2013 - Postmedia NetworkDigital revenue was $24.1 million and $70.2 million for the three and nine...

2013

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2013 Third Quarter

Head Office1450 Don Mills RoadToronto, ONCanada, M3B 2X7416-383-2300

Investor RelationsDoug LambEVP and Chief Financial [email protected]

General InquiriesPhyllise GelfandVice President, [email protected]

Third Quarter – Fiscal 2013

Table of Contents Interim Management’s Discussion and Analysis ..................................

Interim Consolidated Financial Statements ....................................... Page 23

Postmedia Network Canada Corp. 3rd Quarter – Fiscal 2013 Page 2

POSTMEDIA NETWORK CANADA CORP. INTERIM MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2013 AND 2012 Issued: July 3, 2013


JULY 3, 2013

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 interim condensed consolidated financial statements and related notes of Postmedia for the three and nine months ended May 31, 2013 and 2012 and the annual audited consolidated financial statements and related notes of Postmedia for the years ended August 31, 2012 and 2011. The interim condensed consolidated financial statements of Postmedia for the three and nine months ended May 31, 2013 and 2012 and the annual audited consolidated financial statements of Postmedia for the years ended August 31, 2012 and 2011 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. This discussion contains statements that are not historical facts and are forward-looking statements. These statements are subject to the risk factor described in the section entitled “Risk Factors” and the number of risks described in the section entitled “Risk Factors” contained in our annual management’s discussion and analysis for the years ended August 31, 2012 and 2011. 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 tried, where possible, to identify such statements by using words such as “believe”, “expect”, “estimate”, “anticipate”, “will”, “could” and similar expressions in connection with any discussion of future operating or financial performance. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise. All amounts are expressed in Canadian dollars unless otherwise noted. The interim condensed consolidated financial statements of Postmedia for the three and nine months ended May 31, 2013 and 2012 have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and International Accounting Standard (“IAS”) 34 – Interim Financial Reporting. In certain aspects US Generally Accepted Accounting Principles as applied in the United States (“US GAAP”) differ from IFRS. See “Differences between IFRS and US GAAP”. This management’s discussion and analysis is dated July 3, 2013 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.

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Additional IFRS Measures We use operating income before depreciation, amortization, impairment and restructuring, as presented in the interim condensed consolidated statement of operations for the three and nine months ended May 31, 2013 and 2012 and described in note 3 thereto, to assist in assessing our financial performance. Management and the Board of Directors of Postmedia use this measure to evaluate consolidated operating results and to assess Postmedia’s ability to incur and service debt. In addition, this measure is used to make operating decisions as it is an indicator of how much cash is being generated by Postmedia and assists in determining the need for additional cost reductions, evaluation of personnel and resource allocation decisions. Operating income before depreciation, amortization, impairment and restructuring is referred to as an additional IFRS measure and may not be comparable to similar measures presented by other companies. Overview and Background

We are the largest publisher by circulation of paid English-language daily newspapers in Canada, according to the Newspapers Canada 2012 Circulation Data Report. Our paid English-language daily newspapers have, in total, the highest weekly print readership in Canada, based on the NADbank 2012 survey data. Our business consists of news and information gathering and dissemination operations, with products offered in major Canadian markets and a number of regional and local markets in Canada through a variety of print, web, tablet and smartphone platforms. The combination of these distribution platforms provides readers with a variety of mediums through which to access and interact with our content. The breadth of our reach and the diversity of our content enable advertisers to reach their target audiences on a local, regional or national scale through the convenience of a single provider.

During the three months ended May 31, 2013, we amended our operating segments to reflect our change to a functional reporting structure which resulted in the elimination of publishers at our individual newspapers and the creation of Senior Vice President roles which will be responsible for specific functions across the entire business (the “Reorganization”). Prior to the Reorganization, we disclosed separately the results of both the Newspaper operating segment and an All other category which included other business activities and an operating segment which was not separately reportable. As a result of the changes to the reporting structure the All other category is now included in the Newspaper operating segment. Changes in reporting segments are to be applied retroactively; however, because we now operate in only one operating segment there is no segment information to disclose and accordingly we have removed the discussion surrounding our segment operations from this management’s discussion and analysis. The Newspaper segment publishes daily and non-daily newspapers and operates digital media and online assets including the canada.com network, each newspaper’s online website and Infomart, our media monitoring service. Recent developments

On June 26, 2012, we entered into an agreement of purchase and sale to sell the land and building located at 1450 Don Mills Road in Don Mills, Ontario for gross proceeds of $24 million. The sale closed on October 12, 2012. On November 12, 2012, the net proceeds from the sale were used for a mandatory redemption of $23.2 million aggregate principal amount of 8.25% Senior Secured Notes due 2017 (“First-Lien Notes”) at par in accordance with the terms and conditions of the First-Lien Notes indenture. The issuance of the First-Lien Notes in August 2012 and subsequent repayment of the then outstanding Senior Secured Term Loan Credit Facility (“Term Loan Facility”), gave rise to a potential termination event under our existing foreign currency interest rate swap associated with the 12.5% Senior Secured Notes due 2017 (“Second-Lien Notes”). As a result, in September 2012, we settled a notional amount of US$97.5 million of the foreign currency interest rate swap for a cash payment of $9.6 million including accrued interest.


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, single copy sales at retail outlets and vending machines and is a function of the number of newspapers sold and the price per copy. Digital revenue is comprised of revenue from national and local display advertising on our newspaper and other websites, including canada.com, revenue from e-Papers and digital access subscriptions and subscription revenue generated through Infomart, our media monitoring service.

As part of our fiscal 2014 planning process we updated our long-term financial forecast and as a result of lower than anticipated long-term revenue projections we have recorded impairment charges of long-lived assets during the three and nine months ended May 31, 2013. During the fourth quarter, we will complete our annual impairment test as of June 30, 2013, based on management's best estimates of market participant assumptions at that time. Accordingly, there may be adjustments to the impairments recorded during the three months ended May 31, 2013 and the amounts may be material.

Print advertising revenue was $113.4 million for the three months ended May 31, 2013, representing 59.1% of total revenue. The following chart summarizes our print advertising revenue by category for the three months ended May 31, 2013 ($ in millions):

Print advertising revenue was $351.6 million for the nine months ended May 31, 2013, representing 60.4% of total revenue. The following chart summarizes our print advertising revenue by category for the nine months ended May 31, 2013 ($ in millions):


Print advertising is influenced by the overall strength of the economy and significant structural changes in the newspaper industry and media in general. In recent years and continuing to date, the economic uncertainty and structural changes in the industry have resulted in significant declines in print advertising as well as a continuing shift in advertising dollars from print advertising to advertising in other formats, particularly online and other digital platforms such as search and social media websites. This shift is expected to continue and may be permanent. We expect the print advertising market to remain challenging throughout the remainder of fiscal 2013 and expect the current trends to continue into fiscal 2014. During the three and nine months ended May 31, 2013, we experienced print advertising revenue declines of 13.5% and 12.7%, respectively, as compared to the same periods in the prior year. The decline in print advertising revenue in the three and nine months ended May 31, 2013 primarily relates to weakness in the classified category which decreased 18.1% and 19.5%, respectively, and the national advertising category which decreased 16.3% and 14.4%, respectively, as compared to the same periods in the prior year. We are in the process of implementing a three year business transformation program (“Transformation Program”) that is expected to significantly reduce operating costs and focus on the development of our digital products.

Print circulation revenue was $49.4 million and $146.5 million for the three and nine months ended May 31, 2013, representing 25.8% and 25.2% of total revenue for such periods, respectively. Declines in circulation volumes have been experienced over the last few years and this trend continued in the three months ended May 31, 2013. Circulation volume decreases have been partially offset by price increases. We expect these trends to continue throughout the remainder of fiscal 2013. A portion of the print circulation volume decrease relates to the implementation of initiatives such as the elimination of publishing days and unprofitable circulation.

Digital revenue was $24.1 million and $70.2 million for the three and nine months ended May 31, 2013, representing 12.6% and 12.1% of total revenue for such periods, respectively. Digital revenues increased 2.2% and 4.6% in the three and nine months ended May 31, 2013, respectively, as compared to the same periods in the prior year. Increases in digital revenue are primarily a result of increases in local digital advertising revenue, partially offset by declines in digital classified revenue. We continue to believe digital revenue represents a future growth opportunity for Postmedia and as a result we are focused on various new products and initiatives in this area.

Our principal expenses consist of compensation, newsprint, and distribution. These comprised 52.2%, 6.4% and 17.3%, respectively, of total operating expenses excluding depreciation, amortization, impairment and restructuring for the three months ended May 31, 2013 and 52.0%, 6.8% and 17.3%, respectively, of total operating expenses excluding depreciation, amortization, impairment and restructuring for the nine months ended May 31, 2013. We experienced declines in compensation, newsprint and distribution expenses of 7.3%, 25.6% and 12.4%, respectively, in the three months ended May 31, 2013 and declines of 7.4%, 21.5% and 13.3%, respectively, in the nine months ended May 31, 2013, as compared to the same periods in the prior year.

During the three months ended May 31, 2013, we implemented initiatives which will result in an additional $4 million of net annualized cost savings. These cost savings are part of our Transformation Program that, in total, is expected to result in net operating cost savings of 15% to 20%. Since we announced the Transformation Program in July 2012 we have implemented initiatives which are expected to result in net annualized cost savings of approximately $62 million or a 9% decrease in net operating costs.


Our operating results are impacted by 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 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 newsprint expense by approximately $3.5 million on an annualized basis. We don’t expect a material change in newsprint prices throughout the remainder of fiscal 2013.

Our distribution is primarily outsourced to third party suppliers. The key drivers of our distribution expenses are fuel costs and circulation and insert volumes. Our distribution expenses have decreased during the three and nine months ended May 31, 2013 as a result of decreased circulation and insert volumes.

Other Factors

Seasonality

Revenue has experienced, and is expected to continue to experience, significant seasonality due to seasonal advertising patterns and seasonal influences on 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 IFRS requires our management to make estimates and assumptions 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 judgements on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions. There are no significant changes in our accounting estimates since August 31, 2012 as described in our annual management’s discussion and analysis and annual audited consolidated financial statements for the years ended August 31, 2012 and 2011, except with regards to the assumptions and accounting estimates used in evaluating goodwill and indefinite life intangible assets, more specifically the long-term financial forecast discussed in note 4 of our interim condensed consolidated financial statements for the three and nine months ended May 31, 2013.


Operating Results

Postmedia’s operating results for the three months ended May 31, 2013 as compared to the three months ended May 31, 2012

2013 2012Revenues

113,395 131,077 49,401 52,484 24,093 23,584

4,895 4,876 191,784 212,021

Expenses82,956 89,469 10,147 13,644 27,542 31,456 38,268 41,224 32,871 36,228

6,706 6,585 11,111 10,828 93,883 - 16,814 14,730

Operating income (loss) (95,643) 4,085 14,994 16,084

383 975 (Gain) loss on disposal of property and equipment and intangible assets……………… (202) 43

760 (9,836) 588 8,956

Loss before income taxes (112,166) (12,137) - -

Net loss attributable to equity holders of the Company (112,166) (12,137)

Depreciation…………………………………………………………………………………………Amortization…………………………………………………………………………………………

Restructuring and other items……………………………………………………………………

Interest expense……………………………………………………………………………………Net financing expense relating to employee benefit plans……………………………….…

Impairments…………………………………………………...………..…………………………

(Gain) loss on derivative financial instruments……….……………………………………… Foreign currency exchange losses …………..…………………………………………………

Provision for income taxes………………………………………………………………………

Operating income before depreciation, amortization, impairment and restructuring

Print advertising…………………………………………………………………………………… Print circulation…………………………………………………………………………………… Digital……………………………………………………………………………………………… Other………………………………………………………………………………………………

Distribution…………………………………………………………………………………………

Total revenues

Newsprint………………………………………………………………………………………… Compensation ……………………………………………………………………………………

Other operating……………………………………………………………………………………

Revenue

Print advertising

Print advertising revenue decreased $17.7 million, or 13.5%, to $113.4 million for the three months ended May 31, 2013, as compared to the same period in the prior year. This decrease relates to most of our major categories of print advertising revenue, including decreases from national advertising of 16.3%, retail advertising of 9.4%, classified advertising of 18.1%, and insert advertising of 6.9%. The total print advertising linage and average line rate related to national, retail and classified advertising decreased 9.6% and 5.8%, respectively, during the three months ended May 31, 2013, as compared to the same period in the prior year. Insert revenue decreases are primarily related to volume decreases of 5.8% during the three months ended May 31, 2013, as compared to the same period in the prior year.

