Corus Entertainment Inc. - First Quarter Report to Shareholders
HIGHLIGHTS
Three months ended
(Unaudited) November 30,
(thousands of Canadian dollars except per share data) 2004 2003
Revenues 180,600 184,962
Segment profit
Radio 21,024 17,801
Television 44,945 39,788
Content 122 2,605
Corporate (3,623 ) (2,731 )
Eliminations (103 ) (194 )
62,365 57,269
Net income 29,077 5,700
Earnings per share
Basic and diluted $ 0.68 $ 0.13
Weighted average number of shares outstanding (in thousands)
Basic 42,739 42,666
Diluted 42,822 42,767
Significant Events in the Quarter
On September 7, 2004, Corus appeared before the CRTC to present its
application for a planned radio asset swap with Astral Media which would give
Corus ownership of eight stations in the province of Quebec including two
stations in Quebec City, one of Canada's ten largest radio markets. Five
regional stations presently owned by Corus would be acquired by Astral.
On September 23, 2004, Corus, hosted its annual Investor Day in Toronto and
announced its fiscal 2005 financial guidance: $180-190 million in
consolidated segment profit(1); $40-$45 million in free cash flow(1);
adjusted net debt to segment profit(1) of 2.5-3.0 times.
On October 21, 2004, Corus and Canadian Satellite Radio announced a marketing
and programming agreement.
On November 30, 2004, the Canadian Association of Broadcasters (CAB) awarded
Corus five 2004 Gold Ribbon Awards, and Corus' CEO, John Cassaday, was
awarded the CAB Gold Ribbon, the industry's highest honour.
Corus Radio was also honoured at the annual CAB Awards with three gold
ribbons awarded for achievements in broadcasting. CHED in Edmonton was
honoured for Best Information Program for The Inside Story: Crystal Death;
CFNY-FM in Toronto was honoured for Best Promotion: Audience Building for the
The Edge Wheel of Sloth; and CISN-FM in Edmonton was given the award for What
Radio Does Best - The Mad Dash to the Border.
Premiered Miss Spider's Sunny Patch Friends on Nick Jr. in October and
secured a global master toy licence with Fisher Price.
In November 2004, Kids Can Press illustrator Stephane Jorisch won the
Governor General's Award for Children's Illustration for the book
Jabberwocky.
(1) See "Key Performance Indicators".
Corus 1
Significant Events Subsequent to the Quarter
On December 31, 2004 the Company paid a semi-annual dividend of $0.02 and
$0.025 to holders of its Class A and Class B shares respectively.
BBM radio ratings for Fall 2004 were released on December 16th and Corus
Radio retained it's #1 position with the largest audience reach and hours
tuned. Corus holds the top-rated stations in key demographics in Vancouver,
Calgary, Edmonton, Winnipeg, Toronto and Montreal and has positive momentum
on the developing stations.
Corus Entertainment received a record 47 nominations for the 2004 Gemini
Awards. At the awards ceremonies, held December 11, 12 and 13, 2004, Corus
was awarded 10 Geminis for television properties produced in association with
independent producers, including three wins for the Movie Central original
mini-series, Slings & Arrows.
On December 16, 2004, the CRTC announced a new policy for the introduction of
foreign third-language television channels. Generally, all applications for
general interest third-language services will be approved subject to certain
packaging and programming rights conditions.
Management's Discussion and Analysis
The following should be read in conjunction with Management's Discussion and
Analysis, consolidated financial statements and the notes thereto included in
our August 31, 2004 Annual Report. All amounts are stated in Canadian dollars
unless specified otherwise.
Cautionary statement regarding forward-looking statements
Certain statements in this report may constitute forward-looking statements and
are subject to important risks and uncertainties. The results or events
predicted in these statements may differ materially from actual results or
events. Factors which could cause results or events to differ from current
expectations include, among other things: our ability to attract and retain
advertising revenues; audience acceptance of our television programs and cable
networks; our ability to recoup production costs, the availability of tax
credits and the existence of co-production treaties; our ability to compete in
any of the industries in which we do business; the opportunities (or lack
thereof) that may be presented to and pursued by us; conditions in the
entertainment, information and communications industries and technological
developments therein; changes in laws or regulations or the interpretation or
application of those laws and regulations; our ability to integrate and realize
anticipated benefits from our acquisitions and to effectively manage our growth;
and changes in accounting standards. Consequently, all of the forward-looking
statements made in this report are qualified by these cautionary statements, and
there can be no assurance that the actual results or developments anticipated by
us will be realized or, even if substantially realized, that they will have the
expected consequences to, or effects on, us. Unless otherwise required by
applicable securities laws, we disclaim any intention or obligation to publicly
update or revise any forward-looking statements whether as a result of new
information, events or circumstances that arise after the date thereof or
otherwise.
