##### 



Corus Entertainment Inc.   First Quarter Report to Shareholders HIGHLIGHTS (Unaudited)
    
    Three months endedNovember 30,(thousands of Canadian dollars except per share data)
    
    2004
    
    
    2003Revenues
    
    
    180,600
    
    
    
    184,962Segment profitRadio
    
    
    21,024
    
    
    
    17,801Television
    
    
    44,945
    
    
    
    39,788Content
    
    
    122
    
    
    
    2,605Corporate
    
    
    (3,623
    )
    
    
    (2,731
    )Eliminations
    
    
    (103
    )
    
    
    (194
    )62,365
    
    
    
    57,269Net income
    
    
    29,077
    
    
    
    5,700Earnings per shareBasic and diluted
    
    $
    0.68
    
    
    $
    0.13Weighted average number of
shares outstanding (in thousands)Basic
    
    
    42,739
    
    
    
    42,666Diluted
    
    
    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 Friendson 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




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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




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##### 



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




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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
    
    
    2003Revenues
    
    
    65,533
    
    
    
    60,738Operating, general and administrative expenses
    
    
    44,509
    
    
    
    42,937Segment 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




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##### 



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
    
    
    2003Revenues
    
    
    98,520
    
    
    
    94,203Operating, general and administrative expenses
    
    
    53,575
    
    
    
    54,415Segment 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




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##### 



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
    
    
    2003Revenues
    
    
    18,928
    
    
    
    30,718Operating, general and administrative expenses
    
    
    18,806
    
    
    
    28,113Segment 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,
Backyardigansand 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 Beyblademerchandise and the
weaker U.S. dollar. Miss Spiderand Backyardigansare 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
    
    
    2003Stock-based compensation
    
    
    1,275
    
    
    
    735Other general and administrative costs
    
    
    2,348
    
    
    
    1,996General 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




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##### 



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 shareCanadian dollars)
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic and diluted20051st Qtr
    
    
    180,600
    
    
    
    62,365
    
    
    
    29,077
    
    
    $
    0.6820044th Qtr
    
    
    162,959
    
    
    
    42,837
    
    
    
    14,018
    
    
    $
    0.333rd Qtr
    
    
    163,864
    
    
    
    (43,777
    )
    
    
    (51,160
    )
    
    
    (1.20
    )2nd Qtr
    
    
    155,019
    
    
    
    34,069
    
    
    
    8,305
    
    
    
    0.191st Qtr
    
    
    184,962
    
    
    
    57,269
    
    
    
    5,700
    
    
    
    0.1320034th Qtr
    
    
    175,138
    
    
    
    41,737
    
    
    
    12,432
    
    
    $
    0.293rd Qtr
    
    
    155,296
    
    
    
    44,186
    
    
    
    12,265
    
    
    
    0.292nd 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




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##### 



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




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##### 



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
    
    
    2003Cash 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
    
    2004Long-term debt
    
    
    444,750
    
    
    
    529,139Cash and cash equivalents
    
    
    (48,127
    )
    
    
    (95,231
    )Net debt
    
    
    396,623
    
    
    
    433,908Unrealized cumulative foreign exchange gains
    
    
    159,250
    
    
    
    111,625Adjusted 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
    
    2004Adjusted net debt [numerator]
    
    
    555,873
    
    
    
    545,533Adjusted segment profitSegment profit (2)
    
    
    95,494
    
    
    
    90,398Write-down of investment in film (2)
    
    
    85,000
    
    
    
    85,000Adjusted segment profit [denominator]
    
    
    180,494
    
    
    
    175,398Adjusted 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
    
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CORUS ENTERTAINMENT INC.
CONSOLIDATED BALANCE SHEETS [unaudited]
    
    As at November 30,
    
    As at August 31,(in thousands of Canadian dollars)
    
    2004
    
    2004ASSETSCurrentCash and cash equivalents
    
    
    48,127
    
    
    
    95,231Accounts receivable
    
    
    167,628
    
    
    
    143,641Prepaid expenses and other
    
    
    13,627
    
    
    
    9,674Program and film rights
    
    
    97,967
    
    
    
    92,786Future tax asset
    
    
    10,364
    
    
    
    13,719Total current assets
    
    
    337,713
    
    
    
    355,051Tax credits receivable
    
    
    11,677
    
    
    
    10,774Investments and other assets
    
    
    42,305
    
    
    
    41,683Capital assets, net
    
    
    79,064
    
    
    
    82,105Program and film rights
    
    
    45,523
    
    
    
    32,523Film investments [note 9]
    