Print circulation

Print circulation revenue decreased $3.1 million, or 5.9%, to $49.4 million for the three months ended May 31, 2013, as compared to the same period in the prior year. Net paid circulation decreased 14.3% for the three months ended May 31, 2013, as compared to the same period in the prior year and was partially offset by price increases. A portion of the print circulation revenue decrease relates to the implementation of initiatives which include the elimination of publishing days and unprofitable circulation.


Digital

Digital revenue increased $0.5 million, or 2.2%, to $24.1 million for the three months ended May 31, 2013, as compared to the same period in the prior year. Growth in digital revenue is primarily a result of increases in local digital advertising revenue of $2.0 million, partially offset by declines of $1.4 million in digital classified revenue.

Other

Other revenue increased a nominal amount for the three months ended May 31, 2013, as compared to the same period in the prior year.

Expenses

Compensation

Compensation expenses decreased $6.5 million, or 7.3%, to $83.0 million for the three months ended May 31, 2013, as compared to the same period in the prior year. The decrease is primarily due to lower salary costs of $8.4 million which are primarily as a result of our Transformation Program, partially offset by increased share-based and other long-term incentive plan compensation expense of $1.6 million as a result of changes in the share price of our Class C voting shares which is used to compute the fair value of our other long-term incentive plan. Excluding non-cash share-based and other long-term incentive plan compensation expense, compensation expense decreased $8.1 million, or 8.9%.

Newsprint

Newsprint expenses decreased $3.5 million, or 25.6%, to $10.1 million for the three months ended May 31, 2013, as compared to the same period in the prior year. Newsprint expense decreases are primarily a result of consumption decreases of 22.9% due to continued usage reduction efforts, reduced publishing days and lower newspaper circulation volumes, combined with a decrease in newsprint cost per tonne of 3.5%.

Distribution

Distribution expenses decreased $3.9 million, or 12.4%, to $27.5 million for the three months ended May 31, 2013, as compared to the same period in the prior year. Decreases in distribution expenses are primarily a result of a reduction in newspaper circulation volumes and the elimination of publishing days and unprofitable circulation.

Other operating

Other operating expenses decreased $3.0 million, or 7.2%, to $38.3 million for the three months ended May 31, 2013, as compared to the same period in the prior year. Decreases in other operating expenses are primarily a result of ongoing cost savings initiatives. Partially offsetting these decreases are increased rent and occupancy costs associated with new property operating leases.


Operating income before depreciation, amortization, impairment and restructuring decreased $3.4 million, or 9.4%, to $32.9 million for the three months ended May 31, 2013, as compared to the same period in the prior year. The decrease relates primarily to decreases in revenue, partially offset by decreases in expenses as discussed above. Excluding non-cash share-based and other long-term incentive plan compensation expense, operating income before depreciation, amortization, impairment and restructuring decreased $1.8 million, or 5.1%.


Depreciation

Depreciation increased $0.1 million, or 1.8%, to $6.7 million for the three months ended May 31, 2013, as compared to the same period in the prior year.

Amortization

Amortization increased $0.3 million, or 2.6%, to $11.1 million for the three months ended May 31, 2013, as compared to the same period in the prior year.

Impairments

During the three months ended May 31, 2013, we updated our long-term financial forecast. As a result of lower than anticipated long-term revenue projections due to economic and structural factors including the uncertainty of the print advertising market and the rapidly evolving digital advertising market, we concluded our assets may be impaired and as a result were required to perform an impairment analysis. As a result of the impairment analysis as at May 31, 2013, we recorded an impairment charge relating to our goodwill and indefinite life intangible assets of $73.9 million and $13.9 million, respectively. In addition, during the three months ended May 31, 2013, we recorded an impairment loss of $6.1 million with respect to a production facility upon reclassification of the asset from property and equipment to asset held-for-sale. There were no such impairments in the three months ended May 31, 2012.

Restructuring and other items

Restructuring and other items expense increased $2.1 million to $16.8 million for the three months ended May 31, 2013 as compared to the same period in the prior year. Restructuring and other items expense for the three months ended May 31, 2013 and May 31, 2012 consist of severance costs, which include both involuntary terminations and voluntary buyouts. Operating income (loss) Operating loss was $95.6 million for the three months ended May 31, 2013, as compared to operating income of $4.1 million for the same period in the prior year, primarily as a result of impairments recorded in the three months ended May 31, 2013 and decreased operating income before depreciation, amortization, impairment and restructuring which are both discussed above.

Interest expense Interest expense decreased $1.1 million, or 6.8%, to $15.0 million for the three months ended May 31, 2013, as compared to the same period in the prior year. Interest expense primarily relates to interest on our long-term debt that is recognized using the effective interest rate method, which amortizes the initial debt issuance costs and includes both cash and non-cash interest. The decrease in interest expense for the three months ended May 31, 2013 relates to a decrease in non-cash interest expense due to changes in amortization assumptions and lower debt levels as compared to the same period in the prior year, partially offset by an increase in the effective interest rate as a result of the refinancing on August 16, 2012. Cash interest expense decreased $0.3 million during the three months ended May 31, 2013, as compared to the same period in the prior year, due to reduced hedging on the Second-Lien Notes and lower debt levels, partially offset by an increase in the interest rate on the First-Lien Notes. Net financing expense relating to employee benefit plans

Net financing expense relating to employee benefit plans decreased $0.6 million to $0.4 million for the three months ended May 31, 2013, as compared to the same period in the prior year. The decrease relates to both a decrease in the interest cost on plan obligations and an increase in the expected return on plan assets.


(Gain) loss on disposal of property and equipment and intangible assets

During the three months ended May 31, 2013, we disposed of property and equipment and realized a gain of $0.2 million. During the three months ended May 31, 2012, we disposed of intangible assets and realized a nominal loss.

(Gain) loss on derivative financial instruments

Loss on derivative financial instruments for the three months ended May 31, 2013 was $0.8 million as compared to a gain of $9.8 million during the same period in the prior year. The loss for the three months ended May 31, 2013 relates to the change in fair value of our variable prepayment option embedded derivatives on the First-Lien Notes and Second-Lien Notes. The gain for the three months ended May 31, 2012 included a gain of $7.0 million related to the change in fair value of a fair value foreign currency interest rate swap that was not designated as a hedge and a gain of $3.7 million related to the change in fair value of the variable prepayment option embedded derivative on the Second-Lien Notes, partially offset by net cash outflows of $0.9 million related to a contractual cash interest settlement on a fair value swap not designated as a hedge. There were no losses related to the fair value swap not designated as a hedge during the three months ended May 31, 2013 as it was settled in conjunction with the refinancing on August 16, 2012 described previously.

Foreign currency exchange losses

Foreign currency exchange losses for the three months ended May 31, 2013 were $0.6 million as compared to $9.0 million during the same period in the prior year. On August 16, 2012 we repaid our Term Loan Facility in its entirety, which was denominated in US dollars, and replaced it with the First-Lien Notes which are denominated in Canadian dollars, thereby permanently reducing our exposure to foreign currency changes on approximately half of our long-term debt. In September 2012, we settled a notional amount of US$97.5 million of the foreign currency interest rate swap designated as a cash flow hedge thereby increasing our exposure to foreign currency changes on the non-swapped portion of the Second-Lien Notes from US$3.6 million to US$101.1 million. For the three months ended May 31, 2013 foreign currency exchange losses consist primarily of unrealized losses of $0.5 million related to the non-swapped portion of the Second-Lien Notes. For the three months ended May 31, 2012 foreign currency exchange losses consisted primarily of net realized losses of $0.2 million related to repayments of the Term Loan Facility, unrealized losses of $8.6 million related to the outstanding principal amount of the Term Loan Facility (both the non-swapped portion and the portion which was not subject to hedge accounting) and $0.2 million of unrealized losses relating to the non-swapped portion of the Second-Lien Notes. Loss before income taxes

Loss before income taxes was $112.2 million for the three months ended May 31, 2013, as compared to $12.1 million for the same period in the prior year. The increase in loss before income taxes is primarily the result of increased operating losses and losses on derivative financial instruments partially offset by decreased foreign currency exchange losses, all as discussed above.

Provision for income taxes

We have not recorded a current or deferred tax expense or recovery for the three months ended May 31, 2013 or 2012. Current taxes payable or recoverable result in an decrease or increase, respectively, to our tax loss carryforward balances. The cumulative tax loss carryforward balances have not been recognized as a net deferred tax asset on the statement of financial position. Net loss attributable to equity holders of the Company

Net loss for the three months ended May 31, 2013 was $112.2 million as compared to $12.1 million for the same period in the prior year, as a result of the factors described above in loss before income taxes.


Postmedia’s operating results for the nine months ended May 31, 2013 as compared to the nine months ended May 31, 2012

2013 2012

Revenues351,579 402,830 146,540 157,954 70,198 67,139 13,957 13,830

582,274 641,753 Expenses

247,076 266,766 32,111 40,911 82,099 94,654

113,826 123,259 107,162 116,163 20,336 19,564 32,679 32,685 93,883 - 23,425 22,341

Operating income (loss) (63,161) 41,573 46,767 47,720 1,149 2,925

(Gain) loss on disposal of property and equipment and intangible assets………………………… (989) 78 2,650 (15,260) 5,286 15,034

Loss before income taxes (118,024) (8,924) - -

Net loss from continuing operations (118,024) (8,924) - 14,053

Net earnings (loss) attributable to equity holders of the Company (118,024) 5,129

Provision for income taxes……………………………………………………………………………

Net earnings from discontinued operations, net of tax of nil…………………………………………

Interest expense………………………………………………………………………………………Net financing expense relating to employee benefit plans……………………………….…………

(Gain) loss on derivative financial instruments……………………………………………………… Foreign currency exchange losses……………………………………………………………………

Restructuring and other items……………………………………………………………………….

Total revenues

Compensation ……………………………………………………………………………………… Newsprint……………………………………………………………………………………………… Distribution…………………………………………………………………………………………… Other operating………………………………………………………………………………………

Impairments…………………………………..……………………………….………………………

Operating income before depreciation, amortization, impairment and restructuring Depreciation……………………………………………………………………………………………Amortization……………………………………………………………………………………………

Print advertising……………………………………………………………………………………… Print circulation……………………………………………………………………………………… Digital………………………………………………………………………………………………… Other……………………………………………………………………………………………………

Revenue

Print advertising

Print advertising revenue decreased $51.3 million, or 12.7%, to $351.6 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. This decrease relates to most of our major categories of print advertising revenue, including decreases from national advertising of 14.4%, retail advertising of 8.0%, classified advertising of 19.5%, and insert advertising of 7.3%. The total print advertising linage and average line rate related to national, retail and classified advertising decreased 9.5% and 4.7%, respectively, during the nine months ended May 31, 2013, as compared to the same period in the prior year. Insert revenue decreases are primarily related to volume decreases of 5.9% during the nine months ended May 31, 2013, as compared to the same period in the prior year.


