Corus Entertainment announces third quarter results
Corus Entertainment announces third quarter results
- Combined Radio and Television revenues up 8% for quarter and 9% year-to-date - Combined Radio and Television segment profit up 11% for quarter and 12% year-to-date - 257,900 shares acquired through normal course issuer bid - Annual dividend increased to $0.86 per Class B Non-Voting Share from $0.40
TORONTO, July 13 /PRNewswire-FirstCall/ -- Corus Entertainment Inc. (TSX: CJR.B; NYSE: CJR) announced third quarter financial results today with continued strong operating results.
"We had another excellent quarter with particularly strong results for Television. Ad markets continue to be strong in both our core segments of specialty television and radio and our pay subscribers continue to expand, responding well to programming and marketing investments," said John Cassaday, President and Chief Executive Officer, Corus Entertainment Inc.
Third Quarter Results
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Consolidated revenues for the third quarter ended May 31, 2006 were $181.6 million, up 6% from $171.9 million last year. Consolidated segment profit was $57.7 million, up 10% from $52.4 million last year. Net income for the quarter was $23.2 million ($0.55 basic and $0.54 diluted earnings per share), as compared to income of $19.4 million ($0.45 basic and diluted earnings per share) last year.
Corus Television contributed quarterly revenues of $99.0 million, up 9% from $90.5 million last year, led by specialty ad growth of 11% and subscriber growth of 10%. Quarterly segment profit increased to $41.7 million, up 20% from $34.7 million last year.
Corus Radio revenues were $71.9 million, up 5% from $68.3 million last year. Segment profit was $21.1 million, down 5% from $22.2 million last year. Revenues and segment profit were impacted by the sale of Corus' Red Deer assets and the multi-station swap in the province of Quebec. On a same station(x) basis, revenues were up 3% and segment profit was up by approximately 3%.
Corus Content revenues were $12.6 million, down 14% from $14.6 million last year. Segment profit was $0.5 million compared to $0.1 million last year. Revenues were down in the quarter as fewer episodes were delivered and Beyblade merchandising revenue declined.
Year-to-Date Results
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Consolidated revenues for the nine months ended May 31, 2006 were $541.3 million, up 7% from $507.8 million last year. Consolidated segment profit was $169.6 million, up 11% from $152.7 million last year. Net loss for the nine months was $11.2 million ($0.26 basic and diluted loss per share), as compared to income of $61.5 million ($1.44 basic and $1.43 diluted earnings per share) last year, as the Company recorded a $132.0 million pre-tax debt refinancing charge related to the purchase of the Senior Subordinated Notes and the termination of cross-currency agreements associated with those notes in the second quarter.
Corus Television contributed nine month revenues of $298.7 million, up 10% from $270.8 million last year led by specialty ad growth of 13% and subscriber growth of 9%. Corus' pay television assets increased their subscriber base from 748,000 at August 31, 2005 to 822,000 at the end of the third quarter. Nine month segment profit increased to $130.1 million, up 18% from $110.0 million last year.
Corus Radio revenues were $202.1 million, up 8% from $187.4 million last year. Segment profit was $52.5 million, down 1% from $53.2 million last year. Revenue and segment profit were impacted by the sale of Corus' Red Deer assets and the multi-station swap in the province of Quebec. On a same station(x) basis, revenues were up 6% and segment profit was up by approximately 8%.
Corus Content revenues were $45.4 million, down 17% from $54.4 million last year. Segment profit was $2.9 million compared to $1.8 million last year. Revenues were down in the first nine months as fewer episodes were delivered and the Beyblade merchandising revenues declined. Production is on schedule to deliver approximately the same number of episodes as last year by the end of the fiscal year. The division continues to generate positive cash flow.
Corus has continued to purchase shares under its Normal Course Issuer Bid announced in December 2005. At the end of May 2006, the Company had purchased for cancellation 776,800 Class B Non-Voting Shares at an average price of $35.28 per share.
"Our strong brands continue to lead the way in what is turning out to be another very strong year for Corus. We are very pleased to be announcing a significant increase to our dividend," said Heather Shaw, Executive Chair, Corus Entertainment Inc.
Corus Entertainment Inc. reports in Canadian dollars.
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(x) See "Supplemental Earnings Measures"
About Corus Entertainment Inc.
Corus Entertainment Inc. is a Canadian-based media and entertainment company. Corus is a market leader in specialty television and radio with additional assets in pay television, advertising and digital audio services, television broadcasting, children's book publishing and children's animation. The company's multimedia entertainment brands include YTV, Treehouse, W Network, Movie Central, Nelvana, Kids Can Press and radio stations including CKNW, CKOI and Q107. Corus creates engaging branded entertainment experiences for its audiences across multiple platforms. A publicly traded company, Corus is listed on the Toronto (CJR.B) and New York (CJR) exchanges. Experience Corus on the web at www.corusent.com.
Supplemental Earnings Measures
In addition to providing earnings measures in accordance with Canadian and U.S. Generally Accepted Accounting Principles ("GAAP"), the Company presents certain supplemental earnings measures and financial information. With the exception of radio same station results, these have been outlined in the Management's Discussion and Analysis contained in the Annual Report for the year ended August 31, 2005. These measures and financial information do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.
Radio same station results
Radio same station segment results represent the revenues and segment profit for the 43 radio stations whose results are included in the first nine months of fiscals 2006 and 2005.
This statement contains forward-looking information and should be read subject to the following cautionary language:
To the extent any statements made in this press release contain information that is not historical; these statements are forward-looking statements within the meaning of applicable securities laws. These forward-looking statements related to, among other things, our objectives, goals, strategies, intentions, plans, estimates and outlook and can generally be identified by the use of the words such as "believe", "anticipate", "expect", "intend", "plan", "will", "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Although Corus believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these 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; our ability to successfully defend ourselves against litigation matters arising out of the ordinary course of business; and changes in accounting standards. Additional information about these factors and about the material assumptions underlying such forward-looking statements may be found in our Annual Information Form. Corus cautions that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Corus, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. 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 arises after the date thereof or otherwise.
Full financial details are available on the Corus Entertainment website
at www.corusent.com under Investor Information.
CORUS(TM) ENTERTAINMENT
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Third Quarter 2006
Report to Shareholders
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For the Nine Months Ended May 31, 2006
(Unaudited)
CORUS ENTERTAINMENT INC.
Third Quarter Report to Shareholders
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HIGHLIGHTS
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(Unaudited) Three months ended Nine months ended
(thousands of Canadian dollars May 31, May 31,
except per share data) 2006 2005 2006 2005
Revenues 181,562 171,890 541,291 507,790
Segment profit
Radio 21,141 22,184 52,508 53,222
Television 41,687 34,670 130,099 110,026
Content 490 149 2,916 1,796
Corporate (5,547) (4,824) (16,147) (12,639)
Eliminations (69) 172 228 335
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57,702 52,351 169,604 152,740
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Net income (loss) 23,154 19,430 (11,171) 61,452
Earnings (loss) per share
Basic $0.55 $0.45 $(0.26) $1.44
Diluted $0.54 $0.45 $(0.26) $1.43
Weighted average number of
shares outstanding (in
thousands)
Basic 42,283 42,901 42,629 42,751
Diluted 43,176 43,381 43,362 42,965
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Significant Events in the Quarter
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- On March 7, 2006 Corus Radio received five Canadian Music Industry
Awards. Corus Radio also received four Radio Marketing Bureau
Crystal Awards, recognizing the best in radio creative. 102.1 the
Edge, Q107 Toronto, 99.3 The FOX, FM96, The New 1031 Fresh FM,
Corus Radio Calgary, Power 97 and Y108 Hamilton were recognized
across several different categories.
