Newfoundland Capital Corporation Limited - Second Quarter 2010 - Period Ended
June 30 (unaudited)
DARTMOUTH, NS, Aug. 5 /CNW/ - Newfoundland Capital Corporation Limited (the "Company") today announces its financial results for the second quarter ended June 30, 2010.
Highlights Double-digit revenue growth has continued into the second quarter.
- Revenue was $30.8 million in the quarter, a $4.0 million or 15%
increase over the same period in 2009 while year-to-date revenue of
$56.5 million was $7.1 million or 14% higher than last year. This
double-digit growth in revenue was primarily attributable to same-
station revenue gains.
- Earnings before interest, taxes, depreciation and amortization
("EBITDA"(1)) were $6.1 million in the quarter and $10.5 million year-
to-date, $0.9 million and $3.3 million higher than the respective
periods in 2009. A recent ruling by the Copyright Board has increased
fees for the radio industry. As a result, the Company's copyright fees
increased by $2.3 million, $1.8 million of which related to prior
years. Excluding the impact of this adjustment, EBITDA
would have been 62% higher than the second quarter last year and 77%
higher than 2009 year-to-date results due to higher revenue.
- Net income in the quarter was $2.1 million and $3.4 million year-to-
date; lower than the respective prior periods due to the above-noted
$2.3 million copyright fee expenses and a $1.6 million
non-cash impairment charge on one of its broadcast licences.
- On August 5, 2010, the Company declared dividends of $0.06 per share on
each of its Class A Subordinate Voting Shares and Class B Common Shares
payable September 15, 2010 to shareholders of record as at August 31,
2010. This represents a 20% increase over the $0.05 per share dividend
which has normally been declared at this time of year.
Significant events
- During the quarter, the Company re-branded two of its radio stations.
CHNO-FM was re-launched as Rewind 103.9, playing Sudbury's Greatest
Hits and Hank-FM in Winnipeg was re-launched as K-Rock playing classic
rock music as well as a diverse mix of blues and roots music.
- Subsequent to quarter end the Copyright Board issued its ruling on
certain tariffs which resulted in a $2.3 million adjustment for
copyright fees. As a result of this ruling, copyright fees as a whole
have increased from 7.3% to 8.9% of revenue.
"We have enjoyed double-digit revenue growth for the first half of 2010 and continue to outpace the radio industry's growth rate," commented Rob Steele, President and Chief Executive Officer. "We have achieved excellent positive organic growth as a result of the great efforts across all of our radio stations. We continue to explore new growth opportunities as we enter the second half of the year and remain committed to solidifying our financial position."
Financial Highlights - Second Quarter
(thousands of dollars except share information) 2010 2009
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Revenue $ 30,785 26,772
EBITDA(1) 6,143 5,224
Net income 2,127 3,144
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Earnings per share - basic 0.06 0.10
Share price, NCC.A (closing) 7.20 7.33
Weighted average number of shares outstanding
(in thousands) 32,972 32,972
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Total assets 231,433 237,790
Long-term debt 51,044 71,840
Shareholders' equity 107,085 95,005
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(1) Refer to page 17 for the reconciliation of EBITDA to net income.
Management's Discussion and Analysis
The purpose of the Management's Discussion and Analysis ("MD&A"), dated August 5, 2010, is to provide readers with additional complementary information regarding the financial condition and results of operations for Newfoundland Capital Corporation Limited (the "Company") and should be read in conjunction with the unaudited interim consolidated financial statements and related notes for the periods ended June 30, 2010 and 2009 as well as the annual audited consolidated financial statements and related notes and the MD&A contained in the Company's 2009 Annual Report. These documents along with the Company's Annual Information Form and other public information are filed electronically with various securities commissions in Canada through the System for Electronic Document Analysis and Retrieval ("SEDAR") and can be accessed at www.sedar.com. All amounts are stated in Canadian dollars. Certain of the comparative figures have been reclassified to conform to the financial statement presentation adopted in Fiscal 2010.
Management's Discussion and Analysis of financial condition and results of operations contains forward-looking statements. These forward-looking statements are based on current expectations. The use of terminology such as "expect", "intend", "anticipate", "believe", "may", "will", and other similar terminology relate to, but are not limited to, our objectives, goals, plans, strategies, intentions, outlook and estimates. By their very nature, these statements involve inherent risks and uncertainties, many of which are beyond the Company's control, which could cause actual results to differ materially from those expressed in such forward-looking statements. Readers are cautioned not to place undue reliance on these statements. Unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
CORPORATE PROFILE
Newfoundland Capital Corporation Limited (the "Company") is Canada's largest pure-play radio company, employing approximately 800 of the best radio professionals across the country. The Company's portfolio of radio assets includes 60 FM and 19 AM licences which can be heard throughout Canada. The Company reaches millions of listeners each week through a variety of formats and is a recognized industry leader in radio programming, sales and networking.
STRATEGY AND OBJECTIVES
The Company's long-term strategy is to maximize returns on existing operations, convert AM stations to FM, and add new licences through business and licence acquisitions and through the Canadian Radio-television and Telecommunications Commission ("CRTC") licence application process.
As stated in the 2009 Annual Report, this year the Company will continue to grow its existing operations by increasing advertising revenue and remaining focused on controlling discretionary costs to drive EBITDA margins. It will launch recently awarded AM to FM conversions - four in Alberta and two in Newfoundland and Labrador. Management continues to explore acquisition and expansion opportunities that fit the Company's acquisition objectives and it will make applications to the CRTC for new licences and additional AM to FM conversions. The Company's commitment to its talented employees, its customers, its listeners and to the communities it serves remains critical to its success.
CORPORATE DEVELOPMENTS
The following is a review of the key corporate developments which should be considered when reviewing the "Consolidated Financial Review" section. The results of the acquired or launched stations have been included in the consolidated financial statements since the respective acquisition and launch dates.
2010 Developments:
- February - launched the four repeater signals in Prince Edward Island.
- February - CFCB in Corner Brook, Newfoundland and Labrador celebrated
its 50th anniversary.
- February - received CRTC approval to convert the AM station in
Westlock, Alberta to FM. Planning for the conversion is underway.
- March - CFRQ-FM, otherwise known as Q104, serving Halifax, Nova Scotia
was named mid-market station of the year during Canada Music Week.
- April - received CRTC approval to convert the AM station in Brooks,
Alberta to FM. Conversion is underway.
- May - re-launched CHNO-FM as Rewind 103.9 playing Sudbury, Ontario's
Greatest Hits.
- July - changed the format of CHNK-FM in Winnipeg, Manitoba re-branding
it as K-Rock 100.7 World Class Rock. The station plays primarily
classic rock music as well as a diverse mix of blues and roots music.
2009 Developments:
- January - Launched the new FM station in Pincher Creek, Alberta playing
country music.
- April - CRTC approved two AM to FM conversions for stations in St. Paul
and High Prairie, Alberta. Planning for the St. Paul conversion is
underway while the High Prairie station is expected to be on-air in the
fall of 2010.
- June - CRTC approved the Company's applications to convert AM stations
to FM in Wabush and Goose Bay, Newfoundland and Labrador. Anticipated
on-air dates are late summer 2010.
- June - Re-branded CFUL in Calgary, Alberta as a Contemporary Hits Radio
format, branded as AMP Radio. This format is similar to the very
popular Ottawa station, Hot 89.9, which was named the 2008 Contemporary
Hits Radio station of the year.
- July - Completed the previously announced exchange of assets with
Rogers Broadcasting Limited. The Company's Halifax AM licence was
exchanged for Rogers' AM licence in Sudbury, Ontario plus $5.0 million.
- August - Launched Hot 93.5, the newly acquired Sudbury, Ontario radio
station which was converted to FM. Its format is Top 40 and has been
met with a very positive response from both listeners and clients.
- August - Launched the converted FM radio station in Athabasca, Alberta.
94.1 FM The River plays Classic Hits.
- November - The Company's stock was split on a three-for-one basis.
- December - Completed the previously announced sale of the broadcasting
assets related to the two FM stations in Thunder Bay, Ontario for
$4.5 million.
CONSOLIDATED FINANCIAL REVIEW
Consolidated Financial Results of Operation
(thousands of dollars, except percentages)
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Three months ended June 30 Six months ended June 30
2010 2009 Growth 2010 2009 Growth
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Revenue 30,785 26,772 15% 56,491 49,432 14%
Operating
expenses 24,642 21,548 14% 45,956 42,164 9%
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EBITDA(1) 6,143 5,224 18% 10,535 7,268 45%
Depreciation
and
amortization 918 912 1% 1,794 1,813 (1%)
Interest
expense 786 935 (16%) 1,550 1,943 (20%)
Accretion of
other
liabilities 190 227 (16%) 380 454 (16%)
Other expense
(income) (624) (998) (37%) (79) (2,005) -
Impairment
charge 1,609 - - 1,609 - -
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Earnings from
continuing
operations 3,264 4,148 (21%) 5,281 5,063 4%
Provision for
income taxes 1,137 1,067 7% 1,917 1,398 37%
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Net income
from
continuing
operations 2,127 3,081 (31%) 3,364 3,665 (8%)
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Net income
from
discontinued
operations - 63 - - 31 -
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Net income 2,127 3,144 (32%) 3,364 3,696 (9%)
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(1) EBITDA - Earnings before interest, taxes, depreciation and
amortization - refer to page 17 for reconciliation to net income
A more thorough discussion on revenue, operating expenses and EBITDA are described in the section entitled "Financial Review by Segment".