Print circulation

Print circulation revenue decreased $11.4 million, or 7.2%, to $146.5 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. Net paid circulation decreased 12.4% for the nine months ended May 31, 2013, as compared to the same period in the prior year and was partially offset by price increases. A portion of the print circulation revenue decrease relates to the implementation of initiatives which include the elimination of publishing days and unprofitable circulation.

Digital

Digital revenue increased $3.1 million, or 4.6%, to $70.2 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. Growth in digital revenue is primarily a result of increases in local digital advertising revenue of $6.2 million partially offset by declines of $3.5 million in digital classified revenue.

Other

Other revenue increased $0.1 million for the nine months ended May 31, 2013, as compared to the same period in the prior year.

Expenses

Compensation

Compensation expenses decreased $19.7 million, or 7.4%, to $247.1 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. This decrease is primarily due to lower salary costs of $23.4 million as a result of Transformation Program, partially offset by increased share-based and other long-term incentive plan compensation expense of $3.6 million as a result of changes in the share price of our Class C voting shares which is used to compute the fair value of our other long-term incentive plan. Excluding non-cash share-based and other long-term incentive plan compensation expense, compensation expense decreased $23.3 million, or 8.7%.

Newsprint

Newsprint expenses decreased $8.8 million, or 21.5%, to $32.1 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. Newsprint expense decreases are primarily a result of consumption decreases of 19.6% due to continued usage reduction efforts, elimination of publishing days and lower newspaper circulation volumes, combined with a decrease in newsprint cost per tonne of 2.3%.

Distribution

Distribution expenses decreased $12.6 million, or 13.3%, to $82.1 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. Decreases in distribution expenses are primarily a result of a reduction in newspaper circulation volumes and the elimination of publishing days and unprofitable circulation.

Other operating

Other operating expenses decreased $9.4 million, or 7.7%, to $113.8 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. Decreases in other operating expenses are primarily a result of ongoing cost savings initiatives. Partially offsetting these decreases are increased news service costs as a result of the shutdown of Postmedia News and increased rent and occupancy costs associated with new property operating leases.



Operating income before depreciation, amortization, impairment and restructuring decreased $9.0 million, or 7.7%, to $107.2 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. The decrease relates primarily to decreases in revenue, partially offset by decreases in expenses as discussed above. Excluding non-cash share-based and other long-term incentive plan compensation expense, operating income before depreciation, amortization, impairment and restructuring decreased $5.4 million, or 4.7%.

Depreciation

Depreciation increased $0.8 million, or 3.9%, to $20.3 million for the nine months ended May 31, 2013, as compared to the same period in the prior year.

Amortization

Amortization decreased a nominal amount for the nine months ended May 31, 2013, as compared to the same period in the prior year.

Impairments

During the three months ended May 31, 2013, we updated our long-term financial forecast. As a result of lower than anticipated long-term revenue projections due to economic and structural factors including the uncertainty of the print advertising market and the rapidly evolving digital advertising market, we concluded our assets may be impaired and as a result were required to perform an impairment analysis. As a result of the impairment analysis as at May 31, 2013, we recorded an impairment charge relating to our goodwill and indefinite life intangible assets of $73.9 million and $13.9 million, respectively. In addition, during the nine months ended May 31, 2013, we recorded an impairment loss of $6.1 million with respect to a production facility upon reclassification of the asset from property and equipment to asset held-for-sale. There were no such impairments in the nine months ended May 31, 2012.

Restructuring and other items

Restructuring and other items expense for the nine months ended May 31, 2013 increased $1.1 million to $23.4 million as compared to the same period in the prior year. Restructuring and other items expense for the nine months ended May 31, 2013 includes an expense related to changes made to an employee benefit plan as a result of an arbitrators ruling. Our estimate of the expenses related to the changes made to the employee benefit plan consist of a $1.8 million increase to the employee benefit plan liability and cash expenses of $0.5 million. As a result of the changes made to the employee benefit plan, we expect future cash contributions to increase by approximately $0.1 million per year. Additionally, included in restructuring and other items are $21.1 million of severance costs, which include both involuntary terminations and voluntary buyouts. Restructuring and other items expense for the nine months ended May 31, 2012 was comprised of $22.3 million related to severance costs, which included both involuntary terminations and voluntary buyouts. Operating income (loss) Operating loss was $63.2 million for the nine months ended May 31, 2013, compared to operating income of $41.6 million for the same period in the prior year, primarily as a result of decreased operating income before depreciation, amortization, impairment and restructuring, and impairments recorded in the nine months ended May 31, 2013 which are discussed above.


Interest expense

Interest expense decreased $1.0 million to $46.8 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. Interest expense primarily relates to interest on our long-term debt that is recognized using the effective interest rate method which amortizes the initial debt issuance costs and includes both cash and non-cash interest. The decrease in interest expense for the nine months ended May 31, 2013 relates to decreases in interest expense due to lower debt levels as compared to the same period in the prior year, partially offset by an increase in the effective interest rate as a result of the refinancing on August 16, 2012. Cash interest expense decreased $1.0 million during the nine months ended May 31, 2013, as compared to the same period in the prior year, due to reduced hedging on the Second-Lien Notes and lower debt levels, partially offset by an increase in the interest rate on the First-Lien Notes. Net financing expense relating to employee benefit plans

Net financing expense relating to employee benefit plans decreased $1.8 million to $1.1 million for the nine months ended May 31, 2013, as compared to the same period in the prior year. The decrease relates to both a decrease in the interest cost on plan obligations and an increase in the expected return on plan assets.

(Gain) loss on disposal of property and equipment and intangible assets

During the nine months ended May 31, 2013, we disposed of property and equipment and intangible assets and realized a net gain of $1.0 million. During the nine months ended May 31, 2012, we disposed of property and equipment and intangible assets and realized a loss of $0.1 million.

(Gain) loss on derivative financial instruments

Loss on derivative financial instruments for the nine months ended May 31, 2013 was $2.7 million as compared to a gain of $15.3 million during the same period in the prior year. The loss for the nine months ended May 31, 2013 relates to the change in fair value of our variable prepayment option embedded derivatives on the First-Lien Notes and Second-Lien Notes. The gain for the nine months ended May 31, 2012 included a gain of $11.0 million related to the change in fair value of a fair value foreign currency interest rate swap that was not designated as a hedge, a gain of $7.7 million related to the change in fair value of the variable prepayment option embedded derivative on the Second-Lien Notes, partially offset by a loss of $0.7 million related to the settlement of a portion of a cash flow swap designated as a hedge and net cash outflows of $2.8 million related to contractual cash interest settlements on a fair value swap not designated as a hedge. There were no gains or losses related to the fair value swap not designated as a hedge during the nine months ended May 31, 2013 as it was settled in conjunction with the refinancing on August 16, 2012 described previously.


Foreign currency exchange losses

Foreign currency exchange losses for the nine months ended May 31, 2013 were $5.3 million as compared to $15.0 million during the same period in the prior year. On August 16, 2012 we repaid our Term Loan Facility in its entirety, which was denominated in US dollars, and replaced it with the First-Lien Notes which are denominated in Canadian dollars, thereby permanently reducing our exposure to foreign currency changes on approximately half of our long-term debt. In September 2012, we settled a notional amount of US$97.5 million of the foreign currency interest rate swap designated as a cash flow hedge thereby increasing our exposure to foreign currency changes on the non-swapped portion of the Second-Lien Notes from US$3.6 million to US$101.1 million. For the nine months ended May 31, 2013 foreign currency exchange losses consist primarily of unrealized losses of $5.2 million related to the non-swapped portion of the Second-Lien Notes. For the nine months ended May 31, 2012 foreign currency exchange losses consisted primarily of net realized losses of $4.0 million related to repayments of the Term Loan Facility, unrealized losses of $10.7 million related to the outstanding principal amount of the Term Loan Facility (both the non-swapped portion and the portion which was not subject to hedge accounting), realized losses of $0.8 million on contractual principal settlements on the foreign currency interest rate swap not designated as a hedge, partially offset by unrealized gains of $0.4 million related to the non-swapped portion of the Second-Lien Notes. Loss before income taxes

Loss before income taxes was $118.0 million for the nine months ended May 31, 2013, as compared to $8.9 million for the same period in the prior year. The increase in loss before income taxes is primarily the result of increased operating losses and losses on derivative financial instruments, partially offset by decreased foreign currency exchange losses, all as discussed above.

Provision for income taxes

We have not recorded a current or deferred tax expense or recovery for the nine months ended May 31, 2013 and 2012. Current taxes payable or recoverable result in an decrease or increase, respectively, to our tax loss carryforward balances. The cumulative tax loss carryforward balances have not been recognized as a net deferred tax asset on the statement of financial position. Net loss from continuing operations Net loss from continuing operations was $118.0 million for the nine months ended May 31, 2013, as compared to $8.9 million for the same period in the prior year, as a result of the factors described above in loss before income taxes. Net earnings from discontinued operations We completed the sale of substantially all of the assets and liabilities of the Lower Mainland Publishing Group, the Victoria Times Colonist and the Vancouver Island Newspaper Group on November 30, 2011, and as a result there were no discontinued operations for the nine months ended May 31, 2013. Net earnings from discontinued operations for the nine months ended May 31, 2012 was $14.1 million and included a $17.1 million gain on sale of discontinued operations and an allocation of $6.4 million of interest expense representing an acceleration of debt issuance costs related to the debt repayment made with the net proceeds from the sale. Additional information on this transaction is available in note 14 of our interim condensed consolidated financial statements for the three and nine months ended May 31, 2013 and 2012. Net earnings (loss) attributable to equity holders of the Company

Net loss for the nine months ended May 31, 2013 was $118.0 million as compared to net earnings of $5.1 million for the same period in the prior year. The decrease is due to a decrease in the net earnings from continuing operations and no net earnings from discontinued operations, both as discussed above.


Consolidated quarterly financial information

Fiscal 2011 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4

Revenue…………………………………………………………………………… 191,784 178,818 211,672 190,124 212,021 198,642 231,090 202,151

Net earnings (loss) from continuing operations………………………………… (112,166) (14,162) 8,304 (28,351) (12,137) (11,065) 14,278 (838) Net earnings (loss) per share from continuing operations

Basic…………………………………………………………………………… (2.79)$ (0.35)$ 0.21$ (0.70)$ (0.30)$ (0.27)$ 0.35$ (0.02)$ Diluted…………………………………………………………………………… (2.79)$ (0.35)$ 0.20$ (0.70)$ (0.30)$ (0.27)$ 0.35$ (0.02)$

Net earnings (loss) attributible to equity holders of the Company……………… (112,166) (14,162) 8,304 (28,351) (12,137) (11,065) 28,331 (351) Net earnings (loss) per share attributible to equity holders of the Company…

Basic…………………………………………………………………………… (2.79)$ (0.35)$ 0.21$ (0.70)$ (0.30)$ (0.27)$ 0.70$ (0.01)$ Diluted…………………………………………………………………………… (2.79)$ (0.35)$ 0.20$ (0.70)$ (0.30)$ (0.27)$ 0.70$ (0.01)$

Cash flows from operating activities……………………………………………… 15,975 20,706 13,228 (7,472) 24,046 16,045 9,922 (5,187)

($ in thousands of Canadian dollars, except per share information)Fiscal 2012Fiscal 2013

Liquidity and capital resources

Our principal uses 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 senior secured asset-based revolving credit facility (“ABL Facility”) will enable us to meet our working capital, capital expenditure, debt servicing and other funding requirements for the foreseeable future. However, our ability to fund our working capital needs, debt servicing and other obligations 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”. Our cash flows from operating activities may be impacted by, among other things, the overall strength of the economy, 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, particularly online and other digital platforms such as search and social media websites. 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 agreements. As at May 31, 2013, no amounts were drawn under the ABL Facility.

