other items 11,209 (518) 2,660 28,805 Operating income (loss) (11,556) 12,843 127,470 102,544 Interest expense 12,702 4,498 60,633 98,426 Other income - (283) (1,501) (2,500) Gain on disposal of property and equipment - - (2) (2,186) Loss on disposal of interest rate swaps - - - 180,202 Ineffective portion of hedging derivative instrument - - - 60,112 Impairment loss on masthead - - - 28,250 Gain on derivative financial instruments (7,550) - - - Foreign currency exchange losses (gains) 9,607 (4,542) (49,610) (154,513) Acquisition costs 18,303 - - - Earnings (loss) before reorganization costs and income taxes (44,618)

13,170

117,950

(105,247)

Reorganization costs - 16,500 41,192 25,756 Earnings (loss) before income taxes (44,618) (3,330) 76,758 (131,003) Recovery of income taxes (3) - n/a (18,111) (8,893) Net earnings (loss) (3) (44,618) n/a 94,869 (122,110) Notes: (1) We have included historical consolidated financial information of Canwest LP, to provide historical financial data of the operations we acquired. However, Canwest LP’s historical financial statements are not comparable to our consolidated financial statements and readers are cautioned that such information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business. Additionally, Canwest LP’s historical consolidated financial data has been reclassified to be consistent with Postmedia’s revenue and expense presentation. (2) See “Reconciliation of Non-GAAP Financial Measures”. (3) Under the liquidation basis of accounting for the period from June 1, 2010 to July 12, 2010, the supplementary financial information in note 5 of the audited financial statements of Canwest LP did not include a provision for income taxes.


Revenue

Print advertising

Print advertising revenue decreased $43.6 million, or 5.9%, for the year ended August 31, 2010, from $740.1 million for the year ended August 31, 2009. This decrease was primarily due to declines in advertising revenue associated with the weakness in the Canadian economy as well as a continuing shift in advertising dollars from newspaper advertising to advertising in other platforms, including new media outlets. In the year ended August 31, 2010, we experienced lower revenue in all of our print advertising categories from the year ended August 31, 2009, except for national advertising which increased by 0.8%. Retail advertising decreased 7.3%, classified advertising decreased 16.2%, insert advertising decreased 2.9% and other advertising decreased 8.8% compared to the year ended August 31, 2009.

Print circulation

Print circulation revenue decreased $5.2 million, or 2.1%, for the year ended August 31, 2010, from $246.1 million for the year ended August 31, 2009. Net paid circulation volume decreased 6.4% for the year ended August 31, 2010 from the year ended August 31, 2009, offset partially by price increases, resulting in a 2.1% decrease in overall circulation revenue.

Digital

Digital revenue increased $5.1 million, or 6.4%, for the year ended August 31, 2010, from $79.1 million for the year ended August 31, 2009. The increase was due to an 8.1% increase in online advertising revenue and a 3.2% increase in digital circulation revenue and subscription revenue from FPinfomart.

Other

Other revenue decreased $2.8 million, or 8.4%, for the year ended August 31, 2010, from $33.9 million for the year ended August 31, 2009. The decrease was primarily due to lower levels of commercial printing business.

Operating expenses

Compensation

Compensation expenses decreased $11.8 million, or 2.5% for the year ended August 31, 2010, from $480.5 million for the year ended August 31, 2009. Decreased compensation expenses are primarily the result of cost savings initiatives implemented by Canwest LP in fiscal 2009 and continued focus on cost containment in the year ended August 31, 2010.

Newsprint

Newsprint expenses decreased $26.2 million, or 28.3% for the year ended August 31, 2010, from $92.7 million for the year ended August 31, 2009. Newsprint consumption decreased 9.2% from the year ended August 31, 2009 due to usage reduction efforts implemented in fiscal 2009 by Canwest LP and lower newspaper circulation volume. In addition to this reduction in newsprint volume, newsprint cost per tonne decreased 21.0% during the same period contributing to the majority of the overall decrease in newsprint expense.

Other operating

Other operating expenses decreased $27.7 million, or 7.8% for the year ended August 31, 2010, from $354.0 million for the year ended August 31, 2009. Decreased other operating expenses were primarily the result of cost savings initiatives implemented in fiscal 2009 by Canwest LP and continued focus on cost containment in the year ended August 31, 2010. Reductions were experienced across most categories including distribution, travel, entertainment, marketing and occupancy.



Operating profit before amortization and restructuring and other items increased by $19.2 million, or 11.2% for the year ended August 31, 2010, from $171.9 million for the year ended August 31, 2009. The increase relates to the costs savings initiatives discussed above, partially offset by revenue decreases discussed above.

Amortization

Amortization increased by $8.4 million, or 20.7% for the year ended August 31, 2010 from $40.5 million for the year ended August 31, 2009. Amortization is not comparable between these periods as amortization was higher subsequent to the Acquisition due to the higher fair values of both intangible and tangible assets as a result of the Acquisition.


Restructuring of operations and other items decreased by $15.5 million for the year ended August 31, 2010, from $28.8 million for the year ended August 31, 2009. The decrease is the result of a lower level of restructuring activity in the year ended August 31, 2010. The majority of restructuring expense in the year ended August 31, 2010 was expensed after completion of the Acquisition and relates to restructuring initiatives of Postmedia that continued in the year ended August 31, 2011. The expense of $28.8 million for the year ended August 31, 2009 does not include expenses related to the Acquisition.

Operating income

Operating income increased by $26.2 million, or 25.6% for the year ended August 31, 2010, from $102.5 million for the year ended August 31, 2009. The increase in operating income relates to the decrease in restructuring of operations and other items of $15.5 million, partially offset by the increase in amortization of $8.4 million discussed above.

Interest expense

Interest expense is not comparable between Postmedia and Canwest LP due to different capital structures.

Other income

Other income represents a charge to Canwest Global Communications Corp., the ultimate parent company of Canwest LP, for the use of shared equipment.

Gain on disposal of property and equipment

In the year ended August 31 2009, Canwest LP sold a building in Edmonton, Alberta and realized a gain of $2.2 million.

Loss on disposal of interest rate swaps

As a result of the termination of hedging derivative instruments, Canwest LP recorded a foreign currency swap loss of $180.2 million in the year ended August 31, 2009.

Ineffective portion of hedging derivative instrument

As a result of the termination of hedging derivative instruments in the year ended August 31, 2009, Canwest LP reclassified $60.1 million of accumulated other comprehensive losses to the statement of earnings (loss) as a result of the hedge ineffectiveness.


Impairment loss on masthead

Due to a decline in operating results, and lower expectations for advertising revenue growth, Canwest LP recorded an impairment charge of $28.3 million for the National Post masthead for the year ended August 31, 2009.

Gain on derivative financial instruments

During the period ended August 31, 2010, Postmedia recorded a gain on derivative financial instruments of $7.6 million. This amount includes a gain of $3.5 million related to a foreign currency interest rate swap that was not designated as a hedge and a gain of $4.3 million related to a variable prepayment option on the Notes that represents an embedded derivative.

Foreign currency exchange gains

Foreign currency exchange gains are not comparable between Postmedia and Canwest LP due to the different capital structures.

Acquisition costs

During the period ended August 31, 2010, Postmedia incurred acquisition costs of $18.3 million related to the Acquisition of Canwest LP. These costs were expensed as they were not directly related to either the issuance of debt or equity.


Reorganization costs represent costs that can be directly associated with the reorganization of Canwest LP. During the periods ended May 31, 2010 and July 12, 2010, Canwest LP incurred reorganization costs of $41.2 million and $16.5 million, respectively, a cumulative increase of $31.9 million from the year ended August 31, 2009 total of $25.8 million. These costs consist of professional fees, advisory fees, management incentive plan and key employee retention plan costs, and foreign currency exchange losses resulting from translating monetary items that were subject to compromise at the period end compared to the translated amounts at January 8, 2010, the date of Canwest LP’s CCAA filing, and amounts related to resolution of legal claims outstanding on the date of Canwest LP’s CCAA filing.

Earnings (loss) before income taxes

Earnings (loss) before income taxes is not comparable between Postmedia and Canwest LP due to different capital structures. The net loss before income taxes of $44.6 million for Postmedia for the period ended August 31, 2010 is primarily due to acquisition costs, restructuring of operations and other items and seasonality.

Recovery of income taxes

Income taxes are not comparable between Postmedia and Canwest LP due to different organization structures. For the period ended August 31, 2010 Postmedia did not record an income tax provision or recovery. Our effective tax rate for the period was different than our statutory tax rate of 29.0% as a result of adjustments to the income tax expense, including a $10.4 million increase related to changes in our valuation allowance, a $0.5 million increase related to the non-deductible portion of a capital loss and a $2.1 million increase related to non-deductible expenses.

Net earnings (loss)

Net earnings (loss) is not comparable between Postmedia and Canwest LP due to different capital structures. The net loss of Postmedia for the period ended August 31, 2010 of $44.6 million, or $1.11 per share, is primarily due to acquisition costs, restructuring of operations and other items and seasonality.


Results of Postmedia’s segment operations for the period ended August 31, 2010 and Canwest LP’s segment operations for the periods ended May 31, 2010 and July 12, 2010 compared to Canwest LP’s segment operations for the year ended August 31, 2009


For the period July

13 to August 31,

2010

For the period

June 1 to July 12, 2010 (1)

For the period

September 1, 2009 to May 31, 2010 (1)

For the year

ended August 31,

2009 (1) Revenue Newspapers 117,694 115,968 785,903 1,058,227 All other 5,244 3,710 28,707 45,551 Intersegment elimination (844) (449) (3,430) (4,703) 122,094 119,229 811,180 1,099,075 Operating expenses Newspapers 100,036 93,668 616,282 875,963 All other 6,024 3,462 17,750 37,528 Corporate 6,152 3,087 19,712 18,403 Intersegment elimination (844) (449) (3,430) (4,703) 111,368 99,768 650,314 927,191 Operating profit (loss) before amortization, restructuring and other items (2)

Newspapers 17,658 22,300 169,621 182,264 All other (780) 248 10,957 8,023 Corporate (6,152) (3,087) (19,712) (18,403) 10,726 19,461 160,866 171,884 Notes: (1) We have included historical segment information of Canwest LP to provide historical financial data of the operations we acquired. However, Canwest LP’s historical segment information is not comparable to our segment information and readers are cautioned that such information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business. Additionally, Canwest LP’s segmented information has been reclassified to reflect our segmented reporting with the following exception. As of September 1, 2009, Canwest LP began attributing the portion of national display advertising revenue and expenses associated with the newspaper websites to the Newspapers segment. We have not restated the prior periods because we are not able to generate the data for earlier periods and, as a result, prior period segment information is not comparable. If Canwest LP had not changed the allocation of revenue and expenses, revenue for the All other category for the year ended August 31, 2010 would have increased by $8.9 million, with a corresponding decrease to the Newspapers segment revenue; operating expenses for the All other category for the year ended August 31, 2010 would have increased $5.0 million, with a corresponding decrease in Newspapers segment operating expenses; and operating profit for the All other category for the year ended August 31, 2010 would have increased by $3.9 million with a corresponding decrease to the Newspapers segment operating profit. (2) See “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of operating profit before amortization, restructuring and other items to net earnings (loss).


Newspapers

Revenue

Revenue for the Newspapers segment decreased $38.7 million, or 3.7%, for the year ended August 31, 2010 from $1,058.2 million for the year ended August 31, 2009. The decrease in revenue is primarily due to a decline in advertising revenue associated with the weakness in the Canadian economy as well as a continuing shift in advertising dollars from newspaper advertising to advertising in other platforms, including online and other digital outlets.

Total advertising linage and the average line rate decreased 1.0% and 5.3%, respectively, from the year ended August 31, 2009. National advertising revenue increased 0.8% during the year ended August 31, 2010 offset by decreases in retail and classified advertising of 7.3% and 16.2%, respectively. Insert revenue decreased 2.9% primarily related to volume decreases of 2.2% from the year ended August 31, 2009. A 6.4% decrease in print circulation volume was partially offset by increases in per copy pricing, resulting in a 2.1% decrease in print circulation revenue from the year ended August 31, 2009. Newspaper digital advertising revenue increased 26.3% for the year ended August 31, 2010, from the year ended August 31, 2009, primarily due to the reclassification of national display advertising. The revenue in these periods are not directly comparable as Canwest LP began, effective September 1, 2009, attributing the portion of national display advertising revenue associated with the newspaper websites to the Newspapers segment. If Canwest LP had not changed the allocation of revenue and expenses, revenue for the Newspapers segment would have been $8.9 million lower for the year ended August 31, 2010 as compared to the year ended August 31, 2009.

Operating expenses

Operating expenses for the Newspapers segment decreased $66.0 million, or 7.5%, for the year ended August 31, 2010 from $876.0 million for the year ended August 31, 2009. The decrease in expenses was primarily due to the impact of cost reduction initiatives implemented by Canwest LP in the year ended August 31, 2009 as well as decreases in newsprint volume and prices. In particular, compensation expense decreased 6.4% for the year ended August 31, 2010 from the year ended August 31, 2009. Newsprint expense decreased 28.3% due to newsprint consumption decreases of 9.2% and Newsprint pricing decreases of 21.0% for the year ended August 31, 2010 from the year ended August 31, 2009. Newsprint consumption decreases are the result of usage reduction efforts implemented by Canwest LP in the year ended August 31, 2009 and lower newspaper circulation volume. Operating expenses in these periods are not directly comparable as Canwest LP began attributing the portion of national display advertising expenses associated with the newspaper websites to the Newspapers segment. If Canwest LP had not changed the allocation of revenue and expenses, operating expenses for the Newspapers segment would have been $5.0 million lower for the year ended August 31, 2010 as compared to the year ended August 31, 2009.


Operating profit before amortization, restructuring and other items, for the Newspapers segment increased $27.3 million, or 15.0%, for the year ended August 31, 2010 from $182.3 million for the year ended August 31, 2009. This increase was primarily due to benefits from operating cost reduction initiatives implemented by Canwest LP in the year ended August 31, 2009 and continued focus on cost containment in the year ended August 31, 2010. Operating profit in these periods is not directly comparable as Canwest LP began attributing the portion of national display advertising revenue and operating expenses associated with the newspaper websites to the Newspapers segment. If Canwest LP had not changed the allocation of revenue and expenses, operating profit for the Newspapers segment would have been $3.9 million lower for the year ended August 31, 2010 as compared to the year ended August 31, 2009.


All other


Operating profit before amortization, restructuring and other items for the All other category increased $2.4 million, or 29.9%, for the year ended August 31, 2010 from $8.0 million for the year ended August 31, 2009. This increase is due to the discontinuation of the printed directory division and reflects changes in the allocation of costs to the Newspapers segment offset by a reduction in profit due to the change in allocation of national display advertising revenue from the All other category to the Newspapers segment.

Corporate

Operating expenses

Corporate expenses increased $10.5 million for the year ended August 31, 2010 from $18.5 million for the year ended August 31, 2009. The increase is due to increases to compensation costs, including pension, and incentive programs. Additionally, the expenses for the year ended August 31, 2009 include a reduction of operating expenses of $6.2 million for active employee health and insurance benefits related to prior years.

Consolidated quarterly financial results ($ in thousands of Canadian dollars, except per share information)

Postmedia

Canwest LP(1)

Fiscal 2011 Fiscal 2010

Fiscal 2010

Three months ended

August 31, 2011

Three months

ended May 31, 2011

Three months ended

February 28, 2011

Three months ended

November 30, 2010

July 13, 2010 to

August 31, 2010

June 1, 2010 to July 12,

2010

Three months

ended May 31, 2010

Three months ended

February 28, 2010

Three months ended

November 30, 2009

Revenue(2) ........................................... 230,338 259,192 242,538 287,057 122,094 119,229 270,345 254,418 286,417 Net earnings (loss)(1) ........................... (2,312) (3,881) (12,310) 5,565 (44,618) n/a(3) 40,639 (7,613) 61,843 Net earnings (loss) per share Basic ................................................. $(0.06) $(0.10) $(0.31) $0.14 $(1.11) n/a(4) n/a(4) n/a(4) n/a(4) Diluted ............................................... $(0.06) $(0.10) $(0.31) $0.14 $(1.11) n/a(4) n/a(4) n/a(4) n/a(4) Cash flows from operating activities.... (5,187) 39,236 9,185 (4,615) 17,502 n/a(3) 37,913 45,652 5,253 Notes: (1) We have included historical consolidated quarterly financial information of Canwest LP to provide quarterly historical financial data of the operations we acquired. However, Canwest LP’s historical quarterly unaudited financial information is not comparable to our unaudited quarterly consolidated financial information and readers are cautioned that such information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business. (2) Beginning in the three months ended February 28, 2011 our revenues experienced declines from the prior year due to the loss of a commercial printing contract as well as decreases in print advertising revenue. (3) As Canwest LP was under the liquidation basis of accounting for the period from June 1, 2010 to July 12, 2010, the supplementary financial information in note 5 of the audited financial statements of Canwest LP did not include a provision for income taxes. As a result net earnings (loss) have not been presented for the period from June 1, 2010 to July 12, 2010 in the above table. Additionally, no cash flow information was prepared for Canwest LP under the liquidation basis of accounting for the period from June 1, 2010 to July 12, 2010 and as a result cash flows from operating activities have not been presented for the period from June 1, 2010 to July 12, 2010 in the above table. (4) Net earnings (loss) per share information has not been provided for the partnership units of Canwest LP.


Liquidity and capital resources

Our principal use of funds are for working capital requirements, debt servicing and capital expenditures. Based on our current and anticipated level of operations, we believe that our cash on hand, cash flows from operations and available borrowings under our Term Loan Facility and asset-based revolving credit facility (“ABL facility”) will enable us to meet our working capital, capital expenditures, debt servicing and other funding requirements for the foreseeable future. However, our ability to fund our working capital needs, debt payments and other obligations, and to comply with the financial covenants under our debt agreements, depends on our future operating performance and cash flows. There are a number of factors which may adversely affect our operating performance and our ability to meet these obligations. See “Key Factors Affecting Operating Results” described earlier. Our cash flows from operating activities may be impacted by, among other things, competition from other newspapers and alternative forms of media and competition from alternative emerging technologies. In addition, in recent years there has been a growing shift in advertising dollars from newspaper advertising to other advertising formats, including new media outlets. Although we expect to fund our capital needs with our available cash, cash generated from operations and available borrowings under the ABL facility, our indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our debt. See “Risk Factors”.

In conjunction with the refinancing on April 4, 2011, described below under “Uses of Cash - Indebtedness”, the financial covenants in the Term Loan Facility credit agreement were favourably modified and are as follows:

• The consolidated interest coverage ratio shall not at any time be less than 2.00 to 1.00; • The consolidated total leverage ratio shall not exceed (a) 4.50 to 1.00 through November 29, 2012 and

(b) 4.00 to 1.00 from November 30, 2012 through maturity; and • The consolidated first lien indebtedness leverage ratio shall not exceed (a) 3.00 to 1.00 through

November 29, 2012 and (b) 2.50 to 1.00 from November 30, 2012 through maturity.

As at August 31, 2011, we were in compliance with all debt covenants and no amounts were drawn under the ABL Facility.

As part of our annual budgeting process, management projects capital expenditures for the forthcoming fiscal year. Each project is subject to a detailed review on a case by case basis prior to approval. Investment projects must achieve an acceptable return on investment and generally are expected to demonstrate a payback period of no more than three years. In certain instances where there are strategic considerations, a longer timeframe may be considered.

For the year ending August 31, 2012, we expect our major non-operating cash requirements to include discretionary capital expenditures of approximately $32 to $35 million and contractual principal repayments of long-term debt to total approximately $17 million. We expect to meet our cash needs for fiscal 2012 through a combination of operating cash flows and cash on hand.

Sources of Cash

Cash flows from operating activities

Our principal sources of liquidity are cash flows from operating activities. For the three months and year ended August 31, 2011, our cash flows from operating activities were a usage of $5.2 million and a source of $38.6 million, respectively (for the period ended August 31, 2010 – a source of $17.5 million). As of August 31, 2011 we had cash of $10.5 million (August 31, 2010 - $40.2 million) and our ABL facility remained undrawn. Availability under the ABL facility as August 31, 2011 was $37.3 million (August 31, 2011 - $35.1 million).


Uses of Cash

Cash flows from investing activities

For the three months and year ended August 31, 2011, our cash flows from investing activities were an outflow of $7.2 and $19.2 million, respectively (for the period ended August 31, 2010 – an outflow of $841.1 million). Total capital expenditures related to property and equipment and intangible assets for the three months and year ended August 31, 2011 were $7.2 million and $20.4 million, respectively (for the period ended August 31, 2010 - $1.4 million). In addition, during the three months and year ended August 31, 2011 we disposed of property and equipment and intangible assets for proceeds of a nominal amount and $1.2 million, respectively (for the period ended August 31, 2010 – nil). In the period ended August 31, 2010, we paid cash consideration, net of cash acquired, of $839.7 million for substantially all of the assets and certain liabilities of Canwest LP.

Cash flows from financing activities

Cash flows from financing activities for the three months and year ended August 31, 2011, were an outflow of $8.2 million and $49.2 million, respectively, primarily related to our indebtedness as discussed below. During the period ended August 31, 2010, cash flows from financing activities were an inflow of $863.8 million. This included cash proceeds raised from the issuance of capital stock, net of costs to issue, of $251.0 million and net cash proceeds from the issuance and repayment of long-term debt as discussed below.

Indebtedness

As of August 31, 2011, we have amounts outstanding under the Term Loan Facility of US$340.0 million (August 31, 2010 – US$267.5 million and CDN$110.0 million). In addition, as of August 31, 2011, we have US$275.0 million of Notes outstanding (August 31, 2010 - US$275.0 million).

On April 4, 2011, we entered into an agreement to amend certain terms of the Term Loan Facility. As a result, amounts then outstanding under the US Tranche of the Term Loan Facility of $238.0 million (US$247.0 million) and the Canadian Tranche of the Term Loan Facility of $107.3 million were repaid and replaced with Tranche C. Tranche C was issued for US$365.0 million (CDN$351.7 million) at a discount of 0.25% for net proceeds of $350.8 million, before financing fees of $5.4 million. On July 13, 2010 we entered into the Term Loan Facility and issued US$275.0 of Notes. The net proceeds received from the issuance of the Term Loan Facility and the Notes was $649.2 million, net of issuance costs of $35.6 million.

