Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Company") announced its financial
results for the second quarter and first six months of fiscal 2010, ended
February 28, 2010.
For the second quarter and first six months of fiscal 2010:
-- Revenue increased by 5.5% to reach $329.1 million, and by 5.9% to $657.1
million, respectively;
-- Operating income before amortization(1) grew by 0.7% to reach $124.4
million for the second quarter, and by 3.9% to reach $253.6 million for
the first six months;
-- Operating margin(1) for the quarter decreased to 37.8% from 39.6% and to
38.6% from 39.4% in the first six months when compared to fiscal 2009.
The reduced margins reflect the retention strategies and additional
marketing activities in the European operations of the cable subsidiary;
-- For the second quarter, net income amounted to $10.5 million compared to
a net loss of $115.2 million for the second quarter of the previous
fiscal year. The net loss in the second quarter of fiscal 2009 included
a non-cash impairment loss on the net value of the acquired assets of
the indirect Portuguese subsidiary, net of related income taxes and non-
controlling interest, of $124 million, and excluding this amount,
adjusted net income(1) would have amounted to $8.7 million. When
compared to fiscal 2009 adjusted net income, fiscal 2010 second quarter
net income grew by $1.8 million, or 20.2%. For the first half of the
fiscal year, net income amounted to $33.3 million. Excluding a
favourable income tax adjustment, net of non-controlling interest, of
$9.6 million in the first six months of the year related to the
reduction of Ontario provincial corporate income tax rates for the cable
subsidiary, adjusted net income would have amounted to $23.6 million, an
increase of $4 million, or 20.6%, compared to $19.6 million in fiscal
2009 after adjustment for the impairment loss described above;
-- Free cash flow(1) reached $45.8 million for the quarter and $112.9
million for the first six months, representing increases of $13.7
million and $59.1 million when compared to the comparable periods of
fiscal 2009;
-- In the cable sector, revenue-generating units ("RGU")(2) grew by 68,782
and 158,567 net additions in the quarter and first six months, for a
total of 3,050,805 RGU at February 28, 2010.
"COGECO continues to generate growth across its main key performance indicators
for the second quarter of fiscal 2010. In the cable sector, Canadian operations
have posted steady growth with net additions of 47,274 RGU, while the European
operations' RGU growth of 21,508 continue to demonstrate the efficiency of the
various customer acquisition and retention plans, and the promotions implemented
in response to the difficult competitive environment beginning in the prior
year. These recent activities have impacted operating margins, however we
believe that this situation is transitory and that margins will recover to
historical levels. As for the radio activities, Rythme FM remains the preferred
choice of Montreal listeners according to the 2010 winter BBM Canada survey,
conducted with Portable People Meter ("PPM"). In this competitive market,
advertisers and listeners continue to choose our radio stations. These results
reinforce our confidence in our ability to achieve our revised fiscal 2010
projections, and anticipate RGU growth in the cable sector to surpass these
projections and reach 200,000 net additions by the end of the year", 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
---------------------------------------------------------------------------
Quarters ended February 28, Six months ended February 28,
2010 2009(1) Change 2010 2009(1) Change
($000, except
percentages
andper share
data) $ $ % $ $ %
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operations
Revenue 329,087 311,825 5.5 657,090 620,200 5.9
Operating
income
before
amortization
(2) 124,363 123,505 0.7 253,626 244,216 3.9
Operating
margin(2) 37.8% 39.6% - 38.6% 39.4% -
Operating
income 58,370 60,171 (3.0) 121,932 120,000 1.6
Impairment
of goodwill
and
intangible
assets - 399,648 - - 399,648 -
Net income
(loss) 10,511 (115,210) - 33,259 (104,349) -
Adjusted net
income(2) 10,511 8,741 20.2 23,639 19,602 20.6
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Cash Flow
Cash flow
from
operating
activities 117,498 117,322 0.2 116,088 143,799 (19.3)
Cash flow
from
operations
(2) 120,331 97,193 23.8 255,849 188,826 35.5
Free cash
flow(2) 45,782 32,089 42.7 112,913 53,860 -
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Financial
condition(3)
Total assets - - - 2,666,853 2,670,128 (0.1)
Indebtedness
(4) - - - 1,065,659 1,064,542 0.1
Shareholders
' Equity - - - 360,893 332,122 8.7
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RGU growth 68,782 60,410 13.9 158,567 113,124 40.2
---------------------------------------------------------------------------
Per Share
Data(5)
Earnings
(loss) per
share
Basic 0.63 (6.90) - 1.99 (6.25) -
Diluted 0.63 (6.88) - 1.98 (6.23) -
Adjusted
earnings per
share(2)
Basic 0.63 0.52 21.2 1.41 1.17 20.5
Diluted 0.63 0.52 21.2 1.41 1.17 20.5
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(1) Certain comparative figures have been restated to reflect the
application of the Canadian Institute of Chartered Accountants
("CICA") Handbook Section 3064. Please refer to the "Accounting
policies and estimates" section of the Management's discussion and
analysis for more details.
(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) At february 28, 2010 and august 31, 2009.
(4) indebtedness is defined as the total of bank indebtedness, principal
on long-term debt and obligations under derivative financial
instruments.
(5) Per multiple and subordinate voting share.
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 2009 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 2009 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 operating income before amortization(1), operating margin(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.
Cable sector
During the first six months of fiscal 2010, Cogeco Cable invested approximately
$67.8 million in its network infrastructure and equipment to upgrade its
capacity, improve its robustness and extend its territories in order to better
serve and increase its service offerings for new and existing clientele.
RGU growth and service offerings in the cable sector
During the first six months ended February 28, 2010, the number of RGU increased
by 158,567, or 5.5%, to reach 3,050,805 RGU. In light of the strong RGU growth
during the first six months of fiscal 2010, Cogeco Cable has revised its
guidelines to 200,000 net additions, or approximately 6.9% when compared to
August 31, 2009, from 150,000 RGU as issued on January 12, 2010. Please consult
the "Fiscal 2010 financial guidelines" section for further details.
Operating income before amortization and operating margin
For the second quarter of fiscal 2010, operating income before amortization grew
by $0.9 million, or 0.7%, to reach $124.4 million, however operating margin
decreased to 37.8%, from 39.6%. For the first half of fiscal 2010, operating
income before amortization increased by $9.4 million, or 3.9%, to reach $253.6
million, while operating margin decreased to 38.6% from 39.4%. Management
maintains its revised projection of $512 million in operating income before
amortization for the 2010 fiscal year as issued on January 12, 2010.
Free cash flow
In the three month period ended February 28, 2010, COGECO generated free cash
flow of $45.8 million, compared to $32.1 million in the second quarter of the
prior fiscal year. In the first half of fiscal 2010, free cash flow amounted to
$112.9 million, compared to $53.9 million in the first six months of fiscal
2009. Free cash flow growth results mainly from the cable sector and is due to
an increase in cash flow from operations(1), including the reduction in current
income taxes stemming from modifications made to the corporate structure, partly
offset by the increase in capital expenditures. Management expects to achieve
its revised free cash flow guidelines of $140 million for the 2010 fiscal year.
(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.
Other
BBM Canada's winter survey in the Montreal region, conducted with the Portable
People Meter ("PPM"), shows that Rythme FM has maintained its leadership
position in this competitive market.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
During the second quarter of fiscal 2009, the competitive position of Cogeco
Cable's subsidiary, Cabovisao - Televisao por Cabo, S.A. ("Cabovisao"), in the
Iberian Peninsula further deteriorated due to the continuing difficult
competitive environment and recurring intense 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 customer, local
currency revenue and operating income before amortization 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 to which
goodwill is assigned 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 impairment loss is measured as the amount by which the
carrying amount of the reporting unit's goodwill exceeds its fair value. 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 of the 2009 fiscal year. Fair value
of the reporting unit was determined using the discounted cash flow method.
Future cash flows were based on internal forecasts and consequently,
considerable management judgement was necessary to estimate future cash flows.
Significant future changes in circumstances could result in further impairments
of goodwill.
Intangible assets with finite useful 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. The impairment loss is measured as the amount by which
the asset's carrying amount exceeds its fair value. 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 of the 2009 fiscal year.
The impairment loss affected the Company's financial results as follows during
the second quarter of fiscal 2009:
---------------------------------------------------------------------------
($000) $
---------------------------------------------------------------------------
(unaudited)
Impairment of goodwill 339,206
Impairment of customer relationships 60,442
Future income taxes (16,018)
---------------------------------------------------------------------------
Impairment loss net of related income taxes 383,630
Non-controlling interest (259,679)
---------------------------------------------------------------------------
Impairment loss net of related income taxes and non-
controlling interest 123,951
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OPERATING RESULTS - CONSOLIDATED OVERVIEW
--------------------------------------------------------------------------
Quarters ended February 28 Six months ended February 28,
2010 2009(1) Change 2010 2009(1) Change
($000, except
percentages) $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 329,087 311,825 5.5 657,090 620,200 5.9
Operating
costs 204,724 188,320 8.7 403,464 375,984 7.3
--------------------------------------------------------------------
Operating
income before
amortization 124,363 123,505 0.7 253,626 244,216 3.9
--------------------------------------------------------------------
Operating
margin 37.8% 39.6% 38.6% 39.4%
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(1) Certain comparative figures have been restated to reflect the
application of the Canadian Institute of Chartered Accountants
("CICA") Handbook Section 3064. Please refer to the "Accounting
policies and estimates" section for more details.
Revenue
Fiscal 2010 second-quarter and first six months, revenue improved, mainly in its
cable sector, by $17.3 million, or 5.5%, and by $36.9 million, or 5.9%, to reach
$329.1 million and $657.1 million, respectively. Cable revenue, driven by
increased RGU, the introduction of HSI usage billing, the revenue related to the
additional levy amounting to 1.5% of gross Cable Television service revenue
imposed by the Canadian Radio-television and Telecommunications Commission
("CRTC") in order to finance the new Local Programming Improvement Fund ("LPIF")
for the benefit of conventional television broadcasters operating local stations
in Canada, and rate increases implemented at the end of fiscal 2009 in its
Canadian operations, went up by $15.5 million, or 5.1% for the second quarter
and by $33.4 million, or 5.5% for the first six months when compared to the
prior year.
Canadian cable operations revenue increased by $27.8 million in the second
quarter and by $54.7 million in the first half of the fiscal year, both
representing increases of 11.4% over the comparable periods of the prior year.
However, cable sector revenue growth has been curtailed by its European
operations which recorded declines of $12.3 million, or 20%, in the quarter and
$21.3 million, or 17.3% in the first six months mainly due to a lower number of
Basic Cable service customers compared to the same periods of fiscal 2009 year,
to the impact of retention strategies implemented in the second half of the
prior year in order to reduce customer attrition, and to a decrease in the value
of the Euro compared to the Canadian dollar.
Operating costs
For the second quarter and first six months of fiscal 2010, operating costs
amounted to $204.7 million and $403.5 million, respectively, increases of $16.4
million, or 8.7%, and of $27.5 million, or 7.3%, when compared to the prior
year, mainly due to the cable sector. Operating costs in the Canadian operations
of the cable sector increased due to the servicing of additional RGU, the launch
of new HD channels and the additional levy amounting to 1.5% of gross Cable
Television service revenue imposed by the CRTC in order to finance the new LPIF.
In Europe, operating costs decreased due to the decline of the value of the Euro
over the Canadian dollar which surpassed increases in operating costs related to
marketing initiatives and the launch of new channels, net of the impact of cost
reduction initiatives implemented by Cabovisao, such as a headcount reduction
plan.