Revenue
In the quarter, consolidated revenue of $30.8 million was $4.0 million or 15% higher than last year; for the six month period ended June 30, 2010 the increase was $7.1 million or 14% higher. The vast majority of this improvement was a result of increased revenue in the broadcasting segment.
Operating expenses
Consolidated operating expenses of $24.6 million were $3.1 million or 14% higher than the second quarter last year and year-to-date operating expenses of $46.0 million were $3.8 million or 9% higher than 2009. The increases were due to higher variable costs and a $2.3 million adjustment for copyright fees in the broadcasting segment.
EBITDA
Consolidated EBITDA in the quarter of $6.1 million was $0.9 million or 18% higher than the same period in 2009. Year-to-date consolidated EBITDA of $10.5 million was $3.3 million or 45% higher than last year. Improved EBITDA was due to growth in the broadcasting segment.
Depreciation and amortization
In the quarter and year-to-date, depreciation and amortization expense was on par with the same periods in 2009.
Interest expense
Interest expense in the second quarter and year-to-date, was less than the prior year due to the lower debt balance.
Accretion of other liabilities
Accretion of other liabilities arises from discounting Canadian Content Development ("CCD") commitments to reflect the fair value of the obligations. The expense decreases as CCD obligations are drawn down.
Other income
Other income generally consists of gains and losses, realized and unrealized, on the Company's marketable securities. Second quarter unrealized gains were $0.6 million (2009 - $1.0 million) and year-to-date unrealized gains were $0.8 million (2009 - $2.0 million), partially offset by a small realized loss.
Broadcast licence impairment charge
During the second quarter, management conducted a broadcast licence impairment analysis for one of its reporting units due to a triggering event in which the Company's request for the removal of certain format restrictions on one of its Winnipeg broadcast licences was not approved by the CRTC. As a result of the analysis, management recorded a broadcast licence impairment charge of $1.6 million, which is more fully described in note 4 of the Company's unaudited interim consolidated financial statements.
Discontinued operations
In 2009, the Company disposed of its net assets associated with the two FM radio stations in Thunder Bay, Ontario and therefore, the 2009 comparative financial results of operations from this component were treated as discontinued operations.
Provision for income taxes
The provision for income taxes is higher than 2009 due to improved pre-tax earnings. The effective income tax rate approximated 35% in the quarter and 36% year-to-date, slightly higher than the statutory rate of 34%. The effective rate for 2009 was lower than the current period because the prior period included mark to market investment gains which are taxed at one half of the normal tax rate.
Net income
Second quarter net income of $2.1 million was $1.0 million or 32% lower than last year. Net income year-to-date of $3.4 million decreased by $0.3 million or 9%. These declines were primarily a result of the $1.6 million broadcast licence impairment charge.
Other comprehensive income ("OCI")
OCI consists of the net change in the fair value of the Company's cash flow hedges. These include interest rate swaps and an equity total return swap. The net change in the fair value of the interest rate swaps recorded in OCI in the quarter was after-tax expense of $0.4 million (2009 - $1.7 million after-tax income) and year-to-date was $0.1 million (2009 - $1.8 million after-tax income). The net change in the fair value of the equity total return swap recorded in OCI in the quarter was after-tax expense of $0.1 million (2009 - $0.4 million after-tax income). Year-to-date the after-tax expense was $0.1 million (2009 - $0.8 million after-tax income).
FINANCIAL REVIEW BY SEGMENT
Consolidated financial figures include the results of operation of the Company's two separately reported segments - Broadcasting and Corporate and Other. The Company provides information about segment revenue, segment EBITDA and operating income because these financial measures are used by its key decision makers in making operating decisions and evaluating performance. For additional information about the Company's segmented information, see note 12 of the Company's unaudited interim consolidated financial statements.
Broadcasting Segment:
---------------------
The broadcasting segment derives its revenue from the sale of broadcast advertising from its licences across the country. Advertising revenue can vary based on market and economic conditions, the audience share of a radio station, the quality of programming and the effectiveness of a company's team of sales professionals.
Reporting units within the broadcasting segment are managed and evaluated based on their revenue and EBITDA. Here are the key operating results of the broadcasting segment.
Broadcasting Financial Results of Operation
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(thousands
of dollars,
except Three months ended June 30 Six months ended June 30
percentages) 2010 2009 % Change 2010 2009 % Change
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Revenue $ 29,875 25,967 15% 54,771 47,764 15%
Operating
expenses 22,124 18,847 17% 40,957 37,215 10%
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EBITDA 7,751 7,120 9% 13,814 10,549 31%
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EBITDA
margin 26% 27% (1%) 25% 22% 3%
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Revenue
Broadcasting revenue in the quarter of $29.9 million was $3.9 million or 15% better than last year. For the six month period, broadcasting revenue was $54.8 million, an increase of $7.0 million or 15% over the same period in 2009. The increase came almost entirely from organic (same-station) revenue growth.
The significant revenue improvements were attributed to both local and national advertising revenue. Local revenue growth was 12% while national growth was 14%. Year-to-date, the Company achieved increases over the same period last year of 13% in its Western Canadian properties, a 13% increase in Central Canada and a 12% improvement in Atlantic Canada. These rates have exceeded industry growth.
The Company continues to benefit from successful ratings results and is optimistic this trend will carry on throughout 2010.
Operating expenses
For the quarter, broadcasting operating expenses were $22.1 million, up $3.3 million or 17% over last year. Year-to-date operating expenses were $41.0 million, $3.7 million or 10% higher than the same period in 2009. The increase in operating expenses was due to higher variable costs and the Copyright Board ruling which is described below.
In July 2010, the Copyright Board of Canada rendered a decision on an ongoing copyright fee issue (for more detailed information, refer to the heading "Subsequent Event" on page 15). New tariffs were introduced and one component of the existing tariffs was increased. The ruling was retroactive to January 2008. This resulted in a $2.3 million adjustment to operating expenses; $0.9 million of which related to 2008 and $0.9 million related to 2009.
Excluding the impact of the Copyright Board ruling, broadcasting operating expenses would have been $19.8 million in the quarter and $38.6 million year-to-date. This would have represented a 5% increase over the second quarter last year and a 4% increase year-to-date.
EBITDA
Broadcasting EBITDA for the first quarter was $7.8 million, $0.6 million or 9% higher than the same period in 2009. Year-to-date EBITDA was $13.8 million, $3.3 million or 31% higher than the first six months of 2009. Excluding the effect of the increased copyright fees, EBITDA for the second quarter would have been $10.1 million, $3.0 million or 42% higher than last year. Year-to-date EBITDA would have been $16.2 million, $5.6 million or 53% better than 2009. These significant EBITDA improvements were due to higher revenue and close monitoring of discretionary costs which allowed the Company to post EBITDA margins (prior to the adjustment for tariffs) of 34% in the quarter and 30% year-to-date - 7% and 8% higher than the respective comparative periods.
Corporate and Other Segment:
----------------------------
The Corporate and Other segment derives its revenue from hotel operations. Corporate and other expenses are related to head office functions and hotel operations.
Corporate and Other Financial Results of Operation
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(thousands
of dollars,
except Three months ended June 30 Six months ended June 30
percentages) 2010 2009 % Change 2010 2009 % Change
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Revenue $ 910 805 13% 1,720 1,668 3%
Operating
expenses 2,518 2,701 (7%) 4,999 4,949 1%
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EBITDA (1,608) (1,896) 15% (3,279) (3,281) -
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Revenue
Revenue for the second quarter and year-to-date was higher than the respective periods in 2009 due to higher hotel revenue.
Operating expenses
Corporate and Other operating expenses for the second quarter of $2.5 million were $0.2 million or 7% lower than 2009. The decrease was primarily related to lower stock-based compensation expense. For the six month period, Corporate and Other operating expenses of $5.0 million were only $0.1 million higher than last year.
EBITDA
Second quarter EBITDA was $0.3 million or 15% better than 2009 because of higher hotel revenue along with reduced stock-based compensation expense. Year-to-date EBITDA was on par with last year.