Overview of Consolidated Results
The first quarter was highlighted by strong net income growth and excellent
operating performance from our Radio and Television segments. Net income for the
quarter was $29.1 million on revenues of $180.6 million, compared to net income
of $5.7 million on revenues of $185.0 million in the prior year. The Radio and
Television segments delivered segment profit growth of 18% and 13% respectively,
as consolidated segment profit grew 9% over the prior year.
Corus 2
First Quarter Results
Revenues
Revenues for the first quarter were $180.6 million, down 2% from $185.0 million
last year. Radio and Television experienced increases of 8% and 5% respectively,
while Content was down 38% from the prior year primarily due to lower
merchandising revenues.
Operating, general and administrative expenses
Operating, general and administrative expenses for the first quarter were
$118.2 million, down 7% from $127.7 million in the prior year. The decrease is
primarily due to lower operating expenses in the Content division.
Depreciation
Depreciation expense for the first quarter was $5.4 million, a decrease of
$0.7 million from last year. This change reflects a lower capital cost base, as
capital expenditures have been significantly lower than depreciation for the
past several quarters and assets become fully depreciated.
Amortization
Amortization expense for the first quarter was $1.2 million, down from
$2.2 million last year. The decrease is a result of deferred start-up and
reformatting costs becoming fully amortized.
Interest on long-term debt
Interest expense for the first quarter was $13.6 million, down from
$13.8 million last year primarily due to savings generated by a
fixed-to-floating interest rate swap, offset somewhat by a higher average bank
loan balance. The effective interest rate for the first quarter was 8.6%
compared to 8.9% in the prior year.
Other income, net
Other income for the first quarter was $6.4 million, compared to $2.4 million in
the prior year. The current year's quarter includes an unrealized derivative
transaction gain of $2.1 million and foreign exchange gains of $3.9 million,
while the prior year's quarter includes foreign exchange gains of $2.7 million.
The foreign exchange gains in the current year arise from the impact of the
strengthening Canadian dollar on Corus' U.S. dollar bank loan balance.
Income taxes
The effective tax rate for the first quarter was 38.6%, compared to the
statutory rate of 36.3%. The effective tax rate for the first quarter of last
year was 82.8%. The first quarter of last year was impacted by the Ontario
government's decision to cancel previously announced reductions to future tax
rates and to increase current tax rates. The change in Ontario tax rates caused
an increase in the Company's non-cash income tax expense and net future tax
liability position of $17.8 million, or $0.42 per share.
Net income
Net income for the first quarter was $29.1 million, up from income of
$5.7 million last year. Earnings per share for the first quarter were $0.68
basic and diluted, compared with earnings per share of $0.13 basic and diluted
last year.
Corus 3
Radio
The Radio division comprises 50 radio stations situated primarily in eight of
the ten largest Canadian markets by population and in the densely populated area
of southern Ontario. Corus is Canada's leading radio operator in terms of
revenues and audience reach.
Financial Highlights
(Unaudited) Three months ended November 30,
(thousands of Canadian dollars) 2004 2003
Revenues 65,533 60,738
Operating, general and administrative expenses 44,509 42,937
Segment profit 21,024 17,801
Revenues for the first quarter were $65.6 million, up 8% from the corresponding
period last year. The Ontario and Quebec regions delivered strong performances
for the quarter. According to the Trans-Canada Radio Advertising by Market
("TRAM") report for the three months ended November 30, 2004, advertising sales
growth for Corus' Ontario and Quebec regions exceeded overall market growth for
those regions. A competitive environment continues to challenge the western
region, and is reflected in the results for that region for the quarter. While
the western region lagged behind overall market growth for the region in the
year, as indicated by the TRAM report, Corus' strategy, which included
reformatting several stations, has translated into improved Fall 2004 Bureau of
Broadcast Measurement ratings. In particular, the Vancouver cluster has started
to recover from last year's performance by posting year-over-year ad growth.