    
    56,376
    
    
    
    56,867Deferred charges
    
    
    18,140
    
    
    
    19,305Broadcast licenses
    
    
    509,040
    
    
    
    509,040Goodwill
    
    
    789,518
    
    
    
    789,5181,889,356
    
    
    
    1,896,866LIABILITIES AND SHAREHOLDERS EQUITYCurrentAccounts payable and accrued liabilities
    
    
    161,631
    
    
    
    161,397Income taxes payable
    
    
    7,782
    
    
    
    4,567Total current liabilities
    
    
    169,413
    
    
    
    165,964Long-term debt [note 2]
    
    
    444,750
    
    
    
    529,139Deferred credits [note 3]
    
    
    192,587
    
    
    
    146,164Future tax liability
    
    
    168,970
    
    
    
    169,085Other long-term liabilities
    
    
    16,260
    
    
    
    16,203Non-controlling interest
    
    
    9,862
    
    
    
    9,131Total liabilities
    
    
    1,001,842
    
    
    
    1,035,686SHAREHOLDERS EQUITYShare capital [note 4]
    
    
    884,053
    
    
    
    884,053Contributed surplus
    
    
    1,937
    
    
    
    1,287Retained earnings (deficit)
    
    
    11,955
    
    
    
    (17,122
    )Cumulative translation adjustment [note 8]
    
    
    (10,431
    )
    
    
    (7,038
    )Total shareholders equity
    
    
    887,514
    
    
    
    861,1801,889,356
    
    
    
    1,896,866
 See accompanying notes On behalf of the Board, John M. Cassaday
    
    Heather A. ShawPresident and Chief Executive Officer
    
    Executive Chair
 January 13, 2005 Corus
    
    10




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CORUS ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT) [unaudited]
    
    Three months ended November 30,(in thousands of Canadian dollarsexcept per share amounts)
    
    2004
    
    
    2003Revenues
    
    
    180,600
    
    
    
    184,962Operating, general and
administrative expenses [note 8]
    
    
    118,235
    
    
    
    127,69362,365
    
    
    
    57,269Depreciation
    
    
    5,419
    
    
    
    6,093Amortization
    
    
    1,165
    
    
    
    2,222Interest on long-term debt
    
    
    13,592
    
    
    
    13,787Other income, net
    
    
    (6,362
    )
    
    
    (2,385
    )Income before income taxes
    
    
    48,551
    
    
    
    37,552Income tax expense
    
    
    18,743
    
    
    
    31,097Income before non-controlling interest
    
    
    29,808
    
    
    
    6,455Non-controlling interest
    
    
    (731
    )
    
    
    (755
    )Net income for the period
    
    
    29,077
    
    
    
    5,700Retained earnings (deficit), beginning of period
    
    
    (17,122
    )
    
    
    8,135Retained earnings, end of period
    
    
    11,955
    
    
    
    13,835Earnings per share[note 6]Basic and diluted
    
    $
    0.68
    
    
    $
    0.13Weighted average number of shares outstanding
[in thousands]Basic
    
    
    42,739
    
    
    
    42,666Diluted
    
    
    42,822
    
    
    
    42,767
 See accompanying notes Corus
    
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CORUS ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS [unaudited]
    
    Three months ended November 30,(in thousands of Canadian dollars)
    
    2004
    
    
    2003OPERATING ACTIVITIESNet income for the period
    
    
    29,077
    
    
    
    5,700Add (deduct) non-cash items:Depreciation
    
    
    5,419
    
    
    
    6,093Amortization of program and film rights
    
    
    28,148
    
    
    
    26,291Amortization of film investments
    
    
    9,422
    
    
    
    13,594Other amortization
    
    
    1,165
    
    
    
    2,222Future income taxes
    
    
    3,230
    
    
    
    16,802Non-controlling interest
    
    
    731
    
    
    
    755Foreign exchange gains
    
    
    (2,747
    )
    
    
    (2,386
    )Stock-based compensation
    
    
    1,275
    
    
    
    735Other
    
    
    (1,711
    )
    
    
    54674,009
    
    
    
    70,352Net 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 ACTIVITIESAdditions 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
    
    
    
    58Cash used in investing activities
    
    
    (4,519
    )
    
    
    (6,379
    )FINANCING ACTIVITIESIncrease (decrease) in bank loans
    
    
    (34,017
    )
    
    
    2,363Decrease in other long-term liabilities
    
    
    (198
    )
    
    
    (235
    )Issuance of shares under stock option plan
    
    
    
    
    