SELECTED QUARTERLY FINANCIAL INFORMATION
(thousands
of
dollars
except
per 2010 2009 2008 (restated)
share ----------------- ------------------------------- ----------------
data) 2nd 1st 4th 3rd 2nd 1st 4th 3rd
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Reve-
nue $ 30,785 25,706 30,458 25,408 26,772 22,660 29,306 26,069
Net
income
(loss) 2,127 1,237 5,461 6,209 3,144 552 (3,796) (7,580)
Earnings
per
share
- Basic 0.06 0.04 0.17 0.19 0.10 0.02 (0.12) (0.23)
- Dilu-
ted 0.06 0.04 0.16 0.18 0.09 0.02 (0.12) (0.23)
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The Company's revenue and operating results vary depending on the quarter because of seasonal fluctuations in advertising sales. The first quarter is generally a period of lower retail spending while the fourth quarter tends to be a period of higher retail spending. The 2010 second quarter net income was impacted by the broadcast licence impairment charge of $1.6 million. In 2009, a gain on the disposal of a broadcasting licence positively impacted net income by $5.6 million in the third quarter. In 2008, the unrealized changes in the value of marketable securities affected net income in the quarters as follows: negative fluctuations of $8.8 million in the third quarter and $4.6 million in the fourth quarter.
As a result of the requirement to adopt CICA 3064 "Goodwill and Intangible Assets" in 2009 which set new accounting standards related to start-up operations, the 2008 comparative figures were restated to include pre-operating costs that had been previously capitalized and amortized. The earnings per share information was restated to reflect the three-for-one stock split that occurred during the fourth quarter in 2009. Discontinued operations, as described in note 3 of the Company's unaudited interim consolidated financial statements, also impacted the comparative figures.
Selected cash flow information - three months ended June 30, 2010
Cash from operating activities was $5.1 million. During the quarter, the Company repaid long-term debt in the amount of $4.5 million, purchased $0.5 million of property and equipment and paid $0.4 million toward CCD commitments.
Selected cash flow information - three months ended June 30, 2009
Cash from operating activities of $2.2 million was used primarily to finance property and equipment additions of $1.9 million.
Selected cash flow information - six months ended June 30, 2010
Cash from operating activities was $8.7 million. During the six month period, the Company repaid $5.6 million of long-term debt, paid dividends of $3.3 million, purchased $1.0 million of property and equipment and paid $0.8 million toward CCD commitments.
Selected cash flow information - six months ended June 30, 2009
Cash from operating activities of $6.2 million was used to purchase property and equipment totalling $2.5 million, to repay $2.0 million of long-term debt and to contribute $1.4 million toward CCD.
Capital expenditures and capital budget
The capital expenditures for 2010 are expected to be approximately $6.0 million. The major planned expenditures include launching recently awarded AM to FM conversions as well as general improvements and upgrades. The Company continuously upgrades its broadcast equipment to improve operating efficiencies.
FINANCIAL CONDITION
Total assets
Assets of $231.4 million were $1.4 million lower than those reported at December 31, 2009. This was mainly due to the reduction of $1.6 million in broadcast licences due to the impairment charge.
Total liabilities
As at June 30, 2010 the Company's total liabilities were $124.3 million, $4.8 million lower than those reported at December 31, 2009 primarily due to the repayment of long-term debt in the amount of $5.6 million.
LIQUIDITY
Liquidity risk
Liquidity risk is the risk that the Company is not able to meet its financial obligations as they become due or can do so only at excessive cost. The Company's growth is financed through a combination of the cash flows from operations and borrowings under the existing credit facility. One of management's primary goals is to maintain an optimal level of liquidity through the active management of the assets and liabilities as well as the cash flows.
Management deems its liquidity risk to be low and this is explained in the paragraphs that follow.
Credit facility and covenants
The Company's syndicated credit facility of $76.5 million was renewed and now expires in June 2012. The Company has chosen a revolving facility because it provides flexibility with no scheduled repayment terms. The cost of borrowing under the new facility is approximately 2 1/4% higher than the previous facility. Other terms and conditions of the facility were improved to give the Company flexibility for growth. Additional details on long-term debt are included in note 8 of the unaudited interim consolidated financial statements.
The Company is subject to covenants on its credit facility. The Company's bank covenants include certain maximum or minimum ratios such as total debt to EBITDA ratio, interest coverage and fixed charge coverage ratio. Other covenants include seeking prior approval for acquisitions or disposals in excess of a quantitative threshold. The Company was in compliance with the covenants throughout the quarter and at quarter end.
Funding sources
Cash flow from operations and funds available from the Company's $76.5 million credit facility have been the primary funding sources of working capital, capital expenditures, Canadian Content Development payments, dividend payments, debt repayments, and other contractually required payments through the past several years. For the six months ended June 30, 2010, the Company's cash generated from operating activities was $8.7 million, its long-term debt balance was $51.0 million and its bank indebtedness was $1.9 million which left $23.6 million available to be drawn upon from the credit facility.
Positive cash balances
The Company does not maintain any significant positive cash balances; instead it uses the vast majority of its positive cash balances to reduce debt and minimize interest expense. As a result, the Company nets its deposits in banks with bank indebtedness. The fact that the Company does not have positive cash positions on its balance sheet does not pose an increase to its liquidity risk because the Company generates cash from operations and, as part of its $76.5 million credit facility, it has a $5.0 million current operating credit line to fund any current obligations and it can also access any unused capacity in its credit facility to fund obligations.
Working capital requirements
As at June 30, 2010, the Company's working capital balance was $3.2 million. The cash from current receivables will be sufficient to cover the Company's current obligations to its suppliers and employees and in combination with ongoing cash from operations and the availability of cash from its debt facility, the Company will be able to meet all other current cash requirements as they arise. If cash inflows from customers are not sufficient to cover current obligations, because of timing issues, the Company has access to a $5.0 million operating credit line. The balance remaining on this operating credit line is $3.1 million.
Future cash requirements
Other than for operations, the Company's cash requirements are mostly for interest payments, repayment of debt, capital expenditures, Canadian Content Development payments, dividends and other contractual obligations. Management anticipates that its cash flows from operations and the availability of the credit facility will provide sufficient funds to meet its cash requirements.
Based on the above discussion and internal analysis, management deems its liquidity risk to be low.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
There has been no substantial change in the Company's commitments and contractual obligations since the publication of the 2009 Annual Report.
SHARE CAPITAL
Stock split
Effective on November 25, 2009, the Class A Subordinate Voting Shares and Class B Common Shares were split on a three-for-one basis. Accordingly, the comparative number of shares and per share amounts have been retroactively adjusted to reflect the three-for-one split.
Outstanding share data
The weighted average number of shares outstanding at June 30, 2010 was 32,972,220 (2009 - 32,972,220). As of this date, there are 29,200,518 Class A Subordinate Voting Shares and 3,771,702 Class B Common Shares outstanding.
Dividends
Dividends of $0.06 per share were declared in August to all shareholders of record as of August 31, 2010. The dividends will be paid September 15, 2010. Annual dividends of $0.10 per share were declared in December to all shareholders of record as of December 31, 2009. Those dividends were paid January 29, 2010.
Share repurchases
The Company has approval under a Normal Course Issuer Bid to repurchase up to 583,991 Class A Subordinate Voting Shares ("Class A shares") and 75,453 Class B Common Shares. This bid expires February 8, 2011. Year-to-date in 2010 and in 2009, the Company did not repurchase any of its outstanding Class A shares.
EXECUTIVE COMPENSATION
Executive stock option plan
Compensation expense related to executive stock options for the three months ended June 30, 2010 was less than $0.1 million (2009 - less than $0.1 million). Refer to note 5 of the unaudited interim consolidated financial statements for further details relating to the executive stock option plan.
Stock appreciation rights plan
For the quarter ended June 30, 2010, the compensation expense related to stock appreciation rights ("SARS") was $0.2 million (2009 - $0.7 million). Year-to-date, the expense was $0.2 million (2009 - $0.9 million). The total obligation was $1.2 million (2009 - $0.9 million). Refer to note 7 of the unaudited interim consolidated financial statements for further details relating to SARS.
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
For more detailed disclosures about derivative financial instruments and financial risk management, refer to note 10 of the unaudited interim consolidated financial statements.
Interest rate risk management
To hedge its exposure to fluctuating interest rates on its long-term debt, the Company has entered into interest rate swap agreements with Canadian chartered banks. The swap agreements expire in 2013 and involve the exchange of the three-month bankers' acceptance floating interest rate for a fixed interest rate. The difference between the fixed and floating rates is settled quarterly with the bank and recorded as an increase or decrease to interest expense. The aggregate notional amount of the swap agreements was $55.0 million (2009 - $60.0 million). The Company formally assesses effectiveness of the swaps at inception and on a regular basis and has concluded that the swaps are effective in offsetting changes in interest rates. The aggregate fair value of the swap agreements, which represents the amount that would be payable by the Company if the agreements were terminated at June 30, 2010 was $3.6 million (2009 - $4.5 million). After-tax, the unrealized non-cash loss recognized in OCI for the quarter was $0.4 million (2009 - $1.7 million after-tax income) and year-to-date was $0.1 million (2009 - $1.8 million after-tax income).