Operating, general and administrative expenses for the first quarter were
$44.5 million, up 4% from the corresponding period last year. Variable costs
increased in proportion to the revenue increases, while fixed costs remained
stable, resulting in improved margins.
Segment profit for the first quarter was $21.0 million, up 18% from the
corresponding period last year.
Corus 4
Television
The Television division is composed of the following: specialty television
networks YTV, Treehouse TV, W Network, Corus' 80% interest in CMT (Country Music
Television), 50.5% interest in Telelatino, 50% interest in Locomotion, and 40%
interest in Teletoon; Corus' premium television services Movie Central and
Encore; interests in three digital television channels, Scream, Discovery Kids
and The Documentary Channel; Digital Adventure (now known as Corus Custom
Networks), a cable advertising service; three local television stations; and Max
Trax, a residential digital audio service.
Financial Highlights
(Unaudited) Three months ended November 30,
(thousands of Canadian dollars) 2004 2003
Revenues 98,520 94,203
Operating, general and administrative expenses 53,575 54,415
Segment profit 44,945 39,788
Revenues for the first quarter were $98.5 million, up 5% over the corresponding
period last year. Strong growth in advertising revenue was achieved, up 6% for
the quarter, driven by CMT,W, Teletoon and YTV. Continued subscriber revenue
growth of 3% over the prior year was also experienced, with Movie Central,
Corus' western-based pay television service, finishing the quarter with 704,000
subscribers, down slightly from August 31, 2004 but up 25,000 subscribers from
the first quarter of last year.
Operating, general and administrative expenses were $53.6 million for the first
quarter, down 2% from the prior year, as the Television segment effectively
controlled overall expenditures.
Segment profit for the quarter was $44.9 million, up 13% from the prior year.
Corus 5
Content
The Content division consists of the production and distribution of television
programs and the sale and licensing of related products.
Financial Highlights
(Unaudited) Three months ended November 30,
(thousands of Canadian dollars) 2004 2003
Revenues 18,928 30,718
Operating, general and administrative expenses 18,806 28,113
Segment profit 122 2,605
Revenues for the first quarter were $18.9 million, a decrease of 38% from the
prior year. During the quarter Content delivered 52 episodes, primarily of Delta
State, Funpak, Miss Spider, Backyardigans and Jacob Two Two, compared to 17
episodes delivered in the same period last year. Revenues were down in the
quarter due primarily to lower sales of Beyblade merchandise and the weaker U.S.
dollar. Miss Spider and Backyardigans are enjoying considerable ratings success,
but Corus will not begin to realize the benefit of significant merchandising
revenue on these properties until fiscal 2006.
Operating, general and administrative expenses for the first quarter were
$18.8 million, down 33% from the prior year. The reduction reflects lower
revenues.
Segment profit for the first quarter was $0.1 million, compared to $2.6 million
last year.
Corporate
The Corporate segment results represent the incremental cost of corporate
overhead in excess of the amount allocated to the other operating segments.
Financial Highlights
(Unaudited) Three months ended November 30,
(thousands of Canadian dollars) 2004 2003
Stock-based compensation 1,275 735
Other general and administrative costs 2,348 1,996
General and administrative expenses 3,623 2,731
General and administrative expense increased to $3.6 million in the first
quarter from $2.7 million in the same period last year. This increase is in line
with the Company's expectations. Stock-based compensation includes the expenses
related to the Company's Performance Share Units and the issuance of stock
options.
Corus 6
Quarterly Consolidated Financial Information
The following table sets forth certain unaudited data from the consolidated
statements of income and retained earnings (deficit) for each of the eight most
recent quarters ended November 30, 2004. The information has been derived from
the Company's unaudited consolidated financial statements that, in management's
opinion, have been prepared on a basis consistent with the audited consolidated
financial statements contained in the Company's Annual Report for the year ended
August 31, 2004.