During the three months ended August 31, 2011 we made mandatory and optional principal repayments on our Term Loan Facility of $2.1 million (US$2.2 million) and $5.9 million (US$6.0 million), respectively. During the year ended August 31, 2011 we made mandatory and optional principal repayments on our Term Loan Facility, excluding the repayment on April 4, 2011 discussed above, of $10.1 million (US$7.5 million and CDN$2.8 million) and $37.3 million (US$38.0 million), respectively (for the period ended August 31, 2010 – optional principal repayments of $34.7 million (US$32.5 million)).


During the year ended August 31, 2011 we made a capital lease payment of $1.8 million (for the period ended August 31, 2010 - $1.7 million).

The following tables set out the principal and carrying amount of debt outstanding as at August 31, 2011 and August 31, 2010. The first column of the table translates our US dollar debt to the Canadian equivalent based on foreign exchange rates specified in our foreign currency swap agreements for swapped debt and at the closing foreign exchange rate on August 31, 2011 and August 31, 2010, respectively, for our non-swapped debt.

August 31, 2011

($ in thousands of Canadian dollars) Principal translated

at swapped or period end rates

Principal translated at period

end exchange

rates

Financing fees,

discounts and other

Carrying value

Term loan – Tranche C (swapped) (US$228.1M) ................ 233,679 223,426 13,325 210,101 Term loan – Tranche C (non-swapped) (US$111.9M) ......... 109,598 109,598 6,537 103,061 Notes (swapped) (US$275.0M) ............................................ 284,625 269,335 10,199 259,136 627,902 602,359 30,061 572,298

August 31, 2010 ($ in thousands of Canadian dollars)

Principal translated

at swapped or period end rates


end exchange

rates

Financing fees,

discounts and other

Carrying value

Term loan – US Tranche (swapped) (US$225.0M) .............. 232,875 239,963 17,608 222,355 Term loan – US Tranche (non-swapped) (US$42.5M) ......... 45,326 45,326 5,949 39,377 Term loan – Canadian Tranche ............................................ 110,000 110,000 8,400 101,600 Notes (swapped) (US$275.0M) ............................................ 284,625 293,288 10,589 282,699 672,826 688,577 42,546 646,031

Financial position as at August 31, 2011 compared to August 31, 2010

August 31, August 31,($ in thousands of Canadian dollars) 2011 2010 Current assets 150,822 177,678 Total assets 1,180,243 1,266,204 Current liabilities 148,255 164,542 Total liabilities 875,901 950,802 Shareholders’ equity 304,342 315,402


Our current assets are lower at August 31, 2011 due to a decrease in cash primarily related to optional payments made under our Term Loan Facility. Total assets have decreased due to the reduction of carrying amounts for property and equipment and indefinite life intangible assets as a result of amortization recorded during the year ended August 31, 2011 and the reduction in cash already described. Current liabilities have decreased due to decreases in payroll related liabilities and restructuring accruals, partially offset by increases to the current portion of derivative financial instruments. Total liabilities have decreased due to foreign exchange translation and principal payments on long-term debt as well as decreased pension liabilities and the reduction in current liabilities described above.

Financial Instruments and Financial Instruments Risk Management

Risk Management

Our activities expose us to a variety of financial risks: market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. We use derivative financial instruments to hedge certain foreign currency and interest rate risk exposures. We have also entered into certain derivative financial instruments to reduce foreign currency risk for which we are unable to utilize hedge accounting.

Current risk management techniques utilized include monitoring fair value of derivative financial instruments, fair value of publicly traded debt, foreign exchange rates and interest rates with respect to interest rates and foreign currency risk, aging analysis and credit reviews for credit risk and cash flow projections for liquidity risk. Risk management is primarily the responsibility of our corporate finance functions.

Derivative financial instruments

Following the completion of the Acquisition on July 13, 2010, we entered into a foreign currency interest rate swap related to the Notes with a notional amount of US$275.0 million, a fixed currency exchange rate of US$1:$1.035 and a fixed interest rate of 14.53%. This arrangement terminates on July 15, 2014 and includes a final exchange of the principal amounts on that date. On April 4, 2011, we amended the hedging arrangement for the Notes to favourably modify the financial covenants such that they are consistent with the financial covenants in the Term Loan Facility described earlier. As a result the interest rate on the notional principal amount has changed from a fixed rate of 14.53% to a fixed rate of 14.78%. We have designated this instrument as a hedge and utilize cash flow hedge accounting in our financial statements.

On July 13, 2010, we also entered into a foreign currency interest rate swap which amortizes with principal payments on the debt and has a notional amount outstanding as at August 31, 2011 of US$180.0 million related to Tranche C of the Term Loan Facility (August 31, 2010 – US$225.0 million). This foreign currency interest rate swap has a fixed currency exchange rate of US$1:$1.035 and converts the interest rate on the notional Canadian principal amount to bankers acceptance rates plus 9.25% until August 31, 2014. On April 4, 2011, in conjunction with the amendments to the Term Loan Facility, we amended this foreign currency interest rate swap to modify the terms to be consistent with the Term Loan Facility amendments. As a result, the interest rate on the notional Canadian principal amount has changed from bankers acceptance rates plus 9.25% to bankers acceptance rates plus 7.07%. The Company has not designated this swap as a hedge and accordingly does not use hedge accounting for this instrument.

On June 20, 2011, we entered into a foreign currency interest rate swap of US$50.0 million to hedge part of the remaining foreign currency risk and interest rate risk associated with Tranche C. This foreign currency interest rate swap amortizes with principal payments on the debt until May 31, 2015 and has a notional amount outstanding at August 31, 2011 of US$48.1 million, a fixed currency exchange rate of US$1:$0.9845 and a fixed interest rate of 8.66%. We have designated this instrument as a hedge and utilize cash flow hedge accounting in our financial statements.


Foreign currency risk

As discussed above we have entered into transactions to reduce foreign currency risk exposure on our US dollar denominated debt. As at August 31, 2011, we had mitigated foreign currency risk on 82% of our US dollar denominated debt, meeting our goal of largely eliminating our exposure to foreign currency fluctuations on our US dollar denominated indebtedness (August 31, 2010- 92%). As at August 31, 2011, we were still exposed to foreign currency risk on the unswapped portion of Tranche C of US$111.9 million, representing 18% of our outstanding US dollar denominated indebtedness (August 31, 2010 - 8%). As at August 31, 2011, a $0.01 change in the period end exchange rate of a Canadian dollar per one US dollar, holding all other variables constant, would have resulted in an increase or decrease of $0.9 million to the statement of operations (for the period ended August 31, 2010 - $0.1 million).

Interest rate risk

We have no significant interest bearing assets. Our interest rate risk arises from long term borrowings issued at variable rates which expose us to cash flow interest rate risk and borrowings issued at fixed rates which expose us to fair value interest rate risk.

We manage our cash flow and fair value interest rate risk by using foreign currency interest rate swaps but we do not have a formal interest rate risk policy. Such swaps have the economic effect of converting borrowings from US floating rates to Canadian floating and fixed rates as applicable or from US fixed rates to Canadian fixed rates.

Under these swaps, we agree with other parties to exchange, at specified intervals, the difference between US and Canadian fixed interest rates or US and Canadian floating interest rates calculated by reference to the agreed upon notional amounts, as well as amounts reflecting the amortization of the principal amount.

As at August 31, 2011, we held $285.9 million of debt subject to cash flow interest rate risk and $316.5 million of debt subject to fair value interest rate risk (August 31, 2010 - $395.4 million and $293.3 million, respectively).

As at August 31, 2011, if interest rates on long-term debt had been 100 basis points higher or lower, with all other variables held constant, interest expense would have been $3.5 million higher or lower for the year ended August 31, 2011 (for the period ended August 31, 2010 - $0.6 million).

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial asset fails to meet its contractual obligations. As at August 31, 2011, no individual balance represented a significant portion of our accounts receivable. We establish an allowance for doubtful accounts based on the specific credit risk of our customers and historical trends. The allowance for doubtful accounts amounted to $2.7 million as at August 31, 2011 (August 31, 2010 – a nominal amount). On the Acquisition Date we were required to fair value our assets which resulted in our doubtful receivables being valued at nil and our allowance for doubtful accounts being eliminated. As a result our allowance for doubtful accounts was nominal at August 31, 2010.

We continuously monitor the financial condition of our customers, review the credit history of each customer, review the aging of accounts receivable, evaluate significant individual credit risk accounts and utilize each customer’s historical experience in order to both grant credit and set up our allowance for doubtful accounts. If such collectability estimates prove inaccurate, adverse adjustments to future operating results could occur and could be material.


Liquidity risk

Liquidity risk is the risk that we will not be able to meet our financial obligations as they come due or the risk that those financial obligations have to be met at excessive cost. We manage this exposure by using cash on hand and cash flow forecasts and by deferring or eliminating discretionary spending. We have an ABL Facility of up to $60 million which is subject to certain restrictions as described in note 11 of our annual audited consolidated financial statements resulting in an availability of $37.3 million as of August 31, 2011 (August 31, 2010 – $35.1 million).

Our obligations under firm contractual arrangements, including commitments for future payments under capital lease arrangements, operating lease arrangements, and pension funding agreements and debt and swap agreements as of August 31, 2011 are as follows:

($ in thousands) Fiscal year ending August 31,

2012 2013 2014 2015 2016 Thereafter Capital leases ............................ - - - - - 1,560 Operating leases ....................... 16,713 14,605 13,401 11,180 10,453 15,083 Estimated pension funding obligations(1) .............................. 35,816 28,010 25,534 24,539 22,006 N/A Long-term debt(2)(3) .................... 16,862 33,724 50,586 50,586 181,266 269,335 Interest on long-term debt(2)(3) ... 54,783 53,496 50,882 47,151 42,727 67,461 Cash outflow on derivative financial instruments(4) .............. 125,525 132,350 411,175 10,130 - - Cash inflow on derivative financial instruments(4) .............. (109,021) (117,120) (380,316) (9,969) - - Total .......................................... 140,678 145,065 171,262 133,617 256,452 353,439 Notes: (1) Reflects expected contributions to defined benefit pension, post-retirement and post-employment plans. Information for pension funding obligations is based on our most recent actuarial valuation dated December 31, 2010, which does not include calculations of our pension funding obligations beyond Fiscal 2016. Future required payments will be material. (2) Long-term debt and interest payments include only the quarterly minimum contractual principal repayments. (3) US dollar long-term debt payments have been converted to Canadian dollars using the closing exchange rate on August 31, 2011. Interest payments have been calculated based on actual interest and foreign exchange rates as of August 31, 2011. (4) Cash disbursements and receipts on derivative financial instruments represent contractual future cash payments based on current interest and foreign exchange rates. Guarantees and Off-Balance Sheet Arrangements

We do not have any significant guarantees or off-balance sheet arrangements.

Differences between Canadian GAAP and US GAAP

The preceding discussion and analysis has been based upon financial statements prepared in accordance with Canadian GAAP, which differs in certain respects from US GAAP. The significant differences are discussed in detail in note 20 of our audited consolidated financial statements for the year ended August 31, 2011 and the period ended August 31, 2010.

Risk Factors

The risks and uncertainties described below are those we currently believe to be material, but should not be considered exhaustive. If any of the following risks, or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our business, financial condition, results of operations and cash flows and consequently the price of our Shares and the Notes could be materially and adversely affected.


Risks Relating to Our Business

Competition from other newspapers and alternative forms of media may impair our ability to generate advertising and circulation revenue.

Participants in the newspaper publishing industry depend primarily upon advertising sales, paid subscriptions and single copy newspaper sales in order to generate revenue. Competition for advertising, subscribers, readers and distribution is intense and comes primarily from television; radio; local, regional and national newspapers; magazines; free publications; direct mail; internet; telephone directories; and other communications and advertising and subscriber-based media that operate in these markets. In addition, in recent years there has been a growing shift in advertising dollars from newspaper advertising to other advertising platforms, including new media outlets, and this shift may be permanent. Participants in the online media industry also depend upon the sale of advertisements and paid subscriptions in order to generate revenue. The online media industry experiences additional competitive challenges because barriers to entry are low and geographic location is less relevant.

The cost of advertising in alternative forms of media such as those described above may decline, and the ease of producing advertising for alternative media might improve. Similarly, participants in alternative media platforms may improve their ability to target specific audiences and therefore become a more attractive media for advertisers. These circumstances could result in our newspaper or online media not being as competitive as they are currently in relation to these alternative forms of media. In order to respond to changing circumstances, our costs of producing or promoting our editorial content may increase, or we may need to reduce our advertising and/or subscription rates, either of which could adversely affect our financial performance. Increased competition could also lead to additional expenditures for editorial content and marketing.

In addition, there is increasing consolidation in the Canadian newspaper publishing and other media industries, and competitors increasingly include market participants with interests in multiple media. These competitors may be more attractive than we are to certain advertising agencies because they may be able to bundle advertising sales across newspaper, television and internet platforms. Some of these competitors also have access to greater financial and other resources than we do.

Our ability to continue to compete successfully in the newspaper and online media industries and to attract advertising dollars, subscribers and readers will depend upon a number of factors, including:

• our continued ability to offer high-quality editorial content;

• the variety, quality and attractiveness of our products and services;

• the pricing of our products and services;

• the platform on which our products and services are offered;

• the manner in which we market and promote our products and services;

• the effectiveness of the distribution of our products and services;

• our customer service; and

• the emergence of technologies resulting in further shifts, which may be permanent, from newspaper advertising to advertising in other formats, including new media outlets.

These factors are largely dependent upon on our ability to:

• identify and successfully respond to customer trends and preferences;

• develop new products across our business lines;

• appeal to many demographics; and

• expand into new distribution channels, particularly with respect to digital media and online products.


There can be no assurance provided that existing and future competitors will not pursue or be capable of achieving similar or competitive business strategies. In addition, there can be no assurance provided that we will be able to compete successfully with existing or potential competitors, or that increased competition will not have an adverse effect on our business, financial condition or results of operations.

Advertising revenue is the largest component of our revenues and our advertising revenue is influenced by prevailing economic conditions and the prospects of our advertising customers. Advertising revenue has been declining since 2009.

We generate revenue primarily from the sale of advertising. Advertising revenue, including both print and digital advertising, represented 72% of our consolidated revenues in the year ended August 31, 2011. (for the year ended August 31, 2010 – 72%)

Advertising revenue is affected by prevailing economic conditions. Adverse economic conditions generally, and downturns in the Canadian economy specifically, have a negative impact on the Canadian advertising industry and, consequently, on our financial prospects. The Company has been experiencing a decline in advertising revenue since 2009.

Our advertising revenue is also dependent on the prospects of our advertising customers. Certain of our advertising customers operate in industries that may be cyclical or sensitive to general economic conditions, such as the automobile, employment, technology, retail, food and beverage, telecommunications, travel, packaged goods and entertainment industries. Advertising customers could alter their spending priorities and reduce their advertising budgets in the event of a downturn in their business or prospects which would have an adverse effect on the revenue we generate from advertising. In addition, because a substantial portion of our revenue is derived from retail advertisers, our business, financial condition and results of operations are also adversely affected by a downturn in the retail sector.

A further reduction in our advertising revenues could result from:

• a continued decline in economic conditions;

• a decline in the circulation volume of our newspapers, which decline may be permanent;

• a decline in popularity of our editorial content or perceptions about our brands;

• a change in the demographic makeup of the populations to which our newspapers are targeted;

• the activities of our competitors, including increased competition from other forms of advertising-based media (e.g., magazines, radio and television broadcasters, cable television, direct mail and electronic media), and other platforms such as the internet;

• a decline in the amount spent on advertising in general or in particular industries such as those discussed above; and

• the continuing shift from newspaper advertising to advertising in other formats, including new media outlets, which shift may be permanent.

To the extent the current negative economic conditions continue or worsen, our business and advertising revenues will continue to be adversely affected, which would in turn adversely impact our operations and cash flows.


Failure to fulfill our strategy of building our digital media and online businesses would adversely affect our business prospects.

The competitive environment in which we operate demands, and our future growth strategies incorporate, the development of our digital media and online businesses. We believe the consumer preference for digital media and online products will accelerate as younger, more technologically savvy customers make up a greater portion of our potential customer base. In order for our digital media and online businesses to succeed, we must invest time and significant resources in them, to, among other things:

• accelerate the evolution of existing products (such as local newspaper websites and national content channels);

• develop new digital media and online products (such as redesigned classified sites in automotive, employment and real estate categories);

• develop new content channels (such as mobile optimized formats, online video capabilities and content and e-reader devices);

• attract and retain talent for critical positions;

• transform our organization and operating model to grow our digital media and online business;

• continue to develop and upgrade our technologies and supporting processes to distinguish our products and services from those of our competitors;

• sell advertising in significant markets, and be a compelling choice for advertisers online;

• attract and retain a base of frequent, engaged visitors to our websites; and

• continuously advance our digital offerings based on fast-moving trends that may pose opportunities as well as risks (e.g., e-readers and mobile applications).

No assurances can be provided that we will be successful in achieving these and other necessary objectives or that our digital media and online businesses will be profitable or successful. Our failure to adapt to new technology or delivery methods, or our choice of one technological innovation over another, may have an adverse impact on our ability to compete for new customers or to meet the demands of our existing customers. If our digital media and online businesses are not successful, we could lose significant opportunities for new advertising revenue from digital sources while also losing advertising revenue from traditional sources due to the reallocation from print to digital advertising currently taking place. If we are not successful in achieving our digital media and online objectives, our business, financial condition and prospects would be materially adversely affected.

Our failure to maintain our print and online newspaper readership and circulation levels, would limit our ability to generate advertising and circulation revenue.

Our ability to attract advertisers and thereby generate revenue and profits is dependent in large part upon our success in attracting readership of the newspapers and online publications that we publish. Readership and, to a lesser extent, circulation volume are the key drivers of advertising prices and revenue in the Canadian news and newspaper information industry.

We believe reader acceptance is a function of the editorial and advertising content being offered and is influenced by a number of factors, including:

• reviews of critics, promotions, the quality and acceptance of other competing editorial content in the marketplace;

• the availability of alternative forms of news and other editorial content;

• the availability of alternative forms of media technologies, such as the internet and other new media formats, that are often free for users;

• a growing preference among some customers to receive all or a portion of their news from sources other than from a newspaper;


• increases in subscription and newsstand rates;

• general economic conditions, including the resulting decline in consumer spending on discretionary items such as newspapers;

• public tastes and perceptions generally; and

• other intangible factors.

Circulation volumes of our newspapers have been declining in both the home delivered and single copy distribution channels. The rate of circulation decline could increase due to changing media consumption patterns of our readers or other factors, and these declines may be permanent. If we are unable to stop these declines or if the rate of decline were to accelerate, it will result in lower readership and circulation levels and, consequently, may lead to decreased advertising and other revenues.

Although we make significant investments in the editorial content of our newspapers, there can be no assurance provided that our newspapers will maintain satisfactory readership or circulation levels and any decrease in such levels may be permanent. In addition, factors affecting our readership levels could change rapidly, and many of the changes may be beyond our control and permanent. Loss of readership could have a material adverse effect on our ability to generate advertising and circulation revenue.

Because a high percentage of our operating expenses are fixed, a decrease in advertising revenue could have a negative impact on our results of operations.

Newspaper publishing is both capital and labour intensive and, as a result, newspapers have relatively high fixed costs structures. Advertising revenue, on which we rely for a majority of our revenue, may fluctuate due to a variety of factors whereas our expenses do not vary significantly with the increase or decrease in advertising revenue. As a result, a relatively small change in advertising revenue could have a disproportionate effect on our results of operations. For example, during periods of economic contraction, our advertising revenue may decline while most costs remain fixed, resulting in decreased earnings, as has been evident in the current economic environment.

The financial difficulties of certain of our contractors and vendors could have a negative impact on our results of operations.

The financial difficulties that some of our contractors and vendors may face, including as a result of one or more contractor or vendor bankruptcies due to poor economic conditions, may cause them to fail to provide us with products and/or services or may increase the cost of the products and services that they provide us. We may be unable to procure replacement products and/or services from other contractors or vendors in a timely and efficient manner and on acceptable terms, or at all. Any material change in these relationships, such as increased pricing, could have a material adverse effect on our business, financial condition, results of operations, liquidity and cash flow.

We compete with alternative emerging technologies and anticipate that we will be investing a significant amount of capital to address continued technological development.

The media industry is experiencing rapid and significant technological changes that have resulted in the development of alternative means of editorial content distribution. The continued growth of the internet has presented alternative content distribution options that compete with traditional media for advertising revenue. We may not be able to compete successfully with existing or newly developed alternative distribution technologies, or may be required to acquire, develop or integrate new technologies in order to compete. The cost of the acquisition, development or implementation of any such new technologies could be significant, and our ability to fund such implementation may be limited. In addition, even if we are able to fund such an implementation, we may be unable to implement any such technologies successfully. Any such event could have a material adverse effect on our business, financial condition or results of operations.


In addition, the continuing growth and technological expansion of internet-based services has increased existing competitive pressure on our businesses. As web-based and digital formats grab an increasingly larger share of consumer readership, we may lose customers or fail to attract new customers if we are not able to transition our publications and other products to these new formats. Furthermore, to the extent that advertisers continue to shift advertising dollars to new media outlets, which shift may be permanent, our advertising revenues will decrease even if we are able to maintain our current share of print media advertising dollars. The increased competition may have a material adverse effect on our business and financial results.

We may not be able to achieve a profitable balance between circulation levels and advertising revenues.

We must balance our circulation levels with our advertising revenue objectives. This balancing necessitates a continuous effort that varies by publication and requires effective management of the circulation rate, the addition of new subscribers through cost-effective marketing methods and effective advertising operations. To maintain our readership and circulation rates, it may be necessary to incur additional costs that we may not be able to recover through circulation and advertising revenues. No assurances can be provided that we will be able to add and retain a sufficient number of newspaper subscribers in an economically efficient manner. Failure to do this could require reductions of our circulation rate or the elimination of certain products, which would negatively affect our advertising revenues and could materially and adversely affect our results of operations and financial condition.

We may not realize our anticipated cost savings from our cost savings initiatives and any failure to manage costs would hamper profitability.