Sources of Cash

Cash flows from operating activities

Our principal sources of liquidity are cash flows from operating activities. For the three and nine months ended May 31, 2013, our cash flows from operating activities were inflows of $16.0 million and $49.9 million, respectively (2012 – $24.0 million and $50.0 million, respectively). Cash flows from operating activities decreased $8.0 million for the three months ended May 31, 2013, as compared to the same period in the prior year due to a decrease in cash flows as a result of declines in operating income before depreciation, amortization, impairment and restructuring as well as a decrease in cash flows as a result of higher working capital partially offset by lower funding obligations on our employee benefit plans. Cash flows from operating activities decreased $0.1 million for the nine months ended May 31, 2013, as compared to the same period in the prior year due to a decrease in cash flows as a result of declines in operating income before depreciation, amortization, impairment and restructuring and the settlement of the foreign currency interest rate swap designated as a cash flow hedge offset by lower funding obligations on our employee benefit plans.

As at May 31, 2013 we had cash of $56.5 million (August 31, 2012 - $22.2 million) and our ABL facility was undrawn (August 31, 2012 – nil). Availability under the ABL facility as at May 31, 2013 was $30.4 million (August 31, 2012 - $23.3 million).


Cash flows from investing activities

For the three and nine months ended May 31, 2013, our cash flows from investing activities were outflows of $2.1 million and inflows of $16.5 million, respectively (2012 – outflows of $1.8 million and inflows of $76.6 million). The net cash outflows from investing activities during the three months ended May 31, 2013 include the net proceeds received on the sale of property and equipment and assets held-for-sale of $0.3 million, offset by outflows on capital expenditures related to property and equipment of $1.1 million and intangible assets of $1.3 million. The net cash outflows from investing activities during the three months ended May 31, 2012 included the net proceeds from the sale of discontinued operations of $1.5 million, offset by outflows on capital expenditures related to property and equipment of $1.7 million and intangible assets of $1.5 million. The net cash inflows from investing activities during the nine months ended May 31, 2013 include the net proceeds received on the sale of property and equipment, intangible assets and asset held-for-sale of $25.9 million, offset by outflows on capital expenditures related to property and equipment of $5.4 million and intangible assets of $3.9 million. The net cash inflows from investing activities during the nine months ended May 31, 2012 included the net proceeds from the sale of discontinued operations of $87.3 million, offset by outflows on capital expenditures related to property and equipment of $5.6 million and intangible assets of $5.2 million.

Uses of Cash

Cash flows from financing activities

Cash outflows from financing activities for the three and nine months ended May 31, 2013, were $8.9 million and $32.2 million, respectively (2012 – $7.6 million and $108.3 million, respectively), and were related to our indebtedness as discussed below.

Indebtedness

As of May 31, 2013, we have $218.0 million First-Lien Notes and US$268.6 million Second-Lien Notes outstanding (August 31, 2012 - $250.0 million and US$268.6 million, respectively). During the three and nine months ended May 31, 2013, we redeemed $8.9 million and $32.0 million aggregate principal amount of First-Lien Notes at par in accordance with the terms and conditions of the First-Lien Notes indenture, respectively. During the three months ended May 31, 2012 we made mandatory and optional principal repayments on the Term Loan Facility of $7.6 million (US$7.5 million). During the nine months ended May 31, 2012 we made mandatory and optional principal repayments on the Term Loan Facility of $102.0 million (US$100.0 million), which included the required repayment due to the sale of discontinued operations, as discussed previously. During the nine months ended May 31, 2012 we repurchased and retired US$6.4 million of the Second-Lien Notes for total cash consideration of $6.3 million (US$6.2 million).


The following tables set out the principal and carrying amount of our long-term debt outstanding as at May 31, 2013 and August 31, 2012. The first column of the table translates, where applicable, 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 May 31, 2013 and August 31, 2012, respectively, for our non-swapped debt.

First-Lien Notes (CDN$218.0M)……………………………… 217,960 217,960 5,572 212,388 Second-Lien Notes (swapped) (US$167.5M)……………… 173,363 173,664 5,122 168,542 Second-Lien Notes (non-swapped) (US$101.1M)…………… 104,857 104,857 3,093 101,764

496,180 496,481 13,787 482,694

First-Lien Notes (CDN$250.0M)……………………………… 250,000 250,000 5,866 244,134 Second-Lien Notes (swapped) (US$265.0M)……………… 274,275 261,211 8,904 252,307 Second-Lien Notes (non-swapped) (US$3.6M)……………… 3,583 3,583 122 3,461

527,858 514,794 14,892 499,902

($ in thousands of Canadian dollars)August 31, 2012

Principal Outstanding

(US$ Debt translated at swapped or

period end rates)


(US$ Debt translated at period end

exchange rates)

Financing fees,

discounts and other

Carrying Value

May 31, 2013($ in thousands of Canadian dollars)


(US$ Debt translated at swapped or

period end rates)


(US$ Debt translated at period end

exchange rates)

Financing fees,

discounts and other

Carrying Value

Financial position as at May 31, 2013 compared to August 31, 2012

($ in thousands of Canadian dollars)May 31,

2013August 31,

2012

Current assets………………………………………………… 159,925 127,199 Total assets……………………………………………………… 911,619 1,044,848 Current liabilities………………………………………………… 150,055 159,293 Total liabilities…………………………………………………… 784,156 811,093 Equity…………………………………………………………… 127,463 233,755

The increase in our current assets at May 31, 2013 as compared to August 31, 2012 is primarily due to an increase in cash. Total assets at May 31, 2013 decreased compared to August 31, 2012, due to the impairments on property and equipment, intangible assets and goodwill, the disposal of an asset held-for-sale as well as a decrease in the carrying value of property and equipment and intangible assets as a result of depreciation and amortization during the nine months ended May 31, 2013. These decreases were partially offset by the increase in current assets previously described. Current liabilities have decreased due to a reduction in the current portion of long term-debt due to the mandatory redemption of First-Lien Notes on November 12, 2012 as discussed previously, partially offset by increased accrued interest payable on long-term debt. The decrease in total liabilities is due to the decrease in current liabilities previously described, the settlement of and decreases in the fair value of derivative financial instruments liabilities, decreases in other non-current liabilities due to a decrease in the carrying value of our employee benefit plans liability, partially offset by an increase in the carrying value of long-term debt as a result of unrealized foreign currency exchange losses during the nine months ended May 31, 2013.


Financial Instruments and Financial Instruments Risk Management

The financial instruments and financial risk management policies are the same as disclosed in the audited consolidated financial statements for the years ended August 31, 2012 and 2011, except as disclosed below.

Derivative financial instruments

During the nine months ended May 31, 2013 we settled a notional amount of US$97.5 million of the foreign currency interest rate swap designated as a cash flow hedge for a cash payment of $9.6 million, including accrued interest of $0.6 million, and as a result have a notional amount of US$167.5 million of the foreign currency interest rate swap designated as a cash flow hedge outstanding as of May 31, 2013 (August 31, 2012 – US$265.0 million). Foreign currency risk

As at May 31, 2013, approximately 56% of the outstanding principal and related interest payable on our long-term debt is payable in US dollars (August 31, 2012 – 51%). We have entered into transactions to reduce foreign currency risk exposure on our US dollar denominated long-term debt. As at May 31, 2013, through our foreign currency interest rate swap we had hedged foreign currency risk on 62% of our US dollar denominated debt (August 31, 2012 - 99%). As at May 31, 2013, we were exposed to foreign currency risk on the non-swapped portion of the Second-Lien Notes of US$101.1 million (August 31, 2012 - US$3.6 million). As at May 31, 2013, 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 a $1.0 million increase or decrease to foreign currency exchange losses in the statement of operations.

Guarantees and Off-Balance Sheet Arrangements

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

Contractual obligations and commitments

Our obligations under firm contractual arrangements, including commitments for future payments under finance lease arrangements, operating lease arrangements, debt agreements and swap agreements, are not materially different from those discussed in our annual management’s discussion and analysis for the years ended August 31, 2012 and 2011, other than the effects of foreign exchange on our US dollar debt and swap agreements. Our obligations under firm contractual arrangements related to minimum required employee benefit plan funding has been decreased due to solvency relief measures provided to all Ontario registered pension plans by the Ontario government. After taking into account the solvency relief measures, we expect to contribute $12.4 million to our defined benefit pension plans for the year ended August 31, 2013 of which $9.1 million has been contributed during the nine months ended May 31, 2013.


Future Accounting Standards Future accounting standards that are issued but not yet effective are the same as described in our annual management’s discussion and analysis and annual consolidated financial statements for the years ended August 31, 2012 and 2011, except as disclosed below and in our interim condensed consolidated financial statements for the three and nine months ended May 31, 2013 and 2012. IAS 19 – Employee Benefits (Amended)

IAS 19 amendments include, among other changes, the immediate recognition of the actuarial gains and losses in other comprehensive income, the introduction of a net interest approach that replaces the expected return on plan assets and interest costs on the defined benefit obligation with a single net interest component and all past service costs are to be recognized in profit or loss when the employee benefit plan is amended. This standard is required to be applied retrospectively for annual periods beginning on or after January 1, 2013. We will be adopting this standard effective September 1, 2013, for the year ending August 31, 2014, and at that time under the amended standard will be required to restate our results for the prior year, which is the year ending August 31, 2013. As a result, under the amended standard, for the year ending August 31, 2013 we anticipate that compensation expense and financing expense related to employee benefit plans will increase $0.5 million and $5.9 million, respectively. In addition, we anticipate an offsetting increase in other comprehensive income related to actuarial gains on employee benefits of $6.6 million. The aggregate anticipated impact is an increase to comprehensive income of $0.2 million. Differences between IFRS and US GAAP

The preceding discussion and analysis has been based upon financial statements prepared in accordance with IFRS, which differs in certain respects from US GAAP. The significant differences are discussed in detail in note 15 of our interim condensed consolidated financial statements for the three and nine months ended May 31, 2013 and 2012. The IAS 19 amendments described above are expected to result in additional differences between IFRS and US GAAP because there is no corresponding change to US GAAP.

Risk Factors

The risks relating to our business are the same as described in the section entitled “Risk Factors” included in our annual management’s discussion and analysis for the years ended August 31, 2012 and 2011, which section is incorporated by reference herein, with the following additional risk factor:

We may not be able to refinance our ABL Facility on attractive terms or at all

On February 1, 2013, the Supreme Court of Canada (the “SCC”) released its decision in Sun Indalex Finance, LLC v. United Steelworkers, a case which dealt with the priority claims of pension plan members against those of secured creditors in the context of the insolvency of a plan sponsor. The SCC overturned the Ontario Court of Appeals decision that effectively subordinated a debtor-in-possession financing that had been granted super-priority status in a Companies’ Creditors Arrangement Act proceeding to the wind up deficiency under a pension plan. The SCC, however, upheld the Ontario Court of Appeal’s expanded interpretation of the deemed trust provisions of the Ontario Pension Benefits Act, and found that a deemed trust applies in respect of the entire wind up deficiency of a plan upon its wind up, which is an expansion from previous case law which limited the deemed trust to current service costs and special payments accrued and unpaid to the wind up date. The expanded definition of the deemed trust may affect the availability of credit to companies who sponsor defined benefit pension plans as lenders consider the possible impact of a future plan wind up on the security of any loan.

