Continued growth for COGECO in the third quarter of 2009
MONTREAL, QUEBEC, Jul 10 (MARKET WIRE) --
Today, COGECO Inc. (TSX: CGO) ("COGECO" or the "Company") 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 11.4% to $316.3 million, and by 14.8%
to $936.5 million, respectively;
- Consolidated operating income from continuing operations before
amortization(1) grew by 10.4% to reach $129.4 million, and by 16.5% to
reach $380.8 million;
- In the first nine months of fiscal 2009, the cable subsidiary, Cogeco
Cable Inc. ("Cogeco Cable"), recorded a $399.6 million non-cash
impairment loss on its investment in Cabovisao - Televisao por Cabo, S.A.
("Cabovisao") as a result of recurring competitive pressure resulting in
subscriber losses that were more severe than originally anticipated. Net
of related income taxes and non-controlling interest, the impairment loss
amounted to $124 million;
- Third quarter consolidated net income amounted to $10.5 million,
compared to $9.5 million for the same period of the prior year. Excluding
an unfavourable income tax adjustment of $2 million related to the
utilization of pre-acquisition tax losses in Cabovisao, net of
non-controlling interest, and a $3.5 million favourable reduction of
withholding and stamp tax contingent liabilities(1), also in Cabovisao,
net of non-controlling interest, consolidated net income would have
amounted to $8.9 million, a decrease of $0.6 million, or 6.3%, compared
to $9.5 million for the third quarter of fiscal 2008;
- For the first nine months, consolidated net loss amounted to $93.8
million, compared to net income of $15.5 million in the prior year.
Excluding the impairment loss described above, the adjustments related to
income taxes and withholding and stamp tax contingent liabilities in
Cabovisao described above for the current quarter, the $7.9 million
income tax adjustment related to the reduction of Canadian federal income
tax rates, net of non-controlling interest, and a loss from discontinued
operations of $18.1 million in the first nine months of the prior year,
consolidated net income would have amounted to $28.6 million for the
first nine months of fiscal 2009, compared to $25.6 million in the prior
year, an increase of $3 million, or 11.9%;
- Free cash flow(1) reached $32.4 million for the quarter, representing a
decrease of 12.6% over the same period of the prior year, and $86.3
million, representing an increase of 8.6%, for the first nine months;
- In the cable sector, 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.
"The financial results of our cable sector and of our radio activities in
Canada drive COGECO's growth in the third quarter. All of our radio
stations have shown improvement in reaching their target audiences. For
the nine month period in the cable sector, our Canadian operations are
growing at a steady pace with net additions of 140,215 RGU. In our
European operations, 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.
(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 Quarters ended May 31, Nine months ended May 31,
percentages and 2009 2008(1) Change 2009 2008(1) Change
per share data) $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Revenue 316,310 283,878 11.4 936,510 816,027 14.8
Operating income
from continuing
operations
before
amortization(2) 129,404 117,206 10.4 380,771 326,903 16.5
Operating income
from continuing
operations 61,750 58,642 5.3 182,269 158,954 14.7
Impairment of
goodwill and
intangible assets - - - 399,648 - -
Income (loss) from
continuing
operations 10,480 9,538 9.9 (93,758) 33,509 -
Loss from
discontinued
operations - - - - (18,057) -
Net income (loss) 10,480 9,538 9.9 (93,758) 15,452 -
Net income
excluding the
impairment loss,
the tax
adjustments and
the loss from
discontinued
operations(2) 8,933 9,538 (6.3) 28,646 25,600 11.9
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Cash flow from
operating
activities from
continuing
operations 102,653 112,893 (9.1) 253,603 252,439 0.5
Cash flow from
operations from
continuing
operations(2) 95,498 96,068 (0.6) 291,475 262,819 10.9
Capital
expenditures
and increase
in deferred
charges 63,082 58,961 7.0 205,199 183,364 11.9
Free cash flow(2) 32,416 37,107 (12.6) 86,276 79,455 8.6
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Earnings (loss)
per share
Basic
Income (loss)
from continuing
operations 0.63 0.57 10.5 (5.60) 2.01 -
Loss from
discontinued
operations - - - - (1.08) -
Net income (loss) 0.63 0.57 10.5 (5.60) 0.93 -
Net income
excluding the
impairment loss,
the income tax
adjustment and
the loss from
discontinued
operations(2) 0.53 0.57 (7.0) 1.71 1.54 11.0
Diluted
Income (loss)
from continuing
operations 0.63 0.57 10.5 (5.60) 2.00 -
Loss from
discontinued
operations - - - - (1.08) -
Net income (loss) 0.63 0.57 10.5 (5.60) 0.92 -
Net income
excluding the
impairment loss,
the tax
adjustments
and the loss
from discontinued
operations(2) 0.53 0.57 (7.0) 1.71 1.53 11.8
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
(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'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 Company'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 believes are reasonable as of the current date. While management
considers these assumptions to be reasonable based on information
currently available to the Company, they may prove to be incorrect. The
Company 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 Company's expectations.
It is impossible for COGECO to predict with certainty the impact that the
current economic downtown 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 Company's 2008 annual Management's Discussion and Analysis
(MD&A) that could cause actual results to differ materially from what
COGECO 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 Company's control. Therefore,
future events and results may vary significantly from what management
currently foresees. 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 Company 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 Company's
consolidated financial statements, and the notes thereto, prepared in
accordance with Canadian GAAP and the MD&A included in the Company'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 Inc.'s ("COGECO" or the "Company") objectives are to maximize
shareholder value by increasing profitability and ensuring continued
growth. The strategies employed to reach these objectives, supported by
tight controls over costs and business processes, are specific to each
sector. For the cable sector, sustained corporate growth and the
continuous improvement of networks and equipment are the main strategies
used. The radio activities focus on continuous improvement of programming
in order to increase market share, and, thereby, profitability. COGECO
uses growth of revenue and operating income before amortization(1), free
cash flow(1) and revenue-generating units ("RGU")(2) growth in order to
measure its performance against these objectives for the cable sector.
Below are the Company's recent achievements in furthering the corporate
objectives.
(1) 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
(2) Represents the sum of Basic Cable, High Speed Internet (HSI), Digital
Television and Telephony service customers.
Tight control over costs and business processes
- For the first nine months of fiscal 2009, the Company's operating costs
increased over last year by 13.6% compared to a revenue growth of 14.8%;
- During the quarter, the Company's cable subsidiary, Cogeco Cable Inc.
("Cogeco Cable") 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 Company 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.
Cable sector
Sustained corporate growth
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 Company invested
approximately $76.9 million in its cable infrastructure including head-
ends and upgrades and rebuilds.
Other
- Spring's BBM Canada survey conducted with the Portable People Meter
("PPM") shows that RYTHME FM has maintained its leadership position with
audiences in the adult and female categories in the Montreal and Trois-
Rivieres markets. The other RYTHME FM stations continue to gain market
share. As for the 93.3 station in Quebec City, it registered its highest
numbers ever and has reclaimed the first position in this very
competitive market.
Discontinued Operations
In October 2007, the Board of Directors of TQS, an indirect subsidiary of
the Company, engaged CIBC World Markets to advise on and assess strategic
options for the TQS network in the face of financial difficulties. On
December 18, 2007, the Quebec Superior Court issued an order under the
Companies' Creditors Arrangement Act (Canada) protecting TQS, its
subsidiaries and its parent 3947424 Canada Inc. ("TQS Group") from claims
by their creditors. On June 26, 2008, the Canadian Radio-television and
Telecommunications Commission ("CRTC") approved the proposed transfer of
ownership and control of TQS to Remstar Corporation Inc. ("Remstar") and
on August 29, 2008, the transfer of ownership and control of TQS to
Remstar was completed, which allowed the new ownership group to pursue
the broadcasting activities of TQS.
Effective December 18, 2007, the Company has ceased to consolidate the
financial statements of the TQS Group. Accordingly, the results of
operations and cash flows for the three month period ended November 30,
2007, have been reclassified as discontinued operations.
The results of the discontinued operations were as follows:
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-
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Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
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(unaudited)(unaudited) (unaudited)(unaudited)
Revenue - - - 38,499
Operating costs - - - 35,822
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Operating income
before amortization - - - 2,677
Amortization - - - 1,364
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Operating income - - - 1,313
Financial expense - - - 291
Impairment of assets - - - 30,298
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Loss before income
taxes and the
following items - - - (29,276)
Income taxes - - - -
Non-controlling interest - - - (11,219)
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Loss from discontinued
operations - - - (18,057)
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The cash flows of the discontinued operations were as follows:
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Quarters ended May 31, Nine months ended May 31,
2009 2008 2009 2008
($000) $ $ $ $
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(unaudited)(unaudited) (unaudited)(unaudited)
Cash flow from
operating activities - - - (3,973)
Cash flow from
investing activities - - - (133)
Cash flow from
financing activities - - - 4,106
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Cash flow from
discontinued operations - - - -
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Continuing Operations
RGU growth in the cable sector
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 Company'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 and operating income from continuing operations before
amortization growth
For the third quarter of fiscal 2009, revenue increased by $32.4 million,
or 11.4%, to reach $316.3 million while operating income before
amortization from continuing operations grew by $12.2 million, or 10.4%,
to reach $129.4 million. For the first nine months of the year, revenue
increased by $120.5 million, or 14.8%, to reach $936.5 million while
operating income before amortization from continuing operations grew by
$53.9 million, or 16.5%, to reach $380.8 million and management expects
to attain its revised guidelines of $1,238 million in revenue and $505
million in operating income before amortization from continuing
operations 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 of fiscal 2009, COGECO generated free cash flow of
$32.4 million compared to $37.1 million for the same period last year.