- On March 11, 2006 Corus Entertainment's CJOB celebrated its
60th anniversary. Since March 11, 1946, CJOB-AM has been a vital
part of Winnipeg's city landscape, delivering local news, weather
and traffic and an interactive forum for discussing the issues
that matter most to the community.
- On March 20, 2006 the CRTC held a public hearing regarding the
licensing of a new FM radio broadcasting undertaking in Quebec
City. Corus was an applicant.
- On April 3, 2006 Nelvana and Nickelodeon jointly announced the
production of a second season for 3-D musical preschool series The
Backyardigans.
- On April 4, 2006 Nelvana announced that Jacob Two-Two would be
available on the AOL KOL service.
- On April 13, 2006 the Company paid a quarterly dividend, for
holders of its Class A and Class B shares, of $0.0975 and $0.10
respectively.
- On May 8, 2006 Corus Entertainment, Scholastic, NBC Universal,
Classic Media/Big Idea and ION Media announced a new children's
network featuring bilingual (English and Spanish) content.
- On May 11, 2006 Corus Entertainment and CBC/Radio-Canada announced
that they had reached an agreement that will see CBC/Radio-Canada
purchase Corus' 53% ownership stake in the digital television
service The Documentary Channel, subject to the approval of the
Canadian Radio-television and Telecommunications Commission
(CRTC). In a separate agreement, CBC Television and Corus extended
their current television affiliation agreements in Kingston and
Peterborough.
- On May 14, 2006 the Company announced that it had received 17 LEO
Awards. The winners included Movie Central's Terminal City with
six awards, while YTV's series Being Ian and Zixx: Level II and W
Network's The Shopping Bags also took home awards.
- On May 19, 2006 Corus Custom Networks announced the launch of its
Digital Signage department, which features multiple TV screens
with customized information and advertising that can be found in
retail, banks, airports, restaurants, grocery stores and public
transportation.
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Significant Events Subsequent to the Quarter
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- On June 1, 2006 the Company introduced its new direct-to-family
broadband video storefront TreehouseDirect.
- On June 2, 2006 the Company announced that effective Wednesday,
June 7, 2006, its ticker symbol on the Toronto Stock Exchange
("TSX") would be modified as part of a broader symbol change
initiative previously announced by the TSX. The ticker symbol
CJR.NV.B previously used on the TSX for the Company's Class B
Non-Voting Shares was replaced by the ticker symbol CJR.B.
- On June 2, 2006 as part of Corus Entertainment's integrated
multiplatform strategy, Treehouse announced that it will launch
its new live-action preschool series This is Emily Yeung on
mobile, online and on video-on-demand (VOD) prior to its broadcast
premiere.
- On June 5, 2006 Corus Radio Vancouver launched a reformatted
CHMJ-AM. The new AM730 Continuous Drive Time Traffic and the Best
of Talk delivers continuous traffic reports during the critical
morning and afternoon drive periods. The new station also features
the Vancouver White Caps and Giants and the Seattle Seahawks
play-by-play as well as the "best of talk," offering original
programming and time-shifted CKNW signature programming.
- On June 13, 2006 the Company announced that Jane and the Dragon, a
Nelvana co-production, and Corus-supported series ReGenesis and
Terminal City had won 2006 Banff World Television Festival Awards.
- As of June 30, 2006 the Company had purchased an additional
257,900 Class B Non-Voting Shares for cancellation under its
Normal Course Issuer Bid at an average price of $36.40 per share.
- On July 13, 2006 Corus and Astral Media announced that they had
reached an agreement to purchase the remaining 20% of TELETOON
network from Cookie Jar Entertainment. The deal, subject to CRTC
review, will give both Corus and Astral a 50% ownership in the
network. The purchase price for Cookie Jar's 20% stake is
approximately $96.0 million.
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Management's Discussion and Analysis
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Management's Discussion and Analysis of the financial position and results of operations for the nine month period ended May 31, 2006 is prepared at June 30, 2006. 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, 2005 Annual Report and the consolidated financial statements and notes of the current quarter. The financial highlights included in the discussion of the segmented results are derived from the unaudited consolidated financial statements. All amounts are stated in Canadian dollars unless specified otherwise.
Cautionary statement regarding forward-looking statements
To the extent any statements made in this report contain information that is not historical; these statements are forward-looking statements within the meaning of applicable securities laws. These forward-looking statements related to, among other things, our objectives, goals, strategies, intentions, plans, estimates and outlook and can generally be identified by the use of the words such as "believe", "anticipate", "expect", "intend", "plan", "will", "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Although Corus believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from these 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; our ability to successfully defend ourselves against litigation matters arising out of the ordinary course of business; and changes in accounting standards. Additional information about these factors and about the material assumptions underlying such forward-looking statements may be found in our Annual Information Form. Corus cautions that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Corus, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. 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 arises after the date thereof or otherwise.
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Overview of Consolidated Results
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The third quarter was highlighted by strong revenue growth from Television and another quarter of positive segment profit contribution from Content, while Radio overcame an industry-wide slump in April to post solid revenue gains in May. The year-to-date results are impacted by a pre-tax $132.0 million debt refinancing loss resulting from the purchase and cancellation of its Senior Subordinated Notes ("Notes") and the termination of the associated cross-currency agreements. These transactions resulted in an after-tax loss of $1.89 per share in the second quarter and year to date.
Financial Results
Revenues
Revenues for the third quarter were $181.6 million, an increase of 6% over $171.9 million last year. Radio and Television experienced increases of 5% and 9% respectively. For the nine-month period, revenues of $541.3 million represented a 7% increase over $507.8 million last year. Radio and Television experienced increases of 8% and 10% respectively. Content decreased by 14% for the three-month period and 17% for the nine-month period as fewer episodes were delivered. Please refer to the following section for a further discussion of segmented results.
Direct cost of sales, general and administrative expenses
Direct cost of sales, general and administrative expenses for the third quarter were $123.9 million, up 4% from $119.5 million in the prior year. For the nine-month period, expenses were $371.7 million, up 5% from the prior year. Expense increases in Television were a result of higher revenues, while increases in Radio were a result of the integration of the new stations in Quebec. Expenses at Content decreased as a result of lower revenues, while Corporate expenses increased as a result of stock-based compensation and compliance costs. Please refer to the following section for a further discussion of segmented results.
Depreciation
Depreciation expense for the third quarter was $5.7 million, a decrease of $1.1 million from last year, while for the nine-month period depreciation of $15.7 million represented a $2.1 million decrease from the prior year. This decrease reflects a lower capital cost base and continues a trend reflecting lower capital expenditures in recent years.