Share price volatility management
In July 2006, the Company entered into an agreement to hedge its obligations under the stock appreciation rights plan using an equity total return swap agreement to reduce the volatility in cash flow and earnings due to possible future increases in the Company's share price. Gains or losses realized on the quarterly settlement dates are recognized in income in the same period as the SARS compensation expense. Unrealized gains and losses, to the extent that the hedge is effective, are deferred and included in OCI until such time as the hedged item affects net income. If at any time, the hedge is deemed to be ineffective or the hedge is terminated or de-designated, gains or losses, including those previously recognized in OCI, will be recorded in net income immediately.
The Company has concluded that this cash flow hedge is effective. The estimated fair value of the equity total return swap receivable at June 30, 2010 was $1.7 million (2009 - $1.9 million). After-tax the unrealized non-cash loss recognized in OCI for the quarter was $0.1 million (2009 - after-tax income of $0.4 million) and year-to-date was $0.1 million (2009 - after-tax income of $0.8 million).
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The fair value of the Company's marketable securities is affected by changes in the quoted share prices in active markets. Such prices can fluctuate and are affected by numerous factors beyond the Company's control. In order to minimize the risk associated with changes in the share price of any one particular investment, the Company diversifies its portfolio by investing in various stocks in varying industries. It also conducts regular financial reviews of publicly available information related to its investments to determine if any identified risks are within tolerable risk levels. As at June 30, 2010, a 10% change in the share prices of each marketable security would result in a $0.4 million after-tax change in net income.
Credit risk management
Credit risk is the exposure that the Company faces with respect to amounts receivable from other parties. Credit exposure is managed through credit approval and monitoring procedures.
The Company is subject to normal credit risk with respect to its receivables. A large customer base and geographic dispersion minimize credit risk. The Company reviews its receivables for possible indicators of impairment on a regular basis and as such, it maintains a provision for potential credit losses.
At June 30, 2010, the Company's credit exposure as it related to its receivables continued to be slightly higher than in the past due to the recent Canadian economic conditions. The Company sells advertising airtime primarily to retail customers and since their results may also be impacted by the current economy, it is difficult to predict the impact this could have on the Company's receivables' balance. The Company believes its provision for potential credit losses to be adequate at this time given the current circumstances.
With regard to the Company's derivative instruments, the counterparty risk is managed by only dealing with Canadian Chartered Banks having high credit ratings.
Capital Management
The Company defines its capital as shareholders' equity. The Company's objective when managing capital is to pursue its strategy of growth through acquisitions and through organic operations so that it can continue to provide adequate returns for shareholders. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, issue new shares or repurchase shares. The Directors and senior management of the Company are of the opinion that from time to time the purchase of its shares at the prevailing market price would be a worthwhile investment and in the best interests of the Company and its shareholders. Material transactions and those considered to be outside the ordinary course of business, such as acquisitions and other major investments or disposals, are reviewed and approved by the Board of Directors.
FUTURE ACCOUNTING POLICIES
Section 1582 Business Combinations
During 2009, the CICA issued Handbook Section 1582 Business Combinations which replaces Section 1581 bearing the same name. This Section is effective for fiscal years beginning on or after January 1, 2011, with earlier adoption permitted, and the changes align the standard with the guidance in International Financial Reporting Standards ("IFRS"). Of the amendments in the Section, the one that will represent the most significant change in how the Company accounts for business combinations is the determination of the cost of the purchase. The cost that is allocated to the fair value of the net assets acquired is the direct cost of the business combination; indirect costs such as legal or restructuring are expensed. The Company intends to early adopt this standard if any business combinations should occur in 2010. The impact the changes will have on its consolidated results will continue to be monitored.
Section 1601 Consolidated Financial Statements and Section 1602 Non-controlling Interests
These Sections were issued and together replace Section 1600 Consolidated Financial Statements. These too are applicable for fiscal years beginning on or after January 1, 2011, with earlier adoption permitted. The new sections establish standards for the preparation of consolidated financial statements and for the accounting of a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Company will continue to evaluate the impact of the amendments.
International Financial Reporting Standards
On February 13, 2008, the Accounting Standards Board confirmed that IFRS will be required for publicly accountable profit-oriented enterprises for fiscal years beginning on or after January 1, 2011. After that date, IFRS will replace Canadian GAAP for those enterprises. The Company will apply IFRS beginning January 1, 2011 and will present 2010 comparative figures using IFRS, starting in the first quarter of 2011.
The Company has committed adequate internal resources to oversee the IFRS project and external consultants have been engaged throughout the process. The Audit and Governance Committee is regularly updated on the status of the project. Management has satisfied itself that it has sufficient resources, systems and applications in place to meet its financial reporting requirements.
IFRS-1 First-time Adoption of International Financial Reporting Standards provides guidance for transition which generally requires an entity to apply all IFRS standards retrospectively, with prior period restatements, on adoption of the new standards. However, IFRS-1 also includes mandatory exceptions and certain exemptions which enable an entity to apply certain areas of the standards prospectively. Management has analysed the exceptions and exemptions available under IFRS-1 and is considering applying the exemptions listed in the table below. A brief description of the impact of applying these exemptions is discussed as well.
-------------------------------------------------------------------------
Exemption Impact
-------------------------------------------------------------------------
Business combinations The Company will elect to not restate any prior
business combinations on adoption, to the extent
the assets and liabilities meet the recognition
criteria under the relevant IFRS standards.
(If any business combinations occur during fiscal
2010, the Company will early adopt the new rules
under Canadian GAAP Section 1582 Business
Combinations, described earlier, as they are
consistent with IFRS.)
-------------------------------------------------------------------------
Fair value or Due to the extensive cost involved in revaluing
revaluation as its property and equipment and the fact that most
deemed cost arose through business combinations, the Company
has chosen not to revalue property and equipment
on the transition date to its fair value.
-------------------------------------------------------------------------
Employee benefits The Company has elected to charge to equity any
unamortized actuarial gains/losses arising from
the defined benefit pension plans. The financial
impact of this election, along with other pension
restatement entries, approximates $2.0 million.
-------------------------------------------------------------------------
Share-based payment The Company will elect not to retrospectively
transactions apply the IFRS-2 Share-Based Payments standards
for any executive stock options granted prior to
November 2002 and for any options that have fully
vested or have been exercised prior to transition
date.
-------------------------------------------------------------------------
Management has identified the differences between Canadian GAAP and IFRS and has devoted considerable time and resources on those areas that will most significantly impact the Company. The following table sets forth the accounting standards that will most likely impact the Company's consolidated financial statements; however, the actual impact has not been fully measured and conclusions may differ as management continues its analysis. Some of the standards are in the process of being reviewed and/or modified and the impact of those changes could pose differences for the Company's consolidated financial statements as well. Management is monitoring these standards closely.
The following list shows the areas that management believes will present the most significant differences in accounting treatment based on the standards in effect as at June 30, 2010. It is not a complete and exhaustive list of all the Canadian GAAP and IFRS differences. Quantification of the impact is ongoing and will continue to be communicated as the transition date nears.
The following are the key accounting areas management believes will impact the Company's consolidated financial statements with a brief description of the likely impact.
-------------------------------------------------------------------------
Key accounting areas Impact
-------------------------------------------------------------------------
IAS - 1 Presentation Additional financial statement note disclosures
of Financial will be required.
Statements
-------------------------------------------------------------------------
IAS - 12 Income Taxes Future income tax assets/liabilities will be
referred to as deferred income tax
assets/liabilities and no current classification
will be permitted.
The criteria to recognize and measure deferred
income taxes may result in differences compared to
existing future income tax calculations.
-------------------------------------------------------------------------
IAS - 16 Property and Entities are required to split traditional asset
Equipment categories into components based on varying useful
lives which may result in changes to the amount of
annual depreciation expense.
-------------------------------------------------------------------------
IAS - 19 Employee An accounting policy choice is available for
Benefits actuarial gains or losses after adoption;
- an entity may elect to amortize the
gains/losses using the corridor approach;
- it may elect to recognize the gains/losses in
net income annually; or
- it may elect to recognize gains/losses in OCI
annually.
Under IFRS, there are differences in how defined
benefit plan assets are valued and how an entity
measures its plan asset valuation allowance, if
any.
This particular standard is under review by
standard setters and any modification to it may
dictate the accounting treatment the Company will
adopt as it relates to actuarial gains and losses.
-------------------------------------------------------------------------
IAS - 36 Impairment Impairment calculations under IFRS are done at the
of Assets cash-generating unit ("CGU") which is defined as a
unit that has independent cash inflows (as opposed
to independent net cash flows under Canadian
GAAP).