Operating income before amortization and operating margin
Operating income before amortization grew, essentially in its cable segment, by
$0.9 million, or 0.7%, to reach $124.4 million in the second quarter of fiscal
2010, and by $9.4 million, or 3.9%, in the first six months of the year when
compared to the corresponding periods of the prior year. The cable sector
contributed to the growth by $0.3 million during the second quarter of the
fiscal year, and by $7.2 million in the first half of fiscal 2010. COGECO's
second-quarter operating margin decreased to 37.8%, from 39.6%, and in the first
six months decreased to 38.6% from 39.4% in the first six months of the previous
year.
FIXED CHARGES
---------------------------------------------------------------------------
Quarters ended February 28, Six months ended February 28,
2010 2009(1) Change 2010 2009(1) Change
($000, except
percentages) $ $ % $ $ %
---------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Amortization 65,993 63,334 4.2 131,694 124,216 6.0
Financial
expense 15,187 18,028 (15.8) 31,464 41,806 (24.7)
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(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
Second-quarter and first six months 2010 amortization amounted to $66 million
and $131.7 million, compared to $63.3 million and $124.2 million for the same
periods of the prior year. The increases are mainly due to the cable sector and
due to additional capital expenditures arising from customer premise equipment
acquisitions to sustain RGU growth.
Second-quarter and first six months financial expense amounted to $15.2 million
and $31.5 million, compared to $18 million and $41.8 million for the prior year.
The financial expense of the current year includes foreign exchange gains in the
cable sector of $0.4 million and $0.9 million for the quarter and first six
months, compared to foreign exchange losses of $0.6 million and $4.4 million in
the prior year. The losses in the prior year were essentially due to the
unusually high and sudden US dollar volatility, as the majority of customer
premise equipment is purchased and subsequently paid in US dollars. The
remaining decreases of $1.8 million and $5.1 million, respectively, are due to
interest rate reductions and a decrease in Indebtedness (defined as the total of
bank indebtedness, principal on long-term debt and obligations under derivative
financial instruments) when compared with the comparable periods of the previous
fiscal year.
INCOME TAXES
Fiscal 2010 second-quarter income tax expense amounted to $12.5 million,
compared to $0.2 million in the prior year, and for the first six months, the
income tax recovery amounted to $1.3 million compared to an expense of $9.9
million in the prior year. The income tax recovery in the first six months of
fiscal 2010 includes the impact, in the cable sector, of the reduction in
corporate income tax rates announced on March 26, 2009 by the Ontario provincial
government and considered substantively enacted on November 16, 2009 (the
"reduction of Ontario provincial corporate income tax rates"). These lower
corporate income tax rates reduced future income tax expense by $29.8 million in
the first six months of fiscal 2010. The income tax amounts for the second
quarter and first six months of the prior year include a future income tax
recovery of $16 million related to the impairment loss recorded in the second
quarter of fiscal 2009. Excluding the impact of the reduction of Ontario
provincial corporate income tax rates in the current year and of the income tax
recovery related to the impairment loss in the prior year, income tax expense
would have amounted to $12.5 million and $28.5 million for the second quarter
and first six months of fiscal 2010, respectively, compared to $16.2 million for
the second quarter and $25.9 million for the first half of fiscal 2009. The
decrease in income tax expense for the second quarter of fiscal 2010 is mainly
due to the reduction of Ontario provincial corporate income tax rates. The
increase in income tax expense for the first half of the fiscal year is mainly
due to the improvement in operating income before amortization and a reduction
in fixed charges in the Canadian operations of the cable sector.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7%
in Cogeco Cable's results. During the second quarter and first six months of
fiscal 2010, the income attributable to non-controlling interest amounted to
$20.2 million and $58.5 million due to the strong cable sector's results. The
loss attributable to non-controlling interest for the comparable periods of last
year amounted to $242.5 million and $227 million due to the impairment loss
recorded in the cable sector.
NET INCOME
Fiscal 2010 second quarter net income amounted to $10.5 million, or $0.63 per
share, compared to a net loss of $115.2 million, or $6.90 per share, for the
same period in 2009. For the first half of fiscal 2010, net income amounted to
$33.3 million, or $1.99 per share, compared to a net loss of $104.3 million, or
$6.25 per share. Net income for the first six months of fiscal 2010 includes the
reduction of Ontario provincial corporate income tax rates described above.
Fiscal 2009 net losses were due to the impairment loss, net of related income
taxes and non-controlling interest, of $124 million recorded in the second
quarter, as described in the "Impairment of goodwill and intangible assets"
section. Excluding the effect of the reduction of Ontario provincial income tax
rates in the current year and the impairment loss recorded in the prior year,
adjusted net income((2)) would have amounted to $10.5 million, or $0.63 per
share(1), and $23.6 million, or $1.41 per share, for the quarter and first six
months ended February 28, 2010, respectively. These amounts represent increases
of 20.2% and 21.2%, respectively, over adjusted net income of $8.7 million, or
$0.52 per share for the quarter, and of 20.6% and 20.5% over adjusted net income
of $19.6 million, or $1.17 per share for the first six months of fiscal 2009.
Net income progression has resulted mainly from the decrease in the Ontario
provincial corporate income taxe rates, coupled with the growth in operating
income before amortization and a reduction of fixed charges in the cable sector
in the first six months of the fiscal year.
CASH FLOW AND LIQUIDITY
---------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 28,
2010 2009(1) 2010 2009(1)
($000) $ $ $ $
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating activities
Cash flow from
operations 120,331 97,193 255,849 188,826
Changes in non-cash
operating items (2,833) 20,129 (139,761) (45,027)
---------------------------------------------------------------------------
117,498 117,322 116,088 143,799
---------------------------------------------------------------------------
Investing activities(2) (74,447) (64,737) (142,673) (133,644)
---------------------------------------------------------------------------
Financing activities(2) (42,694) (36,365) 4,759 2,411
---------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents
denominated in foreign
currencies (1,102) 641 (900) 1,328
---------------------------------------------------------------------------
Net change in cash and
cash equivalents (745) 16,861 (22,726) 13,894
---------------------------------------------------------------------------
Cash and cash
equivalents, beginning
of period 17,477 34,505 39,458 37,472
---------------------------------------------------------------------------
Cash and cash
equivalents, end of 16,732 51,366 16,732 51,366
period
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
(2) Excludes assets acquired under capital leases.
Fiscal 2010 second quarter cash flow from operations reached $120.3 million,
23.8% higher than the comparable period last year, primarily attributable to the
cable sector and due to the reduction in current income taxes stemming from
modifications to the corporate structure and the reduction in financial expense.
Changes in non-cash operating items required cash outflows of $2.8 million,
mainly as a result of increases in income taxes receivable and accounts
receivable, partly offset by increases in accounts payable and accrued
liabilities and deferred and prepaid revenue and other liabilities. In the prior
year, the cash inflows of $20.1 million were mainly the result of increases in
accounts payable and accrued liabilities and income tax liabilities.
For the first six months of fiscal 2010, cash flow from operations reached
$255.8 million, 35.5% higher than the comparable period last year, primarily due
to the reduction in current income taxes stemming from modifications to the
corporate structure, the increase in operating income before amortization and
the reduction in financial expense, all in the cable sector. Changes in non-cash
operating items required cash outflows of $139.8 million, mainly as a result of
decreases in accounts payable and accrued liabilities and income tax liabilities
and increases in income taxes receivable and accounts receivable. In the prior
year, the cash outflows of $45 million were mainly the result of decreases in
accounts payable and accrued liabilities and in income tax liabilities and an
increase in income taxes receivable.
(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.
In the second quarter of fiscal 2010, investing activities, including mainly
capital expenditures and the increase in deferred charges, amounted to $74.4
million, an increase of $9.7 million, or 15% when compared to $64.7 million for
the corresponding period of last year. For the first six months, investing
activities increased by $9 million, or 6.8%, to reach $142.7 million when
compared to $133.6 million in the first half of the prior year. The most
significant variations are due to the following factors:
-- An increase in customer premise equipment spending in the European
operations in order to support the continued growth of Digital
Television service customers, partly offset by a decrease in Canadian
operations which reflects lower customer growth for this same service;
-- An increase in scalable infrastructure spending in the Canadian
operations to increase DOCSIS network bandwidth capacity in order to
support the internet traffic growth;
-- An increase in upgrade and rebuild to improve network capacity in new
and existing areas served;
-- A decrease in support capital spending as the prior year reflected
improvements to the information systems to sustain the business
activities, the acquisition of a new facility in the Canadian
operations, and in the first six months, the acquisition of a power
generator for the Canadian data communications subsidiary.
In the second quarter and first six months, COGECO generated free cash flows of
$45.8 million and $112.9 million, compared to $32.1 million and $53.9 million in
the prior year, representing increases of $13.7 million and $59.1 million,
respectively. The growth in free cash flow over the prior year is mainly from
the cable sector and is due to an increase in cash flow from operations
including the reduction in current income taxes stemming from modifications made
to Cogeco Cable's corporate structure, partly offset by the increase in capital
expenditures.
In the second quarter of fiscal 2010, Indebtedness affecting cash decreased by
$37.1 million mainly due to the free cash flow of $45.8 million, partly offset
by the dividend payment of $6.3 million described below and the decrease in
non-cash operating items of $2.8 million. Indebtedness mainly decreased through
a net repayment of $36.5 million on Cogeco Cable's revolving loans. In the
second quarter of fiscal 2009, indebtedness affecting cash decreased by $31.5
million due to the free cash flow of $32.1 million and the increase of non-cash
operating items of $20.1 million, net of the increase in cash and cash
equivalents of $16.9 million and the dividend payment of $5.3 million described
below.
During the second quarter of fiscal 2010, a dividend of $0.10 per share was paid
by the Company to the holders of subordinate and multiple voting shares,
totalling $1.7 million, compared to a dividend of $0.08 per share, or $1.3
million the year before. In addition, dividends paid by a subsidiary to
non-controlling interests in the second quarter of fiscal 2010 amounted to $4.6
million, for consolidated dividend payments of $6.3 million.
For the first six months of fiscal 2010, Indebtedness affecting cash increased
by $19.5 million mainly due to the decrease in non-cash operating items of
$139.8 million and the dividend payment of $12.6 million described below, partly
offset by the free cash flow of $112.9 million and the decrease in cash and cash
equivalents of $22.7 million. Indebtedness mainly increased through an increase
of $49.6 million in bank indebtedness, partly offset by net repayments totalling
$28.1 million on the Company's revolving loans, including net repayments of
$21.6 million by the cable subsidiary. During the first half of fiscal 2009,
Indebtedness affecting cash increased by $12.3 million due to the reduction of
non-cash operating items of $45 million, the increase in cash and cash
equivalents of $13.9 million and the payment of dividends totalling $10.6
million, partly offset by the free cash flow of $53.9 million. Indebtedness was
increased through the issuance on October 1, 2008, in the cable sector, of
Senior Secured Notes for net proceeds of approximately $255 million, and by an
increase of $28.1 million in bank indebtedness, net of the repayment of US$150
million Senior Secured Notes Series A and the related derivative financial
instruments for a total of $238.7 million, and of net repayments on the cable
subsidiary's revolving loans of $23 million.
During the first six months of fiscal 2010, quarterly dividends of $0.10 per
share were paid by the Company to the holders of subordinate and multiple voting
shares, totalling $3.4 million, compared to quarterly dividends of $0.08 per
share, or $2.7 million the year before. In addition, dividends paid by a
subsidiary to non-controlling interests in the first half of fiscal 2010
amounted to $9.2 million, for consolidated dividend payments of $12.6 million.