The level of our expenses impacts our profitability. Because of general economic and business conditions and our recent operating results, we have taken steps to lower operating costs by implementing cost saving initiatives including various transformation projects. We have recently completed a restructuring program designed to reduce costs which consisted of certain transformation projects that resulted in voluntary and involuntary buyout programs. We continue to explore strategic initiatives, including additional transformation projects.

Estimates of cost savings are inherently uncertain, and we may not be able to achieve cost savings or expense reductions within the period we have projected or at all. Our ability to successfully realize savings and the timing of any realization may be affected by factors such as the need to ensure continuity in our operations, labour and other contracts, regulations and/or statutes governing employee/employer relationships, and other factors. In particular, certain of our collective bargaining agreements limit our ability to achieve operating efficiencies by limiting our ability to implement our strategic initiatives. In addition, our implementation of these initiatives has and is expected to require upfront costs. There can be no assurances that we will be able to successfully contain our expenses or that even if our savings are achieved that implementation or other expenses will not offset any such savings. Our estimates of the future expenditures necessary to achieve the savings we have identified may not prove accurate, and any increase in such expenditures may affect our ability to achieve our anticipated savings. If these cost-control efforts do not reduce costs in line with our expectations, our financial position, results of operations and cash flows will be negatively affected.

Our revenue, which is generated primarily from advertisers, is subject to significant seasonal variations, which may increase our borrowing needs at various points in the year.

Our revenue has experienced, and is expected to continue to experience, significant seasonal variances due to seasonal advertising patterns and seasonal influences on media consumption habits. Typically, our revenue is lowest during the fourth quarter of our fiscal year, which ends in August, and highest during the first quarter of our fiscal year, which ends in November, as a result of a traditionally strong retail sales period leading up to the holiday season. These seasonal variations may lead to increased borrowing needs at certain points within the year.


Our intellectual property rights are valuable, and any inability to protect them or liability for infringing the intellectual property rights of others could reduce the value of our services and our brands.

We rely on the trademark, copyright, internet/domain name, trade secret and other laws of Canada and other countries, as well as nondisclosure and confidentiality agreements, to protect our intellectual property rights. However, we may be unable to prevent third parties from using our intellectual property without our authorization, breaching any nondisclosure agreements with us, acquiring and maintaining domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights, or independently developing intellectual property that is similar to ours, particularly in those countries that do not protect our proprietary rights as fully as in Canada. The use of our intellectual property by others could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our businesses. If it became necessary to litigate to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.

We have obtained and applied for several Canadian and foreign service mark and trademark registrations, and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. We cannot guarantee that any of our pending applications will be approved by the applicable governmental authorities. Moreover, even if the applications are approved, third parties may seek to oppose or otherwise challenge these registrations. A failure to obtain trademark registrations in Canada and in other countries could limit our ability to protect our trademarks and impede our marketing efforts in those jurisdictions.

We cannot be certain that our intellectual property does not and will not infringe the intellectual property rights of others. We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the trademarks, copyrights and other intellectual property rights of third parties. Any such claims, whether or not meritorious, could result in costly litigation and divert resources and the efforts of our personnel. Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and to cease using certain trademarks or copyrights or making or selling certain products, or need to redesign or rename some of our products or processes to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs.

We maintain many well-known mastheads, consumer brands and trademarks, damage to the reputation of any of which could have an adverse impact upon our business, financial performance or results of operations.

The mastheads, brand names and trademarks that we own are well-known to consumers and are important in maintaining existing business and sourcing new business, as our ability to attract and retain customers is in part dependent upon the external perceptions of the Company, the quality of our products and services and our integrity. Damage to the reputation of any of these brands or negative publicity or perceptions about the Company could have an adverse impact upon our business, financial performance or results of operations.

We may be adversely affected by variations in the cost and availability of newsprint and newsprint prices have been rising since the second half of the year ended August 31, 2010.

Newsprint is our largest raw material expense, representing approximately 8% of total operating costs in the year ended August 31, 2011 (for the year ended August 31, 2010 –8%). Newsprint is a commodity and, as such, price varies considerably from time to time as a result of, among other factors, foreign currency exchange fluctuations and supply shortfalls. In recent years, the price of newsprint has generally increased as a result of various factors, including consolidation in the newsprint industry, which has resulted in a smaller number of suppliers and reduced competition on price among them, and declining newsprint supply as a result of mill closures and conversions to other grades of paper. Changes in newsprint prices can significantly affect our operating results. We would expect a $50 per tonne increase or decrease in the price of newsprint to affect our operating expenses by approximately $5.5 million on an annualized basis. As compared to the year ended August 31, 2010, newsprint cost per tonne has increased 13% due to both commodity price increases as well as increased use of specialty grades of newsprint.


There can be no assurances provided that we will not be exposed to additional increased newsprint costs, which could have a material adverse effect on our business, financial condition or results of operations. In addition, if newspaper suppliers experience labour unrest, transportation difficulties or other supply disruptions, our ability to produce and deliver newspapers could be impaired and the cost of the newsprint could increase, both of which would negatively affect our operating results.

We rely upon information systems and technology and other manufacturing systems, disruptions to which could adversely affect our operations.

Our newspaper and digital media and online operations rely upon information technology systems, and other complex manufacturing systems, in order to produce and distribute their products. Our information technology and manufacturing systems may be vulnerable to unauthorized access, computer viruses, system failures, human error, natural disasters, fire, power loss, communications failure or acts of sabotage or terrorism. If a significant disruption or repeated failure were to occur, our business or revenue could be adversely affected. There may also be significant costs incurred as a result of such disruptions or failures that adversely affect our financial performance or capital expenditure levels.

Our operations could be adversely affected by labour disruptions, and labour agreements limit our ability to achieve operating efficiencies.

Approximately 41% of our employees were employed under 40 separate collective agreements as of August 31, 2011. Certain collective agreements include provisions that could impede restructuring efforts, including work force reduction, centralization and outsourcing initiatives. Furthermore, a majority of our collective agreements contain provisions restricting outsourcing. We are currently in negotiations with 17 bargaining units regarding expired agreements covering the equivalent of 1,122 full-time employees. The remaining bargaining units will expire at various times through Fiscal 2014, with the exception of a small Montreal local of Compositors agreement which expires on May 31, 2017. On August 7, 2011 four bargaining units of Teamsters ratified the Montreal Gazette’s final contract offer, two bargaining units did not. The two units have been locked out. Operations are continuing using management staff. There can be no assurances provided that any of these collective agreements will be renewed on satisfactory terms or at all. Labour organizing activities could result in additional employees becoming unionized, which could result in higher ongoing labour costs and reduced flexibility in running our operations. In addition, labour disruptions or grievances could also affect our operations. In addition, certain unions have filed grievances against us alleging violations of one or more provisions of the applicable collective agreements. There can be no assurances provided that we will not experience other labour disruptions, or that a material grievance will not be decided against us, or that we will not experience other forms of labour protest. Any strike, lock out or other form of labour disruption could have a material adverse effect on our business, financial condition or results of our operations.

Equipment failure may have a material adverse effect on the Company.

There is a risk of equipment failure, primarily related to our printing facilities, due to wear and tear, latent defect, design error or operator error, among other things, which could have a material adverse affect on the Company. Although the Company’s printing facilities have generally operated in accordance with expectations, there can be no assurance that they will continue to do so.


We are subject to environmental, health and safety laws and regulations, which could subject us to liabilities, increase our costs or restrict our business or operations in the future.

We are subject to a variety of laws and regulations concerning emissions to the air, water and land, sewer discharges, handling, storage and disposal of, or exposure to, hazardous substances and wastes, recycling, remediation and management of contaminated sites, or otherwise relating to protection of the environment and employee health and safety. Environmental laws and regulations and their interpretation have become increasingly more stringent, and we may incur additional expenses to comply with existing or future requirements. If we fail to comply with environmental or health and safety requirements we could incur monetary fines, civil or criminal sanctions, third-party claims or cleanup obligations or other costs. In addition, our compliance with environmental, health and safety requirements could restrict our ability to expand our operations or require us to install costly pollution control equipment, incur other significant expenses or modify our printing processes.

We use and store hazardous substances such as inks and solvents in conjunction with our operations at our printing facilities. Such hazardous substances have in the past been stored in underground storage tanks at some of our properties. Some of our printing and other facilities are located in areas with a history of long-term industrial use, and they may be impacted by past activities onsite or by contamination emanating from nearby industrial sites. In the past, we have had contamination resulting from leaks and spills at some of our locations. We have not conducted environmental site assessments with respect to all of our owned and leased facilities, and where such assessments have been conducted, we may not have identified or be aware of all potential causes of environmental liability. There can be no assurances provided that remediation costs or potential claims for personal injury or property or natural resource damages resulting from any newly-occurring or newly-discovered contamination will not be material, or that a material environmental condition does not otherwise exist at any of our properties.

Our editorial content may be controversial and may result in litigation.

We have had, in the ordinary course of our business, and expect to continue to have, litigation claims filed against us, most of which are claims for defamation arising from the publication of our editorial content. While we maintain insurance in respect of claims for defamation, some claims made against us may not be insured or may result in costs above our coverage limits. In the event that a judgment is rendered against us, there can be no assurance that our insurance coverage will cover that particular loss.

We are currently involved in unresolved litigation matters.

Based on claims filed against Canwest Publications Inc. (“CPI”) during its CCAA proceedings, nine typographers represented by the Communications, Energy and Paperworkers’ Union of Canada, Local 145 (the “CEP”), are claiming $500,000 each and two independently represented typographers (collectively, the “Typographers”) are claiming $6,599,074 and $6,413,714 respectively. In addition, the Typographers have advanced a claim dated July 14, 2000 for further damages resulting from the same lockout. It is the position of Postmedia that prior arbitration and resulting court rulings have effectively already determined that this additional claim has no merit. In January 2011, the Ontario Superior Court of Justice determined that the claims of the five retired Typographers were properly compromised within the CCAA proceedings while six Typographers were assumed by Postmedia (the “Assumed Typographers”) when Postmedia acquired the assets and business of CPI. The litigation relating to the Assumed Typographers’ claims has proceeded to arbitration in Quebec. In 2009 the Arbitrator ruled that the claims of the Assumed Typographers were limited to the equivalent of nine months’ salary and benefits and were subject to a counterclaim for approximately the same amounts relating to amounts allegedly overpaid to the Typographers’ during the original lockout. Although we take the position that no amounts are owing to the Assumed Typographers on the merits of their claims in respect of their claims and intend to defend this position, we may be required to expend significant amount of capital and devote considerable management time to defend this claim. It is not possible to accurately predict the amount of expenses that will be incurred to resolve this matter. The damages owed and expenses incurred may be greater than expected.


On May 25, 2011 Postmedia was made aware of an application brought by CEP on April 20, 2011 against the Minister of Heritage under the Federal Courts Act seeking an order to quash his decision not to conduct a review of the Acquisition under the Investment Act Canada and seeking an order for such a review to be conducted by the Minister of Heritage. In the alternative, the CEP Application seeks an order directing the Minister of Heritage to reconsider his decision not to review the Acquisition, together with directions for the reconsideration. We are of the view that Postmedia is a Canadian controlled entity for purposes of the Investment Canada Act and, as such, Postmedia is not subject to the Investment Canada Act and we intend to defend our interests in these proceedings.

CEP further alleges that newspapers owned by Postmedia do not meet the definition of “Canadian newspapers” for purposes of the Tax Act, but for a grace period that ran until July 31, 2011 and that it is unlikely that Postmedia will be able to meet that requirement by the end of that grace period. However, Postmedia believes that, upon the listing of the Shares on the TSX on June 14, 2011, its newspapers met the definition of “Canadian newspapers” for purposes of the Tax Act. ”

Failure to comply with “Canadian newspaper” status would materially affect our financial results and our business prospects.

Under the Tax Act, generally no deduction is allowed for an outlay or expense for advertising space in an issue of a newspaper for an advertisement directed primarily to a market in Canada, unless the issue is a “Canadian issue” of a “Canadian newspaper.”

In order to qualify as a “Canadian issue”, the issue generally must have its type set in Canada, be edited in Canada by individuals resident in Canada for purposes of the Tax Act and be printed and published in Canada.

The test of whether a newspaper is a “Canadian newspaper” depends on the jurisdiction, governance, factual control and share ownership of the corporation which directly publishes the newspaper. The newspapers acquired pursuant to the Acquisition are directly published by Postmedia Network Inc. In order to satisfy the requirements of a “Canadian newspaper” (subject to a statutory 12 month grace period from the Acquisition Date), Postmedia Network Inc. must satisfy the following: (i) the corporation must be incorporated under the laws of Canada or a province thereof, (ii) the chairperson or other presiding officer and at least 75% of the directors or other similar officers of the corporation must be Canadian citizens, and (iii) the corporation must not be controlled, in fact, directly or indirectly, by persons or partnerships who could not themselves hold the right to produce and publish issues of a “Canadian Newspaper”, including citizens or subjects of a country other than Canada. In addition, under the share ownership requirements, at least 75% of the voting shares of Postmedia Network Inc. and shares having a fair market value in total of at least 75% of the fair market value of all issued shares of the corporation, must be beneficially owned by either (i) Canadian citizens or (ii) one or more Qualifying Public Corporations incorporated in Canada each of which is a public corporation a class or classes of shares of which are listed on a designated stock exchange in Canada other than a public corporation controlled by citizens or subjects of a country other than Canada. Postmedia Network Inc. is a wholly-owned subsidiary of Postmedia Network Canada Corp.; accordingly, the Corporation must itself be a Qualifying Public Corporation.

Issues of our newspapers qualify as “Canadian issues” of “Canadian newspapers” (or otherwise fall outside of the limitation on deductibility of advertising expenses) and as a result advertisers currently have the right to deduct their advertising expenditures for Canadian tax purposes. Specifically, upon the listing of the Shares, the Company became a Qualifying Public Corporation and, as such, our newspapers qualify as “Canadian newspapers”.

There can be no assurance that issues of the newspapers published or produced by us will continue to be “Canadian issues” of “Canadian newspapers” under the Tax Act, or that Canadian federal income tax laws respecting the treatment of deductibility of advertising expenses incurred in relation to “Canadian issues” of “Canadian newspapers” will not be changed in a manner which adversely affects us.


If our newspapers cease to be “Canadian newspapers” for purposes of the Tax Act, it is expected that our advertising revenue will decline significantly, which would have a material adverse effect on our business, financial condition and results of operations.

The collectability of accounts receivable could deteriorate to a greater extent than provided for in our financial statements.

In the normal course of business, we are exposed to credit risk for accounts receivable from our customers. Our accounts receivable are stated at net estimated realizable value and our allowance for doubtful accounts has been determined based on several factors, including the aging of accounts receivable, evaluation of significant individual credit risk accounts and historical experience. If such collectability estimates prove inaccurate, adverse adjustments to future operating results could occur and could be material.

We may have goodwill and intangible asset impairment charges

Pursuant to section 3064 of the Canadian Institute of Chartered Accountant’s Handbook, we evaluate annually (or upon the occurrence of a triggering event) our goodwill and other intangible assets to determine whether all or a portion of their carrying values may no longer be recoverable, in which case a charge to the statement of operations may be necessary. Canwest LP recorded a masthead impairment charge of $28.3 million in the year ended August 31, 2009 reflecting an impairment driven by the economic downturn. Should general economic, market or business conditions continue to decline, we may be required to record impairment charges in the future.

Disruptions in the credit markets could adversely affect the availability and cost of short-term funds for liquidity requirements, and could adversely affect our access to capital or our ability to obtain financing at reasonable rates and refinance existing debt at reasonable rates or at all.

If internal funds are not available from our operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs. Disruptions in the capital and credit markets could adversely affect our ability to access additional funds in the capital markets or draw on or refinance our new or any future credit facilities. Although we believe that our operating cash flow and access to capital and credit markets, including funds from our ABL Facility, will give us the ability to meet our financial needs for the foreseeable future, there can be no assurances provided that continued or increased volatility and disruption in the capital and credit markets will not impair our liquidity. If this should happen, we may not be able to put alternative credit arrangements in place or without a potentially significant increase in our cost of borrowing. As of August 31, 2011, we had the Canadian equivalent with a carrying amount of $572.3 million outstanding under our respective debt agreements, consisting of $259.1 million in respect of the Senior Secured Notes and $313.2 million Tranche C of the Term Loan Facility. In addition, as of August 31, 2011 we had availability of $37.3 million under the ABL Facility. The US dollar denominated debt has been converted to Canadian dollars at the closing rate as announced by the Bank of Canada as of August 31, 2011. No assurances can be provided that we will be able to refinance our indebtedness on attractive terms or at all.

We may be adversely affected by the availability and terms of our insurance policies.

We carry liability, property and casualty insurance and director and officer liability insurance coverage subject to certain deductibles, limits and exclusions which we believe are customary or reasonable given the cost of procuring insurance and current operating conditions. However, there can be no assurance that: (i) such insurance coverage will continue to be offered on economically feasible terms, (ii) all events which could give rise to a loss or liability will be insurable, or (iii) the amounts of insurance coverage will at all times be sufficient to cover each and every material loss or claim which may occur involving our assets or operations.


Our underfunded registered pension plans or our inability to make required cash contributions to our pension plans could have a material adverse effect on us, our business, cash flows, operations and financial condition.

We maintain several defined benefit and defined contribution plans providing pension and other retirement and post-employment benefits to our employees. Provincial pension legislation requires that the funded status of registered defined benefit pension plans be determined on both a going concern basis (which essentially assumes the pension plan continues indefinitely) and a solvency basis (which essentially assumes a cessation of a pension plan, and is based on statutory requirements). Based on our most recently filed actuarial valuations as of December 31, 2010 and a Canwest LP valuation dated December 31, 2008 the aggregate going concern unfunded liability was approximately $33.1 million and the aggregate wind up deficiency (which essentially assumed that all of the pension plans terminated on their actuarial valuation dates) was approximately $80.3 million. The actual funded status of our pension plans and our contribution requirements are dependent on many factors, including regulatory developments and changes to legislation, changes to the level of benefits provided by the plans, actuarial assumptions and methods used, changes in plan demographics and experience, and changes in the economic conditions, such as the return on fund assets and changes in interest rates and other factors. Additionally, significant changes in investment performance or in a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change to the expected rate of return on plan assets. Significant variations in pension performance could produce volatility in our reported results, and significant underfunding in our pension plans could necessitate higher company contributions to those plans.

Significant changes in pension fund investment performance or assumptions relating to pension costs may have a material effect on the valuation of pension obligations, the funded status of pension plans and our pension cost.

Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return on plan assets. A change in the discount rate could result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net pension cost in subsequent fiscal years. Similarly, changes in the expected return on plan assets can result in significant changes to the net pension cost of subsequent fiscal years.

We may be adversely affected by foreign exchange.

As of August 31, 2011, all of our borrowings are denominated in US dollars and interest, principal and premium, if any, on such borrowings must be paid in US dollars. Through the use of foreign currency interest rate swaps we have mitigated foreign currency risk on 82% of our US dollar-denominated debt as at August 31, 2011 (August 31, 2010 – 92%) but no assurance can be given that any such hedging will be successful. We are still exposed to foreign currency risk on the unswapped portion of our US dollar-denominated debt of US$111.9 million (August 31, 2010 - US$42.5 million). Canadian currency volatility has increased significantly and may retain the same level of volatility in the coming years. As a result, we have significant exposure to foreign currency exchange risk.

Our distribution costs could increase due to increases in fuel prices.

Although we do not incur significant fuel related distribution costs directly, our third-party distributors are adversely affected by rising fuel costs. Significant increases in fuel prices could result in increased fees paid to our distributors in the form of fuel subsidies or surcharges. Significant increases in fuel prices could result in material increases to our distribution expenses which could result in an adverse affect to our financial condition.


We outsource certain aspects of our business to third-party vendors that may fail to reduce costs and may subject us to risks, including disruptions in our business and increased costs.

We continuously seek to make our cost structure more efficient and to focus on our core strengths. These efforts include contracting with other companies to perform functions or operations that, in the past, we have performed ourselves. We currently rely on partners or third-party service providers for services such as the provision of advertising production, certain of our printing operations and call center services, and we may outsource additional business functions in the future. Although we believe that outsourcing will result in lower costs and increased efficiencies, this may not be the case. Because these third parties may not be as responsive to our needs as we might be ourselves or they experience problems to their own operations beyond our control, outsourcing increases the risk of disruption to our operations. If we are unable to effectively utilize, or integrate with, our outsource providers, or if these partners or third-party service providers experience business difficulties or are unable to provide business services as anticipated, we may need to seek alternative service providers or resume providing these business processes internally, which could be costly and time-consuming and have a material adverse effect on our operating and financial results.

Our business may suffer if we are not able to retain and attract sufficient qualified personnel, including key managerial, editorial, technical, marketing and sales personnel.

We operate in an industry where there is intense competition for experienced personnel. We depend on our ability to identify, recruit, hire, train, develop and retain qualified and effective personnel. Our future success depends in large part upon the continued contribution of our senior management and other key employees. A loss of a significant number of skilled managerial, editorial or technical personnel would have a negative effect on the quality of our products. Similarly, a loss of a significant number of experienced and effective marketing and sales personnel would likely result in fewer sales of our products and could materially and adversely affect our results of operations and financial condition. Our ability to identify, recruit, hire, train, develop and retain qualified and effective personnel depends on numerous factors, including factors that we cannot control, such as competition and conditions in the local employment markets in which we operate. The loss of the services of any of our senior management or other key employees could harm our business and materially and adversely affect our ability to compete in our markets. Although we have employment agreements with certain members of senior management and key employees, those individuals may choose to terminate their respective employment at any time, and any such termination may have a material adverse effect on our business.

The occurrence of natural or man-made disasters could disrupt the marketing and promotion and delivery of our products and services, and adversely affect our financial condition and results of operation.