    
    1,952Cash provided (used in) by financing activities
    
    
    (34,215
    )
    
    
    4,080Net decrease in cash and cash equivalents
during period
    
    
    (47,104
    )
    
    
    (4,588
    )Cash and cash equivalents, beginning of period
    
    
    95,231
    
    
    
    43,874Cash and cash equivalents, end of period
    
    
    48,127
    
    
    
    39,286
 See accompanying notes Corus
    
    12




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##### 



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 POLICIESThe 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
    
    2004Senior subordinated notesPrincipal amount translated into Canadian
dollars at hedged rate
    
    
    604,000
    
    
    
    604,000Unrealized cumulative foreign exchange gains
    
    
    (159,250
    )
    
    
    (111,625
    )Senior subordinated notes translated at the
current rate
    
    
    444,750
    
    
    
    492,375Bank loans
    
    
    
    
    
    
    36,764444,750
    
    
    
    529,139
 Corus
    
    13




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##### 



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
    
    2004Public benefits associated with acquisitions
    
    
    29,981
    
    
    
    31,102Cross-currency agreements translated into
Canadian dollars at the current rate
    
    
    159,250
    
    
    
    111,625Unearned revenue from distribution and
licensing of film rights
    
    
    2,778
    
    
    
    2,800Other
    
    
    578
    
    
    
    637192,587
    
    
    
    146,164
  4.
    SHARE CAPITALAuthorizedThe 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 OutstandingThe 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 PlanUnder 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




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##### 



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
    
    Fiscal2005
    
    2004Expected life
    
    Five years
    
    Five yearsRisk-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
    
    
    2003Net income
    
    
    29,077
    
    
    
    5,700Pro forma net income
    
    
    28,593
    
    
    
    5,001Pro forma basic and diluted earnings per share
    
    $
    0.67
    
    
    $
    0.12
  5.
    BUSINESS SEGMENT INFORMATIONThe Companys business activities are conducted through three reportable operating
segments:RadioThe 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.TelevisionThe 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.ContentThe 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




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##### 



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
    
    
    2003RevenuesRadio
    
    
    65,533
    
    
    
    60,738Television
    
    
    98,520
    
    
    
    94,203Content
    
    
    18,928
    
    
    
    30,718Eliminations
    
    
    (2,381
    )
    
    
    (697
    )180,600
    
    
    
    184,962Segment profitRadio
    
    
    21,024
    
    
    
    17,801Television
    
    
    44,945
    
    
    
    39,788Content
    
    
    122
    
    
    
    2,605Corporate
    
    
    (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
    
    2004Radio
    
    
    753,948
    
    
    
    744,358Television
    
    
    899,240
    
    
    
    855,186Content
    
    
    172,264
    
    
    
    187,119Corporate
    
    
    65,561
    
    
    
    112,424Eliminations
    
    
    (1,657
    )
    
    
    (2,221
    )1,889,356
    
    
    
    1,896,866
 Assets are located primarily within Canada. Corus
    
    16




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##### 



Corus Entertainment Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 2004
(in thousands of Canadian dollars except share information)  6.
    EARNINGS PER SHAREThe 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
    
    
    2003Net income for the period [numerator]
    
    
    29,077
    
    
    
    5,700Weighted average number of shares outstanding
[denominator]Weighted average number of shares outstanding  basic
    
    
    42,739
    
    
    
    42,666Effect of dilutive securities
    
    
    83
    
    
    
    101Weighted average number of shares outstanding  diluted
    
    
    42,822
    
    
    
    42,767
  7.
    CONSOLIDATED STATEMENT OF CASH FLOWSInterest paid, interest received and income taxes paid and classified as operating
activities are as follows: Three months ended November 30,2004
    
    
    2003Interest paid
    
    
    26,847
    
    
    
    28,022Interest received
    
    
    654
    
    
    
    380Income taxes paid
    
    
    12,095
    
    
    
    17,124
  8.
    FOREIGN EXCHANGE GAINS AND LOSSESThe 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
    
    
    2003Operating, 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




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##### 



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
    
    2004Projects in development and in process,
net of advances
    
    
    12,454
    
    
    
    15,990Completed projects and distribution rights
    
    
    31,854
    
    
    
    31,843Investments in third party film projects
    
    
    12,068
    
    
    
    9,03456,376
    
    
    
    56,867
  10.
    RELATED PARTY TRANSACTIONSIn 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 TRANSACTIONOn 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 STATEMENTSCertain comparative consolidated amounts have been reclassified from those previously
presented to conform to the presentation of the fiscal 2005 consolidated financial statements. Corus
    
    18