Calculations are done using a discounted cash flow
method under a one-step approach (as opposed to a
two-step approach under Canadian GAAP).
Goodwill is allocated and tested in conjunction
with its related CGU or group of CGU's that
benefit from collective synergies. Any impairment
of intangible assets that occurs after the
adoption of IFRS, other than goodwill, may be
reversed.
-------------------------------------------------------------------------
IAS - 38 Intangible After analysing IAS 38, management has concluded
Assets that there will be no significant differences in
how the Company measures its internally-developed
broadcast licences under IFRS.
-------------------------------------------------------------------------
IAS - 39 Financial This standard will effectively be replaced by new
Instruments: IFRS-9 Financial Instruments effective January 1,
Recognition and 2013 and may pose differences in how the Company
Measurement classifies, recognizes and measures its financial
instruments, including how it accounts for hedges.
Earlier adoption may be permitted and the Company
will monitor these standards closely.
-------------------------------------------------------------------------
IFRS - 2 Share-based The Company anticipates a change in how it
Payments measures executive compensation for its stock
appreciation rights' plan because of differences
related to pricing models, vesting periods and how
to account for forfeiture.
-------------------------------------------------------------------------
IFRS - 3 Business Under this standard, acquisition-related costs
Combinations such as legal, accounting, and other
administrative costs, cannot be capitalized; they
are to be expensed as period costs. Under Canadian
GAAP, these costs were included in the cost of the
business combination and capitalized.
The Company is still researching the treatment of
other significant commitments that arise on
business combinations and are payable to third
parties, such as CCD commitments. The outcome of
this research will impact the accounting for any
future business acquisitions the Company
undertakes. Currently these commitments, which are
equal to 6% of the purchase price, are
capitalized under Canadian GAAP.
-------------------------------------------------------------------------
At this time, management is on track with the conversion project; however it is not in a position to quantify the impact of all of the differences that will arise upon the adoption of IFRS. The Company will disclose more detailed information during its third quarter interim period as it proceeds with its analyses and conclusions. Certain analyses that will enable full disclosure are still being researched and their conclusions are important to the Company and its consolidated financial results.
CRITICAL ACCOUNTING ESTIMATES
There has been no substantial change in the Company's critical accounting estimates since the publication of the 2009 Annual Report.
OFF-BALANCE SHEET ARRANGEMENTS
The Company's off-balance sheet arrangements consist of operating leases. Other than these, which are considered in the ordinary course of business, the Company does not have any other off-balance sheet arrangements and does not expect to enter into any other such arrangement other than in the ordinary course of business.
SUBSEQUENT EVENT
Subsequent to June 30, 2010, the Copyright Board of Canada issued a fact sheet entitled "Commercial Radio Tariff 2008 to 2012" that introduced new copyright tariffs and that increased one component of the existing tariffs. The decision is retroactive to January 1, 2008 and repayment is expected to be made evenly over twelve months beginning in September 2010. As a result of this decision, the Company has adjusted its copyright fees expense, included in operating expenses, by $2.3 million, $0.9 million of which relates to 2008 and $0.9 million to 2009.
RISKS AND OPPORTUNITIES
There has been no substantial change in the Company's risks and opportunities since the publication of the 2009 Annual Report with the exception of the decision on the copyright tariffs as disclosed above under the heading "Subsequent Event".
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in the Company's internal controls over financial reporting that occurred in the three months ending June 30, 2010 that have materially affected, or are likely to materially affect, the Company's internal controls over financial reporting.
OUTLOOK
The Company has experienced another impressive quarter by posting double digit revenue growth in its core operating segment. Management is optimistic that the positive growth will continue throughout the remainder of the year.
The close monitoring of discretionary costs has paid off; the EBITDA margins achieved throughout 2010 are some of the highest ever achieved by the Company's broadcasting segment (when excluding the $2.3 million adjustment for the copyright tariffs).
Management will carry on with its successful operating strategy and focus on the following:
- Continue to maximize operating margins from the existing stations by:
- Managing costs to achieve the highest possible EBITDA margins
without compromising the quality of the product;
- Increasing revenues by providing creative solutions to advertisers,
particularly with regard to local revenue where management has the
most ability to influence buying decisions;
- Augmenting audience share by providing locally-focused programming
that delivers the music, news and information that local
communities want.
- Plan and prepare to launch the upcoming AM to FM conversions;
- Review all acquisition opportunities that are cash accretive in the
near term and that would complement the Company's strategy;
- Apply for licences in new communities, thereby expanding the number of
licences held; and
- Seek approval from the CRTC to convert additional AM stations to FM
which generates immediate top line growth.
Non-GAAP Measure
(1) EBITDA is defined as net income from continuing operations excluding depreciation and amortization expense, interest expense, accretion of other liabilities, other expense (income), broadcast licence impairment charge and provision for income taxes. A calculation of this measure is as follows:
Three months ended Six months ended
June 30 June 30
(thousands of dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income from continuing
operations $ 2,127 3,081 3,364 3,665
Provision for income taxes 1,137 1,067 1,917 1,398
Broadcast licence impairment
charge 1,609 - 1,609 -
Other expense (income) (624) (998) (79) (2,005)
Accretion of other liabilities 190 227 380 454
Interest expense 786 935 1,550 1,943
Depreciation and amortization
expense 918 912 1,794 1,813
-------------------- --------------------
EBITDA $ 6,143 5,224 10,535 7,268
-------------------------------------------------------------------------
-------------------------------------------------------------------------
This measure is not defined by Generally Accepted Accounting Principles and is not standardized for public issuers. This measure may not be comparable to similar measures presented by other public enterprises. The Company has included this measure because the Company's key decision makers believe certain investors use it as a measure of the Company's financial performance and for valuation purposes. The Company also uses this measure internally to evaluate the performance of management. Beginning in 2010, other income, which is primarily the results from investment holdings, was excluded from the determination of EBITDA. Consolidated EBITDA for 2009 has been adjusted to reflect this reclassification.
Newfoundland Capital Corporation Limited
Notice of Disclosure of Non-Auditor Review of Interim Financial
Statements for the three months and six months ended June 30, 2010 and
2009
Pursuant to National Instrument 51-102, Part 4, subsection 4.3(3)(a) issued by the Canadian Securities Administrators, the interim financial statements must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor if an auditor has not performed a review of the interim financial statements.
The accompanying unaudited interim consolidated financial statements of the Company for the interim periods ended June 30, 2010 and 2009 have been prepared in accordance with Canadian generally accepted accounting principles and are the responsibility of the Company's management.
The Company's independent auditors, Ernst & Young LLP, have not performed a review of these interim consolidated financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.