As at February 28, 2010, the Company had a working capital deficiency of $220.1
million compared to $245.8 million as at August 31, 2009. The decrease in the
deficiency is mainly attributable to the cable sector and caused by reductions
in accounts payable and accrued liabilities due to the timing of supplier
payments and in income tax liabilities stemming from income tax payments
relating to the 2009 fiscal year, and to an increase in income taxes receivable
as a result of modifications to the corporate structure. These decreases have
been partially offset by the increase in bank indebtedness and the decreases in
cash and cash equivalents resulting from the above mentioned payments, and by
the increase in the current portion of future income tax liabilities also
stemming from modifications to the corporate structure. As part of the usual
conduct of its 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 the Company to use cash and cash equivalents to reduce
Indebtedness.
At February 28, 2010, Cogeco Cable had used $194.7 million of its $862.5 million
Term Facility for a remaining availability of $667.8 million and the Company had
drawn $3.3 million of its $50 million Term Facility, for a remaining
availability of $46.7 million.
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, 2009, there have been significant changes to the balances of
"accounts receivable", "fixed assets", "goodwill", "accounts payable and accrued
liabilities", "deferred and prepaid revenue", "income taxes receivable", "income
tax liabilities", "future income tax liabilities", "bank indebtedness",
"long-term debt", "derivative financial instruments", "cash and cash
equivalents" and "non-controlling interest".
The $10.7 million increase in accounts receivable is due to the increase in
revenues and the timing of payments received from customers in the cable sector.
The $12.2 million decrease in fixed assets is also attributable to the cable
sector and is primarily due to the decline in the relative value of the Euro
over the Canadian dollar, partly offset by the increase in capital expenditures
previously discussed. The $7.3 million dollar decrease in goodwill is due to the
utilization of pre-acquisition tax losses and the decline in the value of the
Euro relative to the Canadian dollar. The $70.1 million decrease in accounts
payable and accrued liabilities is related to the timing of payments made to
suppliers in the cable sector. The increase of $7.4 million in deferred and
prepaid revenue is mainly due to advance billing in Cogeco Cable's data
telecommunications subsidiary for services to be provided in the remainder of
the fiscal year. The increases of $31.6 million in income taxes receivable and
$53.7 million in the current portion of future income tax liabilities are mainly
due to modifications to Cogeco Cable's corporate structure. The $39.3 million
decrease in income tax liabilities is due to income tax payments made in the
first half of fiscal 2010 relating to the 2009 fiscal year. The $28 million
decrease in long-term future income tax liabilities is mainly attributable to
the cable sector and is due to reduction of Ontario provincial corporate income
tax rates. The increases of $49.6 million in bank indebtedness and the decreases
of $55.9 million in long-term debt, $22.7 million in cash and cash equivalents
and $7.4 million in net derivative financial instruments are due to the factors
previously discussed in the "Cash Flow and Liquidity" section combined with the
fluctuations in foreign exchange and interest rates. The $46.4 million increase
in non-controlling interest is due to improvements in the cable subsidiary's
operating results in the current fiscal year.
A description of COGECO's share data as at March 31, 2010 is presented in the
table below:
---------------------------------------------------------------------------
Number of Amount ($000)
shares/options
---------------------------------------------------------------------------
Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,959,338 121,347
Options to purchase subordinate voting shares
Outstanding options 62,782
Exercisable options 62,782
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 2009 Annual Report, have not
materially changed since August 31, 2009, except as mentioned below.
On March 4, 2010, the Company's subsidiary, Cogeco Cable Inc., issued a letter
of credit amounting to EUR2.2 million to guarantee the payment by Cabovisao of
withholding taxes for the 2005 year assessed by the Portuguese tax authorities,
which are currently being challenged by Cabovisao. Although the principal amount
in dispute is fully recorded in the books of its subsidiary Cabovisao, the
Company's subsidiary, Cogeco Cable Inc., may be required to pay the amount
following final judgement, up to a maximum aggregate amount of EUR2.2 million
($3.1 million), should Cabovisao fail to pay such required amount.
DIVIDEND DECLARATION
At its April 7, 2010 meeting, the Board of Directors of COGECO declared a
quarterly eligible dividend of $0.10 per share for subordinate and multiple
voting shares, payable on May 5, 2010, to shareholders of record on April 21,
2010. 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
During fiscal 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 EUR111.5 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 and stood at EUR95.8 million at February 28, 2010. 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. In
the first six months of the fiscal year, the fair value of interest rate swap
decreased by $0.2 million, which is recorded as a decrease of other
comprehensive income net of income taxes and non-controlling interest.
In the previous fiscal year, 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. In the first half of the 2010 fiscal year, amounts due
under the US$190 million Senior Secured Notes Series A decreased by $8.1 million
due to the US dollar's depreciation compared to the Canadian dollar. The fair
value of cross-currency swaps decreased by a net amount of $7.2 million,
resulting in an increase, net of income taxes and non-controlling interest, of
$0.7 million recorded in other comprehensive income.
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 values of the Canadian dollar
versus the Euro. This risk is mitigated since the major part of the purchase
price for Cabovisao was borrowed directly in Euros. This debt is designated as a
hedge of the net investment in self-sustaining foreign subsidiaries and
accordingly, Cogeco Cable realized a foreign exchange loss of $5 million in the
first six months of fiscal 2010, which is presented in other comprehensive
income net of non-controlling interest of $3.4 million. The exchange rate used
to convert the Euro into Canadian dollars for the balance sheet accounts at
February 28, 2010 was $1.4330 per Euro compared to $1.5698 per Euro at August
31, 2009. The average exchange rate prevailing during the second quarter and
first six months used to convert the operating results of the European
operations were $1.4905 per Euro and $1.5318 per Euro, respectively, compared to
$1.6265 per Euro and $1.5864 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 six months ended February
28, 2010:
---------------------------------------------------------------------------
Exchange rate
Quarter ended February 28, 2010 As reported impact
($000) $ $
---------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 101,972 10,197
Operating income before amortization 18,194 1,819
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 14 of the consolidated financial statements for further details.
CABLE SECTOR
CUSTOMER STATISTICS
---------------------------------------------------------------------------
% of
Net additions (losses) Penetration(1)
February Quarters ended Six months ended
28, February 28, February 28, February 28,
2010 2010 2009 2010 2009 2010 2009
---------------------------------------------------------------------------
RGU(2) 3,050,805 68,782 60,410 158,567 113,124 - -
Basic Cable
service
customers 1,131,848 (794) (9,953) 7,563 (9,155) - -
HSI service
customers 698,242 16,861 3,030 39,576 17,330 63.6 58.8
Digital
Television
service
customers(2) 659,614 26,243 59,886 58,463 83,503 59.0 48.6
Telephony
service
customers 561,101 26,472 7,447 52,965 21,446 53.3 46.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) As a percentage of Basic Cable service customers in areas served.
(2) The number of Digital Television service customers in the European
operations of the cable sector for the second quarter of fiscal 2009
has been restated in order to conform to the presentation adopted in
the Canadian operations. This restatement increased the number of net
additions to the Digital Television service customers and RGU for the
second quarter and first six months of the previous year by 34,784.
In the cable sector, second quarter and first six months RGU net additions
amounted to 68,782 RGU and 158,567 RGU, respectively, compared to 60,410 RGU and
113,124 RGU in the comparable periods of the previous fiscal year.
The Canadian operations' net additions of 47,274 RGU in the quarter and 110,446
RGU in the first six months were essentially the same as compared to 47,577 RGU
and 113,040 RGU for the same periods of the prior year, and continue to generate
RGU growth despite early signs of maturation of some of its services. The net
customer losses for Basic Cable service customers stood at 54 for the quarter,
compared to net customer additions of 1,955 in the second quarter of the prior
year. For the first six months, Basic Cable service customers grew by 8,865,
compared to 10,788 in the prior year. Basic Cable service net additions in the
first half of the fiscal year were mainly due to the beginning of the school
year for college and university students and to expansions in the network. In
the quarter, Telephony service customers grew by 22,206 compared to 16,411 for
the same period last year, and the number of net additions to HSI service stood
at 11,068 customers for the quarter, compared to 10,518 customers for the same
period last year. For the first six months of the fiscal year, Telephony service
customers grew by 42,847 and HSI service customer net additions amounted to
28,574, compared to 35,312 and 30,027 net additions, respectively, for the same
period last year. HSI and Telephony net additions continue to stem from the
enhancement of the product offering, the impact of the bundled offer (Cogeco
Complete Connection) of Television, HSI and Telephony services, and promotional
activities. The Digital Television service net additions stood at 14,054
customers for the quarter and 30,160 customers for the first half of the year,
compared to 18,693 and 36,913 customers for the three and six month periods of
the prior year. Digital Television service net additions are due to targeted
marketing initiatives to improve penetration and to the continuing interest for
high definition ("HD") television service.
The European operations Basic Cable service customer base has begun to stabilize
and reflect the benefits of the Portuguese subsidiary's customer retention and
acquisition strategies launched at the end of the 2009 fiscal year in order to
reduce the customer attrition brought on by the difficult competitive landscape
in Portugal and the economic environment in the Iberian Peninsula throughout the
previous fiscal year. For the three and six month periods ended February 28,
2010, net additions amounted to 21,508 RGU and 48,121 RGU, respectively,
compared to 12,833 RGU and 84 RGU for the same periods of the previous year.
Fiscal 2010 second quarter Basic Cable service customers decreased by 740
customers compared to a decrease of 11,908 customers in the comparable period of
the prior year. In the first half of the fiscal year, Basic Cable customer
losses amounted to 1,302 compared to 19,943 in the 2009 fiscal year. HSI service
customers increased by 5,793 and 11,002 customers for the quarter and first six
months, respectively, compared to decreases of 7,488 and 12,697 customers in the
second quarter and first half of fiscal 2009. The number of Digital Television
service customers grew by 12,189 customers in the second quarter and by 28,303
customers in the six months ended February 28, 2010, compared to 41,193 and
46,590 customers in the three and six months ended February 28 of the previous
fiscal year. Telephony service customers increased by 4,266 customers in the
quarter and 10,118 in the first half of fiscal 2010, compared to losses of 8,964
and 13,866 customers for the comparable periods of the preceding year.
OPERATING RESULTS
---------------------------------------------------------------------------
Quarters ended February 28, Six months ended February 28,
2010 2009(1) Change 2010 2009(1) Change
($000, except
percentages) $ $ % $ $ %
---------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited) (unaudited)
Revenue 320,397 304,920 5.1 637,762 604,358 5.5
Operating costs 195,106 179,579 8.6 383,524 357,306 7.3
Management fees
- COGECO Inc. 2,678 3,038 (11.8) 9,019 9,019 -
--------------------------------------------------------------------
Operating income
from before
amortization 122,613 122,303 0.3 245,219 238,033 3.0
--------------------------------------------------------------------
Operating margin 38.3% 40.1% 38.4% 39.4%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
Revenue
Fiscal 2010 second-quarter revenue improved by $15.5 million, or 5.1%, to reach
$320.4 million, and first six-month revenue amounted to $637.8 million, an
increase of $33.4 million, or 5.5%, when compared to the prior year. Driven by
increased RGU, the introduction of HSI usage billing, revenue related to the
additional levy amounting to 1.5% of gross Cable Television service revenue
imposed by the CRTC in order to finance the LPIF and rate increases implemented
at the end of fiscal 2009, second-quarter and first six-month Canadian
operations revenue went up by $27.8 million and $54.7 million, respectively,
both representing 11.4%, over the comparable periods of the prior year.
Fiscal 2010 second-quarter and first six months European operations revenue
decreased by $12.3 million, or 20%, and by $21.3 million, or 17.3%,
respectively, when compared to the same periods of the prior year. The decreases
were mainly due to a lower number of Basic Cable service customers compared to
the same periods of fiscal 2009 year, to the impact of retention strategies
implemented in the second half of the prior year in order to reduce customer
attrition, and to a decrease in the value of the Euro compared to the Canadian
dollar. Revenue from the European operations in the local currency for the
second quarter amounted to EUR32.8 million, a decrease of EUR4.8 million, or
12.7%, when compared to the same period of the prior year. For the first six
months revenue amounted to EUR66.5 million, representing a decrease of EUR11.2
million, or 14.4%, when compared to the first half of fiscal 2009.