(thousands of Revenues Segment profit Net income (loss) Earnings (loss) per share
Canadian dollars) Basic and diluted
2005
1st Qtr 180,600 62,365 29,077 $ 0.68
2004
4th Qtr 162,959 42,837 14,018 $ 0.33
3rd Qtr 163,864 (43,777 ) (51,160 ) (1.20 )
2nd Qtr 155,019 34,069 8,305 0.19
1st Qtr 184,962 57,269 5,700 0.13
2003
4th Qtr 175,138 41,737 12,432 $ 0.29
3rd Qtr 155,296 44,186 12,265 0.29
2nd Qtr 147,542 31,431 7,028 0.16
Seasonal Fluctuations
As discussed in Management's Discussion and Analysis for the year end August 31,
2004, the first quarter results tend to be the strongest and second quarter
results tend to be the weakest in a fiscal year.
Significant items causing variations in quarterly results
The first quarter of fiscal 2004 was impacted by the Ontario government's
decision to cancel previously announced reductions to future tax rates and to
increase current tax rates. This change in Ontario tax rates caused an
increase in the Company's non-cash income tax expense and net future tax
liability position of $17.8 million ($0.42/share).
The third quarter of fiscal 2004 was impacted by a non-cash, after-tax
write-down in film investments of $60.3 million ($1.41/share) resulting from
the Company's decision to lower estimates of future revenue as a result of a
challenging library market and lower U.S. dollar. The pre-tax write-down of
$85.0 million was recorded in operating, general and administrative expenses.
Risks and Uncertainties
There have been no material changes in any risks or uncertainties facing the
Company since the year ended August 31, 2004.
Financial Position
Total assets at November 30, 2004 were $1.89 billion compared to $1.90 billion
at August 31, 2004. The following discussion describes the significant changes
in the consolidated balance sheet since August 31, 2004.
Current assets decreased by $17.3 million. Cash and cash equivalents decreased
by $47.1 million. Accounts receivable, prepaid expenses and program rights
increased by $24.0 million, $4.0 million and $5.2 million respectively. The
increase in accounts receivable was due to higher Radio and Television
Corus 7
revenues in the quarter compared to the fourth quarter of fiscal 2004. The
increase in prepaid expenses reflects the timing of certain expenditures such as
insurance.
Non-current assets increased by $9.8 million. Tax credits receivable increased
by $0.9 million due to accruals made related to film production. Capital assets
decreased by $3.0 million as capital expenditures of $3.0 million were offset by
depreciation of $5.4 million. Program and film rights (current and non-current)
increased by $18.2 million, as accruals for acquired rights of $46.5 million
were offset by amortization of $28.1 million. Film investments decreased by
$0.5 million, as net film spending of $13.4 million was offset by film
amortization and accruals for tax credits. Deferred charges decreased by
$1.2 million due to amortization.
Current liabilities increased by $3.4 million. Accounts payable and accrued
liabilities increased by $0.2 million and income taxes payable increased by
$3.2 million. Accounts payable and accrued liabilities related to working
capital decreased by $14.5 million, due to the payment of interest on long-term
debt in the quarter, while non-working capital accruals for program rights and
film investments increased by $14.7 million.
Non-current liabilities decreased by $37.3 million. Long-term debt decreased by
$84.4 million, resulting from repayments of $34.0 million and foreign exchange
translation adjustments. Deferred credits increased by $46.4 million, as
payments of $1.1 million for public benefits related to acquisitions were offset
by $47.6 million in deferred foreign exchange gains for the year and other
working capital adjustments. Net future tax liability (including current asset)
increased by $3.2 million in the quarter primarily as a result of the
utilization of tax loss carryforwards.
Share capital is unchanged from the end of the prior year. Contributed surplus
increased by $0.7 million as a result of expensing stock-based compensation for
the period. Cumulative translation adjustment increased by $3.4 million due to
the effect of exchange rate fluctuation on the translation of the net assets of
self-sustaining foreign operations.
Liquidity and Capital Resources
Cash flows
Overall, the Company's cash and cash equivalents position decreased by
$47.1 million in the three months ended November 30, 2004. Free cash flow was
negative in the first quarter, as it was in the first quarter of last year.
Cash used in operating activities for the first quarter was $8.4 million,
compared to $2.3 million last year. This increase is due primarily to an
increase of $6.1 million in expenditures for program rights. An increase in net
income adjusted for non-cash items of $3.7 million was offset by an increased
investment in non-cash working capital of $4.7 million. The first quarter
typically requires an investment in non-cash working capital as revenues are
generally higher than in the fourth quarter of the prior year, and interest on
long term debt is paid in the quarter.