Amortization
Amortization expense for the third quarter was $0.8 million, down from $1.1 million last year, while for the nine-month period amortization of $2.3 million represented a decrease of $1.1 million from last year. The decrease is a result of certain deferred start-up and reformatting costs becoming fully amortized, as well as the write-off in the second quarter of deferred financing costs associated with the Senior Subordinated Notes. The write-off of these costs has been recorded as a component of the debt restructuring loss. The remaining deferred start-up costs of $0.6 million will be fully amortized over the next several quarters, while $6.0 million in deferred financing charges relating to the new bank debt is being amortized over the life of the facility.
Interest on long-term debt
Interest expense for the third quarter was $9.0 million, down from $13.9 million last year, while for the nine-month period interest expense was $34.6 million, representing a decrease of $6.7 million from $41.3 million last year. The Company refinanced its debt at the end of January 2006, with the result that the Notes, which paid interest at an effective rate of 9.33%, were replaced with bank debt paying interest on a floating rate plus a margin. Interest rate swap agreements fix the interest rate at 4.13% plus a margin on $400.0 million of the bank debt for the full term of the facility. The effective interest rate for the third quarter was 5.3% on bank debt, compared to 9.1%, primarily on the Notes, in the prior year.
Debt restructuring loss
In the second quarter of fiscal 2006, the Company purchased and cancelled U.S.$373.6 million of its Notes. Concurrently, the cross-currency agreements which fixed the exchange rate on the principal and interest on the Notes were effectively terminated. In order to fund the purchase of the Notes, the Company amended its credit facility with a syndicate of banks. These transactions resulted in the Company recording a pre-tax debt restructuring loss of $132.0 million in the second quarter. The components of this loss include mark-to-market payments on the cross-currency agreement terminations, consent and tender premiums, the non-cash write-off of deferred financing charges related to the Notes, and other fees. The after-tax impact of these transactions was approximately $1.89 per share.
Other expense (income), net
Other expense for the third quarter was $4.6 million, compared to income of $1.8 million in the prior year, while for the nine-month period other expense of $3.4 million represented a decrease from income of $10.8 million in the prior year. The current year includes severance-related restructuring charges of $4.1 million incurred in the Radio segment in the third quarter. The prior year nine-month period included foreign exchange and derivative gains of $4.2 million and $4.4 million, respectively. The financial instruments which gave rise to these gains were terminated in fiscal 2005 so there is no corresponding impact in fiscal 2006.
Income taxes
The effective tax rate for the third quarter was 35.5% and 54.9% for the nine-month period, compared with the Company's 37.3% statutory rate. The difference between the effective and statutory rates on a year to date basis is primarily due to the tax treatment of certain elements of the debt refinancing transaction that occurred in the second quarter.
Net income (loss)
Net income for the third quarter was $23.2 million, compared to $19.4 million last year, while for the nine-month period, a net loss of $11.2 million represented a decrease of $72.6 million from the prior year. Earnings per share for the third quarter were $0.55 basic and $0.54 diluted, compared with earnings per share of $0.45 basic and diluted last year. For the nine-month period, the loss per share was $0.26 per share basic and diluted, compared to basic and diluted earnings per share of $1.44 and $1.43 respectively. The after-tax impact of the debt refinancing transaction in the second quarter of fiscal 2006 was a loss of approximately $1.89 per share.
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Radio
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The Radio division comprises 51 radio stations situated primarily in nine 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
Three months ended Nine months ended
May 31, May 31,
(thousands of Canadian dollars) 2006 2005 2006 2005
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Revenues 71,904 68,340 202,080 187,415
Direct cost of sales, general
and administrative expenses 50,763 46,156 149,572 134,193
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Segment profit 21,141 22,184 52,508 53,222
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The quarter and year-to-date results of fiscal 2006 reflect the impact of acquisitions and disposals that occurred in both fiscals 2006 and 2005. A reconciliation of Radio same station results is provided on page 15.
Revenues for the third quarter were $71.9 million, up 5% from the corresponding period last year. For the nine-month period, revenues of $202.0 million were up 8% from a year ago. On a same station basis revenues were up 3% and 6% over the prior year for the three- and nine-month periods, respectively. Revenue growth for the quarter was experienced in Western Canada and Ontario, with Vancouver, Calgary, Winnipeg, and the Ontario regional stations contributing above market average growth in the quarter, as indicated by the Trans-Canada Radio Advertising by Market ("TRAM") Report for the three months ended May 31, 2006. Local airtime sales for the third quarter increased over the prior year by 6%, while national airtime sales decreased by 5% in the quarter. On a same station basis, local airtime sales increased by 4% while national airtime sales decreased by 4% in the quarter. This decrease in national airtime sales was the result of a very soft market in the month of April, in which TRAM reported a decline in radio industry revenues over the prior year. Based on the May TRAM it would appear that the market decline in the month of April was temporary. On a same station basis, Corus Radio continues to track ahead of the market growth for the fiscal year. Corus Radio believes that its assets continue to be competitively positioned to take advantage of the strong ad market.
Direct cost of sales, general and administrative expenses for the third quarter were $50.8 million, up 10% from the corresponding period last year. For the nine-month period, expenses of $149.6 million were up 11% over the prior year. On a same station basis expenses were up 4% and 5% over the prior year for the three- and nine-month periods respectively. This same station expense growth is attributed to increased investments in new media and programming content, principally related to professional hockey which was unavailable last year and contributed approximately $2.1 million in costs to the current year. During the third quarter Corus Radio incurred $4.1 million in expenses related to restructuring costs primarily in Western Canada. These costs are reflected in Other expense (income), net. Expenses related to the integration of the recently acquired Quebec stations are marginally higher than management's expectations and this combined with lower than anticipated revenue growth has had a negative impact on results for the quarter and year to date.
Segment profit for the third quarter was $21.1 million, a decrease of 5% from last year, while for the nine-month period segment profit of $52.5 million represented a 1% decrease from the prior year. On a same station basis, segment profit increased by 3% and 8% over the prior year for the three- and nine-month periods respectively.
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Television
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The Television division comprises the following: specialty television networks YTV, W Network, Treehouse TV, Corus' 80% interest in Country Music Television Limited ("CMT"), a 50.5% interest in Telelatino, a 40% interest in TELETOON and a 20% interest in Food Network; Corus' premium television services Movie Central and Encore Avenue; interests in three digital television channels: SCREAM, Discovery Kids Canada and The Documentary Channel; Corus Custom Networks, a cable advertising service; three local television stations; and Max Trax, a residential digital music service.
Financial Highlights
Three months ended Nine months ended
May 31, May 31,
(thousands of Canadian dollars) 2006 2005 2006 2005
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Revenues 98,951 90,508 298,699 270,752
Direct cost of sales, general
and administrative expenses 57,264 55,838 168,600 160,726
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Segment profit 41,687 34,670 130,099 110,026
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Revenues for the third quarter were $99.0 million, up 9% from the corresponding period last year. Revenues of $298.7 million for the nine-month period represented a 10% growth over prior year. Revenue growth was driven by continued advertising growth of 11% and 12% for the three- and nine-month periods, respectively, and subscriber growth of 10% and 9% for the three- and nine-month periods, respectively. The strong advertising results were driven by double-digit growth in W Network, TELETOON and Telelatino. In total, specialty advertising revenues grew 11% over the prior year's quarter. Specialty advertising growth for the nine-month period was 13%, while total revenues from local and other television properties grew by 5% over the prior year. Subscriber revenue growth was driven by Movie Central, which finished the quarter with 822,000 subscribers, up 10% from 748,000 at August 31, 2005. The Company attributes this increase to successful marketing campaigns surrounding high-profile HBO programming, including Rome and the sixth season of The Sopranos, which launched in March 2006. The rate of subscriber growth is expected to slow in the fourth quarter as churn rates in the summer months are traditionally higher.
