Continued Growth for Cogeco Cable in the Third Quarter of 2009
MONTREAL, QUEBEC, Jul 10 (MARKET WIRE) --
Today, Cogeco Cable Inc. (TSX: CCA) ("Cogeco Cable" or the "Corporation")
announced its financial results for the third quarter and first nine
months of fiscal 2009, ended May 31, 2009.
For the third quarter and first nine months of fiscal 2009:
- Consolidated revenue increased by 11.2% to reach $305.7 million, and by
14.9% to reach $910 million, respectively;
- Consolidated operating income before amortization(1) grew by 9.6% to
reach $128.7 million, and by 15.6% to reach $373.9 million, respectively;
- In the first nine months of fiscal 2009, a $399.6 million non-cash
impairment loss on the Corporation's investment in its Portuguese
subsidiary, Cabovisao - Televisao por Cabo, S.A. ("Cabovisao") was
recorded as a result of recurring competitive pressure resulting in
subscriber losses that were more severe than originally anticipated. Net
of related income taxes, the impairment loss amounted to $383.6 million;
- Third quarter consolidated net income amounted to $31.8 million
compared to $31.1 million for the same period of the prior year.
Excluding an unfavourable income tax adjustment of $6.1 million related
to the utilization of pre-acquisition tax losses in Cabovisao and a $10.9
million favourable reduction of Cabovisao withholding and stamp tax
contingent liabilities(1), consolidated net income would have amounted to
$27 million, a decrease of $4.2 million, or 13.4% compared to $31.1
million for the third quarter of fiscal 2008;
- Consolidated net loss amounted to $303.2 million for the first nine
months compared to net income of $101.4 million in the prior year.
Excluding the impairment loss, the adjustments related to income taxes
and withholding and stamp tax contingent liabilities described above for
the current quarter, and the income tax adjustment of $24 million related
to the reduction of Canadian federal income tax rates in the first nine
months of the prior year(1), consolidated net income would have amounted
to $75.6 million, a decrease of $1.8 million, or 2.4% compared to $77.4
million for the first nine months of fiscal 2008;
- Free cash flow(1) reached $31.9 million for the quarter, representing a
decrease of 13.6% over the prior year, and $80.7 million for the first
nine months, an increase of 3.6% over fiscal 2008;
- Operating margin(1) decreased to 42.1% for the quarter compared to
42.7% in the prior year, and increased to 41.1% from 40.8% for the first
nine months of the fiscal year;
- Revenue-generating units ("RGU")(2) grew by 14,985 net additions in the
quarter and 93,325 net additions in the first nine months, for a total of
2,810,199 RGU at May 31, 2009.
"Cogeco Cable's financial results are well aligned with the revised
financial projections for fiscal 2009. We are pleased with our
consolidated results for the third quarter, in particular the increases
in revenue and operating income before amortization. For the nine month
period, our Canadian operations are growing at a steady pace, as
demonstrated by net additions of 140,215 RGU. In our European operations,
the Digital Television service continues to grow in our markets with the
addition of 20,976 new customers. We have recently realigned our short
term strategic plan in order to curtail subscriber losses that continue
to adversely affect the financial results of our Portuguese operations in
the current difficult competitive environment", declared Louis Audet,
President and CEO of Cogeco Cable.
(1) The indicated terms do not have standard definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by
other companies. For more details, please consult the "Non-GAAP
financial measures" section of the Management's discussion and analysis.
(2) Represents the sum of Basic Cable, High Speed Internet ("HSI"), Digital
Television and Telephony service customers.
FINANCIAL HIGHLIGHTS
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($000, except
percentages Quarters ended May 31, Six months ended May 31,
and per 2009 2008(1)Change 2009 2008(1)Change
share data) $ $ % $ $ %
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(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 305,672 274,944 11.2 910,030 791,879 14.9
Operating
income before
amortization
(2) 128,731 117,492 9.6 373,915 323,452 15.6
Operating
income 61,218 59,283 3.3 175,836 156,567 12.3
Impairment
of goodwill
and intangible
assets - - - 399,648 - -
Net income
(loss) 31,770 31,142 2.0 (303,248) 101,416 -
Net income
excluding
the impairment
loss and tax
adjustments(2) 26,982 31,142 (13.4) 75,594 77,414 (2.4)
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Cash flow from
operating
activities 102,736 112,799 (8.9) 249,650 249,135 0.2
Cash flow
from
operations(2) 94,810 95,829 (1.1) 285,506 260,855 9.5
Capital
expenditures
and increase
in deferred
charges 62,919 58,928 6.8 204,853 183,040 11.9
Free cash
flow(2) 31,891 36,901 (13.6) 80,653 77,815 3.6
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Earnings (loss)
per share
Basic 0.65 0.64 1.6 (6.25) 2.09 -
Diluted 0.65 0.64 1.6 (6.25) 2.08 -
Earnings per
share excluding
the impairment
loss and tax
adjustments(2)
Basic 0.56 0.64 (12.5) 1.56 1.60 (2.5)
Diluted 0.55 0.64 (14.1) 1.55 1.59 (2.5)
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation to reflect the reclassification of foreign
exchange gains or losses from operating costs to financial expense.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
FORWARD-LOOKING STATEMENTS
Certain statements in this press release may constitute forward-looking
information within the meaning of securities laws. Forward-looking
information may relate to Cogeco Cable's future outlook and anticipated
events, business, operations, financial performance, financial condition
or results and, in some cases, can be identified by terminology such as
"may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe";
"intend"; "estimate"; "predict"; "potential"; "continue"; "foresee",
"ensure" or other similar expressions concerning matters that are not
historical facts. In particular, statements regarding the Corporation's
future operating results and economic performance and its objectives and
strategies are forward-looking statements. These statements are based on
certain factors and assumptions including expected growth, results of
operations, performance and business prospects and opportunities, which
Cogeco Cable believes are reasonable as of the current date. While
management considers these assumptions to be reasonable based on
information currently available to the Corporation, they may prove to be
incorrect. The Corporation cautions the reader that the current adverse
economic conditions make forward-looking information and the underlying
assumptions subject to greater uncertainty and that, consequently, they
may not materialize, or the results may significantly differ from the
Corporation's expectations. It is impossible for Cogeco Cable to predict
with certainty the impact that the current economic downturn may have on
future results. Forward-looking information is also subject to certain
factors, including risks and uncertainties (described in the
"Uncertainties and main risk factors" section of the Corporation's 2008
annual Management's Discussion and Analysis (MD&A) that could cause
actual results to differ materially from what Cogeco Cable currently
expects. These factors include technological changes, changes in market
and competition, governmental or regulatory developments, general
economic conditions, the development of new products and services, the
enhancement of existing products and services, and the introduction of
competing products having technological or other advantages, many of
which are beyond the Corporation's control. Therefore, future events and
results may vary significantly from what management currently foresee.
The reader should not place undue importance on forward-looking
information and should not rely upon this information as of any other
date. While management may elect to, the Corporation is under no
obligation (and expressly disclaims any such obligation), and does not
undertake to update or alter this information before the next quarter.
This analysis should be read in conjunction with the Corporation's
consolidated financial statements, and the notes thereto, prepared in
accordance with Canadian Generally Accepted Accounting Principles and the
MD&A included in the Corporation's 2008 Annual Report. Throughout this
discussion, all amounts are in Canadian dollars unless otherwise
indicated. MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are
to improve profitability and create shareholder value. The strategies for
reaching those objectives are sustained growth through the
diversification and the improvement of products, services, clientele and
territories, as well as the continuous improvement of networks and
equipment and tight controls over costs and business processes. The
Corporation measures its performance, with regard to these objectives by
monitoring revenue growth, revenue-generating units ("RGU")(1) growth and
free cash flow(2). Below are the recent achievements in furthering Cogeco
Cable's objectives.
Continuous improvement of the service offering and expansion of the
customer base
Canadian operations
- Digital Television service :
- On July 9, the following High Definition ("HD") Television services
were launched:
- Tele-Quebec HD, Canal Evasion HD, TV5 HD, PBS HD, Mystere HD, The
Score HD, National Geographic HD and Discovery HD in Quebec.
- Telephony service:
- During the third quarter, the Telephony service was launched in the
following cities:
- Brighton, Wyoming, Petrolia, Oil City, Napanee and Deseronto,
Ontario;
- North Hatley, Ayers Cliff, Gaspe, Forestville and St-Etienne-des-
Gres, Quebec.
European operations
- Bundled offers:
- Cabovisao - Televisao por Cabo, S.A. ("Cabovisao") realigned some of
its bundle offers to retain and attract customers.
- Television service:
- Continued deployment of Cabovisao's Digital Television service;
- Launch of Jim Jam, Luxe HD, MVM TV, Telesur, Regioes TV, TVGlobo and PFC
channels.
- High-speed Internet ("HSI") service:
- On July 7, announcement of the launch of Nitro 60 Mbps and Nitro 120
Mbps Internet services, the fastest available in the Portuguese market.
Continuous improvement of networks and equipment
- During the first nine months of fiscal 2009, the Corporation invested
approximately $76.9 million in its infrastructure including head-ends and
upgrades and rebuilds.
Tight control over costs and business processes
- For the first nine months of the 2009 fiscal year, consolidated operating
costs, excluding management fees payable to COGECO Inc., increased by
14.7% while revenue grew by 14.9% for the same period;
- During the quarter, the Corporation has implemented new processes and
software to track its home terminal devices from their initial purchase
to their return by customers, and has adjusted the carrying values of the
assets accordingly. The Corporation has continued its project to improve
the design and implementation of internal controls, and the project is
progressing according to management's plan. Please see the "Controls and
procedures" section for further details.
(1) Represents the sum of Basic Cable, HSI, Digital Television and
Telephony service customers.
(2) Free cash flow does not have a standardized definition prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section.
Effective management of capital
- On June 9, 2009, the Corporation completed, pursuant to a public debt
offering, the issue of 5.95% Senior Secured Debentures Series 1
for $300 million maturing June 9, 2014. The Debentures were
priced at $99.881 per $100 principal amount for an effective yield of
5.98% per annum. The net proceeds of sale of the Debentures were used to
reimburse Cogeco Cable's existing indebtedness and for general corporate
purposes;
- On January 21, 2009, the Corporation entered into a swap agreement with a
financial institution to fix the floating benchmark interest rate with
respect to the Euro-denominated Term Loan facilities for a notional
amount of EUR 111.5 million. The interest rate swap to hedge the Term
Loans has been fixed at 2.08% until their maturity on July 28, 2011. The
notional value of the swap will decrease in line with the amortization
schedule of the Term Loans. In addition to this fixed interest rate,
Cogeco Cable will continue to pay the applicable margin on these Term
Loans in accordance with its Term Facility. At May 31, 2009,
approximately 80% of Cogeco Cable's debt was at fixed interest rates;
- On October 1, 2008, the Corporation completed, pursuant to a private
placement, the issue of 7.00% Senior Secured Notes Series A for US$190
million maturing October 1, 2015, and 7.60% Senior Secured Notes Series B
for $55 million maturing October 1, 2018. The Corporation also entered
into cross-currency swap agreements to fix the liability for interest and
principal payments on the total of its Senior Secured Notes Series A.
Interest on the Notes is payable semi-annually on April 1 and October 1
of each year commencing April 1, 2009. The aggregate gross proceeds from
the issuance of these Notes amounted to approximately $257 million. Net
proceeds of approximately $255 million, after underwriters' fees and
other expenses, were used to repay maturing debt and reduce bank
indebtedness.
RGU growth
During the first nine months ended May 31, 2009, the consolidated number
of RGU increased by 93,325, or 3.4%, to reach 2,810,199 RGU, on target to
attain the Corporation's RGU growth projections of 100,000 net additions
issued on October 29, 2008 and revised on April 8, 2009, which represents
approximately 3.7%, for the fiscal year ending August 31, 2009. Please
consult the fiscal 2009 revised projections in the "Fiscal 2010
preliminary financial guidelines" section for further details.
Revenue growth
Third-quarter revenue increased by $30.7 million, or 11.2%, when compared
to the same period of the prior year, to reach $305.7 million. During the
first nine months of 2009, revenue increased by $118.2 million, or 14.9%,
to reach $910 million, and management expects to attain its revised
guidelines of $1,205 million in revenue for the 2009 fiscal year, as
issued on April 8, 2009. Please consult the fiscal 2009 revised
projections in the "Fiscal 2010 preliminary financial guidelines" section
for further details.
Free cash flow
In the third quarter and first nine months, Cogeco Cable generated free
cash flows of $31.9 million and of $80.7 million compared to $36.9
million and $77.8 million, respectively, for the same periods last year,
representing a decrease of 13.6% for the quarter, and an increase of 3.6%
for the nine months ended May 31, 2009. The reduction in free cash flow
for the quarter is mainly due to an increase in capital expenditures and
the decrease in cash flow from operations, due to the increase in current
income taxes. For the first nine months, the growth in free cash flow is
essentially due to increases in cash flow from operations(1), resulting
primarily from the improvement of the Corporation's operating income
before amortization(1), partly offset by increases in capital
expenditures. On April 8, 2009, management revised its guidelines for
free cash flow to $80 million for the 2009 fiscal year. Due to the usual
higher level of capital expenditures in the last quarter of the year,
management expects to meet its free cash flow guidelines. Please consult
the fiscal 2009 revised projections in the "Fiscal 2010 preliminary
financial guidelines" section for further details.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
In the second quarter of fiscal 2009, the competitive position of
Cabovisao in the Iberian Peninsula further deteriorated due to the
continuing difficult competitive environment and recurring intense
customer promotions and advertising initiatives from competitors in the
Portuguese market. Please refer to "European operations" section for
further details. In accordance with current accounting standards,
management considered that the continued RGU and local currency revenue
decline were more severe and persistent than expected, resulting in a
decrease in the value of the Corporation's investment in the Portuguese
subsidiary. As a result, the Corporation tested goodwill and all
long-lived assets for impairment at February 28, 2009.
Goodwill is tested for impairment using a two step approach. The first
step consists of determining whether the fair value of the reporting unit
exceeds the net carrying amount of that reporting unit, including
goodwill. In the event that the net carrying amount exceeds the fair
value, a second step is performed in order to determine the amount of the
impairment loss. The Corporation completed its impairment tests on
goodwill and concluded that goodwill was impaired at February 28, 2009.
As a result, a non-cash impairment loss of $339.2 million was recorded in
the second quarter of the fiscal year. Fair value of the reporting unit
was determined using the discounted cash flow method. Future cash flows
were based on internal forecasts and consequently, considerable
management judgement was necessary to estimate future cash flows.
Significant changes in assumptions could result in further impairments of
goodwill.
Intangible assets with definite lives, such as customer relationships,
must be tested for impairment by comparing the carrying amount of the
asset or group of assets to the expected future undiscounted cash flow to
be generated by the asset or group of assets. Accordingly, the
Corporation completed its impairment test on customer relationships at
February 28, 2009, and determined that the carrying value of customer
relationships exceeded its fair value. As a result, a non-cash impairment
loss of $60.4 million was recorded in the second quarter of fiscal 2009.
(1) The indicated terms do not have standardized definitions prescribed
by Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult
the "Non-GAAP financial measures" section.
The impairment loss affected the Corporation's goodwill and customer
relationship asset balances as follows at February 28, 2009:
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($000) $
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(unaudited)
Goodwill 339,206
Customer relationships 60,442
Future income taxes (16,018)
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Impairment loss net of related income taxes 383,630
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OPERATING RESULTS - CONSOLIDATED OVERVIEW
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Quarters ended May 31, Nine months ended May 31,
($000, except 2009 2008(1)Change 2009 2008(1)Change
percentages $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 305,672 274,944 11.2 910,030 791,879 14.9
Operating
costs 176,941 157,452 12.4 527,096 459,713 14.7
Management
fees - COGECO
Inc. - - - 9,019 8,714 3.5
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Operating
income before
amortization
(2) 128,731 117,492 9.6 373,915 323,452 15.6
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Operating
margin(2) 42.1% 42.7% 41.1% 40.8%
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation to reflect the reclassification of foreign
exchange gains or losses from operating costs to financial expense.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
Revenue
Fiscal 2009 third-quarter consolidated revenue improved by
$30.7 million, or 11.2%, to reach $305.7 million, and first nine-month
consolidated revenue by $118.2 million, or 14.9%, to reach $910 million,
when compared to the prior year. Driven by increased RGU combined with
rate increases and the acquisition of MaXess Networx(R), FibreWired
Burlington Hydro Communications and Cogeco Data Services (the "recent
acquisitions") in the second half of fiscal 2008, third-quarter Canadian
operations revenue went up by $37.2 million, or 17.6%, and for the first
nine months by $116.8 million, or 19.1%.