Operating costs
For the second quarter and first six months of fiscal 2010, operating costs,
excluding management fees payable to COGECO Inc., increased by $15.5 million and
$26.2 million, respectively, to reach $195.1 million and $383.5 million,
increases of 8.6% and 7.3% compared to the prior year. Operating costs in the
Canadian operations increased due to the servicing of additional RGU, the launch
of new HD channels and the additional levy amounting to 1.5% of gross Cable
Television service revenue imposed by the CRTC in order to finance the LPIF.
In Europe, operating costs decreased due to the decline of the value of the Euro
over the Canadian dollar which surpassed increases in operating costs related to
marketing initiatives and the launch of new channels net of the impact of cost
reduction initiatives implemented by Cabovisao, such as a headcount reduction
plan. Operating costs from the European operations for the second quarter in the
local currency amounted to EUR27.5 million, an increase of EUR0.8 million, or
2.9% when compared to the prior year. For the first half of fiscal 2010
operating costs amounted to EUR54.7 million, EUR1.4 million, or 2.5% higher than
in the previous fiscal year.
Operating income before amortization and operating margin
Fiscal 2010 second-quarter operating income before amortization remained
essentially the same at $122.6 million, and increased by $7.2 million, or 3%, to
reach $245.2 million for the first six months as a result of RGU growth, the
introduction of HSI usage billing and rate increases generating additional
revenues, net of the increases in operating costs described above. Cogeco
Cable's second-quarter operating margin decreased to 38.3% from 40.1% in the
comparable period of the prior year. The operating margin for the second quarter
in Canada decreased to 42.2% from 42.9%, and the European operating margin for
the same period decreased to 16.4% from 29.1%. For the first six months, Cogeco
Cable's operating margin decreased to 38.4% from 39.4%. In the first six months,
the Canadian operations' operating margin increased to 42.4% from 41.5%, which
partly offset the decrease in the European operating margin to 17.8% from 31.3%
during partly that period.
FISCAL 2010 FINANCIAL GUIDELINES
Cable sector
In light of the strong RGU growth during the first six months of fiscal 2010,
Cogeco Cable has revised its guidelines to 200,000 net additions, or
approximately 6.9% when compared to August 31, 2009, from 150,000 RGU as issued
on January 12, 2010. The increase in RGU growth will stem primarily from the
growth in Digital Television service customers and promotional activities.
While the increase in RGU will generate additional revenue and require increases
in operating and capital expenses, the anticipated decrease in the value of the
Euro over the Canadian dollar is expected to offset the increases in Cogeco
Cable's financial guidelines, and accordingly, management has not revised the
financial projections for the 2010 fiscal year.
CONTROLS AND PROCEDURES
The President and Chief Executive Officer ("CEO") and the Senior Vice President
and Chief Financial Officer ("CFO"), together with management, are responsible
for establishing and maintaining adequate disclosure controls and procedures and
internal controls over financial reporting, as defined in NI 52-109. COGECO's
internal control framework is based on the criteria published in the report
"Internal Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission and is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with Canadian GAAP.
The CEO and CFO, supported by management, evaluated the design of the Company's
disclosure controls and procedures and internal controls over financial
reporting as of February 28, 2010, and have concluded that they were adequate.
Furthermore, no changes to the internal controls over financial reporting
occurred during the quarter ended February 28, 2010.
UNCERTAINTIES AND MAIN RISK FACTORS
Except as mentioned below, there has been no significant change in the
uncertainties and main risk factors faced by the Company since August 31, 2009.
A detailed description of the uncertainties and main risk factors faced by
COGECO can be found in the 2009 Annual Report.
The CRTC recently published its broadcasting regulatory policy on a group-based
approach to the licensing of private television services. This policy
contemplates the establishment of a new right for private local television
stations to negotiate with cable and satellite broadcasting distribution
undertakings ("BDU"s) a value for carriage of their signal ("VFS"). The VFS
regime would also establish a new right for private local television stations
that elect to negotiate VFS to withhold carriage of their signal and require
deletion on other signals distributed by BDUs of the programs for which they own
exclusive broadcasting rights. The VFS regime, which may lead to various forms
of compensation, including monetary compensation, is however predicated on the
Federal Court of Appeal issuing a favourable legal ruling. The CRTC is also
considering the offering of discrete small basic packages comprising only local
and regional television signals at no charge in order to facilitate the
transition to digital terrestrial television broadcasting scheduled to take
place on August 31, 2011. Because the final outcome of these proceedings is
uncertain, the Company is unable to estimate the potential impact of VFS at this
time.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO's accounting policies, estimates
and future accounting pronouncements since August 31, 2009, except as described
below. A description of the Company's policies and estimates can be found in the
2009 Annual Report.
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and intangible assets,
replacing Section 3062, Goodwill and other intangible assets and Section 3450,
Research and development costs. The new Section established standards for the
recognition, measurement, presentation and disclosure of goodwill subsequent to
its initial recognition and of intangible assets by profit-oriented enterprises.
Standards concerning goodwill remained unchanged from the standards included in
the previous Section 3062. The new Section was applicable to interim and annual
financial statements relating to fiscal years beginning on or after October 1,
2008, with retroactive application. The adoption of Section 3064 eliminated the
deferral of new service launch costs which are now recognized as an expense when
they are incurred. Reconnect and additional services activation costs are
capitalized up to an amount not exceeding the revenue generated by the reconnect
activity. Consequently, the Company adjusted opening retained earnings on a
retroactive basis and the prior period comparative figures have been restated.
The adoption of this new section had the following impact on the Company's
consolidated financial statements:
Consolidated statement of income (loss)
---------------------------------------------------------------------------
Three months ended Six months ended
Increase (decrease) February 28, 2009 February 28, 2009
($000) $ $
---------------------------------------------------------------------------
(unaudited) (unaudited)
Operating costs 3,158 7,151
Amortization of deferred charges (3,451) (6,632)
Future income tax expense 45 (164)
Non-controlling interest 167 (244)
Net loss (81) 111
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Consolidated balance sheets
---------------------------------------------------------------------------
Increase (decrease) August 31, 2009 September 1, 2008
($000) $ $
---------------------------------------------------------------------------
(unaudited) (unaudited)
Deferred charges (34,551) (32,405)
Future income tax liabilities (10,229) (9,624)
Non-controlling interest (16,428) (15,376)
Retained earnings (7,894) (7,405)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
FUTURE ACCOUNTING PRONOUNCEMENTS
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 International Financial Reporting Standards ("IFRS") for
Canadian publicly accountable entities. This plan was confirmed in subsequent
exposure drafts issued in April 2008, March 2009 and October 2009. 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, which oversees the IFRS
implementation project on behalf of the Board of Directors. The Company is
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:
---------------------------------------------------------------------------
Phase Area of impact Key activities Status
---------------------------------------------------------------------------
Scoping and Pervasive Perform a high-level impact
diagnostic assessment to identify key
areas that are expected to be Completed
impacted by the transition to
IFRS.
Rank IFRS impacts in order of
priority to assess the timing
and complexity of transition
efforts that will be required
in subsequent phases.
---------------------------------------------------------------------------
Impact For each area Identify the specific changes
analysis, identified in required to existing accounting
evaluation the scoping policies. Completed
and design and diagnostic
phase
Analyse policy choices
permitted under IFRS.
----------------------------------------------
Present analysis and
recommendations on accounting In progress -
policy choices to the audit to be completed
committee. in fiscal 2010
------------------------------------------------------------
Pervasive Identify impacts on reporting In progress -
systems and business processes.to be completed
in fiscal 2010
Prepare draft IFRS consolidated
financial statement content.
----------------------------------------------
Identify impacts on internal
controls over financial To be completed
reporting and other business in fiscal 2010
processes.
---------------------------------------------------------------------------
Implementa- For each area Test and execute changes to
tion and identified in information systems and In progress -
review the scoping business processes. to be completed
and diagnostic by fiscal 2010
phase
----------------------------------------------
Obtain formal approval of
required accounting policy To be completed
changes and selected accountingin fiscal 2010
policy choices.
----------------------------------------------
Communicate impact on
accounting policies and To be completed
business processes to external by fiscal 2011
stakeholders.
-------------------------------------------------------------
Pervasive Gather financial information
necessary for opening balance To be completed
sheet and comparative IFRS in fiscal 2011
financial statements.
Update and test internal
control processes over
financial reporting and other
business processes.
----------------------------------------------
Collect financial information
necessary to compile IFRS- To be completed
compliant financial statements.by fiscal 2012
Provide training to employees
and end-users across the
organization.
Prepare IFRS compliant
financial statements.
Obtain the approval from the
Audit Committee of the IFRS
consolidated financial
statements.
----------------------------------------------
Continually review IFRS and To be completed
implement changes to the throughout
standards as they apply to the transition and
Company. post-conversion
periods
---------------------------------------------------------------------------
The Company's project for the transition from Canadian GAAP to IFRS is
progressing according to the established plan and the Company expects to meet
its target date for migration. Please refer to the 2009 Annual Report for more
details.
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", "free cash flow", "operating income before amortization",
"operating margin", "adjusted net income", and "adjusted earnings per share".
Cash flow from operations and free cash flow
Cash flow from 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 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. Cash flow from operations is calculated as follows:
---------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 28,
2010 2009(1) 2010 2009(1)
($000) $ $ $ $
---------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Cash flow from operating
activities 117,498 117,322 116,088 143,799
Changes in non-cash operating
items 2,833 (20,129) 139,761 45,027
---------------------------------------------------------------------------
Cash flow from operations 120,331 97,193 255,849 188,826
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Free cash flow is calculated as follows:
---------------------------------------------------------------------------
Quarters ended February Six months ended
28, February 28,
2010 2009(1) 2010 2009(1)
($000) $ $ $ $
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from operations 120,331 97,193 255,849 188,826
Acquisition of fixed assets (72,094) (62,161) (137,276) (127,870)
Increase in deferred charges (2,455) (2,621) (5,519) (5,835)
Assets acquired under
capital leases - as per
note 12 c) - (322) (141) (1,261)
---------------------------------------------------------------------------
Free cash flow 45,782 32,089 112,913 53,860
---------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
Operating income before amortization and operating margin
Operating income 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 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 available, before taxes, to pay for its fixed costs,
such as interest on Indebtedness. Operating margin is calculated by dividing
operating income before amortization by revenue.
The most comparable Canadian GAAP financial measure is operating income.