Direct cost of sales, general and administrative expenses were $57.3 million for the third quarter, up 3% from the prior year, and $168.6 million for the nine-month period, up 5% from the prior year. The increase was primarily due to higher programming costs, as amortization of program rights increased by 7% over the prior year. These costs fluctuate in proportion to changes in subscriber levels, as a result of program supply agreements, and content requirements based on the prior year's revenues, as a result of conditions of license. These increased costs were offset by effective cost containment in other general and administrative overhead, which decreased by 2% in the current quarter due to a lease write-off in the prior year, and increased by 1% over the prior year on a year-to-date basis, due to higher marketing costs as well as bad debt expense incurred in the first quarter of this year.
Segment profit for the third quarter was $41.7 million, up 20% from the prior year, while segment profit of $130.1 million for the nine-month period represented an 18% increase over the prior year.
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Content
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The Content division participates in the production and distribution of television programs and the sale and licensing of related products and rights.
Financial Highlights
Three months ended Nine months ended
May 31, May 31,
(thousands of Canadian dollars) 2006 2005 2006 2005
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Revenues 12,594 14,599 45,356 54,368
Direct cost of sales, general
and administrative expenses 12,104 14,450 42,440 52,572
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Segment profit 490 149 2,916 1,796
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Revenues for the third quarter were $12.6 million, a decrease of 14% from the prior year. For the nine-month period, revenues of $45.4 million represented a 17% decrease from the prior year. During the three- and nine-month periods, Content delivered 25 and 60 completed episodes respectively, compared to 28 and 99 episodes in the prior year. Production is on schedule to deliver approximately the same number of episodes as last year. The year-to-date decrease in revenues from the prior year was due to fewer episodes being delivered in the current year, and the decline in Beyblade revenues towards the end of fiscal 2005. The Beyblade decline is not likely to reverse and merchandising revenues will not return to the levels of the past few fiscal years until new brands come on line. These decreases have been offset in the current year by library sales. Included in Content's revenues for the three- and nine-month periods are intercompany revenues of $1.5 million and $4.5 million, respectively. These revenues are eliminated upon consolidation.
Direct cost of sales, general and administrative expenses for the third quarter were $12.1 million, down 16% from the prior year. For the nine-month period, expenses of $42.4 million represent a decrease of 19% from the prior year. The decrease reflects ongoing diligence in expense control, as well as lower film amortization and third-party participation costs that fluctuate in proportion to revenues.
Segment profit for the third quarter was $0.5 million, compared to $0.1 million last year. For the nine-month period segment profit was $2.9 million compared to $1.8 million in the prior year. The Content division continues to perform in line with the Company's current expectations of modest segment profit and neutral to positive free cash flow.
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Corporate
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The Corporate segment results represent the incremental cost of corporate overhead in excess of the amount allocated to the operating segments.
Financial Highlights
Three months ended Nine months ended
May 31, May 31,
(thousands of Canadian dollars) 2006 2005 2006 2005
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Stock-based compensation 2,764 1,946 6,551 4,588
Other general and administrative
costs 2,783 2,878 9,596 8,051
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General and administrative
expenses 5,547 4,824 16,147 12,639
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General and administrative expenses increased to $5.5 million in the third quarter from $4.8 million in the same period last year, and for the nine-month period increased to $16.1 million from $12.6 million last year.
Stock-based compensation includes the expenses related to the Company's Performance Share Units and the issuance of stock options. The increase in the quarter and year-to-date expenses reflect the impact of Corus' higher average share price in fiscal 2006 compared to the same periods last year.
The increase in other general and administrative costs of $1.5 million for the nine-month period relate primarily to increased costs of information technology and costs associated with implementing the requirements of the Sarbanes-Oxley Act and new Canadian securities standards.
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Quarterly Consolidated Financial Information
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The following table sets forth certain unaudited data derived from the unaudited consolidated financial statements for each of the eight most recent quarters ended May 31, 2006. In management's opinion, these unaudited consolidated financial statements 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, 2005.
Net Earnings (loss)
(thousands of Segment income per share
Canadian dollars) Revenues profit (loss) Basic Diluted
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2006
3rd Qtr 181,562 57,702 23,154 $0.55 $0.54
2nd Qtr 164,388 42,151 (65,732) (1.54) (1.54)
1st Qtr 195,341 69,751 31,407 0.73 0.72
2005
4th Qtr 175,279 42,571 9,662 $0.23 $0.22
3rd Qtr 171,890 52,351 19,430 0.45 0.45
2nd Qtr 155,300 38,024 12,945 0.30 0.30
1st Qtr 180,600 62,365 29,077 0.68 0.68
2004
4th Qtr 162,959 42,837 14,018 $0.33 $0.33
Seasonal Fluctuations
As discussed in Management's Discussion and Analysis for the year ended August 31, 2005, Corus' operating results are subject to seasonal fluctuations that can significantly impact quarter-to-quarter operating results. In particular, as the Company's broadcasting businesses are dependent on general advertising and retail cycles associated with consumer spending activity, 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 second quarter of fiscal 2006 was impacted by the purchase and
cancellation of the Company's Senior Subordinated Notes, as well as
the termination of the cross-currency agreements associated with the
Notes. The after-tax impact of these transactions was approximately
$80.7 million or $1.89 per share.
-------------------------------------------------------------------------
Risks and Uncertainties
-------------------------------------------------------------------------
In fiscal 2006 a number of regulatory proceedings and decisions occurred which may have an impact on Corus. These include the granting of a pay television license by the CRTC to an entity allowing it to compete with our premium television services and the start-up of satellite radio. The CRTC is also conducting radio and television policy reviews that may impact Corus' regulated entities.
Except as noted above, there have been no material changes in any risks or uncertainties facing the Company since the year ended August 31, 2005.
-------------------------------------------------------------------------
Financial Position
-------------------------------------------------------------------------
Total assets at May 31, 2006 were $1.86 billion compared to $1.93 billion at August 31, 2005. The following discussion describes the significant changes in the consolidated balance sheet since August 31, 2005.
Current assets decreased by $82.8 million. Cash and cash equivalents decreased by $82.3 million. This decrease is the result of financing activities related to the purchase of the Senior Subordinated Notes and the termination of the associated cross-currency agreements as well as the purchase of the Company's shares through the Normal Course Issuer Bid. Other non-cash current working capital items did not fluctuate significantly from the year-end balances.