Fiscal 2009 third-quarter European operations revenue decreased by $6.4
million, or 10.1%, at $57.6 million, compared to the same period of the
prior year, as a result of a net RGU loss in the quarter. First nine
month revenue increased by $1.3 million, or 0.7%, to reach $180.9
million, due to the strength of the Euro against the Canadian dollar,
despite a RGU loss in the first nine months of the year. Revenue from the
European operations in the local currency for the third quarter amounted
to EUR 35.7 million, a decrease of EUR 5.1 million, or 12.5%, and to EUR
113.5 million, a decrease of EUR 7.4 million, or 6.1%, for the first nine
months.
Operating costs
For the third quarter and first nine months of fiscal 2009, operating
costs, excluding management fees payable to COGECO Inc., increased by
$19.5 million and $67.4 million to reach $176.9 million and $527.1
million, respectively, increases of 12.4% and 14.7% compared to the prior
year. Operating costs increased due to the servicing of additional RGU
and the impact of the recent acquisitions in Canada, and in Europe, due
to the appreciation of the Euro over the Canadian dollar and an increase
in the level of uncollectible customer accounts.
Operating income before amortization
Fiscal 2009 third quarter and first nine-month operating income before
amortization increased by $11.2 million, or 9.6%, to reach $128.7
million, and by $50.5 million, or 15.6%, to reach $373.9 million,
respectively, as a result of various rate increases, recent acquisitions,
and RGU growth generating additional revenues which outpaced operating
cost increases in the quarter and first nine months of the year. Cogeco
Cable's third quarter operating margin decreased to 42.1% from 42.7% for
the same period of the prior year. The operating margin in Canada
improved to 45.9% from 44.3% which offset the decrease in the European
operating margin to 25.9% from 37.6%.
For the first nine months of fiscal 2009, the consolidated operating
margin improved to 41.1% from 40.8% with the Canadian operating margin
improving to 43.9% from 42.5% and the European operating margin
decreasing to 29.6% from 35.3% the year before.
RELATED PARTY TRANSACTIONS
Cogeco Cable is a subsidiary of COGECO Inc., which holds 32.3% of the
Corporation's equity shares, representing 82.7% of the votes attached to
the Corporation's voting shares. Under a management agreement, the
Corporation pays COGECO Inc. monthly management fees equal to 2% of its
total revenue for certain executive, administrative, legal, regulatory,
strategic and financial planning and additional services. In 1997,
management fees were capped at $7 million per year, subject to annual
upward adjustment based on increases in the Consumer Price Index in
Canada. Accordingly, for fiscal 2009, management fees have been set at a
maximum of $9 million, which was reached in the second quarter. For
fiscal 2008, management fees were set at a maximum of $8.7 million, and
were fully paid in the first six months of the year.
Furthermore, Cogeco Cable granted 29,711 stock options to COGECO Inc.'s
employees during the first nine months of fiscal 2009, compared to 22,683
for the same period last year. During the third quarter Cogeco Cable
charged COGECO Inc. an amount of $0.1 million with regards to Cogeco
Cable's options granted to COGECO Inc.'s employees, for a total charge of
$0.2 million in the first nine months of the year, compared to $0.1
million and $0.3 million for the same periods of the prior year. Details
regarding the management agreement and stock options granted to COGECO
Inc.'s employees are provided in the MD&A of the Corporation's 2008
Annual Report. There were no other material related party transactions
during the quarter.
FIXED CHARGES
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Quarters ended May 31, Nine months ended May 31,
($000, except 2009 2008(1)Change 2009 2008(1)Change
percentages $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Amortization 67,513 58,209 16.0 198,079 166,885 18.7
Financial
expense 14,206 17,374 (18.2) 55,588 50,387 10.3
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation to reflect the reclassification of foreign
exchange gains or losses from operating costs to financial expense.
The third-quarter and first nine months of 2009 amortization amounted
to $67.5 million and $198.1 million, respectively, compared to $58.2
million and $166.9 million for the same periods the year before. The
increase is mainly due to additional capital expenditures arising from
customer premise equipment acquisitions to sustain RGU growth, to the
recent acquisitions in Canada and to the appreciation of the Euro
currency over the Canadian dollar.
Third-quarter financial expense decreased by $3.2 million compared to the
prior year mainly due to a foreign exchange gain on unhedged long-term
debt and the reduction of interest rates during the quarter, partly
offset by the increase in Indebtedness (defined as bank indebtedness,
derivative financial instruments and long-term debt). In the first nine
months of the year, financial expense increased by $5.2 million due to
the rapid appreciation of the US dollar and the Euro over the Canadian
dollar and the increase in the level of Indebtedness, partly offset by
interest rate reductions. More specifically, financial expense was
adversely impacted by foreign exchange losses of $2.7 million in the
first nine months of fiscal 2009, despite the favourable impact of
foreign exchange gains of $1.7 million in the quarter, mainly on unhedged
long-term debt, as the majority of customer premise equipment is
purchased and subsequently paid in US dollars. The losses in the first
nine months of the year were essentially due to the unusually high US
dollar volatility with the Bank of Canada closing rate fluctuating from
$1.0620 per US dollar at August 31, 2008 to $1.0917 per US dollar at May
31, 2009, reaching a high of $1.2991 per US dollar on March 9, 2009. For
the corresponding periods of the prior year, the Corporation recorded no
foreign exchange gains or losses in the quarter and foreign exchange
gains of $0.9 million in the first nine months. REDUCTION OF WITHHOLDING
AND STAMP TAX CONTINGENT LIABILITIES
The Portuguese subsidiary, Cabovisao, had recorded contingent liabilities
for withholding and stamp taxes relating to fiscal years prior to its
acquisition by Cogeco Cable. At the date of acquisition, the amount
accrued represented management's best estimate based on the available
information. Management reviews its estimate periodically to take into
consideration payments made relating to these contingencies as well as
newly available information which would allow the Corporation to improve
its previous estimate. During the third quarter of fiscal 2009, Cabovisao
received a preliminary report from the Portuguese tax authorities with
respect to some of the items included in the contingent liabilities.
Accordingly, management has reviewed its estimate of the contingent
liabilities to reflect the new information available in this preliminary
report, and has determined that a reduction of EUR 7 million, equivalent
to $10.9 million, of the amount previously accrued was required at May
31, 2009, in order to reflect management's best estimate.
INCOME TAXES
Fiscal 2009 third-quarter income tax expense amounted to $26.2 million
compared to $10.8 million in fiscal 2008. The income tax expense for the
quarter and first nine months was unfavourably impacted by a non-cash
income tax expense of $6.1 million resulting from the recognition and
subsequent utilization of Cabovisao's pre-acquisition income tax losses
following the receipt of preliminary tax audit reports for those fiscal
years. Excluding this amount, income tax expense for the quarter would
have amounted to $20 million compared to $10.8 million in the prior year.
For the first nine months, the income tax expense amounted to $34.8
million compared to $4.8 million in the prior year. The income tax
expense for the first nine months of fiscal 2009 includes a future income
tax recovery of $16 million related to the impairment loss recorded in
the second quarter and an unfavourable impact of $6.1 million from the
utilization of Cabovisao's pre-acquisition tax losses described above.
The income tax expense for the comparable period of the prior year
includes the impact of the reduction in corporate income tax rates
announced on October 16, 2007 by the Canadian federal government in its
Economic Statement and considered substantively enacted on December 14,
2007 (the "reduction of Canadian federal income tax rates"). The
reduction of these corporate income tax rates reduced future income tax
expense by $24 million in the first nine months of fiscal 2008. Excluding
the effect of these items, income tax expense would have amounted to
$44.7 million for the first nine months of fiscal 2009, compared to $28.8
million for the first nine months of fiscal 2008. The increases in income
tax expense in fiscal 2009 are mainly due to the increase in operating
income before amortization surpassing that of the fixed charges in the
Canadian operations.
NET INCOME (LOSS)
Fiscal 2009 third quarter net income amounted to $31.8 million, or $0.65
per share, compared to $31.1 million, or $0.64 per share, for the same
period in 2008. Net income for the third quarter of fiscal 2009 includes
an unfavourable impact of $6.1 million from the utilization of
Cabovisao's pre-acquisition tax losses and a favourable impact from the
reduction of withholding and stamp tax contingent liabilities in the
amount of $10.9 million described above, also in Cabovisao. Excluding the
impact of these items(2), net income would have amounted to $27 million,
or $0.56 per share(1), compared to $31.1 million, or $0.64 per share in
the prior year, representing decreases of 13.4% and 12.5%, respectively.
For the first nine months of fiscal 2009, net loss amounted to $303.2
million, or $6.25 per share, compared to a net income of $101.4 million,
or $2.09 per share. In addition to the impacts described above for the
third quarter, the net loss in the first nine months of fiscal 2009 was
affected by the impairment loss net of related income taxes of $383.6
million recorded in the second quarter of the year, as described in the
"Impairment of goodwill and intangible assets" section. Furthermore, 2008
first nine months net income included an income tax adjustment of $24
million described above. Excluding the effect of these items, net income
would have amounted to $75.6 million, or $1.56 per share for the first
nine months ended May 31, 2009, decreases of 2.4% and 2.5% when compared
to $77.4 million, or $1.60 per share in the prior year. Please consult
the "Non-GAAP financial measures" section for further details. Net income
reduction for the quarter and first nine months has resulted from the
decline of the financial results of the European operations due to the
net RGU loss and the increase in income tax expense described in the
"Income taxes" section above, partly offset by the improvement of the
Canadian operations and the appreciation of the Euro currency compared to
the Canadian dollar during the majority of the first nine months of the
year.
(1) The indicated terms do not have standardized definitions prescribed
by Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
CASH FLOW AND LIQUIDITY
-------------------------------------------------------------------------
--
-----------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating
activities
Cash flow from
operations(1) 94,810 95,829 285,506 260,855
Changes in
non-cash
operating items 7,926 16,970 (35,856) (11,720)
-------------------------------------------------------------------------
102,736 112,799 249,650 249,135
-------------------------------------------------------------------------
Investing
activities(2) (61,559) (74,014) (202,274) (196,655)
-------------------------------------------------------------------------
Financing
activities(2) (45,494) 17,957 (40,697) (36,466)
-------------------------------------------------------------------------
Effect of exchange
rate changes on
cash and cash
equivalents
denominated in
foreign currencies (1,866) 1,063 (538) 1,265
-------------------------------------------------------------------------
Net change in cash
and cash
equivalents (6,183) 57,805 6,141 17,279
Cash and cash
equivalents,
beginning of period 48,695 23,682 36,371 64,208
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period 42,512 81,487 42,512 81,487
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Cash flow from operations does not have a standardized definition
prescribed by Canadian GAAP and therefore, may not be comparable to
similar measures presented by other companies. For more details, please
consult the "Non-GAAP financial measures" section.
(2) Excludes assets acquired under capital leases.
Fiscal 2009 third quarter cash flow from operations reached $94.8
million, 1.1% lower than the comparable period last year, due to the
increase in current income tax expense, partly offset by the increase in
operating income before amortization and the decrease in financial
expense. Changes in non-cash operating items generated cash inflows of
$7.9 million, mainly as a result of an increase in income tax
liabilities, partly offset by a decrease in accounts payable and accrued
liabilities in the third quarter of fiscal 2009. In the prior year, the
cash inflows of $17 million were mainly a result of an increase in
accounts payable and accrued liabilities and in income tax liabilities.
For the first nine months of fiscal 2009, cash flow from operations
reached $285.5 million, 9.5% higher than in the prior year, primarily due
to the increase in operating income before amortization, partly offset by
the increases in current income tax expense and financial expense.
Changes in non-cash operating items generated cash outflows of $35.9
million, mainly as a result of a decrease in accounts payable and accrued
liabilities and an increase in income taxes receivable, partly offset by
an increase in income tax liabilities. The cash outflows of $11.7 million
in the prior year were mainly due to a decrease in accounts payable and
accrued liabilities in the first nine months of the year, partly offset
by an increase in income tax liabilities.
Investing activities, including capital expenditures segmented according
to the National Cable Television Association ("NCTA") standard reporting
categories, are as follows:
-------------------------------------------------------------------------
--
-----------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Customer premise
equipment (1) 19,948 20,238 75,080
70,477Scalable
infrastructure 15,734 8,627 43,326 30,726
Line extensions 5,002 2,160 14,579 7,738
Upgrade/Rebuild 12,853 15,498 33,541 41,105
Support capital 4,126 5,355 20,085 12,433
-------------------------------------------------------------------------
Total capital
expenditures(2) 57,663 51,878 186,611 162,479
-------------------------------------------------------------------------
Increase in deferred
charges and others 5,058 7,002 17,983 20,488
-------------------------------------------------------------------------
Business acquisition - 16,105 - 16,105
-------------------------------------------------------------------------
Total investing
activities(2) 62,721 74,985 204,594 199,072
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes mainly new and replacement drops as well as home terminal
devices.
(2) Includes capital leases, which are excluded from the statements of cash
flows.
Fiscal 2009 third quarter total capital expenditures amounted to $57.7
million, an increase of 11.2%, when compared to the corresponding period
of last year, due to the following factors:
- An increase in scalable infrastructure capital spending mainly due to
the timing of the expansion and head-end improvements, system powering
and equipment reliability to sustain increased customer demand for HSI
and Telephony services in Canada;
- An increase in line extensions due to the expansion of the networks in
Canada;
- An increase from the appreciation of the Euro and the US dollar over
the Canadian dollar;
- A decrease in capital expenditures associated with network upgrades and
rebuilds due to the timing of these initiatives;
- A decrease in customer premise equipment spending which reflect lower
RGU growth in Canadian operations and net RGU losses in European
operations.
First nine months total capital expenditures amounted to $186.6 million,
an increase of 14.9%, when compared to the corresponding period of last
year, due to the following factors:
- An increase in customer premise equipment capital spending resulting
from RGU growth in Canadian operations fuelled in part by continued
interest for the HD Television service, combined with the deployment of
Digital Television in Portugal, net of RGU losses in the other services
in European operations;
- An increase in scalable infrastructure capital spending mainly due to
the timing of the expansion and head-end improvements, system powering
and equipment reliability to sustain increased customer demand for HSI
and Telephony services in Canada;
- An increase in support capital spending due to improvements in the
information systems to sustain the business activities and the
acquisition of a new facility in the Canadian operations, and to the
acquisition of a power generator for Cogeco Data Services;
- An increase in line extensions due to the expansion of the networks in
Canada;
- An increase from the appreciation of the Euro and the US dollar over
the Canadian dollar;
- A decrease in capital expenditures associated with network upgrades and
rebuilds due to the timing of these initiatives.
Deferred charges and others are mainly attributable to reconnect costs.
For the third quarter, the increase in deferred charges and others
amounted to $5.1 million compared to $7 million for the same period of
the prior year. For the first nine months of fiscal 2009, the increase in
deferred charges and others amounted to $18 million compared to $20.5
million the year before. Slower RGU growth explained the lower increases
recorded in fiscal 2009.
In the third quarter and first nine months, Cogeco Cable generated free
cash flows of $31.9 million and of $80.7 million compared to $36.9
million and $77.8 million, respectively, for the same periods last year,
representing a decrease of 13.6% for the quarter, and an increase of 3.6%
for the nine months ended May 31, 2009. The reduction in free cash flow
for the quarter is mainly due to an increase in capital expenditures and
the decrease in cash flow from operations. For the first nine months, the
growth in free cash flow is essentially due to increases in cash flow
from operations, partly offset by increases in capital expenditures. The
aggregate amount of total capital expenditures and deferred charges and
others increased by $3.8 million for the quarter ended May 31, 2009, and
by $21.6 million for the first nine months of fiscal 2009 compared to the
corresponding periods of the prior year due to the factors explained
above.
In the third quarter of 2009, Indebtedness affecting cash decreased by
$39.7 million mainly due to the free cash flow of $31.9 million, the
increase in non-cash operating items of $7.9 million, and the decrease in
cash and cash equivalents of $6.2 million, net of the dividend payment of
$5.8 million described below. Indebtedness mainly decreased through the
net repayments on the Corporation's revolving loans of $56.5 million, net
of an increase of $17.7 million in bank indebtedness. During the third
quarter of fiscal 2008, the level of Indebtedness affecting cash
increased by $22.7 million, primarily due to the issuance by the
Corporation on March 5, 2008 of a $100 million senior unsecured debenture
by way of a private placement, the proceeds of which were used in part to
reimburse the bank indebtedness of $17.7 million and to finance the
acquisition of MaXess Networx(R) for $16.1 million, partly offset by
repayments on the revolving credit facility of $58.6 million from the
generated free cash flow of $36.9 million and the increase in non-cash
operating items of $17 million.
During the third quarter of fiscal 2009, a dividend of $0.12 per share
was paid to the holders of subordinate and multiple voting shares,
totalling $5.8 million, compared to a dividend of $0.10 per share, or
$4.9 million the year before.