The success of our businesses is largely contingent on the availability of direct access to customers. As a result, any event that disrupts or limits our direct access to customers or disrupts our ability to rely on delivery services would materially and adversely affect our business. We are exposed to various risks arising out of natural disasters, as well as man-made disasters, including acts of terrorism and military actions. The threat of terrorism and ongoing military actions may cause significant volatility in global financial markets, and a natural or man-made disaster could trigger an economic downturn in the areas directly or indirectly affected by the disaster. These consequences could, among other things, result in a decline in business from those areas. Disasters also could disrupt public and private infrastructure, including communications and financial services, which could disrupt our normal business operations. In addition, increased energy costs, strikes and other labour-related supply chain disruptions could adversely affect our business. A natural or man-made disaster also could disrupt the operations of our counterparties or result in increased prices for the products and services they provide to us.


We have become subject to the requirements of Regulation 52-109 on Certification of Disclosure in Issuers’ Annual and Interim Filings and the Sarbanes Oxley Act and must devote time and resources to maintain compliance.

As a result of listing our Shares on the TSX and our SEC-registered exchange offer for our Senior Secured Notes in the year ended August 31, 2011, we became subject to the requirements of Regulation 52-109 and the Sarbanes Oxley Act, which requires, among other things, public companies to maintain disclosure controls and procedures to ensure timely disclosure of material information, and for foreign private issuers like the Company, to have management review the effectiveness of those controls on an annual basis. These requirements may place a strain on our systems and resources. Sarbanes-Oxley also requires public companies to have and maintain internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements and to have management review the effectiveness of those controls on an annual basis following the filing of a company’s first annual report. In order to maintain and improve our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

If we fail to maintain an effective system of internal controls, we may not be able to provide timely and reliable financial reports.

We are responsible for establishing and maintaining adequate internal control over financial reporting, which is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our business could be adversely affected by a change of laws

Changes to the laws, regulations and policies governing our operations, the introduction of new laws, regulations or policies and changes to the treatment of the tax deductibility of advertising expenditures could have a material effect on our business, financial condition, prospects and results of operations. In addition, we may incur increased costs in order to comply with existing and newly adopted laws and regulations or pay penalties for any failure to comply. It is difficult to predict in what form laws and regulations will be adopted or how they will be construed by the relevant courts, or the extent to which any changes might adversely affect us.


Risks Relating to Our Indebtedness

Our substantial indebtedness could adversely affect our financial condition.

As of August 31, 2011, the total carrying value of amounts outstanding under our respective debt agreements was $572.3 million, excluding $37.3 million of availability under our ABL Facility.

Subject to the limits contained in the credit agreements governing the ABL Facility and the Term Loan Facility, the indenture that governs the Notes and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of debt could intensify. Specifically, our level of debt could have important consequences, including the following:

• making it more difficult for us to satisfy our obligations with respect to the Notes and our other debt; • limiting our ability to obtain additional financing to fund future working capital, capital expenditures,

acquisitions or other general corporate requirements; • requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of

other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

• increasing our vulnerability to general adverse economic and industry conditions; • exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings

under the ABL Facility and the Term Loan Facility, are at variable rates of interest; • limiting our flexibility in planning for and reacting to changes in the industry in which we compete; • placing us at a disadvantage compared to other, less leveraged competitors; and • increasing our cost of borrowing.

In addition, the indenture that governs the Notes and the credit agreements governing the ABL Facility and the Term Loan Facility contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debts.

Despite our current level of indebtedness, we may be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.

Our operating subsidiary may be able to incur significant additional indebtedness in the future. Although the indenture that governs the Notes and the credit agreements that govern the ABL Facility and the Term Loan Facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and the additional indebtedness incurred in compliance with these exceptions could be substantial. Additionally, the ABL Facility provides commitments of up to $60 million in the aggregate, subject to the Borrowing Base and excess availability requirements, and the Term Loan Facility provide us with the ability to incur up to an additional US$50 million in incremental term loan facilities subject to certain conditions. All of those borrowings would be secured indebtedness. If new debt is added to our current debt levels, the related risks that we and our subsidiary now face could intensify.


The terms of the ABL Facility, the Term Loan Facility and the indenture that governs the Notes, restricts our operating subsidiary’s current and future operations, particularly our ability to respond to changes or to take certain actions.

The indenture that governs the Notes and the credit agreements governing the ABL Facility and the Term Loan Facility contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including, among other things, restrictions on our ability to:

• incur additional indebtedness;

• pay dividends or make other distributions or repurchase or redeem certain indebtedness or capital stock;

• make loans and investments;

• sell assets;

• incur certain liens;

• enter into transactions with affiliates;

• alter the businesses we conduct;

• enter into agreements restricting our subsidiary’s ability to pay dividends; and

• consolidate, merge or sell all or substantially all of our assets.

There are limitations on our ability to incur the full $60 million of commitments under the ABL Facility. Availability will be limited to the lesser of the Borrowing Base and $60 million, in each case subject to reduction for a required excess availability amount of $15 million. The Borrowing Base is calculated on a monthly (or more frequently under certain circumstances) valuation of eligible accounts receivable. As a result, access to credit under the ABL Facility is potentially subject to significant fluctuation, depending on the value of the Borrowing Base eligible assets as of any measurement date. The ABL Facility provides the lenders considerable discretion to impose reserves, which could materially impair the amount of borrowings that would otherwise be available. There can be no assurances provided that the lenders under the ABL Facility will not impose such actions during the term of the ABL Facility and further, were they to do so, the resulting impact of this action could materially and adversely impair our subsidiary’s ability to make interest payments. The inability to borrow under the ABL Facility may adversely affect our liquidity, financial position and results of operations. As at August 31, 2011, no amounts were drawn under the ABL Facility and we had availability of $37.3 million.

In addition, the restrictive covenants in the credit agreement governing the Term Loan Facility will require the Company to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet them. Access to the US$50 million incremental term loan facilities is also subject to certain conditions, and there is no guarantee we will meet those conditions and have access to such facilities.


A breach of the covenants under the indenture that governs the Notes or under the credit agreements that govern the ABL Facility and the Term Loan Facility could result in an event of default under the applicable indebtedness. Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the ABL Facility would permit the lenders under the ABL Facility to terminate all commitments to extend further credit under such facility. Furthermore, if the Company were unable to repay the amounts due and payable under the ABL Facility, the Notes or the Term Loan Facility, the applicable lenders could proceed against the collateral granted to such lenders to secure the indebtedness under the applicable facility. As a result of these restrictions, we may be:

• limited in how we conduct our business; • unable to raise additional debt or equity financing to operate during general economic or business

downturns; or • unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our plans.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.

Borrowings under the ABL Facility and the Term Loan Facility are at variable rates of interest and expose us to interest rate risk. As at August 31, 2011, we have total principal borrowings of $285.9 million that bear interest at variable rates, representing 47% of the total principal debt of the Company at such date. If interest rates increase, our subsidiary’s debt service costs on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing such indebtedness, would correspondingly decrease.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations and derivative financial instruments depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the future amounts due on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service and derivative financial instrument obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service and derivative financial instrument obligations. The credit agreements that govern the ABL Facility and the Term Loan Facility and the indenture that governs the Notes will restrict our ability to dispose of assets and use the proceeds from any such dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service and derivative financial instrument obligations then due.


Our inability to generate sufficient cash flows to satisfy our debt and derivative financial instrument obligations, or to refinance indebtedness on commercially reasonable terms or at all, would materially and adversely affect our business, financial position and results of operations, and our ability to satisfy such obligations.

If we cannot make scheduled payments on our debt, we will be in default and, as a result, holders of the Notes could declare all outstanding principal and interest to be due and payable, the lenders under the ABL Facility could terminate their commitments to loan money and our secured lenders, including under the ABL Facility and the Term Loan Facility, could foreclose on or exercise other remedies against the assets securing such borrowings on a basis senior to the Notes and we could be forced into bankruptcy, liquidation or other insolvency proceedings.

Risks Relating to Our Shares

An active public market for the Shares has not yet been developed

On June 14, 2011 our Shares began trading on the Toronto Stock Exchange. An active public market for the Shares has not yet developed and, if developed, may not be sustained. If an active public market does not develop, the liquidity of an investment in our Shares may be limited.

Volatile market price for the Shares

The market price for the Shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following:

• actual or anticipated fluctuations in the Company’s quarterly results of operations;

• changes in estimates of future results of operations by the Company or securities research analysts;

• changes in the economic performance or market valuations of other companies that investors deem comparable to the Company;

• addition or departure of the Company’s executive officers and other key personnel;

• release or other transfer restrictions on outstanding Shares;

• sales or perceived sales of additional Shares;

• our dual class share structure;

• significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors; and

• news reports relating to trends, concerns or competitive developments, regulatory changes and other related issues in the Company’s industry or target markets.

Financial markets have recently experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have, in many cases, been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. As well, certain institutional investors may base their investment decisions on consideration of the Company’s environmental, governance and social practices and performance against such institutions’ respective investment guidelines and criteria, and failure to meet such criteria may result in a limited or no investment in the Shares by those institutions, which could adversely affect the trading price of the Shares. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Shares may be adversely affected.


We have a dual class share structure

Our authorized capital consists of two classes: Voting Shares and Variable Voting Shares. The Voting Shares may only be beneficially owned and controlled, directly and indirectly, by persons that are not Non-Canadians. An outstanding Variable Voting Share will be converted into one Voting Share, automatically and without any further act of the Company or the holder, if such Variable Voting Share is not or ceases to be beneficially owned or controlled, directly or indirectly, by one or more Non-Canadians. In addition to the automatic conversion feature, a holder of Voting Shares shall have the option at any time to convert some or all of such shares into Variable Voting Shares on a one-for-one basis and to convert those shares back to Voting Shares on a one-for-one basis. Given these conversion features and the fact that the Company will not know whether a purchaser of Variable Voting Shares is not a Non-Canadian unless such person completes a declaration provided by our transfer agent from time to time, the transfer agent’s records of the amount of Voting Shares and Variable Voting Shares outstanding at any one time may not be accurate. As we believe that the issued and outstanding Variable Voting Shares currently represent more than 97% of the outstanding Shares, if a person who is not a Non-Canadian acquires Variable Voting Shares such Shares would automatically convert into a larger percentage of the outstanding Voting Shares. In certain circumstances, such an acquisition may constitute an indirect take-over bid under applicable securities laws and require the offeror to make a formal take-over bid for the outstanding Voting Shares or, alternatively, rely on certain exemptions from the formal take-over bid requirements under applicable securities laws. As a result, persons who are not Non-Canadians may purchase fewer Variable Voting Shares then they otherwise would have, which could, in turn, result in the Shares being relatively illiquid and could also adversely affect the prevailing market price of the Shares. Purchasers of our Shares should consider applicable take-over bid laws as well as the Postmedia Rights Plan prior to purchasing Shares that may represent more than 20% of any class. In addition, one class of Shares may be less liquid than the other and the classes of shares may have different trading prices.

Postmedia Network Canada Corp. is a holding company

Postmedia Network Canada Corp. (“PNCC”) is a holding company and a substantial portion of its assets are the capital stock of its subsidiary, Postmedia Network Inc. (“PMNI”). As a result, investors in PNCC are subject to the risks attributable to PMNI. As a holding company, PNCC conducts substantially all of its business through PMNI, which generates substantially all of its revenues. Consequently, PNCC’s cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of PMNI and the distribution of those earnings to PNCC. The ability of PMNI to pay dividends and other distributions will depend on its operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained, and contractual restrictions contained in the instruments governing its debt. In the event of a bankruptcy, liquidation or reorganization of PMNI, holders of indebtedness and trade creditors will generally be entitled to payment of their claims from the assets of the subsidiary before any assets are made available for distribution to PNCC.

Future sales of Shares by directors and executive officers

Subject to compliance with applicable securities laws, officers and directors and their affiliates may sell some or all of their Shares in the future. No prediction can be made as to the effect, if any, such future sales of Shares will have on the market price of the Shares prevailing from time to time. However, the future sale of a substantial number of Shares by the Company’s officers and directors and their affiliates, or the perception that such sales could occur, could adversely affect prevailing market prices for the Shares.


Dilution and future sales of Shares may occur

The Company’s articles permit the issuance of an unlimited number of Shares, and shareholders will have no pre-emptive rights in connection with such further issuances. The directors of the Company have the discretion to determine the price and the terms of issue of further issuances of Shares.

Share Capital

As at October 25, 2011 we had the following number of shares and options outstanding:

Class C voting shares 1,191,868 Class NC variable voting shares 39,131,302 Total shares outstanding 40,323,170 Total options and restricted share units outstanding (1)

1,880,000

(1) The total options and restricted share units outstanding are convertible into 1.8 million Class C voting shares and 0.1 million Class NC variable voting shares. The total options outstanding include 0.8 million options that are vested and 1.1 million options that are unvested.


Reconciliation of Non-GAAP Financial Measures

The following table provides a reconciliation of operating profit before amortization, restructuring and other items to net earnings (loss), the most closely comparable GAAP measure for the following periods. We believe this non-GAAP measure is useful to investors as it is an indicator of our operating performance and ability to incur and service debt. In addition, it allows us to meaningfully compare our results to our predecessor as it excludes both amortization expense, which is not comparable between Postmedia and our predecessor as a result of the changes in the value of our assets because of the Acquisition, and restructuring and other items expense, which relates mainly to severance costs related to the restructuring of the operations incurred as a result of the Acquisition which are not comparable to the restructuring expense recorded by our predecessor. Management uses this non-GAAP measure to make operating decisions as it is an indicator of how much cash is being generated by our operations and assists in determining the need for additional cost reductions, evaluation of personnel and resource allocation decisions. Finally, this non-GAAP measure is the primary measure used by our creditors to assess our performance and compute our financial maintenance covenants contained in our Term Loan Facility.

Postmedia Canwest LP (2) ($ in thousands of Canadian dollars)

For the year


For the three

months ended August 31, 2011

For the period

July 13, 2010 to August 31, 2010


2010

For the period

September 1, 2009 to May 31,

2010

For the year


Net earnings (loss) ............................................. (12,938) (2,312) (44,618) n/a (1) 94,869 (122,110) Recovery of income taxes - - - n/a (1) (18,111) (8,893) Net earnings (loss) before income taxes (12,938) (2,312) (44,618) (3,330) 76,758 (131,003) Acquisition costs 1,217 - 18,303 - - - Reorganization costs - - - 16,500 41,192 25,756 Interest expense, excluding loss on debt prepayment

80,315

18,189 12,702

4,498

60,633

98,426

Loss on debt prepayment 11,018 - Other income - - - (283) (1,501) (2,500) Loss (gain) on disposal of property and equipment and intangible assets

175

63 -

-

(2)

(2,186)

Loss on disposal of interest rate swap - - - - - 180,202 Ineffective portion of hedging derivative instruments

-

- -

-

-

60,112

Loss (gain) on derivative financial instruments 21,414 (8,059) (7,550) - - - Impairment loss on masthead - - - - - 28,250 Foreign currency exchange losses (gains) (17,960) 4,605 9,607 (4,542) (49,610) (154,513) Restructuring of operations and other items …. 42,775 2,902 11,209 (518) 2,660 28,805 Amortization……………………. 75,092 18,575 11,073 7,136 30,736 40,535 Operating profit before amortization, restructuring and other items

201,108

33,963 10,726

19,461

160,866

171,884

Notes: (1) As Canwest LP was under the liquidation basis of accounting for the period from June 1, 2010 to July 12, 2010, the supplementary financial information in note 5 of the audited financial statements of Canwest LP did not include a provision for income taxes. Therefore, in the period from June 1, 2010 to July 12, 2010 no income tax provision is reflected and as a result net earnings has also not been presented. (2) We have included historical consolidated financial information of Canwest LP to provide historical consolidated financial data of the operations we acquired. However, Canwest LP’s historical consolidated financial information is not comparable to our consolidated financial information and readers are cautioned that such information is not indicative of the future financial condition, results of operations, cash flows and the future development of our business.


POSTMEDIA NETWORK CANADA CORP. CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED AUGUST 31, 2011 AND THE PERIOD ENDED AUGUST 31, 2010

Issued: October 27, 2011


Management’s Responsibility for Consolidated Financial Statements

The accompanying consolidated financial statements of Postmedia Network Canada Corp. and its subsidiaries (the “Company”) are the responsibility of management and have been approved by the Board of Directors of Postmedia Network Canada Corp. Management is responsible for the preparation of the consolidated financial statements in conformity with generally accepted accounting principles, the selection of accounting policies and making significant accounting judgments and estimates. Management is also responsible for all other financial information included in the annual report and for ensuring that this information is consistent, where appropriate, with the information contained in the consolidated financial statements. Management is responsible for establishing and maintaining adequate internal control over financial reporting which includes those policies and procedures that provide reasonable assurance over the completeness, fairness and accuracy of the consolidated financial statements and other financial items. The Board of Directors fulfills its responsibility for the consolidated financial statements principally through its Audit Committee, which is comprised of independent external directors. The Audit Committee reviews the Company’s annual consolidated financial statements and recommends their approval to the Board of Directors. The Audit Committee meets with the Company’s management and external auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues, and formulates the appropriate recommendations to the Board of Directors. The auditor appointed by the shareholders has full access to the Audit Committee, with or without management being present.

Paul Godfrey Doug Lamb President and Chief Financial Officer and Chief Executive Officer Executive Vice President

Toronto, Canada October 27, 2011

The external auditors appointed by the Company’s shareholders, PricewaterhouseCoopers LLP, conduct an independent audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and express their opinion thereon. Those standards require that the audit is planned and performed to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.


October 27, 2011

Independent Auditor’s Report

To the Shareholders of Postmedia Network Canada Corp. We have audited the accompanying consolidated financial statements of Postmedia Network Canada Corp. and its subsidiaries, which comprise the consolidated balance sheets as at August 31, 2011 and 2010 and the consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for the year ended August 31, 2011 and for the period from April 26, 2010 to August 31, 2010, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

"PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

PricewaterhouseCoopers LLP, Chartered Accountants One Lombard Place, Suite 2300 Winnipeg, Manitoba Canada R3B 0X6 Telephone +1 (204) 926 2400 Facsimile +1 (204) 944 1020


An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Postmedia Network Canada Corp. and its subsidiaries as at August 31, 2011 and 2010 and the results of their operations and their cash flows for the year ended August 31, 2011 and for the period from April 26, 2010 to August 31, 2010 in accordance with Canadian generally accepted accounting principles.

Chartered Accountants Winnipeg, Canada


POSTMEDIA NETWORK CANADA CORP. CONSOLIDATED STATEMENTS OF OPERATIONS

For the year ended August 31, 2011 and the period from April 26, 2010 to August 31, 2010 (with operations commencing on July 13, 2010) (note 1) (In thousands of Canadian dollars)

See accompanying notes to consolidated financial statements.

2011 2010

Revenues Print advertising 674,451 75,624 Print circulation 233,984 31,721 Digital 90,282 10,751 Other 20,408 3,998

1,019,125 122,094 Expenses Compensation 423,512 62,422 Newsprint 62,125 8,175 Other operating 332,380 40,771 Amortization 75,092 11,073 Restructuring of operations and other items (note 4) 42,775 11,209 Operating income (loss) 83,241 (11,556) Interest expense, excluding loss on debt prepayment 80,315 12,702 Loss on debt prepayment (note 11) 11,018 - Loss on disposal of property and equipment and intangible assets 175 - Loss (gain) on derivative financial instruments (note 5) 21,414 (7,550) Foreign currency exchange (gains) losses (17,960) 9,607 Acquisition costs (note 3) 1,217 18,303 Loss before income taxes (12,938) (44,618) Provision for income taxes (note 6) - - Net loss (12,938) (44,618)

Loss per share (note 13): Basic (0.32)$ (1.11)$ Diluted (0.32)$ (1.11)$


POSTMEDIA NETWORK CANADA CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS



2011 2010

Net loss (12,938) (44,618)

Other comprehensive lossUnrealized loss on valuation of derivative financial instruments,

net of tax of nil (2010 - nil) (note 17) (1,573) (13,263) (1,573) (13,263)

Comprehensive loss (14,511) (57,881)


POSTMEDIA NETWORK CANADA CORP. CONSOLIDATED BALANCE SHEETS

As at August 31, 2011 and 2010 (In thousands of Canadian dollars)

See accompanying notes to consolidated financial statements

2011 2010

ASSETS

Current Assets Cash 10,483 40,201 Accounts receivable 118,577 116,417 Inventory (note 7) 5,834 6,187 Prepaid expenses and other assets 15,928 14,873

150,822 177,678

Property and equipment (note 8) 336,268 355,194 Derivative financial instruments (note 9) 13,817 15,831 Other assets 3,211 4,208 Intangible assets (note 10) 440,032 477,200 Goodwill (note 3) 236,093 236,093

1,180,243 1,266,204


POSTMEDIA NETWORK CANADA CORP. CONSOLIDATED BALANCE SHEETS (continued)

As at August 31, 2011 and 2010 (In thousands of Canadian dollars)

On behalf of the Board of Directors:

Signed Signed

Paul Godfrey Ron Osborne

Director Director


2011 2010

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities Accounts payable 8,330 12,705 Accrued liabilities 80,262 100,716 Deferred revenue 30,494 32,096 Current portion of derivative financial instruments (note 9) 12,307 3,685 Current portion of long-term debt (note 11) 16,862 13,499 Current portion of obligation under capital lease - 1,841

148,255 164,542

Long-term debt (note 11) 555,436 632,532 Derivative financial instruments (note 9) 31,093 558 Obligation under capital lease 134 128 Pension, post-retirement, post-employment and other liabilities (note 12 140,302 152,361 Future income taxes (note 6) 681 681

875,901 950,802

Shareholders' Equity Capital stock (note 13) 371,132 371,132 Contributed surplus (note 15) 5,602 2,151

Deficit (57,556) (44,618) Accumulated other comprehensive loss (14,836) (13,263)

(72,392) (57,881) 304,342 315,402

1,180,243 1,266,204

Commitments and contingencies (note 18)Subsequent event (note 21)


POSTMEDIA NETWORK CANADA CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


�


Balance as at August 31, 2010 371,132 2,151 (44,618) (13,263) 315,402 Net loss - - (12,938) - (12,938) Other comprehensive loss - - - (1,573) (1,573) Stock-based compensation (note 15) - 3,451 - - 3,451 Balance as at August 31, 2011 371,132 5,602 (57,556) (14,836) 304,342

Balance as at April 26, 2010 - - - - - Shares issued (note 13) 373,362 - - - 373,362 Share issuance costs (note 13) (2,230) - - - (2,230) Net loss - - (44,618) - (44,618) Other comprehensive loss - - - (13,263) (13,263) Stock-based compensation (note 15) - 2,151 - - 2,151 Balance as at August 31, 2010 371,132 2,151 (44,618) (13,263) 315,402

2010

Capital stock

Contributed surplus Deficit

Accumulated other

comprehensive loss

Total Shareholders'

equity

2011

Capital stock Deficit

Accumulated other

comprehensive loss

Total Shareholders'

equityContributed

surplus


POSTMEDIA NETWORK CANADA CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS



2011 2010CASH GENERATED (UTILIZED) BY:

OPERATING ACTIVITIESNet loss (12,938) (44,618) Items not affecting cash: Amortization 75,092 11,073 Loss (gain) on derivative financial instruments (note 5) 15,410 (7,774) Non-cash interest 9,399 1,658 Non-cash loss on debt prepayment 9,635 - Loss on disposal of property and equipment and intangible assets 175 - Non-cash foreign currency exchange (gains) losses (20,405) 9,591 Stock-based compensation (note 15) 7,021 3,600 Excess of employer contributions over pension and post-retirement/employment expense (note 12) (15,955) (336) Net change in non-cash operating accounts (note 16) (28,815) 44,308 Cash flows from operating activities 38,619 17,502

INVESTING ACTIVITIESAcquisition, net of cash acquired (note 3) - (839,669) Proceeds from the sale of property and equipment 1,226 - Additions to property and equipment (11,663) (761) Additions to intangible assets (8,736) (679) Cash flows from investing activities (19,173) (841,109)

FINANCING ACTIVITIESProceeds from issuance of long-term debt (note 11) 350,835 684,824 Repayment of long-term debt (note 11) (47,472) (34,661) Repayment of long-term debt on refinancing (note 11) (345,242) - Debt issuance costs (note 11) (5,444) (35,624) Equity issuance costs (note 13) - (2,230) Issuance of capital stock (notes 3 and 13) - 253,225 Payment on capital lease (1,841) (1,726) Cash flows from financing activities (49,164) 863,808

Net change in cash (29,718) 40,201 Cash at beginning of period 40,201 - Cash at end of period 10,483 40,201


POSTMEDIA NETWORK CANADA CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the year ended August 31, 2011 and the period from April 26, 2010 to August 31, 2010 (with operations commencing on July 13, 2010) (note 1) (In thousands of Canadian dollars, except as otherwise noted)

1. DESCRIPTION OF BUSINESS

Postmedia Network Canada Corp. (“Postmedia” or the “Company”) is a holding company that has a 100% interest in its subsidiary Postmedia Network Inc. (“Postmedia Network”). The Company was incorporated on April 26, 2010, pursuant to the Canada Business Corporations Act, to enable the purchase of the assets and certain liabilities of Canwest Limited Partnership (“Canwest LP”) on July 13, 2010 (the “Acquisition Date”) (note 3). These consolidated financial statements include the operations of Postmedia Network Inc. and, until January 31, 2011, its wholly owned subsidiary, National Post Inc. (“National Post”). On January 31, 2011 National Post was dissolved and all its assets and liabilities were transferred to Postmedia Network. The comparative consolidated statement of operations, consolidated statement of comprehensive loss and consolidated statement of cash flows have been presented for the period from April 26, 2010 to August 31, 2010, with operations commencing on July 13, 2010.