For the nine month period ended May 31, 2009, COGECO generated free cash
flow of $86.3 million compared to $79.5 million in the prior year. The
reduction in free cash flow for the quarter is mainly due to the cable
sector and resulted from an increase in capital expenditures and the
decrease in cash flow from operations(1), due to the increase in current
income taxes. For the first nine months, the growth in free cash flow is
essentially from the cable sector and is due to increases in cash flow
from operations, resulting primarily from the improvement of Cogeco
Cable's operating income before amortization, partly offset by increases
in capital expenditures. On April 8, 2009, management revised its
guidelines for free cash flow to $85 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.
(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.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
In the second quarter of fiscal 2009, the competitive position of Cogeco
Cable's subsidiary 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 the "Cable sector"
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 Cogeco Cable's investment in the
Portuguese subsidiary. As a result, Cogeco Cable 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. Cogeco Cable 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. 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, Cogeco Cable
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 $60.4
million was recorded in the second quarter.
The impairment loss affected the Company's goodwill and customer
relationship asset balances as follows at February 28, 2009:
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($
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
Non-controlling interest (259,679)
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Impairment loss net of related income taxes
and non-controlling interest 123,951
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OPERATING RESULTS - CONSOLIDATED OVERVIEW
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($000, except Quarters ended May 31, Nine months ended May 31,
percentages) 2009 2008(1) Change 2009 2008(1) Change
$ $ % $ $ %
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(unaudited)(unaudited) (unaudited)(unaudited)
Revenue 316,310 283,878 11.4 936,510 816,027 14.8
Operating costs 186,906 166,672 12.1 555,739 489,124 13.6
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Operating income
from continuing
operations before
amortization(2) 129,404 117,206 10.4 380,771 326,903 16.5
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Operating margin(2) 40.9% 41.3% 40.7% 40.1%
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
(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 revenue improved, mainly in its
cable sector, by $32.4 million, or 11.4%, to reach $316.3 million. Cable
revenue, 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 in the Canadian operations, partly offset
by a net RGU loss in European operations, went up by $30.7 million, or
11.2%, in the third quarter of fiscal 2009.
In the first nine months of the year, revenue improved by $120.5 million,
or 14.8%, to reach $936.5 million. The majority of the increase is
attributable to the cable sector, with an increase of $118.2 million, or
14.9%, due to an increased number of RGU combined with rate increases and
the recent acquisitions in the second half of fiscal 2008 in the Canadian
operations, and the strength of the Euro against the Canadian dollar,
despite a RGU loss in the first nine months of the year in European
operations.
Operating costs
Operating costs increased by $20.2 million, or 12.1%, to reach $186.9
million in the third quarter and by $66.6 million, or 13.6%, to reach
$555.7 million in the first nine months of fiscal 2009 compared to the
prior year. The increase in operating costs was mainly attributable to
the cable sector, 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 from continuing operations before amortization
Operating income from continuing operations before amortization grew,
essentially in its cable segment, by $12.2 million, or 10.4%, to reach
$129.4 million in the third quarter of fiscal 2009 compared to the
corresponding period of the prior year, and for the nine month period
ended May 31, 2009, by $53.9 million, or 16.5%, to reach $380.8 million.
The cable sector contributed to the growth by $11.2 million during the
third quarter, and $50.5 million during the first nine months of the
fiscal year.
FIXED CHARGES
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-
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($
000, except Quarters ended May 31, Nine months ended May 31,
percentages) 2009 2008(1) Change 2009 2008(1) Change
$ $ % $ $ %
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(unaudited)(unaudited) (unaudited)(unaudited)
Amortization 67,654 58,564 15.5 198,502 167,949 18.2
Financial expense 14,362 17,748 (19.1) 56,168 51,631 8.8
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous year
has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
Fiscal 2009 third quarter and first nine-month period amortization
amounted to $67.7 million and $198.5 million, respectively, compared to
$58.6 million and $167.9 million for the corresponding period the year
before. The increase in amortization expense was mainly due the cable
sector and attributable to additional capital expenditures arising from
customer premise equipment acquisitions to sustain RGU growth, to the
recent acquisitions in the Canadian operations and to the appreciation of
the Euro currency over the Canadian dollar.
Third-quarter financial expense decreased by $3.4 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 $4.5 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 in the cable sector 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 cable subsidiary
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
COGECO's indirect 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 cable subsidiary 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 $26.3 million
compared to $10.3 million in fiscal 2008. The income tax expense in the
cable sector for the third 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 $20.2 million compared to $10.3 million in
the prior year. For the first nine months of the year, income tax expense
amounted to $36.4 million compared to $5.1 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, both in the cable sector. 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 $24.1 million in the first
nine months of fiscal 2008. Excluding the effects of these items, income
tax expense would have amounted to $46.2 million for the first nine
months of fiscal 2009, compared to $29.3 million in 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.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately
67.7% in Cogeco Cable's results. During the third quarter of fiscal 2009
the income attributable to non-controlling interest amounted to $21.5
million, and a loss of $205.3 million for the nine months ended May 31,
2009, due to the impairment loss recorded in the cable sector. The income
attributable to non-controlling interest for the comparable periods of
the prior year amounted to $21.1 million and $68.6 million, respectively.
NET INCOME (LOSS)
Fiscal 2009 third-quarter net income amounted to $10.5 million, or $0.63
per share, compared to $9.5 million, or $0.57 per share, for the same
period last year. Net income for the third quarter of fiscal 2009
includes an unfavourable impact of $2 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 $3.5 million described above, also in Cabovisao, both net of
non-controlling interest. Excluding the impact of these items(1), net
income would have amounted to $8.9 million, or $0.53 per share(1),
compared to $9.5 million, or $0.57 per share in the prior year,
representing decreases of 6.3% and 7%, respectively. Net income reduction
for the quarter is mainly attributable to the cable sector and 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
quarter. Please consult the "Non-GAAP financial measures" section for
further details.
Net loss in the first nine month period of fiscal 2009 amounted to $93.8
million, or $5.60 per share, compared to net income of $15.5 million, or
$0.93 per share, for the same period last year. In addition to the
impacts described above for the quarter, the net loss in the first nine
months of fiscal 2009 was affected by the impairment loss of $399.6
million recorded in the second quarter of the year in the cable sector,
as described in the "Impairment of goodwill and intangible assets"
section. Net of related income taxes and non-controlling interest, the
impairment loss reduced net income for the first nine months by $124
million. The net income amounts of the 2008 fiscal year included an
income tax recovery of $24.1 million resulting from the reduction of
corporate income tax rates in the second quarter of fiscal 2008 as
described in the "Income taxes" section, net of non-controlling interest
of $16.2 million, for a net impact on income of $7.9 million, and losses
from discontinued operations of $18.1 million for the first nine months
of fiscal 2008. Excluding the effect of the above items, net income would
have amounted to $28.6 million, or $1.71 per share, for first nine months
ended May 31, 2009, compared to $25.6 million, or $1.54 per share, for
the first nine months of the 2008 fiscal year, representing increases of
11.9% and 11%, respectively. Net income progression has resulted mainly
from the growth in the cable sector of operating income before
amortization exceeding that of fixed charges in the Canadian operations,
offset by the decline of the financial results in the European operations
and the increase in income tax expense described in the "Income taxes"
section above.
(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
from continuing
operations
Cash flow from
operations(1) 95,498 96,068 291,475 262,819
Changes in non-cash
operating items 7,155 16,825 (37,872) (10,380)
--------------------------------------------------------------------------
102,653 112,893 253,603
252,439-------------------------------------------------------------------------
Investing activities
from continuing
operations(2) (61,719) (74,415) (202,514) (197,487)
--------------------------------------------------------------------------
Financing activities
from continuing
operations(2) (44,677) 18,771 (42,266) (39,815)
--------------------------------------------------------------------------
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
from continuing
operations (5,609) 58,312 8,285 16,402
--------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 51,366 24,369 37,472 66,279
--------------------------------------------------------------------------
Cash and cash equivalents,
end of period 45,757 82,681 45,757 82,681
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 $95.5
million, 0.6% lower than the comparable period last year, primarily 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 $7.2 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 $16.8 million were mainly a result of an increase in
accounts payable and accrued liabilities and in income tax liabilities.
In the first nine months of fiscal 2009, cash flow from operations
reached $291.5 million, 10.9% higher than the comparable period last
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 $37.9 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 $10.4 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.
In the third quarter of fiscal 2009, investing activities from continuing
operations including assets acquired under capital leases stood at $62.9
million due primarily to the cable sector, with capital expenditures of
$57.7 million and an increase of $5.1 million in deferred charges and
others. The capital expenditures, stemming essentially from the cable
sector, increased compared to the same period 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.
In the first nine months of fiscal 2009, investing activities from
continuing operations including assets acquired under capital leases
stood at $204.9 million due primarily to the cable sector, with capital
expenditures of $186.6 million and an increase of $18 million in deferred
charges and others. The capital expenditures, stemming essentially from
the cable sector, increased compared to the same period 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 in
the cable sector. The increase in deferred charges and others for the
third quarter amounted to $5.1 million compared to $7.4 million for the
same period the year before, and to $18 million compared to $21.1 million
for the first nine months of the year. Slower RGU growth explained the
lower increases recorded in fiscal 2009.