The deemed trust is limited in respect of the assets to which it applies. Specifically, wind up deficiencies have a priority charge only over a debtor company's accounts receivable and inventory and their proceeds. Other assets are not subject to the deemed trust.


We have an ABL Facility with an availability of an aggregate amount of up to $60 million subject to a reduction for a required excess availability amount of $15 million. As at May 31, 2013, no amounts were drawn under the ABL Facility and we had availability of $30.4 million. The ABL Facility is secured on a first-priority basis by accounts receivable, cash and inventory of Postmedia Network Inc. and any related assets of Postmedia Network Canada Corp. As such, the ABL Facility is primarily secured by the assets over which a deemed trust could be found in the event of the wind up of a company sponsored pension plan. The ABL Facility terminates on July 13, 2014. Given that the SCC decision is recent and its impact on the credit markets is uncertain, as well as the current solvency deficiencies in our pension plans, there can be no assurance that we will be able to refinance the ABL Facility on attractive terms or at all.

Internal Controls

Disclosure controls and procedures within Postmedia have been designed to provide reasonable assurance that all relevant information is identified to its management, including the President and Chief Executive Officer (“CEO”) and the Executive Vice President and Chief Financial Officer (“CFO”), as appropriate, to allow required disclosures to be made in a timely fashion.

Internal controls over financial reporting have been designed by management, under the supervision of and with the participation of the CEO and CFO, to provide reasonable assurance regarding the reliability of Postmedia’s financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

The CEO and CFO have evaluated whether there were changes to Postmedia's internal control over financial reporting during the three and nine months ended May 31, 2013, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting. There were no changes identified during their evaluation.

Share Capital

As at June 27, 2013 we had the following number of shares and options outstanding:

Class C voting shares 982,561 Class NC variable voting shares 39,227,058 Total shares outstanding 40,209,619 Total options and restricted share units outstanding (1)

1,832,000

(1) The total options and restricted share units outstanding are convertible into 1,762,000 Class C voting shares and 70,000 Class NC variable voting shares. The total options and restricted share units outstanding include 1,032,000 options that are vested and 800,000 options that are unvested.


POSTMEDIA NETWORK CANADA CORP. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2013 AND 2012 (UNAUDITED) Issued: July 3, 2013


POSTMEDIA NETWORK CANADA CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands of Canadian dollars, except per share amounts)

2013 2012 2013 2012

Revenues Print advertising 113,395 131,077 351,579 402,830 Print circulation 49,401 52,484 146,540 157,954 Digital 24,093 23,584 70,198 67,139 Other 4,895 4,876 13,957 13,830 Total revenues 191,784 212,021 582,274 641,753 Expenses Compensation 82,956 89,469 247,076 266,766 Newsprint 10,147 13,644 32,111 40,911 Distribution 27,542 31,456 82,099 94,654 Other operating 38,268 41,224 113,826 123,259 Operating income before depreciation, amortization, impairment and restructuring (note 3) 32,871 36,228 107,162 116,163 Depreciation 6,706 6,585 20,336 19,564 Amortization 11,111 10,828 32,679 32,685 Impairments (note 4) 93,883 - 93,883 - Restructuring and other items (notes 8 and 10) 16,814 14,730 23,425 22,341 Operating income (loss) (95,643) 4,085 (63,161) 41,573 Interest expense 14,994 16,084 46,767 47,720 Net financing expense relating to employee benefit plans (note 10) 383 975 1,149 2,925 (Gain) loss on disposal of property and equipment and intangible assets (202) 43 (989) 78 (Gain) loss on derivative financial instruments (note 5) 760 (9,836) 2,650 (15,260) Foreign currency exchange losses 588 8,956 5,286 15,034 Loss before income taxes (112,166) (12,137) (118,024) (8,924) Provision for income taxes - - - - Net loss from continuing operations (112,166) (12,137) (118,024) (8,924) Net earnings from discontinued operations, net of tax of nil (note 14) - - - 14,053 Net earnings (loss) attributable to equity holders of the Company (112,166) (12,137) (118,024) 5,129

Loss per share from continuing operations (note 11):Basic (2.79)$ (0.30)$ (2.93)$ (0.22)$ Diluted (2.79)$ (0.30)$ (2.93)$ (0.22)$

Earnings per share from discontinued operations (note 11):Basic -$ -$ -$ 0.35$ Diluted -$ -$ -$ 0.35$

Earnings (loss) per share attributable to equity holders of the Company (note 11):Basic (2.79)$ (0.30)$ (2.93)$ 0.13$ Diluted (2.79)$ (0.30)$ (2.93)$ 0.13$

For the three months ended For the nine months endedMay 31, May 31,

The notes constitute an integral part of the interim condensed consolidated financial statements.


POSTMEDIA NETWORK CANADA CORP. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) (In thousands of Canadian dollars)

2013 2012 2013 2012

Net earnings (loss) attributable to equity holders of the Company (112,166) (12,137) (118,024) 5,129

Other comprehensive income (loss) from continuing operationsAmounts subsequently reclassified to the statement of operationsGain on valuation of derivative financial instruments, net of tax of nil 1,416 2,115 319 5,163 Amounts not subsequently reclassified to the statement of operationsNet actuarial gains (losses) on employee benefits, net of tax of nil (note 10) (5,689) (41,393) 10,606 (71,581)

Other comprehensive loss from discontinued operationsAmounts not subsequently reclassified to the statement of operationsNet actuarial losses on employee benefits, net of tax of nil (note 10) - - - (906)

Other comprehensive income (loss) (4,273) (39,278) 10,925 (67,324)

Comprehensive loss attributable to equity holders of the Company (116,439) (51,415) (107,099) (62,195)

Total comprehensive income (loss) attributable to equity holders of the Company: Continuing operations (116,439) (51,415) (107,099) (75,342) Discontinued operations - - - 13,147 Comprehensive loss attributable to equity holders of the Company (116,439) (51,415) (107,099) (62,195)




POSTMEDIA NETWORK CANADA CORP. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) (In thousands of Canadian dollars)

As at May 31,

2013

As at August 31,

2012

ASSETS

Current Assets Cash 56,480 22,189 Accounts receivable 91,082 90,923 Inventory 3,072 3,829 Prepaid expenses and other assets 9,291 10,258 Total current assets 159,925 127,199

Non-Current AssetsProperty and equipment 234,255 267,491 Asset held-for-sale (note 4) 10,530 23,139 Derivative financial instruments (note 6) 21,458 24,108 Other assets 936 1,549 Intangible assets (note 4) 334,915 377,862 Goodwill (note 4) 149,600 223,500

Total assets 911,619 1,044,848



POSTMEDIA NETWORK CANADA CORP. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued) (UNAUDITED) (In thousands of Canadian dollars)

As at May 31,

2013

As at August 31,

2012

LIABILITIES AND EQUITY

Current Liabilities Accounts payable and accrued liabilities (note 7) 77,575 65,268 Provisions (note 8) 32,895 29,888 Deferred revenue 24,806 25,915 Current portion of derivative financial instruments (note 6) 2,279 6,069 Current portion of long-term debt (note 9) 12,500 32,153 Total current liabilities 150,055 159,293

Non-Current LiabilitiesLong-term debt (note 9) 470,194 467,749 Derivative financial instruments (note 6) - 12,369 Other non-current liabilities (notes 10 and 12) 162,352 169,413 Provisions (note 8) 874 1,588 Deferred income taxes 681 681

Total liabilities 784,156 811,093

Equity Capital stock (note 11) 371,132 371,132 Contributed surplus (note 12) 8,695 7,888 Deficit (246,775) (139,357) Accumulated other comprehensive loss (5,589) (5,908) Total equity 127,463 233,755 Total liabilities and equity 911,619 1,044,848



POSTMEDIA NETWORK CANADA CORP. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) (In thousands of Canadian dollars)

Balance as at August 31, 2012 371,132 7,888 (139,357) (5,908) 233,755 Net loss attributable to equity holders of the Company - - (118,024) - (118,024) Other comprehensive income - - 10,606 319 10,925 Comprehensive income (loss) attributable to equity holders of the Company - - (107,418) 319 (107,099) Share-based compensation plans (note 12) - 807 - - 807 Balance as at May 31, 2013 371,132 8,695 (246,775) (5,589) 127,463

Balance as at August 31, 2011 371,132 5,602 (46,618) (14,836) 315,280 Net earnings attributable to equity holders of the Company - - 5,129 - 5,129 Other comprehensive income (loss) - - (72,487) 5,163 (67,324) Comprehensive income (loss) attributable to equity holders of the Company - - (67,358) 5,163 (62,195) Share-based compensation plans (note 12) - 1,845 - - 1,845 Balance as at May 31, 2012 371,132 7,447 (113,976) (9,673) 254,930

For the nine months ended May 31, 2012

Capital stock

Contributed surplus Deficit

Accumulated other

comprehensive loss

Total Equity

For the nine months ended May 31, 2013

Capital stock

Contributed surplus Deficit

Accumulated other

comprehensive loss

Total Equity



POSTMEDIA NETWORK CANADA CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands of Canadian dollars)

2013 2012 2013 2012CASH GENERATED (UTILIZED) BY:OPERATING ACTIVITIESNet earnings (loss) attributable to equity holders of the Company (112,166) (12,137) (118,024) 5,129 Items not affecting cash: Depreciation 6,706 6,585 20,336 19,727 Amortization 11,111 10,828 32,679 32,740 Impairments (note 4) 93,883 - 93,883 - (Gain) loss on derivative financial instruments (note 5) 760 (10,726) 2,650 (18,741) Non-cash interest 672 1,467 3,470 10,178 (Gain) loss on disposal of property and equipment and intangible assets (202) 43 (989) 78 Non-cash foreign currency exchange losses 550 9,016 5,228 14,218 Gain on sale of discontinued operations (note 14) - - - (17,109) Share-based compensation plans and other long-term incentive plan expense (recovery) (note 12) 214 (1,380) 1,149 (2,463) Net financing expense relating to employee benefit plans (note 10) 383 975 1,149 2,932 Non-cash compensation expense of employee benefit plans (note 10) 1,078 - 2,130 - Employee benefit funding in excess of compensation expense (note 10) - (2,741) - (15,588) Settlement of foreign currency interest rate swap designated as a cash flow hedge (note 6) - - (8,976) - Net change in non-cash operating accounts 12,986 22,116 15,224 18,912 Cash flows from operating activities 15,975 24,046 49,909 50,013

INVESTING ACTIVITIESNet proceeds received on the sale of discontinued operations (note 14) - 1,450 - 87,340 Net proceeds from the sale of property and equipment, intangible assets and assets held-for-sale 262 4 25,884 4 Additions to property and equipment (1,108) (1,695) (5,414) (5,635) Additions to intangible assets (1,314) (1,537) (3,937) (5,159) Cash flows from investing activities (2,160) (1,778) 16,533 76,550

FINANCING ACTIVITIESRepayment of long-term debt (note 9) (8,853) (7,629) (32,040) (108,310) Debt issuance costs - - (111) (37) Cash flows from financing activities (8,853) (7,629) (32,151) (108,347)

Net change in cash 4,962 14,639 34,291 18,216 Cash at beginning of period 51,518 14,060 22,189 10,483 Cash at end of period 56,480 28,699 56,480 28,699

2013 2012 2013 2012Supplemental disclosure of operating cash flows Interest paid 13,399 4,447 33,895 35,910 Income taxes paid - - - -




POSTMEDIA NETWORK CANADA CORP. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2013 AND 2012 (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 Company’s head office and registered office is 1450 Don Mills Road, Don Mills, Ontario. The Company’s operations consist of both news and information gathering and dissemination operations, with products offered in major Canadian markets and a number of regional and local markets in Canada through a variety of print, web, tablet and smartphone platforms, and digital media and online assets including the canada.com network, each newspaper’s online website and Infomart, the Company’s media monitoring service. The Company supports these operations through a variety of centralized shared services. The Company’s advertising revenue is seasonal. Historically, advertising revenue and accounts receivable are typically highest in the first and third fiscal quarters, while expenses are typically relatively constant throughout the fiscal year.