Non-current assets increased by $16.9 million. Investments and other assets decreased by $8.6 million, as the Company divested itself of an interest in a privately owned Canadian media company. Property, plant and equipment decreased by $0.9 million as capital expenditures of $14.6 million were offset by depreciation of $15.7 million. The property, plant and equipment balance will continue to decline as the significant investments from fiscals 2001 and 2002 get depreciated, however capital expenditures in the third quarter of fiscal 2006 were higher than in the first two quarters as the Company invests in consolidating its Montreal Radio facilities. Program and film rights (current and non-current) increased by $28.2 million, as accruals for acquired rights of $119.3 million were offset by amortization of $92.0 million. Accruals for program rights are weighted to the first half of the fiscal year, as programming is acquired for the fall launch and the ensuing broadcast year. Film investments increased by $11.9 million as net film spending of $34.8 million was offset by film amortization and accruals for tax credits. This increase is primarily in projects in development and process for series that will be delivered in future periods. Deferred charges decreased by $9.3 million due to amortization and the write-off of deferred financing charges as a result of the refinancing transactions in the second quarter. This was offset by the addition of new deferred financing charges related to the new bank facility. Broadcast licenses decreased by $3.8 million and goodwill decreased by $4.1 million as a result of the sale of two radio stations in the first quarter.
Current liabilities increased by $5.1 million. Accounts payable and accrued liabilities decreased by $1.3 million and income taxes payable increased by $6.5 million. Accounts payable and accrued liabilities related to working capital decreased by $21.5 million, due to the timing of the payment of interest, while non-working capital accruals for program rights and film investments increased by $20.1 million, as the Company grows its program rights assets.
Non-current liabilities decreased by $23.9 million. Long-term debt increased by $181.4 million, resulting from the refinancing transaction in the second quarter. The Company paid $436.0 million to purchase its Senior Subordinated Notes, and has drawn down $622.8 million on its new bank facility. This bank facility combined with an existing cash balance was used to finance the purchase of the Notes and terminate the associated cross-currency agreements. Deferred credits decreased by $162.0 million as a result of the termination of the cross-currency agreements associated with the Senior Subordinated Notes. Net future tax liability (including current future tax asset) decreased by $42.0 million primarily as a result of the tax impact of the refinancing transaction in the second quarter.
Share capital decreased by $11.9 million as a result of the repurchase and cancellation of shares with a book value of $16.3 million under the Company's recently implemented issuer bid. This was offset by the receipt of $4.0 million on the exercise of employee stock options, in response to a recent increase in the Company's share price. Contributed surplus increased by $2.1 million as a result of expensing stock options for the period. Cumulative translation adjustment increased by $1.4 million due to the effect of the strengthening Canadian dollar 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 has decreased by $82.3 million in fiscal 2006, compared to an increase of $14.4 million in the prior year. This is due to the refinancing of the Company's debt in the second quarter. Free cash flow is historically weak in the third quarter, as the Company paid interest on its Senior Subordinated Notes. With the retirement of these Notes in the second quarter of this fiscal year, this interest is no longer paid. On a year-to-date basis however, the amount of interest paid in the current year is approximately the same as the prior year, since interest on the bank debt is now paid monthly as opposed to semi-annually.
Cash provided by operating activities in fiscal 2006 is $66.1 million, compared to $61.1 million last year. This increase is primarily due to cash provided by a $16.9 million increase in segment profit, offset by an increased investment in non-cash working capital of $3.7 million, and higher payments for program rights of $17.4 million.
Cash used in investing activities in fiscal 2006 is $2.2 million, compared to $10.1 million last year. The current year includes $10.6 million in proceeds from the sale of certain radio and other assets, and $8.1 million from the disposal of investments, while capital expenditures are ahead of the prior year. This trend will continue through the remainder of the year.
Cash used in financing activities in fiscal 2006 is $146.2 million compared to $36.5 million last year. In the second quarter of fiscal 2006, the Company purchased and cancelled its Senior Subordinated Notes, terminated the cross-currency agreement associated with the Notes, and amended its credit facility. In the third quarter of fiscal 2006, the Company continued to purchase outstanding Notes, and repaid a portion of its revolving credit facility. In the third quarter, the Company continued purchasing its own shares under an issuer bid that began in the second quarter of fiscal 2006. To the end of the third quarter, 776,800 shares had been purchased for cash consideration of $27.4 million.
Liquidity
As at May 31, 2006, the Company has available $170.0 million under a revolving term credit facility that matures on January 24, 2011. Interest rates on the Company's facilities fluctuate with Canadian bankers' acceptances and LIBOR.
As at May 31, 2006, the Company had a cash balance of $55.8 million and a working capital balance of $109.0 million. Management believes that cash flow from operations and existing credit facilities will provide the Company with sufficient financial resources to fund its operations for the next 12 months.
Net debt and adjusted net debt
At May 31, 2006, net debt was $570.8 million, up from $307.1 million at August 31, 2005. Adjusted net debt at May 31, 2006 was $570.8 million, up from $465.9 million at August 31, 2005. This increase in net debt is a result of the cash flows incurred to buy back the Senior Subordinated Notes and terminate the associated cross-currency agreements. Adjusted net debt to segment profit at May 31, 2006 was 2.7 times, up from 2.4 times at August 31, 2005. This ratio remains below management's stated guidance range of 3.0 to 3.5 times.
Off-balance sheet arrangements and derivative financial instruments
During the second quarter of fiscal 2006 the Company entered into Canadian interest rate swap agreements to fix the interest rate on its outstanding bank loans. The estimate fair value of these agreements at May 31, 2006 is $8.4 million. No asset has been included in the consolidated balance sheet.
As at August 31, 2005, the consolidated balance sheet included a liability of $158.8 million related to a cross-currency agreement. Corus terminated this agreement in the second quarter of fiscal 2006 as part of the refinancing of its debt. The fair value of the liability at the date of its termination was included in the debt refinancing loss recorded in the second quarter of fiscal 2006.
-------------------------------------------------------------------------
Outstanding Share Data
-------------------------------------------------------------------------
As at June 30, 2006, 1,723,929 Class A Voting Shares and 40,204,775 Class B Non-Voting Shares were issued and outstanding.
-------------------------------------------------------------------------
Key Performance Indicators
-------------------------------------------------------------------------
The Company measures the success of its strategies using a number of key performance indicators. With the exception of radio same station segment results, these have been outlined in the Management's Discussion and Analysis contained in the Annual Report for the year ended August 31, 2005, 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 Nine months ended
May 31, May 31,
(thousands of Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities 27,497 13,910 66,115 61,070
Investing activities (489) (4,592) (2,168) (10,147)
-------------------------------------------------------------------------
Free cash flow 27,008 9,318 63,947 50,923
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net debt and adjusted net debt
As at As at
May 31, August 31,
(thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
Long-term debt 626,553 445,162
Cash and cash equivalents (55,797) (138,086)
-------------------------------------------------------------------------
Net debt 570,756 307,076
Unrealized cumulative foreign exchange gains - 158,838
-------------------------------------------------------------------------
Adjusted net debt 570,756 465,914
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted net debt to segment profit
As at As at
May 31, August 31,
(thousands of Canadian dollars except ratios) 2006 2005
-------------------------------------------------------------------------
Adjusted net debt (numerator) 570,756 465,914
Segment profit(1) (denominator) 212,175 195,311
-------------------------------------------------------------------------
Adjusted net debt to segment profit 2.7 2.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) 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.
Radio same station segment results
Radio same station segment results represent the revenues and segment profit for the 43 radio stations whose results are included in the first nine months of fiscals 2006 and 2005. With the acquisition and sale of certain stations over the past several quarters, the radio same station segment results metric has been included in this Managements' Discussion and Analysis to enhance the Company's disclosure.