Cash used in investing activities was $4.5 million for the first quarter
compared to $6.4 million last year. The decrease in cash used reflects a
decrease in capital expenditures and lower payments for public benefits
associated with acquisitions.
Cash used in financing activities in the first quarter was $34.2 million
compared to cash provided of $4.1 million last year. The Company paid down its
U.S. dollar denominated bank loan of $34.0 million in the quarter. The prior
year's quarter included a drawdown of the bank loan and cash provided from the
exercise of stock options.
Corus 8
Net debt and adjusted net debt
At November 30, 2004, net debt was $396.6 million, down from $433.9 million at
August 31, 2004. Adjusted net debt at November 30, 2004 was $555.9 million, up
from $545.5 million at August 31, 2004. The first quarter generally results in
an increase in adjusted net debt. Adjusted net debt to adjusted segment profit
at November 30, 2004 was 3.1, unchanged from August 31, 2004.
Key Performance Indicators
The Company measures the success of its strategies using a number of key
performance indicators. These have been outlined in the Management's Discussion
and Analysis contained in the Annual Report for the year ended August 31, 2004,
including a discussion as to their relevance, definitions, calculation methods
and underlying assumptions. Certain key performance indicators are not
measurements in accordance with Canadian or U.S. generally accepted accounting
principles ("GAAP") and should not be considered as an alternative to net income
or any other measure of performance under Canadian or U.S. GAAP.
The following tables reconcile those key performance indicators that are not in
accordance with GAAP measures.
Free cash flow
Three months ended November 30,
(thousands of Canadian dollars) 2004 2003
Cash used in:
Operating activities (8,370 ) (2,289 )
Investing activities (4,519 ) (6,379 )
Free cash flow (12,889 ) (8,668 )
Net debt and adjusted net debt
As at November 30, As at August 31,
(thousands of Canadian dollars) 2004 2004
Long-term debt 444,750 529,139
Cash and cash equivalents (48,127 ) (95,231 )
Net debt 396,623 433,908
Unrealized cumulative foreign exchange gains 159,250 111,625
Adjusted net debt 555,873 545,533
Adjusted net debt to adjusted segment profit
As at November 30, As at August 31,
(thousands of Canadian dollars except ratios) 2004 2004
Adjusted net debt [numerator] 555,873 545,533
Adjusted segment profit
Segment profit (2) 95,494 90,398
Write-down of investment in film (2) 85,000 85,000
Adjusted segment profit [denominator] 180,494 175,398
Adjusted net debt to adjusted segment profit 3.1 3.1
(2) Reflects aggregate amounts for the most recent four quarters, as detailed
in the table in the "Quarterly Consolidated Financial Information" of
Management's Discussion and Analysis.
Corus 9
CORUS ENTERTAINMENT INC.
CONSOLIDATED BALANCE SHEETS
[unaudited] As at November 30, As at August 31,
(in thousands of Canadian dollars) 2004 2004
ASSETS
Current
Cash and cash equivalents 48,127 95,231
Accounts receivable 167,628 143,641
Prepaid expenses and other 13,627 9,674
Program and film rights 97,967 92,786
Future tax asset 10,364 13,719
Total current assets 337,713 355,051
Tax credits receivable 11,677 10,774
Investments and other assets 42,305 41,683
Capital assets, net 79,064 82,105
Program and film rights 45,523 32,523
Film investments [note 9] 56,376 56,867
Deferred charges 18,140 19,305
Broadcast licenses 509,040 509,040
Goodwill 789,518 789,518
1,889,356 1,896,866
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 161,631 161,397
Income taxes payable 7,782 4,567
Total current liabilities 169,413 165,964
Long-term debt [note 2] 444,750 529,139
Deferred credits [note 3] 192,587 146,164
Future tax liability 168,970 169,085
Other long-term liabilities 16,260 16,203
Non-controlling interest 9,862 9,131
Total liabilities 1,001,842 1,035,686
|
SHAREHOLDERS' EQUITY
Share capital [note 4] 884,053 884,053
Contributed surplus 1,937 1,287
Retained earnings (deficit) 11,955 (17,122 )
Cumulative translation adjustment [note 8] (10,431 ) (7,038 )
Total shareholders' equity 887,514 861,180
1,889,356 1,896,866
See accompanying notes