For the first nine months of fiscal 2009, Indebtedness affecting cash
decreased by $24.2 million mainly due to the free cash flow of $80.7
million, partly offset by the reduction of non-cash operating items of
$35.9 million, the payment of dividends totalling $17.5 million described
below and the increase in cash and cash equivalents of $6.1 million.
Indebtedness decreased through the repayment of US$150 million Senior
Secured Notes Series A and the related derivative financial instrument of
$56.2 million, both maturing on October 31, 2008, for a total of $238.7
million, and of net repayments on the Corporation's revolving loans of
$79.5 million, net of the issuance on October 1, 2008 of Senior Secured
Notes, Series A and Series B, maturing October 1, 2015 and October 1,
2018, respectively, for net proceeds of approximately $255 million, and
by an increase of $41.9 million in bank indebtedness. During the first
nine months of fiscal 2008, the level of Indebtedness affecting cash
decreased by $25.3 million, mainly due to a net reduction of $123.1
million on the revolving credit facility, partly offset by the issuance
of a senior unsecured debenture as discussed above.
During the first nine months of fiscal 2009, quarterly dividends of $0.12
per share were paid to the holders of subordinate and multiple voting
shares, totalling $17.5 million, compared to quarterly dividends of $0.10
per share, or $14.5 million the year before.
As at May 31, 2009, the Corporation had a working capital deficiency of
$360.7 million compared to $607.8 million as at August 31, 2008. The
decrease in the deficiency is mainly attributable to the repayment of the
US$150 million Senior Secured Notes, Series A and the related derivative
financial instrument for a total of $238.7 million on October 31, 2008,
using the proceeds of issuance of the Senior Secured Notes Series A and
B. As part of the usual conduct of its business, Cogeco Cable maintains a
working capital deficiency due to a low level of accounts receivable as a
large portion of the Corporation's customers pay before their services
are rendered, unlike accounts payable and accrued liabilities, which are
paid after products are delivered or services are rendered, thus enabling
the Corporation to use cash and cash equivalents to reduce Indebtedness.
At May 31, 2009, the Corporation had used $425.4 million of its $885
million Term Facility for a remaining availability of $459.6 million.
On October 1, 2008, the Corporation completed, pursuant to a private
placement, the issuance of US$190 million Senior Secured Notes Series A
maturing October 1, 2015, and $55 million Senior Secured Notes Series B
maturing October 1, 2018. The Senior Secured Notes Series B bear interest
at the coupon rate of 7.60% per annum, payable semi-annually. The
Corporation has entered into cross-currency swap agreements to fix the
liability for interest and principal payments on the Senior Secured Notes
Series A in the amount of US$190 million, which bear interest at the
coupon rate of 7.00% per annum, payable semi-annually. Taking into
account these agreements, the effective interest rate on the Senior
Secured Notes Series A is 7.24% and the exchange rate applicable to the
principal portion of the US dollar-denominated debt has been fixed at
$1.0625 per US dollar.
On June 9, 2009, the Corporation completed, pursuant to a public debt
offering, the issue of 5.95% Senior Secured Debentures Series 1 for $300
million maturing June 9, 2014. The Debentures were priced at $99.881 per
$100 principal amount for an effective yield of 5.98% per annum. The net
proceeds of sale of the Debentures were used to reimburse Cogeco Cable's
existing indebtedness and for general corporate purposes. FINANCIAL
POSITION
Since August 31, 2008, there have been major changes to the balances of
"fixed assets", "intangible assets", "goodwill", "accounts payable and
accrued liabilities", "future income tax assets" "income taxes
receivable", "income tax liabilities", "future income tax liabilities",
"cash and cash equivalents" and "Indebtedness".
The $12.4 million increase in fixed assets is mainly related to increases
in capital expenditures to sustain RGU growth and to the recent
acquisitions in Canada, partly offset by the depreciation of the Euro
compared to the Canadian dollar since August 31, 2008. The $67.4 million
and $334.1 million reductions in intangible assets and goodwill are due
to the impairment loss recorded on the Corporation's investment in
Cabovisao in the second quarter of this fiscal year. The $12.4 million
decrease in future income tax liabilities is mainly due to the impairment
loss described above. The $46.7 million decrease in accounts payable and
accrued liabilities is related to the timing of payments made to
suppliers, the reduction of withhold and stamp tax contingent
liabilities, and the fluctuations of the Euro currency over the Canadian
dollar. The $6.4 million reduction in future income tax assets is due to
the utilization of Ontario minimum tax credits and tax loss carry
forwards to reduce current income taxes. The $8.4 million increase in
income taxes receivable is due to income tax payments relating to fiscal
2008. The $6.7 million increase in income tax liabilities is a result of
the increase in operating income before amortization surpassing that of
the fixed charges. Indebtedness has decreased by $14.6 million and cash
and cash equivalents has increased by $6.1 million as a result of the
factors previously discussed in the "Cash Flow and Liquidity" section.
A description of Cogeco Cable's share data as of June 30, 2009 is
presented in the table below:
-------------------------------------------------------------------------
--
-----------------------------------------------------------------------
Number of shares/options Amount
($000)
-------------------------------------------------------------------------
Common shares
Multiple voting shares 15,691,100 98,346
Subordinate voting shares 32,867,426 891,715
Options to purchase Subordinate voting shares
Outstanding options 716,745
Exercisable options 430,243
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On April 6, 2009, the Corporation cancelled 206,180 options which had
been conditionally granted in relation with the acquisition of Cabovisao,
at a price of $26.63 per share, subject to performance criteria of
Cabovisao being met. Of these options, 93,518 were exercisable.
In the normal course of business, Cogeco Cable has incurred financial
obligations, primarily in the form of long-term debt, operating and
capital leases and guarantees. Cogeco Cable's obligations, as discussed
in the 2008 annual MD&A, have not materially changed since August 31,
2008 except for the new financings discussed in the "Cash Flow and
Liquidity" section.
DIVIDEND DECLARATION
At its July 9, 2009 meeting, the Board of Directors of Cogeco Cable
declared a quarterly eligible dividend of $0.12 per share for subordinate
and multiple voting shares, payable on August 6, 2009, to shareholders of
record on July 23, 2009. The declaration, amount and date of any future
dividend will continue to be considered and approved by the Board of
Directors of the Corporation based upon the Corporation's financial
condition, results of operations, capital requirements and such other
factors as the Board of Directors, at its sole discretion, deems
relevant. There is therefore no assurance that dividends will be
declared, and if declared, the amount and frequency may vary.
FINANCIAL MANAGEMENT
On January 21, 2009, the Corporation entered into a swap agreement with a
financial institution to fix the floating benchmark interest rate with
respect to the Euro-denominated Term Loan facilities for a notional
amount of EUR 111.5 million. The interest rate swap to hedge the Term
Loans has been fixed at 2.08% until their maturity at July 28, 2011. The
notional value of the swap will decrease in line with the amortization
schedule of the Term Loans. In addition to the interest rate swap of
2.08%, Cogeco Cable will continue to pay the applicable margin on these
Term Loans in accordance with its Term Facility. Since the issuance on
January 21, 2009, the fair value of interest rate swap decreased by $2
million, which is recorded as a decrease of other comprehensive income
net of income taxes of $0.6 million.
On October 1, 2008, Cogeco Cable entered into cross-currency swap
agreements to set the liability for interest and principal payments on
its US$190 million Senior Secured Notes, Series A maturing in October 1,
2015. These agreements have the effect of converting the U.S. interest
coupon rate of 7.00% per annum to an average Canadian dollar interest
rate of 7.24% per annum. The exchange rate applicable to the principal
portion of the debt has been fixed at $1.0625 per US dollar. Since the
issuance on October 1, 2008, amounts due under the US$190 million Senior
Secured Notes Series A increased by $5.5 million due to the US dollar's
appreciation over the Canadian dollar. The fair value of cross-currency
swaps decreased by a net amount of $0.3 million, of which an increase of
$5.5 million offsets the foreign exchange loss on the debt denominated in
US dollars. The difference of $5.8 million was recorded as a decrease of
other comprehensive income, net of income taxes of $0.2 million.
The Corporation's net investment in the self-sustaining foreign
subsidiary, Cabovisao, is exposed to market risk attributable to
fluctuations in foreign currency exchange rates, primarily changes in the
values of the Canadian dollar versus the Euro. This risk is mitigated
since the major part of the purchase price for Cabovisao was borrowed
directly in Euros. This debt is designated as a hedge of the net
investment in self-sustaining foreign subsidiaries and accordingly, the
Corporation realized a foreign exchange gain of $9.6 million in the first
nine months of fiscal 2009 which is presented in other comprehensive
income. The exchange rate used to convert the Euro into Canadian dollars
for the balance sheet accounts at May 31, 2009 was $1.5433 per Euro
compared to $1.5580 per Euro at August 31, 2008. The average exchange
rates prevailing during the third quarter and first nine months used to
convert the operating results of the European operations were $1.6126 per
Euro and $1.5951 per Euro, respectively, compared to $1.5694 and $1.4851
per Euro for the same periods of the prior year.
The following table shows the Canadian dollar impact of a 10% change in
the average exchange rate of the Euro currency into Canadian dollars on
European operating results for the first nine months ended May 31, 2009:
-------------------------------------------------------------------------
--
-----------------------------------------------------------------------
Exchange rate
Nine months ended May 31, 2009 As reported impact
($000) $ $
-------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 180,875 18,088
Operating income before amortization 53,617 5,362
Net loss (387,952) (38,795)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Corporation is also impacted by foreign currency exchange rates,
primarily changes in the values of the US dollar relative to the Canadian
dollar with regards to purchases of equipment, as the majority of
customer premise equipment is purchased and subsequently paid in US
dollars. Please consult the "Fixed charges" section of this MD&A and the
Foreign Exchange Risk section in note 15 of the consolidated financial
statements for further details.
CANADIAN OPERATIONS
CUSTOMER STATISTICS
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Net additions (losses) % of
Penetration(1)
Quarters ended Nine months ended
May 31, May 31, May 31,
-----------------------------------
May 31, 2009 2009 2008 2009 2008 2009 2008
--------------------------------------------------------------------------
RGU 2,132,123 27,175 36,658 140,215 160,491 - -
Basic Cable
service
customers 865,729 (2,153) (520) 8,635 9,413 - -
HSI service
customers(2) 509,433 5,939 8,480 35,966 48,832 61.6 57.5
Digital
Television
service
customers 488,724 10,065 11,585 46,978 45,717 57.3 50.4
Telephony
service
customers(3) 268,237 13,324 17,113 48,636 56,529 34.3 28.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) As a percentage of Basic Cable service customers in areas served.
(2) Customers subscribing to the HSI service without the Basic Cable
service totalled 78,947 as at May 31, 2009 compared to 74,434 as at May
31, 2008.
(3) Customers subscribing to the Telephony service without the Basic Cable
service totalled 23,439 as at May 31, 2009 compared to 15,258 as at May
31, 2008.
Fiscal 2009 third quarter and first nine-month RGU net additions were
lower than for the same periods last year and reflect an early sign of
maturation in some services. The number of net losses for Basic Cable
stood at 2,153 customers for the quarter and net additions of 8,635
customers for the first nine months, compared to a loss of 520 customers
and customer additions of 9,413, respectively, for the same periods of
the prior year. Third quarter Basic Cable service customer losses are
usual and due to the end of the school year for college and university
students. In the quarter, Telephony customers grew by 13,324 compared to
17,113 for the same period last year. For the first nine months,
Telephony customers grew by 48,636 compared to 56,529 for the first nine
months of the prior year. The lower growth is mostly attributable to the
increased penetration in areas where the service is already offered and
to fewer new areas where the service was launched. Telephony service
coverage, as a percentage of homes passed, is now above 90% compared to
83% at May 31, 2008. The number of net additions to HSI service stood at
5,939 customers for the quarter and 35,966 customers for the first nine
months of fiscal 2009, compared to 8,480 and 48,832 customers for the
same periods last year. The growth in HSI customer net additions
continues to stem from the enhancement of the product offering, the
impact of the bundled offer (Cogeco Complete Connection) of Television,
HSI and Telephony services, and promotional activities. The Digital
Television service net additions stood at 10,065 customers compared to
11,585 customers for the third quarter, and at 46,978 customers compared
to 45,717 customers for the first nine months of the prior year, due to
targeted marketing initiatives in the second half of fiscal 2008 and in
2009 to improve penetration and to the continuing strong interest for the
HD Television service.
OPERATING RESULTS
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
($000, except 2009 2008(1)Change 2009 2008(1)Change
percentages $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 248,101 210,928 17.6 729,155 612,337 19.1
Operating
costs 134,309 117,512 14.3 399,838 343,566 16.4
Management
fees - COGECO
Inc. - - - 9,019 8,714 3.5
--------------------------------------------------------------------------
Operating
income before
amortization 113,792 93,416 21.8 320,298 260,057 23.2
--------------------------------------------------------------------------
Operating
margin 45.9% 44.3% 43.9% 42.5%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
current year's presentation to reflect the reclassification of foreign
exchange gains or losses from operating costs to financial expense.
Revenue
Third-quarter revenue rose by $37.2 million, or 17.6%, to
reach $248.1 million, and first nine month revenue increased by $116.8
million, or 19.1%, to reach $729.2 million mainly due to the RGU growth,
combined with the impact of the recent acquisitions as well as the
various rate increases implemented by the Corporation during fiscal 2008.
These rate increases represent an average of approximately $1.60 per
Basic Cable service customer.
Operating costs
2009 third-quarter and first nine month operating costs, excluding
management fees payable to COGECO Inc., increased by $16.8 million, or
14.3%, to reach $134.3 million, and by $56.3 million, or 16.4%, to reach
$399.8 million, respectively. The increase in operating costs is mainly
attributable to servicing additional RGU and to the impact of the recent
acquisitions.
Operating income before amortization
Operating income before amortization rose by $20.4 million, or 21.8%, to
reach $113.8 million in the third quarter, and by $60.2 million, or
23.2%, to reach $320.3 million in the first nine months of fiscal 2009.
The operating income before amortization has risen due to the increased
revenue outpacing the operating costs growth including the impact of the
recent acquisitions. Cogeco Cable's Canadian operations' third-quarter
operating margin increased to 45.9% compared to 44.3% for the same period
in the prior year, and to 43.9% from 42.5% for the first nine months.
EUROPEAN OPERATIONS
CUSTOMER STATISTICS
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Net additions (losses) % of
Penetration(1)
Quarters ended Nine months ended
May 31, May 31, May 31,
May 31, 2009 2009 2008 2009 2008 2009 2008
--------------------------------------------------------------------------
RGU 678,076 (12,190) 14,231 (46,890) 29,618 - -
Basic Cable
service
customers 264,798 (11,394) (1,069) (31,337) 6,588 - -
HSI service
customers(2) 142,184 (4,420) (1,615) (17,117) 4,287 53.7 54.7
Digital
Television
service
customers(3) 45,428 9,170 14,470 20,976 14,470 17.2 4.8
Telephony
service
customers(4) 225,666 (5,546) 2,445 (19,412) 4,273 85.2 82.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) As a percentage of Basic Cable service customers in areas served.
(2) Customers subscribing to the HSI service without the Basic Cable
service totalled 7,940 as at May 31, 2009 compared to 8,346 as at May
31, 2008.
(3) The Digital Television service was launched in the third quarter of
fiscal 2008.
(4) Customers subscribing to the Telephony service without the Basic Cable
service totalled 8,335 as at May 31, 2009 compared to 10,043 as at May
31, 2008.
Fiscal 2009 third quarter and first nine months were marked by a
continuing difficult competitive environment in the Iberian Peninsula,
recurring intense customer promotions and advertising initiatives from
competitors for their new respective third leg of the triple-play service
in the Portuguese market. These factors were the main contributors to net
customer losses in the Basic Cable, HSI and Telephony services compared
to the same periods of the prior year. The Digital Television service was
launched during the third quarter of 2008, with net additions in fiscal
2009 of 9,170 customers in the third quarter and 20,976 customers in the
first nine months. Fiscal 2009 third quarter and first nine month period
Basic Cable service customers decreased by 11,394 and 31,337 customers,
respectively, compared to a decrease of 1,069 customers and a growth of
6,588 customers in the comparable periods of the prior year. HSI service
customers decreased by 4,420 and 17,117 customers compared to a decrease
of 1,615 and an increase of 4,287 for the corresponding periods in fiscal
2008. Telephony service decreased by 5,546 and 19,412 customers compared
to a growth of 2,445 and 4,273 customers for the same periods of the
preceding year.
In addition to the launch of new channels and retention strategies during
the quarter, new marketing and other operating initiatives were
implemented, the result of which should reduce customer attrition in the
upcoming quarters.