In the third quarter and first nine months, the Company generated free
cash flows amounting to $32.4 million and $86.3 million, respectively,
compared to $37.1 million and $79.5 million for the same periods of the
preceding year, representing a decrease of 12.6% for the quarter, and an
increase of 8.6% for the nine months ended May 31, 2009. The reduction in
free cash flow for the quarter is mainly due to the cable sector and
resulted from 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 from the cable sector and is 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 $3.6 million for the quarter
ended May 31, 2009, and by $21.1 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
$40.3 million mainly due to the free cash flow of $32.4 million, the
increase in non-cash operating items of $7.2 million, and the decrease in
cash and cash equivalents of $5.6 million, net of the dividend payment of
$5.3 million described below. Indebtedness mainly decreased through the
net repayments on Cogeco Cable's revolving loans of $56.5 million, net of
an increase of $17 million in bank indebtedness. For the same period of
the prior year, Indebtedness affecting cash increased by $22.9 million,
primarily due to the issuance by Cogeco Cable 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 by the cable subsidiary to reimburse
its 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 in the cable sector and a
reduction of the Company's Term Facility for an amount of $2 million from
the free cash flow of $37.1 million and the increase in non-cash
operating items of $16.8 million.
During the third quarter of fiscal 2009, dividends of $0.08 per share for
subordinate and multiple voting shares, totalling $1.3 million, were paid
by the Company, compared to $0.07 per share, totalling $1.2 million in
the third quarter of fiscal 2008. Dividends paid by a subsidiary to
non-controlling interests amounted to $3.9 million during the third
quarter of fiscal 2009, for consolidated dividend payments of $5.3
million.
In the first nine months of fiscal 2009, Indebtedness affecting cash
decreased by $28 million due to the free cash flow of $86.3 million,
partly offset by the reduction of non-cash operating items of $37.9
million, the payment of dividends totalling $15.8 million described below
and the increase in cash and cash equivalents of $8.3 million.
Indebtedness decreased through the repayment, in the cable sector, 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 Cogeco Cable'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 $45.1 million in bank indebtedness. For
the same period of the prior year, Indebtedness affecting cash decreased
by $29.7 million mainly due to a net reduction of the amount outstanding
on the revolving credit facility of $123.1 million in the cable sector
and a reduction of the Company's Term Facility of $6.5 million, partly
offset by the issuance of a senior unsecured debenture, as discussed
above. During the first nine months of fiscal 2009, quarterly dividends
of $0.08 per share for subordinate and multiple voting shares, totalling
$4 million, were paid by the Company, compared to quarterly dividends of
$0.07 per share, totalling $3.5 million in the first nine months of the
prior year. Dividends paid by a subsidiary to non-controlling interests
amounted to $11.8 million, for consolidated dividend payments of $15.8
million in the nine month period ended May 31, 2009.
At May 31, 2009, the Company had a working capital deficiency of $363.7
million compared to $611.8 million as at August 31, 2008. The decrease in
the deficiency is mainly attributable to the cable sector and is due 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 cable business,
COGECO maintains a working capital deficiency due to a low level of
accounts receivable as a large portion of the cable subsidiary'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 Cogeco Cable to use cash and cash
equivalents to reduce Indebtedness.
At May 31, 2009, Cogeco Cable had used $425.4 million of its $885 million
Term Facility for a remaining availability of $459.6 million and the
Company had drawn $12 million of its $50 million Term Facility, for a
remaining availability of $38 million.
On October 1, 2008, the Company's cable subsidiary, Cogeco Cable,
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. Cogeco Cable 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, Cogeco Cable 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.
The assumptions used in the actuarial valuations performed for the year
ended August 31, 2008 were adjusted to reflect the current rates of
return and market conditions, and accordingly, the payments made by the
Company to fund the actuarial deficit of its defined benefit pension
plans were higher in fiscal 2009 than in fiscal 2008. Based on the August
31, 2008 actuarial valuations, the Company made payments of approximately
$1 million in the first nine months of the 2009 fiscal year.
Transfers of funds from non-wholly owned subsidiaries to COGECO are
subject to approval by the subsidiaries' Board of Directors and may also
be restricted under the terms and conditions of certain debt instruments.
In accordance with applicable corporate and securities laws, significant
transfers of funds from COGECO may be subject to approval by minority
shareholders.
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", "Indebtedness" and "non-controlling
interest".
The $12.3 million increase in fixed assets is mainly related to increases
in capital expenditures to sustain RGU growth and to the recent
acquisitions in Canada in the cable sector, 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 Cogeco
Cable's investment in Cabovisao in the second quarter of this fiscal
year. The $12.8 million decrease in future income tax liabilities is
attributable to the cable sector and is mainly due to the impairment loss
described above. The $46.5 million decrease in accounts payable and
accrued liabilities is related to the timing of payments made to
suppliers, the reduction of withholding and stamp tax contingent
liabilities, and the fluctuations of the Euro currency over the Canadian
dollar in the cable sector. 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 in the cable
subsidiary. The $8 million increase in income taxes receivable is due to
income tax payments relating to fiscal 2008 in the cable sector. The $6.8
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 $18.3 million and cash and cash
equivalents has increased by $8.3 million as a result of the factors
previously discussed in the "Cash Flow and Liquidity" section. The $213.7
million decrease in non-controlling interest is due to the impairment
loss recorded on the cable subsidiary's investment in Cabovisao in the
second quarter of the year as described in the "Impairment of goodwill
and intangible assets" section, net of improvements in the cable
subsidiary's operating results excluding the impairment loss.
A description of COGECO's share data as at June 30, 2009 is presented in
the table below:
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Number of shares/options Amount
($000)
--------------------------------------------------------------------------
Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,942,470 120,994
Options to purchase subordinate voting shares
Outstanding options 79,650
Exercisable options 79,650
--------------------------------------------------------------------------
--------------------------------------------------------------------------
In the normal course of business, COGECO has incurred financial
obligations, primarily in the form of long-term debt, operating and
capital leases and guarantees. COGECO's obligations, discussed in the
2008 annual MD&A, have not materially changed since August 31, 2008,
except for the new financing in the cable sector discussed in the "Cash
Flow and Liquidity" section.
DIVIDEND DECLARATION
At its July 10, 2009 meeting, the Board of Directors of COGECO declared a
quarterly eligible dividend of $0.08 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 Company based upon the Company'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,
their amount and frequency may vary.
FINANCIAL MANAGEMENT
On January 21, 2009, the Company's cable subsidiary, Cogeco Cable,
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 and non-controlling interest of $1 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 and
non-controlling interest of $3.9 million. Cogeco Cable'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 value 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 net investments in self-sustaining foreign subsidiaries and,
accordingly, Cogeco Cable realized a foreign exchange gain of $9.6
million in the first nine months of fiscal 2009, which is presented net
of non-controlling interest of $6.5 million 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 in the cable sector 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
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company 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 in the cable sector 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.
CABLE SECTOR
CUSTOMER STATISTICS
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Net additions (losses) % of Penetration(1)
Quarters Nine months
ended May 31, ended May 31, May 31,
May 31, 2009 2009 2008 2009 2008 2009 2008
--------------------------------------------------------------------------
RGU 2,810,199 14,985 50,889 93,325 190,109 - -
Basic Cable
service
customers 1,130,527 (13,547) (1,589) (22,702) 16,001 - -
HSI service
customers
(2) 651,617 1,519 6,865 18,849 53,119 59.7 56.7
Digital
Television
service
customers 534,152 19,235 26,055 67,954 60,187 47.8 38.5
Telephony
service
customers
(3) 493,903 7,778 19,558 29,224 60,802 47.2 44.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 86,887 as at May 31, 2009 compared to 82,780 at May
31, 2008.
(3) Customers subscribing to the Telephony service without the Basic Cable
service totalled 31,774 as at May 31, 2009 compared to 25,301 at May
31, 2008.
In the cable sector, third quarter and first nine months RGU net
additions were lower than for the same periods last year and reflect an
early sign of maturation in some services for the Canadian operations and
the difficult competitive environment in Portugal. The number of net
losses for Basic Cable stood at 13,547 customers for the quarter and
22,702 customers for the first nine months, compared to net losses of
1,589 customers and net additions of 16,001 customers, respectively, for
the same periods of the prior year. This decrease is due to net customer
losses in the European operations reflecting 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, partly offset by increases in Canadian operations
stemming from continuous improvements to the service offering, targeted
marketing activities and an upswing in subscription activity in border
markets due to the impending over-the-air digital conversion in the
United States. The number of net additions to HSI service stood at 1,519
customers for the quarter and 18,849 customers for the first nine months,
compared to 6,865 and 53,119 customers, respectively, 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 in Canadian operations
offset by net customer losses in European operations due to the factors
mentioned above. The Digital Television service net additions stood at
19,235 and 67,954 customers, for the quarter and nine month period ended
May 31, 2009, respectively, compared to 26,055 and 60,187 customers for
the same periods in the prior year due to targeted marketing initiatives
in the second half of fiscal 2008 and in 2009 to improve market
penetration and to the continuing strong interest for the HD Television
service in Canadian operations, as well as the launch of the Digital
Television service in Portugal in the third quarter of fiscal 2008. In
the quarter and first nine months, Telephony customers grew by 7,778 and
29,224 customers to reach 493,903 at May 31, 2009, compared to a growth
of 19,558 and 60,802 customers for the same periods 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 in Canadian operations offset by net customer
losses in European operations due to the difficult competitive
environment. Telephony service coverage in Canada, as a percentage of
homes passed, is now above 90% compared to 83% at May 31, 2008. The
service is offered in all of the Company's territories in Portugal.