Three months ended Nine months ended
May 31, May 31,
(thousands of Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Total Radio revenues 71,904 68,340 202,080 187,415
Adjustment for stations not in
both fiscal periods (4,682) (3,339) (12,664) (9,023)
-------------------------------------------------------------------------
Radio same station revenues 67,222 65,001 189,416 178,392
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Radio direct cost of
sales, general and
administrative expenses 50,763 46,156 149,572 134,193
Adjustment for stations not in
both fiscal periods (5,273) (2,251) (15,182) (6,633)
-------------------------------------------------------------------------
Radio same station direct cost
of sales, general and
administrative expenses 45,490 43,905 134,390 127,560
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Radio segment profit 21,141 22,184 52,508 53,222
Adjustment for stations not in
both fiscal periods 591 (1,088) 2,518 (2,390)
-------------------------------------------------------------------------
Radio same station segment
profit 21,732 21,096 55,026 50,832
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Financial Statements
-------------------------------------------------------------------------
CORUS ENTERTAINMENT INC.
CONSOLIDATED BALANCE SHEETS
As at As at
(unaudited) May 31, August 31,
(in thousands of Canadian dollars) 2006 2005
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 55,797 138,086
Accounts receivable 157,545 155,343
Prepaid expenses and other 11,581 10,948
Program and film rights 94,255 93,725
Future tax asset 2,635 6,498
-------------------------------------------------------------------------
Total current assets 321,813 404,600
-------------------------------------------------------------------------
Tax credits receivable 16,305 12,292
Investments and other assets 28,238 36,886
Property, plant and equipment, net 75,145 76,041
Program and film rights 82,419 54,715
Film investments (note 2) 70,345 58,417
Deferred charges 6,221 15,560
Broadcast licenses (note 3) 510,712 514,552
Goodwill (note 3) 751,238 755,301
-------------------------------------------------------------------------
1,862,436 1,928,364
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 170,847 172,236
Income taxes payable 9,576 3,049
-------------------------------------------------------------------------
Total current liabilities 180,423 175,285
-------------------------------------------------------------------------
Long-term debt (note 4) 626,553 445,162
Deferred credits (note 5) 33,740 195,789
Future tax liability 101,924 147,744
Other long-term liabilities 23,120 22,895
Non-controlling interest 10,506 11,227
-------------------------------------------------------------------------
Total liabilities 976,266 998,102
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (note 6) 874,023 885,911
Contributed surplus 5,611 3,558
Retained earnings 17,945 50,802
Cumulative translation adjustment (note 11) (11,409) (10,009)
-------------------------------------------------------------------------
Total shareholders' equity 886,170 930,262
-------------------------------------------------------------------------
1,862,436 1,928,364
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
On behalf of the Board,
John M. Cassaday Heather A. Shaw
President and Chief Executive Officer Executive Chair
July 13, 2006
CORUS ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND RETAINED EARNINGS
(unaudited)
(in thousands of Three months Nine months
Canadian dollars ended May 31, ended May 31,
except per share amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
Revenues 181,562 171,890 541,291 507,790
Direct cost of sales, general
and administrative expenses 123,860 119,539 371,687 355,050
Depreciation 5,707 6,811 15,733 17,828
Amortization 823 1,130 2,306 3,448
Interest on long-term debt 9,041 13,861 34,581 41,276
Debt refinancing loss (note 4) - - 131,951 -
Other expense (income), net 4,644 (1,821) 3,393 (10,789)
-------------------------------------------------------------------------
Income (loss) before income
taxes and non-controlling
interest 37,487 32,370 (18,360) 100,977
Income tax expense (recovery) 13,290 12,170 (10,072) 37,061
Non-controlling interest 1,043 770 2,883 2,464
-------------------------------------------------------------------------
Net income (loss) for the
period 23,154 19,430 (11,171) 61,452
Retained earnings (deficit),
beginning of period 7,002 23,840 50,802 (17,122)
Dividends (4,170) - (10,566) (1,060)
Share repurchase excess
(note 6) (8,041) - (11,120) -
-------------------------------------------------------------------------
Retained earnings, end of
period 17,945 43,270 17,945 43,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per share (note 9)
Basic $0.55 $0.45 $(0.26) $1.44
Diluted $0.54 $0.45 $(0.26) $1.43
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of shares
outstanding (in thousands)
Basic 42,283 42,901 42,629 42,751
Diluted 43,176 43,381 43,362 42,965
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
CORUS ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Three months Nine months
(in thousands of ended May 31, ended May 31,
Canadian dollars 2006 2005 2006 2005
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) for the
period 23,154 19,430 (11,171) 61,452
Add (deduct) non-cash items:
Depreciation 5,707 6,811 15,733 17,828
Amortization of program and
film rights 31,888 29,263 92,023 83,854
Amortization of film
investments 7,864 6,705 22,014 24,528
Other amortization 823 1,130 2,306 3,448
Future income taxes 3,235 1,947 (40,872) 10,388
Non-controlling interest 1,043 770 2,883 2,464
Foreign exchange gains (31) - (356) (2,747)
Stock-based compensation 2,764 1,946 6,551 4,588
Unrealized derivative losses
(gains) - 298 - (3,278)
Debt refinancing loss - - 131,951 -
Other 1,804 (287) 2,957 (245)
Net change in non-cash working
capital balances related to
operations 2,831 (14,461) (19,984) (16,263)
Payment of program and film
rights (40,753) (27,237) (103,135) (85,788)
Net additions to film
investments (12,832) (12,405) (34,785) (39,159)
-------------------------------------------------------------------------
Cash provided by operating
activities 27,497 13,910 66,115 61,070
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (6,685) (4,538) (14,648) (10,776)
Decrease (increase) in
investments, net 8,315 109 8,076 (906)
Decrease in public benefits
associated with acquisitions (2,119) (3,142) (6,165) (5,287)
Proceeds from sale of assets - 2,979 10,569 6,822
-------------------------------------------------------------------------
Cash used in investing
activities (489) (4,592) (2,168) (10,147)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in bank
loans (10,574) - 622,780 (34,017)
Notes repurchase and swap
termination (1,120) - (727,741) -
Additions to deferred
financing charges - - (6,000) (832)
Decrease in other long-term
liabilities (131) (185) (483) (629)
Issuance of shares under stock
option plan 1,462 48 4,036 735
Shares repurchased (19,753) - (27,402) -
Dividends paid (4,220) - (6,352) (1,060)
Dividends paid to
non-controlling interest (4,674) - (5,304) (937)
Other - - 230 208
-------------------------------------------------------------------------
Cash used in financing
activities (39,010) (137) (146,236) (36,532)
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash equivalents
during period (12,002) 9,181 (82,289) 14,391
Cash and cash equivalents,
beginning of period 67,799 100,441 138,086 95,231
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 55,797 109,622 55,797 109,622
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Corus Entertainment Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
May 31, 2006
(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, 2005.
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. Each of the
broadcasting businesses (Radio and Television) and the Content
business has unique seasonal aspects.
For the 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 for the second quarter tend to be the
weakest, consistent with lower consumer spending in winter months.
For the Content business, operating results are dependent on the
timing and number of television programs made available for delivery
in the period, as well as the 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 fluctuate and are
not necessarily closely related to revenue recognition.