Operating income before amortization and operating margin are calculated as
follows:
---------------------------------------------------------------------------
Quarters ended February Six months ended
28, February 28,
2010 2009(1) 2010 2009(1)
($000, except percentages) $ $ $ $
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating income 58,370 60,171 121,932 120,000
Amortization 65,993 63,334 131,694 124,216
---------------------------------------------------------------------------
Operating income before
amortization 124,363 123,505 253,626 244,216
---------------------------------------------------------------------------
Revenue 329,087 311,825 657,090 620,200
---------------------------------------------------------------------------
Operating margin 37.8% 39.6% 38.6% 39.4%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
Adjusted net income and adjusted earnings per share
Adjusted net income and adjusted earnings per share are used by COGECO's
management and investors to evaluate what would have been the net income and
earnings per share excluding unusual 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 Six months ended
February 28, February 28,
2010 2009(1) 2010 2009(1)
($000) $ $ $ $
---------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited) (unaudited)
Net income (loss) 10,511 (115,210) 33,259 (104,349)
Adjustments:
Reduction of Ontario
provincial corporate
income tax rates net of
non-controlling interest - - (9,620) -
Impairment loss net of
related taxes and non-
controlling interest - 123,951 - 123,951
---------------------------------------------------------------------------
Adjusted net income 10,511 8,741 23,639 19,602
---------------------------------------------------------------------------
Weighted average number of
multiple voting and
subordinate voting shares
outstanding 16,714,030 16,686,158 16,721,865 16,693,972
Effect of dilutive stock
options 14,436 9,963 11,152 15,175
Effect of dilutive incentive
share units 71,862 55,072 63,745 46,864
---------------------------------------------------------------------------
Weighted average number of
diluted multiple voting and
subordinate voting shares
outstanding 16,800,328 16,751,193 16,796,762 16,756,011
---------------------------------------------------------------------------
Adjusted earnings per share
Basic 0.63 0.52 1.41 1.17
Diluted 0.63 0.52 1.41 1.17
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
ADDITIONAL INFORMATION
This MD&A was prepared on April 7, 2010. 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 subsidiary, Cogeco Diffusion Inc., COGECO owns and
operates the Rythme FM radio stations in Montreal, Quebec City, Trois-Rivieres
and Sherbrooke, as well as the FM 93 radio 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: Thursday, April 8, 2010 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: 1 888 300-0053
International Access Number: + 1 647 427-3420
Confirmation Code: 58923696
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until April 15, 2010, by dialling:
Canada and USA access number: 1 800 642-1687
International access number: + 1 706 645-9291
Confirmation code: 58923696
Supplementary Quarterly Financial Information
(unaudited)
---------------------------------------------------------------------------
Quarters ended February 28, November 30,
($000, except percentages and
per share data) 2010 2009(1) 2009 2008(1)
---------------------------------------------------------------------------
Revenue 329,087 311,825 328,003 308,375
Operating income before
amortization(2) 124,363 123,505 129,263 120,711
Operating margin(2) 37.8% 39.6% 39.4% 39.1%
Operating income 58,370 60,171 63,562 59,829
Impairment of goodwill and
intangible assets - (399,648) - -
Net income (loss) 10,511 (115,210) 22,748 10,861
Adjusted net income(2)(3) 10,511 8,741 13,128 10,861
Cash flow from operating
activities 117,498 117,322 (1,410) 26,477
Cash flow from operations (2) 120,331 97,193 135,518 91,633
Free cash flow(2) 45,782 32,089 67,131 21,771
Earnings (loss) per share(4)
Basic
Net income (loss) 0.63 (6.90) 1.36 0.65
Adjusted net income(2)(3) 0.63 0.52 0.79 0.65
Diluted
Net income (loss) 0.63 (6.88) 1.35 0.65
Adjusted net income(2)(3) 0.63 0.52 0.78 0.65
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Quarters ended August 31, May 31,
($000, except percentages and
per share data) 2009(1) 2008(1)(2) 2009(1) 2008(1)(2)
---------------------------------------------------------------------------
Revenue 316,284 292,873 316,310 283,878
Operating income before
amortization(2) 144,654 117,557 126,624 112,639
Operating margin(2) 45.7% 40.1% 40.0% 39.7%
Operating income 76,244 58,664 62,623 57,114
Impairment of goodwill and
intangible assets - - - -
Net income (loss) 14,631 9,332 10,704 9,221
Adjusted net income(2)(3) 7,647 9,332 9,157 9,221
Cash flow from operating
activities 177,032 141,590 99,873 108,326
Cash flow from operations (2) 108,744 95,507 92,718 91,501
Free cash flow(2) 14,742 20,981 32,416 37,107
Earnings (loss) per share(4)
Basic
Net income (loss) 0.87 0.56 0.64 0.55
Adjusted net income(2)(3) 0.46 0.56 0.55 0.55
Diluted
Net income (loss) 0.87 0.56 0.64 0.55
Adjusted net income(2)(3) 0.46 0.56 0.55 0.55
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the Canadian Institute of Chartered Accountants
("CICA") Handbook Section 3064. Please refer to the "Accounting
policies and estimates" section of the Management's discussion and
analysis for more details.
(2) Certain comparative figures have been reclassified to reflect the
reclassification of foreign exchange gains or losses from operating
costs to financial expense.
(3) 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.
(4) Per multiple and subordinate voting share.
SEASONAL VARIATIONS
Cogeco Cable'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
second half of the fiscal year as a result of a decrease in economic activity
due to the beginning of the vacation period, the end of the television seasons,
and students leaving their campuses at the end of the school year. Cogeco Cable
offers its services in several university and college towns such as Kingston,
Windsor, St. Catharines, Hamilton, Peterborough, Trois-Rivieres and Rimouski in
Canada, and Aveiro, Covilha, Evora, Guarda and Coimbra in Portugal. Furthermore,
the operating margin in the third and fourth quarters is generally higher as the
maximum amount payable to COGECO under the management agreement is usually
reached in the second quarter of the year. As part of the management agreement
between Cogeco Cable and COGECO, Cogeco Cable pays management fees to COGECO
equivalent to 2% of its revenue subject to an annual maximum amount, which is
adjusted annually to reflect the increase in the Canadian Consumer Price index.
For the current fiscal year, the maximum amount has been set at $9 million,
which has been paid in the first half of the fiscal year. For fiscal 2009, the
maximum amount of $9 million was attained in the second quarter and therefore,
no management fees were paid in the third or fourth quarters of the 2009 fiscal
year.
Cable Sector Customer Statistics
(unaudited)
---------------------------------------------------------------------------
February 28, 2010 August 31, 2009
---------------------------------------------------------------------------
Homes passed
Ontario 1,057,267 1,049,818
Quebec 519,957 515,327
---------------------------------------------------------------------------
Canada 1,577,224 1,565,145
Portugal(1) 905,244 905,129
---------------------------------------------------------------------------
Total 2,482,468 2,470,274
---------------------------------------------------------------------------
Homes connected(2)
Ontario 671,305 658,690
Quebec 289,757 285,944
---------------------------------------------------------------------------
Canada 961,062 944,634
Portugal 267,353 269,022
---------------------------------------------------------------------------
Total 1,228,415 1,213,656
---------------------------------------------------------------------------
Revenue-generating units
Ontario 1,556,786 1,483,324
Quebec 713,523 676,539
---------------------------------------------------------------------------
Canada 2,270,309 2,159,863
Portugal 780,496 732,375
---------------------------------------------------------------------------
Total 3,050,805 2,892,238
---------------------------------------------------------------------------
Basic Cable service customers
Ontario 603,134 597,651
Quebec 270,536 267,154
---------------------------------------------------------------------------
Canada 873,670 864,805
Portugal 258,178 259,480
--------------------------------------------------------------------------
Total 1,131,848 1,124,285
---------------------------------------------------------------------------
High Speed Internet service
customers
Ontario 394,375 374,906
Quebec 149,251 140,146
---------------------------------------------------------------------------
Canada 543,626 515,052
Portugal 154,616 143,614
---------------------------------------------------------------------------
Total 698,242 658,666
---------------------------------------------------------------------------
Digital Television service customers
Ontario 346,003 326,227
Quebec 182,555 172,171
---------------------------------------------------------------------------
Canada 528,558 498,398
Portugal 131,056 102,753
---------------------------------------------------------------------------
Total 659,614 601,151
---------------------------------------------------------------------------
Telephony service customers
Ontario 213,274 184,540
Quebec 111,181 97,068
---------------------------------------------------------------------------
Canada 324,455 281,608
Portugal 236,646 226,528
---------------------------------------------------------------------------
Total 561,101 508,136
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Cogeco Cable is currently assessing the number of homes passed.
Includes Basic Cable service customers and HSI and Telephony service
(2) customers who do not subscribe to other cable services.
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
---------------------------------------------------------------------------
(In thousands of dollars, Three months ended Six months ended
except per share data) February 28, February 28,
2010 2009 2010 2009
$ $ $ $
------------------------------------------------
(restated, (restated,
see note 1) see note 1)
Revenue 329,087 311,825 657,090 620,200
Operating costs 204,724 188,320 403,464 375,984
---------------------------------------------------------------------------
Operating income before
amortization 124,363 123,505 253,626 244,216
Amortization (note 3) 65,993 63,334 131,694 124,216
---------------------------------------------------------------------------
Operating income 58,370 60,171 121,932 120,000
Financial expense (note 4) 15,187 18,028 31,464 41,806
Impairment of goodwill and
intangible assets (note 5) - 399,648 - 399,648
---------------------------------------------------------------------------
Income (loss) before income
taxes and the following
items 43,183 (357,505) 90,468 (321,454)
Income taxes (note 6) 12,525 220 (1,293) 9,859
Loss (gain) on dilution
resulting from the
issuance of shares by a
subsidiary (18) 22 (18) 48
Non-controlling interest 20,165 (242,537) 58,520 (227,012)
---------------------------------------------------------------------------
Net income (loss) 10,511 (115,210) 33,259 (104,349)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings (loss) per share
(note 7)
Basic 0.63 (6.90) 1.99 (6.25)
Diluted 0.63 (6.88) 1.98 (6.23)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
---------------------------------------------------------------------------
Three months ended Six months ended
(In thousands of dollars) February 28, February 28,
2010 2009 2010 2009
$ $ $ $
------------------------------------------------
(restated, (restated,
see note 1) see note 1)
Net income (loss) 10,511 (115,210) 33,259 (104,349)
---------------------------------------------------------------------------
Other comprehensive income
(loss)
Unrealized gains (losses)
on derivative financial
instruments designated as
cash flow hedges, net of
income tax recovery of
$333,000 and $2,474,000
and non-controlling
interest of $782,000 and
$3,333,000 (income tax
expense of $1,401,000 and
$ 3,836,000 and non-
controlling interest of
$4,907,000 and $20,606,000
in 2009) (373) 2,342 (1,591) (2,638)
Reclassification to net
income of realized losses
(gains) on derivative
financial instruments
designated as cash flow
hedges, net of income tax
recovery of $79,000 and
$1,086,000 and non-
controlling interest of
$345,000 and $4,731,000
(income tax expense of
$902,000 and $5,225,000
and non-controlling
interest of $3,929,000 and
$23,140,000 in 2009) 165 (1,876) 2,258 2,947
Unrealized gains (losses)
on translation of a net
investment in self-
sustaining foreign
subsidiaries, net of non-
controlling interest of
$17,813,000 and
$15,969,000 ($12,339,000
and $16,453,000 in 2009) (8,503) 5,890 (7,621) 7,891
---------------------------------------------------------------------------
Unrealized gains (losses)
on translation of long-
term debt designated as
hedge of a net investment
in self-sustaining foreign
subsidiaries, net of non-
controlling interest of