In addition to the launch of new channels and retention strategies during
the quarter in the European operations, new marketing and other operating
initiatives were implemented, the result of which should help in reducing
customer attrition in the upcoming quarters.
OPERATING RESULTS
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
($
000, except Quarters ended May 31, Nine months ended May 31,
percentages) 2009 2008(1) Change 2009 2008(1) Change
$ $ % $ $ %
--------------------------------------------------------------------------
(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
-------------------------------------
Operating income
from continuing
operations
before
amortization 128,731 117,492 9.6 373,915 323,452 15.6
-------------------------------------
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. Financial information for the previous
year has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
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 an increased number of RGU
combined with rate increases and 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, Cogeco Cable's 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.
FISCAL 2010 PRELIMINARY FINANCIAL GUIDELINES
Consolidated
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Preliminary Revised projections
Projections April 8, 2009
Fiscal 2010 Fiscal 2009
(in millions of dollars) $ $
--------------------------------------------------------------------------
Financial guidelines
Revenue 1,285 1,238
Operating income before amortization 505 505
Financial expense 70 70
Current income taxes (55) 50
Net income (loss) 30 (87)
Capital expenditures and deferred charges 360 300
Free cash flow 130 85
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cable sector
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 increased 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. Cogeco Cable 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 Cogeco Cable'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.
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
(i
n millions of dollars, Preliminary Revised projections
except net customer Projections April 8, 2009
additions and Fiscal 2010 Fiscal 2009
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
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. Other sector
Revenue should increase to approximately $35 million due to improved
audience ratings in radio and operating income before amortization should
reach $5 million.
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Preliminary Revised projections
Projections April 8, 2009
Fiscal 2010 Fiscal 2009
(in millions of dollars) $ $
--------------------------------------------------------------------------
Financial guidelines
Revenue 35 33
Operating income before amortization 5 5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
CONTROLS AND PROCEDURES
The application of Bill 198 and its regulations represents an exercise in
continuous improvement, which is leading the Company to formalize
processes and control measures that are already in place and to introduce
new ones. COGECO 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 Company'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 Company's disclosure
controls and procedures were adequate and effective to ensure that
material information relating to the Company 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 Company's cable subsidiary,
Cogeco Cable 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
Company'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 Company since August 31, 2008, except as described
below. A detailed description of the uncertainties and main risk factors
faced by COGECO 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 Company'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
Company being required to make contributions in the future that differ
significantly from the current contributions to the Company's defined
benefit pension plans.
The Company 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 Company'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 in the cable sector.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO's accounting policies,
estimates and future accounting pronouncements since August 31, 2008,
except as described below. A description of the Company's policies and
estimates can be found in the 2008 annual MD&A.
Capital disclosures and financial instruments
Effective September 1, 2008, the Company 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 Company'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 Company's financial instruments.
The new disclosures pursuant to these new Sections are included in note
15 of the Company'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 Company 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, decreased non-controlling interest by $1.8 million and decreased
accumulated other comprehensive income by $0.8 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 Company 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 Company'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 Company 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 Company
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 Company 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 Company 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 in order 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 delivery of further training to
staff as revised systems begin to take effect.
The Company 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, information technology
and data system impacts as well as impacts on business activities will be
assessed. The Company's analysis of IFRS and 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 Company.
Set out below are the main areas where changes in accounting policies are
expected to have a significant impact on the Company's consolidated
financial statements. The list below should not be regarded as a complete
list of changes that will result from transition to IFRS. It is intended
to highlight those areas that the Company 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 Canadian GAAP and IFRS have significant ongoing projects that
could affect the ultimate differences between Canadian GAAP and IFRS and
their impact on the Company's consolidated financial statements in future
years. The future impacts of 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 Company is not able to reliably quantify the impacts expected on its
consolidated financial statements for these differences. 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 Company is
analyzing the various accounting policy choices available and will
implement those determined to be most appropriate in the Company's
circumstances. The Company 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 plan established
by management.
NON-GAAP FINANCIAL MEASURES
This section describes non-GAAP financial measures used by COGECO
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 may not be comparable with similar measures presented
by other companies. These measures include "cash flow from operations
from continuing operations", "free cash flow", "operating income from
continuing operations before amortization", "operating margin", "net
income excluding the impairment loss, the tax adjustments and the loss
from discontinued operations", and "earnings per share excluding the
impairment loss, the tax adjustments and the loss from discontinued
operations".
Cash flow from operations from continuing operations and free cash flow
Cash flow from operations from continuing operations is used by COGECO'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 Company to isolate the cash flows from operating
activities from the impact of cash management decisions. Cash flow from
operations from continuing operations is subsequently used in calculating
the non-GAAP measure "free cash flow". Free cash flow is used by COGECO's
management and investors to measure COGECO's ability to repay debt,
distribute capital to its shareholders and finance its growth. The most
comparable Canadian GAAP financial measure is cash flow from operating
activities from continuing operations. Cash flow from operations from
continuing 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 from
continuing operations 102,653 112,893 253,603 252,439
Changes in non-cash
operating items (7,155) (16,825) 37,872 10,380
--------------------------------------------------------------------------
Cash flow from operations
from continuing
operations 95,498 96,068 291,475 262,819
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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
from continuing
operations 95,498 96,068 291,475 262,819
Acquisition of
fixed assets (56,664) (50,940) (184,534) (160,286)
Increase in
deferred charges (5,256) (7,050) (18,242) (20,661)
Assets acquired
under capital
leases - as per
note 13 b) (1,162) (971) (2,423) (2,417)
--------------------------------------------------------------------------
Free cash flow 32,416 37,107 86,276 79,455
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating income from continuing operations before amortization and
operating margin
Operating income from continuing operations before amortization is used
by COGECO's management and investors to assess the Company's ability to
seize growth opportunities in a cost effective manner, to finance its
ongoing operations and to service its debt. Operating income from
continuing operations 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 Company's revenue which is left over, before taxes, to
pay for its fixed costs, such as interest on Indebtedness. Operating
margin is calculated by dividing operating income from continuing
operations before amortization by revenue.
The most comparable Canadian GAAP financial measure is operating income
from continuing operations. Operating income from continuing operations
before amortization and operating margin are calculated as follows:
--------------------------------------------------------------------------
-
-------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2009 2008(1) 2009 2008(1)
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Operating income
from continuing
operations 61,750 58,642 182,269 158,954
Amortization 67,654 58,564 198,502 167,949
--------------------------------------------------------------------------
Operating income
from continuing
operations before
amortization 129,404 117,206 380,771 326,903
--------------------------------------------------------------------------
Revenue 316,310 283,878 936,510 816,027
--------------------------------------------------------------------------
Operating margin 40.9% 41.3% 40.7% 40.1%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
Net income excluding the impairment loss, the tax adjustments and the
loss from discontinued operations and earnings per share excluding the
impairment loss, the tax adjustments and the loss from discontinued
operations
Net income excluding the impairment loss, the tax adjustments and the
loss from discontinued operations and earnings per share excluding the
impairment loss, the tax adjustments and the loss from discontinued
operations are used by COGECO's management and investors to evaluate what
would have been the net income and earnings per share excluding these
adjustments. This allows the Company 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. These above-mentioned non-GAAP financial measures 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) 10,480 9,538 (93,758) 15,452
Adjustments:
Impairment loss net
of related income
taxes and
non-controlling
interest - - 123,951 -
Tax adjustments net
of non-controlling
interest:
Reduction of
withholding and
stamp tax
contingent
liabilities (3,531) - (3,531) -
Utilization of
pre-acquisition
tax losses 1,984 - 1,984 -
Reduction of
Canadian federal
income tax rates - - - (7,909)
Loss from discontinued
operations - - - 18,057
--------------------------------------------------------------------------
Net income excluding the
impairment loss, the tax
adjustments and the loss
from discontinued
operations 8,933 9,538 28,646 25,600
--------------------------------------------------------------------------
Weighted average number of
multiple voting and
subordinate voting
shares outstanding 16,758,923 16,682,468 16,746,931 16,676,369
Effect of dilutive
stock options 3,947 54,599 11,432 70,256
--------------------------------------------------------------------------
Weighted average number
of diluted multiple
voting and subordinate
voting shares
outstanding 16,762,870 16,737,067 16,758,363 16,746,625
--------------------------------------------------------------------------
Earnings per share
excluding the impairment
loss, the tax adjustments
and the loss from
discontinued operations
Basic 0.53 0.57 1.71 1.54
Diluted 0.53 0.57 1.71 1.53
--------------------------------------------------------------------------
--------------------------------------------------------------------------
ADDITIONAL INFORMATION
This MD&A was prepared on July 9, 2009. Additional information relating
to the Company, including its Annual Information Form, is available on
the SEDAR website at www.sedar.com.