The Company’s operations consist of news and information gathering and dissemination operations, with products offered in a number of markets across Canada through a variety of daily and community newspapers, online, digital and mobile platforms. Additionally, the Company operates digital media and online assets including the canada.com network, FPinfomart.ca and each newspaper’s online website. The Company supports these operations through a variety of centralized shared services.

2. SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements are prepared on a going concern basis in accordance with Canadian Generally Accepted Accounting Principles – Part V of the Canadian Institute of Chartered Accountants Handbook (“Canadian GAAP”) and reflect all adjustments which are, in the opinion of management, necessary for fair statement of the results presented. The following is a summary of the significant accounting policies:

(a) Principles of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances are eliminated on consolidation.

(b) Use of estimates

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related amounts of revenues and expenses, and disclosures of contingent assets and liabilities. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results could differ from those estimates.


(c) Foreign currency translation

At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars using the foreign currency exchange rate in effect at that date. Revenues and expense items are translated at the foreign currency exchange rate in effect when the transaction occurred. The resulting foreign currency exchange gains and losses are recognized in the statement of operations.

(d) Property and equipment

Property and equipment are recorded at cost. Amortization is provided for on a straight-line basis over the following useful lives:

Amortization expense related to property and equipment under capital lease is included in amortization expense in the statement of operations.

(e) Impairment of long lived assets

The Company reviews long lived assets with definite useful lives, and recognizes impairments when an event or change in circumstances indicates that the assets’ carrying value will exceed the total undiscounted cash flows expected from its use and eventual disposition. An impairment loss is calculated by deducting the fair value of the asset from its carrying value.

(f) Goodwill and intangible assets

Goodwill and intangible assets with indefinite useful lives are not amortized.

The goodwill in these consolidated financial statements as at August 31, 2011 and 2010 relate solely to the acquisition as described in Note 3 and represents the excess consideration transferred over the fair value of net identifiable assets acquired and the liabilities assumed.

Goodwill is tested for impairment annually or when events or a change in circumstances occurs that more likely than not reduces the fair value of the reporting unit below carrying value. Goodwill is tested for impairment by comparing the fair value of a particular reporting unit to its carrying value. When the carrying value exceeds its fair value, the fair value of the reporting unit’s goodwill is compared with its carrying value to measure any impairment loss and the loss is recognized in the statement of operations. The goodwill impairment analysis requires the Company to make various judgments, estimates and assumptions, about future revenues, operating profits, growth rates, capital expenditures, and discount rates. The starting point for the assumptions used in the Company’s analysis is the Company’s annual forecast which takes into consideration a multitude of factors, including historical growth rates and operating performance, related industry trends and economic conditions, among others. Assumptions are also made for growth rates for periods beyond the annual forecast. The estimates of fair value are sensitive to changes in all of these variables, certain of which are outside the Company’s control.

Assets

Buildings 10 - 40 yearsMachinery and equipment 2 - 20 years

Estimated Useful Life


Intangible assets, including newspaper mastheads and the related domain names have been recorded based on their fair values on the Acquisition Date as described in note 3. The mastheads and certain domain names related to the online newspaper websites have indefinite lives, are not subject to amortization and are tested for impairment annually or more frequently if events or changes in circumstances indicate the asset may be impaired. Impairment of an indefinite life intangible asset is recognized in an amount equal to the difference between the carrying value and the fair value of the related indefinite life intangible asset.

The significant estimates and assumptions used by management in assessing the recoverability of goodwill and intangible assets are primarily estimated future cash flows, discount rates and growth rates. Any changes in these estimates or assumptions could result in an impairment charge. The estimates, based on reasonable and supportable assumptions and projections, require management’s subjective judgment. Depending on the assumptions and estimates used, the results of the impairment tests can vary within a range of outcomes.

Intangible assets include internally generated software. Costs of internally generated software comprise all directly attributable costs necessary to create, produce and prepare the software to be capable of operating in the manner intended by management. All costs incurred during the research and planning phase are expensed as incurred. Development costs that are directly attributable to the design and testing are recognized as intangible assets.

Intangible assets with definite useful lives are amortized over their useful life using the straight-line method over the following periods:

(g) Revenue recognition

Print advertising revenue is recognized when advertisements are published. Print circulation revenue includes home-delivery subscriptions and single copy sales at newsstands and vending machines. Print circulation revenue from subscriptions is recognized on a straight-line basis over the term of the subscriptions. Print circulation revenue from single-copy sales at newsstands and vending machines, net of a provision for estimated returns based on historical rate of returns, is recognized when the newspapers are delivered. Digital revenue is recognized when advertisements are placed on the Company’s websites or, with respect to certain online advertising, each time a user clicks on certain ads. Digital revenue also includes subscription revenue for business research and corporate financial information services and is recognized on a straight-line basis over the term of the subscriptions or contracts. Other revenue is recognized when the related service or product has been delivered. Amounts received relating to services to be performed in future periods are recorded as deferred revenue on the consolidated balance sheet.

Assets

Software 2 - 10 yearsSubscribers 5 yearsCustomer relationships 4 - 5 yearsDomain names 15 years

Estimated Useful Life


(h) Income taxes

The asset and liability method is used to account for future income taxes. Under this method, future income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Future income tax assets and liabilities are measured using substantively enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the substantive enactment date. Future income tax assets are recognized to the extent that realization is considered more likely than not.

(i) Inventory

Inventory, consisting of primarily printing materials, is valued at the lower of cost, using the first-in-first out cost formula, and net realizable value. Inventories are written down to net realizable value if the cost of the inventories exceeds its net realizable value. Reversals of previous write-downs to net realizable value are required when there is a subsequent increase in the value of inventories.

(j) Business combinations

The Company uses the acquisition method of accounting to record business combinations. The acquisition method of accounting requires the Company to recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree measured at the acquisition-date fair values. The consideration transferred shall be measured at fair value calculated as the sum of the acquisition-date fair values of the assets transferred by the Company, the liabilities incurred by the Company and any equity interests issued by the Company. Contingent consideration is recognized as part of the consideration transferred. Goodwill as of the acquisition-date is measured as the excess of the consideration transferred and the amount of any non-controlling interest acquired over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, measured at fair value. Acquisitions costs are expensed in the period they are incurred except for those costs to issue equity securities which are offset against the related equity instruments and those costs to issue debt which are offset against the corresponding debt and amortized using the effective interest method. Acquisition related costs include advisory, legal, accounting, valuation and other professional or consulting fees; and costs of registering and issuing debt and securities.


(k) Financial instruments, derivatives and hedge accounting

Financial instruments are classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables or other financial liabilities, and measurement in subsequent periods depends on their classification. The Company has classified its financial instruments, excluding derivative financial instruments, as follows:

� Cash, accounts receivable and other long-term receivables included in other assets are considered loans and receivables;

� Accounts payable, accrued liabilities, long-term debt and other long-term payables are considered other financial liabilities.

Upon initial recognition all financial instruments are recorded on the consolidated balance sheet at their fair values. After initial recognition, financial instruments are measured at their fair values, except for loans and receivables and other financial liabilities which are measured at amortized cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash flows through the expected life of the financial instrument to its net carrying amount. Financing fees related to other financial liabilities are recorded as a reduction to the carrying amounts and amortized using the effective interest rate method. Financing fees related to revolving debt arrangements are initially recognized as an other asset and amortized over the term of the arrangement in interest expense. The Company uses trade date accounting.

Collectability of trade receivables is reviewed on an ongoing basis. An allowance account is used when there is objective evidence that a receivable is impaired and it is probable that the Company will not collect all contractual amounts due. The factors that are considered in determining if a trade receivable is impaired include historical experience, analysis of aging reports and specific factors including, whether a customer is in bankruptcy, under administration or if payments are in dispute. The offsetting expense is recognized in the statement of operations within other operating expenses. When a trade receivable for which an impairment allowance had been recognized becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against operating expenses in the statement of operations.

The Company uses derivative financial instruments to manage its exposure to fluctuations in foreign currency rates and interest rates. The Company does not hold or use any derivatives instruments for trading purposes. Derivative financial instruments are initially recognized at fair value on the date a contract is entered into and are subsequently re-measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative financial instrument is designated as a hedging instrument and the nature of the item being hedged. Under hedge accounting, the Company documents all hedging relationships between hedging items and hedged items, as well as its strategy for using hedges and its risk management objective. The Company assesses the effectiveness of derivative financial instruments when the hedge is entered into and on an ongoing basis.


The Company uses foreign currency interest rate swaps to hedge (i) the foreign currency rate exposure on interest and principal payments on foreign currency denominated debt and/or (ii) the fair value exposure on certain debt resulting from changes in the US and Canadian variable base rates and/or (iii) foreign currency and interest rate exposure on variable interest rate and principal payments on foreign currency denominated debt. The foreign currency interest rate swaps that hedge all future interest and principal payments on U.S. denominated debt in fixed Canadian dollars are designated as cash flow hedges.

For derivative financial instruments designated as cash flow hedges, the effective portion of the hedge is reported in other comprehensive income until it is recognized in the statement of operations during the same period in which the hedged item affects income, while the ineffective portion is immediately recognized in the statement of operations. When a hedged item ceases to exist or cash flow hedge accounting is terminated, the amounts previously recognized in accumulated other comprehensive income are reclassified to the statement of operations when the variability in the cash flows of the hedged item affects income. Cash flows associated with derivative contracts accounted for as hedges are classified in the same category in the statement of cash flows as the item being hedged.

Derivative financial instruments that are not designated as hedges, including certain derivatives that are embedded in financial or non-financial contracts, are measured at fair value in the consolidated balance sheet. An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract, with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. If certain conditions are met, an embedded derivative is separated from the host contract and measured at fair value. Any change in the fair value of these derivative financial instruments is recorded in the statements of operation as gain or loss on derivative financial instruments.


(l) Pension plans and post-retirement/employment benefits

The Company maintains a number of defined contribution and defined benefit pension and defined benefit post-retirement/employment plans. For defined benefit plans, the accrued benefit obligation associated with pension and post-retirement/employment benefits earned by employees is determined using the projected benefit method pro-rated on service. Under this method an equal portion of the total estimated future benefit is attributed to each year of service. The determination of the benefit expense requires management’s estimate of expected return on plan assets, rate of compensation increase, retirement ages of employees, expected health care cost trend rate, and other costs, as applicable. For the purpose of calculating the expected return on plan assets, those assets are valued at fair value.

Vested past service costs from plan amendments are recognized in the statement of operations immediately and unvested past service costs are amortized on a straight-line basis over the average remaining service period of employees active at the date of the amendment. Actuarial gains and losses arise from the difference between the actual rate of return on plan assets and the expected rate of return on plan assets or from changes in actuarial assumptions used to determine the accrued benefit obligation. For each plan, excluding event-driven post-employment benefits, the excess of the net actuarial gain or loss over 10% of the greater of the accrued benefit obligation and the fair value of plan assets at the beginning of the year is amortized over the average remaining service period of active employees. For event-driven post-employment benefits, actuarial gains and losses are amortized over the average duration over which benefits are expected to be paid (expected average remaining service life). Curtailment gains are recognized in the period in which the curtailment occurs. Curtailment losses are recognized when it is probable that a curtailment will occur and the effects of which can be reasonably estimated. Gains or losses arising from the settlement of a pension plan are only recognized when responsibility for the pension obligation has been relieved. When an event gives rise to both a curtailment and a settlement, the curtailment is accounted for prior to the settlement. For the post-retirement and post-employment defined benefit plans the related benefits are funded by the Company as they become due. For the defined contribution plans, the pension expense represents the amount to be contributed by the Company in the period.

(m) Cash and cash equivalents

Cash equivalents are highly liquid investments with an original term to maturity of less than 90 days are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Cash and cash equivalents are designated as loans and receivables and are carried at amortized cost.


(n) Stock-based compensation

The Company has a Stock Option Plan and a Restricted Share Unit Plan that will be settled through the issuance of shares of Postmedia or through cash at the option of the Company, a Deferred Share Unit Plan that will be settled with cash and an Employee Share Purchase Plan that will be settled with shares of the Company.

The Company recognizes compensation expense for all stock options granted based on the fair value of the option on the date of grant using the Black-Scholes option pricing model. The fair value of the options is recognized as stock-based compensation expense over the vesting period of the options with a corresponding credit to contributed surplus. The contributed surplus balance is reduced as options are exercised through a credit to capital stock. The consideration paid by option holders is credited to capital stock when the options are exercised.

The Company recognizes compensation expense for all restricted share units granted based on the fair value of the Company’s shares on the issuance date of each restricted share unit grant. The fair value of the restricted share units is recognized as compensation expense, over the vesting period of each restricted share unit grant, in operating expenses with a corresponding credit to contributed surplus. The contributed surplus balance is reduced as units are exercised through a credit to share capital. Compensation cost is not adjusted for subsequent changes in the fair value of the Company’s shares.

The Company recognizes compensation expense for its deferred share unit plan based on the fair value of the Company’s shares on the issuance date of each deferred share unit grant. The fair value of the deferred share units is recognized as compensation expense, over the vesting period of each deferred share unit grant in operating expenses with a corresponding credit to other liabilities. The deferred share units are re-measured at each reporting period until settlement, using the fair value of the shares of the Company.

The Company will recognize its contributions under the terms of the Employee Share Purchase Plan as compensation expense over the vesting period of each plan issuance with a corresponding credit to contributed surplus. The contributed surplus balance will be reduced when shares are issued through a credit to capital stock.

The Company uses the graded vesting method to calculate compensation expense for all stock- based compensation plans.


3. BUSINESS COMBINATION

The Company was incorporated on April 26, 2010 to enable certain members of the Ad Hoc Committee of noteholders and lenders of Canwest LP to purchase substantially all of the assets, including the shares of National Post Inc., and assume certain liabilities of Canwest LP (the “Acquisition”). Canwest LP previously operated the newspaper, digital media and online assets now owned by the Company.

An asset purchase agreement was approved on June 18, 2010 and on July 13, 2010 Postmedia Network completed the Acquisition.

In accordance with the asset purchase agreement, on the Acquisition Date, Postmedia Network made the following payments in order to complete the Acquisition (the “Acquisition Consideration”):

(1) Postmedia issued 13 million shares valued at $9.26 per share based on the per share proceeds received on the initial capitalization of Postmedia and supported by a discounted cash flow (Level 3 inputs).

The Company obtained proceeds to fund the cash portion of the Acquisition Consideration from the issuance of shares, the issuance of 12.5% Senior Secured Notes due 2018 (the “Notes”), a Senior Secured Term Loan Credit Facility (“Term Loan Facility”) and acquired cash.

Canwest LP retained $9.0 million in cash to be held in trust by the court appointed monitor (the “Monitor”) to pay certain administrative fees and costs relating to the Canwest LP Companies Creditors Arrangement Act filing (the “CCAA filing”). Any excess cash not used by the Monitor at the completion of the CCAA filing will be returned to the Company. The Company had recorded estimated contingent returnable consideration receivable of $4.7 million of which $3.0 million remains uncollected as at August 31, 2011. The Company expects the outstanding contingent returnable consideration receivable to be received during the year ending August 31, 2012. Any future change to the estimate or actual contingent returnable consideration received will be recognized in the statement of operations.

Cash Payment of cash consideration 927,771 Non cash payments

Issuance of shares to Canwest LP (1) 120,137 Acquisition Consideration 1,047,908


The Company incurred acquisition costs during the year ended August 31, 2011 of $1.2 million (for the period ended August 31, 2010 - $18.3 million), which have been charged to the statement of operations.

The following statement of net assets summarizes the fair value of the major classes of assets acquired and liabilities assumed in the Acquisition:

(1) The fair value of trade receivables was $140.3 million. The gross contractual amount for trade receivables was $144.5 million of which $4.2 million was not collectible.

(2) Of the $483.0 million of intangible assets acquired, $248.6 million was assigned to mastheads with indefinite lives, $30.0 million was assigned to domain names with indefinite lives, $36.8 million was assigned to software with an estimated weighted average useful life of 5 years, $148.3 million was assigned to subscribers with an estimated useful life of 5 years, $12.2 million was assigned to customer relationships with an estimated weighted average useful life of 5 years and $7.1 million was assigned to domain names with an estimated useful life of 15 years.

Goodwill of $236.1 million has been recognized and consists of the assembled workforce, non-contractual customer relationships and expected cost savings and has been determined as follows:

(1) Goodwill of approximately $172 million is deductible for tax purposes.

Had the Acquisition occurred on September 1, 2009, the revenue and net loss for the year ended August 31, 2010, would have been $1,058.5 million and $23.2 million, respectively.

Assets acquired Cash 88,102 Accounts receivable (1) 140,312 Inventory 5,221 Prepaid expenses and other assets 14,880 Property and equipment 359,001 Intangible assets (2) 483,026

1,090,542

Liabilities assumed Accounts payable and accrued liabilities 89,207 Deferred revenue 33,954 Obligations under capital leases 3,696 Pension, post-retirement, post-employment and other liabilities 151,189 Future income taxes 681

278,727 Net assets acquired at fair value 811,815

Acquisition Consideration 1,047,908 Net assets acquired at fair value 811,815 Goodwill (1) 236,093


4. RESTRUCTURING OF OPERATIONS AND OTHER ITEMS

(a) Restructuring of operations On the Acquisition Date, the Company assumed restructuring liabilities of $6.6 million. These restructuring liabilities consisted of initiatives that were started by Canwest LP and continued by Postmedia Network. These initiatives involved the shutdown of certain activities as well as the restructuring of various processes within the Newspapers segment. All amounts pertained to severance of employees and no related amount remains payable as at August 31, 2011 (August 31, 2010 - $6.2 million). Subsequent to the Acquisition, the Company implemented new restructuring initiatives in order to reduce costs. The restructuring initiatives consist of a series of involuntary terminations and voluntary buyouts and the Company has accrued $52.6 million related to them of which $41.9 million was accrued during the year ended August 31, 2011 (for the period ended August 31, 2010 - $10.7 million). These restructuring initiatives were substantially complete as at August 31, 2011. All amounts pertain to severance of employees and as at August 31, 2011, $9.2 million remains payable (August 31, 2010 - $10.6 million) and is expected to be substantially paid by August 31, 2012. The Newspapers segment accrued $46.6 million and paid $39.2 million related to these initiatives of which $38.5 million was accrued and $39.1 million was paid during the year ended August 31, 2011 (for the period ended August 31, 2010 - $8.1 million and $0.1 million, respectively). The Company has recorded the restructuring amounts in accrued liabilities with a corresponding expense recorded in restructuring of operations and other items in the statement of operations as follows:

(b) Other items The Company has incurred expenses relating to the filing of its non-offering prospectus, expenses relating to complying with the Company’s contractual obligation to make an exchange offer for the Notes that is registered with the U.S. Securities and Exchange Commission and non-severance expenses related to management oversight for the various restructuring initiatives. These expenses totaled $3.2 million for the year ended August 31, 2011 (for the period ended August 31, 2010 - $0.5 million).