2. FILM INVESTMENTS
As at As at
May 31, August 31,
2006 2005
---------------------------------------------------------------------
Projects in development and in process, net of
advances 24,571 15,876
Completed projects and distribution rights 31,507 28,796
Investments in third-party-produced film projecs 14,267 13,745
---------------------------------------------------------------------
70,345 58,417
---------------------------------------------------------------------
---------------------------------------------------------------------
3. BROADCAST LICENSES AND GOODWILL
During the first quarter of fiscal 2006, the Company completed the
sale of two radio stations for an aggregate purchase price of $9,115.
There were reductions of $3,840 and $4,063 in broadcast licenses and
goodwill, respectively, and an immaterial loss was recorded on these
dispositions.
4. LONG-TERM DEBT
As at As at
May 31, August 31,
2006 2005
---------------------------------------------------------------------
Senior Subordinated Notes 599 445,162
Bank loans 625,954 -
---------------------------------------------------------------------
626,553 445,162
---------------------------------------------------------------------
---------------------------------------------------------------------
On March 7, 2002, Corus issued U.S.$375,000 aggregate principal
amount of 8.75% Senior Subordinated Notes (the "Notes") due in 2012
at a price of 99.186% of their aggregate principal amount. The
Company entered into cross-currency agreements to fix the liability
for interest and principal payments on the Notes. The agreements
resulted in an effective interest rate of 9.33% on the Canadian
dollar equivalent of the U.S. debt. The exchange rate applicable to
the principal portion of the debt was fixed at Cdn.$1.6107,
translating to approximately Cdn.$604,000.
On December 15, 2005, the Company announced that it had commenced a
cash tender offer and consent solicitation for its Notes. On
January 23, 2006, the Company completed its tender offer for the
Notes, and as a result U.S.$373,646 of the Notes were acquired by the
Company and cancelled, leaving U.S.$1,354 outstanding. Concurrently,
the cross-currency agreements were effectively terminated. As at
May 31, 2006, U.S.$544 of the Notes remain outstanding.
In order to fund the purchase of the Notes, the Company's credit
facility with a syndicate of banks was amended and its operating loan
facility was terminated. The amendment resulted in an extension of
the maturity of the credit facility to January 24, 2011. The amount
committed is $800,000, of which $300,000 is available on a revolving
basis (the "Revolving Facility") and $500,000 on a non-revolving
basis (the "Term Facility"), and is repayable at maturity. Funds are
available to the Company in both Canadian and U.S. dollars and charge
interest on a fluctuating basis plus a margin. Other terms of the
amended credit facility are substantially similar to the prior credit
facility. As at May 31, 2006, $130,000 of the Revolving Facility and
all of the Term Facility were utilized in Canadian dollars.
Interest rates on the balance of the bank loans fluctuate with
Canadian bankers' acceptances and LIBOR. The Company has entered into
Canadian interest rate swap agreements to fix the interest rate at
4.13% plus a margin on $400,000 of the Term Facility for the full
term of the facility.
These transactions resulted in the Company recording a $131,951 debt
refinancing loss in the second quarter of fiscal 2006. The components
of this loss include mark-to-market payments on the cross-currency
agreement termination, consent and tender premiums, the write-off of
deferred financing charges, and underwriting and other fees.
5. DEFERRED CREDITS
As at As at
May 31, August 31,
2006 2005
---------------------------------------------------------------------
Public benefits associated with acquisitions 15,044 21,209
Cross-currency agreements translated into
Canadian dollars at the current rate (note 4) - 158,838
Unearned revenue from distribution and licensing
of film rights 15,155 12,320
Other 3,541 3,422
---------------------------------------------------------------------
33,740 195,789
---------------------------------------------------------------------
---------------------------------------------------------------------
6. SHARE CAPITAL
Authorized
The Company is authorized to issue, upon approval of holders of no
less than two-thirds of the existing Class A shares, an unlimited
number of Class A participating shares ("Class A Voting Shares"), as
well as an unlimited number of 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 changes in the Class A Voting and Class B Non-Voting Shares since
August 31, 2005 are summarized as follows:
Class A Class B
Voting Shares Non-Voting Shares Total
---------------------- -----------------------
# $ # $ $
-------------------------------------------------------------------------
Balance,
August 31,
2005 1,724,929 26,715 41,078,119 859,196 885,911
Issuance of
shares under
Stock Option
Plan - - 160,356 4,164 4,164
Shares
repurchased - - (776,800) (16,282) (16,282)
Repayment of
executive stock
purchase loans - - - 230 230
-------------------------------------------------------------------------
Balance,
May 31, 2006 1,724,929 26,715 40,461,675 847,308 874,023
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2006, the Company granted 262,000
stock options with a weighted average exercise price of $32.25 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
2006 was $11.16 per option.
As at May 31, 2006, the Company has outstanding stock options for
3,497,965 Class B Non-Voting Shares, of which 2,491,376 are
exercisable.
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
2006 2005
---------------------------------------------------------------------
Expected life 5 years 5 years
Risk-free interest rate 3.73% 4.31%
Dividend yield 0.31% 0.21%
Volatility 33.33% 35.98%
---------------------------------------------------------------------
---------------------------------------------------------------------
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 three- and nine-
month periods of $734 and $2,181 (2005 - $567 and $1,712) 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 Nine months ended
May 31, May 31,
2006 2005 2006 2005
---------------------------------------------------------------------
Net income 23,154 19,430 (11,171) 61,452
Pro forma net income 22,887 19,032 (12,175) 60,180
Pro forma basic earnings
per share $0.54 $0.44 $(0.29) $1.41
Pro forma diluted
earnings per share $0.53 $0.44 $(0.29) $1.40
---------------------------------------------------------------------
---------------------------------------------------------------------
Long-term Incentive Plan
In fiscal 2006, the Company is implementing a new long-term incentive
plan for senior management based on shareholder appreciation targets.
No expense was recorded in the first three quarters in relation to
this plan.
Normal Course Issuer Bid
On December 15, 2005, the Company announced its intention to make a
normal course issuer bid for its Class B Non-Voting Shares through
the facilities of the Toronto Stock Exchange. The Company intends to
purchase for cancellation a maximum of 3,000,000 Class B Non-Voting
Shares.
During the nine months ended May 31, 2006, the Company repurchased
and cancelled 776,800 Class B Non-Voting Shares for a total cash
consideration of $27,402. This cash consideration exceeded the
carrying value of the shares repurchased by $11,120, which amount was
charged to retained earnings.
7. BUSINESS SEGMENT INFORMATION
The Company's business activities are conducted through three
reportable operating segments:
Radio
The Radio segment comprises 51 radio stations, situated primarily in
high-growth urban centres in Canada. Revenues are derived from
advertising broadcast over these stations.
Television
The Television segment includes interests in several specialty
television networks, pay television, conventional television
stations, a digital music service 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.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Management evaluates each business segment' performance based on
revenues less direct cost of sales, general and administrative
expenses. Transactions between reporting segments are recorded at
fair value.