On behalf of the Board,
John M. Cassaday Heather A. Shaw
President and Chief Executive Officer Executive Chair
January 13, 2005
Corus 10
CORUS ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT)
[unaudited] Three months ended November 30,
(in thousands of Canadian dollars
except per share amounts) 2004 2003
Revenues 180,600 184,962
Operating, general and administrative expenses [note 8] 118,235 127,693
62,365 57,269
Depreciation 5,419 6,093
Amortization 1,165 2,222
Interest on long-term debt 13,592 13,787
Other income, net (6,362 ) (2,385 )
Income before income taxes 48,551 37,552
Income tax expense 18,743 31,097
Income before non-controlling interest 29,808 6,455
Non-controlling interest (731 ) (755 )
Net income for the period 29,077 5,700
Retained earnings (deficit), beginning of period (17,122 ) 8,135
Retained earnings, end of period 11,955 13,835
Earnings per share [note 6]
Basic and diluted $ 0.68 $ 0.13
Weighted average number of shares outstanding[in thousands]
Basic 42,739 42,666
Diluted 42,822 42,767
|
See accompanying notes
Corus 11
CORUS ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[unaudited] Three months ended November 30,
(in thousands of Canadian dollars) 2004 2003
OPERATING ACTIVITIES
Net income for the period 29,077 5,700
Add (deduct) non-cash items:
Depreciation 5,419 6,093
Amortization of program and film rights 28,148 26,291
Amortization of film investments 9,422 13,594
Other amortization 1,165 2,222
Future income taxes 3,230 16,802
Non-controlling interest 731 755
Foreign exchange gains (2,747 ) (2,386 )
Stock-based compensation 1,275 735
Other (1,711 ) 546
74,009 70,352
Net change in non-cash working capital balances related to operations (38,296 ) (33,573 )
Payment of program and film rights (29,687 ) (23,586 )
Net additions to film investments (13,428 ) (14,261 )
Other (968 ) (1,221 )
Cash used in operating activities (8,370 ) (2,289 )
|
INVESTING ACTIVITIES
Additions to capital assets (3,037 ) (3,786 )
Increase in investments (907 ) (178 )
Decrease in public benefits associated with acquisitions (1,121 ) (2,473 )
Other 546 58
Cash used in investing activities (4,519 ) (6,379 )
FINANCING ACTIVITIES
Increase (decrease) in bank loans (34,017 ) 2,363
Decrease in other long-term liabilities (198 ) (235 )
Issuance of shares under stock option plan - 1,952
Cash provided (used in) by financing activities (34,215 ) 4,080
Net decrease in cash and cash equivalents during period (47,104 ) (4,588 )
Cash and cash equivalents, beginning of period 95,231 43,874
Cash and cash equivalents, end of period 48,127 39,286
See accompanying notes
Corus 12
Corus Entertainment Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 2004
(in thousands of Canadian dollars except share information)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements include the accounts of Corus
Entertainment Inc. and its subsidiaries ["Corus" or the "Company"]. The
notes presented in these interim consolidated financial statements include
only significant events and transactions occurring since the Company's last
fiscal year and are not fully inclusive of all matters normally disclosed in
the Company's annual audited financial statements. As a result, these
interim consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements for the year ended
August 31, 2004.
These interim consolidated financial statements follow the same accounting
policies and methods of application as the most recent annual consolidated
financial statements.
Corus' operating results are subject to seasonal fluctuations that can
significantly impact quarter-to-quarter operating results. Accordingly, one
quarter's operating results are not necessarily indicative of a subsequent
quarter's operating results. Our broadcasting businesses (Radio and
Television) and our Content business each has unique seasonal aspects.
For our broadcasting businesses, operating results are dependent on general
advertising and retail cycles associated with consumer spending activity.
Accordingly, operating results for the first quarter tend to be the
strongest, reflecting pre-Christmas advertising activity and the second
quarter tends to be the weakest, consistent with lower consumer spending in
winter months.