OPERATING RESULTS
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
($000, except 2009 2008(1)Change 2009 2008(1)Change
percentages $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 57,571 64,016 (10.1) 180,875 179,542 0.7
Operating
costs 42,632 39,940 6.7 127,258 116,147 9.6
--------------------------------------------------------------------------
Operating
income before
amortization 14,939 24,076 (38.0) 53,617 63,395 (15.4)
--------------------------------------------------------------------------
Operating
margin 25.9% 37.6% 29.6% 35.3%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
current year's presentation to reflect the reclassification of foreign
exchange gains or losses from operating costs to financial expense.
Revenue
Fiscal 2009 third-quarter revenue decreased by $6.4 million,
or 10.1%, at $57.6 million, due to the net RGU loss in the quarter. For
the first nine months, revenue slightly increased by $1.3 million to
reach $180.9 million, an increase of 0.7% over 2008. This growth is due
to the favourable impact of the appreciation of the Euro over the
Canadian dollar and to monthly rate increases implemented by Cabovisao
averaging $2.00 (EUR 1.30) per Basic Cable customer in January 2008, net
of decreases in overall RGU in the first nine months of fiscal 2009.
Revenue from the European operations in the local currency for the third
quarter and first nine months amounted to EUR 35.7 million and EUR 113.5
million, decreases of EUR 5.1 million, or 12.5%, and EUR 7.4 million, or
6.1%, respectively. Operating costs
For the third quarter, operating costs increased by $2.7 million to reach
$42.6 million, an increase of 6.7% compared to the prior year. In the
first nine months of fiscal 2009, operating costs increased by $11.1
million to reach $127.3 million, an increase of 9.6%. The increases in
operating costs are mainly attributable to the unfavourable impact of the
appreciation of the Euro over the Canadian dollar and an increase in the
amount of bad debts recorded in the quarter and first nine months of the
year. However, Cabovisao has put together initiatives at the end of the
second quarter of 2009 to better manage its collection processes which
management expects will have a favourable impact on the level of bad
debts in the coming months. Operating costs from the European operations
in the local currency for the third quarter and first nine months of
fiscal 2009 amounted to EUR 26.4 million and EUR 79.8 million,
respectively, increases of EUR 1.4 million, or 5.6%, and EUR 1.9 million,
or 2.4% compared to the prior year.
Operating income before amortization
For the third quarter, operating income before amortization decreased to
$14.9 million from $24.1 million, and to $53.6 million from $63.4 million
in the first nine months of fiscal 2009, representing decreases of 38%
and 15.4%, respectively, mainly due to increases in operating costs and
decreases in revenue. European operations' operating margin decreased for
the third quarter to 25.9% from 37.6%, and for the first nine months to
29.6% from 35.3% in the prior year. Operating income before amortization
in the local currency amounted to EUR 9.3 million for the third quarter,
a decrease of EUR 6.5 million, or 41.3%, and to EUR 33.7 million, a
decrease of EUR 9.3 million, or 21.5% for the first nine months of the
year.
FISCAL 2010 PRELIMINARY FINANCIAL GUIDELINES
For fiscal 2010, Cogeco Cable expects to grow revenue and maintain
operating income before amortization essentially at the same level as the
fiscal 2009 projections. The preliminary guidelines take into
consideration the global economic slowdown which is expected to continue
during 2010. In Canada, Cogeco Cable's footprint includes certain regions
in Ontario (Burlington and Windsor) where the automobile industry is a
significant driver of economic activity. The sharp downturn experienced
by the automobile industry in recent months may have an adverse impact on
the level of economic activity and consumer expenditures on goods and
services within those communities. In previous recessionary periods,
demand for cable telecommunications services has generally proven to be
resilient. However, there is no assurance that demand would remain
resilient in a prolonged global recession.
In Portugal, fiscal year 2009 was marked by a continuing difficult
competitive environment in the Iberian Peninsula, recurring intense
customer promotions and advertising initiatives from competitors for
their new respective third leg of the triple-play service in the
Portuguese market. These factors were the main contributors to the
decline in net RGU and in the financial results of Cabovisao.
Furthermore, digital terrestrial television services were launched in
Portugal in the second half of fiscal 2009, and this development may
limit the growth or result in some attrition of Basic Cable television
service customers and consequently have an adverse impact on RGU.
Management has realigned its short term strategic plan in order to
curtail subscriber losses and is expecting RGU loss deceleration in
fiscal 2010. In addition, Cabovisao recently launched new channels and
retention strategies, which combined with new marketing and other
operating initiatives, should reduce customer attrition in fiscal 2010.
These factors should result in slower growth for Cogeco Cable when
compared to prior years.
Fiscal 2010 consolidated revenue should increase by approximately 3.7%
compared to the prior year. The Canadian operations revenue should
increase as a result of additional RGU from continued deployment of the
Telephony service and expanded penetration of the HSI and Digital
Television services in fiscal 2010. Canadian operations will also benefit
from the impact of rate increases implemented in fiscal 2009 in Ontario,
averaging $1.00 per Basic Cable service customer. Cogeco Cable plans to
expand its Canadian Basic Cable Service clientele through consistently
effective marketing, competitive product offerings and superior customer
service. As the penetration of HSI, Telephony and Digital Television
services increase, the demand for these products should slow, reflecting
early signs of maturity. Revenue from European operations should
decrease, mainly from the impact of the significant decline in RGU in
fiscal 2009 and that is expected to continue in fiscal 2010, although to
a lesser extent, and from the impact of retention strategies implemented
in fiscal 2009. Digital Television service is still under deployment and
should continue to generate net additions in fiscal 2010. European
operations revenue should reflect attrition due to the expected
fluctuations in the value of the Euro compared to the Canadian dollar.
For fiscal 2009, the expected foreign exchange rate was approximately
$1.60 per Euro while for fiscal 2010, it is anticipated that the Euro
should be converted at a rate of approximately $1.50 per Euro.
The operating costs increase of approximately 6.4% should come both from
the Canadian and European operations. The Canadian operating costs
increase is mainly attributable to servicing additional RGU, to inflation
and salary increases as well as to the new Local Programming Improvement
Fund for which payments will be required as of September 2009. The
European operations costs increases are essentially due to new marketing
initiatives and the launch of new channels.
For fiscal 2010, consolidated operating income before amortization should
remain essentially the same at $500 million coming from the revenue
growth offset by the increase in operating costs. Cogeco Cable expects to
achieve an operating margin of approximately 40%.
Cogeco Cable expects the amortization of capital assets and deferred
charges to increase by $15 million, mainly due to capital expenditures
and deferred charges related to RGU additions and other initiatives in
fiscal 2009 and 2010. In addition, cash flows from operations will
finance capital expenditures and deferred charges, expected to amount to
$360 million, an increase of $60 million compared to fiscal 2009
projections. The increase in capital expenditures are mainly due to
customer premise equipment required to support RGU growth, to scalable
infrastructure for product enhancements and the deployment of new
technologies, and to support capital to improve business information
systems and facility requirements. The Corporation expects to generate
free cash flow in the order of $125 million, an increase of approximately
$45 million compared to the fiscal 2009 projections mainly due to
anticipated income tax recoveries of approximately $55 million resulting
from modifications to the corporate structure, offsetting the increase in
capital expenditures. Generated free cash flow should be used primarily
to reduce Indebtedness, thus improving the Corporation's leverage ratios.
Despite the anticipated decrease in Indebtedness, financial expense will
remain the same at $70 million due to an increase in the average interest
rate from the recent issuance of $300 million Senior Secured Debentures
Series 1. As a result, net income of approximately $85 million should be
achieved.
Consolidated
-------------------------------------------------------------------------
--
-----------------------------------------------------------------------
Preliminary Revised projections
Projections April 8, 2009
(in millions of dollars, except net Fiscal 2010 Fiscal 2009
customer additions and operating margin) $ $
-------------------------------------------------------------------------
Financial guidelines
Revenue 1,250 1,205
Operating income before amortization 500 500
Operating margin 40% 42%
Financial expense 70 70
Amortization 285 270
Current income taxes (55) 50
Net income (loss) 85 (275)
Capital expenditures and deferred charges 360 300
Free cash flow 125 80
Net customer additions guidelines
RGU 125,000 100,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The exchange rate used for the fiscal 2010 preliminary projections is
$1.50 per Euro compared to $1.60 per Euro for the April 2009 revised
projections.
CONTROLS AND PROCEDURES
The application of Bill 198 and its regulations represents an exercise in
continuous improvement, which is leading the Corporation to formalize
processes and control measures that are already in place and to introduce
new ones. Cogeco Cable has chosen to make this a strategic endeavour,
which will result in operational improvements and better management.
The President and Chief Executive Officer and the Vice President, Finance
and Chief Financial Officer, together with management, have evaluated the
effectiveness of the Corporation's disclosure controls and procedures and
the design of internal controls over financial reporting as at May 31,
2009 and August 31, 2008. They have concluded that the Corporation's
disclosure controls and procedures were adequate and effective to ensure
that material information relating to the Corporation is complete and
reliable. However, certain material weaknesses were identified in the
design of internal controls over financial reporting at these dates. The
status of the remediation of the material weaknesses identified at August
31, 2008 is as follows: The evaluation of Cogeco Data Services Inc. was
completed during the third quarter of 2009 and management has concluded
that the operations of its subsidiary do not meet materiality criteria on
a consolidated basis.
During the third quarter of fiscal 2009, the Corporation has implemented
new processes and software to track its home terminal devices from their
initial purchase to their return by customers, and has adjusted the
carrying values of the assets accordingly. This adjustment did not have a
material impact on the Corporation's financial statements. Controls in
relation to those new processes are presently in monitoring mode and
management expects to conclude, before the end of fiscal 2009, on the
full remediation of this material weakness identified at August 31, 2008.
During the fiscal year ending August 31, 2008, management has documented
evidence of existing controls and designed and implemented new and
enhanced automated and manual internal controls over financial reporting
for many processes for its Canadian operations. Material weaknesses
related to access controls over various databases and automated controls
were identified and have now been remediated.
On August 1, 2006, Cogeco Cable purchased Cabovisao in Portugal. During
the fiscal year ended August 31, 2007, management conducted a project to
review the design of internal controls over financial reporting of
significant processes. As at May 31, 2009, some key internal controls are
still under evaluation and implementation. Some controls over access to
databases, segregation of duties, and policy design are under review as
well as some automated controls and any material weaknesses identified
will be remediated before the end of the 2009 fiscal year.
As required under NI 52-109, management anticipates certifying design and
effectiveness of internal controls over financial reporting within the
2009 fiscal year.
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the uncertainties and main risk
factors faced by the Corporation since August 31, 2008, except as
described below. A detailed description of the uncertainties and main
risk factors faced by Cogeco Cable can be found in the 2008 annual MD&A.
Cogeco Cable's footprint includes certain regions in Ontario (Burlington
and Windsor) and in Portugal (Palmela) where the automobile industry is a
significant driver of economic activity. The sharp downturn experienced
by the automobile industry in recent months may have an adverse impact on
the level of economic activity and consumer expenditures on goods and
services within those communities. In previous recessionary periods,
demand for cable telecommunications services has generally proven to be
resilient. However, there is no assurance that demand will remain
resilient in a prolonged global recession.
Despite Cogeco Cable's strong balance sheet and the proactive management
of debt maturities, the present situation in financial markets and the
credit crisis may result in reduced availability of capital in both the
debt and equity markets in the coming years. As Cogeco Cable's current
credit facilities and other sources of financing reach their respective
maturities, the terms of bank and other debt facilities may be less
favourable upon renewal.
Market conditions may also have an impact on the Corporation's defined
benefit pension plans as there is no assurance that the actual rate of
return on plan assets will approximate the assumed rate of return used in
the most recent actuarial valuation. Market driven changes may impact the
assumptions used in future actuarial valuations and could result in the
Corporation being required to make contributions in the future that
differ significantly from the current contributions to the Corporation's
defined benefit pension plans.
The Corporation is exposed to interest rate risks for both fixed interest
rate and floating interest rate instruments. Fluctuations in interest
rates will have an effect on the valuation and the collection or
repayment of these instruments which could result in a significant impact
on the Corporation's financial expense. At May 31, 2009, approximately
80% of Cogeco Cable's debt is at fixed interest rates.
The current volatility of currency exchange and interest rate in the
financial markets is unusually high and could lead to an increase in the
level of risk on hedging instruments to which Cogeco Cable is a party,
should one or more of the counterparties to these instruments become
financially distressed and unable to meet their obligations.
Digital terrestrial television services have been launched in Portugal in
April 2009. This development may limit the growth or result in some
attrition of Basic Cable television service customers, and consequently
have an adverse impact on RGU.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in Cogeco Cable's accounting
policies, estimates and future accounting pronouncements since August 31,
2008, except as described below. A description of the Corporation's
policies and estimates can be found in the 2008 annual MD&A.
Capital disclosures and financial instruments
Effective September 1, 2008, the Corporation adopted the Canadian
Institute of Chartered Accountants ("CICA") Handbook Section 1535,
Capital Disclosures, Section 3862, Financial Instruments - Disclosures
and Section 3863, Financial Instruments - Presentation.
Capital disclosures
Section 1535 of the CICA Handbook requires that an entity disclose
information that enables users of its financial statements to evaluate
the entity's objectives, policies and processes for managing capital,
including disclosures of any externally imposed capital requirements and
the consequences for non-compliance. These new disclosures are included
in note 15 of the Corporation's interim consolidated financial statements.
Financial instruments
Section 3862 on financial instrument disclosures requires the disclosure
of information about the significance of financial instruments for the
entity's financial position and performance and the nature and extent of
risks arising from financial instruments to which the entity is exposed
during the period and at the balance sheet date, and how the entity
manages those risks.
Section 3863 establishes standards for presentation of financial
instruments and non-financial derivatives. It deals with the
classification of financial instruments, from the perspective of the
issuer, between liabilities and equities, the classification of related
interest, dividends, gains and losses, and circumstances in which
financial assets and financial liabilities are offset.
The adoption of these standards did not have any impact on the
classification and measurements of the Corporation's financial
instruments. The new disclosures pursuant to these new Sections are
included in note 15 of the Corporation's interim consolidated financial
statements.
Credit risk and fair value of financial assets and financial liabilities
On January 20, 2009, the Emerging Issues Committee ("EIC") of the
Canadian Accounting Standards Board issued EIC Abstract 173, Credit Risk
and Fair Value of Financial Assets and Financial Liabilities, which
establishes guidance requiring an entity to consider its own credit risk
as well as the credit risk of the counterparty in determining the fair
value of financial assets and financial liabilities, including derivative
instruments. EIC 173 is applicable to all financial assets and
liabilities measured at fair value in interim and annual financial
statements for periods ending on or after January 20, 2009 and is
applicable to the Corporation for its second quarter of fiscal 2009 with
retrospective application, without restatement of prior periods, to the
beginning of its current fiscal year. The adoption of this new abstract
during the second quarter decreased derivative financial instruments
assets by $3.5 million, decreased future income tax liabilities by $1
million and decreased accumulated other comprehensive income by $2.6
million at December 1, 2008 and had no significant impact on the
consolidated balance sheet at September 1, 2008.
General standards of financial statement presentation
The CICA amended Section 1400 of the CICA Handbook, General Standards of
Financial Statement Presentation, to include a requirement for management
to make an assessment of the entity's ability to continue as a going
concern when preparing financial statements. These changes, including the
related disclosure requirements, were adopted by the Corporation on
September 1, 2008 and had no impact on the interim consolidated financial
statements.
FUTURE ACCOUNTING PRONOUNCEMENTS
Business combinations, consolidated financial statements and
non-controlling interests
During January 2009, the CICA issued Handbook Section 1582, Business
Combinations, which replaces Section 1581 of the same name, and Sections
1601, Consolidated Financial Statements and 1602, Non-Controlling
Interests, which together replace Section 1600, Consolidated Financial
Statements. These new Sections harmonize significant aspects of Canadian
accounting standards with the International Financial Reporting Standards
("IFRS") that will be mandated for entities with fiscal year beginning on
or after January 1, 2011.
Section 1582 requires that all business acquisitions be measured at the
fair value of the acquired entity at the acquisition date even if the
business combination is achieved in stages, or if less than 100% of the
equity interest in the acquiree is owned at the acquisition date, and
expands the definition of a business subject to an acquisition. The
Section also establishes new guidance on the measurement of consideration
given and the recognition and measurement of assets acquired and
liabilities assumed in a business combination. Furthermore, under this
new guidance, acquisition costs, which were previously included as a
component of the consideration given, and any negative goodwill resulting
from the allocation of the purchase price, which was allocated as a
reduction of non-current assets acquired under the previous standard,
will be recorded in earnings in the current period. This new Section will
be applied prospectively and will only impact the Corporation's
consolidated financial statements for future acquisitions concluded in
periods subsequent to the date of adoption. Sections 1601 and 1602
dealing with consolidated financial statements require an entity to
measure non-controlling interest upon acquisition either at fair value or
at the non-controlling interest's proportionate share of the acquiree's
identifiable net assets. The new Sections also require non-controlling
interest to be presented as a separate component of shareholders' equity.