2. BASIS OF PRESENTATION

These interim condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and International Accounting Standard (“IAS”) 34 – Interim Financial Reporting. The accounting policies applied in the preparation of these interim condensed consolidated financial statements are the same as those used in the Company’s annual audited consolidated financial statements. In addition, these interim condensed consolidated financial statements do not include all the information and disclosures required in the annual audited consolidated financial statements and accordingly should be read in conjunction with the Company’s audited consolidated financial statements for the years ended August 31, 2012 and 2011. These interim condensed consolidated financial statements were approved by the Board of Directors (the “Board”) on July 3, 2013.


Accounting standards issued but not yet effective Future accounting standards that are issued but not yet effective are the same as described in the audited consolidated financial statements for the years ended August 31, 2012 and 2011, except as disclosed below: IAS 19 – Employee Benefits (Amended) IAS 19 amendments include, among other changes, the immediate recognition of the actuarial gains and losses in other comprehensive income, the introduction of a net interest approach that replaces the expected return on plan assets and interest costs on the defined benefit obligation with a single net interest component and all past service costs are to be recognized in profit or loss when the employee benefit plan is amended. This standard is required to be applied retrospectively for annual periods beginning on or after January 1, 2013. The Company will be adopting this standard effective September 1, 2013, for the year ending August 31, 2014, and at that time under the amended standard will be required to restate its results for the prior year, which is the year ending August 31, 2013. As a result, under the amended standard, for the year ending August 31, 2013 the Company anticipates that compensation expense and financing expense related to employee benefit plans will increase $0.5 million and $5.9 million, respectively. In addition, the Company anticipates an offsetting increase in other comprehensive income related to actuarial gains on employee benefits of $6.6 million. The aggregate anticipated impact is an increase to comprehensive income of $0.2 million.

3. OPERATING INCOME BEFORE DEPRECIATION, AMORTIZATION, IMPAIRMENT AND

RESTRUCTURING

The Company presents operating income before depreciation, amortization, impairment and restructuring, in the condensed consolidated statement of operations, to assist users in assessing financial performance. The Company’s management and Board use this measure to evaluate consolidated operating results and to assess the ability of the Company to incur and service debt. In addition, this measure is used to make operating decisions as it is an indicator of how much cash is being generated by the Company and assists in determining the need for additional cost reductions, evaluation of personnel and resource allocation decisions. Operating income before depreciation, amortization, impairment and restructuring is referred to as an additional IFRS measure and may not be comparable to similar measures presented by other companies.


4. IMPAIRMENTS

Impairments of goodwill and indefinite life intangible assets During the three months ended May 31, 2013, the Company updated its long-term financial forecast. As a result of lower than anticipated long-term revenue projections due to economic and structural factors including the uncertainty of the print advertising market and the rapidly evolving digital advertising market the Company concluded its assets may be impaired and as a result was required to perform an impairment analysis. Due to the change in operating segments during the three months ended May 31, 2013, the Company’s goodwill is now allocated to only one cash-generating unit (herein referred to as the Goodwill CGU) (note 13). The recoverable amount, determined based on fair value less costs to sell, of the Goodwill CGU and individual CGU’s as at May 31, 2013 was determined in the same manner as disclosed in the audited consolidated financial statements for the years ending August 31, 2012 and 2011, using updated cash flow projections, which are based on the updated long-term financial forecast, an after tax discount rate of 13.4% and a terminal growth rate of 0%. As a result of the impairment analysis as at May 31, 2013, the Company concluded the carrying value of two of its individual CGU’s were less than their recoverable amounts. Accordingly, the Company has recorded an impairment charge of $13.9 million pertaining to certain indefinite life intangible assets of the two individual CGU’s for the three and nine months ended May 31, 2013 (2012 – nil and nil, respectively). As the recoverable amount of these two CGUs is equal to their carrying value any change in the discount rate or terminal growth rate would impact the impairment recorded. If the terminal growth rate were to decline by 0.5% or if the discount rate were to increase by 0.5%, assuming a constant cash flow margin, the impairment would increase by $3.7 million and $5.0 million, respectively. As a result of the impairment analysis as at May 31, 2013, the Company concluded the carrying value of the Goodwill CGU was less than its recoverable amount. The Company has recorded an impairment charge relating to its goodwill of $73.9 million for the three and nine months ended May 31, 2013 (2012 – nil and nil, respectively). As the recoverable amount of the Goodwill CGU is equal to its carrying value any change in the discount rate or terminal growth rate would impact the impairment recorded. If the terminal growth rate were to decline by 0.5% or if the discount rate were to increase by 0.5%, assuming a constant cash flow margin, the impairment would increase by $18.5 million and $25.7 million, respectively. There were no tax impacts as a result of the impairment charges. During the fourth quarter, the Company will complete is annual impairment test as of June 30, 2013 based on management's best estimates of market participant assumptions at that time. Accordingly, there may be adjustments to these impairments during the three months ended August 31, 2013 and the amounts may be material. Other impairments During the three months ended May 31, 2013, the Company recorded an impairment loss of $6.1 million with respect to a production facility upon reclassification of the asset from property and equipment to asset held-for-sale on the condensed consolidated statement of financial position. As a result of the outsourcing of certain functions the production facility is no longer required and the Company has engaged a third party to market it for sale.


5. (GAIN) LOSS ON DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s (gain) loss on derivative financial instruments for the three and nine months ended May 31, 2013 and 2012 is comprised of the following:

2013 2012 2013 2012

Gain on fair value swap not designated as a hedge - (7,019) - (11,019) Realized loss on settlement of cash flow swap

designated as a hedge - - - 675 Contractual cash interest settlement on fair value swap

not designated as a hedge - 890 - 2,806 (Gain) loss on embedded derivatives 760 (3,707) 2,650 (7,722) (Gain) loss on derivative financial instruments 760 (9,836) 2,650 (15,260)


During the three and nine months ended May 31, 2013 and 2012, no ineffectiveness was recognized in the condensed consolidated statements of operations related to the Company’s cash flow hedges.

6. DERIVATIVE FINANCIAL INSTRUMENTS

As at May 31,

2013

As at August 31,

2012

AssetsEmbedded derivatives 21,458 24,108 Portion receivable within one year - - Non-current derivative financial instruments 21,458 24,108

LiabilitiesForeign currency interest rate swap - designated as a cash flow hedge (1) 2,279 18,438 Portion due within one year (2,279) (6,069) Non-current derivative financial instruments - 12,369

(1) The notional principal amount outstanding on the foreign currency interest rate swap designated as a cash flow hedge as at May 31, 2013, was US$167.5 million (August 31, 2012 - US$265.0 million). During September 2012, the Company settled a notional amount of US$97.5 million of the foreign currency interest rate swap designated as a cash flow hedge for a cash payment of $9.6 million, including $0.6 million of accrued interest. During the three and nine months ended May 31, 2013, foreign currency exchange gains of $0.9 million and $8.5 million, respectively (2012 – $13.3 million and $17.0 million, respectively), were reclassified to the condensed consolidated statements of operations from accumulated other comprehensive loss, representing foreign currency exchange gains on the notional amount of the cash flow hedging derivatives. These amounts were offset by foreign currency exchange losses recognized on the US dollar denominated 12.50% Senior Secured Notes due 2018 (“Second-Lien Notes”) and for the three and nine months ended May 31, 2012, the hedged portion of the Senior Secured Term Loan Credit Facility (“Term Loan Facility”). During the three and nine months ended May 31, 2013, losses of $1.7 million and $5.3 million, respectively (2012 - $2.1 million and $6.1 million, respectively), were reclassified from accumulated other comprehensive loss to interest expense in the condensed consolidated statements of operations related to the effect of the derivative financial instruments 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 consolidated statement of operations over the next twelve months is $6.2 million.


7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

As at May 31,

2013

As at August 31,

2012

Trade accounts payable 9,984 9,973 Accrued liabilities 51,589 49,065 Accrued interest on long-term debt 16,002 6,230 Accounts payable and accrued liabilities 77,575 65,268

8. PROVISIONS

Restructuring (a)Other

provisions (b) Total Provisions as at August 31, 2012 27,753 3,723 31,476 Net charges (recoveries) 21,087 (670) 20,417 Payments (16,300) (1,824) (18,124) Provisions as at May 31, 2013 32,540 1,229 33,769 Portion due within one year (32,540) (355) (32,895) Non-current provisions - 874 874

(a) Restructuring During the year ended August 31, 2012, the Company began implementing a three year business transformation program aimed at significantly reducing legacy newspaper infrastructure costs. The restructuring expense consists of a series of involuntary and voluntary buyouts. (b) Other provisions Other provisions include unfavorable lease contracts, equipment removal costs, as well as provisions for certain claims and grievances which have been asserted against the Company.


9. LONG-TERM DEBT

As at May 31,

2013

As at August 31,

2012

Maturity Principal

Financing fees,

discounts and other

Carrying value of

debt

Carrying value of

debt

8.25% Senior Secured Notes (1) August 2017 217,960 5,572 212,388 244,134 12.5% Senior Secured Notes (US$268.6M) (**) July 2018 278,521 8,215 270,306 255,768 Senior Secured Asset-Based Revolving Credit Facility (2) July 2014 - - - - Total long-term debt 482,694 499,902 Portion due within one year (12,500) (32,153) Non-current long-term debt 470,194 467,749

(**) - US$ principal translated at May 31, 2013 exchange rates. The terms and conditions of long-term debt are the same as disclosed in the audited consolidated financial statements for the years ending August 31, 2012 and 2011, except as disclosed below:

(1) On November 12, 2012, the Company redeemed $23.2 million aggregate principal amount of 8.25% Senior Secured Notes due 2017 (“First-Lien Notes”) at par in accordance with the terms and conditions of the First-Lien Notes indenture with the net proceeds from the disposition of the land and building located at 1450 Don Mills Road in Don Mills, Ontario.

(2) As at May 31, 2013, the Company had no amounts drawn (August 31, 2012 – nil) and had

availability of $30.4 million (August 31, 2012 – $23.3 million) under this facility.