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable
subsidiary, COGECO provides its residential customers with Audio,
Analogue and Digital Television, as well as HSI and Telephony services
using its two-way broadband cable networks. 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. Through its Cogeco Diffusion
subsidiary, COGECO owns and operates the RYTHME FM radio stations in
Montreal, Quebec City, Trois-Rivieres and Sherbrooke, as well as the 933
station in Quebec City. COGECO's subordinate voting shares are listed on
the Toronto Stock Exchange (TSX: CGO). The subordinate voting shares of
Cogeco Cable are also 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)
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Quarters ended May 31, February 28/29,
($000, except percentages 2009 2008(1) 2009 2008(1)
and per share data) $ $ $ $
--------------------------------------------------------------------------
Revenue 316,310 283,878 311,825 271,894
Operating income from
continuing operations
before amortization(2) 129,404 117,206 126,663 109,523
Operating margin(2) 40.9% 41.3% 40.6% 40.3%
Amortization 67,654 58,564 66,785 56,346
Operating income from
continuing operations 61,750 58,642 59,878 53,177
Financial expense 14,362 17,748 18,028 17,550
Reduction of withholding
and stamp tax contingent
liabilities (10,930) - - -
Impairment of goodwill
and intangible assets - - 399,648 -
Income taxes 26,334 10,285 175 (14,426)
Loss (gain) on dilution - 3 22 (25)
Non-controlling interest 21,504 21,068 (242,704) 33,763
Income (loss) from
continuing operations 10,480 9,538 (115,291) 16,315
Loss from discontinued
operations - - - (425)
Net income (loss) 10,480 9,538 (115,291) 15,890
Net income excluding
the impairment loss,
the tax adjustments and
the loss from
discontinued
operations(2)(3) 8,933 9,538 8,660 8,406
Cash flow from operations
from continuing operations(2) 95,498 96,068 100,351 85,374
Cash flow from operating
activities from continuing
operations 102,653 112,893 120,480 92,942
Free cash flow(2) 32,416 37,107 32,089 19,374
Earnings (loss) per share
Basic
Income (loss) from
continuing operations 0.63 0.57 (6.89) 0.98
Loss from discontinued
operations - - - (0.03)
Net income (loss) 0.63 0.57 (6.89) 0.95
Net income excluding
the impairment loss,
the tax adjustments and
the loss from
discontinued
operations(2)(3) 0.53 0.57 0.52 0.50
Diluted
Income (loss) from
continuing operations 0.63 0.57 (6.89) 0.97
Loss from discontinued
operations - - - (0.03)
Net income (loss) 0.63 0.57 (6.89) 0.95
Net income excluding
the impairment loss,
the tax adjustments
and the loss from
discontinued
operations(2)(3) 0.53 0.57 0.52 0.50
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Quarters ended November 30, August 31,
($000, except percentages 2008 2007(1) 2008(1) 2007(1)
and per share data) $ $ $ $
--------------------------------------------------------------------------
Revenue 308,375 260,255 292,873 251,300
Operating income from
continuing operations
before amortization(2) 124,704 100,174 122,019 100,755
Operating margin(2) 40.4% 38.5% 41.7% 40.1%
Amortization 64,063 53,039 61,775 54,723
Operating income from
continuing operations 60,641 47,135 60,244 46,032
Financial expense 23,778 16,333 19,066 19,084
Reduction of withholding
and stamp tax contingent
liabilities - - - -
Impairment of goodwill
and intangible assets - - - -
Income taxes 9,848 9,277 9,849 (7,480)
Loss (gain) on dilution 26 107 19 (27,011)
Non-controlling interest 15,936 13,762 21,559 24,240
Income (loss) from
continuing operations 11,053 7,656 9,656 37,097
Loss from discontinued
operations - (17,632) - (6,713)
Net income (loss) 11,053 (9,976) 9,656 30,384
Net income excluding
the impairment loss,
the tax adjustments
and the loss from
discontinued
operations(2)(3) 11,053 7,656 9,656 5,309
Cash flow from operations
from continuing operations(2) 95,626 81,377 99,969 78,153
Cash flow from operating
activities from continuing
operations 30,470 46,604 146,052 107,155
Free cash flow(2) 21,771 22,974 20,981 9,131
Earnings (loss) per share
Basic
Income (loss) from
continuing operations 0.66 0.46 0.58 2.23
Loss from discontinued
operations - (1.06) - (0.40)
Net income (loss) 0.66 (0.60) 0.58 1.83
Net income excluding
the impairment loss,
the tax adjustments
and the loss from
discontinued
operations(2)(3) 0.66 0.46 0.58 0.32
Diluted
Income (loss) from
continuing operations 0.66 0.46 0.58 2.21
Loss from discontinued
operations - (1.06) - (0.40)
Net income (loss) 0.66 (0.60) 0.58 1.81
Net income excluding
the impairment loss,
the tax adjustments
and the loss from
discontinued
operations(2)(3) 0.66 0.46 0.58 0.32
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the four
quarters of fiscal 2008 and fourth quarter of fiscal 2007 reflects the
presentation of foreign exchange gains or losses as financial expense
instead of operating costs.
(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 a $27 million gain on dilution resulting from shares issued by
a subsidiary and income tax adjustments of $4.8 million, net of non-
controlling interest, 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.
The cable sector's operating results are not generally subject to
material seasonal fluctuations. However, the loss in Basic Cable service
customers is usually greater, and the addition of HSI service customers
is generally lower in the third quarter, mainly because students leave
their campus 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.
Cable Sector Customer Statistics
(unaudited)
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May 31, 2009 August 31, 2008
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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
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Total 2,459,997 2,427,534
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Revenue generating units
Ontario 1,472,676 1,387,054
Quebec 659,447 604,854
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Canada 2,132,123 1,991,908
Portugal 678,076 724,966
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Total 2,810,199 2,716,874
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Basic cable service customers
Ontario 600,160 596,229
Quebec 265,569 260,865
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Canada 865,729 857,094
Portugal 264,798 296,135
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Total 1,130,527 1,153,229
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Discretionary service customers
Ontario 496,706 493,858
Quebec 224,792 215,820
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Canada 721,498 709,678
Portugal - -
--------------------------------------------------------------------------
Total 721,498 709,678
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Pay TV service customers
Ontario 105,260 97,753
Quebec 50,044 47,075
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Canada 155,304 144,828
Portugal 66,295 57,715
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Total 221,599 202,543
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High speed internet service customers
Ontario 373,884 352,553
Quebec 135,549 120,914
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Canada 509,433 473,467
Portugal 142,184 159,301
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Total 651,617 632,768
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Digital television service customers
Ontario 320,765 288,345
Quebec 167,959 153,401
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Canada 488,724 441,746
Portugal 45,428 24,452
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Total 534,152 466,198
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Telephony service customers
Ontario 177,867 149,927
Quebec 90,370 69,674
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Canada 268,237 219,601
Portugal 225,666 245,078
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Total 493,903 464,679
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(1) Cogeco Cable is currently assessing the number of homes passed.