The new standards will apply as of the beginning of the first annual
reporting period beginning on or after January 1, 2011, with simultaneous
early adoption permitted. Early adoption may reduce the amount of
restatement required upon conversion to IFRS. The Corporation is
currently assessing the impact of these new Sections on its consolidated
financial statements.
Harmonization of Canadian and International accounting standards
In March 2006, the Accounting Standards Board of the CICA released its
new strategic plan, which proposed to abandon Canadian GAAP and effect a
complete convergence to the IFRS for publicly accountable entities.
In April 2008, the CICA published an exposure draft as guidance which
requires the transition to IFRS to replace Canadian GAAP as currently
employed by Canadian publicly accountable enterprises. In March 2009, the
CICA issued its second exposure draft on that matter which addresses
additional IFRS standards, considers comments received to date and
clarifies certain matters. The changeover will occur no later than fiscal
years beginning on or after January 1, 2011. Accordingly, the Corporation
expects that its first interim consolidated financial statements
presented in accordance with IFRS will be for the three-month period
ending November 30, 2011, and its first annual consolidated financial
statements presented in accordance with IFRS will be for the year ending
August 31, 2012.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are
significant differences in recognition, measurement and disclosure
requirements. The Corporation has established a project team including
representatives from various areas of the organization to plan and
complete the transition to IFRS. This team reports periodically to the
Audit Committee, who oversees the IFRS implementation project on behalf
of the Board of Directors. The Corporation will be assisted by external
advisors as required.
The implementation project consists of three primary phases, which may
occur concurrently as IFRS are applied to specific areas of operations:
- Scoping and diagnostic phase - This phase involves performing a
high-level impact assessment to identify key areas that are expected to
be impacted by the transition to IFRS. The result of these procedures is
the ranking of IFRS impacts in order of priority to assess the timing and
complexity of transition efforts that will be required in subsequent
phases.
- Impact analysis, evaluation and design phase - In this phase, each area
identified from the scoping and diagnostic phase will be addressed in
order of descending priority, with project teams established as deemed
necessary. This phase involves specification of changes required to
existing accounting policies, information systems and business processes,
together with an analysis of policy choices permitted under IFRS and the
development of draft IFRS financial statement content.
- Implementation and review phase - This phase includes execution of
changes to information systems and business processes, completing formal
authorization processes to approve recommended accounting policy changes
and training programs across the organization, as necessary. It will
culminate in the collection of financial information necessary to compile
IFRS-compliant financial statements, embedding IFRS in business
processes, eliminating any unnecessary data collection processes and
finally the approval by the Audit Committee of the IFRS financial
statements. Implementation also involves additional staff training with
the deployment of revised systems.
The Corporation completed the scoping and diagnostic phase in February
2009, and is now conducting the impact analysis, evaluation and design
phase. As implications of the conversion are identified, impact on
information technology, data systems and business activities will be
assessed. The Corporation's analysis of the IFRS and the comparison with
currently applied accounting principles has identified a number of
differences that may require information system changes or which are
likely to have a material impact on the financial statements of the
Corporation.
Set out below are the main areas where changes in accounting policies are
expected to have a significant impact on the Corporation's consolidated
financial statements. The list below should not be regarded as a complete
list of changes that will result from transition to the IFRS. It is
intended to highlight areas that the Corporation believes to be the most
significant; however, analysis of changes is still in process and the
selection of accounting policies where choices are available under IFRS
has not been completed. We note that the regulatory bodies that
promulgate the Canadian GAAP and the IFRS have significant ongoing
projects that could affect the ultimate differences between Canadian GAAP
and IFRS and their impact on the Corporation's consolidated financial
statements in future years. The future impacts of the IFRS will also
depend on the particular circumstances prevailing in those years. The
standards listed below are those existing based on current Canadian GAAP
and IFRS. At this stage, the Corporation is not able to reliably quantify
the expected impacts of these differences on its consolidated financial
statements. They are as follows:
- Presentation of Financial Statements (IAS 1)
- Income Taxes (IAS 12)
- Property, Plant and Equipment (IAS 16)
- Revenue (IAS 18)
- Impairment of Assets (IAS 36)
- Business Combinations (IFRS 3)
Furthermore, IFRS 1, First-Time Adoption of International Financial
Reporting Standards, provides entities adopting IFRS for the first time
with a number of optional exemptions and mandatory exceptions to the
general requirement for full retrospective application of IFRS which may
differ from the requirements of the sections listed above. The
Corporation is analyzing the various accounting policy choices available
and will implement those determined to be most appropriate in the
Corporation's circumstances. The Corporation has not yet determined the
aggregate financial impact of adopting IFRS 1 on its consolidated
financial statements.
The conversion project is progressing according to the established plan.
NON-GAAP FINANCIAL MEASURES
This section describes non-GAAP financial measures used by Cogeco Cable
throughout this MD&A. It also provides reconciliations between these
non-GAAP measures and the most comparable GAAP financial measures. These
financial measures do not have standard definitions prescribed by
Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. These measures include "cash flow from
operations", "free cash flow", "operating income before amortization",
"operating margin", "net income excluding the impairment loss and the tax
adjustments" and "earnings per share excluding the impairment loss and
the tax adjustments".
Cash flow from operations and free cash flow
Cash flow from operations is used by Cogeco Cable's management and
investors to evaluate cash flows generated by operating activities,
excluding the impact of changes in non-cash operating items. This allows
the Corporation to isolate the cash flows from operating activities from
the impact of cash management decisions. Cash flow from operations is
subsequently used in calculating the non-GAAP measure, "free cash flow".
Free cash flow is used, by Cogeco Cable's management and investors, to
measure its ability to repay debt, distribute capital to its shareholders
and finance its growth.
Cash flow from operations is calculated as follows:
-------------------------------------------------------------------------
--
-----------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from
operating
activities 102,736 112,799 249,650 249,135
Changes in non-cash
operating items (7,926) (16,970) 35,856 11,720
-------------------------------------------------------------------------
Cash flow from
operations 94,810 95,829 285,506 260,855
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Free cash flow is
calculated as follows:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from
operations 94,810 95,829 285,506 260,855
Acquisition of
fixed assets (56,501) (50,907) (184,291) (160,062)
Increase in
deferred charges (5,256) (7,050) (18,242) (20,561)
Assets acquired
under capital leases - as per note 13 b) (1,162) (971)
(2,320) (2,417)
-------------------------------------------------------------------------
Free cash flow 31,891 36,901 80,653 77,815
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income before amortization and operating margin
Operating income before amortization is used by Cogeco Cable's management
and investors to assess the Corporation's ability to seize growth
opportunities in a cost effective manner, to finance its ongoing
operations and to service its debt. Operating income before amortization
is a proxy for cash flows from operations excluding the impact of the
capital structure chosen, and is one of the key metrics used by the
financial community to value the business and its financial strength.
Operating margin is a measure of the proportion of the Corporation's
revenue which is left over, before income taxes, to pay for its fixed
costs, such as interest on Indebtedness. Operating margin is calculated
by dividing operating income before amortization by revenue.
The most comparable Canadian GAAP financial measure is operating income.
Operating income before amortization and operating margin are calculated
as follows:
-------------------------------------------------------------------------
--
-----------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating income 61,218 59,283 175,836 156,567
Amortization 67,513 58,209 198,079 166,885
-------------------------------------------------------------------------
Operating income
before amortization 128,731 117,492 373,915 323,452
-------------------------------------------------------------------------
Revenue 305,672 274,944 910,030 791,879
-------------------------------------------------------------------------
Operating Margin 42.1% 42.7% 41.1% 40.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
current year's presentation to reflect the reclassification of foreign
exchange gains or losses from operating costs to financial expense.
Net income excluding the impairment loss and the tax adjustments and
earnings per share excluding the impairment loss and the tax adjustments
Net income excluding the impairment loss and the tax adjustments and
earnings per share excluding the impairment loss and the tax adjustments
are used by Cogeco Cable's management and investors to evaluate what
would have been the net income and earnings per share excluding these
adjustments. This allows the Corporation to isolate the unusual
adjustments in order to evaluate the net income and earnings per share
from ongoing activities.
The most comparable Canadian GAAP financial measures are net income and
earnings per share. Net income excluding the impairment loss and the tax
adjustments and earnings per share excluding the impairment loss and the
tax adjustments per share are calculated as follows:
-------------------------------------------------------------------------
--
-----------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss) 31,770 31,142 (303,248) 101,416
Adjustments:
Impairment loss net
of related income
taxes - - 383,630 -
Tax adjustments:
Reduction of
withholding and
stamp tax
contingent
liabilities (10,930) - (10,930) -
Utilization of
pre-acquisition
tax losses 6,142 - 6,142 -
Reduction of
Canadian federal
income tax rates - - - (24,002)
-------------------------------------------------------------------------
Net income excluding
the impairment loss
and the tax
adjustments 26,982 31,142 75,594 77,414
-------------------------------------------------------------------------
Weighted average
number of multiple
voting and
subordinate voting
shares
outstanding 48,558,526 48,502,621 48,540,837 48,460,946
Effect of dilutive
stock options 76,975 247,271 149,389 294,950
-------------------------------------------------------------------------
Weighted average
number of diluted
multiple voting
and subordinate
voting shares
outstanding 48,635,501 48,749,892 48,690,226 48,755,896
-------------------------------------------------------------------------
Earnings per share
excluding the
impairment loss
and the tax
adjustments
Basic 0.56 0.64 1.56 1.60
Diluted 0.55 0.64 1.55 1.59
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ADDITIONAL INFORMATION
This MD&A was prepared on July 9, 2009. Additional information relating
to the Corporation, including its Annual Information Form, is available
on the SEDAR website at www.sedar.com.
ABOUT COGECO CABLE
Cogeco Cable (www.cogeco.ca) is a telecommunications company, the second
largest cable operator in Ontario, Quebec and Portugal in terms of the
number of Basic Cable service customers served. Through its two-way
broadband cable networks, Cogeco Cable provides its residential customers
with Audio, Analogue and Digital Television, as well as HSI and Telephony
services. Cogeco Cable also provides, to its commercial customers, data
networking, e-business applications, video conferencing, hosting
services, Ethernet, private line, VoIP, HSI access, dark fibre, data
storage, data security and co-location services and other advanced
communication solutions. Cogeco Cable's subordinate voting shares are
listed on the Toronto Stock Exchange (TSX: CCA).
Analyst Conference Call: Friday, July 10, 2009 at 11:00 A.M. (EDT)
Media representatives may attend as listeners
only.
Please use the following dial-in number to have
access to the conference call by dialling five
minutes before the start of the conference:
Canada/USA Access Number: 1 800-820-0231
International Access Number: +1 416-640-5926
Confirmation Code: 4714736
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until July 17, by dialling:
Canada and USA access number: 1 888-203-1112
International access number: +1 647-436-0148
Confirmation code: 4714736
Supplementary Quarterly Financial Information
(unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarters ended May 31, February 28/29,
2009 2008(1) 2009 2008(1)
($000, except
percentages and per
share data) $ $ $ $
-------------------------------------------------------------------------
Revenue 305,672 274,944 304,920 265,102
Operating income
before
amortization(2) 128,731 117,492 125,461 108,658
Operating margin(2) 42.1% 42.7% 41.1% 41.0%
Amortization 67,513 58,209 66,644 55,989
Operating income 61,218 59,283 58,817 52,669
Financial expense 14,206 17,374 17,988 17,136
Reduction of
withholding and
stamp tax contingent
liabilities (10,930) - - -
Impairment of
goodwill and
intangible assets - - 399,648 -
Income taxes 26,172 10,767 (250) (14,378)
Net income (loss) 31,770 31,142 (358,569) 49,911
Net income excluding
the impairment loss
and the tax
adjustments(2) 26,982 31,142 25,061 25,909
Cash flow from
operations(2) 94,810 95,829 99,086 85,273
Cash flow from
operating
activities 102,736 112,799 118,440 90,991
Free cash flow(2) 31,891 36,901 30,965 19,305
Earnings (loss)
per share
Basic 0.65 0.64 (7.39) 1.03
Diluted 0.65 0.64 (7.39) 1.02
Earnings per share
excluding the
impairment loss and
the tax adjustments(2)
Basic 0.56 0.64 0.52 0.53
Diluted 0.55 0.64 0.51 0.53
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quarters ended November 30, August 31,
2008 2007(1) 2008(1) 2007(1)(3)
($000, except
percentages and per
share data) $ $ $ $
-------------------------------------------------------------------------
Revenue 299,438 251,833 284,908 244,314
Operating income
before
amortization(2) 119,723 97,302 122,000 102,586
Operating margin(2) 40.0% 38.6% 42.8% 42.0%
Amortization 63,922 52,687 61,414 54,164
Operating income 55,801 44,615 60,586 48,422
Financial expense 23,394 15,877 18,752 18,684
Reduction of
withholding and
stamp tax contingent
liabilities - - - -
Impairment of
goodwill and
intangible assets - - - -
Income taxes 8,856 8,375 9,968 (6,630)
Net income (loss) 23,551 20,363 31,866 36,368
Net income excluding
the impairment loss
and the tax
adjustments(2) 23,551 20,363 31,866 21,647
Cash flow from
operations(2) 91,610 79,753 99,547 83,825
Cash flow from
operating activities 28,474 45,345 143,748 112,615
Free cash flow(2) 17,797 21,609 21,075 14,861
Earnings (loss)
per share
Basic 0.49 0.42 0.66 0.79
Diluted 0.48 0.42 0.65 0.78
Earnings per share
excluding the
impairment loss and
the tax
adjustments(2)
Basic 0.49 0.42 0.66 0.47
Diluted 0.48 0.42 0.65 0.47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
current year's presentation to reflect the reclassification of foreign
exchange gains or losses from operating costs to financial expense.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
(3) Net income for the quarter ended August 31, 2007 has been adjusted to
remove income tax adjustments of $14.7 million related to the
recognition of benefits stemming from prior years' income tax losses
and minimum income tax paid, and a reduction of Canadian federal income
tax rates in addition to the adjustments described in the "Non-GAAP
financial measures" section of the Management's discussion and
analysis.
Cogeco Cable's operating results are not generally subject to material
seasonal fuctuations. However, the loss of Basic Service customers is
usually greater, and the addition of HSI service customers is generally
lower, in the third quarter, mainly due to students leaving campuses at
the end of the school year. Cogeco Cable offers its services in several
university and college towns, such as Kingston, Windsor, St. Catharines,
Hamilton, Peterborough, Trois-Rivieres and Rimouski in Canada, and
Aveiro, Covilha, Evora, Guarda and Coimbra in Portugal. Furthermore, the
third and fourth quarters' operating margin are usually higher as lower
or no management fees are paid to COGECO Inc. Under a Management
Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue
subject to a maximum amount. For more details, please refer to the
"Related Party Transactions" section.
Customer Statistics
(unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
May 31, 2009 August 31, 2008
-------------------------------------------------------------------------
Homes passed
Ontario 1,043,590 1,029,121
Quebec 512,266 502,490
-------------------------------------------------------------------------
Canada 1,555,856 1,531,611
Portugal 904,141(1) 895,923
-------------------------------------------------------------------------
Total 2,459,997 2,427,534
-------------------------------------------------------------------------
Revenue generating units
Ontario 1,472,676 1,387,054
Quebec 659,447 604,854
-------------------------------------------------------------------------
Canada 2,132,123 1,991,908
Portugal 678,076 724,966
-------------------------------------------------------------------------
Total 2,810,199 2,716,874
-------------------------------------------------------------------------
Basic Cable service customers
Ontario 600,160 596,229
Quebec 265,569 260,865
-------------------------------------------------------------------------
Canada 865,729 857,094
Portugal 264,798 296,135
-------------------------------------------------------------------------
Total 1,130,527 1,153,229
-------------------------------------------------------------------------
Discretionary service customers
Ontario 496,706 493,858
Quebec 224,792 215,820
-------------------------------------------------------------------------
Canada 721,498 709,678
Portugal - -
-------------------------------------------------------------------------
Total 721,498 709,678
-------------------------------------------------------------------------
Pay TV service customers
Ontario 105,260 97,753
Quebec 50,044 47,075
-------------------------------------------------------------------------
Canada 155,304 144,828
Portugal 66,295 57,715
-------------------------------------------------------------------------
Total 221,599 202,543
-------------------------------------------------------------------------
High Speed Internet service customers
Ontario 373,884 352,553
Quebec 135,549 120,914
-------------------------------------------------------------------------
Canada 509,433 473,467
Portugal 142,184 159,301
-------------------------------------------------------------------------
Total 651,617 632,768
-------------------------------------------------------------------------
Digital Television service customers
Ontario 320,765 288,345
Quebec 167,959 153,401
-------------------------------------------------------------------------
Canada 488,724 441,746
Portugal 45,428 24,452
-------------------------------------------------------------------------
Total 534,152 466,198
-------------------------------------------------------------------------
Telephony service customers
Ontario 177,867 149,927
Quebec 90,370 69,674
-------------------------------------------------------------------------
Canada 268,237 219,601
Portugal 225,666 245,078
-------------------------------------------------------------------------
Total 493,903 464,679
--------------------------------------------------------------------------------
-----------------------------------------------------------------
(1) The Corporation is currently assessing the number of homes passed.