Dated this 5th day of August, 2010
Interim Consolidated Balance Sheets
(unaudited)
June 30 December 31
(thousands of dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ASSETS
Current assets
Marketable securities $ 5,019 4,923
Receivables 24,200 23,831
Prepaid expenses 1,164 778
Other assets 1,721 1,810
Future income tax assets 1,074 1,173
-------------------------
Total current assets 33,178 32,515
Property and equipment 36,464 37,248
Other assets 4,423 4,216
Broadcast licences (note 4) 148,032 149,641
Goodwill 7,045 7,045
Future income tax assets 2,291 2,188
-------------------------
$ 231,433 232,853
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 1,912 99
Accounts payable and accrued liabilities 19,828 17,118
Income taxes payable 8,280 6,836
Dividends Payable - 3,297
Current portion of long-term debt - 57,100
-------------------------
Total current liabilities 30,020 84,450
Long-term debt (note 8) 51,044 -
Other liabilities 17,571 18,946
Future income tax liabilities 25,713 25,668
Shareholders' equity 107,085 103,789
-------------------------
$ 231,433 232,853
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Subsequent events (note 13)
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statements of Income
(unaudited)
Three months ended Six months ended
(thousands of dollars except June 30 June 30
per share data) 2010 2009 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue $ 30,785 26,772 56,491 49,432
Operating expenses (note 13) 24,642 21,548 45,956 42,164
Depreciation and amortization 918 912 1,794 1,813
-----------------------------------------
Operating income 5,225 4,312 8,741 5,455
Interest expense 786 935 1,550 1,943
Accretion of other liabilities 190 227 380 454
Other expense (income) (624) (998) (79) (2,005)
Broadcast licence impairment
charge (note 4) 1,609 - 1,609 -
-----------------------------------------
Earnings from continuing
operations before income taxes 3,264 4,148 5,281 5,063
Provision for income taxes 1,137 1,067 1,917 1,398
-----------------------------------------
Net income from continuing
operations 2,127 3,081 3,364 3,665
Net income from discontinued
operations (note 3) - 63 - 31
-----------------------------------------
Net income $ 2,127 3,144 3,364 3,696
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share from
continuing operations (notes 5
and 11)
- basic $ 0.06 0.09 0.10 0.11
- diluted 0.06 0.09 0.10 0.11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share (notes 5
and 11)
- basic $ 0.06 0.10 0.10 0.11
- diluted 0.06 0.09 0.10 0.11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statements of Shareholders' Equity
(unaudited)
Six months ended
June 30
(thousands of dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 60,616 48,547
Net income 3,364 3,696
-------------------------
Retained earnings, end of period 63,980 52,243
Capital stock 42,913 42,913
Contributed surplus (note 6) 2,342 2,044
Accumulated other comprehensive loss (2,150) (2,195)
-------------------------
Total shareholders' equity $ 107,085 95,005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statements of Comprehensive Income
(unaudited)
Three months ended Six months ended
June 30 June 30
(thousands of dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income $ 2,127 3,144 3,364 3,696
-----------------------------------------
Other comprehensive income:
Change in fair values of cash
flow hedges
Interest rate swaps (note
10(b)):
Increase (decrease) in fair
value net of $328
settlement and taxes (416) 1,772 (83) 1,664
Reclassification to net
income of realized
interest expense net of
taxes 45 (1) 22 110
Credit risk adjustment net
of taxes (26) - (45) -
-----------------------------------------
(397) 1,721 (106) 1,774
-----------------------------------------
Total equity return swap
(note 10(c)):
Unrealized increase in fair
value net of taxes 255 974 171 1,581
Reclassification to net
income of realized gains
net of taxes (329) (561) (318) (788)
-----------------------------------------
(74) 413 (147) 793
-----------------------------------------
Other comprehensive income
(loss) (471) 2,134 (253) 2,567
-----------------------------------------
Comprehensive income $ 1,656 5,278 3,111 6,263
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statement of Accumulated Other Comprehensive Loss
(unaudited)
Six months ended
June 30
(thousands of dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive loss,
beginning of period $ (1,897) (4,762)
Other comprehensive income (loss) for the
period (253) 2,567
-------------------------
Accumulated other comprehensive loss, end of
period $ (2,150) (2,195)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Interim Consolidated Statements of Cash Flows
(unaudited)
Three months ended Six months ended
June 30 June 30
(thousands of dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Activities
Net income from continuing
operations $ 2,127 3,081 3,364 3,665
Items not involving cash from
continuing operations
Depreciation and amortization 918 912 1,794 1,813
Future income taxes 62 1,035 152 1,258
Executive stock-based
compensation plans (notes 5
and 7) 290 720 403 951
Accretion of other
liabilities 190 227 380 454
Unrealized gains on
marketable securities (632) (982) (817) (1,974)
Broadcast licence impairment
charge (note 4) 1,609 - 1,609 -
Other (551) (712) (582) (1,080)
-----------------------------------------
4,013 4,281 6,303 5,087
Change in non-cash working
capital relating to operating
activities from continuing
operations 1,121 (2,115) 2,390 1,033
-----------------------------------------
Cash flow from continuing
operating activities 5,134 2,166 8,693 6,120
Discontinued operations - 31 - 79
-----------------------------------------
5,134 2,197 8,693 6,199
-------------------------------------------------------------------------
Financing Activities
Change in bank indebtedness 240 579 1,813 158
Long-term debt repayments (4,500) - (5,600) (2,005)
Dividends paid - - (3,297) -
-----------------------------------------
(4,260) 579 (7,084) (1,847)
-------------------------------------------------------------------------
Investing Activities
Property and equipment
additions (482) (1,867) (986) (2,463)
Canadian Content Development
payments (364) (905) (805) (1,423)
Other (28) (4) 182 (466)
-----------------------------------------
(874) (2,776) (1,609) (4,352)
-------------------------------------------------------------------------
Cash, beginning and end of
period $ - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental Cash Flow
Information
Interest paid $ 635 846 1,751 1,666
Income taxes paid 132 714 323 784
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
Notes to the Interim Consolidated Financial Statements - June 30, 2010
and 2009 (unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1. ACCOUNTING PRESENTATIONS AND DISCLOSURES
The interim financial statements presented herein were prepared by the
Company and follow the same accounting policies and their methods of
application as the 2009 annual financial statements. These financial
statements are prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") for interim financial statements. They do
not include all of the information and disclosures required by GAAP for
annual financial statements. Accordingly, these financial statements
should be read in conjunction with the Company's audited consolidated
financial statements and the accompanying notes contained in the
Company's 2009 Annual Report.
Certain of the comparative figures have been reclassified to conform to
the financial statement presentation adopted in the current year.
2. FUTURE ACCOUNTING POLICIES
Section 1582 Business Combinations
During 2009, the CICA issued Handbook Section 1582 Business Combinations
which replaces Section 1581 bearing the same name. This Section is
effective for fiscal years beginning on or after January 1, 2011, with
earlier adoption permitted, and the changes align the standard with the
guidance in International Financial Reporting Standards ("IFRS"). Of the
amendments in the Section, the one that will represent the most
significant change in how the Company accounts for business combinations
is the determination of the cost of the purchase. The cost that is
allocated to the fair value of the net assets acquired is the direct cost
of the business combination; indirect costs such as legal or
restructuring are expensed. The Company intends to early adopt this
standard if any business combinations should occur in 2010. The impact
the changes will have on its consolidated results will continue to be
monitored.
Section 1601 Consolidated Financial Statements and Section 1602 Non-
controlling Interests
These Sections were issued and together replace Section 1600 Consolidated
Financial Statements. These too are applicable for fiscal years beginning
on or after January 1, 2011, with earlier adoption permitted. The new
sections establish standards for the preparation of consolidated
financial statements and for the accounting of a non-controlling interest
in a subsidiary in consolidated financial statements subsequent to a
business combination. The Company will continue to evaluate the impact of
the amendments.
3. DISCONTINUED OPERATIONS
The Company disposed of its net assets associated with the two FM radio
stations located in Thunder Bay, Ontario in 2009. The financial results
of operations from this component have been treated as discontinued
operations in the consolidated statements of income and cash flows for
2009. The results of this component were also excluded from the
comparative figures from the Broadcasting segment results in segmented
information presented in note 12. Selected financial information for the
reporting unit included in discontinued operations is presented below.
Three months ended Six months ended
June 30 June 30
(thousands of dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income from operations
from discontinued component $ - 93 - 46
Income tax expense - (30) - (15)
-----------------------------------------
Net income from discontinued
operations - 63 - 31
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. BROADCAST LICENCE IMPAIRMENT CHARGE
During the second quarter, management recorded an impairment charge of
$1,609,000 related to its Winnipeg, Manitoba broadcast licences. The
Company had applied to the Canadian Radio-television and
Telecommunications Commission ("CRTC") for relief of certain restrictions
imposed on one of its licences in Winnipeg and the application was
unsuccessful. As a result, the Company performed an impairment test of
the licences in Winnipeg and determined that a portion was impaired.
5. CAPITAL STOCK
Stock split
On November 25, 2009, the Class A Subordinate Voting Shares and Class B
Common Shares were split on a three-for-one basis. Accordingly, the
comparative number of shares and per share amounts have been
retroactively adjusted to reflect the three-for-one split.
Share repurchases
The Company has approval under a Normal Course Issuer Bid to repurchase
up to 583,991 Class A Subordinate Voting Shares ("Class A shares") and
75,453 Class B Common Shares. This bid expires February 8, 2011. The
Company did not repurchase any of its outstanding Class A shares during
the second quarter in 2010 and 2009.
Executive stock option plan
No options were granted pursuant to the executive stock option plan
during the second quarters in 2010 and 2009. Year-to-date, 60,000 options
(2009 - 90,000) were granted at a weighted average exercise price of
$6.77 (2009 - $5.83). The options vest at a rate of twenty-five percent
on the date of grant and twenty-five percent on each of the three
succeeding anniversary dates and the options expire March 4, 2015. No
options were exercised to date in 2010 (2009 - nil). Compensation expense
related to stock options for the three months ended June 30, 2010 was
$80,000 (2009 - $52,000) and year-to-date expense was $185,000 (2009 -
$99,000).
6. CONTRIBUTED SURPLUS
(thousands of dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, January 1 $ 2,157 1,945
Executive stock option plan compensation
expense 185 99
-------------------------
Balance, June 30 2,342 2,044
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. STOCK APPRECIATION RIGHTS
A total of 1,745,000 stock appreciation rights ("SARS" or "rights") have
been granted since 2006 at a weighted-average reference price of $5.75.