(a) Revenues and segment profit
Three months ended May 31, 2006
Tele- Cor- Elimi- Consoli-
Radio vision Content porate nations dated
-------------------------------------------------------------------------
Revenue 71,904 98,951 12,594 - (1,887) 181,562
Direct cost of
sales, general
and administrative
expenses 50,763 57,264 12,104 5,547 (1,818) 123,860
-------------------------------------------------------------------------
Segment profit 21,141 41,687 490 (5,547) (69) 57,702
Depreciation 1,976 1,815 789 1,127 - 5,707
Amortization - 423 - 400 - 823
Interest on
long-term debt - - - 9,041 - 9,041
Other expense
(income), net 3,646 19 (297) 1,276 - 4,644
-------------------------------------------------------------------------
Income (loss)
before income
taxes and non-
controlling
interest 15,519 39,430 (2) (17,391) (69) 37,487
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended May 31, 2005
Tele- Cor- Elimi- Consoli-
Radio vision Content porate nations dated
-------------------------------------------------------------------------
Revenue 68,340 90,508 14,599 - (1,557) 171,890
Direct cost of
sales, general
and administrative
expenses 46,156 55,838 14,450 4,824 (1,729) 119,539
-------------------------------------------------------------------------
Segment profit 22,184 34,670 149 (4,824) 172 52,351
Depreciation 1,664 2,266 1,916 965 - 6,811
Amortization - 465 - 665 - 1,130
Interest on
long term debt - - - 13,861 - 13,861
Other expense
(income), net (40) 394 (203) (1,972) - (1,821)
-------------------------------------------------------------------------
Income (loss)
before income
taxes and non-
controlling
interest 20,560 31,545 (1,564) (18,343) 172 32,370
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended May 31, 2006
Tele- Cor- Elimi- Consoli-
Radio vision Content porate nations dated
-------------------------------------------------------------------------
Revenue 202,080 298,699 45,356 - (4,844) 541,291
Direct cost of
sales, general
and administrative
expenses 149,572 168,600 42,440 16,147 (5,072) 371,687
-------------------------------------------------------------------------
Segment profit 52,508 130,099 2,916 (16,147) 228 169,604
Depreciation 5,165 5,489 2,238 2,841 - 15,733
Amortization - 799 - 1,507 - 2,306
Interest on
long term debt - - - 34,581 - 34,581
Debt restructuring
loss - - - 131,951 - 131,951
Other expense
(income), net 3,930 357 (301) (593) - 3,393
-------------------------------------------------------------------------
Income (loss)
before income
taxes and non-
controlling
interest 43,413 123,454 979 (186,434) 228 (18,360)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended May 31, 2005
Tele- Cor- Elimi- Consoli-
Radio vision Content porate nations dated
-------------------------------------------------------------------------
Revenue 187,415 270,752 54,368 - (4,745) 507,790
Direct cost of
sales, general
and administrative
expenses 134,193 160,726 52,572 12,639 (5,080) 355,050
-------------------------------------------------------------------------
Segment profit 53,222 110,026 1,796 (12,639) 335 152,740
Depreciation 5,154 6,752 3,088 2,834 - 17,828
Amortization - 1,394 - 2,054 - 3,448
Interest on
long term debt - - - 41,276 - 41,276
Other expense
(income), net 101 272 121 (11,283) - (10,789)
-------------------------------------------------------------------------
Income (loss)
before income
taxes and non-
controlling
interest 47,967 101,608 (1,413) (47,520) 335 100,977
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 As at
May 31, August 31,
2006 2005
---------------------------------------------------------------------
Radio 713,720 713,427
Television 918,745 878,323
Content 136,816 145,947
Corporate 94,682 191,963
Eliminations (1,527) (1,296)
---------------------------------------------------------------------
1,862,436 1,928,364
---------------------------------------------------------------------
---------------------------------------------------------------------
Assets are located primarily within Canada.
8. FINANCIAL INSTRUMENTS
Fair values
The fair values of long-term debt and derivative financial
instruments have been determined as follows:
Long-term debt
The carrying value of the Company's bank loans approximates their
fair value because interest charges under the terms of the bank loans
are based on current Canadian bankers' acceptance and LIBOR rates.
Derivative financial instruments
The estimated fair values of these agreements are as follows:
May 31, 2006 August 31, 2005
-------------------- --------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
---------------------------------------------------------------------
Cross-currency agreements - - (158,838) (242,005)
Interest rate swap agreements - 8,380 - -
---------------------------------------------------------------------
---------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
9. 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 Nine months ended
May 31, May 31,
2006 2005 2006 2005
---------------------------------------------------------------------
Net income (loss) for the
period (numerator) 23,154 19,430 (11,171) 61,452
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average number
of shares outstanding
(denominator)
Weighted average number
of shares outstanding -
basic 42,283 42,901 42,629 42,751
Effect of dilutive
securities 893 480 733 214
---------------------------------------------------------------------
Weighted average number
of shares outstanding -
diluted 43,176 43,381 43,362 42,965
---------------------------------------------------------------------
---------------------------------------------------------------------
10. CONSOLIDATED STATEMENTS OF CASH FLOWS
Interest paid, interest received and income taxes paid and classified
as operating activities are as follows:
Three months ended Nine months ended
May 31, May 31,
2006 2005 2006 2005
---------------------------------------------------------------------
Interest paid 8,174 26,805 52,665 53,818
Interest received 88 641 2,267 1,910
Income taxes paid 1,795 9,670 25,767 29,375
---------------------------------------------------------------------
---------------------------------------------------------------------
11. FOREIGN EXCHANGE GAINS AND LOSSES
The Company has reflected certain gains and losses in its
consolidated statements of income (loss) and retained earnings as a
result of exposure to foreign currency exchange rate fluctuations. A
portion of these gains and losses relates to operating activities
while other portions are of a financing nature. Foreign exchange
gains and losses are reflected in the consolidated
financial statements as follows:
Three months ended Nine months ended
May 31, May 31,
2006 2005 2006 2005
---------------------------------------------------------------------
Direct cost of sales,
general and administrative
expenses (619) 375 (723) (650)
Other income, net 222 (168) 302 (4,153)
---------------------------------------------------------------------
Total foreign exchange loss
(gains) (397) 207 (421) (4,803)
---------------------------------------------------------------------
---------------------------------------------------------------------
An analysis of the cumulative translation adjustment shown separately
in shareholders' equity is as follows:
---------------------------------------------------------------------
Balance, August 31, 2005 (10,009)
Effect of exchange rate fluctuation on translation of net
assets of self-sustaining foreign operations (1,400)
---------------------------------------------------------------------
Balance, May 31, 2006 (11,409)
---------------------------------------------------------------------
---------------------------------------------------------------------
12. SUBSEQUENT EVENT
On July 13, 2006 Corus and Astral Media announced that they had
reached an agreement to purchase the remaining 20% of TELETOON
network from Cookie Jar Entertainment. The deal, subject to CRTC
review, will give both Corus and Astral Media a 50% ownership in the
network. The purchase price for Cookie Jar Entertainment's 20% stake
is approximately $96,000.
13. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
Certain comparative consolidated amounts have been reclassified from
those previously presented to conform to the presentation of the
fiscal 2006 consolidated financial statements.
Source: Corus Entertainment Inc.
CONTACT: John Cassaday, President and Chief Executive Officer, Corus
Entertainment Inc., (416) 642-3770; Tom Peddie, Senior Vice President and Chief
Financial Officer, Corus Entertainment Inc., (416) 642-3780; Tracy Ewing, Vice
President, Communications, Corus Entertainment Inc., (416) 642-3792
-------
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posted by EntertainmentNews @ 4:16 AM
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