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(In thousands of dollars, except Three months Nine months
per share data) ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Revenue
Service 304,721 273,736 904,523 786,820
Equipment 951 1,208 5,507 5,059
---------------------------------------------------------------------------
305,672 274,944 910,030 791,879
Operating costs 176,941 157,452 527,096 459,713
Management fees -- COGECO Inc. - - 9,019 8,714
---------------------------------------------------------------------------
Operating income before
amortization 128,731 117,492 373,915 323,452
Amortization (note 3) 67,513 58,209 198,079 166,885
---------------------------------------------------------------------------
Operating income 61,218 59,283 175,836 156,567
Financial expense (note 4) 14,206 17,374 55,588 50,387
Reduction of withholding and
stamp tax contingent liabilities
(note 5) (10,930) - (10,930) -
Impairment of goodwill and
intangible assets (note 6) - - 399,648 -
---------------------------------------------------------------------------
Income (loss) before income taxes 57,942 41,909 (268,470) 106,180
Income taxes (note 7) 26,172 10,767 34,778 4,764
---------------------------------------------------------------------------
Net income (loss) 31,770 31,142 (303,248) 101,416
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings (loss) per share (note 8)
Basic 0.65 0.64 (6.25) 2.09
Diluted 0.65 0.64 (6.25) 2.08
---------------------------------------------------------------------------
---------------------------------------------------------------------------
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(In thousands of dollars) Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Net income (loss) 31,770 31,142 (303,248) 101,416
---------------------------------------------------------------------------
Other comprehensive income
Unrealized gains (losses) on
derivative financial instruments
designated as cash flow hedges,
net of income tax recovery of
$3,847,000 and $11,000 (income
tax expense of $279,000 and
income tax recovery of $908,000
in 2008) (32,757) 1,272 (2,308) (6,879)
Reclassification to net income of
realized losses (gains) on
derivative financial instruments
designated as cash flow hedges,
net of income tax recovery of
$4,615,000 and income tax expense
of $746,000 (income tax recovery
of $199,000 and income tax
expense of $1,465,000 in 2008) 29,699 (1,091) (4,497) 8,015
Unrealized gains (losses) on
translation of a net investment
in self-sustaining foreign
subsidiaries (13,185) 23,042 11,124 47,432
Unrealized losses (gains) on
translation of long-term debts
designated as hedges of a net
investment in self-sustaining
foreign subsidiaries 11,389 (16,019) (1,527) (31,282)
---------------------------------------------------------------------------
(4,854) 7,204 2,792 17,286
---------------------------------------------------------------------------
Comprehensive income (loss) 26,916 38,346 (300,456) 118,702
---------------------------------------------------------------------------
---------------------------------------------------------------------------
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Nine months ended May 31,
(In thousands of dollars) 2009 2008
$ $
--------------------------------------------------------------------------
Balance at beginning, as previously reported 297,150 181,952
Changes in accounting policies - 1,307
--------------------------------------------------------------------------
Balance at beginning, as restated 297,150 183,259
Net income (loss) (303,248) 101,416
Dividends on multiple voting shares (5,649) (4,707)
Dividends on subordinate voting shares (11,827) (9,834)
--------------------------------------------------------------------------
Balance at end (23,574) 270,134
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO CABLE INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
May 31, 2009 August 31, 2008
(In thousands of dollars) $ $
---------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents 42,512 36,371
Accounts receivable 56,911 59,582
Income taxes receivable 10,715 2,267
Prepaid expenses 14,813 12,892
Future income tax assets 4,263 8,661
---------------------------------------------------------------------------
129,214 119,773
Fixed assets 1,270,386 1,257,965
Deferred charges 56,628 57,751
Intangible assets (note 9) 1,023,629 1,091,042
Goodwill (note 9) 153,710 487,805
Future income tax assets 2,795 4,819
---------------------------------------------------------------------------
2,636,362 3,019,155
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 52,228 10,302
Accounts payable and accrued liabilities 200,972 247,638
Income tax liabilities 26,872 20,212
Deferred and prepaid income 32,407 32,859
Derivative financial instruments - 79,791
Current portion of long-term debt (note 10) 177,466 336,807
---------------------------------------------------------------------------
489,945 727,609
Long-term debt (note 10) 898,523 718,234
Derivative financial instruments 2,319 -
Deferred and prepaid income and other
liabilities 12,351 11,859
Pension plan liabilities and accrued
employees benefits 3,742 3,139
Future income tax liabilities 240,786 253,235
---------------------------------------------------------------------------
1,647,666 1,714,076
---------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 11) 990,061 988,889
Contributed surplus 4,063 3,686
Retained earnings (deficit) (23,574) 297,150
Accumulated other comprehensive income (note 12) 18,146 15,354
---------------------------------------------------------------------------
988,696 1,305,079
---------------------------------------------------------------------------
2,636,362 3,019,155
---------------------------------------------------------------------------
---------------------------------------------------------------------------
COGECO CABLE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(In thousands of dollars) Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Cash flow from operating
activities
Net income (loss) 31,770 31,142 (303,248) 101,416
Adjustments for:
Amortization (note 3) 67,513 58,209 198,079 166,885
Amortization of deferred
transaction costs 619 730 1,910 2,183
Reduction of withholding and
stamp tax contingent
liabilities (note 5) (10,930) - (10,930) -
Impairment of goodwill and
intangible assets (note 6) - - 399,648 -
Future income taxes (note 7) 7,953 4,782 985 (12,480)
Foreign exchange gain on
unhedged long-term debt (2,376) - (2,376) -
Stock-based compensation 266 739 699 1,961
Loss on disposal of fixed assets 32 152 250 391
Other (37) 75 489 499
---------------------------------------------------------------------------
94,810 95,829 285,506 260,855
Changes in non-cash operating
items (note 13 a)) 7,926 16,970 (35,856) (11,720)
---------------------------------------------------------------------------
102,736 112,799 249,650 249,135
---------------------------------------------------------------------------
Cash flow from investing
activities
Acquisition of fixed assets
(note 13 b) (56,501) (50,907) (184,291) (160,062)
Increase in deferred charges (5,256) (7,050) (18,242) (20,561)
Business acquisitions, net of
cash and cash equivalents
acquired - (16,105) - (16,105)
Other 198 48 259 73
---------------------------------------------------------------------------
(61,559) (74,014) (202,274) (196,655)
---------------------------------------------------------------------------
Cash flow from financing
activities
Increase (decrease) in bank
indebtedness 17,666 (17,697) 41,926 -
Net repayments under the term
facility (56,491) (58,600) (79,494) (123,066)
Issuance of long-term debt, net
of transaction costs - 99,759 254,771 99,759
Repayments of long-term debt and
settlement of derivative
financial instruments (842) (717) (241,388) (1,972)
Issue of subordinate voting
shares - 62 964 3,354
Dividends on multiple voting
shares (1,883) (1,569) (5,649) (4,707)
Dividends on subordinate voting
shares (3,944) (3,281) (11,827) (9,834)
---------------------------------------------------------------------------
(45,494) 17,957 (40,697) (36,466)
---------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents
denominated in foreign
currencies (1,866) 1,063 (538) 1,265
---------------------------------------------------------------------------
Net change in cash and cash
equivalents (6,183) 57,805 6,141 17,279
Cash and cash equivalents at
beginning 48,695 23,682 36,371 64,208
---------------------------------------------------------------------------
Cash and cash equivalents at end 42,512 81,487 42,512 81,487
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See supplemental cash flow information in note 13.
COGECO CABLE INC.
Notes to Consolidated Financial Statements May 31, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and
per share data)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim
consolidated financial statements, prepared in accordance with Canadian
generally accepted accounting principles ("GAAP"), present fairly the
financial position of Cogeco Cable Inc. ("the Corporation") at May 31,
2009 and August 31, 2008 as well as its results of operations and its
cash flows for the three and nine month periods ended May 31, 2009 and
2008.
While management believes that the disclosures presented are adequate,
these unaudited interim consolidated financial statements and notes
should be read in conjunction with Cogeco Cable Inc.'s annual
consolidated financial statements for the year ended August 31, 2008.
These unaudited interim consolidated financial statements follow the same
accounting policies as the most recent annual consolidated financial
statements, except for the adoption of the new accounting policies
described below.
Adoption of new accounting policies
Capital disclosures and financial instruments
Effective September 1, 2008, the Corporation adopted the Canadian
Institute of Chartered Accountants ("CICA") Handbook Section 1535,
Capital Disclosures, Section 3862, Financial Instruments - Disclosures
and Section 3863,
Financial Instruments - Presentation.
Capital disclosures
Section 1535 of the CICA Handbook requires that an entity disclose
information that enables users of its financial statements to evaluate
the entity's objectives, policies and processes for managing capital,
including disclosures of any externally imposed capital requirements and
the consequences for non-compliance. These new disclosures are included
in note 15.
Financial instruments
Section 3862 on financial instrument disclosures requires the disclosure
of information about the significance of financial instruments for the
entity's financial position and performance and the nature and extent of
risks arising from financial instruments to which the entity is exposed
during the period and at the balance sheet date, and how the entity
manages those risks.
Section 3863 establishes standards for presentation of financial
instruments and non-financial derivatives. It deals with the
classification of financial instruments, from the perspective of the
issuer, between liabilities and equities, the classification of related
interest, dividends, gains and losses, and circumstances in which
financial assets and financial liabilities are offset.
The adoption of these standards did not have any impact on the
classification and measurements of the Corporation's financial
instruments. The new disclosures pursuant to these new Sections are
included in note 15.
General standards of financial statement presentation
The CICA amended Section 1400 of the CICA Handbook, General Standards of
Financial Statement Presentation, to include a requirement for management
to make an assessment of the entity's ability to continue as a going
concern when preparing financial statements. These changes, including the
related disclosure requirements, were adopted by the Corporation on
September 1, 2008 and had no impact on the interim consolidated financial
statements.
Credit risk and fair value of financial assets and financial liabilities
On January 20, 2009, the Emerging Issues Committee ("EIC") of the
Canadian Accounting Standards Board issued EIC Abstract 173, Credit Risk
and Fair Value of Financial Assets and Financial Liabilities, which
establishes guidance requiring an entity to consider its own credit risk
as well as the credit risk of the counterparty in determining the fair
value of financial assets and financial liabilities, including derivative
instruments. EIC 173 is applicable to all financial assets and
liabilities measured at fair value in interim and annual financial
statements for periods ending on or after January 20, 2009 and was
applicable to the Corporation for its second quarter of fiscal 2009 with
retrospective application, without restatement of prior periods, to the
beginning of its current fiscal year. The adoption of this new abstract
during the second quarter decreased derivative financial instruments
assets by $3.5 million, decreased future income tax liabilities by $1
million and decreased accumulated other comprehensive income by $2.6
million at December 1, 2008 and had no significant impact on the
consolidated balance sheet at September 1, 2008.
Future accounting pronouncements
Business combinations, consolidated financial statements and
non-controlling interests
During January 2009, the CICA issued Handbook Section 1582, Business
Combinations, which replaces Section 1581 of the same name, and Sections
1601, Consolidated Financial Statements and 1602, Non-Controlling
Interests, which together replace Section 1600, Consolidated Financial
Statements. These new Sections harmonize significant aspects of Canadian
accounting standards with the International Financial Reporting Standards
("IFRS") that will be mandated for entities with fiscal year beginning on
or after January 1, 2011. Section 1582 requires that all business
acquisitions be measured at the fair value of the acquired entity at the
acquisition date even if the business combination is achieved in stages,
or if less than 100% of the equity interest in the acquiree is owned at
the acquisition date, and expands the definition of a business subject to
an acquisition. The Section also establishes new guidance on the
measurement of consideration given and the recognition and measurement of
assets acquired and liabilities assumed in a business combination.
Furthermore, under this new guidance, acquisition costs, which were
previously included as a component of the consideration given, and any
negative goodwill resulting from the allocation of the purchase price,
which was allocated as a reduction of non-current assets acquired under
the previous standard, will be recorded in earnings in the current
period. This new Section will be applied prospectively and will only
impact the Corporation's consolidated financial statements for future
acquisitions concluded in periods subsequent to the date of adoption.
Sections 1601 and 1602 dealing with consolidated financial statements
require an entity to measure non-controlling interest upon acquisition
either at fair value or at the non-controlling interest's proportionate
share of the acquiree's identifiable net assets. The new Sections also
require non-controlling interest to be presented as a separate component
of shareholders' equity.
The new standards will apply as of the beginning of the first annual
reporting period beginning on or after January 1, 2011, with simultaneous
early adoption permitted. Early adoption may reduce the amount of
restatement required upon conversion to IFRS. The Corporation is
currently assessing the impact of these new Sections on its consolidated
financial statements.
Harmonization of Canadian and International accounting standards
In March 2006, the Accounting Standards Board of the CICA released its
new strategic plan, which proposed to abandon Canadian GAAP and effect a
complete convergence to the IFRS for publicly accountable entities.
In April 2008, the CICA published an exposure draft as guidance which
requires the transition to IFRS to replace Canadian GAAP as currently
employed by Canadian publicly accountable enterprises. In March 2009, the
CICA issued its second exposure draft on that matter which addresses
additional IFRS standards, considers comments received to date and
clarifies certain matters. The changeover will occur no later than fiscal
years beginning on or after January 1, 2011. Accordingly, the Corporation
expects that its first interim consolidated financial statements
presented in accordance with IFRS will be for the three-month period
ending November 30, 2011, and its first annual consolidated financial
statements presented in accordance with IFRS will be for the year ending
August 31, 2012.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are
significant differences in recognition, measurement and disclosure
requirements. The Corporation has established a project team including
representatives from various areas of the organization to plan and
complete the transition to IFRS. This team reports periodically to the
Audit Committee, who oversees the IFRS implementation project on behalf
of the Board of Directors. The Corporation will be assisted by external
advisors as required.
The implementation project consists of three primary phases, which may
occur concurrently as IFRS are applied to specific areas of operations:
- Scoping and diagnostic phase - This phase involves performing a
high-level impact assessment to identify key areas that are expected to
be impacted by the transition to IFRS. The result of these procedures is
the ranking of IFRS impacts in order of priority to assess the timing and
complexity of transition efforts that will be required in subsequent
phases.
- Impact analysis, evaluation and design phase - In this phase, each area
identified from the scoping and diagnostic phase will be addressed in
order of descending priority, with project teams established as deemed
necessary. This phase involves specification of changes required to
existing accounting policies, information systems and business processes,
together with an analysis of policy choices permitted under IFRS and the
development of draft IFRS financial statement content.
- Implementation and review phase - This phase includes execution of
changes to information systems and business processes, completing formal
authorization processes to approve recommended accounting policy changes
and training programs across the organization, as necessary. It will
culminate in the collection of financial information necessary to compile
IFRS-compliant financial statements, embedding IFRS in business
processes, eliminating any unnecessary data collection processes and
finally the approval by the Audit Committee of the IFRS consolidated
financial statements. Implementation also involves additional staff
training with the deployment of revised systems.
The Corporation completed the scoping and diagnostic phase in February
2009, and is now conducting the impact analysis, evaluation and design
phase. As implications of the conversion are identified, impact on
information technology, data systems and business activities will be
assessed. The Corporation's analysis of the IFRS and the comparison with
currently applied accounting principles has identified a number of
differences that may require information system changes or which are
likely to have a material impact on the consolidated financial statements
of the Corporation.
Set out below are the main areas where changes in accounting policies are
expected to have a significant impact on the Corporation's consolidated
financial statements. The list below should not be regarded as a complete
list of changes that will result from transition to the IFRS. It is
intended to highlight areas that the Corporation believes to be the most
significant; however, analysis of changes is still in process and the
selection of accounting policies where choices are available under IFRS
has not been completed. We note that the regulatory bodies that
promulgate the Canadian GAAP and the IFRS have significant ongoing
projects that could affect the ultimate differences between Canadian GAAP
and IFRS and their impact on the Corporation's consolidated financial
statements in future years. The future impacts of the IFRS will also
depend on the particular circumstances prevailing in those years. The
standards listed below are those existing based on current Canadian GAAP
and IFRS. At this stage, the Corporation is not able to reliably quantify
the expected impacts of these differences on its consolidated financial
statements. They are as follows:
- Presentation of Financial Statements (IAS 1)
- Income Taxes (IAS 12)
- Property, Plant and Equipment (IAS 16)
- Revenue (IAS 18)
- Impairment of Assets (IAS 36)
- Business Combinations (IFRS 3)
Furthermore, IFRS 1, First-Time Adoption of International Financial
Reporting Standards, provides entities adopting IFRS for the first time
with a number of optional exemptions and mandatory exceptions to the
general requirement for full retrospective application of IFRS which may
differ from the requirements of the sections listed above. The
Corporation is analyzing the various accounting policy choices available
and will implement those determined to be most appropriate in the
Corporation's circumstances. The Corporation has not yet determined the
aggregate financial impact of adopting IFRS 1 on its consolidated
financial statements.