The SARS' expiry dates range from March 2011 to February 2015. As at
June 30, 2010, 270,000 rights had expired and 410,350 rights had been
exercised. The rights vest at a rate of 50% at the end of year three, 25%
at the end of year four and 25% at the end of year five and are
exercisable as they vest. At the date of exercise, cash payments are made
to the holders based on the difference between the market value of the
Company's Class A shares and the reference price. All rights granted
under this plan expire on the 60th day following the 5th anniversary of
the grant date. For the quarter ended June 30, 2010, 350,750 SARS (2009 -
nil) were exercised for cash proceeds of $504,000 (2009 - $nil) and year-
to-date 380,350 SARS were exercised (2009 - nil) for cash proceeds of
$541,000 (2009 - $nil). Compensation expense in the second quarter was
$210,000 (2009 - $668,000) and year-to-date expense was $218,000 (2009 -
$852,000). The total obligation for SARS compensation was $1,221,000, of
which $1,104,000 was current and classified as accounts payable and
accrued liabilities (2009 - compensation payable was $919,000, of which
$460,000 was current).
8. LONG-TERM DEBT
June 30 December 31
(thousands of dollars) 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revolving term credit facility of
$76.5 million, renewable bi-annually,
maturing June 2012 $ 51,500 57,100
Less: Current portion - 57,100
Less: Debt transaction costs, net of
accumulated amortization of $nil (2009 - $nil) 456 -
-------------------------
$ 51,044 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the second quarter, the Company extended its $76.5 million
revolving term credit facility with the bank to mature in June 2012. The
transaction costs associated with negotiating the new facility were
$456,000 and these will be amortized over the term of the debt.
Long-term debt bears interest at bankers' acceptance rates plus a premium
based on certain financial ratios. To manage interest rate risk and
ensure stability in the Company's interest costs, the Company has
interest rate swap agreements on a portion of long term debt which fixes
the floating bankers' acceptance rate.
9. EMPLOYEE BENEFIT PLANS
Three months ended Six months ended
June 30 June 30
(thousands of dollars) 2010 2009 2010 2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Defined contribution plan
expense $ 368 362 725 702
Defined benefit plan expense 118 125 237 250
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
Estimated fair value of financial instruments
Current assets and current liabilities' carrying values are
representative of their fair values due to the relatively short period to
maturity. The fair value of long-term debt approximates the carrying
value because the interest charges under the terms of the long-term debt
are based on the 3-month Canadian banker's acceptance rates. The fair
values of Canadian Content Development commitments approximated their
carrying values as they were recorded at the net present values of their
future cash flows, using discount rates ranging from 8.0% to 14.3%.
The following table outlines the hierarchy of inputs used in the
calculation of fair value for each financial instrument:
Level 1 Level 2 Level 3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quoted
prices Signifi-
in active cant Signifi-
markets other cant
for iden- observa- unobser-
(thousands of dollars) tical ble vable
Description Total assets inputs inputs
-------------------------------------------------------------------------
Cash and bank
indebtedness $ (1,912) (1,912) - -
Marketable securities 5,019 5,019 - -
Accounts receivable 24,200 - 24,200 -
Equity total return
swap receivable 1,721 - 1,721 -
Accounts payable and
accrued liabilities (19,828) - (19,828) -
Long-term debt (51,044) - (51,044) -
CCD commitments (7,896) - (7,896) -
Interest rate swap
payable (3,634) - (3,634) -
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The Company uses the following hierarchy for determining and disclosing
the fair value of financial instruments by valuation techniques:
Level 1: quoted (unadjusted) prices in active markets for identical
assets and liabilities
Level 2: other techniques for which all inputs that have a significant
effect on the recorded value are observable, either directly or
indirectly
Level 3: techniques which use inputs that have a significant effect on
the recorded fair value that are not based on observable market
data
The following sections discuss the Company's risk management objectives
and procedures as they relate to credit risk, market risk, liquidity risk
and capital risk.
Credit risk
Credit exposure on financial instruments arises from the possibility that
a counterparty to an instrument in which the Company is entitled to
receive payment fails to perform. The maximum credit exposure
approximated $26,000,000 as at June 30, 2010, which included accounts
receivable and the equity total return swap receivable.
The Company is subject to normal credit risk with respect to its
receivables. A large customer base and geographic dispersion minimize the
concentration of credit risk. Credit exposure is managed through credit
approval and monitoring procedures. The Company does not require
collateral or other security from clients for trade receivables; however
the Company does perform credit checks on customers prior to extending
credit. Based on the results of credit checks, the Company may require
upfront deposits or full payments on account prior to providing service.
The Company reviews its receivables for possible indicators of impairment
on a regular basis and as such, it maintains a provision for potential
credit losses which totaled $1,289,000 as at June 30, 2010. The Company
is of the opinion that the provision for potential losses adequately
reflects the credit risk associated with its receivables. Approximately
87% of trade receivables are outstanding for less than 90 days. Amounts
would be written off directly against accounts receivable and against the
allowance only if and when it was clear the amount would not be collected
due to customer insolvency. Historically, the significance and incidence
of amounts written off directly against receivables have been low. The
total amount written off in the second quarter was $83,000, and year-to-
date was $260,000.
As at June 30, 2010, the Company's credit exposure related to its
receivables continued to be slightly higher than in the past due to the
recent Canadian economic conditions. The Company sells advertising
airtime primarily to retail customers and since their results may also be
affected by the current economy, it is difficult to predict the impact
this could have on the Company's receivables' balance. The Company
believes its provision for potential credit losses is adequate at this
time given the current economic circumstances.
With regard to the Company's derivative instruments, the counterparty
risk is managed by only dealing with Canadian Chartered Banks having high
credit ratings.
Market risk
Market risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices,
which includes quoted share prices in active markets, interest rates and
the Company's quoted share price as it relates to the stock appreciation
rights plan.
a) Managing risk associated with fluctuations in quoted share prices of
marketable securities
The fair value of the Company's marketable securities is affected by
changes in the quoted share prices in active markets. Such prices can
fluctuate and are affected by numerous factors beyond the Company's
control. In order to minimize the risk associated with changes in the
share price of any one particular investment, the Company diversifies
its portfolio by investing in various stocks in varying industries. It
also conducts regular financial reviews of publicly available
information related to its investments to determine if any identified
risks are within tolerable risk levels. As at June 30, 2010, a 10%
change in the share prices of each marketable security would result in
a $400,000 after-tax change in net income.
For the quarter ended June 30, 2010, the change in fair value of
marketable securities, recorded in other income, was an unrealized
gain of $632,000 (2009 - $982,000) and year-to-date was $817,000
(2009 - $1,974,000).
b) Interest rate risk management
To hedge its exposure to fluctuating interest rates on its long-term
debt, the Company has entered into interest rate swap agreements with
Canadian Chartered Banks. The swap agreements involve the exchange of
the three-month bankers' acceptance floating interest rate for a fixed
interest rate. The difference between the fixed and floating rates is
settled quarterly with the bank and recorded as an increase or
decrease to interest expense. The Company elected to apply hedge
accounting and as such formally assesses effectiveness of the swaps at
inception and on a regular basis and has concluded that the swaps are
effective in offsetting changes in interest rates.
Interest rate fluctuations would have an impact on the Company's
results. A 0.5% change in the floating interest rates would have
impacted OCI due to changes in fair value of the interest rate swaps
by approximately $600,000 after-tax. There would have been no impact
to net income.
The Company has two interest rate swap agreements; one has a notional
value of $10,000,000 and expires in June 2013, and the other has a
notional amount of $45,000,000 and expires in May 2013. In 2008, the
Company early terminated interest rate swap agreements resulting in a
fair value payable of $349,000 which was blended into the interest
rate of the $45,000,000 swap. This fair value payable is being
transferred from OCI to net income (as interest expense) over the
remaining term of the original swap agreements which expire between
2009 and 2011. The before-tax amount related to the $349,000 fair
value payable transferred to net income from OCI for the quarter was
$17,000 (2009 - $17,000). The year-to-date amount transferred to net
income was $33,000 (2009 - $70,000).
Total before-tax interest expense transferred for the quarter from OCI
to net income was $63,000 (2009 - $39,000) and for the year the amount
was $30,000 (2009 -$150,000). In January 2010, the Company settled
$5,000,000 of the $15,000,000 swap which resulted in a payout of
$328,000. $5,000,000 of the remaining $10,000,000 swap has been
de-designated and therefore, hedge accounting no longer applies on
this portion. Of the amount of pre-tax interest expense transferred to
net income from OCI, $58,000 related to the de-designated portion
(2009 - $nil) in the quarter, and for the year the amount was $10,000
(2009 - $nil).
The Company has measured its own credit risk in relation to its
interest rate swaps and as a result has recognized a $37,000 loss in
OCI (2009 - $nil) in the second quarter and $62,000 year-to-date
(2009 - $nil).
The aggregate fair value payable of the swap agreements was $3,634,000
(2009 - $4,528,000).
c) Share price volatility risk management
In July 2006, the Company entered into a cash-settled equity total
return swap agreement to manage its exposure to fluctuations in its
stock-based compensation costs related to the SAR plan. Compensation
costs associated with the SAR Plan fluctuate as a result of changes in
the market price of the Company's Class A shares. The Corporation
entered into this swap for a total of 1,275,000 notional Class A
shares with a hedged price of $5.85. The swap expires in July 2011.