$13,988,000 and
$12,573,000 ($6,469,000
and $8,742,000 in 2009) 6,676 (3,088) 6,000 (4,938)
---------------------------------------------------------------------------
(2,035) 3,268 (954) 3,262
---------------------------------------------------------------------------
Comprehensive income (loss) 8,476 (111,942) 32,305 (101,087)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
---------------------------------------------------------------------------
Six months ended
(In thousands of dollars) February 28,
2010 2009
$ $
------------------------
(restated,
see note 1)
Balance at beginning, as reported 211,922 295,808
Changes in accounting policies (note 1) (7,894) (7,405)
---------------------------------------------------------------------------
Balance at beginning, as restated 204,028 288,403
Net income (loss) 33,259 (104,349)
Excess of price paid for the acquisition of
subordinate voting shares over the value
attributed to the incentive share units at
issuance (430) -
Dividends on multiple voting shares (366) (295)
Dividends on subordinate voting shares (2,988) (2,384)
---------------------------------------------------------------------------
Balance at end 233,503 181,375
---------------------------------------------------------------------------
---------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
---------------------------------------------------------------------------
February 28, August 31,
(In thousands of dollars) 2010 2009
$ $
------------------------
(restated,
see note 1)
Assets
Current
Cash and cash equivalents (note 12 b)) 16,732 39,458
Accounts receivable 76,796 66,076
Income taxes receivable 36,867 5,228
Prepaid expenses 15,551 14,805
Future income tax assets 6,968 4,275
---------------------------------------------------------------------------
152,914 129,842
---------------------------------------------------------------------------
Investments 739 739
Fixed assets 1,293,610 1,305,769
Deferred charges 23,278 24,062
Intangible assets (note 8) 1,045,386 1,047,774
Goodwill (note 8) 146,411 153,695
Derivative financial instruments - 4,236
Future income tax assets 4,515 4,011
---------------------------------------------------------------------------
2,666,853 2,670,128
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 50,045 416
Accounts payable and accrued liabilities 185,186 255,281
Income tax liabilities 2,028 41,358
Deferred and prepaid revenue 41,510 33,877
Current portion of long-term debt (note 9) 40,556 44,706
Future income tax liabilities 53,667 -
---------------------------------------------------------------------------
372,992 375,638
---------------------------------------------------------------------------
Long-term debt (note 9) 967,471 1,019,258
Derivative financial instruments 5,330 2,168
Deferred and prepaid revenue and other liabilities 12,660 12,900
Pension plan liabilities and accrued employees
benefits 11,549 10,453
Future income tax liabilities 206,697 234,710
---------------------------------------------------------------------------
1,576,699 1,655,127
---------------------------------------------------------------------------
Non-controlling interest 729,261 682,879
---------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 10) 119,527 119,159
Contributed surplus 2,489 2,607
Retained earnings 233,503 204,028
Accumulated other comprehensive income (note 11) 5,374 6,328
---------------------------------------------------------------------------
360,893 332,122
---------------------------------------------------------------------------
2,666,853 2,670,128
---------------------------------------------------------------------------
---------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
---------------------------------------------------------------------------
Three months ended Six months ended
(In thousands of dollars) February 28, February 28,
2010 2009 2010 2009
$ $ $ $
------------------------------------------------
(restated, (restated,
see note 1) see note 1)
Cash flow from operating
activities
Net income (loss) 10,511 (115,210) 33,259 (104,349)
Adjustments for:
Amortization (note 3) 65,993 63,334 131,694 124,216
Amortization of deferred
transaction costs and
discounts on long-term
debt 780 634 1,542 1,351
Impairment of goodwill
and intangible assets
(note 5) - 399,648 - 399,648
Future income taxes 22,232 (10,041) 28,636 (7,426)
Non-controlling interest 20,165 (242,537) 58,520 (227,012)
Loss (gain) on dilution
resulting from the
issuance of shares by a
subsidiary (18) 22 (18) 48
Stock-based compensation 856 775 1,564 864
Losses (gains) on
disposal of fixed assets (36) (19) 62 204
Other (152) 587 590 1,282
---------------------------------------------------------------------------
120,331 97,193 255,849 188,826
Changes in non-cash
operating items (note 12
a)) (2,833) 20,129 (139,761) (45,027)
---------------------------------------------------------------------------
117,498 117,322 116,088 143,799
---------------------------------------------------------------------------
Cash flow from investing
activities
Acquisition of fixed assets
(note 12 c)) (72,094) (62,161) (137,276) (127,870)
Increase in deferred
charges (2,455) (2,621) (5,519) (5,835)
Other 102 45 122 61
---------------------------------------------------------------------------
(74,447) (64,737) (142,673) (133,644)
---------------------------------------------------------------------------
Cash flow from financing
activities
Increase in bank
indebtedness 3,305 4,659 49,629 28,118
Net decrease under the term
facilities (39,495) (35,243) (28,070) (29,949)
Issuance of long-term debt,
net of discounts and
transaction costs - - - 254,771
Repayment of long-term debt
and settlement of
derivative financial
instruments (862) (880) (2,086) (240,627)
Issuance of subordinate
voting shares 353 21 353 21
Acquisition of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan (note 10) - (325) (1,049) (325)
Dividends on multiple
voting shares (182) (148) (366) (295)
Dividends on subordinate
voting shares (1,494) (1,192) (2,988) (2,384)
Issuance of shares by a
subsidiary to non-
controlling interest 283 686 283 964
Acquisition by a subsidiary
from non-controlling
interest of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan (note 10) - - (1,744) -
Dividends paid by a
subsidiary to non-
controlling interest (4,602) (3,943) (9,203) (7,883)
---------------------------------------------------------------------------
(42,694) (36,365) 4,759 2,411
---------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents denominated in
foreign currencies (1,102) 641 (900) 1,328
---------------------------------------------------------------------------
Net change in cash and cash
equivalents (745) 16,861 (22,726) 13,894
---------------------------------------------------------------------------
Cash and cash equivalents
at beginning 17,477 34,505 39,458 37,472
---------------------------------------------------------------------------
Cash and cash equivalents
at end 16,732 51,366 16,732 51,366
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See supplemental cash flow information in note 12.
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2010
(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") as at February 28, 2010 and August 31, 2009 as well as its
results of operations and its cash flows for the three and six month periods
ended February 28, 2010 and 2009.
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, 2009. 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.
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and intangible assets,
replacing Section 3062, Goodwill and other intangible assets and Section 3450,
Research and development costs. The new Section establishes standards for the
recognition, measurement, presentation and disclosure of goodwill subsequent to
its initial recognition and of intangible assets by profit-oriented enterprises.
Standards concerning goodwill remained unchanged from the standards included in
the previous Section 3062. The new Section was applicable to interim and annual
financial statements relating to fiscal years beginning on or after October 1,
2008, with retroactive application. The adoption of Section 3064 eliminated the
deferral of new service launch costs which are now recognized as an expense when
they are incurred. Reconnect and additional services activation costs are
capitalized up to an amount not exceeding the revenue generated by the reconnect
activity. Consequently, the Company adjusted opening retained earnings on a
retroactive basis and the prior period comparative figures have been restated.
The adoption of this new section had the following impacts on the Company's
consolidated financial statements.
Consolidated statement of income (loss)
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, 2009 February 28, 2009
Increase (decrease) $ $
---------------------------------------------------------------------------
Operating costs 3,158 7,151
Amortization of deferred charges (3,451) (6,632)
Future income tax expense 45 (164)
Non-controlling interest 167 (244)
Net loss (81) 111
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Consolidated balance sheets
---------------------------------------------------------------------------
August 31, 2009 September 1, 2008
Increase (decrease) $ $
---------------------------------------------------------------------------
Deferred charges (34,551) (32,405)
Future income tax liabilities (10,229) (9,624)
Non-controlling interest (16,428) (15,376)
Retained earnings (7,894) (7,405)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2. Segmented Information
The Company's activities are divided into two business segments: Cable and
other. The Cable segment is comprised of Cable Television, High Speed Internet,
Telephony and other telecommunications services, and the other segment is
comprised of radio and head office activities, as well as eliminations. The
Cable segment's activities are carried out in Canada and in Europe.
The principal financial information per business segment is presented in the
tables below:
----------------------------------------------------------------------------
Cable Other and Consolidated
eliminations
----------------------------------------------------------------------------
Three months 2010 2009 2010 2009 2010 2009
ended February
28,
$ $ $ $ $ $
----------------------------------------------------------------------------
(restated) (restated) (restated)
Revenue 320,397 304,920 8,690 6,905 329,087 311,825
Operating costs 197,784 182,617 6,940 5,703 204,724 188,320
Operating income
before
amortization 122,613 122,303 1,750 1,202 124,363 123,505
Amortization 65,839 63,198 154 136 65,993 63,334
Operating income 56,774 59,105 1,596 1,066 58,370 60,171
Financial
expense 15,033 17,988 154 40 15,187 18,028
Impairment of
goodwill and
intangible
assets - 399,648 - - - 399,648
Income taxes 11,952 (207) 573 427 12,525 220
Loss (gain) on
dilution
resulting from
the issuance of
shares by a
subsidiary (18) 22 - - (18) 22
Non-controlling
interest 20,165 (242,537) - - 20,165 (242,537)
Net income
(loss) 9,642 (115,809) 869 599 10,511 (115,210)
----------------------------------------------------------------------------
Total assets (1) 2,621,394 2,630,912 45,459 39,216 2,666,853 2,670,128
Fixed assets (1) 1,290,033 1,302,238 3,577 3,531 1,293,610 1,305,769
Intangible
assets (1) 1,020,046 1,022,434 25,340 25,340 1,045,386 1,047,774
Goodwill (1) 146,411 153,695 - - 146,411 153,695
Acquisition of
fixed assets
(2) 71,924 62,342 170 141 72,094 62,483
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) At February 28, 2010 and August 31, 2009.
(2) Includes capital leases that are excluded from the consolidated
statements of cash flows.
----------------------------------------------------------------------------
Cable Other and Consolidated
eliminations
----------------------------------------------------------------------------
Six months ended 2010 2009 2010 2009 2010 2009
February 28,
$ $ $ $ $ $
----------------------------------------------------------------------------
(restated) (restated) (restated)
Revenue 637,762 604,358 19,328 15,842 657,090 620,200
Operating costs 392,543 366,325 10,921 9,659 403,464 375,984
Operating income
before
amortization 245,219 238,033 8,407 6,183 253,626 244,216
Amortization 131,404 123,944 290 272 131,694 124,216
Operating income 113,815 114,089 8,117 5,911 121,932 120,000
Financial
expense 31,174 41,382 290 424 31,464 41,806
Impairment of
goodwill and
intangible
assets - 399,648 - - - 399,648
Income taxes (3,814) 8,438 2,521 1,421 (1,293) 9,859
Loss (gain) on
dilution
resulting from
the issuance of
shares by a
subsidiary (18) 48 - - (18) 48
Non-controlling
interest 58,520 (227,012) - - 58,520 (227,012)
Net income
(loss) 27,953 (108,415) 5,306 4,066 33,259 (104,349)
----------------------------------------------------------------------------
Total assets (1) 2,621,394 2,630,912 45,459 39,216 2,666,853 2,670,128
Fixed assets (1) 1,290,033 1,302,238 3,577 3,531 1,293,610 1,305,769
Intangible
assets (1) 1,020,046 1,022,434 25,340 25,340 1,045,386 1,047,774
Goodwill (1) 146,411 153,695 - - 146,411 153,695
Acquisition of
fixed assets
(2) 137,081 128,948 336 183 137,417 129,131
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) At February 28, 2010 and August 31, 2009.