The conversion project is progressing according to the established plan.
2. Segmented Information
The Corporation's activities are comprised of Cable Television, High
Speed Internet and Telephony services. The Corporation considers its
Cable Television, High Speed Internet and Telephony activities as a
single operating segment. The Corporation's activities are carried out in
Canada and in Europe.
The principal financial information per business segment is presented in
the tables below:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Canada Europe Consolidated
---------------------------------------------------------------------------
Three months
ended May 31, 2009 2008 2009 2008 2009 2008
$ $ $ $ $ $
---------------------------------------------------------------------------
Revenue 248,101 210,928 57,571 64,016 305,672 274,944
Operating
costs 134,309 117,512 42,632 39,940 176,941 157,452
Operating
income before
amortization 113,792 93,416 14,939 24,076 128,731 117,492
Amortization 49,038 38,219 18,475 19,990 67,513 58,209
Operating
income (loss) 64,754 55,197 (3,536) 4,086 61,218 59,283
Financial
expense
(revenue) 14,360 17,561 (154) (187) 14,206 17,374
Reduction of
withholding
and stamp tax
contingent
liabilities - - (10,930) - (10,930) -
Income taxes 16,445 12,157 9,727 (1,390) 26,172 10,767
Net income
(loss) 33,949 25,479 (2,179) 5,663 31,770 31,142
---------------------------------------------------------------------------
Total
assets(1) 2,260,410 2,214,840 375,952 804,315 2,636,362 3,019,155
Fixed assets(1) 978,596 940,683 291,790 317,282 1,270,386 1,257,965
Intangible
assets(1) 1,023,629 1,027,268 - 63,774 1,023,629 1,091,042
Goodwill(1) 116,890 116,890 36,820 370,915 153,710 487,805
Acquisition of
fixed assets(2) 44,488 39,572 13,175 12,306 57,663 51,878
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) At May 31, 2009 and August 31, 2008.
(2) Includes capital leases that are excluded from the statements of cash
flows.
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Canada Europe Consolidated
---------------------------------------------------------------------------
Nine months
ended May 31, 2009 2008 2009 2008 2009 2008
$ $ $ $ $ $
---------------------------------------------------------------------------
Revenue 729,155 612,337 180,875 179,542 910,030 791,879
Operating
costs 399,838 343,566 127,258 116,147 527,096 459,713
Management
fees -
COGECO Inc. 9,019 8,714 - - 9,019 8,714
Operating
income before
amortization 320,298 260,057 53,617 63,395 373,915 323,452
Amortization 137,355 110,990 60,724 55,895 198,079 166,885
Operating
income (loss) 182,943 149,067 (7,107) 7,500 175,836 156,567
Financial
expense
(revenue) 55,853 50,710 (265) (323) 55,588 50,387
Reduction of
withholding
and stamp tax
contingent
liabilities - - (10,930) - (10,930) -
Impairment of
goodwill and
intangible
assets - - 399,648 - 399,648 -
Income taxes 42,386 8,341 (7,608) (3,577) 34,778 4,764
Net income
(loss) 84,704 90,016 (387,952) 11,400 (303,248) 101,416
---------------------------------------------------------------------------
Total
assets(1) 2,260,410 2,214,840 375,952 804,315 2,636,362 3,019,155
Fixed
assets(1) 978,596 940,683 291,790 317,282 1,270,386 1,257,965
Intangible
assets(1) 1,023,629 1,027,268 - 63,774 1,023,629 1,091,042
Goodwill(1) 116,890 116,890 36,820 370,915 153,710 487,805
Acquisition
of fixed
assets(2) 154,686 125,042 31,925 37,437 186,611 162,479
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) At May 31, 2009 and August 31, 2008.
(2) Includes capital leases that are excluded from the statements of cash
flows.
3. Amortization
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Fixed assets 60,027 49,953 170,811 142,646
Deferred charges 6,293 5,481 18,142 16,473
Intangible assets 1,193 2,775 9,126 7,766
--------------------------------------------------------------------------
67,513 58,209 198,079 166,885
--------------------------------------------------------------------------
--------------------------------------------------------------------------
4. Financial expense
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Interest on long-term debt 15,172 17,455 52,062 50,534
Foreign exchange losses (gains) (1,687) 2 2,716 (856)
Amortization of deferred
transaction costs 408 408 1,222 1,222
Other 313 (491) (412) (513)
---------------------------------------------------------------------------
14,206 17,374 55,588 50,387
---------------------------------------------------------------------------
---------------------------------------------------------------------------
5. Reduction of withholding and stamp tax contingent liabilities
The Corporation's Portuguese subsidiary, Cabovisao - Televisao por Cabo,
S.A. ("Cabovisao"), had recorded contingent liabilities for withholding
and stamp taxes relating to fiscal years prior to its acquisition. At the
date of acquisition, the amount accrued represented management's best
estimate based on the available information. Management reviews its
estimates periodically to take into consideration payments made relating
to these contingencies as well as newly available information which would
allow the Corporation to improve its previous estimate. During the third
quarter of fiscal 2009, Cabovisao received a preliminary report from the
Portuguese tax authorities with respect to some of the items included in
the contingent liabilities. Accordingly, management has reviewed its
estimate of the contingent liabilities to reflect the new information
available in this preliminary report, and has determined that a reduction
of EUR 7 million, equivalent to $10.9 million, of the amount previously
accrued was required at May 31, 2009, in order to reflect management's
best estimate.
6. Impairment of goodwill and intangible assets
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Impairment of goodwill - - 339,206 -
Impairment of intangible assets - - 60,442 -
- - 399,648 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
In the second quarter of fiscal 2009, the competitive position of
Cabovisao in the Iberian Peninsula further deteriorated due to the
continuing unfavourable economic climate and recurring intense customer
promotions and advertising initiatives from competitors in the Portuguese
market. In accordance with current accounting standards, management
considers that the continued RGU and local currency revenue decline are
more severe and persistent than expected, resulting in a decrease in the
value of the Corporation's investment in the Portuguese subsidiary. As a
result, the Corporation tested goodwill and all long-lived assets for
impairment at February 28, 2009.
Goodwill is tested for impairment using a two step approach. The first
step consists of determining whether the fair value of the reporting unit
exceeds the net carrying amount of that reporting unit, including
goodwill. In the event that the net carrying amount exceeds the fair
value, a second step is performed in order to determine the amount of the
impairment loss. The Corporation has completed its impairment tests on
goodwill and has concluded that goodwill was impaired at February 28,
2009. As a result, an impairment loss of $339.2 million was recorded in
the second quarter. Fair value of the reporting unit was determined using
the discounted cash flow method. Future cash flows are based on internal
forecasts and consequently, considerable management judgement is
necessary to estimate future cash flows. Significant changes in
assumptions could result in further impairments of goodwill.
Intangible assets with definite lives, such as customer relationships,
must be tested for impairment by comparing the carrying amount of the
asset or group of assets to the expected future undiscounted cash flow to
be generated by the asset or group of assets. Accordingly, the
Corporation has completed its impairment test on customer relationships
at February 28, 2009, and has determined that the carrying value of
customer relationships exceeds its fair value. As a result, an impairment
loss of $60.4 million was recorded in the second quarter.
7. Income Taxes
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Current 18,219 5,985 33,793 17,244
Future 7,953 4,782 985 (12,480)
---------------------------------------------------------------------------
26,172 10,767 34,778 4,764
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The following table provides a reconciliation between Canadian statutory
federal and provincial income taxes and the consolidated income tax
expense:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Income (loss) before income taxes 57,942 41,909 (268,470) 106,180
Combined income tax rate 32.56% 33.51% 32.56% 33.51%
Income taxes at combined
income tax rate 18,866 14,044 (87,413) 35,581
Adjustment for loss or income
subject to lower or higher
tax rates (109) (1,006) (667) (1,688)
Decrease in future income
taxes as a result of decreases
in substantively enacted tax
rates - - - (24,002)
Decrease in income tax
recovery arising from the non
deductible impairment of
goodwill - - 89,890 -
Utilization of pre-acquisition
tax losses 6,142 - 6,142 -
Decrease in income tax
recovery arising from non
deductible expenses 146 292 318 585
Effect of foreign income tax
rate differences 1,127 (2,821) 25,155 (6,198)
Other - 258 1,353 486
---------------------------------------------------------------------------
Income taxes at effective
income tax rate 26,172 10,767 34,778 4,764
---------------------------------------------------------------------------
---------------------------------------------------------------------------
8. Earnings (loss) per Share
The following table provides a reconciliation between basic and diluted
earnings (loss) per share:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Net income (loss) 31,770 31,142 (303,248) 101,416
Weighted average
number of
multiple voting and
subordinate voting
shares
outstanding 48,558,526 48,502,621 48,540,837 48,460,946
Effect of dilutive
stock options (1) - 247,271 - 294,950
---------------------------------------------------------------------------
Weighted average
number of
diluted multiple
voting and
subordinate voting
shares outstanding 48,558,526 48,749,892 48,540,837 48,755,896
---------------------------------------------------------------------------
Earnings (loss) per share
Basic 0.65 0.64 (6.25) 2.09
Diluted 0.65 0.64 (6.25) 2.08
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) The weighted average dilutive potential number of subordinate
voting shares, which were antidilutive for the three and nine month
periods ended May 31, 2009 amounted to 76,975 and 149,389. For the three
and nine month periods ended May 31, 2009, 246,759 and 199,038 stock
options (114,879 and 103,963 in 2008) were excluded from the calculation
of diluted earnings (loss) per share as the exercise price of the options
was greater than the average share price of the subordinate voting shares.
9. Goodwill and Intangible Assets
---------------------------------------------------------
------------------
---------------------------------------
May 31, 2009 August 31, 2008
$ $
---------------------------------------------------------
Customer relationships 34,077 101,490
Customer base 989,552 989,552
---------------------------------------------------------
1,023,629 1,091,042
Goodwill 153,710 487,805
---------------------------------------------------------
1,177,339 1,578,847
---------------------------------------------------------
---------------------------------------------------------
a) Intangible assets
During the first nine months, intangible assets variations were as follows:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Customer Customer
relationships base Total
$ $ $
---------------------------------------------------------------------------
Balance at August 31, 2008 101,490 989,552 1,091,042
Amortization (9,126) - (9,126)
Foreign currency translation adjustment 2,155 - 2,155
Impairment (note 6) (60,442) - (60,442)
---------------------------------------------------------------------------
Balance at May 31, 2009 34,077 989,552 1,023,629
---------------------------------------------------------------------------
---------------------------------------------------------------------------
b) Goodwill
During the first nine months, goodwill variation was as follows:
---------------------------------------------------
---------------------------------------------------
$
---------------------------------------------------
Balance at August 31, 2008 487,805
Foreign currency translation adjustment 11,253
Recognition of pre-acquisition tax losses (6,142)
Impairment (note 6) (339,206)
---------------------------------------------------
Balance at May 31, 2009 153,710
---------------------------------------------------
---------------------------------------------------
10. Long-Term Debt
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Maturity Interest May 31, August 31,
rate 2009 2008
% $ $
---------------------------------------------------------------------------
Parent company
Term Facility
Term loan - EUR
94,096,350 2011 1.69(1)(4) 144,712 145,832
Term loan - EUR
17,358,700 2011 1.69(1)(4) 26,668 26,881
Revolving loan -
EUR 69,250,000
(EUR 126,000,000
at August 31, 2008) 2011 1.63(1) 106,873 196,308
Revolving loan 2011 1.22(1) 104,918 94,375
Senior Secured
Debentures
Series 1 2009 6.75 149,989 149,814
Senior Secured Notes
Series A - US$150
million 2008 6.83(2) - 159,233
Series B 2011 7.73 174,482 174,338
Senior Secured Notes(3)
Series A - US$190
million 2015 7.00 205,923 -
Series B 2018 7.60 54,568 -
Senior Unsecured
Debenture 2018 5.94 99,782 99,768
Subsidiaries
Obligations under
capital leases 2013 6.47 - 9.93 8,074 8,492
---------------------------------------------------------------------------
1,075,989 1,055,041
Less current portion 177,466 336,807
---------------------------------------------------------------------------
898,523 718,234
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Average interest rate on debt at May 31, 2009, including stamping fees.
(2) Cross-currency swap agreements have resulted in an effective interest
rate of 7.254% on the Canadian dollar equivalent of the US denominated
debt.
(3) On October 1, 2008, the Corporation issued US$190 million Senior
Secured Notes Series A maturing October 1, 2015, and $55 million
Senior Secured Notes Series B maturing October 1, 2018, net of
transaction costs of $2.1 million. The Senior Secured Notes Series B
bear interest at the coupon rate of 7.60% per annum, payable
semi-annually. The Corporation has entered into cross-currency swap
agreements to fix the liability for interest and principal payments on
the Senior Secured Notes Series A in the amount of US$190 million,
which bear interest at the coupon rate of 7.00% per annum, payable
semi-annually. Taking into account these agreements, the effective
interest rate on the Senior Secured Notes Series A is 7.24% and
the exchange rate applicable to the principal portion of the
US dollar-denominated debt has been fixed at $1.0625.
(4) On January 21, 2009, the Corporation entered into a swap agreement
with a financial institution to fix the floating benchmark interest
rate with respect to the Euro-denominated Term Loan facilities for
a notional amount of EUR 111.5 million. The interest swap rate to
hedge the Term Loans has been fixed at 2.08% until their maturity
of July 28, 2011. The notional value of the swap will decrease in
line with the amortization schedule of the Term Loans. In addition
to the interest swap rate of 2.08%, the Corporation will continue
to pay the applicable margin on these Term Loans in accordance with
the Term Facility.
11. Capital Stock
Authorized, an unlimited number
Class A Preference shares, non-voting, redeemable by the Corporation and
retractable at the option of the holder at any time at a price of $1 per
share, carrying a cumulative preferential cash dividend at a rate of 11%
of the redemption price per year.
Class B Preference shares, non-voting, issuable in series.
Multiple voting shares, 10 votes per share.
Subordinate voting shares, 1 vote per share.
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
May 31, 2009 August 31, 2008
$ $
--------------------------------------------------------------------------
Issued
15,691,100 multiple voting shares 98,346 98,346
32,867,426 subordinate voting shares
(32,826,611
at August 31, 2008) 891,715 890,543
--------------------------------------------------------------------------
990,061 988,889
--------------------------------------------------------------------------
--------------------------------------------------------------------------
During the first nine months, subordinate voting share transactions were as
follows:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Number of shares Amount
$
---------------------------------------------------------------------------
Balance at August 31, 2008 32,826,611 890,543
Shares issued for cash under the Employee Stock
Purchase Plan and Stock Option Plan 40,815 964
Compensation expense previously recorded in
contributed surplus for options exercised - 208
---------------------------------------------------------------------------
Balance at May 31, 2009 32,867,426 891,715
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Stock-based plans
The Corporation offers, for the benefit of its employees and those of its
subsidiaries, an Employee Stock Purchase Plan and a Stock Option Plan for
certain executives, which are described in the Corporation's annual
consolidated financial statements. During the first nine months, the
Corporation granted 138,381 stock options (113,084 in 2008) with an
exercise price ranging from $31.90 to $34.46 ($41.45 to $49.82 in 2008)
of which 29,711 stock options (22,683 in 2008) were granted to COGECO
Inc.'s employees. During the three and nine month periods ended May 31,
2009, the Corporation charged an amount of $81,000 and $172,000 ($99,000
and $280,000 in 2008) with regards to the Corporation's options granted
to COGECO Inc.'s employees. The Corporation records compensation expense
for options granted on or after September 1, 2003. As a result, a
compensation expense of $229,000 and $413,000 ($496,000 and $1,222,000 in
2008) was recorded for the three and nine month periods ended May 31,
2009.
The fair value of stock options granted for the nine month period ended
May 31, 2009 was $7.70 ($12.59 in 2008) per option. The fair value of
each option granted was estimated at the grant date for purposes of
determining the stock-based compensation expense using the binomial
option pricing model based on the following assumptions:
------------------------------------------------------------
---------------
---------------------------------------------
2009 2008
% %
------------------------------------------------------------
Expected dividend yield 1.40 0.90
Expected volatility 29 27
Risk-free interest rate 4.22 4.25
Expected life in years 4.0 4.0
------------------------------------------------------------
------------------------------------------------------------
At May 31, 2009, the Corporation had outstanding stock options
providing for the subscription of 701,745 subordinate voting shares.