10. EMPLOYEE BENEFIT PLANS

The Company has a number of funded and unfunded defined benefit plans that include pension benefits, post-retirement benefits, and other long-term employee benefits. The net employee benefit plan costs related to the Company’s pension benefit plans, post-retirement benefit plans and other long-term employee benefit plans reported in net loss from continuing operations in the condensed consolidated statements of operations for the three and nine months ended May 31, 2013 and 2012 are as follows:

2013 2012 2013 2012 2013 2012 2013 2012

Current service cost 3,024 2,526 448 438 582 578 4,054 3,542 Past service costs - - 62 62 - - 62 62 Net actuarial losses - - - - 64 433 64 433 Interest cost 4,962 5,089 667 761 150 176 5,779 6,026 Expected return on plan assets (5,396) (5,051) - - - - (5,396) (5,051) Net defined benefit plan expense 2,590 2,564 1,177 1,261 796 1,187 4,563 5,012

2013 2012 2013 2012 2013 2012 2013 2012

Current service cost 9,072 7,578 1,344 1,314 1,746 1,734 12,162 10,626 Past service costs - - 186 186 - - 186 186 Net actuarial losses - - - - 2,190 644 2,190 644 Interest cost 14,886 15,267 2,001 2,283 450 528 17,337 18,078 Expected return on plan assets (16,188) (15,153) - - - - (16,188) (15,153) Net defined benefit plan expense (1) 7,770 7,692 3,531 3,783 4,386 2,906 15,687 14,381

For the nine months ended May 31, 2013 and 2012

Pension benefits Post-retirement benefitsOther long-term employee

benefits Total

For the three months ended May 31, 2013 and 2012

Pension benefits Post-retirement benefitsOther long-term employee

benefits Total

(1) During the three months ended November 30, 2012, there was an arbitrators ruling against the Company that resulted in a change

to benefits provided under an other long-term employee benefit plan. During the three months ended February 28, 2013, the Company received a final arbitrators ruling and accordingly revised the estimate related to this change in benefits by reducing net defined benefit plan expense by $1.6 million and increasing an expense for cash costs of $0.1 million, which resulted in a total expense for the nine months ended May 31, 2013 of $2.3 million, which includes actuarial losses of $1.8 million and cash costs of $0.5 million. The expense related to this estimate is recorded in restructuring and other items in the condensed consolidated statement of operations while all other current service cost, past service costs and net actuarial losses related to other long-term employee benefits are included in compensation expense in the condensed consolidated statements of operations. Interest cost and expected return on plan assets are included in net financing expense relating to employee benefit plans in the condensed consolidated statements of operations.


Actuarial gains and losses related to the Company’s pension benefit plans and post-retirement benefit plans recognized in the condensed consolidated statements of comprehensive loss for the three and nine months ended May 31, 2013 and 2012 are as follows:

2013 2012 2013 2012 2013 2012

Other comprehensive loss from continuing operationsNet actuarial losses on employee benefits (4,875) (38,400) (814) (2,993) (5,689) (41,393)

Net actuarial losses recognized in other comprehensive income (loss) (4,875) (38,400) (814) (2,993) (5,689) (41,393)

2013 2012 2013 2012 2013 2012

Other comprehensive income (loss) from continuing operationsNet actuarial gains (losses) on employee benefits 12,239 (65,667) (1,633) (5,914) 10,606 (71,581)

Other comprehensive loss from discontinued operationsNet actuarial losses on employee benefits - (906) - - - (906)

Net actuarial gains (losses) recognized in other comprehensive income (loss) 12,239 (66,573) (1,633) (5,914) 10,606 (72,487)

For the nine months ended May 31, 2013 and 2012

Pension benefitsPost-retirement

benefits Total

For the three months ended May 31, 2013 and 2012

Pension benefitsPost-retirement

benefits Total

The cumulative actuarial losses related to the Company’s pension benefit plans and post-retirement benefit plans recognized in the condensed consolidated statement of financial position as at May 31, 2013 are as follows:

2013

Cumulative actuarial losses recognized directly in deficit, August 31, 2012 (61,715) Net actuarial gains recognized in other comprehensive income and deficit 10,606 Cumulative actuarial losses recognized directly in deficit, May 31, 2013 (51,109)

Changes to the net defined benefit plan obligations related to the Company’s pension benefit plans, post-retirement benefit plans and other long-term employee benefit plans reported in the condensed consolidated statement of financial position for the nine months ended May 31, 2013 are as follows:

Total (1)

Net defined benefit plan obligation as at August 31, 2012 91,243 59,552 17,207 168,002 Amounts recognized in the statement of operations 7,770 3,531 4,386 15,687 Amounts recognized in other comprehensive income (12,239) 1,633 - (10,606) Contributions to the plans (2) (9,070) (1,873) (1,465) (12,408) Net defined benefit plan obligation as at May 31, 2013 77,704 62,843 20,128 160,675

Post-retirement benefits

Other long-term employee benefits

Pension benefits

(1) As at August 31, 2012 and May 31, 2013, the net defined benefit plan obligations are recorded in other non-current liabilities

on the condensed consolidated statements of financial position. (2) After taking into account the December 31, 2011 valuation and solvency relief measures provided to all Ontario registered

pension plans by the Ontario government, the Company expects to contribute $12.4 million to its defined benefit pension plans for the year ended August 31, 2013.


During the nine months ended May 31, 2013, the Company filed an actuarial funding valuation dated December 31, 2011 for the most significant of its pension benefit plans. The Company’s most recent valuations for all of the pension benefit plans indicated they had an aggregate going concern unfunded liability of $18.1 million and a wind up deficiency (which assumes that the pension plans terminate on their actuarial valuation date) of $130.3 million.

11. EARNINGS (LOSS) PER SHARE

The following table provides a reconciliation of the denominators, which are presented in whole numbers, used in computing basic and diluted earnings (loss) per share for the three and nine months ended May 31, 2013 and 2012. No reconciling items in the computation of net earnings (loss) exist.

2012Basic weighted average shares outstanding during the period 40,209,619 40,323,170 Dilutive effect of RSUs - - Diluted weighted average shares outstanding during the period 40,209,619 40,323,170

Options and RSUs outstanding which are anti-dilutive 1,032,000 840,000

2012Basic weighted average shares outstanding during the period 40,249,965 40,323,170 Dilutive effect of RSUs - - Diluted weighted average shares outstanding during the period 40,249,965 40,323,170

Options and RSUs outstanding which are anti-dilutive 1,032,000 840,000

2013

For the three months ended

For the nine months ended

2013May 31,

May 31,

On December 7, 2012 the Company cancelled, for no consideration, 93,871 Class C voting shares and 19,680 Class NC variable voting shares that were held in trust by the court appointed monitor of the Canwest LP Companies Creditors Arrangement Act filing. As at May 31, 2013, the Company had a total of 40,209,619 Class C voting shares and Class NC variable voting shares outstanding (August 31, 2012 – 40,323,170).

12. SHARE-BASED COMPENSATION PLANS AND OTHER LONG-TERM INCENTIVE PLAN Share option plan The Company has a share option plan (the “Option Plan”) for its employees and officers to assist in attracting, retaining and motivating officers and employees. The Option Plan is administered by the Board.


The following table provides details on the changes to the issued options, which are presented in whole numbers, for the nine months ended May 31, 2013:

Options

Weighted average exercise

priceBalance, August 31, 2012 1,480,000 8.74$ Forfeited (128,000) (8.57)$ Cancelled (120,000) (9.85)$ Balance, May 31, 2013 1,232,000 8.65$

During the three and nine months ended May 31, 2013, the Company recorded compensation expense relating to the Option Plan of $0.1 million and $0.3 million, respectively (2012 - $0.2 million and $0.9 million, respectively), with an offsetting credit to contributed surplus. 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 RSU Plan is administered by the Board. During the three and nine months ended May 31, 2013 and 2012, the Company granted no RSUs under the RSU Plan. During the three and nine months ended May 31, 2013, the Company recorded compensation expense relating to the RSU Plan of $0.2 million and $0.5 million, respectively (2012 – $0.3 million and $0.9 million, respectively), with an offsetting credit to contributed surplus. Deferred share unit plan The Company has a deferred share unit plan (the “DSU Plan”) for the benefit of its non-employee directors. The DSU Plan is administered by the Board. During the three and nine months ended May 31, 2013, the Company granted no deferred share units (“DSUs”) under the DSU Plan. During the three and nine months ended May 31, 2012, the Company issued a nominal amount of DSUs under the DSU Plan. During the three and nine months ended May 31, 2013, the Company recorded a recovery of $0.1 million and an expense of $0.3 million, respectively, to compensation expense relating to the DSU Plan (2012 – recovery of $1.9 million and $4.3 million, respectively), with an offset to other non-current liabilities. The expense and recovery are due to the fluctuation in the share price of the Class C voting shares of the Company which are used to compute the fair value of the DSUs. Any changes in the fair value of the DSUs will be reflected in the future through adjustments to compensation expense until such a date as the DSUs are settled in cash. During the three and nine months ended May 31, 2013, the Company settled 21,320 DSUs for nominal consideration and cancelled 14,213 DSUs for no consideration. There were no settlements or cancellations during the three and nine months ended May 31, 2012. The aggregate carrying value of the DSU Plan liability was $0.6 million as at May 31, 2013 (August 31, 2012 - $0.3 million) and is recorded in other non-current liabilities on the condensed consolidated statement of financial position.


13. SEGMENT INFORMATION

During the three months ended May 31, 2013, the Company amended its operating segments to reflect its change to a functional reporting structure which resulted in the elimination of publishers at its individual newspapers and the creation of Senior Vice President roles which will be responsible for specific functions across the entire business (the “Reorganization”). Prior to the Reorganization, the Company disclosed separately the results of both the Newspaper operating segment and an All other category which included other business activities and an operating segment which was not separately reportable. As a result of the changes to the reporting structure the All other category is now included in the Newspaper operating segment. Changes in reporting segments are to be applied retroactively; however because the Company now operates in only one operating segment there is no segment information to disclose other than required entity-wide disclosures. The Newspaper segment publishes daily and non-daily newspapers and operates digital media and online assets including the canada.com network, each newspaper’s online website and Infomart, the Company’s media monitoring service. Its revenue is primarily from advertising and circulation/subscription revenue. Included within digital revenue in the condensed consolidated statements of operations during the three and nine months ended May 31, 2013 is advertising revenue of $17.1 million and $49.2 million, respectively (2012 - $16.6 million and $46.8 million, respectively) and circulation/subscription revenue of $7.0 million and $21.0 million, respectively (2012 - $7.0 million and $20.3 million, respectively). Accordingly, aggregate print and digital revenue from advertising for the three and nine months ended May 31, 2013 was $130.5 million and $400.9 million, respectively (2012 - $147.6 million and $449.6 million, respectively) and aggregate print and digital revenue from circulation/subscription was $56.4 million and $167.5 million, respectively (2012 - $59.5 million and $178.3 million, respectively).


14. DIVESTITURES AND DISCONTINUED OPERATIONS

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 the Lower Mainland Publishing Group, the Victoria Times Colonist and the Vancouver Island Newspaper Group, collectively herein referred to as the Disposed Properties. The Disposed Properties were all within the Newspaper segment. On November 30, 2011, the Company completed the Transaction. As a result of the Transaction, the Company has presented the results of the Disposed Properties as discontinued operations. Details of the Transaction and the gain on sale of discontinued operations are as follows:

Consideration (1)

Purchase price 86,500 Working capital adjustment and other items 1,450 Transaction costs (610) Net proceeds 87,340

Carrying value of net assets disposed Current Assets

Accounts receivable 17,023 Inventory 568 Prepaid expenses and other assets 428

Non-Current AssetsProperty and equipment 27,333 Other assets 804 Intangible assets 25,231 Goodwill 12,593

Total assets 83,980 Current Liabilities

Accounts payable and accrued liabilities 9,485 Deferred revenue 2,202

Non-Current LiabilitiesOther non-current liabilities 2,062

Total liabilities 13,749 Carrying value of net assets disposed 70,231

Gain on sale of discontinued operations, net of tax of nil 17,109

(1) In accordance with the terms and conditions of the Term Loan Facility on November 30, 2011, the Company was required to

repay amounts outstanding with the net proceeds of the Transaction.