For our Content business, operating results are dependent on the timing and
number of television programs made available for delivery in the period, as
well as timing of merchandising royalties received, none of which can be
predicted with certainty. Consequently, Content's operating results may
fluctuate significantly from quarter to quarter. As well, cash flows may
also fluctuate and are not necessarily closely related to revenue
recognition.
2. LONG TERM DEBT
As at November 30, As at August 31,
2004 2004
Senior subordinated notes
Principal amount translated into Canadian dollars at hedged rate 604,000 604,000
Unrealized cumulative foreign exchange gains (159,250 ) (111,625 )
Senior subordinated notes translated at the current rate 444,750 492,375
Bank loans - 36,764
444,750 529,139
Corus 13
Corus Entertainment Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 2004
(in thousands of Canadian dollars except share information)
3. DEFERRED CREDITS
As at November 30, As at August 31,
2004 2004
Public benefits associated with acquisitions 29,981 31,102
Cross-currency agreements translated into Canadian dollars at
the current rate 159,250 111,625
Unearned revenue from distribution and licensing of film
rights 2,778 2,800
Other 578 637
192,587 146,164
4. SHARE CAPITAL
Authorized
The Company is authorized to issue, upon approval of a majority of the
existing Class A shareholders, an unlimited number of Class A participating
shares ("Class A Voting Shares"), Class B non-voting participating shares
("Class B Non-Voting Shares"), Class A Preferred Shares, and Class 1 and
Class 2 preferred shares.
Issued and Outstanding
The were no changes in the Class A Voting and Class B Non-Voting Shares in
the first quarter of fiscal 2005. There were no significant changes to the
outstanding share capital subsequent to quarter end.
Stock Option Plan
Under the Company's Stock Option Plan, the Company may grant options to
purchase Class B Non-Voting Shares to eligible officers, directors, and
employees of or consultants to the Company. The maximum number of shares
that can be reserved for issuance under the plan is 4,084,642. All options
granted are for terms not to exceed ten years from the grant date. The
exercise price of each option equals the market price of the Company's stock
on the date of the grant. Options vest 25% on each of the first, second,
third and fourth anniversary dates of the date of grant.
During the first quarter of fiscal 2005, the Company granted 443,600 stock
options with a weighted average exercise price of $23.80 per share, and a
term of seven and a half years. The weighted average fair value of the stock
options granted in the first quarter of fiscal 2005 was $9.02 per option.
As at November 30, 2004, the Company has outstanding stock options for
3,568,432 Class B Non-Voting Shares, of which 2,171,076 are exercisable.
Corus 14
Corus Entertainment Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 2004
(in thousands of Canadian dollars except share information)
The fair value of each option granted was estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
Fiscal Fiscal
2005 2004
Expected life Five years Five years
Risk-free interest rates 4.31 % 4.08% to 4.67%
Dividend yield 0.21 % 0.19 %
Volatility 35.98 % 37.21% to 39.52%
The estimated fair value of the options is amortized to income over the
option's vesting period on a straight-line basis. The Company has recorded
stock-based compensation expense for the first quarter of $650 and this has
been credited to contributed surplus.
For options granted to employees up to August 31, 2003, had compensation
costs for the Company's Stock Option Plan been determined based on the fair
value based method of accounting for stock-based compensation, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
Three months ended November 30,
2004 2003
Net income 29,077 5,700
Pro forma net income 28,593 5,001
Pro forma basic and diluted earnings per share $ 0.67 $ 0.12
5. BUSINESS SEGMENT INFORMATION
The Company's business activities are conducted through three reportable
operating segments:
Radio
The Radio segment is comprised of 50 radio stations, situated primarily in
high growth urban centres in Canada. Revenues are derived from advertising
aired over these stations.
Television
The Television segment includes interests in several specialty television
networks, pay television, conventional television stations, digital audio
services and cable advertising services. Revenues are generated from
subscriber fees and advertising.
Content
The Content segment includes the production and distribution of television
programs and the sale and licensing of related products. Revenues are
generated from licensing of proprietary films and television programs,
merchandise licensing and publishing. Prior to the first quarter of fiscal
2005, the Content segment had been reported with two components: Content -
production and distribution; and Content - branded consumer products. Corus
has changed the structure of its internal
Corus 15
Corus Entertainment Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 2004
(in thousands of Canadian dollars except share information)
organization such that the production and distribution of television
products and the licensing of related products are managed as an integrated
business process, and are not meaningful to view as separate business
activities. Commencing with the first quarter of fiscal 2005, the results of
the Content division have been disclosed in aggregate, and the corresponding
items of segment information for earlier periods have been restated.