These stock options, which include 10,400 conditional stock options, can
be exercised at various prices ranging from $7.05 to $49.82 and at
various dates up to April 8, 2019. On April 6, 2009, the Corporation
cancelled 206,180 stock options which had been conditionally granted in
relation with the acquisition of Cabovisao, at a price of $26.63 per
share, subject to performance criteria of Cabovisao being met. Of these
options, 112,662 were still conditional.
The Corporation also offers a deferred share unit plan ("DSU Plan") which
is described in the Corporation's annual consolidated financial
statements. During the first nine months, 6,282 deferred share units were
awarded to the participants in connection with the DSU Plan. Reduction of
expense of $44,000 and expenses of $114,000 were recorded for the three
and nine month periods ended May 31, 2009 for the liability related to
this plan.
12. Accumulated Other Comprehensive Income
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Translation of a net
investment in self-
sustaining foreign Cash flow
subsidiaries hedges Total
$ $ $
---------------------------------------------------------------------------
Balance at August 31, 2008 15,660 (306) 15,354
Other comprehensive income (loss) 9,597 (6,805) 2,792
---------------------------------------------------------------------------
Balance at May 31, 2009 25,257 (7,111) 18,146
---------------------------------------------------------------------------
---------------------------------------------------------------------------
13. Statements of Cash Flows
a) Changes in non-cash operating items
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Accounts receivable 2,082 (174) 2,774 (4,594)
Income taxes receivable (1,563) 32 (8,479) 4
Prepaid expenses (2,032) 1,209 (2,022) 1,778
Accounts payable and accrued
liabilities (6,783) 10,133 (34,876) (22,366)
Income tax liabilities 16,579 5,511 6,706 14,352
Deferred and prepaid income
and other liabilities (357) 259 41 (894)
---------------------------------------------------------------------------
7,926 16,970 (35,856) (11,720)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
b) Other information
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Fixed asset acquisitions
through capital leases 1,162 971 2,320 2,417
Interest paid 22,346 20,215 56,060 52,099
Income taxes paid 3,203 524 35,569 2,997
---------------------------------------------------------------------------
---------------------------------------------------------------------------
14. Employees Future Benefits
The Corporation and its Canadian subsidiaries offer their employees
contributory defined benefit pension plans, a defined contribution
pension plan or a collective registered retirement savings plan, which
are described in the Corporation's annual consolidated financial
statements. The total expenses related to these plans are as follows:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
---------------------------------------------------------------------------
Contributory defined benefit
pension plans 364 283 1,056 847
Defined contribution pension
plan and collective registered
retirement savings plan 1,065 767 2,841 2,206
---------------------------------------------------------------------------
1,429 1,050 3,897 3,053
---------------------------------------------------------------------------
---------------------------------------------------------------------------
15. Financial and Capital Management
a) Financial management
Management's objectives are to protect Cogeco Cable Inc. and its
subsidiaries against material economic exposures and variability of
results, and against certain financial risks including credit risk,
liquidity risk, interest rate risk and foreign exchange risk.
Credit risk
Credit risk represents the risk of financial loss for the Corporation if
a customer or counterparty to a financial asset fails to meet its
contractual obligations. The Corporation is exposed to credit risk
arising from the derivative financial instruments, cash and cash
equivalents and trade accounts receivable, the maximum exposure of which
is represented by the carrying amounts reported on the balance sheet.
Credit risk from the derivative financial instruments arises from the
possibility that counterparties to the cross-currency swap and interest
rate swap agreements may default on their obligations in instances where
these agreements have positive fair values for the Corporation. The
Corporation reduces this risk by completing transactions with financial
institutions that carry a credit rating equal to or superior to its own
credit rating. The Corporation assesses the creditworthiness of the
counterparties in order to minimize the risk of counterparties default
under the agreements. At May 31, 2009, management believes that the
credit risk relating to its swaps is minimal, since the lowest credit
rating of the counterparties to the agreements is A-.
Cash and cash equivalents consist mainly of highly liquid investments,
such as money market deposits. The Corporation has deposited the cash and
cash equivalents with reputable financial institutions, from which
management believes the risk of loss to be remote.
The Corporation is also exposed to credit risk in relation to its trade
accounts receivable. In the current global economic environment, the
Corporation's credit exposure is higher but it is difficult to predict
the impact this could have on the Corporation's accounts receivable
balances. To mitigate such risk, the Corporation continuously monitors
the financial condition of its customers and reviews the credit history
or worthiness of each new major customer. At May 31, 2009, no customer
balance represents a significant portion of the Corporation's
consolidated trade receivables. The Corporation establishes an allowance
for doubtful accounts based on specific credit risk of its customers by
examining such factors as the number of overdue days of the customer's
balance outstanding as well as the customer's collection history. The
Corporation believes that its allowance for doubtful accounts is
sufficient to cover the related credit risk. The Corporation has credit
policies in place and has established various credit controls, including
credit checks, deposits on accounts and advance billing, and has also
established procedures to suspend the availability of services when
customers have fully utilized approved credit limits or have violated
existing payment terms. Since the Corporation has a large and diversified
clientele dispersed throughout it's market area in Canada and Portugal,
there is no significant concentration of credit risk. The following table
provides further details on the Corporation's accounts receivable
balances:
--------------------------------------------------------------
-------------
-------------------------------------------------
May 31, 2009 August 31, 2008
$ $
--------------------------------------------------------------
Trade accounts receivable 68,281 66,559
Allowance for doubtful accounts (16,265) (12,357)
--------------------------------------------------------------
52,016 54,202
Other accounts receivable 4,895 5,380
--------------------------------------------------------------
56,911 59,582
--------------------------------------------------------------
--------------------------------------------------------------
The following table provides further details on trade accounts
receivable, net of allowance for doubtful accounts. Trade accounts
receivable past due is defined as amount outstanding beyond normal credit
terms and conditions for the respective customers. A large portion of the
Corporation's customers are billed in advance and are required to pay
before their services are rendered. The Corporation considers amount
outstanding at the due date as trade accounts receivable past due.
-------------------------------------------------------------------------
--
-----------------------------------------------------------------------
May 31, 2009 August 31, 2008
$ $
-------------------------------------------------------------------------
Net trade accounts receivable not past due 40,243 40,945
Net trade accounts receivable past due 11,773 13,257
-------------------------------------------------------------------------
52,016 54,202
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity risk
Liquidity risk is the risk that the Corporation will not be able to meet
its financial obligations as they become due. The Corporation manages
liquidity risk through the management of its capital structure and access
to different capital markets. It also manages liquidity risk by
continuously monitoring actual and projected cash flows to ensure
sufficient liquidity to meet its obligations when due. At May 31, 2009,
the available amount of the Corporation's Term Facility was $459.6
million. Management believes that the committed Term Facility will, until
its maturity in July 2011, provide sufficient liquidity to manage its
long-term debt maturities and support working capital requirements.
The following table summarizes the contractual maturities of the
financial liabilities and related capital amounts:
---------------------------------------------------------------------------
2009 2010 2011
(three months) (twelve months) (twelve months)
$ $ $
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Bank indebtedness 52,228 - -
Accounts payable and accrued
liabilities 200,972 - -
Long-term debt (1) 174,203 40,339 319,340
Derivative financial
instruments
Cash outflows (Canadian
dollar) - - -
Cash inflows (Canadian
dollar
equivalent of US dollar) - - -
Obligations under capital
leases (2) 1,931 3,249 2,324
---------------------------------------------------------------------------
429,334 43,588 321,664
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2012 2013 Thereafter Total
(twelve months) (twelve months)
$ $ $ $
---------------------------------------------------------------------------
Bank indebtedness - - - 52,228
Accounts payable and accrued
liabilities - - - 200,972
Long-term debt (1) 175,000 - 362,423 1,071,305
Derivative financial
instruments
Cash outflows (Canadian
dollar) - - 201,875 201,875 Cash
inflows (Canadian
dollar equivalent of
US dollar) - - (207,423) (207,423)
Obligations under capital
leases (2) 1,590 269 - 9,363
---------------------------------------------------------------------------
176,590 269 356,875 1,328,320
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Principal excluding obligations under capital leases.
(2) Including interest.
The following table is a summary of interest payable on long-term debt
(excluding interest on capital leases) that are due for each of the next
five years and thereafter, based on the principal and interest rate
prevailing on the current debt at May 31, 2009 and their respective
maturities:
---------------------------------------------------------------------------
2009 2010 2011
(three months) (twelve months) (twelve months)
$ $ $
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Interest payments on
long-term debt 10,988 43,621 42,595
Interest payments on
derivative
financial instruments 4,812 18,696 17,398
Interest receipts on
derivative financial
instruments (4,322) (16,957) (16,182)
---------------------------------------------------------------------------
11,478 45,360 43,811
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2012 2013 Thereafter Total
(twelve months) (twelve months)
$ $ $ $
---------------------------------------------------------------------------
Interest payments on
long-term debt 26,890 24,636 78,210 226,940
Interest payments on
derivative
financial instruments 14,614 14,614 30,445 100,579
Interest receipts on
derivative financial
instruments (14,520) (14,520) (30,249) (96,750)
---------------------------------------------------------------------------
26,984 24,730 78,406 230,769
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Interest rate risk
The Corporation is exposed to interest rate risks for both fixed interest
rate and floating interest rate instruments. Fluctuations in interest
rates will have an effect on the valuation and collection or repayment of
these instruments. At May 31, 2009, all of the Corporation's long-term
debt was at fixed rate, except for the Corporation's Term Facility. On
January 21, 2009, the Corporation entered into a swap agreement with a
financial institution to fix the floating benchmark interest rate with
respect to the Euro-denominated Term Loan facilities for a notional
amount of EUR 111.5 million. The interest swap rate to hedge the Term
Loans has been fixed at 2.08% until their maturity of July 28, 2011. The
notional value of the swap will decrease in line with the amortization
schedule of the Term Loans. In addition to the interest swap rate of
2.08%, the Corporation will continue to pay the applicable margin on
these Term Loans in accordance with the Term Facility. The Corporation
elected to apply cash flow hedge accounting on this derivative financial
instrument. The sensitivity of the Corporation's annual financial expense
to a variation of 1% in the interest rate applicable to the Term Facility
is approximately $2.1 million based on the current debt at May 31, 2009
and taking into consideration the effect of the interest rate swap
agreement.
Foreign exchange risk
The Corporation is exposed to foreign exchange risk related to its
long-term debt denominated in US dollars. In order to mitigate this risk,
the Corporation has established guidelines whereby currency swap
agreements can be used to fix the exchange rates applicable to its US
dollar denominated long-term debt. All such agreements are exclusively
used for hedging purposes. Accordingly, on October 2, 2008, the
Corporation entered into cross-currency swap agreements to set the
liability for interest and principal payments on its US$190 million
Senior Secured Notes Series A issued on October 1, 2008. These agreements
have the effect of converting the US interest coupon rate of 7.00% per
annum to an average Canadian dollar interest rate of 7.24% per annum. The
exchange rate applicable to the principal portion of the debt has been
fixed at $1.0625. The Corporation elected to apply cash flow hedge
accounting on these derivative financial instruments.
The Corporation is also exposed to foreign exchange risk on cash and cash
equivalents, bank indebtedness and accounts payable denominated in US
dollars or Euros. At May 31, 2009, cash and cash equivalents denominated
in US dollars amounted to US$2,081,000 (bank indebtedness of US$286,000
at August 31, 2008) while accounts payable denominated in US dollars
amounted to US$3,875,000 (US$16,121,000 at August 31, 2008). At May 31,
2009, Euro-denominated cash and cash equivalents amounted to EUR
1,176,000 (EUR 219,000 at August 31, 2008) while accounts payable
denominated in Euros amounted to EUR 50,000 (EUR 163,000 at August 31,
2008). Due to their short-term nature, the risk arising from fluctuations
in foreign exchange rates is usually not significant, except for the
unusual high volatility of the US dollar compared to the Canadian dollar
during the first nine months of fiscal 2009. During the nine month period
ended May 31, 2009, the exchange rate increased from $1.0620 at August
31, 2008, to $1.0917 at May 31, 2009, reaching a high of $1.2991 on March
9, 2009. The impact of a 10% change in the foreign exchange rates (US
dollar and Euros) would change financial expense by approximately $22,000.
Furthermore, the Corporation's net investment in self-sustaining foreign
subsidiaries is exposed to market risk attributable to fluctuations in
foreign currency exchange rates, primarily changes in the values of the
Canadian dollar versus the Euro. This risk is mitigated since the major
part of the purchase price for Cabovisao-Televisao por Cabo, S.A. was
borrowed directly in Euros. At May 31, 2009, the net investment amounted
to EUR 184,959,000 (EUR 446,051,000 at August 31, 2008) while long-term
debt denominated in Euros amounted to EUR 180,705,000 (EUR 237,455,000 at
August 31, 2008). The exchange rate used to convert the Euro currency
into Canadian dollars for the balance sheet accounts at May 31, 2009 was
$1.5433 per Euro compared to $1.5580 per Euro at August 31, 2008. The
impact of a 10% change in the exchange rate of the Euro into Canadian
dollars would change financial expense by approximately $0.7 million and
other comprehensive income by approximately $0.7 million.
Fair value
Fair value is the amount at which willing parties would accept to
exchange a financial instrument based on the current market for
instruments with the same risk, principal and remaining maturity. Fair
values are estimated at a specific point in time, by discounting expected
cash flows at rates for debts of the same remaining maturities and
conditions. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement, and therefore, cannot
be determined with precision. In addition, income taxes and other
expenses that would be incurred on disposition of these financial
instruments are not reflected in the fair values. As a result, the fair
values are not necessarily the net amounts that would be realized if
these instruments were settled. The carrying value of all of the
Corporation's financial instruments approximates fair value, except as
otherwise noted in the following table:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
May 31, 2009 August 31, 2008
Carrying value Fair value Carrying value Fair value
$ $ $ $
---------------------------------------------------------------------------
Long-term debt 1,075,989 1,064,491 1,055,041 1,049,329
---------------------------------------------------------------------------
---------------------------------------------------------------------------
b) Capital management
The Corporation's objectives in managing capital are to ensure sufficient
liquidity to support the capital requirements of its various businesses,
including growth opportunities. The Corporation manages its capital
structure and makes adjustments in light of general economic conditions,
the risk characteristics of the underlying assets and the Corporation's
working capital requirements. Management of the capital structure
involves the issuance of new debt, the repayment of existing debts using
cash generated by operations and the level of distribution to
shareholders.
The capital structure of the Corporation is composed of shareholders'
equity, bank indebtedness, long-term debt and assets or liabilities
related to derivative financial instruments. The provisions under the
Term Facility provide for restrictions on the operations and activities
of the Corporation. Generally, the most significant restrictions relate
to permitted investments and dividends on multiple and subordinate voting
shares, as well as incurrence and maintenance of certain financial ratios
primarily linked to the operating income before amortization, financial
expense and total Indebtedness. At May 31, 2009, the Corporation was in
compliance with all of its debt covenants and was not subject to any
other externally imposed capital requirements.
The following table summarizes certain of the key ratios used by
management to monitor and manage the Corporation's capital structure:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
May 31, 2009 August 31, 2008
---------------------------------------------------------------------------
Net indebtedness (1) /
Shareholders' equity 1.1 0.8
Net indebtedness (1) /
Operating income before amortization (2) 2.2 2.5
Operating income before
amortization / Financial expense (3) 6.7 6.4
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Net indebtedness is defined as the total of bank indebtedness,
long-term debt and derivative financial instrument liability,
less cash and cash equivalents.
(2) Calculation based on operating income before amortization for the last
twelve month periods ended May 31, 2009 and August 31, 2008.
(3) Calculation based on operating income before amortization and financial
expense for the nine month period ended May 31, 2009 and twelve month
period ended August 31, 2008.
16. Subsequent event
On June 9, 2009, the Corporation completed, pursuant to a public debt
offering, the issue of 5.95% Senior Secured Debentures Series 1 for $300
million maturing June 9, 2014. The Debentures were priced at $99.881 per
$100 principal amount for an effective yield of 5.98% per annum. The net
proceeds of sale of the Debentures were used to reimburse the
Corporation's existing indebtedness and for general corporate purposes.
17. Comparative figures
Certain comparative figures have been reclassified to conform to the
current year's presentation to reflect the reclassification of foreign
exchange gains or losses from operating costs to financial expense.
Contacts:
Source:
Cogeco Cable Inc.
Pierre Gagne
Vice President, Finance and Chief Financial Officer
514-764-4700
Information:
Media
Marie Carrier
Director, Corporate Communications
514-764-4700
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