COGECO INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
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----------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
(In thousands of dollars,
except per share data) 2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
Revenue 316,310 283,878 936,510 816,027
Operating costs 186,906 166,672 555,739 489,124
----------------------------------------------------------------------------
Operating income from
continuing operations
before amortization 129,404 117,206 380,771 326,903
Amortization (note 3) 67,654 58,564 198,502 167,949
----------------------------------------------------------------------------
Operating income from
continuing operations 61,750 58,642 182,269 158,954
Financial expense (note 4) 14,362 17,748 56,168 51,631
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) from continuing
operations before income taxes
and the following items 58,318 40,894 (262,617) 107,323
Income taxes (note 7) 26,334 10,285 36,357 5,136
Loss on dilution resulting
from shares issued by a
subsidiary - 3 48 85
Non-controlling interest 21,504 21,068 (205,264) 68,593
----------------------------------------------------------------------------
Income (loss) from continuing
operations 10,480 9,538 (93,758) 33,509
Loss from discontinued
operations (note 16) - - - (18,057)
----------------------------------------------------------------------------
Net income (loss) 10,480 9,538 (93,758) 15,452
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per
share (note 8)
Basic
Income (loss) from
continuing operations 0.63 0.57 (5.60) 2.01
Loss from discontinued
operations - - - (1.08)
Net income (loss) 0.63 0.57 (5.60) 0.93
Diluted
Income (loss) from
continuing operations 0.63 0.57 (5.60) 2.00
Loss from discontinued
operations - - - (1.08)
Net income (loss) 0.63 0.57 (5.60) 0.92
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COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
(In thousands of dollars) 2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
Net income (loss) 10,480 9,538 (93,758) 15,452
----------------------------------------------------------------------------
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 and
non-controlling interest of
$22,173,000 and $1,566,000
(income tax expense of
$279,000 and income tax
recovery of $908,000 and non
controlling interest of
$860,000 and $4,653,000 in
2008) (10,584) 412 (742) (2,226)
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
and non-controlling interest
of $20,104,000 and $3,037,000
(income tax recovery of
$199,000 and income tax
expense of $1,465,000 and non
controlling interest of $738,000 and $5,421,000 in
2008) 9,595 (353) (1,460) 2,594
Unrealized gains (losses) on
translation of a net
investment in self-sustaining
foreign subsidiaries, net of
non-controlling interest of
$8,925,000 and $7,528,000
($15,588,000 and $32,087,000
in 2008) (4,260) 7,454 3,596 15,345
Unrealized losses (gains) on
translation of long-term debts
designated as hedges of a net
investment in self-sustaining
foreign subsidiaries, net of
non-controlling interest of
$7,709,000 and $1,033,000
($10,837,000 and $21,162,000
in 2008) 3,680 (5,182) (494) (10,120)
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(1,569) 2,331 900 5,593
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Comprehensive income (loss) 8,911 11,869 (92,858) 21,045
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COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended May 31,
(In thousands of dollars) 2009 2008
$ $
----------------------------------------------------------------------------
Balance at beginning, as previously reported 295,808 274,946
Changes in accounting policies - 424
----------------------------------------------------------------------------
Balance at beginning, as restated 295,808 275,370
Net income (loss) (93,758) 15,452
Dividends on multiple voting shares (442) (387)
Dividends on subordinate voting shares (3,576) (3,114)
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Balance at end 198,032 287,321
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COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(In thousands of dollars) May 31, 2009 August 31, 2008
$ $
----------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents 45,757 37,472
Accounts receivable 65,032 64,910
Income taxes receivable 11,528 3,569
Prepaid expenses 15,196 13,271
Future income tax assets 4,263 8,661
----------------------------------------------------------------------------
141,776 127,883
Investments 739 739
Fixed assets 1,273,929 1,261,610
Deferred charges 56,703 57,841
Intangible assets (note 9) 1,048,969 1,116,382
Goodwill (note 9) 153,710 487,805
Future income tax assets 5,265 7,221
----------------------------------------------------------------------------
2,681,091 3,059,481
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 55,406 10,302
Accounts payable and accrued liabilities 212,518 259,038
Income tax liabilities 27,599 20,793
Deferred and prepaid income 32,407 32,859
Derivative financial instruments - 79,791
Current portion of long-term debt (note 10) 177,504 336,858
----------------------------------------------------------------------------
505,434 739,641
Long-term debt (note 10) 910,471 737,055
Derivative financial instruments 2,319 -
Deferred and prepaid income and other
liabilities 12,351 11,859
Pension plan liabilities and accrued
employees benefits 11,510 9,645
Future income tax liabilities 243,507 256,307
----------------------------------------------------------------------------
1,685,592 1,754,507
----------------------------------------------------------------------------
Non-controlling interest 670,224 883,948
----------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 11) 121,006 120,049
Treasury shares (note 11) (1,847) (1,522)
Contributed surplus 2,220 1,727
Retained earnings 198,032 295,808
Accumulated other comprehensive
income (note 12) 5,864 4,964
----------------------------------------------------------------------------
325,275 421,026
----------------------------------------------------------------------------
2,681,091 3,059,481
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COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
(In thousands of dollars) 2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
Cash flow from operating
activities
Income (loss) from continuing
operations 10,480 9,538 (93,758) 33,509
Adjustments for:
Amortization (note 3) 67,654 58,564 198,502 167,949
Amortization of deferred
transaction costs 634 742 1,985 2,215
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) 7,828 4,690 566 (13,050)
Non-controlling interest 21,504 21,068 (205,264) 68,593
Loss on dilution resulting
from shares issued by a
subsidiary - 3 48 85
Foreign exchange gain on
unhedged long-term debt (2,376) - (2,376) -
Stock-based compensation 396 1,022 1,260 2,092
Loss on disposal of fixed assets 29 151 233 388
Other 279 290 1,561 1,038
----------------------------------------------------------------------------
95,498 96,068 291,475 262,819
Changes in non-cash operating
items (note 13 a)) 7,155 16,825 (37,872) (10,380)
----------------------------------------------------------------------------
Cash flow from operating
activities from continuing
operations 102,653 112,893 253,603 252,439
Cash flow from operating
activities from discontinued
operations (note 16) - - - (3,973)
----------------------------------------------------------------------------
102,653 112,893 253,603 248,466
----------------------------------------------------------------------------
Cash flow from investing
activities
Acquisition of fixed assets
(note 13 b)) (56,664) (50,940) (184,534) (160,286)
Increase in deferred charges (5,256) (7,050) (18,242) (20,661)
Business acquisitions, net of
cash and cash equivalents
acquired - (16,105) - (16,105)
Other 201 (320) 262 (435)
----------------------------------------------------------------------------
Cash flow from investing
activities from
continuing operations (61,719) (74,415) (202,514) (197,487)
Cash flow from investing
activities from
discontinued operations
(note 16) - - -
(133)---------------------------------------------------------------------------
(61,719) (74,415) (202,514) (197,620)
----------------------------------------------------------------------------
Cash flow from financing
activities
Increase (decrease) in bank
indebtedness 16,986 (15,686) 45,104 2,090
Net repayments under the term
facilities (56,515) (60,451) (86,464) (129,586)
Issuance of long-term debt,
net of transaction costs - 99,759 254,771 99,810
Repayments of long-term debt
and settlement of derivative
financial instruments (801) (731) (241,428) (2,007)
Issue of subordinate voting
shares 936 266 957 327
Acquisition of treasury shares - - (325) (468)
Dividends on multiple voting shares (147) (129) (442) (387)
Dividends on subordinate voting
shares (1,192) (1,038) (3,576) (3,114)
Issue of shares by a subsidiary
to non-controlling interest - 62 964 3,354
Dividends paid by a subsidiary
to non-controlling interest (3,944) (3,281) (11,827) (9,834)
----------------------------------------------------------------------------
Cash flow from financing
activities from continuing
operations (44,677) 18,771 (42,266) (39,815)
Cash flow from financing
activities from discontinued
operations (note 16) - - - 4,106
----------------------------------------------------------------------------
(44,677) 18,771 (42,266) (35,709)
----------------------------------------------------------------------------
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 (5,609) 58,312 8,285 16,402
Cash and cash equivalents
at beginning 51,366 24,369 37,472 66,279
----------------------------------------------------------------------------
Cash and cash equivalents
at end 45,757 82,681 45,757 82,681
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See supplemental cash flow information in note 13.
COGECO 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, present fairly the financial
position of COGECO Inc. ("the Company") 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 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 Company 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 Company'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 Company 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 Company 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, decreased non-controlling interest by $1.8 million and decreased
accumulated other comprehensive income by $0.8 million at December 1,
2008 and had no significant impact on the consolidated balance sheet at
September 1, 2008.
Future accounting pronouncement
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 for fiscal year beginning on
or after January 1, 2011.
Section 1582 requires that all business acquisition 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
entity 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 Company'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 Company 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 Company
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 Company 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 Company 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 Company 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, the impact on
information technology, data system and business activities will be
assessed. The Company'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 Company.
Set out below are the main areas where changes in accounting policies are
expected to have a significant impact on the Company'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 Company 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 Company'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 Company 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 Company is
analyzing the various accounting policy choices available and will
implement those determined to be most appropriate in the Company's
circumstances. The Company 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 principal financial information per business segment is presented in
the tables below:
----------------------------------------------------------------------------
---------------------------------------------------------------------------
-
Cable Other and Consolidated
eliminations
----------------------------------------------------------------------------
Three months ended
May 31, 2009 2008 2009 2008 2009 2008
$ $ $ $ $ $
----------------------------------------------------------------------------
Revenue 305,672 274,944 10,638 8,934 316,310 283,878
Operating costs 176,941 157,452 9,965 9,220 186,906 166,672
Operating income
(loss) from
continuing
operations
before
amortization 128,731 117,492 673 (286) 129,404 117,206
Amortization 67,513 58,209 141 355 67,654 58,564
Operating income
(loss)
from
continuing
operations 61,218 59,283 532 (641) 61,750 58,642
Financial expense 14,206 17,374 156 374 14,362 17,748
Reduction of
withholding
and stamp tax
contingent
liabilities (10,930) - - - (10,930) -
Income taxes 26,172 10,767 162 (482) 26,334 10,285
Loss on dilution
resulting
from shares
issued
by a subsidiary - 3 - - - 3
Non-controlling
interest 21,504 21,068 - - 21,504 21,068
Income (loss)
from
continuing
operations 10,266 10,071 214 (533) 10,480 9,538
----------------------------------------------------------------------------
Total assets(1) 2,636,362 3,019,155 44,729 40,326 2,681,091 3,059,481
Fixed assets(1) 1,270,386 1,257,965 3,543 3,645 1,273,929 1,261,610
Intangible
assets(1) 1,023,629 1,091,042 25,340 25,340 1,048,969 1,116,382
Goodwill(1) 153,710 487,805 - - 153,710 487,805
Acquisition of
fixed assets(2) 57,663 51,878 163 33 57,826 51,911
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) At May 31, 2009 and August 31, 2008.
(2) Includes capital leases that are excluded from the consolidated
statements of cash flows.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cable Other and Consolidated
eliminations
----------------------------------------------------------------------------
Nine months ended
May 31, 2009 2008 2009 2008 2009 2008
$ $ $ $ $ $
----------------------------------------------------------------------------
Revenue 910,030 791,879 26,480 24,148 936,510 816,027
Operating costs 536,115 468,427 19,624 20,697 555,739 489,124
Operating income
from continuing
operations
before
amortization 373,915 323,452 6,856 3,451 380,771 326,903
Amortization 198,079 166,885 423 1,064 198,502 167,949
Operating income
from continuing
operations 175,836 156,567 6,433 2,387 182,269 158,954
Financial expense 55,588 50,387 580 1,244 56,168 51,631
Reduction of
withholding
and stamp tax
contingent
liabilities (10,930) - - - (10,930) -
Impairment of
goodwill and
intangible
assets 399,648 - - - 399,648 -
Income taxes 34,778 4,764 1,579 372 36,357 5,136
Loss on dilution
resulting from
shares issued
by a subsidiary 48 85 - - 48 85
Non-controlling
interest (205,264) 68,593 - - (205,264) 68,593
Income (loss) from
continuing
operations (98,032) 32,738 4,274 771 (93,758) 33,509Loss
from
discontinued
operations - - - (18,057) - (18,057)
----------------------------------------------------------------------------
Total assets(1) 2,636,362 3,019,155 44,729 40,326 2,681,091 3,059,481
Fixed assets(1) 1,270,386 1,257,965 3,543 3,645 1,273,929 1,261,610
Intangible
assets(1) 1,023,629 1,091,042 25,340 25,340 1,048,969 1,116,382
Goodwill(1) 153,710 487,805 - - 153,710 487,805
Acquisition of
fixed assets(2) 186,611 162,479 346 224 186,957 162,703
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) At May 31, 2009 and August 31, 2008.