The Company has also recorded a curtailment gain in relation to its defined benefit pension plans as a result of the restructuring of $2.3 million for the year ended August 31, 2011 (for the period ended August 31, 2010 – nil) (note 12).

2011 2010

Restructuring liability, beginning of year 16,799 - Restructuring liability, assumed on acquisition - 6,560 Accrued during the year 41,895 10,727

58,694 17,287 Payments during the year (49,486) (488) Restructuring liability, end of period 9,208 16,799


5. LOSS (GAIN) ON DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s loss (gain) on derivate financial instruments for the year ended August 31, 2011 and the period ended August 31, 2010 is comprised of the following:

2011 2010

Loss (gain) on fair value swap not designated as a hedge 16,883 (3,487) 6,004 224

Gain on embedded derivative (1,473) (4,287) Loss (gain) on derivative financial instruments 21,414 (7,550)

Contractual cash interest settlement on fair value swap not designated as a hedge


6. INCOME TAXES

The provision for income taxes for the year ended August 31, 2011 and the period ended August 31, 2010 reflects an effective income tax rate which differs from its combined Canadian federal and provincial statutory income tax rate as follows:

Significant components of the Company’s future tax assets and liabilities are as follows:

As of August 31, 2011, the Company had non-capital loss carry-forwards for income tax purposes of $129.2 million (2010 - $30.3 million), of which $34.6 million expire in 2030 and $94.6 million expire in 2031.

2011 2010

Income taxes at combined Canadian statutory incometax rate of 27.6% (2010 - 29.0%) (3,571) (12,948)

Change in valuation allowance on future tax assets 2,369 10,352 Non-deductible expenses 3,125 2,067 Non-deductible portion of capital loss (gain) (798) 529 Future tax rate changes (341) - Adjustments in respect of prior year (784) - Provision for income taxes - -

2011 2010Future tax assetsNon-capital loss carryforwards 32,765 7,899 Net-capital loss carryforwards - 214 Unrealized capital loss on foreign exchange 4,295 3,346 Book amortization in excess of capital cost allowances - 217 Cumulative eligible capital - 966 Prepayment penalty - 86 Deferred share units 1,274 368 Donation carryforwards 116 - Financing fees 309 604 Pension and post-retirement benefits 33,583 37,145 Unpaid restructuring 942 - Less: Valuation allowance (47,692) (46,250) Total future income tax assets 25,592 4,595

Future tax liabilitiesCapital cost allowance in excess of book amortization 20,675 - Discounts 1,320 - Tax base difference on capital lease 3,068 4,595 Cumulative eligible capital 529 - Intangible assets 681 681 Total future income tax liabilities 26,273 5,276

Net future income tax liability 681 681 Current future income tax liability - - Long-term future income tax liability 681 681


7. INVENTORY

There were no write downs of inventories during the year ended August 31, 2011 (for the period ended August 31, 2010 – nil). No inventories were carried at net realizable value as at August 31, 2011 and 2010.

8. PROPERTY AND EQUIPMENT

Amortization expense of property and equipment for the year ended August 31, 2011 was $29.2 million (for the period ended August 31, 2010 - $4.6 million). The Company has a building under capital lease with a cost of $25.3 million (2010 - $25.3 million) and accumulated amortization of $2.7 million (2010 - $0.2 million). As at August 31, 2011, the Company has $1.6 million (2010 – nil) of assets not yet in use and as such no amortization has been taken. During the year ended August 31, 2011, the Company sold property and equipment with a net book value of $1.4 million, for proceeds of $1.2 million, resulting in a loss on disposal of $0.2 million. All of the assets were within the Newspapers segment.

2011 2010

Newsprint 4,321 5,038 Other 1,513 1,149

5,834 6,187

AccumulatedCost amortization Net

Land 65,540 - 65,540 Buildings 144,691 9,473 135,218 Machinery and equipment 159,780 24,270 135,510

370,011 33,743 336,268


Land 65,760 - 65,760 Buildings 142,959 1,244 141,715 Machinery and equipment 151,043 3,324 147,719

359,762 4,568 355,194

2011

2010


9. DERIVATIVE FINANCIAL INSTRUMENTS

2011 2010

AssetsEmbedded derivative (notes 11 & 17) 13,817 12,344 Foreign currency interest rate swap - not designated as a hedge (notes 11 & 17) - 3,487

13,817 15,831

LiabilitiesForeign currency interest rate swaps - designated as cash flow hedges (notes 11 & 30,004 4,243 Foreign currency interest rate swap - not designated as a hedge (notes 11 & 17) 13,396 -

43,400 4,243 Less portion due within one year (12,307) (3,685)

31,093 558


10. INTANGIBLE ASSETS

For the year ended August 31, 2011, the Company recorded internally generated software of $0.7 million (for the period, August 31, 2010 - nil) and recorded externally acquired software of $8.0 million (for the period ended August 31, 2010 - $0.7 million).

During the year ended August 31, 2011, the Company sold intangible assets with a nominal net book value, for nominal proceeds, resulting in a nominal loss on disposal. All of the assets were within the All other category. Amortization expense related to definite life intangibles for the year ended August 31, 2011 was $45.9 million (for the period ended August 31, 2010 - $6.5 million). Amortization expense for the next five years related to these definite life intangibles is expected to be approximately: 2012 - $43.3 million, 2013 - $40.9 million, 2014 - $36.1 million, 2015 - $30.2 million, 2016 -$1.9 million.


Definite lifeSoftware 46,077 15,030 31,047 Subscribers 148,300 33,723 114,577 Customer relationships 12,200 2,908 9,292 Domain names 7,131 540 6,591

213,708 52,201 161,507 Indefinite lifeMastheads 248,550 - 248,550 Domain names 29,975 - 29,975

278,525 - 278,525 492,233 52,201 440,032


Definite lifeSoftware 37,575 2,065 35,510 Subscribers 148,300 4,099 144,201 Customer relationships 12,200 276 11,924 Domain names 7,105 65 7,040

205,180 6,505 198,675 Indefinite lifeMastheads 248,550 - 248,550 Domain names 29,975 - 29,975

278,525 - 278,525 483,705 6,505 477,200

2011

2010


11. LONG TERM DEBT

(1) Term Loan Facility

The Company has a Senior Secured Term Loan Credit Facility (“Term Loan Facility”) which was entered into on July 13, 2010. The Term Loan Facility includes Tranche C of US$340.0 million (CDN$333.0 million) (August 31, 2010 – nil), a US dollar term loan (the “US Tranche”) of nil (August 31, 2010 – US$267.5 million (CDN$285.3 million)), a Canadian dollar term loan (the “Canadian Tranche”) of nil (August 31, 2010 – $110.0 million), and up to US$50 million in incremental term loan facilities. As at August 31, 2011, the Company has not drawn on the incremental term loan facilities (August 31, 2010 – nil). The Term Loan Facility is secured on a first priority basis by substantially all the assets of Postmedia Network and the assets of the Company (the “Term Loan Collateral”), with the exception of those assets comprising the ABL Collateral (defined below) and on a second-priority basis by the ABL Collateral. In addition to the minimum principal repayments described below, the Company is subject to a mandatory prepayment of the loans with respect to any net cash proceeds of asset sales or issuance of indebtedness and 75% of excess cash flow for each fiscal year subject to adjustments for prepayments and leverage ratios. Such mandatory payments permanently reduce the availability under the Term Loan Facility. The Company has no payment required with respect to excess cash flow for the year ended August 31, 2011. Voluntary prepayments are permitted and reduce the quarterly minimum payments and excess cash flow payments for the fiscal year and permanently reduce the availability under the Term Loan Facility. The Company is subject to certain financial and non-financial covenants under the Term Loan Facility referred to above. The Term Loan Facility requires compliance with financial covenants including a consolidated interest coverage ratio test, a consolidated total leverage ratio test and a consolidated first lien indebtedness leverage ratio test. Among other restrictions the Term Loan Facility restricts dividend payments to an aggregate amount not to exceed $10.0 million over the life of the agreement, provided that the specified coverage ratios are satisfied and the Company is not in default subject to specified exceptions.

2011 2010

Maturity


end exchange

rates

Senior Secured Term Loan Credit Facility Tranche C (US$340.0M) (1)(i) July 2016 333,024 19,862 313,162 -

US Tranche (1)(i i) July 2016 - - - 261,732

Canadian Tranche (1)(i i i) January 2015 - - - 101,600

Senior Secured Notes (US$275M) (2) July 2018 269,335 10,199 259,136 282,699

Senior Secured Asset-Based Revolving Facility (3) July 2014 - - - -572,298 646,031

Less portion due within one year (16,862) (13,499) 555,436 632,532

Financing fees,

discounts and other

Carrying value of

debtCarrying

value of debt


(i) On April 4, 2011, the Company entered into an agreement with its lenders which amended

certain terms of the Term Loan Facility. The Canadian Tranche and US Tranche from the original credit agreement were replaced with Tranche C. Tranche C was issued for US$365.0 million (CDN$351.7 million), at a discount of 0.25%, for net proceeds of $350.8 million, before financing fees of $5.4 million. Tranche C bears interest at Libor, with a floor of 1.25%, plus 5%. The effective interest rate of Tranche C which amortizes the initial $22.2 million of financing fees and discounts based on the estimated future cash flows, including estimated optional repayments, is 8.4%. At August 31, 2011 the Libor rate was less than 1.25%, resulting in the base rate being set at the floor of 1.25%. Tranche C is subject to quarterly minimum principal repayments equal to 0.625% of the initial outstanding principal for the first two installments, 1.25% for the next four installments, 2.5% for the next four installments and 3.75% for the next eleven installments, with any remaining principal due and payable at maturity. During the year ended August 31, 2011 the Company made contractual and voluntary principal payments on Tranche C of $4.4 million (US$4.5 million) and $19.9 million (US$20.5 million), respectively.

On April 4, 2011, in conjunction with the amendments to the Term Loan Facility, the Company amended its pre-existing amortizing foreign currency interest rate swap which was entered into on July 13, 2010. This amended swap hedges the principal payments on a notional amount as at August 31, 2011 of US$180.0 million (2010 - US$225.0 million) on Tranche C, at a fixed currency exchange rate of US$1:$1.035 until July 2014 and converts the interest rate on the notional Canadian principal amount to bankers acceptance rates plus 7.07% (2010 – bankers acceptance rates plus 9.25%). During the year ended August 31, 2011, the Company paid $1.8 million related to the amendment of the foreign currency interest rate swap and charged it to the consolidated statement of operations as a loss on derivative financial instruments. The Company has not designated this swap as a hedge and as a result changes in fair value have been recognized in loss (gain) on derivative financial instruments in the consolidated statement of operations (note 5). As at August 31, 2011, a liability of $13.4 million (2010 – an asset of $3.5 million), representing the fair value of this swap, is recorded on the consolidated balance sheet in derivative financial instruments (note 9).

On June 20, 2011, the Company entered into an amortizing foreign currency interest rate swap with an initial notional amount of US$50.0 million with a fixed currency exchange rate of US$1:$0.9845 and a fixed interest rate of 8.66%. This swap matures on May 31, 2015 and as at August 31, 2011 has a notional amount outstanding of US$48.1 million. The Company has designated this hedging arrangement as a cash flow hedge and its fair value, a liability of $1.6 million is included in the consolidated balance sheet in derivative financial instruments. This cash flow hedge was 100% effective at August 31, 2011.


(ii) On April 4, 2011, the US Tranche was repaid in the amount of US$247.0 million (CND$238.0 million), funded from the proceeds of Tranche C. At the time of the repayment the Company determined that the refinancing of the US Tranche was partially an extinguishment and partially a modification other than an extinguishment. For accounting purposes US$33.2 million (CND$32.0 million) was a debt extinguishment and US$213.8 million (CND$206.0 million) of the US Tranche was a debt modification other than an extinguishment. As a result during the year ended August 31, 2011, the Company charged a total of $2.7 million to the consolidated statement of operations as a loss on debt prepayment which includes $0.3 million of costs that occurred on settlement and $2.4 million of unamortized discounts and financing fees related to the US Tranche. The remaining unamortized discounts and financing fees of $15.9 million for the US Tranche were included in the opening carrying value of Tranche C. The US Tranche bore interest at Libor, with a floor of 2%, plus 7% and had an effective interest rate of 10.7%. The US Tranche was subject to quarterly minimum principal repayments equal to 0.625% of the initial outstanding principal for the first four installments, 1.25% for the next four installments, 2.5% for the next four installments and 3.75% for the next eleven installments, with any remaining principal due and payable at maturity. During the period from September 1, 2010 to April 4, 2011, the Company made contractual and voluntary principal payments on the US Tranche of $3.0 million (US$3.0 million) and $17.4 million (US$17.5 million), respectively (Period ended August 31, 2010 – voluntary payments of $34.7 million (US$32.5 million)).

(iii) On April 4, 2011, the Canadian Tranche was repaid in the amount of $107.3 million funded from the proceeds of Tranche C. At the time of repayment the Company determined that the refinancing of the Canadian Tranche was an extinguishment. As a result during the year ended August 31, 2011, the Company charged a total of $8.3 million to the consolidated statement of operations as a loss on debt prepayment which includes $1.1 million of costs that occurred on settlement and $7.2 million of unamortized discounts and financing fees related to the Canadian Tranche. The Canadian Tranche bore interest at bankers’ acceptance rates plus 6% and had an effective interest rate of 9.8%. The Canadian Tranche was subject to quarterly minimum principal repayments equal to 1.25% of the initial outstanding principal for the first four installments, 2.5% for the next eight installments, 3.75% for the next five installments, with any remaining principal due and payable at maturity. During the period from September 1, 2010 to April 4, 2011, the Company made contractual principal payments on the Canadian Tranche of $2.8 million (Period ended August 31, 2010 - nil).

(2) Senior Secured Notes

Postmedia Network has US$275.0 million (CDN$269.3 million) of 12.5% Senior Secured Notes due 2018 (the “Notes”) (2010 – US$275.0 million, CDN$293.3 million). The effective interest rate of the Notes which amortizes the initial $10.7 million of financing fees based on the estimated future cash flows is 13.3%. The Notes are secured on a second priority basis by the Company and on a third priority basis by the ABL Collateral (defined below).


The Notes have a variable prepayment option subject to a premium of 6.25% for the period July 15, 2014 to July 14, 2015, 3.125% for the period July 15, 2015 to July 14, 2016 and nil thereafter. Additionally, under certain conditions the Company can redeem up to 35% of the original principal amount of the Notes prior to July 15, 2014 for a premium of 12.5% or the Company can redeem the Notes upon the payment of a customary make-whole premium. This prepayment option represents an embedded derivative that is accounted for separately at fair value. As at August 31, 2011, the embedded derivative asset has a fair value of $13.8 million (2010 - $12.3 million), which is recorded on the consolidated balance sheet in derivative financial instruments (note 9). During the year ended August 31, 2011 the Company recorded a gain of $1.5 million (for the period ended August 31, 2010 – a gain of $4.3 million) in loss (gain) on derivative financial instruments in the consolidated statement of operations related to the embedded derivative (note 5).

During the year ended August 31, 2011, the Company amended the foreign currency interest rate swap such that the interest rate on a notional amount of US$275.0 million with a fixed currency exchange rate of US$1:$1.035 changed from a fixed rate of 14.53% to a fixed rate of 14.78%. This arrangement terminates on July 15, 2014 and includes a final exchange of the principal amount on that date. The Company has designated this hedging arrangement as a cash flow hedge and its fair value, a liability of $28.4 million (2010 - $4.2 million), is included in the consolidated balance sheet in derivative financial instruments. This cash flow hedge was 100% effective at August 31, 2011.

The Notes are subject to covenants that, among other things, will restrict the ability to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem certain indebtedness or capital stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, alter the businesses it conducts, enter into agreements restricting its subsidiaries’ ability to pay dividends’ and consolidate, merge or sell all or substantially all of its assets.


(3) Asset-Based Revolving Credit Facility

The Company has a revolving senior secured asset-based revolving credit facility for an aggregate amount of up to $60 million, including a $10 million letter of credit sub-facility, (the “ABL Facility”). The ABL Facility is secured on a first-priority basis by accounts receivable, cash and inventory of Postmedia Network and any related assets of the Company (the “ABL Collateral”) and on a third priority basis by the Term Loan Collateral. The ABL Facility currently bears interest at either bankers acceptance rates plus 3.75% or Canadian prime plus 2.75%. The proceeds of the loans under the ABL Facility are permitted to be used to finance the working capital needs and general corporate purposes of the Company. There are limitations on the Company’s ability to incur the full $60 million of commitments under the ABL Facility. Availability is limited to the lesser of a borrowing base and $60 million, in each case subject to reduction for a required excess availability amount of $15 million. As at August 31, 2011 the Company had no amounts drawn on the ABL Facility (2010 – nil) and had availability of $37.3 million (2010 - $35.1 million). Included in other assets at August 31, 2011 are financing fees of $2.3 million (2010 - $3.2 million) with respect to the ABL Facility. Amortization expense in respect of the financing fees of $0.8 million for the year ended August 31, 2011 (for the period ended August 31, 2010 - $0.1 million), is included in interest expense.

As a result of the dissolution of National Post discussed in note 1, Postmedia Network’s financing arrangements are now guaranteed solely by its parent Postmedia. Such guarantees are full, unconditional and joint and several. Postmedia has no material independent assets or operations and as a result supplemental consolidating financial information for the year ended August 31, 2011 and the period ended August 31, 2010 has not been presented.

Principal undiscounted minimum payments of long-term debt, based on terms existing at August 31, 2011 are as follows:

Interest expense relating to long-term debt for the year ended August 31, 2011 was $79.1 million (for the period ended August 31, 2010 - $12.3 million).

2012 16,862 2013 33,724 2014 50,586 2015 50,586 2016 181,266

Thereafter 269,335 602,359


12. PENSION, POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS

The Company has a number of funded and unfunded defined benefit plans, as well as defined contribution plans, that provide pension and post retirement and post-employment benefits to its employees. The defined benefit pension plans are based upon years of service and final average salary. The Company has measured its accrued benefit obligation and the fair value of plan assets for accounting purposes as at August 31, 2011.

Information on the Company’s pension, post-retirement and post-employment benefit plans are as follows:

(1) As at August 31, 2011, none of the Company’s defined benefit pension plans were fully funded.

(2) Post-retirement plans are non-contributory and include health and life insurance benefits. The assumed health care cost trend rates for the next year used to measure the expected cost of benefits covered for the post-retirement health and life plans were 8.5% for medical, to an ultimate rate of 4.6% over 18 years to 2029. A one percentage point increase in assumed health care cost trend rates would have increased the service and interest costs, and the obligation by $0.6 million and $5.8 million, respectively. A one percentage point decrease in assumed health care cost trends would have lowered the service and interest costs, and the obligation by $0.5 million and $4.7 million, respectively.

2011 2010 2011 2010

Plan AssetsFair value of plan assets - beginning of year 307,030 - - - Fair value of plan assets - at Acquisition Date - 294,949 - - Actual returns on plan assets 18,621 10,718 - - Employer contributions 29,346 2,195 4,151 537 Employee contributions 5,102 412 - - Benefits paid (19,654) (1,244) (4,151) (537) Fair value of plan assets end of period 340,445 307,030 - -

Benefit ObligationsBenefit obligations - beginning of year 390,430 - 70,478 - Benefit obligations - at Acquisition Date - 375,184 - 68,458 Accrued interest on benefits 21,007 2,870 3,647 490 Current service costs 17,950 1,731 3,858 435 Benefits paid (19,654) (1,244) (4,151) (537) Curtailment gains (1,878) - (1,788) - Past service costs - - 2,291 - Actuarial loss (gain) (19,630) 11,889 (2,631) 1,632 Benefit obligations end of period 388,225 390,430 71,704 70,478

The Company's net benefit obligations are determined as follows:Benefit obligations 388,225 390,430 71,704 70,478 Fair value of plan assets 340,445 307,030 - - Plan deficits (47,780) (83,400) (71,704) (70,478) Unamortized net actuarial loss (gain) (12,691) 3,894 (2,393) 1,632 Unamortized past service costs - - 2,171 - Net benefit obligations (60,471) (79,506) (71,926) (68,846)

Pension benefits (1)

Post-retirement and post-employment

benefits (2)


As at August 31, 2011, the accrued pension benefit liability of $60.5 million (2010 - $79.5 million) and the accrued post-retirement and post-employment liability of $71.9 million (2010 - $68.8 million) are included in accrued pension, post-retirement, post-employment and other liabilities on the consolidated balance sheet.

The investment strategy for pension plan assets is to utilize a balanced mix of equity and fixed income portfolios to earn a long-term investment return that meets the Company’s pension plan obligations. Active management strategies and style diversification strategies are utilized in anticipation of realizing investment returns in excess of market indices. The compensation and pension committee, comprised of certain members of the Company’s Board of Directors, is appointed by the Board of Directors to oversee and monitor the management and overall governance of the pension and retirement plans sponsored and administered by the Company. The compensation and pension committee, among other things, oversees the investment strategy for the pension plan assets, including adopting the Company’s investment policy and monitoring compliance with the policy, appoints the investment fund managers and reviews their performance. The utilization of investment fund managers who adopt different style mandates allows the Company to achieve a diversified portfolio and reduce portfolio risks.

The Company's investment policy addresses the permitted and prohibited investments for the plan assets including restrictions on the fixed income quality, and quantity of investments in various asset classes as follows:

• The fixed income quality restrictions include a minimum rating of “BBB” from the Dominion Bond Rating Services or equivalent for bonds and debentures; a minimum rating of “R-1” from the Dominion Bond Rating Services or equivalent for short-term investments; and a minimum rating of “P-1” or equivalent for preferred stock.

• The quantity of investments allowed in various asset classes ranges from 5% to 45% and contains restrictions such that no single equity holding shall exceed 10% of the book value of plan assets, no single equity holding shall exceed 15% of the market value of an investment managers equity portfolio, no single equity holding will exceed 30% of the voting shares of any such corporation, no more than 10% of any investment managers bond portfolio may be invested in bonds of any such company other than bonds of the federal government or bonds of any such provincial government with a minimum rating of AA and no more than 15% of the market value of any investment managers bond portfolio may be invested in bonds with a rating of BBB or equivalent.