The swap includes an interest and dividend component. Interest is
accrued and payable by the Company on quarterly settlement dates. Any
dividends paid on the Class A shares are reimbursed to the Company on
the quarterly settlement dates.
The Company elected to apply hedge accounting and in order to qualify
for hedge accounting, there must be reasonable assurance that the
instrument is and will continue to be an effective hedge. At the
inception of the hedge and on an ongoing basis, the Company formally
assesses and documents whether the hedging relationship is effective
in offsetting changes in cash flows of the hedged item. Gains or
losses realized on the quarterly settlement dates are recognized in
net income in the same period as the SAR Plan compensation expense.
Unrealized gains and losses, to the extent that the hedge is
effective, are deferred and included in OCI until such time as the
hedged item affects net income. If at any time, the hedge is deemed to
be ineffective or the hedge is terminated or de-designated, gains or
losses, including those previously recognized in OCI, will be recorded
in net income immediately.
As at June 30, 2010, the Company de-designated 680,350 of the
1,275,000 notional Class A shares; therefore, hedge accounting no
longer applies on the de-designated portion. A total of $492,000
before-tax gains were transferred from OCI to net income in the
quarter (2009 - $741,000) and the amount year-to-date was $474,000
(2009 - $1,059,000). Of the amount transferred to net income, the gain
in the quarter that related to the de-designated portion was $572,000
(2009 - $255,000) and year-to-date it was $573,000 (2009 - $422,000).
The estimated fair value of the equity total return swap receivable,
classified as current other assets, based on the Class A shares'
market price at June 30, 2010 was $1,721,000 (2009 - $1,891,000 of
which $856,000 was current).
Liquidity risk
Liquidity risk is the risk that the Company is not able to meet its
financial obligations as they become due or can do so only at excessive
cost. The Company's growth is financed through a combination of the cash
flows from operations and borrowings under the existing credit facility.
One of management's primary goals is to maintain an optimal level of
liquidity through the active management of the assets and liabilities as
well as the cash flows. Other than for operations, the Company's cash
requirements are mostly for interest payments, repayment of debt, capital
expenditures, Canadian Content Development payments, dividends and other
contractual obligations that are disclosed below.
The Company has renegotiated its credit facility with the bank which
expires on June 30, 2012. The Company was in full compliance with its
bank covenants throughout the quarter and at quarter end.
The Company's liabilities have contractual maturities which are
summarized below:
Obligation (thousands of
dollars) 12 months 2011 - 2015 Thereafter
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Long-term debt $ - 51,500 -
Bank indebtedness 1,912 - -
Accounts payable and accrued
liabilities 19,828 - -
Income taxes payable 8,280 - -
CCD commitments 2,110 7,627 106
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$ 32,130 59,127 106
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Capital risk
The Company defines its capital as shareholders' equity. The Company's
objective when managing capital is to pursue its strategy of growth
through acquisitions and through organic operations so that it can
continue to provide adequate returns for shareholders.
The Company manages the capital structure and makes adjustments to it in
light of changes in economic conditions and the risk characteristics of
the underlying assets. In order to maintain or adjust the capital
structure, the Company may adjust the amount of dividends paid to
shareholders, issue new shares or repurchase shares. The Directors and
senior management of the Company are of the opinion that from time to
time the purchase of its shares at the prevailing market price would be a
worthwhile investment and in the best interests of the Company and its
shareholders. Material transactions and those considered to be outside
the ordinary course of business, such as acquisitions and other major
investments or disposals, are reviewed and approved by the Board of
Directors.
To comply with Federal Government directions, the Broadcasting Act and
regulations governing radio stations (the "Regulations"), the Company has
imposed restrictions respecting the issuance, transfer and, if
applicable, voting of the Company's shares. Restrictions include
limitations over foreign ownership of the issued and outstanding voting
shares. Pursuant to such restrictions, the Company can prohibit the
issuance of shares or refuse to register the transfer of shares or, if
applicable, prohibit the voting of shares in circumstances that would or
could adversely affect the ability of the Company, pursuant to the
provisions of the Regulations, to obtain, maintain, renew or amend any
licence required to carry on any business of the Company, including a
licence to carry on a broadcasting undertaking, or to comply with such
provisions or with those of any such licence.
The Company is subject to covenants on its credit facility. The Company's
bank covenants include certain maximum or minimum ratios such as total
debt to EBITDA ratio, interest coverage and fixed charge coverage ratio.
Other covenants include seeking prior approval for acquisitions or
disposals in excess of a quantitative threshold. The Company was in
compliance with the covenants throughout the quarter and at quarter end.
Financial projections are updated and reviewed regularly to reasonably
ensure that financial debt covenants will not be breached in future
periods. The Company monitors the covenants and foreign ownership status
of the issued and outstanding voting shares and presents this information
to the Board of Directors quarterly. The Company was in compliance with
all the above as at June 30, 2010.
11. EARNINGS PER SHARE
Three months ended Six months ended
June 30 June 30
(thousands) 2010 2009 2010 2009
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Weighted average common shares
used in calculation of basic
earnings per share 32,972 32,972 32,972 32,972
Incremental common shares
calculated in accordance with
the treasury stock method 1,121 1,024 1,116 964
-----------------------------------------
Weighted average common shares
used in calculation of diluted
earnings per share 34,093 33,996 34,088 33,936
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12. SEGMENTED INFORMATION
The Company has two reportable segments - Broadcasting and Corporate and
Other. The Broadcasting segment consists of the operations of the
Company's radio and television licences. This segment derives its revenue
from the sale of broadcast advertising. This reportable segment is a
strategic business unit that offers different services and is managed
separately. The Company evaluates performance based on earnings before
interest, taxes, depreciation and amortization. Corporate and Other
consists of a hotel and the head office functions. Its revenue relates to
hotel operations. Details of segment operations are set out below.
Results from the Thunder Bay reporting unit have been excluded from 2009
figures as a result of accounting for discontinued operations as
described in note 3. Beginning in 2010 other income, which is primarily
the results from investment holdings, was excluded from the determination
of operating income (loss). The comparative information for 2009 has been
adjusted to reflect this reclassification.
Corpo- Corpo-
(thousands Broad- rate Broad- rate
of dollars) casting & Other Total casting & Other Total
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Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
2010
Revenue $ 29,875 910 30,785 54,771 1,720 56,491
Operating
expenses 22,124 2,518 24,642 40,957 4,999 45,956
Depreciation
and amorti-
zation 848 70 918 1,654 140 1,794
------------------------------------------------------------
Operating
income
(loss) $ 6,903 (1,678) 5,225 12,160 (3,419) 8,741
------------------------------------------------------------
Assets
employed $213,164 18,269 231,433
Broadcast
licences 148,032 - 148,032
Goodwill 7,045 - 7,045
Capital
expendi-
tures $ 413 69 482 854 132 986
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2009
Revenue $ 25,967 805 26,772 47,764 1,668 49,432
Operating
expenses 18,847 2,701 21,548 37,215 4,949 42,164
Depreciation
and amorti-
zation 836 76 912 1,661 152 1,813
------------------------------------------------------------
Operating
income
(loss) $ 6,284 (1,972) 4,312 8,888 (3,433) 5,455
------------------------------------------------------------
Assets
employed $217,058 20,732 237,790
Broadcast
licences 148,396 - 148,396
Goodwill 7,045 - 7,045
Capital
expendi-
tures $ 1,849 18 1,867 2,421 42 2,463
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13. SUBSEQUENT EVENTS
Subsequent to June 30, 2010, the Copyright Board of Canada issued a fact
sheet entitled "Commercial Radio Tariff 2008 to 2012" that introduced new
copyright tariffs and that increased one component of the existing
tariffs. The decision is retroactive to January 1, 2008 and repayment is
expected to be made evenly over twelve months beginning in September
2010. As a result of this decision, the Company has adjusted its
copyright fees expense, included in operating expenses, by $2,344,000,
$879,000 of which relates to 2008 and $893,000 to 2009.
On August 5, 2010, the Company declared dividends of $0.06 per share on
each of its Class A Subordinate Voting Shares and Class B Common Shares
payable September 15, 2010 to shareholders of record as at August 31,
2010.
%SEDAR: 00002995E
For further information: REF: Robert G. Steele, President and Chief Executive Officer; Scott G.M. Weatherby, Chief Financial Officer and Corporate Secretary, Newfoundland Capital Corporation Limited, 745 Windmill Road, Dartmouth, Nova Scotia, B3B 1C2, Tel: (902) 468-7557, Fax: (902) 468-7558, e-mail: [email protected], Web: www.ncc.ca
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