(2) Includes capital leases that are excluded from the consolidated
statements of cash flows.
The following tables set out certain geographic market information based on
client location:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
Revenue
Canada 258,739 219,862 755,635 636,485
Europe 57,571 64,016 180,875 179,542
----------------------------------------------------------------------------
316,310 283,878 936,510 816,027
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
May 31, 2009 August 31, 2008
$ $
----------------------------------------------------------------------------
Fixed assets
Canada 982,139 944,328
Europe 291,790 317,282
----------------------------------------------------------------------------
1,273,929 1,261,610
----------------------------------------------------------------------------
Intangible assets
Canada 1,048,969 1,052,608
Europe - 63,774
----------------------------------------------------------------------------
1,048,969 1,116,382
----------------------------------------------------------------------------
Goodwill
Canada 116,890 116,890
Europe 36,820 370,915
----------------------------------------------------------------------------
153,710 487,805
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Amortization
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
Fixed assets 60,163 50,105 171,219 143,099
Deferred charges 6,298 5,684 18,157 17,084
Intangible assets 1,193 2,775 9,126 7,766
----------------------------------------------------------------------------
67,654 58,564 198,502 167,949
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. Financial expense
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
Interest on long-term debt 15,300 17,788 52,599 51,620
Foreign exchange losses (gains) (1,687) 2 2,716 (856)
Amortization of deferred
transaction costs 408 408 1,222 1,222
Other 341 (450) (369) (355)
----------------------------------------------------------------------------
14,362 17,748 56,168 51,631
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Reduction of withholding and stamp tax contingent liabilities
The Company's Portuguese cable 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 Company's subsidiary 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 Company's subsidiary's investment in the Portuguese
subsidiary. As a result, the Company's subsidiary 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 Company's subsidiary 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 Company's
subsidiary 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 18,506 5,595 35,791 18,186
Future 7,828 4,690 566 (13,050)
----------------------------------------------------------------------------
26,334 10,285 36,357 5,136
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 58,318 40,894 (262,617) 107,323
Combined income tax rate 32.49% 33.42% 32.49% 33.39%
Income taxes at combined
income tax rate 18,949 13,665 (85,334) 35,840
Adjustments for loss or
income subject to lower or
higher tax rates (38) (944) (918) (1,294)
Decrease in future income
taxes as a result of
decreases in substantively
enacted tax rates - - - (24,146)
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 238 298 512 602
Effect of foreign income
tax rate differences 1,127 (2,821) 25,155 (6,198)
Other (84) 87 910 332
----------------------------------------------------------------------------
Income taxes at effective
income tax rate 26,334 10,285 36,357 5,136
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
$ $ $ $
----------------------------------------------------------------------------
Income (loss) from continuing
operations 10,480 9,538 (93,758) 33,509
Loss from discontinued
operations - - - (18,057)
----------------------------------------------------------------------------
Net income (loss) 10,480 9,538 (93,758) 15,452
----------------------------------------------------------------------------
Weighted average number of
multiple voting and
subordinate voting shares
outstanding 16,758,923 16,682,468 16,746,931 16,676,369
Effect of dilutive stock
options(1) - 54,599 - 70,256
----------------------------------------------------------------------------
Weighted average number of
diluted multiple voting
and subordinate voting
shares outstanding 16,758,923 16,737,067 16,746,931 16,746,625
----------------------------------------------------------------------------
Earnings (loss) per share
Basic
Income (loss) from
continuing operations 0.63 0.57 (5.60) 2.01
Loss from
discontinued operations - - - (1.08)
Net income (loss) 0.63 0.57 (5.60) 0.93
Diluted
Income (loss) from
continuing operations 0.63 0.57 (5.60) 2.00
Loss from
discontinued operations - - - (1.08)
Net income (loss) 0.63 0.57 (5.60) 0.92
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The weighted average dilutive number of subordinate voting shares, which
were anti-dilutive for the three and nine month periods ended May 31,
2009, amounted to 3,947 and 11,432. For the three and nine month periods
ended May 31, 2009, 32,782 stock options (33,182 and 22,121 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
Broadcasting licenses 25,120 25,120
Customer base 989,772 989,772
----------------------------------------------------------------------------
1,048,969 1,116,382
Goodwill 153,710 487,805
----------------------------------------------------------------------------
1,202,679 1,604,187
----------------------------------------------------------------------------
----------------------------------------------------------------------------
a) Intangible assets
During the first nine months, intangible assets variations were as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Customer Broadcasting Customer
relationships licenses Base Total
$ $ $ $
----------------------------------------------------------------------------
Balance at August 31, 2008 101,490 25,120 989,772 1,116,382
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 25,120 989,772 1,048,969
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 rate May 31, 2009 August 31, 2008
% $ $
----------------------------------------------------------------------------
Parent company
Term Facility 2011(1) 3.11(2) 11,853 18,748
Obligations under
capital leases 2013 6.61 - 9.29 100 77
Subsidiaries
Term Facility
Term loan
- EUR 94,096,350 2011 1.69(2)(5) 144,712 145,832
Term loan
- EUR 17,358,700 2011 1.69(2)(5) 26,668 26,881
Revolving loan
-EUR 69,250,000
(EUR 126,000,000
at August 31, 2008) 2011 1.63(2) 106,873 196,308
Revolving loan 2011 1.22(2) 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(3) - 159,233
Series B 2011 7.73 174,482 174,338
Senior Secured
Notes (4)
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
Obligations under
capital leases 2013 6.47 - 9.93 8,074 8,492
Other - - 33 47
----------------------------------------------------------------------------
1,087,975 1,073,913
Less current portion 177,504 336,858
----------------------------------------------------------------------------
910,471 737,055
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In December 2008, the Term Facility has been extended for an additional
year.
(2) Average interest rate on debt at May 31, 2009, including stamping fees.
(3) Cross-currency swap agreements have resulted in an effective interest
rate of 7.254% on the Canadian dollar equivalent of the US denominated
debt of the Company's subsidiary, Cogeco Cable Inc.
(4) On October 1, 2008, the Company's subsidiary, Cogeco Cable Inc., 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 Company's subsidiary 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.
(5) On January 21, 2009, the Company's subsidiary, Cogeco Cable Inc.,
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 Company's subsidiary
will continue to pay the applicable margin on these Term Loans in
accordance with the Term Facility.
11. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, issuable in series and
non-voting, except when specified in the Articles of Incorporation of the
Company or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting share, 1 vote per share.
----------------------------------------------------------------------------
---------------------------------------------------------------------------
-
May 31, 2009 August 31, 2008
$ $
----------------------------------------------------------------------------
Issued
1,842,860 multiple voting shares 12 12
14,942,470 subordinate voting shares
(14,897,586 at August 31, 2008) 120,994 120,037
----------------------------------------------------------------------------
121,006 120,049
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the first nine months, subordinate
voting share transactions were as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of shares Amount
$
----------------------------------------------------------------------------
Balance at August 31, 2008 14,897,586 120,037
Shares issued for cash under the
Employee Stock Purchase Plan and
Stock Option Plan 44,884 957
----------------------------------------------------------------------------
Balance at May 31, 2009 14,942,470 120,994
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock-based plans
The Company 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 Company's annual
consolidated financial statements. During the first nine months of 2009
and 2008, no stock options were granted to employees by COGECO Inc.
However, the Company's subsidiary, Cogeco Cable Inc., 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. The
Company records compensation expense for options granted on or after
September 1, 2003. As a result, a compensation expense of $310,000 and
$585,000 ($595,000 and $1,502,000 in 2008) was recorded for the three and
nine month periods ended May 31, 2009.
The fair value of stock options granted by the Company's subsidiary,
Cogeco Cable Inc., for the nine months period ended May 31, 2009 was
$7.70 ($12.59 in 2008) per option. The fair value 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 Company had outstanding stock options providing
for the subscription of 79,650 subordinate voting shares. These stock
options can be exercised at various prices ranging from $20.95 to $37.50
and at various dates up to October 19, 2011.
The Company also offers a senior executives and designated employee
incentive unit plan (the "Incentive Share Unit Plan") which is described
in the Company's annual consolidated financial statements. During the
first nine months, the Company granted 17,702 Incentive Share Units
(12,852 in 2008). These shares were purchased for a cash consideration of
$325,000 ($468,000 in 2008) and are held in trust for participants until
they are completely vested. The trust, considered as a variable interest
entity, is consolidated in the Company's financial statements with the
value of the acquired shares presented as treasury shares in reduction of
capital stock. A compensation expense of $133,000 and $371,000 ($95,000
and $258,000 in 2008) was recorded for the three and nine month periods
ended May 31, 2009 related to this plan.