• Investment managers are prohibited from making direct investments in resource properties, mortgages, venture capital financing, bonds of foreign issuers, investing in companies for the purposes of managing them, purchasing securities on margin or making short sales.

• The pension plans are not permitted to invest in debt or equity securities of the Company.


The pension plans have an asset mix as of August 31, 2011, as follows:

(1) The Company approved a new statement of investment policy and procedures in July 2011 and is currently in the process of transitioning its asset mix.

The average remaining service period of employees covered by the pension plans is 8 years (2010 – 8 years). The average remaining service period of the employees covered by the post-retirement benefit plans is 12 years (2010 – 11 years). The average remaining service period of the employees covered by the post-employment benefit plans is 9 years (2010 – 7 years).

The most recent actuarial funding valuations for the most significant of the pension plans, which makes up substantially the entire net benefit obligation, was as of December 31, 2010. The valuations indicated that the plans had an aggregate going concern unfunded liability of $33.1 million and a wind up deficiency (which assumes that the pension plan terminated on their actuarial valuation date) of $80.3 million. As a result, the Company is currently required to make special payments for the next twelve months of $19.0 million. The next required valuation will be as at December 31, 2011 and must be complete by September 30, 2012.

Actual Target (1)Fair value hierarchy

Canadian equities 37% 30% Level 1Foreign equities 19% 30% Level 1Fixed income 42% 40% Level 2Cash 2% 0% Level 1


The total cash payments for the year ended August 31, 2011, consisting of cash contributed by the Company to its funded pension plans, cash payments to beneficiaries for its post-retirement and post-employment plans and cash contributed to its defined contribution plans, was $39.3 million (for the period ended August 31, 2010 - $3.6 million).

The Company’s pension expense for the year ended August 31, 2011 and the period ended August 31, 2010 is determined as follows:

(1) Actuarial adjustments represent the difference between actual and expected return on plan assets and other adjustments to provide an appropriate allocation of costs to the period in which employee services are rendered.

Incurred Actuarial Recognized Incurred Actuarial Recognizedin year adjustments (1) in year in year adjustments (1) in year

Current service costs 17,950 - 17,950 1,731 - 1,731 Employee contributions (5,102) - (5,102) (412) - (412) Accrued interest on benefits 21,007 - 21,007 2,870 - 2,870 Return on plan assets (18,621) (3,045) (21,666) (10,718) 7,995 (2,723) Curtailment gains (1,878) (1,878) - - - Net actuarial loss (gain) (19,630) 19,630 - 11,889 (11,889) - Benefit expense (6,274) 16,585 10,311 5,360 (3,894) 1,466 Employer contributions to defined contribution plans 5,791 - 5,791 825 - 825 Total pension expense (483) 16,585 16,102 6,185 (3,894) 2,291

2011 2010


The Company’s post-retirement and post-employment benefit expense for the year ended August 31, 2011 and the period ended August 31, 2010 is determined as follows:

(1) Actuarial adjustments represent the difference between actual and expected costs and other adjustments to provide an appropriate allocation of costs to the period in which employee services are rendered.

Significant actuarial assumptions in measuring the Company’s accrued benefit obligations as at August 31, 2011 and 2010 are as follows:

Significant actuarial assumptions in measuring the Company’s benefit expense as at August 31, 2011 and 2010 are as follows:

The discount rate was estimated by applying Canadian corporate AA zero coupon bonds to the expected future benefit payments under the plans. The estimate of the expected long-term rate of return on pension plan assets was based on the Company’s target investment mix as at August 31, 2011 and the bond indices and equity risk premiums as of that date. The Company’s objective is to select an average rate of return expected on existing plan assets and expected contributions to the plan during the year. For the year ended August 31, 2012, the Company expects to contribute $31.9 million (including special payments of $19.0 million) to its defined benefit pension plans and $3.9 million to its post-retirement and post-employment benefit plans.

Incurred Actuarial Recognized Incurred Actuarial Recognizedin year adjustments (1) in year in year adjustments (1) in year

Current service costs 3,858 - 3,858 435 - 435 Accrued interest on benefits 3,647 - 3,647 490 - 490 Curtailment gains (1,788) 1,367 (421) - - - Amortization of past service costs 2,291 (2,171) 120 - - - Amortization of actuarial loss (gain) (2,631) 2,658 27 1,632 (1,632) - Total post-retirement and post-employment expense 5,377 1,854 7,231 2,557 (1,632) 925

2011 2010

2011 2010 2011 2010Post-retirement and

Pension benefits post-employment benefitsDiscount rate 5.45% 5.30% 5.20% 5.10%Rate of compensation increase 3.25% 3.70% 3.20% 3.60%

2011 2010 2011 2010Post-retirement and

Pension benefits post-employment benefitsDiscount rate 5.30% 5.50% 5.10% 5.35%Expected long-term rate of return on pension plan assets 6.70% 6.70% - - Rate of compensation increase 3.70% 3.70% 3.60% 3.60%


Benefit payments which are paid out of the plans, reflect expected future service and are expected to be paid as follows for the years ended August 31:

13. CAPITAL STOCK

On June 14, 2011, the Company’s shares began trading on the Toronto Stock Exchange (“TSX”) under the symbols PNC.A for its Class C voting shares (“Voting Shares”) and PNC.B for its Class NC variable voting shares (“Variable Voting Shares”).

Authorized capital stock

The Company’s authorized capital stock consists of two classes; Voting Shares and Variable Voting Shares. The Company is authorized to issue an unlimited number of Voting Shares and Variable Voting Shares.

Voting Shares

Holders of the Voting Shares shall be entitled to one vote at all meetings of shareholders of the Company. The Voting Shares and Variable Voting Shares rank equally on a per share basis in respect of dividends and distributions of capital.

A Voting Share shall be converted into one Variable Voting Share automatically if a Voting Share becomes held or beneficially owned or controlled, by a person who is a citizen or subject of a country other than Canada. In addition to the automatic conversion feature, a holder of Voting Shares shall have the option at any time to convert some or all of such shares into Variable Voting Shares on a one-for-one basis and to convert those shares back to Voting Shares on a one-for-one basis.

Pension

Post-retirement and post-

employment Total2012 17,448 3,949 21,397 2013 18,460 4,157 22,617 2014 19,339 4,459 23,798 2015 20,258 4,686 24,944 2016 21,262 4,845 26,107

2017-2021 119,644 28,894 148,538


Variable Voting Shares

The Variable Voting Shares have identical terms as the Voting Shares and rank equally with respect to voting, dividends and distribution of capital, except that Variable Voting Shares shall not carry one vote per Variable Voting Share if:

(a) the number of issued and outstanding Variable Voting Shares exceeds 49.9% of the total number of all issued and outstanding shares; or

(b) the total number of votes that may be cast by, or on behalf of, holders of Variable Voting Shares present at any meeting of holders of Voting Shares exceeds 49.9% of the total number of votes that may be cast by all holders of shares present and entitled to vote at such meeting.

If either of the above-noted thresholds is surpassed at any time, the vote attached to each Variable Voting Share will decrease automatically to equal the maximum permitted vote per Variable Voting Share.

Postmedia Rights Plan

On February 24, 2011, the Postmedia Rights Plan was approved by the shareholders. Under the Postmedia Rights Plan, one right has been issued by Postmedia in respect of each Voting Share and Variable Voting Share. A right shall become exercisable upon a person, including any party related to it, acquiring or attempting to acquire 20% or more of the outstanding shares of a class without complying with the “Permitted Bid” provisions of the Postmedia Rights Plan. Should such an acquisition occur or be announced, subject to all other provisions of the Postmedia Rights Plan, each right will entitle the holder to purchase from Postmedia additional shares at a 70% discount to the prevailing market price. This purchase could cause substantial dilution to the person or group of persons attempting to acquire control of Postmedia, other than by way of a Permitted Bid. The Board has discretion to waive the application of the Postmedia Rights Plan, and to amend the Postmedia Rights Plan at any time, or redeem the rights for $0.000001 per right.

The rights expire on the earliest of the Annual Shareholder meeting in the year 2014 and the termination of the rights pursuant to the Postmedia Rights Plan, unless redeemed before such time. If the application of the Postmedia Rights Plan is waived by the Board or a take-over bid is structured as a Permitted Bid, the rights will not become exercisable. Permitted Bids under the Rights Plan must be made to all shareholders for all of their Voting Shares and Variable Voting Shares, must be open for acceptance for a minimum of 60 days, and must otherwise comply with the Permitted Bid provisions of the Postmedia Rights Plan.


Issued and outstanding capital stock

(1) During the period ended August 31, 2010, management purchased 348,300 shares at fair value ($9.26 per share) for total proceeds to the Company of $3.2 million.

Earnings per share

Basic earnings per share are calculated using the daily weighted average number of shares outstanding during the year.

Diluted earnings per share are calculated using the daily weighted average number of shares that would have been outstanding during the year had all potential shares been issued at the beginning of the year, or when the underlying options were granted or issued, if later. The treasury stock method is employed to determine the incremental number of shares that would have been outstanding had the Company used proceeds from the exercise of the options to acquire shares provided the shares are not anti-dilutive. The following table provides a reconciliation of the denominators used in computing basic and diluted earnings per share. No reconciling items in the computation of net loss exist.

Number $ 000's Number $ 000's Number $ 000's

Shares issued (1) 3,686,779 34,136 36,636,391 339,226 40,323,170 373,362 Costs to issue shares (205) (2,025) (2,230)

Balance as of August 31, 2010 3,686,779 33,931 36,636,391 337,201 40,323,170 371,132 Conversions (2,595,664) (23,889) 2,595,664 23,889 - -

Balance as of August 31, 2011 1,091,115 10,042 39,232,055 361,090 40,323,170 371,132

Voting Shares Variable Voting Shares Total Shares

2011 2010

Basic weighted average shares outstanding 40,323,170 40,323,170 Dilutive effect of options - - Diluted weighted average shares outstanding 40,323,170 40,323,170

Options and RSUs outstanding that are anti-dilutive 800,000 400,000


14. CAPITAL MANAGEMENT

The Company’s capital management objective is to maximize shareholder returns by (a) prioritizing capital expenditures related to the development of digital media products with growth potential, and (b) utilizing the majority of remaining free cash flow for the repayment of debt. There were no changes in the Company’s approach to capital management during the period. The Company is in compliance with all financial covenants as at August 31, 2011 (note 11). The Company’s capital structure is composed of shareholders’ equity, long-term debt, net liabilities and assets related to derivative financial instruments, less cash. The capital structure as at August 31, 2011 and 2010 is as follows:

The Company’s capital structure decreased $13.9 million from August 31, 2010, primarily as a result of long-term debt repayments and foreign currency exchange gains on long-term debt offset by increases in liabilities related to derivative financial instruments.

15. STOCK-BASED COMPENSATION AND OTHER LONG-TERM INCENTIVE PLANS

Stock option plan

The Company has a stock option plan (the “Option Plan”) for its employees and officers to assist the Company in attracting, retaining and motivating officers and employees. The Option Plan is administered by the Board of Directors (the “Board”).

The maximum number of options available for issuance under the Option Plan is 3.0 million and shall not exceed 10% of the Company’s issued and outstanding shares. The issued options entitle the holder to acquire one share of the Company at an exercise price no less than the fair value of a share at the date of grant, of which fair value is determined to be the volume-weighted average trading price of the Voting Shares on the TSX for the five trading days immediately preceding the issuance of such options. In the case of shares not being listed on a stock exchange the fair value of the share is to be determined by the Board. The issued options vest as follows: 20% immediately with the remainder vesting evenly over 4 years on the anniversary date of the date of grant. Each option may be exercised during a period not exceeding 10 years from the date of grant.

2011 2010

Long-term debt (note 11) 572,298 646,031 Net liabilities (assets) related to derivative financial instruments (note 9) 29,583 (11,588) Cash (10,483) (40,201) Net liabilities 591,398 594,242 Shareholders' equity 304,342 315,402

895,740 909,644


During the year ended August 31 2011, the Company granted no options under the Option Plan (for the period ended August 31, 2010 – 1.4 million options). The following table provides details on changes to the issued options for the year ended August 31, 2011 and the period ended August 31, 2010:

The Company recognizes stock-based compensation expense for all options issued under the Option Plan based on the fair value of the option on the grant date. The fair value of the underlying options was estimated using the Black-Scholes option pricing model. The fair value of the issued options and key assumptions used in applying the Black-Scholes option pricing model were as follows:

During the year ended August 31, 2011, the Company has recorded stock-based compensation expense relating to the Option Plan of $1.3 million, with an offsetting credit to contributed surplus (for the period ended August 31, 2010 - $0.7 million).

The total unrecognized stock-based compensation expense relating to the unvested options is $0.7 million, which is expected to be recognized over the next three years.

Options

Weighted average exercise

price Options

Weighted average exercise

price

Balance beginning of period 1,400,000 9.85$ - - Granted - - 1,400,000 9.85$ Forfeited (120,000) (9.85)$ - - Balance end of period 1,280,000 9.85$ 1,400,000 9.85$

Vested options at end of year - exercisable 560,000 9.85$ 280,000 9.85$

2011 2010

2011 (4) 2010Fair value - 2.66$

Key assumptions Exercise price - 9.85$ Risk-free interest rate (1) - 2.56% Dividend yield - 0% Volatility factor (2) - 30% Expected life of options (in years) (3) - 5(1) Based on Bank of Canada yield curve in effect at the time of grant.(2) Based on average volatilities of similar companies in the publishing and media industries.(3) Based on contractual terms and a published academic study.(4) There w ere no options issued during the year ended August 31, 2011.


Deferred share unit plan

The Company has a deferred share unit plan (the “DSU Plan”) for the benefit of its non-employee directors. The maximum number of deferred share units (“DSUs”) available for issuance under the DSU Plan shall not exceed 10% of the Company’s issued and outstanding shares. The DSU Plan is administered by the Board.

Under the DSU Plan, non-employee directors of the Company are required to elect to receive at least 50% (and may irrevocably elect to receive up to 100%) of their annual fees satisfied in the form of DSUs, and may receive additional grants of DSUs under the DSU Plan. The number of DSUs to be credited to a director will be calculated, on the date that fees are payable to such director, by dividing the dollar amount elected by such director in respect of such fees by the value of a share. The value of a share will be the volume-weighted average trading price of the Voting Shares for the five trading days immediately preceding the issuance of such DSU’s. As at August 31, 2011, the fair value per DSU was based on a fair value per share of $12.45. As the shares were not listed on a stock exchange during the year ended August 31, 2010 the fair value per share was determined by the Board at $9.26 per DSU, which is based on the per share proceeds received on the capitalization of Postmedia (note 3). The vesting conditions (which may include time restrictions, performance conditions or a combination of both) of each DSU granted under the DSU Plan, will be determined by the Board, and on redemption (which would occur after the holder of the DSUs ceases to serve as a director and is not otherwise employed by the Company) will be paid out in cash. The DSUs are generally non-transferable. Whenever cash dividends are paid on the shares of the Company, additional DSUs will be credited to directors. The Board may discontinue the DSU Plan at any time or, subject to certain exceptions set out in the DSU Plan, may amend the DSU Plan at any time.

During the year ended August 31, 2011, the Company issued 0.1 million DSUs to directors (2010 - 0.4 million). Of the issued DSUs, 33.33% vested immediately with the remaining DSUs vesting evenly over a two year period on the anniversary date of the date of grant. As at August 31, 2011, 0.3 million DSUs have vested (August 31, 2010 – 0.1 million). During the year ended August 31, 2011, the Company recorded stock-based compensation expense relating to the DSU Plan of $3.5 million (for the period ended August 31, 2010 - $1.5 million), with an offsetting credit to other liabilities. No payments were made related to the DSU plan during the year ended August 31, 2011 (for the period ended August 31, 2010 – nil).

As at August 31, 2011, the total number of unvested DSUs that are expected to vest is 0.2 million (2010 - 0.3 million) and the total unrecognized stock-based compensation expense related to them based on a fair value per share of $12.45 is $0.8 million, which is expected to be recognized over the next year.

Restricted share unit plan

The Company has a restricted share unit plan (the “RSU Plan”). The RSU Plan provides for the grant of restricted share units (“RSUs”) to participants, being current part-time or full-time officers, employees or consultants of the Company.

The maximum aggregate number of RSUs issuable pursuant to the RSU Plan outstanding at any time shall not exceed 0.6 million voting shares or variable voting shares (“Shares”) of the Company. The RSU Plan is administered by the Board.


Each RSU will be settled for one Share, without payment of additional consideration, after such RSU has vested; however, at any time, a participant may request in writing, upon exercising vested RSUs, subject to the consent of the Company, that the Company pay an amount in cash equal to the aggregate current fair market value of the Shares on the date of such exercise in consideration for the surrender by the participant to the Company of the rights to receive Shares under such RSUs. The Board may in its sole discretion accelerate the vesting date for all or any RSUs for any participant at any time and from time to time. RSUs are non-transferable. The terms and conditions of RSUs granted under the RSU Plan will be subject to adjustments in certain circumstances, at the discretion of the Board and contain certain conditions regarding the resignation, cessation and termination of participants.

During the period ended August 31, 2010, the Company granted a tandem award. The tandem award provides a choice to either exercise 0.6 million stock options or 0.6 million RSU’s. Of the tandem award, 0.1 million vested immediately on the date of the grant with the remaining 0.5 million vesting evenly over a four year period on the anniversary date of the date of grant. As at August 31, 2011, 0.2 million RSU’s had vested (August 31, 2010 – 0.1 million). The fair value of the tandem award was estimated by using a grant date fair value per share of $9.26. The fair value of $9.26 per share was based on the per share proceeds received on the initial capitalization of the Company (note 3). During the period ended August 31, 2011, the Company recorded stock-based compensation expense relating to the tandem award of $2.2 million (for the period ended August 31, 2010 - $1.4 million), with an offsetting credit to contributed surplus.

As at August 31, 2011, the total number of unvested RSU’s that are expected to vest is 0.4 million (2010 - 0.5 million) and the total unrecognized stock-based compensation expense related to them is $2.0 million, which is expected to be recognized over the next three years.

Employee Share Purchase Plan

On June 14, 2011, the TSX approved the Employee Share Purchase Plan (“ESPP”). The ESPP will enable employees of the Company to purchase shares of Postmedia, up to a maximum of $8,000 per year (“Employee Contribution”). Postmedia will provide a match through which it will purchase additional shares for the employee equal to 25% of the Employee Contribution (the “Employer Match”). The shares purchased through the Employer Match will be subject to a minimum 12-month vesting period. The Company recognizes its contributions under the ESPP as compensation expense over the vesting period of each plan issuance with a corresponding credit to contributed surplus. During the year ended August 31, 2011 there were no plan issuances under the ESPP and accordingly the Company has not recorded any stock-based compensation expense.

During the year ended August 31, 2011, the Company has recorded total stock-based compensation expense of $7.0 million (for the period ended August 31, 2010 - $3.6 million) relating to the above plans, with the exception of the ESPP which the Company has not yet commenced.


16. STATEMENTS OF CASH FLOWS

The following amounts comprise the net change in non-cash operating accounts included in the consolidated statements of cash flows:

2011 2010

Cash generated (utilized) by:Accounts receivable (2,160) 23,895 Inventory 353 (966) Prepaid expenses and other assets (1,055) (1,033) Accounts payable and accrued liabilities (24,829) 24,214 Deferred revenue (1,602) (1,858) Other 478 56 Changes in non-cash operating accounts (28,815) 44,308

2011 2010

Supplemental cash flow informationInterest paid 71,972 4,549


17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

As a result of the use of financial instruments, the Company is exposed to credit risk, liquidity risk and market risks relating to foreign exchange and interest rate fluctuations. In order to manage foreign exchange and interest rate risks, the Company uses derivative financial instruments to set in Canadian dollars future payments on debts denominated in U.S. dollars (interest and principal). The Company does not intend to settle the derivative financial instruments prior to their maturity. These instruments are not held or issued for speculative purposes.

(a) Foreign currency interest rate swaps

The following foreign currency interest rate swaps are outstanding at August 31, 2011:

During the year ended August 31, 2011, a loss of $16.9 million (for the period ended August 31, 2010 - gain of $3.5 million) was recorded in loss (gain) on derivative financial instruments in the consolidated statement of operations related to the derivative not designated as a hedge. During the year ended August 31, 2011, a loss of $1.6 million (for the period ended August 31, 2010 – a loss of $13.3 million) was recorded in the consolidated statements of comprehensive loss related to the derivatives designated as cash flow hedges.

During the year ended August 31, 2011, a loss of $8.0 million was reclassified from accumulated other comprehensive loss to interest expense in the statement of operations related to the effect of the derivative financial instruments designated as cash flow hedges on the Company’s interest expense. The unrealized loss on valuation of derivative financial instruments that will be reclassified from accumulated other comprehensive loss to interest expense in the statement of operations over the next twelve months is expected to be $8.7 million. During the year ended August 31, 2011, foreign currency exchange losses of $24.2 million were reclassified to the statement of operations from accumulated other comprehensive loss, representing foreign currency exchange losses on the notional amount of the cash flow hedging derivatives (for the period ended August 31, 2010 – gains of $9.0 million). These amounts were offset by foreign currency exchange gains recognized on the US dollar denominated Notes and the Term Loan Facility.

Period covered

Notional amount

Pay leg - CDN

Derivative - not designated as a hedge

Tranche C 2010 to 2014 USD $180,000

Bankers' acceptance 3 months +

7.07%

Libor + 5%, with a floor of

1.25% 1.035

Derivatives - designated as cash flow hedge

Senior Secured Notes 2010 to 2014 USD $275,000 14.78% 12.50% 1.035

Tranche C 2011 to 2015 USD $48,125 8.66%

Libor + 5%, with a floor of

1.25% 0.9845

Receive leg - USD

CDN dollar exchange rate

per one US dollar


(b) Fair value of financial instruments

The carrying value of cash and accounts receivable (classified as loans and receivables), accounts payable (classified as other financial liabilities), and accrued liabilities (classified as other financial liabilities), approximate their fair value since these items will be realized or paid within one year or are due on demand.

The carrying value and fair value of long-term debt and derivative financial instruments as of August 31, 2011 and 2010 are as follows:

The fair value of long-term debt is estimated based on quoted market prices when available or on valuation models. When the Company uses valuation models, the fair value is estimated using discounted cash flows using market yields or the market value of similar instruments with similar terms and credit risk.