Except as noted above, the accounting policies of the segments are the same
as those described in the summary of significant accounting policies.
Management evaluates the business segments' performance based on revenues
less operating, general and administrative expenses. Transactions between
reporting segments are recorded at fair value.
(a) Revenues and segment profit
Three months ended November 30,
2004 2003
Revenues
Radio 65,533 60,738
Television 98,520 94,203
Content 18,928 30,718
Eliminations (2,381 ) (697 )
180,600 184,962
Segment profit
Radio 21,024 17,801
Television 44,945 39,788
Content 122 2,605
Corporate (3,623 ) (2,731 )
Eliminations (103 ) (194 )
62,365 57,269
The corporate segment represents the incremental cost of corporate overhead in
excess of the amount allocated to the other operating segments.
(b) Segment assets
As at November 30, As at August 31,
2004 2004
Radio 753,948 744,358
Television 899,240 855,186
Content 172,264 187,119
Corporate 65,561 112,424
Eliminations (1,657 ) (2,221 )
1,889,356 1,896,866
Assets are located primarily within Canada.
Corus 16
Corus Entertainment Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 2004
(in thousands of Canadian dollars except share information)
6. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominators (in
thousands) used for the computation of the basic and diluted earnings per
share amounts.
Three months ended November 30,
2004 2003
Net income for the period [numerator] 29,077 5,700
Weighted average number of shares outstanding [denominator]
Weighted average number of shares outstanding - basic 42,739 42,666
Effect of dilutive securities 83 101
Weighted average number of shares outstanding - diluted 42,822 42,767
7. CONSOLIDATED STATEMENT OF CASH FLOWS
Interest paid, interest received and income taxes paid and classified as
operating activities are as follows:
Three months ended November 30,
2004 2003
Interest paid 26,847 28,022
Interest received 654 380
Income taxes paid 12,095 17,124
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8. FOREIGN EXCHANGE GAINS AND LOSSES
The Company has reflected certain gains and losses in its consolidated
statements of income (loss) and retained earnings (deficit) as a result of
exposure to foreign currency exchange rate fluctuations. A portion of these
gains and losses relate to operating activities while others are of a
financing nature. Foreign exchange gains and losses are reflected in the
consolidated financial statements as follows:
Three months ended November 30,
2004 2003
Operating, general and administrative expenses (1,071 ) (468 )
Other income, net (3,947 ) (2,704 )
Total foreign exchange gains (5,018 ) (3,172 )
An analysis of the cumulative translation adjustment shown separately in
shareholders' equity is as follows:
Balance, August 31, 2004 (7,038 )
Effect of exchange rate fluctuation on translation of net assets of
self-sustaining foreign operations (3,393 )
Balance, November 30, 2004 (10,431 )
Corus 17
Corus Entertainment Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 2004
(in thousands of Canadian dollars except share information)
9. FILM INVESTMENTS
As at November 30, As at August 31,
2004 2004
Projects in development and in process, net of advances 12,454 15,990
Completed projects and distribution rights 31,854 31,843
Investments in third party film projects 12,068 9,034
56,376 56,867
10. RELATED PARTY TRANSACTIONS
In the first quarter if fiscal 2005, Corus acquired from Shaw Communications
Inc. a cable advertising business for $0.9 million in cash. All other
related party transactions in the quarter were in the normal course of
business, as described in note 26 of the consolidated financial statements
for the year ended August 31, 2004.
11. PENDING TRANSACTION
On March 30, 2004, Corus and Astral Media Inc. announced their intention to
exchange a number of radio assets in the province of Quebec, subject to
regulatory approval. The transaction will bring Corus' radio stations total
to 53, with 15 radio stations in the province of Quebec. As this is a
non-monetary transaction at carrying value, there is no gain or loss
anticipated on approval of this transaction.
12. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
Certain comparative consolidated amounts have been reclassified from those
previously presented to conform to the presentation of the fiscal 2005
consolidated financial statements.
Corus 18
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