The Company and its subsidiary, Cogeco Cable Inc., offer deferred share
unit plans ("DSU Plans") which are described in the Company's annual
consolidated financial statements. During the first nine months, 11,113
and 6,282 deferred share units were awarded to the participants in
connection with the DSU Plans by the Company and its subsidiary,
respectively. Recovery of expense of $47,000 and expenses of $304,000
were recorded for the three and nine month periods ended May 31, 2009 for
the liabilities related to these plans.
12. Accumulated Other Comprehensive Income
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Translation of a net
investment in self-
sustaining foreign
subsidiaries Cash flow hedges Total
$ $ $
----------------------------------------------------------------------------
Balance at August 31, 2008 5,064 (100) 4,964
Other comprehensive income (loss) 3,102 (2,202) 900
----------------------------------------------------------------------------
Balance at May 31, 2009 8,166 (2,302) 5,864
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 475 (1,869) (19) (6,148)
Income taxes receivable (1,468) 199 (7,990) 1,406
Prepaid expenses (2,200) 1,222 (2,026) 2,418
Accounts payable and
accrued liabilities (5,732) 11,371 (34,730) (20,995)
Income tax liabilities 16,437 5,643 6,852 13,833
Deferred and prepaid income
and other liabilities (357) 259 41 (894)
----------------------------------------------------------------------------
7,155 16,825 (37,872) (10,380)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 2,423 2,417
Interest paid 22,518 20,319 56,488 53,063
Income taxes paid (received) 3,168 (245) 36,563 2,895
----------------------------------------------------------------------------
----------------------------------------------------------------------------
14. Employees Future Benefits
The Company and its Canadian subsidiaries offer their employees
contributory defined benefit pension plans, a defined contribution
pension plan or collective registered retirement savings plans, which are
described in the Company'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 767 657 2,261 1,973
Defined contribution pension plan
and collective registered
retirement savings plans 1,093 861 2,919 2,283
----------------------------------------------------------------------------
1,860 1,518 5,180 4,256
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. Financial and Capital Management
a) Financial management
Management's objectives are to protect COGECO 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 Company if a
customer or counterparty to a financial asset fails to meet its
contractual obligations. The Company 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 Company. The Company
reduces this risk by completing transactions with financial institutions
that carry a credit rating equal to or superior to its own credit rating.
The Company 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 Company has deposited the cash and
cash equivalents with reputable financial institutions, from which
management believes the risk of loss to be remote.
The Company is also exposed to credit risk in relation to its trade
accounts receivable. In the current global economic environment, the
Company's credit exposure is higher but it is difficult to predict the
impact this could have on the Company's accounts receivable balances. To
mitigate such risk, the Company 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 Company's consolidated trade
receivables. The Company 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 Company believes that its
allowance for doubtful accounts is sufficient to cover the related credit
risk. The Company 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 Company
has a large and diversified clientele dispersed throughout in it's market
area in Canada and Portugal, there is no significant concentration of
credit risk. The following table provides further details on the
Company's accounts receivable balances:
----------------------------------------------------------------------------
---------------------------------------------------------------------------
-
May 31, 2009 August 31, 2008
$ $
----------------------------------------------------------------------------
Trade accounts receivable 77,408 73,160
Allowance for doubtful accounts (17,297) (13,181)
----------------------------------------------------------------------------
60,111 59,979
Other accounts receivable 4,921 4,931
----------------------------------------------------------------------------
65,032 64,910
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
Cogeco Cable Inc.'s customers are billed in advance and are required to
pay before their services are rendered. The Company 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 44,676 43,659
Net trade accounts receivable past due 15,435 16,320
----------------------------------------------------------------------------
60,111
59,979--------------------------------------------------------------------------
-
----------------------------------------------------------------------------
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they become due. The Company 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 Company's Term Facilities was $497.6 million. Management believes
that the committed Term Facilities will, until their maturities in July
2011 and December 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 55,406 - -
Accounts payable and
accrued liabilities 212,518 - -
Long-term debt(1) 174,218 40,357 319,340
Derivative financial
instruments
Cash outflows (Canadian dollar) - - -
Cash inflows (Canadian dollar
equivalent of US dollar) - - -
Obligations under capital
leases(2) 1,941 3,276 2,350
----------------------------------------------------------------------------
444,083 43,633 321,690
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Principal excluding obligations under capital leases.
(2) Including interest.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2012 2013 Thereafter Total
(twelve months) (twelve months)
$ $ $ $
----------------------------------------------------------------------------
Bank indebtedness - - - 55,406
Accounts payable and
accrued liabilities - - - 212,518
Long-term debt(1) 187,000 - 362,423 1,083,338
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) 1,616 295 6 9,484
----------------------------------------------------------------------------
188,616 295 356,881 1,355,198
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 and their respective maturities:
----------------------------------------------------------------------------
---------------------------------------------------------------------------
-
2009 2010 2011
(three months) (twelve months) (twelve months)
$ $ $
----------------------------------------------------------------------------
Interest payments on
long-term debt 11,081 43,994 42,968
Interest payments on
derivative financial
instruments 4,812 18,696 17,398
Interest receipts on
derivative financial
instruments (4,322) (16,957) (16,182)
----------------------------------------------------------------------------
11,571 45,733 44,184
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2012 2013 Thereafter Total
(twelve months) (twelve months)
$ $ $ $
----------------------------------------------------------------------------
Interest payments on
long-term debt 26,999 24,636 78,210 227,888
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)
----------------------------------------------------------------------------
27,093 24,730 78,406 231,717
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest rate risk
The Company 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 Company's long-term debt
was at fixed rate, except for the Company's Term Facilities. On January
21, 2009, the Company's subsidiary, Cogeco Cable Inc., 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 Company subsidiary will continue to pay the applicable
margin on these Term Loans in accordance with the Term Facility. The
Company's subsidiary elected to apply cash flow hedge accounting on this
derivative financial instrument. The sensitivity of the Company's annual
financial expense to a variation of 1% in the interest rate applicable to
the Term Facilities is approximately $2.2 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 Company is exposed to foreign exchange risk related to its long-term
debt denominated in US dollars. In order to mitigate this risk, the
Company 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 Company's subsidiary,
Cogeco Cable Inc., 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 Company's subsidiary elected to apply cash flow
hedge accounting on these derivative financial instruments.
The Company 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 Company'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 $0.2 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
Company'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 1,087,975 1,076,624 1,073,913 1,068,469
----------------------------------------------------------------------------
----------------------------------------------------------------------------
b) Capital management
The Company's objectives in managing capital are to ensure sufficient
liquidity to support the capital requirements of its various businesses,
including growth opportunities. The Company manages its capital structure
and makes adjustments in light of general economic conditions, the risk
characteristics of the underlying assets and the Company'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 Company is composed of shareholders' equity,
bank indebtedness, long-term debt and assets or liabilities related to
derivative financial instruments.
The provisions under the Term Facilities provide for restrictions on the
operations and activities of the Company. 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 Company was in compliance with all 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 Company's capital structure:
----------------------------------------------------------------------------
---------------------------------------------------------------------------
-
May 31, 2009 August 31, 2008
----------------------------------------------------------------------------
Net indebtedness(1) / Shareholders' equity 3.4 2.7
Net indebtedness(1) / Operating income before
amortization(2) 2.2 2.5
Operating income before amortization /
Financial expense(3) 6.8 6.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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. Discontinued Operations
In October 2007, the Board of Directors of TQS, an indirect subsidiary of
the Company, engaged CIBC World Markets to advise on and assess strategic
options for the TQS network in the face of financial difficulties. On
December 18, 2007, the Quebec Superior Court issued an order under the
Companies' Creditors Arrangement Act (Canada) protecting TQS, its
subsidiaries and its parent 3947424 Canada Inc. ("TQS Group") from claims
by their creditors. On June 26, 2008, the Canadian Radio-television and
Telecommunications Commission ("CRTC") approved the proposed transfer of
ownership and control of TQS to Remstar Corporation Inc. ("Remstar") and
on August 29, 2008, the transfer of ownership and control of TQS to
Remstar was completed, which allowed the new ownership group to pursue
the broadcasting activities of TQS.
Effective December 18, 2007, the Company has ceased to consolidate the
financial statements of the TQS Group. Accordingly, the results of
operations and cash flows for the three month period ended November 30,
2007, has been reclassified as discontinued operations. The results of
the discontinued operations were as follows:
----------------------------------------------------------------------------
---------------------------------------------------------------------------
-
Three months Nine months
ended May 31, ended May 31,
2009 2008 2009 2008
$ $ $ $
----------------------------------------------------------------------------
Revenue - - - 38,499
Operating costs - - - 35,822
----------------------------------------------------------------------------
Operating income before amortization - - - 2,677
Amortization - - - 1,364
----------------------------------------------------------------------------
Operating income - - - 1,313
Financial expense - - - 291
Impairment of assets - - - 30,298
----------------------------------------------------------------------------
Loss before income taxes and the
following items - - - (29,276)
Income taxes - - - -
Non-controlling interest - - - (11,219)
----------------------------------------------------------------------------
Loss from discontinued operations - - - (18,057)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
17. Subsequent event
On June 9, 2009, the Company's subsidiary, Cogeco Cable Inc., 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 Inc.'s existing
indebtedness and for general corporate purposes.
18. 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 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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