(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 ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
----------------------------------------------------------------------------
Revenue
Canada 280,120 250,585 555,118 496,896
Europe 48,967 61,240 101,972 123,304
----------------------------------------------------------------------------
329,087 311,825 657,090 620,200
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
February 28, August 31,
2010 2009
$ $
---------------------------------------------------------------------------
Fixed assets
Canada 1,037,854 1,015,298
Europe 255,756 290,471
---------------------------------------------------------------------------
1,293,610 1,305,769
---------------------------------------------------------------------------
Intangible assets
Canada 1,045,386 1,047,774
Europe - -
---------------------------------------------------------------------------
1,045,386 1,047,774
---------------------------------------------------------------------------
Goodwill
Canada 116,243 116,243
Europe 30,168 37,452
---------------------------------------------------------------------------
146,411 153,695
---------------------------------------------------------------------------
---------------------------------------------------------------------------
3. Amortization
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
(restated) (restated)
Fixed assets 62,117 56,650 123,818 111,056
Deferred charges 2,681 2,620 5,488 5,227
Intangible assets 1,195 4,064 2,388 7,933
---------------------------------------------------------------------------
65,993 63,334 131,694 124,216
---------------------------------------------------------------------------
---------------------------------------------------------------------------
4. Financial expense
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
Interest on long-term debt 15,788 17,029 31,689 37,299
Foreign exchange losses
(gains) (391) 619 (879) 4,403
Amortization of deferred
transaction costs 407 407 814 814
Other (617) (27) (160) (710)
---------------------------------------------------------------------------
15,187 18,028 31,464 41,806
---------------------------------------------------------------------------
---------------------------------------------------------------------------
5. Impairment of goodwill and intangible assets
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
Impairment of goodwill - 339,206 - 339,206
Impairment of intangible
assets - 60,442 - 60,442
---------------------------------------------------------------------------
- 399,648 - 399,648
---------------------------------------------------------------------------
---------------------------------------------------------------------------
During the second quarter of fiscal 2009, the competitive position of
Cabovisao-Televisao por Cabo, S.A. ("Cabovisao") in the Iberian Peninsula
further deteriorated due to the continuing difficult competitive environment and
recurring intense promotions and advertising initiatives from competitors in the
Portuguese market. In accordance with current accounting standards, management
considered that the continued customer, local currency revenue and operating
income before amortization decline, were 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 to which
goodwill is assigned 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 impairment loss is measured as the amount by which the
carrying amount of the reporting unit's goodwill exceeds its fair value. The
Company's subsidiary completed its impairment tests on goodwill and 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 of fiscal 2009. 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 future changes in circumstances could result in further impairments
of goodwill.
Intangible assets with finite useful 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. The impairment loss is measured as the amount by which
the asset's carrying amount exceeds its fair value. Accordingly, the Company's
subsidiary completed its impairment test on customer relationships at February
28, 2009, and 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 of fiscal 2009.
At August 31, 2009, the Company's subsidiary tested the value of goodwill for
impairment and concluded that no impairment existed.
6. Income Taxes
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
(restated) (restated)
Current (9,707) 10,261 (29,929) 17,285
Future 22,232 (10,041) 28,636 (7,426)
---------------------------------------------------------------------------
12,525 220 (1,293) 9,859
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The following table provides the reconciliation between Canadian statutory
federal and provincial income taxes and the consolidated income tax expense:
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
(restated) (restated)
Income (loss) before income
taxes 43,183 (357,505) 90,468 (321,454)
Combined income tax rate 31.46% 32.49% 31.44% 32.49%
Income taxes at combined
income tax rate 13,585 (116,153) 28,447 (104,451)
Adjustments for losses or
income subject to lower or
higher tax rates (3,247) (686) (5,669) (880)
Decrease in future income
taxes as a result of
decrease in substantively
enacted tax rates - - (29,782) -
Decrease in income tax
recovery arising from the
non-deductible impairment
of goodwill - 89,890 - 89,890
Utilization of pre-
acquisition tax losses - - 4,432 -
Income taxes arising from
non-deductible expenses 97 157 306 274
Effect of foreign income
tax rate differences 1,877 25,632 2,124 24,028
Other 213 1,380 (1,151) 998
---------------------------------------------------------------------------
Income taxes at effective
income tax rate 12,525 220 (1,293) 9,859
---------------------------------------------------------------------------
---------------------------------------------------------------------------
7. Earnings (loss) per Share
The following table provides the reconciliation between basic and diluted
earnings (loss) per share:
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
(restated) (restated)
Net income (loss) 10,511 (115,210) 33,259 (104,349)
---------------------------------------------------------------------------
Weighted average number of
multiple voting and
subordinate voting shares
outstanding 16,714,030 16,686,158 16,721,865 16,693,972
Effect of dilutive stock
options (1) 14,436 - 11,152 -
Effect of dilutive
incentive share units 71,862 55,072 63,745 46,864
---------------------------------------------------------------------------
Weighted average number of
diluted multiple voting
and subordinate voting
shares outstanding 16,800,328 16,741,230 16,796,762 16,740,836
---------------------------------------------------------------------------
Earnings (loss) per share
Basic 0.63 (6.90) 1.99 (6.25)
Diluted 0.63 (6.88) 1.98 (6.23)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) For the three and six month periods ended February 28, 2010 and 2009,
32,782 stock options 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.
Furthermore, the weighted average dilutive potential number of
subordinate voting shares, which were anti-dilutive for the three and
six month periods ended February 28, 2009 amounted to 9,963 and 15,175.
8. Goodwill and Other Intangible Assets
---------------------------------------------------------------------------
February 28, 2010 August 31, 2009
$ $
---------------------------------------------------------------------------
Customer relationships 30,494 32,882
Broadcasting licenses 25,120 25,120
Customer base 989,772 989,772
---------------------------------------------------------------------------
1,045,386 1,047,774
Goodwill 146,411 153,695
---------------------------------------------------------------------------
1,191,797 1,201,469
---------------------------------------------------------------------------
---------------------------------------------------------------------------
a) Intangible assets
During the first six months, intangible assets variations were as follows:
---------------------------------------------------------------------------
Customer
Relationships Broadcasting Customer
licenses Base Total
$ $ $ $
---------------------------------------------------------------------------
Balance as at August 31,
2009 32,882 25,120 989,772 1,047,774
Amortization (2,388) - - (2,388)
---------------------------------------------------------------------------
Balance as at February 28,
2010 30,494 25,120 989,772 1,045,386
---------------------------------------------------------------------------
b) Goodwill
During the first six months, goodwill variation was as follows:
---------------------------------------------------------------------------
$
---------------------------------------------------------------------------
Balance as at August 31, 2009 153,695
Recognition of pre-acquisition tax losses (4,432)
Foreign currency translation adjustment (2,852)
---------------------------------------------------------------------------
Balance as at February 28, 2010 146,411
---------------------------------------------------------------------------
On November 25, 2009, Cogeco Cable Inc.'s subsidiary, Cabovisao, received
approval to its request for preservation of tax losses for the years preceding
the 2006 taxation year. Accordingly, the recognition of these pre-acquisition
tax losses in the three month period ended November 30, 2009, has reduced
goodwill by approximately $4.4 million.
9. Long-Term Debt
---------------------------------------------------------------------------
February 28, August 31,
Maturity Interest rate 2010 2009
% $ $
---------------------------------------------------------------------------
Parent company
Term Facility 2011 3.04 (1) 2,925 9,382
Obligations under capital
leases 2013 9.29 81 91
Subsidiaries
Term Facility
Term loan -
EUR78,413,625 2011 1.19 (1)(2) 112,080 122,674
Term loan -
EUR17,358,700 2011 1.19 (1)(2) 24,795 27,142
Revolving loan -
EUR25,000,000
(EUR40,000,000 at
August 31, 2009) 2011 1.19 (1) 35,825 62,792
Senior Secured Notes
Series B 2011 7.73 174,634 174,530
Senior Secured Notes
Series A -
US$190,000,000 2015 7.00 (3) 198,629 206,606
Series B 2018 7.60 54,592 54,576
Senior Secured Debentures
Series 1 2014 5.95 297,079 296,860
Senior Unsecured
Debenture 2018 5.94 99,796 99,786
Obligations under capital
leases 2013 6.61 - 9.93 7,569 9,496
Other - - 22 29
---------------------------------------------------------------------------
1,008,027 1,063,964
Less current portion 40,556 44,706
---------------------------------------------------------------------------
967,471 1,019,258
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Interest rate on debt as at February 28, 2010, including stamping
fees.
(2) 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 EUR111.5 million. The interest swap rate to hedge
the Term Loans has been fixed at 2.08% until their
maturity on July 28, 2011. The notional value of the swap will
decrease in line with the amortization schedule of theTerm
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.
(3) Cross-currency swap agreements have resulted in an effective interest
rate of 7.24% on the Canadian dollar equivalent
of the US denominated debt of the Company's subsidiary, Cogeco Cable
Inc.
10. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, could be issued 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.
Issued
---------------------------------------------------------------------------
February 28, 2010 August 31, 2009
$ $
---------------------------------------------------------------------------
1,842,860 multiple voting shares 12 12
14,959,338 subordinate voting
shares (14,942,470 at August 31,
2009) 121,347 120,994
---------------------------------------------------------------------------
121,359 121,006
71,862 subordinate voting shares
held in trust under the Incentive
Share Unit Plan (56,449 at August
31, 2009) (1,832) (1,847)
---------------------------------------------------------------------------
119,527 119,159
---------------------------------------------------------------------------
---------------------------------------------------------------------------
During the first six months, subordinate voting share transactions were as follows:
----------------------------------------------------------------------------
Number of shares Amount
$
----------------------------------------------------------------------------
Balance at August 31, 2009 14,942,470 120,994
Shares issued for cash under the
Employee Stock Option Plan 16,868 353
----------------------------------------------------------------------------
Balance at February 28, 2010 14,959,338 121,347
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the first six months, subordinate voting shares held in trust under the
Incentive Share Unit Plan transactions were as follows:
---------------------------------------------------------------------------
Number of shares Amount
$
---------------------------------------------------------------------------
Balance at August 31, 2009 56,449 1,847
Subordinate voting shares acquired 41,571 1,049
Subordinate voting shares
distributed to employees (26,158) (1,064)
---------------------------------------------------------------------------
Balance at February 28, 2010 71,862 1,832
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Stock-based plans
The Company offer, for the benefit of its employees, an Employee Stock Purchase
Plan, which has been modified effective January 1st, 2010. The new plan is
accessible to all employees up to a maximum of 7% of their base salary and the
Company contributes 25% of the employee contributions. The subscriptions are
made monthly and employee shares are purchased on the stock market. The Company
subsidiary, Cogeco Cable Inc., offer the same plan to its employees and those of
its subsidiaries.
The Company and its subsidiary, Cogeco Cable Inc., also offers, for certain
executives a Stock Option Plan, which is described in the Company's annual
consolidated financial statements. During the first six months of 2010 and 2009,
no stock options were granted to employees by COGECO Inc. However, the Company's
subsidiary, Cogeco Cable Inc., granted 66,174 stock options (133,381 in 2009)
with an exercise price ranging from $31.82 to $38.86 ($34.46 in 2009), of which
33,266 stock options (29,711 in 2009) were granted to COGECO Inc.'s employees.
These options vest over a period of five years beginning one year after the day
such options are granted and are exercisable over ten years. As a result, a
compensation expense of $219,000 and $556,000 ($174,000 and $275,000 in 2009)
was recorded for the three and six month periods ended February 28, 2010.
The fair value of stock options granted by the Company's subsidiary, Cogeco
Cable Inc., for the six months period ended February 28, 2010 was $8.11 ($8.96
in 2009) per option. The weighted average fair value was estimated at the grant
date for purposes of determining stock-based compensation expense using the
binomial option pricing model based on the following assumptions:
---------------------------------------------------------------------------
2010 2009
% %
---------------------------------------------------------------------------
Expected dividend yield 1.49 1.40
Expected volatility 29 29
Risk-free interest rate 2.67 4.22
Expected life in years 4.8 4.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------
At February 28, 2010, the Company had outstanding stock options providing for
the subscription of 62,782 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.
Under the Company's Stock Option Plan, the following options were granted and
are outstanding as at February 28, 2010:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Outstanding, beginning of year 79,650
Exercised (16,868)
---------------------------------------------------------------------------
Outstanding, end of year 62,782
---------------------------------------------------------------------------
Exercisable, end of year 62,782
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Under Cogeco Cable Inc.'s Stock Option Plan, the following options were granted
and are outstanding as at February 28, 2010:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Outstanding, beginning of year 716,745
Granted 66,174
Exercised (10,364)
Forfeited / Cancelled (23,079)
---------------------------------------------------------------------------
Outstanding, end of year 749,476
---------------------------------------------------------------------------
Exercisable, end of year 516,954
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The Company also offers a senior executive and designated employee incentive
share unit plan (the "Incentive Share Unit Plan") which is described in the
Company's annual consolidated financial statements. Effective October 29, 2009,
the Company's subsidiary, Cogeco Cable Inc., established a similar plan for
senior executives and designated employees. During the first six months of 2010,
the Company granted 41,571 (17,702 in 2009) and Cogeco Cable Inc. granted 63,666
Incentive Share Units of which, 9,981 Incentive Share Units were granted to
Cogeco Inc.'s employees. The Company and its subsidiary instructed the trustee
to purchase 41,571 and 55,094 subordinate voting shares on the stock market.