In accordance with CICA Section, 3862, Financial Instruments – Disclosures, the Company has considered the following fair value hierarchy that reflects the significance of the inputs used in measuring its financial instruments accounted for at fair value in the balance sheet:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and

Level 3: inputs that are not based on observable market data (unobservable inputs).

The fair value of derivative financial instruments recognized on the balance sheet is estimated as per the Company’s valuation models. These models project future cash flows and discount the future amounts to a present value using the contractual terms of the derivative instrument and factors observable in external markets data, such as period-end swap rates and foreign exchange rates (Level 2 inputs). An adjustment is also included to reflect non-performance risk impacted by the financial and economic environment prevailing at the date of the valuation in the recognized measure of the fair value of the derivative instruments by applying a credit default premium

Carrying value

Fair value

Carrying value Fair value

Other financial liabilities Long-term debt (572,298) (602,541) (646,031) (691,426)

Derivative financial instruments Assets Foreign currency interest rate swap - - 3,487 3,487 Embedded derivative 13,817 13,817 12,344 12,344

13,817 (1) 13,817 15,831 (1) 15,831 Liabilities Foreign currency interest rate swaps (43,400) (1) (43,400) (4,243) (1) (4,243)

(1) Net derivative financial instruments liabililty (Level 3) of $29.6 million (2010 - asset of $11.6 million) are reconciled in the table below.

20102011


estimated using a combination of observable and unobservable inputs in the market (Level 3 inputs) to the net exposure of the counterparty or the Company. Accordingly, financial derivative instruments are classified as level 3 under the fair value hierarchy.

The fair value of early prepayment options recognized as embedded derivatives is determined by option pricing models using Level 3 market inputs, including credit risk, volatility and discount factors.

The changes to the fair value of derivative financial instruments (Level 3) for the year ended August 31, 2011 and the period ended August 31, 2010 are as follows:

The estimated sensitivity on income and other comprehensive income for the year ended August 31, 2011, before income taxes, of a 100 basis-point change in the credit default premium used to calculate the fair value of derivate financial instruments, holding all other variables constant, as per the Company’s valuation models, is as follows:

(c) Credit risk management

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial asset fails to meet its contractual obligations.

The maximum credit exposure to credit risk at the reporting date is the carrying value of cash, accounts receivable and derivative financial instruments in an asset position. No collateral is held for any of the counterparties to the above financial assets.

2011 2010

Asset as at beginning of period 11,588 - Recognition of embedded derivative (note 11) - 8,057 Gain (loss) on fair value swap not designated as a hedge recognized in the statement of operations (note 5) (22,887) 3,263 Gain on embedded derivative recognized in the statement of operations (note 5) 1,473 4,287 Loss on cash flow swaps recognized in statement of comprehensive loss (1,573) (13,263) Loss on cash flow swaps reclassified from accumulated other comprehensive loss to comprehensive loss (24,188) 9,020 Contractual cash interest settlement on fair value swap not designated as a hedge (note 5) 6,004 224 Asset (liability) as at end of period (29,583) 11,588

Increase (decrease) Income

Other comprehensive

income

Increase of 100 basis points 178 548

Decrease of 100 basis points (181) (561)


Accounts receivable

In the normal course of business, the Company continuously monitors the financial condition of its customers and reviews the credit history of each new customer. The Company’s sales are widely distributed and the largest amount due from any single customer is $4.2 million (2010 - $4.9 million) or 4.1% of receivables at August 31, 2011 (2010 - 5.0%). The Company establishes an allowance for doubtful accounts when collection is determined to be unlikely based on the specific credit risk of its customers and historical trends. The allowance for doubtful accounts amounted to $2.7 million as of August 31, 2011. The allowance as at August 31, 2010 was nominal as a result of recording accounts receivable at fair value as a result of the Acquisition (note 3). At August 31, 2011, $57.0 million (2010 - $48.3 million) or 56% (2010 - 43%) of trade accounts receivable is considered past due as per the contractual credit terms and not yet impaired, which is defined as amounts outstanding beyond normal credit terms and conditions for respective customers. The amount past due relates to a number of independent customers for whom there is no recent history of default. The aging analysis of these trade receivables based on original invoice terms as at August 31, 2011 and 2010 is as follows:

The following table shows changes to the allowance for doubtful accounts for the year ended August 31, 2011 and the period ended August 31, 2010:

2011 2010

30 - 90 days 45,293 40,997 Greater than 90 days 11,718 7,262

57,011 48,259

2011 2010

Balance as at beginning of period - - Provision for doubtful accounts 4,007 431 Write-offs (1,308) (431) Balance as at end of period 2,699 -


Derivative financial instruments

As a result of the use of derivative financial instruments, the Company is exposed to the risk of non-performance by a third-party. The Company uses multiple counterparties when entering into derivative contracts to minimize its concentration exposure. The Company also uses counterparties that have an investment grade credit rating of no less than single “A”.

(d) Liquidity risk management

Liquidity risk is the risk that the Company will encounter difficulties in meeting its financial obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The Company manages this exposure risk by using cash on hand, cash generated from operations, staggered maturities of long-term debt and derivative financial instruments, available borrowings under the ABL Facility, cash flow forecasts and by deferring or eliminating discretionary spending.


As of August 31, 2011, material contractual obligations related to financial instruments included debt repayments, interest on long-term debt and obligations related to derivative instruments, less future receipts on derivative instruments. These contractual undiscounted obligations and their maturities are as follows:

(1) Contractual principal payments on long-term debt are based on actual foreign exchange rates as of August 31, 2011.

(2) Interest to be paid on long-term debt is based on actual interest rates and foreign exchange rates as of August 31, 2011.

(3) Contractual future disbursements and future receipts, on derivative financial instruments relates to principal and interest payments on the notional amount of the underlying swap based on interest rates and foreign exchange rates as of August 31, 2011.

(e) Market risk management

Market risk is the risk that changes in market prices due to foreign exchange rates and interest rates will affect the value of the Company’s financial instruments. The objective of market risk management is to mitigate and control exposures within acceptable parameters while optimizing the return on risk.

Foreign currency risk

As of August 31, 2011, all of the outstanding interest and principal payable on the Company’s long-term debt is payable in US dollars. The Company has entered into derivative financial instruments to mitigate the foreign currency risk exposure on 82% of the US dollar denominated long-term debt outstanding as of August 31, 2011 (2010 – 92%).

TotalLess than

1 year 1-3 years 3-5 years5 years or

more

Accounts payable 8,330 8,330 - - - Accrued liabilities 80,262 80,262 - - - Capital leases 1,560 - - - 1,560 Long-term debt (1) 602,359 16,862 84,310 231,852 269,335 Interest payments (2) 316,499 54,783 104,378 89,877 67,461

1,009,010 160,237 188,688 321,729 338,356 Derivative financial instruments (3)

Cash outflow 679,180 125,525 543,525 10,130 - Cash inflow (616,426) (109,021) (497,436) (9,969) -

62,754 16,504 46,089 161 - Total 1,071,764 176,741 234,777 321,890 338,356


The following table summarizes the estimated sensitivity on income and other comprehensive income for the year ended August 31, 2011, before income taxes, of a change of $0.01 in the period-end exchange rate of a Canadian dollar per one US dollar, holding all other variables constant:

Interest rate risk

The Company’s Term Loan Facility bears interest at floating rates while the Notes bear interest at a fixed rate. The Company has entered into foreign currency interest rate swaps in order to manage cash flow and fair value interest rate risk exposure due to changes in interest rates. As of August 31, 2011 long-term debt, including the effect of the related derivative financial instruments, was comprised of 53% (2010 – 43 %) fixed rate debt and 47% (2010 – 57%) floating rate debt.

The estimated sensitivity on interest expense for floating rate debt for the year ended August 31, 2011, of a 100 basis-point change in the period end interest rates, holding all other variables constant, is $3.5 million.

The estimated sensitivity on income and other comprehensive income for the year ended August 31, 2011, before income tax, of a 100 basis-point change in the discount rate used to calculate the fair value of financial instruments, as per the Company’s valuation model holding all other variables constant:


Other comprehensive

income

Increase of $0.01Gain (loss) on valuation and translation of financial instruments and derivative financial instruments (946) 4,219

Decrease of $0.01Gain (loss) on valuation and translation of financial instruments and derivative financial instruments 946 (4,219)


Other comprehensive

income

Increase of 100 basis points (803) 1,518

Decrease of 100 basis points 2,456 63


18. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

The Company has entered into various operating leases for property, office equipment and vehicles and has various other commitments. Aggregate future minimum payments under the terms of these commitments are as follows:

CONTINGENCIES

In 1996, eleven typographers employed by The Gazette (the “Typographers”) and their union, the Communications, Energy and Paperworkers’ Union of Canada, Local 145 (the “CEP”), commenced litigation against The Gazette, seeking damages for alleged lost salaries and benefits relating to a lockout of the Typographers. During January 2011, the Ontario Superior Court of Justice determined that claims of $15.0 million of certain Typographers (the “Assumed Typographers”) were assumed by Postmedia when Postmedia acquired the assets and business of Canwest LP. The Company has taken the position that no amounts are owing to the Assumed Typographers. The Company has determined that the fair value of the Assumed Typographers claim is nominal and has accrued a nominal amount in respect of the claim. The Company is also involved in various other 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.

19. SEGMENT INFORMATION

The Company has one reportable segment for financial reporting purposes, the Newspapers segment. The Newspapers segment is comprised of the Eastern newspapers operating segment and the Western newspapers operating segment which have been aggregated. The Newspapers segment publishes daily and non-daily newspapers and operates the related newspaper websites. Its revenue is primarily from advertising and circulation. Postmedia has other business activities and an operating segment which are not separately reportable and are referred to collectively as the All other category. Revenue in the All other category primarily consists of advertising and subscription revenue from FPinfomart and the website canada.com.

2012 16,713 2013 14,605 2014 13,401 2015 11,180 2016 10,453

Thereafter 15,083


Each operating 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 intersegment sales as if the sales were to third parties. Included within digital revenue on the statements of operations is advertising revenue of $63.8 million for the year ended August 31, 2011 (for the period ended August 31, 2010 - $6.8 million), and circulation/subscription revenue of $26.5 million for the year ended August 31, 2011 (for the period ended August 31, 2010 - $3.9 million). Accordingly, aggregate print and digital revenue from advertising was $738.3 million for the year ended August 31, 2011 (for the period ended August 31, 2010 - $82.4 million), and aggregate print and digital revenue from circulation/subscription was $260.5 million for the year ended August 31, 2011 (for the period ended August 31, 2010 - $35.6 million). Segmented information and a reconciliation of segment operating profit (loss) to loss before income taxes for the year ended August 31, 2011 and the period ended August 31, 2010 are as follows:

2011 2010Revenue Newspapers 984,660 117,694 All other 38,710 5,244 Intersegment elimination (1) (4,245) (844)

1,019,125 122,094 Operating profit (loss) Newspapers 222,788 17,658 All other 13,162 (780) Corporate (34,842) (6,152)

201,108 10,726 Reconciliation of segment operating profit (loss) to loss before income taxesAmortization 75,092 11,073 Restructuring of operations and other items 42,775 11,209 Operating income (loss) 83,241 (11,556) Interest expense, excluding loss on debt prepayment 80,315 12,702 Loss on debt prepayment 11,018 - Loss on disposal of property and equipment and intangible assets 175 - Loss (gain) on derivative financial instruments 21,414 (7,550) Foreign currency exchange (gains) losses (17,960) 9,607 Acquisition costs 1,217 18,303 Loss before income taxes (12,938) (44,618)

(1) The Newspapers segment recorded intersegment revenue of $3.7 million for the year ended August 31, 2011(for the period ended August 31, 2010 - $0.8 million), and the All other category recorded intersegment revenueof $0.5 million during the year ended August 31, 2011 (for the period ended August 31, 2010 - nil).


The following chart shows an allocation of Goodwill, Intangible Assets, Total Assets and Capital Expenditures by operating segment:

20. UNITED STATES ACCOUNTING PRINCIPLES

These consolidated financial statements have been prepared in accordance with Canadian GAAP. In certain aspects GAAP as applied in the United States (“US GAAP”) differs from Canadian GAAP. The following information complies with the GAAP reconciliations requirements of the Securities Exchange Commission (“SEC”) as published in Form 20-F. Amounts are in thousands of Canadian dollars, unless otherwise noted. Principle differences affecting the Company

a) Pension, post-retirement and post-employment liabilities

US GAAP requires an entity to recognize in its balance sheet an asset for a plan’s over funded status or a liability for a plan’s underfunded status, and recognize changes in the funded status of a defined benefit pension, post-retirement and post-employment plan in the year in which the changes occur through comprehensive income and a separate component of shareholders’ equity. The effect on the US GAAP reconciliation for the year ended August 31, 2011 was to decrease comprehensive loss by $16,484 (for the period ended August 31, 2010 – increase comprehensive loss $5,526) net of a future income tax provision of nil (for the period ended August 31, 2010 – future income tax recovery of nil).

Goodwill Intangible Assets (1) Total Assets Tangible Intangible

Newspapers 214,093 396,280 1,070,908 7,820 535 All other and corporate 22,000 43,752 109,335 3,843 8,201

236,093 440,032 1,180,243 11,663 8,736 (1) Intangible assets of the All other and corporate category include $7.6 million of Customer relationships, $5.6 million of Domain names and $30.6 million of Software.

2011Capital Expenditures

Goodwill (2) Intangible Assets (1) (2) Total Assets (2) Tangible Intangible

Newspapers 214,093 426,701 1,146,452 516 650 All other and corporate 22,000 50,499 119,752 245 29

236,093 477,200 1,266,204 761 679 (1) Intangible assets of the All other and corporate category include $9.6 million of Customer relationships, $6.0 million of Domain names and $34.9 million of Software.

2010Capital Expenditures

(2) Intangible assets and total assets as at August 31, 2010 were reclassified to reflect the final allocation of assets acquired in the Acquisition.


The balance sheet effect at August 31, 2011 was to decrease other accrued pension, post-retirement, post-employment and other liabilities by $10,958 (2010 – increase other accrued pension, post-retirement, post-employment and other liabilities by $5,526) and increase shareholders’ equity by $10,958 (2010 – decrease shareholders’ equity by $5,526). Under Canadian GAAP actuarial gains and losses for event-driven post-employment benefits are amortized over the average duration over which benefits are expected to be paid (expected average remaining service life). Under U.S. GAAP such actuarial gains are expensed in the year of incurrence. The effect on the US GAAP reconciliation for the year ended August 31, 2011 was to decrease compensation expense by $1,955 (for the period ended August 31, 2010 – nil) net of a future income tax provision of nil (for the period ended August 31, 2010 – nil). The balance sheet effect at August 31, 2011 was to decrease accrued pension, post-retirement, post-employment and other liabilities by $1,955 (2010 – increase other accrued pension, post-retirement, post-employment and other liabilities by nil) and increase shareholders’ equity by $1,955 (2010 – decrease shareholders’ equity by nil).

b) Enacted tax rates

Under ASC 740, Income Taxes, future tax liabilities should be adjusted for the effect of change in tax laws or tax rates in the period in which the changes are enacted. Under Canadian GAAP, the change in tax laws or tax rates are reflected when the change is substantively enacted. For the year ended August 31, 2011 and the period ended August 31, 2010, there were no differences in the rates to be used under US and Canadian GAAP.

c) Consolidated Statement of Cash Flows

The Company’s consolidated statement of cash flows is prepared in accordance with Canadian GAAP, which is consistent with the principles for cash flow statements in International Accounting Standard No. 7, Cash Flow Statements. Consistent with the accommodation provided by the U.S. Securities and Exchange Commission for a GAAP reconciliation, the Company has not provided a reconciliation of cash flows to US GAAP.

d) Debt Issuance Costs

Under Canadian GAAP debt issuance costs recorded in the consolidated financial statements are included as a component of long-term debt and recognized in earnings using the effective interest method. Under US GAAP, debt issuance costs are classified as an asset. The effect on the US GAAP reconciliation as at August 31, 2011 would be an increase to other assets of $24.9 million (2010 - $31.4 million) with an offsetting increase to long-term debt.

e) Other US GAAP Disclosures

Operating expenses in the statement of operations include $437.0 million of selling, general and administrative expenses (for the period ended August 31, 2010 - $59.7 million) and $12.0 million of rent expense (for the period ended August 31, 2010 - $1.6 million). Accounts payable and accrued liabilities on the consolidated balance sheet include $49.1 million of payroll related accruals (2010 - $65.5 million) and $5.5 million of accrued interest payable (2010 - $6.8 million).


Proposed Accounting Policies In September 2011, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether it is more likely than not (defined as having a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011. The Company does not expect this guidance will have a material impact on its results of operations or financial position.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The adoption of this disclosure-only guidance will not have an impact on the Company’s consolidated financial results and is effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.

In May 2011, the FASB issued amendments to fair value measurement and disclosure requirements. This guidance amends US GAAP to conform with measurement and disclosure requirements in International Financial Reporting Standards (“IFRS”). The amendments change the wording used to describe the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. This includes clarification of the FASB’s intent about the application of existing fair value measurement and disclosure requirements and those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. In addition, to improve consistency in application across jurisdictions, some changes in wording are necessary to ensure that US GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word “shall” rather than “should” to describe the requirements in US GAAP). This amended guidance is to be applied prospectively and is effective for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating this guidance and has not yet determined the impact the adoption will have on its consolidated financial statements.


Comparative Reconciliation of Net Loss The following is a reconciliation of net loss for the year ended August 31, 2011 and the period ended August 31, 2010 reflecting the differences between Canadian GAAP and US GAAP:

2011 2010

Net loss in accordance with Canadian GAAP (12,938) (44,618) Pension, post-retirement and post-employment liabilities (a) 1,955 -

Net loss in accordance with US GAAP (10,983) (44,618)

Loss per share in accordance with US GAAP: Basic (0.27)$ (1.11)$ Diluted (0.27)$ (1.11)$


Comparative Reconciliation of Comprehensive Income (Loss) The following is a reconciliation of comprehensive income (loss) for the year ended August 31, 2011 and the period ended August 31, 2010 reflecting the differences between Canadian GAAP and US GAAP:

Accumulated other comprehensive (income) loss – Pension, post-retirement and post-employment liabilities The following table represents the balance of accumulated other comprehensive income (loss) related to pension, post-retirement and post-employment liabilities under US GAAP:

Comparative Reconciliation of Shareholders’ Equity

A reconciliation of shareholders’ equity as at August 31, 2011 and 2010 reflecting the differences between Canadian GAAP and US GAAP is set out below:

2011 2010

Comprehensive loss in accordance with Canadian GAAP (14,511) (57,881) Impact of US GAAP differences on net income 1,955 -

(12,556) (57,881) Pension, post-retirement and post-employment liabilities (a) 16,484 (5,526)

Comprehensive income (loss) in accordance with US GAAP 3,928 (63,407)

Accumulated other comprehensive loss in accordance with US GAAP - July 13, 2010 - Other comprehensive loss in accordance with US GAAP (5,526) Accumulated other comprehensive loss in accordance with US GAAP - August 31, 2010 (5,526) Other comprehensive income in accordance with US GAAP 16,484 Accumulated other comprehensive income in accordance with US GAAP - August 31, 2011 10,958

2011 2010Shareholders' equity in accordance with Canadian GAAP 304,342 315,402 Pension, post-retirement and post-employment liabilities (a) 12,913 (5,526) Shareholders' equity in accordance with US GAAP 317,255 309,876


21. SUBSEQUENT EVENT

On October 18, 2011, the Company entered into an asset purchase agreement with affiliates of Glacier Media Inc. (the “Transaction”) to sell substantially all of the assets and liabilities of Lower Mainland Publishing Group, Victoria Times Colonist and Vancouver Island Newspaper Group, collectively herein referred to as the Disposed Properties, for gross proceeds of approximately $86.5 million subject to typical closing adjustments. The gross proceeds less transaction costs (“net proceeds”) will be used to repay a portion of the outstanding loans under Tranche C in accordance with the terms and conditions of the Term Loan Facility and will result in an additional write off of financing fees being recognized in interest expense. The Disposed Properties are all within the Newspapers segment. The Transaction is subject to customary closing conditions and regulatory approvals and is currently expected to close on November 30, 2011. Simultaneous with the closing of the Transaction the Company will enter into agreements with the purchaser for the provision of certain services on an ongoing basis (“service agreements”). The expected gain on sale has not yet been determined as certain goodwill allocations, working capital, and other adjustments have not been finalized.

Selected historical financial information with respect to the Disposed Properties as at and for the year ended August 31, 2011 is as follows:

Revenues 119,682 Operating profit before amortization and restructuring of operations and other items (1)(2) 16,900

Current assets 15,246 Total assets (3) 67,874 Current liabilities 10,808 Pension, post-retirement, post-employment and other liabilities 2,576 (1) Shared service costs historically allocated to the disposed properties have been removed from expenses in order to calculate operating profit before amortization and restructuring of operations and other items.

(3) Goodw ill is recorded at the Western new spapers reporting unit level and no allocation of such balance has been included in this selected f inancial information.

(2) Operating profit before amortization and restructuring of operations and other items has been derived from the New spapers segment operating profit and does not include any future revenues associated w ith the services agreements or expected cost synergies.

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Corporate Information BOARD OF DIRECTORS

Paul Godfrey President and Chief Executive Officer

Ronald W. Osborne Chairman of the Board

Charlotte Burke

Hugh F. Dow

David Emerson

John Paton

Graham Savage

Steven Shapiro

Peter Sharpe

Robert Steacy

STOCK EXCHANGE LISTINGS

The Toronto Stock Exchange (TSX)Trading Symbols: PNC.A, PNC.B

SHARE REGISTRAR AND TRANSFER AGENT Computershare Investor Services Inc. 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 Telephone: 1-800-564-6253

AUDITORS PricewaterhouseCoopers LLP One Lombard Place, Suite 2300 Winnipeg, Manitoba, Canada, R3B 0X6 Telephone: 1-204-926-2400

2011��1450 Don Mills RoadToronto, ONCanada, M3B 2X7416-383-2300

Investor RelationsDoug Lamb��

General InquiriesPhyllise Gelfand��

© 2011 Postmedia Network Canada Corp. all rights reserved.

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