Net earnings from discontinued operations for the nine months ended May 31, 2012, are summarized as follows:

2012 (1)

RevenuesPrint advertising 27,090 Print circulation 3,495 Digital 956 Other 535

Total revenues 32,076 Expenses Compensation 12,756 Newsprint 1,218 Distribution 5,117 Other operating 7,611 Operating income before depreciation, amortization

and restructuring 5,374 Depreciation 163 Amortization 55 Restructuring and other items 57 Operating income 5,099 Interest expense (2) 8,148 Net financing expense related to employee benefit plans 7 Gain on sale of discontinued operations (17,109) Earnings before income taxes 14,053 Provision for income taxes - Net earnings from discontinued operations 14,053

(1) The Transaction was completed on November 30, 2011, as a result net earnings from discontinued operations for the nine

months ended May 31, 2012 relate only to the three months ended November 30, 2011.

(2) The Company had allocated interest expense to discontinued operations representing the portion of interest expense related to the Term Loan Facility that was repaid as a result of the Transaction. During the nine months ended May 31, 2012, the Company allocated interest expense of $1.8 million to discontinued operations. In addition, during the nine months ended May 31, 2012, the repayment of the Term Loan Facility with the proceeds of the Transaction resulted in additional interest expense representing an acceleration of unamortized financing fees and discounts of which $6.4 million had been allocated to discontinued operations.

Cash flows from discontinued operations for the nine months ended May 31, 2012 are summarized as follows:

2012 (1)

Cash flows from operating activities 2,275 Cash flows from investing activities (2) (2,275) Cash flows from financing activities - Cash flows from discontinued operations -

(1) The Transaction was completed on November 30, 2011, as a result cash flows from discontinued operations for the nine

months ended May 31, 2012 relate only to the three months ended November 30, 2011. (2) The cash flows from discontinued operations were transferred to the Company through a centralized cash management

system resulting in cash flows from discontinued operations for the nine months ended May 31, 2012 of nil.


15. UNITED STATES ACCOUNTING PRINCIPLES

These interim condensed consolidated financial statements have been prepared in accordance with IFRS. In certain aspects GAAP as applied in the United States (“US GAAP”) differs from IFRS. The following information is being presented to comply with the US GAAP reconciliation requirements of the Second-Lien Notes indenture. The reconciliations have been prepared based on the same principle differences explained in the audited consolidated financial statements for the years ending August 31, 2012 and 2011, and as described below. All amounts are expressed in thousands of Canadian dollars unless otherwise noted. Principle differences affecting the Company (a) Employee benefits – actuarial gains and losses

Under IFRS, the Company recognizes actuarial gains and losses related to its defined benefit pension and post-retirement plans in other comprehensive income and deficit. Such actuarial gains and losses are not subsequently recycled to the statement of operations. Under US GAAP, the Company recognizes the funded status of defined benefit pension and post-retirement plans and recognizes changes in the funded status in the year in which the changes occur through other comprehensive income and accumulated other comprehensive income. Actuarial gains and losses previously recognized in other comprehensive income are recycled to the statement of operations using the corridor method of amortization. Under the corridor method the net actuarial gain or loss over 10% of the greater of the defined 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. The effect on US GAAP net loss for the three and nine months ended May 31, 2013, was to increase net loss $0.4 million and $1.1 million, respectively (2012 – nil and nil, respectively), with a corresponding decrease to comprehensive loss, net of a deferred income tax provision of nil. During the nine months ended May 31, 2012, due to the sale of the Disposed Properties under US GAAP, the cumulative net actuarial loss in equity related to the Disposed Properties was recycled to the statement of operations. The effect on US GAAP net earnings for the three and nine months ended May 31, 2012, was to decrease net earnings nil and $0.4 million, respectively, with a corresponding decrease to comprehensive loss, net of a deferred income tax provision of nil. (b) Employee benefits – past service costs Under IFRS, for defined benefit pension and post-retirement plans the Company is required to recognize on the statement of financial position the difference between the defined benefit obligation and the fair value of plan assets, plus or minus any unrecognized past service costs, if any. Under US GAAP, the Company recognizes the funded status of defined benefit plans and recognizes changes in the funded status in the period in which the changes occur through other comprehensive income and accumulated other comprehensive income. The funded status represents the difference between the fair value of the plans assets and the defined benefit obligation. The effect on US GAAP comprehensive income for the three and nine months ended May 31, 2013, was to decrease comprehensive loss $0.1 million and $0.2 million, respectively (2012 –$0.1 million and $0.2 million, respectively), net of a deferred income tax provision of nil. The effect on the condensed consolidated statement of financial position as at May 31, 2013, was to increase other non-current liabilities $1.7 million with a corresponding increase to deficit (August 31, 2012 - $1.9 million).


(c) Employee benefits – curtailment Under IFRS, the Company recognizes a curtailment when it is demonstrably committed to make a significant reduction in the number of employees covered by an employee benefit plan. Under US GAAP, a curtailment is recognized at the date of the curtailment. As a result of the termination of employees under the restructuring initiatives implemented during the year ended August 31, 2012, which will be completed in the year ended August 31, 2013, the Company recognized a curtailment under IFRS but not under US GAAP. The effect on the related employee benefit plan expense under US GAAP for the three and nine months ended May 31, 2013, was to increase net loss $0.1 million and $0.4 million, respectively (2012 – nil and nil, respectively), net of a deferred income tax provision of nil. The effect on the condensed consolidated statement of financial position as at May 31, 2013, was to increase other non-current liabilities $4.5 million with a corresponding increase to deficit (August 31, 2012 - $4.1 million). (d) Employee benefits – presentation of expense Under IFRS, the Company recognizes the components of the defined benefit expense within different line items in the statement of operations. The current service cost, recognized element of any past service costs and actuarial gains and losses related to other long-term employee benefits are recorded in compensation expense in the statement of operations. The expected return on plan assets and interest cost on the benefit obligations are presented in net financing expense relating to employee benefit plans in the statement of operations. Under US GAAP, the components of the defined benefit expense must be aggregated and presented as a net amount in the statement of operations. During the three and nine months ended May 31, 2013, net financing expense relating to employee benefit plans was $0.4 million and $1.1 million, respectively (2012 - $1.0 million and $2.9 million, respectively). (e) Long-term debt – debt issuance costs Under IFRS, transaction costs related to the issuance of debt are deducted from the carrying value of the financial liability and are amortized using the effective interest method. Under US GAAP, debt issuance costs, other than debt discounts or premiums, are deferred as an asset and recognized over the contractual life using the constant interest method. There is no earnings difference related to the amortization of debt issuance costs in the three and nine months ended May 31, 2013 and 2012. The effect on the condensed consolidated statement of financial position as at May 31, 2013, would be to increase other assets $15.2 million (August 31, 2012 - $16.4 million) with an offsetting increase to long-term debt.


(f) Impairment of indefinite life intangible assets Under IFRS, indefinite life intangible assets are tested for impairment as part of a CGU because they do not generate cash inflows independently of other assets. A CGU is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Under IFRS, if a CGU is impaired, then the resulting impairment loss is allocated pro-rata to the assets of the CGU however such assets cannot be written down to an amount below its fair value less costs to sell or value in use (if determinable) and zero. Furthermore, under IFRS impairment losses for CGUs can be reversed if there are any indicators that the impairment loss no longer exists or may have decreased. Under US GAAP, impairments of indefinite life intangible assets are measured on an individual basis by directly comparing the fair value to the carrying amount. Impairments recognized under US GAAP are not reversed. During the three and nine months ended May 31, 2013, the Company concluded that certain indefinite life intangible assets were impaired under IFRS and US GAAP. The effect on US GAAP net loss for the three and nine months ended May 31, 2013 was to increase net loss by $9.3 million (2012 - $19.1 million). The cumulative effect of the impairment of indefinite life intangible assets on the condensed consolidated statement of financial position as at May 31, 2013, is to decrease intangible assets $39.3 million with a corresponding increase to deficit (August 31, 2012 – $30.0 million). The impairments recorded under US GAAP, are based on the application of the relief from royalty valuation method. (g) Impairment of goodwill Under IFRS, an impairment of goodwill is recorded when the recoverable amount of a Goodwill CGU is less than its carrying amount. Under US GAAP, if the recoverable amount of a reporting unit is lower than its carrying amount an impairment loss is calculated as the difference between the carrying amount of the reporting unit and the fair value of the net assets of the reporting unit. During the three and nine months ended May 31, 2013, the Company concluded that goodwill was impaired under IFRS and US GAAP. The change in operating segments, as described in note 13, changed the reporting unit determination in accordance with US GAAP. The effect on US GAAP net loss for the three and nine months ended May 31, 2013 was to increase net loss by $20.4 million (2012 - nil). The effect of the impairment of goodwill on the condensed consolidated statement of financial position as at May 31, 2013, is to decrease goodwill $20.4 million with a corresponding increase to deficit (August 31, 2012 – nil). Comparative reconciliation of net earnings (loss) The following is a reconciliation of net earnings (loss) for the three and nine months ended May 31, 2013 and 2012, reflecting the differences between IFRS and US GAAP:

2013 2012 2013 2012Net earnings (loss) in accordance with IFRS (112,166) (12,137) (118,024) 5,129 Employee benefits - actuarial gains and losses (a) (354) - (1,064) (397) Employee benefits - curtailment (c) (125) - (375) - Impairment of indefinite life intangible assets (f) (9,300) (19,100) (9,300) (19,100) Impairment of goodwill (g) (20,400) - (20,400) - Net loss in accordance with US GAAP (142,345) (31,237) (149,163) (14,368)



Comparative reconciliation of comprehensive loss The following is a reconciliation of comprehensive loss for the three and nine months ended May 31, 2013 and 2012, reflecting the differences between IFRS and US GAAP:

2013 2012 2013 2012

Comprehensive loss in accordance with IFRS (116,439) (51,415) (107,099) (62,195) Impact of US GAAP differences on net loss (30,179) (19,100) (31,139) (19,497)

(146,618) (70,515) (138,238) (81,692) Employee benefits - actuarial gains and losses (a) 354 - 1,064 397 Employee benefits - past service costs (b) 62 62 186 186 Comprehensive loss in accordance with US GAAP (146,202) (70,453) (136,988) (81,109)


Comparative reconciliation of equity A reconciliation of equity as at May 31, 2013 and August 31, 2012 reflecting the differences between IFRS and US GAAP is set out below:

As at May 31,

2013

As at August 31,

2012

Equity in accordance with IFRS 127,463 233,755 Employee benefits - past service costs (b) (1,737) (1,923) Employee benefits - curtailment (c) (4,483) (4,108) Impairment of indefinite life intangible assets (f) (39,300) (30,000) Impairment of goodwill (g) (20,400) - Equity in accordance with US GAAP 61,543 197,724 Other US GAAP disclosures Operating expenses in the condensed consolidated statements of operations included:

2013 2012 2013 2012Selling, general and administrative expenses 88,338 93,496 264,850 281,749 Rent expense 3,844 4,195 11,178 9,430 7

May 31, May 31,For the nine months endedFor the three months ended

Accounts payable and accrued liabilities and the current portion of provisions on the condensed consolidated statement of financial position as at May 31, 2013 include $65.0 million of payroll related accruals (August 31, 2012 - $55.6 million).

2013

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2013 Second Quarter

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2013 - Postmedia NetworkDigital revenue was $24.1 million and $70.2 million for the three and nine...

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