These shares were purchased for cash considerations aggregating $1,049,000
($325,000 in 2009) and $1,744,000, respectively, and are held in trust for
participants until they are completely vested. The Trusts, considered as
variable interest entities, are consolidated in the Company's financial
statements with the value of the acquired shares presented as subordinate voting
shares help in trust under the Incentive Share Unit Plan in reduction of capital
stock or non-controlling interest. A compensation expense of $315,000 and
$502,000 ($130,000 and $238,000 in 2009) was recorded for the three and six
month periods ended February 28, 2010 related to these plans.
Under the Company's Incentive Share Unit Plan, the following Incentive Share
Units were granted and are outstanding as at February 28, 2010:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Outstanding, beginning of year 56,449
Granted 41,571
Distributed (26,158)
---------------------------------------------------------------------------
Outstanding, end of year 71,862
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Under Cogeco Cable Inc.'s Incentive Share Unit Plan, the following Incentive
Share Units were granted and are outstanding as at February 28, 2010:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Outstanding, beginning of year -
Granted 63,666
Forfeited / Cancelled (1,230)
---------------------------------------------------------------------------
Outstanding, end of year 62,436
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 six months of 2010, 6,987 and 4,422
(11,113 and 6,282 in 2009) deferred share units ("DSUs") were awarded to the
participants in connection with the DSU Plans. A compensation expense of
$322,000 and $506,000 ($471,000 and $351,000 in 2009) was recorded for the three
and six month periods ended February 28, 2010 for the liabilities related to
these plans.
Under the Company's DSU Plan, the following DSUs were awarded and are
outstanding as at February 28, 2010:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Outstanding, beginning of year 17,244
Awarded 6,987
Dividend equivalents 138
---------------------------------------------------------------------------
Outstanding, end of year 24,369
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Under Cogeco Cable Inc.'s DSU Plan, the following DSUs were awarded and are
outstanding as at February 28, 2010:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Outstanding, beginning of year 10,000
Awarded 4,422
Distributed (2,181)
Dividend equivalents 82
---------------------------------------------------------------------------
Outstanding, end of year 12,323
---------------------------------------------------------------------------
---------------------------------------------------------------------------
11. Accumulated Other Comprehensive Income
---------------------------------------------------------------------------
Translation of
a net
investment in
self-sustaining
foreign Cash flow
subsidiaries hedges Total
$ $ $
---------------------------------------------------------------------------
Balance as at August 31, 2009 7,634 (1,306) 6,328
Other comprehensive income
(loss) (1,621) 667 (954)
---------------------------------------------------------------------------
Balance as at February 28,
2010 6,013 (639) 5,374
---------------------------------------------------------------------------
---------------------------------------------------------------------------
12. Statements of Cash Flows
a) Changes in non-cash operating items
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
Accounts receivable (6,186) 2,695 (11,680) (494)
Income taxes receivable (10,485) (3,637) (30,999) (6,522)
Prepaid expenses (190) (1,163) (1,295) 174
Accounts payable and
accrued liabilities 8,869 15,646 (63,920) (28,998)
Income tax liabilities (51) 7,416 (39,275) (9,585)
Deferred and prepaid
revenue and other
liabilities 5,210 (828) 7,408 398
---------------------------------------------------------------------------
(2,833) 20,129 (139,761) (45,027)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
b) Cash and cash equivalents
---------------------------------------------------------------------------
February 28, 2010 August 31, 2009
$ $
---------------------------------------------------------------------------
Cash 16,732 23,760
Cash equivalents (1) - 15,698
---------------------------------------------------------------------------
16,732 39,458
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) EUR10,000,000, 0.67%, maturing on September 14, 2009 at August 31, 2009.
c) Other information
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
Fixed asset acquisitions
through capital leases - 322 141 1,261
Financial expense paid 10,792 12,219 31,839 33,970
Income taxes paid 1,679 6,479 41,196 33,395
---------------------------------------------------------------------------
---------------------------------------------------------------------------
13. Employee Future Benefits
The Company and its Canadian subsidiaries offer to 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 expense related to these plans is
as follows:
---------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 28,
2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
Contributory defined
benefit pension plans 870 747 1,740 1,494
Defined contribution
pension plan and
collective registered
retirement savings plans 1,112 903 2,238 1,826
---------------------------------------------------------------------------
1,982 1,650 3,978 3,320
---------------------------------------------------------------------------
---------------------------------------------------------------------------
14. 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 February 28, 2010, management
believes that the credit risk relating to its derivative financial instruments
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 than usual 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 February
28, 2010, 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 its market area in Canada and Europe, there is no significant
concentration of credit risk. The following table provides further details on
the Company's accounts receivable balances:
---------------------------------------------------------------------------
February 28, 2010 August 31, 2009
$ $
---------------------------------------------------------------------------
Trade accounts receivable 86,266 75,044
Allowance for doubtful accounts (16,650) (17,261)
---------------------------------------------------------------------------
69,616 57,783
Other accounts receivable 7,180 8,293
---------------------------------------------------------------------------
76,796 66,076
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
February 28, 2010 August 31, 2009
$ $
---------------------------------------------------------------------------
Net trade accounts receivable not
past due 50,673 43,136
Net trade accounts receivable past
due 18,943 14,647
---------------------------------------------------------------------------
69,616 57,783
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 February 28, 2010, the available amount of the Company's Term Facilities
was $714.5 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:
----------------------------------------------------------------
2010 2011 2012
$ $ $
----------------------------------------------------------------
Bank indebtedness 50,045 - -
Accounts payable and accrued
liabilities 185,186 - -
Long-term debt (1) 37,462 135,627 178,000
Derivative financial
instruments
Cash outflows (Canadian
dollar) - - -
Cash inflows (Canadian
dollar equivalent of US
dollar) - - -
Obligations under capital
leases (2) 2,182 3,339 2,324
----------------------------------------------------------------
274,875 138,966 180,324
----------------------------------------------------------------
----------------------------------------------------------------
---------------------------------------------------------------------------
2013 2014 Thereafter Total
$ $ $ $
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Bank indebtedness - - - 50,045
Accounts payable and accrued
liabilities - - - 185,186
Long-term debt (1) - 300,000 354,975 1,006,064
Derivative financial
instruments
Cash outflows (Canadian
dollar) - - 201,875 201,875
Cash inflows (Canadian
dollar equivalent of US
dollar) - - (199,975) (199,975)
Obligations under capital
leases (2) 915 41 - 8,801
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915 300,041 356,875 1,251,996
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The following table is a summary of interest payable on long-term debt
(excluding interest on capital leases) that is due for each of the next five
years and thereafter, based on the principal amount and interest rate prevailing
on the current debt at February 28, 2010 and their respective maturities:
---------------------------------------------------------------
2010 2011 2012
$ $ $
---------------------------------------------------------------
Interest payments on
long-term debt 28,782 57,059 44,245
Interest payments on
derivative financial
instruments 9,158 17,199 14,614
Interest receipts on
derivative financial
instruments (7,777) (15,084) (13,998)
---------------------------------------------------------------
30,163 59,174 44,861
---------------------------------------------------------------
---------------------------------------------------------------
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2013 2014 Thereafter Total
$ $ $ $
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Interest payments on long-term
debt 41,964 37,502 53,009 262,561
Interest payments on
derivative financial
instruments 14,614 14,614 15,832 86,031
Interest receipts on
derivative financial
instruments (13,998) (13,998) (15,165) (80,020)
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42,580 38,118 53,676 268,572
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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
February 28, 2010, all of the Company's long-term debt was at fixed rate, except
for the Company's Term Facilities. However, 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 EUR111.5 million.
The interest swap rate to hedge the Term Loans has been fixed at 2.08% until
their maturity on July 28, 2011. The notional value of the swap will decrease in
line with the amortization schedule of the Term Loans. In addition to 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. 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 $0.4 million based on the current debt at
February 28, 2010 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 February 28, 2010, bank indebtedness denominated in US dollars
amounted to US$688,000 (cash and cash equivalents of US$5,555,000 at August 31,
2009) while accounts payable denominated in US dollars amounted to US$4,021,000
(US$14,997,000 at August 31, 2009). At February 28, 2010, Euro-denominated cash
and cash equivalents amounted to EUR19,000 (bank indebtedness of EUR299,000 at
August 31, 2009) while accounts payable denominated in Euros amounted to
EUR12,000 (EUR26,000 at August 31, 2009). Due to their short-term nature, the
risk arising from fluctuations in foreign exchange rates is usually not
significant. The impact of a 10% change in the foreign exchange rates (US dollar
and Euro) would change financial expense by approximately $0.5 million.
Furthermore, Cogeco Cable Inc.'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 was borrowed directly in Euros. At February 28, 2010, the
net investment amounted to EUR169,541,000 (EUR183,220,000 at August 31, 2009)
while long-term debt denominated in Euros amounted to EUR120,772,000
(EUR135,772,000 at August 31, 2009). The exchange rate used to convert the Euro
currency into Canadian dollars for the balance sheet accounts at February 28,
2010 was $1.433 per Euro compared to $1.5698 per Euro at August 31, 2009. The
impact of a 10% change in the exchange rate of the Euro into Canadian dollars
would change financial expense by approximately $0.4 million and other
comprehensive income by approximately $2.3 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 values of obligations under capital leases approximate the fair
value of these financial instruments due to their terms.
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February 28, 2010 August 31, 2009
Carrying value Fair value Carrying value Fair value
$ $ $ $
---------------------------------------------------------------------------
Long-term debt 1,008,027 1,099,692 1,063,964 1,126,449
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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 February 28, 2010, and August 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 to monitor and
manage the Company's capital structure:
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February 28, 2010 August 31, 2009
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(restated)
Net indebtedness (1) /
Shareholders' equity 2.9 3.1
Net indebtedness (1) / Operating
income before amortization (2) 2.0 2.0
Operating income before
amortization (2) / Financial
expense (2) 8.7 7.3
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(1) Net indebtedness is defined as the total of bank indebtedness,
principal on long-term debt and obligations under derivative financial
instruments, less cash and cash equivalents.
(2) Calculation based on operating income before amortization and financial
expense for the last twelve month period ended February 28, 2010,
and August 31, 2009.
15. Subsequent event
On March 4, 2010, the Company's subsidiary, Cogeco Cable Inc., issued a letter
of credit amounting to EUR2.2 million to guarantee the payment by Cabovisao of
withholding taxes for the 2005 year assessed by the Portuguese tax authorities,
which are currently being challenged by Cabovisao. Even though the principal
amount in dispute is fully recorded in the books of its subsidiary Cabovisao,
the Company's subsidiary, Cogeco Cable Inc., may be required to pay the amount
following final judgement, up to a maximum aggregate amount of EUR2.2 million
($3.1 million), should Cabovisao fail to pay such required amount.
16. Comparative Figures
Certain comparative figures have been reclassified to conform to the current
year's presentation.
Pacific Imperial Mines (TSXV:PPM)
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De May 2024 a Jun 2024
Pacific Imperial Mines (TSXV:PPM)
Gráfica de Acción Histórica
De Jun 2023 a Jun 2024
